Liberalizing the Global Economies
While the US sports our ‘leave no children behind’, which ultimately could impact US competitiveness, by making sure we educate our youth to a ‘higher standard’, Asia problems are more systemic. The economic engines on China and India that so dazzled and frighten the US have left the rural populaces out of the picture. In fact, rural citizens are literally willing to live on the streets of the big cities in order to get a crack at a job-any job-in the city that can offer them steady pay, and provide a vehicle to get their children into better schools, and ultimately a new economic niche.
Both India and China realize that if they leave their rural populations behind the global economy benefits, they will have a BIG problem, social unrest, ultimately violence that could undo all the economic and social gains they have made. China has strict ‘immigration rules’ to migrate from province to province, but people defy this. The ‘central’ government has ‘refocused’ their efforts, therefore, to address their rural populace with policies that provide economic development.
In India, the recent election of the Congress party had all to do with ‘leave no farmer behind’ as well. July 7th, India’s government released their budget focused on rural economy development by infrastructure spending and new lending programs in the farm provinces.
Finance Minister Palaniappan Chidambaram also realized that India’s continued growth really resides on foreign trade. Said recently in the Wall Street Journal, Chidambaram “raised the foreign equity cap in Indian telecommunications, insurance and civil-aviation companies — a move that in one stroke allayed investor concerns that the government was opposed to taking bold steps to liberalize the economy”.
“We will considerably enhance investments in all aspects of the economy,” Mr. Chidambaram told lawmakers. “However, fiscal prudence and financial discipline will remain the overarching objectives.” Chidambaram recognizes that global investors and trading don’t like dangling fluctuating currencies, something that have significantly helped the Chinese. When markets were going crazy after the drop in 2001, (and the previous Asian collapses), China and Taiwan held fast and maintained a prudent tight focus, keeping their economies ‘the place to be’.
The Prime Minister Manmohan Singh is also focused on deficit reductions (hello Mr. Bush!!!). Said Singh, “I am very happy that this budget brings about fiscal consolidation in the sense that the revenue deficit has been reduced by a full percentage point.”
The government targeted a revenue deficit of 2.5% of the gross domestic product in the current financial year and an overall budget deficit of 4.4% of GDP, lower than 4.6% in fiscal 2003-2004.
For investors, the budget’s centerpiece was undoubtedly the plan to raise the cap on foreign equity in Indian telecommunications companies to 74% from 49%, and to 49% for insurance and civil aviation companies, from 26% and 40%, respectively.
“Foreign direct investment has the potential to add a competitive edge, especially in the industrial sector,” said Mr. Chidambaram. “FDI will continue to be encouraged and actively sought [1], particularly in areas of infrastructure, high technology and exports.”
This is such a change for India, which was a very closed economy in the past, to free bi-directional investments. Historically, this move began with Prime Minister Gandhi (the younger).
Now back to Beijing!
The Chinese. In a survey done by the Society Survey Institute of China (SSIC), 57.2% of the families surveyed have both husband and wife (mother and father) having left the rural homestead for work in the city. Premier Wen Jiabao has recognized this issue in many policies focused on developing the rural areas, as well as recognitions of the ‘comparative advantage’ of each region in China and what they have in terms of resources to develop an open world economic view.
At the same time, China is focused at gaining the respect it feels it rightly deserves in the various western trade institutions, governments, press, etc. We predict Wen Jiabao will have the highest frequent flyer index of any world leader, over the next few years. China feels it meets the criteria for being called a market economy. Focusing on what constitutes a ‘market economy’, China is out to prove that they are no longer a state run economy. (At the end of this article we have some definitions based on US Commerce, EU, etc.). Why does this matter? Because it creates frictionless commerce, allows manufacturers to sell unrestrictedly in global markets and avoid litigation (accusations of dumping) and gain time to market, higher margins, etc. Many of the businesses today in China still have the ‘silent partner’, the Chinese, government, but this is less and less the case.
Ironically, the US and especially the IMF have stringent standards for other nations, while the US still favors protectionist approaches to shore up weak competitors. We have the most productive agra-business in the world, have huge exports; yet, we continue to provide farm subsidences, for example. Our economist may debate whether we pay the lowest or the highest corporate taxes in the world, but it is a well established fact that other nations suffer from higher overall tax burdens than the US, removing capital from consumer spending and investment, as well as business’s ability to compensate employees and invest.
One wonders when we see pictures of the ‘old white males club’, the G8, NATO, IMF and wonder whether they represent the progressive element of the global economy at this junction.
Africa established the African Union (AU) in 2002 and recently met 08 July 2004, in ADDIS ABABA, ETHIOPIA. I think of the words of Martin Luther King when he stated that poverty is the worst oppressor. Rather than being ‘all economical development, all the time’, the AU is bogged down with dealing with the violence (Sudan, et al), and desperate health situations of many families. Jeffery Sachs (Harvard Professor and UN advisor) has gone ‘militant’ on the world banking and loaning nations, recommending that African national just stop paying their onerous foreign dept, and use their capital to invest and build institute in their own nations to improve commerce.
Moving our lense southward, we should be a bit alarmed in the US about the lack of economic growth with our neighbors to the south. Per capita GDP, growth has averaged negative every year for the last five. “This is the biggest slowdown in Latin America in the last 100 years,” says Mark Weisbrot, co director of the Center for Economic and Policy Research in Washington, D.C.-one of many analysts who now warn that Latin America is heading for another “lost decade.”
Unknown to most Americans, there has been violence in Mexico. Newsweek reported, “Early one Sunday morning last month, the residents of Jiutepec, Mexico, were rocked from their slumber by the ongoing siege against capitalist democracy in Latin America. Bombs exploded simultaneously at three large, foreign-controlled banks in the small city. A fourth was later discovered in the local offices of HSBC, Europe’s largest bank. The next day a left-wing revolutionary group claimed responsibility and issued a warning to President Vicente Fox. “Our commander detonated four explosives in banks with foreign capital,” it read. “Fox has tried to turn the nation into a private business.” It appears that these skirmishes have been going on for a while, dampening President Fox’s efforts to modernize Mexico’s economy. We have been watching Mexico and Latin American erosion of trade to Asia for many years, who can offer stable governments, law abiding and educated work forces!
We wonder if anyone gets it:
- Violence is the first thing to send money flying out of economies.
- Government myopic values/policies (communism, or religious) or onerous trade restrictions come in second.
Only these nations themselves can solve these problems. However, the so-called developed world can lend a hand, because these unsolved problems wind up on our doorstep with about four million in illegal aliens between Western Euro and the US.
Instead of building borders, find ways to ‘leave no child behind’ around the world-with education. Uneducated and unemployed young people are the best recruiting grounds for terrorists.
It would be cheaper and more effective than the current ‘war of terror’ methodology by opening more trade opportunities. Our net pay will be the same. We can pay the price with salary erosion in gross pay or by paying taxes for the global war of terror with no end. The G8 club should take a page from the Gates Foundation and learn how to really invest in ‘no child left behind’.
A U T H O R ‘ S N O T E
A useful block on global/emerging economies is:
Criteria of `Non-Market’ Economy
“Non-market economies” refers to countries that practice public ownership of the means of production and a planned economy, where the government plans production and sales activities and decides the prices of products, and the currencies of the countries in question enjoy no free converting into other currencies.
“Non-market economy countries” referred to by the U.S. Department of Commerce are countries whose operation does not follow market costs or price rules. The department sets six statutory requirements or specific criteria with regard to a market economy:
(1) The extent to which the currency of a country is convertible into foreign currencies;
(2) The extent to which wage rates are determined by free bargaining between labor and management;
(3) The extent of the freedom to set up joint ventures or other foreign-funded firms;
(4) The extent of government ownership or control of the means of production;
(5) The extent of government control over the allocation of resources and over the price and output decisions of enterprises;
(6) Such other factors as the administrating authority considers appropriate.
In addition, the U.S. Department of Commerce is particularly concerned about the export control by exporting countries: on the one hand, if there is any control by the government with regard to enterprises’ export activities by law. This includes:
(a) Any restrictive regulations concerning business operation and export permits of enterprises;
(b) Any legislation for reduction of control on enterprises;
(c) Any other governmental measures for reduction of control on enterprises.
On the other hand, with regard to the facts of governmental control on enterprises’ export activities, the US Department of Commerce usually considers the following elements:
(a) Whether export prices are determined by the government or subject to government approval;
(b) Whether exporters have right to negotiate contract terms and sign contracts or other agreements;
(c) Whether exporters are free of government restriction in choosing their managing bodies and enjoy full autonomy;
(d) Whether exporters enjoy independent power of decision in distribution of profits and remedying losses.
America is a typical nation that practices “case / common laws.” It defines
China as a non-market economy according to specific charges. In its first anti-dumping investigation against China in 1980, the U.S. Department of Commerce categorized China as a “state-controlled economy”. Anti-dumping charges the Department filed against Chinese enterprises hereafter all cited the charge as a precedent unless the respondent enterprises have clear-cut evidences and the Department annuls the former verdict.
The European Union has worked out a list of non-market economy countries, including four Asian countries (China, Mongolia, Democratic People’s Republic of Korea and Viet Nam), 12 former Soviet republics, four East European countries (Albania, Poland, Czech Republic and Slovak Republic) and three Baltic countries (Latvia, Lithuania and Estonia).
The EU issued the No 905.98 Act in 1998, which allows Chinese respondent
enterprises to apply for the status of market economy in anti-dumping investigations and stipulates five criteria for determining the status of market economy, namely:
- prices, costs and inputs are determined by market demand and supply;
- firms have one clear set of basic accounting records which are independently audited in line with international accounting standards and are applied for all purpose;
- the production costs and financial situation of firms are not subject to significant distortions carried over from the former non-market economy system, in particular in relation to depreciation of assets, other write-offs, barter trade and payment via compensation of debts;
- the firms concerned are subject to bankruptcy and property laws that guarantee legal certainty and stability for the operation of firms; and
- exchange rate conversions are carried out at the market rate.
In its investigation on the issue of “non-market economy,” Canada specified five aspects:
- Is the government’s role in formulating economic policies and controlling economic activities interfering the normal performance of the market economy? This includes the percentage and structure of governmental influence in pricing, distribution of products and procedures for making offers; the pricing mechanism of domestic products and services; planning and controlling of production of commodities and provision of services and market restrictions; the control of domestic and international trade; and further reforms in the structure and functions of government organizations.
- How does the government control or govern enterprises in respect of production, sales and procurement? And how is control or governing applied in connection with enterprises’ financing?
- In respect of international trade, the conditions and procedures foreign trade enterprises must comply with the government to allow them to carry out foreign trade businesses, and government guidance and control in respect of quotas and prices of import and export products.
- Market-oriented reforms of state owned enterprises, including the existing types of ownership, when and how the ownership system was transformed; and, in state-owned enterprises under government control, the mechanism for determining prices of elementary factors such as raw materials, energy, labor cost as well as quantity and prices of their products, the managing of enterprises’ funds and performance, the distribution of profits, the relationship between employers and employees, and the availability of loans, etc.
- Whether there are different interest rates for different enterprises, industries and domestic and international trade departments. Whether exchange rates are determined by the market as far as exporters are concerned and whether enterprises enjoy autonomy in obtaining and retaining foreign exchange, etc.
Obviously, the criteria of market economy defined by European and American countries are based on the factors that may affect fairness of trade in anti-dumping actions, and are precisely related to the issues in question. Naturally, there are differences between the criteria of market economy put forward by the United States and those by the EU and Canada, for the United States has directly raised the issue of criteria for a country to be a market economy, while the EU and Canada mainly target the criteria of a market economy of particular enterprises and industries. It is obvious, however, that such differences are only superficial. As far as the contents are concerned, they are the same or similar, and in essence they are exactly the same. These criteria form an integrated system and thus one single criterion should not be applied independently. European countries and the United States will not make their judgment just according to one criterion, but will sum up the results of investigations in all aspects covered by these criteria in determining whether or not enterprises or industries of a country have reached the critical point of a market economy so as to reach a conclusion whether the country and the industries or enterprises in question have achieved the status of a market economy.
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Source: Report on the Development of China’s Market Economy 2003
and the Bureau of Fair Trade for Import and Export of the
Chinese Ministry of Commerce