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Welcome!

When I started this blog in November 2005, the idea was simply to post comments on the upcoming WTO meeting in Hong Kong—that is why it is called the Hong Kong Blog. But the response was overwhelming and I found the blog format rather appealing, so I decided to continue. I am a Director of the European Centre for International Political Economy (ECIPE), but run this blog in a personal capacity.

Fredrik Erixon

PROJECTIONISM, NOT PROTECTIONISM
Peter Mandelsson, the EU trade commissioner, delivered last week the Alcuin lecture in Cambridge. As in previous speeches and statements, he refuted protectionism as an idea and as a strategy for Europe. Mandelson rather wants to see a strategy of projectionism.
 
No, I did not misspell it.
 
Here’s Mandelson: 
We need to create a positive politics of globalization, and a progressive policy that serves that politics of openness. I have set out today some of the ways in which I think Europeans – and Americans, including the next US President - can do this. In their approach to the role of the state and government. In the way we see employment and the economy. In our renovation of global institutions and renewed commitment to the indispensability of the EU. They all return to the notion of ‘projectionism’: the need to build the capacity to project our values and interests as Europeans in the global age.
 

Posted by Fredrik Erixon, 2008-02-11 15:45:58

THE FED, FISCAL STIMULUS AND THE IMF
Last week offered two unexpected events. First, the U.S. Fed made an out-of-hours, out-of-sequence rate cut of 75 basis points. Second, the White House and the Congressional leadership agreed on a 150 billion USD fiscal stimulus package.
 
I remain hesitant, if not sceptic, two both actions.
 
The Fed now has some explaining to do. For the credibility of the institution itself it must explain why it decided to take the decision last week rather than this week, at one of the scheduled FOMC meetings. Some central bank experts, especially Stephen Cecchetti, have lent support to this choice of actions by pointing to gradualism as a bad strategy for monetary policy “if the proper interest rate instrument setting is 2 or 3 or 4 percentage points below or above the current level…”. Admittedly, this is not the same thing as supporting the Feds timing of rate cuts, especially the choice of an out-of-sequence cut, but it does lend support to views downplaying the importance of a gradual, sequenced, and institutionalised approach.
 
I don’t buy this argument – neither as a general rule of thumb, nor applied to this particular circumstance. Central banks can’t operate as if the current interest rate is a response to current fundamentals. It can, of course, but it would not have much effect. Central banks must look beyond the immediate economic patterns, and take account of medium-term economic trends and the time it takes for a change in interest rates to affect the economy. There is also a fundamental problem of uncertainty over the economic development that must be accommodated in the choice of interest rate strategy.
 
We are also waiting for another explanation from the Fed: how its out-of-hours, out-of-sequence rate cut fits into its broader analysis of the U.S. economy and, subsequently, how this action was not a response to the stock-market development. I think it is a correct strategy to lower the Federal Funds Rate and to stimulate the U.S. economy by this monetary tool. But I don’t see how its action early last week fits into its overall economic analysis and I remain suspicious the action was determined by the falling stock market in recent weeks.
 
The fiscal stimulus package is messy. It contains elements one can seriously doubt will have affect at all on U.S. consumption and investments. Some of it looks more like policies that the White House or the Democratic majority in Congress want to get through regardless their merits as fiscal stimulus.
 
Another interesting development that I picked up today: it seems as if the IMF has now changed position and supports a U.S. fiscal stimulus packages – and elsewhere too. This is the story from today’s FT. The IMF website says nothing of it, and I am not sure the Davos webcast with DSK (and others) comes out strongly on this side. Other sources substantiating the FT story I can’t find.
 
But of the report is correct, this new position deviates from the traditional IMF approach, which has been sceptic to the merits of fiscal-stimulus packages. For reasons already mentioned here and in previous posts I am sceptic to the U.S. new stimulus package, so I should not develop this further in this IMF context. But there are other consequences that follow from this change of IMF position.
 
First, a support for increasing the fiscal deficit in the U.S. to stimulate the economy will affect the credibility of the IMF to recommend other countries not to take similar actions when the IMF feel it should not (which I am sure will happen sooner rather than later).
 
Second, one must raise questions of this position will lead to changes in IMF’s views on current account imbalances and how to address them. The IMF has taken soft positions on the current account imbalances, largely due to opposition from – ahem – some member countries on supporting stronger measures, but it has supported the view of imbalances as a severe problem and diagnosed the U.S. deficit as a function of its fiscal deficit.
 
If the IMF seriously comes out on the side favouring fiscal deficits over fiscal consolidation, how will the IMF tackle the fact that its own analysis, and previous position, suggests the current-account imbalance to pose such a serious risk to the world economy that fiscal policy reforms are called for? That is the conclusion of the last IMF staff report, from mid 2007, in the Article IV consultation with the United States. It is strongly in favour of general fiscal consolidation, and softly in favour of fiscal adjustment as a way to limit the current account deficit and the risks posed by it. Furthermore, the IMF has given support to views saying that the fiscal-deficit fuelled current-account deficit presents systemic risks to the stability of the world financial system. Will the new IMF position be that the current-account deficit is no longer such a grave risk to the U.S. economy and the world economy? Will it be that other measures should be taken?

Posted by Fredrik Erixon, 2008-01-28 13:39:02

FISCAL STIMULUS PACKAGAE
Bush and the congressional leadership have shown Washington is not all about party politics and have agreed on a 150 bn fiscal stimulus package (most of it is targeted for increased consumer spending). Even if I remain sceptic to Bernanke’s panic act earlier this week, I believe monetary policy is a better tool than fiscal policy if the economy needs to be stimulated.
 
I have also problem finding the empirical evidence that a stimulus is needed. Economic forecasts for the US economy in 2008 points to an economic growth between 1 and 2 percent. Unemployment is projected to rise to 5,1 percent. Admittedly, the growth projection is not particularly good, but nor is it particularly alarming. The tax rebate now proposed aims to push consumer spending, but consumer spending in the US is remarkably strong and remains at fairly high levels.
 
I don’t agree with some other sceptics that believe all the stimulus cash will be saved rather than consumed. It is true, to some extent, that households rather save money than spend them when the economic mood is low, but people to also spend. However, a not insignificant part of the spending will be compensation to foreign producers and will have little effect on US output.
 
Other economists seem to agree. Greg Mankiw writes: 
In this environment, I would prefer to rely on monetary policy as the main source of macroeconomic stimulus. If there were a stronger case for a short-run demand-oriented fiscal stimulus, I would view the compromise package announced today as reasonable. But given where the economy is right now and the best forecasts of where it is heading, the fiscal package seems unnecessary as a short-run measure, while in the long run adding to the debt burden without doing anything to improve incentives for economic growth.
 

Posted by Fredrik Erixon, 2008-01-25 12:43:00

POST ELECTION CHAOS IN KENYA
The post-election chaos in Kenya lingers on. It is a sad development. I vividly remember my impression of the new democratic spirit of Kenya after a longer stay there five years ago, just after the December 2002 election, the first free election without Daniel arap Moi running.
 
Optimism was then in good supply. People had elected a new president, not representing the KANU party, and many had high hopes for the new Kibaki government. Corruption was going to be a No. 1 priority for the new government. It promised economic reforms to push Kenya’s low economic growth.
 
Kibaki has been a very hands-off president, but the government has managed to push through some reforms that have helped the economy growing. The efforts to fight corruption soon run out of steam. There were also surprisingly many familiar faces in the new government and in the higher echelons of the civil service. Many of them were old hands from former Moi governments – some of them with a terrible record of corruption.
 
I think Kenya will get over the current chaos. New efforts to mediate have started. As John Githongo, the former corruption buster in Kenya said on BBC Hardtalk this week, there is a growing frustration from people, business, and civil society over the current mess, and they have increasingly started to interfere in the debate. Raila Odinga, the opposition leader, is also a man of real politics and surprises. He has been in similar positions before and has accepted the hard realities of Kenyan politics. It may sound odd – and it is odd – but he accepted once to take a seat in the government that implicitly had ordered the torture of him.

Posted by Fredrik Erixon, 2008-01-24 11:27:57

THE REAL DAVOS…
Davos is off again. You will read plenty of it in the newspapers. I hope FT’s Gideon Rachman will be sending dispatches from Davos, as he did last year. Here is my favourite vintage Rachman piece FROM Davos 2007 – and it says a lot about the Davos meeting.
 
Rachman writes:
I knew it was a good idea to go to the "classic clarets" dinner. Some crazed benefactor had donated an extraordinary collection of wines for us to taste: Latour 1952, Lafite 1962, Cheval Blanc 1975 - and six others.
 
Seated next to me was Victor Yanukovych, the prime minister of Ukraine. Since we do not share a common language, we were unable to exchange the usual chit-chat - "faint whiff of pencil shavings" - that sort of thing. In the event, he had to leave halfway through. This was a lucky break for me, since he left behind unfinished samples of Latour and Lafite, which I swiftly poured into my own tasting glasses.
 
It did cross my mind that there have been some unpleasant cases of poisoning involving politicians from this part of the world - so I hesitated briefly before knocking back Yanukovych's leftovers. But what the hell, you don't get to taste Latour every day. I'm pretty sure I got away with it. I do feel fairly appalling this morning, but I think it's just a standard issue hangover.
After the clarets dinner, it was over to the Belvedere Hotel, where the "young global leaders" were having a drinks party in an igloo - to underline their concern about global warming. I got into discussion with a young guy, who informed me that he might be about to become prime minister of Serbia. Perhaps I looked sceptical, because he then said - "or maybe deputy prime minister". I've got his card, anyway.
 
Talking of future prime ministers, I then spotted the leader of the Britain's Tories at the other side of the room. Emboldened by nine glasses of classic claret plus four margaritas, I glided over to speak to David Cameron. But we hadn't been talking long before we were interrupted by some gushing German, who launched into an absurdly over-the-top tribute to Cameron - "I admire you sir, I wish you good fortune, you are the future of our continent" - that sort of thing. Cameron nodded politely and whispered out of the side of his mouth, "Don't laugh," which rather endeared him to me.
 
At this point, there was a further interruption. A young global leader announced that we now had to listen to a discussion on climate change between Shimon Peres and the actress Claudia Schiffer. (I'm not making this up.)
 

Posted by Fredrik Erixon, 2008-01-23 14:51:48

FED RATE CUT – TIME TO PANIC!
OK, ladies and gentlemen, now I think it is time to panic. Not because of economic fundamentals – which are not that bad in the US, and certainly not as bad as you would imagine if you spent the whole day listening to CNN, CNBC and BBC broadcasts – but because the Fed itself is in a state of panic.
 
I can’t see any other way to interpret yesterday’s exceptional decision to cut the fed rates with 75 basis points is historical. It’s historical for its magnitude, but also for the fact that it signals a change in Fed policy. It has not been Fed policy to let the stock market guide the use of it tools – the mandate for the Fed is the holy trinity of high employment, stable prices and moderate inflation. One can quarrel about various aspects of this mandate, but few would disagree with the position to the stock market out of the trinity. Bernanke now has a lot of explaining to do.
 
Furthermore, the decision was taken out-of-hours and was not scheduled. There is nothing that has happened in the last week that gives ground to act now rather than wait to the next scheduled FOMC meeting, which is already next week. This unexpected move gives further reasons to suspect Fed panic.

Posted by Fredrik Erixon, 2008-01-23 14:48:18

CHINA MANIPULATING THE CURRENCY?
I recently came across this paper on yuan valuation – a paper dismissing standard exchange rate (REER/FEER/BEER) approaches to determining the equilibrium rate for exchange rates and rather looking at relative prices and relative output.
 
Here is one of the conclusions: 
One general observation is that, when one implements the standard operating procedure of accounting for sampling uncertainty in making inferences, there is no evidence supporting the claim that the RMB is substantially undervalued, using conventional significance levels. Depending on the specification under examination, the actual RMB value is usually within one or two standard errors of its predicted level. Our inability to establish a convincing statistically significant result applies to most, if not all, the models and time periods under consideration. We also believe that our results accounting for serial correlation are extremely important, and bear upon the interpretation of the extant literature. With technical procedures controlling for serial correlation effects, the evidence for RMB undervaluation is substantially weakened. 
Required reading for everyone in Europe considering new, tougher approaches to push for RMB revaluation.
 

Posted by Fredrik Erixon, 2008-01-23 14:38:15

BACK TO THE BLOGOSPHERE
I have had a long blog holiday, dear reader, and not posted anything here since mid November. My absence has not been due to lack of opinions or stuff to comment – it has rather been due to lack of time. But after my return from a longer stay in India, I now promise to start posting comments frequently again.
 
And what’s better to start with than some self commercial…?
 
In India I made a presentation at an Observer Research Foundation conference on the EU-India FTA negotiations. It was a good conference, and European speakers as well as Indian speakers raised doubts over all the sales-pitches we’ve been hearing from the Commission and the Indian government. This FTA is said to become a strong, commercially-relevant, WTO-plus FTA. Fine. But neither the EU nor the Indian government have a mandate for, or is constitutionally in a position to agree to, such a FTA.
 
A strong, commercially-relevant FTA would focus primarily on services and investments – which are two areas that are not really part of centralised EU trade policy. The EU does not have a single market for services, and certainly has no centralised policy for investment agreements. So there has to be a lot of internal negotiations in Europe before it can agree to any real commitments. But the problem is that it is highly unlikely that they will come to common to a position that will support a strong, deep-integrating FTA. Similarly, many aspects of these areas do not fall under the federal competence in India, and policies are rather organised at states level.
 
This and many other things were discussed at the conference. My presentation can be found here.
 
Two Indian newspapers also picked up this thread from the conference – see here and here.
 
PS. In yesterday’s Live Mint – an interesting new Indian newspaper with a strong comments and opinion section – there was a good piece by my colleague Razeen Sally.

Posted by Fredrik Erixon, 2008-01-23 14:35:03

THE WTO FACULTY OF ASTROLOGY SPEAKS
Pascal Lamy is upbeat about finishing the Doha Round. To the National Journal (not available on the web) this week he said:
 
“The political stars are aligned like they have never been”.
 
Oh, had you noticed that too?
 
One is tempted to ask if Lamy has arranged the seats in the negotiation rooms to have all people looking at, or from, the point where the two curry lines meet?

Posted by Fredrik Erixon, 2007-11-16 09:33:28

COMMERCIAL (III): EPA
And in the latest issue of Africa Today I am interviewed about the EU-Africa negotiations over partnership agreements.
 
End of commercial.

Posted by Fredrik Erixon, 2007-11-09 23:29:09


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