Economic Reform

I was recently in Pyongyang, at the invitation of the Korean Association for Economic Development, to participate in a two-day conference on special economic zones, co-sponsored by the University of British Columbia. It was one of the most surreal experiences of my life, which I am still trying to process. Members of our group who have previously visited the country say they perceived more openness and less fear among the people than in the past, but it remains a highly regimented society. Visible signs of commerce are completely absent. The only billboards show pictures of the Great Leader and Dear Leader or revolutionary slogans accompanying images of ferocious soldiers bayoneting the imperialists. Not a corporate logo in sight. Shops – the people do have to buy necessities and the occasional small luxury – are utilitarian, and their signage, though I can’t read Korean, is drab and functional: “Bread.” “Clothing.” “Furniture.” It may be the only country in the world without Coca-Cola.

Our hosts have asked me to return, to visit their zones and provide some advice, but they are not willing to pay anything close to my normal consulting fees. One thing they will have to learn as they try to engage with the outside world and attract foreign investment – if indeed that is what they do intend – is that foreign experts (I modestly include myself in that category) expect to be paid. It’s not as if the North Koreans are starved for funds or foreign exchange. The fleet of spanking new Mercedes S-Class sedans and SUVs that chauffered our group around the city, the big bottles of cognac and 18-year-old Scotch in the state-owned restaurants we were invited to, where the elite go to enjoy themselves, not to mention North Korea’s nuclear weapons program, are proof of that. Of course, to the degree that the country can rejoin the international community on less confrontational terms, it can go down the path well trodden by developing countries in Africa, Asia, and Latin America and ask for assistance from international donors to pay for my services.

Two weeks ago I was interviewed about my experiences on The Manzella Report, an international business news and opinion magazine that publishes interviews on YouTube. You can view the interview here: Are the North Koreans Ready for Change?

Like the North Koreans, I too may not be ready for prime time, but I am working on it.

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Outgoing WTO Director-General Pascal Lamy has recently criticized EU-US and transpacific trade talks, which have the potential to create the world’s two largest free trade areas and measurably increase prosperity and growth for hundreds of millions, if not billions, of people. He has a point. Several, actually. Regional trade agreements, though they may possibly serve as stepping-stones to global agreements, can also reduce the urgency with which their members approach global trade negotiations in the WTO framework. A transpacific or transatlantic trade agreement, in addition to excluding China, which already sees hostile intent in the transpacific talks, would also leave out some of the world’s most vulnerable economies and people, especially in Africa and South Asia. Lamy also expressed doubt that either of these incipient trade agreements would address agricultural subsidies, which are the most important trade distortion of all.

All true. And yet, given the paralysis affecting the Doha Round WTO trade talks, now in their 13th year, big regional agreements may be the best deal we can get. According to a study by the European Centre for International Political Economy, a transatlantic zero-tariff agreement, reducing existing tariffs from their current levels of three to five percent to zero, would add between 0.99 and 1.33 percent to U.S. GDP. Eliminating non-tariff trade barriers such as subsidies, and harmonizing product safety and drug approval standards, could add even more. The benefits from a transpacific agreement, which could cover forty percent of global trade if Japan’s efforts to join the agreement bear fruit, could be similar. And the wonderful thing about trade is that one party’s gains are not another’s losses. These agreements could raise everyone’s prosperity.

But relatively trivial disagreements could easily stall both sets of talks or derail them entirely. France has insisted that any trade agreement would have to allow it to continue to lavish subsidies on the French film industry. Japan, whose Liberal Democratic Party owes much of its support to wealthy farmers, insists that it should be allowed to protect its producers of rice, wheat, beef, and soy from imports. Japan has long imposed non-tariff barriers against a wide range of products, including skis, claiming the imported variety are unsuitable for Japan’s unique snow conditions. Such practices are not unknown in France either. At one point, all imported videocassette recorders and players had to be inspected in the customs shed in the city of Poitiers.

The French stance on film industry protection, surprisingly, has come in for more criticism from other EU members fearful of scuppering an immensely valuable deal than from the U.S. and its film industry, which seem fairly relaxed about the whole thing. In a country that has given its highest civilian honor to both Jerry Lewis and Sylvester Stallone, Hollywood has nothing to worry about no matter how much public money French film producers receive. Japanese farmers and their political supporters are, clearly, trying their luck demanding so many exemptions. Kobe and Wagyu beef notwithstanding, none of the products for which Japan is seeking protection has the iconic cultural status of rice, which is tightly bound to Japan’s sense of nationhood. Each year the Emperor conducts special public rituals of sowing, planting, harvesting and giving thanks for rice, while the ceremonies for enthroning a new Emperor include private rites in which he eats specially cultivated sacred rice in an act of communion with his ancestor, the Sun Goddess Amaterasu-ōmikami.

So here is a modest proposal. Each country gets a free pass to protect or subsidize one thing, regardless of fairness or logic. If the French want to give their money to cineastes in the form of subsidies rather than fork out 10 Euros to go see their films, fine. If Mrs. Watanabe wants to buy Japanese rice at a price some 700 percent higher than what she would pay for Thai or American rice, let her. It may not, strictly speaking, be fair to American rice farmers, but it is no more unfair than the subsidies those same farmers get from the U.S. Government (see my recent post on the farm bill), which apparently are legal under current international trade rules. The same rule, of course, would mean that the U.S. would have to choose just one thing to protect or unfairly subsidize. Arkansas rice or cotton growers? Florida sugarcane growers? New England dairy farmers? Archer Daniels Midland? Solar panel manufacturers? And once the choice is made, it’s made. No switching around based on election-year vote counting, depending on who is doing the counting.

On second thought, this is far too reasonable a proposition. It’ll never fly.

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For all its faults, the pharmaceutical industry remains one area in which the United States is still a competitive world leader. But without drastic changes in the way the FDA regulates the industry, this advantage may not last.

Back in the early 1980s I worked for one of the major airlines, a company you have probably heard of, even though it hasn’t flown in over a decade. This was shortly after President Jimmy Carter had deregulated the airline industry. My employer, a pioneer in commercial flight, had grown accustomed to doing business in a certain way and lacked the foresight and skill to adapt to the new environment. Prior to deregulation, airlines needed to have lots of lawyers, whose main job it was to lobby the federal government to get and keep valuable landing slots at major airports. Once you had those, you could count on a steady stream of profits, since the Civil Aeronautics Board limited competition on most routes, thus ensuring high load factors, and also set fares the airlines were allowed to charge. Overnight, things changed 180 degrees, and airlines had to pay attention to things like customer service and efficiency. My employer failed to make the cut.

We may be seeing the opposite phenomenon in the pharmaceutical industry. According to a recent report by KPMG, industry returns on R&D spending have fallen from 18% in 1990 to 10% in 2010, and annual growth in R&D spending has slowed from an average 10% between 1999 and 2006 to just 1% since 2007. Pharmaceutical companies may be turning to lawyers and the regulators to make up the difference. [click to continue…]

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I met Taymor  Kamrany in 2003, just over a year after the U.S.-led invasion of Afghanistan had ousted the Taliban. We were both in Kabul, working on a USAID program to improve the environment for business and help government institutions rebuild their capacity to support a market economy. It was not an easy task. I was working with the management and staff of the Export Department of the Ministry of Commerce. Apart from the Head, a man in his fifties who had worked in the ministry throughout all the upheavals of the previous 30 years, no one in the Department could speak any foreign language. Though Afghanistan had once a thriving export economy – until the civil war of the 1990s, it was the world’s largest exporter of raisins, which were the most delicious I have ever eaten – its productive capacity was largely destroyed, its fields strewn with landmines, its best and brightest long ago departed. I was there for just a month, but in spite of these daunting challenges facing the country,  I sensed a lot of optimism among both Afghans and foreigners.

Taymor, an Afghan-American, born in Afghanistan and relocated with his family to the U.S. when he was a small child, was bright, ambitious, idealistic, and very American in demeanor and outlook. Apart from speaking Dari, the main language of Kabul and the northern part of the country, and having some relatives he visited from time to time, he seemed to be little more at home there than I did. After we had each left Afghanistan, I learned that he had entered an MBA program at the University of Southern California, and still later that he was working for one of the Big 4 consulting firms. Then we more or less lost touch. But most people never prune their e-mail address books, so a while ago I received  a broadcast e-mail from Taymor, linking to an article he wrote, which is published on the web site of the Middle East Institute, entitled Afghanistan 2002-2012: A Decade of Progress and Hope. No question mark. [click to continue…]

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Eurasia Group founder and emerging markets guru Ian Bremmer has come around to the view that the BRICS construct is nothing more than a bunch of countries “united by a catchy acronym” and little else. His op-ed piece in last Friday’s New York Times  notes that Brazil, Russia, India, and China “have formalized their club and extended their reach by inviting South Africa to join” – a development that occurred in December of 2010 and asks, “But do their meetings and joint statements really allow them to punch above their individual weight? What do these countries share beyond a common interest in bolstering their global clout?” Several hundred words later he concludes that these five countries “will sometimes use their collective weight to obstruct U.S. and European plans. But the BRICs have too little in common abroad and too much at stake at home to play a single coherent role on the global stage.” Has he been reading my blog? [click to continue…]

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