Dani Rodrik: Should We Worry About Income Gaps Within or Between Countries? [feedly]

Should We Worry About Income Gaps Within or Between Countries?
https://www.globalpolicyjournal.com/blog/24/10/2019/should-we-worry-about-income-gaps-within-or-between-countries

Cambridge - The rise of populist nationalism throughout the West has been fueled partly by a clash between the objectives of equity in rich countries and higher living standards in poor countries. Yet advanced-economy policies that emphasize domestic equity need not be harmful to the global poor, even in international trade.

At the beginning of classes every autumn, I tease my students with the following question: Is it better to be poor in a rich country or rich in a poor country? The question typically invites considerable and inconclusive debate. But we can devise a more structured and limited version of the question, for which there is a definitive answer.

Let's narrow the focus to incomes and assume that people care only about their own consumption levels (disregarding inequality and other social conditions). "Rich" and "poor" are those in the top and bottom 5% of the income distribution, respectively. In a typical rich country, the poorest 5% of the population receive around 1% of national income. Data are a lot sparser for poor countries, but it would not be too much off the mark to assume that the richest 5% there receive 25% of national income.

Similarly, let's assume that rich and poor countries are those in the top and bottom 5% of all countries, ranked by per capita income. In a typical poor country (such as Liberia or Niger), that is around $1,000, compared to $65,000 in a typical rich country (say, Switzerland or Norway). (These incomes are adjusted for cost-of-living, or purchasing-power, differentials so that they can be directly compared.)

Now, we can calculate that a rich person in a poor country has an income of $5,000 ($1,000 x 0.25 x 20) while a poor person in a rich country earns $13,000 ($65,000 x 0.01 x 20). Measured by material living standards, a poor person in a rich country is more than twice as well off as a rich person in a poor country.

This result surprises my students; most of them expect the reverse to be true. When they think of wealthy individuals in poor countries, they imagine tycoons living in mansions with a retinue of servants and a fleet of expensive cars. But while such individuals certainly exist, a representative of the top 5% in very poor countries is likely to be a mid-level government bureaucrat.

The larger point of this comparison is to underscore the importance of income differences across countries, relative to inequalities within countries. At the dawn of modern economic growth, before the Industrial Revolution, global inequality derived almost exclusively from inequality within countries. Income gaps between Europe and poorer parts of the world were small. But as the West developed in the nineteenth century, the world economy underwent a "great divergence" between the industrial core and the primary-goods-producing periphery. During much of the postwar period, income gaps between rich and poor countries accounted for the greater part of global inequality.

From the late 1980s on, two trends began to alter this picture. First, led by China, many parts of the lagging regions began to experience substantially faster economic growth than the world's rich countries. For the first time in history, the typical developing-country resident was getting richer at a faster pace than his or her counterparts in Europe and North America.

Second, inequalities began to increase in many advanced economies, especially those with less-regulated labor markets and weak social protections. The rise in inequality in the United States has been so sharp that it is no longer clear that the standard of living of the American "poor" is higher than that of the "rich" in the poorest countries (with rich and poor defined as above).

These two trends went in offsetting directions in terms of overall global inequality – one decreased it while the other increased it. But they have both raised the share of within-country inequality in the total, reversing an uninterrupted trend observed since the nineteenth century.

Given patchy data, we cannot be certain about the respective shares of within- and between-country inequality in today's world economy. But in an unpublished paper based on data from the World Inequality Database, Lucas Chancel of the Paris School of Economics estimates that as much as three-quarters of current global inequality may be due to within-country inequality. Historical estimates by two other French economists, François Bourguignon and Christian Morrison, suggest that within-country inequality has not loomed so large since the late nineteenth century.

These estimates, if correct, suggest that the world economy has crossed an important threshold, requiring us to revisit policy priorities. For a long time, economists like me have been telling the world that the most effective way to reduce global income disparities would be to accelerate economic growth in low-income countries. Cosmopolitans in rich countries – typically the wealthy and skilled professionals – could claim to hold the high moral ground when they downplayed the concerns of those complaining about domestic inequality.

But the rise of populist nationalism throughout the West has been fueled partly by the tension between the objectives of equity in rich countries and higher living standards in poor countries. Advanced economies' increased trade with low-income countries has contributed to domestic wage inequality. And probably the single best way to raise incomes in the rest of the world would be to allow a massive influx of workers from poor countries into rich countries' labor markets. That would not be good news for less educated, lower-paid rich-country workers.

Yet advanced-economy policies that emphasize domestic equity need not be harmful to the global poor, even in international trade. Economic policies that lift incomes at the bottom of the labor market and diminish economic insecurity are good both for domestic equity and for the maintenance of a healthy world economy that provides poor economies a chance to develop.

 

 

Dani Rodrik is Global Policy's General Editor and Professor of International Political Economy at Harvard's John F. Kennedy School of Government. he is also the author of Straight Talk on Trade: Ideas for a Sane World Economy.

This post first appeared on Project Syndicate and was reposted with permission.

Image: W H via Flickr (CC BY-ND 2.0)

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Trump Wellness Programs Would Gut Protections for People With Pre-Existing Conditions [feedly]

Trump Wellness Programs Would Gut Protections for People With Pre-Existing Conditions
https://www.cbpp.org/blog/trump-wellness-programs-would-gut-protections-for-people-with-pre-existing-conditions

The Trump Administration has invited states to set up so-called wellness programs, with individual-market insurers creating plans with higher premiums and out-of-pocket costs for people who don't meet certain health targets. Such programs would gut protections for people with pre-existing health conditions.

The Affordable Care Act (ACA) barred individual-market insurers from charging higher premiums to people based on their health status, but the Administration is inviting states to undo that protection. Under its recent bulletin, up to ten states can establish a wellness program under which insurers, for example, charge premiums up to 30 percent higher to people who don't hit a weight-loss target or to reduce their cholesterol by a certain amount. (If the wellness program varies premiums based on tobacco use, insurers could raise premiums by up to 50 percent overall.)

A 30 percent premium differential could mean a significant financial hit of hundreds or thousands of dollars a year for those who don't achieve the targets. And such treatment would begin to look a lot like the discrimination that people with health conditions faced before the ACA.

States that want to establish a "health-contingent" wellness program would have to submit an application to the federal government, including an analysis showing that the state doesn't expect the wellness program to increase federal costs or reduce overall health coverage levels. But the federal government apparently wouldn't reject programs that are expected to drive sicker people out of the insurance market as long as more healthy people enroll to make up the difference.

Seema Verma, Administrator of the Centers for Medicare & Medicaid Services, which would decide whether to approve a state wellness program, said that this initiative would give states "the opportunity to not only improve the health of their residents but also to help reduce healthcare spending." But extensive research on wellness programs that employers have set up has failed to show that they do either. For example, a large randomized trial of an employer wellness program found that it had no effect on health outcomes or health behaviors, but it did reduce costs for people who were already healthier. That makes wellness programs a potential tool for employers looking to recruit or retain healthy over sick employees, the authors of that study note.

Individual-market wellness programs would have to meet the standards that apply to similar programs that employers offer, such as being made available to all individuals and providing a "reasonable alternative standard" for individuals to meet if they don't meet the initial health target. But as the research on employer programs shows, these standards don't prevent cost shifts from healthy to sick people.

And the consequences of such cost shifts would likely be worse in the individual market, where consumers may be paying all or most of their premium amount, and those who don't get the wellness discounts are more likely to find their premiums unaffordable and end up uninsured. Plus, if one individual-market insurer launches a wellness program that affects people's costs, the state's other insurers would have to follow suit or risk losing out to competitors that use the new program to attract healthier enrollees or discourage sicker customers from picking their plan. This sort of race to the bottom, where insurers compete on the health status of their customers instead of the price and quality of their plans, could leave people who have health issues with fewer affordable options in the individual market.

The wellness bulletin is just the latest example of how the Trump Administration is encouraging states to take steps that undermine the ACA. But, so far, no state has responded to the Administration's guidance encouraging states to use 1332 waivers to gut pre-existing condition protections, nor has any state weakened essential health benefits in response to the federal loosening of those rules. And more than a dozen states have stepped in to protect consumers against the spread of short-term health plans that don't cover pre-existing conditions, rather than letting federal rule changes expanding the availability of these plans carry the day.

The ACA's pre-existing condition protections are among the law's more popular and important elements. They help make the individual market accessible for people who had health issues in the past or may have them in the future. As they've previously done when the federal government has offered them the chance to undermine protections for people with pre-existing conditions, states should reject the invitation to set up discriminatory wellness programs.

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China Leapfrogs France for Ease of Business as Emerging World Gains [feedly]

Is it wrong that a socialist country has the most improved "business environment"?  .... or is that "scientific" socialism?

China Leapfrogs France for Ease of Business as Emerging World Gains
https://www.bloomberg.com/news/articles/2019-10-24/china-tops-france-for-ease-of-business-as-emerging-world-gains

text only verson

China leapfrogged France in the World Bank's annual rankings for ease of doing business, a shift that underscores the broader trend of developing economies catching up with their more advanced peers.

The world's second-largest economy catapulted from 46 last year to 31, just ahead of France, which was unchanged at 32, according to the report released Wednesday in Washington. The Middle East showed new strength with Saudi Arabia, Jordan, Bahrain and Kuwait among the top 10 gainers. That most-improved group also included India, Pakistan and Nigeria, three of the most populous nations.

Taking Care of Business

Hong Kong moves up as Sweden joins the top 10

Source: Doing Business 2020, World Bank

Note: Doing Business measures getting a building permit, obtaining an electricity connection, transferring property, getting access to credit, protecting minority investors, paying taxes, engaging in international trade, enforcing contracts and resolving insolvency

Doing business more easily is associated with higher levels of entrepreneurship, which supports better employment opportunities, higher government tax revenues and personal income gains, according to the report. Such outcomes could help lend needed support to the flagging global economy, which the International Monetary Fund projects will slow this year to 3%, the weakest since the financial crisis.

Removing obstacles to businesses can be a positive force for fostering economic expansion, though they're among many of the factors that can affect outcomes, according to Rita Ramalho, a senior manager in the World Bank's global indicators group and one of the main authors of the "Doing Business 2020" report.

"Improving in this can have positive impacts on growth," she said in an interview. "We've done research on that and it does show that there are positive patterns and associations between having simpler, better business regulations and having higher growth rates, but it's not a silver bullet."

Some 115 of 190 economies made it easier to do business, though progress has been uneven: The top 50 include no Latin American economies and just two African nations. It takes entrepreneurs nearly six times longer on average to start a business in the in the bottom 50 economies than in the top 20.

Leader Board

New Zealand kept the top spot and Singapore held No. 2. Hong Kong moved up a notch to third, trading places with Denmark, while South Korea stayed in fifth. The U.S. moved up two spots to No. 6, knocking Georgia back to seventh, while the U.K., Norway and Sweden rounded out the top 10.

The best performers generally have "sound business regulation with a high degree of transparency," and a common theme across the highest-scoring economies was widespread use of electronic systems, according to the report. All of the top 20 offer online business incorporation, electronic tax filing, and online property transfers.

The study evaluates how regulations enhance or constrain activity for smaller firms by measuring 10 variables, including the ease of starting a business, obtaining construction permits, getting electricity connections, access to credit, paying taxes, cross-border trade and enforcing contracts.

The report said a considerable disparity persists between low- and high-income economies for starting a business: Entrepreneurs in low-income economies typically spend the equivalent of 50% of income per capita to start a company, compared with just 4.2% for their counterparts in high-income economies.

'Ample Room'

"There's ample room for developing economies to catch up with developed countries on most of the doing business indicators," World Bank President David Malpass wrote in the report. "Performance in the area of legal rights, for example, remains weakest among low- and middle-income economies."

The development lender credited leaders in both China and India for adopting the indicators outlined in the annual report as a core part of their reforms, according to the report.

Indian Prime Minister Narendra Modi's years-long push to make life easier for companies showed more progress as the country's ranking rose to 63 from 130 in 2016. The report cited a "remarkable reform effort" and said the changes are particularly commendable given the size of the economy.

China has made it easier to obtain construction permits, getting electricity, and resolve insolvency, reflecting government efforts to created working groups focused on each of the report's indicators. "The use of 'Doing Business' as a benchmark aligns with the central government's ambition to improve the competitiveness of the Chinese economy," according to the report.

The improvement in the U.S. was based on changes in New York City and Los Angeles, the two largest cities. Both cut corporate taxes, while Los Angeles made starting a business easier by introducing more online filing and rolled out electronic filing that made enforcing contracts easier.

The six nations rounding out the bottom of the list remained in the same spots as last year: South Sudan, Libya, Yemen, Venezuela, Eritrea and, in last place, Somalia.
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Brexit is a denial of economics as knowledge [feedly]

Brexit is a denial of economics as knowledge
http://mainlymacro.blogspot.com/2019/10/brexit-is-denial-of-economics-as.html

A well known Brexiters said it was almost worth doing Brexit because of the anger I feel about it. He is right about the anger. The prospect of Brexit has filled me with the same horror as austerity did. The connection between the two is obvious. Both involve subjecting the whole country to a policy that basic economic ideas tell you will do nearly everyone harm.

We have seen nothing like this in my lifetime. The only person to try austerity (by which I mean fiscal consolidation in a recession) was Thatcher, and the policy was reversed (not stopped, but the consolidation was undone) within two years. Every government, and especially Thatchers, has pursued regulatory harmonisation and tariff reductions to increase trade. Now in just one decade we have seen both austerity for seven years and an attempt to dramatically increase trade barriers.

Imagine you were a doctor, and the government had appointed anti-vaxers to key positions who proceeded to reduce the vaccination programme. How would you feel as more children fell ill. Imagine you are a climate scientist and your government says it does not believe in man made climate change and encourages coal production. You don't have to imagine of course, because exactly that is happening in the US and elsewhere. And you can ask the doctors and the climate scientists how they feel about it.

What we have seen since 2010 in the UK is the equivalent for economics. I would argue that this is no accident, but comes from the same source as climate change denial and anti-vaxers. Some people may not accept that comparison, and argue that economics is not a real science or some-such. And I agree that with austerity they had ammunition from within economics itself. There are still some macro economists around, nowhere near a majority but because they say things right wing politicians like they are 'prominent in the public debate', who deny the validity of what Keynes wrote after the Great Depression. But we see the proof that Keynes was right today: a Great Recession followed by a limp recovery as the government squeezed demand. A minority of academic economists supporting austerity was no reason to largely exclude the views of the majority of academic economists, and all the evidence is that their views were almost completely excluded from the broadcast media. 

There is no such ambiguity with trade. We know trade between two people benefits those people because otherwise the trade would not happen. The very basis of the economy is trade. Every day we go to work we trade our labour for goods that go to someone else. Our work represents specialisation that allows everyone to benefit. If we had to produce everything we consume ourselves we would be much poorer.

This is why governments try to encourage trade agreements between countries to make trade between them easier. Greater trade is like technical progress, because it allows countries to focus on producing things they are good at producing. Now it is possible that such agreements, although they make the country better off, may not make everyone in the country better off. But every academic trade economist agrees that getting rid of the EU Customs Union and Single Market will make almost everyone in the UK a lot poorer. (Patrick Minford, whose analysis has an uncanny habit of always supporting hard right policies, is not a trade economist.)

Brexiters know this, which is why they came up with the idea of global Britain. It is a farce, which can be refuted in at least two ways. First, every analysis based on academic research I have seen suggests the gains from trade deals with other countries outside the EU come nowhere near the loss due to less trade with the EU. Nowhere near. Second, if you want good trade deals with other countries, the best way to achieve them is to get the EU to negotiate them on your behalf, because the EU is more experienced and has much more clout in any negotiations than the UK. That is why the EU has so many trade agreements with other countries. 

All this knowledge about the impact of trade on productivity and incomes was dismissed by Brexiters with two words: Project Fear. All the knowledge that Keynesians have accumulated for 80 years was dismissed with a few more: the government has maxed out its credit card. Others have dismissed the knowledge of doctors and climate scientists with similar home-spun homilies.

Yet many, including many in the media, still refuse to think of economics as knowledge. People who wouldn't think twice about saying a fall in the supply of coffee will raise its price say all economics is just dressed up political opinion. People who would not dream of ignoring doctors just because they cannot predict when you get a cold say all economics forecasts are worthless. Of course there are some things, like whether the Euro was a good idea in economic terms, where there are pros and cons and therefore economists' views may differ or change. But the evidence that making trade substantially more difficult with our immediate neighbours will be harmful is so overwhelming that only 1 in 22 UK economists disagree. I have yet to meet an economist who specialises in trade who disagrees. 

So when a woman on Question Time saidwe just do not know what will happen after Brexit, she was repeating an idea pushed repeatedly by the Brexit press and implicitly supported by most broadcasters. The BBC accepts that climate change is happening (most of the time) because that knowledge comes from 'proper scientists'. The BBC does not accept that Brexit will make the UK worse off in economic terms because it is knowledge predicted by economists, and they think economics is not knowledge.

The right in the UK and US are now set on a course where they are prepared to defy science itself for their own interests. But this can only succeed when some of those who think of themselves as in the centre let them. In this case it has been allowed to happen in part because political journalists and those above them at the BBC decided economics where the overwhelming majority of economists agree was not knowledge but just another opinion. As I have spent my working life examining how economics can improve policy choices it is hardly surprising I find that simple ignorance outrageous.

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Mark Anner: The Struggle for Work with Dignity through Broad Campaigns and Social Alliances [feedly]

Strengthening global labor organization would make it much easier to pressure the WTO and other trade institutions to add labor representation based on adding INTERNATIONAL LABOR INTERESTS of trade agreement discussions and negotiations.

The Struggle for Work with Dignity through Broad Campaigns and Social Alliances
https://www.globalpolicyjournal.com/blog/22/10/2019/struggle-work-dignity-through-broad-campaigns-and-social-alliances

Improving the lot of global supply chain workers involves not only organising local and migrant workers to pressure suppliers, brands and retailers, but leveraging the financial sector and state institutions.

Power imbalances in global supply chains are used by multinational corporations to squeeze suppliers, and by suppliers to squeeze workers. Yet, supply chains involve far more than buyers, suppliers, and factory workers. Above buyers sit a range of financial sector actors demanding ever increasing returns on their investments, and above them are powerful states and inter-state institutions setting the rules of the game. In the past several decades, those rules have encouraged the proliferation of global supply chains through trade liberalisation and other policies.

At the same time, local factory workers are not the only ones squeezed at the bottom. So are informal sector workers, particularly women, and internal and external migrant workers. Many workers rely on family remittances to survive. They also purchase their goods from workers in the informal sector, whose under-valued labour helps to subsidise the dramatic profits and income of those at the top.

Tackling the challenges facing labour in global supply chains thus involves issues of factory work, the informal sector, and migrant labour. Efforts to achieve sustained improvements will require broad, strategic alliances that bring together labour unions, advocacy organisations for workers in the formal and informal sectors, migrant workers' rights groups, and the philanthropic groups who support these efforts. This broad social coalition will furthermore need to leverage all aspects of the supply chain structure, including suppliers, brands, retailers, the financial sector, states, and international institutions, to achieve positive and lasting change.

Wealth and power at the top of global supply chains

We now live in a world in which the CEO of Amazon, Jeff Bezos, earns $3,181 per second, which is more than the majority of supply chain workers in the global south earn in an entire year. Amancio Ortega, founder of clothing retailer Zara, has an estimated net worth of $62.7 billion. That is more than the total annual value of Bangladesh's apparel exports ($32 billion) and Vietnam's mobile phone and related components exports ($49 billion). The finance sector – whether it is via shareholders, private equity firms, or other financial instruments – wields enormous power and influence. It has been vital to this dramatic concentration at the top. Amazon's market valuation of $910 billion is more than that of the its next seven major competitors, including Walmart.

The top of the global supply chain does not end with the finance sector. One step higher are those who make the rules of the game that allow for this massive concentration of wealth and power. States in the Global North made the decisions to deregulate financial markets, especially in the United States. And inter-state institutions, such as the World Trade Organization in the 1990s, made the decisions that liberalised trade in sectors such as apparel, contributing to the further global dispersion of production.

The International Monetary Fund and the World Bank also have used their power and influence to deregulate labour markets and weaken freedom of association rights, which further facilitated the growth of supply chains by increasing downward pressure on wages and workers' rights. Hence, addressing worker rights problems in global supply chains also necessarily entails leveraging powerful state and inter-state actors to change the rules of the game.

Local, migrant, and informal workers in supply chains

While the role of buyers, the financial sector, and powerful states force us to look more closely at the top of supply chains, diverse worker experiences require us to examine how local labour, informality, and migrant workers all contribute to profit generation in supply chains. In the Dominican Republic, Haitian workers have been used for decades on sugar plantations to keep wages low and unions weak. In India, informal workers – many of them children facing horrifically unsafe conditions – mine the mica that goes into the makeup sold at considerable profit by multinational beauty products corporations. In Bangalore, India, internal migrant workers from northeast India increasingly make up the army of underpaid apparel export workers.

Informal markets for informal workers also help to subsidise those at the top of supply chains. Underpaid supply chain workers do not buy their goods in supermarkets. They shop in the informal sector, where the low income of market vendors reduces the cost of food and other basic goods. How often do we hear factory owners, brands, and retailers justifying the low wages paid to workers as acceptable because living expenses are relatively 'cheap' in producer countries? It's a common but deceptive argument. What is really happening is that underpaid supply chain workers are buying underpriced goods from underpaid informal sector workers. That is, underpaid informal sector work artificially deflates the costs of living, which permits suppliers to pay workers lower salaries, buyers to pay suppliers less for the products they make, and investors to enjoy better returns. The bottom of supply chains once again subsidises the top.

Worker remittances: subsidising supply chains

Completing this picture is the role of remittances. In 2018 migrant workers sent $482 billion back home to low- and middle-income countries. In El Salvador, remittances are approximately ten times the value of apparel exports. In Bangladesh, while four million garment workers receive less than $5 billion in annual wages, the country takes in over $15 billion in worker remittances. In Mexico, where workers labour in apparel, electronics and auto-parts supply chains, firms deliberately seek out communities with high levels of remittances in order to more easily pay less than a living wage. Migrant workers through their remittances (just like informal sector vendors) are thus partially subsidising the firms that sit at the top of global supply chains. Despite corporations' claims of the long-term development benefits of global supply chains, poverty reduction in many developing countries is far more likely to be the result of workers receiving remittances from poor workers abroad than it is a result of work in many global supply chains.

The structure of global supply and the role of factory, informal, and migrant workers. | Provided by author.

The way forward?

The problems facing workers in global supply chains are enormous. They include below subsistence wages, sexual harassment, verbal and physical abuse, inhumane production targets, unsafe buildings, and systematic and often violent efforts to deny workers their rights to organise, collectively bargain, and strike. Yet, the figure above provides some indication of what a comprehensive strategy for change might entail. To start, it requires continued and constant pressure on supplier factories, farms, and mines, and on brands and retailers to ensure respect of workers' rights in supply chains.

The figure also suggests that change entails targeting and leveraging the financial sector. This may include leveraging pension funds as part of campaigns or pushing for effective social investment standards. And it certainly entails targeting state and inter-state institutions that set the rules of the game for supply chains. This requires greater regulation of the financial sector, trade rules for sustainable development, immigration reform, comprehensive mandatory due diligence legislation, and binding treaties.

Private governance, such as the binding accords in Bangladesh and Lesotho, are also powerful and necessary instruments for change. The analysis above also points to myriad ways in which a full range of workers – local and migrant, formal and informal – contribute to the considerable wealth generated by supply chains. This highlights the crucial need to achieve full respect for freedom of association rights and organise all these workers through better labour laws and more effective enforcement so that they are empowered and engaged in collective responses to the enormous challenges they face.

 

 

The author thanks Catherine Bowman and Cathy Feingold for helpful feedback on earlier versions of this article.

Mark Anner is Associate Professor of Labour and Employment Relations and Political Science at Penn State University, and Director of the Center for Global Workers' Rights. He is also chair of the Program on Labour and Global Workers' Rights, which is part of the Global Labour University network. Mark spent 11 years working with labour unions and labour research centres in Central America and Brazil, and was a union organiser in Boston. He represented worker delegations at ILC 2016.

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Tim Taylor: The Rise of Global Trade in Services [feedly]

Important observations from Tim Taylor on the globalization of services -- which once were thought to be more immune to "running away". Not so, it appears.

The Rise of Global Trade in Services
http://conversableeconomist.blogspot.com/2019/10/the-rise-of-global-trade-in-services.html

Our mental images of "global trade" are usually about goods: cars and steel, computers and textiles, oil and home appliances, and so on. But in the next few decades, most of the action in terms of increasing global trade is likely to be in services, not goods. More and more of the effects of trade on jobs is going to involve services, too. However, most of us are not used to thinking about countries import and export across national borders transportation services, financial services, tourism, construction, health care and education services, or many others.  The 2019 World Trade Report from the World Trade Organization focuses on the theme, "The future of services trade."  Here are some tidbits from the report (citations and references to figures omitted):

Services now seem to be transforming international trade in similar ways. Although they still only account for one fifth of cross-border trade, they are the fastest growing sector. While the value of goods exports has increased at a modest 1 per cent annually since 2011, the value of commercial services exports has expanded at three times that rate, 3 per cent. The services share of world trade has grown from just 9 per cent in 1970 to over 20 per cent today – and this report forecasts that services could account for up to one-third of world trade by 2040. This would represent a 50 per cent increase in the share of services in global trade in just two decades.

There is a common perception that globalization is slowing down. But if the growing wave of services trade is factored in – and not just the modest increases in merchandise trade – then globalization may be poised to speed up again.

Of course, high-income countries around the world already have most of their GDP in the form of services. But it's not as widely recognized that emerging market economies already have a majority of their output in services, too, or very close.

Services already accounted for 76 per cent of GDP in advanced economies in 2015 – up from 61 per cent in 1980 – and this share seems likely to rise. In Japan, for example, services represent 68 per cent of GDP; in New Zealand, 72 per cent; and in the US, almost 80 per cent. 

Emerging economies, too, are becoming more services-based – in some cases, at an even faster pace than advanced ones. Despite emerging as the "world's factory" in recent decades, China's economy is shifting dramatically into services. Services now account for over 52 per cent of GDP – a higher share than manufacturing – up from 41 per cent in 2005. In India, services now make up almost 50 per cent of GDP, up from just 30 per cent in 1970. In Brazil, the share of services in GDP is even higher, at 63 per cent. Between 1980 and 2015, the average share of services in GDP across all developing countries grew from 42 to 55 per cent.

Here's  figure showing the main services that are now being traded internationally. International trade in health care and education services is small, so far. The big areas at present are distribution services, financial services, telecom and computer services, transport services, and tourism. 

Like most big economic shifts, the rise in services trade is being driven by multiple factors. One is that advances in communications and information technology are making it vastly cheaper to carry out a service in one location and then to deliver it somewhere else. Another is that services are becoming a bigger part of the output of companies that, at first glance, seem focused mainly on goods. For example, car companies produce cars. But they also make a good share of their income providing services like financing, after-sales service of cars already sold, and customizing cars according to the desires of buyers. Another shift is what has been called "premature deindustrialization,"referring to the fact that much of the future output growth in manufacturing is likely to come from investments in robotics and automation, while most of the future jobs are likely to be in services. The report notes:

Just because the services sector is playing a bigger role in national economies, this does not mean that the manufacturing sector is shrinking or declining. Many advanced economies are "post-industrial" only in the sense that a shrinking share of the workforce is engaged in manufacturing. Even in the world's most deindustrialized, services-dominated economies, manufacturing output continues to expand thanks to mechanization and automation, made possible in no small part by advanced services. For example, US manufacturing output tripled between 1970 and 2014 even though its share of employment fell from over 25 per cent to less than 10 per cent. The same pattern of rising industrial output and shrinking employment can be found in Germany, Japan and many other advanced economies. ...

This line between manufacturing and services activities, which is already difficult to distinguish clearly, is becoming even more blurred across many industries. Automakers, for example, are now also service providers, routinely offering financing, product customization, and post-sales care. Likewise, on-line retailers are now also manufacturers, producing not only the computer hardware required to access their services, but many of the goods they sell on-line. Meanwhile, new processes, like 3D printing, result in products that are difficult to classify as either goods or services and are instead a hybrid of the two. This creative intertwining of services and manufacturing is one key reason why productivity continues to grow.

There are lots of issues here. For example, will the gains from trade in services end up benefiting mainly big companies, or mainly large urban areas, or will it allow small- and medium-sized firms in smaller cities or rural areas to have greater access to global markets? Many trade agreements about services are going to involve negotiating fairly specific underlying standards: for example, if a foreign insurance company or bank wants to do business in other countries, the solvency and business practices of that company will be a fair topic of investigation. 

The report offers lots of detail on services exports and imports around the world: for example, from advanced and developing countries, involving different kinds of services, as part of global value chains, the involvement of smaller and larger companies, the involvement of female and male workers, case studies of different aspects of services trade in India, China Kenya, Mexico, Philippines, and others. But overall, it seems clear that an ever-larger portion of international trade is going to be arriving electronically, not in a container-shipping compartment at a border stop or a port, and all of us are going to need to wrap our minds around the implications. 

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Locking China Out of the Dollar System [feedly]

Locking China Out of the Dollar System
https://www.project-syndicate.org/commentary/trump-china-trade-war-financial-flows-dollar-by-paola-subacchi-2019-10

By broadening the nexus between economic interest and national security, Trump is encouraging the decoupling of the world's two largest economies and the emergence of a bipolar world order led by rival hegemons. Beyond fragmenting the trade and financial system that has underpinned the global economy for decades, the stage would be set for a devastating conflict.

LONDON – The recently announced "phase one" agreement between the United States and China has been touted as an important step toward a comprehensive deal that ends the trade war that has raged for over a year. But if you think that US President Donald Trump is ready to abandon his antagonistic China policy, think again. In fact, the Trump administration is already moving to launch another, closely related war with China, this time over financial flows.


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In a highly integrated world economy, trade and finance are two sides of the same coin. Cross-border trade transactions depend on a well-functioning international payments system and a robust network of financial institutions that are willing and able to issue credit. This financial infrastructure has been built around the US dollar – the most liquid and exchangeable international currency.

The dollar's position as the leading global reserve currency has long afforded the US what Valéry Giscard d'Estaing, then France's finance minister, dubbed an "exorbitant privilege": America can print money at negligible cost and use it to purchase goods and services globally. But, with the opening up of global capital markets, the US has also gained exorbitant leverage over the rest of the world.

Today, some 80% of global trade is invoiced and settled in dollars, and most international transactions are ultimately cleared through the US financial system. About 16 million payment orders transit daily through the Euro-American Society for Worldwide Interbank Financial Telecommunication (SWIFT) network. Thus, US restrictions on capital flows have more far-reaching effects than any trade tariff. And yet imposing them requires only invoking the 1977 International Emergency Economic Powers Act (IEEPA), which allows the US president to declare a national emergency and deploy a range of economic tools to respond to unusual or extraordinary threats.

The IEEPA has formed the legal basis for many US sanctions programs, with presidents using it largely to block transactions and freeze assets. For example, in the 1980s, President Ronald Reagan issued an executive order under the IEEPA blocking all payments to Panama after a coup brought Manuel Noriega to power. (Funds intended for Panama were diverted to an escrow account established at the Federal Reserve Bank of New York.)

Trump – who has proved more than willing to cry "emergency" when it suits him – has cited the IEEPA many times, including to justify tariffs on imports from Mexico and to assert his authority to demand that US companies "immediately start looking for an alternative to China." Hoping to drive Venezuelan President Nicolás Maduro from office, he used the IEEPA to freeze the assets of state-owned oil company PDVSA.

Trump has also forbidden US investors from purchasing any debt owned by Venezuela's government or trading in shares of any entity in which it holds a controlling stake. Meanwhile, Trump has given Juan Guaidó, the US-backed interim president, access to Venezuelan government assets held at the Fed since his predecessor, Barack Obama, froze them in 2015.

Contrary to popular belief, Trump has not imposed more sanctions than his forebears. But he has devised particularly creative ways – often taking advantage of America's disproportionate financial leverage – to ensure that his administration's measures impose maximum damage, regardless of the effects on third parties. Likewise, Russia faces not only standard asset freezes and transaction blocks, but also limits on access to the US banking system and exclusion from procurement contracts.

China, which is already struggling with declining exports, sluggish investment, weak consumption, and a growth slowdown, apparently is next. The Trump administration is reportedly considering restrictions on US portfolio flows into China, including a ban on US pension funds from investing in Chinese capital markets, delisting Chinese firms from US stock exchanges, and limiting their access to stock indexes managed by US firms. How such policies would be implemented remains unclear; it would be no easy feat. But lacking a well-defined strategy has never stopped Trump before, especially when it comes to using economic levers to advance geopolitical objectives.

This approach may work in the short term, but it is sure to catch up to the US. Trump's repeated weaponization of the dollar undermines trust among holders of dollar-backed and US-verified assets. How many foreign companies will be willing to list on a US stock exchange knowing that they may be delisted at will? And how many non-US residents will keep their assets in US banks if any geopolitical skirmish can result in a freeze?

As mistrust of the US mounts, the drive for international monetary reform, which China has been advocating for the last decade, will gain momentum. This could mean expanding the international role of other currencies, such as the euro or, if China has its way, the renminbi. It could also lead to the creation of an alternate monetary system, centered on the needs of developing countries, especially oil and commodities exporters.

By broadening the nexus between economic interest and national security, Trump is encouraging the decoupling of the world's two largest economies and the emergence of a bipolar world order led by rival hegemons. Beyond fragmenting the trade and financial system that has underpinned the global economy for decades, the stage would be set for a devastating conflict.

PAOLA SUBACCHI

Writing for PS since 2012
29 Commentaries

Paola Subacchi, Professor of International Economics at the University of London's Queen Mary Global Policy Institute, is the author of The People's Money: How China is Building a Global Currency.
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