North and South Send Trains Across the Korean Frontier

Wolfowitz Resigns From World Bank

May 12, 2007
Suspicious Trading on the Rise
By JENNY ANDERSON

On Wall Street, it feels like the 1980s all over again. Investment banks and
private equity firms are minting money on a binge of deal making. Buyouts
are not only back, but bigger than ever. Billionaire titans of finance are
feted at huge, glittering parties. Even leggings are back in style.

But there was a dark side to the decade, and that seems to have returned as
well. Regulators are again knee-deep in insider trading cases, with
profiteers spanning the globe, from Hong Kong to Lower Manhattan. Just this
week, United States authorities froze the account of a couple who are
suspected of insider trading on $15 million worth of Dow Jones shares,
arrested an energy banker at Credit Suisse who is charged with leaking
information on nine deals to a contact in Pakistan and accused another
couple of illegally trading on information out of Morgan Stanley’s real
estate subsidiary.

"Everything is going global, even insider trading," said Robert A. Marchman,
executive vice president and head of market surveillance at NYSE Regulation.

But unlike the scandals in the 1980s, when Wall Street stars like Ivan F.
Boesky were caught in insider trading investigations, the recent flurry of
cases have chiefly involved young bit players. And the schemes, as outlined
by regulators, are predictably similar. Wives team up with husbands;
investment bankers call friends; research executives pay off old debts with
valuable tips.

Mr. Marchman cut his teeth on the Boesky scandal, an event he says may have
receded too far into the past to scare the young guns on Wall Street today.

“You are dealing with people who don’t have a recollection of what took
place in that scandal and think they are above the law, that the regulators
don’t have the technology to detect this activity. As evidenced by the
number of recent cases, they are flat- out wrong.”

The rash of cases may be partly attributable to the surge in the number and
the size of deals. Unlike deals in the 1980s, when takeovers were often
hostile, transactions today are usually friendly, which means that there are
two groups of lawyers, bankers and company officials in possession of
valuable inside information, not just one. Deals today are also supersize,
with consortiums of private equity firms lining up seemingly every big bank
on Wall Street to finance the buyout.

At the same time that deals and the number of people involved in deal-making
have increased, the number of hedge funds has surged, with their traders
looking for any competitive edge in information. As a result, the potential,
and temptation, for information to be leaked is substantial.

“Given the incentives and the compensation in the hedge fund industry to
deliver extraordinary returns, there has to be an immense pressure on hedge
fund managers to take every opportunity they can find, even if it means
stepping over the line,” said Donald C. Langevoort, a professor of law at
Georgetown and a former special counsel at the Securities and Exchange
Commission. “That doesn’t mean they all do it, but if you think you won’t be
caught, it’s easy money.”

S.E.C. officials expressed dismay over the number of Wall Street
professionals involved in the cases, from investment bankers and advisers to
lawyers and accountants. “When we see Wall Street professionals engage in
insider trading, it’s particularly reprehensible because we rely on them to
keep the markets fair and clean,” said Peter H. Bresnan, deputy director of
enforcement at the S.E.C. After the insider trading scandals of the 1980s,
Mr. Bresnan said “insider trading moved from Wall Street to Main Street; now
it’s back on Wall Street."

Insider trading cases can originate from tips or from cooperating witnesses.
The S.E.C. generally brings about 45 of them a year. Another important
source consists of referrals from the exchanges. Through April 20, before
the recent flurry, the New York Stock Exchange had referred 45 cases to the
commission, compared with 111 for all of 2006. (Not all those referrals will
result in cases.)

The New York Exchange’s 160-member market surveillance division works in a
warren of cubicles inside the exchange. It resembles any corporate office
except for the widescreen television that lists a table of the active
stocks, along with real-time trading data. Computer systems run specialized
algorithms (co-designed by the Massachusetts Institute of Technology) that
generate alerts when stocks exceed preset trading limits.

It was in that office last fall that Ryan Hickey, a senior special analyst,
noted that the market surveillance system had flagged unusual movement in
the stock of Trammell Crow before the announcement of its acquisition by the
CB Richard Ellis Group. Ms. Hickey then opened a case in the trades,
contacting the brokerage firms that handled the transactions.

The information Ms. Hickey and her team gleaned has since grown into the
investigation of nine deals, including the $45 billion leveraged buyout of
TXU, that regulators say was leaked by the Credit Suisse banker.

Still, it is unclear whether the regulators are even touching the surface.
Technology has improved, allowing authorities to capture conversations on
e-mail and instant messaging that makes it easier to establish that
information has been passed around.

“Historically one of the challenges facing prosecutors is proving that
communication took place between the tipper and the tipee,” said Ron
Geffner, a lawyer at Sadis & Goldberg who previously worked at the S.E.C.
“Advances in technology have helped prosecutors, not hurt them. We now have
records of everything, unless it’s like ‘Goodfellas’ where everyone is
actually meeting to talk.”

But at the same time, information travels at warp speed, financial
instruments are more complex and the trading is showing more savvy.

“The way that people are engaging in insider trading is getting more
sophisticated, derivatives, trading in places that won’t come to us, the
combination of products, the combination of accounts, the use of different
prime brokerage accounts,” said David Steiner, a vice president in market
surveillance at NYSE Regulation. “The more sophisticated it becomes, the
more sophisticated we have to become.”

A case in point is that entities can trade onshore and offshore, in stocks,
derivatives, bonds and even spread betting, where traders can bet on a
percentage increase or decrease in a security without buying it.

Christopher K. Thomas, who founded a firm called MeasuredMarkets to identify
unusual trading patters, says he has not seen a drop in suspicious trading
patterns.

“Nothing so far has shown me that the tendency is decreasing,
notwithstanding all the high-profile cases and the publicity,” he said.

And yet this week alone, regulators seemed to be on a full-court press to
catch offenders. Cooperation, both domestically and internationally, is
helping, say regulators, as well as improvements in technology.

Each of the recent cases has quirky elements of intrigue. Regulators are
examining the “highly suspicious” trading of Dow Jones shares and whether a
Hong Kong couple were tipped off that Rupert Murdoch was making an offer for
the company before it became publicly known. In the Credit Suisse case, the
banker accused of leaking information on deals, made calls from his office,
investigators say.

Two separate Morgan Stanley cases put a new twist on pillow talk. Randi
Collotta, a 30-year-old former lawyer in the compliance department at Morgan
Stanley, fed tips about four deals to her husband who passed them on to a
high school friend. The friend netted $38,000; the Collottas, only $9,000.
(The couple pleaded guilty this week.)

On Thursday, the S.E.C. accused Jennifer Wang, a 31-year-old former analyst
at Morgan Stanley and her husband, Ruben Chen, 34, a former analyst in the
hedge fund group at ING of making more than $600,000 by trading on companies
advised by Morgan Stanley’s real estate subsidiary. Ms. Wang, a Princeton
graduate who was a vice president, and Mr. Chen are accused of trading
through Ms. Wang’s mother’s account. David Spears, a lawyer for the couple,
said on Thursday that they expected to plead not guilty.

But nothing yet would seem to match the audacity of what authorities said
was an insider-trading ring uncovered last year. They say that Eugene
Plotkin, a former fixed-income analyst at Goldman Sachs who graduated from
Harvard, teamed up with another onetime Goldman employee, David Pajcin, to
leak information on deals to various associates, including an aunt in
Croatia who was a former seamstress in an underwear factory. She made $2
million on one trade — setting off alarm bells that ultimately brought the
ring down. (Mr. Plotkin has pleaded not guilty and is awaiting trial; Mr.
Pajcin is cooperating with the government.)

Banks uniformly express outrage at such activity. Employees are trained and
retrained to recognize insider trading and report it. But the temptation is
still there.

“When you consider how complex and far-reaching the global securities
markets are, you see what an enforcement dilemma that provides,” Mr.
Langevoort of Georgetown Law said. “A lot more money needs to be spent on
these problems to not let insider trading be the equivalent of the H.O.V.
lane, where the chance of being caught is pretty remote.”

Michael J. de la Merced contributed reporting.

http://www.nytimes.com/2007/05/12/business/12insider.html?ref=business&pagewanted=print

May 12, 2007
Alfred D. Chandler Jr., a Business Historian, Dies at 88
By DOUGLAS MARTIN

Alfred D. Chandler Jr., an economic historian who revolutionized the writing
of business history, shunning the old debate about whether tycoons are good
or bad, and instead arguing persuasively in almost two dozen books that it
was the emergence of professional management that propelled modern
capitalism, died on May 9 in Cambridge, Mass. He was 88.

Jim Aisner, a spokesman for Harvard Business School, where Dr. Chandler had
taught, announced the death.

Fortune Magazine last year called Dr. Chandler “America’s pre-eminent
business historian,” saying that for a long-term perspective on the Fortune
500, the magazine’s ranking of the biggest corporations, “there’s really
only one person to ask.”

Before Dr. Chandler, the bulk of business histories were morality plays that
portrayed executives as heroic or damnable. He helped redirect the field
toward dispassionate analysis of the anatomy of business. He emphasized the
transformative power of technology as railroads and the telegraph spawned
big business. These corporations needed what Mr. Chandler called “a new
subspecies of economic man — the salaried manager.”

The salaried manager represented a new concept: a manager could possess
management expertise independent of the content of what he was managing.
Unlike the traditional entrepreneur, he need have no stake in the company he
managed.

Dr. Chandler developed this theme most famously in “The Visible Hand: The
Managerial Revolution in American Business” (1977), which won the Pulitzer
Prize for history and the Bancroft Prize. His thesis was that managers,
functioning as a “visible hand,” had replaced the “invisible hand” of Adam
Smith’s free market in allocating resources.

This new emphasis on organizational structure so transformed the field of
business history that some call the period before Dr. Chandler’s
publications “B.C.,” meaning before Chandler. Glenn Porter wrote in 1992 in
“The Rise of Big Business, 1860-1920”: “Virtually every work now written on
the history of modern, large-scale enterprise must begin by placing itself
within the Chandlerian analytical framework.”

Dr. Chandler’s work was distinguished by an intellectual rigor he gleaned
from the sociologist Talcott Parsons, one of his professors at Harvard. Dr.
Chandler rigorously compared earlier and later time frames to see what
changed, and, more important, what caused the change. He likened the process
to a controlled scientific experiment.

His conclusions jolted conventional wisdom. For example, he said that
America’s industrial revolution did not start in New England mills, but with
the beginning of large-scale mining of anthracite coal fields in
Pennsylvania in the 1830s and 1840s. This new power source replaced water,
wood and charcoal, facilitating the making of iron and metal products.

Alfred du Pont Chandler Jr. was born in Guyencourt, Del., on Sept. 15, 1918.
Although he was not a blood relation of the du Ponts who founded the
chemical company, his great-grandmother was raised by the du Ponts after her
parents died of yellow fever.

Alfred spent his first five years in Buenos Aires, where his father
represented an American locomotive company. When he was 11, the family moved
back to the United States and settled near Wilmington.

Family lore has it that the boy announced his intention to become a
historian by the time he was 7. He was inspired by Wilbur Fisk Gordy’s book
“An Elementary History of the United States,” a primer for sixth-graders his
father gave him. He read it 19 times.

At Phillips Exeter Academy, he won a prize for excellence in history. In
1940, he graduated magna cum laude from Harvard, where generations of his
family had studied, beginning in the 18th century. During World War II, he
served in the Navy, interpreting intelligence photos.

He enrolled as a graduate student at the University of North Carolina at
Chapel Hill to study Southern regional history. But he became captivated by
sociology, and returned to Harvard to study with Mr. Parsons.

He stumbled on his dissertation topic in old papers on the history of
American railroads written by his great-grandfather, a founder of the
financial-data company that became Standard & Poor’s. The dissertation
became a book, “Henry Varnum Poor: Business Editor, Analyst and Reformer”
(1956).

From 1950 to 1963, Dr. Chandler taught at the Massachusetts Institute of
Technology, where he helped edit the letters of Theodore Roosevelt and wrote
“Strategy and Structure,” which used General Motors, DuPont, Exxon and
Sears, Roebuck to develop his ideas on how companies employ organization
structure to further strategy.

Dr. Chandler taught at Johns Hopkins, where he edited the papers of
President Dwight D. Eisenhower, then joined the faculty of Harvard Business
School from which he retired in 1989. He was editor of the Harvard Studies
in Business History.

He was a visiting professor at Oxford and elsewhere, and president of the
Economic History Association and the Business History Conference. He was a
member of the American Philosophical Society and a fellow of the American
Academy of Arts and Sciences.

Dr. Chandler is survived by his wife, the former Fay Martin; his daughters,
Alpine (Dougie) Chandler Bird, of Annapolis, Md., and Mary (Mimi) Chandler
Watt, of Dina Powys, Wales; his son, Howard, of Maharishi Vedic City, Iowa.;
his sisters Nina Murray, of Bedford, Mass., and Nantucket, and Sophie
Consagra, of Manhattan; five grandchildren and two step-grandchildren; and
one great-grandchild.

Dr. Chandler fancied a glass of sherry with lunch before retiring to write
on yellow-lined paper in small, cramped letters. Though he did not use a
computer, he gave characteristic thought to its impact on economic change.

“All I know is that the commercializing of the Internet is transforming the
world,” he said in an interview with Newsweek last year.

http://www.nytimes.com/2007/05/12/business/12chandler.html?pagewanted=print

http://www.paecon.net/PAEReview/development/Chang15.htm

post-autistic economics review
Issue no. 15,  1 September 2002
article 3

Kicking Away the Ladder:
How the Economic and Intellectual Histories of Capitalism Have Been
Re-Written to
Justify Neo-Liberal Capitalism

Ha-Joon Chang   (Cambridge University, UK)

© Copyright 2002 Ha-Joon Chang

There is currently great pressure on developing countries to adopt a set of “good policies” and “good institutions” – such as liberalisation of trade and investment and strong patent law – to foster their economic development.

When some developing countries show reluctance in adopting them, the proponents of this recipe often find it difficult to understand these countries’ stupidity in not accepting such a tried and tested recipe for development. After all, they argue, these are the policies and the institutions that the developed countries had used in the past in order to become rich. Their belief in their own recommendation is so absolute that in
their view it has to be imposed on the developing countries through strong bilateral and multilateral external pressures, even when these countries don’t want them.

Naturally, there have been heated debates on whether these recommended policies and institutions are appropriate for developing countries. However, curiously, even many of those who are sceptical of the applicability of these policies and institutions to the developing countries take it for granted that these were the policies and the institutions that were used by the developed countries when they themselves were developing countries.

Contrary to the conventional wisdom, the historical fact is that the rich countries did not develop on the basis of the policies and the institutions that they now recommend to, and often force upon, the developing countries. Unfortunately, this fact is little known these days because the “official historians” of capitalism have been very successful in re-writing its history.

Almost all of today’s rich countries used tariff protection and subsidies to develop their industries. Interestingly, Britain and the USA, the two countries that are supposed to have reached the summit of the world economy through their free-market, free-trade policy, are actually the ones that had most aggressively used protection and subsidies.

Contrary to the popular myth, Britain had been an aggressive user, and in certain areas a pioneer, of activist policies intended to promote its industries. Such policies, although limited in scope, date back from the
14th century (Edward III) and the 15th century (Henry VII) in relation to woollen manufacturing, the leading industry of the time.  England then was an exporter of raw wool to the Low Countries, and Henry VII for example tried to change this by taxing raw wool exports and poaching skilled workers from the Low Countries.

Particularly between the trade policy reform of its first Prime Minister Robert Walpole in 1721 and its adoption of free trade around 1860, Britain used very dirigiste trade and industrial policies, involving measures very
similar to what countries like Japan and Korea later used in order to develop their industries. During this period, it protected its industries a lot more heavily than did France, the supposed dirigiste counterpoint to its
free-trade, free-market system. Given this history, argued Friedrich List, the leading German economist of the mid-19th century, Britain preaching free trade to less advanced countries like Germany and the USA was like someone trying to “kick away the ladder” with which he had climbed to the top.

List was not alone in seeing the matter in this light. Many American thinkers shared this view. Indeed, it was American thinkers like Alexander Hamilton, the first Treasury Secretary of the USA, and the (now-forgotten)
economist Daniel Raymond, who first systematically developed the infant industry argument. Indeed, List, who is commonly known as the father of the infant industry argument, in fact started out as a free-trader (he was an ardent supporter of German customs union – Zollverein) and learnt about this argument during his exile in the USA during the 1820s

Little known today, the intellectual interaction between the USA and Germany during the 19th century did not end there. The German Historical School – represented by people like Wilhelm Roscher, Bruno Hildebrand, Karl Knies, Gustav Schmoller, and Werner Sombart – attracted a lot of American economists in the late 19th century. The patron saint of American Neoclassical economics, John Bates Clark, in whose name the most prestigious award for young (under 40) American economists is given today, went to Germany in 1873 and studied the German Historical School under Roscher and Knies, although he gradually drifted away from it. Richard Ely, one of the leading American economists of the time, also studied under Knies and
influenced the American Institutionalist School through his disciple, John Commons. Ely was one of the founding fathers of the American Economic Association; to this day, the biggest public lecture at the Association’s annual meeting is given in Ely’s name, although few of the present AEA members would know who he was.

Between the Civil War and the Second World War, the USA was literally the most heavily protected economy in the world. In this context, it is important to note that the American Civil War was fought on the issue of
tariff as much as, if not more, on the issue of slavery. Of the two major issues that divided the North and the South, the South had actually more to fear on the tariff front than on the slavery front. Abraham Lincoln was a
well-known protectionist who cut his political teeth under the charismatic politician Henry Clay in the Whig Party, which advocated the “American System” based on infrastructural development and protectionism (thus named on recognition that free trade is for the British interest). One of Lincoln’s top economic advisors was the famous protectionist economist, Henry Carey, who once was described as “the only American economist of importance” by Marx and Engels in the early 1850s but has now been almost completely air-brushed out of the history of American economic thought. On the other hand, Lincoln thought that African Americans were racially inferior and that slave emancipation was an idealistic proposal with no prospect of immediate implementation  – he is said to have emancipated the slaves in 1862 as a strategic move to win the War rather than out of some moral conviction.

In protecting their industries, the Americans were going against the advice of such prominent economists as Adam Smith and Jean Baptiste Say, who saw the country’s future in agriculture. However, the Americans knew exactly what the game was. They knew that Britain reached the top through protection
and subsidies and therefore that they needed to do the same if they were going to get anywhere. Criticising the British preaching of free trade to his country, Ulysses Grant, the Civil War hero and the US President between 1868-1876, retorted that “within 200 years, when America has gotten out of protection all that it can offer, it too will adopt free trade”. When his country later reached the top after the Second World War, it too started “kicking away the ladder” by preaching and forcing free trade to the less developed countries.

The UK and the USA may be the more dramatic examples, but almost all the rest of the developed world today used tariffs, subsidies and other means to promote their industries in the earlier stages of their development. Cases like Germany, Japan, and Korea are well known in this respect. But even
Sweden, which later came to represent the “small open economy” to many economists had also strategically used tariffs, subsidies, cartels, and state support for R&D to develop key industries, especially textile, steel,
and engineering.

There were some exceptions like the Netherlands and Switzerland that have maintained free trade since the late 18th century. However, these were countries that were already on the frontier of technological development by the 18th centuries and therefore did not need much protection. Also, it should be noted that the Netherlands deployed an impressive range of interventionist measures up till the 17th century in order to build up its maritime and commercial supremacy. Moreover, Switzerland did not have a patent law until 1907, flying directly against the emphasis that today’s orthodoxy puts on the protection of intellectual property rights (see below). More interestingly, the Netherlands abolished its 1817 patent law in 1869 on the ground that patents are politically-created monopolies inconsistent with its free-market principles – a position that seems to elude most of today’s free-market economists – and did not introduce another patent law until 1912.

The story is similar in relation to institutional development. In the earlier stages of their development, today’s developed countries did not even have such “basic” institutions as professional civil service, central
bank, and patent law. It was only after the Pendleton Act in 1883 that the US federal government started recruiting its employees through a competitive process. The central bank, an institution dear to the heart of today’s free-market economists, did not exist in most of today’s rich countries until the early 20th century – not least because the free-market economists of the day condemned it as a mechanism for unjustly bailing out imprudent borrowers. The US central bank (the Federal Reserve Board) was set up only
in 1913 and the Italian central bank did not even have a note issue monopoly until 1926. Many countries allowed patenting of foreign invention until the late 19th century. As I mentioned above, Switzerland and the Netherlands refused to introduce a patent law despite international pressure until 1907
and 1912 respectively, thus freely “stole” technologies from abroad. The examples can go on.

One important conclusion that emerges from the history of institutional development is that it took the developed countries a long time to develop institutions in their earlier days of development. Institutions typically took decades, and sometimes generations, to develop. Just to give one example, the need for central banking was perceived at least in some circles from at least the 17th century, but the first “real” central bank, the Bank of England, was instituted only in 1844, some two centuries later.

Another important point emerges is that the levels of institutional development in today’s developed countries in the earlier period were much lower than those in today’s developing countries. For example, measured by
the (admittedly highly imperfect) income level, in 1820, the UK was at a somewhat higher level of development than that of India today, but it did not even have many of the most “basic” institutions that India has today. It did not have universal suffrage (it did not even have universal male suffrage), a central bank, income tax, generalised limited liability, a generalised bankruptcy law, a professional bureaucracy, meaningful securities regulations, and even minimal labour regulations (except for a couple of minimal and hardly-enforced regulations on child labour).

If the policies and institutions that the rich countries are recommending to the poor countries are not the ones that they themselves used when they were developing, what is going on? We can only conclude that the rich countries are trying to kick away the ladder that allowed them to climb where they are. It is no coincidence that economic development has become more difficult during the last two decades when the developed countries started turning on the pressure on the developing countries to adopt the so-called “global standard” policies and institutions.

During this period, the average annual per capita income growth rate for the developing countries has been halved from 3% in the previous two decades (1960-80) to 1.5%. In particular, Latin America virtually stopped growing, while Sub-Saharan Africa and most ex-Communist countries have experienced a
fall in absolute income. Economic instability has increased markedly, as manifested in the dozens of financial crises we have witnessed over the last decade alone. Income inequality has been growing in many developing countries and poverty has increased, rather than decreased, in a significant number of them.

What can be done to change this?

First, the historical facts about the historical experiences of the developed countries should be more widely publicised. This is not just a matter of “getting history right”, but also of allowing the developing countries to make more informed choices.

Second, the conditions attached to bilateral and multilateral financial assistance to developing countries should be radically changed. It should be accepted that the orthodox recipe is not working, and also that there can be no “best practice” policies that everyone should use.

Third, the WTO rules should be re-written so that the developing countries can more actively use tariffs and subsidies for industrial development. They should also be allowed to have less stringent patent laws and other intellectual property rights laws.

Fourth, improvements in institutions should be encouraged, but this should not be equated with imposing a fixed set of (in practice, today’s – not even yesterday’s – Anglo-American) institutions on all countries. Special care has to be taken in order not to demand excessively rapid upgrading of institutions by the developing countries, especially given that they already have quite developed institutions when compared to today’s developed countries at comparable stages of development, and given that establishing and running new institutions is costly.

By being allowed to adopt policies and institutions that are more suitable to their conditions, the developing countries will be able to develop faster. This will also benefit the developed countries in the long run, as
it will increase their trade and investment opportunities. That the developed countries cannot see this is the tragedy of our time.

Ha-Joon Chang (hjc1001@econ.cam.ac.uk) teaches in the Faculty of Economics, University of Cambridge. This article is based on his new book, Kicking Away the Ladder – Development Strategy in Historical Perspective, which was published by Anthem Press, London, on 10 June 2002.
___________________________

SUGGESTED CITATION:

Ha-Joon Chang, “Kicking Away the Ladder”, post-autistic economics review,
issue no. 15, September 4, 2002, article 3.
http://www.paecon.net/PAEReview/issue15/Chang15.htm

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Political Economy Policy Institute Conference on "Inflation Targetting"

Home / Programs / Globalization & Macroeconomics / Alternatives to Inflation Targeting

"Inflation targeting"—a monetary policy focused almost exclusively on keeping inflation in the low single digits—has become the operational objective for many central banks around the world. Many economists, international organizations like the IMF, and central bankers have promoted inflation targeting to the exclusion of other concerns. The policy's record has been rather disappointing. After several decades of experience with the inflation focused approach, problems of employment creation and poverty are mounting around the world.

Gerald Epstein of PERI, together with Erinc Yeldan of Bilkent University in Turkey, convened an international team of economists to develop more socially useful alternatives to inflation targeting central bank policy: policies that promote more employment, reduce poverty, and generate economic growth while also keeping inflation moderate and stabilizing the exchange rate. The research collected here provides case studies of country experiences with inflation targeting, as well as studies on the role of gender in monetary policy and inflation’s effects on growth and poverty. Combined, this research forges a new approach to monetary policy, one that makes central banks part of the solution to poverty and unemployment, rather than an important part of the problem. This project was made possibly by the generous support of the Ford Foundation and Rockefeller Brothers' Fund and the United Nations Department of Economic and Social Affairs (UN-DESA).

>> Read more about Alternatives to Inflation Targeting

Epstein, Gerald and Erinc Yeldan:  "Inflation Targeting: Bad Medicine, But Help is within Reach." (.pdf forthcoming)

Frenkel, Roberto and Lance Taylor, "Real Exchange Rates, Monetary Policy and Employment."

Pollin, Robert and Andong Zhu, “Inflation and Economic Growth: A Cross-Country, Non-Linear Analysis.”

Jayadev, Arjun , "The Class Content Of Preferences Towards Anti-Inflation And Anti-Unemployment Policies."

Braunstein, Elissa and James Heintz, “Gender Bias and Central Bank Policy: Employment and Inflation Reduction.”

Barbosa-Filho, Nelson H., “Inflation Targeting in Brazil: Is There An Alternative?”

Galindo, Luis Miguel and Jaime Ros, “Inflation Targeting in Mexico: An Empirical Appraisal.”

Frenkel, Roberto and Martin Rapetti, “Monetary and Exchange Rate Policies in Argentina After the Convertibility Regime Collapse.”

Jha, Raghbendra “Inflation Targeting in India: Issues and Prospects.”

Lim,  Joseph, "Philippine Monetary Policy: A Critical Assessment and Search for Alternatives."

Packard, Le Anh Tu, “Monetary Policy in Vietnam: Alternatives to Inflation Targeting.”

Voyvoda, Ebru and Erinc Yeldan, “Macroeconomics of Twin Targeting in Turkey: A General Equilibrium Analysis.”

Epstein, Gerald, “A Proposal for Employment Targeting Monetary Policy in South Africa.” (.pdf forthcoming)

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http://www.thenation.com/doc/20070430/greider

The Establishment Rethinks Globalization

by WILLIAM GREIDER

[from the April 30, 2007 issue]

The church of global free trade, which rules American politics with infallible pretensions, may have finally met its Martin Luther. An unlikely dissenter has come forward with a revised understanding of globalization that argues for thorough reformation. This man knows the global trading system from the inside because he is a respected veteran of multinational business. His ideas contain an explosive message: that what established authorities teach Americans about global trade is simply wrong--disastrously wrong for the United States.

Martin Luther was a rebellious priest challenging the dictates of a corrupt church hierarchy. Ralph Gomory, on the other hand, is a gentle-spoken technologist, trained as a mathematician and largely apolitical. He does not set out to overthrow the establishment but to correct its deeper fallacies. For many years Gomory was a senior vice president at IBM. He helped manage IBM's expanding global presence as jobs and high-tech production were being dispersed around the world.

The experience still haunts him. He decided, in retirement, that he would dig deeper into the contradictions. Now president of the Alfred P. Sloan Foundation, he knew something was missing in the "pure trade theory" taught by economists. If free trade is a win-win proposition, Gomory asked himself, then why did America keep losing?

The explanations he has developed sound like pure heresy to devout free traders. But oddly enough, Gomory's analysis is a good fit with what many ordinary workers and uncredentialed critics (myself included) have been arguing for some years. An important difference is that Gomory's critique is thoroughly grounded in the orthodox terms and logic of conventional economics. That makes it much harder to dismiss. Given his career at IBM, nobody is going to call Ralph Gomory a "protectionist."

He did not nail his "theses" to the door of the Harvard economics department. Instead, he wrote a slender book--Global Trade and Conflicting National Interests--in collaboration with respected economist William Baumol, former president of the American Economic Association. Published seven years ago, the book languished in academic obscurity and until recently was ignored by Washington policy circles.

I asked Gomory if his former colleagues from the corporate world quarrel with his provocative message. "Most of them have never heard it," he said. "It's a pretty new message." He has discussed his reform ideas with some CEOs, "who said, Well, maybe we could do that. Others couldn't have disagreed more strongly."

Now Gomory is attempting to re-educate the politicians in Congress. He has gained greater visibility lately because he has been joined by a group of similarly concerned corporate executives called the Horizon Project. Its leader, Leo Hindery, former CEO of the largest US cable company and a player in Democratic politics, shares Gomory's foreboding about the destructive impact of globalization on American prosperity. Huge losses are ahead--10 million jobs or more--and Hindery fears time is running out on reform.

"We want to be a counter to the Hamilton Project," Hindery explains. "They have a sense of stasis that is more benign than I have. I don't think this is all going to work out." The Hamilton policy group was launched last year by former Treasury Secretary Robert Rubin to make sure the laissez-faire trade doctrine known as Rubinomics continues to dominate the Democratic Party. "We're never going to have the status of Bob Rubin," Hindery concedes. "But we're not chopped liver either. We have respectable business careers. You can't tell Ralph Gomory that he is 'smoke and mirrors,' because he wrote the book."

Gomory's critique has great political potential because it provides what the opponents of corporate-led globalization have generally lacked: a comprehensive intellectual platform for arguing that the US approach to globalization must be transformed to defend the national interest. Still, it will take politicians of courage to embrace his ideas and act on them. Gomory's political solutions are as heretical as his economic analysis.

At IBM back in the 1980s, Gomory watched in awe as Japan and other Asian nations captured high-tech industrial sectors in which US companies held commanding advantage. IBM invented the disk drive, then dropped out of the disk-drive business, unable to compete profitably. Gomory marveled at Singapore, a tiny city-state, as it lured American manufacturers with low-wage labor, capital subsidies and tax breaks. The US companies turned Singapore into a global center for semiconductor production.

"It was an unforgettable transformation," Gomory remembers. "And it was pretty frightening.

"The offer that many Asian countries will give to American companies is essentially this: 'Come over here and enhance our GDP. If you are here our people will be building disk drives, for example, instead of something less productive. In return, we'll help you with the investment, with taxes, maybe even with wages. We'll make sure you make a profit.' This works for both sides: the American company gets profits, the host country gets GDP. However, there is another effect beyond the benefits for those two parties--high-value-added jobs leave the U.S."

China and India, he observes, are now doing this on a large scale. Microsoft and Google opened rival research centers in Beijing. Intel announced a new, $2.5 billion semiconductor plant that will make it one of China's largest foreign investors. China's industrial transformation is no longer about making shirts and shoes, as some free-trade cheerleaders still seem to believe. It is about capturing the most advanced processes and products.

The multinationals' overseas deployment of capital and technology, Gomory explains, is the core of how some very poor developing nations are able to ratchet up their technological prowess, take over advanced industrial sectors and rapidly expand their share in global trade--all with the help of US companies and finance, as they roam the world in search of better returns.

The Gomory-Baumol book describes this as "a divergence of interests" between multinational firms and their home country. "This overseas investment decision may then prove to be very good for that multinational firm," they write. "But there remains the question: Is the decision good for its own country?" In many cases, yes. If the firm is locating low-skilled industrial production in a very poor country, Americans get cheaper goods, trade expands for both sides and the result is "mutual gain." But the trading partners enter a "zone of conflict" if the poor nation develops greater capabilities and assumes the production of more advanced goods. Then, the authors explain, "the newly developing partner becomes harmful to the more industrialized country." The firm's self-interested success "can constitute an actual loss of national income for the company's home country."

American multinationals, as principal actors in this transfer of wealth-generating productive capacity, are distinctively free to make the decisions for themselves without interference from government. They want profit and future consumer markets. Their home country wants to maintain a highly productive high-wage economy. Without recognizing it, the two are pulling in opposite directions--the "divergence of interests" most US politicians ignore, evidently believing church doctrine over visible reality.

The Gomory-Baumol book explains the dynamics with charts and equations for economists to study. For the rest of us, it is easier to follow Gomory's personal explanation of changing fortunes among trading nations. "What made America much wealthier than the Asian nations in the first place?" Gomory asks. "We invested alongside our workers. Our workers dug ditches with backhoes. The workers in underdeveloped countries dug ditches with shovels. We had great big plants with a few people in them, which is the same thing. We knew how, through technology and investment, to make our workers highly productive. It wasn't that they went to better schools, then or now, and I don't know how much schooling it takes to run a backhoe.

"The situation today is that the companies have discovered that using modern technology they can do all that overseas and pay less for labor and then import product and services back into the United States. So what we're doing now is competing shovel to shovel. The people in many countries are being equipped with as good a shovel or backhoe as our people have. Very often we are helping them make the transition. We're making it person-to-person competition, which it never was before and which we cannot win. Because their people will be paid a third, a quarter of what our people are paid. And it's unreasonable to think you can educate our people so well that they can produce four times as much in the United States."

As this shift of productive assets progresses, the downward pressure on US wages will thus continue and intensify. Free-trade believers insist US workers can defend themselves by getting better educated, but Gomory suggests these believers simply don't understand the economics. "Better education can only help," he explains. "The question is where do you put your technology and knowledge and investment? These other countries understand that. They have understood the following divergence: What countries want and what companies want are different."

The implication is this: If nothing changes in how globalization currently works, Americans will be increasingly exposed to downward pressure on incomes and living standards. "Yes," says Gomory. "There are many ways to look at it, all of which reach the same conclusion."

I ask Gomory what he would say to those who believe this is a just outcome: Americans become less rich, others in the world become less poor. That might be "a reasonable personal choice," he agrees. "But that isn't what the people in this country are being told. No one has said to us: 'You're probably a little too rich and these other folks are a little too poor. Why don't we even it out?' Instead, what we usually hear is: 'It's going to be good for everyone. In the long run we're going to get richer with globalization.'"

Gomory and Baumol are elaborating a fundamental point sure to make many economists (and political leaders) sputter and choke. Contrary to dogma, the losses from trade are not confined to the "localized pain" felt by displaced workers who lose jobs and wages. In time, the accumulating loss of a country's productive base can injure the broader national interest--that is, everyone's economic well-being.

"Our objective," Baumol told a policy conference last summer, "is to show how outsourcing can indeed reduce the share of benefits of trade, not only for those who lose their jobs and suffer a direct reduction in wages but can wind up making the average American worse off than he or she would have been."

The conventional win-win assurances, they explain, are facile generalizations that ignore the complexity of the trading system--the myriad differences in country-to-country relationships and the vast realm of government actions and policy interventions designed to shape the outcomes. "Many of our 'dismal science' colleagues speak unguardedly as though they believe free trade cannot fail, no matter what," Baumol said.

Some nations, in other words, do indeed become "losers." Gomory fears the United States is now one of them--starting to go downhill. When he and Baumol wrote their book, they figured US trade relations with China and India produced "mutual gain" for both ends. The United States got cheaper goods, China and India got jobs and a start at industrialization. But the rapid improvements in those two nations during the past decade, Gomory thinks, are putting the United States in the bind where their gain becomes our loss.

Essentially, the terms of trade have changed as more and more value-added production has shifted from the United States to its poorer trading partners. America, he explains, becomes increasingly dependent, buying from abroad more and more of what its citizens consume and producing relatively less at home. US incomes stagnate as the high-wage jobs disappear and US exports become a smaller share of the world total.

The persistent offshoring of domestic production is leading to a perverse consequence: The United States finds itself paying more for imports. The production that originally moved offshore to get low-wage labor and cheaper goods is now claiming a larger and larger share of national income, as the growing trade deficits literally subtract from US domestic growth. "All the stuff you were already importing from them becomes more expensive," Gomory explains. "That's why you can start going downhill--because you pay more for what you were previously getting." Put another way, one hour of US work no longer buys as many hours of Chinese work as it once did. China can suppress its domestic wages to keep selling more of its stuff, but that does not alter the fundamental imbalance in productive strength.

The US predicament is vividly reflected in the nation's swollen trade deficits, now running at nearly 7 percent of GDP every year. The country consumes more than it produces. It borrows heavily from trading partners, led by China, to pay for its "excess" consumption. This allows America to dodge--temporarily--a reckoning with its weakened condition, that is, falling living standards. But that will eventually occur, when Americans are compelled to reduce their consumption and pay off the overdue bills. Postponement will deepen the ultimate injury because, meanwhile, the trading partners will gain greater industrial capabilities, while US productive strength weakens further.

Americans can choose to blame China or disloyal multinationals, but the problem is grounded in US politics. The solution can be found only in Washington. China and other developing nations are pursuing national self-interest and doing what the system allows. In a way, so are the US multinationals. "I want to stress it's a system problem," Gomory says. "The directors are doing the job they're sworn to do. It's a system that says the companies have to have a sole focus on maximizing profit."

Gomory's proposed solution would change two big things (and many lesser ones). First, the US government must intervene unilaterally to cap the nation's swollen trade deficit and force it to shrink until balanced trade is achieved with our trading partners. The mechanics for doing this are allowed under WTO rules, though the emergency action has never been invoked by a wealthy nation, much less the global system's putative leader. Capping US trade deficits would have wrenching consequences at home and abroad but could force other nations to consider reforms in how the trading system now functions. That could include international rights for workers, which Gomory favors.

Second, government must impose national policy direction on the behavior of US multinationals, directly influencing their investment decisions. Gomory thinks this can be done most effectively through the tax code. A reformed corporate income tax would penalize those firms that keep moving high-wage jobs and value-added production offshore while rewarding those that are investing in redeveloping the home country's economy.

US companies are not only free of national supervision but actively encouraged to offshore production by government policy and tax breaks. Other advanced economies have sophisticated national industrial policies, plus political and cultural pressures, that guide and discipline their multinationals, forcing them to adhere more closely to the national interest.

Neither of Gomory's fundamental policy reforms--balancing trade or imposing discipline on US multinationals--can work without the other. Both have to be done more or less at once. If the government taxed US multinational behavior without also capping imports, the firms would just head out the door. "That won't work," Gomory explains, "because you will say to the companies, 'This is how we're going to measure you.' And the corporations will say, 'Oh, no, you're not. I'm going overseas. I'm going to make my product over there and I'll send it back into the United States.' But if you insist on balanced trade, then the amount that's shipped in has to equal the amount that's shipped out by companies. If no companies do that, then nothing can be shipped in either. If you balance trade, you are going to develop internal companies that work the way you want." Public investment in new technologies and industries, I would add, may not achieve much either, if there is no guarantee that the companies will locate their new production in the United States.

Essentially, Gomory proposes to alter the profit incentives of US multinationals. If the government adds rules of behavior and enforces them through the tax code, companies will be compelled to seek profit in a different way--by adhering to the national interest and terms set by the US government. Other nations do this in various ways. Only the United States imagines the national interest doesn't require it.

In recent months Gomory and Leo Hindery of the Horizon Project have been calling on Congress with these big ideas and getting respectful audiences. The two met with some thirty Democratic senators and Congressional staffers from both parties. Senator Byron Dorgan, with co-sponsors like Sherrod Brown, Russell Feingold and even Hillary Clinton, has introduced several bills to confront the trade deficits.

Gomory's concept for multinational taxation is a tougher sell amid Washington lobbyists because it goes right to the bottom line of major US corporations. On the other hand, this proposal has stronger intuitive appeal for citizens, who reasonably ask why multinationals are allowed to undercut the national interest when they enjoy all the benefits of being "American" companies.

Hindery's group is advocating Congressional action to arrange a "national summit" on trade, where all these questions can be thrashed out. The political system has never really had an honest, open debate on globalization in the past thirty years. The dogmatic church of free trade--"free trade good, no trade bad"--wouldn't allow it. As more politicians grasp the meaning of Gomory's analysis, they should start demanding equal time for the heretics.

Gomory's vision of reformation actually goes beyond the trading system and America's economic deterioration. He wants to re-create an understanding of the corporation's obligations to society, the social perspective that flourished for a time in the last century but is now nearly extinct. The old idea was that the corporation is a trust, not only for shareholders but for the benefit of the country, the employees and the people who use the product. "That attitude was the attitude I grew up on in IBM," Gomory explains. "That's the way we thought--good for the country, good for the people, good for the shareholders--and I hope we will get back to it.... We should measure corporations by their impact on all their constituencies.

"So in my utopian dream, we decide what we want from the corporations and that's how they make a profit--by doing those things. Failing that, I would settle for the general realization of this divergence and let people argue it out."

Some older CEOs and board members at least listen to him sympathetically. "They have grandchildren," he says. "They wonder too what's going to happen to our grandchildren. You can't get a vote around the corporate board table about, Is this good for the grandchildren? But you can talk to them and they'll worry about it and say, Well, maybe we need to do something."

Copyright The Financial Times Limited 2007