Trade Archives

Globalisation 3.0

By Diego Castañeda Garza

Some scholars would argue that the world was first globalised as far as five centuries in the past when the European conquests of the new world brought its sinews to the old. When silver began to circulate the globe as the first truly global commodity (Flynn & Giráldez 2004). However, for most economists, the world was first globalised as close as two centuries ago, after the end of the Napoleonic wars, with the rising industrial power of the British nation and the peak of its imperial power (O’Rourke & Williamson 2002).

In any case, five or two centuries ago, globalisation has always implied distributional effects, winners and losers in each corner of the world it has reached. First, the enrichment of political and economic elites in the colonial powers and its colonised countries and then again at the time of the great divergence when countries started to industrialise, but most of their populations at either time did not. Today’s globalisation is not different; we have designed it that way.

Since the beginnings of trade theory with David Ricardo’s Principles of Political Economy and Taxation and the introduction of the idea of comparative advantage, the existence of distributional effects was a distinct aspect of international trade. Trade specialisation following national comparative advantages strongly favoured some sectors and industries and hurt others. The gains for trade were never distributed equally among all sectors; the distribution of wages, benefits and rents entailed by necessity winners and losers. Nevertheless, for a long time, economists, when engaging the public about international trade and its benefits, when speaking and teaching about Ricardo’s ideas (and their extensions through the Hecksher-Ohlin model, i.e equalising international prices and wages entails winners and losers) obviated this basic result:often not all benefit from trade.

As Polanyi (1944|2017) argued, the attempt to disembed politics from the economy entails risks. In the past, the negligence encouraged by not recognising the distributional consequences of globalisation and the failure to address them have been a source of social and political instability. Ignoring the people propelled backlashes against globalisation more than a century ago. At the end of the 19th century and the beginning of the 20th, one of those backlashes occurred. The consequence of the backlash was that several countries (i.e. Germany, France, Sweden) that previously had been moving towards trade liberalisation halted their movement. They started to look backwards to protectionist policies. In time, the outbreak of the Great War finally ended the so-called first globalisation (O’Rourke & Williamson 1999).

From this historical experience, we should have learned an essential lesson in our times, but we failed to do so. The lesson is that there is nothing natural nor granted in the process of achieving a sustainable global economic integration. Similarly, there is no linear path of development that necessarily arrives at a hiper-globalised world. Globalisation today, or in the 19th century, is an international political construct supported by the equilibrium of power and interests between existent states. The inequality embedded in our economic systems, in the same way, exists largely due to political economy reasons.

After the 1970s, the end of the trente glorieuses, a new policy framework characterised by deregulation, liberalisation and the capture of the state by private interests took root around the world. It propelled the new second globalisation. Over the last four decades, we have been living in an increasingly interconnected world. For decades, the rate of growth of international trade surpassed the growth rate of the world economy, a phenomenon often called hyper-globalisation. Underlying this era, we have witnessed high-speed economic growth in some regions, but also growing inequalities and accelerated environmental degradation. Now, at the end of this period, there is a trend break in which the costs of the politics of previous years are manifesting themselves. We are witnessing a reversal of fortune in which China is returning to a prominent role in the global economy. Meanwhile, the advanced countries that defined the rules of the world economy are riddled again with backlashes, political instability, and economic stagnation.

These already turbulent times got compounded with the pandemic and the economic fallout it unleashed. However, this bleak scenario also presents us with opportunities. The current sense of crisis around the world, especially in the advanced countries, provides the imperative to solve the “twin problems” of the 21st century: rising national inequalities and climate change. It is a unique opportunity to redesign globalisation under new principles. It represents a chance to redesign it around principles that privilege equality, sustainability, and the existence of global public goods, like global public health and our environment.

The Great Lockdown, a necessary response due to the Sars-CoV-2 pandemic, has served as a mirror for nations to look at themselves, it has made their problems even more evident. The global nature of the current crisis and the way it interacts and exacerbates within-country economic inequalities exhibits economic weaknesses, intensifies geopolitical conflicts, and highlights the need for global solutions. History has yielded us with a perfect context to change globalisation. It is an opportunity to work towards the solution of the twin crisis and, in the process, create a new globalisation 3.0.

Globalisation 3.0 should be constructed as a more sensible process of economic integration. It should be embedded with different rules and norms of good behaviour, that privileges the needs and preferences of the world population and not the preferences of global elites. Instead of focusing on capital flows and finance, it should focus on public health, climate change, labour rights. It should do a better job of representing the priorities of developing countries. Historical experiences either in the times of the gold standard, Bretton Woods or the current one, shows to us that the rules give the shape of globalisation. The rules we agree to uphold, the priorities we set.

The construction of globalisation 3.0 should ensure countries have enough policy space to guarantee economic, political, and social stability. In that sense, instead of reaching from the global to the national in what constitutes a politically fragile architecture, the new rules should reach from the national to the global. It should ensure the states liberty to pursue pragmatic policies that enhance their development capabilities. Room to do active industrial policy, to correct economic inequalities through adequate taxation. That space implies the need to accept the embeddedness of politics in economic matters, to accept that economic policy is unsustainable without addressing mass politics.

To fix our problems, the existence of tax havens, climatic disaster, the surge in inequalities, and their feedback loop towards political life is a necessity of our time. But it will not be possible if we choose to preserve globalisation in its current form. There is no need for a tradeoff between national policies and true global imperatives. Both can be aligned, but they require that we finally learn the lessons of history and redesign our global economy in such a way to leave room for both. In the end, it is only the harmony between national and global interests that will allow us the capacity to respond to our challenges. Redesign the functionings of the world economy is the path to preserve social stability, develop our countries and respond to the crises of our times.

About the author: Diego Castañeda Garza is an economist and economic historian; he is the head of the economic cluster at Agenda for International Development (A-ID) and a coordinator of the Economic History Working Group at the INET’s Young Scholar Initiative.

This article is a runner up in an essay competition held by the UNCTAD YSI Summer School on Globalization and Development Strategies. Participants of the school worked with senior scholars to fine-tune their drafts, and the top-5 articles were published here. For other articles in the series, please click here.

About UNCTAD UNCTAD is a permanent intergovernmental body established by the United Nations General Assembly in 1964. Its headquarters are located in Geneva, Switzerland, with offices in New York and Addis Ababa. UNCTAD is part of the UN Secretariat, reports to the UN General Assembly and the Economic and Social Council, and are also part of the United Nations Development Group.

Global economic justice: from aspirations to transformative action

By Sergio Chaparro Hernández

The unfulfilled promise of a just global order

The Universal Declaration of Human Rights states that everyone is entitled to a social and international order in which her rights can be fully realized. However, the functioning of the global economy today is far from aligned with the kind of order the Declaration prescribes.

Before the COVID-19 pandemic, inequalities between and within countries were already alarming. But confronted with disturbances such as pandemics, the world seems to move towards a greater concentration of power and wealth in the hands of the few, while disadvantaged populations are left behind. Lower-income countries face severe restrictions on their policy space in trade, fiscal, industrial, digital and monetary matters, and the global financial architecture exposes these countries to increasing systemic risks. International cooperation, which is highly necessary to address pressing global challenges, is replaced by competition between States against a background of increasing corporate power. The global order is not enabling the full realization of rights, but rather restricting human flourishing for the many while reinforcing privileges for the most powerful.

Neoliberalism and (the lack of) global democracy

Neoliberalism, understood as the project of creating a world tailored to the needs of capital, faces a serious crisis but has proven its ability to reinvent itself. It is true that some of the entrenched policy myths that its advocates had turned into ‘conventional wisdom’, such as the benefits of fiscal austerity or free trade for all, have been called into question in the context of the pandemic. But they might be revived under more friendly packaging. It is worth remembering how corporate attempts to capture the 2030 Agenda and the Paris Agreement are well advanced. In fact, international financial institutions (IFIs) are prioritizing private finance mechanisms -such as public-private partnerships- over domestic resource mobilization through progressive taxation or through development banks to achieve the Sustainable Development Goals (SDGs) and building ‘green’ infrastructure. Then, it would not be surprising that, in the absence of orderly and massive debt relief and restructuring, a new wave of austerity will be presented sooner than later as the only way to restore trust in domestic economies and let the private sector play the role of ‘Building Back Better’.

In this context, the lack of democratic governance on economic matters goes without saying. Currently, key decisions to address the unparalleled risks and instability that hyper globalization has created are being taken on an ad hoc basis in spaces such as the G-20, when not in opaque instances in which corporate interests prevail. These spaces lack any grounds in international law to operate as the captains of the global economy. International financial institutions continue to function under a plutocratic model that assigns decision-making prerogatives based on the outdated balance of power of the post war economy. In other fields, such as in global tax matters, the OECD controls the agenda and works as the de facto standard-setting global institution, in the absence of a multilateral body in which all countries can participate on an equal footing. On the investment side, there is a semi-private justice system in which investors can sue States before arbitration tribunals for exercising regulatory power to protect people’s rights, arguing that their expected profits will be reduced as a consequence. On the monetary front, while central banks in high-income countries absorbed the economic shock of COVID-19 by expanding their balance sheets in unprecedented ways and without meaningful democratic accountability, lower income countries struggled to overcome harsh liquidity constraints awaiting for global responses that haven’t occurred.

This democratic deficit and the consequent asymmetries of power in the global economy may seem, in principle, disconnected from the daily struggles of ordinary people or social movements. But they have everything to do with the unmet demands for better health care systems, adequate budgets to combat gender violence, or achieving substantive racial equality. Indeed, they are an important factor undermining the capacity of domestic institutions to deliver as well as a driving force behind the way opportunities for human flourishing are unevenly distributed. Among the interests neglected by the way the global economy works are not only those of marginalized communities in the Global South. As it is the case with the dollar hegemony in the international monetary system, hierarchical arrangements do not necessarily benefit the working class neither in the US nor in other rich countries.

Expanding human capabilities in our shared world

Prior to the pandemic, there was an influential narrative that despite widespread pessimism and malaise the world was going through impressive progress, and things were essentially changing for the good. Champions of these views argued that world poverty had been declining and poor countries were progressively catching up with the richest, without explaining that the so-called ‘convergence’ is driven almost entirely by China and East Asian countries. Furthermore, any criticism of the global order calling for structural transformations used to be rejected under the idea that it could end up throwing the baby out (all the supposed benefits and successes achieved by the global order) with the bathwater (the sources of indignation or rage against this order).

This line of thinking falls within the old way of economic reasoning that we must overcome. Countries have gone through paths of poverty reduction and improvements on basic indicators of well-being (not for everyone, and not evenly distributed), while putting more pressure on planetary boundaries and exacerbating inequalities and power asymmetries. Now we are seeing how decades of progress in the fight against poverty in several countries are being erased by factors that cannot be considered merely incidental to the way the global economic works. As scientific evidence has shown, pandemics are not exogenous shocks to economic systems: zoonotic diseases such as COVID-19 arise from the accelerated intervention and degradation of ecosystems by unfettered human activity. Likewise, preventing the catastrophic consequences of climate change depends on our determination to make major shifts in the way we produce, distribute, consume and value in order to adequately address the greatest collective action problem we have ever faced. Even if States were to adopt pro-growth policies that lead to poverty reduction (such as carbon-intensive strategies of development) they could end up reinforcing power arrangements to preserve the status quo and precluding the emergence of the kind of coalitions that are needed to successfully address the risk of extinction and other systemic threats.

Therefore, we need an alternative framework for action – one that enables us to find solutions to our collective challenges in a world with ecological ceilings, while expanding the capabilities of communities and individuals to live according to their own values. Under such a framework, it should not be enough to make progress in basic indicators of well-being regardless of the path chosen, but also to build more equal relationships among States, communities and individuals and create the material conditions for cooperation. To that end, not only institutions and rules matter, but also the distribution of resources, voice, and power.

Global economic governance and a new set of policies

The quest for global justice has focused on the institutional global arrangements that would enable individual States, and particularly low- and middle- income countries, to choose and implement a set of policies that allow them to catch up with the ‘developed’ nations of the world. Such a linear and monolithic view of progress ignores how far the world can go if resources, power and voice were given to communities to seek their own development paths under fairer global rules.

Rather, global justice must be geared towards creating the power arrangements and the material conditions to allow the expansion of human capabilities in our common and interdependent world, leaving no one behind.

This means at least three key shifts in priorities as part of a broader effort to move towards a rights-based economy.

First, expanding lower-income States’ policy space and supporting them for providing comprehensive social protection and implement an audacious set of policies to manage increasingly disruptive risks that could throw millions to poverty and unemployment in a matter of days. Public institutions must be in a position to fulfil basic rights that people can be deprived of due to the intricate network of interdependent connections the global economy has become, including through quality care services and the right to benefit from a compensated general reduction in working hours.

Second, move towards a multi layered global governance system aiming to correct power asymmetries, and give voice and decision power to multiple actors in truly democratic global forums (including social movements, civil society organizations, grassroots, small-scale business and emerging actors). Such a multi layered system should prioritize ambitious targets in terms of carbon pricing, climate change adaptation, free access to public goods, debt restructuring, combating tax evasion and avoidance through taxing multinationals as units (not as separate entities) and the definition of a minimum effective corporate tax rate.

Third, creating the institutional, legal and material conditions for every person in the world regardless of their nationality, gender, race or socio-economic status to use the best available knowledge, technology, data, and a basic capital endowment to pursue their own goals, as well as to benefit from scientific progress and its applications (including free and timely access to COVID-19 treatment and vaccines as public goods).

Geopolitics and collective action for justice

It would be naive to think that these changes can be achieved in a top-down direction and outside of geopolitical dynamics, but it wouldn’t be accurate either to ignore the contradictions of the current global order, and the increasing demands for systemic change. These changes require going beyond the narrow logic of nation-states as the main channels through which human interests in the global order are represented and negotiated. The gap between the possibilities that technological and productive advances have opened up and the inability to put them at the service of fundamental human needs reflects, in turn, the magnitude of what alternative schemes of social cooperation could achieve. For example, the same technological tools used for State surveillance, can also be used for emancipatory purposes if those tools were reappropriated by social movements and democratic forces, as the spread of climate justice, anti-racist or feminist mobilizations beyond borders have shown. Amid the crude exploitation of fear and despair in times of Covid-19, it is worth pushing for transformative joint action and remember Thomas Fuller’s words: ‘the darkest hour is just before the dawn’.

About the author: Sergio Chaparro Hernández is an Economist and M.A in Law from the National University of Colombia. He serves as Program Officer at the Center for Economic and Social Rights (CESR). Twitter: @SergioChaparo8. Email address: schaparro@cesr.org

Highway to hell: How neoliberalism is driving “advanced” economies towards a Latin American-style accumulation pattern

By Baptiste Albertone

The weight of the past has sometimes been more present than the present itself. And a repetition of the past has sometimes seemed to be the only foreseeable future.
Enrique Krauze

The history of independence in Latin America is a history of reproduction of the same, but different. The Napoleonic wars that weakened the Crown provided the opportunity for Latin American landlords to finally claim the full possession and administration of the fertile soil and abundant cheap labour at their disposal. As the first nations proclaimed their right to self-determination, the new states engaged in the consolidation of a new institutional framework, independent of the Crown, but reconfigured to fit the taste and interests of landed-elites and the colonial bourgeoisie. As it is common in the revolutionary processes of nations under colonial rule, despite the adhesion and (indispensable) active participation of the popular sectors, only a segment of the elite benefited from the structural reconfiguration of what the Marxist literature calls: a Bourgeois revolution.

The political rupture translated into economic continuity: The regime of accumulation inherited from the colonial period remained unaltered to reproduce a rentier-style capitalism. Indeed, the material reason for independence was not the transformation of the economic structure but the conquest of a larger share of its benefits by one class. In addition to internal interests, a parallel international driving force supported the maintenance of this rentier regime: the centro-peripheral dynamics of the world economy, which placed Latin American nations in a subordinate and “dependent” condition of natural resource providers for “core” economies.

The role of economic ideas has certainly been decisive in the ability of the rentier regime to reproduce itself despite its deleterious effects. First, in the post-independence period, the neoclassical theory of comparative advantage offered a strong argument against developing a manufacturing sector through industrial policy. Later, in the early post-war years, the US administration-backed modernization theoryacted as a strong counter-discourse to classical development theorists’ arguments in favour of a structural transformation. Finally, from the late 1970’s onward, the infamous Washington Consensus came to provide an intellectual rationale to the political and historical project of capital and power concentration with de-industrialisation in the Latin American continent.

The socio-economic consequences of the rentier developmental mode are profound. As the Latin American structuralist school has vastly discussed, the rent-seeking style of development has favoured the persistence of 1) a large pre-capitalist sector, and 2) a highly heterogeneous intersectoral productivity. These structural determinants have major consequences on both pre-tax and post-tax income inequality dynamics. First, the economic dualism of the productive structure, a feature of rentier capitalism, implies that the share of labour in national income is very low In fact, land concentration and the scarcity of productive employment produce structurally unequal labour markets, with a very high number of informal workers acting as a reserve army. Second, the absence of a meaningful social contract between the governing elites and the popular sector gives rise to a regressive and fragile fiscal state, reluctant to influence the structural level of inequalities and to finance public goods.

Therefore, the Latin American state was designed in such a way to guarantee the reproduction and the capture of the benefits of economic development by a wealthy minority, echoing Smith’s view that “[c]ivil government (…) is in reality instituted for the defence of the rich against the poor, or of those who have some property against those who have none at all”.

The so-called era of democratisation in Latin America did not alter these power asymmetries. The structural configuration of extreme wealth and income inequalities as well as an almost unlimited ability to match economic power with political power gave rise to a form of quintessential Neoliberal state where, in José Gabriel Palma’s words the “new ‘democratic’ agenda of capital ensures that the state will fulfill its sole function of reproducing the new capitalist system”. The consequence is a unique level of inequality characterised by an unrestricted capacity of the elites to perpetuate themselves despite political changes.

But if the recipe for Latin American success once appeared to be a well-kept secret – only shared with some South African nations – it may no longer be the case. The neoliberal revolution that successfully altered labour markets and fiscal structures of most OECD countries is producing what Palma describes as a form of “reverse catching up”, with some advanced economies moving towards a Latin American style of accumulation.

The graphs below illustrate the evolution of pre-tax inequalities in Germany, the United States, and the United Kingdom, three of the countries most affected by Neoliberal — or Ordoliberal in the German case — reforms.

Since the 1980s, these countries have experienced a dramatic rise in the share of the national income going to the individuals in the top 10% of the income distribution, mirrored by an almost identical, but opposite, trend affecting the share held by the bottom 40%. These tendencies are certainly not independent of the political and economic context that characterised the period.

From the mainstream viewpoint, the justification given for the tragic evolution of inequality is that of an growing capital-output ratio driven by entrepreneurial investment leading to an elevation in the share of profits in national income.

Nonetheless, when looking at real investments’ figures, the picture turns out to be dramatically different from the expected dynamic. In the US, the gross private investment share of GDP has fallen by 3 percentage points since the late 1970s. On the contrary, what we see is a growing capacity from corporate elites to capture the benefits of economic growth with the help of both globalisation and financialization dynamics. Consequently, between the mid-1970’s and 2017, while real US GDP did more than triple, the real hourly wage of most Americans stagnated.

What is at stake is a reconfiguration of the political space in the image of the Latin American oligarchical institutional style, where hierarchical economic principles subordinate the democratic and representative principles of politics embodied in the figure of the State. According to Branko Milanovic, the neoliberal restructuring while “it maintained the pretence of equality (one-person one-vote), (…) eroded it through the ability of the rich to select, fund, and make elect the politicians friendly to their interests”. In other words, neoliberalism should be understood as an active project that, as Quinn Slobodian notes it, “rather than ‘freeing’ or ‘disembodying’ ‘the’ market, [attempt] an ‘encasement’ of economic structures, isolating them from popular democratic demands”.

By weakening the power of labour with more flexible workers’ protection, unravelling the Welfare State where it existed, engaging in a privatisation of public goods — the capital of those who don’t have any —, by adopting tax reforms that enhance regressive taxation and tax evasion, and by globally consolidating what Slobodian calls “the human right of capital flight”, neoliberalism demonstrated its striking effectiveness as a “technology of power” to rewrite the rules of the game in favour of capital accumulation. In the same way as Latin-American elites structured the newly born nation for the benefits of their interests, the recent success of Northern capitalist elites to create an environment suitable for the flourishing of their rent-extraction ambitions.

The structural reconfiguration that has been taking place since the mid-1970s is simultaneously endangering social and ecological balances, as well as putting societies at risk of implosion under authoritarian governments eager to establish Neoliberalism in a single country. We might be heading towards a dark horizon sketched by Slobodian as one of “brute competition in a zero-sum world where all that matters is the enrichment of an ethnically defined, territorially bounded national population”, where the protection of the environment – a common good by definition – is relegated to the tenebrous depths of national political agenda.

From this frightening observation arises an unsurpassable necessity to engage in a struggle for the transformation of economics — which today serves under its technocratic authority as the core instrument of the corporate elites’ political project — so that it becomes a democratic instrument for a fair and ecological economic transformation.

About the author: Baptiste Albertone is an MPhil candidate in Development Studies at the University of Cambridge and holds an MA and BA from the Institut d’Etudes Politiques de Paris. His research focuses on industrial policy and sustainable development in the Latin American context. Twitter: @BaptAlbertone

New Economics for Sustainable Development: Alternative economic models and concepts

By Dr. Chantal Line Carpentier

The widespread neoliberal model and the financialization of the economy is linked to the skewed system by which production factors are rewarded, whereby increasingly the lion’s share of income generated is going to reward capital compared to labor thereby increasing inequalities. While the maximization of profits at-all-costs economic model and its linear consumption and production patterns of “take, make, use, and dispose” are leading the rise of greenhouse gas emissions, biodiversity and ecosystems loss, and water, soil, and ocean depletion. The pandemic has exposed the interdependence and fragility of the economic, financial, environmental, and health aspects of human life, as well as the interrelation among these four dimensions as we meet increased material demand by encroaching on the last forested frontiers leading to increasing zoonoses.

The Sustainable Development Goals (SDGs) and the Addis Ababa Action Agenda for Financing for Development (FfD) adopted unanimously by all UN member States in 2015take into account these interconnections and thus provide roadmaps, principles, and means to channel previously unavailable funds that are being rolled out by governments and international organizations to support collapsing economies. These trillions in public funds that just materialized must help advance the transition to economic models compatible with the SDGs – already not on track to be met prior to the pandemic according to the Global Sustainable Development Report 2019. The transition is feasible within the planetary boundaries but we need new economic and financial models. UNCTAD has called for a Global Green New Deal (GGND) but it turns out that blue, orange, purple, and yellow economies together have a better chance to rebuild resilient, inclusive, and more equitable economies. And this is in line with requests made by UN member states that the United Nations ensure its work is tailored to the different contexts in which it operates.

The Green New Deal extends the US “New Deal” approach of massively investing in infrastructure projects to create jobs and get the US economy out of the Great Depression, to target jobs in the green and new economy sectors such as resilient construction, decarbonized energy, clean transport, and sustainable agriculture and cities. The Global Green New Deal (GGND) proposed by UNCTAD crucially includes an equality and equity dimension. Under the GGND, the international community would have to address the root causes of inequality. Spurred by international solidarity and the realization that our economic, health, and political systems are interdependent, developed nations should not only fund their green, blue, orange, purple, or yellow economic stimulus but also support that of developing countries. This would allow developing countries, where most new infrastructure is being built, to use circular economy principles, avoid investing in stranded assets, whilst generating jobs to help workers’ transitions to the new economy, such as from fossil fuels to renewables energy.

The circular economy uses science, technology, and innovation to increase efficiency by designing for recyclability and re-use at the end-of-product lifecycle and cutting out waste and pollution from production systems. It aims to produce more with less waste, resources, and energy through a make-use-recycle-reuse circular pattern. Many countries have embraced the concept. For instance, Uganda does so by using biogas technology, e-waste management, organic agriculture, green manufacturing, and eco-industrial parks. New business and distribution models are needed to achieve deployment at scale.

A related concept is “frugal innovation” whereby the aim is to do “better with less”. A frugal mindset creatively builds upon and repurposes existing technology and innovation and aims to provide low-cost, high-quality solutions to the most pressing issues of the world; it is thus more likely to view inequalities and climate change, and other social and environmental issues as business opportunities. The pandemic has accelerated the digitalization of the economy and the use of automation and artificial intelligence. In this sense, policies and fiscal stimulus that incentivize frugal innovations could accelerate deployment. While better reuse of agricultural and other scrap materials, as well as investment in rural infrastructure, could scale up access to basic services such as water, sanitation, and energy to previously un- or under-served populations while fostering rural MSMEs and job creation.

The Blue Economy is the green economy concept adapted to the ocean economy that could benefit many Small Island Developing States (SIDS) with massive ocean resources and developing countries with long coastal areas.

Similarly, the creative or orange economy, which relies more on human capital and ICTs, can support youth entrepreneurship and job creation. The orange economy is the trade, labor, and production of the creative industries, such as advertising, design, publishing, software, Film/TV/Radio. It requires a labor force with the ability to think and act creatively. The creative economy supports sustainable entrepreneurship and empowers innovators, especially the generation that grew up in the digital era. Marketing, fashion, or media companies also influence values and consumption, and lifestyle choices as they are often operated by young people who tend to be purpose-driven and support sustainability. A dynamic creative economy can thus play a vital role in promoting other alternative economic models, especially in developing countries.

The yellow or Attention Economy is the monetization of consumer’s attention by platforms such as Google, Facebook, Instagram, Snapchat, Twitter, Tik Tok among others by collecting vast amounts of information on consumers. They monetize this information by developing increasingly sophisticated algorithms and persuasion techniques to keep people clicking scrolling, and sharing. These techniques prey on many of human core subconscious tendencies for pleasure or fear to trap people’s attention and alter human behavior or perception. This market, valued in the trillions of dollars, is increasingly believed to be sowing the increased polarization, extremism, and radicalization being observed currently.

However, if harnessed, the Attention Economy could become a powerful tool to effectuate the necessary behavioral changes needed to transition towards the world we want, thriving in authentic mutual connection by using technology to bring humanity back into alignment with the rest of nature and the SDGs.

It is also an opportunity to build their care economy while creating more decent jobs and addressing gender inequalities. The care or “purple economy” – with investment in education and health providers for children, elderly, people with disabilities – would create 2.5 times more jobs than investment in physical infrastructure, create 30 times more jobs for women, and ease restriction on women’s time, and have greater and fiscal sustainability

To be even more inclusive and resilient, in line with the 2030 Agenda, these models could be supported by the Social and Solidarity Economy Organizations and Enterprises (SSEOEs). The Social and Solidarity Economy (SSE) is people-centered, addresses exclusion by reaching-out and incorporating marginalized groups in supply chains and facilitating their vertical integration into the larger economy. SSE also fosters shared prosperity through shared ownership of assets and means of production. It also promotes active citizenship, participatory democracy, and a pluralistic economy which bolsters social cohesion, accountability, and sound governance (SDG16).

SSEOEs include worker, producer, and housing cooperatives that share the features of joint ownership and democratic governance. Being an integral part of their communities, these organizations also have a stake in ensuring the social and ecological integrity of their host communities in the short and long term, which is not necessarily the case for publicly listed or privately-owned companies. Moreover, cooperatives have shown to be a prolific job creator as an estimated 9.5 percent of the world’s working population are employed by cooperatives.

We cannot afford to waste another crisis. The pandemic is and will be costly. Funding the transition to green, blue, orange, and purple economies is feasible! We have a duty to use the trillions that have materialized to jump-start and accelerate the transition to new economic models that can tackle the complex interdependencies among the SDGs. If international solidarity is not sufficient justification to support developing countries, the interconnectedness of our health and the ecosystem demonstrated by the pandemic should be.

About the author: Chantal Line Carpentier is the Chief of the UNCTAD New York Office of the Secretary-General. The views expressed in this publication/study are those of the authors and do not necessarily reflect those of the United Nations including the UN Conference on Trade and Development. This article builds on a draft developed with Raymond Landveld and Olivier Combe, Economic Affairs Officers in the UNCTAD New York office.

Responsibility Shifting in Investment and Sustainability

By Soo-hyun Lee

When it comes to understanding the relationship between investment and sustainability, national and international governance institutions take a facilitative rather than regulatory approach.

This is largely premised on two assumptions: (1) overreach would result in regulatory chilling that could limit investment and (2) regulating investment inflows would limit their potential economic impact. Though taking place in different forms between portfolio investments and foreign direct investment, a facilitative approach, in principle, shifts the responsibility of defining and understanding the interplay between investment and sustainability to market interactions: between the investor and the recipient.

Assessing the facilitative approach to investment and sustainability within the microeconomics of sustainable development policy renders some noteworthy observations. Namely, creating a regulatory and governance environment that facilitates the consumer and producer, or in this case the recipient and the investor, shifts responsibility away from the government or prevailing institution from taking a more prescriptive approach: defining, implementing and enforcing a more substantial linkage between investment and sustainability.

A prescriptive role, while more vulnerable to the potential consequences of regulatory chill, may be necessary to administering the nexus between investment and sustainability because sustainability as a motivating factor does not naturally arise from the economic rationality that fuels market interactions. The relationship between investors and the recipients of investment, just as that between producers and consumers, does not function on the logic of advancing sustainability, but rather economic profit maximization. For this reason, should their interaction deviate from this core market-based logic by, for example, running deficits in consumer and/or producer surplus, or being involved in investments where risk supersedes returns, their interaction is jeopardized and likely to be discontinued. For that reason, shifting the responsibility to the consumer to fuse a more molecular bond between investment and sustainability seems destined to meet an inconclusive outcome as it saps away the essential motivation to shoulder that burden both materially in terms of resource allocation and substantively as a determination to form a meaningful investment and sustainability nexus.

Turning to views in sustainable consumption, Mont, et al (2013) identifies a similar paradox in their work for the Nordic Council of Ministers based on interviews with policymakers as a myth of sustainable consumption. They write that shifting the responsibility of sustainable consumption to the consumer limits state involvement to raising awareness rather than taking more proactive interventions against unsustainable consumption. The inherent problem behind shifting responsibility, they write, is that consumer behaviour is based on contextual factors that are “beyond the control of individual actors”, namely prevailing social norms that shape a consumer’s understanding of consumption in connection to sustainability. Presently, this norm is that sustainable consumption is an extraordinary decision that requires justification (Mont, et al, 35-37) as it deviates from market-based reasoning. The consumer requires additional justification for these decisions to justify that divergence: why to choose a product that provides comparatively less consumer surplus by paying a higher price or paying a price to receive less utility arising from consumption?

Lorek and Spangenberg (2013) explains responsibility shifting in sustainable consumption as the lock-in situation, where transitions to sustainability is contingent on more growth and technological innovation. This is reflected through the I = P*A*T equation, which offsets the added cumulative climate impact (I) as the function of the factor of population growth (P) and greater per capita affluence (A) by technological progress (T). With advances in (T), higher unsustainability derived from increasing (P) and (A) values are offset by technologies that enhance the sustainability of consumption. Herein lies one of the causes behind responsibility shifting, which is a “technological optimism” that firms will advance the state of technology if given the means to do so (Lorek and Spangenberg, 35). The central economic tenet behind this technological optimism is economic liberalism, which attributes the agency and primacy of economic optimality to market-based actors, in turn manifesting external intervention by the state or another prevailing authority as obstacles to that optimality. As such, the role of the state or prevailing authority is limited to providing information, shifting responsibility to market-based interactions (Lorek and Spangenberg, 40).

Responding to the situation of lock-in, which strives in the ecosystem of economic neoliberalism, Dalhammer (2019) advances that policy instruments are necessary to form a sustainable choice architecture that features sustainability as the default option. Lock-in prevents microeconomic transitions to strong sustainability, such as adopting ideas of consumptive sufficiency, thus rendering top-down involvement of the government or prevailing authority necessary (Dalhammer, 140). Simultaneously, policy instruments should be mobilized within a “reflexive governance mode”, which Mont (2019) identifies as a standpoint of continuous learning and acknowledgment of intertwining contextual factors that influence consumptive behaviour (Mont, 3). The policy instruments arising from this mode should aim to facilitate the transition from system optimization, which perpetuates the business-as-usual scenario, to system transformation, which seeks to integrate alternative solutions to the policy and governance process that move beyond the primacy of consumer sovereignty (Mont, 9).

Extrapolating these observations from sustainable consumption to the investment and sustainability nexus takes no stretch of the imagination. The engine that drives forward such extrapolation is simple yet powerful: more consumption and investment are better. The economic neoliberalism to which the origins of unsustainable consumption are traced also lays claim to the origin of crucial disconnects between investment and sustainability. This applies to both forms of investment, portfolio and foreign direct, as do many of the ruminations in sustainable consumption thought. This close albeit conceptual cross-disciplinary application warrants closer examination.

Sustainable portfolio investment has been building traction over the last three years with latter half of 2019 alone witnessing billions of USD identified under the environmental, social and governance (ESG) investment label. There remain considerable limitations to the concept, the most pronounced amongst them being a lack of shared understanding and standards of ESG metrics and stewardship. The World Bank Group (WBG) and the UN Principles on Responsible Investment have been on the forefront of institutional efforts to address these concerns. Despite the wide involvement of national pension schemes, central banks and government regulation, policy instruments remain within the system optimization mindset that shifts responsibility to the actual sustainability element of ESG to the producer-consumer.

The result of a soft sustainability approach to regulating ESG has exposed it to systematic greenwashing. The mentality in ESG continues to be growth-oriented, investors financing asset managers based on perceptual cues and little understanding of metrics and their shortcomings. With the entry of large names in finance like BlackRock and MSCI or international organizations like the WBG and United Nations through the PRI, portfolio investors are eased into the lethargy of technological optimism. Morgan Stanley’s Institute for Sustainable Investing identified promising trends in the sustainable investment epithet, employing a definition of sustainable investing that was not only substantively vacuous but very much aligned to the central economic ideological tenets of growth-oriented market fundamentalism.

Moving outward to foreign direct investment and its governance does little to mitigate these concerns. Despite international investment law being based on a regime of treaties and treaty arbitration, which directly involves governments, investment, less considerations of sustainability in investment, find no prescriptive definition. Investors, which notably include shareholders of companies, are given rights and protections in the state recipient to that investment, such as access to investor-State dispute settlement (ISDS), but the means to determine the substantive qualities of investment remain ad hoc and left the judicial discretion arising from investment arbitration (See, for instance, Mihaly International Corporation v. Democratic Socialist Republic of Sri Lanka, ICSID Case No. ARB/00/2; Ceskoslovenska Obchodni Banka, A.S. v. The Slovak Republic, ICSID Case No. ARB/97/4; Malaysian Historical Salvors, SDN, BHD v. The Government of Malaysia, ICSID Case No. ARB/05/10).

While there is no single government to adopt and then apply a reflexive governance model to the multilateral regime of international investment law, the United Nations can and should play a larger role in taking more prescriptive, system transformative action to ensure that sustainability is not simply a spillover of investment, rather sustainability leads decisions of whether investment should be admitted.

About the author: Soo-hyun LEE is a Agenda 2030 PhD Researcher in international economic law and sustainable development at Lund University, a Private Sector Integrity Research Analyst at the UN Development Programme, and the head consultant at the Information Symmetry Law and Policy Group. His interests and expertise are in the law and policies of international investment, trade, finance, and their interaction with sustainable development. His doctoral dissertation examines the normative and procedural aspects of sustainable development in investment treaty arbitration and their larger development implications.

This article is the winner in an essay competition held by the UNCTAD YSI Summer School on Globalization and Development Strategies. Participants of the school worked with senior scholars to fine-tune their drafts, and the top-5 articles were published here. For other articles in the series, please click here.

About UNCTAD UNCTAD is a permanent intergovernmental body established by the United Nations General Assembly in 1964. Its headquarters are located in Geneva, Switzerland, with offices in New York and Addis Ababa. UNCTAD is part of the UN Secretariat, reports to the UN General Assembly and the Economic and Social Council, and are also part of the United Nations Development Group.

Social Instability, Music, Sailing, and… Economics?

Rob Johnson, President of the Institute for New Economic Thinking, is not your average economist. He’s got heart and soul, or if you’ll have it, the blues! With his deep connection to the arts and humanities, Rob leads the new economic thinking not just with a sharp mind, but also with sensibility.

This article is part of an ongoing series in which Rob shares his life experiences, and biggest lessons learned. If you’re an aspiring expert in economics or a related field, this is for you. It might mitigate the depth and duration of your mid-life crisis. Earlier articles in this series can be found here.

Today, we start at the start. We hear from Rob about his youth, and the way he got involved in economics in the first place. Spoiler alert: it was not a linear path.

1 – Social Instability, Music, Sailing, and… Economics?

“As I was growing up, Detroit was a cauldron for social instability, disorder, racial tension, and labor management issues. It was the time of the Vietnam War, and the 1967 race riots; I was in the middle of that when I was a child. MLK spoke, at what would be my high school 3 years into the future, three weeks to the day before he got assassinated! My parents were talking about whether we needed to evacuate. I saw a lot of violence at 10 and 11 years old. It left me mesmerized by MLK; I wanted to know who he was to evoke such a powerful reaction in society.

I also grew up surrounded by music. My father was a doctor and jazz musician, and my mother was a singer and worked in development fundraising for the Detroit Symphony Orchestra; they brought lots of music into the home. And on top of that, I had a mad passion for sailing. All throughout high school, I was doing high level races. I learned navigation by learning trigonometry myself. I learned aerodynamics by teaching myself calculus. Grades, school, and report cards didn’t matter that much to me. I cared about winning the sailboat races! So I studied meteorology. I read about the history of the great explorers. The North Pole, the South Pole, everything.

When it came time for college, sailing led me to MIT. The greatest naval architect of the 20th century–Olin Stevens–had gone there. And a guy who I sailed on a crew with, John Bertrand (who later became the first person to win the America’s Cup away from America in 132 years) had, too! Plus, my dad was encouraging me. So that’s what I wanted; to go to MIT, and to study engineering and become a Naval Architect.

At MIT, I started out majoring in engineering, aeronautical engineering, I minored in music and creative writing. In creative writing, I chose to specialize in understanding the collective writings of Martin Luther King, and the style and techniques of argument, etc. Because I was still haunted by him.

Then, one day, I was looking at electives. I found a course in financial history of western Europe with a man named Charles Kindleberger, and signed up.

About a month into the semester, there was an article about me in the school newspaper, talking about how I was the leader of a crew that won a college sailing race at the naval academy. Kindleberger had seen it, and he told me “I saw you’re a sailor! And since this is your sophomore year, next year you’ll have to write a junior paper, and I think you should write about the role of marine technology in affecting the trade between the Dutch and the British empire. I can hire you as a research assistant.”

So Kindleberger, at the time of the two oil crises, got me a job between him and a man named Morris Adelman, the most famous oil economist in the world. We were sitting in the same suite. And Kindleberger was amazing. On Friday mornings, he’d take students to the last pre-performance rehearsal of the Boston Symphony. And then we’d go to breakfast and talk about world affairs; he was this lovely, lovely man.

But in the middle of that junior paper, Kindleberger says to me, “well you’re good at engineering and math. If you take advanced econometrics, micro and macro, you can get credit for intermediate and beginners, too; that gives you triple the credits. And I’m gonna be selfish. We have nine people majoring in economics… But if we get a tenth, they double our budget!”

Kindleberger told me that the person who should advise me should be my advisor was Robert Solow, because he and his wife were about to learn how to sail. Teach him how to sail, he said, and he’ll teach you economics and help you in your career.

So here I was, with my background of social turmoil, a passion for sailing, a curiosity for MLK, a love for music, and I’m about to dive deeper into economics…”

Enjoy sound with the story!

This playlist, put together by Rob, captures the spirit of Detroit.

Subscribe to receive the next article directly to your inbox! And in the mean time, take a look at Rob’s podcast Economics and Beyond, available wherever you get your podcasts.

Coronavirus Needs Not Kill Globalization

By Jack Gao | The COVID19 crisis is shaping up to be the most severe challenge the world has to confront since World War II. At present, almost 800,000 cases have been reported from virtually every country in the world, with the death toll nearing 40,000. Not only is much of the global economy frozen as we fight the virus, but national borders are also being shut down to contain its spread. As this battle goes on, many are already predicting that the world may never be the same again.

The knee-jerk reaction is to substantially roll back on the current globalization regime, so global pandemics may be eliminated for once and for all. But this reflex towards nationalism completely misses the point. Crises like this one reflect on the perversion of current globalization, not on globalization per se. We should not throw the baby out with the bathwater, but instead, take the crisis as an opportunity to improve on the version of globalization that prioritized some objectives but neglected others.

First of all, a more divided world in no way guarantees global pandemics will no longer happen. One only needs to turn to the 1918 Spanish flu pandemic that claimed 100 million lives or the even more lethal Black Death episode, both when the world was more divided, for some evidence. Periodic outbreaks of infectious diseases have plagued humanity throughout history, and, more than anything, it was progressing in science and healthcare that accounted for the gradual decline in fatality and damages, in spite of advances in globalization. In fact, we could reasonably argue that better health outcomes, nutrition access, sanitation facilities wrought by economic development are important reasons we have fewer and less deadly pandemics today, thanks to globalization. It’s wishful thinking that less globalization will result in fewer pandemics.

Second, when crises do strike, we are much better positioned to respond to them as a globally connected community. Although leaving much to be desired, information sharing has proved key to containing the coronavirus outbreak. China alerted the WHO by the end of last year of unusual pneumonia in Wuhan; within days, Chinese scientists posted the genome of the new virus, allowing virologists in Berlin to produce the diagnostic test of the disease for worldwide access. We often take for granted communications of this kind today, which we can ill-afford if balkanization was to rule the day.

Even as borders are shut to reduce human flow at the moment, global commerce continues to play a crucial role to ensure the supply of medical products and equipment as we fight the pandemic. For instance, the crisis may have already subsided in China, but Chinese companies are currently working around the clock as ventilator orders pour in from the rest of the world. Similarly, at least a few dozen pharmaceutical companies from around the world are racing to develop vaccines and treatments for the virus, knowing that they’ll have ready access to a global marketplace to recoup their investments. Just imagine how much harder this battle would be if countries were left to their domestic supply chains or scientific knowledge.

Finally, while much is still unclear about how the current outbreak unfolded, from the evidence we do have, it is national mishandling or in some cases deglobalization factors that contributed the lion’s share to its unbridled spread. China’s earlier misstep on information reporting, America’s testing debacle and obsession with travel bans, and UK’s initial flirtation with herd immunity are just a few examples of national blunders that hastened the transmission of the virus, which have little to do with globalization. Meanwhile, in a bid to have America go it alone, Trump’s elimination of epistemologist based in China, staff cuts at the CDC, and heightened tariffs on Chinese medical products may well have made this health crisis worse than it has to be.

Each crisis is an opportunity in disguise, the coronavirus is no different. It should be taken as a reminder that our disregard to some objectives and narrow-minded pursuit of others have tilted the world off-balance. In a globalization solely focused on promoting international trade and financial flows and centered around organizations such as the World Bank and the IMF, this outbreak caught the incumbent international regime completely off-guard. Either in funding, capacity, or power, the World Health Organization has been no match to its counterparts charged with commercial and financial affairs. Seen in this light, the outbreak should serve as a rude awakening to a world economy that prioritizes economic integration over public health, environmental, and climate concerns.

As the fight to contain the coronavirus continues, many believe this crisis will bring an end to globalization as we know it, some may even work hard to make sure this is so out of self-interest. However, it bears emphasizing that a balkanized and disintegrated world is neither feasible nor desirable. The coronavirus does not have to kill globalization, instead, it is our chance to rebalance the world economy to better serve collective social goals and tackle future challenges as a coordinated global community.

Jack Gao is a Program Economist at the Institute for New Economic Thinking. He is interested in international economics and finance, energy policy, economic development, and the Chinese economy. He previously worked in financial product and data departments in Bloomberg Singapore, and reported on Asian financial markets in Bloomberg News from Shanghai. Jack holds a MPA in International Development from Harvard Kennedy School, and a B.S. in Economics from Singapore Management University. He has published articles on China Policy Review and Harvard Kennedy School Review.

Currency manipulation accusation against China not just “wrong now”, but fundamentally flawed

By Alexander Beunder. Investigative journalist. Platform Authentieke Journalistiek, the Netherlands.

Now that the dust has settled around the latest U.S.-China trade war spat, here’s something the Trump regime may want to evaluate before the next round: the fact that many economists and analysts refused to side with Trump and Mnuchin when they accused China of “currency manipulation”.

Initially, the story of Chinese currency manipulation was echoed around the world, when the Chinese yuan dropped 1,4% to the dollar on Monday, August 5. After US president Donald Trump responded by tweet that China was guilty of “currency manipulation”, the Wall Street Journal and others described how Beijing was “weaponizing the yuan”. China was obviously responding, some analysts said, to new import tariffs on Chinese products which Trump had announced a week before. The press paid even more attention to the story because of the diplomatic drama around it, as US Treasury secretary Steven Mnuchin rushed to officially declare China a “Currency Manipulator” and said to bring the matter to the International Monetary Fund (IMF).

It’s an accusation Trump (but before him, Obama) has been repeating for years. China’s central bank is supposedly keeping the value of the yuan to the dollar artificially low – by buying and holding on to dollar reserves – to make its exports cheap for the rest of the world. This creates an “unfair competitive advantage”, in the words of Mnuchin. Thanks to its cunning currency manipulation scheme, the argument goes, China enjoys a persistent trade surplus – exporting more than importing – while the U.S. suffers a trade deficit, hurting businesses and workers.

But fact-checking Trump’s statements has become a healthy habit among journalists. Several analyses quoted economists who disagreed with the latest accusations by Trump and Mnuchin. As The New York Times business correspondent Alexandra Stevenson noted, “many economists believe [China’s] currency should be weakening versus the dollar”, due to slow growth and the trade war with the U.S.. Another source, U.S.-economist Dean Baker, noted the 1,4% drop was large but “not that unusual” and can happen “without government intervention”. Even the annual review of China’s economic policies by the IMF, released after Monday’s accusations, concluded there is no sign of currency manipulation.

Still, several established correspondents agreed that the accusation was valid in the past. “China kept its currency weak a decade ago”, Stevenson wrote, but the yuan has now “strengthened to a level widely believed to be close to fair value”. Her colleague Eduardo Porter at The New York Times shared a similar view in an article which headlined, “Trump Isn’t Wrong on China Currency Manipulation, Just Late”. Bloomberg correspondent Noah Smith drew the same conclusion, noting China enjoyed a large trade surplus in the 2000s, but the “the country’s current account deficit has largely vanished”, after a peak in 2007.

Flawed economics

However, there may be something more fundamentally wrong with the currency manipulation accusation, and not just with the recent application of it by Trump and Mnuchin.

New York-based economist Anwar Shaikh and London-based economist Isabella Weber have been arguing for several years that the whole currency manipulation argument is based on flawed economics. Shaikh, an economics professor at the New School of Social Research in New York, and Weber, a lecturer in economics at Goldsmiths, University of London, published a working paper on the topic last year titled “Debunking the Currency Manipulation Argument”.

If they’re right, even the belief that China was guilty of currency manipulation a decade ago becomes questionable.

To understand what’s wrong with the currency manipulation argument we have to go back to the underlying trade theories, Shaikh and Weber explain. As currency manipulation can not be observed directly, economists look at other economic phenomena which, according to standard trade theory, are indicators of currency manipulation. A persistent trade surplus is the most important indicator because, according to standard trade theory, free trade would automatically eliminate trade imbalances. Hence, wherever a persistent trade surplus exists, it must be the result of currency manipulation, the argument goes.

The Chinese trade surplus, always positive since 1994, has been the central pillar of the currency manipulation argument, Shaikh and Weber note. Not just for academic economists; the U.S. Treasury uses persistent trade surpluses as official, legal criteria to determine whether a country is guilty of currency manipulation to gain an “unfair competitive advantage”.

But the proof is in the pudding, in this case, standard economic trade theory. If the theory is incorrect – which it is, according to Shaikh and Weber – the whole narrative collapses.

What’s wrong with the trade theory? The theory goes back to a famous model of the British economist David Ricardo (1772-1823), Shaikh and Weber explain. In Ricardo’s model and modernized versions of it, free trade ensures that, over time, no trading partner would enjoy a trade surplus or suffer a trade deficit. Imagine a country which would initially be more competitive in, let’s say, all sectors. Free trade would result in high exports and low imports (a trade surplus) attracting a massive inflow of money from foreign buyers. Such an inflow of money creates domestic inflation or an increase in the exchange rate, damaging competitiveness and eliminating the trade surplus. In a weaker, deficit country the opposite would happen: an outflow of money creates domestic deflation or a drop in the exchange rate, boosting competitiveness and exports and eliminating the trade deficit.

But the theory is fundamentally wrong, Shaikh and Weber argue. The “natural” result of a world in which trading partners enjoy different levels of competitiveness is not balanced trade. The “natural” result of free trade in such a world, they argue, is imbalance – trading partners with persistent trade surpluses and deficits.

Relying on classical economists like Adam Smith (1723 – 1790) and Roy Harrod (1900 – 1978), Shaikh and Weber present their alternative trade theory: in their version, the magical price or exchange-rate movements which would equilibrate trade in Ricardian models won’t happen. For instance, in a surplus country, large inflows of money due to excessive exports will not create domestic inflation or a rise in the exchange rate, because there’s something else that these flows of money do: move back to where they came from. Any oversupply of money a surplus country would receive would initially be saved in local banks and decrease the domestic interest rate. This would push capital towards other countries where it enjoys higher returns – indeed, to the deficit countries where the interest rate has increased due to an outflow of money.

Hence, a likely outcome of free trade is that surplus countries become creditors, and deficit countries become borrowers, and there are no automatic price or exchange-rate movements which would balance trade accounts.

This is, Shaikh and Weber note, an accurate description of the financial relation between the US and China, as China has become the largest creditor of the US. The only peculiarity, they explain, is that China’s public central bank is doing the lending (buying dollar assets) because Chinese capital controls prevent private investors from fulfilling this role. But these operations “might only mimic what would be the outcome of free capital and trade flows”, Shaikh and Weber explain. To label these monetary operations as the main instrument of a cunning currency manipulation scheme, as Mnuchin and others do, is unwarranted in their view.

So, if Shaikh and Weber are right, global imbalances in trade are simply natural outcomes of the free market, not of government interference. And if that’s the case, the currency manipulation arguments holds no water, as “we cannot infer from trade imbalances and from China’s purchase of reserves that the currency has been manipulated”.

No, Shaikh and Weber can’t exclude the possibility that China has intervened in the value of the yuan for purposes of competitiveness. Their main point is that the conventional criteria used by academics and the US Treasury to determine this – trade surpluses and deficits – tell us very little.

Perhaps more importantly, their message is to look at free trade itself to understand the roots of the trade deficit of the US and trade surplus of China. The real reason is surprisingly simple: “It is the lower costs in China that drive its trade surplus”, Shaikh and Weber conclude. It’s not Chinese currency manipulation which, as Trump complained in 2015, “makes it impossible for our companies to compete”. It’s simply Chinese competitiveness. It’s an argument which may be harder to swallow for those convinced of the everlasting power and competitiveness of the US economy.

Politics, not economic science

However convincing their debunking of the economic evidence may be, Shaikh and Weber are well aware that in the political arena the economic evidence plays a secondary role. U.S. presidents like Trump repeat the accusation of currency manipulation because of politics, not economic science, they note.

It’s been a “general pattern” in US foreign policy for some time, Shaikh and Weber write, to accuse trading partners of currency manipulation when they are running a trade surplus with the US, typically followed by the “demand that they enter into bilateral negotiations on a wide array of market liberalization policies”. Booming economies like Korea, Taiwan, Hongkong and Singapore faced the same accusation of currency manipulation in the late eighties and nineties, Shaikh and Weber note. China has repeatedly been accused of currency manipulation by the US Treasury since the nineties, Weber adds by email, with increased intensity “since the rapid expansion of the US-China trade imbalance following China’s accession to the WTO in 2001”.

So the return of the currency manipulation argument today, at a time when the US and China are fighting over the terms of a new trade treaty, is not surprising. But it is alarming, Weber says, as the unfounded accusation “is another step towards escalating the trade war”.

This article was also published by Rethinking Economics.