Exam surivived

Done and dusted. One hour of Global Comparative Business later and the prevailing thought among the class is 'what was all the fuss about'. I wrote good stuff on the IMF and a general 'what is globalisation' question. I was less convincing on the differences between the GATT and the WTO, but it was good enough.

Time to relax, and tonight, time to party. We've got a drinks reception at the school, a class photo and then a cruise down the river to look forward to. Tomorrow is Keble ball which the MBA class have adopted as their end of term party - about 60 of us are going.

Todays Required Linking

Read this. Then go here.

If this turns out to be illegal something is seriously wrong.

That'll do for now

I started this at 4 o'clock. It's now nearly ten o'clock and five and a half hours is enough for anyone. If anyone's just reaching this blog here's a brief explanation of what's been going on.

I have an exam tomorrow, for which I was underprepared. I've just written up revision notes for six of the eight weeks of the course online, as blog entries. A quick cut and paste into word reveals almost 5000 words worth of effort. If you read the archives they'll make sense if you start here and work up.

Thank you and goodnight.

Back once again with the online revision. We're up to...

Week 6 : Foreign Direct Investment

Questions to think about for this are

What is the difference between ‘direct’ and ‘indirect’ expropriation and how has the latter been interpreted in recent international investment disputes?
What are international investment treaties and do they matter?

Now I'm not planning on writing any essays on this so what follows is intended to get me marks on one of the short questions I may have to cover on this.

FDI has been growing rapidly lately, about 20% a year since 1980. All kinds of reasons for this, developed countries like being invested in as it's good for unemployment. Developing countries like being invested in as it's good for exports. The opening of the Soviet bloc has also created a load of opportunites for firms who want to invest in educated cheap labour, previously untapped natural resources or just to be near the end market in some very large countries. (Poland is a very big place you know)

There's also what I'm going to call Japanese Car Syndrome. Namely foreign firms tend to be more productive than domestic ones, so you can learn a lot from them.

On the supply side firms have started investing overseas to avoid country of origin clauses, to make use of JIT techniques or to exploit foreign labour (sometimes in a good way). Most FDI has gone to developed countries though, France is much more likely to be investing in Germany or America than it is in Pakistan or Bangladesh. This is partly because the statistics include mergers and large stakeholdings.

How is FDI regulated? Badly is the short answer. There's nothing like the WTO and while direct expropriation (sorry, that's my oil well now, thank's for building it) hasn't happened much lately indirect expropriation (thanks for investing, have you seen next years tax rates / minimum wages) is still a problem.

It hasn't been possible to create something for international investment because there is a lot of entrenched opposition. From labour unions, NGO's, domestic monopolies / oligopolies and NGO's. There are some frameworks though, including Chapter 11 of NAFTA and the Single European Market. WTO members can also agree things called GAT's between themselves,. in NAFTA the equivalent is a BIT (Bilateral Trade Agreement)

It's worth knowing about BITs and GATs cause they work in different directions. A BIT agrees to liberalise everything except named exceptions. A GAT agrees to liberalise only those things it mentions.

Disputes over investment treaties / investments can be settled either through state - state discussion or state - investor discussion. The Ethyl Corporation provides an example of how this works. Ethyl wanted to import MMT (a fuel additive) into Canada. Canada banned the import on health grounds, but didn't ban domestic production. Not surprisingly Ethyl sued for effectice expropriation and Canada both settled and reversed the ban.

Some have seen this as trade treaties overturning good environmental legislation. In this case it's more like trade treaties overturning cack handed Canadian protectionism. If they'd banned it properly and had enough evidence it was bad for your health they'd have been fine.

Now for part II of our exciting look at the Washington Consensus

Week 5 : The Washington Consensus in Action

After seeing off the Latin American crisis the IMF was armed with a new ideology and a one size fits all solution to future crises. In retrospect this should have been alarming, but convergence was the order of the day - if all economies could be made like those of the capitalist west we'd be fine. Sadly the IMF was then presented with a succession of opportunities to demonstrate how not to do it in Russia, East Asia and Africa. I'm going to focus on East Asia here...

In 1997 the Thai Baht was hit by currency speculation and it collapsed. Fear of contagion saw neighbouring currencies start to go the same way as hot money made a 'flight to quality'. (sell Baht, buy $$$). Once again there was the danger that countries with weak currencies would not be able to meet their debts to the west. Enter the IMF.

IMF treatment consisted of short term loans tied to implementation of the Washington Consesus. Governments were told to cut spending and raise taxes. In Indonesia a requirement to cut spending on welfare payments sparked riots and led to deaths - that was reversed shortly afterwards but the cut in investment had long term consequences for the economy.

The IMF considered that it had 'all areas' access to creditor states policy and told the Koreans to dismantle excess capacity in their semi-conductor industry. The Koreans refused arguing that the downturn in semi-conductors was cyclical. Quite why the IMF thought they knew more about the semi-conductor industry than the Koreans is open to debate, in any event the Koreans were proved right and their semi-conductor industry proved vital in leading them out of recession.

Elsewhere the IMF demanded market liberalisation and an end to anything that looked like capital controls. Malaysia refused to go along with this and came through the crisis much better than anywhere else. In Korea long term investment barely dropped despite the crisis, all the damage was being done by 'hot money', capital controls may have forced investors to keep their money wwhere it was and seen off the crisis. This was exactly the kind of thing Keynes had intended when the IMF was set up, but to todays IMF it's anathema.

In Korea problems were caused by market liberalisation. Korea had been pushed into opening it's markets to global capital before they were ready to deal with it. Hence all the problems with Korean banks not being up to scratch and the resulting crisis of confidence. Had the policy been to open Korea up gradually and introduce banking reform / strong institutions as they went this mess might have been avoidable.

The response to this and other problems with the Washington Consensus has been as follows.

1. Sequencing - you have to do things in the right order. Such as not privatising state monopolies before you've got rules to regulate them (Russia)
2. Capital Account Liberalisation - now this should only be attempted in the presence of strong institutions
3. Soverign Debt Workout - a proposal that the IMF should be able to sit down with govts and creditors to restructure their debt. Oddly enough commercial interests are blocking this one.
4. Capital controls - suggestions that these might work after all have sparked *open disagreement* (unheard of in the IMF)
5. Don't mess with what you don't understand - IMF turned out to make a lousy aid agency in Africa

Stiglitz suggests that the culture of the IMF as an institution may be as much at fault as it's economics. IMF economists are not specialists on the countries they're sent to. Rather they're despatched to solve crises at short notice and arrive bearing a briefcase of standard prescriptions. The prevailing attitude is that if the problem state was any good at economics it wouldn't be in the mess it is.

It's worth mentioning what the world bank was doing during all of this. In Africa it's had a much better record since it stopped lending to dictators. In Russia it ran into problems because although it had plenty of money to lend Russia Russia was not well set up to spend it. Russia already had schools, universities, roads and factories and didn't really need more. It also had hyperinflation, inadequate institutions and a massive insurgence of organised crime, but the bank couldn't do much about that. In Asia the bank got caught up in the IMF lending to sustain the currencies that were under pressure from speculators. The immediate result was that the bank, IMF and assorted governments discovered that speculators have an incredible amount of money and can suck up as much as the bank can give out.

Week 4 : The Rise of the Washington Consensus

I'm not going to write too much about this as I'm reasonably confident I can remember this bit, partly because I went and saw Joseph Stiglitz lecture on it, and partly because its something that interests me. Plus it's easy to take up highly opinionated positions which makes life a lot easier. Anyway...

As you may remember from an earlier post in 1982 Mexico nearly went bankrupt in response to high US interest rates and a fall in world trade. This was swiftly followed by similar problems in Brazil and other latin american countries. These states were characterised by poorly performing industry, high levels of debt and governments that had adopted loose monetary policy as a means of postponing difficult decisions. Inflation was rife and no-one had cash to pay the banks.

Many of the banks were in America.

Since the currencies of the Latin American states were under massive pressure this was a job for the IMF. It duly did it's job providing substantial bail outs in exchange for promises of reform from its new debtors. These promises were...

1. Cut government spending
2. Reduce subsidies to domestic industries
3. Broaden the tax base and spend on health, education and infrastructure
4. Raise interest rates
5. Achieve competitive exchange rates

For nations in this position this is reasonably sound advice. However the short term shocks were unpleasant with unemployment soaring and economies entering depression as currency devalution meant firms could not pay back debt in dollars. There were demonstrations against all the governments involved. Almost all the costs were born by the debtor nations, not a single US bank reduced dividends as a result of this. This is despite the fact that the banks new full well how risky these loans had been at the time.

In effect the IMF had bailed out the US banks who's willingness to lend was at least part of the problem. By 1985 it was clear that while these countries weren't in trouble anymore they weren't exactly performing either. Thus another five points were added to the plan, these were cunningly named Phase II : Adjustment for Growth

1. Liberalise trade and minimise tarriffs
2. Encourage FDI
3. Privatise everything that isn't nailed down to improve efficiency
4. Deregulate the economy to stop corrupt / bureaucratic govt inefficiency
5. Enforce property rights

If you think this looks a lot like Reaganite / Thatcherite economics you're right. Although these poor countries saw their trade and tarriffs liberalised a hell of a lot more than we did.

The result of this lot was to put Mexico back on the road to growth, now as a satelite state of the USA. Since joining NAFTA 90% of Mexican trade is with the US, prior to the crisis it had a far broader export base and was a leader among developing nations. Now it's middle classes have been obliterated and there's a lot of ground to make up.

Interestingly the IMF bail out allowed the western banks to shift the debts they'd racked up off their books (the IMF effectively paid them off) but the nations the IMF lent money to are still in debt. The financial community introduced reforms with the Basle I agreement that should prevent them doing the same thing again.

Welcome back to the online revision session. And now for...

Odds and sods about trade

A few things worth mentioning about trade are...

1. In the Uruguay round of GATT the west managed to push for the introduction of trade in services. This was great for them, since it meant they could export the work of their consultants, ad agencies, engineers and so on more easily. It was less good for the developing nations since by and large they don't export services. India may yet have the last laugh on this one though since they're getting very good indeed at IT consultancy.

2. In the 1980's the US imposed 'voluntary quotas' on the Japanese. Since these were voluntary they lay outside the scope of the GATT but by forcing the Japanese not to import more than a certain number of cars they effectively protected the US auto industry. Sort of. The Japanese aren't dumb and promptly went from producing mid range mass market cars to expensive luxury ones (which sell in smaller numbers) and took the most valuable sector of the market away from Detroit.

3. Even within the EU regulations which ostensibly have nothing to do with protectionism form effective barriers. Differing legislation on safety standards has been damaging the efficiency of the automobile industry for decades.

It's getting hot in here

So hot that I'm now revising with my shirt off. Have to put it back on now though, time to go and get some food.

When I return look forward to more on trade and a potted history of the Washington consensus.

Thank god for that

Jeff Pittman, future nobel laureate and current student has just sent me his frameworks for this. As every MBA student and Management Consultant knows you can't go wrong with a good framework.

Fear me exam, for I have a diagram!

Second one looks must more impressive. Right, back to week three.

Welcome to the online revision session. Can I pass Global Coparative Business in a single night?

Week Three : International Trade / GATT and the WTO

For this our questions are...

What were the main consequences for businesses of the Uruguay Round of the GATT?
Does the WTO enforce ‘free trade’?

OK. I don't remember this lecture at all. Not even a little bit. Wonder if I was there.

GATT was set up in 1947 as a temporary measure. One of it's chief goals was to facilitate the reduction of US tarriffs which were up to 100% on somce products and to keep tarriffs low thereafter. There were 23 founding members including such economic giants as Ceylon, Burma, Southern Rhodesia, Luxemburg, the Lebanon and France. Membership fluctuated (in 1949 it was down to 13 countries) but the trend was up. By the Uruguay round (86-94) there were 123 countries.

The basic rules of the GATT are as follows.

1. If you give one member country a break on tarriffs you give all member countries a break on tarriffs.
2. Once it's in your country you have to treat it like any other widget.

This last one is a problem since it makes it impossible to discriminate between dolphin / turtle friendly tuna and non-friendly tuna since according to the rules they're identical product. It's also worth noting that until 2001 when it joined the WTO China's MFN deal with the USA meant the US treated it as a member even though it wasn't.

Free trade or fair? There's a big difference between free trade and fair trade. With free trade things like dumping surpluses on foreign markets, states subsidising domestic industries and so on would be fine. Since the GATT and WTO try to stop this they're more interested in fair trade. But this tends to be fair to big nations with deep pockets.

Article 20 This is the bit that says when you can ignore the rules, and that's basically in time of emergency - to protect lives or the environment. It's the clause that's been used to break patents on AID's drugs. There are a few more get outs for developing countries as well - you can avoid playing by the rules if you've got a balance of payments crisis and you get much longer to implement tarriff reductions.

Importantly GATT doesn't rule out regional trade agreements, so NAFTA and the EU can lower tarriffs internally all they want without having to open the market to the rest of the WTO.

Dispute settlement in the WTO So you've caught Ruritania dumping Ruritanian Marshmallows onto your Ebonian Marshmallow Market, what can you do? Well first you've got to try and reach an agreement with Ruritania. If that fails things go to a panel of lawyers and judges. If you don't like the judges verdict you can go to the Appelate Body and what they say goes. Sadly at this stage there is no automatic punishment, but you are allowed to inflict your own.

Basically if you have a judgement in your favour you can start taxing the imports of the person who upset you as much as you like. This is supposed to go on a carousel method whereby you target their industries in turn. This is fine among nations of similar size, but imagine Bermuda trying to punish America like this - it's not going to work.

That said WTO rulings do tend to get stuck to, especially by the big powers. So far it's been remarkably robust.

Welcome to the online real time revision session

Week Two : Globalisation and it's causes

Sample questions for this week include

1. Is ‘globalization’ different from ‘international economic interdependence’?
2. What causes globalization?
3. Globalize or globalise?

OK, the basic argument here is between those who say that globalisation is nothing new and that we had similar levels of international trade in 1913, (33% of world GDP was trade before WWI buggered everything up) and those who say that a) actually we have got more and b)what we've got is qualitatively different in that it implies much deeper and more complex relationships between states and organisations.

Part of this argument is based around notions of convergence toward a single economic model. The argument says that one day we'll all be like America. Communism failed, European Social Democracy is in financial bother and anyone who wants to have a half way successful economy had better get with the program. Now I didn't do three years of history to fall for this kind of telelogical garbage. People said much the same about Japan in the 80's, Asia in the (pre crisis) 90's and Soviet Russia in the 50's. Anyway, China is too damn big and too damn different for this stuff to hold true.

Now for some figures. Outward Foreign Direct Investment by the USA in 2000 was $1.2trn, little old UK managed $900bn so we're not that far back. France and Germany clock up $500bn and $450bn respectively. This represents a six fold increase for the USA since 1980, but a tenfold one for the UK. For France its about twenty times what it was - for Germany its ten times. To put it another way we're all at it - at least all of us in the west (+Japan).

Here's a scary figure for proponents of US Hegemony. Since 1980 China's share of world production has gone from 3.4 to 12%. The US's share has been a stable 21%. The scary thing is they've only industrialised a fraction of their country. Other useful stats on how real this all is include the fact that 1/3rd of all international trade is intra-firm, that is multinational firms shipping stuff around inside their own organisations. A further 1/3rd is multinational firms selling stuff to each other.

On the other hand, globalisation isn't just about trade. It's about governing on a global scale. Responses to environmental pollution, terrorism, the drugs trade (which is equal to 8% of global trade) and arms dealing (80% of weapons are illegally held) all need to be global in nature. Forums for global government are starting to emerge and as the things that need governing go on getting global we either set up some kind of world government or get buried by them. That's probably over the top but states can no longer do this kind of thing by themselves. That said regionalism may be enough what with NAFTA and the EU.

Works for football doesn't it? You've got CONCACAF, UEFA and all the rest overseen by FIFA. Just a thought.

According to the lecture notes globalisation is caused either by technology, the increased cost of protectionism or the triumph of US neo-conservative ideology. We can probably disregard the last one as a short term blip. Technology has made communication cheaper and the global financial markets couldn't operate the way they do without it. Simply put crises develop too quickly and on too massive a scale for anyone to do anything about it. The costs of staying out argument is more convincing when you see that freight costs are down 70% since the 1970's. The explosion of foreign investment also makes been open to it much more attractive. (However China still regulates FDI heavily - manages to get a lot though)

Welcome to the online real time revision session

Reasons to be cheerful

One : I went to all but one of the lectures
Two : I went to all Stiglitz' lectures when he visited
Three : I can always resort to babbling about Marxism just like when I was an undergraduate

hmm, only two reasons then

Welcome to the online real time revision session

Week One : Introduction to International Political Economy

Big shout out to Andreas Rother for his excellent revision notes. Share and share alike all you b-school people.

Right, following WWII a three legged system was set up to prevent a repeat of the great depression. The three legs were trade, exhange rates and money. Each was the domain of a specific institution. The system was created at the Bretton Woods conference and much of it was the brainchild of John Meynard Keynes. This is important because it means the entire system is predicated on Keynesian lines, namely markets are not efficient and concerted government action at the macro level is needed to correct / prevent market failures.

The GATT was not what was originally planned. Keynes had wanted an international board of trade, but this was watered down to a treaty by the US congress. The GATT never got to be more than a rich man's club with 50 members at its peak and high criteria required for any state joining. GATT never included anything about agriculture which had terrible consequences for the third world.

The IMF was set up to manage a set of fixed exchange rates. A global system of currency pegs was meant to ensure stability. If a country developed a short term balance of payments problem the IMF could intervene with emergency loans. In exchange for these loans the IMF could impose conditions intended to prevent the problem recurring.

The World Bank started life as the International Bank for Reconstruction and Development which could raise money cheaply due to it's excellent credit rating and use this money to finance the projects needed to rebuild Europe. It was effectively one big Keynesian investment vehicle intended to inflate economies by injecting investment. In the event it didn't do much in Europe as fear of democratic communism saw the Marshall plan introduced. For want of something else to do the World Bank turned its attention to the developing world.

Changes to the system
As ever events conspired to send the plans of the great and good astray. The cold war led to the institutions listed above being pushed into the front line to defend capitalism. The World Bank and IMF ended up making loans to third world dictatorships to prevent them turning to the soviet bloc. No-one seriously expected this money to end up anywhere other than in swiss bank accounts and the pockets of arms dealers. Such 'odious debt' is now contentious - surely we can't expect people to repay this?

More importantly by the end of the 1960's Vietnam and Johnson's social policies which had been financed by printing money meant the USA could no longer stay inside the fixed currency regime and in 1971 the US suspended convertibility. In 1973 OPEC delivered the mother of all supply side shocks to the western economy and things were looking rough. Industrialised nations led a round of 'new protectionism' as tarriffs were raised and exclusive deals like the Multi-Fibre Agreement (no cheap cotton here thankyou) were signed.

Realising that this was going to be very bad for them indeed the developing world tried to form something called the New International Economic Order, but this effort failed.

By the early 80's the GATT was in ruins, the IMF redundant and the world bank tainted by association with dubious regimes. Then Mexico nearly went bankrupt and everything changed again...

In 1982 Mexico was hit by the US decision to raise interest rates. Trade collapsed and US banks realised that Mexico was about to default on a lot of debt - potentially triggering a global financial crisis. The IMF intervened with a big bail out and imposed strict controls on Mexico. This and future interventions in Brazil and other countries saw the emergence of the Washington Consensus. (see future notes on week 4)

In the 1990's the Washington Consensus which had worked well (ok, maybe just worked) in Latin America was applied to Russia, East Asia and Africa. It didn't work.

In 1995 the GATT was incorporated into the much bigger and much more pluralist Word Trade Organisation. This has much broader membership and is better for developing countries (see future notes on week 3)

Triage

Ed Yourdon's one word advice for project management is going to be handy here.

What we're trying to learn

Here's the rubric from the reading list.

Globalization describes a transformation in the world economy. As economies become more interdependent and more sensitive to global markets, governments and corporations face a wider and more complex set of opportunities and challenges. This course investigates the phenomenon of globalization, its impact and the choices and dilemmas posed for governance at the level of the corporation, the government and the world economy. The approach and method of the course is international political economy—a branch of international relations which applies the tools of political science and economic theories of institutions to explain what drives and explains events in the world economy. Throughout the course there is an alternating attention given to industrialized economies and relations among them, and to emerging market and developing economies and their role and prospects in the global economy.

This course, unlike many other business school courses on international business, does not concern itself with the internal administration of the multinational enterprise. It focuses instead on the external institutional, regulatory and political environment in which firms conduct their business across national borders. The course begins with an introduction to international political economy, the core questions it addresses in respect of globalization and the tools of analysis deployed to answer those questions. Week 2 then looks specifically at globalization: what it is, what drives globalization, and what this means practically for trade, finance and public policy in the world economy. Week 3 focuses on the issue of international trade and explores how governments and other interested groups negotiate trade rules and the opening up of trade markets and with what implications. Weeks 4 and 5 examine the pressures and problems for policy convergence in a globalizing world economy, shifting the focus of the course to the emerging and developing economies. In particular, the rise of the Washington consensus is charted and its impact on several economies is explored in week 4 and in a sequel lecture in week 5 the rewriting or demise of the Washington consensus is examined. In week 6 the course turns to examine investment and the politics, trends and regulatory environment within which global investors operate. Week 7 explores in greater detail the particular impact and challenges raised for corporations by NGOs and the new ‘Global civil society’ revolution. In the final week of the course global economic governance and accountability are examined along with the implications of current ideas for reforming the management of the world economy.

That's what we've got to get through. I've decided to skip the stuff on NGO's as we did a lot of that in Corporate Responsibility and I can bluff my way through a short question on it. Stuff I need to learn includes the latin American crises in the 80's, the structure of the WTO, World Bank and IMF. I've also decided to brush up on Foreign Direct Investment.

Public revision experiment

OK, I've got an exam tomorrow on Global Comparitive Business, but a combination of coursework, apathy, Summer Project distractions and assorted online gubbins has distracted me to the point that I am now in something approaching trouble. Why? because I haven't done enough revision.

Therefore I will be revising online, all night or at least until my will power gives out. If I pass (and we won't find out for a month or so) you can assume that everything you need to know on the subject is here. OK?

Are you a future student?

By my reckoning about 10% of next years MBA class have found their way to this site and sent me an email. If you are part of that class or know anyone who is please point them in this direction, I'm happy to answer questions.

I'm also trying to improve the quality of the information which reaches people before they get here and have floated a few ideas with the schools admin. If you've got thoughts on this, can point me to some best practice elsewhere or anything else let me know. To get in touch just click this link

Delayed blogging

I forgot to link to this magnificent comic when I found it. Check out the Crab City Series from Goats.com . Here's a sample

"I'm on a case, Knowledgeable Pete. The kind of case that takes your very soul and puts it in a tiny box and then puts a hamster on top of that box. And that hamster never moves, Pete. The hamster never moves again."

Crisis Averted

4950 words later, (plus footnotes) and I've got my leadership essay ready to hand in. That leaves tonight or tomorrow (probably tonight) to sort out the groupwork and then two whole days to revise. It's not a huge amount of time, but it's not nothing either.

If anyone feels advertising withdrawl

Here's a little gimmick that shows the adverts which Google would serve here if I carried advertising via their blogspot hosting services.

Click for Adverts

Pretty accurate huh? Link courtesy of Adsense

First ever essay crisis

Essay crises are traditional for Oxford undergraduates. Indeed the ability to knock out 2000 words on any subject in less than three hours, starting at two in the morning and having done no preparation is one of the main qualifications for studying here. Showing a woeful disregard for tradition I got through my entire undergraduate period without ever having one of these.

I may be catching up for lost time this week. A big old piece on leadership to write, a group essay to assemble and an exam to revise for. Global and Comparative business is the course that deals with stuff like the IMF and World Bank. It's one of the most interesting courses I've been to, and now it's going to be the one I'm least well prepared for come exams.

More from Baghdad

What do you do when you are in a car with someone who asks you about the best place to hide a hand grenade? With reality crashing in through the windows Salaam Pax doesn't have much time for US policy these days.

Personally I'm surprised the whole having his street shelled by a US tank didn't radicalise him more.