The Custom-House

China and India Last week

China and India

Last week the Financial Times ran a series of articles on the relationship between China and India. Some high points:

Both China and India are growing, but can they keep it up? ("Asia's giants take different routes Martin Wolf looks at why Beijing has enjoyed the greater success in stimulating growth - and what New Delhi will have to do to catch up" - registration required):

"... The principal internal constraints on China's growth are institutional: the lack of a rule of law, the consequent uncertainty of property rights, the inefficiency of state enterprises and the profound weakness of the financial system. Important symptoms of these weaknesses have been the reliance on foreign entrepreneurship and an offshore financial and legal centre, namely, Hong Kong.

Behind these weaknesses lies something more profound: a political system that is unlikely to prove suitable for an increasingly sophisticated economy and society... An important symptom of China's institutional weaknesses is the inefficiency with which capital is used...

... 60 per cent of all loans between 1993 and 2000 went to state enterprises. It is astonishing that, in the world's fastest growing economy, as much as 40 per cent of existing loans is considered bad...

China does not only confront domestic challenges. It may well also confront external constraints. China's extraordinary success in export markets has been a powerful engine of growth. Yet it is hard to believe that this can continue, now that China is such a huge player in world trade and its own economy is already so open...

If China's growth does remain rapid, can India match it? The optimistic view has been well expressed by Vijay Kelkar, a former senior civil servant.*** Mr Kelkar argues that India's political stability, well-entrenched democracy, relatively effective financial system, deepening international economic integration and improving environment for provision of infrastructure augur well for future growth.

More fundamentally, India enjoys a greater demographic dividend, with the population of working age expected to rise as a share of the total until 2050, unlike in China, while the quality of the labour force is also improving. The private savings rate should continue to rise as living standards improve and the child dependency ratio falls. Finally, the growth of productivity has been reasonably good in India since 1980...

Yet India, too, suffers from many constraints. Public sector dis-saving imposes a significant limit on capital formation. The political and legal systems, though well developed, are also cumbersome and inefficient. Politics lacks a focus on development..."

Last week there many reports on new U.N. population projections, forecasting that India's population would be bigger than China's by 2030. The Times' story is here: "Population of India forecast to overtake China's by 2030 " - registration required. Other news sources indicated that India's current fertility rate is three children per woman, while China's is 1.7.

Edward Luce and Richard McGregor looked at bilateral economic relations between India and China: "India's prowess in services and China's manufacturing strength are complementary but both countries can also grow in sectors where they compete directly. Other nations should consider how to respond, write Edward Luce andRichard McGregor" - registration required.

"To some extent China and India's strengths are complementary rather than clashing. Whereas China has become the world's workshop for manufactured goods, India is developing a highly competitive services sector...

Yet bilateral trade and investment ties are not simply about India selling software to China and China selling hardware to India. The division of labour is not so clear cut.

A few years ago there was deep fear in New Delhi about the prospect of cheap Chinese imports flooding into India. Yet India actually has a modest trade surplus with China, driven largely by the export of Indian raw materials such as cement and iron ore, but also by exports of manufactured goods including plastics and steel."

Will an economically strong India provide a counterweight to China for the ASEAN nations and the U.S.?

"India's economic emergence is openly encouraged by the 10-member Association of South East Asian Nations, which has become increasingly concerned about the growing preponderance of China. In much the same way as the US hopes India will become a geopolitical counterweight to China over the next decades, Asean hopes India will become an economic counterweight.

That may be premature. India, with its sensitivity about sovereignty, bristles at being asked to play roles on behalf of other countries. But economic ties between India and China will continue to grow and a convergence of the two giants' broader interests at the World Trade Organisation and elsewhere will help bring them closer together."

Both China and India are working hard to secure external energy sources. ("Fuel for rivalry " by Victor Mallet - registration required) Recall that the sea lanes between China and the Middle East go through the Indian Ocean, past India.

"With world energy supplies already tight, the question is not whether the rising demand from India and China will bring them into commercial competition with each other and with other big importers such as the US and Japan: that is already happening. The question is whether it will lead to diplomatic tension and ultimately increase the risk of military conflict in the Asia-Pacific region.

For the moment, the competition for resources is fierce but not hostile. The main evidence of concern is that Beijing, nervous about the possible use of US and Indian naval power to control oil supplies from the Middle East in the event of conflict, is rapidly strengthening its own navy. "The Chinese are building up a capability to defend those sea lanes," says Gary Samore, director of studies at the London-based International Institute for Strategic Studies. "There is a naval rivalry building up in south-east Asia and the Indian Ocean..."

From the WTO to UNCTAD

From the WTO to UNCTAD

What happens when a WTO DG's term ends?

The Kazakh Information Agency reports that the current DG, Supachai Panitchpakdi, will become head of the United Nations Conference on Trade and Development (UNCTAD): "Thai WTO chief appointed to head UNCTAD".

The Financial Times covers the story ("Supachai named to head Unctad"), and notes that Supachai is replacing Brazilian Rubens Ricupero. Ricupero ran unsuccessfully for WTO DG in 1994.

Still Waters Run Deep "ONCE

Still Waters Run Deep

"ONCE they were a byword for mindless docility. But cows have a secret mental life in which they bear grudges, nurture friendships and become excited over intellectual challenges, scientists have found..."

Jonathan Leake, Science Editor for Britain's Sunday Times reports: "The secret life of moody cows"

via Arts & Letters Daily.

We Need A New USTR

We Need A New USTR

We've know since the first week of January (and the Bush Administration has known longer) that Robert Zoellick was stepping down as United States Trade Representative (USTR - the chief US trade negotiator), to be Rice's Deputy in the State Department.

Now, almost eight weeks later, the USTR position has not been filled. Peter Allgeier, a career civil servant in the USTR office, and a Deputy USTR under Zoellick, has been appointed "Acting" USTR.

The Financial Times editorialized today on the need to formally fill the USTR position: "Situation vacant" The Times emphasized the need to fill the position with someone with political stature:

"The trade representative needs to be more than a technocrat. What is needed is someone with a broad international outlook, an understanding of the importance of the task and, above all, substantial political weight. The representative must be able to talk easily and persuasively to foreign counterparts, the domestic public, Congress and the White House. These become all the more essential when, as now, deals are to be closed. Mr Bush should not be content with an acting representative, however technically competent he may be. Trade is far too important to be downgraded in this way."

There's a lot of work to be done this spring:

• Doha negotiations (the next 20 weeks - through the end of July - are widely believed to be a "crunch time" - see below - for the negotiations)
• Congressional passage of the Central American Free Trade Agreements (CAFTA) (which the Times suggests will be an important indicator of the potential of a Doha Round agreement)
• Selection of a new Director General for the WTO
• "Renewal of the Trade Act of 2002"
• a potential congressional vote on US withdrawal from the WTO ("Should the US leave the WTO?")

Failure to fill the position undercuts the status and strength of the USTR position within the U.S. government. It reduces U.S. ability to influence trade negotiations, or provide leadership.

As a case in point - this week there's an informal meeting of WTO member country trade ministers in Kenya. The goal is to move the Doha Round negotiations forward. Richard Waddington reports, Here: "Trade ministers to meet in Kenya as "crunch time" nears". Waddington notes,

"...Preparations for Hong Kong will be addressed at the meeting, to be attended by ministers from Australia, Brazil, China, the European Union, India, Indonesia, Japan, Malaysia, Rwanda and Thailand amongst others.

But the United States will be represented by deputy Trade Representative Peter Allgeier because no replacement has yet been named for Robert Zoellick, who has switched posts to become number two at the State Department.

The absence of the top U.S. trade official could weigh against any clear decisions being taken in Kenya, diplomats say..."

We don't need this.

Revised 3-1-05: crunch time thru the end of July, not June

The Brazilians Are Not Happy With Pascal Lamy

According to MercoPress, a few days ago WTO Director General candidate Pascal Lamy proposed, at a UN conference, declaring "the Amazon region and other rain forests as 'global public assets' subject to world management.

Brazil, with its own DG candidate, sees the potential for interference in its affairs. The MercoPress report is here: "Brazil reacts angrily to Amazon proposal"

"Brazil reacted angrily to former European Union Trade Commissioner Pascal Lamy's proposal to declare the Amazon region and other rain forests as "global public assets� subject to world management

The proposal, which revived Brazil�s fears that rich countries pretend control over the Amazon region was harshly condemned in a release from the country�s Foreign Affairs Ministry.

Mr. Lamy�s statements "are evidence of a prejudiced view underestimating the ability of developing nations to manage their natural resources in a sovereign and sustainable manner", said the release. "Such statements are incompatible with the post of director-general of the World Trade Organization (WTO) to which Mr. Lamy aspires".

The statement refers to the current competition for the WTO chair between five candidates, including Mr. Lamy and Brazilian Ambassador Luiz Felipe de Seixas Correa.

The Brazilian press speculates that Brazil will use Mr. Lamy�s Amazon proposal to influence the votes of other countries with tropical rainforests, such as the seven other South American countries that share the Amazon region. "

Right now there are only four WTO DG candidates.

Pascal Lamy Turns Up In India

Pascal Lamy Turns Up In India

Pascal Lamy took his campaign for Director General of the WTO to India this past week.

Monica Gupta reports in the Business Standard: "Lamy seeks consensus pitch for top WTO job"

"According to Lamy, the new director-general's work is pretty much chalked out for the year, with the Doha round and the Hong Kong Ministerial in December being top priority.

"Many developing countries don't have a permanent contact with the system (WTO). The WTO secretariat, which tends to become bureaucratic, should be more developing country-friendly," he said.

"The director-general will also have to work towards building a better working relationship with other institutions like the Unctad, the World Bank and the IMF. As D-G of the WTO, he has the mandate to do that," he said adding that a candidate from a developed country like himself could exercise the necessary clout to achieve this objective."

Should developing countries support a European Director General?

"Asked if he considered his EU background to be a disadvantage for garnering support from the poorer countries, Lamy said, �On the contrary, there were several occasions where I, as trade commissioner, had taken a stand contrary to the view of domestic constituency.�

I was extremely unpopular in France due to my stand on agriculture. Similarly, concessions on drugs given to developing countries under TRIPS (Trade related intellectual property rights) was extremely unpopular with the pharma industry in EU."

HIV/AIDS and Life Expectancy in

HIV/AIDS and Life Expectancy in Africa

Here is some food for thought from the Economic Report of the President, 2005:

The Report notes that

"As a result of its lethality and the relative youth of its victims, HIV/AIDs has reduced life expectancy by more than 20 years in many African countries. Life expectancy in some countries is projected to fall to roughly 30 years within the next decade, whereas in the absence of HIV/AIDS some were expected to approach or exceed 70 years.

Underground in Brazil Mahalanobis reports

Underground in Brazil

Mahalanobis reports on a McKinsey study on Brazil's underground economy: "Brazil's Informal Economy" . "...the informal economy generates nearly 40 percent of the national income..."

A large underground economy slows down economic growth:

"Few policy makers are concerned, but they should be. By avoiding taxes and regulatory obligations, informal companies gain a substantial cost advantage that allows them to stay in business despite their small scale and low productivity and prevents more productive, formal companies from gaining market share. The result is slower economic growth and job creation..."(From another Mahalanobis post)

High taxes, regulation, and weak enforcement are implicated.

The Economic Report of the

The Economic Report of the President, 2005

The annual Economic Report of the President (ERP) is now available: Economic Report of the President: Main Page

This year a chapter was deleted for political reasons. A blog posts Andrew Samwick gives a view into the White House economic analysis and policy machinery (Samwick worked at the Council of Economic Advisors (CEA), the agency responsible for the ERP, for a year).

How Renato Ruggiero Became the

How Renato Ruggiero Became the First Director General of the WTO

This year's race for Director General (DG) of the World Trade Organization (WTO) is the third in the WTO's history. Both of the other competitions were contentious.

The General Agreement on Tariffs and Trade (GATT), the predecessor to the WTO, lasted from 1948 to 1994, and had four Directors General (DsG). From the retirement of the first GATT DG in 1968, DsG were chosen by consensus.

From 1968 to 1993, the position was filled by civil servants. Following an "informal understanding," these were "chosen from a smaller industrialized country" and the deputy director general positions were divided "between the United States and the developing countries..."(page 55; page references refer to the Kahler paper on which this post is based - see below)

Things began to change in 1993, when Peter Sutherland, of Ireland, was chosen as the last GATT DG. Sutherland had been a commissioner to the European Community, and thus had a somewhat higher political profile than previous DsG. In another change from the past, candidates from developing countries emerged to contest the selection. (pages 55-56)

The agreements establishing the WTO were signed in April 1994, and came into force in January 1995. The selection process for the first WTO DG began shortly after the agreements were signed, with nominations made during June 1994. The four nominees were Renato Ruggiero, an Italian diplomat and former Foreign Trade Minister, Rubens Ricupero, the Brazilian Finance Minister, and a former ambassador to the GATT, Carlos Salinas de Gortari, President of Mexico, and Kim Chul-su, South Korea's Trade Minister. (page 56)

During the first part of the WTO race, a parallel contest was going on for the leadership of the Organization for Economic Cooperation and Development (OECD). This race was resolved in the fall, when one candidate was given an 18-month term, to be followed by another candidate who was given a full five year term. The parallel OECD-WTO races led to proposals for tradeoffs between them. The failure of the OECD to reach a decision, and the resort to a term-sharing compromise, were repeated by the WTO in the spring of 1995. (pages 57-59)

Ricupero's candidacy ended first; he had to leave the race in September, "after admitting that he had massaged official economic statistics in Brazil to enhance his party's electoral fortunes." (56)

Regional blocs formed around the remaining three WTO candidates. The EU endorsed Ruggiero in September, while the US endorsed Salinas de Gortari and Japan backed Kim, in October. (page 56-57) As of October, the race among the remaining candidates was close. A first round of consultations that month found the member countries fairly evenly divided among the three candidates. (page 60)

The Salinas de Gortari candidacy was badly damaged when the Mexican financial crisis broke in 1994. Where the three candidates been neck and neck in the fall, by February Ruggiero had pulled far ahead of both of the others (page 60). Salinas' candidacy died when he withdrew on March 1, 1995, the day after his brother was arrested for murder. (pages 60-61)

Salinas� withdrawal left Ruggiero and Kim. The campaign dragged out for another two weeks, as U.S. internal indecision apparently prevented it from choosing between the two. The US Trade Representative, Mickey Kantor, was strongly opposed to Ruggiero, although other officials were not (pages 60-61).

In mid to late March, a series of compromises ended the contest. The U.S. accepted Ruggiero, but he was given a four-year, rather than a six-year, term; Sutherland, who had already agreed to one extension of his term, agreed to stay on until the end of April; a new DDG position was created for Kim (page 61). This set of compromises was controversial:

"This open trade of a senior WTO position for crucial political support outraged some member states. The side agreement violated WTO rules, which stipulated that the creation of a new position first required consultation with the membership. African governments were particularly offended, since they had offered crucial support to Ruggiero, and they believed themselves underrepresented in Geneva. They immediately began to press for the creation of a fifth DDG position."(page 61)

This post is an abstract of a short history of the race by Miles Kahler, from pages 55-62 of his book Leadership Selection in the Major Multilaterals.

As Kahler tells the story, this selection process was marked by a continuation of the shift towards political and away from civil service candidates, begun with Sutherland. It was also marked by heightened competition, increased competition from developing country candidates, an inability to meet the deadline for concluding the process, regional coalitions between candidates, frustrated developing countries, violation of WTO rules, and the promise of a DDG position to obtain support. Regional loyalties appear to have been more important than candidate policy positions.