Russian and American election year - “Opportunity 08″

 This week-end’s big event: Russian presidential elections on Sunday!

Let’s see where the very likely winner Medvedev will take the country. But given that that the West has been very bad at dealing with Russia, I wonder if the next US president will be able to change tack and somehow be able to engage and tame the roaring Russian bear.

Worrying sign: Hillary Clinton - although apparently the best-informed US candidate on Russia - has demonstrated that she can’t even pronounce the name Medvedev…. I got this info from the really excellent Robert Amsterdam Russia-blog. Given that the US risks “Losing Russia”, we hope (oh no, that sounds like candidate Obama….!) that elections this year in both countries will bring change. Given Europe’ structural inability to take up the Russian challenge (a radical change in its foreign policy structures would be needed, as well as in its energy markets),  more immediate hopes can only be put on the United States. The Brookings Institution has a nice banner of the candidates (Huckabee is now lost). But I love the title: “Opportunity 08″. Let’s hope it will be seized in Russian affairs too.

BRIICS in the global economy

No, not BRIC countries, the BRIICS: Brazil, Russia, India, Indonesia, China, South Africa. BRICs was a term coined by Goldman Sachs to name today’s new high-growth emerging economies. BRIICS is the term used by the OECD: the rich-country think tank adds Indonesia, probably for reasons of regional, and demographic representativity. Indonesia is a South-East Asian middle-income country with an enormous population (223 million). And South Africa is added there as well too: it’s the most dynamic African economy. ECIPE’s director Razeen Sally is currently working on trade and investment policy of the BRIICs. If you are into graphics and statistics, you might find the powerpoint presentation (link Here: briics.ppt) he used for a speech in Australia recently quite a gold mine. What sticks out is the following:

• The most protectionist country is India. Across the board.
• The most expensive country to trade across borders with is Russia.
• The most complicated country to do business in is Indonesia.
• The country which is least capable of controlling corruption is no, not Russia (although it does badly), but Indonesia.
• The greatest foreign investor is Brazil.
• And the best performer in trade and FDI is China - no surprise.
• Interestingly, South Africa has the most FDI restrictive regime in the electricity sector - see slide number 14. Given the enormous electricity shortages South Africa is having, maybe it’s time to let investors in….?
• Yet those giants remain small.: 12.7% of world trade in goods and services (if one adds up the figures on slide 28). China itself has 6.9% of it. These countries however represent almost 3 billion people, nearly half the world’s population.

The causes of tax evasion

Random comment today.

In the context of the current tax evasion row opposing Germany and Liechtenstein: Wolfgang Münchau in his blog said last week that the causes of tax evasion are high taxes. Indeed, Germany has one of the highest marginal tax rates in Europe. And: Crush Liechtenstein and earn votes, but you’ll get the Cayman Islands. Despite the government’s popularity I find it a very sad sight, a government of one of the world’s most sophisticated countries boasting with stolen files- it’s all becoming very dodgy…. It is also very symbolic that Zumwinkel, head of Deutsche Post, the postal monopoly in Germany, who earned credit for imposing a minimum wage not for lofty social reasons but to drive out competitors of the market was the first high-profile tax evader to be caught. This somehow reflects a crumbling social and economic model inherited from the postwar period and the 1970s. 

Policies towards Russia: reaping what one has sown? [update]

It is increasingly clear that “the West” has got Russia badly, very badly, wrong. Europe and the US have accumulated errors towards Russia and are now reaping what they’ve sown. Hard statement, I know.

Dmitri Trenin from the Carnegie Moscow Centre recently wrote one of the first books – entitled “Getting Russia Right” - that tries to undo the mythical fear and loathing in which Russia’s policies are held in the West. Not that the recent slide in both democratic achievements and economic freedoms combined with growing international sabre-rattling is not worrisome: on the contrary! Yet it could be that the West should have been able to see it coming. It even probably could have averted some developments had it acted rightly on time, based on more realistic perceptions. Just a few random illustrating examples:

Russia’s WTO accession - something happening again?

 

The news are just out: Peter Mandelson is in Russia to discuss its WTO accession.

Russia’s double-headed eagle is in action again. On the one hand, sabre rattling on the rise in military matters, more pragmatism in economic matters on the other. The last big speech by Putin had these two elements: only the sabre-rattling was heard in the West. My little source  close to the ground reported:

Putin outlines economic development goals in speech at State Council
Deutsche UFG, Russia
Monday, February 11, 2008

At the State Council meeting on Friday, President Putin made several important statements about Russia’s economic development.

__ Development should become innovative, and the growth rates much higher than now.

Using Russia’s natural resources to undertake further extensive development may become a significant threat for the country. Instead, economic reforms should be continued as the Russian economy is currently not effective.

__ Russia needs a specific development plan through 2020.

__ In the tax sphere, Putin supports the idea that the co-financing of pension savings should be tax exempt. Also, the tax on companies’ and individuals’ medical and educational expenses should be minimised. VAT should be minimised and the tax rate unified.

__ Productivity should increase four-fold in 12 years.

__ Income inequality should be reduced.

__ Power in Russia should be decentralised. Regarding recent changes, Putin particularly mentioned the political changes which have taken place in the last several years and that have resulted in the development of a stable and working political system.

__ The state sector should be reduced and private capital attracted more actively.

__ Russia may be able to double its 2000 GDP by 2009. For 2000-07, GDP has already increased by 72%, and to double it by 2009 would require an annual growth rate of 7.8% y-o-y (less than in 2007).

__ There will be no denomination this year.

All in all, this speech is one of the most liberal over the last several years and may, in our view, be an indication of the main economic targets that Putin will set if he becomes Prime Minister after the presidential elections. We believe that it will be taken positively by the market.”

This change in tone in economic policies is a better starting point for final negotiations to enter the WTO. Regarding the internaitonal politics of Russia’s WTO accession: Russia has started reaching out to Georgia (see here and here) to solve various bilateral issues between them. Georgia is wielding its veto to Russia’s WTO accession. Ukraine managed to access to the WTO before Russia - making Russia lose face. It looks like Russia is hurrying up and wanting to get its act together. There is an understanding that it cannot remain isolated from the rest of the world, and entering the WTO (as well as attenting NATO summits) shows that Russia and the West are “talking to each other” again, if harshly.

Oh, and let me, at this late hour of the day, and as a relaxing game, develop a conspiracy theory - these are so popular in matters Russian and post-Soviet. Was the Georgian tycoon Patarkatsishvili killed by both the Georgian  and the Russian governments? Both hate him - the first for his role as opposition leader, the latter for his friendship with the exiled oligarch Berezovksy… Strange coincidence, this death and this sudden warming up of relations between Russia and Georgia.

Inflation, globalisation, agricultural liberalisation, and maybe a new chance for the Doha Round

(with slightest updates)

Until recently, we thought that the spectre of inflation had faded away. Monetarist theses had triumphed. Central banks have become independent in most OECD countries to shield monetary policy from populist demands to abuse the printing press. Increased globalisation, keeping imports and consumer goods cheap while acting as disciplining force on wages and policies had a positive effect on prices. Inflation is historically, a nightmare: the role of the 1920s hyperinflation in the rise of Nazi Germany is well ascertained. It is also an economic headache - no, a chronic migraine: raising uncertainty over returns, thus acting as a brake to long-term investment decisions. Obviously, rising prices hit the poor most, and developing countries such as those in Latin America suffered enormously during the 1970s and 1980s from excessive levels of inflation. Since the 1990s, inflation has become much less of a concern, and only pariah states like Zimbabwe have been prone to hyperinflation. Until the “credit crunch” last year, the international economic press was rejoicing about an era of low inflation and low interest rates – pretty unprecedented in history – that contributed to the general borrowing binge ranging from “subprime” homebuyers in the US to all the emerging markets, and even poorer nations in Africa.

A recent paper by Gernot Pehnelt at ECIPE corroborated the thesis that globalisation contributes to keeping inflation down. The paper reminds us that
 

“the world has experienced a remarkable process of disinflation, with average inflation rates in industrialized countries falling by 10 percentage points and an even sharper decline of the mean rate of inflation in developing countries.”

In his study, Pehnelt focuses on the case of 20 OECD countries and looks at the relationship between their growing international economic integration and their inflation rates between 1980 and 2005. I’ll let you to the joys of working through the technical details of this econometric study. The result points clearly to a positive effect (checked for its robustness) of globalisation on disinflation - although admittedly it is not all.

Having said all that, we have recently found ourselves faced with a new outburst of inflation all over the world. The European Central Bank is fighting hard to keep its 2% target, emerging markets such as Russia are faced with two-digit inflation rates again, and along with China or Venezuela, they try to fight the spectre by introducing price controls, which are likely to fail (price controls on e.g. food lead to lower supply and a booming black market with skyrocketing prices, that hit most, whom do you think: the poor).

The culprit? Food and commodity prices

Ukraine joins the WTO - the beginning of a long story?

It is confirmed: Ukraine will now accede to the WTO. A big 47-million booming market, Ukraine was the third biggest country outbeside Russia and Iran outside the WTO fold.

Europe is now keen to sign a bilateral free trade agreement with this new frontier country on its Eastern borders. To watch now:

- Ukraine is strong in agriculture: how far will Europe want to open its market in sensitive agricultural products? It could be that the current price hike in agricultural products renders Europe more flexible…

- Ukraine is also very strong in metals. EU anti-dumping exercises tend to focus on metals, and have been hitting Ukraine. How will protectionist forces within Europe influence the outcome of the FTA?

- Ukraine’s economy still needs deep structural and institutional market reforms. Opening up services, accepting international competition in key industries (machinery, cars) might be hard to swallow.

- The EU wants to offer a comprehensive FTA, among others in order to stave off Ukrainian ambitions to join the EU. Given current enlargement fatigue in Europe, the politics of this FTA will be interesting to watch…

- There is/was a tacit “Russia first” policy in WTO accession talks of countries belonging to the former Soviet bloc. Given delays in Russia’s accession, Ukraine is not willing to wait. Russia is not in the position to oppose Ukrainian accession before itself, despite criticising the move by telling Ukraine it is joining on unfavourable conditions (Ukraine accepted restrictions in agricultural subsidies that Russia is still debating with its partners). With FTA talks with the EU looming ahead, Russia’s reaction will need to be watched closely however.

The next CIS country WTO accession in the pipeline is Kazakhstan. ECIPE is preparing a research paper on the matter, it should be out around the end of the month or early March. Watch that space…!

Quo vadis US trade policies?

As the US is braced for its electoral Super-Tuesday, Ben Muse’s Custom House has everything you always wanted to know about the candidates’ position on international trade policies without daring to ask.