In the Darkening Shadow of California Budget Crisis

A few days ago, I received some updated news from our Chancellor at UC Hastings regarding Governor Arnold Schwarzenegger’s proposal to cut 100% state funding for the law school. With $24 billion deficit, the governor was searching for further cuts to make up the remaining $5.5 billion and UC Hastings' 10.3 million public fund, equivalent to approximately 25% of the school budget, was proposed to be taken away all together except for $7,000, which is the nominal amount required from the state by the bequest of the founder, S.C. Hastings. The proposal provoked deep distress within Hastings community since it would amount to $8,175 increase in tuition for Hastings' 1260 student population. The problem is further complicated by the fact that Hastings' 2009-2010 tuition has already set for the new school year. Other alternatives are much less feasible such as admitting more students to Hastings over-crowded facilities or letting go highly qualified faculties which would in turn damage the law school's teaching quality and overall rankings. Otherwise, should UC Hastings, supposedly an arm of the UC system, convert into private law school? I will leave this debate to BLT's readers.

Here is the good news from our Chancellor:

Dear Students,

We are pleased to announce that on Friday, June 5th the budget conference committee voted unanimously to substantially restore UC Hastings' state funding, which will put reductions made to the law school’s budget in substantial parity with cuts applied to the UC system. If this decision stands, we will still receive a budget cut, but nothing as extensive as 100 percent of our state support, as recommended by the Governor. CFO David Seward reported that several members of the committee spoke about the calls and emails they had received, about UC Hastings' unique history as California's oldest law school, and the inequity of singling the law school out for disparate treatment.

California’s budget crisis is not over, however, and difficult choices remain to be made. The conference committee stated they might have to revisit the higher education budget later in their deliberations, including support for UC Hastings. In addition, even if the legislature continues to support the restoration of UC Hastings' state funding, the Governor can countermand, or “blue pencil” the legislative recommendation. So it is important that we not relax our vigilance. We will continue our work on educating the legislature and the Governor's office.

People talk about the long-term benefit of education as a type of secured and high turnout investment for the future. Yet, at the time of crisis and financial difficulty, the value of education almost always faces challenges and skepticism and funding for public education is often on the top the reconsidered list. What appeared as signs of unequal treatment among public universities for higher education is the reality that the funding cuts for all UC Universities are at roughly 20% while Hastings faced nearly 100% withdrawal from the state. With the recent establishment of UC-Irvine law school, one may also rightly ask, as Senator Denise Ducheny, D-San Diego did: "Why would we start a new law school when we've had Hastings around for more than 100 years, and it has a great reputation?"

I was deeply concerned with public reaction and was distressed over the result of California’s deficit-reducing ballot initiative last month. The result convinced me that misinformed exercise of democratic power through special voting can be much more damaging than non-action itself. Yet, the long-term effect of a possible alternative such as having no voting incentive seems entirely unjustified and unacceptable. This is the case where I suspect that the communication between our governor office the people had failed allowing information disparity gave rise to hostile sentiments toward a possible solution for California budget crisis. My direct experience with the state's budget crisis through Hastings community also reminds me that the harmful effects of these deepening cuts could be much worse for other institutions that are more dependable on public fund. Thankfully, about 75% of Hastings budget are raised through other sources.

The glorious celebration of California's dot-come and asset booms has been long gone. How Californians cope with this financial calamity and budget tightening remains to be seen in days ahead. What I do know for certain is that public service will be drastically reduced, income inequality will rise, hence, lowering quality of life. Lastly, it is the poor and various under-represented groups that will suffer the hardest hits among us all.

Schwarzenegger's Defeat and the Californian Discontent

From the Financial Times regarding the result of California budget-reducing ballot initiative:

Their defeat, in a state that desperately needs a path back to fiscal balance, shows how difficult it is to convince voters that they have been living beyond their means. It predicts the troubles in store for other countries guilty of the same sin.

Part of the fault lies with Arnold Schwarzenegger, brought to power by popular disgust with dysfunctional government. Despite early successes, the swashbuckling former film star has not fulfilled his mandate for reform. Even more to blame are the intransigent special interests he has failed to win over.

But ultimately it is Californian voters who have fallen short. The state’s direct democracy gives them influence – and responsibility; but they voted only to ban pay rises for lawmakers. If they think they can escape belt-tightening of their own, they are dreaming. When they wake up, it will be to a nightmare.

We are living in a French land called California. People refuse to come to agreement, and day-dream of a perfect world, yet unwilling to take in any financial sacrifice. If we don’t correct our tax system, California could never get out of the ghost shadow of budget crisis. The domino effects already started with CA bond being the lowest rated bond in the nation and owning one of the worst school systems indeed brings us no pride. We need better communicators to point out that this is no one-man fault and the solution needs a collective action from the people.

Falling Vietnamese Dong

The Financial Times recently reported that the Vietnam's dong is depreciating steadily as budget deficit and account imbalance grows with "chronic current account deficit that reached $8.4bn, or 9.3 per cent of gross domestic product, in 2008". Vietnamese government is facing the threat of not gathering enough money for its $80bn fiscal stimulus package as bonds and other commercial tools are falling flat. Investors are holding onto foreign currency due to the uncertainty of the dongs mostly credits to growing trade imbalances and insufficient foreign reserves.

This is a predictable test that most developing countries face at this stage of development, and is what economists considered as the "original sin," for which domestic currency is not used for foreign loans and on long term domestic loan contracts. Reliance on foreign currency for domestic exchange and long term loans make the country highly vulnerable to exchange shock and speculative attack which were the major drivers of the 97-98 Asian financial crisis. The Vietnamese government has little choice, and each option carries relative cost. Raising more reserves will temporary slow down growth, but this must to be done to boost investor's confidence on domestic market and to provide a stable macro economic framework for further development. Vietnamese government must find the outlet to do this- better now than later.

Statement of the Day

Creating an effective state requires political organizations where leaders take on the costs and risks of solving prisoner's dilemma problems. But this task will be simpler if the distribution of costs and benefits is acceptable to that society and distributive conflicts do not result in permanent war.- Mushtaq Khan

I'm in awe of his intellect.

May the Rise of China Offer Hope for a Multi-Power World?

Recently David Pilling of the Financial Times published a thought-provoking article under the title: “Asia Pays Tribute to Its New Superpower,” which discusses how the rise of China during the time of economic crisis has been perceived within the region and beyond. I found the true nature of this article troubling. David Pilling said it right: there is a sense of “trepidation at the rise of China’s power.” Such idea fuels much of my thoughts the past couple of days. Pilling opened his article by a contemplation of a potential multi-polar world.

There has been much chatter about the “G2” lately. But the idea that the US and China can together, and semi-exclusively, take on the world’s biggest problems is overdone. That day may come. For the moment, though, there are limits to how much an authoritarian government presiding over a relatively poor country can contribute to global problem-solving. For now, the rise of China and the relative decline of the US are more likely to mean a multi-polar than a bipolar world.

The article lists some indicative examples to demonstrate how the world has changed its grasp diplomatically toward China. By owning roughly $1,400bn of the U.S. asset, Chinese government had quieted Hillary Clinton on issue related to human rights, Taiwan and Tibet during her visit early this year. During the G20 gathering in London, France’s president, Nicolas Sarkozy, expressed his withdrawal from supporting Tibetan independence. Smaller countries have provided greater service. Vietnam’s prime minister, Nguyen Tan Dung recently spent one week touring China in anxious mode to close the $11 billion trade gap between the two countries. The South Korean warning of the “Beijing Consensus” reported to leave its Korean diplomats in Beijing apprehensive. What’s more? Taiwan is likely to allow China’s Mobile to purchase 12 percent of the Far East Tone, a Taiwanese mobile operator. Such commitment arguably was arranged to earn Beijing’s agreement toward the Taiwanese’s presence at the WHO’s annual meeting. In just a few days, the news was sufficient to boost Taiwanese stock market up nearly 15% after Beijing announced its consent.

I sometimes wonder how the political and economic landscape of the world be transformed if China grows to be the second largest economy in the world taking over Japan and the European Union. That day may not be postponed that much further as we initially thought. Nonetheless, despite an impressive rapid growth in the past two decades, at $7,600 per capita, China’s per capita GDP still ranks 107th in the world. The country itself is also facing various internal problems namely food and resource shortage, raising unemployment, social and regional marginalization, as well as a degrading environment that together raise serious question of Chinese economic sustainability. There are much awaiting this nation in the post-crisis period to resolve its internal issue. For now, the idea of a multi-polar world offers me much greater comfort.

*Nations with highest GDP (in 2006, trillions of U.S. dollars), figure taken from the Hoover Institue.

The Macroeconomic Case Against the Giving of Aid

Abstract

While foreign aid is generally motivated by respected incentive which is to redistribute income globally, especially among the least developing countries (LDCs), as well as to simulate global growth and stabilization, the arguments for and against aid have been very unsettling among social scientists. It is out of the scope and limitation of this paper to thoroughly present two sides of the debate mostly started ever since Chenery and Strout invented the infamous and controversial two-gap model in 1966. Thus, the paper will mostly look at the skeptic perspective of aid within the macroeconomic framework setting aside issues related to institution and morality.

Structurally, the paper starts by introducing Chenery and Strout’s two-gap model. Next, it presents the on-going disputes against this model arguing that the giving of aid could be counter-productive due to the effects of aid tying, domestic saving displacement and Dutch disease. The paper further advances into the contention by addressing the potential hazardous effects of the Monterrey Consensus and the Doubling of Aid due to diminishing returns, speculative attacks, which may eventually lead LDCs to a currency crisis. It is in this the author opinion that international aid must involve in a more effective and accountable form of assistance instead of devising more dependency from poor countries. International agencies and donor community must make provision for improving the quality of aid before increasing the quantity of aid.

Here is the draft for the paper. While at this topic, the president of Rwanda, Paul Kagame, published an opinion on the Financial Times regarding the aid culture in his country two days ago under the title "Africa has to find its own road to prosperity." President Kagame makes a similar argument: "...the rich world and multilateral institutions have a heart for the poor. But they also need to have a mind for the poor." How delightful to read a view from an aid receiver himself.

The Delayed Apology

Gideon Rachman of the Financial Times today offers a very well written article and some valuable insights toward the Republican's attack of Obama's open foreign relations with the rest of the world. Being outside of the country and having the opportunity to take in the world's opinion toward the Bush's years, I can't agree more with Rachman. Apology, if done right, is not a sign of weakness. It is what a "mature" democratic nation do in the process of learning from its own shortcomings.

A willingness to discuss your country’s history self-critically is a mark of an open society. Vladimir Putin has had Russian history textbooks rewritten to take a more positive view of Stalinism. The Chinese ferociously repress any challenges to the official version of the history of Taiwan. Mature democracies do things differently. They are not afraid of open discussion. Mr Obama’s willingness to acknowledge past American errors is a sign of strength, not of weakness.

At last, I finally have reasons to hope that the U.S. broken relationship with the rest of the world will be amended conceivably for the betterment of all.

The Industrial Policy Aspect of Learning Rents

Abstract

Industrial policy often plays a crucial role particularly in developing countries, within which learning rents are often argued among heterodox economists to be one of the most important policy instruments for developing countries to move up the value chain as well as to sustain steady growth. In an attempt to evaluate the role of learning rents as an industrial policy option, this paper will first explain the theoretical concept of learning rents, followed by presenting the institutional and political conditions which cause learning rent to either success or to fail. The paper offers specific case studies of South Korea, Malaysia, Thailand, India and Brazil to illustrate the argument.

The link to the paper's draft is here.

An American Life Story

Although I'm occasionally partial to economics and more often see myself as an economist than a lawyer, I forever cherish how the law has changed me and my understanding of the world through the lenses of the US and international legal landscape. I have been very appreciative to be a part of the legal community. Today, such gratitude intensifies by the Washington Post's heartfelt portrait of Justice David H. Souter. The story invokes much of my admiration and inspiration for the Superior Court Judge- a simple life fills with unwavering public service and modesty.

Justice Souter recently announced his retirement from the Highest Court leaving this June when the Court will recess for the year. At the age of 69, he would have then served in the bench of the Superior Court for 19 years. Souter's legal legacy in the heart of the liberals will never be forgotten, but the life that he led depicted in "Quiet N.H. Home Is Where Souter's Heart Has Always Been" humbles many of its readers.

"He never unpacked," said Thomas Rath, one of Souter's closest friends. "A few years ago, he said, 'I figured I'd take the pictures out of the boxes and hang them up, but I figured in a few years I'd be coming back to New Hampshire and I'd have to pack them back up, so I might as well leave them in the boxes.' "

At the relatively young age of 69, Souter is giving up what he once called "the world's best job in the world's worst city" for a life of simple solitude in Weare. It is a rural hamlet that fascinates him so much, he has told neighbors he may someday write a history of the town.

When he departs this summer in his Volkswagen sedan -- he dislikes flying and always drives himself to and from Washington, leaving at odd hours to game the traffic -- Souter will cross the Piscataquog River, drive past country stands selling maple syrup and fresh eggs, and turn down a narrow, unmarked dirt road.

**David H. Souter's house in Weare, N.H., a rural town where the Supreme Court justice has said he finds "restoration." He will return there this summer as he retires from the bench. (By Philip Rucker of The Washington Post)

Souter's story touches my heart deeply. If only I could lead a humble yet worthwhile life like him one day.

Reaching out to Sri Lanka

I have been regularly following up with the news from Sri Lanka. Images and news from this civil war brought me solemn concern and uneasiness. Here in London, I caught this scene one weekend early this month. A sense of helplessness arrived soon after I stepped deep into the scene seeing men, children, elders and women yelling out loud their urging need and asking for international intervention. They were right, Sri Lanka is facing a humantarian criris; although, the Tigers themselves also committed the type of war crime that they are pledging against Sri Lankan government. There can never be a right reason for war and violence. Yet, at times people involved seem to put on a convincing case with the Tamil Tiger for their own justice (or injustice).

Last Thursday, Sri Lanka's President, Mahinda Rajapaksa, rejected advice from European high-level delegations to proceed a temporary ceasefire and told the representatives to stop lecturing him.

“The government is not ready to enter into any kind of cease-fire with the terrorists. It is my duty to protect the people of this country. I don’t need lectures from Western representatives,” said the President in a speech distributed by his office, the New York Times reports.

According to the United Nation, 6,500 civilian have died and twice have been wounded since late January. At the moment, there are still 50,000 civilians are trapped in the combat zone with very little humanitarian supports. The refuge camps are reported to be "overcrowding, malnourishment, dehydration and limited medical facilities." Despite growing tension with foreign governments, the Sri Lanka government has been unwilling to openly allow international support-groups to enter further into the war zone.

Last March, Sri Lanka reported its slowest economic growth rate in five years last year, at 6% underlining the need for the government to push ahead with talks on a bail-out from the International Monetary Fund. However, due to the government's resistance, the United States had decided to delay a $1.9 billion International Monetary Fund bailout for Sri Lanka’s central bank to pressure the government to do more to help trapped civilians.

Such intervention seems to do little to change the Sri Lankan government's attitude toward cooperation and helping displaced civilians from boths ethinic groups. International governments and agencies must continue to pressure Mahinda Rajapaksa's government to allow international humanitarian groups to rescue and provide basic aids to the war victims.

Over the Worst Yet, Japan?

We don't know for sure, but at least Japan is showing signs of stabilization. Despite growing deflation and addition contraction at 3.3% this year, the Financial Times today reported some stabilizing signs from the second largest economy in the world giving hope that the worst of the recession may be almost over.

So far, industrial production in March rose at twice the expected pace, climbing 1.6 percent month-on-month. In addition, factory output rose for the first time in six months. The Royal Bank of Scotland in Tokyo also reported: "factory production appears to be getting close to the bottom." That was March, industrial production is expected to continue rising further this month, as well as May due to manufacturers trying to make up for their previous inventory reductions.

Japan predicted stabilization sheds lights and a glimpse of hope for the Asia Pacific region; even though, recovery is probably still far from the horizon. Toyota is expecting its "worst slump in memory" (for almost six decades) and Normura recently revealed a record of $7.2bn net loss. Earlier this week, the Japanese government announced additional issuance of $175 in bonds as tax revenue shortfalls is becoming inescapable this coming fiscal year. However, it remains unclear if the central bank will strike for any further recovering measures. It is keeping overnight lending rate at 0.1 per cent at the moment.

We can't expect good news on global recovery just yet, but stabilization is a real good sign regardless.

Kitchen Thought on Economics

There is not, and never will be, an economic theory of everything. Physics may, or may not, be different. But the knowledge we can hope to have in economics is piecemeal and provisional, and different theories will illuminate different but particular situations. We should observe empirical regularities and – as in other applied subjects such as medicine and engineering – we will often find pragmatic solutions that work even though our understanding of why they work is incomplete.-- John Kay

Matthias and I had a conversation about economics this past Sunday. During our conversation, I joked with him that economics, as a discipline, is somewhat useless. I was only partially serious, but in a way, it reflects my disappointment (as well as appreciation) of the limitation my own discipline.

What I meant was nicely articulated by Kay above. In his article "How economics lost sight of real world," Kay was somewhat pessimistic of how the disciplined has been gradually lost touch of reality by building up unrealistic assumptions from one to the other.

I personally don't think economics is useless. On the other hand, economic understanding has never been as essential in our modern life as it ever was in the past. But such limitation must be, at some point, realized and minimized. There is much pessimism and divergence from the discipline at the moment. Perhaps, they were justified. Will an eventual unity necessary?

It's not the Sport. It's the life chosen by one.

I'm heart broken. Shane McConkey has just passed away yesterday in Italy. Being a mountain biker and a novice skier, I'm speechless after reading the news and watched his works. If one could measure up to the concept of fearlessness, it's McConkey who deserves such recognition. My heart goes out to his family.



McConkey was the founder of Ski & Base Jump. He died of a Base Jump incidence due to malfunctioned skies. Sad. But that's the life that I rather live- full and complete.

Federal and California State Tax: One Step Forward, Two Steps Back

If you would like to find out the tax aspects of Obama's stimulus package which seizes about 36% of the stimulus, as well as how the State of California mends its budget crisis through various tax increases, there was a recent discussion on federal and state tax issues given by professor Heather Field and professor Darien Shanske, two respected tax professors at UC Hastings. The discussion was recorded in mp3 format and is now posted here.[mp3]

Other than the applicable nature of the subject discussed, the discussion offered some insights of how CA tax increases will negate many parts of our federal tax credits and how our state’s constitutional setting makes it difficult to avoid similar budget crisis in the future.

In the first section, professor Field opened by explaining the need for a stimulus package and why the tax system plays an important role in stimulating economic activities. Professor Field then discussed the various implementations of the tax aspect which include non-repayment credit for first time homebuyers, educational tax credit for students, and sales tax reduction for new vehicle. The lecture ended with a thought provoking discussion as to weather the stimulus will work as well as the short term and long term nature of these tax provisions. It is appeared that President Obama is seeking to keep some of these tax provisions permanent despite growing concern over our budget deficit. Here, professor Field nicely instigated the debate over the role of our tax system as a tool for income redistribution.

I thoroughly enjoy the professor's subjective approach toward controversial issues such as the role of our tax system and whether Obama’s tax cuts will sufficiently motivate economic activities in the short run. Field posited the question as to why the tax credits only applies for a “limited window,” and what would be the consequence of extending these provisions permanently.

Other than issues related to fairness and wealth distribution, economists have been concerned over inflation and potential negative impact on monetary system through tax instrument. We are injecting a huge amount of capital inflow to the economy, in the long run, it will take some painful interest hike to restrain these capital surplus, tame down inflation and pay off the budget deficit. Furthermore, at some point, consumers may stop responding to tax cuts as an effort to stimulate economic activities. Behavioral economics tells us that consumer behaviors are often altered by short term and long term expectations of the consumer’s future income.

The discussion quickly moved on to Darien Shanke discussion on California budget crisis and how California state has used tax system to mitigate budget problem in the time of overall global crisis. If California were an independent state, it would have been the tenth largest economy in the world. Here, professor Shanske introduced the not-so-obvious paradox: if California hasn’t overspent, why does a State which arguably has the highest income and sale tax in the country constantly finds ways to bail itself out of budget crisis over the past couple decades?

The key problems rest in property tax and the fact that California doesn’t have a standard sale tax system. At ¼ of the country’s average property tax, the State imposes the lowest property tax rate in the nation. Because income tax is less sufficient and stable than property tax, our State budget has always been much more vulnerable in the time of crisis as it is now. For these reasons, our state is now seeing itself going through massive lay offs (10.5% unemployment rates in February), budget cuts on education, double fee on car registration and general income tax increases.

Professor Shanske then questioned how did end up here? Why can’t we simply increase property tax to balance the budget? California is the only State in the country that requires 2/3 majority to pass the budget. Shanske reasoned that having super majority requirement is not too "insane", but if the State were to make it very difficult to change the budget and tax structure, it should have had a good initial arrangement. Here, our State legislators happened to choose the worse possible arrangement by adopting a highly unstable tax system, and making it very strenuous to change it. Given the State's distressing institutional constrains, professor Shanske left his audience empty of any probable solution. He is not to blame.

The lectures are immensely informative and thought provoking. Nevertheless, they do not require any tax background from its listeners to appreciate the on going changes and debates in the federal and state tax system. "The Tax Aspect of the Stimulus Package"[mp3] is a highly recommended tune.

Female Economic Blogger

Rodrik posted an interesting blog entry under "Scholarship vs. Bloggership" back in September 2007 presenting some statistical data that shows the relationship between scholarship and bloggership. Here is the scattered data on graph:

...that high-impact scholarship appears to be a sufficient but not necessary condition for successful bloggership. Once one leaves out the very top scholars, there is very little relationship between scholarly impact and popularity as a blogger. Cyberspace creates its own pecking order.

I additionally found fascinating that by September 2007, there were approximately only two female economic bloggers on the cyberspace. I am sure the number has been increasing quickly over the past year and a half. Yet it still show the gender gap in academic adaptation to this type of non-traditional academic communication in the blogosphere. May be I should take it easy on myself about blogging and appreciate my own existence .

Rethinking the Washington Consensus on Trade Liberalization

"‘Stabilize, privatize, and liberalize’ became the mantra of a generation of technocrats who cut their teeth in the developing world and of the political leaders they counseled"- Dani Rodrik, Professor of International Political Economy, Harvard University

Across legal economic disciplines, there have been many arguments regarding the benefits of free trade on developing countries. At the heart of such discussion is the controversial result of the Washington Consensus “describe[ed] a set of ten specific economic policy prescriptions that … constitute a "standard" reform package promoted for crisis-wracked developing countries by Washington D.C based institutions such as the International Monetary Fund (IMF), World Bank and the U.S. Treasury Department.” (Wikipedia). According to Dani Rodrik (2006) the ten commandments of Washington consensus were:

1. Fiscal discipline
2. Reorientation of public expenditures
3. Tax reform
4. Financial liberalization
5. Unified and competitive exchange rates
6. Trade liberalization
7. Openness to FDI
8. Privatization
9. Deregulation
10.Secure Property Rights

In an assessment of the literature on the theory and empirical research relating to the benefits of trade liberalization, Deraniyagala and Fine (2001) found that much of the works were flawed, and concluded that the extent to which free trade benefits economic development is unknown. As the result, the past three decades since 1980s found many political economists arguing for a better approach toward trade liberalization in order to minimize its negative impacts of economic backwardness as in the case of Latin American or income distribution and regional polarization as the case of China.

Mexico is an example of a failed economy that followed the conventional wisdom of trade liberalization rigidly. Here, we find that more than one lesson could be learned. The country started its economic reform in 1985. Under tremendous pressure from the U.S. and the IMF, Mexico radically opened up its economy to the world market without sufficient institutional reform to accommodate the economic adjustment. “Import penetration increase from an average of 11.3 percent in 1080-85 to 14.5 in 1986-90. By 1990, import penetration had already reached 17 percent.” (Dornbusch, 1992). The sharp rise in imports, which was not accompanied by immediate gain in exports and foreign direct investments damaged Mexico’s domestic market and defy many infant industries. (Dornbusch, 1992). It is argued that Mexico, as well as Latin America as a whole, did worse than its pre-1980s period, when import substitution, protectionism and macroeconomics populism were enforced. (Rodrik 2007). As Rodrik asserts: “That the region did better with these discredited policies than it has been under open-market policies is a fact that is quite hard to digest within the conventional paradigm.” Such paradox reinforces the importance of a new approach to trade liberalization where country’s institutional and historical background are all too significant to be ignored and total trade liberalization alone may not generate the growth that its creator promised. Here, the role of the government and some forms of targeted protectionism at the beginning of the reform may be useful. South Korea and China offered excellent case studies for its usage of the new trade theory to their economic benefits.

Korea did not play by the orthodox wisdom (nor it has ever accepted the Washington Consensus to be therapeutic during the Asian crisis) when it started to integrate into the world economy. In contrast, the country successful economic reform involves two major key strategies- market orientation coupled with central planning in developing and protecting infant industries while strategically opened up other industries to the world market. During the reform, Korean government, indeed, acted as an entrepreneur to induce desirable private investments toward targeted industries. Korean trade liberalization, therefore, was a selective process instead of being driven solely by global marketization. Many major sectors were deliberately protected and excluded from trade. By using selective export strategy and heavy government intervention, Korea was able to develop many highly competitive manufacturing industries such as automobile, electrical appliances and shipping which respectively hold their own names in the world market.

China started its reform by first rejecting the conventional wisdom of global liberalization and calling its reform “Socialism with Chinese Characteristic.” Unlike Latin America, Chinese government moved cautiously from central planning to gradual adoption of institutional and mechanism of market economy. Rodrik (2004) argues that China reformed its incentives in a “two-track manner” by grafting a market system on top of a central-planned system, rather than abandoning the latter altogether. The country also underplayed private property rights and relied instead on township-and-village enterprises owned by local governments as well as opened up to the world partially by establishing special economic zones. (Rodrik, 2004). Without following the Washington consensus blindly, the result of Chinese economic progress has been impressive. China’s GDP performance has been consistently stayed at 8-10% growth rate in the past 20 years. Here, China’s success challenged the conventional wisdom total trade liberalization and market orientation.

Despite how countries have been benefiting from trade, there exist multiple issues created by export growth strategy itself such as income inequality and regional polarization. According to Ocampo and Taylor (1998), globalization has intensified the income gap and income distribution especially in countries with comparative advantage in skill-intensive products. The authors offer examples of African economies whose comparative advantage in peasant production has worsened income distribution. Similarly, despite China’s conservative approach toward trade liberalization in accordance with government intervention, the country has been facing serious issues regarding income inequality and regional polarization. Prior to the eruption of the global financial crisis, labor migration had moved rapidly to export processing zone set up mostly along the West coast region of the countries. As the result, wage labor and prosperity appeared to increase drastically faster than the interior regions in which agriculture remained to be the dominant means of production and income creation. Here trade liberalization on its own cannot effectively solve social problems created by export-oriented strategy.

Don’t get me wrong. I am not against free trade or market liberalization. I am wholeheartedly against the IMF’s “one size fit all” formula and see the importance of a thorough understanding of country’s historical and political background before any economic policy is prescribed. Market failures are deeply embedded in economic system, which can’t plainly and ignorantly be corrected by Washington’s 10 commandments.

One may then ask: “So, what is the IMF doing these days given our ongoing financial crisis? Has there been a “new” Washington Consensus?” My next entry on this topic will follow.

*Bibliography with attached pdf files on hyperlinks

Deraniyagala, Sonali, and Fine, Ben, “New Trade Theory Versus Old Trade Policy: a Continuing Enigma,” Cambridge Journal of Economics, Vol. 25, pp. 809-825, November 2001.

Dornbusch, Rudiger, “The Case for Trade Liberalization in Developing Countries,” Journal of Economic Perspectives, Vol. 6, issue 1, pp. 69-85, 1992.

Ocampo, Jose and Taylor, Lance, “Trade Liberalization in Developing Economies: Modest Benefits but Problems with Productivity Growth, Macro Prices, and Income Distribution,” Economic Journal, Vol. 108, pp.1523-46, September 1998.

Rodrik, Dani, “How to Save Globalization From Its Cheerleaders,” KSG Working Paper No. RWP07-38, September 2007.

Rodrik, Dani, “Rethinking Economic Growth in Developing Countries,” John F. Kennedy School of Government, Harvard University, October 2004.

Rodrik, Dani, "Goodbye Washington Consensus, Hello Washington Confusion? A Review of the World Bank's Economic Growth in the 1990s: Learning from a Decade of Reform," Journal of Economic Literature, 44(4): 973–987, December 2006.

Vietnam Too Found Itself in the Slump

I found the recent article on Vietnam written by the Economist under the tittle "In need of some snake-blood" disturbing, especially with its use of metaphor to depict Vietnam's gloomy economy. In an amusing tone, the author compares the country's need of regaining economic momentum to the traditional custom of drinking snake blood. Coupled with writer's troubling tone is the irony that Vietnam is in fact has no reasonable treatment for its decreasing exports, slumping economy and hiking unemployment rate. A stimulus bill at the size of 6% GDP (3% for China) was in order late last year; although, I doubt if it would help the economy to turn around at any time soon. The key issue here is that it takes time to stimulate either foreign or domestic consumption in a large scale global crisis as we are experiencing at the moment.

There is one interesting observation from the Financial Times' commenting on Vietnam and the current global crisis.

Globalisation was not supposed to work like this: the rich get poorer, while the poor get poorer still.

This is probably the first time in the development history of the Asia Pacific region that export-led-growth strategy reveals substantial problems of the market liberalization ideology. There are more to come.


*Image by the Economist

Saving the Dragon

In the process of learning about China’s economic development, I often wonder if it was the right policy for China to cut its domestic spending on public services to suppress its currency while exporting most of its capital surplus to the West. Even in pure economic term, shouldn't economic growth equivalent with improvement of social welfare and income distribution? The answer is obvious- there is no promise of such upgrading even in an economy that has been growing at a rapid rate like China. After the Asian financial crisis in the late 90s, the Chinese government together with the rest of the Asia Pacific decided to protect its economy by maintaining a huge amount of reserves in foreign currency and bonds which ended up injecting an enormous capital inflows toward the US and Europe market causing an unprecedented equity bubbles. Ironically, together they became the partial cause of the current global financial crisis.

Last Thursday, Premier Wen Jiabao announced that China expects to meet it goal of 8% growth rate this year despite their declining economic performance. What did he have in mind to secure such ambitious growth rate?

To supplement for the fast decline in exports, the government has allocated $585bn (almost equivalent to 3% GDP) toward domestic spending and investment for the next 2 years. A big portion of this stimulus package will be spent on improving China deteriorating infrastructure especially on the national railway network. “Many economists believe such heavy infrastructure investment will delay the much-needed shift in China’s growth model towards domestic consumption and services, which would be more sustainable in both economic and environmental terms,” said Geoff Dyer of the Financial Times. I have some disagreements with this opinion.

While improving infrastructure will not give Chinese economy a quick boost in domestic consumption, it is of crucial advantage for China long-term growth. On one hand, the plan will enhance long-term development and improvement in the public service by providing transporting access to the remote regions of the country. Investment in heavy infrastructure will also lay a firm foundation to boost domestic consumption in the long term once local economy picks up. Next, improved infrastructure could further attract more foreign direct investment into the interior regions of the country where labor is still abundantly cheap. This will in turn further help to bridge the gap of regional and social differentiation rooted deeply in China's experimenting economic strategy.

Besides, the stimulus bill doesn’t disregard the need to stimulate domestic consumption all together. Some parts of the $585bn are expected to add an additional 24% to education, 38% to health care and 171% in investment for low-income housing this year.

With increasing lay offs from the country’s export processing zones, slumping economy and the tradition of holding high saving rate, it is challenging for the Chinese government to boost domestic consumption in a short term. By allocating money to infrastructure, the government will at least mitigate a portion of workers to construction industry and offset some parts of the growing unemployed labor force. More importantly, improvements of infrastructure and public services are particularly vital for China’s sustainable and long-term development. With much criticism, a part of this stimulus plan appears to hold credible value.


*Image from the Financial Times

A Capitalist's Crisis?

Having born and brought up in a communist country as well as reading Marxism over the years in both social and economic disciplines, I can’t help asking myself the question: “What would Marx respond to this financial crisis?” The question lingered for weeks. Yesterday, I finally did a quick search on this subject. Unsurprisingly, there has been a revival of interest in Marx ever since the crisis started. Das Kapital, one of Marx’s most known analyses on the economy of capitalism have once again become the best seller all over the world. Last year, Phillip Collins of the UK Times published an article under “Karl Marx: did he get it all right?”. After a quick scan through Marx’s Ten Steps to Communism, the author gave Marx 3.5 over 10 for his assumed prophetic ability in predicting our financial crisis. Collin stated the obvious: Mark was right about the nature of crisis embodied in capitalism, but not much more.

I found the article a fun read with good review of Marxism, as well as was amused with Collins British sense of humor. But it did not satisfy my curiosity. What is more? What do our American Marxists think about this issue? Robert Brenner, a Marxist and economic historian of UCLA, seems to offer a solid yet provocative perspective through his interview with Seoul’s economist, Jeong Seong-ji titled "A Way out of the Global Economic Crisis?"

Back in December 2007, Brenner was almost prophetic about the upcoming financial crisis while at least half of the world was still relatively optimistic about economic downturn. By late December 2008, Brenner once again stressed that the crisis is much more substantial than most people expected.

According to the Marxian professor: “The basic source of today’s crisis is the declining vitality of the advanced economies since 1973, and, especially, since 2000.” Brenner contends that capitalists solved the problem of slowing capital accumulation by calling forth to the ever greater levels of borrowing to sustain stability. Thus, our economic system requires the crisis that has so long been postponed since “it’s by way of crisis that, historically, capitalism has restored the rate of profit and established the necessary conditions for more dynamic capital accumulations” said the Marxian historian.

The interview covers controversy issues such as the role of the US’s hegemony in maintaining the world order, Keynes monetary policies as a solution for the crisis, the depth of the Chinese crisis and its role in financing the our debts over the past decades.

In addition, the professor also made a comparison between Obama’s future performance as with Roosevelt’s and how our country can only change the system under a class struggle namely revolving pressure from the workers and unions. He asserts: “like Roosevelt, Obama can be expected to take decisive action in defense of working people only if he is pushed by way of organized direct action from below.”

In responding to Jeong’s question on Korea, Brenner maintains that as deep and troublesome the Chinese crisis is revealing, China may be able to contain the crisis better than Korea due to its low-cost labor force and large domestic consumption. This is due to both Korea and China reliance on globalization for their growth, which turn out to be a weakness at the moment. “It’s not necessarily because Korea is doing the wrong thing,” the author continues, “it’s because I don’t think there’s going to be an easy way out for any part of what has become a truly global, interdependent capitalist system.”

For Brenner, the only way for countries to reestablish healthy capitalism appropriate for growth and further capital accumulation is through strengthening the movement of labor organization. The class struggle promises to balance the distribution of power necessary for readjustment.
“So, again, the top priority for progressives -- for any left activists -- where they should be active is in trying to revive the organizations of working people. Without the re-creation of working class power, little progress will be possible, and the only way to recreate that power is by way of mobilization for direct action. Only through working people taking action, collectively and en masse, will they be able to create the organization and amass the power necessary to provide the social basis, so to speak, for a transformation of their own consciousness, for political radicalization.”

I wonder if one could find a more Marxian solution to our financial crisis than what Brenner contends. On the other hand, this approach has never been so out of reach given the current feeble and fragmented state of our labor unions and the worker’s strength in taking the action necessary to protect their long-term interest.


Robert P. Brenner and Jeong Seong-jin. Photo provided by The Hankyoreh

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Below are a few additional quotes that I also found particularly thought-provoking.

Disputing Keynes monetary policy in effectively changing the landscape of our crisis
"But there is reason to doubt that Keynesianism, in the sense of huge government deficits and easy credit to pump up demand, can have the impact that many expect. After all, during the past seven years, thanks to the borrowing and spending encouraged by the Federal Reserve’s housing bubble and the Bush administration’s budget deficits, we witnessed what was, in effect, probably the greatest Keynesian economic stimulus in peacetime history. Yet we got the weakest business cycle in the postwar epoch."

China and East Asia as the US’s largest creditors
"To have a significant effect on the economy, the Obama administration will likely have to contemplate a huge wave of direct or indirect government investment, in effect a form of state capitalism. To actually accomplish this, however, would require overcoming enormous political and economic obstacles. The U.S. political culture is enormously hostile to state enterprise. At the same time, the level of expenditure and state indebtedness that would be required could threaten the dollar. Until now, East Asian governments have been happy to fund U.S. external and government deficits, in order to sustain U.S. consumption and their own exports. But, with the crisis overtaking even China, these governments may lose the capacity to finance U.S. deficits, especially as they grow to unprecedented size. The truly terrifying prospect of a run on the dollar looms in the background."

The US hegemonic role in maintaining the world order
"I see the elites of the world, especially the elites of the capitalist core, broadly conceived as being very happy with U.S. hegemony, because what it means for them is that the U.S. assumes the role and the cost of world policeman."

Future possibility for the working class to influence our political environment
"The problem is that there is very little organization of working people, let alone any political expression. So, one can say there is this very big opportunity created by the change in the political environment, or the ideological climate, but that by itself is not going to provide a progressive outcome."

Summer Internship Opportunities for 1L Student Abroad

When I arrived in Hong Kong in July last year for the Duke Summer Abroad Program at Hong Kong University, I was surprised to find that many Duke students had already finished a summer internship with law firms either in Japan, Korea or China prior to their arrival in Hong Kong. It turned out that the students were helped by their program director to land 4-6 weeks internship before our summer program. I thought to myself how nice it was to earn 6 law units as well as an internship abroad, all in one summer. I wanted to do that too, but it was already late into the summer, and I was afraid that I would not be able to do it. What were my chances?

After a bit of networking, I got a few words of advice from the program director that it is easier to find a summer internship in either Japan or Korea than in Hong Kong and China at such a late moment, especially for a US student who does not know the local language. I followed his advice and, without any real hope, sent out my resume and cover letters to five Korean law firms in the very last week of our program in late July. I didn’t think that I would be successful but told myself that I would apply anyway just so I wouldn’t regret not doing it. To my surprise, I was offered an internship with a mid-size international law firm in Seoul, South Korea within just a few days! Sometimes it is rewarding to maintain a “just do it” attitude.

Many of you are probably working hard to search for a summer job at the moment. I hope that some of you are considering working abroad, especially those of you who are interested in international law. I found it immensely enriching and eye-opening to live and work in a new place as well as to learn about the similarities and differences that exist between the United States and foreign countries. My last minute job search convinced me that there are more opportunities to intern abroad than one may think. For this reason, I thought I should share some tips and resources with you.

1. Prepare your resume and cover letters as early as you can and apply early. Hastings career center has a great database that will help you to locate alums working in your preferred region. You can contact them for advice and recommendation. Many alums will even help you find local jobs if they are available. It was this linkage that most of the Duke students found their summer internships with very prominent US law firms in Japan and China.

2. I used HG.org and Martindale to search for the firms by region and by practice areas. While doing your search, don’t limit yourself; apply to as many firms as you can. However, you should prioritize your options into region, country and area of practice ahead of time in case you receive a few different offers at once. Even in late July, I received two offers and was ready to negotiate for my best one. Strategize your game!

3. It is best to have a rough idea of the area of law that you are particularly interested in. While negotiating with my law firm, I was asked what field and region I wanted to work in. Later, the firm nicely arranged me to work with the chief attorney who was in charge of the firm’s South East Asian practice. The experience was beyond fruitful and instructive.

4. Be prepared to ask for any accommodation that you may need while being in a foreign country. Some law firms do have a specific program for summer associates, but most firms don’t, which means they may not be entirely familiar with your personal needs. I asked my firm to help me with finding accommodation that is close by the office. The company ended up offering me a small residence only 10 minutes by subway from the main office located in the center of Seoul’s financial district. Later on, they further paid for all utilities, transportation, lunch and even dinners whenever I stayed at work late. There were also a welcome lunch and departing dinner (with karaoke) at the end of my internship, but that was another story of building professional work relationship with your employer. I was told that some Korean and Japanese firms even pay stipends for your stay if they cannot offer you working salaries.

5. Knowing local language is preferred but is not required. Although there is an obvious advantage to speaking the language, it is important to keep this in perspective. Before my internship, I had never been to South Korea and don’t know any Korean. Yet, I did not have any language problems during my internship. If you are in a similar situation, I suggest looking for law firms that have strong international practices, which will almost guarantee you some learning experience and professional interactions.

6. Be prepared, be patient and be open-minded when you are in a new country. Everything will sort itself out gradually. Did I say that you will have a blast? If you trust the journey, it will show you the land where your imagination often fails to reach.

Sail your boat, have fun and best of luck!