Alex Greenbaum

The Economic Pain of Israel's Conflict

Cecille Isidro — Wed, 02 Oct 2002 00:00:00 -0400

Media accounts of the savage, two-year war between Israel and the Palestinians inevitably focus on the enormous human costs exacted by the ongoing strife but there is another facet of the struggle that may do even more lasting damage: its destructive effect on the two societies' economies. The devastation to the Palestinian economy has been well documented, including a recent United Nations report. Yet the intifada's toll on Israel's economy has gone largely unnoticed. Israel has no natural resources; whatever economic strength it has is based on guts and brains. The power of hope and determination cannot be calculated in numbers but its people's high education level is manifest. The intelligence and technological know-how of native Israelis and the 1m immigrants from the former Soviet Union position Israel well for a post-industrial world.

Throughout the 1990s, with peace in the air, foreign investment rocketing and the high-technology sector booming, gross domestic product grew at an average annual rate of almost 5 per cent. During this period, Israel's per-capita GDP surpassed that of countries such as Spain, Portugal and Greece.

Today's numbers are very different. GDP will have contracted by almost 6 per cent between 2000 and 2002. Unemployment, a respectable 8.8 per cent in mid-2000, increased to 10.6 per cent of the population in the first quarter of 2002.

Inflation, which used to be a severe problem in Israel, nearly disappeared in the late 1990s thanks to tight monetary and fiscal policy. But increasing government spending to counteract the recession and fight terrorism is expected to raise inflation to almost 13 per cent this year.

Most worrying, perhaps, Israel's high-tech industry, one of the economy's principal drivers, has buckled. At its height, the high-tech industry accounted for 17.5 per cent of Israel's business-sector product and 70 per cent of the country's exports.

Most countries have other industries to fall back on; but suicide bombers have crippled the other engine of Israel's economic growth: consumer spending. The country's restaurants, bars and clubs, and shopping centres that popped up during the 1990s boom, are struggling to stay afloat -- any public place is a potential target for suicide bombers. In total, consumer-led growth contracted more than 75 per cent in the 12 months to the second quarter of this year. Tourism, a key component of consumer spending, has decreased almost 60 per cent in the past year alone.

It would have been difficult for Israel's economy to weather the continuing violence without any downturn but since its founding Israel has had to cope with economic strife caused by war and terror. Its reliance on the high-tech industry is a new thing, however, and may yet exacerbate the recession into a depression.

Israel could have shielded itself better against the collapse of the high-tech sector. No country should rely on one industry alone but Israel forgot the lessons learnt from cash-crop economies and neglected to diversify its own economy sufficiently. Economic planners acted as though the high-tech boom would last for ever and now they are paying a heavy price.

The continued recession in Israel and the Palestinian territories is exacerbating the horror of the terror and violence, making the lives of everyday people yet more miserable. As the intifada enters its third year, more than 2,500 people have been killed. The economies of Israel and the Palestinian territories are another kind of victim. There is nothing more sacred than life but the human consequences of economic strife cannot be overlooked.

Untangling the Knots of Protectionism

Economic Growth — Sun, 01 Sep 2002 00:00:00 -0400

In the months leading up to the votes on Trade Promotion Authority (TPA), President Bush had to buy off powerful domestic constituencies with tariffs on steel and, more recently, increased subsidies for agriculture. Now that he has TPA, the President has wisely reversed course and proposed a far-reaching plan to use the Doha round of trade talks to eliminate the majority of world-government support for agricultural products by 2010. The agricultural proposal, in conjunction with TPA, will hopefully enable the administration to undo years of European Union and U.S. protectionist policy. This will provide benefits to taxpayers, consumers, and developing countries trying to build credible agricultural export markets.

The Doha agricultural proposal, which includes the scrapping of agricultural export subsidies over the next five years and cutting global farm tariffs to fifteen percent by 2010, is the administration's answer to the European Union's mid-term review of the Common Agricultural Policy (CAP) that recommended a shift away from protectionist policies in Europe.

The TPA (or "fast-track" as it is more commonly known) will allow President Bush to aggressively negotiate the deal with greater credibility than previously anticipated, in the knowledge that he will not have to fear drastic changes from Congress on any agreement.

The agriculture proposal was a surprising turn-around from the farm bill the president signed two months ago. That bill -- reminiscent of the more lavish indulgences of European socialism -- increases agricultural spending by more than $80 billion in the next ten years.

President Bush cannot continue to be swayed by agricultural interest groups. Comprehensive agricultural trade liberalization, such as that being proposed, is essential for four reasons.

One, agricultural policy in the developed world has, for the most part, been anti-trade and anti-development. The worst culprits are the European Union and the United States, who for more than half a century have increased spending for their farmers under the guise of income stability for small farmers and the preservation of the rural way of life. This has not only caused a loss of credibility of the industrialized world in the eyes of developing countries -- countries that want to enable their own development through the creation of sustainable agricultural export markets -- but also undermines the developing world's belief in the free trade system in general.

Two, the notion of protectionism is distinctly anti-consumer. Consumers ultimately pay for protectionism twice: through increases in taxation to pay for protectionist measures such as subsidies and through inflated prices of goods made from the protected products. For instance, it is estimated that the average American taxpayer will pay more than $600 for the increases in the farm bill alone.

Three, agricultural subsidies constitute wasteful and indulgent government spending, especially when there are more pressing spending needs, such as education, healthcare, and more recently homeland defense. The EU can also ill-afford its agricultural spending excesses as it attempts to expand. Extravagant, protectionist spending will be almost impossible to justify. European taxpayers will already be paying heavily in the short run for the poorer newcomers and will thus expect Eurocrats to tighten their purse strings in other places.

Four, protectionist agricultural policies in the United States do not contribute to a positive rural redevelopment policy and preserve a dying way of life. As of 2001, seven percent of farmers were producing eighty percent of farm goods. Farming assistance is going, in the most part, to wealthy corporate farmers and not to the more than two million small farms in the United States. Over the past five years, it is estimated that the wealthiest ten percent of farmers received an average of almost $300,000, whereas the other ninety percent only received an average of $1,100 each.

In light of its recent poor performance in trade matters, particularly the pork-laden farm bill and steel tariffs, the administration must not use the Doha agricultural proposal as mere rhetoric. Bush must lead the world community, by example, toward freer and fairer agricultural trade policy. Congress was right to give the president TPA, and he must not disappoint the American people with imprudent trade policy.

Asia and the American Model

Cecille Isidro — Fri, 02 Aug 2002 00:00:00 -0400

A new model of consumer-led growth is beginning to emerge in the tiger economies -- in South Korea and Thailand, in particular.

This model owes a lot to the U.S. model. But in this instance, it is not the model that the U.S. Treasury and International Monetary Fund, both Washington-based institutions, have been peddling for more than a decade.

The real American model

Rather, it is the American post-war success story of consumer and government-deficit led growth that has made the United States such a prosperous middle-class economy.

The evidence is in the numbers. In 2002, Korea is expected to grow by approximately 5%, Indonesia by 3% -- and Thailand by 2.5%. These figures are not spectacular by historic standards.

But given the world economic slowdown, which has also depressed growth rates in emerging economies, they represent significant progress.

Doing as the United States does

In essence, Korea and Thailand have succeeded by doing as America does -- not as its officials have said. In fact, the policies they have pursued in the aftermath of the Asian financial crisis fly in the face of the policy recommendations offered by the Clinton Administration and the IMF at the time of the crisis.

Given that fact, it is even more perplexing that these recommendations are still being advocated in the beleaguered Latin American economies today.

Tight money -- or American-style growth?

Following the 1997/8 financial crisis, and owing to an immense contraction in the nation's economy, Korean officials decided to ignore the Clinton Administration and IMF doctrine of tight monetary and fiscal policy.

Instead they opted for an American-style consumer-led growth initiative.

That is why, in 1998, Korea lowered its interest rates -- and began to pursue an expansionary fiscal policy. Shortly thereafter, other Asian economies followed suit.

Korea learns

As a result, Korea's central government expenditure increased from approximately 22% of GDP in 1997 to 26% of GDP in 1998. The policy change was based on the idea that increased government spending financed by the issuance of government bonds would be able to revive many small and medium-sized firms.

It was the same strategy that America introduced of an expansionary fiscal policy after World War II. That strategy also achieved great success at the time.

Unsustainable interest rates

The break with Clinton Administration and IMF monetary policy in 1998 came after the Korean government had raised interest rates from 11.8% to 15.1%. This was deemed unsustainable.

The Korean government then slashed rates by almost 6 percentage points in 1999 -- and continued to cut rates. By the end of 2001, Korean interest rates were down to 7.7%.

That decrease has helped create the consumer-led growth which has become prominent in Asia over the past couple of years.

Encouraging consumers

To this day, targeted fiscal measures aimed at further increasing consumer confidence and strengthening the social safety net continue in several key countries in Asia.

The restructuring of Korea's banks and the severe financial problems experienced by many of the country's chaebol helped indirectly to create strong consumer credit markets.

The Latin American mistake?

How so? Well, it ensured an increase in the supply of consumer credit in relation to corporate credit. This triggered an important development: Domestic demand for consumer products is now on the increase. In addition, the savings rate is falling and Korea's over-reliance on export-led growth is gradually declining.

All of that stands in sharp contrast to Latin American countries. Many of them have followed U.S. Treasury and IMF guidelines quite religiously. And yet, by and large they have failed to obtain many of the promised results.

Beleaguered Argentina, once heralded as the paradigm of IMF success, is experiencing its most severe economic, social and political meltdown to date.

Brazil is teetering on the edge of collapse. Venezuela, Colombia, and Uruguay are all facing harsh economic and political predicaments.

Different -- yet similar

The other Latin American economies are only experiencing measured success -- with inflation rates equaling, if not exceeding, those in Asia.

Why is that so? Certainly, it is important to recognize the structural differences that exist between Asian and Latin American economies. Unlike Latin America, the Asian tigers have a history of productive exporting and high savings rates.

Which investor?

Nevertheless, some lessons can be learned from the Asian experience, especially given the slowdown in developed economies. Most important is the importance of growth to investor confidence.

The U.S. Treasury and the IMF argue that currency stability is the most important variable in determining investor confidence in a country. This may be the case for short-term, speculative investments.

However, those wishing to invest on a longer-term basis -- the kind of investment that creates stability -- will be more interested in the growth prospects of an economy.

After all, an economy's growth is perhaps the key variable that determines long-term investor profits. Evidently, the Asian tigers still have a way to go in their economic reforms, both in the private and public sectors.

A lesson from Asia -- and the United States

In particular, they still need to pay close attention to the possibility of inflationary pressures that are often caused by a loosening of fiscal and monetary policy and by an increase in the availability of consumer credit.

Still, the results observed in Asia hint at a policy prescription for ailing economies. The idea is to encourage the availability of consumer credit and support growth through consumerism.

Most important, draconian fiscal and monetary restrictions should never be valued over economic growth. In the final analysis, it is just the sort of model that has enabled the United States to flourish over the past sixty years.

Breaking the Borders

Cecille Isidro — Thu, 30 May 2002 00:00:00 -0400

Thought at one time to be the likely centrepiece of its foreign policy, the Bush administration's relations with Latin America are in disarray.

Argentina, once Washington's neo-liberal darling, is in the midst of an economic and social meltdown. In Venezuela, the White House is backtracking after having been caught giving its blessing to an aborted coup attempt. US military involvement in Colombia is growing. And Brazil, one of the few bright spots in Latin America, is hammering the US for its recently imposed tariffs on steel. This month, negotiations were supposed to begin on plans to create a Free Trade Area of the Americas stretching from northernmost Canada to the tip of Tierra del Fuego. On the surface, this looks like an excellent opportunity to make up for these diplomatically embarrassing developments. But to many serious Latin American observers, George W. Bush's FTAA increasingly appears to be at best a hollow exercise and at worst a one-sided deal, whereby the US demands further opening up of Latin American markets for US goods while following a protectionist course for politically sensitive US industries.

As originally envisaged by Mr Bush's father, there were two main ideas to a free trade agreement in the Americas. The first was to bring about an all-encompassing free-trade zone in the Americas by lifting all existing barriers to investment and trade. The second was to create additional incentives -- easier access to the US market -- for Latin American countries to undertake painful free-market reforms.

The current administration has continued to extol the virtues of an FTAA -- most recently in the form of comments from Mr Bush himself during a recent trip to Latin America. But its actions have increasingly belied the administration's commitment to a fair and equitable agreement.

The US decision on steel imports is one obvious example. But it is one of several. Bowing to political pressure, Washington has just passed an agriculture bill that dramatically expands subsidies for most US agricultural products. It has now signalled that it may seek exceptions for many agricultural products and textiles from a potential FTAA agreement.

These facts are a reminder of how the Bush administration has put the interests of its Republican political base -- US farmers and steel and textile producers -- above the interests of the nation and above improved economic and trade relations with Latin America. Texas, for example, employs about 40,000 agricultural workers and North Carolina has a textile workforce of more than 120,000 people. These are potentially important votes. Florida employs 90,000 people in its citrus fruit industry and traditionally Republican states such as Georgia, Mississippi and Arkansas rely heavily on cotton production. The administration also stands to gain votes in swing states such as Pennsylvania, which produces both steel and a large percentage of the US's dairy products.

Exempting textiles and certain agricultural products from FTAA would create a one-sided agreement, whereby the US would gain while Latin America and the Caribbean would suffer. How can such an agreement be championed as the key to sustained growth and political stability?

Any free trade agreement that excluded agricultural products and textiles would nullify many of the potential gains that Latin American and Caribbean economies would derive from greater access to the US market.

Those likely to lose out include Jamaica, where agricultural products account for approximately 20 per cent of total exports. In Guatemala, about 70 per cent of exports have an agricultural base. In Paraguay and Ecuador agricultural products account for more than 50 per cent and about 40 per cent of total exports, respectively.

Although most Latin American and Caribbean countries have relatively small textile industries, El Salvador and the Dominican Republic have shown interest in creating export industries to enable development, as in Costa Rica. US protectionism and severe competition from south and east Asia are serious obstacles to such plans. Even the best-positioned economies in Latin America would be hurt by such a one-sided agreement. Brazil, for example, wants to expand exports of steel, orange juice and soybeans to the US but would still face barriers after such an FTAA was in place.

If Mr Bush is truly interested in reaching an agreement that promotes development through expanded trade, he must take on the special interests in his own electoral base. An FTAA worth its name would need to reduce barriers on agricultural products, steel and textiles. It should also cover banking services and computer software.

An FTAA along these lines would make a considerable difference to development in Latin America. Mr Bush should abandon the misleading rhetoric and get serious.