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August 2004 Archives


Economic challenges facing the European Union (EU) following the accession of 10 new members Recommended!
Finance and Development Jun/Aug 2004
The main challenge, weak growth, entails tackling such deep-rooted problems as a lack of competitiveness and unemployment. This issue also looks at the EU's Stability and Growth Pact, the single European currency, the implications of population aging for Europe, problems over migration between the established EU members and the new members, and viewpoints on the EU's enlargement. This issue also presents some recent developments in microfinance, including a recent experimental project in which banks on wheels have brought financial services to Vietnam's poorest citizens and the evolution of microfinance institutions that provide flexible, high-quality financial services to low-income clients on a sustainable basis. Other contributions include a Country Focus on the Indian economy, a celebration of 40 years of F&D, an inside account of the successful restructuring and privatization of Seoul Bank in 2000-02, and a profile of Brookings Senior Fellow Alice Rivlin.

Research summaries on ten years of NAFTA Recommended! Adobe Acrobat Required
IMF Research Bulletin Jun/Aug 2004
Economic integration in North America and on international reserves; summary of new IMF study on China; visiting scholars at the IMF; contents of latest issue of IMF Staff Papers; titles of recent IMF working papers; summary of workshop on dynamic stochastic general equilibrium (DSGE) modeling.

A Global Power Shift in the Making Recommended!
James F. Hoge, Jr. (Foreign Affairs) Jul/Aug 2004
Global power shifts happen rarely and are even less often peaceful. Washington must take heed: Asia is rising fast, with its growing economic power translating into political and military strength. The West must adapt -- or be left behind.

The Myth Behind China's Miracle Recommended!
George J. Gilboy (Foreign Affairs) Jul/Aug 2004
Washington need not worry about China's economic boom, much less respond with protectionism. Although China controls more of the world's exports than ever before, its high-return high-tech industries are dominated by foreign companies. And Chinese firms will not displace them any time soon: Beijing's one-party politics have bred a timid business culture that prevents domestic firms from developing key technologies and keeps them dependent on the West.

History and the Hyperpower
Eliot A. Cohen (Foreign Affairs) Jul/Aug 2004
Whether or not the United States today should be called an empire is a semantic game. The important point is that it resembles previous empires enough to make the search for lessons of history worthwhile. Overwhelming dominance has always invited hostility. U.S. leaders thus must learn the arts of imperial management and diplomacy, exercising power with a bland smile rather than boastful words.

Saving Iraq From Its Oil
Nancy Birdsall and Arvind Subramanian (Foreign Affairs) Jul/Aug 2004
Of all the pressing questions facing Iraq today, perhaps the most important in the long run is what to do with the country's oil. Vast wealth from natural resources can often be a curse, not a blessing, corrupting a nation's political and economic institutions and impeding the growth of democracy. There is only one way for Iraq to resist the oil curse: by handing over the proceeds directly to the Iraqi people.

Building Entrepreneurial Economies
Carl J. Schramm (Foreign Affairs) Jul/Aug 2004
The "Washington consensus" approach to development -- which urges other countries to emulate American capitalism -- misses one vital ingredient: the role that entrepreneurs play. Jump-starting growth in the developing world will require an understanding of the American entrepreneurial system, which involves four sectors of the economy.

Europe’s Quiet Leap Forward Recommended!
Kenneth Rogoff (Foreign Policy) Jul/Aug 2004
The European Union seems like it is lagging behind now. But it may just be getting ready for a big jump in the game of global economic leapfrog. The United States and Asia should watch their backs—a new economic juggernaut may be getting ready to dominate the 21st century.

Haitian jobs hang in the balance in IFC-funded plant
Bretton Woods Update No.41 Jul/Aug 2004
Plus: Infrastructure privatisation: “Oversold, misunderstood” … and heavily subsidised; “Middle-income country”? Over half live in poverty; Bank response to oil, gas and mining review “completely inadequate”; The World Bank’s project cycle explained; and more.

Does a Fall in the Dollar Mean Higher U.S. Consumer Prices?
Diego Valderrama (FRBSF) Aug 2004
Beginning in early 2002, the dollar tumbled against major currencies like the euro, the British pound, and the Japanese yen; though it has risen somewhat in recent months, it is still well below that peak. One of the key questions this has raised for U.S. monetary policymakers is: How much of the decline in the dollar passed through to import prices and to overall consumer prices? This Economic Letter looks at the relationship among changes in the exchange rate value of the dollar and in import prices and overall consumer prices, with a particular focus on the current circumstances. It appears that the lower value of the dollar at this point is affecting U.S. prices less than it has historically. The reasons for the difference include changes in trading partners, changes in the composition of U.S. trade, and improved monetary policy over the last several years. Looking ahead, then, it appears likely that the recent dollar depreciation will have only very moderate effects on overall consumer prices.

The Resource Curse Revisited Recommended!
Joseph E. Stiglitz (Project Syndicate) Aug 2004
There is a curious phenomenon that economists call the resource curse - so named because, on average, countries with large endowments of natural resources perform worse than countries that are less well endowed. Yet some countries with abundant natural resources do perform better than others, and some have done well. Why is the spell of the resource curse cast so unequally?

Fear and Loathing in the First World Recommended!
Robert J. Shiller (Project Syndicate) Aug 2004
Within the last few years, people throughout the world's most advanced economies have become acutely worried about the economic prowess of China, India, and other emerging countries with large low-wage populations. They fear for their own jobs and for their children's future in a world where they must compete alongside the world's poorest. Those fears are testing political leaders in the world's richest countries.

Poor Countries, Rich Resources
NYT Aug 1, 2004
The challenge for the World Bank is to help developing nations take advantage of their natural riches, while making sure the poor benefit from them.

WTO gains pact to cut farm aid in rich nations
IHT Aug 2, 2004
The agreement was welcomed as evidence that multilateral organizations such as the WTO can be effective.

Trade and the Honest Candidate
Sebastian Mallaby (WP) Aug 2, 2004
John Kerry may have surrounded himself with Clinton veterans, the technocrats who form the Democratic Party's permanent establishment. But the tone of his convention speech -- nationalistic not just on matters of defense but also on trade and economics -- marked a departure from the Clinton orthodoxy. Kerry attacked the outsourcing of jobs, which he implicitly blamed for a decline in manufacturing and in middle-class living standards. What does it mean, the candidate asked, "when Dave McCune, a steel worker I met in Canton, Ohio, saw his job sent overseas and the equipment in his factory literally unbolted, crated up and shipped thousands of miles away, along with that job?"

World trade: Progress at last, but still a long way to go
Economist Aug 2, 2004
The European Union and the United States have agreed to remove agricultural export subsidies and to reduce other farm subsidies in a deal that rescues the Doha round of world trade talks. However, the details of the deal remain to be negotiated.

The WTO still has a long way to go
Robert Hunter Wade (IHT) Aug 3, 2004
The WTO agreement reached early Sunday morning in Geneva represents a step in the right direction, but a much smaller step than the claims of a "historic achievement" would suggest. Most of the really tough negotiations have yet to come, and it is very unlikely that they will be completed by the end of 2005.

Breakthrough on Trade
NYT Aug 3, 2004
The World Trade Organization's agreement on farm subsidies is cause for optimism, but filling in the blanks remains a big challenge.

Farmer's Market Wall Street Journal Subscription Required
WSJ Aug 3, 2004
Let's keep the spotlight on protectionist politicians.

Trade and the Honest Candidate Wall Street Journal Subscription Required
Sebastian Mallaby (WSJE) Aug 3, 2004
Perhaps John Kerry will be good enough to explain trade to voters the next time he raises the subject.

Opec 'unable to pump more oil'
BBC Aug 3, 2004
The price of crude oil surges past $44 a barrel to hit a new record after Opec's president says the cartel cannot pump more oil.

Currencies: Short-Term Downside Risks to USD/JPY Diminishing
Stephen L Jen (MSDW) Aug 3, 2004
The down-trade in USD/Asia is well behind us. Not only is the structural descent in USD/JPY over, in my view, but the downside risks to USD/JPY that we have been calling for in the second half of 2004 are fast diminishing.

Currencies: EUR/JPY - The Growth Trade
Melanie Baker and Stephen L Jen (MSDW) Aug 3, 2004
The JPY is a ‘higher beta’ currency than the EUR. The market continues to reassess the prospects for US and global growth, but sustained US growth (our central case) should favour the JPY over the EUR.

Indian farmers fear new WTO deal
AT Aug 4, 2004
The weekend's "breakthrough" World Trade Organization negotiations may have had the Indian government cheering, but the country's agriculture and trade experts aren't celebrating, as the accord could end up hurting farmers more than helping them.

WTO rules against EU's policy of subsidizing sugar exports
IHT Aug 5, 2004
The World Trade Organization ruled Wednesday that $1.4 billion of subsidized European Union sugar exports are illegal, handing Brazil a second victory in two months in its campaign against Western support for farmers.

Their Money, Our Strength Wall Street Journal Subscription Required
David Malpass (WSJ) Aug 5, 2004
Foreign investment in our securities market is nothing to worry about.

Oil's price: livable, but maybe not for long
IHT Aug 6, 2004
Analysts say the risk of sudden and sizable jumps in oil prices is on the rise — and with it the risk of a blow to the world economy.

The IMF Gets Into Growth, Stability Pact Fray
David DeRosa (Bloomberg) Aug 6, 2004
The International Monetary Fund last week chose to interject itself into the fray over budget deficits and fiscal policy in the euro region. It weighed in on the side of France, Italy and other nations that want to bend the rules to cut taxes in the hope of stimulating economic growth.

China in Africa: All Trade, With No Political Baggage Recommended!
Howard W. French (NYT) Aug 8, 2004
Beijing's fast-rising trade involvement with Africa grows out of China's growing need for natural resources, causing trade to increase by 50 percent since 2000.

It's Tough to Be a Chinese Bank These Days
David DeRosa (Bloomberg) Aug 8, 2004
China is collecting accolades for efforts to slow down the nation's allegedly excessive growth. The jury is still out, though, especially with respect to the government's instructions to the banks.

Free Trade in Actresses Wall Street Journal Subscription Required
WSJ Aug 9, 2004
Australia's new trade pact with the U.S. sparks an unusual protest.

Free-Trade Worriers Wall Street Journal Subscription Required
Douglas A. Irwin (WSJ) Aug 9, 2004
Misdirected hostility blocks debate on the real problems.

Global: The Mythical Recovery
Stephen Roach (MSDW) Aug 9, 2004
From my jaundiced perspective, renewed weakness in the US economy hardly comes as a surprise. It’s an unmistakable outgrowth of an upturn that has been of highly dubious quality from the start. The consensus view is that America has entered nothing more than a “soft patch” -- the momentary lapses that most recoveries experience before resuming their upward march. Now that the major equity market indexes have all hit new lows for the year, there will undoubtedly be a rush of buy recommendations from that same optimistic consensus. My advice: Look before you leap at the siren song of the mythical recovery.

Managing Director visits Africa Adobe Acrobat Required
IMF Survey Aug 9, 2004
Plus: IEO report on Argentina; Risk management in the insurance sector; Cross border cooperation in financial sector supervision; IMF 60th anniversary reflections; Fighting dirty money.

Asian currency zone beckons
Japan Times Aug 10, 2004
There is no doubt that the stable renminbi (RMB) exchange rate, pegged at about 8.25 yuan to the U.S. dollar, has helped China's economic development. It has brought about enormous production capacity in the export industries. Meanwhile, the sharp increase in exports to the United States has prompted America to pressure China to revalue the RMB. Earlier this year, Zhou Xiaochuan, governor of the People's Bank of China, said China planned to improve the mechanism for determining the RMB exchange rate.

IMF sees Japan recovery picking up speed
IHT Aug 12, 2004
The International Monetary Fund said Wednesday that the Japanese economy would expand more than previously forecast and was likely to continue growing for the next few years.

The Trade Barriers Within Wall Street Journal Subscription Required
Kimberly Elliott & Ethan B. Kapstein (WSJE) Aug 12, 2004
Bottlenecks within developing nations frustrate their export trade.

Global: Geology, Statistics, and Economics: What Are Markets Saying About Oil? Recommended!
Robert Feldman (MSDW) Aug 12, 2004
With oil prices surging, investors are wondering whether the fundamentals in world oil (and energy) markets have changed. Decoding the message from markets requires geology, statistics, and economics. This is the first of a two-installment series on how geology, statistics and economics are interacting in the oil market.

Global: Geology, Statistics, and Economics -- What Are Markets Saying About Oil? (Part II)
Robert Feldman (MSDW) Aug 13, 2004 Recommended!
With oil prices surging, investors are wondering whether the fundamentals in world oil (and energy) markets have changed. Decoding the message from markets requires geology, statistics, and economics. The first installment of this series discussed geology and statistics. This second part discusses the economics.

Global: Razor’s Edge
Stephen Roach (MSDW) Aug 13, 2004
An unbalanced global economy is back on the razor’s edge. High oil prices are taking a toll on the US growth dynamic at precisely the point when a Fed tightening cycle has begun -- a risky combination by any standards. At the same time, a shift to policy austerity in China has led to a modest slowing of that overheated economy, with a good deal more to come. That puts a two-engine world -- driven by the American consumer on the demand side and the Chinese producer on the supply side -- in a zone of heightened vulnerability. As I see it, the risks on the downside outweigh those on the upside by a factor of three to one. I would now assign a 40% probability to a recessionary relapse in the global economy in 2005.

A Fighter For Free Trade
WP Aug 15, 2004
On Bob Zoellick's office wall hangs a portrait of George McClellan, the Union general who was Napoleonic in self-regard but not in martial spirit and who is remembered primarily for his reluctance to fight. "I asked for a good portrait of a Civil War general," says Zoellick. "I should have asked for a portrait of a good general."

Lower Growth May Re-Focus Japan on the Yen
David DeRosa (Bloomberg) Aug 15, 2004
Last week's stunningly paltry Japanese growth statistics for the second quarter highlight the role of exports as the driver of the economy. And this will put the yen under renewed scrutiny by the currency hawks at the Ministry of Finance.

The world economy: Consuming passions
Economist Aug 16, 2004
As the American consumer tires, can shoppers in Europe, Japan and China take up the burden?

Global: Twin Deficits at the Flashpoint?
Stephen Roach (MSDW) Aug 16, 2004
June’s enormous US trade deficit should be a wake-up call to America and the rest of the world. It is a direct manifestation of a lopsided global economy that remains biased toward unprecedented external imbalances. As long as the US continues to live well beyond its means and as long as the rest of the world fails to live up to its means, this seemingly chronic condition will only get worse. The imperatives of global rebalancing are reaching a flashpoint.

Currencies: The Dollar Is Special
Stephen L Jen (MSDW) Aug 16, 2004
Being the hegemonic currency of the world, the dollar enjoys ‘special treatment’ in asset markets. I continue to believe that, partly because of this special status, the sustainable level of the US current account (C/A) deficit—i.e., without triggering a collapse in the USD or Treasury market—is much higher than for any other country. I also continue to believe that the structural USD correction is already complete. The next 10% move in EUR/USD, GBP/USD, and AUD/USD will be down, not up, in my view.

Economic impact of the Civilizing Mission
M Shahid Alam (AT) Aug 17, 2004
There exists no general history - at least one that is available in the English language - explaining the origins, sources, language, uses, and variations on the theme of the Civilizing Mission, the central myth that Europe has employed to misrepresent its depredations around the globe, starting with the Spanish conquests in the Americas. However, even in the absence of such a general history, some general propositions regarding Europe's Civilizing Mission can be advanced safely.

U.S. Trade Gap Represents a Lost Opportunity
John M. Berry (Bloomberg) Aug 17, 2004
The record $55.8 billion U.S. trade deficit for June which shocked the markets last week was further evidence of the nation's growing dependence on the rest of the world for goods, services and capital.

Dollar Falls After Consumer Price Index Unexpectedly Declines
Bloomberg Aug 17, 2004
The dollar fell against the euro after U.S. consumer prices unexpectedly declined in July.

They're coming to America ... and staying
Raja M (AT) Aug 18, 2004
As the world's two largest democracies exchange a contentious flow - outsourced American jobs flowing eastwards and Indians heading westwards - Indian American families juggle the ground realities of changing cultural, economic and political tensions.

'Ghost Bank of Europe': What's hiding in the closet? Recommended!
IHT Aug 19, 2004
Critics regard the EIB as a phantom power, the most secretive public institution lending money around the globe.

The politics of outsourcing
AT Aug 19, 2004
The current debate in the US on outsourcing and some proposed policy solutions reveal that politicians are more concerned about the politics of outsourcing than they are with the economics of the issue. George W Bush and John Kerry, take note.

All Hail Free Trade (and Henry George)
Laurence M. Vance (Mises Daily) Aug 19, 2004
Two large works were published in the 1800s on the subject in question. The first, Protection or Free Trade: An Examination of the Tariff Question, with Especial Regard to the Interests of Labor, was written by Henry George in 1886. The second, The History of Protective Tariff Laws, was written by R.W. Thompson in 1888. Yet today, over one hundred years later, Henry George is still with us, while R.W. Thompson remains obscure.

Global: Oil-Shock Assessment
Stephen Roach (MSDW) Aug 19, 2004
With oil prices now in the high $40s (WTI basis), there is good reason to treat this development as yet another in a long string of energy shocks. The impact of such disruptions depends very much on context -- namely, the vulnerability, or lack thereof, in the underlying economy. When a weak economy is hit by any type of a shock, recession normally results. Conversely, a strong economy is better insulated to withstand such a blow. Most of the oil shocks of the past fall into the former category -- hitting economies when they are vulnerable. Unfortunately, the Oil Shock of 2004 fits that script to a tee.

Unstoppable? Economist Subscription Required
Economist Aug 19, 2004
HOW OPEC's fear of $5 oil led to $50 oil.

As Oil Prices Boil...
David Ignatius (WP) Aug 20, 2004
You wouldn't know it from the running-on-empty rhetoric of the U.S. presidential campaign, but crude oil prices hit an all-time high this week of more than $48 a barrel. Some economists are warning about a full-blown energy crisis, with prices rising to $65 or more until they bring on a global recession that finally slows demand.

Currencies: USD -- Dollar Should Remain Resilient
Stephen L. Jen (MSDW) Aug 20, 2004
Still don’t see a USD crash. The US may not be able permanently to sustain its current account (C/A) deficit at this level (i.e., close to 6% of GDP) without putting the USD in jeopardy. However, I continue to believe the US can run an outsized C/A deficit (i.e., 3–5% of GDP) for much longer than most people think, with negligible effects on the USD. Having said this, a further widening in the US C/A deficit as global growth falters would not be good for the dollar. My medium-term constructive outlook on the USD remains unchanged, but the scope for the USD to rally in 2005 will be constrained if this occurs.

Can Germany Benefit from Offshoring? Wall Street Journal Subscription Required
Diana Farrell (WSJ) Aug 23, 2004
Offshoring can create new wealth for Germany but only if it sparks job creation.

Trade accord seen as a health hazard
AT Aug 23, 2004
Southeast Asia's push to end trade tariff barriers by 2018 could have an unhealthy side-effect - increased tobacco use. The World Health Organization is calling on ASEAN members to exclude tobacco from their free trade agenda for the sake of public health, but most governments aren't inhaling the implications.

Oil's slippery slope
AT Aug 23, 2004
Oil is now 136% more expensive than before September 11, 2001, yet demand surges. OPEC has promised to do something, as has Saudi Arabia, but they can't deliver. Neither can Iraq, where US plans for a world of cheap oil started to go all wrong. - Pepe Escobar

Pouring oil on the flames
Economist Aug 23, 2004
How would financial markets react if the oil price stays stubbornly high?

Global: The Funding of America
Stephen Roach (MSDW) Aug 23, 2004
With the United States pushing the envelope on macro imbalances, the funding of its “twin deficits” -- budget and trade -- has taken on great importance in shaping world financial markets. In the end, these deficits matter only if they have consequences for asset prices and/or the real economy. So far, that has not been the case. Courtesy of massive foreign capital inflows into dollar-denominated assets, America has not been penalized for its profligate ways. Can this continue?

Global: Global Trade Watch
Rebecca McCaughrin (MSDW) Aug 23, 2004
Global trade has been expanding far beyond our and consensus expectations. This cycle has been unique relative to prior trade booms, as the expansion has been driven not by the US or another industrialized economy as is traditionally the case, but by China. Our team’s expectation for a return to near-trend global trade growth of 6.1% in 2005 (from an estimated 8.3% this year) hinges on the government’s ability to engineer a slowdown in China over the second half of this year (see E. Chaney and R. McCaughrin, Global Trade: Mind the Slowdown, June 16, 2004). With most of the major economies having released trade figures for June and a handful of July releases also out, our sense is that global trade growth was still powering strongly ahead in most regions through June, but small pockets of weakness have begun to emerge as of July.

IEO report on poverty programs Adobe Acrobat Required
IMF Survey Aug 23, 2004
Plus: Interview with Jacques Polak; Politics and inflation stabilization; and Domestic debt in Africa.

China's trade law a delicate balance
AT Aug 25, 2004
Beijing's new foreign trade law, in line with its global obligations, has drawn praise as a major first step in opening up to foreign competition and leveling the playing field. But at the same time, it has also incorporated some legal provisions that will allow it to safeguard domestic interests. - Jayanthi Iyengar

Ersatz Europeans
Economist Aug 25, 2004
The political fortunes of the German and Italian governments depend on economic recovery at home. But that recovery depends rather too much on events elsewhere.

As Iraqi oil flows, prices extend retreat
IHT Aug 25, 2004
Price near $45 after flirting with $50.

Proving Keats Wrong: The IMF as a Guardian of International Financial Stability
Anne O. Krueger (IMF) Aug 27, 2004
We in the international financial institutions—the International Monetary Fund which I represent and our sister institution, the World Bank—have been marking our own anniversary this summer. The Bretton Woods Conference that established the IFIs, as we are now collectively known, took place in July 1944. The framework established at that now-famous hotel in New Hampshire has proved every bit as durable. For the IMF, this important anniversary has offered a useful opportunity to reflect on what has been achieved and, looking ahead to the future, to the challenges that remain. I'd like to share some of those reflections with you tonight.

Virtuous in Old Age: How the IFIs Can Help Prepare for Demographic Change
Anne O. Krueger (IMF) Aug 27, 2004
Demographic change and its fiscal implications constitute a significant concern for the IMF and the IFIs more generally. Demographic change will affect all our member countries over the coming decades. Of course, the problems differ greatly among individual countries, and among groups of countries. The industrial countries will encounter the problems posed by ageing populations first: indeed, in a very real sense, those problems are already upon us.

Dollar May Have Peaked Against Euro, Bloomberg Survey Indicates
Bloomberg Aug 30, 2004
The dollar may have peaked on concern the pace of U.S. job creation will fall short of economists' estimates for a third consecutive month, a Bloomberg News survey indicates.

Abandon hope, all ye who enter structured notes
Aileen Saw (AT) Aug 30, 2004
If you're thinking about structured notes for investments, you should heed the warning from The Inferno. The structured note, a recently popular and exotic financial animal gaining currency in Asia, is very lucrative, but it also is very risky. It is not for the faint of heart, but it is taking the Asian private banking world by storm.

Poverty Is a Growing Risk to Asian Markets
William Pesek Jr. (Bloomberg) Aug 30, 2004
It's no coincidence the Asian Development Bank chose Japan, by far Asia's richest economy, to release a report on poverty. Left unchecked, this developing- nation problem could hold back wealthier ones, too.

Global: Hardly a Global Soft Patch
Stephen Roach (MSDW) Aug 30, 2004
Many of the major economies of the world have suddenly slowed. First came the US and China, but then Japan, Korea, and Germany have followed in short order. In my view, this is not a coincidence but yet another important example of the interrelated perils of an unbalanced US-centric global economy. When the US and China flinch, the rest of the world -- lacking in autonomous domestic demand -- is quick to follow. Barring a spontaneous reacceleration in the world’s two major growth engines, risks are mounting that 2005 could be a surprisingly tough year.

India's US trade gamble
Arun Bhattacharjee (AT) Aug 31, 2004
As India releases a new trade policy, a significant development is in the works in the form of a bilateral service-sector treaty with the US. But Delhi will first have to reach a political consensus among its allies, including the communists.

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