It is a fairly reliable rule of thumb that a financial crisis will be blamed on greed. But the enormity of the current challenges has led some people to signpost this as the high-water mark of this particular tide of globalization (see Irwin Stelzer's argument) that the era of free trade has ended) and question the future of capitalism itself.
President Sarkozy's recent speech on the financial crisis has received a fair amount of interest. It did not feel to me like the broadside against capitalism that some have portrayed it, although there was some therapeutic knocking down of straw-men: 'the idea of the all-powerful market which wasn't to be impeded by any rules or political intervention was a mad one'. It would indeed be a mad idea, which is why we have lots of rules (including a legal code) and regulations (even if they didn't work very well in some cases) to channel markets. The part that has received most attention was President Sarkozy's assertion that 'if we want to rebuild a viable financial system, raising the moral standards of financial capitalism is a priority'.
The idea of moralising the market is an idea as old as the hills, of course. During a crisis it is a natural step on from talking about regulation (which, let's face it, is pretty dull). Regulation changes the duties and incentives faced by a company. At its purist, moralisation aims to change the motivations of the people working in the company. But it hasn't been very successful.
Defenders of free markets argue that moralisation isn't necessary and could do harm. Adam Smith famously said that 'it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard for their own interest'. But Smith was by no means the first in the game. Perhaps the most notorious rebuke of moralizers was written by Bernard Mandeville, a Dutchman living in London during the birth of modern finance. His Fable of the Bees, written to rile the self-explanatory Society for the Reformation of Manners, argued that it was private vice itself that led to public economic benefits. A libertine kept an array of tailors and innkeepers in business in a way that a church-going spinster did not. You can draw a straight line from Mandeville to Gordon Gekko. Greed is good.
The interesting middle ground is moralizing the mission of the company. Free marketers argue that profits are a company's good works for society and companies trying to deliver public interests will be distracted from their core business. But there is mounting evidence that consumer dollars are interested in the social responsibility footprint of individual companies. So far this - to borrow shamelessly from Google's logo - seems primarily to be on the basis that a company should do no evil. So multinationals have queued up to manufacture in Cambodia because of the ILO's excellent Better Factory Cambodia initiative. If it says 'Made in Cambodia' on the label, you can be fairly certain as a consumer there was no child labour involved. The Kimberley Process, established in 2003 and covering 99% of rough diamond trade, is another good example: you don't want a conflict diamond to be forever. The next step up the ethics chain is to buy from a company because it does good. Consumers may start to reward more systematically companies that get out ahead on addressing climate change, for example.
Going back to Sarkozy's aim of raising moral standards in financial capitalism, I wonder whether corporate social responsibility has had less bottom-line traction among financial services companies than in other sectors of the economy. There have been a few virtue funds launched (though also some counter-veiling vice funds). Some entities run ethical investment policies. But they feel like a vanishingly small minority. In policy terms, the proxy we seem to have hit on for raising moral standards in banks is to oversee executive remuneration.
Posted at 09:40 20 October 2008 by Oliver Griffiths | Comments[0]
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Peter Mandelson made a short speech on trade and climate change in Oslo recently that is well worth a read. A couple of things sprang to mind for me.
In the first paragraph of the speech there's an (unconscious?) echo of one of Adam Smith's best quotes. Mandelson said: "A tomato grown and shipped to Europe from Senegal produces less carbon than a tomato grown in an artificially-heated greenhouse in Europe". Compare that to Smith in the Wealth of Nations: "By means of glasses, hotbeds and hotwalls, very good grapes can be raised in Scotland, and very good wine too can be made of them at about 30 times the expense for which at least equally good can be brought from foreign countries. Would it be a reasonable law to prohibit the importation of all foreign wines, merely to encourage the making of Claret and Burgundy in Scotland?" In defence of the carbon footprint of 18th century Scottish glasshouses, they were probably only solar powered.
It must be the case that a positive trade policy, based on liberalising markets for low carbon technologies, can help in addressing climate change. A negative trade policy designed to punish international free riders is more problematic. There is rightly a lot of interest in the idea of border adjustment measures, not least because the US Congress currently seems so set on the idea. Setting aside the issue of how compatible border adjustments would be with WTO rules (see a debate here if you're interested), any adjustment mechanism would be very difficult - and consequently costly - to operate. In practical terms, with the globalisation of supply chains and individual products now containing parts sourced from many countries, such measures would be a nightmare to implement. They are also likely to produce incentives to game the system. If you thought preferential rules of origin were complex, just you wait until carbon of origin.
It also feels like using a sledgehammer to crack a nut. It may be axiomatic for some people that US cap and trade legislation without border protection would lead to whole swathes of US industry being wiped out by (especially Chinese) competition. But this hasn't been the experience in the EU under the Emissions Trading Scheme. And the evidence is that cap and trade legislation would have a strictly limited impact in the US too. That's not to belittle the impact on a couple of sectors - but there must be better ways to deal with the problem than overarching border defence. Some free permits perhaps?
My personal nightmare is that if we fail to complete the Doha Round in the near future, one tricky multilateral negotiation cross-fertilises with another tricky multilateral negotiation in the shape of the post-2012 climate change framework. That way madness lies.
Posted at 09:06 09 October 2008 by Oliver Griffiths | Comments[3]
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Sitting through speeches at trade association dinners is not normally a highlight of the job. I tend to find myself absorbed with the calculation of whether I have taken onboard enough coffee to stay awake but not so much that I will be consigned to hours at home reading whatever comes to hand before I can get to sleep. But Bruce Stokes speaking at the Coalition of Service Industries dinner last week was an honourable exception. One of the issues he touched on briefly was WTO reform. Bruce thought that we are likely to have a de facto pause on trade in the US in the coming years, which should allow us all to think big thoughts on the future of the WTO.
Having a WTO that works well is important - but I have heard little discussion on it recently, despite the travails of the Doha negotiations. It's probably wrong to think about WTO reform in isolation. Gordon Brown gave an interesting speech at the Kennedy School of Government earlier in the year, looking at the need for reform of the international institutions to meet the challenges of the twenty-first century. What the IMF does will have important knock-on effects for the WTO - multilateral disciplines on currency exchange rates disciplines, for example, would reduce a number of pressures on the trading system. And then there's addressing climate change, which has to be an imperative for all the international institutions but raises a number of thorny trade questions.
Bruce floated the idea that we should reconsider the Most Favoured Nation provision (a cornerstone of the WTO, under which all countries benefit when another country reduces its tariffs). It feels like there is growing support in Washington - partly as a reaction to seven years of Doha negotiations - for creating a two-track system in the WTO, to allow plurilateral agreements among those prepared to liberalise deeply. A Cordell Hull Institute group looking at the world trading system seemed to be leaning this way at a seminar in April.
A two-track system feels to me like the end to multilateral trade rounds. At the moment that may seem a good idea to those who have spent the last seven years of their professional lives on Doha. But from a historical perspective it potentially slays the goose that has laid the golden egg.
For those interested, the German Marshall Fund is hosting a lunchtime session on WTO reform at lunchtime on Friday, featuring Debra Steger from the University of Ottawa and a former senior negotiator for Canada at the WTO. There will be a couple of sessions on the future of the WTO at the WTO Public Forum in Geneva this week.
Posted at 09:57 26 September 2008 by Oliver Griffiths | Comments[0]
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On a recent trip to the local bike shop I overheard another customer deliberating between two bikes - a Cannondale and another make. Now the British government doesn't endorse any particular bike brand. But I do. I love Cannondales and own two. But they're definitely pricey, as the customer in the bike shop discovered. The Cannondale was about $100 more expensive than the other, equivalent bike and he quite naturally asked why it cost more. The assistant's answer was that it was because Cannondales are made in the USA (in Pennsylania) while the other make was made in Taiwan. This isn't the reason I buy them but it got me wondering about the premium that home producers can charge over competitors from abroad for similar goods. And whether you could put together a league table comparing the different level of premium that home producers could charge in different countries.
The economist's answer is that you should just buy the best goods at the best price. End of story. That will force the competition to catch-up or get out of the business, raising standards across the board. But emotion seems to pull the other way. This phenomenon has been given the rather grand title of consumer patriotism.
A 2007 Zogby poll found that one in three Americans would be willing to pay four times as much for American-made toys over foreign substitutes (which in effect means Chinese goods, as China has over 90% of the global market in toys). Paying four times as much sounds absurd. But if true, MBA graduates must be flooding into toy manufacturing. Japanese consumers have also, famously, been willing to pay a substantial premium for Japanese rice - though in that case supposedly because of a superior level of stickiness. (Consumer patriotism - if only I had known the phrase - also dictated the choice of our family car. My father bought a succession of unreliable estate cars made by British Leyland. It didn't save British Leyland.) One of the least effective consumer patriotism initiatives was - or so I recall from law school - a Buy Irish campaign that was brought to the European Court of Justice for being in contravention of Article 85 of the EC Treaty (one of the EU's competition articles, now changed to Article 81) because it discriminated between producers in the EU. One defence put forward was the fact that sales of Irish goods had actually dropped during the campaign. So my initial international consumer patriotism league table runs: USA, Japan, UK, Ireland.
Anyway, the customer in the bike shop decided not to buy the Cannondale.
Posted at 20:49 21 September 2008 by Oliver Griffiths | Comments[2]
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