Brookings: Experts - Paul Blustein

The Economic Crisis May Be Over, but the World's Financial Institutions Still Aren't Protecting Us

Paul Blustein — Sun, 11 Nov 2012 17:12:00 -0500

With all the crises besetting U.S. President Barack Obama following his re-election – the fiscal cliff and Iran’s nuclear program in particular – he is presumably giving little thought now to longer-term issues. But here is one problem that, if left to fester, could undercut his hopes for a healthy economy: the weaknesses of international institutions responsible for fostering global economic and financial stability.

The financial crisis that erupted in 2008 cast profound doubt over the effectiveness of these institutions and their successor bodies, which include the International Monetary Fund, the Financial Stability Board and the Basel Committee on Banking Supervision. Adroit action by them, guided by the Group of 20 major economies, is now required to overcome serious challenges that loom in the wake of the crisis.

The first of these challenges involves re-balancing the global economy to ensure a sustained recovery. Massive trade imbalances must be shrunk, preferably with a well co-ordinated plan. After all, the countries that have run large trade deficits, notably the United States, are obliged to impose significant austerity measures sooner or later. Belt-tightening in deficit countries will endanger global growth unless countries with large trade surpluses, such as Germany and Asia’s export powerhouses, take offsetting action by ramping up demand and importing more goods.

International co-operation is likewise critical for regulating the global financial system. The nations of the world must avoid creating a hodge-podge of new rules, lest banks move operations to the countries with the laxest regulatory regimes. Better international rules regarding banks and shadow banks – or at least well-harmonized broad principles – are vital, as are improved systems to manage crises that spill over from one country to others.

Hasn’t plenty been done already to beef up the institutions that deal with these issues? Yes, the G20 – which supplanted the elitist G7 as the global economy’s steering committee – undertook co-ordinated action in 2009 that helped avert depression. The IMF got lots of extra financial firepower. And the FSB, composed of policy makers and regulators from two dozen countries, was created to take the place of a feebler group called the Financial Stability Forum. (The FSB’s chairman is Canada’s dynamic central bank governor, Mark Carney.)

But serious shortcomings and failings in these institutions are evident from a detailed look at their inner workings (and that of their predecessors) during the period leading up to the crisis. That is the upshot of research I have done, based on interviews with more than 100 policy makers and thousands of pages of confidential documents – memos, e-mails, meeting notes and transcripts – that have never been previously disclosed. This wealth of material points to dispiriting conclusions about the ability of these institutions and the world’s major countries to co-ordinate the policies necessary to generate a balanced, sustainable global recovery and prevent future crises.

The point is not that these institutions caused the crisis; they didn’t. But they have proven inefficient in two critical ways. First, despite their efforts to attain elevated, global perspectives on the workings of modern markets, they can’t accurately tell where and how crises are likely to arise. Second, they don’t have the power, and they often lack the will, to stop countries from pursuing policies that threaten neighbours’ stability or even the entire financial system.

One illuminating example took place in a March 2007 meeting of the Financial Stability Forum, which was created in 1999 to guard against crises like the ones that had stricken Asia. Signs of serious trouble were emerging in the U.S. mortgage market – precisely the type of threat that the FSF was supposed to assess. But the view FSF members got from a U.S. Federal Reserve official was soothing. It was “important to recognize that the market segment affected ... only constitutes 7 to 8 per cent of the overall U.S. mortgage stock,” a confidential summary of the meeting quotes him as telling the group, “and there has been little evidence of spillover into other market segments.”

This sanguine view drew no challenge from others. “Nobody around that table said, ‘This is not believable,’” one former FSF member acknowledged to me. And that, he added, was fairly typical of FSF meetings, where “there was great defensiveness, and excessive politeness.” Only six months later, financial turmoil provided the first early warning of what was to come – and even then, the FSF was way behind the curve. Its worst-case scenario had to be updated the following March, when the crisis had deepened well beyond the FSF’s expectations.

To achieve global economic re-balancing and effective financial regulation, the world needs institutions that are as free as possible from “great defensiveness and excessive politeness.” It needs institutions that can make and issue credible, candid assessments of problems arising in individual countries that may adversely affect others – and preferably these institutions will gain power to enforce judgments. In a world of sovereign nations, that may be an impossible dream. But in a world where capital roams freely, the lack of such institutions leaves the global economy in grave peril. Hopefully the Obama administration will help guide the international community toward an appropriate remedy.

Authors

Paul Blustein

Publication: The Globe and Mail

Image Source: © Handout . / Reuters

A Flop and a Debacle: Inside the IMF's Global Rebalancing Acts

Paul Blustein — Fri, 22 Jun 2012 13:41:00 -0400

Cooperation among major countries to shrink global imbalances in trade and capital flows is highly desirable for the sake of promoting a sustainable recovery from the financial crisis that erupted in 2008. The story that unfolds in this paper does not bode well for such cooperation. It is a detailed account of the initiatives, led by the IMF, to address imbalances prior to the 2008 global financial crisis.

The paper is based on interviews with scores of policy makers who were involved in the initiatives, and on thousands of pages of confidential documents that have never been disclosed. It focuses on two undertakings. The first is the Fund’s 2007 decision to strengthen its surveillance of exchange rates, which was aimed at prodding countries — China being the most prominent example — to take action when their currencies were seriously under- or overvalued. The second is the multilateral consultations, in which the IMF convened representatives of five major economies to discuss plans for shrinking imbalances.

Download the full paper at CIGI »

Authors

Paul Blustein

Publication: CIGI

Image Source: Kim Kyung Hoon / Reuters

Last Year's Tragedy Failed to Rouse Japan from Its Stagnation

Paul Blustein — Mon, 12 Mar 2012 14:04:00 -0400

At 2:46 p.m. this Sunday, March 11, my family and I will join millions of Japanese standing silently, perhaps at a Buddhist temple or a Shinto shrine. With heads bowed, we will remember the events of one year earlier, when our house swayed for nearly three minutes, the power died, and, in the Tohoku region a couple of hundred miles north, waves engulfed entire towns and two nuclear plants. We’ll relive the sorrow over the 19,000 lives lost in the Great East Japan Disaster, as the 9.0-magnitude earthquake and tsunami are known here.

It is all the more dispiriting, on this somber occasion, to contemplate how little the country’s prospects have changed. The disaster should have roused Japan from its lethargy once and for all. Instead, the nation’s malaise is back with a vengeance.

The Japanese have survived countless earthquakes and tsunamis, and built a spectacularly advanced economy atop the ashes of military defeat, giving them a reputation for rebounding from catastrophe. “In the past 20 years, never have I been more sanguine about prospects for Japan’s rebirth,” Yoichi Funabashi, one of the country’s leading journalists, wrote in a book of essays published shortly after the quake. But Funabashi also warned that the disaster had exacerbated Japan’s vulnerabilities. “Our choice,” he wrote, “is rebirth or ruin.”

If Japan were responding as it ought to, its economy would be poised to emerge from stagnation, spurred by the need to rebuild. And the national trauma would be inspiring politicians to overcome differences on issues vital to the future of the world’s fastest-aging society. But at the disaster’s first anniversary, Japan is floundering.

At first, Japan’s reaction was characteristically gritty. The anguish besetting the people of Tohoku — and the stoicism with which they bore it — generated an outpouring of compassion, support and national pride, encapsulated in the word kizuna, meaning “bonds,” which became a national catchphrase. Thus, when the government imposed rolling power outages, so much voluntary, round-the-clock energy saving occurred — with people donning extra clothing amid the cold — that the outages soon proved unnecessary.

That spirit has faded, however, as divisions have erupted over nuclear power. The national discussion of the country’s reliance on atomic energy has degenerated into farce as many people have become increasingly — and irrationally — preoccupied with how radiation from the crippled Fukushima Daiichipower plant might affect them. Large segments of the population are so petrified, and so militant in their fear, that most local governments outside Tohoku are refusing to accept for burial some of the millions of tons of rubble left by the tsunami. (And I’m talking about the remnants of smashed buildings and vehicles in other prefectures, not junk from the nuclear plant’s vicinity.)

In a town near where I live, officials rejected the debris, saying that even if the radiation emissions were zero, local farmers and fishermen might suffer from huu hyou higai — financial losses due to baseless rumors — just as many Tohoku producers are already. So much for kizuna.

Of Japan’s 54 atomic reactors — which previously supplied about 30 percent of the nation’s power — all but two are shut down, mostly for maintenance and safety checks, and many local authorities are balking at plans to restart plants in their jurisdictions. Although the government is scrambling to devise plans for boosting investment in renewable energy, such efforts will take decades. Amid steep increases in electricity bills, and uncertainty about the reliability of power supplies in general, the nation’s corporate giants — including Sumitomo Electric Industries, Mitsui Mining and Smelting, and the popular social networking service Gree — are warning that they will be forced to shift more operations abroad.

The hysteria about radiation reflects a breakdown in trust, as witnessed by endless media accounts quoting people who doubt the government’s monitoring of food and soil. This is lamentable; although officials disingenuously played down the possibility of a much worse accident at Fukushima Daiichi in the first days after the quake, reputable experts affirm the government’s major claim: that health risks are minuscule except in areas very close to the plant.

The public’s growing skepticism of authority is arousing more citizen involvement in politics, which could prove positive in the long run. But it increases the chances that imprudent ideas — such as mothballing all those nuclear plants — will prevail. Meanwhile, more serious political and economic problems are left to fester.

Tokyo’s political class, which was eager to appear unified after the disaster, is consumed anew with score-settling and power maneuvers of the sort that have given the country six prime ministers in the past five years. The upshot is a lengthy stalemate over the measures necessary to put Japan on sound long-term economic footing.

Prime Minister Yoshihiko Noda has proposed doubling the 5 percent consumption tax, an increase that would take effect only after several years so the economy could first gain strength. But the main opposition party, which favored a similar idea when in power, is refusing to help enact any such measure, insisting that elections should be held first. In the past few days, Noda and opposition leaders have hinted that they may be forging a compromise, but embittered rivals in Noda’s party are complaining that the tax hike is ill-timed and are threatening to break up the ruling coalition.

In contrast to the hapless situation in Tokyo are heartening scenes in Tohoku of life returning to some semblance of normalcy, though the region still faces staggering obstacles, with many of its younger residents moving elsewhere in search of jobs. Shelters that once accommodated half a million people are now closed; many of their former residents are living in temporary, government-provided housing. In coastal towns once inundated with seawater, vehicles traverse repaired roads, and shops have reopened.

Regardless of how such localities fare, however, their fortunes are only a small part of the effort needed to revitalize a national economy that was facing massive challenges long before March 11, 2011. Unfortunately, the disaster has heightened the most daunting problems. Reconstruction costs will swell the government’s $12 trillion debt, which stood at 212 percent of gross domestic product last year (compared with 165 percent for Greece and 128 percent for Italy). By 2013, as reconstruction spending kicks in, the debt burden in Japan will reach 227 percent of GDP, according to the Organization for Economic Cooperation and Development.

Japan has numerous strengths that crisis-plagued euro-zone countries do not, notably control over its currency and a vast pool of local savings from which to borrow. Still, Tokyo is not immune to a cataclysmic debt crisis. A failure to rein in future deficits could lead bond investors to lose confidence in Japan’s creditworthiness, plunging the economy into much worse trouble.

That’s where the need for revving Japan’s economic engine comes in. Although supercharged growth rates like those of the 1970s and ’80s are no longer conceivable, the nation’s vaunted living standards will be at serious risk if the economy keeps turning sluggish, as it has all too often.

The best way for a country to keep its debt-to-GDP ratio in check, after all, is to increase GDP rather than rely too much on austerity. And an even more compelling reason for Japan to improve its economic performance is its demographic problem: In just a couple of decades, a much smaller workforce will be supporting a ballooning number of elderly people. Without vastly greater resources in government and private hands, Japan won’t be able to adequately care for seniors while also preserving its enviable infrastructure, health system and lifestyle. The only way to generate those resources at a time when the workforce is dwindling is to make the economy more productive and efficient.

Good ideas abound for restoring Japan’s dynamism, such as creating more employment opportunities for women, all too many of whom stay out of the workforce because of poor promotion chances and a lack of affordable day care. But new economic pitfalls also loom as a result of last March’s disaster — in particular the danger that the nuclear crisis will spawn additional energy shortages, further subverting growth.

Few of the world’s peoples, if any, are as resourceful and concerned about the welfare of their compatriots as the Japanese. Perhaps it’s just a matter of time before they and their leaders put the country on a more promising path. After last year’s catastrophe, my admiration and affection for this country deepened to the point where I could happily envision my half-Japanese sons choosing to settle here. I just wish I felt confident that Japan will offer them, and the rest of their generation, the kind of prospects that would make that choice attractive.

Authors

Paul Blustein

Publication: The Washington Post

Image Source: © KYODO Kyodo / Reuters

Immoral Hazard

Paul Blustein — Fri, 20 May 2011 00:00:00 -0400

Ever since International Monetary Fund managing director Dominique Strauss-Kahn's arrest last weekend, eye-popping developments have come fast and furious — most memorably the "perp walk" the Frenchman took to face prosecutors' accusations that he sexually assaulted a hotel maid.

Now comes a spectacle that is appalling in a different way: a power grab by officials of the European Union who are insisting that they must retain their prerogative to name one of their own as Strauss-Kahn's successor at the IMF.

The Europeans will probably get their way. If so, that will be a travesty.

The chorus began to emanate from continental capitals even before the IMF chief had a chance to acquaint himself with the unpleasantries of Rikers Island. According to top policymakers in Brussels, Berlin, and elsewhere in Europe, it is necessary to continue — at least for a while longer — the "understanding" about the management of the Fund that has existed ever since its creation in the 1940s, namely that its head will be a European.

Read the full article on ForeignPolicy.com »

Authors

Paul Blustein

Publication: ForeignPolicy.com

Image Source: © Alfred Cheng Jin / Reuters

Why I’m Not Fleeing Japan

Paul Blustein — Thu, 17 Mar 2011 00:00:00 -0400

To get some perspective on the earthquake that struck the country to which I moved last year, I hiked a mile and a half Wednesday morning from our house to the Great Buddha of Kamakura, the most famous attraction of this town on the southwest outskirts of Tokyo.

Serenity washes over me every time I gaze at the 44-foot, 13th-century bronze statue. I’m not spiritual, much less a Buddhist. But I went to confirm, with my own eyes, that the Buddha looks the same as usual — that he wasn’t, say, glowing because of deadly rays emitting from the crippled nuclear plants 200 miles to the north.

Silly? Of course. Not much sillier, though, than many of the reactions I’ve seen or read about in the past couple of days: the hordes of expats shelling out thousands for flights out of the country; authorities in China, South Korea, Singapore and elsewhere screening Japanese food imports for radioactivity; folks in the States clamoring for potassium iodide pills to protect them against atomic particles wafting across the Pacific. I’ve been deluged with messages from loved ones, wondering whether we’re planning to evacuate. Yet while the concern has been touching, we’re staying put.

Particularly because we don’t live in the immediate vicinity of the nuclear plants, we’re confident that we’re as safe here as always — which is to say, extremely safe, the kind of safe that makes us comfortable sending our fourth-grader on a long train and bus commute to school, a fairly common routine here even for much younger children. Aftershocks, power outages, panic food-buying, long gasoline lines — this, too, will pass, and it’s hard to pity ourselves much given the misery that people along Japan’s northeast coast have endured since March 11.

If there is anything to worry about, it is that the perception of Japan as an unsafe country will inflict all kinds of economic and psychological damage. That would compound the tragedy it is enduring, hamper its ability to recover and elevate the challenges it faces just when it is most in need of support.

Read the full piece at washingtonpost.com »

Authors

Paul Blustein

Publication: WashingtonPost.com

Recovery or Relapse: The Role of the G-20 in the Global Economy

Fri, 18 Jun 2010 13:48:00 -0400

On June 26, heads of state and government of the Group of 20 (G-20) will meet in Toronto, which is the fourth time they will convene since the start of the global economic crisis. At last September’s G-20 Summit in Pittsburgh, leaders seemed cautious yet fairly optimistic and confident that the worst of the crisis was behind them and that the world economy was on the path toward recovery. During Pittsburgh, leaders focused on the global coordinated actions needed to ensure a full economic recovery that would deliver sustainable, long-term and balanced global growth.

However, before the economic recovery could be fully entrenched, the global economy was hit with yet another setback in the form of the European debt crisis. Therefore, almost a year later, the question still remains: is the world economy really recovering? Or are we beginning to see a relapse?

Experts from the Brookings Global Economy and Development program examine this question, analyze the current economic climate, and provide recommendations on how the G-20 should continue to serve as the “premier forum for international economic cooperation.”

Download the full report » (PDF)

Articles

Back From the Brink, but a Tough Road Still Ahead for the G-20 » (PDF)
Eswar Prasad takes the pulse of the world economy and tracks the recovery in G-20 economies by looking at a set of real economy, financial and confidence indicators. He discusses the critical policies and reforms that G-20 leaders must take into consideration in Toronto in order to put the world economy back on track toward balanced, robust and sustainable growth.

The G-20 Summit Assesses the European Crisis: Finding the Way From Toronto » (PDF)
Domenico Lombardi assesses how the ongoing European debt crisis will impact the agenda and discussions in Toronto. He argues that the European Union—the largest economy in the world—lacks the institutional framework needed to manage the first serious crisis since its post-World War II establishment. Lombardi also discusses what the G-20 can and cannot do to help Europe deal with its debt crisis.

It’s Time to Drop the G8 » (PDF)
Colin Bradford and Johannes Linn analyze the changing role of the G8 with the rise of the G-20. They argue that the G8 has lost its legitimacy and effectiveness due to its reduced relative weight in the world economy and the growing set of complex global challenges that require greater coordination from a diverse group of countries. They advise allowing the G-20 to break the pre-formed, traditional alliances in order to engage in a more fluid and flexible process of discussion, negotiation and bargaining.

Passing the Development Football From the G8 to the G-20 » (PDF)
Homi Kharas examines what role the G-20 should play in international development vis-à-vis the G8. He argues that while the G8 deserves credit for achieving some positive impacts on development aid and debt relief, the G-20 can and should provide a more comprehensive view of development; one that includes issues like growth, employment, investment and private sector development and that affects a more diverse group of emerging and developing economies.

It’s Time for Africa’s Voice in the G-20 » (PDF)
Ezra Suruma discusses Africa’s lack of representation in the G-20 despite having Ethiopian and South African leaders participate in the meetings in Toronto. Suruma urges the G-20 and other international forums and institutions to respond to Africa’s quest for inclusion and to increase Africa’s voice of nearly one billion people in the global discussions of world economic affairs, which certainly impact the future of Africa’s growth and development.

G-20 Leadership Lacking on the Doha Round » (PDF)
Paul Blustein evaluates how the G-20 has delivered so far on the Doha Round of global trade negotiations. He argues that although G-20 leaders have continued to pledge to refrain from using protectionist measures such as raising new barriers to international trade and investment, they have done little to seek an ambitious and balanced conclusion to the Doha Development Round in 2010.

Downloads

Download Full Report - English

R.I.P., WTO

Paul Blustein — Wed, 13 Jan 2010 00:00:00 -0500

Editor's Note: After eight painful years of standstill and failure, the Doha talks might collapse once and for all in 2010. In an article in Foreign Policy magazine, Paul Blustein discusses the critical link between the World Trade Organization and Doha, and how this collapse could mark the death of the global trade system as we know it.

Someday historians may look back on 2010 as the year the global trade system died -- or contracted a terminal illness. A pledge by world leaders to complete the Doha round of global trade negotiations this year looks increasingly likely to end in yet another flop, and that would deal a crushing blow to the trade system as we know it.

Of course, commerce will continue across national borders, and one-off deals between countries will still happen. But the slow-but-steady, across-the-board opening of markets that has fueled growth for decades is grinding to a halt. After eight painful years of standstill and failure, with each meeting just a shoveling of intractable problems forward to the next, the Doha talks might collapse once and for all in 2010, possibly taking the World Trade Organization (WTO) down in the process.

Yes, negotiators could once again defer the day of reckoning by setting a new deadline and resolving to try again later -- just as they've already done in Cancún, Geneva (three times), Hong Kong, and Potsdam. But they're running out of chances. No less an authority than Stuart Harbinson, the former WTO General Council chairman who played a key role in the round's launch in 2001, wrote recently: "This time ... the crisis is real. Too many deadlines have come and gone and the WTO simply cannot afford a repeat. The fundamental credibility of the institution is now at stake ... 2010 is a real deadline."

That's dangerous, because for all its failings, the WTO is a rare international organization that works as intended. The Geneva-based trade group is the current embodiment of the system established after World War II to prevent a reversion to 1930s-style protectionism and trade wars. Its rules keep a lid on its member countries' import barriers, and members take their trade disputes to WTO tribunals rather than imposing tit-for-tat sanctions on each other's goods. In addition, the WTO is the guardian of the most-favored-nation principle, which requires members to treat each other's products in a nondiscriminatory fashion -- a valuable bulwark against the sorts of trade blocs that can lead to friction or even military conflict.

If Doha falls apart, the WTO's ability to continue performing its vital functions would be imperiled. If it can't forge new agreements, how long before it loses its authority to arbitrate disputes? The trade body won't disintegrate overnight, but the danger is that its tribunals will be weakened to the point where member countries start ignoring WTO rulings and flouting their commitments.

Without negotiated settlements of contentious issues, litigation will almost surely spread like wildfire -- a potentially explosive situation. On climate change, for example, some in the United States and Europe want to impose "green tariffs" on goods from countries that aren't reducing their carbon emissions fast enough (read: China and India). In the absence of clear rules, China and India would have plenty of leeway to challenge such tariffs, putting WTO tribunals in the terribly awkward position of having to decide: Are such tariffs illegal, meaning that free trade trumps saving the planet? Or, if the tariffs are legal, should the Chinese and Indians have the right to slap duties on goods from Western countries, which they blame for creating the global warming problem in the first place?

Sadly, even in a best-case scenario for 2010, with Doha ending in a deal, the global trading regime might still be doomed. The round's initial goals -- making globalization work for the billions left behind by eliminating the farm subsidies and tariffs that adversely affect the world's poor -- have become so laughably implausible that completing what's left of an agreement will prompt a painful reckoning. The deal on the table has been so watered down by negotiations that it cannot be credibly said to work wonders for the poor, or even effect much change in how global trade takes place. The gap between the result and the initial aspirations will prompt legitimate questions about why so much time was required and whether the WTO has any future as a negotiating forum.

What an irony that would be for President Barack Obama. Despite making multilateralism a keystone of his foreign policy, he may preside over the marginalization of the most successful multilateral institution of all.

Authors

Paul Blustein

Publication: Foreign Policy Magazine

Could the WTO Better Serve the Poor?

Mon, 09 Nov 2009 10:30:00 -0500

Event Information

November 9, 2009
10:30 AM - 12:00 PM EST

Falk Auditorium
The Brookings Institution
1775 Massachusetts Ave., NW
Washington, DC

While many developed countries reap the rewards of increased globalization and trade, the developing world struggles to improve its economic status through these foreign markets. Poor countries look to the World Trade Organization to supervise international commercial trading, yet its dispute settlement system disproportionately benefits wealthy nations.

On November 9, Global Economy and Development at Brookings held a discussion on recent efforts and suggested proposals to help developing countries overcome hurdles imposed by the WTO, featuring Chad P. Bown, author of Self-Enforcing Trade: Developing Countries and WTO Dispute Settlement (Brookings Press, 2009). Panelists included Kimberly Ann Elliott from the Center for Global Development; Gawain Kripke from Oxfam America; and James Durling from Winston & Strawn LLP. Paul Blustein, a Brookings nonresident journalist, provided introductory remarks and moderated the discussion.

Participants

Moderator

Panelists

Chad P. Bown

Nonresident Fellow, Global Economy and Development
Senior Economist, The World Bank

James P. Durling

Partner, Winston & Strawn LLP

Kimberly Ann Elliott

Senior Fellow, Center for Global Development

Gawain Kripke

Director, Policy & Research, Oxfam America

G-20 Should Be Pragmatic About Protectionism

Paul Blustein — Mon, 30 Mar 2009 12:00:00 -0400

Telling young people to abstain from sex is “not realistic at all” — new mother Bristol Palin, 18.

The wisdom of Ms. Palin should be borne in mind by the leaders of the Group of 20 nations at their April 2 summit when they turn to trade.

The meeting comes at a time when worries about protectionism are mounting, because a number of countries have raised trade barriers and enacted other quasi-protectionist measures.

It is tempting to say, as many commentators have, that the G20 should vow to shun all new acts of protectionism, including any tariff-raising or more subtle actions such as “buy local” provisions in government stimulus programs. Unfortunately, such blanket pledges will be no more credible than teenage abstinence campaigns. The G20 must be ambitious on trade, but it must also be practical. Minimizing long-term damage to the trading system should be the overarching goal.

The G20’s effort on trade at its first summit last November was loaded with high-mindedness—and, as it turned out, hot air. The leaders said they would “strive to reach agreement” in 2008 in the World Trade Organization’s Doha Round of trade negotiations, which have dragged on for seven years. And they promised to “refrain from raising new barriers” for 12 months.

Alas, violations of both the spirit and letter of the declaration materialized within days of its promulgation.

An effort to convene a meeting to advance the Doha talks fell apart. Meanwhile, Russia raised duties on cars, pork and poultry; India raised tariffs on steel products; Indonesia imposed onerous customs requirements on certain imports. The U.S. Congress included a “Buy American” provision in its economic stimulus package, and Washington has started to bail out the U.S. auto industry, which helps domestic firms at the expense of foreign ones. Other nations are following suit.

As a result, proposals abound for the G20 to approve not only a “standstill” on all tariff hikes but a ban on buy-local preferences and subsidies that favor national producers. Also widespread are exhortations for the G20 to take a “just do it” stance on the Doha Round.

Desirable though it would be to see such an approach endorsed and implemented, the G20 needs to guard against another blow to its credibility. Let’s face some lamentable facts: Auto industries are going to be bailed out, and in an discriminatory fashion. (Congress simply isn’t going to grant loans to Toyota, even though Toyota has large plants in the U.S.) Anti-dumping cases are going to soar. More righteous verbiage from heads of state will do nothing to close gaps in the Doha talks.

So the principles guiding the G20 should be these: Make sure that the rules-based trading system survives. Don’t try now to open markets further; rather, focus on keeping protectionism, and quasi-protectionism, from becoming long-lasting features of the international economy, so that globalized trade can help the world recover and prosper anew. To the extent that anti-market policies are adopted, keep them temporary and limited in scope.

This means first of all shoring up the WTO, which is the ultimate guardian of open markets. The WTO keeps a lid on tariffs of its 153 member countries and adjudicates trade disputes that might otherwise flare into trade wars.

Specifically, the G20 should recast the Doha talks as an emergency anti-protectionism round. The partial deal that is currently on the table, though not at all far-reaching, would lower the legal caps on tariffs that many countries can impose. Adopting a package like that, while postponing action on other, more contentious issues, would help toward insuring against protectionism in the years ahead.

Originally submitted to the Great Debate by Paul Blustein on March 30, 2009.

Authors

Paul Blustein

Publication: The Great Debate - Reuters blog

Restore Global Financial Stability

Fri, 09 Jan 2009 10:30:00 -0500

Event Information

January 9, 2009
10:30 AM - 12:00 PM EST

Falk Auditorium
The Brookings Institution
1775 Massachusetts Ave., NW
Washington, DC

America faces enormous challenges in restoring financial stability, reviving economic growth and dealing with the shifting balance of world economic power. Dealing with these challenges will require some tough actions to tackle domestic policy issues—including financial sector regulation and the fiscal deficit—and a constructive approach toward multilateralism and broader economic engagement with emerging economic powers.

On January 9, Senior Fellow Eswar Prasad will offer a public memo to President-elect Obama with recommendations on how to restore global financial stability, move America's economy forward and usher in a new era of global cooperation. The memo is the ninth of 12 Brookings memos on the most crucial public policy priorities facing the new president.

A distinguished panel will include Prasad, Brookings Nonresident Senior Fellow Colin Bradford and Senior Fellow Barry P. Bosworth. Journalist in Residence Paul Blustein, former staff writer for the Washington Post, will provide introductory remarks and moderate the discussion. After the program, panelists will take audience questions.

Video

Transcript

Transcript (.pdf)

Event Materials

20090109_transition_financial

Participants

Moderator

Panelists

Don't Trade Recession for Depression

Paul Blustein — Sun, 07 Dec 2008 12:00:00 -0500

If the 1930s taught us anything, it was that one way to make a depression "Great" is for countries around the world to go protectionist. The Smoot-Hawley Tariff Act, signed by President Herbert Hoover in 1930, is justifiably notorious for having triggered a disastrous cycle of trade conflict. Among the more insane examples of Depression-era trade policy was the "Egg War" between the United States and Canada, in which the Smoot-Hawley tariff on eggs prompted Ottawa to impose retaliatory duties on American eggs, drying up a once-lucrative source of income for farmers on both sides of the border. So there's no chance that the world will go down the protectionist route again in any serious way, right?

That's what I used to think, until recently. In the 25 years that I've been writing about economics, I've heard -- and scoffed at -- many a Cassandra-like warning that protectionism could soon rear its head. The ghosts of Messrs. Smoot and Hawley have been conjured up so often that they've lost their capacity to frighten us. But now that the breadth and depth of the global slump is coming into focus, I'm not scoffing anymore. Politicians are bound to feel increasing pressure to raise trade barriers, and those old scare stories seem a lot less far-fetched.

All of a sudden, an issue that has barely registered on most Washington radar screens -- the stalemate in global trade talks -- is starting to loom as a serious problem for the already reeling world economy. When negotiations in the Doha Round, as the talks are called, broke down on July 29, the news evoked shrugs, even from trade experts -- and understandably so. This was just the latest in a series of setbacks for the round, which has dragged on for seven years. But here's the catch: The Doha talks could have provided a meaningful insurance policy against protectionism. As the financial turmoil starts to weaken the "real" economies of many countries, the round's failure is starting to look like a calamitous stumble for economic globalization.

The recessions that are now afflicting every major region of the world will make it difficult for governments to resist calls to protect their industries from foreign competition, especially when other countries also seem to be abandoning free-market policies. In the United States, the lure of protectionism will be all the greater because the plunge in many foreign currencies -- from the South Korean won to the Brazilian real to the South African rand -- will make imported products much cheaper in months to come. It's not that President-elect Barack Obama and his advisers are anti-trade; they aren't. But remember, it was President Bush, a supposedly ardent free-trader, who succumbed to demands from the beleaguered steel industry for stiff tariffs in 2002.

The revulsion against unfettered capitalism has been aimed thus far at the system governing flows of money; it is unlikely to spare the system governing the international flow of goods and services. Think the pledge by the leaders of the world's biggest economies at their Nov. 15 Group of 20 summit to refrain from protectionist measures will work? The initial signs aren't promising. No sooner had the leaders left Washington than Russia announced that it was going ahead with plans to raise substantial duties on imports, especially foreign cars. Chinese President Hu Jintao warned a meeting of top Communist Party officials last week that the global financial crisis might tempt other countries to give in to protectionism.

By turning down the Doha deal that was under consideration in July, the members of the World Trade Organization (WTO) passed up a package of measures that could have prevented countries from erecting significantly higher tariffs. The deal was hardly the bonanza for global growth that its boosters claimed; it would have left most existing trade barriers in place. But it did envision a reduction in "bound" tariffs, the legal maximums that countries can impose without incurring sanctions.

Like penitents seeking a last chance at redemption, the G-20 summiteers instructed their trade ministers to go back to the negotiating table and try to complete a detailed blueprint for the Doha Round this year, and WTO Director-General Pascal Lamy may summon those ministers to the trade body's Geneva headquarters next weekend. Their optimism about landing a deal is based on a version of events that gained wide currency after July: that negotiators came tantalizingly close to an agreement on the main elements of the round, and that their failure was attributable almost entirely to discord over one technical matter involving farm tariffs in developing countries.

Unfortunately, a very different picture of that meeting emerges from interviews that I have conducted with a number of key participants. The meeting fell far short of the consensus required by WTO rules for an accord -- and although U.S. officials sought to blame India and China for the failure to cut a deal, American industry and farm groups were profoundly dissatisfied with the accord that was taking shape. (VIew a full account, titled "The Nine-Day Misadventure of the Most Favored Nations".)

Moreover, the plunge in the world economy has immensely complicated the prospects for reaching an agreement. The guts of the deal involve a tradeoff in which the United States and other rich countries agree to cap subsidies and protections for their farmers in exchange for greater assurances of access for their industrial products in developing countries. But the downswing in economic growth and the collapse of commodity prices have drastically stiffened political resistance to the deal in rich and poor nations alike. As a result, the effort to cobble together a deal in the waning weeks of the Bush administration smacks so much of legacy-burnishing by a discredited president that even staunch free-traders are questioning the wisdom of the exercise.

It would be one thing if the meeting contemplated for next weekend could fully conclude the Doha Round and lock in a reduction of bound tariffs. But even if WTO members miraculously agree in the next few days on a deal similar to the one envisioned in July, many months of negotiations would still be required to tie up all the loose ends. And even then, the pact wouldn't be effective unless and until Congress approved it. Would the Obama administration pick up the cudgels for a deal that was bequeathed to it by the Bush administration and that lacks backing from industry and farm groups? I wouldn't count on it.

The Doha Round's travails also pose significant risks to the WTO itself. For all its flaws, the WTO is a crucial linchpin of stability in the global economy. It is the current embodiment of the multilateral trading system that was established after World War II to prevent a reversion to the grim days of the 1930s. The WTO's rules keep a lid on the import barriers of its member countries, and members take their trade disputes to WTO tribunals for adjudication rather than engaging in tit-for-tat trade retaliation. The WTO is also the guardian of the "most favored nation" principle, under which member nations pledge to treat one another's products on a nondiscriminatory basis -- a valuable bulwark against trade blocs of the sort that stoked rivalries among the great powers during the '30s.

The WTO's centrality to the global trading system is already under some doubt, thanks to the proliferation in recent years of bilateral and regional trade agreements. More than 400 of these are currently in force, ranging from the big and well known (such as NAFTA) to the small and ridiculous (such as the Singapore-Jordan free trade agreement). Governments are increasingly tempted to think of these pacts as reasonable substitutes for multilateralism, especially as disillusionment deepens with the WTO's ability to foster new global deals. Although the WTO is not about to disintegrate overnight, its authority might erode to the point that member nations start to flout their commitments and ignore the rulings of WTO tribunals. That would greatly increase the threat of trade wars and hasten a breakdown in the system that has helped keep trade blocs and protectionism at bay.

The complete termination of global trade talks is unthinkable. Nothing of the sort has happened since the '30s. Previous trade rounds had very dark moments, too: The Uruguay Round, which was finalized in 1994, took eight years. One way or another, the Doha Round will get done eventually.

Those sentiments are articles of faith among many trade experts. Experience has taught them that, in the end, the self-interest of the community of nations in preserving the multilateral trading system always prevails. They are probably right. But the risk that they might be proven wrong this time looks uncomfortably high.

Authors

Paul Blustein

Publication: The Washington Post

How the WTO's Doha Round Negotiations Went Awry in July 2008

Paul Blustein — Fri, 05 Dec 2008 12:00:00 -0500

Editor's Note: In a new article, Paul Blustein provides an in-depth account of the collapse of the World Trade Organization’s Doha Round of global trade talks in July 2008, based on interviews with top officials, revealing new insights into what went wrong and what lies ahead for global trade. Blustein is a Journalist in Residence at Brookings and is working on a book on the WTO.

Support for this article was generously provided by the German Marshall Fund of the United States and the Hewlett Foundation.

To those who know him, Pascal Lamy is one of the least likely men on Earth to lose his composure in a room full of people. The 61 year-old Lamy, who is Director-General of the World Trade Organization, is cerebral and almost ascetic in his self-discipline; he runs marathons and sustains himself during periods of stress by eating nothing but bananas and brown bread. A top graduate of France’s elite National School of Administration, he rose to a senior position in the civil service of the European Commission, where he was nicknamed “the Exocet” for his focus on policy and the icy manner in which he enforced his boss’s will on other bureaucrats. He served a term as the European Union’s trade commissioner before winning election to head the WTO in 2005.

But on the afternoon of July 29, Lamy was coming to grips with an enormous personal disappointment as he met with three dozen trade ministers from WTO member countries in the organization’s Geneva headquarters. It was the ninth day of a ministerial meeting, the longest by far in the trade body’s history, which Lamy had convened in hopes of achieving a breakthrough in the Doha Round of global trade talks. Grueling negotiations among a core group of seven powerful members had failed to produce an agreement, and as Lamy presented this news he choked up, stunning the ministers and his subordinates, who had never seen him display such emotion.

“The round has broken down,” Lamy said, according to notes of the meeting. Unable to continue, the Director-General halted to take a sip of water as his sadness permeated the room. Steadying himself, he said that differences on one issue in particular were apparently “irreconcilable,” and he urged the ministers to “please refrain from the blame game.”

Sometimes, the true implications of an event only start to come into focus well afterwards. So it is for last July’s collapse in the Doha talks. At the time, the news evoked many shrugs, even from trade experts—and understandably so, because it was hardly the first setback for the round, which has dragged on for seven years. Memories of the July debacle faded quickly, as upheaval in financial markets seized the world’s attention. Now that the bottom has fallen out of the global economy, who cares anymore that the WTO’s member nations couldn’t strike an agreement four months ago?

But the financial crisis has greatly magnified the import of that failure. As the turmoil starts to weaken the “real” economies of many countries, the WTO’s July meeting can be seen, in retrospect, as a potentially calamitous stumble for economic globalization.

The specter of widespread protectionism, which seemed almost laughably remote in recent years, suddenly looms as a much more serious threat. Up to now, it has been easy to dismiss worries that the world might descend into trade wars like those of the 1930s, when America’s Smoot-Hawley tariff triggered a disastrous cycle of retaliation and counter-retaliation. Those fears look a lot less far-fetched now that recessionary forces are spreading to every major region of the world. The resultant rise in unemployment and bankruptcy is bound to generate intense pressure on politicians to raise trade barriers. In the United States, such pressures will be all the greater because the plunge in many foreign currencies—from the Korean won to the Brazilian real to the South African rand—will make imported products much cheaper.

The groundswell of revulsion against unfettered capitalism so far has been aimed at the system governing flows of money; it is unlikely to spare the system governing the international flow of goods and services. The recent Group of 20 summit pledged to refrain from enacting protectionist measures, but initial signs underscore the flimsiness of that commitment. No sooner had the leaders left Washington than Russia announced it was going ahead with plans to raise substantial duties on imports, especially foreign cars.

By turning down the deal that was under consideration in July, WTO members passed up the opportunity for a meaningful insurance policy against protectionism. The package of measures, though hardly the bonanza for global growth that its boosters often claimed, could have prevented countries from erecting significantly higher tariffs. Meanwhile, the precipitous change in the economic climate has dimmed prospects for a Doha accord anytime soon, because as economies slump, political resistance will stiffen against the dismantling of trade barriers and subsidies. For the long-run health of the multilateral trading system, the ultimate safekeeper of open world markets, the implications are ominous.

This article provides an in-depth account of the July meeting, based on interviews with top-ranking participants from major countries, WTO officials, and other attendees, a number of whom furnished extensive notes that they took of the most important sessions. It is a tale that shows multilateralism both at its most high-minded and at its most dysfunctional—the low points including a tantrum by Japan’s trade minister and an F-word-laden outburst aimed at Lamy by Susan Schwab, the U.S. Trade Representative. More importantly, it sheds new light on what went wrong in Geneva—and how far wrong things went.

Exploring these events is crucial, partly to hold officials and their governments properly accountable for their roles, but also to assess the prospects for reviving the Doha Round. Like penitents seeking redemption, the G-20 summiteers instructed their trade ministers to return to the negotiating table with the aim of completing a detailed blueprint for the Doha Round this year, and Lamy may summon ministers to Geneva again in mid-December. This decision came after a number of leaders, among them President Bush, expressed their eagerness to try again at achieving what the July meeting couldn’t, even before the end of Bush’s term. Their optimism is based on a version of events that gained wide currency after July, namely that negotiators came tantalizingly close to striking a deal on the main elements of the round, and that their failure was attributable almost entirely to discord over one technical matter, which involved poor countries’ rights to raise emergency tariffs when their farmers are deluged by imports.

Unfortunately, from the interviews with insiders, a very different picture emerges—that of a meeting that fell far short of the consensus required by WTO rules for an accord. It is true that at one stage, hope soared that WTO members might converge around a compromise sketched out by Lamy. But despite initial support for the package from Schwab, powerful U.S. farm and industrial groups were profoundly dissatisfied with it, as were leading members of Congress. The U.S. team, anxious to ascribe fault to others, accused China of “walking away” from the deal after having first accepted it—but the Americans were the ones who could most accurately be described as abandoning it. Opposition from India, meanwhile, was if anything even more vehement than previous accounts have suggested.

All this bodes very poorly for completing the Doha Round in its present form. Beyond the foregone benefits, the round’s travails pose significant risks to the WTO itself.

For all its flaws, the WTO is a crucial lynchpin of stability in the global economy. It is the current embodiment of the multilateral trading system that was established after World War II to prevent a reversion to the thirties. The WTO’s rules keep a lid on the import barriers of its 153 member countries, and members take their trade disputes to WTO tribunals for adjudication rather than engaging in tit-for-tat retaliation. That keeps trade wars from erupting, just as any rule-of-law system helps contain tendencies toward the law of the jungle. In addition, the WTO is the guardian of the “most favored nation” principle, under which member nations pledge to treat each other’s products on a nondiscriminatory basis—a valuable bulwark against trade blocs of the sort that, during the thirties, stoked rivalries among the great powers.

The WTO’s centrality to the global trading system is already under some doubt, thanks to the proliferation in recent years of bilateral and regional trade agreements. More than 400 of these are currently in force, ranging from the big and well-known such as NAFTA, to the small and ridiculous such as the Singapore-Jordan free trade agreement. Governments are increasingly tempted to think of these pacts as reasonable substitutes for multilateralism, especially as disillusionment deepens with the WTO’s ability to foster new deals. Although the WTO is not about to disintegrate overnight, the danger is that its authority will erode to the point that member nations will start to flout their commitments and ignore the rulings of WTO tribunals. That would greatly increase the threat of trade wars and a breakdown in the system that has helped keep trade blocs and protectionism at bay.

The policymakers who gathered in Geneva in July were well-versed in long-term worries about the trading system; indeed, many voiced them. Such weighty concerns, however, will only take trade ministers so far when they have vital domestic political interests at stake.

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Paul Blustein

Trade and the G-20 Financial Summit: Next Steps for the Doha Round?

Paul Blustein — Mon, 17 Nov 2008 12:00:00 -0500

Buried in all the dense language of the G-20 communique is a very important statement concerning a matter that has gotten relatively little public attention during the financial crisis—trade. In paragraph 13, the leaders pledge to refrain—for 12 months, at least—from raising new barriers to investment or trade, or to imposing new export restrictions. That's a reassuring signal at a time when the spread of recessionary forces around the globe is raising the specter of protectionism, which could easily make an already-deep slump even worse. So it's helpful that the G-20 leaders are putting themselves on the record as promising that individually, they won't succumb to the temptation to wall off imports. Of course, since the recession is only now building strength, the leaders haven't yet felt the full force of the pressures they're likely to face to protect individual industries from foreign competition. It will be very interesting to see how firmly this pledge is adhered to.

To show they mean business, the leaders also make another, very ambitious statement, by saying that they "shall strive" to reach an agreement this year in the Doha Round concerning the formulas for cutting tariffs and subsidies for manufactured and agricultural goods, and adding that they "instruct [their] trade ministers to achieve this objective." This could mean another major meeting of trade ministers will convene in December, just four and a half months after a similar meeting ended in collapse in late July.

The question is, why do these policymakers think they'll succeed now when they couldn't do so before, even after nine days of very arduous negotiations? The agreement that was on the table then could have provided a very important insurance policy against protectionism, by lowering the "bound" tariffs (that is, the legal maximum duties) that countries are allowed to impose on goods. So approving such a deal now could help enormously in cementing the leaders' commitment to maintaining openness. But I'm very skeptical that this will come to pass.

The claims that trade ministers were "very close" to a deal at their July meeting is, frankly, exaggerated. And the negotiations that have taken place in Geneva since then have made pathetically little progress; in some ways they've gone backwards. True, the economic crisis may help spur governments toward compromise—the Doha Round, after all, was conceived in crisis in the weeks after the 9/11 attacks. But with a new administration coming to power in the United States, it's going to be extra difficult for other nations to make concessions when they can't be sure the new president and his trade representative, or the Congress, will accept the overall deal.

We could be setting ourselves up for another big disappointment in December, and in that case, the G-20's words on this topic will be exposed as empty rhetoric. Let's hope they know what they're doing.

Authors

Paul Blustein

Trade Pacts Run Amok

Paul Blustein — Wed, 20 Aug 2008 12:00:00 -0400

Editor’s summary: Free trade agreements (FTAs) are more trouble than they’re worth, Paul Blustein, Journalist-in-Resident in Global Economy and Development, argues in a recent World Policy Journal publication, questioning the impact of FTAs and the motivations behind them. While some newspaper editorials call the U.S.-Colombia trade agreement a “no brainer,” Blustein contends bilateral and regional trade arrangements are not the best ways to promote trade liberalization. Referring to FTAs as PTAs (preferential trade agreements), Blustein warns that the profusion of PTAs erodes the credibility of the World Trade Organization, thereby greatly increasing the threat of trade wars and a breakdown in the stability of the system that has helped to keep trade blocs and protectionism at bay.

Introduction

Free trade agreements are supposed to be great ways to deepen friendships with U.S. allies. Alas, the theory doesn’t seem to be working very well in the case of Colombia. Therein lies a larger lesson about the pitfalls of trade deals between individual countries.

A battle royale is underway in Congress over the U.S.-Colombia trade agreement, and Colombian leaders are in high dudgeon over the prospect that the pact may be the first such deal to get voted down on Capitol Hill. Emblematic of the accord’s potential for souring relations between the two countries was the spectacle this April when Mark Penn, Senator Hillary Clinton’s presidential campaign strategist, had to quit after the revelation that he met with the Colombian ambassador in his capacity as president of a public relations firm. His description of the meeting as an “error in judgment” did not go over well in Bogota; the government terminated its contract with his firm, citing a “lack of respect to Colombians.” Although the recent rescue of hostages held by Colombian rebels has helped improve U.S.-Colombian ties, the atmosphere appears likely to deteriorate anew as the trade agreement languishes in Congress. Maybe this time, we’ll finally learn that trade deals of this ilk can be a lot more trouble than they’re worth. The Colombia contretemps is the latest sign that the Bush administration’s policy of avidly pursuing bilateral agreements is prone to serious backfiring.

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Authors

Paul Blustein

Publication: World Policy Journal, Volume 23, Issue 2

Doha Trade Talks Collapse: What’s Next for Global Trade?

Paul Blustein — Wed, 20 Aug 2008 12:00:00 -0400

If ever there was an appropriate time for a trade official to choke up in public, Susan Schwab, the U.S. Trade Representative, chose it well on July 29 at the World Trade Organization’s Geneva headquarters. It was the ninth day of a negotiating marathon to secure an agreement in the Doha Round of global trade talks. All day, rumors of a breakdown had swirled. At about 5:30, word reached us in the press room that an announcement was imminent, so reporters swarmed at the foot of the lobby staircase. Finally Schwab descended the steps, showing little of her customary steeliness.

“We were so close,” she said tremulously, then paused, struggling to regain her composure. Describing the outcome as “very disappointing,” she confirmed that a deal under consideration “is not going to carry the day.” She blurted a few sentences about the United States’ commitment to exercising leadership on trade, then turned and walked back upstairs.

A few minutes later, after newswires had flashed bulletins reporting the collapse of the Doha talks, I checked the stock market. After all, this meeting of the WTO’s 153 member nations had been accompanied by plenty of warnings about how good news on the global trade front was desperately needed at a time of financial turbulence. To my amusement, the Dow Jones was up 210 points—and rising.

What a disconnect! Was this event worthy of tears—or a shrug? Was it momentous, so much so that a veteran trade policymaker might feel emotionally overwhelmed? Or was it just a lost opportunity to make the world a bit better, so that investors could justifiably dismiss it?

Both responses were apt. Wall Street is notoriously short-term oriented, and investors rightly see little chance that this setback in the WTO negotiations will have much impact on global commerce during the time horizon that they care about.

Trade has been expanding robustly for the past decade, and all signs suggest it will continue to do so in the next few years. A Doha pact wouldn’t have reduced current trade barriers by much; the deal on the table would have mainly required member countries to lower their “bound” tariffs—that is, the legal maximums—to levels that are still above the “applied,” or actual rates. This is not to say that the deal was devoid of substance; a reduction in bound tariffs would have been highly desirable, by constraining the ability of governments to raise barriers in the future. But that is hardly the sort of thing that causes heart palpitations on Wall Street.

The serious ramifications of the events of July 29 are long-term—and this is why I think the quaver in Susan Schwab’s voice that day was warranted.

The breakdown in Geneva was the third that in the past three years for the Doha Round, which was launched in 2001 with the aim of reducing tariffs and subsidies, especially those that harm developing countries. This has raised uncomfortable questions about the WTO’s ability to continue as the central rule-writer of global trade. That in turn raises the risk that the WTO’s authority will undergo a significant erosion in years to come.

For all its flaws, the WTO is a crucial lynchpin of stability in the global economy. It is the current embodiment of the multilateral system that was established after World War II to prevent a relapse to the 1930s, when protectionism and exclusive trade blocs deepened the Great Depression and intensified rivalries among the great powers.

The WTO’s rules keep a lid on member countries’ import barriers, and by adjudicating trade disputes among nations, the WTO helps keep those disputes from flaring into tit-for-tat trade wars. In addition to its dispute-settlement function, the WTO is the guardian of the “most favored nation” principle, under which member nations are supposed to treat each other’s products on a non-discriminatory basis. Although this principle has often been breached, it is still a valuable bulwark against trade blocs.

The WTO’s centrality to the global trading system is already under some doubt, thanks to the proliferation in recent years of bilateral and regional trade agreements. More than 200 of these accords are currently in force. These range from the big and consequential—NAFTA being one—to the minuscule and absurd, such as Singapore’s deal with Jordan, and Thailand’s with Bahrain. The Bush administration fueled this trend by forging deals with Australia, Morocco, Oman, Central American countries and other partners.

The upshot is a sort of double whammy for the WTO. Disillusionment with its ability to set the rules of global trade is on the rise because of the repeated fiascos in the Doha talks. At the same time, the profusion of bilaterals tempts politicians to think of those deals as reasonable substitutes for multilateralism. Although the WTO is in no danger of disintegrating overnight, the danger is that its authority will atrophy to the point that member nations will start to flout their commitments and ignore the rulings of WTO tribunals. That would greatly increase the threat of trade wars and a breakdown in the system that has helped keep trade blocs and protectionism at bay.

The heightened risk of such a scenario demands action aimed at shoring up the multilateral system’s health.

Having imparted so much momentum to bilateralism and regionalism, the United States should now exercise leadership in the hope of bringing this trend to a halt. The next president should renounce intentions to pursue further bilateral or regional pacts and declare that henceforth Washington will pursue trade deals only under WTO auspices—whether these are big conventional trade rounds or more limited agreements involving individual sectors such as services. Regrettably, the response from some policymakers and commentators has been precisely the opposite. These knee-jerk free traders are calling for more bilateral trade deals, on the grounds that liberalization is stalled on the multilateral front. Although this approach might have been understandable in 1948, when trade barriers were still very high, it is short-sighted in 2008, when the liberalization process is 60 years old and the multilateral system is imperiled.

As for the Doha Round, the next president could propose expanding its agenda to include new challenges, including the food crisis and global warming change (which the WTO must confront soon, because an effective global deal on climate change would probably involve trade sanctions). That would breathe new life into a system that is sadly underappreciated for its role in keeping bad things from happening.

Authors

Paul Blustein

Showdown on U.S.-Colombia FTA

Paul Blustein — Wed, 09 Apr 2008 12:00:00 -0400

Free trade agreements are supposed to be great ways to deepen friendships with U.S. allies. Alas, the theory doesn’t seem to be working very well in the case of Colombia.

A battle royale is underway in Congress over the U.S.-Colombia free trade agreement, and Colombian leaders are spitting mad that the pact may be the first such deal to get voted down on Capitol Hill. Then there’s the spectacle surrounding Mark Penn, Senator Hillary Clinton’s former campaign strategist, who had to quit after the revelation that he met with the Colombian ambassador in his capacity as president of a public relations firm. His description of the meeting as an “error in judgment” did not go over well in Bogota; the government terminated its contract with his firm, citing a “lack of respect to Colombians.”

Maybe this time, we’ll finally learn that trade deals of this ilk can be a lot more trouble than they’re worth. The Colombia contretemps is the latest sign that the Bush administration’s policy of avidly pursuing such agreements with individual countries is prone to serious backfiring.

Don’t get me wrong. I’m not espousing the arguments of the American labor unions and their soulmates in Congress who regard the U.S.-Colombia FTA as a threat to U.S. living standards. But I am equally unmoved by the claims of knee-jerk free traders that the deal is a model of how trade policy ought to be conducted.

My point is that there are good ways and bad ways to promote trade liberalization, and bilateral FTA’s are in the latter category. By far the best way is on a multilateral basis—that is, in the World Trade Organization. For all its flaws, the WTO plays a crucial role in fostering global economic stability, because countries take their trade disputes to WTO tribunals for adjudication rather than engaging in tit-for-tat retaliation. That keeps trade wars from erupting, and so do WTO members’ pledges to keep their tariffs within legally-bound limits.

Bilateral deals, much beloved by politicians and trade negotiators because they offer the opportunity for splashy photo-ops, have spread in such profusion in recent years that they are threatening to erode the authority of the multilateral system. Their advocates argue that while the multilateral approach is preferable, it’s too cumbersome and unproductive, as witnessed by the slow pace of the WTO’s Doha Round of negotiations. Well, first of all, the Doha talks have made some significant progress in recent months, and there’s at least a chance that an important breakthrough will come in the next few weeks. Even if it doesn’t, trade policymakers ought to be spending their time and energy shoring up the credibility of the WTO, rather than undermining it by adding to the spaghetti bowl of bilateral and regional arrangements.

As usual, we’re hearing the litany of justifications for Colombia that the knee-jerkers have trotted out in the past, about how this country of 44 million people is a big potential market for U.S. exports. This is the sort of overselling that just ends up giving open trade a bad name. Yes, an FTA with Colombia would give U.S. firms duty-free treatment on their exports there, and that would help companies like Caterpillar sell some more machinery. But let’s put the payoff in perspective.

Even if U.S. exports to Colombia, which totaled $8.6 billion last year, doubled overnight, that would add less than seven-hundredths of one percent to U.S. gross domestic product. Looking at the broader picture, the exports of all the countries with whom the Bush administration has completed FTA’s add up to less than 7 percent of total exports; throw in the pending deals with Colombia, South Korea and Panama, and the figure is still only about 11 percent of total exports. And that’s just a sliver of the total economy; exports accounted for less than 8 percent of U.S. GDP last year.

The current dustup over Colombia is vitiating yet another of FTA boosters’ favorite claims, that the deals generate foreign policy benefits. I’ll admit that some recent FTA’s have added a little sheen to U.S. relations with certain countries—Morocco and Bahrain come to mind. But are those gains worth the anti-American sentiment that gets stirred up when negotiations go sour, or when Congress balks because of differences with the administration over issues such as labor standards? Accusations of U.S. bullying are often raised by opponents in the countries with whom Washington negotiates, and those accusations are far from spurious. Talks concerning a proposed U.S.-Thailand FTA, for example, have foundered in part because the Thais felt America was pushing them around over protection for drug patents; the spat was barely noticed here but it made headlines in Bangkok.

The Bush administration is undoubtedly right in saying that Venezuelan President Hugo Chavez would take enormous pleasure in seeing the U.S.-Colombia FTA go down in flames, and in the end the specter of such a foreign policy disaster may help get the deal approved. Whatever the outcome, it ought to prompt some deep questioning about why agreements such as these are negotiated in the first place. It may be too late to undo all the Bush deals, but hopefully the next president will recognize the folly of the current policy, stop pursuing FTA’s and use America’s clout to halt the trend toward a more splintered world of trade.

Authors

Paul Blustein

South America Set to Launch 'Banco del Sur'

Paul Blustein — Thu, 06 Dec 2007 12:00:00 -0500

South America is going to launch its own development bank this weekend. The hope for Banco del Sur -- the Bank of the South -- is that it will spur economic growth in poorer countries like Bolivia and Ecuador. Dan Grech reports.

Brookings Journalist-in-Residence Paul Blustein comments on this new development.

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Authors

Paul Blustein

Publication: Marketplace, American Public Media

From Lima to Doha: Assessing the U.S. Trade Agenda

Paul Blustein — Mon, 12 Nov 2007 12:00:00 -0500

The recent approval by the House of the U.S.-Peru free trade agreement is drawing huzzahs from both the White House and Democratic congressional leaders, and in one sense their jubilation is warranted. Support for the pact from nearly half of the House’s Democratic members was a remarkable manifestation of a new bipartisan approach to how trade agreements ought to work.

But in economic terms, the accord itself amounts to very little. Much more significant, both to U.S. interests and the world as a whole, would be a meaningful trade deal on a global level—that is, in the World Trade Organization’s Doha Round of negotiations. On that score, the outlook remains cloudy at best.

Trade has been a bitterly divisive issue between the parties during most of the Bush administration--remember the 2-vote margin by which the Central American free trade deal squeaked through the House in 2005?—so the vote on Peru (285 in favor, 132 against) was especially impressive. As U.S. Trade Representative Susan Schwab noted in a statement issued following the vote, "The conventional wisdom last fall was that the President and Congress could not come together to make progress on a pro-trade agenda" once Democrats had gained a majority on Capitol Hill. Schwab proved the naysayers wrong by working with Reps. Charlie Rangel (D-N.Y.), chairman of the House Ways and Means Committee, and Sandy Levin (D-Mich.), head of the panel's trade subcommittee. Rangel and Levin insisted that the terms of the pact with Lima be renegotiated to include enforceable protections for worker rights and the environment in Peru—the type of provisions they have been demanding in free-trade agreements, without success, for some time. In his statement following the vote, Levin boasted that "we are setting U.S. trade policy on a completely new course"—a bit of hyperbole, perhaps, but a fair indication of what will be required to secure approval for other deals in the future.

To keep this achievement in perspective, however, consider that U.S. exports to Peru last year were less than $3 billion—so even if those exports were to double overnight as a result of Peru's elimination of its tariffs and other barriers on U.S. goods, the impact on the $13 trillion (that's trillion with a "t") U.S. economy would be minuscule. In this regard, the Peru agreement is all too much like the numerous others that the Bush administration has struck. For all the fierce battling that some of these accords unleash in Congress, and all the resistance to globalization that they arouse, the markets involved are often too small to provide much in the way of new opportunities for American companies, workers and farmers. Add up the exports last year to all the countries with whom the Bush administration has completed free trade agreements, and the sum comes to less than 7 percent of U.S. total exports; throw in the pending deals with Peru, South Korea, Colombia and Panama, and the figure is still only about 11 percent of total exports. And that's just a sliver of the overall economy; exports accounted for less than 8 percent of U.S. gross domestic product last year.

All of these deals pale in importance with the Doha Round, the negotiations named for the Qatari capital where they were launched at a WTO meeting in 2001. The round was aimed at lowering barriers worldwide, with a top priority of making international trade rules more favorable for the poor; as President Bush put it at the time, the idea was to "give developing countries greater access to world markets, and lift the lives of millions now living in poverty." But six years later, the lofty ambitions espoused at Doha remain a distant dream. Several times, meetings of key negotiators have broken down in such acrimony as to leave the viability of the round in serious doubt, with politically-explosive farm issues being the main flashpoint. Agriculture is of crucial interest to many developing countries because the majority of the world's poor live in rural areas, and their farmers are disadvantaged by protective barriers and subsidies in the European Union, the United States and Japan. But rich nations have been loath to cut programs that their powerful farm blocs cherish. At the same time, developing countries are balking at demands from the rich to open their markets more widely to manufactured goods.

With the original 2005 deadline for the Doha Round long passed, the current expectation among many insiders and observers is that the round must await the election of a new U.S. president. Even assuming a deal eventually materializes, the betting is heavily in favor of a a watered-down compromise in which benefits to developing countries would be modest at best, an outcome dubbed "Doha Lite." Recently, signs have emerged that the Bush administration, with its attention increasingly focused on shoring up its legacy, is eager to complete the round, and a flurry of negotiating activity has sparked optimism that a deal—or at least the major outlines of one—may be hammered out in the next few months. Trade ministers will undoubtedly tout any pact they reach as historic, and it is conceivable they will achieve a result worthy of being considered respectable. But the gap between the outcome and the initial aspirations will surely prompt questions about why so much time and effort was required, and whether negotiations under WTO auspices should ever be undertaken again. The last major global trade negotiation, the Uruguay Round, took eight years, but it was unquestionably sweeping in scope and impact—a claim that may be hard to make, with any credibility, for Doha.

A meaty, ambitious deal among all 151 nations in the WTO could benefit many countries, but its consequences would go well beyond any short-term economic boost. Probably more important is the revitalization such an accord would mean for the WTO, which is a lynchpin of stability in the global economy. Although just a dozen years old, the WTO is the current embodiment of the multilateral trading system that was established after World War II to prevent a reversion to the protectionism and trade blocs of the 1930s. WTO tribunals rule on disputes among members that might otherwise flare into destructive wars of economic retaliation. The WTO is also the guardian of the "most favored nation" principle, which broadly requires member nations to treat the products of all other members alike—a bulwark against exclusive trade groupings.

The WTO's ability to continue performing these functions would be at serious risk if the Doha Round becomes moribund or ends in "Doha Lite." Disillusionment over the WTO's capacity for setting the rules of trade would make the organization appear increasingly irrelevant and ineffectual—the trading system's version of the League of Nations. Its status as the dominant rule-setting institution has already been battered by the explosion in recent years of bilateral trade deals. A disappointing Doha Round would surely accelerate this trend further, and could gradually erode the WTO's credibility to the point where its authority to settle disputes would come into question. The WTO has many critics, of course, and some might welcome its downfall. But for all of the organization's flaws, the prospect of a diminished, sidelined WTO is alarming, and it would be especially detrimental for poor countries, which depend on the WTO to protect them against bullying by the rich.

So let's hope the conventional wisdom about the prospects for the Doha Round is wrong, just as it was in the case of the U.S.-Peru agreement. Whatever the round’s outcome, the stakes are a lot higher.

Authors

Paul Blustein

Global Trade Talks: The Doha Disaster

Paul Blustein — Mon, 09 Jul 2007 00:00:00 -0400

Glorious news from Potsdam, Germany! Global trade negotiations suffered yet another blow—perhaps a crowning one this time—as a meeting of trade ministers from the U.S., European Union, Brazil and India broke up early on June 21 with the parties declaring that they are hopelessly deadlocked. And here's more glad tidings: congressional authority for President Bush to negotiate trade pacts expired June 30, adding to the woes facing the global talks.

Let me explain. I'm a journalist by trade, and as most people suspect, we journalists relish a good disaster story. After more than 25 years working for newspapers, the portion of my brain that welcomes news beneficial for the welfare of humanity has atrophied, or at least it fails to function on matters about which I'm writing. My current focus is a book on the WTO and the Doha Round, the global trade talks named for the capital of Qatar where they were launched in November, 2001. Following the debacle in Potsdam, I'm happy (in my perverse journalist way) to report that as disaster stories go, the Round is shaping up as a corker.

As a reporter who covered the 2001 World Trade Organization meeting in Doha, I vividly remember the idealism that pervaded the gathering. Braving the perceived risk of traveling to the Persian Gulf just two months after the Sept. 11 attacks, delegates from the 140 countries belonging to the WTO reached an accord after six grueling days on the agenda for a "development round." The goal was to strike agreement by Jan. 1, 2005 on new international trade rules that would be much fairer for developing countries than the current ones, and in so doing give the world's poor a better chance to reap the benefits of globalization. By eradicating many trade barriers and inequities that hamper growth in the developing world, the new rules would help "drain the swamp" of poverty in which terrorism flourishes—or so the attendees hoped.

Not only is the deadline long passed, but those noble goals are clearly running afoul of harsh political and economic realities, especially as the negotiators have confronted the issue of trade in agriculture, the sector in which the bulk of the world's poor make their living. On a couple of occasions since Doha, WTO meetings have eked out progress, but more often than not, they have collapsed amid an orgy of finger pointing, and although the specifics change from meeting to meeting, the basic story has remained the same: Developing countries accuse the United States of refusing to cut its lavish farm subsidy programs, especially in crops such as cotton, where payments to American farmers help generate gluts on world markets that depress the prices received by farmers in countries such as Mali and Zambia. The European Union is blamed for balking at opening up its markets for products such as beef, poultry, and dairy because of the political clout of its cosseted farmers—and the same for Japan and South Korea, which zealously protect their rice growers with tariffs hundreds of percentage points high. The rich nations, for their part, contend that developing nations aren't offering enough concessions to make it worthwhile for them to undertake politically painful measures. In particular, big and fast-growing emerging markets such as Brazil, India, Indonesia and South Africa are rejecting demands to slash their barriers to manufactured imports; India is also taking a very tough stance against opening up its agriculture to more foreign competition.

A year ago, those fundamental gaps in negotiating positions led WTO Director General Pascal Lamy to declare a "suspension" of the Round. Hope rose anew earlier this year that U.S. Trade Representative Susan Schwab and her counterparts from other leading member countries might be able to rejuvenate the process and secure at least the broad outlines of a final pact before the expiration of Trade Promotion Authority, the legislation that ensures any deal struck by the administration will get an up-or-down, amendment-free vote in Congress. But the debacle in Potsdam has dashed those hopes, and now an even more daunting hurdle is looming—the 2008 U.S. election campaign, which makes it harder than ever for the Bush administration to offer meaningful concessions lest voters in key farm districts turn against Republican candidates. Other countries, meanwhile, will be loath to move as long as the administration lacks Trade Promotion Authority, because any deal that is struck among WTO members could be subject to crippling amendments when it comes up for approval on Capitol Hill.

Given all that, prospects are nil for a far-reaching agreement of the sort envisioned at Doha, which would have sharply lowered tariffs and subsidies for both agricultural and industrial goods while also significantly expanding trade in services. The best that can be hoped for prior to the U.S. election—and even for this scenario, chances aren't bright—is a "Doha Lite" deal, which would accomplish a few worthwhile goals (eliminating the most offensive sorts of farm subsidies, for example) but fall far short of dramatically changing the rules of trade for developing countries. The most probable scenario is that the Round will be put in abeyance for a couple of years, in the hope that a new U.S. administration will put a high priority on gaining congressional negotiating authority and concluding the Round—hardly an assured outcome, since trade has become such a contentious issue in the U.S. political debate. Even if the Round staggers to a finish in, say, 2010, it will likely be the Lite version, for the same reasons that have kept the main parties from coming together so far.

Why does this make for a disaster story? It is not that global trade will grind to a halt in the absence of a Doha accord; existing international trade rules will remain in effect. But in addition to the lost opportunity for improving the rules, a Doha failure would endanger the WTO, the institution charged with preserving the multilateral system that has governed commerce among nations since the end of the Second World War. That system, created to prevent a recurrence of the protectionism and exclusive trade blocs that helped deepen the Great Depression, gives basic rights to all countries that accept the rules—in particular, "most favored nation" treatment, which means member countries cannot capriciously discriminate against the products of other members. Its dispute settlement system gives even small and poor countries the right to bring grievances against rich and powerful ones—witness the victory won in the last couple of years by tiny Antigua over the United States in a case involving internet gambling.

The WTO is already at risk of being sidelined as the main rule-setter for global trade, thanks to the proliferation in the past few years of bilateral and regional free-trade agreements such as the ones the Bush administration has struck with Australia, Bahrain, Morocco, Oman, Singapore, the Dominican Republican and five Central American countries plus several more that are pending congressional approval. Failure to achieve a respectable result in the Doha talks could call the organization's credibility further into question, conceivably undermining its authority to adjudicate disputes. Hurt most would be developing countries, because in a world dominated by bilateral and regional accords, they are much more likely to be bullied by trade negotiators from rich countries, who can use their big markets as leverage to extract concessions from the smaller fry.

See why this tale appeals to a journalist? Too bad for the rest of humankind.

Authors

Paul Blustein

Managing Future Financial Crises: The IMF's Role

Paul Blustein — Wed, 27 Jun 2007 00:00:00 -0400

"We were the ghostbusters! Who else were ya gonna call?" With those words, James Boughton, an economist at the International Monetary Fund, recalls the period that began on July 2, 1997, when Thailand was forced to devalue its currency amid financial turmoil that soon spread to neighboring countries and eventually across oceans and continents. From the Washington headquarters of the 180-nation IMF, staffers began jetting into one foreign capital after another, mobilizing tens of billions of dollars in emergency loans as markets plunged, investors fled and defaults loomed in South Korea, Indonesia, Russia, Brazil, Turkey and Argentina. The Fund's efforts to exorcise the demons of panic from the markets—heavily influenced by its political overseers in the U.S. Treasury—sometimes failed miserably, and drew plenty of criticism. But the crisis-stricken countries had little choice but to turn to the IMF, given its war chest of dollars; and without the Fund, the outcome could have been much worse.

Today, the prospect that firebells will ring again at the IMF might seem remote. Nary a crumbling currency is in sight; on the contrary, financial markets, buoyed by the robust global economy and low interest rates, are manifesting extraordinary confidence in fast-growing developing countries. A record $550 billion in net private capital poured into the emerging markets of Asia, Latin America, Eastern Europe and Africa last year.¹ Even countries that previously failed to draw much attention from investors, such as Bangladesh and Cote d 'Ivoire, have enjoyed major inflows, with Standard & Poor's index of stock markets in 22 such countries up some 400 percent over the past five years. Giant investors such as pension funds and mutual funds have snapped up bonds issued by emerging market governments and companies, enabling former deadbeat debtors to borrow at attractive rates.

But similar exuberance preceded the crises in Asia, and there should be no illusion that the centuries-old pattern of financial booms turning to busts has fundamentally changed. The question is, will future crises prove more manageable than before—or less?

Optimists cite impressive evidence showing how many of the problems that fueled the crises of the 1990s have receded. With a handful of exceptions, developing countries are racking up trade surpluses that, as calculated by the broad current account measure, totaled $640 billion in 2006², thanks partly to the soaring prices that they are receiving for exports of commodities. As a result, not only are they far less dependent than they used to be on foreign investors for the capital they need to keep their economies functioning; some of them have amassed huge stockpiles of foreign currencies in their central banks, in amounts that dwarf any IMF rescue—China's $1.2 trillion being the most famous example, with others including South Korea and oil-rich Russia and Venezuela. Many once-profligate governments have brought their budget deficits under control and have been sensibly using their savings to reduce their debt burdens. Moreover, the rigidly-pegged currencies that once provided such tempting targets for speculators are, in most countries, relics of the past.

So the optimists believe that crises are likely to be isolated and easily contained—perhaps striking only in emerging markets that are still running current account deficits. But such a sanguine view overlooks some eternal verities about Why Bad Things Happen to Good Markets.

One of those verities is that markets have a capacity for turning treacherous in ways that even the smartest observers fail to anticipate. Obscure sources of instability lurk in the financial system, unnoticed because they appear harmless during periods of calm. The most notorious illustration is the giant hedge fund Long-Term Capital Management, which despite its Nobel prizewinning investment strategists collapsed following the default of Russia in 1998, putting the entire global system at risk because of its links with major financial institutions. That oft-cited case is by no means the only one; others abounded during the crises of the 90s. In Korea, both the IMF and Korean officials completely overlooked a major vulnerability—the debt of Korean entities based overseas, such as the U.S. branches of major Korean banks. Before the crisis, these tens of billions of dollars in short-term obligations had seemed of no concern, because creditors routinely rolled them over as they came due. But once foreigners suddenly started calling in their loans to anyone or anything Korean, all those debts required the payment of dollars from Korea's central bank, exacerbating the panicky outflow of capital from the country.

Another verity is that the riches to be had in bull markets would tempt a saint to act recklessly—and saintly virtue is not common on Wall Street. People in financial markets have ingrained tendencies, and powerful incentives, to go for short-term, sure-fire income (such as up-front fees for making loans) even when their actions are likely to lead to debt troubles, instability and even greater losses in the long run. Just as in the current woes of the subprime mortgage market, with its cast of lenders and brokers who enriched themselves by granting mortgages on unsound terms, the world of international investing and lending is replete with examples of excessive credit issuance fueled by myopia and greed. The gory details are spelled out in a couple of books about the crises of the 1997-2001 period³. (Please forgive the shameless plug; I 'm the author.)

Nobody can say where, and how, crises will erupt in coming years. But for the ghostbusters of yore, the current financial scene is chock-full of phenomena both unfathomable and disquieting.

The Great Game of emerging markets investing is attracting money from players who were never involved in it before, and for watchdogs like the IMF it's often impossible to divine who they are or what they're doing, much less how they might behave if the financial environment suddenly turned nasty. That's partly because of the explosive growth in the derivatives market (essentially bets on the movement of things such as interest rates, or on the risk of default by a particular borrower), which are traded in private transactions from one giant institution to another. Some of the players, such as hedge funds, are familiar, but they are venturing even further into the wilds than ever—speculating, for example, on the currencies of nations with rudimentary financial systems such as Malawi and the Central African Republic. Other huge players are new and untested, notably the "sovereign wealth funds" of oil-rich states; except for Norway, they are run by countries that tend to be fanatically secretive about their portfolios.

Finally, Jim Boughton and his colleagues have another worry—the possibility that they may lose their monopoly on ghostbusting to countries loaded with reserves. If, say, Brazil or Uruguay were to land in trouble, presumably Venezuela would seek to play the role of savior; likewise, China might offer to bail out an Asian neighbor that hits a rough patch. The IMF's critics may relish that prospect, but the resulting erosion in the Fund's authority could be one more reason to fear that the next crisis will be harder to quell than the last.

¹ Institute of International Finance, "Capital Flows to Emerging Market Economies," May 31, 2007, www.iif.com.

² International Monetary Fund, World Economic Outlook, April 2007, www.imf.org.

³ Paul Blustein, The Chastening: Inside the Crisis That Rocked the Global Financial System and Humbled the IMF (PublicAffairs, 2001) and And the Money Kept Rolling In (And Out): Wall Street, the IMF, and the Bankrupting of Argentina (PublicAffairs, 2005).

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