I don't think this is what Stiglitz had in mind...

When Joseph Stiglitz proposed to move the world away from using the American dollar as the reserve currency, I doubt it was so that nations could circumvent economic sanctions.  However, that is exactly what India and Iran are doing.

http://www.forbes.com/sites/kenrapoza/2012/03/20/india-facilitates-iran-oil-shipments-allows-for-non-dollar-deals/

Negotiations have been going between India and Iran since word of the US/EU sanction against Iranian oil and Iranian capital holdings overseas.  In a move to cripple Iran's attempts at nuclearizing, the sanctions have in effect hurt those of our allies who rely on Iran for their oil, namely India and South Africa.  South Africa has been forced to find alternatives, but Indian bankers have come up with a better idea.

Indian banks pay 45% of the value of Iran's oil in Rupees, which Iran will use to pay for its imports of Indian goods.  A rather complicated issue which sounds simple enough, the deal will in effect make the Indian Rupee, never considered a strong currency, a de facto bilateral reserve currency.  With $10 billion dollars of oil headed for India each year, and $2 billion of exports heading back from India to Iran (now planned to double to make up the difference - 45% of $10 billion is $4.5 billion), this deal will effectively save India from the US sanctions against Iran. 

Actually, it will improve India.  With exports needing to double this creates thousands of jobs, a great benefit for the struggling ruling party.  In addition, with all the transactions for trade for at least the foreseeable future being done in local currency, this is just one more barrier to trade which has been removed.

So, Mr. Stiglitz, is this really what you want?  Without the dollar as a global reserve currency, the United States' ability to sanction international finance and trade will, and arguably has already become, more limited.  This is the story of removing the global economy from a US Treasury-backed reserve currency: as the global economy gains stability, it also gains further independence from the political influence of the United States.  Some may see this as a good thing, since free marketers see sanctions as simply the political manifestation of forced inefficiency.  However, without a peaceful way to limit Iran's advance towards nuclear power, what is the alternative method...?

Is Obama really calling for an end to Fuel Subsidies, or just sucking up to voters?

Now, I hate subsidized agriculture and oil.  It creates inefficiency in the economy by allowing some to sell goods at prices below market value, a failure to pay the full marginal private cost for the good, resulting in higher demand for the good than the market would determine as an efficient equilibrium.  Subsidies also reduce competition and pays from the federal budget to do it.  In some cases it takes no more than ensuring a business keeps its edge on the market in return for political support.  Theoretically all free market enthusiasts should be against subsidies, but it is surprising how many there are in the U.S.  Anyway, as you can tell, I am not a fan.

So when I saw that President Obama called for an end to subsidies on oil earlier this week, I was quite ecstatic.  But I was also surprised.  A loss in subsidies will mean that the price of oil will increase, right?  Can Obama afford for the price of gas to go above $5 per gallon during an election year?  I would argue that he can’t.  If the national average goes above $5, I think he will have a much more difficult election than he should.  So, I guess the question is, why is he pushing for a cut in the subsidy? 

A number of reasons, first of which is the obvious value in the political rhetoric of appearing angry at massive and profitable MNCs and “standing with the American people” while having little chance that the subsidy will ever reach a vote.  Even if the subsidy never gets to a vote, which I sincerely doubt it will, Obama has had his moment in the sun at least appearing as though he doesn’t like subsidized oil.

However, I am hopeful that he might be heading in the right direction, with the goal of real action on the issue.  ExxonMobile, the largest energy corporation in the world, posted revenues of $121.6 billion dollars and profits of $9.4 billion last quarter, up from last year.  The simple fact is that these corporations can afford to be unsubsidized.  The petroleum and hydrocarbon markets are not infant industries, and need no protection.  Competition should be encouraged to the maximum.  With national security so vested in the oil market, it would seem that the greatest price stability and efficiency would be the best policy, so I say lets kill the subsidy.

A repeal of - or even a reduction in - the subsidy makes the price closer to the true cost of the oil (although it should be far higher since the marginal social costs of almost anything, but especially oil, are never factored into the price).  Some predictions show that the lost demand at a higher price would create greater losses to the companies than if they simply ate the lossed revenue difference of the subsidy.  Arguably, cutting the subsidy may not make the price of oil go up at all.  It will just mean that the corporations make less and the government pays them less out of the federal budget, possibly a win-win in my opinion.

So we will see…is it a political stunt or a realistic move in the right direction.  I give it till April 25^th, when gas switches to a more expensive type, one better suited for summer use, storage, and transport (don’t ask me about the technicalities of petroleum chemistry – I study political science).  As the price of gas goes up as summer gets closer, the more difficult it will become to make this all happen, so the sooner the better.  Unless of course you are a fan of subsidizing companies which already make billions.  In that case there is little reason for you to ever read this blog again.

Ramo's THE AGE OF THE UNTHINKABLE

Joshua Cooper Ramo has an interesting argument: most of the leaders of our world, and our country, look at the world in the wrong way.  His explanation is that we all are looking at the world in confined terms, unable to see the reality, that the future is unpredictable.  Ramo uses contemporary physics experiments and interviews with “experts” ranging from Hezbollah leadership to Nobel winners.  Those who have learned to view the world correctly, as a constantly changing and adapting world which fails to conform to any models, are the ones who are successful (i.e. the leaders of Hezbollah, some Fortune 500 CEOs, and a handful of physicists). 

Ramo takes an interesting look at modern physics experiments.  The work of Danish physicist and biologist Per Bak is of particular relevance to Ramo’s argument.  Bak wanted to understand the nature of avalanches, most importantly, their predictably.  He devised an experiment to build sand piles one grain at a time and see how they eventually collapsed.  He found that no matter how many times he did the experiment, he could not predict the outcome, nor control it.  Ramo used Bak’s experiment and applies it to political science.  We cannot predict the outcomes of the next “grain of sand” into our global system, so we can only prepare ourselves to meet the global “avalanche.”  We do this by understanding how “avalanches” work. 

Ramo’s argument goes that we need to rethink how we look at the world, such that our concept of the very foundations of the international system is wrong.  Our models are wrong.  Thus, we are unprepared for events such as the 2008 Global Financial Crisis, economic development in developing countries, or Chinese advancement and global expansion.  We just don’t understand how it all works because we all want to classify and model everything, but not everything is cut and dry.  It’s unpredictable.

Although I agree that our leaders are often shortsighted, I disagree that we should throw out all our models.  We just need to better understand the limitations of models.  Often we want an input to equal a given output for every problem; we want a one-size-fits all policy solution to immense global problems.  This just doesn’t work, but I disagree with Ramo’s argument that we need to start over in our thinking. 

Ramo thinks we should take our thinking to the next level, understanding that our previous conceptions can be “mashed” together to make completely new ideas.  However, his lack of clarity on HOW we should move forward muddies his argument to the point of ambiguity.  It is a very hard argument to follow, especially since he uses unconventional sources of evidence.  I personally don’t like the idea of following the legacy of ingenuity created by Hezbollah, although Ramo seems to think that it doesn’t matter the ends, only the means if it leads us to advance.  I would argue that these advances are wrong.  To an extent he agrees, using the ingenuity of Hezbollah to show the extent to which we must be ingenious in order to beat them. 

Sadly in this, I think Ramo is correct; we will never beat terrorists, solve global poverty, or save the environment by looking at the problem the same ways it has been for decades.  However, like most authors, Ramo seems to be better suited to complaining about the problems and has failed to provide practical methodology for finding real solutions to the problems.  His argument falls short of being worthy in that the reader is left to puzzle.  Beyond now looking differently at the problem, the conversation has advanced no closer to being solved.

Foundations of the Coming Apocalypse in a One Hour Essay - You're all DOOMED!

By far, the greatest challenge facing the world economy in the coming century will be competition for scare natural resources and the environmental effects of our overdependence on those resources as factors for economic production.  Increasing global population and per capita energy consumption are the two factors which drive the ever faster decline in global resource assets.  I include in this all fossil fuels, all minerals used in production, all heavy metals, and water.  These resources are the foundation of every development strategy and economic growth model ever devised.  Without them, nothing goes on.  Without these resources, civilization collapses.

Only 3% of the world’s water is fresh water, even less is drinkable.  This statistic is often overlooked, but emphasizes water’s status as humanity’s most vital natural resource.  There has been more competition over water supplies than any other resource in history, and this trend will continue for the next hundred years, and if we continue to utilize fresh water for its current uses (irrigation, production, hydroelectric power), water will become the same as any other non-renewable resource: it will eventually run out.  Minerals and heavy metals are necessary inputs to production of most goods; especially those most relied upon by societies around the world, such as computers, telecommunications, and transportation vehicles.  Increasing competition for these resources will continue as it has, the industrial trade in them becoming even more corrupt and cutthroat.  Global petroleum markets offer and excellent view of the next century; all we need for a future prediction is to multiply the conflict. 

Competition for the scare global resources necessary for survival and growth has shown us that human beings are far more willing to kill each other over resources than to mitigate problems and find alternatives to their use.  If this trend continues (as I foresee it will until the resources are each exhausted), when the resources are finally gone it will still be too late to find solutions.  The conflict over the resources will destabilize the international order to a point near collapse.  It sounds too apocalyptic to be true, but may actually be worse.  At the rate we are heading as a planet, the destabilizing of the international order through resource conflicts will only provide a less secure foundation under which to bear the environmental costs inherited from the age of industrialization.

Fossil fuels have come under increased scrutiny over the past few years, as they should.  There is 97% consensus among scientists as to the merits of anthropogenic climate change as a result of greenhouse gas emissions in direct relation to industrial development.  No economist, nor most scientists, will argue that the industrial revolution or modern societies are bad things.  However, they have come at a cost, one which is yet to be paid.  The costs of climate shift are currently being felt across the Sahel regions of Africa with drought and famine, Eastern Europe has lost thousands to one of the coldest winters on record, and at home here in Virginia it is yet to snow since Christmas.  We are at the beginning stages of what will eventually define the next century: a shift in our natural environment itself.  This will be the greatest threat to the foundation of the international order, and therefore should be of the greatest concern to leaders in the international arena.

Mzungu Kicha | Jitolee ft. Professor Jay & Mwasiti [Official Music Video]

I thought this might help out our pre-class music selections. This is a Danish-Tanzanian by the name of Mzungu Kichaa, meaning "Crazy White Guy." The song is called Jitolee, meaning "volunteer." The emphasis is on living at peace with eachother, no matter where we are from, and giving up all greed and selfishness. I like to think the message can be applied with particular relevance to the international economy. Imagine if everyone acted in the best interests of the world instead of personal gain. Food for thought.

National Sovereignty vs. Multinational Corporations

Coming out of yesterday's class, I wanted to finish my thoughts from the end of the period.  I know that most of us find some faults with multi-national corporations, whether its because of their ill treatment of foreign laborers, their environmental impacts, or our neighbors who work at Walmart for minimum wage.  It is hotly debated whether a corporation's chief concern should be it's shareholders or whether it has any higher duties to society.  In my opinion, I do feel that all companies have an ethical duty to the societies in which they do business and have a responsibility to those affected by their business practices, whether it be loss of jobs in a community from reduced competition or damage to the environment.  However, I know many feel that this is philanthropic work to be done only when an executive feels inclined, so I will not argue against all corporate profit-maximization.

However, I do believe that a corporation always has an ethical responsibility to act in society's best interest when they have an absolute control of the factors necessary for development or a good which dominates a nation's wealth.  This most often comes in the form of natural resources.  It is one thing to say to a developing country's government that without the corporation, the state will lose some jobs and the corporation will move elsewhere if certain conditions are not met.  It is a whole other matter when a corporation has so much domestic power in a country so as to be able to hold an entire economy hostage. 

I am going to use the examples of energy companies.  I usually harp on energy companies, not out of any real hatred of energy or oil companies in particular, it is just what I study the most outside of class.  Mostly, I find them to be ethically questionable at best, but a necessary evil nontheless.  Also, I have personal experience of what happens in a developing country when power shuts down because the national power company needs to "save" some money (which actually means they all get bigger bonuses at the end of the year).

The problem is not necessarily that the corporation is getting rich.  In many cases this is just large-scale corporate theft of a country's natural resources, economic colonialism, or extractionism.  If paid fairly for their mineral resources, some estimates predict Congo would be the richest country in the world today. Whatever you want to call it, this is wrong.  However, many companies conduct their business fairly.  Please note, I do not think corporations shouldn't make profits or have proper incentives.  I do believe in basic economic theory.  Where I find the most grevious of actions is in the influence a corporation has on a foreign state's domestic political institutions.

Here, I should also note that I don't want to start in on our own country's problems with the Citizen's United decision and corporate funding of political campaigns in the United States.  I find this to be a separate issue because they are domestic corporations investing in domestic politics.

However, just imagine if China gave $10 million dollars to a presidential candidate.  We would be all over them about their allegiances to the Chinese.  Well, this is how I view American corporate influence on foreign state's domestic politics.

Take for example Royal Dutch Shell Corporation, which has most of the oil rights off the coast of Nigeria.  Well, when most of Nigeria's economy (and government funding) come from oil, but are produced and managed by Shell and through Shell gain access to the world markets, this corporation has very great power influencing political processes in the host nation. 

If ExxonMobil doesn't want labor unionization in Kazakhstan, the army goes in and breaks up protesters (all because they wanted an increase from about $2000 a year to $2800 a year).  And when Shell doesn't want to clean up the Nigerian coast after it spills "only about 40,000 barrels of oil" added to the already severly damaged coastline and inland waterways, it isn't going to.  And let's face it, in a free market system, it is the incentive structure (invisible hand) which forces corporations to act in the public interest. 

And if the incentives aren't there?  And the government is too weak to regulate the corporation?  Because if the government opposes the corporation too strongly, they just shut the power off.  If the "disaggreement" lasts, new political leadership will find its way to power in the next election or coup, as was the case when Chile elected socialist President Allende in 1970 and International Telephone & Telegraph (ITT) helped to overthrow him.

Certain corporations simply have too much political power in nations which are not their own.  Call me crazy, but national sovereignty should be guaranteed to every nation.  When sovereignty is challenged by another state for whatever reason, be it an invasion to protect human rights, a first strike defense, or some other just cause, we must look at it on a case-by-case basis to determine the legitimacy.  But when a nation's future is manipulated by a foreign company with no legitimate political power, all for the sake of money, it is simply wrong.

Hotspots of potential conflict in the geo-energy era

http://www.aljazeera.com/indepth/opinion/2012/01/201211414443903202.html

This article by Michael Klare, author of Blood and Oil, is exactly why I am interested in studying IPE.  Oil and energy are inputs to development and growth that are becoming far more scarce as time passes.  The international political arena is cluttered with conflicts over oil, natural gas, energy technology, and all means of transporting them.  This is a perfect example of how an economic demand necessitates political action. 

South Sudan accuses Sudan of stealing 120,000 barrels of oil a day; talks open in Ethiopia

http://www.washingtonpost.com/world/middle-east/south-sudan-accuses-sudan-of-stealing-120000-barrels-of-oil-a-day-talks-open-in-ethiopia/2012/01/17/gIQA4nAE5P_story.html

I found this article by the Washington Post interesting, because it highlights what happens when trade deals are impacted by drastic domestic political developments.  A previous negotiation has to be renegotiated because of a new regime in the South, one now able to negotiate from a position of strength (since independence).  I think that it is particularly interesting that the North assumed that domestic arrangements would continue as before, even though the South had founded a whole new country with its own national sovereignty, therefore making the exportation of oil (as well as its theft) an international issue.  Previously the theft of Southern oil would have been commonplace and handled domestically, but now it is an issue which the international community may choose sides over.  The truth is, Sudan fears that South Sudan will seek alternative trade negotiations with Kenya to export its oil to the south, circumventing Sudanese oil refineries on the Red Sea entirely, thus shattering the North's economy overnight.  In the meantime, however, I would guess we will see further "aggression" by the north to try to get as much oil as possible before any such negotiating with Kenya take place.  Regardless of current state of affairs, with South Sudan too busy building the new country and without any ready alternative, exporting oil to the north as before independence will remain for the time being.