(What’s Left of) Our Economy: The IMF (Unwittingly) Trashes the Case for Obama’s Pacific Trade Deal

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Christine LaGarde, developed countries, developing countries, emerging markets, free trade agreements, IMF, International Labor Organization, International Monetary Fund, Obama, Stolper-Samuelson theory, third world, TPP, Trade, Trans-Pacific Partnership, World Bank, {What's Left of) Our Economy

Whatever reputation the French have had for being master logicians has just been shredded by International Monetary Fund (IMF) chief Christine LaGarde.  Her take on emerging markets’ emerging role in the world economy is completely incoherent, and its fatal flaws have big implications for President Obama’s Trans-Pacific Partnership (TPP) and U.S. trade policy as a whole.

For decades, Washington has told Americans that the U.S. economy urgently needs new trade deals mainly because without them, the nation and its workers would be shut out of all the huge, rapidly expanding third world economies that would surely be the globe’s most powerful growth engine for the indefinite future. Moreover, both Democratic and Republican presidents and Congresses have followed through, as new U.S. trade deals since Mexico’s addition to the North American Free Trade Agreement (NAFTA) have focused tightly on developing countries.

Mr. Obama and other TPP supporters have used the same justification for the Pacific Rim trade agreement, repeating over and over again the mantra that “more than 95 percent of our potential customers live outside our borders….” Obviously, they haven’t been thinking mainly of developed markets like Europe and Japan.

On the level of both individuals and national economies, these claims have always been bogus. As I’ve shown, according to major international organizations like the World Bank and the International Labor Organization, the vast majority of third world populations still earn far too little to buy goods made in wealthier countries like the United States on anything close to a regular basis. Moreover, as my book The Race to the Bottom documented exhaustively, most major developing countries – ranging from Mexico to China and its low-income Asian neighbors – have achieved most of their growth by selling to America and the high-income world. Even the commodity producers that have profited by supplying China have remained dependent on U.S. and other developed markets indirectly, since they have been such important final customers for China’s output.

In a Tuesday speech in Paris, LaGarde echoed recent observations that developing countries are in the process of turning into global growth laggards from global growth leaders. As made clear above, their claim to that former status was dubious at best, but LaGarde’s outlook was also noteworthy for its profound pessimism. She not only warned that emerging economies that borrowed heavily in dollars were vulnerable to monetary tightening moves from the Federal Reserve. She also declared that “emerging and developing countries are now confronted with a new reality. Growth rates are down, and cyclical and structural forces have undermined the traditional growth paradigm.”

Indeed, LaGarde pointed to IMF research projecting that “the emerging world will converge to advanced economy income levels at less than two-thirds the pace we had predicted just a decade ago. This is cause for concern.” (What she failed to mention is that this convergence could also result in part from incomes in the developed world sinking closer to third world standards, as the Stolper-Samuelson theory of international trade’s impact first stipulated.) For good measure, LaGarde reminded her audience that “Clearly, emerging markets are benefiting from the fact that many central banks in many advanced economies still have a very easy policy stance.” In other words, historically easy credit in the wealthier countries had kept third world exports and growth much greater than they would have been otherwise.

Yet even though she made the case that emerging market economies’ prospects were deteriorating and had relied critically on the developed countries even after the financial crisis, LaGarde also mysteriously contended that the emerging world “contributed more than 80 percent of global growth since” the global economy seemed on the verge of collapse and that, consequently, “The economic health of the emerging world is of first-order importance for the advanced economies.”

And in the strangest statement of all, she proceeded to insist that the wealthy countries now need to deal with this situation by propping up emerging market performance with “a stronger global financial safety net” for these economies that expands their access to the swap lines of the richer countries’ central banks.

A respectable case can be made that emerging markets have always been the keys to future global growth. Equally respectable cases can be made for the propositions that they have been the main global growth drivers since the financial crisis; that they have never been the keys to global growth; that they will remain central to the wealthier countries’ well-being; that they are headed to a much gloomier “new normal;” and that they need new aid from the developed countries to avoid major future woes. But no case can be made for all these contentions at the same time – unless reason and logic are abandoned entirely.

Moreover, since the claim behind which LaGarde is putting her money is the one that’s downgrading the third world’s economic importance substantially, and the one conforming with past and future realities, it should be clear that the term “emerging markets” is likeliest to be an oxymoron going forward. As a result, although the United States and other wealthier countries could legitimately decide to lend them a hand for moral and humanitarian reasons, the argument from self-interest is looking ever more far-fetched. And tying America’s fortunes even more tightly to global economic losers via new trade deals like the TPP? That looks downright masochistic.

(What’s Left of) Our Economy: US Workers’ Wage Misery Has Lots of Global Company

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Boston Consulting Group, China, ILO, inflation-adjusted wages, International Labor Organization, manufacturing, manufacturing renaissance, productivity, real wages, Stolper-Samuelson theory, wage stagnation, wages, workers, {What's Left of) Our Economy

Could readers of RealityChek be luckier? I read through weighty tomes like the new International Labor Organization (ILO) report on global wage and income inequality so that you don’t have to!

This report’s findings need to be taken with a sizable grain of salt, mainly because it includes lots of data from developing countries whose statistics-gathering agencies just aren’t yet state of the art. And then there’s the problem of statistics from China, which are “notoriously unreliable” – as they say in polite (economics) society. Nonetheless, the ILO study contains findings that shed lots of light on many of the employment and wage trends being robustly debated in the United States. Here in my view are the most important and/or interesting.

First, wage stagnation is anything but a U.S.-only phenomenon. It’s happening nearly everywhere. Wages aren’t falling in inflation-adjusted terms worldwide (or in America). But their rate of increase recently keeps slowing from levels that are hardly impressive – from 2.2 percent in 2012 to two percent even in 2013. Just before the financial crisis, real wages around the world were growing by three percent annually.

These wages grew faster in the developing world than in the high income countries – which is to be expected, partly because they’ve begun from such a low base. But the third world didn’t escape the slowdown trend either, as its total real wage growth fell from 6.7 percent in 2012 to 5.9 percent in 2013. And if you strip out China, third world and overall after-inflation wage growth rates get cut – the latter in half.

Second, the differing wage trends in rich and poor countries continue to bear out a prediction made by the most important advance in trade theory made in the 20^th century. It’s called the Stolper-Samuelson theory, after its developers (and yes, the Samuelson is the same MIT economist who wrote the best-selling economics textbook of all time), and one of its main claims is that if trade increases between rich and poor countries, their wages will start to converge. In fact, the ILO report finds that inflation-adjusted wages in developed countries were nearly flat in both 2012 and 2013.

Third, both inside and outside the United States, workers’ real wages are rising slower than their productivity. There’s nothing intrinsically wrong with a gap between the two. But when it persists and grows over long stretches, then it’s fair to assume that workers are no longer being adequately compensated for their performance. And if you think that the whole purpose of a national economy is to create the greatest possible prosperity for the greatest number of its citizens, that’s quite a problem.

For the high-income countries, the gap during the 1999-2013 period was greatest for Germany and Japan as well as the United States – no matter which of the two main measures of inflation you use. Moreover, the ILO findings measure labor productivity versus total compensation, not just wages, so benefits are included as well. Where has pay been growing faster than productivity? The United Kingdom, Australia, France, and maybe Italy and Canada. (The performance of those two countries depends on the inflation measure.)

The only disappointing aspect of the ILO report to me was the absence of any data on productivity and wage trends in developing countries, especially China. No doubt data quality – and simple availability – was the main reason, although China publishes both.

I’d like to see this data because of all the evidence I’ve seen that rising wages in China result at least in part from rising productivity – not because, as many American manufacturing cheerleaders claim, China is rapidly losing competitiveness because pay is completely out of control. But it seems we’ll all need to wait. For now, though, the ILO report makes depressingly clear that the American worker has had lots of company in his and her recent misery.