ISE Proposal for Financial Market Reform

The International Securities Exchange (ISE) has issued a proposal for reform to the the U.S. securities markets. The proposal is based on the premise that there are currently significant overlapping areas and regulatory gaps between the Securities Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC).

They are proposing a new risk-based framework that includes 3 components:

  • Financial Systemic Risk: financial and capital matters involving commercial and investment banks, as well as futures commission merchants, investment companies and hedge funds.
  • Disclosure: disclosure/risk analysis for investors, which would cover corporate issuers, investment companies, and product-specific risk.
  • Financial Industry Operations: operation of financial markets, trading platforms and financial service providers, including but not limited to the services traditionally provided by brokerdealers, investment advisors, hedge funds and futures commission merchants.

To execute this framework, there would be a new U.S. Financial Markets Commission (FMC) that oversees all activities. A transitional authority would be set up for 18 months to facilitate the merger.

See the full proposal at: http://ise.com/regulatoryreform/

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Importance of Free Trade to the US

No contentious issue has more agreement among economists than that trade protectionism is detrimental to all concerned. Yet no issue is less understood by the public and politicians.  The typical claim is made that high wage countries cannot compete against countries where labor is exploited by low pay and terrible working conditions. By that reasoning California and New York cannot compete against Arkansas. In addition to huge wage differentials between California and Arkansas, there are no trade, legal, or language barriers to contend with. Therefore, according to arguments of trade protectionists, there should be massive outsourcing to Arkansas, Louisiana and Mississippi from California and New York. Obviously, this has not happened. Also, wages in Japan skyrocketed relative to US wages throughout the post war period with no effect on their huge trade surplus.
Image of globe in networkThe genesis of persistent trade imbalances has only a little to do with wages and working conditions. To understand why, we must start with the basics. When I get a haircut, I have established a trade deficit with my barber. He can take the money and buy something from me, buy something from someone else, or save the money. This same scenario can be aggregated to a nation as a whole. When we purchase clothing made in China, the Chinese have the same three choices as my barber. In recent decades the net of all such choices by citizens around the world outside the US has been to save much of the money earned through trade.
Now, having saved a chunk of the money earned through trade, our frugal foreigners must choose what to do with the dollars they have not spent. They can trade the dollars for other currencies, or they can invest those dollars in the US. The overwhelming choice has been to invest in the US because of the relative strength of our political economy. That is exactly equal to our trade deficit. As our economy weakens in combination with profligate monetary policies our currency will lose value.
Sideshows like currency devaluation, overvaluation and manipulation are irrelevant to our trade deficit. No amount of currency devaluation by our treasury will reduce our trade deficit as long as we spend and foreigners save. Our currency has plummeted over the past 40 years, sometimes so fast as to be on the verge of utter collapse, yet the trade deficit soared. The value of our currency is a sensitive barometer of the strength of our political economy and something that touches every one of us every day. It is insane to want that measure reduced in value.

Prior to WWI, as a debtor nation, our borrowing and spending was primarily for investment purposes (as in capital equipment). Today the trade deficit is for consumption. The consequences are very different. When we borrowed for investment our currency strengthened along with our economy because we were increasing our productive capital. Our borrowing for consumption means we have literally consumed – actually hocked – our productive capital.
Until now the effects of profligate money printing and extreme economy wide debt have been muted because foreigners have considered the US a great place to invest their savings, though at reduced exchange rates for our dollar. That is about to change.

Reader Poll on Fair vs. Free Trade

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Is free trade fair?

Is fair trade free?

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Simpfendorfer’s Book: New Silk Road

Ben Simpfendorfer’s book, The New Silk Road (2009, Palgrave Macmillan), fills a critically needed gap in the international public policy literature on the implications of the new trade and economic alliances now being formed between China and several Arab nations.  His personal accounts documenting his extensive residency and travel in Amman, Beirut, and Damascus in the 1990s and Hong Kong after 2000 tell a story rarely told in the developed world.  His fluency in both Arabic and Mandarin Chinese give him a rare, unfiltered look at the emergence of both the Arab world and China as powerful global financial giants in the 21st century.

SilkShopVivid in its accuracy, without being ostentatious, Simpfendorfer leads the reader on a journey through the streets and bazaars of many cities as a way of conveying the pulse of the Arab and Chinese streets.  His book captures the grit and grime of the cities while, at the same time, fixing the scenes he describes within the socioeconomic context of the events he bears witness to.  As someone who is documenting the global shift of power from the post Bretton Woods Western world to the locale of the ancient Silk Road, he outlines the reasons for this rebalancing in clear and lucid terms.  He goes beyond the simple explanations stemming from oil geopolitics and explores the historical roots of the relationships between China and Syria, China and Egypt, and China with her other important alliances in Africa and the Middle East.

As a thoroughly wired economist who plays the role of participant observer he offers subtle insights into why this global power shift is taking place and how the West can best prepare for the diminution of influence that will inevitably come as a result of this shift.  His well researched and well documented facts and figures reveal the stark truth about the lack of language and cultural preparedness that is existent in America, and how that has worked to reduce her influence within these important regions.  He also shows how poor policy decisions by U.S. leaders to cut budgets for peace time efforts to win the hearts and minds of the Arab world have contributed to misunderstandings that have undermined our foreign policy interests and contributed to the rise of Islamic fundamentalism in the world.

People rushing through train station 4What becomes clear in reading this insightful book is that it is a story only beginning to be told.  This is just the first chapter of a very long tale about the transformation of the global balance of power.  He only touches briefly on such issues as currency reserves, national debt, and military strengths and weaknesses, among other things.  How these issues will factor into the equation are, of course, of paramount importance as the U.S. moves forward with her foreign relations in the Middle East and China. However, as a book that focuses on the trade aspects of these important countries, it gives some foreshadowing of issues to watch for as a newly emerging sea lane-based Islamic corridor is defined and the ancient Silk Road is reestablished.

The West would do well to heed the warnings set forth in this book.  A ‘Go Global’ initiative, much like the one advocated by China in the 1990s, and described in the book, would be a path worth emulating in order to curtail the current global economic crisis.  It strikes a hard blow to the arguments for protectionist policies by showing how these two important regions are passing by the old powers.

The world should listen to those that speak the languages, along The New Silk Road.

Is Fair Trade Really Fair? Does it Matter?

I recently got into a debate with someone that argued that the fair trade movement is really just a marketing ploy that preys on the goodwill of consumers in an effort to increase sales.  Importantly, I noted the important work of the Fairtrade Labelling Organizations International (FLO) in Bonn, Germany as a counter to the critic’s points.[i] Upon reflection, I realized that the assertions of this critic should be closely examined.  It has been recently reported by FLO that world fair trade products expanded by 22% in 2008 despite the onset of the global financial crisis.  If there is a growing demand for these products, while demand for many other products is either leveling off or declining, then there must be something important happening at the international level.

HandbagShopkeeper
In truth, the fair trade movement has led to many unique unconnected, nonetheless, worldwide initiatives that seek to advocate for workers being paid a fair wage.  Furthermore, the advocacy doesn’t end there.   The World Fair Trade Organization (WFTO) audits their members to ensure that, not only the producers, but everyone along the supply chain, all the way to the ultimate consumer is being adequately compensated.  And, it is true in some cases, as some critics of fair trade point out; the end price to the consumer is generally higher than prices on similar items sold without the certification of fair trade.

But the questions remain:

  1. Are these efforts by a growing number of businesses from around the world making an impact on the lives and fortunes of those they are seeking to represent?
  2. Is the new so-called “LOHAS” consumer group, just that; a marketing ploy to those who live Lifestyles of Health and Sustainability (LOHAS)?
  3. Is there truly a growing worldwide demand for fairly traded products?

The Institutional Framework

Some of the most important organizations that are leading the fair trade movement worldwide are as follows:

  • The WFTO, based in the Netherlands, has developed a set of 10 principals that have become the de facto charter for fair trade organizations around the world. [ii] WFTO is over 20 years old and maintains the FT100 list; a list of member companies that are fully committed to creating a sustainable future.
  • The Fair Trade Federation (FTF), based in Washington, D.C., serves as a resource for organizing trade fairs and conferences for U.S. and Canadian wholesalers and retailers who are working with producers from around the world. [iii]
  • FLO, mentioned above, is made up of 24 member organizations from around the world. It has developed a trademark that only its member organizations can use when selling products on the open market.  It has established both generic and product standards, and maintains a standards evaluation unit for ongoing review of members.
  • The Fair Trade Resource Network (FTRN), based in Philadelphia, is an information hub that serves the worldwide fair trade community with educational materials and networking ideas.[iv]

These organizations, as well as many other industry-specific or region-specific non-governmental organizations (NGOs) are the thought leaders of this worldwide grassroots movement.

Is Fair Trade Making An Impact on the Lives of Producers?

HappyKidsGift2Testimonials given on hundreds of corporate sites of the members of the FTF and WFTO seem to suggest that the movement is, indeed making an impact on the lives of producers.  For example, FTF member Baladarshan, based in Chennai, India sells handmade objects through a storefront and on the Internet.  Handicrafts are constructed in vocational training programs supported by the SPEED Trust (Slum People Education and Economic Development).  SPEED is also involved in microfinance, elementary education, and prenatal education for members of the community.

optGroupSimilarly, in Luang Prabang, Laos, the storefront Ock Pop Tok is providing employment for a group of about 40 weavers and trainers and shop-keepers, all involved in selling the masterful weavings that characterize the traditional arts of Laos.

ThaiCraft1In Thailand WFTO member Thai Tribal Crafts brings together the traditional crafts of the Hmong, Lahu, Mien, Karen, Akha, and Lisu tribes to sell to the growing tourist traffic in Chiang Mai.  These artisans produce a wide range of products from silversmithing, to baskets to wood and stone carvings to beautiful weavings.

As encouraging as these isolated examples are, it remains to be seen whether or not many small-scale, regionally focused initiatives can make a dent in the profound need for jobs in the developing world.  To address this on scale large enough to matter, traditional news outlets and political pundits need to forego the call for protectionist policies in developed world countries and start educating people on the systemic benefits of a trading system that holds all its producers in esteem.

Until then, this question remains unanswered.


Is Fair Trade Just A Marketing Ploy?

The LOHAS magazine defines LOHAS as: a market segment focused on health and fitness, the environment, personal development, sustainable living, and social justice.[v] According to researchers at the WorldWatch Institute, the LOHAS market was estimated to be worth $300B in 2006. [vi]

Big corporations are also moving aggressively to market to this segment.  For example, eBay (NASDQ:EBAY) has formed a joint venture relationship with World Of Good to launch WorldOfGood.com, a web-based auction and product sales portal that only sells LOHAS products.

Furthermore, in specific market segments, peer-reviewed, scientific publications are beginning to emerge that suggest that this is an increasingly important phenomenon, and that, beyond the hype, there is some validity to it.

In the agricultural sector, for example, the World Bank published a Working Policy Paper on Fairtrade coffee in Costa Rica.[vii] The abstract states:

“This paper concerns an NGO intervention in agricultural commodity markets known as Fairtrade. Fairtrade pays producers a minimum unit price and provides capacity building support to member cooperative organizations. Fairtrade’s organizational capacity support targets those factors believed to reduce the commodity producer’s share of returns. Specifically, Fairtrade justifies its intervention in markets like coffee by claiming that market power and a lack of capacity in producer organizations ‘marks down’ the prices producers receive. As the market share of Fairtrade coffee grows in importance, its intervention in commodity markets is of increasing interest [emphasis added].

Using an original data set collected from fieldwork in Costa Rica, this paper assesses the role of Fairtrade in overcoming the market factors it claims limits producer returns. Features of the Costa Rican input market for coffee permit a generalization of the results. The empirical results find that market power is a limiting factor in the Costa Rican market and that Fairtrade does improve the efficiency of cooperatives [emphasis added], thereby increasing the returns to producers. These results do not depend on the minimum price policy of Fairtrade and therefore can inform on its organizational support activities…..”

It would appear then, from this initial study that there is more to the Fairtrade agenda then a marketing ploy.  Indeed, many opportunists will be tempted to take advantage of the vulnerability of buyers seeking to do well with their purchasing decisions.  However, as Paul Hawken points out in his book Blessed Unrest: How the Largest Movement in the World Came into Being and Why No One Saw It Coming (2007), there is documented evidence that a major global shift in awareness is taking place by millions of people in many different locales.

I would give a tentative no in answer to this question.  Fairtrade is not just a marketing ploy; it is a genuine global movement with advocates all around the world whose actions are aimed at making world markets fairer to those who produce the goods for the consumers.
Is There a Growing Worldwide Demand for Fair Trade Products?

A survey, carried out by the Dutch Association of World Shops, in 28 European countries plus the United States, Canada, Japan, Australia and New Zealand, showed that global fair trade sales in 2007 reached a record figure of $3.61B.  When coupled with the 2008 Alter Eco consumer attitudinal survey which showed that 65.31% of those surveyed in the US had previously purchased fair trade products, this seems to confirm the trends, at least in the developed world. [viii]

To supplement these findings FLO conducted a global survey in 2008 which reveals that support for Fairtrade is on the rise.

“Ahead of World Fair Trade Day on May 9, 2009, this global consumer survey on Fairtrade shows that shoppers increasingly expect companies to be more accountable and fair in dealing with producers in developing countries. The survey by GlobeScan was commissioned by Fairtrade Labelling Organizations International (FLO) with a sample size of 14,500 in 15 countries. Among those surveyed, almost three quarters of shoppers believe it is not enough for companies to do no harm, but that they should actively support community development in developing countries. Consumers are calling for a new model in trade in which justice and equity are integral parts of the transaction. ‘Active ethical consumers’ make up more than half the population (55%) in the countries surveyed.” [ix]

As useful as these data are, these survey data are missing the added benefit of standard definitions for cross-border measurements.  One has to conclude that the most effective way of answering this question is to conduct statistical analysis on macroeconomic and trade trends at the global level.

This is, in fact, what the Global Trade Analysis Program (GTAP) at Purdue University is doing.  The problem is that the raw data that is analyzed from all of the countries of the world does not yet differentiate between widgets made using sweatshop labor, and widgets made by fair trade producers.

The UK-based New Economics Foundation (NEF) is not waiting, however.  They have recently published the 2nd Annual Happy Planet Index (HPI) report.[x] In this analysis they use a number of indicators including the United Nation’s Human Development Index (HDI) and other measures of ecological balance and social welfare.

As useful as this index is for developing an understanding of the state-of-the-art in quantifying these global economic trends, the only real remedy to this would be a world-wide effort to incorporate fair trade measures in standard census counts and industrial activity surveys.  An agency such as the World Bank would be appropriate for this task; and the surveys could be conducted by all its member countries.  Countries would benefit from the standards definitions work that has been conducted to date by FLO and insight about the synergistic effects of fair trade on other measures of welfare from the members of the WFTO and FTF, among others.

Once standardized data were being collected the researchers of the GTAP project, NEF and others would be able to evaluate the true nature of the economic trends that fair trade advocates are documenting through regional analyses and case studies.  In this way, this final question could be answered.

In the end, NEF’s Happy Planet might just turn out to be very happy indeed.


[i] http://www.fairtrade.net/

[ii] See these principles here:  http://www.wfto.com/index.php?option=com_content&task=view&id=2&Itemid=14

[iii] http://www.fairtradefederation.org/

[iv] http://www.fairtraderesource.org/

[v] http://www.lohas.com/

[vi] Halweil, Brianink =; Lisa Mastny, Erik Assadourian, Linda Starke, Worldwatch Institute (2004). State of the World 2004: A Worldwatch Institute Report on Progress Toward a Sustainable Society. W. W. Norton & Company. pp. 167.

[vii] Ronchi, L. (2006). “Fairtrade” and Market Failures in Agricultural Commodity Markets. World Bank, Policy Research Working Paper # WPS4011

[viii] http://www.wfto.com/index.php?option=com_docman&task=cat_view&gid=94&&Itemid=109

[ix] http://www.kamcity.com/namnews/asp/newsarticle.asp?newsid=46924

[x] http://www.happyplanetindex.org/public-data/files/happy-planet-index-2-0.pdf

Is The U.S. Doomed To Years Of Slow Economic Growth?

Maybe not!

shoppingMallGreenFor decades the US consumer has fueled the fires of economic growth. Spending like drunken sailors the consumer has drained savings and run up a mountain of debt. Today with their savings depleted, their investments pillaged and their homes devalued, it will take a decade before they can spend again. We must pay the piper and are doomed to a lost decade. Or so goes the current economic mantra.
But in a new report entitled “The New Normal Will Likely Be ….Normal“, Wells Fargo’s Chief Investment Strategist Jim Paulson argues our economic recovery will be far better than expected. Paulson argues the seeds of our recovery were planted in the midst of our decadence. In short:

A: For almost two decades US consumers have spent far beyond their means. But that spending has helped jump start third world economies around the globe. We helped create a new world of consumers who have jobs, savings and aspirations for a better life. As we destroyed our savings, we created an emerging class of consumers around the world.

B: During the last expansion (2003-2006) overall real GDP growth averaged 3 to 3.5 percent. That was comprised of about 3% from the household sector, 1% from the business sector and a “net loss” of about 1% from our trade deficit. Let’s say that in the next expansion consumer spending drops to 1% of GDP. Business still contributes 1%, but rising exports now contribute 1%. Overall, GDP growth still remains at 3%, but its composition has changed.

Paulson argues several things must be put in place to make this happen:

1. Emerging world economies must no longer be allowed to continue currency pegs at cheap (below market) levels. Many emerging nations currencies are undervalued and would appreciate considerably were this to happen. China immediately comes to mind.

2. Emerging economies must no longer be able to treat workers like indentured servants. Worker protections, minimum wages and benefit packages must be enforced.

3. Environmental laws will need to be enforced worldwide.

A more level playing field will be created.

Should these things happen, the absence of the US consumer need not be a “death knell” for future economic growth. To read the article in it’s entirety, go to http://www.wellscap.com