The Soloist & Efficient Markets

The chaos in the L.A. streets was artistically depicted in the recent film about poverty in America: The Soloist.  It is the tale of an L.A. newspaper reporter that takes an interest in a homeless person that is a gifted musician. In the course of the film, the reporter – played by Robert Downey, Jr., takes an honest look at the issue of poverty in America through his friendship with the homeless man, played by Jamie Foxx.  BoyPovertyDirector Joe Wright tackles this issue with sensitivity and grit, while at the same time, avoiding the trap of either idealizing or demonizing those who have found themselves in this situation.  I bring this movie up not with the intent of reviewing the film, but rather as a pointer to a vehicle that viewers can use to become more aware of this pressing problem, not only in America, but around the world.

Rarely will you see an essay that merges the theme of an esoteric economic theory with a socio/political issue like poverty as depicted in a recent movie, but here you will see it.  This is because the two issues are intricately linked.

The July 18th-24th issue of The Economist had two good articles on how the entire discipline of economics is going through a major overhaul as a result of the 2008 financial meltdown.  Macroeconomics in particular has been largely discredited; in large part because the models are too simplistic and their usefulness for guiding public policy has been severely compromised.  The inability of the current models to predict the credit and liquidity conditions after the failure of Lehman Brothers has given pause to many people who were so convinced they were right.  Similarly, in the field of financial economics the much touted Efficient Markets Hypothesis (EMH) is now undergoing great scrutiny. Sophisticated methods of financial engineering emerged from EMH, many of which were implicated in the meltdown. So called institutional frictions led to certain inefficiencies that challenged the very basis of the model. These frictions that emerged in the form of toxic assets in the syndicated mortgage lending market were indeed inefficient.

Not only that, there was more than just the theoretical debris.  There has been a form of human debris that is represented by the increasing number of unemployed people and people living under conditions of poverty.  And, this is occurring not only in the U.S., but worldwide, with some countries hit harder than others.

It is within this context that the new conditions for thoughtful living takes place in the world. Certain economists, like Andrew Lo of the Massachusetts Institute of Technology (MIT) are developing models that reflect both behavioral and rational points of view. A behavioral approach is one that reflects the actions of irrational human beings, those that use herding behaviors, like those we have seen on Wall Street and on Main Street over the past few months. A rational approach is the straw man that has been used throughout the history of economics to characterize a value-seeking individual that acts in their own self-interest to maximize profits.  Andrew Lo’s work is premised on the idea that humans use trial and error as a basic decision-making tool.  It is within this context that institutional friction and societal learning takes place. This new “adaptive markets hypothesis” is one that takes into account the imperfections of the system; in the case of the world economy now, that includes the human debris.

The metaphor of a homeless musician playing Beethoven on the streets is an apt one for our time. He wrote his 9th Symphony at a time of great upheaval in the socioeconomic context of 18th century Europe. I wonder if the musicians of our time will be remembered by those living on the streets in the future. Don’t you think it would be better if we could build a society where everyone had a room to go to, like the Jamie Foxx character ends up doing in the movie?


Antidote for Green Protectionism: Fair Trade

The policy mantra in leading up to the planned December, 2009 Copenhagen negotiations on a global climate agreement has been “common but differentiated responsibilities.”  This refers to the important inclusion of several critical fast-growing and large emerging markets in the agreement; unlike that of the Kyoto Protocol. Climate change analysts are looking forward to the reopening of genuine talks on establishing emission caps; nonetheless, there is some trepidation among many going into these talks about the role the current global financial crisis will play in moderating the outcomes.  There is, however, an even more subtle, but potentially contentious item that could influence the outcome.  Negotiators need to be aware of a subtle, but insidious threat lurking in the background that may sabotage any progress made in the negotiations.  This is the impact of growing formal and informal forms of trade protectionism that has infected the public policy agenda in many countries since September, 2008.

colstripIn March, 2009, the Center for Economic Policy Research (CEPR) in London issued an insightful eBook entitled ‘The collapse of global trade, murky protectionism, and the crisis: Recommendations for the G20’ edited by Richard Baldwin and Simon Evenett (2009).  There are a number of hard-hitting essays and recommendations to G20 leaders on how to avoid the protectionist tendencies that are creeping into public policies in response to the global financial crisis.  It is a serious piece of scholarship written in record time in response to the events of the 4th quarter of 2008.  Importantly, it includes an essay by Simon Evenett and John Whalley on how to resist what has come to be known as green protectionism. A working definition of green protectionism can be given as “the deliberate use of environmental policy initiatives to discriminate against foreign commercial interests, including subsidiaries of companies owned or headquartered abroad.”

A similar call to resist regulatory arbitrage was made by the World Bank in its recent report ‘Global development finance: Charting a global recovery’ (2009).   They conclude that

“The international spillovers of the crisis in the financial area presently provide a powerful incentive for harmonization, because concerns over stability temporarily outweigh the urge to seek advantages for the ‘home team’.”

Standards Harmonization

Harmonization has been, in the financial and trade arenas, the driving force behind much of the progress made in the past 20 years to open markets and further progress in increasing efficiencies in global supply chains.  This has had a significant effect on lifting millions of people throughout the world out of poverty. This is not to say that there is no inequality in incomes, or that the digital divide has not been widened. This is an issue that will be addressed in a separate essay. The issue here is how the optics of a ‘green’ agenda has given new impetus to those who seek to protect domestic markets at the expense of consumers and global trade. The progress made toward harmonization in trade and financial sectors is threatened now as more and more national governments install provisions in bailout legislation and crisis management initiatives that give preference to in-country procurement. Similarly, governments in many different regions are instituting higher tariffs and implementing other non-tariff measures to protect domestic industries.

And yet, harmonization of global emission standards and approaches to taxation of carbon inputs in production is, undoubtedly, a key objective of the Copenhagen negotiations. Indeed, harmonization of global environmental standards has been included in the General Agreement on Trade in Services (GATS), the Agreement on Technical Barriers to Trade (TBT), among others. And, the principles embodied in these multilateral agreements are seen in several regional agreements, notably, the North American Free Trade Agreement (NAFTA).  But from a trade policy perspective, the environmental agreements that are seen to be least distorting are those that are preferable for a new Copenhagen Protocol.

Nonetheless, many critics of emission caps and global negotiations on climate issues claim that measures committed to by national governments within the context of climate change amelioration will impair business development and progress.  This is a worn out argument that has been used for years in response to Kyoto Protocol pressures. But now, in the post 2008 financial crisis era, these arguments seem to have been given new impetus.  However, the linkage of downturns in global trade, and the associated impacts to economies around the world to the deleterious effects of protectionist measures has rarely been made.  It is these protectionist trends that threaten to take the planet back to a mercantilist regime as was practiced in the 1800s.  And when trade protectionism is coupled with green technologies advocacy, a dangerous condition is set forth that can lead to a vicious downward spiral in the global situation.

It has been documented by the World Bank that since September 2008, governments around the world have proposed or enacted 78 different trade measures that are protectionist in intent.  Furthermore, 17 of the G20 countries are included in the list of offenders.  Importantly, this includes the United States where the global crisis had its genesis due to the syndication of risky mortgages.  Don’t the critics of climate change talks see this more threatening form of regulatory arbitrage as a harbinger of a shrinking global system?  Wouldn’t it make sense to address this problem as part of the climate change agenda?  In this way the potentially contentious negotiations on emissions caps, technology subsidies, and/or tax offsets can be tackled from a proactive point of view within a win/win framework.

Climate Change Control and Retaliatory Actions

Carbon control techniques being discussed among climate changes specialists include a consumption tax and a production tax.  Although the consumption tax is deemed to be fairer, calculating it is complicated by the complexity of global supply chains and rules of origin (RoO) in many countries.  As a result, the fallback position is a carbon production tax. But, as Evenett and Whalley argue

“To offset this adverse effect on competitiveness some proponents, including the high-profile Lieberman-Warner bill that recently failed in the US Congress, have argued for the introduction of taxes on imports from those jurisdictions with lower carbon taxes. Ultimately, it is feared that unilateral and regional measures will induce defensive protectionist pressures that will manifest themselves in measures to limit imports to the detriment of trading partners in particular from those poorer countries, that to date have expressed less interest in reducing carbon usage” (pg. 94).

Indeed, defensive measures in the form of complaints filed with the WTO under the TBT provisions are up 9% in 2009; another form of quantitative proof that these concerns are more than conjecture.

Climate Change and Trade

Other than Evenett and Whalley, advocates of a global climate change agenda have not addressed the trade factor in the ongoing discussions leading up to Copenhagen 2009.  The trade aspects, which include the need to address WTO Doha Round agenda items, as well as progress toward the Millennium Development Goals (MDGs), must be seen systemically just as the earth’s atmosphere is being viewed.  Importantly, the fact that over 3 billion people live on less than US$2/day should be taken into account as a key factor in moving forward (Prahalad, 2006).

This is where the antidote comes in. And it is coming from a most unlikely source; the grassroots movement known as the ‘fair trade’ movement.  If the multi-dimensional human element (as defined so eloquently by Muhammad Yunas in his book ‘Creating a world without poverty: Social Business and the future of capitalism’ [2007]) is factored in, then alternative strategies can be formulated. These alternative strategies would take into account the need to foster social businesses that both meet a market efficiency goal while at the same time satisfying a social goal, that of productive employment for workers in the budding new ‘green’ manufacturing industries.  However, these jobs may not necessarily be located in the countries that are now sounding the battle cry for supporting only their domestic industries. This could be a reason for easing trade restrictions and getting back on track with financial harmonization.

Alternatively, if business models guiding the development of technologies to implement programs for carbon capture and sequestration and/or alternative energies based on renewable resources must be built on the profit motive premise, then the pyramid-to-diamond transition argued so forcefully by C.K. Prahalad in his book ‘The fortune at the bottom of the pyramid: Eradicating poverty through profits’ could guide public policy discussions (2006).  His reference to the pyramid-to-diamond transition is his way of describing how, through focus on developing suitable products for those people living at the bottom of the pyramid (BOP), while at the same time, building the infrastructure to support the productive growth of this sector, a large segment of the population can be lifted from poverty.  In the context of climate change discussions, appropriately sized technologies based on renewable resources could offset some of the carbon emissions from the millions of people that still rely on coal and firewood burning for heat and cooking.

These two approaches to reducing global poverty rely on a harmonized trade and financial services regime; much like the one that was in place before September, 2008.  And, although global trade has declined precipitously, and economies are shrinking on the order of several percentage points (as measured by gross domestic product [GDP]), free trade is not in total retreat.  There is a solid foundation upon which to build.

Climate Change and Fair Trade

This is where a fair trade approach to production in carbon control and sequestration technologies can come into play. With a systematic approach to global climate change talks that guard against green protectionism and, at the same time, seek to enhance efforts to design appropriate energy sources for the BOP segment, whole new markets for products and services can be created.  Importantly, with a premise that seeks as a primary goal to use climate change progress as a mechanism for empowering those people who will be most affected by the energy resources that will be used as substitutes for fossil fuels, the creative and entrepreneurial power of these individuals can be unleashed to help design systems for carbon capture.

This approach can help negotiators from becoming schizophrenic in the Copenhagen meetings; allowing them to avoid opposing protectionist measures to the financial crisis, while at the same time, advocating for policies that would limit imports on the basis of RoO or TBT.

How this will work is still a bit murky.  It is, right now, just a germ of an idea.  But, by voicing the potential for this nexus, it is my hope that techniques for merging climate change and trade policy with practical, implementable solutions can be formulated. Then the empowered people from all countries can become part of the global trading system, rather than sitting outside watching the sky get smoggier with each passing year.

Lamy Optimistic on Completing Doha Round

When the G-20 countries met in London earlier this year much of the attention was placed on the impact of the global economic crisis on the developing world.  The Doha round of World Trade Organization (WTO) negotiations was to have addressed this issue.  However, negotiations broke down in July, 2008 due to disagreements between EU countries and the U.S. on agricultural subsidies.  This November, 2005 report provides a good analysis of the implications of various policy options:  The below aerial photograph of the Luang Prabang area within Laos illustrates that even small plots on the banks of the Mekong are important for subsistence agriculture in the developing world.

AerialLouangPrabangA meeting of the Cairns Group, reported on today by Germany’s Sueddeutsche Zeitung, noted that Pascal Lamy, the Secretary-General of the WTO is now optimistic that these differences in agricultural subsidies can be overcome and the Doha Round can move forward.  This is good news for the developing world as countries seek to trade their way out of the current global economic crisis.  The value of successful negotiations is estimated to be worth at least US$150B.  Lamy noted, however, that the ultimate success will depend how the U.S. Congress responds.

U.S. Congressional representatives should be contacted by their constituents to ensure that protectionist approaches do not overshadow the real gains that can be made with a globally integrated and well functioning system.

Fair Trade Chat Tool

I have recently set up a Twitter account to link to some of the other people in the global community that are concerned about fair trade, growing trade protectionism, and back-tracking on the trade liberalization agenda.  Granted, this is a pretty esoteric subject…..but that is why Twitter is such a good tool.

Profile of mans face and hand with the word startThere are pockets of people all around the world that are beginning to see the linkages between rising unemployment, inflation, economic crises and political suppression.  The events over the past few days in Iran have begun to illustrate this point to the whole world.  Twitter has been the tool of the democratic-minded youth in Iran to communicate their views on suspected corruption in the election to the rest of the world.

Fair trade, as it is outlined by the 10 Principles of Fair Trade at the World Fair Trade Organization website ( see: ) is one of the only viable approaches to addressing the worldwide disparity between the haves and the have-nots of the world.

And, within the context of the fair trade agenda there is no superficial attempt to outwardly redistribute income.  It is a common sense approach to encouraging the extension of a free trade agenda in a manner that honors all participants in the supply chain.

Join in this important dialogue at this new chat room:

Let us know what you think.  [Note:  This chat box was constructed using the chat functionality at  Here you can integrate all of your chat programs into a single platform.]

Also, be sure to check out some of the fairly traded products at:

This is the essence of the New Silk Road.

Temple Restoration & Economic Development in Cambodia

On June 3, 2009 Robert Turnbull wrote an article for the International Herald Tribune entitled “Coaxing the Khmer temple from the jungle’s embrace” (pg. 10). The article focused on the restoration of Banteay Chhmar in NW Cambodia by a team led by British Architect, John Sanday.


The site, once restored will likely be added to the UNESCO’s World Heritage List. It currently has a budget of US$6M and there are 44 employees working full time to restore the site.  Pictured here is a photo I took of the beautiful restoration that was done on the Banteay Srea temple of about the same historical period.

Interestingly, Turnbull also pointed out some of the other issues that are facing the team as they proceed with restoration. Key among these issues is the availability of water. They are operating in a region with many unexploded ordinance from previous war time activities.

These legacy land mines are dangerous to the local people for two reasons. First, many unsuspecting by passers are injured and maimed from the triggering of these old land mines.


Second, the weapons-grade materials are leaching out of the unexploded ordinance and into the local water supplies. As a result, the local people are plagued by both water quantity and water quality problems.

A hydrologist from Geneva, James Goodman, will be working with the team to map the area and to identify suitable spots for wells to be drilled. These wells will benefit both the restoration activities and the livelihood of the local population. Interestingly, a  Community Based Tourism group has been set up to support the development of a local infrastructure that is compatible with the life style of the local people while at the same time providing a framework for accommodating the increased traffic that is sure to come if the site attains listing on the UNESCO World Heritage List.

I have taken the time to sketch out the events and issues surrounding this temple restoration to point out some of the trade-related implications.

Cambodia is one of the poorest nations in Asia.  Despite recent progress, the Cambodian economy continues to suffer from the effects of decades of war, civil war and internal political strife. The Cambodian economy is still essentially aid-dependent. Investment in infrastructure and social services is predominantly funded by overseas development aid and concessionary loans. Per capita income is rapidly increasing but is low compared with other countries in the region. According the U.S. Department of Agriculture Foreign Agricultural Service, per capita GDP was US$357/year in 2004.

Nonetheless, by 2008 the rate of growth was 9.4% in 2008 as noted by Cambodian Prime Minister Hun Sen in his February, 2009 speech to the Economic Conference of the Economist Group and as reported by the Xinhua News Agency (February, 2009).  They are seeking to maintain a rate of at least 6% in 2009 given the current global financial crisis.  This optimism is based on the relative importance of their three most important industries:  agriculture, textiles, and tourism.

JaneWithChildrenHowever, more than 50% of the population is 20 years or younger. The population lacks education and productive skills, particularly in the poverty-ridden countryside, which suffers from an almost total lack of basic infrastructure. Fully 75% of the population remains engaged in subsistence farming.  Agricultural production for the export markets (a source of hard currency) is just beginning to develop.  And, the country’s textile industry has been affected by the end of the Multi-Fiber Agreement in 2005 which had governed a global quota system for decades.

Nonetheless, efforts are being made, with the support of the World Bank and the Asian Development Bank among others, to develop training programs for employment in each of these sectors.

It is against this backdrop that the Community Based Tourism group associated with the Chhmar restoration is taking place.  It is my hope that the regional issues associated with water availability be resolved.  Further, it is my hope that some training programs be implemented.  A tourist economy can be a double-edged sword.  The demands for young men and women in the sex trade are high in Cambodia.  And, when this is the only option for feeding the extended family, even this can become acceptable in this societal context.

SreyGirlsSmallAgriculture, especially silk worm farming, presents a viable alternative to a Cambodian economy based strictly on the tourist industry.  Silk worm farming relies heavily on the cultivation of mulberry; the leaves of which are the preferred food source for these rapidly growing worms.  And, due to Cambodia’s latitude, rainfall patterns, and climate, mulberry farming is a suitable crop.

It is my hope that some of the contributions being made by the private donors to restore the beauty to the Banteay Chhmar temple be budgeted for just such programs for the local population.