Tag: Kazakhstan

Can the United States, China and Russia Cooperate on Trade?

The 2016 G20 summit in Hangzhou is fast approaching and, similar to the pre-summit meetings hosted by China throughout the year, the focus will be the state of the global economy. Still contending with sluggish global economic growth, the summit’s theme of “Towards an Innovative, Invigorated, Interconnected and Inclusive World Economy” is especially timely. Under the umbrella of global economic growth, cultivating opportunities for trade and investment will become a major priority for G20 states, and three global powers—the United States, China, and Russia—are each developing their own multinational trade route projects. These major trade projects could serve as opportunities for cross-country cooperation and growth, but they could also become sources for future conflict.

China’s management of domestic markets, currency, and commitment to structural reforms was a cause for global concern at the first meeting of G20 Finance and Central Bank Governors in February. At next week’s summit, China’s President Xi Jinping will undoubtedly point out China’s efforts towards realizing supply-side structural reforms in the face of China’s “new normal” of slower economic growth. As part of these reforms aimed at rebalancing China’s economy, Beijing plans to cut industrial overcapacity, tackle overhanging debt, reform state-owned enterprises, and seek out new consumer markets. On the last point, Beijing is championing its New Silk Road Initiative (also known as “One Belt, One Road”), a major state project focused on opening up new markets. To accomplish this, Beijing is building vast trade networks spanning several countries and continents, by land and by sea. However, many countries are wary. The project, billed as purely an economic one, may evolve to include a political and/or military dimension as well.

Industrial Policy Courtesy of the Cromnibus…Because No More Inferior Potassium

Though a monument to the ravages of Soviet central planning, the barren Magnitogorsk steel works complex still inspires America’s industrial policy proponents.  “Failure to plan is a plan for failure,” said comrade Rep. Dan Lipinski (D-IL), as he described the “pro-manufacturing” legislation he helped slip into the mammoth Cromnibus bill, which became law this month.

The Revitalize American Manufacturing and Innovation Act directs the Secretary of Commerce to establish a “Network for Manufacturing Innovation” to:

  • improve the competitiveness of U.S. manufacturing and increase production of goods manufactured predominately within the United States;
  • stimulate U.S. leadership in advanced manufacturing research, innovation, and technology;
  • accelerate the development of an advanced manufacturing workforce; and
  • create and preserve jobs

Of course, the verbs “revitalize,” “improve,” “stimulate,” “accelerate,” “create,” and “preserve” are euphemisms for protect, subsidize, regulate, and intervene.

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Kazakhstan’s Approach to Bank Failure

Gillian Tett has an interesting column in today’s Financial Times, discussing the recent resolution of one of Kazakhstan’s largest banks, BTA.  What’s novel about this particular bank resolution?  Well instead of the taxpayer, or the rest of the banking sector, covering a large hole in BTA’s balance sheet, the bondholders are taking the hit (of course shareholders are also taking a loss).

Some of this is  probably due to politics; the bondholders in this case are mostly foreign, and of course, the taxpayers are domestic voters.  Not that the foreign bondholders didn’t lobby for a bailout. 

But putting the politics aside, this represents a real test of whether we are stuck only with the choice of bailouts or mass panic, as argued by the Bernanke-Paulson-Geithner crowd.  If, in the weeks ahead, Kazakhstan, and particularly its other banks, are still able to tap the debt markets and its economy does not crater, then I believe we have sufficient evidence to end bailouts here in the United States and start letting the bondholders, instead of the taxpayer, take the losses.

Will lending costs to Kazakhstan banks likely go up?  Of course, that is the point.  One of the most damaging aspects of the 2008 bank bailouts was the elimination of whatever market discipline remained, in terms of large bank creditors.   As most financial institutions fund 90% plus of the activities via borrowing, we simply cannot rely solely on equity, management, and regulators to police their behavior.  Only if creditors really have something to lose will we ever have any hope of ending “too-big-to-fail.”