Archive | International Political Economy

The NSA and Internet balkanization

Kevin Drum argues, contra John Naughton and James Fallows, that the NSA program won’t cause an ‘international uprising.’

it’s really not clear to me that broad public reaction is going to be very strong. Will Danish users stop using Facebook until some Danish company creates an alternate social networking platform? Probably not. The fear of NSA spying is simply nowhere near as compelling as the huge inconvenience of everyone being on a different platform and being unable to chat and share pictures with their friends in other countries. As for businesses, they’re probably less interested in avoiding NSA spying than they are in staying ahead of hackers and concealing their more dubious dealings from ordinary law enforcement agencies. Using a non-U.S. platform won’t do them any good on either of these scores. We’ll see, of course. Maybe this is the beginning of a long decline in U.S. information services, as overseas users start to move to other platforms. It’s possible. Unfortunately, I sort of doubt it. At most, I suspect we’ll start to see a bit more nationalistic reliance on domestic network infrastructure, but that’s something that’s always been likely anyway. Beyond that, people will just keep on doing what they’ve been doing.

I think that Kevin seriously underestimates the extent to which privacy and surveillance are important issues in countries like Germany. But the more important issue is that a strong European reaction does not require a mass public revolt. All it requires are more forceful actions by European officials who will have every incentive to make a fuss – specialized privacy commissioners, or, as they are called in Europe, data protection authorities.

Each European member state has a data protection authority (DPA) – an independent watchdog with powers to require corrective action from private companies, or to fine them. To date, these fines have been relatively small scale. Under new legislation in the pipeline, DPAs may be able to fine companies like Google or Microsoft 2% of their annual turnover, if they are found to have breached the privacy of European citizens. Up to the Snowden scandal, it looked likely that this legislation would have a carveout for FISA type requests from the US (the US has been quietly and intensively lobbying for this). No longer. It is clear that no carve out has any chance of making it through the European Parliament.

Furthermore, European politicians are responding to pressure over the NSA by trying to beef up European privacy law still further. One of the reasons that companies like Google and Microsoft have based themselves in Ireland is because the Irish DPA is … more understanding of their needs … than many of his counterparts on the continent. Germany is now pushing to eliminate this national level flexibility in interpretation.

The results are clear. Cooperation with the NSA is probably illegal under European law as it stands, and the law as it is likely to be amended. Big US firms like Google, Microsoft and Facebook may find themselves in the unappealing position of facing hefty European fines if they continue to cooperate with the NSA, and legal difficulties in the US if they stop cooperating. They are unsurprisingly quite unhappy with this turn of events. They are likely to be more unhappy still if (as is entirely likely) DPAs threaten action against European firms who outsource, say, email services to Google. And this is not to get into questions of government procurement (where national IT firms are likely to see a big boost in business thanks to security fears – if Microsoft is cooperating with the US government, do you really want to have it running your internal servers).

The simple lesson here is that it doesn’t take mass public defections to make life difficult for US cloud providers. All one needs is action by the relevant regulators. This kind of politics should also prompt political scientists to pay much more attention to interactions between national regulators than they do, as this is where much of the interesting political action is taking place between countries with low tariff barriers and increasingly interdependent economies (again, Abe Newman and I make this argument at greater length in a forthcoming piece in World Politics).

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Legalized Prostitution Increases Human Trafficking

One of the advertised advantages of legalizing prostitution is that it should reduce illegal human trafficking. The theory is that customers will favor legal over trafficked prostitutes, thus reducing demand for the latter. Yet, legalization may also raise overall demand for prostitution. This increase in the size of the market may lead to more trafficking even if  most customers prefer legal prostitutes.

Seo-Young ChoAxel Dreher, and Eric Neumayer find in a recently published article in World Development that this latter effect dominates empirically:  countries that legalized have larger reported inflows of human trafficking than similar countries where prostitution is illegal. They also found this effect in a more detailed study of Sweden, Germany and Denmark, which changed their prostitution laws.

Eric Neumayer reflects on some of the implications and caveats of the study here, including the difficult data issues that are inherent to a study like this. It may be difficult for customers to distinguish legalized from trafficked prostitution, perhaps partially because prostitution is not always fully legalized. There may also be benefits of legalization for working conditions. Yet, the point that legalizing prostitution can make consumption more desirable (or acceptable) to a broader audience (and lead to negative consequences) strikes me as both plausible and important. Perhaps there is something to be said for the Swedish policy, which makes it illegal to buy sexual services but not to sell them. As Eric Neumayer points out:

The number of human trafficking victims in 2004 in Denmark, where it is decriminalised, was more than four times that of Sweden, where it is illegal, although the population size of Sweden is about 40 per cent larger.

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Will the New Agreement Help Safety Standards in Bangladesh?

The collapse of the Rana Plaza complex, which included several garment manufacturers, is yet another reminder of the working conditions that too often prevail in the apparel sector. The collapse resulted in over 1,100 deaths, and the toll continues to rise.

The global apparel industry is characterized by a vast network of subcontracting relationships. Major brands rarely own the factories in which their products are made; most factories process orders for a variety of firms, and most brands rely on an array of subcontractors. These arm’s length relationships make it difficult for even well-intentioned global brands to monitor conditions in their supply chains (see here for my argument the effects of subcontracting versus directly owned production on workers’ rights). Additionally, with competition in the industry based on speed and price – the subcontractor who can deliver cheaply and quickly enough to satisfy fickle Western consumer markets tends to win business – local factories have incentives to ignore domestic laws and corporate codes of conduct related to working hours and health and safety. Continue Reading →

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Can Crowd Sourcing Improve Data on Chinese Aid to Africa?

AidData has a full response to Deborah Brautigam’s criticism of their data that I discussed yesterday. The debate contains a lot of nuts and bolts but it also raises some issues that should  interest anyone involved in using or collecting large amounts of data based onlocal media reports:

Brautigam seems to think that it’s a bad idea to publish this dataset and expose our methods and sources to public scrutiny. She says “[d]ata-driven researchers won’t wait around to have someone clean the data. They’ll start using it and publishing with it and setting these numbers into stone.” People may abuse the data, but we disagree that this is a good reason not to publish the data. We have been systematically collecting project-level development finance data for the better part of the last ten years, and we find errors in the official data all the time. You cannot fix errors until you know that they exist, and we believe that more sunlight and scrutiny is the best way to spot and fix errors. Brautigam’s arguments seem to suggest that only a small group of people who she considers to be experts should be allowed to collect and analyze data on the nature, distribution, and effects of Chinese development finance. We disagree with this “gatekeeper” approach to social science and expect that it will slow progress in this narrow sub-field of the academy.

I am sympathetic to both claims. I fear that Brautigam is correct that people will start using the data simply because it is there without much regard for data quality. Yet,  there is much to be applauded about AidData’s transparency and willingness to publish data before major publications have appeared. The usual strategy to only release data after publication only magnifies the problem. By keeping data proprietary, researchers can use data without similar levels of scrutiny. This is why Brautigam’s post is so useful: it is easily accessible to reviewers so careful researchers will have to engage with the issues she raises. Moreover, publications in peer-reviewed journals legitimize data sources; reducing incentives for researchers to spend time and resources scrutinizing data quality. There are at least some grounds for optimism that AidData’s approach will pay dividends:

 

Finally, Brautigam claims that AidData’s attempt to crowdsource Chinese development finance information will not work. This assertion is a testable hypothesis. With time, others will be able to judge whether we succeed in generating higher-quality and higher-resolution data over time. It is interesting to note that within 24 hours of the china.aiddata.org site being launched, users began to provide new information about specific projects in the database. The Guardian produced field reports on four of the projects in our database (here, here, here, and here).

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Can Corporate Social Responsibility Improve Labor Standards?

The disaster in Bangladesh has led to much heated discussion in the blogosphere and elsewhere about how best to improve labor and safety standards for workers in the developing world. Can corporate social responsibility help do this? Richard M. Locke, who has conducted extensive research on this question, thinks not. From his article in the new Boston Review:

have these private efforts improved labor standards? Not by much. Despite many good faith efforts over the past fifteen years, private regulation has had limited impact. Child labor, hazardous working conditions, excessive hours, and poor wages continue to plague many workplaces in the developing world, creating scandal and embarrassment for the global companies that source from these factories and farms. …
I began studying Nike because I was impressed with its commitment to labor standards. After several years of effort, with many conversations and visits to corporate headquarters, I convinced the company to share its factory audit reports and facilitate visits to its suppliers. Eventually my case study evolved into a full-fledged research project involving the collection, coding, and analysis of thousands of factory audit reports; more than 700 interviews with company managers, factory directors, NGO representatives, and government labor inspectors; and field research in 120 factories in fourteen different countries. What began as a study of one company (Nike) in a particular industry (athletic footwear) grew to include several global corporations competing in different industries, with different supply chain dynamics, operating across numerous national boundaries. …
… Today, lead firms are coordinating the production of thousands of independent suppliers located for the most part in developing countries. … In the absence of an enforceable system of global justice, private, voluntary regulation became the dominant approach, promoted by labor rights NGOs and global corporations alike. … Given all that Nike invested in staff, time, and resources, one might expect that conditions at their supplier factories improved significantly. But while some factories appear to have been substantially or fully compliant with Nike’s code of conduct, others have suffered from persistent problems with wages, work hours, and employee health and safety.
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How Did Intellectual Property Become a Free Trade Issue?

The decision by India’s Supreme Court to deny a patent to Novartis for Glivec has caused furore among US pharmaceutical manufacturers, who are calling for harsher and more punitive patent policies to be attached to new trade agreements. However, when you think about it, it’s quite weird that “intellectual property protection” has become an integral part of US free trade policy. After all, patents, copyrights and the like are nothing more or less than licensed monopolies – exactly the kind of thing one might expect free trade agreements to push against. And indeed, the story of how the US began to link patents, copyright and free trade is a tortuous one. Susan Sell provides a detailed account of how this happened. The story she tells is of how the intellectual property lobby and the US Trade Representative gradually entered a symbiotic relationship in which the IP lobby pushed for increases in the USTR’s powers in return for an ever greater emphasis on intellectual property issues as part of the US trade agenda.

inserting intellectual property into the multilateral trade regime made no sense on its face. Intellectual property and trade are different issues, posing very different problems … Traditional protectionist groups from the steel and agricultural sectors
pushed for amendments to trade policy law in 1974. They sought more effective remedies against infringement of domestic intellectual property rights in the United States … This provided intellectual property interests with an opening; other sections of the 1974 Trade Act (which were not intended to apply to intellectual property) provided tools that they could develop over the longer term. Section 301 of the Trade Act of 1974 gave the president the power to take all appropriate action to enforce US rights under trade agreements. … private actors lobbied for amendments to Section 301 of the Trade Agreements Act of 1979 that would further embed their access to trade policymaking. This was an important step in the evolution of a trade-based multilateral intellectual property agreement because the private sector and the USTR began to co-constitute each other’s interests and preferences.
… With the USTR as the main focus of lobbying efforts, its relationship to private sector interests became increasingly symbiotic. The MPAA, led by Jack Valenti, became a sharp critic of copyright ‘piracy’ abroad, and urged the USTR to exert bilateral trade pressure on countries ‘pirating’ American movies. … The 1988 Act introduced Special 301 to explicitly cover intellectual property. The Act stipulates that the USTR must annually identify intellectual property priority (i.e. infringing) countries. This mandate institutionalized intellectual property blacklisting as a mechanism to spread domestic regulatory approaches abroad (Sharman, 2008). Within 30 days of identifying a country as a priority country, the USTR must initiate an investigation. Within six months it must determine whether the foreign activity is actionable, and if so, what action to take. The USTR must implement Section 301 action within 30 days of an affirmative determination. Amendments in 1979 required the federal government to ‘take into account the views of affected industry, effectively establishing a cooperative relationship between public and private sectors’ … The process strengthened the private sector’s role in trade policymaking and created policy feedback that led these actors to press for even deeper institutionalization of their preferred approach to intellectual property protection abroad. This was a classic example of Pierson’s (2000) ‘increasing returns.’

This in turn changed the shape of international trade politics.

When the negotiations began in 1986 Brazil and India insisted that intellectual property protection regulation should remain in the WIPO and had no place in the GATT. These two countries stood firm in their opposition from 1986 until 1989 (Matthews, 2002: 30–1). They had assumed that they faced a choice between WIPO and GATT. Their reversion point then would be the pre-negotiation status quo in which WIPO dealt with intellectual property issues. The US had repeatedly seen its push for stronger intellectual property rules fail in the UN-chartered WIPO. However, over the course of the negotiations, US bilateral pressure on developing countries proceeded apace. The US specifically targeted India, Brazil, and Thailand for Special 301 investigations and sanctions during the Uruguay Round negotiations (Matthews, 2002: 31–2). The US had easily intimidated a number of other developing countries into adopting higher standards of intellectual property protection by using 301. By the late 1980s it became abundantly clear that the choice had become not WIPO versus GATT, but rather GATT versus Special 301. Key developing countries finally assented to a multilateral deal in the hope that a rules-based multilateral bargaining system would end the bilateral bullying.
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Did the Iraq War Cause the Great Recession?

Thomas Oatley thinks that it very plausibly did. His argument draws upon an interesting article (should be ungated) in the new issue of Perspectives on Politics, where he, Kindred Winecoff, Andrew Pennock and Sarah Bauerle Danzman argue that international political economy scholars pay too little attention to the structural characteristics of international politics. By concentrating too much on states as unitary actors, they fail to recognize the importance of the network connections between them. The network topology – the shape of the network – can have consequences – networks where no node gets very much more links than any other node are quite different in their consequences from networks where one or a couple of nodes receive a lot more links than others. This has implications for financial contagion – if contagion spreads across links, network topology will have important consequences for the likelihood of spread. As it turns out, there is strong reason to believe that the international financial system is one of the latter kinds of networks rather than one of the former. On two measures of financial ties, most countries on the periphery of the network have few links to other peripheral countries, but pretty well everyone has links to the US, and many have links to the UK too.

Oatley et al. argue that you get two kinds of financial crisis in this kind of world. First, you get financial crises in the periphery, which tend to be limited to a particular region because few other countries are directly exposed to the countries undergoing crisis, and to fizzle out. Here, US dominance serves as a dampener – since it is large enough to absorb shocks itself, it can prevent financial contagion from spreading. In contrast, when a crisis occurs within the US, it tends to spread everywhere, since every other country is heavily linked to the US. When US mortgage markets sneeze, everyone catches cold. Hence, the importance of sudden shocks to fiscal policy in Oatley’s argument.

consider the Iraqi case. The sharp increase of military spending sparked by 9/11 and Iraq followed a massive tax cut (and coincidentally, we had a massive tax cut in 1964). Like Vietnam, therefore, the US borrowed to pay for the War on Terror. If the Vietnam War experience is any guide, this budget deficit must have had consequences for US macroeconomic and financial performance. The deficit was larger and persisted for longer than the Vietnam case. I argue that the choice to finance the War on Terror by borrowing rather than by raising taxes worsened the US external imbalance and the resulting “capital flow bonanza” triggered the US credit boom. The credit boom generated the asset bubble the deflation of which generated the great global crisis from which we are still recovering.
… Regulatory considerations and the global savings glut may be important conditioning factors. But, the more I research this the more I conclude that these factors are less important than most of us believe. Hence my decision to compare the case to the Vietnam War experience and to the Carter-Reagan buildup sparked by Soviet invasion of Afghanistan in 1979. This was financed in the same way as the other two (budget deficits) and had the same economic consequences (housing bubble and the savings and loan crisis) as the War on Terror buildup.
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Culture and European Integration

Gideon Rachman argues in the Financial Times that cultural differences between Northern and Southern Europe remain at the root of the problems facing the European Union:

The bigger problem remains, however, the gap in trust and political cultures between northern and southern Europe. Back before the crisis, when things were going well, it was considered politically incorrect, even xenophobic, to suggest that standards of probity in public life vary widely across Europe and that this is a problem for an organisation dedicated to “ever closer union”.

A difficulty with cultural arguments is that even if they are right, they are often quite vague. Vague arguments are easily abused by opportunists and easily rejected by hard-nosed analysts. One challenge for scholars then is to more precisely identify what work culture is doing, how cultural differences could complicate integration, and how these differences can be overcome.

An interesting attempt to do all this is a working paper by Luigi Guiso, Helios Herrera, and Massimo Morelli. The authors analyze a dynamic game in which economies can either converge to a “cheat and forgive” equilibrium or to a “responsible actions and commitment to punish otherwise” equilibrium. Greece and Germany are the prototypical examples of either. The authors use survey and experimental evidence to illustrate that Germans and Greeks indeed exhibit the behavioral traits associated with each equilibrium. So: Greeks are not just more likely to cheat but also more likely to forgive others who cheat. Germans will punish cheaters even if it is not in their self-interest to do so.

They then assume that leaders are constrained by the cultural norms of their respective societies. This allows them to analyze what happens when exogenous factors make a monetary union between heterogeneous economies  attractive. In the model, the likelihood of fiscal union (in response to an exogenous shock to the monetary union) is increasing in the degree of cultural heterogeneity. The welfare cost of excessive cheating by the Greeks and excessive punishment by the Germans cannot be addressed by retaining national sovereignty if heterogeneity (and the benefits of integration) are too large. That is: cultural heterogeneity should be an argument for increased centralization rather than against it; as is commonly posited. This is, of course, a highly stylized model but interesting nonetheless.

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Getting More Development Bang for Your Foreign Assistance Buck

Below is a guest post by Brad Parks and Zach Rice from Aiddata and William and Mary. They discuss results from a survey of 640 Policymakers and Practitioners in 100 Developing Countries (edit: survey is here).

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Wealthy countries and international organizations have created a wide range of policy instruments—incentive-based aid programs, moral suasion tools, and financial sanctions—to spur and sustain reform efforts in developing countries. The Heavily Indebted Poor Countries Initiative and the Multilateral Debt Relief Initiative make the provision of large-scale debt relief conditional upon the implementation of macroeconomic and public financial management reforms. The U.S. Government’s Millennium Challenge Account provides additional financial assistance to countries that meet certain eligibility conditions, such as the adoption of liberal economic policies and the administration of free, fair, and regular elections. The World Bank, the Asian Development Bank, the African Development Bank, and the Global Environment Facility have introduced similar performance-based resource allocation formulae. Governments and international organizations also lean heavily on moral suasion tools, such as the World Bank’s Doing Business Report and the State Department’s Trafficking in Persons Report. However, there is relatively little evidence about the conditions under which these policy instruments are most effective.

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Protectionism During Recessions: Is This Time Different?

Continuing our collaboration with newsletters from sections of the American Political Science Association, we present a selection from the current issue of the Political Economist, which focuses on the politics of trade policy during hard times. Below you will find a fantastic contribution by political scientist Soo Yeon Kim of the National University of Singapore that compares trade policy during the Great Recession to that in previous economic downturns. Section members can log in to APSA Connect to download the rest of the issue, where they will find full citations and further contributions by Chad Bown, Edward Mansfield and Helen Milner, and Douglas Irwin.

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Recessions are a time of economic uncertainty and retrenchment.  In the absence of a clear path to recovery and the cooperation of other states, countries turn inward and their governments pursue policies to ameliorate the effects of the economic downturn. One set of policy instruments mobilized during recessions is trade protectionism, or the raising of trade barriers that provide a defense against competition from foreign goods and that secure advantageous market access for domestic firms. This brief essay examines the link between protectionism and recessions, with particular attention to the current global recession and the role of international institutions, governments, and firms. One of the notable features of this particular recession is that that dreaded specter of protectionism did not materialize, and in this sense, the current global recession is different in its impact on trade policy and global trade more broadly. This essay also considers how future IPE scholarship, especially in the examination of policy substitutes and of firm-level preferences and behavior, may further advance our understanding of trade policy during economic downturns. 

Why Should We Expect Protectionism during Recessions?

An easy, first-cut answer to this question is that we have been here before. The historical record provides ample evidence supporting the link between recessions and the rise of protectionism, especially when the international economy lacks strong leadership. The major recessions of the last century and a half, including not only the Great Depression era but also the earlier Great Depression of 1873-1896 and the major recessions of the 1970s and 1980s are also key points of comparison. Governments appealed to protectionism to shield domestic economies from international competition, mobilizing policies that ranged from high tariffs to quantitative restrictions. The Great Depression is especially well-known for the retreat from free trade, marked by the infamous Smoot-Hawley Act in the United States and the reign of discriminatory trading blocs held together by tariffs, quantitative restrictions, and exchange controls in Europe.

The causal process that generates this recognizable historical pattern is one in which the onset of recession is marked by severe price deflation, unemployment, and general economic contraction. Governments turn to protectionism during recessions because of political pressure to do so from powerful domestic industries, which see profits fall and competition from imports intensify as overall demand takes a nosedive. Protectionism through the raising of tariffs, for example, increases the price of imported goods relative to those that are domestically produced. Protectionism saves domestic firms, which are at least assured of stability of access to the internal market in the short term. Protectionism thus offers domestic firms a shield against fluctuating prices and international competition. At the same time, it is worth repeating the message of Gourevitch’s enduring insight for “hard times”: protectionism is the product of politics. Protectionism is not a foregone conclusion during recessions, and whether a states becomes (more) protectionist depends on the political power of affected societal groups.

The real danger of protectionism does not lie in one country’s actions, but in the responses of its trading partners and the system-wide ramifications. Trade barriers by themselves may have only a modest impact on trade flows. However, other countries, especially those affected directly and significantly by protectionist measures of trading partners, may retaliate with trade barriers of their own. If countries were to take this route, retaliation against trade barriers would be met with counter-retaliation, and such trade conflicts would escalate to outright trade wars. Such is the well-known scenario that played out during the Great Depression of the 1930s, when “beggar-thy-neighbor” policies prevailed and the international economy experienced the infamous downward spiraling of trade. The implications are even more serious for the present global trading system under the World Trade Organization (WTO), as current WTO commitments are held together by an extremely complex and interwoven set of agreements. If countries were to retreat from the WTO system by withdrawing their concessions, we would face the threat of an “unraveling” of world trade if other members were to respond in kind.

How Do We Know it’s Protectionism?

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