October 16th, 2021

Attersee

RETAIL EXPANSION

Both consumers and businesses have felt the effects of ongoing backlogs in global supply chains. The world's largest retailers have been integral in shaping these supply chains, especially in the global South, where changing patterns of consumption have been met by corresponding production shifts.

A 2019 article by MARTÍN ARBOLEDA looks at the expansion of Walmart in Chile over the last decade and its implications for finance and agricultural supply chains.

From the text:

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October 9th, 2021

Mecklinburg Autumn

CAPITAL FLIGHT

As the Fed moves towards tightening its post-pandemic monetary policy, developing countries around the world face growing risks of capital flight. The deep political constraints posed by this risk are not new, but their implications for contemporary policymaking are persistent.

In a 2014 book chapter, Léonce Ndikumana and James Boyce consider strategies to overcome the tension.

From the text:

"On the African side, capital flight is associated with the embezzlement of national resources, corruption and political instability. But external agents and institutions also contribute to capital flight from the continent, in particular through the opacity of the international banking system and inadequate enforcement of rules on financial transparency.

This implies that efforts to stem and prevent capital flight must be organized on both domestic and international fronts. At the national level, the effectiveness of official institutions in preventing capital flight is contingent on the existence of a dynamic network of civil society entities committed to financial transparency and accountability. Civil society needs to be given ample space to operate as a counterbalancing force to executive power. In turn, civil society must take advantage of this position to consolidate action plans in the fight against illicit financial flows. Internationally, the establishment of a body to adjudicate questions of debt legitimacy would add an important missing piece to the current financial architecture. The coordination and harmonization of regulatory frameworks and enforcement mechanisms are critical to increase effectiveness in preventing illicit financial flows and tax evasion, and in facilitating stolen asset recovery. A more transparent international financial system will benefit developing and developed countries alike."

Link to the piece.

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October 2nd, 2021

Stranger

THE HART CELLER ACT

A rise in deportations of Haitian immigrants at the US-Mexico border has brought another cycle of media attention to the US immigration system and border security apparatus.

The modern US immigration system was largely shaped by the 1965 Hart Celler Act, which passed amidst a wave of civil rights reforms. In a 2010 article, MAE NGAI unpacks the political history of the legislation and its role in defining contemporary understandings of legal and illegal immigration.

From the text:

"The problem of our present system is that it is based on a core paradox: Our system of allocating visas for the admission of permanent residents—the vaunted green card—is based on principles of equality and fairness, yet that very system has generated an ever-larger caste-population of unauthorized immigrants. We rarely, if ever, question the principle embedded in Hart-Celler that we should treat every country the same. It is based on a logic of equality and fairness and was meant to replace the patently inequitable and discriminatory system of national origin and racial quotas that had governed immigration policy since the 1920s. It was also very much in line with the outlook of the civil rights era. That was the ethos of the time—Hart-Celler is often recalled as being of a piece with the Civil Rights Act of 1964 and the Voting Rights Act of 1965. It was also the self-conscious strategy of immigration reformers in the 1950s and early 1960s who decried the national origins quota system for its discrimination against eastern and southern Europeans.

When the initial hemispheric quotas under Hart-Celler went into effect in 1968, deportations to Mexico increased by forty percent, to 151,000. In 1976, when the country caps went into full effect, the United States deported 781,000 Mexicans. This compares with a total of 100,000 removals to all other countries in the world combined. By 1980 it was estimated that an illegal population of some two million people had accreted. There are now some twelve million unauthorized migrants in the United States. Three-quarters of them are from Mexico and Central America. They are the direct beneficiaries of legislation passed in the era of civil rights, founded on the principle of formal equality."

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September 25th, 2021

Dionysus, Silver and Red

REAL ESTATE

The possible collapse of Evergrande, China's second largest property developer, has reverberated through global financial markets. With over $300 billion in outstanding debt, 3.8 million jobs on the line, and investments across consumer industries, the scale of the impact could be great.

The company's fall bodes poorly for China's over-leveraged and over-expanded real estate market. In a 2012 paper, YA PING WANG, LEI SHAO, ALAN MAURIE, and JIANHUA CHENG present a detailed history of the sector.

From the text:

"In 1981, over 82% of urban housing was in public ownership but by 2002, 80% of public housing had been sold, mainly to their occupiers. Comprehensive reform policies that commercialised urban housing were implemented in the early 1990s. In this reformed system, most urban housing would be provided through the market but some 15% of low-income families, with insufficient financial power to become homeowners, would require socially rented housing. Government supported affordable housing was to be the main source of urban housing and would cater for low to middle-income urban households (~70% of the population), including most public sector employees. On top of the housing market was commercial housing provision for the rich (~15% of the population).

Nominally, in two decades China had changed from a nation renting from state owned enterprises to a nation of homeowners. However, a large proportion of homeowners had not been fully exposed to the market; they purchased as sitting tenants, at prices that did not fully reflect market values. In 1997, China’s central bank encouraged all government owned banks to undertake mortgage business. The bank reduced basic interest rates seven times between 1996 and 1999, and introduced a 20% income tax on interest earned from savings. Mortgage interest rates were gradually reduced from 10.5 per cent in 1997 to 5.7 per cent in 2002. These policies were accompanied by a continuous and steady increase in housing supply. Between 2000 and 2002, over 2 million new homes were built each year in cities and towns. This urban housing development helped China successfully avoid serious impacts from the Asian financial crisis. The real estate industry emerged as a key economic sector and in some cities contributed more than half of total local GDP."

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September 18th, 2021

Lead the Horse

DIRECT DEMOCRACY

This week, millions in California voted in support of Governor Gavin Newsom in a recall election. California is one of 19 states that grants power to voters to recall a sitting governor, a law which was passed in 1911 as part of a wider swath of Progressive-era reforms meant to bolster direct participation in government.

A 2013 article by Glen Gendzel examines the political context of California's early 20th century reforms, finding that the laws led to unexpected results for progressive politicians.

From the article:

"In October 1911, California voters approved the initiative, referendum, and recall amendments by a three-to-one margin. They also approved women’s suffrage, railroad regulation, workmen’s compensation, and a raft of other progressive reforms in the same election. No less than twenty-two amendments to the state constitution passed all at once. Conservatives predicted that disaster would ensue from the passage of “freak legislation” in California. Business was expected to flee the state, investors to pull out their funds, and home-seekers to look elsewhere. In fact, however, the progressive revolution of 1911 ushered in two decades of rapid growth and prosperity such as the state had not seen since the Gold Rush.

Nonetheless, there were some early indications that direct democracy might not serve the ends that Governor Johnson and the progressives originally had in mind. For example, the first successful state recall elections in 1913 and 1914, using this tool of progressive politics, removed two progressive legislators from office. In 1915, the first statewide referendum, using another progressive electoral tool, repealed a key progressive law, backed by Governor Johnson, which would have made all state elections non-partisan. The progressive legislature then passed an open primary law, which would at least encourage non-partisanship, but state party leaders forced another referendum on this law in 1916, and the voters rejected it, too. These early uses of the recall and the referendum – to expel progressive legislators and to repeal progressive electoral reforms – did not bode well for progressive hopes for direct democracy."

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September 11th, 2021

Brassieres of Atlantis

CAPITAL FLOWS

Long held to be essential for development, capital flows have come under increasing scrutiny for their impact on the financial stability and autonomy of low and middle income countries.

A recent paper by Karsten Müller and Emil Verner fuels the debate. Using a novel database of private credit in 116 countries since 1940, and drawing on more than 600 sources, it analyzes how the sectoral allocation of credit impacts financial stability in recipient countries. The findings suggest that credit to the non-tradeable sector (where goods cannot be sold internationally, such as construction, repairs, food services, and real estate) predicts lower medium-run growth, while tradable sector credit leads to higher growth in the medium-run.

From the text:

"Why does credit to households and non-tradable sectors, but not to the tradable sector, foreshadow lower future economic growth? First, credit growth to non-tradables and households may reflect that credit finances a demand boom, which may sow the seeds of a future bust. Consistent with this prediction, we find that household and non-tradable credit expansions are associated with a relative expansion in consumption relative to GDP, increasing shares of the non-tradable sector in output and employment, an appreciation of the real exchange rate, and an increase in house prices.

Second, lending to non-tradables and households can increase financial fragility if these sectors face tighter (ex-ante) financing constraints or are more sensitive to changes in credit supply. We document that non-tradable sector firms are, on average, smaller and more reliant on loans collateralized by real estate compared to tradable sector firms. Credit expansions to the non-tradable sector are associated with a considerably higher likelihood of future systemic banking crises. In contrast, lending to the tradable sector has essentially no relationship with banking crises and also falls less after the onset of crises. Third, credit booms may lead to a misallocation of resources away from more productive sectors. Because the level and growth rate of productivity is generally higher in tradable industries, a reallocation away from tradables can cause lower aggregate productivity growth in the medium run. Taken together, the patterns we document suggest that credit expansions are not created equal. They highlight that “good” and “bad” booms can be differentiated based on what the borrowed money is used for along dimensions emphasized by economic theory."

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September 4th, 2021

Red Coyote

ODIOUS DEBT

Haiti won independence from France in 1804, but in return for recognizing its formerly enslaved colony, France later forced Haiti to pay an indemnity of 150 million francs and give preferential treatment to French exports. The debt was equivalent to 270 percent of GDP—Haiti only paid off its debt in 1950.

Considering the absence of Haiti in larger conversations around sovereign debt, a new paper by Kim Oosterlinck, Ugo Panizza, Mark C. Weidemaier, and Mitu Gulati argues that Haiti’s debt should be seen as odious. The authors make the case that Haiti paid an exorbitant cost on an illegitimate debt, and that the nation is entitled to reparations.

From the paper:

"By any reasonable definition, the Haitian Independence Debt would seem to be odious. The circumstances suggest coercion, as does the fact that the agreement obliged Haitians to pay compensation for the freedom they had already won. The amount has been reported at around 300% of Haitian GDP (270% in our estimates), and it was understood that Haiti could pay only by borrowing vast sums from French banks, thus transforming the indemnity into a debt burden that would persist for generations. The debt cannot reasonably be characterized as in the best interest of the Haitian people. Yet we see little mention of it in the literature on odious debt or, indeed, in the larger literatures on sovereign debt or debt and development. To be sure, authors writing in French examine the intertwined history of Haiti and France and often discuss the Haitian Independence Debt. Likewise, articles in the popular press occasionally ask whether France owes compensation to Haiti for the episode. But these discussions have not yet made their way to the general sovereign debt literature or into the sub-field examining the doctrine of odious sovereign debt. Nor have they prompted a deeper examination of whether that doctrine should extend to debts imposed by former imperial powers in the context of independence and decolonization.

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August 28th, 2021

Circus Act

OFFSET MARKETS

Earlier this year, global carbon markets were valued at a record breaking $277 billion. The number contrasts strikingly with this summer's wave of devastating fires, many of which proliferated precisely in protected forests designed to offset carbon emissions from other industries.

In a 2019 book, GARETH BRYANT traces the history of carbon offset markets, considering how their institutionalization has altered climate-related political contestation.

From the text:

"The policy predecessor to carbon markets was sulphur dioxide trading in the United States. From the 1970s, the Environmental Protection Authority began to introduce elements of emissions trading in its regulation of pollution. Growing support for the market-based approach vis-à-vis ‘command and control’ measures among sections of government, business and non-government environmental organisations resulted in amendments to the Clean Air Act in 1990 that established a nation-wide sulphur dioxide trading scheme. The scheme's key innovation was that, within the overall cap, emissions allowances allocated or auctioned to certain power plants could be traded to cover the pollution of other power plants.

US negotiators extolled the cost-efficiency of tradeable permits in advancing their goal of ‘binding but flexible’commitments in the Kyoto Protocol. The US overcame opposition from the EU by making the inclusion of carbon trading instruments a condition for agreement on key European demands for binding emissions reduction targets. It also successfully overturned opposition from developing countries through the transformation of Brazil's clean development fund into a mechanism where emissions reductions from clean development projects in developing countries could be sold to developed countries and count towards their targets. The Clean Development Mechanism (CDM) was thus born."

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August 21st, 2021

13 Hour Cymbal Spiderclock

AGRARIAN-URBAN POLITICS

Observers in the past decades have commented on increased urbanization in India, which has led to new challenges for development, housing, and labor. But the majority of India's population, and thus electoral power, remains in rural regions.

In a 2018 article, SAI BALAKRISHNAN examines how agrarian political power manifests in urban spaces, looking to real estate markets in Mumbai.

From the paper:

"The electoral power of the agrarian countryside is evident in the relationship of Mumbai to its hinterland. India is the second largest exporter of sugar in the world and more than 40% of India’s sugar exports come from the western Maharashtra region. Sugar production in the region is organised in the form of cooperatives. These sugar cooperatives have been heavily subsidised by the state: 90% of sugar cooperative finances came from state-guaranteed cooperative bank debt; over three quarters of the equity was a direct handout from the state budget. It was Mumbai’s thriving industrial economy that was the source of sugar subsidies. Mumbai’s industrial classes tolerated the diversion of capital from the city to the countryside, as they understood that the state government legislators relied on the peasants for their votes, and that capital diversion was the price to be paid for the political stability from subsidised agrarian prosperity.

In a market-oriented urbanising economy, these elites continue to influence the making of urban real estate markets by flexing their regulatory muscle. The price of a plot of land increases when it is well connected to roads and transport networks, when it has uninterrupted water supply, when it can rise high in the air and thus maximise development rights. Politicians control these road, water and air resources, and in a context where local governments are not yet fully empowered as decisionmakers, state-level politicians wield immense control over resources that get capitalised into the price of land."

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August 14th, 2021

Shifting States

NON DISCLOSURE AGREEMENTS

75 percent of US firms currently make use of non-disclosure agreements. Originally developed to protect trade secrets, today's agreements have expanded to include information on salaries, skills, client lists, and employment practices.

In a 2019 research paper, legal scholar ORLY LOBEL considers the impact of restrictive clauses on worker mobility, diversity, and inequality.

From the paper:

"In his seminal work Exit, Voice, and Loyalty, political economist Albert Hirschman proposed an interplay between the three concepts. When an organization breaks down, individuals can effect change by either leaving or by working from within to right the wrongs. Loyalty, Hirschman argued, moderates the choice between exit and voice. In corporate settings, employees regularly experience discontent and must decide what form of action to take. But what happens when both exit and voice are restricted?

In today's labor markets, non-disclosure agreements (NDAs), non-compete agreements, innovation assignment clauses, non-disparagement agreements, mandatory arbitration, and secrecy policies all create exit and voice constraints. Recently, a steep rise in these clauses has shaped human capital in ways that are harmful to all workers as well as to industries at large. Regardless of enforceability, NDAs are routinely expansive and used to signal to employees that a range of knowledge, information, and speech is off-limits. In particular, salary as proprietary information shows the connections between market competition, secrecy, and inequality: if women and minorities are in the dark about their undervalued talent, they are less likely to seek exit or to speak up to be equally compensated for their performance. Another such example is information pertaining to diversity. In recent years, major companies have claimed that their diversity information is a trade secret—in 2018 Microsoft filed a lawsuit against its Chief Diversity Officer, claiming that the employee had knowledge on how to achieve more inclusion. In another case, IBM alleged that the executive held trade secrets which include diversity data and strategies. When corporate contracts, practices, and culture limit employees’ ability to advocate organizational change, the many shades of inequality and status quo are sustained."

Link to the piece.

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