Category Archives: History

China, America, and the International Order after the Pandemic

By Mira Rapp-Hooper – As people around the world fall ill, global markets convulse, and supply chains collapse, COVID-19 may also reorder international politics as we know it. No analyst can know when this crisis will end, much less divine the world we will meet at its conclusion. But as scholars have begun to note, it is plausible that China will emerge from the wreckage as more of a global leader than it began.

Following World War II, the United States was a chief architect of the so-called liberal international order and became its uncontested leader with the Cold War’s end. China, with its breathtaking economic growth and vast increases in military spending, has been on the ascent for decades, but long remained focused on domestic stability and the security of the Chinese Communist Party. It clambered to center stage after 2008, when the global financial crisis appeared to signal a weakening of American primacy.

China and others took the American financial stumble as a blunder of democratic capitalism, and a moment of opportunity to advance their own agendas. Under Xi Jinping, Beijing has seen the last decade as a period of “strategic opportunity” — one it did not necessarily expect to last, as it faces its own expected economic and demographic slowdowns. It built military bases in the South China Sea in contravention of international law, launched the vast and opaque Belt and Road Initiative to spread economic and political influence, doubled down on the state’s role in the economy and prejudicial policies, and coopted international human rights bodies. Along the way, it began to develop its own global governance aspirations and visions.

With the election of Donald Trump, the United States widened Beijing’s window of opportunity with its self-inflicted political convulsion. To China’s great fortune, American foreign policy was now expressly hostile to multilateral institutions, bellicose on trade, and defined national security in terms of narrow, homeland defense. To experts in the United States and abroad this looked like a willing abdication of the system the United States had constructed and led. But alongside these fears, and in another significant shift, foreign policy thinkers from both major parties increasingly agreed that the United States and China had entered a period of a great-power competition, in part, over the future of the international order and which power would set its terms.

Alone, the United States could not hope to match China’s economic and military heft in Asia. With allies by its side, America could remain peerless and manage peaceful change. Narrow unilateralism stoked renewed perceptions of further American decline and attenuated an otherwise favorable balance of power.

Enter the novel coronavirus.

It should be stunning that a virus that originated in China and spread in part due to Chinese government mismanagement may reorder the world to Beijing’s advantage, as Kurt Campbell and Rush Doshi have argued. more>

The rule of law is under duress everywhere

By Ted Piccone – Anyone paying attention to major events of the day in the United States and around the world would know that the basic social fabric is fraying from a toxic mix of ills — inequality, dislocation, polarization, environmental distress, scarce resources, and more. Signs abound that after decades of uneven but steady human progress, we are digging a deeper and muddier hole for ourselves. The principal reason for this pessimism is not the material facts of decline — we have lived through worse times before — but the crumbling consensus around how to overcome such crises. The outbreak of the COVID-19 pandemic is fast becoming the latest stress test for whether the social contract can hold.

The roadmap for climbing out of the trough should begin with the understanding that the rule of law is the sine qua non of more successful societies. Societies with strong rule of law have built-in mechanisms for mediating conflicts through open and inclusive debate, in which all voices are treated equally, and outcomes are perceived as fair and reasonable.

Unfortunately, as documented by the latest findings of the World Justice Project’s Rule of Law Index, the rule of law is declining around the world for the third year in a row. The trends are widespread and persistent: The majority of countries that declined in the 2020 rule of law scores also deteriorated in the previous year, and weaker or stagnating performance occurred in the majority of countries in every region and across every income group.

Of particular concern is that countries experienced the biggest declines over the past year in the areas of fundamental rights (54 countries declined, 29 improved), constraints on government powers (52 declined, 28 improved), and absence of corruption (51 declined, 26 improved). These three factors of the World Justice Project (WJP) Index saw the worst performance globally over a five-year time period as well.

In short, the key rule of law elements that undergird accountable governance, and relatedly, citizens’ trust in their leaders, are in retreat, in both established democracies like the United States, and in entrenched autocracies, from Russia to China to Venezuela. In this context, the rise of populist anger and social protests should come as little surprise. more>

Hard truths about the eurozone crisis

There has been little honest reflection within the European Commission about the eurozone crisis. Until now.
By Adam Tooze – It is not often one finds European officials quoting significant moments from pop culture, let alone an outgoing director-general for economic and financial affairs—the European Commission’s most senior economics official—quoting Ridley Scott’s Blade Runner. But that is how Marco Buti introduces a recent piece summing up his period in office between 2008 and 2019.

Buti’s contribution is significant as personal reflection but also because it raises the more general question of how the EU and its institutions will commemorate the tenth anniversary of the eurozone crisis.

When it came to revisiting the global financial crisis, Brussels did not hold back. In August 2017, to mark the tenth anniversary of its onset, the commission issued a statement blaming the spillover to Europe on the United States and giving itself credit for prompt action to stave off the worst. The press release was however issued on August 9th—anniversary of the failure of the French bank Paribas’ US property funds.

Subprime and Lehman could be safely blamed on the US. What, however, will the European institutions make of the ten-year anniversary of the eurozone crisis and its various phases between 2010 and 2015?

Last year, addressing the European Parliament on the 20th anniversary of the introduction of the euro, the then commission president, Jean-Claude Juncker, admitted there had been a lack of solidarity with Greece. He acknowledged there had been ‘reckless austerity’ (l’austérité irréfléchie). But he had the gall to suggest that the commission had succumbed to the influence of the International Monetary Fund, as though the agenda of austerity and ‘structural reform’ had been imposed from outside.

The traumatic history of the last ten years deserves better. more>

Updates from Chicago Booth

Let your customers tell you when to pivot
Small-business owners can get guidance by surveying their own customers
By Pradeep K. Chintagunta – William Wrigley Jr. spent many of his childhood years selling his father’s Wrigley’s Scouring Soap on the streets of Philadelphia. So when he set out for Chicago in the 1890s, Wrigley did what he knew and brought the soap trade with him.

Had Wrigley stuck to his original plan, it’s unlikely his name would stand today as one of the most iconic in Chicago business history. Instead, he took some calculated risks and pivoted his business twice.

Wrigley had been tossing in packages of baking powder as an incentive for purchasing his soap. When the baking powder proved more popular with customers than his soap, he made it his main product. Soon he realized that his new bonus product, chewing gum, was an even bigger draw, and he changed his focus again. The rest is history.

Despite evidence that pivots can improve productivity and competitiveness, businesses aren’t always eager to make changes. It’s difficult to consider experimenting with a business model that has worked in the past, and many small-business entrepreneurs may not feel as though they have the time and resources to do so. more>

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The future will be shaped by what global productivity growth does next

By Warwick J. McKibbin and Adam Triggs – Productivity growth is a shadow of its former self. It’s one-tenth of what it was 40 years ago in advanced economies, and even emerging economies are struggling to replicate the growth of the past. As the fundamental driver of long-run living standards, weak productivity growth is a serious problem. Lower living standards, bigger budget deficits, fewer jobs, lower wages, and higher inequality await if things don’t improve.

What is most striking about this period of low productivity is that it coincides with enormous advances in technology. An extra 3.5 billion people have gained access to the internet. The processing power of computers has increased exponentially while their cost and size have plummeted. Smartphones have multiplied, and online businesses have flourished. Email, GPS and advanced software have become widespread. The sharing economy is unlocking the full potential of idle cars and empty rooms and houses. Information and communication technologies (ICT) and artificial intelligence (AI) have reshaped many industries. The accumulated history of human knowledge is now at our fingertips.

Robert Solow famously remarked that “you can see the computer age everywhere but in the productivity statistics.” Economists have put forward a variety of explanations for the so-called “Solow paradox,” each of which implies a radically different path for productivity growth in the future. Our chapter in the just-published book “Growth in a Time of Change” models each of these possible scenarios to explore what the world might look like depending on who turns out to be correct.

Let’s start with the optimists. Some economists, like the 2018 Nobel Laureate William Nordhaus and Iraj Saniee and his co-authors at Nokia Bell Labs, point to historical data showing long lag times between technological advances and increases in productivity. For these economists, a big surge in productivity is just around the corner.

If the optimists are correct and global productivity growth takes off rapidly, many of the world’s problems go away. Investment, wages, and employment rise sharply. GDP increases and inequality declines. While all sectors experience an investment boom, the durable goods sector experiences the largest increase. The sharp increase in investment sees an increased demand for investment goods, particularly durable manufactured goods and the energy and mining resources required to produce them. Countries that export durable manufactured goods (such as Germany) and energy and mining resources (such as Australia) benefit significantly. Secular stagnation becomes a thing of the past.

But new challenges emerge. The global economy is a closed system, so the resources to finance this boom in investment and production must come from somewhere: either from increased government savings or from reductions in current consumption. If governments don’t act, or if financial market rigidities prevent access to global capital markets, consumption can fall. The shock also triggers transitions that require the redeployment of labor and capital from declining sectors to booming ones. Rigid labor markets and oligopolistic product markets hamper this adjustment. Thus, the full benefits of the boom can be squandered, and its benefits may be short-lived and distributed more unequally between capital and labor.

Now consider the pessimists. Some economists, notably Northwestern University’s Robert Gordon, argue that the technological advances in recent decades won’t deliver the sort of productivity increases that we saw from the inventions of the last century. Facebook and Netflix are great, but they are no match for electricity and indoor plumbing. more>

Updates from Chicago Booth

The populism puzzle
What caused the uprising that has transformed global politics?
By Hal Weitzman – When UK voters elected a Conservative government in December 2019, they effectively re-endorsed their view, expressed in a referendum three years prior, that Britain should leave the European Union. The news was celebrated by, among others, US president Donald Trump, who drew a parallel with his own attempt to be reelected in 2020 by tweeting, in a paraphrase of comments by Fox News host Steve Hilton, “Here in America it will be the same victory as BREXIT, but even more so.”

The 2016 Brexit referendum, and its transatlantic counterpart—Donald Trump’s victory in that year’s US presidential race—surprised opinion pollsters, and prompted many observers to question conventional political thinking. This more-recent UK election, and a US presidential campaign that has so far been dominated by candidates on the edges of the political spectrum, demonstrates that political populism is a still-potent force. Two of the world’s most stable and well-established democracies appear to have embraced populism and shunned globalization, which has led to much soul-searching about the future of liberal democracy.

The results have also challenged economic thinking, and Chicago Booth’s Lubos Pastor and Pietro Veronesi have been among the researchers studying the implications. “As economists, we have been taught to think that globalization is good, because people get to specialize, and you have free trade, and that’s a way of making somebody better off without making anybody worse off,” says Pastor. “Yet here—with the Trump and Brexit votes—you saw half the population rebelling. You saw the median voter turning against globalization.”

The real puzzle is this: Why did the United States and the United Kingdom turn to populism at a time of economic growth? more>

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Updates from ITU

Transforming the driver experience: The connected technology under the hood of intelligent cars
By Amit Sachdeva – There was a time when any talk of a new car among enthusiasts or potential buyers revolved around engine power, fuel efficiency and the sleek design and finish.

Today, that same conversation has expanded to include sustainability and a connected experience.

Consumers expect every aspect of their life to be connected to the internet, so why should one’s car be any different? Automakers are aware of this and are responding by partnering with technology and B2B companies to find innovative ways to satisfy the demands of customers, and avoid being disrupted.

As a result, newer models with embedded Internet of Things (IoT) connectivity and intelligent applications built-in are redefining the manufacturing landscape and the driving experience for consumers.

The surge in the global connected cars market not only impacts the auto industry, it also offers several opportunities for businesses – retailers, insurers, entertainment businesses and of course, the car makers themselves – to leverage the huge volumes of data generated and captured by connected cars to achieve new levels of customer loyalty and open up new revenue streams. more>

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The IMF: The World’s Controversial Financial Firefighter

The International Monetary Fund, both criticized and lauded for its efforts to promote financial stability, continues to find itself at the forefront of global economic crisis management.
By Jonathan Masters and Andrew Chatzky – Since its inception in July 1944, the International Monetary Fund (IMF) has undergone considerable change as chief steward of the world’s monetary system. Officially charged with managing the global regime of exchange rates and international payments that allows nations to do business with one another, the fund recast itself in a broader, more active role following the 1973 collapse of fixed exchange rates, intervening in developing countries from Asia to Latin America. In 2010, it gained renewed relevance as the European sovereign debt crisis unfolded.

The fund has received both criticism and credit for its efforts to promote financial stability.

Forty-four allied nations convened at the Bretton Woods Conference in 1944 to establish a postwar financial order that would facilitate economic cooperation and prevent a rehash of the currency warfare that helped usher in the Great Depression. The new regime was intended to foster sustainable economic growth, promote higher standards of living, and reduce poverty. The historic accord founded the twin institutions of the World Bank and the IMF and required signatory countries to peg their currencies to the U.S. dollar. However, the system of fixed exchange rates broke down in the late 1960s and early 1970s due to an overvaluation of the U.S. dollar and President Richard Nixon’s decision to suspend the greenback’s convertibility into gold.

The IMF is akin to a credit union that permits its membership access to a common pool of resources—funds that represent the financial commitment or quota contributed by each nation, relative to its size. In theory, members with balance-of-payments trouble seek recourse with the IMF to buy time to rectify their economic policies and restore economic growth. The fund pursues its mission in three fundamental ways:

Surveillance. A formal system of review monitors the financial and economic policies of member countries and offers macroeconomic and financial policy advice.

Technical assistance. Practical support and training directed mainly at low- and middle-income countries help manage their economies.

Lending. The fund gives loans to member countries that are struggling to meet their international obligations. Loans, or bailouts, are provided in return for implementing specific IMF conditions designed to put government finances on a sustainable footing and restore growth. more>

Updates from McKinsey

Digital disruption at the grocery store
Five trends are shaping the transformation of the US grocery industry. Understanding them is key for grocers to achieve profitable growth in this new competitive environment.
By Steven Begley, Eric Marohn, Sabah Mikha, and Aaron Rettaliata – In the past two decades, e-commerce has altered customer shopping behaviors and transformed the US retail landscape from brick and mortar to omnichannel. Grocers have remained largely immune to digital disruption—until recently.

Powerful trends, including new competitive pressures, technological advances, and evolving consumer attitudes and behaviors, will disrupt the grocery business from coast to coast in the next few years. Some grocers are learning from other retail sectors and countries, recognizing threats early, seizing opportunities, and catching a wave of profitable growth. Others are struggling, and some may disappear.

Until relatively recently, the US grocery sector has remained sheltered from the forces of e-commerce for a couple of reasons: Most American shoppers still prefer to choose their own food (especially meat, produce, and other perishable goods), and few grocers have had the financial capacity to invest in the highly efficient, large-scale cold chains required to make home deliveries at a profit. That is changing.

While online sales accounted for anywhere from 3 to 4 percent of the US grocery market in 2019, the share could be greater than 10 percent by 2025 as major retailers—including well-funded entrants from outside the sector—invest in automation and innovative operating models to solve challenges in fulfillment and last-mile delivery. As quality rises and online grocers make more compelling offers, millions of shoppers will get comfortable offloading a task that only about 15 percent say they enjoy. We have seen that online grocery is supply driven, and as online grocers provide more supply, customers will adopt the new method of grocery shopping. more>

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Updates from Chicago Booth

Many retailers are making a basic mispricing mistake
By Robin I. Mordfin – Retailers have long set prices ending in 99 cents, knowing that buyers view $4.99, for example, as significantly less expensive than $5. But many companies underestimate consumers’ left-digit bias and should be using these prices more than they do now, according to research by Chicago Booth’s Avner Strulov-Shlain.

Strulov-Shlain analyzed price data from 1,710 popular products in 248 stores of a single US retailer, as well as data on 12 products carried by more than 60 chains and in 11,000 of their stores. He finds that one-quarter to one-third of all prices ended in 99 cents.

But companies tend to miscalculate how customers react to a one-cent price change, Strulov-Shlain asserts. Buyers treat a price increase from $4.99 to $5 as if it were a 15–25 cent increase, while companies behave as if customers respond as though it were a 1.5–3 cent increase.

To learn how much companies should charge, Strulov-Shlain built a model that combines previously established left-digit bias models with a profit-maximizing formula that takes left-digit bias into account. Using the model and retailers’ pricing data, he estimates what price sensitivity and left-digit bias the companies had in mind when setting prices. Many items would have been better priced with a 99-cent ending, because demand dropped when the dollar digit changed, he finds. That was also the case at higher costs, where selling more units for the lower 99-cent price was more profitable than selling fewer units at a higher price. more>

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