Peterson Institute for International Economics Update Newsletter
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PIIE Update Newsletter
December 14, 2012

"Washington's premier think tank on the global economy"
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What Next? Time for a Change of Direction

Adam S. Posen
  Adam S. Posen For two and a half years, the UK coalition government's economic policies have focused on the wrong narrow goal, been self-defeating in pursuit of that goal, and in so doing have eaten away at British economic capabilities and confidence. The coalition government has failed to address the shortfall in productive British investment. As many have pointed out, British capital investment, public and private, has been well below the level of that of its international competitors like Germany, France, Japan, and the United States. Addressing the shortfall requires structural, supply-side measures, as well as a demand or stimulus agenda that fits with those measures, and is by definition business supporting. It requires confronting the real deficiencies of the British financial system with the same reformist zeal with which governments took on labor market liberalization in the 1980s and 1990s. HM Treasury should deepen investment and investment infrastructure in the UK by: instituting large investment tax credits; creating a public small business bank; increasing new entry and competition in the British banking system; and incentivizing businesses to invest or pay out their cash accumulations.

>> Read full op-ed
>> See also: What Is Wrong with the UK Economy?
North Korea In Focus
North Korea

UNSC Roundup
Stephan Haggard

Flight Tracker for Satellites
Stephan Haggard

audio  North Korea's Immunity to Outside Pressure
Part I
Part II
Marcus Noland

The Missile Launch: Initial South Korean Reaction
Stephan Haggard

The Iron Dome comes to Korea?
Marcus Noland

Slave to the Blog: Missile Launch Edition
(2:30 AM East Coast Time)

Stephan Haggard

Carney Will Gain by Exploring the Territory

Adam S. Posen
  Mark Carney's understandable temptation as the next governor of the Bank of England (BoE) will be to focus on directing technical aspects of bank regulation, but he should resist this urge. He will have to prioritize public engagement and open debate in the BoE, rather than closed international discussions and CEO-style decision making. To be persuasive, as well as to improve the economic forecasts, the new governor also has to take into account the unique attributes of the country's political economy. It is not enough to simply apply general economic principles top down, though they are of course relevant. Carney must also get out into the entire United Kingdom, all four nations and every region—the Canadian will be surprised and inspired by the welcome and the insights he receives. Focusing on technical aspects alone, at the expense of engagement with the broad economic concerns of the British people and their representatives, would be a mistake, and it also would squander an opportunity to energize the BoE's staff when they can contribute most.

>> Read full op-ed

  Policy Brief 12-24
Europe's Single Supervisory Mechanism and the Long Journey Towards Banking Union

Nicolas Véron
  Nicolas Véron The establishment of the Single Supervisory Mechanism is only one step on a longer path towards European banking union, which itself cannot be considered in isolation from the challenges of fiscal union and political union. Losing the current momentum for the completion of this early step would be unfortunate, not only in itself but because it would reinforce the current doubts of the European public and global investors about the very ability of European leaders to make effective decisions. Recent statements issued by the 17 euro area countries contain a promise of supervisory integration and centralized bank crisis management. Europe's leaders now need to deliver on this promise if they are to maintain, or regain, the trust of their constituents.

>> Read full policy brief [pdf]

Reflections on Reserve Management and International Monetary Cooperation

Edwin M. Truman
  Edwin M. Truman Today, the management of a country's international reserve assets, as well as the international assets of any sovereign wealth funds (SWF), is a central financial responsibility of governments. At the end of 2011, international reserve assets alone amounted to 17 percent of world GDP and an average of 29 percent of the national GDP of emerging market and developing countries. Including the international assets of SWFs and similar entities would boost those percentages substantially above 20 percent and close to 40 percent, respectively. At a 5 percent total return, those assets yield 1 to 2 percent of world GDP per year. Consequently, the wise management of these assets is in the strong interests of the citizens of the home countries. Equally important are accountability, transparency, and the interests of the global economy and financial system. SWF managers should keep four points in mind: (1) managers of international assets should be held accountable to their stakeholders, foreign as well as domestic; (2) transparency aids in establishing this accountability; (3) international cooperation is essential; and finally (4) progress has been made on some aspects of international cooperation, but that progress has not kept pace with the increased need for cooperation.

>> Read full speech [pdf]

Ukraine's Flawed Elections: A Silver Lining?

Anders Åslund
  Anders Åslund Belatedly, Ukraine's Central Election Commission issued the results of the parliamentary elections. Zhanna Usenko-Chornaya, Deputy Chair of the Central Election Commission, passed the judgment: "the dirtiest elections in Ukraine's history." Various European and international groups offered similar assessments. US Secretary of State Hillary Clinton stated that these elections constitute "a step backward for Ukrainian democracy." But remarkably, President Viktor Yanukovych's Party of Regions failed to secure a majority in spite of massive fraud. Against all odds, the opposition stood up to the pervasively corrupt regime and won a popular majority. These flawed elections might in fact mark a step toward renewed democratization, because they exposed just how unpopular the Yanukovych regime actually is. But future developments will depend on how the president, the opposition, and the West proceed. The European Union and the United States need to engage ever more with Ukraine to incorporate the country into the Western community of democracies, but they need to do so without illusions. The election results are an encouraging sign that Yanukovych is not untouchable. Democracy in Ukraine is by no means lost.

>> Read full op-ed

Peterson Perspectives Interviews

audio  North Korea's Immunity to Outside Pressure: Part I
Marcus Noland, assessing North Korea's missile launch, says it likely strengthens Kim Jong Un's hand and proves Pyongyang's ability to withstand political, economic, and military pressure.

audio  North Korea's Immunity to Outside Pressure: Part II
Marcus Noland, explaining why sanctions have not worked against North Korea, doubts that Russia and China will line up to make them any more effective after the missile launch.

audio  How the "Resource Curse" Affects Stability in Africa: Part I
Marcus Noland, citing the recent election in Ghana, explains how the discovery of oil can distort and destabilize politics in the developing world.

audio  How the "Resource Curse" Affects Stability in Africa: Part II
Marcus Noland describes the problems that occur when a country's wealth in resources and minerals corrupts its political system, leading to despotic rule or violent competition for control.

audio  The IMF's View of Capital Controls: A Pendulum Swing?
William R. Cline and Arvind Subramanian assess a new IMF finding on capital controls, concluding that the Fund has shifted over time toward the consensus that controls are sometimes necessary.

Recent Blog Posts

RealTime Economic Issues Watch   China Economic Watch    North Korea:  Witness to Transformation
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What Is Wrong with the UK Economy?

Mario Monti's Political Gambit: Does It Jeopardize Reform?

Euro Countries (and the IMF) Can Learn from Latvia's Economic Success

What Is Wrong with French Industrial Policy?

The Ex-Im Bank's Shortsighted "Double Loss" Policies
  Land Reform and Local Government Finances

The Return of the RMB

Time to Address Income Inequality in China?

A Legacy of Inland Development

China's Dream Team
  Size Matters

UNSC Roundup

Missile Launch Contest Winners Announced

Flight Tracker for Satellites

Marcus Noland Interview on the Missile Launch and North Korea's Immunity to Outside Pressure: Part II

PIIE Noted in the News and on the Web

Bloomberg TV
Posen on the Fiscal Cliff and European Developments
Adam S. Posen stops by Bloomberg's studio in Hong Kong to discuss the euro area crisis, fiscal cliff negotiations, and the upcoming elections in Japan.

NPR's All Things Considered
EU Votes to Have a Single Regulator for Its Banks
Nicolas Véron tells NPR the move to a single regulator for banks in the European Union is truly a significant and transformational step. Simon Johnson adds that for the first time in nearly a hundred years, regulators, not politicians, will have the most influence on the banks.

Congress Faces a Bleak Christmas as "Fiscal Cliff" Talks Drag On
Steven R. Weisman tells Euronews that had Mitt Romney won the presidential election the tax cuts that are due to expire would have been continued.

Preview of Our Next Issue

Obama's Historic Budget Opportunity
Robert B. Zoellick
In This Issue

Orrin Hatch Reviving US Competitiveness and Economic Growth

Senator Orrin Hatch and others discuss US corporate tax reform strategies at a PIIE conference.

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