How Japan Restored Its Financial System. By KATSUNORI NAGAYASU
The focus was on better risk controls, not higher capital reserves.
WSJ, Aug 06, 2009
Regulatory authorities around the world are currently discussing ways to prevent another financial crisis. One idea is to mandate higher levels of capital reserves. Japan’s banking reform shows that a comprehensive solution would work better.
After our bubble economy collapsed in the 1990s, it took policy makers many years to address the real issue: the health of our financial system. When they did, they injected public funds into large Japanese banks across the board, enhanced deposit insurance safety nets, and accelerated the disposal of nonperforming assets based on strict risk assessments. The market selected which banks could survive under a system of multiple regulatory requirements, not just a capital requirement. Many banks were absorbed into larger entities.
Japan also avoided moral hazard by studiously avoiding the classification of any bank as “too big to fail.” Regulators instead put more emphasis on improving banks’ risk controls and did not require them to have excess capital. The financial system soon regained its health and the economy enjoyed seven consecutive years of uninterrupted growth, starting in 2001.
Today’s regulatory dialogue in the United States and Europe has implicitly assumed that large financial institutions are “too big to fail.” This assumption may encourage banks to take excessive risks, resulting in potentially more bank bailouts. It has also skewed the regulatory debate toward a focus on requiring banks to hold higher levels of “going concern capital,” such as common equity.
This is a dangerous path to follow. If regulators mandate higher capital requirements for banks, there is no guarantee that banks will be able to raise that capital in equity markets. They may have to shrink their balance sheets to meet the requirements, potentially curtailing their capacity to lend and support economic growth. A narrowly defined approach to capital regulation would also reduce banks’ options for raising other types of capital when they need it. This could result in systemic risk when another financial crisis hits.
A better regulatory framework must combine capital regulations with other tools, including a resolution mechanism for financial institutions that fail, a retail deposit insurance system, and a prompt corrective action system that allows regulators to force a bank to take action before it fails. As long as the regulators can effectively control systemic risk by taking such a multifaceted approach, banks should also be allowed to absorb losses, raising capital other than common equity. It should be acceptable to allow banks to fail, and there should be no need for excessive capital requirements.
A new regulatory framework must also distinguish between banks whose main business is deposit taking and lending—the vast majority of banks world-wide—and banks that trade for their own account. The recent financial crisis demonstrated that balance sheet structure matters. Trusted banks with a large retail deposit base continued to provide funds to customers even in the depths of the crisis, whereas many banks that relied heavily on market funding or largely trading for their own account effectively failed. Investment banks with higher risk businesses by nature should be charged a higher level of capital requirement—otherwise, sound banking will not be rewarded.
Higher capital requirements attempt to rectify market or systemic failure by denying the market mechanism, where banks that take too much risk fail, and those that don’t, survive. Excessive regulation will stifle healthy competition in banking.
Policy makers instead should learn from Japan’s experience by improving the range of regulatory rules available and setting reasonable capital rules for banks based on their actual business models. That’s the best way to ensure banks perform their essential role at the lowest long-term cost to taxpayers, customers and shareholders.
Mr. Nagayasu is president of Bank of Tokyo-Mitsubishi UFJ and chairman of the Japanese Bankers Association.
Thursday, August 6, 2009
A new database tracks emerging threats to trade
Protectionism Exposed. By CHAD P. BOWN
A new database tracks emerging threats to trade.
WSJ, Aug 06, 2009
In May, the United States slapped new tariffs on steel pipe imports from China. In June, China imposed new barriers on U.S. and European Union exports of adipic acid, an industrial chemical used to make nylon and polyester resin. In July, the EU also decided to restrict imports of steel pipe from China.
The important question now is, do these events foreshadow spiraling protectionism and tit-for-tat retaliation that threaten a global trade war? Or is trade policy always like this, and we’re just noticing more now, given the global slowdown and heightened fears of Smoot-Hawley-style protectionism?
A new set of data on protectionism can help answer that question. The World Bank’s newly updated Global Antidumping Database, which I help organize, displays in almost real time emerging trends in this form of protectionism in more than 20 of the largest economies in the World Trade Organization. Some of the numbers are worrying.
The count of newly imposed protectionist policies like antidumping duties and other “safeguard” measures increased by 31% in the first half of 2009 relative to the same period one year ago, which itself is not an alarming number. But many governments take more than a year to make final decisions on such policies after receiving the initial request for protection from a domestic industry. The fact that industry requests for new import restrictions were 34% higher in 2008 relative to 2007 is a worrying trend even though 2007 saw a historical low in such requests. And with the recession continuing, requests for new import restrictions were 19% higher in the first half of 2009 relative to 2008.
This suggests a wave of new protectionist measures may be on the way. While leaders of the Group of 20 large economies unanimously pledged not to resort to protectionism at a Washington summit last November and reaffirmed this in London in April, virtually all of them have slipped at least a little bit.
Nor is it just the U.S., EU and China: Since the beginning of 2008, Indian companies alone are responsible for roughly 25% of all requests for new trade barriers, attacking a range of imports that include steel, DVDs, yarn, tires and a variety of industrial chemicals. While it is too early to know the final resolution of these new investigations, Indian policy makers have imposed at least preliminary barriers on more than 20 different products being investigated.
The burden of this protectionism is not uniformly distributed among exporting countries. In the first half of this year, China’s exporters were specifically named in more than 75% of these economies’ newly initiated investigations. In the second quarter, China’s exporters were targeted in all 17 of the cases in which new trade barriers were imposed around the world.
Despite all this bad news, there is a silver lining. The fact that countries may be resorting to antidumping actions and safeguards in lieu of other protectionist policies, such as across-the-board tariff increases or a proliferation of “Buy-America”-type provisions in national stimulus packages, is a partial sign of the strength and resilience of the rules-based WTO system. It is important to have a reliable trading system that allows for the transparency necessary to clearly see the new trade barriers, because industry demands for protectionism are somewhat inevitable in a recession.
That’s encouraging because “little” acts of protectionism could add up to a big problem. Having accurate data on the extent of the problem is important, but the only solution is for policy makers to recognize the dangers of the path they’re headed down.
Mr. Bown, an economics professor at Brandeis University and fellow at the Brookings Institution, is author of “Self-Enforcing Trade: Developing Countries and WTO Dispute Settlement” (Brookings Press, 2009).
A new database tracks emerging threats to trade.
WSJ, Aug 06, 2009
In May, the United States slapped new tariffs on steel pipe imports from China. In June, China imposed new barriers on U.S. and European Union exports of adipic acid, an industrial chemical used to make nylon and polyester resin. In July, the EU also decided to restrict imports of steel pipe from China.
The important question now is, do these events foreshadow spiraling protectionism and tit-for-tat retaliation that threaten a global trade war? Or is trade policy always like this, and we’re just noticing more now, given the global slowdown and heightened fears of Smoot-Hawley-style protectionism?
A new set of data on protectionism can help answer that question. The World Bank’s newly updated Global Antidumping Database, which I help organize, displays in almost real time emerging trends in this form of protectionism in more than 20 of the largest economies in the World Trade Organization. Some of the numbers are worrying.
The count of newly imposed protectionist policies like antidumping duties and other “safeguard” measures increased by 31% in the first half of 2009 relative to the same period one year ago, which itself is not an alarming number. But many governments take more than a year to make final decisions on such policies after receiving the initial request for protection from a domestic industry. The fact that industry requests for new import restrictions were 34% higher in 2008 relative to 2007 is a worrying trend even though 2007 saw a historical low in such requests. And with the recession continuing, requests for new import restrictions were 19% higher in the first half of 2009 relative to 2008.
This suggests a wave of new protectionist measures may be on the way. While leaders of the Group of 20 large economies unanimously pledged not to resort to protectionism at a Washington summit last November and reaffirmed this in London in April, virtually all of them have slipped at least a little bit.
Nor is it just the U.S., EU and China: Since the beginning of 2008, Indian companies alone are responsible for roughly 25% of all requests for new trade barriers, attacking a range of imports that include steel, DVDs, yarn, tires and a variety of industrial chemicals. While it is too early to know the final resolution of these new investigations, Indian policy makers have imposed at least preliminary barriers on more than 20 different products being investigated.
The burden of this protectionism is not uniformly distributed among exporting countries. In the first half of this year, China’s exporters were specifically named in more than 75% of these economies’ newly initiated investigations. In the second quarter, China’s exporters were targeted in all 17 of the cases in which new trade barriers were imposed around the world.
Despite all this bad news, there is a silver lining. The fact that countries may be resorting to antidumping actions and safeguards in lieu of other protectionist policies, such as across-the-board tariff increases or a proliferation of “Buy-America”-type provisions in national stimulus packages, is a partial sign of the strength and resilience of the rules-based WTO system. It is important to have a reliable trading system that allows for the transparency necessary to clearly see the new trade barriers, because industry demands for protectionism are somewhat inevitable in a recession.
That’s encouraging because “little” acts of protectionism could add up to a big problem. Having accurate data on the extent of the problem is important, but the only solution is for policy makers to recognize the dangers of the path they’re headed down.
Mr. Bown, an economics professor at Brandeis University and fellow at the Brookings Institution, is author of “Self-Enforcing Trade: Developing Countries and WTO Dispute Settlement” (Brookings Press, 2009).
Autocracy and the Decline of the Arabs
Autocracy and the Decline of the Arabs. By FOUAD AJAMI
The Arab world is plagued by despots. But don’t expect the U.N. to give President Bush any credit for challenging this order.
WSJ, Aug 06, 2009
‘It made me feel so jealous,” said Abdulmonem Ibrahim, a young Egyptian political activist, of the recent upheaval in Iran. “We are amazed at the organization and speed with which the Iranian movement has been functioning. In Egypt you can count the number of activists on your hand.” This degree of “Iran envy” is a telling statement on the stagnation of Arab politics. It is not pretty, Iran’s upheaval, but grant the Iranians their due: They have gone out into the streets to contest the writ of the theocrats.
In contrast, little has stirred in Arab politics of late. The Arabs, by their own testimony, have become spectators to their history. A struggle rages between the Iranian theocracy and the Pax Americana for primacy in the Persian Gulf and the Levant. The Arabs have the demography—360 million people by latest count—and the wealth to balance Iran’s power. But they have taken a pass in the hope that America—or Israel, for that matter—would shatter the Iranian bid for hegemony.
We are now in the midst of one of those periodic autopsies of the Arab condition. The trigger is the publication last month of the Arab Human Development Report 2009, the fifth of a series of reports by the by the United Nations Development Program (UNDP) on the state of the contemporary Arab world.
The first of these reports, published in 2002, was treated with deference. A group of Arab truth-tellers, it was believed, had broken with the evasions and the apologetics to tell of the sordid condition of Arab society—the autocratic political culture, the economic stagnation, the cultural decay. So all Arabs combined had a smaller manufacturing capacity than Finland with its five million people, and a vast Arabic-speaking world translated into Arabic a fifth of the foreign books that Greece with its 11 million people translates. With all the oil in the region, tens of millions of Arabs were living below the poverty line.
Little has altered in the years separating the first of these reports from the most recent. A huge oil windfall came into the region, and it was better handled, it has to be conceded, than earlier oil windfalls. But on balance the grief of the Arabs has deepened, and the autocracies are yet to be brought to account. They remain unloved, but they remain in the saddle.
In a clever turn of phrase, The Economist recently wrote of an Arab Rip Abu Winkle awakening from a slumber into which he had fallen in the early 1980s to marvel at how little has changed. He would find Hosni Mubarak still at the helm in Cairo, the policeman Zine el-Abidine Ben Ali in Tunisia, and Moammar Gadhafi in Libya. He would miss Hafez Assad in Damascus, but he would be reassured that his son Bashar had inherited his father’s dominion. He would of course find the same dynasties in Jordan and in the Arab states of the Peninsula and the Gulf.
Wily rulers, the men at the helm may have failed their peoples. They may have denied them decent educational systems. They may not have figured out a way into the modern world economy. But they have mastered the art of political survival. “He who eats the sultan’s bread, fights with the sultan’s sword,” goes an Arabic maxim. The economic dominance of the rulers, the absence of the countervailing power of property and the private sector, has increased the awesome power of the governments and their security establishments.
It is no mystery, this sorrowful decline of the Arabs. They have invested their hopes in states, and the states have failed. According to the UNDP’s report, government revenues as percentage of GDP are 13% in Third World Countries, but they are 25% in the Middle East and North Africa. The oil states are a world apart in that regard: the comparable figures are 68% in Libya, 45% in Saudi Arabia, and 40% in Algeria, Kuwait and Qatar. Oil is no panacea for these lands. The unemployment rates for the Arab world as a whole are the highest in the world, and no prophecy could foresee these societies providing the 51 million jobs the UNDP report says are needed by 2020 to “absorb young entrants to the labor force who would otherwise face an empty future.”
The simple truth is that the Arab world has terrible rulers and worse oppositionists. There are autocrats on one side and theocrats on the other. A timid and fragile middle class is caught in the middle between regimes it abhors and Islamists it fears.
Indeed, the technocrats and intellectuals associated with these development reports are themselves no angels. On the whole, they are unreconstructed Arab nationalists. The patrons of these reports are the likes of the Algerian diplomat Lakhdar Brahimi and the Palestinian leader Hanan Ashrawi, intellectuals and public figures whose stock-in-trade is presumed Western (read American) guilt for the ills that afflict the Arabs. Anti-Americanism suffuses this report, as it did the earlier ones.
There is cruelty and plunder aplenty in the Arab world, but these writers are particularly exercised about Iraq. “This intervention polarized the country,” they say of Iraq. This is a myth of the Arabs who are yet to grant the Iraqis the right to their own history: There had been a secular culture under the Baath, they insist, but the American war begot the sectarianism. To go by this report, Iraq is a place of mayhem and plunder, a land where militias rule uncontested.
For decades, it was the standard argument of the Arabs that America had cast its power in the region on the side of the autocrats. In Iraq in 2003, and then in Lebanon, an American president bet on the freedom of the Arabs. George W. Bush’s freedom agenda broke with a long history and insisted that the Arabs did not have tyranny in their DNA. A despotism in Baghdad was toppled, a Syrian regime that had all but erased its border with Lebanon was pushed out of its smaller neighbor, bringing an end to three decades of brutal occupation. The “Cedar Revolution” that erupted in the streets of Beirut was but a child of Bush’s diplomacy of freedom.
Arabs know this history even as they say otherwise, even as they tell the pollsters the obligatory things about America the pollsters expect them to say. True, Mr. Bush’s wager on elections in the Palestinian territories rebounded to the benefit of Hamas. But the ballot is not infallible, and the verdict of that election was a statement on the malignancies of Palestinian politics. It was no fault of American diplomacy that the Palestinians, who needed to break with a history of maximalist demands, gave in yet again to radical temptations.
Now the Arabs are face to face with their own history. Instead of George W. Bush there is Barack Hussein Obama, an American leader pledged to a foreign policy of “realism.” The Arabs express fondness for the new American president. In his fashion (and in the fashion of their world and their leaders, it has to be said) President Obama gave the Arabs a speech in Cairo two months ago. It was a moment of theater and therapy. The speech delivered, the foreign visitor was gone. He had put another marker on the globe, another place to which he had taken his astounding belief in his biography and his conviction that another foreign population had been wooed by his oratory and weaned away from anti-Americanism.
The crowd could tell itself that the new standard-bearer of the Pax Americana was a man who understood its concerns, but the embattled modernists and the critics of autocracy knew better. There is no mistaking the animating drive of the new American policy in that Greater Middle East: realism and benign neglect, the safety of the status quo rather than the risks of liberty. (If in doubt, the Arabs could check with their Iranian neighbors. The Persians would tell them of the new mood in Washington.)
One day an Arab chronicle could yet be written, and like all Arab chronicles, it would tell of woes and missed opportunities. It would acknowledge that brief interlude when American power gave Arab autocracies a scare, and when a despotism in Baghdad and a brutal “brotherly” occupation in Beirut were laid to waste. The chroniclers would have to be an honest lot. They would speak the language of daily life, and the truths that Arabs have seen and endured in recent years. On that day, the “human development reports” would be discarded, their writers seen for the purveyors of double-speak and half-truths they were.
Mr. Ajami, a professor at the School of Advanced International Studies at Johns Hopkins University and an adjunct fellow at Stanford University’s Hoover Institution, is the author, among other books, of “The Arab Predicament: Arab Political Thought and Practice since 1967 (Cambridge University Press, 1981).
The Arab world is plagued by despots. But don’t expect the U.N. to give President Bush any credit for challenging this order.
WSJ, Aug 06, 2009
‘It made me feel so jealous,” said Abdulmonem Ibrahim, a young Egyptian political activist, of the recent upheaval in Iran. “We are amazed at the organization and speed with which the Iranian movement has been functioning. In Egypt you can count the number of activists on your hand.” This degree of “Iran envy” is a telling statement on the stagnation of Arab politics. It is not pretty, Iran’s upheaval, but grant the Iranians their due: They have gone out into the streets to contest the writ of the theocrats.
In contrast, little has stirred in Arab politics of late. The Arabs, by their own testimony, have become spectators to their history. A struggle rages between the Iranian theocracy and the Pax Americana for primacy in the Persian Gulf and the Levant. The Arabs have the demography—360 million people by latest count—and the wealth to balance Iran’s power. But they have taken a pass in the hope that America—or Israel, for that matter—would shatter the Iranian bid for hegemony.
We are now in the midst of one of those periodic autopsies of the Arab condition. The trigger is the publication last month of the Arab Human Development Report 2009, the fifth of a series of reports by the by the United Nations Development Program (UNDP) on the state of the contemporary Arab world.
The first of these reports, published in 2002, was treated with deference. A group of Arab truth-tellers, it was believed, had broken with the evasions and the apologetics to tell of the sordid condition of Arab society—the autocratic political culture, the economic stagnation, the cultural decay. So all Arabs combined had a smaller manufacturing capacity than Finland with its five million people, and a vast Arabic-speaking world translated into Arabic a fifth of the foreign books that Greece with its 11 million people translates. With all the oil in the region, tens of millions of Arabs were living below the poverty line.
Little has altered in the years separating the first of these reports from the most recent. A huge oil windfall came into the region, and it was better handled, it has to be conceded, than earlier oil windfalls. But on balance the grief of the Arabs has deepened, and the autocracies are yet to be brought to account. They remain unloved, but they remain in the saddle.
In a clever turn of phrase, The Economist recently wrote of an Arab Rip Abu Winkle awakening from a slumber into which he had fallen in the early 1980s to marvel at how little has changed. He would find Hosni Mubarak still at the helm in Cairo, the policeman Zine el-Abidine Ben Ali in Tunisia, and Moammar Gadhafi in Libya. He would miss Hafez Assad in Damascus, but he would be reassured that his son Bashar had inherited his father’s dominion. He would of course find the same dynasties in Jordan and in the Arab states of the Peninsula and the Gulf.
Wily rulers, the men at the helm may have failed their peoples. They may have denied them decent educational systems. They may not have figured out a way into the modern world economy. But they have mastered the art of political survival. “He who eats the sultan’s bread, fights with the sultan’s sword,” goes an Arabic maxim. The economic dominance of the rulers, the absence of the countervailing power of property and the private sector, has increased the awesome power of the governments and their security establishments.
It is no mystery, this sorrowful decline of the Arabs. They have invested their hopes in states, and the states have failed. According to the UNDP’s report, government revenues as percentage of GDP are 13% in Third World Countries, but they are 25% in the Middle East and North Africa. The oil states are a world apart in that regard: the comparable figures are 68% in Libya, 45% in Saudi Arabia, and 40% in Algeria, Kuwait and Qatar. Oil is no panacea for these lands. The unemployment rates for the Arab world as a whole are the highest in the world, and no prophecy could foresee these societies providing the 51 million jobs the UNDP report says are needed by 2020 to “absorb young entrants to the labor force who would otherwise face an empty future.”
The simple truth is that the Arab world has terrible rulers and worse oppositionists. There are autocrats on one side and theocrats on the other. A timid and fragile middle class is caught in the middle between regimes it abhors and Islamists it fears.
Indeed, the technocrats and intellectuals associated with these development reports are themselves no angels. On the whole, they are unreconstructed Arab nationalists. The patrons of these reports are the likes of the Algerian diplomat Lakhdar Brahimi and the Palestinian leader Hanan Ashrawi, intellectuals and public figures whose stock-in-trade is presumed Western (read American) guilt for the ills that afflict the Arabs. Anti-Americanism suffuses this report, as it did the earlier ones.
There is cruelty and plunder aplenty in the Arab world, but these writers are particularly exercised about Iraq. “This intervention polarized the country,” they say of Iraq. This is a myth of the Arabs who are yet to grant the Iraqis the right to their own history: There had been a secular culture under the Baath, they insist, but the American war begot the sectarianism. To go by this report, Iraq is a place of mayhem and plunder, a land where militias rule uncontested.
For decades, it was the standard argument of the Arabs that America had cast its power in the region on the side of the autocrats. In Iraq in 2003, and then in Lebanon, an American president bet on the freedom of the Arabs. George W. Bush’s freedom agenda broke with a long history and insisted that the Arabs did not have tyranny in their DNA. A despotism in Baghdad was toppled, a Syrian regime that had all but erased its border with Lebanon was pushed out of its smaller neighbor, bringing an end to three decades of brutal occupation. The “Cedar Revolution” that erupted in the streets of Beirut was but a child of Bush’s diplomacy of freedom.
Arabs know this history even as they say otherwise, even as they tell the pollsters the obligatory things about America the pollsters expect them to say. True, Mr. Bush’s wager on elections in the Palestinian territories rebounded to the benefit of Hamas. But the ballot is not infallible, and the verdict of that election was a statement on the malignancies of Palestinian politics. It was no fault of American diplomacy that the Palestinians, who needed to break with a history of maximalist demands, gave in yet again to radical temptations.
Now the Arabs are face to face with their own history. Instead of George W. Bush there is Barack Hussein Obama, an American leader pledged to a foreign policy of “realism.” The Arabs express fondness for the new American president. In his fashion (and in the fashion of their world and their leaders, it has to be said) President Obama gave the Arabs a speech in Cairo two months ago. It was a moment of theater and therapy. The speech delivered, the foreign visitor was gone. He had put another marker on the globe, another place to which he had taken his astounding belief in his biography and his conviction that another foreign population had been wooed by his oratory and weaned away from anti-Americanism.
The crowd could tell itself that the new standard-bearer of the Pax Americana was a man who understood its concerns, but the embattled modernists and the critics of autocracy knew better. There is no mistaking the animating drive of the new American policy in that Greater Middle East: realism and benign neglect, the safety of the status quo rather than the risks of liberty. (If in doubt, the Arabs could check with their Iranian neighbors. The Persians would tell them of the new mood in Washington.)
One day an Arab chronicle could yet be written, and like all Arab chronicles, it would tell of woes and missed opportunities. It would acknowledge that brief interlude when American power gave Arab autocracies a scare, and when a despotism in Baghdad and a brutal “brotherly” occupation in Beirut were laid to waste. The chroniclers would have to be an honest lot. They would speak the language of daily life, and the truths that Arabs have seen and endured in recent years. On that day, the “human development reports” would be discarded, their writers seen for the purveyors of double-speak and half-truths they were.
Mr. Ajami, a professor at the School of Advanced International Studies at Johns Hopkins University and an adjunct fellow at Stanford University’s Hoover Institution, is the author, among other books, of “The Arab Predicament: Arab Political Thought and Practice since 1967 (Cambridge University Press, 1981).
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