Hasta La Gadget!

Last week I had just finished re-landscaping my backyard when, within 24 hours, a new direction regarding the path of Hurricane Hermine became evident. In that moment I had an awareness of how absolutely powerless I felt in the immensity of the pending storm; my thoughts were busy painting a grim 3-D picture of my newly planted palm trees floating out to sea. As it turned out, we missed the brunt of Hermine’s wrath and were spared any major damage. It was, nonetheless, an interesting opportunity to witness how easily external circumstances can trigger and manipulate our internal thought process, especially when fear is running the show. In hindsight, I saw the storm as an “invitation” from Mother Nature to mindfully call back the power I tend to give away when I allow things outside of myself to drive my thoughts.

The entire incident was a less than gentle reminder that, while the illusion (fantasy) is that we have control over much, in reality we have control over little more than our next thought, which dictates how we will choose to experience the moment at hand. While we can’t always control events, we can absolutely choose to change our thoughts and perspective about those events. In a very powerful way, this puts us proactively in charge of our experience even while in the midst of life’s greatest “storms.” It’s never too late to take back your power. No one (or no thing–regardless of how big and scary it appears) can rob you of the freedom to choose what your next thought will be; make it a good one!

Peace, Dennis

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The European Space Agency lost contact with its Rosetta mission’s plucky little lander, Philae, in May 2015. Now the orbiter’s high-resolution camera has found Philae wedged into a dark crack on the surface of Comet 67P/Churyumov-Gerasimenko.

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It’s time for Nintendo leave consoles in the past. I’ve rewritten this opening paragraph multiple times trying to figure out the right way to say that. I’ve written that there are few surprising things in the gaming industry these days, save for Nintendo, which remains to be a wild card of poor marketing decisions, and that Nintendo’s mistakes have proven … Continue reading

International economic integration often takes place in tiny increments, but every now and then there is a big jolt that forces everyone to reconsider the foundational principles of the system. Brexit is such an event. If Brexit goes forward, the UK will have to rethink the carefully constructed balance of the economic relationships it currently has with the EU and with the rest of the world. Brexit will force the UK to consider exactly how much economic integration it wants with each, in two main areas: Tariffs on trade in goods, and regulatory barriers that affect both goods and services trade. Tariffs are mostly about economics, and in this case they involve the classic debate over customs unions versus free trade areas, and how deeper integration with a small group of countries compares to shallower integration with a large group. Regulatory trade barriers, in contrast, are more complex and contentious, as they have important political implications and involve the delicate balance between economic efficiency and sovereignty / regulatory autonomy.

Starting with tariffs, the UK is currently part of a customs union with the EU, meaning that all internal tariffs between the UK and the EU have been eliminated. In addition, there is a common external tariff to be applied to non-EU trading partners. This common tariff takes away any UK discretion to set its own tariff rates on its external trade. Beyond the tariffs themselves, a customs union also eliminates burdensome customs procedures between the members, with the importing process vastly simplified. Imports from outside the customs union, by contrast, face burdensome procedures that look into the nature of the product, its value, and its origin, among other things, upon importation.

With Brexit, the UK will be faced with two related questions on tariffs. First, what kind of tariff relationship should it have with the EU? The answer to this first question has an impact on the second question, which is, what kind of tariff relationship should the UK have with the rest of the world?

As to the relationship with the EU, the debate is over whether to maintain a customs union, and, if not, what tariffs to adopt as part of an FTA. A customs union is the most liberalizing option for trade within the EU, but, as noted, it limits the UK’s options for trade arrangements with the rest of the world. If a free trade area with the EU is chosen instead of a customs union, the UK can then negotiate with the rest of the world on its own. At that point, it can decide what external trade arrangements it would like. Should it focus on multilateral trade liberalization at the WTO? Should it participate in “mega-regional” trade agreements such as the TPP or TTIP? Or should it pursue bilateral FTAs, and, if so, with which countries?

Most economists agree that tariffs should be as close to zero as possible. Tariffs are bad economics, leading to inefficient production patterns and imposing costs on consumers. And they are bad international relations, as discrimination against foreigners can lead to escalating tensions.
The UK’s situation is difficult, as there is a tradeoff between tariff policy towards the EU and tariff policy towards the rest of the world. While there are benefits to being part of the EU customs union, in terms of reduced customs procedures and the avoidance of complicated “rules of origin,” being part of a customs union would, unfortunately, constrain the ability of the UK to lower tariffs on its trade with non-EU countries.

Therefore, what makes the most sense is a zero tariff arrangement with the EU, but through a free trade area rather than a customs union; and then a series of FTAs with the rest of the world, which could be bilateral, regional or multilateral (although in the current environment of trade negotiations, bilateral trade deals might be the most promising). In this way, the UK can maximize its tariff-free trade.

Regulatory issues are much more complicated. They affect both goods and services, and generate a great deal of criticism and skepticism from groups — on both the left and the right — who worry about sovereignty or regulatory autonomy.

The EU’s “single market” is generally considered to be a form of deep integration that eliminates many of the impediments to internal trade caused by the regulations of EU member states. But single markets, including even domestic ones such as the United States or Canada, tend to be partial rather than full, with various exceptions thrown in. The EU single market has gone quite far with its integration, but there are still limits. (And it is important to note that integration related to regulatory trade barriers also exists at the WTO and in bilateral and regional trade agreements.)

The UK benefits greatly from being part of the EU single market. As things stand now, EU rules on non-discrimination and mutual recognition, as well as supra-national EU regulations, allow most UK producers of goods and services to sell directly to EU customers without having to navigate through additional domestic government regulations. The rules are broad and have a strong enforcement mechanism. Generally speaking, if UK companies comply with domestic regulations, they may sell in the rest of the EU (as noted, with a few exceptions).

But while there is clear value here, there is also controversy. It is in the area of regulation that sovereignty and autonomy concerns arise. While the motives for the Brexit vote vary, and immigration and financial contributions to the EU probably played a bigger role, clearly one factor has been the idea that the UK has lost some amount of control over its domestic policy-making as a result of EU rules that affect domestic regulation. Thus, the value of the single market needs to be considered carefully, and compared to alternatives.

In this regard, in terms of their substance, EU rules that require regulations to be non-discriminatory are fairly similar to those of the WTO. On the other hand, the EU goes much further with principles such as mutual recognition and harmonization, and covers more areas of services regulation than does the WTO. And EU rules are easier to enforce.

Clearly, there will be something lost by leaving the EU. However, as noted, international rules on regulatory trade barriers do exist at the WTO, and could be supplemented with an FTA. Thus, where particular regulations are an important issue, such as financial services and “passporting,” the UK can negotiate rules through an FTA.

The degree of lost economic benefits due to the shift from deep EU integration to shallower WTO/FTA integration is difficult to measure, but could be substantial. The problem, however, is that with regulatory trade barriers, politics is as important as economics. The economic benefits of integration need to be balanced with the feelings of lost sovereignty and autonomy that come with constraints on domestic regulation. It may be more efficient, for example, to have one EU-wide rule on tobacco regulation. But in doing so, deep integration imposes greater constraints on domestic policy-making, and some people feel like choices have been taken away from them. You can call this a sovereignty or an autonomy or a democracy consideration. Whatever it is, it is almost certainly a motivating factor in resentments against international institutions. For this reason, the UK should consider not being part of the EU single market as it relates to the regulation of goods and services, and rely instead on the alternative that already exists in the WTO, and which could be developed further in a negotiated FTA with the EU. In general terms, this alternative would focus on less intrusive non-discrimination and mutual recognition rules, and avoid more sensitive harmonization efforts. There will still be an impact on domestic regulation, but in a more limited way.

The fundamental question here is one of balance between economic efficiency and sovereignty / autonomy. The benefits of local control over policy may be hard to measure, and to incorporate into economic models, but they can be seen in people’s expressions of discontent over international institutions. For the UK voters at the present time, the WTO and FTAs may offer a more appropriate and acceptable balance than does the EU (or the EEA).

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The conventional map of Africa’s development path went more or less like this: transfers of capital and technology would ease people out of farming and into factory jobs around cities, while income from the extraction of oil, gas, and minerals would help governments pay for education, health, and infrastructure. At the end of it, most workers would manufacture goods that the world would want to buy–at salaries that workers in richer parts of the world would shun. The problem with this march towards “industrialization” is that it has not happened. Africans did move, and are still moving, into cities. But once there, they are stuck in producing services, not goods, mostly informally. The talk is of “premature deindustrialization“. Not even the prospect of China shedding millions of low-skill manufacturing jobs has changed that.

There are of course many reasons why Africa has not yet industrialized big time, like poor governance and bad logistics. It will take decades to fix those. So, the question is: can services be the next engine of economic growth for the continent? Can Africans export enough services to each other and to the world? There is no data to answer these questions with precision. But Nora Dihel and her team at the World Bank had a brilliant try at it. They went directly to the source. Through thousands of old-fashion, face-to-face interviews and some cool, new methodologies–like crowdsourcing and “mystery shopping”–they amassed a wealth of information on African service providers. They talked to street-vendors, hairdressers, housecleaners, doctors, nurses, teachers, bankers, accountants, lawyers, and just about everyone else making a living in the service sector. And they did it all across sub-Saharan Africa. What they found, presented in a just-published book, challenges deep-rooted preconceptions. [You can download their book for free here.]

The first surprise is that virtually all services can be–and are–traded among and beyond African countries–even the most seemingly menial. Sure, local barbers stay local. But Tanzanian Maasai hair braiders travel to Zambia where their skills are in high demand–they have a brand on what they do. Sometimes, it is service companies that open branches in another country–South African banks come to mind. Other times, it is the consumer of the service who travels–think tourism. And, increasingly, it is the product of the service that gets digitally shipped abroad, like a draft tax return prepared in Zambia for a South African client. The level of technical sophistication ranges widely; there are house-keepers and there are software designers.

Trade in African services is not just varied–it is also huge and booming. Much of it goes unrecorded–more on this later–so it is difficult to come up with a dollar estimate. But interviews with cross-border service providers–from gardeners to programmers–suggest that these are well-paying jobs that are lifting and keeping people out of poverty. They also suggest that providing services to or in another country is a great way for female and the young to make a better living. The fact that most respondents see their trade as a long-term occupation speaks for itself.

To Africans’ credit, all this trade happens in spite of a cobweb of laws, regulations, and policies put up over the years by their governments, ironically, to protect national sectors and professions from foreign competition. In many countries, getting a work permit approved, a university degree recognized, or a branch licensed is virtually impossible for a foreigner. So plumbers, doctors, and insurers have to work in informality or recruit local partners. Inevitably, corruption pops up and bribes are paid–those Maasai hair braiders can tell you a story or two about how expensive crossing a border can be. Add to that the problem of cooperation: you need coordinated action on both side of the frontier, and that rarely happens. The result is much less trade in service, fewer jobs, and more poverty than could be possible. Africa’s recorded exports of services is a mere two percent of the world’s total. This shows both that much of it happens under the radar of official statistics and how big the potential for doing more is.

In fairness, African leaders have in recent years tried to remove the barriers that hinder trade in services. They have signed plenty of regional agreements to make things easier. Two trading blocs–the East African Community and the Common Market for Eastern and Southern Africa–have shown the way. But one thing is laws and regulations, and another is practice. Actual traders report little change in how tough it is to do business across countries. [NB: just to get change on the ground quickly, in their book Dihel and her colleagues advocate for a pan-African “Charter of Traders Rights”, a kind of public promise by all governments in the region which, in essence, would say: “If you come to any of our borders, we won’t stall you, rob you, or harass you”. That could work, if monitored by civil society organizations.]

All this has, of course, a not-so-rosy side. Exporting services sometimes means exporting your best and most dynamic people–those who you need to build your country. Yes, they send remittances back home. But the “brain-drain” is large and painful. By some calculations, one quarter of doctors trained in Africa eventually migrate to developed countries. Something similar probably happens to nurses, architects, and academics. But blocking their way out with legislation and bureaucracy is a self-defeating proposition–it just pushes migrants underground and leaves them unprotected abroad.

So, with all its pros and cons, is trade in services the future engine of Africa’s development? Probably not the engine, but one of them, and one that can power up others–agriculture, industry, and natural-resource extraction will do better if cross-border services do better. Remember: when you import a service, you are importing knowledge, and that makes you more productive. If the engineers in your neighboring country are better than yours at running the electrical grid, or its businesses use better processes, why not learning from them? The beauty is that, for all its recent vigor, trade in services remains an unexploited source of economic growth, and policy-makers have the key to tap into it. They just need a bit of leadership and a lot of coordination.

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