A “Marshall Plan” for the German Economy

Germany, the largest Eurozone economy, has so far failed to distinguish itself from its regional peers as far as economic growth is considered. The country clocked 0.1% GDP growth in the third quarter thus marginally saving itself from the ignominy of recession (had registered a sub-zero growth in the previous quarter). The underlying cause for such a performance however is very different from those of its peers.

Germany is one such nation that has a long running current account surplus – its national savings exceed the national expenditure by more than 6 per cent of the GDP. This can be attributed to the general tendency of the Germans to amass wealth. Also, the economy doesn’t produce sufficient assets/avenues for investment. As a result, a major chunk of the investment goes to its neighbours and emerging markets around the world, who are willing to sell their assets to the German savers. This, however, also generates a huge uncertainty for the German economy. Though their desire to invest in the foreign assets is unlimited, the tendency of the other countries to borrow and issue debt assets is not.

This is exactly the reason for the current state of the German economy. Though the Germans continue to save a high portion of their income, the peripheral countries do not wish to borrow as their external debt has surpassed 100 per cent of their GDP and has become unsustainable. The Germany then turned to the emerging markets for rescue. However, with the recent slowdown in China, Russia and also several Gulf countries, the situation has resulted in an excess of savings leading to slow GDP growth and possibility of deflation.

In such a situation, there might be two broad ways in which the Germans could beef up their economy. The first one is to produce more of own assets and incentivize people to invest in them. This, it may accomplish by providing more tax incentives to different businesses to encourage private investment. It may also pare down VAT to further promote household spending, which has shown marginal improvement in the previous quarter and thus needs to be sustained.

The second and perhaps not so obvious solution might be introduction of another “Marshall plan”. The prime difference though being, that this time, Germany would be at the offering rather than at the receiving end. The Economic Cooperation Act- 1948 popularly known as the Marshall plan was carried out by the US under which it helped revive several European economies post the World War II. Though it also aimed at restoring economic and political stability in Europe through checking the growth of communism, it primarily allowed US to recover from the economic slump in 1946-47 and enter a period of economic boom.

Marshall plan works by way of providing a beneficiary nation, say X, with financial aids in form of grants and loans together referred to as the Counterpart funds.  X may preferably be an current/prospective importer for Germany which would additionally help provide an extended market for the German exporters. The loans thus provided under this plan are recycled into different businesses over several years and the compounded amount paid back to the lender country (Germany) resulting in a substantial increase over the principal value. Fig 1 is an illustration of how the recycling mechanism would lead to increase in the loan capital.

A supplier/exporter in Germany would provide his goods for shipment & paid by the German government and this amount is then credited towards the counterpart fund loan. The goods would be shipped thereafter to X where the party overlooking the allotment of the Counterpart funds exchanges them with X’s government and subsequently the importing industry (say A) for the corresponding amount in X’s currency, usually on credit (Note that this doesn’t require Government of X to maintain any German foreign exchange reserve). The credit, along with the interest amount, when paid off by A to the Government of X, would not paid back to Germany but thereafter used to fund more industries (B in figure 1). This cycle thus leads to compounding  of the original sum over several years, through reinvestment of principal & the interest thus obtained, in different industries.

Fig 1. Marshall Plan with Germany as the financier

A key aspect that needs to be highlighted here is that the funds thus invested are not in the fixed income/debt securities of X, but in the working capital of its industries. This model is not only more sustainable because the X’s government original debt is not increased each time an industry is funded, but is also more profitable as the returns received are much higher vis-à-vis those received from Germany investing in the sovereign government bonds of X.

Prospective candidates for X– Marshall plan acts to provide an increase of the beneficiary’s economy by way of promoting its industries through easier availability of raw materials as well as the businesses through availability of overseas investments. The major prospective takers for such a Marshall plan would thus be economies currently struggling in absence of sufficient capital or raw materials to feed their industries. Also as discussed earlier, an existing importer nation or one that is a prospective buyer for the different German exports would be an ideal candidate for a beneficiary for Germany, as this would provide it with two-pronged way to promote its economy- through providing an attractive investment avenue for its savers and also through providing a new/bigger market for its exporters thus providing them incentives to increase private investment.

Both these factors enable us to come up with the following two most likely candidates: Greece and Spain. The former suffers from a severe lack of capital available for starting/sustaining new businesses as well as high cost for raw materials for its infrastructure & energy projects due to austerity measures, making it one of the worst performing economies in the recent time. Similar is the case with Spain where low investor confidence has led to frustratingly slow growth over past several years. Additionally, these two also happen to be major German import partners making them ideal beneficiaries for a German Marshall plan.

Besides the above stated tangible benefits from a Marshall plan, it would help Germany build networks and trade links that could continue to exist far beyond the duration of the plan. It might also allow Germany influence some of the protectionist policies in these European nations, allowing it to promote further trade & contribute to uplifting of economy of the EU. Finally it might serve to market German economy as one that is cooperative and visionary, which would prove beneficial for its other trade relations in the longer run.

INDIA, US and the food security row at WTO

Reforms have always been one of the most crucial gears to pull an economy out of any financial fiasco. The massive economic decline of 2008 necessitated the need for economic policy reforms together with the safety nets to ensure that the social objectives such as food security and health are by no means sidelined. This argument should possibly lead you to a conclusion that economic reform and social policies essentially are the two components of India’s current reform package. The two being complements, need to be taken forward simultaneously. Food security is thus, one of the crucial objectives that need an urgent care. It is imperative to note that food security not just caters to the needs of the consumers below the poverty line but also encompasses the needs of the farmers without which the growth might unduly be industry favoring.

The ruling government had taken a firm stance and in the backdrop of the same, claiming lack of sufficient progress on food security measures India, had refused to adopt the World Trade Organization’s Trade Facilitation Agreement (TFA).

Trade Facilitation Agreement is basically a trade protocol that has been designed to spur and do away with the stumbling blocks to free international trade. It is believed that this agreement has the potential to boost the global GDP by $1 trillion and generate 21 million jobs by slashing red tape and streamlining procedures. Despite the urgency of such an agreement, India continued to maintain its bullheaded approach, thus giving a strong message of its commitment to food security.

This resulted in India, blocking the implementation of the Bali agreement by refusing to ratify the TFA till its concerns over finding a permanent solution to the issue of food security and public stockholding were addressed. The argument which the developing countries (particularly India) had put forth is that the WTO rule that caps subsidies to the farmers at 10% of the total value of agricultural produce is obsolete as it is based on 1986-88 prices.

India’s Concerns

India is all the more concerned about it because the playing field is quite tilted against India. Under the WTO Agreement on Agriculture, the domestic subsidies have been classified into three categories; green, blue and amber. So while the amber box subsidies are those which create trade distortions, as they encourage production through farm subsidies to fertilizers, seeds, electricity and irrigation. The minimal amount of subsidy under this category has been capped at 5% and 10% for the developed and the developing countries. At the 2013 Bali summit India, led by the UPA government, had agreed to sign the TFA under a ‘peace clause’ that gave the developing countries an exemption from the 10% provision until 2017.

However, the concerns of developing countries couldn’t have been possibly addressed with a temporary measure like the peace clause. One, given the fact that there has been a huge variation in the prices and the currency value since the base year which has been taken as 1986-87, India’s argument for base year correction is quite logical and hence justified. Secondly, given the present trends, the domestic prices of most of the commodities are more or less at par with the international standards, this takes the substance out of the oft-repeated argument that India will dump its cheap agro-products in the international market. Additionally, the developed countries have moved their trade distorting measures from the amber box to the green box because the latter is protected from the legal challenges at the WTO. The EU, for instance, has slashed its amber box subsidies from euro 50 billion in 1995 to euro 8.7 billion in 2009, while its green box subsidies have shot up from euro 18.7 billion in 1995 to a whopping euro 83 billion in 2012, accounting for 19 per cent of total farm revenues.

As for the US, its green box payouts have increased from $46 billion in 1995 to $120.5 billion in 2010.  The United Nations’ Millennium Development Goals to eradicate extreme poverty and hunger stands on the foundation of the food security legislation. And for most of the developing countries food security is a livelihood issue

India-US Agreement

This November finally saw an end to this deadlock with the US reaching an agreement with India on public stockpiling of food.

As part of a revised proposal, India and the US have agreed for an indefinite “peace clause” on food security until a permanent solution is found. This is subject to a review by all the WTO members (as WTO works on the consensus principle), for the full implementation of all the elements of the stalled Bali Package, including the much awaited Trade facilitation Agreement.

Though India’s opposition to the TFA was not received well by the trade community but the fact that it clearly sends across the message that issue of food security is paramount for India, certainly justifies the opposition. On the flipside it also brings forth the fact that developed countries like US still continue to have an overwhelming presence in WTO. It has the potential to broker deals in the organization and assert influence to negotiate the stalled agreements.

This also raises concerns over the future of WTO as an organization. Its inability to put the TFA in place by the demarked deadline has sparked pessimism about the same.  So while the 160-member, Geneva-based might survive as a body for facilitating trade liberalization, smaller groups of like-minded assertive nations will continue to reform and update the trade rules amongst themselves.

“Without a serious shakeup, the WTO’s future looks like that of the League of Nations,” said Simon Evenett, a professor at the Swiss Institute for International Economics. “Perhaps ultimately that’s what some governments want.“