NB Financial Health

Friday
April 15
2016

James Militzer / Scott Anderson

Weekly Roundup: The (Possible) Impact of President Trump or Sanders on Emerging Economies

We avoid politics on NextBillion. There are many reasons why, but the primary reason is: it’s just not our focus. But in ways that truly matter to our readers, this U.S. presidential campaign has invaded our territory. Many observers in recent weeks are taking a hard look at what a Donald Trump or Bernie Sanders presidency would mean for emerging economies. In this post, we examine some of the possible repercussions of two key policies advocated by the candidates, as articulated by several economists, journalists and commentators. This shouldn’t be seen as an endorsement of their competitors in the Republican or Democratic races – but simply an analysis of what might happen in developing countries if their campaign promises turn to action.

 

Weaponizing Remittances

First, let’s take a look at the potential implications of Donald Trump’s most famous proposal: the steadily growing 1,000-mile wall he promises to build along the Mexican border – paid for in full by Mexico. It has long been an applause line in his speeches, but Trump fleshed out the proposal recently in an extraordinary two-page memo to The Washington Post. In it, he said his administration would propose to change U.S. banking regulations, requiring money transfer companies to verify that their customers are legal residents of the country. Faced with a steep impending cut in the flow of remittances from Mexican workers in the U.S., which amount to almost $24 billion a year, Trump asserted that the Mexican government would quickly agree to pay for the wall – at which point his administration would call off the proposed regulations.

As other commentators have noted, using the flow of remittances as leverage to coerce payment from a foreign government would represent a dramatic departure from standard practice in policy-making and international relations – even at the height of the Cold War, the U.S. let Cuban exiles send money home. It would also impact a broad array of stakeholders, ranging from multinational corporations to society’s most vulnerable members, among them:

  • Poor communities – not only in Mexico, but throughout Latin America and beyond – for whom remittances from undocumented family members in the U.S. represent a lifeline.
  • Money transfer companies like Western Union, whose ability to serve the single largest remittance corridor in the world would be severely limited.
  • Banks, which would see their own remittances services curtailed, and which have no desire to see their business activities converted into a tool for extracting concessions from foreign governments.
  • Lawful money transfer customers,  including many of America’s 40 million-plus foreign-born residents, who would face the inconvenience of providing proof of legal residence before using these services, and to whom companies would likely transfer the expense of complying with these regulations.
  • The Mexican government, which would find itself in the precarious position of capitulating to Trump (unlikely), or dealing with the fallout of a steep drop in remittance flows.
  • U.S. law enforcement, which could struggle to keep track of the huge new stream of funds flowing through underground networks, where it can be more easily diverted to illegal activities.
  • The U.S./Mexico relationship, which would be seriously tested by such a policy – potentially to the point of retaliatory acts from Mexico impacting trade and other areas (the country is already making diplomatic moves to counteract the “hostile climate” Trump’s proposals are creating).
  • U.S. companies doing business with our second largest export market, which might bear the brunt of Mexican public anger at all things American.

In fact, virtually the only ones who’d likely benefit from Trump’s proposal would be cash smugglers, hawala networks, Bitcoin and other cryptocurrencies – or anyone else who could reliably move money outside the traditional financial system. And, of course, the lawyers representing money transfer companies or customers in their inevitable legal challenges to the move.

– James Militzer

 

Sanders and Blue-Collar Workers – At Home and Abroad

Sen. Bernie Sanders champions the cause of the American blue collar worker. But many economists are noting the unintended consequences of his zealous devotion to that principle at the expense of poor and low-income workers around the world.

Sanders’ opposition to trade pacts like NAFTA and the would-be Trans-Pacific Partnership is well known, and he has raised the specter of hiking tariffs on Chinese goods, not to mention penalizing companies that offshore manufacturing jobs. (To be fair, Hillary Clinton also has come out against TPP, and has also talked about hitting companies that outsource by rescinding tax breaks.)

But as many have pointed out, the UN’s Millennium Development Goal of cutting poverty in half by 2015 was almost single-handedly achieved by China due to its manufacturing explosion. This huge economic transition hasn’t just benefited China, it’s benefitted countries like the United States. China, at least historically, has been the biggest purchaser of U.S. debt, helping to enable low-interest rates for Americans to finance new cars, homes or businesses – and to purchase low-cost goods from China.

Earlier this month in Vox, Zach Beauchamp polled several economists and bottom-lines the problem for Sanders:

“The global decline in extreme poverty is inseparable from the global trading regime. When poor countries can sell cheap goods to rich countries, or bring in a lot of foreign direct investment, growth skyrockets. This means more jobs, better government services, and thus less poverty.”

He goes on to quote to Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics and an expert on trade law:

“The free trade, or freer trade, that we’ve had since the end of the Second World War has been the great engine which has lifted up literally hundreds of millions of people out of poverty — far more than any aid programs,” Hufbauer says. “The econometrics is indisputable.”

China is quickly moving to a service-oriented economy, and that means it’s not as cost effective to manufacture goods there. But shutting the trade door on the countries that could one day take its place, like Vietnam and Bangladesh, means those workers can’t even get to the first rung on the economic ladder, argues Jordan Weissmann in Slate:

“… if the United States comes along and says, ‘Sorry, Vietnam, we’re not going to buy another T-shirt unless your people start earning $5 or $7 an hour,’ factory workers in Hanoi aren’t suddenly going to get a raise. Factories are going to close, and businesses will move their operations to a country where employees are productive enough to justify developed-world wages – which typically means the developed world.”

All politics, they say, is local. But in presidential campaigns that’s no longer the case (if it ever was). As the sole superpower in an interconnected world, U.S. politics is global – and emerging countries have good reason to follow this campaign with particular interest.

– Scott Anderson

 

Photo credit: Michael Vadon and Gage Skidmore, via Flickr.

 
James Militzer is the editor of NextBillion Financial Innovation. Scott Anderson is the managing editor of NextBillion.

 

Categories
NextBillion Originals
Tags
business development, government, poverty, poverty alleviation, remittances