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Sylff@Tokyo:Director Shares Thoughts on New Research Center at UC San Diego

June 26, 2015

Professor Ulrike Schaede, chairperson of the Sylff program at the School of Global Policy and Strategy (formerly the School of International Relations and Pacific Studies), University of California, San Diego, visited the Tokyo Foundation on April 20, 2015.

She met with Tokyo Foundation President Masahiro Akiyama, Executive Director Akiko Imai, Director Takashi Suzuki and Program Officer Tomoko Yamada of the Leadership Development team.

Professor Schaede is an expert on Japanese corporate strategy, business organization, management, financial markets, and government-business relations. She shared with us news of the school’s recent launch of the Japan Forum for Innovation and Technology, a hub for research on contemporary business, science, and technology.

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Response of Indian Industries to Global Environmental Sustainability

April 6, 2014
By 19659

How does the response of one industrial sector affect other sectors of an economy? To gain insights into this question, Shyamasree Dasgupta, a Sylff fellow at Jadavpur University in India, has been analyzing the response over the past four decades of India’s industry to the country’s climate change action plan. In this article, she reports on her research conducted in the United States with an SRA grant has broadened her perspective.

* * *

As a student of social science I always wondered how the response of an individual decision maker shapes up in conjunction with the responses of the bigger community to which the decision maker belongs. It became more interesting to me as I initiated my doctoral research to explore the responses of Indian industries to climate change mitigation goals.

As reduction of carbon emissions is a “global goal,” the most aggregated pledges are taken at the international level (such as the Kyoto Protocol, Copenhagen Accord). Specific climate change mitigation policies are, however, mostly formulated and implemented by the national government or a set of national governments in line with such global pledges. Finally, different economic sectors take their decisions with regard to the pattern of their operations to curb energy use and emissions in line with the pledge and policies.

The response of a particular economic sector (such as the industrial sector) is not a stand-alone phenomenon. The responses are triggered by the actions of other sectors of the economy and at the same time have an impact on the rest of the economy. In fact, the aggregate impact of the decisions taken by one economic sector depends on its relation with the rest of the economy. For example, if an industry substitutes coal by electricity as an energy input, then emissions from that particular industry will come down, but from a macro perspective, aggregate emissions will be reduced only when electricity is produced with a fuel that is less carbon intensive than coal.

My doctoral research seeks to understand how Indian industries have responded during the past four decades under various domestic policy domains, with a special emphasis on the country’s recent climate change mitigation policies. Having estimated such response parameters (for example, price elasticity of energy demand—the change in industrial energy demand when energy price changes), I wanted to explore how the same industrial sector can be expected to behave in a future time horizon while interacting with other sectors in the global economy if some global emission reduction pledge becomes binding.

I got the opportunity to explore this issue with my SRA award along with mentoring and support from my home institute, Jadavpur University in India, and my SRA host institute, the Joint Global Change Research Institute (JGCRI, a collaborative institute of the Pacific Northwest National Laboratory and the University of Maryland in the United States).

An Integrated Assessment Model for India

The author working on the Global Change Assessment Model at JGCRI

The author working on the Global Change Assessment Model at JGCRI

JGCRI has developed the Global Change Assessment Model (GCAM), an integrated assessment model representing the world economy that explores the links between energy, land use, water resource sectors, and a climate model. It incorporates both energy producing (such as electric power) and energy consuming sectors (such as industry). It creates a market where all the sectors are recursively solved for price and quantity, and the amount of carbon dioxide and other greenhouse gases emitted are estimated. The model could be used to explore responses of these sectors to several climate change mitigation pledges and policies.

GCAM divides the world into 14 regions, and India is one of them. The existing model employed the aggregated data for the Indian industry sector. Hence the responses towards any mitigation policy—can be so far analyzed only for the aggregate industry sector for India. My aim was to further develop the model with disaggregated industrial sectors for India, breaking up the industry sector into subsectors such as iron and steel, chemicals, and cement, along with a residual subsector named “other industries.” This would enable the user to analyze responses not only at the aggregate level but also for different subsectors in the context of Indian industry. The challenge was to break up the aggregate industry sector in an appropriate manner supported by authentic data so that the model would offer plausible solutions for years up to 2100 for all sectors and regions.

Being new to integrated assessment models, this was a true learning experience for me requiring several trials with different adjustments to obtain valid results! It was a stimulating experience solving the unforeseen errors cropping up during each trial run until I succeeded. I was greatly supported by my mentors and other colleagues at JGCRI in the process. In the course of my research, I came across fellow visiting scholars who were working on or had worked on several other sectors in other countries, including China and Brazil.

The research was greatly supported by the mentors and other colleagues at JGCRI

The research was greatly supported by the mentors and other colleagues at JGCRI

The model also used average values regarding how demand changes in response to changes in price in different industrial sectors. I substituted the average values for those specific to India that I had estimated prior to my SRA. Data were derived from the “Energy Statistics” and “Annual Survey of Industries,” published by the Ministry of Statistics and Programme Implementation, Government of India. The scenario demands a sharp decline in emissions from nonenergy-intensive industries, the phasing out of coal, and a significant increase in the use of clean electricity in industrial production. The use of biofuel emerged as one of the most effective medium-term solutions for Indian industries to meet the mitigation target.

Case Study in Climate Mitigation

Another objective of my SRA was to visit an energy-intensive industrial unit in the United States in order to compare its production and mitigation practices with its Indian counterparts. I was put in touch with the US Department of Energy through my mentor at the home institution, enabling me to visit such a facility. Things shaped up well, and I got a chance to accompany members of the American Forest and Paper Association on a visit to a pulp and paper company in Virginia. The day-long visit to the paper mill and discussions with the managers provided insights into their production processes and mitigation practices.

Visiting a paper mill with the members of the American Forest and Paper Association

Visiting a paper mill with the members of the American Forest and Paper Association

The mill was established in 1914 and has gone through changes in ownership and technology. It mainly produces corrugated paper from both raw wood and recycled paper. The pattern of energy utilization became a major issue of concern, as a result of which the mill became more energy efficient with greater emphasis on recycling and enhanced use of renewable energy. Over 80% of the electricity used by the mill is generated internally using multiple fuels, including black liquor, wood waste, and sludge. According to the company, it was the rise in fuel prices, rather than any particular energy or climate policy at the federal or state level, that drove it to reduce its dependence on purchased energy.

The SRA experience was extremely enriching for me. It not only helped me to augment my doctoral dissertation, which I am aiming to finalize in the coming few months, but at the same time provided me with an opportunity to work in the multidisciplinary and multiethnic environment of my globally renowned host institution.

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National Policy in the Local Context
Exploring the Influence of “Guest” Workers in Fernie, British Columbia

November 12, 2013
By 19635

How do national immigration policies influence local communities? Laurie Trautman, a geographer who received a Sylff fellowship from the University of Oregon in 2012, explores how “guest” workers in rural resort economies in the United States and Canada are reshaping local labor markets and community dynamics. In the summer of 2013 she conducted fieldwork in British Columbia, Canada, using a Sylff Research Abroad award, and here she highlights some of her preliminary findings.

* * *

The importation of foreign labor is becoming an increasingly common strategy used by advanced industrial economies to maintain global competitiveness. While guest worker programs are designed to import foreign workers on a temporary basis, such policies have a lasting impact on local economies and communities. Despite these impacts, the bulk of literature on immigration has largely overlooked guest workers, who are perceived as having little long-term influence in the communities in which they work.

While guest worker provisions have been a major source of conflict in the United States since World War II, recent Canadian immigration policies have made a decisive shift away from an emphasis on multiculturalism towards a strategic focus on meeting temporary labor needs. As these changes are occurring, they are producing fundamentally different results that have yet to be extensively examined and compared. Yet, as comprehensive immigration reform is pending in both the US Congress and Canadian Parliament, it is essential that the changing nature of immigration policy—and guest worker programs in particular—is systematically and thoroughly analyzed in a cross-national context.

This article explores the influence of guest worker policy on both the local labor market and community interaction in the Canadian resort town of Fernie, British Columbia. Based on qualitative interviews conducted during the summer of 2013, this project aims to provide a better understanding of this understudied, yet increasingly controversial, element of immigration policy.

This research is part of a broader dissertation project that links national policy discourse and community experience to understand how guest worker policies are evolving in different national contexts in the United States and Canada—a critical issue given current debates over immigration reform in North America.

At the national level, this project analyzes narratives in the United States and Canada over nation, race, and labor, as reflected in federal legislation since 1990. At the local level, qualitative and in-depth research in two case-study “receiving” communities (Fernie, British Columbia, and Sun Valley, Idaho) shed light on how these national dynamics intersect with local economies, leading to a new understanding of the influence of guest workers on local labor markets and social interaction.

Case Study of Fernie, BC

The town of Fernie is located in the Elk Valley of southeast British Columbia and has a population of roughly 6,000 and an economy highly dependent on amenity-based tourism. With a high cost of living, small population base, and seasonal fluctuations in labor demand mirroring the tourist season, Fernie is unable to meet its labor needs locally. In the past several decades, Fernie’s reliance on importing labor from abroad has continued to increase.

Fernie Art Depot

Fernie Art Depot

At the same time, the cost of living in Fernie has skyrocketed alongside second home ownership, which has also created an increased demand for low-wage, low-skilled service-sector jobs. The result is an extremely tight labor market for low-wage labor in a rural location with a high cost of living, which has pushed many local businesses to develop retention strategies ranging from a free ski pass to medical benefits. However, for particular positions, some businesses have gone beyond established channels of recruitment and turned to the Temporary Foreign Worker Program (TFWP) to meet their labor needs.

During my research time in Fernie, I conducted 44 interviews and two focus groups with employers, employees, community members, and government officials in order to assess how the presence of temporary foreign workers (TFWs) is shaping the local labor market and community dynamics. I was also involved in participant observation and analyzed local media publications to determine how these dynamics were represented both spatially and socially.

From ferniefix.com

(Photo from ferniefix.com)

I found that, while most employers relied on workers coming with a working holiday visa (primarily from Australia and New Zealand), a small handful of employers are turning to the Temporary Foreign Worker Program as the tourist season is extending to include both winter and summer seasons. Up until just a few years ago, most employers were able to meet their labor needs during the peak winter season with young workers coming for the ski season with a working holiday visa, who would then leave in spring, when most businesses either go on vacation or reduce hours. With the demand for labor beginning to switch from a peak season in the winter to more year round needs, employers are searching for a more stable and longer term labor force which, ironically, they are able to find through the TFWP.

Unlike the working holiday visa, which does not tie workers to specific employers, workers coming on the TFWP need to establish employment prior to obtaining a visa, and thus solidify a relationship with an employer who essentially sponsors them. Upon arrival, they are in a committed relationship with their employer. In Fernie, TFWs are occupying specific positions in the labor market that have become increasingly difficult for employers to fill—namely housekeepers, chefs, and fast food workers. At this time, several fast food restaurants and cleaning companies are employing TFWs from the Philippines, establishing a division of labor along both national and racial lines.

Preliminary Findings

As part of my broader dissertation project, I am analyzing 20 years of national policy discourse in both the United States and Canada. A recurrent theme in both Parliament and Congress is the exploitation and victimization of guest workers, who are often described as being “unfree labor.”

This sentiment is echoed in academic literature, much of which highlights a fear that as Canadians increasingly rely on workers with temporary status who have few avenues to permanent residency, “a US-style underclass defined by precarious status and labour market vulnerability” may be emerging (Goldring et al, 2009: 257).

Help Wanted

Help Wanted

A preliminary analysis of my findings illustrates that TFWs in Fernie are not victimized by their status, nor do they lack agency, which complicates the overriding sentiments evident in both political discourse and academic literature. In fact, they are able to negotiate the immigration system through the relationship with their employers to remain in Canada beyond the original duration and purpose of their visa. In some instances, TFWs obtain residency and move into higher paying positions. This is surprising, as technically speaking, there is no path to residency for low-skilled TFWs.

I also found that workers coming on a working holiday visa will utilize the TFWP as a strategy to remain in Canada after their visas expire. Thus, while the TFWP is constructed as a national policy aimed at addressing temporary and acute labor market shortages, in Fernie it is actually a strategy used by both employers and foreign workers to achieve stability and long term employment relationships. For employers, it fills a chronic labor shortage, and for employees it is often a path to longer-term residency. Both of these outcomes are almost the polar opposite of the stated purpose of the policy.

Despite the agency on the part of TFWs, there remains a real materiality to the different categories of TFWs and ”international visitors” on a working holiday visa (WHV), which is evident at the local level. TFWs in Fernie are increasingly Filipino, while those on a WHV are almost exclusively young, white, and middle class. Those on a WHV have both social and labor market mobility, as they are able to change employers and come to Fernie with enough disposable income to enjoy the amenities. Above all else, they are not visibly different from the local population.

On the contrary, the geographic and labor market mobility of Filipinos coming as TFWs is extremely limited both by their employment in low-wage positions, their commitment to their sponsoring employer, and perhaps by their obvious position as ”minorities” in this small, rural mountain town. This quote from one interviewee highlights this lack of mobility:

“People say that there’s this big Filipino community that's growing, but I don't really see it, it’s not out there, you don't see them walking around, hanging out at the bars and coffee shops, so I don't know. They might be serving you a coffee when you drive through Tim Horton’s, but that’s about it.”

The preliminary findings from this case study will be compared with research in Sun Valley in the United States, in order to assess how guest worker policies are influencing both labor markets and community dynamics in different national contexts. The final stage of this dissertation project will analyze national policy discourse in the United States and Canada since 1990, comparing how 'guest worker' policy is constructed within the context of broader immigration objectives.

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Sylff@Tokyo: Elections and Economic Cycles in Autocratic Regimes

August 28, 2013

Higashijima, center, with the Tokyo Foundation program officers

Higashijima, center, with the Tokyo Foundation program officers

Masaaki Higashijima, who received a Sylff fellowship from Waseda University in 2008, visited the Tokyo Foundation on August 12, 2013. Masaaki is enrolled in PhD programs at Waseda and Michigan State University and is currently writing a dissertation at MSU.

His research analyzes the correlation between elections and economic cycles on the assumption that leaders tend to adopt an expansionary fiscal policy before an election, resulting in post-election slowdowns. Masaaki is paying special attention to autocratic regimes, although the trend had been considered applicable exclusively to multi-party democracies. He is trying to demonstrate that a correlation between elections and economic performance also exists in autocratic regimes.

We believe that Masaaki’s profound analysis can help shed new light on the ties between politics and fiscal policy and wish him all the best with his dissertation.

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Bulgaria and Japan: From the Cold War to the Twenty-first Century

August 14, 2013
By 19617

The following article is based on Bulgaria and Japan: From the Cold War to the Twenty-first Century, an exhaustively researched 2009 book by Evgeny Kandilarov—a Sylff fellow at Sofia University “St. Kliment Ohridski,” who used his fellowship to conduct research at Meiji University in Japan in 2005. The Tokyo Foundation asked the author, who is now an assistant professor at his alma mater, to summarize his findings, which have revealed intriguing patterns in the history of bilateral ties and international relations over the past several decades.

* * *

The book Bulgaria and Japan: From the Cold War to the Twenty-first Century is almost entirely based on unpublished documents from the diplomatic archives at the Bulgarian Ministry of Foreign Affairs. In order to clarify concrete political decisions, many documents from the Political Bureau of the Central Committee of the Bulgarian Communist Party, Comecon, and State Committee for Culture were used. These documents are available at the Central State Archives of the Republic of Bulgaria. For additional information, memoirs of eminent Bulgarian political figures and diplomats who took part in the researched events were also used.

This article aims to give a brief overview of the political, economic, and cultural relations between Bulgaria and Japan during the Cold War and the subsequent period of Bulgaria’s transition to democracy and a market economy.

Exhaustive research on the bilateral relationship between Bulgaria and Japan have revealed specific reasons, factors, and causes that led to fairly intense economic, scientific, technological, educational, and cultural exchange between the two countries during the Cold War. Furthermore, the study raises some important questions, perhaps the most intriguing one being: Why did the relationship rapidly lose its dynamics during the transition period, and what might be the reasons for this?

The study also poses a series of questions concerning how bilateral relations influenced the economic development of Bulgaria during the 1960s and 1980s, throwing light on the many economic decisions made by the Bulgarian government that were influenced by the Japanese economic model.

Five Distinct Stages of the Relationship

The analysis of Bulgaria-Japan relations can be divided into two major parts. The chronological framework of the first part is defined by the date of the resumption of diplomatic relations between Bulgaria and Japan in 1959 and the end of state socialism in Bulgaria in 1989, coinciding with the end of the Cold War. This timeframe presents a fully complete period with its own logic and characteristics, following which Bulgaria’s international relations and internal policy underwent a total transformation at the beginning of the 1990s.

The second part of the analysis covers the period of the Bulgarian transition from state socialism to a parliamentary democracy and market economy. This relatively long period in the development of the country highlighted the very different circumstances the two countries faced and differences in their character.

The inner boundaries of the study are defined by two mutually related principles. The first is the spirit of international relations that directly influenced the specifics of the bilateral relationship, and the second is the domestic economic development of Bulgaria, a country that played an active role in the dynamics of the relationship. In this way, the 1960s, 1970s, 1980s, 1990s (through 2007, when Bulgaria joined the EU), and the years since 2007 represent five distinct stages in the relations between Bulgaria and Japan.

The first stage began with the resumption of diplomatic relations in 1959. This was more a consequence of the general change in international relations in the mid-1950s than a result of deliberate foreign policy. After the easing of Cold War tensions between the two military and political blocs and the restart of dialogue, the whole Eastern bloc began normalizing its relations with the main ideological rival, the United States, as well as with its most loyal satellite in the Asia-Pacific region—Japan. From another point of view Japanese diplomatic activity toward Eastern Europe, including Bulgaria, was motivated mostly by the commercial and economic interests of Japanese corporations looking to extend their markets.

This period in Bulgarian-Japanese relations in the 1960s was characterized by mutual study and search for the right approach, the setting up of a legislative base, and the formulation of main priorities, aims, and interests.

Analyses of documents from the Bulgarian state archives show that Bulgaria was looking for a comprehensive development of the relationship, while Japan placed priority on economic ties and on technology and scientific transfer.

Budding Commercial Ties

One of the most important industries for which the Bulgarian government asked for support from Japan was electronics, which was developing very dynamically in Japan. In the mid-1960s Bulgaria signed a contract with one of Japan’s biggest electronics companies, Fujitsu Ltd. According to the contract, Bulgaria bought a license for the production of electronic devices, which were one of the first such devices produced by Bulgaria and sold on the Comecon market. The contract also included an opportunity for Bulgarian engineers to hone their expertise in Japan.

In the 1960s the first joint ventures between Bulgaria and Japan were established. In 1967 the Bulgarian state company Balkancar and the Japanese company Tokyo Boeki create a joint venture called Balist Kabushiki Kaisha. Another joint venture that was established was called Nichibu Ltd. In 1971 these two companies merged into a new joint venture, Nichibu Balist, engaged in trading all kinds of metals and metal constructions, forklifts and hoists and spare parts for factories, ships (second hand), marine equipment, spare parts, electronics, pharmaceuticals, and chemical products.

Bulgarian prime minister Todor Zhivkov and Japanese Prime minister Eisaku Sato, 1970, Japan.

Bulgarian prime minister Todor Zhivkov and Japanese Prime minister Eisaku Sato, 1970, Japan.

In 1970 Bulgaria and Japan signed an Agreement on Commerce and Navigation, which was the first of its kind signed by the Bulgarian government with a non-socialist country. According to the agreement, the two countries granted each other most-favored-nation treatment in all matters relating to trade and in the treatment of individuals and legal entities in their respective territories.

At the end of this stage of Bulgarian-Japanese bilateral relations, by participating in the Expo ’70 international exhibition, Bulgaria already had a clear idea of the “Japanese economic miracle” and how it could be applied to Bulgaria’s economic growth.

The Bulgarian government led by communist ruler Todor Zhivkov were very much impressed and influenced by Japan’s industrial, scientific, and technological policy, which led to the so called Japanese miracle. That is why the economic reforms and strategies adopted in Bulgaria over the following few years, although conducted in a completely different social and economic environment, were influenced to some extent by the Japanese model, especially in the field of science and technological policy.

Peak of Political and Economic Activity

The second stage in bilateral relations in the 1970s marked the peak of political and economic activity between the two countries. The goals set during the previous period were pursued and achieved slowly and steadily. The legislative base was broadened, and the number of influential Japanese partners increased. The international status quo in East-West relations, marked by the Helsinki process, presented the possibility for Bulgaria and Japan to enjoy a real “golden decade” in their relations.

In 1972 the Japan-Bulgaria Economic Committee for the development of trade, economic, and scientific and technological ties between the two countries was established in Tokyo. Committee participants included a number of large Japanese manufacturers, financial institutions, and trading companies. The head of the Committee was Nippon Seiko (NSK) President Hiroki Imazato. The same year in Sofia, Bulgaria established the Bulgaria-Japan Committee for Economic, Science, and Technical Cooperation, headed by Minister of Science, Technologies, and Higher Education Nacho Papazov.

In the mid-1970s the Bulgarian government undertook some legislative changes regarding the rules for foreign company representation in Bulgaria. These changes were influenced mainly by the attempt by the Bulgarian government to encourage the further development of Bulgarian-Japanese economic relations. After the legislative changes Japanese companies received the right to open their own commercial representative offices in Bulgaria, and in just a few years 10 Japanese companies opened offices: Mitsubishi, Mitsui, Sumitomo, C. Itoh, Fujitsu, Tokyo Maruichi Shoji, Nichibu Balist, Marubeni, Nissho Iwai, and Toyo Menka Kaisha. In 1977 the Japan External Trade Organization (JETRO) also opened an office, greatly contributing to the promotion of the trade and economic relations between Bulgaria and Japan.

Historic Summit Meeting

Bulgarian state leader Todor Zhivkov and Japanese Prime minister Takeo Fukuda, 1978, Japan.

Bulgarian state leader Todor Zhivkov and Japanese Prime minister Takeo Fukuda, 1978, Japan.

A political expression of the peak of Bulgarian-Japanese relations during the 1970s was the first official summit visit in the history of bilateral diplomatic relations—the visit by Bulgarian state leader Todor Zhivkov to Japan in March 1978 for a meeting with Japanese Prime Minister Takeo Fukuda.

During the visit, the two sides agreed to establish a Joint Intergovernmental Commission for Economic Cooperation, which has held working sessions every year, engaging both governments to further promote and extend the bilateral economic relationship.

Bulgarian state leader Todor Zhivkov and Japanese Emperor Hirohito, 1978, Japan.

Bulgarian state leader Todor Zhivkov and Japanese Emperor Hirohito, 1978, Japan.

Following the state visit by Todor Zhivkov, the Bulgarian government created a very detailed strategic program for the development of Bulgarian-Japanese relations for the decade up to 1990. The main focus of the program was the following idea: “The strategic direction in the economic relations between Bulgaria and Japan consists in the rational use and implementation of modern and highly effective Japanese technologies, equipment and production experience for the promotion of the quality and efficiency of the Bulgarian economy.”

 The Crown Prince Akihito during his official state visit in Bulgaria, October 1979.

The Crown Prince Akihito during his official state visit in Bulgaria, October 1979.

Another key point was that the Bulgarian government would focus its efforts on strengthening cooperation with leading Japanese companies in such fields as electronics and microelectronics, automation and robotics, heavy industries, chemicals, electronics, and engineering.

In response to the Bulgarian state visit in 1978, the next year, in October 1979, Bulgaria was visited by Crown Prince Akihito and Crown Princess Michiko as the official representatives of Emperor Hirohito.

1980s: Broadening Spheres of Cooperation

During the third period of Bulgarian-Japanese relations, the momentum of the preceding stages still kept the relationship stable and growing. The sphere of cooperation and mutual interest widened, and the Bulgarian government relied more on the Japanese support and the advantages offered by the Japanese economic model.

At the beginning of the 1980s the Bulgarian government undertook another step toward the liberalization of the Bulgarian economy. It gave an opportunity for Western companies to invest in Bulgaria by concluding contracts for industrial cooperation and creating associations. These changes in the Bulgarian economy caused great interest among Japanese economic circles, and within the next few years six Bulgarian-Japanese joint companies were created. The names and activities of the joint companies were as follows:
Fanuc-Mashinex with the participation of Japanese company Fanuc Co: Service and production in the fields of electronics, automation, and engineering.
Atlas Engineering with the participation of Japanese companies Mitsui, C. Itoh, Toshiba, and Kobe Steel: Design, supply, and implementation of projects in Bulgaria and third countries in the fields of mechanical engineering, chemicals, and metallurgy.
Sofia-Mitsukoshi with the participation of Japanese companies Mitsukoshi and Tokyo Maruichi Shoji: Production and trade in the field of light industry as well as the reconstruction of department stores.
Tobu-M.X.: Manufacture and sale of machinery for magnetic abrasive treatment of complex-shaped parts. Production was based on Bulgarian technology, and the products were sold in Japan and in third countries.
Medicom Systems with the participation of Japanese company Tokyo Maruichi Shoji: Research, production, and sale of equipment and software for the medical and education markets.
Farmahim-Japan with the participation of Japanese company Marubeni: Collaboration in the pharmaceutical field.

1990s: Transformation of the Relationship

The subsequent crisis in East-West relations in the 1980s, the growing economic crisis in the Communist bloc, and changes in the political leadership in Moscow brought about the end of the Cold War and the beginning of a new era in international relations. During the 1990s, these new factors completely transformed the relationship between Bulgaria and Japan.

In the next period, during which Bulgaria began a long and arduous transition to a democratic political system and functioning market economy, an abrupt switch came about in the direction of Bulgarian foreign policy. The governing parties during this period made every effort to incorporate Bulgaria into the Euro-Atlantic military and economic structures, namely, the North Atlantic Treaty Organization and the European Union.

This required a great deal of effort to transform the political and economic systems. The focusing of national energy on these social transformations created a totally different environment for Bulgaria-Japan relations. Bulgaria became a developing country and was placed in an unequal position in terms of the international hierarchy. For a long time, relations between the two countries consisted largely of Japanese disbursements of official development assistance (ODA).

Despite the dialogue between Bulgaria and Japan from 1959 to 1989, the 1990s was a period of steady decline and stagnation in the bilateral relationship, being reduced, to a large extent, to one between donor and recipient.

All this led to a paradoxical situation: economic relations between Bulgaria and Japan were much closer when the countries were politically and ideologically far apart than during the period after 1989, when they stood in the same ideological framework. The underlying reasons for this are related to the question of what were the driving forces of the relationship during the Cold War.

Nurturing a New Partnership

A detailed study of the relationship between 1959 and 1989 shows that for the most part the initiative came mainly from the Bulgarian side, which showed keen interest in and reaped benefits from the relationship. Bulgaria was driven by commercial and economic interests and the need for scientific and technological cooperation. Moreover, Japan was both a good model and a suitable partner for Bulgaria. Japan saw in Bulgaria and other socialist countries an opportunity to expand its export markets and to import cheaper food commodities and raw materials.

At the same time, ties with a highly developed country like Japan provided an opportunity for the Bulgarian government to identify the defects and shortcomings of the closed, centralized, planned economy. This underlined a persistent set of problems, the major one being the lack of competitiveness of Bulgarian products stemming from poor quality, low labor efficiency, poor level of technology, unstable stock exchange, limitations in the number and variety of goods, mediocre design, and the failure to adapt to a highly dynamic and competitive market environment.

As late as January 1, 2007, both countries took a step to set up a new partnership framework on equal terms. After Bulgaria joined the EU, relations between the two countries became almost entirely dependent on the geopolitical, economic, and to some extent cultural interests of the respective counties in the region. From this perspective, the starting points of the relations between Bulgaria and Japan at the beginning of the twenty-first century did not seem very strong. This could be clearly seen in the empirical data on Japanese investment in Bulgaria, financial transactions, the traffic of tourists, cultural presence, and other areas, as well as in the peripheral position of Bulgaria in Japan’s foreign strategy toward the region, underlined by then Japanese foreign minister Taro Aso’s 2006 concept called the Arc of Freedom and Prosperity.

Unfortunately, even almost seven years after Bulgaria joined the EU there has not been any significant change in Bulgarian-Japanese relations, which remain very much below their optimal potential. The reasons for this can be found both in the lack of political and economic stability in Bulgaria as well as in the continuing economic instability of Japan over the last 20 years. Whether Japan and Bulgaria will once again see a merging of interests and revive a mutually beneficial relationship is a matter for another analysis. The most important thing is that there is already a very good base for a fruitful relationship, even though it was set during the Cold War, and it should be used as a starting point in the attempts by the Bulgarian government and its Japanese partners to find a more efficient and beneficial approach in developing bilateral relations.

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Sylff@Tokyo: Latvian Fellow Seeking Keys to Innovation

May 15, 2013

Ilona, center, with Tokyo Foundation program officers

Ilona, center, with Tokyo Foundation program officers


Ilona Dubra, a Sylff fellow at the University of Latvia, visited the Tokyo Foundation on May 9. She is now in Japan to conduct research at Waseda University using an SRA (Sylff Research Abroad) grant.

At the Foundation, she made a presentation of her recent research activities not only in Japan but also in the United States and Portugal. She is examining the factors that influence corporate innovation. During her stay in Japan, she hopes to identify the main factors behind successful innovations at Japanese enterprises.

She believes that there is a need to ensure the growth of the national economy through the creation of value-added products and services and to increase efficiency through the promotion of innovation. She hopes to make use of her research findings to foster innovative activities among Latvian enterprises.

Learning about Japan’s postwar economic growth.

Learning about Japan’s postwar economic growth.


A lively discussion with Tokyo Foundation program officers followed her presentation. She was also given an overview of Japan’s postwar economic growth by Tokyo Foundation Research Fellow Zentaro Kamei.

We were very pleased to learn that the SRA award has contributed to her research and has helped to sustain her enthusiasm for future improvements in her own country.

Sylff fellows and steering committee members are welcome to stop by the Foundation’s office while visiting Tokyo.

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A Prescription for Halting Deflation

February 21, 2013
By null

Yale Professor Urges Bolder Actions from the BOJ

Koichi Hamada, the Tuntex Professor Emeritus of Economics at Yale University and the mastermind behind Prime Minister Shinzo Abe’s policy for economic revitalization—dubbed “Abenomics”—visited the Tokyo Foundation recently to share his thoughts with research fellows.

Hamada has been at the center of Japanese media attention for strongly endorsing Abe’s antideflation strategy. The professor’s remarks were widely quoted by the Liberal Democratic Party leader during the campaign for the December 16, 2012, House of Representatives election, which the LDP won by a landslide.

Hamada’s remarks significantly boosted the LDP’s standing among the public, many of whom are struggling to make ends meet. He advocates a bold quantitative easing policy to halt deflation and reverse the steep appreciation of the yen. Following the election victory, Hamada was appointed by the prime minister to serve as a special advisor to the cabinet.

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Professor Hamada was a key Sylff steering committee member when the Sylff program was established at Yale in 1989, playing an instrumental role in building the program at the university during the crucial early period.

Professor Hamada was a key Sylff steering committee member when the Sylff program was established at Yale in 1989, playing an instrumental role in building the program at the university during the crucial early period.

Joined by Tokyo Foundation Senior Fellows Shigeki Morinobu and Yutaka Harada—experts on the economy and fiscal policy—and other Foundation research fellows at an informal Tokyo Foundation meeting on December 14, Koichi Hamada asserted it was high time for the Bank of Japan to overturn its cautious monetary policy. “Real or structural problems in the Japanese economy, like higher oil prices that have little to do with the currency system, can’t be addressed with monetary policy,” Hamada noted. “However, since deflation and the yen’s steep appreciation are issues related to the domestic and foreign value of money, they should be dealt with policies that directly address currency values.”

Hamada believes, though, that Japan’s monetary authorities have been trying to treat the symptoms with the wrong medicine for the past 15 years. “It’s like trying to cure a stomach ailment with drugs for a heart condition.”

The Bank of Japan contends that its zero-interest-rate policy already furnishes enough funds to the market and that any additional quantitative easing will not lead to increased lending. “All you have to do is look at the Federal Reserve’s purchases of mortgage-backed securities in the United States to realize that such arguments don’t hold water,” Hamada contended. “In Japan, the BOJ can easily purchase CPs, EFTs, REITs, and foreign currency denominated bonds.”

Just as expectations of deflation can in itself have a negative impact on the national psyche, “the belief that deflation is going to be overcome will have a positive effect,” he added. Indeed, the yen has depreciated by more than 10% since November, hitting a two-and-a-half-year low of around 91 per dollar in late January.

“Monetary policy is something that must be applied when the market needs it most,” Hamada emphasized. “It’s common knowledge in economics that monetary policy is more effective than fiscal policy under flexible rates. A bill was passed last year to raise Japan’s consumption tax to 8% by April 2014 and to 10% by October 2015. “Raising taxes first and then relaxing monetary policy is precisely what you shouldn’t do,” Hamada warned. “You need a recovery from deflation first, and then you can use a tax hike to control it, if necessary. And the consumption tax should be the last thing you raise. A much better idea would be an environment tax,” he said, which could encourage innovations in eco-friendly technologies.

 

Is the Yen Really Too Strong?

Shigeki Morinobu, left, and Koichi Hamada.

Shigeki Morinobu, left, and Koichi Hamada.

While admitting that deflation can be mitigated with monetary tools, Tokyo Foundation Senior Fellow and Chuo University Law School Professor Shigeki Morinobu cautioned that real-world trends must also be taken into consideration, such as the end of the Cold War that opened the floodgates to cheaper labor in Eastern Europe and demographic changes toward an aging society in Japan. “Inflation targeting can be effective,” he said, “but there remains the question of whether it can be stopped once the target is reached, say, at around 2 percent.” He also pointed to the negative consequences of having to make higher interest payments for one’s debt once inflation kicks in.

Morinobu also questioned the common assumption that the yen is too strong against the dollar. “In terms of purchasing power, comparing the prices of fast food in Japan and the United States, for instance,” he said, “I don’t think 80 yen is intolerably high. In fact, companies claiming the yen is too strong might simply be trying to cover up for the shortcomings in their own projections.”

Senior Fellow and Waseda University Professor Yutaka Harada took issue with this view, pointing out that just before the global financial crisis of the late 2000s, the yen was trading at around 120 yen per dollar. “When it steadily climbed to around 80 yen,” Harada said, “many Japanese businesses were forced to lay workers off or halt production of items that no longer paid at that exchange rate. Curtailing production,” he emphasized, “means fewer jobs.” Many companies have been able to survive as a result of these adjustments, but the ranks of the unemployed have swelled, and promising R&D projects have been abandoned. “Many of these technologies were picked up by companies in South Korea and elsewhere,” Harada noted, further compounding the woes of Japanese manufacturers.

Yutaka Harada, right, and Koichi Hamada.

Yutaka Harada, right, and Koichi Hamada.

The general lowering of income levels from higher unemployment and sluggish corporate profits, Harada commented, has been affecting demand in the nonexport sectors of the economy as well, exacerbating deflation. “There’s no denying that the exchange rate has presented a serious challenge to many Japanese companies,” Harada added.

Because the yen’s value is the rate vis-à-vis the US dollar, it is bound to rise if the United States expands the amount of money in the economy through quantitative easing while Japan does nothing. “The Fed doubled the money supply with QE1 and tripled it with QE2,” Harada said, as a means of overcoming the financial crisis. The money supply in Japan, which was not as severely affected by the crisis, has expanded by only around 30%. “That’s not nearly enough,” Harada asserted. “If Japan had at least doubled its money supply, the yen wouldn’t have shot up as high, and jobs wouldn’t have been lost.”

 

Working at a Disadvantage

Economists have pointed to the fact that while Japan’s per capita gross domestic product is nearly identical with that of South Korea in purchasing power terms, it is twice the South Korean figure when calculated using exchange rates, suggesting that the yen is disproportionately strong against the won.

“The Korean won depreciated by 30 percent against the dollar while the yen appreciated by 30 percent,” Harada said, “so there’s obviously going to be a big gap in the values of the two currencies.”

South Korea has been known to intervene directly in the currency market to adjust the exchange rate, “But the BOJ can do the same if it wanted to,” asserted Hamada. “It’s been overly timid, thinking that if it aimed for the green it would overshoot it, so it’s been using a putter to get itself out of a bunker for the past fifteen years. Many excellent studies have shown the extent to which Japanese companies have been placed at a disadvantage by this policy,” the Yale professor said, “but such studies have categorically been ignored by the central bank and the major media in Japan.”

The issue of Japan’s huge public debt cannot be overlooked, however, and the Abe administration has announced a fiscal stimulus package that is likely to exacerbate that debt. “Under the circumstances, there’s really no choice but to opt for reflation and somehow get the economy to a state close to full employment,” Hamada said. “Only then can we gauge how bad Japan’s fiscal condition really is. Any hike in the consumption can wait until then.”

Morinobu, though, pointed to the potential risks of higher interest rates on the real economy. “Higher interest will mean that the value of government bonds held by Japanese financial institutions will depreciate,” he claimed. “A 1 percent rise in interest rates will mean a decline of 10 trillion yen in the book value of these bonds. Such a drop will surely affect the capital adequacy ratio, and could lead to a credit squeeze.”

Harada offered the reminder that this has been the argument given by the Bank of Japan for not adopting a quantitative easing policy. “Bonds aren’t the only assets financial institutions own,” Harada said. “They also have loans, equities, and real estate. The bigger banks also have overseas assets, so a cheaper yen will boost those values. If quantitative easing can produce a lower yen, higher nominal GDP, more jobs, and increased tax revenues, there’s no good reason not to take this step.”

“The points we discussed today have been pondered at great length by economists over the past 250 years,” Hamada said in closing, “but our arguments have often gone unheard, even by central bankers. So in that sense, the attention given me by Mr. Shinzo Abe has been a source of great joy for me. At the same time,” he said, “I’m humbled by the fact that it takes politicians to get our message across to the media and the general public.”

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Why Regulate Hedge Funds? : Comments on the Brazilian Experience

August 20, 2012
By 19674

In June 2007, two hedge funds linked to Bear Stearns, a major American investment bank, announced losses of US$16 billion, forcing the bank to inject that amount to prevent the collapse of both funds. These funds operated with a high degree of leverage, based on derivatives financed with funds borrowed from large banks, guaranteed with securities backed by mortgages and other debts: the Collateralized Debt Obligations (CDO). The funds together accounted for approximately US$18 billion in bonds (of which US$16.2 billion had been purchased with borrowed funds), which led Bear Stearns Asset Management to play a prominent role in the CDO market.

The losses represented the first signs of the serious financial crisis that would reach its peak the following year, in 2008, when Bear Stearns itself was bought by JP Morgan Chase in a deal for only US$236 million, aimed at avoiding bankruptcy.

Despite its seriousness, this was not the first time that the failure of a hedge fund triggered panic on international financial markets and weakened them. Ten years earlier, in 1998, the collapse of Long-Term Capital Management (LTCM) forced the Fed, along with 14 financial institutions, to orchestrate a recapitalization of US$0.6 billion. Like Bear Stearns, LTCM had borrowed large amounts from the banking sector, allowing it to take bets that exceeded the notional value of US$1.5 trillion, while shareholders capital was no more than US$4.8 billion. This fund was, arguably, the most active user of interest rate swaps in the world, with contracts that totaled US$750 billion. The magnitude of the two events and the similarity of strategies used to obtain high returns—high degree of leverage and loans from banks—have raised questions about the effectiveness of regulatory initiatives to avoid the recurrence of systemic crisis.

Debate on Regulation

Traditionally, supporters of “laissez faire” argue that hedge funds increase the efficiency and liquidity of the financial system, either by spreading risk among a large number of investors or by improving the pricing of the traded assets, thus removing any space for more restrictive regulations. Not coincidentally, in the last 10 years, mainly in the United States and Europe, the notion that financial regulatory institutions should interfere minimally and only in situations involving the general public has preponderated. Along this line, the hedge funds, as private investment structures targeting high-income investors—and treated in a different way from regular investors—were placed outside the direct jurisdiction of regulators.

Following this line of thinking, regulatory efforts in the period focused on improving the ability of banks and other financial institutions to monitor and manage risks by individually managing exposure to these funds. The promotion of transparency about the risks assumed by those investment companies would be sufficient, it was argued, to enforce an adequate market discipline, with no need for a more direct regulation.

The predominance of this view has hindered the adoption of a more restrictive regulatory framework, especially with regard to the systemic aspects of these funds in financial markets. Even in the context of the last global crisis, the belief that hedge funds played a limited role in the genesis of the systemic turmoil has prevailed, in spite of the substantial losses they have suffered.

In this scenario, hedge funds have fed paradoxes with serious implications for the dynamics of the international financial system. First, they present themselves as managers of large private fortunes, mainly for large institutional investors; however, they usually take loans with the formal banking system, and thus they naturally transfer the risk of their positions to the entire credit system, that is, they transform the operations of private funds into operations throughout the investing public. Second, they claim to be able to deliver high absolute returns, in any condition, exploiting price anomalies in the market; however, they often suffer significant losses in situations of turbulence, as seen in the last global crisis. Third, while they remain largely outside the scope of regulations, they are undoubtedly channels of transmission of systemic risk. Fourth, despite the large number of these agents and the diversity in their investment strategies and objectives, they present a noticeable similarity in their risk exposures and the securities they trade, which tends to cancel any eventually positive effect of a possible heterogeneity of these agents.

The recent, post-crisis initiatives on the regulation of hedge funds, both in United States and Europe, have exhibited superficial and still timid proposals to effectively counter the contradictions listed above. On the other hand, unlike most countries that are still discussing and trying to adopt their laws, in Brazil it has already become a reality. Interestingly, most of the claims for stricter rules on the behavior of hedge funds are particularly familiar to the Brazilian financial markets, and Brazil may be able to make a significant contributions to the design of a more effective regulatory framework at the international level.

The Example of the Brazilian Experience

Traditionally, the Brazilian capital market has been marked by the presence of restrictive regulatory and supervisory structures. Particularly in the segment of investment funds, while the offshore vehicles enjoy wide freedom in conducting its operations, onshore funds must conform to strict standards of regulation and supervision. These standards, although targets of criticism by those who advocate a more flexible market, recently have received worldwide attention because of the low vulnerability demonstrated by domestic financial institutions during the unfolding of the international financial crisis, initiated in the subprime mortgage market in the United States.

Among the major domestic requirements, all investment funds based in Brazil must be registered with the Comissão de Valores Mobiliários (CVM, or the Securities Commission) that acts as the primary regulator and supervisor of funds and investment firms in the country. In accordance with CVM instructions, all funds, including hedge funds, must provide daily liquidity reports and disclose, also daily, the value of their quotas and assets to the general public. Moreover, managers must monthly deliver to CVM statements with the composition and diversification of the portfolio, as well as a summary trial balance of their funds. Additionally, every year they have to send to CVM a consolidated balance sheet approved by an independent auditor. At the same time, the Associação Brasileira das Entidades dos Mercados Financeiros e de Capitais (ANBIMA, or the Brazilian Association of Financial and Capital Markets Entities), which pools the institutions that manage funds in Brazil, also plays an important self-policing role.

In addition to these requirements that provide more transparency to the public, an important restriction applied to the funds in Brazil is that these entities are prohibited from contracting and receiving loans from financial institutions. This limitation establishes an important difference between domestic and offshore funds, since it reduces the possibility of highly leveraged funds being supported by third parties and eliminates a disturbing channel of exposure of the formal banking system to hedge funds, which proved to be particularly disruptive to the international financial market in the last crisis.

On this point, it is important to note that Brazilian authorities do not officially consider hedge funds to be a different family of investment funds and usually subject them to the same regulatory rules that are applied to other funds. Another specificity of the Brazilian financial sector involves the over-the-counter market, in which all financial derivative instruments and securities traded are recorded with the Central de Custódia e de Liquidação Financeira de Títulos (CETIP, or the Central Securities Depository), an agency supervised by the Central Bank of Brazil and whose activities are regulated by CVM. Thus, all securities exchanged between private investors outside the regulated market (São Paulo Stock Exchange) are subject anyway to observation by national regulatory authorities. Again, in the context of both the international financial crisis and the collapse of LTCM in the United States, the absence of such information was particularly harmful in assessing the real extent of risk exposure between different financial institutions.

All these restrictions have been relatively successful in preventing and avoiding the propagation of systemic risk within the domestic financial market, although they are not fully able to prevent the contagion of crisis in the unregulated global markets. Amid the recent turmoil, the defense of more direct, coordinated, and continuous supervision of financial institutions in different countries has gained importance in international forums, making it increasingly more urgent. In this scenario, the Brazilian experience on the regulation of the investment fund industry can be a relevant reference in guiding these discussions at the international level.

The opinions expressed in this paper are those of the author and do not necessarily reflect the views of any organization with which she is or has been affiliated.

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Climate Change Response at a Crossroads

July 14, 2008
By null

CER-based trading of emissions rights has long-term implications for global political and economic power distribution and raises ethical questions about ownership of the right to use the atmosphere.

Globally as well as nationally, we are all at a crossroads. From Rio to Bali, we made efforts to build alternative institutional arrangements for international cooperation to address the problem of climate change. Over these years several positive steps have emerged, but real-world action is still far from the desired level (IPCC 2007, Stern 2007). There has been a marked jump in media coverage on climate change since 2007, but there is a need for further action. The United Nations Framework Convention on Climate Change (UNFCCC) suggests differentiated responsibilities in mitigation due to differences in levels of fossil-fuel-based economic activity.

In the 1997 Kyoto Protocol, countries were grouped into Annex I and non-Annex I countries. Annex I are the OECD countries with high emissions, which were asked to meet reduction targets. Developing nations with lower fossil fuel consumption were grouped as non-Annex I countries and exempted from meeting targets. This arrangement recognized the reality that GHG emissions stay in the atmosphere for more than 100 years; Annex I countries, which have been using fossil fuels since the Industrial Revolution, have largely been responsible for the stockpiling of GHGs in the atmosphere.

Though the Kyoto arrangement seemed logical, it was not ratified by such large emitters as the United States and Australia. And the free-riding attitude of the big emitters failed to induce cooperative solutions to the problem. To prompt action, there must be promises of a reward for the actions taken.

 

Reassessment of the CDM

The Clean Development Mechanism under the Kyoto Protocol is probably the only platform to coordinate the actions of both developed and developing countries toward a common cause by accommodating differentiated responsibilities and the need for incentives. Under this mechanism, an Annex I country is allowed to locate mitigation projects or buy emission reduction credits from developing countries to achieve its Kyoto emission reduction target. Developing countries, meanwhile, benefit from investment and technology transfer, helping their economies to grow on a low carbon pathway - a characteristics of sustainable development. A reassessment of this mechanism makes good sense, as the Kyoto negotiated period will be reviewed from 2009 with a view beyond 2012.

The CDM requires that greenhouse gas reductions from mitigation projects be calculated using a counterfactual baseline that approximates emissions levels without the project. Estimating GHG reductions is a multiple-step process (Sathaye et al. 2003), including (1) determination of additionality or eligibility of a project, (2) construction of a baseline approximating emissions levels that would have occurred without the project, (3) adjustment of the baseline to account for free riders, (4) calculation of project emissions, (5) adjustment of these calculations for potential leakage, and finally, (6) estimation of GHG reductions relative to the baseline.

Additionally, the estimated baseline may be subject to adjustment periodically to reflect changes in business-as-usual conditions. In order to receive credits for reducing GHG emissions within a given carbon trading scheme, a project may be subjected to additionality or eligibility tests (step 1) before being accepted as a qualified project. These tests are designed to ensure that a proposed project will result in real emission reductions.

 

Trading of CERs

This reassessment of the CDM will not discuss in detail the actual mechanism of certified emissions reductions or challenge its concept. Here, the objective is to highlight two issues associated with CERs that are not well understood, discussed, or researched. When CERs are introduced to an existing socio-political-economic landscape, they represent a completely new "good." It follows from the basic concept that if emissions are "bad" and impose costs on the society, then emission reductions are good and produce benefits. The production of such "good" primary products as power, steel, cement also leads to the generation of undesired emissions.

Suppose a 6 MW power generation project in India proposes to use rice husks as a new fuel by taking advantage of new technology. The goal of the project would be to replace coal, a fuel with high carbon content. Suppose, this project can reduce 40,000 tons of CO2 annually compared to a coal-fired plant. The project would then be eligible for 40,000 CERs while producing 6 MW of power. Like power, CERs can be exchanged and traded on the market. However, given the location of the project in developing countries with no Kyoto-related constraints, the 40,000 CERs generated by the project can now be sold to Annex I investors (although this is not automatic and requires a lengthy process, as mentioned above).

Under the Kyoto regime, Annex I countries with binding reduction targets may require such CERs to achieve their goals. Thus the Annex I countries represent the demand side of the CER market and non-Annex I countries the suppliers. The price of CERs will be determined by the relative market supply and demand. Given the voluntary nature of participation under the Kyoto regime, at present the size of the market is small. With the nonparticipation of large emitters, moreover, the demand is extremely small, keeping the price of CERs at very low levels. As of March 2008 total CERs issued globally were 121,122,134 metric tons (CO2 equivalent) and the price varied from 7 euros to 22 euros per metric ton. This is not to argue how the price situation can be improved but rather to show the implications of owning CERs.

 

Ownership of Global Natural Capital

CERs may be owned by any party. A unique characteristic of CERs is that their ownership effectively provides ownership over global natural capital, that is, the right to use the atmosphere. In simple terms, a new capital good is being introduced, ownership of which will result in global market power in the near future, not unlike knowledge capital and physical capital. Creation of such rights or ownership has both long-term implications for global political and economic power distribution and crucial ethical implications. Unless regulated within a target emission level, the creation of CERs will distort climate stabilization, market power and world order.

Non-Annex I countries like India and China that are market leaders with large supplies of CERs and no binding mitigation target under the Kyoto Protocol have little incentive to hold onto their CERs and may wind up squandering ownership over natural capital now and forever. There may even come a time when they will have to buy back those same CERs at a higher price at a later date.

No study exists to show whether countries lose or gain as late entrants in the market. But it can be predicted that they will forfeit an early mover's advantage despite their high potential. In the longer run this is going to be an issue of ownership of natural capital and global commons. Under the circumstances it makes good sense for non-Annex I countries to take up binding emission targets both from an efficiency and equity point of view.

 

Ethical Issues

But deeper issues must also be discussed. One is the ethical question of managing a global common property through inappropriately defined private ownership. Who will own the rights to a global common good? Should it be individual investors, banks, financial institutions, governments, or all future generations of humans on Earth? Ownership by one group, by definition, excludes that by others for the same resource. So under current CDM arrangements, the sellers of CERs are by implication selling off their rights to use a global common property without any institutional arrangement with symmetric information on defined ownership.

High transaction costs, limited market size due to the absence of a cap for non-Annex I countries, large-scale uncertainty on ownership type, lifetime of the market, and what happens beyond Kyoto are all inviting attention to reassess the CDM and CER market. The current state of affairs can be considered a period of learning and experimentation. Asymmetry in information and the ethical issue of providing a "global good" for private trading is bound to generate global conflict sooner or later unless the CDM is crafted properly. The learning process combined with new knowledge can pave the way toward global target setting and a binding target for all whereby each player can choose its role on a level paying ground. This will ensure efficiency as well as equity, but ethical questions will still remain unresolved. Neither does it solve the problem of free riding in the Kyoto regime. There is thus still a long way to go in finding a nondistorting solution.

 

Concluding Remarks

It is time to understand that GHG emissions reduction is an economic activity. It makes good business sense to invest in the low-carbon development pathway. However, without a limit to emissions generation, the CDM will limit participation and distort the situation. A new regime is needed to replace the emphasis on voluntary action. Binding targets needs to be taken up by each emitter, however small or large, from the viewpoints of efficiency and equity.

Targets may be decided by nation-states and negotiated within the global goal of stabilizing emission levels. Under any circumstances, there is a need to coordinate national priorities and goals with those of the international community. Although nation-states are free to decide their own national policies, it can be predicted that those who benefit will be those who can best coordinate national and global goals.

The views presented in this article are of the author and in no way represent those of her country of origin, India, or the IPCC.

References

Intergovernmental Panel on Climate Change (2007). "Climate Change 2007: Mitigation of Climate Change." Working Group III contribution to the Fourth Assessment Report of the IPCC. Cambridge University Press.

Sathaye, J., Scott Murtishaw, Lynn Price, Maurice Lefranc, Joyashree Roy, Herald Winkler, and Randall Spalding-Fecher (2003). "Multiproject Baselines for Evaluation of Electric Power Projects," Energy Policy, Vol. 32/11 pp 1303-17.

Stern N. (2007). "The Economics of Climate Change." The Stern Review. London: Cambridge University Press.


 

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