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Economics-Watching: FRBSF Economic Letter

[from the Federal Reserve Bank of San Francisco]

Are Inflation Expectations Well Anchored in Mexico?

by Remy Beauregard, Jens H.E. Christensen, Eric Fischer and Simon Zhu

Price inflation has increased sharply since early 2021 in many countries, including Mexico. If sustained, high inflation in Mexico could raise questions about the ability of its central bank to bring inflation down to its 3% inflation target. However, analyzing the difference between market prices of nominal and inflation-indexed government bonds suggests investors’ long-term inflation expectations in Mexico are close to the central bank’s inflation target and are projected to remain so in coming years.

Inflation has risen substantially in many countries, including Mexico, since early 2021, driven in part by unique factors related to the COVID-19 pandemic. Sustained elevated inflation could be particularly challenging for inflation-targeting central banks in emerging economies given their higher macroeconomic uncertainty and greater sensitivity to external shocks compared with more developed economies. To examine this risk for a representative emerging economy affected by COVID-era disruptions in much the same way as the United States, we focus on Mexico, which has conducted monetary policy since 2002 according to an inflation targeting regime with a target rate for consumer price inflation of 3% per year.

In this Economic Letter, we assess whether recent higher inflation is leading businesses and households in Mexico to expect inflation to remain high over the long run. Specifically, we focus on what rising market-based measures of inflation compensation may imply about bond investors’ outlook for inflation. The rise in inflation compensation since spring 2021 could reflect three factors: an increase in investors’ inflation expectations, an uptick in the premium investors demand for assuming inflation risk, or changes in other risk and liquidity premiums. We explore the relative importance of each of these factors using a novel dynamic term structure model of nominal and inflation-adjusted yields described in Beauregard et al. (2021, henceforth BCFZ). Overall, our results for five-year inflation expectations five years from now suggest Mexican bond investors’ long-term inflation expectations have been little affected by the recent rise in inflation. Instead, the rise in inflation compensation reflects a notable uptick in the inflation risk premium to the high end of its historical range. This suggests that, despite inflation expectations being little changed on average, some investors are particularly concerned about the risk that inflation will remain above expected levels.

The recent rise in Mexican inflation

Figure 1 shows the year-over-year change in the Mexican consumer price index (CPI) measured both by the headline CPI (green line) and the more stable core CPI (blue line) that strips out volatile food and energy prices. Also shown with a horizontal gray line is the 3% inflation target of the nation’s central bank, the Bank of Mexico.

Figure 1: Mexican consumer price index inflation

We note that Mexican CPI inflation has averaged somewhat above the Bank of Mexico’s target since its adoption in 2002. More importantly, CPI inflation in Mexico appears to have become more volatile and somewhat higher over the past five years. Although previous research by De Pooter et al. (2014) found inflation expectations in Mexico to be well anchored, the significant global economic dislocations caused by the coronavirus pandemic and related inflationary pressures could impact inflation expectations of businesses and households.

To assess the persistence of the recent rise in Mexican inflation, we turn to financial market data, which reflect forward-looking expectations among a large and diverse group of investors and financial market participants. Specifically, we consider prices of conventional fixed-coupon bonds that pay a nominal interest rate and inflation-indexed bonds that pay a real interest rate because their cash flows are adjusted with the change in the CPI and therefore maintain their purchasing power. Both types of securities are issued and guaranteed by the Mexican government.

The difference between nominal and real yields for bonds of the same maturity is known as breakeven inflation (BEI). This represents a market-based measure of inflation compensation used to assess financial market participants’ inflation expectations. Figure 2 shows BEI rates at different maturities, meaning annual average rates of inflation compensation between now and maturity, from 1 to 10 years at the end of March 2021 (green line) and at the end of November 2022 (blue line). The slightly upward-sloping BEI curve of close to 3% in 2021 contrasts with the higher downward-sloping BEI curve in 2022.

Figure 2: BEI curves for 1-year to 10-year Mexican bond maturities

The increase for shorter maturities, the left end of the 2022 BEI curve, is closely tied to the current high level of inflation and suggests inflation may remain elevated for some time. In contrast, the increase at longer maturities, the right end of the 2022 BEI curve, suggests that investors’ longer-term inflation expectations may be drifting above the Bank of Mexico’s inflation target. To better understand the shape and sources of variation of the BEI curve we use a yield curve model.

A yield curve model of nominal and real yields

Market-based measures of inflation compensation such as BEI rates contain three components. First, they include the average CPI inflation rate expected by bond investors, which is the focus here. Second is an inflation risk premium to compensate investors for the uncertainty of future inflation. This premium is embedded in nominal yields that provide no inflation protection. Third is the difference in relative market liquidity between standard fixed-coupon and inflation-indexed bonds. As discussed in BCFZ, both of these types of Mexican bonds are less liquid than U.S. Treasuries, and their prices therefore contain a discount to compensate investors for their liquidity risk. Neither the inflation risk premium nor the liquidity premiums are directly observable and must therefore be estimated.

To adjust for these challenges, we first use the nominal and real yields model developed in BCFZ to identify liquidity premiums in standard fixed-coupon and inflation-indexed bond prices as a function of the time since issuance and the remaining time to maturity. The time since issuance serves as a proxy for declining liquidity as, over time, a larger fraction of bonds gets locked into buy-and-hold strategies. We refer to the observed BEI net of estimated liquidity premiums as the adjusted BEI. In a second step, we then separate adjusted BEI into components representing investors’ inflation expectations using a formula based on the absence of bond market arbitrage opportunities and the residual inflation risk premium.

Results

To assess whether investors’ inflation outlook has fundamentally changed, we follow De Pooter et al. (2014) and examine the five-year forward BEI rate that starts five years ahead, denoted 5yr5yr BEI. This is a horizon sufficiently long into the future that most transitory shocks to the economy can be expected to have vanished. Hence, the embedded inflation expectations are presumably less affected by current high inflation and pandemic-related transitory conditions and can therefore speak to the question about the anchoring of inflation expectations in Mexico.

Figure 3 shows the breakdown of 5yr5yr BEI into its various components according to our model. The dark blue line is the observed BEI, and the red line is the estimated adjusted BEI without liquidity risk premiums or other residual disturbances. The difference between these two measures of BEI—the yellow shaded area—represents the model’s estimate of the net liquidity premium or distortion of the observed BEI series due to risk premiums in both nominal and inflation-indexed bond prices. The adjusted BEI is entirely above the observed BEI, suggesting the liquidity risk distortions are systematically larger in the inflation-indexed bond prices, consistent with similar evidence from the U.S. Treasury market (Andreasen and Christensen 2016). Note that the net BEI liquidity premium widened around the financial turmoil in spring 2020 at the start of the pandemic and remains elevated.

Figure 3: Components of 5yr5yr breakeven inflation for Mexico

The model also allows us to break down the adjusted BEI into an expected inflation component (light blue line) and the residual inflation risk premium (green line). Also shown is the Bank of Mexico’s 3% inflation target (gray horizontal line). For comparison, the figure also shows the 5yr5yr expected CPI inflation in Mexico reported semiannually in the Consensus Forecasts surveys (dark blue squares). We note that both observed and adjusted BEI have trended higher since the start of the pandemic in early 2020. Importantly, the breakdown indicates that long-term expected inflation in Mexico has remained stable, slightly above the 3% inflation target. As a result, the increase in BEI can be attributed to the inflation risk premium, which is at the high end of its historical range towards the end of our sample. Given the elevated levels of current inflation, this suggests some investors are concerned that inflation could remain elevated for longer than currently anticipated.

This raises the question of whether long-term inflation expectations in Mexico are likely to remain anchored near their current level going forward. To assess this risk, we simulate 10,000-factor paths over a three-year horizon using the estimated factors and factor dynamics as of November 2022—that is, the simulations are conditioned on the shapes of the nominal and real yield curves and investors’ embedded forward-looking expectations as of November 2022. These simulated factor paths are then converted into forecasts of 5yr5yr expected inflation. Figure 4 shows the median projection (solid green line) and the 5th and 95th percentile values (dashed green lines) for the simulated 5yr5yr expected inflation over a three-year horizon.

Figure 4: Three-year projections of 5yr5yr expected inflation, Mexico

Our model projections indicate that long-term inflation expectations are likely to deviate only modestly from their current level, consistent with the variation of the historical estimates back to 2009. Overall, our findings represent tangible evidence that long-term inflation expectations remain well-anchored in Mexico despite the recent rise in inflation.

Conclusion

Global inflation pressures in the aftermath of the pandemic have raised fears about a sustained increase in the level of inflation around the world, which could be particularly challenging for developing economies with monetary policy guided by an inflation target. In this Letter, to assess this risk for a major emerging economy with an established inflation target, we examine the variation in Mexico’s nominal and inflation-indexed bond prices, while accounting for their respective liquidity risk premiums. This allows us to estimate Mexican bond investors’ inflation expectations and associated risk premiums. The results reveal that the inflation risk premium has pushed up Mexican BEI rates in recent years, while investors’ long-term inflation expectations have remained stable near the Bank of Mexico’s inflation target despite the rise in inflation.

The policy path needed to keep inflation expectations anchored in a situation with highly elevated inflation may involve tradeoffs. The Bank of Mexico responded early and forcefully to inflation pressures starting in June 2021 and has indicated further tightening of the policy rate would likely be appropriate to bring inflation back down to target over the medium term. This could lower economic growth in Mexico in both 2022 and 2023. On the other hand, history shows that it may be difficult and costly to reverse extended departures from announced inflation targets. Thus, it will be important for central banks with inflation-targeting frameworks to monitor measures of long-term inflation expectations in the current situation.

Remy Beauregard
Economics Ph.D. student, University of California at Davis

Jens H.E. Christensen
Research Advisor, Economic Research Department, Federal Reserve Bank of San Francisco

Eric Fischer
Financial modeling and quantitative analytics principal, Markets Group, Federal Reserve Bank of New York

Simon Zhu
Economics Ph.D. student, University of Texas at Austin

References

Andreasen, Martin M. and Jens H.E. Christensen. 2016. “TIPS Liquidity and the Outlook for Inflation.” [PDF] FRBSF Economic Letter 2016-35 (November 21).

Beauregard, Remy, Jens H.E. Christensen, Eric Fischer, and Simon Zhu. 2021. “Inflation Expectations and Risk Premia in Emerging Bond Markets: Evidence from Mexico.” [PDF] FRB San Francisco Working Paper 2021-08.

De Pooter, Michiel, Patrice Robitaille, Ian Walker, and Michael Zdinak. 2014. “Are Long-Term Inflation Expectations Well Anchored in Brazil, Chile, and Mexico?” [PDF] International Journal of Central Banking 10(2), pp. 337–400.

[Archived PDF]

Economics-Watching: FedViews for January 2023

[from the Federal Reserve Bank of San Francisco]

Adam Shapiro, vice president at the Federal Reserve Bank of San Francisco, stated his views on the current economy and the outlook as of January 12, 2023.

While continuing to cool over the last several months, 12-month inflation remains at historically high levels. The headline personal consumption expenditures (PCE) price index rose 5.5% in November 2022 from a year earlier. This marks a decline in inflation to a level last observed in October 2021, but still well above the Fed’s longer-run goal of 2%. A portion of the inflation moderation is attributable to recent declines in energy prices. Core PCE inflation, which removes food and energy prices, has shown less easing.
Owing to fiscal relief efforts and lower household spending over the course of the pandemic, consumers accumulated over $2 trillion dollars in excess savings, based on pre-pandemic trends. Since then, consumers have drawn down over half of this excess savings which has helped support recent growth in personal consumption expenditures. A considerable amount of accumulated savings remains for some consumers to support spending in 2023.
In the wake of the pandemic, consumer spending patterns shifted away from services towards goods. While there appears to be some normalization of spending behavior, this shift has generally persisted. Real goods spending remains significantly above its pre-pandemic trend, driven by strong demand for durables such as furniture, electronics, and recreational goods. Spending on services has shown a resurgence but remains below its pre-pandemic trend.
Supply chain bottlenecks for materials and labor remain a constraint on production, although there are some recent signs of easing. The fraction of manufacturers who reported operating below capacity due to insufficient materials peaked in late 2021 and has moderately declined over the past year. However, the fraction of manufacturers reporting insufficient labor has persisted at high levels.
The labor market remains tight, despite some signs of cooling. The number of available jobs remains well above the number of available workers, although vacancy postings have been trending down in recent months. The tight labor market has put continued upward pressure on wages and labor market turnover.
A decomposition of headline PCE inflation into supply– and demand-driven components shows that both supply and demand factors are responsible for the recent rise in inflation. The surge in inflation in early 2021 was mainly due to an increase in demand-driven factors. Subsequently, supply factors became more prevalent for the remainder of 2021. Supply-driven inflation has moderated significantly over recent months, while demand-driven inflation remains elevated.
The Federal Open Market Committee (FOMC) raised the federal funds rate by 50 basis points at the December meeting to a range of 4.25 to 4.5%. This cycle of continued rate increases since March of last year represents the fastest pace of monetary policy tightening in 40 years. The increase in the federal funds rate has been accompanied by a gradual reduction in the size of the Federal Reserve’s balance sheet.
Economic activity in sectors such as housing, which is sensitive to rising interest rates, has slowed considerably in recent months. Housing starts have fallen steadily over the past year, as have other housing market indicators, such as existing home sales and house prices.
Although the labor market is currently very strong, financial markets are pointing to some downside risks. Namely, the difference between longer- and shorter-term interest rates has turned negative, which historically tends to occur immediately preceding recessions. It remains unclear whether lower longer-term yields are indicative of anticipated slower growth or lower inflation.
Short-term inflation expectations remain elevated relative to their pre-pandemic levels in December 2019. Consumers are expecting prices to rise 5% this year, while professional forecasters are expecting prices to rise 3.5%. Longer-term inflation expectations remain more subdued, indicating that both consumers and professionals believe inflation pressures will eventually dissipate.
Rent inflation is expected to remain high over the next year. The prices for asking rents have grown quite substantially over the last two years. As new leases begin and existing leases are renewed, these higher asking rents will flow into the stock of rental units, putting upward pressure on rent inflation.
We are expecting inflation to moderate over the next few years as monetary policy continues to restrain demand and supply bottlenecks continue to ease. We anticipate that it will take some time for inflation to reach the Fed’s longer-run goal of 2%.

Inflation is cooling, but remains very high

Supply shortages are prevalent, but easing

Labor market remains tight, but is cooling

Monetary policy tightening is having real effects

Yield curve is inverted, signaling recession risk

Short-term inflation expectations remain elevated

Inflation likely to remain above 2% for some time

[Archived PDF]

Read other issues from FedViews.

Economics-Watching: Fourth-Quarter GDP Growth Estimate Inches Up

The growth rate of real gross domestic product (GDP) is a key indicator of economic activity, but the official estimate is released with a delay. Our GDPNow forecasting model provides a “nowcast” of the official estimate prior to its release by estimating GDP growth using a methodology similar to the one used by the U.S. Bureau of Economic Analysis.

GDPNow is not an official forecast of the Atlanta Fed. Rather, it is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter. There are no subjective adjustments made to GDPNow—the estimate is based solely on the mathematical results of the model. In particular, it does not capture the impact of COVID-19 and social mobility beyond their impact on GDP source data and relevant economic reports that have already been released. It does not anticipate their impact on forthcoming economic reports beyond the standard internal dynamics of the model.

Recent forecasts for the GDPNow model are available here. More extensive numerical details—including underlying source data, forecasts, and model parameters—are available as a separate spreadsheet. You can also view an archive of recent commentaries from GDPNow estimates.

Please note that the Federal Reserve no longer supports the GDPNow app. Download the Federal Reserve’s EconomyNow app or go to the Atlanta Fed’s website to continue to get the latest GDP nowcast and more economic data.

Latest estimate: 3.9 percent — January 3, 2023

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2022 is 3.9 percent on January 3, up from 3.7 percent on December 23. After last week’s Advance Economic Indicators report from the U.S. Census Bureau and this morning’s construction spending release from the U.S. Census Bureau, the nowcasts of fourth-quarter real gross private domestic investment growth and fourth-quarter real government spending growth increased from 3.8 percent and 0.8 percent, respectively, to 6.1 percent and 1.0 percent, respectively, while the nowcast of the contribution of the change in real net exports to fourth-quarter real GDP growth decreased from 0.35 percentage points to 0.17 percentage points.

Japanese Philosopher KARATANI Kōjin (柄谷行人) Awarded the 2022 Berggruen Prize

An expansive thinker who crosses boundaries.

[from Nōema Magazine, by Nathan Gardels, Editor-in-Chief]

KARATANI Kōjin has been named this year’s laureate for the $1 million Berggruen Prize for Culture and Philosophy. An expansive thinker who straddles East and West while crossing disciplinary boundaries, Karatani is not only one of Japan’s most esteemed literary critics, but a highly original mind who has turned key suppositions of Western philosophy on their heads.

In Karatani’s sharpest departure from conventional wisdom, he locates the origins of philosophy not in Athens, but in the earlier Ionian culture that greatly influenced the so-called “pre-Socratic thinkers” such as Heraclitus and Parmenides. Their ideas centered on the flux of constant change, in which “matter moves itself” without the gods, and the oneness of all being—a philosophical outlook closer to Daoist and Buddhist thought than to Plato’s later metaphysics, which posited that, as Karatani puts it, “the soul rules matter.”

In the political realm, Karatani contrasts the form of self-rule from Ionian times based on free and equal reciprocity among all inhabitants — “isonomia” — with what he calls the “degraded democracy” of Athens that rested on slavery and conquest. He considers the former the better foundation for a just polity.

In a novel twist on classical categorizations, Karatani regards Socrates himself as fitting into the pre-Socratic mold. “If one wants to properly consider the pre-Socratics, one must include Socrates in their number,” he writes. “Socrates was the last person to try to re-institute Ionian thought in politics.”

A Degraded Form of Democracy in Athens

For Karatani, Athenian democracy was debased because it was “constrained by the distinctions between public and private, and spiritual and manual labor,” a duality of existence that Socrates and the pre-Socratics sought to dismantle. As a result, by Karatani’s reading, Socrates was both held in contempt by the “aristocratic faction,” which sought to preserve its privileges built on the labor of others, and condemned to death by a narrow-minded mobocracy for his idiosyncratic insistence on autonomy and liberty in pursuit of truth.

Appalled at Socrates’ fate, Plato blamed democracy for giving birth to demagoguery and tyranny, radically rejecting the idea of rule by the masses and proposing instead a political order governed by philosophers. In Karatani’s reckoning, Plato then “took as his life’s work driving out the Ionian spirit that touched off Athenian democracy”—in short, throwing out the baby with the bathwater but maintaining the disassociations, such as citizen and slave, that follow from the distinction between public and private grounded in an apprehension of reality that separates the spiritual from the material.

In order to refute “Platonic metaphysics,” Karatani argues, “it is precisely Socrates that is required.”

Turning Marx On His Head

In his seminal work, The Structure of World History, Karatani flips Marx’s core tenet that the economic “mode of production” is the substructure of society that determines all else. He postulates instead that it is the ever-shifting “modes of exchange” among capital, the state and nation which together shape the social order.

For Karatani, historically cultivated norms and beliefs about fairness and justice, including universal religions, compel the state to regulate inequality within the mythic commonality of the nation, which sees itself as whole people, tempering the logic of the unfettered market. As he sees it, the siren call of reciprocity and equality has remained deeply resonant throughout the ages, drawing history toward a return to the original ideal of isonomia.

Expanding the Space of Civil Society

Not an armchair philosopher, Karatani has actively promoted a modern form of the kind of reciprocity he saw in ancient Ionian culture, which he calls “associationism.” In practical terms in Japan, this entails the activation of civil society, such as through citizens’ assemblies, that would exercise self-rule from the bottom up.

In the wake of the Fukushima nuclear accident in 2011, Karatani famously called for “a society where people demonstrate” that would expand the space of civil society and constrict the collusive power of Japan’s political, bureaucratic and corporate establishment. Like other activists, he blamed this closed system of governance that shuts out the voices of ordinary citizens for fatally mismanaging the nuclear power industry in a country where earthquakes and tsunamis are an ever-present danger.

An Expansive Mind

Along with The Structure of World History (2014) and Isonomia and The Origins of Philosophy (2017), the breadth of Karatani’s interests and erudition are readily evident in the titles of his many other books. These include Nation and Aesthetics: On Kant and Freud (2017), History and Repetition (2011), Transcritique: On Kant and Marx (2003), Architecture As Metaphor: Language, Number, Money (1995) and Origins of Modern Japanese Literature (1993).

The prize ceremony will be held in Tokyo in the spring.

Preparing for the 2020 Round: Select Topics in International Censuses

[from the U.S. Census Bureau, December 9, 2022]

The U.S. Census Bureau is pleased to announce the release of additional technical notes in the series entitled Select Topics in International Censuses. Each one highlights a new subject or method relevant to census planners in middle-to low-income countries. They complement the U.N. Principles and Recommendations for Population and Housing Censuses [archived PDF] by describing select topics in more detail.

The new notes [archived PDFs] focus on:

Sponsored by the U.S. Agency for International Development (USAID) and prepared by U.S. Census Bureau experts, the Select Topics in International Censuses series is designed to assist staff in NSOs to address some of their most pressing census issues.

Technical notes on other topics are in development and will be released in the near future.

Globalization and Its Nuances

The PBS TV program History Detectives had an episode entitled “Atocha Spanish Silver” where the wreck of the Spanish ship Atocha was described like this:

“In 1985, one of the greatest treasure discoveries was made off the Florida Keys, when the wreck of the Spanish ship Atocha was found. On board were some forty tons of silver and gold, which in 1622 had been heading from the New World to the Spanish treasury as the means to fund the Thirty Years’ War.”

Is this an obvious case of globalization? What about Marco Polo? Rome–Han dynasty China trade in silks? Silk Road and Samarkand? Colombus? Magellan? Vasco da Gama?

All of these cases constitute a kind of harmless kind of “pop globalization” based on exotic voyages and travels.

Consider another such example, perhaps more academic:

“About the middle of the sixteenth century Antwerp reached its apogee. For the first time in history there existed both a European and a world market; the economies of different parts of Europe had become interdependent and were linked through the Antwerp market, not only with each other but also with the economies of large parts of the rest of the world. Perhaps no other city has ever again played such a dominant role as did Antwerp in the second quarter of the sixteenth century.”
(Europe in the Sixteenth Century, Koenigsberger and Mosse, Holt Rinehart Publishers, 1968, page 50)

Debt repudiations in several places in the 1550s are described like this:

“This caused the first big international bank crash, for the Antwerp bankers now could not meet their own obligations.”
(Europe in the Sixteenth Century, Koenigsberger and Mosse, Holt Rinehart Publishers, 1968, page 51)

This sounds like some kind of identifiably global period.

Actually, modern historians define globalization as “price convergence” (i.e., wheat has now a unified “world price,” implying a world market). This rigorous definition is confirmed by and also shows up in the data in the 1820s and may or may not be prefigured by all the Marco Polo and Atocha silver stories, mentioned above.

These episodes in history are not there yet.

One sees wheat prices and other commodity prices converging in the 1820s and thereafter based on railroads, steamships and telegrams.

The classic in this kind of analysis is:

Globalization and History: The Evolution of a Nineteenth-Century Atlantic Economy, by Kevin O’Rourke and Jeffrey Williamson.

Kevin O’Rourke and Jeffrey Williamson present a coherent picture of In Globalization and History, Kevin O’Rourke and Jeffrey Williamson present a coherent picture of trade, migration, and international capital flows in the Atlantic economy in the century prior to 1914—the first great globalization boom, which anticipated the experience of the last fifty years. The authors estimate the extent of globalization and its impact on the participating countries, and discuss the political reactions that it provoked. The book’s originality lies in its application of the tools of open-economy economics to this critical historical period—differentiating it from most previous work, which has been based on closed-economy or single-sector models. The authors also keep a close eye on globalization debates of the 1990s, using history to inform the present and vice versa. The book brings together research conducted by the authors over the past decade—work that has profoundly influenced how economic history is now written and that has found audiences in economics and history, as well as in the popular press.
(book summary)

In everyday language, we associate the word globalization with some ever-increasing Marco Polo phenomena. While that’s not entirely wrong, globalization in the more technical sense begins to show up in the data only from the 1820s. At this point, we begin to see the convergence of worldwide wheat prices, for example. This makes the world, for the first time, a global “store” with unified prices. Here is the technical beginning of globalization. The years 1870-1914 are subsequently the first real era of modern globalization and represent a kind of “take-off” from the first stirrings of the 1820s. World Wars I & II might be seen as globalization backlash.

At this moment in world history, whether Putin’s invasion of Ukraine will constitute a new wave of deglobalization remains to be seen.

From ASEAN and G20 to APEC, as World Leaders Meet in Person Again, 3 Reasons to Root for Multilateralism

By Wang Huiyao | Founder of the Center for China and Globalization (CCG)

Over the past two weeks, Asia has played host to the most intense sequence of multilateral summits since the pandemic began, as national leaders gathered for meetings organized by ASEAN, the G20 and APEC. Although overshadowed by geopolitical tensions, the meetings marked a welcome return to in-person summit diplomacy, and the better-than-expected outcomes show hope yet for multilateralism.

The conclaves began in Phnom Penh with the annual summit of the Association of Southeast Asian Nations. At the first of such in-person events in almost three years, ASEAN leaders took the positive step of agreeing in principle to admit East Timor as the 11th member of the organization.

As leaders moved on to Bali for the Group of 20 summit, expectations were low after ministerial meetings in the run-up had failed to produce consensus. Earlier in the year, given fractures in the wake of Russia’s invasion of Ukraine, there was a question mark over whether the G20 could even go ahead or survive in its existing form.

In the end, the summit surpassed expectations by producing a joint declaration after intense negotiations, with leaders finding the compromises necessary to unite in declaring that “today’s era must not be of war” and pledging to uphold the multilateral system.

The summit also saw a positive face-to-face meeting between China’s President Xi Jinping and U.S. President Joe Biden, their first as leaders, signaling a willingness to halt the downward trajectory of China-U.S. relations.

In Bangkok, the 21 leaders of the Asia-Pacific Economic Cooperation forum also pledged to uphold and strengthen the rules-based multilateral trading system. Importantly, the group agreed on a multi-year work plan for an Asia-Pacific free trade area.

Reflecting on these three summits, three takeaways give reason for cautious optimism that multilateralism can yet be revived and play a major role in solving our challenges.

First, and perhaps most obviously, the return of in-person summit diplomacy is a welcome uplift for global cooperation. Virtual formats played a useful interim role at the height of the pandemic but were never a substitute for getting leaders in the same room. That is especially when it comes to interactions on the sidelines, often as important as the main event.

China’s return to diplomacy at the highest level was a further boost, both for the nation and the rest of the world.

In addition to Xi’s highly anticipated meeting with Biden, the Chinese leader met over a dozen other leaders at the G20 and APEC summits, including a warmer-than-expected first meeting with Japanese Prime Minister Fumio Kishida and his first meeting with an Australian prime minister since 2016.

Leaders got to meet their new counterparts for the first time or build on existing relationships, which can only help global cooperation.

The second takeaway is that as grave as our challenges are, the threat of escalating conflict and severe economic pressures on all nations seem to be focusing minds and increasing the willingness to engage and cooperate—out of necessity if nothing else.

The G20 summit was the second major one this year to surpass expectations after the 12th World Trade Organization Ministerial Conference in June surprised observers by agreeing on a plan to reform the organization and its dispute settlement mechanism. The G20 statement reiterated support for this WTO reform plan, which will be critical to get the free trade agenda back on track and provide a much-needed boost for the global economy.

Third, and perhaps most significantly for the long term, the recent summits marked an acceleration of the trend towards multi-polarization in international diplomacy, and in particular, the rising influence of non-aligned “middle powers” to shape multilateral outcomes.

The middle powers represented at ASEAN, the G20 and APEC have huge stakes in avoiding a bifurcation of the global economy that might result from a new cold war. They don’t want to be forced to pick sides and many show a growing willingness and ability to build bridges and restore positive momentum for multilateralism.

Indonesia is a prime example. The country’s strategic heft and non-aligned credibility make it well-placed to bridge different camps. President Joko Widodo made a big political bet on the success of the G20 and has won praise for the deft diplomacy that kept the organization alive and got it to a joint statement.

The Indian delegation reportedly also played a big role in achieving consensus on language in the statement, with the BRICS group (Brazil, Russia, India, China and South Africa)—as well as Indonesia—turning out to be crucial swing voters in securing the joint statement. One Indian official said it was “the first [G20] summit where developing nations shaped the outcome.”

There is scope for this trend to continue next year as middle powers continue to rise in stature, and India and Indonesia take over the presidency of the G20 and ASEAN, respectively. Brazil will host the G20 the year after.

Over in Sharm el-Sheikh at the COP27 UN climate summit, another middle power—the host Egypt—also won praise for helping to shepherd a historic financing deal for poor countries affected by climate change. But the ultimate failure to reach a commitment to phase down fossil fuels was a sobering reminder of the huge difficulties that remain in forging the global consensus needed to overcome our shared challenges.

Education and Circular Causation: Everything Causes Everything Else

The student will have seen in these educational essays the notion of “Husserl’s rhomboid”:

The great philosopher, Edmund Husserl, who died in 1938, would bring a matchbox to class and show his students they see parts and some surface area of the matchbox (a kind of rhomboid, hence the name “Husserl’s rhomboid”) but never all of it at the same time. Students can walk around the matchbox and see facets. They can twirl the matchbox but whatever they do, the students cannot “espy” or glimpse all of it except in their imaginations, once they have been exposed to all of it, side by side, facet by facet.

Gunnar Myrdal, the Swedish economist who won the Nobel Prize in 1974, has something a bit analogous when he speaks of “circular cumulative causation”:

Circular cumulative causation is a theory developed by Swedish economist Gunnar Myrdal in 1956. It is a multi-causal approach where the core variables and their linkages are delineated. The idea behind it is that a change in one form of an institution will lead to successive changes in other institutions. These changes are circular in that they continue in a cycle, many times in a negative way, in which there is no end, and cumulative in that they persist in each round. The change does not occur all at once, which would lead to chaos, rather the changes occur gradually.

Gunnar Myrdal developed the concept from Knut Wicksell and developed it with Nicholas Kaldor when they worked together at the United Nations Economic Commission for Europe.

In the characteristics relevant to an economy’s development process, Myrdal mentioned the availability of natural resources, the historical traditions of production activity, national cohesion, religions and ideologies, and economic, social and political leadership.

He writes:

“The notion of stable equilibrium is normally a false analogy to choose when constructing a theory to explain the changes in a social system.

What is wrong with the stable equilibrium assumption as applied to social reality is the very idea that a social process follows a direction—though it might move towards it in a circuitous way—towards a position which in some sense or other can be described as a state of equilibrium between forces. Behind this idea is another and still more basic assumption, namely that a change will regularly call forth a reaction in the system in the form of changes which on the whole go in the opposite direction to the first change. The idea I want to expound in this book is that, on the contrary, in the normal case there is no such a tendency towards automatic self-stabilisation in the social system. The system is by itself not moving towards any sort of balance between forces, but is constantly on the move away from such a situation. In the normal case a change does not call forth countervailing changes but, instead, supporting changes, which move the system in the same direction as the first change but much further. Because of such circular causation as a social process tends to become cumulative and often gather speed at an accelerating rate…”
(Gunnar Myrdal, Economic Theory and Underdeveloped Regions, Gerald Duckworth, 1957, pp. 12–13)

Myrdal developed further the circular cumulative causation concept and stated that it makes different assumptions from that of stable equilibrium on what can be considered the most important forces guiding the evolution of social processes. These forces characterize the dynamics of these processes in two diverse ways.

These essays that you are reading here are examples encouraging students to put causes in a kind of circle: history exists because economics exists because psychology exists because society exists because history exists. Everything is causing everything else. There isn’t a simple “linear parade.”

By way of contrast, in a person’s private life, he/she went to the dentist before buying the batteries and after having lunch. There’s a timeline of events.

In history, there are such linear timelines also: John Kennedy was assassinated before Donald Trump became president. You had breakfast before dinner. You slept before you got up in the morning.

However, processes (industrialism, migration, urbanization, inflation, etc.) are not analyzable as events like meals and one-time occurrences but are more like getting old or learning a language.

Multi-causal interpretations and circular causes get the student out of simple, “this happened and that happened” in favor of “this and that caused each other, going both ways and interacting with other pressures too.” Everything is causing and altering everything else in all directions.

First Clean Energy Cybersecurity Accelerator Participants Begin Technical Assessment

[From the National Renewable Energy Laboratory (NREL) News]

Program Selected Three Participants for Cohort 1

The Clean Energy Cybersecurity Accelerator™ (CECA)’s first cohort of solution providers—Blue Ridge Networks, Sierra Nevada Corporation, and Xage—recently began a technical assessment of their technologies that offer strong authentication solutions for distributed energy resources.

The selected solution providers will take part in a six-month acceleration period, where solutions will be evaluated in the Advanced Research on Integrated Energy Systems (ARIES) cyber range.

Working with its partners, CECA identified urgent security gaps, supporting emerging technologies as they build security into new technologies at the earliest stage—when security is most effective and efficient. The initiative is managed by the U.S. Department of Energy’s (DOE’s) National Renewable Energy Laboratory (NREL) and sponsored by DOE’s Office of Cybersecurity, Energy Security, and Emergency Response (CESER) and utility industry partners in collaboration with DOE’s Office of Energy Efficiency and Renewable Energy (EERE).

“We are thrilled to welcome and work with the first participants to the secure energy transformation,” said Jon White, director of NREL’s Cybersecurity Program Office. “These cyber-solution providers will work with NREL, using its world-class capabilities, to develop their ideas into real-world solutions. We are ready to build security into technologies at the early development stages when most effective and efficient.”

The selected innovators:

Blue Ridge Networks’ LinkGuard system “cloaks” critical information technology network operations from destructive and costly cyberattacks. The system overlays onto existing network infrastructure to secure network segments from external discovery or data exﬁltration. Through a partnership with Schneider Electric, Blue Ridge Networks helped deploy a solution to protect supervisory control and data acquisition (SCADA) systems for the utility industry.

Sierra Nevada Corporation (SNC)’s Binary Armor® is used by the U.S. Department of Defense and utilities to protect critical assets, with the help of subject matter experts to deliver cyber solutions. SNC plans to integrate as a software solution into a communication gateway or other available edge processing to provide a scalable solution to enforce safe operation in an unauthenticated ecosystem. SNC currently helps secure heating, ventilation, and air conditioning systems; programmable logical controllers; and wildfire detection, with remote monitoring for two different utilities.

Xage uses identity-based access control to protect users, machines, apps, and data, at the edge and in the cloud, enforcing zero-trust access to secure operations and data universally. To test technology in energy sector environments, Xage provides zero-trust remote access, has demonstrated proofs of concept, and deploys local and remote access at various organizations.

Three major U.S. utilities, with more expected to join, are partners with CECA: Berkshire Hathaway Energy, Duke Energy and Xcel Energy. At the end of each cohort cycle, cyber innovators will present their solutions to the utilities with the goal to make an immediate impact.

Additionally, CECA participants benefit from access to NREL’s unique testing and evaluation capabilities, including its ARIES cyber range, developed with support from EERE. The ARIES cyber range provides one of the most advanced simulation environments with unparalleled real-time situational awareness and visualization to evaluate renewable energy system defenses.

Applications for the second CECA cohort will open in early January 2023 for providers offering solutions that uncover hidden risks due to incomplete system visibility and device security and configuration.

NREL is the U.S. Department of Energy’s primary national laboratory for renewable energy and energy efficiency research and development. NREL is operated for DOE by the Alliance for Sustainable Energy LLC.

Movies As Education: Books and Selves

La Notte (English: The Night) is a 1961 Italian drama directed by Michelangelo Antonioni. The film stars Marcello Mastroianni, Jeanne Moreau, and Monica Vitti (with Umberto Eco, the novelist, appearing in a cameo).

Filmed on location in Milan, the film depicts a day in the life of an unfaithful married couple and their deteriorating relationship.

In 1961, La Notte received the Golden Bear (at the Berlin International Film Festival, the first for an Italian film) and the David di Donatello Award for Best Director.

La Notte is the central film of a trilogy, beginning with L’Avventura (1960) and ending with L’Eclisse (1962).

The movie follows Giovanni Pontano (Marcello Mastroianni), a distinguished writer, and his beautiful wife Lidia (Jeanne Moreau) as they visit their dying friend Tommaso Garani (Bernhard Wicki) who is hospitalized in Milan. Giovanni’s new book, La stagione (The Season), has just been published, and Tommaso praises his friend’s work.

La Notte reflects the director’s intuition that “you are what you read,” and books create a kind of thread through the story.

The dying, hospitalized patient has recently published an article on the famous philosophical writer Theodor Adorno. At the party the couple drifts into, the works of the Austrian–Jewish writer, Hermann Broch, are mentioned. Essentially, in a depressing glitzy world of lost and semi-lost souls, reading and books constitute a kind of emotional life raft or direction-finding compass, at least potentially. Antonioni frequently uses this motif.

We find this kind of reading and books-centered view of people interpreting their (bewildering) worlds in the works of the French thinker Charles Péguy (who died in battle during World War I in 1914):

“The Jew,” he declares in a passage that has become famous, “is a man who has always read, the Protestant has read for three hundred years, the Catholic for only two generations.”
(quoted in Consciousness and Society, H. Stuart Hughes, Vintage Books, paperback, 1958, page 355)

Charles Péguy is also central to Louis Malle’s classic French film Au revoir les enfants (English: “Goodbye, Children”).

If we “zoom out” and look for a meta-intelligent lesson, we can say that reading, writing, and arithmetic, the three basics mentioned in the phrase we all know, are very deeply entwined with who we are. Stories explain us to ourselves, and stories involve books and reading in our “Gutenberg world.”

The replacement of these by various (post-Gutenberg) screens and games may or may not be thought of as a variant since they constitute a kind of “pseudo-participation” and not participation based on perusal.