Antigua, Barbuda, C'mon Gamblers

Here is a heartening story that contradicts those who say the WTO is unfair in hearing cases of small countries. Sometime ago, the US decided that online gaming sites operating from abroad could not ply their trade Stateside for they violated laws banning interstate gaming. Antigua and Barbuda, a small Caribbean island nation with a population of 68,000 (not featured in Cocktail or the "Kokomo" video by the Beach Boys) then brought the matter to the WTO Dispute Settlement Mechanism (DSM), alleging that US actions violated General Agreement on Trade in Services (GATS) provisions. Antigua won, and the US said it would adopt the binding WTO ruling. However, the US has been tardy in doing so. In response, Antigua returned to the DSM to ask for US compliance. Once again, the US came out on the losing end. This ruling paves the way for possible remuneration for Antigua from losses sustained by US non-compliance.

The issue at hand is in regard to discrimination. The US claims that it prohibits interstate gaming to "protect public morals." Yet, it still allows the placement of interstate bets on horse racing through the 1978 Interstate Horseracing Act (IHA). Although the WTO allows countries to ban such forms of gambling, the problem is that the US discriminates by banning operators in Antigua while allowing horse racing bets to be placed across borders. The US passed the Unlawful Internet Gaming Enforcement Act (UIGEA) that prohibited credit transfers for cross-border betting in October of last year, but did nothing to clear up conflicts with the IHA. In fact, the WTO cited UIGEA as a source of further confusion. In the meantime, the online gaming industry, which has been hard-hit by legislative moves, is seeing this ruling as a potential respite. The US will have to allow offshore Internet gaming operators to ply their trade in America once more, or eliminate off-track betting on horses once and for all.

NAM: FTAs are Good for America

The National Association of Manufacturers (NAM) in the US believes free trade agreements and bilateral deals are worth pursuing (and implies multilateral ones are not working out too well). True-blue economists will blanch at the scope for trade diversion, but manufacturing interests have views of their own. NAM's Frank Vargo states "Our free trade partners account for close to half of our exports, but only six percent of our manufactured goods deficit." He adds that "while we want to help find a compromise that works for everyone, we can’t take our eye off the ball – we need to cut foreign barriers to our exports, and more trade agreements are the only way to do that." This not-so-subtle chart reinforces NAM's stance:

NAM has traditionally been an exponent of trade agreements. It helped Bush gain fast-track authority and backed China's entry into the WTO. However, it may be souring on the WTO in general and China in particular as NAM members that benefit from trade with China become fewer than those that are hurt. Thus, NAM's recommendation at the current time is geared towards cutting smaller deals such as those with Colombia, Panama, and Peru--countries that one wouldn't expect to be sending boatloads of manufactures to America anytime soon.

US: Screw WTO, It's D-I-Y Time

Here are some preliminary thoughts on the US measure to impose countervailing duties (CVDs, or more commonly referred to as tariffs) on coated paper products from China. Coated paper is of the glossy sort you find in books, magazines, annual reports, brochures, and gift wrap. The case was brought forth by NewPage Corporation, a coated paper producer headquartered in Dayton, Ohio late last year to the US International Trade Commission (ITC). Upon investigation, the ITC found the American paper industry "materially injured" by Chinese imports. The ITC then forwarded the case to the Department of Commerce (DOC), which announced today that countervailing duties would be applied to Chinese coated paper imports ranging from 10.9% to 20.35% for subsidies including tax breaks, debt forgiveness, and low-cost loans. The term "countervailing" refers to these duties purportedly offsetting the amount by which coated paper was subsidized to sell at lower prices in the US market.

Some of you might be wondering what the brouhaha is all about as coated paper does not exactly occupy the commanding heights of global industry. The importance of this case lies in setting a precedent that may pave the way for many, many more similar actions by US manufacturers in industries such as furniture, steel, and rubber against China . Going into a bit of the legal nitty-gritty, China was previously categorized as a "non-market economy" (NME) by the DOC. As such, CVDs were not applied to these countries. The case in question is that of Georgetown Steel in [1984]1986 where the Commerce Department stated

We believe that a subsidy is definitionally any action that distorts or subverts the market process and results in a misallocation of resources, encouraging inefficient production and lessening of world wealth.

In NMEs, resources are not allocated by a market...allocation is achieved by central planning. Without a market, it is obviously meaningless to look for a misallocation of resources caused by subsidies. There is no market process to distort or subvert.

It is this fundamental distinction--that in an NME system the government does not interfere in the market process, but supplants it--that has led us to conclude that subsidies have no meaning outside the context of a market economy.

That was then. This is now according to Commerce Secretary Carlos Gutierrez:

China’s economy has developed to the point that we can add another trade remedy tool, such as the countervailing duty law. The China of today is not the China of years ago. Just as China has evolved, so has the range of our tools to make sure Americans are treated fairly. By acting on the petition filed last October, the United States today is demonstrating its continued commitment to leveling the playing field for American manufacturers, workers and farmers.

I would not harp on this case if it could not portend something big, like a full-blown trade war. With this ruling, an avalanche of complaints may be brought forward against China by firms in several other industries as the DOC is seen as being more receptive as demonstrated by NewPage. Again, notice the timing of this ruling (near election season 2008) and the location of the complainant (rust belt Ohio). If you're a public choice theorist, the vote-gaining angle is obvious. China, for one, has already made it clear that it views this case as "unfair." It made a last-ditch effort to gain an injunction at the US Court of International Trade but failed. While CVDs are allowed under WTO rules if distorting subsidies can be substantiated, this is the first time that the US has not gone through the WTO in seeking remedies and applied these sanctions directly against China--exactly as Peter Morici suggests it should do. The US may have just let loose the dogs of (trade) war.

March 31 Update : To no one's surprise, China is "strongly dissatisfied" with the measure according to Xinhua News agency. What is ironic is that China still insists on having itself classified as a non-market economy by appealing to US (and not international or WTO) precedent. If that's all there is to China's retort, then color me unimpressed. I suspect however that China has more drastic, market-moving tricks up its sleeves.

On Iran Hostage Crisis II

I was hoping that this story of British sailors captured by Iran would have disappeared from the headlines by now as it is, to my thinking, exceedingly ridiculous. Frankly, I do not see how Iran can gain anything from detaining the British sailors any longer. To date, the UK has been playing "good cop" to America's "bad cop" in trying to engage Iran diplomatically along with France and Germany on the nuclear issue. (Not that Iran hasn't been able to game the system.) Now, however, Iran is testing the goodwill of one of the few countries attempting to hold back more drastic American action. If Iran backing out on releasing the lady English hostage was not bad enough, then suggesting that these sailors would be put on (show) trial is even worse. It's almost 1979 all over again, except with a Brit flavor--rising oil prices, saber-rattling, and diplomatic dogfighting at the United Nations. Even the current British foreign minister, Margaret Beckett, cut her teeth as a minister during the term of the late PM James Callaghan.

Some suggest that Iran is trying to use the hostages as bargaining chips over its nuclear program. This line of thinking is perverse since removing whatever remaining goodwill Britain, France, and Germany collectively hold for Iran is not wise, to say the least. Hardliners in the US will tell the European three "I told you so" and may pave the way for tougher measures. It's also a stretch to use British captives in trying to free five Iranian diplomats detained by Americans in Iraq--this is a non sequitur. I would normally find humor in the Keystone Kops- and Fawlty Towers-inspired Iranian efforts to place these sailors within Iranian waters during their capture, but not now. First, they gave the English the coordinates of where they were captured. Next, the English determined that they were indeed still inside Iraqi waters. In response, the Iranians then provided another set of coordinates that showed them as being in Iranian waters. As I said, this is ridiculous.

That British troops should be in Iraq in the first place is a matter I will not touch upon as it is another can of worms. As before, I hope this episode comes to pass without a skirmish. Oil prices have gone from slightly above $60 to $66 a barrel as "political risk" has presumably gone up. Message to Iran: this is not how to win friends and influence people in the international community.

Senators Mull China Trade Sanctions

The story in the US right now is pretty much subprime all time; so much so that even China seems to have been placed on the backburner. It's a shame as yesterday and today's Senate Committee on Finance hearings on "Risks and Reform: The Role of Currency in the US-China Relationship" have yielded a bumper crop of insights. Threateningly for US-China relations, China's perceived inaction by the Senate on currency reform is under scrutiny once more. Senators Charles Schumer (D-NY) and Lindsey Graham (R-NC)--who last year sponsored a bill proposing 27.5% tariffs on Chinese imports as a "a shot across the bow" that was not intended to pass--have now teamed up with Max Baucus (D-MO) and Charles Grassley (R-IA) in building the perfect legislative beast:

Beijing and the Bush administration are both on notice that Congress will pass bipartisan, veto-proof legislation this year aimed at forcing China to allow its yuan currency to continue to rise against the dollar, two of China's most vocal critics on Capitol Hill vowed Wednesday.

Rather than serve as "an apologist" for China, "I hope the administration will join this team," Sen. Lindsey Graham, R-S.C., told reporters after testifying before the Senate Finance Committee in the second hearing on China's economic and currency policies in two days.

They remain (purposely?) vague on how this bill would look like other than that it would be WTO-compliant and would garner enough congressional support to override a presidential veto, or a two-thirds majority in both houses of Congress. While we await the details of this piece of legislation, let us consider the statements of the star-studded witness panel featured on Wednesday...

Stephen Roach, chief economist of Morgan Stanley, repeated the now-familiar mantra of "don't bite the hand that feeds." At the start of his testimony, he suggested that currency was not the only or even the most important source of Chinese competitive advantage. He posed the question: "How would you feel if you got your way on the Chinese currency adjustment but found after three or four years the pressures bearing down on US workers had only intensified?" As a skeptic of currency adjustment as cure-all, he said "I don't buy the notion that China's currency policy is a threat to the global trade. I feel, instead, that many in the developed world--especially the saving-short United States--are treating RMB-related issues as scapegoats for their own macro shortcomings." Ouch. He reaffirmed his (politically unpopular) view by concluding that the US would do better if it considered its own role in creating such a massive trade imbalance. Roach added that a pro-saving agenda would top the list in taming the budget deficit and in pursuing tax reforms which could "alter the personal price between savings and consumption."

As for China, Roach stated that it should move away from excess reliance on investment and exports for its growth and embrace more of a pro-consumption model. Doing so would avoid capacity excesses (by creating internal demand) and protectionist risks from elsewhere. Also, Roach believed it could partly move China away from energy- and pollution-intensive growth, though it would still need to address its serious and growing environmental problem separately. The rest of his statement is interesting in noting China's environmental challenges, and I would invite you to read it if you've got the scratch. There's little new here, though it's odd that he did not necessarily see RMB revaluation as being part of the reform equation.

Eswar Prasad of Cornell and late of the IMF also testified. Being an ex-IMF man, it is no surprise that while he saw revaluation as part of the process of reform, he prioritized financial deepening ahead of it. According to him, "the lack of financial market development and the general increase in macroeconomic uncertainty has made households nervous, increasing their savings to very high levels and restraining consumption growth." As I pointed out earlier, though, many obstacles have been placed in the way of foreign financial service providers who could offer more sophisticated services to Chinese consumers. Nevertheless, Prasad affirmed that the costs of China maintaining its current FX regime outweigh the benefits of moving to a more realistic exchange rate. He offered the following diagram on p. 4:

If China moved to a more flexible exchange rate, it would gain monetary policy independence by not having to gear this policy to keeping the yuan artificially weak and be further able to open its capital account in promoting financial deepening. In short, Prasad suggested that China move from having an inflexible exchange rate and (largely) free capital flows at the expense of a sovereign monetary policy to giving up an inflexible exchange rate and gaining free(er?) capital flows together with sovereign monetary policy. Classic Mundell-Fleming "impossible trinity" stuff. Further along this yellow red brick road are the aforementioned gains to macroeconomic management and financial deepening, which in turn lead to balanced and sustainable growth. Though the diagramming is undoubtedly idealistic, I subscribe to this view most closely among the four presenters: "currency flexibility is an essential but hardly sufficient [Chinese] policy priority."

Morris Goldstein of the Institute of International Economics was third to present. He was, by far, the most gung-ho of all four. In contrast to the gradualist Roach, he said "China should deliver a meaningful 'downpayment' of a 10-15% appreciation of the RMB from its current level. Because China has waited so long to take decisive action on the growing undervaluation of the RMB, the undervaluation can no longer be eliminated in one go." He then cited four indicators as to why China had to move--its "mushrooming" CA surplus, its real exchange rate which he said had actually depreciated 2% against the dollar since 2001, its unwillingness to let market forces determine the (nominal) exchange rate, and its rejection of claims on currency manipulation--which membership to the IMF forbids. In contrast to Prasad, Goldstein suggested capital account liberalization should follow exchange rate reform for China's still-fragile banking system may not be able to cope with sudden liberalization.

Goldstein further added that to speed up currency reform in China, the US Treasury should not hesitate in branding China a currency manipulator. In other words, call a spade a spade so that the current game of gradual but barely noticeable appreciation ends. He too called for the IMF to take a more proactive role in deeming China's exchange rate policy inappropriate. To his thinking, if the US and the IMF both brand China a currency manipulator, international pressure would increase for China to revalue its currency at a faster pace since the arguments for gradual adjustment have yielded few results thus far.

Lastly, John Makin of the American Enterprise Institute made the oft-repeated pitch that it is in China's best interests to move on its exchange rate due to rising trade tensions, domestic inflation pressures, and rising asset market volatility. He exuded pessimism in believing that unless China changed its current course, "we may expect to see a crisis erupt sometime in the next twelve months comparable to the Asian currency crisis that erupted in 1997. In particular, caps on prices may result in goods shortages together with social disorder." He then noted "Long gas lines already exist in China and signs of social unrest are on the rise. If, alternatively, the Chinese simply permit inflation to rise rapidly, the result will again be more social instability." Makin concluded by saying "Some yuan appreciation would help to signal a need for appreciation of most Asian currencies, including the Japanese yen...The Chinese and the leaders of other major nations of the world cannot continue, simultaneously, to complain about global imbalances while resisting exchange rate adjustments..."

Four testimonies, four viewpoints. The sensible-shoe me sides with Prasad, while the action-hungry political science major in me sides with Goldstein and his offensive-minded approach. Either way, expect more strong-armed tactics coming out of Congress in the near future. I just hope that America's elected officials take note of some of the more sensible things said by these economists.

Bush the MBA Public Administrator

I was browsing the latest issue of Public Administration Review when the very first article stopped me in my tracks, "The First MBA President: George W. Bush as Public Administrator." For some time now, the trend in public administration studies has been to speak of public management as opposed to the more traditional administration. Supposedly, general management theory now informs government affairs to a large extent. Bush could have been a good fit with this trend. However, as the author James Pfiffner points out, perhaps business administration needs a better champion in public service. While lauding Bush's "bold thinking," "consistent adherence to his chosen policies," and commitment to "racial and gender diversity," Pfiffner faults Bush for his "lack of systematic deliberation" and "failure to weigh sufficiently the judgments of military and other public administration professionals."

I could scribble endlessly on Bush's innumerable managerial shortcomings (group think, anyone?) but there is little point in kicking a dead horse with a sub-30% approval rating. I'd just like to add that budget management--a key managerial task--has suffered much with Bush's untax and spend policies. That he has racked up the biggest budget (and trade) deficits in American history gives MBAs a bad name. That Bill Clinton--a lawyer--managed to balance the budget and even run a surplus is telling. Would American finances have done better if Bush spent more time studying managerial accounting, or would its international relations have been better if Bush took a course in cross-cultural communication? I doubt it. The recent record of businessmen as public servants is not good, be it (the long-gone) Silvio Berlusconi of Italy or (the overthrown) Thaksin Shinawatra of Thailand. As cynical as people get about politics sometimes, there is still a public service component not fully captured by for-profit dynamics. And, you can take that to the (central) bank.

Killing Reefs & Endangered Fishies

As rapid economic growth continues apace in Hong Kong and other parts of China, demand there for increasingly rare coral fish continues to grow. As these fish command very high prices in those markets, many fishermen have resorted to the dangerous practice of cyanide fishing in parts of Southeast Asia:

The use of cyanide to stun and capture live coral reef fish began in the 1960s in the Philippines to supply the growing market for aquarium fish in Europe and North America, a market now worth more than $200 million a year. Since the late 1970s, the poison has also been used to capture larger live reef fish (primarily grouper species) for sale to specialty restaurants in Hong Kong and other Asian cities with large Chinese populations. Selected and plucked live from a restaurant tank, some species can fetch up to $300 per plate, and are an essential status symbol for major celebrations and business occasions. As the East Asian economy boomed over the past several decades, live reef food fish became a business worth some $1 billion annually.

Despite the fact that cyanide fishing is nominally illegal in virtually all Indo-Pacific countries, the high premium paid for live reef fish, weak enforcement capacities, and frequent corruption have spread the use of the poison across the entire region -- home to the vast majority of the planet's coral reefs. Since the 1960s, more than one million kilograms of cyanide has been squirted onto Philippine reefs, and the vast Indonesian archipelago now faces an even greater cyanide problem. As stocks in one country are depleted, the trade moves on to new frontiers, and cyanide fishing is now confirmed or suspected in countries stretching from the central Pacific to the shores of East Africa. Sadly, the most pristine reefs, far from the usual threats of sediment ation, coral mining, and coastal development, are the primary target for cyanide fishing operations.

Chinese demand has contributed to considerable environmental damage in the region:

Large parts of reefs in the Philippines, Indonesia and Malaysia are becoming void of marine life as a result of overfishing and the use of cyanide to catch fish alive. Though illegal, many fishermen use cyanide, an exceptionally damaging and wasteful way to catch the fish, which hide amongst the coral, marine experts say. The divers squirt the toxin in the reef to stun the fish. But that kills most other marine life, including coral. Only about a quarter survive to make it to restaurants, experts say.

It's a contest with Southeast Asian governments and concerned groups like the World Wildlife Fund on one side versus opportunistic fishermen keen on capitalizing on the high prices of these fish on the other. Thirty Chinese fishermen on board the vessel Hoi Wan were arrested late last year in the Philippines for poaching endangered Napoleon wrasse, though this fish still manages to find a way unto menus in Hong Kong. However, supply is dwindling. Like with the "war on drugs," the challenge remains one of lowering demand. If conscientious diners are made aware that they are complicit in destroying reefs and endangering species, then demand should fall.

Easterly/Wolfowitz/Gates Smackdown

Development aid critic William Easterly is once again stealing the show in economic blogland with his latest missive in the Wall Street Journal, this time covering why more government in Africa is not the answer to regional poverty. Along the way, Easterly makes his now-customary digs at various celebrity activists as well as Jeffrey Sachs's Millennium Development Goals and "End of Poverty" book. I don't know how I managed to miss it for so long, but there is a video excerpt online of a panel at the 2007 World Economic Forum featuring Easterly, Bill Gates, Paul Wolfowitz (key architect of the US invasion of Iraq and current World Bank president), and Liberian President Ellen Johnson-Sirleaf (the first elected lady head of state in Africa). Moderating the panel is no less than Fareed Zakaria:

Hat tip to Jonathan for showing me how to insert this clip. Also, if you haven't read "The White Man's Burden" yet--which I suggest you do if you are interested in development issues regardless of your position on the efficacy of aid--there is a condensed version of this research accompanying Easterly's presentation at the 2007 American Economic Association Annual Meeting.

Bird Flu: Indonesia vs. WHO

Indonesia has decided to hold out on sending bird flu samples to the World Health Organization (WHO). Although the WHO has called on countries to voluntarily share viruses to keep up with newer strains of the bird flu, developing countries like Indonesia are wary of cooperating for they believe that they do not receive much in return. The first issue is that WHO data is not readily shared with developing countries:

Several years ago the agency set up a secure database to allow scientists in its international laboratory network to compare H5N1 avian flu viruses across countries. The aim was to get affected countries to share on an accelerated basis. Typically this type of information isn't shared before scientific papers on the viruses in question have been published; that can take months or years.

But as concern about the threat of the H5N1 flu virus has increased, the closed database has taken on the image of an "old boys' club" for flu. Pressure has been mounting on the WHO to open up the database to the wider scientific community. It reached a peak last month when 70 senior scientists, including Nobel Laureates, signed a letter supporting the creation of an open-access flu database that would be outside the WHO's control.

The second issue concerns the affordability of drug subsequently developed based on these samples:

Indonesia - the nation hardest hit by bird flu, with 66 human deaths - has dug in its heels, refusing to bow to international pressure from scientists desperate to check whether the virus is mutating into a more dangerous form.

"This is the inevitable consequence of trying to privatize knowledge, and of a poor country saying the system is unfair," said Joseph Stiglitz, a Nobel economics laureate who has written about patents and globalization. "There are so few examples where a poor country has some bargaining chips on its side, and that's what makes this case so interesting."

Indonesia is not opposed to monitoring in general, but Health Minister Siti Fadilah Supari has stressed that she is against giving vaccine makers free access to the country's viruses under WHO's 50-year-old system of virus sharing. She fears any bird flu vaccine created from the viruses would be too expensive for developing nations.

Rich and poor countries were set to meet with WHO on Monday in Jakarta to try to hammer out a compromise. But the standoff has raised a much bigger issue: equal access to drugs and technologies.

"The price is too high for the developing countries to have access" to patented drugs, said Dr. Suwit Wilbulpolprasert, senior adviser on disease control at the Thai Ministry of Health, who agrees with Indonesia's stance.

The result of the upcoming meetings mentioned in the above article to resolve this issue should prove interesting. Pharmaceutical pricing in the developing world has been a longstanding trade issue. While some countries pursue "compulsory licensing" of drugs in emergency situations like Thailand recently did with its AIDS epidemic, this instance is notable in that Indonesia has decided to withhold samples altogether if they are to be used commercially. Stay tuned.

March 27 Update: Indonesia has reached a deal wherein drug companies will have to negotiate commercial rights with (developing) countries providing virus samples. Before, these companies could avail of such samples pro bono from the WHO, but things are set to change:

A senior WHO official said the body would now bar pharmaceutical firms from accessing the samples. All financial arrangements would be negotiated between individual firms and countries, he said.

"The WHO will only send the virus to collaborating centres for study and keep the virus from industry," said David Heymann, assistant director general of communicable diseases.

"The WHO will not get involved in financial arrangements. That will be agreed between the country and the company."

The deal will be finalised in June, but the Indonesian health minister said she trusted the WHO not to share samples with industry until then.

The Politics of Subprime Mayhem

Let's face it: For the most part, politicians are reactive and not proactive. Exhibit A is the recent shakeout in the US subprime mortgage industry. As nearly all the mainstream media and economics blogs stateside provide nonstop coverage of the ongoing saga concerning debt, deceit, and disclosure, there is little need for me to go over the story. Suffice to say, lawmakers in the US have begun to understand the implications of this subprime debacle. There is indeed a large political opportunity here; with election season 2008 gearing up, votes are up for grabs.

Take Senator Christopher Dodd (D-Connecticut), Chairman of the Committee on Banking, Housing, and Urban Affairs. To get where he is, he clearly must have some political skills. There are tricks of the trade to be learned in his modus operandi. In the wake of the housing debacle, he hauled several guilty and not-so-guilty parties to appear before his committee on March 22:

• Regulators: A game of political dodge 'em requires pinning blame on someone else for lack of government oversight. Dodd requested representatives from the Federal Reserve, Federal Deposit Insurance Company (FDIC), the Office of Thrift Supervision (OTS), and the Office of the Comptroller of the Currency (OCC) to testify. Unsurprisingly, they feigned previous unawareness of the magnitude of the problem, and said they would do better in the future;
• Industry Representatives: Every decent tale needs bad guys. Cue up patsies sent by HSBC, Countrywide, WMC Mortgage, and First Franklin. (New Century declined as it appears to be in its death throes.) For the most part, these guys had nothing to do but act sheepishly and explain that, actually, they were quite diligent in making these loans;
  
• Consumers: Sob stories need hapless victims. Dodd invited two of those who fell prey to vile predatory lending practices to share their tales of woe.

Naturally, the hearing garnered a lot of media attention. In particular, Dodd made an accusation that the Federal Reserve practiced "bait-and-switch" tactics which led to a "perfect storm". From Dodd's opening remarks:

Regulators tell us that they first noticed credit standards deteriorating late in 2003. By then, Fitch Ratings had already placed one major subprime lender on “credit watch,” citing concerns over their subprime business.

In fact, data collected by the Federal Reserve Board clearly indicated that lenders had started to ease their lending standards by early 2004.

Despite those warning signals, in February of 2004 the leadership of the Federal Reserve Board seemed to encourage the development and use of adjustable rate mortgages that, today, are defaulting and going into foreclosure at record rates. The then-Chairman of the Fed [Alan Greenspan] said, in a speech to the National Credit Union Administration, said:

“American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage.”

Shortly thereafter, the Fed went on a series of 17 interest rate hikes in a row, taking the fed funds rate from 1% to 5.25%.

So, in sum: By the Spring of 2004, the regulators had started to document the fact that lending standards were easing. At the same time, the Fed was encouraging lenders to develop and market alternative adjustable rate products, just as it was embarking on a long series of hikes in short term rates. In my view, these actions set the conditions for the perfect storm that is sweeping over millions of American homeowners today.

Where this depressing story ends nobody knows. Needless to say, more coordination of oversight between state and federal authorities of the subprime market as well as better disclosure of terms will be required. In the meantime, announced Democratic candidates for the US presidency are jockeying for position. As you would expect them to imply, excess Republican laissez-faire led to this fine mess. Hillary Clinton calls for a time-out on mortgages about to go bust; Barack Obama asks Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson to convene a "homeownership preservation summit"; and Dodd uses his chairmanship as a high-visibility platform for Dodd for President 2008. There's a good chance that the public purse will be opened up to bail out these "hapless victims" as election season 2008 kicks into gear. Public choice theorists should be squealing with delight. Politics is fun, eh?

Venezuela: We're #1 in Oil Reserves!

Venezuela now claims that it has the world's largest oil reserves at 316B barrels, topping those of Saudi Arabia at 262B. Or at least that's Hugo Chavez's claim as trumpeted on the state-owned oil firm PDVSA's website. This claim relies on heavy oil deposits being deemed recoverable in its Orinoco River valley--an area immortalized in Enya's hit song "Orinoco Flow (Sail Away)." The problem has always been that the oil there is of a heavy (high specific gravity) and sour (sulphur-filled) variety that is more difficult to refine than Saudi Arabia's typically lighter grades. If you go by quality and not quantity, Saudi Arabia has it all over Venezuela.The standard measure of specific gravity is the American Petroleum Institute's scale. Light crude oil has a gravity higher than 31.1° API; medium oil between 31.1° API and 22.3° API; heavy oil between 22.2° API and 10.0° API; and extra-heavy oil below 10.0° API. Most of Venezuela's crude is of the latter grade, having an average API of 8.5°. According to Rigzone:

Outside the Faja [Orinoco River area], Venezuela has 80 billion barrels of proven crude reserves, and currently estimates that producers in the Faja can extract at least 237 billion barrels of the extra heavy crude with existing technology. With nearly 320 billion barrels of recoverable oil, Venezuela will become the world's largest holder of petroleum reserves.

The Faja's crude is what producers call extra-heavy. Oil from this tar belt averages about 8.5 API gravity, which means that it is heavier than water and oozes rather than flows. This type of oil is difficult to produce and transport, and few refineries in the world will take it. But producers in Venezuela have plenty of experience with heavy oil, and their success so far has been world-class.

The Houston Chronicle provides more details on the commercial arrangements being undertaken by Venezuela. Note that Western oil companies have been put at the back of the bus, figuratively speaking:

In the 1990s, the Faja was divided into four major regions [Boyaca, Junin, Ayacucho, and Carabobo], each being developed through joint ventures with major international oil companies and PDVSA.

Experts have long speculated that heavy oil and bitumen deposits in Venezuela's Orinoco River basin may contain more than 235 billion barrels of commercially extractable petroleum. If that amount can be certified by outside experts and added to conventional reserves, Venezuela would reach 316 billion barrels, moving past No. 1 Saudi Arabia, which holds 262 billion barrels, according to the Oil and Gas Journal.

More than just bragging rights is at stake in PDVSA's two-year certification effort, called the Magna Reserve project.

To prove its Orinoco reserves, PDVSA is carrying out seismic studies and test drilling with the help of national energy companies from Brazil [Petrobras], China [CNPC], India [ONGC], Iran PetroPars), Russia [Lukoil] and elsewhere. When negotiating joint ventures with PDVSA, these newcomers are expected to have a leg up on U.S. firms - which played a major role in developing the Orinoco in the 1990s.

A TOTAL study notes that a key to the full realization of the production potential of these ultra heavy oil reserves will be technology, and more precisely how to find methods allowing to improve recovery rates at acceptable costs and without excessive energy consumption. At present, Venezuela mainly uses a so-called "cold heavy oil production with sand" (CHOPS) method in the region. It recovers less than 10 percent of the oil in place. Targets for subsequent heavy oil projects have been set at 20%, thus producers should utilize more advanced technologies in the near future. If they are able to do so, then the Bolivarian revolution may be in place for quite some time.

On Chavez's Proposed Gas Cartel

It had to happen sooner or later. Seeing how OPEC has, in certain circumstances, been able to affect world prices of petroleum, one of the natural gas producers would eventually follow suit with proposing a gas cartel. What is unusual is that Venezuela would take the lead as its natural gas production is comparatively small. In fact, nearly all of its production is domestically consumed--it'd be a stretch to even call it a gas exporter at the current time. What many commentators downplay while pointing this fact out, though, is that Venezuela has substantial natural gas reserves. The Economist estimates that Venezuela has the most natural gas reserves in the region in an article assessing the prospects for a regional gas pipeline (see chart below):

Hugo Chavez and Argentina's President Nestor Kirchner--another Latin leader who has lukewarm relations with "el Diablo" (US President Bush)--first proposed a "Great Pipeline of the South" linking gas producers to consumers in Latin America. However, this project has (literally) not gotten off the ground so far. Being Hugo Chavez, he nonetheless enlisted the support of Argentina and Bolivia, two of the three leading gas producers in the region, in forming Organización de Países Productores y Exportadores de Gas del Sur (OPEGASUR) together with Brazil. Further, he wants to recruit other countries in the Gas Exporting Countries Forum (GECF) such as Algeria, Brunei, Egypt, Indonesia, Iran, Libya, Malaysia, Nigeria, Oman, Qatar, Russia, Trinidad & Tobago, and the United Arab Emirates. These countries have 73% of the world's gas reserves and account for 42% of production. (Argentina and Brazil are not part of GECF.) Chavez will push the issue in the upcoming meeting of GECF on April 9 in Doha, Qatar. So far, GECF has been characterized as more of a "talk shop" than a formal organization. OPEGASUR will be keen on Russia, Iran, and Qatar coming on board as they have 57% of global reserves and 26% of production.

As large producers, Russia and Iran may also have designs of their own on creating a gas cartel. Whether their interests are congruent with those of Venezuela remains an open question, though they are all are inclined to use energy as a political tool particularly against the US and would probably like nothing better than to spite it by forming a cartel. Nonetheless, several questions arise over a gas cartel's usefulness for its members. As most gas is transported via existing pipelines and not via ships (like petroleum), it is not easy to reroute supplies--buyers and sellers are largely predetermined. Contracts written up tend to be long-term as well, many lasting a decade or longer. Hence, short-term price movements are harder to influence. As a result, it is more of a case of having several regional gas markets and not a global market per se. 59% of global oil demand is met through imports, whereas only 18% of gas demand is accounted for this way. Nearly all of US gas demand is met by local production, for example, though this may change as recent searches there for gas have yielded little. Just as the Economist suggests that it may be cheaper to liquify natural gas (LNG) and ship it instead of using pipelines in Latin America, advances in shipping LNG may give a cartel more leverage by developing a spot market facilitated by maritime delivery.

Is Liberation Theology History?

No discussion of Latin American political economy is quite complete without mentioning liberation theology. Like dependency theory, liberation theology is concerned with Marxist themes of domination and a quest for radical change. Whereas the West is the bogeyman in the former theory, prevailing local structures are the villains in the latter. Jesuit priests in Latin America were the main exponents of liberation theology, which gained a following mostly in the seventies and eighties in the poverty-stricken and largely Catholic region. In fact, I was taught liberation theology in college as I attended a Jesuit university, though I had misgivings even then. Unsurprisingly, the Vatican has had even larger misgivings about incorporating Marxist elements into church teaching. After all, how is it to reconcile the atheistic Marx who proclaimed religion to be the "opiate for the masses" with Catholicism? Moreover, the well-established institution of the Vatican is precisely the sort of status quo organization that liberation theology lashes out against. Here is a brief primer on liberation theology:

Liberation theologians agree with Marx's famous statement: "Hitherto philosophers have explained the world; our task is to change it." They argue that theologians are not meant to be theoreticians but practitioners engaged in the struggle to bring about society's transformation. In order to do this liberation theology employs a Marxist-style class analysis, which divides the culture between oppressors and oppressed. This conflictual sociological analysis is meant to identify the injustices and exploitation within the historical situation. Marxism and liberation theology condemn religion for supporting the status quo and legitimating the power of the oppressor. But unlike Marxism, liberation theology turns to the Christian faith as a means for bringing about liberation. Marx failed to see the emotive, symbolic, and sociological force the church could be in the struggle for justice. Liberation theologians claim that they are not departing from the ancient Christian tradition when they use Marxist thought as a tool for social analysis. They do not claim to use Marxism as a philosophical world view or a comprehensive plan for political action. Human liberation may begin with the economic infrastructure, but it does not end there.

Before becoming Pope Benedict XVI, Cardinal Joseph Ratzinger was already very critical of liberation theology as John Paul II's point man on doctrine. In 1984, he gave it a rough going-over. In addition to the points I mentioned, Ratzinger added that liberation theology was excessively concerned with structural fetters and placed those of sin in second place, whereas he believed it should be the other way around. Since he became Pope, Benedict XVI has, if anything else, become harsher on liberation theology. Father Jon Sobrino, one of the remaining architects of liberation theology, is now set to be disciplined by the Vatican:

Still, many saw a message in the criticism of one of the last champions of liberation theology, a political and sometimes radical interpretation of Roman Catholicism that emphasizes justice for the poor. The controversial school of thought was despised by the conservative church hierarchy, which believed it departed from core dogma.

The order against Sobrino will be issued by the Vatican's watchdog arm, the Congregation for the Doctrine of the Faith [which Ratzinger previously headed], and will carry the approval of Pope Benedict XVI who, as Cardinal Joseph Ratzinger, led efforts to stamp out liberation theology.

The move comes just two months before Benedict is to make his first trip to Latin America as pope. He will visit Brazil, another onetime bastion of liberation theology.

A Spanish-born Basque, Sobrino was assigned to El Salvador half a century ago.

He was part of an intellectual team of Jesuit priests based for many years at the University of Central America. Some believed in liberation theology, but all preached Catholicism with a social conscience in a country that descended into civil war in the 1980s.

Elsewhere in the article it is suggested that the current archbishop of San Salvador, Fernando Saenz Lacalle of the arch-conservative Opus Dei organization, had a role in bringing about this measure. Papal politics are at play. Nevertheless, it will be interesting to see if liberation theology can outlast current efforts to stamp it out, or even if it will fade away through lack of a following.

Political Economy of Pronouns

I still remember a professor of mine from way back who was keen on writing mechanics complimenting me on a presentation I made--except for referring to a manager as a "he." Her advice as an academic was to get rid of this habit. "Think what a female reviewer would make of your political incorrectness in a journal submission," she effectively said. After that incident, I thought I wised up during a subsequent presentation by referring to the archetypal manager as a "she." I was slightly crestfallen when she was not happy with this substitution, either. Her next bit of advice was to use plural forms (they are managers; you don't have to assign gender to them).

Fast forward a couple of years and one of the well-regarded authors in our department has the custom of adding [sic] to quotations that use he / him / his in reference to generic individuals like citizens, workers, and public servants. In this age of political correctness, it is common to see writing that bears the marks of gender neutralization in subtle and not-so-subtle ways. Unlike many other languages, the English language doesn't have gender-neutral pronouns when referring to individuals. Thus, the battleground has been set among traditionalists who see nothing wrong in using he / him / his and those who find reference to them inappropriate. Perhaps I stand accused of not being a sensitive new-age guy (SNAG), but I am largely indifferent to those who use the older convention. Though I have followed my professor's sage advice to use plural forms to avoid this trap--after all, I am just starting out and it would be dumb of me to offend potential reviewers of my work with un-PC terminology--I do not expect the same from my students. Many of them are international students and I believe that I should not burden them with following PC conventions in addition to learning to write in English.

While doing basic research for this post, I found this hilarious rant from Terry Watkins of the controversial Dial-the-Truth Ministries, who believes, among other things, that rock music is the work of Satan [cue up the Rolling Stones' "Sympathy for the Devil"]. Though I have several difficulties with his beliefs, he did raise some though-provoking points about possible PC overreach. He got apoplectic over the gender-neutralization of Today's New International Version (TNIV) of the Bible, which is available online:

By far the most extensive damage performed by the inclusive-perversions is the extermination of the "generic" masculine pronouns, such as "he / him / his".

Known as the "generic he", generic masculine pronouns are the standard method used in the English language when addressing an "indefinite" or "undefined" individual. Masculine pronouns, such as "he / him / his" are utilized to address both male and female when the gender is unknown. The "generic he" has been the accepted method, literally, since the beginning of the English language.

In favor of the convention of using he / him / his, Watkins cites writing authorities such as Strunk and White and the Associated Press stylebook:

How does Strunk and White advise concerning that mean, sexist, "generic he"? "Do not use they when the antecedent is a distributive expression such as each, each one, everybody, every one, many a man. Use the singular pronoun [he, him, his]."

Strunk and White also state concerning the "generic he": "It [the generic he] has no pejorative [derogatory, or belittling effect, negative, sexist] connotations; it is never incorrect."
(William Strunk, Jr., and E.B. White, The Elements of Style, p. 60)

How does the AP Stylebook instruct the journalists on the "generic he"? "Use the pronoun his when an indefinite antecedent may be male or female: [Example] A reporter attempts to protect his sources."
(Norm Goldstein, The Associated Press Stylebook and Libel Manual, 2000, p. 114)

Nor does using plural forms to avoid PC hazards get a free pass from either William Zinsser of On Writing Well fame or Strunk and White:

Author William Zinsser, in the best-selling, On Writing Well, warns of the effects of converting the singular "he" with the plural "they": "A style that converts every ‘he’ into a ‘they’ will quickly turn to mush. . . I don’t like plurals; they weaken writing because they are less specific from the singular, less easy to visualize."
(William Zinsser, On Writing Well, p. 123)

"Alternatively, put all controversial nouns in the plural and avoid the choice of sex altogether, you may find your prose sounding general and diffuse [not concentrated, indirect]."
(Strunk and White, Elements of Style, p. 61)

I will stick with plural forms despite potential costs to writing clarity. The benefits of avoiding PC-related snafus probably outweighs these costs, though things may change if I ever become Mr. Big Shot Author. As with many things, the political economy of gendered pronouns is largely about power--editorial power in this case. Let those editors have their way, for now.

China Crisis Caused by Accounting?

Here's the darndest thing to gain my attention in a while. Forbes suggests that regulations to make Chinese accounting comparable to--but not exactly of the same standard as--worldwide standards (e.g., IASB) may cause stock market turmoil. Skeletons in the closet brought out into the sunlight by firms which have performed bookkeeping sleights of hand may shock. After all, the Chinese are famous for "creative accounting" in keeping three sets of books: one for the tax man, one for the external auditor, and one for internal use. Although moving towards international accounting conventions is of course a worthwhile long-term goal, expect some fireworks in the meantime. With the average P/E ratio in China being a whopping 63 according to Forbes, things are bound to get interesting:

Behind the recent, gut-clenching stock market volatility in China is a disquieting reality: China's rotten accounting. If you thought the Shanghai index's 8.8% drop in late February was bad, wait until a bunch of rickety Chinese companies collapse.

That's the dour outlook from ace China-watcher Brian Hamilton, who runs stock research firm Sageworks in Research Triangle Park, N.C. "Investors in China tend to buy and sell according to price movements, not fundamentals," Hamilton says. "But too often with China's stocks, there are no fundamentals to be found..."

But Hamilton thinks that move still won't stop market swings. That's because investors are about to see much more detail on China's corporate earnings, and the picture may not be pretty. With its accession to the World Trade Organization in 2001 China promised to open up its accounting sector to foreign accounting firms. China decreed Jan. 1 that its listed companies must book their profits under a new set of accounting rules. But what's eventually unearthed just might set off panics among small investors.

The new rules are based on--but not identical to--the international accounting standards increasingly used in most markets. That means much more detail in a secret economy, where even the most basic line items like debt and development costs were hard to come by, says Stephen Chipman, an expert on China's financial systems at Grant Thornton. Now companies will have to do things like quickly write off obsolete inventory and uncollectible receivables. That's a novel concept there.

Financial fraud has been plaguing China's effort to mingle freewheeling capitalism with its murky centrally planned economy. The country's police recently announced that they have uncovered 400,000 cases of economic crimes and arrested 370,000 suspects over the past seven years, recovering $12.9 billion. The harsh prison sentences meted out to Enron's Jeffrey Skilling and WorldCom's Bernard Ebbers are nothing compared with the sentences Chinese authorities handed two embezzlers: Zhou Limin, a former branch president of China Construction Bank, and Liu Yibin, an accountant, will be executed for filching $25 million.

Affluence, Poverty, and Deforestation

Here's yet more evidence that poverty is related to deforestation courtesy of the UN's Food and Agricultural Organization (FAO) in its State of the World's Forests 2007. From figure 67, you might gather that, among regions, Europe is least concerned with deforestation as it has designated the lowest percentage of forest area for conservation. You might be saying to yourself: "I knew it, those Europeans with their 'green parties' and 'leadership' on environmental issues really don't give a damn about deforestation. It's one big sham. Look at those Africans--they've set aside the most forest area for conservation. Africans--not Europeans--are those most concerned about deforestation."

However, figure 66 tells a different story altogether. In reality, Europe is second in the world in forest area gained percentage-wise from 2000 to 2005, whereas Africa lost more than anywhere else. The disparity between rhetoric and reality could not be starker in this instance; Africa's rate of loss is alarming.

The lesson is simple: setting aside forests for conservation is an entirely different thing from actually preserving forest cover. Poverty is associated with clearing for substinence agriculture, illegal logging and other environmentally-damaging practices that are difficult to discourage where poverty is rife. Resources required in monitoring designated areas for compliance and imposing sanctions on violators are harder to come by. While European countries may not mark off as much forest area for conservation, those that are marked off are subject to good monitoring and sanctioning. Nevertheless, there are success stories like Costa Rica that show developing countries too can begin winning the battle against deforestation if they focus on the problem in earnest.

Nail Sticking Out is Pounded Down

This story exasperated me. Zheng Ming, a Chinese professor at Renmin University who served as the dean of political sciences at his school lost his post for writing the obvious about the Chinese educational system on his blog. He commented:

They told me that I should be punished for breaking the 'hidden rules.'

Universities have become an officialdom. The over-intervention and manipulation of academia by power definitely fetters its growth.

How is China's academia doing now? Does anybody overseas read papers written by Chinese scholars? Plagiarism and theft are rampant. Obedient kids are being taught to be minions.

My first reaction was surprise that they teach political science at all in China, albeit in watered-down form. While Marxist / Maoist thought you would expect to be taught even in these days of market socialism (whatever that is), straight-up political science would be something best avoided lest it encourage dangerously independent political thinking. My second reaction was, "well duh, did you expect to get away with making these statements?" Obviously, information dissemination is very tightly controlled in China--especially on the Internet. Mr. Zheng seems all too keen on breaking away from the Confucian tradition hinted at in this post's title. What he labels "hidden rules" and "obedient kids" are merely manifestations of a longstanding tradition in which you are supposed to listen patiently to the master's words of wisdom for the most part.

After thinking it over for a while, my third reaction was a measure of sympathy for Mr. Zheng since I too teach political science. The touchy subject that he brings up is controversial for good reason, and I ask my Chinese colleagues about it from time to time. China wants to be at the forefront of education to boost its human capital. Yet, at the same time, it wants to keep tight reins on freedom of expression. Now, you might say that political science is a fairly useless subject that does little to enhance national welfare unlike subjects such as math or engineering. However, consider that many of the high-technology clusters around the world like Silicon Valley and Bangalore have a freewheeling culture. Without such an attractive culture, creative minds may not be attracted to such a place--especially knowledgeable educators in these disciplines. Even tightly controlled Singapore is learning to give in a little after maintaining a tight grip for so long. In the words of former Singaporean PM Lee Kuan Yew:

The greatest challenge to Singapore today is to get our people to move away from the old model. Just being clean, green, efficient and cost-effective is not enough. You've also got to be innovative, creative, entrepreneurial.

How compatible is Confucianism with a dynamic learning culture where tacit knowledge thrives? We will see how this exciting story unfolds in China. I suspect that Confucius will have to give more way to Adam Smith if officials want to emphasize innovation and creativity.

High Sea Pirates Meet High Tech

Avast, ye scurvy dogs! While reviewing the current trends in maritime piracy (incidences are going down after a spike earlier in the decade), I came across a fascinating set of technologies that are being deployed to combat it. As pirates have increased their capabilities by using fast boats and advanced armaments, those on the defense have upped the ante in terms of technological sophistication as well. The International Maritime Bureau (IMB), which monitors piracy incidences, endorses three applications. According to its blurb:

The Inventus UAV (unmanned aerial vehicle) is a state-of-the-art reconnaissance system packaged in a highly efficient, highly stable flying wing form. Outfitted with cameras, the Inventus flies and covers a large ocean area and relays a real-time data link back to the ground station. This link provides real-time aerial surveillance and early warning of suspect or unauthorised craft movements to the coastal or law enforcement authority. Developed by Lew Aerospace, the Inventus is fully autonomous and can be launched and recovered even from a seagoing or patrol vessel. There are gas and electric formats and both fly in all weather conditions.

Secure-Ship is the most recent and effective innovation in the fight against piracy. It is a non-lethal, electrifying fence surrounding the whole ship, which has been specially adapted for maritime use. The fence uses 9,000-volt pulse to deter boarding attempts. An intruder coming in contact with the fence will receive an unpleasant non-lethal shock that will result in the intruder abandoning the attempted boarding. At the same time an alarm will go off, activating floodlights and a very loud siren.

The IMB endorses ShipLoc, an inexpensive satellite tracking system, which allows shipping companies, armed only with a personal computer with Internet access, to monitor the exact location of their vessels. In addition to its anti-hijacking role, ShipLoc facilitates independent and precise location of ships at regular intervals...

The ship security alert system regulation that will be put into place as of July 2004, requires ships of over 500 GT to be equipped with an alarm system in order to reinforce ship security. The system allows the crew, in case of danger, to activate an alarm button that automatically sends a message to the ship owner and to competent authorities. The message is sent without being able to be detected by someone on-board or by other ships in the vicinity. ShipLoc is contained in a small, discrete waterproof unit, which includes: an Argos transmitter, a GPS receiver, a battery pack in case of main power failure, and a flat antenna.

Together with increased patrolling, these technologies have reduced incidences of piracy as of late. However, pirates may up the ante once again by figuring out workarounds to these technologies or more ingenious ways of hijacking vessels. Vigilance and naval security go hand in hand.

The Infant Industry Which Never Grew

The infant industry argument is a familiar one: Because global competition is intense, it may be necessary to block imports for some time until domestic industry can gain a competitive footing. Critics of this argument, however, point out that some of these infant industries never grow up. Here is a case in point: Proton Cars of Malaysia. It was set up in 1983 by then-Prime Minister Mahathir Mohamed as part of a plan to industrialize Malaysia by creating a car maker to promote technology, earn foreign exchange through exports, and spawn supporting industries. It has achieved none of these objectives. Not that these failures have kept it from expanding its model lineup and production capacity. According to the Economist:

...output never rose above 227,000 cars a year and exports never exceeded 20,000 units annually. In an industry dominated by a handful of global giants, each producing 3m-6m cars a year, Proton remains a minnow. Yet it has refused to scale down its ambitions. Proton has built factories capable of churning out 1m cars a year and has launched a range of models. But quality is poor and low volumes mean it is not able to compete on cost.

The troubles with Proton have accelerated lately as more choice was injected into the Malaysian auto market when the country lessened import tariffs in accordance with Asian Free Trade Area (AFTA) stipulations for cars manufactured in the region. Worse yet, Perodua, a local competitor whose majority owner is Toyota, eclipsed Proton in local sales for 2006:

In 2006, Perodua led national sales with 152,733 units, giving it a market share of 42 percent, up from 32 percent the year before, according to MAA data. Proton sales fell to 115,538 units for a market share of 32 percent, down from 40 percent in 2005. It had held the top sales spot since 1985. Japanese small-car maker Daihatsu Motor, a subsidiary of Toyota, owns a 51 percent stake in Perodua which has produced a series of attractive models well suited to the Malaysian market...

Loss-making Proton is in the process of selecting a strategic partner to arrest its sharp decline and is in negotiations with US auto giant General Motors, Volkswagen of Germany and PSA Peugeot Citroen of France.

It appears that Volkswagen is keen on purchasing Proton, most likely to establish a beachhead in the Malaysian market. Whether Proton's existing production facilities can be retrofitted to produce VWs is an open question. Current Malaysian PM Abdullah Badawi and his predecessor Mahathir have been feuding over the fate of Proton. Badawi wants to rid the government of this loss-making burden, while Mahathir sees it as a move dismantling his legacy. However, as Proton slips further into the red and runs out of cash, Malaysia may have no other choice than to sell its 43% stake. The government says it will identify a buyer by month's end. I guess it's time Proton, well, grew up.

The Three Waves of Globalization

In a review of recent books by Rajan Menon and Daniel Drezner, the Economist seems to find novelty in the idea that globalization is not all it's cracked up to be. Menon champions a strong American unilateral policy in the belief that international organizations are pretty much useless in this day and age--just as the neoconservatives do (or is that did?) On the other hand, Drezner advocates that states use their powers to shape international organizations to better cope with problems with increasingly transnational dimensions like pollution and food safety. In this context, Drezner highlights the point that states--especially powerful ones--still make the rules. While I subscribe to this viewpoint, I must point out that there is a well-developed, chiefly English literature stream on globalization that has covered this ground much earlier. In it there are three waves of globalization:

The hyperglobalist view holds that we live during the "End of History" (Francis Fukuyama), where the "World is Flat" (Thomas Friedman), and the "End of the Nation-State" (Kenichi Ohmae) is at hand. Supposedly, it is now global finance and corporate capital--not states--that exercise decisive influence over the organization, location, and distribution of economic power and wealth.

The skeptical view cautions against making such sweeping claims about the totalizing nature of globalization. Most notable among those holding this view are Paul Hirst and Grahame Thompson who put "Globalization in Question." They point out that, actually, the volume of trade as a percentage of national income was higher in most European countries during the pre-WWI era than it is now. They further add that trade and FDI activity has largely been concentrated in North America, Europe, and East Asia--hence, what is called globalization is in reality just regionalization.

The transformationalist view propounded by the likes of David Held and Anthony McGrew as well as Colin Hay attempts to find a middle ground between the hyperglobalist and skeptical views. It puts current globalization trends in a longer-term perspective of what occurred well before our epoch--like slavery and the creation of nation-states. Power struggles among nation-states and with other actors such as terrorist organizations and multinational corporations are ongoing, but they are now conditioned by the time-space compression of modernity in its many guises. In this view, globalization is a contested arena where there is no teleological certainty that states will disappear or that states will maintain largely undiminished power over their internal affairs. Rather, in Colin Hay's apt description, globalization is "a tendency to which there are countertendencies."

Most likely, as Drezner points out, globalization is not a wholly unique phenomenon that is washing upon us to remove all else, but the latest in a series of events with far-reaching and uneven effects. I am wary of claims that "everything is different now" because they seldom are so. Here is an excellent summary of the globalization literature that was written by Held and McGrew for the Oxford Companion to Politics. It's a shame that the work of English academics sometimes gets overlooked, even by their own press (tsk tsk the Economist), but there is a lot of valuable work being done here across the Atlantic as well.

Is Global Inequality Rising or Falling?

The question of global inequality is perhaps the linchpin of all IPE debates for it concerns, among other things, the benefits of economic globalization and the efficacy of development efforts. For obvious reasons, those leaning left tend to say that global inequality is increasing, whereas those leaning right say the opposite. Among work representative of the former viewpoint is Thomas Pogge and Sanjay Reddy's, while that of the latter is Xavier Sala-i-Martin's. (Oddly enough, all three are at Columbia University; Pogge in the political science department, and Reddy and Sala-i-Martin in the economics department.) For this post, I will briefly describe the work of Branko Milanovic, which I consider more neutral. Even so, he gains a measure of respect from both sides of the debate. His book, Worlds Apart, is my reference on the matter.

Milanovic starts by tackling the question of what sort of inequality we are measuring. Concept 1 inequality is among the mean incomes of individual countries; tiny Lithuania population-wise counts for the same as large Russia. Concept 2 inequality weighs inequality according to each country's population size; Lithuania's average income would be extended to its 3.5M citizens, while Russia's average income to its 143M citizens. In an ideal world, we would have enough data to measure Concept 3 inequality, wherein we have data on the income of each individual in existence. While such data is nearly available in Western countries through household surveys, it is sparse in developing countries, to say the least.

The most commonly used measure of income inequality is the Gini index, which ranges from 0 (perfect equality) to 1 (perfect inequality where a single person has all the income.) Three main considerations also need to be accounted for, namely:

• Do we measure income at market exchange rates (usually against the US dollar) or on a purchasing power parity basis (PPP--what can actually be purchased locally)?
• Do we use survey-based mean income (from household surveys) or GDP per capita (which is basically GDP per head)?
• Do we measure income (what one earns) or expenditures (what one spends)? While Western and Latin American nations typically use income as an indicator, those in Africa and Asia typically use expenditures. The problem is that expenditures are fairly stable over time, presumably because basic needs have to be met, while income is more variable.

Let us move to Concept 1 inequality worldwide. In the graph above from p. 39 of his book, Milanovic uses GDP per capita in 1995 dollars and on PPP terms for 120 countries from 1950 to 2000. It is an open-and-shut case here: inequality among countries unweighted for population size is increasing. From 1982 onwards, Concept 1 inequality has been on the rise with poor countries doing worse on the average than rich ones. For what it's worth, this period coincides with the second oil shock caused by the fall of the Shah of Iran and rising interest rates worldwide as the US Federal Reserve took greater measures to curb inflation in America. Also, note the unfortunate boost given by African countries to the Gini index. Without them, the coefficient would be rather lower. Elsewhere, Milanovic highlights the contribution made to inequality by former Soviet-bloc countries for many of them became "downwardly mobile" in the wake of the Berlin Wall's fall.

The picture changes a lot when we consider the population weights of each country as in Concept 2 inequality using the same set of data previously described. The graph above from p. 87 depicts an improvement in the world Gini index, particularly over the last twenty years. Improvements in the economic performance of China and India mean that whereas they used to contribute to global income inequality, they now reduce it. As these two countries together account for over a third of the world's population with 1.3 and 1.1 billion persons respectively, their recent economic successes have made a large difference in these computations. However, critics note that China's GDP per capita may be inaccurate. To begin with, its GDP data is considered unreliable by many.

Given that China and India are such large countries, Milanovic considers whether Concept 2 results would differ if Chinese provinces and Indian states were substituted for simply "China" and "India" in the sample. Doing so makes sense. Consider what would happen if we used just one mean worldwide income to calculate the Gini index--there would be no inequality whatsoever. Segmenting the world population into finer groups would, all things equal, make measuring inequality a more accurate enterprise. That is, we would be moving towards Concept 3 and away from the more basic Concept 1. After doing so, Milanovic finds that "growing interregional inequality in China and India has a discernible and positive effect on world inequality," and that "as more Chinese (and Indian) provinces become rich while others stay behind, world inequality will rise" (p.99-100) . The Gini index is boosted by over five percentage points between 1980 and 2000 when Chinese provinces and Indian states are included in the sample.

Much, much more is to be found in Milanovic's masterful work. I cannot list more unless I intend to violate stipulations on fair use so I will end here. What Milanovic's work demonstrates to me at least is that inequality is a slippery concept that is highly sensitive to how you measure it. My ultimate take is that while China and India may have reduced Concept 2 inequality somewhat in recent years, this trend might be on the upswing again if regional inequalities in these two countries continue to grow. Sometimes the truth hurts, but it needs to be told.

Gini Index, the Band

While preparing the post on global inequality, I was astonished to find a Yahoo search result from YouTube. Yes, it turns out that there is a band called Gini Index. Like the guy who came up with the index, Corrado Gini, they too are Italian. Listen to a live recording of their song "Structures." I hope that its lyrics are profound since I haven't got the slightest clue what they're singing about. There are more downloadable song samples on their MySpace page. Talk about finding something new each day...

What's the World's Busiest Port?

Marc Levinson's The Box provides a vivid illustration of how the prosaic shipping container revolutionized global trade. Prior to the standardization of the container, Levinson writes that "transporting goods was expensive--so expensive that it did not pay to ship things halfway across the country, much less halfway around the world." Afterwards, though, the volume of global trade increased markedly: "The value of this utilitarian object lies not in what it is, but in how it is used. The container is at the core of a highly automated system for moving goods from anywhere, to anywhere, with a minimum of cost and complication along the way." In economist-speak, the standardization of the container did much to reduce transaction costs for schlepping goods around the world.

While trucks and trains are the primary modes of land-based transportation for containers, shipping remains the long-distance transportation mode of choice. As such, having highly active container ports gives countries economic bragging rights. The task of determining which is the world's busiest port is complicated because three measures of activity may be used:

• Shipping Tonnage: How many cargo ships are handled at a port?
• Cargo Tonnage: What is the total weight of goods that are loaded and discharged at a port?
• Container Throughput: How many twenty-foot equivalent units (TEUs) go through a port? (For example, a forty-foot container would count as 2 TEUs.)

Unsurprisingly, most of the world's busiest ports are in Asia as the table above depicts, though it is somewhat dated. Hong Kong and Singapore have been duking it out for the title of world's top port for some time now. In the recent past, Singapore held the lead in cargo tonnage, while Hong Kong held the lead in container throughput. However, Singapore surpassed Hong Kong in terms of both measures in 2005 and 2006 according to their port authorities' statistics. Even so, Shanghai claims its port exceeded Singapore's in terms of cargo tonnage in 2005 (443M tons to 423M) and 2006 (a whopping 537M tons to 449M). Singapore still leads Shanghai in terms of container throughput, though, with 23.2M TEUs to 18.1M in 2005 and 24.8M TEUs to 21.7M in 2006.

Regardless of which port leads overall, there are some key implications here. China's export growth has benefited from the attention paid to developing a transportation infrastructure for exports. Three out of five of the world's busiest ports in terms of container throughput are in China. Getting goods from special economic zones (SEZs) unto cargo ships has received undoubted attention. Should India wish to follow in China's footsteps, it will have to make improvements to its decrepit infrastructure. Standardizing the shipping container enabled inexpensive shipping the world over; these massive container ports are proof of this ingenuity.

[UPDATE: I have taken a look at the 2007 figures in a more recent post.]

Sell Ford and GM to the Chinese

Here is a solution to many of the challenges facing the US and China that no one talks about: sell Ford and GM to the Chinese. We know that Ford and GM are in dire straits, having lost a humongous $12.7B and $2B respectively in 2006. Despite recording a profit in Q4 2006, GM suffers from subprime housing collateral damage via its ex-lending arm, GMAC. Both their credit ratings have been reduced to junk status. While GM may not be hemorrhaging cash as quickly as Ford, it too faces colossal pension obligations to the tune of some $47B. The writing on the wall seems clear, at least to me: unless these venerable businesses obtain government support, they will soon go the way of Hudson, Packard, and Studebaker.

On the other hand, we have the Chinese. The Chinese government has recently decided to invest its massive reserve pile into something that yields better than the likes of American sovereign debt. The current business trend in China appears to be buying up distressed companies that have recognized brands. At the same time, Chinese car manufacturers are keen on developing cars for the export market. Ford and GM offer an extensive dealer network in America and familiar brands. Voila! A match made in heaven, or at least purgatory in the immediate vicinty of the pearly gates. As bad as Ford and GM's marketing may be at times, it surely can't be as bad as that for the "Geely Beauty Leopard":

It is an urban sport car. Its pure ardor appears before you boldly. With perfect and smooth lines, it looks wild and sexy. The decorating tail wing and the integrated crystal headlamp, all match your enthusiasm and ardor. Dancing and exciting air contains your romantic disposition, your wisdom and your elegance...

Now, it may be a measure of how far these once-mighty companies have fallen, but Ford's market capitalization last I checked was a mere $14.2B while that of GM was $17.1B. Their cash balances alone are greater than their market caps. They are dirt cheap. Let me put it this way: Google has a market capitalization of $139.3B--over eight times more than GM's. True, potential Chinese buyers will probably demand that some of these companies' onerous future obligations are not taken on board. As they are now, these firms are nearly more like health care and pension providers than automakers. Some deal will need to be made to reduce these obligations by a good amount. Of course, there will be be a huge political brouhaha Stateside if the Chinese attempt to buy Ford and GM. For that reason, no such deal is likely. If the likes of Global Crossing and Unocal were considered "strategic" interests that were hands-off to these folks, what more Ford and GM? If you think it through, however, selling these marques to the Chinese makes near-perfect sense. Better to have Chinese-American carmakers than defunct carmakers, methinks. American auto manufacturing's last stand is at hand.

Bananas of Terror; Blood Bananas

The Chiquita Banana Company (CQB) has an exceedingly controversial history. It is rare that Halliburton's misadventures pale in comparison with another firm's when it comes to corporate social responsibility (CSR), but Chiquita is on another level altogether. Perhaps its troubles stem from operating in Latin America where brutal dictatorships are rife (hence the term "banana republic"). Chiquita is the corporate name of the former United Fruit Company, at whose behest it is widely believed that the CIA was enlisted to overthrow left-leaning Guatemalan President Jacobo Arbenz in 1954. An entire website is dedicated to the travails of the United Fruit Company in Latin America, including the Arbenz episode:

[Guatemalan coup leader Carlos] Castillo received a strong financial and logistic support from the Central Intelligence Agency (CIA) to prepare his Army in Honduran territory to attack Guatemala. The CIA's involvement had been approved by Eisenhower as a way to stop what they considered a spread of Communism in the Americas. CIA's director was Allen Dulles, brother of the American Secretary of State, John Foster Dulles. In June, 1954 the troops of Carlos Castillo crossed the Honduran-Guatemalan border and began their attack against the Arbenz government.

The United Fruit Co. changed its name in 1984 to Chiquita, presumably to dissociate itself with its controversial history. Yet, Chiquita has hardly turned the page. It was a key figure in the infamous banana wars at the WTO.

Just today, Chiquita has been convicted of paying $1.7M worth of protection money between 1997 and 2004 to the right-wing United Self-Defense Forces (AUC) paramilitary organization. Prosecutors claim that Chiquita also paid off the leftist Revolutionary Armed Forces of Colombia (FARC) guerrillas which too engage in the illegal drug trade that figures prominently in banana-growing regions. While the rest of us would call the AUC a guerrilla movement, the US has classified it as a "terrorist" organization--just like almost every other insurgent or revolutionary group outside the US (call it a marketing ploy for the "war on terror.") The company has set aside $25M to cover potential damages arising from this case. What more is there to say? Old habits die hard.

March 16 Update: Despite having sold its wholly-owned Banadex Colombian subsidiary in 2004 for $43.5M, Chiquita stands accused of ferrying weapons to paramilitaries by the Colombian prosecutor's office. The prosecutor seeks extradition of Chiquita executives -

The chief federal prosecutor's office said it would ask the U.S. Justice Department for information on Chiquita's role concerning a report that a Banadex ship was allegedly used to unload 3,000 rifles and more than 2.5 million bullets in November 2001 for use by Colombia's paramilitaries. The shipment was revealed in a 2003 report by the Organization of American States.

Demystifying Neoliberalism

David Brooks' recent column in the New York Times has set off a controversy in the blogosphere over whether, indeed, neoliberalism is "dead." It appears to me that much of the confusion arises because neoliberalism is defined in various ways. In particular, the rest of the world seems to understand the term differently from how it used in America. In this post, I will offer an explanation that may clarify the matter. To be sure, not everyone will agree with me, but I'd like to chip in my two cents' worth as it may help others grasp the term better.

Like many other things political, neoliberalism is a contested term. Our friends Stateside associate neoliberalism with Clinton's market-friendly policies involving marketization, privatization, and deregulation. In other words, these are elements of John Williamson's (in)famous "Washington Consensus." Such policies are often classified under "Rubinomics" after the former US Treasury Secretary Robert Rubin. My argument though is that while neoliberal policies may have entered the limelight during the Clinton years, it is incorrect to associate the term with leaning left on the political spectrum. Rather, the "liberal" part of the term stems from being an economic liberal (favoring lower taxation rates, fiscal prudence, free trade, etc.) rather than being a political liberal. The"new" part comes from neoliberalism being a modernized take on the liberal principles first set forth by the likes of Adam Smith and David Ricardo. Furthermore, you can think of "neoliberalism" as the project promoting "neoclassical" economics as articulated by the likes of the late Milton Friedman and others from the Chicago School.

This definition enables a better differentiation between neoliberalism and neoconservatism as well. If neoliberalism concerns being an economic liberal, then neoconservatism concerns being a political conservative--among other things, favoring traditional values and the deployment of a muscular foreign policy. As such, you can be an economic neoliberal and a political neoconservative at the same time. A case in point is President Bush. USA Today recently ran into the same trap of identifying neoliberalism with leaning left on the political spectrum as he visited Latin America:

Only in Latin America could President Bush be accused of being a neo-liberal.

"Neo-liberalism" is one of the names given to the free trade, market-oriented economic approach Bush is promoting throughout Latin America. It's a flashpoint for Venezuelan President Hugo Chavez and other U.S. critics who say free trade has only increased regional poverty.

Bush spent part of Saturday discussing trade with Uruguayan President Tabare Vazquez, seeking to "spread the benefits of investment" in both nations. The day before, in Sao Paulo, Brazil, Bush said open markets help promote initiatives to improve areas such as health care and education.

"The most effective anti-poverty program is trade," Bush said in Brazil.

The rest of the world regards neoliberalism in the terms I've just described--it concerns the propagation of economics favoring free-market principles instead of being a political liberal or conservative. Therefore, as we understand it, Bush is indeed neoliberal when he promotes the gospel of free trade, market access, foreign investment, and the rest. Yet, at the same time, he is also a neoconservative as he favors active projection of US military might to further American interests--but that is a story best saved for another post. Suffice to say, with the leader of the world's most powerful nation actively promoting neoliberalism, it cannot be called dead. While its popularity may be fading, it is by no means a goner.

If You Can't Build Brands, Buy 'Em

We have all seen the scare stories about China's not-so-peaceful rise--especially the ones that deal with how its economic might will soon overwhelm the rest of the world. However, a striking thing about China's rise is its unmistakable lack of distinctive homegrown brands. Sure, technology buffs may know about the likes of Huawei (routers), Haier (appliances), TCL (television sets), and Lenovo (personal computers), but to Joe Average, these brands are largely unknown. Unlike the Japanese or the South Koreans (Samsung, Hyundai, LG and so on), the Chinese have so far been unable to develop their own brands for foreign markets. True, China is still relatively new to the export branding game--hard as it is to believe--but one would think that it should have a handful of brand names with international recognition by now. As it is, China Inc. is a largely faceless enterprise to the rest of the world.

Haier, unbeknownst to me until a few moments ago, turns out to be a sponsor of the NBA. Still, who else is aware of this? The International Herald Tribune suggests that China may be adopting an alternative "stealth" strategy to this problem of name recognition by buying up foreign companies in distress with recognizable brands. It makes a lot of sense, especially now that China has decided to put more of its $1 trillion reserve hoard into play, partly to silence criticism that it has placed too much of its investments in relatively low-yielding assets such as US Treasuries:

It began in 2002 when TCL, a Chinese maker of televisions and mobile phones, bought the German company Schneider Electronics. The Chinese computer maker Lenovo acquired IBM's personal computer business in 2004.

Qianjiang Group, the largest Chinese motorcycle manufacturer, now owns Benelli, the oldest motorcycle maker in Italy. Shenyang Machine Tool Group has bought Schiess, a longtime maker of German machine tools. Xinjiang Chalkis even owns a French tomato cannery and sells Chinese tomato sauce in Provence.

The State Administration of Foreign Exchange (SAFE), which until recently has been solely tasked to oversee this hoard, has become more liberal in giving foreign exchange to Chinese firms wishing to invest in foreign enterprises:

To encourage outbound investment. the Ministry of Commerce now accepts applications online and the State Administration of Foreign Exchange has abolished quotas on the purchase of foreign exchange for such deals. These changes have led to a sharp increase in overseas deals all over the world.

To me, it is a good deal all around. The Chinese gain brands recognized in other parts of the globe while distressed Western brands gain a second chance and access to the potentially lucrative Chinese market. Marketers aim for the win-win; perhaps that's the case here.

Bo Xilai, Comedy Guy

Chinese Minister of Commerce Bo Xilai is your prototypical modern Chinese bureaucrat: well-educated, clean-cut, and inoffensive. You know, very much in the mold of Hu Jintao and Wen Jiabao. You will rarely if ever hear them make controversial statements that attract undue attention to themselves. In his post, Bo Xilai has the thankless task of appeasing China's trade partners over the growing size of China's trade surplus. Reducing the surplus along with promoting equality, environmental concern, and domestic consumption have been stated policy goals ever since the eleventh five-year plan of the Communist Party in 2005. To much of the rest of the world's chagrin, however, China's exports keep chugging along at a rapid clip.

Earlier in the day, Bo Xilai set up the joke by telling journalists that "In the past few years we have taken a series of trade measures that are aimed at boosting imports and slowing the growth in exports." A few moments later, China delivered the punch line by releasing statistics indicating that it recorded its second-largest monthly trade surplus in February of $23.8B. February is usually a slower month for exports. Annualized, China's trade surplus would alone come to $285B. Nevertheless, Bo Xilai managed to make some digs at the US for what they're worth:

"The surplus was not formed only because of trade issues; it has developed due to the industrial structure and the overall situation with the global economy." This is a restatement of the classic Chinese line on global imbalances. America has no one to blame but itself for buying too much and selling too little stuff internationally;

"So we should not expect to see the resolution of the trade surplus problem in the short term, or only because of some trade measures." Ditto; it's a structural problem wrought by America.

"China has a big trade surplus but the profits are being made by [these multinational] companies." Meaning, why are you complaining? China doesn't really benefit as much as American firms taking advantage of inexpensive Chinese labor.

From my point of view, there are two possibilities here. Either the Party is really having trouble redirecting the Chinese economy in a more sustainable path because of China's sheer vastness (remember those independent-minded local governments), or it is saying one thing while doing another by clinging on to a model of export-led growth. As I have noted, America might not be able to take Bo Xilai at his word for much longer if things do not change. Unless tangible changes soon occur, I will have to lump Bo Xilai's famous words with some others':

Bill Clinton - "I did not have sex with that woman"
Rafael Palmiero - "I have never used steroids, period"
Bo Xilai - "We are working on slowing down exports" ;-)

Challenges of Affluence and Poverty

I recently took out two academic titles from the library that have gained a fair measure of attention. The first is economic historian Avner Offer's The Challenge of Affluence: Self-Control and Well-Being in the US and Britain Since 1950 and the second is David Ellerman's Helping People Help Themselves. On the surface, Offer's book covers the challenges of having too much, whereas Ellerman's book those of having too little. After reading both, though, there are many similarities in the approaches they take to their topics. Common to both are a focus on limits to human cognition in terms of bounded rationality. That is, cognitive limitations cause people to behave differently from the proverbial rational economic man. Hence, contextualizing these cognitive limitations in terms of "affluenza" and development may yield better results in terms of coping with the challenges of abundance and scarcity.

The Challenge of Affluence is another book in a seemingly endless literature stream dedicated to cataloging human fallibility and its effects on well-being. A recurring theme is that economic growth and prosperity by no means guarantee well-being, vide the "Easterlin paradox." Part I provides a good start by illustrating how rising wealth in developed countries has not resulted in increasing happiness; rather, stagnation and even decline are pervasive. The neoliberal notion that choice is the sine qua non of human existence is critiqued by pointing out that choice is fallible (due to bounded rationality and imperfect knowledge). Hence, socialization is needed to ensure that better information flows among market participants to avoid this unwelcome eventuality. The "gift economy" where non-market exchanges occur such as among persons in households is then covered as an alternative. So far, so good.

I start having difficulties with this book in Part II. Here, the evils of marketing's "false sincerity" are blamed for everything ranging from obesity, overspending, unsightly billboards, SUVs, to disposable culture. Unfortunately, Offer does not cover much literature from consumer research which challenges the notion that consumers are hapless victims of ever-more sophisticated ad pitches. People can and do filter out a majority of marketing messages. And, they can discern underlying contradictions in marketing messages, such as advertising that features countercultural elements like sixties nostalgia while selling mainstream products. Offer portrays consumers as passive victims to a degree which I believe is unwarranted.

Offer gets somewhat back on track with Part III where he examines the social costs of modernity--rising incidences of divorce, sad childhoods, competition for status, diminishing mental health, growing inequality blamed on neoliberalism, etc. However, there is effectively no conclusion after this part. To be honest, the book presents many, many sources without digesting them fully. While I did pick up some additional useful references, most of what is presented should be quite familiar by now to those following critiques of neoliberalism or modernity. Had these sources been better integrated, a genuine conclusion could have been formed elaborating possible steps for mitigating such social ills. As it stands, I would recommend the likes of Jonathon Porritt's Capitalism as if the World Matters and Barry Schwartz's The Paradox of Choice as books that go past description by making some actionable suggestions.

David Ellerman--who was the speechwriter for Joseph Stiglitz during his tumultuous tenure as chief economist at the World Bank--presents his volume as a companion to Stiglitz's Globalization and Its Discontents. While Stiglitz critiqued (or better yet, slammed) the IMF, Ellerman purports to do the same for the World Bank. According to him, the World Bank would do better if it began with these perspectives:

• First Do: Start from present institutions (and not "start from scratch")
• Second Do: Seeing the world through the eyes of the client
• First Don’t: Transformation cannot be externally imposed
• Second Don’t: Avoid benevolence which tends to render others dependent and thus contradicts the professed aim of helping others
• Third Do: Respect the autonomy of the doers

He then applies findings from the literature on learning in reference to the Bank's learning (or lack thereof):

• Roadblock to Learning 1: Official views as dogma, with examples
• Roadblock to Learning 2: Funded assumptions as dogma
• Roadblock to Learning 3: “Social science” as dogma (economic truisms)
  
• Roadblock to Learning 4: The rage to conclude

Finally, he covers the literature on organization theory and identifies the structural problems that the Bank faces in fostering worthwhile changes:

• Structural Problem 1: Monopolistic power
• Structural Problem 2: Affiliation with US policies and interests
• Structural Problem 3: Money is not the key to development assistance
• Structural Problem 4: Working through governments that are part of the problem
• Structural Problem 5: Trying to control bad clients instead of exiting deleterious relationships

Along the way, Ellerman too covers a lot of literature from different fields like Offer does, but his approach is better digested as he is more able to make workable suggestions by book's end. There are bits of economics, organization theory, learning theory, political science, and sociology thrown in for good measure. In some respects, this book is similar to William Easterly's The White Man's Burden in suggesting that development solutions will most likely be found locally and not through massive, master-planned aid programs. The best that organizations like the World Bank can do is engage their clients from the standpoint of joint learning which encourages experimentation to find creative solutions to developmental roadblocks. For example, how can learning networks be formed that successfully transmit fruitful ideas to different parties? Overall, this book is a recommended read, though more examples of Ellerman's ideas in action could have made them more vivid. A condensed version of this book is available on Ellerman's website.

USA: Who Loves Ya, Baby?

Kyoto/International Criminal Court/Iraq/Abu Ghraib/Guantanamo Bay/extraordinary rendition/Bush's reelection occurred sometime ago. Yet, the image of America is still slipping worldwide according to the University of Maryland's Program on International Policy Attitudes. Why is this so? And, does it really matter? Pollsters may find opinion of America turning negative, but American companies still do good business abroad for American exports recently hit an all-time monthly high. The situation we have here may be akin to the difference between purchase intentions and actual purchasing behavior in marketing-speak. The rest of the rest of the world might profess disliking America's influence, but keeps on buying American products and imbibing American popular culture nonetheless. Suffice to say that I don't see any mass international boycott movement.

In his testimony before the House Committee on Foreign Affairs, Dr. Steven Kull of the Program on International Policy Attitudes said

• In 20 of the 26 countries polled, the most common view is that the US is having a mostly negative influence in the world;
• It should be noted that this reaction cannot simply be dismissed as something necessarily engendered by a powerful and rich country. The numbers we are seeing today are the lowest numbers that have ever been recorded;
• During the 1990s, views of the US were predominantly positive;
• The US military presence in the Middle East is exceedingly unpopular in virtually all countries. On average 69 percent believe the US military presence there “provokes more conflict than it prevents” while just 16 percent see it as a stabilizing force;

Most important to me at least is this point

• The good news is that there is an abundance of evidence that the unhappiness with the US is not a rejection of US values. People around the world say that the problems they have with the US concern its policies, not its values.

Translation: It is the US government and its foreign policy that get the thumbs down from the international community--especially its aggressive use of military force. Americans (and the stuff they sell probably) are alright, but the self-styled "Jorge Bush" and his compadres are not very popular worldwide. Just ask those Brazilian protesters.

Great Firewall of China Approved Site

Pardon me for this bit of silliness. I've just come across this site which claims to test whether the Golden Shield Project (GSP) is blocking your vile propaganda from polluting the minds of the Chinese people. Guess what? My site passes with flying colors. Then again, it has only been in existence for, what, three weeks. I will not list any of the offending words and topics that ring alarm bells for the 30,000 censors (count 'em!) working day and night to ensure the sanctity of China's information stream in the hope that I can keep kosher with them. You can read about that offensive dreck elsewhere. In fact, you can call me "Comrade Emmanuel." Ken Livingstone has nothing on my impeccable left-leaning street cred.

Google and Yahoo have famously been criticized for watering down their search technologies to remove offensive terms in order to operate in the presumably lucrative China market. It's a human rights violation! It's pure greed and unethical business practice besides! I am indifferent; as long as my humble journal gets through to the good people of Haining and Shangdong, my rational choice is to care less. I'd probably change my opinion if I too got censored. Right now though I will not succumb to GSP martyrdom as Wikipedia did. You can bet your bottom renminbi that I love my Chinese readership (yes, there are some who come by once in a while). To establish my socialist credentials, let me say for the record that Hu Jintao has great hair. And, Wen Jiabao is the very picture of a modern world leader with his concern for the environment. Those censors should be cheering for me right about now...

Banana Wars Never End

One of the early signature cases of the WTO dispute settlement mechanism was over banana exports to the European Union (EU) by American firms like Chiquita operating in Latin American countries. The EU had long given preferential access to agricultural exports from former colonies in the Africa, Caribbean, and Pacific (ACP) grouping--including bananas. Meanwhile, tariffs were kept on similar exports from elsewhere such as Latin America. As the EU is the world's second-largest market for bananas, Latin countries dependent on banana exports were keen to have such trade barriers removed. In 2001, the WTO definitively ruled in favor of Ecuador against the EU. However, Ecuador again claims that the EU has been remiss in meeting its obligations. From Bloomberg:

After half a dozen WTO rulings against the EU, the 27- nation bloc still imports bananas duty-free from former colonies in Africa and the Caribbean while applying a duty of 176 euros ($231) a metric ton to shipments from Latin America, including Ecuador, Costa Rica and Colombia. That practice continues the illegal discrimination against Latin producers, Ecuador says.

While the EU thwarted today's request, under international trade rules, it can't block a second call for arbitration by Ecuador that may be made as early as March 20. Bananas are the world's fourth most-valuable food crop, after wheat, rice and corn, according to the United Nations...

Since January 2006, the EU's imposition of the 176-euro tariff has cost Ecuador $131 million in extra duties, said the Latin American nation. About 10 percent of Ecuador's population depends on the fruit for their livelihood, the government says.

Continued EU intransigence on this case is difficult to understand. Unless the EU wants to undermine the WTO's dispute settlement mechanism, it should go along and get it over with as it has been over ten years since the case was first brought to the attention of the WTO.

The Trillion Dollar Question

China has accumulated over a trillion dollars in foreign exchange reserve holdings--the largest pile of reserves ever accumulated by any state--as it has emerged as the workshop to the world and earned a lot of foreign exchange in the process. It has recently made a decision to create an investment company to place these funds in things other than the likes of American or European sovereign debt. Previously, the misleadingly named State Administration of Foreign Exchange (SAFE) had sole responsibility for managing this pile. The big question that comes to mind is, will this action cause the dollar to weaken because demand for dollar-denominated instruments like Treasuries may fall? Well, it depends:

• Will the US allow China to make foreign investments in the US? As the Unocal and Global Crossing episodes demonstrated, the US has been reluctant in the past to cede ownership of "strategic" interests to China. If the US becomes more lenient, then Chinese monies parked in dollar assets may not fall as much;
• Deputy People's Bank of China governor Wu Xiaoling has said that "the government won't reduce its holdings of U.S. Treasuries and other forms of dollar-denominated debt" without elaborating;
• Even if China moves out of Treasuries into other dollar-denominated assets, interest rates may move up stateside as the largest buyer of American debt in recent years decreases the rate at which it's accumulating Treasuries.
  

At any rate, the dollar did not move much and actually strengthened a touch today--markets seem to discount a large Chinese exit from dollar-denominated instruments. Chalk this move up as a victory for Yu Yongding, a fellow keen on reforming China's economic boom in a sustainable direction. (I previously noted that China was already taking steps to level the playing field between foreign and local firms by unfying tax rates for both at 25%.) Early suggestions indicate that $200 billion of reserves will come into play. China is keen on investing in energy to meet its demands at home and in technology to enhance the value-added of its production. Look for the rest of the world to compete for Chinese investment.

Heeeeere's Larry (Summers)!

The quotable, often controversial former US Treasury Secretary Larry Summers has made recent and noteworthy comments before the Senate Finance Committee on protectionist legislation. His testimony is timely for there are so many pending trade bills with protectionist leanings that I've lost count. Baucus-Grassley-Schumer-Graham (which waters down the now-defunct Schumer-Graham bill's 27.5% tariffs on China) and Stabenow-Bunning (which aims to impose countervailing duties on China) are but two proposals which aim to reverse the ever-growing bilateral deficit with China. A whole slew of other bilateral trade deals with Colombia, Peru, and Panama are being held up since the Democratically-controlled Congress wants to incorporate minimum labor standards into these deals.

In his inimitable way, Summers said that "changes in details of trade agreements are not likely to have significant impact on U.S. inequality" for such efforts are akin to "trying to inflate a tire by blowing it up through the place it leaked." He suggested that creating unemployment insurance and closing loopholes on transfer pricing used by MNCs to avoid taxes would work better in reducing US inequality. In particular, gains from enhanced tax collection through reduced transfer pricing "could potentially be devoted to ameliorating the dislocating effects of technological change and globalization," though he was not specific about what measures he had in mind. Summers further noted "that truculence over exchange rates ... can do substantial damage to financial stability, with very serious consequences for American interest rates, for the American stock market." He added that "we need to act with very great care given the magnitudes of the capital flows in China on which our economy has come to rely." In other words, do not bite the (Red) hand that feeds.

Addendum: Summers' prepared remarks are posted on the Finance Committee website.

.xxx Marks the Spot

The efforts of ICM Registry to create an .xxx top-level Internet domain (TLD) appear to be coming to fruition. After seven long years of protracted struggle, the finish line is in sight for ICM. Just last year, the domain was shot down yet again by an unlikely combination of conservative social groups and Internet pornographers using other TLDs. Anti-porn critics pointed out that these online "adult entertainment" providers could still use other domains such as .com and .net; hence, ICM's contention that the use of .xxx would enable better policing would not be valid and would merely serve to increase outlets for online porn. On the other hand, Internet pornographers using other existing TLDs feared that they would be forced to use the .xxx TLD, enabling overzealous censors to curtail free-speech rights more easily. While these groups are difficult to appease, the Internet Governance Project (IGP) believes that ICM's most recent proposal has a good chance of passing because the registry has gone a long way towards mitigating objections by governments and ICANN board members. Some stipulations include:

1. Prohibition of child pornography;
2. The registry is required to allow third-parties like the Internet Watch Foundation to monitor compliance with registry policies;
3. The registry must develop industry best practices designed to protect children online and empower parents and other users to avoid content they do not wish to see;
4. The registry must create and support an "International Forum for Online Responsibility";
5. The registry must reserve geographies and names with religious or cultural sensitivity;
6. The registry must pay $10 for each name registered to support child safety and support development of users' abilities to control their Web experience.

IGP is right on the money with its criticisms of this scheme. Critics of ICANN say that is a victory for the public to control the "unaccountable" ICANN. But, it transforms the ICANN into a netminder--a role it was never intended to fulfill. Worse yet, officials are empowering the ICANN to take on more roles--expanding it instead of shrinking it. That the US government is abusing its unique authority over ICANN to please a strong interest group (religious conservatives) also sets an unwelcome precedent. I agree with IGP: just let them use the domain without turning it into a political circus.

As American as Apple Pie & Toyota

In a survey of 3,322 business leaders, Fortune magazine found that Toyota is "America's Most Admired Car Manufacturer." Toyota has already passed Chrysler for third place in US car sales, and it will likely pass Ford this year. It may also overtake General Motors as the leader in worldwide sales in 2007. This is the second consecutive year in which Toyota has been named to the list, and it now falls behind only General Electric and Starbucks in third place overall. Toyota, of course, is famed for its manufacturing prowess as bestowed by the "Toyota Way." Understandably, not everyone is pleased with Toyota's mercurial ascent stateside. Senator Debbie Stabenow of Michigan--where the ex-Big Three automakers have a strong presence--calls for stronger challenges on alleged currency manipulation by Japan. Meanwhile, some stock-car racing fans are displeased by Toyota's efforts to enter the NASCAR racing series. An irate fan has formed an activist group named FART--Fans Against Racing Toyotas. FART claims that it is raising a stink over this "foreign" automaker invading American turf.

Unsurprisingly, Toyota is keen on being perceived as an American company to counter such criticisms. It has built plants in strategic locations to enlist the support of influential politicians, like that of former Senate majority leader Trent Lott by building a $1.3B plant in Mississippi. It has also started a PR campaign claiming that it has created 386,000 jobs stateside (never mind those lost by GM, Ford, and Chrysler due to competition). Stabenow again complains that 46% of Japanese cars sold in the US in 2006 came from Japan, but still, more than half were made locally. Toyota is politically aware:

Privately, Toyota officials acknowledge the potential pitfalls of growing rapidly in the U.S. during a period of job cuts and plant closings for GM, Ford Motor and Chrysler. Seiichi "Sean" Sudo, president of Toyota Engineering and Manufacturing in North America, warned in a recent presentation that the automaker could become "a scapegoat" as its Detroit competitors work through turnaround plans.

Baby Steps to Euroland

One of my students brought the existence of the Athens Process to my attention. It is basically an energy trading scheme for electricity, petroleum, and gas among states in "southeast Europe" including Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Macedonia, Greece, Italy, Romania, Serbia and Montenegro, Turkey and UNMIK-Kosovo. Romania, for instance, can draw on nuclear power. Many of the former Eastern-bloc countries in this agreement hope that it can provide the foundations for eventual EU membership. Just as the European Coal and Steel Commission (ECSC) was an energy-related agreement that led to the eventual formation of the EU , so do current participants aim for broader inclusion in European economic affairs.

Fast-forward over fifty years from the creation of the ECSC and it is striking how its objectives mirror those of the Athens Process or Energy Community: providing a unified market for [energy] products and lifting restrictions on imports and exports. These liberalizing steps towards market integration are timeless. In some ways, this is a "neoliberal" project involving deregulation, privatization, and marketization. As always, however, it is more a matter of implementation than conceptualization that counts. For that reason, some "neoliberal" projects fail whereas others succeed. If gradually implemented and carefully monitored, the rigors of market discipline and habituation may be successfully imbibed by ex-Soviet-bloc Athens Process participants. Hopefully, lessons learned from the Enron deregulation debacle in California will be heeded before they have a chance to repeat themselves here. Doubters may ask: If American institutions were unable to prevent such a fracas, then what chance do these fledgling democracies have of successfully dealing with complex forms of energy provision? Still, the idea behind this agreement has good historical precedent in the ECSC and it is definitely timely given currently high energy prices and uncertainties involving supplies from Russia--which is keen on using energy as a political weapon. We wish the Athens Process well.

Plot Thickens: China Calls US "Bluff"

Party mouthpiece the People's Daily reports that China has acceded to US requests for bilateral consultations at WTO headquarters in Geneva over alleged subsidies (case 358). It further claims that not only will Japan participate as a third-party observer, but also Mexico, Australia, and the EU. The article suggests that China is calling America's "bluff":

Chinese experts said that the US had not put forward evidence on China's industrial subsidies, and the United States and other developed countries granted much higher subsidies, such as export tax rebates, to their own industries.

However, it is doubtful that the other parties would have joined if this case had such limited merit as the article implies (we should be wary of self-serving bluster from any state publication, no?), or that the US Trade Representative would bring forth weighty accusations without substantive evidence. I still see Chinese movement on this front; they will give in some. After all, China is supposedly keen on removing incentives like tax breaks extended to foreign firms in the past that have benefited them at the expense of local firms. Perhaps China is trying to lower the high cost of prosperity.

Update (March 9): China has decided to end discounted loans of up to 10% to exporters in important sectors. I don't enjoy gloating but...see, I told you so ;-)

Don't Worry, Be Happy

Pardon me for harping on last week's global stock market sell-off so much, but its ramifications have wide-ranging effects on the international political economy. In a deeply interconnected global economy, it is said that when the US sneezes, the rest of the world catches a cold. Unless proven otherwise, I will stand by that assertion. Just today, American bourses mounted a recovery of sorts as the Dow Jones Industrial Average gained 1.3% and the technology-laden NASDAQ 1.9% in the wake of a becalmed Asia. Sentiment may largely be behind this move, as a streak of poor economic data continued with January factory orders in the US falling by 5.6%--the largest drop in six years. The National Association of Realtors also said that pending home sales in January fell by 4.1%, supposedly because of "near-term weather disruptions." Don't worry, be happy.

An important driver of the recent sell-off in America has been increasing caution over subprime mortgages. Simply stated, these are home loans granted to borrowers with spotty credit histories. But, just as the housing sector has entered a slump, many loans granted to subprime clients have gone bad as the lack of diligence on the part of lenders in assessing credit risk has come back to haunt them. Still, today's stock-market gains have served as a panacea for those who believe that the rot in the subprime lending sector will not spread elsewhere. The various ABX indexes, which are used as benchmarks in insuring against mortgage risk, have recovered a touch. The closely-watched BBB minus series (representing the lowest credit rating) for loans originating from the second half of 2006 has shown signs of life after a precipitous fall -

Former Goldman Sachs CEO and current Head Cheerleader Treasury Secretary Henry Paulson also says don't worry, be happy:

U.S. Treasury Secretary Henry Paulson moved to soothe concerns about rising defaults at subprime mortgage companies, saying the woes won't spill over to banks that make less risky loans.

"Credit issues are there, but they are contained,'' Paulson said to reporters in Tokyo during a four-day tour of Asia. The U.S. financial sector is healthy and most institutions won't feel "a big impact.''

It's fair to say that Mr. Paulson did not read today's Bloomberg's article on the subprime situation--especially with regard to his former employer:

Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. would be hardest-hit on Wall Street if the slump in subprime mortgages becomes a credit crisis like the one that followed Russia's debt default in 1998, Sanford C. Bernstein & Co. analyst Brad Hintz said.

In that "worst-case scenario,'' pretax profit at Goldman, the world's biggest securities firm, would tumble 24 percent, Hintz, who's based in New York, estimated in a note to investors today. Lehman Brothers, the Wall Street's fourth-largest firm, would suffer a 20 percent drop in pretax earnings, he said.

Suffice to say, I am skeptical that the subprime mortgage meltdown is an isolated incident. As some say in jest, the 2000 stock market crash was just a localized problem in certain parts of the technology sector. Be wary: the cheerleaders will try to calm the markets, but harsh reality has a way of intruding on don't worry, be happy. Do catch the classic 80s song of the same title by Bobby McFerrin with its apt lyrics about the deadbeats causing much mortgage heartburn:

The landlord say your rent is late
He may have to litigate
Don't worry, be happy

HSBC Writes Off $11B in Mortgages

HSBC is keen on returning to its Asian roots after being mercilessly beaten up by the US subprime mortgage meltdown. Yet, before it moves on, the Sunday Times reports that the firm will write off $11 billion in dud loans made to subprime clients in America:

HSBC’s US business has faced escalating losses from thousands of low-income families who have been unable to repay loans. But the scale of its write-off, largely linked to the US business, will surprise many investors; they will want to know whether the worst is now over and whether the write-off, technically called an “impairment charge”, covers anticipated losses for this year as well.

The provision is equivalent to a third of last year’s operating profits of $30 billion and half its pretax profits, expected to be just north of $22 billion. This will be the highest-ever profit made by a British-based bank. To put it in context, the write-off is equivalent to the overall profits of £5.7 billion announced by HBOS, Britain’s fourth-largest bank, last week.

HSBC has already replaced its senior North American management team, and Doug Flint, the group’s finance director, and Geoghegan have been charged with putting the operation back on track.

Aaron Krowne's Mortgage Implode-o-Meter tracks the unfolding subprime story.

Bad English + Chinese Stock Mania

The Wall Street Journal has noted the mangled English or "Chinglish" that officials are trying to stamp out in Beijing before the 2008 Olympic Games start. An entire weblog is dedicated to signs which are in mangled English. Perhaps unfortunately, the central government website is not immune to bouts of Chinglish, as one of its most recent features boldly proclaims--I kid you not--"Chinese nuts about the stock market." This defective headline is a minor blemish to an otherwise informative story which notes that the recent drop in the Shanghai market did little to dampen traders' animal spirits. After all, doesn't the Year of the Pig bring happiness and prosperity? With reference to A-share (citizen-held) accounts:

Tuesday's stock market slump, which saw shares drop by 8.84 percent, the biggest daily drop in 10 years, did nothing to buck the trend with a record 130,000 new accounts opened.

A further 220,000 new accounts were opened in the next two days, bringing the total number of personal accounts on the two bourses to 82.99 million.

Analysts estimate that around 520,000 new accounts will be opened this week, as much as for the whole month of May 2006.

Taiwan, China, and US Missile Sales

Here we go again: China is warning the US not to sell arms to Taiwan. This time, Taiwan wants to buy 218 Advanced Medium-Range Air-to-Air Missiles (AMRAAM; presumably to defend against a certain neighbor's jets) and 235 Maverick Air-to-Surface Missiles (presumably to defend against a certain neighbor's warships). The proposed deal amounts to $421M--not much by American standards. Chinese officials expressed their understandable dismay to US Deputy Secretary of State Nicholas Negroponte while visiting Beijing. He defended the deal by saying:

"I used the opportunity to reaffirm our 'one China' policy, supported by the three [Sino-US] communiques, and our adherence to the Taiwan Relations Act." He added that these arms were "strictly for defensive purposes and consistent with the 'one China' policy...we believe that the provision of defensive weapons to Taiwan is consistent with that 'one China' policy."

Negroponte was undoubtedly in a hard spot. His tortured explanation leaves obvious questions unanswered. Why is Taiwan so keen on defense--and from whom? Certainly it cannot be China, with which it is "one." Throw in China's recent buildup with Dick Cheney's bellicose comments about China's ambitions and it makes you wonder: China on one hand and the US and Taiwan on the other may be deeply intertwined economically, yet could a fit of pique unleash China's dogs of war? Let's just hope that Thomas Friedman is right with his "Dell Theory of Conflict Prevention," wherein two countries in Dell Computer's supply chain have never gone to conflict with one another.

Whither the Carry Trade?

The recent worldwide stock market crash has been blamed on, among other things, the unwinding of the carry trade. The Federal Reserve Bank of San Francisco (FRBSF) describes the carry trade thusly:

In the most common version of this strategy, an investor borrows a given amount in a low-interest-rate currency (the "funding" currency), converts the funds into a high-interest-rate currency (the "target" currency) and lends the resulting amount in the target currency at the higher interest rate.

Though there are debates on the exact mechanics of how carry trades are conducted and on the volume of existing carry trades, the underlying concept is simple. Look at this table depicting various official overnight interest rates for various world currencies. A very popular carry trade pairing, at least until very recently, has been to borrow in Japanese yen (yielding 0.50%) and to lend in New Zealand dollars or "kiwi" (yielding 7.25%). Assuming the kiwi/yen exchange rate (NZD/JPY) does not move too unfavorably against the kiwi, then you can pocket significant gains by entering these carry trades. If the exchange rate remains steady from the time when the carry trade is written to maturity, for instance, then you pick up 7.25%-0.50%=6.75% in interest rate gains. From about September 2006 to a week ago (see chart below), the carry trade seemed a good trade to pursue for the NZD/JPY exchange rate largely moved in favor of the kiwi. Not only did you gain from the interest rate differential, but you also gained from the kiwi becoming dearer against the yen. In the parlance of finance, there is a condition called "interest rate parity" where gains from interest (6.75% here) should be offset by equivalent exchange rate losses. Like many financial theories, however, this condition does not often hold in reality. The opposite happened as more traders boosted the kiwi and other high-yielding currencies at the expense of the yen by piling into the carry trade (click for a larger image):

Then the Shanghai crash roiled global financial markets. When global equity market sell-offs occur, what typically happens is that investors become more cautious; riskier assets are traded for safer ones. Since the carry trade was aided by a lot of leverage--or borrowing--it was ripe for a turnaround. The looooong (red) drop in the fourth indicator from the end is that on February 27. The yellow line at the bottom of the chart represents the relative strength index (RSI), where overbought/oversold levels are at 70% and 30%, respectively. As you can see, the NZD/JPY went from a nearly overbought to an oversold condition in the span of a mere four days! The unwinding of carry trades like this one has been rapid in the aftermath of Shanghai's drop as those who undertook these trades have been forced to cover their losses by buying back yen and Swiss francs--another favorite funding currency.

The political economy aspect comes in who benefits and loses from a yen that has been kept weak by all this carry trading. Unsurprisingly, US Treasury Secretary Henry Paulson, formerly chairman of the American investment bank Goldman Sachs, has been uncritical of the carry trade as Wall Street benefits from easy money conditions arising from the carry trade. The Japanese have adopted an attitude of "benign neglect"; though they recently raised their overnight rate from 0.25% to 0.50%, this rate remains comparatively low. Of course, their exports benefit from lower prices abroad as a result of the weak yen. On the other hand, the EU has been warning about the dangers of the carry trade for some time. In part, their cautious stance may be attributable to having the euro bear the brunt of the dollar's recent weakness, making European exports costlier than their Japanese counterparts. Nevertheless, Jean-Claude Tritchet and company appear to have been vindicated by recent events. The carry trade has little to do with "market forces" in operation and a lot with rampant speculation. Hopefully, it will fade away.

China Banking Ring of Fire for MNCs

China is committed to opening up its banking sector to international providers of financial services because of its WTO membership. Stipulations on foreign access to the local Chinese market--including the provision of renminbi accounts--came into effect late last year. However, the government has made foreign banks jump through many hoops to obtain licenses as the competitiveness of Chinese banks--particularly state-controlled banks (SCBs)--remains questionable. With their high levels of non-performing loans that the government has spent a reported $400 billion to bail out since 1998, forced purchases of low-yielding sterilization bills to keep inflation in check, and forced purchases of foreign assets so official reserves do not appear so mind-bogglingly huge, these banks bear the brunt of state interference.

Oxford Analytica has just catalogued some eye-popping hoops that a foreign bank must go through to operate in China:

• minimum registered capital of 1 billion renminbi ($129.2M) and allocation of 100 million renminbi ($12.9M) to each branch it opens to obtain national treatment;
• having total assets of over $10 billion, while a foreign bank that seeks to open a branch has to have total assets of over $20 billion;
• foreign branch banks can only take time deposits above 1 million renminbi ($129,200) from Chinese citizens if not locally incorporated;
• numerous provisions allow the China Banking Regulatory Commission (CBRC) to slow or even stop the expansion of foreign banks at any time.

By placing such onerous conditions on entry and operation, China is attempting to shield its SCBs from the onslaught of foreign competition. For instance, such high minimum requirements for renminbi time deposits may make non-incorporated foreign bank operations in China more akin to private banking for an elite clientèle than to retail banking. I enumerated the US cases against China that are underway or are almost underway at the WTO. I suspect that it might not be long before foreign banks start complaining about these onerous conditions for doing business in China. Could these conditions be deemed non-tariff barriers to services by the WTO? Watch this space.

US Vs. China Round III at WTO?

The cacophony of trade saber-rattling sounds is still growing between the US and China. The US has already entered the judicial stage in a case regarding access to the Chinese auto parts market for American manufactures (DS 340). The US is also currently engaged in bilateral negotiations with China over alleged Chinese subsidies which too may lead to adjudication if a deal is not soon reached between these two parties (DS 358).

While these cases are still pending, the US has made overtures suggesting that it may take its longstanding grievances over Chinese software piracy to the WTO as well. The US claims that talks with China have produced little action on intellectual property theft, while apparatchiks argue that the task of policing China for IP violations is a huge task that needs time to bear fruit. Nevertheless, the US says that despite five months having passed since these countries began talks over the issue, China has done little. A large contingent has been sent by the US to various Chinese provinces to assess the extent of piracy there. With election season 2008 heating up, China is a natural target with its $232.5B bilateral trade surplus with the US. Whether it's auto parts, capital equipment, or software, grievances by American industry are more likely to be heard now than in the recent past. The International Intellectual Property Alliance and the Business Software Alliance are definitely seeing Red(s). Unless China takes more visible commitments to enforcing IP laws, don't bet against another WTO filing before the end of H1 2007.