China Protects Sudan from Sanctions

To America’s chagrin, China has taken a realpolitik stance towards the task of securing resources needed by its fast-growing economy by cultivating ties with states that America has iffy relations with. In line with its professed policy of non-intervention in other states’ domestic affairs, China makes for a desirable partner for these African, Asian, and Latin American states by making no demands for political transparency, economic reform, or human rights; providing markets for their raw materials; and supplying investment, trade, training, and weapons. Last but not least, China is also there to water down UN sanctions on these countries.

Today's case in point is Sudan. After we last saw this topic, China became more willing to work on the matter of prodding Sudan after Mia Farrow tagged the upcoming 2008 Olympics in Beijing the "Genocide Olympics." Apparently, the largely world opinion-insensitive China has a weak spot in the Games being sullied by such accusations:

For the past two years, China has protected the Sudanese government as the United States and Britain have pushed for United Nations Security Council sanctions against Sudan for the violence in Darfur.

But in the past week, strange things have happened. A senior Chinese official, Zhai Jun, traveled to Sudan to push the Sudanese government to accept a United Nations peacekeeping force. Mr. Zhai even went all the way to Darfur and toured three refugee camps, a rare event for a high-ranking official from China, which has extensive business and oil ties to Sudan and generally avoids telling other countries how to conduct their internal affairs.

So what gives? Credit goes to Hollywood -- Mia Farrow and Steven Spielberg in particular. Just when it seemed safe to buy a plane ticket to Beijing for the 2008 Olympic Games, nongovernmental organizations and other groups appear to have scored a surprising success in an effort to link the Olympics, which the Chinese government holds very dear, to the killings in Darfur, which, until recently, Beijing had not seemed too concerned about.

Ms. Farrow, a good-will ambassador for the United Nations Children's Fund, has played a crucial role, starting a campaign last month to label the Games in Beijing the ''Genocide Olympics'' and calling on corporate sponsors and even Mr. Spielberg, who is an artistic adviser to China for the Games, to publicly exhort China to do something about Darfur. In a March 28 op-ed article in The Wall Street Journal, she warned Mr. Spielberg that he could ''go down in history as the Leni Riefenstahl of the Beijing Games,'' a reference to a German filmmaker who made Nazi propaganda films.

Four days later, Mr. Spielberg sent a letter to President Hu Jintao of China, condemning the killings in Darfur and asking the Chinese government to use its influence in the region ''to bring an end to the human suffering there,'' according to Mr. Spielberg's spokesman, Marvin Levy.

China soon dispatched Mr. Zhai to Darfur, a turnaround that served as a classic study of how a pressure campaign, aimed to strike Beijing in a vulnerable spot at a vulnerable time, could accomplish what years of diplomacy could not.

However, China is now signaling that further sanctions on Darfur like those recently applied by the United States may be rather unwelcome. If these measures don't work, then the UN can always call on its ultimate resource for prodding China on the Darfur issue--UNICEF rep Mia Farrow. But first, here is the People's Daily:

China said yesterday that it opposed expanded sanctions against Sudan as the United States unveiled tough new restrictions against the African country and pushed for another UN resolution on Darfur.

"Imposing new sanctions only makes the problem more difficult to resolve," China's recently-appointed special envoy to Africa Liu Guijin told a news conference after a fact-finding trip to Sudan.

Expanding sanctions is the last thing that should be done, especially at a time when signs of progress can be seen in Darfur, including talks between Khartoum, the African Union (AU) and the UN, Liu said.

"In these circumstances, why can't the international community give more time for a peaceful settlement of the problem?" he asked.

China is encouraging Sudan to be "more flexible" about implementing a peace plan, and also wants fragmented opposition forces in Darfur to join talks and reach a unified negotiating position, he added...

Political negotiations should go hand in hand with the implementation of former UN chief Kofi Annan's three-phase peace plan, Liu said.

Liu also urged some countries not to politicize Sino-Sudanese energy collaboration, saying it was normal business activity and has, indeed, helped social and economic development in the poverty-stricken country.

Liu said poverty is the real cause of the problems in Darfur; and development is the solution.

Over the past years, China has donated more than $10 million to the region, some in the form of humanitarian aid such as rice, and the rest in development aid such as building schools, water projects and power generators.

In brief remarks at the White House yesterday, US President George W. Bush followed through on a threat made six weeks ago to pursue tougher action against Sudan.

Bush directed Secretary of State Condoleezza Rice to consult with Britain and other allies on pursuing new UN Security Council sanctions against Sudan.

The aim of a new resolution, he said, would be to impose new sanctions against the Sudanese government and officials found to be violating human rights or obstructing the peace process, and to enforce an expanded embargo on arm sales to the government of Sudan.

"It will prohibit the Sudanese government from conducting any offensive military flights over Darfur. It will strengthen our ability to monitor and report any violations," he added.

As part of the tightening of US sanctions, Bush said the US Treasury Department will bar 31 companies owned or controlled by Sudan from doing business in the US financial system, including a company he said that has been transporting weapons to the Sudanese government and militia forces in Darfur.

"Al Qaeda Strikes Back"

In the current issue of Foreign Affairs, the Brookings Institution's Bruce Reidel warns of a resurgent Al Qaeda that may be planning yet another attack on the United States after focusing its attention on Iraq and elsewhere in recent years.

Summary: By rushing into Iraq instead of finishing off the hunt for Osama bin Laden, Washington has unwittingly helped its enemies: al Qaeda has more bases, more partners, and more followers today than it did on the eve of 9/11. Now the group is working to set up networks in the Middle East and Africa -- and may even try to lure the United States into a war with Iran. Washington must focus on attacking al Qaeda's leaders and ideas and altering the local conditions in which they thrive.

A FIERCER FOE

Al Qaeda is a more dangerous enemy today than it has ever been before. It has suffered some setbacks since September 11, 2001: losing its state within a state in Afghanistan, having several of its top operatives killed, failing in its attempts to overthrow the governments of Egypt, Jordan, and Saudi Arabia. But thanks largely to Washington's eagerness to go into Iraq rather than concentrate on hunting down al Qaeda's leaders, the organization now has a solid base of operations in the badlands of Pakistan and an effective franchise in western Iraq. Its reach has spread throughout the Muslim world, where it has developed a large cadre of operatives, and in Europe, where it can claim the support of some disenfranchised Muslim locals and members of the Arab and Asian diasporas. Osama bin Laden has mounted a successful propaganda campaign to make himself and his movement the primary symbols of Islamic resistance worldwide. His ideas now attract more followers than ever.

Bin Laden's goals remain the same, as does his basic strategy. He seeks to, as he puts it, "provoke and bait" the United States into "bleeding wars" throughout the Islamic world; he wants to bankrupt the country much as he helped bankrupt, he claims, the Soviet Union in Afghanistan in the 1980s. The demoralized "far enemy" would then go home, allowing al Qaeda to focus on destroying its "near enemies," Israel and the "corrupt" regimes of Egypt, Jordan, Pakistan, and Saudi Arabia. The U.S. occupation of Iraq helped move his plan along, and bin Laden has worked hard to turn it into a trap for Washington. Now he may be scheming to extend his strategy by exploiting or even triggering a war between the United States and Iran.

Decisively defeating al Qaeda will be more difficult now than it would have been a few years ago. But it can still be done, if Washington and its partners implement a comprehensive strategy over several years, one focused on both attacking al Qaeda's leaders and ideas and altering the local conditions that allow them to thrive. Otherwise, it will only be a matter of time before al Qaeda strikes the U.S. homeland again.

ONE LOST, TWO GAINED

The al Qaeda leadership did not anticipate the rapid collapse of the Taliban regime in Afghanistan in the fall of 2001. Up to that point, Afghanistan had been a fertile breeding ground for the organization. According to some estimates, al Qaeda had trained up to 60,000 jihadists there. Al Qaeda leaders welcomed the invasion by U.S. and coalition forces on the assumption that they would quickly get mired in conflict, as the Soviets had two decades earlier. Al Qaeda and the Taliban thought they had decapitated the Afghan opposition and severely hampered its ability to fight by assassinating the Northern Alliance commander Ahmed Shah Masoud two days before 9/11.

But in December 2001, Mullah Muhammad Omar, the Taliban leader and self-proclaimed "commander of the faithful," to whom bin Laden had sworn allegiance, lost Kandahar, the capital of the Taliban's fiefdom. The Taliban had already lost considerable support among Afghans by the time of the invasion because of their draconian implementation of fundamentalist Islamic law and their harsh crackdown on poppy cultivation, the mainstay of the Afghan economy. But the key to their defeat was the defection of Pakistan. According to Ahmed Rashid, the top expert on the Taliban, up to 60,000 Pakistani volunteers had served in the Taliban militia before 9/11, alongside dozens of active-duty Pakistani army advisers and even small Pakistani army commando units. When these experts left, the Taliban lost their conventional military capability and political patronage, and al Qaeda lost a safe haven for its operational planning, training, and propaganda efforts.

The senior members of al Qaeda and the Taliban recovered quickly. In early 2002, they hid in the badlands along the Pakistani-Afghan border. Fighters went underground, and the trail for the top three men (bin Laden, Mullah Omar, and Ayman al-Zawahiri, bin Laden's top deputy) went cold almost immediately. For the next two years, al Qaeda focused on surviving -- and, with the Taliban, on building a new base of operations around Quetta, in the Baluchistan region of Pakistan.

Al Qaeda also moved swiftly to develop a capability in Iraq, where it had little or no presence before 9/11. (The 9/11 Commission found no credible evidence of any operational connection between al Qaeda and Iraq before the attacks, and the infamous report connecting the 9/11 mastermind Mohamed Atta with Iraqi intelligence officers in Prague has been discredited.) On February 11, 2003, bin Laden sent a letter to the Iraqi people, broadcast via the satellite network al Jazeera, warning them to prepare for the "Crusaders' war to occupy one of Islam's former capitals, loot Muslim riches, and install a stooge regime to follow its masters in Washington and Tel Aviv to pave the way for the establishment of Greater Israel." He advised Iraqis to prepare for a long struggle against invading forces and engage in "urban and street warfare" and emphasized "the importance of martyrdom operations which have inflicted unprecedented harm on America and Israel." He even encouraged the jihadists in Iraq to work with "the socialist infidels" -- the Baathists -- in a "convergence of interests."

Thousands of Arab volunteers, many of them inspired by bin Laden's words, went to Iraq in the run-up to the U.S. invasion. Some joined the fledgling network created by the longtime bin Laden associate Abu Musab al-Zarqawi, who had fled Afghanistan and come to Iraq sometime in 2002 to begin preparations against the invasion. (Zarqawi had been a partner in al Qaeda's millennium plot to blow up the Radisson Hotel and other targets in Amman, Jordan, in December 2000. Later, in Herat, Afghanistan, he ran operations complementary to al Qaeda's.) Zarqawi's network killed an officer of the U.S. Agency for International Development, Laurence Foley, in Amman on October 28, 2002 -- the first anti-American operation connected to the invasion...

Viewpoints on BMW Buying Volvo

The rumor mill is working overtime in this time of merger mania that BMW is in talks to purchase Volvo from Ford. If you will remember, Ford is in dire financial straits and has already sold Aston Martin to David Richards of Prodrive. Will Volvo be next on the auction block? BMW has denied that it is interested. We'll see if this is so. BMW did not have so much luck with its previous acquisition of MG Rover, so this new rumored deal leaves some scratching their heads in wonderment. From MarketWatch:

"I don't really think it's a good fit," said David Healy, an auto analyst at Burnham Securities commenting Tuesday on reports in the Financial Times and online edition of Sweden's Goteborgs Posten over the weekend that the German car maker is taking a hard look at Volvo's balance sheet.

"There would be an awful lot of overlap in the models, especially at the high end," he added.

Healy also doubted BMW (DE:519000: news, chart, profile) and Volvo would be able to mesh what he called their very tight organizational structures, raising the specter of a corporate culture clash akin to the one seen when Daimler-Benz's took over Chrysler.

Analysts also question whether BMW would take the plunge given its ill-fated acquisition of Rover back in 1994. BMW eventually quit its money-losing foray into British car-making by splitting up the company, with the luxury brand Land Rover ending up alongside Volvo and Jaguar in Ford's Premium Auto Group.

Meanwhile, BMW sold the trademark Rover name to a company in China, keeping the Mini brand for itself. BMW has since steered clear of the mergers and acquisition frenzy that marked the auto industry over the past decade, mindful that most deals failed to meet investors' expectations.

If Ford were to sell Volvo, Healy said Renault/Nissan would likely make a better match than BMW. The French-Japanese car maker has long been seeking to build up its presence in the top end of the market, and Volvo would complement its current stable without squeezing out existing models.

Others mentioned as possible Volvo buyers include France's Peugeot, Tata Motors of India and even Magna International/Russian Machines - a Canadian-Russian alliance forged earlier this month. See full story.

And then, there's always the possibility of a private equity group lurking in the wings like Cerberus Capital Management, which two weeks ago secured an 80% stake in Chrysler for a cool $7.4 billion. See full story.

Businessweek raises similar issues over the possible merger:

Executives at both Ford Motor (F) and BMW said on May 29 that there have been no formal discussions between the two companies about the German carmaker acquiring the ailing U.S. automaker's Volvo car business. The possible sale was initially reported by Swedish daily newspaper Göteborgs-Posten and then Financial Times of London.

Executives talked to BusinessWeek on and off the record about the reports, insisting that there have been no deal discussions at the top of the company. But a BMW executive speaking not for attribution said it was "certainly possible that BMW had been studying an acquisition of Volvo as a matter of normal business planning when we know a business is potentially for sale."

Ford spokesman Tom Hoyt said: "Ford is not in discussions with BMW or any other company regarding Volvo. We have seen this kind of speculation for the past year, as Ford has been assessing our operations and portfolio—as any good business does and we will continue to do."

Ford is undergoing a massive restructuring after losing $12.6 billion last year. Its Premier Auto Group (PAG), which is made up of Volvo, Jaguar, and Land Rover, lost $327 million last year. Last year's results also included Aston Martin, but Ford sold 90% of that brand to an investment group, Prodrive, earlier this year (see BusinessWeek.com, 3/13/07, "After Aston, Could Jaguar Be Next?"). Ford does not break out profit figures for its individual brands, but Ford executives say privately that Volvo closed out last year around break-even. Jaguar lost money. Land Rover posted an operating profit.

Executives at Ford and BMW described any communication between the two companies as "exploratory." Of the three PAG brands, Volvo is the most valuable to Ford, according to industry consensus. Merrill Lynch (MER) estimates that all three brands could bring Ford more than $9 billion. Between $7 billion and $8 billion of that would come from Volvo.

The reasons for potentially low prices for Jaguar and Land Rover are their expensive labor contracts as well as a strong currency in Britain, where all the vehicles are all made. That makes them undesirable from a financial standpoint to Ford as well as to potential suitors...

While it is somewhat surprising that Ford would be interested in selling Volvo, it is far more surprising that BMW would entertain buying it. BMW, one of the steadiest and most consistently profitable automakers in the world, nearly came undone in the 1990s over its purchase of the British Rover Group. BMW acquired Rover, Land Rover, and Mini, and lost, by some estimates, in excess of $10 billion before jettisoning Rover to an investment group for no money and Land Rover to Ford. It retained Mini, which has been a huge sales hit for BMW worldwide as the Munich-based automaker remade the Mini Cooper runabout and brand with German know-how (see BusinessWeek.com, 5/29/07, "Super Duper Mini Cooper").

BMW Chairman Norbert Reithofer, who took over from Helmut Panke last year, is facing sales-growth issues. There are differences of opinion as to how the iconic German brand will increase sales and profits in the future. Though the company has added 1 Series small cars to its lineup over the past three years and is planning to launch a multiactivity vehicle, there is worry in some quarters that the BMW brand is getting filled out, and that jamming more vehicles into the lineup could water down its valuable brand equity in the premium price categories.

Acquiring Volvo would give BMW a relatively healthy global brand that needs financial discipline, manufacturing efficiencies, and brand marketing know-how in order to make it more profitable. Volvo cars and SUVs are engineered to be front-wheel drive, while all BMW vehicles are rear-wheel drive. While it is unlikely that BMW would ever build a Volvo and BMW off the same engineering platform, there could be enormous savings from co-developing engines, electrical systems, telematics, and the like. BMW, too, would not hesitate to build Volvos outside of Scandinavia, a move Ford has not yet done to save on manufacturing costs.

Huh? The Cold War is Over?

The increasing hostility of Vladimir Putin's Russia to just about everyone else has been widely noted. [WARNING: A lump of coal polonium might end up in your Christmas stocking for trumpeting this observation too loudly.] In any event, Putin is boasting about a new intercontinental ballistic missile (ICBM) that can overcome the USA's proposed missile defense system, purportedly safeguarding against an Iranian attack. Put it down to another cockamamie military-industrial complex scheme to get more defense spending, but Russia is taking it seriously enough--as if the Cold War never ended. With Russia's massive export receipts from elevated oil prices, it can certainly indulge in such shenanigans. To what end, however, we can all ponder. From the Associated Press:

Russia tested new missiles Tuesday that a Kremlin official boasted could penetrate any defense system, and President Vladimir Putin warned that U.S. plans for an anti-missile shield in Europe would turn the region into a "powder keg."

First Deputy Prime Minister Sergei Ivanov said Russia tested an intercontinental ballistic missile capable of carrying multiple independent warheads, and it also successfully conducted a "preliminary" test of a tactical cruise missile that he said could fly farther than existing, similar weapons.

"As of today, Russia has new tactical and strategic complexes that are capable of overcoming any existing or future missile defense systems," Ivanov said, according to the ITAR-Tass news agency. "So in terms of defense and security, Russians can look calmly to the country's future."

Ivanov is a former defense minister seen as a potential Kremlin favorite to succeed Putin next year. Both he and Putin have said repeatedly that Russia would continue to improve its nuclear arsenals and respond to U.S. plans to deploy a missile defense system in Poland and the Czech Republic _ NATO nations that were in Moscow's front yard during the Cold War as Warsaw Pact members.

Russia has bristled at the plans, dismissing U.S. assertions that the system would be aimed at blocking possible attacks by Iran and saying it would destroy the strategic balance of forces in Europe.

"We consider it harmful and dangerous to turn Europe into a powder keg and to fill it with new kinds of weapons," Putin said at a news conference with visiting Portuguese Prime Minister Jose Socrates.

Russian arms control expert Alexander Pikayev said the new ICBMs appeared to be part of Russia's promised response to the missile defense plans and, more broadly, an effort to "strengthen the strategic nuclear triad _ land-based, sea-based and air-based delivery systems for nuclear weapons _ which suffered significant downsizing" amid financial troubles after the 1991 Soviet collapse.

China's Latest Market Cooling Effort

With a price-to-earnings ratio of 48, valuations of Chinese stocks are becoming more unrealistic than reality show TV. With that in mind, the government has tried various measures to curb speculation such as raising interest rates and reserve requirements, to no avail so far. Its latest effort involves raising taxes on stock transactions threefold:

China's stocks dropped from a record after the government tripled the tax on securities transactions, halting a rally that's made the shares Asia's most expensive.

The CSI 300 Index fell 110.61, or 2.7 percent, to 4057.68 as of 10:30 a.m. in Shanghai, after initially tumbling as much as 6.3 percent. The measure has almost doubled this year, the best performance of 90 global benchmarks tracked by Bloomberg, as an influx of new investors stoked demand. China's brokerage accounts this week topped 100 million for the first time, according to the China Securities Depository & Clearing Corp.

Stamp duty on share trades has been increased to 0.3 percent, effective today, ``to promote the healthy development of the securities market,'' the finance ministry said on its Web site. The central bank this month raised interest rates for the second time this year, encouraging people to save rather than invest in stocks, and brokerages were ordered to make investors sign a declaration acknowledging risks when opening accounts.

``The government is doing something real to curb speculation and prevent the market from overheating,'' said Li Xuewen, who manages about $284 million at Invesco Great Wall Fund Management Co. in Shenzhen. ``If the market doesn't cool down, more measures to stem the gains will probably follow.''

Based on yesterday's closing price of 64 yuan, investors now have to pay 192 yuan ($25.1) in tax when buying or selling 1,000 share of Citic Securities Co., up from 64 yuan before the increase. Citic Securities, the nation's biggest publicly traded brokerage, has the biggest representation in the CSI 300.

A record 455,111 accounts to trade mainland shares and mutual funds were opened on May 28, China Securities Depository & Clearing said yesterday. More than 20 million accounts have been opened at brokerages so far this year, four times the amount in all of 2006, according to the clearing house.

So far today, this effort actually seems to be working as Chinese stocks are going down like a Led Zeppelin [you need coolin', baby I'm not foolin'!]:

Chinese stocks plummet more than six percent on Wednesday after an announcement of a hike in stamp tax on stock trading.

The benchmark Shanghai Composite Index has lost 6.08 percent to 4,071.27 points at the end of morning trading after opening 5.78 percent lower.

The Ministry of Finance announced Tuesday night the stamp tax on stock trading will rise to 0.3 percent from 0.1 percent starting from Wednesday, in the authorities' latest move to cool down the country's runaway equity market.

Bob Zoellick: Next Neocon WB Chief?

When I last talked about the matter of possible neoconservative-leaning World Bank heads, I ended with this: Who's next from these guys? Ahmed Chalabi for World Bank chief? My wish list for the next World Bank chief was simple: First, s/he should not be a neoconservative. Second, s/he should have previous experience with development. Your faithful correspondent thought he was being crafty with suggesting that the next nominee would be another neoconservative, but it turns out that the next nominee from Bush isn't far away from the neocon creed [sigh]. I greatly regret having raised the possibility [a thousand lashes onto me]. Nor does it appear that the nominee has a record of working on development matters.

Bob Zoellick, former US Trade Representative and Deputy Secretary of State, has been suggested as the next nominee for the post of World Bank president. By convention, the US gets to select the nominee for World Bank head, whereas the EU gets the same privilege for the IMF head. So, the US gets to try its luck again after the Wolfowitz debacle. Unfortunately, it seems Zoellick isn't that much different than Wolfowitz in his political leanings. Zoellick was a signatory in the New American Century letter to then-President Clinton on "implementing a strategy for removing Saddam's regime from power" alongside neoconservative luminaries such as Donald Rumsfeld, Paul Wolfowitz [we're not surprised to see you here], Richard Perle, William Kristol, and John Bolton [yipes!] On the neoconservative front, then, Zoellick's credentials are for real. Will he start blabbering about corruption all the time while shoveling wads of cash Iraq's way like Wolfowitz did? Again, it's an open question.

Nor does Zoellick have much development experience as far as I can tell. Really, the Bushites could have made a far less questionable choice than Zoellick, who comes with question marks on his neoconservative leanings and lack of development experience. If this bit of news is true, then the matter heads to the World Bank for his approval. There's a possibility that the other member countries of the Bank will raise their hackles over Zoellick, though I doubt it. They got their scalp with Wolfowitz. Rest assured that if Zoellick turns into a Wolfowitz-lite, then he too will be turfed in short order. Again, though, this choice does not really erase concerns about another rehash of the sad Wolfowitz episode. Bad choice, Bushy.

UPDATE: Here is Zoellick in his pre-W sidekick years in Foreign Affairs on "Campaign 2000: A Republican Foreign Policy"...for the World Bank? We'll soon see whether the two are synonymous. For the Bank and world development's sake, let's hope not:

A primary task for the next president of the United States is to build public support for a strategy that will shape the world so as to protect and promote American interests and values for the next 50 years [again...at the World Bank?].

Military-Industrial Complex & China

The 2007 edition of the United States Department of Defense's Military Power of the People's Republic of China recently came out, and it once again raised concerns about China's growing military capabilities:

China’s near-term focus on preparing for military contingencies in the Taiwan Strait, including the possibility of U.S. intervention, appears to be an important driver of its modernization plans. However, analysis of China’s military acquisitions and strategic thinking suggests Beijing is also generating capabilities for other regional contingencies, such as conflict over resources or territory.

The pace and scope of China’s military transformation has increased in recent years, fueled by continued high rates of investment in its domestic defense and science and technology industries, acquisition of advanced foreign weapons, and far reaching reforms of the armed forces. The expanding military capabilities of China’s armed forces are a major factor in changing East Asian military balances; improvements in China’s strategic capabilities have ramifications far beyond the Asia Pacific region.

China’s strategic forces modernization is enhancing strategic strike capabilities, as evidenced by the DF-31 intercontinental range ballistic missile, which achieved initial threat availability in 2006. China’s counterspace program - punctuated by the January 2007 successful test of a direct-ascent, anti-satellite weapon - poses dangers to human space flight and puts at risk the assets of all space faring nations. China’s continued pursuit of area denial and anti-access strategies is expanding from the traditional land, air, and sea dimensions of the modern battlefield to include space and cyberspace.

Last year, however, Fred Kaplan of Slate noted that the US military-industrial complex made China into its latest bogeyman after years of placing the Soviet Union in the same category. Summarizing Kaplan, the US military-industrial complex needs to frame a threat that justifies spending on even more weapons even if America already has by far the world's largest stockpile of these weapons:

Every day and night, hundreds of Air Force generals and Navy admirals must thank their lucky stars for China. Without the specter of a rising Chinese military, there would be no rationale for such a large fleet of American nuclear submarines and aircraft carriers, or for a new generation of stealth combat fighters—no rationale for about a quarter of the Pentagon's budget. In Secretary of Defense Donald Rumsfeld's Quadrennial Defense Review, released this past February, the looming Chinese threat is the explicit justification for all the big-ticket weapons systems that have nothing to do with fighting terrorists or insurgents.

But is the threat real? In each of the last four years, Congress has required the Defense Department to issue a report titled Military Power of the People's Republic of China. The latest edition, issued this week, starts out ominously, but as you read through its 50 double-columned pages, you gradually realize that claims of emerging Chinese superpower are way overblown...

Take the budget. China officially says it's spending $35 billion on its military, a 14.7 percent increase over last year's budget, amounting to 1.5 percent of its gross national product. (The U.S. military budget is nearly 15 times as large and amounts to 4 percent of our GNP; Japan's and South Korea's defense budgets are larger than China's, too.) The report says that China's growth "sustains a trend that has persisted since the 1990s of defense budget growth rates exceeding economic growth"—but read on—"although the growth of defense expenditures has lagged behind the growth in overall government expenditures over the same period of time." (Emphasis mine.)

The Chinese are not exactly happy with being made into a big threat to global security. The Foreign Ministry had this to offer in response to the report:

Q: Recently the United States Department of Defense has issued 2007 annual report on Chinese military power. Do you have any comment on that?

A: The report of the US Department of Defense continues to spread myth of the "China Threat" by exaggerating China's military strength and expenses out of ulterior motives. It is a grave violation of the norms governing international relations and brutal interference in China's internal affairs, to which China expresses strong dissatisfaction and resolute opposition.

As a peace-loving country, China steadfastly follows a road of peaceful development, adopting a national defense policy that is defensive in nature. Universally recognized by the international community, China is a major force for peace in the Asia-Pacific region and the world at large. Each sovereign state has the right and obligation to develop necessary national defense strength to safeguard its national security and territorial integrity. It is totally erroneous and invalid for the US Report to play up the so-called "China Threat".

Taiwan is an inalienable part of the Chinese territory. China resolutely opposes interference in China's internal affairs by any country with whatever manifestation. The Chinese Government will continue to uphold the basic principles of "peaceful reunification" and "one country, two systems"and exert the utmost sincerity and efforts to strive for a peaceful reunification. However, we will never tolerate the "Taiwan Independence" or any attempt by anyone to separate Taiwan from China by whatever means. We urge the United States to strictly abide by its commitment to the One China policy, the three Sino-US Joint Communiqués and opposing "Taiwan Independence" by stopping its arms sales to and military ties with Taiwan, avoiding sending wrong signals to the splittist forces for "Taiwan Independence".

The Competition State circa 2007

Just out is Swiss business school IMD's World Competitiveness Yearbook (WCY) 2007. It brings to mind exactly what Paul Krugman wrote about a few years back in "Competitiveness: A Dangerous Obsession." Here's a Krugman excerpt, though you can read the whole thing online:

After all, the rhetoric of competitiveness -- the view that, in the words of President Clinton, each nation is "like a big corporation competing in the global marketplace" -- has become pervasive among opinion leaders throughout the world. People who believe themselves to be sophisticated about the subject take it for granted that the economic problem facing any modern nation is essentially one of competing on world markets -- that the United States and Japan are competitors in the same sense that Coca-Cola competes with Pepsi -- and are unaware that anyone might seriously question that proposition. Every few months a new best-seller warns the American public of the dire consequences of losing the "race" for the 21st century.ffi A whole industry of councils on competitiveness, "geo-economists" and managed trade theorists has sprung up in Washington. Many of these people, having diagnosed America's economic problems in much the same terms as Delors did Europe's, are now in the highest reaches of the Clinton administration formulating economic and trade policy for the United States. So [former European Commission Chairman] Delors was using a language that was not only convenient but comfortable for him and a wide audience on both sides of the Atlantic.

Unfortunately, his diagnosis was deeply misleading as a guide to what ails Europe, and similar diagnoses in the United States are equally misleading. The idea that a country's economic fortunes are largely determined by its success on world markets is a hypothesis, not a necessary truth; and as a practical, empirical matter, that hypothesis is flatly wrong. That is, it is simply not the case that the world's leading nations are to any important degree in economic competition with each other, or that any of their major economic problems can be attributed to failures to compete on world markets. The growing obsession in most advanced nations with international competitiveness should be seen, not as a well-founded concern, but as a view held in the face of overwhelming contrary evidence. And yet it is clearly a view that people very much want to hold -- a desire to believe that is reflected in a remarkable tendency of those who preach the doctrine of competitiveness to support their case with careless, flawed arithmetic.

This brings me to the results of the 2007 derby. It's a win for the US, narrowly pipping Singapore to the finish line with Hong Kong coming in third. Singapore and Hong Kong swapped places this year. Here's an explanation of WCY methodology:

And here are a blurb and the results for WCY 2007:

World Competitiveness has never been as dynamic as this year! None of the 55 economies covered in the WCY is in recession (average growth is 5%).

The US is still number one but other nations are catching up quickly - Switzerland, The Netherlands, Sweden, China and Germany are on the way up. Looking at the past 10 years’ evolution of competitiveness performance, new competitive powers clearly emerge and will shake up future rankings. Who are they?

The IMD World Competitiveness Yearbook 2007 (WCY) analyses and ranks the ability of nations to create and maintain an environment that sustains the competitiveness of enterprises. Considered the worldwide reference point to world competitiveness, it has been published without interruption since 1989 and ranks 55 national economies using 323 crieria. The WCY is an indispensable tool for business leaders, government and academia.

(Click on image to view rankings. Note that numbers to the left of the countries are last year's rankings. The entire scoreboard file is available here.)

London Cab: Made in China

Pretty much everything is "Made in China" nowadays, so I suppose this was inevitable: The London Cab has moved production to the Middle Kingdom. That ubiquitous symbol of Britishness has been sold to Geely, a Chinese automaker keen on spearheading the Chinese automakers' charge into overseas markets. But first these cabs will be sold in domestic Chinese markets as taxis and--get this--luxury cars. ("OK kids, it's down to either the urbane E-Class, stylish 5-Series, or hulking London Cab.") It lends a whole new meaning to "giving the family a lift." From Reuters:

London's iconic cabs will soon be picking up fares on the streets of China, costing half as much as they do back home.

Geely Automobile Holdings, the Chinese company which bought British manufacturer Manganese Bronze in 2006, plans to sell the firm's taxicabs in China in 2008 and to begin exporting the vehicle to Asia and beyond soon afterwards.

Ambitious Geely, which makes no secret of its eventual plans to expand globally, may start its export drive with Hong Kong -- bringing a common London sight to the former British colony more than a decade after it reverted to Chinese rule.

"We estimate the production cost can be lowered at least by half," Geely executive director Lawrence Ang told reporters on Monday after showing the firms' newest London cab to pre-selected Hong Kong taxi drivers.

Prices had not been finalized but Ang said British-made models sold at nearly 40,000 pounds ($79,000). [That's a lot of money for a taxicab if you ask me.] Geely and Manganese have set up a joint venture in Shanghai that can crank out 10,000 cabs a year in about a dozen colors apart from the familiar black, tailored to specific markets and customer demand, and another 30,000 intended for private limousine or sedan use.

It will eventually serve as a global base for production and export to Southeast Asia and, eventually, other regions.

Manganese's U.K. production arm, London Taxi International (LTI), sold about 2,850 taxis in the United Kingdom last year and exported a very small number of the cabs to overseas markets, such as South Africa, France and Germany.

Wolfowitz on BBC Radio Four

I sincerely hope that this is the last Wolfowitz post I will ever have to make. Somehow, though, I think this guy won't be taking it easy with a well-deserved retirement sipping pina coladas in the Bahamas. BBC Radio Four interviewed Wolfowitz today. This clip is in RealPlayer format. Wolfowitz's bottom line: it's the media's fault, and the World Bank's as well. He takes umbrage to the interviewer's line of questioning as one would expect. After the interview, Kiwi economist Robert Wade offers his afterthoughts on the matter. Perhaps surprisingly, Wade is somewhat sympathetic to Wolfowitz, particularly his perceived "passion" on the matter of African development. However, Wade views the emphasis on corruption that Wolfowitz took to be excessive as developing countries are almost "by definition" afflicted by corruption.

The Reinvention of Singapore

Singapore fears that it may be losing its attractiveness as a destination for highly-skilled global knowledge workers by remaining a dowdy place where sticking chewing gum is a punishable offense. Accordingly, it has tried to become more bling by inviting two large casino operators to set up shop. Also, it has loosened immigration restrictions as birth rates in the city-state fall. Give me your smart, your rich, your Gucci-shod emigres, etc. This article from TIME has the scoop on Singapore's remaking into Las Vegas via Silicon Valley via Monaco of the Orient:

There was something a bit unusual about Lee Kuan Yew's annual Chinese New Year speech this year. The words of Lee, Singapore's former Prime Minister and founding father, are heeded by the public, because they provide a road map for the city-state's economic development. Hewing to custom, Lee spoke dryly of free-trade agreements and strengthening economic ties with the region. But then he started talking about art exhibitions, jazz bands, museums and alfresco dining. In fact, eating outdoors was mentioned no fewer than three times as Lee laid out the government's vision for a multibillion-dollar residential and commercial real estate project located near the downtown core. The Marina Bay development would transform the way people live and work in Singapore, the Minister Mentor said. Electric golf buggies will whiz by diners as they gaze from the water's edge upon the "sailing, boating, windsurfing and fishing." Singapore aspires to be "a tropical version" of New York, Paris and London all in one, Lee said, adding "the Marina will be like the St. Mark's Piazza in Venice."

Say what? It was hard to tell if the architect of Singapore's rise from third world to first was charting an economic course or making a sales pitch for a master-planned leisure community—because he was, in a way, doing both. Marina Bay is just one part of a government-orchestrated effort to change the face of Singapore. This is no Botox job. Work is underway on an epic facelift, one that could within a few years render Singapore nearly unrecognizable: the financial district will have a striking new skyline while casinos and other amusements will dot the city. Even sleepy Sentosa Island, a 500-hectare tourist hangout located 15 minutes from the city center, is slated for overhaul via a 10-year, $5 billion plan to turn it into a world-class playground for the wealthy, with multimillion-dollar seafront homes, a megayacht marina and a Universal Studios theme park. The point of this real estate renaissance: change Singapore's image as a prosperous but rather dull commercial hub into that of a vibrant, fun destination—a place people will want to live in or at least visit on holiday, not merely transit on their way to more exotic Southeast Asian locales such as Bangkok and Bali. "Our entire nation is focused on a self-transformation," says Lim Neo Chian, CEO of the Singapore Tourism Board. "Singapore is changing its image in the eyes of the world."

Change it must. Faced with challenging long-term economic prospects and a flagging birth rate, Singapore's leaders have determined that the future of its 4.4 million citizens depends upon attracting multinational corporations along with hundreds of thousands of ambitious, educated (and preferably wealthy) foreigners to work and live there. Like other Asian tigers such as Taiwan, Singapore is losing high-tech manufacturing jobs—once crucial to economic growth—to lower-cost countries such as China. Manufacturing now provides work for just 20% of the island's 2.5 million workforce, down from 33% a decade ago, a decline reflected in people's paychecks. The poorest 30% of Singaporeans have seen their wages drop consistently for the past five years, according to United Nations data. This economic predicament is complicated by flagging demographics. Younger Singaporeans—the most productive workers—are increasingly seeking employment overseas, while the ones who remain are having fewer children. At the current birth rate, the population will begin to shrink in 2020. And that portends stagnating economic growth and a declining standard of living.

The antidote: open the gates to immigration. The city aims to boost its population by 25% to 6.5 million over the next few decades. Due to the flagging birth rate, that goal can be reached only by admitting up to 1 million foreigners, more than doubling the current expat population of 875,400. Drawing in so many worker bees will require a lot of honey, in the form of good jobs, recreational opportunities, decent housing—the myriad elements that factor into a city's lifestyle. It will also require a certain amount of buzz—and Singapore is not currently thought of as an exciting city. Not that it isn't a model in many ways. It's admired for its efficient government, first-world infrastructure, solid educational system—a real plus if it is to attract high-income talent from overseas—and clean, crime-free streets. Singapore is regularly named in regional surveys as one of the best places in Asia for expats to live. Per capita income last year was $30,900, equal to that of Japan, and the economy is popping; GDP grew 7.9% last year...

Gambling is fine if you've got the time:

The other casino, to be developed by Malaysia's Genting International, will stand on Sentosa Island, which is connected by bridge, light rail and cable car to the main island. Using land it had been reclaiming since the 1970s, the government several years ago began auctioning Sentosa plots to the private sector, but only to be developed under its careful guidance and marketing. Beaches that ringed the island were spruced up, and two golf courses modernized. Thirteen hotels containing about 3,500 rooms are planned, providing lodging for tourists drawn to the beaches, the casino and a Universal Studios theme park, which is also being built by Genting International and is slated to open in 2010.

Then there's what is arguably the capstone of the Sentosa initiative: Sentosa Cove, Singapore's first waterfront property development and also its first gated community. Each of its approximately 600-sq-m lots will soon sport luxury homes costing up to $20 million, each with infinity pools and private boat berths. Mixed in with the single-family homes will be four condominium complexes, a five-star hotel and a megayacht marina.

Pretty racy, but Singapore won't be Brisbane. Big Brother still wants to charge you a fee for gambling. I don't think this regulation will sit well at all with casual gamblers if it is enforced. It seems that the controlling instincts of Lee Kuan Yew cannot be fully eradicated:

Singapore's government has said it will not offer another casino license for at least a decade. It also says the casinos will be heavily regulated, and is imposing measures to curb problem gambling, including a 100-dollar-a-day levy on citizens and permanent residents entering the gambling rooms.

John Bolton for World Bank Chief

Well, not really. However, Kevin Hassett of the neoconservative American Enterprise Institute (AEI) suggests in a Bloomberg op-ed that another Wolfowitz-lite persona would best serve as the United States' next nominee for World Bank head honcho. Remember when Bolton said that the top ten floors of the UN could be blown away and no one could tell the difference? Hassett says that blowing away the entire World Bank could be done and no one would care. Talk about the World Bank having enemies (on the political) Left and Right.

The complaints Hassett makes are boilerplate neoconservative stuff: the World Bank is a waste of money, it is corrupt, etc. In fact, his rhetoric is indistinguishable from that of Bolton, which is no surprise as Bolton is another AEI character. Given how poorly received Wolfowitz was, nonetheless, Hassett proposes all sorts of folks who aren't that much different--with the possible exception of Larry Summers. Of course, Summers didn't exactly endear himself with the infamous World Bank memo he wrote while serving as chief economist there, but that's another story for another time. Here's Hassett:

Now that World Bank President Paul Wolfowitz has resigned, the Bush administration has two options: It can appoint a new bank president who will continue the tough work Wolfowitz began of reforming the bank. Or it can refuse to name a president and withdraw U.S. support for the institution.

Before he can decide which path to take, President George W. Bush must decide whether the World Bank is worth saving.

On the face of it, the answer seems to be a clear ``no.'' The bank has deviated so far from its original, worthy mission that its founders would hardly recognize it. It has become a generous welfare program for bureaucrats that finances itself by drawing money away from the world's poorest and neediest people.

When the bank was founded in 1944 it was intended to fill a gap caused by a market imperfection. Developing countries often had little access to capital, so they couldn't borrow the money they needed to pursue key economic projects. It was a worthy endeavor for developed countries to pool their resources and lend money to them.

But today, the World Bank hands out subsidized loans to relatively rich countries. My colleague at the American Enterprise Institute, Adam Lerrick, recently wrote that the proportion of loans going to countries without international bond ratings plummeted to 1 percent between 2001 and 2005 from 40 percent in 1993.

The major borrowers of the bank have ready access to credit elsewhere. World Bank loans accounted for a measly 0.4 percent of the capital flow to its top 10 borrowers, according to Lerrick.

What's worse, these borrowers aren't even poor. Lerrick reports that six of the top 10 borrowers, accounting for 52 percent of bank loans over a recent five-year period, had average per capita incomes of $8,000. That places them comfortably in the top quarter of developing countries. To top it off, the money has a nasty habit of disappearing along the way.

A U.S. News & World Report investigation reported that Glenn Ware, a former senior bank investigator, said his unit had uncovered ``a recurring pattern of bribery, kickbacks, front companies (and) shell companies.'' How bad is it? U.S. News quotes Northwestern University professor Jeffrey Winters, who estimated the bank has likely lost $100 billion to corruption over the years.

And it's not just Third World dictators who are running off with the money. World Bank employees often graduate from their cushy salaried positions to become consultants. Consultant fees can run into the millions...

Adding to the problem is that borrowers are required to adjust their domestic policies according to the advice of World Bank ``experts'' when they accept loans. The economic damage caused by World Bank advice may exceed the benefit of the bank's loan subsidies.

In other words, no rational country should be willing to take the loan packages that are offered. Why do the loans still exist at all? A big reason is there are enough bureaucrats the world over who put their own interests above those of their country, and take a slice for themselves.

Many countries have decided not to play that game at all, and there are signs the World Bank's business is drying up. Loans are being retired at a fast enough rate that the bank's total portfolio is dwindling.

So the Bush administration must look at this mess and decide whether it's possible or desirable to save this sinking ship. Or should the U.S. wash its hands of this sorry institution once and for all?

My vote would clearly be for the latter, but if a last rescue is desired, then the president must pick a replacement for Wolfowitz who has the organizational savvy and intellect to go to war against the bureaucrats who finished off Wolfowitz [poor, poor Paul. Sniff].

Four candidates come to mind. The best choice for the job would be Martin Feldstein [!] of Harvard University. Feldstein, a confidant of presidents and giant of the economics profession, is a no-nonsense economist with ample executive experience, both in Washington and in business.

His gravitas would immediately put to shame opponents within the bank, and he would have the intellectual wherewithal to separate the wheat from the chaff in the bank's own analyses.

A second choice would be Glenn Hubbard [!!], dean of the Graduate School of Business at Columbia University. Hubbard is as smart as can be, was perhaps the most successful of all economic appointees in the Bush administration, and has experience running a large organization.

My third choice would be former Clinton administration Treasury Secretary Larry Summers. Summers has the intellectual heft of the other two and Democratic credentials that might help him overhaul the bank from within with less opposition from the staff.

The final choice would be former Tennessee Senator Bill Frist [!!!]. Frist has been extremely active delivering aid that works to developing countries, and has the executive experience, and Teflon skin, necessary to take on the old guard at the bank...

It would be a lot easier, however, to take the money now devoted by the U.S. to the World Bank -- roughly $1.5 billion a year -- and use it to start a new aid organization from the ground up.

Feldstein...Hubbard...Frist? Needless to say, this is the most mind-bogglingly awful op-ed I've read in a while. Who's next from these guys? Ahmed Chalabi for World Bank chief?

Quantifying International Migration

Have I got a paper for you migration aficionados, data freaks, and completists. Migration data is spotty on source and destination countries as well as the number of persons involved because there is no standardized worldwide system for recording and classifying migration (though there should be one, it goes without saying). However, this almost heroic paper attempts to collate as much data as possible. Whatever has been left uncollected has been subject to advanced missing data techniques to provide perhaps the most comprehensive picture yet on global migration patterns. The paper is available for download in its entirety from the Social Science Research Netrwork (SSRN):

CHRISTOPHER R. PARSONS
Affiliation Unknown
RONALD SKELDON
University of Sussex
TERRIE LOUISE WALMSLEY
Purdue University - Center for Global Trade Analysis
L. ALAN WINTERS
World Bank - Department Research Group (DECRG); Centre for Economic Policy Research (CEPR)

---

March 1, 2007

This paper introduces four versions of an international bilateral migration stock database for 226 by 226 countries and territories. The first three versions each consist of two matrices, the first containing migrants defined by country of birth, that is, the foreign-born population; the second, by nationality, that is, the foreign population. Wherever possible, the information is collected from the 2000 round of censuses, though older data are included where this information was unavailable. The first version of the matrices contains as much data as could be collated at the time of writing but also contains gaps. The later versions progressively use a variety of techniques to estimate the missing data. The final matrix, comprising only the foreign-born, attempts to reconcile all of the available information to provide the researcher with a single and complete matrix of international bilateral migrant stocks. The final section of the paper describes some of the patterns evident in the database. For example, immigration to the United States is dominated by Latin America, whereas Western European immigration draws heavily on Eastern Europe, Central Asia, and the Mediterranean region. Over one-third of world migration is from developing to industrial countries and about a quarter between developing countries. Intra-developed country and intra-FSU (former Soviet Union) flows each account for about 15 percent of the total. Over half of migration is between countries with linguistic ties. Africa accounts for 8 percent of Western Europe`s immigration and much less of that to other rich regions.

Pesticide Case Comes to the US

The longstanding controversy over Central American workers who claim to have been affected by the use of the pesticide DBCP is coming to the United States. The companies involved have settled some cases abroad, although this is the first time the matter is being contested Stateside. One of the accusations is that the chemical has resulted in male impotence among field workers. From the LA Times:

After years of toil in Central American fields where they say pesticide use made them sterile, they're suing Dow, Dole and other firms in L.A. — The people crammed into the stifling basketball gym. They filled the court, lined the walls and tumbled beyond the doors onto the sun-blistered streets.

They had gathered to hear a promise of justice.

Many had spent their lives toiling on banana plantations that U.S. companies operated in this region some 30 years ago. By day, the workers had harvested bunches of fruit to ship to North American tables. At night, some had sprayed pesticide into the warm, humid air to protect the trees from insects and rot.

As the decades passed, the workers came to believe that the pesticide, called DBCP, had cost them their health. Prodded by U.S. lawyers, thousands joined lawsuits in the U.S. and Nicaragua alleging that the pesticide made them sterile.

The U.S. firms that sold and used the pesticide have never faced a U.S. jury trial over its use abroad. Last month, a Los Angeles attorney named Juan J. Dominguez stood before a sea of nearly 800 dark, hard faces and predicted that the day of reckoning was at hand.

"We are fighting multinational corporations. They are giants. And they are going to fall!" Dominguez thundered.

The crowd exploded. They leapt to their feet, waved their hats, shook fists in the air. "Viva! Viva!" they chanted.

The scene last month foreshadowed a legal drama set to play out in a Los Angeles courtroom this summer, when a lawsuit filed by Dominguez and his partners could end a struggle that has sprawled across three decades and courtrooms on four continents.

For the first time, a U.S. jury will have the chance to weigh the accusation that Dole Food Co. knowingly used a pesticide manufactured by Dow Chemical Co. that sterilized workers in Latin America three decades ago.

The complexity, history and geographic spread of the case demonstrate how legal systems have failed to keep pace with the rapid movement of goods across international borders. Jurisdictional and procedural issues have repeatedly impeded attempts to sue U.S. companies in the United States. for alleged wrongdoing in other countries.

"The question is where do we litigate these issues," said Alejandro Garro, a Columbia University law professor and expert in international law. "The answer is that we don't have a global law. We are building it on a case-by-case basis."

Dole, the Westlake Village-based food giant, and Dow, of Midland, Mich., deny the allegations. Both companies acknowledge that the pesticide DBCP has been linked to sterility in men exposed to it while manufacturing it in factories. And both companies acknowledge that the product was used in Nicaragua's banana fields.

But the companies contend that there is no proof that DBCP (dibromochloropropane) sterilized any field worker. The quantities of DBCP used were too small, and the open-air conditions too diffuse, to cause harm, the companies say...

DBCP's toxicity first made news in 1977, when about three dozen factory workers at an Occidental Petroleum Corp. subsidiary in Lathrop, Calif., where pesticides were mixed, reported problems having children. Tests showed the factory workers had zero or below-normal sperm counts.

Within months, the EPA had suspended most uses of DBCP. Government hearings revealed that Dow and Shell Chemical Co., then a subsidiary of Shell Oil Co., the primary makers of DBCP, had long known about its dangers. Tests dating to the 1950s showed the chemical atrophied lab animals' testes.

Workers began filing lawsuits. In 1983, Duane Miller, a young Sacramento attorney, won a $4.9-million judgment against Dow on behalf of six Occidental workers. Two years later, the EPA permanently banned the use of DBCP in the United States.

It was the first skirmish in a legal war that soon spanned the globe.

U.S. law firms began suing in U.S. courts on behalf of workers in other countries — more than 50,000 plantation workers over 30 years in countries from the Philippines to Nicaragua to Costa Rica to Ivory Coast. The defendants have been the manufacturers of DBCP — Dow and Shell — and the fruit companies that used it: Dole, Del Monte and Chiquita.

India's Chronic Power Shortages

Bloomberg's Andy Mukherjee has more on the challenges facing India's dilapidated power generation infrastructure as summer rolls in and demand for air-conditioning stretches power availability:

In most Indian cities, being middle- class means owning your own power company.

As summer temperatures approach 40 degrees Celsius (104 degrees Fahrenheit), energy demand from electric fans and air- conditioners is putting stretched utilities under stress.

Against a peak demand of 104,000 megawatts last month, supply was 90,000 megawatts. That's a shortfall of 14 percent.

Rationing of power, which goes on throughout the year, becomes unbearable during the summer months. People resign themselves to blackouts that sometimes last all day, even longer if overburdened cables burn or aging transformers collapse.

Households and businesses create their own electricity by burning diesel in noisy, inefficient, polluting generator sets. Those who can't afford to be power producers buy inverters: chargeable batteries that store utility power for later use.

Businesses have it worse.

An all-India survey of small enterprises in 2002 cited power shortages as one of the top reasons for industrial sickness, far ahead of labor strife or mismanagement.

Why has India allowed itself to get into this mess?

At the end of last year, China had 622,000 megawatts of generation capacity. A fifth of this -- almost equal to India's total capacity built up over decades -- was added in 2006 alone.

Why does India not invest more in energy, which is emerging as a major bottleneck for sustaining the current pace of 9 percent economic growth?

Blame the politicians for this mess:

The seed of India's power crisis was sown in 1977. That's when politicians first came up with the idea of subsidized electricity for farmers to win their votes. Then free power for agriculture became the norm, pushing state-run electricity boards into financial ruin.

Not that free power did much for the really poor.

A small farmer in a backward area of Punjab, the second- biggest grain-producing state in India, typically won't have any power connection on his land; he will have to burn diesel. It is a costly proposition.

Had the farmer used electricity instead of diesel to irrigate a rice crop, which is sown around this time of the year, he could have enjoyed one harvest of wheat absolutely free even after paying a reasonable user charge to the utility, according to a study by Varinder Jain, a researcher at India's Centre for Development Studies.

The link between electrical and political power goes beyond farmers. In cities such as Mumbai and New Delhi, where private operators -- Reliance Energy Ltd. and Tata Power Co. -- are in charge of distribution, squatters steal power from the grid with impunity because politicians need their votes.

Stealing power is also a widespread practice:

Every third Reliance Energy customer in Mumbai lives in a shantytown, where, according to the company's own regulatory submission, pilferage ranges from 15 percent to 70 percent.

No one denies that the poor must get electricity, and perhaps for free. But this isn't the way to provide it. Every year, there are reports of electrical short-circuits in illegal wiring causing fires in unauthorized slums. It won't be any different this year.

India has to adopt a multipronged strategy to end its power drought.

The country has to make better use of the 10,000 megawatts of idle generation capacity. Half of it is lying unutilized largely because of feedstock unavailability.

Natural-gas prices have tripled in the past five years. At $7.80 per million British thermal units, they are double what Indian gas-fired power plants can afford, given limits on how much consumers can be charged for electricity.

Pending a meaningful reduction in subsidies, more expensive power must still be produced, but its cost must be passed on to those who can bear it.

For now, the solution to this lack of power availability is to generate your own power.

The Safety of Chinese Consumables

As the world comes to rely more on consumer goods coming out of China, concerns are rising that Chinese quick-buck artists are scamming these goods by including unsafe chemicals as substitutes. Witness the 41 deaths that occurred in Panama due to tainted cough syrup traced to China. Now, the resource-strapped US Food and Drug Administration (FDA) has troubles of its own in monitoring Chinese products of this ilk. China leads the FDA import refusal list by a wide margin:

Toothpaste from China is the latest official worry. This week, the Food and Drug Administration began testing it at U.S. ports of entry after contaminated Chinese toothpaste began showing up in other countries. It contained a chemical used in antifreeze — the same chemical that killed people in Panama last year when it turned up in cough syrup, mislabeled by Chinese manufacturers as a harmless sweetener. An FDA spokesman says no test results are available yet on the toothpaste at U.S. ports.

The FDA is still watching vegetable proteins from China for signs of melamine contamination, a chemical that turned up in pet food and animal feed earlier this spring.

U.S. officials are asking the Chinese to do more to safeguard the food and drugs they export to America. And Thursday, Secretary of Health and Human Services Mike Leavitt warned that any nation that loses U.S. trust in its exports will suffer economically.

"Assuring the safety of food in large nations is a demanding proposition, whether it's China or the United States," Leavitt said. "And neither of our countries has perfected this process."

Many experts say the problems are a consequence of globalization, and especially of America's growing dependence on China for food ingredients.

The FDA lists on its Web site food imports its inspectors have refused at U.S. ports. Last month, FDA inspectors blocked 257 food shipments from China, according to the list.

"That's by far the most of all the countries of the world," says William Hubbard.

He knows the FDA inside out; Hubbard used to be its deputy commissioner and now works with the Coalition for a Stronger FDA.

Even when the volume of Chinese imports is taken into account, that's a far higher reject rate than other trading partners.

In the past year, the FDA rejected more than twice as many food shipments from China as from all other countries combined.

The rejected shipments make an unappetizing list. Inspectors commonly block Chinese food imports because they're "filthy." That's the official term.

"They might smell decomposition. They might see gross contamination of the food. 'Filthy' is a broad term for a product that is not fit for human consumption," Hubbard says...

When Hubbard was at the FDA, he heard all kinds of stories about foreign food processors, like the one a staffer told him after visiting a Chinese factory that makes herbal tea.

"To speed up the drying process, they would lay the tea leaves out on a huge warehouse floor and drive trucks over them so that the exhaust would more rapidly dry the leaves out," Hubbard says. "And the problem there is that the Chinese use leaded gasoline, so they were essentially spewing the lead over all these leaves."

That lead-contaminated herbal tea would only be caught by FDA inspectors at the border if they knew to look for it, Hubbard says.

"The system is so understaffed now that what is being caught and stopped is only a fraction of the food that's actually slipping through the net," he says.

The FDA normally inspects about 1 percent of all food and food ingredients at U.S. borders. It does tests on about half of 1 percent.

Neoliberalism and Income Mobility

The US and the UK are supposed to be countries following an "Anglo-Saxon" or "neoliberal" economic model. According to this model, the gap between the haves and have-nots is tolerable for it rewards those who work hard enough with upward mobility. As Margaret Thatcher famously said, "It is our job to glory in inequality and see that talents and abilities are given vent and expression for the benefit of us all." But, the evidence suggests this is not so. The US has the highest Gini (inequality) coefficient of all OECD countries, while the UK has the highest for Western European countries. So far, there's no surprise. Worse yet, it also turns out that the US and the UK not only have highly unequal societies, but also are bound to stay that way. From the Economic Mobility Project's "American Dream Report" (they're kidding, right?) we have this figure comparing relative income mobility in a number of industrialized nations:

If that weren't depressing enough for Americans, have a look at this figure:

The same pattern is noted in this paper by a number of Nordic researchers. The UK and the US are highly unequal and offer little room for bettering your fate. And people wonder why spreading the "American system" gets so much resistance in developed and developing countries worldwide. If social justice is your benchmark, neoliberalism fails bigtime. The American dream is dead, my friends.

Fallujah Lynchings Revisited

The image of four lifeless private security contractors hanging from a bridge in Fallujah remains one of the signature images of the Iraq conflict, along with those from Abu Ghraib and "Mission Accomplished." The controversial role of these soldiers of fortune from firms like Blackwater, Titan, and CACI has been explored in the documentary "Iraq for Sale" as well as the book "Licensed to Kill: Hired Guns in the War on Terror." When you sign up to work for these firms for a fat paycheck, your life is obviously at risk. However, the families of the four contractors hanged in Fallujah beg to differ as they have filed a case on the matter which has now gone behind closed doors:

After years of high-stakes legal wrangling, a lawsuit stemming from the gruesome deaths of four U.S. contractors in Iraq is moving behind closed doors in an action seen as an important precedent for the booming private security industry.

The suit, for wrongful death and fraud, was filed in January 2005 against Blackwater Security Consulting, one of scores of companies now fielding close to 130,000 civilians who work alongside the U.S. military in Iraq. Generally their contracts stipulate the contractors assume all risks -- injury, death, disability -- and waive their right to sue.

The risks are considerable: the latest government figures say 916 civilian contractors have been killed from the beginning of the war in Iraq in March, 2003 to April 30, 2007.

Despite the risks, security companies say there is no shortage of applicants attracted by high pay and a taste for adventure.

Contractors -- Americans, Iraqis and nationals from more than 30 other countries -- perform jobs from guarding senior U.S. officials to translating, cooking meals, driving trucks, cleaning toilets and servicing weapons systems and computers.

Contract language is explicit and in the case of Blackwater, it releases the company from "any liability whatsoever" even if it is "the result of negligence, gross negligence, omissions or failure to guard or warn against dangerous conditions."

The suit was brought by the families of four civilian contractors shot in March 2004 by Iraqi insurgents, who burned their bodies and hung the charred remains from a bridge across the Euphrates river in the city of Falluja.

Televised images of the scene, with jubilant Iraqis shaking their fists in triumph, shocked the U.S. and prompted an all-out military assault on the city.

In an unusual decision last week, James Fox, a senior district court judge in North Carolina, where Blackwater is based, ordered the case out of the courts and into arbitration...

"This is a very important decision," said Jeffrey Addicott, a retired Special Forces lawyer and director of the Center for Terrorism Law at St. Mary's University in San Antonio. "It is a recognition that the contract is iron-clad and that its terms absolve the company of liability. In future cases, this will be cited as a precedent."

But some legal experts see the removal of the Fallujah case from the judicial process as an ominous development.

"This may be a victory for the Blackwater legal team but it is a defeat for the principle of transparency," said Eugene Fidell, an expert on military law and president of the non-profit National Institute of Military Justice.

"This means that the shadow army (of contractors) will slip even further into the shadows..."

The suit alleged that Blackwater broke explicit terms of its contract with the men by sending them to escort a food convoy in unarmored cars, without heavy machine guns, proper briefings, advance notice or pre-mission reconnaissance, in teams that were understaffed and lacked even a map.

Since the case began making its slow way through the legal system and eventually to arbitration, the number of contractors working alongside the U.S. military in Iraq has increased by an estimated 30,000 and some experts say the rapid growth has tempted companies to cut corners.

"Standards have been slipping, not for all but for some, in training and the quality of staff," said Robert Young Pelton, author of the book "Licensed to Kill," on the private security industry drawn from three years of travel through conflict zones.

China Lays Out NGO Welcome Mat

A widely-held view is that NGOs start becoming popular when and where governments or markets are unable to provide for people's needs. If so, this may not so such a good sign as China encourages more NGOs to operate there--as long they don't have political aspirations, that is. No Falun Gong folks should apply. Take a look at this table of civil disturbances in China over the years, then read the story about China encouraging more NGOs to operate in the country. I suspect these two stories are related. Got social problems? Let those NGOs take care of them:

China will revise laws and policies to encourage the development of foreign and domestic non-governmental organizations (NG0s), a senior official has been quoted as saying

Among the key changes are a simplified registration procedure for all NGOs and better communication with governments, said Sun Weilin, director of the bureau for NGO administration affiliated to the Ministry of Civil Affairs.

A foundation will also be set up to recognize and reward NGOs with good performance.

"The ministry is drawing up a detailed draft for revising laws and regulations, with the main objective of giving more room for NGOs to grow," Sun told China Business News.

He was speaking at a recent ceremony where the European Union and the United Nations Development Programme signed an agreement to support a large-scale initiative aimed at strengthening the rule of law and enhancing civil society participation in China. The program will be implemented by the National People's Congress, the Supreme People's Court and the Ministry of Civil Affairs.

"If the registration procedure is simplified for domestic NGOs and foreign NGOs can register as NGOs, it will make it easier for them to operate and raise funds for their programs," Li Jianghua, the deputy representative of the China branch of Handicap International, told China Business News.

Experts said the changes will create a better legal framework for foreign NGOs to have a wider presence in China and provide a platform for better coordination with government agencies.

"Foreign NGOs operate in China but their presence has no legal basis, which makes it impossible for them to recruit members or raise funds," Jia said.

As a result, the China operations of some foreign NGOs, including the World Wild Fund for Nature, have been registered as commercial organizations and thus cannot raise funds or recruit volunteers. They also have to pay taxes.

Jia also told China Daily that the unfavorable policy environment has become a major bottleneck for the development of domestic NGOs.

Eco-Terrorists Sentenced

Not all environmental movements are benign or well-meaning. Case in point: the Earth Liberation Front ("ELF"). Here is their manifesto:

Welcome to the struggle of all species to be free.

We are the burning rage of this dying planet. The war of greed ravages the earth and species die out every day. ELF works to speed up the collapse of industry, to scare the rich, and to undermine the foundations of the state. We embrace social and deep ecology as a practical resistance movement. We have to show the enemy that we are serious about defending what is sacred. Together we have teeth and claws to match our dreams. Our greatest weapons are imagination and the ability to strike when least expected.

Since 1992, a series of earth nights and halloween smashes has mushroomed around the world. 1000's of bulldozers, powerlines, computer systems, buildings and valuable equipment have been composted. Many ELF actions have been censored to prevent our bravery from inciting others to take action.

We take inspiration from the Luddites, Levellers, Diggers, the Autonome squatter movement, ALF, the Zapatistas, and the little people -- those mischievous elves of lore. Authorities can't see us because they don't believe in elves. We are practically invisible. We have no command structure, no spokespersons, no office, just many small groups working separately, seeking vulnerable targets and practicing our craft.

Many elves are moving to the Pacific Northwest and other sacred areas. Some elves will leave surprises as they go. Find your family! And let's dance as we make ruins of the corporate money system.

Form 'stormy night' action groups, encourage friends you trust. A tight community of love is a poweful force.

Recon -- check out targets that fit your plan and go over what you will do

Attack -- powerlines: cut supporting cables, unbolt towers, and base supports, saw wooden poles.

transformers: shoot out, bonfires, throw metal chains on top, or blow them up.

computers: smash, burn or flood buildings.

Please copy and improve for local use.

It seems that their activities have not escaped the FBI's attention. Like every other enemy of the state in "Capital G" Bush's America, they have been branded as "terrorists":

A radical environmentalist who admitted to setting fire to an SUV dealership, a tree farm and a police station was declared a terrorist yesterday and sentenced to 16 years in federal prison.

Stanislas Meyerhoff, 29, was the first of 10 admitted saboteurs -- members of a loose-knit extremist environmental group, the Earth Liberation Front -- who face sentencing in the coming weeks for a series of arsons committed across five western states over six years.

Since their arrests last year, members of the cell, who called themselves "the family," have all pleaded guilty to charges of arson and conspiracy. They have insisted, however, that they would fight at their sentencing hearings the "terrorist enhancement" procedures that could increase their prison terms and land them in supermax prisons.

The hearings are at the new center of an old storm about how to define someone a terrorist.

Radical environmental groups including the Earth Liberation Front and an associate network, the Animal Liberation Front, have been called by the FBI "the No. 1 domestic terrorism threat" in America. Their members include four of the bureau's 11 most wanted homegrown terrorists.

The groups and their supporters say that in more than 1,100 acts of arson and vandalism the members have never killed a single person, and the "terrorist" label is intended only as a scare tactic and means of augmenting the government's rolls of captured terrorists.

Federal agents arrested the 10 defendants last year in an action called Operation Backfire. At the time of their arrest, Attorney General Alberto Gonzales called the cell's $40 million dollar campaign of arson -- which targeted a horse slaughterhouse, SUV dealerships, a scientific research center, logging companies and a ski resort -- "a pattern of domestic terrorism activities."

Lawyers and activists defending the saboteurs insist that acts of arson and property damage have never been the stuff of terrorism indictments. They say the label is intended by the government to stir public outrage and increase the length of their client's prison terms.

Views on US-China Talks

(NOTE: Twice updated!) This post should be my last one on the Strategic Economic Dialogue until the next one comes around, although that event may not be a sure thing. As I suggested earlier, the US Congress expressed its dissatisfaction in a way that US Treasury Secretary Paulson did not to Vice-Premier Wu Yi and her entourage over currency manipulation. Here is the letter presented by the House Ways and Means Committee to her on the matter:

May 23, 2007
Her Excellency Wu Yi Vice Premier of The People`s Republic of China

Dear Madam Wu,

We welcome you and your delegation to the Capitol and appreciate your interest in discussing the important relationship between our nations.

We share your interest in engaging in a frank discussion of the issues that stand in the way of a closer relationship between our nations. Our constituents have raised serious concerns regarding China’s policies in a number of areas, ranging from human rights issues such as the crisis in Darfur, to issues of environmental degradation and global warming. Our nations must take every opportunity we have to work to resolve these critical issues, and we look forward to discussing these issues with you today and in the future. As Members of the Committee on Ways and Means, however, we will focus today on the concerns the Committee has on the trading relationship between our countries.

This Committee recognizes the importance and the current and potential benefits of the bilateral trade and economic relationship between our countries and of the rule-based trading system under the World Trade Organization. In our view, however, China has not honored some of the commitments it made when it acceded to the WTO.

The Committee has serious concerns about China’s massive and constant interventions in the currency markets. Those interventions keep the value of the Chinese currency, the renminbi (RMB), artificially low – making exports from China relatively cheap and imports into China relatively expensive. While the International Monetary Fund and the U.S. Department of Treasury have urged China to address this issue for several years now, we have seen almost no meaningful progress to date. To the contrary, the Federal Reserve Chairman noted in December 2006 that the situation has likely worsened recently.

More generally, the Committee is increasingly concerned about trade-distorting subsidies in China. When it acceded to the WTO, China agreed to immediately eliminate its export subsidy programs. Unfortunately, China has failed to do so. A number of subsidies that are strictly prohibited under WTO rules persist – subsidies designed to distort trade by increasing exports or limiting imports into China. China also maintains a number of other subsidies that distort trade and harm U.S. businesses, workers, and farmers. Those subsidies need to be eliminated without further delay.

We also are particularly frustrated with China’s inability to enforce intellectual property rights in China. As you know, the piracy rates in China remain virtually the highest in the world, at 85 to 95 percent of [software?] sales. Not only has China failed to make meaningful progress in this area, China has been sharply critical of the decision by the United States to file a WTO case to address the issue, claiming that the case “will adversely affect bilateral economic and trade ties.”

Unfortunately, the list of trade issues between our nations appears to be growing. Americans are increasingly concerned that food and feed products from China fall short of international safety standards and could pose a health risk. Moreover, we regularly hear from constituents who believe that China has not provided the access to its market that it agreed to provide when it acceded to the WTO.

We hope China will take immediate steps to address these issues and that our exchange of views today will be the beginning of an ongoing dialogue, a dialogue that will contribute to a mutually advantageous economic and trade relationship between our nations.

Sincerely,

Chairman Charles Rangel (D-NY)
Ranking Member Jim McCrery (R-LA)

In contrast, the Chinese state media applied a positive spin to the Dialogue:

China and the United States yesterday signed a slew of agreements at the conclusion of two days of high-level economic talks, which Vice-Premier Wu Yi described as "a complete success".

"We have reached broad consensus and realized positive results," Wu, who led the Chinese delegation to the China-US Strategic Economic Dialogue (SED), told reporters.

The two countries agreed on a wide variety of next steps to be taken in such areas as financial services, energy and the environment, trade balance, civil aviation and innovation.

As part of the opening up of the financial sector, the quota for qualified foreign institutional investors will be tripled from $10 billion to $30 billion.

On the aviation front, daily passenger flights between the United States and China will more than double by 2012; and air cargo companies will have virtually unlimited access to China. "Piece by piece, we are making it easier, cheaper, and more convenient to fly people and ship goods between our two countries," US Transportation Secretary Mary E. Peters said.

Under the pact, US carriers will be able to operate 23 daily round trip flights by 2012, up from 10 now...

[US Treasury Secretary Paulson said] "We agree that by combining the power of our economies, we can spur further development of clean energy technology."

According to a briefing by the US Environment Protection Agency on Tuesday, the two sides discussed four areas for environmental collaboration, including developing up to 15 large-scale coal-mine methane capture and utilization projects in China over the next five years and pushing ahead with the development of a low sulfur fuel policy for China.

As you probably have gathered, the Chinese version of this "complete success" made no mention of yuan revaluation. After Congress gets to work on a bipartisan, veto-proof, WTO-compliant bill against China on the matter of yuan undervaluation, I doubt whether Vice-Premier Wu will feel the same way. It's pretty much in the cards. Here is Senator Max Baucus (D-Montana):

A senior U.S. senator said on Thursday he still planned to introduce legislation aimed at prodding China to revalue its currency after what he said were "very good" talks this week with senior Chinese officials.

"They were quite forthcoming, actually," Senate Finance Committee Chairman Max Baucus, a Montana Democrat, told reporters after meeting with a Chinese delegation led by Vice Premier Wu Yi. "They gave their usual statements on currency ... but you could tell from the tone of their voice that they certainly recognize the concern in America."

Baucus said he would continue to work with other senators on a China trade bill, but added lawmakers were still sorting through their options. "Whatever our bill is -- we don't know yet -- it will certainly be WTO consistent," he said.

Baucus also praised U.S. Treasury Secretary Henry Paulson's efforts to move China to revalue its currency.

"I think he's doing a good job. I think he's doing about as well as almost anyone could do," Baucus said.

You can be pretty sure that this statement of Wu's did not go down well with China-bashers Stateside. In Baucus's words, they were "their usual statements on currency":

The floating band of the renminbi exchange rate will continue to expand as the market changes in the future, Wu Yi said.

"China's exchange rate reform will be advanced in an orderly way, based on the principles of self-initiative, controllability and gradualism," Wu told a group of US business leaders in Washington on Thursday.

"The flexibility of the yuan's exchange rate will be continuously increased through the reform, while being maintained at a basically stable, reasonable level," she said.

She added that a large appreciation could be harmful to China's economy and that exchange rates were not the main cause of the huge US trade deficit with China.

Worse yet, it seems that there were some gaffes in her reception by Congress according to the Washington Wire:

A series of minor missteps marred a visit by top Chinese leaders to Capitol Hill Wednesday as the U.S. Congress, unlike the Bush administration, paid little special heed to a huge delegation of senior Chinese economic officials.

Shortly after the start of a meeting with Chinese Vice Premier Wu Yi and her team of ministers that was meant to defuse tension over China’s currency policies, the entire cast of House members walked out of the meeting to vote on legislation related to U.S. military veteran health-care issues. That walkout left the Chinese side yawning and without interlocutors for about 15 minutes.

Then, as the meeting dragged on late, U.S. and Chinese security officials got into a row over whether China’s minister had to pass through metal detectors when entering the U.S. Senate for meetings scheduled for Thursday. U.S. Capitol security officials insisted Vice Premier Wu was the only official that could enter without being scanned, and the Chinese side requested the U.S. reciprocate their treatment toward U.S. officials during the first Strategic Economic Dialogue by allowing the entire team to pass.

Although less extreme, the spats echoed the gaffe-plagued April 2006 visit by Chinese President Hu Jintao to Washington. During that visit a Falun Gong protester interrupted an event on the White House South Lawn, and a White House announcement introduced China’s national anthem as that of the “Republic of China,” the official name of the island of Taiwan. China, formally called the People’s Republic of China, considers Taiwan a renegade province.

Topless Carwash Political Economy

WARNING: The topic of this post may be politically incorrect. Do not shoot the messenger. Pardon me for this silly post but I have been unable to resist it. You might be wondering, "What the !@#$ do topless carwashes have to do with international political economy?" Well, it's simple, really. The ongoing drought in Australia has made the government ban citizens from washing their own cars. That's the political side. Toss in the possible effects of global warming and you have an international side, too. Consequently, there has been a boom in carwashing services in drought-stricken areas. An enterprising (or depraved, depending on your point of view) strip joint operator thus decided to create a topless carwash service in Brisbane. That's the economic side--supply and demand, my friends. Here's the story:

Australia's worst drought in memory has had many weird side-effects -- but a nude carwash has to be one of the oddest. The "big dry" has driven snakes into towns in search of water and sent thirst-crazed wild camels rampaging through outback camps. In Brisbane, capital of the "Sunshine State" of Queensland on the east coast, it led to water restrictions, including a ban on residents washing their own cars. The result was a boom in professional carwash services, a phenomenon which caught the eye of strip club entrepreneur Warren Armstrong.

He set up "Bubbles 'n Babes", where customers can have their cars washed by a topless woman for 55 dollars (45 US), or a nude woman for 100 dollars. Armstrong told the City News newspaper this week the operation was above board.

"I'm just trying to make an honest dollar -- simple as that," he said. [Such a heartwarming story, Warren.]

Police said no complaints had been received and, as the washing took place out of public view, no criminal offence was being committed. Acting State Premier Anna Bligh said the operation was running on recycled water and therefore did not break water restrictions -- but neither she nor the government fleet would be using it.

"It seems to me a pretty weird and wacky way to get your car washed," she said.

Brisbane's finest have, er, washed their hands clean of the operation:

A nude carwash offering an X-rated sideshow and topless cleaning in Australia's tropical Queensland state has been given the all-clear after police and officials said they were powerless to scrub it.

The Bubbles 'n' Babes carwash in Brisbane prompted a flood of complaints with a topless car wash for A$55 (about R330) and a nude car wash with X-rated lap-dance service for A$100 (about R600).

"If it was approved for a car wash then I can't imagine how we can stop them," Lord Mayor Campbell Newman told a council meeting with worried local lawmakers...

The raunchy wash, set up by a strip-club owner, was screened from the public and used recycled water to avoid breaching water use restrictions, they said.

"We don't want any traffic accidents caused by people looking at the girls instead of looking at the road," Superintendent Colin Campbell told local media.

Australia, the Parched Land

The drought in Australia I covered in an earlier post will certainly have wide-ranging effects on the political economy of the land down under. Leadership changes are likely in store as the Howard administration which has been in power for over a decade faces a big payback for its neglect of environmental issues. Worse, some scientists believe that this drought is not a one-time event, but a long-term trend of global warming frying Southeastern Australia which is home to some of the country's largest cities. A trend of Aussies flocking to parts of the country where water is more readily available may set off a housing boom in the latter areas.

This fine article by the Financial Times narrates the fight for water between residents and rice farmers. Howard has a tenuous grip on the farm vote as the consequences of the drought for Australia's farmers are dire. Also, those who have come to rely on Australian agricultural exports in Africa and Asia are also being affected:

Spot the odd one out. Asia has billions of cheap workers, so exports manufactures. Europe has millions of graduates, so exports banking. Africa has steamy tropical regions, so exports fruit. America has Hollywood, so exports movies. And Australia is the second-driest continent on earth after Antarctica, so it exports water.

It is a paradox on display in the rural town of Griffith, Australia, where fields of rice destined for export sit under water for five months of the year. But Griffith's farmers see no contradiction. Rob Houghton, a local farmer, says: "We have a global responsibility to grow rice the way we do. This is a business and we are among the best at it."

In the wake of the worst drought in living memory in Australia, a battle over the use of water is raging between farmers, urban consumers and environmentalists. Australia in effect sends abroad billions of cubic metres of water a year by using it to grow A$25bn-worth of exported farm goods, both "dryland" (rain-fed) produce such as wheat, beef, wool and dairy, and irrigated crops such as rice and fruit.

Spot the odd one out. Asia has billions of cheap workers, so exports manufactures. Europe has millions of graduates, so exports banking. Africa has steamy tropical regions, so exports fruit. America has Hollywood, so exports movies. And Australia is the second-driest continent on earth after Antarctica, so it exports water.

It is a paradox on display in the rural town of Griffith, Australia, where fields of rice destined for export sit under water for five months of the year. But Griffith's farmers see no contradiction. Rob Houghton, a local farmer, says: "We have a global responsibility to grow rice the way we do. This is a business and we are among the best at it."

In the wake of the worst drought in living memory in Australia, a battle over the use of water is raging between farmers, urban consumers and environmentalists. Australia in effect sends abroad billions of cubic metres of water a year by using it to grow A$25bn-worth of exported farm goods, both "dryland" (rain-fed) produce such as wheat, beef, wool and dairy, and irrigated crops such as rice and fruit.

Global rice prices, too, have risen rapidly. And a shortage of skimmed milk powder, a key ingredient in food processing, has forced up costs. Australia and New Zealand between them supply a third of world milk exports. "It would be very damaging if Australia and New Zealand stopped exporting dairy," Peter Favila, the Philippines' trade and industry secretary, told the FT recently. Other producers could come in to fill the gap, but not as cheaply...

But despite a historical Australian reverence for farming and rural life, the use of water in agriculture has now come under intense scrutiny. Trade should enable dry countries to import water by buyingwater-intensive food and fibre. Egypt, for example, now imports half its wheat,the traditional staple food. Parched Australia, however, is the world's largest net exporter of the "virtual water" embedded in farm produce.

Critics charge this means the country is in effect sucking itself dry to subsidise foreign consumers, and that it should expand other exports instead. Environmentalists say both irrigation and dryland farming deplete water stocks and cause rivers and the country's already naturally salty earth to become dangerously saline.

Griffith is at the frontline of Australia's water wars, the "Murray-Darling basin" - a river system named after its two main watercourses that covers parts of tropical Queensland and much of temperate New South Wales and Victoria, emptying into the sea by the South Australian city of Adelaide. Even farmers admit that the patchwork of state jurisdictions has handed out water rights haphazardly. In January John Howard, prime minister, announced a plan to centralise power over water in the federal government. Water has shot up the political agenda ahead of an election this year in which Mr Howard will be seeking a fifth term.

Irrigated farming is under particular scrutiny. Just 0.5 per cent of Australian farmland is artificially watered, but it produces 23 per cent of agricultural output. So much is financially and psychologically invested in irrigation in towns such as Griffith that to end it will be an enormous upheaval...

Mr Andreazza farms annual crops, usually rice in the summer and wheat in the winter. But the past year was, he says, "just a disaster". Each of his farms has a theoretical annual allocation of water but can only receive a percentage of that based on how much water is available. Because of the desperately low rainfall, the state government cut his allocation to 10 per cent of the maximum. His entire rice crop, which needs to sit under water between October and March, was lost. He was not alone: the national rice harvest - usually around 1.2m tonnes, 85 per cent of which is sold overseas - came in at just 100,000 tonnes...

Mr Howard's government is anxious not to hurt farmers, not least because they traditionally support its junior coalition partner, the National Party. The water issue pits two of the more glamorous characters of Australian politics against each other. The newly-appointed environment and water minister in Mr Howard's government is Malcolm Turnbull, a self-assured and hyperactive MP from Sydney, widely believed to have his own prime ministerial ambitions, while his opposite number in the Labor Party is Peter Garrett, long-time environmental activist and former singer with the socially conscious rock band Midnight Oil.

Mr Turnbull is a largely unknown quality down in Griffith, but antipathy to Mr Garrett is widespread. Though the Labor Party insists it is not anti-farmer, its electoral base is mainly urban and industrial. One Griffith winery owner says: "If Garrett becomes minister we can all walk off the farm the next day. He should stick to singing. Labor will keep all the water for Adelaide and the industries down there".

Peter Garrett is the lead singer for the Aussie band Midnight Oil, best known for their hit song (yes, more eighties stuff from me, sorry) "Beds Are Burning" about compensating Australia's aborigines. Fantastic song, pretty good video. I don't known about beds burning, but it seems that parts of Australia are definitely scorching. The time has come...

America's Beef With Japan

When it comes to protecting its agricultural industry, Japan is as shameless as the EU and the US. Despite US beef being deemed safe enough, Japan remains guarded on importing US beef. Many suspect that Japan has used recurrent "mad cow" episodes as an excuse to develop its own beef industry (moo). In any event, it's fun to see how agricultural subsidizers deal with each other in a holier-than-thou fashion. Is Japan concerned with protecting its citizens from bovine spongiform encephalopathy (BSE), or protecting its domestic industry? Read on:

Japan has no immediate plans to relax its strict conditions on imports of U.S. beef, despite a decision by an international body saying some restrictions were not necessary, the government said Wednesday.

Japan only allows imports of U.S. beef from cattle not more than 20 months old, citing concerns about mad cow disease, which is believed to be more likely to affect older animals. The U.S. has called for that restriction to be eased.

The World Organization for Animal Health recently said the United States was a "controlled risk nation," a category that means countries can export beef irrespective of the animal's age, according to Toshio Katagai, a health ministry official.

The organization's decision was reached at a meeting in Paris to discuss the safety of animal products.

However, Japan will not immediately revise its policy on U.S. beef, the government said Wednesday.

"This will not lead to an immediate change of Japan's import conditions," Chief Cabinet Secretary Yasuhisa Shiozaki said. "It is important to respond to this issue by taking concrete steps in line with scientific facts to ensure food safety and consumers' trust."

John Howard, "Friend of the Earth"

Along with the US, Australia is famous for being an industrial country that did not sign up to the Kyoto Treaty. This anti-environmental stance owes much to Prime Minister John Howard, who has been PM since Tony Blair was in his dipeys 1996. Now, despite an economy that is humming along quite nicely due to strong overseas demand for natural resources, it seems that Howard's relative lack of environmental concern is at last catching up to him, or so Bloomberg suggests. As it stands, his party will get turfed during the 2007/08 election cycle. Yet, his party is partly going green so it won't be seeing red when the votes are tallied at the next election. Whether they can be convincing enough is another question as Australia continues to suffer from a massive drought and tight water restrictions are being enforced. It seems the lack of rain is weighing on voter's minds:

Clare Idriss was so concerned about carbon emissions generated by her wedding guests traveling across Australia in October that she bought A$350 ($283) of pollution credits to offset the greenhouse gases.

Idriss, 26, says Prime Minister John Howard isn't doing his part to address climate change. Howard has refused to ratify the Kyoto Protocol on reducing carbon emissions, saying it will hurt the economy of the world's largest coal exporter.

``There are a lot of options out there, but they're choosing not to be supportive,'' said Idriss, an engineer who got married in Mittagong, 110 kilometers (68 miles) southwest of Sydney.

New weather patterns have become a hot-button issue as the world's driest inhabited continent suffers its worst drought ever recorded. The debate may help determine who will be Australia's next prime minister in an election due by Jan. 19.

Kevin Rudd, leader of the opposition Labor Party, pledges to ratify Kyoto and cut emissions by 60 percent by 2050 if he wins control of the government.

``Given how close the election is going to be, it could be a decisive factor,'' said Andrew Macintosh, deputy director of the Australia Institute, a Canberra-based research group...

Forty-three percent of voters back Howard's 11-year-old government, compared with 57 percent for Labor, according to a May 18-20 survey of 1,151 people by market researcher Newspoll. The margin of error was 3 percentage points.

A March survey commissioned by the Climate Institute, a Sydney-based lobby group, found that 80 percent of the almost 1,000 Australians polled supported laws to curb greenhouse gases.

``It's one of those genuine moments when an issue's time has come,'' said Murray Hogarth, campaign manager at Easy Being Green, a Sydney-based company that sells carbon credits to households and companies.

A temperature increase of 2 degrees Celsius (3.6 degrees Fahrenheit) may bleach 97 percent of Australia's Great Barrier Reef, the world's largest coral system, every year, according to the national science agency. Prolonged bleaching, caused by the loss of algae that live in the reef, can kill coral...

Howard's Liberal-National coalition is trying to bolster its environmental credentials. In February, it announced plans to ban incandescent lights by 2010 in favor of more energy-efficient fluorescent bulbs. That may cut greenhouse emissions by 4 million tons a year by 2015 -- 0.7 percent of current levels.

Treasurer Peter Costello allocated A$150 million in his May 8 budget to double the rebate for homeowners who install solar panels.

``I'll embrace policies that make a contribution to reducing greenhouse gas emissions in a proportionate, measured way that don't destroy jobs, particularly in the coal industry,'' Howard said at an April 12 press conference.

Coal exports will earn Australia A$22.3 billion in the year to June 30, the government forecasts...

``Howard's climate change policy is a joke,'' said Verness, 36. ``It's been dreamed up because he knows it's on people's minds, not because he cares about what impact we are having on the environment.''

Australia generates 85 percent of its electricity from coal, helping make it the industrialized world's biggest greenhouse gas emitter per person, according to the Australia Institute.

The nation released 559 million tons of carbon into the atmosphere in 2005, about 1.5 percent of the global total, the government's Greenhouse Office estimates.

On a related note, the drought is predicted by some to cause a property boom in parts of Oz. How so? Folks might start buying up property in areas which aren't stricken by drought (!):

The ongoing drought will propel the newest property trend with homeowners moving in search of water, a national property researcher says.

The owner of property investment advisory service Hotspotting, Terry Ryder, said the "sea change" and "tree change" phenomena would be followed by an "oasis change" as water availability became a major influence on property buying patterns.

"The ongoing drought, the subsequent introduction of water restrictions and the increased cost of water use has already propelled the issue up the list of buyers' priorities," Mr Ryder said.

He released a list of the top six "oasis hotspots", chosen for their high rainfall or secure water supplies from dam or groundwater stores.

Mr Ryder identifies Townsville, in north Queensland; Perth; Maleny, in south-east Queensland; Dubbo, in central NSW; and Hobart.

Other notable locations were Darwin; Atherton Tableland, in north Queensland; and Port Macquarie, Taree and Bathurst, in NSW.

"While hordes of people are not going to move immediately to the wilds of Tasmania or western Queensland purely for water reasons, the `oasis change' will be a factor amongst baby boomers looking to find a nice place to retire and working families who just want to plant some cherry tomatoes and keep their car and driveway clean," Mr Ryder said.

He said dwindling water supplies in Sydney, Melbourne, Brisbane, and south-east Queensland may affect the property market in the long term in those areas

Sander Levin on Money & Politics

I found this video clip of Congressman Sander Levin (D-Michigan) appearing on Bloomberg's Money & Politics segment. He is one of the most vocal American politicians in calling for a yuan revaluation. Following from the previous post, he reiterated that lack of action on the part of China on yuan revaluation will mean legislation. Read: punitive tariffs. This short clip is worth viewing (it's in Windows Media Player format). Some excerpts:

Sander Levin: China continues to rig its currency...it's a 15 to 40% undervaluation of Chinese currency...

Peter Cook (Bloomberg): How much time are you willing to give [the Bush Administration and Secretary Paulson]?

Sander Levin: If there isn't action soon [by China on yuan undervaluation], then there will be legislation.

Peter Cook (Bloomberg): Are you worried it might trigger a trade war...?

Sander Levin: I want competition to be fair. That's not asking for a trade war.

Strategic Economic Dialogzzzzz...

Let me interpret Paulson's closing statements for the recently concluded Strategic Economic Dialogue for you. As I suggested, nothing much happened:

Thank you, Vice Premier Wu Yi and your distinguished colleagues for a very productive two days. My colleagues and I have been impressed by, and grateful for, the openness and positive spirit you brought to this meeting of the Strategic Economic Dialogue. ["Why the heck did they even bother coming here if they weren't going to seriously discuss yuan revaluation? Time could have been better spent watching reruns of My Mother the Car."]

Over the last five months, China and the United States have come together to discuss our shared economic interests with mutual respect. We agree on many issues. We agree that it is vital to the prosperity of both our nations, that China rebalance its economic growth, encourage consumption and spread development more broadly among its people. We agree that by combining the power of our economies, we can spur further development of clean energy technology. We agree that strengthening and deepening our two-way trading relationship will create jobs and give our citizens a wider variety of choices and lower prices on goods. [Actually, over the last five months, the US has hauled China before the WTO over subsidies as well as intellectual property enforcement and market access. Aside from those three small matters, the US also slapped tariffs on Chinese coated paper exports for good measure. So much for agreeing on the issues.]

While we have much more work to do, we have tangible results for our efforts thus far. These results are like signposts on the long- term strategic road, building confidence and encouraging us to continue moving forward together. [Nevermind that Vice-Premier Wu Yi was so annoyed by US trade measures against China that she almost didn't bother to come, but...]

The United States and China understand that getting our economic relationship right is vital not only to our people, but to the world economy. Vice Premier Wu and I see an important part of our job is to communicate frequently, iron out differences, and keep the economic relationship on an even keel, even during times of tension. Our relationship works best when it produces mutual benefits, which lead to growth, balance and a stronger global economy. [So you say, Paulson. I think that Congress and the China Currency Coalition have different ideas.]

We agreed today on a wide variety of next steps, including significant items in financial services, energy and the environment, and civil aviation. The dialogue will continue; our cooperative spirit will continue as well. At our next meeting, we will focus on capturing the benefits and managing the challenges of global economic integration. [Say, whatever happened to the yuan? It's just a peripheral matter next to opening up Chinese financial markets for Paulson's Wall $treet chums, right?]

We have built strong relationships since our inaugural meeting in Beijing. Those relationships will continue to grow stronger and produce on-going returns. On behalf of the American delegation, thank you for coming and we look forward to returning to China later this year. [Speak for yourself and the Bush administration which got big contributions from Wall $treet in 2004, Paulson. The famed bipartisan, veto-proof, WTO-legal bill on Chinese yuan undervaluation will be tabled soon. Whether it's Ryan-Hunter or Grassley-Baucus-Schumer-Graham, it won't be long in coming.]

Vice-Premier Wu Yi meets with Speaker of the House Nancy Pelosi later today in a closed session of Congress as well as with "Capital G" Bush on Thursday. I am inclined to think Pelosi won't be sugarcoating matters that much. After all, she is on board the China Currency Coalition and voted against China's accession to the WTO. Good fight, good night.

The British National Party Cometh

UK Industry Minister Margaret Hodge has been a lightning rod for controversy for the longest time. Her latest (mis)adventure began with this op-ed in the Guardian Unlimited on housing for immigrants which many took as pandering to a constituency with an anti-immigration undertone:

We prioritise the needs of an individual migrant family over the entitlement others feel they have. So a recently arrived family with four or five children living in a damp and overcrowded, privately rented flat with the children suffering from asthma will usually get priority over a family with less housing need who have lived in the area for three generations and are stuck at home with the grandparents. [The Guardian points out that this is factually incorrect.]

We should look at policies where the legitimate sense of entitlement felt by the indigenous family overrides the legitimate need demonstrated by the new migrants.

We should also look at drawing up different rules based on, for instance, length of residence, citizenship or national insurance contributions which carry more weight in a transparent points system used to decide who is entitled to access social housing.There are a small number of confirmed refugees who, of course, would receive the same entitlements as British citizens. However, most new migrant families are economic migrants who choose to come to live and work here. If you choose to come to Britain, should you presume the right to access social housing?

Now, Barking has a large white working class community that has become disaffected with politics-as-usual. During the 2006 election cycle, she gave attention to the fringe British National Party (BNP) by noting that it might garner 8 out of 10 white votes there. Critics say this led to the BNP winning 12 out of 13 seats contested by BNP candidates in Barking during local council elections. The BNP, by the way, resents the "white supremacist" characterization and has this alternative definition to offer:

How should the British National Party describe its underlying philosophy? We are neither a “right-wing” nor “left-wing” political party. We reject international capitalism, little-Englander type civic nationalism and international Marxism and despite what the liberal-left media slander us with, we are not a party of race hatred nor white supremacists so what are we?

Perhaps there isn’t an existing phrase in the political dictionary to define our embrace of personal responsibility coupled with care for the wide community, our embrace of genuine freedom of thought, of expression and association coupled with a duty to the greater good of family, community and nation. Overriding all is the notion of love - love of our own kind, our rich heritage, our hallowed traditions and centuries old “western” philosophy.

In any event, her op-ed poured even more fuel to the fire that she was pandering once again to the BNP for political purposes:

Margaret Hodge today defended her call for British families to be given housing priority over immigrants as critics claimed she was at risk of allowing the far-right BNP to dictate government policy.

The industry and regions minister acknowledged that the issue was "difficult and contentious" but said that she hoped to engage in a "civilised and constructive dialogue".

Mrs Hodge spoke out after her comments at the weekend prompted outrage from politicians of all parties.

Earlier today, Ken Livingstone, the mayor of London, warned that her outburst would be "catastrophic for community relations", while Labour MP Diane Abbott tabled a Commons motion condemning her remarks...

David Cameron, the Conservative leader, responded by cautioning MPs against "pouring out of their surgeries" and adding to the debate on immigration after listening to complaints from constituents which could be based upon rumours and inaccuracies.

And earlier today Ms Abbott insisted that the current housing crisis would not be solved by "scapegoating homeless families on the basis of race, ethnicity or national origin".

"Mrs Hodge has implied that at the moment immigrants receive some sort of special treatment for social housing; that is simply not true," she said.

"The problem with housing does not come from immigrants being given first choice but rather from the major lack of housing in this country.

"The idea of a native-born preference for social housing is clearly discriminatory ... Social housing should be allocated on the basis of need and nothing else.

"This is supposed to be a Labour government, so why are some ministers allowing the BNP to dictate our policies?"

Mr Livingstone added: "Margaret Hodge's suggestion that housing allocation should be based not on need but factors like length of residence would be catastrophic for community relations ...

"Politicians in general, and government ministers in particular, should get their facts right before making statements with the potential to do great harm to the good community relations on which the prosperity of all Londoners depends."

The Refugee Council pointed out that asylum seekers are not entitled to council housing, and that immigrants from new European Union countries face restricted access to benefits.

Yesterday, Jon Cruddas, the Labour deputy leadership hopeful and MP for Dagenham - which borders Mrs Hodge's Barking constituency - said that the minister's comments were "not only wrong; they are also inflammatory".

An early day motion tabled by Ms Abbott and supported by Keith Vaz, the former Europe minister, expresses regret at "the honourable member for Barking's recent call to give British people housing priority over immigrants".

It adds that the MPs do "not believe that the current housing crisis will be solved by scapegoating homeless families on the basis of race, ethnicity or national origin".

Monetary Unions Galore

I still remember way back when the Euro was in the $0.80 range. Folks were dumping all over it as a dumb idea that would soon end in disaster, particularly the Euroskeptics who dominate the English media. Then a funny thing happened: the Euro rose to $1.3680 and has never looked back since. The Euro has passed the el crappo worthless little green depreciation machines in terms of both bond issuance and currency in worldwide circulation. Now, everyone seems keen on setting up similar monetary unions. Let's tackle them in order:

1. Asian monetary union - the Asian Development Bank has been investigating the possibility of creating an Asian Currency Unit (ACU). However, its prospects are hindered by political horseplay ("whore's play"?...sorry for the pun). From the Vietnam Economic Times:

It is now too early to talk about issuance of an Asian common currency despite increasing economic independence between countries in this region. Many mistake the Asian Currency Unit (ACU) which will be launched by the Asian Development Bank (ADB) in March or April this year for an Asian common currency (note or coin). Such an understanding views the ACU similar to the euro which is circulating in the world. ADB representative at Manila (Philippines) headquarters talked with VnEconomy about this issuing plan.

The trend of individual Asian currencies vis-à-vis the US dollar, the euro, or the yen, is well known. However, while economic interdependence in Asia is rapidly increasing, it is still difficult to observe how Asian currencies are moving against each other and how Asian currencies as a whole are moving against external currencies, such as the US dollar, the euro, or the British pound. We intend to calculate an Asian Currency Unit as a weighted index of East Asian currencies in order to create a regional benchmark to monitor such trends.

ADB is currently reviewing different options concerning the technical aspects related to ACU calculation, including the nature of the basket, the choice of fixed weights vs. fixed units, the selection of currencies to be included in the basket, the choice of weights, the criteria for their periodical revision, and other aspects as well. After completing an internal review of these technical aspects, we expect to post several indexes for ACU on the ADB website in the next few months.

View this presentation by no less than Robert Barro from the ADB website if you're really interested.

2. Gulf Cooperation Council (GCC) monetary union - this one is already underway to some extent, though the Middle East oilers are in danger of not meeting planned dates:

Saudi Arabia, Kuwait, Bahrain and three other Gulf Arab oil producers may miss a 2010 deadline to create a single currency because their economic systems are not yet aligned, Bahrain's Crown Prince said on Tuesday.

"I find it increasingly unlikely to meet that date," Sheikh Salman bin Hamad al-Khalifa told reporters on the sidelines of an exhibition in the Bahraini capital, Manama. He was responding to questions about whether the states could meet the deadline.

The six states, including the United Arab Emirates, Qatar, and Oman, suffer from a "lack of complementary systems", Sheikh Salman said, without being more specific.

The Gulf Cooperation Council countries plan to establish a single currency on January 1, 2010. Gulf officials have raised doubts in the past few months about whether the target could be met.

Asked whether he was concerned about the US dollar's recent slide to a record low against the euro, Sheikh Salman said: "It's not a situation that we haven't been in before. We can handle it, I think."

3. North American monetary union (choke! gasp!) - yessiree Bob, even the Americans might soon junk the wretched dollar. Bank of Canada Governor David Dodge had this to say:

Bank of Canada Governor David Dodge said on Monday it was "possible" there could at some point be a unified North American currency similar to Europe's euro.

However, Dodge, answering questions from the audience after a speech on global economic institutions, said the countries involved would have to "tear down borders in terms of labor flows" to make a joint currency work.

Instead, borders between Canada, the United States and Mexico have "gotten a bit thicker" in recent years, he said.

I am least sanguine on the prospects for an "Amero." This one's a long shot, baby :-)

Overheating Global Markets

Despite raising reserve requirements, interest rates, and even its voice over rampant speculation, China has had trouble reining in money rushing into its stock markets. Here is the latest on the madness:

Chinese stocks rebounded from an early tumble on Monday, undaunted by the latest tightening measures - a simultaneous increase in interest rates and bank reserve requirements.

The benchmark Shanghai Composite Index gained 1.04 percent to close at 4,072.23 points. The Shenzhen Composite Index went up 1.45 percent to 1,181.41 while the Shanghai and Shenzhen 300 Index of major companies rose 1.45 percent to 3,831.44.

In response to the tightening measures, the Shanghai Composite Index opened at 3,902.35, a decrease of 3.18 percent from Friday's close. However, it quickly recovered the lost ground as investors saw the dive as a good opportunity to buy.

Bank stocks were weak, with China Minsheng Banking Corporation being the biggest loser, falling 1.72 percent to 13.18 yuan per share. The Industrial and Commercial Bank of China declined 0.73 percent to 5.45 yuan, while Bank of China dipped 1.03 percent to 5.75 yuan.

Coal shares showed strong performances. Datong Coal, Anhui Hengyuan Coal Industry and Electricity Power, and Shanxi Xishan Coal and Electricity Power jumped their daily limits of 10 percent.

Air China soared 9.2 percent to 11.28 yuan. In the insurance sector, Ping An Insurance of China gained 2.03 percent to 63.46 yuan while China Life was up 0.36 percent to 39.2 yuan.

Trading was heavy, with the volume in the Shanghai Stock Exchange hitting 211.4 billion yuan and turnover in Shenzhen reaching 106.2 billion yuan.

Mike Shedlock has more on China's stock craze, which is even more bubble-icious than the American Internet craze of the late Nineties. Likely, it won't have a pretty ending with ordinary folks mortgaging their homes to buy stocks. Nor, for that matter, will things back in the good ol' US of A. The equity bubble Stateside is somewhat different in that private equity and a resulting M&A bubble have sent stocks soaring while the US economy drags along in the gutter. Nevertheless, Bill Fleckenstein sees a (surprise!) nasty ending and again points out similarities to 1929, when a stock market crash led to the Great Depression:

The economic and financial landscape of 2007 bears striking similarities to 1929. Back then, there were large, unregulated pool operators and other insiders constantly muscling the tape in whatever direction they chose. The public, too, was involved, thinking the country was experiencing a new era. Meanwhile, business began deteriorating in the spring of 1929, though the partying in stocks lasted until the fall.

To give you a flavor of those times, I'd like to quote from Frederick Lewis Allen's "Only Yesterday," which is one of my favorite books about 1929: "Mergers of industrial corporations and of banks were taking place with greater frequency than ever before, prompted not merely by the desire to reduce overhead expenses and avoid the rigors of cut-throat competition, but often by sheer corporate megalomania. (My emphasis.) And every rumor of a merger or a split-up or an issue of rights was the automatic signal for a leap in the prices of the stocks affected -- until it became altogether too tempting to the managers of many a concern to arrange a split-up or a merger or an issue rights not without a canny eye to their own speculative fortunes."Obviously, I don't need to point out how similar that is to the practices we are seeing today.

Today, too, there are pool operators, in the form of leveraged-buyout (LBO) and hedge funds, both of which borrow money to invest. And, just like their predecessors, who ignored macroeconomic and corporate deterioration, they are partying as never before. In reading the following passage from Allen's 1931 book, you have to remind yourself that it's a portrait not of 2007 but 1929:

"One could indulge in all manner of dubious financial practices with an unruffled conscience so long as prices rose. The Big Bull Market covered a multitude of sins. It was a golden day for the promoter, and his name was legion."

Hukou, China's Caste System

China's Hukou system is similar to a caste system in that the socioeconomic opportunities of individuals are largely determined by birth. The Hukou system is a remnant of the Maoist era when the government tried to control migration to large cities to prevent overcrowding by registering citizens as either "urban" or rural" residents. As China has progressed and more opportunities have sprung up in cities--particularly those in coastal areas--those in rural areas have been left behind. Hukou has thus contributed to growing inequality in China as I suggested in an earlier post. A large pool of migrant workers estimated at between 100-200 million persons made up of those who have moved from rural to urban areas exists whose uncertain status has let unscrupulous employers take advantage of them by paying lower wages, exposing them to lower safety standards, and withholding job security. In addition, this "floating population" is unable to obtain state benefits such as health and education while outside their area of registration. That the official China Daily keeps publishing stories about the inequities of the hukou system suggests the government is keen on reforming it:

When Du Yumeng was born in December 2005, she was probably not aware that she had been classified into a different category from other babies - a category which includes people toting wheelbarrows of fresh fruit, selling steamed buns from a corner booth or peddling phone cards. They all share one thing in common - a rural 'hukou', or household registration.

Set up in 1958 in order to control mass urbanization, China's hukou system effectively divides the population in two - 'the haves' (urban households) and 'the have not's' (rural households).

Under the system, rural citizens have little access to social welfare in cities and are restricted from receiving public services such as education, medical care, housing and employment, regardless of how long they may have lived or worked in the city.

Even though Yumeng's parents had been working in Beijing for 10 years, she had to be born back in her father's hometown of Shuangfeng Village, Anhui Province. This was primarily due to her parents' lack of access to services in Beijing and the need for a birth permit from Shuangfeng, where the hukou is registered.

Aged 31, Yumeng's father, Du Shujian, receives a monthly income of 2,000 yuan ($250 dollars) as an interior construction worker. He has been deprived of urban medical and social welfare ever since he arrived in Beijing 10 years ago.

What's more, because of the restrictions of the hukou system, Du is prohibited from buying an affordable house in Beijing - you need a Beijing hukou for that.

"I have decorated so many apartments for Beijing citizens, but I don't know when I can have my own," Du said.

"And my daughter - I feel sorry for her as she had no choice but to have the same rural hukou as me, though she is too young now to know what it means for her..."

As China is struggling with the social effects of a widening rural-urban divide, there have been growing calls to reform the hukou system, owing to the fact that millions of farmers have illegally started moving to towns and cities in order to find work.

In a week-long poll conducted in March by website Sina.com and the China Youth Daily social survey centre, 92 per cent of the 11,168 respondents said that the system was in need of reform.

More than 53 per cent said restrictive policies attached to the system, such as limits on access to education, healthcare, employment and social insurance should be eliminated. More than 38 per cent called for the system to be scrapped entirely.

"Hukou has played an important role as a basic data provider and for identification registration in certain historical periods, but it has become neither scientific nor rational given the irresistible trend of migration," Professor Duan Chengrong, director of the Research Center for Population and Development at the Renmin University of China, said.

At a national public security conference on March 29, officials from the Ministry of Public Security proposed a way to deal with the inequalities across Chinese society and bridge the divide.

The conference suggested eliminating the two-tiered household registration system and to allow freer migration between the cities and the countryside...

The International Organization for Migration, which opened a new liaison office in Beijing last month, is set to launch a US$3 million project in a bid to help Chinese government agencies and social organizations improve their mechanisms and services to protect the rights of migrant workers.

Twelve provincial areas, including Hebei, Liaoning, Shandong, Guangxi and Chongqing, have launched trial reforms to help bring an end to the differentiation between rural and urban residents.

Beijing, Shanghai and some cities in Guangdong Province have loosened some of the restrictions that previously hindered people from changing their hukou. Northeast China's Heilongjiang Province is also initiating trial reforms in its household registration system, and aims to have them fully implemented across the province by the end of the year.

Paulson's Tripartite Juggling Act

Having briefly reviewed Vice-Premier Wu Yi's biography, let us now turn our attention to her counterpart in the upcoming Strategic Economic Dialogue between China and the US, Treasury Secretary Hammerin' Hank Paulson. In general, we know more about him than her:

Before coming to Treasury, Paulson was Chairman and Chief Executive Officer of Goldman Sachs. He joined Goldman Sachs in 1974 in the Chicago Office and became a partner in 1982. From 1983 until 1988, Paulson headed up Investment Banking Services for the Midwest Region and became Managing Partner of the Chicago Office in 1988. In 1990, he was named Co-head of the firm's investment Banking Division, and in 1994 he rose to the position of President and Chief Operating Officer. In 1998, he was named Co-Senior partner, and with the firm's public offering in 1999, became Chairman and CEO [and made lots of money, it goes without saying].

Prior to joining Goldman Sachs, Paulson was a member of the White House Domestic Council, serving as Staff Assistant to the President from 1972 to 1973, and as Staff Assistant to the Assistant Secretary of Defense at the Pentagon from 1970 to 1972.

Paulson graduated from Dartmouth in 1968, where he was a member of Phi Beta Kappa and All Ivy, All East, and honorable mention All American for football. He received an M.B.A. from Harvard in 1970...

As I see it, Paulson needs to accommodate three interests, and this task is far from easy as they ae often conflicting. In order of importance...

1. Wall Street - Poll after poll indicates that a Democrat will likely succeed "Capital G" Bush. With that in mind, Paulson's tenure will soon be over and he will return to the financial services industry. Safeguarding the interests of Wall Street is his primary objective. To be sure, Wall Street has benefited greatly from China and other current account surplus-running countries' "vendor financing" for overextended America. Financial service conglomerates have been busy devising all sorts of financial instruments for them to pile into. In Brad Setser's colorful phrase, it's "financial Dutch disease" as American manufacturing loses out in favor of the financial sector's comparative advantage in offering financial instruments to foreigners.

2. The Bush Administration - I almost forgot that Paulson still works for these guys. You can bet your bottom dollar though that they played a large role in his selection as Treasury Secretary. Undoubtedly, Bush owes a lot to his financial services industry contributors. In 2004, get this--9 out of 10 of Bush's top contributors were from the industry according to opensecrets.org:

Morgan Stanley	$600,480
Merrill Lynch	$580,004
PricewaterhouseCoopers	$513,750
UBS Americas	$472,075
Goldman Sachs	$390,600
MBNA Corp	$356,350
Credit Suisse Group	$331,040
Lehman Brothers	$329,725
Citigroup Inc	$320,620
Bear Stearns	$309,150

The Bush administration's interests are thus largely similar to Wall Street's. But, the administration has an additional task in pacifying a Congress keen on slapping all sorts of punitive trade measures on China. It's a balancing act: Wall Street likes things as they are, but Congress is hellbent on enabling tariffs galore. Paulson needs to convince Congress that the administration is acting tough on China to an extent that trade measures are unwarranted. It's not an easy act.

3. China - Lest we forget, Wall Street and Bush were keen on naming Paulson as the Treasury chief since he has cultivated good relations with the Chinese leadership. According to Bloomberg:

Expectations were higher a year ago this month, when President George W. Bush nominated Paulson. As an executive with Goldman Sachs Group Inc., Paulson had visited China more than 70 times, establishing friendships with many in the country's political elite, including President Hu Jintao.

``Managing China is his highest individual priority as secretary of the Treasury by far, and I'm sure that was fully agreed when he came on board,'' Yeutter says.

Managing expectations is a priority now. ``When we met with him last December, he was very careful'' not to raise unrealistic hopes about his talks in Beijing, Michael Campbell, vice chairman of the National Association of Manufacturers' board of directors, said after a session with Paulson in Washington on May 9. ``It was the same this time.''

Nevertheless, I am convinced that Paulson's juggling act is rapidly becoming untenable. China doesn't want to go for a "big bang" revaluation, nor does it want to be seen caving in to America. On the other hand, the US Congress is fed up with Treasury's unwillingness to brand China a currency manipulator. Whether or not China is classified as a currency manipulator at the next opportunity, Congress will be at work on the famed bipartisan, veto-proof (60% majority in both houses to avoid Bush's veto), WTO-legal legislation against China's perceived undervaluation of the yuan. As the old Chinese curse goes, "May you live and interesting times." And, Paulson is at the epicenter of these interesting times--probably more so than anyone else.

Still, Paulson has become resigned to the probability that Congress will act. Punitive legislation is ``not just a possibility'' but a ``likelihood,'' he said in a speech May 2...

Paulson often describes the differences between the U.S. approach and China's as the U.S. wanting a lot in a hurry, while the Chinese are willing to do a little over a much longer period.

``It's hard to imagine anyone with a shorter sense of timing than the Americans, and Chinese rulers don't have to worry about re-election,'' says William Kirby, a professor of Chinese history at Harvard University in Cambridge, Massachusetts.

Shiv Sena & Hindu Nationalism

Imagine New York City's local government being under the control of the Ku Klux Klan. Hard as it is to imagine, that is the sort of situation they have in Mumbai, India. The largest city in India is politically dominated by a nationalist organization known as Shiv Sena. From scolding Shilpa Shetty for publicly kissing Richard Gere (actually, that may not have been such a bad idea) to haranguing lovers on Valentine's Day (which is bad for commerce), Shiv Sena has got the nationalist basics covered. Pictured here is its founder, Balasaheb Thackeray, a Hitler admirer. The New Republic offer this profile of Shiv Sena:

Savita told me her story as we sat in a quiet Thai restaurant near the ocean. As its variety of cuisines demonstrates, this cosmopolitan port city of 13 million is a diverse mélange of cultures, home to both Bollywood and the Bombay Stock Exchange. It's not the kind of place where one expects to find a violent hoard of Valentine's Day haters. But not only does such a group exist--it is the city's ruling political party. The men who attacked Savita's friend were members of Shiv Sena, a group of Marathi Hindus (Hindus from the Indian state of Maharashtra, which includes Mumbai) who, in elections this past February, re-secured their complete control of Mumbai's municipal government. Shiv Sena, which means "Army of Shiva" (the founder of the Maratha Empire), incites violence and unrest over what it deems improper cultural or religious events--from Valentine's Day to Richard Gere's recent public smooch of Bollywood actress Shilpa Shetty. More ominously, it preaches contempt for foreigners, Muslims, and non-Marathi Hindus.

As Shiv Sena demonstrates, India is going through a debate over immigration and national identity very similar to our own. But, instead of hanging out by the border peering through binoculars, India's Minutemen are actually running one of the country's major states--the Indian equivalent of California. In Mumbai, Shiv Sena has even promised to end migration into the city. How did a party bent on exploiting every ethnic and religious fault line manage to gain control of the most cosmopolitan city in the world's largest multi-ethnic democracy? And what does this tell us about the United States?...

Much of Shiv Sena's success lies in the displacement of the Marathi community in central Mumbai. In the 1950s, immigrants from all over India began to pour into the city for jobs, and many native Marathis began to feel marginalized and shut out of the workforce. Into this void stepped Bal Thackeray--"the Tiger," as his supporters call him--a former political cartoonist bent on reasserting the rights of Marathis. In 1966, he founded Shiv Sena; and, by 1984, he had allied it with the BJP, the major right-wing Hindu nationalist force in India. Over the next two decades, international companies moved in and real estate prices skyrocketed, forcing Marathis into the suburbs. "After the economy began to heat up, the Marathi got dispersed and dislocated," says Kumar Ketkar, the editor of the Marathi paper Loksata ("People Power"). Thackeray capitalized on this--vocally championing the rights of native Hindus. By the mid-'90s, the "Sons of the Soil," as Shiv Sena is called, had completely taken over Mumbai's government. (Thackeray had the city, formerly the anglicized "Bombay," renamed in an "anti-imperialist" gesture in 1995.)

Thackeray's rise has not been without controversy: He is widely assumed to have been behind the 1992 Hindu-Muslim riots, in which approximately 1,200 Muslims were killed, and a variety of other attacks on non-Hindus. As for Thackeray's affection for the Führer, he told an Asian newspaper, "I am a great admirer of Hitler, and I am not ashamed to say so! ... Actually, we have too much sham-democracy in this country. What India really needs is a dictator who will rule benevolently, but with an iron hand."

Chinese Environmental Toons

I was snooping around the China Daily website while preparing the last post when I came across this section entitled the "2007 University Contest on Environmental Protection." It's a timely contest considering that China has 16 out of 20 of the most polluted cities in the world and will soon be the its largest emitter of greenhouse gases. My first selection from an interesting bunch of illustrations is this one to the right featuring an Olympic motif. Tying the Games to environmental quality is, er, natural since a heavily polluted China may put off visitors.

Another one that caught my eye is this Dante's Inferno meets Dr. Seuss's Lorax drawing below. It's pretty darned good if you ask me. There are several more in this series featuring the gingerbread man. They're definitely worth checking out. Just hope they help in some way to encourage environmental consciousness there.

On US Tech Exports to China

In her WSJ op-ed (see previous post), Wu Yi repeated the oft-heard refrain that if the US were really serious about reducing its trade deficit, it would lift restrictions on exports of high-technology products to China. As usual, Communist Party mouthpiece China Daily elaborates on this position:

The US administration has been adopting a strict export control policy on hi-tech exports to China for "security reasons", which has hindered China's imports from the country. Washington drafted a new rule in July [of 2006], stipulating license requirements for additional items defined as "military end-use", and making the procedure of applying for licenses more complicated. Wu noted trade protectionism is on the rise in the US. Some overstate the US trade imbalance with China and blame China for the problems that have arisen as the US adjusts its economic structure to respond to challenges posed by economic globalization. Some have even advocated trade protectionism.

America's main fear is that so-called "dual use" (civilian and military) technologies may be used to bolster China's military ambitions. After all, its military budget has increased substantially as of late--but not to worry, of course, says China Daily. Operation Retake Quemoy (Taiwan) is America's main fear, for it is implicated in Taiwan's defense by the Taiwan Relations Act of 1979 "to consider any effort to determine the future of Taiwan by other than peaceful means, including by boycotts or embargoes, a threat to the peace and security of the Western Pacific area and of grave concern to the United States." The rather paranoid Heritage Foundation has this to say:

The U.S. faces serious security challenges from China. On May 23, the Pentagon issued its report on China’s military power. The same day, the Under Secretary of Commerce announced a tightening of controls on the export of goods with dual military and civilian use to China. Moreover, China has an active program of espionage in the U.S. to gather industrial and military secrets. China’s capacity for espionage in the U.S. is broad. There are more than 130,000 students [great way to attract foreign students, Heritage Foundation] from China in the U.S. at any time, and 3,000 front companies engage in gathering intelligence and industrial secrets.

China poses a challenge to the United States from economic, diplomatic, and military standpoints. Beijing has adopted a strategy that focuses on the accumulation of strategic resources and the development of a productive capacity that attracts vast amounts of foreign capital, modernizes its industry, leaps its technological base forward, and strengthens its military...

A Bureau of Industry and Security undersecretary's testimony describes the situation thusly:

From a security standpoint, the U.S. Government remains concerned about China 's modernization of its conventional military forces and the risk of diversion of sensitive dual-use items and technology to Chinese military programs. For example, building state-of-the-art semiconductor plants could increase China 's ability to apply this technology and equipment in military programs. Advanced telecommunications equipment – if illegally diverted to military end-users – could provide the Chinese missile, nuclear weapons and other military programs with the means to enhance performance capabilities in military radar applications. China has also had limited success in the areas of building and enforcing their export control system and effectively meeting U.S. nonproliferation objectives. The U.S. Government has imposed sanctions on a number of Chinese entities that have exported sensitive items to countries of concern.

Accordingly, the Administration has promoted both our security and our economic interests in controlled trade with China . We seek to implement a policy that ensures that U.S. exports are not diverted to end-uses within China that we do not support, and are not re-exported to other foreign government or terrorist weapons programs that are adverse to our interests. BIS and its interagency export control partners carefully evaluate proposed exports of dual-use items to China on a case-by-case basis, taking into account the type of item to be exported, and the proposed end-user and end-use. BIS does not issue licenses for sales of dual-use items and technology to China if the item or technology will make a direct and significant contribution to the PRC's electronic and anti-submarine warfare, intelligence gathering, power projection, or air superiority. We also deny all items controlled for missile technology reasons that enhance China 's Missile Technology Control Regime (MTCR) Category I missile or weapons of mass destruction (WMD) delivery capabilities.

Moreover, this Administration does not approve licenses for military end-users or end-uses within China , consistent with the long-standing U.S. arms embargo. In the coming months, the Department of Commerce will propose a new “catch-all” regulation that will require a license for otherwise uncontrolled exports that could materially assist the Chinese military, and we will review any application that supports the advancement of Chinese military capabilities under a general policy of denial.

You can also read the provision's fine print if you are interested.

Who is Madame Wu Yi?

Chinese Vice-Premier Wu Yi is best known as US Treasury Secretary Hammerin' Hank Paulson's sparring partner in the US-China "Strategic Economic Dialogue" circus, which comes to Washington, DC next week. According to Paulson, she is a "force of nature." Forbes concurs, claiming that she is the third most powerful woman in the world after #1 German Chancellor Angela Merkel and #2 US Secretary of State Condoleezza Rice. If having to confront China-bashing congressmen next week wasn't enough, she is also involved in China's drive to secure IP law compliance. A tall order, but remember that she was called upon to fix the SARS epidemic in China to good effect. Befitting a diplomat, here is her optimistic and positive take on "win-win" US-China relations from the Wall Street Journal:

China-U.S. business and trade relations are cooperative in nature. It is true that problems, differences and even disputes have arisen in the course of the rapid expansion of our relationship. But mutual benefit and win-win progress remain the defining feature of our business and trade ties. This is the larger picture that no problem can overshadow. As to differences and disputes, it is important that China and the U. S., both being stakeholders and constructive partners, should address them in a coolheaded, objective and responsible way.

Economic globalization is the trend of our times. China and the U.S., having both benefited from economic globalization, need to rise to its challenges. We both need to make necessary economic adjustments, adopt sound and reasonable economic and trade policies, and seize the opportunities created by globalization to promote economic development and make life better for our peoples. However, there are some in the U.S. who overstate the U.S. trade imbalance with China, and blame China for problems that arise as the U.S. adjusts its economic structure to respond to challenges posed by economic globalization. Some even advocate trade protectionism. Such irresponsible acts can only obstruct economic globalization and hinder the fundamental interests of both China and the U.S., our peoples and the sustainable and steady growth of the world economy. China and the U.S. need to, based on our respective national conditions, properly address issues arising in the course of our respective economic adjustment, and resolve bilateral economic and trade issues through enhanced dialogue and consultation, and in a reasonable manner. Attempts to politicize trade issues should be resisted.

As we know, trade deficits are caused by a number of factors associated with economic globalization such as savings and investment correlations, the international division of labor and investment relocation. The U.S. trade deficit with China in goods is also a reflection of these macroeconomic factors. It does not reflect the overall and genuine movement of interests in China-U.S. business and trade relations. China does not seek a trade surplus. In the five-year development plan for 2006 through 2010, the Chinese government explicitly set a basic goal of sustaining economic growth and promoting balance in international payment and macroeconomic stability by expanding domestic demand and particularly, consumption demand. We have taken steps including expanding market access, enhancing intellectual property protection and increasing imports to promote balance in trade. The U.S., as a global leader in science and technology, should give full play to its comparative advantage, enhance mutual trust and relax export controls to boost the competitiveness of American companies, reverse the trend of dwindling market share of American high-tech products in China, and reduce its trade deficit with China.

UPDATE: Despite the diplomatic WSJ op-ed, the Washington Post suggests Wu was quite displeased with the trade measures aimed at China, particularly over intellectual property:

The Chinese are so mad there had been talk Wu might stay home to show "dissatisfaction and anger," said Xu Mingqi, an international economics professor at the Shanghai Academy of Social Sciences, a government-affiliated think tank.

Wu relented, however, and on Tuesday and Wednesday she will lead a delegation that includes 14 government ministers...

In recent months, official rhetoric on U.S.-China trade has grown increasingly hostile.

When the United States imposed the tariffs on paper, China said the sanctions violated a pledge to resolve trade disputes through dialogue. On the intellectual property issue, Wu['s] response, roughly translated, was "If you want a fight, let's fight."

Next week will be interesting. Nevertheless, I remain convinced that nothing substantive will happen at the second round of the "Strategic Economic Dialogue" (or is it a "Monologue" of two sides talking past each other?) If China is not branded a currency manipulator by Treasury in its next report on foreign exchange, then brace yourselves for the long-rumored veto-proof, WTO-legal action against China.

Microfinance and Capital Markets

I am (fashionably?) late to this article on how microfinance initiatives can be bolstered by the development of capital markets according to Morgan Stanley:

At present, microfinance is changing from a sector driven mainly by a commitment to a social bottom-line to one more responsive to the demands and interests of private capital and customers. Traditional NGOs dedicated to microfinance have begun to transform themselves into licensed banks and non-bank financial intermediaries to gain access to public funds or small savings deposits. At the same time, some established commercial banks and finance companies have recognized the potential of micro-credit to enhance their product mix and bottom line. Encouraged by the successes of MFIs, many credit unions have begun to reinvent, or at least reinvigorate, themselves and are seeking to regain their leading role as suppliers of a full range of financial services to the poor. Even more striking, the world's largest banks, including Citigroup, Deutsche Bank, Commerzbank, HSBC, ING, ABN Amro, and Morgan Stanley, are entering this “double-bottom line” industry.

Greater involvement of the capital markets is likely necessary for microfinance to reach its full potential. Estimates of MFI annual growth rates range from 15% to 30%, thus suggesting a demand of somewhere between $2.5 billion and $5.0 billion for portfolio capital each year in the immediate future, with $300 million to $400 million in additional equity required to support such lending. But even these estimates could be too low if expansion continues at the exponential rates seen recently in larger MFIs. In short, it is clear that microfinance will need significant amounts of financing in the coming years.

Much of the demand will come from a handful of institutions. According to the Consultative Group to Assist the Poor, there are now as many as 10,000 microfinance institutions worldwide. But less than 1% are considered economically viable, and just 150 to 200 are estimated to be serving the vast majority of clients. These top-tier MFIs, all of which could be described as having taken a “commercial approach,” share a number of other important features: A range of products developed specifically for their clientele; ability to operate in competitive environments; and consistent maintenance of a portfolio at risk of less than 5% and repayment rates of 97-98% or higher.

Securitization—the repackaging of loans into tradable securities—is likely to be the quickest route for the microfinance industry to gain investor acceptance as an asset class and access to mainstream capital markets. In April 2006, Morgan Stanley arranged the BlueOrchard Loans for Development 2006-1 transaction—an almost $100 million collateralized loan obligation (CLO) backed by unsecured senior loans to 21 MFIs in 13 developing countries in Latin America, Eastern Europe and Asia. The largest of its kind to date, and the first to be arranged by a major international investment bank, the BOLD transaction showed that standard securitization techniques can be used to allow the mainstream capital markets to invest in the microfinance industry.

The Power of Nightmares Revisited

The Wolfowitz saga jogged my memory about the BBC documentary series The Power of Nightmares. Its basic premise is that having lost the ability to provide citizens with dreams, politicians also lost their ability to control. However, they have managed to find something to replace dreams in the form of nightmares. Nowadays, terrorism provides the nightmares. (Note that documentary maker Adam Curtis has a clear left-leaning bias.) The series narrates the rise of two conflicting movements that, ironically, rose to prominence as a response to the perceived vacuousness of modern society--the radical extremists and the neo-conservatives. The latter group featured Leo Strauss, whose ideas inspired one Paul Wolfowitz. The synopsis for parts I, II, and III are online. Better yet, you can view the entire series by streaming it. Enjoy, but be warned that you'd better have some free time before you get started as this series makes for compelling viewing.

Economist's Cool China cover

Dig the cover of this week's Economist on rising "China-bashing" sentiment Stateside. I may not always be 100% on board with this magazine, but they sure do make great covers once in a while! I am sorry that some of the articles are pay-per-view, dear friends, but I will repeat the main points here. As to what I believe they got wrong, I will make brief comments on why I think they're so. If your interest is piqued by these points, do head over to your local newsstand and pick up a copy of this week's edition. It's well worth a read even if, like me, you disagree with a fair number of premises:

WHAT THEY GET RIGHT

• Nothing will likely happen as the second round of the (so far lame-o) Strategic Economic Dialogue between the US and China heads to Washington May 22-3;
• The bilateral deficit is more about America's lack of savings than China's undervaluation of the yuan;
• A yuan revaluation alone will do little if anything to correct the trade imbalance;
  
• An all-out trade war is unlikely because we've got a rule-based WTO now;
• "China is a scapegoat for broader economic anxieties to do with stagnant wages, rising income-inequality and dwindling health and pension benefits" in the US;
• "Comprehensive health-care reform to create a system where all Americans have access to portable health insurance would do a lot to reduce workers' anxiety and equip them for an economy that these days demands frequent job shifts";
• "A revaluation could also help the government succeed in shifting the balance of growth away from investment and net exports towards consumption";
• "And as with all dictatorships, there is the need to seem tough. With the five-yearly Communist Party congress only months away, China's president, Hu Jintao, cannot be seen to be bowing to American pressure on the yuan or anything else."

WHAT THEY GET WRONG, OR ARE QUESTIONABLE ON

• The US-China $232.5B bilateral trade deficit is exaggerated because half of that amount consists of China serving as a way station in the processing trade. Technically this likely is true, but China's non-processing exports are rising more quickly than processing exports (figure 3) and so are non-processing imports than processing imports (figure 4). The figures below are care of the World Bank Beijing office's recent report;
• China can't allow its currency to drastically revalue because it needs to provide employment to those moving from rural to urban sectors. Actually, Chinese industrial employment has remained fairly steady as a percentage of the workforce because productivity increases have kept industrial labor demand fairly contained--hence growing inequality there;
• "The case against China is even weaker than the one against Japan was [in the 80s]" You can't have it both ways, Economist. There is now a WTO that officially frowns on IP violations, subsidies, and the like whereas there wasn't one in the 80s;
• Intellectual property rights violations are peanuts in the overall scheme of things. Ditto;
• Those American consumers simply don't appreciate the benefits they gain from having a China supplying goods at lower prices. Try selling that to regular Joes and Janes instead of elite policymakers. Public perceptions still matter in democracies, methinks.
  

Si Se Puede Catches a Big Break

Immigration-friendly forces in the US scored one over the Buchanan/Dobbs/Tancredo (B-D-T) "America is for Americans" xenophobic crowd today as the Senate and the White House agreed to pen a more lenient measure than the originally conceived Z Visa. That said, the House is loaded with B-D-T folks so this immigration reform proposal is by no means guaranteed to get passed. Among other things, it's a move to a skill-based points system alike what they have in Australia and Canada, somewhat mitigating concerns that America will be overrun by unskilled workers. From the LA Times:

A bipartisan group of senators reached agreement today on an immigration reform bill that would allow millions of illegal immigrants to gain citizenship and create a new merit-based system that will determine whether some legal immigrants are admitted.

The agreement, negotiated with the intense involvement of the White House, brings President Bush one step closer to a domestic goal that he has championed for years. It also sets the stage for a divisive debate that some lawmakers hope to complete by Memorial Day.

"This plan isn't perfect, but it's a strong bill and a worthy solution," Sen. Edward M. Kennedy (D-Mass.) said at an afternoon news conference...

The rough outlines of a deal have been circulating and include a "Z visa" that would allow illegal immigrants to transition to citizenship, provided they meet many requirements.

These include a $5,000 fine that can be paid over time, processing fees for the visa, and a requirement that the head of household return to their home country within eight years.

The bill also includes the Dream Act, a provision for illegal immigrants, who were brought in as children and are enrolled in college or the military. They would be immediately eligible for the Z visa. As long as they remain employed or in school and do not have a criminal record they could become eligible for legal permanent resident status, a step toward citizenship, in three years...

The plan would also reconfigure the system for future legal immigration, setting aside 40% of future visas to be allocated on a merit-based system that awards points for education and skills that are needed in the U.S. These could include high-tech skills as well as low-tech talents that are in demand.

Si se puede (Yes, we can!) Julia Preston over at The Lede also has a good summary of US immigration issues. Meanwhile, Capital G (Bush) had this to say:

I want to thank the members of the Senate who worked hard. I appreciate the leadership shown on both sides of the aisle. As I reflect upon this important accomplishment, important first step toward a comprehensive immigration bill, it reminds me of how much the Americans appreciate the fact that we can work together -- when we work together they see positive things.

Immigration is a tough issue for a lot of Americans. The agreement reached today is one that will help enforce our borders, but equally importantly, it will treat people with respect. This is a bill where people who live here in our country will be treated without amnesty, but without animosity.

3/18 Update: Tempering optimism, Businessweek points out that this piece of legislation makes compromises that may not satisfy a whole lot of folks:

The compromise may end up being little more than an opportunity for politicians to pose in front of television cameras. It is a step forward in terms of process, allowing debate to proceed in the Senate in the weeks ahead. But with critics pushing for so many changes in so many different directions, the proposal may do little to increase the odds of final legislation. "We are pleased that the process is moving forward," says Frank Sharry, executive director of the pro-immigrant National Immigration Forum. But there are "problematic elements in the package that could undermine the purpose of the bill."

Fleeing the IMF

The Wolfowitz post below jogged my memory about a post I've been intending to make for quite some time now concerning the International Monetary Fund (IMF). It seems that there are several discontented with it in both Asia and Latin America. A common theme is that these countries are distrustful of the IMF as it is seen as being staffed by American lackeys. The debate goes on whether that's true. Let's start off with the resurrected plans for an "Asian Monetary Fund" (AMF). If you care to remember the Asian crisis, former US Treasury Secretaries Rubin and Summers were strongly against the plan. That was then, this is now c/o the Korea Times as an even more expansive "economic union" is planned:

There was a significant agreement among the finance ministers of 13 Asian nations in Kyoto, Japan, over the weekend. On the sidelines of the Asian Development Bank's annual meeting, the ``ASEAN+3'' (Korea, China and Japan) group agreed to pool their vast foreign exchange reserves to weather future financial crises like the one that hit the region a decade ago. If nurtured well, this could develop into an Asian version of the International Monetary Fund. But don't hold your breath, yet.

The Kyoto accord represents a big step toward regional financial unity, as an expanded and multilateral version of the ``Chiang Mai Initiative'' [Asian Monetary Fund] in 2000 -- a bilateral currency swap arrangement in times of financial emergencies. The regional attempts for closer financial cooperation started during the 1997-98 currency crisis, but failed to make much progress because of internal problems and strenuous U.S. opposition. Now, the conditions seem far more favorable. The biggest stumbling block still remains within, however.

Behind this renewed attempt are Asia's deep foreign currency reserves. Among the world's top-8 countries in currency reserves, all, except Russia, are Asian nations, whose combined reserves account for two thirds of the global total. Asian countries' currency reserves stood at $500 billion a decade ago but have grown six-fold to $3.1 trillion now. This does not mean, however, the region's ability to deal with a potential crisis has grown as well. The portion of speculative hot money has even risen.

Next up is Bush's arch-nemesis Hugo "Boss" Chavez. I previously relayed his plans to create a gas cartel. Now, Mr. Chavez wants Venezuela to leave the IMF and set up an alternative regional economic institution composed of Latin countries with left-leaning leaders. Like the Asian countries, the other Latin ones are nowhere near as bold as Venezuela in suggesting that they will move away entirely from the IMF, but there looks like some desire for distancing at play here. From The Economist:

SINCE winning another six-year term as Venezuela's president last December, Hugo Chávez has pushed his country swiftly towards “21st century socialism”. As well as plenty of old-fashioned state control (private banks and a steel firm are the latest threatened with nationalisation), this seems to involve Venezuela turning its back on the world. Mr Chávez says that he will leave the International Monetary Fund, the World Bank and perhaps the Organisation of American States. All, he claims, are under the thumb of “the empire”, as he calls the United States. Instead, he is proposing a new body: the Bank of the South (see article). This would make loans to Latin American governments without “neoliberal” strings.

If it does leave the IMF and the World Bank, Venezuela will join a very select club. The only countries that are not members are Cuba and North Korea. Note that the list does not include China, to which Mr Chávez is keen to sell his oil, or his new-found ally, Iran. Since Venezuela is awash with oil money, for now it has no need for either the IMF or the World Bank. Worryingly, Mr Chávez may persuade much poorer countries in Latin America—such as Bolivia, Ecuador and Nicaragua, all governed by his allies—to follow suit.

This might sound an empty threat; but in many parts of the developing world there is resentment against “the Washington consensus”. African countries leap at Chinese aid because it ostensibly comes with fewer strings attached than the World Bank's money. The IMF is hardly the most-loved institution in Latin America: one of Mr Chávez's bigger allies, Argentina, blames the fund for its economic collapse of 2001-02 (mostly wrongly). And the proposed Bank of the South has been given spurious plausibility by the American administration's misplaced determination to keep the World Bank's unpopular president, Paul Wolfowitz, in his job.

Wolfowitz Hits the Road

I'll make an obligatory post for I'm sure the rest of the blogosphere and the media pack will soon be all over the end of this appalling saga. Paul Wolfowitz has resigned from his post as World Bank president. You may not believe this, but I actually feel kind of sorry for Wolfowitz. From my point of view, he did try to make a good faith effort at leaving a development legacy of some sort, but the pull of his bad habits from the past was too strong. His preference for yes-men (and women) to surround him certainly didn't help, nor did his combative attitude coming in which never really waned. Another down, US Attorney-General Alberto Gonzales left to go. On the plus side, you can say that many in the US who were ignorant of the World Bank and its activities were made aware of its important mission through the appointment of the arch-villain neoconservative--a silver lining to this nasty cloud? To avoid further spin (!) I will quote directly from the World Bank executive directors and the man himself:

Washington, May 17, 2007- The Executive Directors have released a statement on the resignation of Paul Wolfowitz as President of the World Bank Group. They will meet tomorrow to continue discussion on arrangements for the interim period as well as the many items on the governance agenda.

STATEMENT OF EXECUTIVE DIRECTORS

Over the last three days we have considered carefully the report of the ad hoc group, the associated documents, and the submissions and presentations of Mr. Wolfowitz. Our deliberations were greatly assisted by our discussion with Mr Wolfowitz. He assured us that he acted ethically and in good faith in what he believed were the best interests of the institution, and we accept that. We also accept that others involved acted ethically and in good faith. At the same time, it is clear from this material that a number of mistakes were made by a number of individuals in handling the matter under consideration, and that the Bank’s systems did not prove robust to the strain under which they were placed. One conclusion we draw from this is the need to review the governance framework of the World Bank Group, including the role as well as procedural and other aspects of the Ethics Committee. The Executive Directors acknowledge Mr. Wolfowitz’s decision to resign as President of the World Bank Group, effective end of the fiscal year (June 30, 2007). The Board will start the nomination process for a new President immediately.

STATEMENT OF PAUL WOLFOWITZ

I am pleased that after reviewing all the evidence the Executive Directors of the World Bank Group have accepted my assurance that I acted ethically and in good faith in what I believed were the best interests of the institution, including protecting the rights of a valued staff member.

The poorest people of the world, especially in Sub-Saharan Africa deserve the very best that we can deliver. Now it is necessary to find a way to move forward.

To do that, I have concluded that it is in the best interests of those whom this institution serves for that mission to be carried forward under new leadership. Therefore, I am announcing today that I will resign as President of the World Bank Group effective at the end of the fiscal year (June 30, 2007).

Russia's "Cyberwar" vs. Estonia

I had been peripherally aware about Russia's dissatisfaction that the Baltic state of Estonia, formerly part of the Soviet Union, decided to relocate the statue of the Bronze Soldier--which commemorates the Soviets retaking Tallinn from the Germans in 1944. It currently calls a military cemetery home as shown in the picture. Quite a number of Estonians saw it as a symbol of Soviet occupation, and were keen on having it relocated. However, the Russian-speaking community in Estonia and a group of war veterans have taken umbrage to this act. Riots have occurred in Estonia. More importantly for this story, Russia has not taken very well to this relocation project.

While scanning our copy of The Guardian at the office, I came across this fascinating article that describes the "cyberwar" Russia is allegedly waging against Estonia as a response to the Bronze Soldier relocation. NATO has been called in by Estonia to assess this new security challenge. (Is it now clear why Estonia was set on joining NATO?) It seems Russia is still keen on seeing itself as the overlord of former parts of the Soviet Union, whether it be over energy quarrels, multicolored revolutions, or statues being relocated. Ah, but for the glory that was the Soviet Union (at least if you ask Putin):

A three-week wave of massive cyber-attacks on the small Baltic country of Estonia, the first known incidence of such an assault on a state, is causing alarm across the western alliance, with Nato urgently examining the offensive and its implications.

While Russia and Estonia are embroiled in their worst dispute since the collapse of the Soviet Union, a row that erupted at the end of last month over the Estonians' removal of the Bronze Soldier Soviet war memorial in central Tallinn, the country has been subjected to a barrage of cyber warfare, disabling the websites of government ministries, political parties, newspapers, banks, and companies.

Nato has dispatched some of its top cyber-terrorism experts to Tallinn to investigate and to help the Estonians beef up their electronic defences."This is an operational security issue, something we're taking very seriously," said an official at Nato headquarters in Brussels. "It goes to the heart of the alliance's modus operandi..."

"At present, Nato does not define cyber-attacks as a clear military action. This means that the provisions of Article V of the North Atlantic Treaty, or, in other words collective self-defence, will not automatically be extended to the attacked country," said the Estonian defence minister, Jaak Aaviksoo."Not a single Nato defence minister would define a cyber-attack as a clear military action at present. However, this matter needs to be resolved in the near future..."

The [denial of service] attacks have been pouring in from all over the world, but Estonian officials and computer security experts say that, particularly in the early phase, some attackers were identified by their internet addresses - many of which were Russian, and some of which were from Russian state institutions."

The cyber-attacks are from Russia. There is no question. It's political," said Merit Kopli, editor of Postimees, one of the two main newspapers in Estonia, whose website has been targeted and has been inaccessible to international visitors for a week. It was still unavailable last night.

10/19 Update: The Washington Post adds more details, especially on the technical side. This case is indeed an example of evolving warfare: Nowadays, not only do you have to defend your land and airspace, but also your cyberspace it seems:

By April 30, Aarelaid said, security experts noticed an increasing level of sophistication. Government Web sites and new targets, including media Web sites, came under attack from electronic cudgels known as botnets. Bots are computers that can be remotely commanded to participate in an attack. They can be business or home computers, and are known as zombie computers.

When bots were turned loose on Estonia, Aaviksoo said, roughly 1 million unwitting computers worldwide were employed. Officials said they traced bots to countries as dissimilar as the United States, China, Vietnam, Egypt and Peru.

By May 1, Estonian Internet service providers had come under sustained attack. System administrators were forced to disconnect all customers for 20 seconds to reboot their networks...

On May 9, the day Russia celebrates victory in World War II, a new wave of attacks began at midnight Moscow time.

"It was the Big Bang," Aarelaid said. By his account, 4 million packets of data per second, every second for 24 hours, bombarded a host of targets that day...

"The nature of the latest attacks is very different," said Linnar Viik, a government [of Estonia] IT consultant, "and it's no longer a bunch of zombie computers, but things you can't buy from the black market," he said. "This is something that will be very deeply analyzed, because it's a new level of risk. In the 21st century, the understanding of a state is no longer only its territory and its airspace, but it's also its electronic infrastructure.

"This is not some virtual world," Viik added. "This is part of our independence. And these attacks were an attempt to take one country back to the cave, back to the Stone Age."

Vladimir Putin, Oil Magnate?

I am kind of incredulous that they're suggesting this, but MarketWatch thinks good ol' Vladimir Putin might head one of the oil companies whose fortunes he's done so much to enhance through means both fair and foul in recent years. Then again, if Paul Wolfowitz can head the World Bank, then this story shouldn't be so far-fetched. On the plus side, Parade magazine ranks Putin as "only" the twentieth worst dictator in the world. If you ask me, there's no other guy who's had a bigger influence in the millennial energy game. (Dig the photo of "Vlad" going for a walk with Sir Paul McCartney and Heather Mills during their happier days. Why I included I don't know...) Anyway, to the intriguing article:

"The position of CEO in a multinational oil and gas corporation with a big Russian state's stake is what Putin wants," said Konstantin Simonov, general director of the National Energy Security Fund in Russia and an expert on Russian political and business elites. He was speaking at a conference on energy security in London's Chatham House on Tuesday.

"The elections are next spring. He may be a bit tired [and] he needs to create a spot for himself that he can take after resigning in 2008 and that can be a promotion for him compared to the Russian president status," said Simonov. "He's currently building his retirement spot at the head of a global player in the world's energy market," he added.

As the world's largest gas producer, OAO Gazprom may well be an ideal destination. Putin has backed Gazprom's efforts to extract maximum possible terms from its European customers as well as from such former satellites as Ukraine and Belarus. Putin has also worked to see off potential rivals, masterminding the Kremlin's dismemberment of Michael Khordokovsky's rival oil company Yukos, whose assets now belong to Rosneft and Gazprom.

Finally, Putin has managed to gradually squeeze Western companies out of Russian investments, alleging breach of environmental regulations, as when he backed a decision to force Royal Dutch Shell to sell control of its Sakhalin energy project to Gazprom.

Nine Inch Nails' Political Economy

I just opened my copy of industrial "band" Nine Inch Nails' latest release entitled "Year Zero." (NIN is basically just this bloke Trent Reznor screaming his head off against a backdrop of heavy beats, screeching guitars, and electronic loops--not saying that's a bad thing.) Our man Trent depicts a post-apocalyptic future, sort of like a pop version of Mad Max. One of the more memorable tracks on this album is a song lambasting George W. Bush, even though we probably should give the poor guy a break as he only has, what, a year and a half left to annoy the world on the job. Here is the song not-so-cryptically entitled "Capital G" set to images by an enterprising YouTuber, together with some sample lyrics:

don't give a s--t about the temperature in guatemala
don't really see what all the fuss is about
ain't gonna worry bout no future generations and a
i'm sure somebody's gonna figure it out
don't try to tell me how some power can corrupt a person
you haven't had enough to know what it's like
you're only angry cause you wish you were in my position
now nod your head because you know that i'm right - all right!

Africa and the New Boss

Pardon me for being skeptical here, but just as China has in many ways replaced the US as Asia's regional boss, China is also becoming Africa's sugar daddy as its hunger for resources leads it to where the resources are. Like Africa's previous Western overlords, China is (surprise!) promising African countries a mutually beneficial relationship. But, what will likely happen in the event of a global slowdown when China has less demand for Africa's plentiful natural resources? Until proven otherwise, I suspect that China is just another fairweather friend. China will not be able to singlehandedly lift the "resource curse" in which several resource-rich African countries haven't been able to progress. In a realpolitik sense, I think China cares less than it says. Such is the cold, calculating way of geopolitics. Anyway, here is a counterpoint from the China Daily:

Premier Wen Jiabao defended China's expanding trade and investment in Africa to help countries to grow at the briskest pace in 30 years.

"We are truly sincere in helping Africa speed up economic and social development for the benefit of the African people and its nations," Wen told the opening session of the African Development Bank's annual meeting.

The two-day gathering, attended by finance ministers and central bank governors from more than 50 countries, is the bank's first meeting in Asia, and the second time outside Africa.

Wen recalled a pledge given by President Hu Jintao at a summit with African heads of state in Beijing in November to double aid by 2009 and to set up a US$5 billion development fund.

"We will fully deliver on our statement and we are working with African countries to implement these measures," Wen said.

Migrants: Globalization's Junk Mail?

I saw this opinion piece intriguingly titled "Migrants: Globalization's Junk Mail?" in the "News on Globalization" feature on the blog's sidebar. Read it and see what you think:

Laura Carlsen
Americas Program
International Relations Center (I.R.C.)
May 14, 2007

The titles that Immigrations and Customs Enforcement (ICE) attaches to its operations reveal a great deal about the logic behind current American immigration policy.

Among the most suggestively titled is the ongoing Operation "Return to Sender," one of the largest such operations in American history. The program, supposedly designed to target "fugitive aliens," has resulted in the indiscriminate round up of over 13,000 undocumented migrants in cities throughout the United States.

The cynical name given to this even more cynical operation implies a sender, a receiver—and an object. The object, or rather objects, is migrant workers and their families.

Operation Return to Sender is an instrumentalist policy that ignores the humanity of migrant workers. It refuses to recognize that migrants have hopes and dreams, that they have a legitimate need to eat and think and act. It denies family ties and affective relationships. It also ignores the central role that undocumented workers play in the American economy and the factors that brought them to the country in the first place.

In short, Operation Return to Sender acts on the premise that the millions of undocumented workers in the United States today are little more than globalization's junk mail.

A large proportion of the detentions in Operation Return to Sender have been Mexicans, which is logical given that most undocumented migrants are Mexican. According to immigration expert Raúl Delgado Wise of the University of Zacatecas, Mexico is now the world champion in exporting its own people, with 11 million Mexicans currently residing in the United States. The migratory drain on Mexico's population shows up in demographic statistics, where 800 townships now register negative growth...

The Mighty Philippine Peso

About a month ago, I featured a NY Times story on the Philippines' remittance economy. Now, the Philippines has racked up eleven consecutive months of remittances surpassing the $1B mark:

The vast army of Philippine overseas workers sent 1.3 billion dollars home in March, a rise of some 26.4 percent over the same period last year, the central bank said Tuesday. It was the 11th consecutive month that remittances surpassed the billion-dollar mark. The bank said remittances for the first quarter of the year totaled 3.5 billion dollars up 24 percent on the same period last year...

The central bank projects this year's dollar remittances sent through formal channels such as banks could reach 14 billion dollars. Some eight million Filipinos, about 10 percent of the population, now live and work in over 100 countries.

This influx of remittances is helping the local currency, the Philippine peso, to strengthen. So too the relatively peaceful elections recently held (at least by Philippine standards). It seems the US dollar is taking a beating against every Southeast Asian currency nowadays--talk about a reverse Asian financial crisis:

The peso Tuesday broke into the level of 46 to the dollar for the first time in six years as financial markets cheered the peaceful conduct of Monday’s midterm national elections, traders said.

Stocks surged to a fresh 10-year high, catching up with similar rallies in the region, with the key Philippine Stock Exchange index gaining 1.3 percent to 3,408.73, the highest since it reached a pre-Asian crisis level of 3,447.6 points on Feb. 3, 1997.

Currency traders said the seasonal influx of cash remittances from overseas Filipinos ahead of next month’s school opening also provided a strong boost to the peso, which reached an intra-day high of 46.95 to the dollar in morning trade before closing at 47.06 to the greenback.

Why is it that the recent Philippine election was relatively peaceful, you ask? "Only" 126 have died from election-related violence so far in 2007 as compared to 189 in 2004:

The Philippines is bracing itself for more violence as the country’s poll inspectors begin a lengthy manual vote count in over a thousand canvassing centres throughout the archipelago.

The mid-term congressional elections, which were also held to pick local officials, have been marred by allegations of fraud and violence, which had seen 126 people killed since the campaign season started in January...

Still, [Police Chief] Calderon declared Tuesday’s counting as ”relatively peaceful” because of the lower number of casualties compared with past elections. Violence during the 2004 elections claimed 189 lives.

Bernanke on Financial Innovation

Federal Reserve Chairman Ben Bernanke delivered a speech fit for an archetypal two-handed economist on the topic of financial innovation. Do these newfangled derivatives used by hedge funds and the like pose a threat to the health of the global financial system? On one hand you have sunny-side Ben singing stock neoliberal praises for financial innovation:

In addressing the challenges and the risks that financial innovation may create, we should also always keep in view the enormous economic benefits that flow from a healthy and innovative financial sector. The increasing sophistication and depth of financial markets promote economic growth by allocating capital where it can be most productive. And the dispersion of risk more broadly across the financial system has, thus far, increased the resilience of the system and the economy to shocks. When proposing or implementing regulation, we must seek to preserve the benefits of financial innovation even as we address the risks that may accompany that innovation.

Then Bernanke displays a more cautious side in advocating government's role:

Complexity, illiquidity, and embedded leverage also create challenges for policymakers with respect to the objectives of protecting investors and maintaining market integrity. If hedge funds and the large banks that are hedge funds' counterparties and creditors have difficulty assessing the risks associated with complex financial instruments, many investors will find gaining a sufficient understanding of the risks even more burdensome. Investors may also not appreciate the extent to which they may have multiple exposures to the same source of risk--for example, arising from effective exposures to the same hedge fund through funds of funds or from investments in different funds with similar trading strategies. Current restrictions on hedge fund investors, which limit direct investors to institutions or wealthy individuals, reflect the recognition of the difficulties that a retail investor would face in adequately assessing these types of risk. But as instruments and trading strategies become more complex and intertwined, even the most sophisticated investors will be challenged to make reliable judgments about their risk exposures. Likewise, complex and difficult-to-value financial instruments could be exploited as vehicles for profiting from insider trading or market manipulation, although, as history shows, simpler instruments can be used in this way as well. Policymakers must be confident of their ability to detect such market abuses when they occur.

Ultimately, Bernanke's suggestion is to emulate the British approach:

How best to respond to these daunting challenges? As I noted, there are powerful arguments against ad hoc instrument-specific or institution-specific regulation. The better alternative is a consistent, principles-based, and risk-focused approach that takes account of the benefits as well as the risks that accompany financial innovation.

Some commentators have sought to draw a sharp distinction between the approach to financial regulation in the United States and that in the United Kingdom. These observers have characterized the British approach as being principles-based and as using a "light touch"--the implication being that these two features somehow go together. In a speech in February of this year, Sir Callum McCarthy, the head of the United Kingdom's Financial Services Authority (FSA), took issue with this interpretation.¹ Sir Callum confirmed that the FSA's approach is built on a framework of principles, although he noted that the FSA also has an 8,500-page rulebook to accompany the eleven principles it has laid out. But the FSA head rejected the view that their approach is "light touch." Rather, he said, it is risk-based, which means that regulatory resources and attention are devoted to firms, markets, or instruments in proportion to the perceived risks to the FSA's regulatory objectives.

English (Language) Imperialism

Let me get this out of the way: One of the prevailing claims to American hegemony is the widespread use of English. I offer two rejoinders: First, it seems to me that the English came up with English, not the Americans. Second, would the fact that we use Arabic numerals be proof of Arabic hegemony? You get the picture, though you are always free to correct me :-) Anyway, I was prompted to write that lead-in since the International Herald Tribune posits that globalization has been accompanied by the spread of English. See what you think:

Riding the crest of globalization and technology, English dominates the world as no language ever has, and some linguists are now saying it may never be dethroned as the king of languages.

Others see pitfalls, but the factors they cite only underscore the grip English has on the world: cataclysms like nuclear war or climate change or the eventual perfection of a translation machine that would make a common language unnecessary.

Some insist that linguistic evolution will continue to take its course over the centuries and that English could eventually die as a common language as Latin did, or Phoenician or Sanskrit or Sogdian before it.

"If you stay in the mind-set of 15th-century Europe, the future of Latin is extremely bright," said Nicholas Ostler, the author of a language history called "Empires of the Word" who is writing a history of Latin. "If you stay in the mind-set of the 20th-century world, the future of English is extremely bright."

Microfinance Skeptics Pounce

2006 Nobel Peace Prize winner Dr. Muhammad Yunus, founder of Bangladesh's Grameen Bank has his share of detractors, hard as it is to believe with all the praise being heaped on microfinance. This article from The American is the result of a reporter trying to deliver the skinny on microfinance's unacknowledged shortcomings:

Thomas Dichter, who has worked in international development since 1964, agrees. In a February paper titled “A Second Look at Microfinance,” for the Cato Institute, he concludes that the advantages of microcredit are overstated, writing, “History seems to be telling us that economic development and its consequent massive poverty reduction did not depend on microcredit being made more accessible for income production or asset acquisition by the poor. Instead, it was the process of development that created jobs, which in turn made the working poor an attractive target for financial services, beginning with savings and then moving toward consumption.” Dichter quotes the late British economist Peter Bauer: “To have money is the result of economic achievement, not its precondition.”

Dichter calls himself a member of the “microfinance movement,” but he is skeptical of the Grameen Bank approach, instead favoring institutions like the Bank Rakyat Indonesia’s Unit Desa system, which, he writes, uses “hardly any outside resources” and instead operates as a thrift society, depending on the savings of its members.

Dichter, however, is not an all-out critic of Grameen. One of the few to fall into that camp is Jeffrey Tucker of the Ludwig Von Mises Institute, who finds the Grameen literature to be “an echo chamber of hurrahs.” By 1999, he said, the bank never had turned a profit. “In fact, it is not a bank at all. It is more correct to view Grameen as a conduit for international aid dollars.”[8]

Jonathan Morduch, a professor of public policy and economics at New York University, writing in the Journal of Economic Literature, said in 1999 that “most [Grameen] programs continue to be subsidized directly through grants and indirectly through soft terms on loans from donors.” The best-known microcredit programs “cover only about 70 percent of their full cost.” Grameen, he wrote, “is in fact subsidized on a continuing basis.”

So I guess that was what was on my mind. If you lend money at 20 percent and everyone repays, you don’t need guilt-edged money from the West Coast. Microcredit is such a fashionable cause that maybe Yunus has all along been a high-class beggar himself, taking his bowl around to Bill Gates, Sergey Brin, and Larry Page, and using the proceeds to pretty up his balance sheets.

The Latest Perma-Bull Spin

On Friday, I mentioned that China would begin allowing its citizens to invest in equities abroad as a way to cool its overheating stock markets. It didn't take long before those who think US stock markets are on a boundless upward trajectory despite a slowing US economy latched on to this emerging development. Nevermind that the "$2.3 trillion" supposedly headed to America is much more than the combined market capitalization of the Shanghai and Shenzen stock exchanges, but when you're looking for bullish excuses, any far-fetched story will do. From MarketWatch's Mark Hulbert:

I owe the story to Dennis Slothower, editor of a newsletter called On The Money. In his hotline Friday night, he pointed out that the China Banking Regulatory Commission, in an attempt to cool its overheated stock market, had ruled that Chinese banks "can now invest as much as 50 percent of funds in overseas stock markets."

Slothower calculates that this means that "up to $2.3 trillion in China monies ... can now move out of China."

To put a sum like that in perspective, consider that the total value of all publicly traded stocks in this country is around $15.1 trillion, according to Wilshire Associates. If even a modest fraction of the $2.3 trillion makes its way into U.S. stocks, we could see a "further parabolic advance in equities," as Slothower puts it.

UPDATE: Here is FT's much saner take on China allowing its citizens to invest abroad under the "Qualified Domestic Institutional Investor (QDII) scheme. If you will recall, China previously allowed only money market placements abroad, not equity investments:

Beijing has lifted restrictions on investing up to half the existing quotas for overseas investment – dubbed qualified domestic institutional investor, or QDII – in equities. That implies potential outflows of just $7bn-$9bn. Hong Kong’s bourse, the obvious first port of call, can turn over more than that in a day. And even that amount may not be unleashed immediately. The attractions of, say, Hong Kong stocks pale when contrasted to the domestic market, up 48 per cent this year in local-currency terms...

Nonetheless, the move marks another milestone on the road to a fully convertible currency [not really--sell RMB, buy $ yes, but not the other way around]. It also demonstrates the extent of pressure on Beijing both to offset surging capital inflows and to cool the domestic stock market bubble. The stock market performance is almost wholly driven by captive liquidity, so broadening the investible universe would remove some of the froth. For now, however, the numbers are too small to have much impact on either front – or on overseas markets.

Malaysia & Exotic Species Smugglers

The rise of China has created increased demand there for exotic species as cuisine. On the menu are several endangered species according to sources like the World Wildlife Fund (WWF). Unfortunately, Malaysia is becoming a regional transshipment point for smugglers of endangered species to China as patrolling the country's vast, rugged terrain is difficult. From the Malaysia Star:

Wildlife smugglers are using Peninsular Malaysia as a transit point to transport pangolins, freshwater turtles, monitor lizards and snakes worth millions of ringgit by land to China, where these animals are in high demand as exotic food.

Although Customs and the anti-smuggling unit at the Malaysian-Thai border have stepped up checks and confiscated consignments of these animals, they believe the illegal trade continues daily.

Kelantan Wildlife and National Parks Department director Pazil Abdul Patah told The Star that smugglers were taking advantage of the long, winding and shallow Sungai Golok to smuggle the animals.

“The river is about 100km long and easily accessible by road from the Malaysian side. This makes it a favourite among smugglers.” He said smugglers used illegal jetties and small wooden boats to ferry the animals across. He said although officers had nabbed some of the smugglers, enforcement along the river was tedious and difficult.

“Furthermore, smugglers are always one step ahead of enforcement officers,” he said.

Investigations by wildlife trade monitoring network Traffic – a joint programme of the World Wide Fund for Nature and the World Conservation Union – have revealed that wildlife traders from Sumatra and Borneo regularly smuggled the animals by sea or air to middlemen in Malaysia.

“These middlemen hold the animals in makeshift bays before packing them into crates, boxes and gunny sacks, and smuggling them to Thailand,” said Traffic South-East Asia regional senior programme officer Chris Shepherd.

“The animals are taken by land, either through Laos or Cambodia, and then Vietnam, to China.”

Rupiah Hits One Year High

In the wake of the Asian financial crisis a decade ago, the Indonesian rupiah suffered terrible devaluation when it fell to around 17,000 to the US$. It got hit worse than most other regional currencies. Fast-forward to 2007 and, my oh my, even the rupiah is gaining strength against the rapidly declining US$. How the mighty have fallen! How times have changed when Indonesia is now worried about excessive currency strength. From the Jakarta Post:

The rupiah reached its highest level against the U.S. dollar in almost a year Thursday, closing at Rp 8,740, as overseas investors retained their appetites for local stocks and bonds.

Statements from the Finance Ministry and the central bank to the effect that the rupiah remained within a comfortable range despite the surge also helped further propel the local unit against the greenback.

Dealers said that the statements eased concern among currency traders that the central bank would act to stymie the rupiah's rise so as to prevent Indonesian goods from becoming more costly overseas…

The rupiah could gain as much as 10 percent over the next three months, Varathan said, and was already up 3.1 percent in the last five trading sessions, including Thursday, the best performance among the 15 most-actively traded Asia-Pacific currencies.

Separately, BI Deputy Governor Aslim Tadjuddin said Thursday that foreign exchange reserves had risen to a record of about $51 billion, close to the bank's target for the end of the year.

The bank said in March that it expected reserves to total $51.1 billion by Dec. 31, versus $42.6 billion at the end of 2006.

China's Stock Mania, Part Deux

With China's stock markets extra-bubbly and government warnings coming out every day to the effect that loose money is ending up in equities, the government has decided to--what's the word--inflict (just kidding)--Chinese stock mania unto the rest of the world. With P/E ratios of Chinese stocks above 40x, it's about time:

China will let its banks buy shares overseas for the first time, diverting some of the country's 35 trillion yuan ($4.6 trillion) of savings from a local stock market where trading has surged sevenfold.

Commercial banks can invest as much as 50 percent of funds in the qualified domestic institutional investors program, or QDII, in overseas stock markets, the China Banking Regulatory Commission said on its Web site today. Investors need at least 300,000 yuan to buy such financial products, the regulator said.

This will help ``cool the very hot domestic stock market a bit,'' said Gabriel Gondard, who oversees $3.5 billion in Shanghai as a fund manager at Societe Generale venture Fortune SGAM Fund Management. ``Don't expect it to trigger a crash. Investors are still reluctant to invest overseas with booming stocks and expectations of currency appreciation at home.''

China wants more money to be invested abroad to slow the growth in the country's $1.2 trillion in currency reserves, which are flooding the domestic market with cash. Local investors have shunned QDII because they had been limited to lower yielding fixed-income and money-market products.

``The government is easing restriction on capital controls so that the central bank won't be the only institution to deal with the flood of foreign exchange coming in,'' said Tao Dong, Credit Suisse Group's China economist. ``The QDII was introduced to help mop up excess liquidity in the system.''

How manic is it in China nowadays, you ask? Get a load of this report on account openings for trading A-shares (those held locally):

A total of 4.79 million new A-share trading accounts were opened in April [2007], 853,500 more than the combined total for the previous two years, according to statistics from the China Securities Depository and Clearing Corporation.

On Tuesday, the first trading session after the week-long May Day holiday, nearly 370,000 A-share accounts were added, almost half of the number for the whole year of 2005.

China on $ Holdings, 06 CA Surplus

China is keen on reassuring the rest of the world that it is not going to have a $ fire sale. Why it is not retaliating yet against a country that has taken a lot of trade actions against it is beyond me (for now). This news is not new; however, the second bit below is--China's current account surplus was reported to be $249.9B in 2006 according to the State Administration of Foreign Exchange (SAFE):

The central bank said yesterday that the country will not sell large amounts of US dollar-denominated assets to diversify its foreign exchange reserves.

The People's Bank of China also warned of a risk of rising inflation and a rebound in investment as the economy steamed ahead in the first quarter, growing by 11.1 percent year on year.

Authorities have said the country will diversify part of its foreign exchange reserves, which amounted to $1.02 trillion by the end of March and are believed to be invested mainly in dollar bonds.

The central bank said it will mainly address the issue of newly added reserves by widening the foreign currency investment channel and reaffirmed the importance of its US dollar-denominated assets. They will remain an important part of China's outbound investment, the bank said in its monetary policy report for the first quarter, which was published on its website yesterday...

In another development, the State Administration of Foreign Exchange (SAFE) announced yesterday that the country's current account surplus hit $249.9 billion last year, an increase of 55 percent over the 2005 level of $160.8 billion.

The jump came mainly from the increase in the trade of goods, which reached $217.7 billion, up 62 percent year on year, the foreign exchange regulator said on its website.

America's Slippery Trade Slope

I had feared this would come to pass, but it has. The Democratically-controlled Congress and the Bush administration now say that they want to incorporate labor and environmental standards into future trade pacts. The slippery slope as I see it is that the Trojan horse of protectionism can now masquerade under the guise of "labor and environmental standards." The Bush administration wants to get the president's fast-track authority renewed when it expires at midyear. This authority allows him to negotiate trade deals that are not subject to modification by Congress; instead, they are voted on as is. The irony, as I have noted elsewhere before, is that to get trade promoting authority, Bush has to agree to measures that smack of protectionism. From the New York Times:

The Bush administration and House Speaker Nancy Pelosi, breaking a partisan impasse that had dragged on for months, reached an agreement this evening on the rights of workers overseas to join labor unions.

Both sides predicted that the agreement would clear the way for Congressional approval of several pending trade agreements.

Democrats hailed the accord as a major victory in their campaign to ensure that trade deals provide for the rights of workers to organize and that trading partner countries ban child labor and slave labor.

The deal is expected to clear the way for Congressional approval of the pending trade deals with Panama and Peru. Representative Sander Levin, a Michigan Democrat, told Bloomberg News that other pending deals with Colombia and South Korea still need a “hard look...”

The Bush administration hopes that this agreement paves the way for a much broader deal to extend Mr. Bush’s authority to negotiate future trade accords and get a quick up-or-down vote on them.

That authority, known as “fast track” trade negotiating authority, expires June 30.

The Wall Street Journal also chimes in:

After months of standstill, the White House and congressional Democrats agreed to strengthen labor and environmental standards in free-trade pacts, signaling a new bipartisan consensus aimed at shoring up crumbling U.S. public support for economic globalization.

The agreement -- which was set to be announced last night by House Speaker Nancy Pelosi, Treasury Secretary Henry Paulson and other top administration officials and lawmakers -- means some smaller stalled trade deals have cleared a key hurdle to passage. And it could smooth the way for broader trade measures on the horizon -- one renewing President Bush's soon-to-expire authority to negotiate trade deals without facing Congressional amendments, and a new global trade pact being negotiated in the so-called Doha Round of World Trade talks.

But yesterday's agreement applies just to bilateral pacts with Peru and Panama. And it puts off, for now, a more contentious, separate agreement with Colombia that Bush officials wanted to complete.

Congress and Currency Manipulation

This story has been almost entirely missed by those in Economics blogland. (Thankfully, I am in political-economic blogland, which is more sparsely populated :-) In any event, the US Congress brought together several committees yesterday to mull undervalued currencies--those of China and Japan. I have no qualms about the former, many about the latter. Nonetheless, as you would expect, John Dingell (D-Michigan) launched a tirade against the vile Japanese practice of currency manipulation. Conveniently forgotten is that many American financial institutions are engaging in the carry trade that is keeping the Japanese yen artificially weak, but never mind...

Since 1994, the Treasury Department has not cited a single country for currency manipulation. Japan, however, was estimated in 2006 alone to have a current account surplus of $167 billion and a bilateral trade surplus with the U.S. that exceeded $88 billion. Strong evidence exists that Japan has manipulated its currency in order to facilitate an export-led growth strategy, to the detriment of the United States economy. Although Japan ceased direct currency interventions in 2004, its government has engaged in verbal interventions in order to keep the value of the yen artificially low. Additionally, it has encouraged banks and pension funds to buy great numbers of U.S. treasury bonds. This, in combination with historically low Japanese interest rates, and other practices artificially decreases the yen's value.

Read the rest if you want, but I will spare you further agony if you too find fault with his arguments. Next, here are more details from Reuters on the "super-hearing" held to contemplate currency manipulation:

Senior Democrats in the U.S. House of Representatives vowed on Wednesday to pass legislation aimed at protecting American jobs by pressuring China and Japan to raise the value of their currencies.

"What we want to do is find the most effective way to not only send a message, but to bring about action," House Trade Subcommittee Chairman Sander Levin, a Michigan Democrat, told reporters. "We're looking at a variety of options."

Levin presided over an unusual joint hearing that brought together lawmakers from three separate House panels -- the Ways and Means subcommittee on Trade, the Financial Services subcommittee on Domestic and International Monetary Policy, Trade and Technology, and the Energy and Commerce subcommittee on Trade and Consumer Protection.

Senior lawmakers said it was the first such hearing they could recall and a sign of the widespread concern in Congress about the perceived unfair advantage that Chinese and Japanese currency practices give exporters in those countries.

Lastly, here is a US Treasury official feigning "frustration" while remaining non-committal on declaring either of these countries as currency manipulators:

The Bush administration is "totally frustrated" with the slow pace of China's currency reform, but still does not believe Beijing is controlling its currency to gain a competitive trade advantage, a U.S. Treasury official said Wednesday.

"We're totally frustrated with the pace of reform in China," Mark Sobel, deputy assistant Treasury secretary for international monetary and financial policy, said during a House of Representatives hearing on currency issues.

Sobel also told lawmakers the Treasury Department will issue its next semi-annual report on foreign currency practices after a high-level May 22-24 meeting with Chinese officials.

He declined to say whether the Bush administration would change past practice and formally label China as a currency manipulator in that report. However, he said the Treasury Department still does not believe China's currency policies are driven by a desire to gain a trade advantage.

I foresee matters coming to a head: Democrats will definitely push for more action--possibly the long-rumored veto-proof legislation against China--should Treasury again decline to label China a currency manipulator. By the way, did you notice the yuan break through 7.70 recently? Coincidence? I think not.

Paulson: US Welcomes FDI

Us Treasury Secretary Henry Paulson is pushing for more foreign investment in the US after several years of declines attributed to "security" reasons in the wake of September 11: From the WSJ:

The push comes amid a weakening in the U.S. of foreign direct investment, or investment of foreign assets into domestic organizations and structures such as manufacturing facilities and real estate. Such investments peaked in 2000 with $321 billion invested by foreign firms, but fell off after the Sept. 11, 2001 terrorist attacks, hitting $184 billion in 2006.

The decline has coincided with a growing perception overseas that the U.S. is hostile to foreign investment. Those concerns have been fueled by controversies surrounding foreign companies' efforts to buy assets in the U.S. An outcry erupted last year when a Dubai-owned company tried to buy operations at five American ports, and complaints flew in 2005 when a state-owned Chinese company, Cnooc Ltd., tried to buy Unocal Corp.

In response, Congress moved to revamp the way the Committee on Foreign Investment in the U.S., or CFIUS, reviews foreign investments with national-security implications. The House recently passed legislation strengthening U.S. scrutiny of such investments and the Senate is expected to act within weeks.

Mr. Paulson attributed the decline in foreign investment to a number of factors, including a belief overseas that the U.S. doesn't welcome foreign investment and a sense that doing business in the U.S. might come with unnecessary burdens.

Methinks a still-dropping dollar is not conducive either to investing in America. Once the dollar stabilizes at a lower rate, though, who knows?

China's Confucius Mania

This past Easter, I contemplated the "Moral Complexion of China's Growth." This interesting article from the LA Times suggests that many in China are doing the same thing through the lens of Confucianism. As I implied, there tends to be a convergence in perspective among the world's great religions, Confucianism not exempted. (Some consider Confucianism more of a philosophy than a religion, though):

Since the publication of her enormously popular book on the teachings of Confucius late last year, Yu [Dan] has been racing from college lectures to book signings, TV appearances and speaking engagements. The public can't seem to get enough of this overnight sensation who has turned dusty old Confucian teachings into a Chinese version of "Chicken Soup for the Soul."

"I never expected this," the smartly dressed 42-year-old said in a hurried interview from the back of the black Audi taking her to the airport. "In the 21st century, our value system is changing; people are faced with a lot of confusion and choices. The classics are not just fossils. They are a value system that can help us find answers to modern-day problems."

For more than 2,500 years, the Confucian doctrines of filial piety, moral righteousness and hierarchical relationships were the guiding principles of life and government in China and most of East Asia. Then the Communists came to power and Chairman Mao declared Confucianism counterrevolutionary and his Red Guards ransacked temples dedicated to the philosopher.

Today, China is charging ahead with dizzying economic growth and breathtaking social change. But many believe the world's most populous nation has lost its moral and spiritual anchor. Enter the wisdom of Kong Fuzi, or Master Kong, as Confucius is known in China — interpreted by a woman.

Liberation Theology, Again

Pope Benedict XVI is set to visit Brazil. There he will encounter vestiges of his old ideological nemesis, the Marxist-leaning liberation theology. From the New York Times:

In the early 1980s, when Pope John Paul II wanted to clamp down on what he considered a dangerous, Marxist-inspired movement in the Roman Catholic Church, liberation theology, he turned to a trusted aide: Cardinal Joseph Ratzinger.

Now Cardinal Ratzinger is Pope Benedict XVI, and when he arrives here on Wednesday for his first pastoral visit to Latin America he may be surprised at what he finds. Liberation theology, which he once called “a fundamental threat to the faith of the church,” persists as an active, even defiant force in Latin America, home to nearly half the world’s one billion Roman Catholics.

Over the past 25 years, even as the Vatican moved to silence the clerical theorists of liberation theology and the church fortified its conservative hierarchy, the social and economic ills the movement highlighted have worsened. In recent years, the politics of the region have also drifted leftward, giving the movement’s demand that the church embrace “a preferential option for the poor” new impetus and credibility.

Today some 80,000 “base communities,” as the grass-roots building blocks of liberation theology are called, operate in Brazil, the world’s most populous Roman Catholic nation, and nearly one million “Bible circles” meet regularly to read and discuss scripture from the viewpoint of the theology of liberation.

Two Views on the Global (ka)Boom

The surge in equity markets practically worldwide has spawned suggestions that this liquidity fueled "bubble" is nearing its demise, and the results will be painful. First up is glass half-full sort Bill Fleckenstein on the Dow Jones Industrial Average's winning streak. He compares its streak to 1989 in Japan (!) and 1929 in America (!!):

In any case, after a little checking, I did find an amazing similarity between the last month or so of the rise in Japan that ended on Dec. 29, 1989, and the current advance in the Dow Jones Industrial Average ($INDU) (through April 27): Specifically, the last 32 out of 38 trading days in Tokyo were on the upside, with an initial run with a higher close on 19 out of 21 days, followed by seven out of 11, followed by six for six before about a 40% drop in the course of nine months took place. Recently, from the lows of March 5, the Dow closed higher in four out of six sessions, followed by seven out of 11, followed by 20 out of 22 -- for a grand total of 31 out of 39 days. Now, I am not a big believer in analogs, but if the mind-set in Tokyo back in those days was similar to the mind-set that we're witnessing here today, which, by my reckoning, it is, I guess it's not impossible for that similarity to have some predictive power.

(Another interesting parallel to note, by way of Justin Goepfert at the ever-valuable sentimenTrader.com: The last time the Dow had a run of 19 out of 21 days was in July 1929 -- not exactly a great time to buy stocks.)

Simon Derrick at the Bank of New York sees bubbles ripe for a pricking:

The global liquidity boom has notched up several new records this past twenty-four hours: in the face of growing economic and political risks that we have detailed at length in this Update, benchmark indices in Singapore, Malaysia and Indonesia today mirrored the performance of the Dow Jones yesterday in reaching new all time (intraday) highs; and in the currency markets, EUR/JPY has today continued its march into uncharted territory.

Experience suggests that, accompanied by a growing polarisation in view (over the likely longevity of trends), market fervour (and hence risk tolerance) grows at an almost geometric rate as the peak in a boom is approached. Certainly, the NASDAQ put in a staggering quarterly average increase of around 20% through the course of 1999 but it took the index just nine weeks to reach this rate of progress in the first quarter of 2000. This latter achievement notably coincided with breach of the 5,000 level (on March 7th) and this author recalls memories of the associated euphoria, unrestrained optimism and the only question asked of analysts at the time: ‘When will the index hit 6,000?’ Yet, just three weeks later, the index embarked upon a precipitous decent to levels from which it has only recently begun to recover. As such, boom conditions clearly present fertile ground for those with vested interests to formulate growing justification in the relentless ascent of an index whose relationship with traditional market fundamentals has become decidedly fuzzy. Put another way, investors often appear to have the same resistance to booms as moths have to light.

These two gentlemen suggest that bubbly markets go parabolic before popping. Fleckenstein sees a US market increasingly detached from fundamentals. Derrick says P/E ratios of 42 in China make little sense. We'll soon see if they were right.

Philippines Scores One Over China

Texas Instruments, the world's largest maker of cell phone chips, has chosen to build its new $1B chip plant in the Philippines after also considering China, Vietnam, and Thailand. As you would expect, this story is mainly about input costs. The first article from the WSJ suggests that rising land and labor costs in China are leading firms to look elsewhere:

Texas Instruments' decision to build another semiconductor testing and assembly plant in the Philippines may also reflect how rising costs in China are encouraging investors to consider other locations.

Land prices on China's industrial coastal belt are rising, and wages have been seeing double-digit growth for several years -- bringing them closer to, and in some cases, higher than -- the cost of hiring skilled workers in countries such as the Philippines. Intel is also increasing its investments outside China, partially to secure its global supply chains in case of disruptions from any one location. Intel announced plans earlier this year to build a $1 billion chip-testing and assembly plant in Vietnam, and has also increased its investments in Malaysia.

Plus, here is the WSJ again citing a possibly resurgent Philippine economy. This piece even suggests that the Philippines might show the way to beat China in attracting FDI (!):

After years in which manufacturers of all stripes have been scrambling to locate plants in China, Texas Instruments Inc.'s decision to build its new $1 billion assembly plant in the Philippines instead, after shortlisting the two countries in a head-to-head contest, might be a sign of things to come as other countries learn how to best China, especially as the costs of setting up there grow.

As James Hookway reports, the move both highlights the Philippines's economic revival and challenges the conventional view that China is Asia's most cost-effective factory floor. Land prices on China's industrial coastal belt are rising, and wages have been rising at double-digit rates for several years, in some cases now even exceeding the cost of hiring skilled workers in countries such as the Philippines.

Reuters adds more color to the story from the Philippine boosters:

"We have broken the myth of China here," said Ernie Santiago, executive director of the Semiconductor and Electronics Industry in the Philippines, Inc. (SEIPI).

"It seemed before all roads are going to China, but we have made a point here that the Philippines is also a smart choice for investment.

"It will be a magnet, we expect other companies would follow," he said.

Foreign direct investment in the Philippines was only $2.35 billion in 2006, dwarfed by almost $70 billion in China.

UBS = U Busted by Subprime

I was somewhat surprised that this story about UBS giving up on its hedge fund specializing in subprime mortgages has been lightly covered by the armada of housing bust blogs. From FT:

Attempts by UBS to launch a hedge fund business using its proprietary traders ended in failure on Thursday when the Swiss bank announced it would fold Dillon Read Capital Management [DRCM] back into its investment banking arm less than two years after it was set up.

The decision, triggered by a SFr150m (£62m) first-quarter loss on US subprime mortgage investments, is an embarrassing end to a bold attempt by UBS to allow a team of fixed income proprietary traders to manage clients’ money. It is also a setback for John Costas, the US-based former chief executive of UBS’s investment banking arm, who stepped down in June 2005 to head DRCM.

The UBS move will trigger a $300m (£150m) restructuring charge, $200m of it being distributed to the 250 DRCM employees via stock for deferred compensation and retention payments.

Lex also of the Financial Times comments:

Two years ago, when the world was as besotted about hedge funds as it is about private equity today, UBS created Dillon Read Capital Management. Analysts’ and investors’ eyebrows rose. It looked like the Swiss bank was creating a plaything for John Costas, its global head of investment banking who may, or may not, have been about to walk. There were also concerns about the business structure. DRCM managed the fixed income funds that used to be run in-house alongside third-party assets. Having a unit at arms length from Zurich created potential conflicts.

On Thursday, UBS announced that DRCM would be closed down following a $123m trading loss in the first quarter of 2007, apparently related to difficulties in subprime in the US. For UBS to pull the plug so quickly as well as incurring a $300m restructuring charge indicates that there must have been insurmountable problems and that initial fears were well founded. Many will groan at the price of this misadventure – probably in excess of $500m – and the hit to credibility. But the management should be applauded for admitting its mistake so quickly and the one-off cost is worth less than 1 per cent of UBS’s market capitalisation.

Big, Good News on Patents

The US Patent and Trademark Office (USPTO) has been under attack for issuing patents for "inventions" that fail to meet the criteria of being useful, novel, and non-obvious. I much recommend the book Innovation and Its Discontents if you are interested in the issue of patent reform. In any event, the US Supreme Court has seemingly taken up suggestions in the book in coming to the conclusion that the USPTO has become far too generous in issuing patents that are especially "obvious." From Fortune online's Legal Pad blog:

In the latest in a series of rebukes, the Court unanimously told the U.S. Court of Appeals for the Federal Circuit and, by extension, the U.S. Patent and Trademark Office, that each had been approving and enforcing patents for inventions that were just too obvious to merit the honor. The ruling came in KSR International v. Teleflex, a case involving an adjustable truck accelerator pedal. For details of the case, see earlier post here.) The Court also handed Microsoft (MSFT) an important victory in a different patent case yesterday, Microsoft v. AT&T (T), which pared back the applicability of U.S. patents to software distributed abroad. Microsoft was the defendant in that case. Microsoft general counsel Brad Smith tells the Wall Street Journal’s Jess Bravin today (click here) that the ruling will lop off about 60% of its exposure in the 45 patent cases pending against it today. For my earlier postings relating to that case, see here and here.

Though these two cases were hardly noted by mainstream media, make no mistake: this is big, very big--especially for pharmaceutical firms that have been successful in extending their patents indefinitely to avoid competition from generics. It will become more difficult to obtain and defend patents Stateside:

But there wasn’t much gilding of the lily at this press conference. Robert Sterne, a patent lawyer for 29 years and the founding partner of the intellectual property firm of Sterne, Kessler, Goldstein & Fox, had this to say: The ruling will make it “harder, more costly, and more time consuming for inventors to obtain U.S. patents in all areas of technology, particularly mechanical inventions and software and methods of doing business.” He added that the pharmaceutical industry would probably be impacted, too, since drug companies try to prolong the terms of their strong patents with dubious, supplemental ones that might not measure up under the new standard...

At the same conference, Supreme Court advocate Tom Goldstein of Akin Gump Strauss Hauer & Feld, who had argued the case for Teleflex, wasn’t downplaying the significance of the loss either: “It’s fair to say that the economic consequences of the obviousness doctrine runs to the trillions of dollars. It’s the gateway to getting a patent, and intellectual property is at the heart of the American economic system.”

Here are the Supreme Court opinions on the KSR v. Teleflex and Microsoft v. AT&T cases.

US & China, Enviro-Fiends?

The fourth assessment of the United Nations' Intergovernmental Panel on Climate Change (IPCC) has not yet been officially released, yet the world's two biggest greenhouse gas emitters have already begun their bellyaching. From the Associated Press:

The USA and China want to water down a proposed plan for fighting climate change, arguing that action to reduce greenhouse gases will be more costly and time-consuming than scientists claim.

They also play down the benefits of reducing emissions, disputing recommendations by European governments that greenhouse gases be capped at around 445 parts per million in the air. The current level of greenhouse gases is about 430 ppm.

The Intergovernmental Panel on Climate Change, a United Nations network of 2,000 scientists, drew up the plan. Governments have spent the last few weeks reviewing the proposals and are meeting with the scientists this week to work out their differences.

A Communist Party publication has even dubbed action to curb emissions--get this--"climate terrorism"(!):

Beijing objects to much in the draft of the latest U.N. report on global warming being discussed by scientists and officials in Bangkok this week. Analysts said Beijing wanted to protect long-term growth from pressure to cut greenhouse gases.

"China doesn't want to be corralled into commitments that minimize its freedom of action, and questioning the science and digging in is part of that," said Paul Harris, an expert on climate change politics at Lingnan University in Hong Kong...

But the assessment also said drastic action was not warranted. "With uncertainties about climate change, there should not be premature or over-zealous setting of overall global carbon emissions caps."

It warned that such steps could "bring major harm to some countries' economies, especially developing countries."

The Global Times, a newspaper run by the ruling Communist Party, accused Western politicians last week of using "climate terrorism" to undermine China's quest for prosperity.

It's Good Being an Apparatchik

I am a bit tardy on this minor controversy about Chinese Commerce minister Bo Xilai. From May of last year came this article from the Financial Times:

The pace of change in China is dizzying indeed. Take the case of Bo Xilai, the hyperactive commerce minister. His dad is Bo Yibo, the last survivor of the Eight Immortals of the communist revolution. His son is attending Harrow, that expensive and prestigious school in west London.

From veteran of the Long March to English private school in three generations is quite a transformation.

The Sydney Morning Herald recently asked how Bo Xilai could send his son to Harrow given his meager salary while observing that the next generation of Chinese "blue bloods" are preparing for careers outside of public service:

Readers who made it to the last paragraph of the recent Herald obituary of the legendary Chinese Red Army marshal Bo Yibo will have learnt an odd, but illustrative, factoid about today's China.

The veteran revolutionary's grandson is attending Harrow, the famous English public school.

The boy's father is China's Minister of Commerce, Bo Xilai, who rose to his position via a stint as governor of the Manchurian province of Liaoning, where he was known for his toughness against dissidents.

How Bo affords Harrow's stiff fees - £7345 ($18,400) a term - on his official salary of less than $500 a month, plus housing, is not quite clear.

What a surprise--there is indeed a Chinese elite prone to graft and corruption, according to Communist Party critics over at the Epoch Times:

Recently the staggering amounts Chinese officials are spending on their children's tuitions abroad have been on the news both in China and overseas. But the media in China is allowed to report on low-level government officials only, with one article saying that the Disciplinary Committee in Taiyuan City, Shanxi Province requires that local officials disclose expenses for their children studying in foreign countries. An Australian newspaper, The Sydney Morning Herald , however, was able to nail an important official, revealing that Bo Xilai, the son of a Chinese communist veteran, Bo Yibo, and China's current commerce minister, spends more than 20,000 dollars a year on expenses for his son who's now studying at the Harrow School in England. Bo Xilai's salary is between 500 and 600 dollars per month, so where does he get that kind of money, the newspaper questioned.