Chavez (Hearts) America's Poor via CITGO

RGE's latest mailing brought to my attention this earlier YouTube propaganda clip by the firm CITGO. It is of course owned by Venezuela's national oil firm, PDVSA. If you will recall, Hugo "Go to Hell, Gringos" Chavez made a PR stunt earlier in the year by using it to sell low-priced heating oil to poor Americans. The ploy supposedly demonstrated that Venezuela's leader cared more for America's poor than Bush did. (Among other things, Chavez has called Bush the devil.) It was a pretty good stunt if attracting attention was the goal. Will Chavez make CITGO do so again in 2008? Your guess is as good as mine. Goodness knows energy prices are even higher now.

Maybe Securitization Really is Casino Capitalism

Securitization involves the packaging of various assets to be sold to other investors in the form of, well, securities. Most infamously, residential mortgage backed securities or RMBS have been in the limelight as the subprime mess has hit primetime and housing loans which should never have been granted in the first place have begun defaulting in ever higher numbers. Actually, I am not a hardened critic of the idea of securitization as it can serve as a worthwhile way for securing additional funding. However, there isn't much you can do when what is being securitized is garbage to begin with like in the case of the housing mortgage mess. Garbage in, garbage out--there is no such thing as financial alchemy that allows trash to end up golden. King Midas is not a mortgage broker.

I got a chuckle after visiting the American Securitization Forum website and seeing a notice that its 2008 annual conference will be held in Las Vegas for the second year in a row--at the Venetian, no less. If you're a hard boiled critic of the whole securitization mess, the choice of location is rich with irony. Las Vegas, the "ultimate boomtown," is now beset with the highest rates of foreclosure in the US as that market has cratered, to state things conservatively. Is securitization all smoke and mirrors, mere hocus-pocus, or both? And, is securitization a fancy word for gambling, oftentimes with the fortunes of others? You've got all the Star Wars droids being discussed at this event, that's for sure--CDOs, CLOs, RMBS, ABS, ABCPs, SIVs, etc. In particular, I am keen on the concept of "whole business securitization." While pretty much any asset which yields an income stream can be securitized, this kind of securitization involves what it says--securitizing an entire business operation. As the link above suggests, this kind of securitization is more worthwhile for firms that are rich in intellectual property--brands, patents, and trademarks. Given the current rate of financial innovation, maybe we'll see "whole country securitization" in a few years' time...

Japan Pushes Financial Sector Reform (Again)

Relatively moribund financial markets in Japan have led the government to shake things up yet again to get more activity going. Time and again Japan has experimented with financial reforms to enliven this sector. However, many of these efforts have been piecemeal and have not really resulted in the intended improvements. With the likes of Sydney, Hong Kong, and Singapore becoming relatively more competitive than Tokyo in the Pacific Rim by offering lower taxes and regulation, Japan has little choice but to make more "market-friendly" reforms should it wish to remain a financial center worth its salt. Dare we say that it is becoming more (gasp) neoliberal? As with most reforms, it is good to ask whether they are culturally appropriate. Though it is not talked about all that much, the success of many reform programs is contingent on the goodness of fit of such efforts with prevailing socioeconomic institutions. From the Financial Times:

The Japanese government has agreed to a sweeping reform package designed to revitalise the country's financial markets, including eliminating the firewalls that keep a strict division between banks and securities companies.

The measures unveiled by the Financial Services Agency on Friday constitute the most comprehensive programme of financial sector reforms since Japan's Big Bang financial deregulation in 1996. The latest effort to boost the country's financial competitiveness comes amid concern that Tokyo, capital of the world's second-largest economy, is losing out to other regional financial centres due to problems ranging from outdated rules to high taxes.

A survey conducted this year by the Corporation of London ranked Tokyo 10th in the world in its competitiveness as a financial centre, below not only regional rivals Hong Kong and Singapore but also Frankfurt and Sydney. The FSA plan, which incorporates about 60 specific deregulation measures, has been welcomed by industry groups. "There is a lot that is good in there," said a representative for a foreign bank. "It's not the end of the story. They need to keep doing more to globalise Tokyo as a financial centre."

The FSA wants to promote the participation of foreign financial institutions, hedge funds and others in Japan's markets and encourage the shifting of household savings into investments [presumably away from the post office--the largest player in the industry]. Under the latest programme, the firewalls that separate banking and securities companies will be lowered to allow financial conglomerates that conduct banking, securities and other financial services businesses to operate more closely and share customer information. This step is particularly welcomed by foreign banks, which have complained the strict separation of banking and broking in Japan has added to costs, hampered operational efficiency and even jeopardised internal risk management.

Another key measure is the decision by the finance ministry to exempt offshore funds from permanent establishment taxation. Under existing rules, offshore funds that conduct business with an agent in Japan are potentially liable for Japanese taxes. The new measure would make it clear that offshore funds will not be subject to such taxation. Other measures include deregulation to allow a broader range of products to be traded on markets and to allow the establishment of markets for professional investors with less stringent rules than those that apply in other markets.

Season's Greetings from Birmingham!

For a bit of a change befitting the holiday season, here's some economic history about the city I am currently living in. Pictured is a scene from the annual Frankfurt Christmas Market in Birmingham. Markets go back a long way here in Birmingham. Since 1166, commerce has taken place in what has come to be known as the Bullring in the city center. Aside from being a "shopping center" for eight and a half centuries, Birmingham also played a key role in the industrial revolution. Brummie James Watt made crucial design enhancements to the steam engine. Soon, the output from Watt's brainchild became instrumental in powering factories, vessels, and trains. (The unit of measurement for electrical power is named in his honor.) The canal system that still wends its way through parts of the town is living testament to an age when steam-powered transport facilitated commerce. Long before China became the "workshop to the world," the city of Birmingham held that title. While no longer a manufacturing powerhouse, Birmingham retains a distinction of being the UK's second largest city.

In terms of culture, Birmingham has been at the forefront as well. From Black Sabbath to Duran Duran, the music scene here has not been wanting. Literature? Another favorite son of Birmingham is JRR Tolkien of video game and action figure fame [what can I say? It's commerce: Been there done that, saw the movie, bought the t-shirt.] Many of the places described in the Lord of the Rings cycle draw from old haunts of Tolkien in the city.

I originally came up with the IPE Zone so that I could place additional reading material for my students online, but it has since attracted a wider audience far beyond the boundaries of Birmingham. It is my modest contribution to keeping Birmingham in the consciousness of those interested in IPE as Birmingham's place in economic history is undoubtedly an important one. That history is still unfolding before our eyes. A Merry Christmas and Happy New Year to all!

No Rest for the Timid: Xmas Reading

In case you were wondering about the holiday reading backlog of an IPE grad student, wonder no more: above is the stack of library books lined up for me over the holidays. On the bright side, being an IPE student allows for a great variety of interesting reading. However, it is still a lot of reading. Unlike in the American system where doctoral students are given four years to complete a degree, they only have three here in the UK. Therefore, a compressed time schedule means that I must do more during the break other than watch reruns of Fawlty Towers, much as that would seem fun. But, it's a choice I've gladly make to save a year. Cheers!

Oil Prices Forecast to Rise Further in 2008

What will the price of crude oil be in the coming year? The Wall Street Journal notes that prognosticators are now betting on the high side after incorrectly lowballing estimates for the past few years. One of the interesting indicators noted in the article is the use of Saudi Arabian benchmarks for the price of oil while making government budget forecasts. Usually, the Saudi government conservatively estimates the price of oil. Like many Middle East petrostates, Saudi Arabia does not collect income taxes; 90% of its revenues are from the black stuff. Hence, there is a strong incentive for the country to come up with accurate estimates. Adding a customary 30% to the conservative Saudi figure and you come up with about $75 a barrel for benchmark light sweet crude. While this figure comes in below most pundits' estimates, I would take it seriously with the US economy downshifting and all. Again, it goes back somewhat to just how much the rest of the world will "decouple" from the US; the pundits seem to say "not much, if at all":

Oil-price prognosticators, bruised after an unusually volatile spell in the oil patch, have reached a rough consensus on next year: Oil will be even costlier, even if the economy cools. Consumers are likely to pay a lot more at the pump, too. The Energy Department predicts that far higher average oil prices will force gasoline prices to even out at $3.11 next year, up 10% from the average price of $2.81 this year.

World crude prices have long tracked the thirst for oil in the U.S., which consumes about a quarter of the world's oil output. But recent months have shown how decoupled the oil market is becoming from the economic ups and downs of the world's largest energy consumer. Even amid fears that the U.S. could slip into recession next year, world-wide consumption is expected to strengthen, driven mostly by more demand from Asia as well as from Middle Eastern economies awash in oil revenue. That, of course, will further tighten global supplies.

Forecasters are notching other lessons from 2007 in looking toward next year. One is that the almost irrational uncertainty that sent prices soaring to more than $98 in November from $69 in late August will last well into 2008. "If I had to describe [2007] in one image, it would be dancing on thin ice," says Fatih Birol, chief economist at the International Energy Agency, which serves as an energy watchdog for rich countries. Global spare capacity is so thin, he says, "that any little thing now can influence price."

A year ago, almost no one in the oil business -- from producers and Energy Department analysts to Wall Street traders -- foresaw crude prices careening toward $100 a barrel this year. Some big investment houses, Morgan Stanley foremost among them, even predicted prices would fall. Instead, prices went on an unprecedented roller-coaster ride, rising to a nominal record of $98.18 last month from the low of roughly $50 a barrel in mid-January. Most of the industry's leading lights now are predicting the U.S. benchmark crude, as traded on the New York Mercantile Exchange, will average around $80 a barrel next year, up from $71.89 this year. The benchmark Friday closed at $93.31.

Extrapolating from forecasts underlying Saudi Arabia's own budget-revenue projections for next year, economists say Saudi Arabia, the world's largest oil producer, expects U.S. benchmark crude to average around $75 a barrel next year. Forecasters at Lehman Brothers Holdings Inc., who predict an average price of $84 a barrel, cite the market's own increasing opacity as one reason why prices will stay bullish.

Big producers from the Organization of Petroleum Exporting Countries are expected to gain an ever-larger share of the market next year, as exports wane from non-OPEC suppliers such as Mexico and Russia. More of that oil, meanwhile, will flow east to hungry Asian consumers. But neither OPEC nor China provides up-to-date or accurate data on their actions, making it difficult to determine the impact on world-wide demand. "We expect OPEC supply to increase by stealth as demand growth increasingly slips under the radar," says Lehman energy analyst Adam Robinson. That combination, he says, "will add an uncertainty premium to the price of oil."

The market has become so unpredictable lately that many forecasters are recalibrating their forecasts every few weeks -- and rarely are they lowering them. Goldman Sachs Group a month ago expected benchmark crude prices averaging $85 a barrel next year. Then economists there took note of some bullish trends, including signs of robust demand growth in much of the world, and this month raised their forecast to a startling $95 a barrel. For that price to hold, crude prices would have to spend much of the year above $100 a barrel.

Of course, forecasters haven't fared well during the oil-price run-up of the past seven years. More often than not, prognosticators have underestimated the forces that have ended up driving prices still higher. "The graveyard is littered with analysts who have tried and failed so far to call the top in this market," says Adam Sieminski, chief energy economist for Deutsche Bank.

A recent study by Roland Berger Strategy Consultants, of Munich, Germany, found that in making its annual price assumptions, the rich countries' own energy think tank, the IEA, of Paris, missed the actual price by 27% on average since 1999, mostly underestimating how high prices would go. The U.S. Energy Department's Energy Information Agency fared only slightly better, with forecasts that on average came in 22% off the actual price.

The best price predictors, the Roland Berger study found, have been the big oil-producing countries themselves. Saudi Arabia, the world's largest oil producer, always gives itself a wide margin when computing anticipated revenue for its annual budget, which is almost 90% reliant on oil revenue. Wim van Acker, one of the study's authors, says the Saudi government routinely underestimates by 30% what they expect to bring in from oil revenue so as to cushion against the risk of running a budget deficit. Once you add in that cushion, the study found that the Saudi government has been off only 12% on average since 1999.

So what is the world's biggest petro-power saying about 2008? Saudi Arabia's 2008 budget, released last week, is based on a price assumption of around $45 a barrel, according to economists who have crunched the numbers. So with the added margin, Riyadh's prediction for 2008 comes in at around $68 a barrel for Saudi oil -- or more like $75 a barrel for the higher-grade U.S. benchmark crude. That is lower than the analysts' consensus, but not by much.

Analysts agree that the one force that could clearly nudge oil prices lower next year would be a sharp decline in demand in the U.S. and China. So far there is little evidence of that happening. Demand is expected to rise by around 1.5 million barrels a day next year, with more than half of the growth coming from Asia and the Middle East. The top 30 industrialized countries will add only 300,000 barrels a day in extra demand. The world now consumes slightly more than 85 million barrels a day.

If prices do continue to climb, economists may finally get an answer to one the lingering riddles of the decade: At what price will oil consumers begin to recoil? Many thought it would happen at $50 a barrel, then $60, then $70. Until there is a clear answer, and demand begins to taper off, Deutsche Bank's Mr. Sieminski says the best forecasting method may be the one that's ruled for much of the decade. "Take the average of everyone's best guess," he says, "and add 30%."

California's Tent City of the Foreclosed

Here are some excerpts from a speech on boosting home ownership made by the leader of the free world, George W. Bush, in 2002: But I believe owning something is a part of the American Dream, as well. I believe when somebody owns their own home, they're realizing the American Dream. They can say it's my home, it's nobody else's home. And we saw that yesterday in Atlanta, when we went to the new homes of the new homeowners. And I saw with pride firsthand, the man say, welcome to my home. He didn't say, welcome to government's home; he didn't say, welcome to my neighbor's home; he said, welcome to my home. I own the home, and you're welcome to come in the home, and I appreciate it. He was a proud man. He was proud that he owns the property. And I was proud for him. And I want that pride to extend all throughout our country...

The goal is, everybody who wants to own a home has got a shot at doing so. The problem is we have what we call a homeownership gap in America. Three-quarters of Anglos own their homes, and yet less than 50 percent of African Americans and Hispanics own homes. That ownership gap signals that something might be wrong in the land of plenty. And we need to do something about it.

Unfortunately, we now know how everyone who wanted to own a home got a shot at doing so in the wake of the subprime crisis. Several got loans they could not afford as many were granted on a NINJA basis--no income, no jobs or assets while the Bush administration trumpeted rising home ownership rates as an accomplishment. In many ways, this tent city described below is symbolic of what's happened to the (MIA/DOA) American dream under the term of Bush: foreclosed and forced to live out in a tent city. That this is happening not in some hollowed-out urban center but in SoCal's Inland Empire is indicative of the problem's magnitude. I remember one person speaking of the US as one big gated community: Bush and Co. live inside the gated community and the rest, well, live in a tent city by the looks of it. From Reuters:

Between railroad tracks and beneath the roar of departing planes sits "tent city," a terminus for homeless people. It is not, as might be expected, in a blighted city center, but in the once-booming suburbia of Southern California. The noisy, dusty camp sprang up in July with 20 residents and now numbers 200 people, including several children, growing as this region east of Los Angeles has been hit by the U.S. housing crisis.

The unraveling of the region known as the Inland Empire reads like a 21st century version of "The Grapes of Wrath," John Steinbeck's novel about families driven from their lands by the Great Depression. As more families throw in the towel and head to foreclosure here and across the nation, the social costs of collapse are adding up in the form of higher rates of homelessness, crime and even disease.

While no current residents claim to be victims of foreclosure, all agree that tent city is a symptom of the wider economic downturn. And it's just a matter of time before foreclosed families end up at tent city, local housing experts say. "They don't hit the streets immediately," said activist Jane Mercer. Most families can find transitional housing in a motel or with friends before turning to charity or the streets. "They only hit tent city when they really bottom out."

Steve, 50, who declined to give his last name, moved to tent city four months ago. He gets social security payments, but cannot work and said rents are too high. "House prices are going down, but the rentals are sky-high," said Steve. "If it wasn't for here, I wouldn't have a place to go."

Nationally, foreclosures are at an all-time high. Filings are up nearly 100 percent from a year ago, according to the data firm RealtyTrac. Officials say that as many as half a million people could lose their homes as adjustable mortgage rates rise over the next two years.

California ranks second in the nation for foreclosure filings -- one per 88 households last quarter. Within California, San Bernardino county in the Inland Empire is worse -- one filing for every 43 households, according to RealtyTrac.

Maryanne Hernandez bought her dream house in San Bernardino in 2003 and now risks losing it after falling four months behind on mortgage payments. "It's not just us. It's all over," said Hernandez, who lives in a neighborhood where most families are struggling to meet payments and many have lost their homes. She has noticed an increase in crime since the foreclosures started. Her house was robbed, her kids' bikes were stolen and she worries about what type of message empty houses send. The pattern is cropping up in communities across the country, like Cleveland, Ohio, where Mark Wiseman, director of the Cuyahoga County Foreclosure Prevention Program, said there are entire blocks of homes in Cleveland where 60 or 70 percent of houses are boarded up.

"I don't think there are enough police to go after criminals holed up in those houses, squatting or doing drug deals or whatever," Wiseman said. "And it's not just a problem of a neighborhood filled with people squatting in the vacant houses, it's the people left behind, who have to worry about people taking siding off your home or breaking into your house while you're sleeping."

Health risks are also on the rise. All those empty swimming pools in California's Inland Empire have become breeding grounds for mosquitoes, which can transmit the sometimes deadly West Nile virus, Riverside County officials say.

But it is not just homeowners who are hit by the foreclosure wave. People who rent now find themselves in a tighter, more expensive market as demand rises from families who lost homes, said Jean Beil, senior vice president for programs and services at Catholic Charities USA. "Folks who would have been in a house before are now in an apartment and folks that would have been in an apartment, now can't afford it," said Beil. "It has a trickle-down effect."

For cities, foreclosures can trigger a range of short-term costs, like added policing, inspection and code enforcement. These expenses can be significant, said Lt. Scott Patterson with the San Bernardino Police Department, but the larger concern is that vacant properties lower home values and in the long-run, decrease tax revenues. And it all comes at a time when municipalities are ill-equipped to respond. High foreclosure rates and declining home values are sapping property tax revenues, a key source of local funding to tackle such problems.

Earlier this month, U.S. President George W. Bush rolled out a plan to slow foreclosures by freezing the interest rates on some loans. But for many in these parts, the intervention is too little and too late. Ken Sawa, CEO of Catholic Charities in San Bernardino and Riverside counties, said his organization is overwhelmed and ill-equipped to handle the volume of people seeking help. "We feel helpless," said Sawa. "Obviously, it's a local problem because it's in our backyard, but the solution is not local."

3/16/08 UPDATE: There is a new story on the infamous tent city in Ontario, CA.

Tancredo's Gone But Tancredoism Isn't

Immigration is promising to be one of the more decisive--and divisive--issues of the 2008 US presidential election. I am sure you're all familiar with the one-note, single-issue focus of representative Tom Tancredo (R-CO) on the issue. While Tancredo has just given up his run at the Oval Office--no one expected him to be a serious contender anyway--the issue he championed has been brought into the limelight in a way it might not have had he not spoken up so much about it. The chart to the right depicts results from a recent US survey by the Economist. As you can see. there appears to be an emerging consensus that American workers at various skill levels are being harmed by migration, and that the American way of life is under threat from those dratted furriners. These results jibe with just how much mileage Tancredo actually got and what his pet issue continues to get. It's very much a classic political economy ploy: when times are bad, blame the furinners. Below is more from the Economist shortly before Tancredo's exit. Indeed, with most Republican candidates taking a tough stance on migration, there may be a backlash in key states with many Latino voters. Knowing my more, er, tolerant attitude towards migration, none of you should be surprised that I am keen on seeing anti-immigration candidates getting walloped by Latino voters at the polls. However, you can be sure that any candidate acting tough on migration will have carefully calculated the benefits of gaining the support of the anti-immigration crowd alongside those lost votes:

The mainstream Republican candidates are all on record as supporting fair-minded “comprehensive” immigration reform. John McCain sponsored a reform bill together with his Democratic colleague, Ted Kennedy. Mr Romney mocked the idea that you could deport 12m people. As mayor of New York, Mr Giuliani denounced federal immigration laws as harsh and unfair. As governor of Arkansas, Mike Huckabee supported allowing the children of illegal immigrants to claim cheap in-state tuition. As a senator for Tennessee, Fred Thompson supported an increase in the number of visas available for agricultural workers.

The most outspoken “restrictionist” on the platform is Tom Tancredo, an obscure Republican congressman from Colorado. Mr Tancredo has made immigration reform—which to him means sending the 12m back home—the centrepiece of his campaign. He has produced advertisements linking illegal immigrants to terrorism and gang violence.

Flaky stuff. But Mr Tancredo speaks for a sizeable portion of the Republican base. He helped to replace Mr McCain's immigration-reform bill with a harsher measure that authorised the building of a 700-mile (1,100km) fence along the Mexican border. And he—or at least Tancredoism—is having a remarkable influence on the Republican debate.

The most shameless flip-flopper on immigration is Mr Romney. He now echoes Mr Tancredo's talk of “amnesty” and criticises his rivals—particularly Messrs Giuliani and Huckabee—for being soft on immigration. But others have followed in his direction. Mr Giuliani emphasises border security. Mr Huckabee has produced a “secure America plan”. Mr Thompson threatens to “punish employers” who hire illegals. Even Mr McCain has hardened his line on immigration, though he continues to warn his party against demonising immigrants. Mr Tancredo now accuses his rivals of trying to “out-Tancredo Tancredo”.

This represents a repudiation of Mr Bush's strategy of welcoming Latinos into the Republican tent by supporting immigration reform. It also carries risks for the Republicans in the 2008 election—and indeed in future elections. Latinos are the fastest growing electoral block in the country. The Republicans could end up losing five Latino-rich states that Mr Bush won in 2004: Florida, Arizona, New Mexico, Nevada and Colorado.

The Democratic candidates have been much more consistent in their support for comprehensive immigration reform. Every senator on the platform supported Mr McCain's legislation, for example. But they are also aware that the subject is a bear trap. Only two mainstream candidates, Mr Obama and Bill Richardson, have come out in favour of allowing illegal immigrants to obtain driving licences (Mrs Clinton resolved her internal debate by deciding against the idea). The mainstream candidates have been careful to avoid calling illegals “undocumented workers”, the formulation favoured by pro-immigrant pressure groups in their party.

They are right to be nervous. Most Americans are ambivalent about illegal immigration—proud of America's history as an immigrant-friendly country but hostile to anything that sanctions breaking the law and worried about the economic impact of immigration. The latest Economist/YouGov poll (see chart) reveals a striking degree of concern about the threat that immigration poses both to “traditional American values” and economic well-being. Illegal immigrants also place huge burdens on America's hospitals, schools and prisons (there are, for instance, around 20,000 of them in California's jails).

Worries about globalisation are strong among two of the Democratic Party's core constituencies—blue-collar workers and blacks. Some working-class Americans must compete for jobs with people who are in the country illegally. In California, English-speakers are fleeing urban schools where more than 70% of the children are Hispanics, forking out for private schools or homes in the suburbs.

The driving-licence question is particularly dangerous for Democrats. Only 22% of the voters in a recent Los Angeles Times/Bloomberg poll supported allowing illegal immigrants to get licences. Eliot Spitzer, the governor of New York, saw his popularity collapse when he endorsed the idea. He has now retreated...

The problem of illegal immigration will continue to haunt the presidential race. Rightly so: no country should have 12m people living illegally within its borders. But awkwardly so from the perspective of the candidates: the issue pulls Americans in all sorts of contradictory directions. No wonder most politicians keep trying to duck the question—and no wonder the voters will not let them.

TIME even goes so far as to describe Tancredo's exit as a "single issue victory." He's gone but his pet issue is not forgotten [Tommy Rotten, Tommy Rotten?]:

Tancredo was always a self-professed one-issue candidate. And far from being disappointed at his meager poll showings, Tancredo says he achieved more in this election cycle than he dreamt possible. In part due to his cage-rattling, immigration is one of the biggest issues in the race, on both sides of the aisle.

True to his single issue focus, Tancredo chose to throw his support behind former Massachusetts Governor Mitt Romney out of a mixture of agreement and spite. Romney, "has actually got a record," said Tancredo. "He was governor of a liberal state but opposed drivers licenses for illegal immigrants and instate tuition for illegal immigrants at a time when they weren't issues on the national scene." As for why the endorsement came now, Tancredo admitted he hoped to hurt the chances of rivals Mike Huckabee and John McCain — both of whom he views as weak on immigration. "It was the rise of Huckabee in Iowa, that's what really was disconcerting, and McCain in New Hampshire." (The McCain campaign declined comment, while Huckabee spokeswoman Charmaine Yoest replied: "The governor has a really strong and tough stand on immigration... and in the days ahead we're looking forward to talking with voters in Iowa about how he sees the need for change.")

Immigration was thrown into the spotlight last year when President George W. Bush moved to create a path to citizenship for the estimated 12 million illegal aliens living in the U.S. while shoring up border security and overhauling the naturalization and visa processes. House Republicans, with Tancredo leading the charge, blocked the plan. They accused Bush of seeking to grant sweeping amnesty. McCain, with a handful of Senate Republicans, backed the president's plan.

In debates, forums and in his own campaigning, Tancredo kept pressure on the issue, railing against Republicans and Democrats alike for not doing enough to secure U.S. borders, even after Congress passed legislation to build a 700-mile border fence that some experts say could cost as much as $50 billion. (So far, less than $5 billion has actually been appropriated for the project).

Tancredo said he surpassed his own goals of raising awareness on the issue, "frankly to an extent that was beyond my greatest expectations." Every Republican candidate — even John McCain is now saying he was on the wrong side issue — has got the basics. You've got Rudy Giuliani running ads talking about securing the border. On the basics we've got 'em."

By basics Tancredo means forcing all illegal immigrants to go home and reapply to enter the country legally if they want to return, making English the national language and denying municipal services for illegal aliens such as driver's licenses, Social Security benefits and state-subsidized education. Huckabee has come under particular fire for backing college-level grants for the children of illegal immigrants in Arkansas. "We are a better country than to punish children for what their parents did," said Huckabee, defending his stance, in a Florida debate last month.

USA Still Masochistic Over Cotton Subsidies

Here is the latest ruling on the long-running cotton subsidies case filed by Brazil against the US in the WTO's dispute settlement mechanism (case DS 267). Brazil had previously won the case as American cotton subsidies were deemed illegal for they were granted on the basis of export performance. Still, Brazil has not been pleased with America's record in complying with this ruling and subsequently launched an Article 21.5 panel investigating US compliance. The DSM has once again found the US in breach of its WTO obligations due to its limited efforts at complying with the WTO ruling. This finding paves the way for Brazil applying sanctions against the US for non-compliance. Worse yet, the US Congress has just passed a farm bill larded up with similar subsidies! Some people never learn, I guess. Roll on the pork barrel [oink, oink] for the political importance of cotton-growing states is considerable. Is it any wonder that the WTO Doha round is in deadlock over agricultural subsidies? From the Associated Press:

The United States has failed to scrap a series of illegal subsidies paid to American cotton growers, the World Trade Organization declared Tuesday in a ruling that could open the door to Brazilian trade sanctions worth billions of dollars.The formal release of the ruling is a significant victory for Brazil's cotton industry and for West African countries that have claimed to have been harmed by the American payments. "The United States has failed to comply," the three-member WTO compliance panel said. Details of the 188-page decision have been known since July, when the panel delivered its interim findings confidentially to the U.S. and Brazil.

The two nations confirmed at that time, and again in October, that the panel found that export credit guarantees and U.S. subsidies under the 2002 Farm Bill unfairly helped American cotton farmers undersell foreign competitors. Brazil has reserved the right to impose annual sanctions of up to $4 billion on the United States, but would probably seek less in retaliatory measures because the U.S. has removed some of the offending subsidies.The United States has failed to scrap a series of illegal subsidies paid to American cotton growers, the World Trade Organization declared Tuesday in a ruling that could open the door to Brazilian trade sanctions worth billions of dollars.

The office of the U.S. trade representative in Washington said it was considering a final appeal. "We are very disappointed with the compliance panel's findings," said spokeswoman Gretchen Hamel. "We continue to believe that support payments and export credit guarantees under our programs are fully consistent with our WTO obligations."

Despite repeated legal setbacks, Washington appears set to continue the payments. President Bush has threatened to veto the legislation, saying it costs too much and it should instead be cutting subsidies at a time of record-high crop prices. Hamel said the office of the U.S. trade representative would be "working closely with members of Congress and the agricultural community as we move forward."

The United States had argued that it sufficiently overhauled its cotton program when it scrapped two export credit guarantee programs and last year repealed a cotton-marketing program that made compensation payments to exporters and domestic mill users for buying higher-priced American cotton. But Brazil said Washington's continued support for American cotton producers ensured artificially high production and export levels, hurting Brazilian and African producers. The Brazilian government claims the U.S. retained its place as the world's second-largest cotton grower by paying $12.5 billion in government subsidies to American farmers between August 1999 and July 2003. China is the largest exporter of cotton, while Brazil is fifth.

If the U.S. fails to comply with the WTO ruling, Brazil has said it would target American goods, as well as trademarks, patents and commercial services, for retaliation. A WTO-proposed draft released in July calls on the U.S. to make an 82 percent cut in trade-distorting handouts to American cotton farmers as part of a new global trade pact.appears set to continue the payments. Friday, the U.S. Senate joined the House in approving a new $286 billion farm bill that would leave cotton programs largely intact for the next five years.

Will Cargo Ships Return to Wind Power?

As I noted a few posts ago, the international shipping industry has entered the crosshairs of environmentalists because many of its vessels rely on bunker fuel, an inexpensive but highly polluting energy source. With the growing amount of shipping in the wake of international trade's continuous expansion, this problem is only set to grow. However, some shipping companies are now addressing this problem like the German firm Beluga in partnership with SkySails which has developed a novel propulsion technology. In a slight return to a bygone era, Beluga has just christened a new vessel which relies on sails for about a fifth of its propulsion using an intriguing looking "kite." While the thingamajig is still a bit experimental, potential savings garnered in use should provide demonstration effects to other shipping firms also keen on cutting fuel costs and emissions. The Beluga website has a blurb on the MV Beluga SkySails while Reuters has both a video clip and the write-up below. I am sailing, I am sailing, home again...'cross the sea...

Turning ocean winds into gold while cutting greenhouse emissions in the process might sound like some sort of alchemy for the 21st century. But unlike futile earlier efforts to convert ordinary metals to gold, two fast-growing German companies have worked together developing a high-tech kite system to pull enormous ships across the oceans -- and save enormous amounts of money.

The 132 meter (433 ft) long MV "Beluga SkySails" will make its maiden voyage in January across the Atlantic to Venezuela, up to Boston and back to Europe. It will be pulled by a giant computer-guided 500,000-euro ($725,000) kite tethered to a 15-metre high mast. It is a throwback to an earlier maritime age, harnessing the winds that fell out of favor over a century ago when sailing lost the battle for merchant shipping to modern steam power because it was seen then as primitive and unpredictable.

But now, in the age of climate change, wind power is making a remarkable comeback thanks to modern technology. "This is the start of a revolution for the way ships are powered," Beluga chief executive Niels Stolberg said in an interview with Reuters on the windswept deck of his new ship MV Beluga SkySails. "It's a small but crucial step for the future."

To latch onto the powerful winds prevailing well above the surface, the kite attached to the high-tech steerage unit flies up to 300 meters high to tug the 10,000-tonne ship forward, supporting its diesel engines and cutting fuel consumption. Under favorable wind conditions, the 160-square meter kite shaped like a paraglider is expected to reduce fuel costs by up to 20 percent or more ($1,600 per day) and cut, by a similarly significant amount, its carbon dioxide emissions. Burning fossil fuels cause CO2 blamed for climate change.

A driving force for Beluga -- and other shippers already lining up to buy the system if it delivers on its promise -- is the fuel price, which has tripled for shippers in recent years. While it might seem almost too simple -- or too good -- to be true, SkySails inventor Stephan Wrage and German engineers have spent more than five years perfecting the system and they will tell you that it is anything but pie-in-the sky technology. "At the heart of this all for me, the real motivating factor is to get to the crossroads of ecology and economics -- and to prove it pays to protect the environment," Wrage said in an interview on the ship so new it still smells of fresh paint.

While some political and industry leaders complain about the financial burdens of fighting climate change and cite costs in resisting CO2 reduction efforts, Wrage said SkySails is proof that the opposite can be true: there's money to be made. "If our calculations are right, our clients will not only have considerably greater earnings but also substantially reduce their CO2 output as well," the 35-year-old added after a ceremony to christen the new ship in Hamburg port on Saturday. "To be able to make a contribution to fighting climate change makes us all proud," the SkySails managing director said as the sail made of ultralight synthetic fibre and as big as a medium-sized passenger jet unfurled in a breeze above the deck.

SkySails developed the kite propulsion system that Beluga Shipping only just finished installing on the new cargo ship. Both firms aim to prove on a commercial scale what years of testing on smaller vessels showed: you can turn wind into cash. Wrage, who got the idea as a 16-year-old while flying kites and wishing he could tap their power to make a small sail boat go faster, is optimistic even greater savings can be achieved. He said larger kites should cut fuel usage by 30 to 50 percent. Two 320-square meter kites will pull two more Beluga ships by 2009 and after that 600-square meter kites will be added. "That's where the savings get really interesting," he said.

But the immediate impact on cutting CO2 caused by ships will be limited. Shipping carries more than 90 percent of the world's traded goods. There are more than 50,000 merchant ships carrying everything from oil, gas, coal, and grains to electronic goods. They emit 800 million tonnes of CO2 each year -- 5 percent of the world's total. They emit high levels of sulphur dioxide. Yet Wrage is confident the demand will take off. There are three orders in hand and if the savings achieved on a smaller 55-metre long prototype are confirmed by the "Beluga SkySails", he said others were lined up to buy systems.

"We're planning to equip four to eight ships next year, provided the first voyage turns out as well as the trials did," he said. "In 2009 we expect to sell at least 35 systems. After that, we want to at least double every year." The target is 1,500 vessels equipped by 2015. "I've had a lot of meetings where shippers have said to me 'If it works out on the Beluga SkySails we're going to buy one, two, four or 10 systems'," Wrage said. "Believe me. If we're successful now, it won't be hard to find buyers."

World Bank Shrinks Chinese Economy by 40%

OK, that title is somewhat misleading. There are many things the World Bank stands accused of, but being able to shrink the Chinese economy by 40% is certainly not within its capabilities. Rather, what we have here is a change in the way that the World Bank measures economic activity that has resulted in drastic changes in the estimated size of the Chinese as well as the Indian economy. As you probably now, there are two main ways of measuring national income for the purposes of international comparison. First, you can convert the national income of various countries into dollar terms by using market exchange rates. However, this tends to ignore quantitative differences in the amount that citizens of various countries can actually buy at home. Hence, the World Bank and other institutions often use purchasing power parity (PPP) terms to estimate what can actually be purchased at home. The Economist's "Big Mac Index" is a well-known application of PPP. After all, isn't your standard of living determined by what you can actually buy? Improvements in measuring the actual purchasing power of those in China and India have resulted in the World Bank greatly reducing the estimated size of those economies on a PPP basis.

The upcoming report by the World Bank on this topic should be eagerly awaited by many interested in development for it can hopefully shed more light on the progress made by China and India by using a more accurate set of indicators from those two large emerging economies. Also, more robust measures ought to give a better picture of just how many Chinese and Indians fall under the poverty line. The latter consideration is an important one as the combined weight of 2.3 billion persons should be a major factor in determining the progress made--or lack thereof--in combating poverty. Important and intriguing stuff:

The economies of China and India are 40 per cent smaller than previously thought, according to new estimates published by the World Bank this week. The ranking of 146 economies by buying power in US dollars was based on the prices of 1,000 goods and services in what the World Bank described as “the most extensive and thorough effort ever to measure purchasing power parity across countries”. PPP, rather than market exchange rates, is regarded as a better measure of the relative cost of living, since it is based on goods and services households can buy with their domestic currency.

The new PPP estimates show a 40 per cent drop in the wealth of the Chinese people to $5.3bn, accounting for nearly 10 per cent of world output. China remains the world’s second-largest economy but, in terms of per capita gross domestic product, it is only 9.8 per cent of the size of the US, according to the research. Robert Zoellick, the World Bank’s president said he was “not drawing any policy conclusions” about the new estimates, which suggest that there are hundreds of millions more Chinese living on the World’s Bank’s poverty line of less than $1 a day. ”We must be careful about drawing conclusions about poverty from these statistics”, he said but added that the figures ”could help Chinese leaders refine their development work.”

Nevertheless, if China is less wealthy than previously thought, it could mean that those US policymakers who regard it as a political and economic threat, can relax. For example, the US Government Accountability Office, using the old estimates, reported this year that China’s economy in PPP terms would be larger than the US by 2012. The recalibration of China’s economy suggests it will be many more years yet before China can rival the US in military or economic terms. The World Bank said the shrinking of China’s economy was due to exaggerated estimates based on less reliable data in the past.

It was the first time that China had participated in the World Bank’s International Comparison Program and the first time since 1985 that India had participated. India’s economy also shrank by 40 per cent, according to the the tables, which ranked it the world’s fourth largest economy, accounting for 4 per cent of output. The world economy is also smaller than previously thought.

The Financial Times sheds more light on this important change and its potential consequences:

China and India are poorer than we thought; rich countries produce even more than we realised. Those are the obvious conclusions from an unprecedented exercise, carried out by a World Bank-led coalition. The “International Comparison Program” attempts to compare the size of the world’s disparate economies on the basis of purchasing power. On this basis, China’s output is just 9 per cent of global gross domestic product, down by more than a third from the previous estimate of 14 per cent. India’s share of global GDP is down from 6 per cent to 4 per cent. The total output share of developing economies is down by a sixth. These are huge revisions to the figures.

The obvious questions are: how could the old figures be so wrong? And can we trust the new figures? The simple answer is that calculating purchasing power is hard even in principle. The Economist’s famous “Big Mac” index captures the theory but not the slog: if a Big Mac costs $4 in the US and 12 yuan in China, then the purchasing power of the yuan is 3 per dollar – but only if you are buying hamburgers. Statisticians cannot stop at the Big Mac but must work out both the contents and the price of a representative basket of goods. With populations of more than a billion, being truly representative is almost impossible.

China has never participated in an exercise on remotely this scale before. India has not done so since 1985. Small wonder that the facts have changed substantially. So while the new figures can never be more than statistical estimates, they are far more credible than the finger-in-the-wind guesses that preceded them.

Will the Commodity Boom Bust Soon?

I'm of two minds about this particular question concerning whether high commodity prices are here to stay or if they'll soon be a thing of the past. True, there have been many previous periods when commodity prices were elevated and many pundits spoke of permanently higher commodity prices. Yet, these prices came down eventually, and the same may happen again. In a nutshell, the yea and nay arguments go something like this:

(1) Yes, high commodity prices are here to stay. We are reaching Malthusian limits to resource supplies that weren't approached in the past. These constraints are fast approaching because the two largest countries in the world with a combined population of 2.3 billion persons, China and India, are now quickly moving up the income and, consequently, the consumption ladder. With so many people clamoring for a higher standard of living, there is a "demand pull" effect as folks fight over the same finite resources.

(2) No, each time commodity prices have been elevated in the past they've always gone down eventually. Currently, we are at the peak of a cycle led by US consumer demand. As the US economy slows down because overstretched American consumers can no longer drive global demand, things will cascade down the supply chain. Manufacturers will have less need for the commodities necessary in producing exports to America. This will eventually result in lowered commodity prices. Besides, technology and preferences have a way of changing patterns of demand in the long run so a plateau of higher commodity prices is far from given.

Which version do you find more realistic? I actually lean more towards (1)--2.3B people need to be fed, clothed, housed, cooled, heated, entertained, transported, etc. to a higher standard as industrialization takes place in China and India. For a take that is more like (2), however, the Daily Telegraph has one that is worth contemplating. Note that I am not a "peak oil" believer. There are ample supplies, but there are also serious political-economic impediments to accessing these supplies in totalitarian regimes. More often than not. multinationals which possess the expertise to extract these supplies more efficiently are being given the cold shoulder (viva la revolucion Bolivariana!):

Peak oil, peak metals, and this year peak food. Every bookshop has a corner warning that mankind will soon outrun the basic resources of the globe.

It was ever thus. Variants of the theme emerge at the top of each commodity super-cycle, only to be deferred for another 20 years or so as new supply comes on-stream and technology outwits the pessimists. Shortage can turn to glut very fast once inflation forces central banks to hit the brakes. Some will remember Limits to Growth, published by the Club of Rome in the 1970s. It said the world's oil reserves would run dry in 30 years. Gold supply would last nine years. The report spoke of the "sudden and uncontrollable collapse" of economic life. What in fact collapsed were oil and gold prices. We can see now that the 1970s was a central bank monetary bubble.

The question for investors who have sunk $150bn into commodity index funds - and trillions in mining and energy stocks - is whether the roaring boom of the last five years is another bubble, or whether the Malthusians are closer to the mark this time. Has the Asian renaissance - the "Great Doubling" of the world's consumer base - changed the balance for ever? The jury is out.

Charles Dumas, global strategist for Lombard Street Research, says the bulls are deluding themselves. "The long-run real return on commodities is negative, except for oil where it has been nil for one and a half centuries. "Smart investors have made huge profits at various times trading commodities. The price cycles can be violent. But it is a tough, cyclical game, fraught with risk. Portfolio positions can't just be comfortably locked away," he said.

Base metals are creatures of the industrial cycle. The US is already in the grip of the worst housing crash since the Slump. It is exporting a manufacturing crunch to Europe through the dollar slide and the banking crisis. Japan is slipping into recession, says Morgan Stanley. No surprise that copper is down 23 per cent since early October after quadrupling in five years. Lead is off 42 per cent. Nickel has dropped 53 per cent since May.

What is striking is that long-term futures contracts continue to set all-time highs, a sharp break with earlier patterns. "The message is simple: markets are looking past the short-term," said Barclays Capital. Oil refuses to buckle at all. Brent crude is hovering near $93 a barrel despite a shock report by the US intelligence concluding that Iran halted nuclear weapons work in 2003. It has left White House hawks beakless. The alleged war premium on oil has vanished, yet prices have barely flinched. "Will oil get to $100 a barrel? Yes, it's a done deal," says Paul Horsnell, commodities chief at Barclays Capital. Goldman Sachs have raised their forecast to $105 by the end of 2008, citing a chronic lack on investment. Who would want to invest in Russia, Venezuela, Ecuador or the "Stans" if expropriation were on the menu?

Oil output has been flat for two years, with the non-Opec trio of Britain, Norway, and Mexico in relentless decline. "Even at this price the oil companies still can't find any supply, which tells you that they are catching a serious crab," says Horsnell. "Oil has been going up a dollar a month for four years. It's a gradual upping of the pressure and I don't see anything to stop it," he says. The peak oil theory claims that the world is depleting crude at 30bn barrels each year, but adding just 10bn in discoveries. Depletion is running at 4 per cent a year (official) or 6 per cent (peakists). "A supply-side crunch in the period to 2015, involving an abrupt escalation in oil prices, cannot be ruled out," said the International Energy Agency in its Outlook report.

China's annual demand is growing at 0.4m barrels per day (bpd). It may reach 8m next year, or 9 per cent of world output. Global needs are expected to rise 50 per cent to 130m barrels by 2030, yet the heads of both Total and Conoco doubt whether output will ever reach 100m barrels before tipping over in 12 years or so. "Peak oil is the secret that everybody knows in the oil industry but has refused to talk about until now," says Chris Skrebowski, editor of Petroleum Review.

"If you look at all the big projects out there, oil output will peak in three years before gently declining thereafter. If there is any slippage, we may have reached the peak already," he says. The counter view is that there are vast reserves of oil sand or shale in Canada, Colorado, and Venezuela worth extracting at $60 prices and above. BP says it has used 3D seismic imaging and other tricks to raise extraction from its Prudhoe Bay field in Alaska from 40pc to 60pc of reserves. If replicated across the world's reserve base, it could add 1.4 trillion barrels, or 45 years' global supply at current demand.

Big if. For now, soaring prices are spilling over into food. Grains stocks are at their lowest in 60 years. Wheat prices have risen by 145 per cent since April. The culprits are biofuel crops, expected to take 12 per cent of global arable cropland within 12 years, according to Credit Suisse. The UN says the amount of ethanol - or "dethanol" to critics - needed to fill a medium car tank can feed a child for a year. Those driving Chelsea Tractors or over-powered BMWs are directly causing hunger - or worse - in poor food-importing countries. The UN food rapporteur Jean Ziegler has called for a five-year ban on ethanol. "It's a total disaster for those who are starving," he says.

The big unknown for commodities in 2008 is whether the supply crunch will eclipse a likely US recession and all its knock-on effects. Rate cuts in the US have caused a fresh surge of liquidity in East Asia and the Mid-East, flooding those countries with dollar pegs or semi-pegs - led by China. Inflation has reached 6.9pc in China, 9.5pc in Vietnam, and risks spiralling out of control in the Gulf. All will have to ration credit or break their pegs. Either way, the game is nearly up.

Once the emerging market boil is lanced we will find out where the core equilibrium price for oil, coal, iron, zinc, and soya beans really lies. Then we can strap up for the second leg super-cycle. Next time to the peaks.

Investing in Low to No Transparency Dubai

Here is an unspoken challenge for foreign investors looking to put their money into Dubai and other emerging Middle East investment destinations: Given that transparency in these locales is low to non-existent, what's the likelihood that you're going to get repaid if push comes to shove? Quite often the answer may be "it's all up in the air." Credit rating agencies are unable to give reliable data on the soundness of various institutions. For instance, the vast real-estate boom in Dubai is increasingly being funded by borrowing through state entities in spite of Dubai not even having a sovereign debt rating. Think of it as borrowing without even having a credit rating. It's something to think about if and when the current mania in Dubai abates. Just how good is the implicit guarantee that Sheikh Mohammed bin Rashid al-Maktoum stands by these projects? That's a good question that surely few would like to test. From the Wall Street Journal:

Dubai is on a spending spree, and financial analysts are starting to wonder about the amount of debt the city-state is racking up. Its oil production is dwindling, and its debt load is four times the average among other Persian Gulf states. Credit-rating companies are asking for more information to determine how sound the government really is. "From published documents, it is difficult to get a picture of the complete financial situation," said Standard & Poor's analyst Farouk Soussa. "The transparency isn't good."

One of seven emirates making up the United Arab Emirates, Dubai, like other Middle East governments, has been on a deal-making binge. Companies owned or backed by the government have signed agreements or made plays for billions of dollars in assets this year, including stakes in American and European stock exchanges, a Las Vegas casino operator and, most recently, a chunk of Sony Corp. Part of Dubai's deal-making is financed by debt.

At the same time, other Dubai entities have launched expansion plans relying on public borrowing. Nakheel, a government-controlled company building a giant, palm-tree-shaped island development, placed $750 million in bonds this month to finance its plans. Government-owned Jebel Ali Free Zone recently listed 7.5 billion dirham ($2 billion) of bonds.

Moody's Investors Service, Fitch Ratings and Standard & Poor's Ratings Services are handing out credit ratings to many of these government-backed companies, and they are starting to ask for more disclosure from the emirate, which they assume will bail out the companies if they get into a jam.

"The rapid economic development of Dubai is certainly being accompanied by increased levels of leverage from companies that are closely associated with the government," said Tristan Cooper, a Moody's analyst in Dubai. "Without a clearer picture of the overall financial position of the central government and the broader public sector," investors could become more cautious.

The situation highlights a broader issue. Many of the world's governments and the companies they control are notoriously opaque, especially in the Middle East. But big regional investors like Qatar, Kuwait and Abu Dhabi (also part of the U.A.E.) have big hydrocarbon reserves to back up their deals. Production can be relatively easy to estimate from public figures. Dubai's reserves have been shrinking for years.

Dubai also has taken a more-complex approach to investing overseas. Most other deal-making countries have used massive investment authorities to pursue their deals. The Abu Dhabi Investment Authority, for instance, bought a $7.5 billion stake in Citigroup Inc. last month. In contrast, Dubai's ruler, Sheikh Mohammed bin Rashid al-Maktoum, has entrusted a cadre of lieutenants to run his own and his government's business interests. They often compete with one another and hunt for deals independently, but they all ultimately answer to Sheik Mohammed.

The government association has helped a handful of Dubai corporate entities get high credit ratings. The assumption is that Sheikh Mohammed or his government will come to the rescue in a pinch. And if Dubai gets overextended, analysts expect the emirate's much-richer cousins in Abu Dhabi will lend a hand. Abu Dhabi is the capital of the U.A.E., and its ruler is the country's president. Sheikh Mohammed is prime minister.

Moody's recently gave one of its highest corporate ratings, A1, to government-controlled DIFC Investments LLC. DIFC owns a stake in Borse Dubai, the holding company that recently agreed to acquire Nordic exchange OMX AB for some $4.9 billion. The complex deal aims to eventually give Dubai a stake of nearly 20% in Nasdaq Stock Market Inc. In a ratings note, Moody's said the rating reflects "the credit support the Government of Dubai is likely to provide in a distress situation."

This year, S&P rated Dubai Holding Commercial Operations Group LLC single-A-plus, citing "strong implicit support from the Emirate of Dubai." Sheikh Mohammed owns the entity's parent, Dubai Holding. A Dubai Holding subsidiary recently bought the Sony stake.

The trouble with these corporate ratings is that without more disclosure, it is difficult to evaluate the financial soundness of these entities and the government backing them. As its oil supplies dwindle, Dubai has diversified its economy into financial services, tourism and real-estate development, among other pursuits. Those revenue streams and their underlying assets are difficult to pin down without access to government books.

In an emailed response to questions, a Dubai government spokesman said the emirate's debt load is "very moderate" by international standards, and the debt raised by Dubai entities "has all been in their capacity as leading international players that are successfully expanding in a number of profitable markets." He said Dubai is in the process of obtaining a rating on its sovereign, or government, debt. Such a rating gauges a government's ability to pay back its borrowing, and it is used to price publicly sold debt.

S&P credit analysts estimate Dubai's debt, relative to gross domestic product, is about 42%. Compared with the U.S., where gross debt stands at more than 60% of GDP, according to the International Monetary Fund, that isn't bad. But in Abu Dhabi, debt is equal to just 2.9% of GDP. Analysts think Dubai's assets, including real estate, aviation and tourism interests and taxes, far outweigh its debt, but they would like to know more. Of course, credit-rating companies have another motivation: In most cases, they are paid to rate the creditworthiness of firms and governments, and the big three firms are eager for clients like the government of Dubai.

On "Measuring the Progress of Societies"

I have used the term "growth lubber" to put down those who make economic growth (as exemplified by measures such as GDP) their principal measure of human well-being. Few will argue that economic growth is a necessary but not a sufficient condition for human well-being. While GDP and other income-based measures of human progress have been criticized for being highly imperfect indicators of human progress, not much progress has been made either on establishing alternate criteria.

It's not that folks haven't tried to come up with better criteria for measuring progress than income-based measures like GDP. For instance, the UN Development Program (UNDP) uses the Human Development Index (HDI) which combines measures of income, health, and education to gauge, well, human development. The tiny state of Bhutan prefers to use Gross National Happiness as an indicator of progress. Even China monkeyed around with "Green GDP" for a while until local officials complained that these statistics painted a grim picture of China's growth as being at the expense of the environment. I myself am partial to Amartya Sen's Capabilities Approach which is more concerned with what people are capable of doing or being instead of just having.

Earlier this year, the OECD held a forum on "Measuring the Progress of Human Societies" together with the EU, UNDP, and World Bank that seeks to come up with a better, and more importantly, standardized measure of progress. As you can imagine, there is still much that is up in the air. For starters, how do environmental considerations figure into measuring progress? Or, what are we to make of things that may make some happy which give rise to others' misery? These are classic social justice and political theory questions that need to be ironed out in coming up with measures of human progress. It's certainly a difficult task, but if it gets peoples' minds off GDP-itis, it will be worth the effort. In the same way that the world looks like a nail if you're a hammer, the world looks a certain--and rather undesirable--way if viewed through the prism of GDP-itis. Above is the first film clip about the OECD's search for alternative measures; the second one is available on YouTube. Below are some excerpts as well from the Istanbul Declaration which came out of the event:

We, the representatives of the European Commission, the Organisation for Economic Cooperation and Development, the Organisation of the Islamic Conference, the United Nations, the United Nations Development Programme and the World Bank, recognise that while our societies have become more complex, they are more closely linked than ever. Yet they retain differences in history, culture, and in economic and social development.

We are encouraged that initiatives to measure societal progress through statistical indicators have been launched in several countries and on all continents. Although these initiatives are based on different methodologies, cultural and intellectual paradigms, and degrees of involvement of key stakeholders, they reveal an emerging consensus on the need to undertake the measurement of societal progress in every country, going beyond conventional economic measures such as GDP per capita. Indeed, the United Nation’s system of indicators to measure progress towards the Millennium Development Goals (MDGs) is a step in that direction.

A culture of evidence-based decision making has to be promoted at all levels, to increase the welfare of societies. And in the “information age,” welfare depends in part on transparent and accountable public policy making. The availability of statistical indicators of economic, social, and environmental outcomes and their dissemination to citizens can contribute to promoting good governance and the improvement of democratic processes. It can strengthen citizens’ capacity to influence the goals of the societies they live in through debate and consensus building, and increase the accountability of public policies.

We affirm our commitment to measuring and fostering the progress of societies in all their dimensions and to supporting initiatives at the country level. We urge statistical offices, public and private organisations, and academic experts to work alongside representatives of their communities to produce high-quality, facts-based information that can be used by all of society to form a shared view of societal well-being and its evolution over time.

Official statistics are a key “public good” that foster the progress of societies. The development of indicators of societal progress offers an opportunity to reinforce the role of national statistical authorities as key providers of relevant, reliable, timely and comparable data and the indicators required for national and international reporting. We encourage governments to invest resources to develop reliable data and indicators according to the “Fundamental Principles of Official Statistics” adopted by the United Nations in 1994.

To take this work forward we need to:
- encourage communities to consider for themselves what “progress” means in the 21st century;
- share best practices on the measurement of societal progress and increase the awareness of the need to do so using sound and reliable methodologies;
- stimulate international debate, based on solid statistical data and indicators, on both global issues of societal progress and comparisons of such progress;
- produce a broader, shared, public understanding of changing conditions, while highlighting areas of significant change or inadequate knowledge;
- advocate appropriate investment in building statistical capacity, especially in developing countries, to improve the availability of data and indicators needed to guide development programs and report on progress toward international goals, such as the Millennium Development Goals.

Much work remains to be done, and the commitment of all partners is essential if we are to meet the demand that is emerging from our societies. We recognise that efforts will be commensurate with the capacity of countries at different levels of development. We invite both public and private organisations to contribute to this ambitious effort to foster the world’s progress and we welcome initiatives at the local, regional, national and international levels.

Reply to Posner: Is HDI "Dubious" and "Senseless"?

While preparing material for the post above on measuring the progress of societies, Google pointed me in the direction of a recent post made by Richard Posner on the popular Becker-Posner blog which features his thoughts as well as those of Nobel laureate Gary Becker. Judge Posner makes it amply clear that he does not think much of the United Nations Development Program's Human Development Index (HDI). What follows are a few excerpts from his post in which he accuses the HDI of being "dubious" and "senseless":

I cannot myself see the value of the Human Development Index. Not that per capita income, life expectancy at birth, and level of education as proxied by adult literacy and school enrollments are unimportant; a ranking of each of these aspects of human development might be a good first step in identifying areas of weakness that a society might wish to devote additional resources to improving. It is the combining of the indexes and announcing that the combination offers a ranking of nations by the degree of their "human" as distinct from narrowly defined "economic" development that strikes me as dubious, and indeed as senseless. The obvious objection is to the equal weighting of the three indexes, and to the omission of a host of other important dimensions of development, such as housing quality, pollution, tax rates, adult life expectancy, crime rates, unemployment, inflation, quality and variety of goods and services, economic growth, and quality of education--though including them would exacerbate the weighting problem, and some involve serious measurement problems...

The Human Development Index is an example of ranking mania that has the United States tightly in its grip, so maybe Americans shouldn't complain about the Index. One cannot generalize about the value of rankings. There are pluses and minuses. The major plus is that a ranking is an economical method of presenting information. The related minus is that it often presents it in a misleading way--that is my earlier point that the distance between ranks is more important than the number of ranks that separates the persons (nations, etc.) being ranked. The more compressed a distribution--of ability, health, income, etc.--the less meaningful rank ordering is.

These criticisms are relatively easy to address. Three things immediately occur to me. First, Posner has taken the HDI out of context. Second, he says there is "ranking mania" at play which is at variance with the UNDP's attempts to come up with more sensible measures of human development. Third, he implies that HDI is a slight to the economic approach (as exemplified by the Chicago School which he is a part of). Let me expand on these three points:

(1) While Posner does identify the UN as the main sponsor of this report, he does not specifically say that the UN Development Program is the agency responsible for it. This distinction is important for the main purpose of the HDI is to provide an admittedly rough comparison of the developmental progress of various countries, especially less-developed ones. Another Nobel Prize winner in economics, Amartya Sen, helped create the index together with the late Mahbub ul-Haq. In fact, Sen admits that HDI, an intellectual brainchild of his, is a "vulgar measure." This paper sponsored by the EU adds more color and highlights why the HDI is, again, not really as well suited for comparing developed countries as that was not its original intent:

HDI is a composite measure of life expectancy, literacy & education, and GDP per capita. The index was developed in 1990 again by Amartya Sen (initially as a spin-off of the capability approach) and Mahbub ul Haq. HDI is mainly used in a development context, to verify progress on key indicators of developing countries. It is used by the World Bank and the UN.

The trade-off that we have sketched above, namely between simplicity and accuracy shows up nicely here. Sen even calls his child a "vulgar measure", since it is a simple average between life expectancy at birth, knowledge (2/3 literacy, 1/3 education) and GDP per capita. The 'vulgar' quote can be explained by the fact that HDI is more suited for developing countries (hence the 2/3 weight on literacy in the knowledge pillar), the weights are totally ad hoc and HDI does not contain many aspects that would be part of well-being. One (not easy to avoid) consequence is that if literacy shoots up but life expectancy goes down there could still be measured progress, but the same numerical result might be obtained if both go up a bit, arguably to be preferred. Yet it has a lot of merits in its simplicity and applicability. Certainly for developing countries it is a more useful way of assessing progress than just GDP per capita. For Europe the HDI is not that useful, since all European countries are in the top group. Also, the challenges that Europe faces are not well picked up by HDI.

Posner notes that the HDI would be more informative than it is if it included several other measures which have some bearing on well-being. Nobody will disagree with him. Given the HDI's emphasis on developing countries, however, another important consideration is whether this rich data is as plentiful in impoverished developing countries where governments have limited means for collecting such data as it is in the United States. It probably is not. Again, it is important to take the context of this measure into account outside of an Amerocentric point of view.

(2) The analogy to American "ranking mania" is false, and worse yet, harmful. Unlike rankings such as those for colleges which Posner compares them to, the HDI by the UNDP is not out to sell a product. The UNDP is a non-profit international organization, not US News & World Report or Forbes which put out rankings to help attract advertisers or sell print and online subscriptions.

Indeed, if the UNDP is promoting a form of "ranking mania" with the HDI, then the organization would not be looking for ways to improve on this admittedly rough measure. As I have noted, however, the UNDP is one of the organizations working on the "Measuring Progress in Societies" project which seeks to come up with a better measure of well-being. Shouldn't the UNDP be protecting its sole status as the leading purveyor of alternatives to income-based measures if its interest was in capturing rents from "ranking mania" spawned by the HDI?

(3) To imply that the HDI is a slight to economists because it emphasizes "human" instead of "economic" development is hard to justify. Who came up with the HDI in the first place? Those who are in the least bit familiar with the HDI know that the late economist Mahbub ul-Haq did together with Nobel Prize winner in economics Amartya Sen. As such, it is hard to argue that there was a slight intended when these well-respected economists came up with the HDI.

In conclusion, I would say that the HDI is neither dubious nor senseless. It is a compromised indicator of well-being and even its creators would not argue otherwise. Yet, the measure has done a number of things whose value is not controversial. Highlighting the multifaceted nature of human well-being at the international level is one. Even Posner admits, by using economic parlance, that income is not the only determinant of a person's utility function. (Money isn't everything.) The HDI should be seen in light of what it aims to do--quantify well-being even in less data rich developing countries--instead of just what it actually does. It is a stepping stone to more elaborate and hopefully more informative measures that Posner would like to see. as with what the OECD is working on in conjunction with the UNDP and others. Given this context, it does little good to knock well-intentioned initial attempts at developing more holistic measures of well-being. The HDI has been a legitimate and sensible step in the right direction.

As an expert in the field of law, Judge Posner should be exceedingly familiar with the importance of being well-briefed on the case at hand before making a judgment. Unfortunately, he seems not to have done simple research on the HDI which could have easily addressed his points on its acknowledged shortcomings. In light of the evidence, HDI is acquitted from charges that it is "dubious" and "senseless."

Eco-tourism? Bah! Try Climate "Doom Tourism"

I made a double take at the title of this International Herald Tribune piece, but no, it is for real. We've all heard of the term "eco-tourism" for supposedly environmentally sound travel in an industry dominated by resource hogging hotels, cruise ships, and other touristy accouterments. With all the attention being placed on likely irreversible climate change, however, a new tourist promotion has sprung up: "doom tourism." No, it has nothing to do with blasting evil alien species to kingdom come. Rather, it concerns visiting places on our environmentally Bush-whacked earth that may soon be unrecognizable from their current state. Gone too soon and lost forever like the dodo. In the meantime, though, debate rages over whether tourism to these places on the brink of succumbing to enviro-jihad should be sites for tourism in the first place. You have the classic question of eco-tourism at play here as well: do these tourists do more good than harm? Or, is tourism hastening the very process of climate change?

Dennis and Stacie Woods, a married couple from Seattle, choose their vacation destinations based on what they fear is fated to destruction. This month it was a camping and kayaking trip around the Galápagos Islands. Last year, it was a stay at a remote lodge in the Amazon, and before that, an ascent of Mount Kilimanjaro. "We wanted to see the islands this year," Dennis Woods, a lawyer, said last week in a hotel lobby here, "because we figured they're only going to get worse."

The visit to the Amazon was "to try to see it in its natural state before it was turned into a cattle ranch or logged or burned to the ground," he said. Kilimanjaro was about seeing the sunrise on the highest peak in Africa before the ice cap melts, as some forecasters say it will within the next dozen years. Next on their list: the Arctic before the ice is gone.

The Woodses are part of a travel trend that Ken Shapiro, the editor in chief of TravelAge West, a magazine for travel agents, calls "the Tourism of Doom." "It's not just about going to an exotic place," Shapiro said. It's about going someplace they expect will be gone in a generation."

From the tropics to the ice fields, doom is big business. Quark Expeditions, a leader in Arctic travel, doubled capacity for its 2008 season of trips to the northern and southernmost reaches of the planet. Travel agents report clients are increasingly requesting trips to see the melting glaciers of Patagonia, the threatened coral of the Great Barrier Reef and the eroding atolls of the Maldives, Shapiro said.

Even the sinking of the Antarctic cruise ship Explorer, which hit an iceberg last month, has not cooled interest. Other Antarctic tour operators say they have received frantic calls asking for last-minute berths from those who had been scheduled to take future Explorer voyages. Since most trips are already full, would-be customers are being turned away. What these travelers are chasing may be a modern-day version of an old human impulse - to behold an untrammeled frontier. Except this time around, instead of being the first to climb a mountain or behold a glacier-fed lake, voyagers like the Woodses are eager to be the ones to see things last.

Almost all these trips are marketed as environmentally aware and eco-sensitive - they are, after all, a grand tour of the devastating effects of global warming. But the travel industry, some environmentalists say, is preying on the frenzy. This kind of travel, they argue, is hardly green. It's greedy, requiring airplanes and boats as well as new hotels. However well intentioned, these trip takers may hasten the destruction of the very places they are trying to see. But the environmental debate is hardly settled. What is clear is that appealing to the human ego remains a terrific sales tool for almost any product.

"Doom tourism has been with us for a long time indeed," Jonathan Raban, the travel writer, said by phone from Seattle, his home. "It's about the world being spoiled, and the impulse of the tourist industry to sell us on getting there before it is too late, before other people spoil it. "I'm thinking of the opening up of the West by the railroads aided by unforgivable painters like Albert Bierstadt, who sold that idyllic version of the pristine West populated only by deer and their fauns and picturesque Indians. There was a rush from the East to get there one step before the miners, who were going to spoil it, and before other tourists started trampling it."

Back then, the images were of geysers and antelope-dotted Rocky Mountain sunsets. Now the worried traveler, motivated by promotional Web sites showing images of smiling natives in face paint and flocks of colorful exotic birds, hastens to the vulnerable Amazon. Not that this tourist will be roughing it: bamboo-floored lodges await, where hot showers come courtesy of solar power and squawking toucans can be viewed from laddered observation towers.

At hundreds of dollars or more a night, people do expect hot water and other comforts. In November, Travel & Leisure magazine published a "responsible travel" issue and listed on its cover: "13 guilt-free travel deals," No. 5 being an Inkaterra Rain Forest package. For $497 a person, it included a three-night stay in a cabana on stilts, an excursion to the hotel's private ecological reserve, a boat trip to a native farm and a 30-minute massage at the hotel spa.

A "Green Serengeti package" in Tanzania started at $836 a night a person, with all drinks "excluding Champagne." This is all a ruse, said John Stetson, a spokesman for the Will Steger Foundation, an environmental education organization in Minnesota. "Eco-tourism is more of a term for the marketer," he said. "Many people want to do what's right, so when something is marketed as the right thing, they tend to do that."

But, he says, traveling by jet to see the icebergs contributes to global warming, which makes the icebergs melt faster. "It's hard to fault somebody who wants to see something before it disappears, but it's unfortunate that in their pursuit of doing that, they contribute to the problem," he said.

Advocates of green tourism counter that even carbon-consuming travel can help preserve destinations, as local people learn that there is more economic value in preserving nature for tourists than in farming or timber harvesting, said Lene Oestergaard, the executive director of the Rainforest Foundation. "There are environmentally friendly resorts,"' she said. "This is possible."

Some travel companies have tried to reconcile the conflicting ideas of seeing the planet while also somehow saving it. Abercrombie & Kent, a luxury travel company, is offering "mission trips" to environmentally fragile locales. For the Antarctica mission under way now, the 22 participants, who paid $6,190 each for a 13-day tour, gave an additional $500 each to Friends of Conservation. Some of that money helped buy a high-definition video camera, which the tourists will deliver to Palmer Station, an American ecological research center on the Antarctic Peninsula, said Pamela Lassers, a spokeswoman for the tour operator. The camera will be used to record the behavior of krill, she said.

Each tourist receives a certificate of participation and a Climate Change Challenge Mission patch. "For their expedition parka," publicity materials instruct. In a way, these earnest expeditions say much about how the very idea of adventure has changed. Once naturalists like Darwin made sense of a wild world. Explorers like Lewis and Clark sought to map what seemed limitless wilderness. Adventurers like Livingstone and Scott sought to conquer the earth's natural challenges and sometimes died trying.

Over the past half-century, backpackers and other adventurers beat new paths across Asia, South America and other locales - only to discover years later that some paths had been clear-cut into highways fit for Holiday Inns. "From where I sit," said Nancy Novograd, the editor of Travel & Leisure, "traveling to Mongolia now is almost cliché. Last summer, it seemed like everybody was going to Mongolia. The bar keeps getting higher."

Videos on Three Gorges Dam(ned)

I was poking around the Financial Times website when I came across a recent video series by the well-regarded newspaper on the pitfalls facing the infamous dam. There are three segments available [1, 2, 3] showing the epic scale of the social and environmental costs exacted by this project. The first is an overview of the project. The second narrates the plight of Fu Xiancai, one of those displaced by the dam who was beaten up by local thugs for being too vocal in his opposition to the project. The third features Tan Qiwei, vice-mayor of the city of Chongquing, admitting that the dam has caused several headaches. Below, I also attach a brief snippet from a more recent report in the International Herald Tribune about the Three Gorges Dam. It's scary that the dam has not deterred the Communist Party leadership from building yet more of these huge dams. Pick your power generation poison: coal plants foul up your air, but hydroelectric projects foul up your water and cause a myriad of dislocations. Hopefully, the recently agreed to provisions at the just concluded UN climate change conference on sharing less environmentally pernicious technologies by industrialized countries with developing ones should help.

Last year, Chinese officials celebrated the completion of the Three Gorges Dam by releasing a list of 10 world records. As in: The Three Gorges is the world's biggest dam, biggest power plant and biggest consumer of dirt, stone, concrete and steel. Ever. Even the project's official tally of 1.13 million displaced people made the list as record No. 10.

Today, the Communist Party is hoping the dam does not become China's biggest folly. In recent weeks, Chinese officials have admitted that the dam was spawning environmental problems like water pollution and landslides that could become severe. Equally startling, officials want to begin a new relocation program that would be bigger than the first.

The rising controversy makes it easy to overlook what could have been listed as world record No. 11: The Three Gorges Dam is the world's biggest man-made producer of electricity from renewable energy. Hydropower, in fact, is the centerpiece of one of China's most praised green initiatives, a plan to rapidly expand renewable energy by 2020.

The Three Gorges Dam, then, lies at the uncomfortable center of China's energy conundrum: The nation's roaring economy is addicted to dirty, coal-fired power plants that pollute the air and belch greenhouse gas emissions that contribute to global warming. Dams are much cleaner producers of electricity, but they have displaced millions of people in China and carved a stark environmental legacy on the landscape. "It's really kind of a no-win situation," said Jonathan Sinton, China program manager at the International Energy Agency. "There are no ideal choices."

For now, China's choice is to keep building big dams, even as the social and environmental impacts of the projects are increasingly questioned. The Three Gorges Dam is projected as an anchor in a string of hydropower "mega-bases" planned for the middle and upper reaches of the Yangtze River. By 2020, China wants to nearly triple its hydropower capacity, to 300 gigawatts...

"In western China, the one-sided pursuit of economic benefits from hydropower has come at the expense of relocated people, the environment and the land and its cultural heritage," Fan Xiao, a Sichuan Province geologist and a critic of the Three Gorges project, said via e-mail. "Hydropower development is disorderly and uncontrolled, and it has reached a crazy scale."

Advocates say hydropower is one of China's richest and least tapped energy resources. Even though much of the country is plagued with drought and water shortages, China also boasts a knot of important rivers that flow out of the Tibetan high plateau. Currently, China uses only about one-fourth of its hydropower potential...

Hydropower...already accounts for 6 percent of the power supply and has major growth potential. Chen Deming, one of the government's top economic planners, said hydropower was a critical noncarbon energy source and described the negative impacts of dams as "controllable." He said officials would emphasize environmental protection and resettlement issues on future projects. "We believe that large-scale hydropower plants contribute a lot to reduce energy consumption, air and environmental pollution," Chen said at a September news conference. China, he added, planned to develop hydropower on "a considerable scale."

Internationally, a debate has raged for years about large dams (those higher than 50 feet) because of their legacy of disruption. Many environmentalists contend that electricity generated by large dams should not be considered renewable because of the social and environmental damage that follow many projects. The United States has many large dams, but in recent years has started decommissioning some of them, particularly in the West, because of environmental concerns.

Tension about large dams is also rising in China. Environmentalists are pushing for tighter regulation and more public input before projects are approved. Resettlement remains a volatile issue. Two years ago, more than 100,000 people protested the Pubugou Dam project in Sichuan Province, until the riot police crushed the demonstration.

President Hu Jintao and Prime Minister Wen Jiabao appear less enamored of the big projects than their predecessors. Neither man attended last year's ceremony for the completion of the Three Gorges Dam. Wen has demanded environmental reviews for different proposed sites. Yet with the momentum of the surging economy, most projects continue moving forward.

The renewed debate about the Three Gorges project offers a view of the competing pressures on China. Equal parts vanity project and technological marvel, the Three Gorges was initially conceived for flood control, not for any efforts to promote clean energy. Today, dams are big business in China, and profit-seeking is another major reason behind the hydropower push...

Today, the Three Gorges Dam is the de facto anchor of a planned system of 12 hydropower mega-bases on the middle and upper reaches of the Yangtze. Over all, officials have said more than 100 hydropower stations could be built on the upper Yangtze basin within two decades. The government-owned corporation that built the Three Gorges Dam has already started construction on 3 of the 12 large projects.

One of those sites, Xiluodu, will be the country's second-largest hydropower station when it is completed in 2015. Two years ago, regulators halted construction at Xiluodu because the project lacked a proper environmental impact study. But work has quietly resumed. In November, crews succeeded in damming the Jinsha River, the tributary that forms the upper reaches of the Yangtze. Environmentalists worry that these systems create a domino effect in which one mega-dam begets another.

New laws require dam projects to undergo environmental impact studies and also provide opportunities for public comment and oversight. But those laws are easy to circumvent, or ignore. Xiluodu, for example, is being built in a national protection zone for several species of endangered fish.

"These large dams will have a lot of impacts, sometimes irreversible," said Ma Jun, an environmentalist and the author of "China's Water Crisis." "We have to look at them very carefully and follow our legal requirements very strictly."

Harry Potter and the Deathly Subprime

I got a chuckle out of the Financial Times' John Authers comparing the subprime mess to the final saga of the Harry Potter franchise, Harry Potter and the Deathly Hallows. According to him, those who find the subprime mess "incuraby boring" yet need to be informed about this act of financial legerdemain should read the aforementioned Harry Potter book. No, I am not pulling your leg. This may sound far-fetched, and I doubt whether the Englishwoman JK Rowling has experience as a mortgage broker. Still, the creative Mr. Authers has an intriguing take that should prove to be amusing yet (somewhat) instructive. You may believe this analogy is silly, but since the Wizard of Oz has long been called an allegory for the gold standard, goodbye yellow brick road and all that, why not this analogy? Come to think of it, isn't "Love Lies Bleeding" all about the subprime mess too?

The most popular book of 2007 also proved to be a good allegory for the problems the markets faced all year. In JK Rowling’s Harry Potter and the Deathly Hallows, our teenage hero has to contend with the evil Lord Voldemort, who has split his soul into many different parts, and hidden them across the world. Voldemort can only be killed once Harry finds each of these objects, known as horcruxes, and destroys them – and the act of destroying them is itself fiendishly difficult.

After nearly a year of the subprime crisis, that sounds dreadfully familiar. Subprime loans, which should never even have been offered to the borrowers, were split into many complicated financial instruments, and distributed, or hidden, worldwide. The battle for investors and regulators has been to identify where these “horcruxes” of the subprime loans are hidden, and to neutralise them. Until they are all found, Lord Voldemortgage [!--that's no typo] rules the earth.

It may sound fanciful to read Harry Potter as a financial text. But The Wizard of Oz is frequently cited as a tract about the debate over leaving the gold standard (or “following the yellow-brick road”) so the notion of reading children’s classics as financial allegories has some precedent. The book is great, and genuinely scary because it is not at all clear whether our hero will be all right in the end. I cannot spoil the ending for those who have not yet read it: suffice it to say the same suspense hangs over the credit crisis.

If you are looking for more immediately practical books, then the best basic guide probably continues to be The Money Machine – How The City Works, by the former writer of this column, Philip Coggan. Amazingly, the first edition came out more than two decades ago – yet the lessons in the book remain fresh.

In the original introduction, he highlighted the now long-forgotten scandal of Johnson Matthey Bankers, which was bought for £1 after making high-risk loans that were more than the bank’s entire capital. He made the point that in spite of their reputation for brilliance, financiers in every generation do things that are stupid, and make the same mistakes. When he comes to revise the book to take account of this year’s credit crisis, he will not need to make many alterations...

For those who find the subject incurably boring, try the Harry Potter, and tell them it’s really about subprime.

Andy Mukherjee on India Buying Up the World

Bloomberg columnist Andy Mukherjee has come up with another fine op-ed on how India opening up to the world is a two-way street: Not only is it becoming an investment destination itself, but India companies are also seeking to invest abroad. Flush with money to burn, the Indian pattern is notable in that private firms, not state-owned ones, are leading India's drive to acquire firms abroad in what has been characterized as "reverse colonization." With all the brouhaha over sovereign wealth funds allegedly getting ready to buy up the West, India's acquisitive drive abroad benefits from not being a state-led activity. In effect, it is harder to characterize these as politically motivated purchases. Indian firms are largely driven to purchase foreign firms on a for-profit motive; what a radical idea in this era of resurgent state-led capitalism:

India's openness to global trade and investments has seen a remarkable increase in recent years. In the year ended March 31, the sum of money flowing into and out of the country rose to $913 billion, or 110 percent of gross domestic product. As late as 1997, annual flows had amounted to only 50 percent of GDP, says Ajay Shah, an economist at the National Institute of Public Finance and Policy in New Delhi. ``India has changed beyond recognition,'' Shah says.

The progress is perhaps best reflected in the speed with which Indian companies are buying businesses overseas. So far in 2007, foreign acquisitions have amounted to more than $39 billion, a fivefold jump from last year. The biggest purchase this year -- and in India's corporate history -- was the $12.8 billion leveraged buyout of Britain's Corus Group Plc by Mumbai-based Tata Steel Ltd.

While a liquidity crunch in the leveraged-loan market could rule out a similar big acquisition in 2008, the smaller deals might be even more numerous next year as the Indian economy, barely affected by the subprime-related credit crisis in the West, continues to power ahead. India doesn't have the sovereign wealth of an Abu Dhabi or Singapore, whose state-sponsored funds recently bought large stakes in Citigroup Inc. and UBS AG, respectively. Nor is the overseas expansion of Indian companies spearheaded by government-owned companies looking to capture energy resources. Private entrepreneurs are driving the agenda in India, with state-owned oil companies making a few small investments, such as Bharat Petroleum Corp.'s purchase this year of a 20 percent interest in an Australian exploration area in the Timor Sea.

Just because Indian acquirers have scant links to the state, their journey to Western boardrooms isn't a cakewalk. Out of the three companies vying for Ford Motor Co.'s Jaguar and Land Rover brands, two bidders -- Tata Motors Ltd. and Mahindra & Mahindra Ltd. -- are Indian carmakers. A recent report in the Wall Street Journal cited the head of a U.S. trade body representing Jaguar dealers as saying that the perception of the luxury brand may take a beating if it was owned by an Indian company.

The financial clout of Indian companies has grown to a point where it's impossible to stop them with snobbery. Last year, Arcelor SA Chief Executive Officer Guy Dolle had ridiculed the takeover bid by Mittal Steel Co. by saying that the steel made by Indian-born Lakshmi Mittal was like eau de cologne when his company produced perfume. Investors judged the cologne to be good enough to be merged with the perfume. Mittal's success in building the world's biggest steel empire -- ArcelorMittal -- with acquisitions around the world has been a tremendous source of inspiration for Indian entrepreneurs.

But ambition alone isn't enough. Several other forces have come together to make Indian acquirers strong contenders for global assets. The modernization of the country's equity market and the loosening of capital controls have improved Indian companies' access to finance while a strengthening rupee has made overseas assets more affordable for them. At the same time, the import tariffs that protected local manufacturers from foreign competition have come down significantly. The only way domestic producers can now compete is by going global themselves. That is, increasingly, the strategy that even midsized companies are pursuing.

Suzlon Energy Ltd., a maker of wind turbines based in Ahmedabad, Gujarat, has seen its assets grow sixfold in two years through acquisitions of Germany's Repower Systems AG and Hansen Transmissions International NV, a Belgian gearbox maker. The company is now the world's fifth-largest maker of windmills and expects to become the third-biggest by 2010.

``The remarkable thing about Indian companies is that they have huge aspirations to be global companies,'' Tarun Jotwani, chairman of Lehman Brothers Holdings Inc.'s Indian operations, told Bloomberg News in an interview this month. ``They're extraordinarily confident about buying companies abroad and integrating them with their companies in India. We think the pace will pick up.''

Jaya Prakash Pradhan, an economist at the New Delhi-based Institute for Studies in Industrial Development, has found that 75 percent of the money spent by Indian companies on overseas acquisitions since 2000 has been in manufacturing. By the number of deals, the pharmaceutical industry is the clear leader, followed by transport equipment and chemicals, he says.

All of these industries are skills-intensive, in line with the core competence of India's homegrown entrepreneurs. Together with computer software, these businesses will continue to be at the forefront of corporate India's expansion overseas.

Meanwhile, foreign direct investment into India will -- once the country has better airports, roads and power supply -- come to be dominated by labor-intensive industries in which the local business tycoons have acquired very little expertise.

A progressively more open Indian economy may be able to expand even faster than the current 9 percent pace. Higher economic growth will, in turn, invite more overseas money into India and give more local businesses the confidence to go global. For investors, India will be equally important as a provider of capital as well as a recipient.

Dubya, the Mugabe of Climate Change?

UK Prime Minister Gordon "British Jobs for British People" Brown boycotted the recently held EU-AU summit over the attendance of Robert Mugabe, one of the world's most odious characters. Well, guess what. With the deadlock over the current climate change negotiations in Bali due in large part to US obstructionism in the face of EU efforts to get the ball rolling to a successor to the Kyoto Treaty, EU officials now threaten to pull out of the upcoming "Major Economies Meeting" to be hosted by Bush on climate change in blue Hawaii. It does make sense: If PetroBush and the Exxonites refuse to get going on this very issue at the UN gathering, there is little chance that substantive (and not cosmetic) efforts will be entertained at the US hosted event which is likely diversionary. The continued intransigence of the US on this matter is to be expected; that the EU is getting fed up with the US stance is not. Let us begin with the EU (finally) showing some backbone on the issue:

The European Union accused the United States on Thursday of blocking goals for fighting climate change at U.N. talks in Bali and threatened to boycott U.S. talks among top greenhouse gas emitting nations. The December 3-14 Bali talks are split over the guidelines for starting two years of formal negotiations on a deal to succeed the Kyoto Protocol, a U.N. pact capping greenhouse gas emissions of all industrial nations except the United States until 2012.

"If we would have a failure in Bali it would be meaningless to have a major economies' meeting" in the United States, Humberto Rosa, Portugal's Secretary of State for Environment, said on the penultimate day of the talks. "We're not blackmailing," he said, escalating ratcheting up a war of words with Washington at the 190-nation meeting. "If no Bali, no MEM (major economies' meeting)."

Portugal holds the rotating EU presidency and Rosa is the EU's top negotiator in Bali, where delegates are seeking to agree to launch talks on a broad new climate treaty to combat floods, droughts, heatwaves and rising seas from 2012.

"We don't feel that comments like that are very constructive when we are working so hard to find common ground," said Kristin Hellmer, a White House spokeswoman in Bali. Washington, long at odds with many of its Western allies on climate policies, has called a meeting of 17 of the world's top emitters, including China, Russia and India, in Hawaii late next month to discuss long-term curbs on greenhouse gases.

President George W. Bush intends the Honolulu meeting as part of a series to come up with plans for curbs to feed into the U.N. process, to be completed after he steps down in January 2009. Washington hosted a similar meeting in September.

The EU wants Bali's final text to agree a non-binding goal of cuts in emissions, mainly from burning fossil fuels, of 25 to 40 percent below 1990 levels by 2020 for industrial economies. The United States, Japan and Canada are opposed, saying any figures would prejudge the outcome.

Luckily, some less environmentally toxic Americans were also present at the Bali conference who made assurances that current US policy is likely to change once Bush is removed from the Oval Office. John Kerry has said "I am convinced the politics of 2009 in the United States are going to be just night and day, different from where we have been before." Kerry and other members of a "shadow delegation" also chimed in on their expectations that the US will become more progressive on climate change in the near future:

For Al Gore, it was time to utter a new inconvenient truth that diplomatic niceties precluded others from telling: "My own country, the United States, is principally responsible for obstructing progress here," he told a packed audience at the U.N. climate change summit in Bali. "We all know that..."

But while Gore's public criticism of his own country's delegation — and implicitly, of the President who controls it — electrified his audience, what he said next was even more important. "Over the next two years, the United States is going to be somewhere it is not right now," said Gore. "We are going to change in the U.S."

That the U.S. leadership is deeply divided on climate change has been patently obvious to even the most casual observer here. Washington's official delegation has emerged as the chief spoiler in moves to take meaningful action on climate change. But among the most vocal critics of the official delegation has been an array of American environmentalists, legislators and state and local government officials. Carl Pope, president of the Sierra Club, called the U.S. performance "the most explicitly irresponsible action that any American Administration has taken in any of our lifetimes."

But the purpose of the shadow U.S. delegation here — spiritually led by Gore and including the likes of Sen. John Kerry, New York Mayor Michael Bloomberg and dozens of officials from California (Governor Arnold Schwarzenegger had planned to attend, but budget negotiations kept him at home) — is to signal the world that the Bush Administration no longer represents the views of most Americans on climate change. They point to the fact that U.S. cities, states and, now, the Congress have taken steps to combat global warming, and that next year's election will likely accelerate that momentum. "The message here is that help is on the way," says Mike Chrisman, California's Secretary of Resources...

New York Mayor Michael Bloomberg was in a nearby hotel arguing the opposite. "People everywhere recognize the time for discussion about whether global warming exists has passed," said Bloomberg, who has called for the implementation of a carbon tax. "Now it's time for action."

And Bloomberg could point to the fact that over 700 U.S. cities have signed up to meet Kyoto Protocol-style carbon cuts, while California has mandated a 25% reduction in greenhouse gases by 2020. "People here are acutely aware of what's happening in the U.S. beyond the Bush Administration, and they take great heart in the growing momentum," says Eliot Diringer, director of international strategies for the Pew Center on Climate Change.

Sen. John Kerry came in person to Bali to deliver that message, meeting with foreign delegations, his rhetoric backed by the recent passage by the Senate Environment Committee of the Warner-Lieberman Climate Bill, which calls for 15% emission reductions by 2020. "I wanted to make certain that those folks who are involved in the negotiations understand that they are not alone in dealing with this," says Kerry. "The Administration is isolated in its own country." Kerry, Maine Republican Senator Olympia Snowe and 50 other members of Congress sent a protest letter Wednesday to President Bush calling for U.S. negotiators to drop their opposition to emission targets.

Boycotting the US would further highlight the contempt shown by Europeans for America's current enviro-jihad. Who'd have thought the standing of the US could fall this low when even its own allies start to contemplate spurning invitations from Washington? Given the potential hazards posed by not addressing this issue, Bush is rightly regarded as an odious figure just as Mugabe is.

Charlie Rose Interview of CIC's Jesse Wang

American readers, pardon me for my previous ignorance of who Charlie Rose is. Aside from not watching TV that much, I didn't even own a set while I was studying in the States. Also, the Public Broadcasting System (PBS) is not widely available internationally, especially compared to CNN. Of course, Larry King's choice of guests is, shall we say, more pedestrian than that of Rose (though the OJ/Buttafuoco set may disagree). I recently came across some of Rose's work and have been much impressed by the highbrow guests he often features as well as the generally intelligent questions he usually asks--two things you don't see much of on today's TV.

Anyway, the clip above features Rose in Beijing interviewing Jesse Wang, chairman of the state-owned Jianyin Investment Company. Wang is also part of the management team at the PRC's newish China Investment Company (CIC). I have poked fun at the $200B fund's investment in the sinking stock of private equity operator the Blackstone Group, but the interview is instructive nonetheless. Wang explains that the CIC has been on the drawing board for quite some time in Party circles. He then elaborates on the logic driving SWFs such as portfolio diversification and the quest for better returns before turning to why the rest of the world does not have to fear the CIC buying up the rest of the world, especially for political motivated purposes.

There are several other clips that are worth watching as well for sinologists on Rose's website. It seems he has done several interviews regarding China's economic rise. His guests include He Ya-Fei, assistant minister for foreign affairs; Ted Fishman, author of China, Inc.; Robert Zoellick before he became World Bank president who has commented on China's need to address "stakeholder" concerns; Henry Paulson who's currently busy with the third China-US Strategic Economic Dialogue; and Singapore's PM Lee Hsien-Long who's a keen observer of China. It's good stuff worth watching. Fortunately, most of Rose's interviews are available online for viewing. I look forward to watching more informative clips...

Chinese Plants to Welcome US Inspectors

It's a shame this news story hasn't received much if any coverage while the third Strategic Economic Dialogue is underway in Beijing: Given rising doubts over the safety of Chinese food and drug exports (and much else besides), PRC authorities have made moves to allow US inspectors to come over. In return, American immigration authorities will make it easier for Chinese tour groups to visit America. It sounds like a fair bargain to me. Likely, this story has escaped attention for regular news media is more interested in sensationalizing the dangers of Chinese products and less in relaying efforts to reduce potential dangers. Oh well. The US and China have been locked in a prolonged tit-for-tat over product safety that has become increasingly contentious. Allowing inspectors into China is strategically sensible on the part of the Party faithful: If American inspectors are given the opportunity to assess the quality of Chinese exports, there is less room to bicker if things go awry ex post facto. Address problems at the source the source. From the Financial Times:

US inspectors will be allowed into China to monitor the quality standards of Chinese food and drugs exports under the terms of agreements negotiated in the wake of the product safety scandals that have damaged China’s “national image”.

In return, under a series of bilateral agreements, the US will allow Chinese tour groups easier access to the US. Tourism visas to the US are, at present, difficult to obtain for Chinese and the move is likely to lead to a sharp jump in the number of tourists to the US.

The ministerial-level negotiations in Beijing on Tuesday got off to a testy start, with Wu Yi, a vice-premier, complaining that exaggerated US reports about shoddy and unsafe Chinese products had tarnished China. “The US media hyped about the ­quality of Chinese exports, causing serious damage to China’s national image,” she said.

In spite of its annoyance, China acceded to Washington’s demands to allow US officials to go to factories in China to check whether goods for export meet US quality standards.

The talks in Beijing, part of a regular exchange on trade disputes, will be followed by a two-day meeting of ministers, led by Ms Wu and Hank Paulson, the US Treasury secretary, who will also press the product safety issue...

Mike Leavitt, the US secretary of health and human services, said the agreements on standards for drugs, medical devices, food and animal feed showed the two sides were trying to “bridge” different regulatory systems. But he said Washington would enforce its standards, exacting “higher penalties” on exporters who breached US standards. “The most severe penalty, and the swiftest penalty, is to be eliminated from access to American consumers,” he said.

The talks, initiated by Mr Paulson, are designed to take a more strategic view ­of the relationship, freed of the often tense haggling that characterises trade discussions. Sino-US relations remain bedevilled by numerous issues, most recently the issue of product safety but, more fundamentally, by Washington’s complaints that Beijing uses a range of policies to favour local industries and exporters.

Michael Bloomberg Blasts Protectionism

The founder of the eponymous financial information services empire and current New York mayor Michael Bloomberg has just penned an op-ed in the Financial Times warning against mounting protectionist sentiment Stateside. Of course, Mayor Mike is hardly a disinterested party. His city benefits from a continued influx of foreign funds which would likely dissipate in the event of harsh protectionist measures. And, doubtlessly, his Bloomberg services would suffer a downturn in client activity should America get Dobbs-ified. Strongly pro-trade rhetoric does something that should prove instructive to media hounds out for a quick story: Mayor Mike isn't likely to run for office given that he is not making concessions to trade bashing rhetoric, now favored (or more likely affected) by even the likes of Hillary Clinton. There is nothing new in his arguments here, though they ought to prevent more silly stories on Bloomberg being a possible Jewish bachelor president.

The US economy has turned downward. People are feeling insecure. There are grave concerns about jobs moving overseas and about losing ground to Asian countries. Heavy pressures are mounting on the presidential candidates in both parties to pander to protectionist and even isolationist sentiments. The year, however, is 1992. Fortunately, the two parties’ candidates – Bill Clinton and George H.W. Bush – refuse to cave in to the pressure. They resist the special interests and stand strong for the long-term health of the American economy – and the country begins one of the greatest economic expansions of our history.

Today, we would do well to remember this lesson. It is easy to say that times have changed and take a more protectionist viewpoint. In fact, times have changed. Dramatic advances in technology and increased global trade are creating enormous economic opportunities, but also challenges. If America is to remain the world’s economic superpower, it must capitalise on the opportunities and confront the challenges. Countries that run away from globalisation in the 21st century – as with those that ran away from capitalism in the 20th century – will pay a heavy price for decades to come.

This week I am meeting with business leaders and government officials in Beijing and Shanghai to discuss the increasingly important relationship between the US and China – and the opportunities that we hold for each other. Some in the west believe that a growing Chinese economy is a threat. As a businessman, and now as mayor of the world’s largest financial capital, I believe the opposite is true: Chinese growth is, in fact, an opportunity for the US and the world, because the global economy is not a zero-sum game. We all share in each other’s success.

A growing China creates jobs for our export producers, keeps consumer prices low, expands our choice of goods and services, and increases our access to capital and talent. It also intensifies pressure on China itself to act responsibly on international issues, including security, trade, product safety and climate change. Our serious differences with China in these and other areas must be managed through engagement, not used as excuses to pursue politically expedient – and economically wrong-headed – short-term retaliatory measures.

What of the argument that China is taking jobs from America? Those jobs – if they did not go to China – would go somewhere else. The US government cannot keep them here through costly consumer-funded tariffs and taxpayer-funded subsidies. We learnt that lesson the hard way in the 1970s, when congressional protection of the automotive industry only hurt Detroit and helped its foreign competitors.

When politicians suggest that the benefits of globalisation go primarily to low-wage countries, they are playing to people’s fears. In fact, globalisation benefits every country that maximises its strategic advantages – and no country has more strategic advantages than the US. We are blessed with many of the best universities in the world; an enormous domestic consumer market; the most cutting-edge technological, medical and scientific research communities; deep capital markets that offer financing to businesses of every kind; and a level of freedom, opportunity and diversity that is unmatched.

These strategic advantages are a powerful magnet for the investors, entrepreneurs and innovators who are pioneering new fields and creating good jobs. But when the federal government builds walls around industries, it also blocks the exploration of new frontiers. Countries that offer open and fair access to new frontiers will be the winners in the new global economy, while those that build barriers will increasingly see their productivity decline and their innovators move elsewhere.

The opportunities created by globalisation will raise salaries and living standards for American families, but the transition can be difficult. The way to help workers affected by globalisation is not to prop up uncompetitive industries, but to assist the people who are displaced, so that they do not bear the costs of globalisation alone. This means strengthening our support of displaced workers and increasing investment in them, so that we can help them acquire the skills that the new economy demands.

At the same time, we have a responsibility to prepare today’s students for tomorrow’s economy. To compete in the 21st century, our students must learn more mathematics, more science, more engineering and more computer technology. Students around the world are outpacing American students in these subjects and unless we change that we will begin falling behind. That is why I have made public education reform a top priority in New York City and the progress we have begun making – substantial gains on math and English scores and graduation rates at 20-year highs – offers hope that by injecting accountability and standards into schools, we can aim for excellence, rather than settle for mediocrity.

Investing in infrastructure is equally critical to a nation’s competitiveness. China is finishing what will be the world’s largest airport terminal in Beijing. It is building 20,000km of railway lines and has already built the world’s fastest train, which runs at a top speed of 267mph. These are the kinds of investments we need more of in America if we are to keep pace with our international competition.

The new global economy holds enormous promise for fulfilling the American dream – that each of us can build a better life for our family. But capitalising on that promise requires courageous leadership. We had it in 1992 and we could use more of it now.

Banana Wars Never End, Part III

There must be something about fighting over bananas that captures the fancy of trade watchers the world over. I have noted developments in the banana wars during recent times [1, 2]. For those of you who are not quite familiar with this row, the Guardian has a brief history. The world's largest banana exporter, Ecuador, and the world's largest banana producer, US-based Chiquita, have long been critical of the EU granting preferential access to the commodity exports of former European colonies which fall under the Africa, Carribean, and Pacific (ACP) grouping. They have already filed and won rulings at the WTO asking for reductions in the tariffs applied to Ecuadorean bananas. However, Ecuador believes that the EU hasn't yet acceded to the WTO rulings, and has asked the WTO to check for compliance. The EU appears to have yet again been found in violation of the binding WTO rulings.

On a related issue, I recently noted that African countries also in the ACP grouping together with various NGOs have been clamoring for an extension of preferential trade agreements with the EU such as that which fomented the banana wars. What this case brings out is that it's not mainly a case of the evil EU lording it over former colonies to end such tariffs as some would make of it. As with Ecuador, these preferential agreements injure other developing countries not in the ACP. From a social justice standpoint, is there much of a case for favoring one developing country over another as a source of banana exports? The EU can atone for its perceived colonial misjudgments through ways less injurious to other LDCs by, for instance, providing aid to ACP countries. Perhaps more developing countries can benefit from a level playing field of lower tariffs on agricultural products all around--what a novel idea. When that moment comes, the banana wars may finally end. From the Associated Press:

The European Union has failed to bring its import tariffs for bananas in line with international trade rules, a WTO compliance panel ruled Monday, possibly opening up the door to millions of dollars (euros) in commercial sanctions from Ecuador. The confidential decision — distributed Monday to the parties and confirmed by Ecuadorean and European officials — is an important development in the decade-old World Trade Organization dispute pitting Latin American countries and the United States against the EU.

The verdict will also be closely followed by Chiquita Brands International Inc., whose shares climbed 9.2 percent last Tuesday on early reports that the EU would lose the case. The tariff costs Chiquita US$1, or €.68 per share annually, according to Barry Sine, an Oppenheimer & Co. analyst.

"It was a total victory," said an Ecuadorean official to the WTO after reviewing the report. "We are very happy with the result." The official asked not to be cited by name because he was not authorized to speak to the media.

Michael Mann, spokesman for EU Farm Commissioner Marian Fisher Boel, confirmed the loss, but criticized the WTO panel for taking a "purely formalistic" approach that ignored data showing an increase in European imports of bananas from Latin America as a whole.

The WTO has consistently ruled against how Brussels sets tariffs for bananas, forcing it to overhaul a system that grants preferential conditions for producers from African and Caribbean countries, mainly former British and French colonies.

The EU claimed that a new banana tariff established last year — €176, or $258 per ton — brought its import rules in line with WTO rulings. But Ecuador, the world's largest banana producer, said the new tariff actually took away some of its market share in Europe, hurting more than 1 million Ecuadoreans dependent on the banana industry.

"In any event, all this is largely academic," Mann said, adding that preferences will be granted under WTO-compliant economic partnership agreements as of next year. "The EU is engaged in good-faith negotiations on the future bound tariff for bananas with all suppliers. It is through negotiations, not litigation, that we will find a solution that is satisfactory for all." The verdict is expected to be publicly released in March, at which point the EU can lodge a final appeal. The U.S. also revived a complaint against Brussels' banana rules at the WTO this year. Colombia initiated a new dispute.

Ecuador claimed in March to have already lost US$131 million because of the discriminatory tariff. It has yet to say how it would retaliate against the EU. Latin American bananas currently have around 60 percent of the EU banana market, while African and Caribbean producers have 20 percent, according to EU officials. Bananas grown in the EU — mostly on Spanish and French islands — account for another 20 percent.

The bananas case was first brought to the Geneva-based trade referee in 1996, but has since spawned a series of disputes as trade lawyers wrangled over procedural intricacies and legislation that had previously never been tested. The U.S., in 1999, and Ecuador a year later both won the right to impose trade sanctions on European goods after the WTO found the EU's rules to be illegal.

Dutch Think of Building Tulip-Shaped Island

With apologies to Herve Villechaize of "Fantasy Island" fame: Di tulip, boss, di tulip!

The Dutch masters in the art of land reclamation are contemplating a project that would top even the now-famous palm islands of Dubai in spectacle. Keep in mind, after all, that it was a Dutch firm that created those Middle East engineering feats. Now, the Dutch are thinking of building an offshore island in the shape of a tulip to accomplish a number of objectives:

(1) Showcase Dutch engineering;
(2) Shield the Dutch coastline from sea rises caused by global warming;
(3) Move some residents from the rather crowded land;
(4) Related to (3), not sacrifice agricultural land for housing--the Netherlands is the Eurozone's third largest exporter of agricultural products

All the same, there are obstacles to this proposal:

(1) The North Sea features much higher waves than the relatively calm Gulf;
(2) Conservationists fear the island could disrupt bird migration and marine life;
(3) It may be more feasible to extend the shoreline cost- and engineering-wise

While I would definitely marvel at the spectacle of a large, tulip-shaped island housing our Dutch friends, those last three considerations bear notice. We'll see what happens; maybe they can get Ricardo Montalban decked out all in white for the ribbon cutting ceremony should this plan come to pass (and he should arrive via di plane ;-) From Reuters:

The Netherlands wants to redraw the map of Europe -- literally. Dubai has built Palm Island. Now the world leaders in land reclamation are considering an island in the shape of a tulip to fight overcrowding and shield the coastline from the rising sea. Supporters of the scheme say it will give Dutch companies a chance to showcase water management skills that are increasingly in demand due to global warming, but critics say the plan will be prohibitively expensive and harm delicate ecosystems.

While a poll in October by research company TNS NIPO with the Red Cross showed the Dutch are more afraid of flooding than a terrorist attack, many have a strong faith in Dutch expertise and technology to protect them from the water. The Dutch parliament has asked a commission on coastal development to look into the idea of building islands in the North Sea that could be used for housing, farming or a nature reserve, while at the same time helping to protect the coast. "People live on top of each other in the Netherlands," said Christian Democrat politician Joop Atsma, who sponsored a parliamentary motion on building in the North Sea. "We are hungry for land. A huge area is needed for building."

Atsma says high land prices threaten the country's position as the world's third biggest exporter of agricultural products, and make a 100,000 hectare island potentially worth 10 billion euros ($14.69 billion) -- enough of a return to fund the project. A government body set up to promote innovation has drawn up proposals for an island about 50 km long, sparking fierce debate which inspired one blogger to joke that a cannabis leaf may be a more suitable shape than the tulip on the formal plans [some Dutch bloggers just love their ganja].

"The Netherlands has a lot of know-how in terms of water. It exports this knowledge but it is missing out on innovation. More experiments are needed in the fields of alternative energy, tides and wind," said Maria Henneman of Innovation Platform. "Of course it is an expensive investment but with current technology a lot is possible."

The Netherlands -- literally the Low Countries -- has a long history of pioneering technology to help it claw back land from the sea and fight recurrent flooding. U.S. officials sought advice from Dutch experts on water management after floods devastated New Orleans in 2005, and Dutch firms have been central in major coastal developments worldwide. Dutch firm Boskalis developed techniques during the Zuiderzee and Delta projects to become the world's largest dredger, helping build the island for Hong Kong's airport and now working on Oman's "Wave" project -- a huge resort added to the coast. Dubai's island, that juts into the shallow waters of the Gulf in the shape of a palm tree, was built by Dutch marine contractor Van Oord using more than 100 million cubic meters of sand.

"I live far below sea level and I have never had wet feet at home," Atsma said. "So much can be done with water management." One of the world's most densely populated countries with 16 million people living in an area about half the size of Scotland , a quarter of the Netherlands is below sea-level and it lies on the flood plains of three big rivers.

The country's earliest inhabitants built their homes and farmsteads on mounds to protect them from flooding. From around 1300, windmills were developed to pump water off low-lying land. Steam-driven pumps accelerated the process in the 19th century. In 1932, work was completed on a mammoth 32-km dike that closed the Zuiderzee off from the North Sea and allowed 1,650 square km of land to be drained. After devastating floods in 1953 killed more than 1,800 people, the Dutch launched one of the world's largest construction schemes -- the Delta project -- to raise dikes, close sea estuaries and build a huge storm-surge barrier.

Scientists expect global warming to raise sea levels along the Dutch coast by up to 85 centimeters in the next century, and cause more severe storms that could make rivers more likely to flood.

"Funny shapes like tulips, clogs and windmills are a good way to start a debate, but they should not be considered as realistic," said Bert Groothuizen, spokesman for Van Oord, the builder of the Dubai palm island. While Dubai's Gulf rarely sees waves above two meters high, the North Sea is much stormier with waves of up to 10 meters. "The seaward protection must be stronger than in the Arabian Gulf which means that construction costs are greater," he said, adding it might be more realistic to extend current Dutch beaches into the sea or move the main airport onto a new island.

That idea was already floated after a plane crashed into an apartment block in Amsterdam in 1992, but it was shelved due to cost and environmental concerns. Nature-lovers have also scuppered plans to drain more land onshore. Independent environmental group the North Sea Foundation notes that an artificial island could disrupt shipping, fishing and migrating birds. "The North Sea is not a wasteland where you can do whatever you want. Especially the coastal zone is one of the most fertile seas in the world. An island would do a lot of damage to the animal life," said the foundation's Lisa van der Veen.

Given rising sea levels, Van der Veen said it made more sense to protect existing land than build a new island: "If you build houses on it you would have to build it really high to protect it from storms and waves. Building an island is a huge investment and you could much easier fortify the dikes."

China to US: Don't Politicize Trade Rows

As you are probably aware of by now, the Chinese leadership likes using the term "political" to denote something undesirable. Don't politicize Chinese product safety. Don't use the Beijing Olympics to politicize human rights abuses in Sudan. Don't politicize splittist movements by meeting with renegades like the Dalai Lama (Tibet) and Chen Shiu-Bian (Taiwan). And, of course, how can we ever forget that old chestnut, don't politicize US-China conflicts over trade. It is odd that China expects a politics-free treatment of these issues abroad when they concern very divisive issues with considerable distributive consequences--the very essence of politics--such as trade, human rights, and state sovereignty. In short, politics are inevitable. Come to think of it, isn't blocking US ships from docking in Hong Kong sort of (gasp!), political?

Obviously, though, the Chinese leadership is not reading IPE Zone meanderings. Here is yet another official take on Sino-American trade spats, from Reuters:

The United States should resolve trade rows with China through dialogue on an equal footing and should not politicize them, a senior Commerce Ministry official said in remarks published on Monday. The warning by Chen Deming came a day after Finance Minister Xie Xuren said legislation being considered by the U.S. Congress could seriously harm trade ties with China. [Chen Deming replaced Bo Xilai as China's trade minister at the end of November.]

The comments put down a marker for two rounds of cabinet-level talks in Beijing this week. On Tuesday, U.S. Commerce Secretary Carlos Gutierrez and Trade Representative Susan Schwab take the lead, followed on Wednesday by Treasury Secretary Henry Paulson. [It's Strategic Economic Dialogue time].

In an interview with the official China Daily, Chen expressed concern that the trend towards politicizing trade and economic issues could mount as the November 2008 U.S. presidential election approaches. America's record trade deficit with China will be high on the agenda this week. Washington wants Beijing to open its market wider to foreign firms and let the yuan rise faster. Chen, a newly appointed vice-minister who is in line to take over the top job, said U.S. media coverage of issues such as the exchange rate, food safety and intellectual property rights had been "hindering the normal development" of two-way ties.

He said growing economic independence meant the two countries had more and more common interests that called for cooperation. "Thus, the two sides should clarify the responsibility each side should shoulder, face and resolve structural problems in the economy, and strengthen dialogue and communication," he told the paper. "We should avoid unreasonably and unilaterally blaming the other side," he added.

Bush's USA: #1 Environmental Rogue Regime?

The American way of life is not up for negotiation - George Bush, Sr. in 1992

The NGO Germanwatch has just released its annual Climate Change Performance Index comparing the progress of the world's top 56 carbon emitting nations on the criteria of emissions trends, emissions levels, and climate policy. To no one's surprise, the country led by PetroBush Jr. and the Exxonites finished 55th out of 56 countries. The USA's score is particularly hard hit in the area of climate policy, undoubtedly due to obstructionism on the matter in international fora (see article below) and climate change obfuscation back home. Isolated by Australia's decision to sign on to the Kyoto Protocol, America is the only developed country to go it alone on the matter. Here is the relevant table:

And here is the breakdown of the criteria:
Hopefully, more enlightened American leadership is forthcoming in the 2008 elections. Meanwhile, Bush's callous "who cares if your dumb island country sinks into the ocean"-type attitude continues at the ongoing UN-sponsored Bali conference on climate change to the chagrin of many. Like with many other things, the Bush administration has its priorities messed up. Most probably, the biggest threat to the planet's well-being is not someone hiding in a cave in Afghanistan or Pakistan but the prospect of global warming. Anyway, here is the Associated Press on the US representatives at Bali calling for voluntary, non-binding, and likely non-consequential action on climate change:

The United States will come up with its own plan to cut global-warming gases by mid-2008, and won't commit to mandatory caps at the U.N. climate conference here, the chief U.S. negotiator said Saturday. "We're not ready to do that here," said Harlan Watson, the State Department's senior climate negotiator and special representative. [Translation: The world can go suck an egg.] "We're working on that, what our domestic contribution would be, and again we expect that sometime before the end of the Major Economies process." That process of U.S.-led talks was inaugurated last September by President Bush, who invited 16 other "major economies" such as the Europeans, Japan, China and India, to Washington to discuss a future international program of cutbacks in carbon dioxide and other emissions blamed for global warming.

Environmentalists accuse the Bush administration of using those parallel talks to subvert the long-running U.N. negotiations and the spirit of the binding Kyoto Protocol, which requires 36 industrial nations to make relatively modest cuts in "greenhouse" gases. The United States is the only major industrial country to have rejected Kyoto and its obligatory targets. The U.S. leadership instead favors a more voluntary approach, in which individual nations determine what they can contribute to a global effort, without taking on obligations under the U.N. climate treaty.

Watson's comments reaffirmed that the Bush administration views its own talks as the main event in discussions over climate change. The European Union, on the other hand, has committed to binding emissions reductions of 20 percent by 2020. Midway through the two-week Bali conference, many of the more than 180 assembled nations were demanding such firm commitments from Washington as well, as the world talks about a framework to follow Kyoto when it expires in 2012.

"It would be useful for Annex I, non-Kyoto countries" — code for the U.S. — "to indicate what level of effort" they'll make, said M.J. Mace, a delegate from the Pacific nation of Micronesia, whose islands are threatened by seas rising from global warming.

The conference's main negotiating text, tabled for debate on Saturday and obtained by The Associated Press, mentions targets, but in a nonbinding way. Its preamble notes the widely accepted view that industrial nations' emissions should be cut by 25-40 percent below 1990 levels by 2020 to help head off climate change's worst impacts — expanding oceans, spreading droughts, dying species, extreme weather and other effects. Even mentioning such numbers in the conference's key document may set off renewed debate next week, when environment ministers and other ranking leaders join the talks, which are meant to launch a two-year negotiation for a post-Kyoto deal...

American negotiator Watson said the Bush administration is planning probably four more meetings in the Major Economies series before a "leaders' meeting" in mid-2008 presents a final outcome...as Bush's White House term nears its end, the rest of the world may be looking instead for a fresh start under a new president less resistant to binding international cooperation. Democratic and some Republican presidential hopefuls favor mandatory reductions. The U.N.'s De Boer, in fact, implied that the world ought to wait before debating binding targets.

"I really hope that that is a discussion that will be taken up toward the end of that two years rather than here," he told reporters. The talks to follow Bali would also attempt to draw China, Brazil and other fast-developing economies — all exempted from binding reductions under Kyoto — into some arrangement whereby they would slow growth in their emissions.

Wait for Bush to go--it's a waiting game just as it was with the demise of that other enviro-fiend John Howard in Australia. In the meantime, this map of climate change performance should be informative. Note the diagonally shaded areas though because carbon emissions due to "land use changes" (that's deforestation to you and me) were not considered in index calculations. The inset is of Western Europe, of course:

Supply Killer: Oil Exporters' Rising Local Demand

Bahrain, Kuwait, Qatar and the United Arab Emirates: what do these petrostates have in common? Surprisingly, their oil consumption per capita is higher than that of the United States. In a time of rising international oil demand, an ever-greater proportion of the production of these petrostates is being consumed at home according to the International Herald Tribune. At fault as well are oil subsidies which boost local oil consumption. It's interesting and rather alarming stuff. If these oil producing countries will be using more of their oil production, who will produce more to meet international demand?

The economies of many big oil-exporting countries are growing so fast that their need for energy within their borders is crimping how much they can sell abroad, adding new strains to the global oil market. Experts say the sharp growth, if it continues, means several of the world's most important suppliers may need to start importing oil within a decade to power all the new cars, houses and businesses they are buying and creating with their oil wealth [again, from where?]

Indonesia has already made this flip. By some projections, the same thing could happen within five years to Mexico, the No. 2 source of foreign oil for the United States, and soon after that to Iran, the world's fourth-largest exporter. In some cases, the governments of these countries subsidize gasoline heavily for their citizens, selling it for as little as 7 cents a gallon [that's the case in Venezuela], a practice that industry experts say fosters wasteful habits.

"It is a very serious threat that a lot of major exporters that we count on today for international oil supply are no longer going to be net exporters any more in 5 to 10 years," said Amy Myers Jaffe, an oil analyst at Rice University. Rising internal demand may offset 40 percent of the increase in Saudi oil production between now and 2010, while more than half the projected decline in Iranian exports will be caused by internal consumption, said a recent report by CIBC World Markets.

The report said "soaring internal rates of oil consumption" in Russia, in Mexico and in member states of the Organization of the Petroleum Exporting Countries would reduce crude exports as much as 2.5 million barrels a day by the end of the decade. That is about 3 percent of global oil demand. It may not sound high, but experts say demand for oil is so inflexible, and the world has so little spare production capacity, that even small shortfalls can raise prices. In 2002, when a labor strike in Venezuela took 3 percent of global production off line, oil prices spiked 26 percent within weeks...

Fatih Birol, chief economist at the International Energy Agency in Paris, rated consumption growth among oil exporters as the second-biggest threat to meeting the world's oil needs."It's a big problem, and growing all the time," Birol said. Internal oil consumption by the five biggest oil exporters — Saudi Arabia, Russia, Norway, Iran and the United Arab Emirates — grew 5.9 percent in 2006 over 2005, according to government data. Exports declined more than 3 percent. By contrast, oil demand is essentially flat in the United States. CIBC's demand projections suggest that for many oil countries, including Saudi Arabia, Kuwait and Libya, internal oil demand will double in a decade.

Factors contributing to the trend include increased industrialization, higher government spending and increasing personal consumption. According to a World Bank report, economic growth in the Middle East and North Africa has doubled since the 1990s, and Russia has done even better. Oil money is giving many countries the means to invest in their own economic development, and robust global growth is creating markets for their goods — including plastics, chemicals and fuels refined from oil...

Perhaps surprisingly, though, some producing countries have surpassed the United States in oil consumption per person. They include Bahrain, Kuwait, Qatar and the United Arab Emirates. Particularly in oil-producing countries with large populations, like Indonesia, Russia and Mexico, a rapid rise in car ownership is a big factor driving consumption increases. Russian farmers are replacing horses and carts with gas-guzzling four-wheel-drive vehicles, while urban consumers are snapping up BMWs even before they learn to drive.

"Most of the producing countries have young populations entering the driving age and can more readily afford to buy cars because the price of fuel is low," said Charles McPherson, an oil expert at the International Monetary Fund. "It's certainly pulling product off the international markets." Some oil-exporting countries use price controls and subsidies to ensure cheap fuel for their people. These programs are politically popular, even though experts say they contribute to wasteful energy use.

Kuwaitis, for instance, often leave their air conditioning — powered by electricity generated from natural gas or oil-derived fuels — running for weeks while on vacation, said an official at the World Bank. Sportsmen of the United Arab Emirates ski indoors on manufactured snow and play golf on lush courses that require desalinated water produced with fuels refined from oil.

Saudis, Iranians and Iraqis pay 30 to 50 cents a gallon for gasoline. Venezuelans pay 7 cents, and demand is projected to rise as much as 10 percent this year. Auto sales have tripled in four years. "Where cheap oil is viewed as a national human right, you've virtually got runaway demand," said Chris Newton, an executive of the Indonesian Petroleum Association in Jakarta.

Indonesia flipped from exporting oil to importing it three years ago because of sagging production in depleted fields and rising demand. Iran, Algeria and Malaysia are vulnerable in the next decade. Most oil experts view Mexico as the next country likely to flip, in as little as five years. Rapidly falling production in Mexico's aging Cantarell oil field is part of the problem. Also significant, though, is the rising number of cars on Mexican roads. They have nearly doubled, to almost 16 million, in the last decade, and gasoline consumption is growing 5 percent a year. In Mexico City the other day, a bricklayer named Jaime Guerrero arrived at a local Chevrolet dealership. His extended family cried "bravo!" as he signed the papers for his first car.

"To have a new car in my name is a dream transformed into reality," said Guerrero, 26. He and his family piled in and weaved through the chaotic traffic of the capital, hunting for a priest to douse the car with holy water. "I don't worry about the climate or shortages of oil in the world," Guerrero said. "I just worry if gasoline prices go up."

RELA, Malaysia's D-I-Y Anti-Immigrant Militia

The Jean-Marie Le Pens and Tom Tancredos of this world must be salivating at the prospects of following Malaysia's example: Imagine an armed and state-sanctioned militia nearly a million strong harassing economic migrants over their legal status. What's more, this militia escapes punishment when it uses brutal tactics on these migrants. Racial profiling is a common tactic as well. It sounds far-fetched, right? Actually, I am describing Malaysia's RELA Corps, an increasingly controversial vigilante squad to which the Malaysian government "outsources" the policing of illegal immigrants. Human Rights Watch has this to say about the group:

The Malaysian government has authorized almost half a million RELA volunteers to help maintain public order, primarily through the apprehension of undocumented migrant workers, most of whom come to Malaysia to augment Malaysia’s insufficient labor force. In carrying out their duties, RELA volunteers often employ unnecessary force and illegal policing practices. Fully uniformed, armed, and unaccompanied by police or immigration officers, they break into migrant lodgings in the middle of the night without warrants, brutalize inhabitants, extort money, and confiscate cell phones, clothing, jewelry, and household goods, before handcuffing migrants and transporting them to detention camps for “illegal immigrants...”

According to the 2005 amendment to Malaysia’s Essential Regulations, part of Malaysia’s security legislation, RELA is allowed to arrest an individual or enter and search any premises, public or private, without a search or arrest warrant. The amendment also gives RELA volunteers the right to bear and use firearms, and to demand documents. All that is necessary is authorization to conduct a raid from certain RELA officials, including the director general and deputy director general of RELA and other RELA officers appointed by the home affairs minister.

The 2005 amendment also gives effective legal immunity to RELA volunteers. Regulation 16 of the act states: “The Public Protection Authorities Act 1948 shall apply to any action, suit, prosecution or proceedings against … RELA … or any member … in respect of any act, neglect or default done or committed by him in good faith or any omission omitted by him in good faith, in such capacity.”

The International Herald Tribune recently had a feature on the group which reinforces what Human Rights Watch said. Truly, it is a scary exercise in using an unaccountable entity to carry out dubious state objectives:

When his turn comes to stand watch, Kang Long posts himself at a window, peering into the dark streets outside the tiny apartment where his fellow migrant workers sleep 10 to a room. "We always fear, especially at night," he said. "Maybe there will be a raid. Where will we run? I worry for my wife and children. I've been thinking of moving to the jungle."

Kang Long, 43, is an ethnic Chin refugee from Myanmar, one of as many as three million foreign workers whose labor on farms, factories and construction sites and in service industries supports the economy of this bustling Southeast Asian nation. About half are estimated to be here illegally. Like foreign workers elsewhere, they are resented by many local people and demonized by politicians. Here in Malaysia they have become the targets of an expanding campaign of harassment, arrest, whippings, imprisonment and deportation.

To lead this campaign, the government in 2005 transformed a volunteer self-defense corps, created in the 1960s to guard against communists, into a strike force deputized to hunt down illegal immigrants. This force, called Rela, now numbers nearly half a million mostly untrained volunteers - more than the total number of Malaysia's military and police in this nation of 27 million.

Its leaders are armed and have the right to enter a home or search a person on the street without a warrant. By an official count, its uniformed volunteers carry out 30 to 40 raids a night. As it takes over more of the duties of the police and prison officials, Rela is drawing the condemnation of local and foreign human rights groups, which accuse the volunteers, some as young as 16, of violence, extortion, theft and illegal detention.

"They break into migrant lodgings in the middle of the night without warrants, brutalize inhabitants, extort money and confiscate cellphones, clothing, jewelry and household goods, before handcuffing migrants and transporting them to detention camps for illegal immigrants," Human Rights Watch said in a report in May. They often fail to honor legitimate documentation and sometimes destroy documents in order to justify their actions, the human rights group said.

In an interview, Rela's director general, Zaidon Asmuni, dismissed the concerns of human rights groups, saying that the nation's security is at stake and demands an aggressive defense. "We have no more communists at the moment, but we are now facing illegal immigrants," he said. "As you know, in Malaysia illegal immigrants are enemy No. 2." Enemy No. 1, he said, is drugs.

Once undocumented migrants are detained, they face a jail term of up to five years and a whipping of up to six strokes. Some of the migrants, like Kang Long from Myanmar, are refugees registered with the United Nations, but they are caught up in the sweeps as well. Malaysia is not a signatory of the UN refugee convention.

According to the accounts of a dozen migrants in the cramped apartments where they hide, things can get even worse once they are deported. After serving time in a detention center, they say, many are taken to a no man's land near the border with Thailand where human traffickers await their arrival. If they can pay 1,500 ringgit, or about $450, the migrants say, the traffickers will smuggle them back to Kuala Lumpur where the cycle of harassment, potential detention and deportation begins again. If they cannot pay, the migrants say, they may be sold as laborers to fishing boats or forced into the sex trade. Some return years later, the migrants say. Others simply disappear.

Irene Fernandez, a Malaysian who heads a local migrants' rights group called Tenaganita, said victims sometimes call from the border begging for money to pay the traffickers. "It's a conflict for us because we cannot support any form of trafficking," she said. "At the same time, protection of life is equally important." The best she can honorably do, she said, is to notify the immigrant communities in Kuala Lumpur, where people barely have enough money to feed themselves, and hope they can find the means to save their friends.

Terrorized by Rela, many of the migrants have left their apartments in the city and built shacks of leaves and branches in the surrounding jungle. But Rela pursues them here as well, the migrants say. "Some jungle sites are periodically cleared by local authorities, the inhabitants are displaced, valuables taken away and at times shelters are burned to the ground," the medical aid group Doctors Without Borders said in a recent report.

Despite the criticisms, Rela - an acronym for the Malay words for People's Volunteer Corps - has been expanding in numbers and in law enforcement powers over the past two years. As of November, it had screened 156,070 people this year and had detained 30,332 for not having travel documents, according to Home Affairs Minister Radzi Sheikh Ahmad. In a further extension of its powers, the minister announced in November that Rela would take control of the country's 14 immigration detention centers and that the centers themselves would be expanded. [See this article.]

Zaidon, the director general of Rela, said his organization is expanding so fast that it is impossible to train most of the volunteers or to carry out background checks before deputizing them to make arrests. "We cannot train half a million just like that," he said. "It's an ongoing process. It will take time, 5 or 10 years." If Rela members were overly scrupulous about human rights, Zaidon said, they could not do their job. "To stop a person by the roadside, that is also against human rights," he said. "But if you talk about human rights you cannot talk about security."

And so, the Rela volunteers cast a wide net as they stop and search people who look like Asian foreigners. Most migrant workers come from Indonesia, while others come from Bangladesh, India, Nepal and Vietnam as well as from Myanmar. In October, the Indonesian government protested when Rela detained an Indonesian student and the wife of an Indonesian diplomat. In both cases, the Indonesian government said, the victims produced documents that were ignored by Rela.

Most of Rela's targets, though, are people like Ndawng Lu, 59, an ethnic Kachin refugee from Myanmar who shares an apartment with 20 other people. Her neighbors fled and she remained alone when Rela made a daytime raid this year, she said. "They shouted at me, 'Where's the money?' " she said. "I got down on my knees and begged them. 'I don't have any money.' But they wanted money. They pulled stuff from under the bed. They looked here, they looked there. They opened all our bags." Her documents were in order, she said, and the search party left her alone. But when it departed, she said, "Everything was a mess."

EU-AU Summit: No Trade Deal (Surprise!)

With the Cotonou trade waivers for preferential access of African goods to European markets set to expire at the end of the year, most African Union member countries have decided against entering into Economic Partnership Agreements (EPAs) that would have superseded the existing deal. I have previously noted the history of preferential trade agreements between these parties that now need to be scaled down under WTO rules concerning non-discrimination. That is, you cannot discriminate against other countries exporting similar goods using PTAs. Here is an Associated Press briefing on this latest impasse:

Most African leaders have rejected European Union proposals for a free-trade deal that would replace colonial-era trading systems, Senegal's president said Sunday at a summit marred by disputes over Zimbabwe and Darfur. The two-day meeting in Lisbon had been seen as a chance to push for progress on the deals known as [Economic] Partnership Agreements, or EPAs.

"It was said several times during the plenary session and it was said again this morning: African states reject the EPAs," Senegalese President Abdoulaye Wade said in angry comments at a news conference. Wade said he and South African President Thabo Mbeki had led African opposition to the EU's proposals which, he said, "aren't in Africa's interest."

He did not provide details. His tone of indignation reflected an increasingly tense atmosphere at the end of a summit that was intended to foster a new era of close relations between Europe and Africa...

On trade, the EU wants to meet a Dec. 31 deadline set by the World Trade Organization for replacing its trading system with former European colonies around the world, including in Africa. The WTO has ruled that the EU's 30-year-old preferential trade agreement with Africa was unfair to other trading nations and violated international rules.

The negotiations have lasted five years and officials had hoped the summit would bring a breakthrough. During previous talks, African governments have said the agreements would do little to boost their access to European markets. They also viewed the conditions as an EU attempt to meddle in African affairs.

European Commission President Jose Manuel Barroso acknowledged the difficulty of reaching free-trade deals between wealthy European countries and poor African nations. "It is a challenge for both Africans and Europeans and will require time," Barroso said in a speech to the gathering.

The two sides will press ahead with talks on interim accords with individual African countries to assure they continue to enjoy privileged access to European markets, he said. "We are nearly there and we now need to focus all of our energy to achieve this priority objective," Barroso said.

The EU says a deal will boost trade and help the development of African economies. It has warned that nations with which it does not forge new agreements by January will automatically lose preferential trade privileges and receive only limited access to EU markets under existing world trade rules.

Various non-government organizations (NGOs) have been accused by the EU of distorting African countries' trade views in pushing for the extension of preferential trade deals. NGOs are asking for a lot of things while accusing the EU of all sorts of malice in pushing these deals. See this Oxfam press release, for instance. Better yet, look at this laundry list of grievances highlighted by the Transnational Institute in the context of EPAs. It seems to blame the EU for every ill that has befallen Africa countries (which of course isn't possible):

• the inherently unbalanced nature of the trade flows between economies of very different size and at totally different levels of development, encouraged by so-called reciprocal 'market access';
• the consequent trade deficits in the weaker economies, contributing to balance of payments difficulties, continued external indebtedness and continuing aid dependence;
• the extensive reduction in tariffs eroding the revenues of governments heavily dependent on custom duties for their budgets; with negative implications for essential public spending;
• the intrinsically unfair competition between large and highly competitive producers/exporters from the EU in relation to the much smaller and weaker counterparts in the ACP countries;
• the inevitable decline and even closure of 'uncompetitive' companies in the ACP, contributing to the de-industrialisation already set in motion there by IMF and World Bank liberalisation programmes;
• the accompanying retrenchments and exacerbation of unemployment, now reaching generalised and catastrophic proportions in most of the ACP countries;
• the parallel loss of livelihoods of small farmers, and even bigger agricultural producers, in large measure through the influx of subsidised EU agricultural exports, whether directly or indirectly subsidised;
• the undermining of family and community food security, and food sovereignty/security within such regions, and their increasing dependence on imports even of their staple foods;
• the aggravation and deepening of poverty in both rural and urban areas, and the accompanying social stresses; including health crises, above all HIV/AIDS in Africa;
• the consequent survival struggles of the poor contributing to the environmental pressures already acute due to the extractive operations of transnational corporations in mining and agriculture, and in their fishing and (de)forestation operations.

Oh, the EU is so...EVIL [sniff...hand me a hankie, quick]; it's Satan's emissary on earth. Seriously, though, here are some reasonable questions I'd like to ask these campaigners and the African countries which they offer advice to:

(1) If preferential trade agreements are so desirable, then why have African countries failed to make progress by leaps and bounds over the past three decades while PTAs were in place?
(2) Conversely, if high tariffs in African countries are so desirable, then why have these countries failed to make much progress while these tariffs were in place?
(3) Who's caused more harm--the EU or a succession of despotic African rulers like Robert Mugabe?
(4) With terms of trade moving in favor of commodity exporters as worldwide commodity prices increase at a healthy clip, are African countries incapable of taking advantage of this trend?

Oxfam also makes much of allowing African countries more time for deliberation. As the AP report highlights, the EU has pressed this matter for five years. The EU has given African countries more than ample time to negotiate more favorable terms IMHO. Furthermore, the year-end deadline is there for a reason and it's not because the EU is "forcing" African countries into compliance. Rather, it's there because other WTO member states have given these countries up to the end of 2007 to dismantle current arrangements. Bottom line: European countries have done plenty of rotten things in Africa, especially during the colonial era. That the Common Agricultural Policy is still in place is also a great shame. All the same, the EU has made steps to make up for its sordid history in Africa by, for example, entering into PTAs with the Lome Convention and Cotonou Agreement. However, PTAs are becoming untenable as the WTO prescribes non-discrimination for various trade partners. More importantly, if PTAs have been unable to promote development over an extended period, shouldn't African countries try another tack? Playing the victim can only get you so far.

EU-AU Summit: Of Money, Mugabe, China

The EU-AU summit currently underway in Lisbon, Portugal has already attracted a huge amount of attention for understandable reasons. It has toxic leaders like Zimbabwe's Robert Mugabe and Sudan's Omar al-Bashir in attendance. (As a result of Mugabe's presence, the UK PM Gordon Brown has boycotted the summit as promised, as have a number of other EU leaders.) There is also a lot of trade at stake as the EU aims to maintain its status as Africa's largest trading partner despite growing Chinese presence in the region. While it may seem that China now drives much economic activity in the region in order to secure the raw materials needed by the Chinese industrial machine, Europe has had a long head start owing to the continent's colonial past.

Let us begin with the Economist analyzing why this summit is taking place despite all the controversy. It says that the summit is driven primarily by economic reasons--the EU doesn't want China to muscle in on its "turf." However, it also says that the enticements offered by the EU are not very attractive and do not justify the damage inflicted to the EU's image by inviting odious characters like Mugabe and Bashir:

The Portuguese, who hold the EU presidency, see this first EU-Africa summit since 2000 as the capstone of their six-month tenure. They accept that the summit carries a “political price”: the one-man-against-the-rest EU split caused by the refusal of Britain's prime minister, Gordon Brown, to attend, in protest against the presence of Zimbabwe's president, Robert Mugabe. But, the Portuguese say, China and others have forced their hand.

For the Europeans are worried that they are losing both trade and clout on a continent that they used to regard as their own backyard. Over the past five years resource-hungry China has swept across a grateful continent, buying oil and minerals. African-Chinese trade has increased five-fold over that time to more than $50 billion last year. Europe's long-standing links mean that it is still Africa's biggest trading partner, but the Chinese are catching up. For example in October the Industrial and Commercial Bank of China paid $5.6 billion for a 20% stake in Standard Bank of South Africa.

India, too, has been buying oil and mineral concessions in countries such as Sudan and Nigeria. America has revived its interest in Africa: it wants to take 25% of its oil imports from there to decrease its dependence on the Middle East...

Europeans complain that China damages Africa by not linking its loans and investments to improvements in government and human rights. [Yes, well, don't invite Mugabe and Bashir to an EU-AU summit, then.] But Africans are dismissive: as one official says, “Europe is jealous. They say we have gotten a new colonial master, but our old one wasn't so good.”

The Lisbon summit will thus be an explicit counterpoint to the China-Africa summit of November 2006, when China cemented its new relationship with a promise of yet more money. Now the Europeans will try to woo the bride back from Beijing, using concessions and inducements.

The main concession is to be less critical of regimes that are a bit light-fingered, or disdainful of human-rights. João Cravinho, the Portuguese minister responsible for the summit, contends that the Europeans have been “excessively simplistic” in insisting on European models of government for Africa. Instead, Europe will “focus on the essence of government [and be] less hung-up on particular forms of decision-making.” Getting into the spirit, Europe overturned its own travel ban on Mr Mugabe, a stranger to decent behaviour, to allow him to attend the summit. Mr Mugabe will be lectured—and is then free to join in the cuddly group photographs. Sudan's president, Omar al-Bashir, will also be at the summit, but there are no plans to nag him about brutality in Darfur.

Of the new inducements, trade deals called Economic Partnership Agreements are the ones Europe thinks will help Africa most. The EU argues that these are good for development, offering African countries full access to the European market while allowing them to keep about 20% of their own markets closed to protect fragile domestic industries. But some African countries, such as South Africa and Nigeria, argue that they are being bullied into making agreements by the end of the year. The Europeans argue that the deals are designed to encourage regional integration in Africa. The Africans retort that by making separate deals with different countries they are doing exactly the opposite.

Europe's new insouciance about human rights will worry many, especially those suffering atrocities in Zimbabwe and Darfur, while the inducements hardly look tempting. Europe needs to do much better than this if it is to win the bride.

Meanwhile, Bloomberg has more on the political maneuvering going on, with a reference to China' role in the region:

``The current situation in Zimbabwe damages the image of the new Africa,'' German Chancellor Angela Merkel told representatives from 80 EU and African states in a keynote speech at the meeting attended by Mugabe. ``Nothing can justify the intimidation of those holding different views and hindering freedom of the press.''

Mugabe's presence came close to wrecking the summit, the first such gathering since 2000. The Zimbabwean leader, who's banned from the 27-nation EU, received a visa from the Portuguese government only after African leaders said they wouldn't come if he were barred. This prompted a boycott by some European leaders, including British Prime Minister Gordon Brown, who says Mugabe is responsible for ``the collapse of Zimbabwe's society and economy.''

In addition to the U.K., Lithuania, the Czech Republic, Poland, Hungary, Slovakia and Cyprus didn't send heads of state or government to the summit, according to a list of participants from the Portuguese foreign ministry...

``Europe wanted this summit to end 50 years of uneasy post- colonial relations. But the meeting is attended by a leader who exploits the colonial past and uses it as an excuse for his human- rights violations and endemic corruption at home,'' Fredrik Erixon, director of the Brussels-based European Centre for International Political Economy, said in an interview. Several of the EU countries at the summit are former African colonial powers including the U.K., France, Belgium, Germany, Spain, Italy and Portugal. ``This summit is a summit of equals,'' said Socrates. ``There are no minor cultures; there are no superior civilizations.''

Aside from human rights, migration and security, EU leaders are using the two-day summit as a bid to counter growing Chinese influence in Africa as competition for the continent's energy and mineral resources grows. ``The EU hasn't missed the boat, but they've certainly lost a lot of ground,'' John Kotsopoulos, an Africa expert at the Brussels-based European Policy Centre research institute, said in a telephone interview.

China is providing $8 billion in loans and investment to Africa and attaches no political demands to aid -- in contrast to Europe, which often links aid to governance and human rights. ``China's approach, also based on their own experiences and values, has forsworn conditions with the exception of the diplomatic recognition of Taiwan,'' said Christopher Alden, an Africa expert at the London School of Economics and author of the book ``China in Africa.'' China regards Taiwan as a renegade province that must be reunited with the mainland, by force if necessary.

Retired South African bishop Desmond Tutu urges action on the part of the EU in dealing with Mugabe, though not much seems to be forthcoming aside from Merkel's largely symbolic swipe. From Africasia:

Meanwhile, South Africa’s retired Anglican bishop Desmond Tutu on Friday said European Union (EU) leaders must confront Mugabe over his human rights abuses at the EU-Africa summit that begins in Lisbon, Portugal today, saying silence could be seen as condoning the abuses in the southern African country. “I would expect that they (EU leaders) would criticise any regime that violates human rights because if you don't, you are condoning those violations. The violators will think you are on their side," Tutu told Renascenca radio station. Tutu, who said he was deeply saddened with what has happened in Zimbabwe, has over the past seven years been among the few African leaders to publicly criticize Mugabe whom he once described as a “caricature of an African leader.” He said he expected EU leaders to “speak without any euphemism on human rights which are being violated so blatantly in Zimbabwe.”

Canada's Oil Boom: Livin' Large in Alberta

Currently high oil prices have meant surging revenues for the Canadian province of Alberta, where multinational oil companies are fighting with each other to attract labor to some of the more remote parts of the province where attractions are few and far between. Yes, it is bleak and isolated in places, but people must go to where the oil is and not the other way around. The Wall Street Journal has a story on how the need for manpower is driving companies to offer posher accommodations in places once described as "prison with a paycheck." Another thing which strikes me are the high wages offered to oil services workers. We've seemingly turned the corner on blue collar jobs being regarded as the poor relation of white collar ones. Scott Adams' Dilbert cartoons have done their part in revealing the foibles of a desk job; it seems that more action-oriented blue collar jobs are regaining attention at the expense of sedentary, white collar ones. Things change...

Mike Savoie's new room comes with a 20-inch flat-screen TV, double bed, high-speed Internet access and daily maid service. Prime rib is on the Thursday dinner menu. The bar opens at 6 p.m., and if that doesn't relax him, there's a yoga class at 7. The cost to the 38-year-old heavy-equipment operator of what he calls his "five star" accommodations? None.

Up here, in the white-hot center of the Canadian economy, riches are being pulled out of the yawning black pits of the Alberta oil sands like cash from an ATM. The Canadian dollar, propelled by oil hovering around $90 a barrel, has surged more than 60% to virtual parity with the U.S. dollar in the past five years. Now, the biggest hurdle oil companies have is finding enough skilled workers to operate the shovels.

That's why Mr. Savoie, who moved here from New Brunswick last month, is enjoying his luxurious new digs. As Canada's unemployment rate hovers at a 33-year-low of 6% -- and Alberta's at 3% -- oil companies are in a fierce bidding war for labor. Salaries have gone through the roof. Inexperienced truck drivers can make C$100,000 a year. [That's USD 99,000! Screw this PhD shtick I'm on; I now want to be a truck driver in Alberta.] Experienced welders can make C$200,000 a year. Now companies are trying to lure employees by reversing what has traditionally been the worst part of working in a remote oil field: grim lodgings, bad food and nothing to do after work.

Last month, Shell Canada, a unit of Royal Dutch Shell PLC, formally opened Albian Village, Mr. Savoie's home and the centerpiece of a $12 billion project that includes housing for 2,500 employees. Each worker will have a private room with a phone and satellite TV and access to a sprawling recreation center with a bar, movie theaters, an indoor basketball court, running track and ice-hockey rink. To organize classes, sports leagues and fitness regimens, Shell hired five recreational directors. The kitchen allots three pounds of steak per week per worker. On the menu one recent Friday: lamb chops, a seafood medley, steamed asparagus and apricot turnovers.

"We're hoping that these guys will go home to Prince Edward Island or Newfoundland and tell their friends that Shell is where they should come if they want to work in the oil sands," says Shell spokeswoman Janet Annesley, noting the millions of dollars at stake when labor shortages cause delays.

Mr. Savoie, who is single and recently bought a C$40,000 Ford Mustang, said he will earn more than C$100,000 this year, up from C$60,000 last year. He is full of praise for the big oil companies that are treating him like one of the new princes of Alberta. "There's a lot to do," he says. "And the pay is great."

He acknowledges the oil sands -- spread across an area the size of Florida, and with a current temperature of about 1 degree Fahrenheit -- are still considered a hardship post, especially for people with families far away. The landscape up here is marked by gaping holes in the earth, miles-long pools of dead water and a stench of petroleum that the workers grimly call "the smell of money." With most workers planning to work for a few years, make big money and go home, Fort McMurray -- in the center of the oil sands -- has the look and feel of a boomtown. The population has doubled to 65,000 in 10 years. The price of a single-family house jumped C$150,000 in the past year to C$625,000. In seven years, home prices have tripled. The roads and sewers can barely keep up.

As the cost of living skyrockets, service workers are also in short supply and they have a hard time paying their rent. Frank Saraka, who runs the Canadian Tire department store here, says he would like to hire an additional 35 employees but can't find them. In the meantime, he has called the police repeatedly to throw out customers angry at the slow service. Signs in many establishments around town -- including the hospital emergency room -- warn customers that "abuse of employees will not be tolerated..."

With an estimated $100 billion in new projects currently being planned, new mines are being situated farther away from Fort McMurray. Some are inaccessible by road. As a result, work camps have become increasingly important -- especially when shifts can run 12 hours a day, for six weeks, followed by a couple of weeks off. Northern work camps have historically been rough, austere places. Men slept six to a room with too much noise bouncing off too-thin walls. The food, while abundant, was cheap and heavy. Bathrooms were little more than port-a-potties. "Prison with a paycheck," is how one veteran described it.

"I remember the meat used to be rainbow colored," says Dave Drummond, president of the Fort McMurray chapter of the Communications, Energy & Paperworkers Union of Canada. With the Alberta Minister of Employment, Immigration and Industry now making trips to Asia and Europe to recruit workers and with companies pitching jobs on marketing roadshows across Canada, conditions are getting better every year. In 1999, when Suncor Energy Inc. opened its Millennium Lodge, 49 workers shared a washroom. The next year they opened up the Borealis Lodge nearby with two workers to a bathroom. Now the Millennium Lodge is undergoing renovations and the bathrooms are being upgraded along with the lighting, beds and mattresses.

Workers have a choice of 17 types of sandwiches for their bagged lunches to eat during their shifts. In their time off, they can play in a 20-team baseball league. Housekeepers make the beds every morning and change sheets on Mondays. In 2005, Canadian Natural Resources Ltd., as part of its $7 billion Horizons oil-sands project, built the first of three, three-story dormitories at a cost of $30 million each, near the Suncor project north of Fort McMurray. The workers have access to an ice-hockey rink and a training center for students who left college early to work as apprentices. Instead of subjecting its employees to a six-hour bus ride to Edmonton once every 10 days for a four-day respite, Canadian Natural has a Boeing 737 to shuttle workers off site.

Near Albian Village, Shell built an airstrip that is among the largest private runways in northern Canada. Beyond the free flights and the Tim Hortons coffee shop, workers can request food from the kitchen for specific dietary needs or religious food laws.

Chinese Migrants in Japan: a Heartwarming Tale

Being a not-so-tireless migration advocate, I am dismayed by the seemingly endless barrage of anti-migration sentiment and action, such as here in the United Kingdom where even the Prime Minister has come out with a blatant line of "British jobs for British workers." Just imagine what the uproar would be in the States if Republicans started proclaiming "American jobs for American workers" as their 2008 campaign mantra. Anyway, this interesting story from the latest issue of TIME Asia is indeed a heartwarming development in that traditional bounds of xenophobia are being broken down in a mutually beneficial fashion. Yes, China and Japan may bicker over the latter's inundation with giant jellyfish, but there are other areas where cooperation is possible.

I have posted a bit on Chinese attempts to gain technological expertise through allegedly underhanded means [1, 2], but this exchange appears less clandestine. Chinese now working in the area of Japanese high technology may be able to ply their familiarity with Japanese business practices in the future as they return to the Middle Kingdom. Conversely, Japanese companies get Chinese employees who know that fast-growing market. Perhaps more importantly, skilled migrant labor from China can alleviate a bit of Japan's pending demographically induced worker shortage, though it should be fair to point out that China's "one child policy" probably means that China too will have similar challenges in the near future. From TIME:

For centuries, East Asia's two great powers took turns trading regional supremacy, each thriving only when the other was at its weakest. More recently, China and Japan have been locked in a political deep freeze, seemingly unable to overcome the legacy of a devastating war more than six decades ago. Yet today, the two countries are both economic juggernauts — and their futures are inextricably linked. Upwards of 20,000 Japanese now live in Shanghai alone. The flood the other way is even more impressive: at half a million strong, Chinese legal immigrants now make up the largest group of recently arrived foreigners in Japan — and, no, they're not just stirring woks or taking the graveyard shift at convenience stores. More than 80,000 Chinese students are studying at Japanese universities, two-thirds of Japan's total foreign college-student population. Upon graduation, they are entering the Japanese workforce, crowding lucrative fields such as IT and biotech. Sheer numbers work in China's favor; each year Japan graduates 100,000 science majors, while China pumps out 2.5 million.

This influx of Chinese white-collar workers is forcing Japan to rethink its very national identity. Traditionally, the island nation has been inward-looking and xenophobic. Today, however, grappling with a labor shortage caused by decades of declining birth rates, Japan knows it must import workers if it is to remain the world's second-largest economy. And so the deluge of highly educated Chinese is challenging Japan to re-evaluate its attitude toward foreigners — particularly those who hail from what was once dismissed as a communist backwater but today is crucial to Japan's economic prospects. In 2004, trade between the two countries reached $205 billion, with China for the first time overtaking the U.S. as Japan's largest trading partner. With their bilingual skills and transnational degrees, Japan's new class of Chinese immigrants is poised to profit from this new East Asian reality. "People like us are building a bridge," says Zhang Liling, a native of the eastern Chinese city of Hangzhou who has lived in Japan for 18 years and runs a television company that delivers Chinese programming to her adopted homeland. "We can develop good personal relationships so that political disagreements won't be the only thing that define the situation between Japan and China..."

The 1989 Tiananmen crackdown hardened many students' resolve to stay abroad. When the pro-democracy protests escalated in Beijing, Chen joined other expatriate Chinese students in their own demonstrations. After earning his Ph.D. in genetics, he stayed in Japan, developing biotech products for Japanese companies. But three years ago, Chen decided that he, too, should profit from China's economic boom. The possible taint of his Tiananmen activism had worn off; plenty of other former protesters were now striking it rich back home. Today, Chen helms a consulting company that helps Japanese pharmaceutical firms conduct clinical trials in China. "Without us, Japanese companies would be helpless," he says. "They don't know how business is done in China."

Chen's adopted city of Kobe has tied its future to China. Since the mid-19th century, Kobe, like the Japanese cities of Yokohama and Nagasaki, has been home to a small Chinatown, a legacy of the Chinese sailors and merchants who flocked to its once thriving port...The aftermath of the 1995 earthquake in Kobe couldn't have been more different. Eager to revitalize a city that was struggling economically even before the massive tremor, the city government began courting Chinese investment. Today, on Kobe's refurbished Port Island, delegations of Chinese businessmen tour a vast technology park where city officials are offering tax breaks in the hopes of creating a new high-tech Chinatown. Chen's company headquarters are already here, as are dozens of other Chinese firms specializing in everything from scrap metal to biotech.

Many of these Chinese-run companies thrive by acting as cultural interpreters. With slowing sales at home, plenty of Japanese firms are looking to China's growing middle class to sustain profits. Who better than expatriate Chinese engineers to advise researchers, for instance, that Chinese like their cell phones painted gold or red? (Japanese, by contrast, prefer white or silver hues.) "With the U.S. and Japan, everyone expects there to be big differences in terms of business culture," says TV director Zhang. "But with China and Japan, even Japanese are often surprised that we don't operate the same way." To smooth the waters — even the channel between the two countries is called the East Sea by the Chinese and the Sea of Japan by the Japanese — head-hunting firm Meitec runs six-month training programs in five Chinese cities for engineers who wish to work for Japanese companies. Some later relocate to Japan. Mandatory lessons include collaborative teamwork (Chinese engineers often prefer the competitive thrill of individual research); practical engineering skills (universities in China tend to emphasize theoretical learning over actual application); and the all-important art of the apology (Japanese engineers are quick to admit fault while Chinese staff can be less contrite). Over the past 21/2 years, Meitec has brought 156 Chinese to Japan; only one has returned home. "Our engineers are not cheap Chinese labor," says Kanji Fukuda, head of Meitec's Global Business Group, who notes that Chinese receive the same salaries as their Japanese counterparts. "They are workers who are just as skilled as our Japanese engineers and actually offer added value because of their Chinese backgrounds."

This new breed of Chinese immigrant is transforming the Yokohama Yamate School, Japan's largest Chinese-language academy. Founded in 1898, the school originally catered to the children of dockworkers or small-time traders, most of whom weren't eligible for Japanese citizenship. Qualified teachers were so rare that classes had to be conducted in a hodgepodge of Chinese dialects depending on who was available. But over the past decade, as the student population has nearly doubled to more than 400, principal Pang Minsheng has witnessed an educational revolution. Many of the students' parents are now IT executives or research scientists, not menial laborers. "These people are the intelligentsia of China, who went to the best universities," says Pang, who has gone on a hiring spree in China to cater to the growing student population. "They want only the same for their children, and they feel confident about China's place in the world."

Such newfound national pride is shared by many of the Chinese university students now flocking to Japan. While Tiananmen-generation scholars went as penniless scholarship recipients, the latest arrivals were raised in Chinese cities whose skyscrapers and Internet cafés aren't so different from Tokyo's. They are not looking for political or economic refuge. Le Yiping is a polished 25-year-old studying transportation and logistics at the University of Tokyo, one of Japan's premier colleges. "I plan to go back to China after graduation because the business opportunities there are very good," she says — though she admits that other Chinese friends have made similar vows, only to remain in Japan. While Le is here, however, she's on a mission to change her homeland's negative reputation. "Japanese have an image of China as still poor," she says, shaking her head. "But that's just not true anymore."

This perception gap may be the single biggest obstacle to closer regional ties. Japanese society remains suspicious of foreigners. Government surveys conducted in 2005 and 2006 found that nearly two-thirds of Japanese harbored negative feelings toward China, the highest percentages in more than two decades...Equally frustrating for many Chinese living in Japan is a new scheme that requires most foreigners to undergo fingerprinting every time they enter the country.

It's easy to think that, at their heart, Japanese instincts don't change. Japanese officialdom tends to treat foreigners who live in Japan as temporary residents, not potential immigrants. This predicament isn't confined to Chinese. Koreans, Brazilians and Peruvians who have lived in Japan for decades have a hard time gaining citizenship. But for highly skilled Chinese workers who could just as easily have emigrated to the U.S. or Europe, such restrictions are particularly galling.

After all, if you're Chinese, the attractions of moving to Japan are multiple: Tokyo is only a short flight away from the Asian mainland, and since Mandarin and Japanese share a common writing system, it's easier for Chinese to gain fluency in Japanese than in Western languages. Still, no amount of linguistic proficiency makes up for potentially abusive immigration policies. Take Tokyo's practice of attracting foreign labor under so-called practical-training visas, which allow for three-year internships. In 2005, more than 55,000 Chinese entered Japan under this scheme. But last year alone, the program, by the government's own count, suffered from 4,639 cases of worker-rights abuse in which unscrupulous employers took advantage of uninformed immigrants. Hikaru Morita, a senior consultant for Temp Staff, a temp agency that began offering Japanese companies highly skilled Chinese office workers in 2004, acknowledges: "Chinese are seen as working harder than Japanese, but the visa situation does make things difficult."

Even Chinese CEOs in Japan aren't shielded. Song Wenzhou, who moved to Japan as a university student in 1985, founded a software business that made headlines in 2000 when it became the first company helmed by a foreigner who arrived in Japan as an adult to be listed on the Tokyo Stock Exchange's NASDAQ equivalent. He's now rich and dines with Japanese Prime Ministers. But Song recounts how he was recently stopped on the subway by police who suspected he was an illegal immigrant. "It's not just the Japanese government," Song says. "It's in the air, this anti-foreigner feeling. Even if Japan loosens immigration, it'll be because of economic necessity, not because of a real change of attitude..."

That idea of a borderless world makes sense to Kuang Yinghuan, who arrived in Japan in 2002 as part of a high-school exchange program that each year brings 200 top students from China's northeast to Japan. Five years on, Kuang's Japanese is impeccable and he's a first-year graduate student at the University of Tokyo. "When I first came here, people made fun of me because I didn't speak Japanese well," he says with a grimace. "But now, when I tell them I'm a University of Tokyo student, they think of me as that, not just as a Chinese." Kuang then breaks into a Chinese-style, open-mouth guffaw — followed quickly with the head-bob of a discreet Japanese bow. At just 23, he's already the perfect embodiment of a new East Asia based not on rivalry but opportunity.

Dealing with Neoliberalism in Japan, Denmark

The International Herald Tribune has two fine stories on the challenges facing two traditionally welfare-heavy states in the age of globalization, Japan and Denmark. What these stories depict is an unsurprising conflict between striving to be a "competition state"and maintaining an extensive welfare regime. Are these two mutually incompatible? First, let's take the case of Japan. It seems that the urban-rural divide there is widening as traditional redistributive measures to rural areas are being cut back on by the Japanese government. This may undermine the prized Japanese concept of social cohesion. That the fiscal situation of Japan has been woeful for a long time is well-known as the leadership has tried to buy off politically important rural constituencies. Particularly interesting to me is the contempt shown in rural areas for big box retailers, echoing concerns in the US over Wal-Mart and in the UK over Tesco:

There is widespread concern here that these changes are turning Japan into a nation divided into winners and losers, split geographically between prosperous cities and the depressed rural areas. Many here attribute this growing disparity to Japan's embrace of American-style economic liberalization, begun in the 1990s to end the nation's decade of stagnation.

The measures to open up markets helped revive cities like Tokyo and lowered prices for Japan's long-suffering urban middle class. But elsewhere in Japan, they are seen as bringing unwelcome and wrenching change.

And now, with recent signs of a coming economic slowdown in Japan, divisions could deepen. On Monday, Japan's top central banker, Toshihiko Fukui, warned of ripples from the housing downturn in the United States, one of Japan's largest overseas markets. He said he was particularly concerned about the impact on Japan's small and midsize companies, many of which are in rural areas.

The new economic policies are blamed for undoing one of Japan's proudest achievements after World War II, the creation of an egalitarian society that was almost uniformly middle class. They have also eroded one of the pillars of Japan's postwar political stability, rural voters' stalwart support for the ruling Liberal Democratic Party.

The changes began during Japan's doldrums, when the government tried to revive growth by slowly but steadily deregulating entire swaths of the economy, like banking, insurance and groceries. As seen in Noshiro, some of the biggest upheavals followed the lifting of restrictions on large stores, a step originally urged by Washington to admit American retailers.

As in the United States, this has filled the countryside with large shopping malls and strips of chain stores, some American but most domestic, at the expense of town centers.

Rural areas also lost out in the 1990s because of the gradual dismantling of government-sanctioned price cartels, which had guaranteed jobs by protecting industries from "excessive competition." As Japan's markets opened, a flood of cheaper industrial and textile products from China and other Asian countries gutted local economies, which still depend heavily on manufacturing.

Rural areas were hit hard again in the early 2000s, when Junichiro Koizumi, then prime minister, tried to unshackle the private sector by shrinking the government. Akita lost thousands of construction jobs as Koizumi made deep cuts in public works projects, which had been a way to redistribute Tokyo's tax revenue to the countryside.

The economic hardships have led to a growing sense of resentment that began to spill into national politics in July. Angry rural voters handed the Liberal Democrats a crushing defeat in elections for the upper house of Parliament. This rural discontent has helped the opposition Democratic Party of Japan, which made closing Japan's regional economic gaps the central plank of its campaign.

Many opposition politicians now talk about halting or rolling back American-style liberalization to protect traditional ways of life. Many blame Washington for having pushed Japan into opening markets. Stung by defeat, the chastened Liberal Democrats and their new leader, Prime Minister Yasuo Fukuda, have backed away from their support of economic liberalization and have begun emphasizing steps to fix regional disparities.

"The elections were the first scream of distress by Japan's regions," said Daigo Matsuura, an opposition Democratic Party member from Akita who defeated the ruling party incumbent in July for a seat in the upper house. "America pressured Japan into making these changes. The result was the birth of regional economic gaps..."

Whatever the cause, the widening of these gaps is apparent in government statistics. Over the last decade, Tokyo's economy has grown 6.9 percent. Land prices in the capital are rising so fast that there is talk of a property bubble, and the city's population has grown by 900,000, to 12.7 million residents, at a time when Japan's overall population growth has flattened.

By contrast, Akita's economy and population have both shrunk by about 7 percent in the last decade, and land prices have been dropping for 15 years. Akita's average annual income has fallen to 2.3 million yen, or about $20,000, exactly half Tokyo's average.

Last year, after the restrictions on building large stores were lifted, Aeon, one of Japan's largest retail companies, proposed a 378,000-square-foot shopping center near Noshiro that would be the largest in northern Akita. The mayor and consumer groups in this city of 60,000 have supported the plan, saying it would bring more jobs and cheaper prices. But they face bitter opposition from the local business establishment, particularly merchants.

Residents say it is the first time they have seen the community so divided. Opponents have erected red flags saying "Oppose Aeon!" and are seeking a referendum on whether to allow the mall. The notion that a company, and particularly one from near Tokyo, can come in and compete with their businesses runs against the grain in rural communities like this one, where a tradition of harmonious coexistence has made the creation of economic winners and losers abhorrent...

For all of Japan, the question now is whether this sort of reaction will be strong enough to stop or reverse economic liberalization. The central government has already begun to tighten restrictions on large stores, and many in rural areas are calling for more public works. But many in Tokyo and regions like Akita say Japan's soaring fiscal deficits make it impossible to return fully to the old ways, and many advocate opening markets further...

So far, regions like Akita have not adapted on their own to the changing economic environment. In interviews, local business leaders bemoaned their declining fortunes, but also quickly dismissed suggestions that they seek new opportunities in nearby emerging markets like China or Russia, which sits just across the narrow Sea of Japan from Akita.

Meanwhile, the Danish case is somewhat different. Denmark has some of the highest tax rates in the world because maintaining flexicurity-style arrangements and other state benefits is not exactly cheap. However, a problem is emerging in that young, skilled, and (very) English-fluent Danish labor often trained at public expense is starting to flee the country and its high tax rates. Heck, if I were being charged a top tax rate of 63%, I too would start thinking about working in income tax-free Dubai no matter how high the quality of life is Denmark. The mobility of this skilled labor is making it difficult for quite a few Danish employers to find qualified workers:

As a self-employed software engineer, Thomas Sorensen broadcasts his qualifications to potential employers across Europe and the Middle East. But to the ones in his native Denmark, he is simply unavailable. Settled in Frankfurt, where he handles computer security for a major Swiss corporation, Sorensen, 34, has no plans to return to the days of paying sky-high Danish taxes...

Born and trained at Denmark's expense, but working - and paying lower taxes - elsewhere in Europe, Sorensen is the stuff of nightmares for Danish companies and politicians searching for solutions to an increasingly desperate labor shortage.

People like Sorensen, and there are many, epitomize the challenges facing the small Nordic country, long viewed across Europe as an example of how to keep an economy thriving and a society equal.

Young Danes, often schooled abroad and inevitably fluent in English, are primed to quit Denmark for greener pastures. One reason is the income tax rate, which can reach 63 percent. "Our young people are by nature international," said Poul Arne Jensen, chief executive of Dantherm, a maker of climate-control technology. "They are used to traveling and have studied abroad. They are no longer 'Danes' in that sense - they are global people who have possibilities around the world," he said.

Denmark is the home of "flexicurity," the catchy name given to a system that pays ample unemployment and welfare benefits but, unusually in Europe, imposes almost no restrictions on hiring and firing by employers. The mixture has served Denmark well, and its economy barreled ahead in 2006 by 3.5 percent, one of the best performances in western Europe. The country is effectively at full employment.

But success has given rise to an anxious search for talent among Danish companies, and focused attention on émigrés like Sorensen. The Organization for Economic Cooperation and Development, which is based in Paris, projects that Denmark's growth rate will fall to an annual rate of slightly more than 1 percent for the five years beginning in 2009, reflecting a dwindling supply of a vital input for any economy: labor.

The problem, employers and economists believe, has a lot to do with the 63 percent marginal tax rate paid by top earners in Denmark - a level that hits anyone making more than 360,000 Danish kroner, or about $70,000. That same tax rate underpins such effective income redistribution that Denmark is the most nearly equal society in the world, in that wealth is more evenly spread than anywhere else. The movement toward lower taxes passed Denmark by, even as it took root in much of Europe.

Small East European countries, notably Estonia and Slovakia, started the trend by imposing low, flax taxes on income and corporate profits about five years ago. Those moves helped prod Austria, and eventually, Germany, to slash high marginal rates as well.

Danish taxes also contrast sharply with those in nearby London, often jokingly referred to among Danes as a Danish town, because so many of them live there. Lower taxes on high earners have been a centerpiece of the policy mix that has fed the rise of London as a global financial center since the 1980s.

But today young Danes can easily choose not to pay for the system's upkeep, once they have siphoned off what they need. For starters, as citizens of the European Union they are entitled to work in any of the 27 EU countries.

Sorensen, who graduated from business school in Copenhagen, found himself earning the equivalent of more than $100,000 before he was 30 - and paying 63 percent of it in taxes. His work as a computer consultant for Deloitte also took him to Brussels, where he met the Spanish woman he would eventually marry. But the high taxes, mixed with his wife's discomfort in Denmark, meant that a job offer in Qatar three years ago was all it took to pry him away from Copenhagen. Now, he is ensconced in Frankfurt, setting up a new business on the side and planning to pay no more than 25 percent of his income to the German state.

"When you are at 63 percent tax, you don't look forward to the evaluation with the boss to get a raise," Sorensen said. "You look for more vacation or a training course in the tropics - something that you get the full benefit of." There are many more Sorensens out there in a work force that is culled from a country of just 2.4 million people.

The Confederation of Danish Industries estimated in August that the Danish labor force had shrunk by about 19,000 people through the end of 2005, because Danes and others had moved elsewhere. Other studies suggest that about 1,000 people leave the country each year, a figure that masks an outflow of qualified Danes and an inflow of less skilled foreign workers who help, at least partially, to offset the losses.

Danish business normally keeps its distance from politics, but in parliamentary elections this year, a few companies jumped into the fray. Lars Christensen is co-chief executive of Saxo Bank, a Copenhagen financial services firm specializing in currency trading and retail brokerage services. New employees at Saxo Bank get a copy of "Winning," the playbook of Jack Welch, the brass-knuckled former chief executive of General Electric, and "Atlas Shrugged," the libertarian manifesto by Ayn Rand, suggesting that the boss has little time for solutions that beat around the bush. [And has poor taste in reading materials to boot with the latter choice.]

"The high tax rate is the No. 1 problem we have," Christensen said. "It's that simple." Christensen said about 150 positions at Saxo Bank had been created outside Denmark because filling them at the home office would have been either prohibitively expensive or simply impossible. Finding people at its offices in Britain, Switzerland and Singapore, where tax rates range from 19 to 40 percent, proved easier. But it forced the bank to break up teams of people that it wanted to be concentrated in Copenhagen.

Acknowledging the need to reduce the tax burden, [Prime Minister Anders Fogh] Rasmussen's previous government approved slight reductions in taxes for lower earners, but he has avoided promises of quick fixes. In 1998, Rasmussen's party narrowly lost a national election focusing on a message of business-friendly reform, an experience that colors the current message of incremental change. "Denmark is a country of consensus," Rasmussen said recently. "Occasionally that fact tends to lower the speed of reforms, but in exchange we are efficient in our implementation."

"My Dinner with Vladimir" (of Putinomics fame)

Anatol Lieven over at the Globalist had the opportunity to dine at Vladimir Putin's dacha in the now-swanky Novo-Ogaryovo suburb of Moscow. He has written a two-part series [1, 2] about it and his findings are instructive. Initially, let's take a look at what Putin had to say about Russia's current oil and gas fueled boom over dinner. The narrative here is already well-known, denouncing the nineties as a time when Russia was placed under the thumb of the West and it was falling apart in the absence of strong leadership traditionally required of a Russian head of state. Also interesting to note is the problem of a public wanting to use oil revenues for this and that project a la Hugo Chavez's largesse while Putin's government champions prudent fiscal management to avoid a rehash of the nineties. Rent-seeking is desired the world over:

Putin’s remarks were of a studied moderation. He rejected the term “energy superpower” for Russia, saying that it was an inappropriate reference to the Cold War and had no relevance to the world of mutually beneficial energy deals. A certain steely quality emerged when he insisted that the West could not demand access to sales of Russian property, while barring Russia from buying shares in Russian corporations.

Still more steel came to light when he warned that any moves by the West to grant independence to Kosovo would result in direct consequences in terms of Russia's own policy towards Georgia’s separatist provinces. But in both cases the tone was mild, the steel decently veiled.

Where Putin, and still more his successors, will really need to show “steel” is in an area rarely mentioned in the West, but which he emphasized in his remarks — a continuation of his present determination to maintain rigorous fiscal discipline. In the face of the flood of revenues pouring in from high oil and gas prices, and growing demands from the population that more of this be spent on public services and raising living standards, that will prove to be a real challenge.

Putin and his team seem to be near-obsessed with memories of the 1990s, when hyper-inflation and declining revenues came close to wrecking the state. These events did, for a while, radically undermine its economic and diplomatic independence vis-a-vis the West. Hence the determination to channel the great bulk of the state’s new resources into the stabilization fund and enormous foreign exchange reserves, with investment in restoring infrastructure and services coming a long way behind.

This is a line which attracted the unwilling, but profound admiration of some of the Americans in our group, given the fiscal exuberance of their own present administration. However, for future Russian governments to stick to this strategy in the face of public unrest if energy prices remain high may one day yet again require not just metaphorical but actual steel on the part of Russia’s rulers.

And here is some telling gustatory commentary on the authoritarian nature of dining with Putin. Hospitality aside, there is little doubting who is in charge of the show:

The meal, though, was worthy of a prince, not in its quantity, but in its really superb quality. We shared an Italian meal, cooked by a chef from a famous restaurant in Moscow…

In one respect, official dinners with Putin resemble what I seem to recall reading was a feature of the court of Franz Joseph of Austria. The sovereign is, of course, served first. He also eats quickly — and drinks almost nothing. And when he is finished, the staff whisk everybody’s plates away, finished or not.

I was sorely tempted to make a grab for the last tentacle of the octopus carpaccio as it passed me on the way out of the door. But while other hosts might have applauded this as a compliment to their hospitality, I do not think it would have gone down well with Putin.

Finally, what will Putin's legacy amount to? The second article previews Russia's upcoming leadership transfer (at least in name) which you can read about and also this concept of Putin being an "authoritarian reformer," whatever that may be and why it is necessary in a country where progress has been uneven:

What will Putin’s legacy amount to? For starters, let us dispense with a giant "red herring" that too many Western commentators have pursued for far too long. What I am referring to is the question of whether Putin is a “democratic reformer” — or a “Soviet authoritarian.”

The answer, of course, is that Putin is an authoritarian reformer. He is profoundly committed to reforms intended to make Russia into a successful modern state. But at the same time, he is profoundly skeptical of his society’s capacity to undertake such reforms without strong control from above — at least without running a grave risk of flying to pieces in the process.

Whether he is right or wrong on this is open to question. But it is an old Russian position dating back to Peter the Great and even beyond. And it is a stance that was confirmed in Putin's mind and in the minds of a large majority of ordinary Russians by the dreadful experiences of the 1990s…

There are certain milder elements of this in Putin’s own attitudes. In addition to limiting even the long-term growth of real democracy, they may also yet help stifle just the economic dynamism that he genuinely wants to promote — above all through state-directed, partially state-controlled monopolization.

For all the strengthening of the state under Putin, Russia has not wholly shed either the anarchy of the 1990s, or the tradition of “Russian revolts — senseless and merciless,” as Pushkin described them. And they are a reminder of the fact that ruling Russia does require a certain toughness.

During my stay in Russia, bloody anti-Caucasian rioting broke out in the depressed northern town of Kondopoga, a place that epitomizes all the dreary, desperate areas left behind by Russia's contemporary march to prosperity. If that march falters, it is easy to see how such places could be breeding grounds for a far more savage version of Russian chauvinism than anything we have seen under Putin.

Is China Making a $134B Bid for Rio Tinto?

OK, this is getting a little confusing. Initially, the newly created sovereign wealth fund the Chinese Investment Corporation (CIC)--unfortunately best known for its el crappo "investment" in private equity fund the Blackstone Group--was rumored to be interested in buying Melbourne-based mining titan Rio Tinto. Before that, BHP Billiton, the world's largest mining firm also headquartered in Melbourne, mounted a $120B hostile bid for Rio Tinto, the third largest one. Supposedly, CIC was mulling an offer, though the official Chinese news agency Xinhua denied that such an offer was forthcoming. From 11/27:

China Investment Corporate Ltd (CIC), the country's newly launched state foreign exchange investment company, said in a statement Monday that it had never been involved in a bid for Rio Tinto. The statement was intended to dispel market rumors started by a report in Chinese weekly newspaper China Business saying the CIC was leading a group of Chinese steel makers in a bid for Rio Tinto.

On Monday, Rio Tinto also denied reports of a bid from China Investment.

Australia's BHP Billiton, the world's largest mining company, is proposing to buy its rival Rio Tinto, the world's number three miner, for more than $120 billion. BHP Billiton's share price surged 1.84 dollars to 42.11 dollars, while its takeover target Rio Tinto skyrocketed 9.6 dollars to 138 dollars on the Australian stock market on Monday, amid speculation of a rival bid from China. The proposed merger between the world's two leading mining groups has aroused concerns over their combined market power over iron ore.

The CIC was launched in September to mitigate the risks in China's huge foreign exchange reserve. It has $200 billion in registered capital allocated from the reserve.

Well, guess what: now Bloomberg notes that the Chinese are likely interested in mounting a $134B offer via Baosteel, which is, alike CIC, ultimately a state-owned enterprise. Now, $134B may seem like an incredible sum to you and me, but it's probably, oh, ten minutes' worth of reserve accumulation for China [just kidding]. What difference would it make if CIC or Baosteel mounted the bid? With sky-high commodity prices at the moment, it seems like China would be buying at the top just as it did with Blackstone before global market liquidity dried up.

As you will read below, the supposed logic behind an offer is that Chinese steelmakers are wary that a BHP Billiton-Rio Tinto combination would concentrate too much supplier power as it would control 38% of the shipborne iron ore trade. China is said to import over half of its iron ore, with Baosteel importing 95% of its supply so this is not a trivial matter for the resource-hungry Chinese industrial machine. Even if such a bid fails, it raises the bar that BHP Billiton must reach to make a competitive offer, to the advantage of the Chinese. Of course, there are big questions over whether the Australian government would let a key cog of its industrial machine go to Chairman Mao's acolytes...

Chinese steelmakers, the largest buyers of iron ore, and the government are studying a joint bid for Rio Tinto Group to counter a $134 billion offer from BHP Billiton Ltd.

``It's an issue being discussed by top-level officials,'' said Chen Hanyu, a director at the resources office of Beijing- based Shougang Corp., the nation's ninth-largest steelmaker. Members of the China Iron and Steel Association have held talks, Vice Chairman Qi Xiangdong said in a telephone interview.

The steel mills want to block BHP's offer because the deal would give the world's biggest mining company control of almost half the Asian market for iron ore. Rio's London shares are trading at a 14 percent premium to BHP's all-share proposal, indicating investors expect a higher offer. Any acquisition by China would dwarf Cnooc Ltd.'s failed $18.5 billion bid for Unocal Corp., rejected by U.S. lawmakers in 2005.

``There are clear strategic reasons why they would consider'' a bid, Angus Gluskie, who helps manage the equivalent of $500 million at White Funds Management, including shares of London-based Rio and BHP, said in Sydney. Australia's newly elected Labor Party government may oppose such a transaction, he said.

Baoshan Iron & Steel Co., the listed unit of China's largest steelmaker, rose 5.2 percent to close at 15.53 yuan in Shanghai. Rio, the world's third-largest miner, gained 72 pence, or 1.3 percent, to close at 5,515 pence on the London Stock Exchange. Seven of the eight other stocks in the Bloomberg Europe Metals & Mining Index dropped. Rio has more than doubled this year in London.

China has been scouring the world for resources. Aluminum Corp. of China bought Peru Copper Inc. for $860 million in August, Anshan Iron & Steel Group in September agreed to a A$1.8 billion ($1.6 billion) Australian iron-ore joint venture, and Cnooc last year spent $2.7 billion buying Nigerian oil fields.

A bid ``is pretty positive for China's steelmakers,'' said Yan Ji, an investment manager at HSBC Jintrust Fund Management Co. in Shanghai. ``The control of raw material costs makes sense.'' Baosteel Group Corp., the nation's largest steelmaker, and domestic rivals are studying a bid, the 21st Century Business Herald said today, citing Baosteel Chairman Xu Lejiang. Fan Shunbiao, a spokesman for Baosteel, said he's not aware of any talks on a bid. Amanda Buckley, a Melbourne-based spokeswoman for Rio, declined to comment today. Samantha Evans, a Melbourne-based spokeswoman for BHP, also declined to comment.

``Chinese steelmakers, if united, are capable of making such a bid,'' said Lu Yizhen, who helps manage $640 million at Citic Prudential Fund Management Co, in Shanghai. ``It's also likely that steelmakers want to influence the shares of Rio, blocking BHP's bid.''

Chen Bin, director of the industrial department of the National Development and Reform Commission, which supervises China's steel industry, said the commission isn't involved in any Rio bid proposal. ``A few of the biggest steelmakers in China and the central government may team up for the bid,'' Shougang's Chen said today in an interview. Chinese steelmakers have the financial ability to bid for Rio and are awaiting for a decision from the government, Zhao Kun, vice president of Baosteel, in charge of merger and acquisitions, said Nov. 26.

A five-year increase in metal prices has spurred about $185 billion of bids in the industry in the past year, according to data compiled by Bloomberg...``It's almost an open secret that China wants to secure more overseas resources assets,'' said William Fong, who helps manage $6.8 billion of Asian equities at Baring Asset Management Asia Ltd., in Hong Kong. ``BHP's bid for Rio is probably a trigger.''

Chinese companies have grown more acquisitive. The Industrial and Commercial Bank of China Ltd. is buying a 20 percent stake in Africa's largest lender Standard Bank Group Ltd. for 36.7 billion rand ($5.4 billion), the country's largest overseas purchase. Ping An Insurance (Group) Co. last month bought a 4.2 percent stake in Fortis, Belgium's largest financial services company.

Australia's previous coalition government blocked Royal Dutch/Shell Group's proposed takeover of Woodside Petroleum Ltd. in 2001. Cnooc, China's third-largest oil producer, was blocked from buying Unocal Corp. in 2005 by U.S. lawmakers. ``There has always been a strong nationalistic viewpoint held by the Labor Party that supports Australian ownership of its resources,'' said White Funds' Gluskie.

Rio's Chief Executive Officer Tom Albanese has told investors BHP's three-for-one stock proposal undervalues his company. BHP and Rio would together control 38 percent of the global seaborne iron ore trade, according to the Australia & New Zealand Banking Group Ltd., rivaling the largest producer Cia. Vale do Rio Doce.

``Chinese steelmakers are so fragmented, putting them in a weaker position when negotiating with giant iron ore suppliers,'' Helen Wang, a Shanghai-based analyst at DBS Vickers Hong Kong Ltd., said by phone today.

Mexico: From Maquilas to Aerospace?

With China shaking the world, other developing countries have been seeking ways to move away from direct export competition with that exporting powerhouse. Mexico has been known for setting up maquiladoras on the US-Mexico border [gimme some water!] to take advantage of less expensive Mexican labor in industries such as textiles, but we all know how China is affecting that particular trade and many others like it. So, here is a somewhat circuitous and unlikely story that demonstrates globalization for you. Here are its three steps: First, global demand for aerospace products has been fueled not by decrepit US airlines but emerging market carriers with big ambitions like Emirates Airlines. Second, US aerospace manufacturers have been well-placed to take advantage of this surge in airplane demand with a dive-bombing dollar. Third, however, these American manufacturers have had trouble sourcing components from faraway places where the supply chain is longer than desired in today's just-in-time manufacturing culture.

What's the solution? You guessed it: farm out aerospace component assembly to nearby Mexico which has just ditched import duties on aerospace components to take advantage of this burgeoning trade. True, the aerospace sector constitutes a small slice of Mexican industry at the moment, but given the continuing boom in the global aerospace sector, the Wall Street Journal expects Mexico to be well-placed to use its traditional comparative advantages of relatively inexpensive labor and geographical proximity to the US of A to avoid competing head-on with China. (The Seattle Times also has an informative take on this trend.) While the PRC itself is seeking to develop an aerospace industry of its own, its designs are still largely based on Western ones, meaning that Mexico probably has more breathing room if it goes down this path:

Mexico has felt the downside of globalization in recent years as cheaper Asian manufacturers of everything from electronics to auto parts have undercut the advantages provided by looser North American trade barriers. Now, Mexican officials are turning to another sector they hope will put down deeper roots: The booming North American aerospace industry.

Mexico has moved to make it even easier for foreign companies to do business south of the border. Already, big names in aerospace such as Goodrich Corp. of the U.S. and Bombardier Inc. of Canada have set up facilities there. The nation offers proximity and easy reach at a time when aerospace giants are under pressure to hit deadlines and deliver new aircraft to customers. Aerospace officials also say they are impressed by Mexico's deep talent pool. And if Mexico successfully bolsters its aerospace industry, it will demonstrate that skills burnished servicing the automotive sector can be transferred to higher-end markets.

American manufacturers, eager to cut costs, raced to build factories in Mexico after the North American Free Trade Agreement was adopted in 1993. Thanks to Nafta, the number of Mexicans employed by maquiladoras -- plants that assemble and export goods made from imported parts -- doubled to more than a million by 1999, making Mexico a leading producer of garments, auto parts and electronics.

But in the past several years, Asian factories, with their even lower labor costs and seemingly endless supply of workers, lured business and jobs away from the maquiladoras. Mexico's biggest advantage may be its location. For years, major aerospace manufacturers such as Boeing Co. have farmed out a growing share of their work to suppliers in Japan, China and elsewhere. But these arrangements can make it a challenge to get finished components back to the companies' main factories for final assembly. The choice often boils down to waiting weeks for delivery by ship or paying for costly space on a cargo jet. [The world ain't flat quite yet.]

With demand for new jetliners and other aircraft at record levels, however, companies are under greater pressure to cut shipping time and increase production. Many U.S. aerospace companies already have built up considerable capacity in Mexico to feed the industry's production hub in Southern California.

Last year, Mexico dropped all import duties on aeronautic components. "It's something we never did for garments or automotive parts or electronics," says Eduardo Solís Sánchez, investment-promotions director for Mexico's Economy Secretariat, who calculates $1.2 billion has been invested in Mexico's aerospace sector since the start of last year.

In September, Mexico concluded a four-year campaign to forge a bilateral aviation-safety agreement with the U.S. Federal Aviation Administration. The deal ultimately will remove barriers for an industry itching to outsource production to Mexico. It contains provisions that will let manufacturers certify and ship components directly from Mexican factories, rather than sending them to the U.S. for completion and safety checks.

The number of Mexican workers employed by aerospace production has doubled in recent years to 16,500. While that is a small share of the 1.2 million jobs in the country's export-assembly sector, it is expected to grow.

In September, Goodrich broke ground on a 350,000-square-foot facility in the Mexican state of Baja California to make a variety of parts, including engine casings and thrust reversers. A Goodrich plant in Sonora produces turbine blades and damper seals for all of the major engine companies. Aerospace manufacturers who count Goodrich as a supplier "have applied pressure up and down the supply chain" to continually cut costs," says Bob Yancey, president of Goodrich's engine-components business. The plant at Sonora has been such a success that Goodrich is doubling it to 70,000 square feet.

While Mexico last year exported less than 2% of the $25 billion in parts imported by the U.S. aerospace industry, that number is expected to increase along with the complexity and value of the components made there. Five years ago, Mexican workers were used for relatively menial work such as weaving the intricate wire bundles used in airplanes. Today, they are producing complete fuselages and landing-gear systems, with plans to export finished airplanes for Bombardier Aerospace Corp. by 2012.

Nowhere is this transformation more apparent than in the state of Querétaro, in Mexico's central valley. A booming auto-parts hub a decade ago, Querétaro has suffered with Detroit's downturn. Now, General Electric Co. and a local partner are developing a $100 million commercial aerospace park there, on land donated by the government.

GE says the development will be the first "aerospace cluster" in Mexico, housing anchor tenant Bombardier and about 20 other suppliers, as well as a government-funded school to train workers. Bombardier expects to pour $250 million into the site over the next 10 years and to have four to six facilities in the park, with a goal of eventually assembling complete commuter jets. Just as the major automobile companies drew clusters of suppliers to their Mexican plants, Mexico expects Bombardier to help draw other companies south.

Consultant Luc Beaudoin, director of the Everest Group, which advises companies setting up operations in Mexico, notes that work on components for Bombardier's new 50-seat Challenger jet has been relocated to Querétaro from places like Japan, Taiwan and Belfast, Northern Ireland.

Mexico's gains aren't sitting so well with labor unions in the U.S. "In aerospace, we're not building kites," said Mark Blondin, an aerospace coordinator with the International Association of Machinists and Aerospace Workers, which represents workers at Boeing, among others. "Long term, workers in Mexico could become highly skilled, but you don't get there overnight."

Chery Chery: China's Global Auto Assault

With apologies to the legendary Neil Diamond:
China loves me...yes, yes, it does
Oh the car's out of sight, yeah
She got the way to move me Chery
She got the way to groove me...

The Chinese automaker Chery has ambitions on a global scale. It combines the advantages wrought by state ownership and an emerging Chinese entrepreneurial culture. While it has forged partnerships with Western automakers like Chrysler and Fiat in the meantime, Chery's eventual goal is to become a global player itself. What strikes me in the accompanying Wall Street Journal story is that the company knows that it will not have an easy road ahead despite its ambitions to replicate Japan's success in global auto markets in a shorter time frame. Chery acknowledges that it will be faced with international buyers doubting the quality of its products. There is no substitute for making a name for itself. As Neil Diamond sang, you've got to make your own lightning.

It's likely after all that recent scares over the safety of Chinese products will have made buyers think twice before purchasing products whose safety literally has life and death implications such as automobiles. I am no auto industry insider, but I would strongly suggest that Chery make sure that its designs do well in crash safety tests to dispel this emerging bugaboo of Chinese products. After that, combining state-of-the-art production technology while undercutting Japanese and Korean designs price-wise may signal great potential for Chinese auto exports. And, oh yeah, getting rid of ridiculous car names ought to help. Neil Diamond fans aside, I don't think "Chery" has the same panache of, say, "Datsun":

In this city on the Yangtze River, more than 25,000 blue-uniformed workers are busy churning out cars for Chery Automobile Co. As they motor through double shifts using the latest imported technology, they're also helping to change the dynamics of the global auto industry. Barely a decade after it was founded, state-owned Chery has emerged as China's largest independent vehicle maker -- and one that is determined to compete against the world's automobile giants.

In the beginning, no one had confidence in us," says Yin Tongyao, Chery's chairman and general manager, in a rare interview. Now, he says, "we are looking globally for markets." The tale of Chery's improbable rise is in large part the story of China's ballooning domestic car market, which has roughly doubled in size since 2004. Its products -- mostly inexpensive cars and SUVs -- are also gaining a following in developing countries hungry for low-cost vehicles. But rapid growth is already taking its toll, as executives strain to manage the company's expansion amid a shortage of experienced workers. "We are still fighting for our survival," says Mr. Yin. "We didn't get to learn from books. We have to learn everything by doing it."

In July, the company signed a landmark deal with Chrysler LLC to sell a series of small cars made by Chery under the American auto maker's Dodge brand. Chrysler has said it plans to start selling the cars in Latin America and other developing markets next year and aims to have them on the market in the U.S. and Western Europe by 2009. The pact marks the first time that one of Detroit's Big Three has outsourced the production of entire vehicles to a Chinese company. The deal also sends a warning to high-cost workers in the U.S. and Europe that even more of their jobs could be at risk.

Chery's arrangement with Chrysler follows years of breakneck expansion. Sales of Chery cars have increased more than tenfold since 2001. This year, Chery expects to sell more than 400,000 compacts, sedans and sport utility vehicles. By 2010, the company says it will be turning out a million vehicles annually, for markets both at home and abroad. Holding the reins of this galloping enterprise are Mr. Yin and a handful of other men who've been with the company since it started as the brainchild of local Communist Party officials in the poor eastern province of Anhui. The founding group is known in China as the "Eight Guardians" -- a reference to eight defenders of the faith in Buddhist legend.

The corporate culture they spawned is an odd hybrid of Communist state enterprise and entrepreneurial start-up. Party propaganda posters hang on factory walls. "Know plain living and hard struggle," one poster exhorts workers, "do not wallow in luxuries and pleasures." In another part of the plant, bulletin boards display quality-survey data from J.D. Power & Associates comparing Chery's cars with those of its rivals.

Inside the gates of Chery's sprawling production complex, where few foreign reporters have been allowed before, assembly lines run 16 hours a day. Much of the equipment is state-of-the-art, imported from Europe. The engine plant has German precision-milling machines and Italian robots. The paint shop is from Germany.

Chery this year expects to export more than 110,000 cars, up from about 50,000 in 2006, mainly to emerging markets such as Russia, the Middle East and Latin America, where its low prices are helping to win it business. The company is building a car-shipping port on the Yangtze near its plant to send vehicles to China's coast and overseas. Still, Chery remains far smaller than the world's big auto makers. Volkswagen AG, General Motors Corp., Toyota Motor Corp. and Honda Motor Co. have each outsold Chery in the China market so far this year. World-wide, GM and Toyota both sell nearly nine million vehicles a year.

At Chery's research and development center, engineers say they are now at work developing 40 to 50 new car models, at least 10 of which could be ready for production as soon as next year. The company is building new assembly lines that next year will boost its capacity to about 700,000. Mr. Yin sets an urgent tone both inside and outside the company. Parts suppliers say they are frequently called to meetings at Chery headquarters late in the evenings and on weekends, as Chery engineers and executives try to push projects forward in a hurry.

Chery says it expects to benefit from Chrysler's technical expertise and established sales and service networks. Even though their cars will be sold under the Dodge brand, they expect consumers will know they are made in China by Chery. "People look down on our products. There are many doubts about our safety and quality," says Mr. Yin. Selling under the Dodge name initially will boost buyers' confidence, he says. "If we work together with Chrysler, we can go global faster."

Chery has combined low wages with massive capital investment and other government backing. This recipe is powering the latest phase of China's industrial revolution, helping firms in industries from cars to consumer electronics become significant global players.

Junior engineers at Chery earn about $6,000 a year, and many sleep in bunk beds four to a room in company dormitories. Some don't have driver's licenses and, like most Chinese people, didn't grow up riding around in a family car. Few workers can afford to buy the automobiles they make. Assembly-line workers earn an average of slightly more than $1 an hour -- far less than their counterparts in Europe or North America but, in Anhui, a sought-after wage...

Chery's conception dates to the mid-1990s, when a handful of officials in Anhui decided to place a bet on cars. Developing a local auto industry, they figured, would boost incomes and growth in a province where the average annual income of people in rural areas is less than $400. The company's first chairman, Zhan Xialai, at the time an assistant to the mayor of Wuhu, recruited Zhou Biren, then a manager at a city-owned building-supply company. The two men faced significant opposition from bureaucrats who doubted local families would ever earn enough to buy a car.

"People thought we were crazy," says Mr. Zhou, now a Chery vice president and one of the Eight Guardians. "In those days, people weren't rich yet," says Mr. Zhou. They "thought it would be a waste of state funds." But Messrs. Zhan and Zhou persevered. They cobbled together a team with connections to Anhui, including Mr. Yin, an Anhui native who was lured away from a Volkswagen joint venture. (Mr. Zhan later became the Communist Party's top official in Wuhu and stepped down from his post at Chery...)

In March 1997, Chery started building its first factories. It hired a Taiwanese company to help it design its first model, a sedan known as the Fengyun, or Wind Cloud, which was cobbled together mostly using parts from components makers that supplied the China operations of VW and GM. The first cars rolled off the line in December 1999. But Chery wasn't allowed to sell them, since it didn't have a government license to be in the auto business. The red tape was eventually untangled when Chery briefly became part of the much larger Shanghai Automotive Industry Corp., a large state-owned company that has partnerships with GM and Volkswagen. The Fengyun hit the market in 2001 and 28,000 were sold.

Chery also began work on a four-door hatchback minicar, which would lead to accusations that the young company was knocking off the designs of its competitors. The car, which went on sale in 2003 and is known as the QQ, is similar to a GM model known as the Chevrolet Spark. GM sued Chery in Chinese court in 2004, alleging that the company had illegally copied its design for the Spark. The companies settled the lawsuit in 2005 without disclosing the terms of their agreement. Chery spokesman Jin Yibo says the deal with GM was "very friendly," and Chery has publicly denied that it did anything wrong.

Manufactured with local partners at a plant in southwestern China, the QQ remains the company's No. 1 model and far outsells the more expensive Chevy Spark in China. "We honor the intellectual-property rights of others," says Mr. Zhou. Amid the controversy over the QQ, a fundamental shift was happening. In 2003, executives and government planners decided that Chery should go beyond recycling outdated technologies for the local market. They envisioned the company as an international player.

Encouraged by sales in Chery's first two years -- and by signs that China's auto market was revving up -- the company and its state owners decided to embark on a massive new investment program. Chery also stepped up its efforts to recruit Chinese nationals working for auto companies abroad, as well as to bring foreign expertise to Wuhu. "There's no way you can move slowly and catch up," says Xu Min, a former Chery engineer who is now dean of Shanghai Jiao Tong University's Institute of Automotive Engineering. "It took the Japanese two or three decades. We didn't have that kind of time."

The central goal: to acquire and develop technology that would belong to Chery and help it compete even in the U.S. and Europe, with their daunting regulatory hurdles and high customer expectations. In 2003, Chery recruited Mr. Xu, the engineer who is now an academic. At the time a specialist on combustion and fuel injection at Delphi Corp. in the U.S., Mr. Xu says he got the hard sell from executives seeking to bring him back to Anhui, where he was born. Mr. Xu says that a lot of his friends questioned his decision to abandon a secure job in Detroit for a post at a then-unknown Chinese company. But he says he felt like he was hitting a wall in the U.S. "In Detroit, you could spend years on something and never see it commercialized," he says. "The pace was so slow." Chery, on the other hand, wanted Mr. Xu to oversee a project that would develop three new families of engines within just a few years.

In 2003, Mr. Xu and Chery turned to AVL List GmbH, an Austrian engineering consulting firm that specializes in internal-combustion engines, for help. AVL promised to train Chery engineers to design and build the sophisticated engines. Teams from the two companies worked side-by-side in Austria and in China. "They knew they had to exchange knowledge for money. That really speeds up your capacity building," says Mr. Xu.

The engines are good enough that Italian car maker Fiat SpA plans to use them in some of its cars as well, buying them directly from Chery. Fiat is to buy at least 100,000 1.6-liter and 1.8-liter engines a year for use overseas starting next year, according to Chery. In August, the two companies also signed a memorandum of understanding to form a joint venture that would produce Alfa Romeos and other cars.

Is Hillary Going the Way of Tancredo & Dobbs?

You know that the silly season known as the US Presidential Campaign 2008 is upon us when the Financial Times offers up an op-ed by Karl Rove [!] offering unsolicited advice to Barack Obama on how to defeat Hillary Clinton [!!] Do not adjust your monitor; click on the link and see that I am not pulling your leg. While unusual, Rove's sudden burst of eloquence does point out something that should be obvious to everyone: for Republicans and Democrats alike, the former first lady is the person to beat. Being in such a position, it should also be plenty obvious that she aligns her rhetoric with popular sentiment Stateside. At the moment, it's heavily inflected with that old crowd pleaser, furriner-bashing. Here are some of her statements in an interview with the FT that purportedly show a leftward lurch on trade compared to Bill, the First-Gentleman-in-Waiting (the picture is priceless, methinks). She also makes some statements on sovereign wealth funds worth noting:

FT: You have said that as president you would take “time out” on new trade deals. But the debate has mostly been focused on the smaller and more symbolic deals like Peru and Colombia. Would your principle extend to the stalled Doha round of world trade talks?

HC: Well what I have called for is a time-out which is really a review of existing trade agreements and where they are benefiting our workers and our economy and where the provision should be strengthened to benefit the rising standards of living across the world and I also want to have a more comprehensive and thoughtful trade policy for the 21st century. There is nothing protectionist about this. It is a responsible course. The alternative is simply to pick up where President Bush left off and that’s not an option. Now I’m trying to take the trade agreements that he has negotiated each one on its merits and I will support the Peru agreements because it has the kind of strong labour and environmental provisions that I’ve long called for. And it helps to level the playing field for American workers because as things stand most Peruvian goods already enter America tariff-free but the tariff that are attached to most American goods entering Peru make them less competitive. I have said I will oppose the agreement with South Korea because the auto provisions don’t go far enough and we have prior experience.

My husband’s administration tried to enforce a memorandum of agreement that they entered into with the South Koreans about opening up their market to American autos and it just didn’t happen. So it’s not that we’re starting on some totally different approach to trade it’s that we have to take stock of where we are today. And specifically with Doha and with these large global agreements, again we have to see what works and what doesn’t work. We have benefited through most of the 20th century from trade. It has helped to raise American standards of living, it has helped to create jobs. And I agree with Paul Samuelson, the very famous economist, who has recently spoken and written about how comparative advantage as it is classically understood may not be descriptive of the 21st century economy in which we find ourselves.

We know for sure that every other country wants access to our markets, because we have high levels of consumer spending since we don’t save anything in America and we have a very vigorous competitive market that is a real prize. On the other hand I want to see living standards improve around the world. I want to see environmental standards improve. And I am concerned by some of the provisions that would prevent countries from for example enforcing stronger environmental and worker safety rules under the WTO. I think we have to take a hard look at this and do it in the right way and that is what I am proposing to do.

FT: In your speech in Knoxville last week you said that the growth of sovereign wealth funds controlled by foreign governments posed a potential risk to America’s economic sovereignty. Can you flesh out what measures you’d take to address that?

HC: Well as president I’m going to direct my National Economic Council to recommend ways of making these funds more transparent. Things are interconnected. We welcome foreign investment in America. I don’t want in any way want to discourage investing in our country and in our financial markets. But I think vigilance is in order when the investor is a foreign government. I want the World Bank and the IMF to draft transparency rules so we have more information about what the funds are investing in and how they are being managed. That is my principal concern – to increase transparency so that there is a clear understanding of where the funds are coming from, what the funds are being invested in, what the potential downsides might be of essentially having a foreign government control certain assets in our country. That is what I am looking for because obviously it is a balance we have to strike and I want to try to get it right.

So, has the woman gone the way of Lou Dobbs and Tom Tancredo-style demagoguery over trade? I'm sure many of you have doubts like me. As I've already pointed out, husband Bill also talked tough on China, NAFTA, etc. while campaigning, then look what sort of policies he actually pursued when in office. Suffice to say, pro- and anti-trade folks probably agree that if it's Dobbs-Tancredo 2008 you're hankering for, you probably won't get it with Mrs. Clinton. The World Trade Law blog has details on a controversy concerning whether her interpretation was correct of what Paul Samuelson said about trade. What follows is a little more from the FT:

Hillary Clinton would ask hard questions about whether it was worth reviving the stalled Doha round of world trade talks if she were elected US president, the former first lady has told the Financial Times in an interview.

Mrs Clinton said she believed that theories underpinning free trade might no longer hold true in the era of globalisation. She has called previously for the US to take “time out” on new trade agreements.

Mrs Clinton’s remarks come at a critical moment in the Democratic presidential race, which has seen rising scepticism among candidates and grassroots supporters about the benefits of an open global economy.

Although the Democratic frontrunner has not gone as far as John Edwards, who is in third place, in attacking free trade deals such as the North American Free Trade Association negotiated by her husband, Bill Clinton, in 1993, she has called for a full review of all deals, including Nafta. Mrs Clinton has also attacked trade agreements that do not include provisions to protect workers and enforce higher environmental standards.

Her remarks are likely to reinforce expectations that US trade policy would change course were a Democratic candidate to take the White House next year.

Super Sarko's Swingin' Reform Moves

Never did it occur to me to compare French President Nicolas Sarkozy to Muhammad Ali, but the International Herald Tribune does just that in the following article. Love him or loathe him, the man is fleet of foot and packs a wallop. Topping even that, Sarko himself is now comparing himself to the arch-reformer Margaret Thatcher. Mais oui! In the short span that's he's been in office, he's made more moves to get France--I'm not too fond of using the word, but what the heck--competitive again than his sclerotic predecessors Mitterand and Chirac. He's already removed overly generous pensions for public sector workers and now he's keen on getting rid of the 35-hour workweek that has become symbolic of France's excessively laid back culture. His juggernaut rolls on, and it could actually be rather good for France. French rent-seeker everywhere, fear Super Sarko's swingin' reform moves:

Muhammad Ali once claimed he was so fast he could flick off the switch on his bedside lamp and slide under the covers before the light went out. Also blessed with supreme self-confidence and a taste for speed, Nicolas Sarkozy explained recently, "I'm not stopping, I'm accelerating."

"One day," he predicted, "you'll say I was as much a reformer as Margaret Thatcher" [!...make that !!!]

There's substance to Sarkozy's ambition. As an agent of change, working against the still-life backdrop of most of François Mitterrand's and Jacques Chirac's quarter century in power, this president, after six months on the job, seems like a man locked in sprint mode.

In four November weeks, he waited out a public services strike to banish the principle of special pension deals that made working less and retiring with extra cash the symbol of a pervasive French anti-work ethic. Doubling up, Sarkozy then pointed last Thursday to a path away from the 35-hour workweek, the country's second less-is-more societal beacon. Combined, the measures are culture-altering twins, decisions in Sarkozy's view meant to dissolve the taboos that for a generation made a reactionary concept for the French out of the idea that greater effort equals greater productivity and greater reward.

Add this: A reinvigorated relationship with the United States that takes France out of its old, marginalized role as reflexive antagonist. With it, a plan to return French forces to NATO's integrated command, aimed at showing the new Europe of former Soviet satellites that Paris is a leader ready to guarantee their security in cooperation with the Americans.

Plus dozens of undertakings wrenching from slumber French citizens and their webs of special interest groups. That's a lot for anyone's May to December. Credit Sarkozy's profound knowledge of the operative lanes of French power, gained in years as interior minister, finance minister and head of the Gaullist party. And also consider Sarkozy's get-up-earlier, think-faster personality, his gifts as a pitchman and his truly exceptional drive, which, at times, gives him the big-screen relentlessness of a Hollywood character marked by passion, haste and, maybe, great failings.

So far in this first reel, Sarkozy has been lucky. The leftist opposition is pathetically leaderless and atomized. The traditional trade unions are not in much more cohesive shape. On the right, the statist, nationalist and corporatist opposition to Sarkozy's policies is lamed.

In truth, Sarkozy was also fortunate that a couple of nights of rioting by Arab and African immigrants last week in a Paris suburb - which began after two local teenagers died when their motorcycle collided with a police car - did not spread. The shock effect and seeming pause for reflection created when several police officers were wounded by shotgun fire seemed to defuse the confrontation.

According to Sarkozy, the shooting was purely the work of thugs; and he jumped on those people who he said searched for a "social problem in every riot." In subsequent days, the president said the government would address the issue of "the suburbs" in a report due in mid-January from Fadela Amara, a Sarkozy appointee of North African origin in the housing ministry whose brief is urban affairs.

Then, over the weekend, Sarkozy proclaimed "the health of the French" as his priority for 2008. The fact is, public health service in France is generally good, and concentrating on it involves creating a "me" issue, or one where great numbers of voters see themselves as beneficiaries. In contrast, dealing with racial discrimination and integration are "them" problems, connected to vast antagonisms across the broadest stretches of the population.

Globalization 5.0: Offshoring R&D to China, India

This story brings two topics that I am reluctant to bring up but I'm sure will be of great interest to many. My caution over these topics arises from there being very little consensus over them. First, is there *really* a shortage of engineers Stateside? Second, is high-technology knowledge work *really* at risk given the rise of China and India as outsourcing destinations? Well-respected economist Alan Blinder has already gotten himself into a terrible bind over the second question [1, 2, 3] with the free trade crowd, so do read his earlier remarks if you've got the scratch.

Anyway, this recent article which appeared in CIO.com (Chief Information Officer magazine) sheds some light on both these questions. The first part of the article cites Vivek Wadhwa who is also quoted in the link above on a shortage of American engineers. He says there is no shortage of engineers as many US firms claim; rather, engineers are plentiful but do not want to work at a "below market price." The implication he makes seems to be that these firms would like to open up immigration to foreign-born engineers given that they are willing to work at lower wages than their American counterparts:

As for the talent crunch argument that Bill Gates and others employ when lobbying for more foreign worker visas, Wadhwa also pushes back. He and his students surveyed 78 leaders at U.S. companies that were outsourcing high-tech work. The majority said they had trouble finding qualified candidates in the U.S. However those same respondents recorded job acceptance rates of greater than 60 percent, with those rates either remaining constant or increasing, and time to fill an open position of four months or less. There's a shortage all right, says Wadhwa, but it's "a shortage of engineers below market price that work day and night like slave labor."

As for the second part, it deals with the technological sophistication of Chinese and Indian engineers. Unless you're convinced that the Boeing 787 Dreamliner is an outdated jalopy, perhaps Americans should be worried as high-level engineering work on that airplane is being done in Uttar Pradesh by HCL. The old conception that only rote work is being sent abroad may be biting the dust. Scary stuff? It literally depends where you're coming from. The debate continues. (BTW, don't ask me about where I got rather misleading Globalization 5.0 title from since I can't tell you what the first four iterations of it were. Being a past marketing major, I decided to make a catchy title so I punched Globalization 2.0...3.0, etc. into the Google search but kept returning results until, you guessed it, Globalization 5.0.)

In spite of the survey respondents' praise of American workers, the offshoring of engineering and IT work to China and India continues for a variety of reasons, including the availability and cost of labor, and its proximity to new product markets.

BusinessWeek's Engardio described for the audience what he saw on his latest trips to Asia. Bangalore, the capital of India's IT industry, is home to Motorola's R&D lab, where employees designed 40 percent of the value of company's latest RAZR models. Next door at NXP (a company spun off from Philips Semiconductors), workers are designing the chip sets for high definition televisions. General Electric's campus, called the Jack Welch Technology Center, features lovely low-slung buildings, first-class gyms and food courts-and much of GE's product design work. Ten percent of GE's Indian researchers are working on products the company plans to introduce in the next six months, 70 percent are working on products to be released in three to five years and 20 percent are doing very early stage work on products that won't be released for more than a decade.

"When I talk to economists or I read a lot of the public discussion of outsourcing, they still draw a lot of distinctions between what's being done 'here' and what's being done 'there,'" says Engardio. "They'll say the high-end stuff is done here (in the U.S.). The low-end, repetitive stuff is done 'there.'" That's not true, says Engardio. GE and Motorola aren't just employing coders or call center workers abroad, "they're employing scientists."

North of Bangalore, Hyderabad has a booming biotech industrial zone, says Engardio, that stretches for miles, housing 37 contract research organizations. "Three years ago, you could not get a major pharmaceutical company to say they would shift R&D to India," Engardio says. "Today they're doing it. Big pharma is gearing up big time." The same day Wadhwa and Engardio conducted their seminar at Harvard, General Motors announced its plans to build an advanced research center in Shanghai to develop hybrid and other leading-edge car technologies. "There are great quantitative and qualitative leaps in what is being doing in Asia," Engardio says.

And it's not just massive multinational corporations setting up R&D shops in Asia. Top-tier Indian IT service providers, once known for pure software development, are going after R&D business too, says Engardio. Satyam has set up a huge, industrial engineering facility. HCL Technologies is doing avionics work for Boeing's 787 Dreamliner . Tata Consultancy Services actually designed a forklift for a U.S. company that was getting by its Japanese competitor and wanted to drastically reduce costs, says Engardio.

How is all this high-end work getting done if the vast majority of engineering undergraduates in India are indeed "unemployable" out of school and India produces fewer than 1,000 PhDs a year (compared to nearly 8,000 in the U.S.)?

For one thing, says Wadhwa, the multinationals and third-party contractors are more than happy to train local graduates who may not be ready to hit the ground running. Some have set up their own six-month "finishing schools" to do just that. The problem with post-graduate degree production in India is proving to be no barrier, says Wadhwa, because many of the researchers and scientists currently working there were educated in the U.S. Due to the difficulty of obtaining work visas or green cards in the United States, these workers have sought greener pastures in India, China and elsewhere, he says.

For its part, China is actually working on improving its educational system the way it improved its manufacturing processes over the last two decades, according to Wadhwa. But India doesn't have to produce its own post-graduate degrees, says Engardio. "We're talking about chemists and molecular biologists with master's degrees or PhDs coming from U.S. to India where it's not doom and gloom," Engardio says. "There's a lot of opportunity."

When you're talking about offshoring, Engardio says, the conversation is no longer just about costs. It's also about where talent and capabilities are available. Though cost-cutting remains the driver behind offshoring, Engardio says this work won't come back to the U.S. as India's wages or other costs rise. "The shift is permanent," Engardio says.

In other words, American workers may be terrific. But they're expensive. And there aren't enough of them, according to Engardio. If the U.S. held on to more of the foreign-born students awarded advanced degrees, there might not be as many of them available in India or China either, according to Wadhwa.

One of the drivers of this R&D shift overseas is the rise of virtual prototyping. That ability to design and test machines on a computer has made design work more mobile. And engineers trained in the necessary software are plentiful in India. That's good, says Engardio, because these companies need "lots and lots of engineers."

Also integral to the shift of product R&D offshore is the focus on embedded software. Fifty percent of the value in new cars, for example, is in the dashboard, Engardio says. "There's a tremendous need for engineering and software expertise," he says, "and the Indian IT services companies like Wipro and Tata have that. They are now the biggest industrial design companies in the world."

The dynamic turns R&D offshoring into a slightly different numbers game. "If you want to keep up and have to introduce this kind of innovation and the myriad services you need to offer, it would be very difficult to do in the U.S. just due to workforce capacity issues," Engardio says.

Then there's the other reason R&D is increasingly headquartered in India and China: proximity to emerging markets. Cisco now has 2,000 people doing R&D in India. "The head of that center sits in an office and looks like a modern day Pharaoh with the scale of building under way around him," says Engardio. "He says in five years, they will have 10,000 people. And by the way, I'm not looking for average engineers. I want innovators. These are no cheap bodies." Why? He's not looking at the U.S. as his major market for product sales. He's looking at emerging technology greenfields markets like Dubai in the United Arab Emirates and Saudi Arabia. "All the new developments outfitted with next generation telecom networks we'll never see in the U.S.," says Engardio. "The next generation of services is going to be in Asia." So Cisco is situating the design work in India. "Is it going to work out?" asks Engardio. "Who knows? But it seems like the right bet."

Anything that a company's customer touches and feels will remain harder to offshore to India, China or anywhere else, says Engardio. And perhaps, most important, so too the innovation itself. The product ideas happen at headquarters and are executed elsewhere. "The only thing (India) isn't doing is owning the intellectual property. The multinationals are pulling the strings and staying at the top of the food chain, which is why the debate over whether this is good or bad for the United States is very, very murky," says Engardio, "The American companies have India working for us, in a way."

Will Ken Lay's Ghost Haunt Goldman Sachs?

Off-balance sheet financing...creative accounting...close connections to the White House...hyping junk as "good as gold" while selling it on the side: do these activities sound familiar? Of course they are--those were the symptoms of Enronitis that plagued the eponymous firm earlier in the decade. The late Ken Lay, Dubya's "Kenny Boy," was headed for the clinker before his untimely demise over such shenanigans including calling Enron stock a "bargain" while unloading it near the peak of the Enron hysteria.

Fast forward a couple of years and now we have one Goldman Sachs. The investment banking powerhouse is a giant not only on Wall Street but also in Washington. Many current and former Bushites, like Treasury Secretary Hammerin' Hank Paulson, are Goldman alumni. The firm was also Bush's fifth largest contributor during the 2004 presidential election. Meanwhile, the fate of subprime junk issued by Goldman and other Wall Street firms is the subject of endless chatter from here to Norway. Recently, Goldman Sachs surprised many in the financial community by reporting sizeable profits while the rest of its Wall Street brethren were eating dirt. The reason? The firm has been heavily shorting mortgage-backed securities. From an earlier report in Fortune:

Much of the focus is on Goldman's trading revenue, which totaled a spectacular $8.23 billion, up 70% on the year-earlier quarter. Part of that increase was due to a bold bet that made money if mortgage-backed bonds and financial instruments tied to mortgage values fell in price. Of course, because of the credit crunch, they did plunge in value, netting gains for Goldman that the banks said "more than offset" the losses it saw on the mortgages it was holding.

So what's the problem, you ask? It turns out that Goldman Sachs was, at the same time, one of the biggest issuers of mortgage-backed securities during recent years, including those with Paulson at the helm. Shades of Key Lay, again. Pump it up to others and bet on a price tumble at the same time. Fortunately for Goldman with its most recent earnings, its gains betting on mortgage security-related junk taking a tumble outstripped losses on those that it held. However, these activities raise the very same question posed by prosecutors to Ken Lay: why did you do the "pump and dump"? That's the question being asked by Ben Stein in a recent New York Times feature. Also, Goldman Sachs research is busy trumpeting a doomsday scenario over subprime which of course benefits the firm if more believe it:

But what leaps out at me from this story is that Goldman Sachs was injecting dangerous financial products into the world’s commercial bloodstream for years. My pal, colleague and alter ego, the financial manager Phil DeMuth, culled data from a financial Web site, ABAlert.com (for “asset-backed alert”), that Goldman Sachs was one of the top 10 sellers of C.M.O.’s for the last two and a half years. From the evidence I see, Goldman was doing this for years. It might have sold very roughly $100 billion of the stuff in that period, according to ABAlert. Goldman was doing it on a scale of billions even when Henry M. Paulson Jr., the current Treasury secretary, led the firm.

The Goldman spokesman would not comment on this except to note that other firms sold C.M.O.’s too. The point to bear in mind, as Mr. Sloan brilliantly makes clear [in this Fortune article], is that as Goldman was peddling C.M.O.’s, it was also shorting the junk on a titanic scale through index sales — showing, at least to me, how horrible a product it believed it was selling. The Goldman Sachs spokesman said that the company routinely shorts the securities it underwrites and said that this is disclosed. He noted candidly that Goldman is much more short in this sector than usual.

Here is my humble hypothesis, even after talking to Goldman: Is it possible that Dr. Hatzius’s paper [forecasting subprime gloom] was a device to help along the goal of success at bearish trades in this sector and in the market generally? His firm says his paper, like all of its economists’ work, was not written to support any larger short-trading strategy. But economists, like accountants, are artists. They have a tendency to paint what their patrons, who pay them, want to see...

Now, obviously, Goldman Sachs does many fine deals and has many smart, capable people working for it. But it’s not the Vatican. It exists to make money for the partners and (much farther down the line) the stockholders. The people there are not statesmen. They are salesmen.

To my old eyes, the recent unhappiness about mortgages and Goldman’s connection with them are not examples of sterling conduct. It is bad enough to have been selling this stuff. It is far worse when the sellers were, in effect, simultaneously shorting the stuff they were selling, or making similar bets...

Here is a query, as we used to say in law school: Should Henry M. Paulson Jr., who formerly ran a firm that engaged in this kind of conduct, be serving as Treasury secretary? Should there not be some inquiry into what the invisible government of Goldman (and the rest of Wall Street) did to create this disaster, which has caught up with some Wall Street firms but not the nimble Goldman?

When the Depression got under way, the government created the Temporary National Economic Committee to study just what had happened on the Street to get the tragedy going. Maybe it’s time for an investigation of just what Wall Street and Goldman did to make money as they pumped this mortgage mess into the economic system, and sometimes were seemingly on both sides of the deal. Or is Goldman Sachs like “Love Story”? Does working there mean never having to say you’re sorry?

It's going to be interesting if Goldman Sachs and Co. are investigated. Yes, Goldman may claim "research independence," but there's something underhanded about having your research arm literally trash products you've marketed--and make a gain by doing so. Making fools of your clients does not strike me as a wise long-term strategy for building customer loyalty. Clearly, there are many conflicts of interest issues at play. But that they are Goldman Sachs' interests may be a game-changing fact.

MI5 Warns of Chinese Internet Espionage

I have a sneaking suspicion that China's leadership is composed of closet Anglophiles with all these accusations of Chinese spying on the UK flying around. Does Comrade Hu warble Gilbert & Sullivan tunes in the shower? Or, does Comrade Wen have the complete DVD collection of Wallace and Gromit shorts? Remember, too, that former Chinese Commerce Minister Bo Xilai's son attends the exclusive private school Harrow. Hot on the heels of an accusation that China is using international students here in the UK as spies for the Communist Party comes yet another accusation that the Chinese are using the Internet to spy on British firms. MI5 chief Jonathan Evans has sounded the alarm. According to the Daily Telegraph article below, attacks traced to Chinese state organizations have occurred targeting British firms doing business in the Middle Kingdom, particularly those involved in physical and telecommunications infrastructure. Somehow, I think Brits are chuffed by all the attention Chinese spooks (or is that would-be spooks?) are paying to Blighty. The Empire may be long gone, but its "intellectual capital" lives on. There will always be an England...to spy on:

The Government has accused China of carrying out an internet spying campaign against vital parts of the economy, it has been reported. The head of the MI5 sent a letter to more than 300 senior executives at banks, accountants and legal firms earlier this week warning them of a web-based attack from Chinese state organisations.

The letter warns that British firms doing business in China are being targeted by the Chinese army, which is using the internet to steal confidential information to benefit Chinese companies. It is believed to be the first time the Government has directly accused China of involvement in such tactics and could cast a shadow on Gordon Brown's visit to the country in the new year.

A summary of the letter, signed by Jonathan Evans, the director-general of MI5, was posted earlier this week on the website of the Centre of the Protection of the National Infrastructure, an organisation charged with protecting the country's computer systems. It says: "The contents of the letter highlight the following: the director-general's concerns about the possible damage to UK business resulting from electronic attack sponsored by Chinese state organisations, and the fact that the attacks are designed to defeat best practice IT security systems."

The summary, which can only be seen by certain companies such as water, electricity and telecoms firms, adds: "The letter acknowledges the strong economic and commercial reasons to do business with China, but the need to ensure management of the risks involved."

It is suspected that Chinese organisations may have created special software designed to hack into the network of a company and feed back confidential information. Last night, no one from the Chinese embassy in London was available for comment.

Powering the Shipping Industry w/ Drrrty Fuel

The global shipping industry has not escaped scrutiny over its widespread use of bunker fuel to power its vessels. Bunker fuel is inexpensive but creates much pollution, laden as its emissions are with particulates as well as nitrogen and sulfur oxides. It is the low-grade stuff left over during the crude oil refining process. As you would expect, environmental campaigners and lawmakers are keen on reducing reliance on this dirty fuel, while industry players are more reluctant to move to less polluting but more expensive fuel sources. [See this graphic as well on the workings of "sailing smokestacks".] There's also a governance issue: is it better for maritime associations, individual states, or international conventions to set the rules on allowable emissions? As the volume of global trade increases, this pressing issue cannot be disregarded. From the Wall Street Journal:

As air pollution rises on the global political agenda, pressure is mounting on a largely hidden and proliferating source of dangerous emissions: the shipping industry. The corpuscles of the global economy, ships carry more than 90% of the world's merchandise by volume, and the tonnage of cargo sent by ships has tripled since 1970. Yet the fuel propelling them is cheap and dirty and produces an especially noxious exhaust.

Ships release more sulfur dioxide, a sooty pollutant associated with acid rain, than all of the world's cars, trucks and buses combined, according to a March study by the International Council on Clean Transportation. That study also found that ships produced an estimated 27% of the world's smog-causing nitrogen-oxide emissions in 2005. Only six countries in the world emitted more greenhouse gases -- which trap heat in the atmosphere, warming the globe -- than was produced collectively in 2001 by all ships larger than 100 tons, according to the study and United Nations statistics.

The global shipping industry is mired in an internal struggle over how to cope with its emissions problem, and no simple strategies have emerged for regulating the open seas. But demands for solutions are intensifying. Assertive governments and a few ports that wield substantial commercial power are proving that local action can reverberate internationally. Since Jan. 1, the state of California has required ships sailing within 24 miles of its shores to use cleaner-burning fuels in their auxiliary engines. Similar to a 2005 measure governing Europe's Baltic Sea region, the California law restricts access to America's two largest ports, Los Angeles and Long Beach. Ships that don't comply can be fined or impounded.

The prospect of authorities around the world adopting different standards for fuel and emissions worries many in the shipping industry. For commercial reasons, most ship owners and operators prefer burning less expensive, if dirtier, fuel when sailing outside a protected zone. Yet the procedures for switching back and forth between different types of fuel are complicated and potentially hazardous.

So a few of shipping's largest players are making an unprecedented proposal for a single, strict limit on sulfur emissions in all oceans. "The general population of the world would have to pay an extra one or two cents for their beer, but you'd solve the [sulfur] emissions problem," says Pradeep Chawla, an executive of Hong Kong-based Anglo-Eastern Ship Management Ltd.

Yet the ravenous appetite of consumers for imported goods is growing so fast that marginal cuts in emissions would likely make no difference. Even a 30% decrease in carbon emissions from ships could be offset by the expanding size of the world's fleet, says Russell Long, vice president of environmental group Friends of the Earth, a respected authority on the subject.

A U.N. study concluded that a 10% reduction in sailing speeds could cut ships' carbon-dioxide output by 23%. But slower speeds would likely prompt shipping lines to deploy more ships to satisfy their customers. "By adding vessels, you'd burn more fuel and generate more pollution, and the benefit of going slower might be canceled out," says Stanley Shen, a spokesman for Orient Overseas (International) Ltd., a shipping concern based in Hong Kong.

One big culprit is the industry's favorite fuel. Most ships rely on residual fuel oil, also known as bunker fuel, to power their huge engines. Bunker fuel is a tar-like sludge left over from the refining of petroleum. It often contains toxic heavy metals such as lead and vanadium and is collected from the bottoms of the distillation towers in which refineries process crude. Raw, unheated bunker fuel has the composition and consistency of asphalt. "You can walk on it," says Claus Jensen, the fleet manager at Torm, a shipping company based in Copenhagen.

It also is cheap. A recent spot price for intermediate-grade bunker fuel traded in Singapore averaged $505.50 a metric ton, less than two-thirds the rate of marine gas oil, a distillate similar to what diesel trucks use. "Ship owners have had a very cheap fuel that's packed with energy, and the refiners have had an outlet for their waste product," says Ian Adams, secretary-general of the International Bunker Industry Association, a group of firms that supply and trade bunker fuel. "Ship owners and refiners have had a perfect relationship." That synergy has come at a cost. This month, a peer-reviewed study in the American Chemical Society's journal Environmental Science & Technology estimated that underregulated air pollution from ships is causing 60,000 cardiopulmonary and lung-cancer deaths annually, mostly along trade routes in Asia and Europe.

At current rates of growth, oceangoing ships will generate 53% of the particulates, 46% of the nitrogen oxides and more than 94% of the sulfur oxides emitted by all forms of transportation in the U.S. by 2030, the Environmental Protection Agency estimates. That compares with levels for the same pollutants in 2001 of 17%, 12% and 49%, respectively, according to the EPA...

The U.N. agency that regulates shipping, the International Maritime Organization, has a membership of 167 fractious national governments, and its Marine Environment Protection Committee has been slow to make policy [hey, what did you expect from the UN?]. Part of the problem is that shipping representatives, oil companies and environmental groups alike lobby to influence committee decisions.

In addition, splits within the shipping industry itself can slow progress; ship owners, for example, have different priorities than firms that charter vessels for short periods. When the committee gathered in London in July, its working group on air pollution spent much of a three-day session discussing procedural details, including the punctuation in its final report, according to one of the group's participants.

The IMO's strongest move against air pollution was the adoption in 2005 of a 4.5% limit on the amount of sulfur allowable in marine fuel. That measure took 17 years for IMO members to debate and ratify, and by then the average sulfur content in marine oil had already decreased to half the 4.5% level. IMO spokesman Lee Adamson concedes that the agency has accomplished little so far to curb air pollution but predicts it will agree as early as next April to toughen standards. The IMO "is working to a timetable that's been developed and agreed by its 167 member governments," he says, adding that they have "looked at the [emissions] issue in all its complexities and understood its multifaceted nature..."

In the U.S., the EPA says it is developing new rules on ship emissions, including one that would apply some of the same standards to marine engines that it enforces already for train locomotives. The agency says it also has urged the IMO to tighten international controls, believing that a global consensus is the best way forward.

Others say the EPA is moving too slowly. California Sen. Barbara Boxer has proposed a bill along with fellow California Democrat Dianne Feinstein that would require ships within 200 miles of U.S. shores to slash the sulfur content of their fuel to a scant 0.1% by 2010. In October, Friends of the Earth weighed in with a lawsuit against the EPA seeking a similar low-sulfur coastal zone. EPA officials say they are considering such a zone in conjunction with Canadian authorities.

As it tends to be on environmental issues, California is out front. In early 2006, the commissions of both the Long Beach and Los Angeles ports held a series of public meetings to address ship-related pollution. Area residents who blamed their cancers and their children's asthma on smog from the ports showed up in force. "In the first meetings, they would come out and say, 'You guys are murderers,'" recalls S. David Freeman, president of the Los Angeles Board of Harbor Commissioners...

A 2006 California Air Resources Board study found that the Los Angeles and Long Beach ports generated more than one-fifth of all the diesel-particulate matter in Southern California in 2002. The smog from ships, trucks and cranes at the ports caused an estimated 29 premature deaths, 750 asthma attacks and 6,600 lost work days that year, the report said. In June 2006, the two ports jointly announced a $2 billion plan to slash harbor emissions by 50% over five years by targeting ships and the trucks that shunt freight to and from them. On Jan. 1, the Air Resources Board barred the use of dirty fuels within 24 miles of state shores. In about 60 random inspections of ships this year, officials have found only four violations.

Elsewhere, the cities of Seattle and Tacoma, Wash., and Vancouver, British Columbia, have agreed to ambitious targets to reduce air pollution from ships entering their ports by 2010. Sweden, Germany and several other countries along Europe's Baltic Sea turned it into a special zone where ships must cap the sulfur content of their fuel at 1.5%. In August, the European Commission expanded the 1.5% umbrella to include the North Sea and English Channel.

The imposition of local restrictions creates a dilemma for ship owners and managers. Many ships now carry different grades of fuel, switching between them as required at various points in a single journey. This practice, however, can be dangerous. If a ship tries to switch between fuels that are incompatible -- a common risk -- waxes in bunker fuel can separate out like "curdles in milk" and clog fuel filters, says Martin Cresswell, director and fleet general manager at China Navigation Co., a shipping line headquartered in London. Lighter components in incompatible fuels can turn into gas and cause a "vapor lock" that stalls the engine. Mr. Cresswell's nightmare is a big ship adrift without power amid the towering swells of a Force 10 storm at the crowded entrance to the English Channel.

The risks and impracticality of switching fuels have persuaded two big shipping groups to seek a radical solution. Both the International Association of Independent Tanker Owners, or Intertanko, which represents 70% of the world's independent tanker fleet, and the Hong Kong Shipowners Association want the IMO to require ships to give up bunker fuel and use only distillates containing no more than 1% sulfur -- far below the current 4.5% IMO standard.

The International Bunker Industry Association calls any proposal to replace bunker with distillates impractical. Oil companies say that if ships burned only distilled fuel, refineries would need to process roughly 12 million additional barrels of crude oil daily -- more than the entire output of Saudi Arabia. But Intertanko argues that if the IMO set a deadline for ships to adopt distillates, then refiners would have an incentive to invest in new capacity.

Japanese FinMin To China: Godspeed the Yuan

Well now it's official: all the G-7 countries are now on board the "China must revalue more quickly" train. At a just-concluded Sino-Japanese economic meeting, Japanese Finance Minister Fukushiro Nukaga prodded his Chinese interlocutors to make the Chinese renminbi revalue faster. This is kind of rich in that the Japanese yen has been languishing in value as of late--especially against the euro. Instead of intervention in the case of the yuan, though, the weak yen has largely been the byproduct of the dastardly carry trade. Still, presenting a united G-7 front may still count for something. Did Japan jump into the currency fray or was it pushed by the US and other G-7 members? I suspect the latter figures more heavily into the equation. From the Wall Street Journal:

Japan's finance minister Saturday asked China to let its tightly controlled currency rise at "the fastest possible speed," aligning himself with other Group of Seven leaders pushing for quicker appreciation of the yuan.

"As for the Chinese yuan, I asked [Chinese ministers] if they could take steps to let it rise at the fastest possible pace," Finance Minister Fukushiro Nukaga told reporters, after top-level economic talks between the two nations Saturday. Mr. Nukaga's comments underscore how China now faces similar pressure from all the G7 leading industrialized nations on its currency policy.

While Mr. Nukaga's commentary was soft in its tone, it was the most straightforward call for a stronger yuan ever made by Japanese officials. It also marked a sudden break with his previous approach. Until Saturday, Mr. Nukaga had kept mostly mum on the matter, even after the G7 as a group demanded faster yuan appreciation at its October gathering. A week ago, Europe also adopted a tougher, U.S.-style position on the yuan...

Chinese ministers said during the Sino-Japanese economic talks that they will work to increase their currency's "flexibility," according to Mr. Nukaga. Still, it remains to be seen whether China will carry that out in a way that would satisfy the G7. The yuan has risen around 12% since July 2005, when China revalued the currency by 2% and ended a decade in which Beijing kept the exchange rate pegged at around 8.3 yuan to the dollar. This year the yuan has gained more than 5%. But some analysts say the pace is slow, and the U.S. and Europe are urging Beijing to speed things along.

Japan's request for yuan gains, however, may have more to do with China's seemingly unhealthy economic boom that analysts say is partly traceable to Beijing's currency control. While Japan runs a deficit with the mainland China, the island nation's trade balance is in the black when its surplus with Hong Kong is taken into account. "China's stable, sustainable growth is extremely important for the Japanese economy," State Minister for Economic and Fiscal Policy Hiroko Ota said at a news conference with other Japanese ministers. China is Japan's largest trade partner.

"I've told them I hope they will stamp out the bubble by wiping out the excess liquidity (in Chinese markets) and have a stable, domestic demand-driven expansion continue," Ms. Ota said.

Economists say China's currency-market intervention is partly to blame for accelerating inflation, overheating growth and asset-price bubbles there. Some of the yuan sold by Beijing to mop up incoming foreign money to keep its currency weak has found its way into stocks, land and other investments, they say. Chinese ministers said they are aware of the heightening risks of domestic bubbles, according to Ota. They said they will "make efforts" to eliminate excess money in the markets by raising interest rates and reducing government spending, she said.

Creaky UN Building = Creaky UN?

Controversial former US Ambassador to the UN John Bolton once famously remarked that you could lop off the top ten floors of the UN building in New York and no one would notice in reference to the perceived bureaucratic sprawl and general ineptitude of the organization. In some ways, I too am critical of the UN for the very same reasons, although I am far more supportive of its various aims and goals--it's just that, yes, bureaucratic sprawl has led to general ineptitude there as various agencies mount petty turf wars handling basically the same things. That is, there is a large degree of overlap in what they do which could be addressed by merging many of these agencies. Have a look for yourselves at the alphabet soup of UN agencies.

Anyway, the UN is currently undergoing a bit of a change that may shake up the organization in ways to make it more streamlined and efficient. It turns out that while the iconic UN building still looks alright from the outside, it is crumbling on the inside. Can it be a metaphor for the UN itself--showing a brave face to the world but facing internal decay? Many unilateralists (like John Bolton) would probably agree, though I see it as an opportunity for organizational reform that really works. Instead of hiding out in the building's nooks and crannies, temporarily having to move out while remodeling and repairs are being carried out could place the various agencies in contact with each other more. Or, at least that's what one hopes. From the New York Times:

Cruise ships, barges, islands, tent settlements, a 30-story annex, a Wal-Mart-size building, even Brooklyn. All of them have been proposed by increasingly desperate United Nations officials as the place to locate thousands of employees and delegates while the organization’s stylishly timeless but dangerously antiquated 39-story headquarters are refurbished.

This decade-long search has ended now with a decision to begin a five-year, $1.876 billion renovation of the complex in the spring and to house the 2,600 people who must move out in rented space in Manhattan, across the East River in Long Island City and a temporary conference building on the United Nations campus.

The 55-year-old steel and glass Secretariat tower and its companion General Assembly Hall, sleek and shapely icons of postwar modernism, still look smashing from the outside, but their interiors are not wearing their years as well. Periodic surveys have cited asbestos insulation [!--it's a wonder no one's sued the UN over this as far as I know], lead paint, outmoded plumbing and electrical systems, lack of sprinklers, frequent power shutdowns and leaking roofs.

Those failings are serious, as Mayor Michael R. Bloomberg underlined in October by demanding that the organization immediately improve its fire safety plans with sprinklers, smoke detectors and exit signs or he would prohibit visits by city students to the building and alert the public to the danger. The United Nations has pledged to make the adjustments in the coming months.

But there are also quaint reminders of just how dated the installation is. Many of the companies that made the internal machinery have gone out of business, so the United Nations has its own shop to make replacement parts, and the originals are prized by industrial museums. On the 28th floor, a padlocked room housing electrical transformers has a “High Voltage” warning sign on its door that advises, “In case of necessity, call MUrray Hill 2-4477.” New York abandoned name telephone exchanges three decades ago.

The elaborate rehabilitation plan, which the General Assembly is expected to approve soon, is the third in a decade. Like many other urgent items on the United Nations agenda, the mission has met with repeated delays. Hesham Mohamed Eman Afifi, an Egyptian diplomat, said at budget committee hearings last month that the only element of the project that had stayed on schedule was the periodic bill received by member states.

The first plan was halted in 2005 when the New York State Legislature, angry about diplomats’ unpaid parking tickets, mismanagement of the Iraq oil-for-food program and what lawmakers viewed as the United Nations’ anti-Israel bias, refused to pass enabling legislation to construct a new annex on an underused city playground next door. The second was abandoned a year later after its architect, Louis Frederick Reuter IV, a veteran of large project management in New York, grew tired of fighting persistent objections from Congress and United Nations bureaucrats. He resigned.

The author of the new plan is Michael Adlerstein, 62, an affable Brooklyn-born former National Park Service architect involved in the preservations of Ellis Island, the Statue of Liberty, the New York Botanical Garden and the Taj Mahal and a man with 20 years of experience dealing with lawmakers in Washington. “I think there is now a general tone that I have found of total support to get this thing done,” he said. “I’ve been dealing with many of the member states on a one-to-one basis — the U.S. one of them — and I have found nothing but support.”

He is unfazed by the problems that have plagued past plans. “I took the job because it’s an ideal challenge for an architect at this point in my career,” he said. “It’s an iconic building of great stature in the world. You can show a picture of this building to people in remote, rural locations in the world and everyone will know it.”

While the famous exteriors will be unchanged, the insides will be brought up to 21st century standards of efficiency and security and reconfigured to consume 40 percent less energy. The glass curtain wall will be replaced by a heavily laminated one that appears identical but is far stronger and able to withstand the blast of a bomb attack. Energy-saving additions include sensors that turn off lights in unoccupied rooms and solar power systems.

“Ten years from now there will be no way to tell that the U.N. was renovated unless you look at the Con Ed bill,” Mr. Adlerstein said. He said that he was well aware of the bribery scandals that have scarred the reputation of the United Nations procurement department but that Skanska, the Swedish company that is the construction manager, an his own people would make sure nothing like that recurred.

“Skanska has its audits,” he said. “We have our own audits. There are several different levels of oversight to make sure this is done right. It will be done right. There’s too much money at risk here not to do it right.”

The cost of the project will be borne by the 192 member states in supplementary annual dues over the five-year period, with the United States responsible for 22 percent, or $413 million. The United Nations has leased office floors in a building at 305 East 46th Street and is negotiating for space nearby and in Lower Manhattan and Long Island City. Impatience comes slowly to the United Nations, but the timing seems to be right for Mr. Adlerstein. “The only question I get now,” he said, “is ‘You’re not going to leave, are you?’”

PETA Takes on Mitsubishi Fried Chicken

Here's a somewhat lighter story for the weekend after yet another week filled with international economic strife and turmoil. It partly concerns the resurgence of the infamous "Curse of the Colonel" in Japan. You might not be aware of the fate of the Japanese baseball team the Hanshin Tigers. In 1985, the perennially underperforming Tigers inexplicably went on to win the Japan Championship Series, the first and only time it has done so. Rabid Hanshin Tigers fan had (have?) a tradition of celebrating their team's success by jumping into the nearby, heavily polluted Dotonbori River. As they sing the team fight song, they call out each player's name, and the fan whose likeness most resembles that of the player called jumps into the river. After winning the championship, fans were celebrating in understandably high spirits until they called out the name of Randy Bass, an American with MLB experience who was the reigning Japanese league MVP. Unsurprisingly, no one in the crowd resembled the bearded, Caucasian player.

The nearest thing Tigers fans could spot that resembled Randy Bass was a nearby plastic replica of one Colonel Sanders at a Kentucky Fried Chicken restaurant. In their excitement, they chucked the good colonel into the Dotonbori. The day after, the polite Japanese fans realized their excesses and apologized to the KFC store owner, vowing to fish the good colonel out of the Dotonbori and return him to his rightful place peddling chicken to Japanese diners. Unfortunately, the colonel was never found. For eighteen straight years afterwards, the Tigers recorded losing seasons. Up to now, the team has yet to return to the Japan Championship Series. And thus a curse was born that's far more hilarious than anything the Chicago Cubs have had to endure.

This brings me to the current manifestation of the curse on KFC. Japanese zaibatsu (conglomerate) Mitsubishi has decided to acquire a larger stake in the Japanese operation of KFC. Before being able to do so, though, Mitsubishi has been cursed by attention from the US-based animal rights group People for the Ethical Treatment of Animals (PETA). The group is famous for making publicity stunts to get its message across, and this current battle for chicken supremacy has made some waves in Japan. While I am, on the balance, sympathetic with some of PETA goals of more humane treatment of animals, its methods are sometimes questionable. In any event, the "Curse of the Colonel" seems to cut both ways at the baseball franchise and the chicken franchise as well. From Singapore's Straits Times:

Japan's largest trading house on Wednesday rebutted a request by animal rights activists to reconsider its plan to take a controlling stake in the Japanese operations of Kentucky Fried Chicken (KFC). The US-based rights group People for the Ethical Treatment of Animals (Peta) wrote a letter to Mitsubishi Corp. urging it to reconsider its plan to spend US$120 million dollars (S$ 173 million) to take control of KFC Japan.

KFC has become one of Japan's most popular fast-food chains since it first established itself here in 1970, marketing itself as a 'traditional' US food for holidays and many Japanese buy fried chicken on Christman Eve. But Peta accuses KFC suppliers of mistreating chickens.

'KFC's suppliers force chickens to live in filthy conditions where many suffer ammonia burns on their skin as well as crippling injuries from being bred to grow so large so fast that their weak legs cannot support their massive upper bodies,' Peta director Jason Baker wrote in the letter, which was given to media. 'They scald millions of birds alive in feather-removal tanks and cut the throats of billions of birds while they are still conscious,' he added.

Mitsubishi said there were no plans to withdraw the tender offer. 'I'm not sure whether (Mitsubishi) and Peta have a common understanding of the issue,' said a company spokesman. Mitsubishi already has a stake of 31.11 per cent in KFC Japan and plans to buy an equal sized stake from US-based KFC, a subsidiary of Yum Brands. Mitsubishi Corp also distributes chickens and other ingredients to the 1,500 restaurants in Japan of KFC and Pizza Hut, which is operated by KFC.

KFC dismisses Peta's claims of chicken cruelty and says it has undertaken studies to ensure that its suppliers use the most humane form of slaughter. The US-based rights group is famous for its publicity stunts in campaigning for animal rights. Last month it launched a successful campaign to persuade Miss Universe - Japan's Riyo Mori - to stop wearing fur.