Post-Subprime: A Bloodbath in Trader Bonuses

♠ Posted by Emmanuel in at 3/31/2008 01:28:00 AM
Ladies and gentlemen, rest assured that I do not read the British lifestyle magazine Trader Monthly on a regular basis. Imagine a combination of Forbes, Stuff, and GQ and you can probably imagine its contents. While visiting a rather well-to-do relative, however, I came across this particular magazine. Something that caught my attention among the endless articles about shorting housing stocks, £40,000 wristwatches, and £3,000 power suits [what, there are women traders?] was a 2007 Bonus Survey projecting "average compensation levels for top-performing trading professionals at major banks globally, based on the best information available." The results, while unsurprising, are interesting for a number of reasons.

Let's begin with the new dregs of the trading world, those who trade mortgage-backed securities:
Bonuses are down across the board for these folks in 2007. In the meantime, all isn't hunky-dory for those who need to package these mortage-backed securities and the like into collateralized debt obligations and other sorts of weapons of financial destruction:

Things ain't too hot either in asset-backed securities or collateralized mortgage-backed securities (for commercial real-estate):

So in what asset classes are traders doing well? According to the survey, investment grade traders are doing well as folks flee subprime-related riffraff. Emerging markets ain't doing too badly, either (see the online article for more). However, the ones who take the cake are, drum roll please...the commodities traders. As if that's any wonder:

I very much suspect that layoffs will hit more traders in the first three asset classes mentioned above sooner or later. Better buy a metal detector and hunt for gold, Charlie, like those crazed Californians.

Climate Change Investing Ain't Too Hot, Eh?

♠ Posted by Emmanuel in , at 3/31/2008 12:40:00 AM
The Bjorn Lomborg "global warming doesn't matter" set may be pleased by this news. While perusing today's edition of the Wall Street Journal, my eye was drawn to an ad asking me to dress up Zwinky for a global warming investment fund. Apparently, DWS Scudder, an asset management subsidiary of Deutsche Bank, has just set up a fund whose cause celebre is global warming. Call it an offshoot of the oh-so-trendy socially conscious investing. (Do view the slick videos about the DWS Climate Change fund if you've got the scratch.) Anyway, the fund info sheet has this to say about why future opportunities are plentiful in this area:
  1. Due to scientific analysis, governments are regulating, creating economic and business opportunities;
  2. Carbon prices are emerging and are central to the whole process;
  3. Some corporates will take action on competitive and reputational grounds;
  4. New technologies will play a central role in mitigating the problem;
  5. These all interact with each other to create a dynamic pool of investment opportunity.
The rationale sounds pretty good to me, and the chart above depicting investment opportunities (click for a larger image) seems straightforward. However, the fly in the ointment is this particular fund isn't doing very well at the moment. In fact, it is underperforming the benchmark MSCI World Index. So, what's the lesson here? These are a handful of possible explanations:

  1. The portfolio manager has not selected the "best performing" green firms;
  2. While climate change-conscious firms will do better in the long run, short-term returns are volatile;
  3. It doesn't pay to be green.
The first explanation is indeed possible. However, the film clip mentioned above suggests that the second one is more at work, as you would expect. Meanwhile, the acolytes of Lomborg would probably take the third. In any event, this particular fund has only been open since September 2007, so it will take some time to establish a long-run pattern. Besides, there a whole lot of other funds touting similar socially responsible credentials so this sample of n=1 isn't exactly representative. Perhaps in a downturn of this severity everyone will get hit--the good, the bad, and the ungreeny.

The Next Real-Estate Bubble is in Farmland

♠ Posted by Emmanuel in at 3/31/2008 12:14:00 AM
Call it Emmanuel's Bubble Theory: the popping of one bubble eventually begets another bubble. The implosion of the dot-com bubble led to interest rates being cut, thus giving rise to the housing bubble. Now that the latter is fast deflating and interest rates are again being cut to soften the blow of an oncoming recession, where are we (or at least the US) headed? I'll put my money on a new farmland craze that's taking shape. The reasons for this new craze are simple and require little explanation: First, growing prosperity overseas--especially China and India--ensures a steady source of demand for farm produce in yonder lands. Second, the biofuel craze--fueled in large part by government incentives--makes investment in agriculture a seeming sure-fire bet. Third, historically low interest rates have been mooted by the likes of Jeffrey Frankel as a mechanism for making commodities relatively more attractive. The end result is rising prices for agricultural lands. However, this Reuters article also points out that just as the owner-renter ratio got out of whack in the US housing market, so too is the ratio between the cost of farmland and the rents obtained from farmers. Interesting stuff...
Investors who have never sat behind the wheel of a tractor are helping drive the price of U.S. farmland to record levels, attracted by its assumed safety following the meltdown in mortgage-related securities and excited by the potential of plant-based biofuels. But is agricultural land really a good long-term investment? Or could the rush into rural real estate be just another Wall Street craze -- one that ends like the Internet and housing manias that preceded it?

An analysis of rents -- a key measure of U.S. cropland values -- suggests the returns investors can expect from farmland are not only substantially below those available in the stock market but in a long-term decline to boot. That disconnect -- between fast-rising farmland prices on the one hand and fast-falling returns from farmland rents on the other -- has some growers and government officials worried a bubble may be forming, one similar to the one that took hold 30 years ago and left rural America reeling once it popped.

Iowa Bank Superintendent Thomas Gronstal is among those concerned. "Current agricultural conditions," Gronstal told lawmakers in U.S. Senate testimony on March 4, "are reminiscent of conditions experienced in the 1970s, which led to the economic and financial collapse of the 1980s." Gronstal said soaring crop prices made "the agricultural sector look strong." But he warned that retreats in those prices could have an immediate and devastating effect on land values. "If there has been too much leveraged or loaned against the inflated value of farmland, the bubble will burst and we will once again experience an economic crisis similar to that of the 1980s," Gronstal said.

Over the past decade, the average price of an acre of U.S. cropland has doubled, according to the U.S. Department of Agriculture, from $1,340 in 1998 to $2,700 in 2007. Last year alone, average prices nationwide jumped 13 percent. Several factors are driving the increase. Farmers are scrambling to ramp up production to take advantage of record prices for many crops -- from corn to soybeans to wheat.

Big city investors, meanwhile, have also gotten in on the act, optimistic that a government push to commercialize biofuels like ethanol is fundamentally altering the rural landscape. But while land prices have surged, cash rents -- the price that landowners charge farmers who work their land -- have failed to keep pace. Last year, according to U.S. Agriculture Department data, average cropland rents rose just 7 percent to $85 an acre. Over the past 10 years, the data show, they've only risen 28 percent.

As a result, rents as a percent of cropland value -- a metric akin to the earnings yield on a stock -- have declined over the past 10 years nationwide, from about 4.96 percent in 1998 to 3.15 percent last year. (By comparison, from January 1926 through December 2007, the annualized total return for the S&P 500 was 10.4 percent per year.) So while the cost of U.S. farmland is rising, the real returns that land generates have fallen.

If that disconnect between purchase price and rents doesn't sound eerily familiar, it should. In 2002, several years before the U.S. residential housing bubble popped, Ed Leamer, an economist at the UCLA Anderson Forecast, warned that the run-up in house prices in some markets had already reached unsustainable levels because prices were rising faster than rents.

Indifference to the relationship between price and earnings on any asset, Leamer said, "is the same error that Wall Street analysts made during the Internet Rush when they imagined that the New Economy changed the rules and created a fundamental disconnect between corporate earnings and stock prices. "We know differently now," Leamer said.

Investors bullish on farmland say, essentially, that things are different because the world is in the midst of an unprecedented agricultural supercycle, driven by growing food demand and wealth in the developing world and a U.S. government mandate for plant-based alternative fuels. Rents, they say, which typically lag changes in land values, will catch up. "Purchase prices have been going up faster than rents," said Iowa State University economist William Edwards. "But I think we're going to see a pretty big push on rents this year."

But rents will have to be pushed pretty hard to get them back to levels seen even five years ago. With other costs rising, including fertilizer, seed and farm equipment, it's difficult to see how land owners make such hikes stick. Ominously, it's growers who seem most worried about the surge in farm prices.

When Iowa State canvassed farmers recently as part of its annual land value survey, it reported that many respondents "expressed a great deal of concern that land values were too high and that the market might be due for a correction." And this week, a survey of farmers by the University of Illinois found "people looking over their shoulder," according to the report.

The California Gold Rush Circa 2008

♠ Posted by Emmanuel in at 3/30/2008 02:10:00 AM
This article from the Financial Times had me thinking a bit. Regardless of what the cause of rising commodity prices is--a slumping US dollar, strong demand from fast-growing Asian economies, an extended period of low interest rates, or a combination of all three--laws of supply and demand are taking effect as gold diggers of the non-figurative variety are going to California with an achin' for the precious metal. Go west, young speculator, go west:

It has been almost 160 years since the first California gold rush but, with prices hitting record highs, prospectors are once again flocking to the state’s rivers and deserts in search of the precious metal. Gold’s ascent – prices crossed the $1,000 an ounce barrier this month and remain well above $900 – has sent sales of mining equipment soaring.

“There’s been a dramatic change . . . our sales have risen four-fold in the last three months,” said Harrigan McGregor, owner of, an equipment retailer in northern California. “This is the second big California gold rush. We’ve had a lot of phone calls from people who are quitting their jobs and prospecting full-time.”

The growth of prospecting by individuals has been accompanied by a sharp increase in commercial mining activity. Commercial claims, most of which involve gold mining, rocketed to 2,274 in the first quarter of this year, up from 132 in the same period of 2005, the Bureau of Land Management says.

Roger Haskins, senior specialist for mining law at the BLM, said the high price of gold was “obviously driving [mining] activity up tremendously. We have a market imbalance at the moment and there’s more demand than supply,” he added. “Gold sits in a little niche because it’s speculative . . . People buy it as a hedge for the future.”

Membership in the Gold Prospectors Association of America “has tripled in a very short space of time”, said Corey Rudolph, an official of the southern California-based group, which organises events for recreational miners.

The hotspot is a 320km strip known as the Gold Belt, or “Motherlode”, which runs near Highway 49 (named for prospecting “49ers” of the 19th century) and the Sierra Nevada mountains. Mr Rudolph said 5-10 per cent of available gold had been mined. “There’s still a lot of gold out there for the smart guys.”

The market in second-hand gold is also booming, with southern California pawnshops reporting increased trade as people sell unwanted gold items. Depending on the quality, these items can be refined and resold. However, Mr McGregor said raw gold can fetch even higher prices. “If you find a nugget larger than your pinkie finger, it could sell for up to 30 per cent more than the spot price.”

That's Progress 2: Cubans Can Own Cell Phones

♠ Posted by Emmanuel in , at 3/30/2008 12:56:00 AM
Whoa, Cuba's new Maximum Leader Raul Castro is making all sorts of socioeconomic advances that would fill the heart of a Taliban mullah with rage. After lifting a ban on owning DVD players and assorted gringo consumerist filth, the Cuban authorities are now in the process of allowing ordinary citizens the privilege of wielding cell phones. Who knows what will follow this consumerist revolucion. From the Guardian:

The Cuban president, Raúl Castro, today lifted restrictions on ownership of mobile phones. Castro's move was another indication that he is prepared to grant more freedom to the island's residents. The right to own mobile phones had been restricted to the employees of foreign firms or those holding key posts in the communist-run state.

Some Cubans had evaded the ban by asking foreigners to sign contracts in their names, but mobile phones remain relatively uncommon in Cuba compared with the rest of the world.
Castro - who formally assumed power from his brother, Fidel, in February – promised in his inaugural speech to ease some of the restrictions on daily life within weeks. He pledged "structural changes" and "big decisions" in the near future.

An internal memo, leaked to Reuters earlier this month, suggested Castro intended to lift restrictions on the ownership of electrical appliances including DVD players and computers, although no mention was made of mobile phones.

Last week, the Cuban government lifted its ban on farmers buying their own supplies in an attempt to improve agricultural production. All supplies had been previously been assigned by the central government, but small-scale farmers on some parts of the island are now permitted to buy such items as seeds, fertiliser and clothing equipment from state stores.

Such changes have been viewed as evidence that Castro is prepared to make concessions to residents, albeit in the context of a one-party state. Days after Castro was sworn in as president, Cuba signed two legally-binding human rights agreements, forming part of the Universal Declaration of Human Rights, at the UN in New York.

He has also held talks with the Vatican's leading diplomat, Cardinal Tarcisio Bertone, who is seen as a potential emissary between the US and Cuba.

Fearful of HillaryCare? Try al-SadrCare

♠ Posted by Emmanuel in at 3/28/2008 02:03:00 AM
Many in the United States fear that the election of a second President Clinton may mean the resurrection of HillaryCare. Well, there is something out there that is much more frightening because it's, well, real. For some reason I can't recall, I was led to the pages of USA Today and this article on "Sadrists' Grip on Iraqis' Health Care Takes Toll." What you have here is a situation in which the health ministry as well as the main importer of medicines is run by Muqtada's acolytes. It just furthers my conviction that the illusory gains made by the US in Iraq as of late have been bought by paying protection money to various groups who would like nothing else than kick the "crusaders" out. Awakening [to the payoff] Councils,'s all bound to end in disaster. So, American voters, keep in mind that there are much, much worse things than HillaryCare:

A 6-foot-wide picture hanging at the front gate of Iraq's Health Ministry removes any doubts about who runs the place. The photo is of the father and uncle of radical Shiite cleric Muqtada al-Sadr, both of whom were religious leaders killed by Saddam Hussein's regime. Employees of the ministry, many of whom are loyalists to al-Sadr, pass their images every day as they go to work. Al-Sadr's ironclad control over Iraq's health system and other key ministries has come under renewed scrutiny following recent clashes between his Mahdi Army militia and the Iraqi army.

Under the influence of the militia and other Sadrists, Iraq's hospitals and clinics have been at the center of some of the country's worst sectarian violence, although recent improvements in security nationwide have made Iraqis less afraid to seek medical attention. Doctors such as Haydar al-Kawaz, the director of the emergency room at Baghdad's Yarmouk Hospital, say that security has slowly improved even though sectarian divisions have not disappeared. "If you come calm and you're not shouting political slogans, it will be safe," al-Kawaz said. "But if you say, 'I am from this group or that group,' it is not safe still."

The Health Ministry has been under al-Sadr's control since 2005, when his political party gained more seats than any other group. His ensuing decision to staff the Health Ministry with his loyalists provided al-Sadr with a critical boost to his reputation among his followers, said Agron Ferrati, the Iraq director for the International Medical Corps, a non-profit group. "It was a brilliant move," Ferrati said. "Provide medicines, doctors and services, and you become a hero in your society."

During the height of Iraq's sectarian violence in 2006, many Sunni patients avoided hospitals they knew were Shiite-controlled, fearing they'd be targeted by al-Sadr's militia. Militia members frequently used ambulances to ferry around weapons instead of patients.

Al-Sadr's control over Kimadia, the state-run company that is responsible for importing and distributing drugs and supplies to Iraq's hospitals, also poses problems, Ferrati said. "Kimadia has a stranglehold on the whole medical sector, and that is a source of power through which Sadr can control the health sector and threaten the country," Ferrati said. "If they decide to stop working, then you cut off all the drugs into Iraq."

The cleric's followers have reacted harshly when their power was threatened. When one hospital challenged Kimadia's monopoly by importing drugs on its own, someone planted a rumor that the drugs were infected with HIV, sending panic through the community, said Hilal Shawki, a cardiologist.

The turmoil in the health sector, plus an open campaign by militants to target trained professionals, has severely damaged Iraq's ability to care for its sick. Since 2003, 2,200 doctors and nurses have been killed, and 250 more have been kidnapped, according to a report published last week by the International Red Cross. Of the 34,000 doctors registered in 1990, at least 20,000 have left the country.

That has left fewer doctors to tend to more patients, and Yarmouk Hospital treated an astounding 45,000 patients last year, said al-Kawaz, the emergency room director. It's now 90% safe to come to Yarmouk Hospital, al-Kawaz said. Of course, that means it's also 10% unsafe, he acknowledged. "I am wearing jeans and a T-shirt, which means I am hiding from something," the unshaven 37-year-old said. "I dress like an assistant so I will not stand out. Being a doctor here threatens our lives."

Lyndon LaRouche's Take on Neoliberalism's End

♠ Posted by Emmanuel in , at 3/28/2008 01:39:00 AM
Conspiracy theorists of all stripes will welcome this latest work from the acolytes of Lyndon LaRouche. The man has "run" for the US presidency continuously without any apparent success. In some ways, his jail time is more memorable to many than his forgettable electoral exploits. Nevertheless, while LaRouche has decided to sit out the 2008 campaign, his Executive Intelligence Review is still putting out all sorts of, ah, interesting stories. This sample purporting "The End of the Line of the Anglo-Dutch System" makes for entertaining if not quite accurate reading. It is beyond me how a drastically weakened Britain at the end of WWII set out to "systematically the American economy" by undermining the Bretton Woods system. Wouldn't such a weakened country have a similarly degraded bargaining position? Nor is it explained why the British Bretton Woods delegation led by John Maynard Keynes of all people would be more keen on "neoliberal" principles than his American counterpart, Harry Dexter White. Ah, but why quibble about historical accuracy when you can do creative writing? In any event, it makes for an interesting contrast to the Financial Times writers' thoughts, to say the least:

During July 1944, a United Nations Monetary and Financial Conference was held at the Mount Washington Hotel in Bretton Woods, New Hampshire. The 44-nation conference established what became known as the Bretton Woods monetary system, a key component of which was the establishment of a fixed system of currency exchange rates among nations. Under Bretton Woods, a gold reserve standard was established, with the U.S. dollar pegged to gold at $35 an ounce. This arrangement was the economic bedrock upon which the post-World War II world was rebuilt, led by the industrial might of the United States.

Bretton Woods was a victory for President Franklin Roosevelt, and his view that the post-war world should be free of empires and their colonies. FDR intended to use the power of the United States and other nations to elevate the status of the common man worldwide, and end the domination of the economic royalists. It was a grand vision, and had he lived to implement it, the world would be in far better shape than it is today.

The British were apoplectic at the prospect of a Rooseveltian/American System world, and pulled out all the stops to defeat it. With the death of Roosevelt in 1945, and the ascension of Harry Truman, the empire struck back. The fear of a Soviet attack and the spread of communism was used to create a Cold War environment, under which the British empire became the top strategic ally of the United States, and FDR's grand vision was swept away. In the name of fighting communism, Truman and his Anglophile controllers sold FDR and America down the river. (The parallels to today's "war on terror" should not be missed.)

The British set out to systematically dismantle the American economy, as a way of restoring their own dominance in the world. They had to move slowly, because the memory of FDR and what he had done for the nation was fresh in people's minds, as were the abuses of the economic royalists he had fought, and because the American people would fight back if they understood what was planned.

One of the biggest obstacles to their plan was the Bretton Woods system, and the stability it provided to the U.S. and the global economy. For the British plan to succeed, Bretton Woods would have to be eliminated...

As the speculative bubble came to dominate the U.S. and world economies, feeding it became paramount. Among other things, this led to a sharp run-up in real estate values, to provide "wealth" which could be turned into mortgage debt, and then into a wild assortment of securities to be used, with lots of leverage, to play in the derivatives markets. To keep the mortgage-debt flowing, as prices rose into the stratosphere, the bankers repeatedly loosened the requirements for home loans. This process, which was driven by the banks and the derivatives market, ultimately exploded. This was falsely portrayed as a "subprime" crisis, but in reality it was the death throes of the financial system itself...

It has taken 37 years for the process set into motion by Richard Nixon in 1971 to destroy the global economy. During that entire period, LaRouche and his international political movement have been a consistent voice for reason, organizing in the streets and in the halls of government for a return to the sound economic policy of the American System, and an end to Anglo-Dutch Liberalism.

We have now reached the point where all of us must decide: Do we go back to what works, or do we descend into fascism and chaos, and a new Dark Age? That is the question we ask you to keep in mind, as you read the following reports.

A Petition to Restrict Capital Flows in the EU

♠ Posted by Emmanuel in at 3/28/2008 01:23:00 AM
If you are an A-1 member of the anti-globalization set, consider signing up to this petition below to bar finance from "destroying society." Actually, I am relatively unperturbed by the usage of capital controls. In a number of instances, they may be useful in helping spur economic development. However, the idea that going back to a mythical pre-globalization age would somehow turn back the tide on financial manias, panics, and crashes is rather unlikely. The record of history indicates that even in a world where capital had nowhere near the mobility it has now, there were recurrent crises. Somehow, I do not think this will do the trick, but you may think otherwise and sign up yourselves. I've made an extended comment on Martin Wolf's blog on this very same topic. Anyway, here is the statement:

Freedom for finance is destroying society. Every day, in both North and South, shareholders silently pressure firms and workers to extract higher and higher returns. The situation becomes dramatically visible when major crises display the excesses of speculative greed and its backlash on growth and employment. Lay-offs, precarious work, deepening inequalities: workers and the poor suffer most from both the speculation and the toxic effects of subsequent financial collapse.

During the last two decades, world finance has brought little but crisis: 1987: stock market crash; 1990: housing crisis in the US, Europe and Japan; 1994: US Treasury bonds crash; 1997 and 1998: international financial crisis; 2000-2002: the internet bubble bursts; and now 2007-2008: the subprime mortgage crisis spilling over into sector after sector and possibly becoming a major global financial crisis.

We refuse to wait passively for the next crisis to occur and to endure any longer the enormous inequalities fuelled by market finance and the dangers it creates for everybody. Because instability is intrinsic to financial deregulation, calls for greater “transparency” or “morality” are worthless and can have no effect, much less prevent the same causes from leading to the same outcomes. Ending the speculative scourge requires radical change in the rules of the “game”, namely those of the financial structures themselves. Any such project is, however, immediately thwarted in the European Union by the outrageous protection granted to deregulated financial liberalisation via the treaties.

As European citizens, we therefore demand the abrogation of article 56 of the Lisbon Treaty which forbids any restrictions on capital flows and thus sets the perfect conditions for the overwhelming hold of finance on society. We also call for restriction of the freedom of establishment (art. 48), leaving capital free to migrate wherever conditions are most favourable and financial institutions free to seek asylum in the City of London or anywhere else they choose.

If “freedom” merely means the right of the dominant power, in the present case finance capital, to suppress the rest of society, we deny that freedom and call, rather, for the people’s right to live free from the tyranny of profit.

Here We Go Again: The Day Neoliberalism Died

♠ Posted by Emmanuel in , at 3/27/2008 04:20:00 PM
Love 'em or hate 'em, you must acknowledge the consistently pro-market outlook of the Financial Times. Yet, here are two recent op-eds by FT stalwarts in response to Deutsche Bank CEO Josef Ackermann stating "I no longer believe in the market's self-healing power." Well, I for one never did. Both authors specifically mention the Fed bailout of Bear Stearns as a turning point. For all the disagreements I have with one Karl Polanyi--a folk hero of the anti-globalization set--I do agree with him that the self-regulating market (SRM) is a myth. Furthermore, the invisible hand trope of Adam Smith has been tortured to mean that market mechanisms have a built-in self-correcting mechanism. (As an aside, visit Gavin Kennedy's blog to disabuse yourselves of the "Chicago School" iteration of the invisible hand. Or, better yet, read his book on the topic.) Well, current events seem to question the validity of those neoliberal leanings.

Let us begin with Michael Skapinker on why the Reaganite / Thatcherite revolution may have run its course in the wake of the subprime debacle:

The US Federal Reserve is providing a $30bn safety net to engineer the fire sale of Bear Stearns to JPMorgan Chase and who knows how many more rescues there are to come? The British government has nationalised failed mortgage lender Northern Rock. This is a remarkable change after three decades in which the market appeared to be the answer to everything.

Facing defeat to Margaret Thatcher in 1979, James Callaghan, then UK Labour prime minister, observed that there were times when the tide of ideas shifted and there was nothing anyone could do about it. “I suspect there is now such a sea-change – and it is for Mrs Thatcher,” Callaghan said then. Mrs Thatcher’s victory, followed by the election of Ronald Reagan as US president a year later, set off a period of deregulation, privatisation and enterprise that greatly enriched both their countries, influenced policymakers everywhere and, thrillingly, swept away the moribund communist empire. When Reagan said “the nine most terrifying words in the English language are ‘I’m from the government and I’m here to help’,” people laughed appreciatively in many languages.

Government ownership of industry began to look as archaic as leeching and bloodletting – relics of an age when people knew no better. Private enterprise, competition, consumer choice – these were the ways to organise economies. If one company was not providing decent goods and services at competitive prices, another one would. Competing enterprises came up with better ideas. Government provision, by contrast, produced queues and shortages.

Tony Blair, former UK prime minsiter, insisted the Labour party scrap its commitment to nationalisation. Only marginal malcontents ever talked about restoring it. This is why Gordon Brown dithered before taking Northern Rock into public ownership, even though his government had guaranteed the bank’s savings accounts – and thereby the savings accounts of every British bank, because if Northern Rock could not be allowed to fail, neither could the others.

Even before the current financial crisis, there were hints that a hands-off approach by government was perhaps not the only way to organise an economy. Russia was not much of an advertisement for a state-controlled economy, but China’s government-administered capitalism appeared to be doing fine. The purchase of chunks of western companies by sovereign wealth funds was a worrying sign that governments were buying their way back into free market economies.

And now we have the great financial unravelling – with governments and central bankers playing a role for which past decades have left us unprepared. Many people remember what Callaghan said about the sea-change in ideas. Fewer remember his observation that these changes seemed to happen every 30 years or so, or that he said that 29 years ago.

So what sort of change might be we witnessing? If the Thatcher-Reagan era is at an end, what might replace it? Trawling leftwing and far-left websites is instructive, because they clearly have not got a clue either. They are not demanding the nationalisation of the banking system, perhaps because that has already happened, either explicitly or implicitly. But they do not seem to be calling for anything else…

However this ends, and however widespread the damage, most of our economies will remain in private hands. There is still no better way to apportion and price our goods and services. There will, on the other hand, be better ways to regulate and police our financial services industry. There will have to be. But the triumphalism of the past 30 years is over. The market is no longer the answer to everything. It certainly does not heal itself.

Now, let us move to the thoughts of Martin Wolf. Let it be noted that he does not take very kindly to the term "neoliberalism" in his book Why Globalization Works. Market-led globalization, arm's length transactions, neoliberalism, whatever; I think the concept is pretty much the same. Despite his reputation, though, Wolf delivers some pretty good lines as to why the SRM is a goner. Neoliberalism, we hardly knew ye:

Remember Friday March 14 2008: it was the day the dream of global free- market capitalism died. For three decades we have moved towards market-driven financial systems. By its decision to rescue Bear Stearns, the Federal Reserve, the institution responsible for monetary policy in the US, chief protagonist of free-market capitalism, declared this era over…

The implications of this decision are evident: there will have to be far greater regulation of such institutions. The Fed has provided a valuable form of insurance to the investment banks. Indeed, that is already evident from what has happened in the stock market since the rescue: the other big investment banks have enjoyed sizeable jumps in their share prices (see chart below). This is moral hazard made visible. The Fed decided that a money market “strike” against investment banks is the equivalent of a run on deposits in a commercial bank. It concluded that it must, for this reason, open the monetary spigots in favour of such institutions. Greater regulation must be on the way.

The lobbies of Wall Street will, it is true, resist onerous regulation of capital requirements or liquidity, after this crisis is over. They may succeed. But, intellectually, their position is now untenable. Systemically important institutions must pay for any official protection they receive. Their ability to enjoy the upside on the risks they run, while shifting parts of the downside on to society at large, must be restricted. This is not just a matter of simple justice (although it is that, too). It is also a matter of efficiency. An unregulated, but subsidised, casino will not allocate resources well. Moreover, that subsidisation does not now apply only to shareholders, but to all creditors. Its effect is to make the costs of funds unreasonably cheap. These grossly misaligned incentives must be tackled…

If the US itself has passed the high water mark of financial deregulation, this will have wide global implications. Until recently, it was possible to tell the Chinese, the Indians or those who suffered significant financial crises in the past two decades that there existed a financial system both free and robust. That is the case no longer. It will be hard, indeed, to persuade such countries that the market failures revealed in the US and other high-income countries are not a dire warning. If the US, with its vast experience and resources, was unable to avoid these traps, why, they will ask, should we expect to do better?

These longer-term implications for attitudes to deregulated financial markets are far from the only reason the present turmoil is so significant. We still have to get through the immediate crisis. A collapse in financial profits (so significant in the US economy), a house-price crash and a big rise in commodity prices are a combination likely to generate a long and deep recession. To tackle this danger the Fed has already slashed short-term rates to 2.25 per cent. Meanwhile, the Fed also clearly risks a global flight from dollar- denominated liabilities and a resurgence in inflation. It is hard to see a reason for yields on long-term Treasuries being so low, other than a desire to hold the liabilities of the US Treasury, safest issuer of dollar- denominated securities.

“Some say the world will end in fire, Some say in ice.” Harvard’s Kenneth Rogoff recently quoted Robert Frost’s words in describing the dangers of financial ruin (fire) and inflation (ice) confronting us. These are perilous times. They are also historic times. The US is showing the limits of deregulation. Managing this unavoidable shift, without throwing away what has been gained in the past three decades, is a huge challenge. So is getting through the deleveraging ahead in anything like one piece. But we must start in the right place, by recognising that even the recent past is a foreign country.

Japan Estimates Reserve Reval Losses at $187B

♠ Posted by Emmanuel in , at 3/27/2008 04:06:00 PM
Here is a perfect illustration of the so-called balance of financial terror inherent in export-reliant Asian economies accumulating excess reserves. The Japanese FinMin Fukushiro Nukaga suggests that Japan has breathtaking unrecorded losses on its FX dollar assets which were acquired when the yen was rather weaker. It's a lose-lose situation for them: accumulate more dollars which have a tendency to go nowhere but down and you get losses of this magnitude ($187B). OTOH, slowing down the rate of accumulation of dollar assets and you face an even steeper loss on accumulated dollars as the wretched currency plunges at an even faster pace. To extend the Cold War analogy, I see this system as one of Mutually Assured Financial Destruction (MAFD), with America becoming a distinctly subprime economy. Before I get more carried away with this military-industrial complex, just read the following Reuters article:

Unrealised losses on Japan's $1 trillion foreign currency reserves amount to about 18.5 trillion yen ($187.2 billion) when the dollar is around 100 yen, Finance Minister Fukushiro Nukaga said on Thursday. Nukaga again declined to comment on specific levels but said a strong yen could benefit the Japanese economy in the long run as it will bring down the country's import costs.

The dollar fell to a 13-year low below 96 yen earlier this month as the U.S. credit mess deepened, increasing valuation losses on Japan's external reserves, which are thought to be mostly made up of dollar assets. On Thursday it traded around 98.9 yen.

Japan intervened heavily in the currency market in 2003 and early 2004 to help the economy tackle deflation. It sold a total of 35 trillion yen for dollars in the 15 months to March 2004, during which the dollar traded between 105 and 120 yen.

"Unrealised losses are certainly increasing. The amount of losses is estimated at around 18.5 trillion if the dollar is at 100 yen," Nukaga told parliament. He defended the government's stance of sticking with the dollar, saying if Japan had sold the dollar it could have had an unexpected outcome on currency markets.

Nukaga also declined to say if he is considering intervening in currency markets and repeated the ministry's stance that currencies should reflect economic fundamentals and excessive moves are undesirable. "I've made it clear that I see last week's currency moves as excessive," Nukaga said when asked about the recent fall in the dollar.

Asked about the impact of the yen's rise on Japan, the world's second-biggest economy, Nukaga said it has both benefits and ill effects but will help the economy in the long run. "If the yen rises, goods will be coming into the country cheaply and could turn the economy for the better while benefiting Japanese consumers, although it could hurt exporters. "I think it would be good in the medium to long run," he said.

Nukaga also said he expects Japan's economic recovery to pick up pace eventually but is closely watching developments in the U.S. economy and financial markets. "Japan's economic recovery is at a standstill," he told a financial committee of parliament's upper house.

Is Mother Russia Nearing WTO Accession?

♠ Posted by Emmanuel in , at 3/27/2008 01:48:00 AM
Perhaps spurred by the Ukraine beating it to WTO membership, Russia is now pulling out all the stops in its efforts to also join the "nefarious" WTO. To gain entry into the organization, Russia needs to obtain the consent of all the WTO's members. For understandable reasons, negotiations with the Russia-fearing and NATO-joining (well, almost) republic of Georgia are among the most contentious discussions. RIA Novosti has a report on the negotiations between the two antagonists:

Russia will hold negotiations with Georgia on joining the World Trade Organization in late April, Moscow's chief WTO negotiator said on Tuesday. Russia has been seeking membership of the WTO since 1993. So far, Russia has concluded bilateral talks with over 60 states but still needs to complete discussions with the WTO members - Saudi Arabia, the United Arab Emirates and Georgia - that have trade disagreements with the country.

"We are discussing the possibility of a new meeting with Georgia, which is likely to take place in late April in Geneva where a new round of negotiations will be held," Maxim Medvedkov said. Tbilisi earlier vetoed Russia's accession to the world's largest trade body. Relations between the two former Soviet republics have rapidly deteriorated since the Western-leaning Mikheil Saakashvili came to power in Georgia in 2004.

Moscow imposed a transportation and postal blockade on Georgia in October 2006 in apparent retaliation for the detention on espionage charges of four Russian army officers. Russian officials cited commercial reasons, while Tbilisi called the move politically motivated. However, flights are set to resume to Georgia from Russia on Tuesday after a deal was struck in late February.

The South Caucasus republic says it will cease to block Russia's WTO bid only after Moscow honors its 2004 commitment to close down its border checkpoints with Georgia's breakaway republics of Abkhazia and South Ossetia. The two de facto independent republics recently appealed to Moscow for recognition of their sovereignty in the wake of Kosovo's unilateral declaration of independence on February 17.

At the same time, Medvedkov said that Russia would possibly sign a protocol on concluding WTO talks with the United Arab Emirates soon. "We hope to complete negotiations with the United Arab Emirates this week and after that we'll sign a protocol at a time convenient for the parties," Medvedkov said, adding that the document could be signed in late April.

Russia's has already completed bilateral WTO talks with both the U.S. and the EU. Multilateral talks are underway now on agricultural support, export duties, veterinary matters and intellectual piracy.

Aside from the negotiations with Georgia, Saudi Arabia, and the UAE, Russia is facing some contentious discussions with the EU, especially on timber export duties that are having deleterious effects on Nordic paper makers. It's interesting to hear what Alexei Kudrin, Putin's point man on economic matters, has to say. This from Reuters:

Russia is nearing the end of its bid to join the World Trade Organisation (WTO) but still faces "difficult" talks with the European Union on timber export duties, Finance Minister Alexei Kudrin said on Tuesday.

"The WTO accession talks are nearing conclusion. There is intense work going on. Officials from the United States and the European Union are constructively working with us," Kudrin said in a speech. "We are holding difficult but constructive talks on timber duties (with the European Union)," Kudrin, who heads the government's WTO commission, told reporters later. Russia is the largest economy outside the WTO.

Kudrin said he would travel next week to Saudi Arabia and the United Arab Emirates, two of the three countries with which Russia has yet to conclude bilateral deals. Ex-Soviet neighbour Georgia is the third.

"Almost every week we undo a knot. The number of unsolved issues is diminishing," Kudrin said. He declined to predict a date for Russia's accession, but said: "We have a feeling that there is positive movement." Kudrin said WTO accession would be the next major milestone in Russia's economic development after the 2006 liberalisation of capital movement. Kudrin, Russia's economic policy tsar and said to be the leading authority on economic issues for outgoing President Vladimir Putin, met European Trade Commissioner Peter Mandelson in Brussels last week.

His schedule indicated he wanted to achieve a breakthrough in the talks before an expected government reshuffle in May after the inauguration of President Dmitry Medvedev. Brussels has yet to give final clearance for Russia's WTO bid, mainly because of the dispute over Russian export duties on timber that hurts paper and pulp producers in Nordic EU states.

President Vladimir Putin imposed export duties on raw timber in 2007 to promote the development of Russia's wood-processing industry, adding to the costs of Swedish and Finnish paper firms such as Stora Enso, the world's biggest paper producer, UPM-Kymmene, and M-Real.

The duties are due to rise to 25 percent from 20 percent on April 1, one of a series of planned increases. Credit ratings agency Standard & Poor's said a planned increase in the duty to 80 percent from January 2009 would be "potentially devastating" and raised the risk of downgrades for companies in the Nordic forest products sector.

The Bank of Finland has said the higher duties could lead to job cuts and lower national economic output. About 20 percent of raw wood used by Finnish paper mills comes from Russia. Russian WTO negotiator Maxim Medvedkov, who said last year Russia had a solution to the timber export duties row, said the issue was still being discussed with the EU, along with six or seven other duties.

"Our disagreements are diminishing but we have not so far reached common ground. We need a little bit more time," Medvedkov told Reuters. Russian officials declined to reveal the proposals.

Welcome to the Terrordome 2: WTO Headquarters

♠ Posted by Emmanuel in , at 3/27/2008 01:32:00 AM
I sometimes get the feeling from the anti-globalization movement that the World Trade Organization is the seat of all evil, responsible for about 99.9% of what's wrong with the world from growing income inequality, environmental destruction, to the endless marketing of the talentless and disastrous Spears family. (The latter case would constitute "trade in services.") And that's just for starters: view this film clip of arch globophobe Walden Bello outside the WTO building cataloging the organization's infinite sins against mankind. Anyway, the WTO building struck me as a rather attractive base for this arch-organization of money grubbers, charlatans, reprobates, and other evildoers. Fortunately, there is a new publication up on the WTO website detailing the (sordid?) history of this building. It's interesting stuff. For example, did you know that the building used to house the ILO? Or, does the architecture of WTO headquarters reflect the nefarious neo-Satanic activities going on within its walls as depicted by the anti-globalization movement? Decide for yourselves...

It was an optimistic time. World War I had ended. Hopes were rising for a new era of international cooperation, and new international institutions were being built. In 1923, work began on what was to become the Centre William Rappard. The building that would first house the International Labour Office (ILO) and later the World Trade Organization (WTO), fully reflected that optimism. Its location could hardly be more appropriate. The building is in a lakeside park in neutral Geneva; across the tranquil waters and beyond the foothills are the immaculate snowcaps of Mont-Blanc and the Alps. With one of the most beautiful views in the city, the site embodied peace and stability.

Three years later, the building was completed and became the headquarters of the ILO, the only organization created at the same time as the League of Nations, which would itself later become the United Nations. At its birth and over the next decades, the ILO received gifts from its member governments and labour unions: artworks of many kinds, taking up themes of peace, social justice, human progress and the glorifi cation of labour. The commissioned artists were in their prime, artistically and by reputation.

India Buys Britain, Cont'd: Land Rover and Jaguar

♠ Posted by Emmanuel in , at 3/26/2008 02:11:00 AM
Boy oh boy, you're likely to have read it here first: the famous British marques Land Rover and Jaguar are to be sold to India's sprawling conglomerate the Tata Group for the tidy sum of £1 billion. Speculation had been running high about the potential suitors of Land Rover and Jaguar, but now the deed is done. Fortune once called the process of Indian companies buying up British ones "reverse colonization" in action, and I guess you can chalk this deal up under the same category. Selling off these brands is part and parcel of the seemingly unending woes at Ford Motor Company. When this deal concludes, Ford will no longer have any car manufacturing facilities in Blighty. Sad but true. From the Times of London:

Jaguar and Land Rover, two of Britain’s most prestigious car brands, will be sold today in a £1 billion deal to Tata, the Indian conglomerate famous for manufacturing the world’s cheapest car. The sale of the two iconic names marks the end of carmaking in Britain by Ford. It follows the US company’s decision to sell its other big British brand, Aston Martin, last year. Production of its own blue-badged brand cars in Dagenham ended eight years ago. Jaguar and Land Rover will sit alongside Tata’s other automotive assets — including the £1,200 Nano vehicle — Corus, the Anglo-Dutch steelmaker, and Tetley’s Tea.

Land Rover, Jaguar and Aston Martin were part of Ford’s premier automotive group, a division that it had hoped would deliver substantial profits. However, Jaguar struggled after Ford failed to make it a volume producer. Now Ford retains only Volvo from the original stable of prestige brands. But both brands are now perceived as being on the rise after the launch of successful new models. Jaguar’s new XF, the replacement for the retro-styled S-type, has been hailed as having all the style and power qualities of a true Jaguar. By contrast the X-type Jaguar, the cheapest model, was criticised for resembling a Ford Mondeo after the US car group based the car on a Mondeo platform. The X-type had been Jaguar’s big hope to move into volume sales.

Jaguars and Land Rovers will continue to be manufactured in Britain for the immediate future, safeguarding 13,500 jobs. The new owner will stick to business plans drafted by Ford. Ford put Land Rover and Jaguar on sale last year when it was reeling from a $12.7 billion global loss for 2006. The company decided to jettison its prime British marques to try to sort out its difficulties in its home market.

Tata has been in exclusive talks with Ford since the beginning of the year after winning a bidding race that originally attracted strong interest from private equity groups working in conjunction with senior former Ford executives. Winning the brands will open a radically new chapter in the company’s history. While Tata’s trucks dominate Indian highways and the company has made cars since 1991, acquiring the marques will represent a foray into luxury territory.

Ratan Tata, the chairman, has acknowledged that the image disparity Tata will face in owning two such prestigious brands while producing what it claims will be the world’s cheapest car: the “one lakh” Nano (one lakh is 100,000 rupees, or £1,200), which was unveiled earlier this year. But at the recent Geneva Motor Show he said: “There is no need to tinker with the brands. Our challenge is to make them thrive and grow.”

Tata’s acquisition is its second big move into the British market in just over a year. In January last year the company, whose interests run from tea plantations to IT, bought the Anglo-Dutch steelmaker Corus for £6.7 billion. Its buying spree has also included Tetley, the tea maker, Daewoo’s commercial vehicle arm and the Ritz-Carlton hotel in Boston, Massachusetts.

Last month Ford smoothed the way for the completion of the sale by offering a £300 million injection into the pension fund. An announcement of a sale had been expected at the start of March but was delayed while the two sides finalised their future working relationship.

Reuters also has more on the pending deal's implications:

But analysts have questioned how Tata will incorporate the luxury brands into its stable of sturdy trucks and functional passenger cars, including the Nano, the world's cheapest car which it unveiled in January.

While Land Rover has generated three years of record sales with its SUVs, the fit of Jaguar is far less clear.Ford, which lost $2.7 billion in 2007 and $12.6 billion in 2006, is selling off Jaguar and Land Rover to focus on turning around its loss-making operations in North America.

I Don't Buy It: Disney's Green Message in Toons

♠ Posted by Emmanuel in at 3/26/2008 01:10:00 AM
File this one under "academics with too much free time on their hands." The Times of London has written a feature on author David Whitley's The Idea of Nature in Disney Animation which purports that Disney has long carried the green message to young children. I am exceedingly skeptical about this: as you will read below, most of the Disney films mentioned below do not have an overtly environmental message compared to, say, Dr. Seuss's The Lorax. Now that was a cartoon with a strong warning about the perils of over-industrialization. When I was a tiny tot, The Lorax scared the bejesus out of me. However, the same cannot be said for the Disney movies mentioned here, methinks. Your mileage may vary. All I can say is "yeah sure, and Harry Potter is really about subprime mortgages":

Walt Disney films such as Bambi, The Jungle Book and Pocahontas have played an important role in educating the public about the environment, a new book by a University of Cambridge academic has claimed. The stories of animated Disney characters, from Snow White in 1937 to the clownfish Nemo in 2003, have built “a critical awareness of contested environmental issues”, according to David Whitley, a lecturer in English.

While Disney movies are often regarded as little more than escapism, and have even been criticised as bland populism, many feature messages about conservation and the relationship between people and the natural world that have proved to be highly influential, Dr Whitley said.

His book, The Idea of Nature in Disney Animation, argues that the films’ cute animals have systematically encouraged generations of children to ally themselves with the natural world and protect it. Dr Whitley singled out Bambi, which was released in 1942, as particularly influential, saying that many green activists had credited it as the inspiration that first made them interested in environmental issues.

He said: “Disney films have often been criticised as inauthentic and pandering to popular taste rather than developing the animation medium in a more thought-provoking way. “In fact, these films have taught us variously about having a fundamental respect for nature. Some of them, such as Bambi, inspired conservation awareness and laid the emotional groundwork for environmental activism. “For decades Disney films have been providing children with potent fantasies, enabling them to explore how they relate to the natural world.”

The book, published by Ashgate, concentrates on two periods in the Walt Disney Company’s history – between 1937 and 1967, when Walt Disney was in charge, and between 1984 and 2005, when Michael Eisner was chief executive. Both moguls “saw themselves as having a sustained and strong commitment to wild nature and the environment”, but in subtly different ways, Dr Whitley said...

How animation brought green issues to life

Snow White and the Seven Dwarfs (1937)
The jealous Queen arranges for the death of Snow White who escapes to the forest and befriends dwarfs and woodland creatures.
The message “The forest’s pastoral setting gives viewers a sense of the integrity and separateness of nature from the world of humans, which is shown as oppressively unbalanced. Snow White is also a role model, showing how humans can protect nature and even bring order to it.”

Bambi (1942)
The plot follows Bambi through his friendships with Thumper the rabbit and Flower the skunk, the death of his mother at the hands of hunters and his ascent to prince of the forest.
The message “A classic example of the use of animated detail to represent the idyllic realm of nature rendered vulnerable by human incursions. The film is credited with having influenced a generation of conservationists.”

Cinderella (1950)
Under the thumb of her cruel stepmother and stepsisters, Cinderella’s only friends are animals. After attending the royal ball, the mice help the Prince to find her.
The message “Cinderella’s relationship with an extensive subculture of friendly animals demonstrates that she is wholesome and good. The animals help to subvert the authority of a repressive, self-regarding human culture cut off from nature and represented by the ugly sisters.”

The Jungle Book (1967)
Ten years after he was found by Bagheera, the panther, it is decided that Mowgli, a feral child, should return to the world of human beings to escape Shere Khan, the tiger.
The message “Mowgli demonstrates not just a desire to protect the animal kingdom but to become part of it. The film introduced young viewers to some of the competing theories about the consumption of natural resources.”

The Little Mermaid (1989)
Ariel, the mermaid princess, longs to be part of the human world. She falls in love with Prince Eric and temporarily becomes a human being.
The message “This suggests a fundamental division between humans and the natural world that can, at least partially, be overcome. The film persuades viewers that the human and natural worlds are comparable and equivalent.”

Pocahontas (1995)
Pocahontas, a Native American, falls in love with John Smith, an English settler. She shows him that her people have an intimate and spiritual relationship with nature.
The message “Pocahontas’s decision to stay among her own tribe teaches that the natural world is not there to be harnessed by the civilising effects of humans. The historically inaccurate reconciliation with the colonists implies that our rift with nature can be healed.”

Tarzan (1999)
Tarzan is raised by gorillas. A group of humans arrive, including Jane, who falls in love with Tarzan after he rescues her. Tarzan saves the gorillas from Clayton, a hunter who wants to capture them.
The message: “The human impact on the environment is seen at its destructive worst in the form of Clayton’s efforts to exploit the natural world for commercial gain.”

Finding Nemo (2003)
Nemo, a clownfish, is embarrassed by his overprotective father, Marlin. He is captured and taken to Sydney.
The message: “The theme of letting go of one’s protective anxieties accepts the dangerous aspect of nature, but we are encouraged to tolerate freedom with all the precariousness that entails.”

How Have Other LDCs Fared Against China Post MFA?

♠ Posted by Emmanuel in ,, at 3/26/2008 12:39:00 AM
The phasing out of the voluntary export restraint (VER) known as the multi-fibre agreement (MFA) imposed by developed countries on textile exports from developing countries was thought to be potentially disastrous for countries in export competition with China. Indeed, the so-called bra wars between the EU and China over the sudden glut of Chinese textile exports is evidence of China's unleashed capabilities after the removal of the MFA. Justifiable fears have been raised by other LDCs which do not have the same manufacturing prowess as China about being literally killed off in global textile markets by the PRC juggernaut.

Interestingly, I was reading the 2008 Global Economic Prospects publication of the World Bank which has a box section (page xlviii, Box 1.1) on the topic. How have other textile exporting LDCs fared post-MFA vis-a-vis China? Has China overwhelmed everyone else? While others have not done particularly well, some of the more doom-laden prognostications have failed to materialize. Bangladesh, for instance, has actually increased its textile exports in the post-MFA period. This topic is sufficiently important that I am including the section in its entirety:

The system of quantitative restrictions that managed rich countries’ imports of textiles and clothing from developing countries for 30 years, especially those produced in China and India (the Multi-Fiber Arrangement), was finally dismantled at the end of 2004, although restrictions for a number of categories of Chinese textile and clothing exports to the EU and the United States remained because of measures that are due to expire in 2008 [see the link above on the bra wars].

China’s exports of clothing soared 22 percent in 2005 and 32 percent in 2006, increasing its market share in those two years to 24 percent and 28 percent, respectively, but the impact on competitors has been less drastic than some had feared. The increase in the size of the world market for clothing has allowed exports from many other countries to grow, including the Arab Republic of Egypt, India, Peru, Sri Lanka, and Turkey. In Bangladesh, where 1 million jobs were predicted to be lost, exports to the EU and the United States gained continuously between 2004 and the first four months of 2007.

Nevertheless, some countries have seen declines in clothing exports that may entail substantial adjustment. For example, exports to the U.S. and EU markets from Brazil, the Dominican Republic, Swaziland, and Taiwan (China) declined substantially in 2005 and 2006. With the exception of Swaziland, clothing exports from these countries continued to decline into 2007. In addition, for Sub-Saharan Africa as a whole, where the end of the clothing sector had been foreseen, exports to the EU and the United States fell by 7 percent in 2004 and 17 percent in 2005 (on a trade weighted average). In 2006, Sub-Saharan African textile exports to the EU grew 3 percent, whereas exports to the United States declined by 6 percent. In 2007, to the extent that data are available, Sub-Saharan African textile exports to both the EU and the United States grew by 7 and 2 percent, respectively. A number of countries, including Madagascar, Mauritius, and Swaziland, managed to reverse an initial decline in clothing exports and return to growth in 2006 or early 2007.

How vulnerable are other countries when the final restrictions on Chinese textile and clothing exports to the EU and the United States expire? In 2006, 19 percent of Chinese exports to the EU and 20 percent of exports to the United States were subject to quota restrictions, and exports of these products will likely grow significantly after removal of the quotas. In the EU market, Colombia, the Dominican Republic, Mauritius, Peru, and Sri Lanka appear to be most at risk with more than 40 percent of their 2006 exports in product categories for which China is currently still subject to quotas. For other countries, the ratio is between 20 and 40 percent, and for Sub-Saharan Africa as a whole stands at 51 percent, mainly driven by the high exposure of Mauritius (74 percent). In the U.S. market, exposure is generally lower: only the Dominican Republic, India, and Sri Lanka export more than 20 percent of their textiles and clothing in categories where Chinese exports are currently subject to quotas. For most other countries, the ratio is between 5 and 20 percent. However, looking at the impact of the elimination of Multi-Fiber Arrangement quotas in 2004, many competitors managed to defend their market shares in recent years, and they might be able to do so in 2008 as well.

The clothing sector still provides an opportunity for export diversification and the expansion of manufactured exports for low-wage countries, even in the face of unfettered competition from China. The countries best able to expand their exports of clothing will be those that have a supportive business environment, low trade costs (efficient customs, ports, and transport infrastructure), and competitive firms that are flexible enough to meet the changing demands of the global buyers that now dominate the industry.

At the same time, significant adjustment pressures may arise as more efficient firms expand, while those unable to compete in the global market decline. In the absence of other employment opportunities, especially for women, workers made redundant from the textile and clothing sector may fall back into poverty. Minimizing the costs incurred by released workers and their families and facilitating their adjustment into alternative employment will be a major challenge for a number of developing countries.

Japan Inc: Yes, Decoupling is Possible

♠ Posted by Emmanuel in at 3/26/2008 12:29:00 AM
Just out is news that Japanese exports for the month of February increased by 8.7%, somewhat assuaging those concerned about Nihon's exports slowing down in line with the US economy entering recession land or somewhere thereabouts. Combined with healthy export growth in January as well, this may be a good portent. Indeed, strong demand growth from LDCs is making up for the subprime-induced coma of the American economy. USA, who needs ye? From Bloomberg:
Japan's export growth accelerated in February as demand from emerging markets helped automakers ride out the U.S. slump.

Exports, which contributed more than half of the economy's expansion last quarter, climbed 8.7 percent from a year earlier after increasing 7.6 percent in January, the Finance Ministry said today in Tokyo. The median estimate of 19 economists surveyed by Bloomberg News was for a 7.5 percent gain.

Hino Motors Ltd. and Honda Motor Co. are relying on consumers in emerging economies to make up for waning demand in the U.S., Japan's largest market. Exports may cool this year as the U.S. slowdown spreads around the world and the yen's surge against the dollar hurts exporters' profits.

``Global demand so far has held up far better than people have hoped,'' said David Cohen, director of Asian economic forecasting at Action Economics in Singapore. ``We've got the Chinese and the Russians to thank for that. They've got money and they're spending it.''

Imports increased 10.1 percent, and the trade surplus widened 0.9 percent to 969.9 billion yen ($9.7 billion), the ministry said...

Japan's sales to Russia doubled in the past two years. Those to China expanded 45 percent. That growth has reduced the importance of the U.S., which accounted for only 20 percent of total exports last year, compared with about 30 percent in 2000.

PRC Actually Loves Bloggers, Ban or Not

♠ Posted by Emmanuel in at 3/23/2008 06:35:00 PM
Well this is funny. The Chinese government, the folks who've banned Typepad and my dear Blogger from polluting the minds of the Chinese people, are now trumpeting the efforts of overseas-based Chinese bloggers in pointing out Western bias in the coverage of the Tibet riots. There are also accusations that images are being manipulated to portray China as a country that is backwards on human rights and what else have you. Here's what I suggest to our favorite totalitarian regime: if the Chinese official media is so keen to use bloggers' posts to point out the flaws in Western media portrayal of the Tibet riots, then maybe actually allowing the Chinese people access to the likes of Typepad and Blogger would be welcome. What a radical idea. From our favorite official publication, the China Daily:

Chinese netizens, including students studying overseas, have been angered by biased and sometimes dishonest reports about the recent riots in Tibet by some Western media. Pictures from some media websites, including CNN and BBC, with untrue reports about the riots have been posted on chatrooms, drawing criticism. "I used to think the Western media were fair. But how could they turn a blind eye to the killing and arson by rioters?" asked a posting at

The pictures illustrate how news can be manipulated. The BBC News website carries a picture with the caption saying "There is a heavy military presence in Lhasa", while the photo clearly shows an ambulance bearing the red cross symbol. The American Fox News website published a photo with the caption "Chinese troops parade handcuffed Tibetan prisoners in trucks", while the photo shows Indian police dragging a man away. used a cropped photo of Chinese military trucks, cutting off the half of the picture showing a crowd of rioters throwing rocks at the trucks.

More notably, the websites of Germany's Bild newspaper, N-TV and RTL TV, and the Washington Post all used pictures of baton-wielding Nepalese police in clashes with Tibetan protesters in Kathmandu, claiming that the officers were Chinese police.

"To tarnish China's image, the West is doing whatever they can, no mater how mean and vicious," said one netizen on "Is this what they call Western democracy and freedom of speech?" asked another netizen.

Huai Bao, a student studying filmmaking in Vancouver, Canada, said: "I have read some news and online discussions made by those who have never been to Tibet, who have zero knowledge about China and the history of Tibet. These people have no rights to comment on Tibet." Bao, from Beijing, became a believer in Tibetan Buddhism after meeting his master, a high-profile lama, in the Chinese capital. He said that some Tibetan monks set fire to shops, schools and hospitals, and attacked Han and Tibetan people, including women and children. "My master told me that the monks involved in the riots were not real monks, as violence and crimes are absolutely against the teachings of Buddha," he wrote in an e-mail to China Daily.

Netizens also mentioned a blog ( [gee, how are they going to access this site in the PRC?] run by a group of Western tourists traveling in Tibet during the riot, where photos and video clips of Tibet are posted. Although their photos were used by the New York Times and the BBC, the following words did not make it into the Western press. One blogger wrote: "I want to make one thing clear because all of the major news outlets are ignoring a very important fact the protests yesterday were NOT peaceful."

He wrote that all of the eyewitnesses agreed that "the protesters went from attacking Chinese police to attacking innocent people very, very quickly. They appeared to target Muslim and Han Chinese individuals and businesses first but many Tibetans were also caught in the crossfire."

A video clip was posted on the blog, in which a Han motorcyclist, an obvious passerby, was stoned by a crowd of mob. Bao said there is a unanimous feeling of anger among his Chinese friends in Vancouver. "Any news about China has to be negative so that they will believe it - from 'poisonous toys to poisonous dumplings'. Some foreign media have a particular interest in bashing China over human rights and pollution. They turn a blind eye to all progressive changes."