The Annals of Marketing: Betfair vs. Ladbrokes

As the locals here are wont to say, I have been investigating the best way to make an online "punt" (bet) on whether Big Brown will be able to become the first Triple Crown winner in thirty years. Not being an inveterate gambler, the first two choices that occurred to me were the heavily advertised firms Betfair and Ladbrokes. One of the most studied areas in marketing is new client acquisition, for it is often difficult to find new customers in relatively saturated markets like the UK. Indeed, this is a good chance to see just how marketing works. In the absence of other informational cues, one of the first things consumers react to is the branding of the product: the very name of the product itself may trigger affective responses. There are good reasons why pharmaceutical firms (and others) spend millions coming up with seemingly inane, vaguely medical-sounding names such as "Erbitux" or "Zyprexa."

In the case of these two gambling firms, their names are indeed suggestive--although not in an immediately desirable way for one firm. Betfair seems like a pretty damn good name for an online gambling firm. There is a fad in the marketing discipline known as "integrated marketing communications." That is, a product or service provider ought to provide a consistent theme in its marketing message; say, from the product packaging seen on store shelves to customer support. From what I can ascertain so far from Betfair, they do a relatively good job in this respect. Their brand emphasizes procedural fairness in determining odds and in placing bets. Whether this rings true is another matter, but the message is pretty consistent.

Next we have one of Britain's three largest bookies: Ladbrokes. Not being English, I have always been perplexed that one of the major gambling firms in the UK is named after an outcome I'm sure all betting lads [and "ladettes"?] would prefer to avoid: going broke. I am not exactly sure if the continued success of Ladbrokes is due to or has been hampered by its colourful name, but it's surely an attention-getter for a gambling company. Attention marketing scholars: there might be some sort of "reverse psychology" thing going on here that may be worthwhile to imitate. Should the latter possibility hold, maybe we'll see hospitals named "Blokecomatose"; cars such as the "Ford Crash" or "Volkswagen Lemon"; and supermarkets like "Poisonproduce." Before getting too carried away, though, note that the Ladbrokes site gives a perfectly good explanation why the firm is named as such:

Betting shops began to spring up around the country but were quickly outlawed by the Betting Act of 1853. Despite the legislation, around two hundred men are thought to have been running books at the time, mostly on course. In 1886 a certain Mr Schwind and Mr Pennington went into partnership as commission agents, principally with the object of backing horses trained by the former at Ladbroke Hall in Worcestershire.

Thoughts on the World Bank's New Growth Report

The World Bank has come out with a new publication entitled the Growth Report: Strategies for Growth and Sustained Development. The effort was headed by Nobel Laureate Michael Spence. It is the product of a lengthy consultative process, with inputs from those with some knowledge on the matter in both the developed and the developing world. The World Bank being the World Bank, the release of this report has resulted in a host of contrasting opinions. Jonathan Dingel over at Trade Diversion has a fairly positive view of the publication, although you should of course go through it yourselves to make up your own minds. Actually, I am in agreement with Trade Diversion that it makes some welcome contributions. In contrast to previous World Bank efforts to promote a "one best way" to development, this publication indicates the Bank is moving towards a more pragmatic instead of a dogmatic approach.

However, William "The White Man's Burden" Easterly begs to differ. If you've read Easterly's previous work, you are no doubt familiar with his arguments: Namely, top-down efforts promoted by the World Bank are not likely to promote development in contrast to more spontaneous efforts. Also, it is better to have "searchers" who seek solutions to problems of development instead of "planners" who try to organize development as they see fit. Ironically, Easterly still sees this World Bank effort as being in the "planner" mould when the institution is moving more towards his idea of enlisting "searchers."

I have long wondered what to make of the widespread controversy over the World Bank. Those with a critical bent view it as a tool for the domination of a global capitalist class, while those with a libertarian bent view it as a bottomless sinkhole for funds better allocated elsewhere. Clearly, the institution cannot be both a ruthless enforcer of a “neoliberal” order and a bumbling spendthrift at the same time. By referring to $4 million spent on this report, Professor Easterly alludes to the latter possibility. Most likely, however, the reality lies somewhere in between.

In defence of the World Bank, the suggestions made in the report which may be uncontroversial to the point of being trite to some reflects criticism the Bank has sustained from both the left and the right. Like the Bank itself at this point in time, the report is gun-shy in staking definitive positions. Statements such as “[this report] does not provide a formula for policy makers to apply—no generic formula” and “[this report] will not give them a full set of answers, but it should at least help them ask the right questions” (p. 2) are not those which experts making top-down prescriptions would likely make. As I see it, the trouble is that Easterly tries to characterize the report as another manifestation of the “development expert” paradigm when, in reality, the World Bank has made a carefully worded effort to stay away from sweeping generalizations of this nature. Easterly cannot argue it both ways: If he believes the report is banal in not making strong recommendations, then he cannot also say that this is yet another master blueprint for development.

Indeed, it would appear to me that the more open-ended approach the World Bank proffers here demonstrates evolution in its thinking in line with his concept of “searching”: In political science, it is akin to Lindblom’s “muddling through” or Wildavsky’s “trial and error”; in anthropology to Levi-Strauss’s “bricolage”; and in econometrics to “Bayesian updating.” That international organizations like the World Bank are prone to the bloat which they themselves claim to abhor is striking, but the result of the process demonstrates evolution that should be taken constructively.

Are You Macho Enough for World Trade?

For some reason I can no longer recall, I was reminded of John Connally, Richard Nixon's Treasury Secretary between 1971 to 1972. Oddly enough, he was a Democrat appointed by a Republican president. Indeed, he stepped down from his post as Treasury Secretary in order to head "Democrats for Nixon" in 1972. Connally is remembered for scaring other nations with the notion of dollar hegemony as encapsulated in the phrase, "our currency, your problem." The context then, of course, was that changes the US made to its monetary policy would be borne by other nations. However, Connally also made another statement which is even more over the top but is nonetheless insightful. In talking about trade relations, he made perhaps the best statement on the idea of mercantilism I have yet heard in plain terms: "My basic approach is that foreigners are out to screw us. Our job is to screw them first." [!] Even if many officials are not as forthright as Connally, surely the idea persists. Given this environment, ask yourselves this: Are you macho enough for world trade?

The Savage Garden of Asian Currency Intervention

I truly, madly, deeply do believe that this is a rather retro post in more ways than one: The well-respected currency commentator Simon Derrick of the Bank of New York suggests in the Financial Times op-ed below that, just like at the outset of the Asian financial crisis, many countries in the region are gearing up for currency intervention measures to once again defend their respective monetary units. In recent times, the US dollar has been taking it on the chin, and the worry has been more about declining Asian export competitiveness via a weakening dollar. More recently, however, Asian countries have become more concerned about domestic inflation. This sort of inflation has made more Asian countries think about wading into the currency markets again--not so much to defend their currencies from speculators a la 1997, but to control inflation circa 2008. On 21 May 2008, USD/KRW reached a recent high of 1057.60 before large-scale intervention kicked in [see marked area in above chart]. So, let us begin with the Economic Times' take on South Korea spending nearly $2B to prop up the won.:

South Korea intervened three times to support the sliding won on Tuesday and warned the currency may have fallen too far, as it wrestled with the problem of containing inflation without choking off economic growth. The Bank of Korea is under political pressure to cut rates to help spur growth in Asia's fourth-largest economy, and minutes from an April policy review showed two of the six board members favoured a rate cut for the first time since November 2004.

The central bank is resisting that pressure because inflation is at a four-year high, partly due to a surge in oil prices and won weakness, which is making imports more expensive. The currency, Asia's second-worst performer this year, may have fallen too far, Choi Jong-ku, head of the finance ministry's international bureau, told Reuters as news of the interventions began surfacing and pushed the won to a one-week high.

The foreign exchange authorities were seen selling almost $1 billion on Tuesday afternoon for won after dumping up to $800 million during the morning session, traders said. The won's rise on Tuesday revived expectations among investors that the central bank would have more room to cut interest rates at its next review on June 12.

Others said the Bank of Korea, hemmed in between rising inflation and the wishes of a growth-hungry new government, would want to avoid cutting rates for fear of stoking inflation. "The Bank of Korea's governor implied at his post-meeting comments in May that as long as the won turns weaker, it would be impossible for an interest rate cut in the near future," said Park Jong-yeon, fixed-income analyst at Woori Investment.

Annual inflation at 4.1 percent in April was above the central bank's 2.5 percent to 3.5 percent target range for a fifth straight month. "The won fell as oil prices jumped but we are worried that the won's fall might be excessive," Choi said. He also said the government was worried the won's fall was due to excessive herd behaviour in the currency market.

The intervention on Tuesday marks the second attempt to shore up the won in under a week. That pushed up the won to a session high of 1,034.9, matching the high on May 19, which was the strongest since May 8. The South Korean authorities spent an estimated $500 million last Wednesday when the won weakened past 1,050 per dollar to a 2-1/2-year low…

Analysts say massive intervention indicates the government is more concerned about inflation than growth but it still likely wants a relatively weak currency to support exports to help meet an ambitious economic growth target of 6 percent this year.

The government has repeatedly backed a weaker won to help boost growth in the export-focused economy, but analysts say fears that it will also lift inflation at home means the authorities will likely step in to prevent any nosedive. "The comment (by Choi) comes as the government needs to show action as a weaker won boosts the impact of surging oil prices on domestic demand," said Jeong My-young, an analyst at Samsung Futures Inc. "But the authorities will never allow the won to strengthen past the 1,000 (per dollar) again," she added.

Following on from this, the redoubtable Mr. Derrick suggests that other countries in the region have, ah, gone to the moon and back in similarly undertaking currency intervention:

Rumours of currency market intervention by a variety of Asian central banks are likely to gather pace, says Simon Derrick, strategist at Bank of New York Mellon. As well as reports that the Bank of Korea had re-entered the market to support the won, Mr Derrick points to talk of currency support action by the central banks of Taiwan, the Philippines and Indonesia. “Comments from a variety of central bank officials indicate that rising inflationary pressures were likely behind these operations,” he says. For example, Vietnam’s annual level of inflation leapt to 25.2 per cent in May from just 7.2 per cent just 12 months ago.

The causes of these sharp rises seem relatively understandable given the recent dramatic increases in food and energy costs globally. Hanoi, Mr Derrick points out, estimates that food prices this month jumped 67.8 per cent year-on-year. Adding to the woes of the central banks is the simple fact that the performance of many of these currencies against the dollar has tended to be a mirror image of the latest commodity price moves, he says. “In the absence of a sharp turnaround in commodity prices it seems reasonable to suppose that these currency pressures will only continue to mount. “As such it seems likely that the central banks of the region will continue their support operations as they try to stop the impact of rising commodity prices being exacerbated by sharp local currency losses.”

Dammit, it's like 1997 all over again, albeit for slightly different reasons. Cue up the Savage Garden, chick-a-Cherry cola, and pretend it's like old times. UPDATE: The Philippines has been spotted selling dollars to the tune of an estimated $150M. It's flashback time, baby. From Reuters...

The Philippine peso hit a seven-month low at 43.925 per dollar, down about half of a percent from Wednesday's close, as investors bought dollars after solid US durable goods data on Wednesday eased concerns over the US economy.

But intervention by the central bank to sell dollars helped limit the peso's further declines, traders said. "They (the central bank) were in the market this morning. I guess they sold the dollar at 43.85 and then at 43.90," said a trader in Manila. "I think the market is trying to target the 44 level, but the central bank does not want the peso to depreciate that fast and was trying to slow it down," he said. Some traders estimated the size of the intervention at $150 million.

After 46 Years, Indonesia Bids Adieu to OPEC

While not one of its original members, Indonesia was one of OPEC's earlier participants, having joined the producer's association way back in 1962. A lot has changed in the 46 years since Indonesia decided to join OPEC. Ecuador joined, left, and rejoined the organization (in 2007). Angola became a recent member. More pertinently, declining oil production in Indonesia meant that it went from being an oil exporter to being a net oil importer in 2005. Although it has already paid its OPEC membership dues of EUR 2 mio this year, it has signalled that it won't be paying up next year. It is, after all, against its interests to continue to support an organization which champions higher oil prices while the country is having trouble making ends meet by subsidizing the costs of fuel. However, there is less reason to feel to sorry for the country as it remains the second largest exporter of LPG and thermal coal. From the Financial Times:

Indonesia on Wednesday said it would withdraw from Opec at the end of this year because, as a net oil importer, its interests were no longer served by being a member of the oil producers’ cartel. Purnomo Yusgiantoro, energy and mineral resources minister, said Indonesia – the cartel’s only Asian member – would like world oil prices to fall while Opec’s 12 other members would like prices to remain high.

Analysts said the decision would have little effect on either Indonesia or Opec since Indonesia’s production, of about 1m barrels a day, was only 3.1 per cent of the group’s 31.9m b/d April output.

Mr Purnomo said Indonesia would like to quit now but since it cannot recoup its 2008 membership fees, it would remain active until its dues expire. However, he said Indonesia might follow the example of Ecuador, which left Opec in 1992 and rejoined last November.

Indonesia’s oil production peaked in 1976 and, after fluctuating for two decades, started to decline in 1995 due to aging fields and a lack of investment. It became a net oil importer in 2005. The energy ministry said production would average about 1m barrels a day while usage would be at least 20 per cent higher than this. Current reserves are 8.4bn barrels.

The country remains a net energy exporter due to its massive gas and coal reserves. It is the world’s second largest liquefied natural gas exporter and second largest exporter of thermal coal, which is used mostly for power generation. Mr Purnomo said Indonesia’s gas and 2008 coal production was expected to be equivalent to 1.5m and 2m barrels of oil a day, respectively.

Kurtubi, the director of the Centre for Petroleum and Energy Economic Studies in Jakarta, said Indonesia’s decision was appropriate in light of its net importer status but that it would have little impact on either the country or Opec. “It’s the right decision because Indonesia wants oil prices to fall to stop its state budget bleeding as much as it has been recently,” he said. “It will also act as a warning to the industry and society that the country must do something to increase production.”

Indonesia raised prices of subsidised fuels, which account for 95 per cent of consumer use, by an average of 28.7 per cent last Saturday. This cut its fuel subsidy bill by Rp35,000bn ($3.76bn), or about 20 per cent.

Mr Kurtubi said it would be at least 10 years before Indonesia recovered its net oil exporter status because the 2004 oil and gas law was less investor friendly than previous legislation. Oil companies are now taxed during the exploration phase in addition to the production period.

Bloomberg adds more colour to the story. An oft-heard refrain against the notion of "peak oil" is that there is still much to go around; instead, the problem is that much of the supply which can be tapped lies in countries that are not exactly welcoming multinationals with the best exploration and exploitation technologies. This holds to some extent in Indonesia as well, although it cannot be ruled out that it will return to OPEC in the future if and when it decides to start exploiting this resource on a large scale once more:

Indonesia, the only OPEC member in Southeast Asia, will pull out of the group as aging fields and declining production force the region's biggest economy to boost imports. Energy Minister Purnomo Yusgiantoro will sign a decree today to exit the Organization of Petroleum Exporting Countries, he told reporters in Jakarta. The nation, a member since 1962, has been considering leaving the body in the past three years.

Indonesia imports about a third of its oil and production has slumped 49 percent from a peak in 1977 partly as disputes with Exxon Mobil Corp. delayed field developments and deterred investments. Subsidies to cap domestic diesel and gasoline prices may exceed $13 billion this year as a lack of refining capacity forces the nation to import fuel.

``Indonesia no longer fits in as an OPEC member because it has become a net importer,'' said Julian Lee, a senior energy analyst at the Centre for Global Energy Studies in London. ``It won't affect OPEC's ability to put more oil onto the market if it chooses to do so.''

The withdrawal from OPEC will help the nation save 2 million euros ($3.1 million) on membership fees a year, according to Purnomo, who failed earlier this year to convince the group to increase oil output in order to lower prices.

OPEC members account for more than 40 percent of the world's oil supply. Crude production from the 12 members within its quota system declined 1 percent last month to 29.74 million barrels a day, according to Bloomberg estimates.

Indonesia's exit follows the addition of two members. Angola became an OPEC member in January 2007 and Ecuador rejoined the organization in December after a 15-year absence, swelling OPEC's ranks to 13. War-torn Iraq is the only OPEC member without a quota.

Crude oil prices have doubled in the past year to reach a record $135.09 a barrel in New York on May 22 as demand growth outstrips supplies. A weaker U.S. dollar has also prompted investors to buy commodities as a hedge against inflation. Oil for July delivery was at $127 on the New York Mercantile Exchange at 12:13 p.m. London time. OPEC Secretary General Abdalla el-Badri in Vienna had no immediate comment.

Indonesia's daily crude output has been less than 1 million barrels since February 2004, according to Bloomberg estimates. Production probably fell 0.9 percent to 859,853 barrels a day in April from March, oil and gas regulator BPMigas said April 29.

``If production comes back to give us the status of a net oil exporter then we can go back to OPEC,'' Purnomo said at the Jakarta Foreign Correspondents Club today. ``We are not happy with the high oil price.''

Indonesia raised fuel prices by almost 30 percent this month to reduce the government's subsidy burden of capping pump prices. Without the increase the government may have to spend 190 trillion rupiah ($20 billion) this year, more than the 126.8 trillion rupiah it had budgeted for 2008, before next year's general election.

``This move really plays to the domestic audience,'' said Tony Regan, an energy consultant with Nexant Ltd. in Singapore. ``How can they show concern about domestic oil prices and expect people to pay more at a time when they are also part of an oil cartel that is trying to push prices up.''

Indonesia produced an average 883,000 barrels of crude oil a day in 2006, while its consumption of refined oil products that year was 1.061 million barrels a day, according to the latest edition of OPEC's Annual Statistical Bulletin.

``For OPEC, the loss of the organization's only Asian member leads to the loss of an Asian perspective at meetings and within the secretariat,'' said Lee of CGES. ``It represents a narrowing of the group's geographical and ethnic outlook'' at a time when Asian demand is becoming paramount, though ties forged over 40 years won't disappear, he said. The last OPEC member to quit the group was Gabon, which left during 1994-1995.

The Pop Psychology of WTO Doha Round Deadlock

Eric Berne's 1964 book Games People Play was more or less the starting point for a veritable cottage industry of self-help books, from Thomas Harris's I'm OK, You're OK to those endless spins on the Mars-and-Venus theme. Today, I will use games illustrated in Berne's book to explain what is going on in the current round of WTO trade negotiations. As I am (somewhat) cynical and value non-esoteric explanations, Berne's book fits my objectives here to a T. Unlike many subsequent books in the pop psychology genre, Games People Play is actually quite instructive. Already, I have alluded to Berne's games in calling the convoluted US position--conflicted as it is between the executive and legislature--one of "Kick Me."

I take no credit whatsoever in noting that the aftermath of the US passing the abominable farm bill is proceeding as I described earlier as anyone with a passing interest in the subject matter could have predicted the same. Yes, Bush vetoed the legislation, but healthy majorities in both houses of Congress ensure a veto override. The latest "modalities" on agricultural issues have now been circulated and talks will resume, but the passage of the US farm bill has definitely not been a sign of encouragement to countries which have long faulted the US for its extensive use of subsidies. From Reuters:

Several countries at the World Trade Organization (WTO) criticized the new U.S. farm bill on Monday for raising farm support when the WTO is trying to reach a deal to cut agricultural subsidies.

"A few of them had a go at the new farm bill," said New Zealand's WTO ambassador Crawford Falconer, after WTO members met to review the revised proposals he issued last week for a farm deal in the WTO's Doha round. The countries criticizing the $289 billion U.S. farm bill, passed last Thursday and overriding a presidential veto, included Burkina Faso, speaking for cotton producers, Canada, Paraguay and Bolivia.

Falconer said the new bill did not directly affect WTO negotiations, but agreed it would have a negative affect. "It's another factor which complicates everybody's life, there's no doubt about that politically," he said.

If WTO members, including the United States, agree a deal including reductions in farm support, and the U.S. Congress ratifies it, Congress would have to amend the farm bill to bring it into line with the new WTO rules.

Canada said that under certain assumptions the United States could hit its proposed limit for overall trade-distorting support with one product under the new bill, a participant in the meeting said. Given that food prices are likely to fall back from their current record highs in the coming years, the new farm bill will trigger support earlier than the present one, the senior negotiator for a major developing country told reporters.

But the new bill could also encourage developing countries to try to bank what has been agreed now, rather than let negotiations drag on into a new U.S. administration next year. Under current proposals, which Washington has indicated it could accept, the U.S. ceiling for overall trade-distorting support would fall to $13-16.4 billion from an estimated $48.2 billion now.

Worse still, many EU countries are not keen on giving up agricultural supports, either. Agence-France Presse notes that France and Ireland are taking umbrage to EU Trade Commissioner Peter Mandelson offering more agricultural market access to LDCs during the current round of negotiations in exchange for non-agricultural market access in LDCs:

France and Ireland poured cold water Monday on proposals to kick-start World Trade Organisation (WTO) talks, with Paris and Dublin indicating a sizeable gulf with EU Trade Commissioner Peter Mandelson. French trade secretary Anne-Marie Idrac said the two countries were far from alone in having misgivings, after she and her European Union counterparts were briefed by Mandelson on the state of negotiations. "A majority" of the 27 EU member states "expressed concern," she said.

Last week the WTO submitted new proposals on agriculture and industry to its 152 members in an effort to revive the stalled Doha round of trade liberalisation talks, launched in the Qatari capital in November 2001. Ironing out differences in farm and industrial goods areas has long dogged negotiators, while the pace of talks on services is also considered to have lagged.

"We have a lot of questions" about the agriculture proposals and "for us French there's no improvement on market access for our industrial goods to emerging markets," said Idrac. "We are less than ever in an ambitious and balanced negotiation," she told journalists after a meeting of EU trade ministers.

New Irish Foreign Minister Micheal Martin, speaking to reporters in Brussels, said there was no need and little chance of a WTO deal before the US presidential election in November. "Our view is you need substance. It's not about completing this just because there's six months left for the US presidency," he said, rejecting Mandelson's stance. Asked if he thought that it would be wise to wait until after the US election he replied "that would be my view, yes." Ireland is particularly worried that the current proposals will hit its vital meat industry hard. "The very clear imbalance in the present set of proposals makes them unacceptable to Ireland and to others," Martin said.

An EU official speaking on condition of anonymity said: "France, Poland, Ireland and to a lesser extent Lithuania really have problems with what's on the table. "Sweden and Britain are more positive," the official said, while "in the middle there is a series of countries with concerns," although "nobody called for the texts to be rejected."

Swedish Foreign Minister Carl Bildt said that Mandelson, whom France has attacked in the past for making too many concessions, enjoyed "fairly broad support" among ministers. "Some were less satisfied, and there are a number of open points to be addressed in the next ministerial in Geneva," Bildt stated.

Idrac said that Paris was against the idea of a ministerial meeting at the global free-trade body in June. "We've got the impression that the conditions are less than ever in place for a ministerial meeting in the short term that would meet European interests," she said.

This brings me to more of Berne's games. In all honesty, I believe that the Doha round as it stands is an unworkable mess, and that we are no closer to a deal now than we were in 2005 (or even 2001, for that matter). US, EU, and Japanese agricultural protectionism shows little sign of abating, and LDCs have become bolder in their demands in the meantime. Given the untenable position of the US on agricultural subsidies, LDCs and others with grievances over America's farm subsidies have the US right where they want it. In Berne-speak, it's "Now I've Got You, You SOB" (NIGYSOB). Agricultural supports are a way of demonstrating how others have been wronged by US insensitivity to global concerns. This will play out for a while, and I envision the US being dragged to the Dispute Settlement Mechanism for litigation in the near future.

There is little reason to expect a forthcoming deal. As most countries are likely to have similar expectations, multilateral negotiations may be little more than points-scoring opportunities that play to domestic audiences. For (most of) the industrialized countries, it's "cherishing our proud agricultural history" or something to that effect. For LDCs, it's "standing up to EU and US bullying despite offering few concessions on agricultural market access." The end result is same old, same old: deadlock. Thus, the Doha round degenerates into a game of ''Why Don't You--Yes But'' in which players begin by bemoaning a problem and inviting others to suggest solutions, all of which will be shot down. The real objective according to Berne is ''to demonstrate that no one can give them an acceptable suggestion.''

If someone can come up with a better pop psychology for trade negotiation failure, I'm all ears. Be careful, though, as I may be duping you into a game of "See What You Made Me Do?" (SWYMD).

PRC: Of $1.76T in FX Reserves and Shoddy Schools

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The blogosphere is all agog over news that China's foreign exchange reserves have reached an astonishing $1.76 trillion. Even if that sum proves to be somewhat exaggerated, the PRC is likely to accumulate that much in reserves in fairly short order anyway. It is estimated that 70% of China's reserves are in US dollar denominated assets to ensure that the Chinese yuan does not appreciate too rapidly. Although it is up nearly twenty percent against the US dollar since being floated in 2005, there is no telling what sorts of depths the unloved dollar would plunge to if it weren't for the continued helping hand of the PRC. In effect, the McMansion- and SUV-loving USA has been able to wage its jihad on fiscal sanity because of China's so far undiminished willingness to provide "vendor finance." The accumulation of such a massive stash of reserves cannot but have distributional consequences. In effect, the $1.76T China has accumulated in reserves has lowered the standard of living for the Chinese people by reducing the purchasing power of their currency. Effectively, the savings of the (relatively) poor Chinese are being used to fund the profligacy of wealthy Americans. It is the Matthew effect in operation on a global scale: To those who hath, more shall be given.

This brings me to the terrible tragedies which have befallen many schoolchildren in China. The New York Times has also penned an article which has attracted much commentary asking why so many schoolhouses crumbled in Sichuan province when the earthquake struck. Certainly, the massive reserves accumulated by China look jarring next to the estimated 10,000 schoolchildren who perished during the earthquake in Sichuan province. Why can't a country with such vast reserves ensure a better standard of educational provision? Of course, there is a tradeoff in that domestic spending would not be helpful in propping up the dollar. Hence, the question that causes me to lose sleep is this: Has China used a trillion plus dollars to ensure that Americans party like it's 1999 while neglecting matters such as health and education at home? It is certainly a controversial thesis, but there are bits of evidence which suggest it cannot be easily discounted.

For instance, it has been extensively noted that economic activity in China has been concentrated in urban areas, giving rise to growing income disparities in this supposedly socialist country which now exceed those in capitalist America. Perhaps unsurprisingly, many of the schools which were adversely affected were in rural areas. Again from the NYT:

The Chinese government has known that many schools, especially in rural areas, are unsafe. Since 2001, the State Council, China’s cabinet, has budgeted roughly $1.5 billion for a nationwide program to repair dangerous schools in rural areas. In 2006, Sichuan Province’s government issued an urgent notice calling for localities to stop using substandard primary and middle schools.

An earlier post I featured on China's economy notes that spending on education has taken a backseat in recent years, especially in rural areas. Again, this has gone together with an emphasis on urban instead of rural areas with regard to economic activity:

• In the rural areas, heavy taxation was accompanied by the withdrawal and rising costs of basic government services;
• A development that has garnered almost no attention in the West is that between 2000-2005 the number of the adult illiterate Chinese increased by 30 million, reversing decades of trend developments;
• The way the Chinese measure adult illiteracy implies that all of this increase was a product of the rural basic education in the 1990s and this adverse development coincided closely in timing with the intensification of urban bias in the policy model.

At the moment, I am also reading an OECD booklet entitled Challenges for China's Public Spending: Toward Greater Effectiveness and Equity. It is again noted that education reflects patterns of inequality [and if I may add, can reinforce them]. On p. 50:

There is a large inequality in the distribution of spending on education across regions and across levels of education. The extent of the shortage of funds for education differs across the country and outcomes vary widely. Also, a comparatively large share of education spending is channelled to tertiary education at the expense of primary and secondary education.

Finally, I am actually in agreement with the WTO here when it ties global economic imbalances with the provision of health and education in China:

China also needs to proceed with its plans to increase government spending on social services, such as health and education, and thus human capital, as well as basic pensions, thereby possibly reducing the need for precautionary saving and thus raising consumption. These and other measures to increase consumption would not only reduce China's reliance on exports for growth, and hence its vulnerability to economic slowdowns abroad, but would also narrow the gap between national saving and gross domestic investment and therefore help to reduce China's large current account surplus.

Imbalances within China--urban versus rural, coastal versus interior--are tied to global economic imbalances in one way or another. Excessive reliance on exports does have its costs. Certainly, it does invite us to ask whether the $1.76 trillion largesse China has provided to the rest of the world could be put to better use, such as educating Chinese schoolchildren in better-designed buildings, for instance. While it may be controversial to link China's mind-boggling reserve accumulation to its inability to provide well-constructed school buildings, these are the sorts of questions more germane to political economy.

Le Strike: Europe Reacts to High Energy Prices

I sometimes get a chuckle when friends and relatives in the US of A complain about "high" oil prices which now approach $4 a gallon Stateside. To put things into perspective, it is worthwhile to point out that oil is not particularly dear in the US by global standards. Here in Europe, for instance, a gallon of the black stuff will cost you $9. As fuel use is taxed to death in this part of the world, there are obvious incentives to alternative means of personal transportation. However, a lack of alternatives is hitting some harder than others, especially those who cannot but rely on petrol for their living. Today we have two examples. First up are fishermen in the Eurozone's Club Med (France, Italy, Spain, Greece, and Portugal) complaining about how high oil prices which have made their livelihoods unviable. From Agence-France Presse:

Protests by fishing fleets against soaring fuel costs threatened to spread across Europe, as French fishermen voted Monday to extend their port blockade and Spanish fleets joined the stoppage with several other countries likely to follow. Italian and Greek fishermen may also join the strike later this week. In France the cost of a litre of diesel fuel for fishing boats has shot up from 45 euro cents (70 US cents) a litre to 70 in just six months.

After tense talks in France's biggest fishing port, Boulogne Sur Mer, fishermen voted to reject an aid package from Paris and extend their strike and oil blockade in a dozen key ports by another 48 hours. Meanwhile fishermen in northeast Spain also went on strike Monday over the same grievance, in a stoppage which is expected to spread to the country's other ports Tuesday. The striking French fishing fleet planned to call for a Europe-wide protest, participants at the Boulogne meeting said. In Ancona, Italy, a "Mediterranean vigilance committee" grouping fishermen from France, Italy, Portugal and Spain called for an indefinite strike from Wednesday, but it was not clear how representative they were.

The four main Mediterranean fishing federations -- Italy, Spain, Greece and Malta -- met later Monday in Paris to discuss possible joint action. The chairman of the Mediterranean fishing association Medisamak, Mourad Kahoul, told AFP on the sidelines of the Paris meeting that European fishermen planned a demonstration this week in Brussels, without giving further details.

The French strike affects fleets in the English Channel and the Mediterranean, although one delegation, from Etaples near Calais, voted to return to work. Fleets along the Atlantic coast agreed at the weekend to head back to sea, after the government promised aid to compensate for diesel costs. "Our demands are still the same, a standardised fuel price across Europe and a responsible management of (EU) quotas," said Thierry Lepretre, head of the fishing committee in Boulogne, where groups of fishermen strung cables across the port entrance to stop colleagues heading out to sea.

French fishermen are also blockading oil depots and refineries on the country's Atlantic, Mediterranean and Channel coasts. The fishermen escalated their protests last week, disrupting cross-Channel traffic, blocking fuel depots and ransacking fish stands at supermarkets as industry leaders negotiated with President Nicolas Sarkozy's government.

Fishermen in northeastern Spain launched a similar protest on Monday to demands for government aid, saying they too are hard hit by high fuel prices. Fishermen in Belgium and Portugal are also planning protests later this week to press demands for government aid. An Italian association, the Federation of Fishing Cooperatives, said its leadership would meet Wednesday to discuss strike action.

A big national demonstration is planned in Madrid on Friday. In Spain union and government representatives met in Madrid on Monday but the talks ended without concrete agreement. Both sides agreed to future meetings aimed at countering the rising cost of fuel. The government "understands the difficulties faced by the fishing sector," said fisheries ministry spokesman Juan Carols Martin after the meeting, but stressed that it was not the only industry suffering from high commodity prices. The Spanish government has already promised a 60 percent increase in subsidies to fishing fleets to relieve their fuel expenses. In France, where fishermen have already been out on strike for several days, Paris has offered an emergency package of 100 million euros (173 million dollars).

Aside from fishermen reeling from dear petrol in the Mediterranean, British lorry [that's "truck" for everyone else] drivers are also demanding rebates on fuel from the government as fuel prices soar. Plus, more stringent vehicle emissions regulations which are set to come into effect may incur the wrath not only of the transport industry but also of the general public. With gas prices these high, aren't there enough disincentives to using dilapidated, highly polluting vehicles? In any event, do visit British news sites in the coming days for possible footage of lorries choking London in protest. [UPDATE: See this footage, f'rinstance.] They sure do love "industrial action" here in Europe. From the BBC:

Hauliers say diesel prices topping 120p a litre, plus a planned 2p fuel tax rise, will drive firms "to the wall". Protesters are demanding an "essential user" duty rebate for HGV drivers. It comes as Chancellor Alistair Darling prepares to meet Labour MPs concerned about plans to increase road tax on older, more polluting vehicles.

A convoy of lorries, led by drivers from Kent, is expected to make its way to central London before handing a petition to 10 Downing Street. Motorists have been warned to expect major delays. In Wales, organisers say around 100 drivers have signed up to take part in a 60-mile convoy protest from Cross Hands, near Llanelli, to the Senedd in Cardiff Bay, where they too will hand in a petition.

Mike Presneill, of Transaction 2007, who is helping organise the London protest, said: "Fuel is rocketing. The government has the power to act but appears not to be listening. Hundreds of UK transport firms are being driven to the wall." Haulage company boss Peter Carroll, another of the protest organisers, told BBC News: "The main thing we're hoping to achieve is to get the government to recognise that this isn't a problem, or even a big problem, it's an absolute crisis."

With each lorry now costing £1,000 per week in fuel, he said hundreds of UK companies would go out of business if nothing was done, to be replaced by continental hauliers using cheaper fuel from abroad. He said drivers recognised the government could not control global oil prices but said it an "essential user" duty rebate of between 20p and 25p per litre for lorries would help firms compete on a "level playing field" with foreign hauliers.

Mr Carroll said a similar rebate scheme was already operating in the UK for bus companies. He added: "If they do that, we keep in business, we continue to pay our taxes and play our part in UK business and also the government wins because we take some of the inflationary pressure out of the economy. "Because all the time that our fuel is going up, we're trying to push those costs onto our customers, who in turn try to push it onto members of the general public."

The government is coming under mounting pressure over fuel prices and its plans to increase road tax for vehicles registered since 2001 which emit higher levels of pollutants. Owners of the most polluting cars could face a tax rise of as much as £200 - a move which the Conservatives say the increase will hit poorer drivers hardest.

A group of 35 Labour MPs have signed a motion calling on the Treasury to think again about the retrospective aspects of the policy. They are expected to warn Mr Darling the government could lose votes over the issue. One Labour MP warned the party risked alienating "Mondeo man" - the name given in the past to middle-income voters Labour needed to woo if it wanted to defeat the Conservatives.

A Treasury spokesman on Monday said the government was aware of their concerns. But environment minister Joan Ruddock said that, while she sympathised with motorists, the government "could not lose sight of the environment agenda". She denied the retrospective aspect of the policy was unfair, saying: "Over a 10-year period... I think the direction we have been going in has been clear to people at the time," she said.

Labour MP Ronnie Campbell, who framed the MPs' motion, told the BBC: "The increase is unfair to people who bought their cars a year ago, not knowing that the government was going to put that road tax on." He said the government was in danger of making the same sort of mistake as when it abolished the 10p income tax rate, and was accused of penalising poorer families.

Mr Campbell, MP for Blyth Valley, also called on the government to think again over plans to raise the cost of fuel duty by 2p per litre from the autumn. Meanwhile, Business Secretary John Hutton is to tell conference delegates Britain needs to become more energy efficient. The country must invest substantial amounts in alternative sources of power, such as wind and wave farms, he will tell the British Atlantic Survey meeting in Cambridge.

Videoconferencing Our Way to a Greener Future

In the past, I've made posts on the ongoing battle over a planned third runway at Heathrow [1, 2]. To be sure, the point of contention here in the UK is not just over another Heathrow runway, but on adding flight capacity in many other locations.From a political standpoint, it's a real fun quarrel as it involves a large cross-section of society. In favour are airlines, airport operators, and a number of other firms; against are those who live near airports, environmentalists, and other green-minded individuals The World Wildlife Fund (WWF) has just come out with a report touching on the economics of expanding air travel in the UK via additional airports or airport terminals. In the report, the WWF argues that the economic case for expanding air travel facilities is specious for the following reasons after contracting a research company to poll FTSE 350 companies:

• 62% of companies surveyed are already reducing their business travel footprint.
• A further 24% of companies are currently developing plans to do so.
• 89% of companies expect they will want to fly less over the next 10 years.
• 85% of companies say that videoconferencing can help them reduce their flying.
• 89% of companies believe that videoconferencing can improve their productivity.

The primary criticism made in the report is that firms will not require as much additional air travel capacity as what the authorities say they will need in the future. Besides, technological advancements like videoconferencing will further reduce the need for air travel. However, the report also notes that business travellers make up just 22% of total trips. Aside from the obvious point that intentions noted in a survey do not necessarily reflect future behaviour, then, there are bigger gaps in this counterargument: What about leisure travel in and out of the UK? Also, what about freight and cargo handling? If these two matters could have been included in the equation, then the WWF could have come up with a more comprehensive argument. The latter are economic arguments which cannot be discounted.

You can also view a videoclip on the WWF site that makes the point "we're headed for an economic downturn anway so there won't be as much demand for air travel." Of course, the world's largest airport management company, BAA, has its own blurb on how the environmental impacts of air travel can be mitigated while providing more travel options. Me? I'll take the Trans Europe Express, thank you much.

Karl Marx Was All for Free Trade

It never ceases to amaze me that posts on the topic of Karl Marx [1, 2, 3] remain among the most popular ones here since I am hardly an authoritative commentator on Marxist thought. Nevertheless, coming from the school of "give them what they want," I will give Herr Marx the pride of place in this post. Cool Papa Marx rides again. For ideological reasons, Marxist thought plays a larger role in British public discourse and academia than in the States. You must remember that Marx is buried in London, and that a BBC poll in 1999 found he was the most influential thinker of the millennium ahead of Einstein, Newton, and Darwin. Would such a survey have returned similar results in the US of A? I think not.

Speaking of British academia, I am currently reading Capitalism Unleashed: Finance Globalization and Welfare by the late, maybe even great Oxford Marxist economist Andrew Glyn. While most of its content is boilerplate socialism with a few references to modern events thrown in, I came across an absolute stunner of a quote on p. 77 where Marx extols free trade. However, there is a supremely sardonic twist to Marx's idea: Free trade, by extending the contradictions of capitalism to all the ends of the Earth, will only hasten capitalism's demise. (See this earlier post for a Cliff's Notes version of the contradictions of capitalism if you are unfamiliar with the basic idea.) A problem with this line of thought, of course, is that few of us are as convinced as Marx about the internal contradictions of capitalism will bring about its demise. It keeps rolling along.

Of course, a coarse analysis would instead point to the demise of the Iron Curtain as a demonstration of the failure of socialism. Still, those who argue that Lenin's iteration of socialism that soon became a prominent feature of the international political economy was not as Marx intended. The "vanguard of the proletariat," Lenin's bastardized version of Marxist leadership, can in retrospect be seen as reformulating the bourgeoisie with class privileges intact under the rubric of socialism. Nowhere is this more evident than in China's variant, replete with inequality surpassing that in many (nominally) capitalist countries and Party elites. In other words, the failure of Soviet-style communism is not the failure of Marxism as the former was not representative of the latter as described by its principal author. Indeed, the more left-leaning can make an argument that the current time is ripe for making the contradictions of capitalism even more apparent than before.

It is debatable, though, whether the never-ending bliss of paradise (where the grass is green and the girls are pretty) promised by Marx after the overthrow of capitalism's shackles would be any better than what we have now. And, invoking that presumes the tipping point for fomenting the oft-predicted workingman's revolution would soon be upon us. Or, is "The Man" too big and too strong?

Anyway, on to the Marx passage in question. The essay below comes from The Northern Star, a publication of the British Chartist Movement to which Karl Marx was sympathetic to. It is Marx's undelivered speech to a gathering of those endorsing the idea of free trade--The Free Trade Congress in Brussels--in 1847. It is illuminating that today's three main IPE points of view as noted in this blog's FAQs are all in there in full guise--mercantilism (List), liberalism (Smith and Ricardo), and Marxism care of the eponymous author. That modern political-economic debate still mirrors the well-formed thoughts of Marx on the differences among these POV is illuminating, as is his conviction that, yes, the demise of capitalism is nigh. Marx being Marx, he's rather long-winded talking about Protection, Free Trade, and the Working Classes, but the last paragraph below best summarizes why Marx believed that, yes, free trade was a splendid idea. Does revolution await?

There are two sects of protectionists. The first sect, represented in Germany by Dr. List, who never intended to protect manual labour, on the contrary, they demanded protective duties in order to crush manual labour by machinery, to supersede patriarchal manufacture by modern manufacture. They always intended to prepare the reign of the monied classes (the bourgeoisie), and more particularly that of the large manufacturing capitalists. They openly proclaimed the ruin of petty manufacturers, of small tradesmen, and small farmers, as an event to be regretted, indeed, but quite inevitable, at the same time. The second school of protectionists, required not only protection, but absolute prohibition. They proposed to protect manual labour against the invasion of machinery, as well as against foreign competition. They proposed to protect by high duties, not only home manufactures, but also home agriculture, and the production of raw materials at home. And where did this school arrive at? At the prohibition, not only of the importation of foreign manufactured produce, but of the progress of the home manufacture itself. Thus the whole protective system inevitably got upon the horns of this dilemma. Either it protected the progress of home manufactures, and then it sacrificed manual labour, or it protected manual labour, and then it sacrificed home manufactures.

Protectionists of the first sect, those who conceived the progress of machinery, of division of labour, and of competition, to be irresistible, told the working classes, “At any rate if you are to be squeezed out, you had better be squeezed by your own countrymen, than by foreigners.” Will the working classes for ever bear with this? I think not. Those who produce all the wealth and comforts of the rich, will not be satisfied with that poor consolation. They will require more substantial comforts in exchange for substantial produce. But the protectionists say, “After all, we keep up the state of society as it is at present. We ensure to the working man, somehow or other, the employment he wants. We take care that he shall not be turned out of work in consequence of foreign competition.” So be it. Thus, in the best case, the protectionists avow that they are unable to arrive at anything better than the continuation of the status quo. Now the working classes want not the continuation of their actual condition, but a change for the better. A last refuge yet stands open to the protectionist. He will say that he is not at all adverse to social reform in the interior of a country, but that the first thing to ensure their success will be to shut out any derangement which might be caused by foreign competition. “My system,” he says, “is no system of social reform, but if we are to reform society, had we not better do so within our own country, before we talk about reforms in our relations with other countries?” Very specious, indeed, but under this plausible appearance, there is bid a very strange contradiction. The protectionist system, while it gives arms to the capital of a country against the capital of foreign countries, while it strengthens capital against foreigners, believes that this capital, thus armed, thus strengthened, will be weak, impotent, and feeble, when opposed to labour. Why, that would be appealing to the mercy of capital, as if capital, considered as such, could ever be merciful. Why, social reforms are never carried by the weakness of the strong, but always by the strength of the weak. But it is not at all necessary to insist on this point. From the moment the protectionists agree that social reforms do not necessarily follow from, and that they are not part and parcel of their system, but form quite a distinct question, from that moment they abandon the question, which we discuss.

We may, therefore, leave them in order to review the effects of Free Trade upon the condition of the working classes. The problem: What will be the influence of the perfect unfettering of trade upon the situation of the working classes, is very easy to be resolved. It is not even a problem. If there is anything clearly exposed in political economy, it is the fate attending the working classes under the reign of Free Trade. All those laws developed in the classical works on political economy, are strictly true under the supposition only, that trade be delivered from all fetters, that competition be perfectly free, not only within a single country, but upon the whole face of the earth. These laws, which A. Smith, Say, and Ricardo have developed, the laws under which wealth is produced and distributed — these laws grow more true, more exact, then cease to be mere abstractions, in the same measure in which Free Trade is carried out. And the master ‘of the science, when treating of any economical subject, tells us every moment that all their reasonings are founded upon the supposition that all fetters, yet existing, are to be removed from trade. They are quite right in following this method. For they make no arbitrary abstractions, they only remove from their reasoning a series of accidental circumstances. Thus it can justly be said, that the economists — Ricardo and others — know more about society as it will be, than about society as it is. They know more about the future than about the present.

If you wish to read in the book of the future, open Smith, Say, Ricardo. There you will find described, as clearly as possible, the condition which awaits the working man under the reign of perfect Free Trade. Take, for instance, the authority of Ricardo, authority than which there is no better. What is the natural normal price of the labour of, economically speaking, a working man? Ricardo replies, “Wages reduced to their minimum — their lowest level.” Labour is a commodity as well as any other commodity. Now the price of a commodity is determined by the time necessary to produce it. What then is necessary to produce the commodity of labour? Exactly that which is necessary to produce the sum of commodities indispensable to the sustenance and the repairing of the wear and tear of the labourer, to enable him to live and to propagate, somehow or other, his race. We are, however, not to believe that the working man will never be elevated above this lowest level, nor that he never will be depressed below it. No, according to this law, the working classes will be for a time more happy, they will have for a time more than the minimum, but this surplus will be the supplement only for what they will have less than the minimum at another time, the time of industrial stagnation. That is to say, that during a certain space of time, which is always periodical, in which trade passes through the circle of prosperity, overproduction, stagnation, crisis — that, taking the average of what the labourer received more, and what he received less, than the minimum, we shall find that on the whole he will have received neither more or less than the minimum; or, in other words, that the working class, as a class, will have conserved itself, after many miseries, many sufferings, and many corpses left upon the industrial battle field. But what matters, that? The class exists, and not only it exists, but it will have increased. This law, that the lowest level of wages is the natural price of the commodity of labour, will realise itself in the same measure with Ricardo’s supposition that Free Trade will become a reality.

We accept every thing that has been said of the advantages of Free Trade. The powers of production will increase, the tax imposed upon the country by protective duties will disappear, all commodities will be sold at a cheaper price. And what, again, says Ricardo? “That labour being equally a commodity, will equally sell at a cheaper price” — that you will have it for very little money indeed, just as you will have pepper and salt. And then, in the same way as all other laws of political economy will receive an increased force, a surplus of truth, by the realisation of Free Trade — in the same way the law of population, as exposed by Malthus, will under the reign of Free Trade develop itself in as fine dimensions as can possibly be desired. Thus you have to choose: Either you must disavow the whole of political economy as it exists at present, or you must allow that under the freedom of trade the whole severity of the laws of political economy will be applied to the working classes. Is that to say that we are against Free Trade? No, we are for Free Trade, because by Free Trade all economical laws, with their most astounding contradictions, will act upon a larger scale, upon a greater extent of territory, upon the territory of the whole earth; and because from the uniting of all these contradictions into a single group, where they stand face to face, will result the struggle which will itself eventuate in the emancipation of the proletarians.

Barack Obama is Wall Street's Chosen One

I went over to OpenSecrets.org to get the latest scoop on the fundraising activities of the US presidential candidates. While not totally comprehensive, the site offers a workable picture of the candidates' funding activities. Actually, the title above is kind of misleading for an obvious reason: we cannot be sure whether a particular candidate is given campaign funds because (a) s/he has a favourable disposition towards an interest group or (b) s/he has the best chance of winning. Consider the case of Wall Street. To hedge their bets, Wall Street firms have not placed all their eggs in one basket, contributing to Obama, Clinton, and McCain's respective campaigns. However the relative proportion of allocated funds may reflect preference and/or the belief that there is a frontrunner. Let us begin with Obama:

1	Lawyers/Law Firms	$15,019,030
2	Misc Business	$13,412,381
3	Retired	$9,206,269
4	Securities & Investment	$7,498,503
5	Education	$6,314,947

As you can see, Wall Street firms are fourth among industry group contributions to Obama's campaign. In terms of outright contributions, Wall Street has made the most to the Obama campaign. Further, four of the top five Obama contributors are Wall Street firms:

Goldman Sachs	$544,481
University of California	$371,266
Ubs Ag	$363,257
JPMorgan Chase & Co	$353,808
Citigroup Inc	$331,946

What about Missus Clinton? Among the remaining Big Three, she comes in second place among Wall Street industry group contributions:

1	Lawyers/Law Firms	$15,425,314
2	Misc Business	$8,411,793
3	Securities & Investment	$6,971,998
4	Retired	$6,937,862
5	Real Estate	$6,077,866

As for her top five contributors, three are Wall Street bigwigs...

DLA Piper	$505,200
Goldman Sachs	$445,350
Citigroup Inc	$406,752
Morgan Stanley	$402,845
EMILY's List	$323,567

Then there's John McCain. As you all know, he hasn't amassed nearly as much firepower as the Democratic candidates for understandable reasons. By industry group, his top contributors are from:

1	Retired	$9,101,609
2	Lawyers/Law Firms	$4,228,737
3	Misc Business	$3,892,667
4	Securities & Investment	$3,764,664
5	Real Estate	$2,915,560

McCain hasn't gotten even half as much as either Obama or Clinton from Wall Street. Going by campaign contributions, it appears that the supposedly populist, middle-class loving Democrats are funded more by Wall Street than the more business-friendly (at least in rhetoric) John McCain. Who would have thought his largest contributor base is the AARP set? Go figure. I round it up with the top contributors to McCain's campaign, "only" two of which are [yawn] Wall Street biggies:

Merrill Lynch	$226,550
Blank Rome LLP	$222,050
Citigroup Inc	$206,102
Greenberg Traurig LLP	$173,837
AT&T Inc	$149,305

Based on campaign contributions so far, you could make a case of McCain being the least influenced by the omnipresent Wall Street contribution machine. Visit the OpenSecrets.org site to understand the method they use to trace campaign funds and for periodic updates on the candidates' fundraising activities. Befitting the adage that all politics is local, it is interesting to note that unions and government employee groups loom large in the bigger scheme of things, high-profile Wall Street contributions to presidential candidates aside.

Bush Sez This is "World Trade Week 2008"

A few days ago, our good friends at the World Trade Law blog had a post entitled "McCain Goes After the Free Trade Vote." This, of course, made me wonder if there is such a thing as a free trade vote in America, or a meaningful voting bloc positively motivated by trade issues. Let me be perfectly blunt: Selling the free trade cause in America at the present time appears to be as easy as hawking Cosmopolitan subscriptions to the Taliban (now that would be the ultimate expression of free trade ;-) Despite the quixotic nature of the cause, it is notable that another thing which binds Bush and McCain aside from Iraq is, well, free trade. Call it senseless, call it "he doesn't care no more 'cause he's a lame duck," but Bush has just declared this week to be "World Trade Week 2008" for what it's worth. That it received virtually zero press coverage just goes to show the status quo. Read it and sleep. From the White House:

Free and fair trade helps secure a future of freedom and promise. During World Trade Week, we recognize the positive effects of opening markets around the world. Open markets play an integral role in America's economic progress, creating better-paying jobs, expanding consumer choices, and providing increased opportunities for American workers and employers. Free and fair trade also increases economic growth among our trading partners.

My Administration is committed to expanding economic freedom worldwide. We will continue to seek an ambitious outcome in the Doha Round that will reduce and eliminate tariffs and other barriers on goods and open new markets for services trade. The Doha Round provides a once-in-a-generation opportunity to advance open markets, strengthen economic growth, and help millions rise out of poverty.

We also encourage the Congress to approve our pending trade agreements with Colombia, Panama, and South Korea. Our free trade agreement with Colombia is important, because it will support one of our closest allies in the Western Hemisphere currently under assault from a terrorist network. Congressional approval of this agreement would make clear America's unshakeable commitment to advancing the benefits of free markets and the interests of free people.

Today, nearly 250,000 U.S. firms export U.S. products. Ninety-seven percent of those exporters are small- or medium-sized businesses. The number of U.S. small business exporters has more than doubled since 1992. Those businesses have surpassed a quarter of a trillion dollars in annual export sales.

Free and fair trade helps reinforce our Nation's commitments to democracy, transparency, and the rule of law. This week and throughout the year, we recognize the importance of trade in promoting prosperity and freedom in the United States and around the world.

NOW, THEREFORE, I, GEORGE W. BUSH, President of the United States of America, by virtue of the authority vested in me by the Constitution and laws of the United States, do hereby proclaim May 18 through May 24, 2008, as World Trade Week. I encourage all Americans to observe this week with events, trade shows, and educational programs that celebrate the benefits of trade to our Nation and the global economy.

IN WITNESS WHEREOF, I have hereunto set my hand this fifteenth day of May, in the year of our Lord two thousand eight, and of the Independence of the United States of America the two hundred and thirty-second.

GEORGE W. BUSH

Out Now: The WTO's Trade Policy Review of China

One of the things I don't like about looking up documents on the WTO site is that they're usually in Word instead of PDF format. Also, they're usually unavailable in a single document but are borken down by chapters. Unfortunately, both hold true for this important release, the WTO's biennial trade policy review of the PRC. Draw your own conclusions, but the findings and recommendations do not deviate much from Washington's line. First, here is the online summary:

The report highlights details about structural reforms, including in the financial and other sectors that have introduced more market-oriented measures aimed at achieving a more efficient allocation of resources. The report also notes that China has continued to be one of the largest recipients of inward FDI and has become a large provider of outward FDI, reflecting its increasing integration into the global economy.

However, the report identifies imbalances in the sources of growth in the economy, which is mainly driven by exports and investment rather than by consumption, a widening gap between savings and investment reflected in China’s growing current account surplus, and rising income inequality despite high GDP growth.

The WTO Secretariat report, along with a policy statement by the Government of China, will be the basis for the second TPR of China by the Trade Policy Review Body of the WTO on 21 and 23 May 2008.

Next, here are excerpts from a summary section about China's trade and investment policy network. By all means, do read the rest of the report if you're further interested:

The overall aim of China's trade policy, which has remained unchanged since its previous Trade Policy Review, is to accelerate the opening of its economy to the outside world to introduce foreign technology and know-how, develop foreign trade, and promote "sound economic development". China aims to further strengthen the multilateral trading system; at the same time, it has been intensifying its pursuit of bilateral/regional free-trade agreements with some of its trading partners.

China has continued to attach high priority to the multilateral trading system and has been participating in the Doha Development Agenda negotiations. China grants at least MFN treatment to all WTO Members except El Salvador and some territories of EC member states. China has been a party to one dispute as a complainant and nine disputes as a respondent since 2006.

During the period under Review, two free-trade agreements entered into force (the China – Chile FTA on 1 October 2006 and the China – Pakistan FTA on 1 July 2007). The Agreement on Trade in Services of the China-ASEAN Free Trade Area also entered into force on 1 July 2007. Four further agreements are being negotiated.

Although some aspects of China's trade policy regime remain opaque, it has continued to adopt measures to increase the level of transparency of its trade and trade-related policies, practices, and measures. Since its previous Review, additional measures, such as the Regulation on Open Government Information, have been introduced with a view to enhancing transparency. On 13 September 2007, the National Corruption Prevention Bureau was established. Since its previous Trade Policy Review, several new trade-related laws, including the Property Law, the Enterprise Income Tax Law, the Anti-Monopoly Law and the Law on Enterprise Bankruptcy, have been adopted.

China has recently been moving towards achieving a level playing field for foreign and domestic investors in China. Until the end of 2007, China had provided better than national treatment in its taxation policies for foreign-invested enterprises (FIEs); since 1 January 2008, a uniform enterprise income tax rate of 25% has been applied to all enterprises (including FIEs) in accordance with the Enterprise Income Tax Law, with some exceptions such as lower rates granted for investment in certain industries. It would appear that all tax incentives now apply equally to domestic firms and FIEs. Several regulations and rules have been introduced or amended with a view to further liberalizing foreign direct investment and establishing a more rules-based and predictable business environment for foreign investors.

Trivial Pursuit, Global Capital Markets Edition

One of the more striking phenomena to emerge in this age of financial globalization has been the ability of sovereigns and corporations to strategically issue debt in international capital markets. This is usually done for tax purposes, although interest rate differentials between home and issuing countries also play a part, as do foreign exchange considerations. In the good ol' days before ol' devil globalization came along, they had little choice but to issue bonds in their home countries. However, the arrival of Eurobonds in the sixties heralded the arrival of more debt instruments not denominated in the home currency of the issuer. Since then, the Eurobond market has given birth to a plethora of variants which differ according to (a) the nationality of the issuer; (b) the currency of the bond; (c) the place of issuance; and even (d) the place of settlement. It gets pretty complicated pretty fast.

Given Japan's huge pool of savings and the low interest rates on yen-denominated instruments, it is of little surprise that many Eurobond variants have something to do with the land of the rising sun. Unless you are a bond trader, the differences among the various Japan-related bonds are difficult to spot--getting 6 or more right would be quite an achievement. The others are pretty obvious; see if you can match the ff:

(1) A bond denominated in U.S. dollars and is publicly issued in the United States by foreign banks and corporations.
(2) A Eurobond that is issued by a Japanese issuer and does not count against a Japanese institution's limits on the holdings of foreign securities.
(3) A yen-denominated bond issued in Japan aimed at a domestic investor, but settled in Europe.
(4) A type of foreign bond that is issued in the Australian market by non- Australian firms and is denominated in Australian currency .
(5) A Canadian dollar denominated bond that is sold in Canada by foreign financial institutions and companies.
(6) A yen-denominated bond issued in Tokyo by a non-Japanese company and subject to Japanese regulations
(7) A sterling denominated bond that is issued in London by a company that is not British.
(8) A type of foreign-currency denominated bond that is issued in Japan by foreign entities.

a. Samurai Bond
b. Shogun Bond
c. Sushi Bond
d. Daimyo Bond
e. Yankee Bond
f. Maple Bond
g. Bulldog Bond
h. Matilda Bond

Answer Key:

House Passes NOPEC: Will US Sue OPEC States?

The US House has just passed HR 6074, colourfully titled the No Oil Producing and Exporting Cartels Act of 2008 (NOPEC) allowing the Department of Justice to pursue cases against OPEC member states on antitrust grounds via amendments to the Sherman Act. Although the Senate has yet to approve the bill, it will be interesting to see what will happen if this bill passes into law and is implemented. Like the folly that is the farm bill, this too has the capacity to really rile any number of LDCs, particularly OPEC members. From the Congressional Report Service, here are it main provisions:

Gas Price Relief for Consumers Act of 2008 - No Oil Producing and Exporting Cartels Act of 2008 or NOPEC - Amends the Sherman Act to make it illegal for any foreign state or instrumentality thereof to act collectively or in combination with any other foreign state or any other person, when such action has a direct, substantial, and reasonably foreseeable effect on the market, supply, price, or distribution of petroleum in the United States, to: (1) limit the production or distribution of oil, natural gas, or any other petroleum product (petroleum); (2) set or maintain the price of petroleum; or (3) otherwise take any action in restraint of trade for petroleum.

Denies a foreign state engaged in such conduct sovereign immunity from the jurisdiction or judgements of U.S. courts in any action brought to enforce this Act;

States that no U.S. court shall decline, based on the act of state doctrine, to make a determination on the merits in an action brought under this Act;

Authorizes the Attorney General to bring an action in U.S. district court to enforce this Act;

Makes an exception to the jurisdictional immunity of a foreign state in an action brought under this Act;

Directs the Attorney General to establish in the Department of Justice (DOJ) a Petroleum Industry Antitrust Task Force to, among other things, develop, coordinate, and facilitate the implementation of DOJ investigative and enforcement policies related to petroleum industry antitrust issues under federal law.

Directs the Comptroller General to conduct a study evaluating the effects of mergers addressed in covered petroleum merger consent decrees on competition in the markets involved, including the effectiveness of divestitures required in such decrees in preserving competition in those markets.

I am of two minds about this bill. Having stayed in oil importing countries my entire life, the idea of producer cartels does not appeal to me or my pocketbook. The Heritage Foundation unsurprisingly supports this legislation; here is a historically informative snippet:

The cartel's operations ensure that its members' oil and gas economies remain insulated from foreign investment flows. Members of OPEC have not worked to enhance the rule of law and property rights and have imposed severe restrictions to prevent foreign investors from owning upstream production assets (oil fields and pipelines). This is a testament to the cartel's de facto monopoly over the petroleum market. Indeed, the only serious challenge to the organization came in 1978 when a U.S. non-profit labor association, the International Association of Machinists and Aerospace Workers (IAM), sued OPEC under the Sherman Antitrust Act, in IAM v. OPEC. But the case was rejected in 1981 by the U.S. Court of Appeals for the Ninth Circuit. OPEC, the court affirmed, could not be prosecuted under the Sherman Act due to the foreign sovereign immunity protection it claimed for its member states.

In practice, however, I do think this bill is more trouble than it is worth. First, I doubt whether OPEC member countries can significantly increase their output at this point in time. Yes, MNCs armed with better extractive technologies can probably eke more output given the chance, but the prospects of allowing MNCs to do so are hardly favourable in petroleum exporting states. Second, and more pointedly, I am convinced that suing a member of OPEC will have the opposite effect of actually slowing OPEC shipments to the US instead of promoting less collusion as intended. As with the farm bill, President Bush plans a veto, but veto-proof majorities appear to exist in both houses of Congress. It's game on although I am firmly convinced that the US would come out on the losing end over any spat with OPEC. Here is a summary from Reuters:

The House of Representatives overwhelmingly approved legislation on Tuesday allowing the Justice Department to sue OPEC members for limiting oil supplies and working together to set crude prices, but the White House threatened to veto the measure.

The bill would subject OPEC oil producers, including Saudi Arabia, Iran and Venezuela, to the same antitrust laws that U.S. companies must follow. The measure passed in a 324-84 vote, a big enough margin to override a presidential veto. The legislation also creates a Justice Department task force to aggressively investigate gasoline price gouging and energy market manipulation.

"This bill guarantees that oil prices will reflect supply and demand economic rules, instead of wildly speculative and perhaps illegal activities," said Democratic Rep. Steve Kagen of Wisconsin, who sponsored the legislation. The lawmaker said Americans "are at the mercy" of OPEC for how much they pay for gasoline, which this week hit a record average of $3.79 a gallon.

The White House opposes the bill, saying that targeting OPEC investment in the United States as a source for damage awards "would likely spur retaliatory action against American interests in those countries and lead to a reduction in oil available to U.S. refiners." The administration said less oil going to refineries would limit available gasoline supplies and raise fuel prices.

Foreign investment in U.S. oil infrastructure has declined in the last decade. But the state-owned oil companies of several OPEC nations are owners of U.S. refineries, and those investments could be affected if the legislation becomes law, said Arlington, Virginia-based FBR Capital Markets Corp.

The bill also requires the Government Accountability Office to carry out a study on the effects of prior oil company mergers on energy prices.

The Senate would still have to approve the House measure. The Senate previously approved similar legislation as part of a broad energy bill. However, the OPEC-suing provision was removed after White House opposition in order to get the underlying energy legislation signed into law.

s TXTing Kiling Nglish? MB tis Nu Lnguag nsted

As an instructor by trade, I sometimes lament the poor spelling and grammar of the work submitted at the undergraduate and even at the postgraduate level. My pet peeve is the substitution of "loosing" for "losing" in written work. This, of course, is just one of my minor irritations. You can probably tell that I am a curmudgeon of the first wafer by having something to moan about on a daily basis on a thing called a "weblog." It boggles the mind that your non-native English speaking correspondent needs to correct the work of English students on a regular basis. In economist-speak, writing conventions exist in order for there to be mutual comprehensibility by reducing transaction costs in understanding each other. However, the pair of articles below which have caught my attention suggest that I have things all wrong: What if the new means of communication we have--short-messaging systems (text messaging), instant messengers, and the like--are giving birth to new languages? Perhaps the conventions of English writing that instructors taught me in my younger days will give way to even newer forms of English. Just as archaic English doth maketh for difficult reading noweth to thine, perchance the text generation will feel the same way about Standard Written English as it is taught in the future.

The first of these articles is entitled "SMS Language is Gr8!" ;-( Here, results of a study which purport the emergence of a new IM language are recounted:

Typed out feverishly with a calloused thumb in the most inhospitable of places, SMSs may appear to be a garbled, lazy substitute for Real English, but one study seems to show that those compressed blocks of seemingly random letters may be the beginnings of a new kind of language.

The study was conducted by Dr Pamela Takayoshi, associate professor of English at the Kent State University in the US, along with fellow associate professor Dr Christina Haas and a group of graduate and undergraduate researchers.

The team collected student instant-messaging (IM) conversations over a period of two years, then analysed the differences between those conversations and Standard Written English. They discovered that the areas in which IM chatter differed from the norms of the Standard weren't mere deviations, but actually conformed to a written standard local to the IM phenomenon.

"IM is not just bad grammar or a bunch of mistakes. IM is a separate language form from formal English and has a common set of language features and standards," says Takayoshi. The study found that the structure of an instant message has little regard for appearance (no surprise), opting instead to concentrate on meaning - and in terms of meaning, foremost is the expression of social relationships.

Separate to the study, Dr Nicola Döring, professor of Media Design and Media Psychology at the Ilmenau University of Technology, says that IM language has developed into its current abbreviated state due to limited character space and the small size of cellphone screens.

On the subject of IM and the expression of relationships, she says that teenagers tend to find it easier to tackle flirting and intimate conversations via the technology, which renders the sometimes uncomfortable aspect of direct conversation unnecessary. IM also allows fledgling couples to "map out common areas of interest and the contours of the relationship at a slower pace", according to Döring.

The team at Kent is now casting a thorough glance at the social website, Facebook, in order to determine possible similarities between IM speak and other forms of electronic language. Says Christina Haas: "When we look at the kinds of technology young people are using today, we see that many of those technologies - IM, blogs and Facebook - are writing technologies. Even the phone is used for writing now." So next time you have your eyes clawed out by the alien glyphs on the screen of your phone, take heart in the knowledge that language isn't being degraded; it's merely being squashed.

But wait, it gets even worse with this Economic Times article, "SMS Not Bad Grammar But Linguistic Renaissance" :-(

Parents need not worry - a new study contends that SMSes and online chats actually help teens hone their linguistic abilities, rather than degrade them. Parental worry has stemmed from the lack of grammar and the extensive use of often unintelligible abbreviations like LOL, OMG and TTYL in SMSes - also known as instant messaging (IM).

But the study has concluded that IM represents "an expansive new linguistic renaissance" being evolved by GenNext kids. Researchers at the University of Toronto have pointed out that teenagers risk familial censure and ridicule of friends if they use slang. But IM allows them to deploy a "robust mix" of colloquial and formal language.

They based their conclusions on an analysis of more than a million words of IM communications and a quarter of a million spoken words produced by 72 people aged between 15 and 20. The researchers have argued that far from ruining teenagers' ability to communicate, IM lets teenagers show off what they can do with language.

"IM is interactive discourse among friends that is conducive to informal language," said Derek Denis, co-author of the study, "but at the same time, it is a written interface which tends to be more formal than speech". They found that although IM shared some of the patterns used in speech, its vocabulary and grammar tended to be relatively conservative.

For example, when speaking, teenagers are more likely to use the phrase "He was like, 'What's up?'" than "He said, 'What's up?'" - but the opposite is true when they are instant-messaging. This supports the idea that IM represents a hybrid form of communication.

Nor do teens use abbreviations as much as the stereotype suggests: LOL (laugh out loud), OMG (oh my god) and TTYL (talk to you later) made up just 2.4 percent of the vocabulary of IM conversations - an "infinitesimally small" proportion, say the researchers. And rumours of the demise of the word "you" would appear to have been greatly exaggerated: it was preferred to "u" a whopping 9 times out of 10. In fact, the study suggests that the use of such short forms is confined mostly to the youngest users of IM.

The findings of the study has been published in the spring issue of the journal American Speech.

Bottom line: What matter is not so much that English is being mangled by IM and SMS users, but that it is being mangled in the same way. As Martha Stewart would say, perhaps that's a good thing, hard as it may be for the likes of me to accept. And, as more people understand "mangled" language better than ol' Standard English, then tz up t us g-zers t chng and nt th othr wy rnd. In the meantime, I have more term papers with mangled English to correct, OMG.

Can Business Help Meet the Millennium Dev't Goals?

The Hippocratic oath is said to embody the idea "First, do no harm." In recent years, corporate social responsibility (CSR) has become all the rage as large corporations of all sorts attempt to deal with the social and environmental challenges of today. Notable attempts to create global standards for CSR practice include the United Nations Global Compact for all corporations as well as the Equator Principles which apply specifically to financial firms' investing practices. As with the Hippocratic oath, they are guided more by the negative principle of doing no harm. Being large, visible entities with considerable economic clout, checks on abuses of corporate power are certainly welcome, even if these attempts are largely voluntary and lack enforcement mechanisms to punish transgressors.

Recently, the UN Development Programme (UNDP) unveiled another initiative entitled the "Business Call to Action" that may be more on the proactive end than the reactive one. Instead of emphasizing not doing harm, the UNDP, the British government, and various multinationals are envisioning corporations doing good. That is, can the efforts of firms be instrumental in achieving the Millennium Development Goals (MDGs)? Although I am no big fan of how the MDGs are written--William Easterly has explained their faults--the objective of enlisting the support of MNCs in helping alleviate poverty is certainly timely. I have long listed pioneering works by CK Prahalad ("The Fortune at the Bottom of the Pyramid") and Stuart Hart ("Capitalism at the Crossroads") on my virtual bookshelf, and the ideas here are similar. What follows are some excerpts. First, here is the main idea:

In July 2007 Prime Minister Gordon Brown, speaking alongside UN Secretary General Ban Ki–moon, called for a new global partnership to address a growing development emergency: the shortfall in progress towards delivering the Millennium Development Goals (MDGs), particularly in sub-Saharan Africa. This is a global Call to Action that cannot be achieved by governments alone, and where the private sector has a unique transformational role.

The Business Call to Action is the focal point for mobilising the efforts of big business to support growth in developing countries and contribute to the MDGs. Businesses are an engine of growth and development with the potential to have a huge impact on improving the lives of people in developing countries through increasing investment and skills, creating jobs and developing goods, technologies and innovations.

This is not about philanthropy. The Business Call to Action challenges companies to find new business opportunities for the 21st century – using company’s core business in a way that both contributes to the MDGs and contributes to their success. The Business Call to Action is not a one off event. It is part of a major campaign to speed up progress on the MDGs during 2008 – drawing on the power of businesses, governments, NGOs, faith groups, and citizens.

Next, here are what the Business Call to Action intends to pursue:

• Generate significant new employment opportunities in developing countries;
  
• Improve the quality of supply chains, helping local businesses to diversify, and/or become internationally competitive;
• Include innovations and/or technologies which make it easier for individuals and businesses to make a living.

I will have more to say about the third point in the near future. Meanwhile, here is the declaration itself:

At the Millennium Summit in 2000 the world declared it would spare no effort to achieve the seven key Millennium Development Goals. There has been some progress. But seven years later and half way to 2015, the world is not on track to meet that commitment. We have just seven years to go – a few short years to make the difference for millions of people on our planet between grinding poverty and the opportunity to learn, be healthy and make enough to support their families. We need urgent action to meet this development emergency if the world is to get back on track.

With will we know we can make the difference. We can build on the progress that has been made on every continent when the right policies have been combined with sufficient resources.

But we need to go further. We need to mobilise all our efforts. The eighth Millennium pledge was that we would “develop a global partnership for development”. The time has come for us all to live up to that promise. We believe we now need an international effort that harnesses the power of everyone: the private sector, individuals, consumers, faith groups, cities, civil society organisations, as well as governments, north and south, to work together to achieve the Millennium Development Goals.

We believe now is the time to act, not talk. We know what needs to be done and the urgency of doing it. So today, as leaders from the private sector, we declare our commitment to meet this development emergency. We commit to action and because the scale of the challenge means no one acting alone can achieve the difference we need, we call on all parties, including the private sector, governments, civil society and faith groups to play their part. It is only by acting together in a genuine partnership that we can succeed.

We urge the convening of a UN meeting in 2008 that brings together heads of government with leaders from the private sector, civil society and faith, to review progress made in the preceding 12 months and accelerate action.

History in the Making: Doha, Dubai, and Abu Dhabi

Forgive me for not being able to resist cheap shots at Francis Fukuyama who predicted the End of History with the collapse of the Iron Curtain, which was supposed to result in the global triumph of capitalist liberal democracy. It appears that only George W. Bush appears to maintain that hackneyed and harebrained notion. A recent events that made the headlines is of Dubya lecturing various Middle Eastern leaders at Egypt's Sharm-el-Sheikh resort about the values of freedom, democracy, and the rest of that Fukuyamaesque stuff. Somehow, I don't think his message got through. In contrast to the distinctly subprime American economy where families are breaking piggy banks to help stay afloat, political repression and energy revenues are fuelling a rather better situation on the shores of Araby. Contrary to Fukuyama, Middle Eastern countries are attempting to make politico-architectural history via their recent construction efforts.

I have written reams of text about the attempts of countries in the Middle East to create world capitals and financial centres by funnelling their oil and gas revenues into construction projects of mind-boggling scale and scope [1, 2, 3, 4, 5, 6, 7]. The world's tallest building, ritziest "shopping resort," most ambitious eco-city, largest cultural centre, most expensive hotel...it's one superlative after the other, a non-stop cavalcade of architectural whimsy. Earlier, I asked the question of what these countries did with their energy revenues, which are expected to amount to $435B this year. Well, look no further. The weekend edition of the Financial Times features an audio slideshow of these mega-projects in the budding world capitals of Doha (Qatar), Dubai and Abu Dhabi (United Arab Emirates). Although an accident of geography ensured that these places would be rolling in petrodollars for a long time, that time is not forever. The question becomes, can these places reinvent themselves as centres of finance, culture, education, and even sports before the oil wells run dry? Certainly, they are sparing no expense.

It's definitely required IPE viewing and I hope you have the time to see these unprecedented gambles Middle Eastern entities have put into the future. If they build it, will they (we) come?

Georgia Blocks Russian WTO Accession; Not Ukraine

As a semi-pointless aside, I am firmly convinced that Hillary Clinton would have walloped that Obama chap in the Democratic primaries if she looked like the otherworldly beautiful Ukrainian Prime Minister Yulia Tymoshenko. If politics is showbiz for ugly people, she is definitely in the wrong business. Somehow, I think that there is no need to pander to cheap populism when you look like, well, Yulia Tymoshenko. It has been demonstrated in the evolutionary psychology literature that beautiful women tend to get what they want. Freer capital flows? Sure thing, Missus T. Liberalize trade? Whatever you want, Missus T. Anyway, back to the matter at hand. Having just acceded to the WTO, the Ukraine is purportedly not against Russia entering the world body despite past disputes over gas supplies. According to the Ukraine's calculus of consent, it will be able to wheedle more favourable trade terms with its sometimes menacing neighbour if it doesn't hinder the latter's path to WTO accession. From the article that follows, Missus T does indeed see better trade ties as a leverage point in Russia's WTO negotiations. You got it, Missus T. From RBC News:

Having entered the WTO, Ukraine will not hinder Russia's accession to the organization, Alexander Babakov, Deputy Speaker of the Russian State Duma responsible for parliamentary relations between the lower chamber of the country's parliament with Ukraine, told journalists today. He reiterated that Ukraine's Prime Minister Yulia Timoshenko named the creation of trade space between the two countries in line with WTO's policies and regulations as Ukraine's priority. Babakov also expressed hope that Russia was getting a new ally that would support the country in its attempt to join the WTO.

The official also pointed out that cheap Ukrainian products could appear on the Russian market, if they could not compete with products of other WTO member states. However, Babkov noted that this had already happened in the past and that negotiations on the mater would be purely economic rather than political.

On the other hand, Russia's other neighbour and former satellite, Georgia, is going berserk over Russia's perceived interference over the would-be breakaway provinces of Abkhazia and South Ossetia. I've posted more extensively about this issue earlier, though it's worthwhile to hear the same idea repeated by Georgian officials. From Reuters:

Georgia said Friday that it would block negotiations on Russian entry to the World Trade Organization until Moscow reverses a decision last month to step up ties with two breakaway Georgian provinces. "Until this document that undermines Georgia's right is revoked, it will be an obstacle for Russia's WTO entry," Georgian Reintegration Minister Temur Iakobashvili told a news conference in Moscow. "I know it is a very tough statement to make, but it is a fact," Iakobashvili added.

Russia, the largest economy still outside the global trade body, is due to hold a next round of talks with the WTO accession working group on May 26, and Georgia said it would seek a bilateral meeting with Russia on the same day. Under WTO rules, candidate countries have to reach agreement with a working party, in which any existing member can take part, as well as agree on a bilateral deal with any member that seeks it.

Moscow's support for separatists in Abkhazia and South Ossetia is the most difficult problem in relations between Russia and Georgia, which is seeking to join NATO and the European Union. Tbilisi has condemned as a breach of international law Moscow's decision to establish legal links with the provinces, controlled since the early 1990s by separatist governments.

"The Georgian side will not change its opinion. We cannot talk about trade regimes when there are sanctions against Georgia in place, when an attempt to annex Georgian territory is going on," Iakobashvili said.

The Global Value Chain of Motorsports

Anyone who hasn't been hiding in a cave for the past quarter century or so knows racing is big business. Formula One (road cars), World Rally Championship, Moto GP and other series are household names which attract international media coverage, big sponsorship bucks, tourists, and other manifestations of late modern capitalism. With F1 top teams like Ferrari and McLaren having annual budgets in the vicinity of $500 million each, it cannot be otherwise. That is, there is also a vast "global value chain" (GVN) behind motorsport. Unbeknownst to me for the longest time, the library here at the University of Birmingham had a copy of this book entitled "Motorsport Going Global." Certainly, it's worth a look if you are interested in the topic. There are some excerpts of the book posted online from which I've taken the illustration above of the sport's global value chain from and the description of the different participants below. The book even boasts a foreword from the powerful and influential if ever-so-kinky FIA President Max Mosley whose hijinks have hijacked the pages of tabloids here in Blighty for weeks on end.

Constructors
A constructor is a firm that creates a motorsport vehicle of some sort. In this sense it is the “OEM” of the motorsport sector. This would be typified by the Formula One and World Rally Championship (WRC) constructors, such as Ferrari, Honda, Prodrive and Mitsubishi Ralliart. In the USA, examples of constructors would be Panoz in Champcar and Roush in NASCAR. In South America, Berta is a constructor of touring cars, while in Italy, both Tatuus and Dallara are well known single-seat constructors. In the UK, Lola typifies this group.

Constructor Suppliers
These represent the specialized suppliers to the constructors, which allow them to create the final vehicle (in automotive terms the Tier 1 and Tier 2 companies). They include suppliers of engines (Cosworth, Hendrick Motorsports); aerodynamic components (Fondmetal Technologies, B3 Technologies); gearboxes (Xtrac, SADEV); tires (Goodyear, Pirelli) and fuel and lubricants (Shell, BP and Castrol). Similarly, there are the specialist services, for example, the technical consultancy provided by organizations such as MIRA, Ricardo and ORECA.

Entrants
An entrant is the organization that enters and is responsible for racing or rallying the vehicle. It includes individuals and racing teams. In some cases, the entrant is the same organization as the constructor, but this allows for the identification of this distinct area of activity with examples of firms that are purely entrants, including Manor Motorsport of the UK, DAMS of France and Andretti Green in the USA.

Events
This category covers those organizations that manage and operate racing events, either as a series or individually. It includes racing clubs, such as the BRSCC in the UK; operations within manufacturers, such as Renault UK motorsport; and specialists such as Formula Palmer Audi. Commercial promoters include NASCAR in the USA or companies such as BMP or SRO, which may promote many series.

Event Suppliers
These include all the components necessary for an event to take place, including circuits (for example, Silverstone or Goodwood in the UK, Hockenheim in Germany and Daytona and Indianapolis in the USA) and specialist suppliers in, for example, construction, catering and related hospitality.

Distribution
These include all media, specialist and general, concerned with dissemination of events, through radio, TV, Internet and press coverage more generally. In the UK Haymarket is a leading print media specialist, while in the USA Fox and NBC/Turner televise NASCAR. RTL in Germany is the leading TV distributor of F1 on TV, while RAI and TF1 perform the same role in Italy and France respectively.

Consumption
This identifies the groups involved in consumption of the events, either as spectators, participants, viewers, listeners or readers of the various media. All of the above groups represent a simplified yet relevant supply chain, which extends from car components to the motorsport event itself. Additionally, there are a number of other groups that influence and provide input to all of the aforementioned organizations.

Supporting Service Industries
These firms provide critical services across the industry in specialized areas such as insurance (THB Clowes, UK), personnel management (IMG, USA, or CSS Stellar, UK), market research (MRA and Sports Marketing Surveys), freight, logistics, legal, marketing, finance, sponsorship recruitment and other areas, like racing schools (Henry Morogh Racing School, Italy; Richard Petty Driving Experience, USA).

Regulation
Regulatory and sanctioning bodies such as the FIA, CIK, CSAI, ACCUS, SCCA, FIM or ACO are influential at all levels in the sport and thereby the industry. They define the “manufacturing” specification of the vehicles and also influence the nature of the delivery and format of events. Similarly, their safety regulations influence manufacturers, component suppliers and circuits.

Regulatory and Fiscal Environment for Business
In addition to the specific regulatory environment of motorsport, organizations operate within the broader regulatory environment that affects all businesses. An obvious example from Formula One would be the differing legal framework for tobacco sponsorship across different nations.

The US Farm Bill is a Big "KICK ME" Trade Sign

Given the current fashion for S&M, I suppose it shouldn't surprise us that the US Congress has set up America for a real good whupping. Whoever thought that America's public officials were such gluttons for punishment? The US farm bill (warning: massive "condensed" file) is a monumental folly that not only lowers already poor world opinion of the US, but also opens the country up to further losses on the trade litigation front. If matters were already iffy before, what more now when the country lards up on even more farm subsidies? Now that both the US House and Senate have passed the pork-laden bill [oink, oink] by overwhelming majorities--318-106 and 81-15 respectively--here are what I bet will happen:

• President Bush will veto the bill when it lands on his desk;
• Bush's veto will have been for nought as votes in both houses comfortably meet override (2/3s) margins;
• The Doha round, already stalling in large part because of developed country recalcitrance over agricultural subsidies and tariffs, will be further negatively affected;
• Accordingly, it doesn't matter one whit if Obama, Clinton, or McCain (who is opposed to the farm bill) becomes the next US President as Congress will not likely become less pro-pork [snort, snort] anytime soon;
• Implementation of this bill will make the US even more vulnerable in the WTO dispute settlement mechanism (DSM) to trade complaints by various countries;
• Doha will become the longest-running trade round / running gag in GATT/WTO history.
  

It is striking that Barack Obama, who claims that he will improve American relations with the rest of the world, is a big supporter of the farm bill. As with the response he gave supporting his constituents' interests over those of impoverished Kenyan farmers', this is not going to bode well for obtaining trade cooperation with any number of LDCs exporting agricultural commodities.

I am not a supporter of the passage of Doha by any means. If it means a raw deal for LDCs, then they would be better off without it. Nevertheless, the comeuppance of the US will not be long in coming if it continues with these shenanigans. The "KICK ME" sign Uncle Sam has placed on his back is not something LDCs will pass up in various trade fora. In what follows, the Economic Times of India explains why Uncle Sam is just begging to be whupped:

The $285-billion farm bill unveiled by Congressional leaders last week after months of negotiations may set the United States up for a hornet’s nest of problems at the World Trade Organization. If the plan for a massive new US agriculture law is passed this week as expected, lawmakers face a promised veto from President George W Bush.

The White House says the bill does not sufficiently cut subsidies to wealthy farmers and ignores other reforms proposed by the administration. If Congress can override a veto, administration officials and other critics warn the farm law will inflame relations with trading partners and spark challenges at the world trade court.

“This farm bill heads in the wrong direction in terms of our international obligations,” deputy agriculture secretary Chuck Conner said in a briefing on the bill. The administration’s problems with the bill go beyond crop subsidies to wealthy farmers. Agriculture officials say measures that could bring problems at the World Trade Organization include: rules benefiting US sugar producers, a $4-billion standby disaster fund and a new cotton incentive similar to one the world trade court already has ruled illegal.

“It’s no secret our current farm programmes under current law have come under enormous fire,” Conner said. “How does this bill respond? This bill responds by increasing trade-distorting supports on 17 out of 25 of the commodities that we provide.”

Trade partners “are going to be incensed, and we would expect them to protest in every way they can,” he added. The United States already has lost one major agriculture case at the WTO, filed by Brazil over cotton supports. Washington now faces new challenges from Brazil and Canada, who believe the United States has roared past WTO subsidy limits in recent years and violated other trade rules.

Gary Blumenthal, a trade analyst at World Perspectives, believes the bill “fails to fix previously adjudicated problems — let alone new areas such as the crop revenue programme.” “One can anticipate future trade cases related to this legislation,” he said.

Congress takes up the bill at a time of sky-high US crop prices and roaring export demand. High prices mean some US subsidies linked to prices are going unpaid, a convenient plus for lawmakers averse to large cuts in the programmes. US farmers get about $5.2 billion a year in direct subsidies, which some countries contend the US government improperly classifies as minimally trade distorting.

Some trade experts believe high crop prices ensure that subsidy payments, even with proposed farm bill changes, will stay safely within WTO spending limits for the time being. “But of course, if the prices don’t stay up, we’re going to run into some problems again,” said David Blandford, an agricultural economist at Penn State University.

“What I am concerned about is the signal this sends,” said Sallie James, an agriculture and trade expert at libertarian think tank the CATO Institute, “that the US is not serious about really reforming its agriculture programmes.” That may or may not be a problem in the Doha round of world trade talks, now in a critical stage as negotiators seek to iron out stubborn agriculture issues and lay the groundwork for a deal before Bush leaves office.

Both the administration and diplomats in Geneva acknowledge that Congress would have to alter farm policy if a deal is to be had, especially since lower US subsidy limits are a priority for developing countries. Farm leaders in Congress paid little attention to the WTO negotiations while writing the farm bill, saying they will revise it if the Doha round succeeds.

But the bill also could fan trade partners’ fears that a Congress so protective of farm programmes might try to obstruct or dismantle a deal if sent to Capitol Hill for approval. Earlier this year, House Democrats derailed a bilateral trade deal with Colombia, a key Latin American ally.

The move, which set the traditional procedure for voting trade agreements on its head, infuriated free-traders and raised fears about growing iciness to trade deals in the Democratic-controlled Congress. Blandford believes a Doha deal would require some painful concessions for certain sectors such as cotton, but says it should garner support because it will open new markets.

A Surefire Doha Show-Stopper: Mode 4, Cont'd.

Here we go again: With regard to old-fashioned trade in goods, developed countries want non-agricultural market access (NAMA) in less-developed countries (LDCs). Meanwhile, LDCs are adamant on not moving unless agricultural market access becomes more of a reality in heavily protected and subsidized Western countries.

When it comes to services, we have something similar going on. Developed countries want greater access to service areas such as banking and telecoms in LDCs, yet are unwilling to move on the main demand of LDCs when it comes to services which is better access to developed markets by temporary workers in line with Mode 4 of the GATS. I recently posted on this matter, noting that developed country concessions on Mode 4 migration are unlikely to come to pass anytime soon as it is regarded more as an "immigration" matter than a "trade" matter. Reuters has more on this issue but makes the same comment that a deal on temporary migration is not forthcoming in the WTO's Doha round:

Global trade negotiations on the services sector are likely to make little progress on a core demand of developing countries -- greater freedom of movement for temporary workers, an expert said on Thursday. The forecast, if confirmed, suggests rich countries will struggle to crack open new markets for services from banking to telecoms, in return for which poor nations want to see rules on temporary workers liberalised.

Rupa Chanda, an economics professor at Bangalore's Indian Institute of Management, said countries preferred to negotiate temporary labour movement bilaterally, rather than in the global Doha round talks at the World Trade Organisation (WTO). "Some of these issues are so complex to discuss multilaterally that bilaterally you would expect much more progress," she told a news conference.

Chanda said there was some chance of liberalisation for temporary workers at the executive or management level in a WTO deal, but little prospect for low-skilled workers. She was speaking at the launch of a report she compiled for the United Nations Development Programme (UNDP) on temporary cross-border movement of service providers, known in trade jargon as Mode 4.

"WTO member countries have shown little interest in liberalising market access to labour flows for the low-skilled workers on a multilateral basis, and they are reluctant to make binding commitments since migration has a bearing on sensitive issues such as national security, integration and unemployment," the UNDP said in a statement.

National security concerns are a particular problem for the United States in letting in more temporary workers from developing countries.

European officials say they are willing to negotiate Mode 4 at the WTO, but need to clarify issues such as defining "temporary" and looking at the impact on domestic wages of an influx of low-skilled workers from poor countries.

David Luke, UNDP coordinator for trade and human development, said developing country representatives at a workshop on the report on Wednesday had not been optimistic about a WTO deal on Mode 4. "Their message to the workshop was their disappointment over the limited progress," he said.

Chanda said WTO negotiators could learn from aspects of the more successful bilateral deals on temporary labour movement. Such deals specify which sectors and type of workers they cover, the duration of their stay and its conditions. They also define the agencies in both the source and host countries that will be involved and coordinate with each other.

Successful arrangements involve the source country handling recruitment, rather than intermediaries or agents who can end up exploiting or abusing temporary workers. They also manage financial remittances sent home, sometimes involving forced savings, to encourage workers to return home.

Schemes to move low-skilled workers from South or Southeast Asia to the Gulf often lacked these institutional arrangements, leaving workers open to exploitation, Chanda said. Women were particularly at risk, with those working outside the visible labour force, such as maids in the Gulf or Singapore, vulnerable to abuse, she said.

Rio Tinto and China: A Love-Hate Relationship

In addition to Chinalco's stake in Rio Tinto, the relationship between the Australian mining giant and China's steelmakers is definitely a many-sided one that mirrors Australia's mixed relationship with China. While Australia's current bout of prosperity owes a lot to China's emergence in the world economy, Oz is wary of becoming too dependent on the PRC for its fortunes. Indeed, Australia may not take too kindly to large-scale purchases of its firms by the Chinese like other developed countries fear. Let us start with the sunnier of two articles on this relationship. First, Rio Tinto is seeing Chinese investment as a potential source of funding in its Simandou project in Guinea. Although the African mine is much closer to Europe, Chinese demand may become the deciding factor in the future for this project which is partially funded by the IFC. From the Financial Times:

Rio Tinto is seeking partnerships with Chinese steel and construction companies to help develop a $6bn (£3.08bn) West African iron ore mine, in what would be the mining group’s largest deal with China, its biggest customer. Sam Walsh, head of Rio’s iron ore division, said in an interview with the Financial Times that the Simandou project in Guinea could eventually supply steelmakers in Europe and Asia with up to 170m tonnes of iron ore a year. The first phase of the mine’s development targets 70m tonnes a year by 2018.

“Europe is the natural market (for the Simandou ore), but there’s a lot of interest from Asia. One option would be to bring a Chinese partner into the project. Our preference would be to have a steel company that is allied to a construction company,” said Mr Walsh. The Chinese steelmaker would agree to buy a portion of Simandou’s output on a long-term “off-take” contract while a Chinese construction group would be valuable in making sure the mine is built on schedule and on budget, at a time of rising costs.

Rio Tinto is the world’s second largest producer of iron ore after Vale of Brazil, and plans to expand its output significantly in the next decade to take advantage of strong Chinese demand. The bulk of its production comes from its huge mines in Western Australia’s iron-rich Pilbara region, but Rio is also looking for new sources of iron ore worldwide. The Simandou deposit was large and high-grade, said Mr Walsh, and Guinea had the potential to be “the third largest precinct for iron ore in the world” after Brazil and Australia. “The Simandou ore body is stunning.” But Simandou lies 750km from the sea and the lack of infrastructure in the area will be a challenge. Rio will have to build a railway from scratch to transport the ore to the coast for export.

Mr Walsh said Rio had spent $300m on Simandou so far, out of a projected total cost of $6bn, and would make a final decision on whether to go ahead with the mine in 2009. He added that he hoped to make progress in finding Chinese partners for the project “this year”, so they could be involved in the design of the mine and the infrastructure.

China is Rio’s biggest customer and this year Chinalco, the Chinese metals group, shocked the market by buying a 9 per cent stake in Rio. Since then Rio has been increasingly talking about how it could co-operate with Chinese companies on new mining projects.

Rio has been emphasising the strength of its growth prospects – such as Simandou and the Oyu Tolgoi copper project in Mongolia – as part of its defence against a hostile takeover bid from rival BHP Billiton. It argues that BHP’s offer of 3.4 BHP shares for each Rio share does not reflect the strength of its project pipeline. But BHP recently hit out at this.

As for the hate side of the relationship, there remains no conclusive deal for Australian miners to provide Chinese steel producers with iron ore after the last one expired earlier in the year. China had hoped that it could negotiate a deal similar to the one it concluded with the world's largest iron ore concern, Brazil's Vale. (If you are familiar with the term "pattern bargaining" in union negotiation jargon, what Chinese steelmakers seek would be similar.) However, Australian firms have been holding out for higher prices for a number of reasons identified below. In the meantime, the rhetoric emanating from both Australian firms and the Chinese steelmaker's association is becoming increasingly combative. From the FT once more:

Rio Tinto on Thursday night slammed Chinese steelmakers over increasingly aggressive negotiating tactics, after the China Iron & Steel Association called for its members to boycott the Anglo-Australian mining group’s spot sales of iron ore.

The steelmakers have failed to agree a 2008-2009 annual contract price with Rio and BHP Billiton despite months of talks. Earlier this year, the Chinese authorities delayed issuing permits needed to import some shipments of Australian iron ore, a move that was also considered a negotiating ploy.

Rio has demanded a price for the annual contracts in excess of the 65-71 per cent rise agreed between Vale, the Brazilian miner, and Chinese steelmakers. The Chinese pay less to ship Rio’s ore from Australia. Rio, which is fighting a hostile takeover bid from BHP worth at least $160bn, has also provoked the Chinese by threatening to move away from traditional long-term contracts by selling more ore into the spot market, where prices are higher.

In a statement published on its website on Thursday, CISA said: “We appeal to domestic mills and traders not to support or take part in Rio Tinto’s spot iron ore sales activities in China.” Rio said it was entitled to sell into the spot market. “For CISA to suggest joint action by the Chinese steel industry to prevent this is a very concerning development.”

Spot iron ore prices of $180-$190 a tonne are markedly higher than the $108 a tonne agreed by Vale and its Chinese customers.

CISA, whose members are China’s large steel mills, accused Rio Tinto of acting in bad faith, telling customers it lacked supply to completely fulfil long-term contracts while at the same time offering iron ore on the spot market to capture higher prices.

CISA said Rio had only supplied 86 per cent of iron ore specified under contracts in 2007 with Chinese clients while in 2006 it only supplied 88 per cent of the agreed amount. Around 20 Chinese steelmakers have long-term supply contracts with Rio Tinto.

Rio said the comments should be considered in the “context of our ongoing price negotiations”. It rejected the CISA’s claims and added it had “rights under a number of contracts that include options to reduce volumes. Rio will continue to negotiate in good faith for a pricing outcome that reflects the continuing strong market fundamentals.”

Sam Walsh, chief executive of Rio’s iron ore division, said that when the iron ore market was tight, it was understandable that mills wanted to maximise their iron ore volumes. “However, Rio Tinto remains determined to achieve a fair pricing outcome for its shareholders,” Mr Walsh said.

Rio also pointed out that the Baltic Index for freight rates from Brazil to China is at a record differential compared to freight rates from Australian ports. Iron ore exported from Western Australia’s Pilbara region is nearly three times closer to China than ore shipped from Brazil. Rio and BHP want to share the Chinese steelmakers’ savings from cheaper freight costs.

More Trouble for Big Pharma: Chinese Generics

I've never been a fan of Big Pharma's business model of sniffing around for blockbuster, big revenue generating drugs designed for Western markets and then ring-fencing profits by ensuring that the strongest possible patent protections are in place. Perhaps as a result of bad karma, blockbuster drugs have been few and far between for pharmaceutical firms in recent years as their financial performance has dwindled accordingly. Meanwhile, the expiration of patents on previous cash cows has meant the encroachment of generic drugs from elsewhere, particularly India. Reuters now indicates that another looming challenge to Big Pharma is on the horizon as the Chinese gear up to produce generics. If Big Pharma doesn't change its antiquated business model soon, its fortunes will only continue to wane as it searches in vain for future blockbuster drugs. If China can assuage the rest of the world about quality gremlins, the sky's the limit:

A coming wave of Chinese pills is set to push down the price of generic drugs, as more low-cost finished medicines from the country win approval in major markets, according to a report on Tuesday. Pharmaceutical information group IMS Health Inc said last year's first okay from the U.S. Food and Drug Administration for a Chinese generic -- a copy of AIDS drug nevirapine -- was a sign of things to come.

China is already the world's biggest producer of active pharmaceutical ingredients (APIs), the chemical raw materials needed to manufacture medicines, but to date it has not been a significant supplier of finished generic pills. Now that is about to change.

Zhejiang Huahai Pharmaceutical Co Ltd won a U.S. green light last July to sell generic nevirapine, once the patent held by Germany's Boehringer Ingelheim expires in 2012. At least 10 other Chinese companies are set to follow suit with other generic products, according to IMS. Some could be available as early as this year.

The result will be increased competition in a generic drugs industry that is already struggling with tumbling prices. "In order to ensure their success in the market, the Chinese manufacturers are likely to undercut all others on price," IMS said in its annual Intelligence.360 report. "Chinese policy will drive generic prices down still further, with far-reaching consequences for both R&D players and international generic companies."

The rise of Chinese generic drugmakers is expected to mirror that of Indian firms like Ranbaxy Laboratories Ltd, which also started out as an API supplier but moved into finished generic medicines a decade ago.

IMS believes China will seek to erode India's strong position in manufacturing by targeting the United States, Europe and key emerging markets.

One potential obstacle for China's emerging generics industry, however, may be its reputation for quality. IMS said recent safety issues involving tainted heparin made with ingredients from China had put the country "on the back foot".

"India has had less publicity than China for manufacturing inadequacies ... and it is here where the competitive battle may be won or lost," IMS said. Contaminated supplies of various brands of the blood thinner heparin have been linked to 81 U.S. deaths since January 2007.

Of the New Argonauts and Venture Capital in LDCs

(NOTE: This is the third and last of today's features on economic geography.) If you have the chance to borrow it from your local library and are interested in the role of diasporas in economic development, I highly recommend reading AnnaLee Saxenian's book The New Argonauts (excerpts here). As an antidote to the Dobbsian and Tancredoite econo-Neanderthal / politico-primitive stories about the evils of globalization and whatnot, it has few peers. Instead of portraying globalization as a winner-takes-all process like the aforementioned scaremongers, she advances a rather more nuanced understanding of how benefits can accrue from accommodating a new class of talented, tech-savvy workers who can span traditional boundaries and are in demand where technological advancement is desirable. Hence the term the "new argonauts." From the Harvard University Press blurb:

Like the Greeks who sailed with Jason in search of the Golden Fleece, the new Argonauts--foreign-born, technically skilled entrepreneurs who travel back and forth between Silicon Valley and their home countries--seek their fortune in distant lands by launching companies far from established centers of skill and technology. Their story illuminates profound transformations in the global economy.

Economic geographer AnnaLee Saxenian has followed this transformation, exploring one of its great paradoxes: how the "brain drain" has become "brain circulation," a powerful economic force for development of formerly peripheral regions. The new Argonauts--armed with Silicon Valley experience and relationships and the ability to operate in two countries simultaneously--quickly identify market opportunities, locate foreign partners, and manage cross-border business operations.

The New Argonauts extends Saxenian's pioneering research into the dynamics of competition in Silicon Valley. The book brings a fresh perspective to the way that technology entrepreneurs build regional advantage in order to compete in global markets. Scholars, policymakers, and business leaders will benefit from Saxenian's firsthand research into the investors and entrepreneurs who return home to start new companies while remaining tied to powerful economic and professional communities in the United States.

For Americans accustomed to unchallenged economic domination, the fast-growing capabilities of China and India may seem threatening. But as Saxenian convincingly displays in this pathbreaking book, the Argonauts have made America richer, not poorer.

Anyway, Saxenian and another well-respected author, Charles Sabel, have written a more condensed treatise that will soon appear in Econonic Geography on the matter of "Venture Capital in the 'Periphery': The New Argonauts, Global Search and Local Institution Building" that takes the case of Taiwan as an example, though similar instances can also be found in today's emerging technology hotbeds of China and India. You can read a draft version of the paper on Sabel's site. As a law instructor, Sabel is fond of warning about the litigation he will pursue if others steal too much of his IP, so I will limit my excerpts here [!] You have been warned:

This paper accordingly examines the creation of venture capital in emerging economies as an illustration of the way that public and private actors, building on networks they “find,” can construct an institution that systematically creates further networks to foster and monitor the progress of new firms and industries. We focus on the case of Taiwan, where highly-skilled first-generation immigrant professionals in US technology industries collaborated with their home country counterparts to develop the context for entrepreneurial development. The paper refers to the members of these networks as the new Argonauts, an allusion to Jason and the Argonauts who centuries ago sailed in search of the Golden Fleece, testing their mythic heroism while seeking earthly riches and glory. While most of the evidence here is drawn from Taiwan, relevant aspects of analogue developments in Israel, India and China are considered as well.

Our central argument is that new Argonauts are ideally positioned (as both insiders and outsiders at home and abroad) to search beyond prevailing routines to identify opportunities for complementary “peripheral” participation in the global economy, and to work with public officials on the corresponding adaptation and redesign of relevant institutions and firms in their native countries. They are, in other words, exemplary protagonists of the process of self-discovery or open industrial policy—though surely there are in other contexts different institutional arrangements that are as exemplary as well. We argue further that in the cases considered here, the Argonauts’ contributions to domestic institution building crystallized most clearly in the development of domestic venture capital, one of, if not the most important, supports for technology entrepreneurship.

Introducing the Concept of "Global Value Chains"

(NOTE: This is the second of today's features on economic geography.) There is an area of study at the intersection of economics and geography called (duh) economic geography which should be of interest to readers of this blog. Among the most prominent journals in this field aside from Geoforum which I mentioned earlier are Economic Geography and the Journal of Economic Geography. The current issue of the latter publication features a collection of articles on the topic of global production networks. Previously, I was familiar with the work on the global commodity chain (GCC) as identified by Gereffi and Korzeniewicz which shares affinities with dependency and world systems theories. It turns out that I have not been keeping up to date with this literature as there are now related concepts of global value chain (GVC) and the global production network (GPN). What's are the differences among these? Damned if I know--or if the persons who thought up these things, for that matter. In the academic interest, I'm thinking of coming up with my own variant called, hold your breath, "people making different parts of stuff around the world" (PMDPSATW).

Poking fun at acronyms aside, there is indeed much interest in the political, economic, social, technological, and even ecological antecedents and consequences of global supply chains involved in the design, manufacturing, transportation, marketing, consumption, and disposal processes of contemporary commerce. It's rather complex and messes up traditional notions of "country of origin." To guide our way, I came across a helpful site mentioned elsewhere, appropriately entitled "global value chains." Here are some excerpts, but do visit the website if you're further interested:

What is a value chain?

The value chain describes the full range of activities that firms and workers do to bring a product from its conception to its end use and beyond. This includes activities such as design, production, marketing, distribution and support to the final consumer. The activities that comprise a value chain can be contained within a single firm or divided among different firms. Value chain activities can produce goods or services, and can be contained within a single geographical location or spread over wider areas. The GVC Initiative is particularly interested in understanding value chains that are divided among multiple firms and spread across wide swaths of geographic space, hence the term "global value chain."

Why are we interested in global value chains?

Studies from a range of disciplines show that global value chains have become much more prevalent and elaborate in the past 10 to 15 years. While many firms have had international operations and trading relationships for decades and a few for more than a century, global value chains now contain activities that are tightly integrated and often managed on a day-to-day basis. This means that firms and workers in widely separated locations affect one another more than they have in the past. Some of these effects are quite straightforward, as when a firm from one country establishes a new factory or engineering center in another country, and some are more complex, as when a firm in one country contracts with a firm in another country to coordinate production in plants owned by yet another firm in a third country, and so on.

Tracing the shifting patterns of global production, understanding how GVCs work or are “governed,” and determining the roles they play in rich and poor countries alike, is what the study of global value chains is all about. GVC research consists of learning the details of jobs, technologies, standards, regulations, products, processes, and markets in specific industries and places. GVC research is challenging, fun, interesting, relevant, and important!

Are all global value chains the same?

No. Research has also shown that GVCs exhibit a variety of characteristics and impact communities in a variety of ways. In a paper that emerged from the deliberations of the GVC Initiative (Gary Gereffi, John Humphrey, and Timothy Sturgeon, “The governance of global value chains,” Review of International Political Economy, vol. 12, no. 1, 2005), five different GVC governance patterns were identified:

1. Markets. Markets are the simplest form of GVC governance. GVCs governed by markets contain firms and individuals that buy and sell products to one another with little interaction beyond exchanging goods and services for money. The central governance mechanism is price. The linkages between value chain activities are not very "thick" because the information that needs to be exchanged and knowledge that needs to be shared is relatively straightforward.

2. Modular value chains. This is the most market-like of three network-style GVC governance patterns. Typically, suppliers in modular value chains make products or provide services to a customer's specifications. Suppliers in modular value chains tend to take full responsibility for process technology and often use generic machinery that spreads investments across a wide customer base. This keeps switching costs low and limits transaction-specific investments, even though buyer-supplier interactions can be very complex. Linkages are necessarily thicker than in simple markets because of the high volume of information flowing across the inter-firm link, but at the same time codification schemes and the internalization of coherent realms of knowledge in value chain "modules," such as design or production, can keep interactions between value chain partners from becoming highly dense and idiosyncratic.

3. Relational value chains. In this network-style GVC governance pattern we see mutual dependence regulated through reputation, social and spatial proximity, family and ethnic ties, and the like. The most obvious examples of such networks are in specific communities, or “industrial districts,” but trust and reputational effects can operate in spatially dispersed networks as well. Since trust and mutual dependence in relational GVCs take a long time to build up, and since the effects of spatial and social proximity are, by definition, limited to a relatively small set of co-located firms, the costs of switching to new partners tends to be high. Dense interactions and knowledge sharing are supported by the deep understanding value chain partners have of one another, but unlike the codification schemes that enable modular networks, these "short-cuts" tend to be idiosyncratic and thus difficult and time-consuming to re-establish with new value chain partners.

4. Captive value chains. In this network-style GVC governance pattern, small suppliers tend to be dependent on larger, dominant buyers. Depending on a dominant lead firm raises switching costs for suppliers, which are "captive." Such networks are frequently characterized by a high degree of monitoring and control by the lead firm. The asymmetric power relationships in captive networks force suppliers to link to their customer in ways that are specified by, and often specific to a particular customer, leading to thick, idiosyncratic linkages and high switching costs all round.

5. Hierarchy. This governance pattern is characterized by vertical integration (i.e."transactions" take place inside a single firm). The dominant form of governance is managerial control.

Bored with IPE? Try "Cultural Political Economy"

(NOTE: This is the first of today's three features on economic geography.) One of the things that never fails to amaze me is the infinite number of offshoots IPE has as field of study. Call it a sign of maturity as an academic discipline--or call it marketing, which would be my take on it. As with virtually all things, academics is subject to marketing. One day you can brand yourself a globalization enthusiast, the next day an anti-globalization sceptic. It's so, how should I put it, Clintonian. If it helps sell books and attracts students (in academia), wins votes (in politics), or moves product (in business), then it smacks of marketing to me. No ifs, no buts.

Anyway, that introduction leads me to an article I found that was mentioned elsewhere regarding, get this, "cultural political economy." Mix one part IPE and another part cultural studies. Stir. Now I've heard of global political economy, regional political economy, critical political economy, but now "cultural political economy"? Since the authors of the article include the redoubtable Bob Jessop, it certainly merits attention. As you would expect of an article appearing in the geography journal Geoforum, it is rather leftist in terms of outlook. This particular article has Marxist leanings. Here is the abstract:

This article explores the implications of making the cultural turn in the engagement of economic and political geography with issues of political economy. It seeks to steer a path between a fetishistic, reified economics that naturalizes economic categories and a soft economic sociology that focuses on the similarities between economic and other socio-cultural activities at the expense of the specificity of the economic. We show how combining critical semiotic analysis with an evolutionary and institutional approach to political economy offers one interesting way to achieve this goal. An evolutionary and institutional approach to semiosis enables us to recognize the semiotic dimensions of political economy at the same time as establishing how and why only some economic imaginaries among the many that circulate actually come to be selected and institutionalized; and Marxian political economy enables us to identify the contradictions and conflicts that make capital accumulation inherently improbable and crisis-prone, creating the space for economic imaginaries to play a role in stabilizing accumulation in specific spatio-temporal fixes and/or pointing the way forward from recurrent crises. The paper illustrates these arguments with a case study on the Flemish ‘anchoring strategy’ as a specific regional economic development strategy. It concludes with a set of guidelines for the further development of cultural political economy.

Meanwhile, some suggestions for this "cultural political economy" include the following from p. 1167. Despite coming to the study of political economy from a different point of view, I really don't have much quibble with this set of suggestions. For cultural studies to better inform political economy, it needs to

1. engage with economics as discipline and not just with a preferred theorist or theorists;
2. address the concrete complexities of economic life, relations and discourses and not just treat theory as an adequate description of economic contexts;
3. get involved in collaborative work across disciplines rather than retreat into its own disciplinary boundaries; and
4. not unreflectively privilege forms of academic knowledge and knowledge production.

We would respond that political economy should follow the same recommendations. Thus scholars of political economy should

1. engage with cultural studies as a whole and not just with one preferred theorist or school;
2. address the complexities of semiosis and explore the discursive and material mechanisms that shape the manner and extent to which ‘ideas matter’ in political economy rather than merely asserting that they do and/or illustrating this with simple narrative accounts;
3. commit themselves to trans-disciplinary interaction or, better, sui generis post-disciplinary research rather than mechanically additive ‘multi-disciplinary’ team work; and
4. not unreflectively privilege forms of academic knowledge and knowledge production but examine in particular common sense economic imaginaries and actually existing struggles over their selection and retention.

Bajaj's 1 Lakh Car: Does Tata Lakh Competition?

Bad puns aside, the importance of a car at the Rs100,000 or 1 lakh price point (a shade less than $2,500) cannot be understated as it appears to be a definite sweet spot for automakers wishing to gain a foothold in the emerging Indian middle class market for cars. Earlier this year, the Tata Group, makers of virtually every sort of product and service on the face of the Earth, unveiled its 1 lakh car to great fanfare, the Tato Nano. Hot on the heels of that vehicle's introduction, we have the legendary Indian scooter maker Bajaj also coming out with its own plans for a one lakh automotive contraption. What makes this particular 1 lakh car particularly interesting to me is the involvement of Carlos Ghosn / Renault / Nissan in its design and manufacture. While Ghosn may have lost some of his reputation with the diminished performance of Renault's Nissan partnership, he remains today's foremost auto magnate by a good measure.

What is interesting is that Renault already has a partnership with the Indian firm Mahindra in producing a local version of its Dacia Logan design. Better yet, call it "partnership diversification" with a range of products with different partners at different price points as noted in a previous post. From the Times of India:

Here's a competitor for Tata Motor's small car Nano. Renault-Nissan head Carlos Ghosn and Bajaj's Rajiv Bajaj unfolded their joint venture plan on Monday, announcing a low-cost car at $2,500 (Rs 1 lakh) to be manufactured in India. The car is expected to hit the road early 2011, a little more than two years after Nano, which is scheduled to roll out in September-October.

Sources said the Bajaj-Renault-Nissan car would come in both petrol and diesel options. "Initially, it would come with a petrol version and diesel would follow," they said. However, apart from revealing the price tag, the two companies refused to give details regarding investments, engine capacity, and fuel efficiency. Sources added that a three-way MoU (memorandum of understanding) could be signed by June with the companies now busy on finalising the technical and legal nitty gritties of future engagement.

In a statement issued on behalf of Bajaj and Ghosn, the companies said they they would form a joint-venture to develop, produce and market the low-cost car code-named 'ULC' (most probably Ultra Low Cost). The new JV will be 50% owned by Bajaj Auto, 25% by Renault and 25% by Nissan (a group company of Renault).

While sceptics had initially doubted the viability and potential of a low-cost car segment priced below $3,000, Ratan Tata went ahead with his dream project, which saw others also drawing plans. Ghosn, who has already tasted success in emerging markets with his 'no-frills' Logan, feels that a new low-price compact not only has potential in a big market like India but can also be pitched well in other similar markets abroad.

Bajaj-Renault-Nissan would manufacture the proposed car at Chakan, in Maharashtra, where Bajaj already has a plant. "Initial planned capacity will be 400,000 units per year. Sales will start in early 2011 in India, as a primary market, with growth potential in other emerging markets around the world," the companies said.

Others players are also eyeing this ultra low-cost segment. South Korean auto major Hyundai, that has already made India a hub for manufacturing small cars like 'i10' and 'Santro', is also working on a low-cost car project to be positioned below Santro. General Motors is developing a car in the range of $3500-$4000 (Rs 1,40,000-Rs 1,60,000).

Analysts said the focus on the low-cost segment is set to yield rich dividends for the Indian automobile industry. Both engineering and manufacturing sectors would receive a boost as most of the car makers, including GM and Hyundai, have said India would be the base to develop and manufacture such a car.

"They understand frugal engineering, which is something we aren't as good at in Europe or Japan," Ghosn has been quoted, while praising Indian engineering and design skills. And, for Bajaj, this would be an ambitious foray into four-wheel segment.

China Admits Concern Over BHP Billiton-Rio Tinto

A few months ago, I featured an article on Chinese state-controlled company Chinalco buying a 9% stake in Australia's Rio Tinto. If you're looking for an example of geopolitical strategy by the PRC, this would have been it. Rio Tinto has been the subject of a £75B-some hostile takeover bid by fellow Australian mining giant BHP Billiton, the world's largest mining concern. Fearing this combination would exert excess monopolistic power over the supply of key minerals such as iron ore, the PRC threw in the monkey wrench of the Chinalco investment. While visiting the Sydney Morning Herald, that newspaper notes that the leadership of Chinalco admits as much, to no one's real surprise:

The president of Chinalco, Xiao Yaqing, has given the strongest indication to date that the state-backed Chinese company is uneasy about BHP Billiton's $US147 billion (AUS$157 billion) bid for Rio Tinto. In an interview with Hong Kong's South China Morning Post, Mr Xiao said he did not think the "whole world" would consent to or support a resources company the size of a combined BHP-Rio. "A firm that owns too many resources is not good for the world," he said. "People do not want to see a company dominate the market in any industry."

Earlier this year, Chinalco and the US aluminium company Alcoa bought 9 per cent of Rio in a $US14 billion raid on its London-listed shares, making it the Anglo-Australian miner's largest shareholder. BHP's bid is contingent on obtaining a 50.1 per cent stake in Rio.

At the time, Chinalco said it would not seek a Rio board seat or interfere in the management of the company. But Mr Xiao told the Post the investment in Rio would allow Chinalco to "know more about its management style and its strategy" and to "have more say in its development strategy". He said Chinalco could become the world's largest aluminium producer within three to five years, and in the longer term it aimed to become one of the world's largest companies.

Mr Xiao said Chinalco was interested in joint ventures with large Western mining companies. In recent months, BHP, Rio and Anglo American have all demonstrated a willingness to work with their Chinese counterparts. Mr Xiao said Chinalco would welcome a co-investor in its $US3 billion Aurukun bauxite mining and alumina refining project in Queensland. The Aurukun project borders Rio's Weipa bauxite operations, and Rio's aluminium chief executive, Dick Evans, last month indicated his company was open to a possible joint venture. Mr Xiao said foreign companies had expressed interest in taking a strategic stake in Chinalco, but no "concrete decisions" had been reached. Alcoa last year sold its stake in Chinalco's Chalco.

In recent months, Chinese companies have taken a more proactive approach to investing in Australian resources. The West Australian iron ore miner Midwest last month agreed to a raised $1.3 billion bid from Sinosteel after rejecting an earlier hostile approach. Mr Xiao said Sinosteel's bid was "a good thing" since it demonstrated Chinese companies had learnt how to launch a hostile takeover. "It's just market behaviour."

Last week BHP's chief executive, Marius Kloppers, said he expected Chinese investors to buy a stake at some point.

A Political Science Question to Stump Them All

I have been searching in vain for the ultimate killer essay question to stump all comers. At last, I seem to have found something which should have masters-level students sufficiently befuddled. It appeals to me on a number of levels in a nerdy sort of way. Not only is it pedantic, but it also has a way of confusing all but the most diligent of students. Heck, I myself was confused by this question for a long time. Only with the passage of some time have I been able to come up with it for the answer eluded me as well. Here it goes:

What are the similarities and differences among neo-liberal institutionalism, new institutionalism, and new institutional economics?

Some dyed-in-wool political economy junkies might have the answer off the top of their heads. Despite all of these terms sounding like each other, there are indeed substantial differences among them. Don't worry; these aren't the sorts of questions posed to graduate-level students. I wish such were the case, but it may be more akin to torture than a test of one's grasp of political science concepts.

In case you want to give this question a shot, here are some short essays which may be of help on neo-liberal institutionalism by PhD student Joseph Ellis, new institutionalism by the legendary Norwegian researcher Johan P. Olsen, and new institutional economics by Nobel Prize in Economics laureate Ronald Coase. Enjoy, I suppose.

"Putin's Plan": A Russian Economic Blueprint?

Doing a search for relevant articles for this post brought me to perhaps the most mind-boggling article I have yet seen. According to Russian ultra-nationalist Vladimir Zhirinovsky, the identification of Russia's ulterior motives as a basis for economic manoeuvring by erstwhile Russia specialist Condoleezza Rice can be attributed to:

Condoleezza Rice released a coarse anti-Russian statement. This is because she is a single woman who has no children. She loses her reason because of her late single status. Nature takes it all.

Such women are very rough. They are all workaholics, public workaholics. They can be happy only when they are talked and written about everywhere: “Oh, Condoleezza, what a remarkable woman, what a charming Afro-American lady! How well she can play the piano and speak Russian! What a courageous, tough and strong female she is!

Anyway, that bit of Pravda-sourced nonsense aside, this paper by Clifford Gaddy and Andrew Kuchins which I found via the Brookings Institution extends Rice's brand of analysis which sees Russia using its resource clout for statist ends. Even if you are no fan of Rice as I am, this point should seem fairly obvious except maybe to Zhirinovsky. For some strange reason, I cannot cut-and-paste the good bits here; you'll have to open the PDF file yourselves. Still, it is filled with insights on how Putin's leadership style has been influenced by American authors William King and David Cleland. This stems from comparing Putin's practices with suggestions contained in the book of the aforementioned authors which Putin cites extensively in his economics postgraduate thesis on--get this--"Strategic Planning of the Reproduction of the Mineral Resource Base of a Region" [!] I hope that piques your interest in this fascinating paper. Here is the blurb accompanying it:

Some of the uncertainty surrounding Russia's political future has passed. The December 2007 parliamentary elections are history, the presidential succession seems clear, and the range of options for Vladimir Putin's future role has been considerably narrowed. Yet, at each turn, other uncertainties remain and new ones arise.

In the eyes of most of the outside world, at least those of Europe and the United States, the Russian electoral process so far has failed to measure up to benchmarks of democracy and free choice of policies and personalities. Rather, this process has been about legitimizing the notion of entrusting the country's future to something called "Putin’s Plan," thus ensuring preyemstvennost' politiki (continuity of policy) beyond the scheduled end of Putin's term of office in May 2008.

What exactly is Putin's Plan, and from where does it come? What are its goals? What are its implications for Russia's domestic and international relations? [Read the paper and find out a bit more about possible answers to these questions.]

China Creates Research Centre on WTO DSM

If any country can be described as a lightning rod for trade complaints, China would be my choice, surpassing even the United States. Aside from being one of the world's three largest exporters, there are a handful of largely undisputed reasons why China is being continually embroiled in trade disputes: extensive use of statist policies, unprecedented currency intervention, weak intellectual property enforcement, and occasionally capricious attitudes to market access issues (at least by WTO rules). It should come as no surprise that China has been or is currently on the receiving end of ten matters which have been brought before the WTO's judicial body, the Dispute Settlement Mechanism (DS309, DS339, DS340, DS342, DS358, DS359, DS362, DS363, DS372, DS373) while it has only be a complainant in two (DS252, DS368).

Our favourite official publication, the People's Daily, now reports that China is creating a research body to look into the workings of the Dispute Settlement Mechanism (DSM). It's about time, I say. While I see it as being more of a defensive apparatus given China's oft-repeated status as a respondent to complaints, there may be some room for China to go on the offensive as well, although I can hardly see any more markets which Chin can pry open. Then again, I may be wrong. My suggestion to the Chines though would be to look into how to avoid being dragged into the DSM altogether as a more proactive way of defusing trade tensions:

A research center on World Trade Organization (WTO) dispute settlement mechanism was set up in Shanghai on Sunday, the first of its kind in the country. The China-WTO Dispute Settlement Mechanism Center (CWTODSMC) will offer suggestions and solutions to trade disputes for government and businesses, said Gong Baihua, deputy director of the center. The center was jointly founded by the Shanghai Institute of Foreign Trade and the Shanghai WTO Affairs Consultation Center, a non-governmental organization.

"Such a research institute will help Chinese government and businesses further familiarize themselves with WTO rules and learn how to resolve disputes using the dispute settlement mechanism," said Zhang Yuejiao, one of the five counselors for the center. In November last year, Zhang was appointed by the WTO Dispute Settlement Body (DSB) as a member of the seven-person Appellate Body, which issues final rulings in trade disputes. She is the first Chinese judge on WTO's highest court. China has been facing a number of trade disputes in the past seven years after the country joined WTO.

BTW: There is an interesting political economy side story involving the selection of Zhang Yuejiao of the PRC as one of the DSM's appellate body members. Taiwan initially made a move to block this appointment, but things were eventually papered over between these countries which perennially joust at international organizations.

The Battle Over Mode 4 Migration at the Doha Round

If you thought services outsourcing wasn't a contentious enough issue, imagine throngs of highly skilled Indian service workers coming to the USA on an expanded if temporary basis. It probably would result in pandemonium if such a thing were to happen: skilled LDC workers being allowed to cross over and render services. Nobody who reads this blog regularly needs to be told that migration is a most contentious global issue, surpassing even trade and the involvement of MNCs. Thus, it would only seem appropriate that the lame WTO Doha Development Agenda would get bogged down on, you guessed it, migration matters. We are concerned in this post with the General Agreement on Trade in Services (GATS) provisions on the movement of natural persons, otherwise known as Mode 4 services trade. For non-trade junkies, services provided fall under four main categories. They are:

From the territory of one Member into the territory of any other Member
(Mode 1 — Cross border trade AKA "outsourcing");
In the territory of one Member to the service consumer of any other Member
(Mode 2 — Consumption abroad);
By a service supplier of one Member, through commercial presence, in the territory of any other Member
(Mode 3 — Commercial presence); and
By a service supplier of one Member, through the presence of natural persons of a Member in the territory of any other Member
(Mode 4 — Presence of natural persons).

The WTO offers examples of each mode of service provision:

Mode 1: Cross-border

A user in country A receives services from abroad through its telecommunications or postal infrastructure. Such supplies may include consultancy or market research reports, tele-medical advice, distance training, or architectural drawings.

Mode 2: Consumption abroad

Nationals of A have moved abroad as tourists, students, or patients to consume the respective services.

Mode 3: Commercial presence

The service is provided within A by a locally-established affiliate, subsidiary, or representative office of a foreign-owned and — controlled company (bank, hotel group, construction company, etc.).

Mode 4: Movement of natural persons

A foreign national provides a service within A as an independent supplier (e.g., consultant, health worker) or employee of a service supplier (e.g. consultancy firm, hospital, construction company).

For understandable reasons, India--one of the two main LDC negotiators in the Doha round together with Brazil--has been a proponent of expanding Mode 4 migration. It is a truism that international organizations are often instruments of those who create then in the sense of following the "golden rule": he who hath the gold maketh the rules. At least when the rules of the WTO were being drafted, the US and the EU had the most clout in international affairs. Hence, the strong influence of Western financial services providers saw to it that the so-called Mode 4 trade in services received mention. Mode 4 was originally conceived to enhance the mobility of skilled MNC employees to provide services where MNCs had a commercial presence.

In the time since the WTO was established in 1995, India has emerged to become a major services provider in its own right. Medical, technical, engineering, software--you name it--India has many trained experts just waiting to be tapped for on-site service tasks in the developed world. Being, in many respects, on the leading edge of services provision, Indian industry is keen on interpreting the Mode 4 text in a way that expands the market access of LDCs abroad for services provision. Concerning Mode 4, here is India's request list to the US for the Doha round. To say that some are demanding is an understatement:

1. Broadening the category of services salespersons to any Business Visitor visiting for purpose of business negotiations;
2. Undertake to put in place a Visa System to ensure the fulfillment of the horizontal and sectoral commitments undertaken;
3. Take full commitments in respect of the category of independent professionals delinking from commercial presence (Mode 3); Remove the limitation on account of narrow definition of specialty occupation which insists on “higher specialised knowledge” or “higher degree” of qualification both of which are not clearly specified;
4. Remove the limitation relating to Quantitative Restrictions and numerical quotas so as to enable Professionals to enter and deliver services as per demand;
5. Remove the Labour condition application requirements for professionals;
6. Remove requirement of licensing in each state to enable practice of profession throughout USA;
7. Undertake to put in place a Visa System ensuring grant of multiple entry visas for professionals;
8. Allow inter-firm mobility to professionals;
9. Undertake full national treatment instead of “Unbound”.

As you would expect, the US has balked at these demands. If most of these demands are passed, they would amount to substantial changes in the US immigration system and give open access to Indian and other LDC service providers to operate in the US market. The US Trade Representative has maintained that migration matters are outside the remit of trade talks. It is ironic how Mode 4 has backfired on the US and to some extent the EU. Mode 4 was once seen as a way to extend the dominance of Western firms in service arenas. Now that LDCs are progressing smartly in services provision themselves, Mode 4 has become a "non-trade" issue according to the West. If Mode 4 speaks so little about trade, then why was it included in the GATS in the first place?

Importantly, being able to provide Mode 4 services without an established commercial presence abroad (e.g., unlike Citigroup having branch networks spanning the globe; Mode 3) is a sticking point as the current rules favour Western MNCs. It will be interesting to see how things turn out. I don't see the US moving on Mode 4. Given the deadlock over so many other matters, this only worsens the prospects for the Doha round. Here is a foretaste of the debate which may pop up in the US if Mode 4 is even contemplated: "The American Resistance" sees job destruction and a loss of sovereignty. Meanwhile, Public Citizen further notes:

The bottom line is that the USTR cannot commit to real increased Mode 4 access – or honestly promise any given country (say, India) guaranteed visa quotas — because it simply is not within the Executive Branch’s authority to deliver on any such commitments. Only Congress can enact such policies, and the mood in Congress is diametrically opposed to any such policy.

Doha, we hardly knew ye? There was a symposium held in 2002 on Mode 4 that featured many worthwhile papers on the topic if you are further interested. Rediff has more on Mode 4 negotiations at the WTO:

India wants to know what it would get for its short-term movement of skilled service providers under Mode 4 on a non-immigration basis from the US and the European Union, said Khullar. He added this was the most important market access area for all developing countries like India...

Besides, the US is not willing to offer any access on Mode 4 on the ground that it is an immigration issue…

During a meeting between the WTO chief and chairs of different Doha negotiating bodies on Tuesday, the chair for Doha services negotiations, [Mexican] Ambassador Fernando de Mateo, said there would not be any favourable response on the issue of Mode 4 from the US.

The Ins and Outs of Russian Investment

For a country that is something of a demographic nightmare (although there are signs of improvement), Russia seems to be very active in the realm of investment--both coming in and going out. Let us begin with the investment activities of Russia going out. Rachel Ziemba over at the RGE Economonitor alerted me this very informative Deutsche Bank report from which the chart above is taken depicting how Russia is outstripping its fellow BRICs in terms of outward FDI. The Deutsche Bank report says that the reasons why the country is investing abroad include the following:

… to obtain higher profit margins. In some sectors, profit margins have been comparatively low as a consequence of selling products at the lower end of the value chain.10 Hence, Russian outward investment has begun to target higher value-added production facilities. Russian corporations are also trying to widen their profit margins by accessing end-customer markets outside Russia.

… to increase their growth potential. Global consolidation pressures raise the need for Russian companies to grow outside Russia in order to retain a strategic position in the domestic market and to withstand global competition.12 In addition, expanding abroad may open new growth opportunities in case of limited domestic growth potential.

… to gain access to technological and management know-how. Investing abroad allows fast access to new and more advanced technologies. In addition, foreign investment can help to broaden management skills and to improve risk control capabilities.

… to secure access to raw materials. Despite possessing a vast amount of natural resources, global resource scarcity and growing demand for commodities have sparked off competition with regard to securing access to natural resources. In addition, the exploitation of e.g. oil and gas reserves has become more difficult and costly in the domestic market. As a consequence, Russian oil and gas companies are trying to access raw material sources abroad; for example, they are increasingly expanding in Africa.

… to reduce capital costs via better governance and diversification. Foreign activities, especially in developed markets, will force Russian companies to increase transparency and to improve their corporate governance structures. In addition, international diversification of a firm’s operations and activities can improve its risk profile. As a consequence of the above, the cost of attracting capital may be reduced.

… to benefit from a more favourable investment climate. Limited domestic investment opportunities and political uncertainty may have contributed to capital outflows. The comparatively difficult business and institutional environment in Russia might also have pushed Russian capital abroad.

The Deutsche Bank report further notes that Russia does not have as clear a national strategy to its investment, unlike China:

In any case, unlike in China, there is no specific “going global” programme for Russian companies, although there is outspoken support by the political elite for corporates’ expansion abroad. The bulk of Russia’s foreign investment is accounted for by private companies and it mainly reflects economic considerations such as obtaining higher profit margins, increasing companies’ growth potential and securing access to raw materials. Foreign engagement also allows access to new technologies, thereby helping to modernise the Russian economy. In addition, foreign activities, especially in developed markets, force Russian companies to increase transparency and to improve their corporate governance structures.

Things are no less interesting on the investment receiving front for Russia. Given the high prices commanded by the commodities to be found throughout its lands, Russia has become a key destination for foreign investors. Yet, some are also becoming interested in investing in retail and construction which have been fuelled by the commodity boom. This in spite of unresolved tensions with the West, a potential conflict with Georgia, and less-than-secure property rights. In other words, the lure of lucre seems to be making many less sensitive to considerable "political risk" in the country, at least for now. From Reuters:

With oil at more than $125 per barrel and growth booming, foreign investors in Russia are finding it easy to turn a blind eye to the expulsion of U.S. diplomats and increasingly bellicose rhetoric over Georgia.

Moscow expelled two U.S. military attaches on Thursday following the ouster in recent months of two Russian diplomats from Washington, with the United States also criticizing the war of words with neighbor Georgia. A Georgian minister said his country was "very close" to war with Russia after its neighbor sent more troops to the breakaway Georgian region of Abkhazia, where separatist rebels said on Thursday they had shot down another pilotless Georgians spy drone.

Some investors said even if war were imminent -- rather than simply more rhetoric -- it might not be enough to put them off Russia as the country benefits from record oil prices in excess of $125 a barrel, pushing growth to 9.5 percent a year.

"Unless the Americans were to send peacekeepers to defend the Georgians I cannot see it having much of an impact," said George Nianias, chairman of Denholm Hall which has some $400 million in fixed income investments in Russia. "Russia is too big, too important and too dangerous for the West to ever risk anything like that. You could see a local conflict with Georgia and the guns actually start to fire without it deterring anyone."

In contrast, Georgia has already suffered a ratings outlook downgrade from agency Standard & Poor's over rising tensions with its neighbor, and fellow ratings agency Fitch has warned any conflict -- unlikely though it is seen -- would lead to a downgrade for Georgia but not Russia. "It is something I'm definitely watching on Georgia," said one fund manager who holds a small amount of Georgia's $500 million Eurobond issued last month and did not want to be quoted because they were not authorized to speak to the media. "But it's definitely not something that changes my view on Russia at all."

But head of Fitch emerging Europe sovereigns Edward Parker said an increase in tension between Russia and the West arising from Georgia could ultimately impact Russian firms by pushing away investors already made wary of risk by the credit crunch. "They have quite significant private sector amortizations (debt) falling due and this could make it more difficult to refinance," he said, making any conflict with Georgia potentially more significant than Russia's long-running war in Chechnya, which had almost no investor impact.

For some investors, the risk of conflict with its neighbors is one of the factors that makes Russia less appealing than some other key emerging markets. "Conflict with its neighbors is a concern that makes it less appealing investment destination than, for example, Brazil where you have the growth story without the political risk," said Jason Hepner, investment director for global strategy at Standard Life Investments. Standard Life does not break down investments publicly, but manages some $280 billion globally including in Russia.

The transition of power from the President Vladimir Putin to his anointed successor Dmitry Medvedev, sworn in this week, is seen making relatively little difference with Putin still in the background as Prime Minister. Some investors say that after the arrest and imprisonment of Russia's richest man Mikhail Khordorkovsky and dismantlement of his multibillion-dollar oil company YUKOS, they have become hardened to political risk and still see good potential profits.

But since then, most have steered clear of the oil and energy field, preferring to target investments on other sectors such as construction and retail to tap wider growth -- seen less likely to attract state intervention. They say any repeat of the YUKOS affair, perhaps in another sector, would worry foreign players -- but they largely shrug off reported human rights worries.

Analysts say a political row between Russia and Britain over the radioactive poisoning of dissident Alexander Litvinenko -- with Russia refusing to extradite the chief suspect and his family accusing the state of murder -- had no impact on investment flows. Britain-based investors continued to put money into a range of Russian assets, while Russian money including from the country's rapidly growing oil-fuelled sovereign wealth fund continued to flow into the West.

Russia's sovereign wealth fund is estimated to be the second largest in the world after China's [?], while last month the number of Russian firms listed on the London stock exchange passed 100. "They're obviously not appealing headlines but at the same time they seem to be the continuation of a trend and they don't change the overall picture as such," said Standard Life 's Hepner. "Although obviously if they become more frequent that is a worry.

Huelga! Argentine Farmers Back on Strike

Call it populism that isn't particularly, well, po-pu-lar. While India has decided to shut down futures trading of in-demand agricultural commodities to show the public it is "doing something" about the high prices of food at home, the Peronist government of Argentinian President Cristina Fernandez de Kirchner has raised export tariffs in a bid to keep the locals well-supplied with increasingly scarce agricultural produce. The problem is that the farmers whose livelihoods have been adversely affected by this tariff are none to happy, as are many middle class folks who Kirchner needs the support of. The decision to raise tariffs was accompanied by massive rioting in Argentina by affected farmers. As is usually the case in Argentina, large-scale disturbances ensued. In this instance, routes were cut off to neighbouring countries which are usually destinations of Argentinean produce until the elevated tariffs were put into effect. If you want more of a background, consult this TIME article, from which I draw the snippet below:

At the core of the discontent was a decision by Fernandez three weeks ago to raise export taxes for soy from 35% to 44% though a sliding scale of tariffs. Other observers have called the soy tax and efforts to ban exports of some farm products as misguided attempts to retain the supply of basic goods in Argentina. The government's argument is that the large-scale export of products like soy cause local shortages and drive up the price of food in Argentina.

The protesting farmers (the organizers claim as many as 150,000 took part) blocked international routes used for trade with neighboring Brazil, Paraguay and Chile, leading the government to threaten police action to clear the roads if necessary. The strike forced many supermarkets and butchers to close their meat counters, a dramatic move in a land famous for its abundant and tasty beef. Fruit and vegetable prices rose and exports of cereals and oils have also been affected.

A 30-day truce ended at the start of the month. With more than half of all export revenues coming from agricultural exports which are now at a standstill, things aren't looking up for Argentina's economy. The main agricultural producers in the country want nothing less than the removal of the additional tariffs, but Kirchner won't back down from the redistributive ploy. The result is that the farmers have gone back to good ol' "industrial action," as per the British euphemism. From Reuters:

Thousands of farmers lined Argentina's highways on Thursday in fresh protests to disrupt key grains exports and pressure the government to cut agricultural taxes. Farmers launched the eight-day strike after breaking off weeks of talks with the government, complaining that President Cristina Fernandez had refused to modify a new system of export taxes that triggered a three-week strike in March.

"They wanted to trample all over us, but they couldn't do it," said Alfredo De Angeli, a farm leader in Entre Rios province who became well-known for his fiery speeches during the first strike. The Entre Rios town of Gualeguaychu, some 125 miles (200 km) from Buenos Aires, has become the focus of farm protests. Argentina is one of the world's top suppliers of corn, wheat and soy, and the protests have pushed up soy prices on world markets.

Argentina's peso currency slipped as investors concerned over a prolonged conflict sought refuge in dollars [!], and the local currency is now languishing close to a five-year low. Bonds and stocks were also jittery.

Traders at Argentina's main grains market in Rosario said they had no orders. Farmers plan to hold back products from soy crushers and exporters through May 15. But they have ruled out a repeat of the roadblocks that caused food shortages during March's strike, when the government accused them of trying to hurt ordinary Argentines.

Fernandez's leftist government has offered a tax rebate and transportation subsidies for small producers to cushion the effect of the new taxes, but farmers said they will not go back to negotiations unless she suspends the measure. The sliding-scale tax system pins export taxes to international prices, raising levies on soybeans to about 40 percent at current prices from the previous fixed rate of 35 percent. "When they don't have any more cash from exports, that's when they'll have to sit down to talk," said one farmer in Gualeguaychu who declined to give his name.

Argentina's vast fertile farmlands make it the world's No. 2 corn exporter, the third-biggest soy supplier and the No. 4 provider of wheat and beef. The conflict with the farming community has landed Fernandez with her biggest challenge since taking office five months ago. Top officials criticized the new wave of protests. "It's a hugely irresponsible decision that makes no sense at all. It's just about defending the interests of one sector and not about the general interest," said Interior Minister Florencio Randazzo.

Fernandez has refused to scrap the sliding-scale tax system and she defends high export taxes on farm goods as a way to redistribute wealth and combat inflation in a country where a quarter of the population lives in poverty. Soy exports earned the country $13.47 billion last year while sales of farm goods abroad accounted for 52 percent of total Argentine exports, totaling $29.13 billion.

What are these farmer doing with all that agricultural produce in the meantime now that they are unwilling to cooperate? Socialists would say they are "hoarding"; these farmers would say they are "protecting their interests." Mercopress has an interesting article on how farmers are using ginormous silos to keep the non-exported grains away from unwelcome parties. Will they succeed in starving the government of revenues from export tariffs? It will be interesting to watch, to say the least:

The extended Argentine farmers/government conflict, which was triggered in early March when the new sliding export taxes system was announced, and its renewed eight days of protest, have left an estimated 44 million tons of grains and oil seeds unsold, valued in approximately 12 billion US dollars, according to market analysts interviewed by the Buenos Aires press. The 44 million unsold tons are equivalent to 45% of the 2007/08 harvest which is forecasted to be Argentina’s second record with 96.8 million tons equivalent to 25 billion US dollars.

Non exported grains will inevitably have an impact for the Argentine government coffers since it will have limited access to collecting the controversial export tax if farmers hold on to their crops. This is particularly true since farmers apparently with the help of plastic silos can store such huge volumes of grains.

According to Gustavo Lopez from Agritrend, of the 44 million tons, 75% is soy. Argentina still has to ship overseas an estimated 32 million tons of soy, (some of it already sold but with no price agreed) which at current local prices is equivalent to 9 billion US dollars. The country’s total soy crop is expected to reach 48 million tons of which 14 million still are waiting to be harvested.

Ricardo Baccarin from Panagricola argues that given the current uncertainty in the grains market, and situation, farmers are holding on to their soy crops “which is the most valuable.They’ve decided to sell what they need to face current expenditures and the rest they are holding on to; we could be facing a historic year in so far as crop retention is concerned”, added Baccarin.

Normally at this time of the year daily transactions in the area of Rosario (Argentina’s main soy bean hub) “are in the range of 100 to 200.000 tons of soy, but currently it’s down to 10 to 30.000 tons”. Lopez revealed that an estimated 51 million tons of the current crop have been commercialized, and even when soy beans retention is as high as 75%, “most of corn and wheat has been traded. Of the 16 million tons of wheat possibly 4.2 million tons remain unsold”.

Regarding corn, of a crop of 21 million tons, 10.4 million tons have been traded and exporters have registered sales for 10.7 million tons. Argentina’s domestic consumption is 7.8 million tons. Nevertheless grain traders are fearful because last year the Kirchner administration clamped exports when the overseas registry reached 10.5 million tons. Lopez says that 25 million tons, (14 million of soy and 11 million of corn, sorghum and others) still have to be harvested.

And how do farmers store such huge volumes? Apparently plastic portable silos with minimum units of 200 tons and which can stand a whole year has become the most common resource in current circumstances. “The plastic silos are a good strategy for tough moments and uncertainty” said representatives from a company which specializes in selling these products. Apparently business has been booming and sales of plastic silos could store well above 40 million tons. “That’s where most of the crop should be now”, added Lopez.

This also means a huge improvement from the 2003/04 harvest when plastic silos helped store 12 million tons. Companies admitted this has become a “90 million US dollars business per crop”. Provincial authorities’ sources from Cordoba estimated that Argentine farmers could be holding on to grains and oil seeds valued at almost 20 billion US dollars [!]

The Long and Winding Road to Asian Monetary Union

With European Monetary Union celebrating its ten year anniversary with well-deserved fanfare [1, 2], Asian countries on the outside looking in have looked at the European example with envy. It is true that the political economies of Asia are far more diverse than those of Europe, ranging from freewheeling bastions of enterprise to (at least de jure) socialist regimes. Nevertheless, strides are being made towards establishing an Asian Monetary Union. At the recently concluded Asian Development Bank meetings in Madrid, Asian finance ministers have agreed to further formalize bilateral swaps of the previous Chiang Mai initiative to a regional arrangement to combat future balance of payments crises in Asia. If you will recall, the United States shot down an effort by Japan at the height of the Asian financial crisis to create an Asian Monetary Fund. It was, of course, a dual power play for regional influence by Japan and the US; the latter wanted to keep its regional influence, while the former wanted to have a greater stake in regional affairs.

Fast forward to 2008 and we are again on the brink of an Asian Monetary Fund (AMF). In contrast to a decade ago, however, Japan is not the only big player in the mix as China has amassed even larger reserves than China in the meantime. Here is the description of the bulked-up arrangement care of Reuters:

East Asian finance ministers are set on Sunday to agree an upgrade to an $80 billion currency swap scheme to fight regional financial crises, a deal taking them a step closer to creating a full scale Asian monetary fund. "The meeting was successful and we agreed on key elements about upgrading the existing arrangements," South Korea's Finance Minister Kang Man-soo told reporters after a meeting with his counterparts from Japan and China. Kang's deputy, Shin Je-yoon told reporters separately that the currency swap scheme "will be upgraded to at least $80 billion".

The deal -- more than a year in the making -- will replace the existing arrangement of mainly bilateral currency swaps, called the Chiang Mai Initiative (CMI) and transform it into a more powerful self-managed reserve pooling mechanism governed by a legally binding single contract. The broad terms are set to be agreed later on Sunday at a full meeting of finance ministers from the so-called ASEAN+3 group -- the 10 members of the Association of Southeast Asian Nations plus Japan, China and South Korea.

The talks, taking place on the sidelines of the Asian Development Bank's annual meeting in Madrid, will finalise terms to pool foreign exchange reserves for use in emergencies in any of the signatory economies. Japan, China and South Korea are expected to provide 80 percent of the total, ASEAN countries the balance, South Korea's Shin said.

Loans will be made in U.S. dollars against local currency collateral provided by the borrowing nation, either via a currency swap or a promisory note. Loans will cost between 150 and 300 basis points above the London Interbank Offered Rate (Libor) and be provided for three months, renewable for up to two years. Borrowing costs will be reviewed every five years.

Finance officials say the agreement will be a significant step forward for the 13 nations involved in the bilateral swap deals that were created in the wake of the 1997-98 Asian financial crisis, taking them closer to a full scale regional equivalent to the International Monetary Fund.

"This will play a role of supplementing existing international financial stability schemes," Shin told reporters. "This will show to the world that Asia is making a concerted push about securing financial stability." The finance ministers said they were determined to work together to secure financial stability in Asia and would create a forum in which to discuss policies required to do so.

"We've decided to hold a gathering of finance ministers, financial supervising authorities and central banks from the three countries within this year because it is important (for) authorities who are responsible for macroeconomic policy and financial market stability to exchange views," Japan's Finance Minister Fukushiro Nukaga told reporters. Japan has been a leading advocate for the creation of a regional forum that brings together policymakers, supervisors and central bankers to promote financial stability, similar to the Financial Stability Forum backed by the Group of Seven industrialised nations.

Calls for an Asian monetary fund were made during the depths of the Asian financial crisis when IMF-led bailouts worth around $100 billion came attached with conditions for unpopular austerity programmes and economic reforms.

But Naoyuki Shinohara, Japan's vice finance minister for international affairs, said ahead of the ADB meeting that any deal agreed would not be about creating easy money. "We don't want it to be a mechanism to give out easy money," Shinohara said. "The most important issue is how to strengthen surveillance," he added.

Complicated factors remain to be negotiated, such as how to activate currency swaps while making sure borrowing countries would return the money after a crisis ends.

Another step to further regional integration is the development of deeper capital markets in the region. ASEAN has more notes on this from the Madrid proceedings under the so-called Asian Bond Markets Initiative (ABMI):

Along with the effort and progress made under the ABMI since 2003, the Asian bond markets have recorded remarkable growth in terms of size and diversity of issuers. We also took note of other progress and effort under the current ABMI such as studies on new securitized debt instruments, credit guarantee and investment mechanism, the suty on Asian Bond Standard and enhancing the credibility of the domestic credit rating agencies.

To further develop the Asian bond markets, we endorsed the New ABMI Roadmap. This new roadmap shows our renewed strong commitment to the concrete progress of ABMI, on the occasion of its fifth anniversary.

First, the new ABMI Roadmap focuses on the four key areas: i) promoting issuance of local currency-denominated bonds, ii) facilitating the demand of local currency-denominated bonds; iii) improving regulatory framework and iv) improving related infrastructure for the bond markets. The Steering Group will be established to monitor and coordinate the activities of the four Task Forces in charge of those areas.

Second, we agreed to make further voluntary efforts to contribute to more accessible regional bond market development in a concerted manner. In this regard, each country will make periodic self-assessments of its progress in line with the objective of ABMI. The reference will be introduced for this purpose.

Third, we recognized that the private sector plays an important role in the development of bond markets. In this regard, we welcomed the launch of a group consisting of private sector participants to discuss the cross-border bond transactions and settlement issues.

And finally, let us discuss the Holy Grail: regional economic integration. Yes, China, Japan, and to some extent Korea are all engaged in a three-ringed battle for regional hegemony. Yes, most Asian countries don't get along with each other for deep-seated sociohistorical reasons. Yes, the disparities in economic progress among Asian economies are truly eye-opening. Despite it all, both the Asian Monetary Fund and the Asian Bond Markets Initiative demonstrate a willingness to cooperate on pragmatic grounds. Such grounds may eventually result in Asian Monetary Union. I certainly don't rule out seeing it in my lifetime. When that happens, the Asian century will truly be upon us. In the end, Hirst and Thompson may well prove to be right in arguing that regionalization, not globalization is the predominant trend of our times. Bill Pesek analyzes the situation, though I am more optimistic than he is on the prospects for further integration:

There's a certain irony to the Asian Development Bank holding its annual meeting in Europe. The Manila-based lender did so this week in Spain, one of the 11 nations that in 1999 embraced a single European currency. The euro area has since grown to 15 members and many in Asia want to replicate the enterprise. Much of the talk in Madrid surrounded accelerating that process.

There's no firm timetable, nor do Asian leaders regularly refer specifically to an Asian euro. They prefer to couch it in terms such as ``regional integration'' and ``economic interconnectedness.'' The ultimate goal is a common Asian currency shared by as many as 16 economies. That ambition made the location and timing of this year's ADB meeting strangely apropos, just as the euro suffers tensions of its own. There's much Asia can learn from Europe's experience.

The euro improved economic efficiency in a region with output comparable to the U.S.'s. Exchange-rate volatility has been eradicated and financial markets are deeper and more flexible. Intra-European trade has blossomed. The euro is becoming a viable alternative to the dollar, which has fallen roughly 45 percent over the last six years…

It took Europe 30 years of planning, negotiation and hard work to create a single currency. The process unfolded amid relative trust after World War II. The continent was endeavoring to maintain peace and build prosperity at a time when the U.S. and Soviet Union were engaged in an arms race.

Asia lacks anything approaching that trust. Tensions over the past mean its three biggest economies -- China, Japan and South Korea -- are barely on speaking terms. Hu Jintao's trip to Japan this week is the first by a Chinese president in a decade and marks an important step forward. Asian relations still have a long way to go.

In Europe's case, political will to integrate helped overcome economic hurdles. In Asia, politics are a big hurdle. ``I can't see any political will within Asia for the creation of a totally independent monetary authority like the ECB,'' says Simon Grose-Hodge, strategist at LGT Group in Singapore. ``None of them would agree to such an organization unless they ran it.''

Asia's economies are far more disparate than Europe's. Take the 10-member Association of Southeast Asian Nations, or Asean, which exists to promote regional growth and cooperation. It includes economies that aren't remotely comparable. Singapore's per-capita income is about $29,000, while Cambodia's is $500 and Myanmar's is so low that the World Bank doesn't even list it.

The region also lacks a European Union-like structure, a NATO-like alliance or an Organization for Economic Cooperation and Development to push integration. Still, officials at the ADB are working to catalyze the process.

In Madrid this week, finance ministers from 13 Asian nations agreed to create a pool of at least $80 billion in foreign- exchange reserves to be tapped by nations in case they need to protect currencies. ``Asia is coming together slowly, but surely,'' says Masahiro Kawai, dean of the Asian Development Bank Institute in Tokyo. ``There is very clear momentum in that direction.''

The wildcard is how the current food-price crisis affects cooperation. Jong-Wha Lee, head of the ADB's office of regional economic integration in Manila, says the events of 1997 brought Asia together. ``The crisis was a watershed,'' he says. ``It sharply focused the region's attention on its interdependence and shared interests.''

The question is whether surging commodity prices and resulting increases in poverty will hinder regional integration. Will the increasing scarcity of food, energy and other commodities fuel a return to an every-nation-for-itself mindset? Only time will tell.

None of this means an Asian euro is doomed. Yet the idea that Asia can achieve what Europe did anytime soon is fanciful. And given the challenges Europe faces, one wonders if it can muster the will to try.

PRC's Excellent Adventures: Invest in US, Farmland

OK. so the title is a bit misleading in that the PRC has long been investing in the United States by plowing its reserve holdings into US Treasuries and Agencies (c/o Fannie Mae and Freddie Mac). However, the Financial Times now notes that China may be keener on diversifying its overseas investments in a number of ways which suit its "strategic" prerogatives. First, there is (misguided?) hope in some circles that Chinese private investors will prop up US bourses. In contrast to dreaded official (read: FDI by state-owned entities) inflows, the more welcome sort is portfolio investment care of private investors. After being socked by the recent declines in Chinese equities, will private investors from the PRC contemplate going stateside to invest? The groundwork has already been set by US and Chinese authorities. Now, Chinese retail investors need to be assured that the dollar as well as US stocks will not be subject to further big drops. With US stocks looking like veritable bargains compared to Chinese ones, the time may just be right for an American incursion:

With their choice of assets restricted to expensive land, bank deposits yielding a negative real return and shares rising like a Chinese rocket, investors were hardly being irrational. But they were exuberant and driven by market momentum rather than fundamental analysis, which is why so many observers concluded that this was indeed a bubble.

Loose talk, says Lombard Street Research's Charles Dumas in a new book on China and the US. Assume, at the very worst, that the true p/e ratio after adjusting for cross holdings was 100 at the peak, giving an earnings yield of 1 per cent. Adding in China's trend real growth of nearly 10 per cent implies a potential all-in yield for Chinese stocks in double figures, once any dividend yield is added to growth to give a total real yield. That, says Mr Dumas, implies a decent 3-4 per cent premium to the S&P 500 long-term real stock market return of 6.5-7 per cent.

Whether that premium makes sense in relation to risk is a question. Clearly the political and economic risks in China are great, as are the risks in China's deficient corporate governance and the authorities' tendency to intervene in the markets. Yet the underlying point remains. Any free cash flow from stocks in an economy growing at a trend rate of 10 per cent is icing on the cake.

That is not to say bubbles can be ruled out in future. They are inevitable unless the aggressively mercantilist exchange rate policy, which floods the economy with liquidity, is changed. Mr Dumas thinks it is now in the country's interest to let the yuan appreciate. He suggests that current policy fails to address the inherent conflict between the desire to prevent inflation in an overheating economy and the wish to keep an artificially low, semi-fixed exchange rate. The conflict cannot be removed without either a painful and unnecessary domestic deflation or abandoning the undervalued yuan-dollar rate.

Even if this policy prescription were adopted soon, there would be a considerable trade surplus for some time. The problem, as Mr Dumas correctly predicted in an earlier book in 2005, is that US capacity to absorb China's excess savings (which are a counterpart to the trade surplus) is now impaired. With the credit crisis, debt exhaustion has set in and US households are rebuilding their savings. So he suggests the Chinese authorities should allow private individuals to export capital.

The US could absorb the resulting flow via equity rather than debt markets. This would be less politically contentious than conducting the flow through state-directed sovereign wealth funds. And since Chinese investors would probably be content with a return rather lower than the long-term return on US equities given their poor domestic choices, this would provide a prop for the US equity market when earnings are under pressure.

The prescriptions are eminently sensible. The snag is that Beijing has never been very susceptible to outside advice, however sane. And confronted with a proposal for liberalisation, a communist regime is no doubt instinctively reluctant to relinquish controls while presiding over a stressful industrialisation in the world's most populous country. Yet the economy's expansion is out of control and a protectionist backlash looms. The stakes in this game are uncomfortably high.

In other dispatches about the impending Chinese domination of the world, the FT also notes that the country is keen on buying up farmland in Africa and South America. Here, the more honest if brutal face of realpolitik figures into the equation as the country seeks to secure food supplies in the wake of rising food prices. Thus, farmland overseas is the next frontier for China's agricultural concerns should the country get its way. Whether other countries will allow China to own vast tracts of farmland while employing Chinese workers to work in those fields is a good question:

Chinese companies will be encouraged to buy farmland abroad, particularly in Africa and South America, to help guarantee food security under a plan being considered by Beijing. If approved, the plan could face intense opposition abroad given surging global food prices and deforestation fears. However an official close to the deliberations said it was likely to be adopted. “There should be no problem for this policy to be approved. The problem might come from foreign governments who are unwilling to give up large areas of land,” the official said.

A proposal drafted by the Ministry of Agriculture would make supporting offshore land acquisition by domestic agricultural companies a central government policy. Beijing already has similar policies to boost offshore investment by state-owned banks, manufacturers and oil companies, but offshore agricultural investment has so far been limited to a few small projects.

The move comes as oil-rich but food-poor countries in the Middle East and north Africa explore similar options. Libya is talking with Ukraine about growing wheat in the former Soviet republic, while Saudi Arabia has said it would invest in agricultural and livestock projects abroad to ensure food security and control commodity prices.

China is losing its ability to be self-sufficient in food as its rising wealth triggers a shift away from diet staples such as rice towards meat, which requires large amounts of imported feed. China has about 40 per cent of the world’s farmers but just 9 per cent of the world’s arable land. Some Chinese scholars argue that domestic agricultural companies must expand overseas if China is to guarantee its food security and reduce its exposure to global market fluctuations.

“China must ‘go out’ because our land resources are limited,” said Jiang Wenlai, of the China Agricultural Science Institute. “It will be a win-win solution that will benefit both parties by making the maximum use of the advantages of both sides.”

In the first quarter of this year, food prices in China rose 25 per cent from a year earlier, the highest level of farm inflation since the early 1990s, said UBS. China is still a net exporter of agricultural commodities but is increasingly reliant on soybean imports and is about to become a net buyer of corn. It imported up to 60 per cent of the soybean it consumed last year and the crop would be a focus of policy support for companies acquiring land overseas, along with bananas, vegetables and edible oil crops, said an official familiar with the ministry’s proposal. The ministry is already talking to Brazil about the possible acquisition of land for soybean, according to this official.

Some countries would find it particularly problematic if Beijing supported Chinese firms to use Chinese labour on land bought or rented abroad – common practice for most companies operating overseas.

India's Marxists Win: More Futures Trading Banned

In an earlier post, I mentioned the efforts of the ruling coalition's communist allies to promote further bans on futures trading in India. Despite government-sponsored research which suggests futures trading in India is not responsible for rising prices, the government has acquiesced to communist appeals anyway in banning yet more futures trading in other commodities. Although the government says it is a temporary measure aimed at gauging whether prices can be controlled through restricting futures trading in these commodities, the obvious point is that the Congress Party has determined that the calculus of consent with upcoming elections requires throwing a bone to the communists. It's a shame that communist parties are a rarity in the West as they do add a degree of liveliness to electoral proceedings regardless of whether their policies actually help. From Bloomberg:

India, the world's second-largest buyer of vegetable oils, banned futures trading in soybean oil, rubber, chickpeas and potatoes as the government seeks to rein in the fastest inflation since 2005. The Forward Markets Commission halted trading for at least four months from today, Anupam Mishra, a director at the market regulator, said last night in a phone interview. Trades will be settled at yesterday's closing price.

Communist allies of Prime Minister Manmohan Singh want to ban futures in cooking oil, sugar and other commodities to tame inflation that reached 7.57 percent last month. While a study found no evidence that halting rice and wheat futures last year curbed prices, the government needs to keep food affordable for the half the 1.1 billion people who live on less than $2 a day.

``Halting futures trading will probably have little impact on Indian inflation,'' Anne Frick, a senior oilseed analyst for Prudential Financial in New York, said in an e-mail. ``World soy- oil prices are up due to fundamental factors, not speculation...''

The four commodities banned by India have a daily traded value of about 12 billion rupees ($288 million) on the Multi Commodity Exchange of India Ltd. and the National Commodities & Derivatives Exchange Ltd., according to the regulator. Trading of all commodities on India's 23 exchanges totaled $922 billion in the year to March.

Finance Minister Palaniappan Chidambaram said on May 4 the government may halt some contracts because of political pressure to see ``if it has any impact at all on inflation.'' The government-appointed panel chaired by economist Abhijit Sen last month didn't recommend extending the ban to other food commodities, saying there was no conclusive evidence to suggest futures trading contributed to price increases.

Chickpeas futures surged 89 percent in the past 12 months on the National Commodities exchange, while rubber rose 41 percent and soybean oil advanced 21 percent in the period. ``Prices may start to rise again if supply-side constraints are not eased,'' Si Kannan, associate vice president at Kotak Commodity Services in Mumbai, said by telephone. ``The ban is a short-term measure.''

The government halted futures trading in wheat and rice last year and lentils in 2006 to check a surge in local prices. A futures contract is an obligation to buy or sell a commodity at a set price for delivery by a specific date.

India's imports of palm oil and soybean oil may be as high as 570,000 tons in May and June and may increase to as much as 700,000 tons a month starting in July, Dorab Mistry, a director at Godrej International Ltd., said last month. The South Asian nation relies on imports to meet half its edible-oil needs, buying palm oil from Indonesia and Malaysia and soybean oil from Argentina and Brazil.

Rubber-growers don't expect the ban to have a significant impact because they don't rely on the futures market to price their crops, Sajen Peter, chairman of the state-run Rubber Board, said in an interview today. ``Indian farmers get the highest farm-gate price anywhere in the world and don't depend much on the futures to formulate their selling strategies,'' he said in the southern city of Cochin.

Kerala state accounts for more than 90 percent of India's rubber production, the world's fourth-biggest. Domestic traders, producers and consuming companies are the main participants in India's commodity exchanges, compared with the 13 million people in the country who trade stocks. Overseas funds aren't allowed to buy and sell commodity futures. China is the biggest buyer of vegetable oils.

First Came OPEC; Is "RICEPEC" Next?

If you haven't done so already, it's almost a requirement to sign up to the (free features of the) Roubini Global Economics (RGE) Monitor. They send a daily e-mail nowadays featuring compilations of five key geopolitical / geoeconomic issues. Today I post on an interesting issue that they featured tackling a putative "RICEPEC" modelled after the Organization of Petroleum Exporting Countries (OPEC). For a bit of history, LDC producer coalitions became all the rage in the seventies as developing countries thought," gee, we ought to follow the example of OPEC and establish cartels of our own to ensure that we get remunerative prices for our commodity exports." This great hope was dashed, however, by the inability of these would-be cartels to function on an effective basis in the face of, among other things, global supply and demand fluctuations. Aside from economic historians, IPE junkies, and development scholars, is anyone else familiar with the International Bauxite Association (IBA), the Union of Banana Exporting Countries (UPEB), or the Members of the the Intergovernmental Council of Copper Exporting Countries (CIPEC)? If you are, perhaps you have too much free time on your hands ;-)

Now, Thai PM Samak Sundaravej proposes that neighbouring countries Vietnam, Burma, Cambodia, and Laos take advantage of the soaring prices commanded by the staple and create a rice cartel to ensure that prices do not retreat to lower levels. Bill Pesek over at Bloomberg thinks it's a really bad idea for a number of reasons. Meanwhile, erstwhile IHT writer Philip Bowring introduces several considerations which are likely to mitigate the effectiveness of a RICEPEC. First, and most importantly, the combined share of world rice output coming from the countries concerned would only come to about 15% of world supply whereas OPEC commanded 50% of world oil production at its peak and still accounts for around 40% at the current time. Second, Thailand risks alienating fellow ASEAN country members who are large importers of rice such as the Philippines, Indonesia, and Malaysia. Establishing a RICEPEC may only give rise to further protectionism in the latter countries. The bottom line according to Bowring: nice try, but isn't likely to work. From the Asia Sentinel:

Prime Minister Samak wants to create a regional rice cartel for Southeast Asia. In a misguided attempt to protect Southeast Asia's rice growers, Thailand’s Prime Minister Samak Sundaravej wants to bring Vietnam, Burma, Cambodia and Laos together to create a cartel of regional rice exporters. Though not quite like OPEC, its aim to keep global prices high, or at least from not slipping back to the low levels seen earlier this decade…On the face of it, the Samak plan may seem a laudable objective, helping exporters by providing a floor price for producers to ensure the security of supply for importers.

However, it may also remind commodity market observers of former Malaysian Prime Minister Mahathir Mohamad’s attempt to do a similar thing with the tin market back in the 1980s, when Malaysia was the leading producer. The tin price collapsed, Malaysia lost a lot of money and its tin industry almost ceased to exist.

In theory the Samak idea might have potential. Thailand and Vietnam export 9-10 million tonnes and 4-5 million tonnes of milled rice a year, respectively, roughly half of global rice exports. Cambodia is currently insignificant but has potential. It is unlikely, but Burma could, with a change of government and policy, see huge increases in output and raise it exports from around 500,000 tonnes to a level at least as large as Thailand, regaining its former position as the world’s major rice exporter.

The flaw with the Samak plan is more fundamental. The countries concerned, even were they to join together, account for only about 15 percent of global rice production. OPEC at its height controlled more than 50 percent of global oil output and around 75 percent of exports and even today accounts for 40 percent of output. Furthermore, rice is more readily substituted by other grains such as corn and wheat, and even by root crops, than oil could be substituted except in the long term. It is no coincidence that rice has soared at the same time as other grains.

A less significant but still important matter is that the most obvious victims of any such successful cartel would be the major importing countries, which are the prospective cartel’s partners in ASEAN, the Philippines, Indonesia and, to a lesser degree, Malaysia.

Meanwhile completely left out of the Samak equation are the world’s largest rice producers, India and China. Both are exporters, although they only export tiny amounts relative to production – 1-2 percent in the case of China, 3-4 percent for India. The key to prices thus lies at least as much in the marginal supply/demand situation in those countries as in the policies and output in Southeast Asia.

For years, both India and China have been far more concerned with food security than with trading in grains and that is likely to continue. Export restrictions by both contributed to the recent price surge. In China it is possible that rice production will continue to stagnate as suitable land is taken up by urbanization, leaving little surplus for export. There may even be a period of rebuilding China’s stocks, which are believed to have run down a lot in recent years, though they are still huge by most countries’ standards. Growing of rice may also be discouraged in water-short northern China where pressure on the government to charge for water is building.

But equally, China’s rice consumption may fall as food choice diversifies, for example into potatoes, a non-traditional crop which is now a significant industry, making China an exporter as well as major consumer. In which case its rice export potential could even grow.

The situation in India is very different. India’s potential to increase rice production far faster than population growth is undeniable. Yields per hectare are half those in China and less than in Bangladesh. A mix of better irrigation, better roads and storage and wider use of improved seeds could easily make India into an exporter at least as large as Thailand.

Meanwhile on the demand side, it is possible that African countries which are currently major importers because their own rice yields are so low may improve their performance, or that local demand will shift back to traditional crops such as cassava and millet.

At the global level, the current grain price scare may well set off increased protectionist trends rather than inspire governments to see the merits of both trade and stockpiles. For example, the Philippines is again making rice self-sufficiency a goal even though imports have been a feature of the country for more than 100 years. It may be the traditional crop in much of the Philippines, and Philippine rice farmers are more productive than they are usually given credit for but scarcity of flat land, lack of major river basins and rapidly rising population all make rice self-sufficiency a goal which can probably only be met at huge cost to other crops and industries – and to urban consumers.

Yet the more Samak and company talk about rice cartels, the more politicians in the Philippines and elsewhere will have to respond with their own forms of costly protectionism. Similar noises have been heard from Malaysia and Indonesia, though it less likely that self-sufficiency rhetoric will become reality if only because both are net food exporters thanks to palm oil. Malaysia is anyway already suffering from the cost of subsidizing both rice production and consumption.

Looking ahead, rice prices are likely to be constrained by the greater ability of other crops for rapid expansion. Production of soybeans and some grains in Latin America will continue to grow rapidly. Ukraine and Russia are already significant wheat exporters and have the potential to double existing yields.

Essentially, the greater the trade in grains, the greater is the chance of global food security being achieved on the basis of efficient production. While short-term export restrictions such as those in Vietnam and India are understandable given the need to keep domestic prices rising as rapidly as international ones, if they are anything other than short term they will simply undermine the efforts being made to liberalize global farm trade, the key goal of the Doha Round of trade negotiations.

Already high prices have become an excuse for the EU and the US to put off addressing their farm subsidy schemes, and Japan is trying to make a virtue out of importing less rice than it had earlier promised.

Recent developments in the grain situation show that global farm trade needs reform and liberalization more than ever. But the responses, whether of Samak, the Philippines or Japan, suggest that more restrictions will be the result, and with them less efficient output and the likelihood of more crises in the future.

$$$ - The Prison-Industrial Complex Circa 2008

She was there through my incarceration; I wanna show the nation my appreciation...

It is inevitable that you will find cases of business acumen that are nonetheless deplorable. My favourite example is of Rupert Murdoch's Fox News. Given a supposed liberal media bias in the States, the ever-enterprising Rupert Murdoch put up the channel with a distinct conservative tilt. You may not always appreciate the product, but hey, it's a damn good illustration of give 'em what they want in operation, Fox News babes and all.

Now, the prison-industrial complex is certainly a growth industry. I like to think of America as one big gated community. Those who have the temerity to try and climb the walls are, of course, carted off to jail. Social mobility is more of a pipe dream than an American dream. Building prisons, monitoring prisoners, feeding prisoners, clothing prisoners...it's all become good business as politicians promising to be tough on crime, harsher penalties, and overcrowded government facilities result in more correctional procedures being outsourced to private industry. Although the relationship between crime and economic downturns is subject to much debate, it is hard to argue that the US slump will slow down the further movement towards private corrections. With apologies to Kevin Costner, if you build correctional facilities, the inmates will come--in droves. Some will lament the social problems; others will be in it for the money. Incarceration nation is where the money is at. Appropriately enough, from Forbes:

The United States currently accounts for approximately 25% of the global prison population, despite possessing less than 5% of the world's population. The U.S. prison population is now so large that it has important economic, fiscal and social consequences that are resistant to policy reform.

A series of recent international studies have underlined the stark picture of prison life and numbers in the United States, compared with other countries. The danger is that the political and economic rationale behind the massive prison population may have created a self-reinforcing cycle.

There are 2.3 million to 2.5 million prisoners in the United States:

--The United States incarcerates 751 per 100,000 members of the population.
--This is a major departure from the historic incarceration rate.

There are several reasons for the comparatively high incarceration rate:

1. Public policy. Federal and state courts follow tougher sentencing guidelines than other countries. Furthermore, several policy developments have helped increase incarceration rates. Extending sentence terms has been a bipartisan policy.

2. New penal regime. Following federal declarations of "war on drugs" and "war on crime," anti-crime policy has become a mainstay of the role of U.S. federal and state authority in society. New penal policies were devised and implemented in the 1980s, which combined novel elements such as:
--much tougher attempts to "manage" the criminally dangerous part of the population through extended incarceration; and
--greater attention to populist demands for harsher punishment.

3. Welfare substitution. This new penal regime coincided with other public policy developments that rolled back the welfare state. Imprisonment, in many cases, became a substitute for cutbacks in other social welfare policies.

Prisons have become a major U.S. industry. Their scale sets in lucrative logistic and organizational dynamics, and has created a network of vested interests. Many new state and federal prisons have been deliberately located in economically deprived rural communities, where they have become the principal employer. Some economists and social scientists describe this as a "prison-industrial complex." It subsidizes jobs for those running prisons and through resources it buys in from the private sector. Moreover, some private employers take advantage of exceptionally low prison pay to outsource basic packing, assembling or services work to prisoners.

High rates of incarceration have numerous negative legacies, but two stand out:
--Ethnic divisions. Blacks and increasingly Hispanics are imprisoned at an exceptionally disproportionate rate.
--Disenfranchisement. Historically, felon disenfranchisement has been a key feature of the U.S. penal system. Given that the prison population is not a random profile of the citizenry, this has important political effects. Unsurprisingly, many former felons fail properly to reintegrate into society following release.

The current role of the criminal justice system in the U.S. political economy will face two near-term challenges:
--Fiscal pressure. Collapsing housing prices have hit state budgets particularly hard, which will make it difficult to expand the prison system at the current rate.
--Political change. The unaddressed problems with the current harsh incarceration policy have begun to attract political attention.

Current U.S. prison policy has many deleterious economic and social effects, and is fiscally unsustainable. Despite the resistance of entrenched interests and political lobby groups, reform--principally a reduced rate of incarceration for non-violent offenders--is inevitable.

Socialista Non Grata: Bolivians Want Autonomy

Comrades and comradettes [sic], it appears that the efforts of Evo Morales to create a Hugo Chavez-style Bolivarian revolution in Bolivia are running into opposition from wealth landowners and other bourgeois enemy of the people. To paraphrase John "Triple H" Edwards, there are two Bolivias: those in the lowlands areas are typically better-off mestizos (of some Spanish ancestry) and those in the highlands are typically indigenous folks of modest means. Morales is supposedly the first indigenous head of state since the conquistadores came. Naturally, his constituency is more receptive to class warfare-type appeals such as land reform and energy industry privatization. You know, it's classic class warfare in the Marxist sense.

However, recent troubles stem from Morales losing administrative grip on the low-lying areas where the bulk of the energy revenues come from. In the EIU report below, it is noted that Santa Rosa province has voted in favour of secession from the government. In light of this "success," three other gas-rich provinces are likely to offer their own referenda and follow suit. What's a socialist to do without the revenues to fund la revolucion? In any event, the business climate in Bolivia is bound to become worse before it improves...

Resisting the central government, Bolivia’s Santa Cruz province voted in favour of autonomy in a referendum held on May 4th. Though expected, the “yes” victory is a blow to the administration of President Evo Morales, who sees the referendum as an illegal challenge to his authority. Three other eastern provinces are likely to follow suit with their own referenda, and this will heighten tensions between the federal government and provincial leaders. The risk of political instability will also increase, undermining effective governance and discouraging private investment.

Clashes between opponents and supporters of regional autonomy accompanied the voting in parts of Santa Cruz, Bolivia’s largest and most prosperous province. The government-run news service put the abstention rate at 40-45%, prompting federal authorities to call the vote a failure. However, exit polls show that at least 85% of those who showed up voted for greater autonomy.

The leaders in Santa Cruz and the other lowland provinces, which are home to Bolivians of mostly mixed or European ancestry, have long opposed Mr Morales’s policies, which favour indigenous groups (concentrated in the highlands) and which opponents see as threatening private property. Since taking office in January 2006, Mr Morales has nationalised the hydrocarbons industry and has promised to implement a land reform (which would affect large landholdings in Santa Cruz), among other socialist-oriented measures.

The referenda are also a response to the recent passage by a constitutional assembly of a new magna carta. That assembly is dominated by members of the governing Movimiento al Socialismo (MAS) party and other allies of Mr Morales, and was approved by a mere majority, with strong resistance from opposition groups. The government itself postponed a national referendum on the new constitution, hoping thereby to bring separatist provinces to the negotiating table. Instead, Santa Cruz went ahead with its plans for May 4th.

Under the statutes of the referendum, Santa Cruz officials will have greater control over matters such as taxation, immigration, transport and public security. The province will be able to directly elect its governor and a local legislature for the first time. In addition, it will seek to negotiate its own royalty agreement with private oil and gas companies.

It is too early to tell how and if these measures will be implemented, and the head of Bolivia’s armed forces has said that the referendum amounts to a threat to national security. Further, the legality of the referendum under the current constitution is still under question. Mr Morales has said he considers the outcome like that of an opinion poll, not a binding resolution.

What is certain is that the autonomy movement is a serious challenge to President Morales’s socialist ideology and vision for Bolivia, under which the government seeks to redistribute wealth and power to benefit the impoverished and long-disenfranchised masses of indigenous Bolivians. As a result, the referendum’s outcome could serve to widen the rift between the government and the rebel provinces, as well as worsen the racial, socio-economic and geographical divisions that characterise Bolivian society.

The Morales government has not stood idle as the Santa Cruz vote has gone forward. Rather, it has deepened its nationalist policies, announcing on May 1st the takeover by the state of Entel, Bolivia’s largest telecommunications company, and of four private energy companies.

The nationalisations are part of a longer process, and conform to Mr Morales’s view that strategic industries and public services should be controlled by the state. Yet the announcement was probably also designed to boost his support among his political base at a time when high inflation and the struggle with rebel provinces threaten to do damage to the president.

Yet the latest takeovers, combined with the ongoing political tensions, will further hurt the business environment and may lead to a longer postponement of foreign investment in sectors such as hydrocarbons and mining that face growing bottlenecks.

Even with the stronger fiscal revenues resulting from high energy prices and higher taxes on energy companies, Bolivia continues to be reliant on foreign investment and know-how to further develop its natural-resource industries. Yet investment in exploration and production in the oil and gas industry fell to US$149m in 2007 from US$650m in 2002, the lowest since 1996, according to the Santa Cruz-based Hydrocarbons Chamber. Santa Cruz and other lowland provinces produce the bulk of Bolivia’s the hydrocarbons, and Santa Cruz is home to the headquarters of most foreign companies engaged in the country.

Meanwhile, in light of the high level of support for autonomy, the government will eventually be forced to negotiate. He has already called all of Bolivia’s governors to the table. These talks will be difficult, given the Bolivia’s deep society fissures, which have become more pronounced since Mr Morales took office. Any consensus solution would probably mean adjustments to the MAS-approved constitution before it is put to a national ballot. For Mr Morales, such concessions would involve a considerable loss of face.

Nonetheless, it is unlikely that instability will escalate to a point where Mr Morales would be forced out of office. He has strong support among Bolivia's social movements, partly because they lack any credible alternative leader. Moreover, the traditional political parties are fragmented and without fresh leadership of their own. Yet the president’s popularity could well decline during the remainder of 2008, and this will complicate the task of getting backing for his new constitution and, more broadly, governing a divided nation.

Calling Nancy Reagan: Uncle Sam, Dope Fiend

There is a school of thought that believes actions speak louder than words. If this is the case, then the role of the US in Afghanistan certainly deserves mention for considerable inconsistency. It is well known that opium production in Afghanistan has boomed since the United States invaded the country. Record harvests of opium (which are usually sold to Taliban middlemen) combined with a distinct inability of the US to foster economic development in concert with the puppet regime of "Heroin Hamid" Karzai mean record levels of GDP arising from the opium trade. It's not that America hasn't tried some half-hearted measures. First came efforts at poppy eradication which failed as Afghans with no other sources of livelihood inevitably returned to opium. Next came efforts to persuade Afghan farmers to plant crops other than opium. Afterwards, ideas were floated of buying up the opium harvest for medicinal purposes.

Whether because of poor planning, insufficient effort, or both, none of these efforts panned out, so the US has basically fallen back to a strategy of "if you can't beat them, join them." The Associated Press now reports that US Marines are turning a blind eye to opium production which is subsequently used to fund the Taliban. What does this tell us? According to the actions speaks louder than words school of thought, I cannot but help conclude that the US invaded Afghanistan to ensure the worldwide supply of narcotics. I wonder what Nancy Reagan would say about the US condoning the heroin trade in Afghanistan--to the advantage of the Taliban and druggies the world over. Dude, this is your country [I show them an egg.] This is your country after the Taliban is kicked out by America [I fry the egg.] Any questions?

The Marines of Bravo Company’s 1st Platoon sleep beside a grove of poppies. Troops in the 2nd Platoon playfully swat at the heavy opium bulbs while walking through the fields. Afghan laborers scraping the plant’s gooey resin smile and wave. Last week, the 24th Marine Expeditionary Unit moved into southern Helmand province, the world’s largest opium poppy-growing region, and now find themselves surrounded by green fields of the illegal plants that produce the main ingredient of heroin.

The Taliban, whose fighters are exchanging daily fire with the Marines in Garmser, derives up to $100 million a year from the poppy harvest by taxing farmers and charging safe passage fees — money that will buy weapons for use against U.S., NATO and Afghan troops. Yet the Marines are not destroying the plants. In fact, they are reassuring villagers the poppies won’t be touched. American commanders say the Marines would only alienate people and drive them to take up arms if they eliminated the impoverished Afghans’ only source of income.

Many Marines in the field are scratching their heads over the situation. "It’s kind of weird. We’re coming over here to fight the Taliban. We see this. We know it’s bad. But at the same time we know it’s the only way locals can make money," said 1st Lt. Adam Lynch, 27, of Barnstable, Mass.

The Marines’ battalion commander, Lt. Col. Anthony Henderson, said in an interview Tuesday that the poppy crop "will come and go" and that his troops can’t focus on it when Taliban fighters around Garmser are "terrorizing the people. I think by focusing on the Taliban, the poppies will go away," said Henderson, a 41-year-old from Washington, D.C. He said once the militant fighters are forced out, the Afghan government can move in and offer alternatives.

An expert on Afghanistan’s drug trade, Barnett Rubin, complained that the Marines are being put in such a situation by a "one-dimensional" military policy that fails to integrate political and economic considerations into long-range planning. "All we hear is, not enough troops, send more troops," said Rubin, a professor at New York University. "Then you send in troops with no capacity for assistance, no capacity for development, no capacity for aid, no capacity for governance."

Most of the 33,000 U.S. troops in Afghanistan operate in the east, where the poppy problem is not as great. But the 2,400-strong 24th Marines, have taken the field in this southern growing region during harvest season.

In the poppy fields 100 feet from the 2nd Platoon’s headquarters, three Afghan brothers scraped opium resin over the weekend. The youngest, 23-year-old Sardar, said his family would earn little money from the harvest. "We receive money from the shopkeepers, then they will sell it," said Sardar, who was afraid to give his last name. "We don’t have enough money to buy flour for our families. The smugglers make the money," added Sardar, who worked alongside his 11-year-old son just 20 yards from a Marine guard post, its guns pointed across the field.

Afghanistan supplies some 93 percent of the world’s opium used to make heroin, and the Taliban militants earn up to $100 million from the drug trade, the United Nations estimates. The export value of this harvest was $4 billion — more than a third of the country’s combined gross domestic product.

Though they aren’t eradicating poppies, the Marines presence could still have a positive effect. Henderson said the drug supply lines have been disrupted at a crucial point in the harvest. And Marine commanders are debating staying in Garmser longer than originally planned.

Second Lt. Mark Greenlief, 24, a Monmouth, Ill., native who commands the 2nd Platoon, said he originally wanted to make a helicopter landing zone in Sardar’s field. "But as you can see that would ruin their poppy field, and we didn’t want to ruin their livelihood."

Sardar "basically said, ’This is my livelihood, I have to do what I can to protect that,’" said Greenlief. "I told him we’re not here to eradicate."

The Taliban told Garmser residents that the Marines were moving in to eradicate, hoping to encourage the villagers to rise up against the Americans, said 2nd Lt. Brandon Barrett, 25, of Marion, Ind., commander of the 1st Platoon.

In the next field over from Sardar’s, Khan Mohammad, an Afghan born in Helmand province who lives in Pakistan and came to work the fields, said he makes only $2 a day. He said the work is dangerous now that Taliban militants are shooting at the U.S. positions. "We’re stuck in the middle," he said. "If we go over there those guys will fire at us. If we come here, we’re in danger, too, but we have to work," said the 54-year-old Mohammad, who supports a family of 10.

An even older laborer, his back bent by years of work, came over and told the small gathering of Afghans, Marines and journalists that the laborers had to get back to work "or the boss will get mad at us."

Staff Sgt. Jeremy Stover, whose platoon is sleeping beside a poppy crop planted in the interior courtyard of a mud-walled compound, said the Marines’ mission is to get rid of the "bad guys," and "the locals aren’t the bad guys."

"Poppy fields in Afghanistan are the cornfields of Ohio," said Stover, 28, of Marion, Ohio. "When we got here they were asking us if it’s OK to harvest poppy and we said, ’Yeah, just don’t use an AK-47.’"

Will US Rent-Seeking Stop? Food Crisis & Tied Aid

This news is potentially groundbreaking. Although the US is the world's largest aid donor, it has long been criticized for observing the practice of "tied aid." For a long time, many other industrialized country aid donors followed policies similar to those that the US still maintains by giving aid that is tied to the interests of American agriculture. In effect, yes, aid is given, but the economic aspects of this aid are of secondary consideration to the support of domestic agricultural industries. This snippet from the Brookings Institution of the aid inefficiencies tied to prioritizing American food production and ship transportation is illustrative:

To its credit, the Bush administration has repeatedly proposed increasing flexibility to purchase food locally [in aid recipient countries], but such efforts have died in Congress because of strong pushback from domestic agribusiness and shipping constituencies. In comparison to a system that requires food aid to be purchased from American farmers and shipped on domestically-registered transoceanic vessels, however, it is roughly 25-50% cheaper to purchase food locally or regionally. Increased fuel prices have only made long shipping more expensive. For the same investment of taxpayers’ money, a faster and more flexible system can result in saving more lives while better supporting developing economies. The arguments against tied aid – that it is slow, costly and inefficient – have remained the same for years.

The following Wall Street Journal article is important in that the Bush administration has tabled a $770M food aid proposal before the US Congress to help combat the rising cost of food in developing countries. Once again, the issue of tied aid is likely to be a contentious one as the agricultural lobby--which has a strong influence on elected officials from farm states for obvious reasons--contends with the commonsensical proposition of untying aid. First, there are the efficiency gains noted above. Second, giving "technical assistance" by training those in impoverished countries to grow their own food is, of course, a better long-term solution than relying on US farm products year in and year out. Also, considering that food demand and prices are so high nowadays, it is debatable whether agribusiness really needs the implicit support of tied aid and the extensive subsidies that go with it. It is time for the US to kill off tied aid: the rest of the industrialized countries have largely done so already and not doing the same only turns world opinion against the US:

The Bush administration called for an emergency increase in U.S. aid to alleviate the global food-price spike, as the administration and its allies seek to use the crisis to push for major changes in the way the world community manages the fight against hunger.

President Bush proposed $770 million in aid as soaring prices are bringing what some say could be the worst hunger crisis in 30 years. The money, if approved by Congress, would come on top of $200 million that the Bush administration released two weeks ago for emergency international food aid, and would bring the total for U.S. efforts to combat global hunger to about $5 billion for 2008 and 2009.

With the developed world's attention focusing again on food aid to Africa and elsewhere, debate is likely to sharpen over how it should be delivered. The traditional U.S. approach effectively turns Washington into an intermediary for American-grown food to be shipped overseas at subsidized prices. That may alleviate immediate hunger, but it does little to deal with the fundamental issue: Africa's inability to feed itself.

The head of the United Nations's World Food Program, an American, has been pushing for her program's dollars to flow directly to Africa's farmers and help build the kind of market -- with multiyear contracts, future pricing and the like -- that Western farmers take for granted.

"As America increases its food assistance, it's really important that we transform the way that food aid is delivered," Mr. Bush said. In his State of the Union address in January, he called for the U.S. to purchase up to 25% of food assistance directly from farmers in the developing world. He said that building up local agriculture is the best way to break the cycle of famine.

The $770 million proposal came as part of a $70 billion emergency request that Mr. Bush sent to Congress for pursuing the Iraq and Afghanistan wars in fiscal 2009, which starts Oct. 1.

The White House sought to defend itself from charges that increased production of biofuels -- which Mr. Bush supports -- is contributing to the food-price spike. The White House said that increased production of corn-based biofuels such as ethanol accounts for only about 3% of the 43% increase in global food prices. Rapid growth in emerging economies, rising energy costs and bad weather in some crucial producing countries such as Australia, China and parts of Eastern Europe have also been factors, the administration said.

Mr. Bush's proposal immediately became tangled in U.S. farm-subsidy politics. Democratic House Speaker Nancy Pelosi (D., Calif.) pledged to work quickly on speeding aid overseas. But she also urged the president to pass the farm bill, of which he has been critical. The speaker noted that it contains "a major increase to the food-stamp program that will ensure that 38 million Americans -- especially children -- have improved access to basic nutrition."

Current U.S. food-aid programs have powerful support among American farmers and agribusinesses. They have long supported overseas aid as long as it was their own grain being shipped overseas, not cash. Rebecca Bratter, director of trade policy at U.S. Wheat Associates, the export development arm of the U.S. wheat industry, said, "We support more money for food aid, but we don't support the local and regional purchase option. It compromises the efficiency of the U.S. food aid program."

But with food prices soaring, U.S. farmers enjoy robust demand, and have less need for the government to buy some of their crop for use in overseas aid. And the U.S. increasingly has come under pressure from other developed countries to change the design of its food aid. Canada recently announced it would move toward more untied aid, and European countries made the switch in the 1990s.

"It is a moment of opportunity in many respects," said Lael Brainard, an expert on global development at the Brookings Institution. Despite the entrenched support for the current programs, she added, "Times have changed. It's worth testing the proposition."

Josette Sheeran, head of the World Food Program and a former U.S. State Department official, has been backing the idea of getting Africa to feed itself since taking office last year. In a recent swing through Africa, she called it an effort "to attack hunger at its root." Ms. Sheeran wants the U.N. agency to evolve into a market-led food development agency from its traditional role handing out food procured elsewhere. Her strategy is to harness the WFP's purchasing power -- it buys nearly $800 million worth of grains and cereals a year -- to create a market for local agriculture production on a continent with vast stretches of fertile land whose potential hasn't yet been tapped.

She is seeking to give African farmers an incentive to increase their harvests and take advantage of the recent surge in prices for corn, wheat, soybeans and other crops. In Africa, farmers are often reluctant to make investments to optimize their harvests because they're uncertain there will be a market for surplus production.

The WFP's "Purchase for Progress" plan has been picking up important allies. The World Bank, after two decades of neglecting African agriculture in favor of urban investments and social projects, is nearly doubling its lending to African agriculture next year to $800 million, and has made ending hunger a top priority.

Robert Zoellick, the World Bank's president and a former U.S. trade representative under Mr. Bush, told Ms. Sheeran at this year's World Economic Forum in Davos, Switzerland: "Hunger hasn't gotten anywhere near the attention it should." On Thursday, Mr. Zoellick praised his former boss's announcement, saying it "goes beyond critical short term needs and aims to deal with the causes of the crisis so millions will not suffer again."

The Bill and Melinda Gates Foundation is working with the WFP to structure multiyear forward contracts -- a common trading device in the West that is mostly unheard of in Africa north of South Africa. The contracts would give farmers a guaranteed price and a steady market. The WFP and the Gates Foundation hope this will showcase the potential for African agriculture and entice investments from private companies or governments like China and India looking for additional food sources.

"The only way to deal with the [food] crisis is to dramatically increase production. Having an assured market from the WFP is a great help," said Akin Adesina, vice president for policy and partnerships of the Alliance for a Green Revolution in Africa, a joint program of the Gates Foundation and the Rockefeller Foundation.

Boosting agriculture production in the developing world will require investment in everything from new research on seeds to irrigation systems to better roads for transporting crops.

Rajiv Shah, the director of agriculture development at the Gates Foundation, estimates it will take additional investments between $9 billion and $12 billion a year over the next 10 to 15 years to transform African agriculture and triple the income of 60 million smallholder farmers in sub-Saharan Africa.

For decades, U.S. policy has been to donate only food. Recent attempts to shift a percentage to cash have met with aggressive opposition from the U.S. agriculture industry. Three years ago, farmers and their allies in Congress effectively shelved an effort by the Bush administration to begin this switch.

European governments switched to giving all-cash donations in the mid-1990s, arguing that cash allows more flexibility in responding to crises and that the U.S. uses its food aid as a form of farm subsidy.

Corruption often bedevils aid, whether the donations are in cash or food. Regimes in nondemocratic countries may seize the aid for themselves or for elites, leaving the intended recipients empty-handed. South Korea has recently cited evidence that its food aid to North Korea was diverted to the North's military.

Today, for the first time in its 45-year history, the WFP receives more than half of its donations in cash rather than food, with the cash coming mainly from Europe, Canada and private donors. Of the WFP's total food procurement of $767 million last year (compared with about $300 million in 2002), 80% was spent buying food from 70 different developing countries. Uganda led the pack, selling 210,000 tons of grain to the WFP for nearly $55 million. Overall, the WFP bought about 902,000 metric tons of food for $253.3 million in Africa.

On a recent swing through Africa, Ms. Sheeran stopped at a chaotic and grimy street market in Addis Ababa, Ethiopia. Grains from around the country arrived there on the backs of donkeys and the open beds of exhaust-spewing trucks. Ms. Sheeran asked consumers and traders how they were coping.

"Supply is low, demand is high. We have gone from three meals a day to two. Then it will be one meal. Then we will die," said Yoseph Yilak, head of the local grain traders' association. "Why is the world taking corn for fuel? It will mean the death of many people."

"What's the solution?" Ms. Sheeran asked. "The best solution long-term is massive production of food," said Mr. Yilak, resplendent in a light blue leisure suit. "Don't just give us food. Help us to grow more."

UK Farmland, the Next Real-Estate Bubble?

With the prices of agricultural commodities as high as they are nowadays, it was probably inevitable that farmland would become the next target for real-estate speculators. The Independent has more on the English phenomenon of farmland becoming more dear as residential and commercial property dwindles in value. Call it the demographic retransition or whatever you will, but farming is back in fashion in a big way. Who would have thought it?

The price of farmland is rising at its fastest rate for more than 30 years as wealthy city dwellers and overseas buyers seek a slice of idyllic rural England and jittery investors rush to move their money out of stocks and shares because of the global credit crunch.

In contrast to falling residential and commercial property values, the average price of farmland rose by more than 10 per cent in the first quarter of 2008, according to a study of agricultural property sales which will be published this month. Arable land, in particular, has become so profitable that its average price has soared from £4,000 an acre in January last year to £5,500 an acre today.

"So far this year, we have seen some of the same trends we saw last year but at an even more accelerated pace," said Andrew Shirley, head of rural land research at the Knight Frank estate agency, which conducted the study. "We have seen farms in Kent and Dorset sell for more than £6,000 an acre and another batch in the North-west go for £5,000. This time last year, the same farms might have fetched £3,500 per acre – that is nearly a 75 per cent increase in some areas."

According to the Royal Institution of Chartered Surveyors, the value of farmland rose by 28 per cent during the second half of 2007. The last time agricultural property prices increased at such a rate was during the late 1970s, when annual increases of 40 per cent were common. Knight Frank believes prices will continue to rise by between 10 and 20 per cent this year.

The increases are being fuelled by the astonishing demand for agricultural holdings at a time when food prices are at an all-time high and when very little farmland is coming up for sale. Savills Private Finance, an independent mortgage broker, said the amount of land coming on to the public market each year was down from about 600,000 acres per year in the 1960s to 125,000 acres a year today.

However, demand has never been higher. For the first time last year, so-called "lifestyle farmers" – City traders and investors who use their wealth to pursue agriculture as a hobby – overtook bona fide farmers as the chief buyers of agricultural property.

Knight Frank's figures for 2007 show that 38 per cent of farmland was bought by agricultural enthusiasts, compared to 32 per cent sold to traditional farmers. However, other estimates suggest that lifestyle farmers bought 45 per cent of the available land.

Analysts say instability in the world's financial markets is fuelling the rush for farmland as investors look to transfer their wealth from stocks and shares into holdings more likely to being a quick return. One trader said: "Big funds will always invest in areas that are doing well and, with food prices being what they are at the moment, they are desperate to get into agricultural property, particularly profitable arable land."

The price of wheat and other cereals has more than doubled in 12 months. While that means the cost of food is going up, it has also improved the profitability of arable farming and made it an attractive investment. At the same time, Britain's agricultural land is attracting interest from abroad.

While more and more British farmers are buying up farms in Russia and the former Soviet states, our farmland is relatively cheap by western European standards. Fifteen per cent of British farms are now sold to overseas buyers. Last year, the Dutch overtook the Irish as the chief foreign purchasers, snapping up 6 per cent of the available property, compared to Ireland's 5.5 per cent. Investors from Denmark bought 3 per cent, as did others from Sweden, Norway and Finland. While studies show that the Irish tend to favour farmland in the west of England, northern European buyers are looking increasingly to East Anglia.

Jeremy Zeid, an arable market specialist at the estate agency Carter Jonas, said: "If anything, the credit crunch has strengthened the agricultural property market. Some people will have seen millions wiped off their investments but those who have placed some of their money into the agricultural sector will be rubbing their hands with glee.

"I would estimate that prices will continue to grow by between 10 and 20 per cent in the next 12 months. It will slightly depend on how much comes on to the market in the spring and autumn but it will pretty much be the opposite to what is happening in the residential sector, where prices are rapidly tailing off."

The boom in agricultural property is mirrored across the Atlantic. The most recent figures from the US Department of Agriculture show that the price of an average acre of arable land rose by 13 per cent in 2007 and is likely to go up by a further 15 per cent this year.

The £1.3m sale of a farm in the Cotswolds demonstrates the dramatic rise in demand for rural land. The 207-acre Roel Hill Farm at Hawling, near Cheltenham, was bought by a wealthy farmer who already owns land at Guiting Power in the Vale of Evesham. It is likely to be used for sheep-rearing.

Auctioneer Charles Arkell, who sold the property at a sale in Stow-on-the-Wold, Gloucestershire, said: "It is supply and demand. There isn't much on the market and farming fortunes have changed in the past 12 months. There are farmers in the Cotswolds who are keen to buy more land and there is a contingent from Ireland interested in it too." Referring to increased demand across the country, Mr Arkell added: "Prices are rising everywhere, as far as land is concerned. The returns are better now. Sheep prices have gone up quite a lot in the past three months and cattle prices have improved a little."

The land at Roel Hill Farm receives £46,000 in grants under the European Union's Environmentally Sensitive Area and Single Farm Payment schemes. For that reason, more than 100 potential bidders were attracted to the auction. The sale of Roel Hill follows the £2m disposal of Moorland Stud Farm in Newmarket, Suffolk, which comprised a farmhouse, two semi-detached cottages, farm buildings, stables and 283 acres.

Sheik Yerbouti: Whaddya Do With Those Petrodollars?

Whaddya do with the proceeds from $435 billion in oil revenues? Surely, this problem should be a most welcome one for other regions of the world as Middle Eastern oil exporters fret over what to do with their projected windfall for the year 2008. The Reuters article below suggests that these countries are in no rush to pile into Western banks desperately in need of capital infusion in the wake of the credit crunch. Having been burned before--they tried to do the knight in shining armour thing well before the subprime mess petered out--they are now far more cautious in investing their petrofortunes. It'a bit of waiting for the market to drop some more before coming back in--call it bargain hunting SWF style--and wariness about unwanted Western protectionism over Middle East investment. Moreover, there are Asian markets which may be more lucrative investment destinations than banged up haute financiers:

Gulf Arab exporters awash with cash from record oil income have put the brakes on foreign asset buys as the global credit crisis promises more bargains later and the political spotlight falls on how they invest. Economists say the battle against domestic inflation in the world's top oil-exporting region is capping spending at home, leaving sovereign funds that invest much of the surplus oil revenue struggling to find a profitable home for their money. "They are doing a little bit of hoarding right now while they take stock of the situation," said John Sfakianakis, chief economist at SABB Bank, HSBC's Saudi affiliate. "For two years they were on a buying spree. But there is an anticipation by sovereign wealth funds that financial assets will depreciate further as credit turmoil spreads in the West."

Acquisitions outside of the region by Gulf Arab buyers more than tripled to $89.13 billion in 2007 compared with the year earlier, according to London-based research firm Dealogic. But buys slowed to $19.8 billion in the first quarter, down over 30 percent from the fourth quarter despite some big-ticket deals that helped shore up Wall Street financial institutions.

Growing sovereign fund acquisitions have raised concern among U.S. lawmakers about foreign influence and control over assets and questions as to whether investments are politically motivated. This may have made Gulf funds more cautious.

Aside from political scrutiny, funds have also taken some pain from their investments and are treading carefully until they get a better idea of whether the credit crisis has hit its nadir. Citigroup and Merrill Lynch shares have lost about 20 percent each since Kuwait's sovereign fund and Saudi billionaire Prince Alwaleed bin Talal agreed in January to invest at least $5 billion in the U.S. banks. "After initial forays, they've gotten their fingers burnt quite badly," said Ala'a al-Yousuf, chief economist in London at Gulf Finance House. "It showed that the worst was not over and they were a bit too hasty in buying into these institutions."

The massive transfer of wealth into the region from higher oil revenues has already unleashed startling economic growth among the Gulf's core OPEC members. Gulf country economies doubled in size from 2002 to 2006.

With crude prices reaching a record $117 a barrel, Gulf oil and gas revenues look set to come in at a new record this year, touching $435 billion versus about $380 billion last year, according to SABB estimates. The price of U.S. oil futures has averaged $99.60 a barrel to date in 2008, up from $72.36 last year.

But government spending at home has not risen at the same pace as revenues in the Gulf as officials look to avoid swamping their economies, where they are already battling decades-high inflation. Currency pegs to the dollar have forced central banks to cut interest rates in line with the U.S. Federal Reserve even as they struggle to contain rising prices.

Migrant workers in the United Arab Emirates and Bahrain have rioted over the erosion of wages due to the declining dollar and inflation. Saudi Arabia, the world's largest oil exporter, should see oil revenues grow to around $235 billion this year, up nearly 12 percent from about $210 billion last year, SABB data showed. Despite the bonanza, spending in the kingdom -- contending with inflation at a 27-year high -- has been prudent, said Brad Bourland, chief economist at Saudi-based Jadwa Investment.

"Saudi government spending has risen about 15 percent per year, which is much less sharply than oil revenues have risen," Bourland said. "I don't see many examples of spending inappropriately, it's well-targeted, mostly on social needs in health and education, and infrastructure."

With Gulf investment funds commanding around $1.5 trillion of foreign assets, according to Bourland's estimates, Gulf investors are struggling for other places to park surplus cash. Many petrodollars are typically recycled into U.S. treasuries, particularly by the region's central banks. "With their currencies pegged to the dollar, central banks would tend to put money into the lowest-risk asset that currency is pegged to and that is treasuries," said Bourland.

But for more risk-hungry Gulf investors, interest rate cuts have made treasuries less attractive. Better investments would be euro-denominated bonds and, if they can stomach the risk, assets in emerging markets such as China, analysts said.

Middle East oil exporters were net sellers of long-term treasuries in six of the eight months since June 2007 for which the U.S. Treasury provides details. Cash still flowed into the U.S., but went into equities. The same exporters' direct holdings of long- and short-term U.S. Treasury debt stood at just under $111 billion in June 2007. That was up about 22 percent on the year.

Gulf acquisitions in Asia are on the rise, with the top-10 deals in states including Singapore and Malaysia at $2.35 billion in the first quarter, Dealogic data showed. "There is going to be a greater concentration on Asia," Sfakianakis said. "But they will probably go slow because Asia has not really decoupled from the West."

"The Globalization of Markets" at 25: An Appraisal

Let me test your mastery of the social sciences once again by posing this question:

Which academic discipline popularized the concept of "globalization"?
(a) Economics
(b) Political Science
(c) Marketing
(d) Geography

The answer, surprising as it may be to some, is (c). When you visit this blog, you will undoubtedly notice that I feature a lot of marketing-related books concerning new product development, services marketing, etc. on my virtual bookshelf. Once in a while, people do ask me what exactly these books have to do with international political economy in general or globalization in particular. In my mission to wipe out ignorance--as one of my mentors said an educator's duties should be (she takes teaching very seriously)--I feature a classic article that still defines a lot of the globalization literature. Theodore Levitt may be more familiar to you as the the guy who coined the phrase "marketing myopia." In that memorable article, he said companies should look beyond what their current products were to determine the broader benefits they conferred to their clients. For instance, an oil company is not merely in the oil business but the energy business, and an automaker is not merely in the car business but the transportation business.

Yet, Levitt's other memorable work is not as closely identified with him, strangely enough. This is perhaps due to the term "globalization" spreading far beyond the realms of marketing. In 1983, he dropped another bombshell on an unsuspecting world (which also appeared in the Harvard Business Review) entitled "The Globalization of Markets" (this linked version is a reprint). Although some had used the term "globalization" prior to 1983 and certainly the phenomenon of globalization was already well underway before then, it was the HBR article that set the stage for today's endless debates about globalization. In a prior post, I wrote about the three waves of globalization thought. The first is the hyperglobalization or "B-school" thesis that sees the all-conquering effects of market-driven globalization a la Kenichi Ohmae. Of course, "The Globalization of Markets" falls under this category as a granddaddy of the genre. It is interesting that both corporate elites and ardent new millennium collectivists who foam at the mouth over the very mention of the term subscribe to the same idea of globalization as all-conquering.

Aside from the world not being flat at all--especially for migration--one of the things which hasn't really been panned out is the notion of a singular "global market" as Levitt forecast. Sayeth he: “Different cultural preferences, national tastes and standards, and business institutions are vestiges of the past." This, of course, is hardly the case. World homogenization is not nearly as complete as that. While technology has eroded some of these peculiarities, differences in culture, income, and political economy still thwart many efforts to create a "global market." Moreover, it always seemed curious to me that the guy who wrote about "marketing myopia" would also put forward rather short-sighted ideas repeating the hoary lines that "there is no such thing as society" in the words of Margaret Thatcher and that "the end of history" is nigh in the words of Francis Fukuyama.

The debate rages on about globalization, overwrought as it may be, as we sit in the pumpkin patch awaiting the unity of the world under a single market entity. Until that time comes (probably never), we can ponder Levitt's original thoughts on the matter as well as a rejoinder by his erstwhile colleagues at Harvard on the occasion of the article's 20th anniversary in 2003. While some of his ideas about it fell flat, there is no doubting that the idea of globalization has indeed been globalized care of Theodore Levitt.

India: Halt Futures Trading to Appease Commies?

Actually, comrades, the title above is a bit misleading in that India already halted futures trading in wheat and rice in 2007. As you probably know, the ruling coalition of Indian Prime Minister Manmohan Singh has had to rely on the backing of those who are near mirror opposites of his technocratic style to government--the Communist Party of India (CPI). In classic Marxist fashion, the CPI has strong doubts about the viability of futures markets for agricultural products at a time spiraling food prices which developing countries like India have to contend with. For PM Singh, the calculus of consent is simple: lose the consent of the Marxists and say goodbye to the ruling coaltion. Hence, he has already had to back down on demands that futures trading in wheat and rice be halted. With elections coming up next year, Singh's makeshift communist allies are angling for yet more bans on the trading of agricultural futures. On 21 April 2008, Comrade A.B. Bardhan, general secretary of the Communist Party of India, released this press blurb detailing a wish for yet more futures trading curbs:

Commerce Minister Shri Kamal Nath has conceded that Government may consider banning futures trading in essential commodities. This is one of the key demands that the Left Parties have been insisting on for the last few months for curbing inflation.

Everyone can see that the steps taken so far by the Government have singularly failed to curb inflationary pressures. Forward Trading in Agricultural goods along with the permission to big Corporate entities, domestic and foreign, to buy foodgrains directly from the farmers and without any ceiling on the amount so bought and stockpiled, has been facilitated by the option to protect their stockpiling by entering into futures contract at high prices.

That the Futures Trade encourages hoarding, especially in view of the entry of big corporate entities in the grains trade and tend to push up spot prices too has come out vividly by the demand of the National Commodity and Derivatives Exchange demanding to exempt the commodities traded in the exchanges from the limits placed on the permitted level of stock build up by the operators in the Futures market.

Mr. Kamal Nath has talked of waiting for the Sen Committee Report on Futures Trade. The interim findings of this Committee are typically ambivalent. It says that, “It could not be concluded emphatically whether Futures Trading fuelled volatility or price rise in agri commodities”. This is neither fish nor flesh. Nowhere has the Left suggested that this alone is responsible for this spurt in prices. But it certainly paves the way to hoarding and contributes to price rise. The Left has suggested a slew of measures, such as ban on Futures Trading, strict implementation of Essential Commodities Act to dehoard huge stocks with MNCs and Corporate Houses (not just a few raid on the small fish), Government procurement by paying remunerative prices for their produce to farmers, and above all restoration of universal, public distribution system for supplying 14 essential commodities at fixed and subsidized prices, withdrawal of the hike in petrol and diesel tariff, etc. CPI hopes that government will urgently take these steps and not limit itself to a few fiscal measures. The anti price rise struggle will further escalate in the coming days, to ensure that the above urgent steps are taken.

To keep things in perspective, we must remember that India used to be closer to the Soviet Union than the United States--especially in the opening decades of the Cold War. Aside from the CPI and the CPIM, vestiges of Marxist-Leninist influence are not hard to find, such as the Gosplan-ish Five Year Plans which India still puts out, the latest being for 2007-2012. Given the rather tenuous grasp on power by the Congress Party-led coalition, it is no surprise that its leaders are sending signals that they may back down yet again. What is interesting is that government commissioned research does not suggest that futures trading necessarily leads to higher prices, but the government is nonetheless being pressured effectively by the CPI. The quest for the worldwide liberation of the workingman lives on--in India, at least. Avast, ye capitalist filth! From Bloomberg:

India may have to suspend trading in some food futures to arrest inflation if parliament calls for it, Finance Minister Palaniappan Chidambaram said. ``If rightly or wrongly people perceive that commodities- futures trading is contributing to a speculation-driven rise in prices, then in a democracy you will have to heed that voice,'' Chidambaram said in an interview in Madrid.

Prime Minister Manmohan Singh's communist allies want to ban futures trading in cooking oil, sugar and other commodities, saying speculators are driving up prices and fanning inflation. The government halted futures trading in wheat and rice last year and lentils in 2006 to check a surge in domestic prices of the commodities.

``The pressure is to suspend a few more food articles,'' Chidambaram said without identifying the products. ``It may be politically wise to do that for a short period to see if it has any impact at all on inflation.''

A panel formed by the government under economist Abhijit Sen to study the impact of futures trading on prices of staple foods, this month suggested maintaining the ban on rice and wheat. It didn't recommend extending the ban to other commodities, saying there was no conclusive evidence to suggest futures trading contributed to price increases.

A futures contract is an obligation to buy or sell a commodity at a set price for delivery by a specific date. Online trading in commodity futures in India started in 2003. Domestic traders and producing and consuming companies are the main participants in India's commodity exchanges, compared with the 13 million individuals who invest in stocks. Overseas funds aren't allowed to trade in India's commodity futures.

Chidambaram said that India may have to live with ``the current level of inflation for a few more weeks.'' India's inflation accelerated to 7.57 percent in the week ended April 19, the fastest pace in more than three years as prices of food and manufactured products rose. ``If food prices continue to rise and demand is high, as it is in India today, then I am afraid we may have to live with the current level of inflation for a few more weeks,'' he said. ``We thought inflation had peaked at about 7.3 percent. We were surprised that it moved up to 7.57 percent.''

Singh, who lost ground in eight state elections since the beginning of January 2007, wants to cool inflation to bolster his Congress party's chances of retaining power in national elections scheduled before May 2009. Inflation erodes the spending power of people, particularly in a country like India where the World Bank estimates half the 1.1 billion population live on less than $2 a day. Singh last week said reining in inflation was the government's top priority, informing business leaders not to expect an interest rate cut anytime soon.

The central bank unexpectedly ordered lenders to set aside more reserves on April 29, raising the cash reserve ratio to 8.25 percent from 8 percent, the highest since March 2001. While doing so, the bank also increased its inflation target to as much as 5.5 percent in the year to March 31, above its previous target of 5 percent.

Chidambaram, who says the ``tolerance'' level of inflation in India is 4 percent, has in the past two months banned export of edible oils, rice and wheat, and cut levies on imports of edible oils, joining China, Malaysia and Thailand in taking steps to secure food supplies.

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