Das Boot, Colombian Drug Smuggler Edition

Der Spiegel has an interesting article and interview on the Colombian drug cartels' latest mode of drug smuggling transportation to North America--the submarine. The UN International Drug Control Programme pegs the illicit trade as a $400B annual industry, so it's not surprising that some of the most enterprising ideas have come from smugglers attempting to overcome those who would intercept them. There is always a race in the technological sophistication of peddlers and enforcers. As in any global industry of note, things do not often stand still. Not that they always work, but certainly, there have been some very creative means of getting the goods across borders into the Land of the Free. Who knows, maybe they'll make a sequel to the famous German submarine flick Das Boot. You guessed it--Das Bong! John Leguizamo should be in the lead role as a kamikaze cocaine sub captain:

Small, homemade submarines have become the preferred means of transport for the Colombian drug cartels -- and a completely new challenge for the Joint Interagency Task Force South (JIATFS), a group consisting of members of the United States Navy, Coast Guard, CIA and drug control agents from 12 other countries.

The boats, made of plastic or steel, can carry up to 10 tons of cocaine each. Because they cannot submerge completely, the correct term for the boats is semi-submersibles. They are used primarily on the drug trafficking routes between Colombia and Guatemala or Mexico. The cartels have devised a complete logistics system, with fishing boats stationed along the way to warn the crews against patrols and provide them with food and water.

The drug boats have to be piloted almost blindly. They sit low in the water, and the crews rely on a type of GPS system used by yachts for navigation. The smugglers spend up to two weeks at sea. They move slowly during the day to avoid creating the telltale wake. But under cover of darkness, they crawl northward at six knots. In 2006, the vessels are believed to have carried between 500 and 700 tons of cocaine from South America toward the United States. About two-thirds of the drugs reached the United States along a western route in the Pacific, while the rest passed through the Caribbean. The number of submersibles is on the rise.

The drug cartels' new mode of transport is a serious threat, says Rear Admiral Joseph Nimmich (read the full interview with Nimmich here (more...)), the director of the JIATFS, which is headquartered in Key West at the southern tip of Florida. Even senior US military officials are concerned. "The crooks are faster than we are," admits Admiral Mike Mullen, the chairman of the Joint Chiefs of Staff. "Putting a stop to this new threat is a central objective of the Armed Forces, and they are working hard at it."

The tough battle between drug cartels and investigators has always been a race to acquire the most effective technical innovations. In the past, the Colombians used small aircraft, but drug agents soon managed to gain the upper hand. Fishing trawlers were the next vessels of choice, but today these cutters are required to be outfitted with homing devices so that their locations can be carefully monitored. Finally, the cartels began using speedboats that were often fast enough to escape during chases. The Navy's response was to use helicopters to fire at the speedboats' engines. So now the traffickers are using submarines.

G8 @ Hokkaido: Anti-Globalization Gets There Early

What's the difference between a football hooligan and an anti-globalization protester? The former probably get more TV coverage. Last year, the annual G8 summit was held at Heiligendamm, Germany. As you would expect, the anti-globalization crowd was out in force then. This year, it seems that the battle lines are forming early as the anti-globalization has already begun to mass for the meetings from 7-9 July in Hokkaido, Japan. While I have no real qualms about the principal complaint of the anti-globalization crowd--global governance as decided by a select group of developed nations does not represent the interests of much of the rest of the world--I honestly see no method to the anti-globalization madness. Have years and years of such protests resulted in significant changes in the structure of international organizations or policy making? It's hard to argue in the affirmative. So many years later, it's the same old, same old.

To be sure, smaller crowds are expected this year compared to the estimated 30,000 who were in Germany for last year's G8. Whether a similar level of carnage will result remains to be seen. Regardless, I think a less confrontational approach would be more effective than the usual anti-globalization hooliganism. Reflecting the increasing marginalization of the anti-globalization movement, there wasn't even a World Social Forum meeting held this year. Hooliganism may make for fleeting TV coverage of foolhardy folks getting gassed, hosed, or arrested, but there is little to show for beyond such acts. Face it: anti-globalization is getting pretty lame. From Reuters:

Anti-G8 summit protesters danced to blaring music and marched down the streets of Tokyo in heavy rain on Sunday, accusing the Group of Eight rich nations of causing poverty and world instability.

The protests, which have become a fixture at Group of Eight summits, came as Japan tightened security ahead of this year's July 7-9 gathering in Hokkaido, northern Japan.

Two separate rallies in the nation's capital gathered over 1,000 people, including anti-capitalists, labour union members and protesters from abroad, such as Spain and South Korea.

Security was heavy with hundreds of anti-riot police guarding the streets as protesters walked down Tokyo's central shopping districts, carrying signs proclaiming various agendas such as "shut down G8 summit" and "G8=hunger".

Some protesters scuffled with the police. Japanese broadcaster TV Asahi said two people were arrested. Police could not confirm the report.

"Issues like environmental destruction and poverty in Africa, these are all caused by the G8 governments," said Yu Ando, a 31-year-old working for a municipal government in western Japan.

"I can't stand that they are proclaiming to solve these issues."

For the summit at Lake Toya, about 760 km (470 miles) north of Tokyo, domestic and international NGOs such as Oxfam plan to protest a range of topics including globalisation, the food crisis and wars.

Protests are expected near the summit venue -- where protesters are expected to gather at three camp sites -- as well as in Tokyo and Sapporo, capital of Hokkaido.

But tight security and the sheer cost of travel to the vicinity of the remote summit site could dampen turnout.

Human rights lawyers have said Japanese immigration authorities are making it tough for some activists to get visas by complicating the application process, and media reports said some activists were detained for hours at immigration.

At last year's G8 summit in Heiligendamm, Germany, an estimated 30,000 protesters flocked to the area and entered a restricted zone set up for the summit, as well as blocking land routes into the area.

Amerocentrism, Saving Doha, and Lamy the Savior

I am currently listening to Handel's Messiah as conducted by Christopher Hogwood. This 1980 recording is credited with ushering a new generation of musicians from the "historically informed" school of classical music. (Although Messiah is often played during Christmastime, I listen to this fine recoding year round--not the least because I feature in a lot of the lyrics ;-) As much as possible, these musicians try to use musical instruments that are more in line with what long-gone composers had at their disposal: harpsichords instead of pianos, baroque instead of modern violins, etc. Anyway, the topic of today's post is familiar fodder for those even remotely concerned with world trade: Pascal Lamy. I bring the Handel recording up because of a most incredulous op-ed I've come across in the Washington Post which places Lamy in nearly the same role as the titular character in the Handel oratorio. Needless to say, the WaPo makes some absolutely wacky points:

[If you have a copy of Messiah at home, cue "For behold, darkness shall befall the Earth"] -

SAVING DOHA: Why an obscure Frenchman may be the the last hope for global free trade.

You have probably never heard of Pascal Lamy, but he might be able to save the world. The only question is when he should do it. Okay, so we're exaggerating a bit. Not about Mr. Lamy's obscurity: The veteran French bureaucrat is director general of the World Trade Organization (WTO), which hardly makes him a household name, even though he is a remarkably talented and persistent international public servant. It's not precisely true that he is the only person who can save our troubled planet. But he might just be the last possible savior of global trade liberalization.

Sometimes, the Amerocentrism of the US media gets to me. Of all people, how can WTO Director-General Pascal Lamy be called "obscure"? Isn't this the same guy who is attended to by the anti-globalization set nearly wherever he goes like in the picture above? Also, isn't this the same guy whose name returns over a million search results on Google? Although many Americans are famously ignorant of the rest of the world until events with global repercussions hit their shores, that one of America's newspapers of record needs to point out the identity of the WTO D-G is surely an indictment of American incuriosity about world affairs. Worse, depicting him as the potential savior of the Doha agenda is surely hyperbole. True, the beleaguered round started before his term, yet he hasn't done much in moving it forward.

[Cue "Why do the nations so furiously rage together?"] -

The latest "round" of tariff-reducing talks began in Doha, Qatar, in 2001; it was billed as the "development round," because it was supposed to lead to a grand bargain between rich and poor countries that would open the former's markets to the goods of the latter, especially in agriculture. At a time of rising food prices, a successful Doha round could add billions of dollars to the earning potential of farmers in the developing world -- as well as to that of businesses and workers around the globe. The vast majority of poor countries are on board for an agreement.

!!!--developing countries have definitely not been "on board for an agreement" or we wouldn't be so far away from a deal. Moreover, the USTR during Clinton's term, Charlene Barshefsky, has insightfully suggested that the "development" designation for the trade round was made under essentially false pretences. Unlike Hogwood's performance on authentic instruments, Doha was a faker from the get-go. Between the WaPo editorial team's puffery and Barshefsky saying there is little enthusiasm for the round, I believe few would dispute the latter conviction. Let us move on...

[Cue "And I know my Redeemer liveth"] -

That's where Mr. Lamy comes in. If the participants in the round cannot bridge their differences in the trade ministers' meeting that he envisions for this month or July, he would have the option of devising a proposed settlement of his own, backed by the knowledge and authority of his office. Until now, Mr. Lamy has, reasonably, stayed neutral, preserving his political capital. But the time is fast approaching when he must step in, lest the Doha round fail, taking the once-promising World Trade Organization down with it.

Can Lamy take the trade bull by its horns that's loose in the WTO china shop (sometimes I think "china" should be capitalized) all by his lonesome? I doubt whether Lamy can. If one man can singlehandedly save Doha from an ignominious end, certainly there should be oratorios written for Pascal Lamy. Until then, I am afraid the WaPo op-ed writers have gone off the deep end. Very bad show, WaPo.

[Cue "Then shall be brought to pass"]

Should the World Bank Still Lend to China?

Setting aside the issue of the efficacy of World Bank lending, shouldn't the priority of Bank lending go to countries that have fared nowhere near as well as China in recent years? Unfortunately, there are far too many countries which have been economically stagnant and whose performance pales in comparison to the emerging giant. Late last year, I featured a Wall Street Journal story on how World Bank lending in fiscal year 2007 was topped by India, followed by China in third place. From a social justice standpoint, aren't there other countries where poverty alleviation is a more pressing matter and should therefore get more lending priority?

Current World Bank President Robert Zoellick offered a good reply to that question. Zoellick invoked the potential benefits of these countries participating more in global governance matters. That is, as a prominent international organization, the World Bank can use its clout to engage China with projects such as green ones whose benefits may accrue not only China but the entire world:

There are some 70% of the poor in middle-income countries. If we are going to deal with the poverty agenda, we need to be engaged with these countries.

[Also] if you look at what's happening in the fields of diplomacy and political and security affairs, one of the big challenges is how we integrate the Indias, the Chinas and the Brazils [of the world] in the multilateral system? It strikes me as illogical that you would be trying to engage them in creating a new multilateral order, and not do it in the multilateral economic system.

The third point [is], let's think of the other big issues of the day, like climate change. Well, China and India and Brazil and others have huge energy needs, so if we are going to be able to contribute to the big economic environmental challenges of the day, we've got to be partners with these countries. I can put skin into the financial game to help make this happen.

While visiting the China Daily website, I came across the following article that reiterates Zoellick's basic points. (BTW, lending to China by the World Bank is marginally down to $1.51B in FY 2008 as compared to $1.64B in 2007). Insofar as projects have environmental and social benefits, there is perceived value in the World Bank funding such projects in China:

The World Bank's lending to China reached $1.51 billion in the 2008 fiscal year dating from June 30, 2007 to June 30, 2008, said the WB Beijing office on Wednesday. The WB's Board of Executive Directors approved four new projects in China on Tuesday, the last four for the fiscal year of 2008, said the WB Beijing office.

These four projects were excellent examples of how the WB could help China with its environmental and social challenges, said David Dollar, World Bank Country Director for China. The new rural health project, getting [a] WB loan of $50 million, sought to support and extend the rural health reforms carried out by the Chinese government by testing a series of new innovations in financing, delivery of services and basic public health.

The WB would lend $50 million to the new rural migrant skills development and employment project. The project would support China to deal with the human skills challenge rising from its huge rural migration during urbanization. The WB would work with local governments of northwestern Ningxia Hui Autonomous Region, East China's Shandong and Anhui provinces, and the Ministry of Human Resources and Social Security to improve skills development programs for migrants.

Through the new Xi'an sustainable urban transport project, with a WB loan of $150 million, bus prioritization, bicycle routes, traffic calming and speed-reducing strategies would be introduced in an effort to foster better road use and access to cultural sites in the northwestern city renowned for Terracotta Army and other cultural relics.

The WB would also lend $300 million to help construct a new 355-km dedicated high-speed passenger rail line between Shijiazhuang, capital of north China's Hebei Province and Zhengzhou, capital of central Henan Province. The rail line is part of the new 2,100-km dedicated high-speed passenger rail line linking Beijing with Guangzhou, capital of South China's Guangdong Province. Upon completion in 2010, the rail line is expected to provide a major boost in rail transport capacity while reducing the travel time for passengers from present 24 hours to less than 10 hours.

China continues to be one of the largest borrowers with the World Bank during the fiscal year 2008. Most WB projects approved this year aim to address environmental challenges through improvement of public transport systems, expansion of urban wastewater treatment and pollution control, and strengthened approaches to energy efficiency, said the WB Beijing office.

In the aftermath of the May 12 earthquake in southwest China, the WB offered China a 1.5-million-dollar grant to support technical assistance for recovery and reconstruction efforts as well as expertise assistance.

Is Pricey Gas Killing of China's Automotive March?

If you have had the (mis)fortune of driving in one of Asia's megalopolises, then bumper-to-bumper traffic that crawls from here to eternity is not unfamiliar to you. In these parts of the world, you do not really drive so much as you get stuck in traffic. Thus, traffic exacerbates concerns about automotive emissions, especially in urban centres. Of course, it is difficult to deny the Chinese private transportation as a matter of fairness. If those in the West have been motoring for years and years, then why should the Chinese have to go easy on auto ownership? Still, the sheer scale of potential automotive emission increases are mind-boggling: China is already the world's largest greenhouse gas emitter and has 16 out of 20 of the world's most polluted cities. Do we really want to see what happens if Chinese car culture reaches Western proportions?

However, high gas prices can counteract visions of Chinese automotive hell on Earth. Recently, the government decided to reduce fuel subsidies, making consumers bear more of the brunt of dear gas worldwide. Xinhua reports that automotive sales are down for two consecutive months. Certainly, it's hard to extrapolate from two months' worth of data, but a stalling or even declining trend may be in store:

China's motor vehicle sector realized a production against sales ratio of 97.82 percent in May. Both output and sales, however, declined month-on-month for the second consecutive month, the China Association of Automobile Manufacturers said on June 12.

China produced 854,100 motor vehicles in May, down 12.96 percent from April but up 20.2 percent over the same month of last year. It sold 835,500 vehicles, down 9.44 percent month-on-month but up 17.04 percent year-on-year.

The total output included 591,400 passenger vehicles, down 10.2 percent from the previous month but up 20.03 percent over a year earlier. The output of commercial vehicles was 262,700 units, down 18.61 percent month-on-month but up 20.58 percent year-on-year.

The monthly sales included 564,600 passenger vehicles, down 6.66 percent from a month ago but up 15.59 percent over a year earlier. Monthly sales of commercial vehicles was 270,900, down 14.74 percent month-on-month but up 20.18 percent year-on-year.

May saw 434,700 cars produced and 415,200 cars sold nationwide, down 11.49 percent and 6.6 percent, respectively, from April.

Furthermore, a survey reported in Xinhua suggests that the Chinese are relying more on public transportation. Moreover, even those who do own automobiles already have cut down on their mileage as motoring becomes increasingly uneconomic due to high fuel prices and persistent traffic snarls impeding forward progress:

Beijing resident Zhuang Yan uses her car mostly on weekends, for drives to the outskirts of the capital. On weekdays, the 29-year-old public servant simply forgets that she has a car. She and her husband seldom drive to work, "because it sometimes takes longer by car than on foot, especially during rush hour".

What is more, car maintenance costs too much, Zhuang told China Daily over the phone. "As oil prices soar, public transport is a wise choice for avoiding traffic jams and parking problems in the capital," she said. Zhuang is part of a group researchers call "owners of idle cars" - people who have cars but seldom drive them. One in 10 car owners in the country belongs to such a group, the 2008 Foton Chinese Index for Mobility released on June 11 showed. The index was derived from a mobility survey jointly conducted by Beijing-based Beiqi Foton Motor Co Ltd and the Horizon Research Consultancy Group.

The two groups started releasing the index in 2005, offering an insight into the transport habits of the Chinese. It showed the extent of people's reliance on motor vehicles in social and economic activities, and how private cars could further influence people's lifestyles and way of thinking. The latest study polled 4,545 people aged between 18 and 60 in 36 cities and towns nationwide.

It saw the Chinese scoring 61.42 points out of a maximum 100 for this year's index, 3.09 points higher than in 2005, showing great strides taken in mobility, the survey said. However, corresponding developments in the automobile industry have also had negative impacts such as serious traffic congestion and greater strain on limited oil resources in the country.

These factors have prompted more motorists to become owners of idle cars, researchers said. Four out of 10 of such owners had done so because of spiraling gasoline prices, researchers found. The surveys showed that about half of urban private car owners thought the fees for car maintenance and oil consumption were "affordable" in 2005, but only one out of five in the 2007 index thought so.

"Driving is a kind of burden to me. Last Friday, fuel prices started to rise again, which means every month I have to pay an additional 300 yuan ($44). I believe more than 20 percent of car owners will use public transport by next week," said Chen Daping, a 30-year-old worker in Beijing.

"It costs me only 1.8 yuan to take the bus from Tian Tongyuan in Changping district to Anzhenli in Chaoyang district, but more than 20 yuan for gasoline to drive a car. What a deal!" wrote an Internet user under the name of "tyy Ma" on news portal Sina.com.

The high costs were not the only reason for the increasing number of owners of idle cars. Traffic jams also played a role, researchers found. The economic loss caused by traffic jams in Beijing was the highest among the cities in the country, about 375 yuan per person per month, followed by Guangzhou at 273.8 yuan and Shanghai at 228.2 yuan. The researchers said convenient public transport networks should be developed to help solve the problem effectively.

Beijing has reportedly done a good job in developing a convenient and affordable public transport system, which was ranked first in the survey. The survey showed that about 21.3 percent of respondents suggested improving public transport routes to help alleviate traffic congestion, while 14.3 percent said special lanes should be arranged for buses. The rest suggested improving road conditions and limiting private car usage.

These are interesting times. I really think that the next wave of innovation in automotive design will arise in meeting the Chinese challenge: It isn't appropriate to deny them private transportation if they want it, but alternative energy sources are necessary that cost and pollute less. The days of the internal combustion engine as we know it may be numbered.

Credit Rating Agencies: The New Jesters of Capital

I've already voiced my doubts over Tim Sinclair's book The New Masters of Capital in which he depicts credit ratings agencies such as Standard and Poor's, Moody's, and Fitch's as globetrotting institutions which enforce an Americanized neoliberal order on a hapless world. For you IPE junkies, these agencies purportedly conduct sovereignty at bay. I'll tell you what: if the calendar showed 1998 instead of 2008, I would be inclined to agree with him. However, in a global political economy in which LDCs have boatloads of reserves to guard against the recurrence of another Asian Crisis, their opinions on sovereign debt are greatly diminished in value and efficacy. Moreover, in the wake of the subprime mess, their reputations have been brutalized to the point of no return. Incensed investors and regulators have them by the balls. Masters of Capital? It's more like the Jesters of Capital. The original case for the overwhelming might of credit rating agencies always seemed overblown. From the book, for instance:

The agencies’ output influences the global distribution of money, jobs, and economic opportunity. Hence, they are highly consequential actors in the global economy (p. 63).

The position taken here is that, in the first instance, rating is a US phenomenon. But rating becomes transnational in character as the agencies acquire both allies and opponent in new territories. The transnational view affirms the agencies’ US origins, norms, and practices. Even if rating is increasingly transitional the mental framework of rating remains largely American (p. 120).

It seems that the US government in the form of the Securities and Exchange Commission (SEC) is now busy undermining the already sodden of these credit rating agencies. Whereas the massive market for institutional investment relied much on the agencies' ratings in the past, the SEC appears keen on returning to a more caveat emptor-like approach that predominated before the ascendance of these agencies. That is, due diligence is to once again become more the province of the purchaser than the (potentially biased agencies as) assessor. If these credit rating agencies were so powerful to begin with, then why is it that mere regulators can set into motion changes which will likely result in these agencies becoming even punier than they are now? From the Wall Street Journal:

The Securities and Exchange Commission plans to propose rules that may diminish the longstanding importance of credit ratings across various markets, including the $3.4 trillion money-market industry, in the latest blow to the rating business stemming from the credit crunch.

The most significant portion of the rules, to be proposed Wednesday, would make it possible for U.S. money-market funds to invest in short-term debt without regard to ratings put on those securities by firms such as Moody's Investors Service and Standard & Poor's, people familiar with the matter said. Currently, SEC rules generally require that money-market funds purchase only short-term debt with high investment-grade ratings. The new rule would put more discretion in the hands of money managers to determine whether the debt is investment grade.

The SEC also will propose rules that may diminish the importance of credit ratings in determining the amount of capital that investment banks are required to hold. In all, the proposal will put about a dozen changes on the table that could touch on the role of credit ratings for investors and banks. An SEC spokesman couldn't be reached for comment.

The renewed effort is part of a wide-ranging regulatory push in the U.S. and Europe amid the credit crunch that has devastated many banks and investors. Major rating services -- Moody's Corp.'s Moody's Investors Service, McGraw-Hill Cos.' Standard & Poor's and Fimalac SA's Fitch Ratings -- have been blamed by some for underestimating the risk of default on hundreds of billions of dollars of mortgage debt.

The dirty secret of some bond investors is that they simply bought securities with the highest yield for a given rating, which is why they snapped up complicated securities tied to subprime mortgages. Those securities often got high ratings but yielded more than other, more standard securities with the same rating.

In 2003, the SEC asked the industry and investors for comment on similar changes to money-market funds and capital rules, but the ideas never went anywhere and were shelved amid mixed reviews.

As the current credit crisis has unfolded, regulators have grown concerned that the reliance on ratings in various market rules gives investors a sense of false comfort, discouraging them from doing their own research when assessing the riskiness of bonds in their portfolios. By diminishing the role of ratings, they hope to reverse that. S&P, Moody's and Fitch declined to comment on the pending proposal. The proposals are expected to generate divided comments from investors and also may affect a range of other SEC provisions.

"My initial reaction is, what's the alternative?" to using rating firms for the rules, said Hal Scott, a Harvard University law professor specializing in capital-markets regulation. "What we need to do is have more assurance that these ratings will be accurate."

SEC Chairman Christopher Cox said at a recent hearing on rating firms that their role in the regulatory apparatus "may have played a role in encouraging investors' over-reliance on ratings."

Despite the backlash against rating firms, their assessments of bonds still play a central role in decisions made by banks and investors. Last week offered the latest example, when Moody's downgraded the debt of bond insurers MBIA Inc. and Ambac Financial Group, triggering a selloff in the companies' stocks and fears of forced sales of bonds insured by the two companies.

Regulators also depend on them. The Federal Reserve, after it arranged a sale of Bear Stearns Cos. to J.P. Morgan Chase & Co., said the Federal Reserve Bank of New York would take as collateral some illiquid, beaten-down assets from investment banks, but only if the assets were rated highly by rating firms. Other international codes such as Basel II also use ratings to determine how global banks manage their balance sheets.

Investors have had similar rules on their books for decades that require they only buy bonds the major rating firms grade at a certain level or above. Some may now expand the list of rating firms they can use for such rules to include new firms. In an effort to create more competition in the rating industry, on Monday the SEC recognized a 10th bond-rating firm, Realpoint LLC, a former unit of GMAC.

Institutional investors such as pension funds are looking to make changes in their ratings-based rules. The Illinois State Board of Investment, for example, recently requested more information from its money managers about their approach to buying bonds such as mortgage-backed securities. William Atwood, executive director of the $12 billion fund, said he would be reluctant to give new money to those managers who rely heavily on the ratings firms.

"We've got to pay closer attention," said Richard Metcalf, director of corporate affairs at the Laborers' International Union of North America, which advises pension funds. "If that means creating additional levels of scrutiny of the process, we will do that."

If regulatory changes succeed, ratings would become more of a guide, but not a quasi-regulation from the government on what investors can or cannot hold. Rating firms haven't protested this line of thinking, saying that they don't want their ratings to be misinterpreted as a catch-all recommendation to buy a security.

While many investors and large institutions say they don't rely on ratings, recent lawsuits from holders of battered mortgage-related debt show that at least some used them extensively. In a lawsuit filed this month against Deutsche Bank AG, Buffalo, N.Y.-based M&T Bank Corp. said it had written down the value of two collateralized debt obligations by more than 90%.

"The AAA and AA ratings were major considerations in M&T's determination to invest," the bank argued in its suit, "because they indicated that the notes were safe, stable, and nearly risk-free investments." M&T didn't sue the rating firms, saying they were misled. Deutsche Bank declined to comment.

Clash of the Titans: Thomson Reuters vs. Bloomberg

The recent merger of Thomson Financial with Reuters has set the new combination on a bid for better bragging rights against Bloomberg in providing financial information to the banking industry. Of course, these two firms also provide news fodder for countless finance and economics bloggers like yours truly, making the competition particularly interesting. Simply put, it's a test of two approaches to marketing financial information. Whereas the more prestigious Bloomberg provides a single package with all the trimmings for a monthly fee of between $1,500-$1,800, Thomson Reuters is offering a more a la carte menu where basic subscriptions can start at as little as $25-$50 a month up to $1,200 for a Bloomberg-near equivalent package. Although having a Bloomberg terminal does have its own kind of cachet--I used to regard colleagues who couldn't find their way around the traditional Bloomberg terminal as terminally gauche back in the day--the incremental approach of Reuters may be more suitable in wooing developing markets where such outlays are at a premium. Who do they think they are? Subprime peddlers? From the International Herald Tribune:

For years, Thomson was the information giant that rarely talked about its own business. But since its acquisition of Reuters, which closed this year, that reticence has softened. Thomas Glocer, the head of the combined company, is very candid about where he is aiming next. "For a long time, Bloomberg had it too easy," he said during a recent interview.

Thomson Reuters is going hard after Bloomberg, which has for some time been the marquee name on Wall Street for financial information. The companies are in a dead heat: Thomson Reuters has 34 percent of the market for financial data and Bloomberg 33 percent.

But Thomson Reuters is a far larger, more diverse company: Its strength is delivering electronic data and services to professionals, including lawyers, doctors and scientists. It was Bloomberg, however, that defined the market by providing information unmatched in scope by any other company, married to a disciplined and customer-driven culture.

Glocer concedes that there is some symmetry in the challenge by Thomson Reuters to Bloomberg. After all, it was Bloomberg in the early 1980s that revolutionized financial information, stealing the market away from established companies like Reuters and Dow Jones. "Reuters used to be BOAC," Glocer said, referring to one of the airlines that later formed British Airways. "Along came Richard Branson and Virgin and suddenly British Airways became a much better airline. Bloomberg is that Virgin that forced Reuters to sharpen up."

The point is not lost on Peter Grauer, who was appointed chairman of Bloomberg when the company's founder, Michael Bloomberg, became the mayor of New York in 2001, that the takeover of Reuters by Thomson might be a first step reclaiming a business that Bloomberg redefined and now dominates. "My job is to worry, to take nothing for granted and make sure that we think about things in terms of humility," said Grauer, a close friend of Michael Bloomberg and a former investment management executive. "Great companies have begun to believe their own press and hubris has killed them. My mission in life is to never let that happen."

It was in the early 1980s that Bloomberg, a former trader at Salomon Brothers, took the high pressure atmosphere of the trading floor, imported it to the newsroom and delivered the result through proprietary, advanced technology backed with exceptional customer service.

"This company has, in many ways, the most powerful business model I've ever encountered," said Daniel Doctoroff, who stepped down in December as Bloomberg's deputy mayor for economic development to become the company's president.

The roots of Thomson Reuters go deeper. Thomson, which is controlled by the Toronto-based family of the same name, began with a newspaper empire that the company abandoned to concentrate on electronic data.

Reuters, which has a business news partnership with the International Herald Tribune, is best known for its news service. The company turned to financial information in the 1980s and is now the leading provider of some types of trading data.

While Glocer may have to deal with all the usual problems that mergers bring, he has the advantage of running a significantly bigger company.

The combined revenue of Thomson and Reuters last year was $12.5 billion, more than double that of Bloomberg, and Thomson Reuters has about five times more employees.

Glocer thinks he can go after Bloomberg on price but, more importantly, flexibility. While privately held Bloomberg generated about $5.4 billion in revenue last year and has about 10,000 employees, it still offers, for the most part, a single product: the Bloomberg terminal coupled with its vast array of data.

For clients, Bloomberg is a take-it-or-leave-it proposition that supplies everything the company generates for a monthly fee of $1,500 a user ($1,800 a month for the small number of firms that use only one terminal). Traders who have no interest in, say, debt markets cannot reduce their Bloomberg costs by subscribing to a service that drops that data.

Bloomberg's price and packaging may not have mattered as much during a bull market, but with Wall Street firms looking to cut costs, the fourth Bloomberg terminal on a trading desk could start to be seen as a luxury.

The combined Thomson Reuters has its own terminal products (some of which are delivered through proprietary computers). Glocer said that the "blended price point" of Thomson Reuters' terminals was about $1,000 a month, well below Bloomberg's.

Indeed, some Thomson Reuters terminals offering minimal information cost just $25 to $50 a month, depending on volume, according to Douglas Taylor, managing partner at Burton-Taylor Consulting and a former executive at both Thomson Financial and Reuters.

"Bloomberg has a real problem finding new business. They priced themselves at the top of the market," Taylor said. "There are different points on a pricing curve that Bloomberg can't hit but that Thomson Reuters can deliver. It's going to be hard to figure out where Bloomberg's new growth opportunities will be that don't cannibalize its current pricing."

Grauer and Doctoroff both dismissed suggestions that the Bloomberg terminal was too costly, arguing that the price was offset by the returns subscribers generated by using it. "Price is really not the issue for the vast majority of customers," Doctoroff said. "It's not how cheap you are."

Price, however, may be a factor in emerging markets, particularly Asia, which both companies agree is the next battleground in their war for financial information supremacy. Thomson Reuters has been traditionally stronger outside of North America than Bloomberg, especially in India, and has been aggressive in China.

While the market downturn has yet to significantly affect either of the two competitors, Thomson Reuters serves its data and services to a broader range of customers - like physicians and scientists - giving it some protection from financial industry cycles.

Even Reuters' founding business - the news agency that supplies stories and photos to newspapers and Web sites as well as news video to broadcasters and publishers - is growing. But some journalists in the Reuters newsroom in London have been protesting against planned job cuts stemming from the merger.

Meanwhile, the growth of the Internet can cut both ways. Both Thomson Reuters and Bloomberg face common enemies in sites like Yahoo Finance and Google Finance, which offer less sophistication, but are free.

What Happens to Ireland If It Ditches the EMU?

Working in a building called the "European Research Institute," you cannot expect me to rehash Eurosceptic rhetoric about EU members surrendering sovereignty to Brussels and all that jazz. Fortunately, there are bazillions of blogs out there if that's your thing. If anything, I am a fierce proponent of giving up the pound and adopting the Euro. However, many others here in Britain and across the continent do not share my sentiments. Witness Ireland's recent referendum where it turned down the adoption of the Lisbon Agenda. Admittedly, the agenda is a warmed-over version of the EU Constitution which France and the Netherlands turned down in 2005. So, once again, dreams of an ever-closer union have been put on hold. While the EU's powers-that-be have demanded another referendum from Ireland, its results are by no means guaranteed to be more favourable than the last one.

Ireland has been an oft-cited example of the benefits of European economic integration. Nicki Smith, a colleague here at the University of Birmingham, even pondered the question of whether Ireland was Showcasing Globalisation. Before embarking on its modernisation programme, Ireland was more famous for its sizeable diaspora leaving its moribund economy. More recently, Wolfgang Munchau has pondered the question of what would happen if the Irish went further down the Eurosceptic road and decided to abandon the EMU altogether. Surely, if Ireland turns down another referendum, that path cannot be far in the distance. As I heartily approve, he gives the idea two thumbs down (plus two big toes down to boot). Below are some excerpts, but do read the whole thing if you're interested in the terrible fate that will surely befall the Emerald Isle should it decide to go it alone. Even the Lone Ranger needs Tonto:

So within a couple of weeks, the chances of Ireland ending up outside the EU have turned from zero to a distinct possibility. The same goes for the Czech Republic, another potential non-ratifier. I do not want to get into the legal details of how a country’s departure from the EU could be accomplished. Suffice it to say that it can be done within European law as long as there is political will.

What strikes me the most about this extraordinary turn of events is the perception in Ireland that a break with the EU would be no big deal. I received a large number of letters from Ireland last week from readers who steadfastly maintain that the country’s economic success had nothing to do with the EU and everything to do with domestic policy – in particular with low corporate taxes and skilled labour.

The view expressed by those correspondents is as wrong as it is revealing. If so many people are delusional about their country’s economy, then we should perhaps not be surprised about the outcome of the referendum. It is therefore perhaps worth looking in some detail at the nature of Ireland’s economic success over the last 30 years to gauge what life might be like outside the EU...

Ireland was one of the early and enthusiastic members of the European Monetary System in 1979, which brought much needed macroeconomic stability. Membership of the eurozone in 1999 led to lower interest rates, which have contributed to the economic growth ever since. Low corporate tax rates certainly helped Ireland attract foreign investors. But never forget that Ireland is also the only English-speaking member of the eurozone, the one place where eurozone and Anglosphere meet.

The country naturally benefited from membership of the EU’s internal market. Without it, Ryanair, the Irish low-cost airline, would not be able to offer its popular flights across Europe. The Irish have also proved influential in the management of the internal market, not least through Charlie McCreevy, the Irish commissioner in charge of the EU’s internal market and financial services. As a member of the EU, Ireland has been in a position to veto motions that would have impaired the country’s economic success. Without steadfast opposition from Ireland, the EU would have made more headway in imposing corporate tax harmonisation...

So what would happen if Ireland were to leave the EU? As an associate member of the single European market, Ireland would probably attract less foreign investment than it does today. Dublin’s financial centre would be demonised as an offshore tax haven and treated on par with Liechtenstein. We would see lots of Ryanair flights between Dublin and Cork and the EU would put even more pressure on Ireland to raise corporate taxes.

Oh, and by the way, Ireland would no longer be a member of the eurozone. The Irish could use the euro if they wanted to but this would be like Panama using the dollar – a little sad, really. There would be no Irish voice in the European Central Bank’s governing council warning that this is not a good time to raise interest rates. Leaving the EU involves a huge loss power and influence.

To put it mildly, the No vote is highly risky. Considering that the country is now on the verge of a severe economic slowdown, brought on by a downturn in the real estate market and the credit market crisis, it could not have come at a worse time. Not only does the No vote carry risks, it is a highly asymmetric gamble that brings no material benefit under the best of circumstances. The No vote put Europe’s most impressive economic miracle at stake, and the cards are not looking good.

Why Do Chinese Households Save So Much?

I am currently revisiting the interesting paradox of rising Chinese household savings in recent years. It is indeed curious how household savings rates in the PRC have risen while consumption has dropped as a percentage of GDP. Given the improving economic fortunes of China, shouldn't more exuberant households instead be spending more, albeit not to Americanesque extremes? Chinese household savings rates are in the range of 20-25%, while American ones are in the range of, er, 0-1%. If we are interested in remedying whopping huge global economic imbalances, then finding ways of inducing more domestic Chinese demand will be part of the solution. There are various explanations offered for this pattern, including:

(1) The government does not provide as many health and education services as in the past, necessitating more savings for out-of-pocket expenses on these expenditures;
(2) China lacks a financial infrastructure that permits more to buy on credit;
(3) The Chinese, like many other Asians, are frugal by nature (the cultural explanation);

In this paper, Marcos Chamon and Easwar Prasad use Chinese survey data to come up with some preliminary fundings. The authors find (1) and (2) account for the increased savings, although (3) is harder to use as justification for increasing savings rates as opposed to just high observed savings rates. Here are a few key lines, although the entire article is well worth downloading if you are interested in either China or global economic imbalances. Here is the abstract:

From 1995 to 2005, the average urban household saving rate in China rose by 8 percentage points, to about one quarter of disposable income. We use household-level data to explain why households are postponing consumption despite rapid income growth. Tracing cohorts over time indicates a virtual absence of consumption smoothing over the life cycle. The age profile of savings has an unusual U-shaped pattern, with saving rates being the highest among the youngest and oldest households. We find that financial underdevelopment, as reflected in constraints on borrowing and low returns on financial assets, partially accounts for this pattern. Moreover, overall saving rates have increased across all demographic groups. We argue that this can be explained by the rising private burden of expenditures on housing, education, and health care.

And here is a key passage:

These various strands of evidence suggest that rising macroeconomic uncertainty, coupled with financial repression--which has resulted in the lack of instruments for borrowing against future income, limited opportunities for portfolio diversification, and low real returns on bank deposits--has driven the increase in household saving rates. The appendix provides a simple stylized model (drawing on Jappelli and Pagano, 1994) to illustrate how the interaction of rapid income growth and borrowing constraints due to financial underdevelopment can drive up saving rates.

There are other factors that may be relevant as well. The overall macroeconomic uncertainty associated with the transition to a market economy has contributed to precautionary saving motives, although we do not find strong evidence that this effect has been quantitatively important. Economic growth may affect savings through habit formation considerations (Carroll and Weil, 1994); our results, however, suggest a limited role for that channel in urban China. Finally, cultural factors are often considered an explanation for the high saving rates in many East Asian countries, including China. But they cannot account for the trend in saving rates, which is the primary focus of this paper.

Keeping Up With China: India's Foray Into SEZs

The use of special economic zones (SEZs) to encourage development in China is well-known. Incentives for local and foreign investors to locate in these zones may include steady electrical and water supplies (not always a given in LDCs), better transportation (especially access to ports and airports), tax benefits, and so on. Like the rest of Asia, India looks upon the Chinese example with a mixture of envy and loathing. While the rest of the world is familiar by now with India's prowess in service sectors--business process outsourcing, engineering consulting, call centres, legal and medical transcription, and what else have you--the government of Manmohan Singh is keen on manufacturing playing a larger role in India's economic resurgence. From Bloomberg:

When Boston Red Sox co-owner Martin Trust first visited the southern Indian village of Achyutapuram three years ago, a pot-holed road ran through the stretch of bare land dotted with thatched huts.

That didn't deter Trust from investing $12 million in a special economic zone being created there by Brandix Lanka Ltd., which makes lingerie for Victoria's Secret. His bet may now be paying off as workers finish constructing roads, a power plant and helipad, and companies including Quantum Clothing Group, a U.K. supplier to Marks & Spencer Group Plc, sign up to build factories in the 1,000-acre industrial site.

The change ``is startling,'' said Trust, 73, who is also founder and president of Brandot International Ltd., a Salem, New Hampshire, investment firm with stakes in 18 textile and apparel companies in seven countries including China, Israel and Mexico. ``It's an inviting place for any investor.''

India's economic zones are finally taking root after more than four decades, laying the foundation for Prime Minister Manmohan Singh's plan to increase manufacturing to a quarter of the economy by 2012 from 17 percent now. That's vital for a nation that needs to find jobs for the 150 million people who will join its workforce in the next 10 years.

There is ``real momentum'' behind the zones, said Alastair Newton, senior political analyst at Lehman Brothers International in London. ``Governments, both at the central and state level, realize they have the potential to create good, long-term employment.''

The rest of the article correctly notes that India has dabbled with SEZs as long ago as the mid-sixties. For a number of reasons, though, dedication to the programme has not been sustained through the years. More importantly, characteristic problems with SEZs such as expropriation of land claimed by farmers and, down the road, inegalitarian income distributions compared to regions excluded from SEZs are larger concerns in a democratic country such as India. Whereas an authoritarian regime like the Communist Party isn't really subject to scrutiny of this sort in China, the ruling Congress Party in India can ill afford to be perceived as pro-bourgeoisie. Aside from that issue, the rise of Indian SEZs is also making for some colourful cultural contrasts as women of modest means and demeanour are now making thongs for Victoria's Secret (cue up a silly Sisqo tune):

While farmer resistance continues in some states, including West Bengal, Haryana and Goa, India now has 42 zones, including the original eight, creating an estimated 176,000 jobs in the past two years, the Commerce Ministry says.

Another 229 zones are under construction and an additional 210 proposals await final government approval, according to the ministry, which forecasts the zones will attract $75 billion in investment by 2013 -- almost a third of India's industry.

To convince local villagers that it's serious about creating employment in Achyutapuram, Sri Lanka-based Brandix set up a trial factory close to its zone that currently employs about 1,500 local women. Ladies ``who never had proper clothes are today making thongs for Victoria's Secret,'' said Reshan Wickramasinha, chief executive officer at Brandix India Apparel City Ltd.

Kanak Mahalaxmi, 19, says her life ``has changed dramatically'' since she got a job as a sewing operator a year ago. ``We just finished building a brick house after living in a thatched one all our lives,'' said Mahalaxmi, who earns 2,500 rupees ($59) a month. ``We just bought our first television set as well.''

There have been fatal clashes already over the creation of more SEZs such as in West Bengal:

Were it not for the evidence of death, the scene in this outpost of West Bengal is that of the perpetual rural idyll, with glowing green rice paddies, jute-thatched roofs and children splashing in the village pond.

However, last week, in a clash with police that cost 14 lives, the villagers of Nandigram district won a victory that threatens to derail the biggest push for economic and industrial development since India won independence 60 years ago.

It came after six months of resistance against government compulsory purchase plans on the villagers' land to make way for a 10,000-acre industrial park meant for an Indonesian chemicals giant.

The same thing is happening in a number of other locations where plans for SEZs have been slowed down such as the state of Goa, India's smallest by land area:

India's controversial special economic zone (SEZ) policy continues to go through various twists and turns. The latest setback came on December 31st 2007, when Goa became the first Indian state to scrap all of its existing SEZ projects. On a more positive note, the central government has recently taken steps to ease the acrimony surrounding SEZs by reviewing its policies on land acquisition.

Protests against SEZs, largely because of issues relating to land acquisition, have been vociferous in several Indian states--most notably in West Bengal. The agitation recently spread to the tiny state of Goa, best known for its balmy beaches and hordes of tourists. As of December 2007 Goa had just seven SEZ projects, of which three had been formally approved and officially "notified", meaning that the central government had acknowledged their eligibility for all the applicable incentives under India's SEZ Act. However, opposition to the SEZ policy from political parties and other local organisations simultaneously reached a crescendo late last year, threatening to disrupt the state's crucial tourism industry.

The groundswell of opposition found its formal expression in the report of a task-force set up by the state government (and headed by the chief minister). While preparing recommendations for a long-term regional plan, the task-force argued that SEZs are detrimental to Goa's overall interests because land is being speculatively acquired for product-specific SEZs, crowding out genuine entrepreneurs who are not merely seeking government incentives. The task-force also concluded that local people rarely have the skills to benefit from the employment opportunities SEZs provide. Instead, it claimed, SEZs attract migrants from other states, putting pressure on Goa's already strained resources.

The central government's Board of Approvals only gives the green light to SEZs supported by state governments, so all seven of Goa's SEZs must have had the backing of the state government. But Goa's government now seems to have changed its stance, perhaps sensing the vehemence of opposition from local people and political parties. The chief minister's decision to scrap all of Goa's SEZs is unprecedented; while opposition to SEZs in other states is also widespread, it has mainly been targeted at specific zones.

Thus, PM Singh has had to rethink the process of SEZ implementation:

SEZ is an instrument of economic policy and it has come to stay. But in the process of implementation, we have been exposed to certain problems that cannot be dismissed. It is the strength of our democracy. If we find there are some flaws in our policy, we can set in motion a mechanism to redress those gaps in our policy.

In the meantime, yet more protests are being held over these SEZs and the government intends to bolster the provision of social services in these zones to counter its critics. Sometimes, the Congress Party probably wishes India was under an authoritarian regime. In a world where SEZs are an instrument of national development, perhaps "market socialism" may have a leg up.

PRC Olympic Squad & NYT's "Ivan Drago" Fixation

International sporting competition and jingoism are as inseparable as Amy Winehouse and eyeliner. In either case, the results can be quite scary. Most infamously, the 1936 Berlin Olympics served as a propaganda vehicle for the National Socialist's idea of Aryan supremacy. Jesse Owens' track and field achievements may have punctured that idea, but, lest anyone forget, the Germans did win the most medals in that event. 72 years later, we have another Olympic host country emerging--or more correctly speaking, re-emerging--on the global scene in the PRC. Although its co-opted, sold-out, and rather bourgeois brand of Leninist-Marxism is not perceived to be a threatening alternative political-economic system, China still sees the Olympics as a coming out party that should be ushered in with a bevy of medals, preferably those of the yellow-tinged variety.

A few weeks ago, I came across a feature by the New York Times on the awe-inspiring efforts of the Chinese national team to put together a world class group of rowers. Unlike, say, table tennis, China does not have a long, distinguished history in rowing. (Famously, China even mounted a reality show to attract performers to this sport.) However, the powers-that-be in China's vast sports training apparatus decided to train athletes hard in this area for there are many medals on offer, giving the PRC a good chance to run up their medal tally in Beijing. I found it pretty interesting and thought nothing more about it until the NYT came up with another two articles on Chinese athletes being forced to train despite the possibility of incurring long-term injuries and being unable to quit under official pressure. While I do understand that interest ought to be high in the run-up to the Olympics, these articles are getting repetitive and make very similar points:

(1) The Beijing Olympics will showcase China's growing sporting prowess to complement its increasing economic clout;
(2) The PRC has spared nothing in athletic selection, training, facilities, and coaching to ensure that it stands a good chance of topping the medal league tables in Beijing 2008;
(3) Youngsters from the provinces showing athletic promise have been separated from their parents beginning at a very young age to train in isolation;
(4) The uni-dimensional focus of Chinese sporting officials on winning at all costs has not allowed these athletes to lead normal lives;
(5) Consequently, these athletes are torn between demonstrating national pride in their sporting achievements and resenting the normalcy which has been taken from them;
(6) Having done little other than train, these athletes are ill-equipped for life after their sporting careers are over;
(7) Promises of fame and fortune in the event of victory makes athletes from families of modest means persist despite the undeniably harsh training regimen;
(8) Western competitors who have been blown away by the Chinese in international competition have resorted to accusations of doping.

Where have we heard this before? A robotic, nearly superhuman man-machine is used for propaganda purposes to instill fear into the hearts of competitors the world over. If it sounds like a hackneyed plot for a Sylvester Stallone movie, well, that's because it's already been the plot to such a movie. Rocky IV was released in 1985 at a time when Reaganite anti-Soviet rhetoric was at a fever pitch, sandwiched somewhere between the "evil empire" and "Mr. Gorbachev, tear down this wall" speeches. Some of you may recall that He-Man himself, Dolph Lundgren, played Ivan Drago, the Russian heavyweight killing machine. Literally, he killed off Carl Weathers playing ex-champ Apollo Creed in an exhibition boxing match, compelling Rocky Balboa to avenge the death of his longtime friend and ring rival. Nevermind that the Swede Lundgren didn't look very Russian, nor did his screen wife Ludmilla played by Brigitte Nielsen [Danish!]--but you must be extremely willing to suspend disbelief while watching this movie. Yes, Rocky beat the tar out of the Soviet killing machine by movie's end, though that was a foregone conclusion from outset.

Has the NYT reprised the role of Sylvester Stallone in creating a stereotypical image of Chinese instead of Soviet athletes with this batch of articles? It certainly seems so to me: "Heck, we Americans may not be as all-out competitive as the Chinese, but we treat our athletes like humans and they have real lives which will continue long after the Games are over." Just as there is trade protectionism, what we have here may be an incipient brand of, er, athletic protectionism. Yo Adrienne, those Chinese rowers sure are fast...

Party Like It's 1899: The Revival of UK Rail

Partly as a result of high fuel prices, the British are resorting in greater numbers to a time-tested form of transportation: the train. In 1986, Margaret Thatcher is said to have uttered the now-famous line "a man who, beyond the age of 26, finds himself on a bus can count himself as a failure" [!] as a put-down to those who have not bettered their situation enough to own private transportation (read: own a car). Despite her put-down, however, it seems the British have been taking the train in ever-larger numbers, necessitating the expansion of rail transport for the first time in ages. Given that car ownership is becoming an increasingly iffy economic proposition with gas prices averaging over $10 a gallon here in addition to various other hassles ranging from unaffordable parking to congestion charging schemes, it is no surprise that the train is regaining its relevance. Both the Financial Times and the BBC have recent articles on plans by Network Rail to expand their lines in the coming years as people start boarding more trains.

For some time, environmental campaigners such as Friends of the Earth and the Heathrow expansion opposition group HACAN have been pressing the government to encourage more rail travel instead of short-haul flights. Given the increasingly favourable economics for rail travel, the tide is turning quickly against Baroness Thatcher. I sure am glad to be a rail-travelling loser! From the BBC comes this note:

Five new high-speed main lines crossing the width and breadth of the UK may be built as part of a review of the rail network, Network Rail says. The network operator will announce on Monday it is to commission a study looking into what could be the largest track build since the 19th century. The study will consider laying new lines alongside five of the UK's busiest routes by 2025. They include the East Coast main line and West Coast main line. The review will also assess the need for high speed trains similar to the French TGV to cope with Britain's growing number of rail users.

In the last decade, passenger numbers have risen by about 40% with more people travelling by rail than at any time since 1946. In addition, numbers are expected to swell by a further 30% in the next 10 years.

The study being commissioned by Network Rail will look at the service in the post-2014 period, with all options "on the table". If given the go-ahead, the new lines are likely to run alongside some of the UK's busiest existing routes.

They include the West Coast line to Birmingham, Manchester and Glasgow, the East Coast main line to Edinburgh, the Great Western main line to Cardiff and Penzance, the Midland main line to Sheffield and the Chiltern route to Birmingham.

A spokesman for Network Rail said: "We are looking at these five strategic routes. We are possibly looking at new lines. "There is a huge case to be made for an expansion of the rail network. All options are on the table looking at how we address capacity issues."

Richard Dyer, transport campaigner at Friends of the Earth, said: "Expanding Britain's railways by building new high speed lines is potentially very exciting - and could play an important role in weaning Britain off fossil fuels and developing a low carbon economy. "But the overall impact that this would have on local people and the environment must be carefully considered. "The UK needs a modern, comprehensive and affordable rail network to provide a real alternative to cars, lorries and short haul flights, and help cut Britain's contribution to global climate change. "Our creaking railway system desperately requires huge investment to bring it into the 21st century."

Ashwin Kumar, passenger director of independent watchdog for rail users Passenger Focus, said: "We welcome the study. It is extremely important the rail industry anticipates future growth."

Cast Your Vote: Do Firms Need Prodding on CSR?

The Economist website has a debate going on regarding this question: "Without outside pressure, corporations will not take meaningful action on sustainability." It follows the rules of the "traditional Oxford-style debate." As I write, the "yes" votes outnumber the "no" votes 72% to 28%. I am not particularly keen on the phrasing of the question for a host of reasons. For instance, "pressure" implies an antagonistic stance between civil society and corporations when opportunities for collaboration do exist and may in fact outweigh this negative framing. In many respects, the CSR debate has moved beyond this combative approach.

On the "yes" side we have Mindy Lubber, president of Ceres, which bills itself as "a national [American] network of investors, environmental organizations and other public interest groups working with companies and investors to address sustainability challenges such as global climate change." Her opening statement is somewhat predictable--subprime, SUVs, Nike, etc:

The recent subprime mortgage meltdown is a painful example of how companies and whole industries can delude themselves into ignoring even the most fundamental issues. If anyone outside the financial markets had been scrutinising the risks from easy mortgages, they could have helped avert millions of foreclosures and an economic recession, and saved themselves a fistful of dollars.

It is the same with global climate change, which presents far-reaching risks and opportunities that many companies—their heads stuck in the sands of the quarterly business cycle—are not grasping on their own. Outsiders warned Ford and General Motors for years that their gas-guzzling high-polluting cars were too big, but the carmakers did not listen. Now their large sports utility vehicles sit unsold in car lots and the companies' very survival is at stake.

Outsiders—investors, environmentalists, public interest groups, other industry experts—have an essential role in pressuring companies on their handling of environmental and social threats. They should be asking tough questions; they should be offering creative, out-of-the-box ideas; they should be demanding real action; and they should be holding companies accountable.

On the "no" side, Bjorn Stigson, president of the World Council for Sustainable Development (WBCSD), makes a more compelling argument from my POV:

Going out of business is never a good move in the quest for sustainability.

Not only is it impossible to imagine business without external pressure, it is increasingly difficult to make out a clear line between what is external and what is internal. It may be too early to say that the internet, open-source technologies, extended value chains and network marketing have turned the corporation inside out, but certainly it is becoming harder to find, with precision, the fence-line.

It is not only in commercial relations that boundaries have become entangled. The World Business Council for Sustainable Development is a coalition of some 200 leading international companies. Our members recognise that rising temperatures, damaged ecosystems and the exclusion of 3 billion people from prosperity are business issues. They know that they cannot solve these problems alone, but have to work with others to develop solutions, even when this means learning to listen to their critics and those who oppose their actions.

While I am more sympathetic to the arguments of the WBCSD, the phrasing of the question is not so ideal that I may actually vote "yes" despite the weaker arguments offered by Ceres. It will be interesting to see how this debate evolves, though it looks like the "yes" vote has either convinced more people or their legions of voters are in rather larger numbers. With online polls, it's difficult to say.

What sayeth thee? Head over to the Economist site and cast your vote.

Take That! US Slaps Tariffs on Chinese Steel

With the fourth US-China Strategic Economic Dialogue (SED) passing into history, the US is going back on the trade offensive. On Friday, the US International Trade Commission ruled against China on the matter of dumping of steel products in the United States. This paves the way for the application of countervailing duties on "circular welded carbon-quality steel pipes." These pipes are used in plumbing, heating, irrigation, and other construction applications. The Chinese government stands accused of granting unfair subsidies to steelmakers. Further, the Chinese steelmakers are accused of dumping their wares in the US below cost. Note, however, that a similar case over coated paper did not come to fruition last year because US firms were unable to demonstrate "an industry in the United States is materially injured or threatened with material injury, or the establishment of an industry in the United States is materially retarded, by reason of subsidized and less-than-fair-value imports."

In the meantime, expect the Chinese to issue their usual "disappointment" at this ruling. The Chinese are threatening to take the matter to the WTO. Also, Candidate Obama approves of this ruling, saying it's "the only responsible response" to China's "egregious and outrageous violations of fair trade." China bashing: if you missed it, here's reminding everyone that it probably never went away. From the Associated Press:

U.S. steel pipe manufacturers, who have been battling a surge in imports from China, won a major victory Friday when the International Trade Commission cleared the way for the imposition of stiff penalty tariffs for the next five years.

The commission voted 5-0 that the U.S. industry was being harmed by the import of circular steel pipe. The decision marked the first time a U.S. industry has won a decision to impose tariffs on a Chinese product based on the argument that the Chinese government was unfairly subsidizing a Chinese industry.

The ruling means penalty tariffs ranging from 99 percent to 701 percent will be imposed on Chinese imports of circular welded pipe, a form of pipe used in a variety of construction jobs, such as home plumbing and sprinkler systems.

For more than two decades, the U.S. government had refused to consider subsidy cases against the Chinese government because China was classified as a non-market economy.

However, the Bush administration, facing increasing anger over soaring trade deficits with China, reversed course last year and announced it would treat China in the same way as other countries in disputes involving government subsidies.

The pipe case is the first to clear all the government hurdles for the tariffs to go into effect. Last year, the Commerce Department imposed penalty tariffs on imports of Chinese glossy paper, but the trade body blocked the tariffs by ruling that the domestic industry had not proven it was being materially harmed by the imports.

In the pipe case, the Commerce Department found the Chinese government was providing unfair subsidies. It also found that the pipe was being sold in this country below the cost of production, a practice known as dumping. The penalty tariffs for the government subsidies, known as countervailing duties, and the antidumping tariffs were upheld by the trade commission vote.

Chinese exports of circular pipe have exploded since 2002, rising from 10,000 tons that year to 750,000 tons in 2007. The U.S. industry said the increase in imports had resulted in the loss of 500 pipe worker jobs, representing about one-quarter of the work force.

Plants making circular welded pipe, also known as standard pipe, are located in 13 states — Alabama, Arizona, Arkansas, California, Illinois, Iowa, Kansas, Missouri, Ohio, Pennsylvania, Tennessee, Texas and Wisconsin.

The case before the government was filed by six pipe producers and the United Steelworkers union, whose president, Leo Gerard, called the commission ruling a major victory that should send a clear message to China and to politicians in this country.

"China is a trade cheat," Gerard said in a conference call with reporters. "They undermine the market, depress prices and destroy jobs."

Gil Kaplan, a lawyer representing the pipe companies, predicted the ruling could be the first of a wave of victories by U.S. companies battling Chinese imports.

"This decision marks a fundamental turning point in the U.S.-China trade relationship," Kaplan said. "The subsidies that the Chinese are giving a whole host of their manufacturing industries are a big reason the U.S. trade deficit has been growing so rapidly. This is the first time the United States is standing up and saying we are not going to put up with this and we will impose duties to offset the subsidies."

Wang Baodong, a spokesman for the Chinese embassy in Washington, said China had not decided what its next step would be. One possibility would be for China to file a case challenging the penalty tariffs before the World Trade Organization.

"The Chinese government will study the latest development carefully and take appropriate action," Wang said.

The companies bringing the pipe case were Allied Tube & Conduit, IPSCO Tubulars Inc., Northwest Pipe Co., Sharon Tube Co., Western Tube & Conduit Corp. and Wheatland Tube Co.

Reps. Phil English, R-Pa., and Jason Altmire, D-Pa., who are sponsoring legislation that would increase the power of Congress in similar trade cases, said it was disappointing that it had taken so long for the domestic companies and workers to win protection.

"There are other workers who are going to continue to face the risk of losing their jobs to Chinese mercantilism unless Congress looks at this issue and decides to strengthen U.S. trade laws," English said.

Since joining the World Trade Organization in 2001, China has boosted steel-making to the point where by some estimates it has more production capacity than the United States, Japan and the European Union combined. United States Steel Corp. and AK Steel Holding Corp., two big steel companies not involved in the pipe case, said they were encouraged by Friday's decision.

"There's no question that Chinese producers have engaged in unfair trade on a massive scale," said John Armstrong, a spokesman for U.S. Steel in Pittsburgh. "There's also no question that dumped and subsidized imports from China have caused material injury to domestic producers."

The circular welded pipe case is one of a number of cases that have already been filed accusing the Chinese of providing their manufacturers with unfair subsidies. Other cases involve different types of pipe as well as tires, lightweight thermal paper and laminated woven sacks.

The U.S. trade deficit with China hit an all-time high of $256 billion last year, an amount equal to one-third of the total U.S. trade deficit and the largest imbalance ever recorded with a single country. Critics contend that the soaring trade deficits have played a major role in the loss of more than 3 million U.S. manufacturing jobs since 2001.

Please Bear With Me: FF3 Is Messing Blogger Up

For some reason I can't explain, the formatting of my blog has become funky ever since I switched over to Firefox 3. The new browser version is causing me much agony with Blogger. Hopefully, I can get this issue sussed out and service will soon return to normal. Thanks!

Does the US Still Lead in Science & Technology?

Just out is the RAND Corporation's monograph entitled US Competitiveness in Science and Technology. The authors of this work find that there is little to suggest that the United States is losing its lead in scientific and technological research based on various indicators of research productivity such as R&D spending, patents, publications, citations, and even Nobel Prize winners in the "hard" sciences. Will this assuage those who fear the US is losing its competitiveness? Read the thing and decide for yourselves. Personally, I think that the indicators used are kind of rough, for the sheer quantity of US research output likely won't guarantee that the Next Big Thing won't come out of China, India, or somewhere else. That is, a thousand incremental innovations may pale in comparison to a radical innovation which may change the world coming outside of the US.

The discussion on pp. 38-39 summarizes the findings neatly:

The United States still leads the world in science and technology. The United States accounts for 40 percent of total world R&D spending, 38 percent of industrialized nations’ (OECD countries) triadic patents, and employs 37 percent of OECD researchers (1.3 million FTE). It produces 35 percent, 49 percent, and 63 percent of world publications, citations, and highly cited publications, employs 70 percent of the world’s Nobel Prize winners, 66 percent of its most cited individuals, and is home to 75 percent of the world’s top 20 and top 40 universities and 58 percent of its top 100.

R&D spending is rapidly increasing in developing nations such as China and Korea. But despite this rapid growth, the U.S. share of world R&D spending (dollars at PPP) fell only by 1.5 percent to 36.1 percent between 1993 and 2003, while the EU-15 and Japan lost significant ground. In absolute terms, the United States increased its R&D spending by $126.3 billion (nominal value at PPP), from $166.1 billion in 1993 to $292.4 billion in 2003. This increase is more than in any other region: Over the same period, the EU-15 added $76.6 billion, Japan added $38.3 billion, and China added $60.8 billion.

S&T employment is not growing more rapidly in other nations/regions than in the United States, though China showed remarkable growth. The United States added a large number of researchers (299,000) between 1995 and 2003, suggesting a vibrant R&D sector. At the same time, China added nearly as many (289,000), the EU-15 added 220,000, and Japan added 95,000. Both the EU-15 and China graduated more scientists and engineers than the United States.

While developing nations (China and India in particular) are starting to account for a significant portion of the world’s S&T inputs and activities (R&D funding in dollars at PPP, research jobs, S&T education, etc.) and are showing rapid growth in outputs and outcomes, they still account for a very small share of triadic patents, S&T publications, and citations. Innovation and scientific discovery are still led by the United States, EU 15, and Japan. The United States did lose 3 percentage points in its world share in publications, citations, and top 1 percent highly cited publications between 1993–1997 and 1997–2001. But on measures such as additions to the S&T workforce and patented innovations, U.S. growth in S&T was in line with or above average world trends. By comparison, Japan grew more slowly in additions to the S&T workforce, and both the EU-15 and Japan had slower growth in patented innovations.

High growth in R&D expenditures, employment of scientists and engineers, and patents suggests that U.S. S&T has remained vigorous. These U.S. developments occur at a time when increases (though at different rates) in each of these measures are also seen in the EU-15, Japan, China, Korea, and many other nations/regions. In other words, strong growth of R&D activity, S&E employment, and innovation in many countries suggests a future of significant innovation activity, and, because of the greater diffusion of technology in a globalized world, the promise of economic growth for those nations that are capable of absorbing (making economic use of) the new technology. Scientifically advanced nations and regions such as the United States, the EU, and Japan are highly capable of implementing new technology and will benefit from it. Developing nations such as China and India have partial capability, but are well ahead of Latin America, the Middle East, and Africa. Though, as we will discuss in more detail later, developing nations can continue to grow their economies rapidly by absorbing existing technology in addition to new technology.

Sachs Versus Easterly Round 1,429: Cato-tonic

Ho-hum, here we go again. The development debate between Jeffrey Sachs versus William Easterly is supposedly planning versus searching, official development aid versus generating local business. Easterly's personal site has the tale of the tape so far. Meanwhile, the latest round is being waged on Martin Wolf's blog, site of some of the best economist-versus-economist intellectual jousting. It all began when Martin Wolf wrote a favourable review of Jeffrey Sachs's new book, "Common Wealth." Here is an excerpt from Wolf:

Is it possible for the vast mass of humanity to enjoy the living standards of today’s high-income countries? This is, arguably, the biggest question confronting humanity in the 21st century. It is today’s version of the doubts expressed by Thomas Malthus, two centuries ago, about the possibility of enduring rises in living standards. On the answer depends the destiny of our progeny. It will determine whether this will be a world of hope rather than despair and of peace rather than conflict.

This – not the effectiveness of its particular prescriptions – is the biggest question raised by the report of the growth commission discussed here last week. It is also the focus of a powerful new book by Jeffrey Sachs, director of Columbia University’s Earth Institute.

The challenge is stark. World real incomes per head could rise 4.5 times by 2050 and world population by 40 per cent. This would mean a sixfold increase in global output, concentrated in the developing world. Is such an increase feasible? The answer he gives is: yes and no – yes, because changes in incentives, technology and social and political institutions would make a benign outcome feasible; and no, because the path we are now on is unsustainable. Professor Sachs is an optimistic prophet of doom. He falls in between those environmentalists who see no solution and those free-marketeers who see no problem.

By inclination, I am far closer to the latter than the former. But it has become evident, at least to me, that the human impact on the planet on which we depend has risen to enormous proportions. We have treated the global commons as if they were free. Self-evidently, they are not.

Prof Sachs emphasises three goals: first, “the end of extreme poverty by 2025 and improved economic security within the rich countries as well”; second, “stabilisation of the world’s population at 8bn or below by 2050 through a voluntary reduction of fertility rates”; and, third, “sustainable systems of energy, land and resources use that avert the most dangerous trends of climate change, species extinction, and destruction of ecosystems”. Finally, to achieve these ends, he recommends “a new approach to global problem-solving based on co-operation among nations and the dynamism and creativity of the non-governmental sector”.

To this Sachs adds his bit of "mainstream economics neglects environmental limits" line of argument:

Martin Wolf is right, in his generous review of my book (“Sustaining Growth is the Century’s Big Challenge,” June 11), that the biggest question in economics is whether there is room enough on the planet for 7 – 10 billion human beings, the tens of millions of other species, and economic convergence, that is the continued, reliable, and fairly rapid narrowing of income gaps between rich and poor due to technological catching up by the poor. The tendencies for convergence are powerful. Rapid economic growth in China and India reflect the powerful capacity of today’s poorer countries to close technology gaps. The results are impressive: income doubling periods of 7 to 10 years. The results are also harrowing: profound threats to the Earth itself, and therefore to continued economic development and even survival of vast numbers of people and vast parts of the biosphere.

Martin calls me both optimistic and pessimistic at the same time. My point is that either the positive trajectory or negative trajectory is possible, indeed both are plausible. I believe that physical resource limits alone will not do us in, or end economic convergence. On the other hand, the market economy by itself will not solve a now world-threatening crisis of sustainable development. The market system fails to solve four fundamental classes of problems: ecosystem functions (the bio-geophysical commons); population; extreme poverty (because of the very real dynamics of poverty traps); and technological pathways needed for sustainability. These are solvable problems. They require collective action, as they are fundamentally in the character of public goods. Yet for the same reason they are not solved. Part of the barrier is the ideology of market economics itself, which often denies these problems and therefore is short on producing practical tools and solutions.

The biosphere does not come packaged according to the assumptions of neoclassical economics. What we call externalities are the norms, not the exception. In ecosystems, the nutrients, carbon, water, nitrogen, energy, and species (including ours) are in flux. There are spatial migrations and temporal flows and interactions which make a lie of the underlying assumptions of “private” property. A farmer that encloses his farm, or drains groundwater, or introduces an invasive species, or puts on chemical pesticides, or replaces high biodiversity with a commercial monoculture, has pervasive effects on a whole ecosystem. These are, by nature, not fenced in his enclosure. None of this mattered in the extreme perhaps when the Earth was still populated by 1 billion of us, or perhaps even 2 or 3 billion. When local systems failed, there were new ecological niches to conquer. Yet in the past 250 years, the population has risen nearly tenfold. There are no more places to flee. And ecosystems everywhere are under profound threat.

Unsurprisingly, Mister Market himself, William Easterly, takes a dim view of Sachs's assorted criticisms of markets. To his loss, Easterly does not seem to address environmental concerns Sachs raises directly. Instead, he dismisses Sachs's concerns as eco-nannyism, more or less. As most of you probably know, Easterly is aligned with the Cato Institute which believes global warming is overblown. (Here's a sample of Cato views on the environment.) Easterly says:

In his new book, Professor Sachs lists other grave global challenges that will not be solved unless we also apply to them the same formula of money, international agreements, and a UN plan. One of these challenges is Sachs’ revival of another old idea, that of The Population Scare - from Paul Ehrlich’s 1968 book The Population Bomb and the Club of Rome’s 1972 Limits to Growth. If the population problem is indeed scary, Sachs’ solutions give a dismal outlook once one considers the track record of aid money, international agreements, and UN plans. John Kay put it well in another column in today’s FT on the recent UN summit responding to the world food crisis:

“So the summit ended as such summits always do. The delegates agreed on the importance of the problem, the urgent requirement to spend more money: they emphasised the need for coordinated action, and resolved to meet again in future to reach the same conclusions.”

Fortunately for the world’s poor and for all the rest of us, there are much more dynamic forces in the world than UN bureaucrats and their academic advocates. Private, political, and social entrepreneurs, creative scientists, technological innovators, and resourceful workers and farmers found a way to escape “poverty traps” - the world poverty rate has declined by half over the last 30 years - and to avoid the famines and growth crash predicted by Ehrlich and the Club of Rome in the 1960s and 1970s. It is never a sure thing to predict that future problems will be solved in a similar way, but this historical record gives one a lot more hope about these challenges than one can derive from yet more toothless international agreements.

There is also a measured response from Paul Collier on Wolf's blog. Indeed, Collier is often posited as occupying the middle ground between Sachs and Easterly on the efficacy of aid. Although I am with Easterly on the point that development won't likely result from more massive aid, I do believe that his nonchalance over environmental matters is too ideologically extreme in the Cato-esque sense. What's wrong with channelling market forces in designing products and services which minimize or reduce environmental damage? Surely, even Easterly can get on that bandwagon--unless he believes global warming doesn't exist in the first place of course.

EU on US Trade Policies: Pot-and-Kettle Syndrome

Just out is the WTO's trade policy review of the United States, the world's top trader in terms of both imports and exports. While most of the report's findings should hold few surprises for those who are generally familiar with US trade policy, I am amused that the EU has used this opportunity to probe the US about rising levels of protectionism [!] when it is hardly guiltless in this and other respects. Here is the introductory blurb on the EU's site:

The European Union used the opportunity of a two-day WTO review of US trade policy to raise concerns about rising levels of protectionism in America. The EU submitted more than 90 detailed technical questions to the United States about its trade policy during the meeting.

In its opening statement to the ninth WTO Trade Policy Review of the United States in Geneva on June 9, the EU expressed its concern at worrying signs of a re-emergence of protectionist sentiment in the United States. The increasingly restrictive import requirements imposed by the US for security purposes – new legislation requiring the 100% scanning of containers destined for the US was an example - and the lack of reform in the 2008 US Farm Bill raised doubts about the compliance and professed intent of some aspects of US trade policy with the WTO.

In questions to the US, the European Union also raised the use of fisheries subsidies, intellectual property rights enforcement, sanitary measures for food products, RTA [Regional Trade Agreements] policy and constraints on investment in services sectors.

The EU believes that the "trade policy review" mechanism plays an important role by ensuring that WTO members review each others' openness to trade and raise concerns about market barriers and compliance with WTO rules and procedures.

Aside from concerns that "security"-related measures may be protectionism in disguise, the 2008 Farm Bill which has been much derided here [1, 2] and elsewhere also serves as fodder for EU criticism. Nevermind that the EU maintains pretty hefty subsidies itself, but maybe it's the spirit of the legislation that counts:

The expiration of the 2002 Farm Bill presented a significant opportunity for the United States, and for the wider WTO membership, to secure a more reformed-oriented US agricultural policy. Unfortunately, this opportunity has been missed, and the recently enacted 2008 Farm Bill has followed the same trade-distorting direction as its predecessor.

Some preliminary analysis reveal that the new provisions have even aggravated the trade-distorting character of the former Farm Bill, in particular, in a number of sectors such as cereals, cotton, sugar and dairy products.

Today, we would like to learn further on the intended objectives and foreseen consequences on world trade of the enactment of the 2008 Farm Bill, and the grounds on which the US justifies it. We wonder what signal the US is giving to us all with such retrograde Farm Bill [their language--not mine!].

Green Revolution Meets Expensive Fertilizer

As if there weren't enough worrying things to trouble global food supplies, add the rising cost of fertilizer to the list. The Green Revolution which increased agricultural yields in many parts of the globe is in part attributable to the widespread adoption of inorganic fertilizers. However, these kinds of fertilizer have become increasingly expensive. The Reuters story below suggests it is more of a "demand pull" sort of inflation instead of the "cost push" variety. Whatever is causing it, there are bound to be major adjustments in the use of fertilizer to the detriment of production:

It powered the Green Revolution and helped save millions from starvation, but now one of the most important tools on the farm is being priced out of reach for many of the world's growers. With food prices soaring and stocks thinning, the world is in need of bumper harvests but once one of most bountiful of commodities, fertilizer, is becoming scarce and expensive. It's estimated that one third of the protein consumed by humans is a result of fertilizer. So high prices and spot shortages are yet another stress on the world's ailing food system.

"You can't really expect a bigger harvest if you will not use fertilizer, but the cost is killing us," rice farmer Jaime Tadeo in the Philippines told Reuters, adding that a bag of fertilizer now sells for nearly 1,800 pesos, or $43, up from less than 1,000 pesos a year ago. "It's totally out of our control because if prices of oil continue to shoot up, the prices of fertilizers will also increase. I am afraid, many of us would not be able to afford it."

Fertilizers are like vitamins for soil and consists of three main types, nitrogen, potash and phosphate. Because some fertilizers such as nitrogen require energy to produce they track energy prices. But other kinds are just in high demand, even though experts say the shortages are not due to a lack of supply.

Last month China agreed to pay more than triple what they did a year ago to get hold of tight supplies of potash, sending the shares of global fertilizer makers to record levels. China, the world's biggest import market for the nutrient, will pay $650 to $670 a metric ton for the product, analysts estimated.

"With the intense pressure on global food production and continued growth in potash demand, this is the reality for our industry for the foreseeable future," said Bill Doyle, chief executive of Canada's Potash Corp, the world's top producer.

The rising price is a burden on rich and poor farmers alike as they represent a big investment upfront, despite high world prices for crops. If all goes well, a farmer can earn $3 for every $1 invested in fertilizer.

"We're all hoping Mother Nature cooperates and we can fill the bins, because ...we've got a lot on the line," said Robert McLean, a farmer in Canada's grain belt as he hauled a tractor-trailer load of canola harvested last fall.

Phosphate prices are up 50 percent over last year at C$570 per metric ton when McLean, who grows wheat, barley and canola in south-central Manitoba, booked supplies in January. Farmers who waited to buy until spring have had to cough up as much as C$1,230 per metric ton, McLean said. "We were hearing reports it was going to go up quite a bit. Nobody envisioned that it would go up 100 percent. It's just god-awful ugly, I think is a good way to express it," With enough rain and heat, fertilizer will help farmers reap historically high grain prices. But poor yields would leave them struggling to pay for next year's supplies.

Fertilizers were seen crucial in the Green Revolution of the past few decades where farmers, especially in poor countries, were able to dramatically increase crop yields. The Green Revolution took root in the 1940s and newly developed inorganic fertilizers -- leaving rudimentary additives such as manure in the dust -- helped spark an explosion in food production, and saved countries such a India from famine.

World fertilizer use grew more than 11 times from a mere 14.5 million metric ton in 1950 to 169.4 million in 2007, while population ballooned from 2.5 billion to 6.6 billion. But now with high fertilizer and fuel prices, some worry many of the gains could unravel, putting strain on all farmers but especially in the developing world.

"This has been a significant problem for the low income farmer," said Rajiv Shah, who manages the agriculture development program at the Bill and Melinda Gates Foundation, which has extensive aid programs in Africa. He said fertilizer use has long been a challenge in Africa, where farmers use about one tenth of what is applied by American farmers.

But now the problems are worsening with farmers forced to use fertilizers even more sparingly. They are also facing shortages and dealing with unscrupulous dealers selling poor quality products. All in all they have a lot on the line this season.

"If it doesn't rain that year, you can lose your entire crop and your family will struggle to get enough to eat," Shah said in a telephone interview.

In the sultry, sprawling palm oil plantations of Malaysia, which produces one of the developing world's most important cooking oils, shortages of fertilizers are already being felt. "The fertilizer shortage is a huge problem," said Martin Bek-Nielsen of United Plantations, who sees it as inevitable that some farmers will have to cut back. "Most plantations will not cut back, but small holders who have limited sources will reduce input. The impact on yields will not be immediate, it will be felt in a year or so."

Some believe one possible solution will be for higher government subsidies for poor farmers. Pedro Sanchez of the Earth Institute at Columbia University said he thinks heavy subsidies for fertilizers is the best way for the farmer to cope with the "worrying" prices.

"The way they are coping is they are getting subsidized fertilizers and improved seeds," he said. "And they are basically tripling their yields of their basic food crops, like corn. And they are having surpluses.

Will South Korea's Gov't Collapse Over US Beef?

The headlines coming out of South Korea may give one the mistaken impression that President Lee Myung-Bak's administration is teetering on the edge of collapse because of a controversy over beef imports from the USA. Lee's entire cabinet has already offered to resign. It is indeed true that the protesters who seem intent on slowing South Korea to a standstill are voicing their displeasure over South Korea allowing imports once again of US beef that is over 30 months of age and more prone to incidences of bovine spongiform encephalopathy (BSE), better known as mad cow disease. In 2003, the country banned US beef imports over mad cow fears. More recently, South Korea has started to import US beef, provided that it was under 30 months of age. In April of this year, though, it reached an agreement with the US on importing beef above that age ceiling in exchange for trade concessions from the US. Remember the putative US-South Korea trade deal? It is stalled partly because congresspersons from farm states want the Korean market to drop restrictions to American beef imports before a vote on it will be allowed in Congress. In response to local protests, the South Korean government requested that the US not send aged beef a few days ago, but that hasn't assuaged the protesters.

I have doubts whether this brouhaha has much to do with the safety of US beef. Given that Americans are hardly being affected by cases of this disease, there is little reason to believe exports of aged beef will cause South Koreans to keel over. Instead, the real beef is over South Korea adopting a wider package of neoliberal reforms to revitalize supposedly moribund Korean industry. My interest is not about beef imports per se. Rather, it is that cottoning up to Sammy at this point in time is both politically malodorous and unlikely to bring much in terms of economic benefits like Lee promises anyway. With the US economy stuck in neutral-cum-reverse, there are plenty of other countries out there to cotton up to that won't get you stuck with the "American lackey" designation and may generate more trade in the process.

Koreans have honed their protest culture to a fine art. As neoliberal reforms have stalled, the country is also faced with mounting inflation at home due to rising prices of, among other things, fuel. Like in many other parts of the world, those reliant on gas have decided to go on strike. It seems the world is becoming increasingly united by three things: inflation, fuel protests, and anti-American sentiment:

Truck drivers, following the lead of unions in a number of countries across Asia and Europe, voted on Monday to go on strike over rising fuel prices. They ignored the government's $10.2 billion financial aid package announced a day before and designed in part to cushion the impact of mounting energy costs. Other unions also voted on whether to strike and slow down production at auto plants and other factories.

The growing political storm has all but blocked the government's plans for major economic reform, including tax cuts, mass privatisation of major state-run firms and banks and efforts to make the country more accessible to foreign investment. The new conservative-dominated parliament has been unable to sit because the opposition has boycotted its opening.

"The current crisis signifies a deeper public malaise in Korea, risking to dampen economic growth over the coming year," said Hong Kong-based HSBC Asia economist Frederic Neumann. "The second big worry is that consumer and business sentiment takes another hit, thus depressing domestic demand at a time when exports could show signs of buckling."

In Case You Missed It: Big Three Overtaken @ Home

The Vapours famously sang about "Turning Japanese" in the eighties. Apparently, the throwaway single was catchy enough that it more recently featured in the popular "Guitar Hero" video game series. In the 80s, Japanese industry was the big fear for American manufacturing just as Chinese industry is now, with similar complaints about state involvement, currency manipulation, and what else have you. Of course, the big controversy back then was over Japanese automobiles. While the abovementioned factors were at play to various extents, I still think that, overall, Detroit was simply outsmarted, outmanoeuvred, and outclassed by Japanese manufacturers. Even if there was a "more level playing field," Detroit was bound for a whupping somewhere down the road.

Nowadays, of course, we have "China-bashing" instead of "Japan-bashing" as the American protectionist's sport du jour. Fear and loathing of Japanese products was more literal (and visceral) back then as neo-Luddites took sledgehammers to perfectly good Datsuns and Toyotas. Unfortunately, the inability of the Chinese to come up with notable brand names has meant that today's China bashers do not have such symbolic scapegoats at hand. What's a 21st century Luddite to do? Dismember Barbie? Molest Bratz? While we wait for such vivid jingoist displays--and they will surely come, as night follows day--let us contemplate today's feature article.

It is odd that very few (including myself) seem to have noticed that last week, automobile sales by Detroit's Big Three--a misnomer for various reasons--were surpassed at home by the combined sales of various Asian makes from Japan and South Korea. The reasons for this turn of events is familiar to all: few except determined masochists want to drive SUVs and other Jurassic contraptions with gas Stateside averaging over $4 a gallon. It's like 1973 or 1979 all over again, although Detroit has never been so badly out of shape. Does anyone really doubt that the uncompetitiveness of the Big Three at home is more the result of a failure to design products Americans actually want to buy instead of Japanese connivance at "unfair" trade? All the "employee discounts" in the world won't sell vehicles people neither want nor need. Japan-bashing, China-bashing...maybe even Vietnam-bashing somewhere down the line. Oftentimes, there is no one to blame but ourselves. Detroit crumbles--not rumbles--on. From Bloomberg:

Asian automakers outsold Detroit's Big Three in the U.S. for the first time last month as buyers left General Motors Corp. and Ford Motor Co. trucks on dealer lots in favor of fuel-efficient Honda Civics and Toyota Corollas. Japanese and South Korean carmakers raised sales 3.7 percent in May to win a record 48.2 percent market share, led by Honda Motor Co.'s 16 percent gain. GM, Ford and Chrysler LLC fell a combined 23.5 percent because consumers shunned pickups and sport-utility vehicles as gasoline neared $4 a gallon.

Honda's Civic small car dethroned Ford's F-Series pickup to become the best-selling vehicle in the U.S. Three other Japanese cars also overtook Ford's perennial sales champion, underscoring a shift that prompted GM to announce the closing of four truck plants in North America yesterday. GM will expand production of cars in response to what it called a permanent change in consumer behavior.

``I've never known the market to change this much this quickly in my lifetime,'' said Jim Hossack, a market analyst for AutoPacific Inc. in Tustin, California, a 38-year industry veteran who previously developed vehicles for Ford, Chrysler, Mazda Motor Corp. and Hyundai Motor Co. ``It's fueled by gasoline prices, obviously, but there's more to it than that.''

Honda rose 8 percent to 3,770 yen, the highest level this year as of 12:54 p.m. on the Tokyo Stock Exchange. Toyota rose 2.4 percent to 5,530 yen and shares of Nissan Motor Co. gained 4.9 percent to 970 yen.

Overall U.S. sales fell 11 percent, their seventh-straight monthly decline, extending the industry's longest streak since 2000-2001. Vehicles sold at an annual rate of 14.3 million, the lowest in a decade. Car sales accounted for 57 percent of new purchases, up from 50 percent a year earlier.

Honda's Accord and Toyota Motor Corp.'s Camry and Corolla also beat the F-Series. The last time the pickup was topped by a car was in December 1992, according to Dearborn, Michigan-based Ford. Among large automakers, the two Japanese companies are rated the most fuel-efficient by the U.S. Environmental Protection Agency.

Honda's Civic travels 36 miles (57.9 kilometers) per gallon of gasoline in highway driving, compared with 17 mpg for Ford's F-150 pickup with a V-8 engine, according to the EPA. Toyota's conventionally powered Camry gets 31 mpg…

Honda outsold Chrysler to rank No. 4 in U.S. sales, behind GM, Toyota and Ford. Chrysler, the automaker most dependent on light trucks, tried to boost demand by guaranteeing buyers that they'd pay no more than $2.99 for a gallon of fuel. Its sales fell 25 percent, for their biggest drop this year.

GM's U.S. sales dropped 28 percent and Ford reported a 16 percent decline. The two companies rely on pickups and SUVS for more than 60 percent of their combined U.S. sales. By contrast, Honda offers no V-8 engine models or full-sized SUVS and pickups.

Today's big pickups and SUVs remind investor Jeffrey Scharf of ``the big land yachts'' of the 1970s. ``When the first oil crisis hit, you couldn't give those things away,'' said Scharf, president of Santa Cruz, California-based Scharf Investments, which manages about $660 million in equities, including Honda and Toyota shares.

Toyota's sales dropped 4.3 percent, hurt by weaker demand for Tundra full-size pickups. Bob Carter, a vice president and head of U.S. Toyota brand sales, said the Toyota City, Japan- based company might report a decline in 2008. Toyota, trailing only GM in U.S. sales, is scrambling to boost supplies of Prius hybrids, Yaris subcompacts and other fuel-efficient models in high demand, Carter said.

Sales of the Prius, rated the most fuel-efficient auto in the U.S., dropped 38 percent last month as the company failed to meet demand, Carter said. ``Prius inventory is now best measured in hours, not days,'' he said. Still, the company expects sales of the model to see a ``mild'' increase from the 2007 volume.

Nissan, the third-largest Japanese automaker, raised sales 8.4 percent. The gain came from a jump in sales of Altima mid- size cars and Sentra and Versa compacts, Al Castignetti, U.S. general manager of Nissan brand sales, said in an interview yesterday.

South Korea's Hyundai Motor Co. had a 5.8 percent sales increase, while Kia Motors Corp., an affiliate of Seoul-based Hyundai, said its sales rose 9 percent. Japan's Mazda, one-third owned by Ford, sold 4.2 percent more vehicles. Fuji Heavy Industries Ltd.'s Subaru brand reported a 13 percent sales gain, while Mitsubishi Motors Corp.'s sales fell 24 percent.

All told, Asia's 10 automakers sold 671,398 cars in the U.S. last month, 32,290 more than Detroit's Big Three. Market share for U.S.-based automakers fell to a low of 44.5 percent.

Japanese Real Estate Bargains: Go East, Gaijin

The height of the real-estate bubble in Japan culminated with the observation that the land underneath the Imperial Palace in Tokyo, all 3.4 sq km of it, was worth more than all of the real-estate in California. During those now-faraway times, it seemed that the Japanese were out to buy the world. We all know how that story ended--the Japanese banking sector was saddled with bad debts for the longest time after lending to fund real estate speculation. Today, Japan remains mired in a deflationary trap which can be traced to those crazy days. Fortunately for foreign real-estate investors, the popping of the Japanese real-estate bubble means that (gasp!) some prime real-estate there is now attractive to foreigners, even in key urban centres thanks to a prolonged real-estate slump. Better yet, those in the know can avail of extraordinarily low Japanese interest rates. Whereas Japanese banks were more reluctant to lend to gaijin (foreign devils) in the past, the lack of local interest has made them somewhat less wary of lending to outsiders. As usual, commerce has a way of overcoming prejudice. Interesting stuff from the International Herald Tribune:

For growing numbers of foreigners living in Japan, their international perspective on the real estate market is prompting them to buy homes or make property investments or both. "We cannot afford to buy in England," said Tony McNicol, a British writer and photographer who has lived in Japan for eight years and is looking for a house in Tokyo, where he is living. "In England, the average price of a house is over £200,000 and average income in Britain is less than £25,000. And people won't lend you money unless you have big deposits or you buy somewhere really small."

This sense that credit is tightening and real estate values are falling around the world just as Japanese property values appear to be headed upward is spurring small but growing numbers of foreigners to buy here.

The Ministry of Justice, which runs the country's real estate registry, does not separate out the homes purchased by foreign residents. But in a country where the number of such residents - and their length of residence - has grown conspicuously in recent years, there is substantial anecdotal proof of the trend.

In the most recent figures available, the ministry said the number of registered foreign residents had grown to 2 million - a 50 percent increase in 10 years - by the end of 2006. And in other tallies, it found that of the foreigners who left Japan in 1996, 377 had lived there longer than 10 years; by 2006, that number had grown to 1,517. While the counts recorded people leaving the country, the totals do show that increasing numbers of foreigners are living there for longer periods.

For Steve Miller, a Tokyo resident for 14 years, the thought of buying in his native California faded over the years as prices there climbed. Now, "the real estate market has turned down in California but the houses are still very, very expensive," said Miller, who recently bought a home in the ancient capital of Kyoto. "To think that I can buy a house in the center of one of the world's great cities is something you just can't do in California.

"If you want to buy houses in San Francisco or L.A., prices start at $1 million, $2 million," he said. "Kyoto is affordable and close to an international airport, has got a modern industry, has universities, is close to Osaka, has beautiful nature and tourism. It has got all the things going for it."

In Tokyo, a property listed on nomu.com, the Web site of Nomura Real Estate Urban Net, a leading real estate agency, is offered at ¥73.8 million, or about $700,000. The 95-square-meter, or 1,020-square-foot, apartment in the Tsurumaki section of the Setagaya ward has a spacious living room, three bedrooms and two balconies.

Takashi Ishizawa, senior real estate analyst at Mizuho Securities in Tokyo, said that, very broadly speaking, residential real estate prices in Japan's major cities had fallen by about half since the peak of the bubble economy in the late 1980s.

However, "the value of residential properties in big Japanese cities has been quite stable" in recent years, Ishizawa said. That assessment seems to affirm Miller's hunches. "The fact that the house prices have fallen for a long time leads me to think that they are already close to the bottom, so there is not a lot of fall room for the houses," he said. "You are starting from a very distressed market."

Miller is renting out his recently renovated wooden house, located near Shijo a tourist hot spot in Kyoto. "If the worst comes to worst and the land didn't appreciate and the yen didn't appreciate, I still have a nice house to live in and to retire into," he said. "On a number of levels it was an interesting purchase."

One leading characteristic of urban properties in Japan is that the market is vast and diverse, Ishizawa said. In the 23 wards, or inner-city area, of Tokyo alone, there is a night-time population of 8.67 million; through development, real estate companies are adding about 30,000 new apartment units a year to the city's stock. By contrast, "the livable area in San Francisco is quite limited, for example," Ishizawa said. "Especially if you are talking about the safe and good neighborhoods."

In Tokyo, known worldwide for its impressive safety statistics, worry about crime is not a factor in choosing housing, something that "broadens the scope of those looking for properties in a good environment," he said. Also, home sales to foreign residents are increasing partly because the one missing piece in the home-buying puzzle has now been supplied: home loans. In the past, Japanese banks, driven in part by a traditional xenophobia, rarely extended mortgages to foreign nationals unless they had become citizens. Big Japanese banks are lending to foreigners now, although the threshold is slightly higher than for citizens.

Japanese loan providers used to take the one-size-fits-all approach, lending to a set standard at set interest rates. But in recent years, lifestyles of the Japanese began to vary, with more people working as independent contractors or becoming self-employed. In the past, "if you did not fit the prescribed standards, you did not qualify for a loan," said Takashi Yamamoto, director of mortgage services at GE Consumer Finance, in Tokyo. "We don't take that approach. We do risk-based pricing, so we lend at 2 percent if we can't lend at 1 percent, or 3 percent if 2 percent isn't enough and so on," Yamamoto said.

Yamamoto acknowledged, however, that big Japanese banks were breaking into this onetime niche of lending to foreigners and independent professionals at various interest rates. "The competition is intensifying recently," he said.

And to the home-buying foreigner, the lending rates are a boon, reflecting still very low interest rates in Japan. Fixed interest rates for terms of more than 10 years can be as low as 2 percent at leading Japanese banks, with average rates standing around 3 percent. At GE Consumer Finance, interest rates vary depending on customers' credit profiles, but the top rate now is 4.6 percent.

Most foreign home buyers are long-term residents and often are familiar with the local culture and language, a condition that reinforces their decision to go through a rather complex transaction.

"You should be able to read the documents in Japanese," said a recent German buyer who preferred to remain anonymous. "Or you should have a spouse who understands Japanese. Or else you don't have a handle on what's going on with all the papers being shuffled around."

Robert Mundell Ponders Global Currency Situation

In many ways, the relationship between the US and China has become the most important one in the global political economy at the turn of the millennium. For how long will a nation of savers accumulate the IOUs of a nation of wastrels? The answer to this question is endlessly debated by many, but few have the same clout as Robert Mundell. The so-called "father of the Euro" has long counselled the Chinese on how to handle their foreign exchange policy, and he is now [yawn] predicting a dollar crisis. Although that eventuality may seem self-evident, he also suggests that China may be contemplating a return to a Bretton Woods system of pegged exchange rates--not the so-called "Bretton Woods II," mind you. While I do not need to be convinced that the dollar is going to tank some more, I am very guarded about his suggestion that China will take the lead in re-establishing a global fixed currency regime. China's international monetary policy clout is slim to non-existent, and this situation would have to change drastically for Mundell's prediction to come true.

Nonetheless, his allusion to Chinese officialdom becoming increasingly concerned about its dollar stash with its built-in depreciation feature may be a hopeful sign that China will no longer play the dollar patsy. From Reuters:

A major dollar crisis could come within five years and China is discussing reforms to the global monetary system to protect its $1.6 trillion reserves pile, says Nobel Prize-winning economist Robert Mundell. Mundell, who has regular contacts with Beijing officials, said they are considering proposing ways to fix major currencies including the dollar and the euro, in a system similar to the one which operated under the Bretton Woods agreement from the end of World War Two until the 1970s.

"There's no doubt about it that inside the Chinese government there's a lot of discussion going on. I'm not sure how they're doing it but I know they're going to get an input from me," Mundell told Reuters in an interview. Without reform, the global monetary system is headed for a dollar crisis within years, Mundell believes.

However, he thinks the United States will avoid a technical recession during the current downturn and that the weak dollar will help it to make a recovery around autumn of this year. But its growing liabilities accumulated by its current account deficit means that it will eventually pay a high price if the current monetary set-up continues, he said. "I see the problem coming maybe in the next recession," he said. "There could be a real dollar crisis in five years."

China is worried about its pile of about $1.6 trillion in foreign reserves, built up during years of U.S. trade deficits, which loses value as the greenback depreciates.

"What you need to have is an International Monetary Fund that's going to take some of these excess dollars, put them into a substitution account inside the IMF or some other institution and then use that and create what is a new international currency," said Mundell. "This kind of proposal would be very acceptable inside China. The Chinese are thinking in terms of this," he said.

Mundell, awarded the Nobel Prize for Economics in 1999 for his work on exchange rates and optimum currency areas, travels regularly to China, where he has advised senior government officials. For years, China has come under pressure from U.S. and European authorities to allow its currency, the yuan, to appreciate, in order to make Western goods more competitive. But Beijing has resisted.

"They don't have many pre-conceptions. They don't have a belief obviously that floating is a good idea, whereas the European Central Bank and the Americans think that floating is the best of all possible worlds," Mundell said.

Fixing exchange rates would favor the euro zone, which is now battling with a euro at around record highs against the dollar, said Mundell, who has often been referred to as one of the intellectual fathers of the single European currency.

"I think the risk now is that the high euro is going to build in pressure which is going to involve deflationary pressure in the asset markets, housing and so on, and that's going to cause a problem, a nagging problem, that's going to go on for a long time as long as the euro is as high as this," he said.

"The swings in the dollar-euro exchange rate are big problems, and the problem is exacerbated by the fact that the Americans get the benefit of these swings and Europe gets the wrong end of the stick."

But Western policy makers, particularly in the United States which receives an economic stimulus from a weak dollar, would be reluctant to accept monetary change, Mundell said. "The U.S. Bush administration isn't much interested in it, they're quite happy with the dollar the way it's working, and the Europeans are really behind the zone on this. Nobody in Europe is thinking about international monetary reform and Europe would be a major beneficiary of it."

"Bernanke and Trichet are very much behind the curve on this," he said, referring to Federal Reserve chief Ben Bernanke and ECB head Jean-Claude Trichet.

Asian Crisis Redux? Hot Money Leaving Philippines

A few days ago, I cited the interesting parallels between 1997 when Asian economies defended their currencies against speculation and 2008 when they did so to help control domestic inflation. In another sign that the flashbacks to 1997 may not be over yet, the Philippine Star is reporting that the Philippines is experiencing hot money outflows of some magnitude. Whereas foreign portfolio investment in the country was quite healthy (at least by Philippine standards) in 2007, this trend seems to be reversing itself in 2008. Even if the country is rather removed from the housing contagion, the knock-on effects of domestic inflation may be making foreign investors think twice and head for safer shores. It may be a cautious sign of things to come in the region:

Portfolio investments continued to flow out of the financial market this month as foreign investors withdrew into the US and other developed markets where they consider their funds to be safer. Although officials expected investors to differentiate among emerging markets, monetary authorities said the Philippine market was not deep enough for this rule of thumb to work.

The Bangko Sentral ng Pilipinas (BSP) reported over the weekend that portfolio investments, also known as hot money, showed a net outflow of $189.9 million as of the third week of May, marking a steady departure of foreign funds from the capital market.

In contrast, data from 2007 covering the same period showed a whopping $1.587 billion inflow, with investors getting increasingly optimistic about their prospects in the market. Hot money refers to investments in the stock market and the money market that are relatively easier to take in or out of a country.

According to BSP Governor Amando Tetangco, foreign portfolio investors were not differentiating the Philippines from other emerging markets despite its steady and positive economic fundamentals. “Our stock market is just not that deep,” Tetangco said. “A deeper market attracts more investors.”

“If you have a bigger market with more liquidity, then investors will prefer that over a market that is relatively small and does not really have the kind of liquidity that investors are looking for,” Tetangco added. He said portfolio investors prefer to be able to go in and out of a market on any given day. This kind of flexibility, he said, could not be found in a market the size of the Philippine stock market.

“If your market is small, a single fund manager can drop $20 million in and prices would go haywire. If they take that much out, prices would go haywire too,” he explained. “What’s $20 million to fund managers? That’s a drop in the bucket.”

According to Tetangco, foreign portfolio investors end up paying for such fluctuations that they could cause merely by doing normal market play. “If they want to buy in, the very act sends prices up so it ends up being more expensive for them. When they want to get out, their sheer size sends prices down and they lose.”

Tetangco said the market would have to be sufficiently deep for transactions that foreign fund managers would consider normal and non-disruptive. When choosing which emerging market to invest in, this meant that the size of the Philippine market becomes a disincentive and often trumps macro-economic fundamentals such as economic growth, debt ratios and even the performance of specific corporations.

Foreign portfolio investments continued to flow out of the country in April, leading to a $113.7 million net outflow for the first four months of the year as investors shed their holdings in emerging markets. Data from the BSP indicated that registered portfolio investments resulted in a net outflow of $49.9 million in April, way below $197.7-million net outflow in March but still a reversal from the $261.9-million net inflow in April 2007.

“Principally accounting for this development were investors’ continuing risk aversion and concerns on the impact of elevated energy and commodity prices on domestic interest rates and corporate earnings,” the BSP said in its report. On a gross basis, registered foreign portfolio investments in April amounted to $885.9 million, not far from total inflows in April last year of $931 million. According to the BSP, 62 percent ($547.6 million) of total inflows went to shares listed in the Philippine Stock Exchange (PSE). Investments in peso-denominated government securities, primarily Fixed Rate Treasury Bonds or FXTBs, and placements in peso time deposits accounted for 14 percent and 24 percent, respectively, of registered investments.

However, the BSP said investment outflows were larger, totaling $935.8 million. The BSP said this consisted of divestments from PSE-listed shares (38 percent), government securities (13 percent); and withdrawals of peso bank deposits (49 percent).

Over the four-month period, the BSP said foreign portfolio investment transactions posted a net outflow of $113.7 million, down about 90 percent from $1.1 billion net inflow for the comparable period in 2007.

Political Economy of South African Tourist Stats

Tourism is big business in many parts of the world, and this certainly holds true in South Africa. While searching for something entirely different, I came across this article by the Independent Online of South Africa concerning a curious phenomenon: While South African tourism officials brag about record tourist numbers year after year into the country, it turns out that the interpretation of what "tourists" are is excessively generous. An academic critic says the figures given are grossly inflated since well over half of all visitors come from neighbouring Zimbabwe, Mozambique, Lesotho, and Swaziland. Unfortunately, visitors to South Africa from these impoverished nations hardly resemble the sort of tourists that typically spring to mind: camera-toting, souvenir-buying, and lodge-renting Westerners with cash to burn at various tourist traps.

Instead, what we have are folks from these countries visiting South Africa in what may be better called "survivalism": many of these erstwhile "tourists" have been deported or are fleeing from the countries mentioned above. While government officials defensively say that their definition of a "tourist" is in keeping with the WTO's, it certainly strains belief. The political economy of statistics can be contentious:

The statistics used by the government to boast about South Africa's ability to attract tourism are, at best, "a sleight of hand" because the numbers are not a reflection of real tourism. This was the response of Professor Loren Landau, the head of the University of the Witwatersrand's forced migration studies programme, to an analysis (by country of origin) of the statistics used by the government to claim the fastest growing tourism in the world.

In 2007, a total of 9,07-million foreigners visited South Africa - an 8,3 percent increase over 2006 - as the country broke its record for annual tourist arrivals for the third year running. But 2-million (just over 22 percent) of the 9 million official, annual visitors come from Zimbabwe and Mozambique, while another 3-million tourists come from Lesotho and Swaziland. This means that 5,2-million of South Africa's visitors emanate from four of the poorest countries in the world. The whole of Europe and North America supply only 1,7-million of the country's tourists.

"Yes, I think one does have to question whether it is honest to use figures from countries like Zimbabwe, Mozambique, and Lesotho as proof of the growth of our tourism. It's pretty much sleight of hand, it's actually a cheek, to claim that a regional migration system equals a growth in tourism," said Landau. "Look, a lot of the people from those countries spend money here. Obviously, they don't spend as much as the camera-toting tourist from Europe who goes to a game lodge, but they spend."

"But the majority of them are visiting to shop for basics or for survival reasons - and linking these figures to the tourism, saying how well these figures bode for the 2010 world cup, using these figures to boost tourism, is a bit of a stretch." Landau noted also that Zimbabweans and Mozambicans, two of the largest contingents of "tourists" to South Africa, recently have been deported or have fled the country. It is also not known how many of those people from neighbouring states, who come into the country on tourist visas, ever go home.

According to South African Tourism (SAT), a tourist is defined as "any visitor travelling to a place other than that of his/her usual environment for more than one night but less than 12 months, and whose main purpose of the trip is other than the exercise of an activity remunerated from within the place visited".

Last month, Rejoice Mabudafhasi, the deputy minister of environmental affairs and tourism, said at the Tourism Indaba in Durban: "there has been a significant growth in the tourism over the past few years. In 1994 fewer than 600 000 tourists visited South Africa per year. In 2007 we received just over nine million foreign arrivals. What an incredible feat."

Also last month, Marthinus van Schalkwyk, the minister of environmental affairs, used the same statistics in parliament when he said that the 9 million arrivals represented growth of 8,3 percent over the previous year, outstripping the average global tourism growth rate of 6 percent.

To back its claims that South African tourism has one of the highest growth rates in the world SAT said that 2,17-million visitors arrived from Lesotho, just over 1 million apiece from Mozambique and Swaziland, and 964 027 from Zimbabwe. These four countries contribute some 5,2-million of the 9-million tourists to South Africa.

African countries are the single largest source of foreign visitors to South Africa with more than 6,8-million people visiting. This is followed by Europe with 1,4-million, North America 329 000, Australasia 115 000, central and South America 57 000, the Middle East 41 000 and the Indian Ocean Islands 17 000. The vast majority of visitors from Africa arrive by land. On average, a visitor arriving by land spends two nights in South Africa while an average arrival by air spends six nights in the country.

Didi Moyle, the chief operating officer of SAT, said: "According to globally accepted definitions, all foreigners who leave their country of origin for more than 24 hours are tourists unless they are in transit, working on contract or staying in the host country for more than 365 days. The World Trade Organisation (WTO) has put massive resources into establishing these global definitions for tourism so that we can compare statistics across the world."

Moyle said that "the outcry from sections of the tourism industry is based on the belief that the term 'tourist' should refer only to people on holiday, with a camera round their neck and preferably from Europe. In WTO terminology, that person is a leisure tourist - to be counted alongside all other people travelling for whatever reason.

"If leisure tourism is the only category that interests some members of the industry, so be it. But others are interested in the bigger picture," said Moyle. "Hotels, for example, want to understand guests who might be wholesale or retail shoppers from the region. They are high spenders who visit often. "They play a critical role in the economies of Mpumalanga, Limpopo, Free State and Gauteng."

Costly Fuel: Born to Be Mild Meets Queasy Rider

The tagline for the now-legendary 1969 movie Easy Rider goes, "A man went looking in search of America / And couldn't find it anywhere." In 2008, what we seem to have in the US and the UK is "A man went looking in search for affordable petrol / And couldn't find it anywhere." My memory of Easy Rider was jogged by two Internet video clips which should be of interest in this fuel-starved age. Heck, if things get any worse, I may even be forced to reference Mad Max: a post-apocalyptic vision of those surviving a nuclear holocaust fighting for the precious last few drops of oil.

First up is this offering from the Times of London. On Thursday, a bunch of motorbike riders jammed the highway leading into Manchester in protest of high oil prices. Peter Fonda and Dennis Hopper they ain't. (The Beeb also has footage of this pseudo-hooliganism.) With a gallon of the stuff in double digit figures in US dollar terms, even the nominally more fuel-efficient cyclists have had enough. Oddly enough, other motorists whose progress was impeded by the cyclists voiced their approval. Given that about two-thirds of fuel costs go to the exchequer in the form of either gasoline taxes or VAT, the political angle is not one that can be taken lightly. This is the second mass action to hit in the UK over fuel. A few days ago, truckers jammed central London. In a short while, there may be an even bigger action:

Hundreds of bikers were cheered on by drivers as they brought roads to a standstill in the North West today in protest against the soaring cost of fuel. More than 500 motorbike riders revved off in convoy from a service station outside Manchester at 8am and staged a “go-slow” demonstration against escalating prices at the petrol pump. Onlookers – and even those caught in the disruption – applauded in support as they sat in the major tailbacks on the M62 and M60 around Greater Manchester caused by the protest.

The Highways Agency warned motorists to find alternative routes but most did not seem too put out by the added journey time and seemed to be enjoying the spectacle. Roads into the city were severely jammed as a series of rolling road blocks put in place by the Highways Agency and aimed at curtailing the protest served only to lengthen the delays. One organiser said onlookers were getting out of their cars to wave and take pictures of the bikers. “They’ve embraced this traffic jam today, that’s what we wanted,” he said.

The bikers are heading for Salford Quays. Michael Clearly, 56, a Salford garage owner, said: “I think it’s brilliant. It’s a pity they’re not blocking off Downing Street and London too.” The demonstration was the latest in a string of fuel price protests across the country as Labour backbenchers called on Gordon Brown to scrap plans for a 2p increase in fuel duty this autumn.

One of the organisers, a 24-year-old known only as 'Maverick' said: "Too many people are happy just to sit watching the news and to accept the fact that fuel prices and taxes are going up." With average prices for a litre of unleaded petrol and diesel now about 114p and 126p respectively motorbike clubs in the north arranged the protest via the internet and word of mouth. "We've decided that we can make a change and that we're going to do something about it”, 'Maverick' told the Manchester Evening News, “We're going to be that voice that stands up and fights back. We'll make a difference."

The latest figures from the RAC indicate that 67.2 per cent of every litre of petrol consists of tax and VAT. A national fuel protest is planned for June 22 when vehicles of all kinds will take to roads across the country for a “peaceful driving protest” organised via the social networking website Facebook.

The second video is on the silly side but is informative nonetheless. Here, a Georgian traffic officer laments the growing number of times he needs to provide a gallon or two to stranded motorists on Georgia's highways as they overestimate their ability to get from point A to point B by running their cars on fuel vapours, it seems. Aside from creating obvious traffic hazards, it sticks the government with a tab for injudicious parsimony.

Me? I'll take the train, thank you very much. Never before would I have thought that the internal combustion vehicle in its current form would be subject to extinction, but the signs of the end are all over the place as motoring as we know it becomes increasingly uneconomic. Next personal transportation technology, please.

SWFs Wising Up: Temasek Rebuffed Bear Stearns

The Federal Reserve-arranged purchase of Bear Stearns by the House of Morgan is still being vigorously debated, and it is unlikely that a satisfactory consensus will be reached on the matter in the near future. Was it a massive case of "moral hazard" legitimating the "too big to fail" mentality of financiers flirting with disaster through financial securitization, or a necessary step in preserving the American or even the world financial system from meltdown? Go figure. In a recent article, the Financial Times notes that Bear Stearns approached the Singaporean sovereign wealth fund Temasek with its over $100B stash prior to the Fed-JP Morgan arrangement. To Temasek's credit, it turned down Bear Stearns' proposition that it be the investment bank's "white knight."

The issues faced by Temasek are well-known: Western governments were/are becoming leery of foreign ownership by "unaccountable" foreign governments pursuing "strategic" instead of "investment" opportunities and all that. Worse, SWFs that invested in Wall Street banks reeling from the mortgage crisis in late 2007 subsequently discovered that these concerns' stock valuations still had room to fall:

Bear Stearns sought rescue financing from Temasek of Singapore in the days before its sale to JPMorgan Chase but was rebuffed, underscoring the growing reluctance of sovereign wealth funds to make high-profile investments.

Temasek received the request for money late in the day Singapore time on March 14, the Friday of the weekend when the deal to sell Bear was brokered by the Federal Reserve and other US regulators, people familiar with the matter say. Temasek, which is considered one of the few sovereign funds with the internal capability to vet complex transactions, declined for practical and political reasons.

Bear’s advisers at Lazard Freres told Temasek it needed to respond before Monday morning in New York, which would have made it hard to do any real due diligence. Temasek also feared that an investment in Bear could generate controversy given “how American” the bank was.

Temasek’s response to the Bear deal was mirrored by the response of sovereign wealth funds from the Middle East and Asia that were asked to provide capital for Wachovia – another US bank with a strong domestic orientation – but refused. Wachovia declined to comment.

People familiar with sovereign wealth funds say they are growing reluctant because they worry about being seen as “dumb money” and because they fear triggering a political backlash. Kuwait Investment Authority executives have asked companies that seek money from it to “clear our name with politicians before you talk to us”, says a top fund executive. This reluctance could become more significant if the credit crisis forces banks to raise fresh capital. Lehman Brothers is considering such a step, people familiar with the matter say.

“The availability of money from sovereign wealth funds was exceptionally helpful to a limited number of US and other financial institutions around the world but since the spotlight has been put on them, they have pulled back dramatically,” Stephen Schwarzman, founder and head of Blackstone, said this week in a video interview with the Financial Times. “They don’t want to be members of a club that doesn’t want them as members. They’ve pretty much withdrawn.”

Sex Ratios in LDCs: Amartya Sen 1, Freakonomics 0

I am somewhat late to this story (apologies), but I do believe that it warrants additional commentary. In the past, I have covered the increasingly lopsided gender imbalances in China and India [1, 2, 3]. Conventional wisdom holds that traditional preferences in these societies for male offspring--continuing the family name, receiving and not paying dowry in marriage, having better economic return potential, etc.--have been exacerbated by the widespread availability of ultrasound techniques in LDCs. Sex selective abortion has been identified as a culprit. Also, women are not given as much attention as their male counterparts after they are born. China's so-called one-child policy may have further exacerbated matters. Nobel Laureate Amartya Sen garnered widespread notice for estimating that there are 100 million missing women if normal sex ratios held instead of the lopsided ones observed in LDCs:

In view of the enormity of the problems of women's survival in large parts of Asia and Africa, it is surprising that these disadvantages have received such inadequate attention. The numbers of "missing women" in relation to the numbers that could be expected if men and women received similar care in health, medicine, and nutrition, are remarkably large. A great many more than a hundred million women are simply not there because women are neglected compared with men. If this situation is to be corrected by political action and public policy, the reasons why there are so many "missing" women must first be better understood. We confront here what is clearly one of the more momentous, and neglected, problems facing the world today.

You should be familiar with the popularity of Freakonomics that currently grips the economics profession. It has spawned a very popular book and blog. While some in the economics profession and beyond have disparaged the Freakonomics phenomenon and there has been a back-and-forth on it already, I tend to be indifferent to the controversy. As long as it produces worthwhile research output, then I would welcome it. Freakonomics owes a good measure of its popularity either to tackling offbeat topics and/or to offering non-intuitive explanations. A few years ago, Emily Oster, an economist who was then completing her PhD at Harvard, offered an explanation of lopsided sex ratios in LDCs which was indeed non-intuitive in the Freakonomics sense. She attributed a considerable part of the "missing women" phenomenon to to parents carrying Hepatitis B as suggested by Baruch Blumberg, a Nobel Prize winner in Medicine. Hepatitis B is said to promote lopsided sex ratios alongside more unsavoury factors alluded to above. Here is the abstract of her academic paper:

In many Asian countries the ratio of male to female population is higher than in the West: as high as 1.07 in China and India, and even higher in Pakistan. A number of authors (most notably Amartya Sen) have suggested that this imbalance reflects excess female mortality and have argued that as many as 100 million women are “missing.” This paper proposes an explanation for some of the observed overrepresentation of men: the hepatitis B virus. I present new evidence, consistent with an existing scientific literature, that carriers of the hepatitis B virus have offspring sex ratios around 1.50 boys for each girl. This evidence includes both cross-country analyses and a natural experiment based on recent vaccination campaigns. Hepatitis B is common in many Asian countries, especially China, where some 10–15 percent of the population is infected. Using data on prevalence of the virus by country and estimates of the effect of hepatitis on the sex ratio, I argue that hepatitis B can account for about 45 percent of the “missing women”: around 75 percent in China, between 20 and 50 percent in Egypt and western Asia, and under 20 percent in India, Bangladesh, Pakistan, and Nepal.

As with pretty much everything else, academia is very much a marketing-driven endeavour, and I do not think many would bother to argue with this point. Novelty is treasured, and I recall reading advice given to would-be academics that soliciting a "gee, that's interesting" response increases one's chances of being published in respected academic journals. (To no small degree, the appeal of Freakonomics due to its novelty has also spilled into the commercial realm.) Now, the Journal of Political Economy is among the major titles in the economics oeuvre, and therefore landing a publication there was a coup for Emily Oster. During that time, author Steven Levitt of Freakonomics fame was the editor for the JPE based at the University of Chicago. He wrote a laudatory piece on Oster's work in Slate as well. Subsequently, she took up a post at Chicago.

As you would expect, many have come forward to contest the explanation offered by Oster. It now turns out that she was wrong, and she has admitted so herself for reasons you can read about in what is, in effect, her mea culpa: "Together, the data suggests that the interaction between hepatitis B and offspring is more complicated than that posited in the original papers from the1970s and 1980s, and in Oster (2005)." In the meantime, Levitt has lauded her academic honesty. The whole episode raises questions on a number of fronts. While I am again indifferent to the Freakonomics phenomenon, these are things which should be asked:

(1) Editors of academic journals are supposed to act as impartial arbiters. Should Levitt have trumpeted the now-discredited findings of Oster in Slate in his capacity as a JPE editor?
(2) If Emily Oster's PhD was granted on the basis of research on Hepatitis B and the missing women which she now has cast doubts on, should the degree now be rescinded?
(3) In light of this episode, should academia--particularly in the social sciences--place less value on novelty?

These are important questions, and the reputations of the persons involved have probably been affected already. From the point of a political science major such as yours truly, however, more helpful research would have gone towards investigating more meaningful things with policy implications than searching for esoteric explanations for the missing women. These may be not be "freaky," but may have more practical utility in the long run. These include:

(1) To what extent have the attitudes of families in China and India shifted over time on gender issues? Have these attitudes been affected by the rapid economic growth in these countries?
(2) China and India have instituted policies aimed at discouraging sex-selective abortion. Have these been effective?

There are many meaningful questions to ask regarding this touchy topic--some of whose responses can probably benefit from the use of advanced econometrics that the Freakonomics gang is proud of using. However, asking the right questions may be more important than coming up with novel explanations in helping reduce these unfortunate occurrences. There are indeed limits to the value of novelty and number-crunching unique data sets. (If you are further interested, the Wall Street Journal has a story and a pair of blog posts [1, 2] on the subject here.)

PRC: "Don't Blame Us for the Food Crisis"

Appropriately, given changing global conditions, the UN Food and Agricultural Organization (FAO) is currently hosting its Food Summit in Rome. As you may already know, the presence of one Robert Mugabe at the summit has caused considerable consternation as he is held by many to be responsible for Zimbabwe's troubles over hunger. Anyway, while visiting China Daily, I came across the explanation below offered by Chinese officialdom at the conference as to why China is not to blame over high food prices. It is noteworthy that India and now China are taking similar strategies in passing the buck, especially to biofuel usage. As with all things, there are partial truths in these matters as high food prices are more likely to be a combination of several factors including Chindian and biofuel demand. But, don't take that line with the PRC:

Developed nations should not blame the developing countries for the rising demand for food and the surge in food prices across the globe, China's top agricultural official said Wednesday. Minister of Agriculture Sun Zhengcai said that as a developing nation, China has contributed greatly to world food security by providing for nearly a quarter of the world's population.

Some developed countries have blamed developing countries, including India and China, for the global food crisis. "The surge in food prices has been caused by multiple factors," Sun told the high-level conference on World Food Security, which began in Rome on Tuesday. He blamed rising crude prices, climate change and speculation for the food crisis. "It's not right to attribute the growing demand for food worldwide to the growth of developing countries or to specific policies of some countries."

The UN Food and Agriculture Organization (FAO) is hosting the three-day summit at a time when the world is experiencing a dramatic rise in food price. Food security is facing a threat from non-traditional sources, too, such as biofuels. More and more food products, especially corn, are being used to make biofuels, and this has the potential of creating more far-reaching problems.

A report jointly issued by the FAO and the Organization for Economic Cooperation and Development recently said the major reason behind the surging food prices is the increase in biofuel production by some developed countries.

Sun said China has succeeded in providing for its 1.3 billion people mostly from its domestic production. "And it has the capability to ensure long-term food security from domestic production." Thanks to its preferential agricultural policy, the country has reaped a bumper harvest in the last four years, with its production crossing 500 million tons last year.

China is committed to contributing to world food production and agriculture. "The country is using its expertise in agriculture, such as cultivating hybrid rice, to help other developing countries to increase their food production," he said.

Visa & Mastercard: Today USA, Tomorrow the World

Like many, I hold the business channel CNBC in contempt. To me, CNBC is to financial journalism what "pro wrestling" is to sports. Lo and behold, however, I have actually come across a rather helpful article from [gulp!] the CNBC folks--wonders never cease. It concerns how Visa and Mastercard stand to make a ton of $$$ despite US consumers being in rather dire straits. Yes, revolving debt, the sort borne by credit card users, is near a trillion dollars Stateside. The CNBC article describes how credit card debt may be the next shoe to drop as more Americans are forced to use plastic for everyday purchases and are hit by high interest rates on revolving credit in the process. Note though that credit risk is not borne by Visa and Mastercard, but by financial institutions which underwrite this sort of consumer credit.

Meanwhile, the credit card companies amass revenues per transaction using their branded cards. So, hapless Americans forced to resort to Visa and Mastercard more frequently are fattening up these companies' wallets, but it is the banks who will ultimately suffer from rising credit card delinquencies. Yes it's twisted, but it's also genius in a demented sort of way. Better yet, these companies are setting their sights abroad to replicate the American model. That means you, BRICs (Brazil, Russia, India, and China). Although consumers in those countries may be more wary of falling into debt traps than lemming-like Americans, "The World's Debt Lovers"®, there are still fortunes to be made as they do away with cash and use debit cards for everyday transactions to take advantage of cashless convenience and/or incentives for their use. Priceless, as they say. From CNBC:

"Right now what we're seeing is the US consumer losing their disposable income as they have to spend more and more on necessities because of higher prices for gas and food," says Ron Ianieri, a market strategist and co-founder of the Options University investor education center. "Normally when you have a certain budget and you can't keep up with the budget one of the easy steps is to extend that budget using credit."

One of the main problems with that is US consumers--and their counterparts in Europe as well--already are delinquent on their credit card payments in numbers not seen in six years. The Federal Reserve last week said credit card delinquencies hit 4.86 percent in the first quarter in 2008, while revolving debt--or the type used in credit purchases--hit $957.2 billion in March, a 7.9 percent increase.

As all that risky, high-interest debt keeps accumulating, consumers will find themselves deeper in a hole that threatens to keep the economy in its sluggish state. Economists worry that the problems are being exacerbated by consumers using credit not only to buy big-screen TVs and patio furniture, but also to pay their mortgages and shop for groceries.

"There's a significant risk to people who are using credit cards to help them try to bridge the gaps that they're facing," says Sean Snaith, director of the University of Central Florida's Institute for Economic Competitiveness. "The reality is the economic picture isn't going to clear up instantaneously."

Meanwhile, the banks that underwrite the credit card debt stand to lose as the delinquencies continue to rise. Standard & Poor's on Monday issued a dour forecast for banks in 2008, in part because of their exposure to bad debt. Ianieri ranks his "starting five" in terms of exposure to risky debt: Lehman Brothers, Citigroup, Bank of America, UBS, and Merrill Lynch.

"It's a disaster, it's a time bomb," Ianieri says. "The credit crisis is a lot more severe than it's being made out to be. I think the government is doing everything it can to keep the severity of this situation under wraps from the general population. I think they're just trying to bide time for these banks."

For the credit card companies, though, it's a different story. Visa and Mastercard back comparatively little of the credit actually issued through their cards, meaning they have a low level of risk for defaults and other payment issues. They get paid a fee each time someone uses their cards, and the banks that issue the cards assume responsibility for the debt.

As such, investors and analysts are fawning over the two companies in the face of consumer cash issues and the growth of emerging markets, where credit cards are only beginning to find popularity. "The reality is probably some of it is hype, but some is based on fact," Snaith says. "'Check or cash' has been replaced by 'debit or credit' and that's going to be a continuing trend not just in the US but spreading worldwide."

In a note issued last Thursday, Lehman Brothers raised its outlook on Mastercard, escalating its price target to $335 from $300. Other analysts have joined in the enthusiasm, with Stifel Nicolaus on Tuesday jacking up its price target from $312 to $367. Visa has gained from the enthusiasm for Mastercard. As of noontime trade Tuesday, both Visa and Mastercard were up more than 12 percent since May 23.

"They have no risk. It's per transaction," says Nadav Baum, managing director of investments at BPU Investment Management. "That's why Visa and Mastercard are bucking the trend when it comes to the other financial companies. Even though they group them as a financial company, they're really not."

Lehman analyst Bruce Harting, in his research note on Mastercard, pointed out that the company believes it can duplicate its US business model in countries including Brazil, Hungary, Poland, Russia, India and China, nations where it projects 39 percent revenue growth.

Similarly, Americans shopping abroad might be more inclined to use their plastic as the dollar begins to gain ground against other currencies. A purchase in euros now could cost fewer dollars by the time the next monthly bill rolls around if the US currency continues to appreciate. "That's another reason why Mastercard and Visa will continue to do well," Baum says. "It's all hand-in-hand."

Finally, there are the responsible consumers who pay their bills in full every month and are joining the legions of people who no longer want to carry cash. They enjoy taking advantage of the rapid growth of retailers and restaurants offering debit options, plus using points they can accumulate by utilizing their cards.

"The danger is in painting with a broad brush and casting all consumers as reluctant or unable to spend," says Greg McBride, senior analyst at Bankrate.com. "There are a lot of consumers that are not in the state of distress and can continue to spend in a manner that's not very different than a year or two ago when the economy was stronger. The card-holders that pay their balance in full every month, the incentive is for them to use the cards as much as possible."

The New World Order: Saudi Exceed London IPOs

With more economic activity headed for the developing world, the London Stock Exchange has become rather subprime. For a measure of how far London has fallen, consider that the volume of initial public offerings (IPOs) on the Saudi Stock Exchange (Tadawul) has exceeded that on the London Stock Exchange through the first five months of 2008. Indeed, if it weren't for the Visa IPO, the global leader in IPO volume would be Saudi Arabia and not the New York Stock Exchange. Go East, young man, go East. From Reuters:

The Saudi Stock Exchange surpassed London to be the world's second busiest market for initial public offerings in the first five months, Thomson Reuters data showed.

The New York Stock Exchange, thanks to the $19.7 billion listing of Visa Inc, topped the global IPO league table with 12 new issues raising a combined $24.4 billion, up 173 percent year on year.

The total of Saudi Stock Exchange IPOs jumped 322 percent from a year earlier to $8.5 billion as it welcomed Alinma Bank 1150.SE, which raised $2.8 billion in the country's biggest IPO in April.

The Saudi bourse also benefited from the $1.87 billion listing of mobile phone company Zain Saudi Arabia, an affiliate of Kuwait's Mobile Telecommunications Co, and Petrochemical firm PetroRabigh's 2380.KE $1.2 billion float.

Despite growth on some exchanges, global IPO activity fell 36 percent to $65 billion in the first five months as the global financial crisis dented investor appetite for equity.

IPOs on the London Stock Exchange's main market were down 74 percent to $5.6 billion, while Hong Kong Stock Exchange, which ranked fourth in the global IPO market, attracted IPOs totalling $5.2 billion, a 57 percent decline from 2007.

Dead Horses II: WTO NAMA Negotiation in Reverse

Despite Pascal Lamy's best efforts at presenting a positive outlook on the current state of WTO negotiations, the wheels of the Doha wagon are coming off fast. With the agricultural market access negotiations already in a parlous state, it is perhaps unsurprising that things are no better on the non-agricultural market access (NAMA) front as negotiations are going nowhere there, either. Or, to be more precise, they may be going somewhere--backwards. Canada's ambassador to the WTO Don Stephenson, who is the chief negotiator over NAMA, says that there is no point in further talks given the current state of affairs. From Thomson Financial:

The WTO's chief negotiator on freeing up access for industrial products said on Monday he sees no point in further talks until member states are ready to compromise over tariffs and other key sticking points. The 152 members of the WTO need to 'work among themselves to bridge their positions and until they do that, it is pointless to convene NAMA negotiating group sessions,' ambassador Don Stephenson said.

Industrial products come under the rubric of 'non-agricultural market access' (NAMA) as part of World Trade Organisation talks launched in 2001 on liberalising the global trading system. Stephenson said that member states were more divided than ever after he had issued a fresh text aimed at spurring stalled negotiations that are key to any success in the WTO's long-running Doha trade round.

'Over the course of the week of discussions, things actually got worse rather than better. We got farther from a text that could be put before ministers rather than closer,' he told reporters. 'Some issues that were either resolved or at least nearly resolved were reopened, some extreme positions were maintained, some positions were perhaps even arguably made more extreme,' he added.

The NAMA text proposes that about 30 emerging market countries would agree to reduce their customs duties to a maximum level of 19 to 26 percent. The more the tariffs are lowered, the greater would be the right of these governments to protect certain 'sensitive' areas. Developing countries have been particularly forthright in their criticism, with India slamming the proposed tariff cuts on industrial goods as a 'total mess' that need to be redrafted.

Washington also cast a downbeat note, with top trade official Susan Schwab describing the new texts on NAMA and agriculture as 'disappointing'. 'Unfortunately recent developments in Geneva have moved the negotiations in the direction of less balance and less market access,' she said.

But Stephenson, who is also Canada's ambassador to the WTO, said it was high time for countries to take 'responsibility' for the negotiations and strive to bridge the gaps in their positions. 'It's their lack of work to try to reach a consensus, it's their lack of engagement in the process, it's their failure to negotiate' that has led to the current impasse, he charged.

Around 30 ministers are set to hold an informal meeting on the sidelines of a summit by the Organisation for Economic Cooperation and Development (OECD) in Paris on Thursday, with WTO director general Pascal Lamy also attending. 'He'll have to ask them whether or not they're ready to negotiate amongst themselves,' one diplomat said last week -- adding that he expected a negative answer.

Dead Horses I: US Loses Cotton Appeal at WTO

To no one's real surprise, the US has lost its appeal over cotton subsidies at the WTO involving Brazil. Just posted on WTO site are the findings and conclusions of the WTO appeals court on the matter. DS 267 has been a long drawn out case, but it appears that we have reached the bitter end. Although the US claims it has since removed the offending supports, that apparently did not sway the opinion of the WTO's appellate body. Brazil will thus be able to impose sanctions worth $1B a year on US imports, likely involving intellectual property (IP). Towards the end of the following Reuters article, there are also hints at potential difficulties with the new farm bill over cotton. Not only does the new farm bill seem to reinstate contested subsidies, but there will also be more trouble down the road if and when cotton prices fall again:

The United States lost an appeal on Monday in its long-running dispute with Brazil over U.S. subsidies for cotton farmers at the World Trade Organization (WTO). The ruling opens the way for Brazil to seek WTO approval for more than $1 billion a year in sanctions on U.S. imports, which it has suggested it could impose on services or by suspending U.S. intellectual property rights.

In a 184-page ruling, the appeal body, the WTO's top court, recommended that the WTO's dispute settlement body should request the United States to bring its measures into line with international trade rules. The appeal body backed findings on almost all counts, issued in December last year by another dispute panel, that the United States had not complied with earlier rulings in the case brought by Brazil in 2002.

Last December's compliance ruling confirmed that U.S. marketing loan and counter-cyclical payments had led to an increase in U.S. production and exports of cotton that depressed world prices. Washington had appealed the ruling, arguing that changes to its farm programs had brought them into line with WTO rules.

The Bush administration on Monday said it was "very disappointed" by the new ruling, suggesting that higher cotton prices made the case irrelevant. "The United States has not been, and is not, making any payments tied to cotton production. Therefore, there is no basis to say that U.S. payments are today having any impact on cotton prices," Sean Spicer, a spokesman for U.S. Trade Representative Susan Schwab, said in a statement.

U.S. cotton subsidies have become one of the most contentious issues in the WTO's Doha trade talks, which seek to expand world trade and give a leg-up to developing countries. Developing country producers, especially in Africa, believe the U.S. subsidies depress prices and squeeze their own poor farmers out of the market. African producers are calling for an 82 percent cut in the round to U.S. trade-distorting cotton subsidies -- bigger than the 66-73 percent proposed for other U.S. farm supports.

Washington has yet to file a counterproposal, but there is strong political backing across Southern states for continued support for the politically influential industry. The U.S. government paid cotton farmers $2 billion to $4 billion in trade-distorting subsidies in most recent years.

But price-linked subsidies have fallen in step with higher cotton prices, which have risen over the past year due mainly to lower cotton sowings and expectations that world cotton demand will increase at a steady cadence. Based on the spot price of cotton futures in New York, fiber contracts were trading around 46 cents a lb in May 2007. They hit a 12-year top over 90 cents in March and closed last Friday at 65.74 cents.

The U.S. cotton industry said the ruling was "out of date and out of touch with existing market conditions. It is simply not the case that world cotton prices are currently suppressed or were ever suppressed," the National Cotton Council said in a statement. The Memphis-based group also noted that one trigger for subsidies, the cotton target price, had been lowered in the 2008 U.S. farm law enacted in late May.

The new farm law sets the target price for upland cotton at 71.25 cents per lb from 2008, down slightly from the earlier level of 72.4 cents per lb. But the new law also introduces an incentive of 4 cents a lb for cotton mills, which critics complain is merely a revival of a subsidy eliminated after Brazil's earlier WTO victory.

WTO DG Pascal Lamy = Don Quixote?

As I've said before, WTO Director-General Pascal Lamy has one of the most difficult jobs around in pursuing the successful completion of the Doha Development Round. Jonathan Dingel over at Trade Diversion points us in the direction of this useful paper on what has brought the WTO to its current impasse. Needless to say, there are easier jobs than selling further global trade liberalization in 2008 like selling copies of "Guitar Hero III" to the Amish or making Amy Winehouse look presentable. Anyway, my current miscellaneous ramblings have been jogged by yet another statement by Pascal Lamy that, yup, a deal is juuuuust around the corner. It may be inescapable as the WTO boss to have to make such statements at regular intervals despite resounding evidence to the contrary. However, it all begins to sound as if the WTO headquarters is not in Geneva, Switzerland, but in Don Quixote's La Mancha. So, let us begin with Pascal Lamy for the optimistic take on matters via Reuters:

World Trade Organization Director-General Pascal Lamy said on Sunday developed and developing nations could still wrap up the Doha round of talks on a global trade deal this year.

"I still believe it's doable this year," Lamy told Reuters on the sidelines of a meeting of trade ministers from the 21-member Asia-Pacific Economic Cooperation forum in the southern Peruvian city of Arequipa. "We know how to get there. We need to cross this bridge of agricultural subsidies, industrial tariffs and agricultural tariffs soon, now, because otherwise we will not have enough time to cross this bridge to finish the road."

The WTO's Doha negotiations to bring down barriers to global trade are now in their seventh year but face a crucial test in the next few weeks, after which the U.S. presidential election may cause years of further delay. APEC trade ministers issued a manifesto in Arequipa on Sunday urging negotiating nations to take immediate steps to prop up the limping Doha round.

The round has sputtered and gained momentum a handful of times since it was launched in November 2001, snared usually on differences between developed nations and major developing countries like China and India.

"We have been working on these for years and years and there's now something on the table that with a few adjustments can materialize and I don't think that there is a sort of trade-off between ambition and timing," Lamy said. Intense negotiations this year have helped push along talks, especially on agricultural issues that are key to a successful round. In industrial goods, the other key hurdle, diplomats say WTO members are at last starting to engage seriously.

Lamy said countries were progressing and all the actors were ready to smooth out remaining issues, including areas like anti-dumping rules, fishery subsidies, environmental goods and environmental services. "Does this mean success is guaranteed? No. It remains a negotiation and we still have to try and clean the ground," he said.

I do not need to point out that Pascal Lamy has made nearly similar, rather optimistic statements over and over again. Facts on the ground, though, are rather bleaker than this. As Indian industrialist Rahul Bajaj notes, it is curious that the chairpersons of the agricultural and non-agricultural market access discussions are from developed countries in what is supposed to be a "development" round. As Agence-France Presse notes below with far more circumspection than Reuters, this is turning out to be a rather quixotic enterprise. It also appears to be a more accurate representation of the status quo:

The WTO has finally created unity among its 152 members -- but unfortunately for head Pascal Lamy, the only thing all states agree on is that the prospect of a new trade deal is still as far away as ever. Lamy said the publication of new texts on agriculture and industrial goods -- key sticking points for nearly seven years of torturous negotiations -- clarified remaining obstacles to an agreement in the Doha trade round. "These revised negotiating texts illustrate clearly where convergence lies among the WTO members ... we are getting closer to our end game," Lamy said.

The round was launched in the Qatari capital in November 2001 with the aim of reaching a deal by 2004. But it has foundered ever since, mainly over disputes between developed and developing countries on agricultural subsidies and industrial tariffs.

The WTO chief has long said a deal is "doable," and has made it clear he would like to see Doha wrapped up before US President George W. Bush leaves office early in 2009. But his was a lone voice of optimism this week as key WTO members made clear their objections to the texts, casting further doubt on the likelihood of any imminent breakthrough.

"The new draft texts on agriculture and manufacturing are disappointing," said top US trade official Susan Schwab. "Unfortunately recent developments in Geneva have moved the negotiations in the direction of less balance and less market access," she bemoaned.

The European Union has been a main advocate of trade liberalisation but there are increasing signs of hostility among some of its 27-member states. French trade minister Anne-Marie Idrac said that "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."

Ireland, where farmers constitute a significant political lobby, cast doubt on the wisdom of a deal at all costs. "Our view is you need substance. It's not about completing this just because there's six months left for the US presidency," new foreign minister Michael Martin said in Brussels this week. Asked if he thought therefore that it would be wise to wait until after the US election he replied "that would be my view, yes."

Developing countries were also forthright in their criticism, with Indian commerce secretary G.K. Pillai slamming proposed tariff cuts on industrial goods as a "total mess" that need to be redrafted.

The latest text on industrial goods -- known as non-agricultural market access (NAMA) in WTO parlance -- proposes that about 30 emerging market countries would agree to reduce their customs duties to a maximum level of 19 to 26 percent. The more the tariffs are lowered, the greater would be the right of governments to protect certain "sensitive" items.

WTO sources sought to portray the various reactions to the texts as just posturing, but other observers believe that time is rapidly running out for any deal this year. Lamy had initially hoped to bring ministers to Geneva over Easter to hammer out "modalities" -- the key numbers for tariff cuts that would form the basis for any comprehensive deal.

The timetable has repeatedly had to be put back as the WTO's 152 member states prove incapable of reaching consensus despite intensive technical discussions. "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," France's Idrac said.

However, some ministers will hold an informal meeting in Paris on Thursday on the margins of a summit by the Organisation for Economic Cooperation and Development, which Lamy will also attend. "He'll have to ask them whether or not they're ready to negotiate amongst themselves," one diplomat said -- adding that he expects a negative answer. "We are very far from having the basis for a serious discussion. On industrial goods, we're not there at all," he warned.

Do SWFs [Heart] Subprime? The UBS Caper

This post is a follow-up to a post I made earlier about "SWFs Not Seeking (Ineligible) Wall Street Firms." Although various sovereign wealth funds more or less proved to be the funders of last resort to these subprime-laden banks towards the end of 2007, SWFs have been remarkably silent in 2008 on the equity stakes front. As stock prices of these banks have fallen markedly since the late 2007 round of official purchases, foreign buyers have stayed away in droves so far this year. You could say that they are waiting for the subprime detritus to work its way out of the financial system before taking another plunge. Once bitten, twice shy.

Recently, however, the Financial Times notes that SWFs may be on the prowl for, of all things, distressed mortgage securities offloaded by the likes of UBS. In particular, half of the funding for investment firm BlackRock's deal to buy $15B in UBS mortgage securities is said to have come from SWFs. Interesting? It certainly is so. Although it may fuel optimists' notion that the mortgage mess is nearly "bottoming out," the market timing of SWFs has not exactly been exemplary as of late:

Sovereign wealth funds have provided more than half the equity for the BlackRock fund that bought $15bn of troubled mortgage debt from UBS this month, people with knowledge of the matter say.

The BlackRock deal highlights the rapidly evolving strategies of the sovereign wealth funds, which initially sought to take advantage of the turmoil in global markets by investing directly in beleaguered financial institutions. However, these rescue financing deals led to fears of losses by the funds – and a political backlash in the West. This has led sovereign wealth funds to look for lower-profile opportunities, often by investing through private equity funds.

The BlackRock deal marks one of the first big forays into mortgage debt by the sovereign wealth funds, providing ammunition for analysts who argue that the mortgage market is recovering. BlackRock raised $3.75bn in equity for the fund that bought the UBS mortgage debt. The rest of the money was borrowed from UBS itself, UBS has said.

Some of the more sophisticated sovereign wealth funds, such as Kuwait Investment Authority, have been looking at acquiring real estate assets in the US, either directly or indirectly. KIA also has acquired stakes in real estate investment trusts, which are trading at bargain levels.

BlackRock has long-standing ties with Middle Eastern and east Asian sovereign wealth funds such as Government of Singapore Investment Corporation. Next week, BlackRock’s founder, Larry Fink, is taking his board on a swing through the Middle East with a stop in Kuwait, the KIA said in a press release.