Maybe the Washington Consensus Wasn't So Bad

The mere mention of the "Washington Consensus" is all you need to get anti-globalization types foaming at the mouth over American imperialism, corporate globalization, and other sorts of unmentionables. Even I am no fan of the standard recipe of liberalization, deregulation, and privatization. Especially after Joseph Stiglitz released his polemic Globalization and Its Discontents, the term has been associated with quite negative connotations. Indeed, some have even mooted the existence of a more LDC-friendly "Beijing Consensus." If I can make money off it, I'll even write an "IPE Zone Consensus" for you (quote your price and send me an e-mail ;-)

Seriously, though, the Financial Times has a very fine article revisiting this familiar Asian financial crisis-era terrain, from Suharto signing another bailout package for Indonesia to America's perceived dominance at key multilateral economic institutions like the IMF. The article cleverly contrasts "market-friendly" prescriptions made then by Americans (and also the laissez-faire Brits) compared to now, when these very same countries are following a new recipe of, er, de-liberalization (e.g., short-sale bans), re-regulation (new housing overseers galore), and nationalization (Northern Rock, AIG). Why, maybe it's the [sigh] "Paulson Consensus."

Is it hypocrisy that rich countries don't administer the same medicine they gave to destitute LDCs a decade ago, preferring an easier route not involving belt-tightening and other unpalatable measures? I have my own opinion, though you can probably answer this for yourselves. Nevertheless, this loosey-goosey bailout festival is making me think that, yes, the Washington Consensus had some virtues--although this may not have been communicated very well at all. Here is the FT revisiting it in a side feature, though I highly encourage you to read the entire article:

The package of reforms that runs from opening up trade to liberalising capital flows is typically labelled the “Washington Consensus”. But as the originator of the phrase wearily points out, this is something of a caricature.

John Williamson of the Peterson Institute for International Economics in Washington invented the expression in 1989 to describe the standard set of 10 policy prescriptions for Latin American countries that emanated from the International Monetary Fund, the World Bank and the US Treasury. But the deregulation of financial markets and the free flow of capital, widely blamed for making developing countries vulnerable to financial crisis, were not on the list.

Mr Williamson says most of the to-do items are relatively uncontroversial and have been implemented even by centre-left governments such as that of Luiz Inácio Lula da Silva in Brazil: competitive exchange rates, fiscal discipline, property rights and shifting spending from general subsidies towards investment in infrastructure, education and health. “There is a lot more consensus around issues like trade liberalisation than there is about following a particular model of rapid financial deregulation,” he says. “The expression ‘Washington consensus’ got a bad press.”

Lula is a "Washington Consensus" follower? Perhaps not in the ideological sense, but his reforms do have elements to its that are eerily familiar. Among other things, trade before capital liberalization. Heck, maybe Bush 'n' Brown should re-read their John Williamson before issuing more "get out of jail [nearly for] free" cards.

Not Even Jah the Maker Will Save America Now

I was confident that the $700 billion giveaway package wouldn't pass in the US House. Hence, I was surprised to see the Dow Jones Industrial Average momentarily fall by 700+ points. Except for the cheerleaders at CNBC, did anyone really expect this hackneyed piece of legislation to pass? The folks over at MarketWatch have put a headline in what I reckon is 70-point font to not-so-subtly underline the market tumult. (Click on the image to appreciate just how large it is.) What font size is this according to this Bob Marley and the Wailers fan? "Not Even Jah the Maker Will Save America Now"-size font. Expecting the debt-addled US government to save American financial markets from its current morass is rather delusional.

Some additional thoughts:

(1) Consider that a ban on short selling stocks was in place on the biggest single day decline in the DJIA. I guess these bans don't really work when sentiment is so bad. (The current ban expires on Thursday.)

(2) Some good news overlooked in all this mayhem is that the US savings rate is actually rising. For three consecutive months, personal savings as a percentage of disposable personal income have been at or above 1%--not much, but hey, it's a start given that they have rarely been at or above the 1% level for three years.

What Would Jesus Do About the MDGs?

My fellow Catholics should be apprised that our church is closely following the financial markets. Why? Is the Holy See a day trader? Probably not. Like Jeffrey Sachs, the Vatican's permanent advisor to the UN notes the irony behind rich Western countries finding oodles of money to bail out their financial systems yet not finding more modest amounts to help meet the Millennium Development Goals. My stock retort, of course, would be that were the US to send more aid, it would only borrow more from LDCs like Asian exporters and Mideast oilers to send to Africa. In effect, the US wouldn't really be "aiding" Africa (it is quite hard up), but merely acting as an intermediary.

Setting aside the question of the efficacy of the MDGs (which I personally harbor doubts about), the Vatican does raise an important question of what the obligations of wealthy Westerners are to their less fortunate brethren. Alas, that's a post for another day. This from the Catholic News Agency:

On Thursday, Archbishop Celestino Migliore, Holy See permanent observer to the United Nations in New York, addressed the 63rd session of the U.N. General Assembly which is considering the Millennium Development Goals. The archbishop asked the assembly how the world is able to find funds to save financial systems in developed countries, but cannot find the resources necessary to invest in the "most destitute" ones.

Speaking English, Archbishop Migliore highlighted how the MDGs "will be achieved if their attainment becomes a priority for all States." To do so, he continued, "we need to foment a new culture of human relations marked by a fraternal vision of the world, a culture based upon the moral imperative of recognizing the unity of humankind and the practical imperative of giving a contribution to peace and the well-being of all."

"The money and resources that the least developed countries need in terms of direct aid, financial assistance and trade advantages are meager compared to the world-wide military expenses or the total expenses of non-primary necessities of populations in more developed countries," he added...

"In these days we are witnessing a debate on an economic rescue aimed at resolving a crisis that risks disrupting the economy of the most developed countries and leaving thousands and thousands of families without work. This rescue of enormous proportions, which amounts to many times the whole of international aid, cannot but raise a pressing question. How are we able to find funds to save a broken financial system yet remain unable to find the resources necessary to invest in the development of all regions of the world, beginning with the most destitute?"

"For this reason," he concluded, "the globalization of solidarity through the prompt achievement of the MDGs established by the Millennium Declaration is a crucial moral obligation of the international community."

The "De-Feminization" of Philippine Labor Exports

The Philippines is known as a labor exporting country par excellence. In the absence of local opportunities, millions upon millions of Filipinos have gone abroad in search of gainful employment. Last year, it sent an all-time high number of laborers abroad, eclipsing even the 2006 mark when overseas contract workers first topped a million. As long as the local economic situation does not improve significantly, Philippine labor exports look set to continue. Certainly, the sheer number of persons working abroad is astounding.

An interesting trend though is the seeming de-feminization of labor exports. When the Philippines first started sending labor abroad in large scale in the mid-Seventies, most were headed to the Middle East where the oil boom meant considerable demand for foreign workers in construction and related industries. After a while, though, the country started sending women in significant numbers in less-skilled (household service workers) and more-skilled (nurses) occupations as well as those somewhere in between (entertainers). More recently, it seems Filipino women going abroad have decreased in number. This is due mainly to two things. First, Japan was cited for "trafficking in persons" by the US State Department as quite a few entertainers from the Philippines were thought to have been exploited in the sex trade. Naturally wary of being stigmatized as such by the US, Japan raised the entry requirements for female entertainers from the Philippines and elsewhere. Meanwhile, the Philippine government itself has raised the requirements for allowing household service workers to go abroad.

That is on female side. On the male side, it is unsurprising that high energy prices have caused another boom in the Middle East. Aside from improving the energy infrastructure, various Middle Eastern nations have begun real-estate mega-projects funded out of energy revenues in hopes that such projects will give the region a lifeline when the next oil slump hits and, ultimately, oil and gas reserves are depleted. Given the shortage of locals to perform construction-related tasks, these countries have once again turned to the Philippines for making up the shortfall of engineers, . Needless to say, men are required for these jobs. From the Philippine Star:

A growing demand for male workers in the Middle East and a new policy on household service or domestic workers (HSWs) has seen the gender of Philippine labor migration shift towards males again in 2008, the Philippine Overseas Employment Administration (POEA) said Tuesday.

"When we used to see a 60-40 ratio of female OFWs (overseas Filipino workers) before, we are seeing more and more males now," POEA Deputy Administrator Carmelita Dimzon told reporters after a press conference at the Philippine Institute on Development Studies. Dimzon said the demand for male workers in Saudi Arabia and parts of the Middle East where so-called “mega cities” are being built is one of the factors for this "de-feminization." "It is unlikely that Saudi and the Middle East will hire female welders and pipe fitters," she said. "Maybe in Australia and Canada, but not in the Middle East." [Movie buffs take note: the Middle East is hardly "Flashdance."]

The POEA official also said the 2007 POEA policy on HSWs also helped reverse the feminization trend in labor migration, which started in the early 2000s. Over the past year, when the POEA policy increased the age, salary, and training requirement for leaving HSWs, the number of women leaving for overseas employment decreased by 47 percent.

The tightened Japanese immigration policy on entertainers, the bulk of whom are women, is also a contributory factor, Dimzon said. Before the new Japanese policy took effect a couple of years ago, the Philippines sent some 72,000 entertainers to Japan every year. Last year, she said, the number of entertainers deployed to Japan had gone down to 7,000.

EU's Mandelson: SWFs = "Savior Wealth Funds"

I was monitoring Bloomberg when an interesting story scrolling on the ticker caught my eye entitled "EU's Mandelson, Airbus's Enders See 'Savior' in Sovereign Funds." It seems the intrepid EU Trade Commissioner and the Airbus big kahuna Tom Enders have recently been to China. While there, they reckoned that sovereign wealth funds (SWFs) ought to take a bigger role in global economic affairs by using their funds to help cushion the blow from the ongoing credit turmoil by--you guessed it--providing Western firms with increasingly scarce funding.

Nevermind that the SWFs came a cropper riding to the rescue of ailing Western banks in 2007 as the share prices of these banks had much more to fall. What Mandelson and Enders seem to imply here is, "Hey, so you got burned investing in the smoke and mirrors world of high finance. Instead, why not invest in tangible things like manufacturing?" Once more, I am wary of Western preconditions of wanting to disavow SWFs of controlling stakes in Western firms, be they in finance or manufacturing. When you're desperate for funding to stave off worse things, foreign ownership looks like a helluva better proposition than, say, receivership. Anyway, to the article:

Sovereign wealth funds will become major sources of funding for Western companies as financial markets reel, said European Union Trade Commissioner Peter Mandelson and Airbus SAS Chief Executive Officer Tom Enders. Companies will ``lack a lot of money for years to come'' because of the financial crisis in the U.S. and Europe and will push their governments to be more open to foreign investments, Enders said at a World Economic Forum meeting in Tianjin, China. Mandelson called for regulation to encourage the investments [ho-hum].

Europe's top trade official has used a four-day visit to China to add his voice to calls for the Asian nation and other fast-growing emerging economies to ``take up the slack'' in the global economy, as the U.S. government works out a $700 billion plan to bail out its banks and keep credit markets functioning, ``The sovereign wealth funds in the present context might better be termed savior wealth funds,'' Mandelson said today. ``We need to find sensible ways and a proper basis on which sovereign wealth is able to deploy and use its resources to inject much-needed liquidity into the financial system.''

Countries including China, Russia and Kuwait have set up funds to seek better returns on cash reserves by investing in equities and other assets abroad. The rising pool of money has sparked concern among some lawmakers in Europe and the U.S. that the funds may be used to gain control over strategic industries.

``You see already major companies, European, American, touring those countries that have the funds because they foresee the need for funding, and these companies will also try to persuade governments'' to be more open, Enders said. ``One of the big changes we're going to see is the acceptance of sovereign wealth funds.''

Sovereign wealth funds, which own about $3 trillion in assets, may almost triple their investments in the next five years as oil and gas prices surge, State Street Corp. estimated in July. Estimates of sovereign funds' asset growth are ``conservatively'' placed at 17 percent a year, said State Street, the world's biggest money manager for institutions...

Both Mandelson and Enders said clear regulation is necessary to smooth the way for greater acceptance of sovereign funds. Mandelson in June suggested the funds could ease political resistance to their investments by signing a code of conduct that they seek only profit, not control of industries.

How Hard Will Asia Be Hit By US-Led Slowdown?

For those of from Asia, I am afraid the prognosis isn't as swell as those who hold a "decoupling" theory would suggest. In fact, things may be even worse now than they were in the past as far as lower dependence on exports to the US and other Western economies is concerned. Although I keep hammering this point, there is only so much Asian countries can do to spur consumer demand in the US that they fail to do at home. The two natural limits to US mega-consumption are becoming more evident these days. Respectively, they're called "bankruptcy" and "foreclosure" (though they often go together). In a recent TIME op-ed, veteran Asia hand Stephen Roach offers this:

The U.S. consumption binge was fodder for export-led economies everywhere. This was especially the case in Asia, which since the turn of the century has been the world's fastest-growing major region. In search of rapid growth in order to achieve its development and poverty-reduction objectives, developing Asia viewed America's consumption binge as manna from heaven. Consumption-deficient Japan had a similar response, as did large, newly industrialized economies such as Taiwan and Korea.

Indeed, exports provided high-octane fuel for Asia's growth, accounting for more than 45% of pan-Asian GDP in 2007, which was a record and was more than 10 percentage points higher than the share prevailing in the mid-1990s. But this left the region more dependent on external demand than ever before. And with the American consumer — the biggest source of that demand — now in trouble, Asia's export-led growth formula is getting squeezed...

Asia's adjustments should not be surprising. The global boom of 2002 to mid-2007 was an outgrowth of the powerful linkages of globalization. No region benefited more from this connectedness than Asia. These linkages are just as strong on the downside of the global business cycle as they are on the upside. Connectivity is now hitting Asia head-on.

The entire Roach piece is well worth reading as it sets out the global implications of the current US-led slowdown concisely. Meanwhile, Bloomberg has anecdotal evidence that Japan is preparing for an export slowdown next year as Japan Air's cargo flights to LA are being cut almost by half:

Japan Airlines Corp., Asia's most- indebted carrier, will reduce cargo flights to the U.S. as a slowdown in the economy cuts demand, the Nikkei newspaper reported. The airline will end cargo flights between Narita and New York and cut flights to Los Angeles to 10 a week from 19, Nikkei said, without saying where it obtained the information. The reductions will start in January, Nikkei said. The airline cut cargo routes to Atlanta and San Francisco this past January, the newspaper reported.

The prognosis for Asia isn't too rosy when globalization is a one-trick pony whose sole trick is "sell boatloads of stuff to America."

Fun With Math: Guess the 2009 US Budget Deficit

Here's a really fun game you can invite your family, friends, and neighbors to play. I call it "How Much More Will Sammy the Beggar Owe in 2009?" Basically, the objective of this game is to guess how much the US will add to its national debt in fiscal year 2009 (October 2008 through September 2009). Needless to say, the US will set astounding new records for outright national profligacy over a one-year period. Even now, political matters are in a state of flux as the mother of all bailouts is still being fought over (although it should be finalized shortly) and Senate Democrats are proposing yet another economic stimulus package. Can the 2009 deficit really come to $1.5 trillion? Even I would be absolutely gobsmacked if it does. Note that the italicized items are not yet finalized at the time of writing. The CBO forecast made before a lot of subprime spit hit the fan called for a record $438B 2009 deficit. Add the other items in and things get pretty interesting in a multiple car crash cum Chernobyl sort of way.

What does it all mean? If you're an acolyte of that renowned economic sage Dick Cheney, absolutely nothing. Remember, "Reagan proved that deficits don't matter." If you aren't, well, these things are a rather heavy cross current and future generations of Americans will have to bear for living like there's no tomorrow.

To get you started on this exciting parlor game, I am furnishing you with a list of considerations you should probably take note of:

(1) The optimists may be right in that a bottoming out of US housing prices is near. Otherwise, count on more troubles as housing-related assets get dragged down further, necessitating yet more bailouts;
(2) Figures reported in the media will of course not represent the ultimate tab to the American taxpayer. For instance, the "$700 billion bailout plan" refers to raising the debt ceiling from $10.6 to $11.3 trillion. However, the last time I checked, the US deficit is "only" $9.788 trillion, Thus, depending on how the final bill is worded, up to a whopping $1.5 trillion can be authorized for mopping up impaired assets;
(3) Some bailout funds have already been spent in 2007 (like perhaps the Bear Stearns $29B), while others will be spent in 2010 and beyond;
(4) It's important to consider how enthusiastic America's suck...I mean honorable creditors will be buying all of Sammy's wonderful Treasuries begotten of subprime wonder and merriment. Last I heard, these creditors and their publics were becoming wary of getting royally shafted by Sammy's rip-off scheme.

One thing you can probably be sure of is that, for political economy reasons, US sovereign debt is unlikely to be downgraded from AAA status over the time period under consideration.

Commentators have been talking about whether this or that financial institution is "too big to fail?" Let me do them one better: since America's basic plan is to borrow more from loaded foreigners such as Middle Easterners and the Chinese, the real question becomes: "Is America too big to fail?"

Will Subprime Crisis Lead to Protectionism?

With commentators often calling the current subprime crisis "the worst economic downturn since the Great Depression," it is hardly surprising that many are warning of a potential outbreak of global trade protectionism akin to the aftermath of the cataclysmic events of 1929. Only yesterday, WTO Director-General Pascal Lamy discussed this very topic, naturally bringing up Messrs. Smoot and Hawley as progenitors of protectionist trade armageddon which led to similar barriers being put up by other countries.

Note, however, that some still dispute the negative effects attributable to the Smoot-Hawley Act. Nonetheless, its passage did usher in a period when sentiment towards trade became more negative around the world. Can the same happen again? Lamy thinks so and warns against it. Here, Lamy addressing an NGO forum perhaps demonstrates a greater WTO willingness to address civil society concerns. I suggest that you read Lamy's short speech where he (of course) suggests that soon-to-restart negotiations should see to it that a Doha deal is in the offing. Here is the introduction:

This year the WTO opens its doors to the public against a background of newspaper headlines heralding a potential Great Depression “Two.” But policy-makers in the United States, who have seen several giant financial institutions sound their alarm bells last week, as well as policy-makers across the globe, are desperately seeking to avoid the series of mis-steps that accentuated the financial crisis of the 1930s.

They are all stressing that lessons from the Great Depression have been learned, and that the many policy mistakes that were associated with it will be avoided. But one of the important lessons of the Great Depression, which we must not forget, is that “protectionism” and economic isolationism do not work. They are policies of the past, which should have no place in our future.

As tempting as it is in moments of crises to give our producers comfort that we are shielding them from competition by shutting our borders to imported goods or services, this course of action must not be pursued. In fact, the infamous Smoot-Hawley Tariff Act of the 1930s that raised US tariffs on over 20,000 imported goods to record levels led to nothing but a trade war between nations. In so doing, it ended up impoverishing us all; proving that protectionism, and beggar-thy-neighbour policies, are a dead-end.

In a financial crisis, and at times of economic distress — in particular at a time of soaring world food prices, what impoverished consumers desperately need is to see their purchasing power enhanced and not reduced. What is needed in times of crises is to enable consumers to purchase more for less. The temptation to shut our borders does exactly the opposite. There is no doubt therefore that the current hurricane that has hit financial markets must not dissuade the international community from pursuing greater economic integration and openness. But in order to be both sustainable and fair, this integration has to be based on rules. And the rule-book needs to be updated regularly.

Whither St. Petersburg, the "Russian Detroit"?

I have been to Detroit and it's not a particularly scenic place. In part, its run-down condition reflects the waning fortunes of America's automotive industry. Not only are automotive sales in America down overall, but those of GM, Ford, and Chrysler more so. However, it may surprise some of you that high gas prices have not dented car sales the world over. Russia, of all places, is a booming automotive market. Aside from the ranks of the nouveau riche who owe their fortunes to Russia's burgeoning exports during a time of rising commodity prices, decades of repression has made Russians clamor for the joys of the open road--although the traffic from Russia to St. Petersburg is often quite bad.

From about zilch in 1991, Russia has become Europe's largest car market, surpassing Germany in the first half of 2008. How times change! Russia is expected to be the world's third largest market by 2012, surpassed only by the US and China. Interestingly, Russia's second city, the rather more scenic St. Petersburg (which I'd love to visit again), is angling to become the "Russian Detroit." Let me rephrase that--Detroit during its heyday. St. Petersburg offers inexpensive but skilled labor, healthy tax breaks, and nearness to major markets--it sounds like a page from the development state playbook. What may set this case apart, though, is a generally healthy level of domestic demand.

Which of the world's automakers have set up shop in St. Petersburg, you ask? So far, try GM, Ford, Toyota. (GM and Ford cars made in Europe are actually quite good compared to their US brethren, though that's another story.) Meanwhile, Nissan and Hyundai will soon open plants in St. Petersburg. Even better yet, with gas prices in Russia comparatively low, hulking monstrosities automakers have trouble selling elsewhere are much in demand in Russia:

For automakers like Ford, GM, Toyota and Nissan, which are struggling to boost sales in saturated home markets, emerging economies represent great opportunities at a challenging time. In Russia, many first-time buyers are strolling into dealerships. While there are 800 vehicles per 1,000 inhabitants in the United States, there are 190 vehicles for every 1,000 Russians.

Unlike customers in the other BRICs -- the acronym for the paramount emerging markets of Brazil, Russia, India and China -- Russians go for the kind of big vehicles that generate big profits for automakers. "It's a big country with long straight roads and big-sized people, so it has many of the preferences of the American market," said Shinichi Sasaki, a senior managing director at Toyota who has worked in Europe.

The only cloud I see on the horizon for St. Petersburg's burgeoning automotive industry--and it's a pretty big one--is foreign investor aversion to Russia given the country's increasing belligerence towards the West. However, it should not be so easy to expropriate facilities producing branded finished goods as opposed to unbranded commodities such as oil and gas, making carmaking a relatively safer endeavor. Though unsurprisingly biased towards the optimistic side, this Russian commentator owning a large auto dealer network suggests the auto boom is here to stay:

In our globalized economy, it's hard not to feel discouraged as we witness one crisis after another on Wall Street. But here in Russia, it's not all doom and gloom. Far from it -- at least as far as the booming Russian market for foreign cars is concerned.

Given the massive problems crippling Detroit, why does Russia's auto market continue to thrive? There are several reasons.

First, a declining stock market primarily affects only those Russians who actively invest in the stock market. Not only is this a very small group -- about 3 percent -- but it is a wealthy group. And its members typically work out of two pockets: one for investing and one for spending. Strong 2008 sales -- up 43 percent from last year -- suggest that this second pocket is still pretty full.

Second, the credit crunch has not had much effect on Russian consumers. Most buyers of foreign cars don't take out loans for their purchases, and the few who do aren't usually put off by occasional hikes in interest rates. Simply put, a 1 percent increase here or there in interest rates doesn't have the same effect in Russia as it does in other markets. In fact, as interest rates have consistently risen over recent years, the percentage of customers buying cars on credit has stayed roughly the same.

Third, the global economic downturn that has shrunk demand for cars in the United States and other developed markets has increased the number and styles of cars available to Russian consumers. Slower sales in developed markets have led to more cars being available for Russia as the number of cars in stock has increased significantly.

For automakers, 2008 is more likely to go down as the year Russia emerged as Europe's largest car market than as the year the world suffered a liquidity crisis.

While much has been made of the distinction between Russian and foreign cars, globalization is unquestionably blurring the lines between national brands. All over Russia, foreign companies are establishing factories and joint ventures, while Russian automakers are increasingly using technologies imported from abroad. Within a few years, consumers will almost certainly look more to the quality and class of a car than to its "nationality."

Whatever happens on Wall Street in the foreseeable future, the Russian auto market should continue to grow. The key to capitalizing on that growth, however, will consist of accurately gauging and effectively responding to another kind of growth -- the growth in the sophistication of Russian consumers.

The $700B Bailout Needs a National Referendum

The (surveyed) people have spoken, and they are unhappy with the $700B bailout plan being assembled in the halls of the Federal Reserve, Treasury, and Congress. This from a recent Bloomberg/LA Times poll:

Americans oppose government rescues of ailing financial companies by a decisive margin...[b]y a margin of 55 percent to 31 percent, Americans say it's not the government's responsibility to bail out private companies with taxpayer dollars, even if their collapse could damage the economy, according to the latest Bloomberg/Los Angeles Times poll.

Note, however, that dissimilar results have been found depending on how the question is phrased. As anyone who has conducted surveys or studied survey design can attest,
many factors can influence the results. For instance:

A poll by the Pew Research Center for the People and the Press, asking a different question, found that Americans, by 57-30 percent, favored government action to save financial companies.

The Pew poll told respondents that the government is ``potentially investing billions to try and keep financial institutions and markets secure'' and asked whether that's the right thing to do. The Bloomberg/Los Angeles Times poll asked whether ``the government should use taxpayers' dollars to rescue ailing private financial firms whose collapse could have adverse effects on the economy and market, or is it not the government's responsibility to bail out private companies with taxpayers' dollars?''

I can see how the phrasing of the Bloomberg/LA Times question may have influenced the results. The term "bail out" is potentially loaded with negative connotations, while mentioning "taxpayers' dollars" frames the question more in terms of respondents bearing the burden, not just the government.

Like Daniel Gross, I believe that a US recession would be good for it and, in turn, the rest of the world. Reducing overconsumption, redressing the trade balance, and making American industries more competitive in world markets should help Americans prepare better for the future as opposed to continuing the status quo of mindless consumerism encouraged by a culpable government. Instead of these endless frantic attempts to forestall a painful episode which is sure to come, the US might as well take things as they come and make the best out of it. Meanwhile, the rest of the world will have to find other sources of final demand instead of relying on the US as consumer of last resort.

Now to the political question. With even politicians like Richard Shelby (rightly) doubting the logic of loading up the country with bazillions more in debt and its dire consequences for the dollar as well as public finances, it'd be sensible to subject this matter to a national referendum. Given that national elections are coming up, the timing is right. Ultimately, the US will be subject to financial pain. Does the bailout reduce this pain in the short-term or increase it in the long-term? Perhaps it's best to...ask the people.

If there were a more appropriate matter to put to a national referendum in America, then I haven't seen it. Then again, a national referendum on the bailout may be too sensible for the folks at the controls.

Sachs and Bono Blog on MDGs @ FT

I sometimes wonder if everyone and his dog has a blog. A few weeks ago, I mentioned the Bill Gates-inspired "Creative Capitalism" site. With world leaders now gathering at the United Nations to discuss progress (or the lack thereof) in meeting the Millennium Development Goals (MDGs) at the midpoint to 2015, the Financial Times has appropriately unveiled the formidable blogging team of Bono and Jeffrey Sachs. I am alternately cheered and dismayed by what they say. But first, let us start with Paul Collier's latest missive against the MDGs in a New York Times op-ed. Needless to say, my thinking is more similar to Collier's than to Sachs / Bono:

A further weakness with the Millennium Development Goals is that they are devoid of strategy; their only remedy is more aid. I am not hostile to aid. I think we should increase it, though given the looming recession in Europe and North America, I doubt we will. But other policies on governance, agriculture, security and trade could be used to potent effect...

International coordination has been, indeed, the great achievement of the Millennium Development Goals; all the major donor countries have bought into them. But they should now be revised so as to focus on the challenge of helping the bottom billion to converge with the rest of mankind — and on a more realistic timescale. We need not just a “Year of the Bottom Billion,” but several decades. This session of the United Nations is an appropriate moment to get started.

On the credit side, Bono at least gives lip service to other factors than just wheedling the West for aid -

BONO: For those of you, the many of you, questioning aid on this site, you’re not wrong to suggest that it’s not the only answer. Of course it’s not. It’s trade, it’s governance, it’s private investment. But aid is critical… ask Germany, ask Ireland. See it as a leg-up, not a hand-out.

I’m not talking about the aid of the 20th century by the way. For too many years, much aid was wasted and ended up redecorating presidential palaces instead of building hospitals. That was our corruption as well as theirs. Handing over billions of dollars to a corrupt dictator because he isn’t a Commie, knowing he will use it to suppress discontent and swell personal bank accounts - that makes you complicit. But, this is a new century, and a new understanding of aid and partnership means that we are starting to see different results.

BONO: I hate talking about aid and, in my experience, so do Africans – they’re entrepreneurial by nature and want our trade more than our aid. But they need seed capital and some start-up infrastructure to get going. Needless to say, it’s hard to do business if you’re dead or dying. As things stand, aid when well spent is a critical source of investment.

The hypocrisy of the "war on terror" and the the US being stingy on aid while planning a $700 billion bailout for wayward financial institution also score points -

SACHS: President Bush’s speech before the United Nations was literally terrifying. He mentioned “terror” (or “terrorists” or “terrorism”) 32 times, “extremists” 7 times, and “tyranny” 4 times. “Millennium Development Goals, “climate change,” and “environment,” did not merit a single reference. “Disease” got 3 mentions, while “poverty” and “education’ each got 2. “Health” got 1. The imbalance in the President’s approach to the world is stunning...

America’s ill-conceived and even worse-implemented “war on terror” has actually stoked terror while leaving neglected the very basic factors – poverty, famine, bulging populations, financial plunder – that have done so much to foment global instability.

SACHS: The UN meetings were abuzz that the US could find $700 billion for a bailout of its corrupt and errant banks but couldn’t find a small fraction of that for the world’s poor and dying. It didn’t make sense to the world community. The puzzlement was all the greater since the very banks being bailed out so generously had awarded themselves more than $30 billion in bonuses early this year, roughly the world’s entire aid budget for 800 million people in sub-Saharan Africa.

Turning to the debit side, it is sad that some things never seem to change. Bono still seems stuck on celebrity culture or "I will talk to my bigwig chums and set things straight" -

BONO: Tough meeting with the Président de la République of France. He’s a tough guy. We like tough guys because they get straight down to business. They don’t waste their time or yours. The French budget is out this Friday and in it we will see if France intends continuing its leadership role on the continent of Africa. In the last few years, French aid has been falling...

The meeting started with the beautiful Carla Bruni, a great ally in our efforts to better our storytelling about the effectiveness of good aid. Both the first lady and the president change the molecular structure of any room they are in - he speeds them up, she calms them down. A great team.

BONO: I’m writing this waiting for the Voice of Africa, Youssou N’Dour...

BONO: Off to meet the head honcho at the EU, President Barroso, now. Let you know tomorrow how I got on. Other things to watch out for this week: Wearing my ONE campaign hat, I should be meeting up with Senator John McCain and Governor Sarah Palin; hoping to see Senator Obama and Senator Joe Biden in the next few weeks.

Alas, it seems these two's talking points invariably return to chastising rich countries for not contributing 0.7% of their output to aid as promised. Instead of hearing about how rich country donor's proceeds have been systematically put to good use to encourage more aid, we get the ol' "shove more money" plea. Regular readers should already know that ODA hasn't been generous in recent years -

SACHS: The laggards in the struggle for the MDGs are not the poor countries or their ostensibly corrupt governments. The laggards are the rich world, so full of promises and high rhetoric and so low on delivery. The MDGs are falling short because of a lack of promised financing to put in place the clinics, schools, roads, power, and other investments needed for their success. Six years ago, the rich countries pledged in Monterrey, Mexico to “make concrete efforts toward the international target of 0.7 per cent of GNP in official development assistance.” Yet the United States stands are 0.16 per cent, Japan at 0.17, Italy at 0.19, Canada at 0.28, Germany at 0.37, and France at 0.39.

SACHS: The U.S. Government willfully ignores, or seems to be unaware, of its own commitments in these areas. After all, the U.S. Government committed in Monterrey, Mexico in March 2002 (with Bush present), to make concrete efforts to reach 0.7 percent of GNP in official development assistance.

To counterbalance things if you are too star-struck by Sachs and Bono devising ways to save Africa, William Easterly has two things for you. First, read how flaws in the formulation of the MDGs make them questionable metrics in "How the MDGs are Unfair to Africa." Second, Easterly has a forthcoming article in the Journal of Economic Literature on "Can the West Save Africa?" Alas, it seems Bono still hasn't found what he's looking for.

UPDATE 1: Naturally, the UN has an MDG blog of its own.

A Kinder, Gentler WTO?

I was searching for something else when this op-ed in India's Financial Express caught my eye about how the "WTO has changed its spots." Unsurprisingly, most of us political science types are less enamored with the WTO than our economist counterparts. Reading the title, I reflexively thought to myself, "just what we need, another economist cheering on the WTO." Imagine the shock I received when I looked at the byline and found that the author was none other than Cambridge's Amrita Narlikar--another IPE type (albeit one who's far more widely known). Oh well, read the op-ed and decide for yourselves whether the new LDC-friendly WTO is in the offing, negotiation paralysis nothwithstanding:

The World Trade Organization has changed. It is a much fairer organisation than the organisation that became the target of the Seattle demonstrations in 1999, and is (at least in some important ways) a much nicer and evolved progeny of the GATT’s. Is it not time that this multilateral body gets the commitment it deserves?

A central critique of the WTO today is that the organisation fails to deliver on fair process. This was a valid criticism of the WTO ten years ago. It is an outdated and irresponsible critique to launch against the organisation today.

Improvements in decision-making and negotiation processes in the WTO are dramatic and far-reaching. The GATT, with its opaque and exclusive decision-making procedures, was labelled the ‘Rich Man’s Club’. Even after the formation of the WTO, the Seattle ministerial conference of 1999 saw riots outside and also a revolution within the organisation as its own members complained of marginalisation from the invitation-only “Green Room” meetings. Indeed, as late as the Cancun ministerial conference of 2003, excessive informality and off-the-cuff decision-making had meant that many developing countries with their small delegations found themselves disadvantaged and unable to negotiate effectively.

Changes in process at the WTO in the aftermath of the Seattle ministerial included improvements in the transparency of its small group meetings. Unlike the much more secretive Green Room meetings of earlier days, these meetings (and their participants) came to be announced in advance. Further, they were framed explicitly as consensus-building consultative meetings rather than decision-making ones. Director General Pascal Lamy deserves special credit for having reinforced the strength of institutional reform. Under his leadership of the organisation, the old core group that led the decision-making process—the so-called “Quad” comprising the EU, US, Canada, and Japan—has come to be replaced by a much more representative grouping that takes the shape of the G4, the “Five Interested Parties” or the Quintet, the G6, and most recently the G7 in the July 2008 talks. Brazil and India, along with the EU and US, have constituted—with consistency—all permutations of this core group.

Moreover, these improvements in the internal transparency of the organisation have been accompanied by unprecedented external transparency. The WTO’s website is to be commended for the richness of the information that it provides to members of the general public. Lamy’s engagement with the NGOs and other stakeholders through his blog and other e-conferences is unprecedented...

Coca-Cola's Huiyuan Bid: Protectionist Payback?

The instances where Chinese firms seeking to buy stakes in Western companies were rebuffed over "national security" concerns are well-known: CNOOC decided not to make a bid for American energy firm Unocal over lawmaker bellyaching. Huawei was discouraged from buying trifling bits of 3Com over the latter handling sensitive defence technologies.

Now, it seems Coca-Cola is testing the waters to see if American protectionism will be returned with its attempted purchase of Huiyuan Juice Company for the sum of $2.4 billion. (Huiyuan is the PRC's largest juice maker.) Something Coca-Cola needs to clear is the newly passed "Anti-Monopoly Law" in which foreign acquisitions of Chinese companies listed in Hong Kong require regulatory approval. The US firm filed just today. While this antitrust law purports to be about preventing the formation of monopolies, some view it as a way to safeguard Chinese firms from purchase by foreigners. Remember, foreigners cannot regularly buy "A" shares (or the majority of stocks) in the Chinese mainland. However, coursing matters through Hong Kong can be a route to get around this limitation, especially as quite a few PRC-based firms raise capital in Hong Kong.

Will Coca-Cola be turned down via the "Anti-Monopoly Law"? We'll soon see as the Chinese Ministry of Commerce will hand down its decision in a months' time. Also, you may laugh about there possibly being "national security" claims against purchasing a juice maker, but don't forget the French case of Danone's "yoghurt protectionism." To each his own protectionist folly.

Reuters has a backgrounder from a few days ago:

Coca-Cola, looking to make inroads into a pure-juice segment of the market it is absent in and shoring up its lead in the overall domestic beverages industry, is paying three times the market price for the Hong Kong-listed Chinese firm.

Some industry experts argue Beijing has no interest in killing a non-sensitive deal but others say a public outcry will have regulators scurrying to protect a beloved national brand.

Chen Yuan, a lawyer at legal firm Linklaters, argued the high-profile acquisition may tweak nationalistic sensibilities but the government is unlikely to kill the deal without good reason, partly because the world is watching...

Donald Straszheim, vice chairman of Roth Capital Partners, was skeptical the deal would be allowed, noting a regulation protecting "famous brands" from foreign acquisition.

Meanwhile, the Times of London mentions the vociferous discussion in China on whether this takeover would injure national pride:

Witness the current uproar in China over Coca-Cola's bid for the Huiyuan Juice Group, dubbed by protesting nationalists a “dragon head enterprise” that it would be “traitorous” to let pass into foreign ownership.

Although I am usually quick to offer an opinion when asked, I am unsure of the outcome of Coca-Cola's bid given today's topsy-turvy economic environment. Will China go into retribution mode for clear past instances of US protectionism or will it play along for now? Stay tuned.

Bilateral Trade Pacts: US / Colombia & EU / Russia

Bilateral trade deals look set to multiply exponentially as the Doha round flounders. It goes without saying that if countries didn't find benefits from trade, they wouldn't be so keen on engaging in trade pacts. Commentators such as WTO Director-General Pascal Lamy have noted the proliferation of such deals, and the trend looks like it won't die down anytime soon. Today, though, we look at two deals which are challenged by domestic factors. In the case of US - Colombia, American lawmakers have become increasingly sceptical about trade's benefits. In the case of EU - Russia, the recent conflict between Russia and Georgia may herald a cooling of relations between the West and Russia.

Largely overlooked during this time of America-sourced financial turmoil is that Bush talked about the ongoing crisis while Colombian President Alvaro Uribe was paying the White House a visit. Alongside the usual paeans to the benefits of trade, Bush took pains to mention the strides made by Colombia in meeting environmental and labour standards which the Democratically-controlled US Congress prizes. Plus, like Pervez Musharraf back in the day, Uribe is a full-fledged ally in the war on terra:

Today, President and Mrs. Bush are hosting President Alvaro Uribe of Colombia. Colombia is a strategic ally of the United States, and this visit underscores the deep friendship and extensive cooperation between the United States and Colombia. The two leaders will discuss a range of issues, including their shared commitments to the U.S.-Colombia FTA, reducing violence, and increasing peace and security in Colombia and democracy throughout the region.

President Bush submitted legislation to implement the Colombia FTA to Congress for approval in April 2008, but House Speaker Nancy Pelosi has refused to allow it to come to a vote. Passage of legislation to implement the FTA would demonstrate U.S. support for an important ally and help cement the gains made by President Uribe, who has worked closely with the United States to accommodate concerns, including revising the FTA to include rigorous labor and environmental protections.

* President Uribe is a strong and effective partner in fighting crime and improving safety for labor unionists. Since President Uribe took office in 2002, the Colombian government has reported dramatic reductions in homicides (down 40 percent), kidnappings (83 percent), and terrorist attacks (76 percent). Homicides of labor unionists dropped 80 percent, from 186 in 2002 to 39 in 2007. Since 2002, Colombia has also extradited more than 720 criminal suspects – mostly for drug trafficking – to the United States.

* The U.S.-Colombia FTA will advance our national security. President Uribe's Administration has fought terrorists, demobilized paramilitaries, and stood strong against hostile anti-American states and forces in Latin America. An impressive example of President Uribe's leadership came during July, when members of the Colombian military successfully rescued 15 hostages – including three Americans – held captive by the FARC. It is in America's interest to support Colombia in the face of these threats, and the best way to do so is for Congress to allow a vote on the FTA legislation.

Meanwhile, the delayed dance between the EU and Russia looks set to continue after Russia meets some preconditions set by the EU with regard to the ongoing conflict in Georgia. As Western Europe relies quite a bit on Russian energy, the outcome here carries weight:

The European Union may start talks with Russia on a new trade agreement next month should Russia fulfill its commitments under a plan to end fighting over a breakaway Georgian region, the French premier said.

There are ``no reasons'' why the talks on a new accord shouldn't start in October if Russia honors the so-called Sarkozy- Medvedev plan, French Prime Minister Francois Fillon told a press conference today with his Russian counterpart, Vladimir Putin, in the Black Sea resort of Sochi.

French President Nicolas Sarkozy brokered a peace plan with Russian leader Dmitry Medvedev to end five days of fighting in August after Russian forces entered South Ossetia in response to a Georgian attempt to retake it. The EU suspended talks Sept. 1 on a new Partnership and Cooperation Agreement and Putin said today that the Russian government was ready for new negotiations.

``We are ready to continue this work,'' Putin said. ``It wasn't us who stopped it.''

Russia recognized the independence of South Ossetia and another breakaway Georgian region, Abkhazia, on Aug. 26, a decision Fillon said France disagreed with. Medvedev pledged to remove all Russian troops from Georgian territory within a month of a Sept. 8 accord with Sarkozy, whose country holds the EU's rotating presidency.

Fillon and Putin were in Sochi, the host of the 2014 Winter Olympic Games, for a forum on Russia's investment climate, which has been tarnished by the Georgian conflict and a shareholder spat over BP Plc's Russian venture...

This is a Test of Asia's Emergency System

A decade after the Asian financial crisis, countries in the region now have the (admittedly unwelcome chance) to test whether the preparations they have made during the intervening years have bulked up their defence mechanisms to withstand the "animal spirits" unleashed by periodic dislocations, this time the US-led subprime crisis. Let us begin with South Korea, a country strongly beset the last time around that was forced to borrow from the IMF as lender of last resort. Although its president believes the country's larger firms are now "action-ready" come what may, the traditionally more interwoven role of the "development state" is still there as the government claims that it stands ready to assist smaller firms which may come under duress:

South Korean President Lee Myung Bak urged officials to take ``immediate and active'' steps to protect against fallout from the global credit squeeze, including aid to any small companies facing cash shortages.

``Most recently, the local and overseas financial situation has stabilized,'' Lee was quoted by his spokesman as saying in a meeting with ministers and aides in Seoul today. Still, further unexpected events may arise ``and have a negative impact on the real economy...''

`Larger companies have some reserves but small and medium- sized companies can go bankrupt, even if they post profit, because of a cash shortage,'' Lee said. ``Financial authorities and related institutions should closely review individual companies' status and prepare countermeasures.''

Bloomberg then goes on to discuss Asia's efforts in general to calm matters down. In particular, China and Thailand are mentioned. China is interesting for while it didn't really get affected by the Asian financial crisis with its very capital controls and pegged currency, Thailand did. Thailand, of course, got the contagion a-rolling. Of particular relevance here is the cushion of a whopping $3.3 trillion piled on in reserves by Asian countries exactly to guard against what is happening now. If that weren't enough, there is a system allowing a total of $83 billion in bilateral swaps through the Chiang Mai Initiative should some of the less reserve-endowed in the region suffer from balance of payments problems:

China and Thailand's central bankers said there has been limited fallout for their banks from the U.S. credit crisis that sent Lehman Brothers Holdings Inc. into bankruptcy and wiped $19 trillion from world stocks in the past year.

``There is not much impact on Asia this time because the problems haven't taken place here,'' Bank of Thailand Governor Tarisa Watanagase told reporters today in Bangkok, where she is hosting a meeting of central bankers. ``So far the impact on Thai banks is very little.''

The region's policy makers this week played down concerns that their countries will be subjected to a meltdown similar to that of 1997, saying contagion from the U.S. turmoil is unlikely to infect their financial systems. Asia's key stock index rebounded yesterday from a three-year low as central banks pumped cash into money markets and the U.S. worked on plans to shore up banks and insurers.

``The direct impact of the subprime crisis is currently limited,'' China central bank Deputy Governor Su Ning said at a financial conference today in Shanghai. Still, ``China will be highly alert to the negative effects of unstable global financial markets and decreasing overseas demand.''

The MSCI Asia Pacific index rose 5.5 percent yesterday and Asian currencies, including the South Korean won, Philippine peso and Indonesia rupiah, advanced. The U.S. government announced plans to purge banks of bad assets and crack down on speculators who drove down shares of financial companies...

Central banks in Japan and Australia pumped $113 billion into money markets this week, joining European and U.S. counterparts in supporting the financial system and attempting to revive confidence. Earlier in the week, China cut interest rates for the first time in six years and allowed most banks to set aside less reserves.

``We central bankers need to be watchful and decisive,'' Tarisa said today. ``We have a swap arrangement between us and standby credit to inject liquidity if problems arise.''

Central banks around the region have boosted cooperation to strengthen their financial markets and set up emergency measures to bail out their systems in case of crisis. Japan, South Korea, China and Asean countries are discussing the creation of a pool of $80 billion in Asian foreign-exchange reserves to be tapped in case the nations need to protect currencies.

The reserve pool is an expansion of a current arrangement that only allows for bilateral currency swaps. It is designed to ensure central banks have enough to shield their currencies from speculative attacks like those that depleted the reserves of some countries during the Asian financial crisis a decade ago.

The region has since accumulated more than $3.3 trillion of reserves, about half of the global total.

Thailand, which triggered the Asian financial crisis with the devaluation of its baht in July 1997, has no shortage of capital and the nation's lenders are ``strong and resilient,'' Tarisa said this week.

Despite being far better placed to withstand contagion, I have no doubt that Asia will be affected by the US-led slowdown. Despite the passage of time, these countries have done little to generate more regional demand as opposed to relying on the West (particularly the US) to buy their stuff. Metaphorically speaking, there are fewer folks willing to buy Asia's flat screen TVs when many Americans are, well, flat broke.

Sell Ford and GM to the Chinese (Part 2)

I am quite frankly bemused that the Big Three (or whatever is left of them) are once again badgering old, broke, and tired Uncle Sam for moolah. The current mortgage mess is dredging up endless mentions of the Chrysler bailout of so long ago. It reminds that, in nearly three decades, Detroit's fortunes have gone nowhere but down. I do not need to elaborate on the following points as they should be self-evident to any reasonable, unbiased observer:

(1) That the automakers are now billing themselves as environmental champions keen on high fuel efficiency and alternative power sources is bunk. For starters, they have been combating tighter emission regulations for years. Had they started selling green vehicles before gas prices spiralled upwards, they wouldn't be in as much of a bind as they now are in. Years of selling monsters trucks with poor mileage that can't be moved off dealer's lots nowadays is testament to this. The "American Prius" is nowhere to be found in dealers' showrooms. And now politicians are saying that these same automakers will lead the charge to an energy-efficient future? Give me a break.

(2) Political pandering--especially in key swing states with large auto manufacuring presences--is largely the reason why politicians aren't bickering too much about facilitating another bailout. Ladling pork and vote-getting go hand in hand. Now more so than ever with the 2008 elections looming large.

(3) One of the complaints these automakers have expressed is that credit is not easy to obtain ever since their ratings were downgraded to junk. Therefore, they need to obtain government-sponsored funding. Again, what kind of capitalist economy is this where credit rationing is done based not on creditworthiness but rather political expediency? Who is it who said from each according to his abilities, to each according to his needs? American automaking is becoming more like a communist enterprise than anything remotely capitalist. Make crappy products few want to buy and be rewarded for it: sounds like the halycon days...of the Soviet Union.

(4) At heart, what we have here is yet another American industry which cannot cut it in its own backyard. The US airline industry is known worldwide for its substandard service; it's able to cadge bucks off Uncle Sam for "national security" reasons. Can automakers make the same (dubious) claim? Sammy's finances just keep getting worse. Airlines...automakers...banks... the supplicants lined up at the door of the biggest supplicant of them all--Sammy the Beggar-- seems endless.

(5) Is it just me or are "private equity" workouts not supposed to be at taxpayers' expense? Isn't sorting matters out in private the whole reason behind purchases like that of Chrysler by Cerberus?

As I've said before, the solution to the automakers' woes is staring them in the face: Sammy the Beggar keeps rattling his cup in front of Mao the Multibillionaire (China). Detroit and the politicians should recognize the writing on the wall: for the benefit of all concerned, it's better to sell Ford and GM to the Chinese. The logic is impeccable:

(a) Protectionism and China-bashing will of course come to the fore if the US automakers and Chinese ones enter talks about, say, Chery buying Ford or GM. Nevertheless, if Detroit wants to keep thousands of auto jobs, it seems the one with the really deep pockets are the Chinese, not Sammy. Logically, being employed by the Chinese seems to be a better proposition than being unemployed. As someone once said, don't offend the Chinese, the real owners of America.

(b) More importantly, what would the Chinese gain from buying the likes of Ford and GM? They would gain recognized brands and established dealerships. Unlike the Japanese (too many to mention) and the Koreans (Hyundai and Samsung), the Chinese have not been enable to establish brands with global cachet (at least so far). These the automakers can still provide a semblance of in America--still the world's largest auto market--although things may get worse with delay.

(c) Chinese auto marketing is, well, kind of cheesy. Especially troubling is their seeming inability to come up with respectable car names. Even the Big Three can teach them a thing or two about these things. Don't believe me? Go see for yourselves.

America must learn to swallow its pride and recognize these manufacturing dinosaurs have seen better days. If the automakers want someone with deep pockets to partner with who are able to throw wads of cash at them, then they will come from the Middle Kingdom. While Detroit can still offer something of value, they better get to it quickly. The only question is, will the Chinese want them, baby?

My Big Mouth: Is Full Nationalization the US Plan?

Bonehead here may live to regret saying this just two posts back: The US can try to bail out the whole damn banking system if it wants. The real question, though, is the above: But who will bail out America? If you want further proof of the unlimited amount of fear attending to the markets at the current time, an as-yet undeveloped plan to mop up toxic securities from the US financial system caused the DJIA to jump 400+ points yesterday and perhaps the same amount today. Berpaulosi (see picture) to the rescue, eh? You'd think that most commentators would have learned their lesson by now, but this latest Jah comes down from the mountain story is not fooling me. Why? Let us count the ways:

(1) In Paulson's most recent statement, this latest initiative involves Fannie Mae and Freddie Mac purchasing boatloads more mortgage-backed securities. Wasn't it a bloated portfolio which helped lead to them getting into such a mess in the first place? With private sources of housing finance drying up, making the US even more of a monopoly-like provider is not likely to help. Of course, I am assuming that home prices have further to sink--no stretch of the imagination is required there. Tell me: how does guaranteeing even more depreciating assets help Fannie and Freddie? Said Paulson: The underlying weakness in our financial system today is the illiquid mortgage assets that have lost value as the housing correction has proceeded. That's really great and everything, but isn't Paulson setting them up to buy more illiquid mortgage assets (MBS, anyone?) that WILL lose value as the housing correction proceeds?

(2) Subprime mortgages gone bad are just the tip of the iceberg. When the whole iceberg reeks, ring-fencing the tip won't do you any good when all else is also going awry. For convenience's sake, Paulson seems to suggest that this problem is confined to subprime Although subprime borrowers were the first to feel the pain since they were most vulnerable to a housing-led slump, increasingly insolvent, bankrupt and/or foreclosed American households will ensure the cascading of troubles into other forms of debt. You name it: credit card, automobile, student loans, etc. Thus, mopping up subprime-related securities alone will not do the trick. Unless the US government can miraculously (a) resurrect home price values, (b) wipe clear trillions worth of American household debt and (c) increase stagnant incomes which have been flat since the start of the millennium, call me unconvinced.

(3) Why would making Uncle Sam more indebted than he is now improve matters for the US? Not only will doing so not change the fundamental picture in (2), but it will also do little to shore up the confidence of America's increasingly wary creditors. I initially thought estimates that this mess would cost the US government up to $2 trillion rather high, but it appears my view needs revision. The dollar will get a long, hard beating in years to come, "special FX" notwithstanding.

Bottom line: If you think the US government is your knight in shining armour, you are losing your mind. The magnitude of America's problems will not be solved by an entity that has so far demonstrated little ability in helping avert a crisis partly of its own making. Garbage in, garbage out.

The World Bank's Remittance Comparison Site

Workers' remittances are big money: in 2007, the World Bank estimates that $317 billion was sent internationally as remittance flows. Given the seeming inevitability of further migration, this amount should increase even further. Those with an interest in migration should welcome the news that the World Bank now has a new website comparing the rates for sending remittances internationally in 120 common North to South corridors. In remittance-speak, a corridor is simply a country pairing such as Italy-Serbia or US-Ecuador. The World Bank site complements the UK Department for International Development (DfID) site SendMoneyHome.org, which also makes price comparisons among different remittance providers. The World Bank's effort cites the following as reasons for putting up their webpage entitled "Remittance Prices Worldwide":

Research and publication of remittance pricing worldwide will serve four important purposes:

• First, updated periodically, this database will provide a benchmark proxy by which to measure improvements in transparency, efficiency, and competition within remittance corridors. Thus, the impact of projects designed to enhance these market characteristics will be measurable.
  
• Second, a streamlined database will allow for comparisons of markets across countries and regions. Regions/corridors in which markets are working well can be studied and inform reform efforts elsewhere.
  
• Third, simply the act of publishing this database may serve to reduce remittance transfer prices. Publication of prices in corridors in which they are high can bring government and public pressure to bear on companies to reduce their fees and other charges. An example of this has been the case of Latin America, where publication of remittance pricing was a factor in the reduction of total costs from 15%, on average, in the region in 2000, to 5.6% in 2006.
  
• Finally, the database may help consumers to better understand their local remittance market and inform their decisions regarding money transfer products. The utility of this function would be improved by increasing the frequency of updates after the first year.

Visiting SendMoneyHome.org is still very much worthwhile for it links directly to the remittance services whose rates are being compared. However, this DfID site tends to have more information for corridors involving the UK as the sending country as you would expect. Moreover, the data presented does not indicate "all-in" fees as a percentage of the amount sent.

There are a variety of providers now competing for the business still dominated by big operators such as Western Union and MoneyGram in certain corridors. For migrants' welfare, this sort of competition is good as it lowers the costs of sending money home. Hopefully, efforts such as these can help migrants sort out which are the most cost-effective means of sending home remittances. Of course, Internet access and computer literacy are prerequisites for taking advantage of these services--or tech savvy relatives receiving remittances can also use them to suggest to their emigres better ways of sending remittances.

There are all sorts of ways of sending remittances nowadays that promise to lower charges that migrants bear. I refer you to a (prize-winning!) International Finance Corporation / Financial Times submission by yours truly comparing the advantages and disadvantages of various technologies such as informal channels, banks, money transfer operators, prepaid cards, the Internet, and via cell phones. Happy reading...

Dead Ducks IV: But Who Will Bail Out America?

The picture here depicts insurance policy holders in AIG's Singaporean subsidiary taking whatever they can from the stumbling institution. What can I say? These Singaporeans are well-advised to cut their losses to AIG given who owns it now--the US government. Given America's bludgeoning deficits, can you blame these Singaporeans if they lack confidence in Uncle Sam's financial management skills? As Nouriel Roubini intones, the United States cannot indefinitely continue bailing out failing financial institutions lest it become insolvent itself. In effect, American shareholders are being made to foot an open tab without clear limits:

This latest action on AIG follows a variety of many other policy actions that imply a massive - and often flawed - government intervention in the financial markets and the economy: the bailout of the Bear Stearns creditors; the bailout of Fannie and Freddie; the use of the Fed balance sheet (hundreds of billions of safe US Treasuries swapped for junk toxic illiquid private securities); the use of the other GSEs (the Federal Home Loan Bank system) to provide hundreds of billions of dollars of “liquidity” to distressed, illiquid and insolvent mortgage lenders; the use of the SEC to manipulate the stock market (restrictions on short sales); the use of the US Treasury to manipulate the mortgage market (Treasury will now for the first time outright buy agency MBS to manipulate and prop up this market); the creation of a whole host of new bailout facilities (TAF, TSLF, PDCF) to prop and rescue banks and, for the first time since the Great Depression, to bail out non-bank financial institutions; the recent extension of the collateral available for the TSLF and PDCF facilities to a much wider range of toxic securities including equities and thus allowing the Fed to effectively manipulate even the stock market; and a whole range of other executive and legislative actions (including the recent bill to provide a public guarantee to mortgages for banks willing to reduce their face value).

The US Treasury has just announced that it will mount an auction to replenish the Federal Reserve's balance sheet, damaged as it has been by mopping up the financial system's variegated detritus in exchange for T-bills. So, it will soon auction $40 billion worth of 35-day (short-term) bills. Notably, Bloomberg implies $263 billion worth of Federal Reserve "investment" in assorted assets of dubious worth through the assorted facilities mentioned earlier:

Fed holdings of Treasury securities have fallen to $478 billion as of Sept. 10, from $741 billion at the beginning of the year, as the central bank has made room on its balance sheet for the new lending facilities.

And there is more in store. As I said, it's an open tab at taxpayers' expense:

Between the $29 billion the Fed pledged to swing the Bear Stearns sale to JPMorgan in March, $100 billion apiece to rescue mortgage finance firms Fannie Mae and Freddie Mac, up to $300 billion for the Federal Housing Authority, Tuesday's $85 billion loan to insurer AIG and various other rescue deals and loans, taxpayers are potentially on the hook for more than $900 billion.

America's deficits were already huge without having to account for these assorted bailouts. A country that already relies on the kindness of strangers to keep it afloat can only resort to borrowing even more in the event of further valiant but wrongheaded and ultimately unsuccessful attempts to salvage a subprime financial system. Given that foreigners are becoming warier of investing in America, will aversion increase in light of current events? The US can try to bail out the whole damn banking system if it wants. The real question, though, is the above: But who will bail out America?

UPDATE 1: Is there no limit to the amount of handouts the US government will give? Reuters now reports that Detroit's Not-So-Big Three have successfully petitioned the government to lend them $25 billion in a sweetheart deal. If you recall, borrowing costs for GM and Ford went through the roof when their debt was downgraded to junk. Voila! Sammy to the rescue

UPDATE 2: Ken Rogoff has a new op-ed out in the Financial Times which appeared after this posting that suggests his thinking is similar (HT: Trade Diversion). First, the US has already spent between $200-300B on subprime-related activities. Second, the ultimate tab should amount to about a trillion (if not more), necessitating a foreign "bailout" of Uncle Sam. Third, it is odd that the dollar has been strengthening, although I must point out the euro staged a strong rally yesterday along with gold.

Dead Ducks III: Over at the Securitization Lobby...

Believe it or not, there is an industry group championing the spread of asset securitization. In this day and age of housing contagion, I suppose that the American Securitization Forum (ASF) would get more members if it were the "Root Canal Fun Society" or the "Gary Glitter Kiddie Klub." It seems no one wants a piece of subprime.

A few months ago, I highlighted the rich symbolism of the ASF holding its annual conference in Las Vegas, of all places. This was not apt as the securitization of subprime mortgages and related detritus has played a large part in the fiasco now roiling US and global financial markets. First, Las Vegas is one of the epicentres of the subprime fallout; having risen so much so quickly, home prices in the area now have much room to fall. Second, holding a meeting in gambling capital of the US is not particularly encouraging to those you'd want to market securitized assets as safe investments. Third, Las Vegas is well-known for its fakeries of famous landmarks. In reality, many mistook securitization of subprime loans for real progress, but how wrong they were. Truly, it is "casino capitalism."

Given the rather poor public image of securitized products, the ASF is now mounting a campaign to clean up their image. It has launched the catchily-titled Residential Securitization Transparency and Reporting initiative or (get it?) Project RESTART. The gist of the project is that securitization itself is not flawed. Rather, better transparency regarding the composition of securitized assets and better, more timely reporting should assuage investor concerns. Do you buy it? The ASF's future probably hinges on the response:

On July 16, the American Securitization Forum (“ASF”) announced the public launch of ASF’s Project on Residential Securitization Transparency and Reporting (“ASF Project RESTART” or “Project”) to restore investor confidence in mortgage and asset-backed securities. Restoring this confidence and thereby restoring over time institutional investor capital to the securitization markets should ultimately increase the supply and lower the cost of mortgage and consumer credit in America. The Project has sought to identify areas of improvement in the process of securitization and refashion, in a comprehensive and integrated format, the critical aspects of securitization with market-based solutions and expectations. Each of the Project’s phases has been sequenced to be developed and released for comment throughout the remainder of 2008 for implementation at specific recommended times in 2009. Although the initial focus of the Project has been on the private-label residential mortgage-backed securities (“RMBS”) market, similar efforts are expected to be pursued in other major asset classes such as student loan, credit card and automobile securitizations.

In addition to announcing the broad direction of each of the phases of Project RESTART, the ASF has also released the first major deliverable of the Project—a request for comment (“RFC”) on granular recommendations of an ASF RMBS Disclosure Package. Although principle-based topics of transparency, disclosure and diligence have played a critical role in the Project’s discussions over the course of the past year, the request for comment on the ASF RMBS Disclosure Package included in this document reflects the Project’s intense focus on developing specific and detailed market standards and practices that, through market-imposed incentives, will likely result in widespread implementation by applicable industry participants.

Dead Ducks II: Lamy Out to Revive Doha (Really)

The Doha Round has degenerated into a really bad horror movie, "The Return of the Doha Zombies," with endless sequels. Indian Finance Minister Kamal Nath once quipped, "while Doha is not dead...it is definitely between intensive care and the crematorium." Once again, WTO Director-General Pascal Lamy is out to resuscitate Doha against all odds. In the past, I have compared D-G Lamy to Don Quixote for his relentless optimism in the face of towering odds. Despite disagreeing with him severely on the meaning of several substantive disputes, I cannot help but admire his dogged pursuit of a deal no matter how the odds stack up against him.

Now Reuters is bringing word that Lamy is--hold your breath--attempting to get the negotiating parties together again in another attempt to get Doha done for good. This he mentioned at a still-ongoing UN Conference for Trade and Development (UNCTAD) shindig. Before you guffaw, remember that the last get-together of trade diplomats was supposed to have almost resulted in a deal. Were it not for Nath's supposed intransigence over the form of special safeguards to support subsistence farmers in India should the country be suddenly overwhelmed by agricultural imports. If a deal really is as close as some trade pundits suggest, by all means, go ahead and demonstrate that it really is. However, the US pressing for non-agricultural market access in China looks set to be a large stumbling block in possible negotiations:

The World Trade Organisation (WTO) could invite ministers to Geneva in the coming weeks to resume July's abortive talks on a new global trade pact, its head said on Tuesday. But fresh sparring between U.S. and Chinese diplomats indicated that any new meeting would not be easy.

"In the weeks to come, and depending on progress made by the negotiations at senior official level, I am ready to call ministers back to Geneva to try and close the issues which remain open," WTO Director-General Pascal Lamy told a meeting of the United Nations Conference on Trade and Development (UNCTAD).

Officials from seven trading powers met last week to explore ways of bridging the gaps, and are to meet again this week. July's ministerial talks fell apart over differences between the United States and India over special measures to help poor-country farmers cope with a surge in imports. The talks were also marked by tension between the United States and China over several issues, including one to eliminate import tariffs on certain industrial sectors.

But speakers from both rich and poor countries at the UNCTAD meeting said that July's talks did not represent a collapse of the WTO's Doha round, launched in 2001 to free up world trade and help developing countries export more. "There's no doubt it was a setback, but it was not a collapse of the round," said Australia's WTO ambassador, Bruce Gosper, who chairs the WTO's General Council.

A deal to free up world trade could boost confidence in a world economy battered by financial meltdown [see my note below]. Developing countries are particularly keen to complete the talks as they recognize trade can help them grow out of poverty. "If the shirt that we are producing to export, we don't find somebody in Europe or in the export destinations to buy it, then we don't survive," said Shree Baboo Chekitan Servansing, the WTO ambassador of Mauritius, which represents African, Caribbean and Pacific countries at the WTO. Both rich and poor countries want to build on what was achieved in July, despite the ultimate failure of those talks.

Trade experts said any resumed ministerial talks would most likely be called before the U.S. presidential election. The deputy U.S. ambassador to the WTO, David Shark, said the United States remained committed to doing a deal this year, and dismissed speculation about the impact of the forthcoming poll. "I can say on behalf of the United States that we remain willing and able to negotiate," he said.

Shark repeated Washington's long-standing view that success in a deal required a big contribution from big developing countries like China and India to open up their markets. But that prompted a swift response from China. "The problem now is that often in the negotiating rooms you find that some members are obsessed with market access rather than development, are obsessed with inventing new terms like 'key emerging countries'," said Huang Rengang, a senior diplomat at China's WTO mission.

BTW, I have expressed disbelief that Lamy ties the completion of Doha to helping countries withstand the current global financial crisis. But, he just keeps repeating this line. My point is that greater trade liberalization has enabled towering trade imbalances to mount. That is, greater integration has only meant the US consuming more and more by importing like there's no tomorrow. Accompanying this trade imbalance has been the world funding the US and its various misadventures--especially the subprime fiasco. It thus seems to me that further trade integration has played a role in making this financial crisis come true, not mitigating it. But, don't try that line on D-G Lamy...

Dead Ducks I: Greenberg's "Pompetus of Love"

Anyone who has listened to classic rock radio should be familiar with Steve Miller's FM staple, "The Joker." A cryptic lyric from that hit song goes: Some people call me the space cowboy / Yeah! Some call me the gangster of love / Some people call me Maurice / Cause I speak of the Pompetus of Love. What the hell does this have to do with the subprime crisis? Perhaps nothing, but disgraced former AIG chairman Maurice Greenberg's attempts to salvage the House That Hank Built (AIG) did jog my memory of the song for some reason.

Quickly, let's look at two theories about Greenberg's actions. Being AIG's largest shareholder still, is he interested in preserving whatever value his equity holdings still have? Perhaps. After all, nationalizing AIG--which is what has ultimately transpired with Uncle Sam footing an $85 billion tab--has basically wiped out current shareholders. In yesterday's Financial Times, Greenberg opined that AIG only needed a "bridge loan" to temporarily tide the firm over instead of a "bailout." A bridge loan would not have resulted in the current situation of ownership being transferred to government-chosen representatives, which of course has instead transpired. So, capital preservation may have been part of Greenberg's motivations.

The second theory--the one I subscribe to more--is that having built up AIG and being unceremoniously dumped in 2005 presented Greenberg a chance to redeem his legacy. He offered to let bygones be bygones and help AIG but was rebuffed. Likely, then, it is more difficult for Greenberg to let go of past glories than anything else. In behavioural economics, there is this thing called the "endowment effect" in which those who possess certain things assign them a higher value than what others think they're worth. Ditto here. For Greenberg, think Sunset Boulevard via--you guessed it--Maurice's "Pompetus of Love." In the end, Greenberg's love for his creation would not save it: I really love your peaches, wanna shake your tree / Lovey dovey, lovey dovey, lovey dovey all the time.

The Meaning of Halted Russian Stock Trading

Some other commentators (coming from you-know-where) have expressed schadenfreude at Russia's stock markets diving. Recently, matters have gotten worse if you believe them: for a second straight day, Russia's equity bourses fell enough to trigger trading halts. In this topsy-turvy world where the rules are being rewritten almost daily, some cling to--pardon the word--neoliberal platitudes that Russia is busy shattering. You know what they are: respect property rights, honour contracts, observe transparency, etc. If it were not already abundantly evident before the Russia-Georgia conflict, those things mean very little to an assertive Russia now.

The naive response is "ha-ha, see how countries that don't play along with the West receive their comeuppance," perhaps in expectation of a 1998-style Russian collapse. It's very Thomas Friedmanesque circa 1999--the (re)imposition of "market discipline." Of course, such a collapse is not likely. As Premier Putin points out, the country's has healthy twin surpluses--budget and trade. Going forward, these will augment Russia's already massive reserves now totalling over half a trillion. Mount a speculative attack on Russia? You must be joking.

Conspiracy theories aside, the West is not out to undermine Russia as Putin suggests. Rather, rational investors are justifiably pulling out of Russia in droves given its independent (mean) streak. The important point is this: flighty FDI is not uncommon. However, increasingly dear stuff you can pull out of the ground--oil, gas, metals--is. In an era where resource scarcity plays a bigger role, demand did not suddenly disappear altogether for Russia's export wares. Instead, what's likely to happen is similar to the Seventies when oil companies were kicked out of the Middle East--key industries became nationalized. In the end, that's all there is to it--a major geopolitical event (support of Israel during the Yom Kippur War in 1973 and the Georgians in 2008) irks resource-rich foreigners (Middle Easterners then and Russians now). Foreign investment fleeing is not necessarily a "negative," but part of gaining greater national sovereignty on resource endowments. If foreign expertise is required, foreign managers can be easily hired by now-nationalized operations.

There will be dislocations in the meantime--nothing that a country with twin surpluses and half a trillion in FX reserves cannot withstand--but ultimately, the stuff buried under Russian soil is worth more than any flighty FDI. Do not forget the lessons of the past like some others have.

UPDATE: Would a country concerned about pleasing the much-vaunted "electronic herd" of foreign investors just now decide to sign friendship treaties with Abkhazia and South Ossetia? Talk about tweaking Russia's critics. Somehow, this doesn't strike me as builder of investor confidence. Further nationalization of Russia's economic interests is consistent with such moves.

Are Foreigners Tiring of Lending to America?

This subject matter is usually Brad Setser's, but I will pitch in given that he hasn't commented on it yet. In order to run humongous trade deficits year in and year out, foreign creditors have had to provide America with funding by investing in US bonds or stocks, whether issued by the public sector (think Treasuries) or the private sector (think corporate bonds). So far, foreign creditors have been more than willing to plunk their money in US assets--not necessarily because US investments provide better returns, but to continue a system of "vendor finance." As many export-oriented economies have trouble generating homegrown demand, they have instead lent Americans cheap and abundant credit to do the consuming for them. In turn, this cheap credit has been used Stateside for acquiring wondrous assets such as subprime mortgages and monster SUVs. Indeed, the current subprime mess would not have been possible without foreign creditors' seemingly endless willingness to lend America.

Or is this appetite really endless? There are two data points in the latest Treasury International Capital System (TICS) report which suggest otherwise. Given poor investment prospects in the US--a subprime financial system, agency bonds of dubious worth (issued by Fannie Mae and Freddie Mac), collapsing stocks, and room for further dollar decline--you would naturally expect foreigners to be wary of America. Well, it turns out that others are wising up--at least a little:

(1) Net foreign purchases of long-term US securities amounted to a measly $6.1 billion in July. Roughly speaking, such purchases need to cover America's monthly trade deficit. That is, America can only buy in excess (the US trade deficit) if foreigners are willing to provide it enough funds to do so (via net foreign purchases). In July, the US had a deficit of $62.2 billion. So, not even a tenth of July's trade deficit was covered by this yardstick.

(2) While it is true that such large shortfalls occur from time to time in the TICS data, these have been more than made up by subsequent (upward) revisions or windfall inflows. However, there appears to be a distinctly worrying trend of lower net foreign purchases in recent months. If you look at the cumulative inflows for the 12-month periods leading to July 2007 and July 2008 respectively, the story is very different. Let's make a rough comparison here: for the former period, the $971.6 billion TICS figure comfortably exceeds the 2007 US current account deficit of $736.8 billion. For the latter period, the $673.8 billion figure suggests more trouble in meeting whatever tab Uncle Sam ultimately runs up in 2008. Annualizing monthly data so far in 2008, it should come to about roughly the same as the 2007 deficit according to my calculations. Is the rest of the world finally forcing America to live within its means? It's about time, I say. It lends America good money and only gets subprimed (verb form!) for its efforts. Such a deal.

Given this lousy inflows report, you shouldn't be surprised that the dollar is strengthening for reasons beyond all logic. Pathetic foreign inflows = stronger dollar. Truly, these are "special FX." If anyone needed further proof of the irrationality of markets, here you go.

9/17 UPDATE: Right on schedule, Brad Setser has made his commentary on the latest TICS report. All I want to add is that, if you add transactions in long-term and short-term securities, the picture looks even worse. In the twelve months leading up to July 2007, the net sum comes to $878.6B. In comparison, the comparable period to July 2008 comes to $210.10B. Short-term flows tend to be "noisier" and are not usually included in determining the adequacy of capital inflows. However, including them may further suggest America's inability to sell assorted not-so-goodies. As always, caveat emptor.

McCain, Obama Outline Their China Policies

Here is an important story buried in the rubble from the subprime mess: the American Chamber of Commerce in China recently invited US presidential candidates John McCain (R-AZ) and Barack Obama (D-IL) to discuss their policy stances towards China. Indeed, were it not for China financing America in recent times, it is arguable that the global political economy wouldn't be as it is at present--for better or worse. Given the caveat that the audience for McBama here is the PRC AmCham, which you would expect to be interested in largely unfettered US-China trade, it is still surprising that many talking points of these candidates contrast where you would expect them to contrast. McCain highlights "win-win" possibilities from trade, whereas Obama highlights--you guessed it--a "level playing field."

Let us begin with McCain, more or less the standard-issue free-trader here. After reiterating the mutual benefits possible from trade, he goes into painting Obama as a protectionist / isolationist (is that redundant?)

A central challenge will be getting America’s relationship with China right. China’s double-digit growth rates have brought hundreds of millions out of poverty, energized the economies of its neighbors and produced manifold new economic opportunities. The US shares common interests with China that can form the basis of a strong partnership on issues of global concern, including climate change, trade and proliferation. But some of China’s economic practices, combined with its rapid military modernization, lack of political freedom and close relations with regimes like Sudan and Burma, tend to undermine the very international system on which its rise depends. The next American president must build on the areas of overlapping interest to forge a more durable US-China relationship.

It must be a priority of the next American president to expand America’s economic relationships in Asia. Unfortunately, in what has become an all-too-predictable pattern, some American politicians—including the Democratic candidate for president—are preying on the fears stoked by Asia’s dynamism; rather than encouraging American innovation and entrepreneurship, they instead propose throwing up protectionist walls that will leave us all worse off. The United States has never won respect or created jobs by retreating from free trade, and we cannot start doing so now.

McCain then goes into somewhat tougher rhetoric on the need for China to become a responsible stakeholder in the world economy given its growing clout. Also, McCain highlights the commercial opportunities in China for American firms:

China has obligations as well. Its commitment to open markets must include enforcement of international trade rules, protecting intellectual property, lowering manufacturing tariffs and fulfillment of its commitment to move to a market-determined currency. The next administration should be clear about where China needs to make progress, hold it to its commitments through enforcement at the World Trade Organization and enforce US trade and product safety laws. Doing so will help steer the process of China’s economic integration with the world to ensure that it is a fair, two-way street. And the US should continually expand opportunities as China develops, moving into retail ventures, environmental protection, health, education, financial and other services.

Meanwhile, Obama is more critical overall of China even if the PRC AmCham is his audience. Oddly, he starts by meandering for eight paragraphs on domestic policy and regional issues before homing in on China. In this context, some cut-and-paste bonhomies designed to please a domestic audience may not be so well-received. Obama goes:

I know that America and the world can benefit from trade with China, but only if China agrees to play by the rules and act as a positive force for balanced world growth. I want China’s economy to continue to grow, its domestic demand to expand and its vitality to contribute to regional and global prosperity. But China’s current growth is unbalanced, and in recent years domestic consumption has actually gone down as a percentage of GDP. To increase internal demand Beijing will have to improve substantially its social safety net and upgrade its financial services sector to bring its consumption in line with international norms. [Dear Obama speechwriter: what exactly are the "international norms" of consumption?]

Central to any rebalancing of our economic relationship with China must be change in its currency practices. Because it pegs its currency at an artificially low rate, China is running massive current account surpluses. This is not good for American firms and workers, not good for the world, and ultimately likely to produce inflation problems in China itself.

As President, I will use all the diplomatic avenues available to seek a change in China’s currency practices. I will also undertake more sustained and serious efforts to combat intellectual property piracy in China, and to address regulations that discriminate against foreign investments in major sectors and other unfair trading practices. And I will work with the Chinese government to establish a better system for both countries to monitor products produced for export and act when dangerous products are identified.

As President, I will take a vigorous, pragmatic approach to addressing these issues, utilizing our domestic trade remedy laws as well as the WTO’s dispute settlement mechanism wherever appropriate. High-level dialogue among economic leaders in both countries is also important to achieving real progress. My approach to our economic relationship is positive and forward-looking: to remove obstructions to gaining the benefits of trade and thus to enable faster, and healthier, growth in both economies.

The rebalancing bit I do appreciate, but the belligerent tone Obama adopts later on is questionable given his audience.

Do read the relatively short essays for yourselves. In addition, there is the usual bashing of China's human rights record, its suppression of personal freedoms, and its support for unsavoury regimes. However, I don't take these points seriously for (1) someone named Clinton also called China on them but proceeded to do little but push for China's further trade integration and (2) the US isn't exactly a model country in these respects. If the US couldn't get anything done when its global standing was far better, then its current subprime-infested iteration is unlikely to do any better.

UPDATE: I forgot to mention this--for what's it's worth, Obama is one of 12 senators who are part of the "Congressional China Currency Action Coalition." In the past, it has sought to apply Super 301 sanctions on China. Others are Senators Schumer, Graham, and Stabenow.

Hey McCain: Clean Up Your Act Before Wall St.

I get annoyed whenever Senator McCain tries his tired old line that he's a reformer out to mend the broken ways of America when the evidence suggests otherwise. Here is the latest case in point. Today, in the wake of Lehman Brothers collapsing, he is styling himself and Sarah Palin as a "team of mavericks" who will "clean up Wall Street." That sounds great and everything, but a quick trip to the campaign finance site OpenSecrets.org paints an altogether different picture. Like for George W. Bush before him, it seems that McCain hasn't been shy in accepting Wall Street campaign money at all. According to OpenSecret.org's tally, McCain's top five donors to date are, er, affiliated with Wall Street firms:

That's really "maverick," McCain: taking bucketloads of (probably subprime tainted) money in the finest Dubya style from the very same Wall Street firms you're bashing. To be non-partisan, Obama does little better despite adopting similarly tough talk. His tenth largest group of contributors is traceable to a certain Lehman Brothers. McCain and Obama as reformers? Somehow, I have my doubts. When it comes to sources of campaign finance--and a whole bunch of other things--these guys are no different from those who came before.

9/17 UPDATE: The "maverick" McCain has now outlined a thoroughly conventional (read: slow-moving and time-consuming) way of dealing with the housing bust--create something to investigate the housing mess modelled on the 9/11 Commission. Is this what a fast-imploding market needs?

Quickly...China to Appeal WTO Auto Parts Ruling

Here's a quick post just to let you know that the semi-infamous auto parts case [1, 2] ruling against China is set to be contested as the PRC will appeal the ruling. This from what is still our favourite official publication, the China Daily. Is it just me or the colloquial English used by Chinese scribes is getting somewhat wearisome?

China on Monday appealed against a World Trade Organization (WTO) ruling that found its auto parts import measures break international trade rules. The WTO expert panel ruling was circulated in July, and it largely upheld US, EU, and Canadian complaints that Chinese tax measures on imported auto parts result in unfair competition.

"China cannot fully agree with the legal explanations and verdict of the expert panel," said a statement from the Chinese WTO mission. The mission said it had appealed the case to the WTO's Appellate Body, and hoped that the body will make a fair-and-square decision [their words, not mine] on this.

Usually the Appellate Body needs 90 days to re-examine and rule on a case. It could maintain or overthrow a verdict by the expert panel. China considers auto parts as a complete vehicle if they account for 60 percent or more of the value of a final vehicle and charges a higher tariff on them. Chinese trade officials said the measure is meant to keep "lawbreakers" from exploiting the differences between tariff rates for importing entire automobiles and auto parts, and to protect consumer interests.

However, the three complainants [the US, EU, and Canada] argue that the Chinese tax measure deters auto-makers from using imported parts to build cars in the country, thus causing uneven competition.

I've Seen the Lights Go Out on Wall Street

With apologies to Billy Joel:

I've seen the lights go out on Wall Street
I saw the stock markets laid low
And life went on beyond the Bloomberg screens
They all bought Lexuses
And left there long ago

They held a concert out in Greenwich
To watch investment bankers glow
They called our securities junk
And made our business bunk
But we went right on with the show!

There is just too much to digest right now with Lehman Brothers declaring bankruptcy (see news release), Merrill Lynch being bought by Bank of America for $50 billion, and AIG supposedly seeking funding to help stay afloat. I suppose there are bazillions of sites out there cataloguing the implications of what some are calling the demise of Wall Street. This being the IPE Zone, I will stick to the more global implications:

(1) Roubini was right (yawn): the days of independent broker-dealers are numbered as two of their ranks ceased to be such in a single day, joining Bear Stearns. What remain are Morgan Stanley and Goldman Sachs;

(2) What's wrong with old-fashioned retail banking? Now that dowdy old Bank of America has swallowed up Countrywide and Merrill Lynch, the wasteful excesses of subprime casino capitalism have been revealed;

(3) European and Asian stock markets are getting hammered hard as risk assessments readjust upward and credit will probably tighten;

(4) Interestingly, the Europeans who are supposed to take a more hands-on approach to corporate governance than their American counterparts are actually leaving matters more to the vagaries of the much-vaunted "market forces." Meanwhile, the ever-so-meddlesome Fed is now accepting stocks for cash loans [!], opening American taxpayers to pick up an open tab. French Finance Minister Christine Legarde is now lecturing the US on how its government cannot always come to the rescue given the Lehman bankruptcy. Ooh, the irony;

(5) This dollar rally nonsense is gradually waning. As far as America goes, subprime garbage in, subprime garbage out.

Airlines: New EC Emission Regs are &*^%$@!

It is an understatement to say that the airline industry isn't one of the current darlings of the environmental movement. I was flipping through the Asian edition of TIME when I encountered a full-page ad by the Pacific Asia Travel Association (PATA), a consortium of airlines plying their trade in the Orient. One of the initiatives that the European Commission (EC) is taking to help curb global warming is to include airlines in its carbon emissions trading scheme from 2012 onwards. This initiative covers airlines with flights into and out of the Eurozone countries.

Unsurprisingly, the airlines in PATA and others operating in Europe are not happy at all about this eventuality. There is even an entire industry-sponsored site detailing the airlines' case. Basically, the defence that the airlines make in the full-page ad is, ahem, Bushian in nature (or, better yet, the disregard thereof). When asked why the United States did not enter the Kyoto Protocol, Bush famously made the point that it was pointless for America to join since developing countries which were big carbon emitters were exempt from carbon caps. Hence, Kyoto wouldn't have much effect on global emissions levels anyway whether America joined in or not. This brings me to PATA's argumentation which is quite similar in nature:

The message from PATA – the Pacific Asia Travel Association – is as simple as it is obvious: if you’re going to introduce a carbon emissions scheme in a global business like aviation, it can’t be limited to one part of the world. It must be global.

The drafters of the Kyoto Protocol understood this and tasked the International Civil Aviation Organization (ICAO) to deal with international aviation and the environment. An ICAO-driven solution is the only effective way forward.

A global warming deal involving all nations--developed and developing--is a difficult feat to manage, and this is borne out by there being no real negotiations working towards a global emissions regime. Ditto with airborne emissions: saying that we're waiting for a global deal is akin to postponing matters indefinitely. PATA continues:

Let’s take an example. Imagine you need to fly from Hong Kong to London. Under the new regime, if you choose to fly directly between the two destinations, the flight would attract an emissions charge from the moment of pushback at Chek Lap Kok to touchdown at Heathrow. If, however, you choose to fly via Dubai, for example, and change planes, then you would be charged for only the second leg of the journey.

The result: confusion for customers, an administrative nightmare for regulators and, as Cathay Pacific chief Tony Tyler noted recently, a severe competitive distortion for airlines operating in a global marketplace. Moreover, what right has the EU to charge an Asia Pacific carrier for emissions over non-EU territory? Instead of cleaning up the environment, it will create an international legal mess.

The tragedy of the EU scheme is that politicians could be taking real steps to help airlines reduce their emissions. The European Commission admits that implementing the Single European Sky for air traffic management could save 16 million tonnes of CO2 each year. But they have been talking for almost 20 years with few tangible results.

PATA is reviving that old devil of red tape. And where there is red tape, there is regulatory arbitrage. For instance, it may be cheaper to fly from Hong Kong to London according to the example on Emirates (with a stopover in Dubai) than on Cathay Pacific (with no stopover) because the emissions charge for the former is lower given the shorter flight distance associated with flying into Europe. PATA then makes the usual, almost mandatory potshot at the EC for bureaucratic paralysis. Perhaps PATA would be more comfortable if a flat fee were charged for flights coming in and out of the EU as a solution. Then again, I fear that getting rid of emissions regulations altogether as a goal overrides any expressed concern for the environment. It's so cynically Bushian.

In a way, the EC is like California in the US. Just as California is usually at the forefront when it comes to emissions regulations in America, so is the EU among regional groupings worldwide. Likely, there will be no global emissions deals without there first being smaller ones such as those in the EC. Though I agree that the current format for applying carbon charges needs some ironing out as suggested by PATA, regional deals will most likely be the stepping stones for more encompassing regimes. PATA disagrees emphatically, though, citing air travels vast contributions to humanity:

PATA is committed to reducing the carbon footprint of the travel and tourism industry. In April, we gathered leaders from all sectors of the industry at the PATA CEO Challenge to share best practices to combat climate change. Airlines including Cathay Pacific, Virgin Atlantic and Qantas were vocal and active participants.

But we will not sit by as bureaucrats impose counter-productive tax schemes in the name of climate change on a sector that underpins the world’s economic health and nurtures its social and cultural well-being [I am so very moved...hand me a hankie, please.]

Airlines must continue to reduce their carbon emissions, through better technology and more efficient operations and infrastructure on the ground and in the air. A universally-applied carbon scheme, under which some of the revenues are re-invested in renewable technology processes, would speed up this process.

However, there is little to be gained, and much more to be lost, if our airlines are terminally wounded by an ill-considered move such as that being championed by the EU.

Crunch Time: Would You Buy a $50,000 Hyundai?

The story of Japan's trailblazing role in East Asian industrialization is well-known: Once upon a time, American manufacturers looked down upon Japanese cars coming onto their shores. They beheld the tiny cars--and had a laugh. In the space of a few years, Japanese auto manufacturers soon had the last laugh as their products became more than serious competitors to American makes. Last year, foreign cars outsold domestic ones in the US for the first time ever, no doubt owing to the pioneering moves of the Japanese.

Stories about industrial development often follow Japan's trajectory and go something like this: You begin with labour-intensive things like textiles then move on to more advanced consumer goods requiring more technical expertise such as transistor radios and motorcycles. Having hopefully established an internationally recognized brand name for such items, you can then move on to even more sophisticated offerings like video game consoles (Sony Playstation, Nintendo Wii) and luxury cars (Lexus, Infiniti). In effect, today is Hyundai's crunch time like it was for Toyota and Nissan back in 1989 when they sought to move up the price ladder to compete wih the likes of German prestige brands Mercedes-Benz, BMW, and Audi. Nearly two decades later, Lexus and Infiniti are part of the luxury establishment that Hyundai is seeking a piece of the market of with its latest and most ambitious offering, the Hyundai Genesis.

Unlike the Toyota and Nissan efforts, however, Hyundai is not establishing a separate luxury brand to go after the German bigwigs, preferring to use the Genesis alone as a spearhead. Of course, it may not be so wise to establish a second luxury brand name in this day and age of dwindling car sales Stateside. Should the Genesis not live up to expectations, then it would be easier for Hyundai to retreat than if it establishes, say, its own dealer network for a Lexus/Inifiniti rival. The big caveat in the Hyundai strategy, however, is that cars with luxury aspirations sold under regular brand names have not had the best history. I have two cases in point, and troublingly for Hyundai, both are of sedans.

First, Mazda too decided to forgo marketing upscale cars under a separate nameplate with its Millenia sedan. I don't know if you remember it, but it's probably a sign that it didn't do too well that few do remember it. Second, Volkswagen's then-CEO Ferdinand Piech had (well, he still has them actually) delusions of grandeur and sold the Phaeton as a Mercedes S-Class rival. Motor-mouthed hack Jeremy Clarkson summed the Phaeton's failing best: All the luxury you need but no pizazz. Like many others, if I want a luxury offering from the VW-Audi Group, it will have four interlocking rings, thank you very much (an Audi). While Hyundai is not aiming that high--it's targeting the midsize E-Class instead of the larger S-Class, the stakes are still pretty sizable. Will its rich feature list make up for its lack of pizazz?

Car and Driver has just performed a test drive of the Hyundai Genesis and finds that while it does give you a lot of bang for the buck in the engine power, interior space, and gizmo departments, it does not drive as well as its comparable BMW rival. Though the German car is well and truly outgunned in the horsepower department, its dynamics are still rather superior. It will be interesting to see if the Hyundai can succeed where Mazda and Volkswagen have not. For sure, it will need a hefty dose of luck. That American consumers are rather broke doesn't help things much, either.

Rage Against MP3s: a Putative LP Renaissance

[After a long hiatus, I bring you...a weekend feature.] One of the ironic things about technological advancements in the realm of audio is that the quality of reproduced sound is going backward, not forward. The biggest culprit, of course, is the now-ubiquitous MP3 "lossy" format. The rise of portable digital players such as the iPod has made file formats which toss out musical information to save on disk space quite common. The victim in this process has been audio quality. Although I am not a dyed-in-wool "audiophile" by any means, I cannot listen to MP3s aside from naturally noisy environments such as on planes, trains, and automobiles where the benefits of portability are evident. If you ask me to sit down and listen to MP3s in a domestic environment, I will say it simply isn't possible. Compared to a regular CD, MP3 files are of comparably low quality.

Real audio enthusiasts are, of course, not quite pleased with CD sound. As many of them will tell you, the frequency range of CDs is constrained to 20Hz to 20kHz; the rest of the information is discarded. MP3s which toss away already limited musical information are even worse. Yes, there are higher resolution digital format such as SACD, but these have not gained much purchase in a time when MP3 files are deemed good enough by John Q. Public.

In a short span of time, both the Financial Times and the Wall Street Journal have come up with articles discussing a potential rebound in vinyl record sales. What is interesting to me from a political economy point of view is that foisting all these crappy compressed digital formats has not only given us poor audio quality but has also diminished record sales in recent times due to susceptibility to online piracy and whatnot. The most important point to me is this: CDs are not usually considered at all as collectibles with their teeny weeny cover art. Even in this day and age, records not CDs or any sort of digital media is prized by collectors. Fortunately, there are still those who keep the analogue flame alive. Apparently, not all consumer technologies are created equal. First, we have the FT:

Certainly, nostalgia plays a part. Many of the people now buying classic rock and pop reissues grew up during the 1960s and 1970s and are attracted to the idea of buying deluxe editions of the LPs they played in their youth. In the past few months three of the big four music companies – Universal Music, Sony BMG and Warner Music – have started re-releasing rock LPs from their back catalogues by artists such as Cream, Bob Dylan and The Doors, often remastered to bring out the best in the music and pressed on higher-quality vinyl. EMI is also re-releasing old LPs sporadically and several specialist labels have sprung up – among them, Classic Records in the US and Speakers Corner Records in Germany – licensing pop, jazz and classical music from the majors’ back catalogues and re-releasing it on audiophile-quality LPs.

Universal’s re-releases are coming out of Universal Music Japan, which has so far pressed 300,000 LPs across 100 titles – mostly rock but also including some classical and jazz. Minoru Harada, in charge of the project, says the records are aimed “especially at those baby-boomers who have started to retire, who have the time and money to spend on personal satisfaction and for whom vinyl connects with their earliest days of discovering music.”

But if it were only old fuddy-duddies still buying LPs, records would soon be heading the same way as the phonograph cylinder. In fact, younger music fans are helping keep the format alive. After CDs came along, dance music DJs did their bit, staying loyal to the 12in single and influencing fans to buy them. More recently, it has suddenly become fashionable among pop artists to release singles on 7in vinyl as well as in digital formats, often in limited editions that are seen as collectors’ items. The joke is, many of these singles are bought by youngsters who do not even own a turntable, but increasingly the records come with a coupon entitling the owner to a download of the same music.

So people are buying vinyl for different reasons. But one that refuses to go away is that many people believe analogue simply sounds better. This belief has grown only stronger as lifestyle changes and advances in technology have, paradoxically, led to a decline in sound quality – a retreat from hi-fi to lo-fi.

Think of it. Only a decade ago, people would sit in their living rooms listening to records or CDs played through expensive hi-fi components and speakers. Today, music has been squeezed out of the living room by visual media – the flat-screen television, satellite TV, home cinema and the games console – and is more often reproduced through iPod earphones or a pair of tinny speakers attached to a PC. According to GfK, a market research company, sales of hi-fi separates fell by more than 60 per cent, from £255m to £98m, in the five years to 2006, though the decline flattened out last year.

To vinyl purists, the rot set in with the introduction of the CD. Sound is naturally analogue, the argument goes, and vinyl preserves its natural character by recording it in an analogue format. But to turn it into a CD or other digital format, the sound has to be digitised. This means taking a series of snapshots of the analogue sound – in the case of the CD, at the rate of 44.1kHz, or 44,100 times per second. These snapshots are also taken with a predetermined degree of precision – in the case of the CD, at 16 bits.

The WSJ also chimes in on how the tide may be turning after LP sales hit a low point in 2006:

The 12-inch vinyl LP record -- in decline for the past two decades, clung to only by DJs, audiophile nerds and collectors -- is making a stand amid the digital revolution. World-wide sales of LP records doubled in 2007 (from three million to six million units) after hitting an all-time low in 2006, according to IFPI, the international recording industry trade association. Global sales of CDs dropped 12% in the same period, after having fallen 10% the previous year. Turntable sales in the U.S. increased more than 80% from 2006 to 2007 and continue to rise this year, according to the Consumer Electronics Association. "Last year and this year have been our busiest ever," says Kris Jones of London's Sounds of the Universe record shop, which sells more music on vinyl than on CD. "It's really crazy."

Record companies are looking for innovative ways to make people pay for music -- often music they already have in another format -- rather than get it free or at a reduced price over the Internet.

"There's a reaction against the commoditization of music" that downloading represents, says Mike Allen, a music industry consultant and former vice president of international marketing for record company EMI Group. "With vinyl there's something that has innate value -- a physical object."

Sound quality also plays a role. Vinyl fanatics have always maintained that LPs sound warmer and richer than digital formats. Some acts, like Beck, Tom Petty and Fleet Foxes, are playing to fans of both the old and new technology by including free CDs or MP3 downloads with vinyl versions of their albums.

LDCs Under Pressure, Continued

It seems that the "decoupling" story of LDCs powering ahead as the US and--to a lesser extent--other Western countries falter was premature. Not only are foreign investors fleeing the likes of Russia over geopolitical concerns, but other less--how do I put it--eventful places too. If you believe that investing in LDCs is a "leveraged play on global growth," then now appears to be as good a time as any to cash out on emerging markets as the US exports its troubles elsewhere: SUBPRIME - Proudly Made in America. LDC equities are being hammered more than American ones, while spreads on LDC sovereign debt are markedly widening. So, foreign investors leaving LDCs does account for some of the "special FX" moves of a strengthening dollar despite woeful macroeconomic new emanating from the US.

Outflows from emerging markets bond and equity funds reached $29.5bn over the past three months, the highest level since at least 1995, with withdrawals gathering pace over the past week.

Investors headed for the exits as rising fears over slowing world growth and the state of the banking system over the past week added pressure on emerging markets – which were already reeling from weaker commodity prices, inflationary pressures, a stronger dollar and geopolitical concerns.

Investors switched $1bn out of equity and fixed income funds on Monday, one of the highest daily outflows since records began in 1995, said EPFR Global, the data provider. Last week there were outflows of $1.6bn, bringing the total since June 4 to $29.5bn, the largest three-month figure since 1995.

Nick Chamie, head of emerging markets research at RBC Capital Markets, said: “Since July, investors have finally become aware of the severity of the global slowdown. The emerging markets are a leveraged play on global growth, so in a serious downturn, investors will naturally sell them.”

David Lubin, emerging market strategist at Citigroup, said: “Emerging market asset prices rose strongly in a world of rapid growth and high commodity prices, creating something like a virtuous circle. “Now we’re faced with the risk that this process is unwinding. The strength of the dollar has put emerging economies’ currencies under pressure just at the point where a rise in global risk aversion is pushing investors away from exposure to developing countries.”

The benchmark MSCI emerging market index fell 1.27 per cent to 857.44, the lowest level since March 2007. The fall extended its decline to 4.8 per cent over the past week and 22 per cent over past three months.

The hardest hit stock markets in dollar terms are Ukraine, which has fallen 58.8 per cent this year in part on geopolitical worries; China, down 57 per cent amid fears it had risen too far on a bubble; Hungary, down 49 per cent on worries over growth; Pakistan, down 46.7 per cent amid political turmoil; and Vietnam, down 46.4 per cent in the face of a sharp rise in inflation...

Emerging market sovereign bond yield spreads have risen to 330 basis points over Treasuries – highs not seen since mid-2005 – from 300bp at the start of last week amid rising risk aversion. Bonds of the four Bric countries – Brazil, Russia, India and China – have also been hit by rising interest rates this year.

Consider the case of Indonesia below. The country recently tried to sell foreign investor-aimed sovereign debt. To no one's real surprise, there were few takers at yields acceptable to the Indonesian authorities. This reflects the higher yields demanded by investors on emerging market sovereign debt, now demanding about a 3.3% yield premium over similar Treasuries according to JP Morgan's EMBI+ index. (Note to the FT: the newer GBI-EM index is a more accurate indicator in this instance for we are talking not about dollar-denominated EM bonds but of debt issued in EM currencies.)

Indonesia failed to sell bonds in an auction on Tuesday in a sign of growing worries over emerging markets as concerns heightened over the health of the world economy. The finance ministry said it was unwilling to pay the higher coupon rates investors were demanding to compensate for the volatile market conditions.

The problems for Indonesia were reflected in the broader market as emerging market bond spreads rose against Treasuries with the benchmark Embi+ index rising 10 basis points to around 325bp – close to this year’s high in March just before the rescue of Bear Stearns.

Analysts say resource-rich nations, such as Indonesia, are particularly exposed to growing fears of a sharp global slowdown, which would sap demand for commodities. The scrapping of the auction followed a similar failure in April when the government was struggling with soaring oil prices and spiralling fuel subsidies.

Yields have since fallen but the ministry said in a statement they were still “higher than what the ministry can afford”. The ministry had hoped to raise Rp3,000bn rupiah ($321m) from the auctions of zero coupon bonds maturing in 2011 as well as fixed rate bonds maturing in 2015 and 2038. But officials said offers only totalled Rp2,900bn – the lowest this year – and some investors were asking for yields of 13.5 per cent. The government offered 10.5 per cent and 9.5 per cent.

Indonesia’s stock market fell 3.9 per cent Tuesday and the rupiah had its sharpest fall in 15 months on Friday. Nick Cashmore of CLSA in Jakarta said: “There’s not any immediate need to sell bonds but what’s happening shows that the whole credit crunch is still working its way through [the system].”

Indonesian corporates are finding it even harder than the government to sell bonds. Not one company listed on the Indonesian stock exchange has sold bonds this year – and many have tried – compared with some three dozen corporate bond offerings last year.

Fredric Teng, of Lehman Brothers in Hong Kong, said Indonesia’s woes were indicative of a broader regional malaise, citing a similar auction failure by the Philippines this year too. Analysts said countries had the option to sell foreign currency debt. Indonesia has twice this year sold dollar bonds and is intending to offer a $1bn sukuk bond next month. South Korea is also selling dollar bonds.

Profit From PRC Paranoia the Costa Rican Way

A few moons ago, I wrote on the checkbook diplomacy being waged by the PRC and the ROC (Taiwan) over diplomatic recognition of their respective countries as "the one true China." Like "The Highlander," there can be only one. There, it was noted that Costa Rica had changed its allegiances to the PRC after being a Taiwan-recognizing stalwart for quite some time. (The previous post also has a list of the Taiwan-recognizing holdouts.) Perhaps reflecting Western concerns about developing countries wielding their massive reserve holdings for accomplishing broadly "political" objectives, it transpires that China bought out Costa Rica using monies from its reserve accumulation, now amounting to some $1.8 trillion. $150 million managed by the State Administration of Foreign Exchange (SAFE) was used in purchasing dollar-denominated Costa Rican external debt to entice the Latin country to switch allegiances.

While China has the biggest FX pile in the world, Taiwan is no slouch in this area as it has some $280 billion. Given that the PRC and the ROC compete over bragging rights in terms of diplomatic recognition, cash-strapped countries looking for cheap and easy investment should be looking to play these two off by upping the stakes going back and forth: "China said it would give our country..." followed by "Taiwan promised..." Easier money could not be had over such foolishness. From the Financial Times:

The secretive government agency that supervises China’s foreign exchange reserves used its funds to help convince Costa Rica to sever ties with Taiwan and establish relations with Beijing last year, according to documents obtained by the Financial Times.

The purchase of US-denominated Costa Rican government bonds by China’s State Administration of Foreign Exchange (Safe) is the clearest proof yet that Beijing regards its $1,800bn in foreign reserves – the world’s biggest – as a tool to advance its foreign policy goals, as well as a potential source of income.

“This is the first smoking gun that proves China uses its foreign exchange reserves for political purposes,” said Kerry Brown, senior fellow with the Asia programme at Chatham House in London. “It raises questions about some of Safe’s other investments and will worry politicians and business people in places where Safe is taking stakes in high-profile companies.”

Encouraging the handful of countries that still recognise Taipei as the legitimate representative of the Chinese people to switch their allegiance is a key foreign policy objective for Beijing, which regards Taiwan as a renegade province. China and Taiwan have for years used aid payments, infrastructure projects and the like as incentives for small countries like Costa Rica to take their side.

But Safe’s international profile is relatively new. In the past year, it has used a Hong Kong subsidiary to buy small stakes in publicly listed companies including BP, Total of France and at least three Australian banks. Safe does not publicly disclose its investments and has refused in the past even to acknowledge the existence of its offshore subsidiaries. Safe and three of its offshore subsidiaries refused repeated requests for comment.

In January this year Safe bought $150m in US dollar-denominated bonds from the government of Costa Rica as part of an agreement signed last year under which the Central American nation cut diplomatic ties with Taiwan (after 63 years) and established relations with the People’s Republic of China.

The agreement, signed on June 1 2007 by Yang Jiechi, China’s foreign minister, and Bruno Stagno Ugarte, foreign minister of Costa Rica, explicitly links the foreign policy switch to China’s purchase of $300m in government bonds and a grant of $130m [my emphasis].

In an exchange of letters from January this year between Fang Shangpu, Safe’s deputy administrator, and Costa Rica’s finance minister, Safe promised to buy government bonds under the terms of the 2007 agreement, but included a clause demanding Costa Rica take “necessary measures to prevent the disclosure of the financial terms of this operation and of Safe as a purchaser of these bonds to the public”.

Costa Rican diplomats advised against keeping the terms secret, but the Chinese insisted, said people familiar with the matter.

The New Battle Cry: Divest From Russia

Visiting the blog of Nouriel Roubini hipped me to yet another of these seemingly endless comparisons of various countries' economic competitiveness based on "neoliberal" criteria involving the triad of liberalization, privatization, and deregulation in the realms of economic management, trade, and finance. Whereas the emphasis of the World Economic Forum (WEF) study is on the latter, all those areas are considered. To no one's surprise, Russia does not exactly do well in the areas of "corporate governance" (where Putin is the ultimate arbiter of governance), "legal and regulatory issues" (where Putin is judge and jury), and "contract enforcement" (where Putin can expropriate your sorry behind without much fuss).

There has been a stampede of foreign investors out of Russia given all the "political risk" surrounding the conflict between Russia and Georgia. As if it were not evident yet, the conflict seems to have removed the last vestiges of foreign investor adventurism in Russia. True, Russia has natural resources that cannot be found elsewhere in the world. That fact alone will probably ensure that its economic well-being is assured in the near future. That said, national industry will play an even larger role than it does now in the country's fortunes as justifiable foreign aversion sets in.

The Financial Times has a pair of informative stories on the matter. First, Putin denies the link between Russia's current economic turmoil and the Georgia episode, saying that markets the world over are taking their lumps. As you would expect, he is also saying that foreign money fleeing Russia is--you guessed it--"speculative" moves related to the housing bust's fallout elsewhere. There must always be a conspiracy, preferably involving evil-minded Westerners:

Vladimir Putin admitted on Thursday that foreign capital inflows could fall by up to 45 per cent this year, but rejected suggestions that turmoil in Russia’s financial markets was caused by the conflict in Georgia. The Russian premier said the country was simply suffering from the same credit crisis affecting the rest of the world, but he acknowledged that foreign inflows might fall this year from $80bn (€57bn, £46bn) in 2007 to $45bn or $50bn.

Mr Putin blamed Russia’s outflow of capital on “speculative” moves by western institutions withdrawing funds because of the “mortgage crisis” in the US and Europe.

But, speaking to western journalists in the holiday resort of Sochi, he denied there was a liquidity crisis and rejected the view that the turmoil had “anything to do” with the Georgian conflict.

The stock market has fallen almost 50 per cent since May, and fell a further 2.7 per cent on Thursday. Alexei Kudrin, finance minister, said on Thursday that Russia was now considering using money from its $32bn national wealth fund and from pension reserves to support financial markets.

Mr Putin played down the scale of the domestic liquidity problems, saying that when the state treasury had offered extra funds to commercial banks, the banks had taken up far less money than they could have done. In aggressive comments towards the United States, he said Washington had huge deficits whereas Russia had “a double surplus” on its budget and trade accounts.

Meanwhile, Russian Finance Minister Alexei Kudrin now suggests that some of Russia's accumulated oil wealth may go towards buoying Russia's ailing stock market, which has already fallen by half since May. Laissez-faire, eat your heart out:

Russia is considering using money from its $32bn national wealth fund and from pension reserves to support financial markets, Alexei Kudrin, finance minister, said on Thursday...“There are several proposals now for the banking community to improve the instruments that would allow [markets] to calmly work in this environment,” the minister told reporters. “Among these there is a proposal to place pension fund money and national wealth fund money on the domestic market.” Mr Kudrin added the money would be placed in securities.

Sberbank, Russia’s largest bank, led the way down on Thursday with a fall of 7.4 per cent – signalling that instability in the financial sector is the key source of weakness. “There is a shortage of liquidity being felt, and the central bank of Russia is carrying out large-scale operations to refinance commercial banks,” said Sergei Ignatiev, chairman of the central bank.

The central bank again injected more than $10bn (€7bn, £5.7bn) in short-term funds into the market on Thursday. The government has for months faced calls to use some of its windfall oil revenues to invest in order to stabilise domestic financial markets.

Mr Kudrin’s comments are significant, as he had proposed the use of national wealth funds to support markets. Erik DePoy, equity strategist at Russia’s Alfa Bank, said Mr Kudrin was the “standard bearer for the conservative approach” of non-intervention. Any intervention by the fund in the Russian market “would be only symbolic. Even if they did $3bn, that is equivalent to one day’s trading. I think they’re just trying to talk up the market any way they can.”

Despite the Russian stock market turmoil, Dmitry Medvedev, Russia’s president, chose Thursday to unveil a plan to upgrade the structure of the financial markets, which will be introduced as legislation next year. Mr Medvedev said laws on stock exchanges, clearing activities and a central depository centre were the first in the legislative pipeline.

“This is in no way a simple period for the international markets,” the president told a Kremlin meeting of senior government and banking officials. “But this perhaps makes our agenda more relevant, not less relevant.”

Intervention using the wealth fund would knock Russia’s sovereign rating if it proved to be more than an attempt to talk up the stock market, analysts warned. “If the government intends to put public funds at risk [funds originally laid aside to shore up the pension system], in order to prop up asset prices, then this would have negative implications for Russia’s rating,” said Frank Gill, head of European sovereign ratings at Standard & Poor’s. [Somehow, I don't think Russia is terribly concerned with external financing given still quite high commodity prices.]

Investing the fund’s money domestically would require changing the law, which created the entity in February with the purpose of buoying the country’s pension system. Chris Weafer, of Uralsib investment bank, said: “There is a group in government pushing for the money to be released domestically. But now that's shifting . . .  because there is a real risk the market fall will have a broader contagion. “Using the money domestically is a lesser evil. If they don't stop the market falling then the whole house of cards could collapse.” If authorities did not use the money now, “$40bn is not going to be of any use”.

China's Forced Unionization of MNCs in the PRC

For quite some time now, PRC officialdom has been nudging foreign firms in China towards mandatory unionization. However, this may not be as "pro-labour" as it sounds as we would understand it--the Teamsters at its height probably isn't setting up shop as we speak. Instead, the PRC is forcing MNC worker enrolment in the All-China Federation of Trade Unions (ACFTU), the only Party-approved and -sponsored union in the Middle Kingdom. As we all know, the Party has not exactly been welcoming of other organizations that could be potential political rivals in the future. Hence its marked suppression to date of the Falun Gong (Falun Dafa). That a group dedicated to stretching exercises and the like is politically persecuted owes to its perceived potential to distract the citizenry from Party loyalties. As far as I can tell, the history of the ACFTU is not exactly one of class struggle in the form of labour militancy; how could it remain the sole government-approved union all these years if the facts were otherwise?

A few years ago, the famously union-phobic Wal-Mart was forced to let its employees join the ACFTU's ranks. However, not much trouble has been caused by this move. Similarly, despite much bellyaching from Western firms whose concept of a "union" does not really jibe with that of the ACFTU--see today's New York Times article--there is not much cause for concern at the present time. The NYT article suggests this move may be in response to Western firms being cited for poor labour standards in China, though I personally doubt it. Noted as well is that the union has more often than not served to restrain rather than encourage workers during confrontational situations. Simply, the ACFTU is the un-Hoffa. What we basically have here is another rather manipulative Party device. Given that the ACFTU's membership is huge--200 million is the figure it bandies about--its mobilization potential is enormous.

Ultimately, why ask Western firms to join or face likely punitive measures? If relations between China and certain Western firms sour due to trade conflicts or what else have you, having ACFTU representatives will be a nice leverage point for getting Party policy across in the guise of "standing up for workers' rights." Western firms take note: they do things differently in this part of the world.

Rising US Dollar: What Explains "Special FX?"

Judging by the number of housing bust sites on my blogroll, you're probably aware that I am one of the many who are down on America's near-term prospects. From such a POV, the United States and its currency should be getting walloped as its macroeconomic picture gets even worse than it is now. Thus, I have been somewhat befuddled by the unexpectedly quick rise of the US dollar against many other world currencies, especially the euro. As late as July 15, the euro was trading above $1.60. Today, however, the US dollar has somehow managed to push the common currency to below $1.39. The moves have been, in a word, dramatic.

Those who are arguing that the dollar was due to strengthen sooner or later raise a number of points. First, the dollar was oversold and due for a correction. (Fair enough.) Second, bad economic news from elsewhere demonstrates that other economies will be affected by the global economic slowdown as much as the US has. On a related note, commodity prices have begun to ease as demand for commodities wanes in the rest of the world. After all, since the US constitutes a final destination for many of the others' wares, a slowdown in the US would affect them as well. Importantly, commodity prices have shown much inverse correlation as of late with the dollar, most famously oil. Third, America's woes have already been "priced in." Fourth, risk aversion in the wake of the subprime mess means investors are once again avoiding foreign markets and repatriating their funds from abroad and changing them into dollars.

OTOH, I am far less sanguine about the above explanations. While they hold to some extent, it seems to me that things are getting even worse Stateside. Indeed, I find it remarkable that a string of bad news has not dented the dollar's recent ascent. These include:

- The trade figures for America have been worsening as of late; moreover, a stronger dollar is only bound to lessen the trade competitiveness of American exports;
- Aside from a once-again ballooning trade deficit, the US budget deficit is soaring up, up, and away. The deficit is set to surpass $400 billion in fiscal year 2008, with worse expected in 2009.

Plus, don't get me into a Roubini-esque laundry list of what ails the US. I ask you: is America the very picture of a "healthy" economy? What we have here is yet another case of what I call "special FX": currency moves seemingly devoid of logic or semblance to economic reality. From my point of view, a buying opportunity to switch out of dollars is close at hand given that America's woes are not going away anytime soon. Plus, I will soon post on why it is unlikely that either Obama or McCain are going to improve America's record of fiscal debauchery. In the meantime, enjoy the special FX.

Trading Insults: "You're a !"£$%^ Protectionist!"

When it comes to international economic diplomacy, calling another's policies "protectionist" is usually equivalent to "yo momma": it is a fighting word. The Financial Times reports that the EU and China have been trading not only goods but also barbs over each other's trading practices, alleging instances of--you guessed it--protectionism. The complaints of the US about China are well-known; given that China's trade policies towards others are hardly different, it should surprise no one that the EU's complaints about China are similar. Accordingly, the EU has been hitting China pretty hard by imposing anti-dumping duties on the products of the Middle Kingdom. Chinese officials have thus been complaining about these protectionist practices.

Returning the favour, China is accused by the EU of setting up all sorts of trade and non-trade barriers to the entry of foreign firms in China. Aside from the ballooning bilateral deficit between the EU and China, concern is being raised over foreign takeovers of Chinese firms being disallowed in several instances including some mentioned below. The EU argues that while its firms are relatively open to Chinese investment, the converse does not hold true:

A senior Chinese official criticised the EU on Tuesday for resorting to protectionism to keep competitive imports from China out of Europe, as European business representatives working in China gave warning of rising economic nationalism. Cheng Yongru, a senior official at the Chinese ministry of commerce, attacked the European Union for its use of “anti-dumping” duties – taxes levied on imports it deems to be priced unfairly low.

The use of anti-dumping duties by the EU and some other large trading partners, such as the US, has been rising over the past year, though still remains low by historical standards. “The trend of trade protectionism in the European Union is very strong. EU companies should adjust their mindsets to adapt to the globalisation trend,” said Mr Cheng.

In a report released by the European Union Chamber of Commerce in China, European companies said they remained “generally optimistic” about their businesses in the country, but complained of a lack of market access, poor transparency and inadequate protection of intellectual property rights.

“Economic nationalism basically shows up in protectionism in China,” said Joerg Wuttke, president of the European Chamber. He said that in China, European and other foreign companies were often excluded from government procurement contracts and that major acquisitions by foreign businesses were “very difficult”, despite the ease with which Chinese companies were able to acquire companies in Europe. He highlighted the steel and automobiles sectors as examples.

The European Chamber is closely following Coca-Cola’s $2.4bn (€1.7bn, £1.35bn) bid to buy Huiyuan, China’s biggest juice manufacturer. If the deal – which was announced last week – receives government approval, it will be the biggest foreign takeover. The bid has stirred up strong nationalist sentiment among Chinese internet discussion group users, who warn of foreign domination and accuse Huiyuan’s owners of being “country-selling thieves”.

Huiyuan’s chairman said he would be happy whatever the outcome because if the deal were rejected by the government it would show how valuable the company was to the nation and many more Chinese would drink its products for patriotic reasons.

The European Chamber’s report estimated non-tariff barriers erected by the Chinese government cost EU operators €21.4bn ($30.2bn, £17.1bn) in 2006 in lost business opportunities and pointed to a growing perception in Europe that China did not always trade fairly. European exports to China grew 12 per cent last year to €72bn, but China’s exports to Europe rose 18 per cent to hit €230bn, accounting for 20 per cent of all Chinese exports.

● The failed foreign takeovers [two cases]

Carlyle/Xugong

Carlyle Group, the US private equity firm, admitted defeat in July after three years of political opposition to its bid to buy China’s biggest construction machinery company. In 2005, Carlyle agreed to buy an 85 per cent stake in Xugong Group Construction Machinery for $375m. However, the government’s refusal to approve the deal turned it into China’s longest-running cross-border corporate saga.

Danone/Wahaha

Nationalist rhetoric has also been a key factor in a heated legal battle between Danone, the French food group, and Wahaha, its Chinese joint venture partner. The Chinese founder of Wahaha has framed himself as a patriot defending his nation’s honour from rapacious foreign invaders. [Those damn gweilo!] Danone accuses him of setting up copycat operations outside its joint ventures to sell competing Wahaha-branded products.

Newsweek's Top-Notch Feature on Int'l Higher Ed.

Apologies on not posting about this earlier, but there is a whole bunch of articles from Newsweek (mostly) on the global education race that is well worth reading in detail. Of course, I am interested in the topic as it concerns my livelihood. However, others who don't work in higher education should nevertheless be interested for a number of reasons: First, international higher education is big business. Next, aside from being big business, studies far too numerous to mention suggest a close correlation between academic production and economic competitiveness. As you would expect, training students at the cutting edge of their respective disciplines tends to sharpen a country's stock of "human capital."

Accordingly, of particular interest is the last article on why overseas competition is good for the prospects of US higher education according to Richard C. Levin, currently the president of Yale. Pessimists on America like myself tend to gloss over America's considerable lead over all other countries when it comes to international higher education, though I suspect that it may matter more that the quality of an average college education elsewhere may be higher than that in America despite the latter being at the cutting edge in several disciplines. Without further ado:

CHAPTER 1: NEW GEOGRAPHY OF EDUCATION

Oil States Are the New Centers of Mideast Learning

How to Save India's Overcrowded Schools

Surprising Success of Iran's Universities

China's Reverse Brain Drain

CHAPTER 2: MARKETING & NATIONAL STRATEGIES

Reinventing the Global University

The Boom In Online Education

How Universities Compete for US Administrators

Keeping Oxford on Top

Liberal Arts Take Off in the Developing World

CHAPTER 3: THE AMERICAN SCENE

From The President’s Office

The Revolution in College Financial Aid

Why Paying For College Is A Smart Investment

Why the U.S. Isn't Short on Scientists

CHAPTER 4: SECONDARY ED--WHERE U.S. DOESN'T LEAD

How to Fix the Rich World's Failing High Schools

The Rise of Korean Prep Schools

Jesuits Teach Rich Compassion For The Poor

CHAPTER 5: THE RISE OF THE REST

Why Competition Is Good for U.S. Colleges

Samak Can Cook (But He Probably Can't Lead)

This post represents an opportunity for me to kvetch over two usually unrelated things: the tenuousness of electoral competition in Southeast Asia and the cult of the celebrity chef. The Philippines set a precedent in 2001 for ousting popularly elected leaders when then-President Joseph Estrada, an actor by trade, was removed over allegations of (yawn) corruption. As the streets of Manila overflowed with indignant opponents, Estrada was compelled to flee. It seems that Thailand is attempting to up the ante by ousting not just one but two popularly chosen leaders. First was Thaksin Shinawatra in 2006 after being re-elected in 2005. Now, it appears that Thaksinite ally Samak Sundarajev is about to suffer the same fate as his predecessor. Several members of Thaksin's outlawed Thai Rak Thai party are now part of the Samak-led People's Power Party, which came into power during the 2007 elections.

However, weeks of endless demonstrations have now been capped by a Thai court declaring that Samak and his cabinet need to step down over--get this--hosting a TV cooking show. After being chosen as Thai Prime Minister, Samak continued to host this show even if Thai elected officials are not allowed to pursue other sources of income. The earliest memory I have of an Oriental celebrity chef on TV is Martin Yan of "Yan Can Cook" fame. While it may be true that Samak too can cook, it seems his culinary flair has led to his early demise. Yes, cooking shows are rather hokey, and the Thais may have inferred as much from Samak's avocation. Although Samak says that he will attempt to regain his post, it is indeed odd to be ousted for being a Martin Yan wannabe. The topsy-turvy quotient in Southeast Asia is indeed on the rise with someone being removed from office over Tom Kha Salmon.

It also speaks volumes about the fledgling concept of electoral competition in Southeast Asia when people lining the streets can readily overturn election results. Why bother to hold polls in the first place if you're just going to turf these folks soon thereafter? The procedural justice is questionable in these political free-for-alls. From the BBC:

Thai Prime Minister Samak Sundaravej has been ordered to resign after being found guilty of violating the constitution over a TV cookery show. His entire cabinet has also been ordered to step down. Mr Samak was found to have violated a ban on ministers having outside interests by taking money from a private company to host a TV show.

However, the ruling People Power Party (PPP) has vowed to re-appoint Mr Samak as prime minister. "I insist that our party leader will be the prime minister," Wittaya Buranasiri, the chief whip of the six-party coalition led by the PPP, told reporters.

In court in Bangkok, Judge Chat Chonlaworn said that Mr Samak had "violated Article 267 of the constitution" and that "his position as prime minister has ended". The judgment, broadcast live on television and radio, was greeted with loud cheers and claps from Mr Samak's opponents, who have occupied his office compound since the end of last month.

However, Mr Samak has not been banned from standing again for prime minister, and it will be 30 days before the court's decision comes into effect. Thailand has had its fair share of crises recently, says the BBC's Jonathan Head in Bangkok, but this is one that even the Thais are baffled by.

For the past two weeks, the Thai government has been paralysed by thousands of protesters who have occupied its office, calling for Mr Samak to resign. They have said they will remain there until Mr Samak leaves office.

Mr Samak, a self-proclaimed foodie, hosted a popular television cooking show, Tasting and Grumbling, for seven years before becoming prime minister. He continued to present the programme for two months after becoming prime minister, saying that any money he received was only used to cover his expenses. The Thai PM is already reeling from the deepening political crisis and this court ruling puts another nail in his political coffin.

However, the constitutional court has ruled that "his employment at the company can be considered an employment", and said Mr Samak gave "conflicting testimony". There was also an attempt to fabricate evidence "to hide his actions", the judge said.

Protesters accuse Mr Samak of being a proxy for former PM Thaksin Shinawatra, who was ousted in an army coup in 2006 amid accusations of corruption and abuse of power. Tension spilt into bloodshed last week, when a man was killed in clashes between pro- and anti-government groups in Bangkok, prompting the government to impose emergency rule in the capital.

Is it 2008 or 1998? Korean + Russian Intervention

Declining confidence in emerging markets...fleeing foreign investors......repatriation of funds boosting the US dollar...it feels oh so very 1998 even if my calendar reads 2008. Although there may be less of a "contagion" to speak of this time around, it seems that many LDCs are returning to old habits that die hard. For this post, I have a double feature of Korea and Russia. First, South Korea has already pumped in a reported $30 billion to defend its currency, the won, from faster deterioration to help shore up foreign investor confidence in the country (among other things). As won-denominated bond issues mature, there is additional fear that large-scale repatriation can occur. Although Korea is far better placed this time around with an FX war chest of some $240 billion instead of one fast approaching zero, the memories of the hardships caused by the Asian financial crisis of a decade ago are causing Korean authorities to act quite aggressively. From Reuters:

Central bank intervention lifted the South Korean won from a four-year low on Wednesday. But the intervention was not enough to reverse the trend for the currency, which has lost more than 18 percent this year. The authorities, which have already sold $30 billion in 2008 to support the struggling won, were spotted intervening in the currency market by some dealers after the won hit a four-year low of 1,158.7 to the dollar.

It was the first significant intervention since last week and deflected growing market speculation that the authorities were backing away from aggressive dollar sales in favor of verbal warnings of "stern measures" for won sellers. In contrast, shares recouped some recent losses on Wednesday and bonds were higher after two days of market turmoil caused by fears of capital flight from South Korea. Foreign investors were still net sellers of Korean stocks for a 12th consecutive trading session, although the pace of the sales had lessened.

Overseas investors have sold large amounts of Korean stocks and have become net sellers of bonds. There are concerns in South Korea that they could repatriate billions of dollars next week when $7 billion in bonds mature. Officials maintained their verbal barrage, seeking to assure investors that the economy was solid.

Shin Je Yoon, the deputy finance minister, told the local online outlet EDaily that the economy was in difficulty but dismissed suggestions of a financial crisis. The won will recover soon, he said. He told Reuters that despite nervous markets, South Korea would go ahead with a planned bond sale abroad for about $1 billion this year.

An International Monetary Fund official also played down worries that South Korea's $243 billion in foreign reserves were shrinking too fast because of interventions. Meral Karasulu, the IMF's representative in Seoul, said the reserves were adequate to cover short-term international obligations. She also said foreign debt was not unusually large.

The won ended in Seoul on Wednesday around 1,148.5 to the dollar, nearly 1 percent above the four-year low of 1,158.7 to the dollar. But the currency was down 1.3 percent on the day.

The stock market's benchmark index rose 1.4 percent after combined losses of more than 4.5 percent on Monday and Tuesday, partly helped by speculation that the government would come up with a stimulus package for financial markets. "There are also hopes of some sort of market-stimulus package from the government amid the current worries about a financial crisis, and many investors seem to view the won currency's current level as the bottom," said Kim Joon Kie, a stock analyst at SK Securities.

The won has fallen nearly 10 percent since July 7 when the Finance Ministry and the central bank pledged in a rare joint statement to sell dollars out of the foreign reserves and take other measures to defend the currency.

The won has been under additional selling pressure in recent weeks because of concern that foreign investors will repatriate the maturing debt next week and trigger a hemorrhage of capital from South Korea. However, the idea that South Korea is on the verge of a repeat of the 1997-98 Asian financial crisis is widely dismissed by analysts because exports continue to grow, foreign exchange reserves are high and the government is stable.

But there are major challenges for the economy, which might explain the current selling by foreign investors, analysts said. South Korea is heavily dependent on imported fuels and other raw materials that have pushed the current account into deficit after years of substantial surpluses. The slump in the won adds to those costs because it makes imports more expensive. Growth in exports, although resilient, has began to lose momentum in the face of a global slowdown, casting doubt on the prospects for the economy's growth.

Next, demonstrating that developing states richly endowed with minerals and whatnot are not immune to the pressures of the marketplace, Russia has been forced to defend the ruble against widespread concern over doing business in Russia. It seems that despite the lure of vast mineral resources, investors are still concerned over such niceties such as "rule of law," "honouring of contracts," "property rights" and other related Western capitalist nonsense. When Comrade Putin wakes up one day on the wrong side of the bed and decides to nationalize your share in Russian energy investments, it does not speak very well of the governance in the wild, wild East. Bloomberg even notes that some are calling for ruble call options as a gambit to profit from surefire Russian intervention. Goodness knows, Russsia with its nearly $600 billion of currency reserves has a lot of ammo to help buoy its currency. These are not the days of Yeltsin, dear friends:

Investors should buy three-month call options on the ruble against the central bank's euro-dollar basket because the currency may rebound from a record low as Bank Rossii uses its $583 billion of reserves to curb declines, Morgan Stanley said.

The ruble slid 0.6 percent to 30.40 against the basket yesterday, after weakening 1.3 percent Sept. 3, its biggest one- day decline since the mechanism was introduced in February 2005. Bank Rossii, the central bank, monitors the ruble against a basket calculated by multiplying the ruble's rate to the dollar by 0.55, the euro rate by 0.45, then adding them.

Investors took $30 billion out of Russia since the Aug. 8 start of its five-day war with Georgia, according to BNP Paribas SA, with concern heightened by U.S. and European condemnation. The ruble should rebound against the euro and dollar once the central bank deploys its foreign-exchange reserves, the world's third-biggest, Morgan Stanley said. The Financial Times yesterday said Bank Rossii started selling dollars.

``The central bank has ample reserves and should be able to corral further ruble weakness,'' said Ronald Leven, a New York- based analyst at Morgan Stanley. ``With deviations from the government target basket at extremes and ruble carry advantage at multiyear highs, we believe it is attractive to go long via options.''

Investors should purchase call options giving them the right to buy Russian rubles in three months at a similar price to the current spot market, Leven wrote in a client note dated yesterday. They should also sell call options of the same maturity at a strike price of 29.50 to reduce the cost of the bet, he said.

Call options give the buyer the right -- but not the obligation -- to buy an asset at a pre-agreed price on a set date. By selling a call option, the investor is taking a bet the contract won't be exercised, allowing them to keep as profit the premium paid for the option. The trade offers a potential return of about 3 percent, Leven said. Investors are better putting their money into options because of the volatile political situation in the region, he said.

Russia's central bank sold as much as $4 billion in reserves yesterday to support the ruble as investors responded to Russia's war with Georgia, the Financial Times reported, citing unidentified currency dealers...

The ruble headed for its biggest weekly drop against the dollar since the second week of August, slipping 3.4 percent to 25.4872 per dollar by 11:28 a.m. in Tokyo, from 24.6450 on Aug. 29. It reached 25.7209, the weakest since Sept. 11, 2007. It dropped to 36.4137 per euro, from 36.1628 late last week.

Bank Rossii keeps the ruble within a trading band against the basket to limit the impact of fluctuations on the competitiveness of Russian exports. It has been widening the band since mid-May to introduce volatility into the currency and prepare it for a free float by 2011...

Sarkozy Hires Sen, Stiglitz to Replace GDP

I have constantly harped on the theme that GDP is a highly imperfect indicator of welfare, although I am hardly unique in this respect. For instance, the Easterlin paradox highlights how gains in material standards of living --especially in the West--have not been accompanied by concomitant gains in perceived happiness. Once basic needs are accommodated, Easterlin observes that increased opulence does little to improve the human lot. Now, French President Nicolas Sarkozy has hired Nobel laureates Joseph Stiglitz and Amartya Sen to come up with yet another measure which surpasses GDP. Hiring Sen is a very interesting move since he is, after all, the originator of the capabilities approach which I think very highly of as an alternative benchmark of human well-being. From the International Herald Tribune:

Nicolas Sarkozy, the French president, recently appointed a commission to come up with a better measure for France, chaired by two Nobel laureates, Amartya Sen at Harvard and Joseph Stiglitz at Columbia. While Sarkozy's goal is to showcase a "quality of life" at odds with the country's more modest GDP gains, the high-profile effort might yield dividends elsewhere as well.

For years now, analysts have been seeking ways to improve the statistic. Instead of capturing only output, like cars rolling off an assembly line, why not also try to capture - in an expanded GDP or some parallel indicator - things like educational attainment or successful child rearing or life expectancy? A half-dozen research groups in the United States are also tackling the question. In good times, none of this effort gets much attention, but in times like these, when well-being and the economic indicator are so plainly out of sync, there's plenty of talk of repair.

"We may be in the early stages in the United States of recognizing that the gross domestic product is very misleading and something must be done to get better measures of well-being," Sen said.

The gross domestic product was invented in the United States during the Depression to measure just how much and how quickly the economy was shrinking and whether President Franklin Roosevelt's New Deal efforts at revival were working. The invention was a success, and other countries gradually adopted the new system.

To this day, the GDP accurately calculates the cash value that is created, for example, when workers put together steel, wires, rubber and upholstery to make an automobile. The car's value, which is the profit as well as the sum of the labor and the parts, is incorporated into the total. Similarly, a dry cleaner adds value when he cleans and presses a pair of pants. That value, which includes the profit to the dry cleaner as well as the cost of cleaning and pressing, is part of the overall calculation - and so on across tens of thousands of activities and transactions.

In the United States, the Bureau of Economic Analysis adds them up four times a year and announces, as it did last week, whether the GDP has risen, or fallen, signaling hard times.

The U.S. gross domestic product grew robustly in the post-World War II years. Family incomes also went up, and a rising GDP came to signal well-being as well as expanding economic activity. But these days, while the value added in making cars goes into the total, same as always, the gain can be distributed in stock dividends or profits or multimillion-dollar chief executive pay more than in raises for workers. The GDP does not reflect the shift in distribution.

And over the past 15 years there has been just such a shift. While the GDP has continued to rise, wages have stagnated, pensions have shrunk or disappeared and income inequality has increased. Health care is measured by the money spent, not by improvements in people's health. Obesity is on the rise, undermining health, but that is not subtracted.

"There are numerous attempts these days to measure happiness and quality of life," said Enrico Giovannini, chief statistician at the Organization for Economic Cooperation and Development, who is responsible for recent, well-attended conferences in Europe and the Middle East where the delegates explored measures of well-being that might be incorporated into the GDP, or used to supplement it.

Taking into account these factors could also increase the GDP. Incorporate unpaid work, like raising children, and the total goes up. Women caring for their children are investing in future skills and productivity. Assign a dollar value to each hour spent in this unpaid child care - $10 an hour, to take one of the amounts the Bureau of Economic Analysis is currently considering - and a new line would exist in the GDP accounts for measuring, in cash, a key industry, parenting.

Within the U.S. government, an annual "time use" survey, started in 2003, is emerging as an important source of raw material for an altered GDP. The Bureau of Labor Statistics has been asking 14,000 people a year how they spend each hour of a designated day. From such data, time spent with children can be tabulated, given a dollar value and inserted into the gross domestic product.

"If you just want to know what is going to happen next in the business cycle, then GDP as it exists today is enough," said Katherine Abraham, a former bureau commissioner, now a University of Maryland economist. "But if you are trying to figure out where we are headed as a society, then this sort of data is a must."

9/15/2009 UPDATE: The report is finally out and I excerpt the recommendations.

Go East: China Clean Tech a $555B Opportunity

I was reading the China Daily on a flight bound for China when I spotted an interesting article on how American firms are keen on selling green technologies to the Middle Kingdom. In fact, US companies recently went on a roadshow to sell such technologies in China. Truly, it should be a win-win situation from my POV: America needs to leverage areas where it still has a competitive advantage to narrow its trade deficit such as green technologies. Meanwhile, PRC officialdom has, in its declarations at least, emphasized the need to transition to a cleaner economy. The famous statistic that China has 16 out of 20 of the world's most polluted cities certainly draws attention to this matter. The trade mission of green technology-selling US firms is part of the Strategic Economic Dialogue which has transpired between these two countries since 2006:

The nation will spend a total of 2 trillion yuan ($293 billion) to ensure that renewable energy accounts for 15 percent of its total energy use in 2020, compared with less than 10 percent at the moment. The government said earlier that it would spend 1.4 trillion yuan from 2006 to 2010 on environmental protection.

According to the US government, the clean technology market in China will amount to $186 billion in 2010 and $555 billion in 2020. The Chinese government's policies, such as targets for renewable energy use and the newly passed circular economy law, will create new business opportunities for US firms, said (US Assistant Trade Secretary David) Bohigian.

China passed its circular economy law on Aug 29, which is aimed at boosting sustainable development through energy saving and the reduction of harmful emissions. When the law comes into force on Jan 1, industrial enterprises will be required to adopt water-saving technologies, strengthen management, and install water-saving equipment in new buildings and projects.

The new law will boost the development of China's clean technology sector, something that overseas clean technology companies hope to cash in on. Bohigain said US companies with clean coal and carbon capture technologies are better positioned to succeed in China, as the nation currently uses highly polluting fuel to satisfy around 70 percent of its energy needs. Meanwhile, renewable energies such as solar and wind power also have great market potential in the nation.

A total of 19 companies ranging from startups to industrial giants such as GE Energy were on the mission, the third of its kind since 2007. After their stop in Beijing, the mission will also visit provinces including Guangdong and Shandong. This is the first time environmental protection technology firms have taken part in the mission led by Bohigian, which used to be comprised mainly of renewable energy companies.