The Toyota Way is Shutting Cali's Last Auto Plant

♠ Posted by Emmanuel in Labor at 8/28/2009 10:07:00 AM

A few days ago, I described America as an amalgamation of Calibankruptcy and Government Motors: insolvent state governments and businesses leeching the life out of a once-healthy entity with little hope of recovery. As it so happens, we have perhaps another notable entry in this line of argument. One of the semi-successes in GM's recent sorry history was its plant in California run jointly with Toyota--a company that actually knows a thing or two about profitably running a car business. This entity is (was) known as the New United Motor Manufacturing, Inc. (NUMMI). With GM entering bankruptcy, it pulled out of its end of the bargain, ending its involvement in the Fremont plant where it had made cars since 1962.

It was only a matter of time until the other shoe dropped. Whatever your view is of Southern states rolling out generous incentives to foreign automakers to set up shop, the lure is proving too great for Toyota. Some say these incentives are too generous for the benefits received; others would argue otherwise. In the end, it doesn't matter. Toyota has decided to shut down its last factory with--you guessed it--a unionized workforce. Certainly, it is very difficult to portray automaker unions positively after they helped leech the life out of GM and Chrysler. While their main problems had to do with selling undesirable cars, the money drain from becoming retirement and health agencies for retiring autoworkers certainly didn't help. From the LA Times (itself a bankruptcy victim, BTW):

Toyota Motor Corp.'s decision to abandon its assembly line in Fremont marks the end of large-scale auto manufacturing in California, which over the years boasted a dozen or more plants building vehicles ranging from Studebakers to Camaro muscle cars. The Japanese automaker said Thursday that it would end production at the plant March 31 [2010], throwing 4,700 people out of work, and return some production to Japan.

It's another hard blow for California, a state already grappling with an 11.9% unemployment rate -- its highest since World War II and the fourth-worst in the nation. In addition to wiping out the jobs directly tied to the plant, closing the facility will send ripples through the web of suppliers that make components for the factory and through nearby stores, restaurants and bars that depend on its workers for business.

Overall, closing the plant could cost more than 40,000 jobs, according to Sen. Dianne Feinstein (D-Calif.), who has worked with other public officials to try to keep the plant open. But communications with Toyota eventually broke down, she said.

Well of course the California state government couldn't throw money at Toyota. Not at this point in time. And here is the most important part:

It is the first time that Toyota has ever closed a major auto assembly plant...Assembly line worker Jose Hernandez, 40, who commutes 75 miles to the plant from the Central Valley town of Ceres, said the news was a bit surprising because the plant had been busy since the government's "cash for clunkers" program jump-started auto sales this month.

So the Toyota Corolla was a model very popular with cash-for-clunkers program buyers. This isn't surprising to me as I'd proudly own one myself. But what now that the program is coming to a close and there are more affordable manufacturing locations that beckon? Let's be honest here: A large reason why Toyota decided to close the plant was to eliminate future entanglements with the UAW. It still puzzles me why UAW-style organized labor does not mind winning benefits that will ultimately drive their employers into the ground. I would not put Ron Gettelfinger in charge of a lemonade stand, let alone a corporation (good luck, Chrysler). See GM and Chrysler for shining examples of the benefits of union membership. With friends like these, you're better off losing them and moving elsewhere.

Expect further exodus from California along these lines, although there is really not much left for the process to go.

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Turner 'n' Hooch: FSA Boss Talks Tobin Tax

♠ Posted by Emmanuel in Casino Capitalism at 8/27/2009 08:10:00 AM

Ah, here we go again with an old chestnut. It's said that there are few truly new ideas, but many that are recycled time and again. The Tobin Tax, named after a proposal of Nobel Prize in Economics winner James Tobin to tax international currency trading, has come and gone in our collective consciousness. Tobin envisioned it as a way of generating socially beneficial revenue and, by contrast, limiting trading which generated socially dubious results including destabilizing currency movements. Activists have long championed the cause of a Tobin tax for understandable reasons, though its uptake has been nil as it would require agreement of all the governments of money center countries. Its prospects have always been dim.

It is thus with some interest that I read that Lord Turner of the Financial Services Authority, Blighty's watchdog, has once more raised the specter of a Tobin tax in the pages of a popular newsmagazine for largely the same reasons Tobin proposed it 38 years ago when major economies abandoned the dollar-gold standard: the spread of financialization is rather unproductive and socially negative. From the FT:

The head of Britain’s top banking watchdog supports the idea of new global taxes on financial transactions, warning that a “swollen” financial sector paying excessive salaries has grown too big for society.

Adair Turner, chairman of the Financial Services Authority, says the debate on bankers’ bonuses has become a “populist diversion” and that more drastic measures may be needed to cut the financial sector down to size. He also says the FSA should “be very, very wary of seeing the competitiveness of London as a major aim”, claiming the city’s financial sector has become a destabilising factor in the British economy.

His comments, floated in an interview in Prospect magazine published on Thursday, may be read in other financial centres, including New York, as a sign that Britain is becoming increasingly sceptical about the perceived advantages of being a leading financial centre.

Lord Turner’s suggestion that a “Tobin tax” – named after the economist James Tobin – should be considered for financial transactions is also likely to reverberate around the world. The proposed tax, which has previously been championed by development economists and the French government as a means of funding the developing world, has been fiercely opposed by the finance industry.

Lord Turner appears worried about a return to “business as usual” in the banking sector, suggesting that new taxes may be necessary to curb excessive profits and pay in the financial sector. “If you want to stop excessive pay in a swollen financial sector you have to reduce the size of that sector or apply special taxes to its pre-remuneration profit,” he says.

Lord Turner says higher capital requirements [reserve requirements] will be the FSA’s main tool to eliminate excessive activity and profit, but that a tax on transactions on a global level may be an additional option.

OK, I do not necessarily have qualms here. Note also that the emphasis has shifted from just FX transactions in the wake of the dollar-gold standard's demise to a broader range of deals. For obvious reasons, the Asian financial crisis prompted more dead-on calls to limit short-term speculative currency flows whereas this one is wider-ranging. However, those working in the City and the government minders in Treasury seem to have other ideas--especially the future of London. The main point of dispute concerns visions of Britain's future: is rolling back the frontiers of finance desirable, or should trends continue of a financial sector occupying a larger and larger share of economic activity?

Aides to Alistair Darling, chancellor, said no such taxes were under consideration. Mr Darling insists that the banking industry in London should continue to play a leading role in global finance...

“This isn’t on the table,” said one government official. “If Adair Turner has views on tax policy, perhaps he should go and work in the Treasury...” [Turner] argues that parts of the financial industry have grown “beyond a socially reasonable size” and that London’s competitive position should not be defended at any cost.

To illustrate his point he looks at growth in the share of gross domestic product made up of wholesale financial services and considers “what percentage of highly intelligent people from our best universities went into financial services”...

Lord Turner’s suggestion of a Tobin tax to rein in excessive profits may turn out to be about as successful as Mr Chirac’s failed initiative. The FSA chairman admits that a global agreement would be “very difficult to achieve”. But his stark warning illustrates a wider fear among some regulators that the easing of the financial crisis has bred complacency and that tough measures still need to be implemented.

Interesting stuff. The French and Turner are well-meaning if I do not necessarily expect much to come out of this latest episode. Moreover, Darling and Co. are on a weaker footing: why should London be uniquely disadvantaged if--and this is a big if--everyone else agrees to such a tax?

UPDATE: Unsurprisingly, misinterpretations of Turner are rife. a global Tobin tax wouldn't single London out for ill fortune as it would impose a similar burden, um, globally. Why London's mayor among others isn't more careful in interpreting what Turner said demonstrates unwillingness to listen. Alike so many other public issues, the quality of the debate is simply appalling.

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How to Create World-Class Universities: A Guide

♠ Posted by Emmanuel in Development,Education at 8/26/2009 06:05:00 AM

This is a bit of navel-gazing at the international political economy of what a lot of us are familiar with in higher education. Given the famously open-ended nature of higher education, our American friends have depicted college as consisting of sex for the undergraduates, parking for the faculty, and football for the alumni. While I am not in a place to doubt the veracity of this assertion, one of the things that interests me at the current time is the challenge for the rest of us in establishing world-class universities. Is it a worthwhile goal or is it one just for wealthy nations? To me, higher education in its current form is an Anglo-Saxon game: the gatekeepers of what constitutes valued research output--"knowledge"--are mostly American and British.

In effect, "world-class" is to no small extent a homogenizing process involving the prioritization of research according to American and British yardsticks to improve international league table standings. As an institution that has in the past been faulted for promoting one-size-fits-all policies, the World Bank may not be best placed to embrace a diversity of approaches to promoting higher education. In particular, LDC resources for higher education may not be best utilized by creating prestigious research centers but by ensuring that teaching quality is improved at the tertiary level with wider access. Still, the title of this new 2009 publication emphasizing world-class institutions does imply a clear (US/UK) direction. Certainly, it's interesting material even if its thrust is somewhat esoteric to the more basic task of establishing workable tertiary educational institutions in the developing world.

Here is the introduction by current World Bank Chief Economist Justin Lin to the publication prepared by well-known higher education researcher Jamil Salmi. If the topic is of interest, though, go through the publication by all means:

This new report, with its focus on world-class universities, examines the power of tertiary education for development from the perspective of excellence in research and scholarship at its most competitive levels. The report is extremely timely in exploring the emerging power of league tables and rankings in driving the tertiary education policy debates worldwide. In seeking a position on these lists of the best universities in the world, governments and university stakeholders have expanded their own perceptions of the purpose and position of tertiary education in the world. No longer are countries comfortable with developing their tertiary education systems to serve their local or national communities. Instead, global comparison indicators have gained significance in local development of universities. These world-class universities are now more than just cultural and educational institutions—they are points of pride and comparison among nations that view their own status in relation to other nations.

World-class standards may be a reasonable goal for some institutions in many countries, but they are likely not relevant, cost-effective, or efficient for many others. Knowing how to maneuver in this global tertiary education environment to maximize the benefits of tertiary education locally is the great challenge facing university systems worldwide. This publication is one important tool to assist with this goal.

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US Deficit Projections: Is the CBO on Drugs?

♠ Posted by Emmanuel in Cheneynomics at 8/25/2009 04:13:00 PM

There is an interesting political economy of budget projections alive and well at the heart of American politics. In days gone by, it was more or less the sole responsibility of the executive to prepare budget forecasts. Hence, the Office of Management Budget (OMB) was tasked with preparing forecasts under White House's auspices. However, congressmen in the early Seventies gradually became wary of a steady diet of White House numbers that were--how do I put this--massaged and frequently underestimated federal budget shortfalls. Hence, the Congressional Budget Office (CBO) came into existence in 1975. The OMB was tasked with giving a less partial budget picture in second-guessing the OMB.

It was thus no surprise when, early in 2009, the CBO came out with a far larger ten-year deficit forecast ($9.3 trillion) than the OMB ($7 trillion) during the February/March period when the 2010 budget was being debated. However, imagine my surprise today after finding out that the revised 2010-2019 deficit midyear estimates offered by the OMB ($9.05 trillion) and CBO ($7.14 trillion) switched places. Yes, the White House now predicts a smaller 10-year deficit than the Congressional watchdog.

A deeper look at these estimates, however, reveals shortcomings in the CBO estimates. The CBO estimates make rather unrealistic assumptions that Alternative Minimum Tax (AMT) loopholes will be closed and that Bush's tax cuts will not expire in 2010. Straight from the CBO horse's mouth:

Those projections generally follow the rules, originally established in law, that have traditionally governed baseline projections. However, some of the resulting assumptions may underestimate potential deficits. Because they presume no changes in current tax laws, the projections incorporate increases in revenues that would result from the expiration of tax reductions enacted earlier in this decade and provisions that have kept the alternative minimum tax (AMT) from affecting many more taxpayers.

Right there you have a damning statement about the realism of CBO assumptions coming from, well, the CBO. However, continuing to read the CBO entry reveals pretty wild forecasts for US growth over the next few years:

Specifically, CBO estimates positive economic growth during the second half of calendar year 2009, at an annual rate of 1.6 percent, following declines at an annual rate of 6.4 percent in the first quarter and 1.0 percent in the second quarter. In CBO’s forecast, real GDP grows by 2.8 percent between the fourth quarter of 2009 and the fourth quarter of 2010, by 3.8 percent in 2011, and by an average of 4.5 percent in 2012 and 2013.

!!!??? I think it's more likely that we'll find Bigfoot and Sasquatch going on a joyride atop the Loch Ness Monster while Kraken swam alongside in the next ten years than we are to see these sorts of US growth figures. As I always like to say, only a minimum of investigative sleuthing can quickly reveal flaws in what the headlines (or blogs for that matter) are saying. Try it for yourselves; it's good for you. Also consider that there is no question made of foreigners' unlimited willingness to buy US IOUs in these projections.

As for the CBO, I offer my regular routine: this is your brain [I show viewers an egg]. This is your brain on whatever the CBO is smoking. Any questions?

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The "Mu$eum of American Finance"? Yes, It's Real

♠ Posted by Emmanuel in Credit Crisis,Marketing at 8/23/2009 09:59:00 AM

A few weeks ago, I visited the Bank of England Museum. While it was certainly an informative enough trip, it certainly lacked any information on the BoE's massive attempts to resuscitate the British economy via unprecedented "quantitative easing" (code words for currency debasement for those like yours truly.) Monetary policy is of interest to a limited audience.

It was thus with great interest that I read about the Mu$eum of American Finance (their spelling, not mine--see the image above) in the pages of today's New York Times. As with many other institutions reliant on the support of wealthy benefactors, it is facing a challenge during these difficult economic times. However, the financial crisis is particularly salient for an institution dedicated to cataloging the plight of American finance whose main contributors have been Wall Street titans--many of which have since moved on to the Great Balance Sheet in the Sky:

The Museum of American Finance was faced with an awkward situation recently: some of the corporate sponsors of the museum — dedicated to glories of free markets — had, well, failed. Rather than fretting, the museum tapped its own entrepreneurial spirit and mounted an exhibit — “Tracking the Credit Crisis” — that reveals what the museum’s president, Lee Kjelleren, calls the “greed, recklessness and arrogance” of Wall Street.

Probably not what Lehman Brothers, Merrill Lynch or the American International Group had in mind when they donated money to the museum. But in the wake of the financial crisis, attendance at the museum — located at 48 Wall Street, near the epicenter of last year’s market collapse — has risen to about 200 visitors a day, nearly double its tally last summer. (The Metropolitan Museum of Art averages that many visitors almost every 90 seconds.)

And where else can you buy a poster for just $12 chronicling the lowlights of the credit crisis — so many, in fact, that it’s a five-poster set? Among the biggest attractions for visitors? The morbid curiosity of a financial train wreck. “This is about the market crashing,” said Lizzie McNeely, 26, a high school teacher from Toronto, as she wandered around the museum one recent afternoon. “I am interested in how they are going to represent that.”

For the $8 price of admission (or free Tuesday to Saturday from 10 to 11 a.m. through October), visitors who have seen enough van Goghs at the Met and Pollocks at the Museum of Modern Art can get a detailed look at the events that brought the global economy to its knees.

The most popular sections of the exhibit, Mr. Kjelleren said, describe so-called toxic assets and how these were exported from America around the world — “As if the rest of the world didn’t already love America enough!” — as well as the dubious role of the ratings agencies in concealing the riskiness of subprime mortgages and the securities based on their values...

Mr. Kjelleren, a former banker for JPMorgan, said, “The idea was to create an awareness of the nature of the driving forces that affected everybody’s lives.” One of the best measures of the scale of the crisis is not on display, but can be found in museum literature detailing its corporate sponsorships.

Goldman Sachs, Citigroup, Morgan Stanley and Wells Fargo generously opened their wallets here a year ago, long before they became part of Exhibit A in a display on the financial crisis. And Lehman Brothers and Merrill Lynch are effectively gone, and American International Group is a shadow of its former self. The government owns nearly 80 percent of that company.

This is an intriguing, feel-good story on several levels. In some ways, it is a truer reflection of capitalism's dynamics in a post-subprime era: A former Wall Street insider given an honorary position to watch over a museum dedicated to extolling the glories of high finance suddenly finds himself in the unexpected position of providing for a suddenly orphaned institution as its benefactors are laid low. Rather than give in, he decides to tell the truth of what's happened even if it paints them in a bad light--and so far has been rewarded.

Certainly, I would be very glad to pay the $8 entrance fee to visit this place if I'm ever in New York. Until then, we can visit the MOAF's online feature. Plus, you can download the timeline made famous by the NYT. As history has demonstrated, capitalism has a way of regenerating itself and, yes, learning from its excesses.

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The "Humanizing" of China x3

♠ Posted by Emmanuel in China,Environment at 8/21/2009 09:39:00 AM

Like America's vaunted currency bashers, the West sometimes views China as a distant other unaccountable to, well, Western codes of conduct. Supposedly, this holds true for any number of things--the environment, human rights, and commercial conduct. We have all read about China's general nonchalance about the environment, its arbitrary detention of multinational employees, and its blase attitude towards property rights.

Or are these really so? The Financial Times offers a cornucopia of stories that suggest China is not as unaccountable as it is often made out to be. First, we have a tale of apparatchiks closing down a third plant in a month due to environmental concerns, this time due to the lead poisoning of many young'uns:

China has closed a manganese smelter after more than 1,300 children living near it were found to suffer from lead poisoning, state media said on Thursday. The scandal marks the third public case of metal contamination in less than a month. It comes at a time when the Chinese government has become increasingly worried about the environmental and health costs of pollution, and of rising public anger over the problem.

Authorities closed the Jinglian manganese smelter in Wenping town in southern Hunan province and detained two executives after 1,354 children were diagnosed with excessive lead levels in their blood, Xinhua, the official news agency, reported on Thursday. The Wugang city government said in a statement on its website that the Jinglian manganese factory had operated illegally and discharged lead exceeding legal limits...

The series of industrial pollution cases is only becoming public as escalating protests force the government’s hand. Soil and water contamination from heavy industry is widespread in China, but local authorities often ignore residents’ complaints until protests turn violent or the issue is revealed to a wider public over the internet. At Wenping, about 1,000 villagers earlier this month blocked a road and turned over a police car during a protest against toxins from the manganese smelter, the China Daily added.

My inclination is to think that Party leadership is more concerned about preventing social unrest than about environmental destruction. Witness China's unwillingness to consider its carbon emissions "until 2050." There, it's carbon caps fueling fears of being unable to provide livelihoods for rapidly urbanizing China as the cause for concern since it can foment unrest. In either case, placation, not the environment, is the thing.

Next we have China making a rapprochement with that bastion of wretched Western capitalism, Rio Tinto, after the infamous jailing of its executives. While this issue remains unresolved, both sides are trying to set it aside in the meantime while business interests predominate:

Driven by the Chinese government’s infrastructure-centred stimulus spending, the steelmakers have been restocking. To do so, they need the high-quality Pilbara iron ore whose supply is dominated by Rio, the world’s second-biggest iron ore producer, and BHP Billiton, the third-biggest.

Thanks to China’s appetite, Rio’s iron ore division accounted for more than 50 per cent of underlying first-half profits of $6.1bn (£3.7bn). Both sides know that the relationship needs to return to normality, probably through delicate, mutually face-saving solutions to two related problems.

The first is the price that the steelmakers pay Rio for their iron ore. This is still nominally agreed through a annual price negotiation, but that system is changing...The other issue that awaits resolution is the fate of the four Rio employees who were arrested in July. They were involved in the iron ore pricing negotiations and were detained on allegations of obtaining state secrets, suggesting that they knew information about Chinese steel mills that not only gave them an edge in negotiating prices but also was illegal for any non-state entity to possess.

My sense is that China will not push on these trumped up charges too much in fear of discouraging foreign investment. Still, it has demonstrated that it does not appreciate being crossed in so public a fashion and will retaliate if need be.

Our last FT feature is on software piracy in China. Here we have officials jailing four sellers of pirated copies of Microsoft Windows XP:

Microsoft said it had won a major battle against software piracy in China after four people were on Thursday sentenced to jail for illegal reproduction and distribution of the Windows XP software through a website called “Tomato Garden”. The US company said the court victory was the first successful criminal prosecution against large-scale software privacy in China.

“The judgement declares the collapse of China’s biggest online software privacy group. It is a milestone in the fight against online software privacy in China,” the company said.

Tomato Garden allowed the public to download pirated software for free, in return for advertising revenues, according to Microsoft. The software company, quoting unofficial estimates, said more than 10m “Tomato Garden” Windows XPs had been installed in China.

While long a point of dispute, my contention is that software piracy is rampant whether in China or elsewhere in the world. It is child's play to find pirated copies of software by Microsoft or others. The ultimate test, of course, is whether jailing these Tomato Garden-Mr. Potato Heads will actually lessen the distribution of pirated software in China. My answer is a clear no. Then again, showing that PRC officialdom is "doing something" about the problem does count for PR points, no?

As with many things in life, these incidences are all about play acting: pretending to be concerned about the environment to keep a lid on social unrest; pretending to be friends with Rio Tinto when (Wen?) you'd much rather kick them in the balls; and pretending to crack down on software pirates to appease IP hawks when piracy doesn't really keep you awake at night. The Chinese are becoming very good at this sort of balancing act, but I wouldn't want to be around when the farce is revealed.

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Faulty Predictions of Falling Philippine Remittances

♠ Posted by Emmanuel in Migration,Southeast Asia at 8/20/2009 03:06:00 AM

Many are predicting that remittances to less-developed countries will fall in 2009 for the first time since 1987. This phenomenon is attributed to the decline in employment opportunities abroad as destination countries have undergone economic slowdown. Worker's remittances are, of course, a significant part of external funding for many LDCs, having long outstripped official development aid as a source of foreign exchange. For several countries, remittances also exceed foreign direct investment. With predicted falls in remittances, it is possible that some LDCs may suffer adverse balance of payments consequences.

The Philippines is often identified as a country of emigration, sending well over a million persons overseas to work annually. Moreover, it is the fourth largest recipient of remittances after China, India, and Mexico. It is no exaggeration to say that these inflows have become a foundation of the local economy in terms of generating consumer spending and guarding against BOP shortfalls.

There is thus no surprise that the Philippines has been expected to suffer from a sizable fall in remittances. Among those predicting a decline are the usual (subprime) suspects: HSBC, the Royal Bank of Scotland, and Citigroup. The IFIs--World Bank and IMF--also have similar expectations. Dilip Ratha, widely known as the authority on remittances, expects a 4% decline in remittance inflows. Notably, even Nouriel Roubini's RGE Monitor is in agreement that Philippine remittances will decline.

However, the methods all these entities use is not very sophisticated by their own admission. I have been at a conference where Dilip Ratha spoke. He explained how he arrived at his predictions. Basically, it involves establishing what percentage remittances to a source country are of a destination country's GDP. Next, inflows to a source country are projected by multiplying the percentage arrived at against the predicted GDP in the destination country for 2009. Unsurprisingly, using such a formula yields the negative expectations all these banks, IFIs, and research groups have as a function of declining economic activity in most destination countries.

This unanimity would be all well and good if it were not for remittances to the Philippines, er, increasing in the first half of 2009. Moreover, in not a single month has there been a year-on-year decrease in remittances. RGE casting aspersions on official predictions of a slight increase in remittances have proven to be wide of the mark thus far. While the year isn't over yet, trends are certainly not in the pundits' favor. From the Bangko Sentral ng Pilipinas (BSP):

OF Remittances Up 2.9 % in First Half at US$8.5 Billion (08.17.2009)

Remittances from overseas Filipinos (OFs) coursed through banks reached
a record high of US$1.5 billion in June 2009, posting a year-on-year growth of
3.3 percent. This positive development brought cumulative remittances for the
first half of the year to US$8.5 billion, indicating a 2.9 percent increase from
the year-ago level. Remittances from sea-based and land-based workers posted
gains of 4.5 percent and 2.5 percent, respectively.

Once again, this is likely another episode of excess hubris familiar in development history of (Mostly White) People In Rich Countries Writing About What's Happening In Poor Countries Who Don't Really Understand What's Going On There--particularly so in the case of the subprime-loving banks' research. HSBC, after all, expected a 20% decline. In my blog musings, I actively try to avoid this sort of Western bias by drawing on my personal experience of working in both worlds--both developing and developed. We don't need more (Mostly White) People In Rich Countries Writing About What's Happening In Poor Countries Who Don't Really Understand What's Going On There demonstrating this fact.

In their defense, the data on migration and remittance flows is not as comprehensive as would be desired. Nevertheless, there are blind spots that those making these predictions would be well advised to consider:

1. How do countercyclical flows affect remittances to LDCs? There is a fairly large literature on remittances to LDCs increasing in times of difficulty. That is, emigres send back more money to their relatives when times are tough. That none of the models used by the various pundits make use of this literature is regrettable;
2. What skill level do migrants from a particularly country have? The Philippines has made it a national policy objective to upskill its migrants to, among other things, help ensure that they aren't gotten rid of in the first instance in highly cyclical trades like basic construction;
3. How adaptable are migrants to changing situations? Emigres who have a broad skill set may be more valued in being able to shift their tasks based on prevailing economic conditions;
4. Related to the (2) and (3), what industries are migrants working in? The Philippines sends a lot of nurses, doctors, and other health workers. With the imminent geezerization of any number of Western countries due to demographic trends, poor economic times do not stop the aging process that drives demand for these health workers.

The subprime mess was built on a premise of ever-rising home prices. Similarly faulty logic attends to predictions of a fall in Philippine remittances that largely gloss over the four considerations identified above. Remittance inflows are not a mechanistic function of falling GDP in destination countries and I hope this episode imparts another lesson alike that made by the subprime debacle on economist types.

For the record, I never made much of these pundits' so far inaccurate estimates.

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What If a Formula One Guy Ran the United Nations?

♠ Posted by Emmanuel in Governance,Sports at 8/17/2009 05:25:00 AM

It's interesting times in Formula One, supposedly the world's most watched sport--bar football (soccer) perhaps. Aside from Honda leaving the sport for cost reasons at the end of last year, BMW is set to do the same after this year. There's also been this mini-drama about seven-time world champion Michael Schumacher rejoining to fill in for injured Ferrari driver Felipe Massa, though this possibility was ruled out after Schumacher concluded that existing neck injuries made him unfit for subbing.

The interesting political angle is that longtime Federation International de l'Automobile (FIA) President Max Mosley is scheduled to step down after being its head since 1993. The FIA represents motoring and motorsports organizations throughout the world. Until last year, Mosley was a figure known mostly to F1 followers until he became tabloid fodder over his clandestine S&M activities. As part of a longer-term peace deal with F1 clubs over the future of the sport, Mosley agreed not to stand again. Meanwhile, he has extended his endorsement to former Ferrari boss Jean Todt, whose curious comments we'll look at in more detail. Aside from the Ferrari link, Todt's celebrity appeal is enhanced by him being married to action star Michelle Yeoh.

In an interview with ITV, Jean Todt makes the pitch that FIA clubs with the largest membership should not be given a greater number of votes as some propose. Think of it as the sporting equivalent of qualified majority voting in the EU. Moreover, Todt makes curious statements about the nature of the United Nations being a highly democratic organization:

Q: Your opponent has proposed to change the FIA voting system to give more votes to the biggest clubs with the largest membership. Do you think the voting system of the FIA should be changed in this way?

JT: I don’t agree with this idea at all.

It would concentrate power and decision-making in the FIA in the hands of a just a few mobility clubs that have large memberships simply because they happen to exist in countries with large populations.

That would be unfair and undemocratic. The FIA is the equivalent of the United Nations for global motor sport and mobility. Like the UN every member of the FIA has the right to vote, irrespective of their size. I am committed to this fundamental principle because it ensures that the democratic rights of all our clubs, big or small, are equally balanced.

Quite rightly an FIA presidential candidate can only be successful if he and his team appeal to a broad range of the FIA membership, large or small, motoring or motor sport.

For a guy who led a team favoring one driver (Michael Schumacher) over another (Rubens Barrichello) during its heyday, this appeal to democracy is quite rich. Perhaps that's why he portrays the UN as such an egalitarian institution. If the UN's main decision-making body were the General Assembly and not the Security Council, I would be more convinced. As it stands, the UN is still largely governed by the WWII victor's club. If Todt wins over rally legend Ari Vatanen [1, 2]--the choice of many for this post--I think it'd be more like a rehash of the Mosley years. Max speaks, FIA does; Jean speaks, FIA does.

What if an F1 guy ran the United Nations? Certainly, a whole lot of people who know who headed the organization instead of ol' what's-his-name. Whether non-Security Council participation would be enhanced I am not so sure.

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The Heart of the Matter on Stimulus

♠ Posted by Emmanuel in Credit Crisis at 8/17/2009 02:37:00 AM

I got the call today, I didn't wanna hear...but I knew that it would come

And so I find myself in familiar territory of having to comment on stimulus, particularly the non-stimulating American variety due to various press reports about it that make very little sense for reasons that will become very clear. Let us begin our journey to get it over with as soon as possible.

That four commentators on various ends of the respectability spectrum misunderstand the matter of recession spending is indicative of the fog that surrounds the stimulus debate. While I cannot claim to be the last word on the matter, rest assured that I can tell when others make basic factual errors. Let us first dispose of that poster boy for economic sensationalism, Ambrose Evans-Pritchard, recently dubbed by this blog as the world's worst financial reporter due to his proud lack of basic understanding of finance and serial tabloidal tendencies:

Crass Keynesianism has done its job. A blast of fiscal stimulus and "cash-for-clunker" schemes have lifted France and Germany from the depths of recession...The twin motors of Europe each eked out 0.3pc growth in the second quarter, much to the consternation of their own governments and the International Monetary Fund...

Charles Dumas from Lombard Street Research said Germany has relied on more crass Keynesianism than it lets on. "They have had a budget stimulus, car subsidies, and they're paying people without jobs [Kurzarbeit]. This is all to the good, but it doesn't in any way create the foundations for a new growth story."

As usual, we should take whatever Evans-Pritchard says with a grain of salt. The thing is that neither France nor Germany are particularly big spenders on a metric of stimulus spending as a percentage of GDP. Portraying France (1.6%) and Germany's (1.3%) efforts as "crass Keynsianism" is, well, just crass. The contrast is sharpest, of course, with the United States' $787 billion effort (5.5% of GDP). So, for starters, we can comfortably dispose with the idea that France and Germany are big stimulus spenders.

Next up we have another dodgy character, Henry Blodget. Blodget is best remembered for his pump-and-dump antics as a Merrill Lynch tech stock analyst during the height of the Internet bubble. We know the rest of the story: he was fined heavily and barred from working in the securities industry. Like Evans-Pritchard, Blodget has found a second life as a pundit for any number of gullible news outlets. For instance, take Yahoo!

If there's one thing most American capitalists agree on it's that Europe's economy is a disaster. It never grows, it takes years to fire lazy employees, there's no entrepreneurialism and innovation, they tax they living hell out of you, etc. And yet look who's recovering first? And look who didn't even bother with a stimulus (Germany).

That's great, Blodget. So Germany hasn't spent anything on stimulus, eh? Thanks for the (dis)information, but you're just as accurate now as you were in your pump-and-dump days.

Third on our hit parade is the sort of character I tend to dislike, the USA#1-style cheerleader who willfully ignores the pathetic state of modern America. This one is by Jeffrey Garten, formerly a Clinton-era Undersecretary of Commerce and currently a Blackstone managing director. With a profile like that, you expect boosterism during a Democratic administration. The title of a recent Newsweek cover was so incredulous that I had to take a second glance: it read--I am not kidding--America Still Rules. Topping off this whopper was the article inside by Garten entitled--get this--Why America Leads the Economic Recovery: Why the United States Will Come Out of the Crisis On Top. You can laugh at this article at your leisure, but here are two choice throwaway lines:

Although the upturn in the U.S. may be coming quicker than in most other countries, it is unlikely to be strong enough to be the locomotive for global recovery, as has happened in past recessions...

The German chancellor is also facing an imminent election and has been too vocal in opposing the stimulus the world desperately needs, and France's president is too inconsistent and too mercurial to be effective on the international scene...

The bottom line is that America can lead the global recovery politically without having to do all the heavy lifting economically.

In hindsight, Garten evidently saw stimulus-jihad as America's way out of this morass
ahead of other countries, nevermind that it's actually France, Germany, and now Japan who have actually led the way out. In the second quarter of 2009, all three have recorded positive growth figures while the Anglo-Saxons the US and UK remain in recessionary doldrums. So why isn't the US coming out if others have already begun their heavy lifting? Beats me; go ask Garten.

Finally, we have the respected if politically incorrect conservative historian Niall Ferguson pitching in on America's stimulus-driven plight:

His stimulus bill has clearly made a significant contribution to stabilising the US economy since its passage in February...According to Moody’s, the ratings agency, the stimulus package has saved more than 500,000 jobs. Without the jump in government spending, GDP would still be in a nosedive...

Actually, I am receptive to the second half of Ferguson's article when he gets to how US debt will sink it. However, his treatment of stimulus as positive defies realities even he recognizes:

Anyone expecting private consumption to bounce back is dreaming; real personal spending actually fell in June. Moreover, the property crisis is far from over. The number of prime borrowers behind on mortgage payments rose 13.8 per cent between March and June.

You can add record foreclosures during the most recent month to US housing woes. There are also two prime indicators that suggest the US consumer is a carcass of its former selfishness. To negative personal spending in June you can add negative retail sales for the month of July despite expectations of a hefty rebound--what a start for those expecting a consumer-led bounce in third quarter 2009.

And the kicker is that much-trumpeted Q2 GDP report which showed a "slowing down" in the rate of the incredible shrinking economy according to permabull pundits. Like many, I enjoy my newsletter subscription to John Mauldin. Another former Merrill Lynch guy, David Rosenberg, put Obamanite stimulus in proper perspective in a recent newsletter. Despite bags of money being thrown at consumers and reductions in taxes galore, the results were decidedly disheartening for USA#1-style cheerleaders:

The details in today's report left something to be desired. Consumer spending came in at -1.2% annualized, twice the decline expected by the consensus. This occurred in the face of gargantuan fiscal stimulus and leaves wondering how this critical 70% chunk of the economy is going to perform as the cash-flow boost from Uncle Sam's generosity recedes in the second half of the year. Imagine, government transfers to the household sector exploded at a 33% annual rate, while tax payments imploded at a 33% annual rate and the best we can do is a -1.2% annualized decline in consumer spending in real terms and flat in nominal terms? What do we do for an encore? In the absence of the fiscal largesse, it is quite conceivable that consumer spending would have shrunk at a 10% annual rate last quarter!

Bottom line: the US economy stinks, it isn't getting a whole lot better, and even if it does improve it's likely to have subpar, below trend growth for an extended period of time. Meanwhile, its stimulus is worse than useless in racking up future obligations at a torrid pace. My suggestion is that you set aside some time to look at actual numbers to put things together for yourselves no matter what the pundits say--me included! The above smorgasbord of faulty commentary is just the tip of the misinformation iceberg. As for me, my beliefs regarding stimulus remain the same even if it's early days with the economic results. Call them Emmanuel's Stimulus Rules:

1. There is no significant correlation between the amount of fiscal stimulus and improvements in economic performance;
2. Untargeted, pork-filled, throw it against the wall and see if it sticks Obamanite stimulus is least likely to obtain results;
3. Given that towering indebtedness is a likely consequence of massive stimulus, adjusting spending on a limited trial-and-error basis is welcome to identify areas where improvements may obtain instead of having a master blueprint followed through and through regardless of performance.

Guess which country flouts all three rules and whose main stock index is down about 200 points as I write? The only real question is why it isn't down 2000 as its prospects are really, really bleak--and even more so with useless and senseless deficit spending.

UPDATE: Polls indicate Americans are unconvinced that stimulus has done or will do anything to improve their sad lot.

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Ambrose Evans-Pritchard, Worst Financial Reporter

♠ Posted by Emmanuel in Nonsense at 8/15/2009 01:59:00 PM

You have to be pretty bad to outdo the CNBC flunkies who pollute cable TV with their endless hype about the US stock market and America in general when the truth is that neither have exhibited any progress in about a decade. However, there is worse. I began to wonder about who exactly Ambrose Evans-Pritchard was after his endless sensationalist features as international business editor of the Daily Telegraph. As a financial reporter, I was even more astounded to read him proudly confess that he was a "technical dolt" while stating that he did not know why a high put to call ratio could be a contrary indicator. (In typical fashion, he wrote this in a blog about China leading the world into depression.) Anyone with a search engine could figure this simple thing out; I was thus puzzled why a person working in finance would say something so foolish.

Digging further, we learn about Ambrose Evans-Pritchard's sordid past inventing others' sordid pasts as the pied piper of Clinton conspiracists in that president's heyday. It turns out that, in his previous iteration, he is most famous for writing an "expose" of Bill Clinton published by none other than Regnery of John Kerry-and-loincloth fame entitled The Secret Life of Bill Clinton. The Amazon review sums up this sensationalistic piece of trash:

Evans-Pritchard's exposé of Arkansas's favorite son is indeed scathing: he documents the then-governor's drug use and consort with prostitutes (primarily in the company of ne'er-do-well brother Roger); innumerable lies to friends, staff members, and the people who empowered him; numerous infidelities; blackmail--the list goes on and on. Evans-Pritchard claims that, because he is not an American citizen, he is not "beholden to any political or financial interest in the United States," and he does not "hang on lips of official sources," nor does he "fear the loss of access in Washington, or the blackball of [his] profession"; in other words, he ain't afraid to call 'em like he sees 'em. And although many of his seemingly wild claims and accusations are substantiated by thorough notes and appendixes following the text (including copies of original FBI documents), you're never quite convinced of the author's theories. Whether or not you come to believe, as Evans-Pritchard does, that "Arkansas was a mini-Colombia within the United States, infested by narco-corruption"; that--because of William Jefferson Clinton--"you can sniff the pungent odors of decay in the American body politic"; that the president's "actions and character ... have engendered the most deadly terrorist movement in the industrialized world," you will most certainly be entertained and enlightened by the dirt this British muckraker has uncovered. You may not be an F.O.B. [Friend of Bill], but after reading this book, you may not mind so much.

Ambrose Evans-Pritchard is the Kitty Kelley of financial reporting as he goes about his business in the same breathless manner whether writing about Clinton or call options. While creative writing may be to others' style, I have to give grudging credit to the CNBC crew--they may be cheerleaders to the bone, but at least they know what a put-call ratio is. Plus, they aren't likely to write about Tim Geithner conspiring to ruin the world economy with Ben Bernanke while wearing a loincloth and smoking crack in the company of prostitutes and Roger Clinton as state troopers fired by Sarah Palin stood guard.

If you take this guy seriously, I have some fine Regnery publications for you to read. What a joke.

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Calibankruptcy is Enfeebling Its University System

♠ Posted by Emmanuel in Education at 8/14/2009 10:36:00 AM

Think of the US 'economy' as a marriage of Calibankruptcy and Government Motors blown up to national scale: it is a combination of hemorrhaging public finances partly stemming from unlimited desire to prop up money losers like airlines, carmakers, and casino capitalists. You can believe that there will be collateral damage from this exercise in self-destruction. While the abovementioned episodes have received tons and tons of coverage, there is a recent article that I bookmarked from the LA Times that oddly received basically none since my del.icio.us social bookmarking account indicates no one else has bookmarked it. Most likely, it reflects another vice of America in zero long-term thinking since its future implications are...further Calibankruptcy and Government Motors.

As you may have surmised from the graphic, today's feature concerns California's university system. This system has long been the envy of other states and indeed the world as, in theory, any Californian student with enough dedication could in time attend one of the world's finest universities at a reasonable cost. For instance, three of my uncles--all brothers--completed their college degrees at UC Berkeley. Now, however, financial pressures are endangering the Californian university system--one of the last remaining vestiges of the Californian success story. In particular, it is the California State institutions that are having a rough time of it since they get most of their funding from Sacramento. Contrary to what the article says, however, I don't think the University of California system is much better insulated even if it draws more of its money from grants and the like. After all, a significant amount of grant money comes from an organization even more bankrupt than the state of California known as the US federal government. That is, megadeficit spending will need to give way to the novel concept of "revenue generation" from both Cali and Sammy somewhere down the line.

In the meantime, the idea of an affordable education at a UC institution is rapidly going the way of the dodo as fees spiral for students circa 2009. Like those foreign nuisances who 'stole American jobs' in Silicon Valley now being chased away by protectionist-isolationist elected officials, the California university system is now being starved of funds. So--you guessed it--this is another indicator of how America has seen its better days. If there is a more surefire way of going on the road to hell than dismantling your educational system, then I sure would like to know:

California's higher education system, created to offer the opportunity for advancement to any resident, rich or poor, has seen hard times before. But the deep cuts imposed by the Legislature and Gov. Arnold Schwarzenegger this year are raising the question of whether the University of California, the California State University system and the nation's largest community college network can maintain their reputations for quality, or whether a public higher educational system that has been lauded as the world's finest may be in serious decline.

"This notion of the California dream, the idea that every adult could go to college, we've been hacking away at that during every recession for the past 25 years, and this year may well be it," said Patrick M. Callan, president of the San Jose-based National Center for Public Policy and Education. "We're coming out of this really tarnished." The governor and legislative leaders acknowledge that the cuts will be devastating, but say they have no choice.

Already, campuses from Humboldt to San Diego are raising fees, shedding courses, slashing enrollment, and compelling faculty and staff to take unpaid furlough days. Class sizes are up, library hours are down, and long-held dreams for new programs and schools are on hold...

The state's college and university systems, which educate 2.3 million students annually, have roots in California's early days, but their modern history begins in 1960, when the educational plan was approved. It called for all state residents to have access to a tuition-free, public higher education, and outlined the mission of the three levels of colleges.

The higher education system has been credited with helping to shape and nurture California's economy and draw striving migrants from around the world. "It had a magnet effect here for people who had ambitions for their children, that they could come to a place with good and virtually free public education all the way through college," said Richard White, an American history professor at Stanford University.

And the money drought goes on:

So how bad is it? According to the Department of Finance, the state is expected to spend about $8.7 billion in general revenue funds on UC, Cal State and the community colleges in the coming fiscal year. That would be a 17% drop from two years ago, the department reported. Federal stimulus money will offset some of that, but there remains much uncertainty about the level of funding from Washington, and how long it will last.

UC's state general revenue fund budget of $2.6 billion will be 20% less than it was two years ago. Cal State is seeing a similar percentage drop to about $2.3 billion.

There's also ill will being created over suggestions that UC is firing talented researchers to draw attention to its plight:

Critics of the UC administration contend that UC is purposefully aiming the cuts at undergraduates to increase political pressure, and should instead tap other income sources, including endowments and research grants.

"I think it's a really dangerous game and the students are already going to suffer," said Bob Samuels, a UCLA lecturer who is president of UC's American Federation of Teachers union. This week, Samuels was among 67 UCLA lecturers who received warnings that they might face layoffs next year. Several analysts said they expect raids on UC's blue-chip faculty, many of whom face up to 10% salary cuts.

The road to hell is devoid of human capital.

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DPJ Japan's Retro Style on Market Fundamentalism

♠ Posted by Emmanuel in Japan at 8/13/2009 09:42:00 AM

The question of how to reinvent Japan, Inc. is one that has puzzled the world ever since the turn of the Nineties. How can this once-dynamic country be rescued from its moribundity?Despite all it trials and tribulations, leadership changes in Japan have been largely conservative. That is, perhaps, until now. There's interesting commentary from Democratic Party of Japan (DPJ) leadership. The party, of course,is widely expected to defeat the perennial Japanese incumbents, the inaptly named Liberal Democratic Party (LDP). Channeling Stiglitz-era Globalization and Its Discontents, he criticizes "market fundamentalism" for the ailments that have been visited upon Japan. From the Financial Times:

Yukio Hatoyama, the leader of Japan's opposition Democratic party who is strongly placed to become prime minister after elections this month, has condemned “US-led market fundamentalism” and vowed to shield his nation from the effects of untrammelled globalisation.

With the era of US unilateralism ending and worries about the dollar’s future role growing, Japan should also work towards regional currency union and political integration in an “East Asian Community”, Mr Hatoyama wrote in an essay published Monday in the Japanese magazine Voice.

Mr Hatoyama offered a robust defence of his political philosophy of yuai – fraternity – which critics have derided as wishy-washy wishful thinking, but which he declared a “strong, combative concept” and “banner of revolution”...

In his essay, Mr Hatoyama said the global economy had “damaged traditional economic activities” while market fundamentalism had destroyed “local communities”, citing the decision by Junichiro Koizumi, former LDP prime minister, to privatise Japan's post office.

“Under the principle of fraternity, we will not implement policies that leave economic activities in areas relating to human lives and safety, such as agriculture, the environment and medicine, at the mercy of the tides of globalism,” Mr Hatoyama wrote.

Analysts say that wide policy differences within the often fractious DPJ make it difficult to predict how such statements of principle might be put into practice. Mr Hatoyama highlighted the need for better welfare, more child support and wealth redistribution.

He made clear that while security ties with the US would remain a “diplomatic cornerstone”, Japan must do much more to tighten links with Asian neighbours such as China and South Korea.

“As a result of the failure of the Iraq war and the financial crisis, the era of the US-led globalism is coming to an end and …we are moving away from a unipolar world led by the US towards an era of multipolarity,” the DPJ leader said, adding that fears about China's military rise were a big factor in “accelerating regional integration”.

Japan should "aspire to the move towards regional currency integration" and "spare no effort" in building the security frameworks needed to make union possible, he wrote, adding that the example of European Union showed that integration itself could be the best way of defusing territorial disputes often seen as an impediment to closer ties.

Mr Hatoyama also emphasised the DPJ's campaign pledge to push devolution of power to local governments within Japan as embodying his fraternal values, again approvingly citing European examples. Dismissing the “Ministry of Finance-led theory” of trying to rebuild Japan's state finances through welfare cuts and tax rises, he said he would aim to reform bureaucracy, regain trust in the pension system and give regions fiscal autonomy. “Resolving our fiscal problems is impossible without comprehensively rebuilding Japan's political systems,” Mr Hatoyama wrote.

OK, this is interesting but often self-contradictory commentary:

1. Did it even occur to Hatoyama that freeing Japanese immigration policy to inject fresh consumer activity instead of having an aging population save ever more for the country's eventual geezerization makes more sense than dumping on America the pitiful? Record deflation doesn't lie.
2. So he wants fat welfare and pensions along with healthy doses of agricultural protectionism. How is this different from Japan as it is now? The usual question of who will pay for this largesse comes to mind in a country whose public debt burden is already the largest among industrialized nations. Maybe he should consider, well, bringing in immigrants who can help pay for this Obamanite orgiastic spending.
3. I like the idea of a regional currency. I also like his preference for European-esque economic governance instead of the Anglo-Saxon one. Remember, France and Germany have already escaped the clutches of recession unlike the US and UK. However, who will play the role of our Asian Bundesbank? Plus, why does he cite increasing regional integration as evidence of security fears abour China when he wants to include China in the development of a regional currency?

I have no trouble with wanting to wean the region off the white master's yoke. His ideas strike me as rather confused, however. We'll see if there is an improvement once he presumably wins office. IMHO, being Japanese prime minister is an even crappier job than being president of the United States. The American model of capitalism has been spectacularly discredited, but my suspicion is that Japan's problems are largely of its own making.

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US Wins in WTO A/V Case vs. China as Expected

♠ Posted by Emmanuel in China,Litigation,Trade at 8/12/2009 03:49:00 PM

It's like shooting fish in a barrel sometimes: Sometime ago, the US lodged complaints at the WTO over China's intellectual property regime--mostly dealing with minimum quantities vendors of pirated software need to have to be apprehended (DS362), and this one over limitations on the distribution of imported A/V materials--mostly music, movies, and books (DS363). The former case was something of a split decision, but this one is more unequivocally a US victory. Then again, when you are the primary author of the rules of international organization to date, you do expect comfy wins when you bring things up, eh?

The US Trade Representative lauds this victory. Here is an excerpt although the entire blurb is worth reading if you want to know more:

U.S. Trade Representative Ron Kirk welcomed the results of a World Trade Organization (WTO) dispute settlement panel report made public today. The report found that major Chinese restrictions on the importation and distribution of copyright-intensive products such as theatrical films, DVDs, music, books and journals are inconsistent with China's WTO obligations.

The WTO panel called on China to come into compliance with its obligations to allow U.S. companies to import these products into China and to eliminate the discriminatory requirements faced by imported products and their U.S. distributors in China.

"Today, a WTO panel handed a significant victory to America's creative industries," said Ambassador Kirk. "These findings are an important step toward ensuring market access for legitimate U.S. products in the Chinese market, as well as ensuring market access for U.S. exporters and distributors of those products. We will work tirelessly so that American companies and workers can fully realize the market opening benefits that this decision signals."

Of course, you can also view the WTO ruling.Trade watchers will be interested to see if this win emboldens the USTR to implement actions unilaterally over Chinese tire exports already faulted by the US International Trade Commission. With friends like these...

UPDATE: Reuters reports that China expresses its usual "regret" in being at the losing end of WTO cases. It also maintains that distribution of culturally relevant media products can be limited by government fiat as per the WTO rules. See the IELP on this point. As a reminder, China can still appeal this ruling, so this story may not be over just yet.

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The Non-Aligned Movement As Living Fossil

♠ Posted by Emmanuel in Development,Economic Diplomacy at 8/12/2009 03:31:00 AM

The story of the Coelacanth fish is not one that routinely comes to mind when discussing international organization, but it is nevertheless one worth recounting in the present context. As I would like to think that this blog provides a richer slice of life than your everyday economistic fare, let me explain what Coelacanth fish have to do with a long-dormant grouping of developing countries.

The Coelacanth fish is said to represent the closest link between fish and the amphibian creatures that first waded their way onto land. Paleontologists believed that the fish, whose existence predated that of the dinosaurs, became extinct along with the dinosaurs at the end of the Cretaceous period which concluded 65 million years ago. Hence, the recovery of a specimen in 1938 by a museum curator was hailed as a major event that set into motion a rush to find more specimens worldwide. It is theorized that the Coelacanth survived by living in deep waters of 200 meters and below sea level as well as having few natural predators. There is available footage of this amazing fish on Google.

Similarly, the Non-Aligned Movement (NAM) is an item of curiosity for those of steeped in the history of third world solidarity and international organization. The NAM grew out of the Bandung Conference of 1955 which proclaimed the right of developing countries--many of which had just emerged from a period of Western colonialism--to self-determination. In particular, non-alignment concerned, well, not being aligned with either the Soviet or American powers during the Cold War period.

Never a very active or meaningful grouping, the demise of the Cold War also means that NAM has no particular blocs to identify as needing avoidance. The reason why you haven't heard much about NAM is that it isn't really all that significant. Nevertheless, its history is marked by leadership (lip service?) from third world figures who require little introduction--Tito, Nasser, the brothers Castro, Mugabe, Suharto, Mandela, Mbeki, and Mubarak. It was thus with some interest that I received an e-mail message from the South Centre concerning NAM. In the time I've been maintaining this blog, I have subscribed to all sorts of newsletters--most of which have items of occasional interest. The South Centre's current honcho, Martin Khor, is a fellow who knows a lot about the history of South cooperation even if our views tend to diverge.

Anyway, the most recent meeting of NAM was hosted by Egypt in the resort town of Sharm al-Sheikh--familiar to many as the site of the 2005 bombing attacks. Here is the write-up the South Centre has prepared of the proceedings. There is more to be found on this page:

At the Sharm El Sheikh Summit, several leaders stressed that the Cold War is over, but NAM is needed just as before. However, as some of them pointed out, to keep up with the modern times, it may, however, have to re-invent its image and rationale, and advocate positions in the current global agenda. The need to avoid being victims or subjects of hegemony or domination by a superpower or a group of developed-country powers seems to remain the NAM’s driving force.

The most passionate single cause at the summit was the support for the rights of Palestinians, shown in many speeches that condemned Israel’s occupation and brutality in Palestinian territories, and by a separate declaration on Palestine. Cuban President Raul Castro, reviewing his country’s chairmanship of NAM, called for opposition to hegemony, the use of force, and an end of an international order dominated by big powers...

A favourite theme, stressed by many, was how the UN Security Council has been used by a few big powers to selectively pick on and act against some countries, while these same powers also use unilateral military actions or economic sanctions when these suit them. Libyan Leader Gaddafi said NAM which was born in the Cold War era faces a new condition and challenge. It should assess the current international situation and agree on new positions. The UN Security Council does not represent the vast majority of countries as it was under the authority of a few big powers...

President Mugabe of Zimbabwe criticized the Non-Proliferation Treaty (NPT) for allowing those who produced nuclear bombs to keep them without being charged for treaty violation, while smaller countries which later produced the weapons are pursued. The treaty should be changed to ban those who have weapons from keeping them, he proposed. UN Secretary General Ban Ki-Moon, speaking at the opening, also called for a nuclear weapons free world under the NPT.

The Summit was also preoccupied with the impact of the global financial crisis on developing countries. Many leaders stressed the need to reform the imbalanced global economic system through giving the UN a central role and giving developing countries fair representation in decision making in the IMF and World Bank.

President Fernandez Reyna of Dominican Republic, speaking for the Latin American countries, said the US$20 billion that the G8 leaders recently pledged to fight hunger in developing countries is “negligible” compared to the US$18 trillion provided to their banks, which is more than GNP of the African and Latin American countries combined. “Injustice, insecurity and inequality does not have a better example than the greed of a few versus the unmet needs of the many,” he said. He also expressed skepticism that the poor countries would get the $20 billion pledged, because so far much of the aid promised had not been given...

The Summit was a shot in the arm for NAM, whose many leaders thought it important enough to turn up in force. Whether NAM can rise above “business as usual” to help developing countries face the world’s many crises is its major challenge in the years ahead. To prove it is a vibrant force, it has to turn its words and rhetoric into actions.

Therein lies the rub. There are some good ideas here like better representation of LDCs in the UN Security Council, World Bank and IMF more commensurate with their increased political-economic clout. At the same time, defending North Korea over the nuclear issue elsewhere is iffy, as is the age-old practice of groveling for more aid. NAM has been lame because these leaders get together every so often to denounce the continuing evils of Western imperialism but with no follow-through. Yes, the Non-Aligned Movement is still alive, but it is more of interest to curators of historical curiosities like yours truly than as a meaningful international organization. Ironically, it's ultimately the lack of meaningfulness of the organization that shields it from pressures to maintain relevancy and maintains its status as, yes, living fossil.

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Fond Reminisces About Enronitis and US Decline

♠ Posted by Emmanuel in Credit Crisis,CSR,Hegemony at 8/11/2009 01:51:00 PM

Have I got a treat for you today, dear friends. I was rummaging through my cabinet in search of something else when I came across this priceless piece of disaster memorabilia. As you can see, it is an Arthur Andersen binder for a seminar concerning--I kid you not--a "Business Ethics Program." There is an old saying about being able to tell who a person is by the persons he keeps company with. As an inveterate collector of oddball stuff--I like to think of this blog as postcards from a world gone wrong as its subtitle suggests--my conviction is that I can tell who a person is by the memorabilia s/he keeps.

But wait, it gets even better. Open the binder and you can see what must have been highly informative content on, among other things, "Accounting Minicases" and "Finance Minicases." Rest assured that what I am presenting you is a genuine article as I have neither the time nor the talent to make this stuff up. (Topping things off, it's from Houston, but that's another story.) To prove that I have not grabbed this stuff via image search, I am including two Nintendo characters I purchased recently while having to kill time at a shopping mall. Goomba is thoroughly appalled: "Even Bowser wouldn't commit such villainy!" Yoshi agrees, saying "Where is Mario when you need him to eliminate these evildoers?"

Actually, we all know what happened sometime ago: the world's largest accounting firm was effectively put out of business when criminal convictions were levied against Arthur Andersen. The ironic thing is that the conviction was overturned in 2005--well after the accounting firm ceased to exist and its various offices became affiliated with the other major accounting concerns.

Mind you, America is still the world's leading practitioner of fraudulent accounting. By not recognizing its unfunded health care and old age liabilities--an act guaranteed to land any accountant in jail were he auditing a corporation--it perpetuates the moronic and morally bankrupt process of poor countries subsidizing rich countries we call subprime globalization. As Willem Buiter notes, America's Medicare's unfunded obligations total $85.2 trillion alone--let's see if they can make the Chinese pay for that. Yes, Virginia, there still is a political economy of bookkeeping.

Before I rehash that stuff, I view my Arthur Andersen binder as another piece of evidence in--you guessed it--the overall narrative of American decline. A country that trades real productivity for smoke and mirrors bookkeeping to dupe others into "investing" in its "assets" should be realized for what it is. Simply put: the US dollar is depreciating junk, Treasuries are trash printed in nearly infinite quantities, and American equities that are in the same place now as they were over a decade ago (not even adjusted for inflation) are utter rubbish.

Call it the endowment effect in operation, but I would not sell this magnificent memorabilia even if someone offered me a thousand dollars. Meanwhile, business ethics my sassafras--the entire edifice reeks of corruption, sort of like nationalized Enronitis. Does moral decline accompany financial decline? I need not answer that question.

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Fuzzy Math: PRC Says Rio Tinto Bilked It of $102B

♠ Posted by Emmanuel in China,Trade at 8/10/2009 03:54:00 AM

Things are going from bad to worse for Sino-Australian relations. Earlier on, I relayed my thoughts on the detention of Rio Tinto mining executives over spying charges. By coincidence [wink, wink], negotiations have stalled over the price Aussie miners will charge its official Chinese customers. The United States has not really forced this issue at Australia's behest lest China express wariness over holding over a trillion US dollars--most likely because it wants to stay in Beijing's good graces despite the evidently manufactured charges against the Rio employees. That is, the concern that China will detain American execs if they fall afoul of the politburo's whims in the future Hugo Chavez-style isn't so pressing now that it is evidently flat broke for all the world to see and reliant on debtor's manna courtesy of the good burghers of Beijing.

In the meantime, China's Australian interlocutors have upped the stakes by suggesting in an official publication that Rio Tinto has ripped it off to the tune of $102 billion. Even by Chinese standards, that's a fairly huge amount considering that (a) Rio's annual revenue doesn't even come to $60 billion a year and (b) its entire iron ore sales over the past six years amount to $42.6B by analysts' estimates. Could every such transaction to China and everyone else have been a PRC rip-off? Even if I'm no math whiz, I doubt it. From the Sydney Morning Herald:

China accused Rio Tinto of stripping $123 billion [that's in Aussie dollars; the FT says it's about USD102B] from the country through a six-year program of commercial espionage, as it signalled it was broadening its spy blitz beyond the four mining employees detained in Shanghai. The allegations published on an official website - by far the most detailed and explosive by an official source - all but kill hopes that the Australian executive Stern Hu and his three Chinese colleagues will avoid convictions and lengthy jail terms...

The Australian Government has received scant information about Mr Hu, as well as several blunt diplomatic rebuffs. And senior Rio managers have been humiliated in their attempts to see the former head of iron ore sales in China, who is being held in the Shanghai Detention Centre, and to learn the whereabouts of his three Chinese staff arrested at the same time. The Herald understands senior Rio executives were shadowed and intimidated during a recent visit to Shanghai.

The report, published on a website of China's National Administration for the Protection of State Secrets, alleges that Rio was involved in a six-year clandestine operation against China's steelworks. It accuses the Anglo-Australian miner of ''winning over and buying off, prising out intelligence … and gaining things by deceit''.

And here comes the nonsense arithmetic:

It says Rio's activities led China to pay $123 billion more for iron ore than it otherwise would have. ''That means China gave the employer of those economic spies more than $123 billion for free, which is about 10 per cent of Australia's GDP,'' the article says. The report does not explain how Rio is accused of thieving a sum which is far in excess of Rio's total iron ore sales to China over that period...For most of the past six years, Rio Tinto and BHP-Billiton have sold iron ore to Chinese mills at a steep discount to the prices received by domestic Chinese and other international producers.

The report also revived Cold War terms like ''traitors'' and ''espionage warfare'', signalling that the nation may be embarking on a campaign of intimidation against foreigners [how about referring to gweilo or "foreign devils" for good measure?] It says foreign businesses must come under stricter controls to stop them from obtaining commercial secrets. ''Our country has entered a peak period of commercial espionage warfare, and the threat to important economic intelligence and security of national economic activity increases by the day.''

The report urges strict controls of contact between foreign businesses and local officials, asserting that ''traitors'' were enriching themselves at China's expense. For three weeks the state-controlled media have been warning citizens to protect themselves and their country against what they allege is a foreign espionage blitz. There has also been vitriolic media commentary directed at Rio, including calls for China to boycott the company's products.

And here's the kicker: what China is doing to Rio Tinto makes no apparent economic sense as the current or spot price for iron ore soars domestically beyond that offered by Rio:

But it remains unclear how China would benefit economically from the extraordinary attack on Rio. The spot price for iron ore on the domestic Chinese market has soared since the Rio arrests five weeks ago. Last week it hit $US110 per tonne, which is about 20 per cent higher than the international benchmark price that Rio offered but China refused to accept.

OK, this is very interesting as it appears to any reasonable observer that the PRC's actions make no sense. The PRC is (a) offending an important trading partner whose cooperation is crucial in ensuring a continuous flow of raw materials to today's workshop to the world; (b) alarming foreign investors about the PRC's penchant for arbitrary detentions and demonizing foreign firms; and (c) getting a raw deal by spurning Rio's offer when prevailing prices are considerably higher due to this impasse. Other than venting its spleen, I cannot understand China's actions.

Then again, we live and learn. Perhaps China is laying down the gauntlet to the West. First Oz, then the crusaders. We know that Obama is wary of annoying Beijing by pressing China on this case as it's already held back from previous stated intentions. Still, it's possible to foresee increased Chinese belligerence as a capacity building exercise before taking on the biggest, baddest gweilo itself. Watch out, Sammy: your turn may be next to answer the question "So what are you gonna do about it, buddy?"

Naked power politics may not be good for international relations, but they do help illustrate where each country stands in relation to one another in a high stakes game of chicken. I guess it's time we found out who wears the pants in globalization circa 2009 as inquiring minds want to know.

UPDATE 1: The agitprop may have been a well-placed shot since retracted as government minders have disavowed any responsibility for the tirade according to the WSJ -

Chinese officials distanced the government from allegations on a state-backed Web site that employees of mining giant Rio Tinto PLC had used years of "deceit" to obtain state secrets that cost China's steel industry more than $100 billion -- spotlighting the murky and often confusing way China handles such secrecy cases.

The allegations, published over the weekend, had quickly gained widespread attention, as they appeared to represent the government ratcheting up pressure over the case of four Rio Tinto employees, including an Australian citizen, who were detained last month by the Shanghai State Security Bureau on vague accusations of using bribery to obtain secrets that harmed China's national interests...

But on Monday an official with the propaganda department of the state secrets administration said it "didn't authorize anybody to release comments" on the case and that Mr. Jiang's essay didn't necessarily represent the view of the administration. "It is his own essay," the official said...The confusion highlights the difficulties of obtaining clear, authoritative accounts on sensitive issues in China, where huge swathes of information remain under wraps, and where the Internet and an increasingly rambunctious local media often add to the perplexity.

The China Secret Protect Online site (www.baomi.org) where Mr. Jiang's article appeared is run by a publishing house affiliated with the administration -- which has no public Web site of its own -- and publishes a magazine on state secrets work. But on Monday morning, Mr. Jiang's article no longer appeared on China Secret Protect Online, and the entire site later became inaccessible for much of the day, with a message suggesting it had been pulled down or blocked by the government. It then came back online hours later, before becoming inaccessible again. The reason for the disruption wasn't clear. Mr. Jiang and person who answered the phone at the contact number listed on the Web site both said they didn't know what happened.

What likely happened was the message being conveyed satisfactorily. The facts remain unchanged: four Rio Tinto employees are being held involuntarily on dubious grounds. Moreover, the defamation campaign against Rio and other gweilo hasn't halted. Thus, matters remain very tense even if this is ultimately just for show. Ha-ha, isn't quality gulag time in China for sympathizers funny?

UPDATE 2: By popular demand, the PRC has leveled charges against the Rio Tinto Four. Xinhua made a brief statement since elaborated on by the Australian press. The important takeaway is that the charges are not as strong as initially feared. Indeed, they may pave the way for Stern Hu to be merely deported. From BusinessDay:

Chinese prosecutors have finally approved the formal arrest of Rio Tinto iron
ore chief Stern Hu and three Chinese colleagues, laying charges of bribery and
obtaining commercial secrets, news agency Xinhua reported overnight.

The brief report did not say the four had been charged with stealing state secrets,
raising the prospect that authorities have significantly downgraded the case.
Xinjing Bao newspaper reported the case was being investigated under Article 219 of the Criminal Law code which is a commercial secrets provision rather than a state secrets provision. "That puts it in the business context rather than the realm of state seccrets," said Jerome Cohen, professor of law at New York University. "This would seem to be a lowering of the temperature somewhat..."

If the state secrets accusations against Rio Tinto's China iron ore team
have been dropped, this would open the way for a far more transparent judicial
process, lighter sentences and perhaps even the possibility of Mr Hu being
deported back to Australia.

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