'Buy Gun Stocks; Yanks Like Shooting Each Other'

The behavior of Americans is a subject of fascination to the rest of the world. Having American relatives, I must admit to being occasionally puzzled by their behavior. In the past, I have done my fair bit of pop anthropology in describing US culture as one based on commerce. However, when an old grad school roommate from Greece had too much to drink, he would tell me a more elaborate version of the American gothic which went something like this: "You know these Americans, Emmanuel. First they eat too much. So, they cannot fit in compact cars and have to buy hulking SUVs. To park these giant SUVs, they must in turn buy huge houses with huge garages. Having little savings, though, they need to borrow trillions from the Chinese."

Whatever you make of my old roommates' caricature, I'm thinking that if I gave him a ring in Athens, he'd add more to the story. Given the bursting of the housing bubble, many Americans have become unemployed, foreclosed, or any other number of undesirables in a highly financialized and commercialized society. Earlier, I posted in jest that Ozzy Osbourne may offer a way out for many overindebted Americans. It's no laughing matter that more seem to have followed this suggestion in a dark application of Americana. The Christian Science Monitor suggests there may be a link to unusually tough times:

Four Oakland, Calif., police officers shot down. An Alabama man strolling a small town with a rifle, looking for victims. Seven elderly people shot dead at a North Carolina nursing home. And on Sunday, six people, including four kids, died in an apparent murder-suicide in an upscale neighborhood in Santa Clara, Calif. The details in all these cases are still emerging. In most, the exact motive has yet to be determined – or may never be fully understood.

On a broader level, however, such incidents may be happening more often because an increasing number of Americans feel desperate pressure from job losses and other economic hardship, criminologists say. "Most of these mass killings are precipitated by some catastrophic loss, and when the economy goes south, there are simply more of these losses," says Jack Levin, a noted criminologist at Northeastern University in Boston.

Direct correlation between economic cycles and homicides is difficult to prove, cautions Shawn Bushway, a criminologist at the University at Albany in New York. But an economic downturn of this breadth and depth hasn't been seen since data began to be collected after World War II, he also points out. "This is not the average situation," Mr. Bushway says.

Still, criminologists do say that certain kinds of violent crimes have risen during specific economic downturns. The recession in the early 1990s "saw a dramatic increase in workplace violence committed by vengeful ex-workers who decided to come back and get even with their boss and their co-workers through the barrel of an AK-47," Mr. Levin says.

Say what you will about American gun culture, but one thing you can count on is it not going away. Accordingly, the rather tasteless post title is not from me but a paraphrase of Reuters columnist Bernd Debusmann's latest missive on how Ruger and Smith & Wesson stocks are up bigtime early in 2009 while nearly all else is, ah, shot:

In the first two months of this year, around 2.5 million Americans bought guns, a 26 percent increase over the same period in 2008. It was great news for gun makers and a sign of a dark mood in the country. Gun sales shot up almost immediately after Barack Obama won the U.S. presidential elections on November 4 and firearm enthusiasts rushed to stores, fearing he would tighten gun controls despite campaign pledges to the contrary.

After the November spike, gun dealers say, a second motive has helped drive sales: fear of social unrest as the ailing economy pushes the newly destitute deeper into misery. Many of the newly poor come from the relentlessly rising ranks of the unemployed. In February alone, an average of 23,000 people a day lost their jobs.

Tent cities for the homeless have expanded outside a string of American cities, from Sacramento and Phoenix to Atlanta and Seattle, for people who are living the American dream in reverse. First they lose their jobs, then their health insurance, then their homes, then their hopes. The encampments are reminiscent of Third World refugee camps.

Often former members of the middle class, tent dwellers’ accounts of their plight to television cameras have a common theme: “I never thought this could happen to me.” Unlike the victims of Katrina, the 2005 hurricane that destroyed much of New Orleans, many of the newly-poor are white.

The FBI says it carried out 1,213,885 criminal background checks on prospective firearms buyers in January and 1,259,078 in February, jumps of 28% and 23.3% respectively. Keen demand turned the stocks of publicly-trade firearms companies like Smith & Wesson (up 80% since November) and Sturm Ruger (up more than 100%) into shining stars on the New York Stock Exchange.

Isn't commerce grand? Just don't forget to, er, pack some heat. In all likelihood, this gun-buying spree is probably motivated by self-protection more than anything else, unfortunately feeding into a cycle of higher gun ownership and a higher probability of gun violence. For better or worse, guns are as American as mom, apple pie, bankruptcy and foreclosure. Obama striking down the Second Amendment is as likely as Americans stopping to borrow money. As my friend would probably add to his commentary: "The trouble started when the Americans could not pay the mortgages on their McMansions as home prices tanked. Rather than face economic reality, they went to the gun store and fed the family...with lead."

There is a real political economy aspect to the right to bear arms. Sometimes, it isn't particularly pretty.

4/6 UPDATE: The bloodbath continues as to become almost unexceptional -

A 22-year-man who shot and killed three Pittsburgh police officers over the weekend had been stockpiling guns and ammunition, buying and selling the weapons online "because he believed that as a result of the economic collapse, the police were no longer able to protect society," according to a court report.

The shootings came during a particularly violent three days across the U.S., with shootings that left 14 dead in Binghamton, N.Y., and six dead in Washington state, where a father shot five of his children, ages 7 to 16, using a rifle, and later, himself. It also follows just two weeks after four police officers were fatally shot in Oakland, Calif., in the deadliest day for U.S. law enforcement since Sept. 11, 2001. Last month, a North Carolina man shot and killed eight people before police shot him and ended the rampage, and a 28-year-old man killed 10 people, including his mother and four other relatives, across two rural Alabama counties before killing himself.

PRC's Great Currency Game, or Nothing Special?

The story that dollar debasement going forward will occur is a familiar one. TIME even has a photo essay comparing present-day America with Weimar-era Germany. One certainly hopes this comparison isn't apt for a number of reasons, but you certainly cannot rule it out. Life is a cabaret, old chum. Much has been made in recent days of China's proposal to diversify out of dollars which the US has certainly done everything humanly possible to debase; this point is not really under much contention outside of neo-Bushian "strong dollar" comments from Obama administration officials. This new Reuters article notes that the bluster behind China's call for a new reserve currency would amount to little if it weren't for the PRC's other currency ploy which has not attracted that much attention.

Drudge Report readers and other yokels are certainly unaware that China is busy signing swap arrangements with other countries outside the context of the Chiang Mai Initiative with ASEAN+3 countries (which has evolved to being more regional from its origin as a series of bilateral swaps). Reuters sees this process as China being more assertive on the economic diplomacy front. With a real long-term view--think 25, 40, 50 years down the road--the Chinese are playing a great currency game which Americans can't, fixated as they are on a four-year election cycle:

The political intent of Zhou's message [on elevating the status of SDR to true reserve alternative] could not be clearer: as the crisis of capitalism erodes U.S. influence, China is losing faith in the dollar and sees the time ripening for the yuan to assume its rightful role as a major world currency. "It has the potential to lead to one of the most profound reforms of the global monetary system in the coming decades," Jun Ma, Deutsche Bank's chief China economist, said of Zhou's blueprint.

However, with 5,000 years of history behind it, Beijing is ready for a long game. Zhou knew his trial balloon would immediately be shot down, save for backing from Russia. Hence his acknowledgement that creating a new international monetary order would require "extraordinary political vision and courage".

Translation: Beijing realizes that a currency does not lose its global domination overnight. Even after the United States overtook Britain in economic size in the late 19th century, it took two world wars that drained Britain's Treasury and its military might before the dollar supplanted sterling. The American grandmaster will not surrender his title lightly...

And here's the novel part, unbeknown to most except the most informed (like my dear IPE Zone readers; also this brief blurb):

...Zhou's essay takes on a different complexion if read in the context of a flurry of moves by China in the usually dull arena of trade finance.

Since mid-December, China has sealed currency swap accords totaling 650 billion yuan ($95 billion) with the central banks of South Korea, Malaysia, Indonesia, Hong Kong, Belarus and, in a deal announced on Monday, Argentina. These are pawns that are not being moved at random, and financial diplomats say more agreements are in the pipeline.

The proximate purpose is to grease the wheels of trade, which have been gummed up by the global credit crunch. Importers in the six countries will be able to pay for Chinese goods in yuan instead of in dollars, the principal export-import currency. But the potential repercussions for global currency politics are more far-reaching: if Asia got accustomed to the practice, the yuan could evolve into a regional currency, giving Beijing the status and influence that goes with it.

A former senior international monetary official said the pacts were in keeping with what he said was China's greater assertiveness in global forums over the past two years or so. "They want to play a stronger role, and these small steps such as giving bilateral swaps to Indonesia, Malaysia and Korea are a lot more important than the SDR proposal," said the official, who declined to be named as the issues are sensitive.

Getting comfortable with the internationalization of the yuan for trade should, in turn and in time, make Beijing more willing to move toward capital account convertibility -- a precondition for the yuan to become part of a revamped SDR.

Now, there is no sign China wants to speed up the opening of its capital account -- even though the yuan, if it could be bought and sold for non-trade purposes, would be more attractive for central banks as an alternative reserve asset to the dollar. But, as some economists see it, pricing and settling trade in yuan will inevitably lead to greater use of the Chinese currency offshore for financial and investment purposes.

"The swaps should be seen as a political statement with the intention of turning the yuan into a regional reserve currency," said Ben Simpfendorfer with Royal Bank of Scotland in Hong Kong.

Already there are pilot efforts in Hong Kong to see if settlement can be performed in yuan on a wider basis:

Take the scheme, due to be launched soon, that will allow trade between Hong Kong and the mainland province of Guangdong to be settled in yuan rather than in U.S. or Hong Kong dollars. The 200 billion yuan swap that Beijing signed with Hong Kong in January will provide an initial pool of Chinese currency needed for paying export and import invoices in yuan.

But imagine if the experiment takes off: banks would eventually need access to the mainland interbank market for funding, according to a financial diplomat in Beijing. And should banks in Hong Kong -- and other centers -- be allowed to adjust their positions with each other? If so, an offshore interbank market in yuan would sprout.

"We must understand that it is an inevitable trend that an overseas yuan investment market will grow after foreign trade settlement in yuan becomes widely accepted," Ye Xiang, a co-founder of VisionGain Capital, a Hong Kong investment management firm, wrote in Caijing magazine.

There are terribly plenty obstacles that China faces if it wants the yuan to be an eventual contender for a dollar replacement including classic functions of money--store of value, medium of exchange, and unit of account. Of course, unlike the dollar, the yuan is not yet freely traded, has no large international capital market, is subject to currency controls, and is not yet accepted by other countries for trade settlement. Indeed, I am still unclear on the mechanics of these swap arrangements as China would effectively have to loan yuan in order for other countries to pay in yuan. China is gradually putting these pieces in place if you believe Reuters, setting the stage for a showdown in a couple of years' time:

Many pieces will need to be moved around the board before China is in a position to force a draw with the dollar, let alone declare checkmate. But Beijing, thinking strategically, is unlikely to be too perturbed if Zhou's gambit founders in London [at the G20 meeting].

Also read this article from Bernama on how Indonesia is keen on seeing China take on a more aggressive role in global economic affairs. Certainly, there is no lost love between the US and many other countries like Indonesia. As I've mentioned many times, Indonesia believes it was hurt by the worst of Washington Consensus-style policies of fiscal austerity and belt-tightening during the Asian financial crisis whereas the US now splurges in troubled times because it can by drawing on the dollar's status as the preeminent reserve currency.

Would a world where the dollar loses its prominent role be a better place? The debate rages on. And I love a cabaret.

Obama Gives UAW, Organized Labor the Shaft

Say what you will about organized labor's agenda, but it seems to me like it's being given a bum deal. Real liberals have criticized Obama for cozying too much to moneyed interests, and this story will do nothing to allay that particular concern. Democratic presidents of recent vintage have displayed a similar modus operandi: court the votes of organized labor and then largely forget about them when in power. Think of Bill Clinton signing on to NAFTA and allowing those human rights violators China to join the WTO. Why, just a few months ago, Obama was being heralded as the champion of the United Auto Worker's union as he garnered its approval:

"From the streets of Chicago to the state legislature in Springfield, Ill., to the halls of the U.S. Senate, Barack Obama has been a voice for dignity and justice for working people. He has a strong program for a safe and secure America, which will protect our citizens and help our country prosper in a new century.

"On every issue that counts, we can count on Barack Obama to stand with our members, our families and our communities. He has pledged to rebuild America's manufacturing base and to assist the auto industry as we re-tool toward a cleaner, more modern transportation system. Sen. Obama supports free choice in the workplace; he will fight to deliver quality, affordable health care to every American; and he understands the need to change our trade policies so that U.S. workers and U.S. companies can compete fairly in the global economy.

"As president Barack Obama will unite our country – and the active and retired members of the United Auto Workers will be proud to work with him to change our country for the better."

That sounded all very well and good. Now, however, the Obama administration is forcing the UAW to go on a diet as it refuses to throw billions more at those wealth-destroying enterprises par excellence GM and Chrysler. And, get this--the administration is asking investment bankers to assess how much improvement organized labor is making in reducing wages:

The Obama administration refused on Sunday night to give fresh bail-out money to General Motors and Chrysler, telling the carmakers to come up with new plans or risk insolvency. GM has received $13.4bn in government aid and had asked for an additional $16.6bn. Chrysler has received $4bn and had asked for another $5bn. But both companies failed to meet targets on cutting their debt and reducing the cost of benefits paid to workers.

The crisis talks between the companies and the administration’s auto task force cost the job of Rick Wagoner, chief executive of General Motors, who was asked to step down by the White House after 30 years with the carmaker.

Officials said on Sunday night that Chrysler would be given 30 days and GM 60 days to reach agreement with debtholders and unions, with new tougher targets for cost cutting, or they would lose their last chance for a government bailout, almost certainly sending them into bankruptcy. “That’s going to mean a set of sacrifices from all parties involved: management, labour, shareholders, creditors, suppliers, dealers,” President Barack Obama said Sunday on CBS, before the details had been laid out.

“Everybody is going to have to come to the table and say it’s important for us to take serious restructuring steps now in order to preserve a brighter future down the road... They’re not there yet,” Mr Obama said. The task force, whose members include former investment bankers Steve Rattner and Ron Bloom, decided that the companies had failed to prove their viability and would not, therefore, receive the combined $21.6bn of taxpayer money they had asked for [my emphasis].

This is quite brilliant if the objective is fomenting class warfare. To improve matters, I suggest they hire John Thain and Charles Prince to oversee this task force. If Obama is organized labor's "champion," then I'm Jimmy Hoffa.

G-20 Protests: Let Leftist Profs Be Leftist Profs, Etc.

And so the world is awash with protests over the upcoming G-20 meeting. In London just yesterday, they were 35,000 strong--not a bad showing. I will soon post at greater length about the G-20's prospects--more hopeful than you'd probably expect--but for now let us cover the sideshow. A criticism many have had of the so-called anti-globalization movement has been its rather scattershot agenda, throwing together anarcho-syndicalists, deep ecologists, neo-primitivists, rioters, party animals, etc. into the mix. Same here. If you think this world is run pretty poorly by the axis of spending (Barack Obama, Gordon Brown, and someone TBA), you'd be pretty hard-pressed to see an improvement from these guys. As usual, their challenge is lame and unfocused.

Now, as I've learned, academia is certainly an interesting place filled with all sorts of characters you'd be hard-pressed to find elsewhere. Even by American standards, British academia is, well, downright weird. Where else can you find it common for unreconstructed Marxists to teach...in business schools? Pinko Business Management--now there's a course offering for you (full of the inherent contradictions of capitalism, no doubt). As the death place of Herr Marx, Britain has long been teeming with those convinced that the downfall of capitalism is right around the corner. Certainly, the current time is a fruitful one to strike a chord for change especially with the ham-fisted handling of the subprime crisis in the US and the UK.

I found it rather amusing when Professor Chris Knight of the University of East London--formerly a "polytechnic" akin to a community college in the States--got suspended for getting into the anti-globalization spirit. Here are some choice statements that got him into trouble:

"We are going to be hanging a lot of people like Fred the Shred [former RBS Chairman Fred Goodwin] from lampposts on April Fool's Day and I can only say let's hope they are just effigies...To be honest, if he winds us up any more I'm afraid there will be real bankers hanging from lampposts and let's hope that that doesn't actually have to happen.

"They should realise the amount of fury and hatred there is for them and act quickly, because quite honestly if it isn't humour it is going to be anger. I am trying to keep it humorous and let the anger come up in a creative and hopefully productive and peaceful way.

"If the other people don't join in the fun - I'm talking about the bankers and those rather pompous ministers - and come over and surrender their power obviously it's going to get us even more wound up and things could get nasty. Let's hope it doesn't."

Is Professor Knight trying to incite a mob riot? I really think not as he just got caught up in the spirit of the moment. As you'll gather from his website, his PhD thesis was on "Menstruation and the origins of culture. A reconsideration of [Claude] Levi-Strauss's work on symbolism and myth." From what I gather, it has something to do with lunar activity--hence the graphic on his website. Is this chap Carlos the Jackal II? No tampon jokes please, but I doubt it. It's more likely that he's just another timid academic in the ever-popular leftist, Noam Chomsky-wannabe mold.

This op-ed from the Sunday Herald asks the right question: if a million protesting Britain's imminent participation in the Iraq invasion did basically nothing, what more this march or even the larger one planned on April 1? The University of East London certainly has made more of this nonsense than warranted. Last I heard, Professor Knight was wandering around alone. So much for solidarity. If this guy is a troublemaker, then Paul Schaffer really leads the world's most dangerous band. I fear him far, far less than a real public menace like Boy George.

Bilateral Mania: Antipodes Strike FTA with ASEAN

I almost forgot to mention this news closer to home: A few months ago, I mentioned that the ten-member Association of Southeast Asian Nations (ASEAN) was engaging in several bilateral trade negotiations--with China, Japan, South Korea, India, Australia and New Zealand. There are a number of reasons for this deal frenzy after a long history of ASEAN being little more than a talk shop, including stalled WTO negotiations leaving these countries hungering for more elsewhere and lingering fear of China leaving them far behind economically. Because negotiations seemed more advanced, I expected the ASEAN-India deal to be inked as scheduled in December 2008. For a number of reasons, it's been delayed. This means the rather mouthful ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA) came to fruition sooner.

The press blurb on the ASEAN Secretariat's website dating from February 27 of this year is informative, including this nugget on how ASEAN countries are significant trade partners for the Antipodean pairing:

Through the AANZFTA Agreement, ASEAN, Australia and New Zealand effectively create a free trade area of over 600 million people with a combined GDP of US$ 2.3 trillion (based on IMF 2007 figures), which is expected to have reached US$ 2.7 trillion, according to the IMF forecast for 2008. Intra-regional (ASEAN, Australia and New Zealand) trade has been growing an average of about 16 per cent per annum since the start of the FTA negotiations in 2005. The Ministers noted the increase in Australian and New Zealand investments to ASEAN which reached US$ 1.1 billion in 2007. With the liberalization of barriers to trade and investment under the AANZFTA Agreement, the Ministers expressed confidence regarding the further growth and expansion of intra-regional trade and investment. Taken together, Australia and New Zealand comprise ASEAN’s sixth largest trading partner. ASEAN as a group is the second and the third largest trading partner of Australia and New Zealand, respectively.

Unfortunately for Jagdish Bhagwati, regional trade deals certainly look like the wave of the (near) future. Few doubt that ANZ's economic fortunes going forward are tied to Asia. Look east, young man, look east.

Why Do Aussies Keep Bashing Chinese Investors?

I find this utterly disgraceful. The Chinalco bid for a share in Rio Tinto being "reviewed" for three months has been covered here and elsewhere as a sign of incipient protectionism. There is, however, a lesser profile bid by another Chinese mining concern for a similarly endangered Australian entity. In this case, it's Minmetals for Oz Minerals. Just as Rio Tinto overextended itself with acquisitions at the height of the commodity boom, so did Oz Minerals. As is usually the case for these things, "national security" concerns are being invoked.

The purported catch here is that Oz Minerals' most lucrative mine is located inside one of Australia's weapons testing ranges, the Woomera Prohibited Area. I simply do not think this is an insurmountable difficulty as it is not especially difficult to agree with Chinese investors that transport from the mining site to the main road not veer off track. Getting blown up by munitions testing seems to be a pretty good deterrent against wandering around. Plus, it's fairly easy to monitor activity on flat desert lands from a long distance. Hence, I have no choice but to cry foul. From the Financial Times:

The Australian government has blocked a A$2.6bn (US$1.8bn) recommended bid by China’s Minmetals for Oz Minerals on the grounds that the mining group’s flagship mine is located in a military zone.

Wayne Swan, Australia’s treasurer, said “alternative proposals” would be considered from the Beijing-based metals group but it could not approve the deal if it included Oz’s Prominent Hill copper and gold mine, located in the Woomera Prohibited Area in South Australia. “It is not unusual for governments to restrict access to sensitive areas on national security grounds,” Mr Swan said.

Mr Swan’s surprise decision will fuel speculation Canberra may also block Chinalco’s controversial plan to invest $19.5bn in Rio Tinto, the Anglo-Australian mining group. Australia’s Foreign Investment Review Board is assessing the deal by the Chinese aluminium producer on “national interest” grounds, which includes investments made by state-backed entities.

Blocking the deal also threatens Oz’s survival. The miner, which had already warned it risked bankruptcy without the Minmetals takeover, is locked in talks with bankers owed A$1.3bn to extend debt repayments beyond March 31. The Woomera Prohibited Area includes a weapons testing range that Mr Swan said made a “unique and sensitive contribution to Australia’s national defence...An important part of this [national interest] assessment is whether proposals conform with Australia’s national security interests, in line with principles that apply to foreign government related investments,” he said.

And it's not over yet as there's, geez, a third Sino-Aussie deal endangered along similar grounds:

As well as deliberating on Chinalco-Rio, the regulator is examining Hunan Valin Iron and Steel of China’s planned A$1.2bn investment in Fortescue Metals, Australia’s third biggest iron ore group.

My broader point is this: developed countries keep complaining that China is propping up its currency artificially by buying US Treasuries and other reserve assets. Fine. However, when the PRC then tries to diversify into other things it has clear use for such as ensuring a steady supply of raw materials, countless roadblocks are thrown in its way. It always returns to global economic imbalances: you cannot have it both ways by telling the Chinese "don't buy debentures" and then "don't buy equity stakes" when they try to diversify.

Hey buddy, this is free trade. If you keep running external deficits (like Australia), then you have no choice other than to accept offsetting capital inflows. You can try and be a Robinson Crusoe-style autarky, but North Korea is not a particularly shining model of development. And some people still wonder why the Chinese are upset...

Seychelles: Rich and Famous to Heavily Indebted

You can easily picture Robin Leach of "Lifestyles of the Rich and Famous" fame yukking it up with the great and the good in Seychelles, the idyllic island playground for the uber-wealthy. The official website purports that is a travel destination for romance, sailing, diving, and fishing--a potent mix for sure. Unfortunately, the current economic crisis has not favored the Seychelles as revenues from tourism and fishing have dried up. This is rather unfortunate as the country has borrowed big in expectation that the good times would continue to roll. This Fortune article suggests "think again," although it's a little too late as they country has already sought IMF emergency financing:

Last year, as tourism and fishing revenue began slowing, the Seychelles defaulted on a $230 million, euro-denominated bond that had been arranged by Lehman Brothers before its own bankruptcy. The IMF came in in November with a two-year, $26 million rescue package, and the country has since taken a series of emergency steps: It laid off 12.5% of government workers (1,800 people), floated its currency (the Seychelles rupee, which has fallen from eight to the U.S. dollar to 16, effectively doubling the prices of imports), lifted foreign exchange controls and agreed to sell state assets.

The IMF has given a thumbs-up to the initial progress, but it warned that the economy would contract 9.5% this year. The government of Australia is sending tax experts to help overhaul the revenue collection system and audit local companies.

Now the Seychelles is negotiating with the governments of Britain, France and other Western countries including the U.S. - the so-called Paris Club - to reschedule $250 million in debt it owes them. It is asking for 50% of it to be forgiven - a rate it hopes its commercial creditors will then apply to its remaining $550 million outstanding. "We borrowed more than we can repay," complains Ralph Volcere, the editor of Le Nouveau Seychelles Weekly and a vocal government critic. "This was wholly irresponsible."

Debt relief from large Western lenders is a usual plea, although these lenders may not look favorably on some of the Seychelles' efforts to generate revenue by talking up its status as a tax haven when those lenders are cracking down on tax havens to increase their own revenue take. Moreover, isn't there something jarring about a champagne-and-caviar destination with oodles of five-star resorts asking for debt relief? Still, its efforts at increasing its UNCLOS waters for fishing may be more plausible:

Seychelles officials have another idea though: to promote the country's longstanding virtue of being an off-shore business haven, with no corporate tax, no minimum capital requirements, only one shareholder or director required, and an annual licensing fee of just $100.

It also hopes to grow revenue from fishing licenses in its territorial waters, and on March 26 it will present a proposal to the United Nations to expand its exclusive rights to the surrounding seabed, potentially increasing prospects of revenue from underwater minerals, oil and gas.

Trade Down? Use Shipping Containers for Housing

I remember watching an episode of Seinfeld where the character Kramer decided to live in a shipping container to cut down on living expenses. It seemed like a funny idea at the time, but some people are actually ingenious enough to make this idea more plausible and actually desirable. Not only does it make good use of shipping containers as international trade is going to the dogs, but it's also environmentally friendly in the sense of recycling old discarded containers for livable housing. But first, let's get to declines in container trade. We start in the US of A via Portworld:

The top 10 US box ports registered their 19th-straight [year-on-year] decline in monthly box volumes in February, a clear indication of slowing economic growth. The statistics, from the National Retail Federation (NRF) and IHS Global Insight monthly Port Tracker report, cover total box volumes handled at key US box ports in California, Texas, Washington, New York/New Jersey, Virginia, Georgia and South Carolina. The report pegged February throughput at one million twenty-foot equivalent units (TEUs), 17.7% down from throughput for the same month last year.

And if shipping is down at the receiving end, it must also be down at the sending end:

The volume of containers handled in Chinese ports in February fell 17% year-on-year as the country's export sector slowed, reports said. Last month, box volumes amounted to 6.97 million TEUs, representing a 22.5% fall from January's 8.99 million TEUs. Collapsing consumer demand in the US and Europe has hit the Asian export markets.

So if container ports aren't busy, a lot of containers are being left unused. That's where these two recent features come in. By coincidence (or not), both tout twelve innovative designs, although there is some overlap. The earlier one comes care of TreeHugger, and here is a sample conversion of what appears to be a single twenty-foot equivalent unit (TEU):

There are also projects using multiple containers in "Crate Expectations." More recently, Yahoo! has gotten into the act. Here is another installation from Bangkok, Thailand featuring not just one but four containers:

Good stuff--stylish yet environmentally-friendly is the way to go in a time of declining trade. If economic slowdown gives you containers, make container homes ;-)

Investors to Stimulus Lubber Gordon Brown: Stop It

As I've said again and again to the point of grating on blog readers, this is exactly what the rest of the world needs to do to the United States: like Barack "Trillions in Deficits" Obama, British PM Gordon "British Jobs for British Workers" Brown has been throwing good money after bad at stimulus packages without much afterthought. Like the US, the UK thought that its currency's status as a reserve unit could finance unprecedented fiscal expansion. As I've said before, both plan a level of (fiscal) debauchery unseen since the heyday of Sodom and Gemorrah. Well, the UK now finds itself in a bit of a pickle as a gilt auction has just failed (cue "Hey Big Spender" above to up the irony factor):

Wednesday’s failed government bond auction [NOTE: see my explanation below] looks ominous for investors, as auctions rarely fail in the sovereign market. For a government looking to raise a record amount to pay for fiscal stimulus packages and bank bail-outs, a trend of bond auction failures could put serious pressure on the public finances. This would force the Debt Management Office to reconsider how it will raise the £148bn – a record annual amount – it plans to issue in bonds in the 2009-10 financial year. It could even put pressure on the Bank of England to increase interest rates to push up bond yields and make the securities more attractive to investors.

The repercussions are forcing Brown to rethink his free-spending ways:

Gordon Brown last night backed away from plans for a recession-busting spending spree in next month's budget, after City investors delivered a stern message about the health of the public finances by shunning a sale of government debts for the first time since 2002.

In New York to canvass support for a deal at next week's G20 London summit on a worldwide economic rescue package, the prime minister said he had no plans to add to the £20bn fiscal stimulus announced by Alistair Darling last autumn, saying there were other "effective and quicker ways" of kick-starting demand.

Back in London, investors sent shockwaves through financial markets by shunning a £1.75bn auction of government IOUs - gilts - amid mounting fears about the Treasury's ability to pay for its bank bailouts and fill the hole left by collapsing tax revenues. "This is a bit of a shot across the government's bows," said Jonathan Loynes, of Capital Economics.

The prime minister's enthusiasm for an international economic agreement on tackling recession had been widely interpreted as an attempt to win political cover for a renewed spending spree at home, but he played that idea down yesterday. "Nobody is suggesting that people come to the G20 meeting and put on the table the budget that they're going to have for the next year. What we are suggesting is that we have together to look at what we have done so far cumulatively," he said.

I will soon outline a non-wussy plan (as opposed to an Olive Oyl one) to get the US to behave. Yes, it involves flexing LDC muscle as if it were 2009 instead of 1964. Uncle Sam has been a very, very naughty boy indeed. With the notable exception of Britain for reasons you can deduce from reading the articles linked to above, most other countries have shown displeasure at America's plan to run up ten trillion or so dollars in debt over the next decade. A stimulus-addled United States is a danger to itself and the world economy. If market discipline is not enforced, then other ways should be found to make it cut the crap. Go ask Gordon Brown (reprise "Hey Big Spender"). Why should anyone have to put up with this nonsense?
---

The notion of a "failed" auction simply means HM Treasury did not find enough buyers for the entire face value of bonds announced prior to auction (£1.75B) at prices deemed acceptable by the government. Only £1.627B worth of 40 year gilts were awarded as other investors are requiring a higher yield for the risk they perceive in holding British gilts. In other words, the auction's "bid-to-cover ratio"--the ratio of bids received to bids accepted--was less than 1.

Exactly: EU Says US Policies on "Road to Hell"

Sometime ago, I lauded the first Czech PM Vaclav Havel's high opinion of Frank Zappa as encapsulated by then-US Secretary of State James Baker's clear annoyance when he said, "You can do business with the United States or you can do business with Frank Zappa." The obvious flaw in Baker's reasoning was that Zappa was very much your archetypal exponent of American capitalism. Now it seems current (endangered) Czech PM Mirek Topolanek is also a big music fan. (The Czech Republic is current EU rotating head.) In this case, I believe that he's cranking Aussie AC/DC. Like me, ol' Mirek has a similarly dim view of America's so far ineffective efforts to revive its moribund economy. Yes, he says, America is on the road to hell. Friedrich Hayek and Angus Young--what a combination.

He is hardly alone as several other countries are being hurt by these infantile policies. Obamanite protectionism [e.g., 1, 2, 3, 4] has been widely noted here in addition to ridiculous stimulus packages that do nothing other than destroy the dollar's value--a real concern among those who hold it as a reserve currency. Just yesterday, another Geithner slip from the line that the currency is fine and dandy caused the beleaguered greenback to sag in FX markets. What else can I say? I think that, if possible, the rest of the world would prefer not to be taken along for a doomed ride by America's junk policies. In the real world, however, we are nearing a time when others will have to work together to stop this abusive behavior. It's time to hold Washington's feet to the fire. From the Financial Times:

European Union hopes for a new era in relations with the US were thrown into chaos on Wednesday when the holder of the EU presidency condemned American remedies for the global recession as “the road to hell”.

Barely a week before Barack Obama is due to arrive in Europe on his first official visit as US president, Mirek Topolanek, the Czech Republic’s prime minister, put the 27-nation EU on a collision course with Washington...

“The US Treasury secretary talks about permanent action and we, at our spring council, were quite alarmed at that...The US is repeating mistakes from the 1930s, such as wide-ranging stimuluses, protectionist tendencies and appeals, the Buy American campaign, and so on,” he told a European parliament session in Strasbourg. “All these steps, their combination and their permanency, are the road to hell.”

US officials made no comment on the remarks. But the Obama administration says it took great pains to ensure that the Buy American provisions in the $787bn (€579bn) stimulus that the president signed into law last month were consistent with World Trade Organisation rules. It followed, therefore, that any attempt to make them permanent would continue to be consistent with WTO rules.

EU diplomats said it was the most extraordinary outburst from a political leader in charge of running the EU’s affairs since Silvio Berlusconi, Italy’s prime minister, caused uproar in 2003 when he likened a German socialist member of the European parliament to a Nazi concentration camp guard.

Other leaders of EU member states, including Angela Merkel, Germany’s chancellor, disagree with US calls for big fiscal stimuli to battle the recession. But they have couched their opposition in more diplomatic language than Mr Topolanek’s. The Czech leader was speaking eight days before Mr Obama was due to arrive in London for a G20 summit of the world’s developed and emerging economies.

The analogy to the 1930s is inapt, but the analysis is generally correct as you'd expect me to say. Moreover, why should a group of countries that follows sound money principles be punished for not going along with a heavily distorted view of stimulus manna from above? My view will never change in that observing sound money principles will pay off in the long run. Short-term pressure by exporters to engage in currency debasement to "increase competitiveness" comes at the expense of long-term costs in inflicting mountains of debt on future generations and making holders of your currency think twice. The US would like you to think this tradeoff doesn't exist, but it should know better.

A Petition Against Protectionism

Since both Jonathan Dingel and Ben Muse have already done so--both of whom maintain what I consider as peer blogs--I thought it only proper to mention this petition from the Atlas Economic Research Foundation against the troubles with protectionism. As this place has threatened to become the International Protectionism Economy Zone due to seemingly endless stories of trade barriers being erected, here you go. What follows is a snippet of the statement:

But the fact that protectionism destroys wealth is not its worst consequence. Protectionism destroys peace. That is justification enough for all people of good will, all friends of civilization, to speak out loudly and forcefully against economic nationalism, an ideology of conflict, based on ignorance and carried into practice by protectionism.

Two hundred and fifty years ago, Montesquieu observed that “Peace is the natural effect of trade. Two nations who differ with each other become reciprocally dependent; for if one has an interest in buying, the other has an interest in selling; and thus their union is founded on their mutual necessities.”

Trade’s most valuable product is peace. Trade promotes peace, in part, by uniting different peoples in a common culture of commerce – a daily process of learning others’ languages, social norms, laws, expectations, wants, and talents.

See? US Frowns On Alternative Reserve Currency

In recent days, we have gone on a mini-binge of reserve alternative stories [1, 2, 3]. Bang on schedule, the United States is pooh-poohing the notion that an alternative reserve currency and medium of exchange for world trade is needed. Debase the dollar? Not me, says the US. First up, let's see what Obama has to say:

There is no need for a global currency to replace the dollar as suggested by Chinese leaders, President Barack Obama said Tuesday. "The dollar is extraordinarily strong right now," he said, because the American economy and political system are stronger than many others.

Yes, whatever. These guys are starting to sound exactly like Bush and Paulson with the tragicomic "strong dollar" theme that any reasonably informed commentator would see through. Speaking of whom, US Treasury Secretary Tim Geithner and Fed Chairman Ben Bernanke also chimed in with the same message. From MarketWatch:

Federal Reserve Board Chairman Ben Bernanke and Treasury Secretary Timothy Geithner flatly rejected on Tuesday a call from a senior Chinese official to drop the dollar as the world's key reserve currency. Zhou Xiaochuan, head of the People's Bank of China, proposed the creation a new international reserve currency in an essay published on the central bank's Web site on Monday.

The proposal is the latest sign of tension between China and the U.S. over important global economic matters. Zhou is expected to attend the Group of 20 meeting in London on April 2 where reform of the global financial system is on the table...

The MarketWatch article also contains currency watchers' opinions of what is going on. Both commentators seem to be suggesting China is just firing a warning shot across the bow, not taking aim at the mast:

Axel Merk, president and chief investment officer at Merk Investments, said that Zhou's views "reflect China's frustration in relying on the U.S. dollar as the world's reserve currency, when U.S. policy makers conduct monetary policy based on domestic considerations." "That's a friendly way of expressing that the U.S. may be trying to debase the dollar, raising concern in China about the value of its massive U.S. dollar denominated reserves," Merk said in a research note. Central banks around the world won't be willing to yield power to a new world monetary authority, specifically the IMF, Merk said. "We believe China may realize sooner rather than later that building a diversified basket of reserves followed by a free floating exchange rate, will provide China with the advantages China's central bank governor is seeking," he said.

Marc Chandler, currency strategist at Brown Brothers Harriman, said that China has not sought to undermine the U.S. dollar. "Just as important is what China is not saying," Chandler said. "It is not saying it will dump dollars. It is not saying it will buy more euros." The support for a new international reserve asset seems to be an attempt to get around the contradictory pressures on a national currency that is also a reserve asset, he said. "The dollar's role seems as secure as ever," Chandler said. "There is no clear national alternative and a new international asset cannot simply be foisted on countries. The dollar remains numeraire, imperfections and all."

It is no surprise to me that the United states is keen to scuttle the Chinese proposal. After all, who would remain as keen to fund America's enormous deficits if its currency were no longer the world's main reserve currency and medium of exchange in international trade? Once more, I am surprised how uninformed commentary on this proposal has been in much of the blogosphere. For instance, there has not been much discussion of the evolution of the international monetary system in the postwar period--something Zhou goes into at some length. To be honest, your average Amerocentric blogger wouldn't know the difference between an SDR and a DDR3.

To get things done, China will need the assent of many other countries also concerned about ongoing dollar debasement. Think of other Asian exporters and Middle East oil exporters who too have played a significant role in funding US deficits in recent years. As the commentator Chandler said, China needs to put its money where its mouth is at by moving away from dollar purchases if it is to be taken seriously. With PRC exports to the US shrinking anyway, this should be happening in fairly short order if China is really serious about it.

Can the IMF be the place where moving away from the dollar to an upgraded SDR? Again, effective American "veto power" in having a 15% share of SDRs or voting rights will likely block any such initiative from being started without significant LDC cooperation. So far, it is notable that China has resisted calls to participate more in the IMF. Whether it is wary of US influence or wants more changes like upgrading SDRs we cannot really tell from the outside looking in. Ultimately, though, the ball is in China's court. How it accumulates or diversifies away from dollars will be key in determining whether this latest tantrum is just more bluster or something more significant.

California's Tent City of the Foreclosed is Closed

I thought it right to post about this to achieve some, ah, closure. In times past, I have marveled about the existence of a tent city of the foreclosed at the heart of America's wealthiest state, California [1, 2]. Recently, I had an upsurge in hits for these two older posts, making me wonder what was going on. It turns out that Ontario, CA was featured on the Oprah Winfrey show. For so long, Hollywood has sold the California Dream like a giant Beach Boys soundtrack. However, the housing implosion in the boom-to-bust Inland Empire has meant skyrocketing foreclosure rates, forcing many to live in the now-infamous Tent City of the Foreclosed. It appears this shantytown has given the California Dream a black eye as officials are now in a hurry to close it down in embarrassment. From Reuters:

The mayor of California's state capital unveiled plans on Thursday to shut down a sprawling "tent city" of the homeless that has drawn worldwide media attention as a symbol of U.S. economic decline. Sacramento Mayor Kevin Johnson promised to first make alternative shelter space available for the estimated 150 men and women who inhabit the squalid encampment near the American River, at the edge of the city's downtown.

Johnson, who toured the area with California Governor Arnold Schwarzenegger a day earlier, said he hoped to have the ramshackle settlement cleared of tents and debris in the next two to three weeks. "We want to move as quickly as we can," he told a news conference, insisting the city was determined to treat the tent dwellers with compassion. "They are people out there. We have to do whatever we can do," he said. "We as a city are not going to shy away from it. We're going to tackle it head-on." Advocates for the homeless applauded the mayor's action. Municipal authorities in Sacramento have been debating the fate of the tent city for weeks.

Sacramento has one of the highest mortgage foreclosure rates in the United States, and the homeless total in the city and surrounding county is estimated to have jumped nearly 10 percent last year to nearly 2,700. About half are believed to be living outdoors, according to a local survey.

And so ends the California Dream, as fake as a Hollywood set--or an AAA CDO for that matter. At least in the Tent City of the Foreclosed you had a tent ownership society, to paraphrase Dubya. Now it's gone like Greta Garbo.

My Wish Come True? China Backing $ Alternative

Well here's some potentially very welcome news. In recent days, I have discussed proposals emanating from the UN concerning the creation of an alternative reserve currency to the US dollar [1, 2]. I liken the US to a lumbering giant drunk on massive amounts of debt plied by LDCs even its behavior becomes more and more irregular with its various stimulus cravings. What is common to the various UN proposals has been the absence of a key dollar victim/co-perpetrator in creating massive global economic imbalances--China. Well, it appears that my wish is coming true (at least in part) as China realizes the future extent of its losses if it continues accumulating money-losing $ holdings as the US prints money like there's no tomorrow. So, it's time to stop juicing the debt addict and allow it to collapse under the weight of its habitual binging. Cold turkey is what's best for America.

The Financial Times pointed out that the governor of the People's Bank of China (PBoC), Zhou Xiaochuan, has released a missive on the PBoC website suggesting measures reminiscent of those proposed by the UN and Stiglitz. However, China getting in the action would be the game-changer as I've suggested many, many times before. I suggest that you read the PBoC missive in its entirety even if the translation is not the best. The juicy parts I will excerpt here. This is the intro:

The outbreak of the current crisis and its spillover in the world confronted us with the long existing but still unanswered question--i.e., what kind of international reserve currency do we need to secure global financial stability and facilitate world economic growth, which was one of the purposes for establishing the IMF? There were various institutional arrangements in an attempt to find a solution, including the Silver Standard, the Gold Standard, the Gold Exchange Standard and the Bretton Woods system. The above issue, however, as the ongoing financial crisis demonstrates, is far from being solved, and has become even more severe due to the inherent weaknesses of the current international monetary system.

Theoretically, an international reserve currency should first be anchored to a stable benchmark and issued according to a clear set of rules, therefore to ensure orderly supply; second, its supply should be flexible enough to allow timely adjustment according to the changing demand; third, such adjustments should be disconnected from economic conditions and sovereign interests of any single country. The acceptance of credit-based national currencies as major international reserve currencies, as is the case in the current system, is a rare special case in history. The crisis called again for creative reform of the existing international monetary system towards an international reserve currency with a stable value, rule-based issuance and manageable supply, so as to achieve the objective of safeguarding global economic and financial stability.

After alluding to how the US keeps abusing the privilege of issuing the world's standard reserve currency such as Bernanke's various money for nothing gambits, Zhou geets to discussing the benefits of a true supranational reserve currency:

A super-sovereign reserve currency not only eliminates the inherent risks of credit-based sovereign currency, but also makes it possible to manage global liquidity. A super-sovereign reserve currency managed by a global institution could be used to both create and control the global liquidity. And when a country's currency is no longer used as the yardstick for global trade and as the benchmark for other currencies, the exchange rate policy of the country would be far more effective in adjusting economic imbalances. This will significantly reduce the risks of a future crisis and enhance crisis management capability.

Like yours truly, the PBoC guv'nor realizes that there are tough obstacles to getting this done. That is, the United States will not let its (waning) hegemony slip without a fight by letting an alternative currency be established as a store of value in providing reserve liquidity as well as a medium of exchange in settling world trade. From the Chinese perspective, broadening its portfolio is certainly desirable:

The reestablishment of a new and widely accepted reserve currency with a stable valuation benchmark may take a long time. The creation of an international currency unit, based on the Keynesian proposal, is a bold initiative that requires extraordinary political vision and courage. In the short run, the international community, particularly the IMF, should at least recognize and face up to the risks resulting from the existing system, conduct regular monitoring and assessment and issue timely early warnings.

Here are the steps Zhou envisions if the SDR is to become a real alternative reserve currency as opposed to its current status as little-held unit of account:

(1) Set up a settlement system between the SDR and other currencies. Therefore, the SDR, which is now only used between governments and international institutions, could become a widely accepted means of payment in international trade and financial transactions.
(2) Actively promote the use of the SDR in international trade, commodities pricing, investment and corporate book-keeping. This will help enhance the role of the SDR, and will effectively reduce the fluctuation of prices of assets denominated in national currencies and related risks.
(3) Create financial assets denominated in the SDR to increase its appeal. The introduction of SDR-denominated securities, which is being studied by the IMF, will be a good start.
(4) Further improve the valuation and allocation of the SDR. The basket of currencies forming the basis for SDR valuation should be expanded to include currencies of all major economies, and the GDP may also be included as a weight. The allocation of the SDR can be shifted from a purely calculation-based system to one backed by real assets, such as a reserve pool, to further boost market confidence in its value.

These are fine words; I hope they translate into action. I just hope that China will be willing to side with LDCs when push comes to shove as the US inevitably objects to reform of the IMF in a way that diminishes its influence over the organization. Remember, it still holds a "veto" due to it having over 15% of SDR holdings that are equivalent to votes at the IMF where an 85% majority is required to push changes through. If China really wants an alternative reserve currency to become a reality, it certainly should be willing to play a larger role in international institutions. It should also be willing to put Uncle Sam on debt rehab despite its outstanding reputation as a debt pusher. I feel chuffed for now; we may finally be getting somewhere. And the UN is nowhere in sight for this proposed solution.

China getting fed up with dollar debasement--who'd have thought of it? Nobody likes being played for a fool. Heck, it only took five or so years and a major financial calamity for China to get the message.

Olive Oyl Globalization: Stiglitz's UN Populism

Cartoon watchers of all ages are familiar with Popeye damsel in distress Olive Oyl. When in trouble, she calls for Popeye to come to the rescue. To paraphrase her in the context of today's offering, "Woe is me, LDC!" Now, the history books are littered with past efforts at creating meaningful groupings that promote an LDC agenda. Among others, the Non-Aligned Movement, the G-77, and the New International Economic Order have tried to counteract the influence of industrialized countries at important multilateral institutions such as United Nations and the Bretton Woods twins (World Bank and IMF). The reason why you don't hear much about these past efforts is that none have really made a mark on global economic governance.

That's not to stop Joseph Stiglitz, however, from giving it another go. If LDCs are squealing like Olive Oyl during the current crisis, is Stiglitz our Popeye? (I hope he has large forearms.) From the Financial Times comes word of yet another plan to make these institutions more accountable to LDC concerns. Is it 1964 or 2009? See for yourselves:

The Group of 20 should be replaced by a new Global Economic Council, an advisory panel of senior international economists has said. Under the panel’s proposals, the council, which would be a United Nations body, would become the main forum for setting the agenda for worldwide economic and financial policy.

The proposal, made by an 18-member UN commission headed by Joseph Stiglitz, the Nobel-prizewinning economist, will be raised at next week’s expanded G20 summit in London, at which heads of state will debate a global response to the world financial crisis. It is part of a draft 10-point plan put forward by the panel, appointed last October by the 192-member UN General Assembly, to study reform of international financial institutions...

The new UN body, which would be independent of the Security Council in which the main powers hold a veto, would have a membership of 20 to 25, Mr Stiglitz told the FT. The proposal goes to the general assembly this week.

The panel’s plan also proposes a new global reserve system that would provide support to developing countries on a regular basis and would not be subject to veto by industrialised countries that dominate existing international financial institutions, such as the IMF [also see this recent post].

The plan calls for developed countries to set aside 1 per cent of their fiscal stimulus plans, in addition to existing foreign aid budgets, to spend in developing countries. “While the decision on stimulus is national, it should be judged on its global impacts,” the panel says in a draft document.

It also calls on advanced economies to abide by pledges to avoid protectionism “and . .. insure that stimulus packages and recovery programmes do not further distort the economic playing field and further increase global imbalances”. The draft criticises “misguided policy recommendations” by institutions such as the IMF that have prevented developed countries from adopting the counter-cyclical stimulus policies being pursued by the developed countries.

The draft document says that a global response to the financial crisis “must encompass more than the G7 or G8 or G20, but the representatives of the entire planet, from the G192”.

There is much to discuss here but probably little to look forward to in terms of becoming a reality. The UN-phobic William Easterly will have a field day with this globalization-by-committee approach. From my POV, some of these suggestions appear rather impracticable and will fall on deaf ears like in so many times past:

• The G20 is already weak-kneed as it is; adding another layer of UN bureaucracy to the proceedings is bound to hinder rather than help;
• The UN already has a General Assembly in addition to a Security Council; why would adding another grouping help matters along? And don't forget UNCTAD, either;
• Stiglitz proposes a global reserve system to replace that overseen by the IMF, but won't that require setting up an alternative institution to the IMF?;
• Why would the many industrialized countries already running large fiscal deficits readily be able to fork out 1% of their respective stimulus packages to help LDCs?
• The G-192 sounds like a recipe for gridlock; if the G-77 was unwieldy, what is this thing?
  

Bottom line: while I await the final document, Stiglitz's suggestions certainly mirror initiatives past that have fallen by the wayside. Plus, many are recycled from his recent book. That this one is being captained by an American at a tony Ivy League institution certainly does it no favors in terms of legitimacy.

I am perplexed why Stiglitz is keen on portraying LDCs as hapless victims when many now have increased political-economic clout. LDC populism without realism has not, in times past, proven to be a recipe for reform of global economic governance. If Stiglitz is concerned about exacerbating global economic imbalances, the best course of action is not to recycle the "woe is me" approach taken so many times before. Rather, making large LDC funders of US deficits force Uncle Sam to shape up or feel the wrath of reserve sales is the way to go. As I've said, US protectionism may be a way of generating this desired result as offended countries chafe at ridiculous protectionist policies. Sorry Dr. Stiglitz but realpolitik beats Olive Oyl each time out.

Fight Rejoined Over Soya Export Tax in Argentina

It baffles me how long this has been going on: In May of last year, I posted about Argentina's efforts to keep the local market well-supplied with soybeans as farmers preferred selling to export markets given the prevailing high prices of commodities. Fast-forward nearly a year and things are rather different as soybean prices have fallen markedly alongside those of other commodities (see chart). Plus, a continuing drought is worsening prospects down on the farm. Now Argentinean farmers are unhappy that, despite the fall in soya's price and hence the original justification given by Argentinean President Cristina Fernandez-Kirchner, the export tax remains in place. Worse, a revenue-starved government (attributable to the fall in commodity prices) has just said that it would send tax proceeds to local governments--not a popular move, to say the least. Like before, farmers have blocked streets to stop the transport of soya and mounted roving strikes. From Reuters:

Argentine farmers blocked roads and called an anti-government strike [for a week] on Friday, reigniting a year-long standoff over soy taxes and challenging the president three months before a mid-term vote. The protests erupted a day after ruling party lawmakers refused to debate an opposition-led bill to cut the taxes, further dimming prospects of a quick resolution to a conflict that has weakened President Cristina Fernandez.

Her cash-strapped government is battling to retain some $4.9 billion in tax revenue from soy exports in the run-up to the congressional vote, which is expected in June.
"A great opportunity was lost yesterday," said Mario Llambias, president of the Argentine Rural Confederations, one of the country's four main farming groups, as he called the seven-day freeze on grains and livestock sales from Saturday.

Fernandez further riled farmers in the agricultural powerhouse with an announcement that revenue from the levies would be shared with provincial governments. "We've gone back to the 2008 situation," said Alfredo de Angeli, the outspoken leader of a local FAA branch, who was arrested by military police last year when he blocked the same highway in the eastern province of Entre Rios.

Protesters stopped traffic by parking tractors on several highways in the fertile Pampas region, some burning tires in scenes reminiscent of last year, when blockades caused sporadic food shortages and sent local financial markets tumbling. Friday's protests pushed U.S. soy futures and local livestock prices higher, while the peso and Argentine bonds fell. Mario Balletto, a Citigroup analyst in Chicago, said "seven days will not cause too much excitement but the uncertainty that it could become longer would be supportive" for prices.

Fernandez has refused to lower the tax on soybeans from the current rate of 35 percent, even as global prices have slid 40 percent from last year's record high and a severe drought has slashed corn and wheat production. She defends the levies as a way to share wealth in a country where roughly one in four people lives in poverty.

Soy is Argentina's top crop and income from taxes on soybeans, oil and meal has become more important for the government as the economy slows after years of robust growth...the farming conflict is leading major soy buyers like China to look to the United States and Brazil for supplies, industry analysts said.

The current grains harvest, valued at about $17 billion, is expected to earn the government $5.6 billion in export levies, the vast majority from soy, according to a recent estimate by the Argentine Rural Society.

Aren't Peronist politics supposed to be populist? You don't hear of counterprotests.

Investment Grade Debt for Libya? Yessiree Bob

Picture this: a country whose leader was not so long ago synonymous with terrorist activity is now a near-shining model of economic rectitude, while its historical antagonist the United States is a basket case whose currency the community of nations will soon suggest others flee from. How time change, eh? From MarketWatch:

[Standard & Poor's] assigned Libya A- long-term and A-2 short-term foreign and local currency ratings, citing the strength of its balance sheet. The ratings agency assigned the sovereign rating following a request from Libya's government, said David Beers, global head of sovereign ratings at Standard & Poor's, in a phone interview with MarketWatch.

"I think it's fair to say that their motivation to ask for the rating is in keeping with the broader philosophy of recent economic reforms," Beers said. "The rating is useful in terms of helping the country attract more foreign investment. Unsurprisingly, the focus of investor interest has been overwhelmingly in the oil and gas sector," Beers said. Other sectors that will likely draw investors are banking and tourism, he said.

Located in North Africa, Libya has the largest proven oil reserves in Africa. A member of the Organization of Petroleum Exporting Countries, it also holds vast reserves of natural gas. Its leader, Moammar Gadhafi, has been in power since 1969...

S&P assigned a stable outlook on Libya's ratings. "The ratings on Libya are supported primarily by what we consider is one of the strongest balance sheets among A-rated sovereigns, comprising substantial public assets and negligible debt, relatively low financial contingent liabilities, and the solid medium-term growth prospects of the country's energy sector," said Standard & Poor's credit analyst Ben Faulks in a statement...

S&P expects the sharp fall in oil prices and OPEC-driven cuts in production to cause a significant contraction of Libya's real and nominal gross domestic product this year. However, due to its strong balance sheet, Libya is well-equipped to confront likely fiscal and current account deficits and to moderate what could otherwise be a significant shock to the economy, S&P said.

The country's medium-term growth prospects are "promising," and international oil companies have demonstrated great interest in Libya, attracted by low production costs and the fact that some 75% of the country remains unexplored, the agency said. Infrastructure is underdeveloped following years of international isolation.

"The main constraint on the ratings on Libya is our belief that decision-making is more centralized and the political process more complex than in many A-rated peers, leading to less predictability in policy-making," S&P said.

At this point, Moammar could teach Barack a thing or two--especially about socialism.

North-South Divide: UN To Say "Let's Ditch the $"

It's times like this when you should be glad about my semi-fastidious approach to classic IPE problematiques. Today, we return to the never-ending issue of a North-South divide between industrialized and developing countries concerning reserve currencies. It is no secret that the US is resorting to all sorts of dollar molestation tactics to buoy its economy. The US government will print something on the order of $2 trillion in IOUs to pay for a $787 billion stimulus package and a plan to refinance foreclosed mortgages (many of which will foreclose again anyway). Plus, you have news that the Fed plans to add $300B or so more to its balance sheet by purchasing long-dated Treasuries to try and lower consumer borrowing costs. In effect, the US government is cranking the printing press not only to mint its IOUs but also to allow the Fed to buy up Treasuries that America herself issued. What a plan.

These actions have not endeared the US to LDCs, just as the US running chronic external deficits didn't at the turn of the 1970s culminating in the "Nixon Shock" demise of the dollar-gold standard. LDC unhappiness stems from the US being unconcerned as the value of the world's standard reserve currency, the dollar, sinks. In response to dollar molestation, necessary commodities become dear, swelling many LDCs' import bills--especially those of oil importers. Many have long been concerned about America's willingness to abuse this privilege of issuing dollars, including John Maynard Keynes who suggested the creation of the bancor. Postwar Britain not being the dominant power at the Bretton Woods conference, this idea was quickly shelved by the US, which naturally favored a multilateral system built on American hegemony.

Hence, special drawing rights (SDRs) established during the turn of the seventies did not really allay LDCs fears; it has never really fulfilled the role of an alternative reserve denomination as SDR holdings remain minuscule among various countries' reserve holdings. Given current global conditions, however, LDCs are once again clamoring for a genuine dollar alternative. From Reuters comes this potential bombshell:

A U.N. panel will next week recommend that the world ditch the dollar as its reserve currency in favor of a shared basket of currencies, a member of the panel said on Wednesday, adding to pressure on the dollar.

Currency specialist Avinash Persaud, a member of the panel of experts, told a Reuters Funds Summit in Luxembourg that the proposal was to create something like the old Ecu, or European currency unit, that was a hard-traded, weighted basket. [He] said the recommendation would be one of a number delivered to the United Nations on March 25 by the U.N. Commission of Experts on International Financial Reform. "It is a good moment to move to a shared reserve currency," he said.

Central banks hold their reserves in a variety of currencies and gold, but the dollar has dominated as the most convincing store of value -- though its rate has wavered in recent years as the United States ran up huge twin budget and external deficits...

Persaud said that the United States was concerned that holding the reserve currency made it impossible to run policy, while the rest of world was also unhappy with the generally declining dollar. "There is a moment that can be grasped for change," he said. "Today the Americans complain that when the world wants to save, it means a deficit. A shared (reserve) would reduce the possibility of global imbalances."

Persaud said the panel had been looking at using something like an expanded Special Drawing Right, originally created by the International Monetary Fund in 1969 but now used mainly as an accounting unit within similar organizations.

So there you have it. After all this time, the question of an alternative reserve currency remains unresolved as old ideas are being resurrected. Actually, this proposal mirrors a more recent one by the historically LDC-friendly UN Conference for Trade and Development (UNCTAD) to reduce the asymmetries in the world economy where industrialized countries able to print reserve currencies can splurge while LDCs are forced to save [see my recent post on this point and also this UNCTAD summary]:

[UNCTAD Chief Macroeconomist Heiner Flassbeck] said it was essential to examine this problem from a broader perspective - namely that under the current system, some countries were not allowed to “print unlimited amounts of money” or run large budget deficits without causing their currency to “fall down a very deep hole.” This represented a fundamental asymmetry in the global economy that was in no one’s interest. In effect, countries who are the victims of currency speculation, or “carry-trade” (portfolio investments based on borrowing in low-yielding currencies and investing in high-yielding ones) are forced to take “pro-cyclical” measures (such as interest rate hikes or public budget cuts or freezes) that aggravate the crisis in the real economy in order to reassure international currency speculators. This perverse phenomenon underlined the importance of UNCTAD’s proposal to develop a multilateral framework for an automatic stabilization of real exchange rates that would defeat the purpose of any speculative attack on a currency. This would enable all countries to regain the policy space needed to act in the interest of the real economy and avoid “beggar-thy-neighbour” policies or “devaluation wars” reminiscent of the 1930s...

Such a global reserve currency was part of the original proposals of John Maynard Keynes at the 1944 United Nations Bretton Woods Conference (which he had termed the “bancor”), but it was resisted by the United States at the time. Instead, the IMF constitution enables it to issue an artificial liquidity called “Special Drawing Rights” (SDRs), but its emission has been blocked by the United States’ de facto veto at the IMF and suffers from a number of limitations compared to Keynes’ original proposal, including the IMF’s governance structure. Nobel Prize laureate Joseph Stiglitz, who also chairs the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System, has repeatedly emphasized that the need for a new global reserve system which would be more stable than the US dollar has become more dire today: it is an idea “whose time may have finally come.”

In a nutshell, the system would work as follows: when a country faces a devaluation attack, the monetary authorities of the revaluing currency would automatically stave off the attack by a symmetrical intervention to stop the “undershooting” with its own currency, which is available in unlimited amounts: it can be printed. Nominal exchange rate changes would be readjusted periodically by governments, not markets - which contrary to neo-classical theory have empirically been proven not to be able to get “the price right.” These adjustments would be based on the objective criterion of changes in Purchasing Power Parity, or “inflation differentials.” Unlike the Post-World War II Bretton Woods system of fixed exchange rates (which was based on the US dollar and collapsed in 1970s), the value of each currency would be anchored to a new artificial global currency based on a basket of currency values, like the European “ECU” was used in Europe prior to Monetary Union.

One hopes this new proposal does not fall on deaf ears like both times before--at the Bretton Woods Conference and during the demise of the dollar-gold standard. Certainly, the US is much weaker at this point and cannot exercise as much hegemonic power as way back when. I, however, think the remedy to the US holding the rest of the world hostage to "quantitative easing" (dollar molestation) is for China to show solidarity with third world concerns and stop buoying the dollar. I wish the UN the best but do not pitch my hopes too high.

The Official Anthem of Protectionist Mania 2009

I'm strapped for time but, in light of this place becoming the International Protectionist Economy Zone, here's my choice for this year's new official song. This one is off Jamaican disco goddess Grace Jones' classic album from 1980, Warm Leatherette. I was inspired to look for this song appropriately entitled "Bulls--t" on YouTube and, sure enough, here it is. I suggest they play it at the next G-20 meeting before proceedings get underway:

And if I wander down the wrong road,
It's alright baby, just let me go,
If I get tired of all those a--holes,
It's alright cause' I want them to know.

I'm sick and tired of all this bulls--t,
Rough s--t, same s--t

Juice protectionism, mining protectionism, trucking protectionism..I really am tired of these never-ending variations on a pathetic theme.

If Geithner's the Lone Ranger, Where's Tonto?

Kindred over at IPE@UNC uncovered startling online evidence that Treasury Secretary Geithner may truly be a one-man show. It reminds me of a somewhat offensive joke about the Lone Ranger and sex education, although this one is more appropriate:

The Lone Ranger and Tonto find themselves in very big trouble. 100 Indians to the north, 75 to the east, 200 to the south and 400 to the west. The Lone Ranger turns to Tonto and says: "What do you think we should do Tonto?"

Tonto replies: "What you mean we white man?"

Geithner's is truly a thankless task. The stakes are pretty high if you screw up, to say the least. Just a few days ago, I said in jest that he'd be pricing women's pantyhose in the near future given the US government's continuing usurpation of the private sector's previous remit. Given his expanding portfolio, he could use some warm bodies real soon.

Gotcha 2! China Blocks Coca-Cola's Huiyuan Bid

There I was just a few minutes ago, feeling all sympathetic to China being thwarted yet again by Western protectionism when, uh, the PRC returned the favor. About half a year ago, I discussed at greater length Coca-Cola wanting to buy China's largest juicemaker, Huiyuan. It needn't have wasted its time. From the Financial Times:

China on Wednesday formally rejected Coca-Cola’s proposed $2.4bn takeover of the country’s leading juice maker on competition grounds. The decision represents a major blow to multinational companies seeking to make acquisitions in China. The planned deal, the largest ever foreign takeover of a Chinese company, was the first major test of the country’s revamped anti-monopoly regime that was given extra teeth last August.

China’s ministry of commerce said that allowing the deal to proceed would hurt small local juice companies, could have pushed up juice market prices and limited consumers’ choices. Huiyuan, which is listed in Hong Kong, boasts a 42 per cent share of the domestic market in pure fruit juices. The announcement follows an earlier report in the Financial Times that the regulator had demanded that Coke relinquish the China Huiyuan Juice brand after the acquisition. People familiar with the matter said the ministry’s thinking reflected wider worries in Beijing about the loss of a leading brand to a foreign company. The demand was regarded as a deal breaker because the US company offered to pay a huge premium on the basis of Huiyuan’s strong brand image...

MofCom’s decision is a huge setback to the selling consortium which comprises Zhu Xinli, Huiyuan founder chairman, who owns 36 per cent of the company and France’s Danone, which owns 23 per cent. Warburg Pincus, the US private equity firm, owns 6.8 per cent.

You could say that this decision is retaliation for then-US Trade Representative Susan Schwab singling out China for subsidies given to "famous brands" in the dying days of the Bush administration--something the PRC clearly intended Huiyuan to be in the future given its insistence that Coca-Cola give up the name after purchasing the concern. Yes, American football fans, it's like the city of Cleveland asking that the Browns name and brand remain in the city's hands after its then-owner split for Baltimore. What more can I say? This has become the International Protectionism Economy Zone.

UPDATE: I neglected to mention pertinent history for those unfamiliar with the story. The US gave Chinese energy firm CNOOC the political run-around after it expressed interest in buying Unocal over dubious "national security" concerns. Rather than be subject to undue scrutiny, CNOOC dropped the bid. Also, Huawei Technologies' bid for 3Com was dropped after being subject to political point scoring described by a Huawei senior exec as "bulls--t."

Gotcha! Protectionism Hits Chinalco-Rio Tinto Deal

Patriotism is the last refuge of a scoundrel - Samuel Johnson

Ladies and gentlemen, believe me when I say that I would like to be proven wrong most of the time. While many prefer to say "I told you so," I long ago figured that being pessimistic and cynical has its drawbacks. You do not go wrong in many instances expecting the worst of people--I am admittedly a glass half full sort, but still... A month or so ago, your correspondent voiced doubts over whether (PRC-owned) Chinalco's bid for 18% of Aussie mining giant Rio Tinto would be consummated with ease. Many said that existing shareholders would not welcome the share dilution which would happen if it pushed through. True enough; this has been a major source of problems in making the deal happen. However, I also pointed out the ugly face of blatant protectionism as a possible hindrance. Bang on schedule, I present you protectionism's unvarnished nastiness as Rio's stock takes a beating from the inevitable delay or even scuttling of this deal. From the Syndey Morning Herald:

Rio Tinto shares are under pressure amid investor uncertainty about the future of the $US19.5 billion ($29.5 billion) investment deal by Chinalco. Rio Tinto shares ended the day down $4.51, or 8.7%, at $47.50, while rival BHP Billiton lost 82 cents, or 2.6%, to $31.08.

The Chinalco deal is facing a mounting political backlash that has led to independent senator Nick Xenophon today joining National senate leader Barnaby Joyce in expressing concerns about the move. The planned investment by Chinalco in Rio Tinto will give it stakes in a number assets, including iron ore in Western Australia and increase its interest in the dual-listed miner from 9% to 18%.

"It is the uncertainty surrounding the Chinalco deal, there has been a bit of talk out today that there is a lot of opposition to the deal and this is what's weighing on it,'' MF Global senior trader Anthony Anderson said. "The FIRB extension and the senate inquiry into foreign investment is adding to the uncertainty.''

The mounting political concern follows a decision by the Foreign Investment Review Board (FIRB) to extend its review to 90 days and initiate a more in-depth examination of the transaction, after the initial 30-day evaluation period closed on Monday. The transaction, which has been backed by the Rio Tinto board, will also allow Chinalco to appoint two new non-executive board members to the global miners board.

Major Rio Tinto shareholder Australian Foundation Investment Company (AFIC) on Monday expressed deep concern over the Chinese state-backed aluminium producer becoming involved with the running of the business. AFIC cited potential conflicts on interest over investment decisions.

The Chinalco transaction has also drawn the ire of some of Rio Tinto's UK investors, who expressed disquiet over not being offered the chance to participate in a rights issue. Rio Tinto has been forced to seek a lifeline to help tackle the $US38 billion mountain of debt it incurred buying Canadian aluminium producer Alcan in 2007.

There is nothing much for me to add here other than say beggars can't be choosers given Rio's decrepit finances from its costly acquisition near the height of the commodity bubble. There is a good chance that commodity prices will rise significantly pretty soon, but for now, Rio Tinto must bite the bullet. What we have here is as another discriminatory arrangement. Just as the US-Mexico spat concerns a quite frankly ridiculous conviction of "driving while Mexican," this one is of "investing while Chinese." There is no doubting that the commanding heights in China are party-controlled; however, this does not mean that a measly 18% stake will turn Rio into a Party satellite or anything of that sort. I have long championed Chinese investment outside of (declining) US assets, and closing off PRC efforts at portfolio diversification isn't healthy for anyone in the long run.

As Bloomberg notes, this is looking like a rehash of the failed CNOOC-Unocal deal. You cannot say racist sentiment doesn't exist in Australia. You have Pauline Hanson's One Nation party (of white people) and the aptly named Australian Protectionist Party plying xenophobic rhetoric. You will have a very hard time convincing me that this isn't the sort of sentiment politicians are pandering to--everything was fine here until the colored people showed up, etc, etc.

Mexico's Tariff Frenzy vs. US Trucking Policies

With apologies to Eddie Kendricks, what we have is the US telling Mexico, "(Don't) Keep on Truckin'" and the latter being very unhappy about it. The roots of this conflict lie in blatant protectionism. I am not especially bright, but my understanding of NAFTA is that it is a free trade agreement. In theory at least, these agreements encourage the free movement of goods, capital and labor. For the longest time, however, the United States has disallowed Mexican truckers from transporting goods into the US on specious grounds. Where should we begin? It all goes back to the start of NAFTA when then-President Bill Clinton--the guy who signed NAFTA--bowed to pressure from organized labor which supported him in his election bid, the Teamsters:

The problem dates back to 1995, when Bill Clinton issued an executive order — in violation of Nafta, which he had signed into law — to stop Mexican long-haul trucks from crossing the border. Mr. Clinton was responding to pressure from Teamsters, who didn’t want any new competition. He cited safety concerns — things like substandard drivers and vehicles — which to this day have never been supported by evidence...

Earlier this year, the DOT analyzed the safety record of Mexican carriers in the U.S. from 2003-2006. It looked at the rate in which trucks received an “out-of-service” designation by DOT inspectors targeting companies with the worst records. The out-of-service rate for U.S. trucks was 23.5%, compared to a rate for trucks from Mexico of 21.29%. Mexican short-haul trucks operating in the border zone also had a better record than the U.S. trucks, with an out-of-service rate of 22.5%.

In 2001, NAFTA's dispute settlement body found the US in violation of its commitments by limiting Mexican trucking in no uncertain terms, paving the way for sanctions if the US did not comply. Towards the end of the Bush administration, there was some improvement in fixing this offending policy:

These statistics ought to be enough to end the debate. But with Teamster pull still strong in Congress, the Bush administration this year offered to introduce a pilot program to allow a limited number of new trucking companies to begin doing business in the U.S. under close DOT scrutiny. The program kicked off on Sept. 6, and there are now seven Mexican companies operating 44 vehicles in the U.S. and four U.S. companies operating 41 vehicles in Mexico. You’d think that those with safety worries would be glad to see such a vigilant approach to the problem. But just after the program started, both the House and the Senate voted to strip its funding in the 2008 budget.

It’s not clear whether this budget cut will be sustained. But the effort makes it obvious that Congress is no honest broker. As John Hill, administrator of the Federal Motor Carrier Safety Administration, told me last week: “Every time we move closer to implementing the provisions of Nafta, Congress adds a new provision. It’s hard to hit a moving target.”

As usual, ersatz "safety" fears are driving this protectionist rule since Mexican truckers have been found to be more cautious than their gringo counterparts. Now, let's fast-forward to the present time. In the US Congress' $410B Supplemental FY 2009 Omnibus bill, AKA "Porkulus II", funding for the Bush-era pilot program was stripped:

The bill bars the use of funds to establish a cross-border motor carrier demonstration program to allow Mexico-domiciled motor carriers who meet safety standards to operate beyond the roughly 25-mile commercial zones along the international border between the United States and Mexico.

An understandably offended Mexico has hit back--which they are entitled to--against this provision:

The Mexican government said that it would slap tariffs on 90 US industrial and agricultural products, in a trade dispute that underscored the difficulties facing President Barack Obama as he tries to assure business and global allies that he favours free trade...

Mexico said the tariffs were in retaliation for the cancellation of a pilot program allowing Mexican trucks to transport cargo throughout the U.S. Mexican trucks on US highways have for years been primarily opposed by unions, despite long-standing agreements by the two countries to eventually allow their passage. Legislation killing the pilot program was included in a $US410 billion spending bill Mr. Obama signed last week.

The White House responded to the tariff threat with assurances that Mr Obama would work with Congress to create a new cross-border trucking program...The Mexican government wouldn't say exactly which products would be hit with tariffs but that the total value of the products was $US2.4 billion in 2007 and originated in 40 states. A detailed list was expected to be published this week...

The back-and-forth between the US and its third largest trading partner dramatised the pressure on Mr Obama as he prepared for an April meeting of G-20 leaders in London. Mr Obama ran for office as a trade sceptic, and urged the North American Free Trade Agreement, known as NAFTA, be renegotiated to better protect the interests of U.S. workers...

The International Brotherhood of Teamsters hailed the end of the road for the trucking program, and issued a sharp rebuke of Mexico's retaliatory action on Monday. "The right response from Mexico would be to make sure its drivers and trucks are safe enough to use our highways without endangering our drivers," said Teamsters president James Hoffa said.

The pilot program at the centre of the trade dispute involved 29 Mexican carriers and 100 trucks, far less than the 100 carriers and 500 to 1,000 trucks initially projected by the Transportation Department.

An agricultural economist previously figured that Mexican retaliation would hit the US hard where it hurt:

Based on a draft retaliation list obtained in Mexico from a reliable and confidential source, economist Dermot Hayes of Iowa State University has analyzed the potential impact of Mexican retaliation on the U.S. economy. Hayes found that up to 40,909 U.S. jobs in seventeen states could be lost as a result of the failure of the United States to honor its commitments on trucking.

I'll be honest here and say that this is not only protectionist but also downright racist. As Daniel Griswold notes:

Although the Teamsters talk about safety, their real agenda is not to promote safer roads but to protect themselves from increased competition. The real agenda of their congressional allies is to thwart full implementation of a successful trade agreement with Mexico, our third-largest trading partner. The real objection they have to Mexican trucks making deliveries to U.S. cities is not that they are unsafe but that those trucks are driven by Mexicans. In the eyes of congressional leaders, “driving while Mexican” remains an unacceptable public hazard.

It is a shame that Mexican truckers are forced to drop off their goods at warehouses along the border for US truckers to carry onwards (many Teamsters, no doubt), adding an estimated $400M a year to the cost of Mexican exports. This Obama guy may be new, but he sure has a way of offending everyone else with his isolationist leanings: Canadians and Europeans ("buy American"); Chinese ("China Currency Coalition"); Indians (not giving bailout funds to those hiring foreign workers); and now the Mexicans. I say this for all to hear as I usually do for protectionist nonsense: Mr. Obama, let my people go. Our Mexican friends ought to be able to ply their trade on the highways and byways of America--as is their right.

10/18 UPDATE: The deed is done.

DPRK, You Don't Attract FDI by Holding Hostage

Truly independent regimes do not exist outside the minds of anti-globalization fantasists. Indeed, there are still goods which need to be procured from the outside world even in cuckoo land, North Korea. The question then becomes, "How do you earn foreign exchange while keeping a lid on corrosive foreign influences?" I had been planning to blog on this but got waylaid a bit. A few weeks ago, I posted about North Korea making a gambit to attract foreign investment via its Kaesong Industrial Complex. Some (brave or foolhardy?) South Korean enterprises have set up shop there. However, the most recent iteration of the US/South Korea "Key Resolve" war games prompted the hermit regime to shut down the border crossing to South Korean workers returning home from Kaesong. So much for the new era of cooperation North Korean officials boast about for investors in Kaesong. Here's an op-ed from the English language version of the Chosun:

After effectively holding around 720 South Korean workers prisoner in the Kaesong Industrial Complex since Friday, North Korea on Monday allowed 453 of them to return home. But there have been major difficulties in running the industrial complex as North Korea prohibits the entry of South Korean workers and raw materials and other goods. If the situation persists until Friday, when the "Key Resolve" joint military exercises between South Korea and the United States comes to an end, 90 percent of the factories in the complex are expected to shut down. North Korea has used the joint military drills as an excuse to impose the unilateral ban...

Yet North Korea's sudden treatment of South Korean officials as hostages, taking issue with a joint South Korea-U.S. military drill that has been taking place annually for a decade, raises serious questions whether it can be treated as a reliable business partner. The head of one South Korean business in the complex lamented in a media interview, "We are not toys North Korean authorities can play with." It is outrageous of North Korea to use the Kaesong Industrial Complex as leverage to exert political pressure on South Korea.

Even when North Korea launched a missile and tested a nuclear device in 2006; when the U.S. government took issue with the influx of dollars into the communist country; and even when a South Korean tourist was shot and killed in the Mt. Kumgang resort, the Kaesong Industrial Complex operated normally. Despite mounting criticism from within, the South Korean government kept the complex open, since it symbolized cooperation between the two Koreas.

Talk about "political risk." The place is practically shut down. I guess Lotte World isn't setting up shop anytime soon in the DPRK.

A Lopsided World: So Much for Kinder, Gentler IMF

Although rather overstated, the graphic I found above isn't far from how many LDCs view the IMF when it comes to crunch time, like now. I was always reluctant to buy into the lovey-dovey hullabaloo surrounding the IMF circa 2008-09. In this version of the story, the IMF is now helmed by a soft-hearted French Socialist, albeit one with an eye for the (married) ladies--Dominique Strauss-Kahn. From being a hard*ss tightwad that imposed innumerable conditionalities on Asian countries that weren't in particular need of them, the IMF had literally morphed into a super swingin' sexy IFI.

Unfortunately, I must now disabuse you of this notion--and how! Dani Rodrik held out hope that new IMF facilities would lessen the conditionality burden on LDCs. Quite eerily, today's Financial Times has news of Thailands' new PM Abhisit Vejjajiva expressing wariness about still-onerous loan conditionalities during a time when its ability to attract foreign exchange is dwindling due to falling exports. I certainly hope this is not going to end up as a replay:

Many developing countries will be unable or unwilling to use increased loan facilities from the International Monetary Fund in the present crisis unless there is a relaxation of the tough conditions normally imposed on borrowers, Abhisit Vejjajiva, the Thai prime minister, has said.

In an interview in London with the Financial Times, he issued an urgent appeal for the Group of 20 summit in April to focus on the plight of emerging economies. “When the G20 talks about reform of international financial institutions, it is not just a question of increasing capital, but also of how that capital is used,” said Mr Abhisit, who will attend the meeting as the chairman of Asean, the Association of South-East Asian Nations. “That means making sure there are new facilities for fiscal stimulus, continued development and social safety nets for developing economies.”

He said the poorest people would bear the brunt of the global recession. “When your exports are down 20 or 30 per cent, you are going to have unemployment shoot up. We do not have the social safety nets and welfare programmes to the same degree as western economies. The IMF will need to review its role. We are still concerned that the Fund when it does grant credit [imposes] conditionality that makes it difficult for a number of countries to use the facilities without affecting their development plans.”

He said one of the lessons of the 1997 financial crisis in Asia, which began in Thailand, was that the conditions enforced by the IMF had caused “unnecessary pain. Some was necessary but it could be excessive, particularly the credit constraints and interest rates,” he said. It was clear that neither the US nor European economies were obeying normal IMF conditions in seeking to counter the crisis and nor should emerging economies in the current “extraordinary” circumstances [emphasis mine].

As a significant exporting country, Thailand has seen its exports badly hit by the downturn, recording a 26 per cent decline in January. It is keen to see the IMF set up some form of trade credit insurance scheme to provide the essential finance for continuing trade flows, according to Korn Chatikavanij, the finance minister, who accompanied Mr Abhisit.

You see, here we get into the trouble over IMF double standards. Principally due to China funding US deficits year in and year out, the country most in need of "structural adjustment" has been able to get off pretty lightly in deficit financing terms considering the collateral damage it has imposed on the rest of the world. (You could probably say the same for Britain.) Given America's towering and fast-growing obligations, why shouldn't it move towards bolstering its export-competitive industries instead of trying to reflate a consumption bubble? Certainly its days selling securutized riffraff are over. When you have these double standards--frou-frou for those able to attract funding due to issuing international reserve currencies and pinpricks for most everyone else, people question the fairness of the entire framework.

I bookmarked the following article for a very long time and did not excerpt from it for a very good reason: its authorship is the (American-funded) Radio Free Europe. With that caveat in mind, here's the descriptively titled "As Rich Countries Spend, IMF Borrowers Have to Swallow the Bitter Pill":

Last week, President Barack Obama signed a $787 billion spending program designed to revive the U.S. economy, just the latest in a series of government interventions aimed at "stimulating" growth as consumer demand and industrial production slump. Other rich countries have also opened the taps of government spending. But countries like Ukraine and Latvia, which have been forced to turn to the International Monetary Fund (IMF) for loans, are being told they must do the opposite -- slash spending and balance their budgets.

The key difference between Ukraine or Latvia and most industrialized Western countries is the ability to deal with growing debt. Basically, countries like the United States and Britain can afford large stimulus packages because they can afford to create more government debt. For now, at least. They will fund their debts by issuing a record amount of government bonds in 2009 and investors are expected to keep buying them.

But when it comes to countries like Ukraine of Latvia, they have already borrowed so much from abroad that borrowing further to fund more deficits is simply not an option. Outside investors will no longer buy their government bonds in the required quantity. And printing more money would just lead to high inflation.

As a result, large government stimulus just can't be done. That's when the IMF steps in, as a lender of last resort. "Basically [the difference is] between those countries who can take on extra debt, where markets have confidence that their wider budget deficits will remain under control, and those that don't have the resources to take on extra debt, either because they would face very high borrowing costs or they're already highly indebted," says IMF spokesman David Hawley. "And the distinction isn't strictly between the industrial economies and the rest of the world -- for example emerging-market countries such as China, which have quite rightly undertaken fiscal stimulus."

Hawley says the IMF can help countries that can't afford to mount stimulus campaigns in two ways: by providing temporary loans to help stabilize a country's currency, and provide what he calls "policy advice," which is designed to help a country emerge more quickly from the crisis. And that advice often includes cutting social spending, raising taxes, and balancing the budget.

The goal is to ensure that those countries can once again become attractive to outside investors when the IMF stops lending. In Hawley's view, Ukraine is a textbook example. "Ukraine is not in a position to undertake the kind of fiscal stimulus that a country like the U.S. is undertaking," he says. "Ukraine needs the help of others to emerge from its difficulties, and that means a combination of some budget adjustment and some external financing, a portion of which comes from the IMF."

Desmond Lachman, an economist who worked for the IMF for 22 years, says the fact that Latvia and Ukraine are both postcommunist countries isn't really relevant. It's not a case of double standards, he argues [my emphasis].

I would've liked more on the point emphasized above. As it stands, I fault China for being a buster of Global South solidarity in funding America's reckless policies. If I were countries in the South seeking more influence in international affairs, then I'd ask China to support its fellow LDCs by not funding the country most in need of "structural adjustment." Heaven knows China isn't gaining anything by funding Sammy; in fact, it's quite the opposite. I would really like to ask Premier Wen, "Whose side are you really on, anyway?" Here's the bottom line: America acts like a punk because China lets it. The US needs a swift kick in the *ss, pronto. If it takes the US foolhardily slapping punitive tariffs on China for "currency manipulation" to provoke some action, so be it. The sooner the better

Make no mistake: International financial institutions are still Darwinian, and as long as the US is still at the controls, you will get your share of Blanchards and Lipskys.

UPDATE: The January TICS data is an encouraging way to start off the year in the junking American junk department, regardless of what Obama says.

Geithner's AIG Problem: Of Politburo & Pantyhose

I very much recommend the PBS documentary The Commanding Heights for a primer on the postwar history of IPE, especially the rise and demise of communism. (There is also a book of the same name by Daniel Yergin and Joseph Stanislaw on which the series is based.) For the longest time, I have had the PBS website among our IPE resources. You might think that this series is getting long in tooth as it came out in 2002, but I demur. Especially now when the states-markets pendulum in shifting back in the former direction, it pays to know important recent economic history. The PBS website features extensive interviews with movers and shakers in the postwar era. One of them, of course, was Mr. Perestroika himself, Mikhail Gorbachev. Commenting on the Soviet Union as it approached its demise, he had this to say:

It was a shame, and I continue to say that it was a shame, that during the final years under Brezhnev, we were planning to create a commission headed by the secretary of the Central Committee, [Ivan V.] Kapitonov to solve the problem of women's pantyhose. Imagine a country that flies into space, launches Sputniks, creates such a defense system, and it can't resolve the problem of women's pantyhose. There's no toothpaste, no soap powder, not the basic necessities of life. It was incredible and humiliating to work in such a government. And so our people were already worked up, and that is why the dissident movement occurred.

Fast-forward to 2009 and you have another government struggling with the infelicities of government planning and centralization as well as widespread discontent: the US of A. The various strains now being placed on the government in handling a financial system teetering on the edge--disavowal of trading financial WMD; improving transparency; and most importantly for this post, reducing executive pay--has led it to undertake tasks it is not ideally suited for. As with the Soviet example, bringing more and more economic functions under state directive has its price. Bureaucrats are often forced to micromanage things, diverting attention from more pressing issues like removing junk assets clogging up the banking system. From Bloomberg:

American International Group Inc., the insurer saved from collapse by taxpayer bailouts, was ordered by the U.S. Treasury to scale back bonuses and reimburse the government for some 2008 payments, according to a person briefed on the matter.

Treasury Secretary Timothy Geithner telephoned Chief Executive Officer Edward Liddy on March 11 to demand changes to New York-based AIG’s bonus payments, an administration official said separately. The people declined to be identified because discussions weren’t public. Liddy told Geithner in a letter that retention payments for 2009 -- designed to keep employees from leaving AIG -- will be cut at least 30 percent, and that some payments can’t be stopped because they’re binding contracts.

“I do not like these arrangements and find it distasteful and difficult to recommend to you that we must proceed with them,” Liddy wrote to Geithner in the March 14 letter, which said that the agreements predated his appointment by the U.S. “With the benefit of hindsight, I would have designed these differently and at significantly lower levels.” Liddy wasn’t among those entitled to a bonus.

AIG had expected its retention payments would cost about $1 billion, according to a March 2 regulatory filing. The payments, reported earlier by Bloomberg, drew criticism from U.S. lawmakers who objected to giving individual employees as much as $4 million at a company whose wrong-way bets on credit-default swaps helped deepen the global credit crisis. AIG had said the payments were needed to keep talented people.

The insurer’s plan to repay the U.S. for its bailout package included selling subsidiaries. The retention payments would benefit taxpayers by making the units attractive to buyers, Liddy had said earlier. AIG scaled back plans for those sales when few bidders emerged.

Granted, $300M or so is no small beer. Then again, neither was supplying women's undergarments near the time of the USSR's collapse. However, Geithner's plate is already very full dealing with far larger sums. After all, this is the guy who needs to issue something on the order of $2 trillion in IOUs this year on top of figuring how to salvage a hugely undercapitalized banking system. Given the re-emergence of central planning where top officials need to shake down quasi-nationalized entities, The Commanding Heights is certainly required viewing.

Provided the ongoing extirpation of the private sector, government will be all that's left if things keep going this way. If and when it gets to the point when the US treasury secretary--not the Soviet secretary of the central committee--needs to make decisions about women's pantyhose, I further suggest they hire three experts on the matter: Billy Gibbons, Dusty Hill, and Frank Beard. So much for that "retreat of the state" jazz, comrades.

Capitalism's Future? Cell Phones in Afghanistan

People keep talking about "the future of capitalism" after the subprime debacle; it is as if private enterprise had lost its muse. The Financial Times even has an entire section devoted to it. While that debacle is surely regrettable, remember that there are numerous counterexamples of channeling capitalism for better ends. (Being of Asian descent, you surely can't accuse me of following Anglo-Saxon orthodoxy ;-) There is a dynamism to it that allows renewal time and again--something Marx would actually agree with. Today, I bring you an example of how this future could be like in a country that certainly could use one.

Given the daily bad news spilling out of Afghanistan, I figured we could all use some good news. Like in Iraq, there are people of good will trying to lay the groundwork for Afghanistan's (hopefully heroin-free) future. There is an innovative firm telecoms firm called Roshan receiving funding from the Asian Development Bank (ADB) spearheading an effort to surmount a number of difficulties. There is no fixed-line network in the country; whatever little existed has been idled in the war-torn nation. Yet, the advantages of cellular telephony are clear in alleviating social challenges such as encouraging women to communicate more openly. Also, speech is more important than writing in a country whose illiteracy rate is unfortunately high. From the ADB's program write-up:

Decades of conflict devastated Afghanistan's already challenged communications systems. Fixed telephone lines are virtually absent in a country with rugged terrain—soaring mountains and wide deserts—as well as limited electricity and poor roads. Postal services don't work well, either, especially with weak demand—the illiteracy rate is roughly 70%. An unstable security situation further contributes to a difficult environment.

Thus, the arrival of mobile phones in Afghanistan represented a telecoms revolution, enabling the country to leapfrog conventional fixed line systems straight to 21st century satellite technology.

As a result, families that have been displaced by the conflict can remain connected. Commerce and industry can grow as business owners are better able to search for the best prices and are better informed as to when goods are arriving. Isolated communities can be more integrated into the economy. In a country where remittances play a vital role in the economy, cellular technology enables people to carry out basic banking functions.

Demand for mobile phones was strong from the outset, but service rollout was constrained by limited financing options in Afghanistan's challenging political and security environment.

Telecom Development Company Afghanistan—operating under the name Roshan, which means "light" and "hope" in the two national languages—is the country's largest operator with over 2.6 million subscribers. Roshan has been able to expand its mobile network infrastructure nationwide as well as improve its range of services with an assistance package from ADB's private sector operations. An initial loan of $35 million in late 2004 was followed by a $40 million loan in mid-2006. The second loan was accompanied by a complementary financing scheme of up to $30 million and a political risk guarantee of up to $15 million. In July 2008, ADB provided a third loan of $60 million and a $10 million political risk guarantee.

"The development impact of mobile phones has spread across the country and through all levels of society," says Craig Steffensen, ADB's Country Director for Afghanistan. " Having access to information and knowledge is as critical for the education of the young—almost half the population is under 15—as it is for the social development of women." He notes that such communications promote better understanding—and reduce misunderstandings—in a society that is ethnically and linguistically diverse.

The firm is even beginning to offer financial services via cell phone, following the example of the Philippines:

With expansion, Roshan has been able to lower the cost of its mobile phone services, increasing their accessibility to the poor. As an example of innovative services, Roshan introduced M-Paisa, designed as a mobile wallet. M-Paisa enables the transfer of funds by mobile phone in a quick, easy, safe, and cost-effective way for peer-to-peer transfer, repayment of microfinance loans, purchase of airtime, and salary disbursement. This has brought financial transaction services to a country where only 3% of the population has a bank account. Users can access the service at the push of a button and face less of the risk involved with physical money transfers.

Countrywide, Roshan has set up public call offices—places to call for those who do not have their own mobile phone. Apart from offering a service to the poor, this scheme offers an opportunity for Afghans to learn how to run their own business. Roshan has partnered with First Microfinance Bank in a scheme under which aspiring entrepreneurs can borrow capital to set up a public call office. Roshan also supports women-only public call offices. This is important in a culture in which the sexes are often segregated.

In another example of using innovative technology, Roshan is installing solar photovoltaic panels to power telecom towers, thus reducing diesel fuel consumption and greenhouse gas emissions. In 2009, Roshan plans to launch Trade Net, which will provide farmers with market prices through text messaging. This will allow farmers and traders to secure the best prices possible for their crops, enabling them to increase their incomes.

One of the most war-torn nations on Earth now has cell phones being used for financial transactions--something that isn't even being done in most of the land of subprime. The ADB article goes on to discuss how this system is being used for telemedicine given a highly fragmented health care system. Add in renewable energy for powering the network and you have a compelling project all around. How about this for the innovative power of capitalism? There are efforts we can all get behind like this wherein the power of capitalism is working for the common good. My friends, it is in these cases where I see "the future of capitalism" unfold--something anti-globalization neo-primitivists would never really understand.

Recession, Bah! Me Fun, Fun, Fun on Ze Autobahn

The (American) Rock and Roll Hall of Fame tends to be biased towards Anglo-Saxon acts. As a result of this bias, a most unforgivable act has been committed: synth pop pioneers Kraftwerk have not even been inducted into the HoF despite their outsized influence on pop music. In its review of the superb live set Minimum-Maximum from which the above clip is taken, the New Music Express says things like they are: Given the proliferation of synth-based pop acts that have come in their wake, the two most influential acts in pop history are not the Beatles and (Rolling) Stones, but the Beatles and Kraftwerk. All I can say is "Amen!" Given that Kraftwerk founder Florian Schneider has just left the music scene some forty years after co-founding the group, some respect is long due these great German entertainers.

This musing was prompted by news that German automakers are partially bucking the global trend of dwindling auto sales at home. A few months ago, I discussed how automakers were keen on EU governments ladling incentives for those driving older cars not meeting upcoming emissions regulations to switch to newer, less polluting drives. It turns out that the German government has largely acceded to this request, as have any number of other EU states. We are now beginning to see the results. From TIME:

Amid the gruesome headlines generated by the world's auto industry these days, this one almost reads like a typo: new car registrations in Germany rose 21% year-on-year in February, the country's Association of the Automotive Industry (VDA) announced on March 3. This, though, was no error. The 278,000 cars put on the road, crowed Matthias Wissmann, the VDA's president, amounted to "the highest level of sales in the month of February for 10 years."

Why the splurge? German drivers have latched onto a juicy new deal. Under a scheme started in January, car owners who trade in a vehicle that is more than nine years old for a new, greener model can expect $3,172 from the German government as well as a break from paying road tax for at least a year. Similar "scrapping schemes" have been launched in recent months in France, Italy and Spain. Now motor manufacturers in Britain are pleading with their government to follow suit.

It's not hard to fathom why. Carmakers are grappling with an extraordinary shortage of credit and customers. Sales in Europe — the $700 billion auto industry there accounts directly or indirectly for 1 in 10 jobs — dropped to a 15-year low last year, with little sign of picking up in 2009. Toyota announced earlier this week that 4,500 staff members at its British factories would see their pay and hours slashed 10% for a year starting in April. German and British governments are still in talks with General Motors over potential aid for the U.S. automaker's beleaguered European subsidiaries, Opel in Germany and Vauxhall in the U.K. GM says it needs some $4.2 billion to save its businesses in the region.

Amid that carnage, scrapping schemes can offer something for the pain. The aim is to pump up weak car sales while at the same time taking older, potentially more polluting vehicles off the road. And it seems to be working — at least in Germany. With new car orders in Europe's largest car market rising in February, the VDA expects registrations for the first quarter of 2009 to trump those seen in the same period last year. A more modest $1,300 on offer to French motorists hasn't been enough to prevent car sales there from sliding 13% last month. Scrapping schemes in Italy and Spain failed to halt even steeper falls.

Even when it works, a scrapping scheme won't guarantee that the money will go to domestic carmakers. In Germany, sales of the Volkswagen Polo and Opel Corsa have been boosted by the government's initiative, but a surge in orders for Fiat (Italy) and Renault (France) means "two-thirds of the additional sales are imported cars," says Ferdinand Dudenhöffer, an auto-industry expert at the University of Duisburg-Essen. "And most of the German cars which are booming are at least partly produced elsewhere."

That might help explain the British government's hesitation to launch an initiative of its own. Almost 90% of all cars sold in the U.K. are imported, with most of those arriving from continental Europe. So a British scrapping scheme "wouldn't be a huge boost to British car factories," says Garel Rhys, president of Cardiff University's Centre for Automotive Industry Research. "In a sense it would be the British taxpayer subsidizing factories in France and Germany..."

Doubtless, there's still a long road to go in restoring sales elsewhere. The trick in avoiding the "protectionist" tag I warned of earlier is that these deals are open to all comers, including American nameplates Adam Opel (GM) and Ford. In contrast to oversized American clunkers, Opels and European Fords are generally fine cars. The article then goes on to caution that a glut of sales now may be stealing future sales. Overall, though, I think this is a pretty good idea for boosting flagging sales and cleaning up the air. Surely, Kraftwerk would approve. Godspeed, Florian Schneider, and may the autobahn forever resonate with automotive fervor.

Wen's Pointless Bellyaching on PRC's $ Assets

China's Premier "Shoeful" Wen Jiabao (in contrast to "Shoeless" Joe Jackson) appears to be footing some rather self-serving commentary on the PRC's economic situation. Other than reaffirming a rather unlikely 8% GDP growth target in 2009 which probably won't be reached unless the books are cooked even more severely than usual, he had this to say on China's assorted financial interests in America. From Reuters:

The premier said Beijing expected to see results from President Barack Obama's economic recovery plan but expressed concern that massive U.S. deficit spending and near-zero interest rates would erode the value of China's huge U.S. bond holdings. China is the biggest holder of U.S. government debt and has invested an estimated 70 percent of its $2 trillion stockpile of foreign exchange reserves, the world's largest, in dollar assets.

"We have lent a massive amount of capital to the United States, and of course we are concerned about the security of our assets. To speak truthfully, I do indeed have some worries. "I would like, through you, to once again request America to maintain their creditworthiness, keep their promise and guarantee the safety of Chinese assets," Wen said.

U.S. Secretary of State Hillary Clinton voiced her appreciation during a visit to Beijing last month of China's continuing "well-grounded confidence" in U.S. Treasuries. Any big switch by Beijing out of U.S. Treasury bonds would drive prices lower, inflicting the very losses Wen fears. Still, his remarks, along with the lure of surging share prices, helped depress U.S. Treasuries in Asia.

China's central bank weighed in later with criticism of America's "inappropriate" economic policies, including low savings and high consumption, and said the global crisis had its roots in what it called an unchecked issuance of dollars.

A few thoughts:

1. China keeps invoking non-intervention in other countries' affairs, especially when quizzed about Tibet, Burma, or Sudan. For this Nehruvian principle to hold, I suggest that it leave American monetary and fiscal policy to the, er, Americans.

2. When it comes to these sorts of economic relations, exit says more than voice (complaining) or loyalty in the vernacular of Albert Hirschman. If China were really "concerned" about the eventual haircut it will receive (via surefire dollar devaluation as a tsunami of treasuries is issued this year) on top of that which it has already lost (think Blackstone, Morgan Stanley, etc.), then it ought to consider some "portfolio diversification."

3. The point I am sick and tired of hammering in is this: China providing what Brad Setser estimates as $500B in dollar financing year in and year out has afforded the US to go on serial misadventures--Iraq and Afghanistan, the housing boom and bust, securitization, and now bailing out any and all comers. It's the ultimate "moral hazard": If China will buy whatever dreck the US will sell to finance the excesses China doesn't particularly like such as virtually all of the above, then it should just stop buying Treasuries. China is responsible for allowing "low savings and high consumption" to proliferate. Yes, it will lose money when the dollar slides as the PRC stops financing American's continuing jihad on fiscal sanity, but it'd be only saving up for a bigger loss further down the line.

This madness must stop. In the meantime, I am 0% sympathetic to China for indulging America's reckless behavior. You get what you deserve. With restless, jobless college grads hitting the streets, maybe the PRC should explain to them why the public purse has been used for such a monumental folly--one the likes our world has never seen before and hopefully will never see again.

Is Software Piracy Married to the Mob?

My post below on software piracy buoying video game console sales has prompted me to warn about the potential downsides of software piracy. Those studying marketing have noted the curious divide between stealing hardware (such as by shoplifting electronics), and stealing software (by downloading copyrighted content). Many people who not be caught dead doing the former do the latter without afterthought, thinking that it's a "victimless crime." In the digital age where more and more products will be of the IP variety, this situation raises legitimate questions. Is there really a difference between stealing physical and intellectual property, or is just a self-serving cognitive illusion? Maybe the philosophers in the audience can weigh in on this weighty matter.

In any event, the RAND Corporation gives more reason to be wary of piracy. In particular, pirated film titles my be funding the operations of a number of criminal enterprises, including India's nefarious D-Company run by Dawood Ibrahim. You can download the report and view the summary from which the following excerpt is taken. Truly, it is a case of caveat emptor:

Organized crime increasingly is involved in the piracy of feature films, with syndicates active along the entire supply chain from manufacture to street sales of pirated movies, according to a new RAND Corporation report.

While crime syndicates have added piracy to criminal portfolios that include drugs, money laundering, extortion and human smuggling, the profits from film piracy also have been used on occasion to support the activities of terrorist groups, according to researchers.

"Given the enormous profit margins, it's no surprise that organized crime has moved into film piracy," said Greg Treverton, the report's lead author and director of the Center for Global Risk and Security at RAND, a nonprofit research organization. "The profits are high and penalties for being caught are relatively low..."

Because of its image as a victimless crime and the fact that those who buy are complicit in the crime, information about counterfeiting is sparse and information about the involvement of organized crime sparser still, Treverton said. Because most instances of counterfeiting go unaddressed, there is reason to believe that the more formal data, like arrests and convictions, understate the extent of counterfeiting.

The RAND report outlines three cases where film piracy has helped support terrorist groups:

* Historically the best documented case involves the Irish Republican Army that used many criminal activities, including film piracy, to support its efforts to drive the British from Northern Ireland. A political agreement in 1998 ended its violent acts, but at least parts of the IRA continue to operate as a criminal enterprise that remains involved in counterfeiting activities.

* The D-Company is an organized crime group active for generations in India. Since the 1980s, it has been the major syndicate involved with film piracy in India. The group was transformed into a terrorist organization when it carried out the "Black Friday" bombings in Mumbai in 1993 that killed more than 257 people and injured hundreds more. It continues to advance a political agenda with its actions funded at least partly by the proceeds of crime.

* Another case involves the tri-border area of Brazil, Argentina and Paraguay that has emerged as the most important financing center for Islamic terrorism outside of the Middle East, channeling $20 million annually to Hezbollah. At least one transfer of $3.5 million was made to Hezbollah by known DVD pirate Assad Ahmad Barakat, who received a thank-you note from the Hez­bollah leader. Barakat was labeled a "specially designated global ter­rorist" by the U.S. government in 2004.

It's certainly interesting stuff.

New USTR Kirk: We'll Check Yuan on WTO Rules

Just when you thought China's dwindling trade surplus was going to alleviate trade tensions (at least according to the Financial Times), newly installed US Trade Representative Ron Kirk is suggesting things may not be that hunky-dory. Not so fast, buster. For reasons I should give pretty soon, there is virtually no ground for the US to cite China as being inconsistent with its WTO obligations lest it put the WTO's very existence at risk. But, given the sour mood in Washington, you'd better not count against some action being lodged altogether if things get worse and a convenient scapegoat becomes necessary--namely, those dratted furriners. From Reuters:

The United States will examine whether China's currency practices are consistent with Beijing's obligations under the World Trade Organization, U.S. Trade Representative-designee Ron Kirk said on Thursday.

In written responses to the Senate Finance Committee, Kirk declined to say whether China is "manipulating" its currency as President Barack Obama said during last year's campaign. But he said the Obama administration would "develop a comprehensive and integrated policy to address the full range of China's trade policies that impact the United States."

"As part of this comprehensive effort, of course, we will need to review China's actions for consistency with its WTO obligations," Kirk said in response to questions from a number of senators about China's exchange rate practices.

I'm dying for some action here.

Weak Sony PS3 Sales or Gaming's Dirty Li'l Secret

I've been cleaning out my bookmarks as of late and found some left over from the Christmas season concerning video game console sales. It is well-understood that Sony's Playstation 3 (PS3) has been underwhelming in terms of both sales and contribution to Sony's bottom line. Unlike the PS2, it has been an also-ran in the video game sweepstakes. Many commentators correctly identify Sony's problems. The thing is very expensive to make with its Blu-Ray hi-def video player, whereas the Nintendo Wii doesn't even have standard video playback and the Microsoft XBox 360 makes do with a DVD unit. As such, Sony has no choice but to rely on an unprofitable variation of the "razor and blade" model. Insofar as it loses money on every console it sells, Sony tries to make up the difference on game titles. Unfortunately, it doesn't benefit much since Sony sells just 15% of PS3 games compared to Nintendo's 60% of Wii games--not to mention that Nintendo makes modest money off every console it makes (see this very informative Forbes article).

The Nintendo Wii is acknowledged to be a generation behind both the Xbox 360 and PS3 in technological sophistication, but that hasn't prevented it from taking an overwhelming sales lead due to its innovative control system and appeal to casual (read: family) gamers. Given that the 360 isn't faring too badly either, I have always thought that there's another largely unspoken reason for stronger Nintendo and Microsoft sales: gamers with a sprinkling of motivation can easily run pirated game titles for those consoles. I won't go much into describing how this is done as gamers probably know already and information is widely available. Basically, it involves (1) adding a "modchip" to your console that allows you to run "homebrew" applications of your own [nudge-nudge, wink-wink] and (2) either downloading and burning titles that can run on chipped consoles or buying pirated DVDs.

At this junction, the PS3's issues are two: First, Blu-Ray discs are not yet widely available. Hence, piraters don't have ready access to duplication machines that can forge titles en masse. Ironically, DVD at this stage is probably the better gaming media than Blu-Ray. Second and more importantly, there is still no known loophole for getting PS3 to run faked titles. Those of you with long memories know Sony's troubling fixation with running proprietary formats, from SACD to ATRAC. Things are no different here; Sony has made technological barriers by using Blu-Ray and engineering its machine to probably be foolproof to faking games. While a workaround may still be found, PS3 is certainly in the latter phase of its development cycle. In contrast, Nintendo and Microsoft jostle for often token US government crackdowns.

The funny thing is that Sony acknowledges pirated software has boosted sales of its other--more successful, I should add--video game platform, the Playstation Portable. From Destructoid:

I know it, you know it, and you know that Sony has always been aware. But it's weird to actually hear them say it. "There is a piracy problem on PSP. We know about it, we know how it’s done,” says SCEE President David Reeves, at a recent DevStation conference in London. According to NextGen, Sony is looking into a way to combat this piracy "problem," but, in the meantime, this very problem is boosting sales, and Sony is totally aware of this. “It sometimes fuels the growth of hardware sales, but on balance we are not happy about it,” Reeves said.

Sure, you're not happy about the piracy, but you're always happy to report strong PSP sales. We don't blame you at all! Sony has been trying to prevent piracy and hacking for some time now, but the hackers always seem to find a way back in. I know that for some gamers, piracy and emulation are their only reasons to even own a PSP. Would Sony be shooting themselves in the foot by fixing this piracy problem?

Again, this is not necessarily a solution for the PS3 as Sony loses money on each unit sold. Still, I believe that a case can be made for what I call gaming's dirty little secret: co-opting the pirates can drive hardware sales. I suspect that Nintendo and Microsoft know this, but do not devise such elaborate traps to foil would-be piraters. While casual gamers probably aren't going to open the hoods of their machines to attach warranty-voiding "modchips," there's little point preventing the more persevering from doing so. In effect, Nintendo and Microsoft segment the market into two: casual gamers uninterested in hardware modifications buy unpirated titles, while hardcore gamers still need to buy a console at the end of the day.

It would make for an interesting study to see how console sales are driven by purchases of fakeries, especially in countries where IP laws aren't strictly enforced and knock-offs can be readily bought from street vendors and makeshift markets. Then again, the survey design required would have to be elaborate as admitting to piracy not only raises "social desirability" bias issues but also legal entanglements.

Certainly, the beating Sony is taking should make it question the viability of its strategy and whether to, in some degree, co-opt piracy for its next generation console--provided it is still interested in selling one. Sometimes, being too clever in foiling pirates doesn't pay. Go ask Sony.

Aid Fragmentation or How Aid is Waylaid

Aid fragmentation refers to the diminution of aid effectiveness due to a proliferation of incoherent instrumentalities. On the donor side, you get less bang for the buck when you funnel aid through different aid hierarchies which themselves consume money in the process of disbursement. On the recipient side, paperwork becomes onerous as aid agencies often require detailed documentation of where aid is needed, where aid is used, etc. Hence, what effectively occurs is that aid is diluted twice by bureaucratic apparatus (i.e., "red tape") on both sides of the coin. Mindful of this, OECD countries signed the Paris Declaration on aid effectiveness to streamline processes by which aid is disbursed in 2005.

Unfortunately, the most recent 2009 report from the OECD suggests that instead of reducing aid fragmentation after the signing of the Paris Declaration, aid disbursement has become even more fragmented. Those interested in development can download a PDF copy of the summary from the OECD website. Meanwhile, here is a scathing appraisal of the findings from the (left-leaning) IPS:

Civil society representatives agree with the recent finding of the Organisation for Economic Cooperation and Development (OECD) that fragmentation of international cooperation has increased instead of diminished, in direct contradiction to the so-called Paris Declaration where over 100 countries called for effective dispensing of aid.

In its Development Co-operation Report (DCR) for 2009, released on Feb 19, the OECD’s Development Assistance Committee (DAC) concludes that the ever-growing number of donors and aid agencies and mechanisms across the world is making ‘‘aid increasingly fragmented and reducing its effectiveness’’.

As a result, the DCR 2009 says, ‘‘the international development effort now adds up to less than the sum of its parts’’. The DAC, a forum for major bilateral aid donors, is the principal body through which the OECD deals with issues related to cooperation with developing countries. The forum releases a DCR once a year.

The DCR defines fragmentation of international development cooperation as aid ‘‘that comes in too many small slices from too many donors, creating high transaction costs and making it difficult for partner countries to effectively manage their own development’’.

African countries with between 24 and 30 active donors are the following: the Democratic Republic of Congo, Angola, Kenya, Tanzania, Uganda, Rwanda, Burundi, Ethiopia, Sudan, Egypt, Cameroon, Ghana, Mali, Niger, Burkina Faso, Zambia, Lesotho and South Africa. Countries where between 15 and 23 donors account for less than 10 percent of the country’s aid are: South Africa, Nigeria, Kenya, Tanzania, Rwanda, the DRC, Cameroon, Egypt, Tunisia and Senegal.

In an interview with IPS, Barbara Unmuessig, a member of the directorate at Germany’s Heinrich Boell Foundation and former counsellor at the United Nations (UN) Conference on Environment and Development, concurred with the DCR findings. The Heinrich Boell Foundation, which is affiliated with Germany’s Green Party, describes itself as an ‘‘(environmental) think tank and an international policy network’’ which main tenets are ‘‘ecology and sustainability, democracy and human rights, self-determination and justice’’.

According to Unmuessig, ‘‘during the last two years alone, more than 14 new bilateral and multilateral international mechanisms for the financing of environmental development policy have been created, making coherence and complementarity of international cooperation even more difficult.’’

Unmuessig complained that practically every single international organisation participating in development cooperation creates ever new instruments. ‘‘For developing countries, it is extremely difficult to cope with this endless flow of new agencies and mechanisms,’’ she added. ‘‘This growing fragmentation of aid demands more competent personnel and institutions in developing countries, represents an insurmountable challenge, and erodes the effectiveness of cooperation,’’ Unmuessig claimed.

Fragmentation of aid compels government officials, doctors, teachers and aid workers in developing countries to spend much of their time filling in reports or being bogged down in meetings with donor governments and agencies or accompanying monitoring missions. Aid fragmentation can also create overlap and wasted effort among donors, with some working in sectors where they have less expertise...

Four years on, not only the OECD finds that aid has become more fragmented, and thus less effective but the DAC plainly says that the world is not on course to meet the 2010 targets of the Paris Declaration.

Not encouraging stuff.

Some Housekeeping Notes on Blog Changes

Longtime readers probably know by now that I freshen the blog layout once in a while. At least for me, blogging gets somewhat boring when you look at the same interface day in and day out. Your truly maintaining an ugly blog? Never! Accordingly, here are some changes I've made:

1. While doing an image search, I found this absolutely gorgeous rendition of a hulking container ship. Named after the US Navy's former naval base in the Philippines, Subic, the vessel pictured here is almost 1200 feet long and carries a mind-boggling 12,800 twenty-foot equivalent units (TEUs). You see, after the Yanks left, the famous Korean shipbuilder Hanjin established a shipyard there. This seafaring leviathan is one of its proud manufactures. (It is called a "post-Panamax" vessel in that it will only be able to traverse the Panama Canal after the canal's widening is completed.) I sure hope its scheduled delivery date next year isn't delayed by global slowdown for I would love to see this sea monster in the flesh. The sheer size of the thing has made cropping the image a challenge for me. As you can see above, I have elected to crop the image from the deck down. Newbies who glance upon it will probably wonder what it is, but let it be our inside joke :-)

2. I kept seeing this thingy called "Followers" on my Blogger account's start page. I didn't know what it was until very recently. It turns out various others on Blogger can nominate themselves as followers or readers of your blog. Out of politeness, I have included the IPE Zone's fellow Blogger users who have signed up, unbeknownst to me. Accordingly, there is a new widget on the blog's left column entitled "In the Zone" for those who are keen (or at least pretend to be) on my ruminations.

3. I felt that the blog subtitle deserved a change. In my initial effort, it read "Tales of Power, Money, and Occasional Violence". While this subtitle was certainly descriptive of the blog's subject matter, it sounded a bit, well, mundane. So, the next subtitle which you probably still recall went, "Sunspots, Walrasian Auctioneers & Impartial Spectators". I hope you caught these references, but if not...

Sunspots refers to the theory of William Stanley Jevons (one of acknowledged progenitors of the marginal revolution) that sunspots affect the business cycle by causing changes in agricultural output. Suffice to say, this was never conclusively demonstrated. However, sunspots are still invoked when extrinsic random variables instead of economic fundamentals are said to influence market outcomes. More than a century before Nicholas Nassim Taleb's schtick, you had Jevons.

Walrasian auctioneers refers to Jevons' fellow marginal revolutionist Leon Walras' idea of how markets cleared. Just as a thorny plot situation in Greek drama is resolved by bringing out a deus ex machina (God from the machine), so is the thorny plot behind "market clearing" resolved by a fictive device. Here, an auctioneer aggregates supply and demand across various economic agents to effortlessly find the clearing price. In practice, of course, this almost never happens as required conditions of perfect information and perfect competition are very rare. Nevertheless, your basic supply and demand curves are constructed with the notion of a Walrasian auctioneer firmly ensconced.

Impartial spectators refers to Adam Smith's notion in The Theory of Moral Sentiments similar to one's conscience or Freud's idea of the superego:

When I endeavour to examine my own conduct, when I endeavour to pass sentence upon it, either to approve or condemn it, it is evident that, in all such cases, I divide myself, as it were into two persons; and that I, the examiner and judge, represent a different character from that other I, the person whose conduct is examined into and judged of. The first is the spectator, whose sentiments with regard to my own conduct I endeavour to enter into, by placing myself in his situation, and by considering how it would appear to me, when seen from that particular point of view. The second is the agent, the person who I properly call myself, and of whose conduct, under the character of a spectator, I was endeavouring to form some opinion. The first is the judge; the second the person judged of. But that the judge should, in every respect, be the same with the person judged of, is as impossible that the cause should, in every respect, be the same with the effect.

Even now, orthodox economists like William Easterly have difficulty grasping the connection between political economy and its denuded progeny, economics--though Amartya Sen knows better. In several ways, IPE is more of a throwback to political economy than an offshoot of economics (which it often finds fault with).

I really loved that subtitle, but it has to go as new and casual visitors probably found it non-intuitive. Not all readers are as stuffy about political economy as I am. While IPE obviously builds on political economy, discussing the former can often be done without extensive knowledge of the latter. And so we have a new subtitle, "Attitudes of elegant despair on world economy". I believe that this statement accurately describes the blog content like the first subtitle while, at the same time, maintaining the elegance of the latter. See what you make of it!

Still 'Risk-Free'? Insurance on Treasuries Jumps

The first thing you're taught in B-school is that the prevailing Treasury rate--most likely on the 10-year note--establishes the 'risk-free' rate of return. Now, imagine the entity issuing all these Treasuries being on the hook for all the risks previously borne by various financial institutions (plus airlines, automakers, and I don't know what else). Also imagine that the institutions in question had declared over a trillion in losses, with several more yet to be disclosed. I am of course not telling you a FEDtime story but the fate of the entity known as 'The United States of America'.

It seems investors are bidding up default premia on probably the world's largest banana republic. Just as all sorts of subprime-related riffraff were rated AAA before the crisis hit, so is Treasury riffraff still being given the blessing of rather clueless rating agencies. Ooh Sammy, you're the greatest [smooching sounds all around]; you should manage everything--like Hugo! As I've mentioned before, America's rating will probably never be lowered despite its relentless Summers-style jihad on fiscal sanity. Others, however, probably know better as the costs of insuring against American default are ballooning at a rapid clip. From MarketWatch:

The cost of buying protection against the risk that the United States will default on its mounting debt has surged in the past months, outpacing the rise in corporate-credit costs, now that the government has absorbed more private-sector debt. The spreads on credit-default swaps for U.S. government debt jumped to 97 basis points Tuesday, nearly seven times higher than a year ago and 60% higher than the end of last year, to a level roughly in line with those of France, according to data supplied by Markit. The spreads also hit a record last week.

In contrast, an index that tracks the cost of buying credit protection against defaults on North American companies with investment-grade ratings -- the Markit CDX.NA.IG index -- has not even doubled in the past year. The index, which includes CDS on blue-chip companies like Altria Group and Bristol-Meyers Squibb Co. has risen 30% this year.

Higher spreads on credit-defaults swaps indicate sellers have raised the price of guaranteeing protection because they perceive the likelihood of a default as higher. A spread of 97 means it would cost about $97,000 to buy protection on $10 million in U.S. government debt.

The rise in U.S. sovereign CDS spreads reflects the increasingly active role the United States has played in debt markets, according to Bank of America Securities analysts. In the past year, it's absorbed the toxic assets that led to Bear Stearns' collapse; taken mortgage-backed and asset-backed securities as collateral for loans; and bought commercial paper and agency debt, among other moves.

"Having effectively guaranteed the short-term markets, that risks shifts to the government," wrote Bank of America Securities-Merrill Lynch analysts led by Jeffrey Rosenberg, in a note issued early Tuesday. The rising costs to buy credit protection undermine hopes that credit markets are improving -- a turnaround that could set up the U.S. economy and stock market for revival...

As the US nationalizes ever-greater swathes of what used to be known as the 'private sector' (remember that?) its risk premia should increase accordingly. And we haven't even talked about surefire dollar devaluation yet. God Bless America, for it will require divine intervention soon.

EU to Larry Summers: Go Stimulate Yourself

I almost forgot to post about this too-precious moment: Larry Summers has been a magnet for controversy in each of his high-profile jobs--World Bank chief economist, US secretary of Treasury, and president of Harvard. In the first instance, he circulated what he says was an ironic memo supporting dumping more waste in Africa; in the second he castigated Japan's efforts to shield Southeast Asia from the brunt of harsh IMF policies at the height of the Washington Consensus era; and in the third he made comments to the effect that women were not suited for certain jobs. Say what you will about Summers, but he is not a dull chap due to his tin ear for diplomacy.

It now seems that Summers is not wasting time rubbing others the wrong way in his new job as head of Obama's National Economic Council. It's all of a piece with my recurrent criticism of hypocrisy in international organizations. When Summers was at the controls at the World Bank and US Treasury, it was all about "structural adjustment," "living within one's means," and "belt tightening" for wayward LDCs. However, when the world's largest debtor country and spendthrift extraordinaire the US into trouble, Summers all of a sudden switches into stimulus-all-around mode to suit the US agenda. Again, the Washington Consensus held for everyone except Washington itself. From the Financial Times:

Barack Obama’s top economic adviser has urged world leaders to pump more public money into the economy in a co-ordinated effort to boost demand and lift the world out of recession. In an interview with the Financial Times, Lawrence Summers said the urgent need for a short-term increase in spending by governments temporarily overrode the longer-term goal of tackling the global imbalances many economists believe caused the financial crisis.

The US administration had no choice but to take strong public action to “save the market system from its own excesses”, he said. His comments, ahead of next month’s crunch G20 summit in London, make it clear that the US administration wants industrialised nations to share responsibility for engineering a global demand-led recovery and does not believe this burden should fall on China alone.

“The old global imbalances agenda was more demand in China, less demand in America. Nobody thinks that is the right agenda now,” said Mr Summers. “There’s no place that should be reducing its contribution to global demand right now. It is really the universal demand agenda.” While the US and other western nations should return to living within their means in the medium term, everyone should raise spending sharply now. “The right macro-economic focus for the G20 is on global demand and the world needs more global demand,” said Mr Summers.

Widely seen as being among the most pro-market voices in the White House, having been Bill Clinton’s last Treasury secretary in the 1990s, Mr Summers said the view that the market was inherently self-stabilising had been “dealt a fatal blow”. At a time when the Republican critique of Washington’s aggressive response to the crisis is growing more trenchant, Mr Summers made an unapologetic case for government intervention.

“This notion that the economy is self-stabilising is usually right but it is wrong a few times a century. And this is one of those times . . . there’s a need for extraordinary public action at those times...”

Someone Summers should be familiar with, Milton Friedman, once said "there is nothing as permanent as a temporary government program." Indeed, Uncle Sam seems to be having trouble dissociating himself from bailing out any and all takers--airlines, automakers, banks, etc. Moving to the other side of the Atlantic, response to Summers' plea for stimulus mania appears to have fallen on deaf ears, hence the post's title. Again from the FT:

European ministers said yesterday they had no plans to add to recent fiscal stimulus packages despite calls from the US for radical expansions in government action to boost ailing economies. Meeting in Brussels, finance ministers from the countries in the eurozone said they wanted first to see the effect of stimulus packages that had been passed. Peer Steinbrück, the German finance minister, said: "We are not debating any additional measures." He said that Germany had recently passed a second stimulus package worth €50bn ($63bn, £46bn) and was also counting on the automatic fiscal stabilisers that increase government spending in a downturn.

Jean-Claude Juncker, chair of the "eurogroup" of ministers, said: "The 16 finance ministers agreed that recent American appeals insisting Europeans make an added budgetary effort were not to our liking."

Lawrence Summers, senior economic adviser to Barack Obama, US president, told the Financial Times recently that the Group of 20 countries should agree to boost government demand. Yesterday Christina Romer, chair of the White House Council of Economic Advisers, said: "The more that countries throughout the world can move toward monetary and fiscal expansion, the better off we will all be."

But European ministers are concerned that building up more government debt would threaten the stability of the eurozone and say that they want to assess the effects of spending boosts that have already been passed before considering more. The US Treasury declined to comment on their remarks yesterday...

A recent assessment by the International Monetary Fund said that the US had enacted new discretionary economic stimulus equal to 2 per cent of gross domestic product for 2009, compared with 1.5 per cent for Germany, 1.4 per cent for the UK and just 0.7 per cent for France. But the IMF said that automatic stabilisers were worth 2 per cent of GDP for the UK and France, which have relatively large welfare states, compared with 1.5 per cent for the US.

The EU offers sensible points. Is it not prudent to see if various stimuli work? Also, the broader panoply of social supports in continental European countries means a lot of what the Anglo-Saxon US would consider stimulus has already kicked in. Old EU observers will mention the so-called Stability and Growth Pact which proscribes member states from running fiscal deficits larger than 3% of GDP lest they incur sanctions from the EU. It is true that this proviso has been honored more in the breach than in the observance. Moreover, the EU has never, ever punished any member state over it being breached. Perhaps it's time to consider it more seriously lest the EU degenerate into American-style stimulus mania. Future generations of Europeans, and holder of the euro (like myself), will appreciate it.

As for Summers' current affliction with stimulus mania, I suggest that he look up "Yerkes-Dodson." In this world, you will not make many friends setting double standards far more favorable to your interests. Perhaps even he can be rehabilitated, though I'm not putting money on it.

UPDATE: Also see TIME on this point.

Camdessus Returns; ADB Wants More Funding

You know it's an Asian financial crisis redux--or worse--when former IMF Managing Director Michel Camdessus makes a reappearance on the world stage. Only yesterday, Asia's regional development lender, the Asian Development Bank (ADB) held a conference in its Manila headquarters discussing steps to cope with the crisis. Camdessus probably agreed to appear since the meeting was in Manila instead of Djakarta, where he remains a controversial figure due to the IMF's handling of Indonesia's crisis all those years ago. Now, the man who oversaw the IMF at the height of its Washington Consensus agenda is looking to Asian to take the lead. From ABS-CBN News:

To recover from the ongoing economic crisis and to prevent it from happening again, the world should make way for a new architecture of global governance, the former chief of the International Monetary Fund (IMF) said Monday. Speaking at a forum organized by the Asian Development Bank (ADB), former IMF Managing Director Michel Camdessus said the key building blocks for such reform include a “brand new IMF” and a more inclusive global governance group “to replace all the key ‘Gs’” such as the G-8 and the G-20.

“This is the most effective way to prevent the recurrence of crises…To hesitate to adapt to this reform is to accept that the same causes can lead to the same or worse crises,” Camdessus told reporters and finance ministers at the ADB headquarters in Mandaluyong City.

The G-8 (Group of 8) is a forum of the world’s most industrialized democracies which was formed to respond to the global recession. Its member states include Canada, Germany, France, Japan, Italy, Russia, the United States, and the United Kingdom. On the other hand, the G-20 (Group of 20 Finance Ministers and Central Bank Governors) is composed of the world’s 20 largest national economies, including the G-8. The group serves as a forum for consultation on global financial concerns.

According to Camdessus, emerging countries, particularly Asia, should be at the helm of this proposed architecture. He said Asian nations should be more properly represented, adding that they should “take advantage of the power they hardly recognize to change the world. Asia must be in the driving seat, or at least share it with key international centers of the world…This is the hour of Asia,” he said.

In a study, the ADB said “over-represented Europe and others” in the G-8 and the G-20 may need to accept the realities of the new world, shift their voting powers to the “new countries” such as Asia, making international financial institutions more relevant to them.

For the IMF to be more effective, Camdessus said it should undergo these basic changes: a new mandate, a high council entrusted with key political responsibilities, and the real establishment of unquestionable legitimacy. Camdessus said amendments should be made to IMF’s articles of agreement: “A new mandate is indispensable…[The IMF] should have full surveillance of financial governance. No institution has before been formally in charge of this.”

The IMF, Camdessus added, should also be able to focus more on systemic issues, as well as promote efficiency and accountability. Aside from an improved IMF, Camdessus stressed the need for a new global governance group, where all countries are members and are represented in all levels: “The G8 should be prepared to relinquish some of its responsibilities.”

At the same meeting, current ADB head Haruhiko Kuroda echoed calls elsewhere for increased funding for during a time of crisis to help Asian LDCs coming under duress:

The Asian Development Bank (ADB) is eyeing a 200-percent increase in its capital resources in order to increase lending and financial assistance to its members who will be needing additional funds during the crisis. In a briefing with reporters, ADB president Haruhiko Kuroda said ADB shareholders are now discussing the increase in the Manila-based multilateral development bank’s capital resources.

He said he is hopeful shareholders will already have a decision on the increase before the 42nd Annual Meeting of the ADB in Bali, Indonesia, from May 2 to 5 this year. “We are asking shareholders to increase our capital resources by 200 percent. [The shareholders are] discussing among themselves [the possible] general capital increase. Hopefully, before Bali, we will agree [whether] to increase [capital resources or not],” Kuroda said on Monday...

Kuroda said, in his speech during the South Asia Forum on the Impact of the Global Economic and Financial Crisis, that the bank is stepping up its operations by “several billion dollars” from the originally planned $12 billion in 2009 to better respond to the crisis.

The increase in capital resources, Kuroda said, will address the financing needs of its member-countries, particularly during this time of crisis. The increase in capital resources will also allow the bank to continue providing assistance to reduce poverty and promote development in member-countries.

Kuroda said the additional resources will be divided proportionately among its focus areas. Under the ADB’s Strategy 2020, or the long-term strategic framework adopted in 2008, the ADB will follow three complementary strategic agenda, namely, inclusive growth, environmentally sustainable growth and regional integration.

The ADB president said the role of multilateral development banks will be crucial in helping countries all over the world overcome the crisis. He said the critical areas where development banks will be needed at this time of crisis will be infrastructure, education and health. “We must work together to ensure that developing Asia has sufficient access to financing—through a mix of loans, grants and credit guarantees,” Kuroda said.

Earlier, in a paper titled “Global Financial Crisis and Proposed ADB Response” by the bank’s Strategy and Policy Department, the Manila-based multilateral financing institution said among the proposed responses of the ADB to respond to the crisis is to front-load its two-year Asian Development Fund (ADF) lending and grants to $3.4 billion in 2009 and add around $5 billion to $6 billion for Ordination Capital Resources (OCR).

You can see copies of the speeches of Camdessus and Kuroda on the ADB website.

And Now for Gambling Protectionism in Macau

I can't honestly say that I've seen it all yet during this time of economic turbulence as protectionist measures come from all angles thick and fast: North-North (e.g., US vs. EU); North-South (US vs. China); and South-South (China vs. India). While I usually root for the underdog--that is, LDCs--in these sorts of quarrels, I am forced to take the opposite side in this latest squabble.

The contours of this story are well-known. The recent boom in Asia propelled by the Chinese juggernaut has led to its special administrative region (SAR) of Macau overtaking Las Vegas in terms of gaming revenues. This boom in business has brought in a lot of Western casino operators to set up shop in Macau. At the same time, Stanley Ho, the man who held the territory's gaming concession during the British colonial era, has been understandably wary of the competition as the PRC allowed other casino operators to ply their trade in Macau. Bringing in Vegas-style glitz, Ho has been pressured by the competition to upgrade his gaming facilities to world-class standards.

Things are now coming to a head as a global slowdown takes place. You have all these new facilities vying for a smaller group of visitors. The Communist leadership cracking down on CPC officials siphoning state coffers to gamble in Macau isn't helping, either. Seeking to gain an advantage at an adverse time, Ho is resorting to an ugly but time-tested strategy: fanning the flames of xenophobia. Ultimately aimed at tilting political fortunes in his favor against the likes of the legendary Sheldon Anderson, Ho is busy hitting below the belt according to the Wall Street Journal:

The chief executive of Las Vegas Sands Corp. is worried that an apparent attempt to foment anti-American sentiment by a prominent Chinese rival could hurt his company's operations in Macau, China's gambling enclave.

In several addresses to business groups last month, casino operator and political figure Stanley Ho urged Macau to "unite against" the Venetian, the towering casino that Sands has built in Macau, according to several Chinese newspaper accounts. "We are Chinese. We should unite against foreign capital. We cannot keep silent. If not, the foreign capital will bully us," Mr. Ho said in a Feb. 9 speech, according to the accounts. Mr. Ho's spokeswoman, Janet Wong, didn't respond to requests for comment.

Sheldon Adelson, the Sands CEO, says he believes his company's growing presence in the market has unnerved Mr. Ho. Sands is depending on Macau to provide relief as U.S. consumers drastically cut spending at the company's Las Vegas properties. But new travel restrictions to Macau, imposed by the Chinese government, limit how often mainlanders can visit the city and have lowered gambling revenues there as well [This refers to Party officials gambling with state funds.]

Ho also has other business interests in the line of fire:

If Mr. Ho is trying to stir up nationalist feelings to help steer business from his rivals, it is unclear how much support, if any, he has in higher political circles. While he is a member of a top mainland Chinese political consultative body, it was with Beijing's blessing that the Macau government broke his monopoly on gambling in Macau earlier this decade.

Sands has made the biggest impact on Macau. It built the largest casino in the world there, the Venetian Macau. It began dredging land from the sea to build a sprawling new $12 billion resort complex -- now on hold as the company scrambles to cut costs -- and purchased its own fleet of high-speed ferries to shuttle gamblers from mainland China to Macau. The Sands ferries have challenged Mr. Ho's own ferry business.

Is there no honor among one-armed bandits?

The Truman Show: EU to Say IMF Needs $500B

Reuters has a new article discussing how the EU will call for governments to up IMF funding to $500 billion in light of ongoing financial difficulties in the run-up to the G-20 meeting of April 2:

European Union finance ministers are set to back a call from the International Monetary Fund to double its funds to $500 billion to fight the global financial crisis, a document showed on Monday. The move, outlined in a paper seen by Reuters, spells out the EU's position ahead of a G20 finance ministers meeting and comes as a key U.S. policymaker said a coordinated global effort was needed to stimulate demand and drag the world out of recession...

"It is essential that the IMF has appropriate financial means to assist countries particularly affected by the current crisis," said the EU draft document, to be approved by ministers of the 27-nation bloc on Tuesday.

G20 officials will on Friday and Saturday discuss how to deal with the global financial and economic crisis, which has made several European countries turn to the IMF for help. The meeting is in preparation for a summit in London next month of the G20, which groups the world's richest nations and biggest emerging economies.

A cynic would probably tie EU demands for doubling IMF funding to troubles in Eastern Europe. As Western European banks have lent large sums in former parts of the Iron Curtain, this may be a self-serving plea as troubled Eastern European countries eventually call on the IMF. Then again, where else will increased IMF funding come other than from Western European governments as well? Officially at least, the EBRD is describing the situation in Eastern Europe as "manageable":

Eastern Europe’s financial crisis is “manageable” so long as western banks continue lending to their units in the region, said European Bank for Reconstruction and Development Chief Economist Erik Berglof. Emerging European nations are struggling to refinance short- term debt as the global crisis that has left banks with more than $2 trillion in losses and writedowns cuts off credit and investment and plunges most of the region into a recession.

“The key is continued support from banks in Western Europe to their subsidiaries in the east,” Berglof said in an interview yesterday in London. “As long as those flows continue, that’s a very large part of the solution to the problem. The situation is manageable but we must make sure that it is being managed.”

Eastern Europe’s refinancing need is about $200 billion, based on short-term external debt owed by the region’s banks to foreign creditors, Berglof said. Excluding Russia and Kazakhstan, which can use their reserves to support banks, the amount is $130 billion, with more than half owed to western banks by their eastern units, he said. Sustained flows to the subsidiaries will be “a major source of filling the funding gap,” he said. The EBRD is investing a record 7 billion euros ($8.8 billion) in central and eastern Europe this year, compared with about 5.8 billion euros last year.

Going back to the topic of increased IMF funding and to explain the post's title, Ted Truman of the Peterson Institute of Economics proposed something eerily familiar only four days ago in the pages of the Financial Times. That is, $250 billion in SDRs should be made available ASAP to all comers in light of the current situation:

When the leaders of the Group of 20 nations gather in April, they will have one policy instrument available to address the financial crisis co-operatively, concretely and credibly. They should make a commitment to an immediate, one-time allocation of $250bn in special drawing rights by the International Monetary Fund to its 185 member countries...

Backers of an SDR allocation are likely to face some tired, out-of-date arguments. First is that the potential credit would be extended without conditions on recipient countries’ economic policies. But that is a plus today. Some countries are not in a position to provide income growth support through monetary and fiscal policies and would use their SDR allocations to do so. In the process, the recent record of economic reforms in many countries would continue because they have less incentive to roll them back.

A second argument against SDR allocations is that they are inflationary. That is not today’s problem. The more likely problem is deflation.

A third argument will be that a substantial amount of the SDR allocation may go to countries that do not need and would not use it. This is an empty argument. If a country did not need to do so, it would not mobilise the SDR-based credit. There would be no benefit, but also zero cost. Furthermore, under current uncertain circumstances, no country can be sure it will not need access to official international credit – witness Iceland.

Finally, countries are free to lend their SDR to other countries or use them to support the policies of neighbouring countries, as is being contemplated in western Europe with respect to their partners and neighbours in central and eastern Europe.

Either this Truman fellow is psychic or he's been working with EU finmin.

PS: If you still haven't got your fix of IFI gloom and doom, the World Bank estimates the financing gap of LDCs to total between $270 and $700B this year.

PPS: Not to be outdone, the US now says the IMF needs $500B more to bring its total funding to $750B. Let's see if the US can get China to foot the bill.

Try Something Different: Iraqi WTO Membership

What's a petrostate to do when oil is not quite so dear? It is with great interest that I note Iraq's trade minister wants to hasten Iraqi WTO membership. For a country that was on the verge of--if not actually engaged in--civil war, this is quite a turnaround--or at least some say. Skeptics view the lull in violence as a temporary ploy tacitly agreed to by warring factions to speed up American departure. Once that happens, all bets are off as they again vie for turf. Since Iraqi officialdom is a decidedly more optimistic lot (outwardly at least), let's consider their motives. Although the subprime debacle has wiped Iraq off the headline pages, it may be driving Iraq to seek WTO membership nonetheless.

This Reuters article suggests Iraq wants to safeguard oil exports during a time when it's being badly hit by the over $100 fall in the price of a barrel. In this version, Iraq needs to ensure a remunerative oil price to afford basic state functions such as paying police, maintaining roads, and ensuring electric power. There's also the matter of creating jobs to arrest civil unrest:

Iraq, whose plans to rebuild after years of war have been undermined by a collapse in oil prices, could get a boost from joining the World Trade Organisation (WTO), a top official said. "Iraq has all the components to be able to accede" to the Geneva-based multilateral body, Trade Minister Abdul Falah al-Sudany said in a statement after a meeting with U.S. officials in Baghdad.

Violence has dropped sharply in Iraq, but Prime Minister Nuri al-Maliki's government is increasingly alarmed about the impact of a drop in oil prices on plans to provide essential services and create jobs. The price of oil, which accounts for more than 90 percent of government revenues, has fallen by more than $100 from a record $147 per barrel last July.

A steady stream of oil dollars will be key to paying police, paving streets, boosting power supplies -- all crucial to ensuring Iraq does not return to the horrific violence of the years since the 2003 U.S.-led invasion. According to the WTO, Iraq applied to WTO membership in 2004, and the last meeting of a working group on joining it was held in April 2008.

Surely, I understand the part about (relative) economic prosperity being central to Iraq's security. However, I doubt whether safeguarding oil revenues is what's compelling Iraq to join the WTO. If a higher price of oil is what Iraq wants, then it's better of arguing for lower production targets in OPEC. That Afghanistan and Iraq established accession working parties at the same time is indicative of American influence. Yet, Iraq seems keener at the current time. Instead of what Reuters suggests, I believe that WTO membership is aimed at old-fashioned portfolio diversification by Iraq branching into other industries rather than concentrating further on oil exports.

What other industries can Iraq offer? The fertile crescent which allowed many civilizations to thrive between the Tigris and Euphrates is largely no more. So, scratch agriculture. Off the top of my head, then, I come up with tourism. Iraq occupies territory known as a cradle of civilization. As such, it contains plentiful important architectural sites such as the Babylonian ruins and ziggurats in Ur, Nineveh, and Nimrud. Religious tourism is growing given numerous pilgrimage sites, though accommodation is not up to par. Indeed, religious fervor may still be a travel requirement at the current time, though one hopes that improvements allow more secular motivations to flourish. You also have the macabre phenomenon of disaster tourism. The Iraq invasion offers many opportunities here, from Saddam Hussein's palace to the bridge where they hung American military contractors. It is difficult to foresee what sort of industries the Iraqis can come up with to pick up the slack from oil exports, but it does indicate a willingness to explore other opportunities even if they're not entirely clear at the moment.

If you're of the opinion that it's just a temporary lull in oil prices, then maybe pressures on diversification should ease pretty soon.

Regulate: The IMF's G-Funk Era Begins Now

With apologies to Warren G and Nate Dogg:

It was a junk world economy; a bad moon
Olly B [Olivier Blanchard] was on the beat, trying to consume
Some hedge funds so he could get some funk
Just rollin' in DC, chillin' all alone

Ah, the troubles IMF homies (gangstas?) have dissociating themselves from the excesses of neoliberalism. The document referred to in the post below is now up on the IMF site. Here we have a somewhat more honest discussion from the IMF crew about the troubles with securitization, derivatives, and the rest of it. However, it seems they're not telling us much new here. This being the Lenten season, I kind of expected more penitence. After all, this is the organization that (still) employs the David Lereah of international finance, its First Managing Director John Lipsky. This taken from the summary -

The IMF’s analysis points to failures at three different levels:

• Financial regulators were not equipped to see the risk concentrations and flawed incentives behind the financial innovation boom. Neither market discipline nor regulation were able to contain the risks resulting from rapid innovation and increased leverage, which had been building for years.
• Policymakers failed to sufficiently take into account growing macroeconomic imbalances that contributed to the buildup of systemic risks in the financial system and in housing markets. Central banks focused mainly on inflation, not on risks associated with high asset prices and increased leverage. And financial supervisors were preoccupied with the formal banking sector, not with the risks building in the shadow financial system.
• International financial institutions were not successful in achieving forceful cooperation at the international level. This compounded the inability to spot growing vulnerabilities and cross-border links.

And here are five policy suggestions from the IMF folks; the third point sounds interesting though seems difficult to implement regarding raising capital requirements during boom times -

1. First, the regulatory perimeter, or scope of regulation, needs to be expanded to encompass all activities that pose economy-wide risks. Regulation should also remain flexible to keep up with innovation in financial markets, and it should focus on activities, not institutions. Risk concentrations should not be allowed to develop beyond the regulatory perimeter. Clarifying the mandate for oversight of systemic stability would be an important first step.
2. Second, market discipline needs to be strengthened. The failures of credit rating agencies to adequately assess risk have been criticized by many, and initiatives to reduce their conflicts of interest and improve investor due diligence are underway. Other steps could include less reliance on ratings to meet prudential rules, and a differentiated scale introduced for structured products. Also, the resolution of systemic banks should include early triggers for intervention and more predictable arrangements for loss-sharing.
3. Third, procyclicality in regulation and accounting should be minimized. Increasing the amount of capital required of banks during upswings would create a buffer on which banks can draw during a downturn. An international framework for provisioning is needed to reflect expected losses through-the-cycle rather than in the preceding period. Supervisors should also routinely assess compensation schemes to ensure they do not create incentives for excessive risk-taking. In addition, there is a strong case for improving accounting rules by acknowledging potential for mispricing in both good and bad times.
4. Fourth, information gaps should be filled. Greater transparency in the valuation of complex financial instruments is needed. Improved information on off-market transactions and off-balance sheet exposure would allow regulators to aggregate and assess risks to the system as a whole. Such measures would also strengthen market discipline.
5. Fifth, central banks should strengthen their frameworks for systemic liquidity provision. The infrastructure underlying key money markets should also be improved.

Note that the IMF is not necessarily taking the initiative, but it's leaving it up to member countries to get the ball rolling (read: the G20) -

This paper does not seek to prescribe the specifics of various policy measures,since these will need to be defined by national regulators and international standard setters. Nonetheless, the Fund, given its unique mandate and broad membership, is well placed to both help define priorities and assist in implementation, and the following appear to warrant particular attention:

And if your *ss is a buster--IMF will regulate.

IMF Fesses to Sleeping On the Job (Far Too Late)

[Updated below.] Current IMF Chief Economist Olivier Blanchard has some interesting things to say, not all of which I agree with, to put it mildly. While I will have more of his views to comment on in the near future, for now let us consider a forthcoming IMF publication concerning "lessons learned" from the current crisis. Interestingly, Blanchard & Co. lash out against the shadow banking system--the very same non-transparent web that enabled highly damaging speculation during the Asian financial crisis. At that time, the Washington Consensus agenda was in full swing at the IMF of liberalization, privatization, and deregulation. Interestingly, it has taken the IMF over a decade to figure out that the shadow banking system this agenda promotes is harmful. Plus, it now approves of stimulus mania--at least for Western nations.

The code words now being used by the IMF are increased "systemic risk" compared to way back when. Of course, there are shared dynamics between today's events and those of a decade ago, from construction bubbles to heavy share speculation. The IMF has never really escaped accusations that it is a rich country's club; Blanchard reinforces this notion by basically saying the shadow banking system is at issue now because it is hurting not just piddling LDCs but the Great White Master itself. What more can I say? These confessions would have had more force if the IMF made these admissions a decade or so ago. As things stand, it just gives LDCs more reason to be wary of the IMF given its heavily biased views. From the Financial Times:

Financial regulators must agree binding international codes of conduct to prevent chaos when crises hit banks operating across national borders, the International Monetary Fund has warned. In a major study of the lessons learned from the financial crisis, the IMF also accepted blame for missing the dangers arising from weakly regulated financial institutions and admitted it had failed to provide global leadership. But the fund argued that global economic imbalances, notably the huge current account deficit in the US and corresponding surplus in China, had played only a secondary role in creating the crisis.

The IMF stopped short of calling for a global financial supervisor, saying that mechanisms of information sharing and risk assessment between national regulators generally worked well in normal times. But it said that the response to the Icelandic bank runs and the collapse of Lehman Brothers showed the need for more cooperation and binding agreements on who would bear the burden when crises hit.

The IMF’s admission of blame focused on the damage wreaked by the so-called “shadow banking system” – a set of lightly regulated financial institutions including investment banks, hedge funds and mortgage companies that were not subject to strict banking regulation. “The Fund warned about global imbalances but missed the key connection to the looming dangers in the shadow banking system,” the study said.

Henceforth, it said, such institutions needed to be regulated by their function rather than their form, with companies that posed risks to the whole financial system brought within prudential rules that would cover bank-style capital and liquidity requirements. While rules were being tightened on institutions that were already regulated, “an extension to the regulatory perimeter still seems necessary,” the IMF said.

Many economists and ministers have pointed to the huge global current account imbalances as a key cause of the crisis, through encouraging the US to borrow heavily to fund its consumption. But Olivier Blanchard, the IMF’s chief economist, said that the reckless creation of risky assets could have occurred even without the imbalances. ”The macroeconomic causes of the crisis are a factor after the failure of market discipline and weaknesses in regulation,” Mr Blanchard said. “My view is that global imbalances contributed indirectly to the crisis.”

If they earnestly clamped down on the shadow banking system when it dramatically reared its head over a decade ago, then the current mess would've probably been headed off. Instead, it was allowed to grow as those at the IMF and other Temples of High Finance viewed the crisis as one involving half-witted East Asians who didn't know any better. I guess the Great White Master didn't know any better, either.

Is India Relaxing Offending Ban on Chinese Toys?

I recently made a fine blog find called "India in the WTO" which does a good job keeping track of India's international economic relations. Pursuant to my recent posts about China being in the process of filing a WTO complaint against India over the latter's non-specific toy ban [1, 2] India's Department of Commerce has just come out with a new notification concerning the ban:
-----
TO BE PUBLISHED IN THE GAZETTE OF INDIA EXTRAORDINARY

PART-II, SECTION—3, SUB SECTION (ii)

GOVERNMENT OF INDIA

MINISTRY OF COMMERCE AND INDUSTRY

DEPARTMENT OF COMMERCE

NOTIFICATION NO. 91 /(RE-2008) / 2004-2009

NEW DELHI, DATED 2nd MARCH, 2009

S.O. (E) In exercise of powers conferred by Section 5, read along with Section 3(2) of the Foreign Trade (Development and Regulation) Act, 1992, also read along with paragraph 2.1 of the Foreign Trade Policy, 2004-09, the Central Government hereby amends Notification No. 82 /(RE-2008) / 2004-2009 dated 23rd January, 2009 as under:-

1. “Import of ‘Toys’ from China appearing under ITC Codes 9501, 9502, 9503 of Schedule – I of ITC(HS) Classifications of Export and Import Items is prohibited for six months with immediate effect and until further orders. However, import of toys from China accompanied by the following certificates shall be permitted:

(i) A certificate that the toys being imported conform to the standards prescribed in ASTM F963 or standards prescribed in ISO 8124 (Parts I-III) or IS 9873 [Parts I-III];

(ii) A Certificate of Conformance from the manufacturer that representative sample of the toys being imported have been tested by an independent laboratory which is ILAC [International Laboratory Accreditation Commission] accredited and found to meet the specifications indicated above. The certificate would also link the toys in the consignment to the period of manufacture indicated in the Certificate of Conformity”.

2. This issues in public interest.

(R.S. Gujral)
-----
Seema Sapra sees it as a relaxation of the (blanket) ban on Chinese toy exports. With all due respect to Seema, I am not quite sure about this. While spelling out conditions by which Chinese toys will not be covered by the ban, Commerce appears to be putting not-insignificant roadblocks in front of Chinese toy exporters concerning verification that toys meet certain safety standards. I don't claim to be an expert on toy safety, but this certainly looks like a case of much-vaunted non-tariff barriers (NTBs). It is probably neither inexpensive nor quick to get these certifications. Moreover, as the ban was (supposedly) going to be in place only for six months, the effort may not pay off for toy exporters.

Being cynical old me, this is an NTB highly reminiscent of the formidable license Raj. Instead of giving local firms the run-around, they're giving foreign ones the same red tape. In either case, the result is similar: frustration not creation of commerce to satisfy special interests. Here, the supposed beneficiaries are domestic toymakers. Unfortunately, India has considerable expertise in this unsavory activity. To Shri Kamal Nath, I once again implore you: Let my people go; set the Bratz free.

UPDATE: The official news agency Xinhua views this as a "lifting" of the toy ban, so I gather they're more or less satisfied.

UPDATE 3/19: Well, not quite. The countries are in "bilateral consultation" and China doesn't rule out filing a case at the WTO.

Hugo(es) There? Venezuela Expropriates Cargill

The press wires are agog with the news that Hugo Chavez has decided to expropriate the Venezuelan operations of American food titan Cargill. Many including myself are fascinated with the secretive corporation--the largest privately held US concern with $120B in revenues. Its tightly held nature has made it regular fodder for activists, especially during the 2007-08 run-up in food prices. For more, see this recent backgrounder from the Minneapolis Star-Tribune. (There's more environmentally related stuff to get into regarding Cargill, from GM food to rainforest depletion that I won't get into here.)

Despite the recent modulation in food prices, not all concerned are happy, like Chavez. Recently buoyed by winning a referendum on enabling more term extensions--enabled by beating up student protesters among other things--he has returned to his usual business of expropriation. Via Reuters:

President Hugo Chavez seized a unit of American food giant Cargill on Wednesday and threatened to take over Venezuela's largest private company, renewing a nationalization drive as the OPEC nation's oil income plunges...

The moves to tighten the government's grip over the food supply were criticized by the private sector and many economists who say the state distorts the supply chain and contributes to food shortages. Chavez's clash with the food companies, demanding they produce cheaper rice, came less than three weeks after he won a referendum on allowing him to run for reelection and marked his first nationalization in seven months...

U.S. company Cargill, which operates one rice mill in Venezuela, said earlier in the week it was expecting a visit from officials even though it does not produce the type of rice that is at the center of the dispute.

Cargill said on Wednesday night it was "respectful" of the Venezuela decision but seeks talks to resolve the situation. "Cargill is committed to the production of food in Venezuela that complies with all laws and regulations," Cargill spokesman Mark Klein in Minneapolis, Minnesota, told Reuters. "Cargill expects the opportunity to clarify the situation with the government and is respectful of the Venezuelan government decision," Klein said. "The rice mill was designed exclusively to manufacture parboiled rice, which the company has done at this site for the last 7 years and elsewhere in the country for 13 years."

Chavez said he ordered the takeover because Cargill -- one of the largest privately owned U.S. companies -- avoids producing basic rice that is subject to government price controls. "Prepare the decree, we are going to expropriate Cargill. We are not going to tolerate this," Chavez said.

It was not clear if Cargill's other Venezuelan food units would be affected. Cargill has approximately 2,000 employees at 22 locations across Venezuela and operates 13 manufacturing plants including oilseed and animal feed processing...

Chavez has typically paid companies adequately after ordering their takeover. But several nationalizations last year have not been implemented and this year Chavez has said he would only pay for seizures with government debt paper.

While Chavez's nationalizations tend to be widely supported, periodic shortages of basic goods have hurt his popularity in recent years. Venezuelan shoppers have faced shortages of white rice sold at a low government-set price in recent weeks, while stores have ample supplies of parboiled rice which is not subject to price controls.

Venezuela's rice millers association blames the shortages on insufficient supplies of the grain, while the government says the mills are deliberately producing small quantities of white rice to skirt price controls.

Chavez wants Cargill to produce not just parboiled rice but also varieties covered by price controls to feed his Bolivarian revolution. Likely a money-losing enterprise, Cargill has not complied, hence the order. It seems Chavez's jihad on economics--circumventing market prices has not often worked--is resulting not in lower prices but in lower availability of goods. Unless the Venezuelan government is the world's most efficient producer of--let's do a quick count--food staples, oil, electricity, steel, cement and telecommunications services, I don't think improvements are in store for Juan Q. Publico. Talk about "political risk."

Bhagwati Gives Obama Another Chance on Trade

Poor, poor Dr. Bhagwati. A few months ago when Obama and Missus Clinton were vying for the Democratic presidential nomination, he went on the record saying that Obama would be the better (read: less protectionist) choice among the two. Many including myself were rather skeptical of this, with me thinking he had it the other way around. After all, this is "China Currency Coalition" Obama we're talking about here. It was thus no surprise when Professor Bhagwati came out with another op-ed in the Financial Times earlier this year unloading both barrels at the Obama administration for stocking up on a tradophobic cabinet. He even took a shot at one of Obama's advisors, Warren Buffett, for good measure.

While visiting the FT more recently, I clicked on an interesting section entitled "Protectionism." It is a sign of the times when probably the world's most renowned outlet for financial journalism devotes an entire section to the Smoot-Hawleyization of world trade (or something like that). Lo and behold, what else did I find other than another op-ed by Bhagwati on his favorite subject matter. It is not so much that Bhagwati has lightened up on Obama. Rather, the full implications of Obamanite protectionism seem to be getting to him. From the Financial Times:

President Barack Obama faces protectionist pressures. These are not just from the labour lobbies that have led Joe Biden, US vice-president, to chide “pure free traders” and to ask for “fair trade”; and which, astonishingly, have also led the US president to use his first meeting with President Felipe Calderón of Mexico – overwhelmed by the brutal fight against drug cartels caused by the US failure to legalise drugs – to urge on him tougher labour standards, a protectionist demand that is clearly aimed at raising Mexican costs of production. The pressures come also from the lobbies pushing for a Detroit bail-out that is inconsistent with the World Trade Organisation...

Yet, protectionism is a dangerous virus that requires a passionate response. Indeed, Mr Obama faces his two most serious protectionist challenges from the Buy American provisions that have infiltrated his stimulus package and from the China-bashing on “currency manipulation” that surfaced in the confirmation hearings of Tim Geithner, Treasury secretary...

President Bill Clinton marred the first year of his presidency by indulging the Japan-bashers whom he had cultivated in his campaign. President George W. Bush succumbed also to steel protectionism in his first year. They had time to change, however. But Mr Obama, in the midst of a historic economic crisis, can ill afford to repeat this pattern: he has to fight protectionism right away or live to see the virus spread beyond control.

Wait till Bhagwati gets a load of the latest stimulus provisions dealing with not assisting firms that hire foreigners on H-1B visas, particularly Indian workers.

Thatcher + Woodrow Wilson = Gordon Brown?

Gordon "British Jobs for British Workers" Brown is once again styling himself as an internationalist after his earlier attempts at channeling BNP-style xenophobia. Brown is about to go to Washington to visit Barack "Trillions in Deficits" Obama, and this has led him to pen a new op-ed in the Times of London (and shed the BNP stylings for now). Brown mentions Britain and the US joining up to beat the Nazis in WWII and the Soviet Union during the Cold War era before turning to current affairs. In the new millennium, climate change, financial instability, and poverty are their main opponents says Brown. Along the way, he channels Baroness Thatcher by making his own version of TINA--There Is No Alternative (to Globalization):

Now, in this generation, we must renew our work together once again. A new set of challenges faces the whole world, which summons forth the need for a partnership of purpose that must involve the whole world. Rebuilding global financial stability is a global challenge that needs global solutions. However, financial instability is but one of the challenges that globalisation brings. Our task in working together is to secure a high-growth, low-carbon recovery by taking seriously the global challenge of climate change. And our efforts must be to work for a more stable world where we defeat not only global terrorism but global poverty, hunger and disease.

Globalisation has brought great advances, lifting millions out of poverty as they reap the benefits of economic growth and trade. But it has also brought new insecurities, as this – the first truly global financial crisis – underlines. Globalisation is not an option, it is a fact, so the question is whether we manage it well or badly...

Then Brown offers his own recipe for Fixing the World, with lots of Getting By With a Little Help From Britain and America's Friends:

It is a global new deal that will lay the foundations not just fora sustainable economic recovery but for a genuinely new era of international partnership in which all countries have a part to play. This programme of internationally coordinated actions includes six elements:

First, universal action to prevent the crisis spreading, to stimulate the global economy and to help reduce the severity and length of the global recession. Second, action to kick-start lending so that families and businesses can borrow again. Third, all countries renouncing protectionism, with a transparent mechanism to monitor commitments. Fourth, reform of international regulation to close regulatory gaps so shadow banking systems have nowhere to hide. Fifth, reform of our international financial institutions and the creation of an international early warning system. And last, coordinated international action to build tomorrow today – putting the world economy on an economically, environmentally and socially sustainable path towards future growth and recovery.

I am not hopeful that the two countries most responsible for derailing the world economy will be those responsible for fixing it up. If anything else, the UK and US think borrowing even more money to solve problems caused by borrowing too much money in the first place ought to do the trick. Only dummies listening to this ersatz Wilsonian rhetoric will provide London and DC with money to go on another jihad on fiscal sanity.

Obama's Latest Protectionist Flap Offends India

India's domination of the outsourcing trade has hardly gone unnoticed among the protectionists and xenophobes in America. A key question for Indian business is if Obama is one of those. His membership in the PRC-bashing "China Currency Coalition" is already well-known; go ask Treasury Secretary Geithner. Moving from goods (PRC) to services (India), we may see the same phenomenon at work with the supposedly "internationalist" Obama. In 2007, he offended many Indians by characterizing his then-opponent for the Democratic presidential nomination Hillary Clinton as representing (D-Punjab). Let's just say that Obama doesn't rub many Indians the right way.

This latest flap is over immigration. Recent news that workers of Indian outsourcing firms are the largest recipients of H-1B visas is causing protectionist hackles. To their line of thinking, Indian companies are not only "stealing American jobs" by receiving outsourced business, but they don't even hire Americans for work that needs to be performed in the US. Hence, it's double jeopardy. Senators Durbin (D-IL) and Grassley (R-IA) have tried to contest the awarding of H1-B visas on such grounds amid efforts by firms to increase yearly H-1B quotas from the current 65,000. These, of course, are filled almost instantly:

“By the end of the day today, all of the H-1B visas for the year will likely be spoken for,” Durbin said. “The H-1B program can’t be allowed to become a job-killer in America. We need to ensure that firms are not misusing these visas, causing American workers to be unfairly deprived of good high-skill jobs here at home.”

Durbin and Grassley have repeatedly raised concerns that the loopholes in the H-1B and L-1 visa programs are allowing for the outsourcing of American jobs. Last year, they introduced the H-1B and L-1 Visa Fraud and Abuse Prevention Act, which would require H-1B applicants to make a good faith effort to hire American workers first and would give the Department of Labor greater oversight authority in investigating possible fraud and abuse.

"I have no doubt that we'll hear arguments all day as to why the cap on H-1B visas should be raised, but nobody should be fooled. The bottom line is that there are highly skilled American workers being left behind, searching for jobs that are being filled by H-1B visa holders," Grassley said. "It's time to close the loopholes that have allowed this to happen and enact real reform."

The emerging point of contention is a stipulation in the ever-controversial stimulus bill dictating that no bailout money be allocated to firms attracting workers on H-1B visas (read: from India). Call it the backdoor revenge of Durbin and Grassley. From the Economic Times:

With the economies in the U.S. and India both struggling and with unemployment rising, the outsourcing of American jobs to Indian workers has become an even more explosive issue. That's leading business leaders, politicians, and ordinary citizens in both countries to focus on a controversial visa program, the H-1B, that allows a limited number of foreigners to work at U.S. companies for up to six years. Critics have long claimed the program allows high-paying software-writing and engineering jobs at companies and state governments to go to foreigners.

On Feb. 23, the H-1B critics got a new round of ammunition. Data released by the U.S. Citizen & Immigration Services showed that in 2008, for the second year running, many of these visas went to Indian IT services companies that were sending engineers to the U.S. temporarily to work. In effect, a visa that had been designed for U.S. corporations to remain competitive at a time of talent shortage had become a blessing for the U.S. operations of global Indian companies, allowing them to send engineers from India, rather than hiring locally.

The news comes at a time when many Indians already suspect the U.S. is trying to put a squeeze on the country's successful outsourcing industry. Each year, the American government hands out 65,000 H-1B visas, and Indian engineers receive many of them. However, as part of President Obama's economic stimulus package, Congress passed provisions to bar any U.S. company that receives bailout dollars from directly hiring workers on these H-1B visas.

Irrational American nationalism is provoking similar responses from India's Hindu nationalist opposition parties, whose bellicose rhetoric includes boycotting American MNCs:

In India, there has been a swift outcry. "This is just irrational protectionism," says Montek Singh Ahluwalia, deputy chairman of India's Planning Commission. "It makes no economic sense at all."

In the 15 years since the H-1B began, a strong U.S.-based Indian diaspora has emerged, in part because of the visa program, to become one of America's most successful minority groups. It has also become politically powerful within India. Many Indians in the U.S. are strong supporters of the Bharatiya Janata Party, leader of the opposition to Prime Minister Manmohan Singh's government; U.S.-based Indians often make donations to BJP causes and lobby through its parent body, the Vishwa Hindu Parishad (Global Alliance of Hindus). Courting nonresident Indians has been a consistent fundraising tactic for the BJP and VHP, especially since a large proportion of the Indian diaspora in the U.S. comes from Gujarat, a state north of Mumbai where the BJP holds power and is more popular than elsewhere in the country.

So as news trickled in about the provision in the stimulus bill, political groups in India swung into action. The VHP first asked India's External Affairs Minister Pranab Mukherjee to see if he could arrange for Indians losing their H-1Bs to have more than the regulated 30 days to leave the U.S., allowing them to sell their houses and settle their affairs with more flexibility. A spokesman for Mukherjee says no action has been taken on that letter.

Then, the VHP decided on a more popular approach, calling for Indian consumers to boycott the goods of 14 U.S. multinationals. Praveen Togadia, general secretary of the VHP, declines to share the list of the companies the group plans on targeting. He says a boycott is justified. "If these policies hurt Indians abroad, then we have to take steps to hurt American companies in India," he says. "The reaction must be strong, or else who knows if the legally resident Indians in the U.S. are one day thrown out."

What more can I say? It's garbage in, garbage out as both sides, ah, talk trash.

3/9 UPDATE: BofA's hand has been forced by this provision. It is now taking away job offers made to international graduates of American MBA programs.

Hungarian PM: Give Eastern Europe $141B or Else

It is really hard to sympathize with Hungarian PM Ferenc Gyurcsany calling for a whopping $241B to be schlepped to Eastern Europe for reasons I have given very recently. Most of these countries put off joining the EMU and using the euro--something that would have given them protection from storms now roiling the world economy. I don't think Italy and Greece are much better run than these ones, but their use of the euro gives makes them rather less vulnerable. Also, these guys have ignored the similar example from the East Asian crisis of a decade ago involving unhedged borrowing in foreign currencies--in this case, euros and Swiss francs. In times of trouble, folks stampede out of less liquid holdings such as currencies of Eastern Europe and into more liquid ones such as the euro. Oh well, that didn't stop Gyurcsany from making hyperbole about an economic iron curtain [I roll my eyes].

This time, they can't blame the big, bad Soviet Union using military dominance to bring them into its orbit. Emotional blackmail doesn't really work here. As is usually the case, their current troubles are largely self-inflicted, so the blathering is infantile, indeed. Those Slovenians and Slovakians were wise; Eurosceptics are econo-Luddites of the first water. From the Associated Press:

Hungary's prime minister warned of a new economic "Iron Curtain" being drawn unless leaders at Sunday's European Union summit acted to protect the bloc's weakest members from drowning in the global economic crisis. Prime Minister Ferenc Gyurcsany said the credit crunch is hitting poorer, eastern member states the hardest. The Hungarian leader called for a special EU fund of up to euro190 billion ($241 billion) to help restore trust and solvency in eastern EU members' financial markets. "We should not allow that a new Iron Curtain should be set up and divide Europe," Gyurcsany told reporters ahead of the summit.

Hungary, along with other eastern EU nations like Poland, Latvia and Slovakia, are in dire economic straits and are pleading with richer countries in the 27-nation bloc to show solidarity. Hungary and Poland and the Baltic countries also want the EU to fast-track their bids to join the euro-currency, which could offer them a stable financial anchor...

Gyurcsany said eastern EU countries could need up to euro300 billion ($380 billion), or 30 percent of the region's gross domestic production this year. He warned, in a paper presented to the EU summit, that failure to offer bigger bailouts "could lead to massive contractions" in their economies and lead to "large-scale defaults" that would affect Europe as a whole. Gyurcsany added that failure to support fellow EU countries could trigger political unrest and immigration pressures as jobless rates soar.

Once booming east European economies have been hit hard by the economic downturn. As cheap [foreign] credit dried up their export markets shrank, causing eastern currencies to slide and triggering more financial turmoil.

UPDATE: German Chancellor Angela Merkel flat-out rejects this appeal, pointedly naming Slovenia and Slovakia as counterexamples that are not in trouble for the reason I've mentioned--they took joining the EMU seriously earlier on. This woman is a voice of fiscal sanity in a region full of stimulus crass Keynesianism:

European Union leaders rejected pleas for an aid package for eastern Europe and EU funds for carmakers, bowing to German concerns over budget deficits as the economic slump deepens. EU leaders vetoed a call by Hungary for loans of 180 billion euros ($228 billion) for ex-communist economies in eastern Europe, and told automakers such as General Motors Corp.’s European arm to look to national governments for help.

“I would advise against taking huge numbers into the debate,” German Chancellor Angela Merkel told reporters at an EU summit in Brussels today. “I see a very different situation -- you can compare neither Slovenia nor Slovakia with Hungary.”

That these troubled Eastern European countries missed the euro boat is their fault; making others pony up tens of billions for their mistakes is so...American.