China, Would-Be Saviour of Troubled EU PIGS

♠ Posted by Emmanuel in China,Credit Crisis,Europe at 10/29/2010 12:55:00 AM

For those of you who doubt China's increasing clout in the global political economy, this new phenomenon may make you think again. It is no secret that the European PIIGS of Portugal, Ireland, Greece and Spain have some fiscal issues to work out. However, such concerns may be assuaged somewhat when the world's largest reserve holder indicates that it is willing to buy some euro-denominated debt from them. Ever so aware of the situation in countries he visits, Premier Wen Jiabao now makes boilerplate statements about China considering the purchase of public debt to prop up any number of PIGS.

Earlier this month, we had Greece trying to get on China's good books if and when it starts issuing longer-dated paper again:

China offered on Saturday to buy Greek government bonds when Athens resumes issuing, in a show of support for the country whose debt burden pushed the euro zone into crisis and required an international bailout. Premier Wen Jiabao made the offer at the start of a two-day visit to Greece, his first stop on a tour of Europe, and also said he wanted to boost shipping and trade ties with Athens, underscoring Beijing's use of economic strength to win friends.

"With its foreign exchange reserve, China has already bought and is holding Greek bonds and will keep a positive stance in participating and buying bonds that Greece will issue," Wen said, speaking through an interpreter. "China will undertake a great effort to support euro zone countries and Greece to overcome the crisis..."

A senior Greek government official said Wen made clear his offer concerned buying bonds only when the country returned to markets. Greece, which is currently funded through a 110 billion euro ($150 billion) EU/IMF bailout, is only issuing short-term T-bills for the time being...It has said it wants to return to markets some time next year to sell longer-term debt.

"China is prepared, hand in hand with the EU, as passengers in the same boat, to strengthen cooperation ... to confront the financial crisis," Wen said. "I believe that we can undertake a genuine effort to promote the reform of the international financial system and strengthen its supervision," he said.

And now we have news that the Chinese are courting Portugal's favour as well using the same sort of "debtor diplomacy":

Portugal’s minority government has welcomed a growing appetite by China to invest in the country’s public debt as it struggles to avert a Greece-style bail-out. “China’s interest is the result of a successful strategy of diversifying our investor base,” Carlos Costa Pina, Portugal’s secretary of state for the treasury and finance, told the Financial Times.

Speaking before a state visit to Portugal next week by Chinese President Hu Jintao, a Beijing official said China looked favourably on investing in Portuguese government bonds. China “has always given positive and favourable consideration” to bond purchases when making state visits, deputy foreign minister Fu Ying said on Thursday.

China has previously bought Spanish government bonds and has made a similar offer to buy Greek government debt when Athens resumes issuing. According to a person familiar with Portugal’s public debt market, China has already purchased Portuguese government bonds.

However, Mr Costa Pina said the government had no means of identifying individual investors. “It’s not surprising that Chinese investors want to buy Portuguese debt or increase their positions,” he said. The Lisbon government and the state debt agency had been in contact with Chinese and other Asian financial institutions to promote such investment.

Portugal was keen to diversify its public debt market, he said, as investors from the UK, Germany and France currently accounted for about 40 per cent of the total. “Portuguese debt offers an interesting ratio between profitability and risk,” he added. “Considering the fundamentals of our economy, the yields on our government bonds are much higher than they would be in normal market conditions”.

It's just in time given contentious domestic politics that the ruling party can say "The Chinese will buy our debt." If push comes to shove, who's to say that China can't buy friends and influence countries?

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Africa's Security, Governance & Development Nexus

♠ Posted by Emmanuel in Africa,Development at 10/29/2010 12:27:00 AM

I was very intrigued by this contribution from Knox Chitiyo from the Royal United Servicemens' Institute (RUSI) to our IDEAS maiden publication commemorating the launch of our African International Affairs programme. However, it's only now that I've had the chance to mention it. The general gist is that security, governance and development are interlinked in Africa. Whereas most tend to come at it from one of the three perspectives, it is perhaps better to view them as a set of overlapping challenges.

While the likes of William Easterly think that traditional development scholars mucking about with security matters is beside the point--see his criticism of Paul Collier's advocacy of intervention [1, 2]--there may be a path that is less activist yet keeps security matters in sight as a precursor and not a side-issue to economic development:

The 2002 transition from the organisation of African Unity (OAU) to the African Union has been the catalyst for an African road map for Africa’s Security Architecture (ASA). The AU, and the regional and national organisations to which it is linked, have four main premises for Africa’s security.

First, although recognising the importance of partnership and assistance from external stakeholders, there is recognition that it is Africa which takes primary responsibility for its security.

Second, Africa’s security road-map requires a formal framework, agreed at continental level and implemented at various levels, if it is to have any real-world applicability. this has led to the consensus on an AU led African Security Architecture framework. The ASA articulated the challenges and opportunities for security in Africa, and offers a long-term road map for embedding security in the continent.

Third, in terms of its hard security parameters, the ASA recognises the need to build capacity for African forces to cope with peace and stabilisation efforts. this in turn requires the increased professionalisation of Africa’s militaries and improved coordination of continental, regional and sub-regional militaries for alliance operations. the establishment of the regional Africa Standby Force (ASF) brigades in each of Africa’s regions is intended to strengthen the work done by AU peacekeeping forces. AU forces have achieved a great deal in peace operations, but because they often operate as allied but national forces under an AU aegis, there have been long term problems of equipment interoperability, logistics (particularly lack of air power), command and control, standard operational Procedures (soP) and funding. the establishment of the AsF, with its permanent regional depots, is intended to build sustainable capacity and capability, as well as to shorten reaction times.

Fourth is the realisation that Africa’s security, governance and development are interlinked. In this regard, the AsA should be seen as part of what we might call a wider African Security, Governance and Development (ASGD) architecture. there are no rigid barriers between security, governance and development, Indeed, the conditions under which regional and continental forces can intervene include situations in which a governance and/or development crisis creates insecurity (for instance, military coups or extreme environmental crises). This securitisation of development, which recognises that security is a prerequisite for sustainable development, is important. Also important and often ignored is the ‘developmentalisation’ of security; i.e. the recognition that security forces can, and should on occasion, contribute directly or indirectly to development. this developmentalisation of security is already becoming the ‘new wave’ in the security-development nexus. It has been spurred by the global recession, by the growth of civil society in Africa, by the increasing professionalisation of Africa’s militaries and by questions regarding wealth distribution in Africa.

It relates to longstanding questions about the nature of the state in Africa, about the role of the military, and about whether militaries can engage in non-traditional projects such as state-building. This has been a major issue for allied forces in Afghanistan and Iraq – it is also a question which the ASF and Africa’s militaries will have to engage with. This is one of a number of challenges and opportunities for Africa as it creates an ASGD. the increasing interaction of Africa’s governance, security and development institutions is fundamental for the continent as it seeks to widen its footprint in the global system. This entails ending, or at least moderating, the traditional compartmentalisation and mutual distrust and antipathy which characterised relations between the security, justice, political and development sectors.

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A Bloody Project: Tweaking SGP in the EU Treaty

♠ Posted by Emmanuel in Credit Crisis,Europe at 10/28/2010 12:51:00 AM

Boy oh boy, this story never seems to end. As even I am becoming confused with all the melodrama, let's try to make sense of what's happened to the European Union in recent times. To make a very, very long story short:

1. Plans to implement a European Constitution were shot down by several publics in referenda, most notably the French and Dutch in 2005;
2. In place of a European Constitution, the burghers of Brussels came up with the Lisbon Treaty which retained a lot of the mooted constitution's text but discarded its overtly supranational features;
3. Wary of plebiscites, many EU member states ratified the Lisbon Treaty in their legislatures;
4. Except for the Irish that is, who turned in down in a referendum;
5. Rather annoyed, the EU bigwigs made Ireland hold another referendum. Fearful of being marginalized in the EU at a difficult time--October 2009--the Irish public relented just a year and a quarter after rejecting it;
6. Despite murmurs from dyspeptic Eurosceptic leaders in the Czech Republic and Poland that they would delay signing on to the Lisbon Treaty until the Conservatives assumed power in the UK and put it to a plebiscite there that would likely doom Lisbon, they too eventually relented;
7. Earlier this year, Greece's woes laid bare the somewhat toothless Stability and Growth Pact conditions which are routinely violated;
8. European leaders came up with a massive emergency package to help assuage markets that the project of European integration wasn't about to fall apart as Greek contagion effects affected other peripheral EU economies;
9. The European Commission unveiled a set of proposals to strengthen the Stability and Growth Pact to (hopefully) prevent another Greek tragicomedy.

Whew! This long and winding road brings us up to speed with 10. The current situation in which certain EU leaders like Chancellor Merkel, leader of the German paymasters of Europe, are demanding revisions to the EU Treaty after the convoluted journey of the Lisbon Agenda. I certainly wonder if the others have the stamina or appetite for another round of what would be challenging negotiations:

European heads of state will meet this week to decide whether and how to pursue a controversial change to the European Union treaty that could toughen the bloc's budget rules and create a permanent mechanism for dealing with governments that can't finance their public debt.

German Chancellor Angela Merkel is the driver behind the effort, with most other EU governments grudgingly accepting her demands that the issue at least be discussed. But EU diplomats say governments have serious reservations about changing the treaty, and the summit Thursday and Friday will be one of the first tests of how much support or opposition there is for Germany's demand. "Nobody else wants this, but Germany will get it because Merkel has put her foot down," said one diplomat.

The Lisbon Treaty, the EU's governing treaty, came into force this year after a lengthy process during which Irish voters rejected it once before approving it in October of last year. Ireland and a number of other countries must allow voters to decide on treaty changes through national referendums. With austerity plans coming into force across the EU at the urging of the European Commission, it is unclear whether disgruntled voters will be willing to hand over yet more power to Brussels.

Last week, EU finance ministers on a task force chaired by EU President Herman Van Rompuy agreed to new budget and macroeconomic rules for the bloc. In a key breakthrough, hammered out at a separate Franco-German summit, French President Nicolas Sarkozy agreed to support a treaty change; in return, Germany acceded to French demands that budget rules proposed by the European Commission be softened to allow more political control over their enforcement.

Germany wants a treaty change to create a permanent "crisis resolution" plan, which could include a procedure for allowing EU governments to default on their debt. But EU diplomats say the Lisbon Treaty might accommodate the idea without being changed, so long as the EU isn't given more power over national governments. One possible outcome of the summit will be an agreement calling on Mr. Van Rompuy to come up with proposals for creating the crisis resolution mechanism, including via a treaty change, diplomats say.

Controversially, Ms. Merkel earlier this year floated the idea of taking away the right of countries that violate the budget rules to vote in the European Council. That proposal, however, is stiffly opposed by most governments, and it is unclear to what extent the Germans are still backing it, diplomats say.

Germany's concern is that emergency loan plans organized for Greece and other euro-zone countries earlier this year violate German law. The Germans believe creating an orderly way for euro-zone countries to default on their debt, with creditors absorbing losses as they would in a normal bankruptcy, would get around German laws that prevent the government from bailing out other euro-zone governments.

If they can "Lisbonize" things as much as possible--ram changes via legislative measures instead of via referenda--there is a chance of a more forceful Stability & Growth Pact coming into effect in the near future. Otherwise, the dissension and market overreactions such rule changes may foment in different member states may make them regret they ever brought up the topic in the first place.

UPDATE: To no one's surprise, there is no real appetite for Merkel's proposed changes since the EU member states would have to undergo the same tortuous process to getting the Lisbon Agenda done (and only just). Moreover, with almost exclusively German stick as opposed to any real carrots save for the establishment of a permanent emergency fund, there is not much upside for the rest:

Ms Merkel appeared headed for an outright rejection of one of her proposals – renegotiating the treaty to allow EU voting rights to be suspended for persistent debtor members – after José Manuel Barroso, president of the European Commission, publicly called the measure “unacceptable”.

“If treaty change is to reduce the rights of member states on voting, I find it unacceptable and, frankly speaking, it is not realistic,” Mr Barroso said at a news conference, a stance he repeated inside the summit meeting. “It is incompatible with the idea of limited treaty change and it will never be accepted by the unanimity of member states.”

More importantly, Ms Merkel’s fellow heads of government were preparing to delay a final decision on her central demand: that they re-open the treaties for a permanent version of the €440bn ($607bn) rescue fund that member states cobbled together in May at the height of the Greek crisis.

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Trouble Merging Singapore, Oz Stock Exchanges

♠ Posted by Emmanuel in Southeast Asia at 10/28/2010 12:00:00 AM

Well this is a way to douse excitement over frantic mergers and acquisitions activity in the Asia-Pacific. Just a few days ago I was all excited about Singapore Exchange's (SGX) proposed takeover of Australia's largest stock exchange, the Australian Stock Exchange (ASX) in Sydney. After the initial euphoria over creating further economies of scale (more companies being traded on the same platform can help reduce transaction costs for investors) and scope (more financial products can be availed of to meet investors' needs), we come crashing down to the reality of a bare-knuckle political contest brewing down under.

Once more, protectionism comes in the form of examining the "security" implications of such a takeover. Being a small, open economy with no history of foreign interventionism, it strikes me as unlikely that Singapore is any threat to Australia. But leave it up to the politicos to think of something. The national interest can be defined in ever so many woolly ways, and that's where it's at right now. Like other foreign concerns taking a controlling interest in Aussie firms, SGX will need to gain clearance from regulatory agencies if it is to raise its stake in ASX over 15%. Moreover, Labor's coalition partners may not be as sanguine about the proposed deal as many in Julia Gillard's party even if Treasurer Tony Swan approves of the Singaporeans' proposed governance structure for the combined stock exchange. From the WSJ:

A political backlash threatens to derail the proposed $8.3 billion takeover of Australia's largest stock-market operator by Singapore Exchange Ltd. Key lawmakers signaled they may block the deal because it gives a foreign investor too much control of the Sydney-based exchange. Meanwhile, the president of Tokyo Stock Exchange Group Inc., which owns 4.99% of the Singapore exchange, criticized the deal. "As the second-biggest stakeholder in SGX, we are not happy that the move would cause big dilution to our holdings," Atsushi Saito said at a regular monthly news conference. The TSE's holding would be diluted to about 3.1%, he said

Politicians on both sides of Australia's Parliament questioned the takeover of ASX Ltd., which requires the approval of both the government and regulators to go ahead. Under Australian law, no single shareholder can own more than 15% of the ASX, and any regulation to lift that threshold must be considered in Parliament for 15 days.

Singapore "is a state that tramples all over freedom of speech, democracy, the rights of oppositions, the ability for public discourse," said Bob Brown, leader of the Greens party. "The proposal here is that effectively the Australian Stock Exchange in Sydney be subjugated to Singapore and we'll see it wither on the vine," he said. The support of the Greens party is crucial to Prime Minister Julia Gillard's minority Labor government.

Mr. Brown's concerns about the takeover, which could create Asia's fifth-largest market operator, were echoed by senior political figures, including the shadow treasurer for the opposition Liberal-National Party coalition, a clear sign the deal is becoming a political issue. "There will be concerns about our stock market being bought by a regional competitor, so it's essential the government explain how this is good for Australia," Joe Hockey, shadow treasury spokesman, said in a statement to Dow Jones Newswires.

The remarks from the opposition camp prompted Trade Minister Craig Emerson to call on lawmakers to take a step back and allow a "proper process" in which authorities make their assessment "free of this sort of political chicanery and posturing." Mr. Emerson, who will travel to Singapore next week on government business, said Australia must let the regulatory process take its course, allowing authorities to make their judgments "independently of interference by the political parties."

SGX has offered 22 Australian dollars (US$21.78) in cash and 3.743 SGX shares for each ASX share, valuing the company at A$48 a share, based on the closing price before the offer was announced. ASX shares closed down 7.4% Tuesday, weighed down by concern that a political backlash could derail the deal. J.P. Morgan Chase & Co. warned Tuesday in a note to investors that the deal risks becoming "a heavily politicized issue."

The chief executives of both ASX and SGX have said they want to break down national boundaries and form an Asian-Pacific powerhouse with more than 2,700 listed companies from about 20 countries. The exchanges already have started their campaign to woo regulators and politicians. Executives from ASX are due to meet with Mr. Hockey this week.

So there went my dreams of consolidation among bourses in the Asia-Pacific? It certainly put others on the alert that mega-exchanges like SGX + ASX might be able to woo IPOs with promises of greater market-making:

Hong Kong Exchanges & Clearing Ltd. Chairman Ronald Arculli acknowledged that the merger would pose a threat to Hong Kong's competitiveness for new listings. "All of us are out there competing," he said in a phone interview, but "there will be occasions when a company decides Australia and Singapore is the place for them."

Amid calls for close scrutiny of the deal, Australian Treasurer Wayne Swan told Parliament that the deal should also be viewed in terms of building "Australia's reputation as a financial-services hub." He also said that SGX's takeover will undergo intense regulatory scrutiny to ensure Australia's interests and the market integrity of ASX are preserved. "Regulators on both sides would need to look into any regulatory issues and be satisfied that the proposed transaction meets regulatory requirements in their jurisdiction," a spokeswoman for the Monetary Authority of Singapore said in a statement. The Financial Sector Development Fund, which is administered by the monetary authority, controls a 23% stake in SGX.

Even if the deal clears the regulatory hurdles, a closer inspection of the offer may prompt ASX shareholders to demand a higher price or even open the door to a rival bidder, analysts say. "Due to the structure of the deal, ASX shareholders are being asked to bear substantially more leverage—SGX/ASX will be the most-leveraged global exchange—as well as risk around delivery of synergies," Macquarie Research said.

The Australian government may struggle to convince some hard-liners such as independent lawmaker Bob Katter, who plans to present a motion in Parliament to oppose the takeover of the ASX by a foreign investor. "I do not wish to live in a country of serfs working for foreign landlords," he told Dow Jones Newswires.

Serfs working for foreign landlords...and non-white ones to boot, it goes without saying? It seems all too much for certain current coalition partners. Indeed, Labor may be better off banking on support from the Conservative opposition, but it's not a sure deal:

A cloud hangs over the deal in Australia's parliament, where a minority Labor government is relying on support from a handful of Green and independent lawmakers. The Greens and at least one independent are hostile to the deal, with one calling it "lunacy on a grand scale". Most of the concerns centre on foreign control of the Australian exchange, although the Greens also question Singapore's commitment to democracy and free speech...

If the Treasurer decides the deal does not damage national interests and agrees to lift the 15 percent shareholder cap, ruling Labor should in theory be able to clear any parliamentary hurdles with conservative opposition support. That assumes the opposition -- usually pro-business -- did not stand in the way of the merger. But the opposition could fuel nationalist sentiment on the deal to turn a political blowtorch on the government, which continues to struggle in opinion polls.

Prime Minister Julia Gillard's Labor and the conservatives both aim for Sydney to emerge as an Asia-Pacific financial centre, but will need persuading that a merged SGX-ASX would strengthen, rather than weaken, Australia's ambitions. The conservatives and the Greens combined would have the numbers to kill the deal.

This is one for Asia-Pacific watchers to follow.

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Ha-Joon Chang Bids Capital Controls Farewell

♠ Posted by Emmanuel in Development,IMF,Neoliberalism at 10/27/2010 12:02:00 AM

And so the death knell for Washington Consensus-style policies tolls even louder. While it's certainly debatable whether the excesses of liberalization, deregulation, and privatization helped bring about the current US-led subprime globalization mess, there are undeniable signs that laissez-faire has had its day as Gordon Brown once said. First, the architect of many such efforts stateside, the archetypal ugly American Larry Summers, is soon to exit the White House. Whether he went or was pushed is quite immaterial; the bigger point is that no one seems to be lamenting his demise. Second, current IMF leadership embodied by Dominique Strauss-Kahn is not so fond either of the Asian crisis-era Washington Consensus. Third, the IMF is even warming up to the use of capital controls--albeit in specific situations--which it once thought of as the work of the devil.

Welcome to the brave new world, then. As always, that champion of heterodox economics, Ha-Joon Chang, is heralding the demise of these once-fearsome policy prescriptions used to open up developing countries to the will of global capital (or something like that). Here he is together with Ilene Grabel of the University of Denver on why FDI still goes on irrespective of capital controls being implemented:

Was it really just a decade ago that the International Monetary Fund and investors howled when Malaysia imposed capital controls in response to the then looming Asian financial crisis? We ask because suddenly those times seem so distant. Today, the IMF is not just sitting on its hands as country after country resurrects capital controls, but is actually going so far as to promote their use [see third point above]. What about the investors whose freedoms are eclipsed by the new controls? Well, their enthusiasm for foreign lending and investing has not been damped in the least. So what is going on here? In our view, nothing short of the most significant transformation in global financial management of the past 30 years.

Like most transformations, this reform has been gradual. Reform in the IMF view of capital controls actually began soon after the Asian crisis, as countries such as Chile, China and India imposed controls. Most analysts found that these controls were beneficial in key respects. This success led the IMF to soften its hardline stance: it admitted that controls might be tolerable in exceptional cases provided that they were temporary, market friendly and focused strictly on capital inflows. That said, policymakers adopted capital controls at their peril – not least risking condemnation by the Fund and by credit rating agencies, and punishment by international investors.

What was just a trickle of controls before the current crisis is now a flood. Iceland led the way in 2008 as it grappled with its financial implosion. Soon after, a parade of developing countries took action: some strengthened existing controls while others introduced new measures that targeted inflows and outflows. For example, during the crisis China augmented its extensive array of controls, while Indonesia, Taiwan, Peru, Argentina, Ecuador, Ukraine, Russia and Venezuela also introduced controls of one sort or another. In October 2010 alone: Brazil twice raised its tax on foreign investment in fixed-income bonds while leaving foreign direct investment untaxed; Thailand introduced a 15 per cent withholding tax on capital gains and interest payments on foreign holdings of government and state-owned company bonds; and South Korean regulators have begun to audit lenders utilising foreign currency derivatives.

The IMF did not drive this process of reform, but its staff have adjusted their thinking quickly in response to the exigencies of the crisis. One of these is the unforeseen currency appreciation in many developing countries that is a consequence of capital flight from the dismal returns now on offer in wealthy countries [pace "international currency war"]. Many recent Fund reports make clear that capital controls are a legitimate part of the policy toolkit. Dominique Strauss-Kahn, the IMF’s managing director, said as much in his recent speech in Shanghai, while the director of the Fund’s western hemispheric department made a case (unsuccessfully) for the use of controls in Colombia in response to the rapid appreciation of its currency. Not your grandfather’s IMF, to be sure...

What was forgotten during the neo-liberal era is that many of these explicitly “anti-market” measures helped to promote rapid economic development by increasing financial stability. This is not to say that all controls were successful or that all measures taken to enforce them were appropriate. But that should not distract us from acknowledging their tremendous contributions to unprecedented economic growth and stability during the period.

Those of us who have long advocated systematic financial reform look at current developments with excitement. Countries need the latitude to impose capital controls that meet their particular needs, and it is a relief to see that they are finally getting it after a long period of debilitating neoliberal ideology.

Though I have my differences with Ha-Joon Chang, I certainly believe capital controls can and should be a matter of national policy space instead of being forbidden by IMF diktat, AKA conditionalities.

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A Brief History of Foreign Aid Levels, 1960-2010

♠ Posted by Emmanuel in Development at 10/26/2010 12:05:00 AM

My curiosity about regarding official development aid was piqued by a recent New York Times article profiling Dr. Rajiv Shah, the head of the US Agency for International Development (USAID). In recent years, USAID's stature within American policy circles has diminished somewhat, though it is supposedly in the ascendant once more given its closer ties nowadays to the State Department. Hopefully, USAID's efforts may become less politicized as well. That is, instead of aid being predicated on pet American causes as it's been in the past, it can move towards more impartial determinants of disbursing aid.

One of my more popular posts over the years is, appropriately enough, a summary of aid contributions in 2007 by Development Assistance Committee (DAC) members composed of several developing countries. Three years on, I though it's about time I visited the OECD site and figured out what's been happening ever since. As it turns out, there is a new OECD report discussing fifty years of development assistance from 1960 to 2010. Of course, final 2010 data is not yet available but only estimates. Still, the picture that emerges is not entirely satisfying for those of you who believe that aid should be constantly increasing and reach at least 0.7% of industrialized countries' annual gross national income (GNI). What you can immediately grasp from the image above [click for a larger image] are two: First, ODA has actually increased in inflation-adjusted terms--especially towards the end of the new millennium's first decade (blue LHS). Second, ODA has not, however, increased in line with increases in national income among DAC donors (green RHS). Currently, we are marginally above the 0.3% contribution level. Putting these two observations together, ODA as a percentage of these industrialized countries' GNI has been falling as of late.

At any rate, here is the OECD blurb:

From 1960 to 1990, official development assistance (ODA) flows from DAC countries to developing countries rose steadily. By contrast, total ODA as a percentage of DAC countries' combined gross national income (GNI) – a target to measure aid flows – fell between 1960 and 1970, and then oscillated between 0.27% and 0.36% for a little over twenty years.

Between 1993 and 1997, ODA flows fell by 16% in real terms due to fiscal consolidation in donor countries after the recession of the early 1990s. Aid then started to rise in real terms in 1998, but was still at its historic low as a share of GNI (0.22%) in 2001.

Since then, a series of high-profile international conferences have boosted ODA flows. In 2002, the International Conference on Financing for Development, held in Monterrey, Mexico, set firm targets for each donor and marked the upturn of ODA after a decade of decline. In 2005, donors made further commitments to increase their aid at the Gleneagles G8 and UN Millenium + 5 summits.

In 2005 and 2006, aid peaked due to exceptional debt relief operations for Iraq and Nigeria. Despite the recent financial crisis, ODA flows have continued to rise to 2009, and are expected to reach USD 126 billion in 2010, demonstrating how effective aid pledges can be when they are made on the basis of adequate resources and backed by strong political will.

There are also interesting individual donor profiles. And speaking of Iraq, checking the recipient profile of the United States in recent years reveals that the Cold War mentality is still very much alive. From giving large amounts of money to self-styled champions of freedom 'n' growth jibba-jabba so beloved by the Yankees like Zaire's Mobutu Sese Seko, today's beneficiaries are self-styled "tough on terror" American puppets like Hamid Karzai and...whatever sort of "head of government" they have in Iraq. I guess some things never change. Let's just say Rajiv Shah has his work cut out for him at USAID.

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Fareed Zakaria on Restoring the American Dream

♠ Posted by Emmanuel in Hegemony at 10/26/2010 12:03:00 AM

TIME-CNN has evidently hired former Newsweek editor Fareed Zakaria lock, stock, and barrel. Before, he already had his GPS programme on CNN. With Newsweek being sold for $1, he's evidently transferred his print commitments to TIME magazine as well. Not one to dwell with small topics like yours truly, he attempts to explain no less than how to restore the American Dream. You needn't ask me what I think of it as it's probably dead and gone. Indeed, the standard of living of the current generation of folks living in that subprime pastime paradise will, on current trends, be assuredly lower than that of their predecessors. Before getting to his article, I 'd also like to point out that he would have done better had he mentioned a host of other things I've covered in one way or another:

• No mention of reducing inequality that spreads benefits per increment of national income better;
• No mention of increasing very limited social mobility (the Horatio Alger part of the American dream or, more accurately, delusion);
• No mention of getting extraordinarily portly Americans to be fit, which is a more proactive way to control health care costs;
• No mention of how public policy can encourage beneficial apprenticeships instead of often-pointless college degrees as he alludes to which afford few job opportunities;

Ah well, enough of me. The essay is well worth reading if ever so optimistic. Here are his main suggestions:
-----------------------------------------------
What We Need to Do Now

Ultimately American jobs are created from the bottom up by companies, not from the top down by government fiat. But there are measures we can take that will encourage the process. Here are the key ones:

Shift from consumption to investment. Fundamentally, America needs to move from consumption to investment. Everyone agrees that the best way to create good jobs in the U.S. is to create new industries and companies and to innovate within old ones. This means large investments in research, technology and development. As a society, this needs to become our strongest focus. (See how the future of work is changing.)

Despite substantial increases and important new projects under the Obama Administration, the federal government is still not spending as much on R&D as a percentage of GDP as it did in the 1950s. I would argue that it should be spending twice that level, which would be 6% of GDP. In the 1950s, the U.S. had a huge manufacturing base that could absorb millions of semiskilled workers. Today, manufacturing is a small part of the economy and faces intense global competition. The only good jobs that will stay in the U.S. are jobs related to knowledge and innovation. Additionally, in the 1950s, America was the only research lab in town, accounting for the vast majority of global scientific spending. Today, countries around the world are entering the arena. Two weeks ago, South Korea — a country of just 50 million people! — announced plans to invest $35 billion in renewable-energy projects. We should pay for this with a 5% national sales tax — call it an American innovation tax — which would be partly offset by a small reduction in income taxes. This would have the twin benefits of tamping down consumption and yielding some additional funds. All the proceeds from the tax should be focused on future generations, because we need to invest massively in growth. (Comment on this story.)

The often overlooked aspect of investment is investment in people. America has been able to create the future in large measure because it has tapped into the energies and work of immigrants. It has managed to invest in human capital by taking smart, motivated people from around the globe, educating them in the planet's best higher-education system and then unleashing them in a dynamic economy. In this crucial realm, the U.S. is now disinvesting. After training the world's best and brightest — often at public expense — we don't find ways to make sure they stay here by giving them a green card but rather insist that they leave and take their knowledge to another country, where they will invent, inspire, build and pay taxes. Every year, we send tens of thousands of the smartest Indians and Chinese back home, which is a great investment — in the future of those countries.

Training and education. "Most jobs that will have good prospects in the future will be complicated," says Louis Gerstner, the former CEO of American Express and IBM. "They will involve being able to juggle data, symbols, computer programs in some way or the other, no matter what the task. To do this, workers will need to be educated and often retrained." We need more and better education at every level, especially job retraining. So far, most retraining efforts in the U.S. have not worked very well. But they have worked in countries that have been able to retain a manufacturing base, like Germany and parts of Northern Europe. There, some of the most successful programs are apprenticeships — which cover only 0.3% of the total U.S. workforce.

There are advantages to the U.S. system. We don't stream people too early in their lives, and we allow for more creative thinking. But the path to good jobs for the future is surely to expand apprenticeship programs substantially so industry can find the workers it needs. This would require a major initiative, a training triangle in which the government funds, the education system teaches and industry hires — though to have an effect, the program would have to be on the scale of the GI Bill.

Fiscal sanity. To pay for such initiatives, the government needs to get its house in order. The single most important aspect of this is getting health care costs under control, followed by other entitlement programs, especially pensions at the state level. Government today spends vast sums of money on current consumption — health care and pensions being a massive chunk of it — which leaves little money for anything else. We need a radical rebalancing of American government so it can free up resources to fund future growth. (Watch a video about being young and uninsured in America.)

Benchmark, benchmark, benchmark. There is now global competition for growth, which means the U.S. has to constantly ask itself what other countries are doing well and how it might adapt — looking, for example, at what other countries are doing with their corporate tax rates or their health care systems and asking why and where we fall short. Americans have long resisted such an approach, but if someone else is doing tax policy, tort litigation, health care or anything else better, we have to ask why.

There are things the U.S. does well. Most new jobs in America are created by start-ups and small companies, so the ease of doing business is crucial — and there's good news there. The World Bank has a ranking of countries measured by the "ease of doing business," and the U.S. is No. 4. That's very good, but there's a catch. Those rankings are divided into several categories. In most, like "starting a business," the U.S. does well. But in one category it's only 61st in the world, and that is "paying taxes." (See six year-end tax tips.)

The American tax code is a monstrosity, cumbersome and inefficient. It is 16,000 pages long and riddled with exemptions and loopholes, specific favors to special interests. As such, it represents the deep, institutionalized corruption at the heart of the American political process, in which it is now considered routine to buy a member of Congress's support for a particular, narrow provision that will be advantageous for your business.

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Currency Anarchy: Toshiba Prepares for ¥70 per $

♠ Posted by Emmanuel in Currencies,Japan at 10/25/2010 02:30:00 PM

Oh the humanity. An apparently ineffectual G-20 has not stemmed further gains in the Japanese yen as the US seems to have gotten its way by escaping censure over its intentions to helicopter drop dollars en masse over the coming weeks. Hence, the yen is ominously poised to breach the 80 yen to 1 US dollar handle and break the postwar mark of 79,75. As someone said before, it's nothing less than a call to arms.

Now, I don't believe the Japanese consumer electronics firm Toshiba needs any introduction to IPE Zone readers as its laptops and personal computing peripherals are well-known the world over. Having shifted a lot of manufacturing and assembly to other parts of Asia for cost reasons, it is now contemplating what would be tantamount to the United States launching an ICBM full of greenbacks in this international currency war aimed at the heart of the Land of the Rising Sun. While Toyota is resigned to the idea of preparing its next financial report at 80 yen to the dollar, Toshiba is getting ready for the yen strengthening to 70 to the dollar. My oh my, if "Project 70" isn't currency anarchy in motion I don't know what is:

Japanese electronics conglomerate Toshiba Corp is stepping up its expansion of overseas production and procurement to withstand a further rise in the yen as far as 70 to the dollar, its chief executive said on Monday. Toshiba conducted a stress test last October, dubbed "Project 70", that assumed an exchange rate of 70 yen to the dollar and became the basis for expanded efforts to counter the effects of the rising yen.

"People said the yen would never go to that level when we came up with this plan last October, but looking at the weakness of the dollar and the strength of the yen now, that may not be too far from reality," Toshiba CEO Norio Sasaki said at the Nikkei Global Management Forum in Tokyo. The dollar fell to a 15-year low against the yen on Monday, drawing closer to its postwar record low of 79.75 yen set in 1995 as traders took a weekend G20 statement as a green light for continued dollar weakness.

Yen strength has taken its toll on Japan's export-fuelled economy, with data on Monday showing export growth slowed for a seventh consecutive month while policymakers struggle to keep the fragile economic recovery intact. Sasaki said Toshiba's measures, which also include expanding strong businesses and shrinking money-losing operations, have been paying off and now the company's operating profit actually rises by 700 million yen ($8.6 million) for each 1 yen gain in the Japanese currency's value against the dollar.

Like for most Japanese exporters, the strong yen has eaten into profits reported after conversion since the multiplier value keeps going down:

Yen strength against the dollar used to cut into Toshiba's profit. He added, however, that the euro was a "different story". Strength in the yen generally hurts the competitiveness of Toshiba, the world's No. 2 maker of NAND-type memory chips used widely in cellphones and consumer electronics, as its rival Samsung Electronics Co enjoys the benefits of a relatively weak won. "We have the currency issues and other disadvantages including a high corporate tax," Sasaki said. "What we can try to do is to stay ahead with advanced technology while lessening the impacts (of these disadvantages)."

The dollar has fallen steadily across the board, including against the yen where the threat of intervention by Japanese authorities has slowed but not halted the slide, as the market anticipates a second round of quantitative easing from the Federal Reserve.

At the rate those Yanks will be dropping greenbacks, dare we say "Project 60" is on the cards? OTOH, you can argue that those of us in surrounding Asian countries are indirect beneficiaries as we become more enmeshed in "Factory Asia" when firms like Toshiba relocate activities abroad to cope with the mighty yen. Then again neither are we immune to a dropping US dollar...

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Are IMF Reforms Favouring LDCs Truly 'Historic'?

♠ Posted by Emmanuel in Governance,IMF at 10/25/2010 12:06:00 AM

So it has finally been agreed upon: In addition to the much-ballyhooed ceasefire of sorts on the international currency war front [1, 2], G-20 participants at the recently concluded finance ministers meeting in Gyeongju, South Korea also finalized plans to reallocate Executive Board seats and thus contributions to the International Monetary Fund. In effect, European countries that were prominent in the postwar world will vacate two seats at the IMF's Executive Board that developing countries will now occupy. The IMF write-up summarizes these changes and how it believes its legitimacy will be enhanced by virtue of representing more voices from the developing world that are undeniably gaining clout in the world economy:

Ministers of the Group of Twenty (G-20) industrialized and emerging market economies agreed on a proposed raft of reforms of the IMF that will shift country representation at the IMF toward large, dynamic emerging market and developing countries.

Meeting in Gyeongju, Korea, G-20 finance ministers and central bank governors agreed on a doubling of IMF members’ quotas—financial stakes that determine voting power in the institution—that will shift voting shares toward dynamic emerging market and developing countries. As a result of the quota rebalancing, the large, dynamic emerging market countries Brazil, China, India, and Russia move up to be among the top 10 shareholders of the IMF.

The ministers also agreed on a reshuffle of the IMF’s 24-member Executive Board that will raise the representation of dynamic emerging market and developing countries on the institution’s day-to-day decision-making body. There will be two fewer Board members from advanced European countries, and all Executive Directors will be elected rather than appointed as they are now. The size of the Board will remain at 24.

IMF Managing Director Dominique Strauss-Kahn, speaking to reporters after attending the Gyeongju meeting, said the move was “historic” and the most important decision on the governance of the IMF since its creation in 1944. “There will be other reforms, but what we did today puts an end to a discussion on legitimacy that had lasted for years, almost decades."

The Gyeongju ministerial meeting was held to prepare the agenda for the full summit of G-20 heads of state and government in Seoul, Korea, on November 11. The agreement reached at Gyeongju still has to be approved by the IMF’s Board. The target date for completion of the changes to IMF governance is the IMF-World Bank Annual Meetings in October 2012.

At their summit in Pittsburgh, United States in September 2009, G-20 leaders provided political support for a shift in country representation at the IMF. Leaders backed “a shift in quota share to dynamic emerging market and developing countries of at least 5 percent from over-represented to under-represented countries using the current quota formula as the basis to work from.” The leaders also stressed their commitment to protect the voting share of the poorest in the IMF. Currently, there is roughly a 60/40 percent split in the shares at the IMF between advanced countries and emerging market and developing countries.

While the Pittsburgh summit targeted a quota shifts of 5 percent from advanced countries to dynamic emerging market and developing countries and from over- to underrepresented countries, the Gyeongju deal achieves a shift of more than 6 percent in both cases.

The IMF head honcho is saying that his expectations were thus surpassed by what was achieved over the weekend:

Strauss-Kahn said the decision on IMF governance had responded to the mandate given in Pittsburgh in a way that exceeded expectations. "The 10 biggest shareholders in the IMF are those who deserve to be in the top 10 as they are the 10 most systemically important countries in the global economy," Strauss-Kahn stated. He also said the IMF’s Executive Board would be a "more democratic Board as will be an all-elected Board".

It's a welcome move, but shifting two seats out of 24 may better be portrayed as a gradual shift than an earth-moving, historic event. As always, I am keener on observing the follow-through. Should developing countries gain an even larger share of world economic activity, then there should be an even more pronounced shift in the membership of the Executive Board forthcoming. Moreover, it certainly would be nice if the IMF managing director were elected rather than appointed by a group of European countries as has been the convention at the IMF since its inception. With the Socialist Dominique Strauss-Kahn being ahead of Nicolas Sarkozy in the polls, DSK coming home to contest French elections in 2012 may be the first opportunity to see if this club has truly changed when matters come around to choosing the next IMF chief.

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G-20 Cops Out on Currencies, CA Balances

♠ Posted by Emmanuel in Currencies,G-20 at 10/23/2010 01:31:00 PM

Continuing from the previous post, there has been some lip service paid to what must be done about "international currency war" and global economic imbalances in the G-20 communique. For the former, currencies have been mentioned for the first time, though chronic surplus-running countries have repeated my point that helicopter dropping paper money alike what's being done by a certain North American country is indeed tantamount to declaring currency war. For the latter, there were no numerical percentage targets given to running a current account deficit or surplus as suggested by US Treasury Secretary Tim Geithner (plus/minus 4%). Supposedly, they're to be investigated and discussed further, but there's no definitive timetable. In other words, it's been left alone for now. As for using the IMF for beefed up macroeconomic surveillance, that unsurprisingly went untouched.

So, it's likely same old, same old. Continue as you were--America certainly appears to have no intention of laying up on "quantitative easing," while chronic surplus-running countries take it as a reason not to take US overtures seriously. Market News International offers a thoughtful analysis on what happened at the gathering. Recession in the heartland of subprime has actually reduced the US external deficit to below 4%, making China and Germany the main parties in American crosshairs with such a figure. Unsurprisingly, neither are very happy about it:

As expected, the G20's final communique did pledge to move towards market-determined exchange rates, to avoid competitive devaluations, and to use "the full range of policies conducive to reducing excessive imbalances and maintaining current account imbalances at sustainable levels." But the group failed to agree on any concrete plan for reducing global imbalances and prevent growing unilateralism from harming the world economic recovery.

A U.S. proposal to set numerical limits on current account balances was shunted to the International Monetary Fund for further study, leaving the G20 delegates saying that "indicative guidelines to be agreed" would provide a framework for addressing global imbalances at some indeterminate point in the future.

The woolly nature of the communique, and the at times confrontational briefings held by G20 delegates following its publication, left the impression that the world's major advanced and emerging market economies failed to make any real progress in arriving at an agreement that will meaningfully tackle imbalances.

Financial Stability Board Chairman Mario Draghi said that U.S. Treasury Secretary Timothy Geithner's proposal, which would seek to limit current account surpluses and deficits to 4% of GDP by 2015, is "on the table" and deserves "close attention, consideration and discussion." Instead of that proposal, the final communique saw the G20 asking the IMF to study the causes of large imbalances and the range of policies needed to correct them.

In any case, the "indicative guidelines" won't be ready by the time G20 leaders meet for the summit meeting in Seoul in November, Japanese Finance Minister Yoshihiko Noda said, without indicating when they would be ready. While it all might have sounded like passing of the buck, most officials here have not hesitated to talk up the level of cooperation and agreement reached during these recent days of talks.

But German Economic Minister Rainer Bruederle, in the best blunt German fashion, provided some corrective to the very public cordiality on display here when he lashed out Saturday at both the proposed fresh round of quantitative easing by the U.S. Federal Reserve and Geithner imbalance proposal.

While Fed Chairman Ben Bernanke has said that such a move would be motivated by fears of a fresh U.S. recession, "I have tried to make clear in my contribution that I think this is the wrong way," Bruederle told reporters.

Moreover, the Fed's policy belied the U.S. charge that some emerging countries were manipulating their currencies, he argued. "An excessive increase in (the quantity of) money to me represents indirect manipulation" of the exchange rate toward a weaker dollar, he charged, arguing that major emerging countries shared this view. "This was also the criticism of the BRIC states (Brazil, Russia, India and China), he continued. "They say that (the United States is) also manipulating exchange rates because (it is) pumping so much liquidity (into the markets)."

Bruederle also said that Geithner's proposal to cut imbalances smacked of "planned economic thinking." The IMF is forecasting Germany's current account surplus to rise to 6.055% of GDP this year from 4.890% last year before shrinking to 3.884% by 2015. Speaking later, U.S. Treasury Secretary Timothy Geithner claimed that he hadn't heard Bruederle's comments. Although he wouldn't comment directly, he did reaffirm the U.S. government's support for a strong U.S. dollar. "We recognize our responsibility for financial stability that comes with the dollar," he said.

But Germany's wasn't the only opposition to the Geithner plan. As early as late Friday, Noda noted the level of caution -- if not outright opposition -- among G20 countries to the Geithner proposal. Noda was more diplomatic about the Geithner proposal than his German colleague, but also noted that Japan's current account surplus as a percentage of GDP stood at 2.8% last year "and is likely to stay well within the range through 2015." He said Friday that the current account balance is a useful reference point for measuring imbalances, but also argued that various factors affect current account flows and that the causes of surpluses and deficits vary from country to country.

One mystery of the Korea meetings was the position of China, now set to replace Japan as the world's second-largest economy. Chinese officials were out in force, but weren't talking to the media and, apparently, weren't doing much talking to their fellow delegates either.

An official Xinhua News Agency report filed in the hours after the G20 meetings said that Geithner's proposal was "met with negative sentiment...There was doubt across the board about Geithner's proposal. China, Russia, Germany and Saudi Arabia's trade surpluses are way above Geithner's proposed limit, while the U.S.'s trade deficit stands at 3% of GDP," it said, suggesting that the Xinhua reporters had been briefed by otherwise inaccessible Chinese government representatives.

Geithner told reporters after the release of the communique that "China has played a constructive pragmatic role and is very supportive of finding a multilateral framework." But Noda said late Friday that China hadn't made its position on the proposals clear, and there was no indication of any more clarity by the end of the talks on Saturday.

(The Chinese at least did better than the Brazilians, whose central bank governor Henrique Meirelles and Finance Minister Guido Mantega -- who bears responsibility for being the first to publicly label the current situation a global "currency war" -- didn't even show up at the G20 meeting. They sent their deputies.)

Still, the Chinese may just have been letting the advanced countries argue among themselves to sideline the Geithner plan. The IMF is forecasting China's current account surplus as a percentage of GDP to fall to 4.697% this year from 5.96% in 2009, and then to gradually rise over the following years to 7.796% by 2015, which would make China one of the biggest targets if something like the Geithner plan were ever agreed.

The current account surplus lies at the heart of a sharp disagreement between the Chinese government and the IMF, and specifically the fund's assertion that the surplus points to a "substantially undervalued" yuan. Beijing argues that the IMF's assessment is flawed in that the current account surplus has been falling and, according to its forecasts, will continue to do so.

There are interesting details in the proposal like natural resource exporters Russia and Saudi Arabia being given more leeway in running external surpluses. The absence of Brazilian finance bigwigs is noteworthy, too. As ever, though, we seem to return to the G-2:

As with previous meetings of this nature, there was also little progress on the row over currencies and currency intervention. Bruederle may have attacked the U.S.' "indirect manipulation," but there was little public comment on China's very direct manipulation of the yuan. Many believe it's a primary cause of global imbalances and Geithner believes it is prompting other countries to intervene in foreign exchange markets to hold down the value of their currencies.

The G20 communique included a vow to "move towards more market determined exchange rate systems that reflect underlying economic fundamentals and refrain from competitive devaluation of currencies." But the statement also bears the hallmarks of the Chinese leadership, with a pledge by the advanced economies -- particularly those of reserve currencies (ie. the U.S. dollar, euro and yen) -- to "be vigilant against excess volatility and disorderly movements in exchange rates."

It's not a question of China sharply appreciating the yuan, Beijing argues, but of the U.S. stabilizing, rather than debasing, the dollar and getting its own house in order. That's an argument that Washington and Beijing have been having for several years now. The Chinese argument appeared to at least hold its own -- if not win more converts -- at this weekend's G20.

The cooperation which marked the world's response to the global financial crisis has all but evaporated in favor of a very public row among the world's major economies which sounds much like the one that the U.S. and China have been having for all these years. And the G20 talks which just ended here leave the impression that row is set to continue, perhaps for some time.

To be continued when the leaders meet next month in South Korea. Certainly, there is much that's been left unresolved despite the lip service.

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Today's US G-20 Gimmick: Geithner on CA Limits

♠ Posted by Emmanuel in Currencies,G-20 at 10/22/2010 07:42:00 PM

Here's more from the white man & forked tongue department: Perhaps unsurprisingly, the Yanks are first out of the chute prior to this weekend's G-20 gathering in South Korea with yet another plan to get its way. Instead of focusing on undervalued currencies--which it in any case is wont to let go of as you'll soon see in the second paragraph below--their latest tack is calling for limits on the external imbalances participating states can run (got that, China?) There's also a continuation here of the longstanding call to use the IMF as a tool to beat other countries into submission via enhanced surveillance that, surprise, developing countries are not particularly keen on. Aside from having limited participation because of limited IMF reform of voting rights, where's the joy in giving the America a multilateral stick to bash your head with over "currency manipulation"?

At any rate, here is the text of the letter Geithner sent to other G20 member economies in its entirety since it's relatively brief:

First, G20 countries should commit to undertake policies consistent with reducing external imbalances below a specified share of GDP over the next few years, recognizing that some exceptions may be required for countries that are structurally large exporters of raw materials. This means that G20 countries running persistent deficits should boost national savings by adopting credible medium-term fiscal targets consistent with sustainable debt levels and by strengthening export performance. Conversely, G20 countries with persistent surpluses should undertake structural, fiscal and exchange rate policies to boost domestic sources of growth and support global demand. Since our current account balances depend on our own policy choices as well as on the policies pursued by other G20 countries, these commitments require a cooperative effort.

Second, to facilitate the orderly rebalancing of global demand, G20 countries should commit to refrain from exchange rate policies designed to achieve competitive advantage by either weakening their currency or preventing the appreciation of an undervalued currency. G20 emerging market countries with significantly undervalued currencies and adequate precautionary reserves need to allow their exchange rates to adjust fully over time to levels consistent with economic fundamentals. G20 advanced countries will work to ensure against excessive volatility and disorderly movement in exchange rates. Together these actions should reduce the risk of excessive volatility in capital flows for emerging economies that have flexible exchange rates.

Third, the G20 should call on the IMF to assume a special role in monitoring progress on our commitments. The IMF should publish a semiannual report assessing G20 countries progress toward the agreed objectives on external sustainability and the consistency of countries' exchange rate, capital account, structural, and fiscal policies toward meeting those objectives.

With progress on these fronts, we should reach final agreement in an ambitious package of reforms to strengthen the IMF's financial resources and its financial tools, and to reform the governance structure to increase the voice and representation of dynamic emerging economies.

I obviously don't think this will work. I needn't go into why the US is the biggest currency manipulator of them all since no one else in the G-20 is running a fiscal deficit as big as America, clogging its central bank's balance sheet with junk assets with similar gusto, or has interest rate targets in a range including zero. As for using the IMF to police currency manipulation and other dastardly deeds, forget it. Even LDCs competing with China in export markets will not agree to equipping the IMF with powers to do America's dirty work for it.

Apparently, this characteristic Yankee double talk is not being received very well by most of the others:

Group of 20 finance chiefs conclude talks today with the U.S. running into resistance as it pushes targets for current account imbalances as a new way of prodding China and other Asian nations to let their currencies rise...

“Setting numerical targets would be unrealistic,” said Japanese Finance Minister Yoshihiko Noda, while German Economy Minister Rainer Bruederle rejected a “command economy” approach. Indian Finance Minister Pranab Mukherjee said caps would be hard to quantify. In interviews with Bloomberg Television, Canadian Finance Minister Jim Flaherty said the idea was a “step in the right direction” and Australian Treasurer Wayne Swan called it “constructive.”

By turning the focus to current accounts away from currencies, Geithner is hoping China will be more agreeable to accelerating the yuan’s appreciation after limiting its gain to about 2 percent against the dollar since June... The U.S. recommended deficits or surpluses of no more than 4 percent of gross domestic product, Noda said. The International Monetary Fund this month estimated China’s surplus will swell to 7.8 percent of GDP in 2015 from 4.7 percent this year. A current account is the broadest measure of trade because it includes investment and transfer income and it would be hard to achieve any correction in one without a currency shifting...

The G-20 officials are trying to end what Brazilian Finance Minister Guido Mantega calls a “currency war” as next month’s Seoul summit of leaders nears. China’s restraining of the yuan even as it runs a trade surplus and builds currency reserves has been attacked for distorting markets as has the recent slide of the dollar as the Federal Reserve shifts toward easier monetary policy.

Nations caught in the middle such as Brazil and South Korea are embracing capital controls or intervening themselves to stay competitive with China and limit inflows of speculative cash from North America and Europe. This has raised concern from policy makers and investors that the friction will spark a round of devaluations and retaliatory protectionism, derailing an already fragile global economic recovery.

“If we fail to reach an agreement now and delay it to next time, the global economy will face a serious risk and it will unnerve people,” South Korean President Lee Myung Bak told the meeting. The G-20 has long sought ways to rebalance the world economy away from its reliance on excess U.S. demand and Chinese savings. Limiting those talks to foreign exchange is too inflexible for nations with trade surpluses, a South Korean official said. Looking at the current account allows countries to decide on which tools to adopt to reduce imbalances, including currency changes, he said...

The G-20 policy makers are also debating whether to make their first joint comment on currencies since their leaders began meeting in 2008, having previously resisted remarks for fear of alienating China. A draft statement included a pledge to avoid “competitive undervaluation” of exchange rates. The final text is scheduled for release at about 5 p.m. local time.

It should be interesting at least. As the World Bank has noted, the trail of international currency war begins with the United States. To stop the rot, the world needs to clamp down more on America than America needs to clamp down on the world.

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Asian Economic Integration, Meet the 'Anti-Region'

♠ Posted by Emmanuel in China,Japan,Southeast Asia at 10/22/2010 12:01:00 AM

Yesterday evening, we at LSE IDEAS hosted an event titled "Contesting East Asian Economic Integration: China, Japan, US" featuring two of the UK's foremost authorities on the subject matter in Shaun Breslin of the University of Warwick and Christopher Dent of the University of Leeds. Those with an interest in regions or regionalization--particularly in the Asia-Pacific--should find both names exceedingly familiar. As I was the speaker introducing the topic at this roundtable presentation, I set the table with the presentation slides above. (The content of PowerPoints above are much updated from the lecture slides I uploaded earlier.) Understandably, free trade agreements are always coloured by political considerations--whom to include, what goods and services to include, and so forth.

As such, various countries tout their own preferred groupings--including the world's three largest economies. China wants to stick with ASEAN+3 or the ten ASEAN countries plus China, Japan and South Korea. Japan, wary of increasing Chinese regional influence--perhaps especially now that the PRC has overtaken it as the world's third largest economy--is keener on ASEAN+6, or ASEAN+3 plus India, Australia, and New Zealand. More recently, the East Asia Summit upon which a putative ASEAN+6 (or East Asian Community) would be based recently invited Russia and the US, further complicating matters. After all, Russia isn't even a WTO member. Also, can you imagine the US and Myanmar being in a free trade agreement? Finally, the United States is still pushing for a regional grouping built upon the Asia Pacific Economic Cooperation (APEC). At present, there is an existing FTA called the Trans-Pacific Partnership (TPP) among Brunei, Singapore, Chile, and New Zealand that does boggle the mind as to the 'Asianness' of it all. Still, the US is exploring possibilities for joining the TPP and creating momentum for a 'bandwagon' effect. Not only would it include itself in regional integration despite obviously being outside of Asia proper, but it would also make TPP the more likely wider FTA.

Shaun Breslin countered my suggestion that China, Japan, and the US were seeking their own visions of economic integration by explaining that Japan and the US were likely pursuing a strategy of 'anti-region.' That is, the purpose of championing an East Asian Community for Japan wasn't really to counterbalance the presence of China in a regional grouping, but to forestall the far more likely formation of an ASEAN+3. For Japan, it may indeed be the case that the status quo of having no broader regionalism effort suits it better. With more countries being invited at Japan's behest to the East Asia Summit, it becomes progressively more difficult to obtain consensus on a pan-regional FTA. To some extent, the Trans-Pacific Partnership is yet another instance of an unlikely FTA whose main purpose is not constructive but diversionary. (For instance, ASEAN members Brunei and Singapore are founding TPP members, while Vietnam is seeking to join--but what about the rest?)

Meanwhile, the objectives for China in pursuing regional integration according to him are threefold:

1. To neutralize America's geostrategic hold over East Asia by means of growing trade ties with nation-states in the region;
2. To undermine Japan's regional stature in relation to China; and
3. To continue Taiwan's status as a non-country despite its obvious economic heft.

Though it's a bit too complex to explain here and I suggest reading Professor Breslin's recent Review of International Studies paper to get a fix on the concept, he draws on the work of Walter Mattli to ultimately argue that there is a deliberate oversupply of regions being proposed by the Japanese and Americans to delay the seeming inevitability of ASEAN+3. Provocatively, he suggests that China's 'Monroe Doctrine' moment when China declares East Asia as its sphere of influence may be at hand.

Christopher Dent also had interesting things to say about this regional competition. For him, regions are in a constant state of flux where power essentially resides in those who are able to determine membership in a particular region and make it stick. (For instance, previous centuries of European hegemony mean that the 'Middle East' and 'Far East' make sense--if your location was in Western Europe.)

Moreover, he believes that many of us who study regions neglect to mention that FTAs can be very dissimilar. Given that all of them are custom-made or bespoke as it were, they vary greatly in terms of what falls under their remit as well as how various participants' areas of comparative advantage are treated. For obvious reasons, media content-heavy America will always insist on strong intellectual property rights protection and access to others' markets for services.

As for the likelihood of regions, all three of us agree that ASEAN+3 is most likely to come to fruition--there is no doubt about that given its more compact membership (read: less rival interests to sort out) and already-existing Asian Development Bank-based initiatives. Still, Professor Dent believes that there can be a multiplicity of regional arrangements coexisting at the same time covering ever-so-slightly different facets of economic interaction. At the same time, while ASEAN+3 and the East Asian Community may stand some chance of coexisting, the prospects for an expanded Trans-Pacific Partnership are remote to him. For, prospective TPP member Vietnam is very unlikely to adduce trade and environmental standards as per the preferences of more trade-phobic Democratic lawmakers who've inserted such conditions into recent US FTA proposals.

All in all, it was a highly informative and at times entertaining event. We will soon upload a video interview of Shaun Breslin so that will be something to look forward to as well. In the meantime, we'll continue to monitor the rather exciting if sometimes confusing proliferation of FTAs in the Asia-Pacific. I hope the material included above helps makes sense of it all.

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Chile, From Rescuing Miners to Rescuing the US$

♠ Posted by Emmanuel in Currencies,Latin America at 10/21/2010 12:22:00 AM

This week, the Chilean President Sebastian Pinera Echenique did his victory lap here at the LSE after the successful and heartwarming rescue of the stranded miners. Again, do bear with me as I wasn't able to attend that event since LSE IDEAS' own Niall Ferguson was presenting at the same time. However, you can of course listen to President Pinera's presentation via video and podcast which you can follow through the link above.

And speaking of Chile, we turn to the more nitty-gritty, nasty business of protecting oneself from serial dollar bombardment from the US. Almost exactly a month ago, I discussed the many different countries keen on keeping the value of their currency reasonable howsoever defined by--how do I phrase this--actively participating in the currency markets. With undimmed prospects for American-led international currency war, even the in recent years passive Chile is keen on putting the brakes on the US-led jihad on fiscal sanity. Simply put, a mighty Chilean peso is not on the cards for them. Fancy that; all sorts of pesos are becoming hot property throughout Latin America after it being a term of abuse for permanently devaluing currencies during the seventies through the nineties:

Chile may take new measures as soon as this week to control its sharply appreciating currency, which has tested the Andean country's hands-off approach to markets as it aims to become a regional financial hub. Countries from Thailand to Peru have taken steps to curb their strengthening currencies as investors chase high interest rates provided by fast-growing emerging economies.

Chile Finance Minister Felipe Larrain warned, "We may have something to say this week" as the country studies "alternatives" for controlling the peso. The peso has strengthened more than 12 percent against the dollar since the end of June. But the country has held off so far on buying dollars in the local foreign exchange market, like Colombia, or raising taxes on foreign investment in local assets, as Brazil has done twice since the beginning of October.

As its peso hovers around 485 per U.S. dollar, near 28-month highs, here are some of Chile's options: One likely approach would be to offset incoming investment with increased capital outflows. President Sebastian Pinera, a billionaire businessman, said this week in London that he is not planning capital controls, and he would like to stem the peso's appreciation by encouraging more Chilean investment abroad.

Last month Peru raised the amount of assets that pension funds can hold overseas in an effort to increase dollar demand and lessen the pressure placed on its currency by capital inflows.

Actively purchasing US dollars, imposing capital controls, promoting outward portfolio investment, raising taxes on FDI...the list of potential countermeasures goes on and on. After rescuing miners, Chile finds itself in the odd position of, well, saving the US dollar.

UPDATE: Can streamlining customs procedures for exporters help offset a stronger peso? It's one measure you can try, but still...

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World Bank: US Started World Currency War

♠ Posted by Emmanuel in Bretton Woods Twins,Currencies at 10/20/2010 12:10:00 AM

Well, in so many words. As you know, I needn't be convinced who the aggressors are in "international currency war" [1, 2, 3] as the American game plan of further bulking up its central bank's balance sheet with junk assets purchased through debased currency are well-known. What I didn't expect, however, is that World Bank research would come to the same conclusion:

Inflows of capital are posing a growing risk to East Asian macro-economic stability, according to the World Bank’s half-yearly review of regional trends. The report comes amid concern in Asia that a likely fresh round of US Federal Reserve quantitative easing, dubbed “QE2”, will unleash a destablising wash of funds into the region.

Capital flows driven by easy monetary policies, low yields in advanced nations and confidence in East Asian prospects were helping to drive up asset valuations in some countries, “precipitating fears of a new bubble”, the World Bank said in its East Asia and Pacific Economic Update.

The report highlighted a rapid increase in equity prices as sparking memories of the market turmoil caused by Asia’s financial crisis in the late 1990s. “The authorities in East Asia need to take adequate precautions to ensure that they do not repeat the same mistake twice in slightly over a decade,” the report said.

Vikram Nehru, World Bank chief economist for East Asia and the Pacific, said the most immediate policy option for countries in the region would be to push forward with “unwinding” monetary easing policies adopted during the global downturn. “If these flows were to continue and to pose a threat, as we expect they probably will, then a…further tightening of the monetary stance will probably be appropriate,” Mr Nehru said.

So China has indeed tightened today, presciently enough. However, there is still reason to be wary that Asian countries may be cannon fodder for Yankee helicopter pilots dropping dollars like there's no tomorrow (which, as far as America goes, is a pretty accurate assessment IMHO). The report quoted above is from the East Asia and Pacific Update released just today. Here is the key part on the helicopter dropping leaving countries in the region vulnerable from dollarized aerial assaults. From p. 5:

The return of large capital inflows to the region, combined with rising inflationary pressures and climbing asset prices, presents an emerging policy challenge and a growing risk to macroeconomic stability. The large increase in inflows, driven by abundant global liquidity and low yields in advanced countries [I wonder who that may be], and reflective of foreign investor's confidence in East Asia’s growth prospects, has been mainly responsible for a substantial appreciation of exchange rates, despite sustained exchange market interventions by central banks. The surge in inflows, combined with ample domestic liquidity and rising confidence, has boosted equity and real estate prices in some countries. Most monetary authorities have refrained thus far from introducing new capital controls although some have liberalized rules for resident investment abroad. But should inflows remain strong, especially against a background of weak global growth, the authorities will be faced with the challenge of balancing the need for robust capital inflows (especially foreign direct investment) with ensuring competitiveness, financial sector stability, and low inflation.

So the World Bank is still wary about capital controls, but does mention that it's a path countries may take in trying to ward off dollar emissions. Best of luck, but the real key IMHO is for the rest of us to get together and put America in its place. Meanwhile, watch the skies. When will we finally get fed up with such abusive Yankee behaviour that involves externalizing homegrown woes?

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Building the New Silk Road Leads to Tehran

♠ Posted by Emmanuel in China,Middle East,Trade at 10/19/2010 03:35:00 PM

Having attended an interesting [to say the least] conference on multiculturalism in Tehran over the summer, I of course took notice of another event going on there concerning the rebuilding the New Silk Road. Since it doesn't look too exciting, the Western press has not paid much attention to a gathering ostensibly concerned with customs regulations, but its implications may be far-ranging indeed in the near future. For, another post I made spoke of the Chinese spearheading this effort to establish a New Silk Road by relinking the Silk Road via their high-speed rail technology. The reasons for doing so are obvious. In contrast to naval routes that are under the watch of the US Navy, overland ones are not as susceptible to Western machinations and intervention as has been the case for several centuries now. Also, the Chinese are keen on infrastructure being the springboard to economic development as evidenced by their own emphasis on ports, highways, and so on linking Chinese production to the world's markets.

So, having literally conquered Western markets with merchandise exports, the wily Chinese are setting their sights on the trading routes of yore. Also, the Turks warming up the Iranians cannot be viewed very positively by the West. Colleagues here at LSE IDEAS are even planning an event on how the West lost Turkey [!] should it tilt further away from the NATO sphere. With the EU treating Turkey with what I regard as barely concealed prejudice in its application for EU membership [1, 2], the message of "you're not of us" is unmistakeable. I further understand that Turkey is not very happy with the US client state Israel. Perhaps its current feeling is that its near neighbours won't treat them with similar contempt:

[The] Turkish Minister joins international forum on silk road in Iran Yazici attended the international forum in Tehran, Iran, on role of customs administrations in development of trade among Silk Road countries. Turkish State Minister Hayati Yazici said that Silk Road countries carried out nearly 25 percent of the world trade, and highlighted historical and cultural importance of the Silk Road. Yazici attended the international forum in Tehran, Iran, on role of customs administrations in development of trade among Silk Road countries.

Representatives from 18 countries including Turkey, Afghanistan, Azerbaijan, Georgia, Iraq, Japan, Kazakhstan Kyrgyzstan, Mongolia, Russia, Pakistan, Saudi Arabia, South Korea, China, Ukraine, Vietnam and Turkmenistan were also in attendance at the two-day gathering.

Speaking at the forum, Yazici said, "the Silk road includes the main transportation corridor connecting the continents of Asia and Europe. The Silk Road is of great historical and cultural importance. The Silk Road countries carry out nearly 25 percent of the world trade."

"International trade has a key importance for sustainable economic development. It is one of the most important elements increasing the level of prosperity in the world. International trade also makes significant contribution to efforts to reduce poverty and create a more stable and secure world. After globalization gained momentum, international trade made a great progress. And it saw an average annual increase of 9 percent in the last decade. On the other hand, foreign trade volume by the Silk Road countries reached an annual increase rate of 15 percent in the same period," he said.

"Recent development of information and communication technologies led to an important progress in transportation and logistics. All those developments entailed customs administrations to improve themselves. Development of regional trade will have a positive impact on the level of prosperity. It will also improve good neighborly relations and consolidate regional stability. If we manage to ease customs proceedings in the Silk Road geography, we will serve prosperity and stability in our region," he said.

Yazici added, "Turkey has launched several projects for use of border crossings with the neighboring countries in the Silk road geography. These projects aims at easing customs proceedings."

It's a modest beginning on fairly technical aspects of trade facilitation, but South-South trade certainly has room to grow. The Rest getting it together without the West? It's a start.

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Why Merkel Fails Multiculturalism, Not Vice-Versa

♠ Posted by Emmanuel in Europe,Multiculturalism,Religion at 10/19/2010 02:52:00 PM

It's interesting times in Germany-outwardly one of the most insular EU countries when it comes to discussions of multiculturalism. There is, of course, the still-unresolved matter of the French and Germans blocking several chapters for Turkish accession to the EU. (As a champion of Turkish EU membership, I even placed a clip of "Everyone's a Little Bit Racist" from the hit musical Avenue Q.) Now, we have an even more vehement statement of cultural insularity care of Chancellor Angela Merkel. Addressing the youth wing of the CDU, she avers that "multiculturalism has failed." This, of course, is partially aimed at the large Turkish minority in Germany who came as gastarbeiter (guest workers) but never left:

In a speech to supporters, Chancellor Angela Merkel said multiculturalism in Germany has not been successful. Party leaders also sparred over immigrants' role in filling the country's shortage of skilled workers. Attempts to build a multicultural society in Germany have "utterly failed," according to Chancellor Angela Merkel.

"This approach has failed, utterly failed," said Merkel, head of the Christian Democratic Union (CDU), in a speech to the party's young people's association in Potsdam on Saturday. She added that not enough was done in the past to support the movement. "The failures of the last 30 or 40 years cannot be resolved so quickly," she said.

The comments followed a similar speech from Horst Seehofer, head of the CDU's Bavarian sister party the CSU. On Friday he declared his party's stance against multiculturalism: "Multiculturalism is dead," he said, to delegates' applause. Seehofer's comments were criticized by Stephan Kramer, the general secretary of the Central Council of Jews. In an interview with the Rheinpfalz am Sonntag newspaper, he said the idea that immigrants from Turkey as well as Arab countries found it harder to integrate was "not just tactless, but downright irresponsible."

There are two components to this version of multiculturalism. The one dealing with those living in Germany having to speak German is common sense and can fit within a concept of multiculturalism for the obvious reason that socioeconomic interaction would be difficult outside of diaspora communities. However, overtures to making Christianity the standard religion are very worrying to me. While this speech may indeed be an empty political gesture, the chequered history of German race relations suggests it may nonetheless spur untoward sentiments.

"We feel tied to Christian values. Those who don't accept them don't have a place here," said the chancellor. "Subsidising immigrants" isn't sufficient, Germany has the right to "make demands" on them, she added, such as mastering the language of Goethe and abandoning practices such as forced marriages.

Merkel spoke a week after talks with Turkish Prime Minister Recep Tayyip Erdogan in which they pledged to do more to improve the often poor integration record of Germany's 2.5-million-strong Turkish community.

Turkish President Abdullah Gul, in a weekend interview, also urged the Turkish community living in Germany to master the language of their adopted country. "When one doesn't speak the language of the country in which one lives that doesn't serve anyone, neither the person concerned, the country, nor the society," the Turkish president told the Suedeutsche Zeitung. "That is why I tell them at every opportunity that they should learn German, and speak it fluently and without an accent. That should start at nurseries."

German President Christian Wulff was due for a five-day visit to Turkey and talks with the country's leaders on Monday.

Beyond the headline statement about multiculturalism failing, however, there is still much triangulation at play, with Merkel stating the need for Germany to attract skilled workers, who presumably would be able to speak fluent German. While making the usual conservative gestures about no-gooders sponging on the welfare state, she also says...

On Saturday, Merkel also underscored the continued importance of immigration to Germany and the job market, especially highly skilled migrants. She pointed out that every year, 200,000 Germans retired and left the job market, and weren't replaced, which could lead to companies leaving Germany due to labor shortages. The German Chamber of Industry and Commerce has said Germany's shortfall of about 400,000 skilled workers costs the country 1 percent in growth annually.

Merkel said, however, that older German workers should not be overlooked in favor of immigrant laborers, adding that immigrants should not be considered "until we have done all we can to help our own people to become qualified and give them a chance." For his part, Seehofer, in an interview with Focus magazine, said Germany should not use a lack of skilled workers as an excuse to open its doors to all comers, adding that demands made of those who wish to move to Germany should not be watered down. "We do not want to become the world's welfare office," he said.

It's the same all over the developed world, I guess. Skilled workers are welcome who do not disturb the postwar social fabric. At the same time, however, the welcome mat is always tenuous as scapegoating is not bound to any particular ethnic group. In that sense, immigrant-baiting at least is multicultural. As for making older workers work for longer, that is standard stuff in the immigration debate. Why hire foreigners when you can employ "your own people"?

Overall, I don't see the point in this speech other than repeating scare tactics that have been used by Germans at other points in time. Speaking fluent German is not a disavowal of multiculturalism, but forcing everyone to convert to Christianity would certainly be an affront. Not only is it very unlikely to happen, but it also offends many who would consider Germany as a destination for immigration. Let's face it: English speakers far outnumber German speakers, so asking even more for (1) Christian (2) skilled (3) German speakers is too much. (2) and (3) should suffice, no? And even (2) can be done away with in performing simpler service tasks.

And, like in the rest of Europe, the claim that Christianity is central to European or in this case German identity must be taken with a grain of salt. With church attendance still in fairly significant decline, Germany is at least as secular as the European average. In other words, politicians give religion lip service, but huge swathes of the populace couldn't care less about going to Sunday mass. The pretence is obvious, but hey, politics is largely symbolic. It's just that the rhetoric scares me given Germany's history.

UPDATE: A reader recommends this clip from Newsy.com.

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