A Swingin' IMF: The Multicountry Credit Line

♠ Posted by Emmanuel in at 2/27/2010 04:02:00 PM
No, no, I am not referring again to past indiscretions of IMF Managing-Director Dominique Strauss-Kahn. That stuff is old. Instead, what we have here is yet another proposal to make the international financial institution more in tune with the times. After a slow period in the wake of the Asian financial crisis, it seems the IMF has sprung up all over the place and is still gathering momentum. As I see it, the essential point here is that modern financial crises have contagion-like characteristics that affect groups of usually neighbouring countries facing similar difficulties: think of Southeast Asian countries that couldn't roll over foreign currency-denominated debts in 1997/98 or Eastern European countries suffering from parlous finances exacerbated by the credit crunch of 2008.

Hence, a new WSJ article outlines plans to change traditional IMF patterns of lending and surveillance to meet today's challenges by shifting focus away from single countries to groups of countries:
The International Monetary Fund is considering a new multibillion dollar lending arrangement it would deploy during crises, which would offer money to countries even if they don't ask for it. Under the "multicountry credit line," the IMF would, for the first time, make money available to groups of countries that it believes are in danger during financial crises, rather than individual nations, said a senior IMF official.

The countries wouldn't need to request the assistance; rather the IMF would make lines of credit available to those nations whose policies it deems are sound. The nations wouldn't be required to use the money. "The fund would declare there's a systemic problem and here's line of credit for the following countries," said the official. He emphasized that a formal proposal isn't expected to be ready before September and would need to be approved by the IMF's governing board.

Board members have said they are interested in "exploring the merits" of the proposal, according to an IMF summary of board discussions.
The article further notes that the usual stigma associated with approaching the IMF should be lessened with this multicountry approach. That is, a particular country doesn't need to call Washington with mayday appeals. Rather, the IMF monitors the situation in a particular area of the world and decides if the extension of emergency funding is called for largely of its own initiative. In a speech just this Friday, Strauss-Kahn alluded to the tabling of such a mechanism in line with the challenges now faced by the lender:
In principle, the Fund’s surveillance covers both economic policies in individual member countries, and developments relating to the global economy as a whole. But in practice, the bulk of our efforts have been at the country level. One result of this has been that we have not paid enough attention to the linkages and spillovers between economies—including those that transmit through the arteries of the global financial system.

For this reason, there may be a need for a clearer mandate to pursue risks to global economic and—I stress—financial stability. In particular, we are floating the idea of a new multilateral surveillance procedure. This would allow—indeed require—the Fund to assess the broader and systemic effects of country-level policies, and the associated risks, in a fundamentally different way. We need to take up these issues of systemic importance frankly, regularly, and even-handedly.

I believe the world is ready for a shift to this more “systemic” vision of IMF surveillance. A clear indication is the G-20’s launch of the Mutual Assessment Process. The so-called MAP aims to reduce risks to the system by making the world’s largest economies accountable—to each other—for ensuring the global consistency of their economic policies.

Of course, there is a much broader range of international policy challenges than those currently being considered by the MAP. And an enhanced multilateral approach, with increased accountability between countries, is essential for finding lasting solutions. I see a role for the IMF to help address these kinds of multilateral problems.

At the same time, we should enrich the systemic content of our bilateral or country-level surveillance. One way to do this would be to introduce thematic country reports, with staff undertaking joint policy discussions with several countries facing common issues. This type of analysis would improve our comparison across countries, our analysis of regional spillovers, and indeed the interest and traction of our surveillance in member countries.
It's an interesting new product proposal.

The Varieties of Chinese Finance in Africa

♠ Posted by Emmanuel in , at 2/26/2010 01:26:00 AM
There's interesting commentary coming from Chris Alden and Riaan Meyer suggesting that not all Chinese finance in Africa is the same. Contrary to the image that China is a one-stop shop for dictators wishing to obtain infrastructure improvements, aid and forex in exchange for natural resources the PRC needs, they argue that a more nuanced picture needs to be made. That is, there are many modes of Chinese finance that cannot be lumped into a simple view of it being an extension of the non-interference principle. They also envision China's activities in Africa being part and parcel of a wider drive to build alternatives to the dollar as a vehicle currency for trade:
The conventional view of Chinese finance in Africa is that it is a lump sum concessional loan, negotiated in secret between Beijing and the host government, built around the twin pillars of a substantive Chinese investment in infrastructure in exchange for access to African resources. The idea is that it is all wrapped in a commitment to non-interference and peopled by Chinese companies, unskilled labour and supplies.

Such is the power of this image that African leaders themselves have been seduced by it. Former leaders Olusegun Obasanjo of Nigeria, Omar Bongo of Gabon and, most recently, Guinea’s Moussa Dadis Camara all believed that this was the definitive Chinese approach and pursued arrangements with Beijing on this basis. And in the main, their efforts to secure such deals have been dogged by controversy.

Chinese financing towards the continent, in fact, has always been more diverse than is commonly assumed. Financial restrictions on Chinese banks in the past have been placed by Beijing, which have limited their role to operating in the domestic setting when coupled with smaller reserves at the time and lack of experience. Following a series of policy innovations – especially after the establishment of national policy banks in 1994 and the subsequent opening of commercial banking – the scope for involvement abroad widened considerably.

Today, the spectrum of Chinese financial institutions operating in Africa ranges from those with direct ties to the government and its largesse to that of an emergent group of private banks and investment houses.

Those with the closest links to Beijing, such as the China Development Bank, are involved in conventional project finance as well as some more politically-motivated projects, such as the China Africa Development Fund.

China Eximbank, though obviously a policy bank and involved in large-scale infrastructure projects, nonetheless has increasingly sought to emulate the practices and conventions found in other leading national export banks.

Industrial and Construction Bank of China (ICBC), the world’s largest by market capitalisation, has pursued a joint venture strategy since 2007, purchasing 20 percent of Standard Bank and benefitting from its established position across Africa. It has been taking the lead in structured project finance deals and, through Standard Bank, is poised to use its financial resources to expand into retail banking.

Private finance like China Merchant Bank is testing the waters in Africa while the murky Chinese International Fund (CIF) is pursuing its own joint venture strategy in Guinea and Zimbabwe.

Understanding this diversity of Chinese financial actors is important not only for African policy makers and corporations, but it also sheds light on the changing nature of China’s business engagement with Africa.

With increasing Chinese government financing linked to real projects awarded to Chinese companies, the flow of these funds needs to be managed. Yet the presence of Chinese banks abroad and in emerging markets in particular is limited as these institutions are unable to handle remittances and advances in African countries. The pressure to have a more meaningful presence in Africa is to a large extent driven by the corporate customers of Chinese banks in the domestic market. Such customers would much rather be dealing with Chinese banks or banks that have partnered with Chinese banks.

A series of recent initiatives by Beijing has bolstered the exposure in Africa of Chinese financial institutions.

At the Forum on China-Africa Cooperation meeting in Egypt late last year, China announced it would support Chinese financial institutions in setting up a special loan of U.S. $1 billion for small- and medium-sized African businesses. This is a clear sign that Beijing wants to encourage them to take a credit view on local companies. This was further supported by a Chinese commitment to cancel debts associated with low- or interest-free loans that were due to mature by the end of 2009, paving the way for improved credit terms in the future for these countries.

The broader implications of Chinese experience in the financial sector in Africa and other parts of the developing world are manifold. Chinese corporates have seen a movement to conduct overseas trade on open-account rather than the more traditional letter-of-credit terms with overseas customers. Moreover, in the wake of the global financial crisis, China has demonstrated a willingness to play a much more assertive role in international finance by proposing alternatives to the U.S. dollar in settling international trade transactions.

China is currently piloting international trade settlements in renminbi (yuan) in a number of Chinese cities. The pilot scheme allows for 400 approved Chinese enterprises in five approved cities, including Shanghai, Guangzhou, Shenzhen, Dongguan and Zhuhai, to settle trades with their counterparts in Hong Kong, Macau and Asean member countries.

If the renminbi is finally allowed to trade freely it is only natural that a large part of international trade will be conducted in renminbi. For Africa, whose trade is rapidly shifting eastward but is still dominated by the dollar (except in Francophone West Africa) the switch to renminbi will be a natural progression if the current trends in trade continue.

Clearly then, as Chinese corporates evolve and their banking system becomes more internationalised, these changes seen in the developing world will be increasingly reflected in global trends in international finance.

Hand of God? Nope, UK Oil Drilling in the Falklands

♠ Posted by Emmanuel in ,, at 2/25/2010 03:44:00 PM
Brezhnev took Afghanistan
Begin took Beirut
Galtieri took the Union Jack
And Maggie, over lunch one day
Took a cruiser with all hands
Apparently, to make him give it back

In "Get Your Filthy Hands Off My Desert" above, Roger Waters implies that the United Kingdom expended lives and resources for a Phyrric victory in regaining the Falkland islands after Argentina's then-dictator Leopoldo Galtieri invaded the place in 1982. The aftermath is well-known: British Prime Minister increased in stature over this display of strength while Galtieri was bounced after this misadventure.

Tensions over the Falklands between the UK and Argentina never seem to have entirely dissipated. A case in point is the never-ending British whingeing over Diego Maradona's infamous "Hand of God" goal [clip here] during the UK versus Argentina quarterfinals of World Cup 1986 held in Mexico City. Old enmities die hard indeed.

And so we find ourselves in another situation in which matters which haven't entirely healed are coming back to the fore. Contrary to Roger Waters' perception of the Falklands as a barren wasteland, the British--among the very best in the world at the semi-dark arts of oil exploration--are planning to do so in the vicinity of the Falklands. In the past, the Falklands have served as a a naval outpost for the Empire and a site for fishing and whaling. With the North Sea oilfields' declining production and imminent marginalization as a productive source, every little helps if the UK can source oil from elsewhere.

The potential onset of oil drilling has occasioned much bellyaching from the Latin left, with even somewhat more moderate voices like Brazil's Lula asking for Britain to give these islands back to Argentina. All 32 Latin American nations have signed on to the request. Still sore about the British Empire's dominions after all these years, eh, socialistas and the rest? Henry Mance of the Guardian makes a valid point that, instead of a military conflict, the best thing for the parties involved to do would be to go to the International Court of Justice (ICJ) and sort this matter out for good. I doubt the Foreign Office would countenance such an action, however.

In the meantime, here's the transcript of a recent Sky News interview of Foreign Office Minister Chris Bryant telling the Argentinians to, er, lay their hands of Britain's filthy desert:
Sarah Hughes [of Sky News]: Foreign Office Minister, Chris Bryant, joins us now live, good afternoon to you Mr Bryant. Firstly can I ask you your reaction to that statement from the Venezuelan President?

Chris Bryant: We have absolutely no doubt about our sovereignty over the Falkland Islands and I’m slightly surprised that Hugo Chavez, with whom we work quite closely on some issues like counter narcotics because they have a big problem in Venezuela and we work with them on that, why he should now be arguing this case given that the, he often argues about self determination for the people of Latin America. We believe, wholeheartedly, in the self determination of the people in, people of the Falklands and I know what Falkland Islanders believe and I think they’re quite right that they have every legal right, to be able to drill for oil in the Falklands.

SH: None the less Argentina is rallying support particularly in Latin America, the Argentinean Foreign Minister is meeting Ban Ki-moon tomorrow to state their claim for sovereignty. How concerned are you about that?

CB: Well, obviously, we monitor the situation closely but this is nothing new. There have been discussions like this in previous years, there have been motions carried by different groups over different years in Latin America and, and I suppose it’s not to be unexpected that some Latin American colleagues would adopt this kind of position. But that doesn’t undermine that work that we can do with our friends in Brazil or in Uruguay or in Chile or in any of the other countries of Latin America. And nor for that matter does it undermine that work that we can do with Argentina with whom, you know, we forged a very close, close alliance last year working in the G20 to make sure that there was a proper response to the world wide economic crisis.

SH: Lord West described it this morning as sabre rattling said there was no threat to oil drilling there, is that your position?

CB: As I say we monitor the situation very closely but, and we have no doubts about our sovereignty. We, we, I mean it’s to be expected in a sense that the, the Argentinean Government would make these noises but I do note that they’re saying very clearly that they’re not talking about any kind of abandonment of the, of the peaceful discussions that they’ve been engaged in and I, I think that that’s the right way to go.

We have no interest in escalating the, the kind of rhetoric that some people have been engaged in, we’re just very certain that the Falklands are British, the Falkland Islanders want to be part of the United Kingdom and we welcome that and we stand by them.

SH: No interest you say in escalating that rhetoric, what’s Britain doing to try and calm these waters then?

CB: Well we’ve just been, we, we’ve made very clear, we’ve talked to, sometime before, to both our Argentinean counterparts and to the other Governments across Latin America to make sure that they understood what was going to happen when the rig arrived off the Falklands, make, to make sure that everybody understood the legal position. And we, we’re not going to chase every headline that, that some politicians may want to engage in we’re just very resolute, very calmly determined about our position in the Falklands; standing by the Falklanders, standing by their right to exploit the hydrocarbons if there are any there, we don’t yet know whether there will be a commercially viable operation there. And making sure that everybody understands our legal right both across the, in the United Nations and across Latin America.

SH: Foreign Office Minister Chris Bryant thanks very much for your time.
The concern overseeing plans to drill the Falklands, Desire Petroleum plc, has much technical information about the Falklands apparently welcome prospects if you're so inclined. As Roger Waters once sang, "Ooh...Maggie, what have you done?"

Shell In Nigeria: An Enduring CSR Conundrum

♠ Posted by Emmanuel in , at 2/25/2010 12:02:00 AM
This is a follow-up to a post I made concerning Nigeria's oil curse. In that post, I discussed how it was a real shame that Nigeria has not built up significant oil refining capacity despite being the largest exporter of crude oil in Africa. Here, we zero in on the activities of one of the foreign firms whose activities have received criticism over the years in the oil-rich but troubled Niger Delta. The still-controversial execution of Ken Saro-Wiwa of the Ogoni tribe is well-known and has caused many corporate social responsibility issues to be raised with regard to Shell. Nevertheless, the activist group The Ecumenical Council for Corporate Responsibility has just released a report suggesting that not much has improved with regard to Shell's treatment of environmental issues or social issues concerning its treatment of local communities. Here are the conclusions and recommendations though the whole report is well worth reading for those interested in the subject matter:

Conclusions and recommendations
Despite their differences of emphasis, the case studies reveal a consistent thread of concerns. These include a continuing failure by Shell and SPDC [Shell Petroleum Development Corporation] to operate in the Niger Delta fully according to robust international social and environmental standards; severe pollution of air, land and water, with disastrous impacts on health and livelihoods; inadequate inclusion of communities in decisions affecting their lives; a failure to dialogue respectfully, address critical needs and maintain trust; short-termism and lack of vision.

Shell’s own General Business Principles, if rigorously implemented, would go some way to meet these concerns. So would the recommendations of the 2008 Report of the Technical Committee on the Niger Delta, set up by the Nigerian Federal Government and chaired by MOSOP President Ledum Mitee. Also worth consideration are practices of other international oil companies that are said to have secured more community consent in the Delta than Shell and SPDC have achieved.

The report makes the following ten overall recommendations to Shell and SPDC:
  1. Stop gas flaring as a matter of urgency, prioritising flares closest to communities, if necessary halting production while flares are eliminated.
  2. Mobilise resources without delay to address communities’ need for sustainable sources of clean drinking water.
  3. Embark on a Delta-wide environmental audit and rehabilitation programme,cleaning up the legacy of oil spills, polluted land and waterways, and rapidly replacing old pipelines to international standards.
  4. Transform SPDC’s operating culture through a continuous programme of staff training in human rights, conflict management and community relations.
  5. Apply effective social and environmental impact assessment methodologies; respect principles of open dialogue and community consent; establish independent monitoring and effective grievance mechanisms.
  6. Scale back operations in localities where significant unfulfilled commitments remain and community tensions exist until problems have been remedied.
  7. Transform community development programmes through participatory, inclusive and empowering strategies.
  8. Implement a policy of fully disaggregated revenue and expenditure transparency.
  9. Affirm the findings of the Report of the Technical Committee on the Niger Delta and publicly commit to work with others in implementing its recommendations.
  10. Link the remuneration of senior company executives responsible for Niger Delta operations to satisfactory progress on human rights and environmental issues.

Enron the Play? You Better Believe It

♠ Posted by Emmanuel in , at 2/23/2010 07:49:00 PM
Are you kidding me? Did we take advantage? That's what we do, that's how the world works! If you want an objective morality, you're living in a dream. So when you ask, 'did we take advantage?', I hear, 'do you make a living?', 'do you breathe in and out?', 'are you a man?'! Yes, we took advantage. And the only difference between me and the people judging me is they weren't smart enough to do what we did. Now, are you gonna judge me or are you gonna help me? -- 'Jeff Skilling' in Enron the Play

Samuel Johnson is attributed with saying that a person who is bored with London is bored with life. Well, add this to London's brilliant parade. Some of you probably know this already, but in case you don't, they've been staging Enron the Play since November of last year and it has just extended its run based on initial success. This play mixes factual elements about the Enron story--routing Internet broadband through pipelines originally intended for delivering energy--with more fantastical takes on true-to-life elements such as CFO Andrew Fastow naming various investment vehicles designed to inflate earnings and conceal debts after Star Wars characters. So, it's a mix of fact and fiction. For good measure, they even throw in a love interest for the disgraced Jeff Skilling.

The play has been receiving quite positive reviews from the business and mainstream press, so yes, it's definitely something I have to see. If you are passing through London and have an interest in financial shenanigans and musicals, it's a must-see. Nixon in China? What we have here is more like artistic license with a heaping financial pretence. They even have an Enron Education Resource Pack [?!]

Given Enron the Play's success, I am once again shopping around my very own Tony Blair: The Musical!

Questionable Socialist Stylings: Ecuador's Correa

♠ Posted by Emmanuel in ,, at 2/23/2010 07:26:00 PM
On 27 October 2009, Ecuadorean President Rafael Correa came to speak at the LSE. Brandishing the classic repertoire of Latin American firebrands, he denounced American imperialism, the Washington Consensus, neoliberalism, neoclassical economics, free trade, "kicking away the ladder," and so forth. While I do not have particular issues with several of these denouncements--I've made some myself--it is worth comparing how rhetoric compares with reality. The text of his speech is available online, as are a podcast and video. Still, I kind of wonder why one needs a PhD in Economics from a fine institution like the University of Illinois at Urbana-Champaign to recycle this masters-level anti-globalization repertoire. Yet, what's passable for a master's-level essay is certainly not what one expects from somebody who should know better.

More importantly, Correa's bog-standard class warfare stylings seems--in classic populismo fashion--to have backfired on him. If you will remember, one of the first things Correa did upon assuming office was default on governments he deemed as not being legitimate debts. While I too would like to try this trick sometime if I had country of my own, the financial community is apparently none too impressed. As a consequence of this action, Ecuador has been locked out of international capital markets. Like in Venezuela, populismo has not only trumped economics--something Correa should know about--but common sense: he who burns his bridges had better be a good swimmer. Now, faced with a large revenue shortfall in light of declining oil prices--Ecuador is the second largest oil exporter in the region after Venezuela--the country has sought the comfort of, er, the Washington-based lender the Inter-American Development Bank whose principal funder is of course the United States:
Ecuador may cut government spending as it struggles to cover a $4.2 billion budget shortfall after a debt default shut it out of credit markets, Fitch Ratings said. President Rafael Correa could slash planned investments aimed at boosting oil production after halting payments in December 2008 on $510 million of bonds and in March on $2.7 billion of notes, Fitch analyst Theresa Paiz said yesterday in a telephone interview from New York. “There could be a sharper adjustment in the budget and cuts to capital expenditure,” Paiz said. “External borrowing is pretty much off the table.”

Correa defaulted on Ecuador’s 2012 and 2030 global bonds, saying the securities were “illegitimate” and “illegal.” Ecuador, which depends on oil exports for about a quarter of its revenue, may post economic growth of 1.5 percent this year after gross domestic product shrank 2.3 percent in 2009, according to Fitch. Ecuador may be able to narrow its budget shortfall if oil prices continue to rise and the country receives financing from multilateral lenders, Paiz said. Crude oil prices have almost doubled to $79.30 a barrel from a year ago as a global economic recovery boosts energy consumption.

Corporacion Andina de Fomento, a Caracas-based a multilateral lending institution, approved a $200 million loan for Ecuador last week, and the Andean nation may receive $350 million from the Inter-American Development Bank, Finance Minister Maria Elsa Viteri said Feb. 12 in a statement on the president’s Web site.

Correa has also tapped Ecuador’s state-run Social Security Institute to fund projects ranging from oil exploration in the Amazon to hospital building, according to statements on the president’s Web site.
The digital webpage of this government trumpeting Correa's "citizen's revolution" confirms these details--Ecuador's ambassador to Washington has [shhh] gone to the Yanqui capital with begging bowl in hand. Some were hopeful that Correa could be another Lula instead of another Hugo, but the latter scenario seems to have panned out. Correa has even raided Social Security funds to pay for pet projects, so Ecuadoreans pinning their hopes on future disbursements have further reason to worry as external sources of funding dry up.

You show those neoliberal Yanks, Rafael Correa...by borrowing from Washington? Like Chavez, Correa's revolucion is fuelled almost solely on high oil prices which he probably should be wishing are on the rise again. You certainly don't need a PhD in Economics to figure out that, after you kick your creditors in the balls, external funding won't be forthcoming. Colour me unimpressed.

Nobody Home: Inflating a Chinese Housing Bubble?

♠ Posted by Emmanuel in at 2/23/2010 12:31:00 AM
I've got wild staring eyes
And I've got a strong urge to fly
But I got nowhere to fly to
Ooh, babe when I pick up the phone
There's still nobody home

There's an interesting article in the Financial Times cataloguing the emergence of ghost cities in the wake of massive property investment borne of the PRC telling government banks to open the lending spigots wide open. (As you can see above, it's evoked a classic Pink Floyd number, too.) The essential question is whether this torrent is being put to good use of will go to waste. Two arguments--pro and con--are being advanced. Either all this investment is being thrown away since they're building new edifices for which no one will come, or it is just what is needed to accommodate China's still-burgeoning growth going forward. As with most things, I believe that the truth lies somewhere in between, though exactly where that lies is still up in the air:
Chenggong is a new town near Kunming, one of the main cities in the south-west of China. Construction started in 2003 and the results are now apparent in 13 immaculate local government buildings, each clad in marble tiles. A high school boasts an impressive indoor swimming pool and several of the region’s main universities have built large campuses. Pristine high-rise apartment blocks stand in rows, their new windows glinting in the subtropical sun.

The one drawback: at the moment, Chenggong is almost completely empty. Its wide streets are all but bereft of traffic, a bank branch has no customers and leaves collect in the foyers of the municipal offices.

It is places such as Chenggong that are starting to divide opinion about what is really happening in the Chinese economy. China was the big winner from the global crisis, with its economy expanding by 8.7 per cent last year amid recession elsewhere. But as the country returns from its lunar new year holiday, divisions are emerging over the long-term impact of the stimulus package implemented by Beijing to carry it through the international downturn.

While some regard China as having made forward-looking investments in infrastructure and urban planning that will lay the foundations for a new burst of growth, others fear last year’s recovery is really a mirage based on an investment bubble. It is also a crucial question for the fragile global economy. If China’s rebound were to fizzle, it could easily drag the rest of the world into a double-dip recession.

Within the government, there is sharp debate about the risks from last year’s credit binge, which saw the number of new loans double. Some officials want to keep the investment taps open because they fear the economy is still weak, while others worry about looming threats of inflation and overcapacity.

Among professional investors, views are even more polarised. Anthony Bolton, the prominent British investor, recently announced he was moving to Hong Kong to manage a China fund and purred about “the effectiveness of the centrally run economy”. Yet Jim Chanos, the hedge fund manager best known for seeing the fiction in Enron’s accounts, says the very same centrally planned system has created “an unprecedented bubble” in investment, especially in real estate. Both sides can find ammunition for their arguments in Chenggong.
Certainly, these levels of investment as a percentage of GDP are unparalleled even in the context of Asian development history. In the meantime, cue up The Wall.

Three Flawed Arguments for a Stable Yuan

♠ Posted by Emmanuel in at 2/23/2010 12:17:00 AM
Steven Dunaway at the Council of Foreign Relations has an interesting essay on why those who argue for a stable yuan--especially PRC officialdom--are incorrect. While I am general agreement with his arguments, the real question for me that remains largely unanswered is how to get China to move on the matter of currency. Without further ado, here are the arguments he shoots down:

I. The first old argument making a comeback is that a stable yuan is not only good for China, but is good for the rest of the world. The roots of this argument go back to the Asian financial crisis of 1997-98. At that time, China was persuaded to keep its exchange rate fixed against the U.S. dollar when its currency was facing downward pressure to prevent setting off a round of competitive devaluations among the crisis-stricken countries in the region. While at the time this was a very important policy decision by the Chinese authorities, any competitive disadvantage that China may have suffered was quickly more than offset in the period after the crisis by the rapid growth in productivity in China relative to its competitors. Nevertheless, despite a burgeoning trade surplus, China continued to defend a pegged exchange rate until July 2005 (when the rate was revalued slightly and allowed to appreciate gradually until August 2008, at which time the rate was effectively repegged to the U.S. dollar) as being in the best interest of China and the rest of the world, just as it had been in 1997-98.

China's actions in 1997-98 are being invoked by officials in Beijing as justification for China's decision during the current economic and financial crisis to maintain a stable exchange rate against the U.S. dollar. It is argued that this policy helped to support China's growth during the recession and that it is good for the rest of the world because strong growth in China's economy makes a major contribution to recovery in the world economy.

There is truth to this claim from a narrow statistical point of view. As the second or third largest economy in the world, if China grows faster, then that would, of course, raise the average rate of growth for the world economy. But that does not mean China's growth is adding measurably to the growth of other countries. That impact depends on how much growth in China's demand is contributing to stimulating growth in other countries. The reality is that China with a large trade surplus sells substantially more to the rest of the world than it purchases, and therefore, it continues to subtract significantly from net world demand. Thus, the rest of the world as a whole is not benefitting much from China's strong growth.

Some countries (particularly those in Asia and commodity producers) may be benefitting, and the decline in China's trade surplus in 2009 means it took less away from net world demand than in previous years. Nevertheless, China's contribution to the rest of the world's growth has not been much, and it will diminish in 2010 and the years beyond as China's trade surplus is expected to start rising again.

II. Another old argument still making the rounds is that even if the yuan were allowed to appreciate significantly, it would not materially change the pattern of imbalances among the world's major economies because it is not the root of the problem. Even with a higher value for the yuan, China would continue to be the world's leading exporter because it has a major competitive advantage in manufacturing. Manufacturing in the developed countries would not recover. Therefore, the argument concludes, changing China's exchange rate cannot be expected to make a major contribution to boosting the net exports of developed countries.

For instance, some analysts argue that even if China's currency were allowed to appreciate such that China's current account surplus would decline by 4 percent of its GDP annually and return to a level more in line with the country's long-term fundamental saving and investment balance, this would directly contribute only about a half percentage point to annual growth in the developed countries. Such a boost to these countries' economies is characterized as being small and not critical to addressing global imbalances.

However, when the developed countries are looking at prospects for annual growth of 1-2 percent, an extra half percentage point boost to growth that would come from China permitting its exchange rate to adjust is no small matter. In addition, this half percentage point addition to growth from foreign demand would further stimulate economic activity in the developed countries so that, ultimately, the impact of such a change in China's exchange rate policy would be even greater. Also, the boost to developed country growth would permanently raise the level of incomes and employment in the developed countries.

In a world economy looking for new sources of stimulus to spur demand growth (and developed countries as a rule having little scope to make further use of fiscal policy), the old argument is clearly wrong. A change in China's exchange rate policy is a critical element in the world economy's recovery.

III. Finally, there is the grand old argument that the Chinese authorities do not respond well to external pressure for policy change. Changing exchange rate policy in China is a political decision made at the highest level of government. Accordingly, China's leaders do not want to be seen as bowing in the face of foreign pressure. This is said to be particularly true at the moment because relations between China and some of the developed countries, especially the United States, have become increasingly tense. In these circumstances, the Chinese authorities could choose to cling to the current fixed exchange rate policy to project strength. The suggestion from this argument is that the rest of the world should ease pressure on China, and a change in China's exchange rate will come at a more appropriate time.

The reality is, however, that without pressure being exerted to encourage a change in its exchange rate policy, China will have no reason to move. And when patience grows thin and pressure rises again, this same argument will be trucked out once more to try to further postpone policy adjustment.

It is on the last point that Dunaway justifies the heat being placed on Chian by President Obama. Still, I find the "reverse psychology" argument interesting. That is, don't bug China on currency and it will eventually revalue since it won't be seen as "giving in" to foreigners.

Why UK Academia Must Be Real-World Relevant

♠ Posted by Emmanuel in at 2/22/2010 12:01:00 AM
Obviously not being extremely familiar with the goings-on in Stateside academia, I am amused by what appears to be an ongoing tussle to make make academia more relevant to real-world concerns. Instead of staying in ivory towers, American academics are urged to make [gasp!] tangible contributions to society. I hate to noodle our US-based friends again on the Amerocentric nature of the blogosphere, but us bumpkins (1) have already taken a look at this question and (2) are in the process of doing something about it.

In general, British academia is more reliant on state funding than American academia. Whereas US institutions have more experience in soliciting contributions from alumni and others--especially elite ones--this is not necessarily the case here in the UK. Hence the many complaints over Lord Mandelson in the wake of his holiday season announcement that UK higher education funding over the next few years will be slashed. Even if research-oriented universities will not feel the brunt of these cuts since research is supposed to be spared ahead of teaching, the Russell 20 group of the UK's top research universities is unhappy. See Michael Arthur and Wendy Piatt, both of the Russell Group, commenting on how universities face "meltdown."

In previous years, the mechanism that the UK government has used to allocate research funding from the government has been the Research Assessment Exercise (RAE), last held in 2008 and in 2001. In those RAEs, experts in each field were appointed to judge the output of various departments' research. For instance, in Politics, Economics, Sociology, etc. However, some have expressed dissatisfaction over two things: (1) potential arbitrariness of the judgements made by examiners and (2) the aforementioned lack of real-world relevance of much research.

And so it has come to pass that the RAE is in the process of being replaced with the new Research Excellence Framework (REF) during the next assessment cycle. The innovations of note here are twofold. To replace potentially subjective decisions on the merits of others' work, we are moving from a qualitative to a quantitative measurement system that makes use of bibliometric information like the Social Science Citation Index (SSCI). From the REF guide we have this:
How will citation information be used in assessing outputs?

We conducted a substantive pilot exercise to test how to use citation information in the REF. We concluded that citation information is not sufficiently robust to be used formulaically or as a primary indicator of quality, but there is considerable scope for it to inform and enhance the process of expert review. We propose that:

• Those UOAs for which robust data is available will make use of citation information. Sub-panels will decide this in advance. We expect that medicine, science and engineering panels will do so, but that the arts, humanities and a number of other panels will not.
• We will provide the relevant panels with citation information about the number of times that submitted outputs have been cited, and with appropriate benchmarks.
• These panels will use the information to inform and supplement their review of the
outputs, to assist with achieving consistency, international benchmarking and where possible reducing workloads.
• There will be clear guidelines on using the data robustly to take account of the known limitations and to avoid bias (for example, citations are less meaningful for recently published outputs, and are not available for certain types of output). Panels will not make judgements about the quality of outputs solely on the basis of citation information; expert judgement must be applied. All submitted outputs will be treated equally, whether or not there is citation information available for them.
And here's the kicker as far real-world relevance is concerned: In addition to the aforementioned outputs, it is proposed that a quarter of the overall excellence score be judged on impact or usage among practitioners. For us in political science, this should mean performing paid work for firms, development agencies, or local, state, or national governments that bolsters our research interests. In other words, there is an emerging emphasis on demonstrating work that is of use outside of the usual circuit of refereed journals, conferences, and workshops. The REF guide offers us this nifty graphic:

As someone who does consulting for government, I believe that this change is long overdue as there is much that can be gained from dealing with real-world policy issues. I used to have a long debate with an old professor who claimed that the "n=1" of actually working in the public or private sector didn't matter since researchers could draw on "n=thousands upon thousands" from academic research. Then, as now, I disagreed since one cannot gain a proper perspective pecking away at the keyboard divorced from the day-to-day workings of business and government. You must both talk the talk and walk the walk IMHO.

These upcoming changes are already having an effect of university hiring here in the UK. For instance, the well-respected University of Warwick is currently looking to hire an Assistant Professor for IPE. Lo and behold, among the listed duties and responsibilities are the following:
4. Where appropriate and expedient, to secure contract work to benefit (your) research activity and to provide resources to underpin this activity...

8. To work where appropriate with Research Support Services in realising potential
commercial benefits of research for the Department and the University.
What can I say? Ditto. Like many universities, Warwick is sprouting a consulting arm of its own that can help prepare it for the REF, here called Research Support Services. Among its aims are:
* to transfer knowledge and skills from the university to industry
* to develop graduates for industrial careers
* to increase industrial relevance of academic research and teaching
* to encourage investment by industry into innovation

Benefits to the Company
* Highly skilled graduate to work on a strategic company project
* Access to academic expertise and university facilities
* Improved competitiveness and financial benefits from completed projects

Benefits to the Academic and the University
* Development of collaborations with innovative businesses
* Development of business-relevant teaching materials
* Conference material and publish high quality research papers
While, I generally applaud these changes, I must point out that left-leaning academics may increasingly find themselves marginalized as a result of their inability to provide evidence of this sort of work. A Marxist instructor I know of is delighted with finding work with China's Communist Party for scholarship, though others may not be so lucky. For instance, I have no idea how Trotskyites can address a public policy question like, say, garbage collection.

Real-world relevance is more likely to become the litmus test of research worthiness. Even the newer, high-profile academic journals are moving in this direction. At least in this respect, those of us in the UK are somewhat ahead of the curve.

$ Long Positions Most Since 2008; Turnaround Near?

♠ Posted by Emmanuel in at 2/21/2010 03:29:00 PM
Woes for the US dollar need little recounting from me as the American currency is faced not only with massive debt projections at the national level but also at the state level [1, 2]. As yet, it is unclear to me how states will manage with their deficits and underfunded liabilities. They will probably ask Uncle Sam to fund them, so the headline figures for US budget deficits are, in all likelihood, worse than what the already dismal figures suggest.

I mention this in light of yet another bout of inexplicable dollar strength. Currency speculators seem to have decided that the dollar is a good alternative at the moment since it is not the Euro given Greece's prevailing woes. Once more, I find this strange since Brussels trying to rein in Athens indicates that the EU will, if push comes to shove, enforce discipline on wayward members. The United States, however, has no one doing so at the national or state levels, hence my expectation that the US will perform far less well in terms of budgetary performance going forward.

Meanwhile, Reuters has just provided the most recent International Monetary Market (IMM) data showing existing currency futures bets on widely traded currencies . It further says that dollar long positions are the most since the week of 23 September 2008:
Currency speculators increased bets the U.S. dollar will rise to the highest level since the week of Sept. 23, 2008, according to Commodity Futures Trading Commission data released on Friday.

The value of the dollar's net long position rose to $9.69 billion in the week ended Feb. 16, up from $9.41 billion in the prior week. The Reuters calculation for the aggregate U.S. dollar position is derived from the net positions of International Monetary Market speculators in the yen, euro, British pound, Swiss franc, Canadian and Australian dollars.
Turning to the technical side, the chart I have for you above is of monthly data for EUR/USD [click for a larger image]. What you will notice is that, shortly after bets increased to their previous highest weekly level, the month of October saw a bottoming out of the most widely traded currency after the dollar, the euro. This movement was then followed by an upswing in the euro that took it past $1.50.

Combining the fundamental picture for America (out-of-control national and state finances) with the technical picture (pronounced dollar buying interest) and a reversal may be due soon if CTFC data is taken as a contrarian indicator. We'll see...

PRC Football Diplomacy & Africa Cup of Nations

♠ Posted by Emmanuel in ,,,, at 2/19/2010 01:01:00 AM
I've just emerged from a most interesting lecture here at the LSE featuring the prominent sportswriter and leading IPE of sports commentator David Goldblatt. The name should be familiar to those of you who've studied IPE in Britain as one of the co-authors of the earlier editions of the standard IPE textbook Global Transformations. I also own his nearly 1000-page magnum opus on the history of football, The Ball is Round, though I must sheepishly admit that I haven't gotten around to reading it yet as free time is hard to come by for me nowadays. He has since given up academia to become a sports journalist, and his many travails were the subject of his just-concluded lecture.

One of the things I deeply regret is not covering Africa closely. While listening to Goldblatt, he mentioned how sports is an often overlooked aspect of IPE. As an example, he brought up Angola. Long beset by civil war, the country's situation is not entirely resolved. However, there is a reason why great powers care much about Angola: it is rich in crude oil, diamonds, iron, and other natural resources. Now, I have dedicated many posts about the role of China in Africa [1, 2, 3, 4, 5] and will probably have more in the future. China likes to portray its role positively. Unlike Western exploiters of the past, the Chinese like saying they're just an LDC like African countries who know what it's like to be under the white man's thumb. What's more, China highlights its interest in building useful infrastructure--roads, bridges, and so on unlike Western colonizers who just extract and leave a mess behind.

Regardless of China's ultimate intentions in Africa, Angola suddenly sprung four brand spanking new stadiums on an unsuspecting world in time for the biennial, just-concluded 2010 Africa Cup of Nations. Mostly remembered for the ambush of Togolese footballers en route to the event, there's an interesting backstory to how Angola came up with the resources to host it. Where exactly did the money come from to put up these stadiums? The answer, of course, is China. Not only did the PRC front the money, but it's also had to provide the construction crews to finish the job. According to Sue Branford:
The four new football stadiums, built at a cost of US$600m, have delighted Angolans. They are aesthetically pleasing and reflect the country's rich cultural heritage. They are a far cry from the ugly old cement buildings in which Angolans and many other Africans generally watch football matches.

The stadiums are meant to show that Angola has finally recovered from a 27-year civil war that cost a million lives and drove four million people from their homes. But they also symbolise Angola's reliance on foreign investment, for the stadiums were built and largely funded by China. In stark contrast with the Communist policies adopted in the years following independence, Angola's current model of development relies heavily on a big influx of foreign money.
Don't forget there are other players, though China is still the largest--especially in the petroleum arena:
Today even more than then, it is difficult to travel in Angola without hearing about Chinese investment. China's Sino Hydro Corporation is investing US$2.4bn in rebuilding Angola's infrastructure, including hospitals and irrigation canals for agriculture. Overall, China is reported to have lent Angola more than US$5bn for this kind of project. And it is not just China. The US, Brazil, Portugal (the old colonial power) and other countries are all there.

Much of the interest in Angola is linked to the country's oil wealth. Oil accounts for 95% of Angola's export earnings, with the lion's share going to China. Angola is China's main trading partner in Africa, with two-way trade totalling US$25.3bn in 2008.
And it turns out that Angola is far from alone in China's plans to capitalize on football diplomacy as it is in the process of building stadiums in seventeen, you read that right, seventeen other African nations. The emerging issue for Africans, however, is that these acts of goodwill are not often accompanied by jobs as Chinese construction crews tend to use their own:
One of the tactics used by China to win friends is to build football stadiums -- 'stadium diplomacy', as it has been dubbed. According to Pitch Invasion, ' The Chinese have built or are in the process of building stadiums across a veritable A to Z of African states, including Angola, Benin, Cameroon, Central African Republic, Congo-Brazzaville, Djibouti, the Gambia, Liberia, Mali, Mauritius, Mozambique, Niger, Guinea, Senegal, Sierra Leone, Togo, Uganda, and Zimbabwe.

Some Angolans are unhappy with the use of unskilled Chinese workers to build roads. "About half of the labour force here in Luanda is unemployed," a director from Sonangol told a journalist in an off-the-record briefing. "It makes no sense at all to bring in Chinese workers to build roads."
Auntie has as photo essay of the stadiums being built which naturally features a lot of shots with Chinese architects. South-South cooperation for development or the yellow man's burden? I myself haven't come to a conclusion yet, but it's sure interesting to watch these developments. And certainly, building sports stadiums as a form of diplomacy is a novel way to win hearts and minds if not necessarily to provide employment where it is undoubtedly needed.

Chile's Salmon Industry Sleeps With Fishes Tonight

♠ Posted by Emmanuel in , at 2/19/2010 12:22:00 AM
It's been a long time since I've done an environmentally-related post so I'll take the opportunity to do so here. The FT is reporting that prices of salmon have shot through the roof as of late because of declining hauls from Chile. Previously a burgeoning industry in Chile, it's been hit hard by an outbreak of a lethal virus that's causing declines in fish stocks:
Salmon prices are jumping after a sharp decline in global supply following the collapse of the Chilean industry following an outbreak of a fish disease. Since the start of the year, wholesale prices for Norwegian-produced Atlantic salmon have risen 20.6 per cent, says Statistics Norway. That has extended a year-long rally in prices, which have risen 32.5 per cent to NKr37 (£4) a kilo. Industry analysts expect the surge to feed through to what people pay for salmon steaks and fillets.

Chile's output of Atlantic salmon has been hammered by the virus that causes infectious salmon anaemia, which emerged in 2007. The disease, which does not affect humans if such fish is consumed, kills off salmon by attacking their red blood cells.

"Chile, which was the second- biggest producer of salmon, has seen its output plunge more than 75 per cent in two years," said Aslak Berge at First Securities in Norway. "During peak production in 2008, Chile sold 403,000 tonnes, but we forecast a sales estimate of 90,000 tonnes this year..."

"We have never seen a year-on-year decline in global supply before and this is happening in a market where the willingness to pay is increasing," said Sjur Malm, an analyst at SEB Enskilda in Norway. "We estimate a global supply decline of 6 per cent year on year."
The culprit, it seems, are those environmental bugaboos of excessive use of chemicals and overconcentrated fish farms. The New York Times tracked the rise of infectious salmon anemia sometime ago that reduces red blood cell counts in salmon, often fatally:
A virus called infectious salmon anemia, or I.S.A., is killing millions of salmon destined for export to Japan, Europe and the United States. The spreading plague has sent shivers through Chile’s third-largest export industry, which has left local people embittered by laying off more than 1,000 workers.

It has also opened the companies to fresh charges from biologists and environmentalists who say that the breeding of salmon in crowded underwater pens is contaminating once-pristine waters and producing potentially unhealthy fish. Some say the industry is raising its fish in ways that court disaster, and producers are coming under new pressure to change their methods to preserve southern Chile’s cobalt blue waters for tourists and other marine life.

“All these problems are related to an underlying lack of sanitary controls,” said Dr. Felipe C. Cabello, a professor in the Department of Microbiology and Immunology at New York Medical College in Valhalla that has studied Chile’s fishing industry. “Parasitic infections, viral infections, fungal infections are all disseminated when the fish are stressed and the centers are too close together.”
It appears the Chileans haven't changed their methods enough since the NYT article appeared in March of 2008 to stave off the current crisis. Last year, the Pew Charitable Trusts pulled documents out of the US Food and Drug Administration (FDA) via the Freedom of Information Act (FOIA) suggesting that the methods used by Chilean salmon farmers are indeed toxic and involve use of chemicals banned in America:
The Pew Environment Group recently acquired documents from the U.S. Food and Drug Administration (FDA) revealing that three Chilean salmon farming companies, including the two largest producers of farmed salmon, used a number of drugs not approved by the U.S. government. These chemicals include the antibiotics flumequine and oxolinic acid and the pesticide emamectin benzoate. The documents further show that the farmed salmon containing residues of unapproved chemicals were destined for the U.S. market.

In these reports, obtained through a Freedom of Information Act request, the FDA declared that “if the drug is not listed in the approved drugs list… they [Chilean companies] are not allowed to use the drug to treat salmon destined to be distributed in the U.S., not even if they meet withdrawal periods and no tissue residue can be detected...”

The pesticide and antibiotic residues found are of concern due to their potential effects on human health and the environment. The pesticide emamectin benzoate, for example, is “very toxic to aquatic organisms” and “may cause long-term adverse effects in the environment,” according to the manufacturer’s safety data. The non-therapeutic use of antibiotics in fish destined for food production also raises concerns about possible antibiotic resistant bacterial infections in humans.
Final score: Mother Nature 1, Chilean Fish Farms 0. Together with Luca Brasi, Chile's salmon industry sleeps with the fishes tonight.

Franco-German Banks Will Be Hurt if the PIIGS Are

♠ Posted by Emmanuel in , at 2/18/2010 01:05:00 AM
Prior to the IMF-led rescues of ailing Eastern European countries like Hungary, Latvia, and Romania, one of the oft-spoken interests for the EU in hastening the effort was the large volume of lending emanating from the likes of Sweden to these nations that would, in turn, be endangered in the event of sovereign default. And so it is that we are hearing similar noises about how much French and German banks, among others, have at stake in lending to the financially pigged-out EU members Portugal, Ireland, Italy, Greece, and Spain. The graphic of an informative WSJ article on the subject matter pretty much says it all about the lenders and the lent to:

I think hair shirt masochists like Otmar Issing should keep these figures in mind. We are all Greeks now, buddy.

Preview: US Branding China a Currency Manipulator

♠ Posted by Emmanuel in , at 2/18/2010 12:03:00 AM
We are nearing that time of year when the US Treasury is required by Congress to report on the currency practices of trade partners as per the Omnibus Trade and Competitiveness Act of 1988. Originally devised with Japan in mind, this act has since been turned into a biannual ritual held in April and October. Once more, we get to see whether those hawkish on China are finally getting the upper hand. Last year, I said Treasury Secretary Tim Geithner wimped out on doing so; and he did so again in October. This year, we are running over the same old ground once more. Since the surrounding issues are well know, let me just bring you two articles portending what may come. First up is the Wall Street Journal:
"We expect to see actions by China" to help rebalance global trade flows, a White House official said. If Beijing fails to act, that "will put greater and greater pressure on the U.S. to respond."

"We have 10% unemployment and China is racking up huge trade surpluses with an undervalued currency—the politics [of that] are very tough," said Kenneth Lieberthal, a former Clinton administration official who now heads Brookings Institution's John L. Thornton China Center in Washington...

But lately, many elements of U.S-China cooperation have been put to the test. While the value of the yuan has long concerned U.S. politicians and business, the rhetoric is heightening as the U.S. continues to grapple with high unemployment and China hits new growth benchmarks. In a meeting with Senate Democrats this month, Mr. Obama vowed to "get much tougher" with China on trade rules, including currency rates, to ensure that U.S. goods weren't at a competitive disadvantage. The U.S. says its trade deficit with China totaled $226.83 billion in 2009—narrower than the annual deficits from 2006 to 2008, but still the U.S.'s largest imbalance with any nation...

The next big test comes in April, when, under the Omnibus Trade and Competitiveness Act of 1988, the U.S. will decide whether to label Beijing a "currency manipulator." Such a move technically wouldn't result in any U.S. actions against China. But invoking the rarely used act—no countries have been named since 1994—would likely infuriate Beijing and give Congress new ammunition to press for concrete action against China...

A senior Treasury Department official said no decision on the matter has been made. Treasury Secretary Timothy Geithner said during his Senate confirmation hearings in early 2009 that Mr. Obama believed China was manipulating its currency. But the administration declined in its semiannual Treasury Department report that April to officially label China a manipulator.

Some U.S. lawmakers are also considering steps to address the Chinese-currency issue. Sen. Chuck Grassley, an Iowa Republican, will "evaluate legislative options" if the administration doesn't label China a manipulator, said Grassley spokeswoman Jill Kozeny.
Alike most, the WSJ article believes that China will not be bullied into getting the yuan to revalue prior to the April decision. Now let us turn our attention to the Reuters article on the same issue. Unlike the WSJ, it is more bullish on the prospects of Chinese movement on the currency--for its own interests as President Obama and the WSJ suggest as well:
Beijing is likely to let its currency begin rising in value again this year in response to growing pressures at home and abroad, two U.S. private sector specialists on China said on Wednesday. "I think China has been waiting for its exports to resume growth, which they started to do in December. That, I think, gives them the domestic cover they need to resume (a) gradual appreciation," John Frisbie, president of the U.S.-China Business Council, said during a panel discussion.

President Barack Obama pushed China's exchange rate practices to the top of the bilateral agenda this month when he complained countries that undervalue their currency put U.S. companies at a huge competitive disadvantage...

Charles Freeman, a former U.S. trade official now at the Center for Strategic and International Studies, said he agreed Beijing would allow the yuan to rise gradually this year "as long as (its) exports don't drop through the floor." Many within China who "are deeply upset that they continue to have to spend hundreds of billions of dollar every year" to suppress the value of the currency, Freeman said. "So you know, there are pressures internally in China to appreciate the renminbi for its own purposes and I'll we'll see an appreciation this year," said Freeman, who worked on China issues at the U.S. Trade Representative's office.

Beijing allowed its currency to rise about 20 percent between July 2005 and July 2008, but put on the brakes to help stabilize its exports when the global financial crisis hit.

Obama's recent comments have raised speculation his administration might label China a "currency manipulator" in an semiannual Treasury Department report due on April 15. "My gut is it doesn't out-and-out name China a currency manipulator, but it comes awful close," Freeman said. "I think the administration's approach is going to be to shake a big stick on appreciation and, when they move, declare victory," he said.
I think the latter statement will be prove to be on the money. Obama will make a big stink about the matter in the run-up to the April 15 report. Once more, being branded a manipulator paves the way for punitive legislation such as the infamous Super 301. Whether legislators take up the matter in the likely non-declaration is another matter, but past history suggests we shouldn't be too surprised if talk of more China-bashing legislation falls by the wayside...at least until October when this circus starts up again.

Beauty and the Beasts: Ukraine's Tymoshenko, IMF

♠ Posted by Emmanuel in ,, at 2/17/2010 12:59:00 AM
If politics really is showbiz for ugly people, then stylish Yulia Tymoshenko should never have become the current prime minister of Ukraine. To my eyes, she looks more like the heroine of a space novel than the leader of a country suffering from something as terribly prosaic as...balance of payments problems. She seems to have used her looks for political advantage. Heck, even her bloc's logo features a heart. But, don't take my word for it: some bloggers with too much free time on their hands have dubbed the famously lovely Missus T the "#1 Hottest Head of State." I heartily agree; in second place is Cristina Fernandez of Argentina. Before I get carried away, let me just say it's not everyday that you come across a leader whose website has an entire section devoted to glamour shots like the one above. Vroom-vroom!

As you probably know, however, our Ukrainian friends recently held an election whose results favour the Russia-friendly politician Viktor Yanukovych. Unlike the 2004 contest when then-opposition allies Yulia Tymoshenko and Viktor Yushchenko successfully protested election fraud and called for a second run-off election which saw them to victory, few international observers are claiming the most recent polls were rigged. Then as now, Yanukovych's voters are those in Eastern and Southern Ukraine where folks are sympathetic to neighbouring Russia. Then as now, Tymoshenko is contesting the election results and has held a lot of things up while doing so. In terms of interstate relations, it certainly did her few favours to write about "Containing Russia" in the May/June 2007 issue of Foreign Affairs.

The poll results suggest public opinion has swung against her in the interim. Why? There's the not-inconsequential matter of Ukraine being forced to the poorhouse. If you will recall, Ukraine had to resort to a $16.4B IMF standby agreement in October of 2008. Around that time, I commented on how conditionalities were still very much operational, belying current IMF head Dominique Strauss-Kahn's notions of a kinder, gentler IMF. The style is new but the face is the same as it was so long ago. To no one's real surprise, these belt-tightening efforts have not been popular with the electorate. While she was preaching austerity, Tymoshenko's former ally, President Yushchenko, made matters worse in the run-up to the elections by unleashing a torrent of spending just as the IMF was about to release its second tranche to Ukraine worth $3.8 billion:
Earlier in the week [of November 2, 2009], the IMF warned Ukraine President Viktor Yushchenko that he needed to veto the law boosting Ukraine's minimum wage and pensions if the country was to remain on track with the IMF lending program. Mr. Yushchenko, who trails far behind major rivals in opinion polls, had remained noncommittal until Friday, when he announced to reporters that he had signed the bill. Mr. Yushchenko said he didn't want the country's budget problems to be solved "at the expense of pensioners, poor people and the disabled"...IMF chief Dominique Strauss-Kahn told Reuters that Ukraine was now "off track and in this situation I'm afraid it would be very difficult to complete the next review of the program."
That was in November. As mentioned earlier, infighting between Yushchenko and Tymoshenko has further stalled the release of the second IMF tranche. At present, it's the latter contesting the election result with Yanukovych that's holding matters up. Reuters has more on the matter:
The International Monetary Fund suspended its $16.4 billion bailout programme -- a lifeline for crisis-hit Ukraine -- at the end of last year in the wake of a series of broken spending promises and a fierce election campaign run by the two sides.

The recipe to bring the IMF back to the negotiating table seems simple -- the existence of a stable government and a functioning parliament. But Tymoshenko's intention to challenge the result shows she will put up a fight for power and all but rules out a future coalition between her supporters and Yanukovich's party in parliament to form a strong ruling coalition...

International observers hailed the vote as "impressive" and Tymoshenko is unlikely to get the hundreds of court rulings needed to cancel the poll result as a whole, so the deadline to formally conclude the election by Feb. 17 and inaugurate a new president by mid-March is likely to be met, analysts said. Even then, working on the assumption Yanukovich's victory is confirmed, the new president will then face a hostile government still in power and no majority of his own in parliament -- vital if he is to pass the laws that are conditions of the IMF aid.

The global lender wants to see the 2010 budget draft passed, wage increases it objected to scrapped and domestic household gas prices increased, easing the load on the budget of the state, which still subsidises them. Every month, the government faces hefty bills for Russian gas, state wages and pensions and to repay domestic debt at skyhigh yields that it has been issuing to fund its spending...

Even once the political landscape has calmed down in Ukraine, Yanukovich faces either tough negotiations with the IMF or an unpopular U-turn. The fund failed to provide a $3.8 billion tranche expected last November after parliament increased minimum wages and pensions by up to 10 percent, a move that would cost the budget billions of dollars it does not have.
Ukrainian politics is difficult to say the least. Nevertheless, it's disheartening how Yanukovych has been awarded another chance almost by default in the absence of more promising alternatives. Make no mistake: the three main antagonists of 2004 are still here. Hopefully, Yanukovych can bargain for a better deal on energy supplies with the Russians or even receive some emergency funding.

As for Missus T, I simply think that being in government during an IMF bailout is political suicide. If Yanukovych can wangle much-needed concessions from Ukraine's ever-menacing neighbour, so much the better. It's called realpolitik and "Sucking Up to Russia." Among other things, Yanukoych proposes a consortium to manage Kiev’s strategic natural gas pipeline and extension of a lease to allow Russia continued access to the Black Sea naval port of Sevastopol beyond 2017 when the current one expires. Tymoshenko's had many years to help remedy things but has been thwarted for one reason or another. Beautiful as she is, mayhaps it's better if she took her bike and hit the road (or at least rode alongside) so we can see if Yanukovych--dowdy looking he may be--can do better. Sometimes, I guess beauty can be positively heartbreaking as the Ukrainians are learning these days.

UPDATE 1: Also see this more recent Reuters article on the post-election political calculus.

UPDATE 2: Well I'll be darned--Tymoshenko has successfully petitioned for a temporary suspension of the presidential election results. Nevertheless, it should be ruled on before February 25 when parliament is scheduled to swear in the new president.

UPDATE 3 on March 4: Tymoshenko's ruling coalition has been disbanded pending the formation of another government. Parliamentary meanderings are fun to watch, no?

Why Yes, China is Already Unloading US Treasuries

♠ Posted by Emmanuel in at 2/17/2010 12:30:00 AM
I haven't the slightest idea of why most media outlets and the rather logic-proof foreign exchange market haven't made more of the news that, yes, China is shedding its identifiable holdings of Treasuries. Fortunately, the ever-reliable Reuters--my favourite newswire nowadays--picks up the trail. Not that it's showing up in the yen's value but Japan has actually surpassed China in terms of recorded official holdings for the first time since August of 2008:
China fell behind Japan to become the second-biggest holder of U.S. Treasuries in a sign the Chinese have been acting on recent complaints about U.S policy by unloading U.S. debt. As one of the biggest creditors of the United States, China has complained over the past year about U.S. policies and worried publicly about the security of its dollar-denominated assets.

China sold more than $34 billion in short- and long-dated Treasuries in December, bringing its total holdings down to $755.4 billion from $789.6 billion in November, according to U.S. Treasury data released on Tuesday.

Some analysts fear a waning appetite for U.S. debt could push up Treasury yields and weaken a fragile U.S. recovery. "Net-net this data is only going to add to second guessing of Chinese behavior and raise concerns that they are not showing much enthusiasm for U.S. dollar-denominated paper," said Alan Ruskin, chief international strategist at RBS Securities in Greenwich, Connecticut.

Ties between China and the United States have been tested several times recently on issues including currency, trade, Internet censorship, human rights and U.S. arms sales to Taiwan. Japan, by adding $11.5 billion, raised its total holdings to $768.8 billion, surpassing China for the first time since August 2008.
There is no rocket science with this observation as the relevant data is easily accessible. PRC holdings peaked in May of 2009 at $801.5 billion and have fallen since then. That said, I'd be disingenuous if I didn't mention the appropriate caveats: First, note the sizeable difference between what Treasury records as China's American holdings--the $755.4 billion--and what observers think China holds in terms of dollar-denominated reserves--widely believed to be 70% of its official reserve total of $2.4 trillion or $1.68 trillion. Obviously, not all of China's holdings are in Treasuries with some in agencies (Fannie Mae and Freddie Mac paper), corporate bonds, and equities (via its sovereign wealth fund, the China Investment Corporation).

Next, what are mostly captured here are what are known as "custodial holdings" or foreign governments' Treasuries held by the Federal Reserve on the former's behalf. It is thus very possible that China is using other agents or primary dealers to buy Treasuries such as those in other financial centres like London or Hong Kong. Indeed, it may even deliberately do so to produce the impression that it is not increasing or even decreasing its holdings according to TIC (Treasury International Capital system) data mentioned above. Finally, I'd be remiss if I didn't point out that, for the month of December 2009 at least, net capital inflows were a still-healthy $50.9 million according to yesterday's report.

All the same, it's good to see China indicating that it's putting its money where its mouth is at. More of this, please.

Greek Tragedy? No, Greek Tragicomedy Must End

♠ Posted by Emmanuel in ,, at 2/16/2010 08:22:00 AM
This is becoming farcical: given recent EU flailing over what to do with Greece, the latter's Prime Minister George Papandreou has gone into Marxist recycling mode by describing his country as "a laboratory animal in the battle between Europe and the markets." Pretty soon, this guy may be talking about circuits of capital and the rest of it. Meanwhile, the well-known German economist Otmar Issing, formerly on the boards of both the Bundesbank and the ECB, ups the tragicomic ante by offering an op-ed describing why the EU "cannot afford" to give Greece a helping hand:
Participation in Emu brings huge advantages. The benefits of joining a stable economic area are greatest for countries that were unable to deliver such conditions before. Thanks to the euro, Greece has enjoyed long-term interest rates at a record low. But instead of delivering on its commitment at the time of entry to reduce public debt levels, the country has wasted potential savings in a spending frenzy. The crisis with which it is now confronted is not the result of an “external shock” such as an earthquake, but the result of bad policies pursued over many years. Bailing out Greece would reward such behaviour and create moral hazard of a dimension hardly seen before.
There are two points of note here. First, by referring to an "external shock," Issing is trying to preempt claims that, on the contrary, EU support for troubled Eurozone economies is possible. To Issing, there is no incident of force majeure here compelling the EU to bail out Greece; it was largely Greece's fault that it finds itself in this situation rather than any exceptional occurrence. As Tony Barber of the FT points out, however, Article 122 of the Lisbon Treaty states:
Where a Member State is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control, the Council, on a proposal from the Commission, may grant, under certain conditions, Union financial assistance to the Member State concerned. The President of the Council shall inform the European Parliament of the decision taken.
Second, conveniently forgotten in Issing's account are accession but not (yet) European Monetary Union members Hungary, Latvia, and Romania already feeding at the EU trough. Take Latvia. It has availed of "medium-term financial assistance" worth 7.5 billion mostly in the form of an IMF stand-by agreement together with contributions from Nordic countries and token amounts from the EBRD, World Bank, the Czech Republic, and Poland. See the EU site on how the second disbursement has already been released and the particulars of Latvia's Memorandum of Understanding. Essentially, this bailout is in the time-honoured format: further releases of money are contingent on the borrower meeting certain fiscal targets and the implementation of public sector belt-tightening measures. Yes, they're conditionalities and "structural adjustment" in so many words. The same pattern holds for the earlier precedent of Hungary receiving a combined 17B package and the later one of Romania receiving 20B.

The argument being put forward by Greek bailout naysayers is that this balance of payments facility was not designed for the situation Greece finds itself in. That is, it does not suffer from a balance of payments crisis or a lack of foreign exchange to purchase necessary imports but a (potential) difficulty in financing a rather large and growing fiscal hole. Again, however, Article 122 neither limits the coverage of support to BoP crises exclusively nor to non-EMU states.

Like before, I am convinced that the road ahead for the EU's Greek tragicomedy is to repeat the precedent set by Hungary, Latvia, and Romania. Instead of confusing the general public with hyperbolic statements on both sides, just say that the EU will lend to Greece if push comes to shove, but in tandem with the IMF. Doing so accomplishes a number of things. First, making conditionalities restrictive will have demonstration effects for other PIIGS--there would be less or no "moral hozard" arising from the ignominy of a Eurozone economy resorting to the IMF. Second, it will calm down this endless speculative feeding frenzy concerning what is basically a minor EU economy. Third, it does not break with recent historical precedent of what the EU has done with wayward member states.

Indeed, Greece is largely behind its messed up finances and yes, it's even fudged figures to disguise this fact. But, extending assistance does not necessarily invite further "moral hazard" provided that the process is humiliating and punitive enough to compensate for past indiscretions. Times are extraordinarily tough. Implying that Greece may soon face the wrath of Dominique Strauss-Kahn despite protestations from Athens to the contrary is long overdue.