FX Intervention Trifecta: Korea, Malaysia, Thailand

♠ Posted by Emmanuel in ,, at 12/31/2010 12:57:00 PM
Oh, will the combatants ever cease from "international currency war" so we can celebrate the holidays in relative peace? With the US dollar doing another of its habitual swoons due to much-lamented American free money policies, Asian economies not particularly keen on shooting themselves in the foot are having to wade into the open market and buy the godforsaken and hapless greenback to stem the appreciation of their currencies. From the Wall Street Journal comes this snippet:
Central banks in South Korea, Malaysia and Thailand are believed to have intervened in foreign-exchange markets Thursday as Asian currencies surged against the dollar on optimism about the region's economic outlook, underscored by strong economic data from China and signals that the yuan will continue to strengthen.

Taiwan, meanwhile, unveiled measures to buttress its banking system against rapid movements in foreign capital, the latest Asian economy to introduce stricter regulations to control the risks posed by such capital flows...

In Kuala Lumpur, traders said Malaysia's central bank was suspected of buying dollars to curb a rise in the ringgit, which hit a three-month high Thursday. Bank Negara Malaysia may have bought dollars at around 3.0810-3.0820 ringgit per dollar, dealers said. The dollar was at 3.0846 ringgit in late trade.

Traders in Seoul said they suspected the Bank of Korea entered the market, buying more than $500 million at several intervals between 1,135 and 1,140 won per dollar. The dollar closed at 1,134.80 won, bringing the won's gains against the dollar to 2.6% for the year.

In Bangkok, the dollar was at 30.15 baht in late trade—down from 30.16 baht late Wednesday—with suspected buying by the central bank around that level to limit the downside, two dealers said.

In Taipei, which has been trying to temper gains in the New Taiwan dollar—a favorite among investors seeking exposure to China, given Taiwan's increasingly close economic ties to the mainland—Taiwan's central bank announced new measures to control capital flows. Starting Saturday, local banks will have to set aside 90% of foreign investors' new deposits as reserves, a leap from the current level of 9.775%.
So the usually America-friendly Martin Wolf believes Asian countries cannot win in the US-led "international currency war." I don't see any sign of many of these Asian countries relenting just yet, though. 2011 promises to be more of the same unless something major changes the outlook of these nations. For, Bernanke's chopper will surely be strafing us with greenback emissions from greater heights--of that you can be as certain of as death and taxes.

China: Moving from or Clinging to Export Reliance?

♠ Posted by Emmanuel in , at 12/31/2010 12:15:00 PM
We have, dear friends, reached the end of another year. Still, there is interesting news that suggest the Chinese are already thinking about 2011 while we're still celebrating the arrival of a new year (Chinese new year is still on February 3). The changes identified below seemingly indicate contrasting pressures on the PRC leadership.

First, the central government is demanding a greater share of dividend payouts from state-owned enterprises. Given the astounding rates of investment in China, I certainly believe this is a welcome development. Aside from reducing the potential for overinvestment, the hope here is that more state funds emanating from these SOEs will be allocated to spending on social safety nets which can encourage the emergence of a Chinese consumer culture:
Currently, 99 central government-backed firms are required to pay 5% of their profits as dividends, and 18 companies pay 10%. Another 34 centrally owned companies pay nothing. Under the new rules, 15 companies, including China's major energy and telecommunications companies, will have to pay 15% of profits in dividends. Another 78 companies in sectors including transportation and metals, will pay 10%, and 33 companies will pay 5%. Two companies that manage the government's grain and cotton reserves will continue to be exempt.

The new ratios are still far below the 33% average dividend that state enterprises pay on average in other countries, according to World Bank research. The World Bank and the International Monetary Fund have been among the most ardent advocates of an overhaul of the way China handles state firms' earnings, arguing that using the funds for costs like expanded health care would help lower China's astronomical savings rate and reduce its trade surplus.

Such arguments have come from within the government, too. Zhou Tianyong, a vice director of the research bureau at the Communist Party's Central Party School, recently suggested the government use the dividends from state firms to replenish China's national social security fund. Mr. Zhou, the central bank adviser, said the government should consult the public on how the dividend income should be spent.
It's good, encouraging stuff. On the other hand, the Chinese government is also implementing a measure that encourages exporters to keep more of their money offshore. Instead of having to repatriate overseas earnings ASAP (and strengthen the yuan with regular sales of foreign currency), the new ruling will allow Chinese firms more discretion in doing so. I may also encourage more Chinese firms to think about investing abroad--not a bad idea as a diversification play:
China said Friday it will allow the country's exporters to park their revenue overseas, expanding a trial program that marks a significant loosening of Beijing's currency controls and could reduce pressure on the yuan to appreciate. Under the new rules, which will take effect Saturday, qualified Chinese exporters will be free to decide on the length of time they want to keep their income offshore and when to repatriate the funds to China, the State Administration of Foreign Exchange, said in a statement.

Previously, Chinese exporters were required to repatriate their foreign currency earnings and exchange them for yuan under the so-called surrender requirement. But the influx of foreign exchange caused problems for monetary authorities, contributing to inflation pressures and putting pressure on the currency to appreciate.

"The direction is clear. The authorities want less foreign exchange to come in, so they are giving exporters the right to keep it abroad," said UBS economist Wang Tao. The move, which is modeled on a small pilot project that started Oct. 1, will also help Chinese companies conduct cross-border financing and support their overseas expansion, the foreign-exchange regulator said.

Relaxing the surrender requirement could help resolve several problems for Beijing. If firms aren't forced to repatriate their foreign earnings, it could reduce demand for the local currency, thus reducing pressure on the yuan to appreciate. The change could also reduce inflation pressures, and slow the buildup of foreign-exchange reserves. China's central bank, the People's Bank of China, bought up the foreign exchange under the surrender requirement, which left it with an ever-growing stash of foreign currency that it recycled into foreign government bonds and other investments.
Why yes, we do live in interesting times.

Indonesia Mounts Its Defence in Int'l Currency War

♠ Posted by Emmanuel in , at 12/30/2010 02:14:00 AM
Just a little over a decade ago, Indonesia was the epicentre of the Asian financial crisis. In a matter of months, the local currency, the Indonesian rupiah (IDR), had lost eighty percent of its value as foreign investors fled the country as quickly as they came. After all, they call it "hot money" for a good reason. Amidst all this were food riots, race riots, and various separatist movements trying to take advantage of the seeming loss of control by the central government. By 1998, harsh IMF conditionalities had helped ease out the long-running Suharto regime.

But that was then and this is now. The--how should I describe them--flatulent fiscal and monetary policies of the Americans, currency warriors extraordinaire, now threaten to overwhelm Indonesia's financial stability. Like in so many other countries in the region, the nearly unlimited ammunition the Yanks threaten to use causes asset bubbles, inflation, and a diminution of export performance.

And so it has come to pass that our Indonesian colleagues have sounded the warning bells. While not slapping capital controls per se, there has been considerable use of macroprudential measures such as increasing reserve requirements. It should be noted that the Chinese use a lot of this tinkering as well:
Indonesia said it will tighten rules on banks’ foreign-exchange holdings and overseas borrowing to cope with capital inflows that have pushed up inflation and strengthened the rupiah this year. Bank Indonesia will also reintroduce a 30 percent cap on lenders’ short-term overseas borrowing to minimize the risk of sudden capital outflows, it said yesterday. Banks must set aside 5 percent of their total foreign-exchange holdings as reserves as of March 2011, from 1 percent currently, Deputy Governor Budi Mulya said at a press briefing in Jakarta yesterday. The reserve requirement will rise to 8 percent effective June.

“These rules will ease pressure on the rupiah,” said Anton Gunawan, chief economist at Jakarta-based PT Bank Danamon Indonesia. “The central bank wants to absorb excess liquidity in the banking system.” Indonesia and its peers are grappling with increasing capital inflows as borrowing costs and growth rates that are higher than those of developed economies boost the appeal of emerging-market assets. Taiwan tightened curbs on exchange-rate derivatives this week and South Korea plans similar measures, according to an official at the country’s financial regulator...

Bank Indonesia has resisted imposing capital controls or raising its benchmark interest rate from a record-low 6.5 percent, choosing instead to increase bank reserve requirements and encourage investors to keep their money in the country for longer periods. The current benchmark rate is consistent with Indonesia’s goal of achieving inflation of 4 percent to 6 percent in 2011 and 3.5 percent to 5.5 percent in 2012, Mulya said yesterday.

The higher foreign-exchange reserve ratios may absorb as much as $3 billion in excess liquidity, and are “prudent banking” measures aimed at helping Southeast Asia’s largest economy cope with capital inflows, Mulya said. “If money is pulled into the reserve requirement then it cannot circulate within the system,” said Purbaya Yudhi Sadewa, an economist at PT Danareksa Research Institute in Jakarta. “That’s a disincentive to avoid banks attracting too much dollar since they must pay interest on that dollar whereas the money is put away at Bank Indonesia, which may not even earn interest.”

Lenders will be required to limit their short-term overseas borrowing to no more than 30 percent of their capital starting in January, the central bank said. The rule aims to encourage a shift to long-term foreign borrowing and reduce the risk of sudden reversals in capital flows, it said. The requirement was scrapped in 2008 because of the global financial crisis...

Five state-owned Indonesian financial institutions, including PT Bank Mandiri, have given their commitment to buy back bonds to ease the impact of sudden capital outflows during a crisis, Agus Suprijanto, acting head of fiscal policy at the Finance Ministry, said this week. The government is still in talks over the use of their funds and will prioritize funding from the state budget for any buybacks, he added.

Indonesia will also require lenders with assets of at least 10 trillion rupiah ($1 billion) to announce their prime lending rates, effective in March 2011. This rule will push banks to decrease their net interest margin and become more efficient, the central bank said. Lending growth may reach 22 percent this year, it said.
Bridging the Asian financial crisis era of foreign exchange pouring out and today's Indonesia with money pouring in, keep in mind that former Indonesian Finance Minister Sri Mulyani Indrawati has become a managing director at the World Bank for her widely praised efforts to stabilize Indonesia's economy post-financial crisis. Aside from reining in foreign short-term borrowing, she also did much to address the pervase corruption of the Suharto era. We wish our fellow Southeast Asians all the best, and I guess it's better to have problems dealing with excessive foreign exchange inflows instead of the opposite, right?

Philippines' Economics of Excessive Vacation

♠ Posted by Emmanuel in , at 12/26/2010 07:35:00 PM
Is too much vacation bad? Working in academia right now, I must unreservedly state that one of its perks is having more free time once the semester is out. However, for the clock puncher / office slave classes, things are not as straightforward. Take the example of the Philippines. Inheriting a "hectic" holiday schedule from its colonial masters of manana the Spanish, things have gotten out of hand in recent years. In a bid to supposedly increase vacation trips and decrease disruptions due to holidays, it has had a habit of moving holidays that fall midweek to Fridays and Mondays.

However, the economic benefits of doing so are not clear. Indeed, industry voices and the president himself are looking to reduce the number of paid holidays to a more manageable 16 [!] days--still world-leading by any standard, though:
With less than two weeks left before Christmas this year, the Philippine government unveiled a holiday gift to its people: Friday would be day off to mark Christmas Eve, and a second public holiday, in honor of a national martyr, would be observed on Monday, Dec. 27.

The result was a windfall four-day weekend. But instead of invoking cheer, such surprises are increasingly being met with grumbles from Philippine business leaders, its president and even some of its heavily vacationed workers. The Dec. 12 holiday shuffle was part of a distinctly Philippine way of handing out and scheduling days off—offering many official vacation days, and often rearranging them at the last minute to fall on the nearest Friday or Monday.

The country's leaders have hoped the long weekends will encourage citizens to shop and travel, boosting retail sales and the local tourism industry. Former Philippine President Gloria Macapagal Arroyo embraced the strategy, dubbed "holiday economics," and was often photographed on long weekends kitted out in a wetsuit for some surfing, or visiting her home province [of Pampanga], north of Manila.
Not working out that way. First, disposable income is not high enough to encourage jaunts elsewhere in the Philippines during long weekends. Let's just say there isn't yet a habit of going around Europe on cheap Easyjet or Ryanair weekend trips:
The tourism industry in the Philippines accounts for 8% of total gross domestic product, compared with nearly double that in nearby Thailand, so shuffling and adding holidays to benefit the travel industry would have a relatively slight knock-on effect on the broader economy. Many Filipino workers don't earn enough to go off on lavish jaunts around the country anyway. The per capita income here averages under $2,000 a year. Even those with solid professional jobs struggle to make ends meet, and don't necessarily get paid on national holidays.
Second, all these paid holidays are, according to some, making the Philippines less attractive as a business destination compared to its neighbouring countries which get by on less R&R:
Fewer holidays could help stir more foreign interest in the economy. In a recent study, the Joint Foreign Chambers of Commerce warned that the number of holidays and their erratic timing dissuades some foreign companies from coming here. Under Philippine law, businesses have to double daily wages for those who work through the main public holidays, or pay up to 50% on other selected holidays. That is a powerful deterrent as lower-cost locations such as Bangladesh and Vietnam open up to the global economy.

Already, foreign direct investment is the lowest of the major Southeast Asian countries, totaling $1.95 billion in 2009 compared with $4.88 billion in Indonesia, $7.60 billion in Vietnam and $5.96 billion in Thailand.
Maybe too much vacation isn't good. But then again, I'm not exactly in a position to gripe, right?

'Indonesian & Filipino Corruption Compared'

♠ Posted by Emmanuel in , at 12/24/2010 01:29:00 PM
With Christmas a few hours away, here's more lighthearted fare for you all. A few weeks ago, I attended an LSE event held by our colleagues here at the Asia Research Centre intriguingly titled "Where Have all the Bad Guys Gone? Governance in Indonesia Today." Since Southeast Asia is my area of interest for obvious reasons, governance matters are a matter near and dear to me. Needless to say, it was a very interesting discussion. After the event, Roger Montgomery told me the following joke about the difference between Indonesia and Filipino corruption, with the latter coming out worse and being the punch line.

So the Philippines ranks rather lower than Indonesia in corruption perceptions via the likes of Transparency International .The latter has made some strides towards combating corruption that the Philippines should investigate. Ah well, I just hope my retelling is reasonably accurate for now. Here it goes...

A decade and a half ago, Dian and Renato were roommates at Harvard Business School studying for their MBAs. Reminiscing about their B-school days, Dian rung up his Filipino friend Renato from his office in Jakarta. When Renato had free time, Dian said, he should come visit Indonesia.

And so it came to pass that Renato found some time off work to accept the invitation of his old roommate. Upon arriving at Soekarno-Hatta International Airport, Renato was suitably impressed when Dian sent a Mercedes-Benz limousine to pick him up. Arriving at Dian's sprawling mansion in Jakarta's exclusive Kebayoran Beru residential district, Renato greeted his old friend warmly:

"I've got to hand it to you, Dian. You've really made it. Once we were just grad students struggling to get by. But look at you now, you're a wealthy industrialist--one of Indonesia's elite! What's the secret of your success?"

Dian just grinned, told Renato to get back in the car, and instructed his chauffeur to drive to the outskirts of Jakarta. While approaching a power plant, Dian asked Renato, "Do you see that geothermal plant?"

Renato nodded.

Dian smiled broadly at his friend and said, "ten percent!"

Renato gave Dian a big pat on the back and replied, "That's brilliant, Dian!" For the rest of his stay, Renato was treated to the finest entertainment money can buy in Jakarta. But, in the back of his mind, he was already plotting how to top his old schoolmate.

Four years later, Dian was at work when Renato rang him up and invited him to visit the Philippines. Renato assured him of a good time, and Dian found himself in Manila two months afterward.

Arriving at Ninoy Aquino International Airport, Dian was suitably impressed when Renato sent a stretched Mercedes-Benz limousine to pick him up, complete with a chauffeur wearing immaculate white gloves. Arriving at Renato's mansion in Manila's exclusive Forbes Park residential district, Dian greeted his old friend warmly:

"I've got to hand it to you, Renato. You've really made it. Not so long ago we were just MBA students scrounging for our meals. But wow, you're now the toast of the town --one of the Philippine elite! What's the secret of your success?"

Renato just grinned, told Dian to get back in the car, and instructed his chauffeur to drive to the outskirts of Manila. For two hours they talked about the good old days until they came upon an empty stretch of road. Renato pointed at nothing in particular and asked Dian, "Do you see that geothermal plant?"

Dian looked at the empty expanse, scratched his head and said, "I don't see anything."

Renato smiled broadly and said, "one-hundred percent!"

This joke is probably based on the infamous Bataan Nuclear Power Plant that the US-based firm Westinghouse built under the rule of Ferdinand Marcos but was never used. (History buffs will also remember Bataan as the site of the infamous 1942 Bataan Death March.)

Markets Ponder China Bailing Out Europe (Again)

♠ Posted by Emmanuel in ,,, at 12/22/2010 07:16:00 PM
OK, OK, so I am using the term "bailing out" in a very loose sense: For instance, China has not quite said that its continued patronage of US debt in the wake of the financial crisis is specifically to bail out America. Rather, it's always couched in diplomacy-speak such as preserving "stability" in the global financial system as a certain Yankee diplomat-beggar would put it.

I almost missed the clip above of LSE IDEAS' very own Niall Ferguson arguing that the Chinese should help bail out China on Fareed Zakaria's GSP programme. (Despite what our school paper says, he does work here.) This theme has been a continuing one: former IMF Chief Economist Simon Johnson even went so far as to suggest its headquarters should be in Beijing if and when the Chinese become the largest shareholders. Somewhat less far-fetched, China has indeed voiced support for the idea of diversifying its holdings by purchasing sovereign debt of troubled eurozone members (which ares still denominated in euros).

So it is that newswires are abuzz with news that the Chinese are once again making noises to similar effect:
China has promised to take further “concerted action” to support European financial stabilisation, including continuing to buy the bonds of countries at the centre of the sovereign debt crisis, according to senior European officials. The officials, who declined to be named, said Wang Qishan, a Chinese vice-premier, had given assurances that China would step up support for European stabilisation efforts “if necessary”. Mr Wang made the pledge during the third annual China-EU High Level Economic and Trade Dialogue, held in Beijing on Tuesday...

In addition, Klaus Regling, the head of the eurozone’s €440bn ($577bn) bail-out fund, said China had shown enthusiasm for bonds issued by his agency, tasked with raising a sizeable chunk of the funding for the €85bn Irish bail-out. The EU is China’s biggest export market, with two-way trade valued at $434bn in the first 11 months of this year, and Beijing has a strong interest in supporting regional stability. “From the European point of view we appreciate the support of China for the European and international effort to safeguard financial stability in Europe,” said Olli Rehn, European Commissioner for Economic and Monetary Affairs.
Two things, however: so the Chinese have already voiced support for troubled eurozone economies, but that hasn't done much to reduce their interest rate differentials over that of German debt. Also, further support is likely to be tied to the EU moving on two longstanding grievances China holds with the West over lifting its designation as a "non-market economy" earlier than 2016 as agreed to in its WTO accession and limitations to its purchases of European arms:
Mr Wang’s comments boosted the euro’s value against the US dollar, but China’s public support for Greece and Portugal over recent months has not prevented their bond yields remaining near record highs. European officials said that although China had not explicitly linked its bond purchases to any specific issues, Beijing asked in the talks for the EU to grant it “market economy” status and lift a long-standing arms embargo.
That said, I gather that market commentators are taking somewhat increased risk appetite as a result of expectations for China to backstop Europe. Once more, it's interesting how much market participants now attribute to China's actions despite limited evidence of it buying distressed euro-denominated sovereign debt.

US Sues China at WTO on Wind Power Subsidies

♠ Posted by Emmanuel in ,, at 12/22/2010 05:34:00 PM
This case has been anticipated for some time but is very interesting nonetheless. It is yet another entry in a series of steel-related actions by the US against China on the import front. Previous actions include those over tires and steel pipe. While China took the US to the WTO and recently lost its appeal over tariffs applied to its tires, this new action involves the US taking China to the WTO instead of unilaterally applying tariffs against Chinese steel products. On the export front, the US did take China to the WTO as well but that was over the PRC applying duties to American flat-rolled electrical steel.

From the USTR press blurb:

U.S. Trade Representative Ron Kirk announced today that the United States has requested consultations with the People’s Republic of China under the dispute settlement provisions of the World Trade Organization (WTO) concerning a program known as the Special Fund for Wind Power Manufacturing. Under this program, China appears to provide subsidies that are prohibited under WTO rules because the grants awarded under the program seem to be contingent on Chinese wind power equipment manufacturers using parts and components made in China rather than foreign-made parts and components.

“Import substitution subsidies are particularly harmful and inherently trade distorting, which is why they are expressly prohibited under WTO rules,” said Ambassador Kirk. “These subsidies effectively operate as a barrier to U.S. exports to China. Opening markets by removing barriers to our exports is a core element of the President’s trade strategy. Our decision today, along with the two other WTO cases that we recently filed against China, underscores our commitment to ensuring a level playing field with China for American workers and businesses.”

USTR is also including in its consultations request transparency-related claims, which address China’s failure to comply with its obligation to notify the subsidies at issue under the WTO’s Agreement on Subsidies and Countervailing Measures (SCM Agreement) and China’s failure to translate the underlying measure into one or more of the official languages of the WTO.

The size of individual grants currently available under the Special Fund for Wind Power Manufacturing ranges between $6.7 million and $22.5 million, and the recipients of these grants – Chinese manufacturers of wind turbines and Chinese manufacturers of parts and components for wind turbines – can receive multiple grants as the size of the wind turbine models increases. USTR estimates that grants provided under this program since 2008 could total several hundred million dollars.

Today’s action arises out of an investigation USTR initiated in response to a petition filed by the United Steelworkers (USW) under section 301 of the Trade Act of 1974, as amended. That investigation was initiated on October 15, 2010, and addressed allegations relating to a variety of Chinese practices affecting trade and investment in the green technology sector, including not only prohibited subsides but also export restraints, discrimination against foreign companies and imported goods, technology transfer requirements, and domestic subsidies causing serious prejudice to U.S. interests.

USTR was able to make progress on some of these other areas of concern during the course of the section 301 investigation through its bilateral engagement with China.

The USW raised a number of concerns regarding discrimination faced by U.S. firms seeking to supply equipment to large-scale wind power projects in China. At the December 14-15 meetings of the U.S.-China Joint Commission on Commerce and Trade (JCCT), USTR was able to address one highly problematic Chinese policy measure negatively affecting U.S. firms in China’s wind sector. Going forward, China agreed to modify its criteria for approval of new wind power projects by no longer requiring foreign enterprises to have prior experience supplying equipment to large-scale wind power projects in China and instead will recognize their prior experience outside China. Through the JCCT, China also reconfirmed its 2009 JCCT commitment that it had eliminated other discriminatory provisions related to local content requirements in the wind manufacturing sector.

During the course of the section 301 investigation, the United States was also able to obtain China’s clarification that two additional subsidy programs identified by the USW in its petition, the Export Research and Development Fund program and the Ride the Wind program, had been fully terminated. These programs appeared to have provided prohibited export subsidies and prohibited import substitution subsidies. Along with the case being filed today, these steps effectively address a substantial portion of the claims in the USW’s petition.

With respect to the remaining USW allegations, Ambassador Kirk stated that USTR will continue to investigate them even though no formal action is being taken under the section 301 statute. “We will continue to work closely with the USW and other stakeholders in the months ahead on the remaining allegations. If we are able to develop sufficient evidence to support those allegations and they can be effectively addressed through WTO litigation, we will pursue the enforcement of our rights at the WTO independently of section 301,” said Ambassador Kirk.


On October 15, 2010, USTR initiated an investigation under section 302(a) of the Trade Act of 1974, as amended, with respect to acts, policies, and practices of the People’s Republic of China affecting trade and investment in the green technology sector. USTR initiated the investigation in response to a petition filed on September 9, 2010 by the USW. USTR delayed requesting WTO consultations pursuant to Section 303(b) of the Trade Act of 1974, as amended, which provides that USTR, after conferring with the petitioner, may delay for up to 90 days any request for consultations. Today’s announcement to request consultations on the Special Fund for Wind Power Manufacturing concludes the pre-consultation phase of USTR’s investigation under section 302(a) of the Trade Act of 1974, as amended.

The SCM Agreement differentiates between prohibited and actionable subsidies. Article 3.1(b) of the SCM prohibits subsidies conditioned on the use of domestic over imported goods – known as import substitution subsidies – because they are recognized to be especially trade distorting. The Special Fund for Wind Power Manufacturing appears to fall within the prohibition of Article 3.1(b). In contrast, actionable subsidies are permissible under the SCM unless they cause adverse effects or injury to the interests of another Member.

The two other WTO cases referenced by Ambassador Kirk were brought against China on September 15, 2010. In one case, the United States is claiming that China acted inconsistently with various substantive and procedural obligations under the applicable WTO rules when it imposed antidumping duties and countervailing duties on imports of grain oriented flat-rolled electrical steel from the United States. In the other case, the United States is challenging China’s restrictions on foreign suppliers of electronic payment services, like the major U.S. credit card companies.

Consultations are the first step in the WTO dispute settlement process. Parties are encouraged to arrive at a mutually agreed solution through consultations. If the matter is not resolved through consultations, the United States may request the establishment of a WTO dispute settlement panel.

Maybe LDCs Aren't Being Inundated w/ Capital (Yet)

♠ Posted by Emmanuel in , at 12/21/2010 02:51:00 PM
The general impression you get from certain developing countries is that easy money policies emanating from reserve currency-issuing ones like the unbelievably profligate United States are driving up their exchange rates and threatening to inflate various bubbles. It may be some surprise that, in 2009 at least, this scenario did not really happen as capital flows to the developing world fell from 2008 according to a just-released World Bank report:
Net global capital flows to developing countries fell 20 percent in 2009 to $598 billion (3.7 percent of gross national income [GNI]), from $744 billion in 2008 (4.5 percent of GNI) and were a little over half the 2007 peak of $1.11 trillion. This according to a new comprehensive dataset launched by the World Bank today on international capital flows titled “Global Development Finance 2011: External Debt of Developing Countries,” which reveals the impact of the financial crisis on 128 developing countries.

Global private flows (debt and equity) declined by 27 percent in 2009 despite a rebound in bond issuance, portfolio equity flows, and (mostly trade-related) short-term debt flows. Foreign direct investment (FDI) inflows across the globe fell 40 percent, to $354 billion - their sharpest drop in 20 years. All the largest recipients of FDI saw net inflow declines in 2009. Net debt flows from private creditors dropped by 70 percent from $182 billion in 2008 to $59 billion the following year, driven by the collapse in medium-term commercial bank lending to public and private borrowers.

Reflecting increased support to developing countries during the crisis, net capital inflows (loans and grants) from official creditors increased by 50 percent to $171 billion in 2009. This was driven by a sharp rise in gross disbursements on new loans extended by the international financial institutions. These rose to $98 billion (from $61 billion in 2008) in calendar year 2009, of which $31 billion came from IBRD and IDA, the highest in the history of these institutions.
It will be interesting to study the implications here when the 2010 figures come around: Did repatriation flows to distressed Western firms temporarily reduce capital flows to the developing world? Or, did the effects of free money policies kick in after a lag--especially once everyone recognized that countries like the US had no intention of shaping up anytime soon?

Architect of the Euro, Padoa-Schioppa, Dies

♠ Posted by Emmanuel in at 12/19/2010 05:23:00 PM
The eurozone's current woes notwithstanding, one of the indicators of the worth of an idea is the number of persons who are attributed to helping create a single currency. For its conceptual underpinnings, American Nobel laureate Robert Mundell is widely regarded as the (Intellectual) "Father of the Euro." Meanwhile, the late Dutchman Wim Duisenberg who died in a swimming pool accident also has an argument for being the "Father of the Euro" after being the first ECB president and seeing its introduction in 13 countries.

It is thus with sadness and more than a little confusion that we must observe the passing of another notable figure in the history of European economic integration, Tommaso Padoa-Schioppa, at the age of 70. Perhaps this political economy Mamma Mia situation is mitigated by him being regarded as the one placing the scaffolding around the currency; its operational infrastructure--hence his recognition as the architect of the single currency. This Italian fellow has been arguing for a single currency since the beginning and has served many important Euro-posts:
Padoa-Schioppa, who fought for the single currency as a catalyst for European integration, served on the ECB’s executive board from 1999 until 2005. He was deputy director general of the Bank of Italy for 13 years, during which time he was passed over for the governorship in favor of Antonio Fazio in 1993. He was named finance minister under Italian Prime Minister Romano Prodi in May 2006, a position he kept until the government collapsed in January 2008.

The central banker completed a seven-year term on the ECB board overseeing the euro at the end of May 2005. The only founding board member to serve longer was Chief Economist Otmar Issing...

In 1988, Padoa-Schioppa served as joint secretary to the Delors Committee, called after the then-president of the European Commission, which was formed to investigate how European Union countries could remove all common trade barriers by introducing a single currency. The committee came up with a three-stage plan that was later included in the 1992 Maastricht Treaty that instituted the single currency.

Concerned that countries might retreat from their commitments to the single currency, Padoa-Schioppa developed a timetable for currency conversion that made it harder for member countries to back out of the project. On the flight to Maastricht, he persuaded Giulio Andreotti, then Italian prime minister, to push for the euro’s initiation in 1999 if a majority of members didn’t agree on a date to start by 1997, according to Matt Marshall in his 1999 book on the euro’s creation called ‘‘The Bank.”

The euro was introduced on Jan. 1, 1999, and was coined “a currency without a state” by Padoa-Schioppa. “I do not think that a single currency is an event for the last days of the history of mankind that simply crowns perfection,” he said in his testimony before the European Parliament in May 1998. “It is something that has to be in reality while reality evolves.”

Padoa-Schioppa was picked to serve as Italian finance minister [during the short-lived Prodi administration] at a time when the country’s economy had stalled for two out of five years and the debt burden had ballooned to the largest in the EU. He focused on cutting government spending, often taking low-cost airlines to international meetings. His efforts to cut spending ensured Italy’s budget deficit fell below the EU limit in 2007 for the first time since 2002. Before him, the annual deficit had widened to 4.3 percent of gross domestic product in 2005, a 10-year high at the time.
Make no mistake: many capable folks fought long and hard for the single currency against naysayers all and sundry. The battle to keep it a viable enterprise goes on.

Can Count Dracula Save Romania's Economy?

♠ Posted by Emmanuel in ,,, at 12/16/2010 01:16:00 PM
The title is more apropos than you would think. When we last talked about Romania, it was in the clutches of an IMF standby agreement as one of the Soviet satellite countries that ran into a bad balance-of-payments situation in June of 2009. The recently Economist featured a downcast article on Romania's economic prospects going forward. In some respects, it's a matter of "political risk" being an unsettled matter in the country:
Nor are foreign investors queuing up to take advantage of Romania’s fertile soil and beautiful scenery or its flexible, cheap and multilingual workforce. Services are particularly underdeveloped. “This could be the back office of Europe,” says a foreign banker, who tries hard to stay optimistic. It could also be a regional hub for companies interested in smaller neighbouring countries. But investors like certainty, not the murky, jerky decision-making that typifies Romanian politics.
Aside from the difficulties attracting foreign investors due to political shenanigans, there's the matter of promoting tourism. For better or worse, Romania is associated with Vlad Basarab Tepes, also known as Vlad the Impaler or "Count Dracula" as immortalized in fiction. In scenic Snagov Lake lies the island of Snagov, whose monastery contains his grave. Despite his global renown (or notoriety depending on your perspective), this site should be of at least as much historical interest as Lenin's Tomb or the Mausoleum of Mao Zedong. Yet, despite the picturesque location, efforts to make it into a tourist destination have been haphazard at best:
A good example of good intentions but poor results comes from Snagov, an island monastery where the real-life Dracula, a prince called Vlad Tepes, is supposedly buried. With much fanfare, the authorities have built a bridge across the lake, a beauty spot, in the hope of attracting tourists. That is welcome: past governments perversely shunned Romania’s most famous son. The new tourism minister, Elena Udrea (a vivacious and wealthy blonde), wants him to take centre stage. She will lead foreign ambassadors on a “Dracula tour” of his castles in the summer. But for humbler visitors, finding the unsignposted way to Snagov is hard. The ill-built bridge is an eyesore. A rough-spoken monk demands a hefty fee and refers to local gypsies (Roma) as “scum”.
It's not quite a Disneyfied attraction just yet. Call it a regrettable metaphor for lack of progress -

Once I had the rarest rose
That ever deigned to bloom
Cruel winter chilled the bud
And stole my flower too soon

'Key to Happiness is Work, Not Necessarily Growth'

♠ Posted by Emmanuel in , at 12/16/2010 07:59:00 AM
Well here's another report that should put growth fetishists on the defensive. Before you start talking about endogeneity biases and how employment is related to economic growth, do note that the assertion above ain't mine. Rather, it's that of the International Institute of Labor Studies in Geneva--a research body of the International Labor Organization which, of course, is under the United Nations. International organizations, what'd we do without them?

Anyway, the notable assertion the IILS makes in the 2010 edition of the World of Work report is that life satisfaction is driven primarily by employment outcomes and not economic growth. This being a UN publication, you will not be surprised to note that the policy recommendation is thus to reduce unemployment and to reduce income inequalities stemming from unemployment. The summary concerning this finding is reproduced below, though the section of the report is well worth reading for those with an interest in labor or well-being:
Social cohesion should figure more prominently in the policy debate. The initial policy response contributed to building a sense that employment and social concerns were taken into account. However, continued social cohesion cannot be taken for granted if the strategy became less inclusive.
Already, there is growing evidence of a deteriorated social climate, especially in countries where job losses have been the highest. For example, out of 82 countries with available information, more than three-quarters indicate that in 2009, individual perceptions of their quality of life and standard of living have declined. The unemployment rate in these countries has risen by nearly 3 percentage points more than in the other countries. Even among those with a job, satisfaction at work has deteriorated significantly – in more than two-thirds of 71 countries with data, job satisfaction fell in 2009. Not surprisingly, perceptions of unfairness are growing (46 out of 83 countries) and people have less confidence in governments (36 out of 72 countries) than prior to the crisis. The Report shows that higher unemployment and growing income inequalities are key determinants of the deterioration in social climate indicators. By contrast, economic growth per se is not a very significant factor behind social climate indicators. This result reinforces the importance of job-centered policy action advocated by the ILO Global Jobs Pact.
In sum, adopting a job-centered exit strategy would enhance social cohesion while ensuring sustainable recovery from the crisis. This requires carefully-crafted fiscal support to tackle long-term unemployment, efforts to strengthen the links between labour incomes and productivity developments and financial reforms geared towards the needs of the real economy. As stressed by many observers, the crisis should be used as an opportunity to building a balanced global economy. The employment and social outlook suggests that time is running out to make this opportunity a reality.

Round 2: China Bashing Bill Heads to US Senate

♠ Posted by Emmanuel in , at 12/15/2010 01:35:00 PM
A few months ago, I commented on a China-bashing bill, H.R. 2378 ("The Currency for Fair Trade Reform Act"), finally getting through the US House of Representatives. That done, its equivalent is now coursing its way through the Senate. Something that strikes me is the timing: instead of waiting for the newly-elected senators to take their place next year, the China-bashing bills proponents think it at least has a chance during the current lame-duck session. Why? I can think of two reasons: First, gains the Republicans made during the November elections may appear negative to the bill's proponents insofar as Republicans are, on the balance, less protectionist by perception. Second, anti-China sentiment may be so great at present that it's the right time to strike.

In any event, what's transpiring is that the bill's co-sponsors in the Senate are trying to tie this China-bashing legislation to the pending and rather odious spending bill Obama has penned as a compromise between--what--American hyperspending and mere superspending:
Two US senators on Monday sought to introduce legislation targeting China over alleged currency manipulation by tying it to a bill championed by President Barack Obama to avert a massive New Year's tax increase. Republican Olympia Snowe and Democrat Sherrod Brown said they had introduced the "Currency Reform for Fair Trade Act" as an amendment to the tax measure.

The act would direct the Commerce Department to treat deliberate currency undervaluation as a forbidden export subsidy, paving the way for countervailing duties on exports from the offending country. Though the effort was not expected to succeed, it reflected persistent congressional anger about China's huge trade surplus with the United States.
Well heck, if they think it's worth a try. What follows is the text of the letter urging a Senate vote -

Dear Leader (Harry) Reid and Leader (Mitch) McConnell:

We are writing to ask that a Senate vote be scheduled on the Currency Reform for Fair Trade Act (H.R.2378), which addresses an abusive practice that is thwarting free market competition in the global trade arena. Currency manipulation is undermining the ability of American companies to compete in the global marketplace and hire American workers. It is in the national interest to address this issue before the Senate adjourns.

The problems facing workers and manufacturers due to currency manipulation are growing more severe with each passing day. China is by far the leading violator of international trade rules and its actions continue to harm America’s workers, farmers, industry, and manufacturing. Federal Reserve Chairman Ben Bernanke has said that China’s currency undervaluation provides “an effective subsidy for Chinese exporters.” Leading economists estimate that the renminbi is undervalued by as much as 40 percent. Our nation’s trade deficit with China reached $227 billion last year, which represents a 170 percent increase since 2000. According to the Economic Policy Institute, currency manipulation – along with other factors – has caused the United States to lose more than 2.4 million jobs to China over the past decade.

The United States has been pressing China to allow the renminbi to appreciate for more than seven years. In 2004, the Treasury Department expressed concern when China’s foreign exchange reserves rose to $346 billion. Today, those reserves exceed $2.4 trillion. Repeated efforts by the administration to address Chinese government currency manipulation through diplomacy have yielded no meaningful results. The American people are demanding legislation to stop our trading partners from rigging the game to undercut true market competition. It is time for the Senate to meet that demand and take action by voting on the House-passed bill.

Under existing laws, tariffs can be imposed on imports benefitting from government subsidies, if the subsidized exports from foreign countries threaten the well-being of American companies and workers. In the past, the Department of Commerce has refused to designate currency manipulation as illegal because its benefits are not deemed to be “limited exclusively to circumstances of export.”

The Currency Reform for Fair Trade Act is a measured approach that would direct the Department of Commerce to treat currency undervaluation as a prohibited export subsidy. This designation would ensure the government is equipped to respond on behalf of American workers and manufacturers by imposing countervailing duties on subsidized exports from China.

The challenges facing our nation’s working families, including those who depend on trade-sensitive manufacturing jobs in Ohio and Maine, increase with each passing week. The House of Representatives passed the Currency Reform for Fair Trade Act in September with overwhelming, bipartisan support. It is time to take action to help rebuild the economic foundation of the middle class. It is time to move this legislation forward in the Senate for a vote.

Thank you for your consideration of this important matter.


Senator Sherrod Brown (D-Ohio)
Senator Olympia Snowe (R-Maine)

IMF's Strauss-Kahn on Progress in Saving Greece

♠ Posted by Emmanuel in , at 12/14/2010 01:57:00 PM
There's an interesting interview of IMF Managing-Director Dominique Strauss-Kahn (DSK) that recently appeared in the Greek newspaper Kathimereni. Protestations that this is a kinder, gentler, less Washington Consensus-style lender aside, the emphasis is still very much on the old triad of liberalization, privatization, and deregulation. Elsewhere, DSK is quite diplomatic and in the process avoids questions about Portugal and Spain, preferring to point out that neither has approached the IMF for help. (He usefully points out as well that the problems facing Greece and Ireland differ significantly.) Moreover, Strauss-Kahn avers that the current episode is not an existential threat to the euro, two-speed economies and everything else. Yet the usually smooth DSK stumbles a bit when asked which industries he sees growth coming from. It kind of beats me, too...

Q: What specific moves are needed in the next couple of months in order for the fourth installment of the loan to Greece, in March, not to be endangered?

DSK: As the recent assessment of the EC, ECB, and IMF made clear, the program is broadly on track. There has been good progress in a number of key areas--notably in reducing the fiscal deficit and in completing a landmark pension reform. Now, the program is at an important crossroads. The overriding issue--as I reiterated during my visit to Athens--is to get growth going again. Growth--and the jobs that come from it. To achieve this, fundamental structural reforms are needed. For example, opening up services, trade, and the professions; streamlining state enterprises; and improving the climate for business and investment. In short, unlocking the potential of Greek industry and the Greek people. This is not easily done, but if Greece can maintain the momentum of reform, investors will come to realize the country's commitment to change and confidence will grow. I am optimistic Greece can do it.

Q: The IMF has repeatedly noted the need for political consensus. The leader of the main opposition party, who voted against the program, has said he is willing to show solidarity, provided there are changes to the program. Is that something you would accept?

DSK: I met with the leadership of the Opposition during my visit to Athens. I think we agreed that Greece is at a defining moment in its history and that the country can only succeed if there is the broadest possible support for the changes that are needed. That said, it is not up to the European partners or the IMF to make decisions on policy changes--that is the government's prerogative. So ideas for policy changes should, first and foremost, be discussed with the government. What the IMF does is advise on policy options and their feasibility based on our global experience.

Q: Is today's crisis the sole fault of the previous government, or is there enough blame to go around, given that the spreads skyrocketd during the first six months that Papandreou came to power?

DSK: Playing the "blame game" is not helpful. What matters is how to get out of the crisis. To that end, the government is implementing an ambitious program that aims at restructuring broad parts of the economy to make it more competitive, create jobs, and put it on a path of sustainable growth. At the same time, the government is trying to do this in a way that is fair, socially balanced, and protects the most vulnerable groups. So let's look forward instead of backwards--that's what is important now: to support the reform effort and realize the country's true potential.

Q: In that context, did Mr Papandreou take too long to request assistance from the EU/IMF last Spring?

DSK: When the crisis deepened last year, the government took the necessary steps to consult its partners and seek help. Don't forget also that the government had already begun to implement substantial measures to lower the deficit and stabilize the situation--long before the Europeans or the IMF came in. When the pressures increased to unsustainable levels, the government did the right thing and sought assistance.

Q: Is the fact that the IMF and EU will assist Ireland helpful or detrimental to Greece's effort, and how? And should the repayment plans for the two countries be the same?

DSK: Greece and Ireland are very different cases. While Greece was mainly affected by mounting public debt in an uncompetitive and relatively closed economy, Ireland, which has a very open and dynamic economy, faced mainly a crisis in the banking system that became a heavy burden on state finances. These differences mean that the economic programs supported by the European partners and the Fund need to be tailored to those specific circumstances. Regarding the repayment period for Greece, we are--as you know--advocating an extension and we will work with our European partners on a solution to give Greece some further breathing room.

Q: Should Portugal, and even Spain, opt for the EU/IMF mechanism in the near future?

DSK: Neither country has requested help from the IMF, and there is no point to speculate about hypotheticals.

Q: Do you find the idea of issuing Eurobonds helpful, or even necessary at this stage, and can it materialize given Germany's opposition which brings to mind its delay in agreeing with the mechanism for Greece last year?

DSK: The situation in Europe is serious and economic recovery sluggish-- and there is no silver bullet to fix it overnight. What the Eurozone needs is a comprehensive solution. Just as the resolution of the global financial crisis two years ago required a global approach, a European approach is now needed to resolve the problem of low growth in the Eurozone.

Q: What is your view on the potential for the members of the Eurozone going back to their national currencies, or the introduction of a two-speed Europe with a stronger euro for the North, and a weaker one for the South?

DSK: As I said, the situation in Europe is serious, but it is not a threat to the euro. The Eurozone's system and institutions worked well during the "good times" over the past decade. Now they need to be strengthened so as to better deal with crises. I am confident this will happen.

Q: The global crisis demands a globally coordinated response, but how helpful is the fact that Germany is following a tight policy while the Obama Administration has opted for expansionism?

DSK: Again, every country's circumstances are different and the response needs to be customized accordingly. What is important is that national policies do not create or exacerbate global imbalances. That's why we are advocating, within the framework of the G20, the Mutual Assessment Process to help countries monitor and coordinate policy responses that invariably affect their neighbors, regions, and the world. No doubt the world can do better on this point, but we are getting there--one step at a time.

Q: Are you worried that the crisis in Southern Europe could spread to the whole continent and negatively affect growth?

DSK: Clearly, the plight of some European countries affects growth in neighboring countries and across the region. All countries in Europe should be concerned about the slow pace of growth. Looking at the bigger picture, Europe risks faling behind other regions of the world and needs to become more innovative and competitive. Europe has done this before, and it can do it again. A growing and dynamic Europe, of course, is also good for the rest of the world.

Q: At a press conference during the Annual Meetings, I asked you about the difficulty Greece faces in achieving growth in the present world economic environment. Can you please tell us where growth can come from in the case of Greece?

DSK: Well, I pointed to some of the potential areas for growth in my previous answer. Among the sectors that offer strong potential growth are tourism, and the energy and transport sectors, and I am also convinced that liberalization and opening up of closed professions will spur the retail and service sector. The key is for Greece to restore its competitiveness in Europe and beyond. If Greece can implement the reforms in the program, we project growth returning in the latter half of next year or early in 2012. This depends, of course, on there being a positive economic environment in the rest of Europe and in the global economy--because we are all connected now. That is true for Greece as it is for every other country.

Q: How would you describe your personal relationship with PM Papandreou and FM Papaconstantinou?

DSK: Excellent. PM Papandreou and FM Papaconstantinou, as well as other government officials, are showing great resolve in getting the country back on track under very difficult circumstances. Political will and leadership are essential for any economic program to succeed.

Q: How do you assess the lack of coordination among ministers and would the personal involvement of the PM be neded?

DSK: The government is committed and fully engaged. Otherwise an ambitious reform program such as this wouldn't go anywhere.

Q: Finally, may I ask you for your reaction, both on a personal level, as well as head of the IMF, to the demonstrations against you?

DSK: Demonstrations are part of any healthy democracy. It is only natural that some people are unhappy about the changes that need to be made. I understand that. This is a very difficult situation for the Greek people and I do not underestimate the efforts they are making. In fact, I commend them on those efforts--as I believe the rest of the world also is beginning to do. I would only emphasize this point again: when you have to make tough decisions and take difficult measures, it must be done in a socially just manner. From the beginning, we--and the government--have stressed the issue of fairness. Ordinary workers and pensioners have done their part. Now, others in Greek society--including the high-income earners--must do their part too. That is why, for example, strengthening tax administration, and coming down hard on tax evasion, is so important. Yes, this will help increase needed revenues but, more than this, it will help enhance fairness. I believe that,ultimately, people will support reforms--even very difficult reforms--if they feel they are in the best interest of their country and if everyone is contributing their fair share.

WikiLeaks: Shell 'Infiltrates' Nigeria, Hugo Bossed

♠ Posted by Emmanuel in ,, at 12/10/2010 01:14:00 AM
I can hardly believe that this is my third post on WikiLeaks. After cataloguing typical American double-speak on "Internet freedom" (whatever that is) and suggesting that WikiLeaks move to Montenegro if survival is its goal, we now have two interesting entries.

First, I have in the past featured the highly controversial activities of Royal Dutch Shell in Nigeria. To say that its activities in the Niger Delta and relationship with the Ogoni tribe are controversial is to put things mildly. Now we have these cables in which American officials claim that a Shell executive boasted of infiltrating the Nigerian government. From WikiLeaks' media partner The Guardian:
The oil giant Shell claimed it had inserted staff into all the main ministries of the Nigerian government, giving it access to politicians' every move in the oil-rich Niger Delta, according to a leaked US diplomatic cable.

The company's top executive in Nigeria told US diplomats that Shell had seconded employees to every relevant department and so knew "everything that was being done in those ministries". She boasted that the Nigerian government had "forgotten" about the extent of Shell's infiltration and was unaware of how much the company knew about its deliberations.

The cache of secret dispatches from Washington's embassies in Africa also revealed that the Anglo-Dutch oil firm swapped intelligence with the US, in one case providing US diplomats with the names of Nigerian politicians it suspected of supporting militant activity, and requesting information from the US on whether the militants had acquired anti-aircraft missiles.
There's another story that caught my eye. I have never been much of a fan of Venezuela's so-called Bolivarian Revolution insofar as it has done rather worse by its people in the aftermath of expropriating several Western oil companies. If you kick the foreigners out, I'd be a heck of a lot more impressed if you could at least sustain output at pre-nationalization levels. Let's just say Hugo Chavez hasn't achieved this feat. Talk about ideology trumping reality. Worse, for lack of technical expertise, it's said that he's asking same Western companies he kicked out to come back on terms more favourable to them. Not very impressive; Simon Bolivar probably wouldn't approve:
Venezuela's tottering economy is forcing Hugo Chávez to make deals with foreign corporations to save his socialist revolution from going broke. The Venezuelan president has courted European, American and Asian companies in behind-the-scenes negotiations that highlight a severe financial crunch in his government. Venezuela's state-owned oil company, PDVSA, is the engine of the economy but buckled when given an ultimatum by its Italian counterpart and has scrambled to attract foreign partners, according to confidential US embassy cables released by WikiLeaks.

The memos depict an unfolding economic fiasco and suggest some of Chávez's key allies – Argentina, Brazil and Cuba – are gravely concerned at Venezuela's direction. "President Chávez, for his part, is acutely aware of the impact the country's general economic trajectory has had on his popularity," says one cable...

However, in separate private conversations with the [American] ambassador, Patrick Duddy, industry figures detailed the parlous state of the industry. A senior manager from Chevron estimated the state oil company's output at 2.1m to 2.3m barrels per day, well below official declarations of 3.3m.
And then there's the humiliation of Hugo as he calls back the conquistadores:
Italy's ambassador to Caracas, Luigi Maccotta, told his US counterpart that [national] Italian oil company ENI squeezed PDVSA over an Orinoco belt deal in January this year knowing it had no one else to turn to. The Italians delayed the signing by two days to reinforce the Venezuelan government's "need for ENI". Paolo Scaroni, the company's CEO, then faced down Venezuela's oil minister, Rafael Ramirez, over changes to terms and conditions.

"Thirty minutes before the ceremony was supposed to begin Scaroni told Ramirez: 'Take it or leave it, I can get on my plane and move on.' Ramirez apparently used that half an hour to convince President Chávez to accept all of ENI's proposed changes or risk losing the deal," according to the US cable. The Italians said they would not pay PDVSA a standard signing bonus because the company already owed them $1bn.
Colour me unimpressed, Hugo.

Philippines, Not India is World's Call Centre Capital

♠ Posted by Emmanuel in ,, at 12/09/2010 12:03:00 AM
Now this article kind of took me by surprise. While India is renowned as a global hub for business process outsourcing (BPO)--we even have popular entertainment glamorizing its services-led economic renaissance in Slumdog Millionaire--it seems another country has been away from the BPO limelight that has just stolen India's thunder. Alike India, the Philippines has been subject to the (English-speaking) white man's burden of enlightening us coloured people about the benefits of markets and democracy (well sort of). Also like India, then, the Philippines has a large English-speaking population which happens to be tertiary educated. And while India has its slumdog millionaires, the Philippines has its own emerging call centre subculture of those who work the night shift to synchronize with overseas markets like Western Europe and North America. (As a side note, I am very pleased with phenomenon since daytime traffic in Manila is horrendous.) Heck, stories of escapades by call centre workers are rife with alleged rises in HIV cases being attributed to them.

Anyway, back to the story. Earlier this year, I was struck by outgoing Philippine President Gloria Macapagal-Arroyo claiming in May that the Philippines was second only to India in BPO foreign exchange revenues. Pretty impressive for a country that's not been as widely stereotyped as a call centre destination, right? Well now comes news that, actually, the Philippines is set to end the year ahead of India in terms of call centre employees and revenues for 2010. Of course, call centres are only a sliver of the BPO market--and not often very attractive ones unless you consider telemarketing and fielding customer service calls fun.

I am also not entirely sure if the head of the Commission on Information and Communications Technology (CICT)--an executive-level body in the Philippine government--has his numbers entirely right. But, as the Indians aren't contesting these figures, perhaps they're correct. From BusinessWorld:
The [Philippines] may have surpassed India in terms of call center employees and revenues, but it has yet to take a similar lead in other segments of outsourcing, an official said Tuesday. Commission on Information and Communications Technology Chairman Ivan John E. Uy told reporters at the sidelines of an electronics industry conference that the Philippines had exceeded India in the number of new employees, with 15,000 as of end-October. "India had 13,800 new hired [sic] employees for this year but we still have to wait until the year ends."

Mr. Uy said the Philippines had also surpassed India in call center revenues, with $5.5 billion as of end-October against the latter’s $5.3 billion. "We are projecting to reach $5.8 billion by the end of the year, while India projected $5.5 billion. These are significant accomplishments, but the entire [Philippine outsourcing] industry is still valued at $9 billion, while India is at $47 billion," he said.

On its Web site, IT services firm SourcingLine said the entire outsourcing industry goes beyond call centers, to include services that demand higher skills like software development, engineering design and investment research. Business Process Outsourcing Association of the Philippines chief executive officer Oscar R. Sañez said in a phone interview that the country’s annual offshore outsourcing revenues could more than double to $25 billion, equivalent to a 10% share of the global market, by 2016.

"The industry can grow from $9 billion in annual revenues and approximately 500,000 direct employees today to $20 billion and 900,000 employees by 2016 if current conditions are sustained and with a lot of hard work," he said.
The reasons given for this surprising factoid are many (and a few are likely self-serving): Filipinos have a more "neutral" accent (i.e., they can imitate talking like white people more easily--cue "Apu Nahasapeemapetilon"); Philippine workers are better equipped with relevant skills; etc -
"We won this war not because we're lower cost than India. To some extent, we are a little bit higher priced to operate a call center compared to India. We won this battle by virtue of Filipino quality. We grew faster than India because it's the Filipino talent, which is world class caliber," he said. He noted that Indian call centers are already migrating some of their operations to the country.

Jojo Uligan, CCAP corporate secretary and executive director, said the Philippines played up its strengths in the past 10 years by being a superior value destination for US companies. He said Filipinos have a better cultural affinity to Americans, and their accents are more neutral. "When you train a Filipino to speak English, you would never know it is a Filipino. I think Americans like to talk to a person they can understand," he said...

"We're not just focusing on the United States but other English-speaking countries like the UK, which we only service a little. Australia and New Zealand are also good potential for us. But again, if you can market in these areas where we service a smaller percentage of the business, then we will have a better chance of getting more jobs," he said...
But then comes the honest truth: call centres are atthe bottom end of the BPO totem pole. So, in reality, India may already be leaving such services behind in search of greener and more profitable pastures:
Call centers are generally positioned at the bottom of the BPO value chain since they provide lower profit margins compared to other BPO offerings. Non-voice BPO offerings, such as financial, medical, editorial, and engineering services, contribute higher profit margins, thus is preferred by more established BPO players, including those from India.

Local BPO firms have pursued call center services as part of a strategy. Call centers are considered as their entry point for a slice of the non-voice outsourced and/or offshored businesses of clients.
So perhaps it's Jai-Ho (You Are My Destiny) for the Philippines to rule the roost in call centre operations, but the challenge is to continue to move up the ladder like India in terms of the sophistication and profitability of services on offer such as CAD/CAM work, digital animation and so forth. In the meantime, Shakalaka Baby not to Bangalore but to Manila!

Already I'm thinking of preparing my screenplay for The Great Philippine Call Centre Movie to raise public awareness about the country's status as the world leader. In tawdry modern fashion, it will concern before or after work-hours recreational (procreational?) activities by call centre workers. Fielding calls by Yanks who don't know what a MAC address is, long-distance love triangles at Hewlett-Packard Philippines, an A.R. Rahman soundtrack, Danny Boyle for the director...it's a guaranteed hit, I tell you. I am yours forever; yes forever I will follow...

OECD on Education: Chinese Bury US Students

♠ Posted by Emmanuel in ,, at 12/08/2010 12:01:00 AM
About the capitalist states, it doesn't depend on you whether or not we exist. If you don't like us, don't accept our invitations, and don't invite us to come to see you. Whether you like it or not, history is on our side. We will bury you!

One of the signature statements of the Cold War was Nikita Khrushchev saying the above phrase to Western diplomats in 1956. While it was certainly enjoyable bluster alike his alleged shoe-banging incident at the UN General Assembly four years later, let's say that history was not on his side. However, let's now turn to an altogether different sort of command economy of the "market authoritarian" sort.

Call it Michael Fay syndrome. I needn't remind readers about the pitiful performance of the American educational system or "K-12" from kindergarten to the twelfth grade. High school leavers' continuously declining performance is certainly no reason to be optimistic about the decrepitude of American education. In international comparisons, American pupils underwhelm--to put it mildly. Now, the OECD has just released its 2009 edition of the Programme for International Student Assessment (PISA) comparing the performance of 15-year-old students from 65 countries on a standardized test with reading, science, and math portions. While the 2006 edition flagged up the unsurprisingly poor performance of the United States, let's say things haven't gotten much better overall. Despite marginal improvements, the overall picture remains the same. In comparison to its peers, the US lags.

More embarrassingly, this is the first edition of the PISA to include evaluations of students from mainland China. (Note that this is being done for comparison purposes, not because China is an OECD member.) While students from Hong Kong have routinely kicked Yankee student butt for years, we now understand that the youth from the town of Shanghai do a pretty damn good job of doing the same (not that it's so hard given the bedraggled state of modern America). The table above from the Sydney Morning Herland should ram home this point: the sample of Shanghainese students are tops in reading, science, and math. In comparison, their Yankee peers are...near or below OECD average in all three areas. From the Christian Science Monitor:
The latest results from the Programme for International Student Assessment (PISA) released Tuesday by the Organisation for Economic Cooperation and Development (OECD) show Asian students – particularly those from China, who participated in the exam for the first time in 2009 – at the top of the pack, with the United States generally in the middle or, in math, toward the bottom.

“We are in the middle of the pack; that’s not where we want to be,” said Stuart Kerachsky, deputy commissioner of the National Center for Education Statistics, in a call with reporters. “That’s not the goal, but all I see in these numbers is things maybe inching in the right direction.”

The test is given to 15-year-old students in dozens of countries around the world every three years, and aims to assess their reading, math, and science literacy as they prepare to enter college or the workforce. It has long been used in the US to raise alarm bells about American students falling behind in a global world.

And indeed, the most striking result from the 2009 PISA may be the top performance of Chinese students, who participated in the exam for the first time with a pilot program that tested students in several cities. Mr. Kerachsky and others cautioned not to read too much into the comparisons, since they are from cities – those which draw many of China’s top students – and are hardly representative of all of China. But the results from Shanghai, in particular, which came out No. 1 in all three subject areas, were remarkably high.

In math, for instance, Shanghai students scored an average of 600 (on a scale with a 500-point average). Students in Korea, the top OECD country, scored a 546, and in the United States, they scored 487. That score puts them in 25th place among the 34 OECD countries, though the score is statistically lower than just 17 of those countries, and indistinguishable from 11 others.

American students scored below the OECD average of 496. The countries outperforming the US include Finland – perennially a top-shower on PISA, along with Korea – Belgium, Estonia, Iceland, France, and the Slovak Republic, among others. US students scored higher than those in just five OECD countries: Greece, Israel, Turkey, Chile, and Mexico.
Yes, you can complain that Shanghai isn't representative of the educational performance of China as a whole. Then again, why not get American students from the largest US cities of New York or Los Angeles to participate and I'd still wager that the kids from Shanghai will utterly demolish the US kids. The thankful difference between Cold War-era Soviet Union and China is simple: unlike Khrushchev and others full of his sort of bluster, the Chinese don't really brag about their achievements, preferring to be low-key about them. But on a day like this, the world wakes up and realizes that Chinese students seem to be leaving their American brethren far behind in terms of academic performance. With so many near-insolvent US states left with few choices but to cut education budgets, I am not optimistic about future US performance in international education comparisons like PISA.

I do look forward to these OECD reports that tell us what we already suspect but now have hard evidence to back up. Yes, Americans are getting fat as all get-out. And now, yes, American kids aren't exactly the brightest. So actually Nikita, as American students demonstrate, there's no need to bury America. It's doing a pretty damn good job burying itself.

World Bank's Lin on Post-Crisis Industrial Policy

♠ Posted by Emmanuel in ,, at 12/07/2010 12:01:00 AM
A few months back I featured Robert Wade's article in Global Policy concerning the prospects of industrial policy post-crisis. Yes, it was a bit of triumphalism about the follies of blind obeisance to American neoliberal diktat circa 1997. However, time moves on. World Bank Chief Economist Justin Yifu Lin has a new response in the same journal to Wade that takes (surprise!) issue with some of the latter's assertions, especially scepticism about the worth of neoclassical economics as well as the role of the market vis-a-vis that of the state. Let's just say Lin is more sanguine on neoclassical economics and the market as an engine of economic growth. Although Lin takes a somewhat softer line towards heterodox economics championed by Wade et al., let's just say this detente has limitations:
I do not share Wade’s severe assessment of neoclassical economics on two points. First, despite the absence of convergence among world economies, the progress made by developing countries in recent decades cannot be underestimated. The fact that the majority of states have remained in the same income category over two decades may be the reflection of general progress (a tide-lifting-all-boats phenomenon) rather than a sign of general stagnation. Although relative incomes among various groups of countries may not have changed much, the absolute levels of incomes have increased steadily in recent decades. This has contributed substantially to the reduction of world poverty (Ravallion and Chen, 2008). Clearly, an open world economy has offered opportunities for many developing countries throughout the world to achieve sustained growth and improve their living standards (Growth Commission, 2008). This is true even in many countries that have not moved up the convergence ladder.

Second, the market is an important resource allocation mechanism at any given level of development. Economic growth occurs when firms are given the incentive system to take advantage of existing opportunities determined by the country’s endowment structure. They can also create potential new business niches by identifying and exploiting the economy’s latent comparative advantage. They spontaneously enter industries and choose technologies consistent with the economy’s comparative advantage only when the price system reflects the relative scarcity of factors in the country’s endowment. Therefore, a competitive market system should be the economy’s fundamental mechanism for resource allocation at each stage of its development. However, economic development is a dynamic process that requires industrial upgrading and corresponding improvements in ‘hard’ (tangible) and ‘soft’ (intangible) infrastructure at each stage. Such upgrading requires coordination and entails large externalities to firms’ transaction costs and returns to capital investment. Thus, in addition to an effective market mechanism, the government should play an active role in facilitating industrial upgrading and infrastructure improvements.
And here is Lin's assessment of what industrial policy can do for development. To no one's real surprise, he does not afford it the commanding heights and instead gives it a more limited role:
A framework for conceptualizing the facilitating role of the government in industrial upgrading and economic diversification could involve a six-step process as follows. (1) Developing country governments can identify the list of tradable goods and services that have been produced for about 20 years in dynamically growing countries with similar endowment structures and a per capita income that is about 100 per cent higher than their own. (2) Among the industries in that list, the government may give priority to those in which some domestic private firms have already entered spontaneously, and try to identify and help remove the obstacles to their development. (3) Some of those industries in the list may be completely new to domestic firms; in such cases, the government could adopt specific measures to attract firms in the higher-income countries identified in the first step to invest in these industries. (4) Developing country governments should pay close attention to private enterprises’ successful self-discoveries of industries that are not included in the list identified in step (1) and provide support to scale up those industries. (5) In developing countries with poor infrastructure and an unfriendly business environment, the government can invest in industrial parks or export processing zones and make the necessary improvements to attract domestic private firms and/or foreign firms that may be willing to invest in the targeted industries. Finally (6) limited incentives may also be provided to domestic pioneer firms or foreign investors that work within the list of industries identified in step (1) in order to compensate for the non-rival, public knowledge created by their investments.
Also, don't miss my previous post on Lin debating with Ha-Joon Chang in the pages of the Development Policy Review. For those really into the topic, there's also a longer World Bank working paper co-authored by Lin on "Growth identification and facilitation : the role of the state in the dynamics of structural change." Happy reading! States and markets...the debate continues.

Hey Assange, Take WikiLeaks.ch to Montenegro

♠ Posted by Emmanuel in at 12/06/2010 12:09:00 AM
Whatever you may think of Julian Assange's now world-famous leaks, you have to wonder about his follow-through. Having plied a cache of cables from the world's most formidable foreign service, he's had a more challenging time keeping his leaks online. As we keep reading nowadays, Amazon decided to discontinue hosting WikiLeaks (allegedly under duress). Meanwhile, the cash flow to Julian Assange & Co. has also been severed as PayPal has similarly cut off handling donations to this "illegal" operation.

So having done the hard work of acquiring American secrets, it is thus puzzling to me why he's not thought of keeping his online renegade activities afloat. Odd? Yes, of course. Puzzlingly enough, Assange hasn't observed the tactics of those who've been in American crosshairs for a much longer period of time--Internet software piracy sites. As if on cue, the world's top private tracker site, Demonoid, has moved its registration to--get this--Montenegro
Earlier this week Immigration and Customs Enforcement announced it had seized some 82 domain names as part of its ongoing “Operation In Our Sites” and already one site, Demonoid.com, is trying to stay one step ahead of the game by migrating its site to a new address. “We are in the process of migrating the site to our new address, Demonoid.ME,” says the BitTorrent tracker site.

When it comes to foreign sites the US govt can only seize the domain name pointers of domains under its jurisdiction. This includes those top-level domains administered by Verisign, and thus ICANN [like .COM].

Though no torrent tracker-hosting sites have been targeted thus far, the latest round of “Operation In Our Sites” did ensnare the BitTorrent tracker search engine Torrent-finder.com. If ICE can seize the domain name of site that doesn’t even host torrent trackers then surely it could one that actually does.

Demonoid.com is simply trying to stay one step ahead of the game by registering the site with .me, the top-level domain for the tiny country of Montenegro. It’s another in a long series of tug wars between govt and technology, despite the fact that the latter is always guaranteed victory in the end.
Well of course this writeup views Demonoid's actions favourably since it's called, erm, ZeroPaid. In any event, the Yanqui cybercops at Immigration and Customs Enforcement (ICE) have triggered a backlash among the money-for-nothing online crowd with its "Operation in Our Sites" (v. 2.0, mind you) that targets those selling pirated merchandise:
Seizure orders have been executed against 82 domain names of commercial websites engaged in the illegal sale and distribution of counterfeit goods and copyrighted works as part of Operation In Our Sites v. 2.0, as part of an ongoing investigation by U.S. Immigration and Customs Enforcement (ICE).

"The sale of counterfeit U.S. brands on the Internet steals the creative work of others, costs our economy jobs and revenue and can threaten the health and safety of American consumers," said ICE Director John Morton. "The protection of intellectual property is a top priority for Homeland Security Investigations and the National Intellectual Property Rights Coordination Center. We are dedicated to protecting the jobs, the income and the tax revenue that disappear when counterfeit goods are trafficked."
Unlike the hostage-to-events WikiLeaks, however, it seems the other torrent sites have drawn the connection: if the US is seizing domains of those selling pirated goods, it won't be long before it does the same to intellectual piracy transgressors. Hence, the exodus out of .COM to places like .ME Montenegro is well underway:
A sort of mass-exodus from US-controlled .COM domains is taking place, with dozens of sites registering alternate domains in nations where chances of persecution for association with copyright infringing activities is slim. This action has been sparked by the domain seizures in the United States, performed by the Department of Homeland Security and the Immigration and Customs Enforcement agency that occurred just a week ago. Site owners are choosing domains which are controlled by nations that either don’t have strict copyright laws, or even locations that do have the laws but lack the resources to enforce them.

Demonoid, the world’s largest BitTorrent tracker, chose to leave their .COM domain behind completely in favor of a .ME domain operated by the nation of Montenegro. Others are, ironically, leaving the US, supposedly the “Land of the Free,” for China, a country well-known for their rampant censorship.

Gary Fung, owner of BitTorrent engine Isohunt, is based in Canada, however his own run-ins with the American film industry has driven him to reserve a backup .HK domain in case the US government decides to seize his .COM. “Countries like China censor for political reason, US with COICA will censor for copyright and commercial reason,” Fung told TorrentFreak. “It’ll be a chilling parallel put into serious question how the US should still be in charge of the much of the internet infrastructure like the root DNS, or how US can continue to claim as the model example for free-speaking democracy.”

Site owners like Fung are most concerned about the rationale behind the US domain seizures. Torrent-Finder.com, similar in function to Fung’s Isohunt, was targeted simply because they ended up on the MPAA and RIAA lists of “notorious markets” of copyright infringing material.

“For RIAA, MPAA’s slandering of us as rogue websites, it’s political PR and lobbying that has no basis in reality and ignorable,” Fung says. “Perhaps they should be educated in the many non-infringing uses of BitTorrent and P2P, or they risk listing every social media and sharing website as rogue.” Unless something changes for the better, Fung will be keeping his .HK domain in case his site is one of the next to be targeted by US government raids. And he’ll be joined by many others in that regard. Yes, site owners are leaving the United States in favor of China because they’ll have more freedom and less chance of persecution. How incredibly unbelievable and sad.
Seen any torrent trackers heading to Switzerland, Assange? What the heck he's doing mucking about in the likes of Switzerland flat out befuddles me. Take a hint from the pros, Assange, and hie thee to Montenegro if you want to escape this American dragnet:
Whistleblowing organisation WikiLeaks has moved its website to Switzerland as it struggled to remain open in the face of official and corporate moves to cut its access to the internet. And there was speculation that an arrest of the site's founder Julian Assange might be imminent, after Swedish authorities refiled an international warrant with additional information requested by the Metropolitan Police...

The website moved to the Swiss address wikileaks.ch after the American company providing its domain name, EveryDNS.net, cut off service because cyber attacks were threatening the rest of its network. WikiLeaks had turned to EveryDNS and servers in Europe after Amazon stopped hosting the site on Thursday. Meanwhile, reports suggested that authorities in Paris were trying to ban French servers from hosting its database of leaked information.
It's interesting times for America's cyber-foes. Things will become doubly interesting if and when the Combating Online Infringement and Counterfeits Act (COICA) becomes law Stateside. Undoubtedly, the US remains the 500-pound gorilla in cyberspace.