From Davos to Doha: WTO Round Done in 2011?

♠ Posted by Emmanuel in , at 1/29/2011 09:43:00 AM
Running over the same old ground
What have we found?
The same old fears
Wish you were here

And now for some postcards from Davos. Sometime ago, I had a self-parodying feature of T-shirts being sold at the WTO headquarters gift shop in Geneva depicting how trade talks to conclude the Doha Development Agenda--now considerably the longest-running trade round in GATT/WTO history by a comfortable margin--have literally spanned the globe to little effect. At the start of this year, then, it is apropos that the usual suspects of world leaders and trade ministers are affirming the benefits of trade liberalization and that we're near the finish line. From the newswire reports [1, 2], we gather assertions that:
  • Failure to conclude Doha represents a failure of global leadership (Thai Prime Minister Abhisit Vejjajiva);
  • Fair, free and open trade is more important than aid for developing nations (Indonesian President Susilo Bambang Yudhoyono);
  • We are so very nearly there (German Chancellor Angela Merkel);
  • It is not true that the Doha Development Round is dead (British Prime Minister David Cameron, who even mentions Monty Python's "Dead Parrot" sketch--watch this video if the reference is obscure)
Meanwhile, I am now (belatedly) wiser about the claim that with US elections just around the corner--the 2012 presidential elections, that is--failure to complete Doha this year will mean that the world's largest trading nation will be in gridlock and nothing will be done. OK, here's my complaint: they always say this, too. As we all know, the United States has a four-year election cycle, with even years having either presidential or midterm (congressional) elections. Meanwhile, odd years are always "the year before an election." So, journalists who write on trade usually spin matters thusly: because next year or this year is an election year, it's likely that a multilateral trade deal won't get done due to American lawmakers being distracted or unwilling to appear pro-trade before their increasingly sceptical electorates.

And so the reasons why a trade deal benefits us all and why we are close to one get rehashed, year after year. Meanwhile, the usual "election in the US" angle is repeated ad infinitum. It makes you want to cue the Pink Floyd, right? But hey, if even they could reunite, perhaps pigs will fly and (sigh) Doha is a done deal in 2011.

UPDATE: Trade Diversion points us in the direction of an accompanying report on setting a deadline and defining a trade deal for 2011 penned by Jagdish Bhagwati, Peter Sutherland, and more trade illuminati.

Of Sexy Russian Spies and 'Erotic Capital'

♠ Posted by Emmanuel in , at 1/28/2011 12:03:00 AM
Lest you think I've become an econodullard obsessed with discount rates and multiplier effects--it's easy enough to find plenty enough of those without looking hard--here's funner stuff that showcases the diversity which the best IPE encompasses. Freakonomics-style dweebery doesn't count by the way; let's just say I don't prattle endlessly about the veracity of being described as "concave-chested." Anyway, to today's post. A few months ago, the headlines were littered with headlines of American authorities arresting and sending away the Russian spy Anna Chapman. The gaffer here at LSE IDEAS, Professor Michael Cox, was inordinately proud to have a feature in The Sun on her alleged spying escapades. He further exclaimed that unlike el cheapo academic publications, this Rupert Murdoch news outlet paid its contributors--and pretty well to boot.

The curious thing was that Anna Chapman did not appear to have stolen any meaningful information. The only remarkable thing about the episode was that, yes, she was an attractive Russian spy--certainly the stuff of Cold War-era spy novels and male imaginations. Not quite being a real spy like Valerie Plame, Miss Chapman subsequently lost her British citizenship and used her newfound celebrity for material gain. Nothing wrong there, actually--from appearing in her skivvies (with weaponry, even!) in the Russian edition of Maxim to recently hosting an otherwise unremarkable mystery show in her homeland in, er, skimpy attire.

Closer to the end of last year, we had another spy scandal here in the UK involving an attractive, young Russian lady that didn't receive as much attention abroad (at least until she appears in FHM, Maxim, Stuff or another of those lad's mags). Ekaterina 'Katia' Zatuliveter was working as an aide to Liberal Democrat MP Mike Hancock when the UK Border Agency had her arrested and scheduled for deportation over not being "conducive to national security."

It seems that the brain trust here at the LSE is of two minds about these mildly salacious stories. On one hand, Avery Hancock sees popular commentary as juvenile:
It seems clear then for both journalists and their sources that Ms Zatuliveter’s beauty, age, or hair colour are all judged highly relevant in forming the basis for such serious allegations. Yet, leaving aside possible connections to the FSB, why is it so surprising that young, educated women (not girls, I would point out) should be taking part in internships, or looking for jobs pointing towards a political career? Some commentators have pointed out that her researcher position in the Commons may have only served as launch pad into a more powerful career in government. But that is precisely what hundreds of parliamentary researchers (many of whom are foreign) are trying to do. The LSE runs a very popular scheme that places many of our graduate students (often from overseas) with MPs as interns to do just that. So until we find out that Ms Zatuliveter’s intentions were to penetrate the heart of British government in order to spy, it seems unfair to criticize her ambition as well.
My preferred, actually very gender-neutral theoretical application is this notion of 'erotic capital'. Instead of overdoing the politically correct route by ignoring that looks matter--for both sexes, actually--why not try to describe it, quantify it, and explain how it is deployed? In the beginning, we had old-fashioned economic capital familiar to readers of classical political economy. Then Chicago School sociologist Gary Becker came up with 'human capital'. Later came the notion of 'social capital' still very much in vogue with policymakers. Not to be outdone, environmentalists coined the term 'natural capital'. Pretty soon, some bored political scientists came up with 'political capital'. Bewildered with this veritable explosion of capitals, Catherine Hakim of our Sociology department has come up with yet another sort of capital:
Erotic capital is the implicit but powerful commodity that can count just as much as educational qualifications in the labour market, politics, media or the arts, finds a new report published today by a sociologist at the London School of Economics and Political Science. 'Beauty and sex appeal have become more important personal assets in the sexualised cultures of our liberal, modern societies, often just as important as educational qualifications' says Dr Catherine Hakim in the study.

She coins the term 'erotic capital' to refer to this difficult-to-define but crucial combination of physical and social attractiveness which makes some men and women agreeable company and colleagues, attractive to all members of their society and especially to the opposite sex. She says: 'People who possess an above-average amount of erotic capital are more persuasive, are more often perceived as honest and competent. They find it easier to make friends, get jobs, get married, and tend to earn 15 per cent more on average as well'.
And here's a list of the seven components of erotic capital:
  1. Beauty - Though it varies across times and cultures, great beauty is always in short supply and highly-prized by all societies. The modern emphasis on photogenic features means that men and women with large eyes and mouths and sculpted faces are valued. Conventionality, symmetry and an even skin-tone also contribute to attractiveness.
  2. Sexual attractiveness - This can be quite separate from classic beauty. Beauty is mainly about facial attractiveness while sexual attraction is largely about a sexy body. However sex appeal can also be about personality and style, femininity or masculinity, a way of being in the world. Beauty tends to be static and easily captured in a photo while sexual attractiveness is about the way someone moves, talks and behaves so it can only be captured on film.
  3. Social attractiveness - Includes grace, charm and social skills – the ability to make others feel at ease and happy, wanting to know you and, possibly, desire you.
  4. Liveliness - A mixture of physical fitness, social energy and good humour. As illustrated by those who are 'the life and soul of the party'
  5. Presentation - This includes the way you dress, style your hair, wear make-up or perfume and jewellery. People who are skilled at these accomplishments are more attractive.
  6. Sexuality itself - A category that includes sexual competence, energy, erotic imagination, playfulness and all the things that constitute a sexually satisfying partner. Not the same thing as having a strong libido, although those that do are more likely to acquire these qualities through experience. The only one of the six which usually only applies in private, rather than social, situations.
  7. All six categories apply to some extent to both men and women However for women, in some cultures, there is a seventh category – of fertility. In many cultures a fertile woman is regarded as having extra attractions, especially if her children are healthy and beautiful.
Returning to our Russian spies, there is an explanation for the phenomenon at hand:
She finds that women have the edge over men in these areas, partly because women work harder at being physically and socially attractive, and at dressing well. However, another reason is the large sex deficit that affects more men than women, universally. Recent national sex surveys show that, around the world, men's sexual interest greatly exceeds women's sexual interest and activity, especially among people aged 35 and over. So women are in greater demand as sexual partners, a dramatic reversal of men's advantage in courtship and marriage markets.
So there you are. Cue the Apollonia 6 for old time's sake while you're at it. Let's say I'm not entirely sold just yet, but there are certainly testable hypotheses here that can be examined through the use of survey data and experiments. You can read the entire journal article to make up your mind. (Unsurprisingly, there are sceptics out there.) Meanwhile, the proliferation of various forms of capital being identified is driving me bonkers to the point of wishing I were an orthodox Marxist alike social capital critic Ben Fine who has built a career repeating the idea that capital is indivisible ad infinitum.

But hey, if Marxists were considered sexy, maybe I should become one. Vladimir Putin did say that the collapse of the Soviet Union was last century's worst geopolitical catastrophe. As the saying goes, if you can't beat 'em...

Climate Apartheid? The India-Bangladesh Superfence

♠ Posted by Emmanuel in ,,, at 1/27/2011 12:02:00 AM
My friend came to me, with sadness in his eyes
He told me that he wanted help
Before his country dies

And so begin the lyrics to "Bangla Desh" from George Harrison's Concert for Bangla Desh held on 1 August 1971 in Madison Square Garden. Well before we had Sir Bono and Sir Bob Geldof, Live Aid and Live 8, we had the late, great Beatle setting the template for all there was to follow. This forerunner of all benefit concerts was held to support the victims of the 12 November 1970 Bhola cyclone in which an estimated 300,000 lost their lives in the region then called East Pakistan--today's Bangladesh. Just as Pakistan emerged from India, so did Bangladesh in turn emerge from Pakistan, declaring independence on 26 March 1971. It was a very difficult time for Bangladesh to say the least as it faced both the aftermath of a devastating natural calamity and the teething woes of becoming a nation--hence the lyrics above.

Now, politics on the Indian subcontinent are usually as contentious as they are interesting. Back then, Pakistan tried hard to keep Bangladesh from becoming a country, and India offered support. Among other things, India opened its border with East Pakistan to help refugees from the disaster cope. Unfortunately, environmental pressures on Bangladesh have hardly ebbed in the intervening years. Obviously, it hasn't gained any elevation while global warming has taken further effect. What more if sea levels continue to rise? With a population of over 160 million, Bangladesh is far from a tiny country population-wise.

The Commonwealth Secretariat has a new publication called Global: the international briefing that looks at global policy issues from the perspective of member states in the British Commonwealth. I highly recommend Robin Cohen's essay on why migration is a boon to globalization, though there are obviously strong interests opposed to it. In particular, the border between Bangladesh and India has become more fractious. To those following migration issues, such episodes are unsurprising given that about half of migration is, contrary to popular perception, South-South or between developing countries. I was thus struck by Cohen's description of a massive fence India is putting up:
As for South–South migration, there remain many tensions and important fault lines. The data are disputed, but there are probably about 3.5 million people born in Bangladesh living in India, with 1 million born in India and living in Bangladesh. With the Ganges Delta prone to periodic flooding, further population movements from Bangladesh to India are likely, but are inhibited by an Indian-built fence, stretching for nearly 4,100 km.
2011 is 40 years after 1971, and let's just say that the Indians are no longer as welcoming of Bangladeshis pouring over their borders. Moreover, even the effects of a major cyclone are time-bound, while permanently higher sea levels aren't. It's a security issue, they say. Aside from preventing those affected by flooding to seek refuge in neighbouring India, Brad Adams of Human Rights Watch asserts that Indian border guards have been overzealous while this massive fenestration project has become underway:
Do good fences make good neighbours? Not along the India-Bangladesh border. Here, India has almost finished building a 2,000km fence. Where once people on both sides were part of a greater Bengal, now India has put up a "keep out" sign to stop illegal immigration, smuggling and infiltration by anti-government militants.

This might seem unexceptional in a world increasingly hostile to migration. But to police the border, India's Border Security Force (BSF), has carried out a shoot-to-kill policy – even on unarmed local villagers. The toll has been huge. Over the past 10 years Indian security forces have killed almost 1,000 people, mostly Bangladeshis, turning the border area into a south Asian killing fields. No one has been prosecuted for any of these killings, in spite of evidence in many cases that makes it clear the killings were in cold blood against unarmed and defenceless local residents.

Shockingly, some Indian officials endorse shooting people who attempt to cross the border illegally, even if they are unarmed. Almost as shocking is the lack of interest in these killings by foreign governments who claim to be concerned with human rights. A single killing by US law enforcement along the Mexican border makes headlines. The killing of large numbers of villagers by Indian forces has been almost entirely ignored.
It gives one reason to pause about the consequences of global warming if the threats identified are real. Not being a climate change denier (or a deficit denier for that matter; these paleolithic tendencies tend to run together), the prospect is scary indeed. It pits higher-lying areas against adjacent lower-lying ones in a manner that seems not to build on the goodwill evident in past times, like say 1971. While the Guardian op-ed may overstate shootings on the border, the likelihood of rising sea levels and the continuing construction of this fence do not bode well for relations on the Indian subcontinent concerning borders. Also consider the economic effects of artificial separation.

Since George Harrison is no longer with us, perhaps it's up to his forebears to draw attention to a worthy cause. Is it climate apartheid, then? If migration restrictions increase further, I doubt whether this instance will be an isolated one, sadly.

Financial Wargaming: If China Dumps US Treasuries

♠ Posted by Emmanuel in at 1/26/2011 12:04:00 AM
Boo! Here's a fun feature you may have overlooked. Well, let's just say it's fun contemplating--I offer no guarantees that it will be enjoyable if it comes through. It is said that popular entertainment gains resonance from being not entirely disconnected with reality. In particular, resonating with commonly held anxieties usually works. During the eighties when Ronald Reagan was at the height of his "evil empire" phase, there was a made-for-TV movie concerning a Soviet takeover of the United States, Amerika. More recently, of course, the reds under the bed of the ever-gullible American public have been the Chinese instead of the long-departed Soviets. Hence the entertainment takeover of "Chinese Invasion"-style scenarios. So, for your consideration today, I have nothing less than a call to arms if China takes the "nuclear option" of unloading its Treasuries.

As it turns out, even (bored) journalists enjoy their share of scare stories. This being the IPE Zone, a common favourite is that of China being sufficiently piqued with the United States as to unload its dollar-denominated holdings. It's certainly true that the Chinese are, in the larger scheme of things, far from majority bondholders in America. Yet, the knock-on effects of a vote of no confidence by America's largest creditor would likely cause the others to lose the comforting thought that the Chinese would always lap up the remainder. What then would Uncle Sam do? Having stuffed the Federal Reserve with Treasuries, options are by necessity limited. There's the "Buy American" tack, although that never did help US automakers any. Perhaps the better analogy would be to the government encouraging Americans to buy war bonds...
Most experts say if there were signs of this [Chinese sell-off] happening, the U.S. government would go for a combination of persuading Americans to buy more U.S. debt, the same way they did in World War II, and finding friendly foreign governments to make additional purchases. Banks could be called on to increase their holdings of treasuries, and as a last resort, the Federal Reserve could also be called on to fill the gap, though this could risk turning any dollar weakness into a slump.

"The U.S. government should have and maybe still could call on the people of the U.S. to invest in U.S. debt," said David Walker, a former U.S. comptroller general who heads an advocacy group calling on the government to curb the U.S. budget deficit and borrowings.
And what will trigger China going into a major tiff? Taiwan, which the US is generally believed to be obligated to defend in the event of a PRC attack? Contrary to our excitable Reuters scribes, I doubt the South China Sea would be a tipping point other than in the very unlikely event of American vessels being blocked from entering these sea lanes--in which case Treasuries would be the last of our problems on planet Earth:
It likely would take something like a massive rise in tensions over an issue like Taiwan or oil exploration in disputed areas of the South China Sea, including possible military confrontation between the two nations. Such a confrontation would also make it easier for Washington to appeal to the American public to buy its debt for patriotic reasons.

But Beijing could also justify pulling back sharply from U.S. Treasuries if the dollar were to plunge, perhaps because of Washington's failure to curb its budget deficit and debt. "I worry that we could be at a tipping point," said Eswar Prasad, a Brookings Institution economist and former International Monetary Fund official with responsibility for China. "If the Chinese say 'We're not buying any more Treasuries,' this could act as a trigger around which nervous market sentiment coalesces," he said. "People could start wondering how the U.S. is going to finance its deficit."
Would other Asian countries be able and willing to pick up the slack? Germany has troubles in its own backyard, while Japan has homegrown fiscal woes. Which leaves us with:
Other countries in the region that already buy large amounts of U.S. Treasuries to try to keep the value of their currencies from climbing, such as Thailand and India, or countries with large sovereign wealth funds, such as Singapore, could also be called on to increase their purchases. Then there are the oil producers in the Middle East, such as Saudi Arabia and the United Arab Emirates, which have traditionally been seen as American allies. Together, the region's oil producers hold around $210 billion in Treasuries.

"These countries all have a massive amount of dollars invested in Treasuries already," said Eric Stein, vice president and portfolio manager at Eaton Vance in Boston. "It would be hard for them to commit to incrementally increase their holdings."
As before, the obvious solution for these profligate people is not to spend so !$%damn much (or increase revenue generation very significantly). Then again, US banks could be forced to buy American sovereign issues the way Chinese banks are forced to buy sterilization bonds at present:
Treasury officials already tout the increasing demand for Treasuries from U.S. domestic savers. But Walker, the former comptroller general, sees potential for a more aggressive effort to market Treasuries to Americans that could help shift the government away from dependence on foreign creditors.

In his view, the efforts would have to include an appeal to patriotism and come with a longer-term plan to rein in the budget deficit. "What we need to do is have a plan that's reasoned, reasonable, can reassure our foreign lenders and also demonstrate to the American people that Washington can get something done," Walker said.

Eaton Vance's Stein said U.S. banks could also be pressured, or even forced, to buy more treasuries as part of their capital cushions. "It seems maybe on some level unbelievable that that would happen in the U.S.," Stein said. "But other countries even now, if they can't find anyone to take down their paper, will turn to domestic banks."
What if, indeed.

'End of History' Fukuyama Raps US, Lauds China

♠ Posted by Emmanuel in at 1/24/2011 12:27:00 PM
While I try to be a conscientious scholar, a neat thing about academia is that you don't even have to be right to gain attention. Take Francis Fukuyama [please!] After the collapse of the Soviet Union, he gained notoriety for his now widely derided "End of History" thesis that all political-economic systems would converge on capitalist liberal democracy as the only game in town. While the succeeding years have put paid to that idea, Fukuyama has successfully parlayed a naff idea into a vehicle for self-promotion. Among other things, he famously broke with his erstwhile neoconservative ideological allies over the invasion of Iraq as an experiment in forcefully fomenting freedom 'n' growth so beloved by certain Americans.

Moving to the year 2011, we find ourselves with a more reticent Francis Fukuyama who, if anything else, veers too much in the other direction. The End of the Line for the End of History, Frank? Somebody would have suggested it's The Return of History and the End of Dreams if that even more faux-grandiose title weren't already taken. Actually, I have just attended a presentation by Nicholas Lardy of the IIE here at the LSE that takes some exception with Fukuyama's characterization of contemporary China. One of the more striking refutations Lardy makes is the commonplace assertion that the state has retaken the commanding heights of industry in China. Parsing the data carefully, Lardy notes that the share of economic activity attributable to state-owned enterprises was still going down in 2009 and 2010 as effects of the US-led financial crisis were being felt and China undertook a large stimulus programme aimed especially at infrastructure development.

Let's just say the authoritative Nicholas Lardy neither wishes schadenfruede on China nor sees any imminent banking crisis. While we wait for the event's podcast to be posted, let's turn to some choice quotes from the reinvented Francis Fukuyama on why US democracy has little to teach China:
The first decade of the 21-century has seen a dramatic reversal of fortune in the relative prestige of different political and economic models. Ten years ago, on the eve of the puncturing of the dotcom bubble, the US held the high ground. Its democracy was widely emulated, if not always loved; its technology was sweeping the world; and lightly regulated “Anglo-Saxon” capitalism was seen as the wave of the future. The US managed to fritter away that moral capital in remarkably short order: the Iraq war and the close association it created between military invasion and democracy promotion tarnished the latter, while the Wall Street financial crisis put paid to the idea that markets could be trusted to regulate themselves.

China, by contrast, is on a roll. President Hu Jintao’s rare state visit to Washington this week comes at a time when many Chinese see their weathering of the financial crisis as a vindication of their own system, and the beginning of an era in which US-style liberal ideas will no longer be dominant. State-owned enterprises are back in vogue, and were the chosen mechanism through which Beijing administered its massive stimulus. The automatic admiration for all things American that many Chinese once felt has given way to a much more nuanced and critical view of US weaknesses – verging, for some, on contempt. It is thus not surprising that polls suggest far more Chinese think their country is going in the right direction than their American counterparts...

The most important strength of the Chinese political system is its ability to make large, complex decisions quickly, and to make them relatively well, at least in economic policy. This is most evident in the area of infrastructure, where China has put into place airports, dams, high-speed rail, water and electricity systems to feed its growing industrial base. Contrast this with India, where every new investment is subject to blockage by trade unions, lobby groups, peasant associations and courts. India is a law-governed democracy, in which ordinary people can object to government plans; China’s rulers can move more than a million people out of the Three Gorges Dam flood plain with little recourse on their part.
As for democratic convergence, it seems to be put off (for now):
Americans have long hoped China might undergo a democratic transition as it got wealthier, and before it became powerful enough to become a strategic and political threat. This seems unlikely, however. The government knows how to cater to the interests of Chinese elites and the emerging middle classes, and builds on their fear of populism. This is why there is little support for genuine multi-party democracy. The elites worry about the example of democracy in Thailand – where the election of a populist premier led to violent conflict between his supporters and the establishment – as a warning of what could happen to them...

[I]f the democratic, market-oriented model is to prevail, Americans need to own up to their own mistakes and misconceptions. Washington’s foreign policy during the past decade was too militarised and unilateral, succeeding only in generating a self-defeating anti-Americanism. In economic policy, Reaganism long outlived its initial successes, producing only budget deficits, thoughtless tax-cutting and inadequate financial regulation.

These problems are to some extent being acknowledged and addressed. But there is a deeper problem with the American model that is nowhere close to being solved. China adapts quickly, making difficult decisions and implementing them effectively. Americans pride themselves on constitutional checks and balances, based on a political culture that distrusts centralised government. This system has ensured individual liberty and a vibrant private sector, but it has now become polarised and ideologically rigid. At present it shows little appetite for dealing with the long-term fiscal challenges the US faces. Democracy in America may have an inherent legitimacy that the Chinese system lacks, but it will not be much of a model to anyone if the government is divided against itself and cannot govern. During the 1989 Tiananmen protests, student demonstrators erected a model of the Statue of Liberty to symbolise their aspirations. Whether anyone in China would do the same at some future date will depend on how Americans address their problems in the present.
Despite its unwillingness to lose even the slightest grip on power, the Communist Party has actually done much to evolve since the events of Tiananmen lest China end up like other socialist states in Eastern Europe right about the time Fukuyama was ending history. Let's just say Fukuyama is now rectifying the error of his ways even if he may be going overboard with the state-led capitalism bit as per Nicholas Lardy. Better late than never, I guess, and perhaps Fukuyama will fix that misstatement a few years down the line.

And yes, it is the US, not China, that has become ideologically rigid. Adapt or die--and even Americans know who the endangered species is: debtlodocus Americanus. The galling thing about the US is that current "grown ups" believe their children will be worse off than they are--and they are doing a damned good job of making sure of that eventuality by racking up, well, $14 trillion in debt and counting.

Eurosceptics & UK-Baltic 'Anti-French Alliance'

♠ Posted by Emmanuel in at 1/24/2011 12:07:00 AM
$acre bleu! While the IPE Zone doesn't do conspiracy theories, the above post title was suggested by none other than the Financial Times, not some Eurosceptic rag which are a dime a dozen here in the UK. Alas, there is always a vocal bunch of Euro-haters perpetually voicing their opposition to UK involvement in European affairs as a further erosion of national sovereignty to stereotypically faceless bureaucrats from Brussels.

Needless to say, Eurosceptics enjoy predicting and sometimes even plotting the ever-imminent downfall of the European Union the way orthodox communists do with capitalism. A few months ago, I featured one of the more improbable schemes prior to the passage of the Lisbon Treaty. Czech, Polish, and British Eurosceptics imagined that they could scuttle the Treaty thusly: instead of signing on to Lisbon, Czech and Polish EU haters would hold up proceedings for as long as it took the British Conservatives--famously anti-integration--to gain power and force the matter to be subject to a referendum in Britain, resulting in a surefire defeat. Or so the argument went. The Eastern Europeans eventually folded, and the Conservatives weren't even able to form a government on their own. Had push come to shove, it's unlikely that their Liberal Democrat coalition partners, famously led by someone who served in Brussels and met his wife there (Nick Clegg) would have played along.

But alas, these sorts of conspiracies for the EU's demise keep popping up. Recently, British Prime Minister David Cameron invited several Nordic countries to Blighty for a so-called "Nordic-Baltic Summit." Ostensibly aimed at generating innovative ideas and encouraging stronger ties between Britain and the Nordic-Baltics, there was nonetheless a [surprise!] anti-EU interpretation available. Alike the United Kingdom, the Nordic-Baltics are supposedly independent-minded nations, geographically away from Europe's centre who are wary of EU encroachment. So this narrative doesn't fully work with some having adopted the euro like Finland and Estonia, but hey, don't take it too literally...
Britain’s prime minister will host an unprecedented “UK-Nordic-Baltic” summit on Thursday, bringing together the leaders of some of Europe’s most liberal, free-market, green and fiscally tough nations. David Cameron has been keen to present the meeting of nine countries as a cosy get-together, where issues such as wave power [hydroelectric in non-Britspeak] and family-friendly policies feature on the agenda alongside technology and growth.

But others in Europe may see the summit as a power play by Mr Cameron – an attempt to forge a “northern league” of often Eurosceptic, Atlanticist countries that share a desire to rein in the power of Brussels and European Union spending. Alexander Stubb, Finland’s foreign minister, said the summit was “a smart move” by the UK prime minister. “He’s looking for allies in the EU. Small member states are always flattered when approached by big member states.”

When Downing Street was asked whether Mr Cameron was forging an “anti-French alliance”, the prime minister’s spokesman pointed out that he had worked with Paris and Berlin to call for EU budget discipline. Mr Cameron hosted a dinner for the leaders of Iceland, Norway, Sweden, Denmark, Finland, Lithuania, Latvia, and Estonia at Downing Street on Wednesday.

The Nordic countries often have an awkward relationship with Brussels. Norway and Iceland are outside the EU, while Denmark and Sweden are outside the euro and look as far away as possible from joining. One Brussels-based analyst said the summit seemed to be a means for Mr Cameron to engage with the rest of Europe while bypassing the EU institutions.
A meeting among the most "Anglo-Saxon" (read: independence-minded) countries who Britain can count on to scuttle efforts at further integration, then? While moving away from the centre of Europe wasn't on the agenda, it possibly was a meeting of like-minded countries that could be called on in the future to frustrate further "Frenchification"--ever closer union in oldspeak. Still, Iceland's leadership may still be smarting from the UK labelling their countrymen as a bunch of terrorists in the recent past. These are interesting times in the EU--even among countries not in the Eurozone.

Everything's Big in Texas, Including Austerity

♠ Posted by Emmanuel in at 1/21/2011 12:06:00 AM
Texans famously have a strong independent streak, hence the bumper sticker "Don't Mess With Texas." A few months ago, Texas Governor Rick Perry famously suggested that, given Washington's continuing profligacy, the state may consider seceding from the union to avoid saddling its future generations with such a horrendous debtload:
An animated Perry told the crowd at Austin City Hall -- one of three tea parties he was attending across the state -- that officials in Washington have abandoned the country's founding principles of limited government. He said the federal government is strangling Americans with taxation, spending and debt.

Perry repeated his running theme that Texas' economy is in relatively good shape compared with other states and with the "federal budget mess." Many in the crowd held signs deriding President Barack Obama and the $786 billion federal economic stimulus package. Later, answering news reporters' questions, Perry suggested Texans might at some point get so fed up they would want to secede from the union, though he said he sees no reason why Texas should do that.

"There's a lot of different scenarios," Perry said. "We've got a great union. There's absolutely no reason to dissolve it. But if Washington continues to thumb their nose at the American people, you know, who knows what might come out of that. But Texas is a very unique place, and we're a pretty independent lot to boot."
In recent years, Texas has been less hard hit than many other states by the American-made housing crisis. Aside from having little to no statewide housing bubble, it has also been able to count on still-healthy energy revenues to (nearly) balance the books. However, all good things must come to and end, and even Texas' day of reckoning has been closing fast. Like the bedraggled finances of nearly every other state, Texas believes it is near hitting a wall.

It is here that we perhaps see the difference between Texas and most other states. While still obviously reluctant to raise taxes--this is the heartland of "Don't Tread On Me" after all--it's now shown that it's quite willing to go the starve the beast route of cutting expenditures before a budget crisis is upon it. Being proactive--how distinctly un-American. (Perhaps even to the point of seceding from the United States, eh?) The axe is falling particularly hard on education:
Texas lawmakers plan to unveil a $79.3 billion two-year general-fund budget that would cut spending by 10 percent from the current fiscal biennium and not raise taxes, according to documents outlining the proposal. The draft budget would slash education spending by 10 percent, to $44.3 billion, and health and human services by 7.7 percent, according to a copy of the plan. Leaders of the Texas House of Representatives will make the proposal public today.

The spending plan would cut education jobs by 2.4 percent to 85,119 while withholding funds for teacher incentive pay and pre-kindergarten programs. The draft projects a 160,000-student increase in public-school enrollment over the biennium, while cutting related expenses by 9.1 percent as property-tax receipts are projected to fall by more than $2 billion.

“We must cut spending to keep our economic engine on track,” Governor Rick Perry, a Republican, said yesterday in a speech following his inauguration for an unprecedented third term. “These tough times dictate government doing more with less,” he said.

The budget plan also would cut 13 percent from higher- education spending in the current biennium, to $13.6 billion. Public-school funding would fall $3.1 billion to $30.7 billion, according to the draft. It wouldn’t cover enrollment growth at community colleges and state universities while trimming financial aid by $431 million and eliminating funds for four community colleges.

Texas voters in November re-elected Perry and supported Republicans who pledged to cut spending and not raise taxes, Lieutenant Governor David Dewhurst said in his inaugural speech. Members of his party hold all statewide elective offices and control both the House and state Senate, where he is president.

The House proposal projects cutting 9,610 state jobs, or 4 percent of the total, over the next two fiscal years, to 231,574. Public-safety positions would be trimmed by 6.3 percent to 51,395, and health and human services employment would be reduced by 3 percent to 56,072.
And the coffers aren't filling up they used to even in Texas:
Legislators and Perry face a 2.9 percent decline in revenue for the two-year period that starts Sept. 1, according to Comptroller Susan Combs. Last week, she projected revenue available for general-fund spending would drop to $72.2 billion, after accounting for a $4.3 billion gap in the current biennium and $866 million in energy revenue to be placed in the state’s reserves. House lawmakers said their spending plan doesn’t rely on the projected $9.4 billion in reserves.

Perry reiterated his view that the state’s fiscal position will let it balance spending and revenue without raising taxes, in his speech yesterday in Austin, the state capital.
Well, good luck with the no new taxes pledge. (I don't think that strategy will hold out indefinitely if the economic situation doesn't improve there.) It's not quite British-style austerity which couples swingeing budget cuts with revenue-raising measures (like [eek!] higher taxes), but it's a start considering the context we have here. Still, I feel sad that Texas is cutting education funding now when the home institution of a co-author of mine, the University of Houston, is moving towards becoming one of the United States' elite or "Tier 1" research universities:
The University of Houston has been named a Tier One school for research activity, another step in its quest to become Texas' fourth "Tier One" university. The Carnegie Foundation for the Advancement of Teaching moved the university on Tuesday from its previously ranked second-tier status to a Tier One school for "very high research activity." Rankings are updated every five years.

To reach an overall "Tier One" ranking like the University of Texas, Rice University and Texas A&M, the University of Houston needs to receive a "Tier One" designation from two other academic institutions. Texas wants several schools to achieve this status. University president Renu Khator told the Houston Chronicle the announcement is "good news" but the school needs to increase its graduation rate and better its reputation in Houston.
The UH will have to rely less on state handouts, but I guess that's true for most of the rest of us. Austin giveth, Austin taketh away.

Are Ugly People Crime Prone? Loughner Edition

♠ Posted by Emmanuel in at 1/20/2011 10:11:00 AM
To begin with, let me say that I obviously don't have conclusive survey evidence that now-famous Arizona gunman Jared Loughner--on whom I'll have more about shortly--is widely regarded as "ugly." It must be said, though, that there has been a general public outcry over his prison mugshot. The vacant stare and mad grin are widely noted, but also consider the cracked smile, crooked nose, and general lack of facial symmetry. I doubt whether most of you out there would disagree that this guy is not the most aesthetically pleasing fellow. Which brings me to a longstanding body of research that should shed light on the link between lack of physical attractiveness and violence. Some may view this notion as prejudice plain and simple, but the thing is that widespread beliefs of the sort may systematically bias economic opportunities for Loughnerites. In fact, two Turkish-American economists, Naci Mocan and Erdal Tekin, have already done research on related matters in the context of young American criminals in "Ugly Criminals." Here is the longer abstract:
Using data from three waves of Add Health we find that being very attractive reduces a young adult's (ages 18-26) propensity for criminal activity and being unattractive increases it for a number of crimes, ranging from burglary to selling drugs. A variety of tests demonstrate that this result is not because beauty is acting as a proxy for socio-economic status. Being very attractive is also positively associated adult vocabulary test scores, which suggests the possibility that beauty may have an impact on human capital formation. We demonstrate that, especially for females, holding constant current beauty, high school beauty (pre-labor market beauty) has a separate impact on crime, and that high school beauty is correlated with variables that gauge various aspects of high school experience, such as GPA, suspension or having being expelled from school, and problems with teachers.

These results suggest two handicaps faced by unattractive individuals. First, a labor market penalty provides a direct incentive for unattractive individuals toward criminal activity. Second, the level of beauty in high school has an effect on criminal propensity 7-8 years later, which seems to be due to the impact of the level of beauty in high school on human capital formation, although this second avenue seems to be effective for females only.
Still, the Loughner case is perhaps contextually different in that he didn't commit his crime for economic reasons. Then again, the US Army is said to have turned him down due to being unfit for service, reflecting decreased employment opportunities for such people. Which brings us to a sociology review article entitled "Never Pick a Fight With an Ugly Person, They've Got Nothing to Lose" that argues along similar lines:
In the 1970s, social psychologists conducted numerous studies analyzing physical appearance as a social variable. More recent studies in the social sciences appear to have abandoned this topic as unimportant; in any case, very few social scientific studies have been found that incorporate a measure of attractiveness into their analyses. The present study seeks to revive the emphasis on physical attractiveness as a social variable by testing the relationship between crime severity and physical attractiveness, i.e., by presenting evidence to suggest that physically unattractive men commit more serious offenses.
Given how radically fat Americans have become (and the rest of the developed world has followed suit to be fair), there is certainly room here for interesting research--especially on the economic consequences. For instance, does the uglification of the general population implied by exploding rates of obesity decrease or increase the beauty premium? On one hand, you can hypothesize that the beauty premium is attenuated given how portly everyone has become--we're all ugly Americans now. On the other hand, the increasing scarcity of fit, trim folks may increase returns to being so in a society of fatties.

Given that mine is purportedly an IPE blog, consider this: ugliness may exacerbate the US trade deficit insofar as those like Jared Loughner and Cho Seung-Hui prefer Austrian-made Glock 19s. Further, these incidences beget even more sales of these plastic fantastics. Now there's the real Freakonomics for you. Certainly, American gun culture isn't disappearing anytime soon.

Does China Lend More to LDCs Than World Bank?

♠ Posted by Emmanuel in , at 1/20/2011 12:18:00 AM
In case you missed it, here's further proof of how far China has come in terms of winning friends and influencing people. Paramount Leader Hu Jintao pretty much came, saw, and conquered (veni, vidi, vici) his obsequious, occasionally backstabbing lodgers renting the PRC's subprime North American real estate whose (very dysfunctional) tenants association is led by--who else?--Barack "China Currency Coalition" Obama. Now hilariously lame get-tough-on-China campaign pledges aside, Obama and the rest of the administration toadies' eagerness to please their betters only further underlines who wears the pants in today's global political economy.

However, the hapless Yanks are not the only recipients of Chinese largesse. China is reported by many news outlets [e.g. 1, 2, 3, 4] to have surpassed that archetypal Washington-based institution the World Bank in loan volume provided to developing countries--with an important caveat I'll mention in a while. Of course, the kind of money China provides is strategic since its biggest lenders are not PRC aid bodies per se but trade finance bodies alike export-import (ExIm). While not particularly caring about its recipients' human rights records or any of that Western BS those folks used to package with freedom 'n' growth shtick, it's perhaps no coincidence Obama doesn't make any demand on that front, either. Beggars can't be choosers, and Washington is just one of the many mendicants jockeying for manna from, er, Beijing:
China has lent more money to other developing countries over the past two years than the World Bank, a stark indication of the scale of Beijing’s economic reach and its drive to secure natural resources. China Development Bank and China Export-Import Bank signed loans of at least $110bn (£70bn) to other developing country governments and companies in 2009 and 2010, according to Financial Times research. The equivalent arms of the World Bank made loan commitments of $100.3bn from mid-2008 to mid-2010, itself a record amount of lending in response to the financial crisis.
Their timing was exemplary in picking up the pieces when the Westerners fled:
The volume of overseas loans by the two banks indicates how Beijing is forging new patterns of China-led globalisation, as part of a broader push to scale back its economic dependency on western export markets.

The financial crisis allowed Beijing to push the commercial interests of its energy companies by offering loans to producer countries at a time when financing was hard to come by. The agreements include large loan-for-oil deals with Russia, Venezuela and Brazil, as well as loans for an Indian company to buy power equipment and for infrastructure projects in Ghana and railways in Argentina.
There has been much comment on this article claiming that China now lends more to LDCs than the World Bank before I came upon it, but there is an important caveat nonetheless which almost all missed by (1) not bothering to read the entire article and/or (2) not really understanding the structure of the Washington-based lender. The comparison is arguably incomplete insofar as the Financial Times writers only tallied loans from two out of three World Bank lending arms--the International Bank for Reconstruction and Development (IBRD) and the lender to the private sector the International Finance Corporation (IFC). They didn't include those made by the World Bank's concessional arm the International Development Association (IDA) that forks money over at obviously concessional (subsidized, well below market) rates. Then again, their argument is that China does the same in providing financial aid but they too ignored that part of the PRC loan portfolio for lack of publicly available data:
The World Bank figures are for the International Bank of Reconstruction and Development, the bank’s main lending arm, and the International Finance Corporation, which lends to the private sector. They do not include the International Development Association, which makes grants and low-interest loans. China also gives financial aid to other developing countries, but provides little detail.
I have two observations before ending. First, those claiming that China now lends more to LDCs than the World Bank cannot do so on the basis of this article since even its authors don't go that far for want of data. Second, it will probably provoke a further outcry from those who continually observe that China itself is still a pretty significant recipient of ODA from international development agencies. You can make the argument that China is a huge place with several noticeably underdeveloped pockets and that help may come more in the form of technical assistance, but it is undeniably jarring alongside the largesse it sets aside meant to win friends and influence people.

Are Brits Dumb Enough to Hold $511B in Treasuries?

♠ Posted by Emmanuel in ,, at 1/19/2011 12:02:00 AM
(OK, so that's an obviously loaded question. But hey, this is a blog for crying out loud.)

With apologies to our Chinese colleagues, I generally hold one's Treasury holdings as a yardstick for one's gullibility. If you're dumb enough to own so much stake in a sunset nation like America, then you really have no one but yourself to blame when it inevitably goes down like, well, a Led Zeppelin. And speaking of the homeland of that legendary band, something striking that has not gained much notice is the United Kingdom supposedly having accumulated over half a trillion in these papers by November 2010. In a year's time if we are to believe US government figures, UK Treasury holdings have increased by a scarcely believable $356.3 billion, from $155.5 to $511.8B.

Brad Setser usefully pointed out how monthly Treasury data was subject to annual revisions that usually resulted in the UK tally being marked down significantly while that of China being marked up significantly. The same is probably true here. As before, London's status as a global financial centre is being used to facilitate Treasury purchases by those wary of being identified as avid purchasers of American debt for obvious reasons. In this day and age, announcing that you're an enthusiastic buyer of American debt is rightfully identifying yourself as a target for ridicule. Simply put, why invest in a country whose best years are well behind it instead of one whose fate is most likely the opposite on existing trends? China certainly has a habit of not promptly updating its reserve figures...I wonder why.

CNNMoney has an interesting article on China being the new landlord of the US--a somewhat less bold assertion than mine that the Chinese are the real owners of that dissipated place. Hyperbole (but not much) aside, the point is alluded to that most UK holdings are probably attributable once more to the Chinese attempting to hide the extent of their folly--especially to domestic audiences wary that so much money could be spent in so many far more socially productive ways:
There's also the issue of just how much U.S. debt China really owns. The official number reported by the Treasury is just a hair under $900 billion. But the actual amount could be higher, said Nancy Vanden Houten, an analyst with Stone & McCarthy Research Associates in Princeton, N.J.

That's because it is widely believed that China has used dealers in the United Kingdom to scoop up Treasuries. Those purchases would then show up on the holdings for the U.K., not China. And while the amount of China's debt holdings are roughly the same now as at the start of 2010, the U.K.'s holdings has surged from $208 billion in January to $511 billion in November.
Which brings us to a larger point: China shouldn't complain too much about characteristically self-important, bratty American behaviour insofar as it has indulged so much of it (and tried to hide it out of shame). It's bad parenting pure and simple, but more on this later. Aside from being hard up and currently embarking on a pretty hardcore austerity programme, the UK is certainly in no position to fritter away so much money. Nor is there any massive public outcry here over how the government is ploughing hundreds of billions into Treasuries. The only reasonable conclusion is that the UK is being used by an entity or a group of entities as an intermediary for very large scale purchases of US sovereign debt. If historical precedent is accurate, then the revisions should point to China. You can bet your bottom dollar that China has more than an unfathomable $3 trillion in reserves by now.

But then again, as Yankee impresario PT Barnum said, a fool is born every minute. That pretty much sums up modern US grand strategy--hoodwink others into believing the US is a "safe" investment--though I don't think the UK is culpable despite what the figures indicate at the moment.

Welcome to London, World's Most Open City

♠ Posted by Emmanuel in at 1/18/2011 12:07:00 AM
And now for a news flash from the clash of metropolises. Here's a consolation prize of sorts for London after receiving a beating during the "selection" process for the 2018 World Cup: a study commissioned by the British Council and the European Commission finds that, based on a range of criteria, London is the world's most open city. (Utterly unsurprising fact of the day for FIFA: 2022 World Cup host Doha, Qatar doesn't appear on the list of the top 25. Qataris make up for it by having bags of money to throw at soccer federations, but more on this later.) The full report isn't out just yet, so in the meantime, here's the Evening Standard:
London is the world's most “open” city because of its welcoming attitude to foreigners and liberal immigration policies, according to a new league table. The capital beat New York, Los Angeles, Dusseldorf and Toronto in an assessment by the British Council of cities' ability to attract and benefit from international populations.

Among the 54 factors considered were the ease of firms to hire foreign labour, entry into the relevant country, the rights given to migrants and their ability to bring in family members. The number of overseas students and international schools were also assessed, as were policies to help the integration of new arrivals and public attitudes to migration. The “quality of living” — including crime levels and standard of medical services — was a further key element, along with measures such as unemployment, taxation and rents.

London's success is certain to be welcomed by business leaders and will intensify debate about the Government's bid to restrict immigration through a cap on arrivals from outside the EU. Mayor Boris Johnson, the business organisation London First and university chiefs have all expressed concern that the proposals could hinder the ability to attract talent. Ministers insist the rules, which are still being drawn up, will be flexible enough to ensure recruitment of highly skilled migrants...

Professor Mike Hardy, the head of partnerships at the council, said: “Openness is a real advantage for cities if they are pursuing plans to be internationally connected and play international roles...[A]ll cities strive to be successful in a transforming global political economy. One identified success criteria, recognised by all, is the ability to attract talented and skilled people, and to build the balanced and cohesive human resources needed for the contemporary economy.”

Professor Hardy said the ability of “diverse communities to live together in some sense of safety and security” was also important. He added: “While some of the factors influencing openness are beyond the direct control of cities, many of these factors are well within the control or immediate influence of city governments: the city's identity and character; its education, housing and cultural offer; the kind of local democracy it practices and the forms of participation it encourages.”
And here are the world's top 25. Notably absent are any French towns and Tokyo--Japan isn't yet the most welcoming place to foreigners, I guess. Sydney is notable in its absence as well...

1 London
2 New York
3 Toronto
4 Dublin
5 Los Angeles
6 Vienna
7 Auckland
8 Edinburgh
9 Madrid
10 Manchester
11 Barcelona
12 Nottingham
13 Dusseldorf
14 Newcastle
15 Cardiff
16 Belfast
17 Buenos Aires
18 Bilbao
19 Sao Paulo
20 Beijing
21 Nitra
22 Poznan
23 Bucharest
24 Cape Town
25 Sofia

So, not only does London do New York one better in being the world's financial centre, but also in terms of being more open. I suspect both findings are related. Despite everything, the capital still thrives so many years after the sun supposedly set on the British Empire.

PRC's PR Stunt: Yanks Can Open RMB Accounts

♠ Posted by Emmanuel in , at 1/17/2011 12:10:00 AM
A couple of years ago during the height of the energy price rises, Venezuelan President Hugo Chavez made a widely-commented PR stunt by making the now Venezuelan government-majority owned firm CITGO sell discounted heating oil to disadvantaged Americans, the implication being that Hugo Chavez cared more about poor Americans than George W. Bush. In the run-up to President Hu Jintao visiting Washington DC on an official visit, we have arguably the same phenomenon at work. However, instead of the greedy energy industry and its favoured politicians, US currency debauchery is firmly in China's crosshairs this time around. Read on...

The ever-reliable Wall Street Journal has had a brace of informative articles lately on how China is relaxing controls on the foreign availability of its currency, the reniminbi AKA the yuan. Anyone who's taken an economics course knows that the three roles of currency are as medium of exchange, store of value, and unit of account. In the past few years, China has been promoting the yuan as a medium of exchange in international trade by extending swaps to Southeast Asian countries, among others, to facilitate the use of RMB in trade. Now, it appears the Chinese are also moving along on the store of value front by allowing state-owned overseas banking subsidiaries to open RMB-denominated accounts for overseas retail and commercial banking clients:
China has launched trading in its currency in the U.S. for the first time, an explicit endorsement by Beijing of the fast-growing market in the yuan and a significant step in the country's plan to foster global trading in its currency. The state-controlled Bank of China Ltd. is allowing customers to trade the yuan, also known as the renminbi, in the U.S., expanding the nascent offshore market for the currency which began last year in Hong Kong.

The decision is the latest move by China to allow the yuan, whose value is still tightly controlled by the government, to become an international currency that can be used for trade and investment. "We're preparing for the day when renminbi becomes fully convertible," Li Xiaojing, general manager of Bank of China's New York branch, told The Wall Street Journal. He said the bank's goal is to become "the renminbi clearing center in America."

Until the middle of last year, the buying and selling of yuan had largely been confined to mainland China by the country's strict capital controls. But in July, it opened the currency to trading in Hong Kong. Daily trading has since ballooned from zero to $400 million...

While businesses and individuals in the U.S. can already trade yuan through Western banks such as HSBC Holdings PLC, the move by a Chinese-owned bank marks a stamp of approval by China on the expansion in yuan trading. Bank of China, which is 70%-owned by the government, now allows companies and individuals to buy and sell the Chinese currency through accounts with its U.S. branches.

Bank of China limits the amount of yuan that can be converted by a U.S.-based individual customer to up to $4,000 a day [and $20,000 annually as per the next article]. The restriction is designed to fend off speculation in the currency, bank officials say. But there is no limit, at least for now, on the amount that can be converted by businesses, so long as they are engaged in international trading. The bank has no restrictions on the ability by U.S.-based customers to convert the yuan back into dollars.
Before moving to the next story, do note that the medium of exchange function is proceeding along nicely as well, with more and more China firms accepting yuan as payment during trade settlement:
Chinese regulators last month increased the number of exporters that can use the yuan to settle international transactions from a few hundred to nearly 70,000. Some analysts have predicted that it will be only a few years before 20% to 30% of China's $2.3 trillion in imports could be conducted in yuan rather than dollars. Today, less than 1% is done in yuan, according to London's Standard Chartered Bank. While offshore yuan trading has grown rapidly, it's still a fraction of the $4 trillion daily trading in currency markets world-wide and pales next to trading in the dollar, yen, euro and other currencies.
Simply put, it fits with general expectations of China moving to a fully convertible currency in a few years' time. Certainly, bellyaching Yanks can't complain. Now we get to a really fun personal interest article from the WSJ that gives reasons--nay--implores (smart) Americans to ditch their greenbacks for the currency of the future. Five reasons are given for doing so excerpted here:
  • First, it's very unlikely to go down. Of how many investments can you say that? The yuan has very little room to fall farther because it is already seriously undervalued. Beijing has spent hundreds of billions of dollars keeping the currency artificially cheap for years to boost exports.
  • Second, it's very likely to go up. Why? China is growing rapidly, is a manufacturing powerhouse and is running an enormous trade surplus. Countries like that usually have very strong currencies. Think of the Japanese yen, or the old German Deutsche mark.
  • The third reason for holding some money in yuan: What else are you going to do with it? Interest rates elsewhere are minimal, so you won't be missing out on much. According to, the highest-yielding six-month certificate of deposit pays just 1.3%, before taxes. The dividend yield on the stock market is 1.7%. You can earn better yields from government bonds—the 10-year Treasury is paying 3.3%—but that's also subject to federal taxes, and you can put yourself at risk from inflation.
  • The fourth argument for a yuan account: It makes you more diversified. That's the holy grail of investing. The yuan-dollar exchange rate probably has little, if any, correlation to any other asset in your portfolio. (As a bet against the dollar, it might have some correlation to gold.) The exchange rate between the renminbi and the dollar will follow its own path. This is unlikely to be dictated much, if at all, by developments in stocks or even bonds.
  • The fifth and final argument for holding Chinese currency: It may help you offset the costs of U.S. economic decline. Our share of the world economy, which was 24% a decade ago, is this year expected to sink below 20%—the lowest figure in modern times. We are running a current account deficit of 3.5% of gross domestic product. Our national debt has nearly tripled in a decade, and deficits stretch out as far as the eye can see. Will the greenback survive as the world's reserve currency? Why should it? The British pound didn't.
My dear American friends and dollar holders the world over, ask yourself this simple question: How gullible are you in having whatever greenbacks you have left economolested by B-B-B-Bennie of the Feds and Tim "Strong Dollar" Geithner? If you haven't done any diversification yet, well, here's perhaps your last chance in abandoning the hapless, hopeless, godforsaken dollar.

It's an excellent way of showing up American economic mismanagement--the Chinese indeed offer Americans a better bargain than their own easy money enthusiasts who've helped make the United States an economic cesspool and global laughingstock. If Hugo can do it, trillion dollar man Hu can too.

Chuka Umunna, 'British Obama,' Takes on Tax Havens

♠ Posted by Emmanuel in , at 1/15/2011 10:50:00 AM
[Let me try my at hand at a compound post--something I haven't done in quite a while. In three parts, then...]

I. After Barack Obama was elected president and before last year's UK general elections, there was some comment on how British politics could not or would not produce a British Obama:
Britons are ready to elect a black prime minister - but the system may never give them a chance, a study concluded today. It found a "deepening tide of tolerance" over the past 50 years, with attitudes to race similar in Britain to the US. But America's political system was better at promoting black talent than Parliament or local councils.

Author Professor Robert Putman [of Bowling Alone fame] said: "The minimal representation of non-whites in the House of Commons is a significant bar to the arrival of a British Obama." The researchers, from Harvard and Manchester, tracked views on mixed marriage and other tell-tale signs, on both sides of the Atlantic since the Fifties. Last year equalities watchdog Trevor Phillips said he doubted the UK's political machinery would let a "British Obama" break through.
Note that I am exceedingly wary of the term 'black president' for a number of reasons. First, Obama has a mixed race parentage, and it reflects biases that someone with one black parent is considered 'black' while having one white parent does not necessarily make one 'white' in popular discourse. In part, it reproduces deplorable notions of 'racial purity'. Second, phenotype matters: Manchester United footballer Ryan Giggs is not really considered 'black' despite having a black father largely due to his 'white' appearance.

At any rate, we come to another potential post-racial politician (caution advised using that term) with much promise. Also from a centre-left party (post-New Labour Labour, whatever moniker it has nowadays), Chuka Umunna, MP for Streatham and 32 years of age, is gaining national attention by adopting populist stylings reminiscent of someone prior to taking the highest US office. While this comparison works in some respects, it doesn't in others. They share:
  • Being young politicians who've made it at an early age;
  • Exotic, Africa-sounding last names (as opposed to more racially ambiguous, common surnames such as Brown, Johnson, etc);
  • Mixed heritage featuring a father who was, in effect, a first-generation migrant,
  • Sharp fashion sense; and
  • As we shall see, a gift for oratory
On the other hand, our man Chuka comes from a more distinguished background on both sides:
Chuka Umunna is best known around Westminster for being black [see my caveat above], the one subject which this loquacious MP is rather reluctant to discuss. It is not that he is awkward about his mixed Nigerian/Anglo-Irish ancestry; more that he finds people make boring assumptions about him based only on his skin colour.

Far from being the poor south London kid, Umunna is rather grand on both sides. His father, who in 1964 arrived in the Liverpool docks from Nigeria with a suitcase on his head, was part of the local ruling family of chiefs. He did well in Britain by setting up an import-export business, before his premature death in a car crash when Chuka was 13.

His mother is of a prominent Anglo-Irish family from Sligo, the daughter of Sir Helenus Milmo, high court judge and interrogator of the Cambridge spies. Umunna has lived his entire life around Brixton and Streatham, “but I'm not going to pretend I grew up on one of the toughest estates in my constituency, because I didn't”. Indeed not. When his parents felt that teachers had given up on him in his local state school, they moved him to private St Dunstan's College in Catford, where he immediately began to thrive.
II. From more of the political bit we move, let's move to the international political economy bit. Barclays is undoubtedly familiar to football fans the world over as the title sponsor of the English Premier League. Something it shares though with other major financial institutions--not only those in Blighty--is a penchant for operating in paradis fiscaux or tax havens. And so it came to pass just a few days ago that Barclays President Bob Diamond found himself being grilled in parliament by one Chuka Umunna:
When Bob Diamond came before the Treasury Select Committee this week, he knew he would be asked awkward questions about the ample sufficiency of his multimillion-pound remuneration from Barclays Bank.

But he was not expecting the best-dressed MP in the room, a striking 32-year-old novice with just eight months in the Commons, to land the most painful kicks by suddenly interrogating him about Barclays' offshore subsidiaries. These allow the banks to enhance what lawyers delicately call “tax efficiency” for their clients and shareholders.

With elaborate, mocking courtesy, Chuka Umunna asked Diamond if he would like to tell the committee how many subsidiary companies the group operates in the three benign jurisdictions of the Isle of Man, Jersey and the Cayman Islands. Diamond said he was awfully sorry and would have to get back to the committee on that one. Umunna spared the Barclays chief the bother, and as the television cameras rolled, provided the information — respectively 30, 38 and 181.
Offshore activist Richard Murphy has more commentary on this Umunna v. Diamond episode.

III. Especially after the global financial crisis blew over, the role of offshore tax havens has come back into focus after being off the popular radar for some time--especially with Northern Rock's use of vehicles located...elsewhere. If there are ready-made villains in subprime globalization, rich folks schlepping money away to faraway lands to avoid contributing their fair share of revenue to the tax authorities seem like naturals. Together with Professor Ronen Palan of my alma mater the University of Birmingham and Christian Chavagneux, they also authored a Cornell University Press title last year that is one of the most up-to-date on the subject of tax havens if you're further interested. Here is the introductory blurb:
From the Cayman Islands and the Isle of Man to the Principality of Liechtenstein and the state of Delaware, tax havens offer lower tax rates, less stringent regulations and enforcement, and promises of strict secrecy to individuals and corporations alike. In recent years government regulators, hoping to remedy economic crisis by diverting capital from hidden channels back into taxable view, have undertaken sustained and serious efforts to force tax havens into compliance.

In Tax Havens, Ronen Palan, Richard Murphy, and Christian Chavagneux provide an up-to-date evaluation of the role and function of tax havens in the global financial system-their history, inner workings, impact, extent, and enforcement. They make clear that while, individually, tax havens may appear insignificant, together they have a major impact on the global economy. Holding up to $13 trillion of personal wealth—the equivalent of the annual U.S. Gross National Product—and serving as the legal home of two million corporate entities and half of all international lending banks, tax havens also skew the distribution of globalization's costs and benefits to the detriment of developing economies.

The first comprehensive account of these entities, this book challenges much of the conventional wisdom about tax havens. The authors reveal that, rather than operating at the margins of the world economy, tax havens are integral to it. More than simple conduits for tax avoidance and evasion, tax havens actually belong to the broad world of finance, to the business of managing the monetary resources of individuals, organizations, and countries. They have become among the most powerful instruments of globalization, one of the principal causes of global financial instability, and one of the large political issues of our times.
While I acknowledge that tax havens often are places where corrupt rulers of developing nations siphon off cash from the people's purse, financial activity generated in tax havens surely benefits their hosts too, right? It's not entirely as, ah, black and white an issue as most commentators make it out to be. Whether becoming a tax haven is a legitimate development strategy for small island nations is certainly up for discussion. On the balance--that's what we need to investigate.

Still, it's a pretty good issue for a 'British Obama' to gain attention with, don't you say?

Brazil-PRC Trade: Bikini Wars & Beyond

♠ Posted by Emmanuel in ,, at 1/13/2011 12:02:00 AM
A few days ago, I featured Brazilian Finance Minister Guido Mantega citing China for its unfair trade practices. Today, we feature a rather racy application of this complaint. While the affinity of the Chinese people for intimates is certainly beyond my realm of expertise (even if can vouch that Western-style billboards featuring underwear models are common in Chinese megalopolises), you can be sure that Chinese garment manufacturers love making them for the rest of the world. Only a few years back when Peter Mandelson was exiled to Brussels and served as the EU trade commissioner, he famously prosecuted the "bra wars" that involved invoking safeguard clauses under the terms of China's WTO accession as the multifibre agreement (MFA) was being phased out in 2005 and Europe was being inundated with intimates from the PRC.

Fast-forward to today and it appears our Chinese friends are once again involved in a trade row over their knickers--this time with fellow BRICs nation Brazil. There are two sides to this story that portray the economic relationship differently. On one hand, Brazilian commodity exporters are glad to have the Chinese market fuelling demand for their wares. On the other hand, Chinese imports are proving to be a tough challenge for domestic competition--especially in garments. Brazil is famous for coming up with all sorts of variations on--how should I describe 'em--slinky swimwear. However, inventing or popularizing something is no guarantee of continuing dominance. Think of the British in cricket, football, golf, tennis, etc.

And so it has come to pass that Brazil's bikini industry is up in arms against Chinese competition. I can hear it coming: Unfair trade! Undervalued currency! Slave wages! Like others have found, it's no picnic being in direct export competition with the mighty Chinese manufacturing machine. Let's begin with the happier side of this relationship with jet-setting Brazilian billionaire Eike Batista, purportedly the world's eighth richest person, riding the crest of a massive eastbound commodity wave. From Auntie:
Indeed, the real purpose of our helicopter trip was to view Eike Batista's latest project, a vast superport north of Rio, built with this customer in mind. The centrepiece of the complex is a two-mile-long pier jutting straight out into the South Atlantic, which has been dubbed "the highway to China". Mr Batista's companies control enormous reserves of iron ore and oil - commodities the Chinese economy desperately needs.

In fact, Chinese demand for the raw materials Brazil has in abundance has pushed prices to record highs and, as a result, Mr Batista's business - and the Brazilian economy - is booming. Eike is confident the boom will continue and that Chinese demand will help power him yet further up the world wealth rankings.

"I told Carlos Slim," he recalled with a grin - referring to the world's richest man, the Mexican telecommunications tycoon - "clean your rear-view mirror on the right hand side and clean your rear-view mirror on your left hand side because I don't know which side I will be overtaking you."
But then we get to the domestic bikini industry:
But, down on the beaches below Mr Batista's office [down at the Copa for you Barry Manilow fans], the fit doesn't seem quite so perfect. There are few products as emblematic of Brazil as the bikini but Brazil's bikini industry is in trouble, fighting off stiff competition from - you guessed it - China...

Then, three years ago, the Chinese entered the market. Within 12 months the export business that [Brazilian bikini designer] Ieura had been building up had disappeared completely. "My biggest competitors used to be other Brazilian companies," Ieura said ruefully, "now it is the Chinese."

And it is not just the bikini industry that is suffering. A recent study found that more than 80% of Brazil's manufactured exports are being adversely affected by competition from China. That is a real danger to the Brazilian economy because mining and commodities are not very labour intensive. The bulk of the Brazilian workforce is employed in manufacturing industries. The problem is that, natural resources aside, Brazil has a similar competitive advantage to China - cheap unskilled labour. As a result, the two countries tend to compete in similar sectors and, just as in most other economies around the world, China tends to win.
Even on Copacobana beach, the thong [sic] remains the same in the trade realm, it seems. Mayhaps it's a sexed-up version of the commodity curse.

UPDATE: See this (surprisingly informative and unbiased) USDA feature for a brief description of the multifibre agreement mentioned in the context of the "bra wars."

Castronomics, From Fidel to Li'l Brother Raul

♠ Posted by Emmanuel in at 1/13/2011 12:01:00 AM
What must this island nation do to work around the long-running US embargo against it? First came the foreign exchange-bringing tourists. Then came the Venezuelan doctors-for-oil deal. Vile consumerist filth like DVD players and cell phones came along shortly thereafter. Let's just say that since assuming leadership from his quite ill brother, erstwhile "Maximum Leader" Fidel, Raul Castro has set about dismantling Soviet-style central planning. Oh, the irony. To keep the revolution going, you must soft-pedal its more socialist elements.

Anyway, the good news as far as Cuba is concerned is that its trade surplus reportedly doubled in 2010 as Raul moves to consolidate the process of reforms he set into motion:
Cuba racked up a $3.9 billion trade surplus last year as President Raul Castro's efforts to cut imports and earn more abroad bore fruit for a second consecutive year, the government's statistics office reported on Friday. The surplus was nearly twice the $2 billion reported in 2009 -- good news for Cuba but only a first step toward getting its debt-ridden economy out of the woods.

The country has been struggling with severe financial problems since 2008, when hurricanes, the international financial crisis and internal inefficiencies left it without funds to pay its bills. The National Statistics Office reported on its web page,, that exports increased 12.9 percent to $13.6 billion in 2010, led by the selling of services at $9.4 billion. Imports fell 3.3 percent to $9 billion.

Higher prices for Cuba's main exports -- nickel, petroleum derivatives and medical and other technical services -- likely accounted for most of the increase, while revenues from tourism and communications were also reportedly up.

Some 75 percent of Cuban exports come from services such as tourism, communications and the export of doctors and other professionals to oil-rich countries such as Venezuela, Angola, Algeria and Qatar, which pay for the services on a sliding scale linked to oil prices. Prices for oil increased significantly in 2010, as they did for Cuban exports nickel and sugar.
Meanwhile, Raul the reformer is still at it. Heck, if retaining government employees that can't be paid for is a measure of socialism, then many parts of the United States are more communistic than Cuba circa early 2011:
Raul Castro has hammered away at the need for Cuba to get its economic house in order and pay its bills since taking over as president from his brother Fidel in 2008. The country's growing debt and service payments are a key reason for Castro's push to overhaul Cuba's Soviet-style economy, according to government insiders.

The reforms, to be discussed at a Communist Party congress in April, include drastic budget cuts and layoffs and ending most state subsidies. They also would grant state-run companies more autonomy and encourage more small private businesses, foreign investment, cooperatives and other "non-state" forms of running enterprises.
The revolution will continue...if fuelled with foreign exchange, that is.