Islamic EconoFundamentalism: Egypt's FX Rationing

♠ Posted by Emmanuel in Credit Crisis,Egypt at 12/30/2012 08:01:00 AM

Is sound money management a normative activity? I would tend to think so since depreciation, inflation and so on tend to have widespread negative effects on the population's well-being. However, it comes as no real surprise that the Egyptian central bank has taken what are arguably steps on the road to a full-blown economic crisis, namely: (a) rapid currency devaluation and (b) foreign exchange rationing. For our dear Arabic readers, the press release is up on the Central Bank of Egypt website--an, er, exciting place to work in there ever was one.

Reuters has the pertinent details:

Egypt's central bank said it would start foreign currency auctions on Sunday to conserve reserves that have fallen to a critical level, pointing to a deepening economic crisis as President Mohamed Mursi tries to calm political turmoil. The announcement was posted on the bank's website on Saturday just two hours after Mursi used a major policy speech to declare the economy was showing signs of improvement [if this is an improvement...]

The central bank has spent more than $20 billion in foreign reserves to support the pound since a mass uprising against Hosni Mubarak in early 2011 chased away tourists and foreign investors...Violent street protests and political wrangling over the last month have prompted a rush by investors and ordinary citizens to switch their Egyptian pounds into foreign currency on concerns the government might devalue or bring in capital controls. The bank allowed the pound to weaken to an eight-year low of 6.188 to the U.S. dollar on Thursday. On Saturday it urged Egyptians to "rationalise their use" of foreign currency and not speculate against the pound.

I would like to wish our Egyptian friends a Happy New Year, but I am afraid that the conditions that have led to this state of affairs are only likely to worsen in 2013. The constitution ramrodded by the fundamentalist leadership is deeply divisive, causing many of the natives to go restless. In turn, widespread turmoil at home is hardly conducive to attracting much-needed FDI or tourists. While the new currency controls may partially be aimed at staunching capital flight, I don't think they will deter those who want to park their money in safer places alike the Dubai.

There is debate about the meaning of FX rationing so late in the game. It may mean that Egypt does not expect its purported $4.8B IMF bailout deal to be cemented by January, causing it to prepare for the worst. OTOH, it may be the Central Bank of Egypt--still de jure independent the last time I checked--signalling to the fundamentalist crew that things are getting really, really bad. Morsi mentions that Egypt's reserves have been buoyed in recent months, but that's largely down to Arab states lending it some money to tide it over until...the IMF lends it money too? One can only hope.

It's bad news all around...unless you're Morsi's spin doctor, that is.What a shining success, this Arab Spring. As I've said before, more pragmatic sorts will legitimately question if this parlous state of affairs is an improvement in any tangible sense over the Mubarak years.

1/1/2013 UPDATE: Government foreign exchange auctions have not prevented the Egyptian pound from sliding to all-time lows. Market participants can smell Egypt's desperation.

1/3/2013 UPDATE: Still sliding to a new record low of 6.42 to the US dollar.

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Back in America: Is "Reshoring" Overblown?

♠ Posted by Emmanuel in Supply Chain at 12/30/2012 07:22:00 AM

There's an interesting feature over at The Atlantic on how more American manufacturers are moving back to the United States since expected savings from moving more production to the likes of China didn't materialize. To be sure, the world economy has also changed since the offshore fad peaked (see this earlier post on why offshoring and outsourcing are not synonymous--and why the article should have been entitled the "reshoring boom" instead of the "insourcing boom" to be more accurate). How has the world changed? They given the following bullet points:

• Oil prices are three times what they were in 2000, making cargo-ship fuel much more expensive now than it was then.
• The natural-gas boom in the U.S. has dramatically lowered the cost for running something as energy-intensive as a factory here at home. (Natural gas now costs four times as much in Asia as it does in the U.S.)
• In dollars, wages in China are some five times what they were in 2000—and they are expected to keep rising 18 percent a year.
• American unions are changing their priorities. Appliance Park’s union was so fractious in the ’70s and ’80s that the place was known as “Strike City.” That same union agreed to a two-tier wage scale in 2005—and today, 70 percent of the jobs there are on the lower tier, which starts at just over $13.50 an hour, almost $8 less than what the starting wage used to be.
• U.S. labor productivity has continued its long march upward, meaning that labor costs have become a smaller and smaller proportion of the total cost of finished goods. You simply can’t save much money chasing wages anymore.

These are all to an extent true--especially the one about the excesses of American organized labour being reined in. Moreover, as the article does state, there isn't much logic in sending production half a world away if you're mainly just going to service the US market. (Mexico makes more sense for that, though the hardest core reshoring fanatic would consider going across the Southern border a step too far unless you are again using the land of El Tricolor for an entry to point to increasingly lucrative Latin American markets.)

At any rate, (American) firms thinking of moving to China at this point--you're kinda late, buddy--can play around with the "Total Cost of Ownership Estimator" provided by Harry Moser's Reshoring Initiative. While I would naturally suspect the output is skewed towards staying bank in the US of A, freight information and whatnot are readily obtainable for those actually making this kind of decision. You also have to factor in cultural, linguistic and time zone issues--although these kinds of transaction costs are not readily computable I believe. Anyway, Moser is mentioned in the article as one of the champions of this movement in the article, and the calculator provides...

Most companies make sourcing decisions based on price alone, resulting in a 20 to 30 percent miscalculation of actual offshoring costs. With the Total Cost of Ownership Estimator, users account for all relevant factors when determining their total cost of ownership including overhead, balance sheet, corporate strategy and other external and internal business costs.

Once your unique data is input into the calculator, you will receive your total cost of ownership analysis complete with:

• Calculations of each source’s cost
• An accumulation of all costs into cost categories
• A grand total cost
• Line charts showing each source’s current price, total cost of ownership and 5-year forecast
• Line charts showing your cumulative cost by category

Have a look and see. Me? I am generally agnostic about location as a sometime consumer as long as the product is of good quality and is readily accessible when needed, so more power to those who "reshore" if improves either or both for American consumers. Still, the emphasis here is probably too Amerocentric for truly multinational firms that are neither American nor serve a largely continental US market.

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South Korea as the Catholic Church's Asian Tiger

♠ Posted by Emmanuel in Religion,South Korea at 12/24/2012 08:46:00 AM

Long lay the world in sin and error pining...

The Roman Catholic Church is savvy enough to know that its game is for the most part up in Western Europe. Lip service to a "Catholic revival" in that part of the world aside, we all know a declining market when we see one. Its resources are not really being used to fight a rearguard motion for a European reconquista. While there are some holdouts alike Poland, it's obviously in Eastern Europe. Nosediving church attendance, skyrocketing rates of illegitimacy and all the rest of it tell the tale. I fear that a Catholic revival in Europe is as much a lost cause as a surplus-running United States. At this rate, it will not be long before Catholic voices will start wondering why their headquarters remain in such an unappreciative continent when there are many other places where the Church would receive a much better reception. That is, what is the cost-benefit calculation of losing the "Roman" bit?

A thrill of hope the weary world rejoices
For yonder breaks a new and glorious morn...

But, the Good News is that the Church still manages to gain adherents in developing parts of the world alike Africa and Asia, with the number of priests increasing to meet new demand. Just like any old business, the Catholic Church appreciates that this is a game of numbers--albeit its concern is saving the most souls as opposed to more temporal concerns alike ROI. Moreover, its "investment" in the developing world is more likely to pay dividends given the more promising demographics there of followers yet unborn. That said, Asia is a funky place to promote religion. Just as China is famous for its intellectual property, er, lapses, so is it known for its habit of ordaining fake bishops. Since the Communist Party regards all other possible sources of authority with suspicion, it is hard to imagine the world's most populous nation gaining many more converts.

South Korea, meanwhile, is highly atypical in many respects. It is an OECD member and thus considered by most as a developed country. Its population is comparatively small as well at under 50 million. Alike other Asian tigers, it has among the world's lowest fertility rates. You would think increasing affluence would render more Koreans less religious and its demographic profile less attractive to the Church, but surprise, surprise: In South Korea, Roman Catholicism has spread like wildfire in recent years. Unlike Europe that could certainly use an opiate for the masses given its less-than-stellar economic fortunes, the still-rising Koreans have turned to the Gospel. Fr. Pierro Gheddo of the Pontifical Institute for Foreign Missions lays out the landscape:

There may be no other country in the world that over the past half century has seen growth as sustained as that of South Korea, including conversions to Christ. From 1960 to 2010, the number of inhabitants went from 23 to 48 million; per capita income from 1,300 to 19,500 dollars; Christians from 2 to 30 percent, of which about 10-11 percent, 5.5 million, are Catholic; there were 250 Korean priests, today there are 5,000.

I first went to South Korea in 1986 with Fr. Pino Cazzaniga, a missionary of the Pontifical Institute for Foreign Missions in Japan, who speaks Korean. Even back then it was a Church with many conversions, and it is still so today. Every parish has from 200 to 400 baptisms of converts from Buddhism each year. Most of the converts are city dwellers. Each year there are 130-150 new priests, one for every 1,110 baptized. In 2008, the proportion of Catholics exceeded 10 percent of South Koreans, and grows by about 3 percent each year. In 2009, the number of baptized reached 157,000, and 149 priests were ordained, 21 more than in 2008. More than two thirds of the priests are under the age of 40. "Over the past ten years, the Catholic Church in Korea has gone from three to five million faithful; in Seoul we are 14 percent," Cardinal Nicholas Cheong Jin-suk, archbishop of Seoul, has said in an interview.

It is certainly contentious to relate Europe's economic decline with its spiritual one so I won't even go there, but in South Korea's case you can make the opposite argument that secularization does not necessarily accompany economic progress. It appears increasingly prosperous Koreans have sought to find meaning beyond material well-being. As long as the Roman Catholic Church provides answers that are meaningful to them, it's a win-win proposition. Even for a centuries-old institution, it appreciates like pretty much everyone else that the future belongs to Asia.

And that is your religious political economy instalment for New Year's Eve 2012. A Merry Christmas to one and all from the IPE Zone...

...O night, O Holy Night, O night divine!

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The Argentine Isolationist Grinch Who Stole Xmas

♠ Posted by Emmanuel in Latin America,Socialism at 12/24/2012 06:20:00 AM

In addition to cooking the books, Argentina appears stuck in an import substitution industrialization [ISI] time warp. I sure would love to sell bell-bottom pants there for the full retro flavour, but they are of course throwing impediments to all sorts of imports. As the blog's subtitle goes, I affected an attitude of elegant desperation at an Associated Press article that discussed the growing unavailability of bicycles in Argentina despite its self-styled populist government promoting their use.

Now Americans are known for their mind-boggling levels of mega-obesity and hyperpollution. Rightly identifying more with progressive Europeans than Americans, Argentinians have taken up the cause of bicycling in urban centres. Doing so doubly makes sense: not only do you get much-needed exercise, but you also cut down on carbon emissions getting stuck in interminable traffic. Or so the reasoning would go since the government's neo-ISI policies have created [surprise!] a shortage of bicycles together with a burgeoning grey market for them:

Civic leaders have tried to make Buenos Aires a bicycle-friendly city, but that's been stymied by another government initiative — protectionist import bans designed to spur domestic production that have instead strangled supplies of everything from bananas to prescription drugs...

A record 1.8 million bicycles were sold in Argentina in 2011, and the industry had predicted sales would surpass 2 million bikes in 2012, producing an estimated $510 million in revenue. Now, the Argentine Bicycle Chamber of Commerce and Industry [!] estimates some 1.6 million bikes will be sold in 2012. And that number would have been lower but for a Buenos Aires city program that offered loans of up to $600 per bike purchase, the group says. In its first week, the financing program drew 4,000 requests at the 21 bike shops taking part. 

As with most of these retro-protectionist measures, the ultimate loser is the consumer:

If anything, Argentines have learned how to be creative, as President Cristina Fernandez imposes tight currency controls and other economic measures designed to fight high inflation and stop the flight of dollars...

Argentina's bike sector, however, wasn't prepared to export or otherwise meet local demand, which meant the price of bikes and bike parts has shot up and stock is dwindling, says the bicycle chamber's president, Claudio Canaglia. At Nodari, a Mongoose bicycle that retails for $150 in the United States now costs the equivalent of $700 in Argentina.

Once again, all this demonstrates that economic mismanagement tends to compound elsewhere since it is so difficult to sort out all the cascading effects of ill-though policies. Meanwhile, it's no-go for Shimano as cyclists must make do without during this "festive" season. 

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History Repeats Itself: Greek Crises 1832-1897

♠ Posted by Emmanuel in Credit Crisis,Economic History,Europe at 12/22/2012 02:28:00 PM

Just as some folks spell T-R-O-U-B-L-E, certain nations have the reputation for it going a looooong way back. For a blog purporting to be the IPE Zone, you may have noticed that I have had very few posts on the EU project as of late and the myriad crises on its periphery. Honestly, I tired of this story a very long time ago and have as much interest in it now as the details of a root canal operation. While I found it amusing when the Greek finance minister responsible for hiding the true extent of his nation's debts came to the LSE and faced a very hostile audience, it's been blah ever since. Essentially the Greek story is one of Hellas repeatedly failing to meet economic targets set by the EU; the EU demanding more concessions from Greece, and Greek leaders giving in to EU demands after some posturing. The cycle repeats itself with the Greeks arguing that belt-tightening measures are responsible for insufficient "escape velocity" from now-chronic recession. And on and on it goes...

Interestingly though, Greece has had recurrent crises stretching back many, many decades. What's more, other Europeans alike the--wait for it--French and Germans have been forced to marshall their resources to bail out an ungrateful, perpetually hard-up nation. This from Stephen Krasner on seeming violations of Greek sovereignty from its creditors during earlier episodes of financial crises (pp. 12-13):

When Greece was recognized as an independent state in 1832, it received a 60 m franc loan from Britain, France, and Russia, but only by signing an agreement pledging that the ‘actual receipts of the Greek treasury shall be devoted, first of all, to the payment of the said interest and sinking fund, and shall not be employed for any other purpose, until those payments on account of the installments of the loan raised under the guarantee of the three Courts, shall have been completely secured for the current year’. In 1838 the entire finances of Greece were placed under a French administrator.

Greece could not secure new loans during the middle of the nineteenth century in part because it was in default on its 1832 obligations. After 1878 its borrowing increased substantially, but to secure these funds Greece committed specific revenues, including the customs at Athens, Piraeus, Patras, and Zante and the revenues from the state monopolies on salt, petroleum, matches, playing cards, and cigarette paper. The loan of 1887 gave the lenders the right to organize a company that would supervise the revenues that were assigned for the loan.

In 1897, after a disastrous war with Turkey over Crete, Greece’s finances collapsed. It was unable to service its foreign debt or to pay the war indemnity that was demanded by Turkey. Germany and France, along with private debtors, pressed for an international commission of control. Greece acceded when it became clear that this was the only way to secure new funding, and Britain, which had been more sympathetic to preserving Greek autonomy, then accepted the Control Commission. The Commission, which consisted of one representative appointed by each major power, had absolute control over the sources of revenue needed to fund the war indemnity and foreign debt. The Commission chose the revenue sources that it would control. They included state monopolies on salt, petroleum, matches, playing cards, cigarette paper, tobacco duties, and the customs-revenues of Piraeus. Disputes that might arise between the Commission and agencies of the Greek government were to be settled by binding arbitration. The members of the Commission were given the same standing as diplomats. One member of the Greek parliament argued that the establishment of the Control Commission suspended the independence of Greece.

Bottom line: if the EU were wise, then they would have taken Greece's history of repeated financial debacles as a warning for the future. Some argue that the EU's German paymasters were too naive in expecting EMU members to actually follow rules alike the Stability and Growth Pact to avoid undermining the entire project. It's the same old, same old over a century and a half later with these same folks whingeing about their loss of sovereignty and so forth when, of course, they wouldn't be in this place if they actually bothered sorting out their finances for good. Heaven knows, they've had, what, 180+ years to sort themselves out so there's really no excuse even if European powers have continually meddled in its affairs since the Treaty of Constantinople. Set against its history as a nation-state, Greece's current troubles are exceptionally unexceptional.

But no; I guess some people never learn and carry over bad habits for decades and decades.

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Park Geun-hye's Lump of Coal for Chaebol Haters

♠ Posted by Emmanuel in Marketing,South Korea at 12/20/2012 09:14:00 AM

When it comes to showing the West how things differ in Asian nations, I suppose nothing quite beats electing a military dictator's daughter to power via freely contested polls. But that of course is just what has transpired in prosperous South Korea. And General Park is a rather revered figure for spearheading their nation's rise to the top tier (OECD) of the global pecking order culminating with the hosting of the 1988 Seoul Olympics. Park Chung-hee has set off lots of debate about the merits of authoritarian development that continue to this day. For more on the specifics from an obviously supportive POV, I refer you to my current reference on the subject matter of Korean economic policymaking during the Park era by Kim Chung-yum.

Anyway, back to the subject matter at hand. Public debate in Korea has concerned continued favouritism shown towards large Korean conglomerates known as chaebol. These were of course modelled with a few modifications on Japanese zaibatsu. Despite differences here and there, the criticisms are remarkably similar, too. Because credit and whatnot have been preferentially allocated to these mega-firms, there has not been sufficient development of young, innovative firms. Insofar as alternative SMEs would be more geared towards meeting local tastes and customs, these countries also fail to become less dependent on export markets at a time when the West is, well, kaput. Lee Byong-chul notes how, in the run up to the elections, even mighty Samsung--vanquisher of Sony, highest-rising global brand, and the only real Apple rival--came under sustained criticism:

When asked to identify Samsung’s fiercest enemy, most people would name Apple, given ongoing patent lawsuits in various countries. But Samsung, the largest of South Korea’s chaebol (vast, politically connected, family-run conglomerates), has bigger problems at home. In the run-up to the December presidential election, the chaebol have become a target of growing popular anger...

But the conglomerates’ gluttonous business practices have suffocated small and medium-size firms, stifled innovation, undermined job creation, and left much of South Korea’s population in relative poverty, while catapulting their founding families to extreme wealth. As a result, what had once been a fount of pride for South Koreans has become a source of contention.

Chaebol reform is a defining issue in this year’s presidential campaign, epitomized in popular bumper stickers reading, “It’s the chaebol, stupid.” Past presidential candidates pledged to reform the chaebol – from cracking down on corruption to restructuring corporate governance – but delivered little, instead favoring short-term political gain from maintaining the status quo. Nevertheless, many anticipate that this year’s election will catalyze change, and that the cycle of greed and corruption that is weakening South Korea’s economy will finally be broken.

For all the huffing and puffing from the presidential contenders, though, Park's reforms are expected to be more cosmetic than a real change to Korea's political economy:

[G[iven that the Saenuri Party is traditionally pro-business, Park limits her reform pledges to harsher sentences for convicted chaebol executives and new restrictions on circular equity investment through chaebol affiliates.

Not pardoning convicted executives and cutting down on cross-shareholding doesn't count as a revolution in corporate governance in my books. While you can certainly have a debate on the merits of these practices, they are ultimately not very major efforts to begin with. Timing-wise, this election was doubly critical for reformers since a new generation of chaebol leaders--drawn from their families, naturally--are coming into power. From Reuters:

The election came at a sensitive time for Samsung and Hyundai as both are in the process of passing power to a third generation of their family owners, a process that left-wing candidate Moon Jae-in could have complicated with an attack on their shareholdings, had he won. "She doesn't have any plans to alter the structures of the chaebol ownership and their concentration of economic power," said Kim Sang-jo, an economist at Hansung University and executive director of a group urging reform of South Korea's economy...

Park Geun-hye is not likely to be as irascible as her father and her policies remain sketchy. She has promised to share wealth more widely but said no new taxes on individuals or companies, and no attack on the chaebol. "It is not my aim to dismantle or bash the chaebol," Park said in July. "The main aim is to fix negative parts such as abuse of economic power and to save the positive part the chaebol have such as job creation..." 

The chaebol themselves appeared to be happy with Wednesday's outcome and the prospect of being left alone. "We want (the president-elect) to undertake lots of economic policies that help investments and job creation so that our companies can focus on reviving the economy," chaebol lobby group the Federation of Korean Industries said in a congratulatory message.

I am not entirely sure if the chaebol inevitably "crowd out" SMEs. Anyone not hiding in a cave somewhere will have noticed Korea's newfound dominance in pop culture via the "Korean Wave." Its dominance is not an accident as the state once again has a strong hand in developing entertainment talent. Importantly for this discussion, it is not chaebol who are leading the charge here but smaller outfits alike Psy's YG Entertainment and a whole host of other acronym-heavy entertainment groups.

Botttom line: Korea is the envy of all Asia and perhaps the world for its economic dynamism and exceedingly popular entertainment. Why mess with a good thing? Economies of scale matter especially in export industries, hence the continuing relevance of chaebol. During the Asian financial crisis, Kia was bankrupted. In less than fifteen years, it is one of the world's top 100 global brands. As for the SMEs, I certainly think they can apply the lessons of the "Korean Wave" in extending the state-led model of development to smaller firms. Why should it not work for them as well?

Ultimately, Park Geun-hye gives lip service to reining in the chabeol. But honestly, they seem to be doing well enough to be left alone. As with many things, you can't argue with results. In a down world economy, you cannot ask for more.

PS: You may be wondering about the title. There is the oddly routine celebration of Christmas in any number of predominantly non-Christian nations that befuddles Westerners. Go to the lobby of any major international hotel and there will be the inevitably humongous Christmas tree. While their materialistic interpretation centred on gift-giving and a festive atmosphere kind of loses out on the core irony that the saviour of the world was born in a horse's stable, I just wanted to point out that a "lump of coal" is not an entirely foreign idiom. South Korea is rapidly gaining Catholic adherents as well, but I'll keep that idea for another post which will appear near December 25.

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There's No Power Shift (or Western Decline Either)

♠ Posted by Emmanuel at 12/20/2012 06:33:00 AM

...or so says our LSE IDEAS head honcho Michael Cox. To say I disagree with him is an understatement, but he of course deserves to be heard as one of it not the best-recognized scholars of US foreign policy in Britain. We have no "shop" opinions at LSE IDEAS, and I believe such diversity is welcome as it isn't usually seen at other thinktanks. Head here. 

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The Yen Also Falls: To Negative Nominal Rates?

♠ Posted by Emmanuel in Currencies,Japan at 12/17/2012 07:17:00 AM

Everything is less than zero - Elvis Costello

I am constantly befuddled by foreign exchange markets since they tend to display even more "irrational" behaviour than stock markets. Witness Japan and its currency. Beginning 1999 or so, Japan has conducted aggressive monetary easing via its zero-interest rate policy (ZIRP) that entails [duh] near-zero nominal interest rates. However, this and quantitative easing (QE) have done little to pull Japan out of its funk since the bubble burst in 1990. I of course think there are lessons to be learned here for Westerners who do the same Stupid Monetary Tricks, but others would say that their situations are different.

No matter; after being the almighty yen for the past several years, we get news that the yen is (slightly) weakening due to the (actually quite conservative and traditionally dominant) Liberal Democratic Party beating the (once upstart but now quite entrenched and equally staid) Democratic Party of Japan in parliamentary elections. News of an LDP victory has sent the yen tumbling--or at least what passes for it in this day and age of mild rather than wild forex swings in Japan:

The yen slumped to its lowest in over a year-and-a-half against the U.S. dollar on Monday as part of a broad skid after Japan's conservative Liberal Democratic Party, which is committed to aggressive monetary easing, won a landslide victory. The LDP surged back to power in Sunday's election, giving ex-Prime Minister Shinzo Abe another chance to take the helm. The LDP and its ally the New Komeito party secured the two thirds majority needed to overrule parliament's upper house, meaning the new government has a greater chance of pushing though its policies.

The LDP being a traditional practitioner of patronage politics, their priorities lie in American-style "shovel ready" projects. It's somewhat ironic; they taught the Yanks all this ZIRP and QE tomfoolery which they are continuing with anyway, and in turn they are imbibing construction-as-stimulus:

The Bank of Japan meets later this week and most analysts expect the central bank will ease policy further. It will most likely increase its asset-buying and lending programme, currently at 91 trillion yen, by another 5-10 trillion yen, sources have said. Abe, who quit as premier in 2007 citing ill health, has called for "unlimited" monetary easing and big spending on public works to rescue the economy from its fourth recession since 2000.

I have always been a connoisseur of sorts of Japanese economic policy. Accustomed to being meek and mild worker ants in the postwar period, they still display their banzai and kamikaze streaks in a few areas alike macroeconomics. How did they manage to run up a public debt that is 200% of GDP which is set to rise even more sharply with the LDP that's responsible for a lot of it? Honestly, I think that the fiscal levers are well and truly overdone. What's there left? Consider once more the "zero-bound" problem:

In spring 1999, ZIRP was introduced but it was constrained by the so-called zero bound problem. Therefore, worsening deflation meant the real interest rate would rise, aggravating recession and hence deflation.   

What the heck else can Japan do? Having "pioneered" the modern implementation of ZIRP, maybe they can try NIRP--negative interest rate policy. That's right; they should target rates at which they punish you for keeping money in a bank. Certainly even such a palliative won't work--those thin tatami mats they roll away during the day won't hold as many squillion yen as king-sized beds those portly Yanks have--but it may be worth a try as implied by yen weakening as of late. At the very least there will be amusing stories of folks hoarding cash.

Desperate times call for desperate measures. Bring on the NIRP! It's the ultimate weapon--unthinkable, even--in international currency war (and more specifically Japan's two-decade-long battle with deflation).

Screw M2, if you know what I mean.

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Harming Schoolkids: US & China are Rather Alike

♠ Posted by Emmanuel at 12/16/2012 09:43:00 AM

There is an adage about people hating those who are so much like them because they cannot stand being reminded of their own failings. Think of a rooster that sees a mirror image of itself, raises its hackles and wants to fight it. Being the world's largest carbon emitters aside, nowhere is this adage tragically truer than with the US and China in the matter of harming schoolchildren. While assorted American crazies like that Batman fanboy have topped global attention for years and years, unbeknownst to many, China has been giving the US a run for its money.

As it so happens, a Chinese nutter also tried to harm schoolchildren a few hours before the Newtown incident. However, he was fortunately not armed with a gun. The fact remains though that the frequency of attacks on kids is on the rise in China. "Asian values" notwithstanding; perhaps there's been a rise instead in "American values"?

The children of Chengping were still filtering into the local elementary school on Friday morning, China time, when a deranged thirty-six-year-old man named Min Yingjun entered the campus. He carried a knife. (China bans private gun ownership.) By the time the security guards got to him, he had wounded twenty-two children and one adult. All survived. China, like most places, had seen this kind of madness before: one especially heavy string of school attacks in 2010 killed nearly twenty people and wounded more than fifty. The killers are as hard to recall in their particulars as they deserve.

My initial suspicion is that while school attacks in China may be even more frequent than those in the US--there are impediments to knowing their number--those in America are invariably more lethal given the ready availability of firearms Stateside. There must be a lesson in here somewhere for the gun lobby, whose logic is even more obscure than that of the no new taxes forevermore crowd. There are reasons to believe that limiting access to weaponry does curb gun violence, but many Americans would rather stick their heads in the ground and pretend everything's OK just like they do when they hear about climate change.

We then get to the broader implications of US and Chinese societies' ill treatment of children. Unfortunately, crazies shooting schoolkids is but the tip of the iceberg for either nation. Emotional outpourings at tragic events like these aside, the reality is that older American generations consume public resources in such a way as to leave future generations decidedly worse off (despite certain objections that fail to ignore spiraling health care costs of all things). It is no accident that ever-diminishing US standards of living have a momentum that is difficult to arrest as the number of seniors giving themselves cushy retirements at their children's expense increases. China? Oddly technocratic ploys represented by the one-child policy spell trouble on the demographic front as the world's most populous nation eventually suffers from...too few kids.

Bottom line: In certain respects, the US and China share characteristics indicative of very sick societies. That is, mental pathologies that lead to these incidences are more likely to emerge in certain nations than others. Of course they claim to be different, but actions speak louder than words. As for the rest of the world, why should we blindly accept either one's political-economic model? Just as developing nations once fought to be non-aligned during the Cold War--including China if I remember correctly--I think the rest of us should search for alternatives lest our societies end up harming schoolchildren with such sickening regularity.

Mind you; we are not fated for the barbarism routinely displayed there.

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Google's Top Search Result for IPE is This Blog!

♠ Posted by Emmanuel in Service Announcement at 12/15/2012 11:44:00 AM

To my surprise today, I entered "international political economy" into Google and lo and behold, the very site you're looking at has emerged as the top search result. While I've found that results do vary from country to country--don't ask me why, ask Google--IPE Zone is usually in the top five. But, having acquired a track record over the five years it's been in existence, I suppose that all the incoming links have brought me up to today's result... and find I'm King of the Hill, Top of the Heap, A#1! It's particularly rewarding to me to have (finally) bested the wretched Wikipedia entry, which if you ask me, is a FrankenPage from hell that I outdo in PageRank anyway--but more on that some other time.

As always, many thanks to the loyal readers over the years who have brought about this magnificent showing. I literally couldn't have done it without you [sigh]. Of course, I am also grateful for newer readers who have entered the IPE Zone fold. Sometimes I honestly feel lazy about blogging, but I have somehow persevered long enough to get somewhere. Let this be a lesson to me...

That said, international political economy as a field is admittedly low in terms of general public awareness. Perhaps it's because the state of the art is stuck in what IPE stalwart Jerry Cohen calls "economistic mid-level theory" wherein economics envy has made us nearly as dull and formulaic as that certain other discipline. At any rate, I think this blog represents something of a change insofar as (a) it is not written by yet another white guy and (b) it is written by someone from the developing world. Just as there are certain problems with White People Trying to Dance, I believe there are issues with White People Trying to Pass Judgement on Us Coloured People. While I am not entirely bereft of colleagues from mainstream IPE, I remain something of an outsider because I don't suck up to anyone--least of all the practitioners of what I call "White PE" [sic].

To be truly worthy of the term "international," I believe you must have certain things like a diversity of backgrounds, ethnicities, experiences, genders, outlooks and perspectives. I'm sorry to say that mainstream IPE--alike much social science, to be fair--suffers from the phenomenon of Lots of Monolingual White Guys at American and British Universities Talking to Each Other and Calling It "International." See the academic blogosphere and the offenders are more plentiful than you can shake a stick at.  Maybe it's precisely because I am not part of their echo chamber that I have gotten this far as an an outsider, but I do think we can go even farther.

With your help, we will!

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And the World's Best Finance Minister is...

♠ Posted by Emmanuel in Development,Southeast Asia at 12/14/2012 06:22:00 AM

Cesar Purisima of the Philippines for 2012 according to Euromoney. It just goes to show you how far the United States has fallen in the opinion of those in the know that an American has not won this award since Bob Rubin back in 1996 (before being tarnished by all that Citi stuff during the global financial crisis). Nowadays, of course, being US Treasury Secretary doesn't involve much more than writing $1,000,000,000,000+ worth of IOUs year in and year out. However, the rest of the world (surprise!) doesn't think that prudent macroeconomic management involves such shameful behaviour.

Appropriately enough, this award is usually given at the World Bank / IMF meetings, this year famously held in Tokyo, Japan.

Cesar V. Purisima has been named “2012 Finance Minister of the Year” by leading global banking and finance magazine Euromoney for his “careful and successful stewardship” of the Philippine economy, and for his initiatives in promoting capital markets, both in the Philippines and in the Association of Southeast Asian Nations.

Euromoney is the flagship publication of business and financial publisher Euromoney Institutional Investor. It has been selecting a “Finance Minister of the Year” over the past 30 years to coincide with the World Bank/International Monetary Fund (WB/IMF) Annual Meeting. Selection is based on three factors: Opinions of a committee of Euromoney editors, views of world’s leading bankers, and analysis of over 400 global economist-contributors.

Secretary Purisima, who received the award during the week-long WB/IMF Meeting in Tokyo, which started October 11, 2012, said it is a recognition of the Philippines’ economic gains under the Aquino Administration. “This is a testament to how far the Philippine economic story has turned around under the leadership of President Aquino. The President’s unwavering commitment to good governance has brought significant gains to the Philippine economy,” he said. In 2011, Secretary Purisima was also named Finance Minister of the Year by the London-based financial news source, “Emerging Markets,” comprised of current financial news on emerging market trends and analysis in capital markets.

The unique thing with him is that while mainstream economists like Simon Johnson--one time head of research at IMF--now fault the United States for massive amounts of corruption via a "Wall Street Takeover," Purisima has chosen good governance and anti-corruption as important things to pursue. Given the Philippines' endemic culture of corruption, it will be an uphill battle for him, but it does make sense if you think of it even if "corruption fighter" is not usually one of the roles a finance minister usually takes: Would the US be bailing out banks to the tune of trillions of dollars of, ah, "stimulating" free money policies if they weren't so entrenched?

He said that the administration has laid the groundwork so that confidence would improve and investments would come in. Purisima said that unlike in previous administrations, the Aquino administration can boast of “honest, transparent and accountable leadership.” Furthermore, he said that the government would continue to improve the business climate, level the playing field, put in place predictable rules and implement a strong anti-corruption drive.

The government, Purisima said, has been doing this. “We are now starting to ignite private sector interest,” he said. He also said that there is now more fiscal space because of the administration’s anti-corruption drive. Every week, the Bureau of Customs (BOC) and the Bureau of Internal Revenue (BIR) alternates in filing before the Department of Justice (DOJ) cases against smugglers and tax evaders. 

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Michael Pettis Should Read More, Blog Less

♠ Posted by Emmanuel in China,Currencies,South Asia at 12/13/2012 10:45:00 AM

Skip the maths, will ya?

I have in the past tied Michael Pettis to the whipping post for uncritically accepting Bernanke's self-serving notion of a "global savings glut" amidst falling levels of savings worldwide and a fantasyland assertion that the US household savings rate would hit double digits. It didn't, and I still don't quite understand why someone who keeps making factually inaccurate statements and predictions remains popular. If you read blogs to keep ahead of the curve of mainstream media or to understand the antecedents of various economic events, well, I would not be so sure about that if you are a regular China Financial Markets reader.

I do not like to keep doing this, but he has done it again (and again and again). In a recent blog, he takes Arvind Subramanian and Martin Kessler to task for their argument that there is a "yuan bloc" emerging in East Asia. The PIIE authors base this argument on movements of several regional currencies covarying more with the Chinese yuan and less with the US dollar. However, Pettis argues that this argument is artifactual:

Well actually you can argue with the math, or at least you can argue with the interpretation of the math. There are alternative – and much simpler, I think – explanations for the increased “co-movement”, and these do a much better job, I think, of explaining what is happening than reserve currency displacement.

Assume for a moment a global scenario in which the largest exporter of manufactured goods in the world has a significantly undervalued currency. Assume further that many of its competitors also have undervalued currencies, and would like to revalue in order better to manage their domestic monetary policies. Assume finally that the world is in crisis, and exporting nations are having trouble maintaining the necessary growth rate of their exports, so they cannot allow their currencies to rise faster than that of their main export competitors.

In this scenario which currency would the currencies of the smaller exporting countries track, the US dollar, or the undervalued currency of the largest and most competitive exporter of manufactured goods in the world? Almost certainly the latter, right? The smaller exporters would want their currencies to rise, but the rise in their currencies would be limited by the rise in the currency of their largest competitor. This would happen not because they are tracking a new reserve currency but only because they are in export competition with that currency.

That is all well and good if Subramanian and Kessler didn't bother to consider this scenario as Pettis clearly suggests, but they did. On page 11, the PIIE boys write:

i. Is the RMB bloc related to trade integration with or competition against China?
A currency could co-move with the RMB because it is integrated with China in terms of common supply chains. A related but distinctly different reason for co-movement could be if policy targets the RMB because countries do not want to lose competitive advantage vis-à-vis Chinese exporters and domestic manufacturers. In other words, the reason for the co-movement could be competition against rather than integration with China.

How can we distinguish the two? One way of measuring competition is to see if a country exports products similar to China’s. Mattoo, Mishra and Subramanian (2012) develop such an index of competition relative to China. Unfortunately, they compute this index for fewer emerging market countries than contained in our sample.

When we introduce this index of competition (which is country-specific), it has consistently the right sign (the more a country competes with China, the more likely its currency to track the RMB). But is not consistently significant in a statistical sense (in Table 6, the index is statistically significant in column 2 but not in column 1). And when we run a horse race between this competition variable and a pure integration variable, the latter consistently trumps the former. So, the evidence, albeit limited, favors an explanation for co-movement that is more related to trade integration than competition, although a role for the latter cannot be ruled out. One reason for that last caveat relates to the findings reported in Table A6. It seems that outside East Asia, more countries track the RMB when it depreciates than when it appreciates. Moreover, the average magnitude of the CMCs outside East Asia more than doubles in such instances. So, we cannot rule out entirely a competitive pressure motivation for currencies to track the RMB.

PIIE boys did their homework, period. Some points:

1. I don't know why Big Name Authors think they can get away with such sloppy writing;
2. My policy of not having a comments section is vindicated by the echo chamber over at Pettis' blog. 59 comments...and not one who points this out either. I guess the Pettis Fan Club takes his word for gospel truth for better or worse--rather worse here;
3. I'm afraid that this is another example of inept blogging. Pettis writes--and he sure does write with posts extending to thousands and thousands of words--but he clearly doesn't do so from a position of knowledge of the material he himself links to;
4. This demonstrates why some quantitative analysis skills are worth learning for those interested in the subject matter. How do you measure covariance? How can alternative variables be included in models to account for alternative hypotheses? Pettis is a poet with limited numbers chops, so this probably explains his lack of awareness about such things. Do the math.

Note to Mike: If you link to something, at least try to understand what you're criticizing. I am not convinced that the yuan is going to take over as the world's dominant currency soon either, but I think it's at least worth trying to understand the arguments of Subramanian and Kessler before criticizing them for faults they didn't commit.

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Egypt Falls at First Hurdle to Get $4.8B IMF Loan

♠ Posted by Emmanuel at 12/11/2012 07:23:00 PM

As Egypt falls into a Morsi-made crisis by him trying to ramrod an Islamist-designed, next-to-no other public consultation constitution via a hastily called referendum this Saturday, its financial rescue prospects get even cloudier. Public order has gotten even worse than in recent months--which is in turn a marked deterioration from the Mubarak years. I guess the IMF's wish for a broad-based consensus is a pipe dream: How exactly is the current government going to gain any semblance of approval from non-hardline Islamist stakeholders for harsh conditionalities after these constitutional manoeuvrings?

Apparently, Morsi's allies have now decided not to push through with the IMF loan for now since they understand that the opposition will only be stoked further should bitter medicine be forced on the Egyptian people in addition to a constitution only a Muslim Brother could love:

A vital $4.8 billion International Monetary Fund loan to Egypt will be delayed until next month, its finance minister said on Tuesday, intensifying the political crisis gripping the Arab world's most populous nation. As rival factions gathered in Cairo and Alexandria for a new round of demonstrations, Finance Minister Mumtaz al-Said said the delay in the loan agreement was intended to allow time to explain a heavily criticised package of economic austerity measures to the Egyptian people. 

The announcement came after President Mohamed Mursi on Monday backed down on planned tax increases, seen as key for the loan to go ahead. Opposition groups had greeted the tax package, which had included duties on alcoholic drinks, cigarettes and a range of goods and services, with furious criticism. "Of course the delay will have some economic impact, but we are discussing necessary measures (to address that) during the coming period," the minister told Reuters, adding: "I am optimistic ... everything will be well, God willing."

All will be well, Inshallah? The current government is fundamentalist and fantasist at the same time. So much for all that Internet Freedom jibba-jabba about how Egypt was embarking on a new era of digital democracy and that sort of nonsense.

Don't make me laugh.

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Lord Patten, 'Fat Pang', on the 21st 'Asian Century'

♠ Posted by Emmanuel in China,Economic History,India at 12/11/2012 08:29:00 AM

Though not always, expatriates often develop piercing insights into the often strange political economy of Asian nations as outsiders looking in. Lord Christopher Patten of Barnes should be familiar to all scholars of Asia as the last British governor of Hong Kong. He remains controversial to this day for, in so many words, attempting to enshrine democratic processes in the colony prior to the 1997 handover. Jaded Hong Kong residents even grew a fondness for him--well, at least outside the business community--for his instincts as a retail politician did not go away when appointed for the post. From Andrew Craig-Bennett's superb and much-recommended history of Hong Kong where he traces the backhanded nickname of endearment "Fat Pang":

Patten continued to behave differently to his predecessors; although, unlike his predecesors for many generations, he did not speak either Mandarin or Cantonese, he used to go for informal strolls in the streets, chatting to people and pressing the flesh. In fact, he was behaving like the seasoned democratic politician that he actually was. Trouble was, Hong Kong had never seen such an animal before. As my Taipan remarked, "When will he stop kissing babies in Mong Kok? Doesn't he realise he doesn't have to get elected in this job?" 

Patten also used to make political speeches at the drop of a hat - no mere cutter of ribbons with a few kind words, like earlier Governors, he would deliver a twenty minute oration and - people listened. He became the first and last Governor to acquire a Chinese nickname - Fat Pang - 肥彭 (Chinese nicknames were sought after amongst the gweilo [foreign] community because they were only bestowed (behind your back) if you deserved one, for good or ill, and it was usually very hard to find out what yours was.)

So it is that he retained that Tory British predilection of adopting strong democratic stances as governor when his country of course used to be the world's foremost imperialist and slaver. Needless to say, attempting to instil democracy in a colony that would soon be handed over to China did not go so well with the PRC. What's more, his actions have undoubtedly caused ongoing headaches for the Chinese leadership insofar as several opposition parties now responsible for organizing mass protests against the mainland and so forth sharpened their teeth during Patten's epoch-ending stint:

Legco [legislative committee--which retains its role post-handover] debates became very different; long diligently televised, they started to be watched. The subject of debate moved away from the usual municipal trivia and started to take on a broader view. Patten was a veteran of the House of Commons; Hong Kong's political class watched and learned.

The first group to take a serious dislike to Fat Pang was the business community. Legco was not meant to be a debating chamber; it was meant to be a rubber stamp for [commercially friendly] decisions arrived at over lunch. All this political activity had an effect which I must assume (since he is still active in politics, and has not settled down to write his memoirs yet) Patten intended it to have. Hong Kong developed political parties. Strictly speaking, there had been parties since soon after WW2, but with one exception they were informal and had little influence.

Very interesting stuff. In line with this bit of Patten-era Hong Kong history, RBS has an unsurprisingly rollicking interview with the man himself on the so-called Asian Century. To no one's real surprise given his advocacy as Hong Kong governor, he believes that how far the likes of China and India will go depends on the extent they internalize democratic values (especially China):

Yet Chinese consumption remains low as a proportion of GDP, as does domestic investment. If China is to make its growth sustainable, it must change its model from investment in low-cost manufacturing to investment in the domestic economy and personal consumption. This will mean offering more social entitlement programmes and investing more in education and health. Sustainable growth also requires political reform, an area in which the Chinese leadership has had to tread carefully. “The Chinese often claim that they can do things to the economy without having an effect on politics,” says Lord Patten. “I rather doubt that myself and so, clearly, do some Chinese leaders.”

Like me, he believes that prospects of Chinese global preponderance are wide of the mark:

Next year will see a change in China’s political guard. Xi Jinping is expected to take over the presidency from Hu Jintao, but comparatively little is known about the likely new leader’s agenda. There is an ongoing debate within China between the party hardliners and some of the modernisers.

“The hardliners’ argument is that if the party continues to allow the privatisation of state and enterprises, along with more foreign direct investment, it will sooner or later lose control over the state,” explains Lord Patten. “The modernisers say that unless they continue to stand back from the state and enterprises, and encourage the private sector, the economy won’t grow quite so fast and won’t create so many jobs, which would result in the party losing control. I think the Chinese dilemma is that both those propositions are correct.”

In light of these challenges, he questions the claim that the 21st century belongs to China. “It’s certainly the case that America and Europe won’t dominate the global agenda in the next few years in the way they have in the past century,” he says. “But I don’t think that we’re going to live in a Chinese century. It may be one in which the Chinese and Indians, like the Japanese, refuse to define modernity in entirely western terms, but I don’t believe that we’ve seen the end of western influence.”

Good stuff; and he's probably on target.

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Venezuelan Bonds: Pricing Hugo Chavez's Demise

♠ Posted by Emmanuel in Latin America,Socialism at 12/09/2012 08:55:00 AM

While I am certainly no fan of Hugo Chavez, I do not wish terminal illness on anyone as a God-fearing Christian. That said, financial markets make it their business to peer into the crystal ball to foresee the future. Will Venezuela open itself up again to foreign investment in the energy sector, for instance? Nowhere is the practice of divination more visible than with Venezuelan sovereign debt, which has been on a roller-coaster ride as of late given its president's reportedly serious medical condition.

News reports out of Caracas are, in a word, manic. Let me provide some examples here. Early Friday morning, Bloomberg was commenting on the rally in 15-year bonds as Chavez's situation was viewed as dire and he was in Cuba for advanced medical treatment. Whereas Venezuelans used to regard his trips to Cuba with more curiosity, they had supposedly grown indifferent:

“In times past, when he’s gone to Cuba for treatment, there’s always been video of him getting on or off the plane or he would make a phone call to Venezuela’s state TV or pose with a picture of the Granma newspaper with Fidel for a sort of proof of life,” Russ Dallen, the head bond trader at Caracas Capital Markets, said today in a telephone interview from Miami. “But we haven’t had any of that for going on 21 days now. We’re getting closer to the end.”

The yield on Venezuela’s benchmark 9.25 percent securities due in 2027 fell 33 basis points, or 0.33 percentage point, to 9.18 percent at 3:12 p.m. in Caracas, according to data compiled by Bloomberg. Yields have plunged 1.74 percentage points since mid-November. The bond’s price rose 2.62 cents today to 100.50 cents on the dollar, the biggest one-day rally since June 2010.

Well guess what; just a few hours later Chavez made a semi-triumphant display returning home. So bond prices again fell:

Venezuelan bonds fell, pushing yields up from the lowest level since February 2008, after President Hugo Chavez broke a 21-day silence and returned from cancer treatment in Cuba. The yield on Venezuela’s benchmark 9.25 percent securities due in 2027 rose 26 basis points, or 0.26 percentage point, to 9.43 percent at 10:12 a.m. in Caracas, according to data compiled by Bloomberg. The bond’s price fell 2.02 cents today to 98.58 cents on the dollar, the biggest one-day drop since Oct. 9...

State-run Venezolana de Television broadcast images of Chavez waving and smiling as he came off a plane. The self- proclaimed socialist, who has seized companies and imposed currency and price controls during his 14 years in office, said he was “very excited” to be back in Venezuela.

Over the weekend, Hugo Chavez further reached out to the electorate which had elected him to another term and whose fourth inauguration is set for 10 January 2013. Hoping for the best but expecting the worst as the saying goes, Chavez has anointed his successor in Vice-President Nicolas Maduro. Previously, Chavez reportedly did not disclose the exact nature of his condition and the accompanying need for repeated trips to Cuba:

Venezuela’s president Hugo Chávez has revealed that he needs more cancer surgery and endorsed vice-president Nicolás Maduro as his successor if his condition should worsen...“It is absolutely necessary, absolutely essential, that I undergo a new surgical intervention,” said Mr Chávez in a national television broadcast on Saturday night, despite repeatedly having claimed to be free of cancer.

“With God’s will, as on previous occasions, we will come out of this victorious,” said Mr Chávez. He said doctors had found a recurrence of “some malignant cells” in his pelvic area, from which tumours have previously been removed. He has never disclosed the precise type or severity of his cancer.

Given the clear-cut majority Hugo Chavez attained in the most recent election, I simply do not think that "Chavismo" will disappear with the man should he step down from office for whatever reason. In any case, it will be a test of whether his personal popularity is mostly attributable to what Max Weber called "charismatic authority" or to deep-seated grievances against Western and mestizo domination Chavez routinely rails against. I am sorry to disappoint the markets, but I suspect it's the latter. It is unlikely that Venezuela will have a radical change to pro-market leadership to replace him anytime soon.

At any rate, I am convinced that the best outcome for Venezuela anyway, especially given its highly divided electorate, is not a sharp turn towards a neoliberal regime, but rather a market-friendly brand of socialism of the sort that Brazil has exemplified with (lapsed dependencia theorist) Cardoso, (labor unionist) Lula and now (former Marxist activist) Dilma Rousseff. All those three Brazilians were firebrands in their youth, but eventually grew up understanding the need for economic development and to play along to some extent with the damn capitalists. May Venezuelan leadership go down the same route in due course.

In the meantime, don't be surprised to see even more bond gyrations as markets open on Monday.

12/10 UPDATE:  As predicted, bond yields are falling in expectation that a post-Chavez administration will come into power soon...

Venezuelan bonds surged, sending benchmark yields to a five-year low, as speculation mounted that President Hugo Chavez will be unable to complete his third term after he acknowledged a recurrence of his cancer. The yield on the government’s dollar bonds due 2027 plunged 57 basis points, or 0.57 percentage point, to 8.79 percent at 10:52 a.m. in New York as traders anticipated a new administration taking office and courting the investment Chavez drove away. The bond’s price soared 4.61 cents to 103.71 cents on the dollar, according to data compiled by Bloomberg...

Today’s gains add to a two-week rally that left Venezuelan bonds up 44.7 percent this year, the second-biggest return in emerging markets after the Ivory Coast. In his 14 years in office, Chavez has seized more than 1,000 companies and imposed currency and price controls as part of what he says is a push to turn South America’s biggest oil producer into a socialist country. Those moves left Venezuela’s yield premium to U.S. Treasuries over 1,000 basis points as recently as Oct. 10, according to JPMorgan Chase & Co.’s EMBI Global index.

“There is a clear correlation between the price of Venezuela’s debt and Chavez’s health,” Jorge Piedrahita, chief executive officer at Torino Capital LLC, said in a telephone interview on Dec. 6. “The market believes that a post-Chavez Venezuela will not be socialist.”

I do not doubt that Chavez's health is dire, but at the same time, I think market participants vastly overestimate the possibilities for change in the market-friendly direction. Certainly it won't happen all at once.

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Why (They Say) Somali Piracy is Falling

♠ Posted by Emmanuel in Africa,Environment,Underground Economy at 12/07/2012 07:56:00 AM

 ...or so they say. Given my nationality, I have been particularly interested in this issue. Providing between one-fifth to one-fourth of all seafarers depending on your source, the Philippines has been particularly hard-hit by Somali piracy since its seafarers literally have a 1-in-5 to 1-in-4 chance of being on board a vessel hijacked in the Gulf of Aden. However, including even the BushBama years, all bad things must come to and end. Just as maritime piracy has been curbed in the traditional hotspot of the Malacca Straits due to littoral states engaging in more vigilant patrolling of these waters, so too does it seem that piracy has been reduced in the now-notorious Gulf of Aden. Instead of Southeast Asian nations doing the patrolling, however, it's been European ones under the command of EU-Navfor and its Operation Atalanta to keep piracy in check.

EU Navfor Rear Admiral Duncan Potts (seconded from the Royal Navy--history suggests they know a thing or two about piracy) gives a number of reasons for this decrease:

• The deployment of armed private security guards on board ships who have been 100% successful in deterring or defeating attacks;
• Better management practice by shipping companies, such as hardening their vessels or taking evasive action;
• Pre-emptive action by combined navies in the region, helping to ensure that pirates do not get out of their anchorages;
• A change in Somalia at national and local level, with Somalis far less tolerant of pirates.

Me? I am not entirely sure if this phenomenon is done and dusted. While the cost-benefit ratio of piracy has risen significantly as of late, long-term development of Somalia needs to occur to deter this line of livelihood going forward. In accomplish that, you need to accomplish a number of things that will be no small feat such as (1) establishing rule of law in the coastal regions especially and (2) creating viable sources of livelihood aside from fishing and piracy. Interestingly, Filipino seamen have been treated relatively well since they are viewed by the Somali pirates as victims of circumstance--poor people just like themselves as opposed to Europeans or others.

To be sure, Somali fishers-turned-pirates still complain that it was European overfishing in their waters that has made them lose their traditional livelihoods and turn to yo-ho-hoeing. I tried to investigate this evocative environmental notion sometime ago, but there is no data comparing fish stocks off the Somali coast over the years that could provide empirical evidence for such claims. (Please get in touch with me if you do!) So, what we are left with are counterarguments from those encouraging deterrence that other factors play a far larger role.

For instance, see this interview of Patricia OBrien, UN Under Secretary-General for Legal Affairs ont he matter:

Q: Many fisherman impoverished by declining fish stocks turn to piracy. Will the Yeosu Project [see here], which aims to build the capacity of emerging countries to address such issues, contribute to combating piracy?

A: The initiative taken by the Republic of Korea is commendable, and constitutes an important part of the regional and international efforts that must be undertaken by States Parties to UNCLOS and to the 1995 Agreement relating to the Conservation and Management of Straddling Fish Stocks and Highly Migratory Fish Stocks to promote the conservation of fish stocks, both within and beyond the Exclusive Economic Zone (EEZ, a nation’s official territorial waters).

However, the root causes of piracy do not only lie in the mismanagement of fish stocks and the depletion of resources from seas and oceans. If the trends regarding piracy off the coast of Somalia are to provide any guidance, whereby pirates have expanded their areas of operation and acquired heavier artillery, allowing them to attack larger ships further out at sea, major shipping routes such as the Strait of Malacca should continue to be monitored closely.

And cue "Rhymin' and Stealin'" for old times sake...

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Ramchandra Guha on Why London Outdoes NY

♠ Posted by Emmanuel in Education,Europe,India at 12/06/2012 07:51:00 AM

With all due respect to our readers from the Big Apple, I still hold that London is the world's capital for reasons both fair and foul. Quantitatively speaking, you can cite trading volumes in various financial markets to argue that London truly deserves the title of "the world's financial capital" unlike what you keep hearing on CNBC. It is also considered more open to all comers regardless of race, colour, or creed (unless you're an intolerant sort like Captain Hook). Throw in the astonishing buoyancy of its real estate market even as economic times are difficult--not something that can necessarily be said of New York--and the quantitative evidence for London's supremacy is overwhelming.

But, there are also qualitative aspects to this designation. Ramchandra Guha, the renowned Indian historian who succeeded Niall Ferguson at our LSE IDEAS as the Philippe Romain chair (see his recent WSJ interview as well), serves up a fond reminisce of his year in London that also bolsters the case that it is indeed the world's capital:

New Yorkers may contest this judgement, but despite the many attractions of the Big Apple, London still holds the edge. For one thing, the architecture is more appealing. The buildings are elegant, and on the human scale. They speak to you in a way that skyscrapers cannot [I can only assume he did not spend a lot of tie in the City of London!]. The city’s crescents and squares lend it an eccentric charm that the straightforward grid of Manhattan does not contain. And there are many more parks in London, as well as water bodies of various shapes and sizes.

London is also, in social terms, at once more diverse and more integrated than New York. On its streets and subways, Arabic and Hindi jostle with English and French (and, increasingly, Polish). New York, by contrast, is essentially monolingual. (To be sure, first-generation immigrants speak their language at home, but on the streets at least it is mostly all English). At the same time, in London, blacks and whites and coloureds are less rigidly separated by social class or place of residence. As a result, there are more mixed groups in the parks and restaurants of London than in the parks and restaurants of Manhattan.

To be sure, the academically inclined also have huge benefits by virtue of its unique place. He mentions the absolute wealth of speakers who would come on campus to speak. While the relatively younger LSE is not quite up there with Cambridge and Oxford in the prestige sweepstakes, the sheer volume of top-class speakers from academia, business, civil society and government who would come to speak is astounding since they inevitably come to (obviously English-speaking) London to be heard if they are in Europe:

The LSE has, however, one inestimable advantage over those other places of learning — it is located in a city in the centre of the universe, and thus regularly visited by scholars from Asia and Africa, North and South America, and of course Continental Europe. Its location and its attractions mean that a Mozambiquan historian wishing to travel to Brazil is very likely to route his journey via London. So too the Indian sociologist travelling to San Francisco or the American political scientist studying the Congo.

Making use of this strategic location, the LSE showcases a more impressive series of public talks than any other institution in the world. Harvard or Columbia might have specialists from other universities coming in for departmental seminars, and occasional public lectures for a wider audience. But the LSE has, during term time, as many as four different public lectures every day. The student, professor and alert private citizen are all spoilt for choice. Thus, on the same evening, one might have Paul Krugman speaking in the Sheikh Zayed Theatre, the lawyer who attended on Nelson Mandela speaking in the Old Theatre, and an expert on Egypt speaking at the Hong Kong Theatre. 

Geographically speaking, the LSE's place at the centre of London which is in turn the "centre of the universe" cannot be bettered. Heck, my very own boss hosted John McCain prior to the US elections. As I like to point out, though, you're not out of luck if you don't happen to be in central London since most of the events are recorded and podcasts if not videos are available online. Enjoy...but don't expect our NYU colleagues or others from Noo Yawk to offer the same sort of amenities for reasons Ramchandra Guha so eloquently makes!

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Will Remittances Outstrip FDI to LDCs?

♠ Posted by Emmanuel in Migration at 12/04/2012 07:50:00 AM

In an older post, I reiterated the argument that if rich countries were truly interested in promoting world development, then they would allow more persons from poor countries to work there. As we all know, however, significantly increased liberalization of migration is not likely because of the politics in rich countries. Labour protectionism, unvarnished racism, and misplaced fears of terror all work against making globalization live up to the name instead of the half-baked sort we have today which favours rich countries. That is, the free movement of capital, goods and services benefits those who have plenty of those--rich countries--more than it does those who have mostly labour--poor countries--to offer in the bargain.

Reading through the World Bank's most recent Migration and Remittances Brief, I was thus rather encouraged by migrant workers' international remittances slowly but surely gaining ground on FDI as the poor countries' largest source of capital inflows. What is more, projections are that they will keep that trajectory, while more volatile FDI which tends to vary with global economic conditions may again suffer a large dip alike during the global financial crisis:

Rich countries are understandably stingy with official development aid (ODA) nowadays since they really don't have cash to burn, especially with their assorted crises. Still, FDI is arguably better in the sense that its benefits are longer lasting. Then again, remittances are better yet insofar as they do not have the same sort of boom and bust cycles even during the teeth of financial crises. I suspect that this hypothesis may unfortunately be tested by another major crisis coming out of the developed world--that is, remittances will again outstrip FDI for the first time since the early Nineties.

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Gadgets Make the World Go Round: 15 Yrs of ITA

♠ Posted by Emmanuel in Governance,Supply Chain,Trade at 12/03/2012 12:07:00 AM

During these dark days of Doha Round deadlock, good news from the WTO is hard to come by. But, even your ever-pessimistic correspondent has managed to fetch--wait for it--reasonably good news involving the WTO. Although many people do not know of it, the Information Technology Agreement (ITA) signed under the auspices of the WTO way back in 1996 was a seminal event in the formation of global value chains in  the electronics industry. By gradually encompassing more and more countries in tariff-free arrangements in the production of electronic goods, disparate nations have benefited. To use commercial lingo, ITA enabled both Super Mario and Samsung to each have their own (export) Galaxy.

Just to show you how I am in such a generous mood, I will even let Mr. Doha Round Failure himself, WTO Director-General Pascal Lamy, fill you in on ITA's importance:

The 21st century is the era of information and communication technology, and the ITA has played a vital role in promoting affordable access to those technologies. This sector is crucial for the world economy – not only due to its considerable size, but also because it is an important driver of productivity, innovation and, ultimately, economic growth. Over the past 15 years, world exports of IT products have almost tripled in value since 1996, and reached an estimated US $1.4 trillion in 2010, accounting for 9.5 percent of world merchandise trade. Together, ITA participants account for 96 percent of world trade in IT products. And because they provide duty-free treatment to imports on a most-favoured-nation basis, they have created opportunities for exporters in all WTO members, including those in least-developed countries.

With the most recent participation of Colombia, the ITA has now grown to include 74 WTO members, and the majority of them are developing participants. Developing countries have consistently increased their participation in world trade of IT products since 1996, accounting for approximately 64 percent of exports and 51 percent of imports in 2010. While a growing share of the investment in both the production and use of these products is made by developed country IT industries, IT spending is increasing considerably in some emerging economies, such as China, India and countries of the Association of Southeast Asian Nations (ASEAN). These investments have been the catalyst that has allowed countries as diverse as China, Costa Rica, and some ASEAN countries to develop their capacity for manufacturing IT products and become important players in global production networks. In addition, other developing nations used these IT products and technologies as tools to become key players in other areas. For example, access to affordable IT equipment was instrumental in enabling India to become a powerhouse in consulting services, software development and other services. 

Good stuff, and there's much more information on the ITA's history, mechanics and future in the publication I excerpted Lamy from. As ever there's far too much interesting stuff to read if you're interested at all in international political economy. Rest assured that, sometimes at least, the WTO works.

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