Government Motors, Peugeot's Would-Be "Saviour"

♠ Posted by Emmanuel in Americana,Europe at 2/29/2012 01:18:00 PM

Here comes a knight in rusty armour. It is unfortunate that GM Europe--the only part of General Motors whose vehicles I would remotely consider buying--is also unprofitable. Let's just say that the European auto market is quite competitive aside from being stagnant. Take, for instance, French automaker Peugeot-Citroen. Hemorrhaging cash at the moment and making cars that are not so desirable, it too is feeling the pinch of European economic slowdown.

The question becomes one of whether Government Motors (or more accurately its European money-losing subsidiary) can productively join up with Peugeot-Citroen. By supposedly enhancing their market power in buying shared components and other inputs together with the associated economies of scale, it is hoped that both can survive the European shakeout. That said, there are limits to restructuring in Europe where government and labour interests often preclude shutting down automobile plants altogether:

General Motors Co. plans to extend a $335 million lifeline to struggling French auto maker PSA Peugeot Citroën as part of a tie-up that each hopes will aid turnarounds at their struggling European car operations. GM is expected to take a roughly 7% stake in Peugeot as part of an effort by the Paris-based auto maker to raise cash through a share sale. Under the deal, expected to be disclosed as early as Wednesday, the two would jointly buy supplies, build engines and, potentially, entire vehicles in Europe and elsewhere.

Recently, GM and Peugeot have been arguing separately for the need to close excess factories in Europe. But government and labor officials have opposed large-scale job cuts. Peugeot's move to raise cash is seen as a sign the company is worse off than initially believed. "One can be excused for getting the impression that things have become a lot worse than the company has been saying over the last two weeks," Credit Suisse analyst Erich Hauser said. France's stock market regulator on Tuesday called for Peugeot to disclose its discussions with other auto makers.

Again, this tale of woe extends to both GM and Peugeot:

The move would be GM's most significant manufacturing alliance since its 2009 bankruptcy. The auto maker has tried European partnerships in the past with mixed results. GM paid $2 billion to Fiat in 2005 to dissolve a failed alliance. It has been more successful with targeted partnerships in the region, including ones to build commercial vans with Fiat and an engine venture with BMW AG. GM's operations in Europe are unprofitable, losing $747 million in 2011 and a cumulative $14 billion since 1999.

Peugeot recently reported its automotive division suffered a €497 million operating loss in the second half of 2011. The firm burned through €1.65 billion in cash for all of 2011 amid slowing demand for new cars and fierce competition in Europe's oversupplied auto market.

What you have here is essentially a tale of three money losers compounding each others' misery. Call it "The Story of Modern America." The debt-swilling US government still owns over a quarter of Government Motors which would have gone bankrupt if it were not for the intervention of this supposedly free-enterprise championing nation. (Nor will the feds be fully repaid, but that's another story.) Meanwhile, handout-addled GM is seeking to partner with yet another concern with similarly questionable financial standing and expects things to get better. Isn't American enterprise grand? One thing you can be assured of is that the ultimate losers from this process of serial money wastage will be future American generations while its government--the world's most indebted--throws away good money after bad on such diversions on the highway to hell.

But what the heck, GM #1!

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Thou Shalt Obey Thy Lord Mandy on Globalization

♠ Posted by Emmanuel in Europe,Governance,Neoliberalism at 2/28/2012 11:02:00 AM

On paper, I am not supposed to favourably regard Peter Mandelson, the third architect of the UK's third way along with Tony Blair and Gordon Brown. While I regard the latter two as rather odious at this point in time, I have yet to definitively suss why I remain a Lord Mandelson fan. Perhaps it's because his various machinations have ensured that he would never hold the UK's highest office--if he were such a brilliant schemer, then he would have become king instead of being exiled twice from British government.

And yet what a journey he's had! From being the EU trade commissioner to the de facto prime minister of the UK during the dying days of Brown's ill-fated time as PM, Mandelson can never be accused of being dull. I also find it remarkable that while Blair and Brown's underlings have subsequently bashed them to the high heavens, you don't see Mandy's acolytes doing the same. Perhaps the erstwhile Prince of Darkness commands loyalty through his actions.

Now, a few weeks ago Peter Mandelson came out swinging in his sort-of-retirement years against giving up on globalization in the pages of the FT. As you would expect, I was generally in agreement with what he had to say. Now, though, he's fleshed out more details in arguing that managing the social consequences via the third way has given way to the older question of defining the scope of globalization. In The Globalist, he begins by describing the age of high neoliberalism:

The two serious attempts to govern globalization in the first two-thirds of the 20th century — negatively through isolationistic, autarkic policies during the 1930s, and more positively through the Bretton Woods system between 1945 and the early 1970s — were both accounted to be failures. So we embarked on a third attempt — not to govern globalization as such, but to actively expand its reach.

The attempt at creating true governance structures was restricted chiefly to managing the social and economic consequences rather than trying to define and impose the desirable scope of globalization itself. To some extent this approach was intellectually underwritten by the IMF, World Bank and OECD, and in many — but not by any means all — of the economics departments and business schools of Western universities. In the Anglo-Saxon world, it simply became the conventional wisdom.

With the benefit of hindsight, Lord Mandy is backtracking and looks to salvage the more acceptable elements of contemporary globalization. All the while, better representation is necessary to improve the image of globalization:

Looking back, we can see that this approach did neither us, nor globalization itself, any favors. First, it was intellectually abstract and inflexible. In political terms, it often ignored the basic fact that preserving the conditions of open trade and open global markets is possible in a democracy only if we make those conditions sufficiently tolerable and beneficial that people do not vote to end them. Second, it oversold globalization, and ultimately made it harder to make a pragmatic case for openness.

It is not enough to pretend that globalization is simply irreversible and has to be tolerated. The reversals of the 1930s show that the direction of globalization can be changed by political and economic choices over which we have no shortage of control — if we choose to take them.

In the increasingly multipolar world in which we live, it is arguable that no single world view will emerge to define the way we manage globalization. But while the end of a world in which the West dictated the terms of globalization is not necessarily a tragedy, a world without a shared set of principles for managing globalization would be. I am not naïve about the prospects for global governance, but I would argue for new rules accepted by developing and developed countries alike, because "no rules" is not a sustainable option. 

It's good stuff from Peter Mandelson, who is honest enough to admit where policy shortcomings lay. For more, see a recent Institute for Public Policy Research (IPPR) publication that Mandelson helped in preparing about globalization.

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I [Heart] Empire: "Hong Kong Better Under Brits"

♠ Posted by Emmanuel at 2/27/2012 04:08:00 AM

Niall Ferguson probably cemented the fashion of extolling the virtues of British empire with his bestselling book from a few years back. While the British empire had its downsides alike slavery earlier on and occasional massacres of various peoples supposedly under the crown, it was, on the balance, quite "developmental." Or at least goes Ferguson's thesis on how the British empire set the stage for the modern world characterized as it is by enhanced trade flows.

Along this line of reasoning we have Hugo Restall penning a WSJ op-ed--the outlet gives away the author's orientation--that claims Hong Kong was better off as a British colony than as a special administrative region of the Republic of China. In many ways it echoes the worst fears many Hong Kong residents had about the 1997 handover. While some wealthier families obtained citizenship elsewhere (particularly in Australia and Canada which grant residency readily for those willing to invest a certain amount) to hedge against possible anti-capitalist tendencies of the incoming ruling class, most accepted the handover as fait accompli. 

This roundabout discussion brings us to the present time when many Hong Kong residents are complaining about the handpicked leaders chosen by the communist Party. While conveniently neglecting to mention popular current chief executive Donald Tsang, the op-ed carps about his unpopular predecessor Tung Chee-Hwa and Tsang's likely successor Henry Tang. Restall also fails to compare Hong Kong's economic performance under the British and Chinese. The latter have undoubtedly provided Hong Kong with much more additional business that complaints about mainlanders' increasing dominance are rife even as it has so much revenue that it doesn't know what to do.

Nevertheless, Restall provides a nuanced argument that skirts the comparison between a "democratic" British rule (which it wasn't) and an unfree Chinese one (which actually provides for representation, albeit in limited form). He begins with the benefits of colonial administration trying to appease a demanding populace:

The Brits created a relatively incorrupt and competent civil service to run the city day-to-day. [Former editor of the now-defunct Far Eastern Economic Review Derek] Davies' countrymen might not appreciate his description of them: "They take enormous satisfaction in minutes, protocol, proper channels, precedents, even in the red tape that binds up their files inside the neat cubby holes within their registries." But at least slavish adherence to bureaucratic procedure helped to create respect for the rule of law and prevented abuses of power. Above the civil servants sat the career-grade officials appointed from London. These nabobs were often arrogant, affecting a contempt for journalists and other "unhelpful" critics. But they did respond to public opinion as transmitted through the newspapers and other channels.

Part of the reason was that Hong Kong officials were accountable to a democratically elected government in Britain sensitive to accusations of mismanaging a colony. But local officials often disobeyed London when it was in the local interest—for this reason frustrated Colonial Office mandarins sometimes dubbed the city "The Republic of Hong Kong." For many decades it boasted a higher standard of governance than the mother country. Mr. Davies nailed the real reason Hong Kong officials were so driven to excel: "Precisely because they were aware of their own anachronism, the questionable legitimacy of an alien, non-elected government they strove not to alienate the population. Their nervousness made them sensitive."

Contrast them with the Chinese and their alleged role in steeping Hong Kong in cronyism:

Contrast all this with Hong Kong post-handover. The government is still not democratic, but now it is accountable only to a highly corrupt and abusive single-party state. The first chief executive, Tung Chee Hwa, and Beijing's favorite to take the post next month, Henry Tang, are both members of the Shanghainese business elite that moved to the city after 1949. The civil service is localized.

Many consequences flow from these changes, several of which involve land, which is all leased from the government. Real estate development and appreciation is the biggest source of wealth in Hong Kong, a major source of public revenue and also the source of most discontent. In recent years, the Lands Department has made "mistakes" in negotiating leases that have allowed developers to make billions of Hong Kong dollars in extra profit. Several high-level officials have also left to work for the developers. This has bred public cynicism that Hong Kong is sinking into crony capitalism.

I can see the Union Jacks waving and hear "God Save the Queen" playing in the background already as Restall calls for more democracy based on his nuanced argument:

Under the British, Hong Kong had the best of both worlds, the protections of democracy and the efficiency of all-powerful but nervous administrators imported from London. Now it has the worst of both worlds, an increasingly corrupt and feckless local ruling class backstopped by an authoritarian regime...

[D]emocracy is the only system that can match the hybrid form of political accountability enjoyed under the British.Mr. Davies ended his appraisal of colonialism's faults and virtues thus: "I only hope and trust that a local Chinese will never draw a future British visitor aside and whisper to him that Hong Kong was better ruled by the foreign devils." Fifteen years later, that sentiment is becoming common.

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Japan Ponders Limits of National Superindebtedness

♠ Posted by Emmanuel in Japan at 2/24/2012 09:23:00 AM

That Japan owes over twice its annual output has been a favourite storyline for assorted end-of-the-world-economy cultists in triggering the next round of global financial meltdown. Nevermind that such predictions have proven woefully inaccurate given the yen strengthening to all-time highs in recent months, but there are of course...concerns.

The main reason why Japan's economy has not keeled over despite such an onerous burden are well-understood (except to the aforementioned cultists): Persistent deflation makes it actually attractive for Japanese savers to buy its sovereign debt yielding next to nothing, coupled with a sense of duty to help the country out during these trying times. Unlike the United States where nearly half of all lenders are foreign, Japan has to be more concerned about appeasing domestic audiences to curtail such doomsday scenarios from coming true.

That said, solving this issue will involve probing deep-seated structural problems with their economy. It's like Japan's own series of nested dolls: How can you address deflationary pressures in the absence of significant economic growth? How do you generate economic growth with a shrinking population? How do you generate more revenues to not have to issue so many IOUs without economic growth? It's not an isolated issue of, say, raising the VAT rate but goes into why Japan Inc. no longer works as it did in its 70s and 80s heyday.

And now to a more realistic disaster scenario over national superindebtedness:

Capital flight, soaring borrowing costs, tanking currency and stocks and a central bank forced to pump vast amounts of cash into local banks -- that is what Japan may have to contend with if it fails to tackle its snowballing debt.Not long ago such doomsday scenarios would be dismissed in Tokyo as fantasies of ill-informed foreigners sitting on loss-making bets "shorting Japan"...It costs Japan half of the country's tax income just to service its debt.

Each year, Japan's debt level increases by more than the combined gross domestic product of Greece and Portugal. Yet Prime Minister Yoshihiko Noda's plan to double the 5 percent sales tax to 10 percent over the next three years is seen as far too timid to stop debts from piling up. The fact that bureaucrats openly discuss such disaster scenarios shows their concern that the public, politicians and even some people in financial markets do not take the situation seriously enough, and that the debt blowout will become a self-fulfilling prophecy if necessary steps, such as raising taxes, keep getting pushed back.

But to some economists who have followed Japan for years, the frustration is that the country has yet to solve its underlying problems of slow economic growth and stubborn deflation. As long as those conditions persist, it will be difficult to crawl out from under the debt burden.

 Hardest hit will be Japanese banks who hold a lot of JGBs, potentially posing "moral hazard" issues that would make the West's response to the global financial crisis look like small beer:

While officials stress it is too early for a definite contingency plan, there seems to be an agreement that financial institutions will be the hardest hit because of their big government bond holdings, and that the Bank of Japan will play a key role in shoring up the sector. "The most important thing, in the event of a crisis, is perhaps not trying to affect fund flows by buying government bonds in huge amounts, but to make sure Japanese banks aren't forced to sell en masse to meet day-to-day funding," one of the officials familiar with BOJ thinking said. "Once it becomes a banking sector problem, it's very hard to contain the damage."

In an event of a surge in yields, the Bank of Japan could flood money markets with cash the way it did after the March 11 earthquake and act as a market-maker for the bond market, matching bids and offers if they fail to meet, officials say. The finance ministry could also be forced to redeem bonds ahead of maturity to calm investors, says Yoichi Miyazawa, former vice finance minister and upper house lawmaker for the opposition Liberal Democratic Party. Miyazawa, who led work on the party's crisis plan, says the worst case scenario could involve bank bailouts and Greek-style austerity if debt servicing costs soared, threatening to eat up a big portions of revenues. "The government should show a concrete roadmap for rebuilding public finances, including the kind of reforms adopted by Greece, which involve painful belt-tightening, slashing welfare spending and boosting sales and other tax rates," he said.

Finance Ministry data confirms that banks, rather than the budget, would take the hardest, most direct hit. First, the 2012/13 budget plan is based on 10-year yields of 2 percent, giving the government some cushion considering those bonds are currently yielding less than half of that. Secondly, its simulations show adding 1 percentage point to borrowing costs would add 1 trillion yen to about 22 trillion in borrowing costs over the course of one year, rather than double them as some commentators warn, because the spike would only affect newly issued and rolled over debt. 

It all hinges on the continuing willingness of Japanese citizens to buy JGBs despite growing awareness of the risks involved:

What sets Japan apart from Europe's crisis-hit nations is that it borrows almost exclusively at home and with domestic savings of some 1,500 trillion yen ($19 trillion) it can do it paying less than 1 percent for 10-year bonds. Deflation and the yen's long bull run foster a "patriotic" home bias among households and institutions, turning private savings into quasi public money, always there and easily accessible. In addition, the central bank acts as a buyer of last resort for the market, taking up large amounts of government bonds both as part of its annual quota of more than 20 trillion yen and an asset-buying plan launched in 2010.

That explains how a nation with one of the lowest tax burdens in the OECD and a stagnant economy never seemed to have trouble rolling out hefty stimulus packages or subsidising social security. In fact, the system got so entrenched that bond sales are often reported as budget "revenue," not borrowing. 

Still, inertia favors this odd and ultimately unwelcome situation to continue in the absence of alternatives, or more specifically, attractive alternatives to domestic participants:

Budget arithmetic and demographics suggest that it will take another decade before Japan's swelling ranks of retirees will begin to run down their vast savings to the point where Tokyo will need to start borrowing more from overseas lenders.  The $10 trillion question is when that money or local investors' patience will run out.

"There's a very strong system in place where all the stakeholders benefit from how things operate now," says one official. The optimistic view is that until then the government can keep rolling over the snowballing debt with ease. "Japanese banks don't have anywhere else to invest, so park their funds in the JGB market. The BOJ supports this by accepting JGBs as collateral. The only thing that could trigger a bond sell-off would be a huge pull-out of deposits from banks, which is hard to imagine."

Also recall that in addition to having a sizable reserve pile of over $1 trillion, Japan has accumulated among the world's stashes of overseas investment holdings as a consequence of running current account surpluses for so long:

But soaring fuel imports since the Fukushima nuclear crisis drove the trade balance into deficit in 2011 for the first time in three decades and probably brought closer the moment when the current account will also fall into the red. Hefty surpluses have allowed Japan to accumulate foreign assets exceeding 300 trillion yen, making a nation with the most indebted government also the world's biggest international creditor.

It may still be quite some while till this whole economic sideshow comes to a grinding halt. On to Japan's national debt being 300% of GDP!

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PIIGs in a Blanket: IMF & Reverse Robin Hood

♠ Posted by Emmanuel in Credit Crisis,IMF,Southeast Asia at 2/23/2012 11:07:00 AM

I've often harped on the idea that Europe's troubled PIIGS nations shouldn't be receiving IMF funding since the nature of their woes do not primarily deal with balance-of-payments woes the institution was meant to address. Greece simply borrowed too much. Ireland overcommitted to guaranteeing its banks' viability without fully understanding the enormity of the sums they put themselves on the hook for. And so on and so forth for the others. Given that financial concerns from these concerns could exchange their euro-denominated (demoninated?) sovereign debt for euro currency at the ECB, albeit controversially, they largely had no trouble availing of the foreign currency needed to survive, either.

Another line of criticism many commentators have had is the fairness of it all. PIIGS nations are developed, whereas more and more IMF funds come from developing ones. Aside from the rationale of rescuing nations on grounds arguably outside of the mandate of the IMF, there remains the problem of the IMF being a Western power dominated institution. Continuing the unspoken tradition of having a European IMF head did not reflect well for an institution now being perceived as the "EMF" since nearly half of all its lending now goes to troubled European states. It's the "reverse Robin Hood" of the IMF taking from the poor to give to the rich.

Which brings me to the current post. Just today, I covered central bank independence (CBI) with my students in comparative political economy class. (Yes, it's a somewhat dry topic judging from their interest, but an important one nonetheless.) To keep up to date, I visited various central banks' websites. Thus, I was astounded that the Philippines was now lauding its supposed turnaround from being a longtime IMF borrower to an IMF lender. While this change may reflect improved economic conditions particularly since the Asian financial crisis, I remain wary. While there is some gloating involved--you've come a long way, baby and all that--I believe it's not only a travesty of economic justice for reasons given above but also a political boondoggle on the country's part. In particular, the Philippine central bank boasts that it will in time give more to the global financial crisis New Arrangements to Borrow (NAB) whose most notable political-economic feature is that contributions are not allocated additional voting rights. From the press release:

The Philippines’ long-standing relationship with the International Monetary Fund (IMF) has evolved from being a prolonged user of Fund resources to a stronger partnership marked by the country's contribution to collective efforts in preserving the stability of the international monetary system. In 2010, the Philippines, through the Bangko Sentral ng Pilipinas (BSP), became a participant to the Financial Transactions Plan (FTP) of the IMF. The FTP is the mechanism by which the Fund finances its lending and repayment operations through a transfer of foreign exchange from members with strong external position to borrowing members. The Philippines holds a creditor (or reserve) position in the IMF through its participation in the Fund’s FTP. A member is said to have a creditor position in the Fund when the latter has used the holdings of the member’s currency to provide financial assistance to other members. Such use of a member’s currency is remunerated, i.e., earns interest and continues to be part of the country’s international reserves.

By virtue of their participation in the FTP, emerging market economies like the Philippines have joined international cooperation efforts to mitigate the spillover effects of Europe’s sovereign debt crisis by enhancing global financial safety nets. As of 31 December 2011, the Philippines has made available to the Fund through a currency exchange arrangement SDR163.8 million or about USD251.5 million. More than half of these funds were disbursed by the IMF to European countries such as Ireland, Portugal and Greece in an effort to address the financial crisis impacting the European economic zone. Most important, the country’s continued participation in the FTP will pave the way for the BSP’s admission in the New Arrangements to Borrow (NAB) facility of the IMF, a credit (lending) arrangement between the IMF and member countries or institutions which aims to forestall or cope with difficult situations that could impair the international monetary system.

The participation in the NAB would be a significant step in strengthening international cooperation. This would also demonstrate the BSP’s strong commitment to global efforts to help address threats to the international monetary system. The Philippines’ participation in the FTP marks a transition in the country’s relationship with the IMF. In 2006, the BSP prepaid all outstanding debt from the IMF which triggered the country’s early exit from its Post-Program Monitoring Arrangement and concluded the country’s use of IMF resources after nearly four and a half decades...This strong external payments position paved the way for the Philippines' entry into the creditors' list among the Fund members. 

The important thing to remember is that there are several more developing countries other than the Philippines that find themselves in this same "reverse Robin Hood" situation contributing to the IMF. There is an increased financial contribution, but where's the increased political clout--especially with regard to the NAB? While the Europeans are certainly not doing so well economically, their influence remains in both how IMF funds are used as well as how IMF leadership is selected. (I hope things will change at the World Bank, though.) The more things change, the more things stay the same, eh?

UPDATE: Also see the IMF's criteria on how it selects members to finance IMF transactions. Again, it's a double-edged sword for the likes of the Philippines. While some may see it as a compliment to be selected by virtue of one's financial position, the fairness element is sorely tested at the present time.

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Onshoring--You Macho Enough to Make in the USA?

♠ Posted by Emmanuel in Trade at 2/22/2012 09:02:00 AM

I have to run so this will be a quick if interesting one: Remember during the 2004 American presidential elections when John Kerry was inveighing against outsourcers with talk about "Benedict Arnold corporations"? What we now have is an interesting Reuters article that takes this line of argument to its (il)logical conclusion.  

In this version, the flight of "lemmings" or the exodus of Benedict Arnold corporations has largely run its course. What you have instead are many firms finding that vertical or horizontal de-integration is more costly than they thought, hence many are locating more of their enterprises back in the good ol' US of A. In many ways it's an archetypal application of transaction cost theory in which the erstwhile offshorers (that's "job killers" to you US union types) have found that the costs in terms of losing oversight or coordinating with those in other time zones, different cultures and of varying educational backgrounds is more trouble than they're worth:

Big U.S. manufacturers moved their production out of the country too quickly over the past decades and now see a competitive advantage in building up their footprints back home, top executives said on Monday. The chase for lower-paid workers drove the migration, which resulted in employment in the U.S. manufacturing sector falling by 40 percent from its 1980 peak.

But big companies including Boeing Co and General Electric Co are now finding that the benefit of lower wages can be offset by higher logistics and materials costs. "We, lemming-like, over the last 15 years extended our supply chains a little too far globally in the name of low cost," said Jim McNerney, chief executive of world No. 2 planemaker Boeing. "We lost control in some cases over quality and service when we did that, we underestimated in some cases the value of our workers back here." McNerney spoke at a Washington event organized by GE aimed at promoting the competitiveness of the U.S. economy. The nation has been slow to recover from a brutal 2007-2009 downturn and high unemployment -- 8.3 percent in January -- stands as one of the main barriers to a brisker recovery.

Boeing in particular ran into extensive delays in the launch of its 787 Dreamliner aircraft, handing off much of the manufacturing responsibility to outside suppliers, leaving the launch of the fuel-efficient aircraft some three years behind schedule. "You are going to see more (manufacturing) come back to the United States, and that's in part for business reasons and in part because we want to be good citizens," McNerney said.

Unsurprisingly, GE's head honcho Jeffrey Immelt--a talented fellow, no doubt--figures big in this story alike the one concerning funding the Ex-Im Bank as head of Obama's industrial input team:

The nascent resurgence in U.S. manufacturing -- which added 50,000 jobs in January -- has caught the attention of the White House. President Barack Obama, to whom Immelt is a top adviser on jobs and the economy, singled out the sector in last month's State of the Union address as an area where he would promote tax breaks in hopes of generating more jobs. Noting that GE currently generates about 60 percent of its revenue outside the United States and that some 70 percent of the orders in its backlog are from abroad, Immelt said that multinational manufacturers need to add jobs both at home and overseas if they are to be competitive. 

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Pro Death: US Congress Ponders Aborting Ex-Im Bank

♠ Posted by Emmanuel in Americana at 2/21/2012 10:37:00 AM

A running thread throughout this blog's history has been that Americans are not the most cosmopolitan of people. Witness, inter alia, the racist-protectionist treatment of Dubai Ports World, the inability of 90% of their youth to find Afghanistan on a map of Asia despite their government squandering untold hundreds of billions in that "nation building" fiasco, or their veep's near-total incomprehension of what the US owes other people. I don't mean to rub the point in, but I often find that foreign bloggers like myself have superior general knowledge of American institutions than many Americans themselves. Largely insulated by two big oceans, the instruments of US foreign policy are often better known to those who've witnessed them firsthand than the blithely incurious inhabitants of the US.

Today's post concerns the United States' Export-Import Bank. Alike the World Bank's International Finance Corporation, it too promotes investment abroad, albeit by American corporations including SMEs. The website blurb briefly describes its functions well:

The Export-Import Bank of the United States (Ex-Im Bank) is the official export credit agency of the United States. Ex-Im Bank's mission is to assist in financing the export of U.S. goods and services to international markets.Ex-Im Bank enables U.S. companies — large and small — to turn export opportunities into real sales that help to maintain and create U.S. jobs and contribute to a stronger national economy.

Ex-Im Bank does not compete with private sector lenders but provides export financing products that fill gaps in trade financing. We assume credit and country risks that the private sector is unable or unwilling to accept. We also help to level the playing field for U.S. exporters by matching the financing that other governments provide to their exporters.

Ex-Im Bank provides working capital guarantees (pre-export financing); export credit insurance; and loan guarantees and direct loans (buyer financing). No transaction is too large or too small. On average, 85% of our transactions directly benefit U.S. small businesses.
With more than 77 years of experience, Ex-Im Bank has supported more than $456 billion of U.S. exports, primarily to developing markets worldwide.

Now, an innate American fixation is needlessly blowing stuff up. Consider Afghanistan and Iraq. Combine this inbred violence with gross negligence of international institutions and you often have interesting results. Witness American lawmakers' serial reluctance to pay their share of UN dues despite it being headquartered in New York. Ditto for the IMF and World Bank in Washington DC. Especially now that the US is in dire financial straits, one thing that may bind the left and the right is cutting off support for bodies that have secured America's place in the world (for better or worse).

And so it is with the Ex-Im Bank: despite not featuring much in the headlines Stateside for reasons given above, nearly everyone else familiar with foreign investment trends worldwide should know of it. Yet despite many American manufacturers lauding the role the Ex-Im Bank plays in facilitating foreign investment, we return to the problem of inward-looking lawmakers not really appreciating the same. Thus it is currently engaged in an appropriation fight that pits the remaining American lawmakers with an internationalist outlook against rational choice theory acolytes who do not really understand the difficulties faced--especially by SMEs--in conducting business abroad:

General Electric Chief Executive Jeffrey Immelt on Monday defended the U.S. Export-Import Bank against charges the export-facilitating lender is "corporate welfare" and should be shut down. "It's not really corporate welfare to put us on the same playing field that our global competitors are on," Immelt said during a panel discussion on the future of American manufacturing with Boeing Chairman Jim McNerney and Dow Chemical Chairman Andrew Liveris.

The Export-Import Bank is facing a tough reauthorization fight in Congress. Immelt, who also heads an outside economic advisory council for President Barack Obama, said the United States needed the nearly 80-year-old bank to compete against the European Union and China in global markets for aircraft and other products. "If you're trying to sell a Boeing 737 MAX with GE engines in Africa, you've got (to compete against) a fully subsidized European superstructure and Chinese bank financing...I think things like Exim are ways that we can level the playing field," Immelt said.

The usual suspects are behind this "starve the foreign beast" lobbying. Also note its increased role in a world where export finance from private sources has thinned:

The conservative Republican group, Club for Growth, which is influential with members of the Tea Party movement, has called on Congress to kill Eximbank, which provides direct loans, credit guarantees and other financial instruments to support U.S. exports. "The Export-Import Bank is a prime example of corporate welfare that should have been eliminated years ago," Club for Growth President Chris Chocola said on January 31. "By picking winners and losers, politicians and bureaucrats are distorting trade flows. It's time to end the Eximbank for good."

The bank has played an increasing role in supporting U.S. exports since Obama took office. That's largely due to the lingering effects of the global financial crisis, which dried up other sources of export financing. But Obama's goal of doubling exports in five years has also increased the bank's activity. After two back-to-back record years, Eximbank's total credit exposure is now more than $90 billion, close to the $100 billion limit set by Congress. Some lawmakers want to increase the exposure cap to around $135 billion as part of the bank's proposed reauthorization.

In a letter last week to congressional leaders, the National Association of Manufacturers said it was vital that Eximbank be reauthorized for four more years before its current short-term extension expires on May 31. "The Eximbank is the only tool American manufacturers have to counter the huge sums of export financing - many hundreds of billions of dollars - that other governments provide their exporters," NAM Vice President Frank Vargo said. "If American manufacturers lose access to the Eximbank, our ability to compete globally will be severely curtailed." 

So I find myself in the odd position of agreeing with NAM which, characteristically, is one of the most vehement opponents of other countries investing in the US. Nor am I keen on the "everyone else is subsidizing the bejesus out of their manufactures, so why can't we?" argument, but still. These are strange times, indeed.

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Ranking World's Largest Container Port Operators

♠ Posted by Emmanuel in Economic History,Trade at 2/20/2012 08:58:00 AM

Among my most searched-for posts over the years this blog has been in operation have been those concerning the world's busiest ports [1, 2]. Truly, one of the underappreciated facets of globalization has been the expansion of facilities to standardize shipping merchandise throughout the world. By making containers identical to each other, loading and unloading massive amounts of goods has been made possible.

However, an even more underappreciated corollary concerns the rise of container terminal operators. Just as airlines used to be nearly the exclusive preserve of flag carriers throughout the globe in the not-so-distant past, most of the world's major ports used to be run by national port authorities. However, lacking any comparative advantage in handling goods shipments, many have since outsourced this activity to commercial container terminal operators which have accumulated expertise over the years in this specific endeavour.

Accordingly, a cursory look at the world's top terminal operators yields no surprises. (This compilation was prepared by the folks at Hofstra U.) At the top of the list is PSA International. formerly known as the Port of Singapore Authority. Over the years, Singapore's port has been at or near the top of the charts in container throughput as measured by twenty-foot equivalent units (TEUs) handled. In other words, its local expertise has readily been transferred to operating others' ports as nearby as India or as faraway as the UK.

In second place is Hong Kong multibillionaire Sir Li Ka-Shing's flagship enterprise, Hutchison Whampoa. While some claim that it is the world's largest port operator based on container handling capacity, the above chart is rebalanced to account for the fact that a fifth of Hutchison Whampoa is owned by PSA (hence-the measure "equity-based throughput"). Nevertheless, Li's vaunted business chops are once more evident in how he began his involvement in this business just as global merchandise trade volumes shot upwards

At a more than respectable third place is Dubai Ports World, perhaps known to most for bring forced to divest in America, where anything vaguely Middle Eastern-sounding has terroristic overtones to a lot of politicians and regular Joes. Although it got its start in the eponymous UAE port city, it has expanded largely through acquisitions alike that of the British P&O which then managed several US ports. Despite "national security" claims masquerading as protectionism--I don't recall any Yanks complaining about foreign port management when the British were in charge--such racist-protectionist thinking is embarrassingly typical of many US lawmakers and their hick constituencies.(For instance, then-Senator Barack Obama said "we're not allowing our port security to be outsourced to foreign governments" which is strictly not accurate.) Think about it: what sort of idiotic port operator would risk losing so much business by facilitating the transfer of WMD and other such supplies?

That aside, there is also greater concentration evident in the business being handled by these large conglomerates as in other lines of business. The following write-up also offers a way of distinguishing the method they use to rank these concerns:

The importance of port authorities in directly managing terminals is in decline, particularly in view of the emergence of global port holdings. This is mainly the outcome of deregulation of port management in a number of countries, which permitted the emergence of global terminal operators. By 2001, global terminal operators were controlling 35% of the port terminals and 42% of the containerized throughput. Ocean carriers accounted for 19% of global terminal ownership.

Since terminal operators have various stakes depending on the concerned terminal, equity-based throughput is commonly used to measure the respective amount of containerized traffic they handle. For instance, two terminal operators may have respective stakes in a terminal of 75% and 25%. If that terminal handles 100,000 TEU per year, then 75,000 TEU will be attributed to one terminal operator and 25,000 TEU to the other.

By using such a measure, PSA is the world's largest terminal operator, even if HPH, DPW and APM have more terminals in their portfolio. Actually, PSA owns a 20% stake in HPH, which from an equity-based throughput perspective conveys traffic handled by another terminal operator. The top ten terminal operators control an increasing share of the world’s total container handlings: 64.6% in terms of total throughput handled in 2009 compared to 41.5% in 2001.

As with most things, no news from port operators is good news since they get the job done with a minimum of fuss. But unfortunately, it also may mean that their good work is underappreciated--including that of Dubai Ports World

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Egypt's Beer- & Bikini-Approving Muslim Brotherhood

♠ Posted by Emmanuel in Credit Crisis,Middle East,Travel at 2/19/2012 07:34:00 AM

I suppose that attracting tourists is generic task for governments the world over nowadays. There is also a certain amount of homogenization involved in tourism with providing amenities that punters now expect unless you're offering ecotourism or frontier tourism options where roughing it out is part of the attraction. At the current time, Egypt's Muslim Brotherhood is facing pressures too familiar to troubled nations in terms of generating funding during a time of crisis. It has already (cautiously) approached the IMF in search of a (highly improbable) conditionality-free loan.

However, aside from being made to comply with the strictures laid down by foreigners alike IMF officials, a Muslim fundamentalist organization also needs to deal with...moral impediments to spinning cash. Tourists in particular are a noisome lot, prone to binge drinking and displaying much flesh in public--strongly disapproved of by religious authorities perhaps, but whose foreign exchange is most welcome especially at this point in time.

Accordingly, the WSJ has an interesting feature on the bourgeoisification of the Muslim Brotherhood. While there are certainly lots of old school elements in positions of leadership keen on introducing the hardline on this sort of moral decay, there too is an up-and-coming generation that is more realistic about what needs to be done to bring in the punters from abroad. Meet the Arab world's version of Clinton's dictum that it's the economy, stupid:

Hard reality is steering that transformation. Confronted with a badly sinking economy, the Brotherhood doesn't have the luxury of harping endlessly about Zionist conspiracies, American hypocrisy, or bikini-clad tourists—not if it wants to put Egypt back together again.

Tourism revenue dropped by at least one-third since the uprising, according to government statistics. And billions of dollars of annual foreign investment—which peaked at $13.7 billion in 2007—were almost entirely choked off. "Egypt is running smack into an economic wall," said Karim Sadek, a managing director at Citadel Capital, a Cairo-based private-equity firm.

A Gallup poll conducted between April and December of last year showed 54% of Egyptians placed jobs and economic development as their top priority, while less than 1% cited implementation of Islamic law. The results were consistent across all political parties, even Islamist ones. "Their supporters want the economy fixed, not religious solutions," said Dalia Mogahed, head of the Abu Dhabi Gallup Center, which conducted the poll.

And whom else would they talk to other than representatives of global capital:

The Brotherhood has received multiple delegations of foreign investors, including J.P. Morgan Chase & Co. and Morgan Stanley. The Brotherhood is meeting with executives from leading U.S. corporations that operate in Egypt, including oil and gas producer Apache Corp., Coca-Cola Co., General Electric Co. and General Motors Co. The meetings are part of a broad, tentative rapprochement between the West and the Islamist forces coming to power as part of the Arab Spring.

Advocates of engagement with the region's Islamists have maintained that integrating these movements into politics is the surest means of moderating them, and now that thesis is suddenly being tested on a broad stage. 

As the post title mentions, the morals policing squad has been muzzled for now by the dictates of attracting foreign exchange:

One concern was what the Brotherhood's Islamist agenda might do to tourism, an industry worth $13 billion a year to Egypt and employing 11% of the work force. During the recent campaign for parliament, some Brotherhood candidates advocated banning alcohol sales and forcing Western tourists to cover up on Egypt's beaches.

When Essam el-Eryan, a member of the movement's leadership bureau, met with an influential Egyptian business association in January, he was bombarded with worried questions about the future of tourism in Egypt, according to several people present. A few weeks later, in early February, Mr. Eryan met with tourism operators. He had a surprising message: "He said very clearly: beer and bikinis are OK," a businessman who attended recalled.

Mr. Eryan couldn't be reached to comment. No one believes the Brotherhood is suddenly pro-bikinis and beer. But it is hard to find a member willing to publicly denounce such vices nowadays. "We can't tell people how to dress when they can't put food in their stomach," said Mr. Haddad. 

Elsewhere this article discusses whether this compromise is temporary. That is, if and when Egypt regains its financial footing, will concessions to Eurotrash and other denizens of beach culture be curtailed? At the moment, though, let the fat guys in Speedos (and their female equivalents) be on Sharm el Sheikh.

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3 Cheers for Austerity: Iceland is Investment Grade

♠ Posted by Emmanuel in Credit Crisis,Europe at 2/18/2012 04:03:00 PM

Well here's a just reward for a nation sanely adjusting to the age of austerity. While no longer AAA USA is busy gorging on yet more costly giveaways costing hundreds of billions of dollars--it's an election year, duh--another of the countries hardest hit by the 2007/08 global financial crisis is finding its footing back to safer ground.

Hard as it is to believe, Iceland has recovered sufficiently by reducing both its massive deficits and its outsized financial services industry. As a consequence, Fitch's has just rehabilitated Iceland's credit rating to investment grade:

As the first country to suffer the full force of the global financial crisis, Iceland successfully completed a three-year IMF-supported rescue programme in August 2011. Despite some setbacks along the way, the programme laid the foundations for renewed access to international capital markets in mid-2011 and an encouraging rebound in economic growth to 3% for 2011 as a whole. Flexible labour and product markets and a floating exchange rate have facilitated the correction of external imbalances and contained the rise in unemployment, while the financial system has shrunk to one fifth of its former size.

Iceland has been among the front runners on fiscal consolidation in advanced economies: the primary deficit has contracted from 6.5% of GDP in 2009 to 0.5% in 2011 and Iceland appears to be on track to attain primary fiscal surpluses from 2012 and headline surpluses from 2014.

Fitch believes that gross general government debt may have peaked at around 100% of GDP in 2011 (excluding potential Icesave liabilities); net debt is significantly lower at around 65% of GDP, reflecting appreciable deposits at the Central Bank (CBI).

And, wonder of wonders, capital controls have also been implemented that have helped Iceland:

Capital controls continue to block repatriation of USD3bn-USD4bn of non-resident investment in ISK-denominated public debt and deposit instruments. Fitch acknowledges that Iceland's exit from capital controls promises to be lengthy, given the underlying risks to macroeconomic stability, fiscal financing and the newly restructured commercial banks' deposit base.

While the American debt lovers continue to pile up the IOUs, it seems saner nations understand that there is no such thing as a free lunch. As the US external deficit explodes upwards together with its fiscal one, we've seen their movie before. Fortunately, Iceland and a few others do not care for a second showing. For all their shortcomings, credit rating agencies have the general directions of Icelandic and US economies sussed out.

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The Race is On to Succeed Zoellick at World Bank

♠ Posted by Emmanuel in Bretton Woods Twins at 2/16/2012 05:25:00 AM

I have to run but it's going to be very interesting going with the current World Bank President Robert Zoellick indicating that he is about to resign his post. The search is on for a successor with the US naturally in the vanguard. However, given the controversy of yet another European succeeding the ill-fated Dominique Strauss-Kahn with Christine Lagarde at the IMF, it is high time that representation at the Bretton Woods institutions became at least as cosmopolitan as changes in the leading players of the world economy. That is, non-European leadership at the IMF and non-American leadership at the World Bank where both jobs have been stitched up ever since. From Reuters:

World Bank President Robert Zoellick said on Wednesday he will step down in June and Washington pledged to put a replacement candidate forward within weeks for a job that has always gone to an American. The Obama administration said it would open the process to competition [to non-Americans], marking the first time it has shown willingness to loosen its grip on the world's top development lender...

Developing countries have for years pressed for a greater voice in leading global financial institutions and are likely to stress the importance of a competitive process, but the United States is still widely expected to retain its hold on the job.

"It is very important that we continue to have strong, effective leadership of this important institution, and in the coming weeks, we plan to put forward a candidate with experience and requisite qualities to take this institution forward," U.S. Treasury Secretary Timothy Geithner said in a statement.

There is also supposedly a "hostage" situation of US congressional funding being contingent of selecting yet another American for the top post:

While Geithner called for an "open and expeditious process," analysts say Washington can ill afford to give up the post without risking the U.S. Congress cutting funding for the Bank. Zoellick, who discussed the selection process with the board in a two-hour meeting on Wednesday, said the first step was for the board to call for nominations. "An open process is important," he said...

Speculation has been rife over who might take the job when Zoellick departs. Possible U.S. candidates include Secretary of State Hillary Clinton and former White House economic adviser Lawrence Summers, but the State Department said Clinton would not be taking the job. "She has said this is not happening," spokeswoman Victoria Nuland said.

Emerging market and developing countries have campaigned hard in recent years to break Europe's grip on the top position at the International Monetary Fund and the United States' hold on the presidency of the World Bank.

Officials from large emerging economies like Brazil said on Wednesday the selection process for Zoellick's successor should be based on qualifications and not nationality. However, they acknowledged that given U.S. congressional pressure the job will probably remain in the hands of an American.

But there are always excuses based on American political expediency--again, as if the world stops to wait for what America does:

Last year, emerging market economies made an aggressive push to fill the IMF top job in a bitter contest won by France's Christine Lagarde. On Capitol Hill, lawmakers said the World Bank job should stay in U.S. hands. "I think it ought to be (an American) given the balance between that and the IMF and the interests that we have right now," said Senate Foreign Relations Committee Chairman John Kerry, a Democrat from Massachusetts.

Senator Richard Lugar of Indiana, the committee's top Republican, echoed that sentiment: "Ideally I would like to see an American replace him ... That would be my preference."

Nancy Birdsall, who heads the Center for Global Development in Washington, said that while the United States was committed to an open process on paper, domestic politics necessitated a American successor. "The election year timing puts the White House in an especially unenviable position. There is a risk that the World Bank could become a highly partisan, U.S. hot-button issue, as the UN has too often been," she wrote in a recent blog.

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TPP is Ludicrous: US Auto, Canadian Agri Edition

♠ Posted by Emmanuel in Agriculture,Economic Diplomacy,Trade at 2/15/2012 02:44:00 PM

Here are two more examples of the rather enormous roadblocks to the US government attempting to expand an APEC PTA to counterbalance growing Chinese trade dominance in the region. In their own ways, they are rather ludicrous examples of how Trans-Pacific Partnership (TPP) enlargement is infeasible at the current time given the policies of certain aspirant nations:

(1) Having largely survived via government bailouts, American automakers are now encouraging the US government not to let Japan join TPP enlargement negotiations for the reason that the Japanese supposedly throw up "non-tariff barriers." Having tried to pry open the Japanese market before via the blunt route of trade negotiations, it seems these automakers haven't yet learned their lesson. That is, selling big, gas-guzzling left-hand drive cars in a market where almost all cars are small, frugal and right-hand drive doesn't work. Quoting from a Japanese official on these alleged NTBs:

A Japanese government source in Tokyo rejected Detroit's contention that regulatory and other hidden or structural barriers keep U.S. cars out of the Japanese market. "Japan has no tariffs on cars and our acknowledgment is Japan has no non-tariff barriers either," said the government source, speaking on condition of anonymity.

"U.S. cars do not fit Japan's market or Japanese consumers' requirements because of size, high fuel consumption and higher prices. They need to have a line-up that suits Japanese consumers' preferences," the source added.

American consumers may have an enduring appetite for crapmobiles from Government Motors, but that does not necessarily mean that Japanese consumers are similarly gullible. I will not even get into the matter of agriculture where the TPP will supposedly offer no opt-outs.

(2) It appears that Canada in the TPP too looks like a long shot given its liberal use of agricultural supports. Canadian Trade Minister Ed Fast is looking to gain the approval of ANZ countries in particular of this matter while in Singapore:

A tariff structure that supports domestic farmers should not be a barrier to Canada's entry to a pan-Pacific trade pact, although all issues are up for negotiation, Canada's trade minister said on Wednesday. Ed Fast, interviewed in Singapore at the end of a tour of Southeast Asia, said most of the nine countries working toward the conclusion of a Trans-Pacific Partnership (TPP) deal supported Canada's entry into the negotiations.

He declined to say which countries did not back the plans. News reports have suggested Australia and New Zealand are unhappy about Canada's supply management support program for poultry and egg producers, a network of marketing boards and quotas intended to keep markets stable and ensure farm incomes.

It may be the case that TPP will be shot through with opt-outs if the likes of Canada and Japan come on board without significant changes in agricultural policy, negating the American assertion that it is a "high standard" FTA in the process. (See a recent post on Japan in the TPP.)

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Day's EU Analogy: Greece 2012 = Versailles 1919

♠ Posted by Emmanuel in Credit Crisis,Europe at 2/15/2012 06:12:00 AM

My oh my. There appears to be some sort of competition going on among journalists to make the most outlandish analogy between what's going on with Greece in the EU and a historical European moment best forgotten. A few weeks ago we had the FT's Wolfgang Munchau likening events in today's Europe to the Thirty Years' War--in part a religious conflict between Catholic and Protestant faiths. Now we have CNN business and travel journalist Richard Quest saying that the conditions being imposed on Greece are alike those of the Treaty of Versailles [!] Which, of course, imposed such heavy burdens on Germany that they led to hyperinflation to pay off war debts, the rise of the Nazi party, re-militarization to avenge perceived, slights and the outbreak of WWII.

He first sets the scene for Greek economic capitulation:

It is official. The Greek economy has gone into meltdown. The numbers released Tuesday show that during 2011 the economy contracted by 7%. Barclays estimates that much of that loss came in the last three months – when the economy dropped a whopping 5.1%.

A look at the IMF's World Economic Outlook puts it into context. In the darkest days of the recession no other developed country came close to suffering such a large loss (U.S. -2.4%; UK -4.9%; Eurozone -4.1). It is now clear Greece's economy has fallen off a cliff. It has endured five years of grueling recession and every prospect of much more to come, as even the Greek prime minister warned that things would be tough for years to come.

Then we get to the harshness of the prescriptions akin to those of Germany in 1919--albeit with Germany now going into the imposition business:

If Greece sinks into riot and rebellion, will we look back on this time as being an error in history because, even for understandable reasons, the Europeans pushed too hard?

Comparisons can be made with the Versailles Treaty and the way Germany was treated after World War I. Hefty reparations and a humiliating defeat were heaped on the country. It all ultimately led to such resentment and anger that the seeds were sewn for the nationalism which followed. In Greece's case there are the years of debt burden on future generations, the humiliation of making elected politicians sign pledges to other European governments and ultimately the destruction of a way of life (albeit unsustainable) that is precious. I don't think I can push the analogy much further though. Greece hasn't had territorial appropriations or restrictions on its military.

But the point remains. What some in Greece are calling the "German boot" on their throat is stoking up a level of nationalist fervor and resentment that, if not careful, the Europeans may literally push too far.

For all that, Martin Wolf notes how major political parties in Greece remain all for staying in the EMU. But, for how much longer if popular sentiment turns even worse with such violent images being transmitted throughout the world day in and day out? Perhaps Richard is on to something here even if belligerent nationalism by the Greeks is not really something to fear at the moment. After all, Germany pre-WWII was complemented by a mighty industrial machine, whereas Greece in this day and age would appreciate (export-led) industry of any scale.

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Not-So-Still Life: A Greek Riot Scene

♠ Posted by Emmanuel in Credit Crisis,Europe,IMF,Labor at 2/14/2012 08:17:00 AM

I'm a bit strapped for time today so here's something that captures the moment in Greece. On Facebook, my Greek friends have been posting these sorts of riot pictures and videos for several years now. I suppose it's conventional scenery when the IMF is called into action. Whether the IMF's presence raises the probability of these scenes happening or whether social disturbances are more indicative of government mismanagement is certainly a question for debate. It's back to the old debate of whether the IMF is merely the "doctor" called in when a nation's financial situation is already dire, or if the IMF makes matters worse by prescribing cures alike austerity measures that give rise to social disturbances that are worse than the (financial) ailment.

For all that, some research suggests that the IMF softens labour conditionalities where unions are influential--like Greece. The commonality of scenes like these seems to belie that argument, though.

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Revisiting WWII, or When Adidas Made Bazookas

♠ Posted by Emmanuel in Economic Diplomacy,Economic History,Europe at 2/12/2012 11:27:00 AM

This coming week I am going to discuss European economic integration in class. As most of you can recite from memory, the European Union got its start as the European Coal and Steel Community (ECSC) back in 1952. However, the political logic of the ECSC is a bit more obscure. While you will appreciate the necessity of rebuilding an industrial base in Europe post-WWII, the political story is a bit more involved.

You see, the French had a recurring fear of postwar German reconstruction coming in the form of re-industrialization. A number of conditions laid down on Germany after WWI concerned limiting its re-industrialization to prevent its re-militarization. Looking back, the French were to their dismay proven correct when the Nationalist Socialist party came into power and sped up the reformation of the German industrial machine. So, after WWII, the French had similar apprehensions about German re-industrialization. The solution, of course, was jointly administering the system by which key inputs--coking coal and iron ore--were distributed at the heart of Europe. That is, in exchange for Germany being allowed to (peacefully) re-industrialize, the erstwhile victor, France, would gain a veto power over resources if they perceived they were being requisitioned for military purposes.

Which brings me to the history of famous German brands. While they are today among the most coveted and recognizable in the world, their Nazi-era past is often forgotten (and thankfully so). Hugo Boss wasn't making designer duds but Nazi uniforms. BMW was building aeroplane engines for Luftwaffe bombers and fighters--hence the propeller logo. Hitler initiated the people's car project that is today's largest auto empire. Ferdinand Porsche helped design Panzer and Tiger tanks that dominated land-based conflict in the early going. And so on and so forth.

As WWII dragged on, many other manufacturers in unrelated lines of business started contributing to the war machine. While looking around, I came across a Der Spiegel article that explains how the brothers Dassler--Adi Dassler (Adidas) and Rudolf Dassler (Puma) were made to make highly effective anti-tank bazookas [!] The same factory that made the shoes Jesse Owens wore at the 1936 Munich Olympics to wide acclaim was making anti-tank weapons by 1944:

But the history of the Dasslers -- who both joined the Nazi Party in 1933 -- wouldn't be complete without one chapter from World War II: In 1944, there was suddenly a spike in the number of Allied tanks being blown apart by German fire. The culprit was the latest anti-tank rocket launcher, nicknamed the "Panzerschreck" ("Tank Terror"). This extremely effective weapon petrified Allied tank crews -- and it was manufactured in the same factory that had developed Owens' shoes only eight years earlier.

With Germany well on the losing side already, a crude yet effective weapon was made:

The German army fashioned the Dasslers' Panzerschreck after the American bazooka: a shoulder-fired steel tube; weight 9.3 kilograms (20.5 lbs); length 164 centimeters (5.4 feet); with a range of up to 180 meters (590 feet). A rocket fired from the Panzerschreck could penetrate steel armor 20 centimeters (8 inches) thick...

Inside the plant, shoe seamstresses -- who had quickly been given makeshift training to work in the armaments industry -- welded sights and blast shields onto the pipes. French forced laborers were also on the production line. "The construction of the Panzerschreck was so simple that, given a little practice, even unskilled workers had hardly any problems manufacturing it," one former employee told local historian Manfred Welker. But even with the simple design, German army inspectors still found themselves discarding many of the weapons made by Herzogenaurach's amateurs on account of their flaws. The complicated and dangerous production of the rockets, though, continued to be handled by the professionals in Vach.

Fortunately for the Allies, the effective tank killer from the shoe factory came too little, too late:

Wherever the specially trained "tank-destroying detachments" made an appearance, there was a significant increase in the number of enemy tanks knocked out. In March 1945, there were some 92,000 Panzerschrecks being used on the crumbling fronts. But the weapons had arrived too late to have a major influence on the war's outcome. It wasn't until 1944 that Panzerschrecks and Panzerfausts could be deployed on a large scale, but by then the military's initial good fortune had long since run out. "If large numbers of Panzerschrecks could have been deployed during the Russian campaign in 1941, Moscow would have probably fallen."

It's doubly good fortune for the brothers Dassler that the Yanks who went to the factory were duped into believing that they didn't contribute to the war effort but had in fact made Owens' shoes:

The Dasslers' brief career as weapons manufacturers nearly proved their undoing. In April 1945, when the Americans marched into Herzogenaurach, US tanks pulled up in front of the factory. The soldiers were still debating whether they should destroy the building when Adi's wife, Käthe, walked out and charmingly convinced the GIs that the company and its employees were only interested in manufacturing sports shoes.

What's more, after the factory was saved, the occupying forces turned out to be a blessing for the two shoemakers. The US Air Force set up its own operations at the former military air base in Herzogenaurach. When the sports-crazy Americans got wind of the fact that the Dassler brothers had produced the shoes that Jesse Owens had run in, they started buying all the products the company could produce. Large orders for footwear for basketball and baseball (and hockey) soon rolled in and gave the company its first boost on the road to becoming a worldwide success story.

It's very interesting stuff, and certainly worth more than a footnote to European history. Indeed, similar concerns would reappear about German dominance leading to military adventurism in the aftermath of German reunification post-1989. How did they deal with that possibility? For better or worse, the Maastricht Treaty is offered up as an even more elaborate mechanism to bind German interests to those of Europe in general.

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Asian Values 2012: Dr Mahathir Kicks West's Hiney

♠ Posted by Emmanuel in Credit Crisis,Southeast Asia at 2/10/2012 07:49:00 AM

To say that I am ambivalent about still-controversial former Malaysian Prime Minister Mahathir bin Mohamad is an understatement. On one hand, his time in office was accompanied by economic gains that were among the best in our region of Southeast Asia. On the other hand, he has had a penchant for vanity projects that are a big drain on the public purse alike the ill-starred Proton national car project. And don't get me started with his party UMNO playing along with if not leading the persecution of his former protege Anwar Ibrahim on dubious grounds. If you think your country's politics are rough, then I don't know what you'll make of Malaysia's where folks play the hardest brand of hardball.

For all that, I must give Dr Mahathir additional props for two things. First is his continued espousal of regional economic integration among nations that are truly within our sphere. Instead of entertaining the United States' various endeavours to style itself as a "Pacific" nation through various APEC-based initiatives of which the Trans-Pacific Partnership is but the latest gimmick, he originally proposed the East Asian Economic Caucus (EAEC). The EAEC was famously dubbed the "caucus without Caucasians" by the wags, but the notion remains of Western interests trying to introduce WTO plus measures in their favoured areas where they seek to consolidate existing advantages alike intellectual property, government procurement and so forth. Kicking away the ladder sounds about right. After all, why should Asians let outsiders dictate economic terms of engagement among ourselves?

Second and along similar lines, it remains the case that Malaysia was among the quickest of Southeast Asians to recover from the Asian financial crisis. This was done through the use of things the World Bank/IMF were discouraging such as capital controls and the use of other measures to protect domestic industries from capital flight and destabilizing economic conditions.

For a recap, here is Dr Mohamad being interviewed for The Commanding Heights on the crisis and what it meant:

In the old days you needed to conquer a country with military force, and then you could control that country. Today it's not necessary at all. You can destabilize a country, make it poor, and then make it request [IMF] help. And [in exchange] for the help that is given, you gain control over the policies of the country, and when you gain control over the policies of a country, effectively you have colonized that country.

Given his demonization of arbitrageurs and financial sleight of hand way back when, I still refer to him as Mahathir "Death to Speculators" Mohamad:

Because we have no say in controlling currency speculation. They can speculate with any currency, and their speculation is so designed that they can either revalue a currency or devalue a currency to any level. They hold this power, and they can literally make or break you by just by doing that. It has nothing to do with bad government or corruption or not being transparent, because if we were a bad government, then long ago our currency would have collapsed...

In addition to imposing capital controls, he also tried fixing the Malaysian ringgit (MYR) against the tide of World Bank/IMF advice:

I think the [Bretton Woods institutions'] perception is all wrong, and the reasoning behind it is also wrong. Just because you control the exchange rate of your country doesn't mean we are closing off our country from outside participation. As you can see, they are still here. They are still investing in this country, despite the fixed exchange rate. In fact, they find it very comfortable knowing exactly what they would earn, whether they would get back their budget or not, go according to their budget. You can actually plan for the future. That is what a fixed exchange rate means.

This trip down memory lane brings us to the present time. We can debate whether the IMF in particular has indeed taken a softer stance on rich nation borrowers in light of the Asian financial crisis or because they belong to the club of developed nations. However, what you cannot really dispute is that Western nations' own responses to suffering from homegrown crises have been to reregulate, nationalize and deliberalize--precisely the opposite prescription to what the IMF was prescribing during the high neoliberal era. Say one thing, do another.

It is thus no surprise that this sort of hypocritical behaviour has not been lost on Dr Mahathir. Ladies and gentlemen, I bring you a recent FT op-ed by the man on "Asian Values 2012":

The world is still Eurocentric: how Europe handles the financial crisis is of universal importance. But I have serious doubts about Europeans’ “infallibility”. I particularly dislike their double standards. Centuries of hegemony have convinced them they know best what is good for the world: their values are to be accepted as universal; Asian values are deemed irrelevant.

This explains the simplistic solutions offered to east Asian countries when currency traders impoverished them. Malaysia was told to raise interest rates, have a surplus budget, allow distressed banks and businesses to go bankrupt, etc. This was the formula for all. Yet when America and Europe faced their financial crisis, they did everything they told Malaysia and east Asia not to do. While these measures worked for Asia, they are not going to work for the west.

I believe that Mahathir's spoken record as well as his efforts to resuscitate Malaysia in the face of stiff Western opposition at the height of the crisis speak for themselves. If there is anyone who has a right to criticize the mess the West has made, it's him:

In Hong Kong in 1997 I spoke at the meeting of the International Monetary Fund and the World Bank and I blamed the financial crisis in east Asia on currency trading. I told them currencies were not commodities and should not be traded. But the World Bank and IMF did not care. They even accorded currency traders such rights as not having to be transparent and not paying taxes. They gave these exemptions in the name of free trade, and yet others had to be transparent and to be subjected to regulations. We concluded that their recommendation would bankrupt us and make us dependent on their loans.

I was condemned for my criticism of currency trading. But the exploitation and abuses of the financial market could not last forever. In 2008 the bubble burst. Banks, insurance companies, investment funds and even countries went bankrupt. But for its position as the currency for trade settlements, the dollar would be worth almost nothing.

Again, it's double standards:

Just as in the east Asian countries earlier, America and Europe became poor. The refusal to accept their impoverishment has resulted in their refusal to accept austerity measures. Their people demonstrate and go on strike against the measures. This simply aggravates matters.

Asian countries behaved differently. When they became poor because of the devaluation of their currencies they lived within their means. Some countries went to the World Bank and the IMF but Malaysia fixed the exchange rate and prevented the currency traders from accessing the ringgit. We were told our economy could collapse, that no one would lend us money, and we were warned of dire consequences. But nothing like that happened. Malaysia recovered faster than the rest.

It fits with what he's said before. While mainstream Western economists pointing out that Western finance is rather corrupt now constitutes conventional wisdom about "moral hazard," Mahathir grasped this long ago. Who's to say that kind of corruption is necessarily worse than what goes on in Asia? Back to The Commanding Heights:

In the rich countries, as you know, the top businesspeople and the financiers, they are very close with the government. They have a big influence over the government because the government knows that what they do is going to affect the economy of the country. That is why when the LTCM [Long Term Capital Management] collapsed, they were able to get the government to take action to have the banks support the LTCM. If the government had done nothing, then the LTCM would have collapsed, and the whole financial system would have collapsed. But then they know that they have to get political action to help them out. So that is collusion. That is very definite linkage between the top businesspeople and the government.

Like Mahathir, I believe that I am not an "anti-Western" blogger, but merely point out serial hypocrisies and patent falsehoods certain dirty white boys have tried to foist on others time and again:

I would like to say this: There is a tendency among the people in the West that when you criticize an idea coming from the West, it is because you are anti-Western and, therefore, Western people should not have anything to do with us. Their businesses shouldn't invest in our countries because we are being anti-Western. But we criticize ideas. If the ideas are good and they come from the West, we will support them, because it's not a question of being anti-Western but a question of being against certain ideas coming out of the West. It should not be assumed that it is because we are anti-Western. Anybody at all who criticizes the West is considered anti-Western. But we are criticizing the ideas, not the West.

For all his faults, Dr Mahathir doesn't mince words. Certainly us Asians could use more folks who can speak their mind? I believe that the respective economic trajectories of Malaysia post-Asian financial crisis and that of American post-subprime crisis say a lot.

His right to criticize the West has been hard-earned and well-deserved; that you cannot take away from the good doctor.

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Poland's Bid to Become a European Big Beast

♠ Posted by Emmanuel in Europe at 2/09/2012 11:17:00 AM

There is much discussion about an "EMU-lite" being the likely result of current crises in the Eurozone. When all is said and done, what will supposedly remain in the eurozone are traditionally strong economies that were among the earliest joiners such as Germany, Austria and the Netherlands. Yet, one of the most overlooked aspects of European integration remains that, even at the current time, there are far more countries trying to get into the EMU than those trying to get out (of which there are precisely zero--at least in official discourse). Witness, for instance, the last country to join this club--Estonia at the start of 2011 doing so despite all the alarming headlines.

I am of the general opinion that adopting the euro provides more benefits than costs provided countries are willing to adopt sane fiscal and monetary policies. While it's increasingly difficult to do so in many European nations due to mounting costs dealing with aging populations, it's certainly not impossible to do so.

Hence I found a recent FT feature quite fascinating concerning the good fortunes of Poland. Aside from trying to join the euro zone, its economic performance has been exemplary--especially in recent years compared to its neighbours. Having avoided outright recession in 2009, it is now attempting to parlay its track record into joining the inner circle of influential EU voices:

...Poland stands a good chance of repeating its feat of 2009 [in 2012] and again dodging a recession. That record should translate into increasing political weight for Warsaw within the European Union – where Poland sees itself as becoming one of the bigger beasts, at least on a par with fifth-ranking Spain.

One of the ways it's trying to accomplish this feat is to move closer to Germany. Historically an iffy proposition, let's just say we live in more enlightened times and the Germans see the advantages of letting Poland in on the EU party. In modern world systems theory terminology, Poland having made the leap to the semi-periphery now seeks representation at the even-grander table of core nations. Again, there's this notion that there ought not be second-class EU membership and of Poland being well-placed to demonstrate that the EMU remains an open club to all and sundry aspirants:

This could, therefore, be a crucial year for those ambitions – and Donald Tusk, the prime minister, has been frank about what could derail them. “In recent months, we are hearing more and more boldly articulated the idea that the EU should return to its core, described today as the borders of the euro area,” he told parliament recently. “From our point of view it is very important that Poland – if only because it is outside the euro area and has not yet achieved the level of development of the richest countries in the euro area – not become part of the second or third rank.”

For Germany, Poland is now a more important trade partner than Russia; Polish factories are tightly integrated into the supply chain of Europe’s economic powerhouse. That creates some risks if Germany stumbles but the combination of strong exports and a large and so far resilient domestic market leave Poland better placed than others. As Marek Belka, the central bank governor, says: “We have managed to nurture a real entrepreneurial class which is pretty resilient. Almost half of our exports to Germany come not from big multinationals like Volkswagen or Siemens with plants in Poland but from small Polish companies providing consumer and investment goods.”

Along the way, Poland has laudably ditched its eurosceptic / fantasist-Atlanticist stylings. At the European table, you don't gain influence trying to be like standoffish Britain with its odd preoccupation with having a "special relationship" to the "indispensable nation." No, you must have your mind firmly set on Europe in the first instance:

Warsaw’s ambition is to become Berlin’s indispensable eastern neighbour in the same way that France is in the west. Mr Tusk’s centrist government has abandoned the hope of his conservative predecessors of being an eastern mirror of the UK – pro-market in its economics, standoffish about the EU and avowedly pro-American in its foreign policy.

Poland is already the EU's seventh-largest economy. Can it eventually become a Franco-German-Polish alignment? Geography certainly works in its favour:

For its part, Germany is a strong supporter of the so-called Weimar Triangle involving Poland in a regular tripartite debate with Berlin and Paris. Both because of its size and strategic location on Germany’s eastern border, Poland was always regarded by the German government as the most important new member of the EU to join in the “big bang” enlargement of 2004.

Also this video clip of Tusk explaining why former Eastern bloc nations shouldn't be marginalized. I do think the Poles--fine, God-fearing people--ultimately made the right decisions on both economic matters and geopolitical ones concerning where to align themselves. They are well-poised to reap the benefits in the EU as a consequence.

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