Meet China's Real Challenger, Mexico (No Kidding)

Military man-turned-president Porfirio Diaz is usually attributed with saying, "Poor Mexico--so near the United States, so far from heaven." It is true that more than a fair share of Mexico's law and order woes stem from being a gateway to the world's largest consumer market for drugs in the United States--ask Hillary Clinton. Yet, while lurid tales of drug-related violence at the US-Mexico border unfortunately feed stereotypes about the country, Mexico has actually been quite progressive in the economic realm and is even approaching North American standard-bearer Canada in many respects. Debt crises no more; it's time is now.
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Anyway, I was reminded to post about Mexico's burgeoning economy by two separate articles reiterating the idea that, while China's colossal trade surplus with the United States attracts the largest share of public attention worldwide, Mexico is actually gaining ground on the PRC and may realistically surpass the latter as the United States' second largest trading partner after Canada in the near future. And, thankfully, you don't have presidential candidates and others trying to outdo themselves in the "Mexico-bashing" sweepstakes alike they do over China:

Trade between the United States and Mexico is surging, up 17 percent in 2011 to a record $461 billion, as Mexico vies with China to become America’s second-largest trading partner after Canada. China and the United States did $502 billion in trade last year...“We are obsessed with China when we ought to seriously focus, for our own benefit, on our neighbor Mexico,” said Robert Pastor, a professor of international relations at American University and author of “The North American Idea.”

A Fed governor comes to the natural conclusion that his country is today's basket case in comparison to the progressive nation that is Mexico:

“Not only is Mexico doing better, macroeconomically speaking, than the false stereotypes would have us think, Mexico is actually doing better than the United States,” said Richard Fisher, president of the Federal Reserve Bank of Dallas, who applauds Mexico for controlling inflation, balancing budgets and managing debt. Fisher grew up in Mexico City in the 1950s and remembers a Mexico that “was our soft underbelly, a country of tremendous poverty and horribly bad governments.” Now Fisher and his peers praise Mexico for pouring billions of pesos into infrastructure, including ports, railroads, refineries and highways.

While NAFTA remains controversial stateside, such is not the case in Mexico where the trade benefits are more than obvious to many:

And there is little wonder why. Mexican exports to the United States have soared from $42 billion in 1993 to $263 billion in 2011, according to the Commerce Department. Almost 80 percent of Mexico’s exports go to the U.S. market, led by crude oil, fruits, vegetables, televisions, cellphones, computers and passenger vehicles.

“Before NAFTA, we had a slight trade deficit with the United States,” said Daniel Chiquiar, a Bank of Mexico statistician. “Now we have a huge trade surplus.” U.S. exports have also multiplied, especially as the consumption tastes of the growing Mexican middle class increasingly resemble those of U.S. shoppers.

Unlike China, Mexico cannot be accused of pursuing mercantilist policies so readily. Its exports are growing on the back of becoming a regional production hub, all the while being backed up by prudent economic management. As the FT notes, China's share of manufactured imports in the US is falling, while that of Mexico is rising. All the while, it is becoming less dependent on the US market:

During the first half of this year, Mexico accounted for 14.2 per cent of manufactured imports into the US, the world’s largest importer. In 2005, Mexico’s share was just 11 per cent. Surprisingly, China, which gained huge chunks of the US import market for many years, has started to lose ground. From a high of 29.3 per cent of the total at the end of 2009, it has now shrunk to 26.4 per cent

While winning a bigger slice of the US market, Mexico has diversified its customers. A decade ago, about 90 per cent of the country’s exports went to the US. Last year, that figure fell to less than 80 per cent. Suddenly, it seems, Mexico has become the preferred centre of manufacturing for multinational companies looking to supply the Americas and, increasingly, beyond. Today, Mexico exports more manufactured products than the rest of Latin America put together.

Mexico has also become quite outward oriented, signing a bevy of FTAs and in the meantime increasing its ratio of trade to GDP:

Its free trade agreements with 44 countries – more than twice as many as China and four times more than Brazil – have given companies based in Mexico the ability to source parts and inputs from a wide range of nations, often without paying duty.

Partly as a result, the sum of Mexico’s imports and exports as a percentage of its gross domestic product, a strong indicator of openness, rose to 58.6 per cent in 2010. In the case of China, it was 47.9 per cent, and just 18.5 per cent in the case of Brazil. HSBC in Mexico City estimated recently that the figure for Mexico could increase to as much as 69 per cent this year.

Elsewhere the FT also mentions young Mexico's demographic advantage over China, its obvious locational advantage, and its narrowing wage differential as labour costs naturally rise in the PRC. While Mexico may probably never overhaul China worldwide in the trade sweepstakes, as a preferred manufacturing base for products destined for the Americas it may soon become the obvious choice. That Mexican consumers are also eager buyers of American-made products certainly helps defray trade tensions.

Cooked Books & Worse: Argentina's IMF 'Red Card'

Say what you will about the IMF, but they're pretty thick-skinned folks by now with all the criticism they engender year after year. Materially, however, the power they have over countries emanates from them being able to withhold emergency lending to countries that do not stick to the (structural adjustment) programme. Witness the likes of Serbia and Hungary endangering their IMF (life) lines due to abrogating central bank independence, the sine qua non of modern central banking for the neoliberal set.

Today, it's Argentina's turn to be in the IMF doghouse [arf-arf]. And how! Remember that Argentina was not so long ago in a major crisis situation as its currency board collapsed at the turn of the millennium, necessitating the largest bailout to that point in time. The IMF came to the rescue, but suffice it to say that controversy still, ah, dogs the bailout and the lender remains vastly unpopular there. Longtime readers will remember that the current Argentinian President Cristina Fernandez successfully campaigned on the idea of never having to approach the IMF again. Although Argentina fully paid off its IMF loans half a decade ago, its name still invokes fear among many Argentinians.

Apparently, the IMF is still dissatisfied with Argentina. As a user of system of national accounts and balance of payments statistics produced by various national governments, the IMF is of course interested in ensuring that these statistics be reasonably accurate. However, it called out Argentina once more a few days ago over the latter's dubious bean counting:

The IMF’s Executive Board met on September 17, 2012 to consider the Managing Director’s report on Argentina’s progress in implementing the remedial measures to address the quality of the official data reported to the Fund for the Consumer Price Index for Greater Buenos Aires (CPI-GBA) and Gross Domestic Product (GDP). (See: Statement by the IMF Executive Board on Argentina, Press Release No. 12/30, February 1, 2012.)

The Executive Board regretted the lack of sufficient progress in implementing the remedial measures since its February 1, 2012 meeting and expressed to the authorities its concern that Argentina has not brought itself into compliance with its obligations under the IMF’s Articles of Agreement by implementing the said measures. The Board took note of the ongoing dialogue between the IMF and the authorities regarding the measures, and called on Argentina to implement the measures without delay.

Now we receive further news that IMF Managing-Director Christine Lagarde is getting ready to issue Argentina a "red card" over the matter should it not change its ways:

 The head of the International Monetary Fund said on Monday she hoped Argentina could avoid IMF sanctions over its flawed economic data and has three months [17 December to be accurate] to improve the quality of its growth and inflation statistics." If no progress has been made, then the red card will be out," IMF Managing Director Christine Lagarde told a Washington audience, drawing from a soccer analogy for penalizing players.

"I was quite comforted to see the Argentinian authorities' reaction over the weekend ... of their determination to work cooperatively with us," she said. "I hope we can avoid the red card but if the data is not suitable, not appropriate, does not meet the standards, then all players are the same ... despite how good they are at soccer," she added.

While the Argentinians are supposedly obligated under the articles of agreement to provide reasonable quality data--I can't really point out where, though--the IMF does not really have leverage over the Latin American nation at this point in time since it paid off its IMF loans in 2006. This then brings us to the question of why Argentina is seemingly reluctant to issue better quality statistics. Obviously, it should have an interest in depicting inflation as being "under control" in its largest city. The same thing holds with "showing" the world that Argentina is a growing nation, economically speaking, under Fernandez. Alike the previous post, it's another one to file under the political economy of statistics.

As it turns out, the IMF data request is but the tip of the iceberg of an Argentina--or, more specifically, a Cristina Fernandez versus the West running battle, with the IMF acting as the agent of the United States et al. Aside from nationalizing foreign energy firms, the international economic community has any number of other grievances with her variegated populist stylings:

President Cristina Fernandez is on a US tour this week with a message for critics on Wall Street and in Washington who say Argentina is headed for economic disaster by refusing to play by the rules of the global financial system: good riddance to the rules. Her government has racked up a long list of unpaid IOUs while helping the country recover from its humiliating, world-record debt default a decade ago, but Fernandez argues Argentina's economic rebound has been possible precisely because its leaders have stood up to foreign pressures and put their people first.

Argentines used to be "dazzled by the North," she said last month while inaugurating an expanded highway, one of many infrastructure projects she said would have been impossible had her government done as outsiders demand. "They hadn't noticed that the rich countries don't want partners or friends; they just want employees and subordinates. And we're not going to be anybody's employees or subordinates. We are a free country, with dignity and national pride."

She also plans to snub Obama while recycling Latin socialist themes in the process:

Fernandez was meeting with billionaire George Soros and Egypt's new president Mohamed Morsi on Monday, but was skipping a dinner that President Barack Obama is hosting for his fellow leaders at the Waldorf Hotel, planning instead to visit an Evita Peron exhibit at the Argentine consulate. Fernandez says corporations no longer tell Argentine presidents what to do, and instead must heel to a government that puts the people's needs first. Natural resources are once again sovereign, and Argentina is freer than ever from international debt obligations.

Why cook the books, then? Alas, Argentinian inflation figures seem to have been "massaged," and the GDP figures may not be any more reliable as their statistics increasingly emanate from the land of make-believe. Meanwhile Argentina is racking up yellow cards at a torrid pace:

A far different picture is presented by Argentina's many critics in the U.S. and Europe. In the past few days alone, Moody's Investors Service downgraded the country's risk rating, potentially increasing borrowing costs for anyone doing business with Argentina, and the International Monetary Fund chief drew a firm line Monday against Argentina's widely disbelieved economic data. The government's INDEC statistics agency has magically kept inflation below 1 percent monthly for the last 29 months, even as consumers struggle with price hikes two or three times bigger...

Obama's trade negotiators and diplomats have lost patience, removing trade preferences over her refusal to pay more than 100 court judgments to U.S. businesses. Her government also has ignored World Bank arbitrators, stiffed the Paris Club lenders and brushed off the European Union's threats of sanctions for expropriating Grupo Repsol's $10.5 billion stake in Argentina's oil company without any compensation.

I think we needn't state the obvious as she comes out swinging against all comers--especially the IMF with firebrand rhetoric that would do Che Guevara in his heyday proud:

"These legal questions continue to raise red flags to investors that the Argentine government does not respect the rule of law," University of Houston energy analyst Michael Economides concluded Thursday in a scathing report that accused Fernandez of "populist thuggery..." 

Fernandez anticipated such criticism in her highway speech, recalling that her late husband and predecessor, President Nestor Kirchner, "dared to tell the IMF to go to hell...That's what they're never going to forgive: that Argentines have been able to demonstrate, contrary to all the theories of despondency, of fear, of unpatriotic feelings of those who didn't believe in Argentina that they could do what's necessary so that Argentines would live better," she said.

"They still keep punishing us, because we're a bad example; we're the example that it's possible to build a country without an outside tutor. We're the example that a country can vote for a president and the one who decides is this president."

I am generally unimpressed with anti-Western rhetoric when it is used as a smokescreen for economic mismanagement. Unfortunately, that seems to be the case here. Remember, South Korea too was well and truly broke not long before Argentina was during the Asian financial crisis. Rather than b*tch and moan about the evils of the West, however, the Koreans worked out what they needed to do in order to avoid a rehash. And, of course, they have since done the Westerners one better in becoming more economically progressive in the new millennium.

Meanwhile, Fernandez is still stuck in this Latinate victim complex mode fulminating about the evils of Western capitalism--all the while charting a course for yet another economic breakdown by the looks of it. At the end of the day, my dear Cristina, having to cook the books is indicative not of "standing up the West" but of embarrassment in one's inability to sustainably improve Argentina's economic fortunes. That is all.

Still, it is interesting how the West thinks the IMF can be used to club Argentina even now. Is Argentina really that close to requiring yet another IMF infusion that denying the possibility will make Argentina behave no matter how hated it is? Or, can it use a non-conditionality sanction alike temporarily suspending Argentina from the Fund? Stay tuned, for I believe the endgame should prove to be very interesting and informative.

26/9 UPDATE: To no one's surprise, Cristina Fernandez did not take kindly to the football analogy while in New York to speak at the United Nations. Still, she is not really addressing the criticism about cooking the books:

Fernandez ridiculed the warning. “My country is not a soccer club. It is a sovereign nation that makes its decisions sovereignly and will not be subjected to any pressure, let alone to any threat,” she said. Fernandez did not refer directly to the economic statistics questioned by the IMF, saying only that Argentina has turned its back on formulas promoted by the agency and has a stronger economy than countries that follow its prescriptions.

As before, my opinion remains that the best insurance against needing IMF support is to have a well-functioning economy.

Pol Eco of Trade Stats: Value-Added, Anyone?

Can it be that a large part of economic conflict in the world is down to artifactual statistical considerations? That in fact could be the conclusion you would draw if the latest effort to change the way the world records trade comes true in due time. Everyone is by now aware of the fact that the United States is the world's largest net importer, and this fact has been lamented far and wide by Americans decrying their diminishing exporting prowess in recent decades. On the other hand, export-focused Asian nations alike China and before it the Asian tigers and Japan have routinely been accused of using unfair trade practices to gain an advantage on others, and their significant trade surpluses over the years have provided ammunition for this accusation.

The problem to many trade followers goes like this: the recorded trade balance ultimately boils down to the final international transaction--say, between China and the United States--while ignoring the intermediate steps in the process. Especially now when supply chains range far and wide, a computer labelled or recorded as "Made in China" by American customs officials may actually made up of components from different countries, perhaps Thailand for the hard disk and South Korea for the DRAM chips. Moreover, if the computer is a Dell, HP, or what else have you, the value-added contribution of the American firm is not really that well-recorded.

Hence, tucked in somewhere below a recent Reuters article is a mention of the OECD, WTO and UNCTAD working on a way of recording the value-added contribution of each nation in international trade. And, as I like to keep repeating, the value-added of trade is more in the branding and distribution, not simply in making the bits and bobs:

"For example between the United States and China, we are going to be able to present a new logic, a new way of appraising the benefits. We will see, we know, that mostly it is going to be knowledge that drives the benefit of international trade, rather than where you are producing the bits and pieces."

To that end, [OECD Secretary-General Angel] Gurria said a joint effort by the OECD, WTO and the United Nations' trade body, UNCTAD, to recalculate global trade in terms of value created at each stage of the production process as opposed to final sales terms, should help to defuse trade tensions when the data is published in December.

"We will make a very decisive change in the way we look at trade and in the way the benefits of trade and investment flows accumulate in different countries. We believe this is going to remove the edge on the protectionist tendencies that there are today," Gurria said.

So, taking the US-China trade debate as an example, perhaps US presidential contenders would not be competing to outdo each other in bashing China if the trade balance were not so hugely in favour of the PRC. Conversely, Chinese officials understand that the heat may be lessened on them by the ongoing effort and thus support it wholeheartedly. An earlier China Daily article expresses China's logic in doing so clearly by way of illustration:

"Worked out by conventional trade calculation methods, China has a huge trade surplus. But this does not reflect the real scenario of international trade and is often misused by foreign politicians to criticize China's policies on foreign trade and its exchange rate," Yu Jianhua, assistant minister of commerce, said on Tuesday at a forum on global value chains in Chengdu, Sichuan province...

With the past two decades of economic globalization, products are made in no single country but instead "Made in the World" through global value chains. Thus a transition has been made from trade in goods to trade in tasks "Traditional trade statistics based on customs data may not always give the picture needed for factual decision-making," Pascal Lamy, director-general of the WTO, said last year.

Under the traditional method of calculation, the value of an exported product is attributed to the country of origin, but very often that country accounts for only a small portion of the total added value created through the export. For example, an iPhone 3G assembled in the country is exported to the US at the price of $179, which is taken as China's export value. But in fact the country accounts only for $6.50 of the total added value, according to a calculation by Xing Yuqing, a professor of economics at the National Graduate Institute for Policy Studies in Tokyo.

Lamy said early this year that "the statistical bias created by attributing the full commercial value to the last country of origin can pervert the political debate on the origin of the imbalances and lead to misguided and hence counterproductive decisions." Traditional trade statistics place China's trade surplus with the US in 2008 at $285 billion. "But if calculated by the value-added trade, the trade surplus was just $164 billion," Yu said.

It looks like a win-win situation all around, but there are other practicalities involved that we ought to consider:

1. Will value-added measures of trade better match actual capital account transactions than the current system?
2. Will developing countries in particular have the ability to modify their trade accounting systems to capture the value-added contributions in trade?

These are questions that require investigation as well as we anticipate the said December 2012 unveiling of the recalculated trade data . That is, would we need to change conventional balance of payments accounting and the system of national accounts to accommodate these changes introduced by value-added trade statistics? Also, can the many countries in the world actually record these value-added transactions accurately? What may look like arcane matters for bean counters to ponder actually has far-reaching political-economic implications.

Indeed, there is a political economy of statistics since the way we measure "the world" affects the way we perceive it.

Agrodiplomacy: PRC-Ukraine $3B Loans-for-Corn

It's no big secret that Ukraine has been on the ropes financially for the past few years. Alike every sort of commodity exporter nowadays, however, it's found itself in luck as the the world's banker du jour and its voracious appetite have come to the rescue. That is, troubled countries can of course go to the conditionality-laden IMF as Ukraine has. But, if they're lucky, they have commodities to offer that other creditor of note which couldn't care less about economic management, governance and other Western hang-ups.

Actually, there's more to this story than "Ukraine will guarantee its annual output of maize exports to go to China at a set price in exchange for loans from the PRC." Why is there suddenly such a voracious Chinese hunger for corn? Well, that's an easy one to answer. Consider that China is by far the world's most voracious consumer of meat. Treehugger puts it well in the following chart and excerpt:

More than a quarter of all the meat produced worldwide is now eaten in China, and the country’s 1.35 billion people are hungry for more. In 1978, China’s meat consumption of 8 million tons was one third the U.S. consumption of 24 million tons. But by 1992, China had overtaken the United States as the world’s leading meat consumer—-and it has not looked back since. Now China’s annual meat consumption of 71 million tons is more than double that in the United States. With U.S. meat consumption falling and China’s consumption still rising, the trajectories of these two countries are determining the shape of agriculture around the planet.

That's a nice way to put it. The outlines of the deal involve China's Export-Import Bank facilitating this exchange go like this:

Ukraine is set to sign an unusual loan-for-crops contract with China that will see Kiev access $3bn in credit lines in exchange for supplies of corn, a commodity that Beijing has started to import in large quantities...

Mykola Prysyazhnyuk, Ukraine agriculture minister, said in an interview that the deal with the Export-Import Bank of China would be signed in mid October. “China is asking for about 3m tonnes of corn each year ... to be supplied at market prices that are set at the time of export,” Mr Prysyazhnyuk told the Financial Times. 

And yes, it does create trade ties between two countries that don't have so many right now. With global corn prices exploding upwards, it's also a fairly astute move on the part of Beijing. Meanwhile, Ukraine intends to plow back loan proceeds into improving its agricultural technology. Remember especially that corn is an important feed for pigs and cows as meat demand in China keeps rising:

The deal between Kiev and Beijing comes as China has rapidly become the world’s fifth largest importer of corn. The country will buy overseas about 8.3m tonnes of the commodity between 2011 and 2013, or as much as it imported in the previous 15 years combined, according to estimates from the US Department of Agriculture.

Corn is a key feedmeal to fatten cows, sheep and pigs as consumption of meat in China continues to grow, analysts said. “This market is important and attractive for us. We have not yet exported crop there,” Mr Prysyazhnyuk said...

Mr Prysyazhnyuk said the Chinese loans will be used to finance the purchase of Chinese agriculture technologies, herbicides and pesticides. “We will use these investments to boost our harvest and, in turn, fulfil export obligations to China.”

It's a bit unusual, but it's a potential trade win-win nonetheless. It makes you wonder why so many Westerners think the Chinese lack creativity in the practice of diplomacy when they can think of things like this instead of merely getting chased out alike certain others.

Vladimir Putin Tells USAID to Beat It (Just Beat It)

Let me preface this blog post by saying I don't want to see no blood, so there's no point in USAID acting like a macho man. It doesn't matter who's wrong or who's right--just beat it.

I believe that I have been fair in criticizing the US development agency USAID on two main grounds. First and foremost, they remain one of the most egregious offenders in the "tied aid" sweepstakes. That is, they only allow aid monies to be spent on American products and services in several categories until now. This practice is most offensive when it comes to food aid. Instead of helping build up the capacity of aid recipient countries to provide food for their populations, self-interested Americans dump their (heavily subsidized) agricultural surplus, adding insult to injury by unjustly undercutting domestic producers.

Second, it is somewhat of a misnomer that this agency is "aiding" other countries. Given that the United States borrows somewhere between 41 to 43 cents for every dollar it spends, the honest truth is that it merely reycles other peoples' money in "aiding" poor countries. Given that China is the United States' largest creditor, for instance, it would not be inaccurate to say that all the Americans are doing is attaching all sorts of strings to money the Chinese give while claiming to aid other developing countries. What a deal. We are so touched by your generosity...to wealthy American farmers, Sammy. [Someone, get me a handkerchief quick...sniff.]

It seems that in today's case though that the Russians have their own particular hang-ups and grievances. Russian President Vladimir Putin famously stating that the collapse of the Soviet Union was the "worst geopolitical catastrophe" of the last century" prefigures resentment of Russia's diminished status. From being a (nominal) superpower less than a quarter of a century ago, it became a mere developing nation. Adding to the humiliation, it became an aid recipient whereas it was once competing with the US for global influence by also providing aid. So, the loss of face from the US providing it aid was too much to bear. Not exactly strapped for cash in this day and age when commodities are dear, we get this result:

Matthew Rojanksy, an expert on Russia at the Carnegie Endowment for International Peace, said in an e-mail that he thought this decision had been brewing for a while. “Russian authorities have made clear for the better part of a decade that they see Russia as a great power, and a provider of assistance, not a recipient,” he wrote. “Add to that tension over the pre- and post-election protests, which the Kremlin alleges were orchestrated by U.S.-funded NGOs, plus the deep disagreement over U.S. democracy promotion activities in the Middle East, and you can see why this decision may have come now.”

And so there's the not-insignificant matter of democracy promotion which has messed up USAID in places like Egypt. Logically, I believe that aid agencies should concern themselves more with helping alleviate poverty than promoting democracy since there is no direct relationship between the two. However, with USAID in Russia, the distinction has not always been that clear. With the Kremlin becoming increasingly antsy about the matter, it was probably only a matter of time before Russia gave it the ol' heave-ho:

USAID, which has been working in Russia since shortly after the fall of the Soviet Union, had budgeted $49.47 million for Russian programs for fiscal 2012, with 59 percent of that directed for programs supporting democracy and civil society, 37 percent designated for health projects and 4 percent for environmental programs. It had 13 American employees, supported by Russian staffers.

The fire's in Putin's eyes and his words are really clear, so beat it--just beat it. 

Japan, PRC & Dumbly Shooting Down Flying Geese

The migration of the so-called "Flying Geese Model" has been responsible not only for integrating more regional economies into the world economy's fold but also raising living standards in East Asia as the centre of economic gravity is rapidly heading towards our part of the world. The essentials of this story are well-known: high production costs due to a strong yen and dearer labour have encouraged Japanese firms from the first wave of industrialization in our region to set up shop elsewhere as long as comparative or competitive advantages are found. In turn, the likes of Taiwan and South Korea have followed in Japan's wake by extending their production facilities elsewhere in the region such as Southeast Asia when their production costs in turn increased. And so on down the line, with China being the largest beneficiary of this process in recent years.

Hence, it was with no small amount of displeasure that I noted the re-emergence of territorial disputes in Asia flaring up, especially in mainland China. While the politics of territorial disputes have until now been fairly contained, there has always been the danger of these tensions spilling over into economic disruptions. With tightly integrated production schedules alike "just in time" processes nowadays, such disruptions could easily affect the global availability of important consumer alike automobiles or consumer electronics if prolonged. The cause this time, though, does not involve an earthquake, a tsunami, or a torrential downpour but simple human insensibility.

These past few days have witnessed Chinese protests spilling over into outright hostility against Japanese foreign investment and investors--or factories and expatriate personnel alike. Left with few alternatives, many Japanese companies operating in China have closed offices and factories. The BBC reports on this across-the-board demolition derby prompting widespread Japanese closures that threaten $345B in bilateral trade between these two giants of the region:

• Panasonic - shut factory in Qingdao
• Canon - suspended operations at three plants
• Honda and Nissan - stopped production for two days
• Mazda - stopped production at Nanjing factory for four days
• Toyota - suspended some production
• Sony - closed two of its seven plants and is discouraging non-essential travel to China
• Seven & I Holdings - closed 13 supermarkets and 198 convenience stores
• Fast Retailing - shut 42 Uniqlo clothing stores and advised Japanese employees to stay at home
• Aeon - closed 30 out of 35 supermarkets
• Komatsu - the construction equipment maker has halted work at three plants in Shandong province

As I said, it's not a small incident as there has emerged a witch hunt against all things Japanese in many Chinese cities. In turn, I've given some thought about how we can settle quell disputes, but it will require compromises from all sides:

1. Japan would do itself a lot of favours if it finally issued an apology to all the countries it rather savagely occupied during WWII. Germany did so long ago, and it is never too late for Japan to follow suit since Asians apparently have very long memories. The grievances extend practically everywhere--from China to South Korea and on to Southeast Asia--while the offences are undoubtedly grave--forcing women into prostitution, [subsequently American exploited] human experimentation, arbitrary torture and execution, etc.
2. OTOH, the others--Chinese, Koreans and Southeast Asians in particular--ought to discourage obtaining cheap political points by distracting people from more significant matters. Unpopular at home? There is always the temptation to "blame Japan."
3. Insofar as territorial disputes in Asia will not likely be solved through arbitration at bodies alike the International Court of Justice due to the reluctance of certain parties, the promise of much-needed fuel supplies in the East China Sea can be brought to fruition by joint exploration. Yes, there will be issues as to what each party will contribute and get in return, but such matters are comparatively trivial to the gains from exploiting these resources in the here and now and easing territorial disputes in the process.

Just my two cents' worth for now. Meanwhile, what's going on is beyond comprehension since there is tacit approval of such senseless violence that threatens to destroy what has taken years of cooperation to build in the aftermath of WWII. Economic ministers whose role is to create trade ties may shake their heads in disgust, but rest assured that there are others who believe their political standing may rise by stoking the flames a wee bit more.

UPDATE: Also see the Lowy Interpreter on the possible demise of "Factory Asia."

The World's Best Central Bankers Don't Do QE3

The definition of insanity is doing the same thing over and over again and expecting different results - Albert Einstein

Here in the rest of the world, Fed Chairman Ben Bernanke is regarded somewhere between a joke and a menace. It thus comes no surprise that the world's most infamous central banker is nowhere to be found among this year's rankings of the world's top practitioners in this art. As observant American T-shirt makers have noted, "let them eat cash" is not quite an economically progressive move either at home or abroad.

On its present trajectory, the US escaping the "new normal" of 1-2% annual growth is a distant pipe dream. Various QEx stimuli--there will probably be more Stupid American Monetary Tricks--have done nothing to improve US economic prospects as Americans still won't believe in America if you actually paid them to spend increasingly worthless dollar-denominated detritus. Meanwhile, the rest of the world is girding up for another round of dollar devaluation via the latest US salvo in "international currency war."

Dear readers, there is no real skill involved in giving money away for free...and not achieving any sort of economic growth sufficient to reduce mass unemployment in the process. Any half-wit could do that. The only reason why Ben "Choplifter" Bernanke managed to get a grade of "B" this year instead of last year's "C" is because he didn't embark on QE3 prior to the announcement of the 2012 rankings. So roll on 2013 and possibly even his replacement by another hapless figure if the Republicans win. One thing's for sure, though: the (dark?) arts of central banking can do next to nothing to reverse America's slide into its sunset years.

But, enough of lousy central banking. To paraphrase another set of (misguided) American leaders, the high art of central banking is pivoting towards Asia, where people learned from their crisis while the haughty Yanks didn't. Instead of throwing away unlimited amounts through buying mortgage-backed securities and whatever else the Fed is purchasing nowadays, Asian countries structurally adjusted themselves--as the Americans used to prescribe to errant economies. When faced with their own crisis, the Americans have of course chosen to double down on things which have led them astray alike trying to revive the moribund housing market and running up unprecedented fiscal deficits. As it so happens, two of the worst crisis-affected countries in Malaysia and the Philippines now have two of the world's six top central bankers, while half of those taking home As including them are from Asia.

Actually, this year's "A" list is identical to last year's, bar one change: Australia's Glenn Stevens, Canada's Mark Carney, Israel's Stanley Fischer (formerly the IMF's No 2 man), Malaysia's Zeti Akhtar Aziz, the Philippines' Amando Tetangco, and Taiwan's Fai-Nang Perng. The criteria are: inflation control, economic growth goals, currency stability and interest rate management

Sound money principles in central banking. What a revolutionary idea as we contemplate QE77 a few years down the line. Some people just don't get it, and probably should get to writing "How to Lose an Economy and Offend Other Central Bankers," pronto instead of sticking around in a job they obviously gave no skill in. A mandate of full employment? Don't make me laugh. If today's best central bankers are not delusional enough to think they can achieve it through monetary shenanigans, then I think it's high time the Fed amateurs followed suit.

What Euro at $1.31 Says About Western Economies

Not to my particular surprise--I too believe that the world should worry about the dollar and not the euro--the common currency went back up to $1.31 after the Federal Reserve announced QE3. Oh, the irony. Here we were supposing that old Europe had been left for dead, yet even this currency used by various troubled peripheral nations alike Greece, Ireland, Italy, Portugal and Spain has managed to bounce back despite everything.

To cut a long story short concerning the battle of the moribund Western economies, consider:

1. If subprime growth [U-S-A!] combined with unlimited deficit spending is preferable to fiscal retrenchment resulting in (a hopefully short-lived and transitional) recession [E-U!], then why is the currency of the latter preferred to the former?
2. As per point (1), does the market prefer policies that involve tackling fiscal problems head-on despite the immediate costs over delaying any meaningful effort to address deficits?
3. Considering that the bond yields of the aforementioned PIIGS range from 5.01% to 20.90%, then what would the market-determined yield of US treasuries be without such heavy Fed buying distorting the market?

Both Europe and the US happen to be in sorry shape, but the latter is the biggest loser hands down--together with those poor sods dumb enough to hold its currency.

An Economic Case for Catalan Independence?

Nothing stokes popular discontent like economic malaise, and Spain's current plight of enduring, among other things, borrowing costs characteristic of a third world country instead of a first world one is now the Catalan cause. Never fond of Spanish central government to begin with, the rallying cry for independence is in not being weighed down by that economically regressing nation:

For the first time, polls this year revealed that a majority of Catalans now want an independent state – a demand that will reach full voice on Tuesday in mass rallies marking the Diada, Catalonia’s national day, under the banner of “Catalonia: a new state in Europe”.

The critical date, however, falls the week after, when Artur Mas, the Catalan president, meets Mariano Rajoy, Spanish prime minister. Mr Mas, a mainstream nationalist from Mr Pujol’s Convergencia i Unio party, is seeking Madrid’s commitment to fiscal autonomy – the right of Catalonia to collects its own taxes, as the Basques do – the pledge upon which he was elected.

Almost no one believes Mr Rajoy’s centre-right Partido Popular government is either ideologically willing or fiscally able to concede this demand. Most analysts therefore anticipate an early Catalan election, probably in the spring, which will become a de facto referendum on independence.

A further argument is that if Catalunya had fiscal authority, it would not find itself in as bad a shape financially as it does now:

Catalans always accepted that as a relatively rich part of the country, they “needed in justice to contribute” to a central budget channelling resources to less developed regions such as Andalucia, says Mr Pujol. But they “fell into the solidarity trap”, and “this has led to the total abuse of our [fiscal] situation”, he argues.

Catalonia last month had to seek a €5bn rescue package from Madrid, which Cristobal Montoro, the Spanish finance minister, has indicated will come only with increased central control of its government. But the Catalans argue they could refinance their €42bn debt and manage their budget deficit – 3.9 per cent of GDP last year – if they could collect their own taxes and keep more of their revenue.

Alike many Eastern European nations still wanting in to the European Union, what I find remarkable is that Catalunya still wants to be an EU state. The mass protests last Tuesday for instance championed "Catalonia: A New European State." In so many words, the Catalans are more after fiscal autonomy from Spain than political autonomy from the European Union when you could of course argue that the problems besetting it stem from the latter at least as much as from the former.

Also consider that Catalunya would itself have to re-apply for EU membership and the idea of independence becomes even more far-fetched. Indeed, letting go of Spain may mean losing economies of scale and markets that outweigh any potential gains from fiscal autonomy:

Whether Catalonia would be viable as an independent state is an open question. Much of Catalonia's wealth comes from tourism, but there are major industries in the region, as well as a significant multinational presence. Whether these firms would want to remain in a small state that was not part of Spain is unclear.   

If the region continues to pursue independence, boycotts could follow, analysts warn. There was a damaging cava boycott in 2005, when Catalonia refused to back Madrid's bid for the 2012 Olympics. The economist Xavier Cuadras warned: "A large-scale boycott could cause a 40% drop in exports of consumer goods to Spain, and a sustained boycott could cost Catalonia 4% of its GDP." Spain accounts for 54% of the region's exports.

So no, I doubt whether this move is a sensible one even given Spain's current woes

Roll Over Reagan: On Naming US EEZ After Ronnie

Readers familiar with maritime disputes will of course know that the United States has not signed on to the UN Convention on the Law of the Sea (UNCLOS) even now. While UNCLOS was introduced by the United Nations during the term of President Reagan, he was one of the leading voices against signing on since it would limit American sovereignty. Reflecting that quintessentially conservative American tone, he derided UNCLOS as "socialism run amok" and a "third world giveaway." Unfortunately, this sort of self-interested reasoning is also behind the US not signing on to several other meaningful UN conventions alike those on gender equality and the use of land mines. What's the point in having UN headquarters in a country which doesn't particularly like the institution?

To be sure, there are political-economic costs to this sort of American isolation. Witness Hillary Clinton's wishes that Asian nations contesting the dominion over the South China Sea resolve their conflicts by applying international maritime law. Which, of course, is exceptionally hypocritical even by US standards of incredulity since the US has not even ratified UNCLOS. There is also the danger of the Yanks losing out in the Arctic land grab as warmer temperatures up north makes it more feasible to drill for fossil fuels in the near future since they have no legal justification for making territorial claims.

Interestingly though, some US lawmakers are keen on honouring Reagan by naming the Exclusive Economic Zone (EEZ) he identified after him--which is actually similar to that under UNCLOS provisions of extending 200 nautical miles from the US coastline. In effect, it would be another celebration of the US flouting international law--the sponsor is a Republican--and making rules for itself. Aside from being amenable to signing on to UNCLOS in general, Democrats reflexively abhor all this Ronnie-mania:

Rep. Henry Waxman (D-Calif.) isn’t on board with fellow Californian Rep. Darrell Issa’s (R) push to name millions of square miles of ocean waters after the late Republican President Ronald Reagan. “I never thought they should have re-named National Airport [after Reagan], so I don’t think they ought to be re-naming large bodies of water after him,” Waxman said in the Capitol Wednesday.

Issa is pushing legislation that would name the United States’ Exclusive Economic Zone – which extends 200 miles off U.S. coastlines – after Reagan, who established the EEZ by presidential proclamation in 1983. Waxman called Issa’s effort part of a broader trend. “There has been a campaign for deification of Ronald Reagan by the Republicans for some years now, since he has passed away particularly, and this is part of that effort,” he said.

“They would like to name everything on earth that they can get a hold of ... because his legacy is the only thing they have going for them,” Waxman said Issa’s bill is before the House Natural Resources Committee, and a committee aide said it is not yet clear if it will receive a vote.

It's odd but Americans not only like being isolated but many of them actually celebrate it. Why do Republicans in particular waste time on such frivolities when they could actually be working towards signing up to UNCLOS? Alike in so many other things, their priorities are warped.

Jobless USA: Industry Training vs College Education

Ho hum, another month, another jobs disaster Stateside as less than 100,000 jobs were created --a pace which only prolongs what is already the most protracted recovery from job losses suffered from a recession. While the unemployment rate "dipped," this artifactual occurrence is largely down to many leaving the labour force for one reason or another.

Although many Americans--including largely self-serving academics--repeat the mantra that college is the solution to US job woes, I remain unconvinced. Not only are college graduate wages falling, but college expenses are rising at a rate far outstripping inflation. If college was the magic bullet to the employment situation Stateside, then the situation should not be so dire to begin with given that enrollment is at or near all-time highs. It does not compute.

In addition to college's worsening cost-benefit proposition, another thing the "college fundamentalists" (education's equivalent of religious and market fundamentalists) haven't adequately explored is the the prevalence of job-skill mismatches. That is, colleges cannot answer the simple question of whether they are equipping their graduates with skills useful to modern employers. Hence my continuing support for the Geman apprenticeship system as opposed to what I call the US/UK uni-jobless system. While snooty Anglos may like their hoity-toity degrees as opposed to vocational qualifications, it ultimately boils down to employment outcomes (BLS statistics included). Or, more accurately for America, the lack thereof.

Thankfully, even the stubborn (and stubbornly unemployed) Yanks are seeing the light. A recent FT article highlights how industrial employers' groups are copying elements of the German example in providing skills that are actually useful:

While larger groups can afford in-house training schemes, small and medium-sized US industrial companies facing a lack of qualified young workers are increasingly taking the situation in to their own hands and forming partnerships with educational institutions to train workers with the skills they need.

Only one in five employers use training and development programmes to fill the skills gap internally, while only 6 per cent team up with outside educational programmes, a recent survey by Manpower Group has found...

Such partnerships are still unusual, however. Although 93 per cent of manufacturers said they faced some kind of skills shortage, in a survey last year by the Manufacturing Institute, an industry body, only 14 per cent are working with technical and community colleges. But the institute’s Jennifer McNelly says the numbers are increasing. “We are seeing it become part of the solution,” she says.

Again, the larger point is that it's high time that folks questioned the utility of a college education as more and more employers perceive such education as being quite pointless to them in addition to being cost-ineffective for students: 

The focus on four-year college degrees is a perennial gripe of US industrial companies, many of which argue that technical training would better serve young people when they come to look for employment.

According to Ms McNelly, many college courses that offer training for manufacturing jobs are not actually helping, because they are not designed in consultation with industry. “A lot of people go through manufacturing education but are they achieving industry certifications? Not all are right now,” she says.

In response, the Manufacturing Institute has developed its own national credential to teach a set of standard competencies for industrial jobs. The US federal government is encouraging companies to train young people, asking them to commit to taking on a certain number. More than 300,000 commitments have been secured this year, says Adriana Kugler, chief economist at the Department of Labor.

The Manpower report mentioned in the article enumerates further instances where employers are taking the initiative to deal with the obviously deficient products of the American education system. Alike its other quaint institutions, I ultimately think the US university system will soon be subject to the gales of creative destruction as its economic rationale is quickly eroding.

As with many things wrong in America, let Germany--a country that actually works--show them the way. That so many other countries have followed the US rather than the German education system should likewise be rectified as employment outcomes tell the tale.

Patrice Lumumba Friendship University Revisited

Younger readers probably don't know what the USSR's Patrice Lumumba Friendship University was, so a short introduction is required. Having spent a while in Western academic circles, I can assure you that although many instructors have leftist sympathies--they know their Antonio Gramsci and Karl Kautsky by heart--they simply don't live the communist lifestyle, preferring the petit bourgeoisie sort of existence. British and American academia have more than their fair share of champagne socialists and the gauche caviar. Call it an inherent contradiction of leftish Western academia.

However, during the cold war (LSE IDEAS used to be the Cold War Studies Centre, mind you), the Soviets actually had an educational institution dedicated to spreading the revolution to other parts of the world instead of wallowing in faux-socialist stylings as many Western academics still do. The People's Friendship University of Russia was established in 1960 at the height of the aforementioned ideological conflict. A year later, it acquired the even more grandiose full name of the Patrice Lumumba Friendship University of the Peoples to symbolize the struggle of oppressed people all over the world for freedom and independence. I have not yet visited the LSE registrar to confirm whether Carlos the Jackal studied at the LSE as some claim, but rest assured that the self-styled professional revolutionary Ilich Ramirez Sanchez did study in Russia. (Talk about famous, world-changing alumni.)

Westerners usually prefer not to dwell on their complicity in anti-American and anti-European sentiment, but the name Patrice Lumumba remains evocative. The CIA openly acknowledges having orchestrated the demise of Iran's democratically-elected Mohammed Mossadeq to return the more pliable Shah of Iran to power (and set the stage for today's fundamentalists and other blowhards in the process). In what was then the Belgian Congo, however, the similarly democratically-elected Patrice Lumumba was also removed due to Western insecurities--especially about his purported Communist sympathies. Mossadeq lived a few more years after being eased out, but Lumumba was executed under Belgian instruction. American complicity in Lumumba's death is still debated, but the larger point is that Westerners need not wonder why us coloured peoples remain wary about their endless harangues about democracy when they have a long history of forcing out third world leaders they found, well, inconvenient.

It was in this spirit that Patrice Lumumba Friendship University operated as the USSR styled him as a martyr. While Westerners branded him a communist in order to get rid of him, the Soviets embraced this categorization to make him a martyr (see the commemorative stamp). The interesting thing though is that while Lumumba was certainly a nationalist, there is no consensus that he was a communist (although Americans of the time reflexively made the connection more often than not). At any rate, the university's goal was very much similar to that of Western academic institutions in training young professionals sympathetic to the USSR instead of the USA.

The end of the cold war was something of a shock to the (academic) system. What would Patrice Lumumba Friendship University be without the goal of world revolution? Worse yet, this university has actually been subject to market forces arguably even more than British academic institutions insofar as its stipend from the Russian government has been markedly reduced in the wake of 1991:

The university opened its doors in 1960, at the height of the Cold War, providing a training ground for young communists from developing countries. The terrorist Carlos the Jackal studied at this university, along with guerrillas and revolutionaries from Latin America, Africa and Asia. It was called Patrice Lumumba University, in honor of a first prime minister of the former Zaire, who was killed in a coup blamed on the United States. Now, with the Cold War over and Russian communism in tatters, the institution has a new name Russian Peoples Friendship University [actually, that's the old school name before Lumumba was killed]. And students who once were schooled in Marxist philosophy now take courses in capitalist business.

The university is now forced to survive in a free market economy. And since it gets only about a third of its budget from the government, most of the rest comes from student tuition fees, which run about 2,000 a year for international students. In order to attract students, the university added new courses and spent [$]350,000 on new equipment, including computers. "We've learned the rules of the market economy and adapted as much as you can in Russia, and were doing quite well, especially when compared to other colleges I've seen," said the university's Vice Rector Dimitri Bilibin.

And that's what has become of this legendary educational institution--famed less for its academics and more for its aims and roster of students from a bygone era. Is this progress? In certain senses yes, but it's also lost a lot of its notoriety as current students now come more from Russia than from abroad. Then there are those business courses. To be fair, a lot of course offerings sound more like IPE than International Business, but I digress...

[The] Institute of World Economy and Business (IWEB) qualifies top specialists, capable of efficient business and management activity in the context of the modern market economy. Being one of the first educational institutions in business not only in Moscow but in Russia as well, today IWEB is a major international study center. The Institute has been member of the Russian Business Education Association practically since the very moment of its creation and a member of the Business School Association of Central and Eastern Europe.

One of the principal features of IWEB is its commitment to the needs of business education not only in Russia, but in CIS countries, Asia, Africa and Latin America. Multiple contacts with PFUR [People's Friendship University of Russia] graduates working in the majority of countries around the world are a big advantage of the Institute. PFUR IWEB pursues wide international policy. It actively develops collaboration with universities of the USA, France, Great Britain, Mexico, Chile, Brazil, Spain etc.

Aside from business courses, it now collaborates with American and British universities [!?] What would Patrice Lumumba do about loss of authenticity? I'll make a plug here and say that you might as well study in our dual degree with Columbia in International and World History or with Peking University in International Affairs. They may be less retro-cool, but prestige matters in this day and age when there is no longer a real alternative to "mainstream" Western education that Patrice Lumumba Friendship University represented way back when. Go ask Carlos.

CSR: From 'Blood Diamonds' to 'Conflict Minerals'

In 2006, there was a movie entitled "Blood Diamonds" starring Leonardo DiCaprio (before he became blubberized and American-sized) that brought popular attention to the titular cause. For those of you covering corporate social responsibility (CSR), the issues should be familiar: Repressive governments and militiamen have been accused of using proceeds from the mining of these diamonds to fund their bloody conflicts in Africa. Nowadays, the cause celebre is the Democratic Republic of Congo. 

As it turns out, diamonds are but one product of extractive industries which have been identified in funding African conflicts. The problem that many American firms perceive with proposed Securities and Exchange Commission (SEC) laws is that many of these other minerals are found in everyday products you find at the strip mall--the archetypal symbol of American consumerism: canned goods, lightbulbs, jewelry, MP3 players, flat-screen TVs and so on:

Big retailers including Target and Wal-Mart may largely escape a costly new rule that requires U.S.-listed companies to disclose whether their goods contain so-called conflict minerals that are blamed for fueling violence in central Africa. Retailers lobbied to be exempted from the requirement, which will affect manufacturers of a range of products, including smartphones, light bulbs and footwear.

The Securities and Exchange Commission had proposed an earlier version of the rule that would have applied to retailers carrying products sold under their own brand names (store brands alike Archer Farms at Target or Kirkland at Costco), but which are typically produced by outside contractors. On Wednesday, however, the SEC voted 3-2 to adopt a final rule that would exempt companies that don't exert direct control over the manufacture of such products.

The rule, which was mandated by the Dodd-Frank financial overhaul, have been a source of friction between the SEC and companies ever since the law was passed in 2010. Companies have said the requirement would be burdensome and expensive. Indeed, the SEC on Wednesday sharply raised its estimate of the rule's financial impact, saying it would cost companies a total of $3 billion to $4 billion upfront, plus more than $200 million a year. The SEC initially had said the cost of compliance would be just $71 million. It said it revised its estimate based on comments from the business community and others.The SEC estimates around 6,000 U.S. and foreign companies would have to comply with the conflict-minerals rule, which covers products containing tin, tantalum, tungsten and gold [my emphasis].

NGO Global Witness is naturally dismayed with the SEC ruling. It should be pointed out here that the conflict minerals law will need to be implemented eventually to meet OECD standards. The point of the law, of course, is to discourage funding ongoing conflicts instead of caving in to powerful retailer's associations:

Global Witness is disappointed that the rule will allow companies to describe the origin of their minerals as ‘undeterminable’ for a period of two years – or four years for small companies.

“The minerals trade is fuelling violent conflict and human rights abuses in the eastern DRC and delays in implementing the law postpone the moment at which companies take responsibility for the impact of their purchases, jeopardising efforts to stop minerals funding conflict, and seriously undermining the aim of the law. By allowing companies to say ‘I don’t know where my minerals are from’, the regulators are effectively inviting issuers to evade all of the substantive measures required by the law. The incentive for companies to plead ignorance will be overwhelming,” says Global Witness.

Meanwhile, SEC staff made it clear that the Organisation for Economic Cooperation and Devel- opment’s (OECD’s) five-step due diligence framework is the benchmark against which companies’ due diligence should be measured.

So this "grace period" may be one of obfuscation as dishonest firms simply say they cannot identify where their tin, tantalum, tungsten and gold comes from in cases where they do indeed come from conflict-ridden regions.That said, others even argue that the law may instead have the effect of depriving poor communities of their livelihoods due to overzealous policing.

Peddling Geo-Influence: PRC/Cambodia, US/Egypt

Geopolitics may have gone somewhat out of fashion after the fall of the Berlin Wall, but they've never become truly unfashionable. With the US nosediving in terms of global competitiveness and so many other things, various parts of the world are literally up for grabs to those displaying enough initiative. In other words, the "end of history" looks further away than ever with China replacing the Soviet Union with its odd hybrid of market socialism. As a sign of the times, contrast the United States which is more in prevent defence mode and China which is taking a more aggressive line.

Recently I wrote about how China used its relatively close ties with Cambodia to frustrate the latter's fellow ASEAN countries who wished to bring up the matter of the South China Sea during the most recent ASEAN Regional Forum (ARF) security meetings. As the host in 2012, recall that Cambodia essentially told the Philippines and Vietnam to shove it. Back to the future? Back to the seventies, I say (with Pol Pot in full effect). As it turns out, Cambodia is now (surprise!) reaping the rewards for its recent subservience to the PRC. That is, Cambodia remembers Hu's its daddy despite all this lip service to ASEAN solidarity:

China has pledged more than $500 million in soft loans and grants to Cambodia and Prime Minister Wen Jiabao thanked it for helping Beijing maintain good relations with the regional grouping ASEAN, a Cambodian junior minister said. A summit of the 10 members of the Association of Southeast Asian Nations (ASEAN) in July failed to issue a joint communique for the first time in the group's 45-year history after disagreement over the wording of a section on territorial claims in the South China Sea. Cambodia, which chairs ASEAN meetings this year, was accused by some countries in the group of stonewalling in support of its ally, China...

Four loan agreements for unspecified projects worth about $420 million were signed when Cambodian Prime Minister Hun Sen visited China over the weekend...[a]nother three loan agreements, worth more than $80 million, are expected to be signed this year, [Cambodian Finance Minister] Aun Porn Moniroth said, adding that Wen had also promised a grant of 150 million yuan ($24 million) as "a gift" for Cambodia to use on any priority project..."

Chinese investment in Cambodia totaled $1.9 billion last year, more than double the combined investment by ASEAN countries and 10 times more than the United States, which is trying to extend its influence in the region. Aun Porn Moniroth said Premier Wen had given "positive consideration" to Hun Sen's proposal that China provide new loans of between $300 million to $500 million per year for the next five years for unspecified projects. He also said a Chinese firm planned to invest $2 billion to build a steel plant in Cambodia employing about 10,000 people and with the capacity to produce 3 million tons of steel a year. He gave no details so it was not possible to verify how far advanced the plans were.

Cambodia parties like it's 1979--except with even more lavish benefits from its nouveau riche Chinese benefactors. Meanwhile, the United States is also lining up to purcha$$$e geopolitical influence...in Egypt. While the latter has received generous American military aid during the Mubarak years, its recently precarious financial situation appears to have occasioned even more American generosity lest Egypt slip away from the American security ambit. Recall that the IMF head was dispatched to Egypt, while various sorts of Iraq-inspired debt forgiveness deals are in the offing:

American diplomats are closing in on an agreement to dole out $1 billion in debt relief to Egypt, part of a gilded charm offensive that Washington hopes will help shore up the country's economy and prevent its new Islamist leadership from drifting beyond America's foreign-policy orbit...As the recipient of $1.3 billion in annual U.S. military aid, Egypt has historically ranked among America's top security partners in the Arab world. Its peace treaty with Israel has helped buttress regional security for more than 30 years.

U.S. diplomats say American funding for Egypt has been stalled by disagreements over how the government in Cairo will allocate the debt relief. The envoys currently in Cairo are negotiating over slightly less than half the money, which would be paid as a direct cash transfer to Egypt's budget. The larger portion, about $550 million, would be doled out in a debt-swap program in which both the U.S. and Egyptian governments would agree on how the money will be allocated.

That said, Egyptian leaders and citizens are wary of the conditionalities all this American help will entail. Once again, remember US help in addition to that offered by the IMF and fellow Arab countries will not plug Egypt's financial hole. The implicit hope is that the US and the IMF giving Egypt a thumbs-up will not only encourage others to lend to it but also invest there to create a more viable economy going forward:

Even when not imposing concrete conditions, U.S. officials have stressed the Obama administration's view that the Islamist government should maintain an inclusive posture toward all segments of Egyptian society. "Progress will only be possible if the talents of all citizens are drawn upon and all have a voice—men and women, all religious groups, and all parts of the country," Mr. Hormats said.

The aid offers will still strain to meet Egypt's estimated $12 billion in external financing needs. Last year's revolution and the subsequent 19 months of political instability have kept tourists and foreign investors at bay. Egypt's Central Bank has bled through nearly two-thirds of its $36 billion foreign-currency reserves to maintain the strength of the Egyptian currency. Many economists say a currency devaluation is inevitable.

Another prong of this American goodwill effort involves guarantees on US investment in Egypt as the State Department arranges a roadshow for American MNCs to encourage FDI:

Beyond the debt forgiveness and IMF loan, U.S. officials are also promoting two financing opportunities: $375 million in financing through the U.S. Overseas Private Investment Corp., a government development finance agency,for loan guarantees for small and midsize Egyptian businesses; and $60 million to help launch such businesses through a new U.S.-Egypt Enterprise Fund. American officials say their efforts are part of a multipronged strategy aimed at glossing Egypt's profile for international investors.

The debt-relief negotiations come as the U.S. Chamber of Commerce prepares to send a delegation of some 50 American business leaders to Egypt. The delegation, which is set to include regional Middle East heads from companies such as Boeing Co., General Electric Co., Google Inc. and Citigroup Inc. is working in partnership with the U.S. State Department.

Which is the less ambitious status quo play here? The US is keen on shoring up its Middle Eastern influence instead of extending it, while China merely used the occasion of its traditional ally Cambodia's ASEAN chairmanship in 2012 to frustrate Southeast Asian nations it has territorial disputes with. Both the US and China have more to do, but you get a stronger sense of China counting on old alliances now while it figures out what to do with those pesky other ASEAN nations in the future. After all, charm offensives must display consistency in both the economic and political realms to work.

Recall too that these are hardly "exclusive" areas of influence, with Egyptian President Morsi making his first trip outside the region to China and Missus Clinton agitating for a binding agreement between China and the Southeast Asian nations it has territorial disputes with. In geopolitics, loyalties can of course be swayed--especially with the help of wads of cash.

Thailand Still Dreams About an 'OPEC of Rice'

I guess there are few truly novel ideas in international political economy. Since the formation of OPEC, developing nations have envied its perceived success in buoying oil prices. As such, there have been any number of cartels for other commodities which have been mooted or even made. Bauxite, anyone? However, it should immediately be apparent that the prospects of a successful cartel depend on a number of things such as (a) the centrality of a commodity to modern life, (b) the price elasticity of demand for the commodity, (c) the global market share of the countries within a cartel and (d) the willingness of cartel members to stick to production quotas.

In 2008, the literally cooking Thai Prime Minister Samak Sundaravej proposed that Thailand group together with four other Southeast Asian nations--Vietnam, Myanmar, Cambodia and Laos--to form a rice cartel. Rice being a staple food in Asia, it definitely meets the criterion of being an important commodity in everyday life in our part of the world. The global rice industry is somewhat unique though in that most production is consumed domestically. Given that situation, countries that do export have a greater say in global rice prices which may belie their comparatively lesser output compared to the likes of, say, China and India. The world's top two rice exporters, #1 Thailand and #2 Vietnam, would have been included in the mooted cartel

As it so happens, the Thais have once again been clamouring for the creation of this cartel, demonstrating the durability of the idea through various leadership changes there. However, there appears to be a fly in the rice as India has become more oriented toward exporting rice as well and is purportedly poised to overtake Thailand as the world's #1 rice exporter this year. Just as Russia is the spoiler to OPEC by being a major energy exporter that is not within the organization, so too does India pose a rice "threat":

An alliance of Thailand, Vietnam, Cambodia, Laos and Myanmar will aim to share information and cooperate in production and marketing, with the goal of increasing rice export prices, Yanyong Phuangrach, Thailand's permanent secretary for commerce said in Bangkok Wednesday. The aim is to form the alliance by the end of the year, he added.

Thailand and Vietnam usually control close to half of the global rice trade. But the London-based International Grains Council estimates their combined share will fall to 38% this year, as India has become the world's biggest exporter. This week's move to create a cartel is seen as a response to India's increased market share, which came after it lifted a 3½-year ban on exports of "ordinary" rice last September.

For obvious reasons, getting Vietnamese cooperation is crucial to Thailand's effort. Vietnamese officials are also wary of the sensitivities involved in raising food prices worldwide at a time when high food prices causing hunger in LDCs is causing concern:

If this new effort is to succeed, it will need to keep Vietnam on board, said Chiaki Furui, chief executive of Agrow Enterprise, a Bangkok-based commodities brokerage. Indeed, Vietnam responded to India's lifting of the export ban last year by cutting its own export prices, despite Thailand's lobbying of other exporters to keep prices high, and some are skeptical that the latest push for an alliance can work.

"A cartel on rice trade won't succeed. Vietnam already has a minimum rice export price, but traders continue to sell at lower prices to be competitive in the global market," said Tejinder Narang, an executive with New Delhi-based trading company Emmsons International. An official with state-run Vietnam Southern Food Corp., the country's largest rice exporter, warned that efforts to boost prices could trigger world-wide protests, given that many people around the globe are starving.

Further, it is very important to keep in mind that Thailand's proposed cartel is not an ASEAN effort. Alike in other regional groupings, there usually are importers and exporters of certain commodities. Hence, while the proposed membership is entirely composed of ASEAN members, higher rice prices in international markets are most likely to harm other ASEAN members that import much rice to meet domestic demand alike Indonesia and the Philippines (which are more populous than any of the mooted cartel countries):

But the push for higher rice prices could put Thailand at odds in this case with Indonesia, a major rice importer. Indonesia's response to possible higher global prices will be to expand local buying and stockpiling by raising the domestic purchase price, said Mohammad Ismet, a former consultant to Indonesia's state-run buyer, Bulog. "There is no reasonable basis to form such an alliance. Clearly, traditional importers such as Indonesia and the Philippines feel threatened by the unreliability of the world's rice market," Mr. Ismet said.

In the interest of third world solidarity, I do not favour this cartel since rice-consuming nations are predominantly developing ones. Fellow Southeast Asians, you won't be "sticking it to the (white) man" but rather ourselves.