International Political Economy Zone

2012: Year of the Dragon, Year of the Renminbi!

2012-01-30T03:37:00.001Z

A week ago today, the Chinese and their vast diaspora celebrated Chinese New Year. As it so happens, it also ushered in the Year of the Dragon. Famously the most auspicious of characters, this too may be the year that the PRC powers-that-be become serious about internationalizing the RMB with the long-term goal of reforming the international monetary system in mind. Just as red envelopes like those above are used to give gifts in cash, 2012 may be the year the Chinese give the gift of renminbi internationalization to the world in a meaningful way. I've mentioned recent efforts to make RMB use more widespread worldwide, but I forgot to mention these two that point towards the same trend.

First, Chinese authorities are improving RMB payment handling systems' integration with the international standard SWIFT (Society for Worldwide Interbank Financial Telecommunication):

The People's Bank of China, the country's central bank, is in the process of upgrading what is known as China's National Advanced Payment System, or Cnaps [I pronounce it as 'Schnapps' ;-)], to better facilitate cross-border trade denominated in yuan, according to government officials and executives at Chinese banks. The processing of yuan payments isn't at the same level of efficiency as a cross-border payment in other major currencies like U.S. dollars, with a hands-on system that often leads to high transaction costs, some observers said.

"The processing cost of yuan payments must come down, so that when corporations do start to put significant yuan volumes through, banks can handle them smoothly and efficiently," said Patrick de Courcy, head of markets in the Asian-Pacific region for Swift, which operates a world-wide financial-messaging network between banks and other financial institutions.

Mr. de Courcy said China's central bank has agreed to use messaging standards adopted by Swift to support electronic payments into its system. A central-bank official confirmed the bank is upgrading the yuan-payment system. The bank declined to comment further.

Next, aside from payment handling, another obvious avenue for making the yuan more widely used is establishing a benchmark interbank lending rate alike LIBOR (London Interbank Offered Rate) and its various offshoots. This process has begun (where else?) in the Hong Kong offshore lending market:

Hong Kong's banking association this week began widely disseminating yuan-lending rates offered by three of the city's biggest banks to their peers, marking an important step toward the development of benchmark rates that could spur growth in the market for offshore yuan loans.

The Treasury Markets Association's daily interbank reference rates from HSBC Holdings PLC, Standard Chartered PLC and BOC Hong Kong (Holdings) Ltd. involve loans ranging from overnight to one year. The association has said it aims to increase the number of banks contributing rates, in a bid to set benchmark yuan-lending rates.

Setting benchmark levels for yuan loans similar to the London interbank offered rate, or Libor—the most common global benchmark for short-term borrowing costs—is necessary so that banks can better price loan risks and measure borrowing costs, bankers and analysts say.

Elsewhere, currency-watching stalwart Jeffrey Frankel handicaps prospects that the RMB will overtaker the dollar in short order based on historical precedents. Also note how African nations are gearing up in a similar fashion to handle RMB. Regardless, all I can say is that Chinese authorities are committing substantial efforts in making the RMB an international currency. Indeed 2012 may be remembered as the year the currency broke ground on the world stage in a major way.

Long Time Coming: Int'l Derivatives Court, Now Live

2012-01-29T16:02:00.001Z

Here's something that I found in the LSE employee newsletter, of all places. Given the often legalistic culture of Western economies, it is no surprise that they prefer the settlement of economic disputes in formal fora. The WTO's dispute settlement mechanism exemplifies that for trade. Meanwhile, the likes of the International Court for the Settlement of Investment Disputes (ICSID) and the International Chamber of Commerce (ICC) Court of Arbitration do the same for disputes involving foreign investors and governments. Think of Hugo Chavez's latest fulminations against international energy companies.

Whatever you think of derivatives or financial instruments that derive their underlying value from that of another instrument, there is no denying their proliferation. Trade volumes have simply exploded, with notional amounts of existing contracts now amounting to the hundreds of trillions of dollars. Some even implicate them in both the US subprime crisis and the European debt crisis. Warren Buffett famously called them "financial weapons of financial destruction"--before taking out some derivatives of his own and losing money on them in the process. Ah well, I guess that it underscores their ubiquity.

But, along with their ubiquity comes the realization that these are not often technically straightforward contracts to interpret--especially the more esoteric derivatives. Hence, the lack of many nation's courts of the necessary technical understanding means that there is much scope for interpretation, especially when things go awry. From the press blurb:

A tribunal devoted to settling the world's most complex and contentious financial cases opened for business today in The Hague. Comprised of a group of judges and other international legal and market experts with more than 2,000 years of relevant collective experience, the P.R.I.M.E. Finance Disputes Centre will take on cases which are too specialised for many national or local courts.

It also aims to create an internationally-agreed body of law in areas where different countries often hand down conflicting rulings. It was the brainchild of Professor Jeffrey Golden of LSE's Law Department and he is chairman of its management board. The tribunal expects to handle multi-billion-dollar cases in fields such as derivatives and structured financial transactions. Its role is all the more urgent, argue its founders, because of the uncertainty created by world financial crisis.

P.R.I.M.E. Finance (the Panel of Recognised International Market Experts in Finance) is backed by the Dutch government and will hear cases at the Peace Palace in The Hague, where it will be formally opened by Jan Kees De Jager, Finance Minister of the Netherlands. Its advisory board is chaired by Lord Woolf, former Lord Chief Justice of England and Wales.

Our Professor Golden [great name, that, for what he does] explains the rationale for P.R.I.M.E. in terms of there being a need to reconcile often conflicting opinions passed down in national bodies:

Professor Golden said: "This project emerged against a backdrop of financial market crisis and legal uncertainty. The amounts at stake are staggering, the legal and contractual issues are complicated and the volume of complex cases is increasing.

"To date, national courts and ad hoc arbitration have been unable to produce a settled and authoritative body of law. Decisions are unpredictable, too decentralised, often taken too slowly and not always enforceable in other jurisdictions. The global marketplace needs a more innovative method of settling disputes and we believe this tribunal is the answer."

P.R.I.M.E. sounds too close to S.U.B.P.R.I.M.E. to my tastes. All this finance makes me want to cry U.N.C.L.E., but there is definitely a niche market to be found here. Even a necessary one insofar as there has been no great climbdown in the use of these instruments.

Lastly, do note that P.R.I.M.E. is not a free-floating body but one which aims to institute the arbitration rules set forth by the UN Commission on International Trade Law (UNCITRAL).

Yay! Our LSE IDEAS, World's 4th Best Uni Thinktank

2012-01-27T07:27:00.012Z

Well here's a nice bit of news concerning LSE IDEAS, the research centre I am associated with. The good folks at the University of Pennsylvania Think Tank and Civil Societies Program recently came out with the 2011 edition of their authoritative report on the world's leading thinktanks. To my personal surprise considering that LSE IDEAS only started in 2008, we are now considered the world's fourth most influential university thinktank alongside our colleagues from the Public Policy Group. Launched at the United Nations no less, the UPenn report is not a trifling one. Here is the relevant table with the 30 top-ranked university thinktanks:

Those who come ahead of us are obvious given their advantages in being longer-established and better-funded. However, consider as well those we've bested that I would not have suspected to have surpassed at all. Being a blogosphere minnow myself, I was bemused to see that the Mercatus Center of Marginal Revolution and Koch Industries-funding of the Tea Party variety fame came in 8th. Or, consider that we bested the mega-famous Jeffrey Sachs' very own Earth Institute at Columbia. The same sort of surprise comes from outranking the likes of the Institute of Development Studies at Sussex, the Weatherhead Center for International Affairs at Harvard, and the Center for the Study of Globalization at Yale. (On another note, I am chuffed by the emergence of so many influential think tanks from outside the West. There are more folks in developing countries who also can benefit from considering policy advice, right?)

Perhaps one of the sources of strength of LSE IDEAS is its unity in having a diversity of opinions. Whether you like libertarian thought or not, the Mercatus Center is certainly consistent in its advocacy and vantage point. For us, though, our co-directors don't even agree on such basic things as a power shift from the West to the East occurring in the world economy. The same holds true with our visiting fellows and their ideological perspectives. On one hand we've hosted Niall Ferguson who styles himself as a "punk Tory." On the other hand we've also had Martin Jacques of "When China Rules the World" fame--a former editor of Marxism Today and a columnist for The Guardian.

While the IPE Zone is for now an orbiting offshoot of LSE IDEAS, note that there too is an official LSE IDEAS blog (to which I contribute to sometimes in, er, more sedate fashion).

Recalling early last year, attempts to tar us with the Libyan involvement at LSE may have actually done us good by bringing attention to our unique work alike inviting Chinese foreign ministry officials to come and share with us "What China Wants" instead of embarking on the umpteenth rehash of "Why America is So Great and You Stupid Coloured People Should Fall In Line" and its corresponding whitebread echo chamber. While some pitiably misinformed tabloid linked the presence of many top British diplomats here to being "useful idiots" of Moammar, the Woolf Report found no links between us and the the previous Libyan leadership. Sorry, there are no Moammar outfits in our closet.

Ah, but enough of that. I must salute the powers-that-be at LSE IDEAS for I did not really appreciate the comprehensiveness of their vision. It has come a long way from its humble start as the Cold War Studies programme--understanding the collapse of the Soviet bloc is the key to understanding contemporary globalization, they kept telling me--to its current recognition as one of the world's finest academic thinktanks.

Fact-Checking Obama: GM World's #1 Automaker?

2012-01-25T07:29:00.024Z

Obama's 2012 State of the Union address was your typical flag-waving, USA #1 cheerleading exercise. It's to be expected with these kinds of events, to be fair. Particularly notable on the trade end though was Obama declaring the creation of a "Trade Enforcement Unit that will be charged with investigating unfair trade practices in countries like China"--your official China-bashing unit. Those trade evildoers must be punished, eh?

Together with the formation of this odious agency, however, we too have an egregious misstatement of fact concerning the bailout of various troubled American automakers in the aftermath of the (self-inflicted) 2008/09 subprime crisis. To quote from Obama:

On the day I took office, our auto industry was on the verge of collapse. Some even said we should let it die. With a million jobs at stake, I refused to let that happen. In exchange for help, we demanded responsibility. We got workers and automakers to settle their differences. We got the industry to retool and restructure. Today, General Motors is back on top as the world’s number one automaker [my emphasis].

GM's claim to being the world's top automaker is iffy. Germany's Volkswagen Group has a better claim to the title. Since dodgy accounting and America are practically synonymous, we must look into the GM claim. It says that it sold 9.03 million vehicles in 2011. But, this total was achieved with the sleight of hand of including the output of a Chinese subsidiary that it has interests in but does not own:

GM's rivals also point out that the big U.S. auto maker's numbers are boosted by ownership stakes in China's SAIC Motor Corp. and Liuzhou Wuling Motors Co. While SAIC builds GM cars in China, Wuling's 1.2 million vehicles last year are mostly cheap commercial vehicles used only in China.

Some analysts prefer not to count the Wuling vehicles in GM's global total because GM doesn't have a controlling stake in its partner [my emphasis]. "We have to draw the line somewhere and this at least gives us some consistency around the globe," said Jeff Schuster, an analyst with forecasting firm LMC Automotive.

The VW Group previously reported that it sold 8.16 million vehicles in 2011. Unlike GM, it did not count the numbers of its commercial vehicle subsidiaries MAN SE and Scania AB (formerly of Saab-Scania for you trivia buffs). Attention GM: it helps with the bragging rights that VW actually owns these concerns. Adding both in boosts VW figures by about 200,000. So, subtract the 1.2 million Wuling vehicles gives you legitimate GM sales of 7.83 million vehicles. The once and future king of all things automotive however is the maker of the people's car with [8.16 + 0.20 =] 8.36 million in vehicle sales.

Bottom line: American automakers AND politicians are economical with the truth if not necessarily with taking away the well-being of future generations. Yanquis attempting to pull an (amateurish) fast one; what a surprise. Germans have a reputation for being plainspoken; certain others for being emptily boastful. I would also love to hear the response of unionized and protectionist crowds Obama is pandering to when they find out that GM's (bogus) claim largely boils down to Chinese production. "Made in America?" Not quite.

Why doesn't this glib assessment of US bailouts for all and sundry money losers not discuss, say, mortgage lenders Fannie Mae and Freddie Mac? How about the airline industry? Yesterday was a more appropriate moment to call Obama out on this untruth.

As a parting shot and returning to the notion of a level playing field (whatever that is to these folks), given Obama's thumbs-up to massive government intervention, he compounds untruth with hypocrisy in the SOTU with special reference to China:

It’s not fair when foreign manufacturers have a leg up on ours only because they’re heavily subsidised.

Having claimed to have "saved" the US auto industry, I guess that logic legitimizes the PRC slapping tariffs on large automobiles imported from the US, doesn't it? Revisit the good book and what it says about casting the first stone.

Goin' Down: Those Crappy US Airlines, Cruise Lines

2012-01-24T09:13:00.014Z

For those of you who remember your high school literature, Charon in Dante Alighieri's Inferno was the ferryman of Hades who transported the souls of the dead across the river Styx on a journey to farther reaches of the underworld. In today's international political economy, you can argue that American travel services now perform similar functions. Perhaps ol' Charon has hung up his oars for good and struck a deal with Satan himself to outsource these devilish duties. At any rate, modern American travel services epitomize America itself circa 2012: an economically unviable entity that should be put out to pasture ASAP if our contemporary era of subprime globalization had any sense (which it doesn't).

For a country that pioneered the concept of services marketing, its cutting-edge research, and its application to real-world business, it remains astounding how poor the United States' travel services are. Truly subprime, in fact. Let us begin with the most egregious violator of economic logic, the US airline industry. Given how flying into and around the US presents America's face to the world at large, this industry drags the USA's tarnished reputation further into the mud. We all know the maths of it: In no small part due to American warmongering in Iraq and perhaps Iran in the near future via the Bushite doctrine of pre-emptive strike, oil prices have shot through the roof and caused American carriers already on shaky ground post-9/11 to cease being businesses in the commonly understood sense. In the decade since, these airlines have lost over $50 billion. Especially if you're of the "deficits don't matter" persuasion, you can of course argue that this amount pales in comparison with the US federal deficit. But, the larger point is that the constant need to subsidize this money loser and keep interstate/international air travel is but another leech on the decaying body politic of America.

At the end of last year, we received news that American Airlines entered bankruptcy proceedings. This action completed the cycle of every single major US carrier (save for Southwest, but some would say it doesn't count as a discount carrier) declaring insolvency at least once. Hilariously, it was not long before that when American Airlines proudly proclaimed that it made the largest order in airline history with Airbus and Boeing. Again it's symptomatic of America nowadays: speaking loudly, carrying no stick. The truth is more straightforward: US carriers have among the oldest fleets, poorest customer ratings, surliest and highly unionized flight crew, lousiest on-time performance, a chequered history with lost baggage...the list goes on and on. Let's just say you won't be hearing "Relax" playing in the background with this lot. That they run old jets exacerbates their status as perennial money losers given that older designs are less fuel-efficient than modern ones. America and its airlines: misery loves companies.

* * *

We also received truly appalling news of the Costa Concordia sinking in Italy. My first reaction was, "That's impossible! European cruise lines aren't into PR fiascoes." Its online advertising states "Experience the Costa Concordia cruise ship for a cruise vacation you will never forget." Quite so. Ever-so-slightly more investigation reveals that the parent company of the doomed liner is none other than the former Carnival Cruise Lines. Having a long memory--sometimes a blessing, often a curse--I recall the good ol' days of its operation when the worst sort of maltreatment passengers encountered on Carnival was chronic food poisoning [1. 2, 3]. Apparently unsatisfied with such offences to passenger health, they hired some nutter to run a $600 million vessel into something.

You can argue that Carnival improved somewhat by linking up with a British cruise line. You can further argue that it has done reasonably well compared to its airline counterparts. All I can say is wait till the lawyers are done with Carnival. There may have been a smidgen of improvement via the British involvement, but traditional American hallmarks of harming the customer never really go away in these sorts of services. How about giving a 30% discount to survivors of the ill-fated Costa Concordia on future Carnival trips to add insult to injury? Let's say the PR geniuses at Carnival will never get over that blunder. US airlines may be terrible, but outright termination is admittedly seldom on the cards. It's even pulled much advertising out of sheer shame.

And don't get me started on how US airports have suffered from neglect alike the rest of America's rotting infrastructure. With New York's JFK Airport ranked worst in the world, America's shame is only increased. Got that, America #1 cheerleaders? Instead of telling us how great your nation is and how stupid us primitives are, why not address your thoroughly rotten transportation services that reveals the joke is on you?

Certainly Obama's drive to double exports in five years should benefit from services people actually can, ah, stomach using? That such matters appear like a pipe dream in modern America tells you how far it's fallen. Hellbound, in fact--go ask Charon.

R.I.P. Japanese Trade Surplus, 1981-2010

2012-01-24T08:26:00.004Z

There's grim news care of Reuters in anticipation of Japan's release of trade figures tomorrow. The country is expected to have run a trade deficit for the first time in nearly 30 years in 2011. Worse, prospects are for it continuing to do so in the near future despite the (hopefully) one-time catastrophes of 2011:

Japan probably produced its first trade deficit last year in more than three decades as energy imports surged to cover for the loss of nuclear power following the Fukushima disaster, a major blow to an economy built on its exports prowess... Official trade figures due for release on Wednesday are expected to show that Japan swung to a deficit for the first time since 1980, as utilities purchased fossil fuels for power stations to make up for the loss of nuclear power.

Economists say Japan's trade will be in deficit for the next few years as it copes with the Fukushima catastrophe that released radiation into the atmosphere and forced most nuclear power stations to shut in the face of a public outcry over safety. Trade will then return to a surplus, but long-term trends suggest the surplus will weaken anyhow. A rise in the yen to a record last year of fewer than 77 per dollar from more than 250 in 1980 is making Japanese exports increasingly uncompetitive and so encouraging manufacturers to move overseas.

Such a situation will cast int doubt the ability of the nation to finance its ballooning national debt with external surpluses:

The argument that Japan can rely on surpluses from its international trade to offset a large public debt could also look less convincing and lead some investors to bet that a funding crisis will come sooner than originally expected.

In reality, the student (South Korea) may have already surpassed the master (Japan) in the exporting prowess realm

Allah & Moolah: Muslim Brotherhood Meets IMF

2012-01-23T06:38:00.014Z

Elected with a convincing majority, Muslim Brotherhood-linked legislators under the Freedom and Justice Party umbrella are now the forces to be reckoned with in Egypt. It will be fun to see how Yanqui hypocrites of the "elections are great...except when you elect Hamas" variety will respond if and when more elements of sharia law are enshrined there. While it's certainly debatable whether hardline Islamism is a marked improvement over despotism in the freedom department, one thing is for certain: the economic situation in Egypt is deteriorating. Foreign investment has fled. So have the tourists.

You certainly can make the argument that Egypt now has the worst of both worlds: a worsening climate for freedom in the very shallow American understanding of being able to do whatever you want and a free-falling economy. What an improvement. Isn't all this progress wrought by the "Arab Spring" grand? Recently, the Egyptians cried uncle and asked the IMF for help to the tune of $3.2B:

Foreign financial investors have given Egypt a wide berth since street protests erupted a year ago, forcing the government to rely on local banks for funds, a situation that has forced up yields on treasury bills and bonds to levels that some economists say are unsustainable. The new negotiations take place as the ruling military council tries to fend off criticism of its temporary rule from pro-democracy groups and grapple with social tension caused by poverty and rising prices.

What? You mean those stupid foreigners haven't been impressed with all this US-inspired "Internet freedom"? Such a surprise. Returning to the worst of both worlds POV, we now have deleterious effects from attempting to combine Mubarak's multifarious subsidies and expectations of more (currently non-existent) economic opportunities:

The new cabinet nominated in November needs to cut spending but risks further angering a population that depends on state subsidies and whose hopes for an improvement in living standards were raised by the uprising that ousted President Hosni Mubarak...[T]he projected budget deficit [in 2012] was now 144 billion Egyptian pounds ($23.85 billion), or 8.7 percent of estimated gross domestic product. That compares to an official estimate for the previous year of 9.5 percent.

Now to the interesting Allah and moolah part. Even the incoming Muslim Brotherhood leadership that is replacing the military "caretaker" government recognizes that Egypt is in very bad financial straits. However, it appears that they may need a hefty dose of divine intervention since they believe the IMF will provide conditionality-free loans:

Egypt's Muslim Brotherhood would consider supporting a deal to obtain emergency aid from the IMF, providing there are no conditions attached and alternatives are explored first, a senior official in the Brotherhood said..."There is no objection to borrowing. But it must be without conditions. And it should be in accordance with national priorities," Ashraf Badr El-Din, the head of the Islamist movement's economic policy committee, told Reuters in an interview on Thursday.

Admittedly, there's a lot of amateurishness in their understanding of what the IMF requires of borrowers after being marginalized all these years under Mubarak:

IMF aid is sensitive in Egypt because of national pride and because the Fund is expected to ask the government for assurances on curbing state spending — an explosive issue in a country where frustration over poverty has been causing unrest...The Brotherhood's ambivalent position on IMF aid reflects both its inexperience in handling economic policy — its activities were severely restricted under Mubarak — and the fact that it is not clear how much it will be able to shape policy in the next government.

Indeed, the IMF mission which recently visited Egypt met with the incoming Muslim Brotherhood leadership:

But there is also anger over the IMF negotiations with an unelected, non-civilian government that has failed to articulate a comprehensive economic vision and presided over a repressive transition to democratic rule.

To its credit, the IMF delegation sent to Egypt - and which departed yesterday - met with leaders of the Muslim Brotherhood's Freedom and Justice Party, whose candidates just won a near majority in parliament, to discuss assistance and economic policy. Some saw it as a sign that the IMF preferred not to negotiate with the generals, instead ensuring the assistance had broad and legitimate political support.

The wording of the IMF official statement is obtuse on this point but confirms that the Muslim Brotherhood - IMF meetings did take place. I must meet with the writers of such statements at the IMF who have to deal with such euphemisms day in, day out. I am sure they have a side-splittingly good sense of humour to write such things...

The program developed by the Egyptian authorities and its key policies are currently being discussed with emerging political parties to ensure broad political support. This should help reduce uncertainty and boost confidence in the program’s successful implementation. During our visit, we also had the opportunity to meet with the economic committee of the Freedom and Justice Party and members of other parties...

Recent Egyptian history is marked by protests aplenty--now including against the IMF--but progress? Not much at all. Still, the possibilities are endless for this Muslim Brotherhood and IMF, religious 'n' market fundamentalists brew. Just think: If matters go sour, will somebody declare a fatwa on IMF officials? You hope otherwise but these are mostly bad possibilities despite being incongruously entertaining in the Benjamin Barber sense.

Can you say "fiscal austerity"? How about "tranche"?

Axis of Upheaval: Iran-Russia Trade in Own Monies

2012-01-20T12:40:00.005Z

Mahmoud Ahmadinejad: They get our oil and give us a worthless piece of paper.

Vladimir Putin: They are living like parasites off the global economy and their monopoly of the dollar.

Factually speaking, the ongoing long-term devaluation trend of the dollar is not in dispute. However, America #1 cheerleaders don't like hearing it from the likes of the folks mentioned above with their particular put-downs (however appropriate). The common refrain of "well, what are you gonna do about it?" referring to dollar hegemony is an important one. How do you escape being ripped off in advance by Uncle Sam? Already Japan is buying more RMB-denominated sovereign bonds.

In such a vein, I suppose this example is as straightforward an example of the principle of "the enemy of my enemy is my friend" as you can get. You see, the axis of upheaval of Iran and Russia--two countries currently in the Western doghouse over alleged nuclear weapons programmes and vote-rigging respectively are joining forces to defeat the need to use dollars in their trade activities with one another. The particular reason cited for this move is the imminent imposition of sundry Western sanctions on Iran designed to curtail its trade with the rest of the world:

Iran and Russia have started using their domestic rial and rouble currencies in bilateral trade instead of the U.S. dollar, Iran's envoy to Moscow said on Friday, after the United States imposed new sanctions on the Middle East state.

"(Trade) is based on our national currencies," said Iranian ambassador to Russia Seyed Sajjadi...We started this work long ago. Iranian businessmen are buying products in Russia and are using the rouble as (payment) currency ... The U.S. dollar has no (economic) support base," he said speaking at a news conference.

Iran is seeking to boost trade after the United States imposed additional sanctions in late December in a response to Teheran's refusal to abandon uranium enrichment. The European Union is expected to finalise the ban on imports of Iranian oil at a meeting next week.

Russia, opposing oil sanctions against Iran, has long promoted the rouble as an international currency which could be used in bilateral settlements. In 2010 Moscow began offering to exchange roubles for Chinese yuan as the two nations look to boost bilateral transactions in their own currencies and reduce their reliance on the dollar. China accounts for 10.1 percent of Russia's foreign trade and is its second-largest trading partner after the European Union, while Iran's share in Russia's trade in 2011 stood at 0.5 percent.

While I neither think the ruble is an ideal vehicle currency [!] nor view the rial as a viable currency at all given how I mostly used other denominations when I visited Iran, there may be something going on here worth emulating. As you probably expect, I will have more to say about Iran's persecution in the coming days. Stay tuned.

Indonesia Got It Right: A Post-Crisis Success Story

2012-01-19T02:10:00.006Z

To say that I didn't rate Indonesia's prospects highly after the Asian financial crisis of 1997/98 would be an understatement. It was going from one transitory leader to another after Suharto's ouster. Its economy contracted hugely. All the while, various secessionist movements were tearing the country apart. That was a nasty, nasty time.

It is remarkable how in the relatively short space of little over a decade how Indonesia has reconstituted itself. I guess adversity brings out the best survival instincts in some (while bringing about even more gorging on debts 'n' fats in others). Regaining its investment grade credit rating from Moody's is but the latest manifestation of the country being back in the high life again. Whereas nearly all of the West is having trouble dealing with debt loads hovering around the 100% of GDP mark, Indonesia has over the years whittled down its sovereign debt to 25% of GDP. 25%! All the while it has created a lively and participative political sphere where previously there was none. Enter its singing president and all that. PIGS, eat your hearts out...

The country is already seeing some of the dividends of its improving global reputation as international investors have started flocking to its bonds. Last week, Indonesia achieved a record-low yield on the largest-ever long-dated bond sold in Asia, when it sold 30-year bonds at a yield of 5.375%. That's less than some European countries have to pay to raise money. Italian 30-year debt yields, for example, are around 7% and Spain's around 6%.

The ratings moves also cap an extraordinary run of triumphs for Indonesia, which has nursed itself back to financial health following the Asian financial crisis in the late 1990s, when it became a poster child for emerging economies run amok with a massive debt load and unstable leadership. More recently it has benefited from several years of political stability under President Susilo Bambang Yudhoyono, conservative fiscal management and deep reserves of natural resources such as coal and natural gas that have fueled strong economic growth, even in the worst days of the most recent global financial crisis.

There may be nothing like a full-blown crisis to concentrate the mind, indeed:

Indonesia's relative health today as other countries struggle with ratings downgrades is a direct result of its efforts to deal with its own financial troubles in the late 1990s. Few countries have suffered through a debt implosion like the one Indonesia felt in the Asian financial crisis, when investors fled the country and the country's government effectively collapsed. Since then, the Southeast Asian nation's ratio of public debt to gross domestic product has plunged from more than 90% in 2000 to a modest 25% today, as the painful rebuilding process has made it more cautious about spending and debt.

As I asked recently, do financial markets nowadays really distinguish between developed and developing? Those labels may have been rendered meaningless in that sphere. Many of the Southeast Asians look to be in better shape overall with far lower debt loads and far higher growth prospects. Once more some learned from their crises; others did not. To the former goes the Pacific Century and the latter the New Normal.

Islamization: Libyan Rebels' Price for Qatari Support

2012-01-18T10:18:00.006Z

It may have been a self-serving argument, but hardline leaders in the Middle East who successfully beggared the West on the premiss that even more fundamentalist forces would take over in their stead were not really being disingenuous. Witness Egypt. While wet-behind-the-ears white kids with a penchant for digital exceptionalism (today's cyber-equivalent of American exceptionalism possessing similar pitfalls) were working themselves into a frenzy about the "Arab Spring," less excitable commentators looked on warily. And so it has come to pass that far more extreme figures have emerged on Egypt's political scene, while the destabilizing effects of all this tomfoolery has been yet another round of IMF beggary. Yippee, what a success story, this cyber freedom 'n' growth shtick. [NOTE: This post was not written on an iPad, Blackberry or any sort of fanboy device.]

As with all sob stories, however, it gets even worse. The Libyan revolution has been of particular interest to me given our university's imbroglio with the clan Gathafi (more on this later; see an eariler post for now). So the previous leader may not have been a Western lackey claiming to protect his country from even more extreme influences, but it doesn't really matter. Unable to gain enough material aid from the West, Libyan revolutionaries were in no small part funded by the Qataris of Harrods, al-Jazeera and World Cup 2022 fame. No matter; despite the overtly liberal tones of their own investments, it seems the Qataris are keen to extract a fairly hefty dose of strict Islamization from the new Libyan leadership as quid pro quo for funding de-Moammarization.

Let us begin with what Qatar has provided:

Qatar did much more than finance weapons purchases and provide battlefield training. With no access to money and facing legal difficulties in selling oil, the rebels' political body — known as the National Transitional Council (NTC) — could not pay Libyan salaries and fund the wide-ranging subsidies on everything from bread to gas, which grease the economy. Qatar stepped in by offering to market 1 million barrels of oil for the NTC, which brought in about $100 million. Later, the small but immensely rich country delivered four consignments of refined petroleum products, such as diesel and gasoline. When international oil firms refused to offload oil shipments in Benghazi's port until the NTC paid for them, Qatar intervened and pledged to do so if the Libyan council could not.

And what Qatar appears to want in return is a rollback of secularization:

But with Gaddafi dead and his regime a distant memory, many Libyans are now complaining that Qatari aid has come at a price. They say Qatar provided a narrow clique of Islamists with arms and money, giving them great leverage over the political process. "I think what they have done is basically support the Muslim Brotherhood," says former NTC Deputy Prime Minister Ali Tarhouni, referring to the Islamist organization that has won elections in Egypt and Tunisia. "They have brought armaments and they have given them to people that we don't know." Some Qatari officials have indeed exerted influence in Libyan politics. During deliberations to choose a new Cabinet in September, a senior Qatari official was seen huddled with the outgoing Defense Minister, allegedly trying to guide appointments to sensitive security positions.

NTC members complain that actions like these are undermining the fragile transition to democracy the NTC has promised. "Qatar is weakening Libya," says an NTC member who requested anonymity because he was speaking about a sensitive topic. "In funding the Islamists, they are upsetting the balance of politics and making it difficult for us to move forward. They need to stop their meddling." Senior military officials sidelined by Qatar's cronies are just as blunt. "If aid comes through the front door, we like Qatar," says General Khalifa Hiftar. "But if it comes through the window to certain people [and] bypassing official channels, we don't want Qatar."

You do hope things get better in these countries in the long run even if they may undergo painful changes in the meantime. Still, you cannot rule out that more and more will increasingly remember the "bad old days" under Ben Ali, Mubarak, Gathafi as the "good old days." Meanwhile, those Qataris appear to be quite a crafty bunch even if many may disapprove: avoiding protest at home by adapting neoliberal affectations while actually applying pressure elsewhere to adopt the hardline.

More "Internet Freedom" Hypocrisy c/o the Yanks

2012-01-18T08:15:00.006Z

This post will be brief: I have identified the several contradictions of Hillary Clinton's hoary notion of "Internet Freedom" in a previous co-authored essay. Mind you, that bit of writing even preceded the WikiLeaks dustup which permanently consigned that bit of digital exceptionalism to the scrap heap of computer history.

More recently, American lawmakers have forwarded bits of legislation in the House and Senate designed to protect intellectual property rights by strongly obliging Internet service providers (ISPs) to monitor their customers for piracy. It seems even American tech firms recognize this sort of inconsistency regarding Uncle Sam's treatment of the Internet when it comes to addressing the rights of commercial rights holders (not predominantly theirs, mind you) vis-a-vis those of regular folks without such commercial clout. Certainly the likes of Wikimedia Foundation and Google of "Enabling Trade in the Era of Information Technologies: Breaking Down Barriers to the Free Flow of Information" fame are up in arms against this latest intrusion. Wikipedia is even blacked out today.

Why should being unable to pirate the latest episode of Gossip Girl be a more important global priority than, say, respecting other nations' rights to non-interference and non-intervention and hence keep the interstate system--in reasonably decent operation since 1648--intact? Not only do some folks have unworkable ideas but also a highly distorted set of priorities.

UPDATE: And don't forget this bit of proposed American legislation is but the tip of the iceberg. Actually, the Obama administration is very much behind the Anti-Counterfeiting Trade Act (ACTA)--a nasty piece of work masquerading as a trade agreement with provisions not unlike those of PIPA and SOPA with farther-reaching potential.

Apple & Samsung: Who's Got Whom by the Balls?

2012-01-17T13:08:00.009Z

[NOTE: For those who don't get the title, play this AC/DC song.] There are two broad debates going on regarding the current dominance of Samsung in the consumer electronics space. First we have the perennial question about the role of industrial policy for its success. Widely lauded for being a source of South Korea's competitive advantage during its rise to "Asian tiger" status, industrial policy was subsequently derided as a mechanism for harmful corruption during the Asian financial crisis. Surely there are those who criticize the continued state favoritism shown towards chaebol and its effective stifling of the emergence of smaller, nimbler Korean startups.
Me? I say the results speak for themselves.

Second and more interesting to me at the moment is the ongoing legal battle being waged by Apple against Samsung. At the same time that the Korean firm manufactures a number of the components used in the Apple iPhone, it makes its own line of smartphones. Samsung has been very successful in this regard, overhauling Apple as the world's largest seller of such devices in Q3 2011. Samsung's explanation for this strategy is that being a parts maker and a branded seller helps achieve economies of scale which it otherwise would not have had if it did not spread development costs to other customers. On the other hand, Apple is very much in line with the modern vision of an American "knowledge economy" firm that does not concentrate on manufacturing (the gritty stuff whose value-added tends to fall over time) but on branding and design (the glamorous stuff whose value-added tends not to fall). That is, who wants to be stuck with plant, property & equipment when they eventually become obsolete--isn't it worth a lot more "up there" in your head?

In many ways it's a next-generation debate between those who see the "knowledge economy" or a broader shift towards services as a source of comparative advantage (especially Americans) and those who perceive that industrial policy is still viable in the 21st century with tweaks here and there (especially Asians). Yet to paraphrase an ad slogan from long ago, Korea no longer practices its grandfather's reverse engineering but one wherein it sets the pace in new industries ahead of its Western competitors. It has certainly done well in this regard during the 21st century with bets that have paid off:

In 2000 Samsung started making batteries for digital gadgets. Ten years later it sold more of them than any other company in the world. In 2001 it threw resources into flat-panel televisions. Within four years it was the market leader. In 2002 the firm bet heavily on “flash” memory. The technology it delivered made the iPhone and iPad a reality, and made Samsung Apple’s biggest supplier—and now its biggest hardware competitor.

Or so the Koreans would like to think. As you know, Apple has taken Samsung to court over, indeed, copying the look and feel of its products (imitation is the sincerest form of flattery and all that):

Competitors also balk at the way that Samsung scales up quickly to supply parts to other firms as well as to price its own gadgets keenly. Supplying the rest of industry drives down Samsung’s costs yet further, with its rivals in effect financing its success. This strategy can create problems. Samsung is Apple’s most important supplier in the smartphone and tablet-computer markets. Samsung components, which include all the product’s application processors, account for 16% of the value of an iPhone. It is also Apple’s greatest competitor in those markets. Apple is now suing the socks off the company for copying the look and feel of its products. At the same time it is urgently seeking new ways to diversify its supply chain.

There may thus be limits to the symbiosis said to be going on between these firms. Apple may want to broaden its component supplier base in case Samsung tries to get back at it for legal contretemps. Meanwhile, Samsung may want to devote more attention to the software side as the hardware side of the consumer electronics equation. That is, an amount of overlap in expertise is perhaps inevitable for each to maintain competitiveness vis-a-vis each other. While the Economist views this relationship as rather unique, B-school professors Brandenburger and Nalebuff already noticed how widespread the phenomenon of "co-opetition" was back in 1997 when Steve Jobs had yet to sell a single iProduct (having just rejoined Apple). Been there, done that, saw the movie, bought the T-shirt.

Returning to the post's title, who has whom by the balls? In the short term it's to an extent mutually assured electro-destruction if either backs out in a significant way. In the long term it's probably not a question we will be asking as Apple seeks to broaden its supplier base and Samsung does what it's done many times before and moves on to other industries it deems more promising--which are not necessarily those in the consumer electronics space. Remember, Samsung was not originally a consumer electronics company. Tis but a momentary convergence of interests.

That said, the broader debate on the prospects for the "knowledge economy" which America has in large part bet its economic future on compared to those for the reworked conception of industrial policy which Asian nations have staked a claim to should be interesting to watch. Who says both cannot work--and purchase stocks of both firms to diversify one's portfolio? More importantly from a political economy perspective, which specific strategy will be most beneficial to their home nations? I've already criticized the Apple model for not doing much that is good for America, for instance.

What Threat Does Europe Pose to Asian Growth?

2012-01-16T00:03:00.002Z

Not much according to the Asian Development Bank (ADB). Despite the ongoing--how should I describe them--gyrations in the Eurozone, the Asia-Pacific is expected to do well. Actually, the ADB has already downgraded its prediction for Asian growth in light of the various Western foibles--from 7.5% to 7.2% [yawn]. As I said, there is not much of a threat predicted. The worst case scenario is of simultaneous US/EU combustion. Here is the press blurb:

Economic growth in emerging East Asia will continue to moderate into 2012 as growing sovereign debt problems in Europe and an anaemic US economy raise the spectre of a deep global economic downturn, says the Asian Development Bank’s latest Asia Economic Monitor [you can download the whole report here].

In the event that both the eurozone and the US economies contract sharply, the impact on emerging East Asia would be serious yet manageable, the report says. “The turmoil emanating from Europe poses a growing danger to trade and finance within emerging East Asia; so the region’s policymakers must be prepared to act promptly, decisively, and collectively to counter what could be an extended global economic slowdown,” said Iwan J. Azis, Head of ADB’s Office of Regional Economic Integration, which produced the report.

The pertinent part of the report is this one regarding the tricky business of forecasting:

ADB cut its forecast for the region's growth in 2012 to 7.2% from the 7.5% forecast in the September Asian Development Outlook 2011 Update. Growth is still forecast at 7.5% for this year.

In a special section—-Can East Asia Weather Another Global Economic Crisis?—-the report describes the events that could lead to a recession in the eurozone and a new economic downturn in the US. It examines how a new global economic crisis would affect the region under differing scenarios. East Asia comprises emerging East Asia plus Japan.

In the worst case scenario—with the eurozone and US contracting as much as they did in 2009—-emerging East Asia would grow by 5.4% next year. That would be 1.8 percentage points below the current forecast but not as severe as the impact of the 2008/09 global crisis. This is due in part to diversification of the region’s export markets and increased domestic demand as a source of growth.

This decoupling is down to Asian exporters developing markets within Asia as opposed to relying on Western ones that are no longer in such good shape. Not putting all of a nation or region's bets on a few export categories (i.e., diversification) has helped, too.

For a counterpoint to the optimistic scenario for Asia, see Roubini. To paraphrase Rummy, though, Asians should care progressively less about the "old West" as it has in all likelihood seen its better days and insulate themselves accordingly from blowback.

Sinking US Exports? Obama Says Merge Agencies

2012-01-13T15:57:00.010Z

Ho hum, hot off the presses is yet another lacklustre just-released American trade report for the month of November. With imports on the rise (mostly due to energy) and exports on the wane, let's just say US trade performance is not going to be contributing as positively to their GDP figures in Q4 2011 as hoped. You may recall back in 2010 when Obama set a target to double US exports by 2015? Let's just say they're not moving towards that goal with any alacrity as evidenced by the latest trade figures or with the figures to date.

What to do? It's probably just rearranging deck chairs on the US Titanic, but just in is word that Obama intends to (finally) merge various government agencies handling trade. Moreover, the move is calculated to receive Republican support by reducing a sprawling network of agencies:

The Commerce Department would cease to exist after the consolidation of trade agencies that President Barack Obama is seeking, a White House budget official said on Friday. It would create a new yet-to-be-named department focused on exports, said Jeffrey Zients of the Office of Management and Budget.

Parts of the Commerce Department that are unrelated to trade and businesses, like the National Oceanic and Atmospheric Administration, would be moved to other government agencies, he told reporters. The U.S. Trade Representative would remain a cabinet-level position and the head of the Small Business Administration would also be made a cabinet post, Zients said. White House spokesman Jay Carney said the overhaul proposal would save money and should get bipartisan support in Congress.

That said, Obama mooted doing so in March of last year to no avail. Busybody activity aplenty perhaps, but to what end?

UPDATE: The WSJ adds more details, including some lawmakers on either side of the aisle reluctant who are reluctant if it involves dismembering the USTR:

"Taking USTR, one of the most efficient agencies that is a model of how government can and should work, and making it just another corner of a new bureaucratic behemoth would hurt American exports and hinder American job creation," House Ways and Means Chairman Dave Camp (R., Mich.) and Senate Finance Committee Chairman Max Baucus (D., Mont.) said in a joint written statement.

Watch al-Jazeera To Get Smart, Not BBC or CNN

2012-01-13T11:51:00.002Z

There's a feature in a recent issue of Newsweek that reiterates something many probably already acknowledge: al-Jazeera is now the international news channel to be reckoned with. Sure its lapses now and again into bashing the West may be grating to occidental audiences, but hey, that may be a good thing. The logic here is that persons think through their beliefs more when challenged, stimulating their intellect in the process. Hence, the worldviews which underlie much of al-Jazeera coverage may prompt those with more whitebread notions about the white man's burden in civilizing us primitives to rethink such ideas.

And so the fourth best way to get smart in 2012 according to Newsweek is...

Don’t shut yourself out from new ideas. A 2009 study found that viewers of Al Jazeera English were more open-minded than people who got their news from CNN International and BBC World.

If even the hopelessly Amerocentric Hillary "Internet Freedom" Clinton cites al-Jazeera for its breadth and depth of coverage compared to its Western counterparts, isn't it time for you to do the same?

Revealed: Secrets of Korean Economic Policy

2012-01-12T12:05:00.005Z

Well OK, the title of this post is an exaggeration. Still, I believe that I've come across something quite significant for scholars of development. My e-mail inbox tends to get clogged with not only the usual things--manhood enhancement products, cheap vacations and whatnot but also their academic equivalents--invitations to obscure conferences (which you must pay for), invitations to review for obscure journals (which you've never heard of) and so on. Unfortunately, lost among this pile of stuff folks send me to read are a number of very helpful publications.

So, it is with no small pleasure that I've rescued the Korea Development Institute's recent publication From Despair to Hope: Economic Policymaking in Korea: 1945-1979 from the chaos that is my electronic mail account. (A PDF copy is available from the Duke University servers.) Given the prominent role many Western commentators give to the South Korean state in promoting national development, it's only fitting that the author Kim Chung-yum is a longtime public servant--first for the central bank and then later on in the Ministry of Commerce and Industry at the time of the nation's much vaunted take-off.

While there are any number of secondhand accounts of Korea's success story, this one is obviously a firsthand one that is proving to be quite informative the more I read it. Certainly South Korea has gone in and out of fashion. From being lauded as an Asian tiger during the Eighties it was subsequently disparaged in the aftermath of the Asian financial crisis as it was eventually forced to take out an IMF bailout. The important thing though is that its highly competent civil service has been quite instrumental in helping right the international prospects for Korean products when called for. Hence Samsung for instance being a "model company" in today's world economy.

Especially for policymakers involved in development, I hope there are nuggets to be gleaned here for you. Yes the Korean case is not universally applicable, but there are certainly practices which may be transferable and beneficial from all those years ago.

The Agony of Wolfgang Munchau, Euro Hater

2012-01-11T10:46:00.004Z

Brother will kill brother; spill blood across the land
Killing for religion is something I don't understand...

Do Financial Times columnists listen to Megadeth? I admittedly do--and proudly so. One of my trademark posts in the run-up to the global financial crisis concerned "The Subprime Wisdom of Megadeth" which was true then as it is now. However, it seems that the FT's Wolfgang Munchau wants to do me one better by implying that Europe is not only combating financial crisis but is also engaged in "Holy Wars...The Punishment Due" [padarumph...padarumph...padarumph (I can hear air guitars riffing the intro already)].

To avoid possible conflicts of interest, let me disclose that the FT once gave me a fairly lucrative prize a few years ago. While I still regard it as being at the pinnacle of financial reporting alongside the Wall Street Journal sans the latter's op-ed section, I'm beginning to wonder if the standards of the FT in the column writing department are now approaching WSJ neocon territory. Which, of course, is not quite good unless you're a firm believer in bombing Iran ASAP, reducing taxes to single digit rates and other wingnut causes that render you politically radioactive.

Which brings me to Wolfgang Munchau. In the past, I have found him to be a trenchant if pessimistic commentator on the European Union. The British famously produce many Eurosceptics whose dislike for "being enslaved" by Brussels borders on the fanatic. But while you may expect such writing from the worst lot of the Eurosceptic British press, you expect the FT to have higher standards. So it was a big surprise to me in late November when Munchau formed his own Euro-doomsday movement by stating that the Eurozone would expire on 7 December. I suppose that such prophecies not coming true would have quieted him somewhat alike other end-of-the-worlders who've found the world existing past its putative sell-by date, but I guess not. It makes me think that he may be a British Eurosceptic in disguise. After all, he has subsequently disparaged assertions that the French defenders of the euro will fare worse than the British with their neoliberal policies favouring financial services industries.

But that's not all. He now suggests that what we have with Europe's financial woes is nothing less than a rehash of the Thirty Years' War between Catholic and Protestant religions. In his scheme of things Catholic Italy, Portugal and Spain are engaged in a conflict with Germany:

But what remains unchanged from those times are the underlying cultural conflicts between Protestants and Catholics, north and south, Britain versus the Continent. The many decades of European integration have not ended this fundamental mistrust. This is also one the reasons why the Europeans have created such an irrationally unbalanced monetary union. Its rules were not the result of a rational economic argument, but designed to allay very old German suspicions.

While working in London, something striking is that I always had Catholic flatmates for some reason--French and Italians among others. Yet I was the only one who bothered with going to mass on Sunday. It is a fairly well-known observation that Europe is becoming increasingly secular. Many Europeans never bother to attend services, and this phenomenon cuts across Catholic-Protestant divides. Nor is there much stigma in out-of-wedlock births across Europe as evidenced by soaring rates of illegitimacy. Gay marriage in Spain raised nary an eyebrow elsewhere despite vehement opposition from the Catholic church. In other words to quote Munchau, something which truly unites Protestants and Catholics, north and south, Britain and the Continent is a pronounced increase in secularism. That is a cultural unity, not an underlying cultural conflict. The numbers back me up, not Munchau.

It is also odd that Munchau does not mention his bete noire France in this context given that it lies at the heart of the EU-2 Franco-German "Merkozy" leadership complex. Isn't it (nominally) Catholic as well--like thrice-married Nicolas Sarkozy? Again, it is very odd to compare today's goings-on with those of holy wars of so long ago when today's putative combatants are largely indifferent to religious culture. What's more the last I checked, Germany not only is about evenly divided between Protestants and Catholics but is also the proud homeland of the current Pope, Benedict XVI, and an admirable one to boot.

Bottom line: this comparison is ludicrous. While drawing (far-fetched) analogies is par for the course from economic commentators, this one goes far beyond imperial overstretch by invoking religion where it explains next to nothing. What's next, Turkish EU accession will be a re-run of the Battle of Gallipoli?

Stephen Roach: It's Still Bet On China, Not India

2012-01-09T14:51:00.001Z

Rumours of China's imminent demise are much exaggerated (see Roubini on the overinvestment thesis, for instance)--or so says Stephen Roach (inveterate PRC fan). In a new al-Jazeera op-ed, he addresses the alleged seeds of China's downfall alike excess real estate investment (the PRC's subprime moment?) and excessive lending of state banks by official diktat to marginal projects:

[I]t is a serious exaggeration to claim, as many do today, that the Chinese economy is one massive real-estate bubble. Yes, total fixed investment is approaching an unprecedented 50 per cent of GDP, but residential and non-residential real estate, combined, accounts for only 15-20 per cent of that - no more than 10 per cent of the overall economy. In terms of floor space, residential construction accounts for half of China's real-estate investment. Identifying the share of residential real estate that goes to private developers in the dozen or so first-tier cities (which account for most of the Chinese property market's fizz) suggests that less than 1 per cent of GDP would be at risk in the event of a housing-market collapse - not exactly a recipe for a hard landing.

As for Chinese banks, the main problem appears to be exposure to ballooning local-government debt, which, according to the government, totalled $1.7tn (roughly 30 per cent of GDP) at the end of 2010. Approximately half of this debt was on their books prior to the crisis.

Some of the new debt that resulted from the stimulus could well end up being impaired, but ongoing urbanisation - around 15-20 million people per year move to cities - provides enormous support on the demand side for investment in infrastructure development and residential and commercial construction. That tempers the risks to credit quality and, along with relatively low loan-to-deposit ratios of around 65 per cent, should cushion the Chinese banking system.

Contrast China to India, which (yawn) Roach again emphasizes has a more serious structural bias towards an external deficit (alongside its still-marginal infrastructure):

India is more problematic. As the only economy in Asia with a current-account deficit, its external funding problems can hardly be taken lightly. Like China, India's economic-growth momentum is ebbing. But unlike China, the downshift is more pronounced - GDP growth fell through the 7 per cent threshold in the third calendar-year quarter of 2011, and annual industrial output actually fell by 5.1 per cent in October.

But the real problem is that, in contrast to China, Indian authorities have far less policy leeway. For starters, the rupee is in near free-fall. That means that the Reserve Bank of India - which has hiked its benchmark policy rate 13 times since the start of 2010 to deal with a still-serious inflation problem - can ill afford to ease monetary policy. Moreover, an outsize consolidated government budget deficit of around 9 per cent of GDP limits India’s fiscal-policy discretion.

Still, it will take a pretty serious external shock to knock either one of these off-track in a significant way in 2012:

While China is in better shape than India, neither economy is likely to implode on its own. It would take another shock to trigger a hard landing in Asia.

One obvious possibility today would be a disruptive break-up of the European Monetary Union. In that case, both China and India, like most of the world's economies, could find themselves in serious difficulty - with an outright contraction of Chinese exports, as in late 2008 and early 2009, and heightened external funding pressures for India.

Hugo Away: Chavez Ignores World Bank on Exxon

2012-01-09T10:31:00.013Z

File this under: pre-emptive strike. It appears that the indefatigable Hugo Chavez is back on the warpath against all things American. A few days ago he publicly suspected the United States of unleashing cancer on fellow left-leaning Latin American leaders. In less improbable news, however, we now understand that his Venezuela will not abide by subsequent rulings that find the country liable for nationalizing ExxonMobil oil fields in the Orinoco Belt. At the end of last year, forum shopping ExxonMobil received a favourable $746.9 million verdict against state oil company PDVSA at the International Chamber of Commerce (ICC) Court of Arbitration over the expropriation. While a victory nonetheless, ExxonMobil believes that this sum amounts to less than a tenth of its original investment.

Now, as most of you know, the International Court for the Settlement of Investment Disputes (ICSID) is a World Bank body that does what it says on the label. That is, it addresses legal conflicts over the handling of international investment--most often cases of expropriation alike what Venezuela is said to have done to ExxonMobil. ICSID is currently set to pass judgement on ExxonMobil's investment in Venezuela alike many others who've similarly complained about expropriation at Chavez's hands.

Anticipating a more negative ruling, Chavez is already signalling that Venezuela will not honour the decision of the Washington-based institution:

Venezuela won’t accept any verdict from the World Bank’s International Centre for Settlement of Investment Disputes, including Exxon Mobil Corp.’s claim for its nationalized Cerro Negro project, President Hugo Chavez said. The Washington-based court is considering Exxon’s claim in one of about 20 suits filed there against the Venezuelan government. Chavez, a self-professed socialist revolutionary, has taken over assets in the energy, metals, cement and telecommunications industries.

“We won’t recognize any decisions from the ICSID,” Chavez said on state television yesterday during his first Sunday program since announcing he had cancer last year. The company is “seeking the impossible, that we pay what we will never pay.” Exxon, the world’s largest oil company by market value, was the first to abandon Venezuela after Chavez expropriated industry assets in the Orinoco heavy crude belt in 2007. The president forced foreign oil producers into joint ventures as minority partners that year and is also in arbitration with ConocoPhillips, which rejected the terms...

Despite being a buffoon in many respects, Chavez logically assumes that the World Bank's ICSID and its usual American influences will result in a less favourable outcome. Here's a thought for you, though: What if the ICSID awards ExxonMobil an even smaller amount than the ICC's International Court of Arbitration or even finds in favour of PDVSA? The willingness of PDVSA to compensate ExxonMobil for what the ICC adjudged means it believes that it's as good as it gets:

In a separate case, the New York-based International Chamber of Commerce, an arbitration court, ruled last month that state oil company Petroleos de Venezuela SA must pay a net $746.9 million for the nationalization. Venezuela will compensate Exxon for the Cerro Negro project as ordered by that court, Chavez said yesterday.

“If Exxon gets an award in the ICSID, the enforcement mechanisms are strong,” Michael Nolan, a partner in the Washington office of Milbank, Tweed, Hadley & McCloy who has represented clients in arbitration with Venezuela, said in a telephone interview last week. “There’s a treaty.” Exxon in 2010 reduced its claim to $7 billion from $12 billion, according to PDVSA, as the Caracas-based company is known. The Venezuelan company said Jan. 2 that it would pay $255 million in cash for the International Chamber of Commerce judgment, after accounting for about $300 million in a frozen New York bank account and $191 million of Exxon debt that it will cancel.

Perhaps unsurprisingly, ExxonMobil is again forum shopping for the best result. Having been disappointed by the ICC ruling, it now awaits that of the ICSID which is supposedly considering a more strictly enforceable bilateral investment treaty (BIT) as evidence as opposed to a contract between just ExxonMobil and Venezuela. On the other hand, PDVSA is also looking for the best deal to get ExxonMobil off its back for now which it believes can be done by promptly (or at least by Venezuelan standards) paying at least part of the $746.9 million. I leave you to (enjoy?) more Hugo-isms:

“It’s insane!” Chávez said. “It’s such an insane position taken by this company than the decision [of the court] recognizes less than 10 percent of what they were asking for. How much must these companies have robbed in the last hundred years? They stole from us; they had to pay us back for damages made in the last hundred years; the capital they have wouldn’t be enough,” Chávez said.

Even Hugo knows a good deal when he sees one (perhaps). Still, I would be gobsmacked if the average Venezuelan knows what the ICSID is when most persons don't. Moreover, permanently blowing off those with the actual know-how to extract extra-heavy sour crude may not be the best course of action insofar as PDVSA does not necessarily have this expertise on its own.

Comrade Bob Mugabe and the Dictator Fun Club

2012-01-08T03:03:00.007Z

I'm a bit tardy here (apologies), but better late than never. Name the chicken restaurant chain and I've probably patronized it before: Kentucky Fried Chicken, Chick Fil A, Kenny Rogers Roasters, El Pollo Loco and so forth. Nando's is in a unique position of being a very international chain that isn't American. As we learn, however, its cosmopolitan nature isn't always an advantage. I was flipping through a recent issue of the Economist when the TV advertisement of the South African chicken restaurant chain entitled 'Last Dictator Standing' came to my attention (I too have consumed their poultry products since they have many branches in England):

Insulting dictators ought to be safe, so long as you do not operate in the same country. Nando’s, a South African restaurant chain, forgot that with an ad showing a Robert Mugabe lookalike glumly alone at dinner (after many of his fellow despots had been deposed [and perhaps more importantly, dead]). He reminisces about happy days shooting water pistols with Muammar Qaddafi, playing in the sand with Saddam Hussein and riding a tank, “Titanic”-style, with Idi Amin. The ad was broadcast in South Africa, where Nando’s middle-class target audience found it hilarious. But Nando’s also has restaurants in Zimbabwe. Threats ensued. Fearing violence against its staff there, the ad was pulled.

To be more exact, political youth groups linked to Mugabe threatened to harm Nando's employees in Zimbabwean outlets. The ad was also broadcast not only in South Africa but throughout the continent via satellite TV. (You also can't insult the head of state in Zimbabwean law.) Still, the corporate social responsibility angle is quite obtuse given that the aggrieved party is not exactly an exemplar of good governance. With his penchant for hyperinflation in the economic realm and even more unpleasant things in the security one, Mugabe is not a sympathetic figure to say the least. That said, he has gradually become worse in true Anakin Skywalker - Darth Vader fashion.

My, er...enjoyment of this Nando's commercial compared to the more straightforward if even more politically incorrect dumb blonde ad is curtailed though despite its IR angle. There is this thing called the willing suspension of disbelief that is said to enable enjoyment of fiction. However, when the events being depicted vary too far from established facts, the cognitive dissonance becomes too severe to overcome.

And so it is with this ad to an extent. While I appreciate that singing karaoke is an Asian stereotype, it is chronologically impossible for Mugabe to have joined Chairman Mao in this activity as a fellow dictator. For, Comrade Bob only assumed power in 1980 when Mao died in 1976. The same qualifier holds for Idi Amin who was ousted in 1979. Besides, isn't Mao responsible for the Cultural Revolution which aimed to expunge harmful foreign influences alike karaoke? Even more surreal is having Comrade Bob play on a swing set with South African apartheid-era Prime Minister P.W. Botha [?!] Why would an erstwhile leader of the pan-African independence movement away from white rule be frolicking with one of its most odious proponents? I suppose it's what got the Zimbabwean pro-Mugabe crowd most in a frenzy about the ad more than anything else.

It's too bad Nando's isn't going to include Kim Il-Jong in a follow-up advert with all the controversy. Now that's a real contemporary of Comrade Bob's who's gone on to...I don't quite know where atheists of his sort go. Besides, why feature Chairman Mao instead of true contemporaries alike Zaire's Mobutu Sese Seko, the Philippines' Ferdinand Marcos, Chile's Augusto Pinochet or Panama's General Manuel Noriega--certainly recognizable figures to any international audience?

I guess the song gets it right, though:

Oh my friend we're older but no wiser
For in our hearts the dreams are still the same

Counterpoint: Japan's Lost Decade is a Myth

2012-01-08T02:44:00.002Z

The New York Times features an op-ed from Eamonn Fingleton arguing that Japan never suffered from a lost decade then and is doing perfectly well now. (He's been making this point for over a decade.) While I would probably agree that Japan's stagnation has been overstated by Western media, Fingleton fails to explain how China has overhauled Japan in a short span of time. He may also be misreading the consequences of such things as long lifespans and a strong currency for the nation's economic well-being. For one thing, continuing and sizeable current account surpluses he cites may be evidence of an inability to transition to a more domestically driven economy. Hence it is more vulnerable to economic downturns in export markets--even for capital goods--and the challenges posed by a strong currency.

For another thing, is life expectancy now a measure of competitiveness? Or, aren't substantial and still-rising health care costs an additional burden on Japan's fiscal well-being given that its citizens live so long? Speaking of which, why does the author (conveniently) ignore that its public debt is over 200% of GDP and that 2012 will not be a year for fiscal consolidation? Given that he keeps harping on US decline, it is odd that he gives Japan a free pass on debt while arguing that the US should emulate Japan. There are many holes in Fingleton's reasoning, but here's some of his cited "evidence" as to why Japan has not had a lost decade...

Japan’s average life expectancy at birth grew by 4.2 years — to 83 years from 78.8 years — between 1989 and 2009. This means the Japanese now typically live 4.8 years longer than Americans. The progress, moreover, was achieved in spite of, rather than because of, diet. The Japanese people are eating more Western food than ever. The key driver has been better health care.
Japan has made remarkable strides in Internet infrastructure. Although as late as the mid-1990s it was ridiculed as lagging, it has now turned the tables. In a recent survey by Akamai Technologies, of the 50 cities in the world with the fastest Internet service, 38 were in Japan, compared to only 3 in the United States.
Measured from the end of 1989, the yen has risen 87 percent against the U.S. dollar and 94 percent against the British pound. It has even risen against that traditional icon of monetary rectitude, the Swiss franc.
The unemployment rate is 4.2 percent, about half of that in the United States.
According to skyscraperpage.com, a Web site that tracks major buildings around the world, 81 high-rise buildings taller than 500 feet have been constructed in Tokyo since the “lost decades” began. That compares with 64 in New York, 48 in Chicago, and 7 in Los Angeles.
Japan’s current account surplus — the widest measure of its trade — totaled $196 billion in 2010, up more than threefold since 1989. By comparison, America’s current account deficit ballooned to $471 billion from $99 billion in that time. Although in the 1990s the conventional wisdom was that as a result of China’s rise Japan would be a major loser and the United States a major winner, it has not turned out that way. Japan has increased its exports to China more than 14-fold since 1989 and Chinese-Japanese bilateral trade remains in broad balance.

Lastly, what does the number of tall skyscrapers built in Tokyo have to do with Japan's relative prosperity? Isn't it a function of land being scarcer in Tokyo than major American cities alike relatively roomy LA? As I said, there are many glaring questions here but read it and see what you make of it yourselves. Yes, America is not doing well but it can do far better than emulate Japan of all places.

Japan, Real Euro Saviour and Big EFSF Customer

2012-01-06T09:23:00.006Z

This is a short take on a news item I found interesting. With its massive $3 trillion and "change," China has often been touted as the saviour of various ailing peripheral EU economies [1, 2]. While European leaders--Nicolas Sarkozy in particular--have solicited China's help in these fundraising efforts, PRC help has not been forthcoming. China, for one, would like a lot of concessions granted first such as the EU lifting its designation of the PRC as a "non-market economy" before 2016 or the 15th anniversary of its WTO accession. (I explain why in a November 2011 post.)

So, it may surprise some of you that the big customer for European Financial Stability Facility (EFSF) bonds from the Asia-Pacific has been Japan, not China. In the auctions to date including the most recent, apparently oversubscribed one, it has been the Japanese who've upped their holdings of euro-denominated papers:

Japan has bought 300 million euros ($383 million) worth of bonds sold by the euro zone's rescue fund, the European Financial Stability Facility (EFSF), in an auction on Thursday, a finance ministry official told Reuters on Friday. The amount accounts for 10 percent of an oversubscribed 3 billion euros worth of bonds sold by EFSF on Thursday to raise funds for Ireland and Portugal. The bond was the first with a three-year maturity for the triple A-rated EFSF, which is seeking to offer a greater range of maturities. It attracted orders close to 4.5 billion euros [for a bid-to-cover ratio of around 1.5].

Japan has so far bought 3.535 billion euros worth of EFSF bonds of a total 21 billion worth of such bonds sold by the Luxembourg-based fund, set up in 2010, in all the six auctions since last year. A senior Japanese government official said on Thursday that Japan will continue to buy bonds issued by the EFSF by making use of highly liquid euro assets in its foreign reserves in accordance with Europe's certain efforts to resolve the region's debt crisis.

The rescue fund is hoping that strong demand will quieten concerns that the EFSF could struggle to raise funds as the debt crisis threatens the credit ratings of its main guarantors, particularly France.

So there you go as far as Asian vote of confidence in the euro is concerned--albeit from a country you may not necessarily have suspected to be buying in large quantities. In a small way, it also buoys the EUR/JPY rate to Japan's benefit.

Today's Resource Curse on Aussie Surfboard Mfg

2012-01-05T04:36:00.011Z

Little surfer, little one, make my heart come all undone...with your"Made in China" surfboard?

Is there nothing sacred about beach culture that the Chinese won't infiltrate with their relentless manufacturing machine? First you had them testing the Brazilian bikini industry. Now you have them putting Australia's equally famed surfboard makers to the test with inexpensive boards.

It may be odd that the Bloomberg article I excerpt here was the main story on the site front page, but closer inspection reveals that it's quite a straightforward application of resource curse theory: Enduringly strong global and in particular Chinese demand for Aussie minerals and deposits has appreciated the Australian dollar (AUD) massively, promoting both a decline in domestic manufacturing and an influx of foreign goods (that are often substitutes as the article notes). Given how seriously Australians take their surfing, emotions are running high as PRC-made wares come ashore in larger quantities:

On Australia’s Gold Coast, a 22-mile- long (35-kilometer) stretch of beaches named Surfers Paradise and Rainbow Bay, Neil Rech opened a surf shop in December and unwittingly disturbed the peace. His store, Sedition Surfboards [an apt name IMHO], sells Chinese imports for A$250 ($259), one-third the cost of some Australian-made boards that competitors are offering. Rival retailers averse to discounts and upset about local job losses questioned his patriotism, and even threatened violence, he said.

“It’s quite heavy,” Rech, 34, said of the backlash. After teaching for two years in China before opening a store in Coolangatta, Queensland, “I realized how cheap you can actually get these boards so I thought it’d be a great opportunity to bring them here and sell them to the public cheaper.”

And then we have a backgrounder on the economics of it all that are definitely unfavourable to the domestic industry:

Inexpensive imports from Asia, coupled with a 54 percent jump in the local dollar since October 2008, are delivering a double dose of pain to one of Australia’s most iconic industries. The struggles at surfboard makers are playing out at manufacturers across a country where China’s demand for iron ore and fuel has spurred a mining boom while leaving non-resource businesses behind.

Manufacturers are on the wrong side of a divide in Australia’s economy, which has avoided a recession since 1991 and boasts an unemployment rate of 5.3 percent, about half the level in Europe. While the number of mining jobs (AULQMINN) soared 21 percent to 242,400 in the fourth quarter from a year earlier, manufacturing employment slumped 4.4 percent to 953,500 and retail positions sank 2.2 percent to 1.21 million.

Chalk another one up for China. Now, if they only had a Beach Boys-like ensemble singing in Mandarin it would be a total appropriation of beach culture. Heaven knows, they've already got the beachwear arena, er, covered.

PRC vs Cultural Imperialism: Mao 1, Disco Stick 0

2012-01-04T08:03:00.010Z

I've talked about how a left-leaning British professor of my acquaintance claims that he does a roaring trade in consulting with PRC doctrinaires on Marxist theory. Talk about the contradictions of market authoritarianism. It is befuddling to me how the Communist Party in particular pays lip service to fairly conventional Marxist theory when modern China is precisely the sort of bourgeois society Herr Marx would disapprove of with its often crass materialism and gross inequality. It outdoes any number of Western nations in both respects, while adding insult to injury by having perhaps the lowest labor share of income of any major country. Worker's paradise? I think not.

We recently read news that China is once again entering one of its Western demonization phases. There are any number of reasons being cited for this turn of events: PRC officialdom wanting to deploy its culture as a "soft power" instrument; authorities fearing the erosion of morals via lowest-common denominator Westernized culture; and a tit-for-tat retaliation reflecting resentment at attempts to isolate it economically in its own region. Whatever the reason--I think it's a mixture of different concerns--the screws are being tightened:

President Hu Jintao has said China must strengthen its cultural production to defend against the West’s assault on the country’s culture and ideology, according to an essay in a Communist Party policy magazine published this week. The publication of Mr. Hu’s words signaled that a new major policy initiative announced in October would continue well into 2012.

The essay, which was signed by Mr. Hu and based on a speech he gave in October, drew a sharp line between the cultures of the West and China and effectively said the two sides were engaged in an escalating war. It was published in Seeking Truth, a magazine that evolved from a publication founded by Mao Zedong as a platform for establishing Communist Party principles.

“We must clearly see that international hostile forces are intensifying the strategic plot of westernizing and dividing China, and ideological and cultural fields are the focal areas of their long-term infiltration,” Mr. Hu said, according to a translation by Reuters. “We should deeply understand the seriousness and complexity of the ideological struggle, always sound the alarms and remain vigilant, and take forceful measures to be on guard and respond,” he added.

So far so propaganda-ish alike the 1954 poster above about how Chairman Mao Gives Us a Happy Life. The New York Times article linked to above goes into how making mainland media outlets more self-sustaining has resulted in progressively racier reality show-type fare (and worse). Mirroring the drug legalization argument, that the number of Western films that can be shown in a given year is limited may only create more demand for such "forbidden fruit":

Chinese leaders have long lamented the fact that Western expressions of popular culture and art seem to overshadow those from China. The top-grossing films in China have been “Avatar” and “Transformers 3,” and the music of Lady Gaga is as popular here as that of any Chinese pop singer. In October, at the sixth plenum of the party’s Central Committee, where Mr. Hu gave his speech, officials discussed the need for bolstering the “cultural security” of China...

Mr. Hu’s words suggested that China would not lift anytime soon strict limits that it sets on imports of some cultural products. Each year, the agency in charge of regulating film allows only 20 foreign movies to potentially make a profit off their box office take here. Hollywood studios have long criticized that system and lobbied the United States government and international organizations to pressure China into scrapping or loosening the quota.

Let the market decide? We're talking about "Communist" China here, classified by the US as a non-market economy after all. The BBC further notes that p-p-p-p-p-p-p-p-poker faced telecasters have begun removing Westernized vulgarities faster than you can say "Berlusconi variety show" in the wake of Chairman Hu's proclamations. It hastens matters that there were edicts requiring them to do so, too:

Satellite broadcasters in China have cut entertainment TV by two-thirds following a government campaign, state news agency Xinhua has reported. An order by the State Administration of Radio, Film and Television (SARFT) to curb ''excessive entertainment'' came into effect on 1 January. The number of entertainment shows aired during prime time each week has dropped to 38 from 126, said the watchdog. The news came as the president warned of the influence of Western culture...

The order, which was issued in October 2011, limits each of the country's 34 satellite channels to two entertainment programmes each week and a maximum of 90 minutes of entertainment content every day from 7:30 to 10 p.m. Broadcasters are also required to air at least two hours of news programming between 6 a.m. and midnight. They must each broadcast at least two 30-minute news programs between 6 and 11:30 p.m. The country has the largest number of television viewers in the world - an estimated 95% of its 1.3 billion people.

Is access to trash TV the right of every person? My intuition tells me that the killjoy Chinese authorities would not be so censorious if a Chinese Lady Gaga double entrende-spouting rival existed, but till then, mum's the word. As in the days of way back, lay back and think of...Chairman Mao.

Garrett: US 'All In' On Right Side of History vs China

2012-01-02T08:41:00.010Z

The framing is not one which I would use, but it's an increasingly familiar trope nonetheless: Is the United States' model of capitalist liberal democracy becoming obsolete vis-a-vis the "developmental authoritarianism" of China? The litmus test in Asia in this regard may be coming fast as the US appears to be nearing its neo-Bushian "you're either with us or against us" moment in the preferential trade agreement realm. Hillary Clinton recently suggested as much. However, I seem to have missed political economy stalwart Geoffrey Garrett's take on Obama going "all in" or betting everything regarding the Asia-Pacific via the much-ballyhooed Trans-Pacific Partnership (TPP) expansion bid. (When we last saw Garrett in these parts, he was talking about a G-2 US-China compact emerging in global governance.)

It's curious as to why Garrett penned write this article for probably the most bellicose of China's state-supported publications, the Global Times, when it suggests Chinese not American overreach. For what it's worth, though...

[T]he US is insisting that this will only be possible if China is willing to play by what Obama called "the rules" set by the US, which he claims are widely accepted in the region. As every poker player knows, going "all in" is the ultimate high risk and high reward gambit. You can win big, in this case having China accede to the US demands regarding opening its economy, giving larger political freedom to its people, and ending its territorial disputes in the region.

But you can also lose everything. Here Obama's gambit risks not only alienating China but also increasing the chances of conflict with China. Only the confident risk going all in. Obama's confidence stems from his belief that "history is on the side of the free - free societies, free governments, free economies, free people."

So far so grandiloquent. Which is par for the course for US officialdom almost by definition. But, the reasoning offered is that while China's trade ties with others in the region are growing and in many cases now outstripping their ties with the US, uncertainty about China's territorial designs gives the US a benefit of the doubt that it's using advantageously:

This statement is more than blind faith. Obama reasons that the trajectory of change is on the US side. While China has booming trade relationships with many countries in the Asia Pacific, including longstanding US allies led by Australia, Japan and Korea, there is still widespread unease in the region about China's ultimate intentions and ambitions.

In contrast, despite the big hits the US brand has taken, most Asian nations seem interested in even tighter ties with the US. This includes not only traditional allies but also new friends like India, Indonesia and Vietnam. The US calculation is that its coalition in the Asia Pacific is not only invulnerable to China's rise, but that it is so powerfully magnetic that bit by bit it will socialize China into joining, and changing itself in the process.

Add in the obligatory self-serving contrast between the US and China:

This socialization strategy is most obvious regarding economics and the TPP. Obama told his audience in Canberra "we need growth that is fair, where every nation plays by the rules; where workers rights are respected and our businesses can compete on a level playing field; where the intellectual property and new technologies that fuel innovation are protected; and where currencies are market-driven, so no nation has an unfair advantage." Although he didn't mention it by name, the specific issues Obama raised were no doubt directed at China.

Obama also went out of his way to talk up the importance of domestic political freedoms, claiming that "certain rights are universal, among them freedom of speech, freedom of the press, freedom of assembly, freedom of religion, and the freedom of citizens to choose their own leaders." And in an even more direct challenge to China, Obama asserted that "prosperity without freedom is just another form of poverty."

We then return to the commingling of security and economic concerns that I'm not so fond of...

Obama has laid down the gauntlet to China, saying that its booming trade ties must be underpinned by its acceptance of the values he believes the rest of the region holds dear. And he thinks, over time, China will agree.

Obama probably thinks this is a smart bet for three reasons. The US debt-induced military spending cuts won't curtail its capacity in Asia. China is unlikely to respond decisively until its new leadership team is firmly in place. And most importantly, it is in China's interests to move in the direction Obama wants. Time will tell if he is right.

For a different point of view, see Jagdish Bhagwati. To him, TPP is not a virtuous call for a level playing field but the ultimate trade diversion. Not only does it isolate China, but it also largely rules out the PRC ever joining according to the Columbia professor. While my thinking is more in line with that of Garrett--the US hopes to create sufficient bandwagon effects that China will want to come on board and play by the (American) rules--my belief is that Garrett far overestimates America's residual influence in the region. Witness, for instance, Japan signalling that it will join TPP negotiations--to appease the Americans--while knowing that little is likely to come out of them given the strength of its domestic agricultural lobby. That bit of Yank appeasing done, their leader then inks a deal to cement the use of RMB in regional transactions and for Japan to purchase RMB bonds to boot over Christmas. Note that these are not mere discussions alike TPP expansion but concluded agreements. Money talks.

Just as North Korea makes displays of bellicosity when in times of trouble to attract attention, American sound and fury is unarguably becoming a more common sight and sound these days. If that doesn't signal terminal decline, you tell me.

Hungary the EuroPakistan & CB Disindependence

2012-01-01T08:51:00.003Z

It's time to get the IPE Zone show on the road for 2012! Honestly, though, I wish I could say the same for the Hungarian economy. For a bit of a background, do you remember the time prior to the outset of the 2008/09 global financial crisis when the Hungarian forint hit all-time highs against the euro? Those were heady days for speculation on emerging Eastern European economies during a period when due diligence was an iffier, more relaxed concept. Borrow a lot in euros--what's the problem there? Unable to sustain its gaping current account deficit in the wake of the crisis, it soon took out a €20B bailout from the EU together with the IMF.

With the replacement of the party that negotiated the EU/IMF deal, the centre-right party of Viktor Orban decided to go down the populist route by chastising the IMF for Hungary's woes. This politicization included telling these lenders to effectively beat it by turning down another tranche disbursal in 2010. Now, I would have been more impressed by this "sticking it to the man" display if, a few more months down the road, we find that Hungary could not do without and is again at the IMF's door asking for help. The scoreline? IMF 1, Orban the insubstantial faux-populist 0.

In the meantime, Hungary under Orban has been busy testing the EU and IMF's patience by attempting to consolidate Fidesz's political grip. In recent days, the Hungarians have dished out a tripartite whack job of what not to do in currying the lenders' favour.

First, in an era which champions central bank independence, how about Hungary pushing for central bank disindependence by making politicians choose key CB figures? The EU among others warned of this coming to pass, but it now has despite being in clear violation of the Lisbon Treaty:

Barroso was referring to the Hungarian government's plans to reshape the structure of the central bank by designating a third deputy governor and also raising the number of members in the Monetary Policy Council. The newspaper quoted National Bank of Hungary Governor András Simor as saying that these elements of the legislation could serve no other purpose than to increase government influence on monetary policy...

The Commission has serious doubts about the compatibility of the Magyar Nemzety Bank (Hungarian National Bank) bills with Article 130 of the Lisbon Treaty...[a]rticle 130 says that neither the ECB nor a national central bank, nor any member of their decision-making bodies, shall seek or take instructions from Union institutions, bodies, offices or agencies, from any government of a member state or from any other body.

Second, there is concern about enshrining a flat tax into law depriving the country of flexibility for revenue raising measures which the EU and IMF will almost certainly seek if asked for help. Third, the Fidesz party is in the process of gerrymandering districts the old-fashioned way to ensure a firmer grip on electoral results.

Add all three in and it's quite a power grab by Fidesz. With formal negotiations for another loan disbursement due to start at the beginning of 2012, you have to wonder if Hungary can be forced to recant already-passed legislation. As the post title intones, today's Hungary is alike Pakistan: an economically misfiring entity that lurches from crisis to crisis. At the same time it is resentful of outside help yet insufficiently capable of resolving woes that drive it to external lenders time and again. While it may be fun to bite the hand that feeds, such gestures are empty if you eventually have to make nice with the folks you vilify since the essential problems remain unresolved.

Add in bonds downgraded to junk status, soaring bold yields and an abortive bond auction. Colour me unimpressed, Orban. Who do you think you are, the Eastern European Bolivarian?

3 January UPDATE: Confidence in Hungary's government is getting rather worse.

IMF's Blanchard on Consolidation vs Stimulus

2012-01-01T08:05:00.005Z

IMF Chief Economist Olivier Blanchard writes about the "four hard truths" from 2011 that should interest most readers. Alike other economists, Blanchard is ambiguous on fiscal consolidation--its magnitude and the timing of when it's implemented. I have previously commented on the unreality of the widely-held idea that the US for instance should splurge now and retrench later based on the observation that America's national government has not managed to decrease its expenditures since 1965. Expanding government generates its own momentum into the future. There's also more than a smidgen of hypocrisy involved now that industrialized countries (from which many of these economist types comes from, you will observe) instead of developing ones are enduring hard times. Go easy on the richer ones, yeah?

That said, here is another Blanchard-ism for you concerning how markets seem to welcome announcements of fiscal consolidation but do not welcome the resulting slowdown in growth...

Financial investors are schizophrenic about fiscal consolidation and growth.

They react positively to news of fiscal consolidation, but then react negatively later, when consolidation leads to lower growth—which it often does. Some preliminary estimates that the IMF is working on suggest that it does not take large multipliers for the joint effects of fiscal consolidation and the implied lower growth to lead in the end to an increase, not a decrease, in risk spreads on government bonds. To the extent that governments feel they have to respond to markets, they may be induced to consolidate too fast, even from the narrow point of view of debt sustainability.

I should be clear here. Substantial fiscal consolidation is needed, and debt levels must decrease. But it should be, in the words of Angela Merkel, a marathon rather than a sprint. It will take more than two decades to return to prudent levels of debt. There is a proverb that actually applies here too: “slow and steady wins the race.”

Is it a "deficits don't matter since the markets will punish slower resulting economic growth from austerity" argument? I submit that Dick Cheney's durable and adaptable economic belief system remains worthy of a Nobel Prize given its modern ubiquity.

BlackBerry's Latest Banishment Threat - Indonesia

2011-12-30T06:03:00.004Z

The sheer difficulty of cracking BlackBerry encryption has made several states wary of the Research In Motion service operating in their countries. As a compromise on national security-esque grounds, the Canadian firm RIM has located its servers within the countries that raise such concerns instead of at home--most famously the UAE:

Last year, the UAE threatened to suspend BlackBerry Messenger, email and web browser services unless RIM worked out a way to locate its encrypted computer servers in the country so the state could get access to email and other data -- the same access it says the United States, Russia and other states have.

That concession granted to some, it appears Indonesia is now complaining about how Singapore was made the location of RIM's Southeast Asia servers instead of the region's largest nation and largest user of the popular BlackBerry service. The mooted penalty for this betrayal of sorts is (once again) banning BlackBerry from operating in Indonesia. Via the Jakarta Post:

The Indonesian Telecommunication Regulation Body (BRTI) says that it may have to end the BlackBerry Messenger (BBM) service on all BlackBerry after the smartphone’s manufacturer, Research In Motion (RIM), opted to build a server in Singapore rather than in Indonesia.

“Because RIM has not been cooperative, it is possible that we will soon end BIS (BlackBerry Internet Service) and BBM service. BlackBerry therefore, would just be like other cellular phones,” BRTI member Heru Sutadi told The Jakarta Post on Friday.

The Indonesian government claims that, aside from the usual national security request, RIM indicated that it would build the server in Indonesia before its act of info-treachery:

In September, RIM made a commitment with the government to carry out four agreements by Dec. 31. One of the agreements called for the establishment of a server or a data center. Although the agreement did not specify where the server would be built, the government felt that RIM should make Indonesia a priority as it was home to the most BlackBerry users in Southeast Asia, far exceeding the number of users in Singapore.

The government’s insistence on having a server built in the country was mainly due to security reasons, Heru said. Currently, all data exchanged through the BIS and BBM is processed in Canada, the home of RIM, which makes it impossible for the government to monitor and protect data sent by its millions of Indonesian users.

“With the condition as it is now, we warn that the country’s users to be cautious about using BlackBerry because the data exchanged is not safe or cannot be guaranteed of its safety,” he said.

While the idea that Indonesian users are more at risk now that RIM servers are in Singapore than they were before when the servers were in Canada is risible, I remain a believer that information flows within a nation remain a state's prerogative despite insipid notions to the contrary. Insofar as we haven't moved past notions of state sovereignty to something akin to world government, firms must play by national rules for better or worse.

To be sure, the longstanding presence of active separatist movements and terrorist groups may make Indonesia more legitimately entitled in raising information security concerns. It's too bad that Indonesia appears to want punishing RIM for commercial reasons as well. But, it's a price you have to pay in a world where extraterritoriality does not apply.

Singapore's Fat-Fighting Tool: Military Conscription

2011-12-29T08:10:00.024Z

Given its sheer girth, the globalization of American-style obesity is not a problem you can sit on and forget about. Industrialized countries already burdened with sizeable health and pensions obligations may, in all likelihood, be underestimating this weighty problem as their citizens become US-huge and encounter all sorts of related problems. Aside from the aesthetic pitfalls of being a nation of fatties, there is an all-you-can-eat buffet of illnesses associated with mega-tubbiness.

Venerable medical journal The Lancet recently featured a series of alarming studies about the consequences of what medical types call "obesogenic" cultures--of which the United States is the prime (rib?) example with forecasts predicting that half of all Yanks will be obese by 2030. Which is not much of a stretch given that over a third of them already are obese. Definitely, health is a very understudied issue in IPE and this gap should be addressed since the health of nations will certainly shape patterns of national indebtedness. A study out of Emory estimates that obesity-related costs for the US will amount to $344B by 2018--about 21% of a gargantuan health care tab. For several nations, health care is the largest line item in the national budget and will only become more so given their aging populations.

Certainly the likes of the United States ought to concern themselves more with their cellulite-superindebtedness complex than their military-industrial one. American indiscipline is a multifaceted construct, with their legendary fiscal depravity combined with physical inactivity and unprecedented gluttony resulting in a health crisis that turbocharges the national debt via endlessly mounting health care costs. Perhaps it's in the genes, though I hope that's not the case.

Such despair. It's depressing enough to make a Yank down a milkshake or twenty. Is there any way out of this bottomless American-style debts 'n' fats trap? Thankfully, there is. Just as Singapore shows the potential way forward for the intensely wasteful and mediocre US education system, so does its lesser known fat-fighting tool of military conscription show a way out. To be sure, many other industrialized countries also have mandatory national service. However, Singapore alone makes it a continuing exercise apart from a few months to a year in your late teens / early twenties. You see, Singaporean males need to devote a couple of weeks each year after completing basic training to military drills. Further, they need to undertake fairly strenuous tests annually to prove their worth lest they be sent off to boot camp indefinitely until they pass. From the Singaporean Ministry of Defence website comes this description:

All PES A, B and C1 active NSmen [national servicemen or "reservists" which include practically all younger Singaporeans] below the age of 45 years for Officers and 40 years for Warrant Officers & below are required to take the IPPT [Individual Physical Proficiency Test] annually. All IPPT eligible NSmen must attempt IPPT once within their IPPT year. They may attempt IPPT during or outside their ICT [in-camp training] and may make as many attempts as they want to improve their IPPT results. The best result achieved will be taken as the record for the IPPT year.

Make no mistake: the IPPT is no wussy exercise, either:

As frontline soldiers, it is essential for all NSmen to maintain physical fitness. The IPPT is designed to test the basic components of physical fitness and motor skills of the NSmen. It comprises the following tests (see diagram below):

Test Item	Fitness Component(s)
Sit-Up	Abdominal muscular strength and endurance
Standing Broad Jump	Lower limbs extensor muscular power
Chin-up	Upper limbs muscular strength and endurance
4 * 10m Shuttle Run	General speed, agility and co-ordination
2.4Km Run	Cardio-respiratory endurance and lower limbs muscular endurance

Your typical sofa-ridden, iPad-fondling Yankee would probably keel over after a 0.24 km run [lotsa wheezing in the background], but that would be no surprise. As I like to say, there are good reasons why even (unbiased) Americans take the example of a society that works rather than one that doesn't--and hasn't for a very long time now. In the case of Singapore, there's a strong incentive to stay fit or face pretty negative consequences. There's no subtle "nudge"-style nannying here. It's so un-American--being practically forced to stay fit, but hey, just see how fat land is faring to see what their indiscipline has resulted in.

Singaporean children are quite a fit bunch, then they have years of military training to keep things that way. While obesity rates have inched up in recent years, they are far from American levels and haven't gone unnoticed. There are noticeable government efforts to fight the fat. To be sure, there too are whingers who would rather park themselves on the La-Z-Boy and fondle the iPad in Singapore. One justification for doing away with the practice is lost economic productivity:

Military service works this way: At 18 all youths have to report for a two-year stint, followed by 10 years of reservist duty, potentially frontline troops in the event of war. The reservists are recalled for annual in-camp training or military exercises, which last one or two weeks. The government has done much to recognise the sacrifice of NS men, giving perks that range from tax incentives to higher savings top-ups and fee discounts. The civil service also offers a slightly higher salary scale for employees who have completed their service.

With Singaporeans facing growing competition from foreign workers, however, national service has become a strain when bosses pass them over in favour of permanent residents (PRs) because of their “cumbersome” reservist duties. Singaporean employers who have gone through it are generally more ready to employ reservists, but foreign companies often feel no such responsibility. They often turn away locals who are still doing reservist duty, preferring to hire foreigners or PRs, who are free of the obligation...

Recently, a fresh Singaporean 26-year-old graduate related his interview at a foreign-owned fabrication plant here. The first question the Taiwanese manager asked him was: “I see you are a Singaporean. Do you need to go back to serve NS every year?” When he replied that he had to report back for in-camp training every year, the manager reacted negatively, observing that reservists who failed fitness tests would need to train until they passed.

Ah, "economics"--the last refuge of a modern-day scoundrel. From talking to folks from Singapore, however, I gather that the couch potatoes are outnumbered (though this assertion can definitely be subject to surveys). Certainly there's no mass movement at present to do away with the practice. Aside from escaping the tedium of office slaving, many young Singaporeans actually look forward to spending some time away with their school buddies. Add in the benefits of camaraderie and fitness and the equation should be clear. Moreover, Singaporeans take their training seriously and are rewarded accordingly. Unlike many other countries' mandatory services, it is possible to become a pilot or suchlike as NSMen.

So yes, it's not only military conscription but also the way the programme is designed with strong disincentives to becoming American-sized at work here. Execution matters. As in so many other things, Singaporeans take pride in their accomplishments and don't tolerate Bart Simpson-esque brattiness which contemporary America is renowned for. While they may be smugly self-superior sometimes, they achieve things the likes of which bumbling America can only dream of nowadays. As a basis of comparison, that Charles "Guantanamo Ghraiber" Graner remains the world's best known US reservist tells you something.

As I said, indiscipline manifests itself in so many ways, but in the end such pathologies are reflective of the societies from whence they came. Anyone else want to end up with American obesity rates? No? That's what I thought.

Like Japan's, I Wish My Gov't Held RMB Bonds

2011-12-27T14:09:00.013Z

This holiday season has been quite active on the IPE front; enough to keep me on my toes. No sooner did some journalists pooh-pooh China's attempts to revitalize the yuan and I too cast doubt on Arvind Subramanian's idea that the yuan would become the world's dominant currency by 2021 that we come across news that China is redoubling its efforts in internationalizing its currency. They are small moves, yes, but this pattern of gradual experimentation should not be dismissed. After all, this formula appears to have taken China from its pre-1979 state to being the world's second largest economy outright.

In any event, the main headline of the hour is of the Japanese PM Yoshihiko Noda travelling to Beijing over Christmas and signing up to an agreement to use renminbi and yen more extensively in the two countries' trade and investment relations as opposed to the US dollar with its built-in depreciation feature for those dumb enough to traffic in that riffraff:

The two Asian economies said that they wanted to reduce costs and risks for their companies – an implicit call for less reliance on the dollar, which is currently their predominant medium of exchange.

Analysts said the agreement could help boost the renminbi’s role in Asia and internationally but that it was only one of the many tiny steps that Beijing has taken to elevate its currency’s status and that the dollar’s position as the world’s premiere reserve currency was safe for now.

That said, there are substantial issues concerning where the likes of Japan can park their RMB given that China's capital account is closed:

The key obstacle to promoting such trade has been China’s reluctance to relax controls on its capital account, meaning that foreign companies that receive its currency have nowhere to invest it apart from the offshore renminbi base of Hong Kong.

Liang Meng, a researcher with the People’s Bank of China, acknowledged that the vow to settle more trade in renminbi would by itself change little. “It’s not like the unimpeded global flows of the dollar. To invest in China, you still have to go through intermediary channels,” he said in the commerce ministry’s newspaper.

Unfortunately alike many others Uncle Sam makes miserable, my country's forex reserves are held mostly in dollars, rendering Treasuries' "store of value" a running gag America plays at the expense of other nations including its so-called friends. (And with a friend like Sammy...) So it comes as a bit of a surprise that erstwhile staunch US "ally" Japan is now trumpeting how it is accumulating PRC sovereign debt--starting with $10 billion worth of real securities instead of helicopter-dropped American pieces of paper:

Japan also sought to downplay its plan to purchase up to $10bn of Chinese government bonds. An unnamed Japanese official was quoted in Chinese media as saying that this was an expression of economic co-operation, not an attempt at diversification of its foreign exchange reserves. [Yeah sure, and I'm sure they're firm believers in "strong dollar" policy too (nudge, nudge, wink, wink).]

Over the past five days, China has also signed currency agreements with Thailand and Pakistan, opening bilateral swap lines worth Rmb70bn and Rmb10bn, respectively. “These are all little parts of the bigger picture of trying to internationalise the renminbi,” said Ken Peng, an economist with BNP Paribas.

So much for that TPP feint. Made to choose between closer economic ties between the US and China, Japan sensibly goes for the rising power. As Depeche Mode once noted, everything counts in large amounts in moving towards a non-dollar centric world. The handshake seals the contract; from the contract there's no turning back. etc. I believe it's time others in the region copied Japan's example and made similar goodwill visits to Beijing--where the money is nowadays--to procure reserves denominated in real (RMB), not play (USD) money.

That settles it; my New Year's resolution is to petition our central bank authorities to swap dollar-denominated detritus in our reserves for the people's money. If there's something that unites all persons, it's the wish that they not be shafted time and again by the likes of helicopter droppers, liars by profession, and mathlexics.

UPDATE: The WSJ has more on the mechanics of this trade. As anyone who has traded forex knows, all basic exchange rates (USD/RMB, GBP/USD, etc.) must have the dollar in there somewhere, making it obligatory to transact by referencing USD. However, the Japan-China deal aims to bypass having to deal with dollars altogether:

[...]China and Japan announced a series of deals that promote the use of the yuan in trade and investment between the world's second- and third-largest economies, which would limit somewhat the use of the dollar in Asia, the world's fastest growing region. Specifically, the two countries agreed to promote direct yuan-yen trade, rather than converting their currencies first to dollars, and also for Japan to hold yuan in its foreign-exchange reserves, which are now largely denominated in dollars.

Also notable is how Hong Kong, the entrepot chosen for yuan liberalization, is becoming even more of a hub for currency exchange due to China making it an offshore centre for the RMB:

So far, China has taken some incremental steps toward setting the yuan free. Hong Kong, the only place outside mainland China where the yuan can trade freely, has become the world's fastest-growing currency market in the world.

Nearly a tenth of all trade with the PRC is now settled in RMB compared to nearly nothing the year before:

The most significant measure China has taken so far is allowing cross-border trade to be invoiced and paid in its currency. Yuan-settled trade now accounts for about 10% of China's total trade, compared with less than 1% a year ago. Analysts at Deutsche Bank AG predict that yuan-settled trade would amount to 3.7 trillion yuan next year, or 15% of China's total trade.

So the RMB really is gaining substantial ground, unbeknownst to many.

2012 EU Carbon Tax on Airlines: US, China Whine

2011-12-26T09:38:00.007Z

For some strange reason, the end of the year--especially between Christmas and New Year--is an especially busy one for trade matters. Sometime ago I discussed how Airbus was in danger of losing aircraft orders due to China being wary of impending EU regulations subjecting even foreign airlines to EU carbon limits under the Emissions Trading System (ETS). If you're unfamiliar with it, PriceWaterhouseCoopers has a neat summary as it applies to airlines. At the start of 2012, these emissions laws will come into effect. North American airlines mounted a challenge recently, but were not entertained by the European legal powers-that-be:

The European Court of Justice threw out Wednesday a case brought by north American airlines against a new EU system charging airlines for carbon emissions. European Union law "including aviation activities in the EU's emissions trading scheme is valid," said judges in a ruling which tees up US reprisals threatened by Secretary of State Hillary Clinton.

The EU is to include all airlines in its Emissions Trading System (ETS), used to charge industries such as oil refineries, power stations and steel works for CO2 emissions as part of Europe's efforts against climate change. Furious US, Canadian and other carriers say their inclusion violates international aviation pacts, but the European Commission said following the ruling that the ETS would enter force as scheduled on January 1.

Under the scheme, airlines would have to pay for 15 percent of the polluting rights accorded to them, the figure rising to 18 percent in 2013-2020. "Application of the emissions trading scheme to aviation infringes neither the principles of customary international law at issue nor the Open Skies Agreement" across the Atlantic [improving access of foreign carriers to European airports], the court decided.

"It is only if the operators of such aircraft choose to operate a commercial air route arriving at or departing from an airport situated in the EU that they are subject to the emissions trading scheme," it added. As a result of this choice, the EU system "infringes neither the principle of territoriality nor the sovereignty of third states, since the scheme is applicable to the operators only when their aircraft are physically in the territory of one of the member states of the EU."

Let's say the EU has rubbed virtually everyone else the wrong way on the matter:

In a letter to EU officials dated December 16, Clinton listed 43 nations from Argentina to Russia to Venezuela also opposed to the EU move. "Halt or, at a minimum, delay or suspend application of this directive," she wrote. "Re-engage with the rest of the world. "The United States stands ready to engage in such an effort. Absent such willingness on the part of the EU, we will be compelled to take appropriate action."

The US House of Representatives passed a bill in October directing the US government to forbid US carriers to take part "in any emissions trading scheme unilaterally established by the European Union."

The (increasingly air travel-happy) Chinese, once more, are particularly aggrieved judging from the reports emanating from our favourite official news agency, which is talking about "trade war"--the aforementioned Airbus incident notwithstanding:

Beijing criticized a decision by Europe's highest court to allow airlines to be charged for carbon emissions on flights to and from the European Union, with state media warning on Thursday it could spark a trade spat and the foreign ministry urging talks.

"This is a trade barrier in the name of environmental protection and will strike a wide blow to passenger benefits and the international airline industry," the state-run Xinhua News Agency said in a commentary. "It will be difficult to avoid a trade war focused on an aviation 'carbon tax'," said Xinhua, whose editorials generally reflect the official government position.

My take is that the law disadvantages non-European airlines proportionately more given that their originating or destination airports are usually farther afield than those which mostly ply their trade in Europe itself.

Also, the EU Court of Justice ruling that US & PRC complaints fail to pass muster since their airlines choose to fly to European destinations and aren't being "forced" to do so is far from unchallengeable. The famous precedent of the tuna-dolphin case comes to mind. Ironically, the US was ruled against by the GATT for "extraterritoriality" or forcing others wishing to sell tuna products in the US to comply with domestic American law protecting dolphins from being caught in tuna nets via the Marine Mammal Protection Act. In the carbon tax matter, the EU takes the role of the US in foisting its carbon tax law on international airlines--particularly those of the bellyaching US and China.

Is it protectionism in disguise as the Chinese suggest? Again, the law applies to all airlines--although international ones will likely have to pony up more per flight on average given that they fly greater distances than those that operate mostly in Europe. However, the tuna-dolphin case sets a precedent which may work in the United States' favour this time around over the application of domestic law internationally via the notion of "extraterritoriality."

Hence, I would not be surprised to see the US and China filing complaints at the WTO next year against the EU. Fancy that; the US and China being on the same side of a trade issue in 2012.

Bid the EUR Adieu, Re-Enter PTE, ITL, GRD, ESP?

2011-12-25T07:27:00.015Z

Respectively, those are the symbols for the (currently) defunct Portugese escudo, Italian lira, Greek drachma and Spanish peseta.

The most financially morbid article of 2011 comes from the Wall Street Journal. While we still await the killing off of the euro predicted by the FT's Wolfgang Munchau, EMU hater (more later), it appears that major European banks have wasted no time in paving the way for the return of the alphabet soup of currencies the continent had back in the day. The debate on whether benefits of a single currency outweigh those of having multiple currencies that can be debased at a whim--and which the likes of Italy did constantly--rages on. However, more forward-looking financial services providers are more interested in the practicalities of resurrecting these left for dead monies:

As the euro-zone debt crisis intensified in recent months, at least two global banks took steps to install back-up technology systems that could handle trades in old European currencies like drachmas, escudos and lire. That, the banks quickly found, is not so easy in a financial world that is trying to both exhibit confidence in the ailing euro and—just in case—plan for its possible demise.

Technology managers at the banks contacted Swift, the Belgium-based consortium that manages the network used in financial transactions [the interbank transfer folks familiar to those who've sent money abroad], said people familiar with the matter. The banks wanted Swift's technology support and the currency codes that would be necessary to set up the backup systems.

But Swift declined to provide some information for such contingency planning, including whether old codes could be used in the system, said the people familiar with the matter. That is partly because officials there feared that releasing the information could fuel further doubts and instability in the euro zone, these people said.

Those euro-wrecking Brits--with a large share of their economy in financial services--have been particularly active anticipating the endgame. There are even plans to repatriate UK citizens from these countries [!] if push comes to shove. (Remember the mini-fiasco of Brits stranded on the continent after the Icelandic volcano explosion grounded so many flights.) Anyway...

Nevertheless, governments, finance firms and corporations have been quietly stepping up plans in the past several weeks to prepare for a worst-case scenario. The Financial Services Authority, the U.K.'s bank watchdog, has sent letters to the country's major banks asking for updates on their level of preparedness, and a similar dialogue has begun between banks and regulators in the U.S. in recent weeks, said the people familiar with the matter.

The U.K. Foreign Office has begun making contingency plans to evacuate U.K. residents from Spain and Portugal in the case of bank meltdowns in those countries, said a person familiar with the matter. In a sign of concern over stirring panic, a spokesman was tight-lipped about details apart to say that office is always preparing for all types of scenarios.

And, of course, there is talk of setting up the infrastructure to revive old currencies that most thought left us for the Great Bank Vault in the Sky:

Currencies have three letter codes—such as USD for U.S. dollars—that banks use in a wide range of financial transactions, from complex investment-banking trades to the basic transfer of money. The codes are set by the Geneva-based International Standards Organization, and used by Swift, which is a co-operative company that formats and sends payment orders for some 10,000 firms in more than 200 countries.

One question banks have, and have not been able to clarify, is whether codes for now-defunct currencies, such as GRD for the Greek drachma, will be valid in the current Swift system. A Swift spokesman said the company is ready to take whatever actions are required to maintain normal operations, but that "it is not appropriate this time for Swift to comment on issues specifically associated with the euro zone."

If a new currency emerges, it is handled by a maintenance agency affiliated with the International Standards Organization. A spokesman for that agency, SIX Interbank Clearing Ltd., said the agency has several projects looking at "dire scenarios" but the contingency plans for such scenarios have so far remained confidential.

Once a bank knows what the code is, it is relatively simple to set up a program for that new currency, according to technology experts. The bank must then tweak its infrastructure for expected volume and ensure data for counter-party banks are correct. Systems must then be modified and tested, said a technology executive at a bank in London, a process which takes one to two weeks.

As I said, it's very financially morbid, but planning ahead dictates thinking about the endgame no matter what.

Your Top Migration Stories of 2011

2011-12-23T16:42:00.008Z

The Migration Information Source lists its top migration stories for 2011. You have the usual xenophobia. But, the main themes are evenly split between human security issues involving unstable Middle East states and economic migrants fleeing economic, not combat, warzones in traditional migrant-receiving nations that have seen better times in search for greener pastures in faster-growing developing countries--some of which they left in the first place. Things change, my dear:

1.	Arab Spring and Fear of Migrant Surge Expose Rift in EU Immigration Policy Circles - The Arab Spring exposed critical weaknesses and exacerbated long-held disagreements within the European Union related to asylum, immigration, and external border control policy matters that spilled over into the operation of the Schengen area.
2.	Economic Malaise Makes Immigrants a Target for Restrictive Legislation, Public Backlash - With unemployment rates remaining persistently high in the wake of the global economic crisis, ongoing turbulence in financial markets, and new austerity in public spending, anxious publics and governments trained their attention on immigration and immigrants during 2011.
3.	Immigration in the United States and Parts of Europe Gives Way to Increased Emigration - Immigration flows this year continued to respond sharply to the economic climate in major immigrant-receiving nations, as many people struggled to gain a labor market foothold in the aftermath of the global economic meltdown.
4.	Highly Skilled Migrants Seek New Destinations as Global Growth Shifts to Emerging Economies - Developing nations that were once primarily migrant-sending states are now experiencing a boom that is beginning to increase their attractiveness for highly educated and highly skilled migrants and beckoning their diaspora members home.
5.	Substantial Investments to Court Diaspora Entrepreneurs for Development Gains - With the goal of building and sustaining economic growth in mind, some countries have intensified their efforts to court investments from their nationals and co-ethnics abroad, recognizing that diaspora entrepreneurs are uniquely positioned to spot opportunities in their countries of origin and capitalize on them.
6.	Heading into the 2012 Elections, Republican Presidential Candidates Walk the Immigration Policy Tightrope - The debate season is well underway for the Republican presidential primary races in the United States, and immigration has once again emerged as a highly contentious policy issue.
7.	Immigrant Detention under Scrutiny in Australia, United Kingdom, and United States - Public backlash against the detention systems of Australia, the United Kingdom, and the United States mounted in 2011with allegations of unacceptable living conditions, abuse, prolonged detention, and government waste.
8.	The Arab Spring and Other Crises in Africa Displace More Than 1 Million People - The succession of displacement and refugee crises arising from the Arab Spring and in Côte d'Ivoire, Somalia, and Sudan highlighted the need for governments and the international community to achieve and maintain readiness to manage population movements triggered by sociopolitical unrest and environmental factors.
9.	A Decade after 9/11, Enforcement Focus Prevails in the United States; Broader Immigration Reforms Remain Stalled - As the United States paused in September to mark the tenth anniversary of the 9/11 attacks, the enforcement paradigm that took hold immediately after the terrorist attacks showed no signs of waning.
10.	Caught between Two Migration Realities, Mexico Passes New Immigration Legislation - In April 2011, the Mexican Congress unanimously approved an ambitious new migration law that sets out to address longstanding problems related to the immigration and transmigration of Central Americans and the emigration and return migration of Mexicans.

Filipino Migrant Workers & Middle East Crossfire

2011-12-23T16:15:00.006Z

What is the responsibility of a migrant-sending nation to its people overseas during times of trouble o'er yonder? I suppose it depends on the level of encouragement that the nation in question provides to finding work abroad. In the case of the Philippines with its substantial state infrastructure for helping its citizens find work overseas, perhaps a larger burden of ensuring safety when push comes to shove is placed on the government. insofar as the government is seen as a promoter of large-scale migration, its obligations are more extensive. Hence the constantly depressing coverage of seafarers picked off by pirates in the Gulf of Aden.

Additionally, something striking has been how overseas Filipino workers manage to find themselves caught in virtually every shakeout in the Middle East in recent years. You name it: Lebanon in 2006; Egypt and Libya in 2011...and this year ain't over yet. Compared to those conflagrations, the situation in Syria has been protracted:

The Philippines on Thursday offered to fly its 5,000 citizens in Syria home for free as it again urged them to leave immediately to escape escalating violence, the foreign department said. Foreign Secretary Albert del Rosario said the government would help all Filipinos arrange passage out of the Middle East country, which has been torn by deadly protests against President Bashar al-Assad's regime.

"In view of the escalating violence in Syria, the Department of Foreign Affairs will be raising alert level 4 for the entire country of Syria effective today," he said in a statement. That alert status meant all Filipinos would be repatriated at Philippine government expense, the ministry said.

Yet, alike in those other countries, the notable thing is how these workers are ambivalent about evacuating the strife-hit Syria even when offered a ticket home by the Philippine government. If the pay is relatively good and your workplace is not in the direct line of fire, some may think "Why go?" Once you head home, there is no guarantee that you will be able to find your way back.

'Nature's Banker' on Proper Environment Valuation

2011-12-21T08:06:00.008Z

A few months ago Pavan Sukhdev delivered a very interesting talk at the LSE concerning 'The Economics of Ecosystems and Diversity' that brought home the point for me that resource finitude and non-renewability violate economic logic. That is, the dismal science of allocating scarce resources did not, on a global level, consider this question to the extent that it should.

I subsequently got in touch with Pavan Sukhdev concerning some aspect of his G8-commissioned project since it seemed very fascinating to me. It now turns out that our good man has garnered more of the spotlight as of late. Just today, I received a holiday greeting from him that mentioned how he had recently appeared at the TED conference. Although I am not the biggest fan of the TED shindig, it is nonetheless a good way for him to reach a larger audience with his important message.

What is the value of nature? Can you put a dollar value on the Amazon rainforests' environmental services? How about bee pollination? These are the sorts of questions we need to look at more according to him, and I am in total agreement.

At this point in world history, we really should be better stewards of the earth or 'natural capital' in the lingo. Properly valuing the externalities of environmental abuse is a really good starting point to know just what we have lost and may lose more of if we don't change our ways.

Game Over, America: RMB Eclipses $ by 2021

2011-12-18T08:14:00.001Z

Or so someone now says. Publicity-seeking economic commentators like making bold predictions that sometimes cause them to lose face. Alike various doomsday cult pronouncements that the world will come to an end at a certain date, there is no hiding from being discredited when giving certain dates for things to pass since you can't obviously weasel your way out of them. When you make a public pronouncement, it's on the record. For instance, Wolfgang Munchau is probably eating humble pie at the moment after his 7 December deadline for the euro's abolition came and went with nary a whimper. We're still waiting, bub.

I bring this up because Peterson IIE stalwart Arvind Subramanian makes similarly bold claims about China. More specifically, he takes a look at various economic indicators, extrapolates from them, and argues that 2021 will be the date when the world's most systemically important currency will be the yuan and not the dollar. Along the way, he looks at the rise and fall of eras of British (Pax Britannia) and American (Pax America) dominance and believes that China's rise is more imminent than most believe. Certainly others have made such predictions before--especially more political-economic types alike LSE IDEAS' erstwhile Senior Fellow Martin Jacques. However, Subramanian's take is potential unique in that he is an economist looking at marco data to make similar arguments--and sets a date to boot.

While it is true that linearly predicting China's economic progress based on recent years' performance should lead you to believe that America's eclipse is imminent, others would beg to differ. Certainly the US is going nowhere. With its "new normal" annual rate of growth between 1-2%, it surely isn't keeping up the pace to maintain a decent lead, compelling certain USA#1 cheerleaders to shift the goalposts of the seemingly inevitable American eclipse. The American has-beens may try to portray themselves as the still-ises, but the numbers certainly indicate otherwise.

At any rate, do catch Subramanian's new book on Eclipse: Living in the Shadow of China’s Economic Dominance. What follows is the press blurb to accompany the clip above:

In his new book, Arvind Subramanian presents the following possibilities: What if, contrary to common belief, China's economic dominance is a present-day reality rather than a faraway possibility? What if the renminbi's takeover of the dollar as the world's reserve currency is not decades, but mere years, away? And what if the United States's economic pre-eminence is not, as many economists and policymakers would like to believe, in its own hands, but China's to determine?

Subramanian's analysis is based on a new index of economic dominance grounded in a historical perspective. His examination makes use of real-world examples, comparing China's rise with the past hegemonies of Great Britain and the United States. His attempt to quantify and project economic and currency dominance leads him to the conclusion that China's dominance is not only more imminent, but also broader in scope, and much larger in magnitude, than is currently imagined. He explores the profound effect this might have on the United States, as well as on the global financial and trade system. Subramanian concludes with a series of policy proposals for other nations to reconcile China's rise with continued openness in the global economic order, and to insure against China becoming a malign hegemon.

I certainly think the RMB will become a major world currency. Perhaps it can even help stabilize what Robert Gilpin calls the non-system of flexible exchange rates that has made the world economy lurch from crisis to crisis more frequently given the lack of American stewardship. But, my inclination is to believe that it will be more important in Asia than in the rest of the world as it evolves to being more multipolar than unipolar. That is, while China may surpass the United States in terms of nominal GDP, trade and other indicators, but it probably will not aspire to global hegemony as it so often indicates in an echo of its Communist past. Pax Sinica? The Chinese may eventually become able to take up the lead in the international monetary system, but will they be willing? (As a counterpoint, the US too was reluctant to take up such a role in WWII's aftermath, so you never know.)

Manifold Destiny: PRC Slaps Tariffs On US Autos

2011-12-16T05:44:00.015Z

You can say that eventual trade war is written in the stars above between the world's two largest nations, though here's another example of a skirmish testing the waters. There I was enjoying the holiday season, watching A Charlie Brown Christmas for the nth time when the Yahoo! front page news item from Forbes caught my eye about how "China Gets Revenge On Obama With Tariff On US Autos." The first few lines provide the gist of the PRC argument against alleged US subsidies to the automotive industry:

President Barack Obama hit China automobile tire makers with a trade tariff in 2009 and now Beijing has struck back with a potentially more punitive tariff, as much as a 21% tax hike on U.S. car exports bound for China, the world’s largest auto market.

This week, the Chinese government upped the ante in the Obama-China trade dispute by surprisingly imposing new tariffs on imports of Honda and Cadillac models, Chrysler Jeep Grand Cherokee, the BMW X5 and X3 and Mercedes Benz models made in Michigan, Alabama and South Carolina. China argues that the U.S. provided illegal subsidies to these companies during the economic downturn in 2008 and is selling those vehicles cheaper in China than they are sold for in the U.S.

Tire-car metonymy aside, it seems odd to me why China would retaliate directly in response over tariffs on China-made tires given the time lag and the relatively small volume of such tires being sold in the US. To be sure, the proportion of affected American automobiles affected by this new ruling--those with engines larger than 2.5 litres displacement--will be relatively small as well. More pertinently, the Chinese should have a job on their hands proving that 'transplants' or US-made cars from foreign brands alike the aforementioned Honda, BMW and Mercedes-Benz (ML series) benefited from government subsidies during the Great Recession.

Yes, Chrysler and General Motors received substantial, money-losing state support to keep them alive during the recent recession. However, the case is not clear with regard to the transplants. It is true, for instance, that the state of Alabama gave Mercedes a hefty $300M worth of subsidies to locate its SUV plant there, but that was in 1994, not 2008. Though the states and incentives in question vary, the other transplants like BMW also chose to locate in the (largely union-free) American South during the Nineties and not in the aftermath of the subprime crisis.

In addition to subsidy claims, the New York Times' Keith Bradsher notes that the Chinese are oddly making dumping claims given that these cars sell for much more in China than in the US after all levies are accounted for:

The new tariffs, totaling up to nearly 22 percent of the import prices, will probably have a mainly symbolic function, rather than reducing the already skimpy sales of such vehicles in China. Other tariffs and taxes already in place have limited sales of American imports by helping raise their retail prices by about three times what the same cars and S.U.V.’s sell for in the United States. [my emphasis]

The new tariffs China imposed Wednesday will be antidumping duties of 8.9 percent for G.M. vehicles, 8.8 percent for Chrysler, 2.7 percent for Daimler and 2 percent for BMW. The ministry separately imposed additional antisubsidy [countervailing] duties of 12.9 percent for G.M. and 6.2 percent for Chrysler.

Is it the United States manifold destiny [no sic] to take China to the WTO over this action? That the US is hardly a saint on the matter of propping up its automakers is evident. Hence, the subsidy claims against GM and Chrysler probably pass muster. However, the dumping claims are quite far-fetched IMHO given how much these types of US-made vehicles sell for in China. Still, the PRC is adamant that their actions will hold up even if the US takes the WTO litigation route. Chinese Commerce Minister Chen Deming added the following:

"China according to WTO rules ... conducted in an open manner and rule-based manner investigations into US car imports in China and decided to impose anti-dumping and countervailing measures," he said. "This is in line with WTO rules and not a form of protectionism...[i]f anyone begs to differ, the best solution is to ask the WTO experts to rule," said Chen, adding that China will respect the trade watchdog's verdict.

The pile-up of US cases against China in tires, chickens and solar panels probably made China hurry up with a retaliatory measure to make the larger point that the US is not Mr. Clean, either. However, singling out the big-engine American automobile import sector minimizes the domestic political cost of making this point by angering more price-insensitive luxury brand buyers instead of Jiang Average:

Wednesday's announcement came amid Chinese anger over a U.S. investigation into whether China unfairly subsidizes its solar panel makers. But China's previous experience with trade disputes have taught its officials the lesson that American firms can be allies in opening American markets. In recent years, the U.S. poultry industry lobbied actively against a Congressional ban on negotiating with China to import Chinese cooked chicken -- imposed after Chinese food safety scandals -- because they feared losing the lucrative Chinese market for chicken feet.

China's choice of targets is limited by its reluctance to alienate Chinese consumers with higher prices for imported foodstuffs or raw materials. The value of soy and oilseeds imports from America so far this year is triple that of cars, at about $12 billion. Making imported cotton, chemicals or grains more expensive would also only contribute to inflation in China.

Imported cars, however, appeal mainly to China's wealthiest consumers, who aren't very price sensitive to begin with.

China has laid the gauntlet down by practically daring the US to take it to WTO dispute settlement.

Holy Guacamole, Russia Finally Joins WTO Today!

2011-12-16T05:42:00.002Z

Yikes, it's finally happening: While the WTO ministerial meetings will almost certainly result in nothing substantial, Russia's road to WTO accession is finally over. As you've gathered through my posts over the years, it's been a long, circuitous process [1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11]. In latter times, the requirement that all WTO members assent to Russian membership has been delayed by Georgia naturally feeling aggrieved over border quarrels with Russia over breakaway provinces Abkhazia and South Ossetia. Think of being unfree to conduct trade with parts of your own country due to another's interference and you can begin to appreciate Georgia's apprehension.

Yet all things must come to pass. Tonight, a night to end all nights in the history of trade negotiations, Russia joins the WTO:

Russia is finally set to join the World Trade Organization (WTO) on Friday at a ceremony in Switzerland, after 18 years negotiating its membership. The Swiss brokered a deal between Russia and Georgia earlier this year that removed the last obstacle to Russia's accession. Georgia had tried to block Russia's WTO entry since the two countries fought a short war in 2008. Russia is by far the biggest economy yet to join the global trade body...

The deal with Georgia hinged on international monitoring of trade along the mutual borders of Abkhazia and South Ossetia. The two provinces have broken away from Georgia and are recognised as independent states by Russia. The formal signing ceremony has been added onto the end of a summit on Thursday between President Dmitry Medvedev and European Union officials in Brussels.

For the record, only Algeria's accession process outdoes Russia's in terms of being drawn out:

Russia’s 18-year path to the WTO was almost record-slow, with only Algeria’s negotiations taking longer at the moment. It was also the world’s largest non-member economy. The hurdle was caused by the principle of consensus the organization uses, which means each member can veto its enlargement.

So I suppose congratulations are obligatory all around to Russia, Georgia, Switzerland (brokers of the trade peace deal) and the WTO. The world's 12th largest trading nation will shortly be on board the multilateral institution that claims in its name to concern itself with world trade. May trade help bring peace on Earth and better shopping opportunities to all mankind. This is the Christmas season, after all.

Hey Saint Jude: The Lost Cause of the UK in the EU

2011-12-12T13:54:00.011Z

For non-Catholic readers, the apostle Saint Jude is the patron saint of lost causes. (He too features in a lot of trinkets as a commercial racket arising from this fame). Over the past few days, I've been thinking of him in relation to the plight of Britain in the European Union. For, the strains of UK membership in Europe are appearing once more. From chafing against contributing to the system of agricultural subsidies known as the Common Agricultural Policy to not joining the Eurozone, Britain's independent streak has always rendered it a less than fully fledged member of the EU in the eyes of many.

By now, I am sure that you have heard of how Britain has managed to further marginalize itself by effectively vetoing an EU treaty change that would entail more enforceable limits on the fiscal deficits Eurozone member countries can run. Which, of course, is churlish since the British famously have not adopted euro currency. nor do they intend to join the eurozone for the foreseeable future despite many of the Conservative Party old guard being quite keen. It is thus odd that British PM David Cameron wanted more guarantees on this occasion that the UK would obtain opt-outs on stricter financial regulations which could hurt London's status as a global financial centre since it's not the main agenda.

Among the things the UK vetoed are the following:

a cap of 0.5% of GDP on countries' annual structural deficits
"automatic consequences" for countries whose public deficit exceeds 3% of GDP
a requirement to submit their national budgets to the European Commission, which will have the power to request that they be revised

Again, it's curious that a chronic go-it-aloner would request to do so when it comes to topics that primarily don't concern it. There's also the matter of what happens to EU financial rule-making now with the UK choosing to isolate itself. Consequently, the British will have no say in drawing up EU-wide regulations but may be compelled to accept whatever the other 26 (or 25 if you also exclude the Euroskeptic-led Czech Republic) come up with anyway:

Just as important, the U.K.'s banks are now worried that the ill-will created by Mr. Cameron's stance means the U.K. "won't even have a seat at the table" the next time financial regulations are negotiated under existing rules, said one lobbyist for the City of London.

The Liberal Democratic-Conservative coalition faces a pretty stern test. The Lib Dems are more pro-Europe, with their leader having met his (Spanish) wife while working in Brussels. While he may want to keep them in the coalition for obvious reasons, you have to wonder how they can keep this coalition together in relatively harmonious fashion until the next scheduled election in 2015.

In any event, the party poopers here are easily identified.

Indian Retail: Mom & Pop 1, Wal-Mart 0

2011-12-12T13:26:00.008Z

It's somewhat unimaginable for those in Britain for the corner store to politically outmaneuver the likes of mighty retailing giant Tesco, or for those in America to have the Kwik-E-Mart outfox the likes of massive Wal-Mart. Well, in India at least, it seems the little guys have outdone the international retailers at the lobbying game. For, the government has just shelved plans to allow stores to stock more variegated "multibrand" fare that would have paved the way for international retailers alike Tesco, Wal-Mart and Carrefour to begin plying their trade on a larger scale in India.

Alike in many other Asian countries, the Indian retail scene is highly fragmented with a multitude of small retailers or the archetypal mom-and-pop shops. Selection is limited by national laws discouraging "multibrand" retailers or your conventional supermarket fare. Aside from the inconvenience of multi-stop shopping, prices are also higher for obvious reasons:

The enormity of the Indian retail market has dazzled major corporations: Consulting firm A.T. Kearney, which has been polling companies about global-expansion aspirations for more than a dozen years, said India now ranks only below China on their priority lists, ahead of markets like Brazil and the U.S.

But public opposition to the move in India remains rife. Radha Krishna Store in Bengali Market in central Delhi is typical of the mom-and-pop stores the Indian government wants to protect from big-box retailers like Wal-Mart. The small store's shelves are stacked with items as diverse as shampoos, cooking oils, diapers and milk. Kamlesh Gupta and her husband have been operating the store for 25 years.

If chains like Wal-Mart and Tesco are permitted to operate in India, "everything will be over," Mrs. Gupta said. "If they sell goods cheaper than us, who will come here? Already, we have lost 20% of our business since Big Bazaar and Reliance [local chains] started operating in the last two years," she said, referring to two Indian retailers.

To protect stores like these, Uma Bharti, a leader of the main opposition party, the right-of-center Bharatiya Janata Party, had threatened that she would personally set fire to any Wal-Mart stores if they were allowed to enter India. She said she was prepared to go to prison for it. This party's voting constituency includes small retailers.

The political opposition to loosening the foreign-investment rules ensures that, for now, Wal-Mart's only way to grab a piece of the lucrative market is through a partnership with Bharti Enterprises Ltd. to operate wholesale-style "cash and carry" shops selling bulk items to small-business owners. The joint venture only had nine stores as of the end of October, a minuscule presence for a retail giant with more than 9,000 shops in 28 countries.

Forcing supermarket chains to break up their advantages--economies of scale--to deal with mom-and-pop shops sort of defeats the entire purpose of having them around. I guess their belief is that gaining a foothold is better than having none at all. It's also scary to think that a politician of one of India's main political parties threatens to burn Wal-Mart superstores if they're ever put up. Talk about militancy.

What are the chances for retail liberalization now?

The Indian government's decision to put the proposal for multibrand retailers on ice came also as a blow to Tesco, which along with other British businesses has advocated changing the regulations. Tesco has been unable to open stand-alone retail stores in India and instead operates through a franchise deal with Tata Group unit Trent. "The decision to defer [foreign direct investment] is a missed opportunity for Indian producers, farmers and consumers," Tesco said.

Saloni Nangia, senior vice president and head of retail and consumer goods at Technopak, a consulting firm based in New Delhi, is hopeful that the decision to allow foreign retailers to open supermarkets in India might still happen.

One hopes it will eventually happen for the consumer's benefit, but you never know. Lest you think it's an open-and-shut case of Western imperialism at work here, remember that Indian farmers also lose out from this situation in a major way due to spectacular inefficiencies:

The global chains were likely to invest in trucking and distribution systems in India, where government estimates show 40 percent of fruit and vegetables rot before being sold because of the lack of cold-storage facilities and poor transport infrastructure. Farmers will have “assured business” if foreign companies were allowed to invest in multibrand retail, said Pratichee Kapoor, associate director for retail at Technopak Advisors Pvt...

Rajan Bharti Mittal, managing director of Wal-Mart’s wholesale partner Bharti Enterprises, in a statement yesterday called the government’s reversal an “unfortunate” decision. The policy change would have brought “farmers better realization for their produce as well as better prices for the consumer,” he said.

Let the consumers decide for themselves where to shop, I say. 40% wastage due to poor retail infrastructure is really, really terrible.

CSR in Iran? My Way or the Huawei (Router Mfg)

2011-12-12T10:52:00.006Z

There's an interesting article in the WSJ on the recent pullback of Chinese router manufacturer Huawei from doing business with Iran. Given the perceived willingness of Chinese firms to go where Western MNCs dare not roam due to limitations on investing in certain bogey nations alike (yes) Iran, Myanmar and North Korea, this occurrence is eye-opening at the very least. That is, are even Chinese corporations (with government ties, no less) subject to international pressure regarding Iran's alleged nuclear programme, human rights abuses and so forth?

Chinese telecommunications- equipment maker Huawei Technologies Co. said it will scale back its business in Iran, where the company provides services to government-controlled telecom operators, following reports that Iranian police were using mobile-network technology to track down and arrest dissidents.

Shenzhen-based Huawei will "voluntarily restrict its business development there by no longer seeking new customers and limiting its business activities with existing customers," according to a statement Friday on the company's website. It said the company was making the move due to the "increasingly complex situation in Iran." Company spokesmen declined to elaborate.

The action follows a front-page Wall Street Journal article in October that documented how Huawei's business grew in Iran following a pullback by Western companies after the government's bloody crackdown on its citizens two years ago. Iranian human-rights groups outside Iran say there are dozens of documented cases in which dissidents were traced and arrested through the government's ability to track the location of their cellphones—technology for which Huawei has provided support.

Activists hailed the company's decision, noting it was the first time a major Chinese company had decided to scale back its business in Iran. Until now, Iran has viewed its partnership with Chinese companies as a solid alternative to Western contracts.

"This is a significant milestone," said Mark Wallace, president of United Against Nuclear Iran and a former U.S. ambassador to the United Nations. "For the first time a major Chinese business is pulling back from Iran in the face of mounting international scorn for Iran's brutal regime." The New York-based group had been pressuring Huawei to leave Iran and had been communicating privately with the company for several weeks.

A spokesman for the U.S. State Department said it welcomed Huawei's announcement, adding that the U.S. "calls on all firms to exercise vigilance when doing business with Iran and ensure that any business does not contribute to the Government of Iran's ability to repress its own people."

That's all very well and good, but did the bleeding hearts brigade really persuade Huawei to curtail its activities selling routers to Iran that could help their government identify particularly vocal denizens--or is something else? Well, the article goes on to strongly suggest the latter possibility:

Executives at Huawei's highest levels have been discussing for months whether to scale back in Iran, according to people familiar with the matter. Those discussions gained in intensity in recent weeks, particularly after the Journal article, several people said...

Some Huawei executives in Shenzhen see operations in Iran as jeopardizing expansion opportunities in the U.S. and Europe, where the Chinese company has faced skepticism over its compliance procedures and dealings with countries that have pariah regimes. That was a driving factor behind the decision to dial back operations in Iran, a person familiar with the matter said. The Chinese company has held talks with consultants, lawyers and lobbyists from the U.S. on the issue.

Huawei is probably dialling back operations after finding out that Iran is not as lucrative an opportunity as once thought--or is already an exhausted one. As Jessie J sang, the Chinese don't need so much Iranian (money, money) at this point in time. There's also the matter of Huawei trying to establish a better reputation for itself independent of PRC state policy to consider and all of that protectionist "security"-related BS. Insofar as Huawei perceives US and European markets as being larger opportunities than doing business with Iran, well, let the human rights activists think they're having their "way."

I for one don't buy this story--though I have no qualms about using Huawei's routers instead of Cisco's and saving money in the process.

Multilateralism Ain't Dead: A Climate Deal in Durban

2011-12-11T11:33:00.009Z

Well here's a pleasant surprise: while the fine print remains to be hammered out and non-ratification by the countries concerned remains a distinct possibility, the broad outlines of a multilateral climate deal are in place. While many economics and even IPE blogs do not cover climate change, it is obviously an important and relevant topic since efforts to combat it (a) indirectly place limits on economic activity, (b) shift the relative attractiveness of more- and less-carbon intensive industries and (c) implicate North-South technology transfer in reducing LDC emissions. As my post title intones, there's also the matter of it (d) indicating appetite for multilateral negotiations in general.

Of particular interest it that the world's worst climate offenders, China and the US, have both (tentatively?) assented to having their carbon emissions bound by international law. This result gets around the "if [China; the US] refuses to be involved despite being a major emitter, then why should we?" sort of weaselling out prevalent in the past.

The four elements of the deal are (1) an extension of the Kyoto Protocol, (2) the enabling of a $100B Green Climate Fund to give LDCs technical assistance in reducing GHG emissions, (3) an agreement to make all countries involved sign a deal in 2015 to cut emissions by 2020, and (4) a plan for next year. The first thus concerns Kyoto:

Sunday's deal extends Kyoto, whose first phase of emissions cuts run from 2008 to the end of 2012. The second commitment period will run from January 1 2013 until the end of 2017.

The next one deals with funding and operationalizing the Green Climate Fund I discussed in an earlier post. (However, a proposed tax on trade to contribute to this fund proved unworkable.) Still, you have to wonder if hard-hit industrialized countries are excited about funding it:

Poor nations are most in need of finance to help pay for adapting to global warming and introducing low emission energy and industrial processes. Against the backdrop of a sovereign debt crisis, developed nations are also ill-placed to commit money beyond short-term financing that runs out at the end of next year.

The Durban talks made headway on agreeing the design of Green Climate Fund to channel up to $100 billion a year by 2020 to poorer nations, but achieved little on establishing where the money will come from to fill it. A proposal last week to generate cash from charging international shipping for the carbon emissions it generates faced such opposition it did not survive in the final text [my emphasis].

Then we get to the heart of the matter in the form of a legally binding treaty:

Delegates agreed to start negotiations for a new legally binding treaty to be decided by 2015 and to come into force by 2020. The process for doing so, called the Durban Platform for Enhanced Action, would "develop a new protocol, another legal instrument or agreed outcome with legal force that will be applicable to all Parties to the UN climate convention," under a working group.

The exact nature of what "legal instrument" or "agreed outcome" has not yet been decided. Delegates decided the process towards developing a new legal instrument would "raise levels of ambition" in reducing greenhouse gas emissions.

Lastly, there's ongoing work towards making a "single market" in carbon credits that avoids splintering of the trading activity that could result in "carbon diversion" effects to borrow a phrase from international trade:

Talks agreed to define new market mechanisms under a successor treaty to the Kyoto Protocol, but pushed forward a decision to develop rules for them until next year. Delegates decided the mechanisms would operate under the UNFCCC Conference of the Parties and "bear in mind different circumstances of developed and developing countries."

The EU wants any new market mechanisms to cut greenhouse gas emissions outside of Kyoto anchored in international law, in order to avoid fragmentation of the international carbon market. Parties will now work on developing a framework for new mechanisms over the next 12 months with a view to making recommendations at a summit in Qatar at the end of 2012. The rules must ensure environmental integrity of new markets, seek to avoid double counting and ensure that a net decrease in CO2 emissions is achieved.

What would I prefer, completing the Doha Round or this? I much prefer the latter outcome given the potential consequences of irrevocable climate change as most studies on the subject suggest. It is perhaps with a touch of irony that the next climate shindig (COP 18) will occur in Doha at the end of next year--the tenth anniversary of the launching of the WTO Doha Round.

At the very least, though, it does show that multilateralism is not entirely dead and that there is a growing consensus about the magnitude of the climate problem. While some may quibble with the magnitude of the emissions cuts on the table, the alternative--no deal--would have left us with a greater distance to a meaningful bargain.

Obama, Bushite Climate Obstructionist or Hero?

2011-12-08T11:58:00.002Z

It's Christmastime, there's no need to be afraid...or is there? One thing for sure is that there will be no snow in Africa this Christmas. Or maybe even a partial deal on combating global warming, for that matter. For the third year running, the end-of-year multilateral agenda is dominated by climate change given that the WTO Doha Development Agenda is in limbo. One of the difficulties with the ongoing meeting in Durban, South Africa concerns establishing a Green Climate Fund. It is meant to, well, fund technology transfer from developed to developing nations for combating climate change. Supposedly, the Durban shindig was to finalize the format of the Green Climate Fund:

[T]he Transitional Committee shall develop and recommend for approval to the COP at its 17th session to be held in Durban, South Africa, from 28 November to 9 December 2011, a number of operational documents for the Green Climate Fund. In the conduct of its work, the COP requested the Transitional Committee to encourage input from all Parties and from relevant international organizations and observers.

To make a long story short, let's just say this is not happening at the moment. The big disagreement, you will not be surprised, concerns how much developed countries are willing to put in towards the establishment of this fund. Love them or hate them, the Yanks still hold many of the cards as to whether such a fund will come into existence:

A flagship green climate fund aimed at channelling billions of dollars to help poor countries tackle global warming has been put on ice at the Durban climate summit as a growing number of countries bicker over how it should work.

Wealthy countries have promised to mobilise up to $100bn a year by 2020 to help developing countries tackle climate change. A significant portion is expected to flow through the fund but there have been tensions from the start over how much control donor and recipient countries should have over the fund...

Ahead of the summit, the US and Saudi Arabia said they would not sign off on a report setting out a blueprint for the fund, which took much of the past year to finalise...

US deputy special envoy for climate change, Jonathan Pershing, told the conference the US wanted to see the fund become operational in Durban. But there had been a “rushed” timetable for agreeing on its design, he said, and “the final draft text raised a number of substantive concerns and included certain errors and inconsistencies that could result in confusion”.

Anti-poverty campaigners agreed there were some aspects of the proposed design of the fund that were not ideal. “But unfortunately, any delay that may now occur would play mostly into the hands of the US and other countries that would rather avoid a discussion of where the money will come from to fill the fund,” said Tim Gore of Oxfam.

Well that's one version of the story. In another one being propagated by climate change deniers, the US is said to be willing to go along with a globally applicable Tobin tax on foreign exchange transactions. The said reason is that ratifying a multilateral climate regime in the US is difficult--remember Kyoto, "the American way of life is not for sale" according to Bush Senior and all that. Hence, the deniers are scaremongering about a backdoor process to rob Americans of their sovereignty, tax them and the rest of that paleoconservative stuff:

President Obama's team of negotiators at the United Nations Climate Change Conference may agree to a tax on foreign currency transactions, designed to pay for a "Green Climate Fund," that would fall disproportionately on American travellers and businesses, according to a group attending the conference that is skeptical of the UN position on global warming.

...Obama is open to implementing this tax and similar policies in the absence of a full climate treaty, which would require congressional approval. "We have learned that while many have discounted this conference, knowing that a full climate treaty is difficult to achieve especially with a U.S. Senate that will not vote to ratify," CFACT says. "Obama and his fellow climate travelers are working around the Senate and planning to stick America with the bill."

Aside from these paleoconservatives not understanding that foreign exchange trading far eclipses actual trade flows (of goods and services), can poor President Obama be both a climate obstructionist and a climate hero (hence a hate figure to climate change deniers)? With the Durban meetings wrapping up soon, I guess we'll know more in the very near future about where the US stands. Certainly the hard-up US and EU nations aren't keen on loosening the purse strings for just anything nowadays. Still, China for one is becoming more amenable to a global deal.

But climate change doesn't matter the way deficits don't matter, right? If I had my way in this crummy world, I'd have sent both camps of fantasists to live in Guantanamo Bay a long time ago for some special conditioning. Serious problems call for serious people, and some folks simply prefer Cloud Cuckoo Land to unrelenting reality.

'China's Reserves Have Fallen 3 Months In a Row'

2011-12-07T11:13:00.005Z

Well here's a very positive development from my point of view and perhaps nearly everyone else's. China having an unfathomably huge $3.2 trillion in foreign exchange reserves may prove to be the apotheosis of a supremely wasteful activity. It is, to me, the largest financial folly in world history--and certainly in nominal amounts. This misallocation of capital has obviously not benefited China's citizens much in receiving public benefits but has fuelled wasteful excesses elsewhere such as funding American tomfoolery through the Afghanistan and Iraq misadventures as well as the subprime crisis.

While Chinese policymakers have long called for rebalancing their economy towards domestic demand, it has not really been evident over the years. Well things may be changing (at long last). Remember, too, that debates in China happen alike those elsewhere in the world between export lobbies that would like to maintain the status quo of dirt-cheap, essentially subsidized inputs and those favouring a more balanced form of growth. In any event, the notable observation in the Reuters wire report that follows is that China's reserves have fallen for three straight months in a row, though we won't know for sure until the official figures come out early next year:

A decline in China's foreign exchange reserves extended through November, providing a good chance for Beijing to speed up capital account opening, an advisor to the Chinese government said on Wednesday. Concerns about "hot money" inflows have long been cited as a reason for Beijing's caution in liberalising its carefully controlled capital account and foreign exchange regime.

But Li Yang, a deputy head of the Chinese Academy of Social Sciences and a former central bank adviser, said the concerns are no longer as potent as China's foreign exchange reserves had been falling every day for the last two months. "It provides a time window for China to speed up its necessary reforms, like capital account opening and yuan convertibility reform and even the exchange rate formation mechanism," Li told reporters.

For all the talk of yuan undervaluation, the currency has appreciated significantly in real terms as inflation remains a factor in China. Hence the ancillary issue of how to handle capital inflows. Moreover, the yuan is no longer a one-way bet as the powers-that-be allow it to move forwards and back nowadays...

China's foreign exchange reserves have expanded rapidly over the last decade, becoming the world's biggest in the process worth some $3.2 trillion, swollen by a huge trade surplus and strong capital inflows. The inflow has driven the yuan some 40 percent higher in real effective terms since China broke its peg to the U.S. dollar in a 2005 landmark reform. The People's Bank of China (PBOC) has managed appreciation carefully since to prevent the exchange rate from rising too sharply while maintaining steady upside.

But the situation had changed abruptly in the last two months as money started to leave China and the yuan began to weaken against the dollar in the onshore market. It has lost around half of one percent since marking a record high to the dollar on November 14 of 6.3354.

"It's still hard to say whether these changes will become trends, but one thing is clear, one-way capital inflow or one-way bets on a yuan rise have become history," Li said. He added that China's 50 basis point cut in the reserve ratio banks are required to hold -- announced on Nov. 30 -- was a move designed to cope with capital outflows and shrinking foreign exchange reserves.

"Foreign exchange reserves declined in September, October and in November -- they have been falling each day," he said.

You can have a lively debate on whether PRC reserves are falling out of (policy) choice or (economic) necessity as traditional export markets sputter anew. It may be a combination of both as the article implies as authorities make adjustments in anticipation of further softening of export performance. The EU is the PRC's largest export destination, remember. But it does look like more changes will be forthcoming in the form of diminished export performance, moderation of maniacal reserve accumulation, and hopefully more emphasis on domestic demand as well as a more liberal capital account. All the while the yuan will actually be subject to market forces--meaning it can depreciate as China's economic performance shifts.

Yes, the Main Beneficiary of the Euro Was...the UK

2011-12-07T10:57:00.002Z

Probably one of the major irritants in always tense "UK in the EU" relations is the former's ability to corner a lot of the market in trading the currency as well as other euro-denominated instruments. Both are quite interdependent; I would say that London is Europe's financial casino. One observation is the historically close correlation between euro and British pound movements. One can also argue, however, that Britain's status as a top euro-trading centre makes its financial services arguably even more sensitive to fluctuations in that currency's fortunes than those of EMU members.

So goes the euro currency, so goes the UK more than countries actually in the Eurozone. Particularly hard-hit is the square mile of the City of London where employment relies so much on this sort of trading activity. There's a reason why they don't mention the likes of Frankfurt or Zurich.

City job vacancies fell by 42 per cent last month compared with a year ago, as hiring collapsed amid the deepening eurozone crisis, says a report by a leading Square Mile recruiter. Morgan McKinley, a financial specialist, also found in a survey that while two-thirds of City workers still expected to receive a bonus in the new year, a third thought it would be lower than last year’s.

The London banker, never quite a hot property in the Noughties, has seen his ranks among the reserve army of labour grow. Estimates place the current number of such jobs as equivalent to those nearly a decade and a half ago. In other words, ever more folks dreaming of financial fame and glory chasing fewer jobs:

The Centre for Economics and Business Research, a consultancy, has said it expects London to have lost 27,000 financial jobs this year, slashing numbers to levels last seen in 1998. That would take the total to 288,000, well below the peak of 354,000 in 2007. It forecast that this year’s total of bonuses would tumble by 38 per cent to £4.2bn.

Morgan McKinley found that job opportunities in the City fell by 29 per cent last month, compared with October to 2,725 – a figure 42 per cent below last year. Astbury Marsden, another City recruiter, put the fall at 16 per cent since October and said there were five qualified candidates chasing each vacancy, the highest ratio since 2008.

The euro giveth, the euro taketh away. It's an increasingly FILTH-y environment out there (Failed In London, Try Hong Kong). Perhaps it's time for would-be London bankers to FILCH their way as an alternative route to success (my own term of Failed In London, CHina-bound). Either way, the European crisis is doing the City of London no favours.

UPDATE: Also see MP Jo Johnson on this topic more or less.

Chicago Merc Now Takes RMB for Futures Trading

2011-12-05T11:06:00.008Z

The interesting thing about the United States at the current time is that it's the new Italy. Whereas Italy would continually add zeros to the dollar/lira exchange rate to compensate for a lack of competitiveness via depreciation, that route is no longer there since it joined the Eurozone. The US, however, is not similarly compelled to act in a responsible way. Hence its installation of a helicopter dropper as Fed chairman who plays a lead role in bombarding the world economy with dollar emissions in what has come to be known as "international currency war."

Step by step, however, alternatives are emerging. The dollar certainly is suspect as a store of value, "strong dollar" policy pronouncement hilarity aside. A particularly interesting new application now lies in the realm of futures trading. It turns out that the largest US futures exchanges are now allowing the use of RMB for margin. As you know, the Chinese have been experimenting with internationalizing the use of its currency for currency exchange, trade settlement and other purposes in financial centres such as Hong Kong and Singapore. Not one to be left behind, London is lobbying PRC authorities to some extent for similar privileges as the PRC experiments with making its monies more readily available.

So it is probably of little surprise that another heartland of casino capitalism has jumped the gun in allowing yuan held by clients in Hong Kong-based accounts to be used for topping up trading accounts. Welcome to the future...

CME Group Inc, operator of the world's leading energy, grains and precious metals markets, said it will start accepting the Chinese currency traded in the offshore market as collateral on all its exchange-traded futures products. By expanding its list of collateral to include the offshore yuan, or "CNH" as it is popularly known, a Hong Kong depositor can now use CNH deposits to take positions in a variety of futures contracts traded on the CME, a new avenue for using these funds.

Jeremy Hughes, a spokesman at the CME, said the exchange will cap the amount of CNH it would accept at $100 million. CME and European lender HSBC have built the operational framework enabling HSBC Hong Kong to hold CNH deposits from CME clients and to use these deposits as collateral, it said.

As futures trading goes global, so too should the currencies that may be used:

CME is rapidly increasing its China-focused business. In August, it launched dollar-yuan futures for investors wanting to bet on the yuan's direction. It even launched a micro-version of the yuan futures to attract more clients.

CME, which operates the Chicago Mercantile Exchange, the Chicago Board of Trade, and the New York Mercantile Exchange, gets the bulk of its revenue from trading fees and sales of market data. Volume originating outside the U.S. now accounts for 22 percent of all CME Group volume, it said in a statement.

China's move to liberalise the offshore yuan market has picked up since its launch in June 2010. At the end of October, total yuan deposits in Hong Kong banks swelled to more than 600 billion yuan, representing nearly 10 percent of all deposits in Hong Kong banks, compared with less than 1 percent in January 2010.

So goes the story in the new age (RMB) as folks become more reluctant to hold sewage ($).

Adios Gringos: CELAC, the US-Less Americas PTA

2011-12-04T07:24:00.018Z

China may be getting back at the US for aggressively pursuing the Trans-Pacific Partnership (TPP) in China's backyard and supposedly including Japan in negotiations to broaden the TPP. Since China to an extent perceives TPP as a way for the Yanks to freeze it out in an Asia-Pacific PTA, so in turn China supports a trade bloc in the Americas that would similarly exclude that region's main economic power.

Enter CELAC or La Comunidad de Estados Latinoamericanos y Caribeños. Anglicized it's the Community of Latin American and Caribbean States. UNASUR Plus, anyone? In terms of membership, it is essentially the Organization of American States less the (industrialized, largely non-Hispanic) United States of America and Canada:

Latin American and Caribbean countries signed the “declaration of Caracas” today in Venezuela to formalize the creation of the Community of Latin American and Caribbean States, an economic and political bloc that excludes the U.S. and Canada. Leaders and officials from 33 countries approved the declaration that pledges to improve ties in the region.

The Celac, as it is known, which Venezuelan President Hugo Chavez says fulfills the dreams of Simon Bolivar and other liberators in the hemisphere, will seek to boost regional trade and integration and may create an international reserve fund to protect its members against the global economic crisis. “We’re laying the foundation stone for integration,” said Chavez, who postponed the same summit in Venezuela by five months after undergoing surgery to remove a cancerous tumor. “Only unity will make us free.”

While leaders from countries critical of the U.S.’s foreign policy, including Cuba, Nicaragua and Venezuela, have said they expect the Celac to replace the Washington-based Organization of American States, other members from Mexico to Chile see it as a complementary organization. “This is in our interest, not against the OAS or Iberoamerican Summit, this is integration between Latin America and the Caribbean,” said Juan Manuel Santos, the president of Colombia. “I laud the meeting as a step in the right direction for Latin America...”

Chile will assume the presidency of the group during its first year and the next summit will be held in Santiago at the end of 2012.

As I mentioned, one of the more interesting geopolitical aspects is China rapidly extending its congratulations to the Lat-Ams for (yes) breaking away from the erstwhile imperialists. While Washington has pointedly ignored CELAC's birth, Chinese Premier Hu Jintao has been among the very first to extend recognition:

While the U.S. refrained from commenting, Chinese President Hu Jintao sent Chavez a letter congratulating the region for the creation of the group. “I’d like to send my warmest congratulations,” the letter said, according to an e-mail from Venezuela’s Foreign Ministry. “China is always looking to approach its ties with Latin America and the Caribbean from a strategic perspective and is willing to deepen dialogue, exchanges and cooperation.”

More from Xinhua, naturally. Chinese media are largely those first to this story [1, 2].

Then again, I am keener on knowing how involved the members other than Venezuela are on pursuing this arrangement than what Hugo Chavez says. While he may trumpet it for obvious reasons of portraying it as a USA-free regional foil, Venezuela's diplomatic abilities are, shall we say, suspect. Witness its current inability to join MERCOSUR at the hands of a reluctant Paraguayan legislature. How can a country that cannot even manage to join a longstanding customs union currently composed of four countries take the lead in promoting a PTA of, what, 33 states? It's up to the others--especially the likes of Brazil and Chile--to make it happen.

I'll bet you won't read about CELAC from the USA#1 cheerleaders for obvious reasons as the erstwhile imperialist gets dissed in its own backyard (with nearly full participation from everyone else, no less). Call it the reverse Monroe Doctrine.

UPDATE: The WSJ adds the obvious angle that the American-led OAS is feeling rather abandoned right about now:

The U.S. has indicated that it will continue to back the embattled OAS amid renewed criticism from Chavez-allied leaders who say it is a shill for U.S. interests...The OAS was founded more than 60 years ago as a kind of United Nations of the Western Hemisphere. And as a regional arbitrator the organization is regularly accused of ineffectiveness and bias by disputing members.

Methinks the gringos have spent too much time mucking about in the Asia-Pacific when a mini-revolt was breaking out far closer to home.

Don't Count on China Using Reserves for 'Rescue'

2011-12-04T06:45:00.002Z

There's more interesting stuff from Bloomberg on current efforts to get China to help bail out all and sundry troubled European economies. Particular insights I want to highlight that I've brought up now and again include:

1. The Communist Party is not monolithic. Alike other political entities, there are tensions among various factions;
2. Public pronouncements in particular are contentious, with various ministries vying to be "the last word";
3. With quite some justification, the Party cites protectionism as a barrier to investing in US assets instead of Treasuries and others' sovereign debt.

Here are the relevant parts:

China can’t use its $3.2 trillion in foreign exchange reserves to “rescue” European nations and the country “has done its part” to help the region deal with its financial crisis, Vice Foreign Minister Fu Ying said. “Foreign reserves are not revenues,” Fu, whose portfolio is European affairs, said in a question and answer session following a speech in Beijing yesterday. “It’s not money that can be used by the premier or the finance minister.”

Fu said China can’t use its reserves to fund poverty alleviation at home or to bail out foreign countries. The country learned from the 1997 Asian Financial Crisis that it needs to keep large reserves to maintain liquidity in order to honor obligations, she said.

There remains the issue of your typical American hypocrisy over China being "free" to purchase as much (AA+ and sinking) dollar-denominated sovereign detritus but being unable to invest in American corporations:

China wants to convert some of those reserves into investments in the U.S., Chinese Commerce Minister Chen Deming said separately in a speech to the American Chamber of Commerce in Beijing yesterday evening. China is “willing to convert some of the holdings of debt into investment in the U.S.,” Chen said, without giving details. He also said that the government is also very concerned that a further “festering” of the debt crisis in Europe will affect the nation’s economy.

There's also the problem of "Who Speaks for China?" in these matters:

The Foreign Ministry does not control the country’s foreign exchange reserves, and the ministry’s Fu said yesterday it would have been more appropriate for People’s Bank of China Governor Zhou Xiaochuan to make the remarks, which were in response to a question. Fu is one of six vice foreign ministers, according the the ministry’s website.

Fu also said “now is not the time” for China to have a contingency plan in the event a euro zone country defaults on its debts or exits from the 17-nation single currency. The government has already done its part to help Europe, which has the “wisdom” and strong economic fundamentals to solve its sovereign debt crisis, she said.

I guess the Europeans are on their own in this regard, while the Americans are long overdue on practising what they preach concerning FDI.

Should US Borrow More Given Treasury 'Demand'?

2011-12-02T11:53:00.009Z

To make a long story short, the answer to the post title is "no" contrary to what some IPE and economist types believe [1, 2]. At worst it is financially ruinous to do so and at best it is a very parochial assertion that there is limitless demand for US Treasuries out there. For, not only are there countries with significantly lower borrowing costs than the US, but they also have strong currencies that indicate continuing demand for assets denominated in their currencies unlike the slumping dollar which is near all-time lows on any number of indices. Those who think of the US as a "safe haven" obviously paint a very partial picture. Treasuries are just one asset class among many $ denominated assets. Foreigners also need to exchange their monies into dollars to invest in Treasuries.

Switzerland, Hong Kong, Sweden and Singapore that have both lower borrowing costs and currencies that actually hold their value unlike that of a certain North American nation do not take it as a signal to run up their debts as a "global public good." Even the most disingenuous American politician isn't mad enough to say "we're doing the world a service by running massive deficits."

This being an international political economy blog not a domestic economics blog spewing out Amerocentric regurgitations, I hold myself to a higher standard of looking at others' performance in issuing sovereign debt. Even the most cursory glance reveals their story does not hold up. Moreover, it goes unexplained in their version of events in which the world is flocking to American Treasuries how the currency that it's denominated in is slumping. It is simply not good social science to cherry-pick cases (limit yourself to n=1 America) or completely ignore the fact that foreigners would first have to change their currencies to that which your sovereign debt is denominated in. A more holistic picture suggests this simplistic low yields = limitless Treasury demand story is unwarranted.

On the other hand, an empirically verifiable and non-contradictory assertion is that the frequency of financial crises has increased ever since Richard Nixon dealt away with the dollar-gold standard in 1971. In other words, when the US no longer had its debt issuance levels constrained by the Bretton Woods system, we've had more instead of fewer financial crises. (The linked paper does not suggest their severity has increased, but remember that it was written prior to 2008/09--I'll give the benefit of the doubt to be charitable.) From this point of view, it is perverse that some call for unlimited American bond issuance if the goal is to stabilize the world economy since America being freed from such reins coincides with our, ahem, age of turbulence.

To properly apply the thinking behind Kindleberger's hegemonic stability theory, the current period when the US has been either unwilling or unable to keep the dollar-gold standard intact is marked by more frequent incidences of financial crises. There is no hegemon out there "stabilizing" anything, least of all itself. Moreover, a stable system of exchange rates was one of the things the hegemon was supposed to provide according to Kindleberger, not the mishmash of freely floating ones we have today.

A more cogent, logically defensible argument is that the dollar is now a liability to the international monetary system rather than an asset. Has the US channelled its resulting capital account surpluses in productive ways? I do not think it's far fetched to answer in the negative after the subprime crisis. Did the chances of a European crisis occurring increase in the aftermath of the US subprime mess? I do not think it's far-fetched to answer in the affirmative. Trouble in core Western nations is more suggestive of systemic breakdown than systemic assurance.

But deficits don't matter since interest rates are so low, right? Go buy Dick Cheney's autobiography if it maximizes your utility, but I for one prefer social science to Cheneynomics.

Doomsters' Disagreement: Faber, Rogers on PRC

2011-12-02T09:56:00.009Z

When I have some time, I do watch the financial news channels which regularly feature bears to counterbalance the more regular fare of bulls. Over the years, one of the more frequent guests have been Marc Faber of gloom, boom, doom report fame. Another fellow is Jim Rogers, co-founder of the Quantum Fund together with George Soros back in the day. Rogers has been bullish on both commodities and China for the longest time--which I've always found to be a counterintuitive combination insofar as the former would mostly feature as (rising) costs to China's import bill due to their limited domestic availability. That is, China is a net importer of these types of commodities and its terms of trade are hurt by rising raw material costs.

At any rate, the debate between Faber and Rogers concerns China in general and its relation to commodities in particular. Whereas Faber sees the popping of the China bubble as the world's next disaster story, Rogers remains steadfast in his bullishness on the Middle Kingdom. However, Faber also relates China and commodities in a more intuitive fashion: China going bust will hurt what some have called the "commodity supercycle":

Jim Rogers thinks Marc Faber has got it wrong about China, when [Faber] says the country is possibly headed for a hard landing, which would lead to a devastating impact on commodities around the world. "Marc still does not understand China. There are going to be several hard landings in the next few years, but China’s will be less hard overall than others such as Greece, U.S., et al," Rogers told CNBC in an email.

Rogers says some parts of China's economy will have a "hard landing" but other parts will continue to boom. He says the commodity market will have a correction, but rebutted Faber's view that it would be devastating.

They also differ on the events of the global financial crisis and its relation to commodity crises:

According to Faber, Rogers' bullish call on commodities is misplaced. "If I was always bullish about commodities and completely missed out on the crash in 2008, then obviously, having tied essentially my reputation to commodities, I'd continue to be bullish," Faber said.

But Rogers said Faber had got it wrong when it came to his call in 2008. "I proclaimed repeatedly far and wide that one should not buy commodities in the run up phase. I also explained that I was not selling mine since we were [and are] in a secular bull market," Rogers said.

There's also the accusation levelled against Faber with being a perma-bear on China even during its run-up period:

According to Rogers, Faber is the one who has made many wrong calls, arguing that he "totally missed" the secular bull market in commodities that began in early 1999. "Also back in those days, he and his friends proclaimed often that China was a mess and would continue to be so," Rogers said. "They all were wildly excited about Russia. Some of his friends even left China to start operations in Russia. We all know how that resulted."

I personally am more in line with Rogers' way of thinking. Of course China's rate of economic growth will taper off. There are manufacturing numbers that suggest the same. Will there be overinvestments in certain industries that lead to busts? Yes, those too have and will probably occur as they always do in a capitalist world-system--go ask Marx. However, the long-term outlook for China remains positive and I agree with Rogers on that, especially when compared to the economic cesspools that are modern-day Greece, USA, etc.

Think of Faber as being keener or timing the market and of Rogers as being more of a "buy to hold" sort. Their disagreements may ultimately boil down to their respective investment (or disivestment) horizons.

EU Freezing Over: UK Adopting Euro, Turks Joining

2011-11-30T10:30:00.001Z

Even while commentators as mainstream as the FT's Wolfgang Munchau are already counting the days towards EU breakup and the Economist ponders its inevitability, we have some interesting countervailing forces at work. They're something to think about if you've tried totting up the trillions upon trillions said to be necessary to keep the monetary union intact.

While the current Tory-led coalition is very Thatcher-esque in pooh-poohing the EMU, remember that there remains an older generation of Conservative politicians who believed the UK would eventually adopt the single currency. Remember Kenneth Clarke and Chris Patten. To this list we should add Michael Heseltine:

Former Deputy Prime Minister Lord Heseltine has said he still expects the UK to eventually join the euro. The Conservative peer, one of his party's most pro-European figures, said the eurozone had real problems but he hoped it would survive as its collapse would be "catastrophic" for the UK.

All three of the largest Westminster parties have ruled out joining the euro in the foreseeable future...Prime Minister David Cameron has faced opposition to his European policies within Conservative ranks, with more than 80 MPs defying the government and calling for a referendum on EU membership [let alone joining the Eurozone].

He places current EU-phobia against the historic trend towards greater UK economic interaction with the EU:

Asked by the BBC's Politics Show if he still felt the UK would ultimately join the single currency, he replied: "I think we will join the euro." He acknowledged that the eurozone was in crisis but said he believed it would endure, largely due to the determination of Germany and France to preserve its "cohesiveness".

"I think the chances, and it is a balance, are that the euro will survive. They (Germany and France) have got a hell of a problem, let's be frank about that, but my guess is that they will find a way through. I hope they will because the downside for the British economy of the eurozone going under is catastrophic. People have no idea of the scale of money British banks are owed by European banks." He said European co-operation since the 1950s had been "remarkably successful".

So that may be a long shot, but here's yet another--Turkish EU membership. I've long discussed what I believe are fundamentally racist attitudes behind French and German opposition to Turkish membership. With Turkey now in the ascendant relative to both (and its PM on TIME's cover besides), now may be as good a time as any to prompt a reappraisal. That is, buoyant Turkey would join a bunch of troubled European nations to hopefully add dynamism instead of a troubled Turkey bringing its own problems to European nations:

The Turkish President, Abdullah Gul, says his country still wants to join the European Union despite the euro zone crisis...

Mr Gul said: "Some people who think in a narrow scope and who do lack a strategic perspective consider Turkey's membership a burden". He said Turkey can be the EU's "growth engine". Britain supported Turkey's right to became an official candidate for EU membership and formal accession negotiations began in 2005. If it joined Turkey would be the first EU nation with a majority Muslim population.

Especially with the EU-Turkey question, who knows? Especially during these times, things change, my dear.

Mitt Romney & the Republicans' Sinophobic Turn

2011-11-28T13:23:00.008Z

Obama the candidate in 2008: What we need to do is to just be better bargainers and say, 'Look, here's the bottom line: You guys keep on manipulating your currency; we are going to start shutting off access to some of our markets,'

Romney the candidate in 2011: We can't just sit back and let China run all over us. People say, 'Well, you'll start a trade war.' There's one going on right now, folks. They're stealing our jobs. And we're going to stand up to China. We have right now something they need very badly, which is access to our market. And our friends around the world have that same power over China.

Fareed Zakaria has an interesting new TIME op-ed on how China should shoulder more of the burden of providing global public goods (no argument from me there). In so doing, he cites the seeming change in Republican presidential frontrunner Mitt Romney on the longstanding virtue of free trade as a warning of how things may worsen if China doesn't change its (evil?) ways. Granted, Obama was making similar noises about China-bashing to curry favour with the Democrats' labour-heavy base. But, the curious thing is that Romney does not need to pander to the likes of the Teamsters and so forth. If you are a believer in the median voter theorem, then the implication of the "Romney Republican" position is that Joe Average has demonstrably turned against free trade. Moreover, China in particular is an "unfair" trade parter.

What our man Fareed Zakaria does is talk about how Republican presidents have, since the time of Nixon thawing the US relationship with China--ping-pong diplomacy and all that--supported closer economic ties. Nixon, Reagan, Bush Major and Bush Minor have not really gone against that tide. But, with Romney becoming nearly indistinguishable from Democratic protectionist blowhards and an unpopular incumbent, who knows if an avowed Republican China-basher can gain the highest office in the land:

The Republican primary campaign has not been noteworthy for its discussion of foreign policy. But one set of statements stands out: Mitt Romney’s on China. In a series of speeches, responses and op-eds, Romney has taken a fierce line, accusing Beijing of cheating “on almost every dimension” in its economic relations with the U.S. and promising to brand it a currency manipulator on his first day as President. “If you are not willing to stand up to China, you will get run over by China,” he said in a debate in October. Romney’s stance is significant because he is breaking with 40 years of Republican foreign policy.

Ever since Richard Nixon and Henry Kissinger opened the door, the Republican Party has been the party of engagement with China. Democrats have often campaigned on tougher platforms. So why is Romney—a moderate Republican who is trying his best not to make news during this primary campaign—making this sharp break? The answer can be found in the polls. One of the consequences of this Great Recession is that the American public now has an unreservedly hostile view of China as a job stealer and economic threat. A recent Pew Research Center poll found that more than half of Americans see China’s growth as bad for the U.S. Romney’s shift reflects the fact that even business—the core constituency for good relations with China—is changing its views. As Beijing has adopted policies to favor Chinese companies over foreign ones and refused to crack down on rampant intellectual-property theft, businessmen in the U.S. have become less starstruck and more worried.

So there is another nuanced argument here of China not only losing the support of Joe Average but also of business elites as time goes on. Still, possible shifts in an ostensibly pro-free trade party may mean that fewer mainstream American politicians will hold such views in the near future. While Romney's China-bashing rhetoric may be an Obama-like electioneering ruse, it does point to a larger, worrisome trend.

Attn World: Eurozone Will End on 7 December

2011-11-28T12:50:00.001Z

This assertion may brand Wolfgang Munchau a genius or a laughingstock for life on the level of Francis "End of History" Fukuyama or the Dow Jones 36,000 jokesters, but for what it's worth, the German commentator is definitely going all-in:

I have yet to be convinced that the European Council is capable of reaching such a substantive agreement given its past record. Of course, it will agree on something and sell it as a comprehensive package. It always does. But the half-life of these fake packages has been getting shorter. After the last summit, the financial markets’ enthusiasm over the ludicrous idea of a leveraged EFSF evaporated after less than 48 hours.

Italy’s disastrous bond auction on Friday tells us time is running out. The eurozone has 10 days at most.

Mark your calendars for December 7 and look for that old R.E.M. greatest hits CD if your Internet connection isn't fast enough for streaming video.

Marx Revisited: Overproduction & Inevitable Crises

2011-11-27T13:18:00.007Z

I am teaching Marxist perspectives in International Political Economy class this week in the usual sequence of tackling it together with liberalism and mercantilism/realism. In other words, the three main perspectives in the discipline. Those with just a passing familiarity with Marxist theory probably know Das Kapital's Chapter 32 of "one capitalist always kill many" and "the expropriators are expropriated" fame. While looking around for additional material, I came across a (relatively) expanded and more up-to-date take on the Historical Tendency of Capitalist Accumulation by the late Ernest Mandel that to me makes quite a lot of sense given today's ongoing events.

In particular, the incorporation of China into the world economy (or modern world-systems for those who know of [not my namesake BTW] Immanuel Wallerstein's famous work) is simultaneously a problem of what to do with additional manufacturing capacity on one hand and where to park surplus value (from an export-orientation) on the other. Witness the US subprime crisis borne of "vendor finance" and in Europe's periphery as it became more uncompetitive with China joining the WTO at roughly the same time the single currency was coming into usage. The irony is rich: integration of an ostensibly socialist state is promoting a crisis of capitalism. Let's begin...

Capitalist economic crises are always crises of overproduction of commodities (exchange values), as opposed to pre- and post-capitalist economic crises, which are essentially crises of underproduction of use-values. Under capitalist crises, expanded reproduction - economic growth - is brutally interrupted, not because too few commodities have been produced but, on the contrary, because a mountain of produced commodities finds no buyers. This unleashes a spiral movement of collapse of firms, firing of workers, contraction of sales (or orders) for raw materials and machinery, new redundancies, new contraction of sales of consumer goods etc. Through this contracted reproduction, prices collapse, production and income is reduced, capital loses value. At the end of the declining spiral, output (and stocks) has been reduced more than purchasing power. Then production can pick up again; and as the crisis has both increased the rate of surplus-value (through a decline of wages and a more ‘rational’ labour organisation) and decreased the value of capital, the average rate of profit increases. This stimulates investment. Employment increases, value production and national income expand, and we enter a new cycle of economic revival, prosperity, overheating and the next crisis.

And, as no one should be surprised, there is no real way to "manage" our way out of an unworkable system according to Marxist thought as we stumble from one crisis to the next:

No amount of capitalists’ (essentially large combines’ and monopolies’) ‘self-regulation’, no amount of government intervention, has been able to suppress this cyclical movement of capitalist production. Nor can they succeed in achieving that result. This cyclical movement is inextricably linked to production for profit and private property (competition), which imply periodic over-shooting (too little or too much investment and output), precisely because each firm’s attempt at maximising profit unavoidably leads to a lower rate of profit for the system as a whole. It is likewise linked to the separation of value production and value realisation.

Accordingly, the solution is largely incompatible with modern economic thought in ridding ourselves of property rights and the divide between capitalist and labourer classes--or doing away with capitalism altogether:

The only way to avoid crises of overproduction is to eliminate all basic sources of disequilibrium in the economy, including the disequilibrium between productive capacity and purchasing power of the ‘final consumers’. This calls for elimination of generalised commodity production, of private property and of class exploitation, i.e. for the elimination of capitalism.

Food for thought, I must say.

All the Way to Reno: UK Gilts Outdo German Bunds

2011-11-25T06:41:00.009Z

Humming...all the way to Reno
You've dusted the non-believers
And challenged the laws of chance
Now, sweet--you're so sugar sweet
You may as well have had 'kick me'
Fastened on your sleeve

Reno, Nevada of R.E.M. song fame is a popular gambling destination for Northern California residents alike some of my relatives in the Bay Area. While nowhere near as large a gambling mecca as Las Vegas, its location near the California-Nevada border makes it more accessible to Californians fancying a game of chance on a day or overnight trip. Reno further bills itself as "The Biggest Little City in the World."

In more ways than one, the United Kingdom too is a comparatively small gambling destination dwarfed by the continental EU economies. Despite its reluctance to become thoroughly intermeshed with regional integration and its attendant regulatory pressures--especially by not joining the eurozone--the UK has obtained significant benefits nonetheless from being adjacent to the eurozone. Given its status as a more liberal financial centre that facilitates 'casino capitalism,' the City of London has benefited more than 'real' EMU nations from expanded trade in euro-denominated bonds and euro currency. It seems that such 'close distancing' is reaping particular advantages at the present time. To be honest, the UK is currently in a mess. Student protests in addition to widespread worker protests, next-to-no growth and what else have you, people are unhappy when there's no money to go around.

But, on the bright side, the moribund UK economy's sovereign debt is now outperforming its German equivalent by non-implication in the EMU debt crisis. That is, over a decade, the UK's borrowing costs are now lower than Germany's. Go figure; a recent German failed auction where bidders for 10-year bunds were few and far between certainly didn't improve confidence. From Investment Week:

Germany will have to take its share of the pain caused by the crisis in Europe, which will cause yields on its debt to climb. "In the medium term there has to be burden sharing in Europe, and Germany has to play its part in that," [bond fund manager Stephen Snowden] said. Snowden said as bund yields rise, it will leave the UK looking more and more like one of the few real safe havens. "For me it all reaffirms gilts' status as a safe haven."

His comments came ahead of a shock climb in bunds seen today, with yields jumping above 2% for the first time in weeks after a disastrous debt auction. Germany said the bid-to-cover ratio was only 0.65 times [!], with the German debt agency selling just €3.644bn of its new 10-year bund, well under the €6bn targeted. Yields on the country's 10-year bonds have climbed to 2.06%, well above last Friday's level of 1.89%.

Snowden said while bund yields looked set to continue to rise over the medium term, gilts have a lot of support at these levels. "Gilts are well supported at these levels and I certainly do not see an imminent collapse. "You would not want to be shorting gilts now as the Bank will continue to buy them and international investors will look to them more and more as one of the few safe havens left."

Perhaps the UK really has written its own directions and whistled the rules of change in terms of the EU pecking order despite everything.

UPDATE: Bloomberg suggests Japanese investors shunning bunds and moving into gilts helps explain these market movements.

Japan's Trading Houses Vie for Copper Supremacy

2011-11-23T12:04:00.006Z

In competitive market economies, the battle for the commanding heights is conducted by corporations as well as countries. Now, Japan's massive trading houses that underpin the keiretsu system of business groups (Mitsui, Mitsubishi, etc.) have often been criticized as inefficient middlemen by Westerners who deal with them. However, the recent global financial crisis may have provoked a reassessment of their worth. Given the credit squeeze that resulted when trust became scarce in "arm's-length" financial markets, these trading houses kept the credit flowing given that they were more trust-based institutions. Count it as another demerit for neoliberal orthodoxy.

Another important function they are performing nowadays though is securing raw material availability for the manufacturing arms of their groups (alike Mitsubishi Steel, Motors, and what else have you). What, after all, would Japan Inc. be without such RM inputs to create world famous export-oriented outputs?

Although the heyday of Japanese industrial policy--Ministry of International Trade and Industry (MITI) coordination with keiretsu and all that--may have passed, there is still a lot of it being formulated. Witness for instance the current government initiative to capitalize on the mighty yen to secure natural resource supplies worldwide (presumably in the face of the Chinese attempting to do the same). Here we encounter a similar story, and who else is there to get the job than other than these trading houses? Once more onto the breach...

Japan's top trading house are likely to come head-to-head again while competing for copper mines across the globe, armed with an unprecedented ability to spend on what they see as a long-term bull market. The competition is likely to drive up asset prices for potentially lucrative properties holding the base metal, with the trading houses jostling for the prize of becoming the top supplier for the world's fifth biggest copper market and to tap surging demand in China and other emerging markets.

Japan's six big trading firms, which derive up to 80 percent of their profit from commodities, plan a combined 2.76 trillion yen ($36 billion) investment, a record high, in the year to March 2012 on the back of strong earnings growth in the past few years largely due to gains in oil and other commodity prices. About a half or a third of that amount will be reinvested in natural resources.

This great game between conglomerates' trading houses naturally spans the globe:

In the latest round of the battle for copper, Mitsubishi Corp and Mitsui & Co stood against each other in the high-profile face off between mining giants Anglo American and Codelco in Chile. Anglo shocked Chile's state copper giant last week when it announced it had sold a 24.5 percent stake in its southern Chilean copper properties to Japan's biggest trading house Mitsubishi for $5.4 billion.

The move signalled an aggressive stance in Anglo's negotiations with Codelco on the Chilean firm's option to buy 49 percent of the properties. Codelco has sued Anglo to prevent further sales and says it is still entitled to exercise that option, while Anglo says after the sale Codelco only has an option on 24.5 percent.

Mitsubishi paid a hefty $520 million, or 10 percent, premium to Codelco's valuation of the assets, Jiro Iokibe, analyst at Daiwa Securities Capital Markets Co, said. [OTOH] Codelco has secured a $6.75 billion bridging loan from Mitsubishi's rival Mitsui & Co to buy the assets, in which the Chilean company has given Mitsui an option to take the 24.5 percent stake which Mitsubishi has bought for $4.88 billion.

Certainly the omens are with even higher prices in the future due to good ol' supply and demand:

Japan's trading firms have been chasing copper assets as they see the prospect for rising demand and limited supply leading to higher prices for the industrial metal used in products ranging from cars to electric wiring. They expect demand in China, which accounts for 40 percent of global demand, to continue rising for at least the next five to six years while supplies remain tight due to a falling ore grade, analysts said.

"Demand will be particularly tight in the next two years as new mines will not come onstream until after 2014," Yasuhiro Narita, analyst at Nomura Securities, said. "Copper is one of their preferred assets, which has a large trading volume, meaning less volatility, and there is no concern of new substitutes emerging from technology development..."

While demand is rising, falling ore grade and increasingly difficult development conditions have boosted development costs. "Most mines currently being developed are located in inlands far from ports, causing development cost to balloon," said an official at the Agency for Natural Resources and Energy.

Japanese companies' copper development costs have risen to an average of $5,600 a tonne since 2008, up from the average of $2,500 during 1988 and 2005, according to government data. The official said the copper content of ore has now fallen to about 0.4 percent down from about 1 percent in 2000.

Very interesting stuff, and it's much like the current scramble for oil supplies--less accessible supplies become more economically viable as commodity price rises continue apace.

Honest Jian's Used Cars: China's Next Auto Market

2011-11-22T10:45:00.008Z

In 2009, China ended the United States nearly century-long reign as the world's largest auto market. But, we probably should add a qualifier--that's the new car market. Also, although the Chinese make some nifty products, let's just say that mostly homegrown products may not yet have similar stature with Western brands (who many Chinese concerns make for on an OEM basis anyway). In cultural anthropology, there is a phenomenon of "colonial mentality" that may be at work of colonized countries displaying an inferiority complex towards the products or even the culture of the former colonizer. The reasoning is that they must be superior since they managed to occupy us for some time.

China has of course undergone occupation and domination by Japan and Western powers in recent centuries. Given the long-term memory of many Chinese compared to the zero-planning horizon of most Americans for example, this history may also play out in consumer attitudes towards the superiority of foreign brands to domestic makes.

Accordingly, the WSJ has an interesting new article on how this longstanding preference for foreign brands may be advantageous for the same at this point in time. You see, the Chinese used car (pre-owned, if you prefer that euphemism) market is dwarfed by the new care one--something that isn't really the case in many Western nations with their extensive secondary dealerships, auctions for used vehicles and so forth. Foreign brands introducing used car sales with official warranties and other guarantees may be fuelling a trend of "colonial mentality" in motion by eating into Chinese brand new automobile sales by offering more car for less via used vehicles. That is, the "lemon" issue is solved by clever marketing via backing from established foreign brands which command a premium in the PRC:

China's auto industry is so new that there are few used-car businesses today and little involvement by big dealers. Buyers and sellers now meet at stadium-size, open-air markets, some with luxury-car sections. That's about to change with used-car sales likely to reach 4.1 million vehicles this year, up 7% from last year, according to an estimate from Daimler AG's Mercedes-Benz.

In response, auto makers including Daimler, Nissan Motor Co. and Volkswagen AG are racing to build used-car operations that can take trade-ins for new cars and offer dealer guarantees and services on used vehicles. One big Chinese auto retailer says it plans to increase its focus on used cars to help improve profit margins.

And:

China's used-car sales today are less than a quarter of the 19 million new cars expected to sell in the country this year. But the number of used-car sales should soar as the new-car market in China slows and matures, industry officials say. "How we handle this as an auto maker will determine who is going to be a winner and decide who is going to survive and possibly thrive long term in China," says Hideki Kimata, a senior sales executive for Nissan's China sales arm, based in Guangzhou.

The biggest threat they pose is to China's homegrown brands, such as BYD and Zhejiang Geely Holding Group Co. Chinese consumers generally prefer foreign brands; an overwhelming majority of China's top selling cars in recent months were from global auto makers' joint ventures with Chinese car makers.

One reason for that is the lack of cachet among home-grown Chinese auto makers, stemming from their "lack of competitiveness" in creating quality cars, says Dong Yang, deputy chairman of the China Association of Automobile Manufacturers.

It's an increasingly competitive market, and homegrown Chinese manufacturers do need to improve their overall image in terms of providing dependable vehicles, superior customer service, lengthy warranties and so forth to compete not only in the new car market but also in the used car market. As we have seen again in many Western countries, second-hand cars are quite attractive given the longevity of modern designs as well as their significantly lower prices since someone else has already borne the brunt of most of the depreciation.

Lastly, the emergence of a used car market highlights the growing sophistication of Chinese consumers. Used cars are a potential minefield with tampered odometers, incomplete service records, and other cheap tricks. Sellers thus need to establish good reputations in helping to alleviate "moral hazard"-type problems.

Yanks Foresee Yuan as World's Top Currency?

2011-11-21T12:49:00.001Z

There's interesting stuff from Reuters on the contents of the just-released 2011 Annual Report to Congress of the US-China Economic and Security Review Commission. The latter body, as most of you probably know, was created by the US congress in 2000 with some foresight that China was becoming an increasing force in the global political economy that the US had to deal with. Although some members of this commission are definitely scaremongers, their views are for the most part counterbalanced by more nuanced opinions.

I have yet to sift through this mammoth 400-page report which you can avail of by e-mailing a request to USCC.gov. However, the parts concerning the yuan AKA renminbi (RMB or people's money) becoming an international standard currency are quite interesting. Indeed, these folks may be playing up the role of the yuan more than their Chinese counterparts who still follow a strategy of not drawing too much attention to their currency machinations. Rest assured, though, that the Yanks staffing this commission sense the Chinese are up to something:

China's economy is moving up the value chain and its currency could "mount a challenge" to the U.S. dollar in five to 10 years, a congressionally created commission reported Wednesday. "Similarly, it no longer seems inconceivable that the RMB could mount a challenge to the dollar, perhaps within the next five to 10 years," the commissioners said, 10 years after China joined the World Trade Organization...

The Chinese authorities are laying the groundwork for internationalization of the currency via bilateral arrangements with foreign companies and financial centers, particularly Hong Kong, the report said. Goldman Sachs representatives told commissioners that Hong Kong had been tapped to be China's offshore currency platform "because Beijing would be able to fully control the terms of the market," the report said. Hong Kong was returned by Britain to Chinese sovereignty in 1997.

There's also a reference to the imminent PRC leadership succession being an occasion to outline a push to issue more Chinese bank-issued RMB bonds marketed to an international investor crowd:

More mainland-based financial institutions will be able to issue RMB-denominated bonds in Hong Kong under plans outlined by Li Keqiang, China's likely next premier, during an August visit to the financial center, the commission said...

William Reinsch, this year's chairman, said he did not expect the yuan to "supersede" the dollar in coming years unless Beijing floats its currency and removes capital controls. However, "certainly what they're doing in Hong Kong suggests an impending challenge," Reinsch, president of the National Foreign Trade Council, a private U.S. business group, said in a telephone interview with Reuters.

But there is still a long ways to go:

Dollar-denominated financial instruments dwarf their yuan-denominated counterparts in terms of new issuances. But the RMB markets have made remarkable progress in less than a year to achieve 11 percent of the daily trading volume of dollar-denominated markets, the report said.

Still, trade in yuan accounts for a mere 0.3 percent of the $4 trillion changing hands daily in international currency markets, the commission said, with the U.S. dollar making up one side of 85 percent of all trades.

Things can turn quickly, though. Think of the knock-on effects that the US debt debacle will have on dollar confidence in the next few years. It will be interesting to see how the currency game plays out. That is, will China be willing and able to provide public goods in the Asia-Pacific region by making its currency freely traded and (yes) "floating" in a manner it hasn't really up to now? For sure, many financial centres want in on the RMB trading action [1, 2]. Ditto with some of the world's largest multinationals. Then again, teething problems in experimenting with offshore yuan use are evident that need to be ironed out during this, what..."pilot" stage.

With the US down for the count, it's probably wise for the Chinese not to allow themselves to be dragged down along with Washington's gutter politics. Bite the bullet, good burghers of Beijing, and provide the rest of the world with a clear alternative to dollar detritus that has helped roil the world economy to no small extent. Multipolarity is good.

Twitter Revolution My Sassafrass: Back to Egypt

2011-11-20T16:40:00.006Z

The self-styled American digerati has me ROFL even more now with their belief about the central importance of digital media in the Arab Spring events. A few days ago, we gathered that Egypt was in many ways worse off economically now than under President Mubarak. For, without a figure to provide basic law and order, the result would be what it is at present-chaotic. From today's headlines, we now gather that they're back in Tahrir Square. With civilians getting shot once more, we've seen this movie before.

So far, what can we reasonably deduce?

Digital technologies are mere communication tools, not instruments for lasting change or even "revolution" as some hype it to be;
Mob rule with people taking to the streets time and again is still mob rule even when using Twitter etc. to gather. It's inimical to establishing order;
Hence, exporting these technologies in the belief that it would promote freedom and economic growth is far-fetched. Take Egypt with its resulting reversion to military rule, endless protests and continuous credit downgrades;
Insofar as we haven't yet left the Westphalian system as far as I can tell, states should be left alone to determine their policies regarding these technologies--just as the United States is busy trying to prosecute WikiLeaks founder Julian Assange for leaking US diplomatic cables;
Fair is fair: China should be left alone as unpalatable as its policies towards the Internet may be to some white people. National laws regarding non-intervention and non-interference with regard to media--whether they be those of the US or China--still have validity in a bordered world.

It's long overdue to consign the hypocritical, incredulous notion of "Internet freedom" to the dustbin of similarly awful American wheeze alike the "strong dollar" policy and the "Washington Consensus."

Let US Debt Supercommittee Finish Off America

2011-11-19T16:12:00.005Z

It's hilarious that some delusional Americans think they're getting the better of things by putting off fiscal adjustments Europeans have either voluntarily undergone or are being forced to undergo. (Ditto with the EU itself.) In many ways, it's the same kind of deficits-don't-matter happy-go-lucky attitude they've exuded right before the global financial crisis they literally financially engineered and afflicted the Eurozone with for good measure. Trot out all the old reasons for good measure: the dollar remains the world's standard currency, the US makes problems for everyone else and not the other way around, we can still borrow so cheaply despite an S&P downgrade, etc.

Well, for those waiting for the United States to get its (much-deserved and long overdue) comeuppance, there is a worthwhile event on the horizon: the imminent failure of the so-called debt supercommittee. The latest word is that it has not only failed to meet its $1.2 reduction target over a 10-year period, but that it failed to agree on an amount which already falls well short of that amount:

A high-profile congressional effort to trim stubborn budget deficits appeared near collapse on Friday as Democrats rejected a scaled-back proposal from Republicans that contained few tax increases.

With Democrats and Republicans on a deficit-cutting "super committee" deadlocked ahead of a Wednesday deadline, House of Representatives Speaker John Boehner floated an offer to try to break the logjam on tax increases and benefit cuts. The plan would save $643 billion over 10 years, about half of the panel's goal of $1.2 trillion, but the two sides were unable to even agree what was in the plan.

As you probably know, automatic reductions--about half each to military and civilian spending--will kick in during 2013 worth $1.2 trillion should the debt supercommittee fail to identify particular programmes for the chopping block. Recall my recent post about how failure to come up with a credible (read: real, not fictional revenue increases or budget reductions with bipartisan support) agreement to address future budget deficits.

Alike in Europe, there are already obvious hints emanating from Washington that further scrutiny of these credit agencies should they have the cheek to deliver further much-needed downgrades to US sovereign debt:

The controversial companies known as credit-rating agencies are drawing fresh scrutiny from officials in the United States as they weigh whether to downgrade U.S. government debt should Congress fail to come to an agreement to reduce borrowing.

The credit-rating firms — Standard & Poor’s, Moody’s Investors Service and Fitch Ratings — have said that they could downgrade U.S. debt if Congress does not find at least $1.2 trillion in budget savings over a decade, or if the economy worsens significantly in coming months...Congress is set to automatically cut $1.2 trillion in domestic and military spending starting in 2013 if the committee deadlocks. But the U.S. credit rating would be imperiled if lawmakers tried to postpone or reduce the automatic budget cuts.

There is a lot of opinion out there on what would trigger a downgrade. Some believe that it would be reneging on the automatic $1.2T worth of cuts starting in 2013. I, however, believe that the quotations above from S&P and Moody's respectively spell things out in a straightforward fashion (as far as credit rating agencies are concerned). That is, no credible plan to deal with gargantuan deficits the US is running into perpetuity = a second S&P downgrade and a first from Moody's in the next few months.

As certain other countries have demonstrated, the road to junk status is not a particularly long one. A severely messed up one should get there in no time whatsoever. With that in mind, I fully expect the US debt supercommittee to continue the process of finishing off America. In the final analysis, the United States fully deserves the leaders it gets.

Of EU-Wide Bonds & Gerhard Schroeder's 'Harikiri'

2011-11-16T14:19:00.009Z

There's interesting stuff c/o the Globalist's Stephan Richter on how German austerity measures under previous German Chancellor Gerhard Schroeder of the Social Democratic Party (SPD) actually set the stage for his CDU successor Angela Merkel to reap the benefits. The straightforward narrative here is that he effectively sealed his political fate as his traditionally left-leaning party could not stomach downsizing the welfare state. Ironically, Schroeder's actions set Germany as a pace-setter for European reform that have now put it in good stead when various economic commentators were literally crying Wolf way back when:

A key ingredient of Germany’s success in today’s increasingly dismal global economic environment was that a former chancellor, Gerhard Schroeder, mustered the courage to jump over his shadow.

Thanks to the fact that he, a man of the center-left, was principled enough to launch structural reforms to Germany’s welfare state via the so-called (and aptly titled) Agenda 2010, Germany’s economy is now performing relatively well. Commentators such as the Financial Times’ Martin Wolf had claimed at the time that the German economy would fail due to high price and benefit levels, which the country would not be able to reduce. As a consequence, they argued, it would catapult itself out of a competitive world market.

Things have turned out differently. Although controversial, Schroeder’s historic achievement was to bring German unemployment benefits down to the American level. The fact that Germany’s unemployment rate, long an albatross around the country’s neck, is now at the lowest level in two decades (and in line with U.S. levels during good economic times) proves the architects of the project right.

From what I can gather, Germany's success at implementing reform first does not necessarily mean that other countries should follow its example. Rather, just as Schroeder of the SDP put into place uncharacteristically "neoliberal" reforms, so should the CDU be more charitable toward its European neighbours as opposed to being German-centred all the time:

However, now she faces a similar test of political courage. Just as it was a test of character for Schroeder and his Social Democratic Party (SPD) to trim the welfare state, so it is now a test of character for Mrs. Merkel and her Christian Democratic Union (CDU) to accomplish the rightsizing of the nation state.

While in a completely different domain, that is a challenge on par with what the SPD had to accomplish. Basically, the CDU’s voter base consists of proudly patriotic people. But rather than bask in the illusory glory of Germany doing marvelously, thank you, Mrs. Merkel has to move her base to accept that, in the end, Germany does have to provide a significant back-up mechanism for Europe. Making the case for sharing a nation’s wealth with others is certainly no easy task.

While there are problems with the identification of CDU as being more domestically oriented--think of Helmut Kohl--I do agree that the challenge of a conservative party accepting "ever closer union" especially at this time are enormous and at least on a par with Agenda 2010 for the SPD. Hopefully statesmanship wins out. That is, you may even sacrifice your political career, but what matters to you most in the end?

And so bring on those EU-wide bonds signed severally by Eurozone member countries--Germany included first and foremost...

Just imagine the firestorm the German unions would have unleashed against the CDU had it been the one to implement the structural reform package called Agenda 2010. The beauty of the political dialectic governing Germany is that it is now the CDU that must act in the overall national interest by overcoming the overly nation-state-oriented thinking in its conservative wing.

Conservatives cannot continue basking in self-satisfaction at the good things the EU delivers to Germany’s balance sheet, while refusing to accept any debits. That is why Mrs. Merkel has quite a task ahead of her. She must, and she will, make the case for a truly historical transition toward a deeper integration process.

Austerity Victim: APEC Leaders' Fancy Dress Party

2011-11-15T09:08:00.010Z

Once upon a time there was a tavern
Where we used to raise a glass or two
Remember how we laughed away the hours
And dreamed of all the great things we would do...

Those were the days, indeed, as Mary Hopkin once sang. Remember in bygone years when Asia-Pacific Economic Cooperation (APEC) leaders would show unity by wearing national costumes that made Western heads of state in particular look ridiculous? I am afraid that we may have moved on from that tradition when the world was younger and somewhat more innocent. In a twisted form of hegemony, it appears that our American friends started and have now done away this tradition--at least for now. According to the UK Independent, Clinton started this gimmick in 1993 after giving each APEC leader a bomber jacket to be photographed in what has become known as the "APEC leaders' family photo."

I hope that you immediately noticed what was very conspicuously missing in the group photo above at the completion of the APEC leaders' meeting in Honolulu this year. Instead of your traditional jaunty outfits alike in the photo below taken from the 2006 gathering in Vietnam, they have apparently reverted to bog-standard business formal attire. Talk about a disappointment! Admittedly, though, Obama has never looked out of place the way Bush used to while wearing traditional garb.

So, why did Obama allegedly ditch the fancy dress when the hosting city was Honolulu--certainly a rich source of sartorial possibilities? For what it's worth...

Obama seemed content to play the stuffed shirt. Never mind that he is a native of the islands and having the Pacific Rim leaders show off the shirts might have provided a nice boost to tourism. A braver host might have offered the leaders other fashion options: grass skirts perhaps, or surfer-dude attire. Even the famously dour Richard Nixon once sported an Aloha shirt when campaigning for the White House on the archipelago. (His was of lurid hibiscus design...)

[Obama said:] "I got rid of the Hawaiian shirts because I looked at pictures of some of the previous Apec meetings and some of the garb that appeared previously and I thought this might be a tradition that we might want to break," Mr Obama told reporters. "I didn't hear a lot of complaints about breaking precedent."

Well the region is all the poorer for it, I say. The explanation going around for this decision was that, during these difficult times, leaders are wary of looking frivolous. While the White House did commission special outfits beforehand, there was some kind of consensus around not wearing them this time:

Honolulu clothing company Tori Richard, Ltd., designed both the APEC shirts worn by organizers and volunteers and a special APEC-themed shirt for the 21 world leaders, said Josh Feldman, company president and chief executive officer. Feldman said Tori Richard was contacted directly by the White House earlier this year and commissioned to design the shirt.

"We produced 21 shirts in the design that at the White House's request, we not show to the public until the leaders were given the shirt as a gift," Feldman said in an email. "While we are disappointed a decision was made not to wear them for the iconic photo, we were still honored to be selected."

Once again demonstrating how Bill Clinton understands politics more than Barack Obama, here's the former's take on the tradition he helped establish:

In her autobiography, Cherie Blair, wife of former British Prime Minister Tony Blair, revealed some of the political calculations that could lie behind even the simple act of donning a fancy outfit overseas. She said that her husband was given a lesson in international politics at a summit in Japan where she said Clinton chose the most hideous shirt offered to world leaders.

“Why on earth did you do that?” Tony Blair asked Clinton, according to the book written by the wife of the British leader then. “Take it from an old-timer,” Clinton told the British prime minister before explaining to the latter that his less offensive shirt was a naive political choice.

“Now you, Tony, wearing that particular shirt, people at home might conceivably think that you chose to wear it,” Clinton was quoted as saying. “Me, wearing this shirt, everybody at home is going to think, Boy is that Clinton diplomatic, being so nice to those foreigners. There’s no way he would have chosen to wear that. What a good man he is.”

IMHO, Obama lost a chance to "humanize" himself and his peers at a time when political elites are increasingly becoming seen as a homogeneous suit-wearing class. Not a very good show--take it from the big dog Clinton himself.

Those were the days, oh yes those were the days.

PRC SWF Official: European Welfare Undid Europe

2011-11-12T15:09:00.007Z

In the past, I have poked fun at poor investments the China Investment Corporation (CIC) has made as the PRC's sovereign wealth fund. If there ever was an example of a buy at peak price strategy, then CIC would have it: Blackstone, Morgan Stanley...the list goes on and on.

Now, however, its Chairman Jin Liqun offers an assessment that partly gets at the rather mixed performance of some of CIC's Western investments. Having reportedly been approached by European powers-that-be to invest in European debt--again, it beats me why an SWF whose normal purpose is to diversify away from sovereign debt of reserve currency issuers should buy more of that--he also needs to explain his newfound reluctance. As many Asians believe, the culprit for Western budgetary woes is the unsustainable welfare state as per a recent Al Jazeera interview:

If you look at the troubles which happened in European countries, this is purely because of the accumulated troubles of the worn out welfare society. I think the labour laws are outdated. The labour laws induce sloth, indolence, rather than hardworking. The incentive system, is totally out of whack.

Why should, for instance, within [the] eurozone some member's people have to work to 65, even longer, whereas in some other countries they are happily retiring at 55, languishing on the beach? This is unfair. The welfare system is good for any society to reduce the gap, to help those who happen to have disadvantages, to enjoy a good life, but a welfare society should not induce people not to work hard.

It's the oldest explanation in the book--they fail because they're lazy. While Jin's opinions are not necessarily those of current PRC leadership, they do hint at continuing Chinese reluctance to become the world's new lender of last resort as every country running into trouble nowadays--various European states, Pakistan, and so forth--are inevitably linked to PRC bailouts.

Does US Want to Isolate China Via an APEC FTA?

2011-11-12T12:49:00.016Z

Oops, I may have spoken too soon when I mentioned that the US would not seek to antagonize China by excluding it from an Asia-Pacific FTA. This is just a brief follow-up to a recent post I made pooh-poohing prospects for an expanded Trans-Pacific Partnership composed of APEC member countries.

First, after dilly-dallying a bit, PM Yoshihiko Noda now says Japan will join the negotiations:

Japan's decision to join talks on a trade deal spanning the Pacific marks a major boost for the US bid to shape the new order in Asia, but it will likely mean longer, rockier negotiations...The move by Japan, announced by Prime Minister Yoshihiko Noda just before heading to Honolulu, leaves China as the conspicuous outlier in the emerging trade deal which will now encompass more than one-third of the global economy.

Second, it may be or likely is the case that Japan--a heavyweight with a complex domestic political economy similar to the US--will further complicate negotiations. Think of the WTO Doha Development Agenda and its non-completion due to the ever-expanding number of members and their different agendas. We even have the Stone Age fear of US automakers and Japan Inc [?!]:

But Japan's political leaders decided that "it is a strategic agreement to ensure that Japan is part of the rule-making process," said Michael Green, a Japan expert who was a top aide to former president George W. Bush. Green, now a scholar at the Center for Strategic and International Studies and Georgetown University, said US trade negotiators are likely nervous as they must now contend with a "large and sophisticated and complicated counterpart.""It may complicate the negotiations in the short-run by having the third largest economy entering, but it also makes the TPP a much more credible pillar for an Asia-Pacific-wide free trade agreement," he said.

The United States has said it wants to move quickly to wrap up the Trans-Pacific Partnership, but many observers believe that the deal will take years -- especially now that Japan is involved.

While the United States has saluted Japan's decision to join the talks, a number of US lawmakers and industries are haunted by bruising trade negotiations with the Asian ally in the 1980s. The American Automotive Policy Council, which represents General Motors, Ford and Chrysler, said that a free trade agreement with the land of auto giants such as Toyota would devastate a recovering Detroit. "Providing preferential trade benefits to Japan, while they continue to embrace closed-market policies, would only serve to undermine the competitive gains made by American automakers," said Matt Blunt, the council's president. US automakers had initially fought against a US free trade agreement with South Korea, which was approved last month by Congress after marathon talks and concessions to Detroit.

American automakers have kept trying to sell their crapmobiles--often oversized left hand-drive vehicles in an RHD country--but haven't learned their lesson is all I have to say about the latter.

Third, China is indeed coming around to being excluded from the process despite after all being an APEC member country:

But the trade pact also has a political dimension. Chinese media have characterized it as a way to isolate the growing power, although a senior official, Yu Jianhua, said in Hawaii that China would consider the pact if invited.

Fourth, here's the most galling part. In a recent speech at the East-West Center in Honolulu, Hillary "Internet Freedom" Clinton recycles her freedom 'n' growth schtick in describing the rationale for expanding TPP. Not exactly China-friendly talk, eh?

There is new momentum in our trade agenda with the recent passage of the U.S.-Korea Free Trade Agreement and our ongoing work on a binding, high-quality Trans-Pacific Partnership, the so-called TPP. The TPP will bring together economies from across the Pacific, developed and developing alike, into a single 21st century trading community. A rules-based order will also be critical to meeting APEC’s goal of eventually creating a free trade area of the Asia Pacific.

The United States will continue to make the case that, as a region, we must pursue not just more growth but better growth. This is not merely a matter of economics. It goes to the central question of which values we will embrace and defend. Openness, freedom, transparency, and fairness have meaning far beyond the business realm. Just as the United States advocates for them in an economic context, we also advocate for them in political and social contexts.

While I appreciate the mom, apple pie & Guantanamo Ghraib sentiment, there are two big troubles with this shtick. Let's start with founding TPP member Brunei. It is an absolute monarchy with next to no press freedom. Do you think it's appropriate for Johnny-come-lately USA to dictate to Brunei what standards TPP member countries should be held to, or the other way around? Next let's move on to Vietnam. Returning to the AFP article...

Critics say that communist Vietnam's membership weakens the US message that the deal is about fundamental freedoms.

You don't need to ask Freedom House about that one.

Message to Hillary Clinton: Save it for the next Sarah Palin rally, girlfriend (even if you should not personally deliver the message if you knew any better). Nevertheless, why do certain folks keep thinking that this schmaltz pass without notice?

UPDATE: Reuters has more on China and the TPP. As an important aside, shouldn't news agencies point out that the TPP is a preexisting FTA instead of one that is just coming into fruition due to US-led efforts fer crying out loud?

China is not part of these trade talks, and views them warily. The differing views were captured on Friday in a politely pointed public exchange between top American and Chinese trade officials.

Asked whether China would join the TPP, as the talks are known, a Chinese official, Assistant Commerce Minister Yu Jianhua, noted that no invitation had been sent to Beijing. "If one day we receive such an invitation, we will seriously study" it, Yu said.

U.S. Trade Representative Ron Kirk responded that the trade deal "is not designed to be a closed clubhouse. All are welcome. But it is also not one where you should wait for an invitation."

Also:

A commentary in China's state-owned news agency Xinhua said Washington was using the trade deal as a way to enhance its influence in Asia on its own terms. "The United States' primary reason for actively promoting the development and expansion of the TPP is to raise its leadership in the Asia-Pacific region," Xinhua wrote.

"The United States does not want to miss a golden opportunity with the economic development in the Asia-Pacific, and at the same time it hopes to install a fixed set of rules to guide changes in the region's future political and economic structure."

Japan Returns to 'Stealth Intervention' Tactics

2011-11-11T09:00:00.002Z

Since we once more encountered Japanese intervention to drive down the value of the mighty yen in September of 2010 after a hiatus of about six years, there has been a pattern in place. Tha Bank of Japan makes a big announcement concerning market volatility or the unduly strong yen. In turn, this is followed up by the BoJ wading into the spot market, selling yen and buying dollars in a major way to achieve an implicitly desired dollar/yen level.

Let's just say that this has not been an approach that has yielded sustainable results from the Japanese point of view. Forex traders have learned to wait the BoJ out insofar as its recent efforts have been one-day wonders not backed up by subsequent dollar buying. It appears though that Japanese officials are returning to what they hope are subtler, more effective tactics. That is, the past week has not seem any dramatic BoJ denunciation of forex market evils accompanied by massive intervention. Instead, it is more or less keeping silent to not give away timing cues. Plus, intervention is not a one-shot deal but a continuing effort dubbed 'stealth intervention' said to be similar to the 2004 campaign:

Japan's stealth intervention replicates an approach employed in the massive yen-selling intervention in 2003-04 that totaled about ¥35 trillion, or about $450 billion at today's exchange rates. But the new use of the tactic caught market participants off guard because many believed the latest intervention was a one-day operation.

To maximize the impact and preserve secrecy, the Finance Ministry and Bank of Japan select a limited number of private banks for intervention in the direct deals, refraining from electronic trading systems such as EBS. The designated banks were cautioned by authorities not to leak the information outside.

Sworn to secrecy, Japanese banks facilitate the deed clandestinely so as not to reveal BoJ presence on forex trading platforms. While the Japanese hope that keeping things under wraps results in a more tolerable USD/JPY exchange level for exporters, it too probably wishes that it won't collect as much opprobrium from fellow G7 members. Why is one of their own setting a bad example when global 'rebalancing' is supposedly being encouraged, especially among G20 emerging economies?

US & Roping Japan Into Trans-Pacific Partnership

2011-11-10T09:46:00.007Z

There's a new article in Foreign Affairs by Bernard K. Gordon on further broadening the mooted expansion of the Trans-Pacific Partnership (TPP) to include Japan. Right now, the existing hole-hearted TPP includes trade-deal hungry countries Brunei, Chile, New Zealand and Singapore. The US is in a group of countries including Australia, Malaysia, Peru and Vietnam that is currently negotiating to join the TPP. A large part of TPP's appeal to America is that it includes many issues near and dear to the US alike intellectual property and services trade.

By contrast, I've been quite sceptical of this grouping from the get-go. The latest US tack is expanding a pre-existing Asia-Pacific "coalition of the willing" to ensure that it remains deeply involved in this fast-growing region. As I've mentioned though with regard to Hillary Clinton's recent and rather hackneyed speech on why the US should remain involved in this region, it's yet another in a long line of failed American initiatives to launch a broad FTA among APEC members. The latter have indicated time and again that they are more interested in capacity-building. Which, to me, makes perfect sense insofar as LDCs need to have the infrastructure to handle trade liberalization before actually undergoing it.

At any rate, Gordon now sees the inclusion of Japan as crucial to ensuring that TPP encourages bandwagon effects and produces tangible gains for the US:

First is the fear generated by the U.S. free trade agreement with South Korea. [For instance, having the tariff applied in America to Korean automobile imports reduced from 2.5% to nothing.] Japan’s export industry has long been worried about near-identical Korean products in foreign markets, and Seoul’s access to U.S. consumers will only grow once the pact is implemented.
The second element is the declining political clout of Japanese agricultural interests. This group was long opposed to a free trade agreement with the United States because it feared that Japan’s small-scale and highly protected farmers would be overrun by lower-priced imports. But agriculture now accounts for less than 1.5 percent of Japan’s GDP, which has also meant a sharp decline in farm-related employment. The need to rebuild the economy in the wake of the March disasters amplified calls for reform of Japan’s outdated farming sector. This has eased the way for Japan’s exporters, led by the business federation Keidanren, to step up their pro-trade agenda.
The final factor is China’s new foreign policy assertiveness. An early sign was Beijing’s revival, in 2010, of claims to islands in the South China Sea, an issue that has roiled relations between China and its neighbors since the mid-1990s. In 2002, China and its neighbors in the Association of Southeast Asian Nations agreed to resolve the claims multilaterally, but China later insisted on dealing bilaterally with each neighbor. China’s foreign minister argued at the time, “China is a big country and other countries are small countries, and that’s just a fact.”

While I acknowledge Gordon's Sinophobia in particular, is TPP expansion really a trade counterbalance to China in the region? In previous discussions, I certainly got the feeling that all APEC members were being welcomed to maximize America's bang for the buck in promoting its very expansion. Why is Gordon keen on antagonizing China where US previous efforts regarding TPP do not?

At any rate, the APEC leaders' meetings over the weekend will tell us more about the state of TPP. There already are signs that Japan may not be anxious to be involved as evidenced by its recent delay of an announcement to join TPP negotiations:

Japanese Prime Minister Yoshihiko Noda abruptly postponed a news conference Thursday at which he had been expected to announce that his government will join negotiations on a trans-Pacific free trade pact.

Japanese news reports say the prime minister planned to announce the decision to the Japanese people Thursday and personally notify U.S. President Barack Obama when the two meet in Hawaii on Saturday. But officials announced late Thursday that the Tokyo press conference has been pushed back to Friday.

Participation in the talks is highly controversial in Japan, where thousands of farmers and fishermen marched late last week to oppose membership in the Trans-Pacific Partnership . Politically powerful rice farmers, who have been excluded from previous Japanese free trade deals, are adamantly opposed.

Watch this space.

Decline's Bright Side: BRICs Tourists Do America

2011-11-09T12:36:00.005Z

If there's any consolation to going down the plumbing system of economic history, it's probably this: Chinese and Brazilian tourists are taking advantage of their strengthening currencies to go on shopping binges in America--where goods are admittedly still among the cheapest in the world. They're also seeing the sights while they're at it:

The U.S. is struggling to keep up with surging demand for visas in China and Brazil, as the growing middle class in the world’s two biggest emerging markets flock to American shopping malls and tourist meccas.

The U.S. plans to boost by 100 people this year its staff dedicated to processing visas in the two countries after it issued 35 percent more travel permits in China this year and 44 percent more in Brazil, Ed Ramotowski, managing director for U.S. visas, said in a conference call with reporters yesterday.

“It’s a function of the robust economy in Brazil,” Donald Jacobson, who oversees visa operations at the U.S. Embassy in Brasilia, said in the same conference call. “Their currency is very strong against the dollar and Brazilians are coming to America to visit Disney World and do lots of shopping.”

To promote job growth and welcome more visitors from the increasingly affluent countries, the U.S. hopes it can handle up to 4 million visa applications in the two countries by 2013, more than double the current amount, Ramotowski said. Together the two countries accounted for about 1.8 million of the 7.5 million visas issued last year.

Ooh, the irony. Consider: (1) America's bad habit of relying too much on consumer spending to fuel growth in recent decades may now have put into place an infrastructure for accommodating tourists visiting the US in its sunset years before its hegemony passes into The Great Strip Mall in the Sky. Also, (2) with any number of consumer goods now Made in China, the Chinese may in more than a few instances be buying products made at home that have become relatively more affordable Stateside due to dollar devaluation.

You're 'Developed'? Italian vs LDC Bond Yields

2011-11-08T12:59:00.010Z

Ah Italy, G7 member country and the land of bunga bunga parties (but until when?) With Italian bond yield spreads over German Bunds now in orbit somewhere above Brussels and Strasbourg, I came across an interesting chart from Trading Economics that compares 10-year bond yields of a number of developed and developing nations. From this (abridged) list alone we see that Singapore (kinda obviously), Thailand, China, Malaysia, South Korea, Brazil, Russia, Mexico, Indonesia are able to borrow at cheaper rates for debts due in a decade than Italy's 6.59%--or fellow EMU members Ireland, Portugal or Greece for that matter. Moseying over to the ADB bond site, we too should add the Philippines to this list. Why is this important? After doing so, we find that all five original ASEAN members (Indonesia, Malaysia, the Philippines, Singapore and Thailand) now have lower 10 year borrowing costs than an erstwhile G7 stalwart undergoing difficult times.

As it so happens, pop financial writer Michael Lewis has a book just out entitled Boomerang: Travels in the New Third World that features him embarking on journeys to recent crisis-hit Western countries alike Iceland (chapter title "Wall Street On the Tundra"), Greece ("And They Invented Math?") and Ireland("'s Original Sin"). While his characterization of each new third world country's failings may border on the simplistic, he does hint at a wider question that I increasingly find harder and harder to answer: Does it still make sense to divide this world of ours into developed and developing countries or first and second or third world ones?

Remember, it was not so long ago during the Asian financial crisis that the likes of Thailand, South Korea, and Indonesia mentioned above had their own catastrophic run-ins with financial contagion. Being a charitable sort to those willing to atone for past misdeeds, I mention all this not out of schadenfreude but out of a wish that these peripheral European economies recover just as quickly.

Here's my parting thought for you: Why is the world's foremost regional grouping headed by someone from a nation whose borrowing costs are definitely third world (Portugal's Jose-Manuel Barroso) and its central bank by, well, someone from Italy circa the end of 2011 (Mario Draghi)?

As you ponder that, the development divide blurs more when it comes to borrowing costs.

CSR: Milton Friedman Would OK Both Jobs & Gates

2011-11-03T17:21:00.012Z

There's a much-read article taken from Harvard Business Review by Maxwell Vessel circulating on the Businessweek website. He argues that while the late, great Apple chief Steve Jobs and his Microsoft counterpart were both admirable business leaders, Bill Gates deserves to be idolized more for his subsequent philanthropic work after leaving day-to-day operations at MS:

As much as I love Apple, Inc, I would happily give up my iPhone to put food on the plates of starving children. Steve Jobs turned his company into a decade long leader in the truly new space of mobile computing. Bill Gates decided to eliminate malaria. Who do you think we should be putting up on a pedestal for our children to emulate?

To those familiar with the CSR literature, there is a false argument in place here that is exacerbated by the quotation above. Let me explain. Even the arch-critic of CSR Milton Friedman did not disapprove of do-gooding. Rather, he thought that devoting time and effort to worthwhile causes should be separate from the regular business of doing business:

[H]ow much cost is he justified in imposing on his stockholders, customers and employees for this social purpose? What is his appropriate share and what is the appropriate share of others?

And, whether he wants to or not, can he get away with spending his stockholders', customers' or employees' money? Will not the stockholders fire him? (Either the present ones or those who take over when his actions in the name of social responsibility have reduced the corporation's profits and the price of its stock.) His customers and his employees can desert him for other producers and employers less scrupulous in exercising their social responsibilities.

The important thing to remember, dear readers, is that neither Steve Jobs' Apple nor Bill Gates' Microsoft for that matter have devoted the bulk of their companies' activities to social causes per se. activity. While both Apple and Microsoft do conduct CSR-related activities--supplier audits for labour and environmental standards, for instance--that is pretty much par for the course among their peers. The purpose is primarily defensive in avoiding Nike-and-sweatshops-like entanglements.

Rather, what does set Bill Gates apart is that he devoted his post-Microsoft work to funding socially beneficial initiatives alike coming to terms with HIV/AIDS, tuberculosis and malaria. In a Friedman-friendly way, he did not plow Microsoft's retained earnings into philanthropic ventures. They instead conducted using his own funds (along with those of other fellow billionaires, it should be added) and on his own time. Here's Friedman again:

Of course, the corporate executive is also a person in his own right. As a person, he may have many other responsibilities that he recognizes or assumes voluntarily–to his family, his conscience, his feelings of charity, his church, his clubs, his city, his country. He may feel impelled by these responsibilities to devote part of his income to causes he regards as worthy, to refuse to work for particular corporations, even to leave his job, for example, to join his country's armed forces.

If we wish, we may refer to some of these responsibilities as "social responsibilities." But in these respects he is acting as a principal, not an agent; he is spending his own money or time or energy, not the money of his employers or the time or energy he has contracted to devote to their purposes. If these are "social responsibilities," they are the social responsibilities of individuals, not of business.

In essence, Milton Friedman would have approved of both Steve Jobs and Bill Gates. Yes, Microsoft's stock has not done as spectacularly well as Apple's in recent years, but hey, it's not as if Gates still runs the show there. Returning to the first quote above from the article's author, it is thus far-fetched to assume that buying Microsoft products instead of iDevices will better serve the cause of saving the world. Again, separate MS (the company) from Bill Gates (the philanthropist). In Friedman's terms, investing in Apple stock should even prove to be the more humanitarian action insofar as it would provide a socially responsible citizen with more capital to do good deeds--hopefully as a principal and not just as an agent.

Will a US Tax Holiday Boost US Interest Rates?

2011-11-03T10:11:00.004Z

There's an interesting video clip over at Reuters Breakingviews on how measly yields on interest-bearing instruments may increase Stateside in the aftermath of the declaration of a tax holiday. Designed to repatriate profits that US multinationals hold abroad by offering concessions on the statutory 35% tax rate to, say, 5.25% (which most corporations dodge anyway--witness those allegedly paying no taxes despite being profitable), the seemingly unrelated and surprising result may be higher yields.

In a nutshell, the argument is that firms which hold a collective $1.4 trillion or so overseas would have to liquidate their existing US Treasury holdings to bring home their foreign income. While I do have doubts about (a) the amount of Treasury holdings firms have and (b) the need to sell such holdings to effectuate repatriation, the video clip presents some thought-provoking ideas.

There's also talk of tax holiday "Dutch disease" insofar as benefits from additional government revenue may be blunted by a stronger dollar from these inflows hurting exports according to the Congressional Report Service.

Either way--the tax holiday's normative implications aside--there are interesting economic implications that may mitigate the revenue-enhancing argument for such an act.

11/4 UPDATE: Here is the text from Reuters Breakingviews if you're unable to access the clip above. Their reasoning involves MNCs having substantial holdings overseas kept not in cash but in nearly as liquid US Treasuries:

Another snag exists: much of the money is invested in Treasuries. The side effects of companies dumping all that paper need to be factored into the equation. Most of the overseas money is on the balance sheets of blue-chip pharmaceutical, technology and consumer goods companies with significant foreign sales and profits.

They include Pfizer, Microsoft, Cisco Systems and Procter & Gamble. Bringing the money home would mean paying taxes, so companies are hoping for a break from the current 35 percent top rate. Microsoft, for example, has $56 billion of cash on its books, $51 billion of which is outside the United States and almost entirely invested in Treasuries.

Securities filings suggest this is typical of multinationals. Investing in United States government bonds mitigates currency fluctuations, carries very little risk and keeps holdings liquid.

Business "B-20": Screw the $, Internationalize RMB

2011-11-02T16:07:00.013Z

Darn, just when you thought the states-and-markets IPE literature was becoming increasingly stale comes this news. But first, did you know that there's now a "B-20" parallel to the "G-20" composed of 200 major companies from G-20 countries? I suppose that firms desire a larger stake in the current global governance picture. So, just as the World Economic Forum spawned a concurrent alter-globalization doppelgänger (of sorts) in the World Social Forum, we now have a B-20 convening alongside the upcoming G-20 summit in Cannes, France.

There will of course be less of The Beautiful People in Cannes this time around, and a heckuva lot more of The Angry People. What we may have in a few days is not the Cannes Film Festival but the Cannes Rioter Festival. All the same, businesses the world over have a new gripe that may be unexpected to some. You would think that having the dollar as the world's reserve vehicle currency is generally desirable especially among MNCs that would prefer to deal less with foreign exchange losses and uncertainty over the same. But wait, the answer is a big, bold NO. All this Yankee helicopter dropping is prompting the B-20--which includes several American firms, no less--to call for the further internationalization of a currency of the future and not of the past with an appreciating and not a depreciating bias in the Chinese renminbi.

The Wall Street Journal covers this clamour for real money:

Business leaders meeting alongside the Group of 20 industrial and developing nations summit in France on Wednesday endorsed a move toward a "multipolar" global currency system, with a greater role for the Chinese yuan. But they also called on China to allow full convertibility and greater flexibility for the yuan, saying such a move would be in China's own interest.

The B-20, a group of dozens of top executives from firms around the world, made the recommendations in a report released one day before the start of two-day G-20 summit in Cannes, France. "The current U.S. dollar-dominated system amplifies the risks of the global economy," the group said in a statement. A multi-polar currency system, it said, would reduce uncertainties and transaction costs for companies, "and would lead to a more balanced global economy."

"In a multi-polar system, the dollar and the euro should be followed by the Chinese yuan and other emerging market currencies," the report said. At the same time, a fully convertible yuan would facilitate global trade and investment with China, and "is necessary to enhance the international importance of the nation's currency."

China maintains a broad range of controls on the currency, limiting its convertibility for investment-related transactions on the capital account. Analysts say the country is likely to move gradually towards greater convertibility over the next five years, but Chinese officials haven't given a specific timeline for reaching full convertibility...

The B-20 was assembled by the Mouvement des Entreprises de France, an association of French employers, with assistance by the World Economic Forum and the International Chamber of Commerce.

Fairly mainstream research indicates that more financial crises are occurring in the post-Bretton Woods era (1973 and onwards) than during the Bretton Woods era of the dollar-gold standard. When one country has a practically unlimited ability to abuse the international monetary system, you end up with...well, the world economy circa 2011. To paraphrase Winston Churchill, Americans will %^&* it up if the world has exhausted all other alternatives and the US is left to its devices. As portfolio theory suggests, the impacts of shocks is mitigated if folks collectively hold less of the same sort of thing.

In an increasingly multipolar world where economic activity is less concentrated in Western metropoles, it makes more sense if we had another vehicle currency (or two). Although China is understandably cautious in making the RMB take up that role given the lasting success of its current growth model, it admits that capital account openness and currency convertibility are among its medium- to long-term goals. It's just good to know that even the movers and shakers of the world economy back the idea of such an eventuality. Don't forget who called for and eventually got the creation of the World Trade Organization. When big firms move in unison, they have tremendous political clout.

Being all for a multipolar, superpowerless world--not simply another unipolar one with China in charge, for instance--I fully endorse this idea. Take that, America #1 cheerleaders--the business community is fully fed up with your dollar detritus.

UPDATE: Searching around a bit, I found the lengthier earlier version of the document ultimately given to Sarkozy. Among the signatories are many heads of MNCs; indeed, including several American ones. If anything else, the version described above is even more downcast on the dollar. On p. 51 are the bits concerning the "key policy message" about reserve currency arrangements...
-----------------------------

On the other hand, there is a broader debate about the gradual shift of the global monetary system from a dollar-based system towards a multi-currency monetary system...

As regards the latter, the development of the reserve currency regime will ultimately depend on the choices of economic actors and thus be the result of a market-led (and presumably lengthy) process[:]

A global monetary system in which the role of the reserve currency is based more broadly than is the case in the present system is a logical corollary of the shifts in the economic weight amongst national economies. It also reflects a geographically more balanced structure of trade, production and investment at the regional level which creates incentives for countries to re-balance their currency reserves in light of these interlinkages.
A multi-polar reserve currency regime will be possible only if financial markets in those currencies currently used less become deeper and more liquid. Hence, the development of financial markets (indeed, in some cases the transition to full convertibility) will be a pre-condition for this process. Indeed, we would note that the share of the USD in international currency reserves has already started to decline; this, in our view, is a reflection of the greater attractiveness of non-dollar capital markets.
Compared to the dollar-standard, the transition towards as well as the existence of a multi-polar currency regime can, theoretically, be marked by greater instability, as major shifts in reserve currency allocation – and ensuing capital flows – can occur. Consequently, in a multi-polar currency regime, predictability, sustainability and transparency of economic policies by reserve currency countries (areas) become even more important.

Hillary Clinton Brings Her "F" Game to Asia-Pacific

2011-10-31T16:18:00.027Z

Hillary Clinton and her supporters writing in Foreign Policy represents a sure-fire way to irk me. Sometime ago, a partisan New Democrat Network (NDN) kid went after me in Foreign Policy after I wrote in Foreign Affairs about the conceptual shortcomings of US Secretary of State Hillary Clinton's "Internet freedom" idea. That, of course, was before Missus Clinton's "Internet freedom" shtick went the way of "strong dollar" policy after the Julian Assange / WikiLeaks imbroglio. Let's just say that certain people warned her of the overblown nature of the idea long before it became a global laughingstock.

Now I am confronted with some more eyebrow-raising commentary in Foreign Policy, this time from Hillary Clinton herself. (Or, more accurately, her speechwriters.) Although hyperbole is pretty much par for the course when it comes to US foreign policy pronouncements, it is quite frankly appalling how errors of omission and commission permeate her latest magnum opus (of sorts). Hillary Clinton writes that the future of politics will be decided in the Asia-Pacific, and that the US needs to be there. So far so good; I certainly don't agree that Asia is where the action will be this century. However, I have strong reservations about American willingness and ability to be there in a meaningful fashion.

Now, let me mention a few of her worst misfires (of which there are many):

1. The article gets off to a very factually-challenged start by stating "[t]he future of politics will be decided in Asia, not Afghanistan or Iraq, and the United States will be right at the center of the action." The implication here is that Afghanistan is not a part of the region.

I would thus like to ask: Why is Afghanistan a "regional member" of the Asian Development Bank (ADB), Missus Clinton? She's much like the 9 out of 10 geographically illiterate young Americans who can't find Afghanistan on a map of Asia. On top of abysmal US education standards for reading, science and mathematics, it pretty much sums up the state of their geographic knowledge when America's top diplomat can't do any better (or her speechwriters are too lame to fact-check).

2. For that matter, why is she so quick to brush off Iraq and Afghanistan (in particular) where the Yanks have basically redone the Nixonian strategy of declare victory and leave? Just as they got their behinds handed back on a plate in Vietnam all those years ago, it is left unexplained why their anxiousness to leave a still-lawless place alike Afghanistan represents a triumph of force deployment. What kind of regional security blanket can they provide in Asia if they cannot even pacify non-powers alike these?

Clinton then goes into (she hopes) keeping the extensive American network of bases in the region--as if having those helped in Vietnam or Afghanistan before. With little talk of counterinsurgency strategy, she comes across as distinctly Cold War-ish. Well guess, what: you aren't fighting Soviets in open combat where America's military might would likely win out but against insurgents who play a more effective game of hit-and-run. Ignore the past at your own peril. The rest have learned to just get a cache of AK-47s and wage a waiting game against the modern-day crusaders who eventually flee anyway as protracted deployment becomes vastly unpopular in the homeland.

3. China is now far and away ASEAN's largest trading partner, but Clinton fails to mention this. One of the reasons America is keen on maintaining a regional presence is to take advantage of commercial opportunities there. Thus, why does it go unmentioned that the US is falling behind in the trade league tables as a reason to redouble economic efforts in Asia?

4. She goes a lot into how the Asia-Pacific Economic Cooperation (APEC) can become a (US-led) grouping for promoting trade liberalization in the region. The truth, however, is that APEC is pretty much just a talk shop where US efforts to turn it into a wider free trade area have faltered. The currently much-vaunted expansion of the Trans-Pacific Partnership (TPP) is but another proposal in a long line of failed American initiatives alike the Free Trade Area of the Asia-Pacific (FTAAP) and the Early Voluntary Sector Liberalization (EVSL) scheme.

5. Worst of all, she does not even bother to take into account the sheer hypocrisy pointed out by many critics aside from myself of wishing that various claimants to islands in the South China Sea settle territorial disputes "in accordance with established principles of international law." The United States is famously not a signatory to the UN Convention on the Law of the Sea (UNCLOS). Hence, how can she suggest that others iron out their differences according to a body of international law that America does not abide by? That the US has even offered to mediate this territorial dispute is even more far-fetched.
----------------------

What we have here is too much self-congratulation and too little self-reflection on why the US now plays second fiddle in so any respects to others in the region. To my mind, it is precisely this sort of haughty self-belief in being the indispensable nation that is responsible for its declining Asian presence. America's real Pacific Century was during the 20th century when Henry Luce endlessly proselytized about the need for a strong US presence in the region while leaders as disparate as William Howard Taft and Henry Kissinger understood how to serve American interests well (if not necessarily those of Asians).

Alike with a US veep who thinks Americans hold 85% of US Treasuries, the rest of the world should have trouble taking seriously a secretary of state who does not even display a basic command of geography, history or international law.

BoJ vs the World: Yen Intervention Chronicles

2011-10-31T14:15:00.014Z

I admittedly feel sorry for the Japanese with their currency hitting record high after record high while their economy suffers from massive public debt, lingering deflation, and this year's devastating earthquake. While there are reasons that partially explain why the yen is especially strong at the moment, you have to wonder if Japan's macroeconomic fundamentals warrant such strength. Although Japanese firms have done their best over recent years to move more manufacturing operations offshore to Asian neighbours in particular precisely to escape yen strength, they can only go so far. Japanese companies are certainly feeling a profit pinch nowadays [1, 2] due to currency factors.

After the dollar hit at all-time low of ¥75.31 at the start of this week early Monday in Tokyo trading, the BoJ came into the market in a major way for the second time in three months:

Japan sold the yen for the second time in less than three months after it hit another record high against the dollar Monday, saying it intervened to counter excessive speculation that was hurting the world's No. 3 economy. The intervention vaulted the dollar more than 4 percent higher, which would mark its biggest one-day gain in three years.

Though official figures are hard to come by due to the recency of the action and Japan's obvious reluctance to disclose them, the magnitude of the dollar buying was no small beer and likely set new standards in terms of the amount of greenbacks bought by the BoJ. How does $70 billion in a day sound, for starters?

Finance Minister Jun Azumi said Tokyo stepped into the market on its own at 1025 am. local time (0125 GMT) and would keep intervening until it was satisfied with the results. Traders estimated the Bank of Japan could have bought between $65 and $75 billion against the yen, which would be more than its Aug. 4 intervention, when it was a record $59.4 billion. The scale of the intervention demonstrated the authorities' resolve, but more was expected given substantial long yen positions in the market.

Many market participants however are unsure if Tokyo will or can sustain this level of dollar buying. After all, the intervention in August was not followed up in a major way and we've ended up where we are right now with the dollar doing another of its periodic death swoons:

European traders were inclined to test Tokyo's resolve, pushing it below 78 even though there had been talk of possible official bids around there. This brought it well below an earlier high of 79.55 yen on EBS trading platform. "The focus is to make it as painful as possible to hold long yen/short dollar positions," said Sebastien Galy, currency strategist at Societe Generale.

"If dollar/yen continues to go aggressively lower then the Japanese authorities will feel the need to intervene again". The dollar was still shy of its 200-day moving average around 79.88 yen, though some traders speculated Japanese authorities may look to push it above 80 yen. It was last up 2.75 percent at 77.83 yen.

Although it's a cliche by now, blaming America is not at all unwarranted here with various Fed officials signalling enhanced free money policies via a third round of quantitative easing. (When in doubt about financially-related shenanigans, investigate the US of A.) How much more rather useless dollars is Japan willing to accumulate? Buying $70B daily of a currency with a clear depreciating bias is... sheer madness. Call it the exorbitant privilege of America during the contemporary era of global currency war as it inflicts untold amounts of "collateral damage" on Japan.

In geopolitical terms, dollar carpet bombing hurts America's strategic allies (e.g., Japan) as much if not more than its competitors (e.g., China). With friends like FRB Chairman Bernanke, who needs enemies, indeed. It's something to ponder as Japan seeks leniency from being labelled a "currency manipulator" by increasingly desperate US political classes. Indeed, top on the Japanese agenda is asking other G20 countries to be more understanding of its currency interventions. Although the European debt crisis looks set to top the G20 to-do list, Japan may still be made to explain what's going on...

Tokyo's latest foray followed warnings that its patience with yen strength was wearing thin, and came just days before the Group of 20 leaders' summit in France, where the euro zone debt crisis was expected to dominate the agenda. Japan will be keen to win G20 understanding that a strong yen is one challenge too many for an economy still grappling with the effects of March's massive earthquake and tsunami.

I for one certainly cannot fault the Japanese for their actions in good conscience.

Attribute Indian GP Success to No Gov't Involvement

2011-10-30T12:53:00.003Z

Well here's something that might gladden the hearts of Cato or Mises Institute haters of all that is the public sector. I have just finished watching the inaugural Indian Grand Prix at the brand-new Buddh International Circuit, and I must say that the facilities look world-class. To observers of Indian sports hosting, the F1 race represents a remarkable turnaround from the Commonwealth Games fiasco of only a few months ago with the latters' collapsing structures, unfinished stadiums, and a squalid athletes' village.

It is perhaps prescient that in that previous post on the Commonwealth Games, I ventured that the forthcoming Indian Grand Prix would not be allowed to be held in such conditions by F1 impresario Bernie Ecclestone, and sure enough, the race was up to snuff. The reason given for hosting success this time around is, yes, freezing out public sector infrastructure work with its endemic corruption, shoddy building standards and so forth:

Another factor is that, unlike the Government-funded Games, the money to build the Buddh International Circuit and stage the grand prix has all come from private investment. Industrial conglomerate The Jaypee Group [JPSI or the race organizers] are behind rejuvenating a deprived area they are calling "Sports City" to the tune of £250million.

'It's very significant something like this has come up to showcase India,' [Indian Motor Sports Federation President Vicky] Chandhok added. 'It's not about Formula One, it's not about motorsport, India has never hosted something on this magnitude ever.

It further turns out that Indian government officials were not feted at the F1 confabulation as they usually are at other sporting events where they are treated like the new sahib (or foreign master). In a fit of pique, the sports minister went on Twitter to register his dismay at being shut out altogether:

The [current government] was left out of the megaeyeball F1 race frame, starkly contrasting with jamborees like the ICC Cricket World Cup and the Commonwealth Games, where political class rushed to tap the popularity.

The event featuring global icons was so curt to the political spectrum that sports minister Ajay Maken vented out with a sarcastic tweet: "When F1 is flagged off, as Sports Minister, I am laying foundation stone for Rs 5 crore synthetic track at P T Usha's academy in Koyilandi near Calicut."

Further government dismay at being shut out is shown by removing favourable tax treatments usually afforded to cricket and the aforementioned Commonwealth Games. Murali Sashidharan offers some fine commentary on government double standards with regard to F1 being treated as an "elite" sport unworthy of public attention. It's like the bad old days of the "licence Raj" being brought back just to harass F1:

The complaints coming up about the race is that the government is making it harder than normal in various departments, namely the tax and customs department. Unlike this year’s cricket World Cup or last year’s CWG, which were given ‘ national importance’ status by the sports ministry, the Indian GP has not been granted the same gradation and hence JPSI are expected to pay the duty for stuff like F&B, tyres, engine which will be imported for the race. The value floating around for this is ranging from Rs. 150cr to Rs. 600cr.

The tax row centred on the legislation which would make teams and driver pay a tax bill for portion of their income, potentially taking 1/19th of their income because India is one of the 19 races on the calendar. The government exempted this year’s cricket World Cup from income tax and also granted special tax exemption on income to residents and non-residents alike gained from international sporting events in India in 2006, when the country hosted the ICC Champions Trophy cricket tournament.

To be sure, other new hosting nations (i.e., China, Singapore, South Korea, Turkey, Bahrain, Abu Dhabi) have successfully held largely government-organized races in recent years. It may be a reflection of their respective political economies how private sector elites relate to those in the public sector. In turn these relationships affect the suitability of building a racetrack and hosting an F1 event. Other than India, the other major race without major government involvement is the British GP at Silverstone. There must be a lesson somewhere here.

At any rate, I must extend my hearty congratulations to the organizers of the inaugural Indian GP for putting on a superb show.

UPDATE: Oops, it looks like the other organizers of the (cancelled) Metallica concert did not fare so well. For whom the bell tolls, time marches on.

West's Gloom Aside, World is Getting Much Richer

2011-10-30T07:31:00.008Z

It is probably a reflection of Western media dominance that the overriding tone of much coverage is of sour times. I was particularly struck by the TIME cover story that inflated the recent London riots to a tale of the decline and fall of the West. Having personally witnessed next to none of the violence while living in London--like most cities, it is geographically clustered into socio-economic pockets--let's say I have my doubts of what really happened in a single city. Still, the prevailing mood is undoubtedly glum in Europe, North America and so forth. With their ageing populations and stagnant (crisis-prone) economies, it's hard not to see why many of their citizens think that their better days have come and gone.

Which, thank goodness, is not really the prevailing story in much of the rest of the world. Although global media coverage is sparser there, developing economies are on a roll especially compared to recent decades. Having sorted out on their own many of the causes of previous frailties, many are now poised to reap substantial economic benefits Why is that the rise of the rest gets little acknowledgement except from a handful of commentators? To paraphrase a certain good book, there is good news that's being seriously neglected as living standards rise in the wider world where more of us live.

Recently, Credit Suisse came out with its Global Wealth Report 2011. While obviously focused on high net worth individual (HNWI) market that the bank services, the broader implication is that benefits are more widespread in the developing world. Financial Post offers a summary of the main points. I am especially struck by how holding "real" as opposed to "financial" assets is a meaningful difference in the developing world:

You wouldn’t know it from the endless torrent of gloomy news but the world is getting a lot richer. In fact, according to the Credit Suisse 2011 Global Wealth Report, total household wealth in the world has reached an all-time high of US$231-trillion. This enormous sum, which encompasses real assets including homes as well as financial assets, and is net of debts, is equivalent to $51,000 of wealth for every adult in the world.

It turns out the financial crisis was only a temporary setback in the march of wealth accumulation across the globe. Although total wealth in Europe and North America remains slightly below the 2007 peak, rapid growth in the wealth of emerging markets in Asia, Latin America and Africa helped lift total wealth by 18% over the past year. Unlike the U.S., wealth in Canada has fully recovered from the crisis.

Wealth composition varies across the globe. Although financial assets including bank accounts, stocks and bonds constitute slightly more than one-half of the world’s wealth, developed nations such as Canada tend to have a higher proportion in financial assets. Americans, in particular, hold a large chunk of their wealth in stocks. In contrast, in emerging markets such as India or Indonesia as much as 80% of total assets are non-financial including housing, farms and small business assets.

Nor are global households much like megadebt American ones, thankfully:

For all the chatter about a world awash with debt, household liabilities on average globally are only 15% of total assets. Although household liabilities grew rapidly from 2000 to 2007, they have since fallen back and are now below their 2007 level. Debt levels are particularly low in the developing countries, but even in the advanced nations household debt tends to average only 15%-20% of assets. It is governments, not their citizens, which have been profligate.

For instance, India continuing to surpass the (abysmal) "Hindu rate of growth" has astounding implications for the creation of household wealth. While the Western world's often-romanticized good times were during the postwar period, there is already speculation that the coming decades will be similar for developing countries:

The pace of expected wealth accumulation in these countries is astounding. India today has aggregate wealth that is comparable to that of the U.S.’s in 1916. Over the next five years, India is forecast to gain as much wealth as the U.S. did in the 30 years after 1916.

Credit Suisse isn’t alone in seeing the world becoming much wealthier as the emerging markets leapfrog ahead. Citigroup Global Markets recently forecast global economic growth over the next 20 years that will rival the worldwide boom that occurred in the 1950’s after the Second World War.

Good, optimistic stuff--for the growing non-Western majority of the world's citizens, that is, for all its implications.

What's Next? 2nd S&P or 1st Fitch's US Downgrade?

2011-10-27T12:12:00.007+01:00

I've gotten bored of Europe's so-called problems. All this time I've kept a lot of my cash in euros and for this cheap Yankee talk about Euro-collapse, it's back above $1.40. Like I said, markets realize what real money is as opposed to play money.

Which brings us back to America--a place with real problems and a quite useless currency to boot. Giving away the store, the above title is pretty much a pointless question since both will probably occur nearly simultaneously, conditioned as they both are on the imminent failure of the deficit commission to come up with something constructive before year's end. Given the current state of efforts to significantly reduce the size of American fiscal deficits going forward (i.e., nuthin'), both are pretty much baked in the cake unless major evasive action takes place. Which is worse? Having two out of the three major global rating agencies whack US debt from AAA will likely have more repercussions insofar as a majority opinion is required to cement the status of most sovereigns among bond traders.

Let us begin with S&P's continuing threat to move the US further southbound. From a previous post on the first S&P downgrade, we noted that it mentioned...

The outlook on the long-term rating is negative. As our downside alternate fiscal scenario illustrates, a higher public debt trajectory than we currently assume could lead us to lower the long-term rating again. On the other hand, as our upside scenario highlights, if the recommendations of the Congressional Joint Select Committee on Deficit Reduction–independently or coupled with other initiatives, such as the lapsing of the 2001 and 2003 tax cuts for high earners–lead to fiscal consolidation measures beyond the minimum mandated, and we believe they are likely to slow the deterioration of the government’s debt dynamics, the long-term rating could stabilize at ‘AA+’...

Also:

We see at least a one-in-two likelihood that we could lower the long-term rating by one or more notches on the U.S. within the next three months and potentially as soon as early August — into the ‘AA’ category — if we conclude that Washington hasn’t reached what we consider to be a credible agreement to address future budget deficits.

There has also been much made in the past few days over a Bank of America - Merrill Lynch report indicating that for a Moody's downgrade (it has a negative outlook on US debt) "[t]he trigger would be a likely failure by Congress to agree on a credible long-term plan to cut the U.S. deficit." FT Alphaville has more of the specifics of near-inevitable deficit commission deadlock continuing as the deadline nears to identify $1.2T in cuts...

The “not-so-super” Deficit Commission is very unlikely to come up with a credible deficit reduction plan. The committee is more divided than the overall Congress. Since the fall back plan is sharp cuts in discretionary spending, the whole point of the Committee is to put taxes and entitlements on the table. However, all the Republican members have signed the Norquist “no taxes” pledge [see here] and with taxes off the table it is hard to imagine the liberal Democrats on the Committee agreeing to significant entitlement cuts. The credit rating agencies have strongly suggested that further rating cuts are likely if Congress does not come up with a credible long-run plan. Hence we expect at least one credit downgrade in late November or early December when we expect the super Committee crashes.

So both S&P and Moody's vow further downgrades should the deficit committee do the nearly inevitable nothing. While I remain wary of credit rating agencies and think that we and not some agency is ultimately responsible for performing due diligence on the financial soundness of various institutions, it's still nice to have the US get its due. While recessionary conditions Stateside are depressing Treasury yields for now, there is no doubt that American prestige from being further removed from the top rank of the world's most creditworthy nations is a serious blow.

It could use more downgrades too until it's brought to its senses.