International Political Economy Zone

Is Alibaba Worth More than Google?

♠ Posted by Emmanuel in China,Trade at 10/26/2007 04:03:00 PM

The headline is from Forbes and isn't mine, BTW, and refers to possibly richer P/E valuations for Alibaba.com stock at the IPO stage than for Google. It feels like the heady days of the dot-com boom again as Chinese business-to-business web portal Alibaba.com is set to make a very, very pricey initial public offering. The main difference is that Alibaba.com has quite a viable business model. Let's start off with the Financial Times' take on the massive investor interest in the upcoming Hong Kong listing:

Alibaba.com has attracted more than $100bn in orders from institutional investors for its planned $1.5bn capital raising, reflecting keen demand for one of Hong Kong’s hottest offerings this year. [Reuters says it's now more like $180bn.]
Last year, Industrial and Commercial Bank of China, which raised $16bn on the Hong Kong stock exchange, received $350bn in orders from institutional investors and another $55bn from retail investors.
As a result of the strong interest shown in the Chinese e-commerce group it has decided to close the order book early for institutional investors in Asia and the US.
Unlike retail share applicants, however, institutions do not have to present their money upfront for Hong Kong initial public offerings. That makes it easier for them to submit big orders for popular offerings in the hopes of receiving a bigger allocation.
“It’s a bit of a [misleading] number because the dollars don’t exist,” said one person familiar with the situation.
Subscription numbers for the IPO’s retail tranche, which closes on Friday, were not available yesterday.
In another sign of Alibaba.com’s popularity, on Monday the company raised its price range to HK$12-13.50, from an indicative range of HK$10-12. Goldman Sachs and Morgan Stanley are acting as Alibaba.com’s joint global co-ordinators.
Alibaba.com, China’s largest business-to-business website, is coming to market in ideal conditions. Hong Kong’s benchmark Hang Seng Index is again testing the 30,000-point level and has risen more than 40 per cent since mid-August. Chinese companies have been particularly popular, on expectations that Beijing will soon allow mainland investors to begin buying shares in the territory.
Investor demand for Hong Kong dollars has helped push the currency to its upper limit of HK$7.75 to $1.
On Tuesday the Hong Kong Monetary Authority, which “pegs” the local currency to the US dollar in a range of 7.75-7.85, intervened in the market for the first time since May 2005, buying $100m in an effort to stop the local currency’s rise.
According to data compiled by Thomson Financial, Alibaba.com will be the largest internet IPO to come out of China and the sixth-largest offering on the Hong Kong stock exchange this year.

With that in mind, let's head over to Forbes' take on the IPO:

Alibaba.com, China’s largest e-commerce company, on Monday launched what is set to be one of the world’s most expensive initial public offerings, seeking to raise up to 11.6 billion Hong Kong dollars ($1.49 billion) through a share sale priced at a much higher valuation than investors paid for Google when it came public.
Alibaba.com, founded by former English teacher Jack Ma in 1995, is selling a 17% stake in the company, in the biggest technology IPO since Google raised $1.66 billion in 2004.
Alibaba.com on Monday revised its already high pricing range upward to between 12 Hong Kong dollars ($1.54) and 13.50 Hong Kong dollars ($1.73) a share, which would raise a maximum of 11.6 billion Hong Kong dollars( $1.49 billion) before an allotment option that would allow it to raise more in after-IPO trading.
The pricing works out to an astronomical price-to-earnings range between 94.5 and 106.3 times 2007 earnings. By contrast, Google shares were priced at a P/E of 90 in its IPO and currently fetch a 50.66 multiple.
Ma, who spoke from a road show in the U.S. via a teleconference link to a roomful of reporters in Hong Kong on Monday evening, defended the pricing, saying the company had room to raise it even higher. “Some investors who had missed out on Google’s IPO don’t want to miss out on Alibaba’s,” he said.
His No. 2 man, Alibaba.com chief executive David Wei, said many investors are buying into the company’s growth prospects for 2008 and beyond, which makes the pricing look more reasonable.
If it prices at the top of the proposed range, Alibaba would not be the most expensive stock in the high-flying Chinese Internet stock sector. Baidu.com, China’s largest search engine, is currently trading at 188 times its trailing 12-month earnings on the Nasdaq, but it has a unique edge — the support of the Chinese government, with which it cooperates hand in glove to censor the Web in China, while foreign competitors like Google face strict rules and service blockages.
Even based on 2008 earnings projections, the pricing is on the ultra-rich end. At the top end of the pricing spectrum, it is valued at 54 times its 2008 forecast, higher than Chinese Internet services provider Tencent, at 36, and Google’s 32. Nasdaq-listed Global Sources, which operates a similar e-commerce exchange in China, is trading at 33 times its 2008 consensus estimate.
But Alibaba.com would be cheaper than Baidu.com, which is trading at 57.78 times its projected 2008 earnings.
Many big-name investors have bought into Alibaba.com's growth story, including AIG Global Investment, Taiwanese billionaire Terry Gou’s Hon Hai Precision, Peter Woo of Hong Kong’s Wharf (Holdings), the Kwok family of Hong Kong’s largest real estate developer Sun Hung Hai Properties, Malaysian Chinese media and hotel magnet Kuok Hock Nien, Cisco Systems, and China’s largest bank, Industrial and Commercial Bank of China.
These seven cornerstone investors have agreed to buy a total of about 2.3 billion Hong Kong dollars ($296 million) worth of shares, or 20% of the offering.
Yahoo!, which holds a 39% stake in Alibaba Group, has agreed to buy about $100 million worth of shares.
Alibaba.com is the largest business-to-business e-trading site in China; it reported earnings of 295.2 million Chinese yuan ($39.2 million) in the first six months of 2007.
The listed company would not include two fast-growing Alibaba Group businesses: its online shopping unit, Taobao.com, and its online payment services provider, Alipay.

Hank Paulson, a "Victim of Love"?

♠ Posted by Emmanuel in Casino Capitalism at 10/26/2007 03:44:00 PM

You might be wondering about the slightly offbeat title of this post. Well, it's simple, really. Senator Charles Schumer (D-NY) claims that the White House has kept tight reins on Treasury Secretary Hank Paulson. Schumer says that Paulson is being held hostage by Bush's--how do we put it--Friedmanite leanings from addressing the subprime crisis in a substantive fashion. Schumer's observation strikes me as odd, given that Paulson was chosen precisely because he was the head of one of those Wall Street firms which have pumped a lot of cash into Bush's campaign coffers. Somehow, Goldman Sachs doesn't strike me as a bleeding heart. That Bush has an ideological commitment to small government according to Schumer strikes me as fanciful. The administration does become a champion of small government--when it comes to Democratic spending initiatives, that is. In any event, on to the Financial Times article:

Hank Paulson, the US Treasury secretary, has been “handcuffed” by George W. Bush in his handling of the subprime mortgage crisis, according to a powerful Democratic senator.
Charles Schumer, chairman of the congressional joint economic committee, said the president was preventing Mr Paulson from taking stronger action to stem the crisis because of his ideological commitment to free markets and small government.
“Paulson is in ideological handcuffs,” said Mr Schumer in an interview with the Financial Times. “Everybody who studies this knows the government should be involved.”
Mr Schumer’s committee published a report on Thursday predicting that 2m homes would be subject to foreclosure by the end of next year, destroying more than $100bn (€70bn, £49bn) in housing value. “This is serious and getting worse,” he said. “Until the market sees somebody is in charge and making sure this doesn’t get out of hand they are going to continue to get spooked.”
Congressional Democrats are pressing for Fannie Mae and Freddie Mac, the government-sponsored mortgage companies, to be given a bigger role in helping struggling borrowers refinance mortgages. However, the proposal is opposed by the administration, which advocates a more limited government response to the crisis.
“If there was a less ideological president, the business community would be happier because there would be much more confidence that somebody was dealing with this,” said Mr Schumer. A Treasury spokesman dismissed Mr Schumer’s criticisms as “ridiculous”, saying: “The secretary and the president have both called on the senate to take up legislation to help struggling homeowners – it’s the Senate that seems to be handcuffed.”
Mr Schumer predicted that turmoil in the mortgage market and the decline in real estate prices would have an impact on next year’s presidential and congressional elections. “If home values are going down it will matter. Everybody knows when a home is sold on the block how much it costs.”
His committee’s report showed the 10 states with the greatest number of predicted foreclosures included Ohio, Florida, Pennsylvania and Michigan – four of the most fiercely contested battleground states in recent presidential elections.
Mr Schumer said about 30 per cent of subprime borrowers were in “bad shape”. A further 50 per cent were at risk but could avoid foreclosure if given the chance to refinance.
Democratic calls for greater intervention in the mortgage markets fit the party’s push for government-led solutions to ease the growing sense of economic insecurity in middle class America.

Supachai: South-South FTAs' Value

♠ Posted by Emmanuel in Development,Trade,United Nations at 10/25/2007 03:28:00 PM

Speaking of Professor Bhagwati jogged my memory about a recent entry made by former WTO Director-General Supachai Panichpakdi about why, contrary to Bhagwati's opinion that they promote unhealthy trade diversion, South-South regional FTAs can have beneficial effects for the world trading system. Supachai is currently the Secretary-General of the UN Commission on Trade and Development (UNCTAD), which was formed in the seventies to press trade-related concerns of developing countries and remains sympathetic to them:

In an in-depth study of regional trade agreements and their implications for developing countries, UNCTAD has found that there tends to be an important difference between North-South Regional Agreements, i.e. bilateral Free Trade Agreements (FTAs) between developed and developing countries, and regional agreements between developing countries, so-called South-South agreements. In particular, our research found that developing countries should strengthen regional cooperation with other developing countries, and proceed carefully with regard to North-South bilateral agreements.

The main reason for this is easy to understand: Many of these North-South agreements are missing the developmental perspective, for at least three reasons:

1. Bilateral FTAs often transform formerly non-reciprocal trade preferences between developed and developing countries into symmetric market access regulations; thus, the cornerstone of the post-war international trade system, the special and different treatment of developing countries, is continuously being eliminated.

2. WTO-plus standards and Singapore issues, e.g. labour and environmental standards, government procurement, investment and competition policy, are increasingly being incorporated into North-South FTAs, while the sector in which developing countries are highly competitive - agriculture - is left out. Moreover, these FTAs usually make no provisions at all for monetary cooperation, even though the overall competitiveness of developing countries is highly vulnerable to external shocks. Thus, developing countries often have to accept far-reaching commitments regarding formerly classical domestic policy without being adequately compensated in terms of warranted market access and market success.

3. Simultaneous participation in many FTAs with different rules and implementation horizons makes policy coordination in developing countries increasingly difficult, in particular with regard to the reconciliation between national development objectives, regional commitments and multilateral rules and regulations.

By contrast, UNCTAD’s research has also found that South-South agreements offer developing countries many advantages, which for the time being are not provided on the multilateral level, nor incorporated in North-South agreements.

One of the key motives for developing countries to enter into agreements with partners at a similar level of development in the same area is that of market access. Of course, the benefits of market access, such as scale economies and the diversification of production, are arguments that apply to trade integration generally, be it with developed or developing countries. Nevertheless, for many developing countries that are at an early stage of industrial development, a regional orientation involving countries with similar economic structures and technological capabilities may be considered a more viable option. The initial foreign competition within the region may be less difficult to handle, the technological gap vis-à-vis competitors from more advanced countries outside the region may be easier to close, and the probability of finding a level playing field is greater. In other words, the regional market often sets less exclusive benchmarks than competition with mature suppliers, so that even production at the infant industry stage can be successfully broadened. South-South cooperation can also be advantageous when it comes to competition to attract FDI and to avoid races to the bottom.

Do read the UNCTAD report on "regional cooperation for development" if you're interested.

Bhagwati: Sachs AND Easterly Wrong

♠ Posted by Emmanuel in Development at 10/25/2007 03:17:00 PM

In an interview with a university publication, Columbia Professor Jagdish "In Defense of Globalization" Bhagwati has just declared a plague on both Jeffrey Sachs and William Easterly's houses in the debate regarding aid's efficacy. Call it Bhagwati in defense for a middle way between "we need more aid" (Sachs) and "aid does little good" (Easterly):

Interviewer: What do you think about professor [Jeffrey] Sachs’ argument for a dramatic increase in foreign aid? Do you side with [NYU economics professor William] Easterly in the debate?
Jagdish Bhagwati: My reaction is: plague on both your houses! Professor Rosenstein-Rodan, who advised John F. Kennedy on foreign aid, taught me about “absorptive capacity”—that we should ensure that aid is absorbed productively. This is not just a moral requirement—few would want aid to be given just as a duty but with disregard to its consequences. In the 1960s and 1970s, I participated on the huge discontent on the left about how aid was either a malign-intent way of keeping neocolonial control of the decolonized lands, or that it unwittingly led to dependence in various ways: by reducing domestic savings, by hurting domestic agriculture through supply of foreign aid, and argued that, on balance, aid had been useful in countries like India. I doubt professor Sachs ever pays attention to such sophisticated objections, always dismissing those who raise them as if they were wicked conservatives with horns and no brains. But Easterly is equally wrong in arguing that aid hardly works.

India Takes Up with Iran, Spurns US?

♠ Posted by Emmanuel in Energy,India at 10/24/2007 01:37:00 AM

The rapid economic growth of India is fueling its need for energy. (The India Energy Portal provides a lot of information about the country's choices in meeting its energy requirements.) It's notable that India is risking the ire of America by cottoning up the idea of creating a natural gas pipeline linked to Iran via Pakistan. Worse than possibly spurning US warnings not to go ahead with the pipeline, it seems the ruling coalition does not want to push through with another controversial deal on nuclear energy with the US. Supposedly, the US was going to provide India with technical assistance as well as fuel. Realpolitik: don't leave home without it. First up is a Financial Times article on the pipeline:

Senior Indian government ministers are showing fresh enthusiasm for building an oil and gas pipeline to Iran, in a move likely to add further tensions to US-India relations.
Growing support for the pipeline, which would pass through Pakistan, comes as hopes fade for a hasty conclusion to a historic nuclear power agreement with the US. It had been assumed India would abandon plans for the pipeline once the nuclear deal was finalised since its energy needs would have been addressed.
Palaniappan Chidambaram, India’s finance minister, said after meeting his Iranian counterpart in Washington on Monday that the pipeline was “completely doable” and “we should do it – Iran has the gas and we need the gas”.
He added: “He asked me about our commitment to the pipeline. I said we remain committed.”
The finance minister’s comments risk irritating the administration of George W. Bush, US president, and adding to its disappointment at India’s stalled efforts to push through a bilateral nuclear co-operation agreement. Manmohan Singh, the Indian premier, last week told Mr Bush that opposition from leftist members of India’s Congress-led coalition government meant it was having difficulties implementing the deal.
People close to Mr Singh, who has twice publicly shaken hands on the deal with Mr Bush, say he is “embarrassed” by the government’s inability to move ahead. There are also a growing number of reports that he is considering resigning.
Nicholas Burns, the US undersecretary of state for political affairs, has said Washington hopes “very much that India will not conclude any long-term oil and gas agreements with Iran”.
India has been blowing hot and cold on the pipeline during the nuclear talks with Washington but Pakistan and Iran recently announced their intention to sign a memorandum of understanding on the pipeline and a related sale and purchase agreement by the end of this month.
By increasing the potential size and profitability of the pipeline, India’s participation could overcome financing obstacles at a time when Pakistan’s turbulent domestic political situation has made it difficult to attract the required $5bn-7bn in private capital.
Under the 1996 Iran-Libya Sanctions Act, the US could in theory impose sanctions on countries that assist Iran in exploiting its petroleum resources. [Picture the effect of the US imposing sanctions on India. Unthinkable?]
But New Delhi insists that its decision on whether to participate in the pipeline will be based solely on an assessment of its own national interest.
“How India handles ever-tighter US-led sanctions against Iran will determine whether a degree of strain is injected into the Indo-US strategic relationship just as it is beginning to unfold,” said N.K. Singh, a political analyst. “There are 40m Shias in India and I don’t think the political parties will be unmindful of how all this plays out in terms of the Muslim vote in general and the Shia vote in particular.”

On the other hand, here is Dr. Singh relating the challenges he faces in gaining the assent of his Communist coalition members (comrades?) on reaching a deal over nukes with the US:

Manmohan Singh, India's prime minister, has been forced to tell US President George W. Bush that his government is struggling to win domestic support for a historic nuclear agreement between their two countries.
In a telephone call on Monday, Mr Singh told Mr Bush "that certain difficulties have arisen with respect to the operationalisation of the India-US civil nuclear co-operation agreement"...
US officials said they still held out hope that Mr Singh would be able to pull off a domestic political compromise. "This is a very important, even historic, agreement," Nicholas Burns, the US undersecretary of state, who negotiated the deal, told the Financial Times.
"While we would obviously not interfere in the internal discussions in India, we will work closely with the Indian government to bring this to a successful conclusion."
But US officials privately said that India had only a few weeks to get its internal house in order before it started missing deadlines.
To implement the deal, India must negotiate a safeguards agreement with the International Atomic Energy Agency, persuade the 45- country Nuclear Suppliers Group to permit nuclear commerce with it and secure the backing of the US Congress.
"If this starts drifting into 2008 then it becomes decreasingly likely Congress will have no time to vote on it - especially in an election year," said a US official. "The next administration is highly unlikely to want to inherit a deal without -renegotiating it - and this took two and a half years to negotiate."
Analysts said India's credibility would suffer if the deal collapsed.
Advocates of the deal have expressed disappointment with the Congress-led coalition government's decision to put the agreement on hold rather than risk a confrontation with the communist parties that could have triggered an early election.
"The US will be thinking the Indians are very strange people who do not know what's in their national interest," said K. Subrahmanyam, a strategic affairs analyst and chairman of the Indian government's Task Force on Global Strategic Developments. Seema Desai, an analyst at Eurasia Group, said the sudden change of sentiment was "all the more puzzling given that a panel appointed to look into the objections of the left had not yet completed its deliberations on the issue".
The government's apparent abandonment of a confrontational approach vis-à-vis its leftist backers came after political parties in the United Progressive Alliance coalition warned Mrs Gandhi of the dangers of triggering an election.

Italy's Top Conglomerate, the Mafia

♠ Posted by Emmanuel in Europe,Underground Economy at 10/24/2007 01:02:00 AM

I came across the following story in the International Herald Tribune on how the mafia accounts for a whopping 7% of Italy's GDP according to Confesercenti, a business group in the country. To the left is a map accompanying the report indicating that mafia activity is concentrated in southern parts of the country. It has long been noted that the northern part of Italy has economically outperformed the south because institutions in the former are better formed. Robert Putnam's well-known book Making Democracy Work noted the (dysfunctional) role played by the mafia. Here is a brief summary of the book's premise...

In a study of Italian politics, Making Democracy Work, he contrasted the flourishing democracy of northern Italy with the collapse of politics in the south. Putnam looked back into Italian history and found in the self-governing city republics of the north a strong tradition of voluntary association, trust and civic engagement. The result was a flourishing economy and a healthy polity. The south, by contrast, was riddled by mutual distrust and defection, a Mafia culture of exploitation with little history of voluntary association. In the absence of strong social capital, democracy fell apart and economic growth was hindered.

Anyway, to the article:

Organized crime represents the biggest segment of the Italian economy, accounting for €90 billion in receipts, according to an annual report issued Monday.
The report, titled "SOS Businesses" and released by the Confesercenti, a major business association in Italy, asserts that through various activities - extortion, usury, contraband, robberies, gambling and Internet piracy - organized-crime syndicates account for 7 percent of Italy's gross domestic product.

"From the weaving factories, to tourism to business and personal services, from farming to public contracts to real estate and finance, the criminal presence is consolidated in every economic activity," the report said.

The €90 billion, or $128 billion, compares with the figure of €75 billion in the group's 2006 report.

Also highlighted is the trend of collusion that big businesses, especially in public works, participate in. "The businessmen prefer to make a pact with the Mafia rather than denounce the blackmail," the report said.
On Sunday, Pope Benedict XVI visited Naples and condemned a "deplorable" mob violence that he said had insinuated itself into everyday life. Long considered one of Italy's most dangerous cities, Naples is home to the Camorra crime syndicate, the local version of the Sicilian Mafia.

Usury is the most lucrative of activities by organized crime, with syndicates pulling in €30 billion and racketeering €10 billion, the report estimated. Illegal construction nets €13 billion, it added.

The businesses most afflicted by organized crime are in the south, in Sicily, Campania, Calabria and Puglia, the report said.

According to the report, 80 percent of the businesses in the Sicilian cities of Catania and Palermo regularly pay protection money, or "pizzo."

India's "Reverse Colonization"

♠ Posted by Emmanuel in India at 10/24/2007 12:51:00 AM

The current issue of Fortune has a fine feature on the international buying spree cash-laden Indian companies have embarked upon. Interestingly enough, it's not just India's famous outsourcing services powerhouses making acquisitions, but also manufacturing concerns keen on expanding their international reach. As some commentators suggest, what we may have here is a case or "reverse colonization" as Indian firms buy up those in the West. In a world turned upside down, there's a new sahib on the global scene:

Buoyed by a robust economy, a booming stock market, and the sharp appreciation of the rupee, India's flagship firms are pushing beyond their home market into the wider world.
Once sheltered from overseas competition by a government fearful of foreign domination, Indian companies now are building global empires with impressive speed, ramping up exports, striking cross-border corporate alliances, snapping up firms in the U.S., Europe, and emerging markets, and attracting billions in foreign portfolio capital to India.
India's largest IT-services companies, which count on foreign customers for more than 90% of sales, remain at the vanguard of India's outward expansion. In little more than a decade, firms like Wipro, Infosys Technologies, and Tata Consultancy Services have evolved from niche players handling basic debugging projects for foreign multinationals into giants in their own right, with operations in every major foreign market, tens of thousands of employees, and equity valuations in the tens of billions of dollars.
But Indian manufacturers are going global too. Consider Bharat Forge in Pune: After six foreign acquisitions in three years, Bharat has emerged as the world's second-largest manufacturer of axle beams, crankshafts, and other forged auto components. CEO Baba Kalyani says he's ready to spend another $250 million on foreign acquisitions and expects to overtake Germany's ThyssenKrupp as industry leader by the end of next year.
Across town Bajaj Auto, squeezed by competition from Japanese motorcycle manufacturers in the Indian market, has repositioned itself as the premium-brand leader at home - and is now taking the battle back to Japanese and Chinese rivals in markets like Indonesia, Egypt, and Brazil.
Ranbaxy Laboratories, India's largest pharmaceutical company, manufactures generic drugs in 11 countries, distributes and markets them directly in 49, and counts on foreign markets for 80% of its revenue. CEO Malvinder Singh touts Ranbaxy as India's first true multinational. "Our headquarters may be in India," he says, "but we have learned to operate locally and in a very decentralized manner."
India Inc. still wrestles with the old demons: bad roads, an inadequate education system, shortsighted politicians. In the most basic categories of development, India's economy lags behind China's. Morgan Stanley estimates that China outspends India on infrastructure by a ratio of seven to one. The result: India's manufacturers pay twice as much for electric power as do their Chinese counterparts and three times as much for railway transport.
It's estimated that 40% of India's perishable goods rot before reaching market. India's vaunted technology institutes graduate hundreds of thousands of engineers each year, but their skills are uneven, and India's broader educational institutions have neglected the rest of the nation, leaving 30% of the population unable to read and write.
India's dysfunctional political system - riven by caste, religion, party, and faction - bears much of the blame for these failures. Prime Minister Manmohan Singh and members of his economic team win high marks for policymaking savvy. But they answer to a fractious political coalition whose leaders seem indifferent to the realities of the global economy. Little wonder that while China attracted $70 billion last year in foreign investment, India took in less than $10 billion.
And yet, for all those handicaps, India is barreling forward. Indeed, for the past two years its economy has managed growth rates of 9%, only a percentage point or two shy of China's. In many ways Asia's two emerging giants have embraced development models that are polar opposites. China's strengths may be India's weaknesses - but the reverse is also true. Says CLSA equities strategist Christopher Wood: "China's economy grows because of its government, while India's economy grows in spite of it."
China's broad highways and bustling factories are the product of an authoritarian regime that puts a premium on control. Growth is stoked by government spending and exports, and the economy is dominated by state-owned companies. India's more chaotic business landscape is dominated by family-owned conglomerates, many founded generations ago during India's years as a British colony.
After India won independence in 1947, state planners parceled out monopolies to these dynasties under an arrangement known as the license raj. When a 1991 balance-of-payments crisis forced planners to loosen up, the family firms scrambled to adapt. Now many of them - including groups bearing names like Tata, Birla, Godrej, and Mahindra - are reemerging as well-managed, globally competitive players.
Lightly regulated sectors like software programming, telecommunications, and pharmaceuticals spawned new players such as Narayana Murthy, who launched Infosys (Charts) from his Pune apartment, and Sunil Mittal, who parlayed a bicycle-parts company in Ludhiana into Bharti Airtel, India's leading mobile-phone company.
The success of Indian ventures, whether old or new, owes much to the quality of their domestic capital markets. Deng Xiaoping launched mainland China's exchanges in the early 1990s as an experiment. More than a decade later they remain badly regulated, wildly speculative, and mostly off-limits to both foreign investors and private Chinese firms.
The Bombay Stock Exchange, by contrast, has been around twice as long as India has been independent. It is one piece of infrastructure India's regulators have gotten right: encouraging new ventures, punishing poor management, and accelerating growth of established players. India, CLSA's Wood argues, "has by far the best growth story of any of the emerging economies."
Infosys co-chairman Nandan Nilekani claims the India model is evolving into "something unique. On the one side, there's this array of entrepreneurs and a large pool of inexpensive talent. And on the other we've created a very market-oriented mechanism for raising capital. Put those things together and there's a real ferment. In India all it takes is a little deregulation, and whole sectors go from sleepy oligopolies to highly competitive environments almost overnight."
The bullishness of India's business Brahmans was on display in New York City last month during a four-day, $10 million marketing blitz. The campaign, billed as a celebration of India's 60th year of independence, featured billboards in Times Square, Bollywood dancers performing atop a replica of the Taj Mahal in Bryant Park, and posh dinners attended by dozens of business and political leaders flown in from India.
The objective, said Bharti's Mittal, president of the Confederation of Indian Industry, which organized the events, was to "present the picture of a confident nation ready to engage with the world."
That willingness to engage is manifest in a rising tide of Indian acquisitions. In 2000 the Tata Group, one of India's oldest and proudest conglomerates, made headlines by paying a then-record $430 million for the company that invented the tea bag, Britain's Tetley Tea. Indian purchases of that magnitude are now routine.
In April, Hindalco Industries, part of India's Aditya Birla group, paid $3.6 billion for Canadian aluminum company Novelis. In May, as Suzlon closed its deal on REpower, Vijay Mallya's United Breweries snapped up Whyte & McKay, the world's fourth-largest distiller of Scotch whisky. In August, Wipro (Charts) pocketed New Jersey software house Infocrossing for $600 million. In the first three quarters of this year, Indian companies announced 150 foreign acquisitions with a total value of $18.1 billion, according to Dealogic - a fourfold increase over all of 2005.
But none can match Tata Group for ambition. In April, Tata Steel paid $13 billion for Corus, an Anglo-Dutch steel company, securing mills in Ohio and Pennsylvania and quintupling its steelmaking capacity. That remains India's biggest foreign purchase to date. But between Tetley and Corus, Tata scooped up a slew of other overseas assets: an undersea-cable business, the truck-manufacturing operations of South Korea's Daewoo group, a stake in one of Indonesia's largest coal mines, and a raft of foreign hotels, including the Ritz-Carlton in Boston.
This year, for the first time, the group will take in more revenue overseas than it does at home. Tata is well on its way to becoming India's first truly global brand. And chairman Ratan Tata, who wouldn't talk to Fortune for this story, is still shopping. In August he declared his interest in buying Jaguar and Rover, now owned by Ford Motor.
In Mumbai, India's financial hub, bankers joke about "reverse colonization." An oft-heard lament is that the deals reported in the financial press are nothing compared with the ones considered and then rejected. Ranbaxy, which gobbled up no fewer than eight firms last year, passed on an opportunity to buy Germany's Merck. The drugmaker was sold instead to Mylan Laboratories in the U.S. for $6.6 billion. "Acquisitions, yes," says CEO Singh, "but not in a reckless manner."
Ranjit Pandit, managing director of the Mumbai office of General Atlantic, a U.S. private equity group, says it wouldn't surprise him to see a $50 billion deal. "Suddenly," he says, "bankers the world over are beating a path to India."
Remarkably, few of India's foreign acquisitions have gone awry. For now at least, there is no Indian equivalent of TCL, the Chinese TV manufacturer still struggling to digest its 2004 purchase of the troubled television division of France's Thomson. Nor have Indians encountered the sort of political backlash that thwarted efforts by CNOOC, China's state-owned petroleum giant, to purchase U.S.-based Unocal in 2005.
Tata's bid for Jaguar and Rover, which are expected to go for at least $1.5 billion, will test his limits. That deal would bring Tata's automotive unit new technologies and a broad international sales network. But industry analysts question how Tata Motors, whose products and sales service finished at the bottom of J.D. Power's 2007 India customer-satisfaction ranking, would revitalize the two money-losing British luxury brands. It's hard to see how either company will mesh with Tata's push to produce the world's cheapest passenger car, at about $2,500.
Anand Mahindra, CEO of Mahindra & Mahindra, India's largest manufacturer of tractors and SUVs, wonders whether India's global expansion resembles corporate Japan's buying binge during its 1980s bubble economy. "Is this really the carpe diem moment for India?" he asks. "Is this part of a well-considered strategic roadmap? Or is it all just steroids?"
Mahindra won't comment on reports he dropped out of the bidding for Jaguar and Rover. But he is hardly shrinking from other opportunities. Over the past several years he has purchased a tractor plant in China and diversified into the forging industry by purchasing companies in Germany and Britain. Each acquisition made sense, he argues, because it brought new technologies, new customers, or significant economies of scale.
Mahindra has also entered into an alliance with Renault to build a passenger car based on the French automaker's low-cost Logan sedan. Together with Renault and Nissan, he is investing in a $900 million passenger-car plant on the outskirts of Chennai. That facility, which will be India's largest auto factory, is scheduled to open in 2009 with an annual capacity of 400,000 vehicles. That same year Mahindra plans to launch a range of compact pickups and hybrid SUVs in the U.S.

Russia: From Market to Gosplan

♠ Posted by Emmanuel in Europe at 10/24/2007 12:10:00 AM

In case you're not an IPE junkie (which is probably a good thing), I am making a reference in this post's title to the World Bank's 1996 World Development Report entitled From Plan to Market. The report concerns the transition from state- to market-dominated political economies post-Cold War, especially in former Soviet bloc countries. Gosplan, of course, was the former Soviet agency tasked with writing up five-year plans for the USSR. As you will read below, Russia has decided to impose price controls--just as China has--which the Financial Times says are designed to ensure that Putin's party stays in control when as another election cycle rolls around. Call it public choice theory, Russian style.

In a way, the reimposition of price controls is of a piece with Putin's recent moves to reclaim the USSR's glory days by sliding back to a more, shall we say, centrally planned era. After all, he's said that the collapse of the Soviet Union was "the catastrophe of the century." Sending bombers to patrol I don't know what, suppressing political opposition, and now determining prices of basic goods--the evidence is overwhelming. Comrade Putin, you've done the hammer and sickle proud:

Russia is introducing Soviet-style price controls on some basic foods in an effort to prevent spiralling prices from denting the Putin administration’s popularity ahead of parliamentary polls in December.
The country’s biggest food retailers and producers have reached an agreement, expected to be signed with the Russian government òn Wednesday, to freeze prices at October 15 levels on selected types of bread, cheese, milk, eggs and vegetable oil until the end of the year.
Russia’s move is the latest sign of surging agricultural prices becoming an international political issue. Big retailers will limit their mark-up on those goods to 10 per cent.
China has also agreed to food price controls; Egypt, Jordan, Bangladesh and Morocco are increasing subsidies or cutting import tariffs to lower domestic prices. Rich countries are not immune: Italian consumer groups organised a pasta boycott last month in a protest over prices.
The Russian economy ministry is also examining whether to increase a 10 per cent export tariff on wheat planned for November to 30 per cent to keep its domestic market well supplied. That prospect has pushed wheat prices up 6 per cent in Chicago in the past week, giving Moscow’s fight against rising food prices an effect beyond its borders.
Russia’s agriculture ministry said the food pricing arrangement was voluntary. But industry insiders said they had come under heavy pressure. “We were told in no uncertain terms that we have to freeze prices on certain products,” said one Russian food industry executive, who asked not to be named. “Everybody understands what the government is doing. It is part of their election campaign.”
Russian food prices rose steeply in September, with vegetable oil up 13.5 per cent, butter up 9.4 per cent and milk 7.2 per cent, thanks to global agricultural price increases. Given a big low-income population and meagre pensions, the price rises are among the few factors capable of deflating President Vladimir Putin’s 80 per cent-plus approval ratings...
Russia has fought off inflation in recent years but rising food prices mean it has already exceeded this year’s 8 per cent inflation target, with the final figure likely to top 10 per cent.
Food prices have risen globally thanks to increasing demand and changing diets in developing countries, more frequent floods and droughts damaging harvests, and the biotech industry’s growing appetite for grains.
Russia, like many countries, faces the additional challenge of fighting food inflation while pumping money into the financial system to combat the global credit squeeze.
But, as Izvestia newspaper commented, Moscow has “found its solution in the past”, with price freezes harking back to Soviet times.
“The reaction of the Russian authorities to the recent inflation spike has been even more predictable than the price surge that triggered it,” Dresdner Kleinwort said in a note to investors.
Industry insiders said price freezes might restrain headline inflation but would not reduce the overall rate.

Globalization and Inequality Roundup

♠ Posted by Emmanuel in Development,IPE 101 at 10/23/2007 12:30:00 AM

This is my final installment relating to the October 2007 IMF World Economic Outlook. It concerns the headline subject matter of the report, Globalization and Inequality. Now, some ink has been spilled on the report in the financial press. The Wall Street Journal makes much about the finding that rises in income inequality as measured by the Gini coefficient are being fueled by technology and foreign investment. Furthermore, the WSJ says this provides ammunition for the anti-globalization movement. On the other hand, the Financial Times' Clive Crook--a well-known globalization proponent--says that the WSJ and others have missed the more important finding from the report: Yes, inequality may be on the rise due to technology and foreign investment, but incomes of the poor are rising around the world, in industrial and developing countries alike. Second, liberal trade reduces inequality – again, in poor countries as well as in rich countries.

What are we to believe, then? As always, it pays to look at the source material. Figure 4.3 to the left (click for larger image) indicates that [i]nequality has risen in developing Asia, central and eastern Europe, the NIEs, and the advanced economies, while falling in the Commonwealth of Independent States and, to a lesser extent, in sub-Saharan Africa. Few except the most rabid pro-globalizers would probably contest this point. Inequality is rising throughout most of the world's regions.

Before making a wholesale indictment of globalization based on rising inequality, though, pay some heed to Figure 4.5 to the right (click for larger image). As the accompanying text notes, [i]ncomes have risen for all quintiles across all regions except for the poorest quintile in Latin America, related in part to the aftereffects of crises. This is the point Crook wants to make. To me, it is also the more important one. Yes, inequality is rising, but nearly everyone in various quintiles have higher incomes compared to the decade or so before.

I will make a statement that I suspect more left-of-center readers may not agree with: In a perfect world, we'd of course prefer it if incomes increased and inequality decreased at the same time. However, given a choice between rising incomes (+) and rising inequality (-) versus falling incomes (-) and falling inequality (+), I would likely prefer the former combination. Which, of course, is what these statistics indicate. There are many potential qualifiers that I can throw in. To think of three (there are too many to mention), the data may not be reliable especially in developing countries, income growth is not necessarily the best measure of human development, and environmental costs are not included in this analysis.

Nevertheless, if the data compiled by the IMF is accurate and income growth has resulted in real welfare gains for the poor in various parts of the globe, this news is welcome indeed.

Lastly, have a look at Figure 4.10 to the left (click for a larger image). The IMF uses a regression model to determine how globalization--in the form of exports, tariff liberalization, and inward FDI--has affected income inequality. As Crook noted, trade narrows income inequality across all regions. Figure 4.9, which I do not show here, further illustrates that technology is the principal driver of inequality. Technology tends to increase the rewards for those skilled at harnessing technological innovations instead of the unskilled. As an aside, some of my research is on policymaking aimed at introducing technologies that benefit the unskilled more than the skilled, but that's a story for another day. Nevertheless, this WEO report introduces a whole bunch of other possible considerations regarding innovation: Why is it that the lion's share of innovations are geared towards rewarding those who have already been rewarded? (This is the so-called Matthew effect.) In any event, cheer up, free traders. It appears the evidence here is that trade narrows inequality and doesn't widen it.
[UPDATE: The IMF has a slideshow on globalization and inequality.]

Don't miss UNCTAD's superstar blog

♠ Posted by Emmanuel in Development,United Nations at 10/23/2007 12:14:00 AM

While visiting UNCTAD's site to get a copy of the World Investment Report 2007, I noticed that UNCTAD has just put up what promises to be a fine blog called "Ideas 4 Development." Color me impressed by its premise and its superstar lineup. Here is its blurb...

Ideas for Development, an international Blog designed to stimulate debate on economic development issues, will be launched in Washington DC on 21 October 2007 at the World Bank and IMF annual meetings. Created by seven prominent personalities, this blog provides web users with a new forum to share information, viewpoints and visions for the future, with the common goal of advancing the cause of development.

Heads of international organizations will actively take part in the blog:

Kemal Dervis, Administrator of the United Nations Development Programme,
Abdou Diouf, General Secretary of the Organisation De La Francophonie,
Donald Kaberuka, President of the African Development Bank,
Pascal Lamy Director general of the World Trade Organization,
Supachai Panitchpakdi, Secretary-General of the United Nations Conference on Trade and Development,
Jean-Michel Severino, Managing Director of the Agence Française de Développement,
Josette Sheeran, Executive Director of the World Food Programme.

Partnerships will enable other development specialists to take part in the debate. These guest commentators, coming from NGOs (Care, WWF, Oxfam…) and universities (LSE, Columbia, Sciences-po, …) will guarantee a lively debate and a broad range of information.

Ideas for Development is an original platform of exchange - in its format as well as in its content. It will offer many applications such as video, RSS syndicate and e-mail updates. Available in three languages - English, French and Spanish - Ideas for Development will host wide-ranging debates, crossing perspectives and points of views from all over the world.

Development issues meet a growing interest on the internet, yet blogs that address these issues are either of individual web users or of institutions. Ideas for Development´s ambition is to promote a genuine and informed debate in which the contributors share their own convictions, both with their peers and with the larger public.