Space, the Final Frontier for Governance

♠ Posted by Emmanuel in at 6/14/2011 12:01:00 AM
Remember when we did the moonshot and Pony Trekker led the way?
We'd move to the Canaveral moonstop and everynaut would dance and sway
We got music in our solar system; we're space truckin' round the stars
Come on...let's go...Space Truckin'!

How do we keep on space truckin' in the 21st century? It's not a hypothetical question. With real-estate here on earth becoming increasingly scarse and with climate change threatening to make things worse, it was perhaps natural that its denizens would search the heavens for relief. Among today's most interesting challenges for global governance are issues which do not map neatly onto national boundaries. Global warming is indifferent to where carbon emanates from. The Internet is compelling countries to quash notions of extraterritoriality when it suits them--ask Hillary "Internet Freedom" Clinton, for example.

And then there's the issue of carving up space. Earlier on, the Soviets were keen on extending the territorially-bound notion of airspace into further reaches until they too discovered the joys of satellite spying. With decades of space activity under the belt, we have now bumped up against limits of existing governance regimes: How can traffic jams be avoided in outer space? What areas can be used for orbiting satellites? What is to be done with space debris? To these questions we must now add a few more: What about mining rights... on the moon? Who will regulate space tourism? Certainly Sir Richard Branson of Virgin Galactic fame will have interest in responses to the latter.

These questions verging on--you guessed it--interstellar overdrive should be very interesting to IPE Zone readers who I assume are interested in global governance issues. Fortunately, there is a fine introductory article in our alumni newsletter LSE Connect that begins to tackle these questions from Jill Stuart on "cosmic governance" (gotta love the jargon). It is not only on earth with the emergence of major emerging economies that the status quo is being disputed:
Where next for issues of outer space ownership? Several questions promise to rear their head in the next decade. As more and more countries develop space-faring capabilities (and particularly developing countries leading in this area, such as China, India and Brazil), matters regarding orbital overcrowding, debris, and right-to-access will become more pressing. Space tourism into Low-Earth Orbit, by companies such as Virgin Galactic, will also likely require a clarification of the boundary between air- and outer-space – up until now planes flew low enough, and satellites high enough, to avoid addressing the question more thoroughly – but space tourism vehicles will fly/orbit in the grey area. Several private companies have also recently expressed an interest in mining the moon – and the introduction of non-state actors into outer space activities is likely to pattern future developments in legislation over the region. In short, a new treaty clarifying mining rights and obligations is needed.

Sputnik disintegrated in the Earth’s atmosphere in January 1958, after spending three months in orbit. The last American space shuttle mission is due to launch later this year, after which the entire fleet of vehicles will be retired. Landmark events such as these leave a legacy of legal, political and philosophical questions for humankind. In the near future we will need to readdress the question first raised 60 years ago: who owns outer space?
To boldly go where no regulator has gone before may not have the faded romance of naive American universalism, but it's an important activity nonetheless.
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India Needs Jets: Sweden's Saab, US Overstretch

♠ Posted by Emmanuel in ,,,, at 6/13/2011 12:00:00 AM
[NOTE: This still is the IPE Zone, not Jane's Defence Weekly. Still, you may want to pull the bomber jacket out of the closet and groove to Steve Stevens for old time's sake.] Here's an interesting IPE angle on the machinations of defence procurement that I came upon totally at random alike much of the most interesting blog fodder. It's funny how time flies when Top Gun is 25 years of age this year. Back then the Cold War was still very much in full swing with Maverick and Goose encountering the (fictional) MIG-28. As late as 1986, India was still more sympathetic to the Soviet Union than the United States in the belief in central planning and a mistrust of unfettered markets. This was before Manmohan Singh started loosening the reins of the infamous "Licence Raj" that kept India on the infamous Hindu rate of growth.

So it will be of no surprise to anyone that aside from the custom of writing five-year plans, the Indians also purchased a lot of their military hardware from the Russians. They Still do--but even that may change. Manmohan Singh, now prime minister, famously signed a nuclear technology sharing agreement with the Yankees in 2006, causing his then-Communist allies great consternation. In the commercial realm with India becoming perhaps the offshoring destination of choice for Western firms, the globalization game was well and truly on.

Now resurgent India is flush with cash as its aging fleet of MIG-21s reaches the end of the red brick road. To be sure, the nation has a fair need for military hardware. India's main security concern remains nuclear-armed Pakistan--the suspicion is mutual--while its border dispute with China remains a point of contention. In geopolitical terms, it is troubled by both US-Pakistan and China-Pakistan military cooperation. Internationally, there is now a massive race to see who can get India's signature for a multibillion dollar deal that is arguably the most eagerly anticipated one in the international arms bazaar. Aside from the Soviets and the Americans, the French and the Swedes are also vying for this lucrative contract.

For comprehensive information on India's Medium Multi-Role Combat Aircraft(MMRCA) competition, let us turn to Defense Industry Daily for the first time ever:
“It’s the biggest fighter aircraft deal since the early 1990s,” said Boeing’s Mark Kronenberg, who runs the company’s Asia/Pacific business. India’s planned multi-billion dollar, 126+ plane jet fighter buy became a contest between Dassault, Saab, MiG, American competitors and EADS’ Eurofighter...

The original intent of India’s fighter purchase was to replace hundreds of non-upgraded MiG-21s that India will be forced to retire, with a complementary force of 126 aircraft that would fit between India’s high end Su-30MKIs and its low-end Tejas LCA lightweight fighter. While plans to develop a “fifth generation fighter” in conjunction with Russia have received a lot of press, they are uncertain at best, address a different requirement, and offer no solution to the immediate problem of shrinking squadron numbers as existing aircraft are forced into retirement.
Let us now segue into Saab's story. Unlike ill-fated Saab Automobile AB which was bought by GM in 1990, Saab Aerospace--maker of sleek fighters and other defence gear--has remained in Swedish hands. The Swedes are a go-it-alone sort, preferring not to join the Eurozone while keeping the krona, for instance. So it has been in defence: its jets are not Eurofighters but homegrown designs. Through persistence and individuality, Saab is now in the frame with the world's top defence concerns in a race to replace India's MIG-21s even if its name recognition handicaps it somewhat:
The biggest contract that everyone is fighting for at the moment is an anticipated $11bn (£6.7bn) Indian order for 126 fighter jets, set to become one of the biggest export orders in the history of the defence industry. Saab was recently told it had not been shortlisted for the Indian contract, due to be awarded in March 2012, but remains hopeful nevertheless...

Saab is convinced its lightweight single-engine multirole fighter aircraft is both as capable as and much cheaper to buy and operate than larger, twin-engined jets such as the Eurofighter Typhoon, Dassault's Rafale and Boeing's Super Hornet - not to mention Lockheed Martin's F-35 Joint Strike Fighter, which has suffered from cost overruns running into billions of dollars. By contrast, [Saab's] Mr Sindahl observes: "We made the Gripen demonstrator at 40% of the original budget because we introduced new ways of working.
At any rate, there are other customers for the Swedes even if India doesn't sign on:
Saab's gain is a commercial product that is marketable across the world, according to Lennart Sindahl, head of Saab Aeronautics, the largest of the group's five divisions. The Saab JAS 39 Gripen has so far been bought not only by Sweden, but also by the Czech Republic, Hungary, South Africa and Thailand, and the UK is using it as its advanced fast jet platform for test pilots worldwide...

Saab is convinced it can extend its list of customer countries considerably over the next decade or so, as some 5,000 of the 13,000 fighter jets currently in operation are scheduled for retirement, and as emerging nations prepare to gear up their air forces. "For the Gripen, there are new markets and market possibilities coming along all the time," Mr Sindahl tells BBC News in an interview.
Those crafty Swedes have used the oldest trick in the book, industrial policy, of keeping its defence industries competitive:
The Gripen project has emerged from Sweden's desire not to rely on foreign companies for its defence capabilities. The programme has been further strengthened by the country's supportive industrial policy.

Sweden has realised that targeted investment in hi-tech sectors, such as the military aircraft industry, can be hugely beneficial for the nation as a whole, according to Gunnar Eliasson of Sweden's Royal Institute of Technology and the Ratio Institute, a free-market think tank. "Long-term competitive sustainability of an industry requires the local presence of one or more technology-leading firms for the rest of industry to learn from," he says in a book on advanced public procurement as industrial policy. Investment in the Gripen project "has generated an additional social return to society on the order of magnitude of at least 2.6 times the original development investment", according to Mr Eliasson.
Now let us turn to the Yanks. Lockheed's F-35 Joint Strike Fighter (JSF) programme has famously been beset by delays and cost overruns. Like America itself, US defence contractors are seldom on time or on budget. That figures. While it is certainly one of the more advanced and highly rated designs in the race to replace the ageing MIGs, it is beset by--you probably guessed it--industrial policy, this time on both sides. On one hand, while the Indian economy has certainly liberalized compared to the pre-Manmohan Singh days, it seems they are still keen on not just being paying customers by availing of technology transfer and accompanying "offsets" that benefit local industry:
The vendor who finally wins will be required to undertake 50% offset obligations in India. That’s a boost from the usual 30%, which is required for Indian defense purchases over $70 million. The additional 20% was added because India is looking for a large boost to its aerospace and defense electronics industries, and understands that the size of their purchase gives them additional leverage. The Indian MoD’s RFP release adds that “Foreign vendors would be provided great flexibility in effecting tie up with Indian partners for this purpose.”
On the other hand, you also have American defence firms alike Lockheed being obliged to keep proprietary knowledge in-house that are not keen on sharing this knowledge--even at a price:
India has been invited to F-35 events. With potential US [domestic] order numbers dropping, India might even be accepted into the program if they pushed for it. The F-35’s killer weakness was timing that coudn’t deliver the fighters in India’s timeframe, and India’s pursuit of its FGFA program with Russia offers it a semi-indigenous alternative. Even if India changed its mind, the F-35’s advanced systems, established industrial partnership structure and program procurement policies could also make it nearly impossible to meet India’s technology transfer and industrial offset rules.
Just as international trade policy largely fashioned on American preferences as exemplified by the WTO discourages subsidies, so does US foreign military sales (FMS) procurement policy discourage "offsets":
The general policy of the Department of Defense with regard to offsets is that they are market distorting and inefficient. In accordance with an April 16th, 1990, Presidential Policy statement, the decision whether to engage in offsets, and the responsibility for negotiating and implementing offset agreements, resides with the companies involved. The Presidential Policy mandates that "no agency of the U.S. Government shall encourage, enter directly into, or commit U.S. firms to any offset arrangement in connection with the sale of defense goods or services for foreign governments."
Let's be honest here: Americans have BS artists from here to eternity, and the defence industry certainly isn't free from them. Even when the US military cannot afford jets due to overstretch--broke America probably has more pressing priorities--it still turns up its nose to countries that can actually pay for these killing machines.

Security matters often receive less IPE attention, but we have an interesting triple comparative political economy here depicting countries on different trajectories. India is definitely shining with many keen on sharing design know-how with it. Sweden is maintaining its reputation for engineering through well-applied industrial policy. And the US is, industrially speaking, a beggar being a chooser that is flushing itself down the toilet of history through overstretch. That's about par for the course as far as the global pecking order is concerned.

Modern American defence policy isn't up there with the best of the best, to put it mildly. It's funny what a difference a quarter of a century makes.
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Cyber Attack: Hacking Into the IMF

♠ Posted by Emmanuel in at 6/12/2011 08:00:00 PM
Being rather underwhelmed about former IMF Deputy Managing Director and current Bank of Israel Governor Stanley Fischer going for the top job (has holds both US and Israeli citizenships), let's talk about IMF hacking instead of Asian financial crisis-era dinosaurs. These sorts of attacks are usually said to emanate from China or Russia, so you have to wonder: in theory, what exactly do these FX reserve-heavy nations have to gain from hacking into the IMF? Certainly there is not much for them to gain with respect to themselves in terms of preparing for IMF responses to balance-of-payments crises which are unlikely to befall them.

To me, there are no obvious attractions here for hackers: this entity does not hold consumer financial data or corporate proprietary information. Then again, Russia which always keeps tabs on its neighbours might value more information on the conditions of recent IMF clients Belarus and Ukraine, or to a lesser extent Hungary or Latvia. That for borrowers aside, proprietary information may not be all that unique insofar as Article IV consultations are always publicly released despite often being quite massaged. Go figure. Whodunit?
But in the case of the I.M.F., officials declined to say where they believe the attack originated — a delicate subject because most nations are members of the fund. The attacks were likely to have been made possible by a technique known as “spear phishing,” in which an individual is fooled into clicking on a malicious Web link or running a program that allows open access to the recipient’s network. It is also possible that the attack was less specific, a case in which an intruder was testing the system merely to see what was available.
The BBC also has some footage on the hacking attack. Verging on the improbable, maybe China is curious as to whether the time is nigh for mounting a palace coup in providing the largest share of IMF funding. In that case, IMF headquarters would be headed for Beijing, remember. Or less outlandishly, perhaps the PRC, another country, or a group of countries is interested in further understanding processes of succession?
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Georgia, Still Russia's Roadblock to Joining WTO

♠ Posted by Emmanuel in ,,, at 6/10/2011 12:02:00 AM
I just wanted to add this update to my ever-growing collection of posts pertaining to Russia joining the WTO [1, 2, 3, 4, 5, 6, 7, 8, 9, 10]. The gist of it is that Georgia remains the main obstacle to Russia joining the international trade body. Given Georgia's outright conflict and continuing troubles with Russia over access to its erstwhile breakaway republics of Abkhazia and South Ossetia, the final blocking party was obvious. Imagine having another country controlling access to what you rightfully can claim as your own territory. It's not fun stuff. When we last had dispatches from this front, Switzerland had offered to mediate WTO entry among the quarrelling factions. Many months later, perhaps Swiss efforts haven't been enough. From Bloomberg:
Georgia and Russia haven’t made any “substantial” progress in three months of talks on Russia’s bid to join the World Trade Organization, Prime Minister Nika Gilauri said. “We don’t see any substantial progress yet even though there are some steps,” Gilauri said today in an interview with Bloomberg News at the World Economic Forum on Europe and Central Asia in Vienna. “So far the talks are going very much in the same mode.”

Switzerland in March started mediating negotiations between Russia and Georgia, which fought a five-day war in 2008 over the breakaway Georgian region of South Ossetia. Georgia has cited disputes over customs checkpoints in South Ossetia and another breakaway region, Abkhazia, as reasons to withhold its approval for Russian WTO membership.

Russia, the largest economy outside the WTO, has been seeking to join the Geneva-based trade arbiter since June 1993. The U.S. announced last year it had resolved most issues necessary for Russia’s accession. “The only request from Georgia’s side is for transparency on border crossings, on customs checkpoints,” said Gilauri. “If there is no transparency on checkpoints, how can Russia become a member of the WTO?”

Russia rejects “politicization” of WTO accession talks by Georgia, the Russian Foreign Ministry said in March. The “political window of opportunity” for Russia to enter may “start to close down” at the end of the year as the U.S. and Russia enter election years, Russian Deputy Prime Minister Sergei Ivanov said in an interview with Bloomberg in Miami in April, adding that he is hopeful an agreement will be reached before then.
Like me, do you find it odd that the US election cycle would put off the Russian bid for WTO membership? Despite the usual paeans to equal membership status, some may be just that bit more equal than others--alike the country that was instrumental in creating it. Some things never change, but you have to wonder if US presidential elections really matter that much in an ostensibly multilateral organization.

Meanwhile, As Clausewitz said, war is the continuation of politics by other means--a perfect explanation of the aforementioned conflict. What better way for Georgia to contest Russian checkpoints located in its breakaway republics but to create roadblocks to Russia joining the WTO? Strictly speaking it's not a trade issue being debated, but how does the "free movement of goods and services" sit alongside your neighbour fencing you out from your own territory? Strange but true.
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The Inevitable National Sales Tax in America

♠ Posted by Emmanuel in at 6/10/2011 12:01:00 AM
With more and more American retail spending happening online and not in bricks and mortar outlets, a previous cash cow of American towns has gone the way of, well, many retail chains. Montgomery Ward, Circuit City...the list of outlets that have found their way to the Great Mall in the Sky is long. Building shopping centres used to be an American local government pastime designed to generate sales taxes for revenue. But, with the shift to online shopping and a generally shopped out populace, things are not what they used to be. Let's begin with the increasingly desperate "you build it, but the shopper don't come" scenario care of the WSJ:
Municipal sales-tax receipts have declined in six of the past 10 years, compared with the year before, according to the National League of Cities, including drops of 6.6% in 2009 and 5% in 2010. That has city leaders from Texas to California waking up to the likelihood their sales-tax decline isn't just a result of the bad economy. Instead, it is problem that will persist after a recovery, as demand for retail complexes is whittled by online shopping and the waning popularity of the big-box store selling everything from groceries to electronics.

"I am not sure cities can go back to playing the retail game the way they have over the past 25 years," said William Fulton, mayor of Ventura, Calif., and editor of the California Planning and Development Report newsletter. For decades, cities have engaged in an escalating competition with their civic neighbors to encourage the building of bigger and bolder shopping palaces—often with public subsidies—to enlarge their coffers.
It was a recipe for sprawl, pure and simple. What to do? As you would imagine, pressure is in turn growing from states to apply sales taxes to online retailers. Another recent article in BusinessWeek suggests that, actually, Amazon in particular would still charge less than stores with a physical presence do even if a national sales tax was applied. End result: it would end government pressure for it to do so while presumably not having much of an impact on its business:
There's a growing sense among state and federal lawmakers that the online sales-tax reprieve, once meant to support and nurture a fledgling industry, constitutes an advantage that Amazon, with 90 million customers and $34 billion in annual sales, no longer needs. Over the past year an escalating war over online sales taxes has spread to Texas, Connecticut, California, and dozens of other states. Later this month the battle will reach Capitol Hill. Senate Majority Whip Dick Durbin (D-Ill.) says he plans to introduce a bill, called the Main Street Fairness Act, mandating that all businesses collect the sales tax in the state where the consumer resides.

Such measures have been proposed and disregarded by Congress for years, but Durbin believes the winds are shifting. "This idea is overdue," he says. "Online retail sales are now very fulsome and are growing at the expense of local units of government." Many state budgets are bleeding red, despite some recent revenue upswings around the country, and Internet sales-tax revenue has the gleam of found money. In many states, customers are supposed to declare their online purchases on their income tax forms but rarely do. A University of Tennessee study recently estimated that states will collectively lose $10.1 billion in uncollected online sales-tax revenue this year and $11.3 billion next year.
And then there are the studies that suggest Amazon has little to lose from finally giving in on collecting these sales taxes:
Actually, being forced to collect sales tax may not turn out to be so bad for Amazon. Analysts at Wells Fargo Securities (WFC) recently surveyed a range of products and found that even without factoring in sales tax, Amazon's prices were, on average, 5 to 6 percent lower than Wal-Mart's and 12 to 13 percent below Target's. And without having to worry about sales-tax consequences, Amazon will be able to freely add shipping centers near every major city and accelerate its push toward delivering products overnight, or even on the day they're ordered. "Each year that passes, the relevance of sales tax to Amazon's success is less and less," says Morgan Stanley (MS) analyst Scott Devitt, who notes that the company keeps getting more efficient as it gets larger. "If you look five years out, when there's probably a policy in place, it's possible Amazon will be better off for it. That's not something I would have said before."
I am of two minds about this. Having been a longtime beneficiary of having friends and relatives visiting or living in the United States bring back things for me purchased online, retail prices there remain the lowest for consumer goods anywhere in the world. It's a fascinating application of modern world systems theory how things made in LDCs for export to markets alike the US actually cost less than buying them in LDCs or regions they were made in.

Still, I believe this situation may not last for much longer of not having a unified sales tax that could be applied to online outlets given the bedraggled finances of US local governments up and down the United States. Local governments are in no better shape than that at the federal level, to say the least.
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On Hillary Clinton Angling to be World Bank Chief

♠ Posted by Emmanuel in at 6/10/2011 12:00:00 AM
You've probably seen the headline that Hillary Clinton is agitating to become the White House's pick to succeed Bush-era appointee (and former USTR) Robert Zoellick as the World Bank president when his term runs out next year. While it's the rumour of the day (evening?), consider:
  1. I'd believe it more emanating from Hillary Clinton herself.
  2. If France's Christine Lagarde becoming the next in an unbroken run of European IMF chiefs weren't bad enough, how about Hillary Clinton among American World Bank heads? Whatever happened to more diverse voices at Bretton Woods institutions?
While I am more favourably disposed to Hillary Clinton than Barack Obama and still think she'd have done a better job as US president, I honestly don't see how, if true, another American rubber stamping would improve the World Bank's image as a truly global institution in representation. Would the Europeans have any choice but to back Missus Clinton as a quid pro quo for Geithner backing Lagarde? The West--the US and Europe--looks poised to keep the old order alive. Bloomberg already suggested as much a few days ago. Coincidence? I sure hope so:
U.S. Treasury Secretary Timothy F. Geithner says France’s Christine Lagarde and Mexico’s Agustin Carstens are both qualified to run the International Monetary Fund. He may have little choice but to support Lagarde.

Under an unwritten agreement that dates back to the end of World War II, the IMF has always been led by a European while the World Bank has been headed by an American. Backing a non- European for the IMF could mean relinquishing U.S. control of the World Bank -- an outcome members of Congress who decide on funding for development banks are not ready to contemplate.

“For the sake of influencing policy and lending, as well as maintaining congressional support, it is very important that the World Bank continue to be led by an American,” Representative Nita Lowey of New York, the top Democrat on the House Appropriations Committee panel that oversees foreign-aid spending, said in an e-mail. Congress has yet to approve the Treasury Department’s $3.4 billion international aid budget for next year, which includes funding for the World Bank.

“We would like to see the U.S. continue to play and have a leadership role in these institutions,” Representative Robert Dold, an Illinois Republican and vice chairman of the Financial Services Committee panel that oversees development banks, said in an interview.
Plus, there's a Foreign Relations Committee report that supports continued US dominance of such lenders, the point being that American would be more comfortable funding them if one of their own was in charge:
A March 2010 report by the staff of Senator Richard Lugar of Indiana, the top Republican on the Committee on Foreign Relations, recommended that the U.S. “preserve” its leadership at the World Bank “and senior level positions at the other” international financial institutions. “Having an American at the helm of the World Bank helps ensure continued U.S. support for the institution and facilitates communication” with the bank, the report said.
I'd take fright at the idea even if Bill Clinton's name was put forward. Once more, there are any number of folks from the developed world who can readily fill this position. Besides, the days when the US could easily write the cheques are long gone. Nowadays, it's more honestly the PRC and other LDCs lending the US to fund Bretton Woods institutions, and it may not be long before IMF headquarters are in Beijing due to China's growing contributions.

LDCs, band together to fight this rearguard movement. United we stand, divided we fall.

UPDATE: The White House vehemently denies that she is after the World Bank's top job. Hey, anything to scuttle this bid to maintain the status quo would help, so I thank Reuters in any event.
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Christine Lagarde Answers Your Questions

♠ Posted by Emmanuel in , at 6/09/2011 03:34:00 AM
OK, let me get this out of the way: I hold French Finance Minister Christine Lagarde in high regard, but chafe at the notion of her becoming the next IMF managing director. Do we need another European head when international financial institutions are striving to be in touch with the times when the world's economic centre of gravity is heading eastward? Also, do we need another French person heading another global or regional governance body when we already have WTO Director-General Pascal Lamy, Jean-Claude Trichet at the ECB, and a recently departed Dominique Strauss-Kahn? While the French are skilled diplomats, of that there's no doubt, it's way too much already.

Anyway, while reading a new WSJ article about her attempting to garner support in China and India--both remain noncommittal at present but surely would be even less likely to back Mexico's Agustin Carstens (the IPE Zone pick)--I read that she is quite handy with social media (or maybe her assistant[s] are). Given that many of my incoming links now come from Twitter and Facebook than from other blogs, I am not particularly surprised. Indeed, her skilled use of social media is now being touted as no small advantage. For the curious, she is soliciting questions today from the likes of you and me regarding her IMF bid:
Ms. Lagarde will also take questions on Twitter and Facebook on Thursday as she seeks every possible outlet to bolster her campaign. Readers of her Twitter feed and fans on Facebook can send in questions before the session officially begins at 1 p.m. ET Thursday. "An hour is not a long time!" her Facebook page says, adding she personally will answer the questions.

Ms. Lagarde has tweeted around 70 times to her burgeoning band of followers during her tour of emerging economies. "India seems willing to consider my candidacy," she tweeted Wednesday, despite no clear official backing from India's government after meetings with Ms. Lagarde in New Delhi. The meeting with India's Prime Minister and Finance Minister, who invited Ms. Lagarde to lunch, was "very friendly," she tweeted.

On Friday, Ms. Lagarde will meet African officials during an African Development Bank Conference in Portugal, before travelling to Saudi Arabia and Egypt on the weekend. Her choice of Twitter to keep up links to the rest of the world as she travels may turn out to be a savvy one.
At any rate, do visit her Twitter and Facebook accounts even if you don't raise questions. In addition to being a globetrotter pressing the flesh, the opponent is a cunning new media operator!
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Junk Treasuries: Time for US 'Technical Default'

♠ Posted by Emmanuel in , at 6/08/2011 09:35:00 PM
In three simple points, let me explain the concept of subprime globalization before moving on to the enticing prospect of American sovereign debt being junked in 2011:

1. Free money policies have done America next to no good;
2. These free money policies are ultimately costly in adding to the burden of already heavily indebted future American generations;
3. LDCs that should know better are piling public monies better spent on public goods alike health and education into funding wasteful, pointless American spending.

While slagging America is admittedly a pastime in these parts because it is so fun, easy, and morally justified with generous helpings of righteous fury, I am of the mind that the free-spending fool is just that bit less stupid than those footing the bill of the free-spending fool (LDCs purchasing Treasuries).

No matter; we have some very encouraging news that, while not in the realm of immediate probability, still points to the famously tardy credit rating agencies--those same folks whose rating prowess was on display during both the Asian financial crisis and subprime crises--recognizing what the rest of us already know. Yes, American Treasuries are utter rubbish. Following S&P, last week Moody's placed the US under credit watch for a downgrade from AAA status if nothing was done to improve its fiscal picture as soon as July. Now, however, comes news that Fitch will consider a "technical default" by the US as a credit event worthy of dropping the status of Treasuries to junk as soon as August. A technical default simply means that, the US Treasury having exhausted all artifices in avoiding a breach of the $14.3 trillion debt ceiling which has not been raised, fails to honour American obligations.

So, it seems to me that we have two options here. First, we can continue with subprime globalization from which no one benefits--the US and its similarly brainless creditors, or receive a taste of America's bankrupt future via "technical default." I am all for the latter. You can call me a dreamer, but it seems Republican Tea Party folks are not ruling out such a default to (they say) prod the US on a more sustainable fiscal path. See some representative responses [1, 2, 3]--especially to an earlier WSJ interview urging it. Even the Chinese are affecting displeasure at this possibility--I wonder why. Anyway, to this informative Reuters story:
U.S. Treasury bonds, seen worldwide as the risk-free investment [yeah sure], could be labeled "junk" if the government misses debt payments by Aug. 15, credit agency Fitch Ratings warned on Wednesday. The ratings would go back up once the government fulfills its debt obligations, but probably not to the current AAA level, Fitch said on Wednesday in a stark statement about the impact of a short-lived default on U.S. credit-worthiness.

The statement follows similar warnings by Moody's and Standard & Poor's, but Fitch was the first among the big-three rating agencies to say U.S. Treasury securities could be downgraded, even for a short period of time, to a non-investment grade.
Of course, I am fully encouraging the Tea Partiers to pull the trigger (or flush America down the toilet) now since even worse things are in store for their debt-loving country anyway on its present, unsustainable trajectory:
The idea of a brief U.S. default, sometimes called a technical default, has been growing among some members of the Republican Party, who believe it would be an acceptable price to pay if it forces the White House to deal with runaway spending.

"Even a so-called 'technical default' would suggest a crisis of 'governance' from a sovereign credit and rating perspective," Fitch said in a statement...Clearly the political signals which are coming (from Washington) are a source of concern," David Riley, head of sovereign ratings at Fitch, told Reuters in an interview.

Treasury bonds could be rated "junk" by Fitch Ratings if the government misses some $82 billion in debt payments by Aug. 15 due to disagreement over the debt ceiling. The ratings would go back up once the government fulfills its debt obligations but probably not to the current AAA level, Fitch said.

President Barack Obama is trying to win congressional approval to raise the borrowing authority before an Aug. 2 deadline. The Treasury Department said on Wednesday the Fitch warning was "another stark reminder" of the need for Congress to act quickly.
Mark 2 August on your calendar; hopefully, Congress will have done nothing by then:
Fitch said it would first place U.S. ratings on "watch negative" if lawmakers fail to enact an increase in the U.S. debt ceiling by Aug. 2, the date when the Treasury Department will have run out of extraordinary measures to avoid a default.

The first test for U.S. ratings will come two days later when $30 billion in Treasury bills mature. If the government fails to repay them in full, Fitch will lower the rating on those specific securities to B-plus, four notches into junk territory.

But the real deadline comes on Aug. 15 when $27 billion in Treasury notes and $25 billion in coupon payments come due. If the government misses those, Fitch would downgrade the U.S. sovereign issuer ratings to "restricted default" and lower all Treasuries securities to B-plus.

"Though such an event (such as a short-lived Treasury bill default) may not permanently impair the capacity of the U.S. government to service its obligations, it is unlikely that its 'AAA' status would be retained in the short to medium term," it added...Moody's credit rating agency warned last Thursday that it could consider cutting the United States' top-notch credit rating if there was not progress by mid-July on a deal to reduce the deficit and raise the $14.3 trillion U.S. debt limit.
It's time to call a spade a spade. Americans love all sorts of junk: junk food--witness their gut-busting levels of mega-obesity; junk mortgages--witness the subprime fiasco; junk assets (ditto); junk as in making the most garbage--see here...and they'll learn to love junk Treasuries, too. Life is what you make of it, and modern American finances are, well, you can figure that one out. To save the world from subprime globalization, America must literally pay the price for its boorish behaviour.
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The Pinko Path: On Peru Joining Latin Left's Ranks

♠ Posted by Emmanuel in ,,, at 6/08/2011 12:04:00 AM
It's somewhat odd that the whitebread commentariat hasn't made more of this event, especially since it's happening in their own backyard. While dependencia theory of Latin American countries becoming pliant and fertile grounds for Western exploitation may have gone out of fashion in academic circles, the same does not necessarily hold with Latin American leadership struggles. In the run-up to the seventies when dependencia theory was in full bloom, you had the likes of Jacobo Arbenz in Guatemala and Salvador Allende in Chile whose political fates were--how do I put this--eased along by American intervention. Curiously enough, when leftist ideologies were supposed to have gone out of style, we have seen in the past few years the emergence of several new figures on the Latin left. The questions remain the same as ever: should we promote local industry or welcome foreign extractive concerns? Is there a way to reconcile both objectives to promote development? The faces may change but the essential issues remain the same.

Sure, the brothers Castro had their share of (short-lived) ideological peers over the intervening years. However, it is only in more recent decades that we have witnessed the rise of Hugo Chavez in Venezuela, Evo Morales in Bolivia, Daniel Ortega in Nicaragua, and Rafael Correa in Ecuador. (Prior to Fernando Henrique Cardoso becoming president of Brazil, he was one of the foremost dependencia authors, but turned out to be rather neoliberal upon assuming office.) And so it is that in this alleged twilight time for the Latin left that we have another potentially joining its ranks with the recent election victory of Ollanta Humala in Peru, stock-in-trade socialist firebrand rhetoric in hand.

Without a doubt, certain parts of the Andean business community are running scared as markets have reacted quite negatively:
Shock waves from leftist Ollanta Humala's victory in Peru's Sunday presidential election rattled stock markets and corporate suites around Latin America, as investors girded for the possibility of sweeping changes in one of the region's star economies. Peruvian stocks fell a record 12.5% on fears over increased government intervention in the economy after Mr. Humala's defeat of conservative Keiko Fujimori on Sunday [daughter of controversial former President Alberto Fujimori]. Nervousness also roiled shares of companies throughout the region with Peruvian investments, such as Grupo Mexico, a huge copper producer, and LAN Airlines, a Chilean based regional air carrier...

One of Mr. Humala's economic advisers, Kurt Burneo, tried to reassure markets that Mr. Humala wouldn't spoil an economic formula that has produced 12 consecutive years of growth. "I totally reject that a fiscal binge could happen," Mr. Burneo told Peruvian radio. He said Mr. Humala would be committed to maintaining growth and investment in order to fund his plans for greater social spending. "One point of growth of output generates an increase of 1.2% in tax revenue, thus it's key to continue growing, " Mr. Burneo said.

Mr. Burneo, a former vice minister of the economy in the centrist government of former President Alejandro Toledo who is well-liked by investors, underlines the questions surrounding Mr. Humala's government. Mr. Burneo joined Mr. Humala's campaign in the runoff race after Mr. Toledo was eliminated in the first round of voting, and it is unclear whether he represents Mr. Humala's current philosophy.

Analysts say there is often dissonance between the more moderate advisers who joined Mr. Humala after the first round and the more left-leaning ones who began with him. In a television interview Sunday, Felix Jimenez, a left-leaning economist who is part of the original Humala team, was still defending the interventionist 197-page governing proposal by Mr. Humala that spooked investors during the first voting round. That plan was replaced with a more mainstream five-page plan in the runoff.
So many years after, it's back to debating dependencia:
The Peru election is reviving an ideological debate that had seemed to be settled in Latin America between the largely market-oriented economies of Peru, Brazil, Chile and Uruguay ,and the more populist ones of Venezuela, Ecuador, Nicaragua and Bolivia. The latter seemed on the decline in recent years, beset by faltering economies and growing domestic political headaches, while the former grew more strongly and consistently. In 2005 to 2010, per capita gross income in Peru rose 82%, to about $5,200. Peru has roughly halved the poverty rate to just above 30% over the past decade.

But Mr. Humala's win is prompting some soul searching about the flaws in Peru's economic model, governing institutions and political elite. Analysts said Mr. Humala capitalized on the persistence of rural poverty, the broad distrust Peruvians feel towards traditional politicians and institutions and divisions within the centrist political establishment that kept it from settling on a single candidate to oppose Mr. Humala, who lost a prior presidential bid.
It was, to be sure, something of a surprise to Peruvian elites and observers of the country's political scene:
"For some observers, the idea of an Humala victory in 2011 was inconceivable," said Maxwell Cameron, a political scientist at University of British Columbia. "If he lost in 2006, surely he would win even fewer votes in 2011 after another five years of growth. However, he added, "It was precisely this overconfidence that led the center-right to fail to unify behind a single candidate with broad appeal." Moreover, "After five years of growth, prosperity remained unequally distributed and heavily concentrated in the coast and major cities..."

A paper written a few years ago by Julio Carrion, a political scientist at the University of Delaware, sums up the paradox in Peru between high growth and widespread public dissatisfaction. The title: "It isn't the Economy, Stupid. Economic Growth Does Not Reduce Political Discontent in Peru."

Poverty and inequality were accountable for part of the problem, he wrote, but not all of it. Another issue, he wrote, is Peruvians lack of faith in government and public officials. In a survey last year by Latinobarometro of Chile, Peruvians ranked the lowest of 19 nations in the region in their confidence, in Congress, political parties, and the courts. About one-fifth of the members of Peru's Congress have been caught up in scandals, by the count of a local newspaper...

Mr. Humala, a former military officer, cast himself as the anti-politician. He emerged in the public eye in 2000 when he led 60 troops in an uprising against Alberto Fujimori in an isolated mining town. The act was largely symbolic, but it catapulted Mr. Humala into prominence. Moving forward, [political consultant Hugo] Santa Maria told a conference call of investors that economic growth for the second half of 2011 could decline to 4% to 4.5% from around 7% due to investors' caution over Mr. Humala. "A slowing down of private investment...will slow down the economy," he said.
So, a previous Latin American high-flyer is in danger of stalling. Mining giants operating in the country are already thinking twice, for instance. Will Humala be a Lula de Silva (a former activist turned pro-investment figurehead; they apparently have lots of them in Brazil) or a Hugo Chavez (an erstwhile mentor of his)? It was not so long ago that Lula was regarded with healthy suspicion, yet he turned out to be quite progressive in trying to reconcile social activism with welcoming enterprise. Commentators suggest Humala has learned from his 2006 run when his Chavistic stylings scared off many voters, and that he now intends to be more Lula-like. (The stock market rebounded Tuesday.) His appointments for central bank governor and finance minister represent early opportunities to assuage fears.

Yet, it again begs the question about the foundational stability of rapid but unequal growth in LDCs. So many times you see trickle-down failing to do its thing despite reasonably healthy growth rates. It's certainly something for libertarians and their ilk to ponder.

But with all that comes a blessing of sorts: a side benefit of the Cold War ending is that Washington no longer sees the need to pull the strings in its backyard in fear of Soviets gaining a foothold in Latin America. Despite the appearance of various regimes casting a baleful eye towards Washington--we want to be self-sufficient, go away American imperialists, etc--the old will to meddle in this part of the world is not what it once was.

UPDATE: Markets are being further assuaged by credit rating agencies stating no downgrade is imminent, but geez, isn't it too soon to comment after such recent elections?
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All Hail Sports Corruption: Euro 2012 in Ukraine

♠ Posted by Emmanuel in ,, at 6/08/2011 12:03:00 AM
There appears to be something which just brings the worst out in people while attempting to land marquee sporting events alike the Olympics, the World Cup, and Formula One grands prix. Once the events are finally landed, however, there are yet more layers for corruption to occur during contractual bidding processes. Ah well, just as jingoism and sport often go together, so it seems do governance issues and sport.

Hot on the heels of the FIFA fiasco involving Sepp Blatter being chosen once more over his erstwhile rivals--it appears corruption allegations did little but eliminate erstwhile challengers to his authority--we have yet another episode on the immediate horizon. With the World Cup done and dusted, the next major international football tournament here in Europe will be Euro 2012 which various national teams are busy trying to qualify for at the moment. But alas, while those teams should be in fighting condition for next year, the same may not necessarily hold for co-host country Ukraine (the other being Poland). You see, some of its facilities are behind schedule and construction has been hampered by faulty bidding processes.

It may be the case that Ukraine is going for the double--bidding irregularities to host the event as well as faulty contracting. From the Evening Standard:
An investigation by this newspaper has uncovered claims of murky construction deals and backhanders in Ukraine - which will co-host the tournament with Poland - that have sent costs spiralling. Among the projects that have raised suspicions are the 10 wooden benches bought for £44,000 and the £6 million heliport for players built 150 miles from the nearest stadium.

The Olimpiyski stadium in Kiev, intended to take centre-stage, is still only half built. Although scheduled to have already staged a game, its first match is now planned for November, little more than eight months before the final. The stadium, however, is likely to be the least of Uefa's worries if corruption allegations made by opposition politicians are substantiated. Claims that votes for the winning bid - fronted by sports stars including former Chelsea striker Andriy Shevchenko - were bought resulted in a defamation case that still continues.
Yulia Tymoshenko--she of the famously otherworldly hairdo--has been at the forefront of the allegations:
Yet Yulia Tymoshenko, the former prime minister, claims the worst has yet to be uncovered. "When our government was in office we had an estimate that the cost (of the stadium in Kiev) would be £160 million. Now it has moved to £380 million." The total bill for hosting the tournament, including infrastructure improvements, is expected to reach £8.5 billion.

At the heart of allegations by Ms Tymoshenko and the opposition is a claim that projects have not been put out to tender properly. The European Commission has criticised planned changes to a law that would narrow further the publication of tender documents.

Opposition sports minister Ostap Semerak says the overspend is a result of this. He gives examples such as the purchase of the wooden benches from a sewer manhole manufacturer and the heliport, apparently in a hunting spot favoured by the ruling class. The price of a new stadium in Lviv, meanwhile, has more than doubled from £84 million to £183 million.,,

Ukraine's president, Viktor Yanukovich, elected a year ago, has conceded corruption is a major issue in the country. Uefa president Michel Platini was quoted as saying it was "perhaps an error" to award the event to Ukraine. The quote was quickly dismissed as taken out of context. Yesterday Uefa stressed it was not involved in tenders launched by the Ukrainian government.
This story still has room to run.
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