Antigua, Barbuda, C'mon Gamblers

♠ Posted by Emmanuel in , at 3/31/2007 05:54:00 AM
Here is a heartening story that contradicts those who say the WTO is unfair in hearing cases of small countries. Sometime ago, the US decided that online gaming sites operating from abroad could not ply their trade Stateside for they violated laws banning interstate gaming. Antigua and Barbuda, a small Caribbean island nation with a population of 68,000 (not featured in Cocktail or the "Kokomo" video by the Beach Boys) then brought the matter to the WTO Dispute Settlement Mechanism (DSM), alleging that US actions violated General Agreement on Trade in Services (GATS) provisions. Antigua won, and the US said it would adopt the binding WTO ruling. However, the US has been tardy in doing so. In response, Antigua returned to the DSM to ask for US compliance. Once again, the US came out on the losing end. This ruling paves the way for possible remuneration for Antigua from losses sustained by US non-compliance.

The issue at hand is in regard to discrimination. The US claims that it prohibits interstate gaming to "protect public morals." Yet, it still allows the placement of interstate bets on horse racing through the 1978 Interstate Horseracing Act (IHA). Although the WTO allows countries to ban such forms of gambling, the problem is that the US discriminates by banning operators in Antigua while allowing horse racing bets to be placed across borders. The US passed the Unlawful Internet Gaming Enforcement Act (UIGEA) that prohibited credit transfers for cross-border betting in October of last year, but did nothing to clear up conflicts with the IHA. In fact, the WTO cited UIGEA as a source of further confusion. In the meantime, the online gaming industry, which has been hard-hit by legislative moves, is seeing this ruling as a potential respite. The US will have to allow offshore Internet gaming operators to ply their trade in America once more, or eliminate off-track betting on horses once and for all.

NAM: FTAs are Good for America

♠ Posted by Emmanuel in at 3/31/2007 01:25:00 AM
The National Association of Manufacturers (NAM) in the US believes free trade agreements and bilateral deals are worth pursuing (and implies multilateral ones are not working out too well). True-blue economists will blanch at the scope for trade diversion, but manufacturing interests have views of their own. NAM's Frank Vargo states "Our free trade partners account for close to half of our exports, but only six percent of our manufactured goods deficit." He adds that "while we want to help find a compromise that works for everyone, we can’t take our eye off the ball – we need to cut foreign barriers to our exports, and more trade agreements are the only way to do that." This not-so-subtle chart reinforces NAM's stance:

NAM has traditionally been an exponent of trade agreements. It helped Bush gain fast-track authority and backed China's entry into the WTO. However, it may be souring on the WTO in general and China in particular as NAM members that benefit from trade with China become fewer than those that are hurt. Thus, NAM's recommendation at the current time is geared towards cutting smaller deals such as those with Colombia, Panama, and Peru--countries that one wouldn't expect to be sending boatloads of manufactures to America anytime soon.

US: Screw WTO, It's D-I-Y Time

♠ Posted by Emmanuel in , at 3/30/2007 05:41:00 PM
Here are some preliminary thoughts on the US measure to impose countervailing duties (CVDs, or more commonly referred to as tariffs) on coated paper products from China. Coated paper is of the glossy sort you find in books, magazines, annual reports, brochures, and gift wrap. The case was brought forth by NewPage Corporation, a coated paper producer headquartered in Dayton, Ohio late last year to the US International Trade Commission (ITC). Upon investigation, the ITC found the American paper industry "materially injured" by Chinese imports. The ITC then forwarded the case to the Department of Commerce (DOC), which announced today that countervailing duties would be applied to Chinese coated paper imports ranging from 10.9% to 20.35% for subsidies including tax breaks, debt forgiveness, and low-cost loans. The term "countervailing" refers to these duties purportedly offsetting the amount by which coated paper was subsidized to sell at lower prices in the US market.

Some of you might be wondering what the brouhaha is all about as coated paper does not exactly occupy the commanding heights of global industry. The importance of this case lies in setting a precedent that may pave the way for many, many more similar actions by US manufacturers in industries such as furniture, steel, and rubber against China . Going into a bit of the legal nitty-gritty, China was previously categorized as a "non-market economy" (NME) by the DOC. As such, CVDs were not applied to these countries. The case in question is that of Georgetown Steel in [1984]1986 where the Commerce Department stated
We believe that a subsidy is definitionally any action that distorts or subverts the market process and results in a misallocation of resources, encouraging inefficient production and lessening of world wealth.

In NMEs, resources are not allocated by a market...allocation is achieved by central planning. Without a market, it is obviously meaningless to look for a misallocation of resources caused by subsidies. There is no market process to distort or subvert.

It is this fundamental distinction--that in an NME system the government does not interfere in the market process, but supplants it--that has led us to conclude that subsidies have no meaning outside the context of a market economy.
That was then. This is now according to Commerce Secretary Carlos Gutierrez:
China’s economy has developed to the point that we can add another trade remedy tool, such as the countervailing duty law. The China of today is not the China of years ago. Just as China has evolved, so has the range of our tools to make sure Americans are treated fairly. By acting on the petition filed last October, the United States today is demonstrating its continued commitment to leveling the playing field for American manufacturers, workers and farmers.
I would not harp on this case if it could not portend something big, like a full-blown trade war. With this ruling, an avalanche of complaints may be brought forward against China by firms in several other industries as the DOC is seen as being more receptive as demonstrated by NewPage. Again, notice the timing of this ruling (near election season 2008) and the location of the complainant (rust belt Ohio). If you're a public choice theorist, the vote-gaining angle is obvious. China, for one, has already made it clear that it views this case as "unfair." It made a last-ditch effort to gain an injunction at the US Court of International Trade but failed. While CVDs are allowed under WTO rules if distorting subsidies can be substantiated, this is the first time that the US has not gone through the WTO in seeking remedies and applied these sanctions directly against China--exactly as Peter Morici suggests it should do. The US may have just let loose the dogs of (trade) war.

March 31 Update : To no one's surprise, China is "strongly dissatisfied" with the measure according to Xinhua News agency. What is ironic is that China still insists on having itself classified as a non-market economy by appealing to US (and not international or WTO) precedent. If that's all there is to China's retort, then color me unimpressed. I suspect however that China has more drastic, market-moving tricks up its sleeves.

On Iran Hostage Crisis II

♠ Posted by Emmanuel in at 3/29/2007 08:55:00 PM
I was hoping that this story of British sailors captured by Iran would have disappeared from the headlines by now as it is, to my thinking, exceedingly ridiculous. Frankly, I do not see how Iran can gain anything from detaining the British sailors any longer. To date, the UK has been playing "good cop" to America's "bad cop" in trying to engage Iran diplomatically along with France and Germany on the nuclear issue. (Not that Iran hasn't been able to game the system.) Now, however, Iran is testing the goodwill of one of the few countries attempting to hold back more drastic American action. If Iran backing out on releasing the lady English hostage was not bad enough, then suggesting that these sailors would be put on (show) trial is even worse. It's almost 1979 all over again, except with a Brit flavor--rising oil prices, saber-rattling, and diplomatic dogfighting at the United Nations. Even the current British foreign minister, Margaret Beckett, cut her teeth as a minister during the term of the late PM James Callaghan.

Some suggest that Iran is trying to use the hostages as bargaining chips over its nuclear program. This line of thinking is perverse since removing whatever remaining goodwill Britain, France, and Germany collectively hold for Iran is not wise, to say the least. Hardliners in the US will tell the European three "I told you so" and may pave the way for tougher measures. It's also a stretch to use British captives in trying to free five Iranian diplomats detained by Americans in Iraq--this is a non sequitur. I would normally find humor in the Keystone Kops- and Fawlty Towers-inspired Iranian efforts to place these sailors within Iranian waters during their capture, but not now. First, they gave the English the coordinates of where they were captured. Next, the English determined that they were indeed still inside Iraqi waters. In response, the Iranians then provided another set of coordinates that showed them as being in Iranian waters. As I said, this is ridiculous.

That British troops should be in Iraq in the first place is a matter I will not touch upon as it is another can of worms. As before, I hope this episode comes to pass without a skirmish. Oil prices have gone from slightly above $60 to $66 a barrel as "political risk" has presumably gone up. Message to Iran: this is not how to win friends and influence people in the international community.

Senators Mull China Trade Sanctions

♠ Posted by Emmanuel in , at 3/28/2007 11:14:00 PM
The story in the US right now is pretty much subprime all time; so much so that even China seems to have been placed on the backburner. It's a shame as yesterday and today's Senate Committee on Finance hearings on "Risks and Reform: The Role of Currency in the US-China Relationship" have yielded a bumper crop of insights. Threateningly for US-China relations, China's perceived inaction by the Senate on currency reform is under scrutiny once more. Senators Charles Schumer (D-NY) and Lindsey Graham (R-NC)--who last year sponsored a bill proposing 27.5% tariffs on Chinese imports as a "a shot across the bow" that was not intended to pass--have now teamed up with Max Baucus (D-MO) and Charles Grassley (R-IA) in building the perfect legislative beast:
Beijing and the Bush administration are both on notice that Congress will pass bipartisan, veto-proof legislation this year aimed at forcing China to allow its yuan currency to continue to rise against the dollar, two of China's most vocal critics on Capitol Hill vowed Wednesday.

Rather than serve as "an apologist" for China, "I hope the administration will join this team," Sen. Lindsey Graham, R-S.C., told reporters after testifying before the Senate Finance Committee in the second hearing on China's economic and currency policies in two days.

They remain (purposely?) vague on how this bill would look like other than that it would be WTO-compliant and would garner enough congressional support to override a presidential veto, or a two-thirds majority in both houses of Congress. While we await the details of this piece of legislation, let us consider the statements of the star-studded witness panel featured on Wednesday...

Stephen Roach, chief economist of Morgan Stanley, repeated the now-familiar mantra of "don't bite the hand that feeds." At the start of his testimony, he suggested that currency was not the only or even the most important source of Chinese competitive advantage. He posed the question: "How would you feel if you got your way on the Chinese currency adjustment but found after three or four years the pressures bearing down on US workers had only intensified?" As a skeptic of currency adjustment as cure-all, he said "I don't buy the notion that China's currency policy is a threat to the global trade. I feel, instead, that many in the developed world--especially the saving-short United States--are treating RMB-related issues as scapegoats for their own macro shortcomings." Ouch. He reaffirmed his (politically unpopular) view by concluding that the US would do better if it considered its own role in creating such a massive trade imbalance. Roach added that a pro-saving agenda would top the list in taming the budget deficit and in pursuing tax reforms which could "alter the personal price between savings and consumption."

As for China, Roach stated that it should move away from excess reliance on investment and exports for its growth and embrace more of a pro-consumption model. Doing so would avoid capacity excesses (by creating internal demand) and protectionist risks from elsewhere. Also, Roach believed it could partly move China away from energy- and pollution-intensive growth, though it would still need to address its serious and growing environmental problem separately. The rest of his statement is interesting in noting China's environmental challenges, and I would invite you to read it if you've got the scratch. There's little new here, though it's odd that he did not necessarily see RMB revaluation as being part of the reform equation.

Eswar Prasad of Cornell and late of the IMF also testified. Being an ex-IMF man, it is no surprise that while he saw revaluation as part of the process of reform, he prioritized financial deepening ahead of it. According to him, "the lack of financial market development and the general increase in macroeconomic uncertainty has made households nervous, increasing their savings to very high levels and restraining consumption growth." As I pointed out earlier, though, many obstacles have been placed in the way of foreign financial service providers who could offer more sophisticated services to Chinese consumers. Nevertheless, Prasad affirmed that the costs of China maintaining its current FX regime outweigh the benefits of moving to a more realistic exchange rate. He offered the following diagram on p. 4:

If China moved to a more flexible exchange rate, it would gain monetary policy independence by not having to gear this policy to keeping the yuan artificially weak and be further able to open its capital account in promoting financial deepening. In short, Prasad suggested that China move from having an inflexible exchange rate and (largely) free capital flows at the expense of a sovereign monetary policy to giving up an inflexible exchange rate and gaining free(er?) capital flows together with sovereign monetary policy. Classic Mundell-Fleming "impossible trinity" stuff. Further along this yellow red brick road are the aforementioned gains to macroeconomic management and financial deepening, which in turn lead to balanced and sustainable growth. Though the diagramming is undoubtedly idealistic, I subscribe to this view most closely among the four presenters: "currency flexibility is an essential but hardly sufficient [Chinese] policy priority."

Morris Goldstein of the Institute of International Economics was third to present. He was, by far, the most gung-ho of all four. In contrast to the gradualist Roach, he said "China should deliver a meaningful 'downpayment' of a 10-15% appreciation of the RMB from its current level. Because China has waited so long to take decisive action on the growing undervaluation of the RMB, the undervaluation can no longer be eliminated in one go." He then cited four indicators as to why China had to move--its "mushrooming" CA surplus, its real exchange rate which he said had actually depreciated 2% against the dollar since 2001, its unwillingness to let market forces determine the (nominal) exchange rate, and its rejection of claims on currency manipulation--which membership to the IMF forbids. In contrast to Prasad, Goldstein suggested capital account liberalization should follow exchange rate reform for China's still-fragile banking system may not be able to cope with sudden liberalization.

Goldstein further added that to speed up currency reform in China, the US Treasury should not hesitate in branding China a currency manipulator. In other words, call a spade a spade so that the current game of gradual but barely noticeable appreciation ends. He too called for the IMF to take a more proactive role in deeming China's exchange rate policy inappropriate. To his thinking, if the US and the IMF both brand China a currency manipulator, international pressure would increase for China to revalue its currency at a faster pace since the arguments for gradual adjustment have yielded few results thus far.

Lastly, John Makin of the American Enterprise Institute made the oft-repeated pitch that it is in China's best interests to move on its exchange rate due to rising trade tensions, domestic inflation pressures, and rising asset market volatility. He exuded pessimism in believing that unless China changed its current course, "we may expect to see a crisis erupt sometime in the next twelve months comparable to the Asian currency crisis that erupted in 1997. In particular, caps on prices may result in goods shortages together with social disorder." He then noted "Long gas lines already exist in China and signs of social unrest are on the rise. If, alternatively, the Chinese simply permit inflation to rise rapidly, the result will again be more social instability." Makin concluded by saying "Some yuan appreciation would help to signal a need for appreciation of most Asian currencies, including the Japanese yen...The Chinese and the leaders of other major nations of the world cannot continue, simultaneously, to complain about global imbalances while resisting exchange rate adjustments..."

Four testimonies, four viewpoints. The sensible-shoe me sides with Prasad, while the action-hungry political science major in me sides with Goldstein and his offensive-minded approach. Either way, expect more strong-armed tactics coming out of Congress in the near future. I just hope that America's elected officials take note of some of the more sensible things said by these economists.

Bush the MBA Public Administrator

♠ Posted by Emmanuel in at 3/28/2007 02:16:00 AM
I was browsing the latest issue of Public Administration Review when the very first article stopped me in my tracks, "The First MBA President: George W. Bush as Public Administrator." For some time now, the trend in public administration studies has been to speak of public management as opposed to the more traditional administration. Supposedly, general management theory now informs government affairs to a large extent. Bush could have been a good fit with this trend. However, as the author James Pfiffner points out, perhaps business administration needs a better champion in public service. While lauding Bush's "bold thinking," "consistent adherence to his chosen policies," and commitment to "racial and gender diversity," Pfiffner faults Bush for his "lack of systematic deliberation" and "failure to weigh sufficiently the judgments of military and other public administration professionals."

I could scribble endlessly on Bush's innumerable managerial shortcomings (group think, anyone?) but there is little point in kicking a dead horse with a sub-30% approval rating. I'd just like to add that budget management--a key managerial task--has suffered much with Bush's untax and spend policies. That he has racked up the biggest budget (and trade) deficits in American history gives MBAs a bad name. That Bill Clinton--a lawyer--managed to balance the budget and even run a surplus is telling. Would American finances have done better if Bush spent more time studying managerial accounting, or would its international relations have been better if Bush took a course in cross-cultural communication? I doubt it. The recent record of businessmen as public servants is not good, be it (the long-gone) Silvio Berlusconi of Italy or (the overthrown) Thaksin Shinawatra of Thailand. As cynical as people get about politics sometimes, there is still a public service component not fully captured by for-profit dynamics. And, you can take that to the (central) bank.

Killing Reefs & Endangered Fishies

♠ Posted by Emmanuel in ,, at 3/28/2007 12:53:00 AM
As rapid economic growth continues apace in Hong Kong and other parts of China, demand there for increasingly rare coral fish continues to grow. As these fish command very high prices in those markets, many fishermen have resorted to the dangerous practice of cyanide fishing in parts of Southeast Asia:
The use of cyanide to stun and capture live coral reef fish began in the 1960s in the Philippines to supply the growing market for aquarium fish in Europe and North America, a market now worth more than $200 million a year. Since the late 1970s, the poison has also been used to capture larger live reef fish (primarily grouper species) for sale to specialty restaurants in Hong Kong and other Asian cities with large Chinese populations. Selected and plucked live from a restaurant tank, some species can fetch up to $300 per plate, and are an essential status symbol for major celebrations and business occasions. As the East Asian economy boomed over the past several decades, live reef food fish became a business worth some $1 billion annually.

Despite the fact that cyanide fishing is nominally illegal in virtually all Indo-Pacific countries, the high premium paid for live reef fish, weak enforcement capacities, and frequent corruption have spread the use of the poison across the entire region -- home to the vast majority of the planet's coral reefs. Since the 1960s, more than one million kilograms of cyanide has been squirted onto Philippine reefs, and the vast Indonesian archipelago now faces an even greater cyanide problem. As stocks in one country are depleted, the trade moves on to new frontiers, and cyanide fishing is now confirmed or suspected in countries stretching from the central Pacific to the shores of East Africa. Sadly, the most pristine reefs, far from the usual threats of sediment ation, coral mining, and coastal development, are the primary target for cyanide fishing operations.
Chinese demand has contributed to considerable environmental damage in the region:

Large parts of reefs in the Philippines, Indonesia and Malaysia are becoming void of marine life as a result of overfishing and the use of cyanide to catch fish alive. Though illegal, many fishermen use cyanide, an exceptionally damaging and wasteful way to catch the fish, which hide amongst the coral, marine experts say. The divers squirt the toxin in the reef to stun the fish. But that kills most other marine life, including coral. Only about a quarter survive to make it to restaurants, experts say.

It's a contest with Southeast Asian governments and concerned groups like the World Wildlife Fund on one side versus opportunistic fishermen keen on capitalizing on the high prices of these fish on the other. Thirty Chinese fishermen on board the vessel Hoi Wan were arrested late last year in the Philippines for poaching endangered Napoleon wrasse, though this fish still manages to find a way unto menus in Hong Kong. However, supply is dwindling. Like with the "war on drugs," the challenge remains one of lowering demand. If conscientious diners are made aware that they are complicit in destroying reefs and endangering species, then demand should fall.

Easterly/Wolfowitz/Gates Smackdown

♠ Posted by Emmanuel in at 3/27/2007 01:31:00 PM
Development aid critic William Easterly is once again stealing the show in economic blogland with his latest missive in the Wall Street Journal, this time covering why more government in Africa is not the answer to regional poverty. Along the way, Easterly makes his now-customary digs at various celebrity activists as well as Jeffrey Sachs's Millennium Development Goals and "End of Poverty" book. I don't know how I managed to miss it for so long, but there is a video excerpt online of a panel at the 2007 World Economic Forum featuring Easterly, Bill Gates, Paul Wolfowitz (key architect of the US invasion of Iraq and current World Bank president), and Liberian President Ellen Johnson-Sirleaf (the first elected lady head of state in Africa). Moderating the panel is no less than Fareed Zakaria:

Hat tip to Jonathan for showing me how to insert this clip. Also, if you haven't read "The White Man's Burden" yet--which I suggest you do if you are interested in development issues regardless of your position on the efficacy of aid--there is a condensed version of this research accompanying Easterly's presentation at the 2007 American Economic Association Annual Meeting.

Bird Flu: Indonesia vs. WHO

♠ Posted by Emmanuel in , at 3/26/2007 04:04:00 AM
Indonesia has decided to hold out on sending bird flu samples to the World Health Organization (WHO). Although the WHO has called on countries to voluntarily share viruses to keep up with newer strains of the bird flu, developing countries like Indonesia are wary of cooperating for they believe that they do not receive much in return. The first issue is that WHO data is not readily shared with developing countries:
Several years ago the agency set up a secure database to allow scientists in its international laboratory network to compare H5N1 avian flu viruses across countries. The aim was to get affected countries to share on an accelerated basis. Typically this type of information isn't shared before scientific papers on the viruses in question have been published; that can take months or years.

But as concern about the threat of the H5N1 flu virus has increased, the closed database has taken on the image of an "old boys' club" for flu. Pressure has been mounting on the WHO to open up the database to the wider scientific community. It reached a peak last month when 70 senior scientists, including Nobel Laureates, signed a letter supporting the creation of an open-access flu database that would be outside the WHO's control.

The second issue concerns the affordability of drug subsequently developed based on these samples:
Indonesia - the nation hardest hit by bird flu, with 66 human deaths - has dug in its heels, refusing to bow to international pressure from scientists desperate to check whether the virus is mutating into a more dangerous form.

"This is the inevitable consequence of trying to privatize knowledge, and of a poor country saying the system is unfair," said Joseph Stiglitz, a Nobel economics laureate who has written about patents and globalization. "There are so few examples where a poor country has some bargaining chips on its side, and that's what makes this case so interesting."

Indonesia is not opposed to monitoring in general, but Health Minister Siti Fadilah Supari has stressed that she is against giving vaccine makers free access to the country's viruses under WHO's 50-year-old system of virus sharing. She fears any bird flu vaccine created from the viruses would be too expensive for developing nations.

Rich and poor countries were set to meet with WHO on Monday in Jakarta to try to hammer out a compromise. But the standoff has raised a much bigger issue: equal access to drugs and technologies.

"The price is too high for the developing countries to have access" to patented drugs, said Dr. Suwit Wilbulpolprasert, senior adviser on disease control at the Thai Ministry of Health, who agrees with Indonesia's stance.

The result of the upcoming meetings mentioned in the above article to resolve this issue should prove interesting. Pharmaceutical pricing in the developing world has been a longstanding trade issue. While some countries pursue "compulsory licensing" of drugs in emergency situations like Thailand recently did with its AIDS epidemic, this instance is notable in that Indonesia has decided to withhold samples altogether if they are to be used commercially. Stay tuned.

March 27 Update: Indonesia has reached a deal wherein drug companies will have to negotiate commercial rights with (developing) countries providing virus samples. Before, these companies could avail of such samples pro bono from the WHO, but things are set to change:

A senior WHO official said the body would now bar pharmaceutical firms from accessing the samples. All financial arrangements would be negotiated between individual firms and countries, he said.

"The WHO will only send the virus to collaborating centres for study and keep the virus from industry," said David Heymann, assistant director general of communicable diseases.

"The WHO will not get involved in financial arrangements. That will be agreed between the country and the company."

The deal will be finalised in June, but the Indonesian health minister said she trusted the WHO not to share samples with industry until then.

The Politics of Subprime Mayhem

♠ Posted by Emmanuel in at 3/26/2007 02:33:00 AM
Let's face it: For the most part, politicians are reactive and not proactive. Exhibit A is the recent shakeout in the US subprime mortgage industry. As nearly all the mainstream media and economics blogs stateside provide nonstop coverage of the ongoing saga concerning debt, deceit, and disclosure, there is little need for me to go over the story. Suffice to say, lawmakers in the US have begun to understand the implications of this subprime debacle. There is indeed a large political opportunity here; with election season 2008 gearing up, votes are up for grabs.

Take Senator Christopher Dodd (D-Connecticut), Chairman of the Committee on Banking, Housing, and Urban Affairs. To get where he is, he clearly must have some political skills. There are tricks of the trade to be learned in his modus operandi. In the wake of the housing debacle, he hauled several guilty and not-so-guilty parties to appear before his committee on March 22:
  • Regulators: A game of political dodge 'em requires pinning blame on someone else for lack of government oversight. Dodd requested representatives from the Federal Reserve, Federal Deposit Insurance Company (FDIC), the Office of Thrift Supervision (OTS), and the Office of the Comptroller of the Currency (OCC) to testify. Unsurprisingly, they feigned previous unawareness of the magnitude of the problem, and said they would do better in the future;
  • Industry Representatives: Every decent tale needs bad guys. Cue up patsies sent by HSBC, Countrywide, WMC Mortgage, and First Franklin. (New Century declined as it appears to be in its death throes.) For the most part, these guys had nothing to do but act sheepishly and explain that, actually, they were quite diligent in making these loans;
  • Consumers: Sob stories need hapless victims. Dodd invited two of those who fell prey to vile predatory lending practices to share their tales of woe.

Naturally, the hearing garnered a lot of media attention. In particular, Dodd made an accusation that the Federal Reserve practiced "bait-and-switch" tactics which led to a "perfect storm". From Dodd's opening remarks:

Regulators tell us that they first noticed credit standards deteriorating late in 2003. By then, Fitch Ratings had already placed one major subprime lender on “credit watch,” citing concerns over their subprime business.

In fact, data collected by the Federal Reserve Board clearly indicated that lenders had started to ease their lending standards by early 2004.

Despite those warning signals, in February of 2004 the leadership of the Federal Reserve Board seemed to encourage the development and use of adjustable rate mortgages that, today, are defaulting and going into foreclosure at record rates. The then-Chairman of the Fed [Alan Greenspan] said, in a speech to the National Credit Union Administration, said:

“American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage.”

Shortly thereafter, the Fed went on a series of 17 interest rate hikes in a row, taking the fed funds rate from 1% to 5.25%.

So, in sum: By the Spring of 2004, the regulators had started to document the fact that lending standards were easing. At the same time, the Fed was encouraging lenders to develop and market alternative adjustable rate products, just as it was embarking on a long series of hikes in short term rates. In my view, these actions set the conditions for the perfect storm that is sweeping over millions of American homeowners today.

Where this depressing story ends nobody knows. Needless to say, more coordination of oversight between state and federal authorities of the subprime market as well as better disclosure of terms will be required. In the meantime, announced Democratic candidates for the US presidency are jockeying for position. As you would expect them to imply, excess Republican laissez-faire led to this fine mess. Hillary Clinton calls for a time-out on mortgages about to go bust; Barack Obama asks Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson to convene a "homeownership preservation summit"; and Dodd uses his chairmanship as a high-visibility platform for Dodd for President 2008. There's a good chance that the public purse will be opened up to bail out these "hapless victims" as election season 2008 kicks into gear. Public choice theorists should be squealing with delight. Politics is fun, eh?

Venezuela: We're #1 in Oil Reserves!

♠ Posted by Emmanuel in , at 3/25/2007 03:38:00 AM

Venezuela now claims that it has the world's largest oil reserves at 316B barrels, topping those of Saudi Arabia at 262B. Or at least that's Hugo Chavez's claim as trumpeted on the state-owned oil firm PDVSA's website. This claim relies on heavy oil deposits being deemed recoverable in its Orinoco River valley--an area immortalized in Enya's hit song "Orinoco Flow (Sail Away)." The problem has always been that the oil there is of a heavy (high specific gravity) and sour (sulphur-filled) variety that is more difficult to refine than Saudi Arabia's typically lighter grades. If you go by quality and not quantity, Saudi Arabia has it all over Venezuela.The standard measure of specific gravity is the American Petroleum Institute's scale. Light crude oil has a gravity higher than 31.1° API; medium oil between 31.1° API and 22.3° API; heavy oil between 22.2° API and 10.0° API; and extra-heavy oil below 10.0° API. Most of Venezuela's crude is of the latter grade, having an average API of 8.5°. According to Rigzone:
Outside the Faja [Orinoco River area], Venezuela has 80 billion barrels of proven crude reserves, and currently estimates that producers in the Faja can extract at least 237 billion barrels of the extra heavy crude with existing technology. With nearly 320 billion barrels of recoverable oil, Venezuela will become the world's largest holder of petroleum reserves.

The Faja's crude is what producers call extra-heavy. Oil from this tar belt averages about 8.5 API gravity, which means that it is heavier than water and oozes rather than flows. This type of oil is difficult to produce and transport, and few refineries in the world will take it. But producers in Venezuela have plenty of experience with heavy oil, and their success so far has been world-class.

The Houston Chronicle provides more details on the commercial arrangements being undertaken by Venezuela. Note that Western oil companies have been put at the back of the bus, figuratively speaking:

In the 1990s, the Faja was divided into four major regions [Boyaca, Junin, Ayacucho, and Carabobo], each being developed through joint ventures with major international oil companies and PDVSA.

Experts have long speculated that heavy oil and bitumen deposits in Venezuela's Orinoco River basin may contain more than 235 billion barrels of commercially extractable petroleum. If that amount can be certified by outside experts and added to conventional reserves, Venezuela would reach 316 billion barrels, moving past No. 1 Saudi Arabia, which holds 262 billion barrels, according to the Oil and Gas Journal.

More than just bragging rights is at stake in PDVSA's two-year certification effort, called the Magna Reserve project.

To prove its Orinoco reserves, PDVSA is carrying out seismic studies and test drilling with the help of national energy companies from Brazil [Petrobras], China [CNPC], India [ONGC], Iran PetroPars), Russia [Lukoil] and elsewhere. When negotiating joint ventures with PDVSA, these newcomers are expected to have a leg up on U.S. firms - which played a major role in developing the Orinoco in the 1990s.

A TOTAL study notes that a key to the full realization of the production potential of these ultra heavy oil reserves will be technology, and more precisely how to find methods allowing to improve recovery rates at acceptable costs and without excessive energy consumption. At present, Venezuela mainly uses a so-called "cold heavy oil production with sand" (CHOPS) method in the region. It recovers less than 10 percent of the oil in place. Targets for subsequent heavy oil projects have been set at 20%, thus producers should utilize more advanced technologies in the near future. If they are able to do so, then the Bolivarian revolution may be in place for quite some time.

On Chavez's Proposed Gas Cartel

♠ Posted by Emmanuel in ,, at 3/24/2007 09:49:00 PM
It had to happen sooner or later. Seeing how OPEC has, in certain circumstances, been able to affect world prices of petroleum, one of the natural gas producers would eventually follow suit with proposing a gas cartel. What is unusual is that Venezuela would take the lead as its natural gas production is comparatively small. In fact, nearly all of its production is domestically consumed--it'd be a stretch to even call it a gas exporter at the current time. What many commentators downplay while pointing this fact out, though, is that Venezuela has substantial natural gas reserves. The Economist estimates that Venezuela has the most natural gas reserves in the region in an article assessing the prospects for a regional gas pipeline (see chart below):

Hugo Chavez and Argentina's President Nestor Kirchner--another Latin leader who has lukewarm relations with "el Diablo" (US President Bush)--first proposed a "Great Pipeline of the South" linking gas producers to consumers in Latin America. However, this project has (literally) not gotten off the ground so far. Being Hugo Chavez, he nonetheless enlisted the support of Argentina and Bolivia, two of the three leading gas producers in the region, in forming OrganizaciĆ³n de PaĆ­ses Productores y Exportadores de Gas del Sur (OPEGASUR) together with Brazil. Further, he wants to recruit other countries in the Gas Exporting Countries Forum (GECF) such as Algeria, Brunei, Egypt, Indonesia, Iran, Libya, Malaysia, Nigeria, Oman, Qatar, Russia, Trinidad & Tobago, and the United Arab Emirates. These countries have 73% of the world's gas reserves and account for 42% of production. (Argentina and Brazil are not part of GECF.) Chavez will push the issue in the upcoming meeting of GECF on April 9 in Doha, Qatar. So far, GECF has been characterized as more of a "talk shop" than a formal organization. OPEGASUR will be keen on Russia, Iran, and Qatar coming on board as they have 57% of global reserves and 26% of production.

As large producers, Russia and Iran may also have designs of their own on creating a gas cartel. Whether their interests are congruent with those of Venezuela remains an open question, though they are all are inclined to use energy as a political tool particularly against the US and would probably like nothing better than to spite it by forming a cartel. Nonetheless, several questions arise over a gas cartel's usefulness for its members. As most gas is transported via existing pipelines and not via ships (like petroleum), it is not easy to reroute supplies--buyers and sellers are largely predetermined. Contracts written up tend to be long-term as well, many lasting a decade or longer. Hence, short-term price movements are harder to influence. As a result, it is more of a case of having several regional gas markets and not a global market per se. 59% of global oil demand is met through imports, whereas only 18% of gas demand is accounted for this way. Nearly all of US gas demand is met by local production, for example, though this may change as recent searches there for gas have yielded little. Just as the Economist suggests that it may be cheaper to liquify natural gas (LNG) and ship it instead of using pipelines in Latin America, advances in shipping LNG may give a cartel more leverage by developing a spot market facilitated by maritime delivery.

Is Liberation Theology History?

♠ Posted by Emmanuel in , at 3/23/2007 03:34:00 AM
No discussion of Latin American political economy is quite complete without mentioning liberation theology. Like dependency theory, liberation theology is concerned with Marxist themes of domination and a quest for radical change. Whereas the West is the bogeyman in the former theory, prevailing local structures are the villains in the latter. Jesuit priests in Latin America were the main exponents of liberation theology, which gained a following mostly in the seventies and eighties in the poverty-stricken and largely Catholic region. In fact, I was taught liberation theology in college as I attended a Jesuit university, though I had misgivings even then. Unsurprisingly, the Vatican has had even larger misgivings about incorporating Marxist elements into church teaching. After all, how is it to reconcile the atheistic Marx who proclaimed religion to be the "opiate for the masses" with Catholicism? Moreover, the well-established institution of the Vatican is precisely the sort of status quo organization that liberation theology lashes out against. Here is a brief primer on liberation theology:

Liberation theologians agree with Marx's famous statement: "Hitherto philosophers have explained the world; our task is to change it." They argue that theologians are not meant to be theoreticians but practitioners engaged in the struggle to bring about society's transformation. In order to do this liberation theology employs a Marxist-style class analysis, which divides the culture between oppressors and oppressed. This conflictual sociological analysis is meant to identify the injustices and exploitation within the historical situation. Marxism and liberation theology condemn religion for supporting the status quo and legitimating the power of the oppressor. But unlike Marxism, liberation theology turns to the Christian faith as a means for bringing about liberation. Marx failed to see the emotive, symbolic, and sociological force the church could be in the struggle for justice. Liberation theologians claim that they are not departing from the ancient Christian tradition when they use Marxist thought as a tool for social analysis. They do not claim to use Marxism as a philosophical world view or a comprehensive plan for political action. Human liberation may begin with the economic infrastructure, but it does not end there.

Before becoming Pope Benedict XVI, Cardinal Joseph Ratzinger was already very critical of liberation theology as John Paul II's point man on doctrine. In 1984, he gave it a rough going-over. In addition to the points I mentioned, Ratzinger added that liberation theology was excessively concerned with structural fetters and placed those of sin in second place, whereas he believed it should be the other way around. Since he became Pope, Benedict XVI has, if anything else, become harsher on liberation theology. Father Jon Sobrino, one of the remaining architects of liberation theology, is now set to be disciplined by the Vatican:
Still, many saw a message in the criticism of one of the last champions of liberation theology, a political and sometimes radical interpretation of Roman Catholicism that emphasizes justice for the poor. The controversial school of thought was despised by the conservative church hierarchy, which believed it departed from core dogma.

The order against Sobrino will be issued by the Vatican's watchdog arm, the Congregation for the Doctrine of the Faith [which Ratzinger previously headed], and will carry the approval of Pope Benedict XVI who, as Cardinal Joseph Ratzinger, led efforts to stamp out liberation theology.

The move comes just two months before Benedict is to make his first trip to Latin America as pope. He will visit Brazil, another onetime bastion of liberation theology.

A Spanish-born Basque, Sobrino was assigned to El Salvador half a century ago.

He was part of an intellectual team of Jesuit priests based for many years at the University of Central America. Some believed in liberation theology, but all preached Catholicism with a social conscience in a country that descended into civil war in the 1980s.
Elsewhere in the article it is suggested that the current archbishop of San Salvador, Fernando Saenz Lacalle of the arch-conservative Opus Dei organization, had a role in bringing about this measure. Papal politics are at play. Nevertheless, it will be interesting to see if liberation theology can outlast current efforts to stamp it out, or even if it will fade away through lack of a following.

Political Economy of Pronouns

♠ Posted by Emmanuel in at 3/23/2007 01:36:00 AM
I still remember a professor of mine from way back who was keen on writing mechanics complimenting me on a presentation I made--except for referring to a manager as a "he." Her advice as an academic was to get rid of this habit. "Think what a female reviewer would make of your political incorrectness in a journal submission," she effectively said. After that incident, I thought I wised up during a subsequent presentation by referring to the archetypal manager as a "she." I was slightly crestfallen when she was not happy with this substitution, either. Her next bit of advice was to use plural forms (they are managers; you don't have to assign gender to them).

Fast forward a couple of years and one of the well-regarded authors in our department has the custom of adding [sic] to quotations that use he / him / his in reference to generic individuals like citizens, workers, and public servants. In this age of political correctness, it is common to see writing that bears the marks of gender neutralization in subtle and not-so-subtle ways. Unlike many other languages, the English language doesn't have gender-neutral pronouns when referring to individuals. Thus, the battleground has been set among traditionalists who see nothing wrong in using he / him / his and those who find reference to them inappropriate. Perhaps I stand accused of not being a sensitive new-age guy (SNAG), but I am largely indifferent to those who use the older convention. Though I have followed my professor's sage advice to use plural forms to avoid this trap--after all, I am just starting out and it would be dumb of me to offend potential reviewers of my work with un-PC terminology--I do not expect the same from my students. Many of them are international students and I believe that I should not burden them with following PC conventions in addition to learning to write in English.

While doing basic research for this post, I found this hilarious rant from Terry Watkins of the controversial Dial-the-Truth Ministries, who believes, among other things, that rock music is the work of Satan [cue up the Rolling Stones' "Sympathy for the Devil"]. Though I have several difficulties with his beliefs, he did raise some though-provoking points about possible PC overreach. He got apoplectic over the gender-neutralization of Today's New International Version (TNIV) of the Bible, which is available online:
By far the most extensive damage performed by the inclusive-perversions is the extermination of the "generic" masculine pronouns, such as "he / him / his".

Known as the "generic he", generic masculine pronouns are the standard method used in the English language when addressing an "indefinite" or "undefined" individual. Masculine pronouns, such as "he / him / his" are utilized to address both male and female when the gender is unknown. The "generic he" has been the accepted method, literally, since the beginning of the English language.

In favor of the convention of using he / him / his, Watkins cites writing authorities such as Strunk and White and the Associated Press stylebook:

How does Strunk and White advise concerning that mean, sexist, "generic he"? "Do not use they when the antecedent is a distributive expression such as each, each one, everybody, every one, many a man. Use the singular pronoun [he, him, his]."

Strunk and White also state concerning the "generic he": "It [the generic he] has no pejorative [derogatory, or belittling effect, negative, sexist] connotations; it is never incorrect."
(William Strunk, Jr., and E.B. White, The Elements of Style, p. 60)

How does the AP Stylebook instruct the journalists on the "generic he"? "Use the pronoun his when an indefinite antecedent may be male or female: [Example] A reporter attempts to protect his sources."
(Norm Goldstein, The Associated Press Stylebook and Libel Manual, 2000, p. 114)

Nor does using plural forms to avoid PC hazards get a free pass from either William Zinsser of On Writing Well fame or Strunk and White:

Author William Zinsser, in the best-selling, On Writing Well, warns of the effects of converting the singular "he" with the plural "they": "A style that converts every ‘he’ into a ‘they’ will quickly turn to mush. . . I don’t like plurals; they weaken writing because they are less specific from the singular, less easy to visualize."
(William Zinsser, On Writing Well, p. 123)

"Alternatively, put all controversial nouns in the plural and avoid the choice of sex altogether, you may find your prose sounding general and diffuse [not concentrated, indirect]."
(Strunk and White, Elements of Style, p. 61)

I will stick with plural forms despite potential costs to writing clarity. The benefits of avoiding PC-related snafus probably outweighs these costs, though things may change if I ever become Mr. Big Shot Author. As with many things, the political economy of gendered pronouns is largely about power--editorial power in this case. Let those editors have their way, for now.

China Crisis Caused by Accounting?

♠ Posted by Emmanuel in , at 3/21/2007 11:31:00 PM
Here's the darndest thing to gain my attention in a while. Forbes suggests that regulations to make Chinese accounting comparable to--but not exactly of the same standard as--worldwide standards (e.g., IASB) may cause stock market turmoil. Skeletons in the closet brought out into the sunlight by firms which have performed bookkeeping sleights of hand may shock. After all, the Chinese are famous for "creative accounting" in keeping three sets of books: one for the tax man, one for the external auditor, and one for internal use. Although moving towards international accounting conventions is of course a worthwhile long-term goal, expect some fireworks in the meantime. With the average P/E ratio in China being a whopping 63 according to Forbes, things are bound to get interesting:
Behind the recent, gut-clenching stock market volatility in China is a disquieting reality: China's rotten accounting. If you thought the Shanghai index's 8.8% drop in late February was bad, wait until a bunch of rickety Chinese companies collapse.

That's the dour outlook from ace China-watcher Brian Hamilton, who runs stock research firm Sageworks in Research Triangle Park, N.C. "Investors in China tend to buy and sell according to price movements, not fundamentals," Hamilton says. "But too often with China's stocks, there are no fundamentals to be found..."

But Hamilton thinks that move still won't stop market swings. That's because investors are about to see much more detail on China's corporate earnings, and the picture may not be pretty. With its accession to the World Trade Organization in 2001 China promised to open up its accounting sector to foreign accounting firms. China decreed Jan. 1 that its listed companies must book their profits under a new set of accounting rules. But what's eventually unearthed just might set off panics among small investors.

The new rules are based on--but not identical to--the international accounting standards increasingly used in most markets. That means much more detail in a secret economy, where even the most basic line items like debt and development costs were hard to come by, says Stephen Chipman, an expert on China's financial systems at Grant Thornton. Now companies will have to do things like quickly write off obsolete inventory and uncollectible receivables. That's a novel concept there.

Financial fraud has been plaguing China's effort to mingle freewheeling capitalism with its murky centrally planned economy. The country's police recently announced that they have uncovered 400,000 cases of economic crimes and arrested 370,000 suspects over the past seven years, recovering $12.9 billion. The harsh prison sentences meted out to Enron's Jeffrey Skilling and WorldCom's Bernard Ebbers are nothing compared with the sentences Chinese authorities handed two embezzlers: Zhou Limin, a former branch president of China Construction Bank, and Liu Yibin, an accountant, will be executed for filching $25 million.

Affluence, Poverty, and Deforestation

♠ Posted by Emmanuel in at 3/21/2007 12:10:00 AM
Here's yet more evidence that poverty is related to deforestation courtesy of the UN's Food and Agricultural Organization (FAO) in its State of the World's Forests 2007. From figure 67, you might gather that, among regions, Europe is least concerned with deforestation as it has designated the lowest percentage of forest area for conservation. You might be saying to yourself: "I knew it, those Europeans with their 'green parties' and 'leadership' on environmental issues really don't give a damn about deforestation. It's one big sham. Look at those Africans--they've set aside the most forest area for conservation. Africans--not Europeans--are those most concerned about deforestation."

However, figure 66 tells a different story altogether. In reality, Europe is second in the world in forest area gained percentage-wise from 2000 to 2005, whereas Africa lost more than anywhere else. The disparity between rhetoric and reality could not be starker in this instance; Africa's rate of loss is alarming.

The lesson is simple: setting aside forests for conservation is an entirely different thing from actually preserving forest cover. Poverty is associated with clearing for substinence agriculture, illegal logging and other environmentally-damaging practices that are difficult to discourage where poverty is rife. Resources required in monitoring designated areas for compliance and imposing sanctions on violators are harder to come by. While European countries may not mark off as much forest area for conservation, those that are marked off are subject to good monitoring and sanctioning. Nevertheless, there are success stories like Costa Rica that show developing countries too can begin winning the battle against deforestation if they focus on the problem in earnest.

Nail Sticking Out is Pounded Down

♠ Posted by Emmanuel in , at 3/20/2007 08:15:00 PM
This story exasperated me. Zheng Ming, a Chinese professor at Renmin University who served as the dean of political sciences at his school lost his post for writing the obvious about the Chinese educational system on his blog. He commented:
They told me that I should be punished for breaking the 'hidden rules.'

Universities have become an officialdom. The over-intervention and manipulation of academia by power definitely fetters its growth.

How is China's academia doing now? Does anybody overseas read papers written by Chinese scholars? Plagiarism and theft are rampant. Obedient kids are being taught to be minions.

My first reaction was surprise that they teach political science at all in China, albeit in watered-down form. While Marxist / Maoist thought you would expect to be taught even in these days of market socialism (whatever that is), straight-up political science would be something best avoided lest it encourage dangerously independent political thinking. My second reaction was, "well duh, did you expect to get away with making these statements?" Obviously, information dissemination is very tightly controlled in China--especially on the Internet. Mr. Zheng seems all too keen on breaking away from the Confucian tradition hinted at in this post's title. What he labels "hidden rules" and "obedient kids" are merely manifestations of a longstanding tradition in which you are supposed to listen patiently to the master's words of wisdom for the most part.

After thinking it over for a while, my third reaction was a measure of sympathy for Mr. Zheng since I too teach political science. The touchy subject that he brings up is controversial for good reason, and I ask my Chinese colleagues about it from time to time. China wants to be at the forefront of education to boost its human capital. Yet, at the same time, it wants to keep tight reins on freedom of expression. Now, you might say that political science is a fairly useless subject that does little to enhance national welfare unlike subjects such as math or engineering. However, consider that many of the high-technology clusters around the world like Silicon Valley and Bangalore have a freewheeling culture. Without such an attractive culture, creative minds may not be attracted to such a place--especially knowledgeable educators in these disciplines. Even tightly controlled Singapore is learning to give in a little after maintaining a tight grip for so long. In the words of former Singaporean PM Lee Kuan Yew:
The greatest challenge to Singapore today is to get our people to move away from the old model. Just being clean, green, efficient and cost-effective is not enough. You've also got to be innovative, creative, entrepreneurial.
How compatible is Confucianism with a dynamic learning culture where tacit knowledge thrives? We will see how this exciting story unfolds in China. I suspect that Confucius will have to give more way to Adam Smith if officials want to emphasize innovation and creativity.

High Sea Pirates Meet High Tech

♠ Posted by Emmanuel in at 3/19/2007 10:23:00 PM
Avast, ye scurvy dogs! While reviewing the current trends in maritime piracy (incidences are going down after a spike earlier in the decade), I came across a fascinating set of technologies that are being deployed to combat it. As pirates have increased their capabilities by using fast boats and advanced armaments, those on the defense have upped the ante in terms of technological sophistication as well. The International Maritime Bureau (IMB), which monitors piracy incidences, endorses three applications. According to its blurb:

The Inventus UAV (unmanned aerial vehicle) is a state-of-the-art reconnaissance system packaged in a highly efficient, highly stable flying wing form. Outfitted with cameras, the Inventus flies and covers a large ocean area and relays a real-time data link back to the ground station. This link provides real-time aerial surveillance and early warning of suspect or unauthorised craft movements to the coastal or law enforcement authority. Developed by Lew Aerospace, the Inventus is fully autonomous and can be launched and recovered even from a seagoing or patrol vessel. There are gas and electric formats and both fly in all weather conditions.

Secure-Ship is the most recent and effective innovation in the fight against piracy. It is a non-lethal, electrifying fence surrounding the whole ship, which has been specially adapted for maritime use. The fence uses 9,000-volt pulse to deter boarding attempts. An intruder coming in contact with the fence will receive an unpleasant non-lethal shock that will result in the intruder abandoning the attempted boarding. At the same time an alarm will go off, activating floodlights and a very loud siren.

The IMB endorses ShipLoc, an inexpensive satellite tracking system, which allows shipping companies, armed only with a personal computer with Internet access, to monitor the exact location of their vessels. In addition to its anti-hijacking role, ShipLoc facilitates independent and precise location of ships at regular intervals...

The ship security alert system regulation that will be put into place as of July 2004, requires ships of over 500 GT to be equipped with an alarm system in order to reinforce ship security. The system allows the crew, in case of danger, to activate an alarm button that automatically sends a message to the ship owner and to competent authorities. The message is sent without being able to be detected by someone on-board or by other ships in the vicinity. ShipLoc is contained in a small, discrete waterproof unit, which includes: an Argos transmitter, a GPS receiver, a battery pack in case of main power failure, and a flat antenna.

Together with increased patrolling, these technologies have reduced incidences of piracy as of late. However, pirates may up the ante once again by figuring out workarounds to these technologies or more ingenious ways of hijacking vessels. Vigilance and naval security go hand in hand.

The Infant Industry Which Never Grew

♠ Posted by Emmanuel in ,, at 3/19/2007 02:45:00 AM
The infant industry argument is a familiar one: Because global competition is intense, it may be necessary to block imports for some time until domestic industry can gain a competitive footing. Critics of this argument, however, point out that some of these infant industries never grow up. Here is a case in point: Proton Cars of Malaysia. It was set up in 1983 by then-Prime Minister Mahathir Mohamed as part of a plan to industrialize Malaysia by creating a car maker to promote technology, earn foreign exchange through exports, and spawn supporting industries. It has achieved none of these objectives. Not that these failures have kept it from expanding its model lineup and production capacity. According to the Economist:
...output never rose above 227,000 cars a year and exports never exceeded 20,000 units annually. In an industry dominated by a handful of global giants, each producing 3m-6m cars a year, Proton remains a minnow. Yet it has refused to scale down its ambitions. Proton has built factories capable of churning out 1m cars a year and has launched a range of models. But quality is poor and low volumes mean it is not able to compete on cost.
The troubles with Proton have accelerated lately as more choice was injected into the Malaysian auto market when the country lessened import tariffs in accordance with Asian Free Trade Area (AFTA) stipulations for cars manufactured in the region. Worse yet, Perodua, a local competitor whose majority owner is Toyota, eclipsed Proton in local sales for 2006:
In 2006, Perodua led national sales with 152,733 units, giving it a market share of 42 percent, up from 32 percent the year before, according to MAA data. Proton sales fell to 115,538 units for a market share of 32 percent, down from 40 percent in 2005. It had held the top sales spot since 1985. Japanese small-car maker Daihatsu Motor, a subsidiary of Toyota, owns a 51 percent stake in Perodua which has produced a series of attractive models well suited to the Malaysian market...

Loss-making Proton is in the process of selecting a strategic partner to arrest its sharp decline and is in negotiations with US auto giant General Motors, Volkswagen of Germany and PSA Peugeot Citroen of France.
It appears that Volkswagen is keen on purchasing Proton, most likely to establish a beachhead in the Malaysian market. Whether Proton's existing production facilities can be retrofitted to produce VWs is an open question. Current Malaysian PM Abdullah Badawi and his predecessor Mahathir have been feuding over the fate of Proton. Badawi wants to rid the government of this loss-making burden, while Mahathir sees it as a move dismantling his legacy. However, as Proton slips further into the red and runs out of cash, Malaysia may have no other choice than to sell its 43% stake. The government says it will identify a buyer by month's end. I guess it's time Proton, well, grew up.

The Three Waves of Globalization

♠ Posted by Emmanuel in at 3/17/2007 07:12:00 PM
In a review of recent books by Rajan Menon and Daniel Drezner, the Economist seems to find novelty in the idea that globalization is not all it's cracked up to be. Menon champions a strong American unilateral policy in the belief that international organizations are pretty much useless in this day and age--just as the neoconservatives do (or is that did?) On the other hand, Drezner advocates that states use their powers to shape international organizations to better cope with problems with increasingly transnational dimensions like pollution and food safety. In this context, Drezner highlights the point that states--especially powerful ones--still make the rules. While I subscribe to this viewpoint, I must point out that there is a well-developed, chiefly English literature stream on globalization that has covered this ground much earlier. In it there are three waves of globalization:

The hyperglobalist view holds that we live during the "End of History" (Francis Fukuyama), where the "World is Flat" (Thomas Friedman), and the "End of the Nation-State" (Kenichi Ohmae) is at hand. Supposedly, it is now global finance and corporate capital--not states--that exercise decisive influence over the organization, location, and distribution of economic power and wealth.

The skeptical view cautions against making such sweeping claims about the totalizing nature of globalization. Most notable among those holding this view are Paul Hirst and Grahame Thompson who put "Globalization in Question." They point out that, actually, the volume of trade as a percentage of national income was higher in most European countries during the pre-WWI era than it is now. They further add that trade and FDI activity has largely been concentrated in North America, Europe, and East Asia--hence, what is called globalization is in reality just regionalization.

The transformationalist view propounded by the likes of David Held and Anthony McGrew as well as Colin Hay attempts to find a middle ground between the hyperglobalist and skeptical views. It puts current globalization trends in a longer-term perspective of what occurred well before our epoch--like slavery and the creation of nation-states. Power struggles among nation-states and with other actors such as terrorist organizations and multinational corporations are ongoing, but they are now conditioned by the time-space compression of modernity in its many guises. In this view, globalization is a contested arena where there is no teleological certainty that states will disappear or that states will maintain largely undiminished power over their internal affairs. Rather, in Colin Hay's apt description, globalization is "a tendency to which there are countertendencies."

Most likely, as Drezner points out, globalization is not a wholly unique phenomenon that is washing upon us to remove all else, but the latest in a series of events with far-reaching and uneven effects. I am wary of claims that "everything is different now" because they seldom are so. Here is an excellent summary of the globalization literature that was written by Held and McGrew for the Oxford Companion to Politics. It's a shame that the work of English academics sometimes gets overlooked, even by their own press (tsk tsk the Economist), but there is a lot of valuable work being done here across the Atlantic as well.

Is Global Inequality Rising or Falling?

♠ Posted by Emmanuel in ,, at 3/17/2007 12:20:00 AM
The question of global inequality is perhaps the linchpin of all IPE debates for it concerns, among other things, the benefits of economic globalization and the efficacy of development efforts. For obvious reasons, those leaning left tend to say that global inequality is increasing, whereas those leaning right say the opposite. Among work representative of the former viewpoint is Thomas Pogge and Sanjay Reddy's, while that of the latter is Xavier Sala-i-Martin's. (Oddly enough, all three are at Columbia University; Pogge in the political science department, and Reddy and Sala-i-Martin in the economics department.) For this post, I will briefly describe the work of Branko Milanovic, which I consider more neutral. Even so, he gains a measure of respect from both sides of the debate. His book, Worlds Apart, is my reference on the matter.

Milanovic starts by tackling the question of what sort of inequality we are measuring. Concept 1 inequality is among the mean incomes of individual countries; tiny Lithuania population-wise counts for the same as large Russia. Concept 2 inequality weighs inequality according to each country's population size; Lithuania's average income would be extended to its 3.5M citizens, while Russia's average income to its 143M citizens. In an ideal world, we would have enough data to measure Concept 3 inequality, wherein we have data on the income of each individual in existence. While such data is nearly available in Western countries through household surveys, it is sparse in developing countries, to say the least.

The most commonly used measure of income inequality is the Gini index, which ranges from 0 (perfect equality) to 1 (perfect inequality where a single person has all the income.) Three main considerations also need to be accounted for, namely:
  • Do we measure income at market exchange rates (usually against the US dollar) or on a purchasing power parity basis (PPP--what can actually be purchased locally)?
  • Do we use survey-based mean income (from household surveys) or GDP per capita (which is basically GDP per head)?
  • Do we measure income (what one earns) or expenditures (what one spends)? While Western and Latin American nations typically use income as an indicator, those in Africa and Asia typically use expenditures. The problem is that expenditures are fairly stable over time, presumably because basic needs have to be met, while income is more variable.
Let us move to Concept 1 inequality worldwide. In the graph above from p. 39 of his book, Milanovic uses GDP per capita in 1995 dollars and on PPP terms for 120 countries from 1950 to 2000. It is an open-and-shut case here: inequality among countries unweighted for population size is increasing. From 1982 onwards, Concept 1 inequality has been on the rise with poor countries doing worse on the average than rich ones. For what it's worth, this period coincides with the second oil shock caused by the fall of the Shah of Iran and rising interest rates worldwide as the US Federal Reserve took greater measures to curb inflation in America. Also, note the unfortunate boost given by African countries to the Gini index. Without them, the coefficient would be rather lower. Elsewhere, Milanovic highlights the contribution made to inequality by former Soviet-bloc countries for many of them became "downwardly mobile" in the wake of the Berlin Wall's fall.

The picture changes a lot when we consider the population weights of each country as in Concept 2 inequality using the same set of data previously described. The graph above from p. 87 depicts an improvement in the world Gini index, particularly over the last twenty years. Improvements in the economic performance of China and India mean that whereas they used to contribute to global income inequality, they now reduce it. As these two countries together account for over a third of the world's population with 1.3 and 1.1 billion persons respectively, their recent economic successes have made a large difference in these computations. However, critics note that China's GDP per capita may be inaccurate. To begin with, its GDP data is considered unreliable by many.

Given that China and India are such large countries, Milanovic considers whether Concept 2 results would differ if Chinese provinces and Indian states were substituted for simply "China" and "India" in the sample. Doing so makes sense. Consider what would happen if we used just one mean worldwide income to calculate the Gini index--there would be no inequality whatsoever. Segmenting the world population into finer groups would, all things equal, make measuring inequality a more accurate enterprise. That is, we would be moving towards Concept 3 and away from the more basic Concept 1. After doing so, Milanovic finds that "growing interregional inequality in China and India has a discernible and positive effect on world inequality," and that "as more Chinese (and Indian) provinces become rich while others stay behind, world inequality will rise" (p.99-100) . The Gini index is boosted by over five percentage points between 1980 and 2000 when Chinese provinces and Indian states are included in the sample.

Much, much more is to be found in Milanovic's masterful work. I cannot list more unless I intend to violate stipulations on fair use so I will end here. What Milanovic's work demonstrates to me at least is that inequality is a slippery concept that is highly sensitive to how you measure it. My ultimate take is that while China and India may have reduced Concept 2 inequality somewhat in recent years, this trend might be on the upswing again if regional inequalities in these two countries continue to grow. Sometimes the truth hurts, but it needs to be told.