"Axis of Oil," Kennebunkport, Etc.

♠ Posted by Emmanuel in , at 6/30/2007 01:21:00 AM
You guys and gals who tune in to the US-based financial news media should be familiar with the peripatetic and irrepressible Phil Flynn. This guy is simply everywhere. Until recently, I was unaware that he had a blog on the website of the firm he works for--Alaron Trading. While I don't always agree with him, he usually makes lots of lively commentary. To set the background for this week's increase in oil prices, let's get some quotes in the Wall Street Journal from (surprise!) Phil Flynn. To be honest, I see little connection between the attempted bombings in London to higher oil prices Stateside due to fears of attacks on the oil infrastructure, but here it is anyway:
"This week's rally was driven by a host of issues, from technical factors to stronger-than-expected demand to the increased threat of terror," said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago.

"Going into the weekend, traders have to be prepared that maybe al Qaeda will attack targets other than people, perhaps an oil facility," he said.

Light, sweet crude oil for August delivery on the New York Mercantile Exchange ended 87 cents higher at $70.44 a barrel after rising as high as $71.06.

I have just added Phil Flynn's blog, the Energy Report, to my blogroll (beware that it solicits investors, though). Here are further Flynn-isms from his blog regarding this week's increase in oil prices and the tendency for certain oil-rich states to use oil revenues for furthering their geopolitical interests. Then again, has it ever been different?:

What is the biggest threat to the world energy markets and the future security of all oil consuming nations? It is of course the “Axis of Oil". And it seems as the weeks go on the "Axis of Oil” is spinning its errors [errors? Flynn does have a way with words...] faster and faster and seems to be getting to the point where they are out of control.

Who or what is the “Axis of Oil”. Well as I have mentioned before they are the countries of Venezuela, Russia and Iran. Countries that are increasingly becoming intoxicated with the power of oil. The power comes from controlling all that oil and natural gas in a world that is becoming increasingly more and more dependent upon what they have or seek to steal [and I thought I was cynical].

This week two members of the “Axis of Oil” - Russia and Venezuela - were especially active and transparent so the world can see their true colors. Venezuela nationalized their oil industry and kicked all US oil interests out. Russia is doing their best to do the same. They want to use oil not only as an economic tool but as political weapon. It was a bad week for those who care about freedom, free markets and the future security of oil and gas for consuming nations.

The most obvious assault on the rule of law and the security of the world's oil supply was the strong arm tactics used by Hugo Chavez to force US and Canadian oil companies out of Venezuela. And now Mr. Chavez is hinting that he wants to pursue nuclear weapons.

Russia and the errors they've made with oil and natural gas have been well documented. Putin, like Chavez, has little regard for the rule of law and the first sign that things were not all right with Russian President Vladimir Putin was when he took over YUKO’s. Then Russia started squeezing out Shell and BP from large oil field projects. Now Russia wants to lay claim to all the oil.

Russia is even laying claim to gas and diamonds to be found in the North Pole! This is impossible because everyone knows that the North Pole belongs to the great man himself...Santa Claus! But a report from the Daily Mail says that the Russian President and his scientists claim that an underwater ridge near the North Pole is really part of Russia’s continental shelf. I guess it's kind of the same way Saddam Hussein used to think Kuwait was part of Iraq.

This is another disturbing development from the Axis of Oil and very bullish factor the entire oil complex. Once again while the US Congress sits idly by our economic future is being divvied up and exploited by the “Axis of Oil”. Is anyone in Washington paying attention?

By the way, something to watch out for along the lines of political engagement Flynn discusses is Putin's upcoming meeting with Dubya at the Bush family's famed Kennebunkport vacation house. I assume Bush will look into Putin's soul once more. In any case, the Hudson Institute offers some talking points, not least of which is energy:
On the eve of the Bush-Putin summit meeting in Kennebunkport, four members of a Russian-American study group organized by the Hudson Institute said today that the present Russian regime is moving toward “a durable system of anti-Western authoritarian rule” and called on the U.S. to counteract this tendency by demonstrating strict fidelity to democratic principles.

Zeyno Baran, a senior fellow at Hudson, Evgeny Kiselyev, a well known Russian radio and television personality, Richard Pipes, a professor emeritus of Russian history at Harvard, and David Satter, a senior fellow at Hudson and research fellow at the Hoover Institution at Stanford said in the joint statement that “Russia is reverting to patterns of behavior characteristic of the Soviet Union.”

The four were members of a seven member group that also included Mikhail Delyagin, the director of the Institute of Globalization Studies in Moscow, Andrei Piontkovsky, a visiting senior fellow at Hudson, and Lilia Shevtsova, a senior associate at the Moscow Center of the Carnegie Endowment for International Peace.

The joint statement made the following recommendations:
    • The U.S. should not reach agreements with Russia at the expense of third countries, in particular, former Soviet republics because such bargains would only open the way to “new and more outrageous demands in the future.”
    • U.S. – Russian relations should be based on complete frankness. Self censorship on the part of the U.S. has not induced Russia to moderate its international behavior.
    • The U.S. and the European Union should develop a strategy to prevent Russia from using energy as a political weapon, including measures to protect against the consequences of a sudden cutoff of supplies.
    • The U.S. should take the commitments on the rule of law and human rights that Russia undertook in order to gain access to Western clubs like NATO, the G-8 and the Council of Europe seriously. In the event of flagrant violations, Russia should be expelled.
    • The U.S. should strengthen contacts with Russian civil society, encouraging exchanges and expanding broadcasts.
    • The U.S. should emphasize to Russians that, although it supports democratic institutions, the core of the U.S. position is support for moral values. This means opposing criminality, corruption, the assassination of political opponents and the reckless waste of lives in hostage situations.
The statement emphasized that, with the destruction of independent centers of power in Russia, the regime is actually fragile and the internal struggle for power opaque and uncompromising. Under these conditions, it is important for the U.S. to expand and preserve its moral capital with the Russian people.

BRICs Challenge US in Energy

♠ Posted by Emmanuel in , at 6/30/2007 12:17:00 AM
The current issue of the Economist features an article on how America has been weakened by--among other things--its troubles in Iraq and Afghanistan, its diminished "soft power," and its continued abasement of the US dollar. Repeated yet again is the economic challenge of the so-called BRICs (Brazil, Russia, India, and China) countries. As Gideon Rachman has pointed out, Goldman Sachs research estimates that China will surpass the United States in real GDP terms sometime in the mid-2020s. However, the Economist did not really focus much attention on the current usurpation of the United States and Europe as well by the BRICS players in the domain of energy. The Associated Press has more on the energy angle for us:
The main challengers to U.S. economic power - Brazil, Russia, India and China - have overtaken the United States in dominating the global energy industry, according to a new study by Goldman Sachs.

The rising power of the four countries - the new economic tigers nicknamed the BRICs - is already evident in the metals and mining sector and is starting to be felt in insurance and consumer-related industries, said Anthony Ling, a managing director at the investment bank...

At the end of the first Gulf War in 1991, 55 percent of the 20 largest companies in the energy industry by market capitalization were American, and 45 percent were European, according to the Goldman Sachs Group Inc. study.

But in 2007, 35 percent of the 20 largest energy companies are from BRIC countries, about 35 percent are European, and about 30 percent are American, the study said.

"The U.S. is now lagging with the smallest percentage number of energy companies worldwide," Ling said.

"If you think about the global resource industry typically being a leader in terms of global trends, we're starting to see this replicated in the mining industry, where 20 percent of the top 20 companies are now from BRIC countries," he said. "We believe this sort of pattern will be repeated industry by industry."

It is already evident in the insurance business, where BRICs account for about 10 percent of the top 20 companies, and in the global beverage industry, where the new economic powers are just starting to show with about 5 percent. Ling predicted the BRICs would soon be moving into the food and pharmaceutical sectors.

If investors and corporations don't take the growing power of the BRICs in the global economy into account, he warned, they will lose out on investment growth and competitive advantage for their companies...

Ling, who has been involved in analyzing the energy industry for 20 years, said he did not believe anyone polled after the first Gulf War "would come remotely close" to predicting the market capitalization of the energy industry today.

"I think there's a number of factors, which I think is a very good case study for just how rapidly changing the competitive environment for most industries are," he said.

Irving, Texas-based Exxon Mobil Corp. is still the No. 1 energy company by market capitalization today, as it was in 1991, Ling said.

But he said it is now followed by the likes of PetroChina Co., a unit of state-owned China National Petroleum Corp.; OAO Gazprom, the Russian state-controlled gas monopoly; Petroleo Brasileiro SA, or Petrobras, Brazil's government-run oil company; Sinopec, also known as China Petroleum & Chemical Co.; Russian oil producers OAO Rosneft and OAO Lukoil; China National Offshore Oil Corp.; and Oil & Natural Gas Corp., India's state-owned oil company.

"So you have major state energy companies that have entered the market capitalization ranks," he said. "I think it's a combination of the U.S. energy industry falling dramatically behind the rest of the world for a number of reasons."

First, Ling said, energy production has changed.

Goldman Sachs analyzed about 170 new projects around the world, each in excess of 500 million barrels, "the so-called legacy assets that will drive production in the future," he said.

Ling said 70 percent of that new production is coming from outside the Organization for Economic Cooperation and Development, which includes the world's richest nations including the U.S., Japan, South Korea, Canada, and major European nations.

Historically, he said, the bulk of that production was coming from the U.S., Canada, Norway and Britain.

"So what has happened is there's been an enormous spate of new projects in new areas," he said.

In many cases, Ling said, "it really does look like the attitude of European and also the BRIC countries' oil companies has been very different to the more traditional-based players in the Anglo-American world - much less colonialist, much more inclusive, really working together to come up with solutions in a way that seems to have been beyond the traditional competitors."

That means "they've seen their market share of new projects grow," he said.

There's also been "a conspicuous bout of acquisition, and many of the American companies have been acquired," including Amoco and Arco by London-based BP PLC.

Another factor, Ling said, is the declining number of petroleum engineers in the U.S., especially compared with the Middle East, India, China and Russia, where "being a petroleum engineer is still a highly sought after job relative to going into technology or finance."

"I think all of those things have led to a dramatic shift in the spread of market capitalization within the energy industry - and all of that within a 15-year period," he said. "And it is simply accelerating."

It's worth keeping this perspective in mind when the Economist opines that America will bounce back again from its recent setbacks, although I remain profoundly unconvinced that these setbacks are due largely to mistakes made by Bush as the magazine wants us to believe. Rather, these challenges to American hegemony have been building well before Bush came in, IMHO. The removal of Bush from office will not restore diminished US hegemony overnight:
If America were a stock, it would be a “buy”: an undervalued market leader, in need of new management. But that points to its last great strength. More than any rival, America corrects itself. Under pressure from voters, Mr Bush has already rediscovered some of the charms of multilateralism; he is talking about climate change; a Middle East peace initiative is possible. Next year's presidential election offers a chance for renewal. Such corrections are not automatic: something (a misadventure in Iran?) may yet compound the misery of Iraq in the same way Watergate followed Vietnam. But America recovered from the 1970s. It will bounce back stronger again.

Living Without "Made in China"

♠ Posted by Emmanuel in ,, at 6/29/2007 08:31:00 PM
Reuters has an interesting recent story of an American family trying to live (survive?) without buying any stuff made in China for a year. This story coincides with the release of a new book by Sara Bongiorni entitled A Year Without "Made in China": One Family's True Life Adventure in the Global Economy. Her family's story is featured in the book. My initial thought upon reading the title of this thing was, "well, that's impossible" as that nation has become the workshop to the world. Ultimately, Bongiorni comes to nearly the same conclusion as she ends her quest. Although several recent books have provided thoughtful accounts on China's rise as an economic power, this one seems to bring globalization to light in a different, more personal manner. In my opinion, though, the questions we all must confront sooner or later are the following and you can easily add several more:
  • Do our purchases enable a regime noted for its human rights abuses to escape scrutiny?
  • By transferring manufacturing industries to China, are we complicit in making it a pollution haven whose pollution problems we must eventually confront anyway?
  • Should China be prodded on labor rights, or is this prodding mere cover for Western protectionism?
There are no easy answers to these questions, and they are well worth pondering as they will help determine our collective future. Hopefully, the book provides more food for thought. I suspect though that it may be less than overtly critical of China as the Reuters story has been featured by the Party mouthpiece China Daily. Perhaps its emphasis on seeking a middle ground to "China-bashing" pleased China's platoon of censors:

Lamps, birthday candles, mouse traps and flip-flops. Such is the stuff that binds the modern American family to the global economy, author Sara Bongiorni discovers during a year of boycotting anything made in China.

In "A Year Without 'Made in China,"' Bongiorni tells how she and her family found that such formerly simple acts as finding new shoes, buying a birthday toy and fixing a drawer became ordeals without the Asian giant.

Bongiorni takes pains to say she does not have a protectionist agenda and, despite the occasional worry about the loss of U.S. jobs to overseas factories, she has nothing against China. Her goal was simply to make Americans aware of how deeply tied they are to the international trading system.

"I wanted our story to be a friendly, nonjudgmental look at the ways ordinary people are connected to the global economy," she said in an interview before the book appears in July.

As a business journalist in Baton Rouge, Louisiana, Bongiorni wrote about international trade for a decade. "I used to see the Commerce Department trade statistics, the billions of dollars, and think it had nothing to do with me," she said.

The reality was far different.

As the year unfolded, "the boycott made me rethink the distance between China and me. In pushing China out of our lives, I got an eye-popping view of how far China had pushed in," she wrote.

About 15 percent of the $1.7 trillion in goods the United States imported in 2006 came from China, economist Joel Naroff writes in the foreword. Much of that is the manufactured stuff that fills Wal-Mart and other retailers -- the necessities and frivolities sought by lower- and middle-income Americans.

Lower prices have been one benefit of Beijing's rise and make it very hard for consumers to forswear Chinese imports...

For all of 2005, minor purchases required dogged detective work as Bongiorni scoured catalogues and read labels.

She repeatedly struck out trying to buy inexpensive shoes for her son, and even the chic local boutique that sold fancy European labels had gone out of business. So she shelled out $68 for Italian sneakers from a catalogue.

Broken appliances gathered dust because the spare parts came from China. And, with the Asian country having a near lock on the toy aisles, her 4-year-old son grew tired of taking Danish-made Legos to birthday parties as gifts...

Bongiorni got a lesson in the global economy after products advertised as Made in USA turned out to have Chinese parts. She decided to keep a lamp with just this problem after speaking to the manufacturer and learning how China is "eating the lunch" of the few U.S lamp producers left.

Since the boycott's end, Bongiorni has chosen a middle ground. Her family seeks alternatives but accepts Chinese products when most practical. But one habit from the boycott remains: It required her to think hard about what she buys.

"Shopping became meaningful," she said.

Rupert Murdoch, "The Last Tycoon"

♠ Posted by Emmanuel in at 6/29/2007 07:28:00 PM
The latest issue of TIME Magazine has an extensive feature on Rupert Murdoch that you might be interested in, especially if you read the previous post I featured on his China offensive. Here, TIME discusses in more detail Murdoch's attempts to win over Dow Jones' Bancroft family, which has owned the firm for over a century:

Two months earlier, at a secret March 29 breakfast in the News Corp. building, Murdoch had told Dow Jones CEO Richard Zannino about his $60-a-share offer for the company — a staggering price for a stock that had been trading around $36. But the family that has controlled Dow Jones for more than 100 years, the Bancrofts, at first rejected Murdoch's bid because some of its members loathed his tabloid style and feared he would trample the Journal's independence. The family haggled for two weeks over a proposal designed to buffer the Journal's newsroom from Murdoch. A few hours earlier on this Friday afternoon, Zannino had called Murdoch to say the proposal was finally on its way — and Murdoch had gathered that he'd be pleased with it.

It didn't turn out that way. Murdoch hated the proposal. In his view, it would give the Bancroft family more involvement over the Journal after they sold it than they had exercised before. So he rolled up his sleeves and started working the phones, making his feelings known to key players in the deal, turning up the pressure and threatening to pull his offer — a move that would have sent Dow Jones stock plummeting back to earth. "Dave, you can put the $5 billion away," he told News Corp. CFO Dave DeVoe. He consulted with three advisers about whether to withdraw: group general counsel Lon Jacobs and corporate-affairs chief Gary Ginsberg, who were in the room, and his son and News Corp. heir apparent James Murdoch, the CEO of News Corp.'s European satellite-TV system, who called in from a yacht near Valencia, Spain. Murdoch wanted to jolt the Bancroft family back to reality, and if the deal was going to die, he wanted to be the one to kill it. "If we clean this up to our satisfaction, the family will reject it. So why don't we just reject them?" The phone buzzed again. Zannino was on the line.

"Hello, Rich. I've read it," Murdoch said. "I don't know what you were thinking." He walked through all the ways the proposal was unacceptable. "Oh, yes, we reject this."

As it turned out, Murdoch didn't have to withdraw his bid. The threat of pulling was enough to get the family to budge. Within days, Murdoch and the Dow Jones board had agreed on an independent editorial-oversight committee; a sufficient percentage of the Bancrofts were expected to agree as well, though that wasn't a sure thing. Any deal can blow apart at any time, and this one was especially combustible, but what seems clear is that the Bancrofts, whose Class B supervoting shares give them effective control of Dow Jones, would now find it difficult to pull back from selling their cherished newspaper and the company that owns it.

Should the deal close as expected, Murdoch — the ultimate outsider, the ink-stained interloper who started in 1953 with a single paper in Adelaide, Australia — would add capitalism's daily chronicle to an empire that now comprises the Fox movie studio and television network, satellite TV systems in Europe and Asia, more than 100 newspapers and a fast-growing Internet division that includes MySpace, the massively popular social networking site. Two years ago, Murdoch's archrival, Sumner Redstone of Viacom, thought he had a deal for MySpace, but News Corp. swooped in and snatched it, bidding $580 million, $30 million more than Redstone and far more than anyone else thought it was worth. Then the site grew from 20 million members to almost 200 million, Google paid $900 million for the right to advertise on the site, and suddenly Murdoch's price looked cheap — and Murdoch looked like an Internet visionary. "I love being called that," he says, "but the truth is, I'm just lucky and nimble." He generates his own good fortune by being perhaps the most gifted opportunist in media, a man whose nose for a deal makes him the last of the true media moguls, the one who's still building — grabbing Dow Jones, dreaming about trading MySpace for a big chunk of Yahoo!, trying to launch a Polish TV network. News Corp.'s voting stock, of which the Murdoch family owns 31%, has gone up 18% in the past year, making him worth $9 billion...

Murdoch has invested billions in newspapers when few others were willing, but he has also kept them alive through a lowest-common denominator approach typified by the trashy Sun, with its topless Page 3 girls on the breakfast tables of a million Britons. Murdoch wouldn't be Murdoch if he didn't love sticking it to sanctimonious J-school toffs. "When the Journal gets its Page 3 girls," he jokes late one night, "we'll make sure they have M.B.A.s."

Egadzooks! Does Murdoch purchasing Dow Jones mean that we'll soon be seeing Page 3 Girls in the esteemed WSJ? We already have the CNBC "business" news channel, don't we? Martin Wolf doesn't suggest this may happen, but is concerned that it will move downmarket nonetheless. For once, Wolf doesn't sing the praises of markets:

Rupert Murdoch is a great businessman. The Wall Street Journal is a great newspaper. Which of these reputations is likely to survive Mr Murdoch’s prospective purchase of the Journal? Despite the high price he offers, “his” is the plausible answer.

Business magazines and business television stand on the shoulders of the few newspapers that do the reporting, and analysis, day in and day out. The Journal is the world’s leader, if only by circulation. It is also two papers in one. Its news coverage is independent, questioning and authoritative. Its research is superb and its editing professional. Meanwhile, its editorial pages are the engine of US conservatism [TRANSLATION: it is a neocon bastion].

The WSJ’s readers should imagine what their world would be like if it disappeared. The obvious response is that the WSJ is not threatened with disappearance. But it is threatened, instead, with inclusion in the world’s most dynamic media empire. There it will reside alongside such beacons of excellence as the UK’s News of the World and the New York Post.

Why should that matter? After all, Mr Murdoch owns some better products: the perennially lossmaking London Times, for one, and the more profitable Sunday Times, for another. Many admired former colleagues of mine work for News International.

Yet I wonder how many even of his admirers would argue that Mr Murdoch, for all his successes, has created even one serious, authoritative and truly independent newspaper. That is not what Mr Murdoch is about. He is a populist, a lover of tabloids and a brilliant businessman. We already know three things about his influence on his publications.

The first is that the editorial line will almost certainly be pro-business and conservative. In the case of the WSJ, this would mark no change from its present line [well, duh]. That was untrue in the case of the New York Post, to take a celebrated earlier example. Indeed, since Mr Murdoch is sensitive to changes in the political mood, he may take the WSJ’s editorial line to the left (it can hardly be taken to the right). But wherever it ends up, it is unlikely to be as independent.

The second thing we know is that the paper is likely to become shriller and more populist, across the board. Down-market is the direction Mr Murdoch knows. That has been the direction in all of his publications with which I am familiar. Mr Murdoch can take substantial credit for the tide of vulgarity that now floods the UK. For good or ill, he has helped transform my country...[Murdoch has blighted Blighty?]

...Many newspapers exist to entertain. Business papers exist to inform. Any doubt about the accuracy and independence of their coverage destroys their value as tools. Such questions are, in this case, inevitable.

A notionally independent board can be created to protect editors’ independence, as at The Times. But in the end, editors must be aware of the interests and prejudices of the people who employ them. In some cases, they can be sure that the owner will not interfere. Where Mr Murdoch and a paper as influential as the WSJ are concerned, how credible could that belief possibly be?

A cynical employee of the FT might argue that any faltering of the Journal can only be to its benefit. I am not that cynical. The world needs at least two respected, editorially independent and authoritative English-language business papers. One is too few. None would be a catastrophe. Great newspapers are more than just businesses. They provide the public good of reliable information on which our knowledge-intensive society depends. Competitive markets do not provide public goods well. We may discover quite soon just how bad at it markets can be.

Paulson on Private Equity + Hedgies

♠ Posted by Emmanuel in at 6/28/2007 12:49:00 AM

The clip above from the Wall Street Journal Deal Journal shows Treasury Secretary Henry Paulson defending the status quo of tax treatment for private equity and hedge funds at the WSJ's "Deals & Deal Makers Conference" [yes, well, what did you expect?] If you will recall, a raft of legislation on limiting the perceived tax advantages gained by private equity and hedge funds has made the news.
Democrats in the U.S. House of Representatives introduced a bill on Friday that would more than double taxes on the pay of managers of private equity funds, hedge funds and other investment partnerships.

Throwing down a challenge to some of the nation's savviest and richest financiers, the bill would set a higher tax rate for "carried interest." That is the 20-percent cut of profits beyond targeted returns typically kept by senior managers of private equity firms and other firms on major transactions.

The bill, introduced with the backing of two senior Democratic committee chairmen, ratcheted up a confrontation between Congress and the booming private equity sector, a driving force behind a global surge in corporate buyouts.

Under present law, carried interest is taxed at the 15-percent capital gains tax rate, not the income tax rate of up to 35 percent. The low tax rate makes carried interest a key source of vast fortunes for private equity's top ranks.

"Congress must ensure that our tax code is fair," said Michigan Democrat Sander Levin, one of the 14 lawmakers who introduced the bill.

"We have to be sure that the lower capital gains tax rate is not being inappropriately substituted for the tax rate on wages and earnings," Levin said in a statement.

Joining Levin in introducing the bill were Ways and Means Committee Chairman Charles Rangel of New York, and Financial Services Committee Chairman Barney Frank of Massachusetts...

Citing concerns about the Blackstone IPO, Senate Finance Committee leaders last week introduced a bill they say would close a loophole that allows private equity firms to float as publicly traded partnerships without paying corporation taxes.

The bill was co-authored by Finance Committee Chairman Max Baucus and senior Republican Charles Grassley. It would require publicly traded partnerships deriving income from investment adviser and asset management services to pay the corporation tax rate instead of the capital gains rate.

The Deal Journal adds the following commentary:

Private-equity honchos’ worried that the tax man is coming after them have a powerful ally: Henry Paulson.

At The Wall Street Journal’s Deals & Deal Makers Conference, the Treasury Secretary made it clear he is opposed to emerging efforts in Congress to raise taxes on publicly traded private-equity firms and hedge funds and the people who run them. Paulson was asked by the WSJ’s David Wessel about moves afoot in Washington that could raise the taxes private-equity executives pay to the ordinary-income rate from the lower capital-gains rate.

“This is not the approach that I believe makes sense,” Paulson said. “I don’t think it makes sense to single out one industry.”

(Speaking of private equity, here’s what Paulson had to say about the turmoil sweeping the leveraged-credit markets: “I clearly believe this is a wake-up call to focus on some of the excesses.” He specifically mentioned so-called covenant-light loans that give investors fewer protections against default. )

Paulson’s comments echo Glenn Hubbard, the Columbia Business School Dean and former Bush administration economic adviser. He said in an earlier appearance at the gathering that “the last time we tried to personalize the tax code we got the AMT.” He was referring, of course, to the Alternative Minimum Tax, the provision of the tax code put in place nearly four decades ago to clamp down on tax breaks for rich individuals.

With the Bush administration’s chief spokesman on such matters pooh-poohing higher taxes for private equity, Senators and members of Congress trying to “level” the income-tax playing field may have a high hurdle to clear.

Bloomberg also has more on Paulson's defense

Treasury Secretary Henry Paulson warned that raising taxes on hedge funds and buyout firms may have ``unintended consequences'' and said Congress shouldn't ``single out'' firms that go public, such as Blackstone Group LP.

``I don't believe it makes sense to single out one industry,'' Paulson said when asked about proposed legislation at a conference hosted by the Wall Street Journal in New York. Senate legislation would force Blackstone to pay taxes at corporate rates of 35 percent instead of as a partnership, with a burden as low as 15 percent. ``We need to be careful dealing with something like this piecemeal,'' Paulson said.

Paulson, the former chief executive officer of Goldman Sachs Group Inc., was the second senior Bush administration official today to raise concerns about efforts to increase taxes on many hedge funds and buyout firms. White House spokesman Tony Snow also suggested the administration will oppose such an effort.

``This is not an administration that's predisposed toward tax increases,'' Snow told reporters this morning. He said at a later briefing that he was speaking generally and wasn't addressing specific legislation. ``We're going to take a look at what Democrats have to offer,'' he said...

Shares of Blackstone, which traded as low as $29.13 about 15 minutes before Snow's first remarks, jumped 3.5 percent to more than $30.40 afterward. Shares of Fortress Financial Group LLC, the first hedge-fund manager to go public in February, increased as much as 6.2 percent after Snow's remarks. Shares of Blackstone fell 83 cents, or 2.7 percent, to close at $29.92 at 4 p.m. in trading on the New York Stock Exchange. Fortress shares gained $1.18, or 5.32 percent, to close at $23.25.

The tax structure of such funds has drawn congressional attention in the wake of billion-dollar paydays for fund managers.

The Senate legislation, introduced June 14 by Finance Committee Chairman Max Baucus, a Montana Democrat, and Charles Grassley, an Iowa Republican, would stop financial firms that become publicly traded partnerships from using a 20-year-old law that allows publicly traded investment firms that derive 90 percent of profits from passive investments to pay lower taxes.

The broader June 22 House legislation, backed by top Democrats, would tax the share of profits that managers receive for investment services at ordinary income-tax rates as high as 35 percent and affect all partnerships, public and private. Currently, that income, known as ``carried interest,'' is taxed at capital-gains rates as low as 15 percent.

The House bill, initiated by Representative Sander Levin, a Michigan Democrat, would also affect other partnerships, including those that invest in commercial real estate and oil and gas pipelines as well as venture-capital firms.

Although Paulson was asked about the Senate bill, he didn't distinguish between the two measures in his comments. More broadly, he said higher taxes on hedge funds and buyout firms would potentially affect other industries that use the partnership model. He also said the issues should be studied in the context of broader tax reform.

``We have tended to single out companies and industries to respond to the pressures of the moment,'' he said. ``We need to think comprehensively. We need to be careful of unintended consequences.''

Baucus and Grassley issued a joint statement later in response to Paulson's comments, saying their legislation is intended to equalize tax treatment, not target any one industry.

``We're simply clarifying that private equity firms and similar businesses should not receive special treatment in the tax code,'' they said. ``No one group of businesses should gain an edge over its competitors by subverting congressional intent and claiming a tax status for which they do not qualify.''

The Levin proposal is supported by House Ways and Means Committee Chairman Charles Rangel of New York and Financial Services Committee Chairman Barney Frank of Massachusetts.

Frank said fund managers are getting undue benefits from the tax code.

``I think they are getting a tax reduction they don't deserve,'' he said in an interview yesterday. ``I don't think you should be getting a capital-gains tax for managing other people's money.''

Levin's proposal has drawn sharp criticism from trade groups representing partnerships.

``It is a blow to capital formation,'' Jeffrey DeBoer, president and chief executive officer of the Real Estate Roundtable, wrote in a letter yesterday to Levin.

Lisa McGreevy, executive vice president of the Washington- based Managed Funds Association, the primary lobbying group representing hedge funds, said last week ``this is not about compensation for services. This is about the nature of long-term investment and capital formation.''

Earlier in the day, Michael Graetz, a Yale University tax professor who served in the tax department of President George H.W. Bush's Treasury Department, endorsed both the Senate measure and the Levin bill.

``I think it's odd'' that fund managers pay lower taxes on their labor income than their secretaries, Graetz told the Senate Finance Committee in Washington.

To nobody's particular surprise, the Bush administration has signaled that it will likely veto legislation aimed at reducing tax advantages for private equity and hedge fund operators. Paulson does represent the interests of the financial services industry. Remember, too, that 9 out of the top 10 contributors to the Bush re-election campaign were from the financial services industry. It's about par for the course whether you buy the official line that these operators diversify risk and create new opportunities for investors or not.

Policing Human Trafficking

♠ Posted by Emmanuel in at 6/28/2007 12:38:00 AM
This informative guide on the policing of human trafficking comes from, of all places, the International Association of Chiefs of Police. As human trafficking is a widespread problem, however, the IPE Zone is obligated to cross interdisciplinary boundaries to bring you the latest from whatever field. Contained herein are advice on the following:
  • Definitions of human trafficking and the various forms of exploitation
  • Distinctions between trafficking and smuggling
  • Dynamics of human trafficking and the traumatic effects upon victims
  • Strategies for victim identification and assistance
  • Methods for effective response and investigation
  • Avenues for legal assistance and visa provisions under federal law
  • A pocket card for quick reference
This illustration sets out the three elements of human trafficking discussed in the paper:

Upcoming Water Wars in Asia

♠ Posted by Emmanuel in , at 6/28/2007 12:21:00 AM
China's relentless attempts to muzzle all dissent in Tibet may strike some as unnaturally harsh, especially when it comes to dealing with the Dalai Lama. The International Herald Tribune, however, points out that Tibet has great strategic significance as its glaciers are the wellspring for many of the region's major bodies of water. Water is not especially abundant in Asia, and quarrels over this precious natural resource are set to ratchet up as countries become more progressive and demand more water. China's continued exploration of damming projects has naturally elicited complaints from countries that lose out from rerouting of rivers to benefit the Chinese (don't you dam that river):

The sharpening Asian competition over energy resources has obscured another danger: Water shortages in much of Asia are becoming a threat to rapid economic modernization.

Water has emerged as a key issue that could determine if Asia is headed toward cooperation or competition. No country would influence that direction more than China, which controls the Tibetan plateau, the source of most major rivers of Asia.

Tibet's vast glaciers and high altitude have endowed it with the world's greatest river systems. Its rivers are a lifeline to the world's two most-populous states - China and India - as well as to Bangladesh, Burma, Bhutan, Nepal, Cambodia, Pakistan, Laos, Thailand and Vietnam. These countries make up 47 percent of the global population.

Yet Asia is a water-deficient continent. Although home to more than half of the human population, Asia has less fresh water - 3,920 cubic meters per person - than any continent other than the Antarctica.

The looming struggle over water resources in Asia has been underscored by the spread of irrigated farming, water-intensive industries and a growing middle class that wants high water-consuming comforts like washing machines and dishwashers. Household water consumption in Asia is rising rapidly, although several major economies there are acutely water-stressed...

While intrastate water-sharing disputes have become rife in several Asian countries - from India and Pakistan to Southeast Asia and China - it is the potential interstate conflict over river-water resources that should be of greater concern.

This concern arises from Chinese attempts to dam or redirect the southward flow of river waters from the Tibetan plateau, starting point of the Indus, the Mekong, the Yangtze, the Yellow, the Salween, the Brahmaputra, the Karnali and the Sutlej Rivers. Among Asia's mighty rivers, only the Ganges starts from the Indian side of the Himalayas.

The uneven availability of water within some nations has given rise to grand ideas - from linking rivers in India to diverting the fast-flowing Brahmaputra northward to feed the arid areas in the Chinese heartland. Interstate conflict, however, will surface only when an idea is translated into action to benefit one country at the expense of a neighboring one.

As water woes have intensified in its north owing to intensive farming, China has increasingly turned its attention to the bounteous water reserves that the Tibetan plateau holds. It has dammed rivers, not just to produce hydropower but also to channel the waters for irrigation and other purposes, and is presently toying with massive inter-basin and inter-river water transfer projects.

After building two dams upstream, China is building at least three more on the Mekong, stirring passions in Vietnam, Laos, Cambodia and Thailand. Several Chinese projects in west-central Tibet have a bearing on river-water flows into India, but Beijing is reluctant to share information.

Having extensively contaminated its own major rivers through unbridled industrialization, China now threatens the ecological viability of river systems tied to South and Southeast Asia in its bid to meet its thirst for water and energy.

The idea of a Great South-North Water Transfer Project diverting river Tibetan waters has the backing of President Hu Jintao, a hydrologist. The first phase of this project calls for building 300 kilometers of tunnels and channels to draw waters from the Jinsha, Yalong and Dadu rivers, on the eastern rim of the Tibetan plateau.

In the second phase, the Brahmaputra waters may be rerouted northward, in what be tantamount to the declaration of water war on lower-riparian India and Bangladesh. In fact, Beijing has identified the bend where the Brahmaputra forms the world's longest and deepest canyon just before entering India as holding the largest untapped reserves for meeting its water and energy needs.

Rupert Murdoch's China Offensive

♠ Posted by Emmanuel in at 6/28/2007 12:04:00 AM
Here's an interesting article on Rupert Murdoch's attempts to spread his media empire to the Middle Kingdom by building up guanxi with the Chinese leadership and business elite. Having done so already in the UK, Australia, and the US, Murdoch mixes the personal with business in pursuit of profit$ in China. His Chinese wife, Wendi, figures large in his charm offensive to enter the Chinese media market. The Chinese leadership seems to cotton up to Mr. Murdoch more than most media barons as he is willing to parrot the Party line and muzzle his operations accordingly. From the New York Times:
Many big companies have sought to break into the Chinese market over the past two decades, but few of them have been as ardent and unrelenting as Rupert Murdoch’s News Corporation.

Mr. Murdoch has flattered Communist Party leaders and done business with their children. His Fox News network helped China’s leading state broadcaster develop a news Web site. He joined hands with the Communist Youth League, a power base in the ruling party, in a risky television venture, his China managers and advisers say.

Mr. Murdoch’s third wife, Wendi, is a mainland Chinese who once worked for his Hong Kong-based satellite broadcaster, Star TV. Her role in managing investments and honing elite connections in China has underscored uncertainties within the Murdoch family about how the family-controlled News Corporation will be run after Mr. Murdoch, 76, retires or dies.

Regulatory barriers and management missteps have thwarted Mr. Murdoch’s hopes of big profits in China. He has said his local business hit a “brick wall” after a bid to corral prime-time broadcasting rights fell apart in 2005, costing him tens of millions of dollars.

But as he seeks to buy Dow Jones, the parent company of The Wall Street Journal, his track record in China has attracted attention less because of profits and losses than for what it shows about his management style.

Mr. Murdoch cooperates closely with China’s censors and state broadcasters, several people who worked for him in China say. He cultivates political ties that he hopes will insulate his business ventures from regulatory interference, these people say.

In speeches and interviews, Mr. Murdoch often supports the policies of Chinese leaders and attacks their critics. A group of China-based reporters for The Journal accused him in a letter to Dow Jones shareholders of “sacrificing journalistic integrity to satisfy personal and political aims,” a charge the News Corporation denies.

His courtship has made him the Chinese leadership’s favorite foreign media baron. He has dined with former President Jiang Zemin in the Zhongnanhai leadership compound in Beijing and repeatedly met other members of the ruling Politburo in Beijing, New York and London. Television channels affiliated with Mr. Murdoch beam more programming into China than any other foreign media group.

“The reality is that the Chinese government is not going to let anything radical happen in media,” says Gary Davey, an Australian who once ran Star TV for Mr. Murdoch. “But we got a lot farther than anyone else did...”

China has never been a make-or-break proposition for the News Corporation, since its operations here represent a small part of the company, which is valued at $68 billion. But Mr. Murdoch pushed for nearly 15 years to create a satellite television network that would cover every major market in the world, including China.

He coveted the $50 billion in ad spending that flows mainly to China’s state-owned news media whose products, even after years of improvements, still reflect propaganda directives as well as consumer demand...

The News Corporation and its joint venture partners controlled 9 of the 31 foreign channels, including news, movies, music videos and sports, more than any other foreign media company. Officially, however, it could still reach only government and foreign compounds and luxury hotels, as well as homes in Guangdong. Mr. Murdoch wanted more.

Good news appeared to come in 2004. The authorities began allowing Chinese-foreign joint ventures to produce shows that could be broadcast locally without the restrictions that apply to overseas content.

Mr. Murdoch interpreted the order liberally. The News Corporation allied itself with a state-run broadcaster in the western province of Qinghai. The arrangement covered not only production but also distribution. Through middlemen, the News Corporation also purchased prime-time slots in 25 Chinese provinces. It had become a backdoor national broadcaster.

Aware that the venture pushed the limits of what regulators allowed, the News Corporation sought to arrange political cover, people involved in arranging the deal said. It recruited a media and stock market entrepreneur named Ding Yuchen to join the venture as a partner. Mr. Ding’s father, Ding Guangen, was the longtime propaganda chief. A second partner was the Central Committee of the Communist Youth League, considered the political power base of China’s new top leader, Hu Jintao.

Scrutinizing Sovereign Wealth Funds

♠ Posted by Emmanuel in , at 6/27/2007 02:14:00 AM
Unocal, Global Crossing, P&O...the list of American firms that have been prohibited from being owned by foreign investors supposedly for security reasons runs long. Two recent features have made me think about this issue once again. As you know, America keeps on piling on debt, yet expects foreigners to remain content with buying relatively low-yielding US bonds instead of equity stakes in American companies. However, the recent trend of bigtime reserve accumulators creating "sovereign wealth funds" (SWFs) to invest these proceeds in equities is bound to again rouse, shall we say, protectionist passions in America. Let us begin with Sebastian Mallaby of the Washington Post on the next battleground over globalization--you guessed it, sovereign wealth funds:

The next globalization battle lurks over the horizon, but you can already guess its contours. It will be shaped by two revolutions in finance and business: the growth of vast government-controlled investment funds abroad and the muddled progress toward shareholder democracy in this country. Taken together, these changes will give foreign governments a say in how corporate America is run. Lou Dobbs is going to love this one.

The rise of government investment funds suddenly preoccupies financiers. Treasury officials who never before gave a thought to these outfits now want them on their speed dials. Five years ago, governments were sitting on $1.9 trillion in foreign currency reserves, which was roughly what they needed to stave off financial crises. Now they have $5.4 trillion, way beyond their prudential needs and more than triple the amount in the world's hedge funds. Increasingly, this cash is being moved into "sovereign wealth funds," which have come from obscurity to manage assets worth an additional $1.6 trillion.

These reserves are likely to keep growing. A big chunk of the expansion has occurred in energy-exporting states, and the prices of oil and natural gas show no signs of falling. High energy prices explain why Russia's government, which had negative assets at the time of its default in 1998, now has reserves worth $315 billion, plus an investment fund worth $90 billion. They explain why Nigeria, which pleaded poverty and secured debt relief as recently as 2006, is now sitting on reserves of $80 billion. The Kuwait Investment Office is rumored to manage $500 billion, and the United Arab Emirates has an investment fund worth perhaps $1 trillion (the Arabs won't disclose the real numbers).

The second motor behind sovereign funds is the global trade imbalance. East Asia's exporters rake in dollars that they convert into domestic currency, and the dollars wind up in the region's central banks: China has accumulated an astonishing $1.2 trillion in foreign currency reserves and Japan around $900 billion. Even though the U.S. trade deficit is starting to shrink, it remains huge by historical standards. The flip side is that East Asia's trade surpluses will persist, and the region's central banks will bulge with yet more money.

When central banks amass reserves, they park them in U.S. Treasury bills and risk-free bonds issued by other rich governments. But the buzz about sovereign wealth funds signals that this is changing. The newly wealthy governments are following forebears that grew rich a generation back -- the Gulf states, Singapore, Norway. They want a better return on their savings than they can get from Treasury bills, so they are going to invest in companies.

This need not be sinister. As former Treasury secretary Lawrence Summers argues in the new book "Sovereign Wealth Management," a government that fails to invest excess reserves in corporate assets is irresponsible. Sovereign wealth funds can professionalize the management of national wealth, argues the book's editor, Jennifer Johnson-Calari of the World Bank. A generation ago, the government of Sao Tome might have hidden its oil revenue in Swiss accounts. Today it is consulting the state government of Alaska about sound and transparent management.

But the political backlash is already beginning. China just bought a $3 billion stake in Blackstone Group, the American private-equity firm that sold a chunk of itself to outside investors last week. Blackstone's IPO was controversial even without the China connection -- private-equity firms are already viewed as the engines of ruthlessly competitive global capital, and now they are allied with the engine of ruthlessly competitive global labor. Sen. Jim Webb (D-Va.) raised the predictable red flag. Blackstone may own firms with sensitive national-security information, the senator maintained; therefore, the Chinese investment in Blackstone should have been delayed by regulators.

Imagine Webb's protests if the Chinese do what they say they will do: emulate one of Singapore's national wealth funds, Temasek Holdings, which buys direct stakes in foreign companies without going through a middleman such as Blackstone. Chunks of corporate America could be bought by Beijing's government -- or, for that matter, by the Kremlin. Given the Chinese and Russian tendency to treat corporations as tools of government policy, you don't have to be paranoid to ask whether these would be purely commercial holdings.

If you will recall, I recently posed the question of whether the IMF is America's lackey after the Fund announced that it will monitor "misaligned" currencies more hawkishly. Perhaps this next article from the Financial Times will convince you that the affirmative is the right answer. Echoing the US, the IMF is now voicing its concern over the governance of these SWFs...

The International Monetary Fund has joined calls for greater scrutiny of state- controlled sovereign wealth funds, which it said lacked transparency and could pose risks to financial stability.

Simon Johnson, the IMF’s chief economist, expressed concern that “increasing numbers of financial flows are going through black boxes”, such as sovereign wealth funds. “We don’t know what happens and we should worry about that.”

His comments followed last week’s public warning by the US government that the spread of sovereign wealth funds could create new risks for the international financial system.

Clay Lowery, acting under-secretary for international affairs at the US Treasury, called on the IMF and the World Bank to develop a set of best-practice guidelines for such state-owned funds, which invest excess foreign exchange reserves.

Speaking in Frankfurt on Tuesday, Mr Johnson said the IMF was still at the early stages of its investigations but that the concerns were comparable to those expressed over the rapid growth of hedge funds.

“I think that what the US is calling for is a similar debate on sovereign wealth funds,” he said.

Morgan Stanley has estimated the total assets of Chinese, Russian and Middle Eastern state-controlled funds at $2,500bn (€1,858bn, £1,252bn).

Mr Johnson said his initial impression was that sovereign funds followed conservative strategies. But the degree to which they were leveraging investments to boost returns was unclear. He argued that the best model for such funds was to save resources for future generations, especially if wealth was being generated by the sale of a country’s non-renewable natural resources...

Mr Lowery of the US Treasury had warned in the US that the size of sovereign wealth funds could “fuel financial protectionism.”

Financial market stability could be hit as “little is known about their investment policies, so that minor comment or rumours will increasingly cause volatility [in markets]”.

Keep in mind that tensions are already running high over the accumulation of reserves that enable the creation of these SWFs in the first place. In the US-China trade war, for instance, the IMF is caught in between and is accused of (with good justification, IMHO) serving as a tool for American interests. This dispute rolls on...

When two elephants fight, a senior International Monetary Fund official once told the Financial Times, the grass gets trampled.

The official was referring to the danger that the fund could get caught in the midst of a struggle between the dominant economic power – the US – and the most important rising power – China – over exchange rates and who is to blame for giant trade imbalances.

That prospect moved closer recently when the IMF board, made up of representatives of governments that are the lender’s shareholders, adopted a new mandate for international surveillance in the face of outright opposition from China. The old framework, which dated back to 1977, needed modernisation.

But there was no hiding the international political context. The US hailed the decision as a sign that the IMF was finally heeding its call to get tough on exchange rates. Hank Paulson, the Treasury secretary, said: “The reform will permit firmer surveillance in areas such as insufficiently flexible exchange rates”.

Mr Paulson, who has to date tried to deal with China largely through bilateral channels, said IMF surveillance “has the potential to be a strong complement to bilateral diplomacy”. The US vowed to press the fund to implement the new surveillance regime firmly. “The key issue is enforcement,” said Morris Goldstein, a former IMF official now at the Peterson Institute, a Washington based think-tank.

Beijing immediately pushed back. A critical statement by the People’s Bank of China, the central bank, was followed by the publication in the official press of comments by Ge Huayong, China’s representative at the IMF.

“Supervision under the new rules will put more pressure on emerging market countries especially, but will have little impact on developed countries. This is unfair,” Mr Ge said.

He said China’s stance “received support and understanding from some developing countries, but, due to the push by a tiny number of developed countries with major voting power in the IMF, the decision still passed”. This was “regrettable”.

Ha Jiming, a former IMF economist now with China International Capital Corporation, the largest domestic investment bank, said: “The new ruling has largely been influenced by the US...”

He Fan, an economist with the Chinese Academy of Social Sciences, said many officials were now worried that it would be used to put pressure on China over its exchange rate.

IMF officials insist that the new framework, which was ultimately supported by most developing countries, is not intended to target China [yeah, sure, and you can call me "Chuck Woolery"].

...the official admitted there was no escaping the fact that China presented the IMF with a unique challenge. “China is such an important country, its exchange rate policy is so important, this decision cannot not be about China,” he said. “How to make clear to the Chinese what their obligations are has been part of this whole process.”

Furthermore, while the IMF will look at exchange rate and other policies, its new mandate is far more detailed on exchange rates. With more objective metrics for judging currency policy, the official said, “logically we ought to be more explicit now in terms of whether members are actually meeting their obligations”.

That would tilt the IMF – which has always straddled the twin roles of umpire and adviser to governments – towards being more of an umpire, a long-standing US demand.

Many in and around the Fund are uncomfortable with this idea. A former senior official said the IMF “lacks the ability to declare somebody out and send him off the field”. Officials fear that if China is put in the dock it will ignore the fund and develop Asian monetary arrangements to supplant it.

The former official said the IMF had to continue to approach global imbalances as a multilateral problem with many contributing factors besides China’s exchange rate – not a problem caused by it.

“I hope we do not become a battlefield between the US and China,” one of the senior officials said.

A multilateral approach to dealing with China, he argued, would not work if the IMF was seen as doing the bidding of the US. “I hope Mr Paulson understands this.”

Is Zoellick a "Wolfowitz Lite"?

♠ Posted by Emmanuel in at 6/27/2007 01:25:00 AM
A few moons ago, I described how incoming World Bank President Robert Zoellick has pretty impressive "neocon" credentials. Now, it seems that Zoellick will retain Wolfowitz's strong rhetoric on anti-corruption. If you will recall, Wolfowitz brought two longtime cronies to the World Bank, Kevin Kellems (the "keeper of the comb") and Suzanne Rich Folsom who heads the "Department of Institutional Integrity" [nice title, eh?] Kellems resigned before his boss's early departure, but Folsom is still there, presumably to the chagrin of World Bank veterans. One of the things World Bank watchers will be awaiting is what sort of role Folsom will have under Zoellick. As the International Herald Tribune notes, she's not terribly well-liked. Zoellick needs to rebuild a semblance of trust with World Bank staffers that was put under stress by Wolfowitz. How he deals with Folsom will be interesting to watch:

Combating corruption was a signature issue for Paul Wolfowitz in his two stormy years as bank president. Last year he hailed the belated blacklisting of the firms on the Lesotho project as helping to ensure "that precious public resources go to help the poor, for whom they are intended."

But the corruption issue was also been a source of anger at the bank that contributed to Wolfowitz's forced resignation last month amid charges favoritism. Some bank officials fear, and others hope, that with his departure the issue would fade.

All indications are, however, that his successor, Robert Zoellick - who won the unanimous approval of the World Bank's board on Monday - would not let that happen...

"Corruption is a cancer that steals from the poor, eats away at governance and moral fiber and destroys trust," Zoellick said. "The challenge is how best to clean corruption out. That's what the World Bank must diagnose, determine and execute in concert with developing and developed countries."

Zoellick has vowed in private meetings to press an anti-corruption agenda but also avoid Wolfowitz's mistakes, like cutting off money and punishing poor people dependent on bank programs in countries that happen to be poorly governed, bank officials say.

Zoellick, a former top trade envoy and deputy secretary of state under President George W. Bush, said he realized that much of the controversy under Wolfowitz had occurred because corruption was sometimes identified by him as more important than fighting poverty.

In addition, the head of the department of institutional integrity, Suzanne Rich Folsom, a Wolfowitz appointee and a Republican, has drawn fire for her management style.

Under Folsom's leadership, the department has gotten a 50 percent increase in funding and an expanded mandate to investigate corruption cases. Folsom's defenders say that it was inevitable that she would be unpopular, while critics say she has trampled on employee rights and been selective in her inquiries.

"There are definitely tensions in the system," Zoellick said. "What I've found is a high degree of distrust over the real purpose of the anti-corruption campaign. Our challenge now is to find real guidelines that can restore everyone's trust and assure governments that the bank is not wasting money."

How much corruption exists is a matter of conjecture. A former top official, requesting anonymity because of the sensitivity of the subject, estimated that it might affect, at least in small ways, as many as 40 percent of bank projects. Others say the money lost to graft may not be more than a few percentage points of bank lending.

No one disputes that in its six decades of existence, the bank did not do much about corruption until a decade ago, when its then president, James Wolfensohn, declared that something must be done to combat it.

The department of institutional integrity was established only seven years ago. It has barred 148 individuals and 190 firms from doing business with the bank. In an institution that employs 10,000 workers, 74 employees have been cited for cases of fraud and corruption...

But however grounded in realities, the institutional integrity reviews have left a legacy of tension between the department of institutional integrity and the rest of the bank. Many officials at the bank say that some of their colleagues believe that minor graft is a small price to pay to speed vitally needed programs for the poor.

"Relations between the bank staff and the department have really soured in the last two years," said a former top official of the institutional integrity unit. "There is a lot of pushback from everyone at the bank, because of the us-against-them attitude created by Wolfowitz."

Christopher Burnham, a former United Nations under secretary general in charge of financial management, said that Zoellick must figure out how to enlist suspicious bank officials in his agenda. "International bodies operate by consensus," Burnham said. "He has to bring everybody along with him."

Zoellick has not signaled his intentions about Folsom's office, other than to say that he has learned of the distrust between her and others, according to bank officials. For example, the bank's staff association, which represents the bulk of its employees, has charged that her office has trampled on employees' rights and targeted some unfairly...

Folsom said that, on the contrary, the department had moved in the last two years to "a new level of processing cases" and establishing a series of reforms to expedite cases, including a program under which companies and individuals may voluntarily disclose cases of graft.

"This department has been unpopular since its creation seven years ago," she said. "This type of department is always going to be unpopular. There are going to be some people who just don't want to be bothered."

EU's Horse Trading with China

♠ Posted by Emmanuel in ,, at 6/27/2007 01:16:00 AM
The Wall Street Journal notes that the EU is trying a new tack with China aimed at getting the latter to move more quickly on the matter of intellectual property (IP) protection. By designating China as a market economy well ahead of time, the EU may get a better response from China, or so it hopes:
In the struggle to manage its rising tide of Chinese imports, the European Union is considering a subtle but important shift in its approach to Beijing.

The EU strategy, which people familiar with the matter say is still under discussion, would be to offer China recognition as a "market economy" in the hope of extracting a range of concessions the Europeans deem crucial to balancing the trade relationship.

While the shift would largely be a technical matter, it is a priority for Chinese trade officials and does offer practical gains. Beijing would find it easier to defend against persistent European complaints that Chinese goods compete unfairly with local manufacturers.

In trade jargon, a country achieves market-economy status when it limits state aid, bans monopolies and fulfills other criteria. Only 56 of the World Trade Organization's 150 members give China full market-economy status; the U.S. and the EU, by far China's biggest trade partners, are among those that don't. The U.S. isn't planning to change its policy, and in fact has recently pursued a more aggressive approach against Chinese imports than the EU, imposing extra duties and filing two suits at the WTO.

When China joined the WTO in 2001, it agreed to a 15-year delay before being granted market-economy status. So no matter what, the WTO's 149 other members must offer the label by 2016.

The EU's thinking, according to people familiar with the matter, is to use the designation as a bargaining chip while it still has value to help coax Beijing to stem the proliferation of pirated goods and to offer greater market access to European companies -- especially in the services sector. There are also EU officials who believe China has made legitimate progress, they add.

China has been lobbying for market-economy status for some time. "If 498 out of 500 Fortune 500 companies do business in China, it's because we're a market economy," Chinese Commerce Minister Bo Xilai told reporters in Brussels recently.

Countries labeled as having nonmarket economies are generally more vulnerable to punitive import tariffs on their goods. That is because the designation forces trade investigators to assume companies in places such as China or Cuba receive some level of state support.

To research complaints, therefore, investigators use a surrogate "market economy" to determine what costs really should be and calculate whether goods are being unfairly underpriced on world markets -- a practice known as dumping.

Critics say that method is arbitrary, time-consuming and wildly imperfect.

In China's case, for example, EU and U.S. trade officials often use costs in Turkey or India as a proxy for those in China, though domestic prices in those countries tend to be higher than China's. That makes it easier for U.S. and European companies to level dumping charges.

Countries with heavy manufacturing sectors such as Spain, France and Italy are eager to preserve this leverage. They recently lashed out at a report by the office of EU Trade Commissioner Peter Mandelson that said China had made considerable progress toward earning market-economy status.

Pope Benedict XVI on Globalization

♠ Posted by Emmanuel in at 6/27/2007 12:38:00 AM
As a very well-informed doctrinaire, it is of very little surprise that the Pope offers some thought-provoking words on globalization. While he sees opportunities to be gained from improved material conditions, he also acknowledges that globalization needs to more clearly pronounce human well-being as its end. Typical arguments for globalization discuss enhanced economic efficiency; however, the Pope offers suggestions on how it can serve, yes, a greater calling. Like several others, the Pope in concerned with equity as well as efficiency. Zenit offers a concise statement of the Pope's thoughts on the subject:
Amid the ongoing debate over issues of economics and ethics, Benedict XVI has addressed these issues on several occasions in recent months. On May 26 he spoke to a group of young people from Confindustria, the General Confederation of Italian Industry.

Every business, the Pope noted, should be considered first and foremost as a group of people, whose rights and dignity should be respected. Human life and its values, the Pontiff continued, should always be the guiding principle and end of the economy.

In this context, Benedict XVI acknowledged that for business, making a profit is a value that they can rightly put as an objective of their activity. At the same time the social teaching of the Church insists that businesses must also safeguard the dignity of the human person, and that even in moments of economic difficulties, business decisions must not be guided exclusively by considerations of profit.

The Pope also dealt briefly with the theme of globalization. This is a phenomenon, he commented, that gives hope of a wider participation in economic development and riches. It is a process not without its risks, however, leading in some cases to worsening economic inequality. Echoing the words of Pope John Paul II, Benedict XVI called for a globalization characterized by solidarity and without marginalization of people.

Other principles that need to guide the economy are justice and charity, Benedict XVI explained in a message, dated April 28, to the president of the Pontifical Academy of Social Sciences, Mary Ann Glendon. The letter was sent on the occasion of the plenary session of the academy, held April 27-May 1.

The pursuit of justice and the promotion of the civilization of love, the message stated, are essential aspects of the Church's mission in its proclamation of the Gospel. Justice and love cannot be separated, the Pope observed, because of the Church's experience of how the two were united in "the revelation of God's infinite justice and mercy in Jesus Christ."

Justice, he continued, must be "corrected" by love, a love which inspires justice and purifies our efforts to build a better society. "Only charity can encourage us to place the human person once more at the center of life in society and at the center of a globalized world governed by justice," the Pope stated.

The Pope took a closer look at some of the problems facing workers in a couple of speeches earlier this year. In a message dated March 28, sent to participants in the 9th International Youth Forum organized by the Pontifical Council for the Laity, Benedict XVI commented that in recent years economic and technological changes have radically changed the labor market.

This has given hope to young people, the Pontiff conceded, but it also brings with it the need for greater skills and education, and the demand that workers be prepared to travel, even to other countries, in searching for jobs.

Work, he explained, is part of God's plan for humanity and through it we participate in the work of creation and redemption. We will live this better, the Pope urged, if we remain united to Christ through prayer and sacramental life.

Then, on March 31, Benedict XVI spoke to a gathering of Confartigianato, an association of Italian artisans. Work is part of God's plan for man, even if because of original sin it has become more of a burden, the Pope explained.

It is important, he exhorted, to proclaim the primacy of the human person and the common good over capital, science, technology and even private ownership. As Christians, we can testify to the "Gospel of work," in our daily lives, the Pope reminded them.

The Pontiff also had words for those directing workers, in an address to a group from the Italian group, the Christian Union of Business Executives on March 4. Justice and charity, the Pope said, are inseparable elements in the social commitment of Christians.

"It is incumbent on lay faithful in particular to work for a just order in society, taking part in public life in the first person, cooperating with other citizens and fulfilling their own responsibility," said the Pope.

"Unfortunately, partly because of current economic difficulties, these values often run the risk of not being followed by those business persons who lack a sound moral inspiration," he also noted. Values which, together with sound economic policies, could go a long way in finding solutions to the ethical challenges in a globalized world.

J-Curve, Mugabe, and the World Cup

♠ Posted by Emmanuel in at 6/26/2007 12:43:00 AM
Ian Bremmer's recent book The J-Curve presents a simple thesis. Take a look at the illustration taken from the Daily Telegraph review of the book. Openness increases as you move from west to east, while political stability increases as you move from south to north. According to Bremmer, the least open regimes (like North Korea) tend to be more stable than those undergoing a transition to openness which are least stable (like Iraq), while those that are most open are also the most stable (like the US).

I bring this matter up for I recently came across this article in The American which illustrates J-Curve reasoning. Sanctions imposed on Robert Mugabe's regime have only had the effect of strengthening his grip on a highly dysfunctional country through isolation. Hence, the argument in the article is that the upcoming World Cup presents a better opportunity to make Mugabe shape up if Zimbabwe is to take advantage of the goodwill and business that the Cup will bring to the African continent:

Western sanctions—principally travel bans on Zimbabwean public officials allied to Mugabe and the suspension of most aid programs—have done nothing for Zimbabwe’s politics other than giving its pernicious leader a handy “foreign devil” to frame for his own misdeeds. The World Bank suspended all aid to Mugabe’s kleptocracy, with little effect (thanks in part to Chinese willingness to step in with loans), and at any rate, it did so not for geopolitical reasons, but because Zimbabwe wasn’t making good on its outstanding debts. Even now Zimbabwe remains eligible for “technical assistance” and civil service reform advice from the bank...

Is there no force, persuasion, sanction, or pressure—short of warfare—that can bring Mugabe to heel? Maybe not, but hope should not be abandoned. Where the World Bank has proved feckless, the World Cup may step in to fill the breach.

Zimbabwe, like all of southern Africa, has been counting on big economic and goodwill gains from the 2010 Cup to be hosted by South Africa. It wants to host teams for training, lure in tourists, and get a waiver from FIFA, the global governing body for football, to allow teams to live on-site in Zimbabwe, even during the competition. In fact, with South African support, Zimbabwean football has been assuming the waiver would be granted.

Too presumptuous, maybe: FIFA said earlier this month that no waiver decision has been made, putting a damper on plans to build two entirely new stadiums in Zimbabwe and renovate older ones.

Indeed, FIFA might want to hold that thought, and take it a step further. Already it’s clear that FIFA’s decisions matter more to Zimbabwe than anything the IMF or the G8 might do. The critical pressure point again is South Africa, which has been quite accommodating of Mr. Mugabe. If President Mbeki truly is expected to carry the ball for Tony Blair here, let him work with FIFA and the African Union to keep the World Cup goodies away from Zimbabwe altogether, so long as Mugabe rules. Here at least is a form of pressure that may begin to bite.

FIFA, fortunately, can still help some Zimbabwean workers even if it does act to harm the regime. Zimbabwean construction workers are earning true living wages (denominated in US dollars, not Zimbabwe dollars) by crossing into South Africa to work World Cup construction projects. That’s a lot more effective than western hand-wringing.

EU's I'm-Hurt-By-Globalization Fund

♠ Posted by Emmanuel in at 6/26/2007 12:35:00 AM
Somehow, I am not surprised to learn that the French are the first to take advantage of the EU's new "globalization adjustment fund". From Agence-France Presse:
The European Commission on Monday approved the first two payments of cash from a new EU fund aimed at cushioning the impact of globalisation.

Small companies that supply French car makers Peugeot-Citroen and Renault will receive 3.8 million euros (5.1 million dollars) to help "workers made redundant due to company failures in a climate of changing global trade patterns," the EU executive said.

Commission spokeswoman Katharina von Schnurbein said the money would be disbursed once EU member states and the European Parliament gave their approval, which could take "three or four months."

The fund was set up at the end of last year to help workers who lose their jobs because of globalisation get back to work.

Schnurbein said that other candidates for cash from the fund were "in the pipeline," including the Finnish telecoms sector and textiles workers in Malta.

US Bullies Antigua in the WTO

♠ Posted by Emmanuel in , at 6/26/2007 12:01:00 AM
Previously, I detailed the case of the tiny island nation of Antigua and Barbuda winning its case against the US over online gambling restrictions. If you will recall, Antigua was severely hurt when the US effectively banned offshore online gaming operations from plying their trade Stateside. The significance of this matter is perhaps far greater than the stillborn Doha round. Can the US simply flout the WTO's rule-based regime by ignoring its decisions? It would be terribly unfair if this matter is not resolved in favor of Antigua. Hearteningly, several other countries have now joined Antigua to face down America's bullying tactics. Things will come to a head when the WTO's judicial system, the Dispute Settlement Body (DSB), meets on July 24:
Important questions will be raised in Geneva on July 24, about whether rules based on international systems can be used by the relatively powerless (Antigua), if the most powerful (United States), chooses to ignore or circumvent the World Trade Organization’s legally binding decisions.

The issue is whether the United States will comply with a WTO ruling in favor of Antigua, along with other countries, and compensate its government for loss of earnings because of Washington’s decision that effectively led to the end of online gambling in the U.S.

"There is something clearly wrong with the concept that after a long, difficult struggle covering years of dispute resolution at the WTO, an offending member could ultimately avoid the consequences of its loss by withdrawing the commitment that gave rise to the claim in the first place," said Dr. John Ashe, Antigua's Ambassador at the WTO.

Brazil has joined Antigua & Barbuda, along with the European Union (27 member states, including the United Kingdom), China, India, Japan, Costa Rica, Mexico, and China Taipei, to claim compensation on legal matters of principle involved.

In 2004, the WTO ruled that the U.S. had violated global trade rules with the ban on internet gambling, and that this was an unfair trade barrier that hurt Antigua’s gaming industry. Citing that the U.S. prohibition on internet gambling was inconsistent with its obligations under the 1995 General Agreements on Tariffs and Services (GATS).

The WTO also noted that the U.S. ban on online gambling represented an "arbitrary and unjustifiable discrimination between countries," and was a "disguised restriction on trade." The United States has lost its appeal and has decided to withdraw its commitment on this service from the GATS.
An op-ed in the Jamaica Gleaner also reiterates this theme. The US may try to delay proceedings yet again:

As discussions continue in Germany to see whether an outline agreement is achievable on a new global-trade round, a more fundamental exchange is just beginning in Geneva.

It is one that raises important questions about whether rules based on international systems can beused by the relatively powerless if the most powerful choose to ignore or circumvent the World Trade Organisation's (WTO) legally binding decisions.

At issue is whether the United States (U.S.) will comply with a WTO ruling in favour of Antigua and compensate its government for loss of earnings as a result of Washington's decision that effectively led to the ending of online gaming from or through the United States.

In an extraordinary twist that turns the issue from one in which Antigua was essentially alone in pursuing justice, it has emerged in the last few days that the small island has been joined by Europe, Brazil, Japan and others in its claim for compensation and the matters of legal principal involved.

Antigua will attempt to obtain $3.4 billion worth of IP sanctions against the United States in return for the harm it has done over copyrights, trademarks, industrial designs, patents, and protection of undisclosed information as noted by the International Economic Law blog. See Antigua's official document as well. This story encapsulates matters:

Meantime Antigua and Barbuda has announced its sanctions against the USA specifically by withdrawing intellectual property protection for US trademarks, patents and industrial designs worth up to US$3.4 billion in order to recover the amount it has lost in revenue.

"We feel we have no other choice in the matter, we have fought long and hard for fair access to the US market and have won at every stage of the WTO process," said Finance Minister Errol Cort. "Until such time as the United States is willing to work with us on achieving a reasonable solution to this trade dispute, we will continue to use every legitimate remedy available to protect the interests of our citizens."

According to reports, the US is now willing to consider a solution with Antigua and Barbuda but not with other countries filing claim on Friday.

Antigua and Barbuda has filed claim saying that its revenue from Internet gambling had dropped from US$1 billion annually to US$130 million as a result of the US action.

Needless to say, I am rooting for the little guy. What is the point in having a rule-based system in the WTO if the US merely brushes off its decisions?