I Dream of Naomi the Globophobe

♠ Posted by Emmanuel in at 9/30/2007 10:43:00 PM
Let me qualify that--I have bad dreams about Naomi Klein. She is, of course, the author of the popular book that attacked the evils of corporate globalization, No Logo. A favorite of the anti-globalization movement, she has recently released another, more ambitious book entitled The Shock Doctrine. The book makes an analogy between electroshock therapy applied to psychiatric patients and the "shock therapy" doctrine of wholesale economic makeover. (Although Jeffrey Sachs is associated with the term, he claims not to like it.) Just as electroshock therapy is designed to break down patients and make them susceptible to reprogramming, economic shock therapy supposedly does the same to entire nations. What else, this kind of shock therapy is often accompanied by coercion. To Klein, it's a cocktail of shocks: "Countries are shocked by wars, terror attacks, coups d’état and natural disasters"; afterwards, “they are shocked again — by corporations and politicians who exploit the fear and disorientation of this first shock to push through economic shock therapy.” Lastly, those who “dare to resist” are shocked for a third time, “by police, soldiers and prison interrogators.”

This exceedingly specious analogy is extended to a number of "case studies": Pinochet's Chile in 1973; the Falklands War in 1982; the Tiananmen Massacre of 1989; the rise of Russian oligarchs in 1993; September 11; the invasion of Iraq in 2003; and Sri Lanka after the 2004 tsunami. How deliberately conducted electroshock therapy relates to the catastrophic "shocks" of 9/11 (unless you buy the conspiracy theory that a US missile hit the Pentagon) and the 2004 tsunami is not given much explanation. Nor is it explained how the Falklands War, which, if I recall, resulted from the Argentinian invasion of the Falklands, led to liberalization, privatization, and deregulation in England. In effect, Klein tries to conveniently fit events on a Procrustean bed of an analogy by forcing the description of these events to fit an electroshock therapy/shock therapy analogy and its associated corporate-led violence. Muddling up actors, motives, and outcomes doesn't really matter. Aside from those neoliberal Argentineans who foisted liberalization, privatization, and deregulation on the hapless English, we have the Tiananmen massacre being the turning point in China's conversion to "getting rich is glorious," which Deng Xiaoping first uttered in 1979 if I recall correctly.

Needless to say, I would not hesitate to give any paper based on the idea that the Argentinian invasion of the Falklands was done in order to spur neoliberal reforms in Britain or one that suggested Tiananmen spurred China's turn to the market a failing mark. That such faulty logic could be extended to 500+ pages beggars belief. It's not ideological bias on my part. This is one of the very few blogs covering economics topics that has Marxist sources among its links. Nor would it be fair for me as an IPE instructor to deliberately give lower marks to papers that adopted a Marxist-leaning perspective. (Actually, it's often easier for students to write a good essay with such a perspective, but that's another story.) Rather, the faults with Klein's work are not ideological but logical. Even the renowned left-leaning author, the late great Andre Gunder Frank would have said that markets are not newfangled Western corporate contraptions designed to impoverish the world but have existed throughout the Orient since time immemorial. There's nothing necessarily wrong with markets if you go by the explanation that they're spaces where people come together to exchange things. As Amartya Sen noted in his magnum opus Development as Freedom:
The market mechanism, which arouses passion in favor as well as against, is a basic arrangement through which people can interact with each other and undertake mutually advantageous activities. In this light, it is very hard indeed to see how any reasonable critic could be against the market mechanism, as such. The problems that arise typically spring from other sources—not from the existence of markets per se—and include such concerns as inadequate preparedness to make use of market transactions, unconstrained concealment of information or unregulated use of activities that allow the powerful to capitalize on their asymmetrical advantage. These have to be dealt with not by suppressing the markets, but by allowing them to function better and with greater fairness and with adequate supplementation. The overall achievements of the markets are deeply contingent on political and social arrangements.
Joseph Stiglitz gets this point in his book review of Shock Capitalism: markets become acceptable insofar as institutions are established that enable an economy to function well and reflect the broader social fabric that markets are embedded in. Klein's Procrustean bed is sample selection bias at its worst. Select those cases where money, power, and occasional violence (the subtitle of my blog) come together and use them to make a wholesale indictment of "the market," never mind that the pieces don't fit the (incoherent) shock doctrine thesis. Sorry, but I don't do conspiracy theories. Like the anti-Semitic variation ("Jews control the world") and the anti-American variation ("the corporate American Empire is bent on global domination"), the anti-globalization variation ("the free market is a myth designed to enrich the West and impoverish the rest of the world") suffers from the same tendency towards the grand narrative of market fundamentalists: "free markets automatically deliver peace and prosperity."

The world is too complex to be encapsulated by these conspiracy theory and libertarian simplifications. Grand narratives are fine for storytelling purposes, but for those of us who seek a more nuanced understanding of the dynamics of globalization, it's a much more difficult task. There are no easy answers. I leave you with Will Hutton's scathing but spot-on take on Klein's book:

In her delusional, Manichaean world view, privatisation, free markets, private property, consumer freedom, the profit motive and economic freedom are just other terms for corporate self-enrichment, denial of voice, limitation of citizenship, inequality and, sometimes, even torture. The discredited electro-shock psychological treatment of the Fifties, we learn, informed the thought system of the free marketeers; it is guilt by association and assertion rather than proof, a weaknesses of too much of the book.

Nothing good can ever come from globalisation, which is just more capitalism. Democracy, however, is a halcyon world of political and economic co-operation, citizen voice and engagement, with a freely arrived-at assertion of the common interest in which most think along the same lines as, say, Naomi Klein. She and free-market economist Milton Friedman, whom she has in her sights, are mirror images of each other in the absolutist categories in which they think.

US Student Loans: Subprime II?

♠ Posted by Emmanuel in at 9/30/2007 09:58:00 PM
Uh-oh, we've seen this movie before. Just as the subprime mess has revealed the troubles in America's love affair with costly credit (and not reading the fine print), it seems private student loans may be headed in the same direction with equally dire consequences. Instead of the pitch that adjustable-rate mortgages could be refinanced anyway since the housing market was unsinkable, the pitch here is that college graduates would be able to find good-paying jobs after their graduation that would pay for their college loans. In many instances, however, it seems that college graduates are having trouble finding jobs or jobs that allow them to pay off their loans. Needless to say, things may get worse if America's economic picture worsens further. End result? Some are predicting an explosion in private student loan defaults a la subprime. From the Associated Press:

The near doubling in the cost of a college degree the past decade has produced an explosion in high-priced student loans that could haunt the U.S. economy for years.

While scholarship, grant money and government-backed student loans whose interest rates are capped have taken up some of the slack, many families and individual students have turned to private loans, which carry fees and interest rates that are often variable and up to 20 percent...

Parents are still the primary source of funds for many students, but the dynamics were radically altered in recent years as tuition costs soared and sources of readily available and more costly private financing made higher education seemingly available to anyone willing to sign a loan application.

Students with no credit history and no relatives to co-sign loans (or co-signing parents with tarnished credit) were willing to bet that high-priced loans were a trade-off for a shot at the American dream. But high-paying jobs are proving elusive for many graduates.

"This is literally a new form of indenture ... something that every American parent should be scared of," said Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers.

More than $17 billion in private student loans were issued last year, up from $4 billion a year in 2001. Outstanding student borrowing jumped from $38 billion in 1995 to $85 billion last year, according to experts and lawmakers.

Rocketing tuition fees made borrowing that much more appealing. Consumer prices on average rose less than 29 percent over the past 10 years while tuition, fees, and room and board at four-year public colleges and universities soared 79 percent to $12,796 a year and 65 percent to $30,367 a year at private institutions, according to the College Board.

Scholarship and grant money have increased, yet for almost 15 years, the maximum available per person in government-guaranteed student loans, which by law can't charge rates above 6.8 percent, has remained at $23,000 total for four years. That's less than half the average four-year tuition, room and board of $51,000 at public colleges and $121,000 at private institutions.

Sallie Mae, formally known as SLM Corp., has been on the winning side of the loan bonanza. Its portfolio of 10 million customers includes $25 billion in private and $128 billion in government-backed education loans. However, private-equity investors who had offered $25 billion to buy the company backed out last week, citing credit market weakness and a new law cutting billions of dollars in subsidies to student lenders.

Citigroup Inc., Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co., Wachovia Corp. and Regions Financial Corp. are also big players in the private student loan business. And there has been an explosion in specialized student loan lenders, such as EduCap, Nelnet Inc., NextStudent Inc., Student Loan Corp., College Loan Corp., CIT Group Inc. and Education Finance Partners Inc.

The question is whether everyone who borrowed will be able to repay. Experts don't track default rates on private student loans, but many predict sharp increases in years to come...

Meanwhile, complaints about marketing of private loans like ads promising to approve loans worth $50,000 in just minutes are on the rise. The complaints have made their way to lawmakers, who see a need to regulate the highly profitable and diverse group of companies and the loans they make to college students.

In August, the Senate Banking Committee approved a bill that would mandate clearer disclosure of rates and terms on private student loans. The bill also would require a 30-day comparison shopping period after loan approval, during which time the offer terms could not be altered.

New York Attorney General Andrew Cuomo said many graduates who borrowed owe as much if not more than most homeowners owe on mortgages. Unlike mortgages with clear consumer disclosure requirements even from nonbank lenders, private lending is "the Wild West of the student loan industry," he said in a telephone interview.

Critics say what happened in the mortgage market could happen in the student loan market. Cuomo, who conducted a nationwide investigation, said the parallels between the two markets are "provocative."

Demand for bundled student loans sold to institutional investors worldwide fueled lending to students. The market for private student loan-backed securities leapt 76 percent last year, to $16.6 billion, from $9.4 billion in 2005, according to Moody's Investors Service.

The student loan-backed securities market has yet to suffer noticeable effects of a global credit squeeze that was triggered this summer by a mortgage meltdown of borrowers with risky credit.

"Once the economy starts to slow, you're going to see a large increase of these people in bankruptcy court," said Robert Manning, a professor at Rochester Institute of Technology who has written about college students and credit cards.

A 2005 change to bankruptcy law puts private student loans on par with child support and alimony payments: Lenders can garnish wages if someone doesn't pay.

Cuomo's probe revealed what he calls an "appalling pattern of favoritism" for student lenders that provided kickbacks, revenue-sharing plans and trips to college administrators in exchange for recommended lender status. Other critics allege widespread corrupt arrangements propelled a student loan boom.

Lenders deny such charges, arguing that industry growth resulted from surging education costs and that higher interest rates are justified for unsecured loans to borrowers with blemished or insufficient credit records.

"Lenders take 100 percent of the repayment risk on flexible private-education loans made to people with limited credit histories, on which they will not get repaid for several years," Barry Goulding, a Sallie Mae official, told Congress last spring.

New regulations could dry up access to education financing, he and other industry executives argue. Some experts are skeptical, predicting waves of student loan delinquencies and defaults on what is outstanding.

"Should private student loans suffer the same sort of failure as (subprime) mortgages, as students graduate or drop out and find themselves unable to pay, we will do serious damage not only to the lives of many students but also to the economic and social fabric of our country that depends on college graduates for its strength," said Luke Swarthout at the U.S. Public Interest Research Group.

John Lipsky, the IMF's David Lereah

♠ Posted by Emmanuel in , at 9/30/2007 12:08:00 AM
Recently resigned National Association of Realtors Chief Economist David Lereah is (was?) infamous for his ever-optimistic take on the state of the US housing market. His belief is best summarized by his book's title, "Why the Real Estate Boom Will Not Bust - And How You Can Profit from It: How to Build Wealth in Today's Expanding Real Estate Market." So infamous is Lereah that there's even a website critiquing his merry pronouncements of everlasting housing mirth. Unfortunately for the rest of us, while Lereah is gone, we still have to listen to another Lereah-esque character. Worse yet, he's at the IMF, the supposed guardian of the international financial system. Who will guard the guardians when the guardians are Wall St. cheerleaders?

Michael Panzer, Mr. Financial Armageddon
himself, beat me to the punch in characterizing John Lipsky--First Deputy Managing Director of the IMF and former Vice Chairman of JPMorgan Chase Investment Bank--as a competitor to Lereah in the "don't worry, be happy" sweepstakes. While Lipsky also sounded a sanguine note on US real estate by noting in January that "a more stable US housing market [has] diminished risks in the global economy," he is more famous for his easygoing prognostications on financial derivatives. You know the Wall St. line as it is identical to Lipsky's: Financial derivatives are innovations which quantify risks precisely and enable market participants to diversify risks to those who can bear them. As recent events have demonstrated, Lipsky was wrong on all three counts. First, mark-to-model and rating agency shenanigans laid waste to realistic pricing of these instruments. Second, most hedge funds have shown how un-diverse their strategies were as most got hit at the same time. Third, all sorts of financial institutions have gone belly up.

Ah, but don't sweat it, Lipsky reminds the world at the IMF's Globalization & Risk Conference. Here is the non-apology for his previous statements:
A few months ago, I would have said that one of most striking features of financial globalization has been the broadening reach of financial institutions and markets, creating an ability to disperse risk much more widely than previously. The process of globalized risk transfer is being facilitated by securitization and by the use of complex derivative transactions. As is well understood, the key benefit of modern risk transfer instruments is that they allow investors to bear only the financial risks they wish to.

While I still believe this to be one of the most relevant facets of financial globalization, the events of the past few months have demonstrated that the process of risk dispersion contains some inherent potential [not realized?] problems. In particular, the complex composition of some derivative instruments-and the lack of transparency regarding some holders' balance sheets-make it hard to assess the risk exposure of individual entities, including some regulated institutions. For example, over the last couple of years, U.S. sub-prime and other mortgage-backed assets have been a key ingredient of structured credit products that have been sold to a broad set of investors, many outside the United States. In fact, this aspect of financial globalization has worked well up to now-abstracting from the issue of whether investors became excessively exuberant. [Worked well...in ripping off the ROW?]

Problems arose when it became apparent that the underlying assets were not performing very well-that is, when U.S. house prices began to weaken and mortgage delinquencies rose quickly. At that point, the lack of transparency regarding both instruments and investors created a sudden loss of confidence in the predictability of the mapping of changes in the underlying housing market, to the prices of the relevant derivative securities. Liquidity disruptions emerged quickly-both in terms of the market liquidity of the instruments themselves and the funding liquidity of some of the institutions that purchased them.
Got that? It was a liquidity problem at work. There was nothing much wrong with the instruments themselves. So what are we to do? This is the most head-scratching part. What Lipsky basically says is that "innovation" should not be stifled. Moreover, trying to regulate "innovation" to improve transparency is futile since we may end up watching out for yesterday's problems in an ever-changing world. Nevermind that it seems innovation is causing a lot of these emerging problems but...

Here, I would like to sound a note of caution: We must be careful not to focus excessively on new regulations intended to fight the last battle when the next one could be different. We already have made a lot of progress in recognizing that supervision should be "risk-based" and that regulation should be "incentive compatible." These principles should be kept in mind when we look ahead. The key will be to adapt these concepts to the problems of today with careful thought given to what we expect to happen tomorrow.

For this reason, I find some of the latest criticism of Basel II [banking regulations] to be just a bit too facile. It has been claimed that conduits and SIVs were conceived as a means to avoid Basel II capital charges by placing assets off bank's balance sheets. In a Basel II world, however, it would be less costly to put the assets held by conduits and SIVs on the balance sheet than in the current Basel I world, since their risk-sensitive ratings likely would have required less capital charges than in Basel I. The current debate about ratings agency regulation is another area where we must tread carefully in order not to stifle innovation...

Clearly, investors share the blame for recent market difficulties. They should not take a credit rating letter grade on complex securities as the principal element of their due diligence process. Nonetheless, rating agencies will continue to play an important role in providing third party opinions about credit risks, especially in areas where credit risks are difficult to assess.

Huh? We should do the rating agencies' jobs so we aren't hoodwinked by them, yet they will still have an "important role...where credit risks are difficult to assess"? Don't you feel safer now that the IMF is staffed by the likes of John Lipsky? I'll second Felix Salmon's thoughts on Lipsky: "I, for one, can't ever remember a public official being so Panglossian – certainly not an unelected one." (Someone, please set up a "John Lipsky Watch" before it's too late.)

Travel Cheaply w/ "Surging" Yuan

♠ Posted by Emmanuel in , at 9/29/2007 04:38:00 PM
Here's a travel article from our favorite Party publication the China Daily that will either elicit your interest or have you scratching your head in disbelief. This article is yet another entry in the vast genre of travel stories that go like this: Ever since the currency of country X became that much stronger, citizens of X have gone shopping in country Y and other blighted places suffering from devaluation. (You can read Canada-US and UK-US versions, for instance.) The notable twist to this story is that China is country X and country Y is merely the city of Hong Kong. While the renminbi AKA the yuan has strengthened by about 10% against the US dollar (and consequently the USD pegged Hong Kong dollar), this story is a bit too self-serving IMHO for the Party line that the yuan is not being manipulated. Nevertheless, it's worth noting the large number of tourists emanating from the Middle Kingdom. Truly, a (camera and camcorder-toting) force to be reckoned with:
Shopping in Hong Kong or sunbathing in Thailand are proving more attractive than a domestic trip during the National Day holiday for mainland tourists - thanks to the rising yuan.

As Fang Fang, who plans to go to the special administrative region, said: "It costs the same to go to Yunnan or Hong Kong. Why not go overseas then?"

The price is around 3,000 yuan ($400) each for the overseas trip and the 23-year-old bank employee said the stronger yuan is the major reason for her travel plan.

"I want to buy a watch and cosmetics there. I heard from my friends that I can save at least several hundred yuan," she said.

The value of the yuan vis a vis the US dollar has surged nearly 10 per cent since July 2005, when the central bank unpegged the currency from the greenback and linked it to a basket of currencies.

Most travel agencies have said the number of tourists applying for overseas trips during the National Day holiday is higher than the same period last year.

"We have seen an increase of 10-15 percent in outbound tourism," said Lin Kang, deputy general manager of the outbound travel department of China International Travel Service Head Office.

Tour products to Europe, South Korea, Japan and some islands such as Maldives and Saipan, are also popular, he said.

"The rising renminbi has generated great interest in shopping overseas," he said.

Ctrip.com, an online travel service company, agreed, saying it is especially evident in Hong Kong tours.

It said the number of people applying for Hong Kong trips during the holidays has almost doubled from the same period last year.

"Though outbound tour packages cost the same as last year, shopping cheap is a big attraction," said Wu Jiaoli, an analyst with the company.

"Most mainland tourists go to Hong Kong for shopping. The rising renminbi obviously means they pay less," she said.

Outbound tourism has shown double-digit growth for five consecutive years.

Last year, 34 million Chinese traveled overseas, making them the sixth largest group of outbound tourists worldwide.

In the first half, outbound tourism grew 14 percent year on year, the China National Tourism Administration said earlier this month. It estimated that 37.4 million Chinese will travel overseas this year.

The UN World Tourism Organization has forecast China will become the fourth largest source of outbound tourists by around 2015.

The Burma<->Wonga ($) Nexus

♠ Posted by Emmanuel in , at 9/29/2007 03:00:00 PM
I have a nasty neighbor like the Association of South East Asian Nations (ASEAN) does. Whereas I have to put up with a neighbor playing loud gangsta rap that goes "smack that biatch" and "kill those mofos", ASEAN's neighbor Burma actually does those things all the time. Why does Burma do so? Because it can. It's about the wonga (slang for money), naturally. Corporate social responsibility (CSR) issues aside, there's a heckuva lot of energy reserves not being tapped by America because of its sanctions just waiting for those who can stand dealing with the Burmese junta. As long as it can get a cut on such deals to sustain itself in power, the junta has a way to survive Yes, ASEAN has already made a pretty strong statement about the situation there for an outfit that has emphasized "constructive engagement" with Burma:
The ASEAN Foreign Ministers had a full and frank discussion on the situation in Myanmar at their Informal Meeting this morning in the UN and agreed for the Chair to issue this Statement. They were appalled to receive reports of automatic weapons being used and demanded that the Myanmar government immediately desist from the use of violence against demonstrators. They expressed their revulsion to Myanmar Foreign Minister Nyan Win over reports that the demonstrations in Myanmar are being suppressed by violent force and that there has been a number of fatalities. They strongly urged Myanmar to exercise utmost restraint and seek a political solution. They called upon Myanmar to resume its efforts at national reconciliation with all parties concerned, and work towards a peaceful transition to democracy. The Ministers called for the release of all political detainees including Daw Aung San Suu Kyi.
In addition, Indonesian President Susilo Bambang Yudhoyono has called on Burma to better its human rights record. Philippine President Gloria Macapagal-Arroyo has urged Burma to "
redeem democracy." Singaporean PM Lee Hsien Loong says the situation is "very grave". Even Thai PM Surayud Chulanot who himself was installed by a military junta has "condemned the use of violence." However, it turns out that Thailand is the main customer of the biggest gas project in Burma run by the French energy giant TOTAL:

Total of France, which operates a natural gas project in Burma, has expressed its “deep concern” over the situation in the country but rejected the idea it should pull out.

The company argues that its presence benefits tens of thousands of people and serves as a model for “business and political leaders looking for ways to address the country’s human rights issues”.

Alongside Chevron of the US, Total is one of the leading western companies still active in Burma.

In a statement, it said: “A forced withdrawal would only lead to our replacement by other operators probably less committed to the ethical principles guiding all our initiatives. Our departure could cause the population even greater hardship and is thus an unacceptable risk.”

Total and Chevron are partners on the Yadana offshore gas project, which came on stream in 1998. Last year the field produced an average of 19.3m cubic metres a day, representing about half of Burma’s total gas output.

Most of the gas is sold to Thailand; PTT, the Petroleum Authority of Thailand, is a member of the Yadana consortium. Chevron, which acquired its stake when it bought Unocal in 2005, said it was monitoring the situation.

Production has been steady since 2001. Total said it would not invest in any new projects in Burma, but would continue to spend on maintenance and in areas necessary to sustain production, such as drilling new wells and installing compressors.

In 2003 Bernard Kouchner, now French foreign minister, was commissioned as an independent consultant by Total to write a report on the group’s involvement in Burma. He did not call for it to leave the country, but said the company “must come out clearly in favour of democracy”.

Human Rights Watch, the New York-based campaign group, takes a similar view, saying it has a responsibility to speak out on events in Burma.

Arvind Ganesan of HRW said: “The Yadana project is probably one of the biggest revenue raisers, if not the biggest revenue raiser, for the Burmese government, so it gives them the ability to do the things they want to do.”

He added that there was a similar responsibility on Thailand, which buys most of the Yadana gas, and other Asian countries that have been investing in Burma.

Western companies such as Premier Oil of the UK have pulled out.

But ONGC of India and CNPC of China, both state-controlled, have been building up their investments.

Burma’s gas resources are sizeable, if not enormous. Proved reserves were 540bn cubic metres at the end of last year, according to the BP Review of World Energy.

Aside from Thailand, that's quite a list of other states with interests in Burma's energy reserves. I've already mentioned Chinese involvement in Burma. Just as you don't expect the Thai military junta to be too rough on another military junta, you don't expect Chinese authoritarians wary of populist movements led by religious figures to compel Burmese authoritarians to negotiate with, er, populist movements led by religious figures. Shooting at monks is truly appalling stuff, but Burma uses its business ties well to curry favor with certain others in the international community. That is, enough favor to live out whatever sanctions the US would place on it. At the end of the day, it's all about the wonga.

Structurally Adjusting the IMF

♠ Posted by Emmanuel in , at 9/28/2007 02:59:00 PM
And now here's an old-school, straight-up IPE topic: the fate of the IMF. As you know, the IMF was originally intended to be a lender of last resort when countries ran into balance of payments crises. When a country no longer had the ability to pay for its exports since its foreign exchange holdings were depleted, it had to call on the IMF. The most visible, relatively recent calls for help were made when the Asian financial crisis plunged East Asian countries into financial turmoil as foreign investors pulled out their FDI and portfolio investments en masse while regional currencies devalued severely. Countries that turned to the IMF had to follow tough "structural adjustment" policies that, above all, emphasized fiscal austerity. As Joseph Stiglitz famously suggested in Globalization and Its Discontents, these policies brought about severe social hardships since the socioeconomic effects of such policies were not often thought through.

Hit the fast-forward button and we now find a vastly changed global political economy: developing countries have accumulated vast reserves as mercantilist policies have taken hold, especially among Asian countries. The thinking behind such unprecedented accumulation is simple: "We've seen the terrible effects of resorting to the IMF and its 'structural adjustment' policies, so we're going to accumulate plentiful reserves to ensure we don't have to turn to the IMF." Even if these reserves could have arguably been used for better things such as health care and education as developing countries may have drawn the wrong lessons from the crisis, reserve accumulation continues apace. The flip side of developing countries weaning themselves off IMF support has been that the IMF has had little business for its lender of last resort function. Without lending, of course, the IMF earns no interest income.

What we have, nowadays, is the intriguing situation where the IMF needs to "structurally adjust" itself by undertaking fiscal austerity measures. Like the countries it so famously told to do some belt tightening, the IMF now needs to do the same. Here is an Economist introduction to the current financial state of the IMF:

What is a firefighter to do when there aren't any fires? The IMF spent 1994-2002 dashing from one financial conflagration to the next. But the sirens have been silent for some time. As a result, the fund's budget is shrinking and the morale of its staff is sinking. Some of its best customers are now doing without it, leaving some of its biggest shareholders wondering what to do with it...

Apart from generating reams of analysis, the fund's job is to furnish foreign exchange to countries that have temporarily run short. It can call on about $220 billion of hard currency in the first instance. That sounds like plenty. But some of its former customers now have big, shiny fire-engines of their own. South Korea, for example, has $217 billion in its vaults. Between them, eight East Asian countries (Japan, Singapore, Indonesia, China, Malaysia, the Philippines, Thailand and South Korea) command reserves worth about ten times the IMF total. These countries have even begun to pool a small fraction of their combined hoard, under what is called the Chiang Mai Initiative.

Lately no one has been calling on the fund's own supply. Brazil and Argentina have both repaid their debts. Only Turkey and Indonesia still owe it money on any scale. Quiet times are lean times for the IMF. Like any bank, it covers its running costs (which will amount to over $900m in the year to April 2007) from the interest it earns on its loans. But this financing model “is no longer tenable”, Mr de Rato's report says. By its own projections, the IMF will live beyond its means by almost $300m in 2009-10. The belt-tightening this implies has not gone down well with staff, who show little taste for the austerity they are notorious for prescribing to others.
In short, the IMF has gone from anti-globalization arch-villain to semi-irrelevant international organization in the space of less than a decade. The question has become, "is the IMF still relevant in today's global political economy?" With the imminent appointment of Dominique Strauss-Kahn as IMF chief, this matter has come to the fore. Some suggestions include (a) enhancing the IMF's surveillance role over exchange rates (though this is a contentious matter; (b) broadening the participation of developing countries in global economic governance; and (c) doing medium- to long-term lending like the World Bank. It's interesting stuff, and the International Herald Tribune identifies some of the key emerging issues for the IMF.
A decade ago, the International Monetary Fund helped to stabilize the world economy after markets collapsed in Latin America, Russia and Asia. While conservatives denounced its role in bailing out investors, liberals assailed its austerity measures imposed on several troubled economies.

Today the only crisis faced by the IMF is a crisis of identity. Countries rescued in the 1990s have mostly repaid their debts.

On Friday Dominique Strauss-Kahn of France is to be named the new managing director of the IMF, succeeding Rodrigo de Rato of Spain, who is resigning. He arrives at a time when the Bush administration, which backed him for the job, has joined a global chorus calling on the fund to rethink its priorities and its governance.

With a shrunken loan portfolio, the institution that lectures others about finances has lost operating income, is running a deficit and is facing staff cuts and considering the sale of gold to meet expenses...

"What might be at stake today is the very existence of the IMF as the major institution providing financial stability to the world, a global public good," Strauss-Kahn, a former French finance minister, told the fund's directors last week. "In sum, the two main issues are relevance and legitimacy."

The other key issue to be considered is the way the world's wealthiest countries choose the person to run the fund. Since the fund was established after World War II as part of the Bretton Woods postwar economic architecture, its chief is chosen in private by the leading powers in Europe.

After President Nicolas Sarkozy of France nominated Strauss-Kahn this summer, his selection was a foregone conclusion, just as it was inevitable that President George W. Bush would get his way in picking Robert Zoellick this summer to head the World Bank after the ouster of Paul Wolfowitz, the former U.S. deputy defense secretary.

But there is widespread unhappiness and embarrassment among the fund's board members over the clubby nature of the process, especially among the countries in Asia and Latin America bailed out in the 1990s. Many are now export powerhouses sitting on huge reserves and no longer need or want the fund telling them what to do.

Russia hoped to capitalize on these feelings in challenging the selection of Strauss-Kahn. It nominated its own candidate, Josef Tosovsky, a former prime minister of the Czech Republic, who told the board that as a "representative of an emerging market transition economy," he would bring a different perspective to the job.

Aleksei Mozhin, the board director representing Russia at the fund, said his country was "very, very proud" to nominate Tosovsky. "It is an open secret that the fund is barely alive," he added. "It is in the business of survival. The traditional modus operandi of the fund - you need our money, we tell you what to do - is gone."

De Rato, the outgoing managing director and a former economy minister in Spain, has won widespread credit for initiating many of the changes and rethinking at the IMF, though the Bush administration has made no secret of its impatience over the pace of change.

Last year, with American backing, the fund agreed to give more voting shares to China, South Korea, Turkey and Mexico.

A plan to further expand the voting shares of these and other emerging economies is still being debated. The Bush administration fears that if such steps are not taken, these countries may break away from the fund.

The administration has also gotten the fund to do more to monitor currency manipulations by trading partner countries, especially China, which Treasury Secretary Henry Paulson Jr. has accused of buying dollars to keep the value of its currency low so that its exports can be sold more cheaply in the United States [this is the contentious part].

As a result of American and European pressure, a panel set up by De Rato called on China to end its currency interventions earlier this year. It also called on Europe to deregulate its economy and on the United States to do more to close its looming fiscal deficits in the coming decades.

Paulson has made little secret of his desire for the fund to be more aggressive in pressing China on this issue. Treasury officials were irritated earlier this year when De Rato said he could not lecture China any more than he could lecture Bush about the projected cost of Social Security and Medicare [good comeback, De Rato--the IMF should not be an extension of US policy].

"We're satisfied that there has been progress on the currency issue," said Clay Lowery, an assistant secretary of the Treasury for international affairs. "But more needs to be done for the IMF to be as relevant as it has been in the past."

In speeches, De Rato has said that, with its fading role in bailing out countries in crisis, the fund's new priorities should be in urging countries to take actions to prevent crises, monitoring the global economy and providing technical assistance. Fund officials say that Strauss-Kahn is likely to continue these policies.

But the French nominee has also told fund directors and some interviewers that he wants the organization to do more to alleviate poverty - a statement that some American officials say they hope does not lead to its trying to supplant the World Bank.

If the fund concentrates solely on monitoring the economy and seeking greater disclosure in the world financial system, that would suit some of its critics well. Adam Lerrick, an economist at Carnegie Mellon University in Pittsburgh and the American Enterprise Institute, a private research organization in Washington, is among those who say that the IMF needs to rethink its role in that direction.

"Without radical reform, the IMF will soon be totally irrelevant," Lerrick said. "The fund should focus on data gathering and the dissemination of financial information. Surprise causes financial crises. The more information markets have, the less likely there will be a crisis."

But many experts also warn against the complacency of the moment and say that the fund should be kept healthy in order to play a role in a future global crisis, even if rescue operations have to be carried out also by other players with large pools of reserves.

"It worries me a lot when people say the IMF can just go away," said Anne Krueger, a former first deputy managing director of the fund and now a professor of economics at Johns Hopkins University in Baltimore.

"You have to think of the fund as something of an insurance policy for the member countries," she added. "Times are good right now. But there are so many important economic issues that can't be done bilaterally any more. Big countries and small countries recognize that they need the fund."

Chinese SWF: All Hat, No Cattle?

♠ Posted by Emmanuel in at 9/28/2007 02:31:00 PM
Texans use the term "all hat, no cattle" to describe all hype, no action. In computerese, it's called "vaporware." Much discussion has centered on the possibility that the Chinese government would use its whopping $1.4 trillion in reserves to buy up the West and the rest of the world through its newly created sovereign wealth fund, the China Investment Company (CIC). As the CIC opens its doors this Saturday, Reuters' Alan Wheatley urges us not to believe the hype--for now at least. Among other things, the CIC is likely to be under the thumb of the People's Bank of China (PBoC). Lest we forget, there are also those past bugaboos of el crappo Western investments like Flint--I mean, Blackstone stock and rising Western protectionism for CIC to deal with:
The formal launch of China's investment agency may prove to be a milestone in the development of sovereign wealth funds but for now it is largely irrelevant to the conduct of the country's economic and monetary policy.

Besides giving Beijing a way to earn more on part of its $1.4 trillion in reserves, the agency was billed as a way of siphoning off some of the inflows from China's record trade surpluses that are boosting money supply and pumping up asset prices.

But as the China Investment Corp (CIC) prepares to open for business on Saturday, economists say the fund's initial remit is such that it will not make much of a difference to policy makers at the People's Bank of China, the central bank.

Critically, new net currency inflows will be bought not by the CIC, as was once assumed, but by the central bank.

As it issues yuan in exchange, the central bank will keep creating high-powered reserve money -- the building blocks for bank credit and money growth -- that it will have to keep mopping up through open market operations.

"This means that the scope of the current monetary policy implementation, as well as the complications, including forex reserve accumulation and sterilization, would remain largely unchanged with the establishment and operation of the CIC," economists at JPMorgan Chase said in a note to clients.

The sums of Chinese money chasing a home overseas are also likely to be underwhelming.

Although the CIC has initial capital of $200 billion, one-third of that will pay for Central Huijin, an investment vehicle that the PBOC used to pump foreign exchange into several big state banks.

Media reports have also said the CIC will be used to recapitalize two other banks and perhaps even to buy shares in big state-owned enterprises.

"The external implications are that the impact of the CIC, on the U.S. dollar and U.S. treasuries, at this phase may not be as negative as some market participants may have feared," JPMorgan Chase said.

Recent market turmoil and domestic criticism of the CIC for its purchase of a $3 billion stake in Blackstone mean the fund is likely to start off investing fairly conservatively in liquid foreign securities, said Michal Pettis, a professor at Peking University.

Shares in Blackstone have fallen 20 percent since the U.S. private equity group's initial public offering in June, handing the CIC a big paper loss.

"As the CIC grows, I would bet that an increasing amount of its assets is likely to be invested in strategic investments, which I suspect will include the financing of the foreign expansion of state-owned companies.

"This may turn out to be the most highly politicized aspect of the CIC's future business," Pettis said.

US cattle ranching...in Inner Mongolia

♠ Posted by Emmanuel in ,, at 9/28/2007 02:04:00 PM
One of the truisms in development is that food demand increases as a country becomes increasingly prosperous. Nowhere is this dynamic more apparent than in the PRC. One of the (rather Westernized) habits that the Chinese have picked up is an appetite for beef, AKA heffers. So, enterprising American cattle ranchers have decided to set up shop near the booming Chinese market--in Inner Mongolia. However, big operations modeled after American methods will likely bring social (smaller farmers put at a disadvantage), environmental (carbon emissions and water pollution), and political (growing political-economic clout of big operators) dislocations. File this one under "what hath McWorld wrought?" From TIME:
Kevin Timberlake digs the toe of his cowboy boot into the caked earth and gives the coffee-colored dirt a scuff. Some 70 acres of scrubby land spread out in front of him under the washed-out blue sky. "See the soil. This is junk," Timberlake says. Under his breath, he counts a thin herd of cattle hanging their heads over the weeds. Once a horse trainer and breeder in Missouri, Timberlake now spends his days thinking about cows, and this time next year, he and his employer, Western Cattle Company, would like to see about 10,000 more living on this land. "I'd be taking the ground and turning it into something," he says.

Timberlake's dusty patch is not in Missouri — it's in China. Earlier this year, Western Cattle started to raise Holsteins on an American-style ranch and feedlot built in the wide open spaces of Inner Mongolia. Their goal: deliver truckloads of well-marbled beef to the waiting plates of urban China's growing middle class. With a target herd of 75,000, U.S.-based Western Cattle has the potential to be the leading company in the third-largest beef-producing nation in the world. And if the company's Western take on raising cattle catches on in the East, it could kick start the consolidation of China's disorganized beef-production chain, bringing to Inner Mongolia all the high-volume efficiency — and social and environmental concerns — that go with big agriculture.

A few years back, China wasn't much of an attraction for cattlemen. The Chinese traditionally serve beef sparingly, usually in stir-fried dishes, stews and hot pots for which tough, lean meat suffices. But the rise of McDonald's in China in the 1990s is credited with popularizing the all-beef patty, and today upscale restaurants and hotels in major cities commonly put steak on the menu. Consumption has risen 31% in the past five years alone, according to the U.S. Department of Agriculture. "The beef market is exploding," says Western Cattle president Jim Mueller. He's not exaggerating. Owing to soaring demand, China could face beef shortages as early as next year, says the Asian Agribusiness Research Center, a situation exacerbated by a dramatic decline in pork production brought on by an outbreak of blue-ear disease earlier this year. And for now, Mueller doesn't have to worry about competition from back home. Imports of beef from America — a top global supplier — have been banned in China since mad cow disease appeared in Washington State in 2003.

Mueller and his partners chose to set up their first feedlot outside Hohhot, Inner Mongolia's capital, partly because of the local government's aggressive pro-investment policies. Among other things, officials helped the company find land and provided introductions to potential business partners. Ultimately, though, it came down to the fact that Hohhot is a cow town. Two of China's biggest dairies, Mengniu and Yili, have headquarters in the area, and buy milk from thousands of farmers who raise dairy cows in their front yards. There are more than a million cows around Hohhot; the bustling city is plastered with garish advertisements for yogurt and ice cream, and nearby farming villages have developed de facto affiliations with whichever dairy buys their milk. By offering the farmers more money for milk than they earn for crops, the dairies have helped breathe life into Inner Mongolia's struggling economy.

Western Cattle is counting on the same farmers to help them push their agenda for beef. The private company doesn't breed cows; it buys them, fattens them up on a feedlot and then trucks them off to the slaughterhouse. Today, the half million male calves born every year around Hohhot are mostly sold to blood-serum companies that render the animals' plasma into products such as cosmetics. Timberlake, who is the on-site manager for Western Cattle in China, has been going head to head with serum companies since he arrived six months ago, hitting the dairies and villages with competitive offers for calves. The rangy 48-year-old, who has a salt-and-pepper moustache and shock of white hair, says he thinks he's offering the farmers a good bargain, but the deals he makes have got to be win-win. "We're here to do a service and to make money," he says. "We're not over here for our health, or I wouldn't be breathing smog."

Farmers are no less pragmatic about their relationship with the cattle buyers and big dairies. In the village of Bingzhouhai, the whims of the market rule the daily rhythms of life. Every morning, farmers who live in courtyard-style homes walk their cows past the patches of lettuce and squash gardens to the small milking station that Yili operates there. Before dairy became a local industry, people used cattle to plow the fields, but there was a better living to be made selling milk than grain. Now, that seems to be changing. "The price of feed is going up, but the milk price is stable," says He Erwen, a farmer who lives in Bingzhouhai with his family of seven. Though his cows cost more to feed now, he's keeping them with hopes that milk prices will climb, restoring his profits. As for the prospect of selling his surplus male calves to a newcomer like Western Cattle, He laughs. "Depends on the price."

Some worry that the livelihoods of small farmers will be threatened as Inner Mongolian agriculture modernizes. Western Cattle is providing farmers with an additional source of income, and the farmers are providing the company with inexpensive labor. But big feedlots in the U.S. are essentially factories, much larger than the biggest in China today, maintaining herds of tens of thousands of animals supplied by dedicated cattle ranches. As the industry grows, farmers could be squeezed out. Even now, they are at the mercy of middlemen like the dairies, which have some control over pricing. The farmers have none. "Only the big companies have the power," says professor Jiang Gaoming, a plant biologist with the Chinese Academy of Sciences.

No one expects China's beef industry to be transformed overnight. Others have tried Western production methods and failed. Steffen Schindler, a German butcher who runs two Beijing restaurants and a small meat plant, oversaw the first feedlot and slaughterhouse to sell hamburger meat to McDonald's in China. That joint venture went under after a local company set up a competing operation nearby. But as China keeps growing, Schindler thinks it's inevitable that the mom-and-pop industry will coalesce into large operations. "You cannot meet the demand if you're doing it the old-fashioned way," Schindler says.

Still, if more feedlots like Western Cattle's crop up around the country, communities can expect to deal with a new set of problems. Disease outbreaks in concentrated animal populations can be devastating. Even if the cows and their meat are well monitored and safe, feedlots foul the air and can be a source of water pollution. Growing the massive amount of corn needed to feed herds also means fertilizer and pesticide runoff in water supplies, and trucking feed and meat around the country is a big carbon emitter. Wen Bo, China program director with the NGO Pacific Environment, acknowledges that China's cattle industry needs modernization, but says slapping an American model onto the Chinese landscape won't work. "The situation in China is completely different," he says. "In many rural areas, they do not have the infrastructure for environmental treatment." To mitigate damage, Wen says, big companies and governments will need to invest in the communities they're developing, including funding for programs that help displaced farmers find new lines of work. Without investment, "the booming beef and cattle industry would mean the destruction of the community and environment they rely on," says Wen.

Officials in Hohhot don't see it that way. In the past seven years, the city has almost doubled in both population and physical size, a trend that's in keeping with Inner Mongolia's recent double-digit growth rates. Officials welcome Western Cattle's feedlots as a way to use marginal land, create jobs and produce more food. "If we have a very good feedlot here, it will help people become wealthy," says Teng Guiyuan of Hohhot's Bureau of Investment Attraction. "Small farmers want to make money, but they aren't powerful enough. They need a big company to lead the way."

The whole of China is wrangling with how to develop industry responsibly. But for a farmer like He, the question gets drowned out by how his seven cows are going to make the most money for him and his family. Officials like Teng are busy trying to figure out how to ensure their province does not get skipped in China's race to prosperity.

Timberlake, meanwhile, is buried in the day-to-day realities of getting a business off the ground — choosing a new site for the next feedlot and ranch, getting the word out that he's in the market for cattle, and preventing disease outbreaks in the herd. "Every time you try something new, you have your naysayers," Timberlake says. But he insists Western Cattle is offering Inner Mongolian farmers a better way of life — and some nice, juicy steaks, too.

EC: NGOs Distort LDC's Trade Views

♠ Posted by Emmanuel in ,, at 9/27/2007 06:55:00 PM
Holy moley, the world is awash with a glut of trade news these days. Of course, I try to do the best I can to keep IPE Zone readers up to date. What we have here is the European Commission (EC) accusing NGOs like ActionAid and Oxfam of souring African nations on trade deals in general. In case you missed it, today was the NGO-sponsored "International Stop Economic Partnership Agreements" day (click on Oxfam link).

If you will recall, the EU for the longest time had preferential trade agreements with former colonies under the ACP (Africa, Caribbean, Pacific) grouping. However, the formation of the WTO subsequently led to the ACP becoming untenable for obvious reasons. The current Cotonou Agreement with the ACP is scheduled to end in 2007. It was originally designed to phase out preferential arrangements with the EC, with the now-reviled Economic Partnership Agreements (EPAs) being negotiated to come into effect from 2008 onward. NGOs have been playing the devil's advocate here, implying just how the Wicked Witch of the West has done Africa wrong with EPAs. From my POV, these ACP countries have had more than enough time to adjust. Moreover, prices of agricultural products are quite high nowadays--just as those of other commodities are. It's time for these ACP countries to take globalization by the horns, subdue it, and quit whining about the unfairness of it all. Let's start with the EC accusation about NGOs:
The European Commission accused non-governmental organisations on Thursday of "playing poker" with Europe's former colonies by urging them to reject new trade pacts.

The 78 African, Caribbean and Pacific rim countries making up the so-called ACP group and the European Union are struggling to clinch new agreements by the end of the year, when current preferential market access is due to expire.

To mark the five years since the negotiations were launched, many pro-development pressure groups mobilised on Thursday to protest against the new so-called economic partnership agreements.

NGOs such as ActionAid and Oxfam have accused the European Commission of threatening development of ACP countries by allegedly strong-arming them to sign the new trade pacts.

In an open letter to NGOs, EU Trade Commissioner Peter Mandelson and Development Commissioner Louis Michel said: "Calling for an end to ... negotiations when there is no credible alternative is playing poker with the livelihoods of those we are trying to help."

In a reaction to the letter, Oxfam said in a statement: "The (Commission's) claim that they are being flexible is belied by their behaviour in the negotiations."

The NGO added that the EU "continues to insist on the deadline and reiterate demands in areas such as services, investment and government procurement, that would have negative implications for development."

With the year-end deadline looming ever larger, the EU sought in April to boost the negotiations with an offer to scrap all tariffs and quotas on ACP countries' exports with the exception of sugar and rice.

The agreements are supposed to help ACP countries develop while they diversify their economies and meet WTO requirements that they allow for some opening of their markets to European goods and services.

Meanwhile, protests have broken out today in Kenya, Ghana, Mozambique, Cameroon and elsewhere (with the presence of NGOs, natch):
Kenyan activists and farmers on Thursday protested in the streets of Nairobi against what they said were unfair trade partnerships pushed by the European Union.

Protests were held in several African capitals to mark the fifth anniversary of the start of negotiations for Economic Partnerships Agreements (EPA) between the EU and African, Caribbean and Pacific rim countries (ACP), a spokesman for ActionAid said.

In Nairobi demonstrators crushed farm products and waved banners that read "Fight Poverty... Say No to EPAs".

The EPAs are trade pacts that are set to replace the current preferential trade agreements between Europe and its former colonies, which were deemed illegal by the World Trade Organisation and expire by year's end.

In a statement, the ActionAid organisation charged that Europe's "use of strong-arm trade politics will deny food rights and undermine good governance in the world's poorest countries."

The preferrential trade pacts between Europe and the ACP were initially designed to ensure a steady flow of supplies from former colonies.

Many poor countries argue that they will no longer be able to compete if they lose their special tariffs on exports to EU countries.

"Small scale farmers have systematically been driven out from the export markets in sectors like horticulture leaving only the big players to enjoy the boon," ActionAid said.

"A reciprocal free trade agreement will worsen this situation while limiting the capacity of our governments to protect agriculture especially for majority small scale farmers who produce most of the staple food."

Events and protests aimed at raising awareness on the implications of the new trade pacts were also held in Ghana, Mozambique, Cameroun and several other of the 78 ACP countries.

On a somewhat related note--on which I actually agree with--Oxfam is jumping the gun in asking the likely next IMF chief Dominique Strauss-Kahn to consider giving developing countries more say in IMF affairs:
Oxfam on Thursday called on the likely new head of the International Monetary Fund, Frenchman Dominique Strauss-Kahn, to institute reforms giving greater weight to the developing world.

"Mr. Strauss-Kahn should actively support changes to the way the IMF is managed, so that all developing countries get a fair say in the decisions of the institution," said Elizabeth Stuart of Oxfam International...

"The question of whether to give a bigger voice to poorer members has been dragging on for too long and must be answered now," said Stuart.

"Measures currently on the table would deliver woefully short of a meaningful reform," she added, referring to a reform under way of the voting rights and quotas for the 185 IMF member countries...

Stuart noted that Strauss-Kahn recently has emphasized the importance of such reform and the need for the IMF to adapt to a rapidly changing world.

"This is welcome, but he'll need to set the tone from day one in the position to make it happen," Stuart said.

"Where countries have achieved macro-economic stability, the Fund should simply pull out ... All developing countries ought to be able to decide their own future economic policies," she said.

Four Fantabulous FT Features

♠ Posted by Emmanuel in ,, at 9/27/2007 01:54:00 PM
I am continually surprised by the breadth and quality of the content of the Financial Times. But, don't take my word for it. Have a look for yourselves at these pieces on Boeing v. Airbus, French national champions, Hollywood in Abu Dhabi [!], and drrrty rating agencies. Call it my overactive imagination, but the post-Murdoch Wall Street Journal is already falling behind the FT. Let's start with that old chestnut, Boeing versus Airbus, the pot-and-kettle contest. As most of you know, these firms have dueling claims pending at the WTO. In a nice twist, someone's been quoted as saying that the likely result of these shenanigans is "mutually assured embarrassment." IMHO, there's very little to choose from here as to who is more "innocent" from government support. They more or less cancel each other out:

Alleged illegal government subsidies to Boeing, the US aircraft maker, have cost its European rival, Airbus, some $27bn in lost revenues over the past three years, the European Union claimed on Wednesday at the World Trade Organisation, in the latest salvo in the bitter transatlantic dispute.

An EU statement released ahead of a WTO panel hearing into the EU case against Boeing said “lavish subsidies” had allowed Boeing “to engage in aggressive pricing of its aircraft, which has caused lost sales, lost market share and price suppression to Airbus on a number of select markets”. [No; it's because Airbus put its eggs on the underwhelming A380 while Boeing on the hugely successful 787 Dreamliner.] Brussels puts the subsidies to Boeing between 2004 and 2006 at about $5bn.

The claim was immediately rejected by Washington, whose own complaint against alleged illegal subsidies to Airbus is also before a WTO panel.

Pointing out that Airbus has gained 20 percentage points of market share from Boeing since 2000, Gretchen Hamel, US Trade Representative spokeswoman, said: “The EU has provided no basis to believe that the alleged subsidies have harmed Airbus.”

The EU’s WTO complaint challenges alleged illegal subsidies totalling $23.7bn that Boeing has received or is in line to receive since the mid-1980s and up to 2024 by way of federal and local tax breaks, and research contracts with the US Department of Defense and the National Aeronautics and Space Administration (Nasa).

However, Ms Hamel said on Wednesday that “the EU’s claims are to distract attention from its own massive subsidies”.

In the US case against Airbus, on which hearings have already been held, Washington argues that the $15bn of launch aid provided by France, Germany, Spain and the UK for the development of the Airbus fleet have am­ounted to a subsidy of more than $200bn compared with loans on commercial terms.

The EU has dismissed this suggestion as “ridiculous and absurd”.

Many experts believe that the outcome of the two cases, the most complex and costly the WTO has ever dealt with, will be a condemnation of both sides, or “mutually assured embarrassment”, as one EU official put it at the outset...

And speaking of national involvement, here is the FT on how French President Nicolas Sarkozy is keen on the French government retaking the commanding heights by creating state-owned titans. Naturally, cue up "We are the [French National] Champions":

Nicolas Sarkozy was at the Paris air show on a hot summer’s day in June when, in a speech laying out his vision for French industry, he threw out this simple phrase: “In economics, my only ideology is pragmatism.” Few outside France took note. But perhaps they should have done.

In recent weeks the French president’s pragmatism has led to the planned creation of a €70bn ($98.8bn, £49bn) power giant through the merger of state-owned Gaz de France and private utility Suez that will present a strong challenge to foreign competition in the French energy market.

His government is now turning its attention to Areva, the state-owned nuclear group, where it is mulling how to ensure French dominance of this growing market through a combination with home-grown companies such as Bouygues, Alstom, Total and EDF.

Finally, the industrial architects working away in the president’s Elysée palace are examining the potential for a third merger to create a French champion – this time in the defence sector – by bringing together Thales and Safran, two companies where the state has minority stakes.

All this national champion-building, added to the French president’s campaigns against the European Central Bank and European Union competition policy, has some of Mr Sarkozy’s European partners deeply worried.

The third feature has me scratching my head a bit as Warner Communications aims to establish a media center in Abu Dhabi, of all places. Call it a sign of the times. Perhaps media for the Middle East market is exceedingly particular--so much so that they need to create a presence there. In any event, government involvement probably means you won't see NC-17 and R rated content coming out of the UAE:

Warner Brothers, Time Warner’s film and TV division, has launched an “unprecedented” multibillion-dollar partnership to develop a media and entertainment hub in Abu Dhabi virtually from scratch.

The project, which is being undertaken with Aldar, Abu Dhabi’s largest real estate developer, and the emirate’s new Abu Dhabi Media Company, will include the simultaneous construction of a 6,000 acre theme park, hotel and cinemas as well as the creation of special funds to produce Arabic-language film, TV and video games.

Abu Dhabi will also establish a fund of $500m to co-finance production of Warner films – a figure that could grow over time.

Time Warner declined to comment on financial aspects of the deal, but said it was unprecedented in the scope and breadth of activities being undertaken. It is also significant, they said, in that it marked a long-term commitment to the Middle East by Hollywood’s largest studio.

“For our company and its further globalisation, growth for us is not just in . . . domestic markets. It’s largely outside the US,” said Dick Parsons, chief executive of Time Warner.

Lastly, here is news of a timely development. Just as accounting firms were limited from peddling accounting services to clients in the wake of the Enron, Worldcom, and Tyco scandals, so too are credit rating agencies feeling the heat over rating firms while at the same time offering them (paid) advice on how to improve their ratings. It's a drrty business model that they're trying to push and it's about time they cleaned up their act, I say:

Credit ratings agencies need to separate their rating and advisory functions because of conflicts of interest in their relationship with Wall Street, the newly appointed head of a high-level government advisory panel said on Wednesday.

Eric Mindich, who was named on Tuesday as head of a private sector group advising the White House, said investor confidence in the ratings agencies had been “severely damaged” and that their business model had inherent “serious ­conflicts”.

“I do not think that the market can discipline ratings agencies sufficiently,” said Mr Mindich, chief executive of Eton Park Capital and a former colleague of Hank Paulson, the Treasury secretary, at Goldman Sachs, the investment bank.

Mr Mindich said he was concerned that agencies issue ratings and also advise issuers of securities on how to secure better ratings. He suggested it might be necessary to separate those functions or require agencies to provide detailed disclosure of their contact with clients.

Lawmakers and investors criticised the companies for giving high ratings to subprime securities and failing to act quickly when borrowers began defaulting on loans backing the bonds...

Vickie Tillman, executive vice-president at S&P, defended the “issuer-pays” rating model, in which companies that issue securities pay the ratings agency to assign credit ratings. The executive said it was the only one that allowed ratings agencies to develop costly ratings procedures without charging investors high subscription fees.

Larry Summers, the former US Treasury secretary, said there were obvious conflicts of interest in the ratings industry: “If you are hired by someone at twice your regular fee to work collaboratively with their people to design a security that will receive a triple A rating from yourself” you are likely to deliver certain results. “There needs to be a lot of cleaning up in this area.”

Hu Jintao; Burmese Junta

♠ Posted by Emmanuel in ,, at 9/27/2007 12:02:00 AM
The Chinese are famed for their so-called principle of non-interference in the internal affairs of other countries, most notoriously in Sudan. One of the more interesting developments is China's current reaction to the turmoil in Burma (Myanmar), as the Chinese government has worked closely with the military junta there. It's a familiar criticism of the PRC as a one-stop totalitarian shop offering to purchase natural resources, sell weapons to "silence" critics, and to veto UN measures against human rights violations. To China, Burma offers the lure of a country rich with raw materials and a relatively close location. In other words, ensuring the flow of resources to the Middle Kingdom is a priority. The New York Times reports that, in the background, China has been looking at possible scenarios should the junta be overthrown and ever after. Might the Chinese be negotiating with Aung Saan Suu Kyi soon? It's nothing personal, despots of all stripes--just business. Gotta keep those resources flowing. To stay ahead, you've got to plan ahead, or so it seems:
As China publicly calls for stability and reconciliation in Myanmar, it is also preparing for the possibility that the mounting protests could lead to the downfall of the military junta in its resource-rich neighbor, political analysts said today.

Although China is Myanmar’s most important trading partner, investor and strategic ally, Beijing has also maintained discreet links with opponents of its military rulers, and it tolerates the activity of some exiled opponents on Chinese soil, these analysts said.

While Beijing has shielded Myanmar’s government from its international critics — for instance, by blocking a United Nations Security Council resolution earlier this year condemning its human rights record — it has also urged the junta to avoid a repeat of the violent crackdown on demonstrations in 1988 that led to extended periods of house arrest for the opposition leader Daw Aung San Suu Kyi.

Tang Jiaxuan, a member of China’s State Council and a former foreign minister, told Myanmar’s foreign minister, U Nyan Win, on Sept. 13 that the Chinese government hoped its neighbor could restore stability and promote national reconciliation, the official Xinhua News Agency reported.

“If Aung San Suu Kyi became the leader of Burma tomorrow, China would be the first country to roll out the red carpet,” said Bertil Lintner, an analyst of Myanmar politics based in Thailand. “But they wouldn’t like to see it happen.”

China, already stung by human rights activists who have warned that its ties with Sudan’s repressive government could cast the 2008 Olympic Games in Beijing as the “Genocide Olympics,” wants to avoid further damage to its reputation from Myanmar’s handling of political dissent, analysts and foreign diplomats in Beijing say.

They also note that China wants stability in Myanmar because it is an important supplier of raw materials, including timber and minerals. Two-way trade between the countries increased 39.4 percent in the first seven months of this year over the same period in 2006, reaching $1.11 billion, according to official Chinese government customs figures.

Analysts say China is also eager to import energy from the country, which has 540 billion cubic meters of proven natural-gas reserves, according to a 2007 statistical review of world energy.

China would also like to keep a pliant government in place to develop strategically important access to the Indian Ocean, according to security experts.

In an effort to expand its influence in Myanmar, China has become the junta’s biggest arms supplier, and it has extended discounted loans and development aid to the economically embattled nation.

Moreover, analysts estimate that more than one million Chinese entrepreneurs and traders have crossed the border and settled in Burma in the past decade.

There have been reports that China wants to build a $2 billion oil pipeline from Myanmar’s coast on the Bay of Bengal to Yunnan Province in China. Such a pipeline would allow oil from the Middle East to reach China without having to pass through the Malacca Strait, a waterway that is plagued by piracy and that could easily be closed off in a war or international crisis.

Officially, China maintains its customary diplomatic stance of noninterference in the internal affairs of other countries.

“As a neighbor of Myanmar, we hope to see that its society is stable and its economy developing,” China’s Foreign Ministry spokeswoman, Jiang Yu, said on Tuesday at a regular news briefing in Beijing. “We hope and believe that Myanmar’s government and people can appropriately deal with their current problems.”

But analysts say there is evidence that China has been hedging its bets on political developments in Myanmar for some years.

Mr. Lintner, the Thailand-based analyst, said Beijing maintains unofficial contacts with exiled Myanmar opposition groups in Thailand and other Southeast Asian countries, in a bid to minimize their antagonism and to improve its understanding of political developments.

He said Beijing has also tolerated the presence of these groups in Ruili, a Chinese city on the border with Myanmar in Yunnan Province, where some of them maintain unofficial offices.

Other experts agree that these informal contacts with exiles, along with recent official statements from Beijing calling for a peaceful settlement of differences among all groups in Myanmar, suggest that China has doubts about the junta’s survival.

“One day, they expect the military will no longer be running the place,” said Trevor Wilson, an expert on Myanmar at the Australian National University who was the Australian ambassador to Myanmar from 2000 to 2003.

“It will be political parties, maybe even the current opposition, running the place,” he said, “and China needs to keep open some channels of communication with them, and not put them entirely offside.”

Despite China’s close economic and political ties with the junta, there are also signs that it is dissatisfied with some aspects of its performance.

Mr. Wilson said that senior Chinese diplomats in Myanmar have been bluntly critical of the junta’s poor economic management and its inability to stem the flow of illicit drugs across the Chinese border.

At times earlier in this decade, political tensions led China to suspend making new loans to Myanmar, he said. Political analysts also noted that China had openly called on the junta to show restraint in dealing with the protests.

In his meeting earlier this month with Myanmar’s foreign minister, U Nyan Win, Mr. Tang, the Chinese diplomatic envoy, also said that Beijing wanted Myanmar to move toward “a democracy process that is appropriate for the country,” Xinhua reported.

This did not mean China wanted Myanmar to adopt Western-style democracy, analysts said, but it was a suggestion that the junta should move toward a settlement with its opponents.

China has also recently shown that it is prepared to use its influence with the junta to ease diplomatic tensions with the United States. In June, China arranged in Beijing the highest-level talks between the United States and Myanmar in five years.

Flash Gordon, Meet Susan Schwab

♠ Posted by Emmanuel in , at 9/27/2007 12:01:00 AM
With apologies to Brian May and Queen:

Schwab! Ah-ah...savior of the Doha Round!
She's for ev'ry one of us
Stands for ev'ry one of us
She'll save with a mighty hand
Ev'ry man ev'ry woman ev'ry child
With a mighty FTA!

This current outburst of silliness on my part is driven by the journalistic hyperbole in the title of this Fortune piece about US Trade Representative Susan Schwab, "Can This Woman Save Free Trade?" Its equally grand subtitle is "Susan Schwab's Crusade to Keep Globalization Alive." Unlike most of the Bush junta, I've already indicated that I hold a generally favorable (gulp!) view of Susan Schwab. Nonetheless, it's of course an exaggeration to pin the hopes of the completion of Doha on the shoulders of the USTR. Still, this Fortune article provides an informative glimpse into her efforts to win over Democrats who Bush previously railroaded with previous trade deals before they gained majorities in both houses of Congress. Not that they're getting along exceedingly well with her, but there's no harm in trying:
Susan Schwab is sitting inside a VIP lounge at Dulles airport near Washington, waiting for a call from The Chairman. Jet fumes hang on the tarmac outside, but what Schwab smells is a deal.

That's why she's grounded for the moment on her way to Tampa, where she's scheduled to give a speech to 1,000 people the next morning. In this twilight March moment, waiting for word from The Chairman, there was no better encapsulation of the power shift that had taken place in Washington: President Bush's trade ambassador, yellow legal pad on lap, faux quill pen in hand, surrounded by a handful of aides, hoping for Charlie Rangel to call.

That is the kind of humbling moment that makes up Sue Schwab's lonely crusade to fight the rising tide of protectionism [sniff]. It was her fate to take this job just months before the Democrats gained control of Congress, bringing with them an end to the unfettered, free-trade era of Bush's first six years [never mind those steel tariffs].

During that time Bush and the GOP leadership in Congress rammed through global agreements to open trade in the U.S. and abroad - ignoring a shifting political zeitgeist in which Democrats were jumping off the free-trade bandwagon to complain that American workers were being harmed.

Now Schwab finds herself in the delicate position of pleading for support from the same Democrats who had been bulldozed by her White House boss for six years.

"Hello! Mr. Chairman!" Schwab coos after an aide announces the caller and delivers her cellphone. Even at age 52, draped in a St. John knit and an Hermès scarf, Schwab has a pixie quality; she's the classroom good girl whose razor intellect lies just below the surface.

By contrast, Rangel, at 76, is a natural showman who describes himself as having a "gift for living by my wits and hiding my inadequacies behind bravado." The call goes well. "We'll send those papers over - you got it," Schwab promises before hanging up to dial Treasury Secretary Hank Paulson with a status report: Progress made. No deal yet.

By May, Schwab will close this deal, and the press will label it "historic." In return for Democratic support, the administration will - for the first time ever - agree to global standards for protecting workers and the environment [which are phooey]. Paulson and House Speaker Nancy Pelosi will stand side by side at a late-night Capitol Hill press conference to celebrate their bipartisan good will. Schwab and her staff will pop bottles of champagne.

At last, after months of roller-coaster negotiations...Schwab will be able to take credit for saving America from protectionism.

Or will she? The Schwab story is not over - and this fall comes her biggest test yet. Powerful Democrats, under pressure from organized labor, have suggested they had crossed their fingers behind their backs last summer when signing off on the deal she and Rangel negotiated.

Now the stage is set for a titanic fight on Capitol Hill. The main targets of dispute are agreements with four countries - South Korea, Peru, Panama, and Colombia - that promise to open new markets for agriculture, machinery, financial services, and other industries.

More important, the outcome will signal to the world the direction America plans to take in writing the rules for a globalizing economy that promises riches for U.S. companies but uncertainty for U.S. workers.

Schwab understands the stakes. But can one woman, working for a lame-duck administration, make a difference...?

Everyone has his [sic!] own way of dealing with pain, but for Sue Schwab it has meant 250,000 miles of global shuttling to rescue trade talks, reassure anxious trading partners, and woo wary Democrats as she finds her footing in life again.

I first saw Sue Schwab in action inside Beijing's cavernous Great Hall of the People, where she had just emerged from delivering a lecture to China's vice premier, arguing that China's brand of government intervention in markets historically has led to "less stability, not more; less development, not more."

Schwab's history lesson might seem at face value like the musings of a scholar whose real-world experience ends at the Campus Drive stop sign. After all, the woman has academia written all over her: Williams College, master's from Stanford, Ph.D. from George Washington University...

As trade ambassador, Schwab understands that at any given moment, she is speaking to multiple audiences. In the case of her Beijing remarks, she was keenly aware that the Democrats - who had swept into power a month earlier and viewed China as the chief villain in America's mushrooming trade deficit - were watching closely. It was no time to get squishy toward her hosts.

Schwab has been looking over her shoulder at the Democrats ever since they declared victory last November. "I thought trade was in desperate straits," says Louisiana's Jim McCrery, ranking Republican on the House Ways and Means Committee and a key player in trade talks. "The Democrats had pretty much marched in lockstep with labor, opposing anything of great significance."

But it wasn't just politicians. A handful of prominent free-trade economists had flipped and were now suggesting that what's good for multinational corporations isn't necessarily good for American workers.

That meant a whole flotilla of free-trade initiatives was suddenly in jeopardy this year: newly minted agreements with Peru, Panama, and Colombia that would open business for such companies as Wal-Mart, Caterpillar, and Procter & Gamble. American financial services companies, among others, stood ready to tap into South Korea's middle class.

Despite the sea change, Schwab understood that top Democrats didn't want to be branded the "party of protectionism." Rangel, in particular, was open to finding a way forward. With 36 years in the House behind him, the Harlem Democrat had finally achieved his lifelong dream of running the House Ways and Means Committee and was eager to leave his imprint.

So Schwab marched up to Capitol Hill after the election and offered one word for virtually all of Rangel's conditions: yes. Yes to international labor standards, yes to environmental standards, and, later, yes even to softening drug company patents to let more generic drugs flow abroad.

"We're prepared to concede - just give it to them," she told me a couple of months later in March, after her airport tête-à-tête with Rangel was complete and our plane to Tampa was lifting off the runway. "It's a huge victory for Charlie Rangel and the Democrats, if they choose to take it. The question is, Does Nancy Pelosi want the Democrats to be the party that killed trade...?"

For months Schwab had been a fixture in Rangel's office, negotiating the bipartisan deal. The night before the flight to Tampa, she and Congressman McCrery spent two hours with the chairman and top staffers, quietly working out the details...

She said yes to an offer to become deputy U.S. trade representative in 2005, then was promoted in 2006 to trade ambassador, on the eve of the breakdown of the latest round of World Trade Organization talks in Geneva.

Determined to salvage the talks, Schwab traveled 87,000 miles in three months to try to piece the negotiations back together. "I'm enough of an economist that I really felt I was creating wealth, helping people, creating U.S. exports - all the things I believe in," she says. Whether negotiating over trade in autos or dark-meat chicken parts, Schwab played well in the nuances of trade disputes. "These specific line items mean someone does or does not make a sale," she says...

She has been on airplanes ever since. Longtime friend and former Senator Bill Brock, a Tennessee Republican who was President Reagan's trade ambassador, calls her restless diplomacy a "real tour de force."

Her performance seemed to pay off on the night of May 10, when Paulson and Pelosi convened the joint press conference to announce the bipartisan breakthrough. Then it all came apart again.

Union leaders, never fully onboard, publicly denounced it as a "sellout." They turned up the heat on Democrats, especially over the Colombia deal, citing continued violence against labor organizers in that country, and the Korea accord, pointing to U.S. trade imbalances with that country.

On June 29, as Congress was breaking for the Independence Day recess, Pelosi issued a press release saying the House wouldn't consider the Peru and Panama deals unless those countries first changed their labor laws.

Inside her office next door to the White House, a stunned and angry Schwab began crafting a three-page letter to Pelosi, objecting to the "unprecedented new preconditions on our trading partners" Peru and Panama. The letter ended with a passionate defense of free trade.

"American workers, farmers, consumers, and businesses cannot afford for Congress to hang up a CLOSED FOR BUSINESS sign," she wrote. The letter, Schwab told me a month later, was cathartic. It also forced her to examine the Democrats' press release, which appeared carefully nuanced to keep labor satisfied while moving free trade forward.

"They appear to be moving the goal posts," she says. "But they are saying the right things [privately]. Let's see if they deliver."

It is early August, and we are talking over coffee at the Hay-Adams Hotel, across the street from the White House. A relentlessly upbeat Schwab insists on blending realism with optimism on the WTO talks, too, which have had their own set of twists and turns.

This fall could be "the end of the road," she says of the six-year WTO session to lower trade barriers. "If it doesn't work this time around, we're probably done for now."

And then there's the most controversial trade issue of all - "fast-track" authority for the President, which gives foreign nations the reassurance that their trade deals with the President won't be picked apart by Congress and special interests. (Under fast-track, which expired in June, Congress can only vote up or down, not amend.) Labor leaders and their Democratic allies are reluctant to renew fast-track authority for Bush, though Rangel appears willing to reconsider if there's a WTO deal.

I ask her which is more difficult - negotiating with foreign nations or Democrats. She laughs, because it's something she has thought a lot about. "Whether it's the Indians trying to protect their agriculture or the Brazilians trying to protect their manufacturers or the Democrats trying to protect organized labor," Schwab says, "everyone has their political imperative."

What's generally agreed is that if anyone has the persistence and patience to bring the parties together, it's Sue Schwab. "She hasn't gotten discouraged," observes McCrery. "She's always bounced back from a disappointment to plow ahead." Maybe that's because for Sue Schwab, this crusade isn't just business, it's personal.