Fire Sale America, Way to Fix US Budget Woes?

♠ Posted by Emmanuel in , at 2/28/2011 12:03:00 AM
Here's a fun Newsweek article I missed by none other than LSE IDEAS' own Niall Ferguson. Yes, the same Newsweek sold for $1--a once-great American institution fallen under hard times like so many others. While I suspect that I may be writing more about shutting down American government for a prolonged period of time in the next few days--something I want to do, mind you--here's some food for thought in the meantime.

There are a number of things obvious about the modern-day United States. It's mind-bogglingly broke at the federal level. Many states and cities there are no better off, either. At the same time, though, Americans are reluctant to given in to the natural solution of selling off valuable assets. Say, corporations at the sharp end of the innovation league tables due to "security" concerns. If you thought that solution was pretty severe, Professor Ferguson has come up with something that should raise a true patriot's hackles even more. For, he says that the US should get real and sell off its vast holdings to help raise revenue. In America? Getouttahere! Given characteristic US inability to balance the books (what's that?), it's certainly something they should consider, though:
Yet there is another fiscal option that neither party seems to be considering. The U.S. needs to do exactly what it would if it were a severely indebted company: sell off assets to balance its books...The mystery is why freedom-loving Americans are so averse to privatization—a policy that has been a huge success nearly everywhere it’s been tried. From Margaret Thatcher’s Britain, where the word “privatization” was coined, to present-day China, selling off government-owned industries has not only improved the fiscal position of governments; it has usually enhanced the efficiency with which the sold assets are managed...

So let’s get down to business...the U.S. government currently has about $233 billion worth of nondefense “property, plant, and equipment,” according to the Treasury’s Financial Management Service. That is almost certainly an understatement. The government owns somewhere between 600 million and 700 million acres of land, or about 30 percent of the country’s land surface, much of it in the Western states, where as much as half the land is federally owned.

Washington could also sell its stakes in the Southeastern Power Administration and related assets as well as the Tennessee Valley Authority’s electric-power assets. There’s Amtrak (which runs at a loss) and the extensive hydroelectric empire of the U.S. Army Corps of Engineers.

And then there are the assets that have the potential to be among the most lucrative of all: America’s highways. Plenty of other countries—Japan, Turkey, and even China, to name just three—have already privatized substantial parts of their transportation infrastructure, leaving private companies to manage both revenues and maintenance.

American highways sold to foreign investors? It may sound unthinkable, but it’s already happening. Indiana recently leased the operation of the state’s principal 157-mile highway to a consortium led by the Spanish company Cintra and the Australian investment bank Macquarie. For the next 75 years, the consortium will collect the tolls from motorists. Indiana got $3.85 billion upfront. The city of Chicago has done a similar deal, leasing out its Skyway toll bridge for $1.83 billion. A few other state governments have been moving hesitantly down this same path, usually by setting up public-private partnerships to manage stretches of highway.

But there’s so much more that could be done. California’s government has an estimated $103 billion in assets, including state highways with a book value of $59 billion. Are you telling me a sovereign wealth fund from, say, Singapore couldn’t do a better job of running those choked and often potholed roads? Yet one of Gov. Jerry Brown’s first acts since returning to office was to cancel a planned privatization of state-owned office buildings.

From sea to shining sea, American politicians are running scared from the only credible solution to the country’s fiscal crisis. Rather than publishing honest balance sheets with meaningful valuations of both their assets and liabilities, they’d rather maintain the fiction that it’s their job to invest billions in high-speed railroads and the like.

Let’s face it: if you want to see serious investment in America’s infrastructure—and the American Society of Civil Engineers estimates that a full upgrade would cost $1.3 trillion—it isn’t going to come from the likes of Governor Brown, much less President Obama. They’re broke, folks [Amen to that].

There are, remember, two kinds of economies in this world: those with guns and those who dig—those with piles of cash and those with mountains of debt. Sure, the debtors can keep on borrowing until their creditors revolt, or they can try to dig their way out with austerity budgets. But a better idea would be to get smart and start inviting bidders to what could be the sale of the century.
I am thoroughly in agreement with this. Having encouraged the Chinese to run US K-12 schools, I also think broke public American universities (alike the much-vaunted but now struggling for survival UC system) should be sold to foreigners too. To tweak my colleagues at IPE@UNC, their highly reputable but down-at-the-tar-heels institution could probably be sold to LSE IDEAS' partner institution, Peking University! I can see it now: the Tar Heels, property of the PRC.

Fire sale America: it's long overdue. To be fair, however, Niall Ferguson may have overlooked resistance here in the UK against similar plans. Although the UK isn't nearly as broke as the US, Environment Secretary Caroline Spelman recently had to withdraw the idea of selling 258,000 hectares of state-owned woodlands over alleged environmental grounds:
Controversial plans to sell 258,000 hectares of state-owned woodland in England have been abandoned. Environment Secretary Caroline Spelman told MPs the government had "got this one wrong", as she announced the current consultation was being halted. Instead, it is understood a new panel of experts will be set up to look at public access and biodiversity within the publicly owned woodland. Labour said it showed the government was "incompetent" and "out of touch". The plans were intended to give the private sector, community and charitable groups greater involvement in woodlands by encouraging a "mixed model" of ownership.

But critics argued it could threaten public access, biodiversity and result in forests being used for unsuitable purposes. The public outcry over the plans led to half a million people reportedly signing a petition against the sell-off.

In a statement to MPs, Mrs Spelman announced the policy was being removed from the Public Bodies Bill currently going through Parliament. She said: Ms Spelman said: "I would first like to say that I take full responsibility for the situation that brings me before the House today. "Let me make it clear that we have always placed the highest priority on preserving access and protecting our forests...But the forestry clauses in the Public Bodies Bill, published well before we launched the consultation, gave the wrong impression as to the government's intentions."
I doubt whether the Yanks will long be able to afford to make similar excuses. Moreover, $233 billion worth of non-defence plant, property and equipment by Niall Ferguson's calculations is a drop in the bucket compared to trillion-dollar plus deficits the US has run and will continue to run. What happen after the US has fully unloaded the family silver? Then again, desperate times call for desperate measures.

US Air Force Tanker Wars: Boeing Upends EADS

♠ Posted by Emmanuel in ,, at 2/26/2011 12:54:00 AM
Here is another instance where waving the red, white, and blue seems to have paid off for an American firm. I have made a lengthy earlier post on US Air Force efforts to replace it ancient, 50-some-year-old fleet of KC-135 air refuelling tankers. To make a long story short, the world's two largest purveyors of commercial jets, Boeing and EADS (the parent company of Airbus), have played rough in pursuit of the lucrative $35 billion contract.

Round one of the bidding process went to Boeing in 2003, but it turned out that Boeing's former CFO promised the concerned Air Force procurement officer a lucrative job afterwards, resulting in both being sent to jail and the reopening of the bidding process. Round two then went to EADS in conjunction with its then-US partner Northrop Grumman. Understandably, this result provoked a political backlash Stateside, with Boeing and many self-serving politicians claiming a compromise of national security and a loss of jobs by buying jets from the European consortium (nevermind that Europeans are American allies last I checked and that EADS had a US partner).

EADS has since continued pursuing the DoD contract alone. Meanwhile, Boeing has stepped up the "Buy American" angle while also claiming unfairness in the bidding process...and has now won. However, EADS may yet contest this result, further delaying the replacement of ancient aircraft. Meanwhile the rationale for the winning bid was as follows:
"Boeing was a clear winner," Deputy Defense Secretary William J. Lynn III said at a brief Pentagon news conference announcing the decision. The first 18 of 179 planes, to be called KC-46A tankers, are to be delivered by 2017. Considerations in the award, Lynn said, were "warfighting requirements, price and life-cycle costs." He and Air Force Secretary Michael Donley emphasized that both manufacturers had demonstrated they could deliver on 372 requirements specified in the contract.

"What that means is that, in the end, Boeing won on price," said Loren B. Thompson, a defense policy analyst for the Arlington-based Lexington Institute. "Price consists of the cost of producing the plane, plus the cost of operating it over 30 years. The Airbus plane is so much bigger and burned over a ton more fuel per flight hour...Multiply that by 179 planes, times 30 years of service life and it becomes very big," Thompson said.

"These are fixed-price contracts," Donley said. The decision "reflects our efforts to deliver better value to the a budget process that we realize is not going to give us more money every year."
The Europeans are understandably crestfallen, as are politicians from states that lost out in producing the EADS tanker:
But the decision to award the work to Chicago-based Boeing disappointed the European Aeronautic Defence and Space company (Eads) and Germany which had made a rival bid. They vowed to discuss the decision with the US military. Their disappointment was shared by workers in America's Gulf coast and Alabama, where Eads hoped to assemble its aircraft at a former military base in Mobile...

Politicians from Alabama suggested politics played a role. "I'm disappointed but not surprised," Senator Richard Shelby said. "Only Chicago politics could tip the scales in favour of Boeing's inferior plane. Eads clearly offers the more capable aircraft." Chicago is the political home of President Barack Obama, while his new chief of staff, William M Daley, resigned last month from the Boeing board where he had served since 2006. The White House said Mr Daley had no role in the decision.

Representative Jo Bonner vowed to get a full account of why Eads lost out. "This competition has been challenged before and it's not unlikely it will be challenged again," he said. Mr Lynn said the losing bidder could appeal, but believed there was no grounds for protest. Eads chairman in North America Ralph D Crosby Jnr said: "This is a disappointing turn of events, and we look forward to discussing with the USAF how it arrived at this conclusion."
In true American fashion, they've already held victory parades in honour of Boeing vanquishing EADS. Boeing surely can't stop gloating. Nor did it appear to spare any expense with the online propaganda. Still, it ain't over till it's over as EADS may mount a challenge. Given the history of this transatlantic trade dispute, maybe those KC-135s will be in the air after China has overtaken the US as the world's largest economy ;-)

Reform Interruptus: IMF Kudos for Pre-Crisis Libya

♠ Posted by Emmanuel in , at 2/25/2011 09:12:00 AM
This post is a follow-up to one I have just made on the reformist direction Libya was headed prior to the present crisis. In no small part due to Saif al-Islam Qadhafi's prodding, there were indications that the state was indeed normalizing itself as a market-based economy.

From the last (meaning previous, one hopes) Article IV IMF consultation dated 9 February 2011, we gather a number of interesting factoids:
An ambitious program to privatize banks and develop the nascent financial sector is underway. Banks have been partially privatized, interest rates decontrolled, and competition encouraged. Ongoing efforts to restructure and modernize the CBL are underway with assistance from the Fund. Capital and financial markets, however, are still underdeveloped with a very limited role in the economy. There are no markets for government or private debt and the foreign exchange market is small.

Structural reforms in other areas have progressed. The passing in early 2010 of a number of far- reaching laws bodes well for fostering private sector development and attracting foreign direct investment. The success of the new laws, however, hinges on promoting inter-agency coordination and open consultation with the legal and business communities, and establishing permanent bodies to monitor, assess, and oversee implementation. A comprehensive civil service reform is needed to facilitate more effective wage and employment policies that would address the needs of a young and growing labor force.

Recent developments in neighboring Egypt and Tunisia have had limited economic impact on Libya so far [sure...whatever]. To counter the impact of higher global food prices, the government abolished, on January 16, taxes and custom duties on locally-produced and imported food products. Later in January, the government also announced the creation of a large multi-billion dollar fund for investment and local development that will focus on providing housing for the growing population.
Call it Bretton Woods postcards from the edge. So the IMF observed two trends it welcomed in moving away from reliance on oil revenues for growth and towards private sector employment to provide work to a young population. I guess the speed at which it had moved towards both has not proven to be fast enough to outrace regional events:
Executive Directors agreed with the thrust of the staff appraisal. They welcomed Libya’s strong macroeconomic performance and the progress on enhancing the role of the private sector and supporting growth in the non-oil economy. The fiscal and external balances remain in substantial surplus and are expected to strengthen further over the medium term, and the outlook for Libya’s economy remains favorable. Directors saw as the main challenges the need to provide employment opportunities for a young and growing labor force, and the steadfast implementation of reforms to diversify the economy and reduce the high dependence on oil revenue.
The entire text is not very long and is well worth reading for a glimpse of the Libya just before tumult engulfed the Gulf. The dry text aside, you can see why even the Washington-based pooh-bahs welcomed the direction it was heading. Again, how would you have helped normalize global relations with a pariah state but through commercial exchanges? The Qadhafi clan's siege mentality to recent events is a regrettable regression, though recent indications suggested that Libya was indeed headed in a different direction. Go ask the IMF.

Critics of those who sought to de-isolate Libya should remember that. To paraphrase a certain commercial, this was becoming less and less Moammar's country.

Bad Timing: PM Cameron in Mideast Selling Arms

♠ Posted by Emmanuel in , at 2/24/2011 10:52:00 PM
The British press is having a field day with the coalition government's apparent delay in retrieving its citizens from Libya. Delay aside, let's say there are a lot of incidents suggesting the government was caught unawares. Foreign Secretary William Hague made a gaffe a few days ago in suggesting Moammar Qadhafi was on his way to Venezuela to join his good friend Hugo Chavez. Meanwhile, Deputy PM Nick Clegg forgot he was in charge while Cameron was away interesting business trip.

As it turns out, part of the reason for the slack government response has been PM David Cameron being away on business in the Middle East. Among the wares he was hawking on behalf of British industrialists included, er, weaponry. While the UK decries what's happening in Libya with the ruling Qadhafi clan in last stand mode, it's probable that arms the current government continued to sell to Libya figure into Qadhafi's current repression. From Defence Management [!]:
Prime Minister David Cameron has defended the decision to bring arms industry representatives with him on a trade mission to the Middle East. Cameron has been criticised for taking BAE Systems chief executive Ian King and representatives of Thales, Qinetiq and Rolls-Royce on his current Middle East trade mission. Weapons sold by the UK had reportedly been used to suppress civilians in Libya and other countries affected by civil unrest in recent weeks.

Speaking in Kuwait, Cameron said: "A properly regulated trade in defence is nothing we should be ashamed of.,,The fact that there are British defence companies on this visit – BAE, Thales and others – is perfectly right in this regard...We have probably the toughest set of export rules probably anywhere in the world. It is obviously difficult to get it right on every occasion."

Defence Secretary Liam Fox earlier said the UK should get "a healthy slice" of arms exports in the Middle East within certain ethical limits.Speaking after a speech at thinktank Civitas, Fox said that there were always a "great deal of unknowns" and that each export should be dealt with on "a case-by-case basis."

"We have to recognise that countries have a right of self-defence and not all of them have a defence industry so they will always buy externally," he said. "I want to make sure the United Kingdom - within the limits that we set ourselves ethically on defence exports - is getting a healthy slice of that."
The New Statesman juxtaposes matters thusly:
In his speech to the Kuwaiti National Assembly on 22 February, David Cameron appeared to acknowledge the limits of the policy so far when he declared that "denying people their basic rights does not preserve stability, rather the reverse". But the Prime Minister's laudable words were undermined by his decision to travel to the region with eight of Britain's leading arms manufacturers [out of 30 concerns]. To his critics, Mr Cameron replied: "A properly regulated trade in defence is nothing we should be ashamed of." Yet the presence of Gerald Howarth, a defence minister, at an arms fair in Abu Dhabi - where British companies sold tear gas, stun grenades and rubber bullets for the purposes of "crowd control" - was something to be ashamed of. Rather than delaying action until the moment governments open fire on their own people, as happened in Bahrain and Libya, ministers should declare an immediate arms embargo.
Talk about corporate social responsibility issues galore. It's a hard decision to make on several levels. Defence industries provide employment. Oftentimes, they also lie at the forefront of research and development that are crucial to enhancing much-ballyhooed international competitiveness. How do you channel these two positively without selling these wares to such regimes? This balancing act is certainly a difficult one.

UPDATE: Sarkozy too was keen on selling arms to Libya.

Siberian Shuffle 2011: Russia Finally Joins WTO?

♠ Posted by Emmanuel in ,, at 2/24/2011 12:01:00 AM
Holy moley, I have written about Russia joining the WTO for practically the entire time this blog has been in existence [1, 2, 3, 4, 5, 6, 7, 8]. To be sure, the Russians themselves have been the source of delay more often that not. It had ill-advised run-ins with neighbouring states Georgia and the Ukraine--precisely those it could not afford to offend since it needs all existing members' assent for it to join the WTO. Then the Russians floated the weird idea of it, Belarus and Kazakhstan applying jointly as a customs union. On the balance, there has been a whole lot of posturing, but it appears Russia is now concentrating on appeasing those important to its (sole) bid. Namely, its EU trade partners are keen on seeing some governance improvements to go with less arbitrary treatment of foreigners.

First come the "now is the time" rhetoric along with the West's set of trade demands:
Officials from both Russia and WTO member states have said that 2011 is the year the country will finally sign up — after having started talks in 1993. "The only person who hasn't said it yet is Putin," said Anka Schild, an adviser on international relations at the lobby group BusinessEurope.

At a meeting last fall, the EU and Russia cleared up some of the main obstacles to Russia's WTO membership. They include Russia's high export duties on wood, which have pummeled Nordic paper makers in recent years, and royalties airlines have to pay when they fly over Siberia [en route to . The United States also made similar progress bilaterally. "Now it needs to be multilateralized," said Schild, because all 153 WTO members need to sign off on a newcomer.

One of the demands from foreign countries and companies is that Russia start changing its trade laws and rules on intellectual property now, rather than after it has secured entry into the WTO. Until then, businesses will remain skeptical of Russian promises. "We've heard this story before," Schild said of Russia's request for quick entry to the WTO.
Making concessions granted by Russia to the EU available to others as well is necessary in a multilateral arrangement like the WTO. For those who regularly fly between Europe and Asia, I find it interesting carriers still need to pay up for the right to traverse Russian (to be more accurate, Siberian) airspace as a holdover of Cold War-era dealmaking. An older WSJ article points out that this source of revenue is lucrative. What's more, proceeds go to the not-so-profitable national carrier Aeroflot. In effect, Lufthansa, KLM, etc. subsidize their erstwhile competitor. Strange but true:
Europe is trying to use Russia's bid to join the World Trade Organization to put a stop to the payments. Until now, Aeroflot has been able to play divide and conquer with foreign carriers. That's because when it comes to aviation, each of their governments deals separately with Moscow. But in WTO talks, all 15 European Union countries speak with one voice [this is a 2002 article, remember]. Their negotiators see the overflight charges as far more than just an aviation issue. For them it violates basic free-trade principles, and they say the practice has no place in the world trade club...

For years the full scope of the overflight system remained obscure. Aeroflot, which is 51% state owned, makes only oblique references to the payments in its annual financial disclosures, referring to them as "commercial agreements."
Returning to the present, Russia is also keen on wangling concessions from its interlocutors. The EU is its largest trading partner, and it is keen to hear more about the EU's plans to wean itself off Russian energy. (Maybe Russia's willingness to shut pipelines to Ukraine over political squabbles also feeds Western European fears.) We've also got continued EU insistence on discussing human rights, with Russia hitting back on the welfare of those of Russian descent living on EU soil:
But Russia has some demands, as well, and Putin comes to Brussels with 12 of his cabinet ministers — including those in charge of foreign affairs, investment and energy — who will push their points of view in meetings with their counterparts in the EU's executive Commission. "This will not be a meeting of the mutual admiration society," said Vladimir Chizov, Russia's ambassador to the EU. "I wouldn't exclude that on some issues, some discussions will not be very smooth."

EU Commission President Jose Manuel Barroso will bring up the bloc's concerns about human rights, the rule of law and democracy in Russia when he meets with Putin, a Commission spokesman said Wednesday. At the heart of those concerns is Russia's reluctance to investigate the killings of several journalists and lawyers who had been critical of the government as well as its support for Belarus, which the EU sees as the last authoritarian state on the continent.

The Russian government, meanwhile, complains the EU is not protecting the rights of ethnic Russians in the Baltic states. "The expectation of the EU is that as soon as a country joins it is immediately exempt from criticism. Unfortunately, double standards and biased approaches are quite often visible," Chizov said...

Russia wants better access to the EU for its companies. In the agricultural sector, for instance, only 14 Russian companies are certified to do business in the EU, while about 4,000 European firms work in Russia's agricultural sector, Chizov said.

Central to Russian fears about being squeezed out of the European market is its gas monopoly OAO Gazprom. Earlier this week, Gazprom's CEO, Alexei Miller, asked the EU to clarify rules in its new energy strategy, also known as the Third Energy Package, which aims to separate gas production from pipeline management to prevent one company from controlling the entire supply chain in a country.

Europe is Russia's most important market for gas, but Russia has been concerned about the European Union's plans to diversify its sources of supplies. Many EU countries, including all Baltic states, Slovakia and Finland, get all their gas from Russia, which in the past has cut off supplies amid disputes over pricing.
There is still much to discuss, obviously, before Russian WTO membership is even contemplated. In the meantime, Moscow's road to WTO headquarters in Geneva passes through Brussels via the European Commission.

LSE Alum Saif Qadhafi, Libyan Michael Corleone?

♠ Posted by Emmanuel in , at 2/23/2011 12:04:00 AM
Just when I thought I was out...they pull me back in - Al Pacino as "Michael Corleone" in The Godfather III.

When I was a wee lad, my uncle who was a big fan of The Godfather series forced me to watch these movies with him when I would much rather have watched The Smurfs. Being older--wiser I am not so sure of--I have gained a grudging appreciation for a genre that was already hackneyed in its heyday. We follow Michael Corleone, scion of a family with a colourful history, evolve. Although he tried to move on, make the Corleone name shed its past and go legitimate--events, dear boy, events conspire to bring him back to confront the skeletons in the closet that have piled up over several years.

Khaddafy, Khaddafi, Qaddafi, Gaddafi, Qadhafi, ...who knows what the correct English equivalent is? I have long grappled with this question as the transliteration of this name has never been constant in Western media. For obvous reasons, an old post of mine about Saif al-Islam Qadhafi has received a lot of hits in recent days. To recount, Said Qadhafi is of particular interest to the LSE crowd since he received a PhD from our government department not too long ago. What's more, he was apparently impressed enough with our programmes to give the Global Governance unit a donation of £1.5 million. As you can imagine, it was the cause of much consternation among LSE bigwigs back then. Recent events may have even vindicated the late Fred Halladay who expressed caution. No matter; it's all done and dusted now.

PhD students generally do not lead exciting lives, but Saif al-Islam Qadhafi was an exception. He successfully helped negotiate for the release of convicted Lockerbie bomber Abdel Baset al-Megrahi over health grounds. Though subsequent WikiLeaks indicate that Tripoli applied pressure on London, which then twisted the arm of the supposedly devolved Scottish administration in Edinburgh, involvement in freeing a terrorist is clearly not part of average grad student life. Alike the British government with its concern with business deals, the LSE has benefited from the Libyan connection in other ways. Our consulting arm organized a series of training events for Libyan bureaucrats.

At that stage, it looked like a win-win: Libya was turning its back on being an international pariah. It even attained an investment grade credit rating in 2009. You could have imagined a neat story for Libya: it would have become more of a conventional state as it opened up to foreign businesses wishing to invest in this energy-rich state. Meanwhile, the reformist Saif al-Islam Qadhafi would continue moving his country on a moderate, daresay even democratic path. Working in academia, I've also contemplated the issues behind receiving funding from sources some would consider questionable.

It is during the turmoil in the Middle East / North Africa that events proved unkind to such scenarios. Just as Michael Corleone was a victim of events, it appears the same can be said of another favoured son--not the eldest, likewise--with Saif al-Islam Qadhafi. As the protesters mounted their challenge, he soon appeared on TV speaking of "thousands of deaths" and "rivers of blood." Apparently, this was the last straw for the folks at Global Governance as it decided not to receive any more money from Saif al-Islam Qadhafi's foundation. David Held, co-director of Global Governance, was also rather shocked by the TV appearance:
Professor David Held probably knows more about the beliefs of Saif al-Islam Gaddafi, son of the Libyan leader, Muammar Gaddafi, than anyone else in Britain. For four years, Held was an informal academic adviser to Saif, who has warned in an address on state television that protesters in Tripoli will be eradicated if they continue their unrest.

"Watching Saif give that speech – looking so exhausted, nervous and, frankly, terrible – was the stuff of Shakespeare and of Freud: a young man torn by a struggle between loyalty to his father and his family, and the beliefs he had come to hold for reform, democracy and the rule of law..." Held was not Saif's tutor during his years at the LSE but the young man frequently sought out the professor for advice on his PhD, which called for greater democracy in global governance.

The discussions were passionate and often "very, very heated", Held said. "When I first met Saif, he was struggling with himself and his place in the world, in the context of his family. By the end of his time at the LSE, he had discovered a deep commitment to liberal democratic reform of his country. "The man giving that speech wasn't the Saif I had got to know well over those years. The Saif I knew will be in turmoil over the beliefs he had to betray in order to demonstrate his support to his father. "My support for Saif was always conditional on him resolving the dilemma that he faced in a progressive and democratic direction. The speech makes it abundantly clear that his commitment to transforming his country has been overwhelmed by the crisis he finds himself in."

Held remembers Saif as man with a curiosity for knowledge and a huge appetite for reading and learning. "He always wanted to test arguments for his views, always wanted to engage in dialogue," said Held. But the professor was appalled by the contrast between the relaxed, charming student who took a masters in comparative politics at LSE and a PhD in philosophy and the man who scorned protesters on Monday, talking of "drunkards and thugs" driving tanks about the streets of Benghazi.

"I was appalled to see him on the television. That young man was not the person I knew: the funny, witty man who, while always guarded about his family, was always willing to talk frankly with me about the fundamental questions about his own country and the Middle East in general," said Held. "Saif arrived at the LSE very set in his opinions. I was of the view that here was a relatively unformed young man, struggling to make sense of his life as a member of the Gaddafi family and someone who was also increasingly aware that the democratic reform of his country was essential to its continued existence. Over a period of time, however, he showed every sign of being committed not just to opening up his country but reforming it on liberal democratic principles."

Held pointed out that, far from just talking the talk, Saif put his newfound beliefs into action. He played a key role in opening Libya to the west, in helping to disarm his country when it looked capable of developing a nuclear programme, and in coming to a settlement over the Lockerbie plane bombing. When campaigning organisation Human Rights Watch planned to launch its report on Libya from Cairo, Saif arranged for its staff to present the report in the country's second biggest city, Benghazi.

"The Saif I came to know was one committed to strong liberal values and democratic standards," Held said. "He looked very much to Britain and to the US for inspiration and he certainly was passionately committed to constitutional reform of his country, the rule of law, to democratic elections and to human rights.

"After his speech on Monday, there is no way now in which he can be a credible agent of reform. He was developing a set of democratic and liberal beliefs and he was putting those into practice. He saw them as seeds – as a stepping stone for the reform of his country...The only way I can make sense of his speech is that the speed of change in the Middle East has caught him unawares and overwhelmed him. The position he has taken compromised him in every way, and made him the enemy of ideals he once proclaimed."
Let me say that, had I been in Professor Held's shoes, I'd have done the same things. As an academic with limited sway, how else do you help normalize the rest of the world's relations with a country like Libya? Also, Saif al-Islam Qadhafi's foundation has done a lot of good work that most Westerners don't often recognize. Take the Telegraph (please). For instance, in our part of the world, it has helped broker reconciliation talks in the restive Southern Philippines between Christians and Muslims. In this day and age, must a son be identified as being one and the same as the father?

They say that truth is stranger than fiction, but it seems that truth has emulated fiction in the rather sad case of Saif al-Islam Qadhafi. Despite the best intentions--and you know what they say about those--he's come undone by events that culminated in an ill-judged TV appearance, to say the least. Say what you will about the LSE, but it's usually never dull when you're at the epicentre of global events.

UPDATE 1: Some of our militant students have made a sit-in protest demanding that the LSE return the £300,000 contributed by Saif al-Islam Qadhafi's foundation and that his alumni status be revoked.

UPDATE 2: Aside from being slow on affairs in this part of the world in typical American commentariat fashion, Martin Peretz fails to make distinctions made above.

IPE Zone Fully Endorses US Gov't Shutdown

♠ Posted by Emmanuel in at 2/22/2011 10:31:00 PM
It was quite an easy decision. After all, I am the sole author of the IPE Zone ;-)

But seriously, I gather that one of the most popular video game series in the United States is called Unreal Tournament. In fact, I get the same feeling of unreality with budgetary discussions in the country that spawned Unreal Tournament. States alike Wisconsin, Indiana, and Ohio are becoming battlegrounds for the mother of all showdowns in Washington. That is, the looming March 4 cut-off point at the federal level. The combatants in the American arena line up thusly: Republicans do not understand that revenue generation can be part of the solution, preferring to keep Bush II-era tax cuts that have quite obviously resulted in epic trillion dollar-plus deficits. Democrats on the other hand have no wish to offend traditional constituencies--organized labour, public sector workers, and so forth. With starting points that are difficult to square with reality, you end up with paralysis. At the federal level as well as in various states, there is discussion of shutting down governments at various levels given the inability to pass budgets.

While I am equally appalled by Republicans and Democrats alike, I am naturally very curious about the prospect of having major chunks of the American government shut down. Especially since the era of subprime globalization, with the US sucking capital from the world for no obvious benefit for either those of us who lend it or the Americans themselves, my inclination has been to believe that America is a malign global influence on the balance. While I do recognize that the United States is not the US government alone, it is the conduit by which much American presence is manifested around the world. Moreover, it is the nation-state that is theoretically accountable to "We the People."

Being a scholar of international political economy, it is thus an enticing prospect: what would life be like if (parts of) America just went away? For Amerophiles (that I had to invent the term may indicate the sheer uncoolness of being identified as such), anti-Americans, and those somewhere in between, we can actually learn about a lot of things from such a shutdown. To paraphrase some questions that have long puzzled IR and IPE scholars:
  1. Is America really the indispensable nation? Can us little brown brothers and assorted primitives cope without such enwhitenment?
  2. How would the world economy fare without its largest consumer market not fully functional?
  3. Would international organizations suffice in running the world's everyday affairs, or does the country that helped build most of them have to be there?
  4. For that matter, would anyone miss the United States that much, bona fide American lackeys like Mikhail Saakashvili aside?
As the saying goes, there's only one way to find out. So, dear Republicans, just do it. Pull the plug at the national, state, and municipal levels. Stem the tide of red ink by closing down government full stop (the most comprehensive "starve-the-beast" strategy). It's happened in 1995 and 1996, but this year will likely be a more drawn-out affair if nothing changes. The hammer of the cyber-heretics welcomes this natural experiment. Americans may be surprised to find out that, gee, life goes on elsewhere while they engage in a long overdue, all-American "Last Man Standing" match. If not that, a fiscal "Death Match" will suffice.

Yanqui Protectionism: CFIUS, Huawei, and 3Leaf

♠ Posted by Emmanuel in , at 2/22/2011 12:04:00 AM
Here's another entry in the seemingly non-stop catalogue of US-China dustups. Given America's chronic external deficit, it must attract at least an equivalent amount of capital inflows to compensate. To date, the Chinese have been willing to purchase US Treasuries (perhaps more reluctantly in recent years). However a natural misgiving given the rock-bottom near-zero interest rate policy (ZIRP) being pursued Stateside is that the yields China receives may not adequately compensate for the risk China takes. First, there are local grumbles that so much money is better spent at home where many problems alike poverty and pollution remain endemic. Parking huge sums of money in the US has dubious moral consequences, and domestic unrest can be a manifestation.

Second, there is the valid complaint that while the US is perfectly willing to let China buy Treasuries of dubious worth, it generally doesn't allow it to purchase more valuable parts of America such as its enterprises. On the balance sheet, China can purchase US debt--no problem--but not much equity by owning businesses that have the potential to create large revenue streams for the Chinese unlike Treasuries with their miserly yields. The reason? To me, it's always been naked protectionism. For obvious reasons, Chinese firms have been keenest on purchasing US firms with technological know-how. However, the US government has always baulked under "security" grounds via the Commission on Foreign Investment in the US (CFIUS), a multi-agency body headed by the Treasury.

Hence, there are two asymmetries at work. China can buy lots of America's debt but not equity (or ownership) in America. Also, while US firms have been (usually) welcome to invest in China, the obverse does not neccessarily hold--especially for Chinese technology firms.

I have made many posts [1, 2, 3, 4] on the Chinese telecoms gear manufacturer Huawei being--let's be honest here--harassed by American authorities. There's a longstanding insinuation that Huawei is affiliated with the Red Army. Insofar as it's a claim Huawei has not wholly refuted, it's given the Chinese concern endless grief. As it turns out, Huawei tried a somewhat different tack in approaching yet another US technology outfit. Assets of privately-held 3Leaf Systems (no relation to 3Com which Huawei famously tried to purchase before) were bought on the sly without informing CFIUS. Let's just say CFIUS was not very happy about this after finding out. Recent news suggests government pressure [surprise!] has resulted in Huawei's hand being forced into divestiture:
China's Huawei said it would back away from its acquisition of U.S. server technology company 3Leaf's assets, bowing to pressure from a U.S. government panel that had suggested it should divest the assets. The U.S. government has been concerned about Huawei, China's largest telecommunications equipment maker, for years because of uncertainty over its relationship with the Chinese government. Huawei was founded by a People's Liberation Army soldier, and opponents say it retains links with China's security services. Huawei has denied the links.

Huawei bought certain 3Leaf assets for $2 million last May but did not file with the Committee on Foreign Investment in the United States (CFIUS), which reviews deal for possible national security implications, until November. According to Huawei, CFIUS suggested that the Chinese company voluntarily divest the assets.

As recently as February 14, Huawei said it would wait for a decision from the White House rather than divest. Now it has changed its course. "This was a difficult decision, however we have decided to accept the recommendation of CFIUS to withdraw our application to acquire specific assets of 3Leaf," Huawei said in a statement issued late on Friday night in the United States.

"Huawei will remain committed to long-term investment in the United States. The significant impact and attention that this transaction has caused were not what we intended. Rather, our intention was to go through all the procedures to reveal the truth about Huawei."

Huawei is the world's No. 3 mobile gear maker behind Ericsson and Nokia Siemens Networks, which is a joint venture of Nokia and Siemens. Alleged links with China's security services, which Huawei has denied, have torpedoed its U.S. deals in the past. The company gave up a bid for 3Com in 2008 due to security concerns. In 2010, a group of Republican lawmakers raised national security concerns about Huawei's bid to supply mobile telecommunications equipment to Sprint Nextel Corp.
Meanwhile, China's Ministry of Commerce flags up the obvious:
China's Ministry of Commerce (MOC) said Monday it regrets Huawei Technologies Co.'s withdrawal of its agreement to buy the assets of 3Leaf Systems while under pressure from a U.S. panel. The MOC said in a statement on its website that it hopes "relevant parties" in the United States would "abandon prejudice, avoid protectionist measures and treat properly investments from China and other countries" with a fair, just and open attitude.

The MOC statement came after the Committee on Foreign Investment in the United States (CFIUS) last week recommended opposing the Chinese telecommunications equipment manufacturer's agreement to acquire assets and technology from 3Leaf Systems, on "national security" concerns.

In the statement, the MOC called Huawei's planned acquisition of 3Leaf's technological assets "a normal business move" based upon market economy rules and its own development needs...In recent years, some relevant parties in the United States have used various reasons, such as national security, to hamper Chinese firms' trade and investment activities in the United States," the MOC statement said, adding: "Such obstructions have already had an impact on the Sino-U.S. economic and trade cooperation."

"We believe an open, just and transparent trade and investment environment is good for economic growth for both China and the Untied States and can help facilitate the world economic recovery," the MOC statement said.
Free trade as core American policy? Yeah, right.

Middle East 'Political Risk' - Bahrain F1 Edition

♠ Posted by Emmanuel in , at 2/21/2011 05:52:00 PM
There's an interesting feature from Reuters on what unrest in Middle East / North Africa means:
The winds of change blowing across the Northern Sahara all but demand a look at foreign operations disclosures, particularly as many companies are deeply entrenched in preparing this year’s annual reports. Political risk has many guises—war, expropriation, currency devaluation—but for companies doing business abroad, these risks don’t begin to give a complete picture of potential threats to earnings. Just six weeks into 2011, a number of well-known companies have already provided a glimpse of what’s keeping their board members awake at night.
Just two days ago, I discussed the Bahrain Grand Prix as just the sort of Western-sponsored event at risk in the region. (While watching the BBC, the commentator mentioned that the kingdom spent £25 million to host the 2011 race plus another £11 million for having the first race of the season. These come on top of £92 million to build the Sakhir race track.) Appropriately enough, perhaps, the first race on the Formula One calendar in the now-tumultuous country of Bahrain has been called off. As per my previous post, the race scheduled for March 13 has been cancelled. So, the first race of the year will now be the traditional season opener of year's past--Melbourne on the 27th of March. From the official site:
The Bahrain International Circuit (BIC) today announced that the Kingdom of Bahrain would withdraw from hosting this year’s F1 Grand Prix race so that the country can focus on its process of national dialogue. Last Friday, Bahrain’s Crown Prince - HRH Prince Salman bin Hamad Al-Khalifa - initiated a new national dialogue involving all sections of Bahraini society in order to resolve the current political situation in the Kingdom. The Crown Prince informed Formula One’s Bernie Ecclestone of the BIC’s decision by telephone earlier today.

HRH Prince Salman said: “At the present time the country’s entire attention is focused on building a new national dialogue for Bahrain. “Although Bernie Ecclestone had graciously made clear that a decision on the race was entirely Bahrain’s to make and was not yet required, we felt it was important for the country to focus on immediate issues of national interest and leave the hosting of Bahrain’s Formula 1 race to a later date.

“I would like to extend my personal gratitude to Bernie Ecclestone for his support and understanding. After the events of the past week, our nation’s priority is on overcoming tragedy, healing divisions and rediscovering the fabric that draws this country together; reminding the world of the very best that Bahrain is capable of as a nation once again united.

Chairman of the Bahrain International Circuit, Zayed R. Alzayani said: “Bahrain’s Grand Prix is a time of celebration and hosting the race is a source of great pride for Bahrain and Bahrainis. It is a showcase to the world and we look forward to welcoming the teams and drivers and everyone involved in Formula One back to Bahrain in the very near future. I hope that F1 and our friends around the world will understand our decision at this difficult time.”

Following the Crown Prince’s decision, Bernie Ecclestone commented: “It is sad that Bahrain has had to withdraw from the race, we wish the whole nation well as they begin to heal their country. The hospitality and warmth of the people of Bahrain is a hallmark of the race there, as anyone who has been at a Bahrain Grand Prix will testify. We look forward to being back in Bahrain soon.”

No decision has been made on a new date for the rescheduling of the race, which was due to take place from March 11th to 13th.
So it may still be moved to a later date in the 2011 calendar. In the meantime, I guess the BBC read it right: rather than risk a black eye for both the sport and the country by going on as if nothing happened, those concerned have taken the prudent course of action. For, sports and politics are bound together:
Sport matters to us because of the release it provides. At its grandest, it can unite and liberate. But the sporting powers cannot have it both ways. They cannot celebrate their reach and importance when it is convenient and then wish somehow that they could be left alone to get on with their competitions when it is not. Should Bahrain still be in ferment come the beginning of March, then Ecclestone's decision will - whether he likes it or not - be making a statement which will resonate down the Arab street.

China Shows Its G-20 Might, Wins on Imbalances

♠ Posted by Emmanuel in , at 2/21/2011 12:01:00 AM
In case you missed it, and I can't blame you if you did because it mostly consisted of theatrics as opposed to anything substantial, the G-20 convened a meeting on the question of global economic imbalances over the weekend in Paris and issued a tame communique. Instead of having a substantial bearing on such imbalances, however, it casts more insight on that perpetual question of "Hu's the daddy of the world economy?" Coming into this meeting, the Chinese position was already well understood on the matter of using indicators for imbalances. Which is to say that overall the lesser, the better. At the meeting proper, the PRC held firm in the face of near-universal clamour for using such indicators to prevent another 2008:
China is the only country blocking an agreement on a set of indicators to measure global imbalances, leaving deputies with a limited number of options to present to ministers on Saturday, a G20 official said. The official said G20 deputies had drafted a list of two sets of internal indicators--public debt and deficits and private savings--and two sets of external ones--the current account or trade account as well as reserve levels combined with real exchange rates.

"China is reticent, generally speaking," he said, noting Beijing preferred to include the trade balance rather than the current account. "And its position on reserves and the exchange rate is well known," the official said. China's opposition had left G20 deputies with limited options to suggest on Saturday: either accept the four indicators or reject them; introduce a hierarchy where some indicators count more than others or use a time delay for their gradual introduction, the official said.
Among the Europeans, the Germans were holding out for some Chinese hide:
Germany dug its heels in ahead of G20 talks on global economic imbalances on Friday, with a German source saying Berlin wanted nothing less than agreement on a full list of indicators used to tackle such mismatches, including exchange rates. G20 finance ministers meet in Paris on Friday evening and Saturday to discuss a series of indicators that could be used as benchmarks for judging when one of other of the world's economic powers should change economic policy.
Meanwhile, the Americans brought their usual sob story to the table [quick, bring me a hankie], albeit with some additional flourishes given the wider audience of G-20 member countries. They probably thought a message of "China hurts everyone including fellow LDCs" would have added resonance:
Treasury Secretary Timothy Geithner on Saturday pointed to the problems China's tightly controlled currency poses for other developing economies and said Beijing still had further to go to let its currency rise. Talks at a Group of 20 meeting in Paris centered round efforts, led by Germany and G20 presidents France, to persuade China to include its yawning current account surplus and undervalued currency in a list of measures aimed to start a process of rebalancing the global economy.

There was little public evidence that the United States itself had pushed Beijing hard on that issue, but Geithner reiterated that there was still some way to go in the steady appreciation of the yuan. "China's currency remains substantially undervalued, and its real effective exchange rate -- the best measure to judge its currency against all of its trading partners -- has not moved much in this latest period of exchange-rate reform," Geithner told a press conference after the meeting.
When all was said and done, let's just say China largely got its way at the G-20. Although not necessarily a positive outcome, it goes to show you how the PRC's influence now looms large at these international confabulations. Not only was there any mention of currency reserves in the final communique, but the rest of the terminology was watered down to the point of, well, being back to where we were before. There too was no mention of REER (real effective exchange rate) being used as an indicator as per Geithner's overtures:
The Group of 20 dropped currency reserves and provided compromise wording on other indicators in a list of measures it will use to assess global economic imbalances, a post-meeting communique showed on Saturday. The deal, struck after two days of deadlocked negotiations in Paris, gives ground to China, who had resisted the inclusion of reserves and the current account balance in the list [it favoured using the trade balance].

There was no mention of reserves and rather than the current account and real effective exchange rates, the group agreed to use "the external balance composed of the trade balance and net investment income flows and transfers, taking due consideration of exchange rate, fiscal, monetary and other policies."
Try and make that mishmash of weasel words stick. You can't identify transgressors as there are no hard and fast indicators of exchange rates, fiscal and monetary policies that would identify a nation due for adjustment. Again, read the communique and weep.

Bottom line: Why don't they just give China enough policy space to figure out what it already understands on its own? Attempts to gang-tackle it at international summits clearly haven't worked, and the latest G-20 gathering is no exception. In fact, my argument is that others bloviating about currencies and reserves only makes matters worse by raising Chinese resistance. Generally, states (except for the weakest ones) do not welcome the image of being cowed by foreign nattering nabobs of negativity. What more China?

Bahrain GP in Jeopardy: F1 and Authoritarianism

♠ Posted by Emmanuel in ,,,, at 2/19/2011 08:01:00 PM
In olden days a glimpse of stocking
Was looked on as something shocking
But now, heaven knows - anything goes

It's weekend feature time. I suppose that hosting a Formula One grand prix is, above all else, a vanity project. In the same way that hosting the World Cup or the Winter or Summer Olympics is a way of saying that you've arrived on the world stage, so too does having a spot on the F1 calendar. Unfortunately, however, it's another truism that vanity projects do not always make money. For instance, there were worries over even whether the Shanghai Grand Prix would get a contract extension from the F1 powers-that-be this year given its lacklustre attendance figures. And this is in the mother of all growth markets, mind you:
The Chinese Grand Prix will stay on the Formula One calendar until 2017 after the Shanghai International Circuit agreed a new deal to host the event. Attendances have decreased at the venue since the inaugural race in 2004 attracted a crowd of 240,000. Ticket prices are set to be cut to attract yet more fans while the new deal between Bernie Ecclestone's Formula One Management and organisers Shanghai Juss Event Management Co. is thought to be at a reduced financial rate.
Alike Shanghai which commenced operations in 2004, most of the purpose-built F1 tracks were penned by the German circuit designer Hermann Tilke--the so-called Tilkedromes. Even many of the road races that have been held recently such as the Valencia and the Singapore Grands Prix have received input from him. Hence, charges that the new circuits lack character are rife. Monopolies tend to have their detractors.

Sports-worthiness aside, something that scholars of international political economy have failed to investigate is the link between authoritarianism and new F1 venues. While there are certainly new races in places that do reasonably well on measures of democracy--Istanbul (2005), Valencia (2008), and South Korea (2010) come to mind--more are held in decidedly authoritarian confines: Malaysia (1999), Bahrain (2004), Shanghai (2004), Singapore (2008), and Yas Maria Abu Dhabi (2009). Given the large expenditures associated with putting up racetracks or organizing street races, it is likely easier to create venues in conjunction with maximum leaders (or those approaching such status).

Last season we ended with a climactic race in the desert as Sebastian Vettel became the youngest-ever F1 champion in Abu Dhabi. This year us F1 fans find ourselves in the Middle East sands amidst yet more momentous occasions. However, the excitement at the start of his season will not be on the track but in the host country of the first scheduled race, Bahrain. Cracking down on protesters usually does that. Having brought his racing circus maximus to nearly every (prosperous) corner of the globe, F1 impresario Bernie Ecclestone has been there and done that. Perhaps the prospect of sports event cancellation due to old-fashioned "political risk" in Bahrain may yet be a novel experience.

That is, does F1 with its bevy of Western teams, sponsors, and drivers view popular uprisings with an attitude of "the show must go on," or are there political sensitivities that get in the way? Here's Bernie Ecclestone:
Bernie Ecclestone has expressed hope that the bloody unrest in Bahrain will "blow away" by next week, when he plans to decide whether to pull the opening race of the season. Formula One's commercial rights holder sounded more confident early on Friday that the Bahrain grand prix would go ahead despite the protests in Manama, which have put the race on 13 March at serious risk. But amid reports of renewed unrest in Manama's Pearl Square, with shots fired and reports of at least 20 injuries, Ecclestone later said the situation remained fluid.

"From a realistic point of view it appears that things are changing hourly," he said. "I feel the most important thing now is to wait until after the weekend, to see what happens over the next few days, and then make a decision next Tuesday or Wednesday."

Ecclestone, having sought to expand the Formula One calendar into new, profitable parts of the world in recent years, sidestepped questions about whether the sport should travel to countries that meet protests for democratic change with violent crackdowns. "It seems as if people thought it was democratic a few weeks ago," he said. "We have never, ever, ever been involved in religion and politics. We don't make decisions based on those things..."

"Let's hope this all just blows away. In these parts there have always been skirmishes. This is perhaps a bit more than that." The teams say they will follow guidance from Ecclestone and motor sport's world governing body, the FIA. Speaking on behalf of the Formula One Teams Association after a two-hour meeting, Red Bull's team principal, Christian Horner, said: "It's obviously a really difficult situation in Bahrain.

"But we have complete trust in Bernie, FOM [Formula One Management] and the FIA to make the right decision. They will only send us there if it is safe. It would be a great shame to lose the race, but it's not the teams' decision - it's down to the promoter. Bernie and the FIA will have much more information than us and we will trust their decisions..."

"Consultations are taking place on the whole logistic possibilities and what is happening in Bahrain," Fota's general secretary, Simone Perillo, said. "If things don't calm down then we'll have to consider the possibilities." If the Bahrain race was cancelled, the Melbourne grand prix on 27 March would be the first in a truncated 19-race season, but it is not thought that Ecclestone would be out of pocket, with the costs of up to $60m (£37m) in race fees being swallowed by the Bahraini organisers.

But cancellation would be a blow for both the sport and Bahrain, which became the first Middle East country to host a round of the championship in 2004 in an attempt to transform itself into a tourist destination as well as a business hub. While Abu Dhabi, Dubai and Doha have increasingly sought to attract a range of world-class sporting events as means to showcase their potential, Bahrain has relied on the annual grand prix.
As its energy reserves dwindle, Bahrain has sought to diversify itself as a banking, tourism, and services destination alike Dubai (Abu Dhabi and the Qataris have reserves up the wazoo). The response so far from Bernie Ecclestone is an automotive spin on the non-intervention in the affairs of other countries ("we don't do politics"). However, as a cash-spinner or at least as an event that would clearly not take place with considerable cooperation from Bahrain's rulers, F1 is implicated quite deeply by its previous actions.

While many F1 bigwigs prefer that the political mess just "blow away," Renault driver Nick Heidfeld has perhaps heaped trouble on himself by honestly suggesting that F1 should be more responsive to current events:
Nick Heidfeld says Formula One's rulers should be sensitive to the Bahraini people when it comes to whether the grand prix gets the go ahead. The island kingdom was again rocked by further unrest on Friday as the army and police moved in on anti-Government demonstrators who earlier in the day had attended the funerals of three protesters.

Formula One is undoubtedly on edge at the prospect of visiting a country at the centre of such political unrest and uncertainty. F1 supremo Bernie Ecclestone has promised a decision will be made by next Wednesday at the latest as to whether next month's season-opening race is given the green light or cancelled.

Heidfeld, this week confirmed as a Renault driver in the absence of the injured Robert Kubica, feels there is more at stake than just the safety of drivers, team personnel, media and fans. "It is not only down to how it is for the drivers, but how it is to the general public, to everybody who visits, to all the spectators and whether the risk is too high," said Heidfeld. "It's not just about the safety of those involved, but being sensitive to what is going on in the country."
Former champion Damon Hill once said of F1: "It's all about the wonga [money], isn't it?" I guess we'll find out more come Wednesday. As the graphic above taken from the event website suggests, people fuel their passion in different ways.

UPDATE: Ecclestone now says he will leave it in the hands of the local organizers. More specifically, the House of Khalifa's heir apparent. What's more, rumour has it that some F1 teams are thinking boycott if the event pushes through:
Ecclestone told BBC Sport that Crown Prince Salman ibn Hamad ibn Isa Al Khalifa was best placed to decide. "He will decide whether it's safe for us to be there," Ecclestone said. "I've no idea. I'm not there, so I don't know." He added: "We won't advise people to go unless it's safe..."

He said Bahrain could be moved to another date later in the year if the race in March was called off. Ecclestone said a decision on whether the race could go ahead would be made on Tuesday. "Let's hope it'll be all right," he said. His comments come as the Sunday Times reported that some teams would boycott the grand prix if it went ahead. F1 insiders have told BBC Sport that the teams' contractual commitments to Ecclestone's Formula 1 Management company mean they would be obliged to attend the race if it is held.
It's hard for some to let go. Still, I very much doubt whether Ecclestone's eagerness to avoid political entanglements is best served by placing the decision of whether the race goes on in the hands of someone affiliated with the party with the most vested political interests. You can argue though that the race won't proceed if the kingdom believes it cannot put its best face forward, but the notion of sporting impartiality is not obvious, to say the least [!]

Behavioural Economics? Try Biological Economics

♠ Posted by Emmanuel in at 2/18/2011 12:02:00 AM
By now, all and sundry should be familiar with behavioural economics. In contrast to homo economicus or rational economic man, real humans are subject to all sorts of foibles during decision-making processes. This body of work was most memorably crystallized in Kahneman and Tversky's prospect theory which won a Nobel Prize in Economics a few years back. If anything else, the idea of "bounded rationality" was visibly displayed by the easy fallibility of financial services workers of all stripes during the subprime crisis.

Although behavioural economics is now rightly drawing its share of adherents, there is yet another emerging field that may help our understanding of international finance in particular. No, I am not talking about neuroeconomics, though that too is an interesting area. Rather, we may be on the verge of mainstreaming what was previously esoteric in biological economics. Drawing on natural phenomena, there may be patterns in how financial markets operate that can be understood thusly. Instead of building models on faulty notions of homo economicus, how about building models drawing on nature? Lest you think this work is too high-faluting, the Bank of England has begun sponsoring work here. From Auntie:
Biology and the natural world are helping economists build new models to understand the dynamics of the financial sector and why the US sub prime loan crisis caused so much global damage. Could an understanding of ecology have helped prevent the credit crunch? It sounds unlikely, but a group of scientists working with the Bank of England believe banking has lessons to learn from biological science...

As the financial sector grew, so did the demand for talented, numerate graduates to create new and ever more sophisticated products. But the financial sector became too tangled and when the crash came, it threatened to bring down whole economies. "This was not something that our conventional models could make sense of," says Andrew Haldane, executive director of financial stability at the Bank of England. "Activity in every country around the world fell off a cliff," he says. But there was one group of people who could make sense of it.

Enter the biologists. Scientists and the Bank of England have begun to explore possible insights from the life sciences. Comparisons are being drawn between biological systems, with their complicated webs of interactions between all the different species, and with the interactions between different banks and financial institutions. "We need to think about the system as a system, rather than looking at this atom by atom, or node by node," says Andrew Haldane, admitting that pre-crisis, this had not been done. We didn't differentiate between the big and the small, we didn't really think hard about the joins between them," he says.

Until now, system-wide data collection in banking has been virtually non-existent. Regulators are hoping they can gather information to allow them to map the financial web, and spot fluctuations that could lead to an institution collapsing. Seeing banking as a biological system can also help explain why the financial world became so vulnerable.

Paradoxically, as banks grew bigger and more complex, the financial system as a whole ended up being more homogeneous. "It's rational for an individual bank to have sought to diversify its balance sheet," says Haldane. By taking on different functions, a bank spreads its risk - it is not putting all its eggs in one particular financial basket. But all the big banks were doing the same thing. "The quest for diversification by individual banks, led to the system as a whole rather lacking in diversity," Haldane says.

In biological science, a lack of diversity in a population equals a lack of robustness - and this has fuelled calls to break up the big banks following the credit crunch. Another approach is to look at the spread of disease through a population by drawing on the parallels between big banks, and the epidemiological concept of a "superspreader" - an individual who, through their contact with large number of other people, is responsible for the spread of an infection. Like the spread of an infectious or sexually transmitted disease, the crisis that struck the biggest banks had a knock-on effect to the other institutions connected to them.

"For the equivalent of the promiscuous, we have these big banks globally who have interconnections with all the other banks in the system," says Andrew Haldane. "What you need for those types of entity is a greater amount of protection up front," he says.

In banking terms, that protection requires that the interactions between institutions are kept from being so convoluted that when there is trouble, everything goes wrong at once. The challenge is how to do that in practice, streamlining interconnections and maintaining diversity.
Don't dismiss it out of hand. If it adds to our explanatory power of global financial machinations, then all the better.

BRICs Guy Jim O'Neill: China's Rise Benefits All

♠ Posted by Emmanuel in , at 2/16/2011 12:07:00 AM
Jim O'Neill of Morgan Stanley should be familiar to one and all as the fellow who coined the acronym "BRICs" for the major emerging economies Brazil, Russia, India, and China (though he sometimes expresses regret putting Russia in there). Although a less neat acronym would be required, he's also alluded to including Mexico, South Korea, Turkey and Indonesia. While I'd be inclined not to include South Korea since it famously industrialized earlier as part of the Asian tigers and is not that large population-wise alongside the others, it's his list to make--not mine. Given his track record, he's definitely considered among the top popular commentators on the world economy.

Anyway, while reading the Evening Standard on my journey back from work, the prolific Jim O'Neill had yet another feature, this time on why China's economic rise shouldn't be feared but welcomed. In classic liberal fashion--he still represents an investment bank, after all--the win-win aspects are what he chooses to highlight. (It reminds me of Henry Paulson in his pre-Treasury days, actually.) The occasion was official confirmation that the Chinese economy had surpassed that of Japan--and not by a small margin, mind you:
Yesterday's estimate for Japan's GDP growth in the final quarter of 2010, or rather the lack of growth, was not a surprise. More interesting was that it confirmed China's status as the number two global economy. It wasn't even close: China's GDP stands at around $5.9 trillion, Japan at about $5.4 trillion. The speed of China's ascent relative to Japan is quite remarkable even by my own optimistic standards.

When back in 2001 I first looked at China's remarkable potential at the core of the broader BRIC group - Brazil, Russia, India and China - it wasn't even on my radar that China would overtake Japan as soon as 2010. I was ambitious enough to suggest China would surpass Germany. In 2003, when my team first looked at the world's 2050 potential, we expected China to overtake Japan by 2015. So it has happened five years early.

There is nothing quite like this China phenomenon in modern history. Since 2001, China's economy has grown by $4.3 trillion, in the process effectively creating more than another two of itself than existed in 2001. That growth is equivalent to creating more than two new United Kingdoms.

As the base size of China gets bigger, so does its impact. If China succeeds in growing by the forecasting consensus view of around nine per cent this year, with inflation at around four to five per cent and its currency rising a bit, the end of last year's $5.9 trillion will be close to $7 trillion by the end of this year. In other words, China will create the economic equivalent of another Korea in one year - or one-and-a-half UKs.

Contrary to many perceptions, China is not achieving this growth at everyone else's expense. That is an out-of-date story. Last year China's imports totalled close to $1.4 trillion, and they increased by a massive $400 billion in just that year. Maintained at this pace, within another five years, China's imports will be bigger than those of the US.

Quite simply, China is the single biggest story for us all - and I've been impressed by how the UK Government is grasping it, especially the need to export. This could be our get-out-of-jail-free card. Providing support and encouraging all our manufacturing and, perhaps even more importantly, our service businesses to penetrate further into China is critical.

In this regard, it is imperative that any controls on immigration [by the PRC] don't clash with the importance of this goal (which includes our educational exports too) for China and the other BRICs. It has become quite fashionable - again - to worry about China being some sort of bubble. I'm not sure why this view is so popular but it probably reflects a core belief that a non-democratic country cannot guide its economy to permanent success. Ultimately that might turn out to be true but the same accusations were made a decade ago - and look what has happened since.

The Chinese authorities will soon confirm their next five-year plan and its details. It is likely to embrace a further push towards their consumers and to take the economy away from being driven by exports. We should watch these developments at least as closely as our domestic budget: they are likely to be more important.
It's interesting stuff, though I don't think services liberalization for the benefit of Western firms will happen any more rapidly than it has in the past. Which is to say rather slow especially in financial services. Moreover, China isn't likely to be inundated with FILCH (Failed In London, CHina-bound) British expatriates unless they happen to speak fluent Mandarin. While I appreciate that financial deepening is something desirable in China, especially the provision of sophisticated forms of consumer credit that can make the PRC rely more on domestic instead of international consumption, the West has done itself no favours during the global financial crisis in inspiring confidence in this respect.

BTW, Manchester United fans will also know O'Neill as one of those who have tried to extricate the Red Devils from the revolting Glazer family. Alas, that is a work in progress--unlike the emergence of major emerging economies.

Let the PRC Fund (Broke) US Primary Schools

♠ Posted by Emmanuel in ,, at 2/16/2011 12:01:00 AM
We see in China things we used to see in ourselves...can do, initiative...that used to be us! - Thomas Friedman

I've been watching the BBC's interesting series The Chinese are Coming documenting the effects of China's rise on the continents of Africa [episode 1], South America and North America [episode 2]. Sorry readers outside the UK, these are supposed to be only available to local viewers--but that should give you a clue about what to do if you really want to watch. Display some Chinese-style initiative instead of American-style La-Z-Boy sloth.

This blog has long featured stories on China's activities in Africa and its associated controversies. More recently, I discussed the emergence of "bikini wars" between Brazil and China based on a story that comes from the second episode of this documentary. It turns out that, aside from Thomas Friedman dumping on how pathetic America has become--plenty obvious even for that flat earther--even primary school has become an ideological background of sorts.

If there is a world that best characterizes American finances, it's "broke." These wastrels of the West are set to run a $1.5 trillion deficit in 2010 according to the Congressional Budget Office (CBO), while the Office of Management and Budget (OMB) predicts a $1.645 trillion deficit. Meanwhile, the state of California where this educational battle is being waged is not only the largest state in the union but the most fiscally challenged as well according to a watchdog group. Good luck with that, you'll need it:
In 2007 California stared down a $14 billion budget deficit; in 2008 the deficit hit $18 billion; in 2009 it jumped to $24 billion; and by this year we were attempting to close a relatively manageable $19 billion deficit [???]. Every year the budget was way overdue and every year the governor and legislature cobbled together a flimsy mix of spending cuts, some well hidden tax increases and accounting gimmicks that papered over another year of deficits, and every year the state’s political leadership seemed like they were right back at square one when the fiscal year end rolled around in June. History is repeating itself once again at the Legislative Analyst Office is projecting California’s deficit for 2011 will be $25.4 billion, which is twice as large as officials were expecting. With a new governor taking office and an economy that could improve somewhat over the course of the next year, is there any reason to hope that California’s broken record won’t keep on playing the same terrible song?
Now to the meat of this story: California is massively overstretched, and the same trend generally holds in its K-12 educational system which is mediocre in typical modern American fashion. Last year, a Chinese-American school board president in LA, Jay Chen, decided to do something productive and incorporate Chinese language teaching in his school district. Given the way this world is going, it certainly seemed like a good idea. However, controversy soon surrounded the source of some of the funding Chen procured. You guessed it: the PRC government helped fund these programmes by making them available through its consulate. His opponents are now trying to pull a Gray Davis on him. From the Associated Press:
Four members of a suburban school board are being targeted in a recall effort over their support for a middle-school language program funded by the Chinese government, one of the members said Friday. Hacienda La Puente Unified School Board President Jay Chen said he and the three other members of the five-member panel were being served with notices of intent to circulate recall petitions, each signed by 12 residents of Hacienda Heights in east Los Angeles County.

Chen, along with board members Norman Hsu, Joseph Chang and Anita Perez, voted last year to approve the agreement with China's international language-teaching agency to cooperate on the so-called Confucius Classroom Mandarin program. Under the program, which already is in place at dozens of other schools across the United States, the district was to receive $30,000 a year for language and culture programs at Cedarlane Middle School, along with some 1,000 textbooks, CDs and other educational materials.

The program attracted scorn from some community members, who have said at board meetings it was a vehicle to indoctrinate students with communist ideology and other foreign influences. The recall petition served to Chen claims he "believes that the United States will be subservient to China and manipulates students to serve China's government," among other claims.

Chen said he was surprised that a program as seemingly innocuous as Confucius Classroom would inspire such rancor. "I do sense a strain of xenophobia and even racism," he said. "There's a real fear of China that permeates some of the allegations." He added that most of the Confucius Classroom opponents do not have children in the school district, and the program is generally popular among parents and teachers...

Chen said he believed the recall effort was prompted by a recent vote to approve the teaching materials for classroom use. School officials had previously decided to refuse the $30,000 grant amid the strong community resistance. They also turned down an offer to have the Chinese government place a teaching assistant in Cedarlane and pay his or her salary...

Chen Zhunmin, who directs the Chinese consulate's education office in Los Angeles, said Hacienda Heights was the only community he has encountered where the Confucius Classroom program has stoked controversy. He said many schools have contacted the consulate seeking to set up programs. "Confucius Classroom has nothing to do with ideology," he said. "Its primary role has to do with the teaching of language and also to promote mutual understanding."
There are a whole lot more of these stories about Cederlane if you're interested. So as it turns out, the Chinese government has already been funding many of these innocuous Confucius Classroom programmes in US public schools. Like Jay Chen, I do sense xenophobia and racism. Maybe even some tiger parenting fears thrown in for good measure.

The ironic thing is that, regardless of what this school district decides to do, the PRC government has already lent the US federal government billions and billions that trickles down to US states anyway via "stimulus packages" and the like. So, here's my general advice to the broke United States of America, its broke states, and its broke municipalities: If you can't beat China, you might as well join it and not object so much about where the money is coming from. After all, America has long lost the ability to fend for itself.

Heck, the American K-12 system could probably be improved if it were run by the Chinese lock, stock and barrel. Perhaps they'll succeed in educating Americans since Americans can't do that basic task themselves.