Auto Industry Beggary, €40B European Edition

♠ Posted by Emmanuel in , at 10/07/2008 12:03:00 PM
The notion of "creative destruction" suggests that industries which have lost their economic relevance should be allowed to go gently into the good night. However, political-economic considerations usually mean that they aren't allowed to do so. In this day and age of resource scarcity, the rising price of fuel has endangered the airline and the automobile industries. First, folks are more reluctant to use these modes of transportation as a result of higher fuel prices. Second, airlines and automakers also need to deal with tighter environmental regulations whether they welcome them or not.

A few days ago, US automakers successfully claimed $25B worth of government funding to supposedly help meet higher fuel economy standards. I consider it a cynical ploy given that these automakers have led the fight so far against higher standards. Moreover, if they were really environmentally concerned, then they wouldn't have sold so many monster SUVs in past years that cannot be moved of dealers' lots nowadays. The French government claimed to be appalled by this bailout. However, it is now apparent that rent-seeking is not confined to America: the heavyweights of the European automobile industry including BMW, Mercedes-Benz, FIAT, Ford Europe, General Motors Europe, Jaguar Land Rover, Porsche, PSA Peugeot Citroën, Renault, Toyota Motor Europe, Volkswagen and Volvo are now maneuvering for subsidized EU loans to the tune of €40 billion (about $55B). Unsurprisingly, car sales are also tanking in Europe.

Why, that's over twice what Detroit is asking for. Like Detroit, tight credit conditions have made working capital hard to come by. Also like Detroit, EU carmakers believe it's necessary to cope with increasingly stringent environmental standards for their products. Also, part of the money is to be used to provide motorists incentives to trade their older, high carbon emission vehicles for newer ones that do not emit as much. All this makes me wonder: aren't people sending a market signal that cars are becoming unattractive transportation propositions? Unlike in America, you can pretty much get wherever you want to go using public transportation. Oh well, on to the "beggar thy EU" strategy, invoking the number of jobs the industry provides, etc:
The European automobile manufacturers are deeply concerned about the evolving financial crisis and the consequent drop in consumer confidence and economic growth. The economic downturn adds to already extensive pressure on car production in Europe, due to increasingly stringent regulatory requirements, in particular the pending CO2-reduction legislation, and could represent a serious backlash to the transition to low-emission vehicles on Europe’s streets.

Manufacturers ask that various measures should be considered by EU policy makers to ensure the future of car manufacturing in Europe and reinforce the momentum in consumer demand for fuel-efficient vehicles.

* A low-interest loans package (40 billion EUR) to help secure a sustainable market for current and newly developed fuel-efficient technologies
* Incentives to scrap vehicles of over 8 years old, during a period of 36 months, to accelerate fleet renewal

The above would provide conditions under which the objectives of the CO2 legislation as currently debated by the European Parliament and the EU member states could become more realistic, enabling manufacturers to achieve the desired results. Details of this conceptual proposal will have to be worked out in the weeks to come.

“Car makers face increasingly hesitant consumers and call on governments to respond, stimulate the economy, relieve the credit crunch and restore consumer confidence. Only then will consumers have the means and the confidence to invest in new vehicles”, said Christian Streiff, President of the automobile industry’s trade association, ACEA, and CEO of PSA Peugeot Citroën. “The proposed loans-package will give an important and welcome signal to consumers and financial markets.”

As evidenced at the Paris auto show, which opened over the weekend, the car industry is delivering increasingly lower CO2 levels in new cars. This is the result of and will further involve huge investments in new technologies and R&D. Over the past decade, new car CO2 emissions have already been cut by 14%, an achievement that has not been equalled by any other industry. ”We will continue our work but do believe that the governments can do more to support our already significant investments and growing number of achievements,” said Streiff.

A scrapping scheme for older cars is a further important way of accelerating the take-up of fuel-efficient technologies and renew the car fleet on Europe’s roads, which has a clear environmental benefit. In the EU15, cars older than 8 years represent 36% of the existing fleet. Their replacement with new cars would result in CO2 savings of 20 megatonnes per year, or 4.5% of total passenger car emissions. There would also be a significant reduction on emissions of nitrogen oxide and particulate matter.

The European automotive industry is key to the strength and competitiveness of Europe...They provide direct employment to more than 2.3 million people and support another 10 million jobs in related sectors. Annually, ACEA members invest €20 billion in R&D, or 4% of turnover.
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Is South Korea Having an Asian Crisis Flashback?

♠ Posted by Emmanuel in , at 10/07/2008 11:09:00 AM
The 1997/98 Asian financial crisis retro elements are truly, madly, deeply disturbing. Although Asian countries are now armed to the teeth with whopping levels of foreign exchange reserves to prevent a recurrence of those tumultuous days, I believe that the extreme levels of export reliance they have gone to build those reserves have come at a price. Very simply, who will all these Asian exporters sell to as America's consumer-driven economy hits the wall?

Today we revisit South Korea, one of the countries famously hit by crisis. As its foreign exchange reserves dwindled to nothing, it was forced to resort to the IMF. After years of exporting boatloads of stuff to hyperconsuming Americans and others, South Korea's reserves stand at about $240 billion. Still, its reserves have been declining in recent months as the country has tried to stem rising inflation by propping up the Korean won. Reuters now warns that things may be getting worse for the country as it has slid into a current account deficit for the first time since the Asian financial crisis. Declining export performance has in turn encouraged foreign investors to leave the country, worsening its balance of payments. Moreover, Korea has since become a heavily "financialized" economy with high levels of consumer indebtedness and high loan to deposit ratios compared to other countries in the region.

Ultimately, $240B should be enough to see the country through, though it will get a scare as it tries to sort out its current problems. It will be important to figure out if there are other export markets available. Once again, it begs the question of whether financial sophistication is so wonderful if it means increased vulnerability to credit events and the like:
South Korea urged banks on Monday to sell foreign assets to raise dollars and promised to use its currency reserves to shield lenders from the financial crisis engulfing the United States and Europe...

"Recently our financial institutions have begun experiencing troubles in securing foreign-exchange liquidity," [FinMin] Kang said at a meeting with executives from local commercial banks. "The government judges that we need to deal with the situation preemptively, while assuming the worst-case scenario." He did not elaborate on what preemptive action might include.

Kang repeated an earlier government pledge to give banks access to the country's foreign exchange reserves, the world's sixth largest at nearly $240 billion. "Banks need to take measures themselves such as selling foreign-currency securities and other assets to secure foreign exchange liquidity," Kang said...

South Korea looks more vulnerable than many Asian nations to the credit squeeze triggered by U.S. mortgage defaults last year that has triggered bank failures and nationalisations in the United States and Europe.

"This rush for foreign currency has been heightened not only due to the global credit squeeze but also because Korea has seen its current account falling sharply in recent months, even as investment outflow continues," analysts at UBS said in a note. "Although we are not expecting a banking crisis in Korea, the credit crunch is likely to be most severely felt in Korea among Asian economies given the highly leveraged Korean corporate and households."

Household debt in Korea has hit 82 percent of gross domestic product and 148 percent of disposable income. The bank loans-to-deposits ratio is at 139 percent after a lending spree between 2002 and 2007. Most Asian countries have loans-deposit ratios below 100 with Malaysia at around 74 percent and the Philippines at 57 percent.

The loans-to-deposit ratio of the four biggest Korean banks -- Kookmin Bank, Woori Finance Holdings, Shinhan Financial Group and Hana Financial Group -- ranged between 135-177 percent in the first quarter of 2008, Moody's Investors Service said.

"The current difficulties are a result of the global liquidity squeeze rather than risk issues at individual banks," said spokesman You Jung-youn at Kookmin, the biggest lender. "It is more about the country risk."

The government has spent almost $25 billion since March to support the won, which has lost 26 percent since December and appears headed for its worst year since the 1997-1998 Asian financial crisis when capital fled the region.

Korea is also on track to post its first annual current account deficit since that crisis and foreign investors notched up net stock sales of 30 trillion won ($24.57 billion) this year, already the highest on record. But analysts said comparisons with the Asian financial crisis were overblown. "It's different from the previous crisis because foreign reserves are now more than enough to cover short-term foreign debt," said Lim Ji-won, economist at JPMorgan Chase.

South Korean debt maturing in less than a year is worth about $210 billion. [A measure of reserve adequacy known as the Greenspan-Guidotti rule is being able to cover (usually external) debt due within a year.]
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Dollar's a Safe Haven, Eh? Look at the Yen

♠ Posted by Emmanuel in , at 10/06/2008 05:21:00 PM
The euro slumping below $1.35 as a result of troubles with European financial institutions requiring national bailouts such as Hypo Real Estate in Germany has occupied the attention of currency watchers. However, a far more dramatic move has been made by the Japanese yen, which has strengthened by almost ¥5 against the US dollar in a 24-hour period. Do not adjust your monitor settings; this chart is for real [click for a larger image]. What explains the yen's very spectacular move? Further unwinding of (risky) carry trades funded with yen or Swiss francs--that's for sure. This is illustrated in some way by Icelanders who stand at the edge of the precipice:
Deepening the bite for many Icelanders is that during the good times, many borrowers opted for "basket" loans tied to the yen and Swiss franc, even for auto purchases. Those loans have become disasters, as borrowers need to find ever more fast-devaluing kronur to meet loan payments.
Bottom line: the dollar is not a "safe haven." If such were the case, the yen would be even safer yet. Bloomberg continues with the carry trade unwinding due to deleveraging story:
Japan's currency was the best-performer in September and the only currency to appreciate against the dollar. Deutsche Bank AG, the biggest trader of foreign exchange, says the yen will rise 5 percent in coming months. New York-based Morgan Stanley is telling clients to buy the currency versus the euro and pound.

After seven years of providing the cheapest source of funds for investors buying higher-yielding New Zealand dollars, Australian dollars and Brazil reais, the yen is appreciating as $584 billion of subprime mortgage-related losses force banks to restrict credit. It strengthened 4.4 percent on a trade-weighted basis in September, according to the Bank of Japan's effective exchange rate, the most since August 2007, when the seizure in capital markets began.
After understandably taking a beating as a reserve currency due to its near zero yield in recent years, the yen is making a small comeback in that role:
The percentage of currency reserves held in yen by foreign central banks increased for a third straight quarter through June, according to the International Monetary Fund.

Yen now accounts for 3.4 percent of global reserves, compared with 2.8 percent a year earlier, the lowest amount since at least 1999. The dollar is the world's largest reserve currency at 62.5 percent, IMF figures show. Morgan Stanley strategists said in their Oct. 2 report that the yen may overtake the pound, which is No. 3 at 4.7 percent, in ``coming quarters.''

``There are many risks in the United States and Europe,'' said Satoshi Okumoto, a general manager at Fukoku Mutual Life Insurance Co. in Tokyo, which has $54.1 billion in assets and is Japan's eighth-biggest life insurance company. ``Fund managers are starting to shift their money to yen. They are starting to overweight yen in terms of currency allocation.''
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Incoming EU Trade Chief: Meet the "EuroPalin"

♠ Posted by Emmanuel in , at 10/06/2008 02:22:00 PM
Among the four main negotiators for the Doha Round in recent years, the EU's Peter Mandelson had by far the most name recognition prior to assuming his post. America's Susan Schwab, Brazil's Celso Amorim, and India's Kamal Nath did not really match Mandelson in this department. It is then with considerable consternation that the EU powers-that-be have selected a relatively obscure politician to replace Mandelson after he accepted New Labour's gambit to shore up declining support at home. Picture this: a little-known lady is chosen to vie for a very important post at a critical juncture. In America, you have the gaffe-prone "hockey mom" Sarah Palin becoming a candidate for the second highest office in the land as the country is headed for a full-blown recession. Meanwhile, in Europe, Baroness Catherine Ashton is now--you guessed it--the candidate to occupy the second most important EU post as trade commissioner while international trade talks teeter on the brink of oblivion.

Like most of you, I did not know of Catherine Ashton prior to her being chosen for this post. Thus, I cannot say what sort of job she'll do. EARTHTimes offers this profile on her:
Catherine Margaret Ashton, the 52-year-old British Labour politician set to succeed Peter Mandelson as European Union (EU) trade commissioner in Brussels, has held a number of middle-ranking posts in the British government. She has been responsible for issues including education, justice, equality and human rights.

As leader of the House of Lords, a position to which she was promoted by Prime Minister Gordon Brown in 2007, Ashton was a key figure in securing the parliamentary passage of the Lisbon Reform Treaty through the upper house of the British parliament.

Ashton was given a life peerage under the previous government of Tony Blair in 1999 and has since then been known as Baroness Ashton of Upholland, taking the title from her native town of Upholland, in the northern county of Lancashire. In 2001, Ashton was made parliamentary under-secretary of state in the Department for Education and Skills, where she dealt with issues ranging from school policies to a ban on smacking by childminders. In 2004, she took up a similar role at the Department for Constitutional Affairs, dealing with human rights, equality and justice issues...
Other than helping secure the Lisbon Agenda through the House of Lords, I can't really point to anything significant that suggests she has worked on EU and/or trade issues (shades of Palin?) Although it's not wise to make a quick judgment of what she'll be able to do in her new role, it may have been rash to choose someone who, on the surface, is new to this sort of thing (Palin, anyone?) While EC President Manuel Barroso has been quick to back her, the trade negotiation set is not so sure if she's the right woman for the job due to her relative obscurity at a critical juncture. From Reuters:
The naming of a largely unknown, junior British politician on Friday as new EU trade chief is a setback to efforts to reach an early deal on the World Trade organization's (WTO) Doha round, trade diplomats said.

Catherine Ashton's appointment as European Trade Commissioner, replacing Peter Mandelson, prompted incredulity among the Geneva trade community. "It doesn't give you a lot of confidence that anything can be pulled together," said one influential WTO ambassador, adding that prospects for a deal had shifted since yesterday. The poor reception towards Ashton was attributed to her inexperience and lack of profile.

[Mandelson] was widely respected as master of the trade brief and a driving force behind efforts to liberalize trade in the Doha round, launched in late 2001. "Mandelson's departure at this juncture, when we are so delicately poised, is clearly a huge setback," India's WTO ambassador Ujal Singh Bhatia told Reuters. "He provided great leadership to the Doha process and took many risks to take the talks forward. He will be sorely missed." In an interview with Reuters shortly after he was appointed to his new position, Mandelson said time had run out for an early Doha breakthrough.

Ashton, a 51-year-old economist, previously held junior ministerial positions in the departments of Education and Skills, Constitutional Affairs and Justice, including responsibility for international trade in legal services.
Feel free to chip in if you know more about her. For the rest of us, we'll just have to wait and see what she brings to trade's biggest negotiating table.
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Will Iceland Need an IMF Bailout?

♠ Posted by Emmanuel in , at 10/05/2008 11:18:00 AM
What's a financial crisis without a fast-depreciating currency? In the place of Southeast Asian economies as per the Asian financial crisis, we now have the largely ignored story of Iceland. As the chart above depicts, the Icelandic krona (ISK) has devalued over 50% in little over four months' time and 20% in two weeks' time. Despite the USD being well and truly overbought against the ISK, the Icelandic currency's woes continue. How a lightly populated country few can point to on a map got into such a mess is a very interesting story of globalization.

Like (the area formerly known as?) Wall Street and the City of London, Iceland until recently was a big beneficiary of global liquidity provided by the Chinese and other countries running large external surpluses. Would-be Icelandic tycoons used cheaply available funding to buy up stakes in the rest of the world, especially Merrie Olde England. The Guardian offers a good backgrounder from which this excerpt is taken:
Iceland is on the brink of collapse. Inflation and interest rates are raging upwards. The krona, Iceland's currency, is in freefall and is rated just above those of Zimbabwe and Turkmenistan. One of the country's three independent banks has been nationalised, another is asking customers for money, and the discredited government and officials from the central bank have been huddled behind closed doors for three days with still no sign of a plan. International banks won't send any more money and supplies of foreign currency are running out.

People talk about whether a new emergency unity government is needed and if the EU would fast-track the country to membership. On Friday the queues at the banks were huge, as people moved savings into the most secure accounts. Yesterday people were buying up supplies of olive oil and pasta after a supermarket spokesman announced on Friday night that they had no means of paying the foreign currency advances needed to import more foodstuffs.

This North Atlantic volcanic island, which is the size of Cuba, with a population of 320,000 - the size of Coventry's - is an unlikely player on the global financial stage. It is famous for its fish, geysers and for winning the UN's 2007 'best country to live in' poll. But Iceland built its extraordinary wealth on the crest of the worldwide credit boom and now the crunch is sweeping it away, bankrupting a people for whom the past eight years have been, for most of them and by their own admission, one long party.

The nation's celebrated rags-to-riches story began in the Nineties when free market reforms, fish quota cash and a stock market based on stable pension funds allowed Icelandic entrepreneurs to go out and sweep up international credit. Britain and Denmark were favourite shopping haunts, and in 2004 alone Icelanders spent £894m on shares in British companies. In just five years, the average Icelandic family saw its wealth increase by 45 per cent.

But, as a result of the international banking crisis, the billionaires who own everything from West Ham United football club to the Somerfield supermarket chain, Hamleys toy shops and the House of Fraser, are in trouble and the country is drowning in debt.

Iceland's cheap labour force, the Poles and Lithuanians, have left already - there's little point in sending home such a worthless currency, and the tourist season is over. Iceland is on its own.
As long as global credit flowed freely, Iceland itself became one large hedge fund--with its banks borrowing liberally to invest in equity stakes in European companies. The global credit crunch has seen to it that Icelandic banks cannot find such easy financing, and the now parlous state of Icelandic banks looks set to drag the entire country down via a slumping currency, high inflation, and other not-so-jollies. With a global slowdown in store, it is hard to imagine Icelandic concerns garnering sufficient returns to pay off their accumulated debts. And still things may get worse if Iceland's largest bank, Kaupthing, goes bust, taking Brits down too:
Kaupthing may be headquartered in Reykjavik, some 1,000 miles away from the City of London, but the financial volcano threatening to erupt on the island could send shockwaves down every High Street in Britain. The bank, whose liabilities are several times larger than Iceland's GDP, runs accounts for 150,000 Britons. Not only that, it is a key lender to some of Britain's biggest entrepreneurs, including the top chef and restaurateur, Gordon Ramsay and the property tycoon, Robert Tchenguiz, and bankrolls major retail chains from House of Fraser and Debenhams to Woolworths, Hamleys, Whittards of Chelsea and Karen Millen.

Yesterday the Icelandic government was desperately trying to stitch together a package that would restore confidence in the bank and prop up the country's ailing economy which is teetering on the brink after years of over-expansion by its banks.

Most of the British depositors in Kaupthing are safe - savings in the bank of up to £50,000 are guaranteed by the UK Government. But in Iceland, the population - known for their resilience and stoicism - are panicking. They are rushing to the banks in their snow-topped 4x4s to check that their savings are still there and stockpiling provisions in case the country's rampant inflation heads further out of control.

"Many people are angry. I think it is absurd that we are in this situation," says music student Katrin Hamilton, who has lived in Reykjavik her whole life. "People here are buying more freezers just so they can fill them with groceries..."

Iceland's complicated financial interests are so interconnected – with a small number of key investors owning cross-stakes in each other's institutions [sounds like keiretsu] – that the worst fear is a domino effect which will lead to the collapse of the country's economic system, potentially taking with it any number of high-profile British chains.
Some commentators have mooted that Iceland may soon need an IMF bailout--the first developed country to require one since the UK in 1976. I don't rule it out, and Iceland's fate certainly serves as another cautionary tale against excessive borrowing. Laissez faire, we hardly knew ye.

UPDATE: The WSJ writes that crisis talks over the weekend have yielded plans to raid mandatory pension funds invested abroad thought to amount to $16.5B. (Repatriating these funds would theoretically boost the krona.) Speaking of needing a bailout, the WSJ also says Iceland's forex reserves have dwindled to €2.0B. However, it may approach other Nordic countries before the IMF:
At marathon meetings at a guest house in Iceland's capital on Sunday, bankers and ministers discussed selling pension-fund assets held overseas and seeking assistance from central banks of other Nordic countries to provide liquidity, among other scenarios, according to people familiar with the situation...

Iceland's pension funds, to which private employers and the government are obliged to contribute, are well-funded and together hold about €12 billion ($16.52 billion) in assets, a good portion of it in foreign securities that could be sold to provide liquidity, also bolstering the ailing Icelandic krona.

Using pension plans, in effect, as a sovereign-wealth fund to rescue banks could create risks to future pension benefits. But other options are limited. The Central Bank of Iceland has about €2 billion in foreign-exchange reserves. Standard & Poor's and Fitch Ratings both cut Iceland's sovereign debt rating last week.
UPDATE 2 (10/17): See updated post on how Iceland has nationalized its second-largest bank, pegged its currency, and seeks EUR 4B from Russia.
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Somalia, Afghanistan at Bay

♠ Posted by Emmanuel in , at 10/05/2008 11:17:00 AM
Nobody ever said that Ricardo's notion of "comparative advantage" covers just legitimate enterprise. Two cases to illustrate this point are the burgeoning opium industry in Afghanistan (which is said to account for nearly half of the country's GDP) and maritime piracy off the coast of Somalia. As with many such cases, the roots are political-economic. After its invasion, Afghanistan has become a disembodied state, with a Western-installed figurehead serving merely as the "Mayor of Kabul" as opposed to being anyone with accepted authority throughout the country. Likewise, Somalia is a failed state without any sort of government as you and I would understand it. The resulting breakdown of law and order in both states has undermined whatever little legitimate industry both states had and has facilitated underground economies currently in the news for unwelcome reasons.

Lacking legitimate forms of livelihood, Afghans have turned to the comparatively advantageous trade of opium poppy cultivation. Although Afghanistan is not blessed with fertile land, opium is easy to grow. Outlying areas where the Afghan "government" has minimal presence and warlords hold sway present, shall we say, commercial opportunities. Given few other opportunities to earn a living, many have turned to poppy cultivation. The location of Afghanistan along the famed Silk Road of yore further enhances trade opportunities for illicit drugs.

While Somalia's geography is of course different, its story is much the same, adjusting for the context. Years of strife have largely finished off whatever fishing industry remained. Nowadays Somali pirates are fishers of men: not in the sense Christ intended but of kidnap for ransom (and other wholesome activities like extorting protection money). Like Afghanistan lying on the Silk Road, Somalia's long coastline by the Gulf of Aden serves as a geographically advantageous source of comparative advantage in conducting an underground economy. (The Gulf of Aden is an important waterway for transporting oil.) The seizure of a Ukrainian vessel flying a Belizean flag of convenience with, among other things, 33 T-72 tanks reportedly bound for South Sudan has captured world attention. Aside from the very interesting question of who exactly the customers for the tanks are, the pirates' stated intention to fight to the death against a flotilla of US Navy vessels adds cinematic elements to the story.

Popular Mechanics details the cat-and-mouse game being waged between maritime authorities and the Somali pirates. Meanwhile, the Guardian has an interesting take on how an entire underground economy has emerged in Somalia centered on maritime piracy. Truly, it is Afghanistan at bay. Here are some excerpts, though read the whole thing if you have the time:
The drama in the Gulf of Aden is the latest and most dramatic of 50 serious attacks on ships in this region in the past year. And in the dusty little fishing ports and towns that dot the coastline, an entire economy has been privatised by the overlapping criminal enterprises whose business is the smuggling of weapons and people, obtaining 'taxes' and protection fees from the foreign fishing boats that ply Somalia's waters, and preying on the yachts and cargo vessels that sail off its coast.

'It is pretty Wild West,' says Alixandra Fazzina, an award-winning photographer who recently spent time in Somalia's lawless ports documenting the activities of the criminal gangs for a book. 'Fishing and taxes on fishing used to be the country's biggest source of revenue. Now they can't even fish. There are no ice factories and no government. So the fishermen have turned to piracy and people and weapons smuggling.'

State writ does not run here. There is no attempt by Mogadishu to fine those illegally fishing in the Gulf of Aden. So sea militias grew up that imposed their own ad hoc fines and taxes, a process that has transformed into outright hijacking and an economy based on criminality.

Boatyards produce not fishing boats but vessels intended for smuggling and piracy. Fuel suppliers and merchants equip the boats. Restaurants have grown up to feed hundreds of hostages taken from the tankers and carriers sailed into the waters around Eyl. Officialdom from top to bottom in areas like the autonomous Puntland exists solely to oil the wheels of organised crime. 'Some of these organisations are quite sophisticated,' says Fazzina. 'They'll use their own CB radio networks to organise the laundering of their money.'

Eyl has become the modern era's equivalent of Tortuga, the historic Haitian base of the notorious Welsh pirate Henry Morgan. It suddenly bustles with the pirates' go-betweens, the accountants and middlemen and negotiators in their four wheel drives, each time a new captive ship is sailed in. Around £17m has been raised in ransoms in the past 12 months.

Most of the money, usually 10-20 per cent of that demanded by the hijackers, is moved quickly along the line to the so-called 'Big Fish' in the clans - in the government of the provincial capital, in Mogadishu and in the Somalian diaspora in Nairobi and Dubai where those behind the piracy are allegedly to be found.
TIME recently interviewed the pirate captain Sugule Ali who is currently demanding a $20M ransom for relinquishing control of the ship. His explanation for engaging in piracy is that fishing has become an unviable occupation, turning former fishermen into bandits of the high seas:
We were forced into this work," he argues, speaking from the Faina's bridge at anchor off the village of Hobyo. "We were fishermen. I used to work in the sea every day. But ships from other countries fish our coasts illegally, destroy our nets and fire on whoever approaches them. We were refused the right to fish. They even dump toxic waste. We couldn't work. So we decided to defend ourselves." Ali insists that piracy would stop if the pirates' fundamental grievances were addressed. "If the world stops stealing our property and harming us, we have a solution," he said. "We will stop the piracy and go back to our normal jobs."
UPDATE: Despite the headline-grabbing events related to Faina, Somalia "only" ranks fourth in the International Maritime Bureau's rankings of high risk areas in 2008 after Nigeria, Indonesia, and Tanzania. However, none of those other countries have degenerated to relying on maritime piracy as a main source of livelihood.
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Who's (Literally) Killing Indian Manufacturing?

♠ Posted by Emmanuel in at 10/05/2008 10:19:00 AM
Sometime ago, I audited a graduate-level course at the University of Birmingham on Political Risk Analysis (PRA). In a nutshell, the perspective taken in PRA is of a foreign investor determining, you guessed it, the political risks involved in investing abroad. From the course description:
Political risk analysis evaluates the political context in which political actors take into account not only government policies towards the economy, for example regulatory regimes, but also other potential risks such as political violence, corruption, organised crime, human rights abuses, and environmental risks. Actors in both public and private sectors must attempt to assess the political risks attached to a particular country, policy area, or both, when investing their resources in that region, country or policy area.
I don't mean to toot my alma mater's horn too loudly [honk-honk], but Brum is one of the few universities in the UK (and probably the world) which offers such a course. How likely is it that a Hugo or Evo or Vladimir will expropriate your investment? Like all investors, knowing whether you can recoup your money when times get rough is an important consideration.

What brought my PRA days back to mind were recent events in India that pose challenges to would-be investors. India's physical infrastructure is famously in need of improvement--its roads, ports, and airports have suffered from previous neglect. India's services-focused growth is partly attributable to associated difficulties in linking the country to the global supply chain. Something with much clearer PRA elements, though, is the country's continuing tradition of militant labor. A while back, I discussed how Ratan Tata's plant to produce the "one lakh car" in Singur was endangered by farmers accusing Tata in cahoots with the local government of unjustly taking away their land. It has now come to pass that Tata has written off its $350 million investment in the Singur plant and will look elsewhere. From the WSJ:
Tata's decision underlines a thorny issue for manufacturing investors in India: poor local communities -- sometimes backed by political or environmental activists -- are often suspicious of industrial projects planned for their regions, despite the promise of job creation and stimulation of local economies.

Although it has invested more than $300 million in its West Bengal factory, about an hour's drive from Kolkata, Tata said it had decided to relocate production of its $2,500 Nano minicar to another locale. The company said several Indian states expressed interest, but added that it hadn't yet selected an alternative site. The West Bengal site was expected to eventually generate almost 20,000 jobs...

Protesters were demanding that more than 300 acres of the 1,000 acre site be returned to farmers who were forced by the state government to give up land. "We don't see any change" to the opposition, Mr. Tata said. The relocation "was done for the well-being of our employees, safety of our contractors and vendors."
Not knowing all the facts on the ground, I cannot disallow the possibility that the land was indeed taken away in an unjust manner. However, given Tata's generally good CSR reputation and the seeming characterization of any industrial initiative in India as exploitative in the full Marxist sense, I am beginning to wonder if they're mainly cases of the "standing up for one's rights" or of something else. Here's a dead serious case in point - a manager for a foreign multinational was recently chased and killed by an angry mob:
The last moments of Lalit Kishore Chaudhary, chief executive of a multinational auto parts company in India, were filled with terror. On Monday, the quiet and dedicated 47-year-old businessman was hunted through Graziano Trasmissioni India’s plant on the outskirts of Delhi by an angry mob. His assailants had forced their way through the entrance gate with a truck to embark on what his company described as a hunt for white-collar workers.

“He tried to escape the mob by locking himself into one of the offices. The locked door was broken. He tried to escape again by jumping out of the window and was beaten to death at the very point he landed,” Graziano told the Financial Times.

For 10 years, the company’s factory in Greater Noida ran smoothly. The Italian multinational was part of a wave of foreign interest from Europe, the US and Japan that identified big savings in tapping Indian engineering skills. Now the plant is closed and the owners, the Swiss industrial group Oerlikon, are pondering whether to keep it that way.

The frenzied killing of Mr Chaudhary in an industrial zone has plunged the business community into shock. His murder by former employees armed with hammers and metal bars is sharply at odds with India’s image of opening up to foreign capital and non-violent [Gandhian, I presume] protest, whether political or industrial.

It also asks uncomfortable questions about India’s labour relations, striking a blow to a sector at the forefront of the country’s foreign investment drive. A torrent of disapproval has poured from prominent Indian business associations and people, including Nandan Nilekani, chairman of Infosys, the outsourcing company. Mr Nilekani said no dispute could be settled by “murdering an adversary”.

Others have expressed shock that a severe breakdown in law and order could take place in an industrial hub that is also home to LG, Samsung, Yamaha and Honda. “[Graziano] is not a high- profile company,” said Jayant Bhuyam, deputy director general of the Confederation of Indian Industry. “It’s not in the badlands stuck out in the country. It’s near the capital.”

By contrast, the killing has sown discord in the government. Oscar Fernandes, the labour minister, was forced to apologise for remarks in which he appeared to defend the actions of the rioters. His response that the attack “should serve as a warning for management” betrayed an antipathy towards foreign capital that lurks behind India’s transformation from a largely agrarian economy to a fast-industrialising one.

Kamal Nath, the commerce and industry minister and India’s trade negotiator, swiftly set about setting the record straight. Describing the violence as a “stray occurrence”, Mr Nath said it was “completely at variance with the Indian culture and tradition of peace”.

The police have arrested 136 people and are pledging to reveal on Tuesday the names of those charged with murder. But they face sharp criticism for failing to prevent Monday’s attack and being ill-equipped to tackle labour unrest...“There has been a big outcry by investors. If this is the state of affairs, they say, we should be quite worried. There are concerns that no foreign investment will come.”
The Italian government is now investigating the matter and the plant has since reopened. However, along with its weak physical infrastructure, these two incidences sow doubts about the viability of Indian manufacturing. PRA is important in knowing the probabilities that these issues will arise, with often dire consequences.

10/8 UPDATE: Tata has decided to move the Nano plant to Gujarat. According to Tata, production will not be delayed much in the process. From the Economic Times:
Tata Motors will take at least one year to construct the mother plant. Much of the machinery currently located in Singur will be moved to the new location at Sanand. “A lot of the assets will be relocated,” Mr Tata told ET earlier in an interview.

Mr Tata said he plans to stick as close as possible to his deadline for launching the Nano. Earlier, the Tata Group had said that it plans to launch the Nano in October-December 2008. It is possible that this might slip to January-March 2009, a senior Tata Motor official said. The first batch of Nanos will be rolled from ‘makeshift’ facilities located in Tata Motors’ existing factories in Pune and Pantnagar. Initial production volumes will be lower because of the delay caused by the events at Singur.
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New Labour's Last Stand: Mandelson Comes Home

♠ Posted by Emmanuel in at 10/03/2008 05:14:00 PM

The reaches of the credit crunch are engulfing the world. California faces the prospect of being unable to pay state workers due to tight credit and a lackluster rating to the tune of $7B. India's nascent consumer culture is taking a hit. Even Asia, the world's fastest growing region, is feeling the pinch. The French do everyone one better, naturellement, in the pessimistic scenario category by depicting a world on the edge of the abyss. So much for the subprime crisis being "contained"--or even being contained to America for that matter.

The British press is all agog that erstwhile EU Trade Commissioner Peter Mandelson is coming home to Blighty to try and revive the UK's economic fortunes as Business Secretary. This will be his third go-around as a cabinet minister To put things mildly, things have not gone very well for PM Gordon Brown since taking the reins of power from Tony Blair. Like Blair and Brown, Mandelson is, of course, one of the principal architects of New Labour (or whatever is left of it). Way back in 1994, Mandelson throwing support to Blair was instrumental in making the latter New Labour's standard bearer before Brown, causing Brown's continuing dislike of Mandelson.

Brussels is, in many ways, European political purgatory, a place to send friends of dubious allegiance or foes with excess ambition to in order to rid them from domestic politics. It is an indication of how bad things are that Brown is effectively recalling Mandelson from Brussels for what looks to be New Labour's last stand: if it doesn't get its act economic act together in the British public's eyes, the Tories look more than set to consign New Labour to the dustbin of history.

It's front-page news: the Telegraph, Times, Financial Times, Guardian, and Independent are all over it. So too is the BBC, among others. As Mandelson was twice a Labour cabinet member under Blair, resigning both times for controversial reasons, he is not exactly the most calming political choice. News of Brown's cabinet reshuffle is sort of drowned out by the continuing Mandelson / New Labour soap opera, but when the going gets tough, the tough get going. There are few remaining Labourites with a measure of clout with the Confederation of British Industry (CBI) and other business groups as Mandelson, so he is the last roll of the dice for Brown in attempting to shore up confidence in his economic management.

The US has in recent years been driven by a housing boom and excessive consumer spending, with the former fueling the latter via home equity loans and the like. There is likely no country which so mirrors the US in its political economy than the UK. Deflating housing bubble? Check. Slowing debt-fueled consumption as household finances hit the wall? Check? Highly developed financial infrastructure facilitating both? Check. It will be interesting to see what Mandelson can do to remedy the damage done. I wish him well, but like the US, I think the UK cannot avoid a long, hard spell after years of partying like there's no tomorrow.
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"WTO is Bad!" Battle in Seattle, the Movie

♠ Posted by Emmanuel in , at 10/02/2008 03:23:00 PM

I have finally gotten around to watching the movie Battle in Seattle (BiS), which dramatizes the titular event that occurred nearly a decade ago. I was a bit apprehensive before watching it as the film's reviews have been rather mixed. Indeed, its average score of 55 is just one point more than the toilet-humor laden Zohan. Given the weightiness of BiS's topic, I was rather expecting a more earnest treatment of the subject matter. My expectations were far from met. A common refrain of the press reviews is that the movie does not do much in explaining the workings of the WTO. Having watched the movie, I can now say that its faults are worse than that: its errors of omission in inadequately explaining what the WTO does pale in comparison to its errors of commission in tarring the WTO with far-fetched sins it couldn't possibly have committed.

The opening two and a half minute montage makes accusations against the WTO that are subsequently recycled throughout the movie without much examination. Among other things:

- the WTO harms the environment;
- the WTO harms organized labor (in the United States);
- the WTO harms those in poor countries;

In trying to make the WTO an all-purpose villain, this film begins its descent into incomprehension. Like a certain famous American's worldview, there are no ambiguities here: either you're with us (who love life values) or with the WTO. Plus, anything remotely related to trade is reason enough to tar the WTO, nevermind the lack of an apparent connection--sort of like tying the Iraqi invasion to the 9/11 attacks, for instance. The image above [click to enlarge] is taken from the movie as the narrator states, "despite the problems and the criticism, the WTO continues to grow." Let's examine some of these claims:

(1) It states small bananas growers (in the Carribean) were "crushed" by large corporations. This, of course, is in reference to the never-ending "banana wars" [1, 2, 3]. While it is true that Chiquita Brands has been one of the principal parties to this case, even more vociferous have been the continuing claims of poor Latin American countries like Ecuador, Guatemala, Honduras, and Panama. On what grounds is it just for the EU to maintain preferential treatment for ACP countries at the expense of these developing Latin countries also exporting bananas? Also, does the fact that another large corporation, Dole Foods, supported the ACP's position invalidate the Carribean countries' claim by associating with an evil multinational? The film's Bushian simplicity does it no favors. There are competing claims here by poor countries against each other that cannot be determined by a simplistic "anything concerning the WTO is bad" decision rule.

(2) Now we get to "False [Milk] Labels Kill Babies." Making it appear as if the WTO condoned false labeling that killed babies is pure fantasy. More importantly, no one else seems to have made a similarly wild accusation. Given that every sort of conspiracy theory appears on the Internet, that's no mean feat. Why do you need WTO wherewithal to sell mislabeled milk? Moreover, doesn't the WTO promote sanitary and phytosanitary standards (SPS) to minimize such incidences?

(3) Last in this image is "Infant Mortality Rate Increases due to Fraudulent Marketing." This refers to the still-ongoing controversy of Nestle marketing infant formula when health experts advocate breast feeding in the interest of infants' health. Again, this has virtually nothing to do with criticisms of the WTO. If you look at the picture, the caption itself declares powdered milk manufacturers started marketing milk in LDCs during the Seventies. Since the film at least gets something correct in stating the WTO was formed in 1995, how does it become embroiled here? Given a search engine, even my eight-year old nephew could debunk this piece of pure invention. (2) and (3) describe a major failing of this movie: given that there are so many controversies surrounding the WTO--many of them legitimate--why not discuss those instead of dreaming up unrelated criticisms?

Further demonstrating the film's ineptitude, even the attempt to depict these as Internet stories on a protest site circa 1999 fall flat. What self-respecting activist against global corporate takeover would have registered his or her site "http://www.infantmortality.com"? Shouldn't it be "http://www.infantmortality.org"?

The rest of the movie similarly does little to explain the workings of the WTO, although there are some attempts:

(4) About twenty minutes in, protagonist "Django" played by Andre 3000 of the rap group Outkast mentions the shrimp-turtle case as an instance of the WTO harming the environment. Of course, this superficial treatment ignores important details about the case. Poor countries such as India, Malaysia, Pakistan, and Thailand were the ones that brought the United States to the WTO's Dispute Settlement Mechanism to contest America not importing shrimp from countries where fishers did not use nets that had escape hatches for accidentally caught turtles as these nets were costly to LDC fishermen. Again spoiling the movie's simplistic blanket argument that the WTO harms the environment, labor, and poor countries, shrimp-turtle places (rich country) environmental regulations against the interests of poor countries, just as the banana case (1) pits the interests of developing countries against other LDCs'.

(5) Speaking of labor, "Django" also mentions a "Million working-class jobs outsourced" in reference to US labor. Again, there may be conflicting interests here: organized labor in America versus livelihoods for the poor in the developing world. Why is outsourcing so terrible if those who may gain jobs at their expense are persons of lesser means in poor countries? We get no intelligent discussion of this conflict; after all, the "WTO is bad," right?

The simple truth is this: the WTO could not be made into an all-purpose villain since the participants in the Battle of Seattle hardly represented a unified agenda. Rather, many worked at cross purposes. Organized labor is first and foremost about keeping jobs in America than about the environment or labor concerns in LDCs. In turn, those from developing countries--even way back in 1999--have been wary of labor and environmental standards being included in trade agreements as backdoor protectionist measures. After all, would any trade ever take place if these standards did not allow LDCs developmental leeway? From TIME even before the protests began:
The largest bloc, made up of 77 developing countries, stands virtually united against efforts by wealthier countries to influence environmental and labor laws in developing countries. As for human rights: "There's an Asian consensus that human rights should not be linked to trade," says economist M.G. Quibria of the Asian Development Bank in Manila. In the view of developing countries, trade-pact clauses involving labor and the environment amount to backdoor protectionism.

That makes it awkward for many U.S. protesters, who say they are out to help the Third World, not just clean up the planet, end child labor and promote human rights. Venezuela and Brazil successfully challenged as discriminatory a U.S. law that set stringent environmental regulations for refineries that make gasoline for export.
(6) The closing credits demonstrates this film's powers of invention: Did you know that the WTO was responsible for the war in Iraq? The filmmakers seem to think so [see image to the right]. Being something less than a dyed-in-wool conspiracy theorist (let me "think": maybe Iraq was attacked to become enmeshed into the WTO's webs of evil), I decided to check the WTO's membership rolls. It turns out Iraq isn't even a WTO member, and it hardly looks like it will become one soon.

I have listed only six clear mistruths, half-truths, and non sequiturs the film makes about the WTO. There are many more. As an IPE instructor, I do not believe that I should influence students in one direction or another: They should be able to figure out for themselves whether the WTO confers benefits or otherwise, and consider ways to make it function more fairly. I would do them no favors by inventing that the WTO condones mislabeled milk products, is complicit in the powdered milk controversy, or waged war against Iraq. Any student of mine who suggested any such inanity would get a failing mark straight away. I do not teach creative writing. My criticisms of the movie are on logical grounds, not ideological ones.

Near the end of the movie, Django tells his fellow protesters, "A week ago nobody knew what the hell the WTO was...now they still don't know what the WTO is--at least they know it's bad." It is no surprise that after watching this movie for an hour and a half, you probably won't know what the WTO is, either. Instead, you could have spent your time far more productively by reading backgrounders on the WTO from the organization itself on the pro- side and sites offering coherent criticisms like the Global Policy Forum (listed elsewhere on this blog) on the anti- side. Not only would you actually learn about how the WTO actually functions, but you would also be better equipped to make an informed opinion of the WTO's virtues or lack thereof. I am not the world's biggest WTO fan, having poked fun at its leadership and questioned its moribund state. That said, it would be far below me to try and profit by slandering the organization on tarted up and indefensible accusations.

Ultimately, Battle in Seattle explains the WTO as clearly as Reform School Girls explains the US prison system. If you want to know more about the organization, this is the last place to look.

10/21 UPDATE: Aside from the aforementioned indifferent critical reception, the movie's box office performance is next to negligible. After more than a month in limited release, this movie has yet to clear $1 million at the box office worldwide. Its take in America is barely $200,000. In addition to being inaccurate, Battle in Seattle is a critical and commercial failure.

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Will Asia Please Stop Feeding US Debt Addiction?

♠ Posted by Emmanuel in at 10/02/2008 10:35:00 AM
There's another interesting angle on globalization's pre-eminent economic relationship in the pages of the Financial Times. This story is familiar to virtually all: Asian exporters--especially China--helped keep the good times rolling in the US by providing inexpensive imports to America (lowering inflation) and lending it funds to indulge in a debt-driven spending binge. To make an analogy with drug prevention rhetoric, it often takes two to create a system of dependence. The US, of course, plays the role of the debt junkie, needing around $2.8B each business day in liquidity injections to fund its habit [aaaaahh]. OTOH, Asian exporters (and Mideast oilers) keep providing the US with needlesfull of, shall we say, the good stuff. This analogy, BTW, is quite good in explaining erratic US behavior.

America's funders have a lot at stake at the moment. As the FT article notes, these countries have agitated for the US to bail out the likes of Fannie Mae and Freddie Mac given that foreign holdings of agency bonds approach one trillion dollars. And now we have the matter of a $700B bailout that will ultimately be funded by the likes of the Chinese anyway, provided they are willing to buy more Treasuries. America would be best advised that this is no sure thing [1, 2]. Still, it begs the question better than in the Fannie/Freddie case: who exactly is bailing out whom? China, not the US, would be more accurately said to be bailing out troubled US financial institutions. Given that China doesn't really hold that many, if any, corporate bonds as compared to Treasuries and agency bonds, I think it would be best advised to stay away from US sovereign debt should the $700B bailout plan somehow clear the House.

My view has always been that things will just get worse for these countries if they mindlessly indulge American profligacy. America's addiction makes it a menace to itself and the entire world. Like with any other addict, the debt-addled Uncle Sam needs someone to impose cold turkey ASAP. Hence, the $168B economic stimulus package was quite frankly mindless, the $700B bailout witless, and plans to reduce interest rates Stateside brainless. Isn't it easy money care of foreigners that got America into trouble in the first place? It doesn't take an Einstein to figure more of the same will do nothing to cure what ails America.

Do view the entire article as it provides a concise summary of the main talking points as well as a video interview of Stephen Roach. Meanwhile, below are what I found to be interesting quotes from the perspective of Chinese commentators. This is rather gratuitous, but this is your country [show them an egg]...this is your country on oodles of foreign debt. Any questions?
Did America hang itself with Asian rope? I put this to a Chinese official last week and, quick as a flash, he responded: “No. It drowned itself in Asian liquidity...”

There has been a cautious reappraisal in parts of Asia too. “More people understand that America is not as great as it was 10 years ago,” says Shen Dingli of Fudan university in Shanghai. “This is not a time for China to be on a par with America. But the relative shift of the centre of gravity does bring China more confidence...”

US woes bounce back in other ways, too. In August, Japan recorded its first seasonally adjusted monthly trade deficit in a quarter of a century after shipments to the US slid 22 per cent. Net exports are not expected to contribute anything at all to Chinese growth this year. “China feels the same pain as America,” says Prof Shen. “It is not a case of: ‘Your loss is my win,’ but rather: ‘You lose, I lose...’ ”

Chinese citizens, whose consumption accounts for a measly third of national output – against 70 per cent in the US – could certainly spend more. But Beijing, which has already taken steps to prick the housing bubble, appears in no hurry to encourage reckless spending. Says Mr Fang: “I’m not sure you should encourage people to borrow in order to spend. That is what bankrupted the US.”
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