Government Motors, Peugeot's Would-Be "Saviour"

♠ Posted by Emmanuel in Americana,Europe at 2/29/2012 01:18:00 PM

Here comes a knight in rusty armour. It is unfortunate that GM Europe--the only part of General Motors whose vehicles I would remotely consider buying--is also unprofitable. Let's just say that the European auto market is quite competitive aside from being stagnant. Take, for instance, French automaker Peugeot-Citroen. Hemorrhaging cash at the moment and making cars that are not so desirable, it too is feeling the pinch of European economic slowdown.

The question becomes one of whether Government Motors (or more accurately its European money-losing subsidiary) can productively join up with Peugeot-Citroen. By supposedly enhancing their market power in buying shared components and other inputs together with the associated economies of scale, it is hoped that both can survive the European shakeout. That said, there are limits to restructuring in Europe where government and labour interests often preclude shutting down automobile plants altogether:

General Motors Co. plans to extend a $335 million lifeline to struggling French auto maker PSA Peugeot Citroën as part of a tie-up that each hopes will aid turnarounds at their struggling European car operations. GM is expected to take a roughly 7% stake in Peugeot as part of an effort by the Paris-based auto maker to raise cash through a share sale. Under the deal, expected to be disclosed as early as Wednesday, the two would jointly buy supplies, build engines and, potentially, entire vehicles in Europe and elsewhere.

Recently, GM and Peugeot have been arguing separately for the need to close excess factories in Europe. But government and labor officials have opposed large-scale job cuts. Peugeot's move to raise cash is seen as a sign the company is worse off than initially believed. "One can be excused for getting the impression that things have become a lot worse than the company has been saying over the last two weeks," Credit Suisse analyst Erich Hauser said. France's stock market regulator on Tuesday called for Peugeot to disclose its discussions with other auto makers.

Again, this tale of woe extends to both GM and Peugeot:

The move would be GM's most significant manufacturing alliance since its 2009 bankruptcy. The auto maker has tried European partnerships in the past with mixed results. GM paid $2 billion to Fiat in 2005 to dissolve a failed alliance. It has been more successful with targeted partnerships in the region, including ones to build commercial vans with Fiat and an engine venture with BMW AG. GM's operations in Europe are unprofitable, losing $747 million in 2011 and a cumulative $14 billion since 1999.

Peugeot recently reported its automotive division suffered a €497 million operating loss in the second half of 2011. The firm burned through €1.65 billion in cash for all of 2011 amid slowing demand for new cars and fierce competition in Europe's oversupplied auto market.

What you have here is essentially a tale of three money losers compounding each others' misery. Call it "The Story of Modern America." The debt-swilling US government still owns over a quarter of Government Motors which would have gone bankrupt if it were not for the intervention of this supposedly free-enterprise championing nation. (Nor will the feds be fully repaid, but that's another story.) Meanwhile, handout-addled GM is seeking to partner with yet another concern with similarly questionable financial standing and expects things to get better. Isn't American enterprise grand? One thing you can be assured of is that the ultimate losers from this process of serial money wastage will be future American generations while its government--the world's most indebted--throws away good money after bad on such diversions on the highway to hell.

But what the heck, GM #1!

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Thou Shalt Obey Thy Lord Mandy on Globalization

♠ Posted by Emmanuel in Europe,Governance,Neoliberalism at 2/28/2012 11:02:00 AM

On paper, I am not supposed to favourably regard Peter Mandelson, the third architect of the UK's third way along with Tony Blair and Gordon Brown. While I regard the latter two as rather odious at this point in time, I have yet to definitively suss why I remain a Lord Mandelson fan. Perhaps it's because his various machinations have ensured that he would never hold the UK's highest office--if he were such a brilliant schemer, then he would have become king instead of being exiled twice from British government.

And yet what a journey he's had! From being the EU trade commissioner to the de facto prime minister of the UK during the dying days of Brown's ill-fated time as PM, Mandelson can never be accused of being dull. I also find it remarkable that while Blair and Brown's underlings have subsequently bashed them to the high heavens, you don't see Mandy's acolytes doing the same. Perhaps the erstwhile Prince of Darkness commands loyalty through his actions.

Now, a few weeks ago Peter Mandelson came out swinging in his sort-of-retirement years against giving up on globalization in the pages of the FT. As you would expect, I was generally in agreement with what he had to say. Now, though, he's fleshed out more details in arguing that managing the social consequences via the third way has given way to the older question of defining the scope of globalization. In The Globalist, he begins by describing the age of high neoliberalism:

The two serious attempts to govern globalization in the first two-thirds of the 20th century — negatively through isolationistic, autarkic policies during the 1930s, and more positively through the Bretton Woods system between 1945 and the early 1970s — were both accounted to be failures. So we embarked on a third attempt — not to govern globalization as such, but to actively expand its reach.

The attempt at creating true governance structures was restricted chiefly to managing the social and economic consequences rather than trying to define and impose the desirable scope of globalization itself. To some extent this approach was intellectually underwritten by the IMF, World Bank and OECD, and in many — but not by any means all — of the economics departments and business schools of Western universities. In the Anglo-Saxon world, it simply became the conventional wisdom.

With the benefit of hindsight, Lord Mandy is backtracking and looks to salvage the more acceptable elements of contemporary globalization. All the while, better representation is necessary to improve the image of globalization:

Looking back, we can see that this approach did neither us, nor globalization itself, any favors. First, it was intellectually abstract and inflexible. In political terms, it often ignored the basic fact that preserving the conditions of open trade and open global markets is possible in a democracy only if we make those conditions sufficiently tolerable and beneficial that people do not vote to end them. Second, it oversold globalization, and ultimately made it harder to make a pragmatic case for openness.

It is not enough to pretend that globalization is simply irreversible and has to be tolerated. The reversals of the 1930s show that the direction of globalization can be changed by political and economic choices over which we have no shortage of control — if we choose to take them.

In the increasingly multipolar world in which we live, it is arguable that no single world view will emerge to define the way we manage globalization. But while the end of a world in which the West dictated the terms of globalization is not necessarily a tragedy, a world without a shared set of principles for managing globalization would be. I am not naïve about the prospects for global governance, but I would argue for new rules accepted by developing and developed countries alike, because "no rules" is not a sustainable option. 

It's good stuff from Peter Mandelson, who is honest enough to admit where policy shortcomings lay. For more, see a recent Institute for Public Policy Research (IPPR) publication that Mandelson helped in preparing about globalization.

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I [Heart] Empire: "Hong Kong Better Under Brits"

♠ Posted by Emmanuel at 2/27/2012 04:08:00 AM

Niall Ferguson probably cemented the fashion of extolling the virtues of British empire with his bestselling book from a few years back. While the British empire had its downsides alike slavery earlier on and occasional massacres of various peoples supposedly under the crown, it was, on the balance, quite "developmental." Or at least goes Ferguson's thesis on how the British empire set the stage for the modern world characterized as it is by enhanced trade flows.

Along this line of reasoning we have Hugo Restall penning a WSJ op-ed--the outlet gives away the author's orientation--that claims Hong Kong was better off as a British colony than as a special administrative region of the Republic of China. In many ways it echoes the worst fears many Hong Kong residents had about the 1997 handover. While some wealthier families obtained citizenship elsewhere (particularly in Australia and Canada which grant residency readily for those willing to invest a certain amount) to hedge against possible anti-capitalist tendencies of the incoming ruling class, most accepted the handover as fait accompli. 

This roundabout discussion brings us to the present time when many Hong Kong residents are complaining about the handpicked leaders chosen by the communist Party. While conveniently neglecting to mention popular current chief executive Donald Tsang, the op-ed carps about his unpopular predecessor Tung Chee-Hwa and Tsang's likely successor Henry Tang. Restall also fails to compare Hong Kong's economic performance under the British and Chinese. The latter have undoubtedly provided Hong Kong with much more additional business that complaints about mainlanders' increasing dominance are rife even as it has so much revenue that it doesn't know what to do.

Nevertheless, Restall provides a nuanced argument that skirts the comparison between a "democratic" British rule (which it wasn't) and an unfree Chinese one (which actually provides for representation, albeit in limited form). He begins with the benefits of colonial administration trying to appease a demanding populace:

The Brits created a relatively incorrupt and competent civil service to run the city day-to-day. [Former editor of the now-defunct Far Eastern Economic Review Derek] Davies' countrymen might not appreciate his description of them: "They take enormous satisfaction in minutes, protocol, proper channels, precedents, even in the red tape that binds up their files inside the neat cubby holes within their registries." But at least slavish adherence to bureaucratic procedure helped to create respect for the rule of law and prevented abuses of power. Above the civil servants sat the career-grade officials appointed from London. These nabobs were often arrogant, affecting a contempt for journalists and other "unhelpful" critics. But they did respond to public opinion as transmitted through the newspapers and other channels.

Part of the reason was that Hong Kong officials were accountable to a democratically elected government in Britain sensitive to accusations of mismanaging a colony. But local officials often disobeyed London when it was in the local interest—for this reason frustrated Colonial Office mandarins sometimes dubbed the city "The Republic of Hong Kong." For many decades it boasted a higher standard of governance than the mother country. Mr. Davies nailed the real reason Hong Kong officials were so driven to excel: "Precisely because they were aware of their own anachronism, the questionable legitimacy of an alien, non-elected government they strove not to alienate the population. Their nervousness made them sensitive."

Contrast them with the Chinese and their alleged role in steeping Hong Kong in cronyism:

Contrast all this with Hong Kong post-handover. The government is still not democratic, but now it is accountable only to a highly corrupt and abusive single-party state. The first chief executive, Tung Chee Hwa, and Beijing's favorite to take the post next month, Henry Tang, are both members of the Shanghainese business elite that moved to the city after 1949. The civil service is localized.

Many consequences flow from these changes, several of which involve land, which is all leased from the government. Real estate development and appreciation is the biggest source of wealth in Hong Kong, a major source of public revenue and also the source of most discontent. In recent years, the Lands Department has made "mistakes" in negotiating leases that have allowed developers to make billions of Hong Kong dollars in extra profit. Several high-level officials have also left to work for the developers. This has bred public cynicism that Hong Kong is sinking into crony capitalism.

I can see the Union Jacks waving and hear "God Save the Queen" playing in the background already as Restall calls for more democracy based on his nuanced argument:

Under the British, Hong Kong had the best of both worlds, the protections of democracy and the efficiency of all-powerful but nervous administrators imported from London. Now it has the worst of both worlds, an increasingly corrupt and feckless local ruling class backstopped by an authoritarian regime...

[D]emocracy is the only system that can match the hybrid form of political accountability enjoyed under the British.Mr. Davies ended his appraisal of colonialism's faults and virtues thus: "I only hope and trust that a local Chinese will never draw a future British visitor aside and whisper to him that Hong Kong was better ruled by the foreign devils." Fifteen years later, that sentiment is becoming common.

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Japan Ponders Limits of National Superindebtedness

♠ Posted by Emmanuel in Japan at 2/24/2012 09:23:00 AM

That Japan owes over twice its annual output has been a favourite storyline for assorted end-of-the-world-economy cultists in triggering the next round of global financial meltdown. Nevermind that such predictions have proven woefully inaccurate given the yen strengthening to all-time highs in recent months, but there are of course...concerns.

The main reason why Japan's economy has not keeled over despite such an onerous burden are well-understood (except to the aforementioned cultists): Persistent deflation makes it actually attractive for Japanese savers to buy its sovereign debt yielding next to nothing, coupled with a sense of duty to help the country out during these trying times. Unlike the United States where nearly half of all lenders are foreign, Japan has to be more concerned about appeasing domestic audiences to curtail such doomsday scenarios from coming true.

That said, solving this issue will involve probing deep-seated structural problems with their economy. It's like Japan's own series of nested dolls: How can you address deflationary pressures in the absence of significant economic growth? How do you generate economic growth with a shrinking population? How do you generate more revenues to not have to issue so many IOUs without economic growth? It's not an isolated issue of, say, raising the VAT rate but goes into why Japan Inc. no longer works as it did in its 70s and 80s heyday.

And now to a more realistic disaster scenario over national superindebtedness:

Capital flight, soaring borrowing costs, tanking currency and stocks and a central bank forced to pump vast amounts of cash into local banks -- that is what Japan may have to contend with if it fails to tackle its snowballing debt.Not long ago such doomsday scenarios would be dismissed in Tokyo as fantasies of ill-informed foreigners sitting on loss-making bets "shorting Japan"...It costs Japan half of the country's tax income just to service its debt.

Each year, Japan's debt level increases by more than the combined gross domestic product of Greece and Portugal. Yet Prime Minister Yoshihiko Noda's plan to double the 5 percent sales tax to 10 percent over the next three years is seen as far too timid to stop debts from piling up. The fact that bureaucrats openly discuss such disaster scenarios shows their concern that the public, politicians and even some people in financial markets do not take the situation seriously enough, and that the debt blowout will become a self-fulfilling prophecy if necessary steps, such as raising taxes, keep getting pushed back.

But to some economists who have followed Japan for years, the frustration is that the country has yet to solve its underlying problems of slow economic growth and stubborn deflation. As long as those conditions persist, it will be difficult to crawl out from under the debt burden.

 Hardest hit will be Japanese banks who hold a lot of JGBs, potentially posing "moral hazard" issues that would make the West's response to the global financial crisis look like small beer:

While officials stress it is too early for a definite contingency plan, there seems to be an agreement that financial institutions will be the hardest hit because of their big government bond holdings, and that the Bank of Japan will play a key role in shoring up the sector. "The most important thing, in the event of a crisis, is perhaps not trying to affect fund flows by buying government bonds in huge amounts, but to make sure Japanese banks aren't forced to sell en masse to meet day-to-day funding," one of the officials familiar with BOJ thinking said. "Once it becomes a banking sector problem, it's very hard to contain the damage."

In an event of a surge in yields, the Bank of Japan could flood money markets with cash the way it did after the March 11 earthquake and act as a market-maker for the bond market, matching bids and offers if they fail to meet, officials say. The finance ministry could also be forced to redeem bonds ahead of maturity to calm investors, says Yoichi Miyazawa, former vice finance minister and upper house lawmaker for the opposition Liberal Democratic Party. Miyazawa, who led work on the party's crisis plan, says the worst case scenario could involve bank bailouts and Greek-style austerity if debt servicing costs soared, threatening to eat up a big portions of revenues. "The government should show a concrete roadmap for rebuilding public finances, including the kind of reforms adopted by Greece, which involve painful belt-tightening, slashing welfare spending and boosting sales and other tax rates," he said.

Finance Ministry data confirms that banks, rather than the budget, would take the hardest, most direct hit. First, the 2012/13 budget plan is based on 10-year yields of 2 percent, giving the government some cushion considering those bonds are currently yielding less than half of that. Secondly, its simulations show adding 1 percentage point to borrowing costs would add 1 trillion yen to about 22 trillion in borrowing costs over the course of one year, rather than double them as some commentators warn, because the spike would only affect newly issued and rolled over debt. 

It all hinges on the continuing willingness of Japanese citizens to buy JGBs despite growing awareness of the risks involved:

What sets Japan apart from Europe's crisis-hit nations is that it borrows almost exclusively at home and with domestic savings of some 1,500 trillion yen ($19 trillion) it can do it paying less than 1 percent for 10-year bonds. Deflation and the yen's long bull run foster a "patriotic" home bias among households and institutions, turning private savings into quasi public money, always there and easily accessible. In addition, the central bank acts as a buyer of last resort for the market, taking up large amounts of government bonds both as part of its annual quota of more than 20 trillion yen and an asset-buying plan launched in 2010.

That explains how a nation with one of the lowest tax burdens in the OECD and a stagnant economy never seemed to have trouble rolling out hefty stimulus packages or subsidising social security. In fact, the system got so entrenched that bond sales are often reported as budget "revenue," not borrowing. 

Still, inertia favors this odd and ultimately unwelcome situation to continue in the absence of alternatives, or more specifically, attractive alternatives to domestic participants:

Budget arithmetic and demographics suggest that it will take another decade before Japan's swelling ranks of retirees will begin to run down their vast savings to the point where Tokyo will need to start borrowing more from overseas lenders.  The $10 trillion question is when that money or local investors' patience will run out.

"There's a very strong system in place where all the stakeholders benefit from how things operate now," says one official. The optimistic view is that until then the government can keep rolling over the snowballing debt with ease. "Japanese banks don't have anywhere else to invest, so park their funds in the JGB market. The BOJ supports this by accepting JGBs as collateral. The only thing that could trigger a bond sell-off would be a huge pull-out of deposits from banks, which is hard to imagine."

Also recall that in addition to having a sizable reserve pile of over $1 trillion, Japan has accumulated among the world's stashes of overseas investment holdings as a consequence of running current account surpluses for so long:

But soaring fuel imports since the Fukushima nuclear crisis drove the trade balance into deficit in 2011 for the first time in three decades and probably brought closer the moment when the current account will also fall into the red. Hefty surpluses have allowed Japan to accumulate foreign assets exceeding 300 trillion yen, making a nation with the most indebted government also the world's biggest international creditor.

It may still be quite some while till this whole economic sideshow comes to a grinding halt. On to Japan's national debt being 300% of GDP!

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PIIGs in a Blanket: IMF & Reverse Robin Hood

♠ Posted by Emmanuel in Credit Crisis,IMF,Southeast Asia at 2/23/2012 11:07:00 AM

I've often harped on the idea that Europe's troubled PIIGS nations shouldn't be receiving IMF funding since the nature of their woes do not primarily deal with balance-of-payments woes the institution was meant to address. Greece simply borrowed too much. Ireland overcommitted to guaranteeing its banks' viability without fully understanding the enormity of the sums they put themselves on the hook for. And so on and so forth for the others. Given that financial concerns from these concerns could exchange their euro-denominated (demoninated?) sovereign debt for euro currency at the ECB, albeit controversially, they largely had no trouble availing of the foreign currency needed to survive, either.

Another line of criticism many commentators have had is the fairness of it all. PIIGS nations are developed, whereas more and more IMF funds come from developing ones. Aside from the rationale of rescuing nations on grounds arguably outside of the mandate of the IMF, there remains the problem of the IMF being a Western power dominated institution. Continuing the unspoken tradition of having a European IMF head did not reflect well for an institution now being perceived as the "EMF" since nearly half of all its lending now goes to troubled European states. It's the "reverse Robin Hood" of the IMF taking from the poor to give to the rich.

Which brings me to the current post. Just today, I covered central bank independence (CBI) with my students in comparative political economy class. (Yes, it's a somewhat dry topic judging from their interest, but an important one nonetheless.) To keep up to date, I visited various central banks' websites. Thus, I was astounded that the Philippines was now lauding its supposed turnaround from being a longtime IMF borrower to an IMF lender. While this change may reflect improved economic conditions particularly since the Asian financial crisis, I remain wary. While there is some gloating involved--you've come a long way, baby and all that--I believe it's not only a travesty of economic justice for reasons given above but also a political boondoggle on the country's part. In particular, the Philippine central bank boasts that it will in time give more to the global financial crisis New Arrangements to Borrow (NAB) whose most notable political-economic feature is that contributions are not allocated additional voting rights. From the press release:

The Philippines’ long-standing relationship with the International Monetary Fund (IMF) has evolved from being a prolonged user of Fund resources to a stronger partnership marked by the country's contribution to collective efforts in preserving the stability of the international monetary system. In 2010, the Philippines, through the Bangko Sentral ng Pilipinas (BSP), became a participant to the Financial Transactions Plan (FTP) of the IMF. The FTP is the mechanism by which the Fund finances its lending and repayment operations through a transfer of foreign exchange from members with strong external position to borrowing members. The Philippines holds a creditor (or reserve) position in the IMF through its participation in the Fund’s FTP. A member is said to have a creditor position in the Fund when the latter has used the holdings of the member’s currency to provide financial assistance to other members. Such use of a member’s currency is remunerated, i.e., earns interest and continues to be part of the country’s international reserves.

By virtue of their participation in the FTP, emerging market economies like the Philippines have joined international cooperation efforts to mitigate the spillover effects of Europe’s sovereign debt crisis by enhancing global financial safety nets. As of 31 December 2011, the Philippines has made available to the Fund through a currency exchange arrangement SDR163.8 million or about USD251.5 million. More than half of these funds were disbursed by the IMF to European countries such as Ireland, Portugal and Greece in an effort to address the financial crisis impacting the European economic zone. Most important, the country’s continued participation in the FTP will pave the way for the BSP’s admission in the New Arrangements to Borrow (NAB) facility of the IMF, a credit (lending) arrangement between the IMF and member countries or institutions which aims to forestall or cope with difficult situations that could impair the international monetary system.

The participation in the NAB would be a significant step in strengthening international cooperation. This would also demonstrate the BSP’s strong commitment to global efforts to help address threats to the international monetary system. The Philippines’ participation in the FTP marks a transition in the country’s relationship with the IMF. In 2006, the BSP prepaid all outstanding debt from the IMF which triggered the country’s early exit from its Post-Program Monitoring Arrangement and concluded the country’s use of IMF resources after nearly four and a half decades...This strong external payments position paved the way for the Philippines' entry into the creditors' list among the Fund members. 

The important thing to remember is that there are several more developing countries other than the Philippines that find themselves in this same "reverse Robin Hood" situation contributing to the IMF. There is an increased financial contribution, but where's the increased political clout--especially with regard to the NAB? While the Europeans are certainly not doing so well economically, their influence remains in both how IMF funds are used as well as how IMF leadership is selected. (I hope things will change at the World Bank, though.) The more things change, the more things stay the same, eh?

UPDATE: Also see the IMF's criteria on how it selects members to finance IMF transactions. Again, it's a double-edged sword for the likes of the Philippines. While some may see it as a compliment to be selected by virtue of one's financial position, the fairness element is sorely tested at the present time.

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Onshoring--You Macho Enough to Make in the USA?

♠ Posted by Emmanuel in Trade at 2/22/2012 09:02:00 AM

I have to run so this will be a quick if interesting one: Remember during the 2004 American presidential elections when John Kerry was inveighing against outsourcers with talk about "Benedict Arnold corporations"? What we now have is an interesting Reuters article that takes this line of argument to its (il)logical conclusion.  

In this version, the flight of "lemmings" or the exodus of Benedict Arnold corporations has largely run its course. What you have instead are many firms finding that vertical or horizontal de-integration is more costly than they thought, hence many are locating more of their enterprises back in the good ol' US of A. In many ways it's an archetypal application of transaction cost theory in which the erstwhile offshorers (that's "job killers" to you US union types) have found that the costs in terms of losing oversight or coordinating with those in other time zones, different cultures and of varying educational backgrounds is more trouble than they're worth:

Big U.S. manufacturers moved their production out of the country too quickly over the past decades and now see a competitive advantage in building up their footprints back home, top executives said on Monday. The chase for lower-paid workers drove the migration, which resulted in employment in the U.S. manufacturing sector falling by 40 percent from its 1980 peak.

But big companies including Boeing Co and General Electric Co are now finding that the benefit of lower wages can be offset by higher logistics and materials costs. "We, lemming-like, over the last 15 years extended our supply chains a little too far globally in the name of low cost," said Jim McNerney, chief executive of world No. 2 planemaker Boeing. "We lost control in some cases over quality and service when we did that, we underestimated in some cases the value of our workers back here." McNerney spoke at a Washington event organized by GE aimed at promoting the competitiveness of the U.S. economy. The nation has been slow to recover from a brutal 2007-2009 downturn and high unemployment -- 8.3 percent in January -- stands as one of the main barriers to a brisker recovery.

Boeing in particular ran into extensive delays in the launch of its 787 Dreamliner aircraft, handing off much of the manufacturing responsibility to outside suppliers, leaving the launch of the fuel-efficient aircraft some three years behind schedule. "You are going to see more (manufacturing) come back to the United States, and that's in part for business reasons and in part because we want to be good citizens," McNerney said.

Unsurprisingly, GE's head honcho Jeffrey Immelt--a talented fellow, no doubt--figures big in this story alike the one concerning funding the Ex-Im Bank as head of Obama's industrial input team:

The nascent resurgence in U.S. manufacturing -- which added 50,000 jobs in January -- has caught the attention of the White House. President Barack Obama, to whom Immelt is a top adviser on jobs and the economy, singled out the sector in last month's State of the Union address as an area where he would promote tax breaks in hopes of generating more jobs. Noting that GE currently generates about 60 percent of its revenue outside the United States and that some 70 percent of the orders in its backlog are from abroad, Immelt said that multinational manufacturers need to add jobs both at home and overseas if they are to be competitive. 

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Pro Death: US Congress Ponders Aborting Ex-Im Bank

♠ Posted by Emmanuel in Americana at 2/21/2012 10:37:00 AM

A running thread throughout this blog's history has been that Americans are not the most cosmopolitan of people. Witness, inter alia, the racist-protectionist treatment of Dubai Ports World, the inability of 90% of their youth to find Afghanistan on a map of Asia despite their government squandering untold hundreds of billions in that "nation building" fiasco, or their veep's near-total incomprehension of what the US owes other people. I don't mean to rub the point in, but I often find that foreign bloggers like myself have superior general knowledge of American institutions than many Americans themselves. Largely insulated by two big oceans, the instruments of US foreign policy are often better known to those who've witnessed them firsthand than the blithely incurious inhabitants of the US.

Today's post concerns the United States' Export-Import Bank. Alike the World Bank's International Finance Corporation, it too promotes investment abroad, albeit by American corporations including SMEs. The website blurb briefly describes its functions well:

The Export-Import Bank of the United States (Ex-Im Bank) is the official export credit agency of the United States. Ex-Im Bank's mission is to assist in financing the export of U.S. goods and services to international markets.Ex-Im Bank enables U.S. companies — large and small — to turn export opportunities into real sales that help to maintain and create U.S. jobs and contribute to a stronger national economy.

Ex-Im Bank does not compete with private sector lenders but provides export financing products that fill gaps in trade financing. We assume credit and country risks that the private sector is unable or unwilling to accept. We also help to level the playing field for U.S. exporters by matching the financing that other governments provide to their exporters.

Ex-Im Bank provides working capital guarantees (pre-export financing); export credit insurance; and loan guarantees and direct loans (buyer financing). No transaction is too large or too small. On average, 85% of our transactions directly benefit U.S. small businesses.
With more than 77 years of experience, Ex-Im Bank has supported more than $456 billion of U.S. exports, primarily to developing markets worldwide.

Now, an innate American fixation is needlessly blowing stuff up. Consider Afghanistan and Iraq. Combine this inbred violence with gross negligence of international institutions and you often have interesting results. Witness American lawmakers' serial reluctance to pay their share of UN dues despite it being headquartered in New York. Ditto for the IMF and World Bank in Washington DC. Especially now that the US is in dire financial straits, one thing that may bind the left and the right is cutting off support for bodies that have secured America's place in the world (for better or worse).

And so it is with the Ex-Im Bank: despite not featuring much in the headlines Stateside for reasons given above, nearly everyone else familiar with foreign investment trends worldwide should know of it. Yet despite many American manufacturers lauding the role the Ex-Im Bank plays in facilitating foreign investment, we return to the problem of inward-looking lawmakers not really appreciating the same. Thus it is currently engaged in an appropriation fight that pits the remaining American lawmakers with an internationalist outlook against rational choice theory acolytes who do not really understand the difficulties faced--especially by SMEs--in conducting business abroad:

General Electric Chief Executive Jeffrey Immelt on Monday defended the U.S. Export-Import Bank against charges the export-facilitating lender is "corporate welfare" and should be shut down. "It's not really corporate welfare to put us on the same playing field that our global competitors are on," Immelt said during a panel discussion on the future of American manufacturing with Boeing Chairman Jim McNerney and Dow Chemical Chairman Andrew Liveris.

The Export-Import Bank is facing a tough reauthorization fight in Congress. Immelt, who also heads an outside economic advisory council for President Barack Obama, said the United States needed the nearly 80-year-old bank to compete against the European Union and China in global markets for aircraft and other products. "If you're trying to sell a Boeing 737 MAX with GE engines in Africa, you've got (to compete against) a fully subsidized European superstructure and Chinese bank financing...I think things like Exim are ways that we can level the playing field," Immelt said.

The usual suspects are behind this "starve the foreign beast" lobbying. Also note its increased role in a world where export finance from private sources has thinned:

The conservative Republican group, Club for Growth, which is influential with members of the Tea Party movement, has called on Congress to kill Eximbank, which provides direct loans, credit guarantees and other financial instruments to support U.S. exports. "The Export-Import Bank is a prime example of corporate welfare that should have been eliminated years ago," Club for Growth President Chris Chocola said on January 31. "By picking winners and losers, politicians and bureaucrats are distorting trade flows. It's time to end the Eximbank for good."

The bank has played an increasing role in supporting U.S. exports since Obama took office. That's largely due to the lingering effects of the global financial crisis, which dried up other sources of export financing. But Obama's goal of doubling exports in five years has also increased the bank's activity. After two back-to-back record years, Eximbank's total credit exposure is now more than $90 billion, close to the $100 billion limit set by Congress. Some lawmakers want to increase the exposure cap to around $135 billion as part of the bank's proposed reauthorization.

In a letter last week to congressional leaders, the National Association of Manufacturers said it was vital that Eximbank be reauthorized for four more years before its current short-term extension expires on May 31. "The Eximbank is the only tool American manufacturers have to counter the huge sums of export financing - many hundreds of billions of dollars - that other governments provide their exporters," NAM Vice President Frank Vargo said. "If American manufacturers lose access to the Eximbank, our ability to compete globally will be severely curtailed." 

So I find myself in the odd position of agreeing with NAM which, characteristically, is one of the most vehement opponents of other countries investing in the US. Nor am I keen on the "everyone else is subsidizing the bejesus out of their manufactures, so why can't we?" argument, but still. These are strange times, indeed.

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Ranking World's Largest Container Port Operators

♠ Posted by Emmanuel in Economic History,Trade at 2/20/2012 08:58:00 AM

Among my most searched-for posts over the years this blog has been in operation have been those concerning the world's busiest ports [1, 2]. Truly, one of the underappreciated facets of globalization has been the expansion of facilities to standardize shipping merchandise throughout the world. By making containers identical to each other, loading and unloading massive amounts of goods has been made possible.

However, an even more underappreciated corollary concerns the rise of container terminal operators. Just as airlines used to be nearly the exclusive preserve of flag carriers throughout the globe in the not-so-distant past, most of the world's major ports used to be run by national port authorities. However, lacking any comparative advantage in handling goods shipments, many have since outsourced this activity to commercial container terminal operators which have accumulated expertise over the years in this specific endeavour.

Accordingly, a cursory look at the world's top terminal operators yields no surprises. (This compilation was prepared by the folks at Hofstra U.) At the top of the list is PSA International. formerly known as the Port of Singapore Authority. Over the years, Singapore's port has been at or near the top of the charts in container throughput as measured by twenty-foot equivalent units (TEUs) handled. In other words, its local expertise has readily been transferred to operating others' ports as nearby as India or as faraway as the UK.

In second place is Hong Kong multibillionaire Sir Li Ka-Shing's flagship enterprise, Hutchison Whampoa. While some claim that it is the world's largest port operator based on container handling capacity, the above chart is rebalanced to account for the fact that a fifth of Hutchison Whampoa is owned by PSA (hence-the measure "equity-based throughput"). Nevertheless, Li's vaunted business chops are once more evident in how he began his involvement in this business just as global merchandise trade volumes shot upwards

At a more than respectable third place is Dubai Ports World, perhaps known to most for bring forced to divest in America, where anything vaguely Middle Eastern-sounding has terroristic overtones to a lot of politicians and regular Joes. Although it got its start in the eponymous UAE port city, it has expanded largely through acquisitions alike that of the British P&O which then managed several US ports. Despite "national security" claims masquerading as protectionism--I don't recall any Yanks complaining about foreign port management when the British were in charge--such racist-protectionist thinking is embarrassingly typical of many US lawmakers and their hick constituencies.(For instance, then-Senator Barack Obama said "we're not allowing our port security to be outsourced to foreign governments" which is strictly not accurate.) Think about it: what sort of idiotic port operator would risk losing so much business by facilitating the transfer of WMD and other such supplies?

That aside, there is also greater concentration evident in the business being handled by these large conglomerates as in other lines of business. The following write-up also offers a way of distinguishing the method they use to rank these concerns:

The importance of port authorities in directly managing terminals is in decline, particularly in view of the emergence of global port holdings. This is mainly the outcome of deregulation of port management in a number of countries, which permitted the emergence of global terminal operators. By 2001, global terminal operators were controlling 35% of the port terminals and 42% of the containerized throughput. Ocean carriers accounted for 19% of global terminal ownership.

Since terminal operators have various stakes depending on the concerned terminal, equity-based throughput is commonly used to measure the respective amount of containerized traffic they handle. For instance, two terminal operators may have respective stakes in a terminal of 75% and 25%. If that terminal handles 100,000 TEU per year, then 75,000 TEU will be attributed to one terminal operator and 25,000 TEU to the other.

By using such a measure, PSA is the world's largest terminal operator, even if HPH, DPW and APM have more terminals in their portfolio. Actually, PSA owns a 20% stake in HPH, which from an equity-based throughput perspective conveys traffic handled by another terminal operator. The top ten terminal operators control an increasing share of the world’s total container handlings: 64.6% in terms of total throughput handled in 2009 compared to 41.5% in 2001.

As with most things, no news from port operators is good news since they get the job done with a minimum of fuss. But unfortunately, it also may mean that their good work is underappreciated--including that of Dubai Ports World

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Egypt's Beer- & Bikini-Approving Muslim Brotherhood

♠ Posted by Emmanuel in Credit Crisis,Middle East,Travel at 2/19/2012 07:34:00 AM

I suppose that attracting tourists is generic task for governments the world over nowadays. There is also a certain amount of homogenization involved in tourism with providing amenities that punters now expect unless you're offering ecotourism or frontier tourism options where roughing it out is part of the attraction. At the current time, Egypt's Muslim Brotherhood is facing pressures too familiar to troubled nations in terms of generating funding during a time of crisis. It has already (cautiously) approached the IMF in search of a (highly improbable) conditionality-free loan.

However, aside from being made to comply with the strictures laid down by foreigners alike IMF officials, a Muslim fundamentalist organization also needs to deal with...moral impediments to spinning cash. Tourists in particular are a noisome lot, prone to binge drinking and displaying much flesh in public--strongly disapproved of by religious authorities perhaps, but whose foreign exchange is most welcome especially at this point in time.

Accordingly, the WSJ has an interesting feature on the bourgeoisification of the Muslim Brotherhood. While there are certainly lots of old school elements in positions of leadership keen on introducing the hardline on this sort of moral decay, there too is an up-and-coming generation that is more realistic about what needs to be done to bring in the punters from abroad. Meet the Arab world's version of Clinton's dictum that it's the economy, stupid:

Hard reality is steering that transformation. Confronted with a badly sinking economy, the Brotherhood doesn't have the luxury of harping endlessly about Zionist conspiracies, American hypocrisy, or bikini-clad tourists—not if it wants to put Egypt back together again.

Tourism revenue dropped by at least one-third since the uprising, according to government statistics. And billions of dollars of annual foreign investment—which peaked at $13.7 billion in 2007—were almost entirely choked off. "Egypt is running smack into an economic wall," said Karim Sadek, a managing director at Citadel Capital, a Cairo-based private-equity firm.

A Gallup poll conducted between April and December of last year showed 54% of Egyptians placed jobs and economic development as their top priority, while less than 1% cited implementation of Islamic law. The results were consistent across all political parties, even Islamist ones. "Their supporters want the economy fixed, not religious solutions," said Dalia Mogahed, head of the Abu Dhabi Gallup Center, which conducted the poll.

And whom else would they talk to other than representatives of global capital:

The Brotherhood has received multiple delegations of foreign investors, including J.P. Morgan Chase & Co. and Morgan Stanley. The Brotherhood is meeting with executives from leading U.S. corporations that operate in Egypt, including oil and gas producer Apache Corp., Coca-Cola Co., General Electric Co. and General Motors Co. The meetings are part of a broad, tentative rapprochement between the West and the Islamist forces coming to power as part of the Arab Spring.

Advocates of engagement with the region's Islamists have maintained that integrating these movements into politics is the surest means of moderating them, and now that thesis is suddenly being tested on a broad stage. 

As the post title mentions, the morals policing squad has been muzzled for now by the dictates of attracting foreign exchange:

One concern was what the Brotherhood's Islamist agenda might do to tourism, an industry worth $13 billion a year to Egypt and employing 11% of the work force. During the recent campaign for parliament, some Brotherhood candidates advocated banning alcohol sales and forcing Western tourists to cover up on Egypt's beaches.

When Essam el-Eryan, a member of the movement's leadership bureau, met with an influential Egyptian business association in January, he was bombarded with worried questions about the future of tourism in Egypt, according to several people present. A few weeks later, in early February, Mr. Eryan met with tourism operators. He had a surprising message: "He said very clearly: beer and bikinis are OK," a businessman who attended recalled.

Mr. Eryan couldn't be reached to comment. No one believes the Brotherhood is suddenly pro-bikinis and beer. But it is hard to find a member willing to publicly denounce such vices nowadays. "We can't tell people how to dress when they can't put food in their stomach," said Mr. Haddad. 

Elsewhere this article discusses whether this compromise is temporary. That is, if and when Egypt regains its financial footing, will concessions to Eurotrash and other denizens of beach culture be curtailed? At the moment, though, let the fat guys in Speedos (and their female equivalents) be on Sharm el Sheikh.

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3 Cheers for Austerity: Iceland is Investment Grade

♠ Posted by Emmanuel in Credit Crisis,Europe at 2/18/2012 04:03:00 PM

Well here's a just reward for a nation sanely adjusting to the age of austerity. While no longer AAA USA is busy gorging on yet more costly giveaways costing hundreds of billions of dollars--it's an election year, duh--another of the countries hardest hit by the 2007/08 global financial crisis is finding its footing back to safer ground.

Hard as it is to believe, Iceland has recovered sufficiently by reducing both its massive deficits and its outsized financial services industry. As a consequence, Fitch's has just rehabilitated Iceland's credit rating to investment grade:

As the first country to suffer the full force of the global financial crisis, Iceland successfully completed a three-year IMF-supported rescue programme in August 2011. Despite some setbacks along the way, the programme laid the foundations for renewed access to international capital markets in mid-2011 and an encouraging rebound in economic growth to 3% for 2011 as a whole. Flexible labour and product markets and a floating exchange rate have facilitated the correction of external imbalances and contained the rise in unemployment, while the financial system has shrunk to one fifth of its former size.

Iceland has been among the front runners on fiscal consolidation in advanced economies: the primary deficit has contracted from 6.5% of GDP in 2009 to 0.5% in 2011 and Iceland appears to be on track to attain primary fiscal surpluses from 2012 and headline surpluses from 2014.

Fitch believes that gross general government debt may have peaked at around 100% of GDP in 2011 (excluding potential Icesave liabilities); net debt is significantly lower at around 65% of GDP, reflecting appreciable deposits at the Central Bank (CBI).

And, wonder of wonders, capital controls have also been implemented that have helped Iceland:

Capital controls continue to block repatriation of USD3bn-USD4bn of non-resident investment in ISK-denominated public debt and deposit instruments. Fitch acknowledges that Iceland's exit from capital controls promises to be lengthy, given the underlying risks to macroeconomic stability, fiscal financing and the newly restructured commercial banks' deposit base.

While the American debt lovers continue to pile up the IOUs, it seems saner nations understand that there is no such thing as a free lunch. As the US external deficit explodes upwards together with its fiscal one, we've seen their movie before. Fortunately, Iceland and a few others do not care for a second showing. For all their shortcomings, credit rating agencies have the general directions of Icelandic and US economies sussed out.

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