The Reality of Global Services

Steven Roach, Brad Delong and others often speculate about the long term impact of the growing tendency towards globalisation in the services market. In this sense India and China can be seen as twins with China picking up a sizeable chunk of the planet's industrial needs and India offering the services, especially across the English speaking world. The issue may well turn on the question of relative factor endowments - both countries being extraordinarily rich in labour, although in each case with different characteristics - but it may also be a question of who can attain the required critical mass and realise the networking economies of accumulated expertise and concentration. In both cases the sheer magnitude of the labour force makes strategic concentration much more viable than in many of the other developing countries. Cultural factors will also undoubtedly play a part. But in any event, watch out because the supply lines that configure the global economy for the coming century may well be being laid right now. As an illustration, this piece from India brings out nicely what is actually happening on the ground in the global services area.

Voicing concern over potential job losses in the United Kingdon, Azim Premji chief of IT major Wipro said a number of large British corporations, including HSBC, Royal and SunAlliance, are heading to India and the Far-East to open call centres and in search of cheap skilled labour. Aviva, the world's seventh-largest insurance group, is just the latest company to announce plans to cut jobs in the UK in order to open a call centre in India (Mumbai). Premji said in an interview published on Friday that: "This is an irreversible trend. It's not a question of if it happens, but how fast, and how quickly the countries that are most exposed to the trend react to it. Those that don't adapt to reflect a competitive global cost model will suffer. I'm getting very worried about the potential job losses in the UK. But Britain is not the most vulnerable when you consider France and Germany, with their economies dominated by trade unions."

Fidelity Investments, UK's biggest retail fund manager, has also announced plans to move a chunk of its UK back-office operations to Delhi. The company said it would start expanding its Delhi office by "several hundred" staff in the middle of this year. Paul Kafka, executive director of Fidelity, estimated that the company would save about 50 per cent on overheads by shifting back-office and clerical tasks to India. Initially Delhi will service Fidelity's UK, continental European and Asian markets, although this will, in time, be expanded to include all of its worldwide markets. However, unions are proving the most resistant to change. Prudential's decision last year to shift 850 back-office jobs from Reading in the UK to Mumbai was described by Amicus, the private sector union, as a "despicable act." Premji, who is planning to take his company to the top echelon of the world's computer services industry, said: "However harsh it may seem, we all live in a very competitive world. It's like that in every industry. "It's reasonable to expect a 30 per cent cost discount if you move a function to India. Sometimes we stake a contract on that premise, and we can make that commitment up front." He said, "Possible areas for outsourcing are theoretically unlimited with Wipro already managing call centres, human resources, financial administration, accounting, credit card renewal and marketing. "Among its clients are Thames Water, Friends Provident, Deutsche Bank and the Scotish Parliament." Although cost is the main reason why companies head east, Premji said it was not what locks them in. One of his favourite mantras is "people come to India for cost, and they stay in India for quality." The 4,000 staff employed by Wipro's outsourcing division are graduates with commerce degrees. "Go to an American call centre and you'll find that many of the people there have never even finished high school," Premji said. "India produces 230,000 engineers every year, out of a total of 1.5 million college graduates. I can't see a situation where we will ever be short of skilled young labour."
Source: Rediff.com
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Two Views on the Doha Round

It is an obvious truism that how you feel about something is often a result of where you are looking from. Below I post the example of two contrasting views concerning proposed Doha round changes to agricultural tarrifs and farm subsidies, one from Japan and the other from India. Those who are opposed to globalisation in itself will doubtless find here yet more material for criticism. Those, like me, who are convinced of its potential benefits, can and should note that the process in reality is not unproblematic. India has an enormous problem of rural poverty that cannot simply be waived away overnight. It is, however, extremely encouraging to find that the need for change is accepted in principle, and that the Indian economy is becoming more and more open. The European and Japanese case is rather different, tarrifs and subsidies have been used for far too long as a means to preserve activities which often have little economic (but plenty of political) rationale. Change will come, but it is a pity that in the richer economies, where the possibility of gradual change has long existed, things were not resolved earlier. Now the process may be more painful since - on this and many other fronts - reforms will be introduced against a far less favourable economic backdrop.

Thousands of Japanese farmers rallied Saturday to stop ministers huddled at a World Trade Organization meeting in Tokyo from approving a proposal to slash tariffs. "We are going to send a clear message to the ministers that they must protect Japanese farms,'' Kazuyoshi Fujita who represents agricultural and consumer groups told a crowd of about 8,000 people gathered at a Tokyo park. "Without food, how can people live? Without rice farming, how can Japan survive?'' Delegates from the WTO and 22 member economies are meeting in Tokyo to try to hammer out an agreement on agricultural talks by the end of March, as part of the latest round of WTO global trade talks that began in Doha, Qatar in 2001. The talks Saturday focused on a proposal from former Hong Kong Trade Ambassador Stuart Harbinson, the chair of the WTO farm negotiations, to reduce tariffs by an average 60 percent in five years, reduce subsidies and raise import quotas, officials said. Farmers say Harbinson's proposal would be devastating for Japanese agriculture, which is far more expensive than American agribusiness and the rest of Asia. Japan, which imports 60 percent of its food, protects its rice farms with a 490 percent tariff on foreign rice. "We are fighting hard against the proposal because Japanese farms will be destroyed,'' 58-year-old farmer Yasuhiko Matsunaga said standing among colorful banners that said, "Rice is No. 1.''
Source: The Star Online
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The World Trade Organisation draft proposal on agriculture have come as a shot in the arm for developing countries with many of those attending the mini-ministerial in Japan terming it a small victory, and indicating that it addressed some of their long standing objections related to opening up the farm sector. The latest draft by the chairman of the WTO Committee on agriculture Stuart Harbinson proposed that the developing countries could gradually cut customs duty on agri-products over a negotiated period, and continue with other measures of state subsidy and extraordinary support. But it has also come as something of a jolt to many of the developed countries, including Japan and European Union, which have opposed any drastic reduction of farm subsidy. Delegates from developing countries, including those from India, Kenya and Nigeria said that the outcome could be viewed as a small victory for the strong stand taken by the developing countries at Doha Ministerial gathering against opening up of their agri-market without addressing the problem of the prevailing social conditions. Though India welcomed the draft modalities giving concessions on the state subsidy and special product exemption front, it indicated it would oppose the reduction in the tariff structure as proposed within a period of 10 years, official sources said. The developing countries consider the draft as an important document as it has attempted to take on board the differing views of three major trading blocks - CAIRNS, EU and the developing countries - over the contentious issue of market access in agriculture sector. The CAIRNS countries - including US, Australia, New Zealand, Malaysia, Indonesia, Brazil, Thailand and Canada - being agri-export countries, advocate free market access. Many of these countries have hidden subsidies to boost their agriculture sector. The EU, which gives huge subsidies to the agriculture sector, supports market access but does not agree to link this to a reduction in subsidy. Developing countries fear that their markets will be flooded with products from other countries, which are cheap due to massive state support, thus causing unrest and social tension among the population dependent on this for their livelihood. Explaining the Indian position, the official said 65 per cent of the Indian population was dependent on agriculture and the government views this sector as a means to eliminate rural poverty.Moreover, the total subsidy given by the government through smaller supports in electricity tariff, fertiliser prices and transportations was lower than the WTO benchmark on subsidy. Viewed in this backdrop, the draft modalities proposed by the WTO Committee on Agriculture come at an opportune time. India said that its interests in some key areas had been further protected by the proposition in the draft under the Special Product Exemption category where it could maintain its present tariff.
Source: Redif.com
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China: the World Should Be Put On Notice

Projecting growth in real GDP at a rate of 7.5% for 2003 as a whole Stephen Roach argues that the world should be put on notice: China is now coming of age.

There can be little doubt that China is now coming of age. While still a relatively small economy, China growth is now strong enough to have a major impact on the dynamics of the broader global economy. Currently, China accounts for only about 4% of a $32 trillion world economy. However, in a weakened global climate, China’s growth rate is now strong enough to have accounted for fully 17.5% of the growth in world GDP in 2002 -- second only to the growth contribution of the United States. At the same time, while China accounts for only about 5% of the world’s total manufacturing exports, it accounted for 29% of last year’s growth in such trade. In short, China is now making a highly disproportionate contribution to the growth dynamic of a sluggish world economy. That has put the world on notice that China’s global impact now needs to be taken quite seriously.
Source: Morgan Stanley Global Economic Forum
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Why Don't You Come Up and See My Pheromenes Dear

On this special day devoted to lovers everywhere more scientific info unveiling some of loves chemical mysteries. Among other things I learnt today is the fact that mice are active largely at night - because the night, of course, belongs to lovers - so their vision is generally a poor way of gathering information. Instead mice use their auxiliary nose -- known as their "vomeronasal organ" -- which consequently plays the crucial role in a mouse's life. The vomeronasal organ is apparently extremely small and highly sensitive: there, I always new small organs had some definite selection advantages.

Howard Hughes Medical Institute researchers are beginning to unravel how a mysterious sixth sense guides animal attraction. The scientists have made the first-ever recordings of patterns of brain activity in a mouse as it explores the sex and identity of a newly encountered animal.The research team, led by Lawrence C. Katz, a Howard Hughes Medical Institute investigator at Duke University Medical Center, recorded the firing of neurons in the accessory olfactory bulb, part of a poorly understood sensory pathway that is thought to be important in sex discrimination and social behavior in most mammals. The results, to be published in a forthcoming issue of the journal Science, show that chemical signals called pheromones trigger highly specific patterns of neural excitation in the brain. These “pheromone images” provide vital information about the sexual receptiveness of females and the dominance hierarchy in males, among other things, said Katz. “Mice, which live in the darkness in the wild, can readily identify each other on the basis of a pheromonal image rather than a visual image,” said Katz.

Both wild and domestic animals, such as dogs and cats, collect pheromone signals through the “flehmen” response, in which the upper lip curls back during exploration of the oral and anogenital areas of other animals during social encounters. These pheromone signals are collected by the vomeronasal organ (VNO), a hollow tube in the nasal cavity. Sensory neurons lining the VNO, in turn, stimulate neurons in the accessory olfactory bulb, a part of the central nervous system. Finally, signals are sent to the amygdala, a part of the brain responsible for basic drives, such as fear, aggression, mating behavior and maternal instincts. The information contained in pheromone signals is key to survival and reproduction, said Katz. Male mice establish dominance hierarchies, so they need to know if another male is dominant or non-dominant. In addition, males respond to females who are in estrus because they smell differently. “In essence,” said Katz, “these pheromonal cues help mice decide ‘should I mate or fight.’” Important clues to the VNO’s importance in sex recognition have emerged from genetic studies. For example, HHMI investigator Catherine Dulac and her colleagues at Harvard University reported in January 2002 that mice lacking a key molecule in the pheromone-signaling pathway were unable to distinguish males from females and behaved as if all mice were female.
Source: Science Daily
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Dolly Dead: the Next of Kin Have Not Been Informed

Dolly the sheep, the first animal to be cloned from an adult cell, has been put down after she was found to have a lung disease according to the Edinburgh based Roslyn Roslin Institute. Raelians apart, the premature death is only likely to increase the controversy surrounding cloning techniques, whether human or animal directed, and raise questions about the pace with which genetic-based medical research will produce viable therapeutic results, another case of getting to know more about 'how', than about 'why'. The patient passed away due to shortage of telomeres apparently, sounds quite unpleasant.

Dolly the sheep, the first mammal to be cloned from an adult cell, was put down on Friday afternoon, after developing a progressive lung disease.Dolly's birth six-and-a-half years' ago caused a sensation around the world. But as many sheep live to twice this age, her death will refuel the intense debate over the health and life expectancy of cloned animals. The type of lung disease Dolly developed is most common in older sheep. And in January 2002, it was revealed that Dolly had developed arthritis prematurely. She was cloned using a cell taken from a healthy six-year-old sheep, and was born on 5 July 1996 at the Roslin Institute, Edinburgh, Scotland. The Institute's Harry Griffin says: "Sheep can live to 11 or 12 years of age. A full post mortem is being conducted and we will report any significant findings". Following the post mortem, Dolly will be donated to the National Museum of Scotland in Edinburgh, where she will be stuffed and put on display. Some cloned mammals, including Dolly, have shorter telomeres than other animals of the same age. These are pieces of DNA that protect the ends of chromosomes and research has shown that they act as molecular clocks, governing the process of ageing in cells. There have been contradictory studies on the lifespan of cloned animals. In November 2001, US cloning company Advanced Cell Technology (ACT) said a detailed investigation of 24 calf clones revealed that all were normal. But a study of cloned mice conducted in February 2002 by researchers at the National Institute of Infectious Diseases in Tokyo, Japan, found that they had a shorter lifespan than normal mice.On 2 February 2003, Australia's first cloned sheep died unexpectedly at the age of two years and 10 months. The cause of death is unknown and the carcass was quickly cremated, as it was decomposing.
Source: New Scientist
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From the Own Up When You Got It Wrong Department

Earlier in the week I erroneously suggested that fourth quarter 2002 Japan GDP had contracted. This turns out to have been a mistake, the published figures are in fact better than the forecasts, but that is about the limit of the good news. In particular the deflation that has plagued the economy for three years now seems to be getting worse. The GDP deflator, the broadest gauge of price changes in the economy, came in at minus 2.2 per cent, its lowest level in two years

The Japanese economy grew in the last quarter of the year, defying forecasts of a contraction and fuelling hopes that the economy has finally embarked on a modest expansion track. Real gross domestic product in the October-December quarter increased 0.5 per cent, quarter-on-quarter, or 2 per cent annualised, marking the country's fourth consecutive quarter of growth. The figure astounded economists, who were forecasting the economy to contract by as much as minus 1.2 per cent on an annual basis. "On the surface, it's a pretty shocking result, driven by technical results," said Ryo Hino, economist at JP Morgan. "But it doesn't change the picture at all - we're still clearly in the midst of a slowdown." Economists said the single biggest surprise was an increase in private consumption, which was expected to fall sharply as households reined in their spending in the last few months of the year in line with a deep cut in winter bonuses. Nonetheless, private consumption increased 0.1 per cent, quarter-on-quarter; consumer spending makes up more than half of GDP. "The strength of the GDP data is very hard to reconcile with the weakness of most other data series during the quarter," said Peter Morgan at HSBC in Tokyo. "It should be noted that growth slowed further from the rapid pace of the second quarter, and a decline cannot be ruled out for the first quarter of the year."
Source: Financial Times
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Do the Right Thing

More from our correspondent down at Honesty Pays Inc. Is this the part of the 'New Economy' I never did get?

A dozen tax shelters that Enron used to operate tax-free also fabricated huge profits, the Senate Finance Committee was told Thursday. The disclosure raises disturbing new questions about the reliability of corporate financial reporting. The tax shelters were designed to make it appear that Enron had realized $2 billion of profits almost immediately, while saving $2 billion of federal income taxes over a period of years, a three-volume report by the staff of the Joint Committee on Taxation showed. Enron's tax department "was converted into an Enron business unit complete with annual revenue targets," said Lindy Paull, chief of the joint committee staff. "The tax department, in consultation with outside experts, designed transactions to meet or approximate the technical requirements of tax provisions with the primary purpose of manufacturing financial statement income." "At their core," she said, the tax shelters "were designed to permit Enron to take the position that its long-term tax benefits could be converted to current or short-term financial statement income." The use of tax shelters has become so widespread among the 10,000 largest corporations that their effective tax rate was just 20 percent in 1999, far below the statutory rate of 35 percent and well below the tax rate of the next 31,000 companies, which are too small to attract much interest from tax shelter promoters. Several studies by economists have suggested that tax shelters enable companies that use them to cheat the government out of about $50 billion each year. The idea that tax shelters could be used to create artificial profits seemed to shock the senators, who vowed to shut down such transactions. But when they asked a panel of experts for advice, they got silence or tepid answers, an indication of the complexity of the problem of policing corporate tax returns and financial statements. "The report reads like a conspiracy novel," said Sen. Charles Grassley, R-Iowa, the Finance Committee chairman. The report showed how huge fees were paid to accounting and law firms to set up the deals, often in what Paull said was a collusive manner. She said the tax and accounting opinion letters that Enron paid millions of dollars for, in the hope that it would not pay tax penalties if the Internal Revenue Service demolished its tax shelters, ignored or glossed over accounting and legal issues that made the deals untenable.
Source: Seattlepi.com
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The Kindest Kiss

Ever felt that there was some sort of fundamental injustice about the world, something that could never be put straight no matter what. I guess this thought must come to all of us at some time or another. Well after reading about Onur Gunturkun's recent project I have to admit the feeling did cross my mind, why do some people get to do all the really interesting research!! At least the 'head-tilting preferences established during the last weeks in the womb' gives me the perfect let-off next time my wife complains about me not being sufficiently romantic these days, you see the head tilt I perform as I look up from my computer to give her a kiss comes from my days in the womb (this puts me in mind of one of those old sayings about a misspent youth.....). Whatsmore, what other things about our present inclinations can we put down to all that early tilting, and even more important, just what is it that determines the tilt. And, one last thing, a happy Valentines day to you all (and especially to you Vicenta). As you can imagine this is a special day in the Bonobo calendar, and it's not too difficult to celebrate, all you have to do is tilt your head a bit, now to the left, now to the right, it's easy you'll soon get the hang of it.

Plenty of kissing occurs on Valentine's Day. And most of it will occur with a right tilt of the head. According to a report published today in the journal Nature, people are nearly twice as likely to lean right instead of left when puckering up. The findings suggest that the tendency stems from head-tilting preferences established during the last weeks in the womb. Onur Güntürkün of Ruhr University in Bochum, Germany, watched lovestruck couples kissing in public places such as airports, train stations, beaches and parks in the U.S, Germany and Turkey. After setting guidelines for a scientifically valid smooch--which requires lip contact, an obvious head turn and a lack of luggage that could influence a person's movements--Güntürkün analyzed 124 kissing pairs. He found that 65 percent of the liplockers tilted their heads to the right. A similar ratio has been observed for preferential use of the right foot, hand or eye. (Right-handedness, however, is nearly eight times as popular as left-handedness, and may be mediated by different genes or influenced by cultural factors.) Because right head turns are also favored in the final weeks of gestation and among newborn babies, Güntürkün posits that this right bias develops early on and subtly influences behavior long into adulthood.
Source: Scientific American
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Greenspan: As the Dust Settles

As the dust settles gently over the Greenspan speech the consensus seem to be that what he said amounts to pretty bad news for the Bush administration. Given his previous reputation for independence this should come as no surprise, but this will not make his views any more palatable for the man whose father still holds Greenspan responsible for his losing the 1992 election. As Brad Delong puts it: "Alan Greenspan says the expected the reasonable thing about the prospective return of the deficit and the long-run fiscal policy dilemmas of the American government. The truly surprising, the bizarre thing that I do not understand is why the Bush Administration PR flacks and their tame dogs in the press ever expected him to say anything else... "

When Democrats and liberal economists took potshots at President Bush's tax-cut proposal, everybody yawned. But when Federal Reserve Chairman Alan Greenspan joined the ranks of the critics, warning of wider budget deficits at a Senate hearing Tuesday, suddenly all Washington was in an uproar. Senate Democratic leader Tom Daschle of South Dakota called Greenspan's comments the kiss of death for the Bush plan, but White House spokesman Ari Fleischer said the news media had overplayed the Fed chief's objections. Veteran Fed watchers say Greenspan's stance is neither new nor surprising. Though he is a longtime Republican and shares the president's aversion to taxes, he has consistently railed against big deficits. And he has never bowed to any master in the White House. Tuesday's Senate testimony "is further evidence that he is a maddeningly independent chairman," Greenspan biographer Justin Martin said.

What's new in the latest incident is the public airing of his differences with the president. And the stakes are high, because the $695 billion tax cut plan (now officially revised up from the originally advertised $674 billion) is the centerpiece of Bush's domestic agenda. "I don't recall any case in which he has confronted an administration as openly as he has this time," said Lyle Gramley, a former Fed governor. Before going public, Greenspan voiced his doubts in a closed-door meeting with centrist senators from both parties several weeks ago. "He said the same thing publicly that he said to us privately," said Sen. Dianne Feinstein, D- Calif.
Source: SFGate.com
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Mervyn King is Worried About Eurozone Growth

Future Governor of the Bank of England Mervyn King is worried, about eurozone growth prospects, the impact on UK growth, and the consequent ballooning of the UK trade deficit (which hit a record 34 billion pounds last year). One small note for those who, like me, are avid detail addicts. It concerns the article's final point about UK interest rates. I think it helps to bear in mind here that Mervyn King, like his US counterpart Alan Greenspan, is pretty much on red alert over the ever-present deflation danger. The BoE must have its forecasts and expectations on likely UK inflation levels 12 to 18 months from now, and you don't have to be an economic genius to see that with the probability of cheaper oil and flat eurozone demand, deflation could become a real problem. So drop the interest rate, drop the currency and kill two birds with one stone by making imports dearer to boot. Only one snag: there are three birds out there, and dropping the interest rate won't do anything to ease the housing bubble which may, in fact, be the most serious threat facing the UK right now.

In its regular report published on Wednesday, the UK central bank predicted that growth would be running at an annual rate of about 2 per cent by the end of next year. The latest government forecast, from November, is that the economy will grow by between 3 and 3.5 per cent over the year as a whole. That forecast is expected to be revised down sharply in the UK budget, due next month. Mervyn King, the bank's deputy governor in charge of monetary policy, warned of "a weaker prospect for the world economy" than the bank had seen in November. "We have been surprised by the weakness of domestic demand in the euro area: broadly flat over the past year. It's not common for domestic demand to be flat," he said. "The weakness of domestic demand in Germany has been very marked, and has taken us a bit by surprise." The "very sharp" rise in the euro against the dollar would further weaken demand in the eurozone, he added. The enfeebled condition of the eurozone was illustrated on Wednesday by figures showing that industrial production in France fell by 1.7 per cent in December - the steepest decline for five years. On Monday, official data showed that German industrial output had suffered its sharpest drop in four years, and many economists believe German GDP is currently shrinking. Although Britain grew roughly twice as fast as the eurozone last year, by 1.6 per cent compared with 0.8 per cent, it has been suffering from a sharp fall in exports. A drop of more than 5 per cent in the last quarter of 2002 slowed growth and gave the UK a goods trade deficit worth 4 per cent of gross domestic product. Mr King said the Bank of England's revised forecast explained its decision to cut interest rates last week. The reduction of 0.25 percentage points in the bank's main interest rate to 3.75 per cent caught the markets by surprise, and fuelled speculation that the rate-setting monetary policy committee had been warned of instability in the UK financial system. The speculation was firmly rejected by Mr King.
Source: Financial Times
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Red Hat Puts a Foot in the Door

So the 'reds' finally get to infiltrate the Pentagon. The reds in question this time, however, are not the old adversaries of a bygone era, but Linux enthusiasts from Red Hat, who just got government certification for their Advanced Server operating system. If things go on like this I'm sure it won't be too long before we're reading headlines about Linux 'sleepers' and 'fellow travellers' ensconced in the Pentagon.

The U.S. Department of Defense Information Systems Agency has certified Linux distributor Red Hat's Advanced Server operating system as a "Common Operating Environment," meaning the server product meets the agency's software security and interoperability specification. The certification, announced by Red Hat officials Tuesday, is for Red Hat's top-of-the-line Linux Advanced Server running on IBM's eServerxSeries330 hardware. The Red Hat server is the first Linux product to receive this certification, according to Red Hat. The Common Operating Environment (COE) certification is designed to provide common IT architecture within the Department of Defense, as a way to promote interoperability among the department's computer systems. The certification allows the Defense Department to "achieve the required level of conformance so vital to joint warfare by embracing the self-governance standards created by the Linux community," Matt Mleziva, program director of Defense Information Infrastructure for the U.S. Air Force, said in a Red Hat press release.
Source: Infoworld
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Linux is Secure: It's About to Become Official

Another nice piece of innovation from Market Solutions Inc. According to this week's tech headlines Oracle and IBM are jostling neck and neck in a bid to obtain a federal stamp of approval on Linux, with both companies announcing that they will submit their respective software to certification processes. In particular IBM announced yesterday that it plans to work with the Linux community to enter the Common Criteria certification process for the Linux operating system early this year, and that it will proceed with a progressive plan for certifying Linux at increasing security levels through this year and 2004. The connundrum is that a lot of government agencies aren't allowed to use software that isn't certified, and certification costs money. Now it can't have escaped the notice of even the least informed among us that open-source is for free, so who gets to foot the bill? The problem, as Jim Willis, director of e-government for the Rhode Island Department of State and large scale user of open source technologies puts it: "With proprietary software, it behooves vendors to pay to have it certified, so the government can use it. The problem with open source is, who's going to pay to have it certified? Which open source vendors are going to step up to the plate, to foot the bill?" Well it looks like Oracle and IBM just stepped up to the plate. With so much openware knocking around in the Federal security systems, does this mean we will soon be welcoming Rumsfeld and Ashcroft as open community members?

The Common Criteria is an independently tested set of standards used by organizations – the Federal government included – to evaluate the security and assurance levels of technology products. For Linux, securing the Common Criteria certification means that it provides a secure operating system for government applications, according to Jon Hall, president and executive director of Linux International. Both government computer experts and open source experts said the moves are "huge." Tony Stanko, associate director of Open Source and eGovernment at George Washington University's Cyber Security Policy and Research Institute, in Washington, pointed to a Mitre.org study that showed open source proliferates in the Department of Defense. "They found it's everywhere, and the security of critical systems depends in a large part on open source," Stanko said. In addition, there are looming deadlines that make it incumbent upon vendors to get software evaluated and certified. Stanko called Oracle's move a "great first step" toward dealing with a July 1 deadline, when federal military agencies won't be able to purchase systems that aren't NIAP (National Information Assurance Partnership) evaluated.
Source: E-Week
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Now Its Nokia's Turn to Feel the Pain

Having been relatively sheltered from the havoc which has been reaked in the mobile industry, it seems reality is reaching home even in the blue chip department.

Nokia, the world's biggest maker of mobile phones, plans to cut 550 jobs in its networks business in the face of the continuing downturn in the global telecommunications infrastructure market. The Finnish company said the move, which will result in the closure of two research sites and a scaling back of R&D activity, would increase efficiency and reduce costs. Competitors such as Ericsson, Alcatel, Lucent and Nortel Networks have cut tens of thousands of jobs in the past two years. However, Nokia has been able to avoid such deep cuts to its workforce because of the profitability of its handsets business. Handsets account for 80 per cent of Nokia sales and the business has been much less hit by the telecoms market downturn than infrastructure. But Nokia's networks business has not been so lucky. The unit has seen more than 6,000 job losses over the past two years due to cuts, outsourcing and natural attrition.The latest job losses will hit Nokia employees in the US, UK, Sweden and Finland, with the US being hardest hit. The group plans to close its Santa Rosa broadband access facility in California, transferring most of its operations to Finland. It will also close an R&D site at Kista, north of Stockholm, in a further blow to Sweden's information technology and telecoms hot spot. Kista has already been hit by heavy lay-offs at Ericsson, the Swedish telecoms equipment group.
Source: Financial Times
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This One Looks Dodgy

Well I thought I'd just about heard everything there was to hear about the possibility of war with Iraq, but this one certainly takes the buscuit: it's going to be a handy excuse to get round the embarassing details of the growth and stability pact. In case you think this is me exaggerating I'll quote the venerable Financial Times: "A war in Iraq would at least provide the EU with a way of retaining some credibility for the stability pact in the face of Germany's chronic economic problems", quote, unquote. Come to think of it with so many 'experts' pontificating that the war with Iraq is already priced into the markets, we might ask ourselves whether the possibility that the underlying economic problem may have nothing to do with the war has been 'priced in' yet.

Hopes that Europe's biggest economies would eliminate their budget deficits by 2006 were receding on Tuesday, amid renewed concern about the economic impact of a war against Iraq. The European Commission refused to rule out the possibility of suspending the European Union's stability pact - the eurozone's budget rules - in the event of war. Meanwhile, Germany said it was seeking talks with Britain and France to discuss a programme for balancing budgets across the eurozone. There are now rising expectations that the EU might be forced to postpone again its deadline for reaching "close to balance" budgets within the zone. Last June, EU finance ministers agreed to give France, Germany, Italy and Portugal until 2004 to balance their budgets; that deadline was later moved to 2006.But with sluggish growth across Europe and finance ministers seeking to blame the Iraqi crisis for a worsening outlook, even that deadline may have to be revised. On Tuesday the European Commission said: "If there were to be a war we would look at any measures that were appropriate and might need to be taken". A war in Iraq would at least provide the EU with a way of retaining some credibility for the stability pact in the face of Germany's chronic economic problems.
Source: Financial Times
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Play It Again Alan

After a second look, and a few hours reflection, it seems to me there is plenty of meat to chew on in the Greenspan speech, and that after the Iraq problem has found its place in history the problems of the budget deficit may return time-and-time again to haunt the American presidency. Particularly worthy of note is his advocacy of an accrual based accounting system - one which would take into account accumulated liabilities (like pensions and Medicare) - and his indication (the first I have seen from a 'responsible' figure) of the importance immigration will play in determining the level of US pensions and growth. I quote: "short of an outsized acceleration of productivity to well beyond the average pace of the past seven years or a major expansion of immigration the aging of the population now in train will end this state of relative budget tranquility in about a decade's time". Well an increase in productivity over and above the average for the last seven years seems a non-starter with an older workforce, and China approaching fast in the rear view mirror, so that leaves immigration. In fact, just to ram the point home he reiterates it: "short of a major increase in immigration, economic growth cannot be safely counted upon to eliminate deficits and the difficult choices that will be required to restore fiscal discipline". Well done Alan, I know you've been criticised in the past on many counts (and probably with good reason), but in my party its never too late for someone who's seen the light to climb on board. Now lets get to work.

If instead, contrary to our expectations, we find that, despite the removal of the Iraq-related uncertainties, constraints to expansion remain, various initiatives for conventional monetary and fiscal stimulus will doubtless move higher on the policy agenda...........


One notable feature of the budget landscape over the past half century has been the limited movement in the ratio of unified budget outlays to nominal GDP. Over the past five years, that ratio has averaged a bit less than 19 percent, about where it was in the 1960s before it moved up during the 1970s and 1980s. But that pattern of relative stability over the longer term has masked a pronounced rise in the share of spending committed to retirement, medical, and other entitlement programs. Conversely, the share of spending that is subject to the annual appropriations process, and thus that comes under regular review by the Congress, has been shrinking. Such so-called discretionary spending has fallen from two-thirds of total outlays in the 1960s to one-third last year, with defense outlays accounting for almost all of the decline........


Estimating the liabilities implicit in social security is relatively straightforward because that program has many of the characteristics of a private defined-benefit retirement program. Projections of Medicare outlays, however, are far more uncertain even though the rise in the beneficiary populations is expected to be similar. The likelihood of continued dramatic innovations in medical technology and procedures combined with largely inelastic demand and a subsidized third-party payment system engenders virtually open-ended potential federal outlays unless constrained by law. Liabilities for Medicare are probably about the same order of magnitude as those for social security, and as is the case for social security, the date is rapidly approaching when those liabilities will be converted into cash outlays.

Accrual-based accounts would lay out more clearly the true costs and benefits of changes to various taxes and outlay programs and facilitate the development of a broad budget strategy. In doing so, these accounts should help shift the national dialogue and consensus toward a more realistic view of the limits of our national resources as we approach the next decade and focus attention on the necessity to make difficult choices from among programs that, on a stand-alone basis, appear very attractive.

Because the baby boomers have not yet started to retire in force and accordingly the ratio of retirees to workers is still relatively low, we are in the midst of a demographic lull. But short of an outsized acceleration of productivity to well beyond the average pace of the past seven years or a major expansion of immigration, the aging of the population now in train will end this state of relative budget tranquility in about a decade's time. It would be wise to address this significant pending adjustment sooner rather than later. As the President's just-released budget put it, "The longer the delay in enacting reforms, the greater the danger, and the more drastic the remedies will have to be."

Faster economic growth, doubtless, would make deficits far easier to contain. But faster economic growth alone is not likely to be the full solution to currently projected long-term deficits. To be sure, underlying productivity has accelerated considerably in recent years. Nevertheless, to assume that productivity can continue to accelerate to rates well above the current underlying pace would be a stretch, even for our very dynamic economy. So, short of a major increase in immigration, economic growth cannot be safely counted upon to eliminate deficits and the difficult choices that will be required to restore fiscal discipline.
Source: Federal Reserve Board
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A Greenspan For All Seasons

Alan Greenspan, the Federal Reserve chairman, yesterday appeared to rebut many of President Bush's arguments in favor of big new tax cuts, by saying that the economy probably does not need any short-term stimulus and warning that budget deficits could spiral out of control. This was at least my impression. But It seems Greenspan's speech to US senators could be interpreted as containing something for everyone, and clear ideas for none. Reading around the press I find there are as many different interpretations of his semi-annual report on the state of the US economy (presented to the Senate Banking Committee) as there are varieties of opinion. Perhaps this isn't too surprising in connection with someone often considered the master of enigma, the man to 'keep 'em guessing'. (or it could be, as Brad Delong suggests, that too many of the US commentaries were drafted before actually reading the speech!! here) Perhaps the best recommendation is to read the thing yourself ( here )

On one point, however, he does seem to have committed himself clearly, budget deficits do influence long term interest rates. In a clear reference to the controversy surrounding views recently expressed by (inter alia) Glenn Hubbard, he argued in connection with an increasing deficit that "Contrary to what some have said, it does affect long-term interest rates and it does have an impact on the economy,"

The European press in general seem to present him as being in assertive mode (with Deutsche Welle even going so far as to present him as an opponent of any stimulus package, stating bluntly under the header 'Fed Says Tax Cuts Won't Work' that "US Federal Reserve Chairman Alan Greenspan said he believes the Bush administration's plans for an economic stimulus package are ill-timed" ( here ) thus giving the impression he was waving the warning finger at the Bush administration and playing the newly re-born critic of a growing US structural deficit. Could this have anything to do with the growing anti-Bush mood here in continental Europe? The Financial Times, as ever more restrained, nevetheless has Greenspan the fiscal deficit enemy.

Alan Greenspan, chairman of the Federal Reserve, yesterday said the Bush administration's plans for tax cuts should not be paid for with damaging rises in fiscal deficits. Mr Greenspan reiterated his support for eliminating taxes on share dividends, a key part of the administration's proposals, which he said would boost economic flexibility.

But in comments to the Senate banking committee about the plans for $1,500bn in tax cuts over the next decade, he criticised the projected move into deficit. The tax plan should be paid for by spending cuts or tax rises elsewhere, he said. "I would argue that we ought to be . . . trying to move towards increased flexibility but be very careful not to allow deficits to get out of hand," Mr Greenspan said. "I do believe [the plan] should be revenue neutral." He warned that the social security and Medicare programmes would weigh heavily on the US taxpayer in coming years. Administration officials have sought to play down the importance of deficits in driving up long-term interest rates. But Mr Greenspan said: "Contrary to what some have said, it does affect long-term interest rates. It does have a negative impact on the economy." Democrats seized on the comments. "Alan Greenspan, two years ago, breathed life in the administration's proposal for tax cuts. Today, I think he gave the kiss of death," said Tom Daschle, the Senate Democratic leader. The Bush administration's budget predicts a deficit rising towards 3 per cent of gross domestic product this year and next. Mr Greenspan said acceptable ranges of deficit were 1-2 per cent in today's environment. He said it was too early to tell whether the US economy was weak enough to require emergency fiscal stimulus, given the uncertainty surrounding Iraq.
Source: Financial Times
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For Business Week, on the other hand, it's the pensative and reflective view: a 'Gloomy Greenspan' who 'Weighs His Words' . According to BW 'the Fed chief is uneasy about the economic risks of war -- and reiterates the importance of fiscal discipline for the national budget.'

The man behind the memorable catch-phrase "irrational exuberance," Federal Reserve Chairman Alan Greenspan, sounded even more somber than usual in his semiannual report about the state of the economy, given to the Senate Banking Committee on Feb. 11........His prognosis on the economy was admittedly clouded by war risks with Iraq. And his gentle but familiar lecture on fiscal discipline -- with Congress expected to begin work soon on the Bush stimulus plan -- seemed intentionally vague. Overall, the Fed chairman's testimony -- and his responses to senators' questions afterward -- appeared to be more cautious than the markets anticipated, and investors were disappointed.
Greenspan appeared intentionally unclear on fiscal policy in his prepared text, though he was pressed for his views on the Bush stimulus plan by Banking Committee members. He repeatedly couched his responses in the context of maintaining fiscal discipline. While he doubted the immediate stimulative impact of the plan, he once again stated his view that elimination of double taxation on dividends was commendable. He also warned that faster growth alone would not cure growing budget gaps, with tough spending choices seen ahead. Indeed, the "sobering" budget projections likely make Greenspan long for the Budget Enforcement Act of 1990. Amid such a difficult economic and policy climate, the Fed chief also may be pining for the days when he could tweak the markets for being too exuberant. Those days seem long ago now.
Source: Business Week
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Meantime, for Reuters it's the dollar impact that weighs, and Greenspan was not convincing about his support for the strong dollar policy:

The dollar backtracked from early gains in Asia on Wednesday, hindered by uncertainty over Iraq and the Federal Reserve's cautious view of the U.S. economy. By late morning, the dollar traded at 121.00/05 yen after a move up to 121.16 yen. It had slipped to 120.95 in late New York on Tuesday from as high as 121.78 yen, its best level in nearly two months. The greenback yielded to downward pressure after Federal Reserve Chairman Alan Greenspan said at the start of his twice-yearly testimony to Congress that geopolitical fears were creating "formidable barriers" to U.S. business spending. Greenspan also said it would be best for the United States to hold off on any fresh stimulus for now, given the difficulty in assessing the health of the U.S. economy because of uncertainty over a possible war with Iraq. "Greenspan's testimony shows that once the Iraq issue settles down, the U.S. deficit will be a major cause for concern for the economy and the dollar," said a trader at a Japanese bank. "There's no compelling reason to be long of dollars right now."
Source: Reuters News
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Paul Krugman on Greenspan and the Deficit

Of course Greenspan isn't exactly Paul Krugman's favourite person, so he has been busy again this week driving the point home:

During the Clinton years Mr. Greenspan became an icon of fiscal probity, constantly lecturing politicians on the importance of eliminating deficits and paying off debt. Then George W. Bush took office, and Mr. Greenspan became — or was revealed as — a different man. First the Fed chairman lent decisive support to the Bush tax cut, urging Congress to reduce taxes lest the country run too large a budget surplus and pay off its debt too quickly. No, really. Then when the budget plunged into deficit, Mr. Greenspan not only refused to reconsider, he supported plans to make the tax cut permanent. The stern headmaster had become an indulgent uncle.

But now the fiscal deterioration has reached catastrophic proportions. In its first budget, the Bush administration projected a 2004 surplus of $262 billion. In its second budget, released a year ago, it projected a $14 billion deficit for the same year. Now it projects a deficit of $307 billion. That's a deterioration of $570 billion, just for next year — matched by comparable deterioration in each following year. You know, $570 billion here and $570 billion there, and pretty soon you're talking real money. Not my fault, says Mr. Bush. "A recession and a war we did not choose have led to a return of deficits," he declared. Really? Will the recession and war cost $570 billion per year, every year? Besides, Mr. Bush knew all about the recession and Osama bin Laden (remember him?) a year ago, when his projections showed a return to surpluses by 2005. Now they show deficits forever — even though they don't include the costs of an Iraq war.

The administration has used gimmicks to postpone most of the cost of these tax cuts until after 2008 — and whaddya know, the Office of Management and Budget has suddenly stopped talking about 10-year projections and now officially looks only five years ahead. But there are long-term projections tucked away in the back of the budget; they're overoptimistic, but even so they suggest a fiscal disaster once the baby boomers start collecting benefits from Social Security and Medicare. ("We will not pass along our problems to other Congresses, other presidents, other generations," declared Mr. Bush in the State of the Union. And with a straight face, too.) So where does Mr. Greenspan come in? Next week he will testify before the Senate Banking Committee. Will he, at long last, acknowledge the administration's fecklessness?
Source: New York Times
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So tell us Paul, which way was it. Did he acknowledge the fecklessness, did he kick the open door, or did he hedge his bets?

Japan Back in Reverse Gear

More bad, bad news from Japan.The economy has begun, once again, to contract. You could call it the incredible shrinking economy, were it not for the fact that humour seems to be out of place here, and that these results may give us a pointer to what's in store for the rest of us if I'm even halfway right about the root cause. Apart from the downturn, also worthy of note is the continuing decline in bank lending and the slow rate of growth in monetary supply.

Figures to be released on Friday are likely to show that the Japanese economy contracted in the December quarter, bringing to an end the shortest recovery in Japan's post-war history, a senior economic adviser to the prime minister conceded on Monday. "I am afraid that the economy is already contracting," said Haruo Shimada, professor of economics at Keio University and senior economic adviser to Junichiro Koizumi, prime minister. He said there was no sign of improvement in domestic consumption, with the only increase in demand coming from the external sector. The concession that the economy has stuttered to a halt came as figures showed last year's mini-export boom beginning to slow. Data for bank lending, also released on Monday, showed the 61st straight month of decline as financial institutions continued to shrink their lending base in an effort to shore up capital adequacy and prevent more loans from turning sour. Bank lending for January fell 4.7 per cent.

"Japan is never going to be driven too much by exports because they account for only 10 per cent of the economy," said Peter Tasker, head of Arcus Investment, a Tokyo-based hedge fund. "There's only so much you can do if the other 90 per cent of the economy is going in reverse." The current account surplus for 2002 rose 34 per cent from the previous year to Y14,248bn ($120bn, €112bn, £74bn), about 3 per cent of gross domestic product. Exports for the year rose 6 per cent thanks largely to a 13.7 per cent increase in shipments to Asia, of which almost a third were electronics goods. "Exports to Asia climbed very steeply in the first half of 2002 and have now levelled out," said Chris Walker, economist at Credit Suisse First Boston in Tokyo. Exports to the US rose just 1 per cent during the year.

Signs that the export-led recovery may be petering out came with figures for December, which showed the current account surplus shrinking 1.4 per cent year-on-year. Economists said an improvement in Japan's external performance tended to strengthen the yen, which then choked off further growth. "You had quite a sharp recovery in industrial production driven entirely by the export sector, but momentum peaked in summer and has been easing off since then," said Mr Tasker. He said there had been no collapse in economic activity since growth had never properly got going in the first place. "It's hard to collapse when you're already sprawling on the ground." The Bank of Japan also said on Monday that monetary supply in January grew at 2 per cent year-on-year, its slowest rate of increase since the end of 2000. The central bank's policy board meets on Thursday, but is unlikely to contemplate a radical change of policy before March, when a new governor is due to be appointed.
Source: Financial Times
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China: The Internet of the Decade?

The internet, or at least it's information technology component. Well this is the view of Moragn Stanley's Andy Xie. He argues that China's economic impact is so big that it changes relative factor prices globally, and, thus, inevitably triggers a major economic realignment. During the 1990's IT dramatically decreased the unit cost of information and depressed the relative value of information-intensive products. As Andy Xie points out financial services and information providers generally are still living through the consequences of the 90's boom. China's impact will be mainly in manufacturing (global services could be more an India story) but its reach could be of similar (and in all probability greater) magnitude. He highlights five factor areas: natural resources, labour, capital, land and intellectual property. On resources, he reminds us that since China is not especially rich in natural resources, there will be a potential upside push on prices reminiscent of post world war two industrial reconstruction in Europe and Japan. This can benefit those countries in a position to radically increase their resource output: Australia and South Africa heve been mentioned among others, but this may also benefit Indonesia and possibly Thailand. China's impact here will, if anything, be inflationary.

On the other hand, thinking in terms of land, China's impact on global agricultural prices should be broadly deflationary, as the productivity gains being made in rural China begin to exert an impact on global food markets through China's increasing export participation - remember China has long since left behind the problem of feeding its own population. Ditto and even more so for labour and capital. The rapid entry of relatively cheap labour from China's enormous labour force into the global environment cannot but depress global wages (this is not the same thing as reducing living standards, as falling prices can actually mean that the real value of wages rises), and China's savings-rich population can also start to supply increasingly important inputs for world capital markets as living standards rise, and this again can contribute to a plentiful supply of relatively cheap capital, so, deficits aside, don't look for a strong upside on interest rates in the near future.

On the IP front things are bound to be more complicated. China's relatively low current living standards makes realising high per-unit benefits unlikely. As Andy suggests, made-in-China products paying process licenses is a far more probable outcome, and a far less beneficial one for companies based in developed countries. The relatively weak legal infrastructure also makes protecting property rights far from easy, as Cisco, among others, are currently discovering - although this situation does seem to be improving. All-in-all a complex picture, but an important one, and, above all, watch for the deflation downside!

Factor price equalization is the best starting point to picture China’s interaction with the global economy, in my view. Why should it matter? After all, didn’t Japan and the Tiger economies develop through the same process –factor price equalization with mature economies through trade? The difference is China’s size and its development speed. Other East Asian economies changed relative prices somewhat during their development process and didn’t leave lasting effects on relative factor prices once they matured because they were quite small relative to the developed world and are still relatively small even in their maturity.

China’s labor force is bigger than that in all of the OECD countries combined. Its rapid development has caused dramatic shifts in relative factor prices in a short period of time. Some of the changes will be permanent even with China’s maturity. The most important one is that the value of labor will be permanently devalued against scarce resources. This is likely to have far-reaching consequences to the distribution of income in the world. The speed comes from the fact that the labor productivity gap between China and the mature economies is far less than the wealth gap between them. Labor productivity is a combination of learning-by-doing and education. The former needs investment and the later doesn’t. Labor productivity in developing economies comes mostly from generational shifts, in my view. Indeed, the saying that “you can’t teach an old dog new tricks” appears to have some merit of truth. Therefore, labor productivity is mostly about the quality of education and childhood environment. Apart from the decade of the Cultural Revolution, China maintained a focus on education during its turbulent periods, which allowed its labor productivity to grow even though household wealth didn’t.

China’s reintegration into the global economy, therefore, presents a major discontinuity. The gaps between China and developed economies for productivity and for wealth are expressing themselves through rapid capital reallocation from mature economies to China and the consequent rapid growth of China’s exports. The key driver is China’s low wages resulting from its vast surplus labor and low level of wealth. These are two sides of the same coin – if China’s wealth had kept up with productivity, China’s labor force wouldn’t be so underemployed in the first place.

There are five major factors in production that can be priced distinctly: intellectual property (IP), labor, capital, land and natural resources. China’s story for natural resource isn’t ambiguous. China’s households have low wealth levels and spend their income disproportionately on housing, food or buying automobiles for the first time. China’s household spending is much more commodity-intensive compared with how marginal income is spent in mature economies. When China’s economy matures, its commodity consumption might decelerate but won’t decline. Therefore, China’s development is unambiguously a bullish story for commodities.

In addition to this general demand story, one must bring timing and supply into the picture. Certain commodities take off only when China’s per-capita income hits a particular point. For example, when a large number of Chinese could afford to purchase flats, steel demand took off. Foodstuffs are a rolling story. Palm oil and pistachios are there, but wine and cheese are not yet but prices for these goods will likely take off at some point in this decade.

However, China’s own supply capacity should remain a constraint on commodity price inflation. Anything that is about capital and labor will have a hard time maintaining high prices. Sooner or later, China will produce enough a good for itself and export some. Semiconductors are a great example. Chips are now on China’s chopping block, which means they will not likely be highly profitable in the next upturn. Investors who look only in the rearview mirror will be badly hurt, in my view.

On the other extreme, China is clearly a deflationary force for labor. Wages for low-skilled workers are under pressure. As China’s education improvements progress and its manufacturing base becomes more sophisticated, wages for skilled workers globally will also come under threat. Many would argue that some sectors are not tradable and, therefore, should be immune. This is an erroneous assumption, in my view. As college graduates in mature economics shift into these non-tradable sectors because of the higher wages, wages for those non-tradable sectors will likely come under pressure as well.

Intellectual property in theory should be the biggest winner. China’s development means a bigger market for something with zero reproduction cost. The real story is, of course, more complicated. IP rights for mass consumer market products might not benefit their owners initially. China’s income level is too low for IP owners to price IP goods at affordable prices for China’s consumers. Otherwise, it would cut their revenue too much in developed markets. When China’s consumers become rich enough, IP providers should be able to integrate China into their pricing strategy and benefit as a result.

However, the situation in the business sector is much better. The enforcement of IP rights by China’s government is clearly having an impact on the revenue of IP providers in China. For example, companies in China have become big enough now that they don’t want to risk their overall businesses for the small savings of using pirated software. They are also trying to use licensed technologies as a competitive advantage and, therefore, are becoming vigilante in defending IP rights as a result.

Even on IP, I believe one must take into account China’s supply capacity. IP based on production processes can easily be duplicated without violating patents. The traditional manufacturing powerhouses tend to count on such IP and might not benefit much from China’s development at all. Whereas IP that is rooted in standards, brands or fundamental science should benefit greatly from China’s development.

China’s most important impact on financial markets globally is likely to perhaps be on inflation. It is quite popular to argue that deflation is just a monetary phenomenon. However, when relative prices are changing fast, monetary policy may not be and, indeed, shouldn’t try to keep prices rising for a product category. For example, if a monetary authority tries to keep manufactured goods prices increasing, it may simply translate into more imports without much effect on price. The right monetary policy should target positive GDP deflator only, in my view.

The equilibrium inflation rate in the global economy will likely remain quite low at least in this decade. Therefore, the decline in sovereign bond yields should be viewed as permanent. This disinflationary impact on credit quality is the opposite. Diminishing pricing power in general increases the credit risk associated with business operations. Therefore, corporate paper should be treated cautiously.

Will low inflation rates turn into outright deflation? It really depends on fiscal policy. As capacity formation shifts to China, mature economies will suffer structural shifts in savings rates. Low interest rates might encourage household demand for capital through property purchases for a while but aren’t likely to do much for business demand for capital. Savings rates don’t really respond to interest rates. Therefore, sustained and large fiscal deficits are the only instrument to keep deflation at bay. I believe that the US and, soon, Europe will embark on this trend. The world could avoid deflation.

Finally, how would the income spillover from China benefit other economies? Tourism is a good example. Its beneficial effects depend on a country’s income gap with China. Malaysia and Thailand, for example, are likely to benefit substantially from increased Chinese tourism. Their per-capita income is similar to China’s and Chinese tourism can create jobs in their economies at the prevailing wage levels. However, increased Chinese tourism would likely be much less of a benefit for Hong Kong or Singapore. People who like to dress in Armani can’t make a good living by serving people who shop in Giordano.
Source: Morgan Stanley Global Economic Forum
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Eurozone Deficit Forecasts

The numbers on deficit and debt level forecasts for some key eurozone players do not look promising. Last Tuesday, the French Treasury Department announced a 2002 central government deficit of 49.3 billion euros. This number exceeds the official target by 2.5 billion euros and is a long way above the 32 billion euros recorded in 2001. Once other elements - like social security and local spending - are added in, this should run France in with a defiicit level at around 3% for the year. Germany’s budget deficit was above 3.7% in 2002, and despite a major consolidation effort already put in place by Berlin, most commentators expect that the deficit will remain above the 3% mark through 2003. All of which gives gives Morgan Stanley's Vicenzo Guzzo plenty of food for thought since, as he notes, continued hiking of the deficits could "leave the euro area with high deficit (and in some case very high debt) ratios, low growth, apparently widening differences among country performances, and an appreciating currency". Not the most palatable combination to consider, and not too promising for the kind of policy mix it might allow:

If, as we expect, Germany fails to drive its deficit back below the 3% mark, other governments would soon start questioning the rationale behind their own consolidation efforts. In an environment of deteriorated initial conditions and protracted economic weakness, we think that France would let its deficit slip temporarily above 3% in 2003, confident that, once growth is back, fiscal virtue could easily be restored. Italy would probably follow suit. In this case, we do not see the 3% line being breached, but the amount of one-off measures recently adopted suggests that a truly structural measure of the budget deficit is in fact on a steeply ascending trajectory.

Some could argue that a bit of flexibility is welcome and, if any, should have come at an earlier stage. We would tackle this issue from a different angle. Basically, we are saying that in early 2004 Germany and France could be under the Excessive Deficit Procedure and Italy could keep playing with the fire of its cavernous debt. With growth expected to recover barely to trend, any substantial improvement would have to come again at the cost of further fiscal restrictions. But the major economies in the continent by that time would have moved further on along their political cycles, and the chances of significant corrections are slim. This would leave the euro area with high deficit (and in some case very high debt) ratios, low growth, apparently widening differences among country performances, and an appreciating currency.
Source: Morgan Stanley Global Economic Forum
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Japan Preparing to Oppose Agricultural Reform at the WTO

Japan and the European Union look set to be the two holdouts against freer trade in agricultural products when the World Trade Organization meets informally in Tokyo next week.The trade and agriculture ministers of the WTO member states will be gathering as part of the latest round of multilateral trade negotiations that began with the November 2001 agreement in Doha. Their main focus will be on agriculture: an area where the EU like Japan seems extremely reluctant to give anything away, and an area in relation to which third world protests are becoming increasingly vocal.

Japan and the EU will try to stymie efforts to liberalize farm trade at next week's informal meeting in Tokyo. The United States and the 17-member Cairns Group of agricultural exporting nations are calling for sweeping tariff cuts. Japan and the EU are opposed. Agriculture minister Tadamori Oshima even went so far as to say a broader market opening would ``completely destroy'' the farming sector in Japan and other Asian nations. Ministry officials are particularly concerned about rice growers. The government shields them from foreign competition with high import tariffs. The pro-liberalization states propose cutting tariffs on all farm products to below 25 percent within five years. Tokyo currently charges a tariff of 341 yen per kilogram of imported rice-upwards of 300 percent of the price of most imported rice varieties. Domestic rice, meanwhile, wholesales for 200 to 450 yen per kilogram, depending on the brand.

The protectionist impulse sits well with the powerful farm lobby. Isamu Miyata, who heads the Central Union of Agricultural Cooperatives, urged Prime Minister Junichiro Koizumi late last month to resist any calls for drastic liberalization. Miyata invoked ``the nation's self-sufficiency in agricultural products'' in calling for continued trade barriers. The agriculture ministry also sees the EU as a trusty ally in the fight against trade liberalization. Oshima formally announced Japan's support last week for an EU proposal that tariffs on farm products be lowered by an average of 36 percent. The EU proposal would allow each country to decide its own tariff cuts, so long as they are not less than 15 percent. The pro-liberalization camp's tariff cuts offer no such flexibility, which is permitted under a provision of the 1986-1994 Uruguay Round of trade talks. The EU trade regime would, for example, allow Japan to cut its tariff on imported rice by the 15-percent minimum, to 290 yen per kilogram. A 100-yen kilogram of imported rice would therefore wholesale for about 390 yen-as opposed to 125 yen if the Cairns Group and the United States prevail. Tariff cuts are at the center of the dispute over farm trade, which is one of the seven items on the table in the latest round of multilateral trade talks.

The outcome of the agricultural talks will therefore make or break the new round. WTO member states are working toward a March 31 deadline to conclude a framework agreement on farm trade. It will specify means, such as formulas and tariff cut targets, by which agricultural markets are to be opened. The Tokyo ministerial meeting, which runs next Friday through Sunday, will be an important venue for consultations among members. But there are few signs of a consensus emerging from the meeting, with the two camps still far apart. Many negotiators say they doubt the member states will even be able to meet the March 31 deadline. WTO members are eagerly-and cautiously-waiting for the first draft of the framework agreement for liberalizing farm trade, which Stuart Harbinson, the WTO official chairing the agricultural negotiations, is expected to release just before the Tokyo meeting. The report could set the tone of the meeting, to which 25 countries are expected to send their ministers.
Source: Asahi.com
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Solbes Warns Germany on its Deficit

EU monetary affairs commissioner Pedro Solbes today warned Germany not go back on its promise last month to cut its deficit by one per cent this year. The interesting detail about this piece is the suggestion that the warning is aimed as much at the Christian Democrat opposition as it is at Schroeder's government. All-in-all the German picture is not a pretty one, with few attractive short term alternatives, but the 'shot-across-the-bows' aimed at the Christian Democrats seems to confirm my view that the recent election results do not automatically lead to a stronger reform agenda, such easy interpretations miss the real dymanics of the political process since they fail to understand the specific weight of older voters in an aging society.

Germany was warned on Sunday by the European Commission to stick to its plans to cut its budget deficit, in spite of mounting political opposition and the economic uncertainty caused by the Iraqi crisis. The message was a shot across the bows to Gerhard Schröder's government, grappling with sluggish growth and trying to push through unpopular tax rises.But it was also partly aimed at the opposition Christian Democrats, who are threatening to use their grip on the upper house of parliament to block Mr Schröder's attempts to curb the deficit."It is a politically difficult task and I know that economic reforms are not easy in the current climate, but they are also not impossible," Mr Solbes said in an interview with Bild am Sonntag newspaper. "It is essential that Germany this year implements measures to cut its deficit by one per cent of gross domestic product, as it agreed to do in January." Mr Solbes fears that even if Mr Schröder succeeds in forcing through his reforms, Berlin could be in breach of the pact for a second year running in 2003.He warned on Sunday that unless Germany put its public finances in order, it faced serious problems in the medium term, particularly as the pensions crisis starts to bite.Mr Solbes also said Germany must accelerate reforms to boost growth and employment.
Source: Financial Times
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German Output Falls Again

Figures released today by the German Finance Ministry show that German industrial output fell sharply in December, reinforcing the view that the eurozone's largest economy is now close to declaring its second recession in little over a year. Today's figures will again reopen the debate about whether the ECB rates are way too low for Germany's current situation, and about what specific weight to give the needs of the German economy in the eurozone calculations.

The finance ministry said on Monday that output fell 2.6 per cent month-on-month, offsetting November's rise and dragging the year-on-year rate down to 0.6 per cent. It was the sharpest monthly drop since February 1999, and comes hard on the heels of last week's bigger than expected decline of 4.1 per cent in industry orders for December. Economists said the data were consistent with continued stagnation, if not slight contraction, in the German economy and warned that the stronger euro could make matters worse. The euro has risen around 8 per cent against the dollar since the beginning of December and fears are rising it could soon hit German exporters by making their products uncompetitive. Economists said the poor output data, along with sagging consumer demand and the euro's appreciation, would increase pressure on the European Central Bank to lower interest rates. "The ECB may fear that a rate cut may drown in a sea of uncertainty... but the Germany economy is in need of a lifeline swiftly if it is not to sink further," said Daragh Maher of ING. Most economists expect the ECB, which cut rates by half a point in December to 2.75 per cent, to ease monetary policy in March or April.
Source: Financial Times
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