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Friday, November 07, 2003

Coming in from the Cold

This is my OP-Ed today from Living in China:

Well it's Friday, and it's been a fairly long week, so I'll be off after this till Monday. Still, since its better to sign-off with a bang than a whimper, I'll lace this post with a whiff of contoversy. First through the door is US economist Brad Delong, who is probably pretty well known to you regular blog readers as the editor of Semi Daily Journal . Now Brad had a piece yesterday where he takes to task Aaron Friedberg of the US Vice President's office, where he is Deputy National Security Adviser and Director of Policy Planning, for not being too impressed with the benefits which might accrue "from peace, prosperity, and trade", nor with the ambition of making "the Chinese more like us by maximizing economic, social, cultural, and political contact."

Now Brad undoubtedly has a point here. US China policy since the Nixon-Kissinger era has definitely been centred on bringing the giant panda in from the cold. I have no doubt that Brad's heart is in the right place, but equally I have no doubt that he dismisses far too easily Friedberg's problem. The US - as distinct from the EU - has made a strong game-play of the use of military force in conflict resolution. It is natural that others might be tempted to respond in kind. So when Friedberg says:

According to advocates of "engagement" with the PRC, international trade and investment will fuel economic growth, economic growth will speed democratization, and a democratic China will be far less likely to use force or threats against other democracies, including the United States. It is... possible that... [a] richer China will also become... more benign. But... this may not happen... the United States will be faced with a challenge with which it has not had to cope in over a century: a strategic rival that is economically and technologically dynamic... whose total output may come eventually to approach America's own...

...the sheer size of the potential Chinese market has also helped to create powerful business lobbies favoring... the PRC... these groups can be expected to pressure their own governments in favor of policies that happen also to be in Beijing's interest.... The activities of pro-PRC lobbying groups may be perfectly legitimate and predictable; but... they... dull the reactions and limit the strategic repertory of governments. These effects have been especially pronounced in the United States...

...trade with China will continue to exercise its muffling influence on American strategy...

I think he is to be taken seriously. The global dominance of the US may well be challenged (and not just by China, but also by India). Stories are not always guaranteed to have happy endings, and we should be aware of this.

Where Brad is right I feel is in the remedy: there is no alternative to trying to tame the giant. What he argues is this:

To point out that rich and stable democracies are relatively peaceful, that it is thus in the U.S.'s interest to try to make China as rich as possible, as peaceful as possible and as democratic as possible as quickly as possible, and that the U.S. has no more need to be "master" in Asia than Britain, France, or Germany has to be "master" in Europe--empire-builders like Aaron Friedberg dismiss such points of view as naive, lilly-livered, and foolish.

I, by contrast, see Aaron Friedberg's position as poorly thought-out and analytically badly flawed. Perhaps the most powerful and important of the many reasons we won the Cold War was that we regarded western Europe as a region to be strengthened and developed, rather than an area in which we needed to remain "master."

Sticking, for the moment, to the same theme, US based Indian blogger Reuben Abraham has been talking about similar topics. Apart from noting that the Chinese govt seems determined to come up with a national standard for Linux, he goes on to reply to comments posters Stephen Miller and Laurence Kelly who argue, a propos the China space programme that:

Hmmm. Well, I do agree that the Economist's supercilious tone is annoying at times. And the remark was a little rude. But the point behind it seems to contain a germ of truth: namely, that countries with the luxury to pursue expensive vanity projects like space programs perhaps are not the best candidates to receive aid from the international bodies set up to help the very poorest. Hard to argue that, for example, Mali or Haiti or Laos is not closer to the indended type of government and population for whom the WB etc. were created, and for which rpurposes many countries, not only rich ones, donate funds, Maybe the uneven distribution of growth and wealth in China causes this sort of developmental cognitive dissonance; maybe it's that a one-party state can allocate resources to that kind of thing, through command-economic decisions, of a scale that would be associated with much higher GDP incomes in free economies. (How rich was the USSR in 1957, anyway?)............
Stephen Miller

China cries "Poor!" in begging for, e.g., "developing nation" status in entering the WTO. Using this ploy, it is devastating the manufacturing base of countries who pay a living wage (as opposed to China's 20 to 50 cents an hour --"no uninons, please, or you go straight to our good old gulag!"). Grow up -- both you, and your China. China and its 20 to 50-penny manufacturing wage (often as much as a100 to 1 wage advantage over western "competitors") is laughing all the way to the bank as it cleans the clock of the naive "developed nations". And, "Conquering space!" on the side (on the side, and on our money, as we turn over manufacturing to the 50-centers).

I say, stick a wage-based tariff on the dirt-cheap Chinese labor -- and let's see the growth rate in real competition. But, China has its defenders (for some bizarre reason), so ... "Let the clock-clean
Laurence Kelly

and Rueben replies:

Where to start? What exactly is the developing nation status for entering th WTO? And what is a developing nation supposed to call itself if it is one? Does Mr. Kelly have a clue about what living wages are in China? Why is he comparing living wages in China with living wages in the U.S.? Clearly, he has no idea about comparative advantage or competition, for that matter. Needless to say, he doesnt seem to understand what sticking tariffs onto Chinese imports would do to prices at Wal-Mart.

Normally, I would let this sort of tripe be. But this anti-China nonsense (of the sort Mr. Kelly spouts) has been appearing everywhere in the media and I figured perhaps I should highlight it, especially for the benefit of non-american readers who probably have no idea about the protectionist sentiment that's becoming fashionable in the U.S.

If Mr. Kelly and his ilk are serious about educating themselves beyond Gephardt-ian rhetoric (common world-wide minimum wage etc), they should read this piece by Andy Xie or this one by Mark Clifford.

OK, that's enough for this week: I'm off to the beach, even if it is a bit cold at this time of year. Next week I will try and bring you some more from the pro-and-anti China economy debate.

Whose Century is It?

This, I'm afraid, is an enormous post. I think it is justified by the quantity of issues raised in the content. The body of the text consists of a edited extracts (by me) from an interview with Shekar Kapur published by Rediff. (Thanks to Marcelo for the link). What amazes me about this interview is that he sees everything so clearly. I have been trying to argue some of these topics here in Western Europe for the past couple of years. You see I think here - especially in the 'culture industries' - the numbers are everything, and once you pass a critical point, there really is no turning back. Kapur can even see the importance of the age structure of the population, even if he doesn't grasp the full signifiance of this. He even 'gets' the fact that GWB leading the US off on a 'bad for business' war in Iraq may yet have profound implications, well beyond those that were originally envisaged.

So why are virtually none of the conventional economists getting the message? Why do you need a film maker and cultural entrepreneur to explain this to the world? I've thought long and hard about this. The only answer I've come up with (and I think I've said this before on Bonobo) is the existence of a form of soft-racism. A soft-racism which exists in Asian society itself, in the sense that people feel so lacking in their own self confidence and abilities that they think it can never happen. Then there's the soft-racism of the left, who need the poor to be poor. I mean if the poor can get to be rich by themselves, wouldn't that mean that capitalism might work? And then of course there is the soft-racism of the political and economic elites in the US and Europe who just can't even begin to imagine that a bunch of yellow and brown people could finally get their act together. Kapur mentions 09/11 and the analogy is a good one in another sense. No one important in the US saw 09/11 coming, because they just couldn't believe it could happen.

Of course when all is said and done, I'm not saying you're all going to have to watch or like all those endless Bollywood films that which are the implicit consequence of everything said below.

Film-maker Shekhar Kapur says the expanding infotainment market, estimated to grow to more than a trillion dollars in 10 years, has profound implicationsfor India and Asia.

An accountant by training before he turned to films, Kapur says the sheer size of this market will give India a global role in defining lifestyles and driving what he describes as a process of 'reverse colonisation'. In the first part of an exclusive interview with Senior Editor Shyam Bhatia in London, Kapur says the Asian century has already arrived, but needs nurturing, guidance, and structure. Excerpts:

What do you base your projections on?

Business projections are not difficult, but, unfortunately, all business projections are done on an historical model. Let's look at the trends. The world is changing so drastically every day that it is not possible to draw conclusions 10 years from now unless you have looked carefully and wondered what new things are likely to happen.

People are predicting that the global media business will be worth a trillion dollars in 10 years. If this growth is coming, my question is, where is this growth coming from? Where are the markets for this growth?

Media includes entertainment?

Yes, media includes entertainment, films, television, games, DVD and video. Newspapers are not that large a proportion. It is infotainment, yes. Every way we look at it, my guess is that 10 years down the line the absolute revenue in the entertainment business will be more out of Asia than from the West. Let's take a look at the demographics. Entertainment demographics run from 14-15 to just under 30. The stunning population statistics are huge in the particular demographics I'm talking about. In India, we are expecting almost 30 per cent of our population to increase within that demographic. In the US, despite immigration, they are expecting between 5 and 10 per cent. So it's not just population growth. It is population growth within that demographic as a percentage of total population

If you talk about the business of health care, I would say yes, given that people are living longer, the amount of people that are going to get into that demographic will be huge as a percentage of the total. So healthcare business, yes. Even that part of the healthcare business they keep talking about, a large part of the servicing is shifting to India. I guess the big service that will shift to India specially is health care. You'll probably find that old people's homes exist now in India. They [the West] will be offloading their people at a huge cost to themselves, but at half the cost of what they have to do to keep them well here.

Are you saying that it's the 15-35 age range that will be consuming infotainment and that huge potential market is in India? Basically, what we are doing is just touching the tip of the iceberg, whether it's India or China. Anyway, when you take Asia, whether it's India or Japan, China, Indonesia, Bangladesh, Pakistan, Malaysia, Singapore, they are all about 75 per cent of the world's population already. Right? So when that happens, one thing people don't understand and what I'm banking all my predictions on is a philosophical thing. What happens is that when the financial strength of a particular consumer group becomes stronger, that particular consumer group starts to extend its own cultural muscle.

When American culture and therefore entertainment started dominating the world after the Second World War (they did it in many ways by giving free entertainment also), essentially they could do what they did because at home they were financially strongest anywhere in the world. So they called the shots and they had the financial muscle to go out and conquer the rest of the world, which was coming out of the wars and was underdeveloped. That's what McDonald's did. Before McDonald's went out and conquered the world in a full franchise system, they were hugely strong in their own home market.

Are you saying that the billion-strong Indians in 10 years time will be calling the shots as far as the entertainment industry worldwide is concerned?

Yes, they will ask for their own culture. And the shape it will take is that it will go mythic. In Asia we like more mythic stories. That's the kind of change we'll have. Over the years the 70 per cent majority will gradually marginalise the Western market. So what happens is that just as we now love Tom Cruise, the West will learn to love our actors and they will get used to those faces. So in 20 years time you could have a Shah Rukh Khan who would earn US $40
million because by that time his market has extended.

What about issues like colour and language?

These are tastes. Language is important. In 20 years time I believe the Chinese will start making English-language films. Just remember all entertainment,80 per cent of the viewership of all entertainment, is dubbed into the local language. So that's never a problem, and it's very sophisticated. Even today a Hollywood film you see in Italy is dubbed into Italian. In Germany it's dubbed into German, in France into French. It's not just Arabic and Hindi that they do, in all of Europe it's dubbed.

This shift in culture and the aggressiveness of the Asian consumer is going to be supported by a large number of that culture who actually live in that lifestyle. Currently there are 27 million Indians approximately who live outside India and their combined GDP is 75 per cent of the total Indian GDP. Add to that Bangladeshis, Pakistanis and Chinese. So there's probably a hundred million Asian diaspora dotted around that will support any such reverse cultural colonisation. They will also have the purchasing power. And the purchasing power at home is growing.

Shall I give you an example of this? Everybody told me Bombay Dreams won't work, including Andrew Lloyd Webber. It became the most successful show in town. Who supported it in the first month? The diaspora. Apollo is the largest theatre in town [London]. It's now going up 80 per cent and 90 percent every day and 100 per cent at the weekends. Still, it's one year down the line. It was for the Really Useful Group -- Andrew Lloyd Webber's company -- the fastest payback for investors ever. Not even Phantom of the Opera returned it that fast. All investments were recovered within a year, in fact within eight or nine months it went into profit. So I have tested my theory here. The idea came to me here in London, but I have been in that mode if you like, that Asian culture is going to be the culture of the future. That's why I go to the World Economic Forum every year, I talk about it. People understand it, but they don't know what todo about it. We'll come to that later.

Let's talk more about Bombay Dreams and about growth. If you talk about ticket price growth, in the US it has gone up from about US $5 to $7.

In the UK or Europe it has gone from $6 to $7. It has not been that amount of growth. But take India. It has gone up from Rs 40 in the balconies to Rs 250 in the inner cities. We have more multiplexes being built in India and China than anywhere else in the world.

Is cinema the only avenue you are looking at?

No, let's take television. Twelve years ago India had two state channels and now we have 24 channels. The number of consumers is there. Let's go further. The figure of US $1.3 trillion is never going to be achieved unless there is some kind of merger between various industries, what they call convergence. A convergence between digital and entertainment. Ultimately, what is convergence? People keep talking about it. The end use is always towards the consumer. That's what you are aiming at. The biggest thing convergence will do is change delivery systems. This morning I justset up my broadband and I found a thousand radio stations to choose from.So I'm picking up radio stations from all over the world and it's incredible.Broadband video screening is giving me convergence, so I don't even need to switch on the radio anymore. I have 1,000 radio stations and I can just turn them on.I'll give you an example. Steven Spielberg today decides to release Jurassic Park, let's say. Because it is an event -- like the Harry Potter book or the new Microsoft operating system -- there are queues of people waiting to see it. Why? They could wait for a few days or a week. But human beings in this attention-grabbing world can be provoked into doing this kind of thing. I've seen it in India: first day, first show, everybody wanted to see the show in the first week, on the first day, just to be able to say they had seen it. And they were willing to pay. At a time when the pricewas Rs 10, they would pay Rs 300 to get into the first week, first day show.

Everybody now recognises Asia. The first attempt will be Western corporations to try and treat this as an extension of their product, a market that will extend their product and, yes, MTV will say yes, that's okay because we can do local programming. It doesn't work like that because the intention is not the same. The intention is to increase your shareholders' value and the shareholders' value is held mostly outside. That's where you go wrong. The Asianisation of these businesses will probably come from people who are Asian and who are happy to earn in rupees or earn in the progress and become part of the progress and the expansion of Asia. The only Asian corporation today that is very extensive in infotainment is Sony.

At the last FICCI [Federation of Indian Chambers of Commerce and Industry] meeting I spoke about these figures and I talked to people about the possibilities. I even went into the detail of creating for them a plan, a ten-year plan. Mike Grindon is the head of international television at Sony. He was also speaking at the same thing and wrote me a note, saying every statistic, everything that you've talked about, is exactly the view of the chairman of Sony. This is exactly what he is saying and he is so frustrated with his team in LA who actually control the software of Sony that they don't get the future importance of Asia. That's the problem.

It's an Asian corporation that understands Asia, is Asian, and is being run by Americans who have their own world view. The next thing is that investment in India, in China, in Asia is going to increase dramatically. Where will all the Arab money go now? They don't want to invest in the US. Europe is not offering great investment opportunities. Where is the investment opportunity? Asia! One of the things Mr Bush has done is accelerate this process. Through the Iraq war he has created a divide and that divide will only help Asia. That's what we saw in Cancun when all the Asian economies got together and Brazil joined in. I don't think it would have been possible if Iraq hadn't happened. That's my guess.

The big business opportunity now is for this big Asian corporation, or corporations, to come in and take a long-term view and see that if 70 per cent of the growth in revenues from the entertainment, infotainment, media business is coming from Asia, are we looking at out of US$1.3 trillion, at least $700 billion coming from Asia? If there is a $700 billion future market, how much of that comes from India? Can India take 30 per cent of that? Are we then talking about a $200 billion business that can come out of India?.................................

As a government, as a society back in India, what can we do about this impending change?

We need strategies to take advantage of this. We have to decide which city will become the centre of media in the next 10 years. Because if you are not careful it will be Shanghai. Could it be Mumbai or another Indian city? I think the corporations must start investing.

What we don't have now is structure. The growth is happening in unstructured movement. It's boiling consumer demand and attitude that's pushing it without anyone at the top understanding what's happening. Nobody is pulling it. There's a push factor happening on its own, there's no pull factor. A pull factor that can happen with a large strategy and a corporation saying, 'If we set this, this, this up, and then open the floodgates, we are ready for a catchment area, we are ready to direct this place.' So basically what it needs is large investment, strategy, co-ordination. I have talked about this at the World Economic Forum, Indian film forums and I've talked to the Indian government, which totally agrees with me.

This is superpower stuff?

Yes. Look, when you sell American culture, what follows? McDonald's.We don't buy McDonald's because we love McDonald's. It's because we aspire to a lifestyle. We buy Levi's because it's American culture. You buy McDonald's because it's American culture. Tourism follows.

The Lord of the Rings increased New Zealand tourism by 30 per cent. Go ahead 10 years and see how everything Asian and Indian could become popular.Indian lifestyles, Asian lifestyles, could become popular because this is where everything will be marketed. It will be Indian glamour programmes like The Bold and The Beautiful with Indian models and the Indian scene. Sex and the City will be Indian. It will be watched in New York, that's what will happen.

The Amitabh Bachchan 20 years from now will be a major megastar worldwide, possibly the world's biggest star. That's what's going to happen. Gucci and all these others won't be the big brands, the big brands will be Asian.You'll have an Indian brand that sells all over the world, Indian designers, Indian models, everything Indian or Asian. But you need structure for all that. Because if you don't, Western corporations will try and profit. Trust me, they know about this, they understand it, but they don't know what to do about it. Their attitude is, it's a market for them. I'm saying, 'No, they are a market for us.' There is the big difference and if you can do it in the entertainment business, all businesses follow, attitudes change.

In summary, are you saying the Asia century is upon us and the defining issues of fashion, lifestyle, entertainment will all follow ?

Yes, because attitudes change.
Source: Rediff.com

More on China and Commodities

The inflation in commodity prices caused by China growth continues. Remember we in the OECD are also dependent on the terms of trade:

Xinhua state information agency reported that China has maintained a "basic balance" between supply and demand for major agricultural products since the late 1990s. Yet, national grain production is down for the fifth consecutive year, say experts. Inflation and decreasing grain reserves are worrisome.

The explosive demand for commodities in China has caused prices to rocket also at global level. Imports of grains and oil-seeds have doubled compared with last year. National grain production is down again for the fifth year consecutively. This year in particular, yields of all three major crops; wheat, rice and corn have dropped. Total national grain output is expected to fall below 450 million tons. If the trend does not change, it could result in a shortage by 2005, said the China daily on Thursday.

Inflationary trends have been recorded for grain, cooking oil, meat, eggs and fodder. The price hikes, which began in Beijing, Nanjing and Zhengzhou, quickly spread throughout the country. Purchase prices for wheat went up by 40 to 80 Yuan (US$ 4.80 - 9.70) per ton in major wheat production areas such as Henan Province. Prices for corn rose by 80 Yuan in northern China, while prices for rapeseed and rice increased by 20 and 10 per cent, respectively, in Anhui Province.

Farmers, who have been suffering sluggish income growth over the years, welcome higher prices. Still, that has its implications on the national agricultural market. The growing demand for grain stimulates imports from abroad that has other implications on the nation's trade balance.

Experts are expecting grain shortages. "China has been using its grain reserves to balance the market for the last four years," said Wan Baorui, vice-chairman of the Agriculture and Rural Affairs Committee of the National People's Congress. "The reserves can be used for, at most, another two years."

Since 2000, annual national grain demand has stood at 480-490 million tons, 25-35 million tons more than the annual output. Fundamental changes have caused that the national grain reserve have diminished. Not only natural disasters but also shrinking acreage slowed down the long years of oversupply. Moreover, rapid urbanization has been eating up grain fields.

In addition to the swift expansion of towns and cities, many regional governments have reserved large parcels of land for "economic development zones" meant to attract foreign investment, but many such zones simply lie empty due to a lack of infrastructure or adequate local investment, said the China Daily.

The low grain prices in the past have led to farmers' declining enthusiasm for planting it. Heavily burdened by various taxes and charges, most farmers would rather grow more profitable crops, such as peanuts and cotton, or migrate to the cities to look for better earnings. The latest government statistics indicate that 80.7 million rural labourers were working in cities at the end of September.

Professor Li noted that total global output of the three major crops this year would come to 2.03 billion tons, down 63.3 million tons from last year, marking the sixth consecutive year that the figure has dropped. The world grain market, meanwhile, experienced its biggest price fluctuations in seven years, said the China Daily.

Due to population growth, increasing consumerism and economic growth the grain demand is rising. Although, China must make every effort to guarantee that at least 90 per cent of demand is met by domestic supply, as grain is a product involving national security, that target is not reached so far.

To realize this target, Han Jun, an agriculture researcher with the State Council Development and Research Centre said, national grain acreage must be kept stable, at around 1.07 billion hectares. Han also suggested the central government abolish agricultural taxes in five years while taking strict measures to curb the occupation of farmland for industrial development and other purposes.
Source: China Biz

This Was Not So Unexpected

Not for me at least. Germany is struggling, there is no easy and rapid cure. Equally one month thigs go up, and the next they come down. Or this month they go down and next month they go up. What you shouldn't expect is a clear and pronounced upward march.

German industrial production unexpectedly fell for a second month in September, held back by the effect of summer holidays, a government report showed, a sign the way out of recession for Europe's largest economy may not be smooth. Production at factories, construction sites, utilities and mines dropped 1.2 percent after declining 3.7 percent in August, the Economics and Labor Ministry in Berlin said in a faxed statement. The median forecast of 31 economists surveyed by Bloomberg News was for a monthly gain of 2 percent.

"There's a lot of talk about hope that we have bottomed out,'' said Robert Koehler, chief executive officer of SGL Carbon AG, the world's largest maker of carbon and graphite products. ``I'm not sure if we'll really see top-line growth worldwide.'' At least six reports in the past four weeks, from rising factory orders to falling unemployment, indicated the economy is reviving amid an acceleration in U.S. growth. Still, companies' third-quarter earnings reports have been mixed. SGL Carbon will cut more jobs in coming years and may shed one of its four units after forecasting a loss for this year and little- changed sales in 2004. Bayerische Motoren-Werke AG, the No. 2 luxury car maker, raised profit for the first time this year last quarter. The Economics and Labor Ministry, which said the summer holidays curbed production in September, said it expects industrial output figures for that month to be revised ``markedly'' higher.

Bundesbank President Ernst Welteke estimates Germany's $2.3 trillion economy grew 0.2 percent last quarter. The third-quarter gross domestic product reports is scheduled to be released by the Federal Statistics Office in Wiesbaden on Nov. 13. The euro, which has appreciated more than 13 percent against the U.S. dollar in the past year, may have hurt production. The single currency rose to a record of $1.1933 in late May. It traded at $1.1427 at 11:51 p.m. in Frankfurt. "When the euro rises, we lose sales,'' said Rudolf Winning, chief financial officer of Zapf Creation AG, Europe's largest maker of dolls. ``A rate of $1.10 to $1.15 reflects the fundamentals of the economy.'' The company last week cut in half its estimate for full-year operating profit partly on the euro. In a two-month comparison, which smoothes out short-term swings, German industrial production fell 2.9 percent in the eight weeks through September from the previous two-month period, the ministry said.
Source: Bloomberg

Trichet Backs the Pact

Jean Claude Trichet the new governor of the ECB is trying to convince the media that 'things have changed'. Hopefully he is right. In order to try and set the stage for his term of office, he is quite forethright about his views on the Stability Pact. (Anyone who doesn't visit Fistful regularly could try this post and this one).

Jean Claude Trichet, the European Central Bank's new president, on Thursday warned eurozone countries that the rules underpinning the single currency were "now at a critical point". In a polished performance at his first press conference since taking over from Wim Duisenberg, Mr Trichet said the stability and growth pact provided "an appropriate framework" for ensuring fiscal discipline. He said the budget deficit limit of 3 per cent was "the anchor" for the pact. "It must not be placed in doubt," he said. His remarks came as the ECB held its primary interest rate steady at 2 per cent and signalled rates would remain on hold for some months amid signs that the eurozone economy was finally beginning to pick up speed.

The Bank of England on Thursday raised UK interest rates for the first time in almost four years, making it the first of the world's four leading central banks to tighten its policy since 2000. But Mr Trichet gave no indication that the ECB was close to following suit. The central bank was now more confident about the upturn in the eurozone economy, he said, and "anticipated some stickiness" in inflation rates over coming months because of higher food and oil prices and increases in indirect taxes. But he insisted that price pressures would eventually moderate. Economists said the bank appeared to have adopted neutral "wait-and-see" stance on monetary policy. "A reduction is possible . . . but looks increasingly remote," said Lorenzo Codogno of Bank of America. Mr Trichet also stopped short of giving any signal the ECB was looking to tighten monetary policy in the near term.
Source: Financial Times

Linux for Pandas

Zoo station's Reuben Abraham has a useful piece about Linux in China:

In a seeming blow to Microsoft's attempts to capture the enormous and growing Chinese market, the Chinese govt seems determined to come up with a national standard for Linux to counter MS's dominance of the desktop software market. The ostensible reason is that open standards help China keep better control of "sensitive state information."

China would build a domestic software industry around Linux -- a cheaper software standard that can copied and modified freely -- said Gou Zhongwen, a vice minister at the powerful Ministry of Information Industry. "Linux is an opportunity for us to make a breakthrough in developing software," he was quoted as saying on the ministry Web site www.mii.gov.cn. "But the market cannot be developed on a large scale without government support."

Gou did not give details on the amount of planned government investment in Linux. China's information technology market is growing at 20 percent a year, with software sales expected to reach $30.5 billion in 2005, according to research house International Data Corp.

Will be interesting to see how much political pressure MS will bring to bear on this one, given the blame-it-all-on-China mentality in the U.S. today. China, for it's part, has been trying to mollify the U.S. govt somewhat. The $2 billion deal struck with Boeing (rather than Airbus) is a case in point.

Thursday, November 06, 2003

China Slowdon 'Alert'

Earlier in the week Stephen Roach put up this China slowdown 'alert'. Certainly China's growth engine is not unstopable, and there have been many who have pointed to the dangers of internal instability. But this time it is the driver himself who is applying the break. The really, really big problem (the scenario that every thinking person dreads) would be if this 'unstoppability' were to be tested by an unforeseen crisis. And certainly the rest of the world economy is vulnerable (in particular via the Asian economy) to any turbulence from China.

Personally, however, I think Roach is overdoing it a bit here. I think he over-emphasises the degree of central control over what happens, and he overstates the importance of conventional monetary shocks: even 'uncle Milton' has had to modify his views a bit on this one. So lets take this one day at a time.

The move to skim the froth off China’s exceptional growth vigor was initiated by the central bank in the form of an increase in reserve requirements announced in late August and made effective in late September.

The medicine is already working. The remaining vestiges of a centrally controlled system have certain virtues -- the word gets out quite effectively. In my discussions with senior officials in the Chinese banking sector, there is little doubt that lending growth has already slowed. According to their assessment, the response to the increase in reserve requirements has been almost immediate; lending is reported to be down in both September and October -- responding more to the announcement effect in late August than to the actual implementation of the action a month later. The resulting downshift has initially been concentrated in property markets but apparently is also spilling over into other sectors as well. This could be just the beginning of a shift to policy restraint in China...........

As bank lending slows, so should fixed investment spending. Our official forecast for the Chinese economy looks for 11% growth in fixed investment in 2004, half the excessive 22% rate of increase in 2003. The anecdotal reports from Chinese banking officials that I heard over the past few days seem to confirm this possibility, as the slowdown in real estate lending now spills over into other segments as well. Reflecting this investment-led downshift in domestic demand, we also look for a sharp slowing of Chinese import growth -- a 20% gain in 2004 following a 40% surge this year.

The import impact is of critical importance in understanding the pan-regional and broader global implications of the coming slowdown in the Chinese economy.............The bottom line is that any material slowing in Chinese import growth -- precisely what we expect over the next year -- will have important implications on Asia’s increasingly Chinese-dependent trading partners.
Source: Morgan Stanley GEF

Of Pesos and Mambos

Here's another blog for you to check out: it's an LA group blog called Southern Exposure, and guess who's involved? Today's news, from Argentina and from Brazil.

Telefónica de España has annouced that it will invest U$D 701.3m (about 2b Argentine pesos) to extend and upgrade its infrastructure in Argentina, tempted by prospects of 7% growth for the next year, while Brazil has renewed and expiring $14bn accord with the IMF. These are somewhat significant news, as there have been some strong words crossed between privatized utilities and the government in Argentina, and serious criticism from supporters of Brazil's government regarding dealings with the IMF.

And fishing co-blogger Stephen up from the depths of the comments section:

The Brazil renewal of the IMF accord is indeed significant news. Sort of like "hell freezing over" as far as Lula in opposition was concerned. But he learned it's a bad idea to spook the horses before you have to ride them. Still, the government has said that it would like to exit the IMF arrangement and they consider this an interim arrangement. Lets them save some face, provided Brazil continues to progress and maintains its current account surplus sufficient to service its debt. An article in yesterday's Globo points to intention to invest in Brazil in the year ahead. Overall, investment intentions have increased from US$42bn in 2002 to US$67.9bn in 2003, an increase of 61.5% which is seen as a "reheating" of the economy. The source of the data is the Fundação Getúlio Vargas.

US: Jobless Down, Productivity Up

These numbers are good, surprisingly good, and on the productivity front (even though they don't quite meet up to Bloomberg's earlier 'leak') almost too good. We should keep our eyes open and await further developments. Meantime good news for those who now have work but didn't before.

The number of Americans filing first-time claims for jobless benefits took an unexpectedly sharp plunge last week, reaching a level not seen since before the economy tumbled into recession in 2001, a government report showed on Thursday. A separate report showed U.S. business productivity soared in the third quarter, suggesting little risk inflation will flare despite signs the economic recovery is on firmer ground. Initial claims for state unemployment aid fell 43,000 to 348,000 in the week to Nov. 1 from a revised 391,000 the prior week, the Labor Department (news - web sites) said. It was the lowest level since late January 2001, two months before the recession began.

Stocks were poised to open higher on the data, which suggested an improvement in corporate profits and offered hope a jobs recovery may finally be at hand. Prices for U.S. Treasury securities fell sharply, while the dollar rose. Economists had expected claims to slip to 380,000 from 386,000 -- a figure boosted by a grocery store strike in California -- initially reported for the week to Oct. 25. "The large drop in claims ... confirms that firms have begun to hire and employment has turned up," said Jade Zelnik, chief economist at RBS Greenwich Capital Markets.

A spokesman for the department said he could not account for the big drop in claims last week, but said problems with seasonal adjustment of the data could be a factor. "Every week we encourage (looking at) the four-week average. This is certainly one of those weeks," he said. The four-week average, which smoothes weekly volatility to present a clearer picture of labor-market trends, fell 10,000 to 380,000 last week, its lowest level since March 2001. Initial claims and the four-week average have been below 400,000 for five weeks. Economists see that level as a divide between an improving and deteriorating labor market.

Last week, the government reported that the U.S. economy grew at an annual rate of 7.2 percent in the third quarter, the strongest pace in nearly two decades. Despite that, the economy shed 41,000 non-farm jobs as gains in productivity enabled firms to meet increased demand for goods and services without expanding their workforce. The Labor Department said on Thursday non-farm business productivity climbed at an 8.1 percent annual rate in the third quarter, accelerating from an upwardly revised 7.0 percent gain in the prior three months.

The increase reflected a rise in output that was the strongest in over 10 years, and only a small increase in the number of hours workers put in on the job. The productivity gain pushed unit labor costs -- a gauge of potential wage pressures -- down at a 4.6 percent pace, suggesting a good quarterly performance for corporate profit. Economists polled by Reuters had forecast an 8.5 percent gain in productivity and a 4.7 percent drop in unit labor costs. Analysts say the recent productivity pace is unsustainably strong, and some said the fall in jobless claims suggested firms were finally having to hire to meet demand.
Source: Yahoo News

The Quality of Soya is not Strained

Back to the fascinating story of Brazil's soyabeans for China. Today there is an interesting follow up: the Chinese are worried about quality:

Brazil's agriculture minister Roberto Rodrigues will meet his Chinese counterpart in Beijing later today to resolve quality problems that have slowed Brazil's soybean exports to China, the world's biggest buyer of the oilseed. Brazil, the world's second-largest soybean producer, plans to send inspectors to its main ports to ensure shipments of soybeans to China are free from fungal contamination and don't contain grass or other waste matter, Rodrigues said in an interview at the World Economic Forum's 22nd annual China Summit in Beijing. "Starting now we are sending inspectors to our main ports,'' Rodrigues said. ``Some exporters have wanted to make big profits in one shipment by mixing good quality soybeans with bad quality. We are doing our homework now to resolve the problem.''

In August, China's quality inspection bureau banned new orders for soybean shipments handled by Cargill Ltd., Louis Dreyfus & Cie., Bunge Ltd. and other international traders, citing concerns that shipments contained too much grass or fungus. The ban was the latest in a series of disruptions that started when China introduced regulations on genetically-modified crops last year. Rodrigues will meet Qi Jingfa, China's vice agriculture minister, and Li Changjiang, head of China's quality inspection bureau, later today. China has said it found fungus and other contaminants in shipments of soybeans from Brazil. The discovery has prompted a slowdown in issuance of soybean import permits for shipments from the South American country. Brazil will pledge at the meeting to identify shipments that contain genetically-modified soybeans, Rodrigues said. Of Brazil's total soybean harvest of 51 million tons this year about 7 million tons are gene-modified. That figure will rise to 10 million tons next year, he said. Brazil's soybean harvest may rise to as much as 58 million tons in 2004.
Source: Bloomberg

Technological Leapfrog one More Time

More in the mailbox: this time Joerg.

"NEC is coming out with a credit card-sized cellphone that is just 10mm, or four-tenths of an inch, thick. The N900 also has a built-in digital camera and will be sold initially in China with Southeast Asia and Europe to follow."

Now those who follow Bonobo will know we are just fascinated by the possibility that some parts of Asia can do some technological leapfrogging. Well here we have another example. (I don't know if any of you have noticed a bit of a blogging slowdown on my part, at least in terms of my writing input: well if you look at who's doing the economics and business op-eds you will see why. Maybe this is being done by ex-pats and Barcelona residents, but it is one of the most advanced ideas of its kind, and it is happening in China!

Just Love the Thai Food

Back to Thaksinomics and other matters: in the mail box I have this from Eddie

Interesting to note the interest in Thailand. It's just amazing how this virtuous circle that daniel lian talks about turns things around so completely.

Noticed preliminary estimates that the Thai govt budget will be in surplus this year! Understand that they had initially intended to cap the deficit at about 2% of GDP. Here's how a Thai govt official explained to me:

'The budget balance turns out the surplus since the government revenue outperforms the planned figure by more than Bt 100 bn. The main reason is the more-than-anticipated economic condition.'

and here's what my Thai friend mailed to me:

'My feeling is that....this government moves fast and thinks like businessman. Previous government, they are
just like lawyers....too busy thinking about law...legal issues...etc. I think this government has done numbers of things for the country. Income for poor (farmers) as well as middle class people are better. I think people are regaining their
wealth back. The property boom leads to higher employment. Industries related to property as building materials are better too. The poor get higher income from the one-tumbon one-product (OTOP). I heard that they can sell those low-tech products worth around Bt17bn this year'

When I look at Thailand .. what I see is ... whatever Thaksin's motives maybe, for now he's done what the govt here has failed to do ... lift the people's spirits. Could a country in times of a crisis ask for more?

Joerg's & your point about the lump of structural reform fallacy ... there's something in it. When and what are the returns for the sacrifice? Is there a balance to be found? Where would Thailand be today if they had taken a different road? Thaksin is a populist .. but didn;t the country benefit from it?

The other thing about Thailand I;ve noticed is that their exports have actually done pretty well in the past year... relatively better than Spore and Malaysia. They have certainly benefitted from commodity exports, but 'high-tech' exports have also done well. Why is the question. Is it because the Baht devalued more than the Ringgit & Spore dollar? They appear to have benefited from outsourcing, despite china. (Actually, many of the smaller electronic
manufacturers in Spore have done well too. Those that have a niche that's nicely plugged into the supply chain of the MNCs)

Sustaining Thailand's remarkable recovery despite theuncertain global climate is a question mark. Inflation is still low in Thailand and so are interest rates. So despite the recovery, they have not reached a point where they feel comfortable (or are able) to raise interest rates. When the next global downturn comes, Thailand got to keep going on yesterday's momentum. It's something to watch.

Anyway, on the topic of Thailand, I'm planning to head up there in December for a holiday.up north to the villages and chiang mai. just love Thai food.

Staggering Rise in US Labour Productivity

US labour productivity may have risen at an astounding 8.5% in the third quater, at least that's what Bloomberg are telling us. Following close on the heals of a 7.2% growth in GDP for the same quarter these numbers clearly are incredible: frighteningly so. It is clear that something pretty important is happening, but I fear we may need to wait for the dust to settle before we can see what that 'something' actually is.

U.S. worker productivity may have grown in the third quarter at the fastest pace in more than a year as economic growth surged, economists said they expect a government report to show today. The Labor Department's gauge of how much an employee produces for every hour worked may have risen at an 8.5 percent annual rate from July through September, the most since the first quarter of 2002, when the economy was emerging from recession, according to the median of 64 estimates in a Bloomberg News survey. In the second quarter, productivity rose at a 6.8 percent rate.

Last quarter saw the economy expand at a 7.2 percent annual pace, the most in 19 years. During those three months, companies cut 41,000 workers from payrolls, suggesting remaining employees were more efficient. The resulting boost to corporate profits may soon lead to more investment and renewed hiring. "While it will be difficult to grow at quite that pace in coming quarters, it seems clear we have entered a new phase of economic expansion,'' Treasury Secretary John Snow said a speech to the Economic Club of Washington. Private economists agree. "As corporations continue to register higher profits, you will ultimately see new hiring programs kick in,'' said Bill Sullivan, a senior economist at Morgan Stanley in New York. "Ultimately these productivity gains slow and businesses must begin to raise payroll levels.''

The Labor Department issues the report at 8:30 a.m. Washington time along with statistics that may show a decline in claims for unemployment benefits. New applications may have dropped by 6,000 in the week ended Saturday to 380,000, based on the median of forecasts. Last week would be the fifth in a row for claims to hold below 400,000, the longest such stretch since six weeks in January and February.

The ability to produce more with fewer workers reflects past investments in computers and other equipment that are still making employees more efficient. From 1996 through 2000, productivity gains averaged 2.5 percent a year, more than a percentage point higher than the 1976-1995 average of 1.4 percent. "Much of the strength we saw in the third quarter is likely to continue,'' Snow said in his speech. ``This is not a fleeting glimmer -- there is real muscle behind the growth trend.'' The surge in productivity "probably is a lagged tribute to the 1990s boom in capital investment,'' said Bill Sharp, a senior economist at J.P. Morgan Securities Inc. in New York.

Greater efficiency may have damped unit labor costs, or the amount paid for each unit of production, according to the survey. Costs may have dropped 5 percent last quarter, the most since the first quarter of 2002, following a 2.8 percent decrease in the previous three months, according to the survey median. Falling costs together with rising sales are providing a lift to corporate balance sheets. Third-quarter profits are increasing at the fastest pace in more than three years. Earnings have risen 21.7 percent, based on results from 80 percent of the Standard & Poor's 500 companies reporting so far, according to Thomson Financial. Almost two-thirds of the companies that reported profits topped the average estimate.

Productivity historically slows in the quarter following a surge. It has grown at a 7 percent annual pace or more 26 times since the end of World War II. In the subsequent three-month periods, it dipped to an average of 1.6 percent while companies hired an average of 481,000 workers. "These productivity numbers aren't sustainable,'' said Russell Sheldon, a senior economist at BMO Nesbitt Burns Inc. in Toronto. If business leaders ``remain cautious at this point in the recovery, other companies are going to get the lion's share of growth, and most aren't going to let that happen.''

Companies may have added 65,000 workers to payrolls last month, following a gain of 57,000 in September, the Labor Department may report Friday, according to the median of 68 estimates in a separate survey. September's gain was the first since January. The unemployment rate may have held at 6.1 percent for a third month, the survey found.

For their part, company leaders are hesitant to jump the gun on hiring. "With all the gains that have been made in productivity, employment is going to come back very gradually,'' said Michael Jackson, chief executive officer of AutoNation Inc., the largest U.S. retailer of new and used cars, in a television interview with Bloomberg News last week. "And I see a gradual recovery from the consumer perspective, not roaring back.'' The economy may grow at a 4 percent annual rate this quarter as consumer spending rises at a slower rate, according to the median estimate of 56 economists surveyed by Bloomberg News this month. Household spending, which accounts for about 70 percent of the economy, may grow at a 2.8 percent rate compared with a 6.6 percent increase last quarter that was the biggest since the third quarter of 1997.
Source: Bloomberg

Wednesday, November 05, 2003

China Goes Shopping

So China has learnt something from the Japanese experience. One way to calm things down is to go shopping. This purchase can kill two birds with one stone: cool down the overheating Chinese economy, and lower the political temperature in Washington. As a bonus you get some smart technology thrown in. Of course later you will have to ask how many years will it be before they are manufacturing something - not a copy, of course - but something very similar inside China.

China is poised to buy as many as 30 planes worth about $2 billion from Boeing Co., the world's largest aircraft maker, allowing the country to narrow its trade gap with the U.S. Carriers including Air China, Shandong Airlines Co. and Xiamen Airlines Co. will buy the 737s from the Chicago-based company, an official at China's State Development Planning Commission said in a phone interview from Beijing, speaking on condition of anonymity. The commission approves purchases of planes for Chinese airlines, all of which are state-controlled. The order may be announced during Chinese Premier Wen Jiabao's Washington D.C. visit, scheduled for this month, Boeing officials said. The purchases are a part of China's efforts to ease U.S. concern about its $130 billion trade gap with Asia's second-largest economy, said investors such as Louis Chan.

The order will help Boeing limit the loss of market share to Toulouse, France-based Airbus SAS. Boeing last month said sales of commercial aircraft dropped 17 percent in the third quarter. Airbus has won 263 orders this year, compared with Boeing's 169. Airbus expects to deliver 300 airplanes this year, which would give it more deliveries than Boeing for the first time in its history. Mark Hooper, a spokesman of Boeing in Hong Kong, said airplane order announcements should be made by the airlines. Shandong Airlines said it will buy seven 737s, while Xiamen Airlines said it will purchase five of the planes and Air China said it will also take five aircraft from Boeing. Air China spokesman Wang Yongsheng confirmed the airline's order in a telephone interview, without specifying what type of planes.

Chinese Trade Minister Lu Fuyuan and other officials have said China will bolster imports to close its trade surpluses with the U.S., European Union and Japan.

U.S. Commerce Secretary Don Evans last week denounced China as a closed market and predicted that the U.S. trade deficit with the world's most populous nation will reach a record $130 billion this year. Chinese airlines will buy 2,400 new aircraft worth $197 billion in the next two decades, according to Boeing, as they expand their fleets to meet demand in one of the world's fastest- growing economies. The Chinese economy, the world's sixth-largest, is expanding at an estimated 8 percent annual rate, three times as fast as the Group of Seven industrialized economies.

Shandong Airlines, which is based in the eastern city of Jinan, will take delivery of the 737s as soon as 2005, said Gao Zhu, the carrier's general manager, in a phone interview. The carrier, which has a fleet of 30 planes including those made by Boeing and Canada's Bombardier Inc., plans to expand its fleet by a third to 40 planes by 2007 as it prepares to offer flights to South Korea and Japan next year, Gao said. Shandong Air, which had earlier sought government approval to buy 15 Boeing planes, will order the remaining planes later, Gao said.

Xiamen Airlines, 60 percent owned by China's biggest carrier China Southern Airlines Co., will expand its all-Boeing fleet with the purchase, said its Chairman He Ping. The airline, based in southeastern China's Xiamen city, has 27 737s and 757s. Xiamen Air operates more than 110 domestic routes and four international routes to Singapore, Seoul, Bangkok and Kuala Lumpur. The airline expects to get approval to start flights to the Malaysian island of Penang this year, he said. The 17 planes on order and confirmed by the three carriers will cost an estimated $1.1 billion, based on catalogue prices. The list price for a 737-700 is as much as $55 million, while a 737-800 is as much as $64.5 million. There are usually discounts to these prices.
Source: Bloomberg

Gloom and Doom Continued

Following close on the heels of my recent Gloom and Doom posts about energy shortages in the future, my admirable correspondant Christopher has been kind enough to answer a question I had. I aksed about the work and theories of astrophysicist Thomas Gold:

One question, there is an astro-physicist called Gold who questions the whole biological degradation theory for petroleum. He says the stuff was more or less chemically produced at the start of the planet. He also suggests that there may well be an enormous quantity deep down, and that the deposits we know about are like cisterns that fill up from time to time due to interior pressure. Is he a 'nut', or could there be something in this?

First, a bit of disclosure: I am not a geologist and I haven’t read his book, “The Deep Hot Biosphere” but I have read a few of his papers.

I don’t think one can look at his C.V. and summarily dismiss him as a nut. The issue comes down to whether you consider his theory a replacement for, or a supplement to, the existing theory. Obviously, the theory has to be able to stand on its own but the burden of proof is different.

If his theory is a replacement, then one also needs to explain why the current theory is wrong. This is particularly problematic since the existing theory is backed up by laboratory experiments, fits well with existing geology knowledge base, and has been successful in finding deposits all over the world. In his own words: “If the main supply of the commercial quantities of hydrocarbons, both gas and oil, is indeed derived from mantle depths and from materials that were incorporated in the Earth at its formation, then many points in petroleum geology and in other aspects of geology will have to be reconsidered.” I would also like to stress “and in other aspects of geology”. A lot of established geology has to be wrong for him to be right. This is a very large burden of proof.

If his theory is a supplement, then the question becomes what are the relative magnitudes of each mechanism. However, given the success the current theory has in describing the existing deposits, it’s hard to make a case for his theory being a significant, much less a dominant, factor. It would explain some trace deposits that the existing theory doesn’t, but it wouldn’t be a factor as far as depletion is concerned.

Dr. Gold leaves little doubt as to whether his theory is a supplement or a replacement.

This brings us to the merits of the theory on its own. The biggest hurdle is simple:

No one has found the bacteria which is the centerpiece of his theory.

This is not to say that bacteria with some of the necessary characteristics haven’t been found somewhere in the world. However, bacteria with ALL of the characteristics haven’t been found in ANY deposit (to my knowledge). We’ve pumped a lot of oil and gas out of the ground. It’s pretty reasonable to say that in order to fully accept his theory we would need to find that bacteria AND explain why it hasn’t been found previously. Furthermore, some of the other pieces of evidence he cites can be simply explained by other, established, mechanisms.

Looking over my earlier response I forgot to mention the following: “Hubbert's Peak: The Impending World Oil Shortage” by Kenneth S. Deffeyes (ISBN: 0-691-11625-3) It’s a quick read and doesn’t require a technical background.

More on Thaksinomics

Maynard writes about my recent post on Thaksinonics. I very much agree with what he is saying. I think it is impossible to read the personal motives behind what Thaksin is doing (I don't, remember, get too involved in type 'M' arguments) or what the consequences will be for the long term distribution of wealth and power in Thailand. What I am saying is that as an attempt to pursue a 'reflationary' policy which offers an alternative to excessive dependence on the export track, what he is doing is definitely interesting and worth following. Of course, it could all still end in tears.

Thaksin is a very interesting case. Yes he appears to be doing a whole lot to help the poor and Thailand. BUT he has a finger in pretty much every pie in Thailand, and it's not yet clear to me if his primary interest is in helping Thailand (and being remembered as a statesman), in doing well by doing good, or in fleecing the treasury. Current indications seem to be that he plans to leave all his wealth to the family, not to a foundation or suchlike, which does not seem to me to be a good start - at best they will own a huge chunk of Thailand and may manage it badly, at worst they may have political goals of their own.

I'd be wary of considering the guy as a saint yet. It's too early to tell. And maybe the story will always be a complex one - that in the end he does do a lot of good for the nation...and triples his wealth in the process. Important always to remember is that lasting wealth comes through institutions and process, not through getting lucky with the right
leader, and is there much indication that he is building a process that will work well in his absence?

Privatisation and Market Reforms

Another link to my Singapore friend and colleague, Eddie Lee. I like this piece because it questions received wisdom: the point is that received wisdom, when it becomes unthinking dogma is dangerous. Argentina is a living proof of this. Of course, in many cases deregulation and privatisation can be enormously beneficial. But if the process is applied unthinkingly, or if it is simply the transfer of a state monopoly to a private one, then it is much more problematic. It goes without saying that a regulation ridden and corrupt public sector alternative is no alternative at all. However, as Eddie says, markets do fail, and not only occasionally. This seems to be the most misunderstood part of the story.

Privatisation can harm the public good
By Eddie Lee

LAST week, the re-nationalised owner of the British railway system, Network Rail, announced that it would cancel private sector contracts for the maintenance of its 32,000km network. The decision followed a series of fatal train crashes, which spurred concern that safety standards were being overlooked in the company's rush for profits. From breakdowns of railways to power blackouts such as those that happened in the United States, there's a rethink worldwide on how best to deliver public services. In the United Kingdom, the performance of rail companies has deteriorated, with 20 per cent of trains running late and passenger complaints up by 8 per cent over the past year. Ironically, the big companies were the worst performers: South West Trains notched up a 275 per cent increase in delays, measured in total passenger time, last year. And despite the dismal service record, some train fares were raised by more than twice the rate of inflation earlier this year.

The British rail privatisation experience is significant because it was symbolic of the many privatisations first championed by then prime minister Margaret Thatcher. A number of public services which were earlier thought to be 'natural monopolies' were privatised and subjected to market forces, in the belief that this would result in lower prices and improved service.But so far, not many people think that has happened.

Here's Britain's story.

British Rail was sold in 1996 with the following plan: passenger trains were to be run by 25 Train Operating Companies on franchises, while the railway signalling, tracks, bridges and stations were to be handled by a private company - Railtrack. But Railtrack went bust because attempts to raise profitability backfired. Reductions in expenditure on maintenance and repair led to an increase in accidents and delays that proved costly as the company was fined by the Rail Regulator and also had to compensate train operators for each delayed train.

Investigations into the fatal Hatfield train crash on Oct 17, 2000, and into two other rail accidents revealed that the number of Railtrack workers had fallen by over 60,000 from 159,000 in 1992, even though the number of trains had increased. Railtrack went bankrupt last year, and was replaced with the government-controlled Network Rail. And it looks as though the London Underground could take a step back from privatisation as well. There are inklings that maintenance work may be moved slowly away from the private sector.

As for the subway operators, British transport expert Professor John Whitelegg notes that they now get more public subsidy, about 1.5 billion pounds (S$4.4 billion) a year, than British Rail got in its last few years of existence. Mr Richard Bowker, chairman of the Strategic Rail Authority, is worried about the growing financial frailty of some of the operators and aims to dramatically reduce the number of companies to a handful. What has happened in Britain is that private interest (trying to maximise company profits) ended up with a huge social cost (not just higher fares and delays, but also fatal accidents due to negligence).

In Singapore, Acting Health Minister Khaw Boon Wan expressed his concern over such a divergence of private and social interests when he rebuked hospitals recently for engaging in 'silly competition', and urged hospitals to save money for patients, rather than make more profits for themselves. The belief that public interest is best served by liberating enterprise from state intervention has shaped thinking for almost two decades. The California Energy Crisis of 2001 was one of the first rude awakenings. But even though economists have pointed out that the crisis was actually caused by the manipulation of market power, people still cling to the belief that deregulation reduces market power.

Last month, a report by the United Nations' Conference on Trade and Development asked whether market-led reforms adopted in many developing countries after the debt crisis of the early 1980s have strengthened the ability of these countries to withstand external shocks. The disappointment is deepest in Latin America, which ironically is where deregulation has gone furthest. But after initial success, privatisation has roused anger. Take the case of Argentina's privatisation of water and sanitation in 1993: Sewerage infrastructure development has not kept pace with water delivery expansion, due in part to the fact that water delivery is twice as profitable as sewage treatment. As a result, over 95 per cent of Buenos Aires' sewage continues to be dumped into the Rio del Plata.

So how to avert unnecessary crises from misguided privatisation projects? Professor Paul Krugman of the University of Princeton suggests critical analysis in place of blind faith in the market. This is especially so in the case of companies that also need to respond to shareholders' short-term interests. Markets do fail, and sometimes they fail spectacularly to provide for the public good. Unless private and social interests can be adequately matched, it's silly to sweep all problems under the carpet of competition. Transport Minister Yeo Cheow Tong says the Government's suggestion last week that SBS Transit could transfer the loss-making North-East Line to SMRT was a rethink, not a U-turn. Whatever it is, there's no shame in admitting a good decision. The next question is, should the problem be left solely to the market to resolve?
Source: Straits Times

Rural Connectivity in India

In the mailbox Marcelo sends me a piece about IT and rural India. This is fascinating as a number of my India Economy Watch colleagues are involved in just such projects.The Turow argument referred to relates to this IEW post:

I'm not 100% sure about Lest Thurow's outlook, but it seems like India is (to be fair, has been) addressing at least some of the issues he raised. Having been a fan of Neal Stephenson, William Gibson and the rest of the "cyberpunk" writers for most of my life, I can't but feel a thrill at the concept of a country trying to "upgrade" its peasants to users of digital technology literally bypassing literacy. I don't know if it will or can work, but the concept is fascinating.

India plans $2.7 billion IT investment

Government embarks on four-year effort to bridge digital divide

By John Ribeiro, IDG News Service November 03, 2003

BANGALORE, INDIA - The Indian government plans to spend $2.7 billion over the next four years to bridge the country's digital divide, according to a government official. "You do not want to get into a situation where information and
communications technology, and its progress create social chasms and economic chasms between the haves and have-nots," said Rajeeva Ratna Shah, secretary for industrial policy and promotion in the federal government, at a conference Sunday in Bangalore, India.

As part of its investment in technology and infrastructure, the government plans to introduce a voice-based information technology device that and can be used by Indian villagers regardless of the language they speak.
"(The device) should be able to take commands orally," Shah said. "There must be total interactivity and literacy should not act as a barrier. Language should also not be a barrier. We are moving towards that.'' Shah did not however disclose the technical specifications of the device. This is not the first time engineers in India have attempted to design
a low-cost computer device for rural use. However, the Simputer, a Linux-based handheld mobile computer, with a target price tag of about $200, ailed to take off because of insufficient interest in its target market. A number of nongovernment organizations, multilateral aid agencies, educational institutions and state governments have also launched projects for bridging the digital divide in India, where more than 70 percent of the population live in rural
areas where literacy levels are low and poverty is grinding.

The corporate sector also is discovering that bridging the digital divide could translate into new market opportunities. For instance, HP Labs India, which was set up in Bangalore by Hewlett-Packard Co. (HP), is developing products appropriate for India's rural markets. HP is based in Palo Alto, California. Intel Corp., based in Santa Clara, California, has invested in research at the Indian Institute of Technology in Chennai to explore the viability of wireless Internet connectivity in rural areas. But the investment Shah outlined Sunday is the first time the federal government has put its weight and considerable funds behind such an initiative. A pilot project on broadband connectivity for rural areas is already under way in the state of Uttar Pradesh, according to Shah. In another trial project near Delhi, postal employees are downloading e-mail on wireless handheld devices and delivering them to villagers, who then use the devices to reply to the e-mail, Shah said. The government also plans to introduce a government-to-business
portal, which will allow foreign investors to interact directly with the government, and "enable us to cut corruption," Shah said.
Source: Info World

Tuesday, November 04, 2003

Trichet: A Man For All Seasons?

Yesterday was a reasonably interesting day over at the MS Gloabl Forum. Eric Chaney welcomes the arrival of Jean-Claude Trichet, and in so doing makes an interesting point. The demographic changes may make for a more deflationary atmosphere. When I started saying this publicly over a year ago I felt myself to be a very lonely voice indeed. Every day now I notice more and more people who are thinking about the argument. This can only be to the good. On another angle, I do hope he's right, and that Trichet is 'pragmatic'. What a breath of fresh air that would be!

All that is good, I am often told, but since Trichet got his medals as an inflexible inflation fighter and a true believer of the virtues of a strong currency, will he be able to cope with the challenges of a deflationist world? Although nobody knows if deflation will be a permanent feature of the next eight years, the risk is still there, as the abnormally low level of inflation in the US eloquently reminds us. As far as Europe is concerned, secular demographic trends may increase the risk of deflation: After all, inflation or deflation reflect social preferences, to some extent, and the growing number of pensioners in Europe might tilt the social balance in favor of deflation. This is why a central banker must be open minded and pragmatic. I think that Jean-Claude Trichet has proved he has these qualities in two particular circumstances. First, instead of abandoning ERM rules after the 1992 crisis, he convinced his partners to make the system flexible enough to cope with future speculative tensions, by adopting a large fluctuation band. This proved successful in 1995. Second, in 1998, when financial markets thought that euro interest rates would be some kind of weighted average of member countries’ past rates, Trichet, well aware of the dangerously low level of inflation in core countries (starting with France and Germany) and convinced that averaging Italian and German rates would dilute the credibility of the euro, argued to set the initial level of interest rates at the lowest possible level (3%), despite strong opposition from some countries. This is the man who did not hesitate to push French rates to 7%, then fought to cut them to 3%; simply, times were different. I would call that pragmatism.
Source: Morgan Stanley GEF

Germany: Whither the Structural Deficit?

Following up on the last post, just how big is big in the case of the German deficit. Morgan Stanley's Elga Bartsch has a stab at making a 'best guess' (BTW the problem with giving Brussels giving short term stimulus now for structural reductions later is that if the problem deteriorates rather than improves with time, there really will be a push-comes-to-shove situation in two or three years time.)

Even though we have to wait for the fresh tax estimates to be released in order to finalise our assessment, our best guesstimate for the general government deficit for this year now stands at 4.2% of GDP. Previously, we had expected the Maastricht deficit to amount to 3.9% of GDP this year. According to government estimates, the federal budget deficit alone likely overshot by more than 100%, forcing the finance minister to submit a supplementary budget for 2003 in order to get a net borrowing requirement of €42.3 bn approved by parliament. So far, Herr Eichel only has a mandate to run a deficit of €18.9 bn this year. Both the supplementary budget for this year and the official government estimate for the Maastricht deficit, which will likely show a 4%-plus reading, are largely water under the bridge though.

What is of more importance, however, is the outlook for next year’s budget deficit. This is because according to the Excessive Deficit Procedure, in principle at least, next year would be the year in which the German general government deficit should be back below 3%. In our view, however, it is highly unlikely that the German government will be able to reduce the deficit that drastically. Instead, we estimate the deficit to be on the order of 3.6% of GDP next year. This constitutes a slightly more optimistic view than the one held recently (see Three Cheers for the Chancellor, 22 July 2003), reflecting a more drastic consolidation of subsidies and other tax breaks as well as serious efforts to contain health care and pension spending. But this might still not be enough to prevent the EU Commission from proposing additional consolidation measures to the German government. As in the French case, it seems that the Commission would be willing to allow Germany to stay above the 3% deficit ceiling for another year in exchange for a reduction in the structural budget deficit of 1% of GDP. At the moment, however, the government has delivered half of that.
Source: Morgnan Stanley GEF

Killing the Stability Pact with Kindness?

There's an interesting tussle going on in Brussels at the moment, involving arguments which essetially involve long-term credibility. Short term this may find a not-too-difficult 'compromise' solution, but long-term I think it is an indication of problems to come:

Germany and France were on Monday accused of trying to "kill" Europe's fiscal rules, as EU finance ministers met amid mounting political tension in the 12-country eurozone.They claim to have found a legal loophole that might allow them to escape the threat of sanctions under the EU's stability and growth pact. But their manoeuvre has enraged the European Commission and some smaller countries, which claim it would destroy the pact's already weakened credibility.

Karl-Heinz Grasser, Austrian finance minister, urged his EU colleagues to stand up to pressure from France and Germany, the eurozone's two most powerful economies.Speaking ahead of Monday night's eurogroup meeting of 12 single currency finance ministers, Mr Grasser said both countries must face the consequences of breaching the pact's deficit rules for three years in a row. "We all are obliged for our own credibility and the credibility of the euro to find a way out," he told Reuters news agency. "The way out cannot be by killing the stability pact and putting one pillar of our monetary union at stake."

The 12 members of the single currency are at the point where they must decide if they are serious about enforcing the pact, designed to enforce fiscal discipline across the eurozone.They must decide this month - either on Tuesday or more likely at their next meeting on November 25 - whether to support the European Commission's recommendation to start proceedings against France for its third breach of the pact in 2004.It is the first time the eurogroup ministers have reached this point. Once passed, Brussels assumes powers to direct Paris on how to correct its deficit, and will require Paris to submit progress reports; ultimately fines can be imposed if it fails to comply.

Germany, which will also breach the pact's 3 per cent deficit rule for a third time in 2004, is about to find itself in the same position as France.But rather than face the humiliation of having to submit to economic direction from Brussels, Germany and France are now trying to draw the stability pact's remaining teeth.The two countries, who believe they have support from Italy, Luxembourg and Portugal, want the Commission to suspend enforcement proceedings and adopt a voluntary approach instead.But the Commission insisted that such a step would be illegal under the EU treaty, and that it would not agree to such a retreat. "The Commission has done its job under the treaty, and now it is up to ministers to take up their responsibilities," said Pedro Solbes, EU monetary affairs commissioner.
Source: Financial Times

Monday, November 03, 2003

Better Factory Output News From the US

The US manufacturing sector continues to improve, and this , of course, is a positive sign. Let's hope we see the same continued upturn in the employment news. I have my fingers crossed, but I'm not altogether convinced.

U.S. manufacturers cranked up output in October to the fastest level in nearly four years, according to a report on Monday that showed hard-hit factories enjoyed their best rebound since the 2001 recession. Separate government data showed construction spending hit record highs in September, suggesting that overall third-quarter growth, which came in at the strongest pace in two decades, could be revised even higher.

Taken together, the data showed the recent burst of economic activity maintaining momentum going forward and likely helping spur more job gains -- perhaps putting the final pieces in place for a full-fledged expansion. "Manufacturing has definitely made a turn and is in a recovery phase," said Paul Kasriel, head of economic research at Northern Trust in Chicago. The Institute for Supply Management said its October purchasing managers' index jumped to 57.0 -- the highest since January 2000 -- from 53.7 in September, beatings forecasts. Any reading above 50 points to growth in the sector, which makes up less than a fifth of the overall economy. A breakdown of the ISM survey's components pointed to strong growth going forward as well. New orders flooded in at the quickest pace in four years, rising to 64.3 in October, compared with 60.4 the prior month.

Backlogs of orders also rose, while the dollar's weakness and better demand from abroad boosted exports. Even as orders for goods kept streaming in, cautious factories cut back on already lean inventories. To meet demand, production will have to head higher. The burst of growth and production helped push the ISM employment index to its highest level in 10 months, to 47.7 from 45.7. Although that level means a slower pace of layoffs, some economists said it also suggests hiring by manufacturers.

Factories have suffered the most in the recession and stumbling recovery, losing more than 2.5 million jobs. Those layoffs have made manufacturers' complaints blaming China's currency policy for worsening their problems a hot political issue heading into next year's U.S. presidential election. October was the fourth straight month of expansion for manufacturing, and Norbert Ore, head of the ISM manufacturing business survey committee, noted that job gains usually come at this point in an expansion. "But this is not a typical recovery by any means," Ore said.
Source: Yahoo News

My Whilstlestop Tour of the Net

That, and the changing forms of human contact this seems to imply, formed the subject matter for my post Saturday post at Fisful of Euros. Today it's the weblogging Dutch Finance Minister Gerrit Zalm and the looming problems with the stability pact.

On another front the new Chinese portal, Living in China looks like an idea with loads of potential. Editorial comment on individual blog items on a day to day basis, plus automated RSS feed from the participating blogs.

Meanwhile zooming across the planet, and landing on another continent, I came across Miguel Octavio, wallowing in the Devil's Excrement. He seems to be fighting some kind of one man battle against Chavez:

Economy shrinks by only 8-9%

The Venezuelan economy shrank in the third quarter by 8-9% of GDP according to the Minister of Finance. According to the Government PDVSA is up to speed and the opposition did not stage any strikes or boycotts during the quarter or the previous ones. So how come it shrank? Maybe because they are using Chavez' profound economic statement, made two weeks ago while I was away "You don't need economic growth to improve the life of the poor". It shows.....

Thaksinian Economics and the Second Track

Daniel Lian one more time on the virtues of Thaksinian economics. As he indicates, if Thailand can enter a virtuous circle of growth, the economy can turn out to be a lott more resilient than many were anticipating:

A Real and Virtuous Super Upswing
It has been our long-held view that the Thai economy has entered a sustained period of economic upswing. This upswing should last at least a few more years -- ‘a super economic cycle’. The primary forces behind Prime Minister Thaksin Shinawatra’s ‘super cycle’ have been initial creative macro policies to reverse cyclical doldrums and asset deflation, followed by well-thought-out policy initiatives to create structural resilience in domestic demand. Capital creation projects to create structural domestic demand resilience are at the core of such initiatives.

This exercise has been strengthened by two efforts: first, growing non-mass-manufacturing winners to position Thailand as a niche economy; and second, an intensive effort by the government to squeeze efficiency out of the Thai public sector and the economy in general. Putting the timetable of these capital creation projects together and assuming a continued rise in other ‘second track’ economic activities, we believe the Thai economy -- which barely started to accelerate in 2002 -- will continue to grow rapidly until at least 2007 or 2008. This upswing should feature an acceleration of GDP growth from 1.9% in 2001, when Mr. Thaksin assumed office, to 6-8% in the next few years, on our forecasts.
Source: Morgan Stanley Global Economic Forum

Japan's Job-Loss 'Recovery'

I'v made myself a promise to try and look a bit more at Japan this week, since I'm sure I've been neglecting things there. This piece serves to kill two birds with one stone, since it also relates to the ongoing 'structural reforms' theme. I think the argument demonstrates two things: that job creation is getting harder everywhere, and that the Asia Times (following on from the previous post) is a neglected source of good-quality information. BTW I've put the 'R' word in scare quotes, since that is the topic I will be trying to investigate this week.

Japan: the rising specter of unemployment By Hussain Khan

TOKYO - Higher labor costs, yen appreciation resulting in the outsourcing of production facilities and growing computerization all point to a long-term structural increase in Japan's jobless. Due to heavy losses in labor-intensive sectors, companies are planning further outsourcing of their production facilities to countries where labor costs are much lower.

It is difficult to describe how profound these changes are in Japanese society. They are breaking down a system of lifetime security for the low-paid but loyal sarariman (salaryman) of legend, whose antecedents sociologists trace back to the samurai system in which a warrior class dedicated their lives to their feudal lords. In modern society, the Japanese company has served as the locus of social stability for the sarariman, with loyalty to the firm resembling earlier fealty to nobles. Today, as outsourcing continues and jobs go overseas, the essential nature of the country’s work force and its values are being challenged in an unprecedented way. The office lady, who joined her equally inefficient sarariman colleague in the work force, is also likely to be a victim of the aggressive rationalization of Japan's notoriously disorganized office operations.

Japan's seasonally adjusted unemployment rate stood at 5.1 percent in August, the lowest level since the 5 percent posted in August 2001, according to a report released by the Ministry of Public Management, Home Affairs, Posts and Telecommunications. That means that during the last two years, employment has not improved. Rather it has deteriorated. The number of part-time workers fell for the first time in 20 months, while the total of all people who worked during the month also dropped 100,000 from a year before to 63.61 million, the first negative growth in four months, indicating that the nation's employment situation remains bleak. The number of employed people decreased by 160,000 year on year to 53.47 million.

The number of people out of work due to corporate restructuring and other reasons related to their employers totaled 970,000. This was the first time since January 2002 that the figure had fallen below 1 million, an indication that corporate restructuring may have run its course. But this optimism over a drop of mere 3 percent in one month is not justified after 1 million have been unemployed for the last 20 months.

The weakening dollar and the stronger yen had not taken their toll as the Bank of Japan heavily intervened in the currency market. But after John Snow, the United States Treasury Secretary, criticized Japanese exchange rate intervention in a congressional committee in Washington, the yen rose as high 107 yen to US$1, breaking the psychological barrier of 108 yen. Speculation is for a trend toward 105 yen and more yen appreciation shortly.

Under such a scenario, the pressure is increasing for further corporate restructuring, and with it further job losses. The one-month drop of 3 percent and the 20-month old trend averaging more than 1 million unemployed can be expected to resume with greater force as long the yen continues to appreciate, since a lot of export-related corporations have started fresh plans to outsource their production facilities, especially in the electrical white goods sector.

Even apart from the pressure of yen appreciation, corporate restructuring is continuing, with no signs of abating. Although the banking sector has been the main beneficiary of the recent stock market rise, some banks like the Resona Group expect to cut employees, with the group dismissing some 4,000 employees,reducing its staff from 19,000 to 15,000 by March 2005 in a bid to complete its revised restructuring program two years ahead of schedule.

A draft of Resona's new restructuring plan also calls for reducing outstanding loans to smaller businesses at fiscal year-end next March by 1 trillion yen on the year as an attempt to shift its focus from quantity to quality. The draft fails to set the schedule for repaying public funds, foreseeing that the group's profits will remain flat from fiscal 2004 through fiscal 2006. It also calls for skipping all dividend payouts through fiscal 2004, including those to the government. The latest plan by the banking group, which is effectively under the government's control, is expected to be finalized by the end of next month for submission to the Financial Services Agency.

This is a revised version of the business reconstruction plan crafted in June after the government decided to inject about 2 trillion yen of taxpayer's money into the group. Under the updated plan, Resona group is to also reduce its number of branches to 495 by the end of fiscal 2004, 20 more than called for under the current plan. With these aggressive restructuring efforts, the group's expenses as of the end of March 2005 are projected at 90 billion yen less than those of two years earlier. The ratio of labor and property costs to gross operating profit is to be slashed to 52 percent from 59 percent as well.

The banks are not alone in their restructuring plans. Sanyo is emblematic of the new and unsettling Japan. In the electrical goods manufacturing sector, as a part of its effort to provide secure employment, Sanyo continued to produce white goods at its domestic plants. But with the white goods business unlikely to stop bleeding red ink in the immediate future, Sanyo has decided to downsize its operations in Hyogo Prefecture and another in Shiga prefecture. The Hyogo plant is to cease production of vacuum cleaners, massage chairs and all other products by year-end and focus on research and development. The Shiga plant is scheduled to stop making microwave ovens, washing machines and double-tub washing machines by the end of this fiscal year.

As a result, sales from domestic production are expected to account for about 20 percent of the firm's overall home appliance sales, down sharply from the current 60 percent. Sanyo intends to reduce employees at the two plants from the current 1,250 to around 900 by April 2004 through relocations to other divisions and transfers to subcontractors. The company plans to maintain its product lineup by outsourcing production at the two plants to outside firms and transferring it to overseas factories. Sanyo's home appliance division recorded a 10.5 billion yen operating loss on a consolidated basis for the fiscal year ended March 31, making it the only one of the firm's six divisions to be in the red.

Other companies in the same or related sectors like Futjitsu and Hitachi have also announced losses. Like Sanyo, these companies also must reduce employees to meet their restructuring goals. Fujitsu, the major computer maker, said that it posted a consolidated net loss of 58.5 billion yen for the fiscal first half ended September 30, mainly due to money-losing operations in the computer software service division caused by a general decline in information technology investment among corporate clients.

Profit from the software division, the firm's core operation, declined by more than 40 percent. The manufacturing sectors for electronics parts and for information and telecommunications stayed in the red despite cost reduction efforts, according to company officials. The company reported a special profit of 34.4 billion yen, mainly from sales of its stockholding in Fanuc Ltd, the major industrial robot maker, but the gain was not enough to offset the net loss.

As for Hitachi, growing losses from a hard-disk drive business it acquired the previous year were the main contributor to a 5 percent fall in consolidated net profit to 5.3 billion yen in the fiscal first half, even after Hitachi sold portions of its stock in affiliate Nitto Denko Corp, which generated a special profit of more than 90 billion yen. Hitachi officials said that an increase in pension payments and other factors reduced operating profit by 67 percent to 20.2 billion yen.

Hitachi’s heavy and industrial machinery division also suffered a decline in profit due to cutbacks in investment, mainly among electric power companies. Earnings from refrigerators, washing machines and other household appliances were also weak because Japan experienced an unusually cool summer. Unlike Sharp Corp and Matsushita Electric Industrial Co, neither Fujitsu nor Hitachi is a major player in the fast-growing digital home appliances sector, which is another factor for their poor performance.

The effect of computerization on employment cannot be neglected. On the second day of the Nikkei Global Management Forum, Scott McNealy, chairman and chief executive officer of US computer firm Sun Microsystems Inc, said information technology will bring about drastic changes in the corporate world. Since the spread of IT will render obsolete conventional ways of working, personnel ability and corporate activities, companies will have to adapt to the changes, for example, by reorganizing their employment structure, he said.

McNealy pointed out that companies can enjoy the benefits of a ubiquitous computing environment such as improved productivity and the need for less office space. The Sun executive noted that companies also need to accept the negative aspects of IT, such as changes in working conditions and increases in corporate bankruptcies as the natural consequences of a computerized society. He said that although governments tend to try to stop such changes, companies should be forward-looking.

That means that if Japan's companies are to become more competitive, the job cuts will continue, changing long-held standards of Japanese society. Those changes are bound to be painful for a society not used to pain.
Source: Asia Times