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Friday, December 05, 2003

The Bretton Woods revival that wasn´t

At a meeting of the G24 nations' finance ministers in Geneva in January 1999, Prof. Paul Davidson presented proposals that could have been considered as a starting point for an effort at reforming the international monetary system, but were abandoned as it became clear that muddling-through might once again be an option.

Davidson summarized his concept as follows:

"1. The unit of account and ultimate reserve asset for international liquidity is the International Money Clearing Unit (IMCU). All IMCU's are held only by central banks, not by the public.

2. Each nation's central bank is committed to guarantee one way convertibility from IMCU deposits at the clearing union to its domestic money. Each central bank will set its own rules regarding making available foreign monies (through IMCU clearing transactions) to its own bankers and private sector residents. Ultimately, all major private international transactions clear between central banks' accounts in the books of the international clearing institution.

3. The exchange rate between the domestic currency and the IMCU is set initially by each nation -- just as it would be if one instituted an international gold standard.

4. Contracts between private individuals will continue to be denominated into what ever domestic currency permitted by local laws and agreed upon by the contracting parties.

5. An overdraft system to make available short-term unused creditor balances at the Clearing House to finance the productive international transactions of others who need short-term credit. The terms will be determined by the pro bono clearing managers.

6. A trigger mechanism to encourage a creditor nation to spend what is deemed (in advance) by agreement of the international community to be "excessive" credit balances accumulated by running current account surpluses. These excessive credits can be spent in three ways: (1) on the products of any other member of the clearing union, (2) on new direct foreign investment projects, and/or (3) to provide unilateral transfers (foreign aid) to deficit members.

7. A system to stabilize the long-term purchasing power of the IMCU (in terms of each member nation's domestically produced market basket of goods) can be developed. This requires a system of fixed exchange rates between the local currency and the IMCU that changes only to reflect permanent increases in efficiency wages. This assures each central bank that its holdings of IMCUs as the nation's foreign reserves will never lose purchasing power in terms of foreign produced goods, even if a foreign government permits wage-price inflation to occur within its borders.

8. If a country is at full employment and still has a tendency towards persistent international deficits on its current account, then this is prima facie evidence that it does not possess the productive capacity to maintain its current standard of living. If the deficit nation is a poor one, then surely there is a case for the richer nations who are in surplus to transfer some of their excess credit balances to support the poor nation. If it is a relatively rich country, then the deficit nation must alter its standard of living by reducing the relative terms of trade with major trading partners. If the payment deficit persists despite a continuous positive balance of trade in goods and services, then there is evidence that the deficit nation might be carrying too heavy an international debt service obligation. The pro bono officials of the clearing union should bring the debtor and creditors into negotiations to reduce annual debt service payments by [1] lengthening the payments period, [2] reducing the interest charges, and/or [3] debt forgiveness.

It should be noted that proviso #2 permits capital controls. Proviso #6 embodies Keynes's innovative idea that whenever there is a persistent (and/or large) imbalance in current account flows -- whether due to capital flight or a persistent trade imbalance --, there must be a built-in mechanism that induces the surplus nation(s) to bear a major responsibility for eliminating the imbalance. The surplus nation must accept this burden for it has the wherewithal to resolve the problem."

In the absence of #6, under any conventional system, whether it has fixed or flexible exchange rates and/or capital controls, there will ultimately be an international liquidity crisis (as any persistent current account deficit can deplete a nation's foreign reserves) that unleashes global depressionary forces. Thus, proviso #6 is necessary to assure that the international payments system will not have a built-in depressionary bias. Ultimately then it is in the self-interest of the surplus nation to accept this responsibility, for its actions will create conditions for global economic expansion some of which must redound to its own residents. Failure to act, on the other hand, will promote global depressionary forces which will have some negative impact on its own residents.

Some think that my specific clearing union plan, like Keynes's bancor plan, a half century earlier, is Utopian. But if we start with the defeatist attitude that it is too difficult to change the awkward system in which we are trapped, then no progress will be made. Global depression does not have to happen again if our policy makers have sufficient vision to develop this approach. The health of the world's economic system will simply not permit us to muddle through."
(Further explanations are to be found on Prof. Davidson´s website)

The globalization process is in crisis. While the Bretton Woods arrangements enabled developing nations to grow faster than the industrialized countries - and both groups cumulatively to progress significantly faster than during the period of "Washington Consensus" globalization (roughly the last two decades), recent data from the FAO demonstrate that hunger is once again on the rise in the Third World. World Bank statistics show that foreign direct investment is decreasing. Trade negotiations have soured, and monetary policy has been reduced to an exercise in beggar-thy-neighbour practices.

What kind of catastrophe will it take for policymakers to reconsider viable solutions to problems created by ignorance and neglect?

Where Blogging Goes From Here

This post actually concerns Marcelo more than me, but since he will probably not post this here, I will. During what must have been an extraordinarily late night for him - working on what I can only describe at this stage as a secret mission, he stumbeld up on this:

Terrorists heading towards Buenos Aires caught in La Paz?

Argentine TV news channel Crónica has just informed that around 20 "terrorists from Pakistan" have been arrested in La Paz, Bolivia. They were suspected, Crónica reports, to have intended to travel to Buenos Aires (as you might recall, there was a cautionary report about possible terrorist activities targeting Argentina).

Now, Crónica is... well, anybody who have ever watched it knows that it's not exactly self-restrained in its reports (picture big yellow or white letters over a red background with a soundtrack of -I swear- band music), and I haven't found any online mention of this. On the other hand, they are quite good at catching things early, and if this turns out to be the real thing, well, you read it online first in Southern Exposure!

BTW, I think this might have quite an effect on Argentine's foreign stance, interacting with the country's not very pro-US mood and deep feelings about the bombings a few years ago. We'll have to see how this develops.

Now here you might imagine that here there is nothing special, just a routine incident where a group of terrorists might have been planning to fly an airplane into a US target. But wait a minute, there's something else here, there's the role of blogging as an information source:

Update on the Bolivian arrests

All the information available so far seems to come from this release of ABI (the Bolivian government's press agency). It indicates that 16 Muslim people from Bangladesh -that's not the same country as Pakistan, Crónica!- have been arrested following a tip by French authorities that they could be implicated in a (presumptive) plan to hijack a plane in the La Paz-Santa Cruz-Buenos Aires route and direct it against US targets (most likely, I presume, in Buenos Aires). You can read about these reports in Reuters Alertnet (other articles, like Wired's, are just rehashings of Reuter's somewhat skeptical notice of the ABI press release).

As in most cases where (presumed) links to terrorism are present, there are more assumptions, maybes and coulds than hard data. We'll have to see how this develops.


As an aside unrelated to the story itself, let it be noted that, as far as I can tell, Southern Exposure put the story online well before Reuters did. That's (part of) what this "New Media" thing is about, not online newspapers with pop-up advertising...

So here you are: here's the real story. The power of blogging with its 24/07 connectivity, and an army of amateur journalists to rise and rival the conventional media as information sources in key moments. We aren't there yet, but it will come.

This is Hardly Unexpected

So this months US job creation figures are worse than expected, and next months will be better: so what happens? One thing we do know is at the moment the trend is up - we are in recovery phase - but maybe not as strongly as some might think. My feeling is that we are seeing the crossing of two tendencies: fisrtly the entry into the labour market of latge numbers of immigrant decsendents - which is obviously good for growth - and a rapid increase in restructuring and outsourcing, which in the short term may not be so good. How will this work out: wait and see.

American employers hired far fewer workers than expected in November, a government report showed on Friday, though the gain was the fourth consecutive monthly increase in jobs and the unemployment rate fell.

The number of workers on U.S. payrolls outside the farm sector in November edged up by 57,000, the Labor Department (news - web sites) said, from an upwardly revised climb of 137,000 the previous month.

The November gain was far lower than forecasts for a bumper increase of 150,000.

"The headline nonfarm payrolls number is not great ... but actually I think the underlying data are brighter than the headline," said Lara Rhame, senior economist at Brown Brothers Harriman.

The dollar weakened on the lower-than-expected jobs number but bond prices surged.

Analysts had ratcheted up their forecasts after recent data showed the economic recovery gaining strength. The government said last month the economy grew a rapid 8.2 percent in the third quarter of the year, leading to expectations that this would translate into a pick-up in hiring.

The labor market has lagged other areas of the economy in showing recovery, partly because surging productivity gains have allowed companies to boost output with fewer workers.
Source: Yahoo News

Trichet Fails to Lower Rates

Well some of the speculation is now over. Trichet does not seem to be shaping up as a bold and imaginative head of the ECB. What a surprise! Personally, and if given the opportunity, I would have droppoed the rate to the 1% current US one. At a stroke show you mean business, put a little bit of a brake on the euro rise, and try to give some protection to Germany. Still, it seems to be hard to see all this right now. He does however acknowledge that inflation will already be coming down next year. Not with too much of a bump I hope.

The European Central Bank on Thursday signalled that interest rates were likely to be kept at 2 per cent for several months, but warned that the eurozone's longer-term growth prospects might be undermined by the US's ballooning deficits.

Speaking after the bank left rates on hold for the sixth month running, Jean Claude Trichet, ECB president, said the bank remained concerned about the "sustainability of global economic growth" and the risk it might be "undermined by external imbalances" in some economies - a reference to the US.

Economists fear the unwinding of the US's huge current account deficit will extend the dollar's recent fall against the euro, stifling the fragile export-led recovery that has just begun in the 12-nation economic bloc.

On Thursday, the euro again rose to record highs against the US currency for the fifth day in succession, hitting $1.215 in early US trading.

Mr Trichet said the eurozone upturn was under way and would gradually pick up speed. However, he made it clear that the outlook for inflation remained benign. Inflation would hover around 2 per cent - the bank's price stability ceiling - over coming months but decline next year, he said.
Source: Financial Times

Metamorfosis and the Bonobos

As everyone can see, today is a very quiet day here. It is fact the Bonobo national holiday. Only joking. But seriously, firstly I am in awe of Lloyd's last post. I am in awe of the fact that in this world where far too often nobody seems to give a damn, someone takes early retirement to give their time over to thinking about a problem that affects us all. I'll say more, it speaks loud and long about how deep in it we are when someone who you might - and no disrespect intended Lloyd - consider an afficionado, speculates about things which far too many highly paid 'experts' don't even dimly begin to understand. I think this is great. And I think this is why blogging should get more respect than it does.

On the substantive point I can only say: no comment. I am thinking about all this, but am a long way from thinking I have anything useful to say. Those who know me of old will realise I have already sent out for advice, from my brother, who - when I can manage to drag him away from the likes of Kleist and Novalis - is actually a superb mine of information and ideas on all this. The family consigliere.

Now on the where we go from here part, I have one thing to say: we go to debate. One of the reasons I am reasonably silent today is that I am working mightily on admin, admin which will mean that next week or the other one Bonobo Land will have a new format, an MT based one, with more structure than you can currently imagine, and one where these topics, and those like Chris's energy post can get the debate and discussion they deserve.

A Few IFA Proposals - Conventional - Unconventional

Ah yes, Edward. Quite a problem we seem to be in. Since Edward asked this question, I thought I might stick my head out and see how many chop it off. Somehow, I feel they may not since we are all in such a quandry... "What this means is that the seesaw analogy fails: Europe cannot go up while the US goes down: both need to descend together. So the problem here is architectural (any suggestions Lloyd?):"

As I stated in one of my posts at: MacroMouse and in thorough agreement with you Edward, "We have never been here before." Due to the vast imbalances in global ppp's, wages, debts, trade, wealth, exchange rates, etc., which have evolved since the collapse of the Bretton Woods System in 1971-`73, we face the most serious challenge since, oh who knows when, forever. So what would I do with the international financial architecture? If enough serious minds are willing to admit something needs to be done, then there are definately several answers.

The goal, of course, is to rebalance the entire global system. How? Well, many forms of external exchange clearing have been put forth since Plato first advocated it, though none overly appeal to me or many others, as suggested - they reduce too much autonomy. Therefore, I suggest several different forms of conventional exchange clearing and several unconventional forms of internal exchange clearing - which allow a higher degree of local autonomy. I see no other way to otherwise rebalance the massively out of balance system. If we had originally, in 1971, rebuilt the then broken system by making balanced floating exchange the law of the land, we wouldn't be here, but we didn't. Just for the record, we could have made a 10% maximum balance band law the IMF would have been mandated to follow when nation's ppp's drifted out of balance, that they should have been mandated to rebalance, even though we had abandoned the pegged system. A rebalancing framework could have and should have been set up at that time, even if it meant loaning, or using a standby agreement until hostilities ended, the money needed by the U.S. to finish the war, etc. It would have been smarter than destroying the entire system as has nearly happened. There were many ways to rebuild a workable system at the time, it was just the acrimony over the war that prevented such a wise course. I mention this for background on what now must be done.

I have only recently come across enough information and empirical evolution to possibly offer a few new and different answers. I am no where near ready, but I can set the framework. At the outset, moral hazard must be guarded against most in the workings of any new system. As Alfred Marshall suggested, we could use his units of purchasing power as a solid standard of a new architecture. I suggest a very large basket[20% of GDP] of commodities, production, goods, and services as the new standard for all nations. This large 20% is required because I further suggest using many forms of derivatives contracts and bond contracts as insurance for the new system of clearing - to satisfy the large financial interests. I suggest this be a minimal financial computer controlled international clearing architecture - politics removed after implementation. To implement, all capital markets must be either closed[short term] or laws of gradual rebalance must be written into the architecture implementation and evolution. This way all nations can maintain their sovereignty and autonomy more than other already advocated systems. If the laws and computer programs are properly written, the world can evolve over a given timeframe to a new global balance of all thus mentioned markets. Rebalancing is a simple accounting trick if enough financing is forthcoming, to do so. It will take much new IMF financing, but the rebalancing will recreate so much new credit productivity, it will pay itself back over time just as the massive public financing of global WWII did.

There is also internal exchange clearing, a non-conventional system, that I have written George Monbiot about. There are several of these variations, also, but for now I will enter my e-mail to George:

Earlier today I came across an article of yours about a meeting, to come up with an alternative to capitalism other than the other failed system - totalitarianism. I'd like to make a suggestion that there is a way to build such an architecture. BTW, you are my favorite author. The system I am talking about is already here, almost but unrecognized, as yet. On the one side we have what I refer to as Minsky's Heinz `57 capitalisms. On the other we have the Heinz `57 totalitarianisms. None of these are satisfactory. Yet, the answer lies somewhere in the middle between the two. BushCo wants to implement an outrageously totally free [for the corporations that is] capitalism. China, on the other hand is moving from totalitarianism toward BushCo's totally free corporate capitalism. If it goes all the way this would be a big mistake, as the perfect mixed market capitalism lies in between.

What I'm talking about here is the world has a chance to help China develop the first perfectly balanced mixed economy of public and private enterprise. I use this example as the developed nations will not yet listen to common sense. Now, I know from reading your books and articles you can easily grasp this. If China were to naturally evolve to a state of 20% public enterprise markets and 80% private enterprise markets we would have a chance to witness something truly amazing in economic history, if properly organized at this % mix. As, at this total market mix the 20% public enterprise market could be used to keep inflation/deflation permanently in check throughout the 80% private enterprise market, thus allowing a fiat money system unlimited potential. I mention this about China as it is the only experiment in the world heading toward and most likely to reach this % threshold. It would be a great loss to the world if we do not recognize this once in earth's lifetime chance to grant the world a new path. E=1/5X is a formula for perfect competition capitalism.

The 20% public enterprise mix must be a total % market organization of all production, goods, and services in order to check inflation/deflation throughout the 80% totally free private enterprise side. A tripple entry banking system can be set up to finance. Alfred Marshall, at the turn of the century, mentioned such a similar mix with his units of purchasing power. This is the same thing, so to speak, at a much expanded macro level. If you can actually see this system, which I think you can, you must see the advantages a fiat system would possess when inflation/deflation can be market controlled, it frees the printing press to have free reign to build an unbelievably wealthy, healthy, strong, and viable moral capitalism.

If China were to discover this capitalism key, the rest of the world would be forced to emulate - gladly as debts and taxes would vanish or could be used productively. They most likely will cross the 1/5X threshold sometime in the near future as they are privatizing at a fast rate - almost 50% already. There is no need for them to cross it in disarray as is the case with many of Europe's social democracies and Russia's failed transition. They only need be shown the simple facts. Please dialogue with me to work out the details. The world needs us George.

I wrote three books about this system through the `80's and `90's. Trouble is they are very crude web published material - not enough free time. I am now retired and have the time to finish. My work will be rewritten and republished this winter. My first paper will be 20 to 30 pages long on global credit productivity - a totally new macroeconomic subject.

just a start, I have more,
everyone, dialogue with me,

Thursday, December 04, 2003

Baby steps are good

The White House will announce at 17:30 GMT its decision about the, to put it mildly, controversial steel tariffs. Although there's ample reason to doubt the general level of economic wisdom of the current administration, the usual leakage has indicated for a while that they are about to do the right thing (to drop the tariffs), although giving the wrong reasons ("they worked"; no, they didn't, and even if they had, "worked" in this context means "helped the steel industry make some extra bucks, paid by the American consumer" ).

It would have been better, surely, to avoid going through this in the first place, but let's take our consolations wherever we can find them.

Update: The "leaks" proved correct, and President Bush has announced that the tariffs have "achieved their purpose", and are therefore to be lifted. The EU's answer is expected to be some diplomatic version of a relieved "Okeeey...." and a few rolling eyeballs.

Peeping Tom Gets Comeuppance

A man in Shenzen China who scaled the side of a building for a better look at a dead woman's naked body fell to his own death.

When a prostitute leapt to her death from a high rise apartment building, a throng of onlookers jostled for ring side seats. The Hong Kong edition of the China Daily said a man who climbed up the wall of the building for a better view, lost his grip and also died.

His death sparked superstition and rumours that the dead woman's ghost had lured the voyeur to his death so he would be her companion in the afterlife.

The female victim, meanwhile, had apparently been taken hostage by two men who called for a ransom. Police were yesterday questioning two male suspects.

The Idea of a Nation State

Recently I have been wondering about the idea of the nation state. I wanted to get a better idea about what it means to people to belong to this particular political-economic arrangment. What do people (rightly or wrongly) expect that membership--the legal term is citizenship--will provide them. It was obvious to me that "the nation" meant to more people than just the Hobessian idea--providing security in return for allegiance and obedience. I wrote:

The idea of a Nation or in this case a State. It's obviously a complicated, imagined and for the purposes of this post a parochial and un-meritocratic, idea. The Shiv Saniks went on rampage because, in essence, they think that since Mumbai is a city of Maharashtra, it is legimitate for Maharashtrians to demand a certain amount of preference in how the resources (including jobs) of the state are allocated regardless of efficiency concerns. Basically, "I should get a job in Mumbai even though he will make a better gangman than me, because my name is Wadekar (Maharashtrian) and his is Kumar (Bihari)."

Amy Chua has an excellent article on something related in The Wilson Quarterly. She writes:

A World on the Edge by Amy Chua

One beautiful blue morning in September 1994, I received a call from my mother in California. In a hushed voice, she told me that my Aunt Leona, my father's twin sister, had been murdered in her home in the Philippines, her throat slit by her chauffeur. My mother broke the news to me in our native Hokkien Chinese dialect. But "murder" she said in English, as if to wall off the act from the family through language.

The murder of a relative is horrible for anyone, anywhere. My father's grief was impenetrable; to this day, he has not broken his silence on the subject. For the rest of the family, though, there was an added element of disgrace. For the Chinese, luck is a moral attribute, and a lucky person would never be murdered. Like having a birth defect, or marrying a Filipino, being murdered is shameful...

The Case Against the Strong Euro

If things continue like this problems for the eurozone economy are likely to come thick and fast. In order to explain a bit more what I mean I would like to welcome a new blog on the scene: Brussels Today. Now those of you who know me well enough will know that, while I am a person who many would consider excessively opinionated, I value one thing much more highly than simply having the 'right' opinion, and that is: being open to dialogue. Since we are in a situation which runs well beyond the textbooks, it is a brave person indeed who would set themselves up as the repository of all wisdom. So, enter stage left Durani at Brussels today:

Time to hail the Euro
After being introduced at a rate of $1.17 in 1999, the euro slumped to become worth less than 83 cents the following year. Now, at the end of 2003, Europe's single currency surpassed its launch level with respect to the dollar and became worth over $1.20 for the first time in its history. The euro also hit a record high against the Japanese yen

The Euro as a global reserve currency

A strong stable Euro makes a compelling argument as a reserve and transactional currency for international sovereigns (multinationals and foreign governments). Sound financial and credit policies can help maintain the Euro strong thus appreciating European assets. These can be leveraged as collateral to buy international enterprises further internationalizing European business and cementing the concept of Europe as a geopolitical force.

The successful launch of the Euro as a new artificially created legal tender for over a third of a billion reasonably wealthy individuals creates an unprecedented opportunity for a United Europe to catch up on the knowledge capital gap.

This brings me back to Sharon's post earlier in the week. I didn't comment at the time, although I think it's fairly obvious I am not really in agreement. However what I do agree with Sharon (and Lloyd) about is the difficulty there is with the existing global financial architecture. This worked for a while, but it is pretty clear now that we have here a problem waiting to happen. This problem, as far as I am concerned, mirrors completely the problems encountered with the Gold Standard following WWI and the demise of the UK economy as the guarantor of the globalisation process. History is now repeating itself in the case of the US in the face of the rise of China and India.

What this means is that - following the idea of 'global imbalances' so eloquently described by Stephen Roach - we have a highly unstable dynamic in front of us. Now Durani's argument would be that the US demise is Europe's opportunity: except that Europe is suffering from all the US problems, and some more (see last post). In particular much rests here on whether you are convinced or not by my demographic argument.

Clearly, without the demographic factor we would have a kind of 'swings and roundabouts' situation, where one goes down and the other goes up. But Europe is a leaky ship, and taking on water fast. Out in front lies not a massive growth expansion, but a difficult and painful period of adjustment.

What this means is that the seesaw analogy fails: Europe cannot go up while the US goes down: both need to descend together. So the problem here is architectural (any suggestions Lloyd?): and I for one don't have the answers ready to pull out like a rabbit from my pocket. More daring folk please feel free to venture forth.

I also don't buy the gold and silver standard argument. We need something more imaginative. Forgive me if right now I can't tell you what that might be.

Not Ready For Outsourcing

I suppose today could be christened the european official 'what the hell gives with the euro' day. Maybe we should all buy each other presents: either to celebrate, or as a mark of condolence depending on your view. Meanwhile this news from Xansa seems to me to be deeply significant. You see there is a current of opinion around which takes the view that continental Europe - since it does not by and large communicate in English - is therefore more or less immune from the Indian services outsourcing effect. Nothing could be farther from the truth. The proof: just look at those US productivity numbers. Now it may come as a surprise to some, but European firms still have to compete with their UK and US counterparts, and these counterparts are in the process of leveraging enormous productivity bonuses from outsourcing, at the same time as, in the case of the US enterprise, they are attaining a comparative cost advantage in global markets due to the fall in the value of the dollar.

I will be saying more about this in my next post, but consider this. The French and German governments have had their say: what then is the view from the ECB? I think it's pretty straightforward: the ECB view is that what we need is a bloodletting. Or put another way, a dose of serious structural reform. The only road the national governments have left to the central bank is to go for the most painful of traditional solutions: the survival of the fittest. What this means is that those European enterprises who are willing to become 'lean and mean' will survive, while those that aren't will die. This is going to be true both in services and in manufacturing. And this is where this little 'detail' from Xansa is important. Continental Europe is not ready for outsourcing: this means the obitury columns are going to have their work cut out dealing with the queue of clients who seem destined to expire in the coming months.

Xansa the IT services company, said on Thursday revenues and profits fell in its first half and it was withdrawing from continental Europe in the tough market conditions. Alistair Cox, chief executive, said the company did not believe that the marketplace was ready there for large-scale outsourcing of IT and business processes that leveraged Xansa's Indian offshore model.

The company also announced the appointment of Thames Water's chief executive Bill Alexander as non-executive chairman. He replaces Hilary Cropper who stepped down due to illness earlier this year. Xansa said revenues fell 2.9 per cent from £232.5m ($400.9m) a year ago to £225.7m, while pre-tax profits fell 6.8 per cent to £13.8m (£14.8m). Its interim dividend per share was maintained at 1.08p. The company warned last month that the challenging market and the completion of major contracts would mean lower turnover in the second half. It said there would be an exceptional charge of £12.5m relating to a settlement with a customer over a project services contract.

In continental Europe, revenues fell 13 per cent to £2.7m and losses increased to £0.8m. Mr Cox said that because the world 'was not ready' for large-scale outsourcing it was therefore a better use of resources to focus on winning work in the UK market at a time when the UK was highly receptive to such propositions. He said Xansa would consider re-entering continental Europe when the market was more developed.
Source: Financial Times

Something is Very Wrong Somewhere

People keep writing to me and asking whether the unrepenting rise of the euro mightn't be a good thing after all. My response has been, and continues to be: not if you're living in Germany and sitting on a below 1% inflation rate it isn't. Vivek asked in the comments column why they don't lower the interest rate which might be thought of as the standard response. Well look at the US productivity numbers. These have to have something to do with leveraging outsourcing, and they still continue to come in higher than the GDP growth numbers which, on a simple rule of thumb notion, means they have to be disinflationary in their impact. So the US doesn't want deflation, so logically down the dollar must come (not to mention the trade deficit which it needs to close). This then is why the euro is effectively defenceless: because trying to halt the euro rise would inevitably mean a Dutch auction with the US authorities as the only other bidder.

The euro jumped to its highest level ever against the dollar on Wednesday as news that US productivity grew at its fastest rate for 20 years in the third quarter failed to stop the US cu rrency falling. The 9.4 per cent increase in productivity underlined the critical role of the US in driving the global economic recovery but also showed the market's pessimistic view of the dollar. One trader said: "It takes good news to hold the dollar steady, and bad news will just send it lower." The euro climbed to $1.2128 against the US currency, its fourth successive day at a record high. Economists warned that the euro's rise threatened to damage the competitiveness of Europ ean companies and could stifle the nascent export-led recovery in the eurozone. The European Central Bank, which meets today, is expected to keep interest rates on hold at their post-war low of 2.0 per cent.
Source: Financial Times

Wednesday, December 03, 2003

We're not in Kansas anymore

When do you know, positively, clearly and down to your very bones, that the world you're living in isn't the world where you were born? When Italian mammas have to be incentivated with cash to have more kids? Or when the MIT, one of the world's foremost centers of education and research in science and technology , outsources to an Indian company the core of the software programming it took to "Open Source" its educational materials?

None of this will really be surprising to Bonobo readers, as Edward has been writing for longer than most about the demographic and economic currents driving these events. Yet it's a bit of a shock to realize that they aren't even very surprising to the public in general. Like the proverbial frog in the pan, we get used to trends long before we have fully grasped their implications.

The problem, of course, is that the water in the pan eventually boils...

Update: from Edward

Apart from the fact the post linked to about MIT is interesting in itself, the comments column is fascinating, and some good arguments are made all round, including this one:

We're slowly killing our talent pipeline - the best senior techies start out as programmers and junior technical staff and learn the business from the ground up. The same goes for analytical talent. If you're somewhere in the lower levels of management and came up through the technical ranks, you've got a decent career ahead of you. Half of your peers have probably changed careers - and there is no one coming up the ranks behind you to compete with you. I suspect we're going to see a real problem finding truly competant project managers and development team leaders in a couple of years once the recession is over. Due to the staff cuts and lack of talent nipping at my heels, I'm the top person in my field at my company at age 30. Yes, I really am that good - but I'd have a lot more competition if we hadn't laid of most of our junior analytical pipeline three years ago and dumped half of our senior staff in favor of cheap offshore folks. It's not a problem until you need someone to talk to the client or senior management - then you're screwed. You've then got the choice between charming airheads or incomprehensible technical folks.

Something which Disturbs Me About Australian Politics

I think that's the moment when you know you've finally succumbed to the fatal bloggers illness: when you're trying to write a major post on Mexico and you can't risk getting sidetracked by something like this. I always knew there was a theatrical part to Australian politics which I found pretty disturbing: this makes me a bit clearer about what it is:

Arm-breaker takes helm of Australian party

Australia's main opposition party elected as its leader Tuesday a man who once described John Howard, the prime minister, as an "arselicker."

Mark Latham, who is also notorious for breaking a taxi driver's arm in a fight over a fare, was elected leader of the Labor Party after the resignation last week of Simon Crean.

His election as prime minister would be likely to generate serious tensions with the United States, Australia's main strategic and defense partner.

He once called President Bush "the most incompetent and dangerous president in living memory."
Source: Chicago Sun Times

Something's Weird Here

Like Edward said, there’s something weird here. The lift-off in the US economy is simply stunning. Biz investment is picking up, and looks like it should run for a couple more quarters at least. Tech demand in some segments has actually been quite strong for sometime already.

Investments drive the cycle. So the economy is on the up. Yet the 10yr T-bond yields has been stuck at just above 4%, even as the US$ gradually slides. According to some, the Japanese economy, apparently, is having its best run in years. But the Nikkei hovers at 10,000 rather than 20,000.

In the EU, the demise of the stability pact seems pro-growth short-term at least (but how will the ECBreact?)

There’s commodity inflation, but deflationary pressures remain strong. International reserves continue to balloon and so, has the coiled spring finally sprung?

The US retains this great transmission mechanism, I think largely through its impact on business & consumer sentiment, rather than demand for goods per se. This time round though, there’s greater variety with regards to the response in Asia.

On the one hand, Thailand is hot anyways. Singapore is at the other end. Exports are picking up, but domestic confidence will take a lot longer to revive than in the past. Pricing power could be the key. I found this interesting .. For sale soon, a Walmart notebook? Imagine Dell vs Walmart. They’ll be squeezing Asian suppliers all the way down the food chain. And PC guys are already jumping into the consumer segment = HP in LCD TV, Dell in digital cameras (gee, and what happened to Sony?) China brands have flooded the lower-end = cathode TV, DVD players etc..

But what’s the price elasticity now? And how fast will they need to get the price down to the sweet spot in order to drive sales?

This survey by Grant Thornton of medium size biz in 26 countries was in our local biz paper recently. Consensus expects exports to rise (no surprise here given the current stage of the cycle), but most in Asia remain pessimistic on prices.

Ford Bows Into China

Everyone is sceptical about growth numbers and growth potential from China, and on occasion rightly so. However we do have some firm evidence to go by. I will try given sufficient time to document what I think is for real. This Ford investment seems to me to fit that category nicely. In all this, I think it is important to have one thing clearly in mind: the difference between manufacturing for the home market, and manufacturing - as a form of outsourcing - for the global one. The former is far more problematic than the latter.

Also worthy of note in the article is the explanation of location choice: wages are significantly lower in Western China. This seems to confirm Stephen Frost's argument that wages in some parts of China are definitely on the rise, and to contradict some of the sillier naysayers with their virtual 'slave labour' type arguments.

Ford plans to source about $1bn in automotive components from China next year - later than originally planned - as part of ongoing efforts to buy such items from "low cost" countries in Asia and elsewhere.

Ford said last year that it aimed to have sourced $1bn in parts from such countries, including China, by the end of this year.

However Bill Ford, chairman and chief executive, told a media briefing that the company would "hit that amount" in China next year.

Unlike General Motors and Volkswagen, the European carmaker, Ford has been slow to establish a substantial manufacturing presence in China, where vehicle sales have grown by about 40 per cent this year.

Mr Ford conceded the company had been "late to China". But he said the company's current, gradual expansion plans were appropriate for the market.

"We've taken what I think is a smart approach. Instead of going in and putting in huge fixed investments and hoping the market catches up with us, what we've done is made an expandable facility there so that we can expand in increments as the market demand ramps up," he said.

The carmaker has said it and its joint venture partner, Changan, would invest $1bn in boosting capacity at the sedan plant, build a second plant at a new location, as well as build a new engine plant.

Mr Ford said the company had initially doubted whether a Chinese government request made some time ago that Ford invest in western China made sense but "as we sit here now we think it's been a very good thing for us".

He said: "Even though the infrastructure penalty in terms of shipping costs is a little bit versus on the coast, wage rates are significantly lower in western China and the government has been extremely helpful in terms of infrastructure."

He said he could see the company exporting from China "at some point".

Going back briefy to a post I did yesterday for Living in China on banking reform, it is also of interest that the FT article cited there had this to say about car finance:

Liu Mingkang, chairman of the China Banking Regulatory Commission (CBRC)............said the CBRC was studying applications from Toyota Motor Corp, Volkswagen AG and General Motors Corp to set up auto financing operations."

Clearly this is of interest for the manufacturers since most of the money in car sales comes from the finance end, but, as Fons Tuinstra has previously pointed out, this is a much more risky business in China, and serves perfectly to underline the internal market/global distinction.

IPR Enforcement - A Confession

I confess. I've sold out. I have slid all the way down to being a complete cynic. My idealism has fled.

This confession is a long time in coming. I noticed over the past three weeks that the subject of IP enforcement in China, and what will ultimately fix the problem, has come up a lot. Perhaps it was the recent IP seminar hosted by the US Embassy. Maybe it was all the clients I've spoken to this past month with IP problems that asked about "the big picture" or the three students that have come in the office to chat for various reasons. Possibly it was the blog itself and the opportunity to reflect on my issue positions every day. Anyway, all this cogitating has forced me to examine my stance on this issue.

My long-standing position on enforcement of intellectual property rights has been based on the idealistic notion that if people understood the vital role that IP plays in commerce, not to mention the moral aspect, that demand would dry up. Yeah, that's what I used to believe, no kidding. I figured that China just had economic growing pains and that a big public education campaign would take care of everything. (I can hear the cynics laughing as I type.)

So what changed? Two things, one that I have ignored or perhaps misinterpreted for the past five plus years and the other that is fairly recent.

First, from my personal observations, EVERY foreigner who lives in China purchases counterfeit products. The idea that individuals who understand commerce would not purchase fake goods is not supported all that well by the foreign community here. Over the years, I have attributed this to the general attitude of lawlessness that pervades the souls of many expatriates which, simply put, is that "I'm not at home right now, I'm not a citizen here, and I'm somehow beyond the pale of authority."

This attitude of lawlessness may go some way towards explaining expatriates' actions over here. However, it does not explain why EVERY foreigner who visits China also buys counterfeit products if given the chance. These people are only over here for a couple of days, a week at the most, and consistently snatch up fake Nikes, movies on DVDs, knock-off Rolexes, you name it. What are these people thinking? Even U.S. government employees, such as former U.S. Trade Representative Charlene Barshefsky, have been caught at the Silk Market in Beijing buying fake products.

This brings me to my second point, which involves file-sharing of copyrighted works and other Internet shenanigans. I wasn't even aware of this phenomenon until a couple years ago, but it is rampant in many parts of the world, including North America and Europe. This practice has so worried the entertainment industry that the RIAA (Recording Industry Association of America) has started suing individual file sharers, including the well-publicized case of a 12 year-old American girl who was sharing MP3s; her mother settled for $2,000.

So even at home, with all the knowledge of IP rights and the cultural baggage of morality, Westerners are still violating IP rights. What's the answer? Call me slow, call me stupid, but only now have I realized that the reason why people buy fake stuff and download copyrighted works without paying for them is . . . that . . . they . . . can!

Simple conclusion. Yes, the scales have fallen from my eyes. I wasn't on the road to Damascus, but I had the revelation anyway.

OK, let's stop the histrionics, although as Billy Joel tells us, "Melodrama's so much fun; In black and white for everyone to see." I have debated this with many people over the years, within the context of policymaking. The question is what amount of resources should be spent on education and how much on enforcement? My idealistic view led me to push for education, scoffing at the idea that enforcement of such a widespread problem in such a large country was possible.

My new, pragmatic position is therefore that education ain't gonna cut it. We are all human, which means that we are, to varying degrees, fundamentally selfish. If we can get away with downloading the new Matrix flick for free, we will do so unless someone stops us.

While I vociferously oppose the RIAA's litigation strategy, particularly when 12 year-old girls are involved, I now understand it. Scaring folks might be the only way to make headway on this issue.

The Limits of Intellectual Property

Actually Thucydides claims that the Greeks started off as pirates, and Henry Morgan did play a fairly auspicious role in the rise of British capitalism, still it is hard to see how today the extensive piracy which is rampant across much of the Asian continent is going to be especially productive in stimulating innovation and stable business organisation. This point about Longhorn in Malaysia has been around for a few days, but I didn't have time to pick it up before. I am not a MS fan, but obviously something hitting the streets two years before the scheduled release has to be something of a first. It also raises the question as to how viable our current OECD lifestyle-intellectual property model is going to be when faced with the reality of the hurricane. As Marcelo pointed out in a previous post, the current US retreat into limited protectionism, and the absence of any reforming dynamic will have the natural corrolary that progress in this area is likely to come to a dead stop. Seldom in recent history have the foundations of globalisation seemed so shaky.

Microsoft was trying to plug a security hole on Tuesday after discovering that an early version of its next-generation operating system, codenamed Longhorn, was on sale in Malaysia two years before its scheduled release. The incident underscored the software giant's problems with audacious pirates, who were selling the Longhorn copy for as little as $2 in shopping malls near Singapore. Operating systems for personal computers normally cost $200-$300. Microsoft's CEO, Steve Balmer, has identified emerging markets - especially Asia - as Windows' biggest growth opportunity. But piracy is rampant, with an estimated 95 per cent of PC users in China employing illicit copies of the software. Microsoft warned that the Longhorn version being sold illegally in Malaysia was still in the development stage and could prove risky if on home computers. "The product is incomplete and customers are exposing themselves to vulnerabilities," said Jonathan Selvasegaram, corporate lawyer for Microsoft Malaysia. Microsoft believes an "intricate network" of software pirates may have obtained an early version of Longhorn recently distributed to programmers in Los Angeles for testing or else earlier leaked codes that have been circulating on the internet since last year.
Source: Financial Times

Tuesday, December 02, 2003

Japan's Employment Connundrum

Employment in Japan is picking up: well not exactly. The problem is easing during this expansionary part of the cycle, but only because more people are leaving the labour force than are entering. Just a quick reality check reminder: the optimistic theory is that growth will be sustainable since participation levels will rise. Fine, but where's the evidence?

Japan's economic recovery remained on track in October as deflationary pressures eased and industrial output kept growing despite a slight uptick in the jobless rate, economists said............

A trade ministry survey of select manufacturers showed industrial output was expected to rise 3.1 percent in November but fall 0.9 percent in December. "There's been a striking acceleration in production in recent months," said Richard Jerram, chief economist at ING Securities. "There's a cyclical recovery taking place and the speed of that recovery seems to have accelerated." Economists said Japan's industrial output in October-December was on pace to outstrip the previous quarter by a red-hot 20 percent, lifted by growing exports, although most expected revisions to trim the gains............

However, core consumer prices in Tokyo in November showed a 0.2 percent fall from both the previous month and a year earlier. The year-on-year rate declined for a record 50th consecutive month, but the size of declines has been on the downtrend. "Through structural reforms, we want to put Japan on a path toward stable growth and to conquer deflation," Economic Minister Heizo Takenaka told reporters Friday. Economists had mixed views on the uptick in the unemployment rate to 5.2 percent in October from 5.1 percent in September, off the post-war high of 5.5 percent last reached in January. The jobless rate for women rose 0.2 point to 4.9, while the jobless rate for men fell 0.1 point to 5.4 percent. "I think the job-hunting mindset has actually improved," said Hidehiko Fujii, economist at Japan Research Institute. "Women have probably entered the workforce looking for a job after seeing signs of economic improvement. But economist Ryo Hino of JP Morgan said the increased jobless rate was "clearly a negative outcome," noting that while the ranks of unemployed shrank by 190,000 people, some 370,000 left the workforce altogether from a year ago. Spending at households of salaried workers fell 1.1 percent year on year in October.
Source: Yahoo News

Something's Brewing in China

I owe this one to Living in China co-blogger Marcel.

A friend recently told me that he was happy to find Qingdao beer on sale at a small delicatessen in rural Oregon. This intrigued me because while you can find Budweiser (bai we) almost anwhere in China...Qingdao in America...I think not. So I did an informal survey and I found that (amazingly) Chinese beer can be found in many places....Amsteram (yes), Paris (yes), Tokyo (yes), Washington, DC (yes), Mumbai (yes). But apparently this has not been lost on others...as this article shows:

China has become an increasingly important battleground for the world’s leading brewers in recent years, a move which in no small part contributed to China overtaking the US earlier this year as the biggest beer market in the world. SABMiller, Carlsberg, Interbrew, Heineken and Anheuser-Busch are among the international players with a major presence in China, but one of them is on the verge of expanding its business there even further.

The Predictable is Starting to Happen

Well I think it was obvious really: the European institutions cannot simple sit back and watch a coach and horses driven through their midst. Some response was inevitable, and my guess is that we will see more. It is also noteworthy that this couldn't have come at a worse moment (or perhaps abetter one - depending on his strength of character) for Trichet. Being French he now has to convince the planet that he will not simply lie down and do what he's told to do. At least his term of office promises to be more lively than the Duisenberg one.

The European Central Bank was on Monday embroiled in a harsh exchange with Germany, the eurozone's biggest economy, over the collapse of the European Union's fiscal rules. Jean-Claude Trichet, ECB president, warned that the suspension of the stability and growth pact could undermine confidence and hold back Europe's recovery. "I don't think the spirit or the letter of the pact should be amended," he said. But Germany, which engineered the suspension of the pact last week, said the single currency interest rates set by the ECB were hurting its economy.Hans Eichel, German finance minister, speaking in Frankfurt, said: "Its [the ECB's] monetary policy leads to Germany having the highest real interest rates in the eurozone, which is not enhancing growth."
Source: Financial Times

On the question of monetary policy, it seems to me the Germans have a stong point. The problem is this was always an accident waiting to happen with the whole conception of the currency union. To try to make clearer what I think, I am reproducing an extract from a comment I made on Fistful on Saturday:

On the question of Germany it occurs to me that maybe I should clarify something in order not to appear to be inconsistent (maybe I am inconsistent, but i don't like it being too obvious).

Last spring I called on my blog for the German economy to be freed from the shackles of the stability pact. I did this for two principal reasons. Firstly the German economy is probably the one which has suffered most at the hands of the 'one ring to fit them all' monetary policy which forms an integral part of the euro project. The German economy has long laboured under the weight of an unduly high real rate of interest due to the need to hold rates up for the benefit of the more inflation-prone economies.

Secondly, and this is more a pragmatic question, the German economy has a tremendous specific weight inside the eurozone and is running perilously close to entering a deflationary cycle. If Germany should cross the threshold and enter deflation land, it seems to me it will be extremely difficult to haul them out given the constraints which would apply to using what Bernanke calls the 'unconventional tools' in the context of a currency union.

So it is better to avoid the problem first if possible.

This brings us back to the points often made about mobility and budgetary solidarity. Most of the ways of presenting this are far too abstract for my taste. If the euro were to work, cross border solidarity of a high order would be needed. The current German situation is the ideal place to demonstrate this. But this would mean using due process for decision making, and taking Germany as a special case. The precedent shouldn't be too hard to swallow, since many of those asked to sacrifice have been willing recipients of German aid via structural funds.

Would this work, can the German economy resurect itself? I don't know, but it would seem worth a try, since doing nothing and allowing them simply to follow Japan along the deflation road will probably mean the de facto death of the euro as an economic reality in any event.

What we have now of course is a complete mockery of this. In the place of due process we have a polite wave of two fingers in the direction of the ECB and the Commission, and instead of stong 'exemplary exceptionalism' we have a jumping on the 'special case' bandwagon by both France and (implicitly) Italy.

Monday, December 01, 2003

The Great (and Nasty) Money Experiment

Greetings: please let me first introduce myself. My name is Sharon-Brigitte Kayser and I run an educational website which campaigns for sound currencies along with the reform of the global monetary system. If you are interested in signing this petition, please click here. We need 100,000 signatures by the end of 2004! This said, I am very grateful to Edward, the owner of this blog, to let me vent my frustrations and to offer me so graciously his valuable services as a columnist.

The Great (and Nasty) Money Experiment By James Jaeger summarizes it all. I sincerely cannot compete with his knowledge but James is someone I value a lot on many levels. James and I are Transhumanists and both envisage the death of money as a concept.

Here is what I have been pondering recently:
Taking the long view of history, Capitalism has existed only since the era known as the Renaissance (and possibly at some other very short periods of time throughout history). Capitalism,however, is dead forever. Even The Great Roman and Byzantine Empires succumbed monetary corruption. What is occurring today is not unique phenomenon at all. What does this mean? That Man is unable to deal with a fair monetary system. Extremely sad but so... the worldwide DEBT BOMB was bound to happen and it is most likely why we may expect a important philosophical shift in the next 50 years, a shift which will lead to the death of Money as a concept. Meanwhile, we need to support a strict gold/silver standard because we don't have any other solution.

I for one see the true futuristic society as money-free. With Nanotech making production costs very inexpensive, we'll all be rewarded according to our rank while every world citizen will be enjoying universal health care and teaching. The value of exchange called money will be replaced with services. When? This could take another 50-100 years from now, but that's the path I think we'll be taking. Feudalism and exploitation has been Earth's the cup of tea since the beginning of the ages, what do you think will happen when world citizens will finally come to their senses and decide to put an end to this atrocious illusion?

It is not far fetched to assume that the ensuing emotional shock (if/when it occurs) will be such (TOTALLY UNBEARABLE) that a major philosophical shift will not leave us any other way to counteract.

Having a monetary system within a society where knowledge can be accessed for free (due to the Mega-Computers take over) is NOT workable, History speaks for itself. We've got two choices: either predation leading to the possible extinction of the human race (economic wars and powerful weaponry are a deadly cocktail) or terminating the concept of money for a greater good. If we don't go that road, Mad Max or Blade Runner can well become a reality. Between profits and society..... we must chose?

ps: to read James' response to my view, please click on The Great (and Nasty) Experiment link where you too may be directed to our brand new forum if you'd like to discuss this exciting subject matter

Is Muzimei Really the Internet Revolution?

Edward gets it exactly right. The changes wrought by the Internet in China are not confined to Muzimei, Hailey Xie, and Liu Di (the ‘stainless-steel mouse’) . The real and far reaching transformative implications of the Internet are occurring elsewhere, particularly in the capacity of companies to hire and connect people for low wages via better technology. Edward referred to this as the human version of Moore’s Law: but instead of transistors per integrated circuit doubling every couple of years, it’s now low paid employees connected to their employers and each other via broadband.

Don’t get me wrong. I read blogs from all over and am excited about the capacity of the Internet to connect us, expand our world, and change the way we communicate. I’ve taken a look at Muzimei. I relied on Chinese blogs for information about SARS when it hit the mainland. But there’s a whole other aspect to the Internet and I think it’s from there that the most change will emerge.

It’s been happening for a long time. Well before the Internet revolution, way back in the 1960s, US companies sent container loads of raw data to the Caribbean where operators punched holes in cards for massive mainframes. By the 1990s, as computer communication globalised the service sector, even the Caribbean had become too expensive and offshore back-office work (or these days ‘offshore business processing’ – OBP) started going elsewhere. Over a decade ago, a report funded by the World Bank stated that the Philippines had cornered the market on specific services and had 2,000 keystations producing over 100 billion keystrokes a year.” (It's grown since then: you can walk into warehouses in Manila these days with 3,000 employees punching in data). To the Philippines you now can add India, Bangladesh, Malaysia, Thailand, Cambodia, Korea, Vietnam, Mongolia, China. In fact, according to UNCTAD’s recently released E-Commerce and Development Report 2003, outsourcing of business operations via the internet could earn some of the world's poorest countries billions of dollars over the next few years.

Whether it’s abstracting and indexing, data capture and processing, data warehousing, electronic publishing, legal transcription, litigation support, mailing list management, medical records management, medical transcription, remote secretarial services, technical writing, telemarketing, teleservices, or web site design and management, OBP has meant a fundamental change in the way many places do business. As places like Barbados became too expensive, and countries like the Philippines got contracts to compile the computerised catalogue for the new national library in Paris, even China got in on the act. Although some OBP requires operators to comprehend English (medical transcription, for instance – a great deal of which goes to India), much does not. Thus with its low wage rates, China has been attracting English-language data where same text is “input separately by two or even three workers, and then automatically compared for errors.”

China has attracted other work too. The Hong Kong and Shanghai Banking Corporation (HSBC), the world’s 7th largest bank, has for example been shifting its customer transaction and data processing functions to locations where costs are a fraction of those borne in the London or Hong Kong offices. With centres already in Hyderabad and Bangalore catering to London business, HSBC recently expanded or opened data processing hubs in Guangzhou and Shanghai to service Hong Kong. Relocating from Hong Kong to Guangzhou provided savings in the order of 90% on the wages bill alone. Numerous other companies located in Hong Kong have moved data processing to the mainland (with most of the big banks like Standard Chartered and Hang Seng following HSBC). Shipping companies have followed (an acquaintance has spent the last year setting up a data inputting centre in Guangzhou for the Hong Kong office one of Japan’s largest shipping companies).

I attended a seminar last year in Bangkok on this and some interesting examples came up.

A Swiss-based company that develops smart credit cards outsources the work to programmers Vietnam (a rising star in the computer programming world (the number of overseas Vietnamese working in California’s Silicon Valley now ranks third, after Chinese and Indians).

A Singapore-based operator of charter flights in Asia contracts maintenance to a company in Vietnam. Technicians in Hanoi relay diagnostic information online to supervisors in Singapore who manage servicing remotely.

Bangkok has become the regional hub for 3-D animation. Large studios in the US outsource work to companies based there, as do advertising agencies.

Large amounts of drafting work are now completed offshore. Singapore architect firms have outsourced this work online for over a decade (much of it to China). One interesting case of CAD work involves a Finnish firm of architects working with a Spanish company to design shopping malls in Russia. Drafting work was outsourced to Hong Kong, from where it was bumped to Mongolia (presumably because staff there could read Russian).

IT-enabled technology has also profoundly changed the way goods are manufactured. Li & Fung is one of Hong Kong’s oldest and largest trading companies. It manages the logistics of producing and exporting private label consumer goods across many producers and countries. The catch is that it does so through a database of over 7,000 suppliers (most of which are in Asia, many in China). The logistics management entailed in taking the design and specs from San Francisco, bringing together the material, cotton, buttons and zips and then putting them together in three factories across Asia for a turnaround time of 45 days from the time of order only occurs by having the capacity to hire and connect people for low wages via better technology.

I love blogs, and the access to information in China and other parts of Asia is incredible. And I think we’re on the cusp of something large and exciting. But I also think that if we want to see where transformations are taking place online we need to look beyond Muzimei. Having said that, even I concede that reading about someone else’s sex life online is usually more interesting than tracing outsourcing chains.

Stephen Frost is a Research Fellow at the Southeast Asia Research Centre at the City University of Hong Kong and editor of Asian Labour News.

IT outsourcing and its backlash

First of all, I want to thank Edward for giving me an opportunity to post to Bonoboland from time to time.

I share the unease of others about the State of Indiana's decision to terminate a software contract that it has previously awarded to TCS (Prashant has a good analysis of the decision here). Unfortunately, I suspect that in the run-up to the election, we are going to have a lot more protectionist noises and actions coming from US politicians. Apparently, eight different US states have initiated actions that would cut down state contracts going outside USA.

Arun Shourie, the minister of IT and communication technologies in India seems to be advising the tech sector to lie low and partner with other companies. There is nothing wrong with partnering with other companies to offer end-to-end solutions. The larger Indian consulting companies already have some successes there. But I don't think lieing low is a hot idea. It presupposes that the problem will go away. India is continuing to get really alarmist press in USA and it is increasing the paranoia of the people. It is not going to help matters if the US job outlook looks bad even after the election.

As I tried to argue elsewhere, Nasscom and the leading Indian software consulting companies need to engage with the US Congress and the media to get their point of view across. Indian IT chieftains are smart, well spoken people. I dont think that we need to worry about putting them in front of the camera.

I am also very encouraged by this week's Business Week story to which Edward linked below. Even a few months back, I used to cringe after looking at BusinessWeek covers. By contrast, this article is even handed and well written. India seems to be making at least some headway.

However, there is no denying the fact that US is going through major structural change. Indian BPO and IT companies need to wake up to that pain and engage with the people and the industry. I may turn out to be naive about this, but I think Ranbaxy's decision to actively seek employees from overseas is a very good and welcome step in the right direction. I don't see very many Americans wanting to work in Bangalore and Hyderabad, but at least Ranbaxy is giving them that option. We need to think outside of the box. In the sixties and seventies, Japanese corporations like Sony responded very adroitly to Western paranoia. We are new to this. But we need to learn fast.

I also think that the political environment is US is going to get uglier over the next year and that this could have a serious negative impact on trade. On the face of it, only 2% of our Indian IT revenue from US come through government contracts. So, governmental action (if it is restricted to government contracts) will not have huge short term impact. But overall, 70% of India's IT revenue come from US. Dell's decision to stop using their Indian call centers for some of their support calls in worrying. We really need to go out of our way to extend our language skills and domain expertise to exploit the other markets which are opening up.

Sunday, November 30, 2003

Linguistic Backing For the Renfrew-Cavalli Sforza Thesis

Thanks a lot to Abiola Lapite for this link. As many of you may know my interest in demography and migration goes way back beyond the post industrial revolution version:

A family tree of Indo-European languages suggests they began to spread and split about 9,000 years ago. The finding hints that farmers in what is now Turkey drove the language boom - and not later Siberian horsemen, as some linguists reckon.

Russell Gray and Quentin Atkinson, of the University of Auckland in New Zealand use the rate at which words change to gauge the age of the tree's roots - just as biologists estimate a species' age from the rate of gene mutations. The differences between words, or DNA sequences, are a measure of how closely languages, or species, are related.

Gray and Atkinson analysed 87 languages from Irish to Afghan. Rather than compare entire dictionaries, they used a list of 200 words that are found in all cultures, such as 'I', 'hunt' and 'sky'. Words are better understood than grammar as a guide to language history; the same sentence structure can arise independently in different tongues.

The resulting tree matches many existing ideas about language development. Spanish and Portuguese come out as sisters, for example - both are cousins to German, and Hindi is a more distant relation to all three.

All other Indo-European languages split off from Hittite, the oldest recorded member of the group, between 8,000 and 10,000 years ago, the pair calculates.

Around this time, farming techniques began to spread out of Anatolia - now Turkey - across Europe and Asia, archaeological evidence shows. The farmers themselves may have moved, or natives may have adopted words along with agricultural technology. (emphasis added)

Apart From the Female Engineers in Saris, This Could be Upstate New York

The profile of India continues to rise in the US media, as does the prospect of heated controversy that this will inevitably bring in its wake. This time it's the turn of Business Week, the whole article is really well worth the read.

Except for the female engineers wearing saris and the soothing Hindi pop music wafting through the open-air dining pavilion, this could be GE's giant research-and-development facility in the upstate New York town of Niskayuna.

It's more like Niskayuna than you might think. The center's 1,800 engineers -- a quarter of them have PhDs -- are engaged in fundamental research for most of GE's 13 divisions. In one lab, they tweak the aerodynamic designs of turbine-engine blades. In another, they're scrutinizing the molecular structure of materials to be used in DVDs for short-term use in which the movie is automatically erased after a few days. In another, technicians have rigged up a working model of a GE plastics plant in Spain and devised a way to boost output there by 20%. Patents? Engineers here have filed for 95 in the U.S. since the center opened in 2000.

Pretty impressive for a place that just four years ago was a fallow plot of land. Even more impressive, the Bangalore operation has become vital to the future of one of America's biggest, most profitable companies. "The game here really isn't about saving costs but to speed innovation and generate growth for the company," explains Bolivian-born Managing Director Guillermo Wille, one of the center's few non-Indians.

The Welch center is at the vanguard of one of the biggest mind-melds in history. Plenty of Americans know of India's inexpensive software writers and have figured out that the nice clerk who booked their air ticket is in Delhi. But these are just superficial signs of India's capabilities. Quietly but with breathtaking speed, India and its millions of world-class engineering, business, and medical graduates are becoming enmeshed in America's New Economy in ways most of us barely imagine. "India has always had brilliant, educated people," says tech-trend forecaster Paul Saffo of the Institute for the Future in Menlo Park, Calif. "Now Indians are taking the lead in colonizing cyberspace."

This techno take-off is wonderful for India -- but terrifying for many Americans. In fact, India's emergence is fast turning into the latest Rorschach test on globalization. Many see India's digital workers as bearers of new prosperity to a deserving nation and vital partners of Corporate America. Others see them as shock troops in the final assault on good-paying jobs. Howard Rubin, executive vice-president of Meta Group Inc., a Stamford (Conn.) information-technology consultant, notes that big U.S. companies are shedding 500 to 2,000 IT staffers at a time. "These people won't get reabsorbed into the workforce until they get the right skills," he says. Even Indian execs see the problem. "What happened in manufacturing is happening in services," says Azim H. Premji, chairman of IT supplier Wipro Ltd. "That raises a lot of social issues for the U.S."

No wonder India is at the center of a brewing storm in America, where politicians are starting to view offshore outsourcing as the root of the jobless recovery in tech and services. An outcry in Indiana recently prompted the state to cancel a $15 million IT contract with India's Tata Consulting. The telecom workers' union is up in arms, and Congress is probing whether the security of financial and medical records is at risk. As hiring explodes in India, the jobless rate among U.S. software engineers has more than doubled, to 4.6%, in three years. The rate is 6.7% for electrical engineers and 7.7% for network administrators. In all, the Bureau of Labor Statistics reports that 234,000 IT professionals are unemployed.

Moore's Law As It Applies To Human Brainpower

My Money Files Column

Maybe this is an urban legend, or maybe this is happening right now someplace near you.

Word on the street has it that there are some pretty bright young programmers knocking around these days: some of them, perhaps even among the brightest, write what have become known as spider programmes. But how, you may ask, does the work of anything so exotic sounding as a spider programme affect me. Well, you being a highly intelligent and sophistocated person probably it doesn't. But if you were silly enough to want to sit in the first few rows of a concert by some mediocre but fabulously rich pop star, maybe you would be cursing them: for what the spider programme does is buy up the tickets automatically, before you even get the chance to go and stand in the line. Using these programmes you can buy up any kind of special 'offer' - cheap airline tickets for example - and then offer them for resale a some multiple of the original cost. Word has it that at first this work was easy, but recently the companies offering the tickets have begun to wise up and things have gotten more difficult for our would-be new economy entrepreneurs. One way in which concert organisers have tried to overcome the practice is by having an image inserted at some point in the process to which you have to manually type some given response to establish the fact that you are indeed a human, not a robot. Problem solved you might think. Well not exactly: this is where ingenuity and globalisation come in to guarantee that 'real' entrepreneurship will not be thwarted lightly.

You see our modern day 'spidermen' have actually responded rather creatively: they have taken the business to India. For in the India of today you can contract halls with workers by the hundred, paying by the minute. Such workers may in fact be high-tech engineers working at the highest level, or they may simply be reasonably intelligent and educated people capacitated to spend their day typing routine image responses manually into a data base. And if you put enough of such employees to work you can rapidly run up 6 figure numbers of image responses in your data base - responses which can of course automatically be drawn-upon as the image shows up on the horizon. (It also occurs to me that systematic spam entrepreneurs must do something like this: a kind of bacteria-antibiotic effect).

Now the image of the wharehouse of people defeating the turing-test safeguards is extremely interesting. At the risk of sounding callous, I think that an interesting way of conceptualizing what's happening in India and China might be by saying that what has become know as Moore's law is increasingly extending its application from the world of the silicon chip to that of the human neurone: it seems that the capacity of a person you can rent for $1 is increasing fast, thanks to a bigger pool of people and better technology for teaching and connecting them. Of course the pool of people is finite - something which is true for both the physical and the virtual ecomomy, and eventually you start getting higher wages, but the proportion of available third world brainpower being educated and put to use at the present time is sufficiently low to imagine that a Moore's law type process - where either the available capacity doubles or the price halves - should be more than able to continue for some years into the forseeable future. The principle is in fact very much the same as for the silicon chip - and if stuff like MIT's Open Courseware works well, the trend of extending the pool of cheap and potent brainpower across the planet might well be set to continue.

In fact this is one clear example of where the internet skeptics may be so busy being skeptical that they don't notice when the roof is falling in around their heads.

In the latest edition of Business Week it is not Gordon Moore, but another member of the Intel family, Andy Grove, who is asking the pertinent question. As Grove suggests "it's a very valid question" to ask whether America could eventually lose its overwhelming dominance in IT, just as it did in electronics manufacturing, since lunging global telecom costs, lower engineering wages abroad, and new interactive-design software are driving an increasingly revolutionary change. As he rightly notes: "From a technical and productivity standpoint, the engineer sitting 6,000 miles away might as well be in the next cubicle and on the local area network."

On another front, inveterate new economy skeptic and productivity expert Robert Gordon, try as he might, cannot seem to get to grips with the magnitude of what is happening. The best guess comparison which seems grudgingly to be floating around is one with the invention of the internal combustion engine. Writing back in the summer he argued that it was possible to :

classify innovations as "mega," "first-rate", "second-rate," and beyond and argue that the marriage of computer and communications hardware with software in the 1990s was a first-rate invention, but that it had a one-time-only component because the web could only be invented once, because part of the boom consisted of demand from dot.com firms which promptly went bust, because of the mismatch between hardware and software innovation, because of the timing of Y2K, and because of the overbuilding of telecom infrastructure. The main areas of ICT investment in the near future are innovations that look distinctly second-rate, the further move toward mobility with internet-enabled mobile phones and wi-fi enabled laptops that will allow e-mail, web access, Word, Excel, and Powerpoint to be accessed more conveniently, but the functions to be accessed will be the same as five years ago.

I am sorry, and with all due respect to Bob: this can only be called getting it wrong big-time. The next generation of inventions not only does not appear to be second rate, it appears to be profound, and potentially devastating for the conception of the corporation as a physical entity. What we are about to witness may well turn out to be the unwinding of the institutional and physical structure of the economic organism as it has existed virtually intact since the time of the industrial revolution. What we have is the globalisation of mental capacity, and that little physical detail that your colleague down the corridor may well now be in his home two thousand miles away seems more than an insignificant trifle, it seems in fact to be central to the new conception of flexibility and shared capacity which one might argue will be central to achieving the benefits of the newly available neworking externalaties accrueing to the interconnection of human brainpower.

The fact that we are entering a global deflationary environment has long seemed clear to me. In trying to get to grips with why this might be happening - as opposed to the what we can do about it, which has so notably caught the attention of Central Banker Alan Greenspan and economists across the board from Ben Bernanke to Paul Krugman - I have identified three factors which might be important: OECD ageing, surplus labour in China (and now, increasingly, of course, India), and the falling price of information. Up to now I was never really clear where to go with this third one, it was really simply a case a of reading people like Ray Kurzweil and extrapolating the obvious. Now we have a more succint version: Moore's law as it applies to humans. And like the other version of the law, the only remaining question is how long can this run till we hit specific physical limits. I think Kurzweil's answer would be: farther than you imagine.

Many thanks to Marcelo Rinesi for supplying me with the vision and insight which lies behind this article.