China Tops in Foreign Investment

Posted on January 31, 2015 by Andi Howe

China has overtaken the US as the top destination for foreign direct investment (FDI), for the first time since 2003.

Last year, foreign firms invested $128bn (£84,8bn) in China, and $86bn in the US, according to the United Nations Conference of Trade and Development.

The growth in China’s foreign investment benefitted the services sector as manufacturing slowed.

Globally, foreign investment fell by 8% to a total of $1.26tn last year.

That was the second lowest level since the start of the financial crisis, partly due to the “fragility” of the global economy last year amid geopolitical risks.

US investment drop

“FDI flows to developed countries dropped by 14% to an estimated $511bn, significantly affected by a large divestment in the United States,” the report said.

US investment fell by two-thirds last year, mainly due to US firm Verizon buying back $130bn worth of shares in a joint venture from Vodafone in the UK.

The US is now third in the world for foreign investment, behind China and Hong Kong.

Its foreign investment fell by 63% last year, compared to 2013.

However, the UN agency said the strengthening of the US economy and the pick up in demand from lower oil prices would “favourably” affect foreign investment this year.

Great Recession Haunts Us

Posted on January 29, 2015 by Andi Howe

J. Bradford DeLong looks at two books on the Great Recession and concludes that we acted incorrectly to solve the problems:

The first book is The Shifts and the Shocks, by the conservative British journalist Martin Wolf, who begins by cataloguing the major shifts that set the stage for the economic disaster that continues to shape the world today. His starting point is the huge rise in wealth among the world’s richest 0.1% and 0.01% and the consequent pressure for people, governments, and companies to take on increasingly unsustainable levels of debt.

The second book: Hall of Mirrors, traces our tepid response to the crisis to the triumph of monetarist economists, the disciples of Milton Friedman, over their Keynesian and Minskyite peers – at least when it comes to interpretations of the causes and consequences of the Great Depression. When the 2008 financial crisis erupted, policymakers tried to apply Friedman’s proposed solutions to the Great Depression. Unfortunately, this turned out to be the wrong thing to do, as the monetarist interpretation of the Great Depression was, to put it bluntly, wrong in significant respects and radically incomplete. What Caused the Great Recession

Beware Greeks Bearing Gifts?

Posted on January 27, 2015 by Andi Howe

Charalampos Economou writes: The structural adjustment program in Grrece has failed to deliver the expected results. Indicative of this is the fact that government deficit in 2013 reached 12.2% of gross domestic product (GDP); debt went up to 174.9% of GDP; unemployment reached 27.5%; more than a third of the population (35.7%) is at risk of poverty or social exclusion; and the inequlaity of income distribution increased. Public health expenditure decreased by €4.2 billion between 2009-12, and more than 2.5 million people lost their health insurance.

In this context, Syzria’s election win came as no surprise. Based on an alternative policy proposal of a national reconstruction plan, the party put forward an optimistic vision that was desperately needed.

The plan focuses on four major pillars to reverse the social and economic disintegration, to reconstruct the economy and exit from the crisis. The four pillars are: confront the humanitarian crisis; restart the economy and promote tax justice; regain employment; and transform the political system to deepen democracy.

The plan includes free electricity to households under the poverty line and meal subsidies to families without income. Syriza has also promised to provide free medical and pharmaceutical care for unemployed people without health insurance — a big problem in Greece that impacts on access to care.

Housing guarantees, rent subsidies, transport discounts for long-term unemployed and those under the poverty line aim to tackle issues related to poverty along with the restitution of the €12,000 annual income tax threshold and restoring the minimum wage to €751.

The health sector will be one of Syriza’s priorities, with an emphasis on securing access for the uninsured to health services, staffing the national health service with the recruitment of the necessary number of medical and nursing personnel and increasing the budget for health.

Deliverying health care will be done through an increase in public spending to be covered by decisively combating tax evasion and smuggling, and by establishing a public development bank as well as of special-purpose banks financed from the so-called “comfort pillow” of the Hellenic Financial Stability Fund and other specialized European instruments.

The most difficult task the party has will be to convince the EU and troika that a new European deal for Greece is needed in order to secure a socially viable solution to Greece’s debt problem.

National Central Banks Holding the Bag?

Posted on January 23, 2015 by Andi Howe

Gutram B. Wolff writes:. It is true that the European Central Bank (ECB) cannot solve all of the euro area’s problems: governments have a clear obligation to move ahead more quickly with structural reforms that address the deep divergences in the euro area and with more public investment to trigger growth.

Should national central banks to take on the risk of default on sovereign bonds, while the market risk will remain with the Eurosystem as a whole.

Signalling: Buying sovereign bonds but leaving national central banks to take on the risk of default would be a strong signal that the ECB is no longer a “joint and several” institution. It would effectively be a declaration that the ECB cannot act and purchase government bonds as a euro-area institution in the interest of, and on behalf of, the entire euro area. This could severely undermine the ECB’s credibility not just in the sovereign purchase programme but also more broadly as an institution.

Note: Draghi asked the 19 national central banks to buy the sovereign bonds and be responsible for defaults.

2) ECB executive board member Benoit Coeure argued that it is illegal according to the treaty to reschedule or restructure the Greek debt that the ECB holds. He argued that the ECB bought this debt for monetary policy purposes and that any restructuring of such a portfolio would be against the treaties.

A different question is how to consider losses that the ECB would make on a forced restructuring.

This uncertainty is the main reason why the ECB Governing Council may be why default risk has remained with the national central banks.

Suppose a country has 25 percent of its debt in the hands of its national central bank. What would happen if the national government had to decide to impose a haircut on all of its debt in order to reduce the burden on its taxpayers? There are essentially two options in such a case: The national treasury could decides to exempt the national central bank from participating in the loss. Or the national treasury could include the national central bank in the haircut. The national central bank would incur a loss, its equity would fall or even become negative. Normally, a central bank would then go to its treasury, pass on the losses and ask for a recapitalization. This would essentially mean that the treasury would not benefit from defaulting on this part of the debt and again, the other creditors would have to bear a greater part of the burden. They would be junior and again ask for a risk premium ex ante.

So the purely national purchase of national sovereign debt would either leave the private creditors as junior creditors, or the national central bank has to accept negative equity.

To sum up, either government bond purchases made by national central banks are super-senior or the potential default risk on the government bonds will be passed on to the Eurosystem as a whole. In the former case, the QE bond purchase would be rather ineffective. In the latter case, the only way to avoid losses for the Eurosystem would be to use other national central bank assets, such as gold or potentially future seignorage.

Policymakers will have to accept the consequences of mandating bond purchases on the national central banks.

Mothers: Where Are You?

Posted on January 23, 2015 by Andi Howe

Ramesh Ponnuru writes: Democrats have a knack for stumbling into trouble with mothers who aren’t in the paid labor force.

In the late 1990s, Senator Chris Dodd said that being a full-time homemaker was a “wonderful luxury” for women who “want to go play golf or go to the club and play cards.” In 2012, Democrats said Ann Romney, who raised five sons, had “never worked a day in her life.” And a few months ago, President Obama suggested that for mothers to leave the labor force for a few years is “not a choice we want Americans to make.”

Two of Obama’s new proposals reflect ‘mother’ blindness. Obama wants to triple the existing tax credit for child-care expenses, and create a new credit for second earners. Those proposals will help some parents and couples, but have nothing to offer families where one parent concentrates on home-based tasks. The second-earner credit is probably too small to affect couples’ decisions about work and child-care arrangements. So its main effect will be to lower the share of the tax burden paid by two-earner couples who were going to be working even without the credit.

There are two standard economic justifications for shifting the tax burden in this way, neither of them convincing.

One is that two-earner couples have higher costs than single-earner couples making the same income, so it’s harder for them to pay the same taxes.

The second is that a progressive tax code, when applied to families rather than individuals, can penalize second earners. A second earner will often pay a higher tax rate than she would if she were single and making the same income, because she moves to a higher bracket when she marries a wage earner. The tax code thus discourages her from working. That’s true, but it’s just a special case of the way taxes discourage work, and not one that seems especially unjust or destructive. Marriage is (among other things) an economic partnership, and this feature of the tax code reflects that it involves pooling resources.

If the second-earner credit ignores that feature of marriage, Obama’s other proposal ignores how little Americans like commercial child care.

Given these preferences, it would make more sense to enlarge the child tax credit — not the child-care credit — and let parents use it as they see fit rather than requiring them to use the commercial day care most of them try to avoid.

But as most homemakers could tell you, paid work isn’t everything.

Draghi Next President of Italy

Posted on January 19, 2015 by Andi Howe

Andrea Markuzzo writes: As the 89 year old President of Italy resigns, the party leaders are all likely to find it difficult to impose their preference on the parliamentary groups.

Giorgio Napolitano, Italy’s 89-year-old president, has resigned from the office he has held for nearly a decade. His departure will prompt a secret ballot among parliamentarians to replace him. But this is not likely to be an easy job, since the Italian parliament is currently rife with disagreement and dissatisfaction.

Originally elected in 2006, Napolitano reluctantly accepted re-election in 2013 because a highly polarised parliament could not guarantee the required absolute majority to any successor.

Some believe the Italian presidency is little more than a ceremonial role, but the chief of state is actually assigned substantial powers in the Italian Constitution.

What’s more, Italian governments are traditionally unstable and the political scene notoriously fragmented. There have been 63 governments since 1946, and since the political crisis of the early 1990s, majorities have been more and more fragile, composed of up to 20 different parliamentary groups. Against this backdrop, the president represents a rare centre of institutional continuity.

Napolitano, in particular, has pushed the limits of his authority. He used the highest degree of power on offer to him when trying to bring in effective governance before the debt crisis of 2011-12 and during the hung parliament deadlock that emerged after the 2013 elections.

The prestige of the presidential office naturally attracts some top names to the job and several potentials have been identified in the run up to Napolitano’s departure.

Mario Draghi, president of the European Central Bank, is thought to be a strong candidate,

Romano Prodi, Italy’s prime minister between 1996-1998 and 2006-2008, as well as president of the European Commission from 1999 to 2004 could find support. It will be difficult to find a president with support from a broad range of sources. In fact, the major leaders won’t even been voting in this election. Both Renzi and Beppe Grillo, founder of the radically populist Movimento 5 Stelle, have decided not to run for a parliamentary seat in 2013 general elections, so won’t be eligible to vote. Berlusconi, for his part, lost his seat after being onvicted of tax fraud.

President Renzi has been widely criticised by the traditional left for his attempts to give the Democratic Party a business-friendly image, and Grillo is facing growing criticism for the lack of internal democracy in the Movimento 5 Stelle. In Forza Italia, some accuse Berlusconi of taking care of his own interests above those of the party he founded.

The eventual winner will work with Renzi and his ministers on the final parliamentary passage of two crucial political reforms. A new electoral law should introduce a second round between the two largest parties to make sure one has a super-majority of 55% of the seats.

So Napolitano’s successor will have his work cut out – and Italy’s politics show little sign of fully stabilising any time soon.

Money Laundering Post 9/11

Posted on January 18, 2015 by Andi Howe

Munich-based economic journalist Markus Schulze Wehninck writes: Money laundering has been an international issue since the end of the 1980s but its career on the global agenda did not start until September 11, when it was connected to the fight against terrorist financing. After the attack on the World Trade Center, a global Counter Terrorist Financing (CFT) regime was built up by the United Nations and pre-existing anti-money laundering (AML) measures were expanded. It was believed that the expertise of AML professionals could be used for the fight against terrorist financial flows. The main task of the Financial Action Task Force (FATF) – an OECD-based international body established by the G7 in 1989 – was extended to the combined ‘label’ of anti-money laundering and counter terrorist financing (AML/CFT).

The connection of these two phenomena has had significant consequences. The ‘dirty money’ to fight is no longer only affiliated with crimes already committed, as money laundering only concerns funds from illicit activities, but as well with future terrorist activities. This boosted the international efforts to fight dirty money flows and new obligations for the private sector.

With its ’40 recommendations’, the FATF had already published an extensive blueprint for financial institution regulation to fight money laundering in 1990. The recommendations, which are implemented – at least in part – by most states, commit banks and other institutions to analyse their customers and financial flows, keep records and report suspicious activities to the authorities.

In 2003, the FATF published nine special recommendations for counter terrorist financing and included “designated non-financial businesses and professions” like (internet-)casinos, real estate agents, dealers in precious metals and stones, and lawyers or notaries. Furthermore, alternative remittance systems, like the informal value transfer system ‘hawala’, and non-profit organisations have been taken into the regulatory focus of the international expert body.

At the same time, other standard setters like the Basel Committee on Banking Supervision or the private sector initiative Wolfsberg Group have expanded and further specified the duties of banks in analysing customers and their financial behaviour. A global system of financial surveillance has emerged which obliges the everyday customer’s local bank to act as a financial watchdog. This surveillance system has merits, as it makes tracking dirty money flows more easy and efficient. But, nevertheless, it creates problems which did not exist before 9/11.

Firstly, the global financial surveillance system clearly violates the banking secrecy provision. The FATF recommendations point out, the secrecy laws of financial institutions are to be constrained where they may “inhibit the implementation” of the recommendations. States get what they wanted for a long time – access to private sector financial data. This data is not only supposed to be shared among domestic state agencies, but in cooperation with their foreign counterparts on a global scale..

The financial surveillance system has its weak points and carries the risk of customers beinging suspected by mistake, a ‘false positive’. Private sector institutions use IT-tools to trace suspicious money flows within the huge amount of financial data. A whole industry sector has evolved to commercially exploit the needs of financial institutions, that is, to find the ‘needles in the haystack’. Data management software develops ‘patterns of normality’ in order to identify abnormalities in financial transactions – an error-prone system.

The best strategy of blame avoidance is thus: reporting, reporting, reporting. How many transactions, banking accounts or credit cards are audited by this surveillance system is not known. However, a 2004 evaluation of the private sector reporting behaviour in Germany notes that 6400 suspicions had been reported the year before, from which about 900 had been false alerts, or just a little over 1 in 7 reports.

Another negative effect is that the fight against dirty money threatens to exclude poor people from financial services. Before 9/11, AML measures were merely associated with rather high sums and certain transaction thresholds, while the relatively small amounts of money used for 9/11 have refocused the dirty money chase on daily retail banking.

Their obligations force banks to prove identity and residence of their customers, which might be a minor problem in developed countries, but is of extreme significance in the developing world. As evaluations of the impact of the FATF-recommendations on the access to financial services show, ‘know your customer’-rules pose problems in countries where many households do not have formal addresses. This adverse impact has been shown in South Africa, Indonesia, Kenia, Pakistan and Mexico.

Womanhood: Not a Piece of ‘Cake’

Posted on January 13, 2015 by Andi Howe

Cavan Sieczkowski writes about Jennifer Aniston, nominated for Best Actress in the film ‘Cake.’ “You’re damned if you do and damned if you don’t,” says Aniston. Physical standards in Hollywood are skewed in Hollywood.

Aniston’s role in ‘Cake’ as a woman suffering from chronic pain and depression has already earned her Golden Globe, SAG and Critics’ Choice nominations.

While promoting the film, Aniston’s had to field questions about the “likability” of the character, a question she says “men don’t get asked.” Men in her business also don’t get regularly quizzed on marriage and kids, although those inquiries hound Aniston.

“You don’t see a lot of men getting asked: ‘Why aren’t you married? Why aren’t you having children?’ You don’t get the ‘Well, they seem to play the same thing over and over again,’ and some of them do. We’re very much a sexist society,” she said. “Women are still not paid as much as men … I’ve been up against that in negotiations myself.”

Unlike men in Hollywood, women are faced with distorted beauty standards and unfair criticism.

Aniston said, “I really do think you’re damned if you do and damned if you don’t. You either are too fat — ‘Oh my God, she’s gained weight, getting chubby, mid-40s spread!’ — or ‘She’s so skeletal, get some meat on her bones!’ I’ve been on too-thin lists. I’ve been on what-happened-to-her lists.”

China Financing Oil?

Posted on January 13, 2015 by Andi Howe

Colin Chilcoat writes: As the world’s number one energy consumer China is enjoying the low prices while they last. Never one to settle however, China is finding still more ways to take advantage of the dire straits gripping several oil producers.

China’s slowdown is real but the country still has plenty of money to play with that is taking it places the World Bank and the International Monetary Fund (IMF) wouldn’t dare. Their reward? More oil of course. With tough conditions and greater access to raw commodities, China looks to turn the high risk into equal or greater returns.

Russia has turned to China for a bailout. China has obliged, agreeing to finance state-owned Rosneft’s debt in addition to opening a $24 billion currency swap program, which could expand further. For its part, China gets access to Russia’s tightly held upstream sector – in the form of the giant Vankor field – and fulfills its needs downstream with favorable long-term oil and gas deals.

China'sProductionConsumption

Source: EIA

Russia’s economic situation is by no means rosy, but the state of affairs in Venezuela is downright awful. Oil and gas revenues account for one quarter of the country’s GDP and approximately 95 percent of its export revenues. Not surprisingly, low oil prices have the country teetering on the brink of default. Since 2007, Venezuela has borrowed more than $50 billion from China – loans that prevent Venezuela from otherwise marketing about half of its current exports to the Asian nation, which total approximately 500,000 barrels per day.

While perhaps more cautious, China is ready to keep giving. Venezuela and President Nicolas Maduro have received more than $20 billion in investment for economic, social, and oil-related projects. This arrangement precedes what Maduro hopes to be a more liquid $16 billion loan that could be more freely applied to its other debt obligations. Still, China sets the terms and it wants more oil in return – more than 100,000 bpd greater than current levels.

Elsewhere in South America, Ecuador has pinned its development hopes to the Chinese for better or worse. In Argentina, Brazil, Peru, China is also fronting the bill and staking claim to the raw goods. The country’s high-interest, inflexible lending draws parallels to the multibillion-dollar payday loan industry in the US. In this scenario, the lender is caught in a circle of debt with no real impetus for change. That circle may continue for some as China is pledging $250 billion in investment in the region over the next decade. The country’s oil-based financing is still an unproven gamble – and lower prices increase the default risk – but it’s shrewd move for what will soon be the world’s largest consumer of oil.

Sri Lanka: Free Again?

Posted on January 12, 2015 by Andi Howe

Blommberg editors opine: Strongman Mahinda Rajapaksa was kicked out in last week’s elections in Sri Lanka. Another small, strategically vital Asian nation appears to have rejected China’s embrace. Whether the U.S. and India can exploit this opportunity, however, will depend on whether they recognize what’s unique about Sri Lanka.

Voters elected Maithripala Sirisena as president because they had tired of the opacity and perceived cronyism of Rajapaksa’s administration, symbolized in part by multibillion-dollar projects handed out to Chinese companies with little oversight. Elites had begun to fear that Beijing would soon demand more political and military influence as part of its largesse. Yet, unlike Myanmar, which shares a land border with China, such concerns remain somewhat theoretical. Sri Lanka has vast infrastructure needs — and therefore good reason not to reject Chinese money entirely.

If other nations want to compete, they’re going to have to demonstrate they are as willing and able as China to carry out large projects. India is itself seeking Chinese money for infrastructure. At the same time, Japan, Sri Lanka’s largest donor, has shown interest in increasing its investments in the region, and there should be room for Tokyo and New Delhi to combine forces.

Sri Lanka’s has also sidelined the people who have been most directly implicated in past human-rights abuses — including President Rajapaksa and his brother Gotabaya, who served as defense secretary during the last stages of the brutal war against Tamil Tiger insurgents. This should make it easier for the U.S. and India, which has a large and vocal Tamil minority, to work with the new government and eventually strengthen military-to-military ties. U.N.-led efforts to investigate allegations of Sri Lankan war crimes should continue, but hopefully the new president will be given a chance to promote internal reconciliation and accountability. The campaign to end Sri Lanka’s longstanding culture of impunity will have far higher chances of success if it is led from within, rather than imposed from abroad.

China still has a legitimate interest in expanding its presence in the Indian Ocean, given its dependence on the region’s shipping lanes. By the same token, Sri Lankans could benefit greatly if Beijing’s plans for a “Maritime Silk Road” integrate the infrastructure and economies of the whole region.

Ideally, China will continue to cultivate its interest in Sri Lanka as one investor among several. Worthwhile public projects should proceed with open bidding and labor and environmental safeguards. Needlessly provocative actions — such as the docking of Chinese submarines at Sri Lankan ports, which Rajapaksa allowed — should cease.

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