Category Archives: Globalization

African Development: Infrastructure Key?

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The relationship between manufacturing, development in emerging nations and ‘growth’ in developed ones is a challenging issue.

From the Economist:  Over the past 15 years sub-Saharan African economies have expanded at an average rate of about 5% a year, enough to have doubled output over the period. They were helped largely by a commodities boom that was caused, in part, by rapid urbanisation in China. As China’s economy has slowed, the prices of many commodities mined in Africa have slumped again. Copper, for instance, now sells for about half as much as it did at its peak. This, in turn, is hitting Africa’s growth: the IMF reckons it will slip to under 4% this year, leading many to fret that a harmful old pattern of commodity-driven boom and bust in Africa is about to repeat itself. One of the main reasons to worry is that Africa’s manufacturing industry has largely missed out on the boom.

The figures are stark. The UN’s Economic Commission for Africa (UNECA), which is publishing a big report on industrialization in Africa next month, reckons that from 1980 to 2013 the African manufacturing sector’s contribution to the continent’s total economy actually declined from 12% to 11%, leaving it with the smallest share of any developing region. Moreover, in most countries in sub-Saharan Africa, manufacturing’s share of output has fallen during the past 25 years. A comparison of Africa and Asia is striking. In Africa manufacturing provides just over 6% of all jobs, a figure that barely changed over more than three decades to 2008. In Asia the figure grew from 11% to 16% over the same period.

Many countries deindustrialize as they grow richer (growth in service-based parts of the economy, such as entertainment, helps shrink manufacturing’s slice of the total). But many African countries are deindustrializing while they are still poor, raising the worrying prospect that they will miss out on the chance to grow rich by shifting workers from farms to higher-paying factory jobs.

Premature deindustrialisation is not just happening in Africa—other developing countries are also seeing the growth of factories slowing, partly because technology is reducing the demand for low-skilled workers. Manufacturing has become less labor intensive across the board.

Yet deindustrialization appears to be hitting African countries particularly hard. This is partly because weak infrastructure drives up the costs of making things.

Africa’s second disadvantage is its bounty of natural riches. Booming commodity prices over the past decade brought with them the “Dutch disease”: economies benefiting from increased exports of oil and the like tend to see their exchange rates driven up, which then makes it cheaper to import goods such as cars and fridges, and harder to produce and export locally manufactured goods.

Africa’s final snag is its geography. East Asia’s string of successes happened under the “flying geese” model of development, where a “lead” country creates a slipstream for others to follow. This happened first in the 1970s, when Japan moved labour-intensive manufacturing to Taiwan and South Korea. But Africa seems to have missed the flock.

Ethiopia has bucked this trend.  Tanzania, where manufacturing output has grown 7.5% annually from 1997-2012, is wooing Chinese and Singaporean clothing firms and started building its first megaport and industrial park last month. Rwanda has attracted investment from Helen Ai, the woman behind Ethiopia’s most successful shoe firm. Her garment factory plans to hire 1,000 workers by the end of the year.

Nonetheless, factories are not creating nearly enough jobs for the millions of young people moving into cities each year. Most of them end up in part-time employment in low-productivity businesses such as groceries or restaurants, which are limited by the tiny domestic economy; Africa generates only 2% of the world’s demand. To grow fast, African countries need to shift workers into more productive industries. Their governments need to provide the infrastructure and the incentives for manufacturing firms to set up. Without determined action, they risk another lost decade as the commodity bust deepens.

 

Central Banks Fixated on Inflation?

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A reason why the central banks should not have as big as role as they now do.  Their focus on inflation may well be mistaken.

Stephen S. Roach writes:  Targeting in a world without inflation, central banks have lost their way. With benchmark interest rates stuck at the dreaded zero bound, monetary policy has been transformed from an agent of price stability into an engine of financial instability. A new approach is desperately needed.

The US Federal Reserve exemplifies this policy dilemma. After the Federal Open Market Committee decided in September to defer yet again the start of its long-awaited normalization of monetary policy, its inflation doves are openly campaigning for another delay.

For the inflation-targeting purists, the argument seems impeccable. The headline consumer-price index (CPI) is near zero, and “core” or underlying inflation – the Fed’s favorite indicator – remains significantly below the seemingly sacrosanct 2% target. With a long-anemic recovery looking shaky again, the doves contend that there is no reason to rush ahead with interest-rate hikes.

Of course, there is more to it than that. Because monetary policy operates with lags, central banks must avoid fixating on the here and now, and instead use imperfect forecasts to anticipate the future effects of their decisions. In the Fed’s case, the presumption that the US will soon approach full employment has caused the so-called dual mandate to collapse into one target: getting inflation back to 2%.

Here, the Fed is making a fatal mistake, as it relies heavily on a timeworn inflation-forecasting methodology that filters out the “special factors” driving the often volatile prices of goods like food and energy. The logic is that the price fluctuations will eventually subside, and headline price indicators will converge on the core rate of inflation.

This approach failed spectacularly when it was adopted in the 1970s, causing the Fed to underestimate virulent inflation. And it is failing today, leading the Fed consistently to overestimate underlying inflation. Indeed, with oil prices having plunged by 50% over the past year, the Fed stubbornly maintains that faster price growth – and the precious inflation rate of 2% – is just around the corner.

Missing from this logic is an appreciation of the new and powerful global forces that are bearing down on inflation. According to the International Monetary Fund’s latest outlook, the price deflator for all advanced economies should increase by just 1.5% annually, on average, from now to 2020 – not much higher than the crisis-depressed 1.1% pace of the last six years. Moreover, most wholesale prices around the world remain in outright deflation.

But, rather than recognize the likely drivers of these developments – namely, a seemingly chronic shortfall of global aggregate demand amid a supply glut and a deflationary profusion of technological innovations and new supply chains – the Fed continues to minimize the deflationary impact of global forces. It would rather attribute low inflation to successful inflation targeting, and the Great Moderation that it presumably spawned.

This prideful interpretation amounted to the siren song of an extremely accommodative monetary policy. Unable to disentangle the global and domestic pressures suppressing inflation, a price-targeting Fed has erred consistently on the side of easy money.

This is apparent in the fact that, over the last 15 years, the real federal funds rate – the Fed’s benchmark policy rate, adjusted for inflation – has been in negative territory more than 60% of the time, averaging -0.6% since May 2001. From 1990 to 2000, by contrast, the real federal funds rate averaged 2.2%. In short, over the last decade and a half, the Fed has gone well beyond a powerful disinflation in setting its policy interest rate.

The consequences have been problematic, to say the least. Over the same 15-year period, financial markets have become unhinged, with a profusion of asset and credit bubbles leading to a series of crises that almost pushed the world economy into the abyss in 2008-2009. But rather than recognize, let alone respond to, pre-crisis excesses, the Fed has remained agnostic about them, pointing out that bubble-spotting is, at best, an imperfect science.

That is hardly a convincing reason for central banks to remain fixated on inflation targeting. Not only have they failed repeatedly to get the inflation forecast right; they now risk fueling renewed financial instability and sparking another crisis. Just as a few of us warned of impending crisis in the 2003-2006 period, some – including the Bank of International Settlements and the IMF– are sounding the alarm today, but to no avail.

To be sure, inflation targeting was once essential to limit runaway price growth. In today’s inflationless world, however, it is counterproductive. Yet the inflation targeters who dominate today’s major central banks insist on fighting yesterday’s war.

In this sense, modern central bankers resemble the British army in the Battle of Singapore in 1942. Convinced that the Japanese would attack from the sea, the British defenses were encased in impenetrable concrete bunkers, with fixed artillery that could fire only to the south. So when the Japanese emerged from the jungle and mangrove swamps of the Malay Peninsula in the north, the British were powerless to stop them. Singapore quickly fell, in what is widely considered Prime Minister Winston Churchill’s most ignominious military defeat.

Central bankers, like the British army in Singapore, are aiming their weapons in the wrong direction. It is time for them to turn their policy arsenal toward today’s enemy: financial instability. On that basis alone, the case for monetary-policy normalization has never been more compelling.

Measuring Inflation

 

Japan and the TPP

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Considerations for Japan as they participate in TPP.

Yuriko Koiki writes:  After years of exhausting – and exhaustive – haggling, a dozen Pacific Rim countries finally signed up to the Trans-Pacific Partnership (TPP), an agreement that promises everything from more trade to a cleaner environment. The negotiations were such that the hair of Akira Amari, Japan’s economic and fiscal policy minister, turned completely grey. His solace, however, is that the TPP will prove to be a key foundation stone of the “Asian Century.”.

China’s exclusion was no accident. Its huge and complex economy would have injected insuperable problems.  In response, China has launched its “Silk Road” initiative to create an economic zone that will favor its own priorities. It is also seeking greater trade cooperation with European countries. One example is President Xi Jinping’s recent visit to the United Kingdom – which in essence is also an attempt to weaken Britain’s “special relationship” with the US by creating a cat’s cradle of trade, financial, and investment ties with Britain.

But, as Japanese Prime Minister Shinzo Abe’s recent call for talks with China on the issue confirm, the TPP is not off-limits to China – or to other Asian economies. South Korea is warming to the idea of the TPP, as is Indonesia, following President Joko Widodo’s recent visit to Washington, DC.

For Japan, the TPP is vital to achieve economic liberalization – the third arrow of “Abenomics,” the government’s program to revitalize the country’s ailing economy. The legislation to enact the TPP will simply push aside the lobbies and vested interests that have been so effective in slowing down or diverting piecemeal reforms.

The promise of greater exchange of goods, services, and capital across the Pacific, as well as the creation of international standards (for example, for intellectual-property rights), is simply too appealing to ignore. When Japan and other Asian countries weigh the risk of implementing the TPP against the risk of not participating, the risk of not participating is overwhelmingly higher.

Japan’s political challenge will be to sell the TPP to its voters, especially the farm lobby. The customs duty on beef imports, for example, is currently 38.5%. It will be 27.5% in the first year after the TPP takes effect, and will then be gradually lowered to 9% in the agreement’s 16th year.

That should surely provide more than enough time for Japanese beef ranchers to prepare themselves for foreign competition (of the 870,000 tons of beef imported annually, 520,000 tons come from Australia, the US, and New Zealand). And it will certainly be a boon for consumers, as the price of their beef-noodle soup and sukiyaki falls dramatically.

Japan’s ranchers do need time to adjust. Because they deal with animals, shortcuts cannot be taken, and there are limits to mechanization, particularly in creating the type of beef that Japanese consumers demand. Whereas ranchers in Australia and the US have huge herds of cattle, Japanese ranchers raise each individual cow on beer and massages.

The same applies to rice. Rumor has it that when the wife of a certain Chinese leader visited Japan, she bought a delicious variety of Japanese rice by the ton. Taking advantage of the worldwide sushi boom, Japan needs to emphasize that “real sushi requires Japanese rice,” branding it an exclusive product.

In fact, regardless of whether or not the TPP is implemented, Japan’s farmers must pursue this approach to secure their futures, rather than hoping that protective subsidies continue ad infinitum.

But now comes the truly hard part. The TPP has been signed – but it will not be implemented unless and until it is ratified by the legislatures of countries such as the US and Canada. That process could well be enough to turn Amari’s gray hair white.

Japan and TPP

Banking Transparency: Progress?

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Most countries’ secrecy scores have improved – transparency has increased. . Real action is being taken to curb financial curb secrecy, as the OECD rolls out a system of automatic information exchange (AIE) where countries share relevant information to tackle tax evasion. The EU is starting to crack open shell companies by creating central registers of beneficial owners and making that information available to anyone with a legitimate interest. The EU is also requiring multinationals to provide country-by-country financial data.  But the U.S. is going the other way, rising to third on the list. Higher is bad and Switzerland tops the list, followed by Hong Kong.

Secrecy by country, listed from most to least.

l. Switzerland 2. Hong Kong  3. USA  4. Singapore 5. Cayman 6.  Luxembourg                7. Lebanon 8. Germany 9.  Bahrain 10. Dubai/UAE

Bank Secrecy

FATCA Drives More than Fatcats Out of the US?

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Rocky Road to Globalization

Wall Street Journal editorial:   Few privileges in the world are greater than U.S. citizenship, so why are a record number of Americans giving it up these days? The U.S. Treasury Department reported this week that 1,426 Americans turned in their passports between July and September, more than in any previous quarter. The total for the year is on pace to far exceed last year’s all-time-high of 3,415.

As recently as the George W. Bush years, only about 480 Americans renounced their citizenship annually. But in 2010 the Pelosi Congress and Barack Obama enacted the Foreign Account Tax Compliance Act, or Fatca. Aimed at tax evaders, the law has mostly made financial life hellish for law-abiding Americans living overseas, of whom there are some eight million.

Fatca requires that foreign banks, brokers, insurers and other financial institutions give the U.S. Internal Revenue Service detailed asset and transaction records for any accounts held by Americans, including corporate accounts controlled by American employees. If a firm fails to comply, the IRS can slap it with a 30% withholding tax on transactions originating in the U.S. Facing such risks and compliance costs, many foreign firms have decided it’s easier to dump their American clients.

So Americans overseas are becoming increasingly unbankable. Not the wealthiest ones, of course, those “fat cat” potential tax evaders whom Democrats rail against. Much more vulnerable are sales reps, English teachers, lawyers, retirees—the overwhelming majority of American expatriates—whose modest finances make them unappealing clients amid Fatca’s compliance costs.

American expats in the Fatca age are also less attractive as employees and business partners, as any financial accounts they can access must now be exposed to government scrutiny—not only from the U.S. but potentially also from more than 100 other countries that have signed Fatca-related information-sharing agreements with Washington. Americans up for executive posts in Brazil, Singapore, Switzerland and elsewhere have been asked by their managers to renounce their U.S. citizenship or lose their promotion.

Little surprise, then, that renunciations are on the rise. A few thousand ex-Americans aren’t much of a political cause, but they’re a proxy for U.S. tax and regulatory policies that hamper the entire U.S. economy. For every American who renounces citizenship, there are many more foreigners refusing to do business with Yankee entrepreneurs or to invest money in U.S. businesses. That’s a problem for all Americans.

Fat Cats

Manipulating Markets: Up and Down?

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Should we look at who drives stock prices up as well as who helps them go down?

Matt Levine writes about Chinese markets:  When Chinese stock markets were crashing earlier this year, authorities were quick to blame short sellers and market manipulation. It’s reasonable to be skeptical. Sometimes markets go down because they are overvalued, not because a cabal of evil hedge fund managers is manipulating them.

Chinese authorities have detained the leading light of the “Limit-up Kamikaze Squad”, a group of hedge fund managers known for their fearless speculation.

Xu Xiang, general manager of Zexi Investment Management, was apprehended on Sunday on suspicion of insider trading after a police manhunt.

He was “captain” of the loose collection of fund managers centred around the coastal city of Ningbo in eastern Zhejiang province who are known for pushing favoured stocks up by the 10 per cent daily limit on Chinese exchanges.

A frequent criticism of these sorts of crackdowns is that authorities are quick to blame manipulative short sellers when stocks go down, but are less concerned about manipulation on the way up. Pushing stocks up is just as manipulative as pushing them down. But in fact, while it’s not clear what exactly the charges against Xu are, they might well be related to upward manipulation.

Mr. Xu’s Zexi Investment, based in Shanghai, was the subject of intense market speculation in September, when a post on social media accused the company of market manipulation. The online post suggested that Zexi had told China’s biggest brokerage, Citic Securities, to buy shares of an unprofitable Shanghai clothing retailer to lift its price for one of its politically connected investors. At the time, Zexi said the attacks were “fabrications from nowhere and malicious attacks.”

Image by Claudio Munoz

Image by Claudio Munoz

Entrepreneur Alert: Saving Syria and Diversity

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Barbara Slaver writes:   Outgoing UN High Commissioner for Refugees Antonio Guterres made an impassioned plea Oct. 27 for a political resolution to the Syrian civil war that includes key stakeholders Russia and Iran, and he expressed fears about the imminent disappearance of most Christians from the Middle East.

Guterres — a former Portuguese prime minister — also harshly criticized the European Union for its failure to respond effectively to the exodus of asylum seekers, primarily from Syria.

Noting that the EU countries have a total population of 550 million and that those seeking refuge there this year number about 700,000, Guterres said, “We are talking of a problem that could be managed … but what happened was total chaos.” Europe, he said, “has to [get] its act together.”

 

 

Guterres also called for countries around the world to accept more Syrian refugees, noting that Brazil has recently offered to take 20,000.

 

Guterres criticized the notion that terrorists could take advantage of the refugee resettlement process to infiltrate the United States. “The most stupid thing would be to apply for resettlement in the US,” he said, given the level of scrutiny and background checks.

As for Europe, Guterres said would-be terrorists “will fly … they will come in a much more comfortable way” rather than risk their lives in the hands of human smugglers on rubber dinghies and on long treks through the European countryside.   Ethnic Cleansing in the Middle East

The Last Christian

Horn of Africa Drying?

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A new study finds that the Horn of Africa has become progressively drier over the past century and that it is drying at a rate that is both unusual in the context of the past 2,000 years and in step with human-influenced warming. The study also projects that the drying will continue as the region gets warmer. If the researchers are right, the trend could exacerbate tensions in one of the most unstable regions in the world.

“Right now, aid groups are expecting a wetter, greener future for the Horn of Africa, but our findings show that the exact opposite is occurring. The region is drying and will continue to do so with rising carbon emissions,” said study coauthor Peter deMenocal, who heads the Center for Climate and Life at Columbia University’s Lamont-Doherty Earth Observatory.

The study used a sediment core that deMenocal and his colleagues extracted from the pirate-ridden Gulf of Aden. They used the core to infer past changes in temperature and aridity. By pairing the paleoclimate record from the core with 20th century observations, the researchers determined that drying will probably continue across Somalia, Djibouti and Ethiopia. That contradicts more optimistic models that have suggested future warming might bring rainier weather patterns that could benefit the region.

Global-scale models used to predict future changes under global warming suggest that the region should become wetter, primarily during the “short rains” season from September to November. But the new study suggests that those gains may be offset by declining rainfall during the “long rains” season from March to May, on which the region’s rain-fed agriculture relies.)

The outcome has serious implications for a region that has been racked with political instability and violence as it has dried. The Horn of Africa has suffered deadly droughts every few years in recent decades, and with them humanitarian crises as famine and violence spread. It has also become one of the most unstable regions in the world. In Somalia, as the political situation deteriorated amid droughts of the 1980s and `90s, hundreds of thousands of refugees fled the country, and pirates began raiding ships off the coast.

That sediment core, which dates back about 40,000 years, has already provided new insights into Africa’s climate. In a 2013 study analyzing parts of the core, Tierney and deMenocal showed that the Sahara, which once bloomed with regular rainfall, suddenly dried out over the span of a century or two, during a warm period some 5,000 years ago—not more gradually, as many researchers had assumed. It provided evidence that climate shifts can happen quite suddenly, even if the forces driving them are gradual.

The new study uses isotopes from leaf waxes found in the sediment sample to compare rates of drying over the past 2,000 years. Plants reflect the environment that sustains them. When the climate is drier, leaf waxes are more enriched with deuterium, or heavy hydrogen isotopes; leaf waxes from wetter climates reflect the more abundant rainfall through the presence of the normal hydrogen isotopes. The researchers found an increasing shift toward heavy hydrogen in the last century as the climate, which had experienced a wet period during the Little Ice Age (1450—1850 AD), dried out.

The findings suggest that climate modeling, frequently done at a global scale, would benefit from region-specific studies with higher resolution results in high-impact areas such as the Horn of Africa,

Horn of Africa Drying