Factoid of the day

" In 2002, the total number of undergraduate degrees granted in Arabic in all U.S. colleges and universities—yes, all of them—was six."

Bizarre...that would make doing business in the Middle East for US companies rather difficult.

On the other hand, there's this(from the same link):

"In 2003, two alleged Iranian agents caught photographing the No. 7 subway line beneath the East River were surprised to find themselves confronted by a cop who spoke fluent Persian. They quickly left the country. In 2003, a young undercover officer born in Bangladesh penetrated a small group of angry young immigrants, two of whom had started plotting to blow up targets in Staten Island and the subway station at Herald Square.

When it comes to disrupting potential terrorist plots, cops can use simple techniques out of bounds to the CIA or even the FBI. Cohen's detectives, for instance, might follow a suspect onto a subway and have a uniformed cop collar him for an infraction as minor as sitting on two seats at a time. Once he's taken down to the station, he may be faced with the threat that his friends will find out he was there and think he's talked. "Mostly, we don't hear from those guys again," says one of Cohen's senior operatives."

Interesting exchange at Calculated Risk regarding Indian culture

Bob Dobbs

" El Cliffo wrote on Mon, 04/20/2009 - 9:49am.
Headline in the UK Telegraph: Indian business students snap up copies of Mein Kampf .

"Sales of Mein Kampf, Adolf Hitler's autobiography and apologia for his anti-semitism, are soaring in India where business students regard the dictator as a management guru."

Well, that explains tech support."

"I have a friend, a retired lawyer-turned-mediator who lived in India for a couple of years. Year before last he and his wife were invited to return and give a couple of workshops on mediation techniques in Bangalore and another town -- one to a chamber of commerce, another at a law school. He noted after that "trying to see the other guy's point of view" was considered weakness by most Indian males! Who would say so openly in class. A couple of women came up to him afterwards and said "We've been waiting years for this!"

http://www.talesfromthecoast.blogspot.com

--------------

It would appear that certain aspects of 20th century history are missing from the Indian educational system, at least in some places. Not to say that the US doesn't have its share of neo-Nazi's; but Hitler's written words aren't getting mainstream publication.

The second anecdote is worth noting if you might be doing business in India.

Dropping prices

This website is reporting that

"As the annual iron ore negotiation cranks up, it seems Japan, China, and South Korea steelmakers are expecting a 30%, 40%, even a 50% price cut respectively from the world’s three biggest iron ore miners."

That would result in a significant drop in dollar imports for China should the price cuts take place; which the article indicates is likely. Also, theoretically Japanese carmakers could reduce prices for their product in the near future as a means of increasing unit sales. There is a lot of iron tied up in auto inventory sitting in ports around the world.

US trade deficit

Interesting that the trade deficit ex-petroleum has been essentially in a range since mid-2004 until the recent sharp decrease. With respect to the entire time period shown on the chart, it is an illustration of the offshoring of manufacturing capacity from the US. (Source: CR)

Economics and politics inevitably linked throughout history

I found this excellent piece, "Lessons from the history of trade and war" posted yesterday, with this thesis:

"History, however, suggests that globalisation is as much a political as a technological phenomenon, which can thus be easily reversed, and has been so in the past"...

I couldn't agree more. The authors of this piece go on to say:

"The international system has historically done a pretty poor job of accommodating newcomers to the Great Power club. German unification and industrialisation during the late 19th century led to tensions with Britain and France over colonial and armament policy, while Japan's rise to regional prominence during the interwar period, and its search for secure sources of raw materials, ended in war against United States and its allies. Both precedents are worrying, in that similar questions are posed today, both in terms of the rights of emerging nations to rival the established powers’ military capabilities (notably with regard to nuclear weapons), and in terms of the strategic importance to countries like China of ready access to oil supplies and other natural resources."

Given the overwhelming military superiority of the USA, I don't see any country challenging the existing global economic system through military means anytime soon. Saddam Hussein's invasion of Kuwait was just such a challenge in that Hussein made a grab for oil resources, daring the world to do something about it, and the US quashed that. The costs of military action to acquire resources would be too great to justify the economic gains from attaining control of said resources.

Foreign investor on the way

Dealbreaker points out that:

Dubai Investment Firm Plans U.S. Purchases (Dealbook) and says

"Hide your children, your mortgage deeds and your small businesses. Remove your stock holding from your brokerage account and put the certificates under your pillow. If you're a public company, it's time to go private -- right now. In short, time to go into lockdown mode. The Dubai money is coming. The private equity firm managed by the country's ruler, Sheik Mohammed bin Rashid al-Maktoum, will soon open an American office, so that he can add US firms to his portfolio. They're takin' over."

I say dust off your business plan that's been sitting on the shelf...there's a new prospect in town. Time to get back some of that gas money we've been hosing into our SUV's...

Yen carry trade and New Zealand's economic prospects

Claus Vistesen at Alpha Sources notes today that the most recent inflation numbers for New Zealand

"beat the central bank's expectations. It is of course still too late to say anything but with today's inflation data the markets are gearing up for the RBNZ to raise the refi rate to an unprecedented 8.25% next week. In doing so the bank will clearly be playing into the hands of all those savvy retail investors and indeed institutional players playing the carry trade which is driven by very high global capital mobility and high interest rate differentials between central banks."

It seems to me that the prospect of the currency of one of the world's largest and most populous economies(Japan) being dumped for the currency of one of the world's smaller and more isolated economies is somewhat Kafka-esque.

A quick review of the Wikipedia entry on New Zealand shows NZ to be "a country heavily dependent on trade, particularly in agricultural products, and exports almost 28% of its output." Thus, the current carry trade situation looks to be particularly damaging to NZ's economic prospects.

As far as long term solutions for New Zealand go, the Wikipedia authors state that "the current government's economic objectives are centred on pursuing free-trade agreements and building a "knowledge economy". In 2004, the government began discussing a free trade agreement with the People's Republic of China, one of the first countries to do so. Ongoing economic challenges for New Zealand include a current account deficit of 9% of GDP[19], slow development of non-commodity exports and tepid growth of labour productivity. New Zealand has experienced a series of "brain drains" since the 1970s[20] as well educated youth left permanently for Australia, Britain or the United States." With a population of only 4.2 million and a below-replacement total fertility rate of 1.79, it seems to me that New Zealand likely lacks the human capital to generate sustained economic growth. Given the country's geographic remoteness, it seems unlikely to attract skilled immigrants in any meaningful numbers.

It seems that New Zealand's situation today is analogous to the Eastern European countries being discussed over at Demography Matters.

Iranians like American made goods-smugglers supply them

says a Bloomberg report titled "Dubai Dhow Captains Defy U.S. Sanctions With Shipments to Iran." Says the report:

"Sailors with skin baked to leather by the Persian Gulf sun stack Hewlett-Packard Co. laser-jet printers alongside a 40-foot wooden dhow in Dubai Creek as Ali Reza, an Iranian merchant, watches them sweat. From his base in Dubai, the second-biggest member of the United Arab Emirates, Reza ships General Electric Corp. refrigerators and other American-branded products to Iran, even though re-exporting them is banned under U.S. sanctions. Within days, the printers will be snapped up by buyers in Iran. ``Anything made in America is popular,'' Reza, 55, says as his crew prepares for another voyage."

Ironically,

"The U.S. military inadvertently provides protection for dhows plying the Gulf. Coalition forces are charged with guarding Iraq's offshore oil facilities and check vessels sailing through the Strait of Hormuz for weapons. ``The pirates and the weather are our enemies,'' says Mohammed Ali Hussein, a 35-year-old boat captain who makes the journey to Iran about once a month. ``If we're lucky, our route will take us near Iraqi oil installations. That is a safe area.''

I'd like to see an estimate of US exports to Iran through this channel. According to the article, " Customs laws in the United Arab Emirates mean that officials only look at the port of origin for a cargo. With most of the U.S. goods coming through Asia, there are no legal grounds to seize them, says Marwan Ali Hasan, an inspector in Dubai."

Also, how does the US Navy tell the difference between a pirate and a smuggler? Nobody's flying a skull and crossbones...

Counter-intuitive fact regarding US net international investment position

Brad Setser says:

A paper that Dr. Roubini and I wrote in 2004 – a paper that incidentally is still by far the most popular thing I have ever helped to write – made this argument. We recognized even then that US had one big advantage than most emerging economies lacked: its liabilities are denominated in dollars, while many of its assets are denominated in foreign currencies (mostly the euro and loonie). That means that falls in the dollar improve the United States external position. The falling dollar increases the value of many US external assets without changing the value of (most) US external liabilities.

In the linked article Setser expands considerably on the subject of the US's net international investment position, but the main point of the post is that, contrary to Setser's predictions, "the US net international investment position has actually improved since the end of 2004." The prime reasons for that being due to the decrease in the dollar's value, and also due to the fact that

"Foreign equity markets – in terms of their own currency -- dramatically outperformed US equity markets – in dollar terms -- in both 2005 and 2006...

The implied return (in local currency terms) on US holdings of foreign stocks (portfolio equity) was 22.1% in 2005 and 18.4% in 2006. Throw in currency moves, which cut a bit over 7% off US returns in 2005 but added about 5.5% in 2006, and the gain -- in dollar terms -- on US holdings of foreign stocks in dollar terms was around 15% in 2005 and 24% in 2006.

That tops the 3.1% return foreigners got (in dollar terms) on US stocks in 2006, and their 13.2% return in 2006.

US equity investors abroad did about 12% better than foreign equity investors in the US in 2005 and about 11% better in 2006. They make it hard to argue (credibly) that the US can finance large deficits because the US is such a good place for investment ..."

The question of why foreign investment in the US has performed relatively poorly compared to the reverse is a complex one...perhaps US investment managers are more sophisticated than their foreign counterparts. Two examples of investment trends in the US that drew a lot of foreign capital in recent years are the dot-com boom and the recent residential housing boom. In both instances, I believe a significant amount of capital that drove over-investment in these sectors came from foreign sources who likely failed to perform enough investigation of their investments before forking over their cash.

Review of Hong Kong's history since the handover to China

David Cuthbertson at the Adam Smith Institute Blog has posted a brief editorial on this subject with the thesis that

"It's now almost 10 years since Hong Kong was 'handed back' to the Chinese. At the time, sckeptics were predicting that the uniquely Anglo-Asian success story would come crashing down and that the city would quickly loose its place as an international economic powerhouse. Of course, the skeptics have been proved wrong. In some cases, spectacularly wrong."

I had the opportunity to visit Hong Kong in late June of 1989; shortly after the Tiananmen Square problems. I found the city to be a wonderful mix of English and Chinese influences. The engineering and architectural expertise on display in the amazing office towers impressed me. I imagine that there will be a flood of press coverage of the transition and subsequent change or lack there of in Hong Kong this summer to mark the anniversary.

I found a story in the International Herald Tribune based on comments made by former British PM Margaret Thatcher, which quoted her as follows:

"Margaret Thatcher has said her fears that Hong Kong's economy could not prosper under Chinese Communism have proved to be largely groundless.

She said she has not been disappointed by Hong Kong's development since Britain handed over the former colony to China a decade ago.

"I think we must be realistic," Thatcher said in a rare interview broadcast Tuesday by British Broadcasting Corp. radio.

"Let's think over a moment how great our private worries were about what would happen in Hong Kong after the handover. Now those worries have largely proved groundless.""

A review of everything that has transpired in Hong Kong since 1997 seems it would be well worth the time of anyone interested in China's future.

Solution to pollution havens

Matthew E. Kahn, who posts at Environmental and Urban Economics, discussed "Pollution Havens, Asymmetric Information and Product Quality", and mentioned that "plenty of papers have been written about the rise of poor nations as pollution havens as international trade grows"...I think that a policy that the United States could adopt with regard to imports of manufactured goods that would be reasonable would be to require that imported goods be manufactured at facilities adhering to the same environmental standards as those that are law in the US.

For example, steel imported from China and Russia would have to be produced at plants that meet US emission standards. Short term, this would please US workers, as it would take some time for many foreign operations to get their facilities improved. Long term, it would benefit everyone as citizens of the exporting countries would be exposed to less pollution.

China's oil imports actually a substitute for US imports?

Tyler Cowen at Marginal Revolution asks the question "Is China driving up the price of oil?"...he quotes a Washington Post story that says

"China's oil imports have increased dramatically during the past five years; the country now imports 3.5 million barrels a day, compared with U.S. daily imports of 12.2 million barrels. But it's far less obvious that Americans are really paying a price for this...China is making scads of plastic...by embedding oil in products, China is, in effect, importing oil on behalf of U.S. consumers -- as much as 1 million barrels per day...Chinese pressure on oil imports may have raised U.S. inflation by 0.23 percent from 2001 to 2005, but cheap imports of Chinese goods decreased U.S. inflation over that same period by 0.28 percent"...

My thought on this is that this is an excellent and unexpected insight. One point that I would add is that if production of plastic-based products had not been outsourced to China, the store price of these products would be at some higher level and therefore the demand somewhat less, leading to some reduced level of net oil consumption.

However, I believe that some significant part of today's crude oil prices is due to political/production fear factors and not due to the actual supply levels. I have been tracking US crude oil inventories as reported by the US EIA's This Week in Petroleum website at this blog and those inventories have been at the top of their historical ranges for at least a year. One would expect that imports would decrease to at least bring inventories down to the middle range as refiners are maxed out on refining capacity and therefore wouldn't need to import crude until their crude inventories dropped quite a bit.

Why manufacturing jobs are outsourced while farm jobs go to illegal immigrants

Primarily because US farmers as a rule don't understand that they need to brand and differentiate to offset the fact that farm products are commodities-shoes are a commodity as well, but look what Nike has done...

I think that an improved US farm policy would be to allow imports of many farm products currently produced in the US that are subsidized through federal payments and tariffs/quotas from countries with low labor costs. The key would be to turn family farmers into branding and distribution concerns. I believe that the average American farmer understands that the American food market breaks down into two segments: cheap and plentiful basic foods; and premium specialty foods. What the farmer needs to do is rather than bringing workers to farm his land is to arrange for crop production in say, Mexico, and then his task would be to manage the transport of the crop across the border and marketing the product to food processors and consumers. Distribution and marketing bring higher margins than commodity production and therefore this would improve the farmer's net income.

Ranchers are getting the idea to a degree as we are seeing some ranchers turning to marketing their beef as "free-range" and "hormone-free" and getting higher prices at the supermarket for that product.

In any case, changing this policy would likely significantly reduce illegal immigration into the US...

China's conundrum

In response to a post on the economic relationship between the US and China titled "How George Bush got a cost free trillion dollars for the US economy", my thoughts are as follows:

While I realize your post is a rant, I have to take issue with the idea that Chinese leaders are acting out of stupidity. You state that “China’s economic growth has been export-driven. This is largely a result of a deliberate policy of the Chinese government. They looked around at Japan, South Korea, and Taiwan and they decided that the way you become a rich country is by exporting things to the rest of the world. To that end, the Chinese leadership seems to have decided to do whatever it takes to help their export sector.”

That is a reasonable statement of China’s economic policy. You point out that Japan has had a similar policy and essentially say “Look where Japan is now”…

I think that up until now, the Chinese policy of subsizing exports has been rational in that at the time that Deng decided to implement this policy China had no coherent domestic economic systems at all, and therefore no domestic market to build the country’s economy on. So China took what it had, which was cheap labor, and used that to build up a manufacturing and export sector. Still, a rational policy. Today, I believe that Chinese leaders are perfectly aware of the negative consequences of the massive buildup of foreign reserves and dependence on exports.

The problem is that it will be extraordinarily difficult to shift to a more balanced economic system without serious financial and social shocks. It’s not a question of stupidity, but rather of having difficult choices to make. If the yuan is allowed to float it will rise relative to other currencies and exports to the US will plummet as the price of Chinese goods goes up, damaging the export sector which is the source of the highest paying jobs in China. That would likely lead to serious social unrest in China. Plus, the rise in the value of the yuan would leave the PBoC with capital losses on all of the US debt that they have piled up.

Bribery-still a standard business practice?

I raise this topic in the context of a scandal involving Siemens, a Germany company which is currently in the headlines due to bribery prosecutions of some of its employees. An example is "Bribery trial deepens Siemens woes" from the International Herald Tribune where the first sentence in the story states "Two former managers for the engineering conglomerate Siemens told a German court Tuesday that they meted out €6 million in bribes in Italy as part of the company's strategy to anchor itself in the booming market for power generation equipment." The managers defense is described as "Both men also said that they had not violated a German law forbidding bribery of public officials abroad because the Italian utility in question, Enel, was already effectively privatized."

Further along in the article, the IHT states that "In 2002, Germany passed an additional law extending the prohibition on bribery to all employees abroad, whether at public or private companies." Apparently, the bribing of a foreign office-bearer was not punishable in Germany until the late 1990s. Germany passed an "International Bribery Law" in 1998 to rectify that. Also, since the "Tax Exemption Law" became effective on March 24th, 1999, bribe money is no longer tax deductible in Germany.

There is a Bribe Payers Index which rates countries according "to the propensity of firms with headquarters within their borders to bribe when operating abroad."

Leading countries in share of global gdp

Here is a chart from Wikipedia that shows the rankings as of 1998:

Region / Country	GDP (PPP) mill. of International dollars	GDP Share percentage (%)
World	33 725 635	100
United States	7 394 598	21.9
People's Republic of China	3 873 352	11.5
Far East (excluding China, India, Japan, Russia)	3 140 603	9.3
Japan	2 581 576	7.7
South America and Central America	2 285 700	6.8
Republic of India	1 702 712	5.0
Germany	1 460 069	4.3
West Asia	1 236 328	3.7
United Kingdom	1 150 080	3.4
Russia and Central Asia	1 132 434	3.4
France	1 108 568	3.3
Canada and Australia	1 061 537	3.1
Africa	1 039 408	3.1
Italy	1 022 776	3.0
Eastern Europe (excluding Russia)	660 861	2.0
Mexico	655 910	1.9
Spain	560 138	1.7
Netherlands	317 517	0.9
Belgium	198 249	0.6
Sweden	165 385	0.5
Austria	152 712	0.5
Switzerland	152 345	0.5
Portugal	128 877	0.4
Denmark	117 319	0.3
Norway	104 860	0.3
Finland	94 421	0.3

There is a chart at econstats that lists every country in the world and their shares of world gdp; it's way too large for me to post here but it includes data up through 2006.

Here is a ranking as of 2005 from the World Bank:

Total GDP 2005
(millions of Ranking Economy US dollars)
1 United States 12,455,068
2 Japan 4,505,912
3 Germany 2,781,900
4 China 2,228,862
5 United Kingdom 2,192,553
6 France 2,110,185
7 Italy 1,723,044
8 Spain 1,123,691
9 Canada 1,115,192
10 Brazil 794,098
11 Korea, Rep. 787,624
12 India 785,468
13 Mexico 768,438
14 Russia 763,720
15 Australia 700,672
16 Netherlands 594,755
17 Switzerland 365,937
18 Belgium 364,735
19 Turkey 363,300
20 Sweden 354,115
21 Saudi Arabia 309,778
22 Austria 304,527
23 Poland 299,151
24 Indonesia 287,217
25 Norway 283,920
26 Denmark 254,401
27 South Africa 240,152
28 Greece 213,698
29 Ireland 196,388
30 Iran 196,343
31 Finland 193,176
32 Argentina 183,309
33 Hong Kong 177,722
34 Thailand 176,602
35 Portugal 173,085
36 Venezuela 138,857
37 Malaysia 130,143
38 Israel 123,434
39 Czech Rep. 122,345
40 Colombia 122,309
41 Singapore 116,764
42 Chile 115,248
43 Pakistan 110,732
44 Hungary 109,154
45 New Zealand 109,041
46 UAEmirates 104,204
47 Algeria 102,257
48 Nigeria 98,951
49 Romania 98,559
50 Philippines 98,306

Georgia (the country) is reforming

The Private Sector Development Blog says that "Georgia had the biggest drop in corruption in all of Europe – last year in a survey 95 percent of Georgians reported not having to pay a bribe to receive public service." That is good news. Other reforms mentioned include:
-"Slashing the number of taxes from 22 to 7; a tax rate reduction from 60 to below 40 percent, which more than doubled the revenues"...
-"Further cutbacks in payroll and corporate taxes – all from a new single taxation authority – are scheduled for 2008"...
-"Abolition of most tariffs, combined with a reduction in the time required to import goods from 52 to 4 days"...
-"Eradication of 756 business licenses and permits"...

There is more on Georgia at the link above...

Relevancy of history-the case of the Opium Wars

Marshall Jevons at The Bayesian Heresy has posted a link to a podcast from the BBC regarding the Opium Wars. My thoughts on the relevancy of learning about this subject:

The subject of the Opium Wars is very relevant now as the world's entered the 21st century. As you know, opium and its derivatives are hard-core drugs, and in most countries these days are illegal. Yet the global trade in opiates and other illegal drugs is enormous. One of the unintended consequences of the US invasion of Afghanistan is that Afghanistan has regained its position as one of the world's major suppliers of opium.

Hypothetically, if drug cartels around the world formed an alliance, I believe they would have enough cash to put together a fairly significant military force. Plus, government agencies at all levels are rife with individuals who are on the payrolls of drug cartels. So, it is not out of the realm of conceivability that a new drug war could take place, where an "Axis of Suppliers", if you will, exercises military force to legitimize the drug trade around the world.

Clearly, drug use is considered acceptable by a large proportion of the world's population, since in spite of vast sums spent by governments in efforts to stop the drug trade, illegal drugs are widely available and easy to obtain.

The main factor that cuts against such a scenario is the technological dominance of the US military. At the moment, the hypothetical "Axis of Suppliers" would not be capable of gaining access to certain weapons such as stealth bombers and aircraft carrier task groups. Should the USA decline, however, this scenario could very well come about.

The time frame for any decline in US power is a long one, however. It took some 500 years for Rome to collapse once it transitioned from republic to empire. A wild card would be access by the cartels to nuclear devices. Needless to say, nuclear blackmail would change the equation radically.

Russia dependent on natural gas sales to EU-not reverse

UPI quotes Roland Goetz, Russia and energy expert at the German Institute for International and Security Affairs to the effect that "Russia is not a threat to Europe's energy security." The gist of the article is that "Eighty percent of Russia's gas exports go to Europe, while Europe imports roughly 30 percent of its gas from Russia"...and therefore "that Russia was in some respects even more dependent on Europe than the other way around"...now you know the rest of the story...

Possible solution to developing countries' export problems

Over at the Adam Smith Institute Blog, David Cuthbertson describes how

"It’s a bumper year for cotton farmers in Africa but even so, farmers are not celebrating. World cotton prices are at their lowest since the Great Depression and are showing no sign of recovery. Farmers are facing starvation as unsold and unsellable cotton begins to pile up in storehouses across the continent. The problem is American farm subsidies", and that "Government bodies, including USAID, DFID and the World Bank, have been pouring money into African economic development encouraging countries to specialize in internationally traded cash crops including cotton. But what the developed world gives with one hand it takes away with the other, effectively cutting competitive African farmers out of international markets through aggressive price competition."

My response to this is that government and international agencies should be directing developing countries to invest in indigenous crops that don't compete directly with subsidized crops produced by developing countries. As an example, there is a fruit called breadfruit, which according to Wikipedia "is a tree and fruit native to the Malay Peninsula and western Pacific islands"...and "it is one of the highest-yielding food plants, a single tree producing up to 200 or more fruits per season." In addition, "Breadfruit is a staple food in many tropical regions. They were propagated far outside their native range by Polynesian voyagers who transported root cuttings and air-layered plants over long ocean distances. They are very rich in starch, and before being eaten they are roasted, baked, fried, or boiled. When cooked the taste is described as potato-like, or similar to fresh baked bread (hence the name)."

A well-calibrated marketing program could succeed in getting consumers in developed countries to start consuming this food regularly, which would generate revenue for developing countries, and there are no developed countries that have subsidized production of this food, as far as I know.