Category Archives: policy

Is China trying to “lock up” the world’s natural resources?

Got your attention didn’t I?  Here more:

The rapid emergence of China as a major industrial power poses a complex challenge for the world’s natural resources. This column argues that the Chinese government-backed investments in natural resource supplies are predominately in areas that will help expand, diversify, and improve competition in the global supplier system. But potential geopolitical consequences remain a reason for concern.

In non-jargon-speak, Chinese actions will actually benefit non-Chinese buyers of natural resources by increasing potential supply.  This is because China invests in the smaller resource extractors, who now have the capital to explore and develop virgin fields.  We need not fear or resent aggressive Chinese moves towards resource procurement.

But as always, the devil is in the details.  T.H. Moran makes his cheery prognosis only with respect to physical supply and not with respect to the attendant political machinations, where the elites in poor, but resource-rich nations jockey for a share of the spoils in an orgy of violence and corruption.  But then, one cannot single out the Chinese in this regard.  US and European resource extraction is similarly dogged by political violence and / or corruption all over Africa and Asia.  Angola, Equatorial Guinea, Nigeria and Tajikistan immediately come to mind.

The full article is here.

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Notes on the Euro Debt Crisis

The Euro project is in deep trouble as contagion spreads to Spain and Italy, the big southern countries.  Alarm bells are also going off in France as, like early swallows in late winter, reports and opini0n pieces are appearing on the likelihood of France losing its AAA rating.  The bond spread between French and German bonds had spiked to about 90 basis points and is now simmering at about about 48.  Indeed, the commentariat is of the opinion that the EU’s ‘Lehman moment‘ is fast approaching.

In a valiant attempt to forestall Spanish and Italian fiscal crises, the ECB has shed its habitual reticence in all matters fiscal and has been intervening in the bond markets at an unprecedented rate.  Last week, it bought €22 billion in bonds.  By contrast, its intervention in bond markets since the start of the Greek crisis had been a mere €74 billion.  This trend cannot last.  The volume of bond purchases needed to keep the spread of Italian and Spanish bonds at affordable levels would result in the ECB significantly exceeding its limited fiscal mandate.

Edward Hugh at A Fistful of Euros puts it well.

… the issue involved is no longer one of the mechanics … The current crisis is an existential one, which if left unresolved will rapidly become a matter of life of death for the single currency.

The reason the ECB is impelled to intervene is because of the run on Italy.  More Hughes:

With something like 1.9 trillion Euros in outstanding debt, Italy is the planet’s third largest issuer of sovereign bonds … and although the relatively high savings rate of the Italian private sector (both families and corporates) means that much of the debt is in Italian hands, the deep interlocking of Europe’s financial system … means that a considerable portion is not …

He has more to say on why Italy has escaped attention so far.

The high profile given to the Greek issue meant that to a large extent Europe’s problems were perceived as being fiscal deficit ones, with more fundamental issues like lack of convergence, current account imbalances, cumulative debt and low economic growth all being pushed well into the background.

And these macroeconomic problems are harder to tackle in the Eurozone than in a country like a national currency because of difficulties in synchronizing monetary and fiscal policy.  In the recent words of Gordon Brown, the Euro, when created had

no crisis-prevention or crisis-resolution mechanism and no line of accountability when things went wrong.

After arguing against moving towards three outcomes for the Eurozone, i.e.

  1. Fiscal union
  2. Muddling through through, for example, piecemeal expansion of the EFSF
  3. Complete break up of the Euro, with each member going back to its original currency

Hugh argues for a fourth option, the creation of a 2-Euro zone.  The first zone would consist of the northern countries; Germany, Austria, Holland, Finland and perhaps a couple more.  The second zone would consist of the big southern countries and France.  He then goes on to describe the benefits of this separation, as well as tackle some of the details.  These include the problems faced by northern banks holding southern assets, due to a sudden devaluation of said assets. While inevitable, Hugh argues that the devaluation could be made more palatable by likening it to the haircut being currently proposed for all Greek creditors.

An interesting read.  Recommended.


Riots and the European Welfare State

This one is from Chan Akya at Asia Times Online.  The impetus for this article is the recent rioting and looting in London and other British cities.  The focus, however, is on the European welfare state in general.  While undoubtedly polemical in tone, it’s an entertaining read and I came away with a few points that merit further rumination.

  • These riots have nothing in common with the Arab Spring uprisings.  While, in the Arab world, the masses agitated for a greater voice, in England, the rioters chose to snatch flat screen TVs and other social identifiers of a consumerist society.
  • The supply of free housing, healthcare and housing has served to spoil a large segment of the underclass (from which the rioters came) rather than just ensure a basic quality of life.  The social state has created a sense of entitlement, which has bred a resentment among those without the products in the ads that finally erupted in violent orgy of consumerism.
  • The riots are just the first among many.  Indeed, one might argue that these riots were not even the first.  I do recall car burnings and urban unrest in the banlieues of Paris a couple of years ago.
  • The welfare state is a critical factor, prima facie, behind the European fiscal crisis, in that it contributed to unsustainable debt dynamics.
  • Yet, perhaps symptomatic of how far the notion of social welfare has seeped into the European psyche, there has been no discussion of its pruning.  Instead, the policy discourse has been about technical details:  the size of the EFSF, the timing of the Greek default, the ECB rate policy etc.
  • The social welfare state is unsustainable.  There is no reason for rising Asian powers to continue paying for European social welfare through bond purchases.

In the abstract, a welfare system can be thought of as an institutionalized transfer mechanism from the wealthy to the poor.  The benefits to the poor are obvious.  The mechanism also benefits the rich, in that it co-opts the poor into the existing system of economic relations: the poor now feel that they too gain from the existing arrangements.  They are less likely to challenge the status quo.

The welfare state can then also be used as a stalking horse for other ideas to distract the poor.  For example, the immigration debate can be framed in non-racial and non-exclusionary terms.  Rather than use far right rhetoric, politicians of all stripes can now talk in economese: about how immigration is too expensive through its impact on the welfare state.  The argument is specious.  The basic problem is adverse demography.  There are too many people living on the public dole and too few people paying into the system.  The outflows into pension schemes, healthcare, unemployment benefits and education are much higher than tax inflows from workers.

As always, the article has some entertaining images:

A lazy and semi-educated Chinese man will probably not get married given the country’s ratio of males to females; and even if he did, life would be made hell by the curses of his mother-in-law. A lazy Indian is likely to decline in society to the point where all support systems fail him. leading to an early death or a violent one. There are no lazy Africans because they wouldn’t survive to adulthood.

A lazy European on the other hand, gets to sit at home and watch television while receiving benefits from his government.

The point is valid.


Fluctuating pork and inflexible onions

From Rahul Jacobs at beyondbrics, an FT blog.  Where factors affecting food price inflation in India and China are compared.

Pork prices are a proxy for overall food prices in China because pork forms an integral part of the Chinese diet.  The same holds for onions in India.  Indeed, rising onion prices often have sharp political fallouts.  The Shekhawat government fell in 1998 in Rajasthan in part part due to an unprecedented rise in the onion price.

Jacobs argues that hog price inflation in China is cylical and exacerbated by government policy, which amplifies the amplitude of the price swings. The policy resulted in significant over-investment in the hog sector in 2008, which caused a glut and price collapse 18 months later.  As farmers exited the market in droves, supply shrank and the hog price yoyoed back up.  Now the government is gearing up for another round of over-investment, and the pattern will repeat itself.

In India, on the other hand, the problem is more structural.  Factors include the low level of farmer education, abysmal or non-existent agricultural marketing and storage facilities, poor transport links, systemic underinvestment in irrigation and the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGA).

The MGNREGA guarantees 100 days of employment every year, at minimum wage, to all adults in all rural households.  The employment is typically unskilled manual labor on gonverment-funded infrastructure projects.  The MNREGA increases food price inflation in two ways.  First, it increases the cost of agricultural labor by giving the rural poor an outside option.  Second, it increases food demand, as the purchasing power of the rural poor rises.

The scheme makes for great populism, and will go a long way towards strengthening the Congress’s position in upcoming electoral battles.  But we should be not be unaware of its true function: to serve as a transfer mechanism from the urban to the rural sector.  The mechanism is probably warranted, given the fact that rural India has lagged behind the cities in all growth indicators over the last two decades.  I worry, though, that the money will not be well spent.  We don’t want construction of infrastructural white elephants dotting the rural landscape, paid for by MGNREGA money.


Bail-outs chip away at France and Germany too

From Ambrose Evans-Pritchard at The Telegraph:

“Credit Default Swaps (CDS) measuring risk on German bonds have doubled since early July to 85 basis points, rising above British CDS contracts for the first time despite the London riots.

Non-EMU Sweden enjoys lower borrowing costs than Germany. This has not been seen for half a century.

“What is happening is momentous,” said Andrew Roberts, credit chief at RBS. “The more Europe steps in to buy Italian and Spanish debt, the more Germany shifts towards the group of countries that could be attacked.”

French CDS have surged 161 and are now by far the highest of the AAA club. Yields on French 10-year bonds decoupled from core EMU states such as the Netherlands, Austria, and Finland.”

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As more countries move from the bail-outer camp to the bail-outee camp, the greater the pressure felt by the remaining bail-outers.  Each bail-outer is required to fund a greater share of an ever-growing bailout package.  To see why this is so, consider two facts.  First, as the number of bail-outers decrease, each remaining bail-outer must assume a greater share of funding responsibility.  Second, as the number of bail-outees increase the package itself (currently under the auspices of the EFSF) grows ever larger.

As a bail-outer’s liabilities increase, it is inevitable that questions about its ability to redeem them arise.  Perversely, these questions only serve to weaken the bail-outer’s position, as uncertainty manifests in rising bond and CDS spreads.  Incrementally, the bail-outer moves across the spectrum to the bail-outee camp.

My sense is that the timid, incremental, knee-jerk decisions made so far by eurozone countries only kick the default can further down the road.  And strangely, with each kick, the can grows, which makes each subsequent kick that much less effective. (Yes, I know I need to work on my metaphors.)  Before all policy instruments lose traction, a large, bold and credible decision is required.  Extending the metaphor, this would require grabbing the can and crushing it through application of sheer strength.  Two bold decisions come to mind, each with potentially calamitous consequences.  The decisi0ns would, in some sense, be diametric opposites.

One would ask for bail-outers to commit absolutely and irrevocably  to guaranteeing any and all bail-outee liabilities.  This would require the EFSF to increase significantly.  It would result in some degree of fiscal consolidation of the eurozone and would take the European project irrevocably forward.  The Euro-bureaucracy would become more powerful and each individual nation would lose some sovereignty.  In the long run, national identities might even be subsumed under a pan-European one.

The other would be an immediate and absolute abnegation, by the bail-outers, of all responsibilities towards the debt liabilities of bail-outees.  By rejecting all calls towards fiscal transfer, the bail-outers would put immediate and perhaps irrevocable stress on the euro.  The bail-outees would, probably immediately, default.  Debts would, of necessity, be restructured and defaulters might be forced to leave the euro and thereby regain control of monetary policy.  In the event of the break-up of the euro, we enter a brave new world, but presumably national identities would remain intact.

In my estimation, the timid will prevail.  We will witness a continuum of incremental decisions, each chipping away at the EU core, the bail-outers.  Gradually, the number of bail-outees will increase, the remaining bail-outers will weaken and the EU’s hand will be forced.  Pushed into a corner, incremental decisions will become unviable, and one of the two scenarios sketched above will come to pass.  Probably the latter.

 


Pessimism about the euro

Tyler Cowen has two insights.

I like his analogy where he compares the PIGS to leaky vessels.  As he notes, just throwing money at these countries is not going to help.  Given their high liabilities with foreign counterparties, its not clear that this mechanism will create a virtuous cycle of growth.

Second, he makes a case for a pan-European debt settlement and resolution mechanism.  The concern here is that this will eventually lead to fiscal consolidation across Eurozone economies and a concomitant loss of national sovereignty.


Is the UN Security Council the appropriate forum for discussing climate change?

From the Reuters article:

“Western diplomats said Russia’s statement reflected long-standing concerns about Security Council agenda “creep.”

Temporary council members India and Brazil also said they doubted whether the body should be involved. Indian Ambassador Hardeep Singh Puri said the council “does not have the wherewithal to address the situation.”

Developing countries railed against what they said was an attempt by the big-power club to muscle in on the territory of the 193-nation General Assembly and U.N. agencies specifically devoted to climate change.”

I share the concerns raised by the Russians, Indians and Brazilians.  The link between climate change and international security is tenuous at best, speculative in likelihood and disingenuous at worst.  In addition, there already exist a number of international organizations like the IPCC, UN Environmental Program and the World Meteorological Organization that are better geared towards understanding the ramifications of climate change.  Finally, the UNSC already has enough on its plate, ranging from the situations in Iraq, Côte d’Ivoire and Sudan to investigations of terrorism and genocide.