Downside analysis of telecoms in India

FT full-page analysis by Joe Leahy, who's always good.

The start:

In late 2007, an elated Arun Sarin, then chief executive officer of Vodafone, was enthusing in a swanky Barcelona hotel about his latest acquisition – Hutchison Essar, India’s third largest mobile operator.

The UK-based multinational had just paid nearly $11bn (€8.8bn; £7.6bn) for a 67 per cent stake in the group, gaining with one move a front row position in the fastest-growing large telecommunications market.

“We are going to learn as much from India as we are going to take to India,” Mr Sarin, who was born and raised in the country, told the Financial Times in an interview. “Prices there are two-and-a-half US cents a minute, and they make a 35 per cent margin. How do you do that?”

Mr Sarin could not have envisaged it but just two-and-a-half years later, Indian tariffs have collapsed to less than one US cent per minute. Rather than a positive learning experience, the country has provided a hard lesson for Vodafone.

Everybody is just squeaking by in this suddenly fiercely competitive environment, including giant Bharti Airtel. But nobody can ignore the potential: 20m new subscribers per month and a total market expected to reach--get this!--1.1BILLION! by 2015.

Key difference with China:  India welcomes foreign ownership.

The big problem:  paucity of bandwidth, so spotty coverage and service bedevils the industry.  "Incumbent operators claim the situation has been worsened by the government’s decision to sell spectrum cheaply to newcomers and not auction it to the highest bidder."

More scope:

For India, this mobile phone expansion has significance beyond the immediate telecoms industry. It has been touted as the biggest – some say only – spectacular infrastructure success yet, a beacon of what can be achieved in a country that needs to build $1,000bn worth of roads, power plants, ports and airports over the next five years if it is to realise its dream of being a leading global economic power.

The telecoms revolution has also become one of the country’s primary drivers of development. Millions of urban poor and farmers, from Calcutta rickshaw pullers to Himalayan yak herders, now carry mobile phones. The improved communications enables them to do more business and gives them better access to services, such as healthcare. Every 10 percentage point increase in mobile penetration produces 0.81 per cent economic growth, according to a 2009 World Bank study.

“It’s an infrastructure rollout of a magnitude that has not been seen in the global economy for a long time,” says one former senior industry executive. He says the biggest operators in India in the past 12 months have installed as much network as Germany did in the past 15 years. “It’s something that vastly exceeds the rolling out of electricity, or the rolling out of highways in the 1950s in the United States.”

The great obstacle, as usual, are the rules:

But the regulatory system that gave rise to this expansion now finds itself accused of trying to kill the goose that laid the golden egg. Analysts accuse the government of implementing a series of policy switches in the past two-and-a-half years that have led to an influx of new entrants and a scarcity of spectrum – the precious airwaves on which mobile calls are transmitted. In the communications technology era, spectrum is the new black gold, in short supply all over the world but particularly in India, where the defence ministry still controls many frequencies.

The level of international criticism of India’s telecoms policy regime is worrying for a government that prides itself on its ability to court foreign investors at high-profile gatherings such as the World Economic Forum in Davos. One investment research company referred New Delhi’s recent policy actions as “regulatory basketcasery”. In a note on Vodafone, Bernstein Research said: “If you were looking for emerging market exposure to mobile growth, India was probably not a great choice.” The country, it added, “is a competitive mess, and its regulation grows more capricious and nonsensical by the day”.

Such charges are vehemently denied by regulators . . .

Yet no one can dispute that the sector is overcrowded. Some argue that its problems date back to January 2008, when the government sold eight new mobile service licences bundled with spectrum at 2001 prices on a first-come, first-served basis rather than through a bidding process. This sale is now being investigated for allegations of “serious irregularities” ...

The awarding of so many licences ushered in an era of competition even more intense than that witnessed by Mr Sarin. Many of the newcomers sold large stakes to cash-rich foreign operators . . .

As the new entrants and their international partners began operating, a vicious price war set in. Call prices declined rapidly. Telenor’s local unit, Uninor, recently announced a plan that offers calls for as little as Rs0.20 per minute.

Consumers have welcomed the price war but it has had a catastrophic effect on revenue in the industry. Among large operators, average monthly revenue per user as of March 31 fell up to 37.9 per cent compared with a year earlier, according to Macquarie Securities.

Even as the price war bit into profits, the government launched its long-delayed auction of spectrum for third generation mobile services, which allow subscribers access to the internet on their phones. The auction process was lauded as fair and open but some operators complained that the fact that there were only three pan-India allocations on offer to 15 operators drove up prices artificially. The cost of an allocation soared to more than $3.6bn – about 75 per cent more than the highest analyst estimates before the sale ...

Leading operators such as Vodafone and Bharti balked at paying the full cost of a pan-India allocation, and instead ended up with a patchwork of networks in the more important regions. Even in the areas they did win, the allocation was not enough to offer a meaningful increase in the advanced data services typical of 3G, such as internet television and video-conferencing.

“Operators have paid a huge amount of money ostensibly for 3G purposes but in reality this will be used to fill the gaps on 2G networks,” said Rahul Matthan of Trilegal, an Indian law firm.

For India, this could be a blow. The country’s internet penetration, which the most optimistic estimates put at about 70m users, is one of the lowest among the world’s fast-growing emerging markets.

Given the difficulty of building ground-based infrastructure because of high population density, efficient implementation of 3G might have offered India the chance to leapfrog into the internet age. For the government, short-term gains from the sale of resources such as spectrum have to be balanced against the need to create incentives for investment in communications. World Bank calculations show that increasing broadband penetration generates economic growth to an even greater extent than mobile penetration.

Many experts argue that consolidation is the only long-term solution. Existing rules seriously curb mergers and acquisitions. 

Tumultuous boom-and-bust days of network/biz empire-building.  Fascinating to watch and impossible for all these companies not to engage.

Remember the pot of gold that lies at the end of this rainbow: the ability to process all the biz intell that flows through these mobiles.

Excellent piece.  Serious education.  I can't ever see a future where I'm not subscribing to FT.

The Rooseveltian phase in China

Guardian story by way of WPR's Media Roundup.

Makes me think of TR's initial stuff and then the huge infrastructure push with FDR, this Hoover Dam-like monstrosity planned for Tibet--the biggest dam in human history (38 gigawatt).  Will save tons of CO2, but will likewise change the environmental landscape big time.

But China feels compelled to network and integrate its western provinces--its great inland bridge to the larger energy and mineral resources in Central  and Southwest Asia.

And frankly, tightening the grip makes sense politically, whereas landlocked states do not.

The key for China:  making all this integration seem like a connectivity bonanza that allows economic development, networking toward the richer and better connected coasts, but also allows for increasing political self-rule--less unitary and more federal.  

That's the only way you make economic development work over such a large terrain.

Almost 30 dams are currently planned or being built along this crucial Tibetan river (Bahmaputra).

Iran's oil production decline: oh mighty sanctions!

FT front-pager, but the facts underwhelm.  When Ahmadinejad became president in 2005, Iran was producing 4.2mbd (million barrels per day).  Now it's down to 3.8 or 3.9, which definitely costs them billions, but as a percentage drop, we're talking only 10% max.  Frankly, I would expect that level of drop anyway because of Iran's wariness on using foreign technology in the first place--a bad habit of NOCs (national oil companies) everywhere. I wonder what PEMEX's drop in production has been the last five years in Mexico.  Subtract PEMEX's percentage drop from Iran's and you might get a clearer sense of the delta caused by the sanctions.

Iran's bigger is also much like Mexico's or Saudi Arabia's:  the domestic use of oil is growing faster than the production, narrowing the margin for export.  The effect of sanctions, I would imagine, pales in comparison, even as it exacerbates the situation.

But back to Bremmer's good point in his book:  state capitalism prioritizes the state over economic efficiency, so this is simply viewed as  the cost of doing politics.

Long-term unemployment in America: the new nasty twist

Scary piece by Clive Crook in the FT noting how the long-term unemployed share of total unemployment is unusually high by historical standards--almost 5m out for 6 months or longer.  They account for something like half the unemployed right now, also something not seen in decades.

Americans have always lost their jobs more frequently than their European counterparts, but we've also tended to find new ones faster while the Euro govs tend to offer better retraining and cushier benefits.

It would seem we enter a new period, hence the need for some new rules on how to handle it.

The sweet potato silver-bullet?

WSJ story on how researchers are trying to achieve a more industry-friendly sweet potato.  Unlike its rather uniform cousin, the russet potato, sweet potatoes come in irregular shapes and with irregular sugar content. There's been a push for years to get a single major fast-food chain to pick up sweet potato fries as a healthier alternative--a goal I first ran into at the Clinton presidential library/graduate school years back (a regional ag improvement scheme that struck me as worthy).  The trick is not getting the fries industry to change its machinery so much as getting the sweet potato sector to change the shape and consistency of its product so that the fries industry can process them with the same speed and sustainability as russet potatoes.

Right now there is some sweet potato fries production, using regular potato machinery, and ConAgra is set to open this fall in Louisiana (coincidentally not far from Little Rock) what it claims will be the first dedicated processing plant generating fries, waffles and other products.

Sweet potatoes are not actually potatoes, but the roots of a plant.  The goal of researchers at places like ConAgra is to modify the vegetable to the point where it consistently grows out into a brick-like shape with more uniform color/sugar content.  One line of breeding already seems close to the goal, suggesting a mass production capacity down the road (optimistic is 3-5 years, pessimistic is 7-10).

China: looking to take next step toward global brands

Usual excellent stuff from WAPO's John Pomfret.

The lead:

Quick: Think of a Chinese brand name.

Japan has Sony. Mexico has Corona. Germany has BMW. South Korea? Samsung.

And China has . . . ?

If you're stumped, you're not alone. And for China, that is an enormous problem.

Last year, China overtook Germany to become the world's largest exporter, and this year it could surpass Japan as the world's No. 2 economy. But as China gains international heft, its lack of global brands threatens its dream of becoming a superpower.

No big marquee brands means China is stuck doing the global grunt work in factory cities while designers and engineers overseas reap the profits. Much of Apple's iPhone, for example, is made in China. But if a high-end version costs $750, China is lucky to hold on to $25. For a pair of Nikes, it's four pennies on the dollar.

"We've lost a bucketload of money to foreigners because they have brands and we don't," complained Fan Chunyong, the secretary general of the China Industrial Overseas Development and Planning Association. "Our clothes are Italian, French, German, so the profits are all leaving China. . . . We need to create brands, and fast."

The problem is exacerbated by China's lack of successful innovation and its reliance on stitching and welding together products that are imagined, invented and designed by others. A failure to innovate means China is trapped paying enormous amounts in patent royalties and licensing fees to foreigners who are.

China's government has responded in typically lavish fashion, launching a multibillion-dollar effort to create brands, encourage innovation and protect its market from foreign domination.

Through tax breaks and subsidies, China has embraced what it calls "a going-out strategy," backing firms seeking to buy foreign businesses, snap up natural resources or expand their footprint overseas.

Domestically, it has launched the "indigenous innovation" program to encourage its companies to manufacture high-tech goods by forcing foreign firms to hand over their trade secrets and patents if they want to sell their products there.

Since 2007, thousands of Chinese businessmen have attended government-sponsored seminars on "going out," learning everything from how to do battle with domineering Americans and Britons during conference calls to why a Chinese boss should think twice about publicly humiliating his wayward foreign workers -- as he'd do to his staff at home.

China has also moved to re-brand China itself. Late last year, when memories of China's poisoned pet food and deadly milk were still fresh, the Ministry of Commerce contracted with the global advertising giant DDB for a $300,000 ad showing a series of high-tech products, from top-of-the-line running shoes to an iPod.

As a guitar wails, a voice intones: "When it says 'Made in China,' what it really means is made in China, made with the world."

This is always the tough stretch that I think about when people start predicting China's inevitable domination of the global economy.  Brands a lot more complex that most prognosticators imagine.  I mean, just look at BP all of a sudden--from "beyond petroleum" to beyond pathetic.  You can hire ad agencies to hawk your stuff, but that's just surface sheen.  The real brand loyalty comes in the ability to offer compelling innovation, excellent services, and the like.  That sort of capacity can't be ordered from above; it has to be nurtured from below.  A bunch of guys sitting around a table in Beijing won't be able to pick winners consistently, and in their failures, legitimacy will be lost, grumbling will ensue, and that much more resources will be wasted on policing people and their dangerous thoughts instead of winning hearts and minds and brand loyalists through modeled behavior.  Single-party states simply aren't cool, and they will never will be.

More excellent analysis:

In recent months, the Western media have hyperventilated with stories about China's going-out strategy and about Chinese firms buying up the globe -- Oil! Gas! Cars! -- and even investing in the United States. In 2000, China had $28 billion in overseas investments; this year, it could break $200 billion.

But a little perspective: Even if China's total foreign direct investment hits $200 billion, it still pales in comparison to smaller economies, such as Singapore's, Russia's and Brazil's. And China has plunked down only about $17 billion in rich countries, equivalent to the overseas assets of a single medium-ranked Fortune 500 company.

The 34 Chinese companies on the Fortune 500 list basically operate in China only. The world's three biggest banks are Chinese, but none is among the world's top 50, ranked by the extent of their geographical spread.

"Moving forward another 10 years," said Kenneth J. DeWoskin, chairman of Deloitte's China Research and Insight Center, "it's hard to see how viable Chinese companies will be if they just stay in China."

China's attempts to fight what it sees as the stranglehold of foreign patents and intellectual property rights have also had hiccups.

China is estimated to have paid foreign firms more than $100 billion in royalties to use mobile telephone technology developed in the West, according to executives of Western communications companies.

So in the late 1990s, it decided to develop its own. But after more than $30 billion in development costs, its unique technology still has fewer than 20 million users in a market of more than 500 million.

Handset makers have told China's government that they won't produce phones equipped with the new technology unless they are given subsidies. And China has resorted to giving away the technology to Romania and South Korea to encourage broader use.

"China is still stuck," said Joerg Wuttke, former president of the European Union Chamber of Commerce in China and a 25-year veteran of doing business in China. "There is a huge disconnect between the money spent in universities and the lack of products."

China also faces enormous challenges to creating globalized firms. Studies of Chinese executives show that they spend far more time with government officials -- who in China are the key to their profits -- than with customers, who are the key to international success.

"Chinese executives like me need to spend a generation outside China to learn how business is done around the world," said Hua Dongyi, who chairs a massive Chinese mining company in Australia but has also built roads in Algeria and infrastructure in Sudan.

Remember that line:  Chinese execs spend far more time with their party bosses than focusing on customers.

In a nutshell, there's the Achilles heel of state capitalism.

And that's not a problem you can fix by throwing more $$$ at it.

Rest of the story is about how Lenovo's purchase of IBM computer production was a rare success.

As always, Pomfret captures reality in China--absent hype--better than anybody else.

Chart of the day: cranking DNA ever more cheaply

Per all the recent stuff on Venter's breakthrough, a chart from The Economist. More DNA synthesis productivity over time, with the cost declining.  Add in the fact that it used to take tremendous lengths of time to catalogue a species but now it happens in days instead of years, costing thousands instead of millions, and you got a ton of breakthrough developments coming down the pike.

Conservatives embrace "new" idea of SysAdmin's responsibility for "expeditionary economics"!

From the panel reports from a conference jointly put on by the Kaufman Foundation (focus on free enterprise) and the Command and General Staff College Foundation (Leavenworth), via John Richardson at Esquire's The Politics Blog (to whom the ideas here are radical and "new").

First, Richardson quoting from the conference and/or report or just feeling like he should italicize:

Too often, in both the military and the international development spheres, there has been a failure to consider the postwar economy is any strategic sense. Military doctrine has usually treated operations other than war as secondary matters to be handed off to other agencies. These agencies, USAID in particular, have rarely conceived of their work as part of  a larger strategy for the country in question or for promoting U.S. interests. One-off projects and bureaucratic delays — due in no part to congressional constraints on USAID - have created the impression that dependence and subsistence are the inevitable future for countries such as Afghanistan. Economic growth is rarely even considered a posible goal ... yet economic growth plainly is a positive force in society and for governments; it is no coincidence that most conflicts today, most of which are civil wars, occur in countries with weak or stagnant economies.

Dare we say, "disconnected" from the global economy?

From the future panel report:

Most people agree that the concept of “expeditionary economics” needs to play a greater role and be incorporated into doctrine in future stabilization and reconstruction efforts in post-conflict countries. The questions are “How do we get there?” and “Who should do it?” Answers to these questions vary. While there is a general consensus that the United States is not adequately nurturing economic development in places where security and engagement requires it and that we are not adequately stimulating the entrepreneurial dynamism that has produced global economic prosperity, there is audible disagreement over whether these responsibilities should fall to the military.

Key Takeaways:

• In an ideal world, economic development in post-conflict situations lies within the purview of civilian organizations such as the World Bank, IMF, USAID, and Department of State. Unfortunately, for a variety of reasons, these institutions often lack the requisite resources and capacity for post-conflict economic development. As a result, responsibility for the economic dimension has fallen to the armed forces; yet, the military also lacks a guiding doctrine for such work. For future operations, we must develop doctrine for both the military and civilians, as well as consider new ways of implementing expeditionary economics.

• The primary objective of a stability operation is different than that of a development imperative. When you build a water plant, the secondary objective is to bring clean water to people in the town. The primary objective is the psychological change that reduces violence as a result of building the plant. But if we are not measuring for and evaluating the right things, we can’t determine if the $50 billion that’s been spent in Iraq could have been better spent. We’re scratching our heads because we haven’t won over hearts and minds, and we don’t know why. We need to find better ways to measure the psychological impact of stability operations and, more specifically, economic development efforts.

• When assessing the economy of a country in which we might engage, we can’t fall into the pattern of merely looking at the absences. We must pay attention to the assets that do exist—natural, physical, and human assets that can anchor future economic growth. Moreover, our view must be a regional one as opposed to just local or national. In considering how to stabilize failed states, we need to consider what is the right balance between the state, the market, and civil society 

• When considering who needs to lead to economic development in failed states, the tendency is to look to the State Department and USAID. But the Overseas Private Investment Corporation and the Export-Import Bank of the United States also should play a major role in investing in and underwriting risk.

• The U.S. preference is to separate political, economic, and military concerns when dealing with states abroad. An imperial approach is well understood, and less complicated than our democratic approach. However, it’s more difficult when the objective is to leave once enduring conditions are set so we don’t have to intervene again. Rather than continuing our tendency to view things in a two- to three-year thought cycle, we need a longer-term approach.

• In war, just as there are human casualties, there also are financial casualties, and we need to accept this reality. Some dollars will be misappropriated, and some will go to the enemy, to criminal networks, to ineffective local leaders, and to bad projects. This doesn’t make it okay, but we need a productive dialogue to determine what is a reasonable level of these financial casualties.

• The Foreign Assistance Act of 1961 defined foreign aid as a State Department function because it was a tool of public diplomacy geared toward poverty alleviation and moral good. But the problem with public diplomacy as an imperative is there’s a need to take credit and ensure people know about it. In Iraq and Afghanistan, however, we’ve learned this can generate ill will and be counterproductive. We need to sacrifice public diplomacy to be more effective at counterinsurgency and long-lasting and effective development.

• One proposal is to create a FEMA-like agency with a very modest staff, 100-150 people, that would spring into work when there’s a stability operation. The office would report jointly to the Secretary of Defense and Secretary of State and would have a limited, circumscribed role. It would coordinate with the chief of mission on the ambassador side and the commander general on the military side.

• It’s important to concentrate planning efforts before a crisis arises. If you are not engaged in long-term strategy and planning, you will not get it right.

• How does the military put expeditionary economics into practice? Meeting the economic needs of the populace in an area of operations is an essential task in stability operations, and the best way to do that is with business formation. An example: If a neighborhood lacks dependable electricity, a commander could provide generators to local entrepreneurs, and give them the ability and responsibility to keep them running. This eliminates the insurgent’s ability to generate public support by attacking municipal power grids and then blaming the government or occupational forces; any attack on the power supply thus becomes an attack on individual families and locally owned businesses.

• It is essential to tie the concept of expeditionary economics to the military security mission. How can the military foster economic growth to establish security? The military needs competence with expeditionary economics tools to get through the “golden hour”—the early days of a conflict when the civilian agencies have minimal or no presence, and it’s up to the military to execute.

• Some disagree that economics is not a soldier’s job. Yet, economics is required to win, and a soldier’s job is to win. The military has no choice but to use economics as a weapon in stability operations, so let’s be as good as possible at it. What we need to be thinking is, “What are the appropriate economic principles we can teach military leaders so they can use them to accomplish their mission?”

• The military lacks a doctrine to use economic development in conjunction with other elements of a counterinsurgency effort—information, security, and stability operations. The easiest way to change doctrine is by Department of Defense or commander’s mandate, but there are other requirements: A new doctrine must be proven workable and should demonstrate added value, longevity for application, and it must foster those traits the military sees as important.

• One area of debate is over the constraints on the use of Commander’s Emergency Response Program (CERP) Funds. Those on the ground maintain that a ten-day approval process makes CERP less useful—commanders need to make investments on the spot or at worst within twenty-four hours. This assumes commanders have a high level of ability and economic literacy that sometimes isn’t there because it’s such a complicated task that requires complete attention.

• Economic development and stability is also an intelligence problem. Almost no attention is given to economic intelligence analysis. Threat Finance Cells are for threat targeting—a different function—but if you don’t understand the economies and then intervene, you are not going to be successful.

• USAID and the State Department staff are not properly trained—there is poor investment in level- and role-specific training and education, and senior leaders could be selected for their qualifications in economic development and entrepreneurship.

A call for a Department of Everything Else-like entity that reports to both SECDEF and SECSTATE and somehow bridges the "expeditionary economics" responsibilities that bind them in failed-state or postwar interventions.  

Plus, an almost exact description of Enterra's diagnostic approach in Kurdish Iraq (a focus on critical assets, creating entrepreneurial opportunities and counterparty capacity locally for deal-execution), right down to the regional focus we used in bringing in the Monitor Group to do a competitive assessment. This is Development-in-a-Box in a nutshell.  That's why I penned the self-promoting (for Enterra) section on DiB in "Great Powers."

In short, none of this is new, and much was proven our or templated in the field by Steve DeAngelis.

The SysAdmin's economic responsibilities; the need for a Department of Everything Else that focuses on the postwar reconstruction; the market-based diagnostic focus of Development-in-a-Box, which lives on in Enterra's collaboration with Pacific Command's Center for Excellence in Disaster Management and Humanitarian Assistance--all good stuff.

At first the ideas are ridiculed, then violently opposed, then accepted as conventional wisdom.

Patience and perserverance are the keys, and a willingness to be told to your face--for years on end--that your ideas are bullshit, naive, and completely impracticable--never gonna happen!

Because these are not theories but inevitabilities.  There are only questions of who and when.

There is no credit sought because there is no credit to be assigned.  Everybody comes around to these realities eventually, and until enough do, it's just vision without a budget--otherwise known as an hallucination.

But yes, there is a useful role for consistent hallucinators.

The SysAdmin's civilian-soldier ratio climbs

WAPO story on Army's deputy assistant secretary for procurement, Edward Harrington.

The government's contracting out for services is nothing new, as Harrington's office notes. Its "Contractors on the Battlefield" chart outlines the number of contractors compared with the number of soldiers since the American Revolution. Back then, the ratio of contractors to soldiers was 1:6. World War I, 1:20. Vietnam, 1:6. Gulf War, 1:60. Iraq, 1:1. Afghanistan, 2:1.

An evolution toward SysAdmin operations that has created a rule-set gap:

These days, Harrington points out, the job is tougher because the government's workforce to write, manage and oversee the contractors has shrunk dramatically. The office estimates that as the workload has increased 1,000 percent since 1987, the government's contracting workforce has decreased by 25 percent.

It's why I believe it inevitable that a new bureaucratic center of gravity is created between Defense and State--the Department for Everything Else notion.

It's a serious requirement that's yet to be treated seriously in a bureaucratic revamp.

Diasporas around the world, unite!

Economist article, which highlights a favorite theme of mine:  globalization allows for enclavism to flourish even as it forces society to integrate with the larger whole and submit to its overarching rule-sets.

Starts with a meeting in Chicago of NRIs (non-resident Indians as India refers to its ex-pats) who want to encourage market and political reforms back home.  The transmission of such ideas is facilitated by globalization.

The old ethnic lobbying model was regressive and guilt-ridden:  ex-pats working to get their adopted government to support hardline causes back home or supporting them directly themselves with donations. That model dissipates more and more as immigrants are more easily assimilated and no longer form a reliable lobby on such issues.

So what happens when grievances no longer dominate the ex-pat agenda?  You see the residual nationalism refocused on progressive reforms--as in, give your homeland some of the skill and vision you picked up in your successful ex-pat lives abroad.

The social networks facilitate all this wonderfully.

What's good for China is good for globalization

chart here

An FT op-ed by the president of the Chinese Academy of International Trade and Economic Cooperation and the chairman of the Center for America-China Partnership, timed to the recent Strategic and Economic Dialogue in Beijing.

Nice summary of China's thinking regarding our bilateral economic relationship:

America is used to having it all its own way.  In 1972, as the US opened diplomatic relations with China, it abandoned pegging the dollar to gold.  That enabled it--through its monopoly on printing US dollars--to create huge trade and investment advantages.  Its economy grew strongly as it managed the value of its currency at the expense of other nations.

Washington has not always fully acknowledged that from 2000, the year China joined the World Trade Organization, to 2008 the US dollar declined against many currencies, while from 2005 to 2008 Beijing gradually increased the US dollar exchange rate of the renminbi by 21 percent.

The US stimulus plan increased America's debt and deficits and will decrease the value of the dollar. China increased its holding of dollars as America's other trade partners reduced theirs.  As the US financial crisis loomed, China pegged the renminbi to increase stability and exert a positive influence on its economic recovery.  It will keep a relatively stable renminbi exchange rate to ensure its economic growth is steady rather than uncontrollable, which would harm all nations. Currently, China is providing stability as the largest holder of US government debt and US dollar-denominated reserves.

China-US relations changed when the world learnt that America's financial system would collapse unless the government saved insolvent US-based global banks, insurance companies and carmakers.  The bail-out turned the US government into the largest shareholder of formerly privately-owned companies, subsidizing their commercial failure.  Laissez faire theories, which US policymakers still demand that China adopt, were suddenly replaced by massive US government control of market forces.

The US often pursues policies that are "win-win" for itself alone.  Its policymakers would undermine China's vital national security and economic interests while seeking China's help in protecting America's vital interests.  But the reality is that the policies America proposed are implementable and sustainable only if they are beneficial also for China.  The Strategic and Economic Dialogue should focus on new US policies instead of trying to change China's policies, which are essential for global economic recovery.

An excellent and hard-to-refute summary argument.  Our success in encouraging China's rise is such that it can now legitimately claim to be working on behalf of global economic security as much or more than America. In short, it can make the claim that "what's good for China is good for the world," an argument to which only America could lay serious claim in past decades.

This is why we've never going to war with China; the codependency on globalization is profound.

Gaza's tunnel economy

image here

Naturally, the Israeli graphic focuses on weaponry, but the larger truth is this is how most of the economy works--sad to say.  It's like one giant "Shawshank Redemption" (or a gritty "Hogan's Heroes," depending on your ideological take).  

Either way, it's an imprisoned society doing what people do when they face such circumstances:  they adapt and work around the best they can--and the middlemen profiteer nicely.

Key point from FT story:

For close to three years [the length of the blockade], the tunnels below Rafah have offered a unique lifeline to Gazans, who are otherwise deprived of all but the most basic humanitarian supplies.  They have also allowed Hamas, the Islamist group that controls the strip, to replenish its coffers and rebuild its military arsenal, making the tunnels a target for Israel.

The 200-300 surviving tunnels (there are air strikes) have become so efficient that "shops all over Gaza are bursting with goods."

But the local businessmen say this is no answer.  They insist that the smugglers "are creating a false sense of economic improvement while damaging the territory's battered private sector."  In other words, the tunnels bring in the same goods that could be produced locally, providing formal sector jobs--if the blockade was lifted.

One entrepenuer:

We are just replacing legitimate businessmen with illegitimate businessmen.

This is what gets you aid flotillas.

Coming soon to a home theater in your basement!

The gist:

Major Hollywood studies and one of the country's largest cable operators are in discussions to send movies to people's living-room TVs just weeks after films hit the multiplex, a step that would shake up film distribution.

The norm is four months.  The premium charge would be 20-30$ extra.

Understand this:  I take my brood of six total to an IMAX and I drop $100 on tickets and sundries, so I will consider this a great bargain, especially since my high-def projector's always in focus, my sound is excellent, and I control the projector and the audience.

This could come as early as fall, with the first movies affected being those at the tail end of the year or early 2011.

The driver is obvious:  Hollywood is scrambling to figure out how to cut its declining revenue on video and adjust itself to the emerging realities of digital on demand.

Another Big Pharma purchase downmarket

Abbott buys Piramal Healthcare's generic drugs unit for almost $4B, "the latest in a series of deals by Western drug makers to strengthen their presence in emerging markets including India."

This is good, but it also undercuts Big Pharma's arguments about how there's unsafe drugs in unsafe markets and safe drugs in safe markets and never the two shall meet.

I support this M&A activity because I believe the bottom-of-the-pyramid markets should inform Big Pharma as to how it should be able to deliver drugs a lot more cheaply back home.

And it damn well better do so, because those of us American who buy their prescription drugs via Canadian online drugstores know full well that there's no reason for us to be paying these prices when nobody else in the world--either developed or emerging--seems to.

Abbott's big interest in India is that it's mostly self-pay (70%), as opposed to government-controlled--as in Europe.  So Abbott hopes to balance the belt-tightening in the West with the expanding New Core middle class being willing--and able--to spend more on their healthcare.

Long war planning: for when Obama decides to re-engage--or the world decides to re-engage Obama

Gist of Mazzetti piece in NYT:

The top American commander in the Middle East has ordered a broad expansion of clandestine military activity in an effort to disrupt militant groups or counter threats in Iran, Saudi Arabia, Somalia and other countries in the region, according to defense officials and military documents.

The secret directive, signed in September by Gen. David H. Petraeus, authorizes the sending of American Special Operations troops to both friendly and hostile nations in the Middle East, Central Asia and the Horn of Africa to gather intelligence and build ties with local forces. Officials said the order also permits reconnaissance that could pave the way for possible military strikes in Iran if tensions over its nuclear ambitions escalate.

While the Bush administration had approved some clandestine military activities far from designated war zones, the new order is intended to make such efforts more systematic and long term, officials said. Its goals are to build networks that could “penetrate, disrupt, defeat or destroy” Al Qaeda and other militant groups, as well as to “prepare the environment” for future attacks by American or local military forces, the document said. The order, however, does not appear to authorize offensive strikes in any specific countries.

In broadening its secret activities, the United States military has also sought in recent years to break its dependence on the Central Intelligence Agency and other spy agencies for information in countries without a significant American troop presence.

General Petraeus’s order is meant for small teams of American troops to fill intelligence gaps about terror organizations and other threats in the Middle East and beyond, especially emerging groups plotting attacks against the United States.

But some Pentagon officials worry that the expanded role carries risks. The authorized activities could strain relationships with friendly governments like Saudi Arabia or Yemen — which might allow the operations but be loath to acknowledge their cooperation — or incite the anger of hostile nations like Iran and Syria. Many in the military are also concerned that as American troops assume roles far from traditional combat, they would be at risk of being treated as spies if captured and denied the Geneva Convention protections afforded military detainees.

The precise operations that the directive authorizes are unclear, and what the military has done to follow through on the order is uncertain. The document, a copy of which was viewed by The New York Times, provides few details about continuing missions or intelligence-gathering operations.

Several government officials who described the impetus for the order would speak only on condition of anonymity because the document is classified. Spokesmen for the White House and the Pentagon declined to comment for this article. The Times, responding to concerns about troop safety raised by an official at United States Central Command, the military headquarters run by General Petraeus, withheld some details about how troops could be deployed in certain countries.

The seven-page directive appears to authorize specific operations in Iran, most likely to gather intelligence about the country’s nuclear program or identify dissident groups that might be useful for a future military offensive. The Obama administration insists that for the moment, it is committed to penalizing Iran for its nuclear activities only with diplomatic and economic sanctions. Nevertheless, the Pentagon has to draw up detailed war plans to be prepared in advance, in the event that President Obama ever authorizes a strike.

Doesn't signify anything other than our military plans to be ready, no matter what the leadership decides.  The alternative is to do nothing and then suffer the headlines about how, "Prior to the intervention, the Pentagon didn't even have maps for the areas in question!"

After all, this is why you have Special Ops guys.

Don't stare into her eye!

I call her Rasputin, because she's Siberian too!

That's Sasha, our oldest of three Siberian cats.  Her right eye is permanently dilated--a defect from birth.  We noticed it when she was a kitten, and after a visit with a vet eye specialist, realized it was a rather harmless imperfection that could not be corrected.

Frankly, you forget about it because her eyes are rather dark to begin with.  

But then you snap a flash like that and see the flackback from the back of her retina and it's rather eye-catching!

Chart of the day: tracking China's economy

A Chinese business research org, after four years of effort, comes up with a new monthly index of leading indicators designed to give the public--and government--some deeper sense of where things are headed economically.  The government's stats are notoriously patchy, so the Conference Board came up with six:

1. Expectations of consumers
2. Lending by banks
3. Supply of raw materials to industries (central bank survey)
4. New floorspace being constructed
5. Export orders received by firms
6. Supplies delivered to exporting firms.

But because even that leading index is considered a bit crude, the Board simultaneously puts out a monthly current or "coincident" index.  The current index is more volatile than the leading one, because Chinese bureaucrats have a tendency to smooth out reality in their data.

The proof in the pudding?  The Board retroactively applied the indices all the way back to 1986 and showed how it would have predicted the major downturns since.

A nice little step toward managing things better.

Take away:  we have the tendency to assume China's leadership somehow knows more about its economy than our leadership does about ours. The truth is the exact opposite.

Esquire's The Politics Blog: The Real Israeli Raid Fallout: Turkey with a Bomb?

If you look beyond the international shouting match that began on Monday after Israel botched its handling of a Turkey-sponsored aid flotilla bound for Gaza, well, things look pretty shocking. Just because at least nine people are dead — Western casualties included — doesn't mean the boat raid itself is what "has the makings of a huge international fracas." And just because the Turkish foreign minister says "this attack is like 9/11" — which it isn't — doesn't mean Tel Aviv will take its eyes off what the Israelis actually perceive to be the larger threat: Iran's nuclear weapons.

Read the full post at Esquire.com's The Politics Blog.

There is no Plan B for Afghanistan

Karen DeYoung piece in WAPO underscores the bum's rush mentality at work in the Obama administration:

The Obama administration's campaign to drive the Taliban out of Afghanistan's second-largest city is a go-for-broke move that even its authors are unsure will succeed.

The bet is that the Kandahar operation, backed by thousands of U.S. troops and billions of dollars, will break the mystique and morale of the insurgents, turn the tide of the war and validate the administration's Afghanistan strategy.

There is no Plan B.

The deadline for results is short: Administration officials anticipate that the operation will form the centerpiece of a major strategy assessment due in December and will justify the first withdrawals of U.S. troops from elsewhere in Afghanistan in July 2011. Although operations initiated last winter in southwestern Helmand province will continue, and new troop deployments are scheduled this year for northern and eastern Afghanistan, little else will matter if the news from Kandahar is not good.

The urgency and the difficulty of the task were illustrated Saturday when the Taliban launched an unprecedented rocket and ground attack against the Kandahar air field, NATO's largest installation in southern Afghanistan and the headquarters of the upcoming offensive. Several coalition troops and civilian employees were wounded when rockets sailed over perimeter fortifications, but gunmen who tried to fire their way inside through a gate were unsuccessful, the U.S. military said.

Officials have described the offensive's blend of civilian and military operations as the first true test of the counterinsurgency doctrine adopted five years ago on the eve of the 2007 surge in Iraq, but since only imperfectly applied. As troops battle insurgent forces entrenched among the population on the outskirts of the city, the birthplace of the Taliban movement, U.S.-mentored Afghan police will establish a presence in the relatively secure center.

Scary to think this rush job is being described as the "first true test of the counterinsurgency doctrine."  Last time I checked, the doctrine didn't say, "Do a half-assed job for the first seven years and then cram a serious effort into a window of several months, making a do-or-die show of force in a single city."

We all hope it works, but this is not a seriously patient test of anything other than Obama's intense desire to quit the place amidst a good showing.  

There has been no significant regionalization of the solution set.  Instead, we get this showpiece showdown.

Tell me that doesn't strike you like magical thinking?  "If we can make it work in Kandahar, then the Afghans themselves will make it work throughout the rest of the country!"

I have a bad feeling. 

Even more so when I hear Obama saying his new national security strategy will create a new "international order" based on diplomacy and engagement.  An unimpressive showing in Afghanistan will render that vision DOA--no matter what pretty words are attached.

The invasion of the hypermarkets!

Carrefour plunges into India, putting all manner of corner markets at risk.  It follows Wal-Mart, which opened its first store in the north last year.

For now, supermarkets account for only 5% of grocery sales in India, where middlemen rule.  Laws prevent outsiders from coming in.

But that will inevitably change, not because of the big, bad foreign hypermarkets, but because India's emerging and voluminous middle class will demand more than one brand of rice at one price.  Already, Wal-Mart plans a dozen more stores and reports very positive noises coming from the bureaucracy on this subject.  Why?  A government-sponsored study said that the small shops, when presented with such challenge, lost a lot in the first year but then recovered, presumably by selling differently to maintain their niche rather than their monopoly.

Long-term project by Wal-Mart and Carrefour.  Only the deep-pocketed should apply.

But serious profits await for the stubborn and persistent.