Chart of the day: More likely to be India's century than China's?

A compelling analysis from The Economist on how India's freer style of doing business, when combined with a huge and still unfolding demographic divided, could well trump China's current star turn in the global economy.

As I have noted for a while, China's demographic "golden hour" ends right now, as from here on out they add old people to their non-working-age population--despite the continued cut-off pressure applied through the single-child policy (Deng's gift to the world, for which we must be eternally grateful).  

Point being:  China's labor gets more expensive from here on out, but the good news should be, that means China's domestic consumption (higher wages) should become a huge driver in globalization.  It's just that China will no longer have a no-brainer--pun intended--advantage.  From here on out, the extensive growth must yield to intensive growth--as in, brain-fed.  For somebody who believe his work has a lot to do with capacity-building (i.e., raising a generation of strategic thinkers), China looks like a huge market to me already:  they're having outsized impact throughout the world but aren't assuming commensurate responsibility, which I believe the Chinese shudder from out of fear that it'll be draining (yes) and complex (yes) and demand all manner of innovative thought on their part (absolutely).  But the Chinese have no choice; the world simply will demand it all from them.  So developing China's human capacity is magnificently important for the future of the world--as in, we depend on it.  So whenever I hear about China cranking all manner of this or that skill set, I say, bring it on, and--by doing so--elevate your game and ours. Our education is stuck in industrial era mode and must be radically reformed, but we won't do it without the push of serious competition.  

Conversely, China's own internal reforms, I believe, will be increasingly driven by a sense of India coming up on its heels--all good stuff with all the same attendant dangers.  The question always to be asked when great powers compete intensely on the economic landscape is, "What is the state of the military-to-military relationship?"

When I look at China-US, I spot a moribund relationship.  When I spot India-US, it looks promising but still too embryonic.  And when I spot India-China, I spot another extremely weak bond.  

These are the three dominant economies that will have both the will and wallet, over the long haul, to shape the global security landscape.  Europe is taking a pass, primarily for demographic reasons.  Russia is similarly cursed.  China has a solid window, with India's even bigger.  America, a demographic freak of nature, retains it own.

So, from a security standpoint, the most important hearts-and-minds to win are all found within that trio of powers.  Keep the relations open and cooperative, and the economic competition will never spill over into anything truly bad, but keep them weak, and all sorts of bad choices linger out there.

I stick with my tighter logic that says:  go for China and you get India in the bargain, while going for India as a China hedge, if done too vigorously, gets you neither, for China will withdraw from the logic of security cooperation and India, as we all know, hates being played as pawn more than anything.

So the goal must be:  do whatever it takes to work the security cooperation with China, encouraging India to join at every possible junction.  The tiny bit of naval cooperation on Somali pirates is a start, but so much more can be done.  In a world of frontier integration, America needs two friends with million-man armies (with Turkey the next logical spoke in that wheel).  No one but America will retain the warfighting power-projection capacity, but it's clear there are strong limits to what we can do with that and that alone.  My concept of the SysAdmin was always about reorienting our major alliance relationships, and demographics was always the underlying driver.  Why?  The rise of the middle class triggers the resource relationships, and those relationships must be protected.  Same thing that happened with the US in the late 1800s; same thing happening with China, India, Turkey, Brazil, etc. now.  We are in the midst of a huge swapping out of allies, from North/West to East/South, and America is the connection that binds the two eras, because America's system of states-uniting, economies-integrating, networks-expanding, collective security and so on is the underlying template of this era's hugely successful globalization.

Wal-Mart moves into Africa big time

WSJ and FT pair of stories.  Scanned graphic from latter.

Apparently, Wal-Mart didn't get the "deglobalization" memo.

Wal-Mart bids $4.6B for Massmart Stores chain, a South African company.  The offer, if it goes through, would give Wal-Mart an instant presence of 290 stores in 13 countries.  

The offer is a good one--almost too high for the industry, indicating Wal-Mart's sense of urgency.  As the WSJ piece declares, it's an "aggressive and expensive bid to expand in Africa ahead of its international competitors."

Unlike in booming Brazil, where Wal-Mart has spent plenty and still trails Carrefour in sales share, the company is looking to springboard ahead in Africa.  Carrefour also holds the top international retail spot in China.  Clearly, Africa is a riskier bet/environment than either of those too, but with consumer spending in the trillion dollar range (aggregate), the continent is hard to ignore.  

Emerging/overseas markets now make up one quarter of Wal-Mart's $400B-plus annual revenue, and it is clearly the growth engine in the company.  Wal-Mart is said to be examining Russia and the Middle East as well.  

Places where this strategy of buying a local chain have failed for Wal-Mart tend to be more established markets--to wit, Germany and South Korea.

But when it comes to sub-Saharan Africa, the clear choice is to buy South African chains.  They draw neighboring states' consumers and typically reach back into those same states with satellite stores.

Wal-Mart is paying 13 times pre-tax earnings, which is a nice price for most industries but particularly good for a retail player in developing markets.

As usual, Wal-Mart's entry is expected to shake up the existing grocery oligopoly.

You want an example of how the Gap gets shrunk?  It doesn't much better than this.

Drug war logic repeated on China currency question

Lemme see: inside every Chinese peasant is an American consumer just waiting to break free!

Stephen Roach piece in WSJ.  He's the former Asia head for Morgan Stanley now back to Yale.

Roach is one of those economists who points out that past experience with Japan says gets a revalued currency won't change our foreign trade deficit with China, which is really with Asia as a whole and has been consolidated by China over the past decade or more through its efforts to become the final assembler of note.

Some bits:

The currency fix won’t work. At best, it is a circuitous solution that would address only one of the many pressures shaping the imbalances between our two nations; at worst, it would lead to a trade war, or risk jeopardizing China’s understandable focus on financial and economic stability.

Besides, in a highly competitive world, there are no guarantees that currency shifts would be passed through to foreign customers in the form of price adjustments that might narrow trade imbalances. Similar fixes certainly didn’t work for Japan in the late 1980s, and haven’t worked for the United States in recent years . . . 

Contrary to accepted wisdom, America does not have a bilateral trade problem with China — it has a multilateral trade problem with a broad cross-section of countries.

And why do we have these deficits? Because Americans don’t save. Adjusted for depreciation, America’s net national saving rate — the sum of savings by individuals, businesses and the government sector — fell below zero in 2008 and hit -2.3 percent of national income in 2009. This is a truly astonishing development. No leading nation in modern history has ever had such a huge shortfall of saving. And to plug that gap, we’re left to borrow and to attract capital from lenders like China, Japan and Germany, which have surplus savings.

If Washington were to restrict trade with China — either by pushing the Chinese currency sharply higher or by imposing sanctions — it would only backfire. China could very well retaliate against American exporters, and buy goods from elsewhere (a worrisome development in what is now America’s third-largest export market). Or it could start to limit its purchase of Treasury securities.

The United States would then have to turn to some other nation or nations, at a higher cost, to finance our budget deficits and make up for our subpar domestic savings. The result would be an even weaker dollar and increased long-term interest rates. Worse still, as trade was redirected away from China, already hard-pressed American families would be forced to buy products that are noticeably more expensive than Chinese-made imports.

But Washington remains unwilling to address our unprecedented saving gap, and instead tries to duck responsibility by blaming China. Scapegoating may be good politics, but proposing a bilateral fix for a multilateral problem is just bad economics.

China should stay the course with its measured currency reforms, allowing the renminbi to continue to appreciate gradually and steadily over time. Contrary to the inflammatory rhetoric of China’s critics, this is not “manipulation.” It is a reasonable strategy to anchor the renminbi to the world’s reserve currency, the dollar, in an effort to maintain financial stability in an all-too-unstable world.

True, but by doing so (see reference #2), China is creating a beggar-thy-neighbor bandwagon effect, as Taiwan, Japan and South Korea all start intervening to keep their currencies cheaper, to the point where Brazil's finance minister declares that an "international currency war" has broken out.

Roach then goes on to talk about fixing China's low consumption rate (only 35% of GDP, or about half of the US), but here I think he falls into the trap that Michael Pettis warns about: there is no easy shifting from investment driving most growth to consumption stepping up.  In short, anything but a slow redirect gets a crash, and so long as the redirect is slow, it's unlike to effect a serious shift.  When you stack those two analyses one on top of the other, you get the feeling that China will go on as it does (addicted to exports) until a crash there forces otherwise.  It would seem we've taken sufficient lumps to force the necessary change here--one hopes, which is the big reason why we feel so down on ourselves right now while wildly elevating China in our minds.

But as I like to say, the China model is brilliant until the first big crash.

The thought that prompted the post was that, just like in the drug war, we want our "enemy" to stop exporting so much of that stuff to the U.S., when it's our demand for that stuff and our lack of self-control which is the real issue.  But as Roach points out, we don't like to deal with our own issues, and in a classic psychological trip, we transfer our anger over our lack of self-control by blaming our "dealer."

Not exactly the Opium Wars, but you get my drift.

Israel plays start-up to China's big firm

Tweeted this one earlier this week, but want to post as well.

WSJ technology columnist Peter Stein noting how Israeli private equity firm is specializing in marketing intellectual property from small local high-tech companies to big Chinese manufacturing firms.

You read Baumol et. al's "Good Capitalism, Bad Capitalism," and you come away with the argument that the best mix is to have big go-to-market firms surrounded by a sea of small, innovative high-tech firms that feed the beasts. The authors claimed that America was basically there, in terms of that evolution, having added the high-tech small firms with the IT revolution energizing our innovation base in a number of industries.  Their addition evolved our economy past the big-firm era that marked the post-WWII decades through the difficult 1970s.  The authors also argued that big-firm China was trying to make a similar evolution happen and was succeeding somewhat.

Now with the Great Recession, we get two counter-arguments coming to the fore:  1) globalization is slowly robbing America of its industrial base through off-shoring of manufacturing and losing the proximity between innovation and manufacturing is making us less competitive; and 2) China's increasing reliance on/championing of national flagship companies signals a retreat from further marketization.

My sense is always that linear projections usually fail, so waxing and waning is the norm.  You go too fast down one path, so you pull your foot off the pedal for a period.  I think some American companies in some sectors are recognizing the need to more closely tie innovation with manufacturing.  But in others, like automotive, you don't have a whole lot of choice given the market expansion going on in Asia and Latin America.  

In general, I'm a big believer in IBM CEO Sam Palmisano's notion of a globally-integrated enterprise that sources local, R&Ds local, hires local, manufactures local and sells local--just all over the world.  It's the truly globalized or truly distributed version of the old multinational.  I think companies that do that will fare best over the long haul, understanding that, as countries "rise," they're naturally going to want to carve out space in their expanding domestic market for national flagship companies.  To me, this is China's path right now, along with a firm desire to lock-in access to raw materials around the world through their state-run extractive industries and farm land leasing/purchases.  I think that mindset is a bit 20th century (supply risk oriented versus price risk oriented), but there you have it when a single-party state remains in power.  

Now how China seeks to extend its evolution toward that big firm/small firm mix is to force foreign companies who seek entry into its expanding domestic market to turn over their technologies in joint ventures, something that's naturally going to create a lot of friction.

Less friction filled is what this Israeli private-equity firm is doing. Infinity Group is simply treating China like one giant big firm to which new technologies can be sold, with it playing matchmaker. The process reminds some of when Silicon Valley did the same for Taiwan way back when. Like Taiwan, China wants--nay, NEEDS--to move up the food chain rapidly in order to bring similar development to its better-than-a-half-billion interior rural pool that it has to-date achieved with the urbanized coastal provinces. Then there's China's demographic clock ticking, reflected in the long-term loss of 100m workers by 2050 and the piling up of 400m-plus elders by then.

To me, this is a next, natural phase for globalization, with smart small countries becoming more Israel-like and big, labor-filled developing countries emulating China's strategy, which, quite frankly, isn't unique whatsoever and really is just an updating of what Japan did (the Michael Pettis argument).  If China were to achieve the same per capita GDP growth that Japan did, it could grow rapidly for another quarter century, says Martin Wolf, but . . .

The most interestingly pessimistic view comes from Michael Pettis of Peking University’s Guanghua School of Management. The characteristic of Chinese growth is that it is “unbalanced”, as Mr Wen notes: it is highly dependent on investment as a source of demand and driver of supply (see charts). It is, in a sense, the most “capitalist” economy ever.

Thus, between 1997 and 2009, gross investment rose from 32 per cent to 46 per cent of GDP, while household consumption fell from 45 per cent of GDP to a mere 36 per cent. This must be the lowest share of consumption in any significant economy ever. In a country with hundreds of millions of poor people, it is even shocking. Meanwhile, the rising investment rate has been the main driver of growth. In the early 2000s, “total factor productivity” – increases in output per unit of input – were also important. But the contribution of higher efficiency has been waning.

This, Prof Pettis argues, is a “souped-up version” of the Asian development model we saw in Japan and South Korea in earlier decades. The characteristics of this production-oriented approach are:

• transfers from households to manufacturing, via low interest rates on savings
• repressed wages and a depressed exchange rate
• very high investment
• rapid growth of exports; and 
• high external surpluses. 

China is “Japan plus”: its investment rate is higher, trade surpluses larger, rate of consumption lower and exchange rate intervention bigger.

This has been an extraordinarily successful development model, but, notes Prof Pettis, it eventually runs into the constraints of “massive over-investment and misallocated capital”. He continues: “In every case I can think of it has been very difficult to change the growth model because too much of the economy depends on hidden subsidies.” Moreover, China’s scale will shift the price of imports, particularly raw materials, against it, so accelerating the decline in profits.

In China, a rising rate of investment is needed to maintain a given rate of economic growth. At some point, investment will stop rising and growth will slow. China will then face the Japanese challenge: how to sustain demand as the required rate of investment collapses. If, for example, the gross investment needed to sustain a 10 per cent rate of growth is 50 per cent of GDP, then the rate of investment required to sustain 6 per cent growth might be just 30 per cent of GDP. With its massive dependence on investment as a source of demand, any decline in expected growth threatens a huge recession.

One answer would be another government-driven investment surge, however low the returns. The more attractive answer is faster growth of consumption. There is evidence of that during the past two years. But, as Prof Pettis notes, for consumption to grow consistently faster than GDP, household disposable income must also do so. Yet if this is to happen, income must be shifted from the corporate sector. That implies a squeeze on profits, through higher interest rates, higher real wages or a higher exchange rate. But that increases the risk of an investment collapse, with dire consequences for demand. As Prof Pettis argues, in China “growth is high ... because consumption is low”. Rebalancing the economy towards household consumption could undermine the ability to sustain growth itself. If so, China is on an investment treadmill.

Old story:  there ain't no such thing as a free lunch.  How China has grown makes it harder--with each passing year--to get off the investment treadmill. But that investment level, and the requirements of a trade surplus to feed it, creates it own negative feedback look, which China is just beginning to encounter.  Can it run a huge trade imbalance with the developing world like it did with the West, using renminbi this time around?  Pretty tall order considering its resource draw.  Pettis's point isn't that China can't rebalance, just that it won't be a smooth journey.

But I can't help thinking that the work of Infinity Group is a big plus on this score:  helping move China up for the production/labor wage chain by outsourcing the start-up function to a certain extent while it slowly builds that capacity at home.  Naturally, if you're already a big firm and have amassed a lot of IP, you don't want to hand it over to China as price of admission, but if you're a start-up high-tech firm who needs a go-to-market partner, I can see you being indifferent on the nationality, meaning I think we'll see this become a significant trend in the global economy.  Like Baumol et. al's preferred model, I think we'll see something similar in terms of small and large states.  In a globalized world, tech firms in small states have no choice but to go global because the domestic market is so small (why Israel is such a high-tech incubator).  

On that basis, I become even more convinced that the "clash of civilizations" will end up being a big nothing in retrospect, meaning merely a fraidy-cat capture of when globalization starting truly opening up previously-closed civilizations, triggering a totally natural uptick in cultural friction.  But you look at an Israel making this happen with China and you say to yourself, in a clash-of-civilization world, this shouldn't work--yes?  And yet it does, because Israel needs to do this and China needs to do this and that economic logic surmounts all.

The primary question today

FT column by Philip Stephens that asks the question, "To what degree will the big powers locate their foreign policies in a shared understanding of collective security?"

The Old Think says this is impossible, and that national interests demand zero-sum competition--especially over raw materials. The New Think understands international economics in the age of globalization, meaning globally integrated production chains rule out zero-sum competition over resources ("I'm going to fight you tooth and nail for resources, pissing you off incredibly, and THEN expect to conduct relatively free trade with you that monetizes my victory?"  "Aha," says the Cold Warrior.  "They will somehow enslave their regions to accept this long-term unfavorable transaction, scaring them into become economic vassals with their military might!"--I know, it's almost too stupid to even type but there it is.).

Stephens here, unfortunately, feels the need to resurrect a bad historical analogy: the 19th century Congress of Vienna (ah yes, pre-nuclear analogies for an increasingly post-nuclear world). Naturally, Stephens fears a world of uncontrolled nuclear proliferation, because that's such a standard scare tactic ("Look! Over there, two dozen new nuclear powers!"). Stephens knows this is just around the corner because he went to an IISS conference where State's James Steinberg and Henry Kissinger both said so (the "dangerous game changer"!).

Then he moves onto the intelligent stuff, which he likewise credits to both Steinberg and Kissinger (apparently, the usual credo of proliferation cited, both speakers moved onto to reality): the rise of economic interdependency accompanied by environmental and resource interdependencies.

Naturally, everybody laments that rising Asia seems stuck in myopic nationalism--a good critique.  Their rise forces them to grow up very quickly, without the benefits and wisdom afforded by Eurasia's World Wars.

Nonetheless, the IISS, in a new study, feels comfortable enough to lecture rising Asia to pick up the pace and realize that "interdependence should be driving demand for more collective action."

Then Stephens hits the nail on the head:  the pol-mil cooperation venues haven't kept pace with the rising network and economic connectivity--my primary theme of the need for new rules in PNM. Within that observation I locate the crux of the matter: China and America's pol relationship remains stunted because of the mil residual called Taiwan--thus my call in Blueprint to "lock in China at today's prices" (and yes, as I warned back then, that price has gone up since!).

Stephens whines on a bit about the lack of improvement in transatlantic relations as promised by candidate Obama.  I couldn't care less.

Learning from the yen

FT column by Gillian Tett says to read journalist-cum-banker Taggart Murphy's history of the yen to understand the way ahead on the renminbi, also considered to be held to artificially low value by its government.

But what caused the trade imbalance, argues Murphy was: 1) the US Fed deficit structurally built into the body politic by Reagan, and 2) the Japanese "development state" system of national leverage, centralized credit allocation and credit risk socialization (the govs stood behind banks).

That's all ancient history now, and Japan's gov today intervenes to weaken the strong yen.  

Tett says just read the book and swap out Japan for China and it all makes sense all over again.

This has been my argument in the brief for a couple of years now--a grand strategic choice by America that enabled export-driven growth in Asia while allowing us to: 1) be a military superpower and 2) ask for no sacrifice from society because money remained so cheap.

How did Japan escape the grind?  Not well.  (And the same can be said for us today.)  Japan worked to spur domestic demand while keeping exports strong, and that paved the way "for a crazy bubble, followed by a bust, and more currency instability in subsequent years."

Murphy's point:  "Changing the units of account had not the slightest chance of dealing with these fundamentals.  But they made for a more unstable world."

In other words, be careful what you wish for.

This is a consensus argument I find:  it's not the pegging that hurts us but the sterilization of the foreign currency won in the process (i.e., China's continued insistence of controlling its allocation in a macro sense).

What went wrong with Japan is that it outgrew the need for central control of capital allocation via a state-dominated banking system.  It outgrew that system like a child outgrows shoes, says Tett.  But it waited too long to reform the system--the same danger that awaits China, one imagines.

And yet, China claims to be growing up its system as fast as possible.  Tett says the pace remains too slow.

Macro lesson of Murphy's book:  the twin dangers of rapid revaluation and too slow reforms.  In between lies the sweet spot of making capital allocation more marketized and efficient, letting in a reasonable amount of inflation but not too much.

Old story I would add:  centralized and authoritarian works for extensive growth under conditions of scarce capital, as centralized allocation allows the state to direct growth.  But once the economy matures or "complexifies" sufficiently, the system outgrows the crudity of that initial system and needs the wisdom of crowds larger than can be assembled in one room in Beijing.

How the Old Core profits from China's rise: the example of Germany

The basics:

As Americans fret over high unemployment and the prospect of another recession, an economic renaissance is putting Germans back to work and propelling the economy at a pace not seen since the fall of the Berlin Wall.

Ask a German executive why, and you are likely to get the same one-word answer that slips like silk off Gunter Scheipermeier's tongue: "China."

Vilified in the United States as a great sucking sound on the American economy, China is courted here as a revered client. Fast-growing demand from Asia's giant is helping to fuel the strong German recovery, and Germany now stands as proof that a rich nation can profit off China's rise.

China passed the United States last year as the No. 1 overseas market for big-ticket German machinery, with Teutonic titans from Siemens to Volkswagen - which so far this year has sold 1.3 million cars in China, five times as many as it has in the United States - ramping up production and payrolls to fill Chinese orders.

More important, China is driving growth at smaller German manufacturing firms like Scheipermeier's Nobilia that form the true backbone of Europe's largest economy. A family-run company making modular kitchens in a half-mile-long factory, where free-roaming robots work alongside humans on the most advanced assembly line of its kind in the world, Nobilia is treating nouveau riche Chinese like Americans of the 1950s - when nothing said success such as a sparkling, modern kitchen.

At the same time, the company is aiding Germany's domination in the surging Chinese market for imported household goods. Through alliances with other German companies, Nobilia is selling kitchens to the Chinese that fit standard European-size appliances, 24-inch-wide ovens, for example. These kitchens do not accommodate the larger ovens commonly made by U.S. manufacturers and built for American families cooking Thanksgiving turkeys and Sunday rib roasts.

Overdependence on China for exports growth, many here say, could hurt Germany as the economy there eventually cools. And German companies, like their American and Japanese counterparts, are facing increasingly sophisticated piracy threats from a nation where blackmarketeers can copy an entire BMW roadster or Mercedes sedan.

But with showrooms in 17 cities and sales surging 40 percent this year alone, Nobilia now sells more kitchens in China than all but two domestic Chinese manufacturers, with no American challengers in the top 10.

"China is vital to Germany's future," Scheipermeier said. If he has his way, he said, "Chinese duck will be cooked in kitchens more like those designed for German chickens than American turkeys."

A trade competition

One thing is for sure: When it comes to building a healthy trading relationship with China, Germany is cooking America's goose. U.S. exports to the world's second-largest economy surged 25 percent in the second quarter of this year, but German sales to China grew twice as fast. Overall, German exports have jumped 17 percent this year, driven in large part by a 55 percent rise in China of imports. Although the United States still exports more to China in total dollar terms, adjusted for the size of their economies, Germany is now out-exporting the United States to China by a factor of three to one.

How has this been achieved?  A commitment to excellence:

In recent decades, as countries including the United States and Britain put greater emphasis on financial services and property values, the Germans have hyper-focused on the art of manufacturing. Even relatively small German companies have grown into global market leaders for the products Chinese want, from drilling equipment to optical mirrors to prefabricated kitchens. Exports now account for more than one-third of Germany's national output, more than double the rate in the United States, with Germany's $1.2 trillion in annual exports roughly equal to the entire gross national product of India.

Lessons clearly to be learned.

The Great North as globalization's future economic hot zone

WSJ weekend full-pager by Laurence Smith, prof of geography at UCLA, and it's pulled from an upcoming book, "The World in 2050."  Get used to seeing such analysis: exploring global warming's upside--geographically speaking.

A lot of good, fertile land sitting with technologically advanced and relatively wealthy populations will come into play, along with a lot of transportation connectivity made possible or kicked into year-old exploitation.  

This article focuses on the Arctic (above the Circle), and flips Jared Diamond on his head, asking not what makes civilizations perish but what allows them to grow?   His answer:  

First and foremost will be economic incentive, followed by willing settlers, stable rule of law, viable trading partners, friendly neighbors and beneficial climate change.

Point being, you toss in the beneficial climate change and the northern states have all the mixings.

Now, the guy does rightfully call out Russia an an outlier, but my expectation is, Russia will see this as a godsend and fall into the misguided notion of having to dominate to flourish because its geography and experience base will put it in good stead.

Right now the Arctic is a welfare state of sorts: deeply subsidized economic activity that centers on extractive industries (the Core's version of the Gap sans the violence).

Will these wastelands get settled?  Did the barren desert of America's southwest?

The close:

I imagine the high Arctic, in particular, will be rather like Nevada--a landscape nearly empty but with fast-growing towns. Its prime socioeconomic role in the 21st century will not be homestead haven but economic engine, shoveling gas, oil, minerals and fish into the gaping global maw.

Sidenote:  here's another slew of countries China will need to be friends with due to its extreme resource dependencies.

Just thank God we bought Alaska while we could.

While not exactly on topic WRT this piece, it raises the question of whether or not buyers of certain ag commodities could exploit global warming to shift production from current locations to better ones--as in, safer, more stable, easier to control, etc.

9/15 trumps 9/11

Great piece by Gideon Rachman, a regular FT columnist who sometimes stretches too hard to make his overarching points but drives this one home deftly.

The symmetry of imagery here is haunting:  ten years ago the WTC towers collapse (9/11) and two years ago Lehman Brothers collapses (9/15).

The first event reveals, in sequence, the limits of US military power, but the second quickly exposes the relative economic decline of the US vis-a-vis rising China.

On many levels, I find the need to designate forever-marking tipping points to be a bit much.  America discovered the limits of its Leviathan force in Iraq and Afghanistan, and now builds something very different. Is any other great power out there moving further down that curve than we are? Hardly. China chases our Leviathan's tale in a fabulous waste of force structure that does nothing to actually address its strategic shortfall globally (which is growing at a magnificent rate).

Does 9/15 signal the permanent eclipsing of the US by China? Depends on how you view the long-term prospects of each. China's debts are massive, if hidden, and their demographics bottom out this year, as old people stack up from here on out and the economy loses 100m workers by 2050 (we add 35m and remain remarkably young by comparison).  A lot of experts are sticking with their linear projections of China's advance, but I see a large number of very painful and destabilizing (for single-party rule, that is) transformations laying in wait.  America's necessary transformations, by comparison, will be both faster and easier to swallow.

But I do buy, in a general sense, Rachman's notion that the economic restructuring of the world dramatically trumps the downshifting of violence represented by 9/11 (from nation-states to mere non-state actors), so I admire the piece.

CIVETS to replace N11 to replace BRIC: it's a mad, mad mad men world!

FT "big picture" piece that explores the great Wall Street competition to package the next darling of global investment. The BRIC concept succeeded the more generalized buzz phrase "emerging markets"--itself a brilliant bit of packaging for the post-1987 crash investment audience (no one wants to invest in developing economies, the logic went, but emerging sounds so much better!).

Goldman Sachs' creation of the BRIC notion just concentrated the idea, a somewhat lumpy lumping of the four best investment opportunities of the time.  Naturally, the BRICs have outperformed any other confection since that time--as cherry-picked collections are wont to do.

Then came the Next 11 (another Jim O'Neill creation), a complete hodgepodge that fell, in theory, in emerging markets 5 through 15--a "collection of mini-Indias" one hawker claims.  The sale is simple:  this is the next ground floor of globalization, offering early-entry investment opportunities no longer found in the BRICs.

Alas, just like Malcolm Gladwell's success with "Tipping Point" and "Blink" triggered a whole crop of copycat volumes, all sporting the same white cover with the would-be iconic image dead center ("Look, a one-word book!  I should be able to maintain my attention through that!"), these quaint packages spawn their own competitors, the funkiest of the new crop being the CIVETS!  This comes from HSBC, which is naturally drawn to awkward acronyms.

[I myself have long favored the TPMB, for Turkey, Poland, Malaysia and Brazil.]

CIVETS stands for Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa--a crew that just naturally gloms together. Allegedly, the bond is their expensive type of coffees produced. But that may just be a running joke.

We can laugh at such packaging, but compared to the GWOT or the Axis of Evil or Axis of Diesel, these notions all actually capture a lot more of globalization's ongoing reality than those dreamed up by Pentagon planners.

Charts of the Day: World Economic Forum survey on US competitiveness

Annual WEF "most competitive country ranking," where US now drops to fourth after Switzerland, Sweden and Singapore.

Of course, my usual counter is to say we're comparing a multinational state of 50 members to unitary states, so just as reasonable to see where those three stack up against our 50 individuals members as the other way around, but I quibble.

What's interesting is checking out the details, as in, when you see where we're still near the very top (innovation, labor market, business sophistication, higher education, infrastructure, technology--almost all in the private realm) versus where we've fallen lowest (public spending, public debt, national savings rate--more in the political realm).

So the question begs: What is really "broken" in America?  Capitalism or the political system?

The delicate dance: EU carmakers and PRC wheelmakers

WSJ story on how European rim makers (not the tires but the metal wheels) want antidumping protection from China, whereas European car makers fear they'll get caught up in the fray and lose market share there.

Good quote that captures China's rapid move up the production chain:

"Trade disputes with China used to be about bras, T-shirts, shoes and ironing boards," says Simon Evenett, a professor of trade economics at the University of St. Gallen in Switzerland.  "Now they're moving downstream, and increasingly, they're going to be about cars."

America coming out of the Civil War sold basic consumers goods like that overseas (shoes were a biggie), but by the end of the century, we were likewise elevated to complex manufactured goods, thus increasingly the complexity of our trade relations with the world.

Good cop "Uncle Wen" makes nice @ WEF event

WSJ coverage of World Economic Forum event in Tianjin, where Chinese premier Wen Jiabao went out of his way to combat the nation's growing image as inhospitable to foreign business.

Naturally, a WEF event in China is going to feature a certain amount of self-censorship by foreign businesses, thus allowing Wen's comeback to basically go unchallenged.

Still, the key is he acknowledged policy missteps by China.

It will--for a very long time--remain a tricky balancing act for China:  trying to divert continued economic growth inland while not being too stingy on foreign penetration.

Basel III--the directors' cut

FT, a while back, ran a full-pager analysis that said Basel III?  Ho hum, as the banking industry's regulators were cowed by the efforts of industry lobbyists into diluting the new rule-set package.

Still, when the deal was done last weekend, a lot of pubs hailed its historic nature.  So yeah, higher capital standards for banks, but not so high that most don't already meet them.  As for smaller banks?  Tougher row to hoe

Basel III is described as being different from what the US did under Obama:  "prescriptive rules to steer U.S. banks away from past errors."  Instead, Basel III allows the risky behavior to continue so long as the banks set up bigger capital cushions to absorb losses.

As rule-set resets go, a sort of reversal of the usual philosophies, with the global rules being more passive while ours are more active.   

The big thing, of course, is that some global rule-set package was agreed upon in the first place.

And yeah, markets around the world seemed to like that.

Is the reset finished?  Mebbe . . . mebbe not.  Some banks fear their national regulators will now step in with tougher standards, leading to "regulatory arbitrage" whereby banks seek out the locales with the loosest rules and shun those with the toughest.

A never-ending struggle . . ..

SWFs as a way to protect national resource wealth from the government

Intriguing argument from a CSM op-ed:  African nations taking cue from Arab sovereign wealth funds. Argument: better to secretively stash the cash in a SWF that is kept distant from the bureaucrats' and politicians' corrupt hands.

The key logic:

The continent’s top oil exporters, and even some of its newcomers like Ghana, are taking advice from similarly resource-endowed countries that run state revenues through SWFs, many of them in the Middle East and Asia.

Some of Africa’s oil exporters, like Nigeria, have wrestled for decades on how to safeguard resource revenue at a distance from venal bureaucrats.

Other, more nascent oil powers, like Ghana, are simply trying to get their system right from the get-go.

Middle Eastern oil giants – whose money managers often tuck away state earnings in safe, if not transparent, investments – may be an example for the continent. "The model works well because they're relatively secretive. You can't say transparency is a golden ticket," Gary Smith, head of central banks, supranational institutions and SWF business at BNP Paribas Investment Partners, recently told Reuters in an analysts of Africa's entry into the SWF market.

A $3 trillion industry

An SWF is essentially a massive, state-held investment fund – something like a 401k for the Nigerian people – that invests in a smorgasbord of assets, whether they be property, currency, sacks of gold, or Goldman Sachs shares.

The one thing they don’t do – and this is where the controversy erupts – is invest that money at home. After all, the Ghanaian cedi, the Ghanaian interest rate, the competitiveness of Ghanaian exports, and the average price of a Ghanaian home, are all wed in sickness and health to the Ghanaian economy. Piping some of that oil money toward a far-off market is a way for the country to protect its revenue far from the vagaries of its national economy.

On one hand, a sad admission of a sad state of government affairs.  On the other, whatever gets the development train moving is a good thing.

For now, judgment withheld.  Africa doesn't have a good history of secretive money stashes overseas.

State on top! No, Big Business back on top! No, tougher state rules!

So much back and forth on who's ruling the universe--states or big business.

Strong arguments that states take the upper hand as a result of the global financial crisis (like Bremmer's book, "The End of Free Markets"), but now that the dust settles (to include, apparently, last-minute changes to Basel III that make that new banking rule-set seem more robust), we get arguments saying that not all that much has changed.

From an FT full-pager analysis by Patrick Jenkins and Edward Luce:

It has been two painful years since that mid-September weekend when the collapse of Lehman Brothers jolted the world into a stark realisation – the high-rollers of the investment banking fraternity had threatened the very foundations of capitalism. The big risks that bankers had taken in the boom years, and the big bonuses they had been paid on the back of that, had come back to haunt us all.

For a while, a few signs of moderation were evident on Wall Street and in the City of London. But the show of humility appears to have been short-lived. This week, hackles rose among British politicians as one of the world’s highest-paid investment bankers, Barclays’ Bob Diamond, was named as the UK group’s next chief executive, and it emerged that the rival HSBC was also considering elevating Stuart Gulliver, its investment banking chief, to CEO.

“Mr Diamond illustrates in a particularly graphic way what happens when you have an extremely high-paid head of an investment bank taking over one of these major international banks,” said a clearly peeved Vince Cable, business secretary in Britain’s Conservative-Liberal Democrat coalition government. Lord Oakeshott, a fellow Lib Dem, said Barclays was “sticking two fingers up” at the government.

So has nothing changed? Are rampantly profitable banks returning to their old arrogant ways? And if so, will it spark a dangerous populist backlash?

Regulators insist there is no chance of the old risk-taking culture taking root again. Sunday brings a crucial meeting in Basel, Switzerland, when the likes of Jean-Claude Trichet, president of the European Central Bank, and Ben Bernanke, US Federal Reserve chairman, will gather with other senior regulators to approve tougher capital ratios – part of a plan, in the works almost since Lehman failed, to change the profile of the sector and pre-empt another crisis.

Reformers say the new rules should rein in the worst excesses, cutting banks’ profitability and providing a natural brake on pay levels that should be more effective than politically inspired taxes on bonuses.

But the overhaul, which will be phased in over a decade or more, will do nothing to calm populist anger, which many worry could erupt again soon – particularly in the US.

For now, as one banker puts it, the mood in the US is “the calm after the storm”. Having been cast as the ugly, overfed face of capitalism and the principal culprits in the financial crisis, Wall Street executives are enjoying a rare time out of the spotlight. With the country in campaign mode ahead of midterm congressional elections, discourse has centred on the stalling US economy, the stubbornly high rate of unemployment and the stance of President Barack Obama’s administration on taxing the rich.

Politicians on both sides of the Atlantic claim some credit for that . . .

“For the time being the populist wave is over, because it has been crystallised in the Dodd-Frank legislation,” says Scott Talbott at the Financial Services Roundtable, a lobby group. “But we are watching closely how the consumer agency develops. That is a key concern to our members.”

Britain’s political moves against the banks have, so far, been less extreme than those in the US . . .

On some level, it seems the best of both worlds:  pols confident of their new rules and bankers not feeling too unduly hemmed in.

Only time will tell, but clearly, not nearly the great or permanent shift predicted by many--meaning Bremmer's actual conclusions inside the book hold up better than the bold title on the cover.

Still, I would expect perceptions of who's "winning" to shift back and forth repeatedly in the months ahead, with all sorts of conflicting analysis--meaning only time will tell.

Japan: apparently no de-globalization as it ages?

Special FT insert on Japan's business climate.

Two things I took note of:  Gov seeks to lure foreign investors (not a usual headline re: Japan) because it realizes "that the country has come to rely on the outside world to support growth"; and banks looking to expand externally to counter stagnate growth at home.

Point being: Japan's demographic decline isn't making its business climate less open but just the reverse.  The biz community and government see an even more compelling logic for deeper connection with the global economy.

The Indian-Chinese rivalry on outsourcing: India's upper hand for now

FT story on how India fears China will become a major competitor in outsourcing of services, with the concluding judgment being:  1) China's share remains but a fraction of India's for now; and 2) even if it grows a great deal, this global economy IS big enough for the both of them.

Right now, China's service outsourcing sector is growing faster, but it's where India was years ago, so that steep trajectory is unremarkable.  The Indians are just scared because they know what it means to roll up markets and worry about the Chinese doing the same to them.

Beijing's declared goal:  ten internationally competitive outsourcing hubs with 1k vending Chinese companies pulling in 100 multinational companies as client.  Naturally, China is making some headway in the US and Europe--traditional strongholds of the Indians.  

Why China won't catch up here?  India's language advantage (and frankly, trust advantage) and China's big domestic market.  Plus China is small fry compared to India ($10b to India's $50b).  China's domestic IT services market is already bigger than India's, so China's service outsourcing industry can expect a lot of growth there in addition to whatever it wins abroad.  India's industry would love to capture some of that China pie as state-owned banks and telecoms open up more in that way, but I would expect Beijing to make sure most of that business stays home.

Nyyyoooobody expects the rebound in trade!

Economist story by way of WPR's Media Roundup (how could I have missed this!).

DURING the Great Depression, America’s protectionist Smoot-Hawley Act of 1930 raised tariffs on more than 900 goods. A series of retaliatory actions by other countries followed. The effect on global commerce was devastating. In the three years to June 1932, the volume of world trade shrank by over a quarter. No wonder, then, that the spectre of the worst recession since the Depression led many to fear another descent into protectionism and a similar decline in trade.

At first, the recession did hit trade hard. Global GDP fell by 0.6% in 2009 while the volume of world exports dropped by 12.2%. But whereas the Depression saw trade decline for at least four years, this time the rebound has been quick, and sharp. By May this year, emerging-economy members of the G20 were importing and exporting around 10% more than their pre-crisis peaks (see chart). Rich-world trade has recovered from the trough too, though it has not yet made up all the ground lost since the credit crunch began.

Trade has not been devastated by the raft of protectionist actions taken during the downturn. According to the World Bank, the rise in tariffs and anti-dumping duties explains less than one-fiftieth of the collapse in world trade during the recession. For the most part, the fall in trade reflected a drop in demand. 

There is even some evidence that activity has rebalanced from the lopsided trade pattern that existed just before the crisis. Then, the share of emerging-world imports that came from rich countries had been on a steadily declining path. But now demand from emerging economies is helping to prop up rich-world exports to a larger degree than is commonly realised. According to IMF figures, of nine emerging markets in the G20, seven got a higher share of their imports from rich countries in 2009 than they did a year earlier. Just 59% of China’s imports came from rich countries in 2008, but this rose sharply to 66% in 2009. India obtained 42% of its imports from rich countries in 2008, but last year this rose to 47%.

That mutually beneficial pattern points to the importance of both rich and poor countries keeping their markets open, so that growth in one part of the world can help stimulate a recovery elsewhere. Yet the pressure to protect domestic industry and jobs will only grow as unemployment remains stubbornly high. At the moment, countries have plenty of room to raise tariffs without falling foul of their multilateral commitments.

Reducing this wiggle room means reviving the Doha round of trade talks, which began in 2001 and collapsed in a bout of finger-pointing in July 2008. At the most recent G20 summit in Toronto, the commitment to conclude the deal by the end of 2010 was quietly dropped from the leaders’ communiqué.

More clear evidence of the great "de-globalization"!  Where are those fear-mongers today?

All crowing aside, I would like to see Doha revived.

The "rebalancing" that takes decades?

Banyan column in The Economist.

The key point:

It's economy, for all its three-decades-long boom, still only accoiunts for 8% of global GDP in current dollars; domestic private consumption, though growing fast, remains a small part of national GDP by global standards (36%).  This will grow as China reforms its economy to give a bigger share to household income, for example, by lifting wages for China's factory workers . . This "rebalancing," though, could take decades.  In the short term the high-speed growth much of the rest of the world has enjoyed will moderate.  Growth will not be measured against the worst of the slump; and faltering recovery in the G3 will dent exports, however well China does.  The golden age is not here yet.

Basic message:  there is no real leap-frogging of the West by China.  It got to where it stands today largely because the West could absorb its exports.  That is ending by necessity and by choice--and perhaps soon enough by emotion and fear to boot.

There is no singular rise in a world of interdependencies.  China needs friends far more than its recent hubris and arrogance indicate.

The world needs a new type of leadership in China no less than it does in America.