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Entries in global economy (177)

12:01AM

On Fox Business News today b/t 1100-1130 EST

The details:

SHOW: FOX BUSINESS DAYTIME
ANCHORS: DAGEN MCDOWELL & CONNELL MCSHANE
INTERVIEW WINDOW: 11:00-11:30AM ET

I hope to post link to online video once it's up.  Waiting on Fox.

Meanwhile:

  • Singaporean Chinese-language newspaper Lianhezaobao covers the term sheet solution
  • That story's picked up by Ta Kung Pao.

POSTSCRIPT:  Got to WFYI (local PBS) early and had some fun with son Jerry.

12:01PM

China Daily interview video re: grand strategy term sheet

12-13 minutes long.  Find it here.

10:00AM

WPR's The New Rules: Globalization, Air Hubs and the City of Tomorrow

H.G. Wells’ futuristic 1933 classic, “The Shape of Things of Come,” predicted a post-apocalyptic world in which humanity’s recovery would depend on the airplane as the primary mechanism for both travel and political rule -- the benevolent “dictatorship of the air.”  The book reflected Wells’ prescient fears of catastrophic world war and his faith in technology’s capacity to tame mankind’s worst instincts.  

A book due out in March entitled, “Aerotropolis: The Way We’ll Live Next,” is the closest thing to a real-world vision to rival that of Wells. The book, written by journalist Greg Lindsay, is based on the visionary ideas of business professor John Kasarda, a latter-day Wells who dreams of building future cities around airports instead of the other way around.

Read the entire column at World Politics Review.

12:01AM

Keeping the West-to-East shift in perspective

FT full-pager analysis exploring West-to-East economic shift.

First cool point from the charts above:  the rise of the East is merely a resumption of history disrupted by the West's sudden embrace of industrialization and colonialization (the Great Divergence begin in the 19th century healed by the Great Convergence of the 21st century).

Good point raised:  don't conflate China's rise with Asia's, because the latter's been rising - in sequence - for quite some time.  So it's Japan's rise, followed by South Korea's and the other Tigers' rise, now followed by China's rise, to be followed long-term by India's rise (remember, it adds 300m workers through 2050 while China loses 100m).  

Other cool point:  Remember that all this shifting occurs in an expanding pie.  Today the global economy is about $58T.  By the time China catches the U.S. in GDP, we're talking a global GDP more in the $150T range. As the Chairman of the London Stock Exchange (Chris Gibson-Smith) puts it, "And if you can't find your place in a $150,000bn economy, well, shame on you."

His line reminded me of the Dodo birds' taunting chant in one of the "Ice Age" movies:  "And if you're not prepared, well then, doom on you!  Doom On You!  DOOM ON YOU! . . ."

12:01AM

Will we see National Food Companies?

FT story.

Marubeni is a Japanese trading company. Historically focused on importing energy and raw materials to resource-poor Japan (the map to the right show's the company's global network of independent power producers), Marubeni is also the world's sixth biggest grain trader by volume.  

Marubeni's chief exec just announced that he wants the company to break into the top tier, known as the "ABCD group" (for ADM, Bunge, Cargill, Dreyfus and "lowly" Glencore--which apparently doesn't rank a letter).  Marubeni's grain traffic has doubled in the last five years, so it's no idle boast.

My thought, which I've been toying around with in the Wikistrat global model, is that global ag markets already resemble energy markets in their tightness of supply and volatility of price, so, when you consider that France-sized chunk of arable land that's been taken off the market over the past few years through purchases and leasing, can't we start talking about the rise of National Food Companies, or companies that have, as their guiding logic, the securing of food networks abroad for a primary national customer back home?  

Economist chart found here.

I mean, when China or Saudi Arabia sign these contracts, I gotta bet we're talking investing entities with some serious ties to the government - advertized or not.

Actually, Marubeni's ambition reflects a region-wide focus, since China is already its bigger market.  What's especially interesting about its ambition is how Marubeni uses its grain trade to get into ancillary markets like milling and animal feed processing.  

Just got me thinking . . . 

 

9:55AM

WPR's The New Rules: The End of the U.S. Security Backstop

The global financial crisis was a true system perturbation, revealing the gap between widely perceived risk and actual underlying risk in the world's increasingly integrated financial system. As with any such vertical shock, the resulting horizontal waves continue to be felt long after the initial blow. When gaps in capabilities and rule-sets were subsequently discovered, the world's major economies effected changes, like shifting economic oversight from the G-7 to the expanded G-20 and updating the Basel banking accord. In a world without true global government, these surges of great-power cooperation constitute a critical reassurance function, letting us know that an international commitment, however vague and informal, exists to backstop each nation's individual backstops already in place.

Read the entire column at World Politics Review.

10:03PM

Strange Days (follow up)

Good comments below, triggering this follow-up

I don't argue for not having a strong military and I don't argue for pulling out of regions in terms of bases, even as I want them to shrink in size (more ATMs, less branches).  But I think the passive-aggressive hedge (I'm keeping an eye on you, buster, don't think of making a wrong move in your neighborhood, because here I am, ready to lay down my law!  Oh, and by the way, if you're willing to be my junior partner on all things, I might have a spot for you in my posse.) is counterproductive and oddly detached from the larger economic reality.

So I'd use my force to embrace China security-wise as quickly and as broadly as possible.  I lose nothing in doing this--capabilities wise, and gain a ton of transparency on their side.  I don't pretend that cooperating with them gets me everything I want on every security situation on the planet where our interests collide/overlap. I expect to bargain on all of it if I want the Chinese to truly be my ally.  

So I get off my f--king high horse and extend a hand, choosing to accept satisfycing answers more often than I-get-my-way outcomes.  To me, that's realism, while this I'm-going-to-manage-the-entire-security/democracy-world-agenda-on-my-terms-while-expecting-to-bully-people-on-economics-and-pretend-I-get-to-yea-or-nay-on-great-powers-like-China-rising is just nuts.

Our definition of a "responsible stakeholder" is "do everything the way I want it and THEN you can be my friend!"  That's not how you treat an ally; that's how you treat a dog.  If we have FDR today, he'd deal and he'd deal with confidence.  That guy believed in his system, and had no fears dealing with authoritarian regimes. But we don't have any FDRs today.  Reagan and Clinton were the last, it seems:  guys who knew how to cut deals, compromise, move the ball--with confidence in their country and its future.  Now we have such little people with little minds (yeah, Bloomberg said it and I repeat it!).  We bluster and we strut and we're being ignored more and more--a trend I trace back to the beginning of W's 2nd term (Katrina proves we can't nation-build abroad or at home).  

Obama made everybody like us for a bit, but the realization abroad takes hold again relatively quickly, thanks to the global recession:  we are not serious about dealing with our own problems and hence we're not willing to make deals, so we are not to be taken seriously.  Obama on Afghanistan is proof positive (Get the Russians in there! Get China in there!  Get India in there!  Get Turkey in there!  Even get Iran in there!  Cut the deals and stop running to NATO for permission!), so is the goofy nuclear-free-world nonsense.  He keeps trying to recast the problem so it seems like we're being flexible while, foreign policy-wise, he's just as rigid and unimaginative as Bush and the neocons were.  This is not community consensus building here, this is deal-making--real politics.

So yeah, I cut the deals to lock in China at today's prices (higher than in 2005, when I first proposed, but there you have it). And then I'd make other breakthroughs possible on diplomacy and economics, like attracting a good-sized chunk of that money they've accumulated to revitalize myself.

Oooh! You'd say. Taking money from our betters?  We took money, and lots of it from the Brits after two wars with them. We went a long way to making China what it is today by encouraging its return to the world and encouraging and enabling and accepting its export-driven rise (allowing them to do to us what Japan and South Korea did before), so I have zero problems tapping their reserves to rebalance the global economy directly by revitalizing my economy.

Plus, long term I love my country's chances and find China's kinda scary by comparison, so no, I'm not threatened by an even closer economic embrace.  I know exactly what America is capable of, and I trust in our resilience completely. I'm just being uber-realistic here on what "rebalancing" really means, where I think a lot of people are not being realistic whatsoever (just cut taxes and we're home free!).

So when we do this passive-aggressive hedge, we not only threaten our banker, we threaten the key investor source going forward, and that's just not thinking in a grand strategic way (which most dumbass types think means thinking ahead about possible wars and possible opponents and little else), even as it may make sense from national security's narrow perspective.

But again, if you want to think truly strategically, it's thinking about war but only within the context of everything else--which is looming large right now.

8:47AM

Strange days

Economist cover story on coming wave of Chinese takeovers.

As the chart shows, China's outward stock of FDI (accumulated overseas foreign direct investment) remains low, by historical standards.  But since it's got the money, it's naturally going to rise.

Fascinating really:  you can see the decline of the British empire, then the US stepping in to fund so much of the world post-WWII, and then our own progressive decline as the rest of the West recovered, then Japan rose (and fell), and now China rises.  Naturally, some will wish to make the comparison of the decline of the US "empire" with that of the Brits', but our system was never set up to maintain dominance.  It was set up to encourage the rise of others peacefully, which it's done (65 years of no great power war and counting, the biggest increase in human wealth/income ever seen, billions avoid poverty).  The world simply couldn't handle the rise of great powers--until we came along and forced a system that could. It is, without doubt, the greatest accomplishment of any great power in human history.

But with our success comes adjustment, especially since, in our most recent decades of encouraging globalization's rise, we got addicted to the cheap money mindset afforded us by having the world's reserve currency.  Again, granted, the rise of so many powers simultaneously in Asia is a huge accomplishment, but now we seem intent on turning that wonderful thing into something dangerous--dangerous enough to torpedo the system.

And we're alone in this quest.  NATO's new strategic concept, as summed up beautifully by The Economist, is to expect "fewer dragons, more snakes."  But we seem to reverse that equation, at least in our AirSea Battle power-projection forces (Navy, Air Force).  I realize we've been Leviathan for a long time, but we're setting ourselves up for hedging/containment/struggle with our bankers--truly an awkward choice.  

And we're sending these tough signals at a time when it's clear, if we're going to tap inbound FDI in coming years, we best figure out how to accept it from China, lest we go into a funk that calls into question all manner of met responsibilities around the world.  

China is most definitely cheating its way to the top, just like we did in the 19th century, and more recently in the obviously mercantilist rise of both Japan and South Korea.  We imagine them cheating their way right past us, but, as history has shown, it's one thing to dig stuff out of the ground, make steel and then build buildings and infrastructure, but it's quite another thing to dominant innovation-based industries.

China has its way of taking over Western companies, and the flavoring smells of all sorts of legacy communist mindset (meaning, state in charge), but what is the great success rate here? Not as high as imagined.  They have no secret capabilities, just secret plans they imagine are unique and unfathomable. They are neither.  

The more China reaches out and tries to own, the more it will become subject to global rules, just like any other firm that operates effectively.  If China chooses politics over efficiency, its "reign" will be historically short, and its vast pool of money mostly wasted.  

We can pull for such an outcome--most definitely.  But it's a cutting-off-our-noses-to-spite-our-face logic.  We can benefit from China's money.  Indeed, it seems hard to imagine our recovery without further integration with those to whom we've sent so much money, thanks to our deficit spending.  It will not be an easy path. We'll be working out this clash of cultures mentally in movies, TV and books for years to come, just like we did with the great Japanese "threat" that preceded. The only real difference here is size--as in China's market and wealth and our responsibilities and debts.  

So no, at this time in history and globalization's evolution, I wouldn't be arguing for the U.S. to be planning and preparing openly for war with China (how else do you describe the AirSea Battle Concept?), no matter how carefully I hedged my language. Everybody knows what we're capable of, and that we have the only great-power military in the world with any sort of hardcore recent combat experience (and lots of it). By doing this, we invite uncertainty at unacceptable levels and risk China's long-term effort to shut us out of Asia defensively, because, yeah, a rising power of that size and strength deserves its place in the world--not merely the small space in its own region that we offer it. Did Britain have military bases surrounding the U.S. during it's rise in the late 19th century?  Did it constantly get up into our grill?  No, it was more sensible than that and we should be too.

China's integration into the global economy enters a whole new phase now. We can accept that and seek to shape it--hopefully to our own short-term economic advantage, or we can play long-term blocker, and watch the money and the relationships go elsewhere.  

Europe isn't preparing for war with China, but we are.

8:26AM

China taking big step into the normal world

As someone who spent his youth studying communist systems, this is a big deal that popped out at me yesterday in the FT.  For all the chatter about the PLA getting more bold, etc., this says they just lost out on a major point of internal control.  The winners?  Western businesses that get in, Chinese businesses and wealthy who can now take advantage, and frankly, the Chinese people in general because this says China is becoming that much more like everybody else on a mundane subject that nonetheless has long been a source of huge anxiety/security for the military.

China is opening up its airspace to small commercial and private aircraft:

China plans to open its airspace below 4,000 metres to civilian aircraft, a decision that is likely to open up one of the world’s largest untapped markets for corporate and other private aviation.

The Central Military Commission – the supreme institution governing the People’s Liberation Army – and the state council, China’s cabinet, said in a policy paper that low altitude airspace would be gradually opened to private aircraft, according to people who have seen the document and reports posted on the websites of the defence ministry and the state council.

Helicopters and light aircraft are virtually absent from Chinese skies because of extremely tight military control over all airspace and restrictive regulations that require all private aircraft flights to be approved in advance by military and civil aviation authorities, which can take weeks or longer.

“Right now it is basically impossible to use general aviation aircraft in China and some aircraft owners are already pushing the envelope by flying without permission,” said Jason Liao, chairman and chief executive of China Business Aviation Group, who has been lobbying for the past decade to get Beijing to open China’s lower altitude airspace.

“This is a huge step for China and almost certainly means the country will eventually become the second-largest market in the world for general aviation aircraft like helicopters and turboprop aircraft [after the US].”

At present the PLA has the final say over the use of China’s airspace and often schedules air drills and weapons tests at short notice, severely disrupting commercial aviation operations and exacerbating the country’s chronic flight delays.

According to the policy paper any aircraft flying at 1,000m or lower will be able to take off and fly without any prior approval or paperwork.

And you thought only billionaire Bruce Wayne could fly his planes over China without prior approval!

Really a big deal, of course, for the industry, but - again - a very positive sign of China opening up and trusting its public and its own secure standing in the world a lot more.

And what will be ever cooler to watch is how the Chinese, with their new found wealth, will go after new ideas, like maybe this flying-street-legal car from Terrafugia:

That's a core concept of mine, the old New Core sets the New Rules.  China is still very frontier in a lot of economic ways.  Biases aren't yet established, so the wild-and-wooly that might not fly in the U.S. for this or that reason, could break through that much faster over there, because China's got that brave new world vibe going on.  So I could easily imagine the right rich Chinese industrialist saying to himself, "I've gotta have that flying car!" and booyah!  All of a sudden there's a market that over times doubles back this way, making the idea that much more believable/acceptable in our market. 

We've been THAT market for the world for so long that we'll really be shocked by somebody else stepping in and playing that role more and more.  Japan's been that country for us a little bit in certain technologies, but China is going to play that role big time, if for no other reason that it's undergoing such explosive urbanization, building something like cities for half a billion people in an historical blink of an eye.  When you're doing that much from scratch, you set the new rules, the new standards, the new tastes, the new technologies, the new breakthroughs, the new everything.  

This isn't just an opportunity for Western firms to make money, this is a chance for America to learn something at a point when we need new ideas, new competition in such thinking, and new spurs to our own inestimable ability to reinvent ourselves.

9:49AM

WPR's The New Rules: Globalization's Massive Demographic Bet

By calling the Chinese out explicitly on their currency manipulation in his concluding address to the G-20 summit last week, President Barack Obama may have torpedoed his relationship with Beijing for the remainder of what China's bosses most certainly now hope is his first and only term. Burdened by a Republican-controlled, Tea Party-infused House, and bathed in hypocrisy thanks to the Fed's own, just-announced currency manipulation (aka, QE2), Obama seems not to recognize either the gravity of his nation's long-term economic situation or the degree to which his own political fate now hinges on his administration's increasingly stormy ties with China. 

Read the entire column at World Politics Review.

10:16AM

Chart of the day: Transparency International's annual corruption index

Interesting map from Economist based on Transparency International's annual corruption perceptions index.

The usual Core-Gap breakdown:

  • Other than Core island Israel, basically all least-corrupt countries are Old Core west and east.
  • The middling countries are either neighbors to Old Core (EE) or New Core (South Africa) and its neighbors.  Exception is oil-rich PG majors inside the Gap.
  • Virtually all of the New Core are considered somewhat corrupt.  No surprise, these are booming places and boomers tend to have their share of corruption.
  • All the truly bad situations are Gap countries.

Typical of the map and my biases over the years, much of Africa surprises by not being too bad.  If there is one great mistake I've made on trends analysis, it's been to underestimate Africa's potential for positive change.

 

10:26AM

This week in globalization

 

Clearing out my files for the week:

 

  • Martin Wolf on why the US is going to win the global currency battle:  "To put it crudely, the US wants to inflate the rest of the world, while the latter is trying to deflate the US."  We win because we have infinite ammo.  But better that we come, per my Monday column, to some agreement at the G-20. 
  • Sebastian Mallaby, also in FT, says that, despite the current currency struggles, the "genie of global finance is out of the bottle" and not to be stuffed back in.  Wolf had noted $800B capital inflows to emerging markets 2010-2011, which is gargantuan, thus the crazy struggle of some places to keep their currencies low.  As for America stopping China from buying US bonds in retaliation for our not being able to buy Chinese assets?  China holds only about one-third of the US T-bonds abroad ($3T total), so it can buy all its wants from others in the system.  There is no turning back, he says.
  • Meanwhile, the Pentagon makes plans to turn back the clock on the globalization of defense manufacturing.  A new spending bill provision--inserted at DoD's request--includes the power to exclude foreign parts suppliers (read China). Just about every US-based defense firm uses offshore suppliers, so this is going to get very expensive very fast.  It'll be a lot harder to find that $100B in savings over five years. This is almost a fifth generation warfare version of shooting yourself in the foot--first, before the other guy can.  China does nothing here, that frankly we shouldn't be able to handle, but we move down a path that instantly adds a significant tax to everything we buy in the growing-by-leaps-and-bounds IT realm.  One hopes there's a half-billion for that American rare earths mining co. that's looking for a new investor.  Interesting how China's becoming vulnerable to, and dependent on, so many unstable parts of the world for resources, and we're going to cut off the tip of our IT nose to spite our face.  I can imagine a cheaper way, but that would be so naive in comparison to spending all this extra money.
  • China continues to buy low, as a ruthless capitalist should. Giving us a taste of what it could be like if we don't get too protectionist, it's buying up Greece's "toxic government bonds."--and plenty more in Europe. All of the EU is getting a taste, says Newsweek, as Chinese investors are snapping up bankrupt enterprises and--apparently--putting people back to work.  China also, like a ruthless capitalist, seeks to make bilats reduce the chance of EU-wide restrictions on its trade. Old American trick.
  • Another sign of globalization on the march:  emerging economies buying up food and beverage companies in the West that would otherwise naturally be targeting them for future expansion. Bankers expect the trend to continue.  Gotta feed and water that global middle class that keeps emerging at 70-75m a year.  Emerging economies are buying up the companies from equity firms that had previously bought them during down times.
  • Great FT story on how Turkey has the Iranian middle class in its sights.  Long history of smuggling inTurkey dips a toe in, would like to drink entire tub eastern Turkey.  Sanctions hold up what could be a major trade, so the black-marketing local Turks mostly smuggle gasoline--and a certain amount of heroin.  But the official goal is clear enough:  be ready to take advantage whenever Iran opens up.  A local Turkish chamber of commerce official floats the notion of a free trade zone at the border. Those 70m underserved Iranian consumers beckon.
  • India's airline industry can't keep up with demand generated by itsGet me planes and pilots--now! booming middle class. Boeing says Indian airlines will buy over 1,000 jets in the next two decades. Already they're forced to have one-in-five pilots be foreigners.
  • Fascinating WSJ story on how China's car economy is going wild, with ordinary Chinese exploring the freedom of the road.  Drive-in service is taking off, weekend jaunts mean hotel business, etc. In past visits I saw a lot of this coming down the pike.  Just like when America's car culture went crazy after WWII, this is a serious social revolution.


Don't forget your meal of eternal happiness!

  • Funny thing about all this South China Sea hubbub: "Corporate ties linking China and Japan have never been stronger," says the WSJ.  Serious driver?  Japan is exporting its mania for golf to China--the fastest growing market for the sport.  It's what middle-class guys do.


Coming soon: the "golf wars"

 

  • WSJ story on Vietnam creating its own Facebook to keep a closer eye on its netizens.  Defeat the anti-capitalist insurgents!What caught my attention: "The team has added online English tests and several state-approved video games, including a violent multi-player contest featuring a band of militants bent on stopping the spread of global capitalism."  I would say we finally won the Vietnam War.

 

9:00AM

Quick! Spot the resource war!

I know it's in there somewhere, just waiting to break out!

 

10:02AM

WPR's The New Rules: Defusing the Global Currency War

After having cooperated to an unprecedented degree -- on stimulus spending and new bank rules, for instance -- to avoid a global meltdown these past two years, the world's major economies now appear ready to turn on one another with truly self-destructive vengeance. Poorly informed Americans are increasingly convinced that free trade pacts -- and not our uniquely high corporate tax rates -- are responsible for sending jobs overseas, and they want to see China punished with tariffs on its imports for its undervalued currency. With China's neighbors intervening heavily to keep their own currencies from rising too high in response, global chatter about the unfolding "currency war" has reached a fever pitch. Is this any way to manage a tenuous global economic recovery?

Read the entire column at World Politics Review.

10:15AM

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.

9:10AM

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.

12:01AM

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.

12:50PM

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.

12:10AM

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.

12:09AM

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.