08.27.08
Posted in Economic Analysis, Exchange Rates, Finance, Government Resources at 3:43 am by Administrator
If you ever lived through a period of hyper-inflation, you know the effects on an economy. Savings are lost, basic necessities become scarce and credit disappears. Ending a period of high inflation always requires major contractionary policies, policies that inevitably hit the poor and weakest members of society the hardest.
I remember one time visiting in Brazil when the prices changed from the morning to afternoon. I was completely dumfounded by the currency — there were several varieties floating around and in one case the government just added six zeros to the old currency. One curious fact that I realized is that in high inflation economies, there are no coins. The metal in the coins rapidly becomes more valuable than the currency and bad money (cheap paper bills) drives out the good (copper or even aluminum).
The New York times reported this week about the crippling effects that inflation has had on Vietnam.
The country’s fledgling stock market, which had been booming a year ago, has fallen in volume by 95 percent and is at a virtual standstill.Squeezed on all sides, people are cutting back on food, limiting travel, looking for second jobs, delaying major purchases and waiting for the cost of a wedding to go down before marrying.
More importantly, the downturn has crushed hopes for a better life.
The mood in Vietnam, after years of upward mobility, is tense, said Kim N. B. Ninh, the Asia Foundation’s country representative. “I think people are pessimistic,” she said. “You sense a tougher environment, a more restricted environment, a more pessimistic environment. It’s a moment of turmoil, I think.”
So how does the international businessperson cope with the highly inflationary atmosphere? The answer to remember that “Cash is King.”
You certainly cannot extend credit in the local currency. You also have to check that your banks will continue to extend trade finance — if conditions worsen, even respected guarantee agencies like EXIMBANK will go off cover for a country.
All transactions have to be in a stable international reserve currency — usually the US dollar. Obviously a currency hedging strategy is useless with such volatility. But even be careful of contracts in dollars backed by dollar deposits from within the country. Argentines woke up in 2002 to find that their dollar deposits were frozen –even to pay for international contracts.
Lastly, rely on your customers to figure out how to handle the inflation and resulting foreign exchange problems. Frankly in the 1990s and early 2000’s the average taxi cab driver in Buenos Aires or Sao Paulo knew more about foreign exchange strategies that all but a handful of traders in London or New York. If you work with your established customers during the down times, they will remember you when the market stabilizes again. It always does return — the question is just how long until “again” arrives.
Sphere: Related Content
Permalink
07.31.08
Posted in China, Economic Analysis, Trade Policy at 4:12 am by Administrator
The media is reporting today that the latest round of WTO talks has (again) collapsed. Having been involved with trade talks since the mid 1970’s, my reaction is ‘it ain’t over until its over.’ Talks may string out over time but they eventually pick up where they left off.
That being said, today’s news comes at a difficult moment for the world economy. The US is finally accepting that it is in recession (housing prices nationwide down 16% yr/yr and where I live 35%) and there is a real credit crunch at this moment. Europe, also suffering from a bursting real estate bubble and run-up in oil prices, also faces a period of slow growth — perhaps even a downturn. It’s at times like these, that our political leaders have to take brave steps of keeping open and expanding markets despite domestic political pressures from declining industries.
It is particularly ironic, however, that China and India seem to bear the responsibility for the latest breakdown in the trade talks. Their economies have the most to gain and the most to lose in this period of economic uncertainty. Both have just emerged on the world stage as important exporting nations. With that newfound status playing as equals on the stage of the major industrialized countries, comes the responsibility to resist domestic political pressures to protect traditional markets. Having benefited from GSP and other programs, their products have had for years preferential access to developed country markets with little required in return. To go the next step, the countries will have to make meaningful concessions, particularly in agricultural markets. Ag markets worldwide have been the last to lose protection, but trade barrier reductions in this area that will benefit consumers worldwide, particularly as we see food commodity prices soar and shortages develop.
There is no question that overall the world is better off for having undertaken over a half-century of tariff and trade barrier reductions. We are a much more interdependent world and political relations between countries have strengthened as trade ties have increased. It’s always a hard sell to the public, but our political leaders know the benefits. And that is why we will have to complete these trade talks, eventually.
Sphere: Related Content
Permalink
07.02.08
Posted in China, Intellectual Property, Negotiating, Standards, Taxes & Tariffs, Trade Policy at 11:40 pm by Administrator
International Trade is again an issue in the Presidential campaign. John McCain was in Colombia this week and spoke out in favoring the Free Trade Agreement (FTA) with the country, calling Obama and the Democrats “protectionists”. The most famous FTA, the North American Free Trade Agreement (NAFTA) was a major issue in the 1992 campaign. H. Ross Perot pilloried NAFTA claiming there would be a “great sucking sound” as Mexico would siphon off jobs from the US to Mexico. That never occurred, and although there were never the major job gains that the George H.W. Bush promised, the US clearly has benefited from tremendous increase in bilateral trade.
How do FTAs work? The countries involved (this could be bilateral as in the case of Chile-US or multilateral as with Central America and the Dominican Republic –CAFTA-DR– with the US) negotiate on both tariff levels and codes of conduct. Most tariffs are reduced to zero, but inevitably some politically sensitive products are excluded (so most are “Almost Free Trade Areas”). On codes of conduct, the countries negotiate on issues like intellectual property, standards, financial services, etc. using the original NAFTA agreement and the WTO codes as a starting point. The resulting agreements have to be ratified by the respective legislative bodies. (In the US, under the negotiating authority, the House and Senate approve it on an up/down vote (no amendments allowed), as opposed to other international treaties which require a 2/3 vote of the Senate. Once the agreements are ratified the governments must pass implementing legislation to bring national law into conformity with the FTA. The FTAs also provide for consultations and dispute resolution mechanisms to ensure that both sides are living up the bargain.
For the US, the FTA is usually a great deal since the US has relatively low tariffs and already has strong laws that the codes cover. The pending agreement with Colombia is a case in point. Virtually all of Colombia’s exports enter the US duty free and Colombian companies already enjoy all of the protections in terms of intellectual property, investment guarantees etc. On the other hand, US exporters face considerable tariff and non-tariff barriers going into Colombia. Clearly the US has lots to gain from an agreement with our South American partner.
Why then is there such opposition from groups like unions and environmental groups? The unions may affected by job losses for union members who are protected from international competition. Frankly, with greater and greater trade, the marginal effect of an FTA with Colombia or South Korea on union jobs will be so small that it would be hard to detect by most statistical analyses. Nevertheless, manufacturing jobs are being outsourced (largely to countries with no FTAs, like China and India) and the unions are looking for scapegoats. On the environmental front, there is the concern that increased production will result in increased environmental damage. The FTA’s all contain environmental clauses, not as strong as some enviros would want, but considerably more that there are in the absence of FTAs (again China and India are prime examples.)
We are in an increasingly interconnected world and FTAs increase the interconnectedness. While there are some inevitable unintended results from FTAs, overall the global economy benefits.
Sphere: Related Content
Permalink
06.11.08
Posted in China, Economic Analysis, Exchange Rates at 4:01 am by Administrator
The Bank of China again raised the amount of cash that banks must keep on hand. The reserve requirement limits the amount that a bank can on-lend. At its current level of 16.5%, a bank can lend out approximately six times the deposit base. Until mid-2003, the level was only 6%, allowing the banks to lend out 16 times the deposits. The authorities are trying to limit money supply (M1) growth and this rapid increase in the reserve requirements has done that. Interest rates (both lending and deposit) are up about 100 basis points although inflation remains a concern, particularly in the wake of skyrocketing prices for crude oil and other commodities.
Usually Central Banks regard changing reserve requirements as a sledgehammer approach to controlling inflation. Why did China pick this policy? The basic answer is that the continuing trade and current account surpluses are creating challenges in controlling the money supply. When a dollar comes in from an exporter, the Bank of China is required to convert it into yuan, thus increasing M1. With such a large and continuing surplus, the normal monetary policy controls (buying and selling of treasury notes) are overwhelmed. China has also been reluctant to use the other instrument of a major revaluation of the currency. (Note: the Peoples Bank of China has put the Yuan on a 15% percent annual appreciation course; nevertheless most observers believe that the currency continues to remain undervalued.)The change in reserve requirements is a much more blunt instrument and has effects of tightening credit, taking some wind out of the overheated economy. As noted in previous posts, watch out for major economic contractionary measures after the Olympics.
Sphere: Related Content
Permalink
05.19.08
Posted in Economic Analysis, Government Resources, Strategies, Taxes & Tariffs at 5:12 am by Administrator
I was speaking with the site manager for a large corporation that has a significant R&D component. The Company has steadily off-shored manufacturing of its sophisticated product and little traditional manufacturing is left in the US. What is new is that the company is being tempted to offshore its R&D jobs as well. In this case Ireland is offering incentives of € 20,000 per research worker. I remarked to him that that was “real money” — the incentive being in Euros instead of dollars. Another factor was that Ireland has a low corporate income tax rate and that in particular moved decisions at the US headquarters
There is an on-going discussion about whether offering incentives produces real long-term economic growth. There are certainly lots of examples where the jobs never materialized or the industry hit hard times later on and the new plant shut down. On the other hand there are examples like the German and Japanese automakers who opened sites in the US South, bringing jobs and prosperity to those regions.
There are several issues to be addressed — does the industry fit the development strategy of the region? Putting a heavy polluting plant in Northern California would be a non-starter. Trying to develop a Web 2.0 cluster in an area of the country where few such companies exist may not result in lots of jobs.
Another issue is the net effect on government revenues – i.e. taxes. Some countries and localities have given such large concessions that the result is that the government unit has greater costs with a permanently lower income level (look at some of the oil drilling concessions). On the other hand, a good project will produce not only more jobs in the long run but also greater prosperity for the community and a larger tax base. With the aid of economic models, those contributions can be quantified.
Do incentives work? There are lots of examples where they have made an impact but the government authorities must carefully craft a package appropriate to the economic development strategy.
Sphere: Related Content
Permalink
05.14.08
Posted in China, Economic Analysis, Oceania Cruise at 3:59 am by Administrator
Taiwan made an important historical choice on March 22 when it elected Ma Ying-jeou, former Nationalist party mayor of Taipei, as its new president. The country is well along a path as a mature democracy, putting back in power the party that had been associated with the dictatorship of Chiang Kai-Shek. Ma won handily 58 to 41% as the electorate strongly supported his policy of closer ties to Beijing.
The Taiwan economy finds itself in a peculiar place. The self-imposed limits on doing business with the mainland, which date back to the Cold War, had limited economic opportunities. It is estimated that almost a million Taiwanese live again in the PRC, with the largest concentration in Shanghai. On paper, Taiwan is the number three foreign investor in the mainland but many independent observers believe that the amount is much larger since Taiwanese companies have had to resort to setting up shell companies in Hong Kong and other countries to get around the official limits on investment in the PRC. Taiwan’s growth this decade has been strong, but many look with envy toward the explosive growth on the mainland. With a higher level of English literacy, Taiwan should be a portal, not a detour, to doing business with China.
My visit to Taiwan occurred two weeks after the elections. The country seemed confident of moving ahead, but like its neighbors it has to deal with the problems of pollution and congestion. The freeways and major highways, many of which are now 40 or 50 years old, are clearly inadequate. But the living standards are clearly on a par with the other Asian democracies and this most recent election bore testament to the strength of democracy in Taiwan, something was in doubt up to only a decade ago.
Sphere: Related Content
Permalink
05.04.08
Posted in Economic Analysis, Oceania Cruise at 11:16 pm by Administrator
On the Oceania Cruise, we stopped in Hiroshima, Kobe and Okinawa. Kobe offered insights into Japan’s economy. The area has always been a major sea-port and the new airport juts out into the Bay. We took the latest, fastest and most energy-efficient version of the bullet train to Kyoto. It is another symbol of the technical prowess of Japanese engineering. Compared to the German, French or Spanish fast trains, the Japanese one is quieter; the connections between cars are hardly noticeable; the overall feel is smoother. While the latest version of the bullet train goes 5% faster, it uses 35% less energy due to aerodynamic features.
The major change that I noted since my last visits to Japan is the increase in upscale spending. Kobe has always been noted as a sophisticated city and the department stores in the city center carried all of the world noted luxury brands. You could see that orinary citizens dress well and wear brand-name accessories.
Japan emerged from the doldrums of the 1990’s by making some tough economic reforms. The government streamlined both regulation and the bureaucracy. The banking sector wrote off many bad debts — including real estate loans that had been on the books for years. (I would encourage our economic policy makers in the US to look at that example. The current trend is to postpone the day or reckoning in the US.) All of the changes and reforms coincided with the global upswing from 2004-2007 and Japan prospered. Most importantly the ratio of exports to GDP rose significantly during the period. Japan had returned to its traditional export-led economic model, except that this time it was without the heavy-handed “guidance” from the Ministries in Tokyo.
As I noted before, Japan is spending its money on consumption, moving it a bit closer to the US model. The Japanese are now enjoying the fruits of their hard work. In the pure economic sense, saving too much (Japan over the past fifty years) is a drag on the economy as well as saving too little (the US since the 1980’s). Allowing the markets to find balance is everything in economics
Sphere: Related Content
Permalink
Posted in Economic Analysis, Oceania Cruise at 11:16 pm by Administrator
On the Oceania Cruise, we stopped in Hiroshima, Kobe and Okinawa. Kobe offered insights into Japan’s economy. The area has always been a major sea-port and the new airport juts out into the Bay. We took the latest, fastest and most energy-efficient version of the bullet train to Kyoto. It is another symbol of the technical prowess of Japanese engineering. Compared to the German, French or Spanish fast trains, the Japanese one is quieter; the connections between cars are hardly noticeable; the overall feel is smoother. While the latest version of the bullet train goes 5% faster, it uses 35% less energy due to aerodynamic features.
The major change that I noted since my last visits to Japan is the increase in upscale spending. Kobe has always been noted as a sophisticated city and the department stores in the city center carried all of the world noted luxury brands. You could see that orinary citizens dress well and wear brand-name accessories.
Japan emerged from the doldrums of the 1990’s by making some tough economic reforms. The government streamlined both regulation and the bureaucracy. The banking sector wrote off many bad debts — including real estate loans that had been on the books for years. (I would encourage our economic policy makers in the US to look at that example. The current trend is to postpone the day or reckoning in the US.) All of the changes and reforms coincided with the global upswing from 2004-2007 and Japan prospered. Most importantly the ratio of exports to GDP rose significantly during the period. Japan had returned to its traditional export-led economic model, except that this time it was without the heavy-handed “guidance” from the Ministries in Tokyo.
As I noted before, Japan is spending its money on consumption, moving it a bit closer to the US model. The Japanese are now enjoying the fruits of their hard work. In the pure economic sense, saving too much (Japan over the past fifty years) is a drag on the economy as well as saving too little (the US since the 1980’s). Allowing the markets to find balance is everything in economics
Sphere: Related Content
Permalink
04.29.08
Posted in China, Economic Analysis, Oceania Cruise at 4:28 am by Administrator
On the surface, China remains a Marxist-Leninist state. Yet the economic system has lost most of its ideological content. Here are a few scenes:
At the Temple of the Jade Buddha, monks chant while the courtyard is filled with ordinary people — old and young — burning incense sticks that waft their prayers above.
The Maserati dealer shows off a beautiful yellow sports coupe and competes with the Ferrari dealer next door. 
Meanwhile, outside the street vendors, those peasants from the countryside without work visas for the City, make a few Yuan shining shoes or selling trinkets. Meanwhile down the road, the Shanghai Aesthetic Surgery Center does a booming business.
The City boasts incredible vistas with daring buildings. Yet if you look up towards the sky, the view is obscured with hundreds of wires. Wireless communications have supplanted the old telephone lines but what to do with the legacy of the communist rule?
Sphere: Related Content
Permalink
Posted in China, Economic Analysis, Oceania Cruise at 3:25 am by Administrator
Sailing into Shanghai’s harbor was an amazing sight. By the entrance from the ocean, the banks of the Yangtze River were littered with the relics of the heavy industry investments of the Central Planning years under Mao and early years of Deng Xiao Peng. As we grew closer to the City, newer construction started to appear. When we rounded the final corner, the massive and daring buildings of new Shanghai appeared.
Shanghai is busy and bustling. As you look up and down busy Nanking Road, people are everywhere, shopping and carrying out business. Along the way, buildings from the Mao era and from before the revolution are being gutted and restored. New highrises are going up by the dozens.
Beside the new Shanghai, there are symptoms of other social problems. The Chinese authorities attempt to slow the rural to urban migration by requiring work visas before the peasants can look for work in the City. As a result, there is a vigorous informal economy. Along the waterfront by the Bund and Nanking Road are hundreds of street vendors selling all manner of goods. We got a number of “Mao” watches with the face of the Chairman and a waving hand — taken from the wind-up Mickey Mouse watches we had as kids.
As with all the cities on our Asia journey, traffic is overwhelming. New freeways are going up but there are already too many vehicles. One can smell the exhaust everywhere. While the new cars must meet strict standards, every effort is made to keep older vehicles running, particularly for delivery vehicles.
Shanghai is the symbol of new China – rapid growth, highly populated and facing major environmental challenges.
Sphere: Related Content
Permalink
« Previous Page — « Previous entries « Previous Page · Next Page » Next entries » — Next Page »
