NEWS,08.08.2012

Will Manufacturing Make China a Democracy?

 

The other day, I had lunch with an economist I respect and admire. I asked him, what would it take for China to become a modern democracy and build a strong middle class? OK. I didn't ask him that. I told him that China would need strong institutions of civil society, and a deeper sense of Social Contract to become a stable modern democracy with a dynamic middle class.In America's early history, we had strong institutions of civil society, such as free press, good education, and strong national identity. We wrote individual freedoms into our Constitution. We had respect for the rule of law, not much bribery, respect for science, and technical progress. We had social and economic mobility, opportunity and fairness. Well, at least for white males who owned property. But you see where I'm going with this. A robust civil society gives voice to workers, families and communities. It serves as a counter-balance to wealthy and powerful economic interests.China has a rich culture and strong national identity, but income inequality is growing in China, no free press, no unions, no environmental groups, and no real political system to make tough tradeoffs between wealthy powerful economic interests and the public good. Workers have no economic bargaining power. China's leaders have limited respect for the rule of law, and little willingness to enforce rule of law. China has done an exceptional job of acquiring the means of production. Not so much for human rights, labor rights, public health, or environmental protections. My economist friend told me, "No! Not buying it." China will modernize simply through economic transformation. I'm not sure what he meant, exactly. Maybe he meant that industrialization and democracy were the same thing, more or less. You get one with the other. My point was that you don't get one with the other. You might get a banana republic. You might get Egypt or something like Egypt, or Victorian England without a history of individual freedoms. Russians got plutocracy, corruption, murdered journalists, and a political system with zero credibility. You might get a lot of things, depending on what kind of civil society you have. National politics is really a contest between short-term investor interests and long-term public interests. Investors will act in their short-term interest. Public good often works in the long term. Market forces will not protect public good. For that, you need an effective political system. Colombia is a poster child for dysfunctional political and economic systems. Their culture and national identity are proud enough, but working Colombians are kidnapped, intimidated and killed routinely, as punishment for political involvement. Prosecutors, judges and justice ministers live in the shadow of violence. The last thing Colombia needed was a so-called Free Trade Agreement, which increases rights and powers for global businesses and weakens rights and powers for civil society. Now, Colombia faces worsening inequality and more social disruption. Japan, Germany, Korea, Singapore, Taiwan, and other modern democracies have strong social cohesion, strong institutions of civil society and strong middle classes. These outcomes are not accidental. They are the result of deliberate political choices these countries made. I asked my friend about China becoming a modern democracy. My real question wasn't about China, or Colombia, for that matter. I was really asking about America. What happens to our prosperity, our middle class, and our institutions of civil society? In the last 30 years, our civil society has weakened. Political and economic power are concentrating in the hands of the top 1%. Our respect for science has been replaced with ideology and denial. We disparage public education, and public employees. Our social cohesion is so weak that we envy our neighbors who still have pensions. Rule of law is becoming situational - it doesn'treally apply to big banks or foreclosure robo-signers. Political campaigns are so expensive that elected officials literally cannot afford to govern for the public good. They can only govern for the wealthy and powerful. Within this 30-year decline for civil society, our so-called free trade policy steadily lowers the bar for democratic political process, substituting global business interests for public interest.In his new book, Nobel laureate economist, Joseph Stiglitz, calls globalization, as we've managed it, "global governance without global government." In Western democracies, we solve tough social and political problems through a political process. However, in so-called free trade agreements, global businesses write the rules, then we send disputes to anonymous tribunals. Democratic problem-solving does not happen in the trade agreements. It won't happen in Colombia. I don't see how it will happen in China. It's becoming more difficult in America. This is really about political and economic power. In the conclusion to his book, Stiglitz offers two possibilities. One is that we in the 99%, can recognize our predicament and reclaim our political birthright. Alternatively, the 1% can recognize their "self-interest, properly understood," and lead the way back to a sustainable democracy. Stiglitz traces this back to Alexis de Tocqueville in 1835. Americans understood a basic fact: looking out for the other guy isn't just good for the soul - it's good for business. The top 1 percent have the best houses, the best educations, the best doctors, and the best lifestyles, but there is one thing that money doesn't seem to have bought: an understanding that their fate is bound up with how the other 99 percent live. Throughout history, this is something that the top 1 percent eventually do learn.Yeah. That would be good.

 

Blair concerned about UK exit from the EU

Former British Prime Minister Tony Blair told a German newspaper he was "deeply worried" Britain might opt to leave the European Union in a referendum, particularly if too many powers were transferred to Brussels without democratic legitimacy.Talk of Britain leaving the EU was once far fetched, but the euro zone debt crisis and the prospect of the currency bloc forging a closer political union have convinced some senior UK politicians it is time to demand a new relationship with Brussels.Current Prime Minister David Cameron said last month it was a "perfectly honourable position" to call for an immediate referendum on Britain's EU membership - something polls show a majority of British people would vote to reject - but that he would never campaign for an "out" vote because leaving the EU would not serve British interests.Blair told Die Zeit it was clear that the euro zone crisis would lead to a "powerful political change of the EU", adding: "And on this point, I am deeply worried that Britain could decide by referendum to leave the whole process.""If more competences are transferred to the EU, then its democratic legitimacy must be built up too," he said, according to a German transcript of the interview which is due to be published on Thursday. "Britain must play a strong role in this. Because we need a balance between European institutions and the nation states.""If this is done wrongly, we could create a political crisis that could become just as a big as the euro crisis. People will not go along with the abolishment of the nation state."Cameron has tried to stave off demands for an immediate vote on Britain's EU membership by holding out the prospect of a referendum some time in the future and by promising a new relationship with the EU.He vetoed a new EU fiscal treaty in December, forcing euro zone states to set their new rules outside the formal EU structure, while using its institutions.Sceptics say EU regulations shackle Britain's $2.5 trillion economy and that leaving the 27-nation bloc would allow London to restore its sovereignty while saving billions of dollars in membership dues.However, supporters of membership argue Britain would lose influence if it left the EU, its biggest trading partner, and that its economy would still be influenced by rules made in Brussels anyway.

HK Airlines to quit London service

 

Hong Kong Airlines will end its service between Hong Kong and London due to poor demand, reports said on Wednesday, another blow to the carrier after authorities banned its expansion. "The last flight from London to Hong Kong will be on September 10," Hong Kong Airlines General Manager Albert Chan told Dow Jones Newswires, meaning the service will have run for just seven months. The airline uses three Airbus 330-200 planes for the flights which are fitted exclusively with business-class seats. The service costs around HK$10m ($1.3m) a month to run, the South China Morning Post newspaper reported. The airline did not immediately respond to requests for comment.The move followed an unprecedented aviation authority ban last month on the airline's expansion, limiting the types of aircraft the company can operate until the airline meets all safety requirements for operating a larger fleet.The airline said it supported the conditions, adding they were sensible for a company at their stage of growth."Given the profitability of our regional routes, we believe that we now have the optimal fleet to continue to build a business... focused on Asia Pacific," an HKA spokesperson told AFP on Monday.Hong Kong Airlines was established in 2006 and operates 21 aircraft flying to locations in mainland China and international destinations ranging from Tokyo to Bangkok.HKA flights were severely delayed and cancelled when a typhoon lashed Hong Kong last month, leaving hundreds of passengers stranded.

NEWS,03.08.2012

Argentina shows Europe how it's done

Bond payoffs are supposed to be boring, but Argentina's president is celebrating Friday's final $2.3bn payment on a bond given to people whose savings were confiscated a decade ago, calling it a lesson for European countries now mired in foreign debt. The nation's economic disaster left thousands with a grim choice after the government seized their dollar-denominated deposits to stop bank runs in 2002. They could switch to devalued pesos and regain access to what was left of their savings, or accept a piece of paper promising to repay the money in dollars over the next 10 years. Few had any faith in the government's promises back then. Argentina had just defaulted on more than $100bn in foreign debt, banks were shuttered, the economy was in ruins and streets were filled with pot-banging protesters whose chants of "throw them all out" would send five presidents packing. But Argentina has mostly paid up after all, making good on 92.4% of that defaulted debt so far, including $19.6bn in US currency over the years to cancel the Boden 2012 bond. Most of the hard-luck account-holders later sold the bonds at a loss, but as the government makes its last $2.3bn payment on Friday, the few stalwarts who kept the faith have been made whole, while earning a modest 28% profit over the years. "It was good business" for anyone who got the bonds early and held them, said Jorge Oteiza, a bond trader with Banco Comafi in Argentina. "To have the same buying power you had back then isn't bad." President Cristina Fernandez praised her government for meeting its commitments and blamed multinational financial institutions for the debt crises that afflicted Argentina back then and threaten Europe today. "This is the money that the banks should have returned to the Argentine citizens," she said during a national address from the Buenos Aires stock exchange Thursday night. Showing charts and rattling off numbers, she argued that her government has shown the world how to emerge from default without imposing austerity measures, growing its economy and strengthening the social safety net. This debt relief "has given us an immense independence from the activity of the market," she said to applause from the hundreds of guests she had invited onto the exchange floor. Argentina's foreign-currency debt has dropped from a daunting 166% of GDP at the end of 2002 to a more manageable 42% of GDP at the end of 2011, said Ramiro Castineira of the Econometrica consulting firm. "If before it was a burden to shoulder, now it's just a handbag. It doesn't restrict the economy as it did in the past," he said. However, the debt has grown in nominal terms during the same period, from $137bn to $179bn. Many economists suggest the official story is misleading at best, since the government has refused to pay billions of dollars in other bad debts while borrowing freely within Argentina, taking money from pension funds, provinces, state-owned banks and the central reserve to stimulate the economy and reduce its foreign debt exposure. In her determination to make Argentina financially independent, critics say Fernandez has only shifted the debt burden onto her citizens, imposing terms that could stunt the country's future growth. For example, the government promised to pay negative 0.25% interest over ten years for the $27.9bn it took from the treasury for debt relief, the central bank said. "It's wonderful to see Argentina pay down debt, but for every dollar they're paying down, they're borrowing two or three through the other window, and increasingly from their own people," said Arturo Porzecanski, an expert on emerging markets at American University in Washington. Economy Minister Hernan Lorenzino proudly described the Argentine recipe in a column Wednesday published by Telam, the government news agency: Spurn the requirements of the International Monetary Fund and World Bank. Strong-arm the so-called "vulture funds" into accepting lower returns on their risky bets. Nationalise private pension plans, the airline and now the YPF oil company, putting their assets to use creating jobs. And tap central bank reserves to pay down international debts. Frozen out of international markets as a consequence of the 2002 default, this government made breaking their rules a point of pride, Lorenzino suggested. "At first, they called us heretics and the international community turned its back on us," he recalled. But "this government makes policies today without conceding to international pressure, thinking first of those on the inside, and later on those outside." Lorenzino has said this government will not take on more international debts. Not that it could: Friday's payoff still doesn't resolve nearly $7.5bn it owes the US and other Paris Club nations, or the $11.2bn claimed in US courts by bond holdouts. Argentina also owes millions in court judgments to US companies, and Spain's Repsol Group wants $10.5bn for its shares in YPF that Fernandez expropriated this year. Many of these investors would try to seize any newly borrowed money before it reaches Buenos Aires. Lorenzino suggested that Argentina's renegade approach makes it better prepared to confront global crises because the portion of its debt held by the private sector has dropped from 124% of GDP a decade ago to 14% last year. "This was possible only under the concept of economic independence, political sovereignty and social justice," Lorenzino wrote. But this shift from private to public debt means that the government is essentially borrowing from Argentine taxpayers and bank account holders to stimulate its economy, at rates far below inflation, which is estimated at 25% a year or more. Unless this changes soon, the money could run out and there will be few other places to turn for help. "This is no longer an 'us-versus-them' problem," Porzecanski said. "At first they went after the big multinationals, then the 'filthy-rich bondholders,' then powerful institutions like the IMF. Now it has become a fight for financial resources within Argentina. That's why I think the end is coming."

 

A Better Job Report But Challenges Remain

 

When it comes to economic data, I have been dreading the employment report issued on the first Friday of every month. And I am not the only one.For the last few years, this release from the Department of Labor has signaled insufficient job creation. It has also pointed to an increasingly segmented labor market, where the highly educated and affluent do well while vulnerable segments of society see little improvement. In the process, the unemployment crisis has gotten more embedded into the structure of the American economy.So it was a major relief this morning that the July report was a lot better than prior ones.At 163,000, job creation came in ahead of consensus expectations of 100,000. Long-term joblessness fell from 5.4 million to 5.2 million. The employment gains were broad based in terms of sectors. And average weekly earnings rose slightly.This is all good news... and especially after way too many months of disappointments. Yet, and unfortunately, it is too early to relax.The report still contains flashing yellow lights; and the future is still too uncertain with respect to both domestic and international conditions.In July, the unemployment rate edged up slightly to 8.3% despite more Americans falling out of the labor force. In fact, the participation rate declined from 64.0% to 63.7%; and the employment-population ratio, which is the most comprehensive measure out there, slipped from 58.6% to 58.4%.Then there are the compositional issues. There was little relief for those who need it most, including too many Americans who risk slipping from being unemployed to being unemployable.For example, teenage unemployment rose from 23.7% to 23.8% while joblessness among those with less than a high school diploma increased from 12.6% to 12.7% (compared to a stable 4.1% for those with bachelor degrees and higher).Put these numbers together and what you get is a picture of an economy that is healing, but doing so gradually and unevenly.So much for the past and present; how about the future?Left to its own devices, the economy would continue to heal and, concurrently, job creation would accelerate. But will they?For the improvement in the labor market to continue and broaden, America needs to minimize the risk of derailment by three clear and present dangers: the reluctance of Congress to deal with the fiscal cliff, Europe's inability to get ahead of its crisis, and a possible geo-political shock emanating from Iran.In such circumstances, it would be reasonable to expect Congress to be giving the unemployment crisis the attention it needs and deserves. Our elected representatives should be working hard on ways to accelerate the economic healing and also minimize vulnerability to these potential shocks.Unfortunately they are too polarized to do so; and it looks like they won't until the November elections are behind them, at the earliest.So despite the latest monthly improvement, America's unemployment situation will remain a challenge. And many of us will continue to nervously await the monthly data releases.