China encourages consumer spending

While Wal-Mart continues to shine in the U.S., China is creating incentives for low income farmers to spend more domestically. Although increased consumer spending may be one strategy for bolstering the economy, this video seems to suggest that rural residents in China living off of $600 per year are ready to rush out and buy washing machines.

Future of capitalism

This week, the FT is having a debate on the Future of Capitalism. Here's a sobering excerpt from Martin Wolf's opening salvo, titled "Seeds of its own destruction:"

"These changes will endanger the ability of the world not just to manage the global economy but also to cope with strategic challenges: fragile states, terrorism, climate change and the rise of new great powers. At the extreme, the integration of the global economy on which almost everybody now depends might be reversed. Globalisation is a choice. The integrated economy of the decades before the first world war collapsed. It could do so again."

The food crisis never ended

Christopher Delgado, an agricultural policy advisor at the World Bank, recently said of the global food crisis, "The food crisis has not gone away...In fact, it is coming back."

Combing through the media, it would be easy to assume that the food crisis had long ago subsided as demand for imports, commodity prices and economic growth declined. However, risks to food security and the possibility of famine are still very high in many countries. While food commodity prices have fallen from their record highs in 2007, the US Department of Agriculture forecasts that they will remain above historical levels in 2009. The combination of rising food prices, economic contraction, export/price controls and tight trade credit exposes many vulnerable countries, particularly LDCs, to serious risks of famine, poor crop yields and higher prices coinciding with falling income. This doesn't even begin to include the impact on food production by drought, land degradation and other environmental conditions; the UN recently warned that global food production may fall 25% by 2050.

Given the still prevalent risks, it is disconcerting that less is being done to combat the problems directly. Further, certain policy responses to the financial and economic crises, such as looser monetary policy in the developed world, or expropriation in countries like Venezuela, risk stoking the rising food commodity prices. Which brings me to the real danger on the horizon (beyond, of course, the human cost): that the financial, economic and food crises will reinforce each other in a vicious cycle. A food crisis is a likely second-round affect of the financial and economic crises, which in itself breeds political and economic instability, undermining the recovery process and further destabilizing the global economy.

Policy responses to the financial and economic crises are understandably driven by the need for immediate action; to stop the bleeding, so to speak. But what if the very policies necessary to bring us out of this downward spiral only reinforce it in the medium-term?

(photo from snake.eyes' photostream)

Reid Hoffman

Reid Hoffman is taking it to the streets and offers an entreprenuerial perspective on the current economic crisis. He has some valid insights, especially his idea on the highly politicized H-1B Visa.

Trade papers worth reading

Trade policy wonks have their hands full.

On Monday, the Obama administration released their 2009 Trade Policy Agenda, outlining their general strategy on trade for the next year. (Never mind that they don't have a USTR yet.) Unless you want to torture yourself, skip the 100+ page report on trade policy in 2008. Trust me, I'm speaking from experience. That said, it's definitely worth reading the five page summary on trade policy going forward at the beginning.

VoxEU has a phenomenal new e-book on the new "murky protectionism". It is absolutely fascinating reading all the way through, but at least have a look at the introduction. I'd write a much longer post on this if I could. Suffice to say that things have gotten worse since the G20 summit in November, and they could get much, much worse if things don't change.

Go check them out. I want a report on my desk by Monday morning at 8am.

Should I stay or should I go?

It's a testament to how bad things have gotten when people are already thinking about whether Treasury Secretary Tim Geithner should step down.

Kind of like Martin Wolf wondering out loud whether Obama's presidency has already failed. And that was a month ago! Think of everything that's happened since then.

Er, actually, maybe it's best not to think about...

Quantifying culture

As a student with formal training in a variety of fields, most notably anthropology and economics, I often find myself flummoxed at how drastically the two fields seem to speak past each other. This sentence gives me hope. 

One interesting bit of research suggests that "group values" cultures will export products that don't require as much impersonal contract enforcement, and thus values is part of what makes you specialize.

Besides the verb disagreement, that's one of the most intriguing ideas I've heard in recent development theory. Easterly, at his new blog AidWatch, vastly oversimplifies the research (as he openly admits) but boils the ideas down nicely. Read the whole thing.

Afghanistan: the weak link in a stronger global chain?

The war in Afghanistan may not end well for the US; history has not been kind to foreign forces. But there are signs that it will become the key linkage in the Obama administration's attempts at redefining US foreign relations.

NATO announced today that it was restoring high-level contacts with Russia. US Secretary of State Hillary Clinton said that, amongst others, Afghanistan was an issue of "mutual concern." She also expressed her support for a conference on Afghanistan that would bring together all of the key stakeholders in the region, including Iran. From the BBC:

"If we move forward with such a meeting, it is expected that Iran would be invited as a neighbour of Afghanistan," she said.

The challenges posed by Afghanistan are shared by each country in the region (whether there by geography, choice or military alliance). Beyond the obvious interest of each stakeholder in the country's success, Afghanistan may provide the conduit for a diplomatic thaw in US-Russia (a "reset"), US-Iran relations (a handshake, maybe?). Stay tuned...

Marketplace of Ideas

Following Kevin's post on the declining newspaper industry, I'd like to draw a somewhat unusual comparison: unlike the newspaper industry, "soft power" is highly compatible with the internet and stands to benefit greatly if leveraged correctly.

As Kevin stressed: "advertising dollars will continue to migrate to the internet where technology provides highly targeted advertising with measurable statistics."

That's the key. Advertising and newspaper debate aside, the internet provides users with MEASURABLE STATISTICS.

Beyond the typical business/marketing use of viral marketing and social media- the internet is a perfect way to to gauge the reception of all sorts of campaigns: health/environmental/social campaigns, development projects, community initiatives, etc... all over the world. Taking a message, including that of the US government, to the internet gives us an unprecedented look into the "success" of the message as well as the demographics of those receiving it.

Just a thought.

*photo from Dru Bloomfield's photostream

Ecuador and new protectionism

Dan's comments on new protectionism:

The Washington Times sees the case of Ecuador - what it calls the "the world's most protectionist response to the global economic crisis," with restrictions on "everything from Peruvian shampoo to Chilean grapes and U.S.-made running shoes" - as a bellwether heralding the possible spread of protectionism around the globe.

The combination of falling remittances, its debt default, and plummeting oil prices have put the country in a very difficult spot, but autarky and import substituting industrialization are not the way out.

New protectionism

This Vox EU piece on post-G20 summit protectionism sheds a lot of light on the current state of international trade. Two World Bank economists have tracked the implementation of 47 new protectionist measures since November. Most of these have had negligible effects on trade, but they're part of a worrying trend of domestic economic retrenchment, which spans agriculture, industry and finance. Also of particular note is a sharp increase in the number of anti-dumping cases.

How green is your stimulus?

The FT has a neat interactive graphic comparing "green spending" in the major national stimulus packages. I must admit, I was a little surprised by which country has the greenest stimulus by volume.

Why I love Warren Buffett

Who else can not only get away with this, but for such wisdom be revered by his audience, most of whom paid somewhere near $148k a pop to hear such gems. Warren Buffett on credit derivatives, which create dependence and entanglement across financial markets:

Participants seeking to dodge troubles face the same problem as someone seeking to avoid venereal disease. It's not just whom you sleep with, but also whom they are sleeping with.

Truer words have never been spoken.

Unsettling news of the day

The Dow Jones closes below 6800, its lowest level since April 1997. Lost decade, indeed.

Can e-readers save newspapers?

An interesting article caught my eye this week concerning the sagging newspaper industry: the Hearst corporation plans to use e-readers to electronically distribute newspapers and magazines. An industry suffering from stale ideas desperately needs this type of innovative thinking. E-readers promise to increase subscriber numbers (and thereby subscription revenue) while simultaneously reducing margin-killing distribution and printing costs.

The CNN article states that media ownership is "increasingly looking to devices like e-readers to lower costs while preserving the business model that has sustained newspapers and magazines."

Hmm. "Preserving the business model" is not a viable path forward for the print industry. Newspapers currently survive on advertising dollars, and an e-reader can't change the fact that a newspaper is a blunt and inefficient advertising tool. In the long term, advertising dollars will continue to migrate to the internet where technology provides highly targeted advertising with measurable statistics. Newspapers need to find new revenue streams outside of advertising dollars to survive and I doubt that increased subscription revenue combined with lower costs can save the industry.

I'm also skeptical that print subsribers will embrace e-reader technology. E-readers offer a superior reading experience that eases eye strain, better portability when compared with laptops or even print newspapers, and instantaneous access to content via wireless network connectivity. However, the Hearst product will launch 12-18 months late to market after strong Kindle sales. Will customers want a specialized 8.5 by 11 inch e-reader just for periodicals when they may have already bought one for books?

Anyways, if Steve Jobs is right, newspapers are facing far more serious problems than declining revenue ...

Hello G20, goodbye G7

In a new piece on Vox EU, the legendary Barry Eichengreen considers some of the repercussions of the G20's rise as the new forum for addressing global economic issues. My two cents: the G20, while more unwieldy than the G7 and yet not as representative as one would like, is still the most logical place to tackle global economic problems right now. Hey, path dependence can be a real pain.

The party's over

When the economy is crashing and the FBI begins to arrest bankers, it really makes the air tingle. Such are circumstances that now surround the Chief Investment Officer for Stanford Financial, Laura Pendergest-Holt, who was arrested Thursday on federal obstruction charges. (Unfortunately, she is not the mad scientist in the photo). Ms. Pendergest-Holt misrepresented herself to the Securities and Exchange Commission and forgot to mention something about a billion dollar loan the bank made to a certain top-executive. There is and will continue to be an extraordinary lack of sympathy for these folks at Stanford. Robert Standford is apparently still without a lawyer after the FBI froze all of his assets. Good luck.

Photo from MatthewBradley's Photostream

The Crisis of Credit Visualized

If you're looking for a fun and easy-to-understand explanation of the causes of the credit crisis, check out this cool video produced by Jonathan Jarvis:

How not to build foreign investor confidence

Bolivian president Evo Morales won a January 25 referendum on a new constitution that significantly increases the central government's control over strategic sectors, including mining and natural gas. The new constitution is but the most recent victory in the Movement to Socialism's drive to nationalize the Bolivian economy and consolidate political power (amongst other objectives, of course).

Obviously, the risks posed to foreign investors have increased substantially since Morales gained power in 2005. This uncertainty has resulted in a 75% decline in foreign investment since 2006. But amidst the commodity price and credit collapse of 2008, Morales seemingly realized that the Bolivian government could not fund, explore, extract and manage its natural resource wealth without foreign involvement. State-owned and private Bolivian firms simply lacked the expertise and capital to maximize the country's production/export potential. A number of public assurances and overtures last fall led some to adopt a more optimistic outlook on the role of foreign investors in the Bolivian economy.

Well, if the referendum itself didn't temper this optimism, February 10 sure did. One day after saying that the government would encourage foreign investment in the natural gas sector, the energy minister announced the central government's intentions to nationalize 4 of the power sector's largest companies, including Empressa Electricia Guarachi SA, majority owned by British firm Rurelec Pc.

February 9: Open for business!

February 10: No soup for you!

At this rate, Bolivia better hope General Motors' restructuring includes a whole lot of electric cars, because their mining, natural gas and power production is in a bit of trouble.

(photo: germeister's photostream)

Russia and China: a Power House or Broken Home?

Russia and China seem pretty chummy of late. Both countries essentially head the Shanghai Cooperation Organization – an organization which frightens the West because it promotes cultural, security, and economic cooperation among China, Russia, and Central Asia. In the cultural arena, China has dubbed 2009 the year of the Russian language, and Russia will make 2010 the year of the Chinese language. To promote security, the two countries established a hotline between their heads of state.

Most recently, the countries displayed extraordinary economic cooperation. Russia secured $25bn in loans from China in return for supplying oil for the next 20 years. This deal is the largest trade financing agreement between the two countries to date: Russia desperately needs money and China desperately needs oil. Everyone’s happy, right?

Not exactly. Days after the historic agreement, a Russian warship opened fire on a Chinese cargo ship and sunk it. The two countries' foreign ministries blame each other. But Clifford Levy of the New York Times actually blames deteriorating bilateral relations. Why?

While both countries enjoy honoring agreements that are mutually beneficial (economic cooperation) or mutually benign (language exchange), Russia and China have a tendency to disregard cooperation when it affects domestic politics. Levy likens the sinking of the Chinese cargo ship to last year’s Russian-Georgian conflict. China didn’t support Russia because Russia recognized the autonomy of South Ossetia, and China didn’t want to encourage Tibet’s or Xinjiang’s calls for autonomy.

What's clear is that Russian-Chinese relations are only as simple as each country’s domestic politics, which is to say they're not all that simple. Notably, Russia and China don’t have an alliance or even an established method to resolve disputes and disagreements. They just have a mechanism for cooperation, which can be honored or ignored at either country’s whim. Hopefully, ignoring the cooperation won't lead to any more drowned sailors.