The global tea party

Tea prices are about to jump...

to an all-time high after damage to production in the world's key exporting countries from simultaneous droughts...Dry weather has led to low yields in India, Kenya, and Sri Lanka. The output fall in the three countries, which account for half the world's exports, will exacerbate last year's market deficit.

Droughts, yes. But Kenya and Sri Lanka are also undergoing serious civil strife. I can't help but imagine that political unrest and violence have contributed to the price rise, either by disrupting supply and delivery chains or through the flight of foreign capital and investors that finance tea farming.

Tea, unlike opium, is not used to finance insurgencies. Maybe the governments, if they are strong or capable enough, should take this chance to encourage the farming of such a storied and legitimate crop. Tea has long been exposed to price fluctuations on the open market, like most commodities. But governments should be careful in the tide of rising protectionism to resist placing restrictions on the trade of tea and encourage its widespread promotion and consumption. Empires have been built on less.

(Photo from thebensteads)

Gallows humor

President Obama has had a rough few months. As the global economy continues its slide, what the crisis means for global trade and financial regulation will dominate discussions in London on Thursday. Rightfully so. After the economy, North Korea's impending missile launch and Afghanistan's gradual decline into disarray dominate any foreign policy discussions. With so much on his plate, not to mention health care reforms and an understaffed Administration, Iraq has fallen by the wayside. The President has admitted as much.

But lest we forget how perilous the gains we've made in Iraq are, Tom Ricks is happy to remind us:

The Maliki government is putting the screws to the Awakening movement (for those who just arrived, that's a mainly Sunni group of about 100,000 people, many of them former insurgents, who in late 2006 and 2007 arrived at ceasefires with the U.S. military presence in Iraq). The American plan was to integrate 20,000 members...into Iraqi security forces, and help the rest find other work...But the Shiite-dominated Baghdad government never really like the idea. Indeed, the first deals were cut by U.S. officials behind the back of the Iraqi government...I think Maliki's gambit is to crack down on the Sunnis while American forces are still available in sufficient numbers to back him up. This is turning into a test of strength, Sunni vs. Shiite.

Sound familiar? 

The President may be better served to focus on actually shoring up our international standing, rather than just paying lip service to the notion while using our current crisis environment to push big government, domestic programs that most independent voters hoped he would avoid.

We're famous in China. Oh, wait...

Random fact of the day: we've received word that China's internet firewall has blocked zzzeitgeist in the People's Republic.

Latin America Update

Venezuela is working on trimming costs at its state oil company, and after the hassle of dealing with services contractors demanding payment, has decided to slowly pay its outstanding bills and then simply replace them all.

Ecuador, by slapping new tariffs on 627 imports, has become the global protectionism posterboy, including mentions in a new WTO report, a World Bank report, and The Economist, as well as lengthy features in the Washington Post and Independent.

Colombia and Panama still have free trade agreements pending with the US. The Obama administration and key members of Congress have signaled a willingness to bring them up, if there is progress on eliminating tax havens in Panama and creating benchmarks for enforcing labor protections in Colombia. The Post interprets this as a toughening of US trade policy, but it may just be the only realistic way to make progress in the current economic and political environment.

Panic and Pandemic

According to the World Health Organization, Ukraine experienced a huge drop in diphtheria, mumps, polio, hepatitis B, TB and whooping cough vaccinations in the last year after a widespread scare about vaccine side effects. Last May, a 17-year-old boy died after he received a combined shot for measles and rubella, and though the causes of his death turned out to be unrelated to the shot, the panic spread across the country like… well like a virus.

Two factors fed this panic: an unstable government and irresponsible media. First, true to their nature, the politicians sought to use the boy’s death to promote themselves and discredit others. Instead of properly investigating the boy’s death and initiating a thorough vaccination campaign, they squabbled like they’ve been doing since the Orange Revolution. So accurate information was not made available, and vaccinations expired before a campaign could be launched.

While the public did not get any accurate information, they were inundated with rumors and drivel, because those types of stories sell. The most popular misinformation: the boy's death was caused by an Indian-made measles and rubella vaccine, which also sterilizes men as part of a plot by Ted Turner, whose charity paid for the vaccines. Why Ted Turner would want to sterilize Ukrainians, I’m still not sure. How would that be good for business? If there were more Ukrainians, he could rationalize opening a chain of Montana Grills in Kyiv. But I digress.

This most recent side effect of political instability and unreliable media causes much cause for concern. In the early 1990s, Ukraine experienced an economic crisis and didn’t really get vaccinations to the public. Combined with the scare, UNICEF estimates that almost 9 million Ukrainians need vaccinations. Since 2000, there have been two major outbreaks of measles, and experts predict another larger outbreak. Moreover, with freer visa regulations established in the last couple years, more Europeans are traveling to Ukraine, and more Ukrainians are traveling to Europe.

Thus the possibility of exporting an outbreak is more and more likely. In this blogger’s opinion, it’s incredibly important that the EU and international organizations work with the Ukrainian Ministry of Health to start a campaign that will convince the public of the importance of vaccinations. Barring that, perhaps they can launch a campaign giving Ted Turner more credibility.

Buying bras shouldn't be this complicated...

One of the irony's of Saudi Arabia's gender segregation is the way in which women shop for lingerie - uncomfortably and inappropriately.

As a result of labor policies aimed at preventing women from dealing with male customers, women are not employed as salespeople. This means that in lingerie stores men end up talking to women about bras/thongs/etc and checking out their bodies to determine cup sizes. On top of that, fitting rooms are banned in the kingdom, since women undressing in the close vicinity of a man is unacceptable.

Not only does this not make sense in ANY way when you consider the conservative nature of Saudi society, (in a gender-segregated society, why would men not be banned from lingerie stores?), but even in the US and Europe, men typically do not sell lingerie to women. Well, as they say in the Arab-world, HALAS! Enough!

A group of Saudi women have launched a boycott of lingerie stores until they employ women. The women are not asking to work WITH men. Far from it - they are not demanding any major shifts in Saudi culture - in fact, they are supporting it. They don't want men to be involved in this type of intimate purchase at all. They want men completely removed from the process, as you would think conservative leaders would agree with.

The boycott was launched on Tuesday by approximately 50 women who gathered at the Al-Bidaya Breast-feeding Resource and Women's Awareness Center in Jeddah, run by founder Modia Batterjee. The aim of the boycott is to pressure the government to IMPLEMENT a law that has been in existence since 2006, which mandates that only women can be employed in women's clothing stores. Reem Assad, a finance professor at Dar Al Hekma College in Jeddah says: "We are raising awareness and calling for the implementation of the law." Assad started a Facebook group which now has 1,680 members, and posted an online petition which has at this point been signed by 1,700 people.

Since only a few Saudi papers have written about the boycott, it has depended largely on word-of-mouth and the internet. The women who launched this campaign knew how to leverage online communications and social media to disseminate their message quickly and effectively. The impact of the campaign remains to be seen, but I am curious to see how else Saudis will chose to utilize new and social media to initiate these types of activities in the Kingdom.

Doing business with the World Bank

Doing Business reports on the ease and openness of starting a business in 181 countries by providing reports and information on a variety of select indicators.

A useful resource for all young entrepreneurs.

Soft power vs. hard power

The fallacy of equating economic power with clout. Choice excerpts:

The US is the world’s pre-eminent military power, but the economic benefit of
that is hard to see...

In the modern world, there is no observable relationship
between size of country and its standard of living. Small and large countries
are found among the rich and among the poor...

Economic power is based on monopoly derived from being the only seller of a particular good or service, or on monopsony derived from being the only buyer. Such power is held by individuals and businesses, not by states. Dominance of an industry or activity is not the same as scale, though scale and dominance are loosely related. International trade is conducted by individuals and businesses, not governments, and it is individuals and businesses, not governments, that negotiate the division of the value added trade creates. The principal economic role of states is not to get in the way. They can impede the process of adding value through trade, protectionism or disruptive currency interventions. These actions damage their own businesses even more than they damage the businesses of other countries.

A visual explanation of Geithner's two-pronged plan

The FT has a handy graphic explaining how Secretary Geithner's plan will actually work if you're a little bit confused.

The inflation hedge of choice

On Wednesday, the US Federal Reserve "shocked the world" by announcing plans to buy $300bn of government debt and double its purchases of Fannie and Freddie securities. According to the FT, once the Fed's plans are fully realized its balance sheet could swell to $4,ooobn, one third the size of the US economy. Hellicopter Ben, meet Bazooka Ben.

The Fed's actions are an attempt to literally shock life into the credit markets. It may also have the convenient effect of driving down the cost of government borrowing. However, the Fed runs the very real risk of stoking a very big inflationary problem down the road. Weimar Republic the US is not, but the money supply is growing at such a rapid rate that the Fed had better hope the US economy rebounds this year. Remember central bankers, there are unintended consequences to such dramatic monetary easing; like say, a housing bubble (Mr Greenspan, I'm looking in your direction).

What then are some of the likely consequences of the Fed's policy innovations? For one, the dollar was the big loser last week; in fact, it registered its worst week against the major currencies in 24 years. This fed into an accelerating rally in commodities, the moment's inflation hedge of choice. The benchmark S&P GSCI index was up 8% last week. Or take copper, up some 28% this year, a feat completely divorced from the underlying fundamentals. Though, the FT has an article this morning on the actions of a "secretive" Chinese state institution stockpiling copper supplies (which sounds like the perfect plot for Bond film). Oil is back over $50, supported by the OPEC cuts, but boosted in recent weeks by Fed policy. The speculative inflow into commodities, as an asset class, may be small compared to the bubble of recent years, but it is nonetheless paring the steep losses experienced in the second half of 2008.

The sustainability of this rally is highly suspect. With Chinese growth forecast at 6% for the year, and the G7 contracting by 3.2%, the global recession will depress demand for commodities well into the year (with the possible exception of food, but that's another discussion). However, loosey-goosey monetary policy (as A-Rod would call it) comes at a price, with inflation second only to a loss of confidence in US treasuries. Bernanke has demonstrated that he is willing to throw everything in the Fed's arsenal at the credit markets. Until he wins, expect commodities to outperform as an asset class.

(photo courtesy of Shiny Things' photostream)

Not a good way to start the week

On the front page of tomorrow's New York Times: Trade Barriers Rise as the Recession's Grip Tightens. Key quote:

"The U.S. is in such great danger of backing away from free trade," said Kenneth
S. Rogoff, a professor of economics at Harvard. "The next two years could be a
disaster for free trade."

Big game hunting

* Trade posts represent solely my own opinions.

At a recent conference that I attended, one of the speakers borrowed a quote from Ike Eisenhower to great effect: “if a problem cannot be solved, enlarge it.” It occurs to me that this sentiment directly applies to the politics of trade in the United States. The public is divided on whether trade is beneficial to the economy, the 111th Congress has already demonstrated protectionist instincts, and it is increasingly difficult to advocate openness as jobs are lost and the recession deepens. How should President Obama, who understands the benefits of trade, address these political realities?

Enlarge the problem substantially by negotiating a comprehensive free trade agreement with the European Union or Japan. First, such an agreement would have huge economic benefits: EU-US trade flows were worth more than $640 billion in 2008. Export-oriented industries on both sides could be counted on to exert a lot of political pressure for that kind of market access. Second, a USEUFTA would take a very long time to negotiate due to the complexity of the trade relationship and both sides’ preference for high-quality agreements. This would put trade on the backburner for at least several years, which would help diffuse political tensions and give the economy time to recover, thereby mitigating the political influence of import-exposed industries. Negotiating with the EU would eliminate the standards (labor, environmental or otherwise) problem.

There are serious drawbacks to such an approach, such as the fact that it shuts out China, India, Brazil and other developing countries (though if you believe in competitive liberalization, you might argue that this would spur further negotiations.) Perhaps most worrisome, by establishing a substantive parallel system, it could easily undermine the multilateral trading system and provide a final knockout blow to the Doha Round. That would be terrible.

Still, the Obama Administration made it clear in its 2009 trade policy agenda that it would seek more economically meaningful agreements. Indeed, in a lot of ways, it would be better to complete one really big one instead of many smaller ones. Perhaps it’s time for trade policy-makers to consider big game hunting.

Hidden gains from trade - St. Paddy's Day edition

This is a few days late, but I wrote this note to my colleagues earlier this week on St. Patrick's Day and thought I would share here:

The shamrock (three-leaf clover) is one of Ireland's most recognizable symbols. But demand for "Irish" shamrocks is now so great that the small island nation must import clover seeds from countries like New Zealand, India, and Germany. In 2007, Ireland imported nearly 200 metric tonnes of clover seeds worth $677,864.

Gains from trade, indeed.

Free trade petition

The Atlast Global Initiative for Free Trade, Peace and Prosperity has written a petition for free trade, to be unveiled on April 1st before the London Summit. My favorite part:

Trade’s most valuable product is peace. Trade promotes peace, in part, by uniting different peoples in a common culture of commerce – a daily process of learning others’ languages, social norms, laws, expectations, wants, and talents.

Trade promotes peace by encouraging people to build bonds of mutually beneficial cooperation. Just as trade unites the economic interests of Paris and Lyon, of Boston and Seattle, of Calcutta and Mumbai, trade also unites the economic interests of Paris and Portland, of Boston and Berlin, of Calcutta and Copenhagen – of the peoples of all nations who trade with other.

Introducing...

... our newest contributor, Alex Orr, who will be writing on finance and economics. His first (excellent) post is here, and his bio is here.

Mo' Rubles Mo' Problems

Amidst the spring-time clouds and snow over the Moscow sky, there appears to be one bit of good news: the ruble, for now, seems to have stabilized, defying the critics of the Kremlin’s ruble stabilization program. When I was in Russia just two months ago, every stop at the ATM was like a special delivery from Ded Moroz, as the RUB/USD rate dropped from 29 to 32 in 8 short days. In the spirit of the season, I decided to do my part for the economy by “donating” my extra 10% of purchasing power to the fine brewhouses and eating establishments of St. Petersburg.

Yet, before we start celebrating, we should keep in mind that movements in the ruble have correlated almost entirely with movements in the price of oil, which is really the only marketable Russian export (in addition to vodka, defunct ideology, and depressing literature), and thus the indicator for the overall Russian economy. As crude has now stabilized above $40/bbl, so the ruble has stabilized below the euro-dollar basket of 41. This is a good thing, but it can also create an illusion of stability and economic upturn. Meanwhile, inflation continues to soar in Russia, outpacing other Eastern European countries. While inflation has picked up, salaries, both nominal and real, have been falling, and consumption has dropped sharply – it has even hit one of the most rock-solid sectors of retail! Sadly, many of my friends have recently had to choose between leaving their jobs or taking pay cuts of up to 50% - one friend tells me that her employer has not even paid her in the past 2 months, and she has taken out a line of credit to fund her basic living costs.

This last part is particularly worrying, especially since ruble stabilization has necessitated a significant rise in the already sky-high interest rates for personal and business loans at Russian banks. Faced with double-digit interest rates, Russians have done what many in the former Communist bloc have done over the past few years – take out loans in foreign currency, particularly in Euros, at much lower rates. This was great when emerging markets were booming, but now that currency devaluation has hit, consumers and businesses are struggling to make payments, with the latter raising prices on goods. Already in Russian cities, most real estate rental prices are set in Euros. As small businesses get hit with higher real costs for rent and loan payments, prices continue to rise. Moreover, as confidence in the ruble continues to wane, the desire for holdings (and lending) in foreign currencies grows still.

What is the Kremlin to do? Lowering interest rates on loans below the current 13% inflation rate would effectively mean government subsidization of lending, and would drive further devaluation of the ruble, and price inflation for imported goods. While this could cause a further flight of capital from Russia and could plant the seeds for ‘90s era economic chaos, it could also stimulate lending and growth, if coupled with prudent policy reforms, particularly toward small businesses which are drowning in bureaucracy and corruption. It might also cost the Kremlin less, and be more effective, than continuing to subsidize banks who then speculate against the ruble in the Forex markets. Keeping interest rates high, however, may create the illusion of stability, but will surely continue to stifle growth, and will hurt ordinary Russians most. In any case, winter in Russia may not end for some time to come.

(photo from Alcoyotl's photostream)

Quantitative easing explained

The FT has a great new interactive feature explaining the central bank policy of quantitative easing. The British narrator sounds reassuringly competent.

Exxxxcellent!

Much talk has surfaced lately concerning provisions in the recent stimulus bill that curb hiring of workers through the H-1B visa program. The proposed restrictions only affect TARP recipients, and Science points out that the practical impact of the limits could be minimal:

The limits affect new hires, not existing holders of work-related visas. And while the amount of TARP money is staggering, the number of companies involved -- generally in the financial services industry -- is relatively small. Only about 1 percent of workers in this industry have H-1B visas.

Rejoice you bloodthirsty capitalists, here are a few reasons to celebrate!

1. Computer software is a high growth industry with great employment prospects, yet interest in computer science remains generally low. Silicon Valley relies on the H1-B hiring process to find skilled workers.
   
2. Immigrants start companies. See Google.
   
3. Exporting education services helps the US to reduce its global trade imbalances. We still have the best higher education system in the world, but inhibiting the prospects of employment in the US may deter foreign students.
   
4. Backdoor isolationism sends the wrong message to our allies and trading partners. We have much work to do in order to improve our global standing.
   

Addendum: This should be an interesting study

Mobile education

I went to New York this past Friday and someone yelled at me on the bus for making a phone call. In the spirit of our age, it immediately inspired me to write a blog post on the topic (ok, ok - I was in the process of writing it already, but it seemed especially serendipitous).

For those of you who may chide me right away for my public chattering, read the whole post. But for those of you too lazy, here is a (long) excerpt.

The use of mobile phones has been used for all types of initiatives that typically fall under the umbrella of development work. Text messages have been used to monitor elections and share market prices for milk. As long as mobiles continue to improve daily life, their importance will grow. If monitored correctly, governments can harness this trend to garner another source of foreign and domestic direct investment to gain desperately needed capital. Doubly productive, the explosion of mobile technology also acts as a "leap frog" technology preventing governments from needing to expend huge sums for the development of traditional infrastructure needed for analog phones and land lines.

Despite all their benefits I would argue that cell phones are still underused in the developing world. In areas where education of youth is prevented either by conflict, distance or terrain, or simply a lack of time due to hours spent working, mobile technology can help provide educational materials and resources that may traditionally be unavailable.

It may sound a little unusual, but radio technology was used throughout Australia in the 1950s and 1960s to educate children where Outback distances prevented collective schooling. If countries are really going to ensure universal primary education by 2015, then governments may be better off distributing cell phones than laptops.

All this and more at Youthink!, the World Bank blog where I'm a regular contributor.

FT Energy Source

It has been a particularly busy beginning of the week, so instead of my usual fare I thought I'd draw your attention to another blog offering really great coverage of the energy/commodities markets.

I recently discovered FT Energy Source, and it is already one of my regular reads. It brings together all the best energy coverage from around the web and the newspaper itself, while also providing terrific original analysis and behind-the-headlines insight. Its coverage this weekend of the OPEC meeting perfectly illustrates the access and insight it offers.

If you are looking to build on the energy/commodities coverage of zzzeitgeist, I recommend checking out FT Energy Source. After us, of course.