Queen Rania of Jordan listens intently in Davos

DAVOS, Switzerland — World Economic Forum: Upbeat bankers clashed with pessimistic economists on the opening day of the World Economic Forum, where the movers and shakers of global politics and business argued over whether to move forward with financial reforms – or to abandon what some claim would be a ruinous path toward over-regulation.

Just hours ahead of President Barack Obama’s first State of the Union address, bosses from Deutsche Bank, Lloyd’s and other financial giants warned Wednesday that a flood of new regulations risked choking off a global economy recovery. Others urged Obama, who has proposed restricting bank risk-taking, to push forward with stronger reforms.

The discussions in the rarefied air of this Swiss Alpine resort reflected the broader debate and anxiety over the global economy, and how to address an uneven recovery powered by a booming China and held back by high unemployment in the United States and other wealthy nations. “Let’s get good regulation, better regulation, but not more regulation,” said Peter Levene, chairman of British bank Lloyd’s. [But his argument misses the point that financial innovation has rendered depression-era regulations irrelelvant in today's casino-royale atmosphere of modern finance, and products like credit default swaps that Warren Buffett referred to as 'financial instruments of mass destruction.']

Peter Sands, the CEO of Britain’s Standard Chartered Bank, added that his industry already has been “fundamentally changed” by tighter regulations and supervision, while Deutsche Bank Chairman Josef Ackermann said “we will all be losers” if governments clamp down on markets too zealously. “The pendulum might have swung too far,” Ackermann warned. “Consistent and global rules, and a level playing field is absolutely key to the global economy.”

Obama is expected to push Wednesday evening for greater regulation of Wall Street, and there are calls in the United States and Europe for tougher taxation on financial institutions to recoup the billions governments have doled out in rescue packages since 2008.

Coupled with the high unemployment much of the rich world is experiencing, there is strong public pressure for action against the sectors that were so deeply involved in leading the world into recession. Some economists said more needed to be done.

Read more from HuffPo here.  And from the Financial Times here. 

Sources:    HuffPo.com; FT.com        Photo:  Zimbio.com

The pantheons of historic African American leaders is replete with courageous, insightful and moral men and women who sacrificed personal gain – and in some cases, their very lives – to enrich the lives of the nation, and of others.  From Harriet Tubman and Nat Turner, to Ida B. Wells and Marcus Garvey; from  Mary McCleod-Bethune and Frederick Douglass, all the way to Medger Evers and Mae Jamison, Black leadership has been unwavering in its commitment to ensuring that America live up to its professed credo of freedom, opportunity and equality for Black America and thereby enhancing the same for all Americans – including recent immigrants and newcomers to the fabric of America.  However, the life and work of Dr. Martin Luther King, Jr. stands apart and alone in relation to the values and noble traditions of which he is a part – namely, African American culture and history.  It is not the breadth or the reach of Dr. King’s leadership that establishes his work as unique— Marcus Garvey after all had a larger global presence.  Nor is it the fact he worked for a dollar a year salary and was completely uninterested in accumulating fame or material wealth—because Malcolm X made the same sacrifice.  But Dr. King’s views on economic justice at home, and questions about U.S. relations abroad, raised important democratic and constitutional questions about whether or not U.S. foreign policy decisions that exclude the values, traditions and perspective of a large, important and influential segment of its society can truly ever reflect “American” national interests.  In the context of an Obama presidency, and what it means for the future of our nation, this question is one that must be addressed by the nation’s foreign policy and national security establishments.  Until this is done, it will remain the elephant in the room that everyone will try to ignore, but simply cannot.

I don’t believe we can have world peace until America has an integrated foreign policy that represents the views and cultural sensibilities of all its people. – Dr. Martin Luther King, Jr.

By the time of his untimely demise, Dr. King had become the country’s most prominent opponent of the Vietnam War, and a staunch critic of overall U.S. foreign policy, which he deemed militaristic. In his “Beyond Vietnam” speech delivered at Riverside Church in Manhattan on April 4, 1967 — a year to the day before he was murdered by the bullet of domestic terrorists — Dr. King called the United States “the greatest purveyor of violence in the world today.”  Many Americans, understandably, might take exception and have a hard time seeing themselves this way. But unless you understand the sometimes nefarious ways that American power has been used overseas – often in the shadows, and unbeknownst to Americans used to the flattering images of ourselves in the media – then we will never truly understand what gave rise to Al Qaeda, or the blowback – the unintended consequences – our foreign policies incur. 

Dr. King lived and eventually died holding onto the fundamental spiritual truth that “we are all tied together in a single garment of destiny, an inescapable network of mutuality.”  It is through the prism of this world view that he viewed the social facts of racial and economic inequality. It is also one of the underlying principles of the Obama foreign policy doctrine of mutual interests and mutual respect between nations. This is why his analysis always started with the spiritual reality that Black Americans and White Americans had more in common than we did differences that separate us;  then he moved courageously to addressing  laws and policies  that divided us.  His speech, for instance, in opposition to the Vietnam war was the blueprint that President Obama used for his ‘A Just and Lasting Peace’ Nobel lecture , as well as his ’A New Beginning’ speech to the Muslim world  in Cairo, Egypt.  Clearly, the values and cultural traditions that deeply influenced Dr. King are central to the Obama foreign policy doctrine – and Obama has said as much. This simple fact holds important contextual understanding as the nation’s demographic landscape evolves.  That is why Dr. King’s proclamations on U.S. foreign policy should be required reading in any university international relations, national security or foreign policy curriculum. (You can hear it in its entirety above.)  Years before Hippie protests, and before Walter Cronkite declared his opposition to the Vietnam War – the watershed moment many consider turned American sentiment against the war – Martin Luther King, Jr. and Muhammad Ali, both prominent Black Americans in their own right and influenced by the same underlying cultural values and traditions, were vocal critics and organized against the war and spoke out about the nefarious nature of the nation’s foreign policies.  

On economic justice Dr. King was equally prolific. Here, for example, are some facts to consider in what is the socio-economic reality of America today: The most recently available poverty data (2008) reveals an America where nearly 40 million citizens (13.2%) live in poverty, while nearly one-third 0f Americans (31.9 %) struggles to make ends meet at twice the poverty level.  According to the data, significant racial disparities still persists. While the number of Whites in poverty was 8.6%, 24.7% of Blacks and 23.2% of Latino peoples lived in poverty in 2008. According to preliminary review, the 2009 data is expected to worsen – a year when rising unemployment pushed many families closer to the brink.

Our needs are identical with labor’s needs–decent wages, fair working conditions, livable housing,  healthcare and welfare measures, conditions in which families can grow, have education for their children and respect in the community. That is why the labor-hater and labor-baiter is virtually always a twin-headed creature spewing anti-Negro epithets from one mouth and anti-labor propaganda for the other mouth. I dream of equality of opportunity, of privilege and property widely distributed; a dream of a land where men will not take necessities from the many to give luxuries to the few.     – Dr. Martin Luther King, Jr.

Racial disparities also continue to separate Black and Latino Americans from White Americans. For example, with unemployment rates and wages—two basic indicators to measure decent work—there remain entrenched racial disparities. In December 2009, the unemployment rate for white men over 20 was 9.8%, but for Black men over 20, by conservative estimates, it’s nearly double at 16.9%. Bureau of Labor Statistic (BLS) statistics for 2008 report that the median weekly earning for full-time wage and salary workers was $742 for White Americans, but only $589 for African Americans, while only $529 for Latino Americans.  Such disparity in the numbers represent an affront not only to our moral sensibilities, but also to our economic self-interest and, even worse, to our global competitiveness with rapidly emerging nations around the world.

Dr. King’s struggle for economic & social justice, and U.S. foreign policy is what consumed the final years of his life.  And as we have learned since his assassination, his organizing around these issues are what most concerned the national security establishment — in particular, J. Edgar Hoover’s FBI.  Dr. King also marched with workers at the Scripto strike in Atlanta and his Southern Christian Leadership Conference worked hard to help hospital workers organize with 1199 in Charleston, South Carolina.  At the 1961 AFL-CIO convention Dr. King said, “Our needs are identical with labor’s needs–decent wages, fair working conditions, livable housing, old age security, health can welfare measures, conditions in which families can grow, have education for their children and respect in the community. That is why the labor-hater and labor-baiter is virtually always a twin-headed creature spewing anti-Negro epithets from one mouth and anti-labor propaganda for the other mouth. I dream of equality of opportunity, of privilege and property widely distributed; a dream of a land where men will not take necessities from the many to give luxuries to the few.”  This sounds eerily familiar to precisely the environment – with the same issues, and the same race-baiters and fear-mongers in the form of far right conservative / lunatic fringe Tea Party protesters – we have today as the president tries to move his agenda forward.

True compassion is more than flinging a coin to a beggar; it comes to see that an edifice which produces beggars needs restructuring. – Dr. Martin Luther King, Jr.

Here is another inconvenient fact to consider:  the last economic recovery holds the distinct dishonor of being the first on record where poverty levels rose, and median income of working & middle class Americans – of all races – fell despite rising corporate profits and productivity. To avoid a repeat performance, Congress must take some key steps to ensure that low-income and working class Americans, ethnic minorities and other traditionally vulnerable communities have the opportunity to participate in the coming economic recovery.  For example, pursuing policies at home and abroad that ensuring a public option in the final outcome of Healthcare reform; pass the Employee Free Choice Act (EFCA) to ensure worker’s rights at home; and demand fair labor standards overseas in order to ensure a fair and competitive landscape in Global Markets, while we develop a globally competitive advantage in our productive capacity as a nation by leveraging the strengths that comes from our diversity and plurality as a nation.

Recommended Reading 

Diversity and U.S. Foreign Policy: A Reader  by Earnest J. Wilson (university press, 2004)

Black Man’s Burden: Africa and the Curse of the Nation-State   by Basil Davidson (Random House 1992)

U.S. Foreign Policy and Black National Interest, Edited by Charles P. Henry

New Directions in U.S. Foreign Policy, by Inderjeet Parmar, et al (UK)

Source: www.TheRoot.com by Andre Willis      Video: YouTube

World Economic Outlook 2010

In January of 2009, the International Monetary Fund (IMF) forecasted that advanced economies would not exit the global recession until the middle of 2010.  However, these economies posted, on average, GDP growth of about 2% in 3Q 2009, and growth in emerging economies accelerated to about 8% in 2Q and 3Q – 2% higher than forecasted.  Additionally, global trade and industrial production are on a sharp recovery path.  

Although most projections show a continuation of positive growth in 2010, questions about the strength and sustainability of the recovery remain. To provide an economic outlook for the new year, the Carnegie Endowment hosted a distinguished panel of the heads of the economic forecasting unit at their respective organizations.  The discussion provided a number of insights and perspective on the global economic outlook that many may find of interest; to some, a surprise.  For instance, the consensus was that Asia would lead the global recovery, and that high unemployment and high sovereign debt levels would be experienced in the developed economies. The panelists included Hans Timmer of the World Bank; Jörg Decressin of the IMF; Phillip Suttle of the International Institute of Finance (IIF); Desmond Lachman of the American Enterprise Institute (AEI), and Uri Dadush of the Carnegie Endowment.  The panel moderator was Pieter Bottelier of the Carnegie Endowment.

First up, Dadush of the Carnegie Endowment highlighted several factors behind this stronger-than-expected recovery:

§  Most importantly, unprecedented stimulus and financial rescue efforts in advanced economies largely worked.

§  Asia, where fundamentals like financial sectors and public budgets were healthy before the crisis, recovered rapidly, helping pull the rest of the world to recovery.

§  The world succeeded in avoiding large-scale contagion effects, including sovereign debt crises, competitive exchange rate devaluations, and trade wars.

Next, Timmer from the World Bank noted that, despite these improvements, production levels across the world remain 7-10 % below pre-crisis levels, unemployment in many countries is around 10 percent, and fiscal positions have deteriorated significantly: ultimately, there is still a long way to go.

What to Expect for 2010

Suttle of the IIF, and Dadush offered optimistic outlooks for 2010, citing several supporting factors:  

§  The growing role of emerging economies, which did not suffer a financial crisis and remain fundamentally strong, will support the global recovery.

§  The corporate sector, particularly non-financial firms in the United States, reacted quickly and aggressively to the crisis, registering better than expected earnings in 2009. As a result, a significant turnaround is expected soon in their labor, inventory, and investment demand, with employment expected to improve by the middle of 2010.

§  Policy will remain supportive. Much of the fiscal stimulus has yet to enter the market, with only one third of the U.S. stimulus package spent so far. Financial rescue is being withdrawn gradually in response to market signals. In addition, as risk appetites increase, low policy interest rates will be much more effective in increasing consumer and investment demand. 

The AEI’s Lachman, however, presented a grimmer picture, projecting a very subdued recovery with a return to recession possible in the United States:

§  With unemployment close to 10 percent in advanced economies, low wage and income growth will depress consumption.  The weak private sector will struggle to support the recovery.

§  Banks, still suffering from huge losses, will be forced to cut credit.  Additionally, regional banks in particular will likely be hit by commercial property market weaknesses.

Advanced Versus Emerging Economies

Major differences have emerged between advanced economies and emerging markets. Emerging economies, which are increasingly driven by domestic growth factors rather than exports, are now contributing significantly more to growth and investment than advanced countries.

§  Decressin of the IMF noted that both groups saw growth from 2007 to 2009 contract by approximately 6 percent, falling from 3 percent to -3 percent in advanced countries and from 8 percent to 2 percent in emerging markets. They remained “cyclically” coupled, though the underlying growth rate in emerging markets is much higher.

§  At the same time, there was much heterogeneity among the emerging economies. While Asia—and China in particular—has led the recovery, Eastern Europe (with the exception of Poland) has been less successful, with little sign of recovery.  Latin America paints the most diverse regional picture, with countries like Brazil faring relatively well and others, like Chile, lagging behind.

§  Decressin argued that as long as the differences between the advanced economies, which are weighed down by both structural and cyclical weaknesses, and emerging ones persist, capital will continue to flow to emerging markets. 

Panelists agreed that China must evolve to fit this new paradigm. China is already or may soon be the world’s second largest economy and the largest trader and emitter of C0₂.  Bottelier argued that China must embrace this new role and take a more prominent leadership role in crucial areas such as global trade reform and climate change. Domestically, China should pursue structural reform and a more flexible exchange rate.  Dadush noted that a flexible and appreciated exchange rate is in China’s interest, as it will help rebalance the economy towards consumption and reduce long-run inflationary pressure. However, placing external imbalances at the center of policy dialogue is misguided. 

Policy Solutions

Speakers outlined the challenges that policy makers face in the coming year, and offered suggestions for solutions:

§  Fiscal policy should remain stimulative in the near term, but panelists agreed that leaders need to begin engineering a shift in demand from public to private sources. Timmer stressed that while fiscal stimulus can provide a short term boost, it is not an effective growth strategy.

§  Similarly, Suttle commented that monetary policy should remain supportive, but given the unprecedented nature of recent policy—particularly quantitative easing in the United States and UK—leaders must exercise caution.

§  More should be done to promote credit.  Banking sector lending remains depressed and credit must be available once demand picks up.

§  Policy should accommodate the permanent shift in the structure of the world economy caused by the crisis, and support demand moving from traditional industrial powers to emerging markets. Timmer noted that these shifts—if managed with long-term considerations like climate change in mind—have the potential to create new sectors, such as “green industries,” that will help drive future growth.

Read more here.

Economic competitive landscape shifting

As the rest of the world struggles to recover from the most severe global economic crisis since the Great Depression, China’s powerful economic miracle has created, effectively, a gradual reverse-flow of economic power from Western to Eastern capitols. Witness, for instance, the emergence of Japan as the second largest economy in the world after having replaced Germany last decade as the former number two economy. And if you believe recent World Bank reports, China, the fifth largest economy just four years ago, will soon replace Japan bumping it to the number three spot; and somewhere in the next decade or so will be poised to displace the U.S. economy as the leading global economic power. When measured on a purchasing power parity (PPP) basis,^[4] China is already  the world’s second largest economy after the U.S. with a GDP of $7.8 trillion (2008).  In fact, according to a recent NY Times article, impressive new economic records, it seems, are being reached daily by the large Emerging Market economies - known more commonly as the BRIC nations.  In this remarkable environment of global trade and economic competition – and helped along by foreign direct investment (FDI) of approximately $80 Bn(US) in 2009, foreign currency reserves of  $1.6 Trn in U.S. Treasury notes, and a declining greenback – China in particular has surged past the United States to become the world’s largest auto manufacturing Market according to recently released data.  To boot, in rapid succession of that amazing feat, China also toppled Germany as the world’s largest exporter of manufactured goods according to preliminary 2009 year-end trade data released last week.  

All this is impressive. Yet, as a casual observer of mainstream sentiment, and judging by feedback & reactions to some of my recent posts, it appears that China’s success and emergence is unsettling to many and is becoming the source of collective angst toward China.  I mean, you can just read the headline of the above referenced NYTs article to sense the anxiety. But this is by no means unusual. It is a prime example of the latent economic nationalism that exists in the national character of many nations — especially competitive ones like ours.

This type of underlying negative sentiment toward China , however, is not new. China has been in the process of emerging for over three decades now – ever since Deng Xiaoping’s economic & Market reforms liberalizing State control of China’s economy began in 1978.  Consider also the fact that in that same time period China has lifted 300 million of its citizens out of poverty and subsistance conditions into a working and middle-class economic engine for the nation.  During the same time period, twelve million more Americans slipped into poverty — an increase of 33%.  And as long as I have been on ‘the Street’, analysts, strategists, pundits, investors and arbiters from ‘the City’ and other financial centers in the West, using Japan as its best example, have been prognosticating the “unsustainability” or imminent economic implosion of China’s remarkable economic growth and performance.  And, of course, no doubt it is bound to happen: after all, even a broke clock is correct twice a day.

But my larger point is simply this: Rather than jumping on the 30-year long “China’s-growth-is-unsustainable” bandwagon, observers would be better served tending to our own acre of diamonds by supporting and advocating for aggressive financial and economic reforms necessary to making the West – and the U.S., in particular – more globally competitive, economically viable and sustainable over the long haul versus newly emerging world players like China & Brazil, among others. That begins by holding Wall Street and the financial industry accountable for the practices and over-leveraged risk-taking that precipitated the global financial crisis and the resulting economic shocks – shocks that have devastating human costs that leave deep impacts on people, lives and struggling families.  If you haven’t been to Shanghai, Beijing or Guangong province lately to marvel at China’s planning and infrastructure acumen, then asked yourself: ’Why can’t we accomplish the same thing in the West since we pioneered development?’ a trip would be well advised. 

The gradual transition of the global competitive landscape from West to East, in particular to China, has occurred partly because economic growth & performance as measured by GDP, FDI, Currency Reserves, job growth, balance of payments, etc, has remained remarkably robust while the world’s wealthy nations and leading developed economies continue to endure the most precipitous decline in global competitiveness, international trade and gross economic production since the Great Depression – rescued, interestingly, only by the advent of WWII. Hmmm…

As a casual observer of mainstream sentiment, and judging by feedback and reactions to some reports, it appears that China’s economic success and emergence is unsettling to many and is becoming the source of collective angst in the West toward China.

And lest I be misunderstood, I’m not an apologist for things Chinese — although I have a weakness for shrimp mei fun.  All I’m saying is that China has five-thousand years of recorded history – and much longer when you consider the archeological record: we might have something to learn about economic sustainability and long-term planning from their ancient civilization, rather than nascently resenting their economic emergence.

In any event, my other point is this: as the NY Times article pointed out, the competitive transition from West to East – contrary to common punditry – did not happen by chance. China’s managed brand of State capitalism, its assiduous implementation of specific five-year economic plans, its efficient State intervention in the national economy without the “advice and consent” of a legislative bureaucracy – as is often the case in Western democracies – combined with the “defiant optimism of its companies and consumers, has propelled an economy that until recently had seemed tethered to the health of its major export markets” – primarily the U.S.  This brand of ‘State capitalism’ – Tea party fanatics to the contrary – is yet another form of capitalism that, thus far, has yielded far more benefits, in far shorter a period of time, without the economic shocks common to capitalism’s development trajectory in the West. Maybe, just maybe, we could endure a little humility in the West and learn a few things from the Chinese.  

By contrast, the global financial crisis, in general, and the U.S. ‘Great Recession’ in particular, China Daily’s website noted recently (and as I have written about prolifically on this blog), has laid bare the unsavory and harmful nature of Western-style, or Laissez-faire, capitalism. 

Of course, China’s State-run media not missing a beat to whip up nationalist sentiments, indulged in a measure of self-aggrandizement, hailed China’s emergent economic prominence as proof of superior global competitiveness. The country’s economic miracle, the State-owned newspaper, People’s Daily, boasted last week, exists because China’s State system — unlike those in the West — can make and implement economic policy quickly & efficiently.  

Say what you will, but the proof is in the pudding.

Source: NY Times, IMF.com, Wiki   Image: english.pravda.ru

China leading global economy in recovery

China’s industrial production and trade surplus posted robust double-digit gains in October, indicating a strengthening recovery in the world’s third-largest economy. China, unlike the U.S. and other western industrial nations, has managed well in the advance of the global economic crisis. Such economic strength is also likely to increase pressure on policy makers to let the yuan appreciate as a hedge against inflation risks.

The announcement came days before leaders from the Asia-Pacific region gather in Singapore this week, and a visit by President Obama to Beijing next week, where he plans to raise the issue of China’s currency policy and a more “helpful” role that China can play in the global economy.  China’s Premier, Wen Jiabao, and Zhou Xiaochuan, China’s Central Bank Chairman, have so far resisted pressures to loosen reins on the renminbi (yuan), awaiting a bigger rebound in exports in an effort to secure social stability and job gains.

“For China, it is necessary and appropriate to allow the currency to be more flexible,” Asian Development Bank President Haruhiko Kuroda said in an interview with Bloomberg Television in Singapore yesterday. “Crisis response by the Chinese authorities has been excellent,” and “they’ve brought about a very strong economic recovery,” he added.  As a result, production rose 16.1% year-over-year, the most since March 2008, according to China’s state statistics bureau in Beijing.  Meanwhile, retail sales gained an annual 16.2% in October.  In addition, the trade surplus almost doubled from September, to $24 Bn, as the slide in exports eased to the slowest pace this year.  The rise in retail sales is promising. If Chinese households can spend and consume more, and more capital investments by corporations, it can go a long way to leading a global economic revovery. Like most Asian nations, Chinese households and corporation are notoriously tight-fisted when it comes to spending, consumption and capital investment. 

Hours after the economic indicators were released, the central bank said foreign-exchange policy will take into account global capital flows and changes in major currencies, prompting speculation it will allow the currency to strengthen. The yuan’s peg to the dollar since July 2008 has left it dropping along with the greenback against the Euro and the Japanese yen.  Successively, China’s central bank holds more than $2Trn in U.S. Treasury reserves — enough to wipe-out the entire current U.S. federal budget deficit. 

Chinese central bank policymakers have indicated they will improve the setting of the yuan’s foreign exchange rate in a “proactive, controlled and gradual manner and based on international capital flows and movements in major currencies,” the People’s Bank of China’s said in a quarterly report yesterday. Officials have previously aimed to keep the yuan “stable.”

“The change in description of the yuan policy may signal an early warning to the market,” said Shi Lei, a Beijing-based analyst at Bank of China Ltd.  Read more here.

Source:  Bloomberg; Globe & Mail         Photo: LIU JIN/AFP/Getty Images

Asian corporate savings glut..??

As the major Asian powers lead the path to global economic recovery, it is going to have to tackle two issues which have direct impact on U.S. economic foreign policy, and which are also constraining Asia’s long-term growth potential.  Namely, (1) Asian firms that have strong net income (profitability) yet still do not make investments to expand or build their franchise; and (2) increasingly wealthy households have strong accumulated savings, but are reluctant to spend and consume. Failing to accomplish either of the two can stifle a global recovery, amplify stagflation, devalue the greenback, and can drive even larger trade imbalances in the U.S.  The IMF has examined this dilemma and their findings are compelling.

At first glance, such behavior seems inexplicable and counter-intuitive.  Let’s imagine for a moment you are an investor—you may well be— you put quite a bit of money into a company to back its expansion plans. Initially, these plans prove successful, and the company makes quite a bit of money. But then the firm ran out of investment ideas. What would you expect them to do?  Surely, you would expect them to return the money you provided, for example by paying it out as dividends. But in the past, prosperous decade before the current downturn this hasn’t been happening in emerging Asia. Firms have been sitting on their profits, not investing them, but not paying them out in dividends, either. That is a puzzle, and a problem.

It’s a puzzle because it’s not obvious why firms should sit on money when they don’t have any need for it. When firms initially started doing this after the Asian crisis of the late-1990s, they had a ready rationale. They wanted to pay down their excessive levels of debt, which during the crisis had brought some of Asia’s largest companies low. But as the years went on, and debts fell, first to safe and then to low levels, it was clear that something else must be going on.  There’s a further puzzling aspect. Economic theory states that households can “pierce the corporate veil” and extract value from a company even if it doesn’t actually pay out profits as dividends. That’s because the retained earnings would increase the firm’s net worth, which would be reflected in its share price. Households could then sell the shares, or borrow against them.

Either way, they could spend more. This theory has been tested in empirical research and found to hold in advanced countries, and some emerging markets. But it doesn’t hold true in China or the rest of emerging Asia. Households simply do not consume more, despite holding valuable financial assets. Why does this matter?

Also see Danny Quah’s comments on RGE’s Asia Monitor

It matters because Asia’s corporate savings puzzle lies at the heart of its economic imbalances. It is precisely the substantial and growing excess of savings over investment in the corporate sector, coupled with subdued household consumption, that over the past decade has produced the region’s large external current account surpluses.

We tried to analyze this mystery in Chapter III of the Asia-Pacific Regional Economic Outlook. We discovered two vital clues:

• Corporate governance. The higher the level governance, the more shareholders are able to exercise their rights and prevent firms from hoarding cash.
• Financial sector development. The more liberalized the financial market, the less firms hoard cash, because they have easier access to funding and are less worried about being shut out of financial markets. Financial liberalization also allows households to consume against their corporate wealth, because they can borrow using their financial assets as collateral.

These finding have profound implications for policy. For example, the econometric estimates imply that if Asia were to reach the average level of corporate governance in advanced economies, it would be able to lessen corporate savings by as much as 2½ percent of GDP. Similar advances in financial sector liberalization could reduce savings by 5 percentage points.  Resolving the conundrum of firms that save but do not invest, and households that hold this wealth but cannot consume may enable Asia to finally catalyze domestic demand.  It could help to  restore rapid growth, even in a “new world” of softer advanced country demand. Improved corporate governance and further financial sector development may be two remedies worth exploring.

Source: IMFdirect posted by Anoop Singh.   Image:  fotosearch.com

World Bank warns of Greenback's declining role in global finance

(NYT) WASHINGTON — The president of the World Bank said on Monday that America’s days as an unchallenged economic superpower might be numbered and that the dollar was likely to lose its favored position as the euro and the Chinese renminbi assume bigger roles.

Zoellick

“The United States would be mistaken to take for granted the dollar’s place as the world’s predominant reserve currency,” the World Bank president, Robert B. Zoellick, said in a speech at the School for Advanced International Studies at Johns Hopkins. “Looking forward, there will increasingly be other options to the dollar.”  Mr. Zoellick, who previously served as the United States trade representative and as deputy secretary of state under President George W. Bush, said that the euro provided a “respectable alternative” for financing international transactions and that there was “every reason to believe that the euro’s acceptability could grow.”  In the next 10 to 20 years, he said, the dollar will face growing competition from China’s currency, the renminbi. Though Chinese leaders have minimized their currency’s use in international transactions, largely so they could keep greater control over exchange rates, Mr. Zoellick said the renminbi would “evolve into a force in financial markets.” 

‘The United States would be mistaken to take for granted the dollar’s place as the world’s predominant reserve currency.’  -World Bank president, Robert B. Zoellick

The World Bank, which is financed by governments around the globe and lends money primarily to poor countries, has no say over the economic policies of large nations or over currency matters.  But Mr. Zoellick’s comments were unusual, in part because he seemed intent on being provocative. He argued that the United States and a handful of other rich nations could no longer dominate the world economy and suggested that America was losing its clout. He also took issue with a central piece of the Obama administration’s proposal regarding the country’s financial regulatory system.

“The greenback’s fortunes will depend heavily on U.S. choices,” Mr. Zoellick said. “Will the United States resolve its debt problems without a resort to inflation? Can America establish long-term discipline over spending and its budget deficit?”  Read more here.

LA Times:  The Twilight of ‘Pax Americana’..??

China's African strategy for oil resources

In yet another example of its increasingly competitive global strategy, China is shopping aggressively for commodity resources in the Dark Continent.  If you’ve kept up to date as I try to with China’s oversea investments in the African continent’s commodity and energy sectors you’re probably aware of the fact China has been shopping for commodities in emerging markets. Africa, and to a lesser extent South America, have been the primary beneficiaries of China’s FDI dollars between 2000-08. The two continents are home to abundant supplies of natural resources that China needs to sustain its robust economic growth. The two continents are also home to various countries that are hungry for foreign direct investment in their commodity sectors which until recent had been the main fuel behind their respective economics booms.

Under China’s foreign policy principle of ‘no political strings attached,’ China’s trade with the continent has no hidden ideological agenda. China and most Africa nations share the view that countries should not meddle in each other’s affairs. They have acknowledged that they can achieve common development only through cooperation based on mutual trust and mutual benefit. The pursuit of their own interests has brought them closer. Economic cooperation between the two sub-continents has grown at a robust pace. And China has stated its ambitions to move its trade with Africa to top $100 billion by 2010. That’s why this piece from today’s Financial Times of London is so interesting:

Lagos (FT) — A Chinese state-owned oil company is in talks with Nigeria to buy large stakes in some of the world’s richest oil blocks in a deal that would eclipse Beijing’s previous efforts to secure crude overseas. The attempt could pitch the Chinese into competition with western oil groups, including Shell, Chevron, Total and ExxonMobil, which partly or wholly control and operate the 23 blocks under discussion. Sixteen licenses are up for renewal.

CNOOC, one of China’s three energy majors, is trying to buy 6bn barrels of oil, equivalent to one in every six barrels of the proven reserves in Nigeria, sub-Saharan Africa’s biggest crude producer and a major supplier to the US.

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Details of the talks were revealed in a letter from the office of Umaru Yar’Adua, Nigeria’s president, to Sunrise, CNOOC’s representative, a copy of which was obtained by the Financial Times. The overall value of the Chinese offer is not disclosed, although some details suggest a figure of about $30bn. Some oil sector executives said the total on the table was $50bn. A spokesman for Mr Yar’Adua said: “Negotiations are ongoing not only with Sunrise/CNOOC but also with all other stakeholders in the industry. The federal government has not taken any final position on the issue.”

The letter, dated August 13, said an initial offer was “unacceptable” but added: “Your interest in all the listed blocks will be considered if your revised offer is favourable.”  Details of how the Nigerian government would allocate equity in the blocks to CNOOC have yet to emerge and it is unclear whether this would involve forcing western groups to relinquish stakes.  Read more here.

U.S. Foreign Policy and the Global Economy: a 'New Era of Engagement'

Echoing the theme and concept of the Global Markets & Foreign Policy blog, ‘The Caucus,’ the New York Time’s political blog, in honor of the opening plenary session of the United Nations’ (UN) General Assembly is featuring a blog page titled Foreign Policy and the Global Economy.  It’s an interesting read. 

‘[W]hen a superpower becomes an agent of change—in word and deed, in policy and tone…we are demonstrating that the United States is willing to listen, respect differences, show mutual respect and consider new ideas from nations large and small. Even more importantly, we are advancing our interests and making Americans safer.’  

                                       –United States  UN Ambassador, Susan E. Rice

The blog covers largely the main points President Obama will address as he attempts to re-establish the U.S. to a position of global leadership through a set of initiatives titled ‘A New Era of Engagement’ with the world introduced earlier this year by his U.N. Ambassador, Susan E. Rice.  The Caucus blog also covers — or attempts to — the various global markets and economic foreign policy issues facing leaders of nations in attendance at this session of the UN General Assembly. Among the topics high on the Economic Foreign Policy agenda are:

• Economic Imbalances resulting from the Global financial crisis
• Agreeing on a global framework for financial regulatory reforms
• Threat of Economic Nationalism (Protectionism) among nations
• Globalization and the Doha Round of WTO talks 
• Coordinating Cap & Trade climate change policy
• The threat of a severe period of global inflation
• Framework for global labor standards

President Obama called on big developing powerhouses like India and China to commit to “strong measures” to combat climate change around the world, saying that rich countries which have contributed to much of the world’s global warming cannot fix the problem alone.

 “Yes, the developed nations that caused much of the damage to our climate over the last century still have a responsibility to lead,” Mr. Obama said, speaking before a United Nations summit on climate change that is being held on the outskirts of the opening of the General Assembly. “And we will continue to do so — by investing in renewable energy, promoting greater efficiency, and slashing our emissions to reach the targets we set for 2020 and our long term goal for 2050.” But then, without specifically naming them, Mr. Obama shifted the onus on to India and China. “Those rapidly growing developing nations that will produce nearly all the growth in global carbon emissions in the decades ahead must do their part as well,” he said. “They need to commit to strong measures at home and agree to stand behind those commitments just as the developed nations must stand behind their own. We cannot meet this challenge unless all the largest emitters of greenhouse gas pollution act together. There is no other way.”

As he spoke, Chinese Premier Hu Jintao sat in the front row with his delegation, listening. Mr. Obama, speaking in the cavernous hall at the United Nations, was the headline speaker in a disparate program put together by U.N. Secretary General Ban Ki Moon, which spanned . . .

Read more here.

Source:  www.unausa.org, Photos: NYTs Caucus blog; www.unausa.org

Don’t know who’s heading the Brazilian delegation..?? How the U.S. plans to face down challenges to President Obama’s import tariffs..??  Or what China really wants out of the Pittsburgh summit? We’ve got you covered.

BOSTON — The world is coming to Pittsburgh. Twenty countries (well, if you count the European Union as a single entity) and 20 delegations. That’s a lot of names, faces and political priorities to keep straight.

But don’t worry. Here’s our interactive guide to surviving the Pittsburgh 2009 G20 summit, put together by our friends at GlobalPost’ – affiliated bloggers and well-informed correspondents in the field worldwide. 

Read more from our friends at GlobalPost here.

Also, Huffington Post is reporting that a fresh threat of Protectionism is the most pressing concern being expressed by various leaders of G-20 nations. 

As economies escape the grips of recession, the pressure to work together appears to be lessening. National economic self-interest [i.e., Economic Nationalism] is reasserting itself. That includes a desire to protect battered home industries from overseas competition as governments look toward the day when they can dial back stimulus measures.

Read more here.

See video: Pittsburgh G-20 Summit: The Basics

Source: World Affairs Council of Pittsburgh video

Photo: www.globalpost.com/commerce