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  THE
KWR INTERNATIONAL ADVISOR May/June
2003 Volume 5 Edition 2
In this issue:
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The Global Economy – Living in Fear
By
Scott B. MacDonald
 Radical
Islamic terrorists strike at targets in Saudi Arabia, Morocco
and Israel, North Korea continues to bluster with its finger close
to a nuclear weapons trigger, Iran is attempting to develop its
own nuclear weapons program, and Iraq remains unruly, with the
rule of law still lacking in the country’s major cities.
The U.S. dollar is falling, the Euro and Yen are going up, and
one of Japan’s major banks appeals for government assistance
to stave off a failure. Economic data from Japan indicates that
a double dip recession is an increasing possibility, while trends
in Europe point to the same direction. The German economy is looking
at unemployment creeping over 11%, while the French government
must contend with fiscal slippage, the pressing need to bring
the pension and benefits systems cost under control, and the strong
hand of unionized labor being manifest in a major national strike.
The stock market euphoria that was evident in April and the early
part of May, is increasingly fickle. Although most investors really
enjoyed the long-deserved and distantly remembered “feel-good”
sensation of watching the Dow, NASDAQ and FTSE tick upwards, the
solid foundation for a sustained bull market – as well as
corporate health and increased capital spending are still lacking.
As we have stated before the economic recovery is going to be
gradual and painful. In the United States, the recession is over,
but the ability to construct a strongly sustainable recovery remains
a challenge. The consumer is tired and the corporate sector still
is not spending. Worse yet, unemployment hovers around 6%, making
it feel like as though the recession is still here for many Americans.
Adding to the sense of uncertainty, there is growing concern about
deflation, broadly defined as a reduction in the level of national
income and output, accompanied by falling prices. It has been
partially caused by excess capacity in industries from automobiles
and telecommunications equipment to banking and airlines. Another
factor is the manufacturing machine that China has become: China’s
cheap labor and exports have forced many other manufacturing countries
to lower their prices to remain competitive.
While a little bit of deflation is not necessarily a bad thing
as it can balance past bouts of inflation (or hyperinflation in
some parts of the world), the fear is that the current type evident
in Japan and Europe could make things much worse in the United
States. If the U.S. economy slips into a new recession, the already
struggling global economy will stagnate.
What must be done to put the global economy back on track? First
and foremost, the U.S. economy needs to maintain growth above
2% in 2003 and increase that pace in 2004. For that to occur some
form of tax reform/budget stimulus must pass the U.S. Congress
and be implemented, interest rates remain accommodative (we expect
one more cut in June), and capital spending resume (this may be
the toughest to occur).
Equally important, but in a medium term timeframe, Europe needs
to regain some degree of economic momentum. This implies a more
accommodative stance by the European Central Bank -- which has
been more obsessed with inflation -- a willingness to implement
badly needed, yet unpopular, pension and benefit reforms, which
are necessary due to demographic and fiscal pressures. It also
requires greater leeway on the fiscal front as the current EU
target of a maximum allowance of a deficit of 3% of GDP is clearly
not helping and can in fact be argued as a contributory factor
to growing deflationary pressures. Germany, in particular, is
vulnerable to deflation – it lacks an ability to cut interest
rates, push up fiscal spending and its banks are in a weak condition.
Rounding out the picture, it is important that China continues
to grow at a rapid pace of above 6%. SARS has clearly put a crimp
in China’s strong GDP performance for 2003, but it could
also result in some positives for the Asian country in terms of
improving the national health care system and upgrading sanitation
practices. This would certainly help to contain SARS and reduce
the potential outbreak of new diseases.
As for Japan, the problems remain – a troubled banking system,
anemic economic activity, a large and mounting national debt,
and an embattled government seeking to move ahead on reforms against
entrenched opposition. We do not see Japan imploding, but the
economy will remain a challenge for the government and a point
of concern for the community of international policymakers. The
May government intervention in Resona Bank, which is a de facto
nationalization of the country’s fifth largest bank, does
provide an opportunity for the Koizumi administration to break
the logjam in the terms of the banking sector. It appears that
Resona’s top management is to resign, providing the government
with an opportunity to appoint reformers. If this transpires,
Japan’s fortunes could begin to look up.
The bottom line on the global economy and stock markets is that
we continue to live in fear. There is a long shadow looming over
the landscape – deflation. It is a major factor in Japan,
the world’s second largest economy, and it is increasingly
being mentioned as a point of concern in Germany and the United
States. The saving grace thus far has been that the U.S. economy
continues to grow – albeit far too slowly to remove the
fear factor. We still expect US real GDP growth of 2-2.4% for
2003, with a pick up to 3.0-3.3% in 2004. Key triggers going forward
include the passage of a stimulus-oriented budget in the US, interest
rate cuts in Europe and the United States, and some reduction
in global excess capacity. However, if the proper measures are
not taken in the United States and Europe, deflationary measures
on the global economy will mount. The nervous market over-reaction
to deflationary fears will become a reality and we will then really
be living in fear.
Will
the Dollar Remain Dominant?
By
Jane Hughes
The dollar has followed a rocky road in recent months, tumbling
to nearly $1.18 against the resurgent euro and to an anemic
119 yen, as foreign investment in both bricks-and-mortar and
portfolio investment in the States has ebbed. If the foreign
exchange rate is essentially the bottom line of the country,
then investor sentiment toward the once-mighty U.S. dollar –
and the economy that underpins it – is definitely cooling.
But while day-to-day currency movements remain well-nigh unfathomable,
there has been surprisingly little structural change in the
FX markets, even over the past decade. The dollar may be slipping
in value, but it continues to dominate the markets in other,
perhaps even more important, ways. The arrival of the euro in
1999 was supposed to herald a new era in which dollar dominance
of the FX arena gradually gave way to a more equitable distribution
of power among a tri-zone currency world (dollar, euro, and
yen). This has not happened. According to the most recent report
by the Bank for International Settlements (BIS) on FX market
activity, published in 2001, within the tri-zone world the dollar
still reigns supreme. A whopping 90% of all currency trades
still include the dollar on one side of the deal; by contrast,
the euro figures in just 38% of all FX transactions.
The potential for internationalization of the euro – its
use in transactions not involving the 12 component countries,
and therefore its ability to challenge the dollar’s dominance
of global FX markets – remains murky. As a general rule,
this potential may be assessed in three ways: the euro’s
use as a medium of exchange for Europe’s trade with non-European
countries; its role as a store of value for stocks and bonds
on world capital markets; and its use in official FX reserves
held by the world’s central banks.
By these yardsticks, the picture is mixed.
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Role in world trade: The U.S. accounts for only 14% of world
trade, but the dollar is used to invoice close to 50% of the
world’s exports. Clearly, there is room for the euro
to play a much bigger role in world trade. Countries with
close political, economic and financial links to the eurozone,
like those in central and eastern Europe as well as some former
colonies in Africa, may move toward the euro as an anchor
currency. This would result in the emergence of a broader,
informal “eurozone” encompassing countries well
beyond its official limits.
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Role on international capital markets: The introduction of
the euro, clearly, is playing a big role in broadening the
depth, liquidity, and appeal of European capital markets.
In 1999, euro-dominated bonds accounted for 45% of all bonds
issued on international markets, slightly outstripping the
42% of bonds issued in dollars. This could presage the evolution
of the euro into a safe-haven currency over time, as investors
assess the strength and stability of the euro as well as the
credibility of the European Central Bank.
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Role
in official reserves: The dollar accounts for 57% of global
FX reserves, and central banks have been loath to trade
in their dollars for euros thus far. Political issues may
eventually hasten this movement, but the huge bulk of FX
reserves held in Asian central banks (China alone is holding
around $200 billion) are conservatively managed. Given the
initial weakness of the euro, and lingering doubts about
the long-term viability of European monetary integration,
it seems unlikely that the euro will challenge the dollar
as a reserve currency for the foreseeable future.
So FX markets are still largely dominated by dollars. What
else has not changed on FX markets? The birth of the euro
led some observers (mostly French and German) to predict that
London would experience a gradual decline in its importance
as an international financial center, to be replaced by Frankfurt
and Paris. This, too, has not happened. London continues to
handle close to 1/3 of FX trading activities, far more than
any of its competitors, and the institutional skills and infrastructure
in the City of London command a hefty competitive advantage
in the FX business.
Trading in “exotic” currencies, too, was supposed
to take off. Faced with liberalization and deregulation in
emerging currency markets around the world – and faced
simultaneously with the need to replace lost opportunities
in intra-European currency trading – many traders looked
to exotic currencies as the next frontier. A decline in trading
activity and increased efficiency in markets for the mature
currencies of western Europe and North America (the euro,
after all, is entirely about removing market inefficiencies)
threatened FX trading profitability. Fortunately, at the same
time governments in Asia, central and eastern Europe, Latin
America, and even Africa were enthusiastically opening their
markets to foreign capital. The result seemed inevitable.
Or was it? In fact, the data on exotics market activity has
failed thus far to support the overheated rhetoric. According
to the BIS, trading in emerging market currencies comprised
just 4.5% of total FX market turnover in 2001, compared to
3.1 percent in 1998. So while trading in exotics is certainly
edging up, and is expected to play a greater role in FX trading
as the mainstream currencies get even older and stodgier,
the markets are still heavily dominated by trading in dollars,
euros, yen, and British pounds. (Indeed, trading in the three
main currency pairs – dollar/euro, dollar/yen, and dollar/pound
– accounts for close to 2/3 of total market activity.)
A few possible trends to watch for, then:
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First, the possibility of a serious decline in market
liquidity is worrisome. FX market participants have complained
in the past couple of years that liquidity has become
erratic. The rise of electronic brokers, consolidation
within the banking industry, and the higher level of risk
aversion among global hedge funds all contribute to this
trend, and make it increasingly difficult to predict when
these pockets of illiquidity will occur.
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Second, the FX markets may prove more herd-like than
ever, as trading business is more and more concentrated
among a few large players and the big macro hedge funds
play a cautious role. This may, in turn, presage more
sudden and dramatic currency swings.∑ Next, the
markets may prove more inexplicable than ever, stemming
from the growing influence of equities, and merger and
acquisition activity, in currency trading. Traditional
reliance on fundamental macroeconomic factors to predict
FX movements is increasingly discredited in this environment,
but it is far from clear what can replace this methodology.
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Finally, trading volumes will probably rebound after
the period of consolidation at the end of the 1990s. Once
the fallout from the emerging markets crises of 1997-87
is fully absorbed and the euro finds its rightful place
in the markets, the inexorable march of globalization
and resulting rise in cross-border capital flows will
be reflected in higher turnover on FX markets. But buyer
beware: The larger and more unwieldy the market becomes,
the less responsive it will be to government intervention
– and the easier it will become for traders to destabilize
currencies of smaller and vulnerable emerging market countries.
Hong
Kong – The Rise and the Decline of a Great City
 That
the world’s economic geography changes from time to time
is nothing new and has been a common feature of human progress
and development throughout the ages. Herodotus already observed
in the 5th century BC that, “the cities that were formerly
great, have most of them become insignificant; and such as are
at present powerful, were weak in olden times”. In fact,
it is remarkable how uneven economic development has been since
ancient times with a great number of cities, countries and civilizations
having flourished and decayed – but at different times
and in different regions of the world.
In early history the major clusters of wealth such as Thebes,
Babylon, Persepolis Nineveh, Bactria, and Samarkand were mostly
located around the Nile, Euphrates and Tigris rivers and along
the Silk Road. However, with the rise of the seafaring Phoenician
trading empire a shift in the centers of prosperity and power
toward the Mediterranean Sea took place, which led at different
times to the rise of cities like Athens, Tyre, Carthage, Alexandria,
Rome, and Constantinople, and finally culminated in the 15th
century with the first centers of capitalism – the Italian
trading cities of Venice, Florence, Pisa and Genoa. But, when
the Portuguese Vasco de Gama discovered in 1498 a new trading
route to Asia around the Cape of Good Hope and with the Spanish
conquest of the Americas, trading routes shifted away from the
Silk Road and the Mediterranean Sea, and threw Venice, as Montesquieu
observed, into a corner of the world where it has remained.
With the rise of the Portuguese and Spanish Empires and later
with the Dutch trading hegemony the clusters of wealth shifted
to cities like Lisbon, Cadiz, Antwerp and Amsterdam in Europe,
to Goa, Malacca, Macao and Batavia in the East, and to Mexico
City, Potosi, Lima, Bahia and Havana in the Americas.
The
Industrial Revolution and the rise of the British Empire in
the late 18th and early 19th century brought once again huge
changes in the world’s economic geography as cities such
as London, Manchester, Birmingham, Lancaster and Liverpool in
England, and Calcutta in the East displaced the old centers
of commerce, which had flourished under either Spanish, Portuguese
or Dutch rule. Then, in the late 19th century and especially
in the 20th century, the rise of industrial and commercial centers
in the US - first all located along the east coast but then
shifting to the Great Lakes region and the west coast displaced
the early English manufacturing centers.
Clearly, throughout the ages, economic growth and development
has been extremely uneven whereby major changes in the world’s
economic geography were driven by new inventions, discoveries
and social events. New inventions such as the compass, shifted
trading routes from land to sea and led in the 15th century
to the discovery voyages, which enlarged the world’s economic
sphere several-fold and relegated the until then rich Mediterranean
cities into a backwater. The construction of canals and the
invention of the steam engine, steel, railroads, tractors, cars
and electricity permitted the opening of landlocked territories
for agriculture and industries, which led to the rapid rise
of many totally new manufacturing and commercial centers, which
were landlocked, in the 20th century. New industries frequently
also increased the demand for commodities, which brought prosperity
to cities near large resource deposits such as Manaus for rubber,
and to Houston and Dallas for oil.
But throughout history cities did not only become rich because
of a favorable location, which was conducive to trade, the proximity
to skilled labor and abundant resources, which facilitated industrialization
and the exploitation of natural resource, and in the case of
Rome through sheer military power. What were also required were
a skilled administration, a well-established legal and commercial
infrastructure, low taxes, and most of all religious tolerance
and freedom, which attracted dynamic minority groups, and scientists,
artists, teachers, philosopher and inventors. Conversely cities
decayed because of internal and social strive, costly military
campaigns in order to maintain their trading empires or other
commercial interests, protectionism, their inability to adapt
to changing economic conditions, and intolerance towards minority
groups, which led merchant families or religious minorities
to leave.
Competition from the opening of new territories or from new
industries as well as infectious diseases was also frequently
an important factor. The Black Death caused by the Pasteurella
pestis, which made its first appearance in Europe at the port
city of Kaffa in 1346 when it was besieged by the Mongol leader
Kipchak Khan Janibeg who catapulted dead bodies into the city
(the first recorded case of biological warfare) quickly spread
to all the port cities of the Mediterranean and European trading
centers and reduced in the second half of the 14th century the
European population by close to 40%. The death toll from the
plague was naturally far higher in densely populated trading
ports and accelerated their economic decline. In fact it was
only in 1550, more than 200 years after the outbreak of the
pest at Kaffa, that Europe’s population again reached
pre-plague figures, whereby renewed plague epidemics ravaged
Venice also in 1575 and 1630. Or consider the economic and social
impact of the infectious diseases, such smallpox and influenza,
which were brought along to the Americas by the conquistadors.
Prior to the conquest by Cortez the Mexican civilization numbered
over 20 million, but the Aztecs lacking any acquired immunities
to the new infectious organisms were decimated within 50 years
to just 3 million!
We can therefore, see that Hong Kong suffers at present from
both a structural shift in the world’s economic geography
and a plague, about whose virulence and duration little is known.
Following the breakdown of the socialist and communist ideology
in China and the Soviet Union, and the end policies of self-reliance
and isolation on the Indian subcontinent the world’s economic
sphere was enlarged by as much as at the time of the discovery
voyages, since more than 3 billion people joined the global
market economy and capitalistic system. This means new competitors
for more recent centers of prosperity, such as Hong Kong, Taiwan,
South Korea and Japan, which benefited for as long as China
was a closed society under socialist policies. The same way
manufacturing shifted in the US from the East Coast to the Great
Lakes following the construction of canals and railroads in
the 19th century, the opening of China will lead to a massive
relocation of production, commerce and financial markets to
the mainland with Shanghai likely to regain the pivotal position
it enjoyed before the communist takeover, and other provinces
undermining the manufacturing sector of the Taiwanese, South
Korean, Japanese and Hong Kong economy.
In addition to this ongoing major change in the world’s
economic geography, which is also taking place in Europe as
a result of the breakdown of the Soviet Union, Hong Kong is
now increasingly vulnerable to infectious diseases whose most
fertile breeding ground is located in Southern China where humans
mingle densely with wild and domestic birds, and livestock.
Fortunate in the case of the 1997 bird flu, which could not
jump from human to human, and was, therefore, contained by killing
a million chicken, Hong Kong is now faced with its most serious
crisis since the 1967 riots due to the SARS causing virus, which
most likely jumped from pigs to humans but can now also be transmitted
among humans. Surely, Hong Kong will survive both the increased
competition from a large number of new commercial centers in
China and the SARS pandemic. But, these two major outside shocks,
which in the case of the increased competition from China will
not go away, and in the case of infectious diseases may recur
from time to time will likely reinforce the relative decline
of Hong Kong’ economic and financial power compared to
other cities in Asia and in particular in China.
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EUROPE/MIDDLE
EAST
Putting the House in Order: Turkey’s Attempts at E.U.
Membership
Following the AKP’s (Justice and Development Party) overwhelming
victory in last November’s general elections, party leader
and now prime minister, Recep Tayyip Erdogan, promised sweeping
human rights reforms and economic measures to comply with the
EU’s political and economic criteria to enable Turkey
to begin membership negotiations. He believed that Turkey was
entitled to a date to begin talks since other candidate countries
had not fulfilled the criteria in full when they had begun their
respective negotiations. At the time, he stressed the mutual
interests of both the EU and Turkey, with the republic’s
membership as an example to the Muslim and western worlds that
democracy and Islam can co-exist. Erdogan also went so far as
to endeavor to implement outstanding rulings by the European
Court of Human Rights, identified as a serious issue by the
European Commission’s regular progress report on Turkey,
removing restrictions on freedom of expressions and conscience,
and allowing non-Muslim religious foundations to own real estate.
During December’s Copenhagen EU meetings, while the proud
Danish government concluded final preparations for the entry
of ten new member states, despite the best of intentions, the
Erdogan government discovered it would have to wait until December
2004 to learn if its planned reforms would meet the EU’s
criteria for membership. The European Council leadership resolved
to review Turkey’s progress on human rights, democracy,
and treatment of the Kurds prior to that date and would begin
negotiations "without further delay" if EU standards
in those and other areas were met. That resolution, in part,
arguably came about following the Turks’ withdrawal of
their long-standing veto over the use of NATO resources by the
EU military rapid reaction force. In the end, Erdogan reluctantly
accepted the December 2004 date, despite the Bush administration’s
strong lobbying tactics for a faster time-table for Turkey’s
accession. The Bush push had been urgently initiated in the
wake of the 9/11 tragedy and ahead of the then Iraqi invasion
plans as a means to demonstrate the benefits of reform to the
Islamic world. Also contributing to the Turks’ displeasure
was the EU leadership’s support for Bulgaria and Romania
to join the community by 2007.
The Treaty of Nice, signed in February 2001, created the framework
for the expansion of the EU. According to the criteria established
during the Copenhagen Summit in 1993, the timing of accession
of each country to the EU depends upon the progress it makes
in preparing for membership. These criteria include:
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stability
of institutions guaranteeing democracy, the rule of law, human
rights, and respect for and protection of minorities;
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the
existence of a functioning market economy as well as the capacity
to cope with competitive pressure and market forces within
the Union; and
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the
ability to take on the obligations of membership including
the adherence to the aims of political, economic, and monetary
union.
While
aware of these strict criteria in relation to Turkey’s
recent economic, political, and social experience, the Erdogan
government realizes there is still much to do, although some
progress has been achieved.
The planned EU enlargement to absorb ten new member states will
create a trade bloc of twenty-five nations, a total population
of 450 million and an economy of $9.4 trillion, closely matching
that of the United States. Following a string of national referendums,
the ten candidate countries are scheduled to join in May 2004.
Soon thereafter, they will elect members to the European Parliament
and within the next few years, the majority, if not all, are
expected to adopt the Euro. The ten states are Malta, Cyprus,
Slovenia, Czech Republic, Poland, Hungary, Slovakia, Estonia,
Latvia, and Lithuania.
The EU’s 10 new member states may not welcome the prospect
of eventually sharing community transfer payments with Turkey,
a much larger country with a lower per capita GDP. Should Turkey
begin serious membership negotiations in early 2005, it may
not complete such negotiations for another eight to ten years
and by then it could have a population in excess of 80 million.
That would make it the EU’s largest member and among its
poorest. However, Turkey’s young population could arguably
become an advantage for the EU’s growing imbalance between
retirees and workers. Yet, its different cultural and religious
traditions would dramatically change the face of Europe.
Among the ten new members will be Cyprus, which has been divided
since 1974, when Turkey sent troops to repel a Greek-sponsored
attempt to take over the island that gained independence from
the U.K. in 1960. In 1983, the Turkish-held northern portion
declared itself an independent republic, but Turkey remains
the only nation that recognizes the separate union. A nine-nation
UN peacekeeping force continues to guard the 120-mile ‘Green
Line.’ Several attempts for a resolution of the partition
have failed, with the most recent occurring this March. Turkish
Cypriot leader Rauf Denktash then rejected a U.N.-sponsored
plan, championed by General Secretary Kofi Anan, that proposed
a combination of compensation and limited restitution to the
Greek Cypriots.
The talks failed because of disagreements over land and population
exchanges. That ended hopes of a united Cyprus that would join
the EU in May 2004. However, Turkey is now reportedly working
on a plan to transfer to a compensation board in the northern
part of Cyprus several thousand Greek Cypriot property claims
that would have otherwise been sent to the European Court of
Human Rights in Strasbourg.
As another positive measure, Erdogan surprisingly convinced
Denktash to lift the travel ban between the two regions in late
April. As a result, more than 300,000 people have since crossed
the ‘Green Line.’ The reported majority of the border
crossings have been made by Greek Cypriots visiting their former
homes, with most Turkish travelers seeking employment in the
south. Erdogan is reportedly ready to lift the trade ban on
Greek Cypriots and urged Greece and the world community to lift
trade restrictions that are economically strangling Turkish
Cypriots who have a per capita income of less than one-third
of the Greek Cypriots. Despite this gesture, he still insists
on the continuation of the two autonomous Cypriot communities.
Although Greece has backed Turkey’s bid for EU membership,
Turkey still fears that Cyprus, as an EU member, could veto
its eventual membership.
Six months after an overwhelming electoral victory, the AKP
has disappointed many as its experiment to reconcile Islam and
democracy continues to struggle. The party’s inexperience
and mistrust of the political establishment have prevented it
from reaching many of its reform goals. The authorities’
reported unsatisfactory response to the aftermath of the earthquake
on May 1st in the Kurdish majority province of Bingol, similar
to past governments’ tardy responses to natural disasters,
led to outcries from the opposition and clashes between police
and local demonstrators who were protesting shortages of tents,
food, and other emergency supplies.
As expected by many analysts, AKP-driven relations between the
secular state and Muslim society have become increasingly strained.
This was most evident when the division in parliament caused
the recent refusal of the U.S. request to deploy troops within
Turkey for the Iraqi campaign. AKP’s biggest challenge
remains the powerful military, which is very wary of further
reforms that would challenge its influence as the proud guardian
of Turkey’s secular traditions.
AKP carries the heavy baggage of the Islamic movement’s
previous failed attempt at democratic leadership. Erdogan’s
former mentor, Necmettin Erbakan, who also promised to respect
the republic’s secular system, found himself deposed by
the military just two years after becoming prime minister in
1997. Erdogan and others abandoned Erbakan and established AKP
on a political platform of democratic reforms with the goal
to achieve EU membership. The spotlight is also now on the AKP
to see whether it will act on its promise to pursue incomplete
IMF dictated structural reforms that were previously agreed
to by the former government. Those reforms range from mass privatization
to direct foreign investment schemes designed to eliminate two
of Turkey’s chronic ailments: the suffocating debt trap
and double-digit inflation levels.
Such an overhaul is paramount for Turkey to satisfy the EU’s
economic conditions, in addition to political criteria for membership.
It remains to be seen how successful the Ergodan government
will be in those efforts. We expect it to be a long road to
climb.
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LATIN
AMERICA
Argentina: A Rock and a Hard Place
By
Jane Hughes
 The
choice between former President Carlos Menem and leftwing
governor Nestor Kirchner in Argentina, the two presidential
candidates to qualify for the second round of voting, was
always depressing. The outcome is worrisome, too: Menem’s
abrupt withdrawal (in the face of certain defeat) handed Kirchner
a presidency that is tainted from the very beginning. At any
rate, now the course is set, so it is time for the markets
to render their verdict.
The stock market actually dropped 8 percent the day after
the first round of voting, which set the stage for a second
round runoff between the widely discredited and unpopular
Menem – whose financial mismanagement is widely viewed
as paving the ground for Argentina’s financial collapse
of 2001 – and Kirchner, an unashamedly unreconstructed
Peronist whose economic plan actually drove business leaders
into the Menem camp. The denouement, giving Kirchner the presidency
without the legitimacy of an electoral win, can hardly be
viewed as a victory for Argentine democracy. In fact, the
peso fell by over 5 percent in the days following Menem’s
withdrawal, reflecting widespread dismay with the result.
Kirchner takes office on May 25 as Argentina’s sixth
president in 18 months; his mandate consists of the 22 percent
of the vote he received in the first round.
Kirchner’s record as a provincial governor and his candidacy
were unimpressive, too. Nothing in Kirchner’s career
as governor of an oil-rich province with less than 200,000
inhabitants has prepared him for the challenges that lie ahead.
In stark contrast to his fellow leftist Luis Ignacio da Silva
(Lula) in neighboring Brazil, Kirchner made little attempt
to reach out to business and foreign leaders who were unnerved
by his sometimes strident leftwing rhetoric during the campaign.
Kirchner’s economic plans are murky, but include:
-
A
pledge to demand that foreign creditors cut Argentina’s
overall debt, lengthen its maturities, and slash interest
rates;
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Promises
of greater social justice and wealth redistribution;
-
Plans
to deepen the government’s import-substitution economic
model; and
-
A
commitment to give the state a bigger role in the economy,
partly by implementing massive job creation programs fueled
by government spending on infrastructure projects. He has
talked of a program to build three million new homes, which
will create five million jobs in an effort to bring down
the 20 percent-plus unemployment rate.
On
the positive side, Kirchner is taking over at a time when
Argentina’s much-battered economy is actually showing
some tentative signs of life. The country will run a healthy
trade surplus in 2003 (partially thanks to a more competitive
exchange rate), the budget is showing a primary fiscal surplus,
growth is put at 4% for the year (after an 11% decline in
2002), and there has been no sign of the much-dreaded hyperinflation
that accompanied past currency devaluations in Argentina.
Both the central bank president and Economy Minister Roberto
Lavagna – who is viewed as the man behind this burgeoning
recovery – have pledged to remain in office under a Kirchner
government.
However, much of this progress can easily be undone. Both
the trade surplus and the lack of inflation reflect, in large
part, the moribund state of the Argentine domestic economy.
Any revival in domestic demand – especially one fueled
by spiraling government spending, as Kirchner suggests –
is likely to invite both higher imports and higher prices
(not to mention a return to government deficits). Moreover,
Kirchner’s approach is unlikely to foster a prompt reconciliation
with Argentina’s foreign creditors, who are still reeling
from the country’s $95 billion default in December 2001,
the biggest sovereign default in history. Argentina cannot
move forward until the issue of its $170 billion debt, the
equivalent of nearly 140 percent of GDP, is resolved. With
the best will in the world, devising a repayment mechanism
will be unspeakably complicated – especially since more
than $55 billion of the bonds are held by overseas investors,
many of them retail investors.
Again, in stark contrast to Lula, Kirchner’s rhetoric
suggests that he may not have the best will in the world.
Under these circumstances, negotiations will be lengthy, intense,
and difficult. In the end, of course, Kirchner will have no
choice but to reach some accommodation with the foreign creditors
– but the process looks to be painful.
On the domestic front, Kirchner’s reputation as an old-line,
unreconstructed Peronist (a ‘party hack’ in American
terms) may also presage trouble. The deeply divided Peronist
party will find it difficult to sustain any kind of congressional
momentum, especially if the nascent recovery proves to be
short-lived. Kirchner’s uncertain mandate will buy him
little support in the congress, nor does he have any support
base among the country’s powerful provincial governors.
In this environment, Kirchner’s prospects for reforming
the deeply troubled domestic financial system – essential
if companies are to regain access to credit and jump-start
a real recovery – are also poor.
Despite all of Menem’s baggage, he probably would have
been the lesser of the two evils at this point in Argentine
history -- from the financial analyst’s point of view.
But the voters have turned their backs on Menem’s shady
past, and chosen to move forward with Kirchner. The best possible
outcome would be a Lula-style conversion for Kirchner once
he is in office. Optimists hope for a form of “smart
populism” that would vindicate the voters’ choice
and propel Argentina forward into the new century. As yet,
though, there is little sign of this. The worst outcome –
a legitimacy crisis that will remove Kirchner from office
well before his term is up – seems like a better bet.
Mexico – Increasingly Attractive Investment Fundamentals
By
Scott B. MacDonald
Mexico's credit fundamentals are improving – albeit
at a slower pace than in previous years. Reflecting this,
Moody's has recently changed the outlook to positive and
the Latin American country could benefit from any extended
complications with SARS in Asia. Mexico remains a relatively
low cost producer of many goods and has excellent proximity
to the U.S. through NAFTA. Despite the slight contraction
in first quarter 2003 real GDP, there are signs that parts
of the economy are beginning to gain momentum, a trend which
could strengthen when the U.S. recovery becomes more pronounced.
The Mexican economy is closely linked to the U.S. When the
U.S. economy slowed in 2001 and 2002, it took the Mexican
economy with it. Real GDP growth contracted in 2001 and
was weak (0.9%) in 2002. We expect the economy to expand
by 2.0-2.4% in 2003, with 3.5% growth possible in 2004.
The maquiladora sector, which has struggled over the last
two years, is beginning to see signs of recovery. The commercial
banking sector is also beginning to see an increase in activity.
Other key points to consider:
1.
Inflation forecasts are heading down. In early 2003, inflation
for the year was expected at 4.3%. The central bank's tight
monetary policy, however, is having a positive impact, as
consensus estimates for inflation have been lowered to 3.9%.
Considering that Mexico's inflation levels were well over
10% throughout the 1990s, this is positive news. For the
first 15 days of April, inflation was just 0.01%, the lowest
biweekly reading since April 2002. Inflation had picked
up in the late part of 2002 due to the steep depreciation
of the peso bled through into prices.
2. Retail sales were up 4.2% in February, well above expectations
and another sign that the worst of the recession may now
be over. Sales growth in basic consumer goods has been relatively
healthy for several months now. Big-ticket items have lagged.
After having fallen year-on-year for five of the six months
between August 2002 and January 2003, auto sales were up
a respectable 2.1% in February. It is expected that auto
sales are likely to continue to show ongoing strength in
March.
3. Higher than expected oil prices have been a major windfall
for Mexico and will help the government make its fiscal
target of a budget deficit equal to 0.5% of GDP. Higher
oil prices and better tax collection measures bore fruit
in the first quarter of 2003, as federal revenues rose 21%.
Mexico has now accumulated a 27.2 billion peso ($2.7 billion)
surplus. The government budget estimates the price of Mexican
oil will average between $23-24 a barrel, helping the state
to take in 14 billion pesos more in revenue this year than
initially forecast.
4. We expect Mexico's external accounts will remain off
of investors' radar screens. Mexico's current account deficit
will be equal to 2.5% of GDP, which should easily be financed
by foreign direct investment (FDI). It will also be an improvement
on 2002's current account deficit of 2.9% of GDP. FDI is
forecast at $14 billion for 2003. In addition, Mexico has
done its financing in the bond market already this year
and does not need to return.
5. There should be increased political noise as Mexico heads
to the July 6, 2003 congressional elections. However, the
political risk associated with the election is low. Both
the party of President Vincente Fox, the PAN, and the major
opposition party, the PRI, share a broad consensus on economic
policy. Indeed, the PRI long dominated Mexico's political
life and the last three presidents, prior to Fox, advanced
much of the structural reforms that provide the economy
its current foundation. Consequently, if the PRI were to
win the congressional elections in July this would not represent
a major shift in terms of policy. It could result in more
politicking between Congress and the Presidency in terms
of making deals to pass key legislation in the second half
of Fox's term. The PAN is coming in around 38% in opinion
polls over 37% for the PRI, while the left-of-center PRD
is polling around 20%. Such an actualization of the vote
would leave the Congress much as it now - an arena where
the PAN must form tactical alliances with the PRI to pass
legislation.
Mexico
has made considerable strides from the bad old days of debt
default during the 1980s. Although challenges remain, Mexico
remains one of the stronger sovereign performers, a trend
that should continue. The trick for Mexico is to maintain
fiscal discipline during the period that it takes the United
States economy to regain stronger and sustained momentum.
When the U.S. recovery eventually comes, the country just
south of the Rio Grande will be a strong position to take
advantage of improving macroeconomic conditions in North America.
BUSINESS
Japan’s Bio-Tech Venture: Tsunami or Just a Bubble?
By
Andrew H. Thorson, Partner of Dorsey & Whitney LLP
in Tokyo
 In
the wake of an anemic economy and a short-lived boom in
e-commerce before the collapse of the global Internet bubble,
Japan’s national and local governments struggle to
retrofit the economy for the 21st century. While closing
companies outpace the number of new companies, national
and local governments are taking steps to encourage entrepreneurs
to develop new businesses. There are hopes that “bio-tech”
or “BT” can help to revitalize the Japanese economy.
Regional Development of BT Industry
Japan’s Kansai region is hoping that BT can do just
that. At the heart of Kansai, Japan’s second city of
Osaka has been burdened by the national downsizing and the
hollowing-out of manufacturing industries. Kansai’s
unemployment rate outpaces Tokyo’s and as the region
struggles to redefine itself amidst vanishing jobs and businesses,
Kansai hopes BT ventures will spawn growth. At the center
of Kansai’s BT movement are projects such as the Kobe
Medical Industry Development Project (regenerative medicines
and medical devices), the Saito Life Science Park (new drugs
by genome and protein analysis), and the Wakayama Bio Strategy
(agriculture related BT). Kansai aims to be Japan’s
international life science hub.
It can be said that Kansai’s BT projects are not out
of character given the region’s existing pharmaceutical
interests. Roughly thirty percent of Japan’s pharmaceutical
industry locates there, including firms such as Takeda Chemical
Industries, Fujisawa Pharmaceuticals, Tanabe Seiyaku, Sumitomo
Pharmaceuticals, Dainippon Pharmaceuticals, to name a few.
Foreign interests have also established a foothold in the
region (i.e., Eli Lilly Japan, Nippon Becton Dickinson,
Bayer Yakuhin).
The Kansai BT base is supported by research seeds such as
Kyoto University, Osaka University, Kobe University and
The National Cardiovascular Center. Notable research facilities
located in the region include the Kobe Medical Industry
City, the Center for Advanced Genome Medical Research Development,
the Institute of Biomedical Research and Innovation (IBRI),
the RIKEN Center for Development Biology (CDB) and the Tissue
Engineering Research Center.
Opportunities for Growth and Investments
According to one survey, sixty-six percent of Kansai’s
BT firms and institutions seek a partnership with foreign
firms. Reasons for tying-up include joint research (both
commercialization and basic), technological alliances (licenses),
joint marketing and funding.
Private equity hopes BT ventures will crystallize into real
businesses and IPOs. One Osaka venture, AnGes MG Inc., receives
much attention as an early IPO success. AnGes MG listed
on the Tokyo Stock Exchange’s Mother Index last year.
While success stories remain few, Japan’s private equity
still anticipates successful BT ventures in Japan. According
to one source, the Kobe Biomedical Venture Fund has already
invested in at least 18 companies. The fund was established
in January 2001 to specialize in medical industries.
Biofrontier Partners, headquartered in Tokyo, also placed
bets on Japan’s BT industries. That firm, established
in 1999, was reported to be the first Japanese venture capital
firm to focus on life sciences.
It is hoped that BT will have spill-over effects in the
economy. For example, budding BT ventures may increase the
demand for support services such as drug design platforms,
BT-related devices and support services.
CAN ANYONE TELL US WHY JAPAN'S TECH ECONOMY IS BROKEN? Is Japan's high-tech economy broken? We don't think so. Derailed perhaps. But if you understand the mechanics, you can gain access to amazing opportunities for business and technology in Japan. Nobody else knows Japan like we do. Find out what's going on, direct from Tokyo, weekly and free. Four great newsletters at http://www.japaninc.com.
New
Tools for Private Equity
Outdated commercial laws and a shortage of legal and business
consultants familiar with high technology and Western-style
venture financing strategies plagued foreign investment
during the recent e-commerce venture boom. Japan’s
rigid legal system also failed to support flexible venture
tools such as certain types of employee stock option plans,
non-voting preferred stock, other creative stock classes,
granting of third party options, etc. Venture capitalists
found that their fast-paced business practices were stifled
by other incomprehensibly rigid formalities such as the
prohibition on board meetings by conference call.In the
wake of an anemic economy and a short-lived boom in e-commerce
before the collapse of the global Internet bubble, Japan’s
national and local governments struggle to retrofit the
economy for the 21st century. While closing companies outpace
the number of new companies, national and local governments
are taking steps to encourage entrepreneurs to develop new
businesses. There are hopes that “bio-tech” or
“BT” can help to revitalize the Japanese economy.
Japan’s Venture Spirit
In the late 90’s, Tokyo boldly compared itself to Silicon
Valley as a venture spirit took hold of Tokyo. In those
days Japan seemed poised on the edge of a venture capital
boom. The Shibuya Ward of Tokyo dubbed itself “Byte
Valley”. Salaried business persons questioned their
sunset careers at struggling trading companies, banks and
electronics manufacturers while friends moved to venture
companies, foreign PE and consulting firms, to ride Tokyo’s
new wave of VC activities.
Although “Byte Valley” died a young death it provided
precedent for a belief that Japan can embrace venture capitalism.
These days venture capital firms are not rare. There is
even a Nippon Angels Forum, which has held numerous sessions
in Japan attended by hundreds of investors. The forum has
opened in fourteen Japanese cities.
Perhaps the new wave of BT-venture is only a bubble right
now, but it could be a tsumani. Japan’s BT industry
is supported by a market said to be worth 1.33 trillion
yen in 2001, and second only to a U.S. market of 3 trillion
yen. By comparison, the combined European market has been
estimated at less than 2 trillion yen. Even under current
deflation, it has been estimated that Japan’s market
could grow at a rate of over 7% annually.
Andrew
H. Thorson is a partner at Dorsey & Whitney LLP in Tokyo.
His opinions may not necessarily reflect those of KWR International.
 |
Buyside Magazine reaches active institutional investors monthly with news and analysis of the equities markets. Buyside takes readers beyond news of the current business climate to report industry and market trends that are crucial for investors to understand -- not simply the latest business trends or product releases. Buyside and BuysideCanada are available in print, and online at www.buyside.com. Subscriber information is available on Buyside's home page.
|
KWR
Viewpoints
 Playing
Hard Ball: The Wisdon of Using Trade as a Foreign Policy Tool
By
Russell L. Smith, Willkie Farr & Gallagher
During the 1993-95 confrontation between the Clinton Administration
and Japan over automobiles, the New York Times carried a new analysis
which quoted Clinton Administration officials (unnamed) to the
effect that if Japan persisted in refusing to grant measurable
market access to U.S.-built vehicles, the inevitable result would
be a weakening of both the economic and strategic relationships
between the United States and Japan. Even the hint that trade
conflicts could affect strategic relationships caused an uproar
in both countries. Administration officials were quick to deny
any such view, and Japan dutifully expressed its confidence that
the strategic relationship was as strong as ever and that even
the best of friends could have an occasional economic tiff without
its threatening their friendship.
A decade later, the current Administration has turned that equation
on its head, and is directly linking foreign policy and trade
policy in a series of actions that go far beyond anything contemplated
a few years ago. The most notable example is the delay in the
signing of the U.S.-Chile Free Trade Agreement after repeated
promises by three Administrations over the last decade that Chile
was “next in line” for an FTA. The Administration explains
that it signed the Singapore FTA but has been unable to complete
the Chile document because of English-Spanish “translation
delays.” Similarly, the Administration indicates that it
is unable to begin work on a U.S.-New Zealand FTA because of the
sensitivity of some of the products that could be affected by
those negotiations, despite the fact that those same products
have been the subject of a number of bilateral and multilateral
negotiations in recent years. Those two countries, of course,
withheld support for the U.S.-led “coalition of the willing”
against Iraq.
The economic conflicts and tensions between the United States
and the EU continue to increase almost daily. The latest is the
U.S. WTO case on genetically modified organisms, but that is only
one manifestation. The two trading partners are fighting over
taxes, steel, agriculture, aircraft, and assorted other sectors.
Those conflicts in turn threaten the success of the Doha Agenda
negotiations on multilateral trade liberalization.
Observers of the trade scene shrug their shoulders, claim “everybody
does it,” and conclude this kind of behavior is a reality
to be accepted. If this is true, it is a most dramatic and unfortunate
development in trade policy. While it is realistic to expect that
trade between nations whose relationships are openly hostile should
not be robust, and that there should be economic consequences
for such hostility, the same should not be the case when historic
trading partners and economic allies have legitimate, and even
difficult, disagreements over strategic policy.
This is particularly true in the present global economic climate.
The leaders of all developed countries, and at least the most
enlightened developing countries, have embraced the concepts of
open trade, multilateralism, trade liberalization, rules-based
relationships, and globalization. They say they are committed
to the principle that trade is the rising tide that floats all
boats. There are a few nay-sayers who claim that open trade retards
development, but in fact it is mercantilism and economic nationalism
that undermine the real economic progress that trade liberalization
unquestionably produces. Now we have added a third threat-- a
foreign policy which is not perfectly symmetrical with that of
the dominant trading partner.
Dealing with the effects of mercantilism and economic nationalism
is difficult enough without further burdening trade relationships
with the notion of punishing partners because they take certain
political stands. Whether one believes that Chile or New Zealand
took the right stand in opposing U.S. actions regarding Iraq,
both of these nations have essentially remade themselves into
market economies, abandoned decades of trade protection, and opened
themselves to outside investment. Their reward is to be brought
to the edge of the promised land of bilateral trade liberalization
and then told they may not enter. What message does this send
to other countries contemplating such actions? If it is that disagreement
with the United States over specific foreign policy goals cancels
out all positive economic initiatives, many nations will ask whether
the domestic economic upheaval is worth the risk. Other nations
will look for alternative opportunities from trading partners
who do not require political correctness as a prerequisite for
an FTA.
Ultimately economic and strategic relationships do go hand-in-hand,
but they do not develop through negative reinforcement. This does
not mean that recalcitrant nations should be coddled or condoned
when they close markets or undermine U.S. foreign policy. There
are trade rules for dealing with closed markets, and there are
diplomatic avenues for addressing foreign policy differences.
Going outside those rules and avenues to exact “rough justice”
by withholding trade benefits assures that both the economic and
strategic side of relationships will be weakened. The approach
was rejected a decade ago, and it should be rejected just as decisively
now.
Russell
L. Smith is a partner at Willkie Farr & Gallagher in Washington,
D.C. His opinions may not necessarily reflect those of KWR International.
Emerging
Market Briefs
By
Scott B. MacDonald
Cuba
– Still the Iron Hand: In March and April 2003 while the
world was focused the Iraq crisis, Fidel Castro, Cuba’s longstanding
socialist caudillo, flexed his regime’s muscles and clamped
down on local opposition groups. Although there has been speculation
as to the creakiness of the Castro regime, the authoritarian Caribbean
government demonstrated it was hardly down and out. In a well-planned
roundup, close to 75 independent journalists, human rights activists
and political opponents were arrested. Security forces charged
the dissidents with conspiring with the chief of the United States
Interest Section in Cuba, James Cason, and other U.S. diplomats
to overthrow the government. The crackdown was given extra severity
when three world-be hijackers apparently seeking to escape to
the United States, were executed by security forces.
The message from the Castro regime is clear – Fidel Castro
is still very much in command, has no intention to liberalize
the island-state’s political life, and regards the United
States as intent on intervening in Cuba’s affairs. While
local opposition groups were clearly cowered by the security crackdown,
the Castro regime was roundly criticized by much of the international
community. One casualty of the crackdown was a pending agreement
with the European Union (EU), which would have given Cuba preferential
terms for its products in the EU market. The EU had sought to
engage Cuba, even opening an office in Havana earlier in 2003.
The EU approach was that Castro could be induced by mutually beneficial
trade agreements and foreign investment to gradually open up Cuba’s
political system. Following the crackdown, the EU quickly signaled
there was no longer a deal on the table. The Cuban government
was highly critical, in turn, of the EU. However, it is the Cuban
people that ultimately suffer, especially considering the economy
is in bad shape, having expanded by only 1.1% in 2002.
Dominican
Republic – S&P Lowers the Boom: On May 15, 2003,
Standard & Poor's put the Dominican Republic’s BB- on
CreditWatch for a possible downgrade. The action was due to concerns
over emerging problems at Banco Intercontinental (the third largest
bank in the country), which could weaken political institutions
and the external reserve position and reduce financial flexibility.
Banco Intercontinental or BanInter has been a troubled institution
for a while, but in April the central bank was forced to intervene
after evidence of widespread fraud undermined plans to sell the
bank. Matters became even more murky when on May 13, 2003 BanInter’s
president was arrested and the government took over the bank’s
companies. The government also confiscated the assets of its troubled
bank’s major shareholders. S&P stated: “The ratings
on the Dominican Republic are constrained by low international
reserves, shallow domestic capital markets, and relatively weak
institutions and social indicators. The ratings are supported
by tax and social security reform programs and a low and favorably
structured public sector debt burden. Should these attributes
be undermined by the contingent liabilities posed by the financial
sector, a downgrade to B+ would be likely.” We expect the
government will scramble to resolve the problems related to BanInter,
though there are concerns that the corruption around the bank
could be deeper than currently anticipated.
Costa Rica – Outlook Less Sunny: Costa Rica has been
one of the more positive examples that a small country can broaden
its export base, upgrade its soft infrastructure (i.e. people
and their skills), and attract considerable foreign direct investment.
While Costa Rica benefited from this package of developmental
strategy throughout much of the 1990s and into 2000, the slowdown
in the U.S. economy has hurt. As the government has sought to
step in and help buffer the slower pace of exports, the fiscal
deficit has widened. In May, the IMF released its annual review
of the Costa Rican economy. While giving the Central American
country credit for a number of reforms, the IMF was critical about
the widening fiscal deficit, which could end up being equal to
4% of GDP in 2003. In 2002, the fiscal deficit was 5.4% of GDP,
a substantial number. This prompted the government to introduce
a tax package and tighten public spending. The government’s
fiscal deficit target is now set at 3.1% of GDP, which could be
a little too optimistic. Shortly following the IMF release of
the annual review, both Fitch and Standard & Poor's changed
their outlooks for Costa Rica from stable to negative.
Hong Kong – Reaching the Heights of Unemployment:
The last two years have not been kind to Hong Kong. Deflation
has become a major factor hanging over the economy, SARS has hurt
tourism and retail sales, and there is considerable discontent
with the government. The government estimates that tourist arrivals
declined 77% in April after the World Health Organization advised
travelers to stay away from Hong Kong. Tourism accounts for 6%
of the city’s GDP.
The most recent piece of bad news was that April’s unemployment
rate rose to 7.8%, matching an all-time high. The main culprit
was SARS, which kept consumers at home and drove away tourists.
There have been around 8,000 cases of SARS worldwide, with the
vast majority being in China, with Hong Kong having the second
highest tally of cases. Expectations are that unemployment will
most likely climb higher. HSBC and Standard Chartered Bank have
recently cut their real GDP forecasts for 2003 down to 0.5%. This
is a considerable slowdown from 2002, when the economy grew at
2.3%.
Jamaica – Problems Mount: In recent years Jamaica
has sought to implement structural reforms to make its economy
work better. However, 9/11, civic unrest and a number of natural
disasters have hurt the economy. In response the government of
Prime Minister P.J. Patterson has opted for fiscal stimulus to
keep the economy moving. This has caused the country’s debt
burden to climb. Jamaica’s debt expanded from 131% of GDP
at the end of the previous fiscal year to 152% this year. In April
the government advanced it budget, which included a J$13.8 billion
($246 million) tax package. Debt repayments will account for 65%
of budget spending this year. Both S&P (B+) and Moody’s
are negative on Jamaica’s outlook and in April the latter
put the country’s Ba3 rating on review for a possible downgrade.
Moody’s stated: “The review was prompted by Moody’s
heightened concerns over the Jamaican authorities’ apparent
lack of policy options to quickly correct the fiscal deterioration
that has occurred over the last 18 months.” We believe Jamaica’s
Ba3/B+ ratings will fall, probably to B1/B in the medium term
as tourism remains weak, international commodity prices (bauxite
and sugar being topical to the Caribbean country) will underperform,
and eventually interest rates will go up (most likely in 2004).
All of this bodes ill for Jamaica.
Singapore
– Adjusted Growth for Q1 Up: The Singaporean economy expanded
at a quicker pace than initially anticipated for the first quarter
of 2003 as exports compensated for a decline in domestic demand.
According to the Trade and Industry Ministry, real GDP for Q1
2003 was 1.1%, an upward revision from 0.7%. Unfortunately,
the expectation is the Q2 2003 will not be as strong due to
the negative impact of SARS on tourism and retail sales.
Uzbekistan – Call for Reform: At the close of the
annual meeting for the European Bank for Reconstruction and
Development (EBRD), that institution’s president, Jean
Lemierre, took the bold stance of calling the host nation to
adopt political and economic reforms. Without reforms, the Central
Asian country could face cuts in the EBRD’s financial support
in 2004. Lemierre did not mince words as he urged President
Islam Karimov to make radical economic and political changes,
in particular, the end of torture in Uzbekistan’s prisons.
In March 2004, the EBRD board meets to discuss lending to Uzbekistan.
If improvements are not made, the board will consider curtailing
funding facilities for the Central Asian government. This has
already been done in the cases of Belarus and Turkmenistan,
where authoritarian governments have blatantly suppressed political
freedoms.
Book
Reviews
 Stephanie
Griffith-Jones, Ricardo Gottschalk, and Jacques Cailloux,
(Eds.) International
Capital Flows In Calm and Turbulent Times: The Need For New
International Architecture
(University of Michigan Press, 2003)
Reviewed
by Jonathan Lemco
Click
here to purchase "International
Capital Flows In Calm and Turbulent Times: The Need For New
International Architecture "
directly from Amazon.com
Following
the Asian Financial Crisis of 1997-98, there have been several
efforts to explain the root causes of the event, and the lessons
we might learn from it. In fact, an excellent web sight maintained
by New York University Stern Business School professor, Nouriel
Roubini, offers a daily chronicle of the causes and consequences
of the crisis, and the various strategies devised to reduce
the likelihood of a re-occurrence.
In this edited volume, Griffith-Jones, Gottschalk, Cailloux
and their contributors offer an overview of the crisis, a
discussion of two other troubled economies at the time (Brazil
and the Czech Republic), and a consideration of the various
current proposals for a new “international financial
architecture”. By comparison to most edited volumes,
this one is more coherent and comprehensive. It is also well
written and fairly jargon-free. But we would stress at the
outset that it does not cover much new ground either, and
would be most appropriate for a senior undergraduate or first-year
graduate course in international finance or economics.
Much of the volume is devoted to a review of the apparent
causes and implications of the financial crisis in Thailand,
Malaysia, Indonesia, and Korea, as well as Brazil and the
Czech Republic. Particular attention is devoted to the role
of banks in lending, and mutual funds in investing in the
region in the late 1990s. This is fine as far as it goes.
The authors come to the reasonable conclusion that the Malaysian
policy of imposing capital and currency controls resulted
in mixed results overall, and the fundamental strength of
the Korean financial system allowed it to recover fairly rapidly.
A great deal of attention is devoted to the relative merit
of maintaining substantial official reserves, given the costs
involved. But there is agreement that as a preventative measure,
greater use should be made of both private and official contingency
credit lines. Also, these funds should be made available before,
rather than after, official reserves reach low levels.
The various articles in this book make the reasonable case
that high savings and investment rates do not prevent a country
from suffering a balance of payments crisis.
In fact, great deal of attention in the book is devoted to
the risks associated with contagion. That is well and good,
but we think that few strategies are suggested in this volume
to deal with this terrible problem. Further, little attention
is devoted to the moral hazard debate, which we think is central
to investor perceptions of the crisis.
On the other hand, the authors argue convincingly that better
regulatory measures are key to avoiding future crisis. Most
notably, they make the case that better international cooperation
is required to reduce the risks of future crises.
This is a solid overview of the Asian crisis and its aftermath.
It deserves to be read by scholars in the field. But this
will not be the definitive work on the topic.
Ian
Buruma, Inventing
Japan, 1853-1964, (New York: Modern Library,
2003). 192 pages. $19.95
 Click
here to purchase"Inventing
Japan, 1853-1964, directly
from Amazon.com
By
Scott B. MacDonald
For
anyone wanting to gain an easy access to Japanese history,
written in an engaging fashion (with no footnotes), there
is much to recommend Ian Buruma’s Inventing Japan.
The author, an accomplished fiction and non-fiction writer,
has studied and worked in Japan for a number of years and
clearly has a deep respect and liking for his subject matter.
In a series of biographical snippets, his essay follows
the dramatic transformation of Japan, beginning in 1853
with the arrival of Commodore Matthew Perry and the Black
Ships to 1964, when Tokyo hosted the Olympics, which symbolically
allowed the Asian country to rejoin the world following
the Second World War. While Buruma recognizes the darker
side of Japanese history, he focuses on the country’s
ability to catch-up with the West and to regain its role
in the world following the disasterous defeat of World War
II. He concludes that Japan is again at a troubled period
in its history, due to “a political establishment that
deliberately stifled public debate by opting for a monomaniacal
concentration on economic growth. And it is the result of
an infantile dependency on the United States.” Unlike
some Japanese who have argued that it would be good for
Japan to have new Black Ships shocking the country into
action, Buruma thinks the Japanese themselves clearly have
the ability to heal themselves and move. Altogether, a solid
and useful read.
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