KWR INTERNATIONAL ADVISOR
2004 Volume 5 Edition 5
In this issue:
Scott B. MacDonald
international political system in Asia remains unsettled
and the potential for a new crisis is growing. As the
United States remains pre-occupied with the Middle
East and Afghanistan, relations between China and Taiwan
are increasingly strained. Taiwan’s political
situation is undergoing an important change, as the
issue of declaring “independence” from
mainland China is a growing possibility. In turn, China
is deeply concerned that Taiwan would declare its independence,
uprooting the fiction that the two parties will eventually
be re-unified. From Beijing’s standpoint any
departure from the “two Chinas” script
is cause for war. If Taiwan can be allowed to “leave” the
Chinese nation-state, then so to will Tibet or the
Muslim dominated northwest be tempted. While much of
the world’s attention is closely focused on the
daily bombings and assassinations in Iraq and Saudi
Arabia, the pieces are falling into place for another
major international crisis in Asia.
The root of the problem is that China regards Taiwan as a breakaway
province. Taiwan and the mainland have been separated since
the Nationalists retreated to the island in 1949, establishing
a rival regime to the Communists in Beijing. Over time, the
power of the Nationalists gave way to a younger generation,
many of whom place a greater significance on being Taiwanese
than Chinese. Today a large number of Taiwanese increasingly
see themselves as a separate country, with a working capitalist
economy and democracy. China in comparison is ruled by the
Communist Party, is not fully capitalist and political freedoms
are few. Indeed, China’s recent efforts to suppress Hong
Kong’s political freedoms does not send a positive message
to the Taiwanese, who are looking for reassurances that if
re-united to the mainland their political rights would be upheld.
Recently re-elected President Chen Shui-bian is taking advantage
of these concerns, having embraced the doctrine of independence.
He has called for a referendum on whether a new constitution
should be drafted in 2006, for adoption in 2008.
Anything that looks like independence for Taiwan has a poor
reception in Beijing. The Chinese establishment has repeatedly
indicated that if President Chen embarks upon this course of
action and declares independence, it will be forced to invade.
In the meantime, the Chinese military has been active with
war games, practicing to invade Taiwan. At the end of July,
Chinese militias staged a two-day weekend exercise off the
southeastern coast, following up on drills by the People’s
Liberation Army earlier in the month. With an eye to the United
States, Taiwan’s major ally, China also recently revealed
a new submarine class. The message is simple - if the U.S.
seeks to come to Taiwan’s aid in the event of a crisis,
the new submarines will be waiting.
China’s leadership is carefully weighing four things.
First and foremost, Taiwan’s President Chen is seeking
to change the status quo. China does not have de facto control
over Taiwan. What is does have is a territorial claim that
the island is part of the Chinese nation, something that is
widely recognized. In reality, Taiwan runs its own affairs,
but has traditionally maintained the façade that it
will seek an eventual re-unification between the two lands.
Chen now threatens this façade.
Second, the Bush administration has slightly shifted policy
on Taiwan. In particular, President Bush signed legislation
on June 14, supporting Taiwan’s efforts to gain observer
status in the World Health Organization (WHO). Although such
a decision is not an abandonment of the official U.S. policy
of one China, any such move as what the Bush administration
did in regard to the WHO is seen as having some recognition
of Taiwan’s right to exist an independent state.
Third, the U.S. government earlier agreed to an $18 billion
weapons upgrade package for Taiwan. Those weapons are now starting
to arrive. They include Patriot anti-missile systems and P-3
anti-submarine aircraft. Such armaments could reduce the capacity
of the Chinese military to launch what it calls a decapitation
strike, based on missiles and paratroopers hitting Taiwan’s
national leadership in the capital Taipei. We expect tensions
to rise as new weapons are delivered.
On July 8, National Security Advisor Condoleezza Rice was sent
to Beijing to help smooth over relations. She met with former
President Jiang Zemin and Foreign Minister Li Zhaoxing. During
the meeting, Jiang asserted to Rice that the “Chinese
people are seriously concerned and dissatisfied about U.S.
selling of advanced weapons to Taiwan.” The next day
President Hu Jintao also indicated that Taiwan’s status
was the key to Sino-American relations. In response, Rice was
reported to have stated that the U.S. would continue selling
arms to Taiwan to provide a healthy “balance” of
power with China.
Fourth, a crisis over Taiwan could come at a good time for
China’s leadership, itself struggling to deal with massive
economic challenges. As Beijing seeks to cool the Chinese economy,
there is always the danger of social unrest, something that
the leadership deeply fears. Playing the nationalism card could
refocus people from problems with the economy at home to an
issue in which China’s honor and standing are perceived
at risk. Considering Washington’s preoccupation with
the Middle East and the stretched nature of the U.S. military,
China’s leadership might calculate they could actually
get away with “retaking” Taiwan.
At the same time, China’s leadership should not be treated
as a monolith. There are differences of opinion and emphasis
between former president Jiang and his successor, Hu. The former
has traditionally taken a hard line on Taiwan and retains his
post as Chairman of the Central Military Commission. He is
also reluctant to leave the political scene and tensions have
risen between Hu and Jiang.
Hu appears to be a little more cautionary, largely for concerns
that an arms race with Taiwan would be costly to the Chinese
economy at a time when slowing growth to a more manageable
pace is critical if inflationary pressures are to be checked
and a hard landing avoided. Along these lines, Hu stated in
the overseas edition of the official People’s daily that
China “must unwaveringly walk the path of peaceful development”.
Consequently, Hu is more concerned about the impact of a new
crisis over Taiwan, especially with a view to the economy.
However, even Hu is vulnerable to the Taiwan issue, as it would
very difficult for him to allow an official declaration of
independence to go unanswered.
There may not be a crisis in the Straits of Taiwan, but the
chances are increasing. This issue should gain greater attention
in Washington, but also from Tokyo. Considering China’s
greater weight as a global trade partner and as a holder of
large foreign exchange reserves (including dollars) and U.S.
Treasuries, a Taiwan crisis could disrupt world economic growth
and, of course, ripple into U.S. stock and bond markets.
Japan – Measuring
Scott B. MacDonald
there has been considerable discussion about the “beating” that
Prime Minister Koizumi’s Liberal Democratic Party
(LDP) took in the July 11th upper house of the Diet
elections, the economy is in about the best shape it
has been since the 1980s. The restructuring of the
banking sector (as reflected by the UFJ and Bank of
Tokyo-Mitsubishi merger) is moving ahead. Economic
growth looks sustainable. This was reflected by the
government’s upgrading its real GDP growth forecast
to 3.5% from its previous estimate of 1.8% for the
year to March 31, 2005. Moreover, Japan’s economy
expanded at an annualized rate of 6.1% in the first
three months of the year, the strongest among major
We think the current growth pattern is sustainable – at
least through next year. Beyond that our outlook is more
cautious. The Japanese economy initially gained momentum
from exports. It then benefited from corporate capital investment,
with personal spending providing the last stimulus for growth.
Ongoing strength in world trade and steady increases in domestic
demand as well as some improvements in the labor market should
provide the foundation for next year’s expansion. It
will also help bring deflation to an end.
Yet, Japan still faces substantial challenges. These include
the fall in land prices (still going on outside of Tokyo),
weak bank lending, the ongoing challenged nature of many
regional banks, and the potential for the Chinese economy
to hit a hard landing. The last is important considering
that China is a major factor in the strong expansion of exports,
accounting for two-thirds of the rise in 2003. There is also
the problematic nature of government’s finances – the
fiscal deficit was 8% of GDP in 2003 and is expected to decline
to 7.1% in 2004. Public sector debt reached a massive 144%
of GDP in early 2004.
Considering the pluses and negatives of the Japanese economy,
it can be said the short-term is positive, but the long-term
is harder to forecast. Government finance is a major concern.
According to the Organization for Economic Development and
Cooperation (OECD), public sector debt is projected to surpass
160 percent of GDP this year. Related to this is the ability
of the Koizumi government to continue its economic reforms.
There remains considerable work – deregulation of agriculture,
medical services and education, reform of the postal bank
system and restructuring regional banks.
Ongoing and broadening economic growth means an eventual
return of inflationary pressures. In turn, the Bank of Japan
will at some point have to abandon its zero interest rate
policy and raise rates. If done too quickly, a number of
large companies that are struggling would be plunged into
having serious problems. If so, that could once again cause
problems in the banking sector.
Koizumi (and the return of global growth) have helped put
the Japanese economy on the right track, but much more work
is required. That requires strong political will. Along these
lines, we fully agree with the OECD’s assessment: “Over
the longer term, failure to press ahead with structural reforms
would limit Japan’s growth potential.” More significantly,
failure will limit Japan’s future, holding the door
open to a possible major economic crisis linked to massive
public sector debt. Having survived the July 2004 elections,
Koizumi has a window of opportunity to push ahead over the
next two years, which should be free of any new electoral
challenges. The stakes of making further reforms could not
be higher. We wish Prime Minister Koizumi well.
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Still A Good Investment Bet
the past few months, the US press has devoted a great
deal of attention to the challenges faced by Mexican
workers. The media has stressed that China will
compete ferociously for Mexico’s export markets, and that the Mexican labor
force will be a big loser. Also, it is noted frequently that Mexican educational
levels have not improved appreciably in recent years. Many critics stress that
vital fiscal and other structural reforms will not pass the Mexican legislature,
and this will severely crimp economic policy-making. Others note that the revenue
base remains too small. There is truth to these allegations, but they do not
tell the whole story.
According to the Mexican Finance Ministry, Mexico’s GDP growth rate is
expected to be in the 4% range in 2004. Inflation is likely to remain a moderate
3.6%. The Mexican private sector is demonstrating higher levels of confidence
in the economy going forward. Although China is a meaningful economic threat,
it is also the case that China is buying Mexican commodities in substantial amounts.
Trade is a two way street, despite all of the attention devoted to Mexico losing
jobs and investment. It is also the case that the China threat has been less
severe than some expected because of currency depreciation. Fewer businesses
have left Mexico than one would anticipate, given the space devoted to this issue
in the US media.
Further, and more important, Mexico’s economic future has far more to do
with the fortunes of the United States than the fact that Mexico competes with
China. The US is Mexico’s largest export market, and the two economies
are substantially integrated. Over the past six months, the US manufacturing
sector has expanded at an annualized rate of 7.1%. Mexico’s manufacturing
sector seems to be keeping pace, and in fact has been growing faster than the
US. The February trade report showed Mexican manufacturing exports up 10% on
a yoy basis. It is important to note that this does not include the trade that
will come from the 1% rise is US manufacturing in February. Investors should
look for stronger output from Mexico in March/April as the effects from that
strong US month are felt by its southern neighbor. In a very meaningful way,
as the US economy goes, so goes Mexico’s.
In addition, in 2003, Mexico enjoyed the benefits of free trade agreements with
the NAFTA nations, as well as Europe and Japan. Several multinational corporations
are putting new money into Mexican industry. Volkswagen has recently announced
a US $2.6 billion investment in new plants, with Mexican operations now acting
as an export platform to Europe, taking advantage of the weak dollar. Japanese
companies have made new investments, based on similar strategic thinking. Wal-Mart
announced at the end of March that it would invest US $600 million in the next
few months. BBVA’s decision to acquire Bancomer’s remaining shares
should also deliver a substantial inflow. In short, Mexican entities are engaged
in deepening financial, productive and trade links.
On the fiscal side, the Mexican Central Bank continues to guide the economy with
strong budgetary discipline. The budget deficit is on target for the year at
an acceptable 0.3%/GDP. The surplus in February was 8.1 billion pesos, with the
year to date surplus of 35 billion pesos. That compares to a surplus of 18.4
billion pesos in the same period in 2003. Further, in February, recurring revenues
expanded by 1.5% in real terms. That includes a 5.3% rise in tax revenues. The
major reasons for this improvement were reduced spending, higher oil price revenues,
and improved levels of VAT tax receipts. Overall, this improved fiscal performance
also reflects the fact that Mexico should be better able to withstand external
shocks or economic contagion.
We do not mean to dismiss Mexico’s problems however. There has been little
progress on passing meaningful structural reform legislation in the Mexican Congress.
Until that occurs, there will be limits on the economic progress that Mexicans
can expect. Also, the Mexican political system now consists of three viable parties.
That is good for democracy, but it makes policy-making that much more difficult.
President Fox appears politically weak relative to the Congress. Furthermore,
Mexico’s infrastructure needs are tremendous and its level of economic
inequality substantial. But there appears little that the government can do to
address these development issues in the short-term. None of this is new, of course.
But what is different is that popular expectations for the success of the Fox
government have been especially high, and many observers have been disappointed.
All this being said, Mexico continues to grow at a decent level. Its fiscal performance
has been excellent such that the credit ratings agencies have steadily upgraded
the credit in recent years to an investment grade level. Thus far in 2004, Mexican
bonds have been among the best performers in the entire corporate bond universe.
We conclude by noting that we expect that Mexico will remain an attractive investment
opportunity for the foreseeable future.
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U.S. Jobs: Economic Boom or Political Bust?
Caroline G. Cooper, Willkie Farr & Gallagher, LLP**
days it seems that almost every political analyst in
Washington is writing about the “growing phenomenon” of
outsourcing U.S. manufacturing and service sector jobs
overseas. Although outsourcing is not new and has been
going on for decades, the issue has garnered much political
attention in the past year in large part because manufacturing
job losses were so great.
In recent months, the negative political rhetoric on outsourcing
has focused more on job losses in the services sector, especially
in the information technology (IT) industry--a driving force
behind America’s renewed economic growth. The reasons
are two-fold. First, politicians claim that IT jobs are being
shipped overseas in droves, and subsequently, America is
losing her technological edge; and second, American consumers
are not happy with the customer service they receive from
foreign call centers. GalleryWatch.com reports that in the
next ten years, researchers predict that nearly 5 million
service sector jobs will be shipped overseas.
That many Americans are concerned about the increase in outsourced
U.S. jobs is understandable; they want to ensure that skilled
employment opportunities are not taken away from future generations
of Americans. But an analysis of the current political debate
on outsourcing and some proposed policy solutions reveals
that politicians are more concerned about the politics of
outsourcing than they are with the economics of the issue.
Politicians should avoid prescribing short-term political
fixes to what could become a longer-term economic problem.
Deconstructing the Political Debate on Outsourcing
As political interest in outsourcing has grown, so has the
debate. Essentially, three schools of thought on outsourcing
have emerged representing the interests of the far right,
the far left, and centrists.
The Bush Administration and conservatives in general represent
the far right school of thought on outsourcing. They argue
that outsourcing jobs is not an economic problem; rather,
it is a boon for the economy, as shipping low-skilled jobs
overseas enables U.S. companies to reinvest in the economy
and create higher-skilled jobs at home.
The Administration’s position on outsourcing was outlined
in the Economic Report of the President released last February.
In the report, U.S. officials downplayed the contribution
of outsourcing to job losses by finding that the decline
in manufacturing jobs last year resulted in small part from
the transfer of low-skilled manufacturing jobs abroad and
more to rising demand for workers in the services sector.
Shortly after the report was released, Gregory Mankiw, Chairman
of the Council of Economic Advisors, received harsh criticism
for his widely reported characterization of outsourcing as
beneficial for the U.S. economy.
U.S. business groups have defended the Administration’s
position on outsourcing, claiming that too few facts and
too much rhetoric have played into the political debate on
the issue. In the April edition of Asia Insider, Thomas Donohue,
President and CEO of the U.S. Chamber of Commerce, outlined
a number “Facts About Outsourcing.” Donohue argued
that U.S. job losses were associated more with increases
in productivity and slow growth in the economy than outsourcing.
He opined that the biggest threat to future employment is
a shortage of workers--not jobs, and that future jobs will
not be created by protectionist policies. Donohue disavowed
the notion that outsourcing IT jobs is causing America to
lose her technological edge, and he pointed to expert’s
opinion that jobs sourced overseas “amount to a small
fraction of (the United States) workforce.”
On the last point, Donohue was proven correct. A report published
in June by the Department of Labor, Bureau of Labor Statistics
(BLS) on extended mass layoffs associated with domestic and
overseas relocations determined that in the first quarter
of 2004, only 4,633 jobs of the 239,361 jobs lost from lay
offs were due to the movement of work overseas.
Donohue’s arguments point to the fact that while outsourcing
may not be an immediate economic problem, preventing it from
becoming one in the future requires that politicians reduce
their political rhetoric and enact the right policies. According
to Donohue, the right policy mix would encourage the government
to “open markets and enforce trade agreements; improve
the skills of our workforce and expand the labor pool; modernize
our transportation, energy, and technology infrastructure;
and reduce the legal, regulatory, tax, and health care costs.”
Analysts from the Progressive Policy Institute (PPI) correctly
argue that the second school of thought on outsourcing, as
advocated by far left Democrats, emerged in response to the
Bush Administration’s inattention to the issue and
suggestion that cutting taxes will keep businesses at home.
In reaction, left-leaning Democrats have introduced legislation,
both at the state and federal level, that “inspires
a retreat from globalization,” according PPI head Will
A survey of legislation on outsourcing compiled by GalleryWatch.com
and MultiState Associates, Inc. shows that members of the
second school of thought want to restrict companies from
sourcing work overseas in two ways: by protecting labor interests
and by protecting consumer interests. One notable example
of legislation proposed to protect labor interests is an
amendment offered by Senator Christopher Dodd (D-CT) to S.
1637, the American Jobs Act. Dodd’s amendment would
preclude the federal government or any state government from
receiving federal funds for a specific project to outsource
federal contracts overseas. One example of a bill introduced
under the guise of protecting consumer interests is H.R.
4366, the Personal Data Offshoring Protection Act of 2004,
sponsored by Representative Edward Markey (D-MA). H.R. 4366
would preclude companies from sourcing work overseas that
involves a consumer’s private information without prior
notification to and consent from that consumer. This is required
for countries that do not have adequate privacy protection
laws. Although a number of state governments have proposed,
and in some cases, passed outright bans on the outsourcing
of U.S. jobs, no such legislation has been approved by either
chamber of the U.S. Congress.
On July 20, PPI introduced a new policy paper on “Meeting
the Offshoring Challenge,” hoping to shift the debate
on outsourcing to the center and create a third school of
thought on the issue. Although PPI is affiliated with the
New Democrat faction of the Democratic Party, many of the
policy proposals advocated by the organization are endorsed
by centrist members of the Republican Party and many businesses.
PPI’s Robert Atkinson promotes the following three-pronged
strategy to confront the outsourcing challenge:
innovation and worker’s skills by providing
federal funding and tax credits for research
and development, promoting education and training programs which emphasize
math and science, and easing immigration restrictions
on Ph.D. graduates in those fields;
the playing field on trade by eliminating currency
manipulation, enforcing U.S. trade agreements
and opening markets, and encouraging U.S. companies to stay home by eliminating
offshore tax shelters; and empowering
U.S. workers by requiring companies to give advance
notice that jobs will be outsourced,
extending trade adjustment assistance to workers
in the services sector, and providing
wage insurance, to name a few.
Finding the Right Solution
As the debate on outsourcing enters the realm of Presidential
politics, it is important that both candidates, President
Bush and Senator John Kerry (D-MA), put aside their
personal politics and consider the economic facts associated
outsourcing before recommending policies to address
First, outsourcing jobs does
not pose an immediate threat
to America’s economic growth. The data concludes that
fewer jobs have been lost to outsourcing than predicted;
however, without the right policies to promote better math
and science education, foster innovation, and reduce some
labor costs here at home, more jobs could be lost in the
future, and America’s competitive
edge could begin to wane.
Second, consumers continue to demand quality, low-cost
goods, many of which are produced overseas. By restricting
to curb the outsourcing of U.S. jobs, American consumers
would be deprived of product choices, and in turn,
economic growth in developing countries could be threatened.
the same time, companies must not sacrifice quality
of the products they make or services they provide
just for cheaper factors of production. The right policy
ensure that consumers continue to have quality, low-costs
goods and services produced both at home and abroad.
Both candidates must face facts
to effectively confront future
challenges associated with outsourcing.
Bush is elected to another term
in office, he must
not dismiss the notion that outsourcing
a negative impact on the U.S.
economy in the long-term. If
Kerry (D-MA) is elected President,
he must consider
a more balanced policy approach
to outsourcing, not one that
trade. **Please note this
the views of the author, and
is not an expression of views
of Willkie Farr & Gallagher
LLP or KWR International, Inc.
Philippines: Outlook for Arroyo’s
Stephen F. Berlinguette
June 30th, Philippine President Gloria
Macapagal-Arroyo was declared the winner
of the May 10th national elections
and inaugurated for another 6-year
term in Manila. The president returns
to office with a strong support base
in Congress, the business community,
the armed forces, and the Catholic
Church. Her first term was characterized
by both domestic security distractions
and policies that improved fiscal discipline
in Manila, supported central bank efforts
to stabilize the peso, and stressed
privatization of major state holdings.
President Arroyo is now expected to
exploit her recent victory by bolstering
her administration’s pro-business
Economic management will be a critical determinant
of Arroyo’s effectiveness in her second
term. Markets are expecting the government
to make significant progress on its vows
to reduce the budget deficit and take long-term
steps to decrease public sector debt in order
to strengthen the peso and drive down interest
rates. With a Philippine budget deficit of
4.6% of GDP and total government debt at
126.2% of GDP in 2003, Manila presently spends
approximately one-third of its budget on
debt servicing. Arroyo has prioritized increasing
government revenues to improve Manila’s
fiscal position and enhance investor sentiment:
the administration’s successes in this
area will depend on a mix of effective policy,
political stability, and security over the
coming 1-2 years.
Central to the Arroyo’s two-track fiscal
reform program is a drive to increase tax
revenues. The government currently has a
debt burden of approximately U.S. $61 billion,
as compared to an annual GDP of about U.S.
$79.3 billion. Tax takings in the Philippines
typically hover around 15% of GDP, though
this figure has been even lower in recent
years. Past Manila attempts at improving
this ratio have emphasized enacting new and
unpopular taxes, but Arroyo has stated that
the government will focus on reducing tax
evasion and developing its revenue collecting
abilities in her second term. The administration’s
achievements in this decisive policy area
will lay the groundwork for deficit reduction
and unlock funds for badly needed infrastructure
The second pillar of Arroyo’s deficit
policy concerns power sector liberalization.
This campaign has centered on the state-owned
utility National Power Corporation (NAPOCOR),
which has been an enormous weight on public
sector resources and in 2004 is expected
to exacerbate its six-years of severe underperformance
with a 100 billion peso loss. Though Arroyo
unsuccessfully attempted to sell off NAPOCOR
assets in her first term, her reelection
improves Manila’s prospects for revisiting
the problem and unloading the utility to
infuse fresh revenues into government coffers.
Privatizing NAPOCOR will be a decisive indicator
of the president’s fiscal discipline
in her second term.
Reconciling debt reduction with pro-poor
election promises will be one of the administration’s
greatest challenges in its second term. In
campaigning against the film star and populist
Fernando Poe Junior, Arroyo sought to offset
his appeal to the poor with pledges to create
6 million new jobs and 3,000 new schools,
bring clean water to every village, and make
fresh technology investments in the countryside.
Clearly, the government’s poverty reduction
strategy is contingent on its capacity to
escalate tax revenue collection and reinvigorate
public investment. Given the obstacles in
this sphere, Arroyo will have to carefully
square the demands of its economic revitalization
program with maintaining her delicate political
support among disadvantaged Filipinos.
In the aftermath of the extremely close May
10th election, many Poe supporters accused
the president of widespread fraud and initiated
sporadic street demonstrations on his behalf.
This defiance also found reverberation among
a minority of restive elements in the armed
forces, which produced whisperings of a coup
later in the month. Much of this disquiet
has now abated, but new questions have emerged
as to the effect that the government’s
withdrawal from Iraq after the July hostage
incident will have on Arroyo’s support
among the military’s top brass, many
of whom advocate close ties with the United
States. New threats to political calm in
the Philippines during the coming months
could also surface from other quarters, such
as renewed Abu Sayaf militant activity in
Mindanao. Barring unforeseen developments
such as the above, however, it looks as if
Arroyo’s popular support will rest
primarily on her government’s performance
on its reform and investment agenda. It is
widely believed that the president’s
reelection has stabilized politics in the
Philippines for some time to come.
Assuming that this political equilibrium
holds, there is a strong likelihood that
the president will have the flexibility to
eventually take up other restructuring proposals
currently on the table, including efforts
to lower tariffs, liberalize foreign investment
restrictions, and eliminate monopolies. The
administration also stands to benefit from
steady and moderate economic growth. On Arroyo’s
watch the Philippines has shown notable resilience
to internal pressures and the global economic
downturn. Driven by strong inflows from overseas
worker remittances and good agricultural
performance, the economy grew by 4.7% in
2003. Inflation has been low despite high
energy import prices and a weak currency,
and international conditions are expected
to improve in the coming year. An export
recovery and higher private consumption levels
in 2004 are together projected to raise GDP
growth to 4.8% this year. Many Philippines
observers agree, however, that growth rates
of 7% or higher are necessary to support
the administration’s restructuring
and reform ambitions.
By all appearances, President Arroyo’s
agenda for her second term promises sound
economic management aimed at both fiscal
reform and economic growth. Yet past events
in the Philippines have shown their ability
to derail the visions of the country’s
most prudent planners. With the reelection
victory behind her, the president’s
objective now is to avoid political conflicts
and contain militants in the south for a
period long enough to lock in effective tax
collection and privatization programs during
the coming year. This will be the key test
of the new administration’s fitness
for skilled economic stewardship in the Philippines.
Sweet Smell of Oil
Scott B. MacDonald
prices reached record highs in August and could keep going up. The
reason is a combination of worries about terrorist attacks on oil infrastructure
in the Middle East (including foreign experts and pipelines in Iraq and Saudi
Arabia), political tensions in Venezuela (an upcoming referendum) and Russia
(Yukos Oil), and on-again off-again labor problems and ethnic turmoil in Nigeria. There
are also concerns about the ability of oil producers to meet upcoming winter
demand. Furthermore, foreign workers must decide whether or not to return
to Saudi Arabia after their summer holidays (we think that many will not for
personal safety reasons) and terrorists could start to attack tankers (they have
already attacked foreign workers and pipelines).
Although oil’s price increases may peak in the short-term, the global energy
industry is in the throes of a structural transformation. On the demand
side, the longstanding U.S. role of being the dominant consumer of hydrocarbons
is being challenged by China. Since 1978, when China began its growth spurt,
the Asian country shifted from being an oil exporter to a major oil importer. Not
far behind China is India, also energy hungry. India’s real GDP growth
is expected to be around 7 percent this year. Between China and India there are
over 2 billion people, working and living in rapidly growing economies, with
expanding middle classes with automobile-oriented consumer cultures. That means
more oil demand.
At the same time as demand is on an upward swing, there is growing concern about
supply, including the aging Saudi fields and their ability to meet global demand. Production
is slumping in long-time OPEC member Indonesia, which in 2004 became a net oil
importer for the first time in 100 years. In addition, supply from the OECD (Organization
for Economic Cooperation and Development Countries) has probably peaked. Any
additional oil to be squeezed is likely to come from Russia, Brazil (offshore)
There is a growing possibility that we have made a structural adjustment to a
period of higher oil prices - hanging in above the $30 a barrel market, possibly
above $35 through 2004 and probably 2005. We would not rule out a spike to $50
a barrel, but that would be entirely related to a serious disruption of supplies
from the Middle East. Barring any such disruption, oil prices should remain
under $40 a barrel.
Previous cycles of high oil prices have usually ended in global recessions and
ultimately lower oil prices that have hurt oil producers. Although we do
not see a collapse of oil prices back down to the low $20’s in the medium
term, it is in the interest of OPEC and other major oil producers to help manage
a lower, more digestible price that does not kill global economic growth. Saudi
Arabia is bringing on two new oil fields in the near future in an effort to bring
prices back into line. Despite all of the oil being pumped, fear remains
the dominant factor, with worry over sabotage and supply ruling the market. We
don’t see this stopping any time soon.
To help our readers keep abreast of of the implicastions of these important trends,
the KWR International Advisor brings you the following three articles concerning
energy developments in Africa, Russia and India.
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Africa Still Matters – Life
in the Age of High Oil Prices
B. MacDonald, Ph.D.
Apprehension over new terrorist attacks, sabotage strikes on oil infrastructure
in the Middle East and the Yukos affair in Russia have helped
drive oil prices to a peak and threaten to bring on the dreaded
scenario of the precious black fluid selling at $50 a barrel.
The Organization of Petroleum Exporting Countries (OPEC) is already
pumping at it highest levels for a quarter of a century and only
Saudi Arabia is thought to have any significant spare capacity
to boost production. In a world where geopolitical uncertainties
and oil prices and supplies are closely entwined, Africa’s
star may be rising. Considering the ongoing dependence on foreign
oil, this development is clearly in U.S. national interest.
Africa’s growing importance as an oil supplier comes at a time
when the global energy industry is in the throes of a structural transformation.
On the demand side, the longstanding U.S. role of being the dominant
consumer of hydrocarbons is being challenged by China. Since 1978, when
China began its growth spurt, the Asian country shifted from being an
oil exporter to a major oil importer. Not far behind China is India,
also energy hungry. India’s real GDP growth is expected to be around
7 percent this year. Between China and India there are over 2 billion
people, working and living in rapidly growing economies, with expanding
middle classes with automobile-oriented consumer cultures. That means
more oil demand.
At the same time as demand is on an upward swing, there is growing concern
about supply, including the aging Saudi fields and their ability to meet
global demand. Production is slumping in long-time OPEC member Indonesia,
which in 2004 became a net oil importer for the first time in 100 years.
In addition, supply from the OECD (Organization for Economic Cooperation
and Development Countries) has probably peaked.
Africa has around 33 percent of the world’s proved reserves. That
includes OPEC members Libya, Nigeria and Algeria. Sub-Saharan Africa
supplies about 15 percent of U.S. oil, of which Nigeria is the leader.
Indeed, the West African nation is the world’s sixth-largest exporter
of oil and the fifth largest supplier of the United States. Bonny Light
crude from Nigeria has a highly desirous low-sulfur content that is easily
converted into gasoline.
It is in the non-OPEC members where the most significant future gains
are expected. In particular, the Gulf of Guinea is estimated to hold
up to 10 percent of the world’s oil reserves. That region encompasses
the Ivory Coast in the north down to Angola in the south. East Africa
is also looming large as a potential area for oil extraction.
Africa’s oil will never duplicate the Middle East’s massive
supply. In 2003, the Middle East accounted for 63.3% of proved reserves.
Africa’s share was a much more modest 8.9%, the same as South and
Central America and a little behind Europe and Eurasia (Russia). However,
it does represent an alternative source. Considering that foreign oil
workers have become targets in Saudi Arabia, Iraq’s oil pipelines
are constantly being sabotaged, and politics are casting a shadow over
the local oil industries in Russia and Venezuela, Africa has become more
Since 9/11 part of U.S. energy policy has been to diversify away from
the country’s dependence on Middle Eastern oil. Transport from
West Africa to the U.S. is far shorter than from the Middle East and
avoids chokepoints such as the Persian Gulf and Red Sea. Along the same
lines, much of the oil is being pumped from offshore oil fields, which
could make transport easier in the case of onshore political turmoil.
Equally important, the sub-Saharan oil producers, with the exception
of Nigeria, are not OPEC members, reducing the complexity of pricing.
For many of the U.S. oil companies the region is also attractive in that
large amounts of oil have been discovered and there is a scarcity of
big new oil projects elsewhere.
The growing importance of Africa as a source of oil was reflected by
the visit of U.S. President George W. Bush in July 2003 to a number of
countries in the region, including Nigeria. According to the National
Intelligence Council, the United States is expected to buy as much as
25 percent of its oil from Africa by 2015, an amount that would put the
region ahead of Saudi Arabia. But the quest for African oil is becoming
competitive. The United States is not alone in appreciating Africa’s
oil as many other countries have sent their oil companies hunting for
new, non-Middle Eastern sources of oil, including China and India – Asia’s
two “new Tigers”.
Despite the lure of Africa’s oil, there are considerable challenges.
These include corruption, political violence and banditry. HIV AIDS kills
thousands of people a year, while the medical infrastructure is weak
and in some places virtually nonexistent. Human rights groups have rightfully
criticized the widespread lack of democracy and accountability in much
of the region. The billions of petrodollars coming into the region are
not translating into better livelihoods for the vast majority of people.
Oil companies have a mixed record in dealing with the region – the
wealth they generate has not trickled down to the general population
and in many cases, there has been long-term environmental damage as in
the Niger Delta. There is a very strong possibility that oil-led development
can serve only to reinforce authoritarian rule, corruption and environmental
Yet, the change in international oil markets represents an opportunity
for Africa and those involved in the continent to do something better
than in the past. And the stakes are high. The poverty that afflicts
even the oil-producing countries creates the ideal breeding grounds for
the penetration of al-Qaeda and its allies and if nothing else perpetuates
weak civil societies dominated by lawlessness. The resentment felt by
local people who have failed to share fully in the benefits of the new
oil bonanza have sparked violence by ethnic militias in Nigeria’s
Niger delta region and a separatist movement in Angola’s oil enclave
The world of higher oil prices is likely to last through much of the
decade; the trick is for African governments and their people to capitalize
on that trend. This represents a major challenge – oil wealth could
provide a major opportunity to break the chain of failed governments
and economic experiments – or another round of dashed hopes for
a better future. For the United States, more attention will have to be
given to Africa, especially if there is a concerted effort to reduce
the dependence on Middle Eastern oil. This also means paying closer attention
to finding a balance between extracting the oil and helping provide for
a sounder socioeconomic infrastructure in those countries involved in
selling their oil to keep the American economy running.
Scott B. MacDonald is a Senior
Managing Director and Head
of Research at Aladdin Capital
Management LLC, in Stamford,
Connecticut. He is also the
firm’s energy analyst.
His most recent book is Carnival
on Wall Street: Global Capital
Markets in the 1990s (John
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Run on Deposits and Yukos Demands: Ominous
Signs for the Global Economy?
MOSCOW (KWR)—Despite high crude prices Russia’s largest
oil firm drifts towards insolvency and the country is experiencing
the biggest run on deposits since the 1998 financial meltdown. It remains
to be seen whether events in Russia will have wider repercussions.
Russia's recently acquired image of order and stability became shaky
in early July as bailiffs began dismembering the once-profitable oil
giant Yukos and panicked depositors staged a run on several of the
country's top banks.
Russia proved to have too many small, unstable banks and not enough
large ones with transparent operations. Cracking down on even the smallest
sends shockwaves through the system. Russia’s Central Bank revoked
Sodbiznesbank's license in May for laundering what it said was some
$1 billion of suspicious funds. CreditTrust went bankrupt in June.
Reports of a central bank list of banks under scrutiny were repeatedly
denied by authorities. In early July, ratings agency Moody's said it
had put 18 banks under review for possible downgrades. Banks have also
begun closing lines of credit on each other, creating a climate of
distrust along with a liquidity problem.
Among the worst hit was Alfa, the country's largest private bank. After
what its directors called a black public-relations campaign by competitors,
it had withdrawals of $100 million in the first week of July - 10 times
more than normal - based almost entirely on rumors. Some branches had
waiting lists to close accounts, leading the bank to introduce a temporary
10% commission on early withdrawals.
Largely unsourced media reports suggested that Alfa Bank, the nation's
largest private lender and the third-biggest bank by personal deposits,
might be next triggered a panic-driven run that saw Alfa clients pull
some $160 million from their accounts in just three days. Alfa lashed
out at the media for fueling fears of a full-blown crisis, in particular
Kommersant daily and its owner, disgraced tycoon Boris Berezovsky,
who is wanted by Russian authorities for alleged tax fraud and is living
in self-imposed exile
However, Alfa Bank reiterated that all withdrawals would be honored.
State-owned Vneshtorgbank has agreed to buy out Guta, thereby rescuing
its depositors. The Central Bank cut the minimum reserve held by banks
against ruble deposits to 3.5% from 7%. By halving mandatory reserve
requirements for banks to 3.5%, it freed up some 130 billion rubles
The State Duma on July 9 passed a bill guaranteeing deposits in uninsured
banks that fail. It will apply to all banks that go under after February
2003, when the Law on Insurance Deposits was adopted. All deposits
up to 100,000 rubles ($3,350) will be returned within six months. This
means that clients of two failed second-tier banks, Sodbiznesbank and
CreditTrust, will be covered.
Adding to the unease was a statement by international ratings agency
Moody's that it would review 18 Russian banks, including Alfa, MDM,
Bank of Moscow and Russian Standard, for possible downgrades. "The
review will focus on the capacity and willingness of Russia's central
authorities and other banking-market participants to provide prompt
liquidity support to the solvent banks in need of such aid," Moody's
said in a statement.
Moody's rivals, Fitch and Standard&Poors, however, both said they
saw no reasons yet to review their ratings of Russian banks. S&P
said it has already factored the "institutional weakness of the
Russian banking sector" into its ratings of 21 banks, while Fitch
noted that Alfa's liquidity is "consistent with its ratings." "While
the current retail deposit runs and interbank market turmoil may end
very quickly, institutional weakness in the sector will remain," S&P
said on July 9. "Russia will not enter a banking crisis on the
scale of the one seen in 1998," S&P said in a statement.
On the other hand, Russia now faces its oil major Yukos's imminent
bankruptcy. Finance Minister Alexei Kudrin said on July 9 that Yukos
had run out of time for striking a deal with the government on restructuring
a $3.4 billion back tax bill for 2000, making asset seizures inevitable.
His statements came a day after Yukos sent a proposal to the government
offering to voluntarily pay more than $8 billion in additional tax
payments for 2000 to 2003 on condition it was given three years to
do so. The company has received another claim for $3.4 billion for
2001 and could face further sanctions for other years.
Last June, Russian President Vladimir Putin indicated the Kremlin did
not support the bankruptcy of Yukos, however, courts have frozen the
company's assets, leaving it without the funds to pay the back-tax
demands and hence opening a way for the company’s formal insolvency.
"The actions of representatives of the Russian government have led Russia's
best and most creditworthy company to the brink of an unintended and artificial
situation of insolvency and bankruptcy, creating an unthinkable default situation
with its bank lenders, all at a time when the company is experiencing the best
results in its history," Yukos chief financial officer Bruce Misamore said
in a statement.
The firm was dealt another blow when a syndicate of Western banks led
by France's Societe Generale declared it in default of a one billion-dollar
loan. Misamore said the consortium of banks was not demanding immediate
repayment of the $1 billion yet, but could do so now at any time following
the company's formal notification by the banks on July 2 that it was
in default. As of July 8, "some action could be taken against
our assets," Yukos's CFO Misamore admitted to investors during
a conference call on Tuesday. Unless a negotiated solution is reached,
the government will have "the full right to come in and try to
realize the value of assets to pay the tax bill. This could be sale
of assets conducted by the bailiffs ... either through an auction or
direct sales," he said.
Yukos said the move to freeze its Russian bank accounts could force
it to halt production because it would not be able to make the payments
required to continue operations. Yukos could slash some of its 400,000
barrels per day of oil and products exported by rail and river in July
as it struggles to find cash for core operations with its bank accounts
frozen, according to media reports. Yukos' pipeline exports to destinations
such as Poland, Slovakia and Hungary, much of which are committed under
long-term deals, could also come under threat as soon as August, forcing
the firm to declare force majeure.
Western institutions have been reportedly buying Yukos stock thinking
everything is going to be fine because President Vladimir Putin said
there would be no bankruptcy. Meanwhile, a group of minority investors
has called on Russia to re-think the assault on Yukos. "A climate
of fear and uncertainty has descended upon the market regarding the
state's ultimate intentions toward Yukos," the group, which includes
Deka, Germany's second- biggest mutual fund and Janus, the ninth-largest
U.S. stock and bond mutual fund manager, said in a letter to Putin
quoted by The Moscow Times. The group has requested a meeting with
Putin to discuss the affair.
Another group of minority shareholders is suing Yukos for allegedly
deceiving investors on the true state of affairs at the company from
Feb. 13 to Oct. 25, 2003, the day Khodorkovsky was arrested. A lawsuit
was filed at a New York court on Friday via the law firm Lerach Coughlin
Stoia and Robbins, Vedomosti daily reported.
Last year, Yukos had been rumored to be considering selling a major
stake to world oil No. 1 ExxonMobil, in an apparent bid to ward off
official pressure by linking up with a foreign partner. Prior to flying
on his last trip to the U.S. in October 2003, Yukos former head Mikhail
Khodorkovsky announced he would rather go to jail than leave the country
as a political emigre and abandon his fight with the Kremlin.
Western governments are warning Russia that its aggressive legal assault
on the country's largest fully private company risks souring relations.
New European Union member Lithuania on Jul 7 said that "all of
Europe" would have to respond if Russia forces Yukos into bankruptcy. "Economic
and trade matters can't be separated from politics and foreign policy
when deciding the fate of such a huge company with assets in Lithuania
and other parts of Europe," Lithuanian Prime Minister Algirdas
Brazauskas told reporters in Vilnius. Lithuania owns 40.7% and Yukos
53.7% of Mazheikiu, the nation's biggest company by revenue. Mazheikiu
operates the only refinery in the Baltics and owns an oil terminal
"The Yukos affair is being monitored carefully" by the British government,
visiting British Foreign Secretary Jack Straw told reporters July 7. "We
have some direct British interests in this," Straw said after meeting Foreign
Minister Sergei Lavrov. “Many Yukos shareholders are British”, he
The United States lashed out at Russia's judiciary, saying the case
appeared to be lacking due process and was discouraging investors. "We've
been concerned about this case all along, and will continue to follow
it closely," State Department spokesman Richard Boucher said in
Washington. "We haven't taken a position on the merits of this
specific case, but we have been concerned about how this process is
unfolding and the effect it might have on investment," Boucher
As the crisis around Russia’s banks and leading oil company,
Yukos, unfolds, it remains to be seen how it can end without wider
repercussions and whether these events will create new anxieties in
global business and financial markets.
Blagov is a Senior Consultant at KWR International
Fund Research tracks
equity and bond fund flows, cross border
capital flows, country and sector allocations,
and company holdings data from its universe
of 5,000 international, emerging markets
and US funds with more than $2.5 trillion
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US-registered funds. The data is used by
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The firm also provides investment management
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Sector in India
Kumar Amitav Chaliha
a time, it looked as if India’s new
Congress party-led government might bring
the recent resurgence of investment in the
country’s power sector to an abrupt
halt. When it was reviewing the Electricity
Act 2003 — legislation passed by the
previous government that laid out a framework
for restructuring and privatizing the debt-laden
state electricity boards that long dominated
transmission and supply — share prices
in India’s increasingly active private
power developers collapsed. This now looks
to have been an over-reaction.
Programs to reduce heavy transmission and distribution losses, and the
theft of as much as 35% of all generated power, are expected to continue
even if the state governments retain ownership of the network. Investors’ concerns
were further assuaged when the new government announced plans to offer
fiscal incentives, including lifting of all import taxes for new power
plants smaller than 1,000 MW, and approved ten power projects. So, it
now appears that some 10,000 MW in planned new generation capacity will
go forward after all.
Firdose Vandrevala, managing director of Tata Power, summarized the view
of many power project developers in a recent interview: "By itself,
the Electricity Act was not going to achieve much," he explained,
as action to improve the distribution system was also needed at the state-level.
He said that Tata Power would go ahead with investing in generation facilities
even if the distribution network remained in state hands, so long as
the state electricity boards "become productive and their payment
capacity improves." He added, "we are not worried whether
[the distribution network] is in private or public hands, so long as
it is efficient and has the ability to pay."
Foreign power developers, which all pulled out of India in the wake of
the collapse of the Enron-led Dabhol project due in part to non-payment
by the Maharashtra State Electricity Board, are still absent. But domestic
Indian conglomerates and trading houses are piling into the sector, along
with upstream major Oil and Natural Gas Corporation (ONGC) and gas operator
Scott B. MacDonald
Republic – Government Falls: In
late June the government of Prime Minister Vladmir
fell, prompting the likelihood of early elections.
Spidla quit when his government lost the support
of his Social Democrats in the three-party ruling
on June 26. This left President Vaclav Klaus to
negotiate with other parties, with the probable
the Communists, who constitute the second largest
bloc of seats in the parliament. Thus far it appears
the old coalition will reform for another government,
but with a one-seat majority of 101 seats out of
200. The outgoing and possibly incoming government
of the Social Democrats, Christian Democratic Union-Czechosolvak
People’s Party and Freedom Union. If the
new old team reforms it will probably not be official
Privatization: Economic observers have indicated
that privatization of state-owned enterprises by
of President Megawati contributed substantially to
increasing the country's foreign exchange reserve
to US$37 billion,
the highest ever recorded by the country. According
to Mumtaz Malik of the Total Reform Monitor Presidium,
of state enterprises is far more efficient under
the present government than during the New Order
Suharto. Under the administration of Suharto, the
highest foreign exchange reserve ever recorded was
Malik said. “Despite criticism and sell-out accusation
the fact is privatization of state enterprises has contributed
substantially to our foreign exchange reserve," he
State Minister for State Enterprises Laksamana Sukardi has
been accused of selling state companies at cheap prices. He
was even accused of selling the state by political opponents.
The present government has also succeeded in increasing revenues
in taxes and dividend from state enterprises, he pointed out.
Revenues in taxes and dividends from state enterprises totaled
Rp52 trillion (US$5.77 billion) in 2003 or the highest ever
recorded compared with only Rp15 trillion 1999.
Indonesia – Power
Plant Construction: In late July it was announced by the
Canadian government that it will build a 200-megawatt mini-
hydropower plant worth Rp2.2 trillion (US$250 million)
in Kanawa village, Tanatoraja district, South Sulawesi.
The Canadian government will undertake the project in cooperation
with a Canadian private company, Excort, but 70 percent
of the plant's equity will be owned by the government and
30 per cent by Excort. The project would be carried out
in three stages with the use of high technology from 2005
to 2007. The project would not use a water dam as other
plants but would pump water to a reservoir. It will then
distribute water to a turbine to generate electricity.
The Canadian government was forming a team to conduct a
feasibility study from September to October 2004.
Review: Princes of the Yen: Japan's Central Bankers
and the Transformation of the Economy
A. Werner, Princes
of the Yen: Japan’s Central
Bankers and the Transformation of the Economy (Armonk:
M.E. Sharpe, 2003). 362 pages.
by Scott B. MacDonald
purchase Richard A. Werner's book, "Princes
of the Yen",
directly from Amazon.com
A. Warner has no doubt written a fascinating
book. Whether or not one concurs with his views,
it is worth reading.
The fundamental thrust of his argument is that
the Bank of Japan is the dominant force behind
economic transformation over the last decade. As he states: “This
book shows the Japanese recession was indeed due to the
main force driving the business cycle – money.
It is not by coincidence that the main proponents of
structural change are precisely those who are in control
of Japan’s money.” The proof is that
the central bank has consistently defied calls
by the government
to create more money to stimulate the economy
and end the long recession. Indeed, the Bank
of Japan has intentionally
left Japan in the economic wilderness to make
certain that the government and politicians had
no other path
but to make painful changes.
What elevated the Bank of Japan over its rival,
the Ministry of Finance (MOF)? A long series
of painful scandals hurt
the MOF, while the BOJ remained largely faceless
to the public. Over time, the Bank of Japan emerged
as the most powerful
financial actor, all “because of a lack of transparency
and a lack of meaningful accountability by the central bank
for its monetary policy.” Werner’s view is that
the central bank is supreme: “It is not the
government but the BoJ that decides whether we will
have a boom or recession.”
At the end of the day, Werner’s book is about competing
capitalist economic models. The message is ultimately that
the Anglo-American model founded more on deregulation and
liberalization of markets (in a sense more rough-and-tumble
economics) is inferior to the more state-guided German/Japanese/Korean
models. In the case of Japan, he asserts: “If anything,
structural reform toward deregulation and liberalization
has been accompanied by reduced economic growth, both in
the short term and in the long term.” He concludes
his book by noting: “Finally, a comparison
of the longer-term macroeconomic performance of the
German, Japanese and Korean
economies in the twentieth century suggest that economic
structures that do not conform to the U.K./U.S. model
can be highly successful, or surpass the U.S./U.K.
when measured by certain indicators of social welfare
(such as indicators of inequality, social stability,
or basic needs,
including access to health services, welfare, and
While there are certain parts of Werner’s argument
that are persuasive, the simple equation that deregulation
and liberalization are bad and state-guided capitalism
is good, is a weak argument. Certainly anyone looking
German economy through the last 10 years is keenly
aware that the German model is deeply troubled, reflecting
the system ultimately is not affordable. Both the
U.S. and U.K. made painful structural changes during
the 1980s and
1990s to make certain their economies remained highly
competitive. While these systems are not without
their own set of problems,
they still provide a much better living for their
citizens than most other countries on the planet.
Could they be better?
Absolutely. Yet, they still attract foreign capital
and individuals that find the risk/reward system
to be worth the venture.
In Germany and Japan the old systems were tinkered with,
but the major gut-wrenching changes were avoided. Now demographic
and financing problems are mounting. If the vaunted German
model is so great, why then has its major bank, Deutsche
Bank,openly talked of re-locating outside the country to
avoid heavy social costs and an inflexible labor market?
Werner’s book was popular in Japan because it is supportive
of the status quo. Let’s avoid those painful
decisions, neuter the power of the Bank of Japan,
and return to a system
based on greater social equity. Nice sentiments,
but hardly realistic for a country with public sector
to reach 160% of GDP in the near future. Moreover,
with the demographic clock ticking, who will pay
the bills for such
a system in the future?
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