地缘贸易博客This blog considers how ideas and events framed by geography and trade shape our world, while sharing observations and analysis on discovery, transport, industry and much more.

Saturday 26 May 2012

The European Union and the Euro

Euro symbol with 12 EU Stars outside European Central Bank

The view from Asia

Europe plays little strategic role in the Asian region apart from its trade relations. Nevertheless in a globalized world everything is interconnected. Should the euro fail, or the EU break apart, the pain would be felt all over the globe, not least in Asia, where economies are seemingly going from strength to strength.

Interestingly one feature of European politics is very much the envy of many Asian countries: the continent's institutional and procedural framework that allows the countries of Europe to feed their problems, conflicts, and crises into an existing mechanism with established rules to have them fixed. However inefficient and underdeveloped that structure might often seem to Europeans themselves, the fact that Europe has both the EU and NATO is seen as a huge plus. 
For Europeans, this view is a big reminder of just how big the achievements of the european integration process really are. To be sure, Europe is flawed in many ways, and the price of being in such a closely-knit union might appear very high at times. But essentially, no one is out there alone. By comparison, in Asia, all existing forums, such as APEC, ASEAN and the like, are more loosely organised with very little binding power. 
The loneliness of nations in Asia's un-integrated region, and the insecurity and fear it breeds, should serve as a reminder to Europeans in this crisis of just how valuable the system they have created for themselves is. It should also remind people that underneath the economic narrative that so dominates the European debate at the moment lurks a much deeper story: a story of peace and freedom from fear, and how the European Union was the key to creating both.

What is needed to make the Euro work?

The Euro will not be safe until Europe answers some fundamental questions that it has run away from for many years. At their root is how nations should respond to a world that is rapidlly changing around them. What will it do as globalisation strips Europe and the US of the monopoly over the technologies that have made it rich.

Creditor countries want the thrust to be on national responsibility and penalties for rule breakers. Debtors want mutual solidarity; if not direct transfers from rich to poor then at least Eurobonds to pool debt (the European Commission is currently studying options for this). In short, the eurozone is badly in need of its own "Hamiltonian moment" that is the point when Alexander Hamilton committed the US federal government to assume the debts of the individual states. After the adoption of America’s constitution, Hamilton became treasury secretary. The federal government assumed the war debts of the ex-colonies, issued new national bonds backed by direct taxes and minted its own currency. Hamilton’s new financial system helped transform the young republic from a basket-case into an economic powerhouse.

America in Hamilton’s time was a young, post-revolutionary republic. Its founding fathers had the prestige to refashion the nation to confront military and economic threats. Hamilton’s assumption of state debt was contentious: virtuous states did not think they should pay for lax ones. Allowing speculators to make fortunes from the junk debt they had bought, often from destitute revolutionary warriors, rankled. This all sounds rather familiar. Yet for Hamilton, assuming the debt was a necessary price of liberty. America created political union followed by fiscal union. The reforms of 1789 were followed by a “no-bail-out” policy in 1840 that forced some states into default. The Federal Reserve was set up in 1913 to act as lender of last resort. The 1930s slump led to much-expanded federal spending under Roosevelt. American states are now constrained by balanced-budget rules, but the federal government borrows hugely to bolster demand. But Europe is doing things backwards, creating the euro partly in the hope of fostering political union. So fiscal integration is being pushed not to preserve freedom and a new nation, but to save a failing currency.

The Role of Big European Countries

Restoring Europe to health will take many years. That is because the troubled countries need to control their government deficits and to re-establish sound current accounts by improving their competitiveness. The true test will be in the content of the reforms. Germany will want to replicate its federal system, with more tough fiscal rules and more power for the European Parliament; the French will want a mirror of the Fifth Republic, with joint bonds issued by the euro zone and executive power (and much discretion) left in the hands of leaders.

Interestingly, the German word for debt, Schulden, is the plural of Schuld meaning guilt or default. Germany is firmly opposed to any solution that would imply open-ended transfers to less wealthy southerners; so are several other northern European countries, not least because guaranteeing others may raise their borrowing costs. But the alternative could be the end of the euro. In reality Europe needs to become more like the US which practices seamless fiscal transfers between the rich California-Connecticut-Illinois-New Jersey-New York quintuple and poorer states like Tennessee. If similar, transfers in the form of Medicaid and unemployment insurance were passed on to the weaker peripheral states, the comparable fiscal transfers may look similar to the graphic below:

Whereas the European Union exists – somewhat superficially – as a contractual union, in the United Kingdom, three centuries of shared experience and a common set of values has meant that English voters never questioned why English taxpayers’ money was used to prop up Scottish banks in the recent banking crisis. This essentially is the challenge for the EU to create a similar union in a relatively young Union where nation states remain considerable clout - to create a Union of belonging.

But that still doesn't resolve the big question what does globalisation mean for Europe? Does it mean Europe becoming more like Germany? (Global banking and trade, high productivity, high taxes, high welfare). Or more like say Texas? (Small budget, low pay, poor welfare). Given the shift in relative wealth and cost advantage away from Europe and the US, trying to make France, Spain, Italy and even the UK more like Germany is improbable. Making them like Texas is doable, but at heavy political cost. Austerity seems likely to be with Europe for years to come, on any policy setting. Globalisation alone will not be suffient to increase growth. Strapped as it is Europe embodies liberal and democratic values – respect for persons, a voice for all, some sense of social equity hence maybe the big questions really are: does embracing globalisation mean dropping these tiresome constraints to unfettered economic growth? And can growth alone be counted on to spread and sustain liberal democracy in 21st century?

Thursday 10 May 2012

Dubai's Dragon Mart - selling to the emerging middle classes of the world

Aerial view of the Dragon Mart Shopping Centre, Dubai

Dragon Mart provides an insight into a different world. It is a mall that is 1.2km  long and contains 3,950 shops. Both the shops that fill the mall and the products that fill the shops do not bear US and European familiar brand names as most of the world's shopping malls do. Dragonmart is dedicated to efficiency and cheapness. The China Ocean Shipping Company (COSCO) has a huge logistics centre next to the mall allowing new goods to be brought straight off the ship from China and wholesale purchases to be exported anywhere in the world.

Who are the customers and what are they buying?
To a large extent, the customers are wholesalers and bargain-hunting migrant workers in Dubai. The bargains are attractive, for example, a digital camera for 99 dirhams ($27) or a treadmill for 700 ($190) dirhams.The Dragon Mart may not be everyone's cup of tea, that is, not everyone may be attracted to polyester Persian carpets or plastic executive desks. Many companies specialise in producing cheap imitations of popular US and European brands. Yet Dragon Mart (and its Chinese manufacturers) cannot be dismissed. Dragon Mart caters for what many believe is the world’s most exciting group of consumers, the emerging middle class. The Consultancy Mckinsey estimates that this group could include 2bn people who spend $6.9 trillion a year. These people cannot afford to shop buying expensive branded US and European products, yet they too are seeking the status symbols of middle-class life. For them, many of the goods displayed represent the dream of upward mobility. The below video shows some of the products on offer at the Dubai Dragon Mart.

Dubai Dragon Mart is also evidence of the rebirth of one of the world’s oldest trading routes, the silk road. The old silk road specialised in luxuries like silk. The new silk road specialises in everything, interestingly with a stress on plastic. Furthermore, Dubai boasts two of the most important transport hubs on this road: the world’s ninth-biggest container port and one of its busiest airports. The rebirth of the new silk route will increasingly branch out to the emerging economies of the world by sea and air bringing affordable consumer goods to the new emerging middle classes in the Américas and Africa.

Tuesday 1 May 2012

The Rise of Las Américas in the 21st Century

Panamá City Skyline in the 21st Century

The Decade of América Latina

The market orientated reforms of the 1980s and the 1990s combined with several years of commodity-driven prosperity have been transforming América Latina into a region of wealth and prosperity over the last decade. The commodity boom together with more progressive social policies has started to create more dynamic and less unequal societies across the region.

Thanks to the commodity boom and rising revenues, governments have presided over a time of rising incomes for the new emerging middle classes in many countries in América Latina. However the increase in wealth has been occurring against a background of an ideological battle between reformers (mostly liberals and social democrat politicians) and those such as Mr Chávez (Venezuela) and potentially President Christina Kirchner (Argentina) and others of the ALBA grouping who would rather return to the authoritarian and populist past. At present the reformers appear to be winning the debate. This is illustrated below in the Economist's Latinobarómetro published in October 2011. Even so there has been a slight fall in optimism over the last year. This chart clearly shows Panamá with the most ongoing optimistic outlook. 

Latinobarómetro Source: The Economist Oct. 2011

What of the northern neighbours – the US

The US, América Latina's northern neighbour on the same continent has so far failed to appreciate the rising importance of América Latina with its expanding market for the north's exports, its huge investment opportunities, its enormous reserves of energy and minerals and its continuing supply of needed labour. However at the same time and despite their recent growth and globalisation, the economies of América Latina still depend on the US for capital, know-how, technology and remittances.

If geography is destiny and the US and América Latina need one another so much, the obvious question is why are the two not pursuing a more joint approach to consolidate their relations in a meaningful way? The answer to this question turns on key policy differences on three main areas. Firstly, immigration, many in América Latina find the idea of building a wall between the México and the US particularly offensive. Secondly, the war on drugs, the North's war on drug trafficking serves mainly to spread corruption, increase criminal violence and generally undermine the rule of law. Finally, the embargo on Cuba imposed by the US is seen as counter-productive and likely to have prolonged the repressive rule of the Castro brothers rather than ending it. However none of these policy issues is easily resolved due to domestic US politics and less so in an election year. Immigration has been a particularly toxic issue in the Republican primaries. To make progress in the war on drugs, the US needs to curb demand for illegal narcotics at home, but US politicians are loathe broach the the idea of decriminalisation. And the Cuba policy is held hostage by the swing state of Florida and its residents of Cuban origen.

Panamá, the Singapore of the Americas

Panamá is the success story of the first decade of the 21st century. Business of all kinds continues to grow, in a land coveted in the late 17th century by the pirate Henry Morgan and occupied since the beginning of the 20th century by the US President Roosevelt, to build the Panamá canal and link the Pacific with the Atlantic on the narrow isthmus. During many decades, the country has served as a hiding place for multiple legal and illegal dealings, from drugs to weapons and political conspiracies and money laundering.

Nevertheless the Panamá of the 21st century has many feathers to its bow: a chanel, an international banking center, the world's first merchant fleet, a free trade area which is one of the main bases for the collection and re-export of inland freight, an interoceanic railway, seven private ports and dozens of casinos and property developments (as the above picture shows). Panama in 2011 was placed at the head of economic growth in Las Américas, an increase of 10.6pc of GDP, against 9.2pc in 2010, according to the Statistics and Census Institute (INEC) of Panamá which likely explains the optimism in the Latinobarómetro above too. 

But the Elephant in the room is still... la droga

US President Nixon declared the war on drugs 40 years ago, interestingly the front that he opened in 1971 has survived all his successors up until now.

The Presidents of Brazil, Colombia and Mexico were the first to speak out on the failure of the war on drugs, Fernando Henrique Cardoso, Cesar Gaviria and Ernesto Zedillo respectively. Recently, the current president of Guatemala, Otto Perez, and the former President of Colombia, Juan Manuel Santos, have also spoken out to demand the opening of a debate on the decriminalization of drugs using the legitimacy granted to countries suffering the most tragic consequences of victims of the war on drugs. Honduras topped the global homicide rate, with 82.1 homicides per 100,000 population, followed by El Salvador. México has also been immersed in the drug war for the last six years, with almost 50,000 people dead and the homicide rate has increased by 65% since 2005 according to UN data.
The legitimacy of key leaders of América Latina speaking out, coupled with the figures of the dead has forced the US president, Barack Obama, to finally address the issue. In the US in April 2012 Obama said "We recognize our responsibility in this matter and I think it is entirely legitimate to engage in a discussion about whether the laws now in force are laws that perhaps are causing more harm than good in some areas." When Obama spoke, everyone understood: it is time to talk about drugs. The issue that is a constant drag on América Latina has finally reached the international agenda, a further sign of the América Latina's rise.