Wealth of Nations

E-commerce Growing Despite Downturn

Newsweek — Fri, 20 Nov 2009 17:00:04 GMT

Credit: Michael Loccisano - Getty Images

Ungenerous Japan

Newsweek — Fri, 20 Nov 2009 10:57:56 GMT

By Takashi Yokota

Japan, the globe's second-largest economy, has long prided itself on its reputation as one of the world's most generous nations. But the Center for Global Development (CGD) thinks the country is punching below its weight. A recent report by the reputable Washington think tank ranked Japan the second-worst contributor among the 22 countries it surveyed. The analysis of "how much countries are living up to their potential to help" found that while Japan's foreign-aid budget is large in absolute terms, it amounts to only 0.18 percent of gross national income, compared with 0.98 percent for Sweden, which ranks first. The report also dings Japan for its insular policies, such as Tokyo's steep tariffs on rice imports (to protect its farmers), its strict policy on refugees (it accepted a mere 410 out of 4,882 applicants between 1982 and 2005), and its small contributions to global peacekeeping efforts (due to restrictions in its pacifist Constitution).

The new Yukio Hatoyama administration may improve matters. Foreign Minister Katsuya Okada has said he will review and increase Tokyo's official development assistance and make it easier to deploy peacekeeping personnel. Last week Tokyo also announced it will dole out $5 billion to Afghanistan over the next five years. But don't expect Japan to move up the ranks on the CGD's scale any time soon--considering the country's severe budget crunch, the coming changes are likely to be incremental at best.

Grumbling About China and the Renminbi

Robert J. Samuelson — Thu, 19 Nov 2009 23:23:38 GMT

Wonder why President Obama’s trip this week to China didn’t go more smoothly? Meetings between Obama and top Chinese leaders were reportedly stiff; the Chinese also limited domestic press coverage of Obama’s appearances. The explanation is disarmingly obvious: huge disagreements separate the two countries that can’t easily be papered over.

Anyone doubting that ought to take a quick read of the latest annual report from the U.S.-China Economic and Security Review Commission, a group established by Congress in 2000 to examine the connections between the countries’ economic relations and broader issues of national security. The Commission has typically been more suspicious of Chinese policies and motives than many American analysts. This year’s report is no exception.

The picture of China drawn by the Commission is of a rapidly-growing country that, through an undervalued exchange rate and systematic industrial policies, increasingly challenges the U.S. economy and is rapidly expanding and modernizing its military. The commission cited estimates that China’s currency, the renminbi (RMB), is undervalued by 12 percent to 40 percent. Despite a 4 trillion RMB ($586 billion) “stimulus” package announced in Nov. 2008—to offset the effects of the global economic crisis—China “is still pursuing an export-led strategy,” the report said. At the end of September, China’s foreign exchange reserves totaled $2.27 trillion.

Though the U.S.-China trade deficit in 2009 of $144 billion (through August) was down 17.6 percent from the same period in 2008, most of the decline reflected the deep U.S. recession and less demand from American consumers. In fact, the report said, China’s share of the total (non-oil) U.S. trade deficit continues to rise and is now about 80 percent, up from 40 percent as recently as 2005. The Commission echoed the criticism of many U.S. economists who argue that China’s large trade surpluses, reinvested in heavily in U.S. Treasury bonds, contributed to the present economic crisis. The argument is that the reinvested dollars kept interest rates down and caused banks and other investors to shift funds into riskier mortgage-related securities with higher interest rates.

“If China continues to pursue huge trade and investment surpluses and to accumulate vast financial claims, it will hinder the necessary global economic adjustment, create excess manufacturing capacity, and lay groundwork for the next [economic] crisis,” the report warned.

Aside from trade policies, the report also alleged that China has stepped up its cyber attacks against U.S. private and government data networks. It cited Defense Department estimates that “malicious” incidents against DOD systems had doubled since 2005, from 23,03l to 54,640 in 2008, and are on track to increase another 60 percent in 2009. The Commission conceded that tracing the origins of cyber attacks is difficult and that many come from “”private hacking groups.”. However, the report contended that the technical features and targets of some attacks pointed to heavy Chinese involvement.

On military matters, the Commission said that, supported by an expanding economy, China “has embarked on its largest naval modernization since the founding of the PRC [People’s Republic of China] in 1949.” The main aim is to deter “Taiwan from declaring independence” and “to impede other nations—including the United States—from intervening on Taiwan’s behalf.” In recent years, the report said, China had purchased or built 38 submarines, 13 destroyers and 16 frigates and has developed “advanced offensive and defensive weapons, such as anti-ship cruise missiles, land –attack cruise missiles, and sea mines.” However, American officials believe that the United States retains naval superiority in the region.

The Commission’s powers are confined to investigations and recommendations to Congress. Its recommendations this year included making more formal complaints to the World Trade Organization about Chinese trading practices and taking legislative steps to offset the effects of the undervalued RMB.

Wheat Replaces Poppies as Top Crop in Afghanistan

Newsweek — Thu, 19 Nov 2009 11:00:34 GMT

Credit: EPA - Corbis
Source: U.S. Department of Agriculture

"Qu’est-ce Qu’être Français?" and French Identity

Eric Pape — Wed, 18 Nov 2009 11:55:18 GMT

Angry young French minorities in dead-end banlieues have, in moments of frustration, expressed themselves crudely. Some set thousands of cars and hundreds of buildings on fire amid weeks of confrontations with riot police in 2005, leaving Paris to decipher the smoke signals. In calmer times, some of those young men offer coarse, half-joking justifications for their troublemaking along the lines of, "I'll screw France until she loves me." All bravado and misogyny aside, French-Cameroonian author Gaston Kelman suggests that those kids are simply demanding that their country truly recognize them as French--despite their darker skin or exotic names.

Kelman makes this provocative assertion in his contribution to a collection of 19 personal, analytic, historic, and philosophic essays that respond to the book's title question: qu'est-ce qu'être Français? (what is it to be French?). The collection--authored by intellectuals, lawyers, politicians, authors, activists, and writers--is being released in late November to mark the fourth anniversary of the Paris riots.

National identity is touchy political terrain in France. On the campaign trail in 2007, Nicolas Sarkozy linked national identity to immigration and integration when he decided to create the Ministry of "Immigration, Integration, and National Identity." The idea paid electoral dividends with nostalgic white rural voters tempted by France's popular far right, essentially guaranteeing Sarkozy's election. President Sarkozy later put the ministry (where Kelman acts as an adviser) in charge of the high-profile expulsions of noncitizens. Some have been shipped off to repressive African states and, more recently, to wartime Afghanistan. Needless to say, this goes against a key element of France's historic identity as a land of refuge--and troubles many people, including some who work closely with Sarkozy.

While many of the book's essayists have direct links to the president's party or his government, their definitions of "Frenchness" tend to be strikingly inclusive. Most writers do offer pride in cliché French areas of achievement (the arts, philosophy, human rights, etc.), but they also point out France's many failures to live up to liberté, égalité, fraternité. Jurist and conservative-party politician Jeannette Bougrab--whose North African father fought for France in World War II and then insisted that his children fully assimilate--recalls the stinging racism of an influential French politician. Speaking before other politicians, he told Bougrab that she could not truly be from France because "the blood that runs in your veins isn't French."

Seen as a whole, Qu'est-ce qu'être Français? amounts to a deft effort to separate patriotism from nationalism, and highlights the rich cultural fabric of France's modern identity. (It also serves President Sarkozy's efforts to lure a large swath of fringe voters back toward his mainstream party for years to come.)

The irony is that people wrestled with the question of French identity prior to the existence of France. The book's introduction cites Julius Caesar's thoughts on les Gaulois. He considered them to be stylish, vain, versatile, and unpredictable showoffs, while noting their "need to shine" and their engagement in "unheard-of fearless acts" that would be seen and known near and far. The Roman emperor's assessment applies to France's president, as well as to many of the swaggering kids in the nation's troubled ghettos. The book's deeper message, of course, is that those kids are as French as anyone.

Wall Street's Ego Bubble

Rana Foroohar — Tue, 17 Nov 2009 17:00:38 GMT

Last week, we got more proof of Wall Street's utter disconnect from the rest of the world when Goldman Sachs's chief executive Lloyd Blankfein was quoted as saying he's doing "God's work." Apparently, he's also a "blue-collar guy" and "everybody should be happy" that he and his peers are on track to take home billions in bonuses this year. Blankfein's hubris generated disbelief among the foreign CEOs and government officials attending a Chinese business conference, put on by a Swiss outfit called Horasis, in Lisbon last week. "Do you think those quotes might be made up?" one Latin American participant asked.

Sadly, no (though Goldman says the God comment was "ironic"). At the same conference last year, right after the start of the financial crisis, there was a surprising lack of ire at the U.S. for causing this mess. Now, with emerging markets surging ahead while rich countries face a low-growth decade, everyone felt emboldened to say what they'd been thinking all along: America is useless. Not only has the U.S. stashed financial bombs under everyone's beds, it's doing a terrible job of cleaning up the mess--and it's certainly not in any position to give economic advice. As Hong Kong real-estate tycoon Ronnie Chan put it: "If we listen to America, we're doomed. Leaders there are pushing aside all the rational voices [calling for greater regulation], and the next crisis is already brewing."

His comments were made during a session on "recapitalizing the world," which quickly turned into a discussion on China. Goldman Sachs itself is now predicting that Chinese GDP will overtake America's by 2027. But already this year, China surpassed the U.S. as the world's largest generator of investment capital, with around $2 trillion to America's $1.4 trillion, according to John Ross, a visiting professor at Shanghai Jiao Tong University. Much of that money is pouring in to markets like Africa and Latin America. Trade deals are often now done in renminbi, and huge commodities buys in such places help China hedge the weakening dollar.

While plenty of financiers in Lisbon were careful to say that the U.S. is still an innovation center, it's clear that BRIC business leaders are looking to each other for future prosperity. China's still-strong growth is the reason that Latin America and Africa, for the first time in modern history, haven't been worst hit by a global downturn. In Lisbon, one Chinese entrepreneur was asked to offer advice to Obama on the eve of his visit to Beijing. His answer: read more about the Middle Kingdom--and get your daughters a Mandarin tutor.

China's Yuan May Strengthen Against the Dollar

Rana Foroohar — Tue, 17 Nov 2009 10:50:42 GMT

Investors last week were buzzing about a report released by the Chinese central bank ahead of President Obama's visit to the country, which indicated that Beijing might once again be thinking of letting the yuan rise to reflect China's growing heft in the global economy. The report surprisingly omitted the usual language that Beijing would keep the yuan "stable at a reasonable and balanced level." The yuan's relatively low value is a key reason that Chinese exports remain so competitive on the global stage; it's also a reason for major trade imbalances between the United States and China, something that underscored the recent global financial crisis.

But economists say the Obama administration shouldn't expect any major change in the short term. "A token shift [in the currency] is the best I would expect," says Morgan Stanley Asia chairman Stephen Roach, noting that China's recovery is still fragile. What's more likely is that, assuming steady economic growth, Beijing will eventually resume its policy of letting the yuan slowly appreciate, something it had capped last year with the advent of the financial crisis and the plunge in exports. Currency watchers, take note: if the yuan does start rising steadily again in 2010, it will be a sign that China is confident it can move away from export dependence and views its economic recovery as real and lasting.

How Long Will the Bull Rally Last?

Newsweek — Mon, 16 Nov 2009 17:00:23 GMT

With so much cheap money sloshing around, the stock market's been on a roll lately. Given that the economy is still sputtering, how long will the rally last?

Robert Prechter Jr.
Not long. This is a bear-market rally, not a new bull market. In March panic reigned as the Dow fell to 6500, but our model called for a sharp rise to 10,000. The advance is now showing signs of exhaustion and shouldn't outlast the year. Investors should use this rally as a final chance to get into the safest possible cash equivalents, like Treasuries.

Jake dollarhide
Another year. We're in for a strong 12- to 18-month rally. With interest rates near zero and stimulus and bailouts continuing, the stars are aligned. When things fell last year, fear set in. But that's gone now. Could all this free money kill things in two or three years? Sure. But there's no reason this will stop any time soon.

Our Verdict
The stock market is becoming less of a bet on the U.S. economy, as companies earn more revenue from abroad. Third-quarter earnings for 80 percent of S&P stocks beat expectations, so fundamentals are improving. And there's still $3 trillion of cash in money-market funds.

Prechter is author of Conquer the Crash. Dollarhide is CEO of Longbow Asset Management.

Chavez's War Mongering Is Cover for Domestic Woes

Mac Margolis — Mon, 16 Nov 2009 10:38:35 GMT

Colombia and Venezuela appear to be on a collision course. Venezuelan President Hugo Chávez recently ordered troops to the Colombian border, where violent clashes involving police, narcoguerrillas, and army troops have flared. But don't buy the saber rattling. Chávez's popularity is plummeting, and this is little more than an act of political desperation.

What prompted Caracas's latest outburst is still unclear, but bilateral relations curdled in August when Bogotá said it would grant U.S. forces access to several military bases--a gesture that rankled Caracas, which sees D.C. as the devil's address. But Yanqis are a proximate cause. The real problem is Venezuela's growing domestic crises, driven by disinvestment and mismanagement. A drought has led to severe water shortages and blackouts. Prices are rising 29 percent a year, the highest in the region. Such dysfunction is eroding Venezuela's economy and patience. In October, polling firm Datanálisis found that Chávez's approval ratings had dropped below 50 percent for the first time. They also found some 80 percent of Venezuelans opposed going to war with Colombia. If Chávez is trying to distract his countrymen with war, he could be out of luck.

Leading Indicator: Credit Cards Still Sticking It to Consumers

Newsweek — Fri, 13 Nov 2009 11:01:01 GMT

Credit: Alan Schein - Corbis

Bank Failures Only Getting Worse

Newsweek — Thu, 12 Nov 2009 17:00:52 GMT

Africa Turns Away the Troops

Scott Johnson — Thu, 12 Nov 2009 11:16:09 GMT

Many experts worry that Africa could soon become the world's jihadist base of choice; its combination of failed states, poverty, and pockets of religious extremism offer the perfect breeding ground for terrorists. That's a big reason why in 2007 the Pentagon created AfriCom, a new command responsible for organizing U.S. military involvement on the continent. Why, then, are senior AfriCom officials still stationed in Stuttgart, Germany? The problem is that locals are not exactly enthusiastic. U.S. officials considered both Botswana and Liberia as possible homes for the new command, but strong local opposition forced them to scrap their plans. In general, say AfriCom officials, there is little appetite for a big U.S. base in Africa, since African leaders worry that an American base would inflame fears of a new era of colonialism. According to AfriCom's chief, U.S. Gen. William (Kip) Ward, the hunt for an African host is now "completely off the table." Stuttgart, after all, is in the same time zone as most African countries, and a quick flight from the continent. Still, with counterterrorism operations ramping up in places like the Sahel and the Horn of Africa, a Germany-based command is bound to become messy. A senior AfriCom official who wasn't authorized to speak on the record admits that they haven't quite given up hope: "When the Africans invite us," the official says, "we'll consider it." But that may be a long time coming.

SEC Starting to Target High-Frequency Trading

Matthew Philips — Wed, 11 Nov 2009 17:01:14 GMT

The arcane world of high-frequency trading, in which sophisticated investors use computer programs to buy and sell huge amounts of stocks at breakneck speeds, is one of the least understood practices in the market. It's also one of the most pervasive. Upwards of 70 percent of all equity-trading volume in the U.S. is done by high-frequency traders. Proponents say it creates valuable liquidity by quickly matching buyers and sellers. Critics say it allows banks and hedge funds with the best code writers and fastest computers to prey on less-sophisticated investors, and possibly even engage in fraud by getting ahead of orders from their own clients and taking advantage of small differences in price. What's certain is that we don't know enough about it. A recent poll by Greenwich Associates found that 20 percent of institutional investors, like mutual funds, don't fully understand the practice. The issue's gaining steam in Congress, where a few members have been prodding the SEC to take action. At an Oct. 28 Senate banking-subcommittee hearing, an SEC official said the regulator intends to take a "deep dive" into high-frequency-trading issues. The SEC has already proposed a ban on flash orders, in which exchanges give certain traders a millisecond's peek at investors' orders before they're filled. SEC chairwoman Mary Schapiro has indicated the need to overhaul outdated regulations despite the protests of Wall Street: "We should not sacrifice the stability and fairness of the markets to give a trader a millisecond advantage."

Afghans Optimistic Despite U.S. Public Opinion

Newsweek — Wed, 11 Nov 2009 11:00:45 GMT

By Jerry Guo
Since Barack Obama took office, U.S. public opinion has grown increasingly bleak on Afghanistan's prospects. Yet Afghans are increasingly optimistic. In an Asia Foundation survey taken in June and July, 42 percent said the country is moving in the right direction, up from 38 percent last year, despite rampant corruption and Taliban advances. The margin for error was about 4 percent, so this doesn't represent a big spike, but it's still striking that Afghanistan's morale is not decaying as fast as the world's view of Afghanistan is.

Polls in allied nations including Britain and Germany show declining support for the war effort. "I don't think Afghan public opinion has swung as wildly as U.S. public opinion," says Daniel Markey, a former State Department official who travels frequently to Afghanistan. At the same time, Afghans hold very low expectations for governance and economic progress. Indeed, pollsters could not reach more than 100 villages, primarily in the south, the Taliban's stronghold. Those living in interior war zones may be just as demoralized as Westerners, but probably not. Afghans have lived with war for decades, so fatalism may explain their lack of pessimism.

Net Justice Targets Chinese Officials

Newsweek — Tue, 10 Nov 2009 17:05:18 GMT

By Lauren Hilgers

When migrant worker Sun Zhongjie recently faced the Shanghai court system, the 19-year-old from Henan, China, guessed his chances for justice were better online. Sun had been caught in a police trap: persuaded to pick up a plainclothes policeman and accused of operating an illegal taxi. In a gruesome play for attention, he chopped a finger off his left hand and went public. "In 24 hours everything you say will be on the Internet," Sun's lawyer threatened a local judge.

For people like Sun, the Internet is changing the equation of justice in China. Netizens are bringing a new level of scrutiny to court cases and local government affairs. If you're the little guy, you want China's Netizens in your corner. If you're wealthy, well connected, or happen to be a corrupt official, you probably want to avoid them altogether.

As instances of Internet justice increase, people like Sun are learning to use the Net to their advantage and government officials--facing a population of more than 338 million online Chinese--are finding it harder to escape scrutiny. With so many people surfing the Web, the ranks of an online mob can swell in an instant. In one of the most famous examples this year--the case of a female pedicurist accused of murdering a local official while he was trying to rape her--Netizens flooded the Web with more than 4 million Internet posts protesting the charges against her.

These online vigilante efforts have proved to be effective. The pedicurist was released without punishment. Sun has been cleared of all charges; his finger has been surgically re-attached and a government team has been set up to regulate how traffic laws are enforced. Out of 84 officials targeted by Internet scrutiny in the past year, one quarter have lost their jobs, according to Steven Dong, the director of global journalism at Tsinghua University. Dong says there has been a significant uptick in such scru-tiny over the past year, more so than ever before.

But Chinese officials are starting to fight back. While some still react to citizen Net surveillance with censorship attempts, more and more are responding with their own online PR. In Guangdong, officials recently sanctioned the first meeting of a "Netizens forum." "In the Internet age," an article in a state-run magazine recently counseled, "every civil servant is the 'image ambassador' for the government and for the Party." If you can't beat 'em, join 'em.