Category Archives: Trade and FDI

What happens when you destabilise a suboptimal system? It implodes.

The death of John and Alicia Nash on 23 May brought attention to game theory and the Nash Equilibrium, which offer insights into resolving the problems of today’s world.

As The Economist succinctly says: “In the real world of less-than-perfect competition, a “Nash equilibrium” may well be stable, but not optimal.”   Game theory shows that competition yields a sub-optimal stability, which can only be enhanced by cooperation.

Today we live in a world where resource constraints are not just widening the chasm between “haves” and “have-nots” but are destroying the fabric of nature upon which all life depends.  Human consumption is reducing access to clean water, land and air, is eliminating species and people increasingly rely upon junk (food, fashion and stuff) to prop up our confidence.

The way to reverse the destruction of the biosphere is to reduce consumption which can only be achieved with a cooperative approach to resource allocation.  At the root of this cooperation must be the sharing of technology which allows efficient production and allocation of food, clothing, housing, energy.

A cooperative approach is not a bureaucratic approach, it is not mechanical and it can not be maintained with laws.  Cooperation is founded on a culture of empathy which engenders trust which reduces enterprise overheads.  The root of a the solution to resource constraints is in cultural maturity.

John Nash showed this scientifically half a century ago.  Many others have shared the same wisdom over the centuries, but have been drowned out by the confidence of political and economic ego.

TOGITV: Stag hunting – thoughts on John Nash and social cooperation

The Mereon Legacy: A Mereonic perspective on John Nash: Cooperation vs. Competition

Wikipedia: Nash Equilibrium

 

The foxes have taken over the hen house!

Big business is secretly lobbying government to pass laws that give the rights to determine what we eat, irrespective of health or environment, as long as it makes money for them!

Maybe that sounds too fantastic to be true, but it’s happening.  Maybe you’re in big business and you think it can’t be that bad and it’s OK, but then ask yourself if you have any influence on the morality of the business that pays you or if they tell you what is ethical and how to behave.

The biggest problem today is corruption in business and politics.  It gets more vile as you ascend the hierarchy.  It shouldn’t be like that, because we’re all good people.  But turning a blind eye to small things has become ignoring big things and now the world is blind to our own failings …

Say no to TIPP here.

The problem with carbon trading

While I appreciate the positive aspect of carbon trading – that it draws attention to the problem of overconsumption of energy, in particular fossil fuels – it is a distraction from focussing on the real problem of changing the way we do things.

A new report of carbon trading articulates the increasing risks of focussing on trading carbon as a means to reduce emissions, rather than directly changing behaviour through voluntary options, regulation or reallocation of supports from fossil fuels to renewable fuels from careless consumption to benign consumption.

The majority of the trade is carried out not between polluting industries and factories but by banks and investors.  They are packaging carbon credits into ever-more complex financial products. This risks a collapse in confidence in the market, with terrible results for the economy and our climate. Existing carbon trading schemes are not delivering the emissions cuts promised. Relying upon this mechanism to reduce global emissions is gambling with the health of the planet.

A dangerous obsession – video and introduction.

A dangerous obsession – The evidence against carbon trading and for real solutions to avoid a climate crunch.

A dangerous obsession – summary – A 6-page Executive Summary of the full report.

Sovereign wealth funds: much ado about some money

Sovereign wealth funds: much ado about some money

by Charles Kovacs*

The first sovereign wealth fund (SWF) was established by Kuwait in 1953,[1] and was followed by many others from 1973-4, after the first oil crisis.[2] Since then, each major jump in oil and gas prices increased the number and size of SWFs; after 2000, countries with large trade surpluses also began to establish SWFs. By April 2009, SWFs had grown to $3-5 bn of assets under management,[3] invested mostly in high quality bonds. Equity investments have been a much smaller part of their portfolio and began to grow only in the 1990s. This trend has since accelerated with at least 698 documented equity investments between June 2005 and March 2009.[4]

These investments brought SWFs not only increased attention, but also their name, adopted by the Financial Times in May 2007.[5] This has been unfortunate and misleading. The term has endowed SWFs with a special and even threatening aura, even though, under international law, they do not enjoy sovereign immunity, as they are just state-owned entities, along with government-owned airlines, banks, shipping companies, etc. We have a long history of national and international jurisprudence for dealing with these, but, since reality is rarely a bar to fashion, the term is here to stay.

The recent large investments by SWFs in troubled financial institutions brought these funds unprecedented publicity, and the increased attention of the governments of host countries and of IFIs. The former were interested mainly in the economic and security implications of SWFs’ investments, while the latter, and the OECD in particular, seem concerned that SWFs might face restrictions by host countries of the kind that many of the SWFs’ home countries have been applying against foreign investors.[6]

How important in fact are the SWFs? Of course, 3-5 trillion dollars is a lot of money, but it is only a small part of the investment universe. This universe includes external sovereign debt of $55 trillion, equities of at least $40 trillion, plus even more in real estate, artificial financial instruments, precious metals, commodity trading instruments, and so on and on.  SWFs are actually one of the smaller players, just above hedge funds. By way of comparison, pension funds, mutual funds and insurance funds each have approximately US$20-23 trillion of assets.

Paradoxically, SWFs are least important with regards to foreign direct investment (FDI), defined by the IMF as equity investments that exceed 10% of the target company’s voting shares. Annual FDI flows in the past 10 years have ranged between US$600 billion to a record US$2 trillion in 2007. Meanwhile, the FDI from SWFs amounted to only US$10 billion in 2007: 0.2% of their total assets, and 0.6% of the FDI flows that year.[7]

Clearly, the attention and concern generated by SWFs has been disproportionate to their systemic importance, and especially so regarding FDI. The reasons? SWFs are good copy for the media because most are from distant countries with dictatorial or authoritarian regimes, they are at least vaguely mysterious, and many of their transactions are genuinely newsworthy. The media’s focus has in turn generated hype and political attention, and much of what we are witnessing now is similar to the spectacles of the late 1970s about Arab equity investments in the United States and Western Europe.

The attention by governments has been partly a response to public and political pressures, but their concern about national security should not be underestimated. All foreign investment has been subject to national security considerations for a long time. SWFs are instruments of state, mostly of states with at best delicate relations with NATO member countries, and several belong to potential adversaries with a long history of extensive and effective espionage. SWFs are not the best vehicle for information gathering, influencing host countries, and for various economic and commercial mischief, and this is why national security related reviews cover all foreign investments.

In the coming years, SWFs will grow in number and size, probably in an international arena more turbulent than now, and SWFs will continue to favor the major advanced economies. Although SWFs are unlikely to become a significant source of FDI, their importance in other equity investments may well increase along the lines of their recent acquisitions of up to 9.99% of several major financial institutions. Consequently, host governments will continue to be obliged to follow a fine line between the demands of national security, balanced against the desirability of increased capital inflows, and the goodwill of countries needed for the attainment of foreign policy objectives.

This may well require a review process for SFWs that goes beyond the existing review mechanisms, and may even have informal aspects.  Host countries will need to differentiate SWFs by their nationality and by their relationship with the host countries. Therefore, decision-making will need the direct involvement of the diplomatic, military and intelligence communities while still acting within the time frame required by investors. All this may seem daunting, but the United States and the United Kingdom in particular have immense experience in dealing with foreign investment since the First World War. These experiences and modus operandi are readily transferable to existing or new monitoring entities. It remains to be seen whether SFWs will become a source of conflict or of responsible capital, but judging from past experience, a sensible and sensitive review process should serve well both the SWFs and the host countries as long as they are both aiming at a seamless and quiet settlement of actual and potential disagreements. After all, business is business, and host countries and SWFs have already established an agreeable symbiotic relationship.

The material in this Perspective may be reprinted if accompanied by the following acknowledgment: “Charles Kovacs, ‘Sovereign wealth funds: much ado about some money,’ Columbia FDI Perspectives, No. 14, October 1, 2009. Reprinted with permission from the Vale Columbia Center on Sustainable International Investment (www.vcc.columbia.edu).”

A copy should kindly be sent to the Vale Columbia Center at vcc@law.columbia.edu.

For further information please contact: Vale Columbia Center on Sustainable International Investment, Lisa Sachs, Assistant Director, (212) 854-0691, Lsachs1@law.columbia.edu.

The Vale Columbia Center on Sustainable International Investment (VCC), led by Dr. Karl P. Sauvant, is a joint center of Columbia Law School and The Earth Institute at Columbia University. It seeks to be a leader on issues related to foreign direct investment (FDI) in the global economy. VCC focuses on the analysis and teaching of the implications of FDI for public policy and international investment law.

At last, real veg allowed back in to the EU.

The EU bureaucrats have finally wised up to the waste and frustration of regulating the shape and look of fruit and vegetables. We know from our garden how weird they can be, naturally. Like this one …

It was a ludicrous regulation when it was brought in and it’s sad that it’s taken 20 years for it to be removed.  A step in the right direction though.

BBC: ‘Ugly’ fruit back on sale in EU

BBC: Your pictures: Wonky fruit and veg

A crisis of protectionism will escalate the economic crisis.

Protectionism has a track record of harming economies. It is harmful to those that implement protectionism and those that are targets of protectionism. It is contrary to the beneficial lessons of the past decades. It is the ideology of failed regimes such as North Korea and former Eastern Block countries. Protectionism exacerbates a downward spiral, yet western governments and others are raising barriers and protectionist rhetoric is increasing. This is bad for us all.

The Collapse of Global Trade, Murky Protectionism, and the Crisis: Recommendations for the G20 (pdf) brings together scholars and practitioners to diagnose the current crisis and offer recommendations.

Read Murky Protectionism Threatens Global Economic Recovery for a synopsis of the paper above.

Chinese Yuan XR volatility – Q and A

Reuters published an interesting analysis of the recent depreciation of the Yuan here, including implications, dangers and analyst expectations.  It’s copied here below.

If depreciation is market driven, a big if, then the depreciation may be appropriate and help revitalise Chinese exports and in turn western consumption.  Whether or not the value has been engineered, it is not dissimilar to the gross fluctuations of other currencies that have been seen over the past few months, eg US$, €, Yen, GBP etc.

Unfortunately only the traders benefit from this kind of volatility, whether it be in currency, stock or asset prices.

Q+A-Why is speculation over China’s yuan heating up?

Thu Dec 4, 2008 2:24am EST

(For related stories see MARKETS-CHINA-YUAN-MIDDAY or [ID:nSHA270570]; CHINA-USA/ or [ID:nPEK36920])

Dec 4 (Reuters) – U.S. officials are expected to urge China to engineer appreciation of the yuan <CNY=CFXS> against the dollar at a two-day Strategic Economic Dialogue between the countries, which opened in Beijing on Thursday.

But the yuan has instead weakened against the dollar this week to a five-month low and the currency market is speculating that it will drop further.

China has not confirmed any policy change, but most traders believe official thinking has shifted to a degree.

Here are some facts about the long-simmering spat over the value of China’s currency.

WHY IS THE YUAN IN THE NEWS?

* This week has seen the greatest turmoil in China’s foreign exchange market since the yuan’s fixed peg to the dollar was scrapped in July 2005.

* After keeping the yuan within a tiny range of about 6.82-6.85 against the dollar for four months, China’s central bank let the yuan drop unusually sharply this week.

* It was trading at 6.8837 per dollar at 0717 GMT on Thursday.

* The yuan’s value is tightly controlled by the Chinese central bank; it sets a daily mid-point <CNY=SAEC> against the dollar, and trades against the dollar can only occur in a band extending 0.5 percent either side of the mid-point.

WHAT’S BEHIND THIS WEEK’S MOVES?:

* Domestic political pressure to help the country’s struggling export sector is believed to be a major factor. Thousands of small factories making shoes, clothes and toys have closed in recent months, raising unemployment and sparking worker protests which the government says threaten social stability.

* Many factories were pushed into the red as the yuan appreciated over 7 percent against the dollar earlier this year to a peak of 6.8099 in September, analysts say.

* Depreciating the yuan would make made-in-China goods cheaper, better insulating exporters from global recession.

WHAT ARE THE INTERNATIONAL IMPLICATIONS?:

* Engineering a yuan rise against the dollar would help ease trade tensions with the United States, which runs a significant deficit with China. The two countries’ lopsided trade relations are closely watched, and may reflect a shift of global economic power to East from West.

* Critics of China, such as U.S. manufacturers, say it has kept the yuan undervalued, giving its firms an unfair advantage in world markets that has cost millions of jobs in the West.

WHAT’S DANGEROUS ABOUT A DEPRECIATION?:

* DOMESTICALLY — Extended, sharp depreciation could prompt capital outflows from China, complicating the central bank’s efforts to bring interest rates down to help the economy. The central bank has declared it is determined to prevent large-scale outflows.

* INTERNATIONALLY — A big drop by the yuan could set China up for a confrontation with U.S. President-elect Barack Obama, who said in September that the yuan was “artificially low” and that he would press for appreciation.

* REGIONALLY — Yuan weakness could trigger competitive depreciations of other Asian currencies, worsening instability in global markets. During the Asian crisis of 1997/98, China’s decision to keep the yuan steady against the dollar, as other emerging market currencies tumbled, helped the region recover.

WHAT DO ANALYSTS THINK WILL HAPPEN?:

* The yuan may not be allowed to fall below 6.90 before the end of this year, according to a dozen dealers and analysts informally polled by Reuters in Shanghai this week.

* It could depreciate as much as 3 percent further in the first half of 2009, to around 7.1 — but only if the dollar continues to rise globally and if China’s economic downturn continues to worsen, they said.

* To fend off charges of currency manipulation from trading partners, China could simultaneously begin reforms to its currency system, such as widening the yuan’s trading band to 1.0 percent on either side of the daily mid-point, traders think.

Source: Reuters

(Compiled by Gillian Murdoch, Singapore Editorial Reference Unit; Editing by Andrew Torchia)

Africa insulated from financial crisis.

As contended in our Financial Crisis 2008 notes, it is likely that Africa will not suffer the same fate as Western economies in this implosion of the financial markets. In this report the BBC asks Can Africa gain in the credit crisis?

I see a number of issues in Africa’s favour:

  • It is coming from a low level of economic activity so there is plenty of room to grow industry and consumption.
  • It has tremendous resources – mineral, land and people – which can be managed better,
  • It is increasingly stable and benefitting from educated, experienced returning Africans.
  • It has developed productive relationships with China which provides appropriate technology for its level of development and requires the mineral commodities that Africa offers. The cultures know how to deal with one another and there is little stigma of colonisation or exploitation.
  • There is tremendous commercial interest from investors.

There remain serous risks as in any emerging market. And some countries’ political risk is grossly unattractive. But overall, Africa is looking like a good bet. But go there with a friend, do your due diligence and don’t overpay.

GM safety scandal 10th anniversary – the scandal continues

Here is copied a letter from Dr Arpad Pusztai to GM Watch on the 10th Anniversary of the GM Safety Scandal.  GM contamination of nature and our food continues to be covered up by irresponsible people.

Dear Claire and Jonathan,

I thought that I should write to you on the 10th anniversary of my 150 seconds of TV “fame” and tell you what I think now. It is very appropriate to write to you because you have provided the most comprehensive service to inform people about the shenanigans of the GM biotechnology industry and its advocates.

On this anniversary I have to admit that, unfortunately, not much has changed since 1998. In one of the few sentences I said in my broadcast ten years ago, I asked for a credible GM testing protocol to be established that would be acceptable to the majority of scientists and to people in general. 10 years on we still haven’t got one. Instead, in Europe we have an unelected EFSA GMO Panel with no clear responsibility to European consumers, which invariably underwrites the safety of whatever product the GM biotech industry is pushing onto us.

All of us asked for independent, transparent and inclusive research into the safety of GM plants, and particularly those used in foods. There is not much sign of this either. There are still “many opinions but very few data”; less than three dozen peer-reviewed scientific papers have been published describing the results of work relating to GM safety that could actually be regarded as being of an academic standard; and the majority of even these is from industry-supported labs. Instead we have the likes of Tony Trewavas and others writing unsupported claims for the safety of GM food and defaming people like Rachel Carson who can no longer defend herself; not that she needs to be defended from such nonentities.

In normal times one would not pay much attention to such people desperately trying to be seen as the advocates of true science, but these are not normal times. The mostly engineered (GM engineered) food crisis gives the GM biotech industry and its warriors an opportunity to come to the fore with claims that GM is the only way to save a hungry world; a claim not much supported by responsible bodies, such as the IAASTD. The advocates of GM also now think that they have found a chink in the armoury of people’s resolve that they can exploit by telling us that we would not be able to feed our animals without GM feedstuffs. In this way, they hope to bring in GM by the backdoor. Please remember that whatever our animals eat, we shall also get back indirectly. Rather ominously, there has been no work whatever to show the safety of the meat of GM-fed animals.

We must not underestimate the financial and political clout of the GM biotechnology industry. Most of our politicians are committed to the successful introduction of GM foods. We must therefore use all means at our disposal to show people the shallowness of these claims by the industry and the lack of credible science behind them, and then trust to people’s good sense, just as in 1998, to see through the falseness of the claims for the safety of untested GM foods.

Let’s hope that on the 20th anniversary I shall not have to write another warning letter about the dangers of untested GM foods!

Best wishes to all,

Arpad Pusztai

Let’s hope change happens well before the 20th anniversary.