Thursday, July 21, 2016

Global energy market fact of the day

The most stunning anecdote about how the shale dynamics have upended the global energy market comes from this reversal of hydrocarbon trade,
Two cargoes of US liquefied natural gas from Cheniere Energy’s Sabine Pass plant in Louisiana have been delivered to Kuwait and Dubai in recent months to meet the rapidly growing demand for energy. 
And more on how the US shale exports have been transforming the global hydrocarbons market,
The Sabine Pass plant shipped its first cargo in February, and has already sent LNG to seven countries: Argentina, Chile, Brazil, India and Portugal, as well as Dubai and Kuwait... Those additional supplies are depressing prices, making LNG a more attractive fuel for power generation, and low-cost floating regasification plants have made it easier for countries to become importers. Kuwait’s LNG imports tripled from 1m tonnes in 2012 to 3.04m tonnes last year, according to the Middle East Economic Survey. Egypt and Jordan became LNG importers for the first time last year. Qatar is the world’s largest LNG exporter, but over the next few years it is set to be toppled by Australia and rivalled by the US. The International Energy Agency has forecast that by 2040 gas demand in the Middle East will almost double, so the region could become an increasingly important market for US LNG.
As regards oil, US continues to import about 1.6 million barrels a day from the Middle East, down from 2.4 mbd in 2003-04.

I think an even bigger transformation will be when more liquefaction terminals on the US east coast come on-line. It could lead to the emergence of a single global market in natural gas

Tuesday, July 19, 2016

The nuanced case for financial liberalization

Financial market development is most often conflated with financial liberalization in debates on economic development. Financial deregulation had therefore become a central pillar of the Washington Consensus world view. Capital account liberalization was advocated as an unqualified requirement for developing countries. 

Since the Global Financial Crisis, the IMF has been at the forefront of questioning several prevailing orthodoxies. The latest comes this working paper by Sami Ben Naceur and RuiXin Zhang which draws the distinction between various dimensions of financial development and points to certain less than benign effects of financial liberalization, especially its effect on income distribution. Specifically, going beyond the conventional focus on financial deepening, they focus on four other dimensions of financial sector development - access, efficiency, stability, and liberalization. They find, 
The results suggest that most financial development dimensions can help reduce income inequality and poverty. However, external financial liberalization tends to have the opposite effect on the global average. In addition, our evidence suggests that banking sector development has a stronger positive effect on income distribution than stock market development. 
They have interesting prescriptions for policy making, including giving priority to banking sector development over capital markets and caution with capital account liberalization,
Observing the benefits of financial development on both economic growth and income distribution, policymakers need to steer the development of the financial system in a progrowth and pro-poor direction. Financial reform policies aimed at expanding financial access and depth, as well as enhancing financial efficiency and stability, should all be encouraged. These policies may include relaxing credit and interest controls, and improving banking and securities market supervision. However, given that external financial liberalization aggravates poverty, capital account liberalization should proceed in a carefully designed and well-sequenced fashion in a stable macroeconomic environment to avoid offsetting the poverty-reducing gains with the development of other dimensions of the financial sector. It is also important to develop an effective regulatory system for financial institutions and to enhance financial infrastructure (credit information, and collateral and insolvency regimes) in order to limit risk taking of banks. Given that the development of financial institutions has a greater impact than the development of the stock market, policymakers may give priority to banking sector improvement when considering poverty and income inequality alleviation. 
This is very sound advice to countries like India which has very narrow traditional banking market and where commentators have tended to prioritize capital market development and external liberalization. Reflecting the very low financial market depth, compared to our even our peers leave aside more developed economies, banking sector assets as a share of GDP is among the lowest in India. Worse still, it has been stagnating for the past decade, including in the high-growth years in the middle of last decade. 
There is only so much you can intermediate with such a narrow traditional banking sector. This goes back to another structural deficiency in our savings balance sheet - over 70% of household savings are held in illiquid property and gold, far higher than elsewhere. These are plumbing issues that need to be addressed before we navigate into the deeper end of the financial development pool.

Monday, July 18, 2016

National cuisines and economic strength

Atlantic has an interesting article that charts the "hierarchy of tastes" or social acceptance trajectories of different national cuisines in the United States. In particular, why does the French and Japanese cuisine get admitted to high-ed, white-tablecloth establishments while the Chinese and Indian recipes are relegated to lower-status eateries as "ethnic" food?
Consider the cases of steak frites and carne asada. They both involve cooking a fairly high-quality cut of meat over high heat, and they’re both dishes whose origins are foreign to America. But they’re often listed on American menus at vastly different prices. Why? “The shortest answer would be cultural prestige, some notion of an evaluation of another culture's reputation,” says Krishnendu Ray, an associate professor of food studies at New York University. In a book published earlier this year, The Ethnic Restaurateur, Ray expands on this idea, sketching the tiers of what he calls a “global hierarchy of taste.” This hierarchy, which privileges paninis over tortas, is almost completely shaped by a simple rule: The more capital or military power a nation wields and the richer its emigrants are, the more likely its cuisine will command high menu prices.
Ray consolidated the average price of a meal at a Zagat-listed restaurant in New York and came up with this graphic, which appears to neatly tie up with the hypothesis about relative economic strength of the country. 
Interestingly, Indian cuisine has been falling down the "hierarchy of taste" since 1986!

More realpolitik for India's foreign policy

The US drone strike that killed Mullah Akhtar Muhammad Mansour, the Taliban leader, a few months back, while driving across Pakistan's Baluchistan Province, may have interesting consequences. A few observations.

1. The "violation" of Pakistan's airspace and the Pakistanis being unaware of the strikes may signal more strains in an already tenuous relationship. That Mullah Mansour was close to Pakistani military and intelligence establishment lends further credence to that view.

2. This victory for the Americans may be short-lived since Sirajuddin Haqqani, who is expected to succeed Mansour, is close to the Pakistani ISI and is a more hardline opponent of the peace process. 

3. For India, the US policy towards Pakistan is a teachable moment in realpolitik. The US are actively engaging with Pakistan, even willing to provide them military assistance, despite their soldiers suffering at the hands of terrorists supported by Pakistan. They see no problem with the apparent contradiction and neither do continuously complain about Pakistan's duplicity. They realize that the Pakistan army and intelligence apparatus are largely outside the control of the country's elected government. But engaging with the government at least leaves them with the best possible lever to influence the trajectory of developments in the country. Further, the weapons supply also helps them exercise some influence over the all-powerful Pak military establishment.

India needs to emulate the US foreign policy calculus in its dealings with both China and Pakistan, especially the latter. In contrast to the Americans' (public) nonchalance with the recurrent stream of Pakistani-supported Taliban attacks on its soldiers in Afghanistan, India makes a very public remonstration and suspends talks after every attack. I am not sure whether this even contributes to keeping Pakistan on the backfoot at international platforms. Playing to the domestic audience, maybe, but this trend has predated the rabble-rousing 24X7 media channels.

There is nothing inherently odd about juggling contradictions - deepening engagement even as we stave off the insurgents. The US foreign policy revolves around a marriage of Wilsonian idealism and George Keenan's realpolitik, although it sometimes throws up ugly contradictions. In dealing with nations, India's national interests dictates that we imbibe a dose of realpolitik. 

Sunday, July 17, 2016

China debt fact of the day

From a Bloomberg article on China's fascination with high speed rail, whose network has grown to nearly 12000 miles in just under a decade,
In May, state-owned China Railway Corporation, the operator of China's rail network, reported that its debt had grown 10.4 percent in the past year and now exceeded $600 billion; in 2014, roughly two-thirds of that debt was related to high-speed rail construction. That’s more than the total public debt of Greece. The company runs only one profitable line -- the massively traveled Beijing-Shanghai corridor.
That is a staggering number. The debt of just China Railway Corporation is 30% of India's GDP! 

Corporate subsidy fact of the day

FT has this article on the struggle to increase minimum wages in the US,
Walmart’s founding family, worth a net worth $130bn according to Forbes, has been a target in the debate over inequality, which has gained traction in this presidential election year. It has also highlighted the extraordinary wealth of one family while many of its staff struggle to make ends meet. Nita Fischer, a single mother, says she was coerced into leaving her Walmart job paying $10.14 an hour when she was pregnant and to reapply after three months. She said she is earning $9 an hour and is reliant on the US government to pay her $294 a month in food stamps — which are spent at Walmart.
Such transfers must constitute one of the largest corporate subsidies in the history of the world!

In this context, I have blogged earlier that, contrary to conventional wisdom, even including all the direct welfare subsidies, the rich benefit disproportionately more from government spending than the poor. In fact, even leaving aside the things that people like Mariana Mazuccato talk about, a very large proportion of corporate fortunes are directly built on the foundations of tax payer financed systems. And this is true for countries across the world - developed and developing, democratic and autocratic, capitalist and socialist, eastern and western. 

Saturday, July 16, 2016

Weekend reading links

1. Following Paris, Brussels, Dhaka, Orlando, and Istanbul, the French Riviera town of Nice was the latest to suffer in the growing list of terror attacks. In the context of the terror attack by an unsophisticated attacker who crudely rammed a plain truck through a crowd of holiday revelers, killing 84 people, the NYT has an excellent article which highlights the challenge posed,
And yet this act, whatever its particulars, represents the culmination of long-building trends, in which terror tactics become more rudimentary and the targets more random. It is forcing a recognition that security and intelligence measures, long the core of Western thinking, are of limited utility and can never provide total safety from an individual who decides to kill. This is shifting pressure onto more abstract and unproven counterterrorism methods that do not promise to halt violence but merely ameliorate underlying political or social drivers. And it is straining the politics of Western countries, where leaders have spent the past 15 years describing terrorism as a war that could be won. The populations targeted by terrorism are confronting a difficult new reality, in which the danger can be managed or policed but perhaps never entirely overcome...
In 2008, Pakistani militants killed 166 people in Mumbai, India, attacking what experts call “soft” targets: places such as hotels and train stations that are populated but, because of their seeming randomness, rarely defended. At security conferences in Western capitals, officials and analysts began to worry about whether they could prevent a “Mumbai-style attack” in their own countries. Then came the rise of “lone wolf” attackers who acted on their own, without training from or often even contact with the terrorist groups they claimed to serve. Attacks are planned within the minds of individuals whose intentions remain hidden until the shooting begins.


Such attacks predate the Islamic State, though the group emphasizes them, disseminating propaganda that provides tactical guidance and ideological justification available to anyone with an internet connection. The use of a truck in Nice was new only in the specifics and in the degree to which it has forced a realization increasingly difficult to ignore: In the world of lone wolves and Mumbai-style attacks, more barricades and metal detectors and monitoring programs can improve security, but can’t guarantee it absolutely.
2.  In the context of the failed military coup in Turkey, MR points to this paper by Jonathan Powell and Clayton Thyne which clearly indicates that while coups are far less frequent today, they are much more likely to succeed,
3. The third big global story is the rise of right-wing populism that underpinned the Brexit vote and the rise of Donald Trump in the US. Dani Rodrik draws the distinction between globalization 'shocks' from immigration and trade and foreign investments. He argues that the former sets the stage for the emergence of right-wing parties (much of Europe) and the latter of left-wing ones (Latin America).

He also makes the case for the left to embrace an alternative to unfettered free market capitalism and hyper-globalization,
Consider just a few examples: Anat Admati and Simon Johnson have advocated radical banking reforms; Thomas Piketty and Tony Atkinson have proposed a rich menu of policies to deal with inequality at the national level; Mariana Mazzucato and Ha-Joon Chang have written insightfully on how to deploy the public sector to foster inclusive innovation;Joseph Stiglitz and José Antonio Ocampo have proposed global reforms; Brad DeLong, Jeffrey Sachs, and Lawrence Summers (the very same!) have argued for long-term public investment in infrastructure and the green economy. There are enough elements here for building a programmatic economic response from the left.
A crucial difference between the right and the left is that the right thrives on deepening divisions in society – “us” versus “them” – while the left, when successful, overcomes these cleavages through reforms that bridge them. Hence the paradox that earlier waves of reforms from the left – Keynesianism, social democracy, the welfare state – both saved capitalism from itself and effectively rendered themselves superfluous. Absent such a response again, the field will be left wide open for populists and far-right groups, who will lead the world – as they always have – to deeper division and more frequent conflict.
4. In a reflection of the rise of "alternative" investment class in a world of ultra-low yields, Brookfield, the Toronto-based asset manager which has $250 bn under management, has raised a $14 bn fund to invest in infrastructure. It would be the largest single commitment to a sector. Brookfield, which bought the owner of London's Canary Wharf, allocates 60% of its investments to developed and the rest to emerging markets, and follows a counter-cyclical investment strategy of buying in distressed periods. It has as partners some of the world's largest SWF's like Singapore's GIC and Qatar Investment Authority and has been acquiring assets in Latin America, including a 2013 acquisition of an integrated system of railroads, ports and inland terminals in Brazil and is investing $7bn to expand the port and terminals.

5. Finally, to Ireland, which claims to have increased its GDP by 26% in 2015. On the back of corporate tax inversions and other forms of corporate re-engineering, Irish exports rose 34%, imports 22%, and investment by 27%. For example, when AerCap, the world's biggest aircraft leasing company, moved its fleet to Ireland, the country gained 35 billion euros in output, without any real economic impact. But even with its super-low taxation rate, corporates have not been satisfied - corporates based in Ireland made $100 bn in profits in 2012, of which, instead of paying $12.5 bn in taxes, they actually paid just $4 bn!

Alphaville puts the Irish growth story in perspective.