One Man's Meat is Another Man's Poison: Perspectives from Spain

News from Europe were mostly negative lately. So, an article titled “Spain’s Chinese thrive during rough time” caught my attention as I browsed through the New York Times. As I read through the article, I can’t agree more with the old saying that one man’s meat is another man’s poison (or rather its opposite).

With high unemployment rate and austerity measures at full swing, life in Spain is clearly not as rosy as the good old time. However, the Chinese immigrants appear to have adapted well to the situation. Many have started small businesses to cater to the needs of the masses even in times of crisis such as food and daily necessities including haircut services. Many have also imported goods from China that are priced much more competitively than say Made-in-Europe goods. While such goods may not have attracted the interest of consumers when times were good, it is doing just that now as Spaniards try to control their expenditure.

And as if to further illustrate the old saying, the strategies adopted by the Chinese immigrants seem to have made the Spaniards who have businesses worse off. As they venture into other industries with cutthroat prices, they are forcing more businesses to contemplate closing down.

Report Card for the 21st ASEAN Summit

The ASEAN Summit was concluded almost a month ago. I had wanted to provide a report card of the summit but was delayed until now. As I see it, there were about four main takeaways, each capable of generating endless debate as to whether it is a good or bad thing.

First in the list is the signing of the ASEAN Human Rights Declaration. For many people, it is indeed an achievement considering that the organization did not come into being with the idea of pushing for human rights. In fact, some would even argue that many of the founders of ASEAN were hardly democratically elected. Yet, some would say that the declaration fell short of expectations as many “standard” norms appear to have been excluded.

Second is the ASEAN Economic Community (AEC). As with other recent summits, ASEAN Leaders pledged their continuous commitment to the establishment of AEC in 2015 but implementation process has been hit with several problems. The decision to delay AEC from 1 Jan 2015 to 31 Dec 2015 further proves this point. Officials can argue that AEC will still come into existence in 2015 but seriously, it is not hard to see that it has effectively been delayed by one year and how that will further affect ASEAN’s credibility remain to be seen.

Third is the announcement of the start of Regional Comprehensive Economic Partnership (RCEP) negotiation. On one hand, it gives the impression that ASEAN is serious in pursuing further economic integration with its neighbours but on the other hand, people are questioning whether anything tangible will come out of this considering the proposed timeline of its conclusion, 2015. One, it essentially clashes with AEC and if you cannot even implement one thing with your existing resources, what can you possibly achieve when you need to divide the same resources to handle two things concurrently. Two, there is a potential impact of South China Sea issue on the negotiation process.

This brings us quite nicely to the fourth and last takeaway, which is the South China Sea issue itself. Unlike the above takeaways where something positive can be distilled from them, I frankly do not see anything positive in this issue. It has wrecked ASEAN unity. It has resulted in several incidents that are likely to increase tensions. It has kick-started some military maneuvers and God knows what will come next.

To conclude, this is not a perfect report card but this is not a bad one either. There are certainly troubles brewing but if the relevant stakeholders can just take one step back and look at the bigger picture, I believe ASEAN can right the wrongs and still come out blazing.

P.S: I survive the end of the world.

Economic Slowdown and Nationalistic Behaviour

Two weeks ago, I mentioned that the Chinese economy is still very much reliant on demand from the West and alluded that it was not really domestic consumption boost or successful diversification, but rather false expectations about the speedy recovery in EU and US that had contributed to the outside appearance that Asia, particularly China has successfully decoupled itself from the West sometime ago when Asia seemed to be doing pretty well as opposed to EU and US (More on Decoupling and Asia).

The latest data released on the Chinese economic slowdown and the need to clear existing inventories served to prove this point. Indeed, an article by Damian Grammaticas from BBC gave some examples of industries where the number of days to clear inventories have increased exponentially.

In that pervious post, I made a passing (and cautious) remark that the Chinese government can consider learning a thing or two from Indonesia, which has been able to drive economic growth by boosting domestic consumption. Learning from Indonesia is one thing. Question is: has the government ever considered boosting domestic consumption as an option to pick up the slack from EU and US? Judging from its past actions, it certainly has. However, boosting domestic consumption is not a free lunch. While they largely fulfill their objectives, interest rate cut and the likes also lead to inflation, default, etc, things that the government has been trying to put a lid on.

Even if they have certain mechanisms in mind to counteract these unwanted side-effects, they may want to tone it down and give the limelight for solving the economic slowdown to the new generation of leaders that are expected to take over the country later this year.

So when you want to do something that will impact your population but can’t really do it for economic and political reasons, the simplest way is to divert the attention of the population away from it. Perhaps this is the reason why China has become more nationalists with regards to South China Sea and other nearby waters in the past few months.

More on Asia and Decoupling

About a year ago, when US and Europe were down, Asia had rebounded and many people were saying that it was a sign Asia had successfully decoupled itself, I cautioned against such a view in a post “Have We Arrived?”

Just about a month ago, China reported that its growth has slumped to a three-year low of 7.6 percent in the second quarter and one main reason was the continuing bad news coming out from Europe amid a slow US recovery. If my argument then was not convincing enough, surely the arrival of these statistics would add substance to it now. It is however not the intention of this post to do just that. Rather, I would like to speculate on why the data a year ago would have misled many people into thinking that Asia had decoupled from the West when it didn’t.

Central to my speculation is the concept of expectations. Few people in China would have expected the crisis in US and Europe to drag for so long considering all the actions taken by the respective governments. They had continued to produce and stockpile their products ready to be exported when the West demanded them. This act of production and stockpiling could have contributed to the rebound observed a year ago. Obviously, this expected demand never materialized. Since the existing stock had not been cleared, there was no need for new production and hence the observed current slowdown.

If domestic consumption had increased substantially over the same period, it would have cleared at least some of the existing stock but this was not the case. Apparently, domestic consumption either remained stagnant or did not increase sufficiently to replace the demand from the West. In fact, if manufacturers were to factor in expected increase in domestic consumption into their production decision a year ago, their existing uncleared stock would have been even higher than if they did not do so. In other words, both the expected increase in demand from the West plus domestic consumption that never materialized has resulted in the current slowdown.

Right about now, people who disagree with this speculation would say that it depends on which part of Asia you are looking at and would point to an Asian country further south of China to make their point: Indonesia. Growth of domestic consumption in Indonesia has been phenomenal, an excellent example of one way a country could decouple itself from the West. Perhaps, China could learn a thing or two from Indonesia about boosting domestic consumption. Is it?

Well, I would again warn against jumping straight to an unsubstantiated conclusion. Indonesia tomorrow could be China today. Indonesia as part of Factory Asia is a supplier of parts and components to China, the final assembler. The current increase in domestic consumption could have been driven by expectations that China will continue to demand parts and components, which is highly unlikely if recent statistics can serve as reliable indicators of how things will evolve.

Will ASEAN Lose Out From The Trilateral FTA Between China, Japan and Korea?

Sometime ago, China, Japan and Korea finally agreed to kick-start talks that would lead to a Free Trade Agreement (FTA) between them. This move brings about two contrasting views. For the optimists, it shows that the 3 countries are finally ready to put behind their historical enmity in the name of economic growth. For the pessimists, particularly those that believe in ASEAN centrality, it is the beginning of the end of ASEAN’s role in providing neutral ground for the 3 countries to negotiate and engage one another, especially if bilateral communications on some matters are close to impossible.

On the economic front, the pessimists fear that the expanded market size of this FTA would reduce ASEAN’s competitiveness when it comes into being. I would like to argue the opposite. China is such a huge market that it does not really need to add Japan and Korea’s population to its investment attraction strategies in order to attract more investments. In other words, firms that find China as a prospective investment location would not have waited until now before making their moves. They would have done so long time ago. There is certainly a value for Japan and Korea use the expanded market size to attract more investments but given the high labor costs in both countries, I doubt expanded market size is a strong pull factor by itself.

Then, there are those who said that ASEAN may be left out of the East Asian fortress since the FTA does not involve them. But this is an unlikely event since ASEAN has arguably pre-empt this by having FTA with each of them. I will also argue that the regional production networks that have been developed and nurtured over the years is not something that can be altered overnight, more so if there is no basis to do so at all.

Last but not least, the talk is only about to start and most definitely has not yielded anything tangible. For all the commotion, it may end up being another FTA that is trade-light and more driven by politics rather than economics.

Is Plurilateral the Way Forward?

Many trade experts have suggested ways to move forward following the deadlock in the Doha Round. Chiefly among them is for smaller groups of countries to negotiate and implement policies that they can then extend to other WTO members as and when they are ready. The simple argument behind this proposal is that agreement can be reached faster and easier among smaller number of negotiating countries. The question is: can multilateralization really be achieved at faster rate via this proposal, as is suggested, or is it going to further burden the already complex environment? In other words, is this a building or stumbling block?

Let me give a negative perspective of this proposal. When countries negotiate, they do so from their own perspectives, taking into account their own interests. One can argue that although agreement can be reached more efficiently, the contents are probably narrower in a sense that it takes into account only the interests of the negotiating countries. If this agreement is to be eventually extended to other WTO members, will they take it at face value? Well, perhaps not since their interests have most likely not been included in the first place. When the time comes, these members will want to amend some parts of the agreement before they will subscribe to it. However, will the original negotiating countries agree since they will have to concede on some points.

Is Race To The Bottom a Valid Reason for Standard Harmonization?

Just as there are many valid reasons against standard harmonization, there are also many credible reasons for it. But there is one reason for standard harmonization that I just can’t get around: the idea of preventing race to the bottom. The argument goes that in the current globalized world where it is so much easier for firms to relocate their production plants to low-cost locations, firms with existing plants in countries with higher standards (higher cost) can easily shift them to countries with lower standards (lower cost), resulting in job losses. To prevent such a move, countries with higher standards will revise down their requirements and spark a race to the bottom, causing lower standards across the world.

My gripe is driven by the fact that there is no clear evidence where countries have lowered their standards in order to prevent job losses. On the other hand, most countries benefiting from FDI appear to have raised their standards, partly driven by the more demanding middle class whose population share has increased. A point of note is a recent article about how Apple has raised the labour standards in China. Although critics may say that it is a one-off event caused by the widespread negative publicity, it is also correct to say that China has come a long way with regards to how it treats its labour force. Among them, the 2008 labour contract law should ring a bell to most people, not to mention the latest promise by China’s Cabinet to raise minimum wage by 13 percent a year until 2015.

The Intrique of Achieving an ASEAN Community: The Middle Countries

Dr. Surin Pitsuwan, the current ASEAN Secretary General once said that it is countries in the middle that impede the progress towards building an ASEAN community. Why did he make such a remark?

Countries at the top are more than willing to take part in the establishment of community, in particular economic community because they are already highly competitive. A community will allow them better access to the neighboring market and they are certainly not worried that they will lose out in terms of efficiency if they open their borders to freer trade among ASEAN member economies.

Similarly, countries at the bottom are also more than willing to take part in this endeavor because after having been isolated for periods of time, they want to plug themselves into the globalized world and joining the ASEAN community is certainly a good starting point for doing so.

Countries in the middle view things rather differently. Opening their markets to freer trade is bound to benefit some groups but at the same time, is going to hurt some groups and these are not weak groups. Having been protected by their governments, they have grown into strong interest groups capable of influencing government policies. They would definitely prefer to maintain the status quo so as to maintain their current level of wealth and benefits.

Education and Employment in the UK

It does not come as a surprise that one of the thriving industries in times of economic crisis is tertiary education. Enrollments double if not triple as young adults decide to go back to schools and prime themselves in anticipation of recovery. The issue seldom mentioned is the fact that not all young adults have the means or rather the luxury to obtain those additional degrees. This puts them in a rather disadvantage position when it comes to job search as they are of less value than their school-returning peers. In other words, they can never break away from the vicious cycle of no education-no employment. This is indeed the plight of approximately 22 percent of the young adults in the UK whose future hangs in the balance, not to mention the implications that it may have on the nation’s future as a whole.

While critics may argue that tackling this issue will bring no significant improvements in their employment prospects since there just isn’t enough aggregate demand in the economy fundamentally, it is also sensible to argue that the different starting points of these two groups of young adults has already put those with less education in a weaker position regardless of whether times are good or bad.

It is thus justifiable for the relevant authorities to correct this failure either by providing training opportunities to boost their competitiveness or providing support for them to return to school and gain that extra knowledge. Austerity is necessary but should we jeopardize the future of the next generation in its pursuit?

The Case for ASEAN Trade & Investment Centre

While the worst is over and the global economy is slowly recovering, there is an ongoing perception among the export economies that they can no longer rely on the traditional markets such as US and Europe to sustain their long-term growth. Consequently, the focus of many policy-makers has been on increasing domestic consumption and looking for alternative markets for their exports.

ASEAN economies take this view seriously considering that 600 million people call the region home. The dynamism of the region where each economy complements one another provide another valid reason as to why ASEAN should not only look outward in sustaining its economic growth. Among the many proposals that are circulating around is one on the establishment of a one-stop trade & investment centre (TIC) in each economy who will liaise with its counterpart in the other economies. While the idea is good in theory and should definitely be assessed critically, it may encounter several roadblocks in the immediate short-run and this is ironically due to the region’s dynamism.

Let’s start with the more developed economies. It is unlikely that these economies will shoot down the idea due to ideological clash. Afterall, economies such as Singapore pride itself as an open economy. It is open to more foreign investments and concurrently, does not spare any efforts in getting their homegrown companies to internationalize. The issue is that having stayed true to this belief for a long time, Singapore already has well-established institutions with the same responsibilities as TIC albeit under different roofs. It may thus reject this idea on the ground of redundancy. We can of course argue that instead of establishing a new centre altogether, Singapore can try to re-structure its existing institutions so that it resembles the proposed TIC but why should it do so if it has done well based on the existing model. In other words, convincing these economies will not be an easy task if we want them to buy this idea beyond solidarity.

Moving on to the less developed economies, there is no disagreement that market access is a good thing for their homegrown companies but market access is based on reciprocity. The issue with these economies is that although they want to “take” (in terms of gaining more market access), they are less willing to “give” (in terms of opening their own market) for fear that their companies are unable to compete with others. The trick is then on how we can convince them that the long-term gains far outweighs the short-term losses.

Reclamation of the Gulf of Jakarta

The reclamation of the Gulf of Jakarta is expected to affect the livelihoods of many fishermen living nearby. Why is it that a country that is not land-scarce needs to reclaim land? Is this going to be another white elephant project with no direct benefits to the people? Have anyone done a proper cost-benefit analysis of this project?

Isn’t it better to invest in improving the transport infrastructure? Isn’t it better to invest in improving the drainage system?

The Case of Bookstores in Indonesia

In a fast-changing world where the viability of certain industries are being questioned and their demise are taken in stride, I was surprised to find an article in an Indonesian newspaper whose purpose was to sustain bookstores operating in small cities and towns via policies that I believe to be against the spirit of fair competition. Don’t get me wrong. I am not against small bookstores or under the payroll of big publishers. I just think that it is wrong to sustain industries whose viability is dependent on unfair policies.

The story of these bookstores is a common story among many industries, particularly those that used to sell their products via middlemen. In the past, lack of efficient infrastructure and local knowledge meant that producers had to rely on middlemen to get better market access. With improvements in infrastructure, it became more efficient to access these markets personally and so producers began to bypass the middlemen. In this specific article, the story goes that publishers used to sell their books to schools via these bookstores but now do so themselves. Unhappy with the turn of events, the owners of these bookstores said that the government should enforce the policy which states that publishers have to sell their books via these bookstores, instead of bypassing them. They also stated that since schools are getting more resources, they should be willing to pay more for books (which is likely to be the case if they obtain their books from the bookstores instead of the publishers).

These just do not make sense because logically, agents will choose the most efficient outcome for themselves. Publishers will choose to bypass the bookstores and deal directly with the schools because they will obtain higher profits. Similarly, schools will choose to deal directly with the publishers because they presumably will get better price for the books. It doesn’t matter whether they have more resources or not because the idea is to make the most efficient use of available resources. In fact if we argue the case from the perspective that schools need resources to cater to the concept of well-rounded learning, the additional resources that they obtain may not be sufficient even if they purchase books directly from publishers.

Instead of delaying the inevitable from happening, I think it is better if these bookstores start to explore other options. These can include diversifying its business, looking at services that publishers cannot provide to the schools or exiting altogether.

Ethiopia and Foreign Agricultural Investment

Globalization has indeed changed the ways things are done. Nowadays, countries no longer need to set aside lands within their borders for agricultural purposes so as to feed their population. They can lease large plots of fertile land in another country for such purposes and this is what some countries like Ethiopia has exploited to get foreign direct investment (FDI). Ironically, despite being the “food-producers” for the world, Ethiopians are among the world’s most malnourished people. To make matters worse, many Ethiopians have been displaced as their villages lie in areas leased out to these foreign firms. Does it mean that Ethiopia should abandon this strategy of getting FDI?

Not necessarily because it is a good strategy in general. The devil lies in the details. With a couple of twists and improvements, this strategy can potentially aid the growth of its economy. For example, the Ethiopian authorities can demand that these foreign firms bear the costs of the displacements. With a bit of negotiating skills, they can get these firms to build new villages complete with basic facilities such as schools and medical centres. They can also persuade the firms to hire the locals to work in their farms. In response to the claims that foods are not reaching the Ethiopians, the authorities can work out some mutually beneficial agreements where the Ethiopians get access to food grown in their country and the firms do not incur any losses.

There are other countless possibilities to turn this strategy into one that is more inclusive towards the Ethiopian society. What we see now is the results of Ethiopian authorities who are not assertive enough to fight for the rights of their citizens, not a fundamental flaw in the strategy.

Between Removal of Tariff Barriers and Improvements in Trade Facilitation

Both removal of tariff barriers and improvements in trade facilitation have been promoted as ways to boost trade between countries. At first glance, they appear to have more or less similar impact on a particular country, regardless of whether it is a developed or developing country. After all, removal of import tax by its partner is likely to make its export more competitive relative to domestic products whether it is a developed or developing country. The same can be said with regards to improvements in trade facilitation. It is challenging to argue that they have little impact on say the developing country.

However, there is a possibility that removal of tariff barriers is likely to benefit developing countries more than developed countries and vice versa in the case of improvements in trade facilitation. The developed countries arguably have more efficient production capabilities than the developing countries. It is thus highly likely that their products remain competitive even without removal of tariff barriers by their partners, notably the developing countries. On the other hand, the less efficient production capabilities of the developing countries necessarily mean that they have to rely on removal of tariff barriers to make their products competitive relative to others.

Moving on to improvements in trade facilitation, we have to understand the motivation of each. In the case of developed countries, improvements means better infrastructure and hence better market access. Essentially, improvements in trade facilitation by their partners increase the size of the potential market. On the contrary, companies in the developing countries that are interested in exporting their products would have selected suitable locations to site their facilities ex-ante. In other words, although improvements in trade facilitation have positive impact in general, they are unlikely to be relevant to these companies. Critics may argue that better infrastructure also mean better market access for the domestic companies but considering that infrastructure development has been rather slow or non-existent until recently, there is definitely a possibility that these companies have developed indigenous mechanisms that are not reliant on better infrastructure to improve their market access.

Presented with the above, one wonders if this could be the main reason why developed countries have been stronger advocates of improvements in trade facilitation as compared to their developing peers.

India and International Aid

A couple of weeks ago, I found out that India has established its own international aid agency. While this shows a country that is rising and ready to do more globally, I can’t help but to pour cold water into this perception. India is a developing country where a large percentage of its population still live below the poverty line. Wander around the big cities and you will see slums as well as how the dwellers make ends meet. Travel to the countryside and you will see many villages whose Gram Panchayat are not carrying out their duties and roads which are supposed to be repaired but for some reasons have been left as they are among others. If you have the time to have conversations with the villagers, you will realize that they have long lost trust in their government. So if India really has the capability to help others, why not help its own people?

Resources and politics appear to be the two main culprits. Its fast-growing economy means that it is likely to need more resources. In this aspect, India seems to have picked up the strategy of China, its neighbour or some would say rival. The Chinese has built excellent relationships with its African counterparts. In return for access to their wealthy resources, the Chinese has promised infrastructure development. Through its newly established aid agency, I believe India hopes to replicate China’s success in courting the Africans. Additionally, in an ever-integrated world where many issues are discussed at global forums, India may hope to gain supporters for its agenda.

In its pursuit for “bigger” reasons which I have to acknowledge are valid, the Indian Government appear to have forgotten the welfare of its own people, the very people who put them into power. The two things are not mutually exclusive. There are definitely ways to achieve both and I think India should seriously explore such options.

Trade Liberalization in Asia

Asia has been rather active to the call of trade liberalization. Numerous trade agreements at bilateral as well as regional levels have been signed to the point that Asia is perhaps the reason “noodle-bowl syndrome” was coined. Moving on, what should Asian Leaders focus on? Here’s my take:

1. Look at realizing the full potential of existing trade agreements rather than signing more. Many of the trade agreements are very heavy on removal of tariff barriers. Perhaps, they should now work on removing non-tariff barriers and improving trade facilitation.
2. Engage the private sectors more because ultimately, these are the end-users of the agreements. Many of the small and medium enterprises (SMEs) appear to be in the dark of how they can utilize and benefit from these agreements.
3. Resolve the “noodle-bowl syndrome”. This will result in more efficient utilization of the trade agreements. Additionally, this is perhaps a bottom-up approach to getting a consensus at the international level.

Have We Arrived?

Despite the debt issues that continue to plague both US and Europe, Asia has pretty much rebounded to the point that many are experiencing overheating economy and high inflation. Presented with this stark difference, many people have made statements, which basically say that US and Europe no longer power the global economy. But are these statements entirely true?

I think as much as Asian leaders and people hope to be less reliant on US and Europe, we have to admit that our economies are still very much export-dependent. Although there is no doubt that the stimulus put in place after the 2008 crisis as well as policies designed to boost domestic demand play a part in the rebound, recovery in US and Europe also do so. If we look at the “Factory Asia” phenomenon whereby many Asian countries send parts to China for final assembly before products are being sent to the end markets, we will find that there is a 3-month lag in China’s imports from rest of Asia and US’ imports from China right around the time when Asia started to rebound. What this tells us is that once positive signs were observed in US, someone presumably called their suppliers in China to make orders. China then imported the necessary parts from the rest of Asia, assembled the products over a 3-month period and then sent them over to the US.

From this perspective, these statements do not fully reflect the reality on the ground and although we are moving towards such an environment, we have not arrived.

Freedom and Growth

The long-running downturn in the Western world and the resilient Asian economies, many of which are nominally democratic have inadvertently churned out the idea of political freedom or economic growth. This is most definitely a very foreign concept in the minds of many people in the West. Indeed, for decades and even centuries, the West has showed us that the two can co-exist and in fact, quite possibly complement each other. There is no doubt that we should not play down Asia’s achievement but is it too soon or is it even right to make political freedom and economic growth mutually exclusive?

At the heart of this idea is the belief that something productive would have been achieved as opposed to time wasted in endless negotiations among politicians in a democracy. Of course, here I am assuming a situation where no single party hold a majority in a parliament and a consensus among the relevant players need to be reached. A very recent example is perhaps the current impasse in US about raising the debt ceiling. Going by the argument and the potential impact that a default may have on the global economy as a whole, would the US have been better off if it abandons democracy altogether?

I think we need to take a step back and ask ourselves what democracy is all about. No doubt economic growth is important but in our quest for this growth, we seem to have been blinded and forgotten what democracy is all about to the extent that we made the two mutually exclusive. It is about collective decision-making. It is about taking into consideration the views of different people, different segments of the society. Surely, it does not imply that it impedes economic growth at any point in time. In fact, inclusivity could have resulted in a more balanced growth. Afterall, who are we to judge that our decisions are the best for the nation? Or superior over the others?

Even if at the end of the day, political freedom and economic growth are indeed mutually exclusive, in reaching a consensus, isn’t it worthwhile to sacrifice a bit of economic growth?