Monthly Archives: January 2014

Long regarded as a region of unbounded promise and rising prosperity, Asia has been sometimes the lone bright spot on a global balance sheet that featured turmoil in the Middle East, torpor in Europe and tilting at windmills in the US. There have been Asian uncertainties and occasional tensions, historic and regional rivalries, but these have been largely muted, generally, for well over a generation as investment, innovation and manufacturing on the continent shifted into overdrive.

However, this year interested observers and key players collectively confront a much more worrisome set of indicators across a diverse Asian scene. Tensions are up, uncertainties outweigh stabilising constants, and suddenly ominous and dark clouds hover on the Asian horizon. The signs of trouble that are stirring anxieties in boardrooms and senior political councils are no longer confined to any one sector or a single country. Many of the challenges are interconnected and even where they are not, there are worries of spillover and contagion. Read more

In his State of the Union address, President Barack Obama had much to say about the US economy and the nation’s recovery from the financial crisis. But some of his sharpest words concerned income inequality. While generating applause, the president’s rhetoric misses the core economic challenges facing low-income Americans and reduces the likelihood of constructive policy action.

While the president now wisely acknowledges the importance of mobility, the underlying difficulty concerns the way the problem is framed. Inequality is not in itself necessarily undesirable. People earn more or less depending on how old they are, how hard they work, and how useful are the business or creative aptitudes they possess. This is a normal feature of a competitive, dynamic economy. Read more

Three cheers for the new EU energy policy for 2030. While last week’s announcement was criticised by some observers as a retreat on clean energy (and praised by some businesses for the same alleged reason), it was no retreat at all. The EU maintains its global leadership in pointing the way out of the climate-energy morass. The new goals are sound but will require considerable diligence to implement.

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China can never be far from the Davos agenda these days. The Indians, and this year the South Africans, strive to make themselves heard: the Chinese do not have to try. Read more

Tuesday Barack Obama will deliver his sixth State of the Union address. Expectations are not running high. Congress is gridlocked, the president’s poll standing is tepid, and 2014 is a year of midterm elections when partisanship usually rises. Moreover, the focus of the speech will probably be income inequality – an issue that Mr Obama calls “the challenge of our time” and which is a popular topic among Congressional Democrats. And yet little or none of the related legislative agenda outlined on Tuesday has a chance to get passed by this Congress. As a result, Mr Obama will be forced to highlight modest executive actions which don’t require legislative approval. Read more

There are many party games to play at Davos. Some work better than others. The fashion now, perhaps driven by the success of TED conferences, is for strictly time-limited interventions, as short as possible. One economic historian was asked to summarise the development of the global monetary system over the last 150 years, and forecast the future of the dollar, the renminbi and the euro out to 2030 – all in three minutes. Actually he made a more than decent stab at it, but others, who may well have something interesting to say, have barely cleared their throats before the bar comes down. Read more

I had hoped that my 25th trip to Davos would be marked by the award of a silver fondu set, at the very least. No such luck. The only prize is to be asked yet again to work on “reshaping the world”, this year’s theme. Read more

The withdrawal of US forces from Afghanistan this year is almost as worrying to the country’s neighbours as to the Afghans themselves. The five central Asian states – Uzbekistan, Tajikistan, Kazakhstan, Kyrgyzstan and Turkmenistan – fear an upsurge in Islamic terrorism, increased flows of heroin and a flood of refugees. The US-led intervention, which aimed to uproot al-Qaeda from Afghanistan, may instead have scattered the seeds of jihadism over a wider field.

In private, Russian officials express nervousness about the withdrawal. But Moscow is also using the political vacuum as an opportunity to reassert itself in a region that it has always considered its backyard. The Kremlin has promised tiny Kyrgyzstan $1.1bn in military aid and debt relief worth a further $500m. In return, Bishkek has agreed to shut down a US air base in the country. In Tajikistan, parliament voted in October to allow Russia to station 6,000 troops inside the country for another 30 years. Read more

The longer we have to reflect on it, the more last November’s Third Plenum of the Chinese Communist party emerges as a watershed. It seems increasingly clear that Xi Jinping, the new party chief, is managing to corral support behind a substantial leap forward from the reforms begun 30 years ago by Deng Xaoping. As state and market continue to jostle for pre-eminence in the leadership’s carefully balanced rhetoric, it would appear that when Mr Xi signals left, he means to turn right.

The plenum was characterised by an interesting metaphor. A senior official told China Daily that while three decades of rapid development had dramatically closed the “hardware” gap between China and the developed world – particularly in the coastal areas in the south – it still had a “software” deficit. While the west focuses on ideas like ‘opening up’ as describing what we want from China, the software metaphor tells us a lot about China’s weaknesses and what it needs from the rest of the world. Read more

Mario Draghi may have offered reassurance last week that the eurozone is not facing a Japan-style deflationary lost decade but, frankly, his reassurance is not terribly convincing. Japan’s problems were partly a reflection of a collective failure to foresee the deflation heading its way.

Over the past 12 months, inflation throughout much of the world has dropped like a stone, ending up at levels wholly unanticipated at the end of 2012. If Japan’s problems partly stemmed from a failure to spot the onset of deflation, might it be that policy makers in the west could be sleepwalking into the very same problem? After all, inflation in both the US and the eurozone is now well below target, a result that should at least give central bankers pause for thought. Read more

Cynics who say power is all that counts in politics forget that power without ideas is just improvisation. It is ideas that enable leaders to impose a direction on events. Margaret Thatcher’s death last year reminds us what it felt like to be led by a conviction politician. Some hated the UK prime minister’s direction, but no one doubted there was one. No one doubted that her success helped produce a conviction politician on the progressive side: Tony Blair.

In the past 15 years, few politicians have imposed their will on our times. We can blame the current crop of leaders for that, but the deeper cause seems to lie in the waning power of ideas. Politics is more polarised than ever, but behind the party stockades, diminishing bands of believers repeat partisan incantations that no longer describe the world, let alone change it. Read more

China and Japan have little in common these days. But in one area the two countries appear to be proceeding along similar lines: both Beijing and Tokyo are working to establish newly institutionalised National Security Councils to co-ordinate their foreign policy and national security. Why? Read more

Debates persist in the US and eurozone about growth and job creation versus fiscal discipline. This false choice diverts fiscal focus away from a balanced approach that could achieve both imperatives. Such false choices also contribute to the failure of our political systems to better address continuing hardship through advancing growth and employment, and through programmes such as the unemployment insurance extension. Moreover, that political failure has also contributed to central bank decisions to employ unconventional monetary policies that create widely under-appreciated risks. Read more

Now among the world’s most dynamic emerging markets, Turkey has proven a remarkable success story in recent years. In the decade since Recep Tayyip Erdogan, prime minister, and his Justice and Development Party (AKP) first rose to power, economic growth has broadened beyond the traditional northwestern Istanbul-Ankara-Izmir triangle and the well-connected secular elite to include new companies and investors from the country’s heartland. Per capita income has tripled in nominal terms, and Turkey has become an influential actor on the global stage. Read more

One striking aspect of last year’s markets is the extent to which emerging market assets underperformed those in advanced economies. As investors search for returns this year among some frothy asset markets, such unusual underperformance attracts even greater attention.

Emerging markets’ underperformance was broad-based, affecting virtually every asset class. EM equities underperformed the aggregate world index by a stunning 29 percentage points as measured by their MSCI index components. In external credit, the return on EM sovereign bonds was a notable 14 percentage points lower than that on high yield bonds (as measured by JPM EMBI Global and ML HY indices, respectively). Local currency EM bonds did even worse, returning minus 9 per cent according to the GBI EM index. Read more

The December spike in China’s interbank interest rates, following a similar episode in June, reinforces two widely shared perceptions. The first is that dealing with the current debt overhang will exacerbate volatility; the second is that interest rates are too low. That financial reforms are needed, despite the risks, is beyond dispute. But whether interest rates — specifically deposit rates paid to savers — are actually too low, as many China-watchers have argued, is debatable. Read more

We may, as I argued last month in the Financial Times, be in a period of “secular stagnation” in which sluggish growth and output, and employment levels well below potential, might coincide for some time to come with problematically low real interest rates.

Since the start of this century, annual US gross domestic product growth has averaged less than 1.8 per cent. The economy is now operating nearly 10 per cent – or more than $1.6tn – below what was judged to be its potential as recently as 2007. And all this is in the face of negative real interest rates for terms of more than five years and extraordinarily easy monetary policy. Read more

Close calls between China and the US, at sea or in the air, are increasingly frequent as Chinese military forces deploy beyond national borders in greater numbers, rubbing up against US military patrols and deployments. Yet China is reluctant to enter into agreements defining the “rules of the road” for incidents of this kind. It has also demurred from establishing crisis communications protocols in the event of a misunderstanding between two ships’ captains. Why? Read more