Maybe the Bhutanese show us the way by adopting "Gross National Happiness"?

I've often featured these sorts of articles concerning how we would be better off moving past gross domestic product (GDP) as a measure of economic welfare. But, what is becoming interesting is that many of today's mainstream economists seem to be agreeing instead of the left-leaning crowd which dominates this discussion.

Take former IMF chief economist Olivier Blanchard:

“The single focus on GDP or GDP growth in many policy discussions is misleading,” Olivier Blanchard, a former International Monetary Fund chief economist who’s now a senior fellow at the Peterson Institute for International Economics, wrote this month. “Distribution effects, or distortions that affect the composition rather than the size of output, or effects of current policies on future rather than current output, may be as important for welfare as effects on current GDP.”

Blanchard’s exhibit 1: the increasing discussions around inequality in America. Exhibit 2: China’s shift from investment toward consumption.

The Americans and the Japanese also warn that GDP readings--which are prone to significant revisions--may give an inadequate description of where economies stand at various points in time:

In the U.S. last week, Federal Reserve Bank of Atlanta President Dennis Lockhart questioned whether official data that showed growth of just 1.2 percent in the three months through June represented a true reflection of activity on the ground. “If you look beyond the troubling headline GDP growth number for the second quarter and study real final sales, a more consistent picture of economic momentum emerges,” he said...

In Japan, a new analysis by the central bank found that rather than contracting in 2014, the economy actually enjoyed robust growth. The contradiction between the government’s data comes as the Bank of Japan steps up its efforts to get better readings, such as by starting its own consumption index. Governor Haruhiko Kuroda has called for better numbers.

The same idea goes for the UK, EU and India:

In the U.K., an independent review in March by former Bank of England policy maker Charles Bean recommended a transformation of the nation’s data. “We need to take economic statistics back to the future or we risk missing out an important part of the modern economy from official figures,” Bean said in a press statement accompanying the report’s release in March.

It’s a similar story around the world. Yves Mersch, a board member of the European Central Bank, warned of the impact of technological change in a February speech. The New Zealand government has a well-being framework, while the European Commission has had a project for almost a decade to look beyond traditional GDP measures.

India’s outgoing central bank chief Raghuram Rajan has warned of the difficulty in measuring growth in the face of aging populations. GDP numbers there have come under scrutiny since a new methodology last year showed a booming economy outpacing China. Ruchir Sharma, head of emerging markets and chief global strategist at Morgan Stanley Investment Management, says such readings demonstrate “incompetence because the statistics bureau there is applying a new methodology not having tested it well.”

So far, though, the problem has been that nobody has come up with a workable replacement to GDP despite everyone criticizing its inadequacies. Replacing it with a new measure will be difficult, and getting the international community to adopt a new system of national accounts for compiling economic data will require much cooperation besides.

Still, why stick with something nobody is particularly fond of just because it's been hard to come up with something better?

Zzzzz...Barack yaps too much...will set things straight in WaPo...zzzzz...

I am utterly perplexed by this recent, bizarre op-ed by former US Treasury Secretary Larry Summers in the Washington Post. In many respects, he embodies negative stereotypes others (justifiably) have of Americans in general: fat, loud, self-important--and crucial for this post--hypocritical. After all, this is the same guy who turned from grand architect of financial deregulation not only in the US but also worldwide using the American bully pulpit to financial regulator in the wake of the global financial crisis. Having played a part in bringing the latter on, he sought to downplay its proximate causes leading to, well, him. To no one's real surprise, Summers is at it again while voicing his superior American insights to us unenlightened colored folks on How To Fix the World.

The historical reinvention he is attempting to make this time around concerns what I've mentioned above--use of the American bully pulpit. In decades past, American influence in international finance usually involved the Bretton Woods institutions--the World Bank and IMF--serving this purpose as the world's largest development lender and lender of last resort, respectively. Very oddly, he claims that the United States' loss of face as a result of so-called allies rushing to be charter members of China's newfangled Asian Infrastructure Investment Bank (AIIB) was avoidable:

But I can think of no event since Bretton Woods comparable to the combination of China's effort to establish a major new institution and the failure of the United States to persuade dozens of its traditional allies, starting with Britain, to stay out.

This failure of strategy and tactics was a long time coming, and it should lead to a comprehensive review of the U.S. approach to global economics. With China's economic size rivaling that of the United States and emerging markets accounting for at least half of world output, the global economic architecture needs substantial adjustment. Political pressures from all sides in the United States have rendered the architecture increasingly dysfunctional.

Largely because of resistance from the right, the United States stands alone in the world in failing to approve International Monetary Fund governance reforms that Washington itself pushed for in 2009. By supplementing IMF resources, this change would have bolstered confidence in the global economy. More important, it would come closer to giving countries such as China and India a share of IMF votes commensurate with their increased economic heft.

At the same time, pressures from the left have led to pervasive restrictions on the infrastructure projects financed through the existing development banks — which consequently have receded as infrastructure funders, even as many developing countries have come to see infrastructure finance as their principal external funding need.

First, U.S. leadership must have a bipartisan foundation, be free from gross hypocrisy and be restrained in the pursuit of our self-interest. As long as one of our major parties is opposed to essentially all trade agreements and the other is resistant to funding international organizations, the United States will not be in a position to shape the global economic system.

Other countries are legitimately frustrated when U.S. officials ask them to adjust their policies — only to then insist that state-level regulators, independent agencies and far-reaching judicial actions are beyond their control. This is especially true when many foreign businesses assert that U.S. actions raise real rule-of-law problems.

The legitimacy of U.S. leadership depends on our resisting the temptation to abuse it in pursuit of parochial interest even when that interest appears compelling [my emphasis]. We cannot expect to maintain the dollar's primary role in the international system if we are too aggressive about limiting its use in pursuit of particular security objectives.

It was not so long ago. I remember and do not forget.

The Ultimax machine gun is proudly Made in Singapore.

Today marks the end of an era as arguably the best-known Asian leader of his generation, Lee Kuan Yew--statesman, father of an independent Singapore, champion of 'Asian Values', and all-purpose pundit--has passed away aged 91. So it is that I find myself watching wall-to-wall coverage of his passing on Channel NewsAsia, which is wholly-owned by the Singaporean government through its Temasek sovereign wealth fund. Like the man himself, Channel NewsAsia is quite matter-of-fact and, er, not quite critical of Singaporean leadership under the People's Action Party.

No matter; there are a lot of tidbits that I've picked up watching the channel these past few hours. The economic story of Singapore has been rehashed countless times already, so I'll leave that to others. However, the security story has not really garnered as much attention despite it being crucial to Singapore's modern-day existence. Remember that, prior to declaring independence from Malaysia which it was a part of for two years (1963-1965), Indonesia's military was setting off bombs in Singapore during the Konfrontasi conflict Indonesia waged with Malaysia. Hence it had to develop militarily as well. For instance, it is somewhat difficult to square that these folks with an otherwise peaceful demeanor developed the famous Ultimax 100 section assault weapon (SAW) that weapons designers still regard as among the finest of its type.

More remarkably, it was later revealed that Lee Kuan Yew chose a rather politically incorrect ally to help train Singapore's armed forces: Israel. Why did it take so long for this factoid to be revealed? The optics certainly weren't good then: like Israel, Singapore was a predominantly non-Muslim country surrounded by rather hostile neighbors. After all, Malaysia kicked Singapore out, while Indonesia bombed Singapore regularly when it was still part of Malaysia. It's a tough neighborhood, and the Vietnam conflict was the last straw. From Haaretz:

Lee explained the need to maintain secrecy to his close friend in the leadership, and the first defense minister in his government, Dr. Goh Keng Swee. "We have to ensure, as far as possible, that the arrival of the Israelis will not become public knowledge, in order not to arouse opposition among the Malay Muslims who live in Malaysia and Singapore," the prime minister summed up. That, in essence, is Singapore's problem. The residents of the small island, which has an area of about 670 square kilometers (Israel is 30 times as large), are mainly Chinese, and they live between the two Muslim countries of Malaysia and Indonesia. Life in the shadow of the large Muslim majority and fear of a Malaysian incursion are an integral part of the history of the two countries. Until 1965, Singapore was part of Malaysia. In that year, the British government decided to withdraw from all its colonies east of the Suez Canal. In a rapid process it was decided to sever Singapore from Malaysia and to establish it as a new and separate country.

Singapore declared its independence on August 9, 1965. At the time of its creation, it had only two infantry regiments, which had been established and were commanded by British officers. Two-thirds of the soldiers were not residents of Singapore, and in any event the leaders of the nascent state had no faith in the strength of the minuscule army. The defense minister, Goh, contacted Mordechai Kidron, the former Israeli ambassador to Thailand, and asked for assistance. Kidron arrived in Singapore within days, along with Hezi Carmel of the Mossad. "Goh told us that they think that only Israel, a small country surrounded by Muslim countries, with a strong army, could help them build a small, dynamic army," Carmel says. The two Israelis met with Lee, who writes that he "told Keng Swee to put it on hold until Lal Bahadur Shastri, the prime minister of India, and President Nasser of Egypt replied to my letters seeking their urgent help to build up our armed forces." 

The Indians and Egyptians eventually dropped out of contention, and a long-forgotten 'special relationship' was born that was only uncovered when Lee published his 2000 autobiography:

In his book, "From Third World to First: The Singapore Story 1965-2000," published in 2000, Lee Kuan Yew, Singapore's founding father and its first prime minister, disclosed the secret that had been kept for almost 40 years: It was the Israel Defense Forces that established the Singaporean army. The Israeli military mission was headed by Yaakov (Jack) Elazari, then a colonel, who was later promoted to brigadier general. After leaving the army, he became a consultant to the Singaporean army. Hedied 15 years ago. "To disguise their presence, we called them `Mexicans.' They looked swarthy enough," Lee wrote.

Singapore's army is today considered the strongest and most advanced of the military forces in Southeast Asia. The alliance between the Israeli and Singaporean defense establishments intensified and expanded, and it now encompasses cooperation between the two countries' military industries, as well. The scope of the deals, according to foreign sources, indicates that the Singaporean army is one of the major clients of Israeli combat means and military technology. 

Like any other human endeavor, training security forces well is another facet of organizational skill. As it transpired, Singapore and Israel were kindred spirits. Although Singapore eventually became quite friendly with everyone else in its neighborhood (and beyond), there was a time when it perceived a high level of external threats in Southeast Asia. It is probably not a coincidence that the need to deal with such an environment spurred not only professionalism in terms of military ability but also the economic growth necessary to sustain these armed forces:

Prior to setting out, the members of the [Israeli] military mission were invited to the chief of staff's bureau. "Dear friends," [Yitzhak] Rabin said, "I want you to remember several things. One, we are not going to turn Singapore into an Israeli colony. Your task is to teach them the military profession, to put them on their legs so they can run their own army. Your success will be if at a certain stage they will be able to take the wheel and run the army by themselves. Second, you are not going there in order to command them but to advise them. And third, you are not arms merchants. When you recommend items to procure, use the purest professional military judgment. I want total disregard of their decision as to whether to buy here or elsewhere." 

Even if you are not particularly fond of Singapore or Israel, there is no taking away from their historic achievements as small countries lying in relatively forbidding environs. They possessed foresight on how to run a society and the capability to realize it--things in short supply elsewhere when these nations were born. The world hasn't changed much in these respects.

They didn't use words like "colonial" and imperial" way back when for nothing.

I am utterly befuddled by (mostly uninformed Western) commentary that depicts protesting Hong Kong students as pro-democracy heroes decrying the slide of Hong Kong away from democracy and meritocracy. Supposedly, these new heroes are pointing out the rough, new reality of Hong Kong after the 1997 handover as PRC apparatchiks have coarsened civil society in the same way that they have in the mainland. In this version of events, things have gone downhill in terms of protecting civil liberties and that chestnut beloved by the gweilo (white people), the Horatio Alger-esque story that anyone willing to work hard can success regardless of their background.

However, if we do not look at matters through rose-tinted glasses, consider two points: First, hankering for the British colonial era as a time of widespread democracy is revisionist to the core. Sure, many of these kids protesting were but tots when the handover occurred, but surely their parents told them the governor of Hong Kong was appointed by the ruling British party? Consider the case of Chris Patten, the legendary "Fat Pang," who tried to run Hong Kong as if he were elected (and its residents tried to humor him accordingly):

Patten continued to behave differently to his predecessors; although, unlike his predecesors for many generations, he did not speak either Mandarin or Cantonese, he used to go for informal strolls in the streets, chatting to people and pressing the flesh.  In fact, he was behaving like the seasoned democratic politician that he actually was. Trouble was, Hong Kong had never seen such an animal before. As my Taipan [friend] remarked, "When will he stop kissing babies in Mong Kok? Doesn't he realise he doesn't have to get elected in this job?"

So there. Great Britain was "democratic" by Western definitions, but its overseas territories certainly were not if electoral participation is your yardstick. End of story.

Second, another fantasist's narrative I keep hearing that gets my eyes rolling is the idea that inequality is significantly increasing in Hong Kong after the handover. Supposedly, Hong Kong was previously a Don King-esque, "Only in Hong Kong" sort of place where anyone with ambition, drive and talent could get rich. Witness these sorts of sob stories:

Hong Kong, China - It used to be a place where anyone who worked hard, excelled in school and possessed an entrepreneurial spirit could rise above their parents' hardship to a better life. That was the Hong Kong dream. Today, that dream has become a mirage - where meritocracy is seen to be supplanted by business and political connections, where good jobs and university places are keenly contested by the mainland Chinese. Young people in Hong Kong fear they are losing out as the playing field tilts increasingly towards China. 

The tens of thousands of people protesting on the streets are not just fighting for democratic reform, they are also struggling for their economic survival in the former British territory returned to China in 1997. "After 1997, you have to have good connections to get a good job. This is not an equal opportunity society anymore," said 54-year-old Jason Wong, a retired investment banker. "The rich and those in power have a better chance."

Again, this is simply not true. If you look at the illustration charting inequality in Hong Kong above, the Gini coefficient was about 0.52 during the handover, and has since gone up to slightly below 0.54. Actually, the largest increases in inequality came at the tail end of British rule from 1981 to 1996 when it zoomed from about 0.45 to 0.52. If there's someone who needs to be called into account for gaping inequality in Hong Kong, then, it would be the British administrators pre-handover, not the PRC toadies who now run the show.

Bottom line: Hong Kong remains as cutthroat now as it ever was. Social safety nets are few, and it's always been a dog-eats-dog sort of place. Many people do not like the frantic pace of life, the pollution and so on, but others thrive on it. (One of the largely unspoken advantages of reintegration is that you can resettle in less hectic places on the mainland if you wish.) This ain't WussWorld, son. As I said before, Hong Kong is the capital of capitalism. Go ask Milton Friedman.

Actually, we're not quite there yet.

The management literature is littered with references to new forms of organizational structures alike matrixes, networks and so on that are coming to replace bureaucratic hierarchies. This phenomenon is linked to modern, politically correct notions of diversity, equity and fairness. Surely, we can't have [white, male] bosses lording it over others in an enlightened age, can we? Having been conditioned to think organizations are evolving in this, well, collegial direction at university, young entrants to the workforce are often surprised that most instead resemble your grandfather's corporate hierarchy straight out of Weber's iron cage.

CFO magazine points us in the direction of recent research by management stalwart Jeffrey Pfeffer reprising themes those familiar with his work should be able to recognize. Because power games are inherent in human societies, the notion that they will go away in "new age" organizations is risible. In a world where people strive to get ahead, it is inevitable that this will be done at others' expense. Call it "workplace realism"; people are keeping score. So, the corporate hierarchy becomes reinforced the embodiment of this perpetual conflict--be it cavemen or white collar workers. There's this person called the boss, gaffer, guv'nor and that's that--none of this touchy-feely stuff beloved by slackers:

“There’s this belief that we are all living in some postmodernist, egalitarian, merit-based paradise and that everything is different in companies now,” [Pfeffer] says. “But in reality, it’s not.” In fact, in a new paper that explores the notion that power structures haven’t changed much over time, Pfeffer explains that the way organizations operate today actually reflects hundreds of years of hierarchical power structures, and remains unchanged because these structures “can be linked to survival advantages” in the workplace. The beliefs and behaviors that go along with them, he writes, are ingrained in our collective, corporate DNA.

Why do traditional power structures have such staying power? One reason is that hierarchies still work. Pfeffer writes that “relationships with bosses still matter for people’s job tenure and opportunities, as do networking skills.” He notes that research shows hierarchies also deliver practical and psychological value, in part by fulfilling deep-seated needs for order and security. Another is that individuals who believe in their own competence and above-average qualities are more likely to take action at work, says Pfeffer. Taking action on the job provides opportunities for success, and success means advancement at the company — including more power and control over others — perpetuating a hierarchical structure.

There is no self-fulfilling prophecy that believing we are in an era of flat organizations will eventually result in having more of them:

Changes in the values and careers of particularly younger employees and changes in organizations, including the reduction of hierarchical levels and greater use of teams and matrix structures—combined with new communication technologies and more social networking—have produced calls for new organization theories for these new realities. Using organizational power and influence as a focus, I argue that fundamental theoretical processes remain largely unchanged in their explanatory power, in part because such phenomena can be linked to survival advantages. The new workers–new work arguments are consistent with the continuing emphasis on novelty and theoretical innovation in the organization sciences, an emphasis that, while promulgated in virtually all the journals, may poorly serve the development of reliable and valid knowledge and hinder our ability to provide useful advice for both organizations and their employees. 

Deal with it: the real world is not like that. Pfeffer's setting may be different--the corporate world instead of international relations--but exactly the same forces undergirding realism reappear. Power matters. The implications are far-reaching in that perhaps it's time to go back to "stodgy" old management research in which organizations resemble military-like command structures instead of these pancake-flat doodles people imagine them to be. More importantly, young people may not be persevering in work environments that do not meet their expectations. Ditto for government organizations (or even more so).

Just as some folks spell T-R-O-U-B-L-E, certain nations have the reputation for it going a looooong way back. For a blog purporting to be the IPE Zone, you may have noticed that I have had very few posts on the EU project as of late and the myriad crises on its periphery. Honestly, I tired of this story a very long time ago and have as much interest in it now as the details of a root canal operation. While I found it amusing when the Greek finance minister responsible for hiding the true extent of his nation's debts came to the LSE and faced a very hostile audience, it's been blah ever since. Essentially the Greek story is one of Hellas repeatedly failing to meet economic targets set by the EU; the EU demanding more concessions from Greece, and Greek leaders giving in to EU demands after some posturing. The cycle repeats itself with the Greeks arguing that belt-tightening measures are responsible for insufficient "escape velocity" from now-chronic recession. And on and on it goes...

Interestingly though, Greece has had recurrent crises stretching back many, many decades. What's more, other Europeans alike the--wait for it--French and Germans have been forced to marshall their resources to bail out an ungrateful, perpetually hard-up nation. This from Stephen Krasner on seeming violations of Greek sovereignty from its creditors during earlier episodes of financial crises (pp. 12-13):

When Greece was recognized as an independent state in 1832, it received a 60 m franc loan from Britain, France, and Russia, but only by signing an agreement pledging that the ‘actual receipts of the Greek treasury shall be devoted, first of all, to the payment of the said interest and sinking fund, and shall not be employed for any other purpose, until those payments on account of the installments of the loan raised under the guarantee of the three Courts, shall have been completely secured for the current year’. In 1838 the entire finances of Greece were placed under a French administrator.

Greece could not secure new loans during the middle of the nineteenth century in part because it was in default on its 1832 obligations. After 1878 its borrowing increased substantially, but to secure these funds Greece committed specific revenues, including the customs at Athens, Piraeus, Patras, and Zante and the revenues from the state monopolies on salt, petroleum, matches, playing cards, and cigarette paper. The loan of 1887 gave the lenders the right to organize a company that would supervise the revenues that were assigned for the loan.

In 1897, after a disastrous war with Turkey over Crete, Greece’s finances collapsed. It was unable to service its foreign debt or to pay the war indemnity that was demanded by Turkey. Germany and France, along with private debtors, pressed for an international commission of control. Greece acceded when it became clear that this was the only way to secure new funding, and Britain, which had been more sympathetic to preserving Greek autonomy, then accepted the Control Commission. The Commission, which consisted of one representative appointed by each major power, had absolute control over the sources of revenue needed to fund the war indemnity and foreign debt. The Commission chose the revenue sources that it would control. They included state monopolies on salt, petroleum, matches, playing cards, cigarette paper, tobacco duties, and the customs-revenues of Piraeus. Disputes that might arise between the Commission and agencies of the Greek government were to be settled by binding arbitration. The members of the Commission were given the same standing as diplomats. One member of the Greek parliament argued that the establishment of the Control Commission suspended the independence of Greece.

Bottom line: if the EU were wise, then they would have taken Greece's history of repeated financial debacles as a warning for the future. Some argue that the EU's German paymasters were too naive in expecting EMU members to actually follow rules alike the Stability and Growth Pact to avoid undermining the entire project. It's the same old, same old over a century and a half later with these same folks whingeing about their loss of sovereignty and so forth when, of course, they wouldn't be in this place if they actually bothered sorting out their finances for good. Heaven knows, they've had, what, 180+ years to sort themselves out so there's really no excuse even if European powers have continually meddled in its affairs since the Treaty of Constantinople. Set against its history as a nation-state, Greece's current troubles are exceptionally unexceptional.

But no; I guess some people never learn and carry over bad habits for decades and decades.

Though not always, expatriates often develop piercing insights into the often strange political economy of Asian nations as outsiders looking in. Lord Christopher Patten of Barnes should be familiar to all scholars of Asia as the last British governor of Hong Kong. He remains controversial to this day for, in so many words, attempting to enshrine democratic processes in the colony prior to the 1997 handover. Jaded Hong Kong residents even grew a fondness for him--well, at least outside the business community--for his instincts as a retail politician did not go away when appointed for the post. From Andrew Craig-Bennett's superb and much-recommended history of Hong Kong where he traces the backhanded nickname of endearment "Fat Pang":

Patten continued to behave differently to his predecessors; although, unlike his predecesors for many generations, he did not speak either Mandarin or Cantonese, he used to go for informal strolls in the streets, chatting to people and pressing the flesh. In fact, he was behaving like the seasoned democratic politician that he actually was. Trouble was, Hong Kong had never seen such an animal before. As my Taipan remarked, "When will he stop kissing babies in Mong Kok? Doesn't he realise he doesn't have to get elected in this job?" 

Patten also used to make political speeches at the drop of a hat - no mere cutter of ribbons with a few kind words, like earlier Governors, he would deliver a twenty minute oration and - people listened. He became the first and last Governor to acquire a Chinese nickname - Fat Pang - 肥彭 (Chinese nicknames were sought after amongst the gweilo [foreign] community because they were only bestowed (behind your back) if you deserved one, for good or ill, and it was usually very hard to find out what yours was.)

So it is that he retained that Tory British predilection of adopting strong democratic stances as governor when his country of course used to be the world's foremost imperialist and slaver. Needless to say, attempting to instil democracy in a colony that would soon be handed over to China did not go so well with the PRC. What's more, his actions have undoubtedly caused ongoing headaches for the Chinese leadership insofar as several opposition parties now responsible for organizing mass protests against the mainland and so forth sharpened their teeth during Patten's epoch-ending stint:

Legco [legislative committee--which retains its role post-handover] debates became very different; long diligently televised, they started to be watched. The subject of debate moved away from the usual municipal trivia and started to take on a broader view. Patten was a veteran of the House of Commons; Hong Kong's political class watched and learned.

The first group to take a serious dislike to Fat Pang was the business community. Legco was not meant to be a debating chamber; it was meant to be a rubber stamp for [commercially friendly] decisions arrived at over lunch. All this political activity had an effect which I must assume (since he is still active in politics, and has not settled down to write his memoirs yet) Patten intended it to have. Hong Kong developed political parties. Strictly speaking, there had been parties since soon after WW2, but with one exception they were informal and had little influence.

Very interesting stuff. In line with this bit of Patten-era Hong Kong history, RBS has an unsurprisingly rollicking interview with the man himself on the so-called Asian Century. To no one's real surprise given his advocacy as Hong Kong governor, he believes that how far the likes of China and India will go depends on the extent they internalize democratic values (especially China):

Yet Chinese consumption remains low as a proportion of GDP, as does domestic investment. If China is to make its growth sustainable, it must change its model from investment in low-cost manufacturing to investment in the domestic economy and personal consumption. This will mean offering more social entitlement programmes and investing more in education and health. Sustainable growth also requires political reform, an area in which the Chinese leadership has had to tread carefully. “The Chinese often claim that they can do things to the economy without having an effect on politics,” says Lord Patten. “I rather doubt that myself and so, clearly, do some Chinese leaders.”

Like me, he believes that prospects of Chinese global preponderance are wide of the mark:

Next year will see a change in China’s political guard. Xi Jinping is expected to take over the presidency from Hu Jintao, but comparatively little is known about the likely new leader’s agenda. There is an ongoing debate within China between the party hardliners and some of the modernisers.

“The hardliners’ argument is that if the party continues to allow the privatisation of state and enterprises, along with more foreign direct investment, it will sooner or later lose control over the state,” explains Lord Patten. “The modernisers say that unless they continue to stand back from the state and enterprises, and encourage the private sector, the economy won’t grow quite so fast and won’t create so many jobs, which would result in the party losing control. I think the Chinese dilemma is that both those propositions are correct.”

In light of these challenges, he questions the claim that the 21st century belongs to China. “It’s certainly the case that America and Europe won’t dominate the global agenda in the next few years in the way they have in the past century,” he says. “But I don’t think that we’re going to live in a Chinese century. It may be one in which the Chinese and Indians, like the Japanese, refuse to define modernity in entirely western terms, but I don’t believe that we’ve seen the end of western influence.”

Good stuff; and he's probably on target.

The migration of the so-called "Flying Geese Model" has been responsible not only for integrating more regional economies into the world economy's fold but also raising living standards in East Asia as the centre of economic gravity is rapidly heading towards our part of the world. The essentials of this story are well-known: high production costs due to a strong yen and dearer labour have encouraged Japanese firms from the first wave of industrialization in our region to set up shop elsewhere as long as comparative or competitive advantages are found. In turn, the likes of Taiwan and South Korea have followed in Japan's wake by extending their production facilities elsewhere in the region such as Southeast Asia when their production costs in turn increased. And so on down the line, with China being the largest beneficiary of this process in recent years.

Hence, it was with no small amount of displeasure that I noted the re-emergence of territorial disputes in Asia flaring up, especially in mainland China. While the politics of territorial disputes have until now been fairly contained, there has always been the danger of these tensions spilling over into economic disruptions. With tightly integrated production schedules alike "just in time" processes nowadays, such disruptions could easily affect the global availability of important consumer alike automobiles or consumer electronics if prolonged. The cause this time, though, does not involve an earthquake, a tsunami, or a torrential downpour but simple human insensibility.

These past few days have witnessed Chinese protests spilling over into outright hostility against Japanese foreign investment and investors--or factories and expatriate personnel alike. Left with few alternatives, many Japanese companies operating in China have closed offices and factories. The BBC reports on this across-the-board demolition derby prompting widespread Japanese closures that threaten $345B in bilateral trade between these two giants of the region:

• Panasonic - shut factory in Qingdao
• Canon - suspended operations at three plants
• Honda and Nissan - stopped production for two days
• Mazda - stopped production at Nanjing factory for four days
• Toyota - suspended some production
• Sony - closed two of its seven plants and is discouraging non-essential travel to China
• Seven & I Holdings - closed 13 supermarkets and 198 convenience stores
• Fast Retailing - shut 42 Uniqlo clothing stores and advised Japanese employees to stay at home
• Aeon - closed 30 out of 35 supermarkets
• Komatsu - the construction equipment maker has halted work at three plants in Shandong province

As I said, it's not a small incident as there has emerged a witch hunt against all things Japanese in many Chinese cities. In turn, I've given some thought about how we can settle quell disputes, but it will require compromises from all sides:

1. Japan would do itself a lot of favours if it finally issued an apology to all the countries it rather savagely occupied during WWII. Germany did so long ago, and it is never too late for Japan to follow suit since Asians apparently have very long memories. The grievances extend practically everywhere--from China to South Korea and on to Southeast Asia--while the offences are undoubtedly grave--forcing women into prostitution, [subsequently American exploited] human experimentation, arbitrary torture and execution, etc.
2. OTOH, the others--Chinese, Koreans and Southeast Asians in particular--ought to discourage obtaining cheap political points by distracting people from more significant matters. Unpopular at home? There is always the temptation to "blame Japan."
3. Insofar as territorial disputes in Asia will not likely be solved through arbitration at bodies alike the International Court of Justice due to the reluctance of certain parties, the promise of much-needed fuel supplies in the East China Sea can be brought to fruition by joint exploration. Yes, there will be issues as to what each party will contribute and get in return, but such matters are comparatively trivial to the gains from exploiting these resources in the here and now and easing territorial disputes in the process.

Just my two cents' worth for now. Meanwhile, what's going on is beyond comprehension since there is tacit approval of such senseless violence that threatens to destroy what has taken years of cooperation to build in the aftermath of WWII. Economic ministers whose role is to create trade ties may shake their heads in disgust, but rest assured that there are others who believe their political standing may rise by stoking the flames a wee bit more.

UPDATE: Also see the Lowy Interpreter on the possible demise of "Factory Asia."

Although more than a few colleagues tend to view the World Bank in quite a negative light no matter what they do, I have come to a more ambivalent position. (Newer readers should note potential conflicts of interest since they gave me not-insubstantial prize a few years back when I was still a PhD student.) Yes, their policies tend to follow what's in vogue among American elites. Yes, their policies too have in the past been less than considerate of the particular circumstances of developing nations in attempting to transplant foreign models of development. But ultimately, I do not think that more sinister motives attributed to them hold. Rather, "America knows best" has often been combined with off-target advice for mixed results in more than a few circumstances.
And speaking of expressways, it should come as no surprise either that the World Bank didn't think much of them despite paving the way for South Korea's success. As ever, the best way to silence DC-based bigwigs is through success:

In light of the IBRD’s reluctance to assist in the construction of expressways, Korea pressed ahead anyway with the construction of the Seoul-Busan Expressway, the Daejeon-Jeonju section of the Honam Expressway, and the Shingal-Saemal section of the Yeongdong Expressway with its own financial resources. After Korea showed it was able to build the Seoul-Busan Expressway with its own financial and technological resources at half the time and a fraction of the cost, the IBRD began to rethink the economic feasibility of expressways in Korea [p. 312].

Other agencies also dispensed bad advice. USAID didn't help matters by far underestimating the energy requirements of South Korea:

The electricity shortage of 1967 was due to underinvestment. The initial investment proposed in the First Electric Power Development Plan had been reduced based on the recommendations of a US research team (Thomas Research Team) commissioned by US AID to conduct a study of Korea’s electricity requirements in September 1964. The study conducted by the research team concluded that the electricity demand forecasted in the First Five-Year Electric Power Development Plan during period of 1962 and 1966 was too high, recommending to the Korean government and USOM to lower the projections. As such, the downward revisions to the initial investment plans reduced electricity capacity by 224,000 KW [p. 152]. 

It's interesting to see how sceptical the World Bank was of South Korea at the outset. I do this not to poke fun at World Bank advice, but to again reinforce the point that the World Bank is ultimately just another source of input and finance among others. Ultimately, developing countries are responsible for their own development or otherwise, generally well-intentioned outsiders notwithstanding.

I recently visited Singapore and was given a quaint reminder of days gone by when, while checking into my hotel, I noticed a separate registration section needed to be filled by unmarried guests sharing the same room. Quibble if you will with the moralistic tone of this practice, but it's definitely not in tune with the times. In a similar vein, I came across yet another practice that seems to have been lifted from antiquity concerning the application of the Jackson-Vanik amendment against Russia which dates from the heyday of one Leonid Brezhnev.

In 1974, Senator Henry Jackson (D-WA) and Congressman Charles Vanik (D-OH) introduced the eponymous amendment which forbids the US from granting most-favoured nation (MFN) status or permanent normalized trade relations (PNTR) in American trade legalese to nations that restricted emigration of their citizens. The Soviet Union had effectively put into place severe limits on emigration to Western nations--especially its most skilled including Jewish citizens. Call it the totalitarian, zero tolerance approach to brain drain. In turn, I assume that the US found this practice to be a gross violation of human rights based on the Universal Declaration of Human Rights wherein Article 13 (2) states "Everyone has the right to leave any country, including his own, and to return to his country."

But that was a long time ago in a political context far, far away. While Jackson-Vanik has become an all-purpose American cudgel against Russia, the honest truth is that the Sov...I mean, Russians have long since relented on such limits to emigration. Nearly all mainstream media commentators have missed this important point that they are now "in compliance" with Jackson-Vanik. Inter alia, over a million Jews have emigrated from the USS...I mean, Russia to Israel. Nowadays, Israelis are instead complaining of integration issues arising from too much emigration from Russia:

Twenty years after Russia opened its doors to mass emigration, the number of immigrants choosing to move to Israel has stagnated. Since 1989, over one million Russians have immigrated to Israel. In the past few years, Israel has seen an average of between five and six thousand Russian immigrants per year.

Professor Eliezer Leshem, a former Hebrew University professor and current Professor Emeritus at Ariel University Center of Samaria, believes that the current cessation of immigration may have something to do with discrimination many Russians felt while being absorbed into Israeli society.

Russians have long been able to settle wherever they want--including the United States as I myself remember from my MBA days when many American classmates had Russian wives. Yet the US has found it politically expedient to continue applying Jackson-Vanik against Russia. A few months ago I relayed the much-anticipated news that Russia would at last join the WTO. The problem here with regard to Jackson-Vanik is that the WTO requires that its members extend MFN treatment to one another. Hence, the Obama administration's recognition of this basic understanding is behind its argument to lift Jackson-Vanik against Russia.

Speaking of Cold War remnants, though, it is unsurprising that it's the neoconservative wing of American politics that is most fervently opposed to removing Jackson-Vanik (which is doubly odd in that Democrats authored this legislation long ago.) For instance, that bastion of right-leaning thought the WSJ op-ed pages says a repeal of the amendment would come "From Obama With Love" by effectively approving of Vladimir Putin's suspect election victory (among other nefarious practices).

To cut a long story short, the US has only two real options here regarding Russia's membership as a Congressional Report Service report anticipated in 2005. First, the US can do what it has done for several other nations it has applied Jackson-Vanik against by granting MFN status upon WTO accession. Which is what several Democratic lawmakers have been pushing for quite some time now. Second, the US can relive the Cold War by refusing to grant PNTR status to Russia, which violates its WTO MFN commitments. The only possible workaround is for the US (and by implication Russia) to pretend the WTO doesn't exist:

[I]nvoke the "non-application principle" of the WTO. For newly acceding countries, a member of the WTO can opt out of WTO commitments with respect to the newly acceding country if it invokes the “non-application” principle [Article XIII of the Marrakesh Agreement to be precise]. If the U.S. were to invoke the non-application principle against Russia, it means that the U.S. would refuse to honor its WTO obligations to Russia. But non-application is reciprocal. So the U.S. would not have any assurance that its exporters or investors would be treated in Russia according to Russia's WTO commitments.

It would certainly have been a rather pointless process to extract all sorts of commitments from Russia to accede to the WTO only for its most influential member to ignore the fact that Russia is indeed a WTO member. But, that's world politics for you. Note however that business lobbies think it would be a daft idea not to repeal Jackson-Vanik after everything that's transpired:

The business community has also “come out in full force,” going on the Hill to make it clear Russia is a priority, said the Baucus aide. A business coalition–whose members include major groups such as the U.S. Chamber of Commerce and National Association of Manufacturers as well as multinationals such as Boeing Co. and General Electric Co., announced earlier this month that restoring trade relations with Russia will be the top trade priority this year.

If this is indeed what will occur, note that the only current WTO member with the dubious distinction of not being granted MFN status by the US is Moldova:

In practice, the U.S. has dropped Jackson-Vanik on all countries that have acceded to the WTO with one exception. In the cases of Albania, Bulgaria Cambodia, Estonia, Latvia and Lithuania, Jackson-Vanik was repealed prior to accession. In the cases of Mongolia, Armenia, Georgia, Kyrgyzstan it was repealed after accession, so the "non-application" principle was invoked, but eventually removed within a year or two. (In the case of Georgia, non-application was never invoked since Jackson-Vanik was removed soon enough after accession.) Only in the case of Moldova does Jackson-Vanik still apply to a country that acceded to the WTO.

Moldovans too have been freely emigrating for years, so their holdup must be for other reasons.

We'll see what happens as the US congress begins deliberations over the implications of Russian WTO membership later this week. Even Putin's opponents can agree that trade with Russia should not be curtailed via Jackson-Vanik (but rather economic ties with specific human rights offenders through separate legislation). Me? I'll be cueing up Springsteen's "Glory Days" as a backhanded salute to those poor souls who simply cannot accept that the world has moved on--in the wink of a young girl's eye.

Among my most searched-for posts over the years this blog has been in operation have been those concerning the world's busiest ports [1, 2]. Truly, one of the underappreciated facets of globalization has been the expansion of facilities to standardize shipping merchandise throughout the world. By making containers identical to each other, loading and unloading massive amounts of goods has been made possible.

However, an even more underappreciated corollary concerns the rise of container terminal operators. Just as airlines used to be nearly the exclusive preserve of flag carriers throughout the globe in the not-so-distant past, most of the world's major ports used to be run by national port authorities. However, lacking any comparative advantage in handling goods shipments, many have since outsourced this activity to commercial container terminal operators which have accumulated expertise over the years in this specific endeavour.

Accordingly, a cursory look at the world's top terminal operators yields no surprises. (This compilation was prepared by the folks at Hofstra U.) At the top of the list is PSA International. formerly known as the Port of Singapore Authority. Over the years, Singapore's port has been at or near the top of the charts in container throughput as measured by twenty-foot equivalent units (TEUs) handled. In other words, its local expertise has readily been transferred to operating others' ports as nearby as India or as faraway as the UK.

In second place is Hong Kong multibillionaire Sir Li Ka-Shing's flagship enterprise, Hutchison Whampoa. While some claim that it is the world's largest port operator based on container handling capacity, the above chart is rebalanced to account for the fact that a fifth of Hutchison Whampoa is owned by PSA (hence-the measure "equity-based throughput"). Nevertheless, Li's vaunted business chops are once more evident in how he began his involvement in this business just as global merchandise trade volumes shot upwards

At a more than respectable third place is Dubai Ports World, perhaps known to most for bring forced to divest in America, where anything vaguely Middle Eastern-sounding has terroristic overtones to a lot of politicians and regular Joes. Although it got its start in the eponymous UAE port city, it has expanded largely through acquisitions alike that of the British P&O which then managed several US ports. Despite "national security" claims masquerading as protectionism--I don't recall any Yanks complaining about foreign port management when the British were in charge--such racist-protectionist thinking is embarrassingly typical of many US lawmakers and their hick constituencies.(For instance, then-Senator Barack Obama said "we're not allowing our port security to be outsourced to foreign governments" which is strictly not accurate.) Think about it: what sort of idiotic port operator would risk losing so much business by facilitating the transfer of WMD and other such supplies?

That aside, there is also greater concentration evident in the business being handled by these large conglomerates as in other lines of business. The following write-up also offers a way of distinguishing the method they use to rank these concerns:

The importance of port authorities in directly managing terminals is in decline, particularly in view of the emergence of global port holdings. This is mainly the outcome of deregulation of port management in a number of countries, which permitted the emergence of global terminal operators. By 2001, global terminal operators were controlling 35% of the port terminals and 42% of the containerized throughput. Ocean carriers accounted for 19% of global terminal ownership.

Since terminal operators have various stakes depending on the concerned terminal, equity-based throughput is commonly used to measure the respective amount of containerized traffic they handle. For instance, two terminal operators may have respective stakes in a terminal of 75% and 25%. If that terminal handles 100,000 TEU per year, then 75,000 TEU will be attributed to one terminal operator and 25,000 TEU to the other.

By using such a measure, PSA is the world's largest terminal operator, even if HPH, DPW and APM have more terminals in their portfolio. Actually, PSA owns a 20% stake in HPH, which from an equity-based throughput perspective conveys traffic handled by another terminal operator. The top ten terminal operators control an increasing share of the world’s total container handlings: 64.6% in terms of total throughput handled in 2009 compared to 41.5% in 2001.

As with most things, no news from port operators is good news since they get the job done with a minimum of fuss. But unfortunately, it also may mean that their good work is underappreciated--including that of Dubai Ports World

This coming week I am going to discuss European economic integration in class. As most of you can recite from memory, the European Union got its start as the European Coal and Steel Community (ECSC) back in 1952. However, the political logic of the ECSC is a bit more obscure. While you will appreciate the necessity of rebuilding an industrial base in Europe post-WWII, the political story is a bit more involved.

You see, the French had a recurring fear of postwar German reconstruction coming in the form of re-industrialization. A number of conditions laid down on Germany after WWI concerned limiting its re-industrialization to prevent its re-militarization. Looking back, the French were to their dismay proven correct when the Nationalist Socialist party came into power and sped up the reformation of the German industrial machine. So, after WWII, the French had similar apprehensions about German re-industrialization. The solution, of course, was jointly administering the system by which key inputs--coking coal and iron ore--were distributed at the heart of Europe. That is, in exchange for Germany being allowed to (peacefully) re-industrialize, the erstwhile victor, France, would gain a veto power over resources if they perceived they were being requisitioned for military purposes.

Which brings me to the history of famous German brands. While they are today among the most coveted and recognizable in the world, their Nazi-era past is often forgotten (and thankfully so). Hugo Boss wasn't making designer duds but Nazi uniforms. BMW was building aeroplane engines for Luftwaffe bombers and fighters--hence the propeller logo. Hitler initiated the people's car project that is today's largest auto empire. Ferdinand Porsche helped design Panzer and Tiger tanks that dominated land-based conflict in the early going. And so on and so forth.

As WWII dragged on, many other manufacturers in unrelated lines of business started contributing to the war machine. While looking around, I came across a Der Spiegel article that explains how the brothers Dassler--Adi Dassler (Adidas) and Rudolf Dassler (Puma) were made to make highly effective anti-tank bazookas [!] The same factory that made the shoes Jesse Owens wore at the 1936 Munich Olympics to wide acclaim was making anti-tank weapons by 1944:

But the history of the Dasslers -- who both joined the Nazi Party in 1933 -- wouldn't be complete without one chapter from World War II: In 1944, there was suddenly a spike in the number of Allied tanks being blown apart by German fire. The culprit was the latest anti-tank rocket launcher, nicknamed the "Panzerschreck" ("Tank Terror"). This extremely effective weapon petrified Allied tank crews -- and it was manufactured in the same factory that had developed Owens' shoes only eight years earlier.

With Germany well on the losing side already, a crude yet effective weapon was made:

The German army fashioned the Dasslers' Panzerschreck after the American bazooka: a shoulder-fired steel tube; weight 9.3 kilograms (20.5 lbs); length 164 centimeters (5.4 feet); with a range of up to 180 meters (590 feet). A rocket fired from the Panzerschreck could penetrate steel armor 20 centimeters (8 inches) thick...

Inside the plant, shoe seamstresses -- who had quickly been given makeshift training to work in the armaments industry -- welded sights and blast shields onto the pipes. French forced laborers were also on the production line. "The construction of the Panzerschreck was so simple that, given a little practice, even unskilled workers had hardly any problems manufacturing it," one former employee told local historian Manfred Welker. But even with the simple design, German army inspectors still found themselves discarding many of the weapons made by Herzogenaurach's amateurs on account of their flaws. The complicated and dangerous production of the rockets, though, continued to be handled by the professionals in Vach.

Fortunately for the Allies, the effective tank killer from the shoe factory came too little, too late:

Wherever the specially trained "tank-destroying detachments" made an appearance, there was a significant increase in the number of enemy tanks knocked out. In March 1945, there were some 92,000 Panzerschrecks being used on the crumbling fronts. But the weapons had arrived too late to have a major influence on the war's outcome. It wasn't until 1944 that Panzerschrecks and Panzerfausts could be deployed on a large scale, but by then the military's initial good fortune had long since run out. "If large numbers of Panzerschrecks could have been deployed during the Russian campaign in 1941, Moscow would have probably fallen."

It's doubly good fortune for the brothers Dassler that the Yanks who went to the factory were duped into believing that they didn't contribute to the war effort but had in fact made Owens' shoes:

The Dasslers' brief career as weapons manufacturers nearly proved their undoing. In April 1945, when the Americans marched into Herzogenaurach, US tanks pulled up in front of the factory. The soldiers were still debating whether they should destroy the building when Adi's wife, Käthe, walked out and charmingly convinced the GIs that the company and its employees were only interested in manufacturing sports shoes.

What's more, after the factory was saved, the occupying forces turned out to be a blessing for the two shoemakers. The US Air Force set up its own operations at the former military air base in Herzogenaurach. When the sports-crazy Americans got wind of the fact that the Dassler brothers had produced the shoes that Jesse Owens had run in, they started buying all the products the company could produce. Large orders for footwear for basketball and baseball (and hockey) soon rolled in and gave the company its first boost on the road to becoming a worldwide success story.

It's very interesting stuff, and certainly worth more than a footnote to European history. Indeed, similar concerns would reappear about German dominance leading to military adventurism in the aftermath of German reunification post-1989. How did they deal with that possibility? For better or worse, the Maastricht Treaty is offered up as an even more elaborate mechanism to bind German interests to those of Europe in general.

Brother will kill brother; spill blood across the land
Killing for religion is something I don't understand...

Do Financial Times columnists listen to Megadeth? I admittedly do--and proudly so. One of my trademark posts in the run-up to the global financial crisis concerned "The Subprime Wisdom of Megadeth" which was true then as it is now. However, it seems that the FT's Wolfgang Munchau wants to do me one better by implying that Europe is not only combating financial crisis but is also engaged in "Holy Wars...The Punishment Due" [padarumph...padarumph...padarumph (I can hear air guitars riffing the intro already)].

To avoid possible conflicts of interest, let me disclose that the FT once gave me a fairly lucrative prize a few years ago. While I still regard it as being at the pinnacle of financial reporting alongside the Wall Street Journal sans the latter's op-ed section, I'm beginning to wonder if the standards of the FT in the column writing department are now approaching WSJ neocon territory. Which, of course, is not quite good unless you're a firm believer in bombing Iran ASAP, reducing taxes to single digit rates and other wingnut causes that render you politically radioactive.

Which brings me to Wolfgang Munchau. In the past, I have found him to be a trenchant if pessimistic commentator on the European Union. The British famously produce many Eurosceptics whose dislike for "being enslaved" by Brussels borders on the fanatic. But while you may expect such writing from the worst lot of the Eurosceptic British press, you expect the FT to have higher standards. So it was a big surprise to me in late November when Munchau formed his own Euro-doomsday movement by stating that the Eurozone would expire on 7 December. I suppose that such prophecies not coming true would have quieted him somewhat alike other end-of-the-worlders who've found the world existing past its putative sell-by date, but I guess not. It makes me think that he may be a British Eurosceptic in disguise. After all, he has subsequently disparaged assertions that the French defenders of the euro will fare worse than the British with their neoliberal policies favouring financial services industries.

But that's not all. He now suggests that what we have with Europe's financial woes is nothing less than a rehash of the Thirty Years' War between Catholic and Protestant religions. In his scheme of things Catholic Italy, Portugal and Spain are engaged in a conflict with Germany:

But what remains unchanged from those times are the underlying cultural conflicts between Protestants and Catholics, north and south, Britain versus the Continent. The many decades of European integration have not ended this fundamental mistrust. This is also one the reasons why the Europeans have created such an irrationally unbalanced monetary union. Its rules were not the result of a rational economic argument, but designed to allay very old German suspicions.

While working in London, something striking is that I always had Catholic flatmates for some reason--French and Italians among others. Yet I was the only one who bothered with going to mass on Sunday. It is a fairly well-known observation that Europe is becoming increasingly secular. Many Europeans never bother to attend services, and this phenomenon cuts across Catholic-Protestant divides. Nor is there much stigma in out-of-wedlock births across Europe as evidenced by soaring rates of illegitimacy. Gay marriage in Spain raised nary an eyebrow elsewhere despite vehement opposition from the Catholic church. In other words to quote Munchau, something which truly unites Protestants and Catholics, north and south, Britain and the Continent is a pronounced increase in secularism. That is a cultural unity, not an underlying cultural conflict. The numbers back me up, not Munchau.

It is also odd that Munchau does not mention his bete noire France in this context given that it lies at the heart of the EU-2 Franco-German "Merkozy" leadership complex. Isn't it (nominally) Catholic as well--like thrice-married Nicolas Sarkozy? Again, it is very odd to compare today's goings-on with those of holy wars of so long ago when today's putative combatants are largely indifferent to religious culture. What's more the last I checked, Germany not only is about evenly divided between Protestants and Catholics but is also the proud homeland of the current Pope, Benedict XVI, and an admirable one to boot.

Bottom line: this comparison is ludicrous. While drawing (far-fetched) analogies is par for the course from economic commentators, this one goes far beyond imperial overstretch by invoking religion where it explains next to nothing. What's next, Turkish EU accession will be a re-run of the Battle of Gallipoli?

In 1987, Susan Strange penned a remarkably lousy if widely cited IPE article on continuing American hegemony predicated on its purported dominance in the areas of security, production, finance and knowledge. In the security realm, she made naive count-the-weapons and tot-up-defence-spending arguments familiar to those who've played Top Trumps to figure that, gee, America far surpassed the rest. Which, of course, neglected American humiliation in Vietnam, followed by similar de facto defeats in Lebanon (fleeing after the 1982 bombing of Marine barracks) and in Somalia (fleeing after the 1993 "Black Hawk Down" incident in Mogadishu). With the white man currently unburdening himself of Afghanistan and Iraq, the existence of well-thought out insurgeny strategies or what some call fourth generation warfare (4GW) against erstwhile "powers" is not generally questioned...except by IPE folks who don't know any better. Despite worsening America's already bedraggled finances via these multi-trillion dollar boondoggles, Afghanistan and Iraq remain largely lawless areas.

Now, the manufacture of weaponry is intertwined with the course of economic history. Among other game-changers you can count the Gatling gun and the atomic bomb. But, it was a rifle whose gestation process began during WWII which has arguably had a far greater effect on democratizing (or proletarianizing depending on your ideological persuasion) the tools of violence and giving haughty Yanks their comeuppance on several occasions: General Mikhail Kalashnikov's AK-47. While improvements in its design have been made over the years--the AK-47 will never be the last word in accuracy--its brief has remained that of an easy to produce, low-cost weapon.

From the arsenal of a onetime superpower to being the weapon of choice of guerrillas, revolutionaries and terrorists the world over, everyone knows what you refer to when you mention the "AK-47." Hence, upon its impending retirement as a frontline rifle in the Russian military, Charles Glass (the journalist, not the bodybuilder) has penned a very interesting article on its long, murderous postwar history. Moreover, it's likely that thousands more will meet their maker being at the wrong end of an AK-47 given its continuing ubiquity:

Estimates of the number of Kalashnikov rifles in circulation run as high as 100 million, making it what the Russian president, Dimitri Medvedev, called "a national brand which evokes pride in each citizen". "It is the [Nazi] Germans who are responsible for the fact that I became a fabricator of arms," Mikhail Kalashnikov later said. "If not for them, I would have constructed agricultural machines."

Alike other innovations, it too diffused in its own way:

Mikhail Kalashnikov's assault rifle equalised the battle between modern western armies and third world liberation movements. It was to independence fighters what the Winchester repeater, the "gun that won the West", was to American frontiersmen. Only later did the Kalashnikov fall into the hands of drug traffickers, slave traders and terrorists. Modern criminals adopted it the way Prohibition-era gangsters had the famed Thompson or "Tommy gun", previously the weapon of the FBI and other G-men who were pursuing them.

It is very important because a soldier doesn't have university degrees," Lt Gen Kalashnikov said. "He needs a simple and reliable weapon ... There's simply no time to figure how to operate a complicated weapon and press many buttons when the enemy is advancing on you."

It was here in Southeast Asia where the robust AK-47 proved its mettle against the far more finicky M-16. Would the Vietnam War have ended the way it did had the US armed its soldiers with something easier to handle?

In Vietnam, the American soldier's M-16 may have been more sophisticated and powerful, but the AK-47 worked without jamming through mud and monsoon. Peasants from Southeast Asia to South America made it their weapon of choice, and its distinctive form ended up on flags from Mozambique's to Hizbollah's. The "Kalashin", as it is called in Arabic, also defined an era in the Middle East. Arab armies deployed it, as did Yemeni tribesmen, Kurdish guerrillas, Lebanese militias and the Palestine Liberation Organisation. A Palestinian friend of mine said of the Israeli siege of West Beirut in the summer of 1982: "All the real fighting is done with Kalashnikovs. The rest is just sound effects."

And so the characteristic ringing sound of 7.62×39mm round has resonated--the true shot heard around the world:

I cannot recall covering a war since my first, the Arab-Israeli War of October 1973, in which the Kalashnikov was not a salient feature. Zimbabwe African People's Union and Zimbabwe African National Union fighters carried them in Rhodesia, and the Eritreans fought with them against Ethiopia for more than 30 years. Hizbollah used far more AKs than suicide bombers against the Israeli army in south Lebanon, eventually driving it back into Israel. In Lebanon's civil war, nearly everyone used them.

And its history is still unfolding:

As with one person's terrorist being another's freedom fighter, a weapon symbolises freedom to one side and terror to another. To Vietnamese, Palestinians, Angolans and Guatemalans, the AK-47 was a tool for achieving justice...

"The AK-47 has become the world's most prolific and effective combat weapon," Larry Kahaner wrote, "a device so cheap and simple that it can be bought in many countries for less than the cost of a chicken." Kahaner estimates that the weapon kills about a quarter of a million people annually. Its victims are buried in the ghetto of south central Los Angeles, the forests of eastern Congo and the mountains of Colombia.

Kahaner has written a book and an earlier WaPo op-ed on the weapon. The AK-47's bloody if game-changing legacy will probably long survive the conversion of one superpower to a BRIC and another being flushed down the toilet of history via its current infatuation with economolesters.

UPDATE: No, I am not turning this blog into Guns & Ammo, but do read an insightful comparison between Eugene Stoner (inventor of the M-16) and Mikhail Kalashnikov on the occasion of the former passing away. At 91, Kalashnikov is still going strong.

With apologies to dandy Sgt Pepper:



It was forty years ago today

The dollar-gold standard went away

It's been going in and out of money

For crisis-hit countries it ain't funny

So may I reintroduce to you

The act you've forgotten all these years

Tricky Dicky's dollar-gold killing day



Well this year has yielded a bumper crop of Nixon-era anniversaries with vast implications for the world economy. First came ping-pong diplomacy. Now, 30 years ago today on 15 August 1971, we had Richard Milhous Nixon eliminating the dollar-gold standard. This act not only destroyed the Bretton Woods system of exchange rates pegged to the dollar and, in turn, to gold, but also paved the way for our current system of free(r) floating currencies. (Paging Fred Bergsten.) Suffice to say that things have not been the same on planet Earth since that momentous if sometimes ill-recalled event.



According to some, exorbitant privilege was further extended on this date (which set the stage for John Connally's now-famous remarks about the dollar) was to allow America to print unlimited amounts of greenbacks while maintaining its reserve currency status. Whether you agree or not, it was a most important day in shaping the future course of globalization as we know it. From Buttonwood of the Economist:

Forget Watergate. For economic historians, Richard Nixon’s place in history is secure. He was the president who, 40 years ago, severed the link between global currencies and gold and ended the fixed-exchange-rate system.



Under the Bretton Woods regime, world currencies were pegged to the dollar, which in turn was tied to a set price of gold. Central banks had the right to convert their dollar holdings into bullion. But on August 15th 1971 Nixon, in the face of economic difficulties, closed the gold window, devalued the dollar against bullion and imposed a 10% surcharge on imports. The era of paper money and floating exchange rates had arrived.

In the wake of the Latin American debt crisis, the Asian financial crisis, the subprime crisis, and whatever crises du jour, you do have to wonder if the US exposed all of us to more currency-induced instability than would have been the case had its external imbalances not grown too large to maintain a credible dollar-gold peg. Ah, but that's all gone now...

The Bretton Woods founders had believed that floating rates would be dangerously unstable. But Friedman argued that, provided sensible policies were followed, speculators would act as a stabilising force, preventing currencies from departing too far from fair value.

Let me offer the inevitable counterfactual: Has it been a change for the better? While some of the more persnickety may quibble, it's notable that even this free-market-oriented publication admits that the dollar-gold standard's demise has augured far more financial crises than when it was in place (at least in the industrialized world IMHO):

By contrast, there were no asset bubbles to speak of in the Bretton Woods era and (not coincidentally) scarcely any financial crises. Between 1945 and 1971, the worst calendar-year loss suffered on Wall Street was a 14.1% decline in 1957.



Perhaps the lesson of the past 40 years is that neither a fixed nor a floating-rate system is a panacea. Many governments have used currency pegs as a shortcut towards economic credibility without the structural reforms needed to ensure their economies remained competitive. Floating rates create the temptation for governments to drive down their currencies and grab a bigger share of world trade. That temptation is very strong at the moment and could lead to further political tensions if America opts for another round of quantitative easing. In a world of competing devaluations, gold keeps driving higher. It surged above $1,800 an ounce on August 11th. In terms of the old gold measure, the dollar has devalued by 98% since the end of the Bretton Woods era.

Nixon's legacy lives on, for better or worse and despite others' (stated) intentions to reform it. So let me reintroduce to you the one and only...Tricky Dicky.