Twofish's Blog

June 21, 2008

Notes on national sovereignty and SWF’s

Filed under: china, finance — twofish @ 8:28 am

One other thing that this illustrations is that using national sovereignty and national security has its limits. If China were thinking about buy mines and mineral rights in the United States, then sure the US government can and in fact should stop that it if doesn’t think that it is in the US national interest. However, it’s really tough for the US government to use US national security interests as an excuse to block in deal in which China buys stakes in Brazil and Australia.

In situations where you are dealing with small impoverished nations, you run into the problem that you have counterparties that aren’t able or willing to make a good deal and the problem of exploitation becomes a problem. In the case of Zambia or Uganda, you really have questions as to whether the government is acting in the Zambian and Ugandan national interest or whether they have the expertise to tell a good deal from a bad one. This definitely is not a problem with Australia, and I don’t think that it is a major problem with Brazil. Both those governments can and should say no if the deals that they are offerred are bad ones.

(Also the problem of insufficient expertise isn’t only a problem in developing countries. The state of Florida and a lot of municipalities has run into huge problems because they didn’t have the expertise needed to run some of their funds.)

Personally, the model I think that CIC should look very closely at is Calpers. However, I think that one thing that has changed in the last three months is that the financial problems on Wall Street have made the government concerned about having too little control over investment decisions.

My own thinking on these issues is very heavily influenced by Von Mises and his ideas on the socialist calculation problem, which is a very good explanation about why central planning doesn’t work for national economies.

Another point is that if CIC turns out to work well, there’s nothing that keeps the US from taking the $2 trillion in the social security trust fund and creating its SWF. I’m not worried too much about CIC “taking over the world.” I’m much more worried about CIC shooting itself.

One other way of thinking about this which tells you how much things have changed in the last few months is that you can think of the holdings of the Federal Reserve as an SWF which is invested in real estate and financial services.

Bernanke has crossed the Rubicon. The old rules are no longer constraints and everyone is busy trying to figure out what the new rules are.

More notes on the China Investment Corporation

Filed under: china, finance — twofish @ 8:25 am

Let’s be very clear about one thing. CIC is and for the forseeable future will be political in the sense that is will be managed in a way that serves to advance Chinese national interests as defined by the Communist Party of China, and that means that CIC will be used as a tool to increase China’s global political and economic interests. This is just a reality. The United States may not like it, but it has to react to this since there isn’t any chance that the US can change this.

What makes this an interesting project is that China is clearly acting in a way so that large segments of the United States benefit from rising Chinese economic and political power (Walmart for example), and can be expected to support it. This is very different from the behavior of Russia or even Japan. China doesn’t want its rise to be zero-sum, and this isn’t out of altruism rather than self-interest. If there is a national consensus within the United States that China’s rise must be stopped then this makes it much more difficult for China to get more political and economic power.

The question that Beijing in interested in becomes *how* can CIC best advance Chinese national interests, and there different people have different ideas. What makes this a difficult question is that some of the obvious ways of using CIC to advance Chinese interests won’t work. I’m not too thrilled about using CIC to establish control over strategic resources and very much opposed to CIC given below-market financing to SOE’s, because based on looking at people doing similar things in the past, my belief is that those activities do not aid in adding to Chinese comprehensive national power, and will end up being a drain on Chinese wealth and power. But I have an open mind about this.

In particular, my personal belief is that to meet its political goals, CIC must remain commercial in the sense of adding wealth to the national treasury rather than subtracting from it, and that things such as promotions and funding decisions be made such that CIC makes a profit, and that people be rewarded when CIC generates wealth and punished when it doesn’t. This doesn’t create large contradictions with the political goals of CIC, since there are lots of different ways of making money. If it is choice between making money with strategic resources and making money with something else, then sure, it’s alright to discuss which industry is going to help China. The commercial constraints come in when its a choice between losing money and making money.

The reason commercial constraints are important is because you end up with lots of principal-agent problems, and you don’t want to end up with a situation were CIC benefits its funded corporations and managers, but hurts the national interest. If you impose a “make money for us or we will fire you all” condition, then it makes it harder for the people running CIC to loot the company, whereas if you merely use vague concepts like “national interest” without controls, then the managers of CIC will act as if “national interest” means moving all of CIC’s money into their personal bank accounts and leaving the government with massive debts.

So in this sense, not only are “political” and “commercial” not in conflict, but the requirement that CIC make money and the desire for the Communist Party to exercise control are not in conflict, since the requirement that CIC make a profit provides a means by which the Communist Party can exercise control over the management of CIC and align the interests of the management with the interests of the Chinese political leadership. The policy here is “if we get money and power, you get money and power.”

The reason business and economics is vitally important is that the Chinese strategy for getting money and power requires that the game be non-zero sum. If more money and power for me means less money and power for you, then we can’t rationally cooperate, but if money and power are generated (which is the goal of business), then we can work in ways that help both of us.

Having two groups of people stare each other in the eye and figure out how they can based interact in a way that benefits them both is almost the definition of commercial.

June 7, 2008

How Biofuels Could Starve the Poor… Not….

Filed under: china, finance, politics — twofish @ 10:43 am

Personally I think that the Runge and Senauer paper is non-sense. It ignores the fact that most people in developing countries are food producers (i.e. peasant farmers) and not food consumers, and so that rising food prices are a *good thing* since they will be able to sell their crops at a higher price.

High food prices do hurt the urban poor, but since the urban poor are the first to riot, developing world governments tend to keep them busy and well fed.

One might want to read “The Road to Hell: The Ravaging Effects of Foreign Aid International Charity”. The book argues that food exports to the developing world are generally a bad thing, since they leave the developing world dependent on agri-business and also put lots of farmers out of work. One should note that the policy agenda of the developing world at the WTO has been to get developed countries to *reduce* subsidizes for agricultural production.

This has some impact on Chinese decision making. One thing that I’ve noticed is that the Chinese government doesn’t seem to be making food inflation a huge priority and that is largely because by letting food prices rise and fixing prices of oil and fertilizer, you have wealth going into rural areas which is the number one priority of the Chinese government.

One other thing this points out is how complex economic decisions really are.  One thing that I’ve noticed is this generalization in which you point out how biofuels are hurting some poor people and from these situations one assumes that biofuels and high food prices hurt all poor people, which they don’t.  If you are a poor urban dweller, then yes high food prices will hurt you.  If you are a poor farmer, then high food prices will help you.

One thing I do before I write something is to do a quick google to do a fact check, and the nice thing about doing this is that I usually learn something new in the process.  For example, the reason I wrote some of this was because I was reading in Bloomberg magazine about the riots in Haiti over higher food prices, and how this proves that biofuel subsidies are destroying to poor of the world.  So to justify my statement that most poor people in the world are farmers, I did a quick google check, and what I found was quite interesting.  Most poor people in the world are farmers, but I was struck at how different the economies of the world were from each other.  For example, most people in China, India, Mali, and Mozambique are farmers, but most people in Peru, Algeria, and most significantly Haiti, aren’t.

Here is a map that I found….

One thing that this does tell you is how extraordinarily different the economies of different places are, and how generalizations about things will or won’t work have to be made very carefully.

Trade – China, Mexico, and Iraq

Filed under: china — twofish @ 9:01 am

I really don’t think that would change things. If China removed all auto tariffs, then they would end up being imported from Mexico rather than the United States. The interesting thing is that the WTO negotiations between China and the United States were nowhere near as tough as the ones with Mexico.

There are two things that make US-China trade very different from US-Japan trade with respect to labor. The first is that with the exception of textiles, change the US-China trade balance really does not help manufacturing in the US. If China disappeared, then you’d end up with manufacturing going off to Mexico, Vietnam, or Bangladesh.

The second thing that makes the politics very different is that there are labor unions that benefit greatly from China trade. The International Longshore and Warehouse Union for one and the Teamsters for another.

Finally, I really think that the root cause of all of this is Iraq (just like a lot of the economic turmoil in the 1970’s was the result of paying for Vietnam). Think about it. The US has spent hundreds of billions of dollars fighting a major regional war. Your taxes didn’t go up. Where is this wealth to fight the war coming from? I don’t think it is much of a coincidence that the world economic system changed right almost the second that US troops marched across the border.

Notes on the IMF and its role (or lack thereof) in current economy

Filed under: china, finance — twofish @ 8:33 am

One basic principle of “getting things done” is that authority and responsible have to be matched. If you make someone responsible for doing something, then you have to give them authority to do it. If you what to give them authority, then you better make them responsible for the consequences.

In the case of currency exchange rates, making Treasury responsible for it is silly if you want anything done, because they have zero authority to do anything that might actually change exchange rates.

Now the Federal Reserve *does* have authority to set exchange rates. The curious thing is that it has no responsibility to do so. Under the Humphrey-Hawkins Act, the responsibility of the Federal Reserve is to maintain growth and minimize inflation. The interesting thing is that currency exchange rates isn’t mentioned, and even more interesting neither is balance of trade.

Part of the reason this is the case, is that under Bretton-Woods the institution that maintained exchange rate stability and balance of trade was the IMF, but they have basically self-destructed and become completely irrelevant in global economics. The only real power that the IMF had after the collapse of Bretton-Woods was the power to grant or withhold funds in a currency crisis, but they used that power so badly in the 1990’s that everyone has created these huge reserves, at which point the IMF became irrelevant.

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