Moody's Report

Asian Crisis - Lessons Learnt and Not Learnt

The Asian crisis, which broke out a decade ago, taught observers many lessons but also raised questions that either have uncertain answers or have yet to be answered at all, says Moody's Investors Service in a new report as part of its "International Policy Perspectives" series. The report, entitled "The Asian crisis: what we know, what we think we know and what we do not know", presents Moody's perspective on how the crisis has added to global knowledge of economics and where it has not allowed firm conclusions to be drawn.

"Ten years after the Asian crisis, there are at least three key issues on which we still do not know enough. The understanding of these issues has improved, but not to the point of providing full comfort in terms of risk assessment," says Pierre Cailleteau, Chief International Policy Analyst at Moody's and author of the report. "Probably the most critical issue is the difficulty of disentangling structural from cyclical factors. This stems from the fact that the world economy is undergoing a dramatic change -- probably one of the most important in its history."

Mr Cailleteau also argues that contagion dynamics remain largely undecipherable. This is an issue that interests investors, because of potentially unexpected portfolio correlations, as much as policymakers. In a way, the reflection on contagion prompted a look at the demand side of the capital market -- who finances what and on which basis -- in addition to the more traditional approach based on the supply side -- i.e. the issuer of financial claims such as governments.

The third issue flagged in the Moody's report as one where knowledge is currently insufficient is political risk. "A final lesson is that we don't know how to anticipate political crises. More precisely, while the risk of political turbulence can be foreseen, the unfolding scenario of a political crisis is unpredictable," advises Mr Cailleteau, who notes that this is more a constant in history than a product of globalisation.Moody's new report cites the "lessons that we think we know" as the realisation (i) that current account imbalances raise concerns, although they do not always end in disaster; (ii) that periods of boisterous financial liberalisation often, but not always, lead to problems; and (iii) that local currency debt is generally "better" than foreign currency debt.

"All in all, the situation of emerging market economies has improved considerably since the 1997 crisis, spurred by a strengthening of liquidity positions, the diffusion of a risk management culture -- practices have improved, broadened and converged across the financial industry and the public sector -- and an intensification in trade integration," says Mr Cailleteau. "These are the three lessons that have been learnt. The repeat of an Asian crisis is thus very unlikely and it will require more imagination to determine how and when risks will coalesce and degenerate into the next crisis.

Source - Asian Banker

The Bangalores of Europe
Eastern Europe emerging as outsourcing centre

The United States may turn to India to fill its call-center jobs and the like. But Western Europe is turning more frequently these days to its own backyard, transforming a few urban centers of the former Communist bloc into the Bangalores of Europe.

Countries in Central and Eastern Europe are offering outsourcing avenues for white collar jobs like bookkeeping, data crunching and even research and development, as the region is moving more quickly to integrate itself economically with its more affluent neighbors to the west, reflecting an economic advance that is reducing the high unemployment that plagued these countries for years after the fall of the Berlin Wall and the collapse of the Soviet empire.

Eastern Europe, with an outsourcing business estimated at a little more $2 billion this year, represents just a fraction of the global outsourcing market, estimated this year at nearly $386 billion. But analysts expect growth in Eastern Europe to outstrip the rest of the market over the next four years, expanding by close to 30 percent by 2010, compared to 25 percent growth for the global market.

The reasons for Central Europe's new attractiveness for outsourcing are not limited to promising talent at cheap prices. Central and Eastern European countries also remain some of the world's great untapped markets for services and consumer goods.

But there is no doubt that low wages in the region have their appeal to western companies. Employees in Hungary and the Czech Republic earn a quarter of what employees in Western Europe make; Slovakia's pay runs only one-fifth as much, according to the European statistical agency Eurostat.

If that does not make the area attractive enough, governments also offer incentives, from simplified tax structures to subsidies for new office construction.

Unlike other regions that compete for outsourcing, like India or the Philippines, where English is the sole operating language, employees in Accenture's central European business speak a variety of languages, giving clients access to people who speak English, French, German, Russian, and a host of local languages.

Other than the multi-lingual talent base, another key factor is a stable political and economic environment as many of these countries are members of European Union and NATO.

Source : International Herald Tribune

Why is US afraid of China?

What does China’s emergence as a major power mean for the power equations on the global stage? What are the implications for the global leadership of the United States? Why is the US threatened by China’s ascendence and what are the options before it?

According to a task force under the auspices of the US Council on Foreign Relations, US needs to adopt a much broader and more focused strategy - integration - to maximize the areas of collaboration with China and minimize the likelihood of conflict.

In an article in International herald Tribute, Carla A. Hills, a former U.S. trade representative and Admiral Dennis C. Blair, a former commander-in-chief of the U.S. Pacific Command, say that relationship between the United States and China will shape the future of the planet in the 21st century. The world has seldom smoothly managed the emergence of a great power, and China's rise will call for wise policies by the United States, other countries and China itself.

As China has grown more powerful and assertive in the international arena, those areas where China's interests and those of the United States diverge have been brought into sharper focus. The US concerns are identified as the massive trade deficit arising from China’s economic development, poor human rights record remains poor with progress on political liberty and religious freedom lagging far behind China's economic accomplishments, China’s growing sphere of influence in different regions and the fact that China's economic growth has provided Beijing the wherewithal to modernize its military and develop a robust space program leading to fears that it can soon emerge as a military peer of the United States.

Talking of “the right American policy”, the article suggests a “positive approach, rather than attempting containment”.

“While taking prudent measures to account for the uncertainty of China's future, the right American policy is to seek to integrate China even further into the global community. This positive approach, rather than attempting containment, is the best policy for America to influence China's interests and actions in accordance international norms.”

The task force has identified three elements of the “integration” strategy that the US should follow:

• deepening engagement with China, especially on security issues, rule of law and good governance;
• weaving China more thoroughly into the international community to better address issues like environmental protection, energy security and public health;
• balancing China's growing power by strengthening America's global economic competitiveness, continuing U.S. force modernization and enhancing alliances and security partnerships.

The complete IHT article "Engaging the New China" can be accessed here.

Taiwan post..of 'sino-cism' and 'de-sinicisation'

Taiwan government is pursuing a drive to remove references to 'China' or 'Chinese' from the names of state owned companies, in an attempt to assert a stronger Taiwanese identity. There have been a spate of name changes recently and some more may be in the offing. Chinese Petroleum Corp has become CPC Corp, Taiwan, while China Shipbuilding Corp has become CSBC Corp, Taiwan and Chunghwa Post Co will be known as Taiwan Post Co. Earlier Chiang Kai Shek International Airport was renamed as Taiwan Taoyuan International Airport, as the current independence leaning ruling dispensation seeks to downplay the historic links with the mainland. This was also reflected in recent changes in history textbooks.

The Democratic Progressive Party of president Chen Shui-bian considers establishment of an independent Republic of Taiwan under a new constitution as its objective and its move to mobilise support for the same is leading to sharp political divides. Although Taiwan is a de facto sovereign state, it exists only under the official name of the Republic of China and has little diplomatic recognition. China considers Taiwan as a part of its territory and has even threatened use of force to prevent any attempt to declare independence. US, Taiwan's strongest ally, and most of the international community favour the status quo to be maintained.

DARE TO DIFFER !!

Comments, discussions, debates, different points of view - these are an integral part of a blog. I am grateful to all of my readers who have commented on my posts and shared their views. I am going to give a link to their blogs here (they are not in any particular order).

Tanguy (Local Lingo)

Sanketh Adiga (Freelancer Online)

Dr. Ashok Dhamija (A few weird thoughts)

Alex M Thomas (Undergraduate Economics)

Ranjan Varma (Musings on Money, Business, Finance and Things Intriguing)

Hiren Shah (Stray Thoughts)

Amit Shekhar (Bombay Today)

Pankaj (Lilylalalali..... Online Magazine)
Matthew C Keegan (Mortgage Paradise)

Dattaprasad Parab (Techniques in Civil Engineering)

WHAT'S HOT NOW

Come, join the ongoing debates on GlobeWatch and AKT on Markets. Here are some of the hot topics.

China's Red Hot Growth
Will the boom last? Will the 21st century be the 'Chinese century'? Will the stock market and property bubbles burst? Will the bad loans of Chinese banks trigger a crisis? Will the growing rich-poor divide lead to social unrest? Will the economic reforms lead to political reforms? Is India better placed ? Is there room for two Asian giants to co-exist on the global stage?

India's Inflation
Will the government's recent measures be effective in containing inflation? Is RBI's response adequate? Have we run out of options to fight inflation? What next? Is high inflation inevitable? What to do to improve the distribution network for agri-commodities? How to tackle hoarding? Do the WPI numbers represent the correct picture?

Home Loan Rates
Are bankers right in jacking up the rates? What is better - fixed or floating? How far will the rates go? Should floating rates have a cap?

What can IT Industry do for India?

IT industry's contribution to the resurgence of India as a major economic power on the global stage need not be over-emphasised. What can it do for the transformation of Indian society? And, why should we burden the industry with a 'social obligation' ? Why should it be expected to do more than what happens automatically from its normal business operations ?

These are some of the questions which Amartya Sen dwelt upon in his Keynote Address at the NASSCOM 2007 India Leadership Forum in Mumbai earlier this month on "I.T. and India". He talked about the possibility of the IT industry to reach out beyond its traditional domain. While acknowledging the enormous contributions made by the industry, the nobel laureate emphasised that it can do even more, indeed in some ways, much more.

"This is partly because the reach of information is so wide and all-inclusive, but also because the prosperity and commanding stature of the IT leaders and activists give them voice, power and ability to help the direction of Indian economic and social development."

Full text of the address is available at The Hindu website. This is a must read for all Indian IT professionals. I am highlighlighting some important points from the lecture.

Amartya Sen has elaboarted on the connections between the success of IT in India and some particular features of India's past - intellectual traditions of Indian society that have tended to support the pursuit of specialized excellence, a general attitude of openness influences from far and near, etc.

Social obligations of the IT industry go beyond the very obvious charitable activities such as building hospitals, research centres and other social institutions which have traditionally been performed by Indian industry, including many of the major IT leaders. As information is key to societal change, the IT industry can take a central role in this regard and make a big difference.

"As it happens the key to the success of IT, namely accessability, systematization and use of information is also very central to social evaluation and societal change. There is, in fact, a very foundational connection between information and social obligation, since the moral - and of course the political - need to pay attention to others depends greatly on our knowledge and information about them."

........"This foundational connection also gives the information industry a huge opportunity to help India by trying to make its contribution to the systematization, digestion and dissemination of diverse clusters of information in India about the lives of the underdogs of society - those who do not have realistic opportunity of getting basic schooling, essential health care, elementary nutritional entitlements, and rudimentary equality across the barriers of class and gender. This can also be said about problems of underdeveloped physical infrastructure (water, electricity, roads, etc.), as well as social infrastructure, that restrain the broad mass of Indians from moving ahead. There are particular causal connections also here: an enterprise that hugely depends on the excellence of education for its success - as the IT sector clearly does - has good reason to consider its broad responsibility to Indian education in general."

Strong Q4 Growth in Japan, Doubts Still Persist

Japan's economy has posted better than expected growth in the last three months of 2006. The annual rate of 4.8% recorded in the quarter is the fastest rate in almost three years and has been driven by resurgent consumer spending and capital investment in factories and equipment. Consumption, which makes up more than half of Japan's gross domestic product, rose 1.1% from the previous quarter, rebounding from an equal drop in the July-September period. For the whole of 2006, Japan's GDP grew 2.2%, up from 1.9% in 2005 and down from 2.7% in 2004. Private consumption in the year increased 0.9 percent, down from the 1.6 percent rise in the previous year.

However, doubts still persist regarding strength of the economic recovery. The economy is witnessing its longest expansion since second world war after stagnating in the 1990s. The 5-year expansion seems to be losing steam as growth rates have been stuck in low gear. The Bank of Japan's policy board meets on 20-21 February and the opinion is divided on whether or not it will go for a rate hike.

The country's central bank is waiting for stronger signs of growth and particularly a rise in inflation. The Bank of Japan raised interest rates by a quarter percentage point last July ending the long period of zero rates and would like to raise them further to a more normal level, but signs of strong growth and inflation have proved elusive on one hand and the govenement has shown an inclination for cotinuance of low interest rates, on the other, to keep the economic recovery on track. Meanwhile, Japan's trading partners, notably European nations, have shown concern on the continued weakness of the Japanese curency Yen and would like to see Japanese interest rates being raised to counter this and protect their trade interests.

Related Posts

Bank of Japan's Assessment of Economic & Financial Developments (Jan 2007)

Politics and Economics of Interest Rates (Jan 2007)
Japan Interest Rates on Hold - for Now (Nov 2007)
Japan's Growth Beats Forecasts, Rate Hike May Come Sooner (Nov 2006)

The Surging Inflation - Other Views

India growth story is hot. And, so are the debates on soaring prices and overheating. As the government is trying its best to dowse the inflation and the political heat it has generated (and RBI doing its part on the monetary side), I decided to check out what the blogging community is saying on this. Are rising prices a necessary side-effect of high growth which we must learn to live with or are they symptoms of a deeper malaise? Why has the government not succeeded in containing the prices despite a series of measures over last few months? What should be done immediately? What should be done in the longer run? How to address the supply bottlenecks?

I came across some very good pieces on the subject. The common thread running through most of the discussions on the blogosphere is about supply side constraints especially those relating to agriculture commodities. It's interesting that many of them refer to onions. The ubiquitous onion seems to have become a symbol of price rise affecting common man and having a potential to affect electoral politics.

I am prividing links to two of the blog articles that I found interesting.

The first one is Inflation + Price of Onions. Kamla Bhatt in this post says that infrastructure bottlenecks should be adressed, as lack of food is not an issue as much as lack of an effective distribution channel.

"Inflation is on the rise and you can see it all around you. Price of onions, wheat, oil have all been climbing northwards and have hit the pocket book of many consumers. The economy is overheated and there is no question about that. ...There is no question that infrastructure is one of primary bottlenecks in India. If the infrastructure bottleneck is addressed it will lead to swifter movement of goods and reduce the transportation costs and the overall cost of products."

The second post is from "chutney spears" How to solve inflation in India? The author Shivaji Das talks about the signs of high prices as experienced in an Indian city. In a lighter vein, he offers some suggestions for controlling inflation, including putting curbs on the Bacchan family’s visits to temples to pray for happy marital life for Aishwary-Abhishek and firing the people publishing such high inflation numbers.

Please give your opinion on this.

Inflation defies monetary and fiscal measures, uptick continues

The annual wholesale price index-based inflation continued its upward march, touching 6.73 per cent for the week ended February 3, up from the previous week's 6.58 per cent. The contributory factors remain the same - pulses, cereals, vegetables and non-vegetarian food articles within primary articles, besides Manufactured Products including cement, steel and machinery items. The inflation estimate for the week ended Dec. 9 has also been revised to 5.63 percent from 5.32 percent. The government revises the inflation rate with a lag of two months on additional price data.

The continued 'pincer movement' - the strategy adopted by the government and monetary authorities to fight inflation from both supply side and demand side - has so far not delivered desired results and we may be approaching a stage where all the weapons in the armoury are exhausted.

To tackle the demand side (i.e. inflation arising from rapid growth and credit expansion), the central bank has been tightening the monetary policy. The most recent monetary policy measures include hike in repo rate and cash reserve ratio in quick succession. The Indian economy is expected to expand at a record 9.2 percent in the year ending March 31, following a 9 percent growth last year. Bank loans increased more than 30 percent in each of the past two fiscal years, outpacing the 23 percent growth in deposits.

The central govenrment, on the other hand, has taken a series of steps to address the supply side constraints. These include ban on export of items wheat and milk powder, lifting restrictions on import, reduction in customs duties, invoking restrictive storage laws and delisting a couple of essential commodities from the futures trading exchanges. The latest one is a cut in petrol and diesel prices.

Though all these fiscal and monetary measures will act with a time lag and may help contain the spiralling prices, these may be 'too late, too little' - especially the fiscal measures, monetary tightening measures beyond a point are not desirable as they will hurt the economic growth. On fiscal side, more needs to be done in the immediate term. And, much more on a long-term basis to improve the farm output.

Business Line editorials on the suject

De-fuelling inflation

Weaponless in price war

Related posts on AKT on Markets

War on inflation intensifies - CRR raised again

RBI raises repo rate