Professional Documents
Culture Documents
ECONOMICS
RESEARCH
2013
The Langley
Intelligence Group
Network
Brent M. Eastwood, PhD
Contents
TO REVIVE JAPAN, ABE'S ARROWS MUST FIND THEIR TARGET ............................... 3
October 25, 2013 | Global Economics | Asia-Japan .............................................. 3
FRANCE AIMS EU TAX CUDGEL AT US TECH GIANTS ............................................... 8
October 3, 2013 | Global Economics | Europe-France .......................................... 8
WHY ECONOMICALLY FREE COUNTRIES ARE OFTEN POLITICALLY FREE.............. 12
October 3, 2013 | Global Economics | Asia and the Pacific ................................. 12
TRANS-PACIFIC TRADE PACT OFFERS TEMPTING ALTERNATIVE TO WTO ............... 17
October 2, 2013 | Global Economics | Asia and the Pacific, The Americas .......... 17
HOW WE KNOW THE ERA OF SECRET SWISS BANK ACCOUNTS IS OVER .................. 21
September 17, 2013 | Global Economics | Europe .............................................. 21
ROGUE CRIME WAVE KNOCKS MALAYSIA OFF BALANCE ........................................ 25
August 30, 2013 | Global Economics | Asia and the Pacific ................................ 25
TINY NONPROFIT CASTS WIDE NET IN HUNT FOR SANCTIONS VIOLATORS ............ 30
August 28, 2013 | Global Economics | Middle East-Iran ..................................... 30
EUROPEAN POLITICIANS STUMPED BY HORDES OF JOBLESS YOUTHS ..................... 34
August 26, 2013 | Global Economics | Europe .................................................... 34
GREECE CAN KEEP THE LIGHTS ON, BUT COLD WINTER AWAITS ............................ 38
August 2, 2013 | Global Economics | Europe ...................................................... 38
HOW THE EMERGING MARKETS CRASH IS HURTING GLOBAL GDP .......................... 43
July 5, 2013 | Global Economics | Asia and the Pacific ........................................ 43
CHINA: DESPITE PLAN, SWEEPING ECONOMIC REFORM DIFFICULT ....................... 47
June 12, 2013 | Global Economics | Asia and the Pacific ..................................... 47
BITCOIN VIRTUAL MONEY OPENS DOOR FOR TERROR FINANCE ............................ 52
April 15, 2013 | Security, Global Economics | Asia and the Pacific, The Americas 52
SOUTH KOREA WILL RECOVER QUICKLY FROM NORTHS ECONOMIC WARFARE ...... 57
April 11, 2013 | Security, Global Economics | Asia and the Pacific ...................... 57
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BOJs qualitative easing has to do with the type of asset purchases the bank takes on
its balance sheet. It will now own a greater amount of less liquid, riskier assets, such
as exchange-traded funds (ETFs) and real estate investment trusts (REITs), according
to research conducted by the Swiss National Bank in April. The Bank of Japan also will
hold longer-term Japanese government bonds and it will pump up its loan program to
get more cash in circulation.
The fiscal prong of Abenomics includes a huge investment of $116 billion, mostly
targeted at the same infrastructure improvements Japan has tried in the past. Other
parts of the package will focus on renewable energy and encourage private
investment in nascent industries.
These first two provisions are generally uncontroversial, but at $10 trillion and 245
percent of GDP, Japans mammoth debt problems have forced Abe to prescribe bitter
medicine: To pay Japans health care and social welfare expenses, estimated at
around 24 percent of GDP, he has decided to raise the countrys national
consumption tax to 8 percent from 5 percent beginning in April 2014.
The tax would go up to 10 percent in October 2015. Such gigantic tax hikes are
expected to cut the budget deficit in half by 2016 and balance the budget five years
later, Reuters reports.
The third policy lever of Abenomics is a program of economic structural reforms. Abe
will attempt to deregulate industries bogged down in red tape, such as energy,
environment and health care, according to the Council on Foreign Relations.
Next, he will encourage more women to join the workforce by providing better day
care opportunities. This reform is designed to foster growth of two-income families
that can spend more on consumer goods.
Abe also will target Japans antiquated labor laws. An estimated 5 million redundant
employees are now subsidized by corporations. Allowing firms to lay off these
workers would promote a more efficient allocation of capital and encourage
investment, according to Abes economic advisers.
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Trade is on the agenda as well. Abe decided in March to join negotiations for the
Trans-Pacific Partnership (TPP) trade pact with the United States and 11 other
countries, spanning the Pacific from North America to the Far East. For more on this
issue, see LIGNETs Oct. 2 report: Trans-Pacific Trade Pact Offers Tempting
Alternative to WTO.
Mixed Results
Japans GDP has reacted positively so far, with first-quarter annualized growth at 4.1
percent and the second quarter at 3.8 percent, according to The Economist. The
Nikkei stock index has risen by more than 35 percent year to date, although down
from a mid-May peak.
Japans loose monetary and fiscal policy was meant to devalue the yen, and it has
worked: The yen has fallen 13.2 percent this year against the U.S. dollar. Thirty-year
and 10-year government bond yields are down, making it easier for Japan to service
its debt.
On the other hand, the hoped-for rise in exports has lagged. Economists had
predicted a 15 percent rise in Japanese exports last month, but growth only hit 11.5
percent year-over-year, according to Reuters. Inflation hit 1.1 percent in September,
but wages are not rising and consumer prices have increased mainly due to higher
energy costs. This type of inflation is not what Abe promised.
Analysis
Global economists generally agree that the monetary policy aspect of Abenomics is
unprecedented. Greg Ip of The Economist believes that Bank of Japan Governor
Haruhiko Kuroda has a vociferous and full-throated commitment to achieving these
goals, as opposed to constantly making excuses.
The financial markets have shown their approval of Abenomics, especially the
quantitative and qualitative easing. This has translated into the best business
sentiment in Japan in six years.
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Stimulus spending on construction has been less robust and in the past has not
trickled down to create jobs, improve capital investment nor promote consumer
spending. The disbursement of construction contracts over the years often results in
waste, fraud and abuse.
Abes remaining policies are problematic. Raising consumption taxes to pay for health
care and welfare spending may sound like the right type of austerity plan, but it
causes political problems. Some detractors of Abenomics believe the tax hikes could
be disastrous. Critics say the last time Japan tried to raise the sales tax in 1997 the
move put Japan on the road toward financial crisis.
Japans deficits and debt problems are not likely to go away no matter how much Abe
tinkers with fiscal policy. Japan has an aging society that will force the government to
continue to borrow and service debt at an unsustainable level for the next decade.
Labor laws need reform but, like Social Security and Medicare in the United States,
changes to these entrenched practices face resistance and only help Abes political
opponents. The parliament has already indicated that labor reform is off the table.
Legislators have expressed willingness to experiment with special economic zones,
where pilot projects with new labor policies might be undertaken. The zones are still
at the conceptual stage, but they could help create a surge in small-business
entrepreneurship, something Japan wants to encourage.
Abe has taken an interesting position in terms of workforce development with his
goal of attracting more women to the labor force. Japan is clearly stuck in the 1950s
in terms of gender equity. Women hold only about 6 percent of management
positions in Japans top companies.
Women are expected to quit their jobs when they have children. If Abe could increase
the number of women in high-paying jobs, he might move the needle on GDP growth.
Japans entrenched special-interest groups, such as rice growers and beer makers,
are no fans of free trade, so the TPP trade pact will face political headwinds as well.
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Even if Japan eventually joins the bloc, it may not create the expected growth in
exports or new jobs.
Meanwhile, the Abenomics currency devaluation gambit has not achieved export
growth either. It has produced the wrong type of inflation, economists say, without
the needed increases in wages and consumer spending.
Conclusion
One way to look at Abenomics is to evaluate the policies on the merits of its threepronged approach. In this view, Abenomics would receive high grades on monetary
policy, low grades on fiscal policy, and mediocre grades on economic reform. The
structural change aspect of Abenomics, often called the third arrow, is encountering
political pushback. Abes arrows are simply not sharp enough to pierce that
resistance and create an economic environment that will result in rapid GDP growth
over the next several years.
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National Security Agency used online data from personal accounts in Europe for
intelligence collection and analysis.
Facebook could become the subject of the data tax and privacy rules if the proposals
are enacted. The EU also could regulate Amazons e-books and take Apple to task
over its app store. It might require Apple to allow European users to have portable
user profiles that can be shared, a measure that would give smaller Internet firms in
the euro zone greater access to new customers in the digital economy.
Google already has been targeted by EU regulators for antitrust issues regarding its
search rankings of European companies. The EU has been studying Googles
advertising and data mining practices over the past three years, allegedly for
infringing on civil liberties.
The head of the EU antitrust agency, Joaquin Almunia, said Oct. 1 that a tentative deal
was in the works that would require Google to give higher visibility to competitors
information during Internet searches instead of blocking them, as European tech
firms allege.
Another oversight body, French data privacy commission CNIL, told Google in June
that it had three months to comment on how it is complying with data protection laws
in France or face a fine. So far Google has not implemented the requested changes,
said a CNIL spokesman, IDG News Service reported on Sept. 27.
Google contends that it is following European law and working in good faith with
CNIL.
Its worth noting that France's sovereign wealth fund, Fonds Stratgique d'
Investissement, invests and holds equity stakes in domestic Internet companies. In
2012, the fund invested about $32 million in Viadeo, a Paris-based social network
that is similar to LinkedIn.
France also had investments in French tech firms such as Dailymotion (video sharing)
and Skyrock (blogging) at that time, the New York Times reported in April 2012.
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It is interesting that the French government does not often publicly disclose that it is
a major investor in French Internet companies. Such conflicts of interest are rarely
noted when French politicians accuse American companies of antitrust violations and
suppressing competition.
U.S. Internet companies have not commented on the French push for more EU-wide
regulations and taxation. Privacy regulations and new taxes in various countries are a
cost of doing business for American technology companies when they expand into
global markets.
The new French regulatory and taxation agenda could be mere saber rattling and
political posturing. It also is not clear what views individual European Parliament
members hold on the subject.
The British government already has expressed opposition to a European Internet
financial transaction tax, according to a Sept. 20 report in the UK Telegraph. Critics
in Britain already are questioning how the data-tax measures could be enforced, if
they are passed.
Conclusion
The French pursuit of regulation and taxation targeted at U.S. technology companies
is not so surprising. Foreign businesses expect to face fees and oversight when
operating overseas. But the proposed rules may be over-reach by French bureaucrats
attempting to protect their own Internet startups. French leaders also often fail to
mention that the government owns equity stakes in domestic Internet ventures, a
clear conflict of interest.
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Hong Kong
Singapore
Australia
New Zealand
Switzerland
Canada
Chile
Mauritius
Denmark
10
United States
The New York City-based democracy watchdog Freedom House conducts an annual
study that evaluates countries based on the extent to which their governmental
institutions embrace political rights and civil liberties.
The Freedom in the World survey ranks 195 countries on political aspects of the
electoral process, democratic pluralism and participation and how well the
government functions. It also grades states based on civil liberties regarding freedom
of expression and beliefs, the right to associate and organize, rule of law and
personal autonomy and individual rights.
This years list appears to show that countries that do well on the Heritage Economic
Freedom rankings also score high on political and individual freedoms as measured
by Freedom House. Eight of the 10 top nations on the economic freedom index also
got top ratings from Freedom House in 2013.
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Two of these states, Hong Kong and Singapore, received only mediocre rankings in
political rights and civil liberties from Freedom House.
There also seems to be a relationship between countries that are the least
economically free and their low scores in political freedom. The 10 bottom dwellers in
economic freedom also receive some of the worst grades from Freedom House.
These countries include North Korea, Iran, Cuba, Burma, Eritrea, Equatorial Guinea,
Democratic Republic of Congo, Republic of Congo, Turkmenistan and Zimbabwe.
Analysis
There appears to be a positive correlation between country rankings on economic
freedom and scores on political freedom and individual liberty. The rankings on both
lists link authoritarian and totalitarian regimes such as North Korea, Cuba and Iran
with low levels of economic freedom.
This would come as no surprise to free-market economists such as Milton Friedman,
Friedrich Hayek and Ludwig von Mises. These pioneers advocated government
institutions that encourage increased levels of economic and individual liberties.
Friedman especially believed that economic and political freedoms go hand in hand
and that countries cannot have one without the other. Many of his writings concluded
that developing economies that emphasized free-market ideals often resulted in a
more democratic and open political climate.
Friedman went on a lecture tour to Chile in the 1970s and encouraged Chilean
dictator Augusto Pinochet to enact free-market reforms. While Friedman has been
criticized for his work there, the country slowly transitioned from the dark days of
Pinochet to a country that scores well on both economic and political measures of
freedom.
What causes the link between economic freedom and political freedom? Freidman
would say that the freedom to choose the individual freedom to vote in elections
or associate freely in a pluralist democratic system also brings people to power who
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guarantee the rule of law, the enforcement of contracts and the protection of property
rights.
These traits often produce a higher level of economic freedom. Alternatively,
countries with statist or authoritarian governments often have political leaders and
institutions that do not promote individual rights and civil liberties. Most countries fit
somewhere in the middle and are an amalgam of varying degrees of freedom.
Transitioning or developing countries known as the BRICS Brazil, Russia, India,
China and South Africa get mixed grades on the rankings. China and Russia finished
136th and 139th on the Economic Freedom Index. Both are considered not free by
Freedom House, with poor rankings on political freedom and civil liberties.
Brazil, India and South Africa are considered free by Freedom House and,
surprisingly, South Africa had the best economic freedom score among the trio
finishing 74th in the world. India, the worlds largest democracy, is still hobbled by
corruption, according to Heritage. Brazil, ranked 100th in economic freedom by
Heritage, struggles with an inefficient legal and bureaucratic system.
The most unexpected developing country to appear at the top is Mauritius. The small
African island in the Indian Ocean east of Madagascar has developed strong
institutions in which all the pillars of economic freedom are solidly maintained.
Mauritius is considered free politically even though it has endured plenty of public
corruption over the years.
In what can be considered a disappointing finish, the UK was ranked by Heritage as
only the 14th freest economy in the world, even though its political environment is
believed to be top notch, according to Freedom House. Despite such a healthy level of
democratic governance, the UK still finished behind Bahrain and Estonia in economic
freedom.
Ironically, former British colonies and Commonwealth nations such as Hong Kong,
Singapore, Australia, New Zealand, Canada and the United States all ranked better
than Britain in economic freedom. Even Ireland finished better this year.
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After the global economic crisis of 2008, much discussion has been devoted to the
rise of authoritarian or state capitalism. Countries that have poor ratings on both
economic and political freedoms, such as China and Russia, would fit under this
banner.
Countries with mixed results (high economic freedom and low political freedom) such
as Hong Kong and Singapore can also be considered states with authoritarian
capitalist tendencies.
Ian Bremmer, Robert Kagan and others have written about governments that believe
in more central command over their economies. It may be too early to say if this trend
will continue or if these countries will grant more political freedoms to their citizens.
The future of governance in China greatly depends on solving this puzzle.
Conclusion
Some correlation appears to exist between countries that score high on both
economic and political freedoms. Similar comparisons can be made with countries
that have totalitarian governments and controlled economies. It can be difficult to
make generalizations based on the range of grades a country may receive in any
given year from various policy institutes. But lists of freedoms reveal much about a
given states economic and political institutions. They can also be a useful barometer
to forecast whether a country can successfully adapt to improvements in economic
development, income distribution, human development and environmental health.
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TPP countries represent about 40 percent of the worlds gross domestic product and
about one-third of all international trade. According to the U.S. Trade Representative
(USTR), the United States exported goods, agricultural products and services worth
nearly $1 trillion to the Asia-Pacific region in 2012. That comes to about 61 percent
of all American exports.
The TPP is a very broad agreement that seeks to energize trade negotiations for
certain countries that became frustrated with the stalling of the Doha Round of World
Trade Organization (WTO) talks. These talks have produced few results since they
started in 2001.
TPP participants, according to World Bank President and former U.S. Trade
Representative Robert Zoellick, are the can-do countries as opposed to the wontdo countries, the Financial Times reported Sept. 22.
The USTR explained in July how the Trans-Pacific Partnership will create rules that
cover market access, rules of origin, technical barriers to trade, investment, financial
services, e-commerce and transparency. However, progress has been slow as the TPP
has endured 19 rounds of negotiations since 2009. The latest talks were held in
Washington from Sept. 18-21 to prepare for Round 20 scheduled for Bali, Indonesia,
Oct. 3-8.
In a report published Sept. 25 by Japans Yomiuri Shimbun, analysts said that
intellectual property concerns in the United States could derail the negotiations. The
results of the meeting here suggest the outcome of the talks for the multinational
framework has become even more unpredictable ahead of the negotiations targeted
year-end conclusion.
The White House, on the other hand, thinks the Indonesia round will yield a major
breakthrough and that the agreement can be reached before the end of 2013.
The U.S. Congress is less optimistic and wants the president to address the issue of
Japan and other Asian countries practice of currency manipulation. Some members of
congress believe Japanese currency manipulation makes its imports to the United
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Along with these difficulties, making all parties completely satisfied with the outcome
will be impossible without substantial compromises. Intellectual property alone is
probably a show-stopper, even if the participants could agree to mitigate patent
disputes regarding the use of generic drugs in developing countries. Patent issues
with technology and entertainment are a whole different set of stumbling blocks.
In Asia, state-owned enterprises have many advantages over private businesses in
terms of subsidies and other forms of government support a type of economics
known as authoritarian capitalism. Vietnamese businesses are especially dependent
on government, so those advantages will have to be navigated somehow.
Every TPP participant protects favored industry and agriculture in one way or another.
Nearly all agricultural commodities will likely be considered non-negotiable by one
country or another.
Conclusion
Despite the hurdles it faces, the Trans-Pacific Partnership is actually fairly good trade
policy. Its inclusive, it spans the globe and it awards free-market principles.
Negotiations will probably not be settled until late in 2014, but as other countries
notice the TPPs momentum and advantages, participants may find other countries
are willing to join. Beijing can be expected to continue to agitate as the proceedings
develop. A successful TPP negotiation could convince the European Union that the
United States is serious about international trade and may allow a future EU-U.S. free
trade agreement that could jump-start the global economy.
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Swiss banks, which hold an estimated $2 trillion in foreign deposits, have also been
targeted by U.S. investigators. UBS, the largest Swiss bank, agreed to avoid an
indictment in 2009 in return for a prosecution agreement that included a $780
million fine and required the disclosure of account information on 4,500 individuals,
the New York Times reported Aug. 29.
Another historic Swiss financial institution, Wegelin and Co., pleaded guilty to
conspiracy charges at the beginning of the year and was fined $74 million. Wegelin
closed down for good in January after being in business since 1741. Fourteen other
Swiss banks are under investigation, including Credit Suisse Group, HSBC Holdings
and Julius Baer, the Economist reported Sept. 7.
As a result of this dogged pursuit by the Justice Department and the Internal Revenue
Service, the Swiss government agreed to a voluntary disclosure deal involving the
other 285 financial institutions located there. Swiss authorities will now force banks
to close American accounts that are determined to be used for tax evasion, require
Swiss banks to divulge information about transfers of American money to other tax
havens, and assist U.S. investigators in other ways. They have until the end of the year
to cooperate or face legal consequences.
But disclosing information is only part of the amnesty program. Offending banks also
have to pay fines in proportion to the amount of money that has been hidden from
the IRS since 2008. These penalties can be from 20 percent to 50 percent of the
dollar value of the illegal accounts.
The 14 banks already under suspicion will not be granted amnesty by the Justice
Department, and they will still face criminal prosecution.
If someone has an account in Switzerland, it is beyond foolish to think that that
account is going to remain secretSwiss bank secrecy never should have been viewed
as a mechanism to commit criminal acts, Assistant Attorney General Kathryn Keneally
told Bloomberg.
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Keneally said her battalion of 360 lawyers will now go after other countries where
Americans try to hide money, including India, Israel, Liechtenstein and Luxembourg.
Banks in Caribbean nations will also be investigated.
The Swiss financial sector has been so shocked by the legal storm that an industry
representative apologized this month for banks that had helped people hide money
and cheat on their taxes. We acted wrongly and we displayed wrong conduct,
Reuters quoted the chairman of the Swiss bankers association as saying Sept. 3.
Analysis
It is nothing new for politicians to shake their fists at foreign governments that
illegally shelter money, but the relatively quick expansion of the law enforcement
efforts against Swiss banks and their depositors is noteworthy. In five years, this
crackdown went from an obscure Senate report on overseas tax evasion to a
watertight, comprehensive enforcement program that affects all 300 Swiss banks.
The U.S. Justice Department even got an unexpected public apology from the Swiss
banking industry, and perhaps more important, U.S. law enforcement sent a message
to the world that the Swiss reputation for privacy, secrecy and discretion for their
clients did not mean account holders can break the law.
Other Swiss banks may be forced into bankruptcy similar to Wegelins fate, but the
sector should be able to survive with fewer members. The U.S. government also
resisted an easy fix that the Swiss government first proposed for the banks to pay a
one-time lump sum fine to make all their legal problems go away. The Justice
Department refused to back down and ended up getting an enforcement mechanism
with real teeth and global reach.
What is not being discussed is American secret funds in Swiss banks that could have
been tied to money laundering for terrorists and criminals. HSBC Holdings already
paid a $1.9 billion fine to the United States in 2012 for allegedly laundering cash for
terror groups and drug cartels. A former employee named Everett Stern opened the
curtain on HSBCs wrongful dealings. HSBCs Swiss accounts are currently under
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investigation and it is plausible that other dirty deals perpetrated by the British bank
could emerge.
Unfortunately, American tax evaders have had plenty of time to pull assets out of
Switzerland and park them in other countries that allow safe havens. The Justice
Department will have its hands full dealing with governments that may not be such
close allies with the United States. But the Swiss should be able to assist investigators
on following the money trail, especially if it has to do with transnational crime, drug
dealing and terrorism. Israel, Lichtenstein and Luxembourg will likely cooperate if
their banks are implicated.
FBI counterterrorism agents could be brought into the mix if they find enough
evidence pointing toward crime and terror in connection with secret bank deposits.
Governments such as Israel may already be assisting the FBI in this realm.
Conclusion
The publicity from U.S. investigations and prosecutions regarding Switzerland may
have a deterrent effect on other individuals and banks around the world from hiding
cash and laundering money illegally. The era of the secret numbered Swiss account,
so often referenced in movies and popular culture, could be over. However, it is very
likely that depositors have found other countries that look the other way when it
comes to secret accounts. This will be a significant challenge for the U.S. government,
but Swiss authorities are likely to cooperate in further investigations that will shine
light on tax cheats or criminals in other countries.
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Analysts at CIMB Group, one of the countrys leading financial institutions, believe
strong foreign reserves, high national savings and low external debt will allow the
country to withstand any coming financial turbulence.
Yet other observers warn that a financial storm is brewing in Southeast Asia. Malaysia,
according to this view, could have difficulty maintaining the level of foreign
investment that previously supported frothy asset prices among the emerging
economies of Asia.
Investors who have turned bearish on Malaysia cite four problematic trends. First, the
Malaysian ringgit is foundering. The currency has been in a broad decline since May
against the dollar, British pound and euro, off by around 11 percent against each.
Secondly, Malaysias benchmark stock index is down by nearly 6 percent from recent
highs set in late July and is up a disappointing 3.5 percent over the latest 12-month
period.
Third, investors are reducing exposure to Malaysian bonds. More debt instruments
have been sold than bought, resulting in negative outflows over the past 12 weeks, a
danger to the ringgit. Finally, lower exports could give Malaysia its first trade deficit
in 16 years.
Malaysias policymakers insist these conditions are cyclical and that the country has
ample foreign reserves to fend off global currency vigilantes who may be shorting
the ringgit on a bet the currency will fall. Stunned by the rapid declines of currencies
in India and Indonesia this month, Malaysias central bankers quickly intervened on
Aug. 20, reportedly selling more than $1 billion of its reserves to steady the ringgit.
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Now, however, some crimes have turned violent. Dozens of fatal shootings have been
reported this year, including daylight executions thought to be related to drug deals
or criminal gang activity. Knife-wielding robbers are suddenly wounding and
terrifying their victims.
Gunfire is common. In the city of Penang, 19 shootings have been reported so far in
2013. According to The Economist, 38 violent crimes occurred in one four-month
period across Malaysia, all involving firearms.
Business leaders worry that rising crime could affect the economy and discourage
foreign investment. People feel scared and they dont commit to investments, said
Datuk Lim Kok Cheong , local president of the Chinese Chamber of Commerce.
Even our own people dont come out at night. The government has to take the
necessary steps, there are firearms everywhere, the chamber leader said, according
to a report posted Aug. 26 on The Malaysian Insider website.
Analysis
Malaysias economy is a puzzle. It sends both encouraging and discouraging signals.
Its current maladies could be a bump in the road or the beginning of a downturn.
Foreign investors sense that Malaysia might be at a tipping point and many of them
have already removed their money from the country.
However, there are larger forces at work. Malaysia might instead simply be getting
punished by being lumped in with larger, struggling emerging markets, such as India
and Brazil. Capital flight is affecting emerging economies from Latin America to the
Far East.
This flight can be attributed to the U.S. Federal Reserve and the general perception
among investors that the Fed soon will wind down its easy-money policy. Central
bankers in the United States have engaged in buying U.S. Treasuries and mortgage
securities from the financial markets, an activity known as quantitative easing. This
policy lever is used to suppress interest rates in the United States. Monetary easing
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Pundits have offered various explanations for the rise in crime. Gangs are stronger
and more sophisticated. A mass prisoner release in 2011 put many hardened
gangsters back on the streets. Police are perceived as corrupt and not trained in
modern crime-fighting techniques.
In response, citizens have begun to form neighborhood watch groups bordering on
vigilantism. Business leaders, too, are pressuring the government to act, so law
enforcement reform is likely on the way, provided that a cyclical downturn in foreign
investment doesnt upset the apple cart.
Conclusion
It appears that Malaysia may have survived short-term turbulence stemming from an
across-the-board Asia sell-off by foreign investors. This time around, Malaysias
central bankers were ready with enough reserves to prop up the ringgit. GDP growth
is disappointing but not catastrophic and employment and inflation are still at
manageable levels. Fiscal stimulus has put more money in the pockets of consumers,
alleviating a drop in exports. The increase in crime is troublesome but could serve to
educate Malaysian politicians that thorny problems can arise at inopportune moments
in the economy.
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and looks for violations of sanctions against Iran imposed by the United States, the
European Union and the United Nations. The group has a proprietary analysis
program that maps satellite surveillance data of ships at sea around the world.
UANI's ship-tracking data revealed that the Persia often sails to Iranian facilities and
ports at Bandar Imam Khomenei, Lavan Island and Chah Bahar. UANI has told the UN
about the ships routes and believes that shipments carried by the Swedish vessel
could assist Iranian navy and air force units stationed nearby.
Sweden and Stockholm Chartering are not the only countries and companies
appearing to skirt Iran sanctions. UANI discovered that three ships owned by
Germanys Medallion Reederei GmbH have also regularly sailed to Iranian ports
managed by Tidewater Middle East Company, an Iranian firm subject to sanctions.
Medallion Reedereis managing director said he was not aware of any violations and
that his firm always respects international sanctions, according to a June 20 New York
Times report.
UANI has told other media outlets that shipping companies engage in subterfuge to
mask their maritime relations with Iran. These scams include operating a ship under a
false flag or renaming the vessel to confuse record keepers. The watchdog group
alleges that the Iranian ship Parisan and other vessels have engaged in mysterious
link-ups in the Red Sea with other ships from Iran, Egypt and Turkey.
In March of this year, the U.S. Treasury Department caught and blacklisted a Greek
shipping magnate named Dimitris Cambis for an alleged complex crime that violated
sanctions against Iran. The Treasury Department, which is responsible for enforcing
U.S. sanctions, accused Cambis of buying oil tankers in collusion with Iran and then
shipping and selling oil for Tehran while disguising the tankers real ownership.
The U.S. Congress acted this year to better ensure that Iranian ships along with
commercial vessels from other countries would not violate sanctions. The latest
National Defense Authorization Act included language that specifically blacklisted
Irans shipping, shipbuilding, energy and port management sectors, according to a
July 2 Reuters report. This latest round of sanctions went into effect July 1.
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member, but the Swedish ships travels to Iran were discovered by the American
watchdog group and apparently were not known to European law enforcement.
UANIs ship-monitoring software uses publicly available data that the U.S. and
European governments can also access. But an Iranian shipping director said that
smaller companies are still able to transport Iranian goods by vessel to Europe and
Asia implying that there are ways to get around trade sanctions.
Conclusion
When it comes to detecting violations of trade sanctions against Iran, it would appear
that one small nonprofit with an annual budget of about $1.5 million is doing a lot of
the investigative heavy lifting. Congress has tightened restrictions on Iranian
shipping, and this has led some large Asian shippers to discontinue shipments to and
from Iran. Smaller companies may still be getting around the sanctions. Moreover,
Iran is likely to continue using fake names and false flags on its ships. More law
enforcement agencies in Europe and the United States may need to be enlisted to
combat these persistent violations of maritime sanctions.
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Chronic joblessness has made it difficult for young people to afford separate living
arrangements. And it is not just youths between 15 and 24 who live with their
parents. Many Europeans ages 25 to 34 remain at home. In Italy and Greece, between
40 percent and 50 percent of adult children cannot move out, according to estimates.
Policymakers have made tackling youth unemployment a high priority. German
Chancellor Angela Merkel and French President Francois Hollande have been the most
outspoken leaders on the issue, with Merkel calling it Europes most pressing
problem.
A recent summit on youth unemployment in Berlin achieved some policy clarity.
Europe will soon create a youth guarantee in which young people will either have a
job or be enrolled in a university or some type of employment training program.
The plan sets aside $10.5 billion from 2014 to 2020 for various policy measures to
make this happen. Most of the funds will go to the European Investment Bank, which
will be responsible for helping small businesses finance industry training. One
proposal would enable young people to more easily change residences from a country
with high unemployment to one with lower unemployment and where jobs,
internships and apprenticeships are more plentiful.
Merkel and German economists believe the problem can best be addressed in
southern European countries by fortifying lending where bank allocation of capital is
inadequate. Merkel proposes that Germanys development bank offer working capital
to small and medium-sized businesses in countries such as Spain, Portugal and Italy.
These enterprises could use the low-interest loans to hire more young people.
In France, Hollande has promoted a jobs program in which the French government
will pay up to a 75 percent subsidy of a young persons wages to small businesses
who hire them. France also attempts to subsidize companies with generation
contracts. The scheme gives money to companies who hire in certain age brackets,
including under the age of 26.
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European leaders have discussed the need for structural reforms when labor supply
does not match demand in a particular industry or location. Many college majors or
secondary school vocational programs in Europe are not meeting the need for
workers. Placing trainees in so-called green jobs, for example, has not succeeded in
reducing youth unemployment.
Economists also bristle at labor laws that make laying off or replacing workers
difficult in many European countries. This discourages the practice of replacing
unproductive older employees with more productive younger workers. High payroll
taxes discourage hiring, and welfare programs do not make benefits contingent on
looking or training for a new job.
Analysis
The youth unemployment crisis in Europe is creating what many are calling a lost
generation. Young people start their working lives burdened by student or consumer
loan debt and are forced to live with their parents longer than usual. Research on the
effects of early-career unemployment concludes that these late starters will earn
much less in their future jobs.
Idle youths are more prone to social problems as well, including higher rates of crime
and substance abuse. They can be more likely to feel politically disenfranchised and
subscribe to extremist worldviews or ideologies.
Europeans do not agree on whether unemployment should be solved by more
government stimulus spending, continued austerity or labor reform. Germany has
been successful with austerity thanks in part to a domestic labor force able to quickly
respond to changing employer needs, reforms that it undertook several years ago.
Most other countries, however, are not used to enforcing austerity measures. Their
workforces are dominated by labor unions and their laws discourage firing.
Berlin points to its highly flexible and effective vocational training programs, which
match workers with an industrial sector at an early age instead of waiting until they
reach their 20s. However, even the most successful vocational education initiatives
cannot foresee economic changes that eliminate jobs in a particular industry. The
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GREECE CAN KEEP THE LIGHTS ON, BUT COLD WINTER AWAITS
August 2, 2013 | Global Economics | Europe
Summary
By barely passing legislative reforms and getting a summertime bonus of European
financial aid, Greece has somehow avoided exiting the euro zone and has enough
funding to make it through this year. Many difficulties remain, however, and there is
no single remedy for its ailing economy. Unemployment in Greece stands at 27
percent, youth joblessness has topped 60 percent and the national debt is nearly
twice the gross domestic product.
Greece is forecast to have another budget shortfall between 2015 and 2016. The one
bright spot is growing revenue from tourism, but persistent deflation could erase
those gains. Greek legislators are worn out and are offering no solutions. Some
disaffected voters are signing up with extremist political parties or abandoning the
country for better economic opportunity abroad.
Background
The International Monetary Fund (IMF) gave the green light on July 29 to another
$2.29 billion loan package to Athens after the fund carried out its fourth review of
Greeces bailout plan. Athens had finally implemented the last items of required
legislation that will hopefully begin the mandatory fiscal and economic reforms to rein
in runaway government salaries and bloated pension obligations.
Greece received its first bailout in 2010. The IMF has now appropriated nearly $11
billion in aid in accordance with the bailout measures adopted by the European Union
and the European Central Bank in March 2012.
On July 26, the EU agreed to pay Greece $3.3 billion as part of that bailout. The ECB
also opted to grant Greece $2 billion in profits the central bank accrued when it sold
its stake of Greek sovereign debt on the open market. This largess is contingent on
approval by various European legislatures but Greece is expected to get the check.
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These funds should allow Athens to meet its fiscal and budgetary obligations until
winter. But EU economists predict Greece will face another budget shortfall of $5.1
billion (2 percent of GDP) in 2015 or 2016.
The latest aid has some Greek policymakers sounding optimistic. Finance Minister
Yannis Stournaras believes that Greece can plug future budget shortfalls since higher
levels of tourism should send more tax revenue to the government. Although Greece
is in a difficult recession, Stournaras believes his country will transition to GDP growth
next year and could even forgo some of its future bailout funding and use greater
amounts of private credit instead.
If we have a positive growth rate for one or two quarters and at the same time have a
primary surplus, then anything is possible even to tap markets next year,
Stournaras said, according to a July 30 Reuters news report.
Stournaras, however, has glossed over some inconvenient facts. With a current
unemployment rate of 27 percent, Greece has lost an estimated 1 million jobs since
2008. Two out of three young people are believed to be out of work. The recession
may lower GDP in 2013 to minus 5 percent. Overall Greek debt stands at a whopping
160 percent of GDP.
Moreover, Greece is fighting deflation for the first time in 45 years. Deflation in
Greece is the worst in the EU as consumer prices dropped by about 0.6 percent in
April. The rate of deflation improved slightly in May to 0.3 percent but remains a
nagging problem.
While protests and political violence have subsided somewhat, the country is still
unstable. Austerity measures including cutting government jobs and pay rates remain
highly unpopular. Protests flared in Athens on July 7 when the mayor was attacked by
a mob outside a government office. He sustained injuries that required a brief trip to
a hospital.
Extremist groups have cropped up during the past few years, capitalizing on the
unrest. One ultra-nationalist party, Golden Dawn, is increasingly in vogue. Critics call
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it fascist and say its members greet each other with Nazi salutes. Party members have
also been arrested for attacks on immigrants.
Meanwhile, the government has increased police powers to counter unrest. After
months of riots, police have been given greater permission to stop and search people
without probable cause. Some suspects reportedly are jailed without due process.
Analysis
Certain European and Greek policymakers and economists should be given credit for
keeping Greece afloat and avoiding a Greek exit from the euro zone. EU and IMF
efforts, along with lower costs to service its debt, should give Greece the funds it
needs to operate through 2013.
Except for tourism, however, Greeces economy is not getting better. There is simply
no way that gains in tourism can grow the country out of recession.
The lack of private-sector jobs is debilitating and forces frightened citizens to hang
on desperately to their civil service jobs. Young people have few options. They can
stay in Greece without a job and join street protests against austerity, or they can
leave the country and find a better life.
The exodus of youth that is occurring in Greece bodes poorly for the nations future.
And young people arent the only ones who are leaving; retirees are looking at a
future in which the government may not be able to pay them enough to live on.
Greek members of Parliament have faced economic crises for years now. They are
tired and produce few new ideas. Policymakers are conducting very little strategic
economic planning, having grown accustomed to reacting to the latest crisis that
greets them each day.
Some think tanks, including the Levy Economics Institute at Bard College in New York,
have proposed a huge international stimulus program for Greece that would be
similar to the Marshall Plan that rescued the German economy after World War II.
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This shock therapy would entail the Greek government embarking on an audacious
New Deal type of public works initiative, funded by the European Investment Bank,
which would put people to work as quickly as possible. The institute estimates that if
Greece can create at least 200,000 new jobs, deficit and debt reduction goals could
be met and positive economic growth could be attained.
Many observers immediately grasp that sustained high levels of debt and joblessness
along with negative GDP growth will destroy Greeces economy. Deflation should be
added to this list.
Long periods of deflation can hamstring economic growth by hurting internal
consumption and tax receipts. If consumers believe that prices will fall in the future,
they will put off major purchases. And for governments like Greece that depend on a
value added tax on the purchase price of consumer goods, lower prices mean lower
tax revenue.
Greeces inability to collect income taxes and its citizens habitual practice of refusing
to pay taxes or cheating the tax collector has often been cited as a key contributor to
the nations deficit and debt problem.
Greece has also been known to misrepresent economic and budget statistics and to
fudge forecasts, so the countrys deficits and revenue projections could be worse that
what is being reported.
Conclusion
Greece has likely avoided an exit from the European Union. It appears that the EU and
the European Central Bank are satisfied, at least for now, that Greek politicians have
passed the needed reforms to stop the bleeding. This means that there should be
enough operating funds to prevent the government from imploding this year.
However, in order to meet expected budget shortfalls in 2015, Greeces finance
minister is betting that the recession will end in 2014 and the country will enjoy
positive GDP growth once again. This is an optimistic scenario that is unaccompanied
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Until the global economic crisis of 2008, investments in the emerging markets and in
BRIC countries surged on an export boom led by commodities and manufactured
goods. Recently, however, the Word Bank has turned pessimistic on the global
economy. A slowdown in the emerging markets is cited as one reason. The bank has
cut its growth forecast for the global economy to 2.2 percent, slightly lower than the
2.3 percent of last year and lower than the 2.4 percent it predicted in January.
Instead of the 5.5 percent growth clip predicted for emerging economies at the
beginning of the year, the World Bank believes that rate will fall to 5.1 percent.
Chinas growth will dip to 7.7 percent. Brazils economy has cratered to an annual
growth rate of 2.9 percent expected in 2013. India also will limp through the rest of
the year at 5.7 percent rather than the 6.1 percent growth forecast earlier this year.
Analysts at Capital Economics, a research firm in London, believe that emerging
markets in aggregate will grow at a 4 percent rate, a sluggish number not seen since
2009.
As a result, many investors are heading for the exits. On July 1, The Wall Street
Journal reported that $6 billion has been pulled from emerging market bond mutual
funds. Bloomberg News reported that almost $14 billion left emerging market stock
funds in late May and early June.
According to Bloomberg Businessweek reporting in June, seven of the 10 worstperforming stock markets of recent weeks were in developing markets. Brazils stock
market has dropped 22 percent year-to-date. Turkish equities fell 11 percent in the
first quarter. Developing countries currencies have taken a beating. Brazils real and
Indias rupee have fallen by double digits against the U.S. dollar.
Long-term forecasts, however, are more bullish. The World Bank, despite its current
skepticism, thinks emerging countries will see growth increase to 5.7 percent by
2015, reported Bloomberg News. The Financial Times reported on June 4 that by
2018, emerging markets will produce more than 55 percent of the worlds goods and
services.
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Analysis
Export-driven emerging markets depend on commodity prices, which have mostly
contracted in recent years compared to the first half of the previous decade. Demand
for copper and iron ore used in construction is not what it was before the financial
crisis. Global electricity production is down, so the need for coal and natural gas has
abated. Russia is probably the emerging market most affected by price volatility in the
energy sector.
Chinas problems with its banking system and the availability of credit have negatively
impacted its manufacturing sector. In addition, Chinas growth depends primarily on
government investment. Consumer spending alone is still not enough to drive its
economy forward.
In the developed markets particularly in the United States, Europe and Japan
loose monetary policies have driven down safe money bond yields. In such times,
global investors typically look to emerging markets bonds for better yields.
On May 22, U.S. Federal Reserve Bank Chairman Ben Bernanke announced that the
U.S. central bank could end or curtail its monetary stimulus, although nothing about
policy has changed. Central banks in other countries, including Japan, England and
Switzerland, are continuing their own accommodative monetary policies, using lower
interest rates to boost growth.
Such expansive policy efforts artificially devalue a countrys currency, making imports
expensive. The result is lessening export growth in emerging markets such as Brazil.
Slow economic growth and unemployment in Europe also has hurt demand for
manufactured goods from China and demand for services from India.
Under economic pressure, some emerging market countries find that weak governing
institutions lead to instability. Brazil, Egypt, Turkey and South Africa have endured
violent protest marches, demonstrations and labor strikes this year, shaking investor
confidence.
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begun to clamp down, restricting borrowing because a huge stimulus package after
the global financial crisis has led to runaway asset price growth, particularly in the
real estate sector.
Most people and small businesses in China instead rely on shadow banking, off
balance-sheet lending that gets around government quotas, including high-interest
borrowing from loan sharks and pawnshops. JP Morgan recently estimated that this
underground part of Chinas finance economy is worth almost $6 trillion (or 69
percent of total GDP), Bloomberg Businessweek reported on May 8.
China President Xi Jinping and Premier Li Keqiang are quite aware of slowing growth
due to structural problems in the economy and the danger of not creating enough
new jobs. They reportedly have assigned economic planning expert Liu He the
unenviable task of creating a seven-point blueprint for economic reform for the
next Communist Party plenary session in October, reported The Atlantic on May 14.
Liu is the architect of Chinas current five-year plan.
Many international economics consultancies, think tanks and academics believe that
China must liberalize its capital account. Government capital controls now strictly
limit monetary flows in and out of the country.
A countrys capital account affects investors, who look for the highest return on
investment while assuming a manageable level of risk. Part of a countrys capital
account is the total of its foreign direct investment. That could be in the form of a
new factory, portfolio investments in stocks and bonds, speculative loans or
conservative bank account savings. Chinese savers also seek a return on investment,
increasingly outside of China.
The Chinese government must keep its capital account from running either too hot or
too cold. State planners want a stable money supply that will keep the currency
exchange rate steady. Its still a command-and-control economy, after the age-old
communist model.
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The government in 2002 instituted what it believed were generous capital controls,
allowing its citizens to send some money outside China to chase higher returns.
Currently, an individual is limited to exchanging $50,000 a year into a foreign
currency. This is not much money among the nouveau riche class in China, which
desperately wants to send much more of its assets abroad. The new middle class also
is interested in investing overseas.
Sometimes investors can be certified as qualified foreign institutional investors,
giving them access to foreign markets. As one can imagine, this coveted designation
is difficult to attain and often based on political connections.
Potential Reforms
Other important reforms are possible, although unlikely, in the blueprint expected in
October. Tax reform would allow local governments to collect revenue by levying
taxes on retail sales and capital gains, rather than relying on property taxes.
The loosening of labor laws, too, would allow people to move around to take better
jobs in different parts of China. As it stands now, residents only receive government
welfare benefits in their hometowns. If they move, they lose those benefits. With
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reform, more people in rural areas could move to cities, get higher paying jobs and
start spending money on consumer goods.
Analysis
Despite all these rosy scenarios, broad-based structural economic reform is not likely
for such an entrenched communist country. Xi and Li, in their first year at the helm,
are not expected to shake up the economy through capital account modifications.
There are many reasons for this, but mostly it is political inertia and communist
orthodoxy. Economic philosophy is a major obstacle to change. The Chinese simply
think that their current version of authoritarian capitalism, along with the many
perceived benefits of a centrally planned command economy, is just flat-out better.
Why should they change to the Washington consensus of free-market mechanisms
when that very same Western model nearly brought down the global economy in the
2008 financial crisis? The Chinese generally think their way is superior. Drastic
change would suggest that communism with capitalist characteristics is flawed.
The plenary session, however, is indeed an interesting symbolic forum, one fit for
announcing sweeping reforms. If anything dramatic happens, it would probably be
rolled out in this venue. This is where Deng Xiaoping introduced the shot heard
round the world economic vision in 1978, which eventually opened up the closed
Chinese economy.
Xi is much less charismatic and is more cautious than Deng. This years reform
blueprint is likely to be incremental rather than sweeping.
Policy incrementalism, however, may be a good thing, according to some scholars.
Revered Chinese economist Yu Yongding believes that it was Chinas capital controls
that kept the country from imploding during the Asian financial crisis of 1997 and
1998.
Yu supports very slow changes to Chinas economy because he thinks enabling a
floating exchange rate would eliminate an important policy lever. Think about how
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little control a U.S. president has over the domestic economy. Xi may not want to
surrender this power to market forces.
Yu also thinks relaxing capital controls would encourage too many Chinese to
expatriate funds all at once, an outcome he considers disastrous. The lack of clear
property rights in China could encourage a scary environment of money laundering
and other financial tricks that might lead to economic turbulence and anarchy,
destabilization that order-loving Chinese fear.
Conclusion
Handicapping the rate of political and economic reform has become a cottage
industry for China watchers. Numerous observers, for instance, have pointed out that
free market reforms in China could lead to more democracy and an accompanying
increase in political rights and individual liberties. Such predictions, however, often
are proven wrong. By the same token, self-styled policy gurus prescribe various
tune-ups for the Chinese economy based on the Washington free-market
consensus. LIGNET believes that the current old-guard, change-resistant policy
environment in China will not allow major reforms. Many Chinese, too, cherish the
thought that their brand of authoritarian capitalism is the best in the world and thus
see no reason for change.
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Since 9-11, numerous U.S. government agencies have fought financial terror
networks on many fronts. Recently, the DOD has categorized these efforts into a
program called Interagency Counter Threat Finance, an umbrella concept for efforts
to target financial networks used for terror.
Since Bitcoins are a nearly perfect tool for money laundering, it is likely that the DOD
and other departments already monitor the ebbs and flows of such online currencies
and their links to terror cells.
In 2012, the U.S. Army War College published the most comprehensive overview of
counter-threat finance activity at the Pentagon. The report, written by Marine Lt. Col.
Jennifer E. Carter, describes how DOD coordinates with federal departments such as
Treasury, State and Justice, along with various intelligence agencies, to attack or
block financial lines of communications and disrupt networks.
An example of counter-threat finance would be the Defense Intelligence Agencys
Global Harvest program, which specializes in rooting out financial terror. Global
Harvest had fallen under the Air Forces oversight for several years but is currently
transitioning to the responsibility of Secretary of Defense, reported Defense News on
November 29, 2012.
Defense News reported that Global Harvest provides timely all-source fused
intelligence assessments on terrorist organizations and illicit finance, according to a
DOD contracting document.
Analysis
LIGNET believes that anonymous electronic wallets full of Bitcoins are likely to become
a popular tool among international criminals and terrorists. Nevertheless, the FBI
realizes that online manhunts for criminal figures who seek to exploit Bitcoins will
divert time and resources away from other investigations.
There are too many ways to foil investigators attempting to discern who is behind
virtualized financial transactions. Terrorists and criminals could use hackers to steal
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One theoretical advantage of Bitcoin proliferation would be what the Army War
College calls the first strike option for pre-emptive attacks against terror groups. As
cyber warfare, this type of virtual combat would not risk death or injury in the
traditional sense. In theory, fighting terror online through finance could reduce the
necessity for raids using real soldiers against a hard target.
Conclusion
Bitcoins may be considered a gimmick now, but their use could easily become the
basis of a major shift in terrorist financial activities, one that can be used to hide state
sponsors of terror and line the pockets of terrorist cells. Counter-threat finance
groups are gearing up to meet the challenge, but many unanswered questions
remain. More human capital and expertise from different agencies is beneficial, but it
is not clear how best to overcome the early advantage Bitcoins give underworld
figures. Counter-threat finance does have the potential advantage, however, of being
able to preempt online activity without losing real agents or soldiers in the field.
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The Korean Composite Stock Price Index (KOSPI) includes major corporations such as
Samsung Electronics, Hyundai Motor Co., Kia Motors, and LG Chemical. Stocks for
these companies trade on the over-the-counter market.
The KOSPI took a huge dive last week when it endured its worst five-day trading
period since May 2012. A volatility that tracks the KOSPI -- the KOSPI 200 Volatility
Index -- surged 29 percent last week on April 5, an indication that there is ample
anxiety among traders in the South Korean market.
The benchmark KOSPI index has fallen nearly 4 percent since the beginning of the
year, but the big sell-off has been in more broadly traded funds that contain some of
the same holdings as KOSPI.
For example, EWY (AMEX:EWY), the iShares exchange-traded fund for South Korea
that tracks Samsung, Hyundai, and others, is off 11.8 percent year-to-date. The
Korea Fund (NYSE: KF), a closed-end fund of large South Korean firms, is down 9.7
percent for the year.
The South Korean won has also taken a beating in the foreign exchange markets. The
won hit its lowest level against the dollar in almost nine months on April 8. It has lost
around 6 percent versus the dollar since the beginning of the year. The government
said it is watching won exchange levels closely and will intervene in the foreign
exchange markets to prop up the nations currency if needed.
Some investors have also become rattled by North Koreas threat to close the joint
industrial complex at Kaesong. North Korea has blocked South Korean workers from
the complex for about a week and withdrew North Korean workers from its factories
on April 8. Kaesong has 120 South Korean companies who employ cheap North
Korean laborers.
Analysis
Most attention on the Korean peninsula has been focused on the military aspect of
the conflict, but LIGNET believes that the North is also practicing a form of economic
warfare against the South.
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Kim Jong Un would love to believe he is responsible for sabotaging South Korean
financial markets and discouraging foreigners from investing in the South. If he could
scare away foreign direct investment with North Koreas distinct mix of purple
rhetoric, propaganda, strategic communications, and psychological operations, he
could hurt Seoul without firing a shot.
Kim also understands that increased fear and the perception of greater market risk
can intensify stock, bond, and currency price reactions that will hurt South Korea
financially.
However, experienced South Korean traders and financial analysts have endured
crises on the Korean peninsula before and they are unlikely to overreact to North
Korean provocations.
In 2010, after a North Korean torpedo sunk the South Korean navy ship, the Chenoan,
killing 46 South Korean sailors, financial analysts referred to the ensuing market
turbulence as the North Korean Risk.
Foreign investors dumped South Korean stocks, bonds, and won for several days. The
won-dollar exchange rate rocketed upward 9 percent in four trading days. But this
disruption was short-lived and not widely covered by the media.
Like most markets around the world, South Korean financial markets have a way of
quickly pricing in actions during the 24-7 news cycle. Even though media outlets
trumpet even the slightest happening as a major newsflash, after a while, traders get
used to the patterns and are more likely block out the daily news churn as
background noise.
If North Korea launches attacks on the scale of 2010, there is a potential for South
Korean retaliation which could lead to a hot war. (Click HERE to read a special
LIGNET analysis of this issue.) Such a development would have devastating effects for
South Korea and possibly Japan, both in terms of loss of life but also for their
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economies. While many experts believe North Korea could still conduct attacks similar
to 2010, it appears intent at this time on demonstrating its military might.
New launches of North Korean ballistic missiles that go harmlessly out to sea will have
no significant effect on South Korean or Japanese financial markets. There could be a
short-term effect if any missiles happened to come down on South Korean or
Japanese territory. This effect would be greater if an errant missile caused loss of life
in another country.
A more serious and continuing risk to the South Korean economy from North Korea
may come from cyber-attacks. North Korean intelligence is believed to operate a
capable and effective cyber-terrorism unit employing over 3,000 computer hackers.
On March 20, around 48,000 personal computers and servers at three major banks
and three television stations were infected by malware. South Korean investigators
announced April 10 that they believe North Korea was behind these cyber-attacks.
This type of economic warfare could be devastating to a country such as South Korea
that is considered one of the most wired places on the globe.
North Korea has been blamed for other cyber-attacks against South Korea and for
disrupting airline flights into and out of Seouls airport (Incheon) by jamming GPS
signals.
Kim Jong Un is also trying to frighten tourists from visiting Seoul and other vacation
sites even though the Korean Tourism Organization recently announced that a record
number of visitors came to South Korea in March according to CNN on April 9. The
U.S. embassy in Seoul has not changed its security posture nor has it delivered any
new travel advisories.
Not every investor is heading for the exits either. Many financial analysts note that the
South Korean economy is fairly strong with low interest rates and relatively low
inflation. The unemployment rate was only 3.5 percent in March.
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Inflation is the most serious economic problem for Argentina. Kirchner claims the
official inflation rate is below 11 percent while independent economists estimate
consumer prices have actually spiked between 25 and 30 percent. The International
Monetary Fund (IMF) censured the Argentinian government early this month for
fudging economic data.
With one of the highest inflation rates in the world, Argentines are struggling to keep
up with high prices. The government has adopted a prize freeze on food at
supermarkets that will be in place until April 1. All products at major grocery store
chains including Wal-Mart are required to keep prices at current levels and consumers
can report any non-compliant price hikes to the Argentine commerce ministry.
Wages are another thorny issue as unions harden their positions on salary
negotiations. The countrys largest trade federation wants raises for workers to go
beyond the wage cap of 20 percent. The food industry union and the teachers union
want at least 30 percent pay increases and have threatened to strike.
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As a result, the United States, the European Union, and Japan have complained to the
World Trade Organization (WTO). The WTO is currently investigating Argentinas free
trade violations and the organization is also looking at the governments seizure of
assets of a subsidiary of the Spanish oil company Repsol SA in April 2012. Repsol has
also petitioned the World Bank over the matter.
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At the time of the analysts visit, inflation in Buenos Aires was taking off. Restaurants
were making daily changes to their menus and revising prices upward by writing them
in pen. Some eateries did away with menus and required diners to ask the waiter the
prices for each item knowing that costs would be higher than the previous day.
An exasperated U.S. Commercial Service officer at the American embassy in Buenos
Aires described, in detail, the governments new import tariffs, and warned that
Argentina can be extremely challenging for even the most experienced exporters to
South America.
Analysis
The damage to the Argentine economy at the hands of Cristina Kirchner since she was
re-elected will be long-lasting and difficult to reverse. One only has to walk the
streets of Buenos Aires to see how the Kirchner wrecking ball has affected a oncethriving market economy.
Inflation and currency controls are hurting the middle class, particularly those who
are on fixed salaries and pensions. These citizens have seen their purchasing power
decline. Savers have watched their bank accounts dwindle in real value.
The food price freeze will be a short-lived public relations gambit and is not expected
to help consumers much. Store managers, after all, can always pull higher profit
margin items off the shelves. And since the end date of the price controls has already
been announced, stores could have a run on staples such as milk, bread, and eggs
after April 1.
Kirchners political orientation as a member of the far-left Peronists has led her to
seek alliances with socialist governments in Latin America such as Venezuela and
Bolivia. She has also recently traveled to Cuba and Vietnam to make statements of
solidarity with communist governments there.
Argentina is in many ways a tragic case. It had transformed itself into one of the most
modern, diversified, and international economies among the emerging states. In just
12 to 24 months, the Kirchner administration has reversed those gains.
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Argentina will likely find a way out of its current debt crisis and is not intimidated by
its creditors. By keeping dollars in the central bank, the government has just enough
foreign currency to make loan payment installments. Legal rulings that have required
the country to pay back bond holders from the last default are difficult to enforce.
Argentina is also a crafty negotiator and is often successful at persuading the United
States and other powers to forgive piles of debt.
However, the complaints filed against Argentina at the WTO may have deeper
repercussions. The WTO could impose retaliatory tit for tat punitive tariffs on
Argentine exports, and this could hit the agricultural sector hard. If Kirchner loses the
urban middle class and the rural vote at once, she may face even lower approval
ratings, larger and more intense demonstrations, and a difficult path to another term
of office that would require a constitutional change.
Conclusion
Argentinas economy is a ship that is taking on water, and with Kirchner at the helm,
it looks like things will not improve until a new president is elected. Argentina has
often run itself on luck and soybeans and other peoples money. Agricultural
commodity prices have swung downward off their highs from the last decade and
more creditors are demanding the South American country pay its debts. The
Argentine government has been unlucky at fighting inflation. The enormous gains
that Argentina had made during the boom times, such as diversifying its economy
away from agriculture and attracting high-tech manufacturing have sadly been
undone by autarkic policies. These protectionist trade practices have created bad will
with its trade partners and could force the WTO to retaliate with trade sanctions that
could hit Argentina hard and continue to punish its middle class.
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