Stat of the day: 1%

US GDP contracted by just 1% in Q2 2009, less than expected and considerably better than the 6.4% fall in Q1...

though, it does mark the fourth straight quarter of decline, the longest streak for the US economy since records began in 1947...

and things have been 'worse than prior estimates'...

but it does appear the recession has, at the very least, bottomed out, which very, very good news.

China's 21st Century Colonialism?

China is all over the news these days, but the debate about their role in the world has been given an extra boost by their participation in a "strategic economic dialogue" in Washington this week.

One theme that keeps re-appearing is that of Chinese expansion abroad. For instance, Marc Chandler at BBH argues that China's use of its enormous foreign reserves to lock up strategic resources abroad is a 21st century version of colonialism. Moreover, the country's level of outbound foreign investment, currently tagged at $41 billion, is set to increase after August when Chinese firms will be permitted to purchase currencies to fund foreign acquisitions.

Marc worries that such activities will stagnate development in the countries that China invests in because "It prevents the economic diversification away from low value-added commodity extraction... and often doesn’t lead to employment opportunities as China often exports workers to operate projects." That may be true in some circumstances, but Adrian Wood counters that this is a one-off phenomenon. As China grows and moves up the value-added chain, it will open up a huge gap in labour-intensive manufacturing that workers in other developing countries can fill. (Of course, that's assuming they can keep growing at pace, which I'm not so sure about).

Nor are China's foreign investments simply to acquire strategic resources to fuel their rapid growth - according to an op-ed by Moldova's OECD ambassador, China has moved into Russia's sphere of influence by acting as Moldova's lender-of-last resort (and replacing the IMF to boot). Moldova isn't what you might call a reliable debtor, so there must be other considerations at play here.

Two other areas where Chinese foreign acquisitions suggest that they're not only interested in "hard power" assets or geopolitical maneuverings, but also "soft power:"

1. The Chinese government has taken a stake in distilling giant Diageo, further confirming the trend in booze sales I reported on in a tongue-in-cheek editorial back in February.



2. A Chinese firm has acquired America's finest news source, but the content looks more-or-less the same.

But fear not - should our blog also be acquired by a foreign fish-stick manufacturer, readers should expect that our quality standards for content, wittiness and snark will remain unchanged.

A discussion with Ben Bernanke

No, not my own. The Newshour with Jim Lehrer, the nightly news program on America's public broadcasting station (PBS), has held an hour-long discussion with the Fed chairman entitled, 'Bernanke on the Record.' I highly recommend it (hopefully the link is available outside of the US, we have had the problem before of posting US-based content subject to distribution restrictions. Apologies in advance- scour YouTube).

The more Bernanke speaks in an open, frank forum (Americans might remember his much-lauded interview on '60 Minutes'), unencumbered by Fed-speak and congressional grandstanding, the more I am convinced that there is no better American to be steering the country's monetary policy/systemic reform/inflationary death spiral(?!?) than Bernanke. He's not only gotten the policies right (well mostly, minus one very very big exception), but has the unique ability to articulate the complexity of the crisis in a manner that enables lay audiencies to make sense of the madness around them. Imagine if a less imaginative or aggressive chief had been at the helm over the past two years. Where would we be?

How to hide a glacier

Recently declassified images of the Chukchi Sea off Barrow, Alaska show the scale of the challenge facing the Copenhagen conference in December. If you can't read the fine print, that's from July 2006 to July 2007. One year.

Following the very public differences between the US and Indian on who should shoulder the burden of the climate change fight, the US-China talks in Washington this week are a critical test of whether a real consensus can be formed ahead of Copenhagen.

Europe's credit card woes

A great article in the FT Weekend highlighting rising consumer debt defaults in Europe.

With all the optimism over green shoots and stock market rallies, many remain worried that the global economy will face a second-wave assault, from credit cards or commercial mortgages or some unforeseen feedback that plunges the real economy back down, irrespective of asset prices.

I am interested in the negative feedback mechanisms that could undermine a return to significant growth over the coming years. The consensus is that the global economy will rebound in 2010, but to what level? And how will factors like the lack of financial aid to college students, or higher US savings rate, shape this recovery and re-order developed economies?

Tall People, Happy People?

Alex Tabarrok points to yet another study suggesting that, in addition to being more successful in their careers, taller people tend to be happier. According to the abstract, the vertically-endowed

...evaluate their lives more favorably, and... are more likely to report a
range of positive emotions such as enjoyment and happiness. They are also less
likely to report a range of negative experiences, like sadness, and physical
pain, though they are more likely to experience stress and anger, and if they
are women, to worry. These findings cannot be attributed to different
demographic or ethnic characteristics of taller people, but are almost entirely
explained by the positive association between height and both income and
education, both of which are positively linked to better lives.

(He also links to an article which discusses the idea of taxing tall people for this very same reason. I do not like this idea one bit.)

Note that all the measures here are relative. This does not mean that tall people are happy, just happier. Except when they are seated in small vehicles, of course.

Does this apply to societies, as well as people? Are countries full of tall people happier and more economically successful than those full of shorter people? Should the poorest countries of the world invest in growth-steroids for their children?

I'm guessing no. The effects of "tallness" are most likely dependent upon your immediate surroundings. You might be happier because you are taller than your neighbour, but how tall you are relative to someone living half-way across the world has no effect. (The same applies to income, by the way). Therefore being 5-foot-9 in Bolivia might result in higher levels of happiness than being the same height and living in the Netherlands.

Also, at what point does the curve of happiness drop off and the effect of constantly knocking one's head on doorframes result in a perma-frown?

Quick hits and pink picks: Bernanke, bonds and babies

-In competing NYT op-eds, Nouriel Roubini and Anna Schwartz lay out the arguments in favor of (Roubini) and against (Schwartz) a Bernanke re-appointment.

-Funny difference a year (see: plunging output and investment) makes: foreign oil companies are suddenly welcome again in Russia.

-Balance of payments pressures + growing investor risk appetite = emerging market debt bonanza.

-While Russia's ticking demographic timebomb made the news this past weekend, Shanghai was hard at work fighting its own.

-Zsolt Darvas makes the argument for easing euro-area entry criteria.

The Political Economy of North Korea and UN Sanctions

North Korea is a scary place. Like swine flu, North Korea is a disaster waiting to happen, but something that I choose to deal with by trying not to think about it and hoping it will go away.

But North Korea (the DPRK) is not going away. And what to do about it is a problem that has bedevilled senior statesmen, diplomats and international relations scholars ever since the miserable little regime was formed. They are possibly the most frustrating negotiation partners in international diplomacy - I've heard stories of negotiations breaking down because DPRK officials didn't like the placement of chairs in the conference room - and anything they agree to is liable to be ignored or reversed at a whim.

Over the years, various strategies of using carrots (aid, more trade, direct funding) and sticks (trade sanctions, financial sanctions) have been tried, but the impact has been limited. The most recent effort is a new set of UN sanctions imposed following North Korea's nuclear test in May of this year. The UN sanctions have more teeth than previous rounds, but will they have the intended effect of choking the DPRK into giving up its nuclear program?

Stephen Haggard and Marcus Noland argue that they probably won't. In a recent paper published by the Peterson Institute, the authors examine how multiple rounds of sanctions and economic isolation has altered North Korea's trade patterns. The effect of this shift has been to push North Korea towards engagement with countries that aren't particularly interested in enforcing UN sanctions.

In short, the US and its partners risk losing their leverage over North Korea. Here's a brief rundown of their findings:

• Despite the internal backlash against reform movements, the DPRK has actually become more economically open.
• Agricultural reforms are unlikely to play a role in North Korea's development, as it did in China and Vietnam; their agricultural sector is too small and fragile.
• North Korea's dependence on China and South Korea has grown dramatically; in addition, trade with partners in the middle east (Iran, Syria and potentially Egypt) has also increased.
• Meanwhile, trade with Japan, the US and Europe has either been reduced to a trickle, or has ceased entirely
• Uncertainty about the succession of North Korea's leader, Kim Jong-Il, is a further incentive for the ruling elite to circle the wagons and resist foreign influence.
• North Korea has re-arranged its external economic relations in order to reduce the impact that traditional sanctions could have.

All of this to say that China has become even more crucial to the unfolding North Korea saga. They are far and away the regime's biggest trading partner and likely the only source of significant external political pressure. By approving the UN sanctions, China is indicating its strong displeasure at North Korea's nuclear antics, but how far they are willing to push the fragile regime remains to be seen.

The US, meanwhile, is left with fewer options. Targeting financial institutions that deal with the DPRK is likely the only remaining tool that the US can use effectively. Using them will be risky, however, because once they're implemented North Korea may simply re-adjust to find new ways of doing business and leave Uncle Sam waving his stick into thin air. In the end, the threat of financial sanctions will likely prove to be more effective than actually using them.

The other option is to simply ignore them and talk about something else, as I do. Incidentally, that is Dan Drezner's half-serious advice to the Obama administration in his sobering summary of the situation.

But wait! you say. If everyone ignores North Korea, Kim Jong Il will be so ronery...

The trouble with blogging or Why I go missing

Where's Rory?

-Dave Hart, 'A Call for Reader Feedback'

Hi friends. I have indeed been deficient in upholding my duty to provide the yearning masses with the kind of sophisticated insights and mind-blowing revelations they've come to expect from IPE Journal. I have quite a viable excuse (cue Dave's inner monologue), but for the sake of argument lets pretend I have been locked in my basement toiling over a masterful blog-post, tentatively called "The normative implications of Pinochet's pension reforms: deconstructing the post-war regulatory state." Ok, not really.

Anyway, my lack of consistency is nothing new; its something I have lacked since we began this little project. As Dave noted in his previous post, we've had periods of boom and bust since last August, but to Dave's enormous credit his busts have been more like blips. Nobody is more impressed by his commitment than I am.

My problem has been a fundamental one: a lack of incentives. Don't get me wrong: we started this site with nothing more in mind than providing a minor, thoughtful contribution to the debate on where our global economy is headed, and I think we have largely achieved that. Sometimes we get sidetracked by booze or expenses, though in our defense a) booze is the prism through which many of us deconstruct the world around us, and b) when such a scandal occurs in Africa it is called 'corruption', but when it occurs on the bank of the Thames it is a 'betrayal of trust.'

But without a more tangible incentive, even the noblest of pursuits can falter under the weight of competing alternatives, and I have found it difficult to sustain my contribution to the blog in a year defined by a gruelling job search and nomadic-like existence. It is not that I have lacked the time, I've had quiet a bit of that over the past 12 months. Rather, I have gone through periods of profound intellectual disillusionment, the circumstances of which I'll spare. That has been deeply disappointing and my sporadic work here has been but one consequence.

But that has turned over the past month or so, and I expect my consistency here to do so as well. Shorter, more frequent posts may be one result, but that probably serves our readers better anyway. And it helps when your partner is a rock star at this. Dave carries the torch well.

Catharsis complete, thanks for sticking with us this past year. You should see our childlike joy at getting an email from a reader. That's what this is all about.

A Call For Reader Feedback

As we approach this blog's 1-year anniversary, it's time to take a few steps back from our little project to take stock. Like any relationship, this one has had its ups and downs. Long time readers will have noticed that posting has slowed down in the last couple of months, partly due to the summer weather and the various distractions that come with it. That is temporary, as I've become too attached to this thing to stop writing, regardless of whether anyone is reading or not. But now is your chance to provide feedback and guide us towards material that you think would be interesting to see tackled.

So have at it, folks: what would you like to see discussed on this blog?

To get your thinking-juices flowing, here are some suggestions:

• US debt and the future of the dollar
• The impact of the financial crisis on sport
• More posts on the political economy of alcohol (a personal favourite)
• The future of the Bretton Woods system
• Posts about a particular country/region
• The British MP expenses scandal (just kidding!)

You may also be asking yourself: what happened to including nifty pictures in your posts? or why did you pick such a boring name for your blog? or where's Rory? These are all reasonable questions. Some even have reasonable answers. I'm open to all questions.

So this is your opportunity to influence the content of the blog - don't miss out! Feel free to use the comments or contact us using the blog email address (to your right -->).

Tuesday Links

This morning's readables, to be enjoyed with coffee (or your stimulant of choice):

• Fred Bergsten urges Obama to be bold on trade in an op-ed for the FT.
• What went wrong with economics? With reponses being posted here, here annnnd here.
• Not-so-well-endowed: Harvard is facing financial troubles. Is Larry Summers partly to blame?
• Rumours that two of the most awful places on the planet are teaming up.
• Dan Drezner discusses Iran, rap music and international relations theory

Dept. of Sentences That Make Me Wince

Hillary Clinton, prior to her trip to India, had this to say:

"Everything is on the table," Clinton said on Wednesday. "We're going to do
everything we can to broaden and deepen our engagement."

The last time the US showed up in India with that approach, they managed to completely undermine the fragile credibility of the nuclear non-proliferation treaty and the comprehensive test ban treaty. I hope this particular trip isn't nearly so short-sighted.

Quote of the Day

From Philip Stephens' leading FT op-ed on the rise of China:

The big mistake is to assume that the future can be mapped out in linear progression from the present. The Chinese economy has been growing at something close to 10 per cent a year for 30 years. If it continues to expand at that rate it will quite soon overtake the US as the world’s biggest economy. Case closed: Beijing will rule the world.... Nothing, though, is pre-ordained. If there is a lesson to be drawn from the recent past it is that geopolitics does not travel in straight lines.

The well-informed are as determined in pointing this fact out as book publishers are in ignoring it.

Cultural Peculiarity of the Day

While walking to work this morning I witnessed an unmistakable cultural event unfold before my eyes:

A Canadian office peon arriving at work with a canoe paddle.

Early Impressions of the Italian G8

Wait, they still have a G8, you ask? Yes indeed, and the Italians are hosting this year's leaders summit in L'Aquila. Some initial news & reaction:

- President Hu of China has returned home from the G8 earlier than expected in order to deal with the unrest in the Xinjiang region. This of courses raises the question of why he was there in the first place, since China is not a member of the G8. Nor, for that matter, are most of the other 39 (thirty-nine!) heads of state, government and international organizations that are attending what Quentin Peel is calling "a monstrous gathering of literally thousands of officials and security staff and spin-doctors, not to mention the media circus that follows them."

In my view, the G8 has merit in its capacity to bring the leaders together, away from their staffers (and finance ministers) to discuss shared priorities. It is possible, albeit rare, to see real progress out of these fireside chats - but the Italians appear to have placed the emphasis on style over substance.

- The G8 aid priorities appear to be.... Africa? no. South America? no. The G8? yes. I know the G8 has promised in the past to help the Highly-Indebted Poor Countries (HIPCs), but Italy only meets most of the HIPC criteria (country, highly-indebted), not all of them.

- No big surprise here, but the focus of the G8 will be likely be on the economic crisis and "exit strategies" at the expense of other priorities like the environment.

UPDATE: Simon Johnson provides 3 reasons why the G8 leaders summit is becoming anarchronistic. His points are well taken, and he rightly acknowledges that the sub-leader-level meetings still have a purpose

Robert McNamara

The former US Secretary of Defense during the Vietnam War and one of the giants of America's Cold War politics, has died at 93. For anyone who is at all interested in his life and the controversies that surrounded it, I recommend the documentary Fog of War, which is excellent.

Military Coup Monday: Turkey

Sticking to today's theme, there is an article in the Globe and Mail about how Turkey is showing signs of moving away from the damn things. This is certainly an interesting story to follow.

Those of us who live in the north-west corner of the world might take civilian control over the military for granted, but in Turkey the army has a fiercely protected independence from government. This is partly because the army views itself as the protector of Ataturk's secular state - a view not shared by all. Nevertheless, throughout the last few decades, a cycle has been repeating itself in Turkey:

1) A right-wing religious/conservative party is elected and forms government
2) the army deems this party "too religious" and a threat to the secular state
3) the army takes over
4) the party is banned, its leaders jailed
5) the army returns power to the civilian government
6) the banned party re-forms under a new name and leadership
7) return to step 1)

However, by historical standard, it appears as though the most recent iteration of this cycle - the election of the Justice and Development Party (AKP) in 2002 - has been going rather well. Although there have been some controversies over the government's policies (notably over lifting the ban on headscarves) the army hasn't deemed it necessary to move to step 3. If this op-ed piece is correct, the army is slowly, but voluntarily, moving away from politics and "back into their barracks." Moreover, the AKP has implemented a number of the Copenhagen criteria for EU membership since being elected, bringing it closer to "Western" standards of governance and suggesting that it may be possible to more closely integrate religious views into Turkey's government without compromising the nature of the state itself.

Of course, as the article points out, this is a very slow process and suspicions on both sides remain. There are plenty of open questions and unforeseen events on the horizon that could drastically shift the nature of this situation. For now, however, I am thankful that the various competing factions in at least one part of the world are moving towards a more stable co-existence, instead of in the opposite direction.

Military Coup Monday: Honduras

Dan Drezner has an interesting post comparing the troubling events in Iran to those in Honduras. I would only add that the OAS also has a much greater chance of reversing the regime change because of the support for the (exiled) Mr. Zelaya among many of the OAS members, specifically Venezuela, Nicaragua, Bolivia and Ecuador.

For a more nefarious connection between South America and Iran, Douglas Farah provides his take on things.

Wimbledon - Wow

For anyone else who just watched the epic 4 hour, 17 minute Wimbledon final, you are likely feeling as exhausted as I am by the whole thing. Thanks to Wimbledon rules that prevent a final set tie-break, the 5th set ran to a stunning 16-14, the most games played in history. Federer knocked in over 50 aces to smash his career record, while Roddick failed to have his serve broken for the entire game, until the very last point.

A classy game by two classy players - pleasure to watch.

Baseline Scenario

The newest addition to our blogroll is The Baseline Scenario written by (among others) the former chief economist of the IMF, Simon Johnson. I recognize we're a bit late to the game on this one, but do check it out all the same.

The World is Ageing

According to a report by the US Census Bureau, the proportion of the world population over the age of 65 will triple by 2050, with Old Man Europe leading the charge. Rebecca Wilder wonders:

...what will happen to aggregate demand for goods and services as an
increasing number of people retire, effectively switching from saving mode to
dissaving (spending) mode. Price pressures?

Of course, that's assuming that people over the age of 65 will actually, ya know, have enough savings be able to retire in the first place. Besides, I suspect that by 2050 the benchmark age for retirement in OECD countries will no longer be 65.