The Globalization of the Scotch Market, cntd.

A little while back I wrote a tongue-in-cheek post about the curious effects of globalization on the market for scotch. The increased wealth and subsequent demand for luxury goods in East Asia, it seemed, was causing the price of scotch in North America to rise and the selection to fall.

There were several reasons for this, including: the sheer size and rapid growth of the market for luxury goods in Asia, higher margins for scotch producers & distributors, and - as was my guess - less competition from similar liquors that could act as substitutes for scotch (like whisky, bourbon, rye, etc.).

Sure enough, I arrived at the Singapore Changi international airport yesterday and a quick scan of the duty free shop* supports the theory: the liquor section is dominated primarily by a lot (a lot!) of high-end scotches, as well as cognac, wine and some champagne. There is far less competition from your usual suspects of rums, ryes, vodkas, gins, and the like.

This is a place, in other words, that has its priorities straight.


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*I recognize that a duty free shop in an airport is not accurate guage of what a regular liquor store will carry. But that is sort of the point: it caters to the wealthier crowd that can afford to travel or do business in and around the region. I suspect, however, that the inventory in duty free stores is dictated by a wider variety of considerations than simply consumer demand, so it will be worth finding a liquor store in a wealthy part of town to do a comparison.

Friday Readables

Dept. of Checks and Balances
After refusing to bow to the government's policy whims, the previous head of Argentina's central banker was dropped like a sack of rice. One is not suprised to learn that his replacement is decidedly more cooperative. There has been some debate recently as to whether inflation targeting should be the only goal of central banks (see here). With inflation running about about 32%/year, Argentina does not figure in this debate.

Sacrilege
Adair Turner, the head of Britain's Financial Services Agency (a position not known for siding with the pitchfork-waving anti-capitalist crowd) calls into question the prevailing dogma about the value of financial liberalization. Ditto over at the IMF blog, where the notion of capital controls is beginning to take hold as part of a 'reasonable' policy approach.

Mine is 1 louder
Last weekend, the Sunday Times published a letter from 20 economists supporting the British Conservatives' plan for fiscal, er, conservatism. This week, 60+ economists responded that the risks of cutting spending are far too high, and could tip the UK back into a recession. So the question is this: are we 1981 or 1997?

Communication Gap
Mobile/cell phone usage, worldwide. I'm guessing that using public transit in Puerto Rico is super-annoying for this reason alone.

The political economy of North-South trade (get it?)

Our friend Patrick Thomas, the UK Embassy in Washington's policy advisor for trade and agriculture, and his colleague Tom Barry, first secretary, economics at the Embassy, have contributed a great guest post to the Wall Street Journal's Real Time Economics blog entitled 'Santa Claus's Trade Infractions.'

According to little Johnny (aged four and three quarters), Santa has a lot of explaining to do before the WTO.

Check it out!

Doing Business affirms the brighter side of crises

The World Bank has released its annual Doing Business report, which looks at the ease of doing business around the world.

Doing Business ranks economies based on 10 indicators of business regulation that record the time and cost to meet government requirements in starting and operating a business, trading across borders, paying taxes, and closing a business. The rankings do not reflect such areas as macroeconomic policy, security, labor skills of the population or the strength of the financial system or financial market regulations.

It is a narrow measure of a country's economic prospects, but an important one in a globalized economy, particularly for country's dependent on foreign investment and trade. Amidst the creeping protectionism, rapid decline in international capital flows, and poor credit availability of this crisis, you might expect such indicators to plunge. However, the World Bank found 2008/09 to be a record year of reform. Surprising? Perhaps not:

-Singapore was ranked #1 for ease of doing business for the fourth year in a row. This is no surprise (small, open, and highly integrated economy).

-Two-thirds of the recorded reforms were in low- and lower middle-income countries. This isn't that surprising either, as the threshold for these countries is typically low (any concerted reform agenda will drive these countries high up the ranking), and crises tend to disproportionately affect smaller, less-diversified economies heavily dependent on exports and commodity prices. Amidst these conditions, either external (IMF, WB, etc.) or electoral (regime change) factors tend to provide a strong impetus to reform.

-Rwanda was the biggest reformer across almost all indicators, a first for a sub-Saharan African economy, but again, not a surprise. President Kagame has vigorously promoted foreign investment to diversify the economy away from commodity exports (coffee and tea), and with donor funds accounting for almost 50% of the budget, Rwanda has a strong external commitment to reform.

The biggest point, but if you know your history perhaps the least surprising, was the following statement:

'The financial crisis has also prompted governments to act in areas where regulatory reform may be more difficult and require more time.'

I have noted on a number of occasions over the past year that despite the massive destruction caused, global crises also present the biggest opportunities for reform. Often, interests are realigned, reformers and technocrats elected, and economies and foreign investment regimes restructured. The latest Doing Business report reaffirms this trend.

So while there is justifiable pessimism over the protectionist slide of many major economies, we should take comfort in knowing that on at least one measure, globalization pushes on.

Quick hits and pink picks: questions and answers

-Is the localization of supply chains history repeating (see: early 20th century)?

-The 'democratization' of the human genome?

-Is the US really more dependent on China?

-Who loves nuclear energy?

-Is Berlusconi the world's biggest party crasher (you might remember his G20 performance)?

-Will Arsenal win the Prem?

The Asians Are Drinking All The Scotch!

We have spent a considerable amount time on this blog defending the merits of globalization in general and free trade in particular. One of the key selling points of opening up trade relations is that consumers get access to more variety and cheaper products. You would need only to compare the variety of cuisine offered in major cities like London, Beijing and Tokyo to what it was 30 years ago for a vivid illustration of this change.

Globalization has also produced some interesting effects on markets for alcoholic beverages. For instance, I enjoy quizzing Guinness drinkers on which country consumes the most of Ireland's famous black liquor. They are usually surprised to learn that Nigeria has taken over the largest share of the Guinness market, with more sales than either Ireland or the UK. In fact, a reliable source suggests that Africa accounts for 40% of Guinness' brew and sales.

So globalized markets are great for beer connoisseurs in Africa. However, I'm sorry to say that there are limits to the globalization of alcoholic beverages, and we've reached them. The line has been crossed. If this trend is not corrected, then I'm leaving the globalization fan club. I'll be handing in my members mug and hoisting a poorly-designed placard, donning my gas mask and joining an anti-globalization rally somewhere. Because, you see, this morning I learned that the Asians are drinking all the scotch.

I was in the liquor store inquiring about why a certain bottle of single malt was no longer being carried, and was it possible for it to be ordered. Following a Q & A, I learned that, despite being one of the largest purchasers of alcoholic beverages in the world, my government-monopoly-owned liquor store is losing its market share of single malt scotch to Asia. Not only has the selection declined, but the prices of the remaining scotches is going up. Indeed, I have watched in horror as the price of one particular bottle - Lagavulin - has increased 25% over the past 6 months. The same trend repeats itself across the shelf, although in varying degrees.

There are some basic economic factors at play here. First, demand in Asia is waaaay up. So much so that suppliers are having a difficult time keeping up with their orders. The high-growth markets are the BRIC countries (Brazil, Russia, India, China) as well as Singapore, South Korea and other smaller markets. Furthermore, I was told by the manager of the aforementioned liquor store that the profit margins are higher in East Asia when compared to the more mature markets of North America - this, despite the fact that they need to ship the booze further and that Asian consumers are less-wealthy, as a group. I wonder if the lack of competition helps as well: in North America, (Scottish) scotch has to compete with Irish whiskey, Canadian whiskey, bourbon and similar products. I doubt the same is true of South Korea.

Thus, by harnessing some of the benefits of globalization, major emerging markets have grown wealthy and have begun importing products on which to spend that wealth. The effect, perversely, is that the globalization of markets has actually made products in my part of the world both less available and more expensive.

A few more points are worth pondering:

- First, is this trend going to repeat itself with other luxury goods like Persian rugs, French wine and German cars?

- Second, given the way things are going lately, this trend makes distilling scotch one of the few areas of UK business where things are looking good (that, and bankruptcy law). In fact, several new distilleries have been built to deal with the surge in demand. Will these new distilleries be able to ride the wave long enough to compete with more established brands? The Asian Generation of single malts, perhaps.

- A final, and related, point is that Asia is set to be very hard hit by the fallout from the current financial turmoil. Will that curb their enthusiasm for delicious scotch? It's reasonable to suspect that it will, but only temporarily. As Frank the Tank put it so eloquently: "Once it touches your lips..."

Paul Krugman wins Nobel Prize in economics

Princeton University professor, New York Times columnist, unabashed liberal and giant of the economics profession Paul Krugman has won the Nobel Prize in Economic Sciences for "his analysis of trade patterns and location of economic activity". This stems from his development of "new trade theory" and "new economic geography".

The FT has a good, brief summary of these theories here.

Any student of IPE, economics, IR, or finance knows Krugman well, and this recognition will come as no surprise. What did surprise me was the Nobel committee's reference to his status as an "opinion maker". This can be interpreted in two ways: as a reference to his popular status, prolific writing, and persuasive arguments, or to his very partisan political commentary. Given the politicized climate surrounding Al Gore's award, it is odd that the committee would allude to Krugman's political views, especially just weeks before a presidential election in which he has been a very vocal critic of one of the candidates (you can guess which one).

I am not one of these disingenuous Nobel purists who believes that prizes should only be awarded strictly on intellectual merit (these criticisms usually come from political critics of the individual winners, not defenders of the integrity of the prize itself). I do, however, worry that by referencing this aspect of Krugman's work, it provides the context for Krugman's political critics (cue Bill O'Reilly) to undermine his achievement. Krugman is highly deserving of the prize, and his political views shouldn't cloud any recognition of his important and groundbreaking research.

We are living through a period in which thoughtful defenders of free trade (tempered, in Krugman's case) and instructors on the complexity of globalization are largely absent in the popular discourse. This is why Krugman's ability to explain complex economic and political trends in layman's terms is so important. This is probably what the committee meant by the phrase "opinion maker". However, some will ascribe a political element to this award, or be unwilling to separate his political commentary from his economic scholarship, and that is unfortunate.
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Case in point: even Reuters can't separate the two Krugmans.

UPDATE: Donald Luskin initiates the backlash. This is one prediction I am disappointed to have been right on. (Via FP Passport)

UPDATE2: the FT is totally plagiarizing me! Shameful, pink lady...

Michael Phelps is Korean

Having spent the past few days birthday partying, traveling, and taking my dissertation procrastination to unseen levels, I am slowly getting back in the saddle. 

While I'll be on the road until Monday night- unless a hurricane throws a serious wrench into my plans (which is looking more and more likely)- I'll be dropping a line here and there on interesting developments. Starting now.

If anyone thought that the deep historical tensions in Asia had been put on hold for the Olympic games, this story comes via FP Passport. Apparently, Chinese bloggers are falsely accusing the Koreans of trying to claim Michael Phelps as their own, going so far as to fabricate the argument of a fake Korean university professor and his non-existent research. The fake Korean professor's claim is that some Koreans settled in the Maryland area around 1,000 B.C., and as everyone knows by now, Phelps is from Baltimore, Maryland. This means that Phelps is pretty definitely of Korean descent.  This is a pretty elaborate lie, not to mention utterly bizarre in its logic. 

But this little story fits nicely in the current debate over the resurgence of nationalism, discussed recently by our friends at Zeitgeist. Russia's actions in Georgia sparked a debate over the impact of nationalism on our interconnected, globalized world. As my co-author recently noted, the Golden Arches rule has been shattered (if ever relevant), and FDI in Eastern Europe is expected to decline due to regional instability. The re-nationalization of strategic sectors such as energy, food, and transport has spread throughout the developing world. In short, we are witnessing the "return of history". 

The liberal peace that has governed the post-cold war era is under increasing strain. The high politics of old are back, and the commercial and financial ties that bind globalization are now wrapped up in relative power and security considerations. In many ways this parallels the pre-WWI breakdown of the last great era of globalization. 

But this is not 1914 and Georgia is not Serbia. The current era of globalization is defined by its breadth and depth. The interdependence between Russia, China and the West is such that no country can afford a deterioration in economic relations. The liberal paradigm is on shaky ground, but the global economy it has created is sustainable. Economic and financial entanglements can preserve this era of globalization in much the same way that military entanglements shattered the previous one.