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The Economist – 28/07/07
August 4, 2007, 8:22 am
Filed under: current affairs

The Economist – 28/07/07

  • Sovereign wealth funds worry rich-world politicians due to issues of national security and lack of transparency. These funds are worth between $1.5 trillion and $2.5 trillion, according to US treasury estimates.
  • The ruling Justice and Development (AK) Party wins decisively in Turkish elections. An mildly-Islamist party that abides by the rules of democracy wins in a secular republic.
  • Japan’s population is aging and shrinking. By 2015, the proportion of elderly will rise to 1 in 4. With the baby-boomer’s retirement, Japan stands to lose a large proportion of its expertise and knowledge. The countryside is losing younger villagers to the city.
  • Chongqing is one of the magnets for the huge shift of people from the countryside to the city. The Chinese government seeks to reduce the imbalance between the prosperous coast and sluggish interior.
  • The Israeli economy is vigorous but vulnerable. The shekel is strong, the ratio of debt to GDP is down, the budget is in surplus and foreign investment is at record levels, with the economy growing at a rate of 5% since 2003. Tax cuts, deregulation, the boom of the defence industry post 9-11 and the technology sector, driven by a highly-educated workforce and incentives to entrepreneurship are some reasons for the economy’s growth. The Israeli technology sector comes in second or thrid in the world in number of start-ups, firms listed on NASDAQ and patents filed
    • However, the tech industry employs only the brightest tens of thousands, which are the most mobile in terms of crisis. Israeli’s spending on education is not keeping in pace with European countries. Inequality is also increasing.
  • Mobile telephony engulfs the developing world. According to the World Bank, the number of mobile-phone subscribers in sub-Saharan Africa increased sevenfold between 2000 and 2006. India nearly doubled its mobile-phone subscriptions last year to 150m and the government expects 500m by 2010.
  • The outsourcing industry matures with an increasing emphasis on quality and not merely price savings. The growth of the industry is slowing with wages rising in developing countries. Consulting and industry expertise is becoming increasingly important in the outsourcing business; “gains-sharing” contracts makes outsourcing firms vested in the performance of the serviced firms. Outsourcing firms are also moving into more countries in order to deliver the right mix of cost, risk and quality; Indian firms seek to focus on markets where buy decisions are made and establish offices there.
  • Japanese companies are having second thoughts about China. Some are moving operations to other countries and some choose to remain at home. Japanese electronics firms all have operations in China but they keep high-end production at home. This is due to a need to prevent intellectual property theft and tap innovation and regional governments offering generous incentives. There is a trend to move operations to other countries with expenses rising in China. Japanese business practises also do not blend well with Chinese attitudes; promotion is based on seniority in Japanese firms rather than merit and hence the prospects of local staff is poor.
  • China’s new labour law is tough on businesses. In effect from 1 January 2008, companies will need written contracts with all full-time employees and anyone who works for more than four hours a day is likely to be considered a full-time employee. Once they are full-ti, employees who are laid off must be bought at a multiple of their average monthly salary. Making more than 20 employees or 10% of the workforce redundant is allowed, but must be done on the basis of seniority not merit.
  • Sovereign wealth funds are getting bigger and bolder, with some involved in mergers and acqusitions and others in private equity. Many emerging countries derive their funds from forex reserves in excess of what is needed to use by the central bank while most others derive their cash from oil money. Many try to imitate the success of Norway’s Government Pension fund. Norway’s fund has two objectives: to act as a buffer against volatility in the price of oil and as a long-term savings vehicle.
    • China’s fund seems to be modeled after Singapore’ GIC and Temasek, taking larger stakes in companies as compared to Norway’s fund.
    • Sovereign funds’ lack of transparency worries markets. Nobody knows the funds’ risk management, their political motivations and their actions.
  • Credit squeeze is happening with investors turning down borrowers with rising concerns over the subprime debacle, indigestion due to too much debt issued, corporate profits growing at single-digits instead of the usual two-digits and the takeover boom reaching a peak.
  • Fears that China’s economy is overheating are overexaggerated. Chinese economic data is dodgy; many China-watchers use alternative proxies of growth, like production of industries, real expenditures. Neither show an acceleration since 2004-2004. Growth of electricity production rose broadly in line with GDP. The other classic symptoms of overheating are also absent, with bank lending and imports slowing in recent years and reports of surging wages due to labour shortages being misleading. Average wages in manufacturing have been increasing but productivity has been increasing even faster. Consumer prices excluding food has only increased 1% over the past year. This might explain why the central bank has not slammed on the brakes.
  • American banks indicate their desire to go global by reaching a compromise on the Basel 2 rules.
  • The US dollar is weak against a bunch of currencies that share many of its flaws. The dollar’s weakness is attributed to weak growth due to the subprime debacle, high oil prices and a weak economy. Deeper causes include Asian central banks’ move to diversify out of large holdings of American debt and America’s mutual funds move to devote more assets to Asian equities. Yet wariness of the dollar might be the prompt for a move to diversify.
    • However, other countries which currencies have gained at the US’s expense have large external deficits and debts like the US too. Australia’s deficit is more persistent than America’s with net overseas debt making up 60% of GDP as compared to the US’s 19%. New Zealand’s debt ratio is larger still at 90% of GDP.

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