Chinese appliance maker Haier Group discovered that customers in one rural province used its clothes washing machines to clean vegetables. Hearing this, a product manager spotted an opportunity. She had company engineers install wider drain pipes and coarser filters that wouldn’t clog with vegetable peels, and then added pictures of local produce and instructions on how to wash vegetables safely. This innovation, along with others including a washing machine designed to make goat’s-milk cheese, helped Haier win share in China’s rural provinces, while avoiding the cutthroat price wars that plagued the country’s appliance industry.

More examples in the full article (registration required).

This paper examines the cyclicality of fiscal behavior in 28 developing oil-producing countries (OPCs) during 1990-2009. After testing five fiscal measures – government expenditure, consumption, investment, non-oil revenue, and non-oil primary balance – and correcting for reverse causality between non-oil output and fiscal variables, the results suggest that all of the five fiscal variables are strongly procyclical in the full sample. Also, the results are not uniform across income groups: expenditure is procyclical in the low and middle-income countries, while it is countercyclical in the high-income countries. Fiscal policy tends to be affected by the external financing constraints in the middle- and high-income groups. However, the quality of institutions and political structure appear to be more significant for the low-income group.

Among the conclusions:

The results confirm that political and institutional factors, as well as financing constraints, play a role in the cyclicality of fiscal policies in the OPCs. Most of the variables on the quality of institutions and the political structure appear to be significant for the low- income group. Two of the variables are significant for the middle-income countries: the composite institution index and checks and balances. None of the institutional variables turns out to be significant for the high-income countries.21 Domestic financing constraints seem to matter for the low-income group. But fiscal policy is affected more by the external financing constraint in the middle- and high-income groups, as they may be more integrated into the global financial system than the low-income countries.

Despite their many differences, all the OPCs face volatile and unpredictable oil revenues, a situation that makes fiscal management challenging. For this reason, it is imperative for them to formulate effective countercyclical fiscal policies by which they can smooth government expenditure, decouple it from the volatile oil revenues, and prevent boom-and-bust cycles. Breaking away from a procyclical fiscal policy will enable them to sustain long-term growth and keep the safety net that the poor need. Sound fiscal policies and discipline require strong institutions, a higher-level bureaucracy, and more transparency. Strong institutions and transparency would also help reduce the ―voracity effect,‖ which, in turn, would facilitate the accumulation of financial assets and build up confidence among investors to raise funds when needed.

More data here.

Order a printed copy here (broken link as of today): http://www.imfbookstore.org/IMFORG/WPIEA2011171

You can also request a PDF from us for free.

US analysts vastly underestimated the duration and expense of the 1999 [bombing campaign against Serbia], in part because they undervalued the role of historic narratives of victory and defeat. Serbia’s national holiday is not a celebration of a past battlefield victory but of a glorious defeat in 1389 at the hands of the Ottoman Turks. Serbs celebrate the valor of the war’s hero, Prince Lazar, who received a heavenly visitation on the eve of battle and was told that unless he surrendered he faced certain defeat the next day. Given the choice, Lazar declared that it was better to die in battle than to live in shame. He did precisely that—and became cemented in Serbian legend.

[...]

Understanding the weight of this narrative for Serbs in defining honorable conduct during war would probably have disabused planners of the idea that the bombing campaign would be over quickly. Instead of projecting a three-day campaign, we might have helped policymakers plan for a campaign closer to the almost 80 days it eventually took.

Mr Berrett explains why he co-authored his paper:

In the third edition of his “History of the World,” J.M. Roberts notes that “Historical inertia is easily underrated…the historical forces molding the outlook of Americans, Russians, and Chinese for centuries before the words capitalism and communism were invented are easy still to overlook.” In this article, Jeannie Johnson and I offer a variation on Roberts’s view: Cultural inertia is easily underrated, and American decisionmakers have shown a need for help in isolating and understanding the complexity, weight, and relevance of culture as they consider foreign policy initiatives.

[...]

The more I observed the policy-intelligence dynamic, the more I perceived a need for an analytic construct designed exclusively to illustrate clearly and persuasively the inertia of culture. Cultural influences are typically touched on within US Intelligence Community (IC) analyses as peripheral factors, described with passing references, and often in general and superficial terms. Although the IC is full of world-class expertise on foreign peoples, places, and organizations, this industry rarely isolates and illustrates culture as a factor deserving its own sophisticated and thorough treatment.

To remedy this perceived deficiency, I teamed with Jeannie Johnson—formerly an intelligence analyst at CIA and now with Utah State University—who had brought her academic training in strategic culture to a pursuit similar to mine. For some time she had been amassing training ideas in the area of cultural analysis for IC experts, and our combined efforts, along with significant input from other members of my former office,3 trial runs of intelligence products, research, and continued refinements over the past four years have resulted in a process we call “Cultural Mapping.” This process, or methodology, is designed to isolate and assess cultural factors at play on issues of intelligence interest and to distinguish the degree to which those factors influence decisionmaking and outcomes. Mapping exercises done across time, spanning multiple issues, and on diverse groups within a society may aid in understanding that society’s “Cultural Topography.” We describe the process below.-mtb

The authors write some interesting questions the analyst of cultures could use as a guide to map the culture is studying. Some of them are these:

Identity

•Is individual identity seen as comprising one’s distinct, unique self, or is it bound up in a largergroup (family, clan, tribe)?
•Does this group see itself as responsible for and capable of solving social problems? Are problems responded to with energy or left to fate?
•Which myths and national narratives compose the stories everyone knows? How do these speak about group identity?
•What is this group’s origin story? Does it inform group members of their destiny?
•What would this group list as defining traits of its national, tribal, ethnic character?
•Is one aspect of identity being overplayed, not because it is foundational for most decisions but
because it is being threatened or diminished?

Values

•What generates hope in this population?
•Which is viewed more highly as a communicative tool—emotion or logic? Are conversational styles which emphasize logic viewed as trustworthy?
•Is conspicuous consumption valued as a status marker? If not, what incentives exist to work hard?
•To what extent do security concerns trump liberty concerns in this society? Which parts of liberty are deemed attractive?
•Is social mobility considered a good thing, or is it deemed disruptive to a highly organized system? Would this group fight to keep a hierarchical arrangement even if offered opportunities for egalitarianism?
•To what extent does loyalty trump economic advantage?
•Which is more value-laden for this group—“progress” or “tradition”?
•Is optimism rewarded as a character trait or is it considered naive, juvenile, and possibly dangerous?
•Which character qualities are consistently praised?
•What composes the “good life”?

These connect with Stratfor.com’s George Friedman’s words, [2]

-  When the Soviet Union collapsed in 1991 and withdrew to the borders of old Muscovy, there were those who said that this was the end of the Russian empire. [I think a "But" here would help.] Nations and empires are living things until they die. While they live they grow to the limits set by other nations. They don’t grow like this because they are evil. They do this because they are composed of humans who always want to be more secure, more prosperous and more respected. It is inconceivable to me that Russia, alive and unrestrained, would not seek to return to what it once was. [This seems applicable to China, too.] The frontiers of Czarist Russia and the Soviet Union had reasons for being where they were, and in my mind, Russia would inevitably seek to return to its borders. This has nothing to do with leaders or policies. There is no New World Order, only the old one replaying itself in infinitely varying detail, like a kaleidoscope.

-  I begin my travels by always re-reading histories and novels from the region. I avoid anything produced by a think tank, preferring old poems and legends. When I travel to a place, when I look at the geography and speak to the people, I find that there is a constant recurrence of history. In many places, a few centuries ago is like yesterday. Reading literature can be the best preparation for a discussion of a county’s budget deficit. Every place and every conversation is embedded in the centuries and the rivers and mountains that shaped the people who shape the centuries.

Of course not all countries are like China, Japan, or Russia. Many never reached the nation-state status. But all countries feel the influence of those that were or are powerful nation-states. Do you agree with Friedman? Why? If not, why?

You already understand how important is culture mapping if you have been to MENA countries. Besides commenting on the post, you can request from us the documents listed in the references below.
References

[1]  Jeannie L. Johnson and Matthew T. Berrett: Cultural Topography: A New Research Tool for Intelligence Analysis. CIA Studies in Intelligence Vol. 55, No. 2, extracts, June 2011. https://cia.gov

[2]  George Friedman: Geopolitical Journey, Part 1: The Traveler. November 8, 2010.  http://stratfor.com

There are historic opportunities for greater openness and citizen participation in economies across the Middle East and North Africa (MENA) that, if strongly managed over the transitions ahead, could see a significant boost to economic growth and living standards in the medium term.
This is the analysis presented on My 24, 2011 in the World Bank’s Regional Economic Outlook: MENA Facing Challenges and Opportunities. The report notes that current economic disruption in many MENA countries is translating into lower growth in the short term (now forecast at 3.6 percent for 2011 down from 5 percent) but that opportunities in the medium term offer new hope for an inclusive and sustainable development that has not before been seen in the region.

“The rich experience from countries that have undergone political changes suggest that short-term disruptions to economic growth and social  tensions are inevitable,” said Shamshad Akhtar, World Bank Vice President for the MENA region.  “However, transition offers an opportunity for countries to break with the past and set course in a newer direction.  A first order of priority is to offer the right signals to restore public and private investor confidence which, in MENA, calls for ensuring respect and citizen dignity through inclusive social policies, a fundamental change in governance frameworks and swiftly restoring macroeconomic stability.”

The report finds that by the end of 2010, MENA countries had largely recovered from the global financial crisis, and growth rates had been expected to reach pre-crisis levels in 2011. Events in early 2011 which led to swift regime change in Tunisia and Egypt, and ongoing challenges in Bahrain, Libya, Syria and Yemen, have affected the short-term macroeconomic outlook and the status and speed of economic reforms in the region.

“The effects of reform tend to follow a J-curve, where things get worse before they get better. Experience from other countries which have made successful transitions has shown an initial decline of 3 to 4 percent in the first year but quickly recovering,” said Caroline Freund, Chief Economist for the MENA region.

“Also encouraging is that successful countries saw significant and fast improvements in voice and accountability, some of the very things that underpin the MENA uprisings. We need to learn from history’s successful transitions and carefully manage the short-term downturn which is where we are focusing our best efforts now. While the challenges are many, the opportunities are more.”

More excerpts and link to full report here.

I naively chose a college that was almost as expensive as Stanford, and all of my working-class parents’ savings were being spent on my college tuition. After six months, I couldn’t see the value in it. I had no idea what I wanted to do with my life and no idea how college was going to help me figure it out. And here I was spending all of the money my parents had saved their entire life. So I decided to drop out and trust that it would all work out OK. It was pretty scary at the time, but looking back it was one of the best decisions I ever made. The minute I dropped out I could stop taking the required classes that didn’t interest me, and begin dropping in on the ones that looked interesting.

It wasn’t all romantic. I didn’t have a dorm room, so I slept on the floor in friends’ rooms, I returned coke bottles for the 5¢ deposits to buy food with, and I would walk the seven miles across town every Sunday night to get one good meal a week at the Hare Krishna temple. I loved it. And much of what I stumbled into by following my curiosity and intuition turned out to be priceless later on. Let me give you one example:

Reed College at that time offered perhaps the best calligraphy instruction in the country. Throughout the campus every poster, every label on every drawer, was beautifully hand calligraphed. Because I had dropped out and didn’t have to take the normal classes, I decided to take a calligraphy class to learn how to do this. I learned about serif and san serif typefaces, about varying the amount of space between different letter combinations, about what makes great typography great. It was beautiful, historical, artistically subtle in a way that science can’t capture, and I found it fascinating.

None of this had even a hope of any practical application in my life. But 10 years later, when we were designing the first Macintosh computer, it all came back to me. And we designed it all into the Mac. It was the first computer with beautiful typography. If I had never dropped in on that single course in college, the Mac would have never had multiple typefaces or proportionally spaced fonts. And since Windows just copied the Mac, its likely that no personal computer would have them. If I had never dropped out, I would have never dropped in on this calligraphy class, and personal computers might not have the wonderful typography that they do.

TradeFlow21 managing partner Steven Towns recently reviewed Trade Myths: Globalization has left trade balances behind, a profound book weighing in at all of 75 pages with an additional ten pages of charts that bust the same myths already exposed in prose. The author, Dr. Enzio von Pfeil, is a Hong Kong-based investment adviser and fund manager. A regular in the financial media in Asia, he is a former chief regional economist at leading London-based investment banks in Hong Kong. Enzio has long studied matters related to trade, and fortunately for those looking for perspective not readily found in the mainstream media, particularly in the U.S., he has penned Trade Myths. Of the five trade myths he discusses, in each instance, Enzio explains how misguided and anachronistic beliefs about trade could lead to an impaired U.S. economy with a simultaneous jump in interest rates having widespread repercussions. The book review begins below followed by Q&A.

The first myth is that “imports kill jobs.” Enzio readily dismisses this as self-serving for politicians wanting to avoid inconvenient truths. In short, politicians (the key subjects of Enzio’s work), rather blame outside forces for their constituencies’ economic troubles, rather than acknowledge failing policies in areas such as education, and matters such as burdensome taxation.  Enzio questions how the U.S. can be expected to increase its headline trade surplus as it employs fewer people in manufacturing. And, it turns out that as imports rise, so does employment, primarily in services. Yet, if all so-called “unfair” imports were banned, America’s multinational corporations (MNCs) would suffer heavy blows since their foreign-made products could not be imported back into the U.S.; and most imports would have to be substituted by local production, resulting in higher costs, in turn pushing up inflation and thus forcing interest rates higher, which would reduce investment and slow job creation (if not resulting in massive job losses), while the higher cost of capital would sink the housing and capital markets.

The second myth is that “exchange rates drive trade,” which is again self-serving for politicians. The argument that if other countries’ exchange rates were stronger, America would not have a deficit, does not hold water, explains Enzio, since a devalued U.S. dollar brings trouble of the kind explained above.  In fact, it’s comparative advantage, not exchange rates that really drive trade.

The third myth is that “trade balances are a national matter.” While being a convenient line for politicians, it is a risk infected one. Given the interconnectedness of the global economy, viewing trade balances nationally is purely mercantilist thinking and potentially subjects MNCs to host government protectionist retaliation. Alarmingly, a tit-for-tat trade war could lead to actual war. Disturbingly however, it turns out that a closer examination of trade data shows MNCs are responsible for very little of the U.S. headline $700 billion-plus trade deficit. More importantly, when factoring in the value of MNC’s foreign affiliates’ purchases and production, the U.S. has an enormous $2.7 trillion surplus! Enzio explains that America’s highly successful MNCs are the root cause of the “bad” trade deficit, not “bad foreigners.” Among his other keen observations is that when backing out the domestic activity of MNCs in China, the latter runs a global trade deficit of $1.7 trillion compared to a headline surplus of $260 billion!

The fourth myth is that “America’s trade deficit is ‘bad.’” This follows myth number three and in short, reiterating what was said about myth number one should politicians ban MNCs from operating abroad, the outcome is likely to be an “economic 9/11.” Two keys to this myth are that non-U.S. MNCs are more than ready to take market share from U.S. MNCs; and it doesn’t necessarily require a ban on U.S. MNCs operating broad, since U.S. politicians angering a host country such as China could result in the same dire consequences. Enzio wonders just how disaffected U.S. MNCs would respond in terms of their political contributions.

The fifth and final myth is that “foreigners finance America.” Once again, he regards this as a political ploy (whether deliberate or naively inadvertent) playing on vulnerability and blaming foreigners for ills. Should foreigners be banned from holding government debt or if they dumped their holdings, the outcome could mirror the fallout from the sub-prime crisis. However, taking a step back, Enzio enlightens readers on two fronts. The first being one must review just who the foreigners that own U.S. debt are and what percentage of the whole it comprises. Interestingly and also surprisingly, Enzio explains that news reports are misleading, since foreigners as a whole owned 25% of Treasuries outstanding in 2006, but of that an increasing amount is held by private investors (such as hedge funds and also MNCs) as opposed to institutions or governments, thus lessening the impact if there were ever any dumping. Data suggests a very strong correlation since 1970 between the growth of FDI and the “foreign” ownership of Treasuries. The other point here is that even if foreign holders were to dump Treasuries, there is no other market that offers the depth, liquidity, and sophistication of the U.S. Enzio notes that the size of the U.S. bond market is greater than the EU, UK, Japan, and Switzerland’s combined.

The remainder of Trade Myths includes an explanation of the drivers of trade flows, the history of the economics behind trade, and Enzio’s suggestions for how to remediate the discussion of trade. His first suggestion concerns myth number three or specifically, antiquated (mercantilist/nationalist) trade balance accounting, and how it needs to be modernized. His second suggestion involves tax solutions for helping the working class. And adding to that, his third suggestion relates to the necessity of improving the quality of the U.S. workforce by way of better vocational and pre-college education. In closing, while Enzio duly noted that political self-interest can prevail during economic downturns, this reader was compelled to reflect on an earlier quoted passage from the late Professor Daniel Boorstin, which Enzio recaps in stating: [America's] politicians/leadership recognizing the U.S. itself is the largest stakeholder in the globalized economy will be the necessary first step in the process of transforming mindsets about America’s trade balances and trade policies.

Q&A:

ST: What are your thoughts on the latest “currency manipulation” talk out of Washington, especially since the situation seems to be worsening with growing bipartisan support in both Congress and Senate?

Enzio: This cheap talk has to be seen against the backdrop of mid-term elections in America. It also has to be seen against the backdrop of Congressional “stimulus” packages which have resulted in 10% unemployment rates – and in 20% unemployment rates for males who are 30 – 55 years old. Another backdrop is that charade of the Treasury report on currency manipulation. Everyone bandies around the “glories” of purchasing power parity; I, for one, have severe methodological problems with this bit of nationalistic chauvinism. It is interesting that the one country whose currency has fallen the most uses this, the U.S. You never hear serious intellectual debate coming from Germany, Japan or Switzerland about how “overvalued” their currencies are – yet, they keep generating huge and growing trade surpluses.

ST: Although it’s mostly “cheap talk” at this point, there’s a palpable escalation of angst in the U.S., meantime while there seems to be firm resolution in China (re. a desired gradual appreciation of the yuan). Do you think another Smoot-Hawley type tariff and a subsequent devastating impact is a possibility?

Enzio: Absolutely not. I don’t think that Congress would be that short-sighted. But I can see its members chasing the WTO with all sorts of law suits, depending upon which constituencies these Reps and Senators are representing.

ST: Changing directions then, tell me, is trade balance accounting consistent among the U.S. trading partners, and what, if anything, is being done to modernize the accounting?

Enzio: Yes, everyone uses the same, 16th century framework. Thus, all trade balances are measured in terms of national borders. This was logical in the 16th century, when there were very few MNCs and when mercantilism was common practice.

ST: Okay, so let’s assume that politicians accept your suggestions and everyone now recognizes that the U.S. has a massive trade “surplus” when factoring in activity of U.S. MNCs’ overseas affiliates. In your opinion, what then is a healthy amount or range of debt-to-GDP? Does or should this vary much across borders, given idiosyncrasies within countries (Japan comes to mind)?

Enzio: It is not as much the ratio per se as it is who is financing that deficit. If the foreigner really is financing that deficit, then the country that is borrowing the money is vulnerable to the foreigner pulling their funds out. But a second point also is relevant: what is the currency of the fiscal deficit? If it is a small currency, then the foreigner, in fact, can pull out. But in the case of the USA, the dollar is the world’s dominant currency, so that reduces the leverage of the foreigner. Furthermore, if American politicians accepted that their own MNCs are very much “at fault” for America’s geographical trade deficit, their whole mindset would change from: “how can we punish ‘bad’ China, to: how can we re-invigorate our own competitiveness?”

ST: For my last question, I want to get your thoughts on if we recognize the massive trade surplus in the U.S. and correspondingly the huge deficit in China when backing out MNC activity, does this change the ongoing U.S.-China trade and currency arguments?

Enzio: Absolutely. Were MNCs’ balances to be included in such “global” trade balances between China and America, then Americans would be asking their very own politicians just why American MNCs are producing more and more abroad instead of back home in the United States. Answer: the politicians have, in their quest to get re-elected, made many expensive promises. That means that taxes and regulations have increased, courtesy of politicians’ desire to get re-elected. The upshot is that the U.S. (like Europe and Japan) have “priced themselves out of the market” in terms of costs and regulations. As a second fusillade primarily against U.S. politicians: instead of focusing on what could make America more competitive – namely, pre-college vocational training – those very politicians who rail against “bad and dangerous” China have a mendacious record when it comes to vocational education policy in America.

Thus, were my points regarding America’s global trade surplus and China’s global trade deficit to be heeded, then this rubbish about exchange rates “really” affecting trade flows would wilt in the face of much more important competitive considerations, e.g. domestic tax as well as regulatory regimes, along with (vocational) education policy. Laconically, you cannot import a car repair; you need a qualified local to repair that Mercedes that you have imported from Germany. Were exchange rates really as important as some politicians claim, then why do Germany, Japan and Switzerland – whose currencies have appreciated fourfold against the dollar since 1970/71 – all have trade surpluses (as I mentioned in your first question)?

ST: Thank you for your time, Enzio.

2) Primacy of DP World: Dubai World’s marine and port subsidiary, DP World, maintains deep-water terminals in over 30 countries from the Americas to Asia. It is simply too valuable a commodity (commercially and politically) for the government to abandon to creditors in courts. DP World’s port presence across the globe is central to the UAE’s identity and prestige.

3) Capitalism 2.0: The Dubai crisis was an inevitable and necessary step in the maturation process of an emerging free-market economy. Sheik Mohammed bin Rashid Al Maktoum’s undisciplined approach to development, coupled with investors who naively assumed their bets were covered by state revenues derived from oil, created conditions that plunged the Emirate $80B in debt. Despite the poor timing of Dubai  World’s announcement of a standstill just prior to the Muslim holiday of Eid al-Adha, Dubai and its flagship company should emerge from the crisis with a new sense of purpose and propriety. Abu Dhabi will likely take the lead in helping Dubai restructure its financial institutions and reshape its strategic thinking as part of a wider effort to regain a measure of market integrity and public trust.

4) Human Capital: Dubai’s “oil reserves” are its people. They are educated (77.9% literacy rate), able, and multi-lingual with commands of Arabic, Persian, English, Hindi, and Urdu. The  serious, sophisticated investor recognizes this as a key attribute in any successful venture. Human capital is the critical “X factor” on a balance sheet.

For information on the latest global economic competitiveness ranking and how the GCC ranks (note Saudi Arabia moved up to #13 this year and is knocking on the door for a top-10 spot), see Doing Business 2010: Saudi Arabia nears goal; UAE climbs ranks.

clipped from www.thenational.ae Diplomat warns US firms are losing edge RIYADH // The new US ambassador to Saudi Arabia yesterday warned American businesses to wake up to the fact that they are losing their edge in an increasingly competitive Saudi market. Ambassador James B Smith, a retired air force general, also told his audience of about 100 US company representatives that it was time for both Saudis and Americans to “rethink some opinions” of each other forged in the wake of the September 11 terrorist attacks. Noting that many US companies are “on the sidelines waiting to see what’s going to happen in Saudi Arabia”, he added: “My message back to them is: What’s happening is the train has already left the station. You are losing market share to India, China, Russia and if you don’t move you’re never gonna catch the train.”