Saturday, July 26, 2008


Bueno. Ingrid Betancourt is free. The American contractors are free. The war with communist terrorists is almost over. For all of you who have not been fortunate enough to discover the boundless charms of Colombia, it is time to chart your flights. Or just about.

Most of you do not realize that I am writing about the 4th largest nation in the Western Hemisphere. The only South American country with access to both oceans. A nation tri-sected not by one Andean range, but three. One of very few places on earth where from a tropical beach you can contemplate snow-capped peaks. What will separate you from them is a jungle with hidden pre-Colombian cities. And until recently, teeming with leftist thugs.

But even those who have not had a chance to explore the extraordinary greenery of Colombia’s landscape have at least once in their lives come across the country’s most prominent exports – Garcìa Màrquez’s realismo màgico, Botero’s jocular voluptuosity or the nation’s “three Co’s” – some coal, more coffee and even more cocaine.

There are two Colombias. There is Colombia Colombians are proud of – a nation historically unscathed by autocratic regimes, blessed with a modern economy, vibrant urban middle class, parks, pedestrian zones and a metropolitan transportation system that serves as a model for developing countries. This is a country of a US-educated elite, unparalleled feminine beauty (probably rivaled only by neighboring Venezuela), rich mineral reserves and a GDP per capita of some $6800 – twice the level of China’s.

And then, there is the fragmented, lamentably poor rural Colombia. Home to the world’s largest organized crime networks, ravaged by decades-long struggle between neo-stalinist guerrillas and right-wing militias, underscored by the failure of the state to protect its citizens, four million of whom have fled the country.

This amazing contrast has been at the very root of Colombia’s problems and the rebel groups’ violent activity, which outlived the relevance of their professed ideological background. Fuelled by highly profitable underground economy and capable management, the guerrillas survived the collapse of leftist ideologies and have continued the armed struggle as a way to protect their economic empires. And for decades, the government failed to respond to this challenge accordingly – through well-funded and capably managed operations.

The reason lies in the fact that for many years the affluent urban Colombia lived in a relative safety and isolation of the dramatic, bloody events that played out in the countryside. This unsustainable balance was eventually broken at the end of the 1990’s, when the combined forces of the economic crisis, insurgents’ cheeky intransigence and government failure put the very survival of the Republic at stake.

Because of their history, unusual ethnic mix and insulating environment, Colombians are quite unique among Andean Latinos.

The Amerindian traditions were pulverized by early settlers, but few immigrants reached the hinterland until the coffee boom in the 1930s. Consequently, whereas other immigration nations fixed the loyalty of primary groups to protect their interests against newcomers, no such fossilizing tradition was necessary Colombia. Just like in other Latin American societies, the family has always played an important role, but the circle of acquaintances has always been wider and flexible enough for Colombians to fill in the organizational vacuum between the elitist State structures and the local communities. Given the inaccessibility of many areas of the country and the fabulous riches that unfolded outside the government control, the incentive to build parallel networks of authority was high, whenever supported by economic rationale.

As a result, Colombians tend to reward individual talent and initiative to much larger extent than other Latinos. Even at times of global ideological schisms, Colombians’ circumstancial pragmatism and a very “un-Latin” propensity for entrepreneurial risk-taking prevented total economic stagnation. Not surprisingly, Colombians make better businessmen (and even businesswomen) than many other South Americans. Their management capabilities are objects of neighbors’ tacit envy.

This does not mean that initial capital accumulation leads to creation of globally competitive companies. The structures Colombians tend to build are strongly hierarchical and impatience to obtain immediate satisfaction stunts growth of their enterprises. Seldom do they build a scale that would position them competitively in the rivalry for political or economic influence. Rather, the multiplication of interests, opportunistic flexibility and the importance of the local context have led to the fragmentation of the society in which communities took issues into their hands. Without falling into naturalistic determinism, it is worth underlying the inaccessible character of the various fiefs – nestled in insulated valleys and still speaking the same language only because 300 years is not long enough to replicate the linguistic variety of the Swiss Alps, the Balkans or PNG Highlands.

Well above these divisions, and unlike in other Latin nations, Colombia has maintained a civilian government with regular free elections, only interspersed by two short-lived attempts to introduce military rule. Polls conducted by Latinobarometro in 17 Latin American countries routinely confirm that Colombians have the strongest attachment to democratic values among various nations inhabiting the varied ecosystems that separate Rio Grande from Ushuaia.

This is more than a passing comment. The tradition of dictatorship, whatever its form - latifundia-based caudillism or a military junta - indelibly shaped the political cultures of Latin America. It spawned an entire literary genre – novela del dictador – and its Nobel-prized epiphenomena: Asturias’ “El señor Presidente”, Roa Bastos’ “Yo el supreme”, Carpentier’s “El recurso del método”, Valle Inclàn’s “Tirano Banderas”. Even if Colombian literature joined the bandwagon (notably in Garcìa Màrquez’s unreadable “Otoño de patriarca”), the Satanist narrative of an inaccessible Supreme Leader – the Lucifer tucked in his sprawling palacio and projecting his ruthless, infernal tentacles of power has never captured the political imagination of Colombians.

But it did capture the nation’s economic reality. By the 1980s, the extraordinary flourishing of drug cartels generated the most powerful underground big shots since the times of Al Capone. The brash, ebullient personality of Pablo Escobar perfectly fit in with the Latin myth of a tragically isolated, brutal, boundlessly wealthy, elusive, eloquent populist with friends in high places (from Norriega to Ortega). Several years after Escobar’s death I went to visit the presumptive headquarters of the cartel in Medellin. The high-rise ruin still stood there, a monument to the hierarchy of terror, untouched because untouchable. Smelling with horror.

Despite the commitment to democratic institutions, periods of widespread conflict have plagued Colombia, leading to civil wars at the turn of the 20th c, in 1950’s and again recently. The foundations for such recurrent social convulsions have been laid by the social and economic fragmentation of the population, and the relative isolation of the privileged elite. In fact, the elite networks may have favored relatively consensual politics, in which opposition parties should be regularly included in the government. However, emerging political forces were not co-opted into the system, but suppressed, leading to the emergence, since the 1960’s, of three armed groups:
• neo-stalinist Fuerzas Armadas Revolucionarias de Colombia (FARC, 1964)
• pro-Cuban Ejército de Liberacion Nacional (ELN, 1965)
• maoist Ejército Popular de Liberacion (EPL, 1966)

The world today may be unrecognizable for those who have stuck to their jungle-based guerrilla anachronism and the very durability of the conflict has astonished distant observers. There are several reasons for it.

By 1970’s, massive urban migration and accelerated modernization had seen the emergence of new social classes which the State’s administrative structure failed to accommodate. In fact, the failure was threefold: economic (lack of perspective for economic welfare, tax evasion and free riding on public costs), political (non-incorporation of large parts of the population into mainstream public life, degradation of regional authority, division between the center and the periphery abandoned to the guerrillas) and ideological (particularism, poor civic sentiment and weak national identity).

By 2001, Colombia’s 150’000-strong conscript army faced 40’000-strong array of rebel forces, right-wing vigilantes and organized crime, each driven by a mix of ideology, pursuit of wealth or - simply - revenge. Almost 40% of the country’s territory was off-bounds.

But even then, at the apex of their military power, the guerrillas in Colombia stood little chance to become a political force. In few cases in which insurgents did submit themselves to the electoral sanction, they fared very poorly. With the possible exception of extremist rural forces supported by puritan ideologies (e.g. Maoism in China and Cambodia, Taliban in Afghanistan), most revolutions only succeed when its leaders make alliances with other sectors or elites, something that FARC was unable to achieve. It is arguable if they were interested in the first place.

The rising security threats to the comfortable urban lifestyle, an epidemic of abductions, economic slump, corruption and the failure to achieve a breakthrough in negotiations with the terrorists created perfect conditions for a strongman who could command support over and above the 300-year old political axes. Early this decade, Uribe proved to be that man.

Today, there seems to be an increased sense of national pride in a country which 10 years ago had fallen to a near-pariah status. Colombians are generally embarrassed by the image problem from which the country has been suffering for decades. Linguistically, they have even learned to dismiss the seriousness of the situation by employing evasive euphemisms. Insurrection and paramilitary excesses are labeled “problemas de orden pùblico” (public order issues) and the high crime rate: “altos ìndices de violencia” (high indices of violence).

There is little doubt that the communist terrorists are cracking and a little bit of national euphoria is well deserved. But longer-term improvements in security and livelihood for all Colombians will hinge on more than just successful military actions and the liberation of captives. The nation has achieved the professionalization of the armed forces. Now it needs a roll-out of sustainable social programs, economic empowerment of lower social strata and the reinforcement of the State’s presence in all parts of the country.

But do not delay your visit until then. This is a country on the rise.

Saturday, July 19, 2008


It has been over six months since the world markets wobbled uncertainly into the New Year. With comfortable hindsight bias overlooking multi-billion dollar losses, it is now time to refresh our view on what to expect during the period which separates us from resinous aroma of Christmas pines.

Investors of All Nations Unite! No amount of diversification has protected you thus far. Year-to-date losses have been remarkable. Shanghai Index has dropped 47%, India 40%, Hong Kong 23%, London 15%, US market (S&P500) 13%, Tokyo 11%. The Pakistani investors eventually decided to ransack the stock exchange in Karachi, and in all candor, other temples of greed deserve commensurate thrashing. Interestingly enough, commodities, so far insulated from the cascading erosion of wealth, have recently joined other asset classes in this broad sell-off.

Alas, the same commodities have now infected the global economy with an epidemic which, along with smallpox, seemed to have been eradicated from the surface of this planet: Inflation.


I meet two types of economists among those who have miraculously maintained their jobs on Wall Street. They can be broadly categorized into two tribes - the White Tribe and the Red Tribe. The Whites focus on the industrialized OECD economies and mostly see a prolonged slowdown precipitated by debt market excesses and graying populations. The Reds, on the other hand, concentrate on the commodity prices and over-accommodating monetary policies in the emerging markets. The two tribes do not really speak the same language, even though they believe that they do. When the White Tribe uses the signifier “CPI” (consumer price inflation), it mentally visualizes an American fatso in front of his oversize family mansion which houses a loud shrew and a couple of spoiled kids. When the Red Tribe uses the signifier “CPI”, it imagines cute and skinny Filipino kids who have not seen their mother in a year (she works as a domestic helper in the Middle East) and their dad for six months (he works on a Greek ship). In the former case, food accounts for some 4% of inflation “basket”. In the latter case, it accounts for 50% of inflation “basket”. But the disparity is even larger. Filipino food is basically a commodity – rice and vegetables, protected partly by government subsidies. Meanwhile 82% of the food value consumed by an obese American is derived from packaging, distribution, processing and labor. The differential impact of commodity price swings is heavily lopsided to the disadvantage of the orphaned family.

The Whites are cold, callous cynics. The Reds are passionate, pugnacious alarmists. The Whites usually see no inflation and ridicule the naïve Western consumer whose perception is skewed by the prices of seven daily products, instead of a scientific, multi-factor inflation model. The Reds have been crying inflation wolf for months, panicked by galloping food and energy prices.


First, are the Whites really wrong? How can one reconcile the recession-prone US economy with persistent inflation pressures? Dismissing outright the global impact of the US demand slowdown has proven to be premature. Indeed, the congenial American fatso is practically irreplaceable. Aggregate US consumer demand is worth over $10 trillion per year. By comparison, Europe and Japan combined represent some $8.5 trillion. For all its swagger, China is a minnow ($900 billion) and India still has a long way to go ($500 billion).

The global economy has over the last 15 years benefited hugely from the disinflationary impact of globalization, facilitated by international labor arbitrage. It is the production of apparel, computers, toys, video and audio equipment - assembled by Chinese girls’ nimble fingers - that has seen the retail prices fall in the developed markets. Alas, these are low-frequency purchase items and they hardly affect the perception of inflation, most impacted by the runaway prices of gasoline, eggs, bread and air fares.

The White tribe continues to ridicule this “inflation perception” as the figment of consumers’ poor understanding of their spending patterns. This is a questionable form of scientism (people do act upon their own perceptions and modify their economic behavior accordingly), but the White tribe does have a point indicating another factor that damps the momentum of the inflationary groove: average wage growth in developed economies.

Indeed, it is only recently that the discussion of increased wages reappeared in the EU’s political discourse. American workers have been deprived of collective bargaining rights during the Reagan administration when Lane Kirkland’s AFL-CIO was more interested in fighting communism in Europe than supporting moribund industries at home. Today, unemployment expectations in the US are at a 28-year high and the precarious character of the (still existing) jobs will not allow the workforce to formulate wage demands that would offset price pressures and entrench inflationary expectations.

Meanwhile, Japan is veering off into a class society. I have two sorts of friends there. One group works for established corporations, with a guarantee of lifetime employment, not unlike their fathers (not mothers) did. Their main risk is karooshi (death from overwork) rather than lifestyle changes. The second group tries hard to make ends meet and maintain their lifestyle by taking unstable weekend jobs combined with part-time employment elsewhere. Culturally and economically, they remain hatarakibachi (busy working bees) and also risk karooshi, but are unlikely to achieve any wage growth before that. It probably did not matter in the recent years so much because your yen tomorrow was always worth more than your yen today, but these days will be over when inflation expectations re-enter Nippon psyche.

With OECD countries having reached wage growth peak in 2006, the current weakness of the workforce’s bargaining power all but disembowels the inflation apparition. But the economic well-being suffers nonetheless, regardless of the economists’ triumphalism.


The Red Tribe focuses a lot more on the commodity prices and the mechanisms through which they affect emerging market economies. But why are emerging markets more exposed to inflationary shocks from commodity prices? Is it just oil and food? Well, not quite, as those who suffer most from price increases often happen to be oil exporters - Venezuela, Russia and Saudi Arabia among them.

Rising food and energy prices only translate into persistent inflation if monetary mass and/or credit grow faster than the gross national product. If India’s or China’s money supply has expanded by 20% year over year, Saudi Arabia’s has grown by 72%! Negative interest rates (i.e. interest rates less inflation) have reached nearly 5% in Russia and 8% in Egypt.

Loose monetary policies have created a liquidity shock in emerging markets fuelling demand for raw materials. The manipulation of the exchange rates and subsidized domestic commodity prices shifted the burden of price adjustment upstream, to dollar-denominated commodities. Given the potentially unstable nature of many of these countries’ political structures, their governments have been obstinate in implementing the plethora of non-market mechanisms. Price controls, emergency supply increases, VAT rebates, export taxes and quotas, or outright export bans have all been destined to dampen the impact of commodity prices on privileged industries or potentially restive urban populations. The demand for raw materials thus continues unabated and the resulting price increases are exported to the developed nations which carry the burden of demand adjustment.

Nevertheless, with the increased rigidity of local labor markets (thanks partly to China’s new labor law), there is a risk that food and energy price increases eventually seep into the “core” inflation. Most Asian and Middle Eastern governments may have little choice but to eventually raise interest rates and let their currencies appreciate. Ample foreign reserves and improved terms of trade with the developed countries give emerging markets enough room to allow their currencies to appreciate incrementally. When this happens, their hitherto “cheap” currency will no longer dis-intermediate the commodity price inflation for the Western end-user. These appreciations, unless corrected by the developing nations’ runaway inflation, would prolong the dollar’s depressive lows.


Lauded by technocrats and demonized by populists, globalization has for the last two decades played a decisively disinflationary role, shielding comfortable western consumers from the shrinking pressure on their wallets.

One of the hugely underestimated side-effects of this cross-border process has been successful labor cost arbitrage. If cheap labor was not allowed to move to the existing industrial installations, then the installations moved to the labor. Since at least 2000, massive shifts in low-skilled labor endowment have been doubly beneficial. They ensured expanding margins for global companies and provided disinflationary safety valve for consumers’ economies. Mexican delivery boys in New York, Polish baggage handlers at Heathrow Airport and Pakistani workers in the Persian Gulf have all combined their forces to slow down the inexorable cost pressure that accompanies economic growth. For as long as the exchange rate differentials flattered their mental anchoring in home countries’ financial realities they willingly filled the labor market niches long abandoned by host economies’ local populations.

We should hope that the remaining pools of inexpensive labor and affordable, non-Western capital will partly offset the inflationary pressures unleashed by the commodity prices. Alas, many of the sources of this politically incorrect and often illegal “cheap labor” may now have seen its peak. Latinos have been the first to suffer from the construction industry shake-off in the US. The pool of Eastern Europeans entering Western Europe’s job markets is not unlimited, although it could potentially be offset by culturally alienated youth from Middle East and Africa. Coastal China has been suffering from rising labor costs for two years as the supply of female labor has peaked. Further flows are still possible into urban India and the Gulf countries.

The globalization of labor flows does and will continue, but is unlikely to directly benefit the profit share of Western, or Western-listed companies. Nor are he recent labor flows positive for the dollar. To protect the value of their remittances, ship crews are now demanding that their wages be paid in Euro. Foreign construction workers in the Persian Gulf will eventually force these economies to break the dollar peg. Japan’s exports are now invoiced in the yen. And China finds it difficult to stem capital inflows drawn by the perception of the unsustainability of the current exchange rate. All these trends bode ill for the dollar, the denominator of most commodity prices.

As the Red Tribe and the White Tribe debate the inflation “decoupling”, they might need to take into account that the burden of commodity prices shifts ineluctably towards dollar economies. Some of the Red blood will then be spilled onto the White Tribe’s clean shirts.

Saturday, July 12, 2008



Emerging markets are often characterized as primarily exporters of commodities. This is an over-simplification. On an aggregate basis, they are both exporters and importers of raw materials. India and China are net importers of commodities, while Australia and Canada are important exporters of commodities, including to customers in emerging markets.

These days, numbers of interplanetary magnitudes are published, illustrating projected “infrastructure development” in the emerging markets. These are staggering figures. Of the $22 trillion earmarked for infrastructure spending over the next decade, some $1.3 trillion is being disbursed this year. Beyond Brazil, Russia, India and Russia, the main multi-billion infrastructure investors will be Indonesia, Mexico, Saudi Arabia, South Africa and United Arab Emirates. Despite of all the wailing about a “bubble”, this infrastructure expenditure has so far proved largely price insensitive.

A closer look at these projects reveals that “only” slightly above 30% of the overall expenditure will transform into commercial and industrial infrastructure. The rest will be spent on what mankind always had to fork out – shelter. And for a good reason. In China, which comprises 34% of all new urban residents among these economies, as much as 63% of all construction is residential. During the next decade 11% of all Chinese, 10% of all Brazilians and 9% of all Indians will relocate to the cities. Only Russia has a negative urbanization rate, offset by the gradual replacement of old Soviet building inventory. All together, the world will experience relocation of 2.4bn people into the cities of Asia, Latin America and Africa. The move dwarfs the magnitude of Western and Japanese urbanization of the 1950s and 1960s which involved one tenth of that number.


Although they are still minnows in terms of final consumer demand, emerging markets now represent some 30% of the world’s economy and 60% of incremental growth. The massive infrastructure spending plans have connected these economies more strongly among themselves. As the global trade flows have registered the lowest growth in several years, the trade among the emerging market economies has been booming. In the process, the US-centric supply chain pattern of the 1990s has given way to a new structure in global trade. These shifts are illustrated by unprecedented spreads between commodity indexes (up) and industrial production in the developed economies (down).

How was this massive realignment possible?

After the 1998 debacle, most governments in emerging markets dodged the pressure to develop internal consumer and financial markets. Instead, since at least 2002, these nations have embarked on major developments of infrastructure, in part to serve new export markets, and in part to address the needs of modern urbanism. This, in turn, reinforced the trade networks among these countries, making them less directly vulnerable to periodic economic slowdown in the US and other developed economies. Not surprisingly, in the early 2008, their overall export growth was maintained, despite falling demand in the US. With 80% of its commodity demand destined for the domestic consumption, China, rather than US, often emerged as the ultimate destination of exports from other Asian and African countries.

Following several years of capital accumulation through trade account surpluses, emerging market nations are now holding 75% of the world’s foreign reserves. Over the last five years, they have been growing annually by 39% in China, 57% in Russia, 32% in India and 33% in Brazil. China has a closed capital account and export earnings are essentially trapped within the Chinese economy. Owing to appreciation pressure on Chinese renminbi, there has been little incentive for illegal capital flight since at least 2001. The Chinese State continues to control not only interest rates and cross border capital flows. It controls asset supply and asset transfers. And it remains the chief banker for infrastructure and property development in the country. Only in the first half o this year, additional $52bn flew into China in the form of foreign investment. This wealth has been largely re-directed into urbanization and re-industrialization of these economies.

The common misconception is that the infrastructure spending (and, by extension) commodity demand will collapse the moment the export industry stumbles. This is misguided for at least two reasons.

First, the contribution of net exports to Chinese gross domestic product, while growing in the recent years, has not exceeded 7%. This is dwarfed by 43% ratio of investment (both public and private) to gross domestic product and the ratio of consumption (46%). Even if the American consumers turned their backs tomorrow on Chinese goods, the impact on China’s growth would be limited. Most of Chinese exports go to Asia (46%), followed by Europe (24%). Only 21% of Chinese exports are destined for North America. And that is less than 1.5% of China’s gross domestic product. At a recent Canton Fair, order volumes were dominated by Europe, followed by the Gulf countries, and only then US. This is understandable given that Chinese currency has actually depreciated 4.4% versus Euro over the last year.

Secondly, the slowdown in Chinese exports will not defeat the building and infrastructure boom because it has occurred already. Since the beginning of the year, roughly 20% of Taiwanese and Hong Kong-invested businesses have closed in Pearl River Delta. While the new French-style Labor Law was the final straw, the maquiladora-type of operations had already been losing competitiveness for some 18 months. Friends in the region are telling me about the same Taiwanese businesses opening in Vietnam (60% of China’s wage level) or Cambodia (40%). While there could be a lagging impact on the local property market, the deceleration in maquiladora activity is unlikely to have a lasting impact on China’s infrastructure spending ambitions.

All this will require materials necessary for property development (aluminum, copper, cement and steel, i.e. iron ore and metallurgical coal), power generation (thermal coal, natural gas, uranium, cement, steel), power transmission (aluminum, copper, steel) and transportation (oil, steel, cement). But what may slow down this urbanization process, is a phenomenon unthinkable just several years ago – insufficient supply of basic commodities.


The main reason for the stubbornly high commodity prices should be sought in their inelastic supply. All the four groups of commodities – agricultural, energy and industrial – have been affected by several, mutually reinforcing factors that bottlenecked supply to the market. The most important among these are access to capital and technology, physical constraints, volatile weather conditions and explosion in capital costs.

Regardless of the potential return, capital and technology find it much more difficult to flow towards the sources of raw material wealth in the conditions of the progressive erosion of what the Western Culture labels “the rule of law”. With long-term security of tenure under threat, resource nationalism on the rise, bureaucratic rent-seeking behavior, ideologically motivated support for social and industrial disturbances – it is not surprising that both risk-averse debt and allegedly risk-tolerant equity markets appear reluctant to lock in capital for considerable periods of time in far-flung, inherently unstable destinations. Despite all the self-satisfied and politically palatable blabber that “the world is flat” the hurdles for capital flows are often insurmountable. Examples are aplenty. Equity investors are unable to prop up the world’s largest copper company. The most technologically advanced oil companies may no longer access bookable reserves in the ground. In turn, Arab oil sheiks are not allowed to invest their resources in North America’s agricultural land, instead of artificial ski slopes in the Persian Gulf. In these cases, and many others, capital will lie fallow, or will be redirected into lower return projects elsewhere.

Nor can resource companies fully leverage the potential of tax arbitrage. Most major companies now have their emerging market subsidiaries attached to holding companies in tax-free jurisdictions, but the subsidiaries themselves are taxed more aggressively by host governments. This has taken an extreme form in upstream industries, where a combination of royalties, export quotas, domestic pricing, equity transfers, beneficiation levies and windfall taxes has reduced incentives to pursue investments. In extreme cases (as in Africa), this is due to state bank-backed competition from China (mostly Exim Bank) which carries promises of large-scale infrastructure projects and local power perpetuation, neither of which are acceptable to Western shareholders.

In one Latin American country, I once assisted in a meeting of “stakeholders” – colorfully clad activists interested more in robust projection of their agendas rather than dialogue with potential employers and tax payers. As much of the increasingly acrimonious debate was couched in terms of racial self-victimization (“Spaniards came here 500 years ago, brought us shards of glass and took our gold”), the most interesting moment came when the attention of the attacks was redirected from the well-trodden path of anti-Western and anti-Anglo Saxon bashing. To rowdy ovation from the class-conscious crowd, a speaker lashed out again a dangerous new beast – “las Multilatinas”, successful Latin American companies in search of growth opportunities in neighboring countries. Latin “capitalists” were deemed unwelcome, just as other “foreigners” and their local allies.

Physical constraints are gradually becoming a barrier to capital flows as well. In agriculture, mining and energy, the low-hanging fruit has been largely harvested. The available agricultural land in South America and Eastern Europe is not adequately linked to major market thoroughfares and it will take years before adequate infrastructure is developed. In the US, much of the protected federal land could be released, but due to soil quality, it cannot be instantly transformed into fertile corn or soybeans acreage. Meanwhile, oil, gas and metal exploration efforts are forced move to increasingly remote locations in the Arctic Circle, sudorific jungles or off the continental shelf, only to tap into deposits of lower quality than those that are currently being depleted.

It is extremely difficult to attract and maintain a committed workforce in those inhospitable, boring and often dangerous places. The fact that so few schools prepare new generations of geologists and engineers further exacerbates this problem. And although the global transportation links may have spread out a single company’s asset web around the planet, the increased transportation costs make even these value chain decisions questionable. The strain on international logistics contributes to increased costs as too few sources with too few linkages carry massive volumes of products to too few end-point destinations. The resulting costly delays lead to further dislocations in the trade system.

All commodity production is, to certain extent, dependent on weather conditions. As the recent floods in Eastern Australia have proved, a global 850mt seaborne coal market may suffer disproportionately from a knock-on effect caused by excessive downpour in one, key region. But more surprises may be on the horizon. The unusually cold winter over a landmass stretching from Iran to Korea, wet weather conditions in Japan, floods in Southern Africa and North America and cooler, wetter summers in Europe, have all an impact on economic activity, and nowhere is this influence stronger than in the agricultural markets. It just could be that the sun spot activity cycle will usher the planet into several cooler years. It could also be that the melting Arctic ice cap has poured so much fresh water into the North Atlantic that the Gulf Stream is trapped much further to the south, leaving American northeast and European west colder than usual. It could also be that we are entering an uncharted era in which anthropogenic factors begin to interact with (poorly understood) climate effects of ultraviolet and cosmic rays. Whatever the causes, the weather volatility at this new stage of Holocene will continue to impact the already tight global commodity markets and the low inventories.

Finally, the illiquid debt markets and the underperforming stock markets do not make it any easier for resource companies to increase the supply of raw materials. Huge delays in permitting process deserve part of the blame. It now takes up to 4 years to finalize a feasibility study, up to 10 years to obtain the necessary permitting in certain Western countries, and up to 48 months to have the critical equipment delivered. Even if some of these periods overlap – it does go a long way in explaining why the commodity boom has NOT been followed by a swift production response.

Because of exploding capital costs and expensive, but chronic delays, mining companies are not developing brand new “greenfields” projects, nor can they enter profitably many countries due to the afore-mentioned resource nationalism. They can and do redeploy their cash either in mergers and acquisitions, which are supply-neutral, or in “brownfields” developments nearby their existing operations. The latter choice may actually be supply negative – the mining companies move to lower grades, extending the life of the mines and improving their net asset value, often effectively lowering the volumes of payable product.


With the supply side so constrained – the only solution lies in the adjustment of global demand patterns. But the much-talked about “demand destruction” could be a short-term phenomenon. In any case, it has not occurred yet. Unfortunately, the main emerging market economies carry a statist legacy, are not fully market-driven and often introduce various price distortions that make price transmission more opaque. Regulated energy prices in China and in India reallocated capital away from utilities and pushed energy demand too high, now leading to accelerated energy imports of oil and coal. Similarly, India froze cement prices between 2006-07, leading to shortages and increased imports. Last May, despite 59% increase in the prices of raw materials and energy imports, China increased the volume of key imports of resources by another 13%.

It appears that neither conservation nor substitution offer a durable demand solution and more radical technological solution should be sought – both on the demand- and supply side.

In 5th c BC, Greek philosopher Zeno formulated a notorious paradox. If the tortoise is given a head start over Achilles, the Greek warrior will never catch up with the turtle if he always halves the distance between the carapaced reptile and himself. It took 24 centuries for human thought to solve this paradox.

We are slowly reaching the conclusion that, at the current level of technological advancement, this planet’s resources will not allow China and India to reach the level of wealth attained by the Western economies and Japan. This is a sobering thought for the world and a challenge for non-linear technological breakthroughs in alternative energy, agribusiness and material science. Let us hope that mankind’s cerebral power finds solutions before we enter a collision course with these new players’ frustrated ambitions.

Saturday, July 5, 2008


“There is no problem. We are all Chinese”.
(A Chinese entrepreneur in response the owner of “Ice Cream Factory” in New York’s Chinatown. The owner confronted him after discovering that the logo, the name and the business model of the decades-old “Ice Cream Factory” were perfectly copied by the newcomer several blocks away from the original shop).

The myth of national unity, as a guarantor of China’s “strength”, is particularly noxious for the development of critical thought. Although Chinese civilization’s most lasting contribution to human intellectual treasure dates back to the era when no single state could claim the monopoly of “Chineseness”, the perverse conclusion perpetuated by authoritarian rulers has been that groupthink is the measure of the (Chinese) man (and woman). The system is always in place to reduce the challenges to authority and breed conformism, not to resolve the underlying problems of the society. Creative thinking would require experimentation and conjure up the dreaded image of chaos (luan).

One of the tragedies of China’s history lies in the entrenched belief that the success in maintaining the ruling regime is the proof of the rulers’ righteousness. Combating the historical discontinuities – both temporal and geographic - Chinese historians fall prey to this perverse form of historicism. The rise to power and the increase in prosperity are identified as a measure of moral excellence of the rulers and the system they represent. This transforms history into a morality tale. But while centralism and appeals to “unity” prevail, maladaptive forms of social organization fester – at least for as long as the ruling dynasty remains in place.

Owing partly to the structure of their languages, the Chinese have a particular weakness for the argument ad verecundiam – appeal to the authority of moral proverbs or sayings. Mao’s shih poetry, Deng’s exhortations and Jiang’s “three representants” have, with various results, accrued an aura of mystical wisdom. Some of these absurdities has even been readily digested by foreign executives and then regurgitated whenever it suited them in the boardrooms full of clueless, but awed septuagenarians. Witness the reference ad nauseam to Deng’s “black cat/white cat” (not a Velvet Underground song). But reliance on these “wisdoms” is slippery. All involved have to be extremely selective when resorting to quotations. If the classic Lao Zi might please a red mandarin with the moral parallelism: “A good man does not argue – he who argues is not a good man”, it will seriously upset him with the political admonition “the greater the government’s power, the more chaotic the nation would become”.

Proclivity for semantic elasticity has been one of the defining features of Chinese propagandists all along its history. Qing emperor Kangxi dealt with the floods in one of the provinces not by damming the rapids, but by renaming the river from “the Uncertain One” (wudinghe) to “the Certain One” (yongdinghe). Watching the patriotic captions Chinese TV provides in its coverage of the tragic earthquake in Sichuan one wonders if anything has changed. These days, Chinese communists cannot quite cover up the drama in Sichuan the way they did in the wake of the 1976 Tangshan tremor. But they can, and do transform the meaning of the event that could threaten the Mandate of Heaven. On the TV screens, the exercise is, again, full of pride in national unity – zhong zhi chang chang, (“Our Wills Unite Like a Fortress”).

This unity of the “nation” is often portrayed as analogous to the harmony and unity of the family. But an extension of family analogy to non-primary groups, such as the state, is a perilous proposition. The occasional pro-democracy demonstrations in Hong Kong are routinely met with patronizing language of Beijing propagandists. Family analogies and meioses may be effective in indoctrinating the subjects, but they “settle” significant empirical questions with a rhetorical sleight of hand. Many dysfunctional forms of social organization have survived too long because of linguistic manipulation of such suggestive, though not demonstrative, family analogies.

“(In a Chinese man) there is very often a set of superiority and inferiority complexes stirring within those who have constant or occasional contacts with foreigners. He constantly persuades himself of his unexplainable superiority over the foreigner, but frequently has to rationalize in order to disperse the inferiority complex” (Hong Yuan, "The China Critic", 1930).

With the exception of the Taiwanese, whose pluralistic political culture has now critically diverged from the chauvinistic sinocentrism, many communities of overseas Chinese (huaqiao) are to varying degrees susceptible to the identification efforts deployed by Beijing propaganda. Although much of the reference to People’s Republic is apolitical, the undeniable economic success of the PRC has made the 37m strong diaspora, obsessed with material success, much more responsive to the themes of “national pride”. Because the institutional and linguistic identification is often beyond the reach of most overseas Chinese, the racialist belief in their otherness from the surrounding – Malay or white - majority appears to be the most prevalent and most easily manipulated. Since at least the date of Hong Kong handover in 1997, much of Huaren wenhua (sinitic culture, to which, in various degrees, most people of Chinese origin “belong”) has moved closer to Zhonguo wenhua – the “patriotic” culture of China.

We have reached a point at which the Chineseness in each person of mainland East Asian ancestry is becoming a question of an absolute. The Chinese no longer are offered any choice between liberalism, nationalism, communism, legalism or a reformed Confucianism. In order to be recognized as Chinese, one has to identify with China qua PRC and its racist policies that the rest of the world finds so questionable. There is little alternative offered to the vigorous trading outposts of successful Fukenese, Cantonese and Hakka communities in the Pacific Basin. The inevitable strengthening of the separate Taiwanese identity has deprived many Chinese of the intellectual alternative that Taipei could still provide a generation ago. In this highly divisive process, the inhabitants of Hong Kong and Macau were left with a stark identity choice – maintaining some links to their institutional, i.e. Western past, or fall into the orbit of aggressive nationalism. To the dismay of their numerous Western friends many have opted for the latter.

The cultural repertoire based on the racialization of the Other is, however, at its most acute among mainland Chinese whose stay overseas is limited both in time and space. The Chinese students, regardless of their actual personal experience, routinely generate a defensive expectation of humiliation and victimhood within a racially alien environment whose numerous aspects they often find alluring. After all, these students head most often to the countries whose educational system they admire. The feelings of alienation are particularly strong among the males who cling to their linguistic group and often lead lives of virtual celibacy. Anecdotal evidence would indicate that this experience is not necessarily shared by highly competitive young Chinese women, who appear less socially anxious and interact more readily with the majority white population. The fact that the existence of mixed couples is itself a proof of the integrative nature of many host societies does nothing to destabilize the racialized feelings of self-manufactured inferiority of the young Chinese men.

This last observation is important. Ever since the population explosion of the Ming dynasty, the size of the Chinese mandarinate has been frozen in proportion to the overall size of the population. Today, merely 2% of the PRC population attends tertiary studies, as opposed to 6% in India and 25% in Japan. University studies, especially overseas, and a good command of English catapult a young Chinese professional to an elite status in PRC. The CCP and the government structures are simply not capable to ideologically co-opt and materially incentivize a larger elite, but the socially frustrating experience of Chinese men abroad will guarantee strong adherence to nationalistic dogmatism nonetheless. This mechanism seems to be underestimated among American scholars. An expert in Chinese studies who started her career at the Woodrow Wilson School of Public and International Affairs recently expressed her amazement at the vigorous reaction of Chinese students, who, unlike people living in the mainland, “were not under the influence of PRC propaganda”. To make such a statement is to dismiss the formative role that nationalist indoctrination plays in the lives of young Chinese between the age of 4 and the age of puberty. No amount of tertiary brain cramming in Sydney or Durham will change these hardened attitudes.

As this darker side of the PRC is becoming more immediately familiar, not only on the streets of Paris or Seoul, but also in Africa and South America, the backlash could have unintended consequences. The network of mainland Chinese students overseas, interacting with established huaqiao communities increasingly “proud of their ancestry” may constitute a marginal phenomenon within the host societies of the prosperous West, but could potentially endanger the career prospects of ethnic Asians in selected domains of public service or in sensitive industries. Such defensive attitudes, should they arise, would have to be combated with vigor. The collective punishment inflicted in the 1940s on Americans of Japanese Ancestry constitutes a sobering precedent.

But the huaqiao, at least those who care about their ancestral land, also have a role to play. This is not a role of deferential kowtow to whoever exercises power in Beijing, however brutally. On the contrary, the risks of the Chinese nationalism derailing Asia’s prosperity are real.

The mass migration of Chinese peasants to the fast expanding megalopoles has been a contributing factor in the cultural homogenization of urban China. Laterally insulated agricultural communities are an unlikely vanguard of nationalist movements, but their role changes the moment they set their feet in the booming towns. The intricacies of the land reclassification system, which allows government officials to speculate on land assets, offer the prospect of ultimate material advancement that the rural folk are deprived of. Unsurprisingly, every year, at least 16m people move permanently to the Chinese cities, where this literate but poorly educated workforce is squeezed into factory and construction site landscapes. With organized religion still being frowned upon by the regime, these masses are prey to any ideological aberration and emotional excess. The numerically male-dominated mass may constitute a potentially explosive force when confronted with the irredentist young student returnees and their xenophobic messages.

It is here that the educationally privileged, bi-cultural huaqiao can assist the 21st China, a country burdened by simmering gender asymmetry and intergenerational displacement. The bi-cultural sino-westerners should help China graduate from its cultural aphasia and join the mankind as a generator of novel ideas and re-distributor of its newly found wealth. Despite the strong path dependency in Chinese history, there is nothing inevitable about its future.