Economics – Page 6 – Gavinsblog.com

Mikhail Khodorkovsky: Letter from a Russian prison

The former head of Yukos with a letter to the outside world. He warns:

I have already realized that wealth, and especially vast wealth, does not in itself make a person free. As a co-owner of Yukos, I had to make enormous efforts to protect this wealth. I had to limit myself in everything that might harm this possession.

I avoided saying many things, because speaking candidly could harm my possessions. I had to close my eyes to many things, to put up with many things, all for the sake of my assets, to preserve and to increase them. I controlled my possessions; they controlled me.

So I would like to warn young people today, those who will soon come to power: Do not envy those who have great wealth.

Do not think that their life is easy and comfortable. Property creates new possibilities, but it also paralyzes a person’s creative forces, it dilutes the personality. It is a cruel tyranny, the tyranny of property.

I have been transformed. I am becoming a normal person (economically, a member of the well-to-do middle class), for whom what is most important is not to acquire, but to live. The struggle now is not for property, but for myself, for the right to be myself.

In this struggle, popularity ratings, official contacts and public relations gimmicks are not important. All that is important is you, yourself – your feelings, ideas, talents, will, intellect and faith.

This is, indeed, the only possible and correct choice – the choice of freedom.

I have great pity for those authorities who sincerely believe that they are doing a good thing for the country, for the people. The road to hell is paved with good intentions. Further down this road they will realize that repressive methods and the forced redistribution of wealth are not compatible with modern economic development. And they will not be able to limit this assault to Khodorkovsky, Yukos or the oligarchs – their victims will be many, including those who created this machinery.

My persecutors know that there’s not a shred of evidence of any guilt on my part. But that’s irrelevant, since they could always accuse me of something else – burning down the Moscow Manege, or economic counterrevolution. I’ve been told that they want to put me away for a long time – five years or more – because they fear that I will seek revenge.

These simple people judge others by themselves. Relax: I have no intention of becoming a Count of Monte Cristo. To breathe the spring air, to play with children studying at an ordinary Moscow school, to read good books – all this is so much more important, more right and more pleasant than multiplying wealth and settling scores.

I thank God that unlike my persecutors, I have understood that making more money is far from the only (or most important) goal of human endeavors.

For me, the time of big money is in the past. Now, freed from the burden of the past, I am determined to work for the benefit of those generations that will soon take charge of our country. Generations that will come with new values and new hopes.

Hollywood banks on foreign DVD bonanza

Ever wonder how much Hollywood makes out of foreign DVD sales? Nobody knows the exact figures, but they are pretty high.

Does Wal Mart affect inflation?

Can a single retail company affect inflation? A recent National Bureau of Economic Research study argues that Wal-Mart’s size and lower-than-average prices have pushed the U.S. inflation rate substantially below what official statistics indicate. According to the study’s authors, the government’s current inflation metric assumes that lower prices at big-box discounters mean products of lower quality. But as the authors point out, the food products available at Wal-Mart tend to be exactly the same as those at local supermarkets, so customers don’t sacrifice quality by taking their business to the big discounter. When the authors corrected for Wal-Mart’s impact on the cost of food around the country, they found that from 1998 to 2001 the government had overstated increases in food prices by 14 to 18.3 percent’meaning, in turn, that the Bureau of Labor Statistics had overstated nationwide inflation by about 15 percent a year.

Tiger, Tiger, Fading Fast

Slate had a brief storyon the Irish economy too last week…

The lessons of Ireland’s success are obvious enough to border on common sense, in the same way that eating less is the key to losing weight. Support free trade. Create an environment that is amenable to investment. Educate your population. Align the interests of industry and workers. And, most of all, have patience and persevere; it took decades for Ireland’s efforts to bear fruit, and the path to prosperity was twisted at best. But even a country that is a dedicated follower of the Irish way could find that linguistic or geographic bad luck might mean that its perseverance would not be rewarded.

Of course, any number of wobbly Third World hellholes has a flock of venal bureaucrats who – thanks to the largess of developmental aid – are fluent in the language of economic openness and investment attraction. Unfortunately, developing countries usually fail to create an (admittedly deceptively) simple and straightforward plan – and stick with it for the following 40 or so years. In much of the Third World, long-term refers to the period required for a crooked minister to siphon off enough cash to leave town in his Mercedes SL-class roadster. The institutional credibility of Ireland’s legal, regulatory, and administrative infrastructure (which was pretty solid, in relative terms, to begin with) was cultivated over decades. And progress didn’t happen in a straight line; as recently as 1988, for example, Ireland’s unemployment rate stood at the nosebleed level of 16 percent.

In any case, though, the Irish tiger’s stripes are fading. Growing by 8 percent a year is a lot more difficult for a $130 billion economy (Ireland in 2003), than it is for a $25 billion economy (Ireland in 1973). Many of the drivers of Ireland’s growth were one-off (even if relatively extended) events, like the sharp increase in workforce participation and massive inflows from the European Union. Corruption has worsened over the past eight years, according to watchdog Transparency International. Perhaps most worryingly, Ireland is a victim of its own success: High prices and rising wages are eating away at the foundations of Ireland’s competitiveness. A deep-seated complacency, particularly in the services industry, will in time undercut one of the key appeals of Ireland as an investment destination. The country’s infrastructure is struggling to manage the explosive population growth – highly unusual for Europe, due to both a relatively high birth rate and significant immigration – of recent years, with no slowdown in sight.

Of course, there’s no shame in becoming a normal First World country. And even now, Ireland’s anticipated 4 percent growth in 2005 is around double European averages. Crowning its turnaround, an annual Economist Intelligence Unit survey named Ireland the best country in the world to live in (the United States came in 13th). As billboards throughout the country have it, the Guinness is great – at more than $5 a pint, it had better be.

On Stinginess again

Dan Drezner has a good round up of the stinginess debate.

Warding off the Oil Curse – Chad

Number 8 in the top ten things from Foreign Policy (see below) is this little gem:

Although the Boston Red Sox undid their curse in dramatic fashion, the West African country of Chad is quietly trying to undo the oil curse that plagues many developing countries. Chad became an oil exporter and in July received its first $38 million in oil revenues. Oil resources routinely fuel government corruption and civil conflict and undermine economic development. But, as part of a deal with the World Bank, which helped fund the pipeline that transfers the Chadian oil to market, 80 percent of the oil revenue will be spent on health, education, and infrastructure for its mostly poor population, and 10 percent will be invested for future generations. The governments expenditures will face the scrutiny of a watchdog committee that includes individuals from civil society and government, and most of the money will be held by the World Bank in a London account to preempt graft. The arrangement may not work outone nongovernmental organization already complained that the oversight board receives inadequate resources. But if it does, it could be a powerful model for other countries who are rich in resources and poor in everything else.

Could Turkey be plunged into a fiscal nightmare? Erinc Yeldan, professor in the department of economics at Bilkent University in Ankara and Mark Weisbrot, co-director of the Center for Economic and Policy Research in Washington seem to think so. Will this threaten future Turkey accession to the EU?

They note:

But beneath these numbers, a crisis looms. The expansion has been driven by a huge inflow of capital from abroad, $10.9 billion in 2003 (4.6 percent of the economy) and $12.5 billion in just the first eight months of 2004. These are overwhelmingly speculative, short-term inflows – not direct investment, for example, which would expand the country’s productive capacity and create jobs. Foreign direct investment has in fact fallen since 2000. The country is very vulnerable to a serious economic downturn when the inflow of foreign money goes dry.

These kinds of massive speculative capital inflows have a habit of reversing themselves, as they did in Asia in 1997, setting off the Asian financial crisis and a regional depression. In such situations, investors eventually begin to worry about the sustainability of such borrowing and debt. Any number of external events could trigger such an exodus from Turkey: For example, if U.S. and world interest rates rise, as they undoubtedly will from their current historic lows, safe assets like U.S. Treasury securities will become much more attractive.

The influx of speculative money from abroad has also pushed the Turkish currency, the lira, to an overvalued level. This, too, is a bubble waiting to burst. In the meantime it has devastated traditional Turkish industries that are typically labor-intensive by making imports artificially cheap, thus aggravating the unemployment problem. The lira had risen 139 percent against the dollar between 2000-2003.

The country’s public debt is unsustainable at 70 percent of the economy. In order to sustain it presently, the IMF has the government running a primary (excluding interest) budget surplus of 6.5 percent. This is extremely high (compare it with 3.0 percent for Argentina and 4.25 percent for Brazil), and prevents the government from making necessary investments in human capital and infrastructure.

Another devastating part of the IMF program is high interest rates: The Treasury’s debt instruments that are the leading assets in the Turkish financial markets carry an interest rate of 26 percent, still very high at 15 percent in real, inflation-adjusted terms. Compare this with 2 percent in the United States – it is easy to understand why businesses in Turkey are reluctant to borrow and invest in productive capacity.

In short, the policy makers have created an economy that runs on a speculative bubble. It would be nice if a majority of the Turkish people at least got some of the benefits of bubble-driven growth for as long as it lasts. But unfortunately, this has not been the case. Since 2000, the unemployment rate has risen by almost 4 percentage points to 10.5 percent, and real wages have actually fallen.

As Turkey and the European Union continue talks on the possibility of EU accession, the Turkish government should re-examine its unsustainable economic policies of the last five years. Continuing these IMF-supported policies in hopes of garnering credibility with the EU may be dangerous. Ironically, such policies could lead to an economic failure that would actually doom Turkey’s chances for membership.

EU 'over-dependent' on Russian gas supplies

A stark warning from the IEA:

A growing dependence among European Union countries on Russian gas supplies piped through politically unstable Ukraine is placing the EU’s energy security at risk, the International Energy Agency has warned.

At a time when China and Japan are increasingly looking to Russia to meet their rising energy demands, Claude Mandil, the director of the IEA, the energy adviser to the industrialised countries, warned: “Governments have been too early in thinking there would never be supply issues with natural gas and electricity.”

Russia is the world’s largest gas producer. EU countries, excluding the 10 new members, buy 40 per cent of their gas imports from the former Soviet Union, most of which is supplied by Gazprom. Some of the new members are entirely dependent on Russian energy.

The IEA’s alert about Russian supplies came as German Gref, Russian economy minister, warned that Gazprom’s proposed purchase of Yugansk, Yukos’s main oil producer, would erode its efficiency and could invite legal action from Europe.

Conflict in Ukraine could have very serious consequences indeed.

New oil proves elusive, and alarm bells ring

Jad Mouawad writing in the New York Times discusses such as facts as:

According to Wood Mackenzie, an energy research firm, six of the 10 largest oil companies have cut their investments in exploration since 1998. Together, the world’s leading companies spent $8 billion drilling for oil last year; in 1998, they spent more than $11 billion. The number of wells drilled in the 11 full members of the Organization of Petroleum Exporting Countries fell 6.5 percent in 2003 from the year before.

As worldwide oil consumption has grown by about 17 percent over the past decade, to about 80 million barrels a day, explorers need to find ever growing quantities of oil to replace depleted reserves. Exxon Mobil, BP and Royal Dutch/Shell alone need to find 4.4 billion new barrels of oil each year just to replace their current production.

Along with most U.S. production, Alaska’s North Slope, which provides a quarter of America’s output, is in decline. With the United States importing increasing quantities of oil to meet demand – to a projected 70 percent in 2025 from 54 percent in 2002 and 37 percent in 1980, according to a forecast by the U.S. Energy Information Administration – the oil industry wants to be allowed to look at the Alaska National Wildlife Refuge.

More interesting stuff:

Unlike the British sector of the North Sea, which is considered completely explored, the Norwegian continental shelf is believed to still hold substantial quantities of undiscovered oil – perhaps one-third of the amount already found, or 9.4 billion barrels of oil and 67 trillion cubic feet, or 1.9 trillion cubic meters, of gas, according to estimates by the Norwegian Petroleum Directorate, the government agency that oversees the oil industry.

But only 19 exploratory wells were drilled last year in Norwegian waters, the fewest since 1977. Only about one in three found oil or gas, down from half in 2002.

Increasingly, the search is moving northward into the Barents Sea, above the Arctic Circle and near Norway’s far northeastern border with Russia, where the weather is bitter and there is no daylight for months in the winter.

The oil industry is also eyeing the Lofoten Islands off Norway’s northern coast, which are closed to exploration because of seabird colonies and cod spawning grounds that environmentalists and the Norwegian fishing industry want protected. Environmental concerns led to a two-year halt in drilling throughout the Barents Sea, but the Norwegian government allowed exploration programs to resume in December, and three more wells are due to be drilled this winter.

“We’re forced into new frontier areas, into deeper and harsher conditions, and into potentially more politically and environmentally sensitive areas,” says Tore Holm, the director of exploration for Shell in Norway. “It’s by nature riskier, and by nature most costly. But the rewards could be higher.”

China's growth as a regional power

Dan Drezner links to an informative article in the New York Times.

Drezner sings her praises, perhaps correctly, she notes:

American military supremacy remains unquestioned, regional officials say. But the United States appears to be on the losing side of trade patterns. China is now South Korea’s biggest trade partner, and two years ago Japan’s imports from China surpassed those from the United States. Current trends show China is likely to top American trade with Southeast Asia in just a few years.

China’s prime minister, Wen Jiabao, as much as threw down the gauntlet last year, saying he believed that China’s trade with Southeast Asia would reach $100 billion by 2005, just shy of the $120 billion in trade the United States does with the region.

Mr. Wen’s claim was no idle boast. Almost no country has escaped the pull of China’s enormous craving for trade and, above all, energy and other natural resources to fuel its still galloping expansion and growing consumer demand. Though the Chinese government’s growth target for 2004 is 7 percent, compared with 9.1 percent for 2003, few are worried about a slowdown soon.

Category: Economics