Thursday, November 17, 2011

How Coca-Cola Manages 90 Emerging Markets

How Coca-Cola Manages 90 Emerging Markets, by William J. Holstein
The world’s largest beverage company has delegated major decision making to individual markets, but it maintains its global brand strategy through collaborative practices.
November 7, 2011
http://www.strategy-business.com/article/00093?pg=all

Ahmet C. Bozer, president of the Coca-Cola Company’s Eurasia and Africa Group, has spent his career demonstrating how a large international company can build a strategy and structure itself to compete in emerging markets. Coca-Cola is one of the most globally active international companies, deriving 80 percent of its sales from outside the U.S., and it is therefore one of the most experienced in tackling emerging markets, including Egypt and Pakistan, where political tension renders the business environment uncertain and Coca-Cola’s strategy has proven resilient.

Bozer, who was born and raised in Turkey, has worked for Coca-Cola since 1990 in various capacities, including operations and finance, as well as leading the Coca-Cola bottling company in Turkey. He is currently based in Istanbul, where he oversees 90 markets, ranging geographically from India and South Asia through the Middle East and all of Africa, across Turkey and the Caucasus into the countries of the former Soviet Union. This territory accounted for 16 percent of Coke’s sales last year, for a retail value of US$10 billion, and Bozer expects that number to grow rapidly during the next decade. Like four other regional presidents, Bozer reports directly to Coca-Cola Chairman and CEO Muhtar Kent in Atlanta, Ga. Bozer sat down with us at the Coca-Cola offices in New York.

S+B: Your late CEO Roberto Goizueta charged the company to “think global, act local” in its strategy. How do you accomplish this?

BOZER: I wish it was as easy as repeating the slogan. The key for international companies is finding the right mix of global and local in their operations. The Coca-Cola brand is global, but it must be locally relevant. We may be giving the same happiness message, the same brand architecture may be communicated, but it has to be done differently in each country.

S+B: Your structure has strong regional managers such as yourself, but headquarters in Atlanta maintains global responsibility for sales, finance, and marketing — and for specific product lines like water or juices. How do you manage this?

BOZER: We are a franchise system. Our bottlers are primarily local. In Turkey, for example, we have a Turkish bottler. So the effectiveness of our company depends on the effectiveness of our relationships with the bottlers and our brands. To manage franchise relationships, you have to have a geographic orientation. Therefore our organization is primarily geographic. Globally, we have five operating groups: North America, Latin America, Europe, Eurasia and Africa, and Pacific.

At the same time, the juice business requires a different organizational structure than the sparkling beverages business. The raw material costs are high and fluctuate a lot, and there are opportunities to innovate more quickly; we may introduce four or five new variants of a juice in a given year. Thus, there is a matrix. A functional group in Atlanta is in charge of juices worldwide, but they work through the geographic organizations.

We are still evolving in finding the best local and global combination that works for us. When it comes to franchise relations with the bottlers, that is local. We have to make decisions in the local context with the right speed. Quality standards are both local (we adhere to all local government safety regulations) and global (we have our own global, rigorous, quality control standards). But we take advantage of our global properties and collaborate as a global team, bringing the best resources to bear on a specific issue.

S+B: How do you manage disagreements between the field and headquarters?
 
BOZER: We have been working on it for many years. We all understand that nothing is as black-and-white as we’d like. Let’s say I’m hiring a function leader. I am the ultimate decision maker, but I know that any function leader must operate as part of the global team. He or she must be able to collaborate globally, and the global organization has to be comfortable with that candidate. This is where maturity is important. We emphasize a collaborative process because it makes the decision better. But our culture is purely focused on making the right choice, rather than defining my turf versus your turf. That allows us to make these decisions quickly.

S+B: How do you manage the dramatic variations in cultures and politics among your 90 markets?
 
BOZER: It’s not as difficult as it might seem. I have six business units, based in South Africa, Kenya, Turkey, Russia, India, and Dubai. And I have a functional team in Istanbul with finance, marketing, and strategy capabilities. The functional team works as part of the global team to come up with strategic plans for each market. We share those with the business units, and we expect them to enrich [the plans] and add value to them by adapting them to their own needs.
Russia might say, “Well, iced tea is a big category here, so here’s how we are going to compete [with that product].” There is a clear thread of consistency among all the regions; we stay connected to the global team in Atlanta through the finance and marketing communities.

S+B: What do you see as the greatest opportunity in your 90 markets?
 
BOZER: If you project the demographics of today into 2020, you will find that about half of the favorable changes will be located in Eurasia and Africa: new entrants into the middle class, an increase in the number of teenagers, urbanization. A few of these countries have very high per capita consumption of our beverages. South Africa is about 250 drinks per year per person, which is above the global average. Turkey is higher than 150. But when you take those relatively well-developed markets out and look at India, Pakistan, sub-Saharan Africa, Russia, and central Asia, those markets have very low per capita consumption — for the whole industry. In India, just 4 or 5 percent of the beverages consumed are packaged. People drink tap water, tea, and dairy; vendors squeeze juice on the street. When people start having a bit more money and a middle class emerges, demand for packaged beverages will increase.
In that context, our strategy is not very complicated. We know how to grow “Brand Coke.” It’s about locally relevant brand building with consumers — the right pricing and packaging, with small packs, large packs, or take-home packs. We place new coolers in the market and invest in people, putting “feet on the street,” and activate outlets one by one. At the same time, there is a flourishing juice business and a flourishing water business, and in some of our markets, teas and energy drinks are developing.

S+B: How do you make yourself “locally relevant?”
 
BOZER: We have very strong consumer marketing teams. We invest a lot in understanding the psyche of the local consumer. In Egypt, during the Arab Spring [uprisings], our marketing people were able to tap into the psyche of the public — especially the teenagers. We understood that despite the uncertainty they were going through, they wanted to create a bright future. Our brand promise is happiness and optimism. Our team quickly put together some excellent consumer communication with the message that if everybody came together, the Egyptian people could build a better future. That message was delivered in a wonderful ad in which the skies over Tahrir Square in Cairo are quite overcast and dark, but people get together and throw ropes to the clouds and start pulling the ropes. The clouds open up and the sun appears. That type of communication resonated extremely well. We tapped into the feelings and emotions that were most relevant to the Egyptian people.
We try to do this kind of thing everywhere. We have good marketers in each country who have access into consumer insight data, and who work with very good agencies, while at the same time working with robust global processes.

S+B: Doesn’t political and social upheaval create a problem for you?
 
BOZER: Not really. I was in Pakistan recently. When you read the papers and watch television, you hear about terrorism, earthquakes, floods, and sectarian violence. It’s all negative. But we’ve been there for more than 50 years and we have not experienced any problems in running our business. In fact, our business is thriving there. Over the past four years, we have been growing extremely well. The same holds true for the Arab Spring countries.
In our external environment, we may have many headwinds, but we sell simple moments of pleasure that get consumed a million times a day, and that business continues to be vibrant. It’s a very simple product. Yes, growth slows when you go through major political changes, but things settle down and life goes back to normal. Then you start building from there.

S+B: You have a tremendous variation in the type and sophistication of bottlers you work with, ranging from a giant like SABMiller in South Africa to mom-and-pop-type bottlers in other markets. How do you adapt to their different styles and capabilities?
 
BOZER: This is the bread and butter of our business: being effective with our partnerships. Our partners may be multi-country bottlers, or they may operate within a single country. They may be public or private. In some countries we work with multiple bottlers. We have all kinds of relationships.

With each one, we first establish a shared vision. We have a one-page road map that portrays a very clear destination for 2020, a clear framework about our strategic pillars and metrics. That road map is actually prepared with our bottlers. It guides all our business planning.
Then it comes to capability. Does the bottler have the capability to execute these plans with us?

At the end of the day, we’re trying to create value for the overall system of the Coca-Cola Company and its bottlers, not just ourselves. Otherwise, the system won’t be sustainable in terms of our results.

One of the best examples is our bottler in Turkey, which I used to run. The bottler was built by the Coca-Cola Company and sold to a local shareholder who now owns a majority. It’s a public company with a market value of more than €2.5 billion (US$3.5 billion). It has great alignment with the Coca-Cola Company. It is now 10 times the size of when it started in 1994. This model really works.

S+B: How do you support your partners? Do you train them or lend them money?
 
BOZER: It depends on the needs of the bottler. The bottlers that operate in multiple countries tend not to need our help. But there might be some emerging area of knowledge — for example, about how to do better category management, in which case we have centers of excellence that the bottlers can access. We have websites where they can download best practices or get our help in building their capabilities. We sometimes support bottlers financially as well, if we are aligned on a fairly aggressive growth plan and want to invest in marketing to build the brands with more intensity. And let’s not forget, we own about 30 percent of our bottlers around the world.

S+B: How do you allow a local bottler and local business unit to differentiate the mix of products they offer?
 
BOZER: We don’t work in a way whereby every time a business unit wants to launch a product, they have to get my approval. Instead, we share the strategic framework. We have strategy discussions and business plan discussions, and we have other guidelines and rules.
For example, it is understood within the group that I want to know your top three priorities. If you want to launch a new product, but you need to take away [resources] from one of those core priorities to launch that product, then you shouldn’t do it. And if your bottler doesn’t have the capabilities to handle that product, you shouldn’t launch it. But if you can figure out how to do all of that in a way that still funds your core, if you have followed the right process, and if you are in the right marketplace with the right capabilities on the marketing side, then by all means go ahead.

We have Maaza juice in India, for example. The local team wanted to launch a Maaza milkshake, which is a wonderful mango dairy product. Dairy is a very relevant category in India, and Maaza milkshakes were received extremely well by consumers. My group function heads and the global function heads contributed to this by supporting the local team. This is not a bureaucratic approval–based system. Of course, there are approvals, but once the strategy and business plan are approved, local teams can execute.

S+B: Have you had much reverse innovation, in which a local group comes up with an idea that you take to other markets?
 
BOZER: Yes. One innovation that came out of India is the solar-powered coolers. We’re looking to expand that to other markets. There’s great engineering talent in India. Another product that shows promise is Minute Maid’s Pulpy, an orange juice with pulp that did extremely well in China. We expanded it into many countries. We have also taken communications elsewhere. Turkey, for example, had a very successful Ramadan communication to celebrate the holy month in Muslim countries. We took that to other Muslim countries in our group.

S+B: How do you recruit the talent you need?
 
BOZER: We look for critical experiences and functional competencies. And we ask about candidates: Do they represent the values of the company? We’re about optimism. A pessimistic person wouldn’t work out.
The nationality and gender don’t really matter. On my group leadership team of 18 people, I have 12 nationalities represented, including individuals from Zimbabwe, Scotland, the United States, Turkey, South Africa, India, Croatia, and elsewhere.
The most important competency is leadership. It takes very strong leadership to be able to explain the environment, establish a vision, and rally the troops. Command and control, in most cases, does not work. If you try to control everything, the system won’t work.

CGFS: The macrofinancial implications of alternative configurations for access to central counterparties in OTC derivatives markets

November 17, 2011
The Committee on the Global Financial System (CGFS) has today released a report on The macrofinancial implications of alternative configurations for access to central counterparties in OTC derivatives markets. It was prepared by a study group chaired by Timothy Lane of the Bank of Canada.

Various alternative access arrangements are under consideration for the central clearing of OTC derivatives trades. Several jurisdictions are exploring the establishment of domestic central counterparties (CCPs) and the possible benefits of establishing links between them.

The conditions under which market participants obtain access to central clearing could have important implications for financial stability and efficiency. The report concludes that:
  • expanding direct access to CCPs may reduce the concentration of risk in the largest global dealers. As direct access is broadened, it is essential that CCPs' risk management procedures be adapted appropriately to ensure their continued effectiveness;
  • both large global and smaller regional or domestic CCPs will probably play a role in meeting G20 commitments. In both cases, developing and adopting international standards will be essential to avoid regulatory arbitrage and promote effective cross-border monitoring of infrastructure and participants; and
  • CCPs and authorities should consider enhancements where needed to strengthen the safety and efficiency of indirect clearing that comply with international standards. Effective segregation, as well as portability of positions and collateral belonging to a direct clearer's clients, will be needed to realise the benefits of systemic risk reduction.
CGFS Chairman Mark Carney, in presenting the report, said that it "provides relevant and timely input to international initiatives related to CCP access arrangements and configurations."

Tuesday, November 15, 2011

Algeria: structural and other reasons for regime stability

Kal writes:
Richard Phelps argues that Algeria has not seen a popular uprising this year on broad structural lines (‘An Algerian Exception?‘ CMEC Blog): ‘Algerian regime does not have an identifiable leader with whom political power truly lies’.

[...]

And the government has focused its strategy toward them based on this reality and avoided the provocative showings of ‘symbolic’ violence that gave fuel to protest movements in Tunisia and Libya and Syria and Egypt (part of this is owed to the government’s relationships with the private media as well). Official and unofficial media has not covered demonstrations extensively to the extent that protesters in one city would necessarily be aware of those in another. The massive showing of ‘force’ at the February demonstrations — which were quite small, using barely a few thousand people if that — was a show of bodies more than anything else, and while protesters were manhandled and some beaten few or none were shot or killed in the way their counterparts elsewhere in the Arab world were. The government issued reforms, after long deliberations, and statements of intent to reform on a range of issues. It acted quickly to buy off organizers and potential participants or to contain and frustrate them rather than making public ‘examples’ of children or attempting to use overwhelming and direct force. The ‘crackdowns’ on protesters in Algeria this year were in large measure qualitatively different from those elsewhere, as were the demonstrations themselves.

Structurally it is important to understand that Algeria’s politics do operate in a diffuse manner, that power is spread through regional and professional and bureaucratic networks which often compete with one another but are also sometimes dependent on one another. (One might quibble with any comparison of the Algerian presidency to the power of any single office in Lebanon or to even its strongest Lebanese za’im; the perception and reality of the president’s power in Algeria is an interesting thing to follow and to try an gage at any one time but the presidency has frequently overwhelmed the military under Bouteflika.) The business class and the military officers and the technocrats and local notables intersect and it would be difficult to ‘purge’ the government as the Tunisians are now trying to do and it would also be difficult to make removing Bouteflika in a coup appear to Algerians as a symbolic act with and the armed forces a trusted ‘care taker’ of some transition process (let alone a ‘savior’) as the Egyptian Army did with Mubarak, since Algerians are generally more cynical and probably distrust their military and opposition more than their cousins in the rest of the region. It is also important to understand the field in which these various networks and factions (‘clans’) interact, overlap and struggle; it involves a great deal of both external and internal opacity and risk. There are enormous uncertainties involved. Longtime Algeria hand John Entelis wrote in September that change of some kind would wind up taking place in Algeria, if only so that the country’s elite could keep its own interests, and that  ’[w]hether this process develops peacefully or violently is ultimately in the hands of le pouvoir’.


But structural reasons are not the only ones Algeria has not seen an uprising. The Algerian military and political class has dealt with uprisings and transitions before and probably had a better idea of how to deal with such problems technically given its experience in the 1988-1990 period and the youth uprising in 2001 and the tens of thousands of youth riots which have struck the country in the last decade. In other words, it is important to recognize that the Algerian regime — like its counterparts elsewhere — made choices this year.

Read the whole post at http://themoornextdoor.wordpress.com/2011/11/16/exceptions-agency-structure/

Monday, November 14, 2011

IMF Calls for Further Reforms in China’s Financial System

IMF Calls for Further Reforms in China’s Financial System
Press Release No. 11/409
November 14, 2011 

http://www.imf.org/external/np/sec/pr/2011/pr11409.htm


China’s financial system is robust overall, but faces a steady build-up in vulnerabilities. While significant progress has been made towards developing a more commercially-oriented financial sector, and supervision and regulation are being strengthened, risks stem from the growing complexity of the system and the uncertainties surrounding the global economy. Further reforms are needed to support financial stability and encourage strong and balanced growth, the International Monetary Fund (IMF) says in its first formal evaluation of China’s financial sector published today.

The IMF’s first Financial Sector Assessment Program (FSAP) review of China was carried out jointly with the World Bank. China is one of 25 systemically important countries that have agreed to mandatory assessments at least once every five years. The FSAPs are part of the IMF’s activities in financial surveillance and the monitoring of the international monetary system.

“China’s banks and financial sector are healthy, but there are vulnerabilities that should be addressed by the authorities,” says Jonathan Fiechter, deputy director of the IMF’s Monetary and Capital Markets Department and the head of the IMF team that conducted the FSAP. “While the existing structure fosters high savings and high levels of liquidity, it also creates the risk of capital misallocation and the formation of bubbles, especially in real estate. The cost of such distortions will only rise over time, so the sooner these distortions are addressed the better.”

Risks
According to the FSAP report, China’s financial sector is confronting several near-term risks: deterioration in loan quality due to rapid credit expansion; growing disintermediation by shadow banks and off-balance sheet exposures; a downturn in real estate prices; and the uncertainties of the global economic scenario. Medium-term vulnerabilities are also building and could impair the needed reorientation of the financial system to support the country’s future growth. Moving along this path will pose additional risks, so priority must be given to establishing the institutional and operational preconditions that are crucial for a wide-ranging financial reform agenda.

The main areas of reform should include:
  • Steps to broaden financial markets and services, and developing diversified modalities of financial intermediation that would foster healthy competition among banks;
  • A reorientation of the role of government away from using the banking system to carry out broad government policy goals and to allow lending decisions to be based on commercial goals;
  • Expansion of the use of market-based monetary policy instruments, using interest rates as the main instrument to govern credit expansion, rather than administrative measures;
  • An upgrading of the financial infrastructure and legal frameworks, including strengthening the payments and settlement systems, as well as consumer protection and expansion of financial literacy.
The Chinese authorities have begun to move on many of its recommendations, and the IMF stands ready to provide technical cooperation in areas relating to strengthening the financial stability framework in China.

Stress Tests
Stress tests conducted jointly by the Fund and Chinese authorities of the country’s largest 17 commercial banks indicate that most of them appear to be resilient to isolated shocks, which include: a sharp deterioration in asset quality (including a correction in the real estate markets), shifts in the yield curve, and changes in the exchange rate. If several of these risks were to occur at the same time, however, the banking system could be severely impacted, the report warns.

About the FSAP
The Financial Sector Assessment Program, established in 1999, is an in-depth analysis of a country’s financial sector. The IMF conducts mandatory FSAPs for the 25 jurisdictions with systemically important financial sectors, and any member countries that request it. Assessments in developing and emerging market countries are conducted jointly with the World Bank. FSAPs include two components: a financial stability assessment, which is the responsibility of the Fund; and, in developing and emerging market countries, a financial development assessment, conducted by the World Bank.

To assess the stability of the financial sector, IMF teams examine the soundness of the banking and other financial sectors; rate the quality of bank, insurance, and capital market supervision against accepted international standards; and evaluate the ability of supervisors, policymakers, and financial safety nets to respond effectively to a systemic crisis. While FSAPs do not evaluate the health of individual financial institutions and cannot predict or prevent financial crises, they identify the main vulnerabilities that could trigger one.

In September 2010, the IMF made financial stability assessments under the FSAP a mandatory part of IMF surveillance every five years for jurisdictions deemed systemically important based on the size of the financial sector and their global interconnectedness. The countries affected by this decision are: Australia, Austria, Belgium, Brazil, Canada, China, France, Germany, Hong Kong SAR, Italy, Japan, India, Ireland, Luxembourg, Mexico, the Netherlands, Russia, Singapore, South Korea, Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United States.

For more information on FSAPs, see Press Release No. 10/357

CGFS: Global liquidity - concept, measurement and policy implications

Global liquidity - concept, measurement and policy implications
CGFS Publications No 45
November 2011

Abstract

Global liquidity has become a key focus of international policy debates over recent years. This reflects the view that global liquidity and its drivers are of major importance for international financial stability. The concept of global liquidity, however continues to be used in a variety of ways and this ambiguity can lead to unfounded and potentially destabilising policy initiatives.

This report analyses global liquidity from a financial stability perspective, using two distinct liquidity concepts. One is official liquidity, which can be used to settle claims through monetary authorities and is ultimately provided by central banks. The other concept is private (or private sector) liquidity, which is created to a large degree through cross-border operations of banks and other financial institutions.

Understanding the determinants of private liquidity is of particular importance. As many financial institutions provide liquidity both domestically and in other countries, globally, private liquidity is linked to the dynamics of gross international capital flows, including cross-border banking or portfolio movements. This international component of liquidity can be a potential source of instability because of its own dynamics or because it amplifies cyclical movements in domestic financial conditions and intensifies domestic imbalances.

Policy responses to global liquidity call for a consistent framework that considers all phases of global liquidity cycles, countering both surges and shortages. Measures to prevent unsustainable booms in private liquidity are linked with micro- and macroprudential policies as well as the financial reform agenda. Country-specific or regional liquidity shocks, in turn, may effectively be addressed through self-insurance in the form of precautionary foreign exchange reserves holdings and existing arrangements which essentially redistribute liquidity. However, truly global liquidity shocks necessitate direct interventions in amounts large enough to break downward liquidity spirals. Only central banks have this ability.

Download PDF file at http://www.bis.org/publ/cgfs45.htm or ask us for the PDF file.

Saturday, November 5, 2011

Global systemically important banks: Assessment methodology and the additional loss absorbency requirement

Global systemically important banks (G-SIBs): Assessment methodology and the additional loss absorbency requirement
Nov 04, 2011


The rules text sets out the Basel Committee's framework on the assessment methodology for global systemic importance, the magnitude of additional loss absorbency that global systemically important banks (G-SIBs) should have and the arrangements by which the requirement will be phased in. The cover note to the rules text sets out the Committee's summary and evaluation of the public comments received on the July 2011 consultative document. The rules text was finalised following a careful review of the public comments received. The work of the Basel Committee forms part of a broader effort by the Financial Stability Board to reduce the moral hazard of global systemically important institutions.

The rationale for the policy measures set out in the rules text is to deal with the cross-border negative externalities created by G-SIBs which current regulatory policies do not fully address. The measures will enhance the going-concern loss absorbency of G-SIBs and reduce the probability of their failure. 

The assessment methodology for G-SIBs is based on an indicator-based approach and comprises five broad categories: size, interconnectedness, lack of readily available substitutes or financial institution infrastructure, global (cross-jurisdictional) activity and complexity.

The additional loss absorbency requirements will range from 1% to 2.5% Common Equity Tier 1 (CET1) depending on a bank's systemic importance with an empty bucket of 3.5% CET1 as a means to discourage banks from becoming even more systemically important.

The higher loss absorbency requirements will be introduced in parallel with the Basel III capital conservation and countercyclical buffers, ie between 1 January 2016 and year end 2018 becoming fully effective on 1 January 2019. 

Thursday, November 3, 2011

Some Root Causes of the Arab Revolution: Rising Literacy and a Shrinking Birth Rate (due to the first)

A Look at the Root Causes of the Arab Revolution. Spiegel interview with Emannuel Todd
http://www.spiegel.de/international/world/0,1518,763537,00.html
May 20, 2011

Rising Literacy and a Shrinking Birth Rate

Excerpts:

SPIEGEL: Aren't poverty or affluence also crucial? Tunisia, Syria, Egypt and Yemen don't have bubbling oil revenues.

Todd: Of course, one can placate the people with bread and money, but only for a while. Revolutions usually erupt during phases of cultural growth and economic downturn. For me, as a demographer, the key variable is not the per capita gross domestic product but the literacy rate. The British historian Lawrence Stone pointed out this relationship in his study of the English revolution in the 16th and 17th centuries. He saw the critical threshold at 40 to 60 percent.

SPIEGEL: Well, most young Arabs can now read and write, but how is the birth rate actually developing? The population in Arab countries is extremely young, with half of its citizens younger than 25.

Todd: Yes, but that's because the previous generation had so many children. In the meantime, however, the birth rate is falling dramatically in some cases. It has fallen by half in the Arab world in just one generation, from 7.5 children per woman in 1975 to 3.5 in 2005. The birth rate among female university graduates is just below 2.1, the level needed to maintain a population. Tunisia now has a birth rate similar to that of France. In Morocco, Algeria, Libya and Egypt, it has dropped below the magic threshold of three children per woman. This means that young adults constitute the majority of the population and, unlike their fathers and mothers, they can read and write, and they also practice contraception. But they suffer from unemployment and social frustration. It isn't surprising that unrest was inevitable in this part of world.

[...]

SPIEGEL: Why has it taken so long for the values of the modern age to reach the Islamic world? After all, the golden age of Arab civilization ended in the 13th century.

Todd: There is a simple explanation, which has the benefit of also being applicable to northern India and China, that is, to three completely differently religious communities: Islam, Hinduism and Confucianism. It has to do with the structure of the traditional family in these regions, with its debasement and with the disenfranchisement of women. And in Mesopotamia, for example, it extends well into the pre-Islamic world. Mohammed, the founder of Islam, granted women far more rights than they have had in most Arab societies to this day.

SPIEGEL: Does that mean that the Arabs conformed to older local circumstances and spread them across the entire Middle East?

Todd: Yes. The patrilinear, patrilocal system, in which only male succession is considered valid and newlyweds, preferably cousins in the ideal Arab marriage, live under the roof and authority of the father, inhibits all social progress. The disenfranchisement of women deprives them of the ability to raise their children in a progressive, dynamic fashion. Society calcifies and, in a sense, falls asleep. The powers of the individual cannot develop. The bourgeois achievement of marriage for love, and the free choice of one's partner, replaced the hierarchies of honor in Europe in the 19th century and reinforced the desire for freedom.

SPIEGEL: Is female emancipation the prerequisite for modernization in the Arab world?

Todd: It's in full swing. The headscarf debate is missing the point. The number of marriages between cousins is dropping just as spectacularly as the birth rate, thereby blasting away a barrier. The free individual or active citizen can enter the public arena. When more than 90 percent of young people can read and write and have a modicum of education, no traditional authoritarian regime will last for long. Have you noticed how many women are marching along in the protests? Even in Yemen, the most backward country in the Arab world, thousands of women were among the protesters.

SPIEGEL: The family is the private sphere par excellence. Why do changes in its structure necessarily spread to the political sphere?

Todd: The relationship between those at the top and those at the bottom is changing. When the authority of fathers begins to falter, political power generally collapses, as well. This is because the system of the patrilinear, endogamous extended family has been reproduced within the leadership of nations. The family patriarch as head of state places his sons and other male relatives in positions of power. Political dynasties develop, as in the case of the senior and junior Assad in Syria. Corruption flourishes because the clan runs things for its own benefit. The state is of course privatized as a family business. The power of obedience is based on a combination of loyalty, repression and political economics.

h/t ‘A Convergence of Civilizations’, http://themoornextdoor.wordpress.com/2011/11/02/a-convergence-of-civilizations

Francis Fukuyama said very much this same thing in 1999, The Great Disruption. I don't know if he did it independently.

University studies crowdsourcing for intelligence

University studies crowdsourcing for intelligence
http://www.sfgate.com/cgi-bin/article.cgi?f=/n/a/2011/10/18/national/a005635D94.DTL&type=printable
Oct 18. 2011

FAIRFAX, Va. (AP)
--
Maybe you've got a hunch Kim Jong Il's regime in North Korea has seen its final days, or that the Ebola virus will re-emerge somewhere in the world in the next year.

Your educated guess may be just as good as an expert's opinion. Statistics have long shown that large crowds of average people frequently make better predictions about unknown events, when their disparate guesses are averaged out, than any individual scholar — a phenomenon known as the wisdom of crowds.

Now the nation's intelligence community, with the help of university researchers and regular folks around the country, is studying ways to harness and improve the wisdom of crowds. The research could one day arm policymakers with information gathered by some of the same methods that power Wikipedia and social media.

In a project that is part competition and part research study, George Mason professors Charles Twardy and Kathryn Laskey are assembling a team on the Internet of more than 500 forecasters who make educated guesses about a series of world events, on everything from disease outbreaks to agricultural trends to political patterns.

They are competing with four other teams led by professors at several universities. Each differs in its approach, but all are studying how crowdsourcing can be used.

At stake is grant money provided by the Intelligence Advanced Research Projects Activity, part of the Office of the Director of National Intelligence, which heads up the nation's intelligence community.

Put simply, crowdsourcing occurs when a task is assigned to a wide audience rather than a specific expert or group of experts. The online encyclopedia Wikipedia is one of the most prominent examples — anyone can write or edit an entry. Over time, the crowds refine and improve the product. Crowdsourcing can range from a simple question blasted to a person's Twitter followers to amateur programmers fine-tuning open-source software.

IARPA spokeswoman Cherreka Montgomery said her project's goal is to develop methods to refine and improve on crowdsourcing in a way that would be useful to intelligence analysts.
"It's all about strengthening the capabilities of our intelligence analysts," Montgomery said.

And if analysts can use crowdsourcing to better determine the likelihood of seemingly unpredictable world events, those analysts can help policymakers be prepared and develop smarter responses. In a hypothetical example, a crowd-powered prediction about the breakout of popular uprisings in the Middle East could influence what goes in a dossier given to decision-makers at the highest levels.

The program at George Mason is called DAGGRE, short for Decomposition-based Aggregation. The researchers have used blog postings, Twitter and other means to get the word out about their project to potential participants. No specialized background is required, though a college degree is preferred.

The project seeks to break down various world events into their component parts. The stability of Kim Jong Il's regime in North Korea provides an example. One forecaster might base his prediction based solely on political factors. But what if the political experts could be guided by health experts, who might observe that Kim's medical condition is flagging?

The DAGGRE participants key their answers into forms on the project's website, and also supply information at the outset about their education and what areas they have expertise in. The scholars overseeing the project will then seek to break down the variables that influence a forecaster's prediction, and use the data in a way that people with disparate knowledge bases can help guide each other to the most accurate forecast.

Military and intelligence researchers have long studied ways to improve the ability to predict the future. In 2003, the Defense Advanced Research Projects Agency launched research to see whether a terrorist attack could be predicted by allowing speculative trading in a financial market, in which people would make money on a futures contract if they bet on a terrorist attack occurring within a designated time frame. The theory was that a spike in the market could serve as a trip wire that an attack was under way. But some found the idea ghoulish, and others objected to the notion that a terrorist could conceivably profit by carrying out an attack, and the research was halted.


Laskey said George Mason's research bears some fundamental similarities with the discontinued DARPA research, with the crucial difference that nobody participating in George Mason's project can profit from making accurate predictions. But participants who make accurate predictions are rewarded with a point system, and there is a leaderboard of sorts for participants to measure their success. Some can also choose to receive a small stipend for their time, but it's not tied to how they answer questions.

Another team, led by psychologists at the University of California and the University of Pennsylvania who are focused on asking questions in ways that minimize experts' overconfidence and misjudgment, said Don Moore, a professor at Cal-Berkeley.

"Small wording changes in a question can have a huge effect" on how a person answers, Moore said.

Twardy said the George Mason study has already drawn more than 500 participants, but only about half are actively participating. The study continues to recruit people as some participants drop out over the four-year course of the study.

Participants come from all walks of life. While Twardy said he'd love to have, say, agronomists, on his team to help forecast European polices and responses to mad cow diseases and the cattle trade, the overriding principle is that people from various backgrounds can contribute to the crowd's collective wisdom, so participation is not restricted by fields of expertise.

George Mason received a $2.2 million grant from IARPA to conduct the study. If the team remains in the competition for the full four years — weaker teams are at risk of being discontinued — the grant will be increased to $8.2 million.

Twardy expects to publish the results of his research and hopes it will ultimately help world leaders make more informed choices when they confront global crises.

"At some level, you cannot predict the future," Twardy said. "But you can do a lot better than just asking an expert."

Wednesday, November 2, 2011

Towards Effective Macroprudential Policy Frameworks: An Assessment of Stylized Institutional Models

Towards Effective Macroprudential Policy Frameworks: An Assessment of Stylized Institutional Models. Authors: Nier, Erlend; Osinski, Jacek; Jácome, Luis Ignacio; Madrid, Pamela
IMF Working Paper No. 11/250
November 01, 2011 

Summary: A number of countries are reviewing their institutional arrangements for financial stability to support the development of a macroprudential policy function. In some cases, this involves a rethink of the appropriate institutional boundaries between central banks and financial regulatory agencies, or the setting up of dedicated policymaking committees. In others, efforts are underway to enhance cooperation within the existing institutional structure. Against this background, this paper provides basic guidance for the design of effective arrangements, in a manner that can provide a framework for country-specific advice. After reviewing briefly the main institutional elements of existing and emerging macroprudential policy frameworks across countries, the paper identifies stylized institutional models based on key features that distinguish institutional arrangements. It develops criteria to assess the effectiveness of models, examines the strengths and weaknesses of models against these criteria, and explores ways to improve existing setups. The paper finally distills lessons and sets out desired principles for effective macroprudential policy arrangements.


NieretaliiIMF-TowardsEffectiveMacroprudentialPolicyFrameworks-AnAssessmentofStylizedInstitutionalModelsNov2011.pdf

Tuesday, November 1, 2011

What drives the global land rush?

What drives the global land rush? Authors: Arezki, Rabah; Deininger, Klaus; Selod, Harris
IMF Working Paper No. 11/251

Summary: This paper studies the determinants of foreign land acquisition for large-scale agriculture. To do so, gravity models are estimated using data on bilateral investment relationships, together with newly constructed indicators of agro-ecological suitability in areas with low population density as well as indicators of land rights security. Results confirm the central role of agro-ecological potential as a pull factor. In contrast to the literature on foreign investment in general, the quality of the business climate is insignificant whereas weak land governance and tenure security for current users make countries more attractive for investors. Implications for policy are discussed.


Introduction

After decades of stagnant or declining commodity prices when agriculture was considered a ‘sunset industry’, recent increases in the level and volatility of commodity prices and the resulting demand for land have taken many observers by surprise. This phenomenon has been accompanied by a rising interest in acquiring agricultural land by investors, including sovereign wealth and private equity funds, agricultural producers, and key players from the food and agri-business industry. Investors’ motivations include economic considerations, mistrust in markets and concern about political stability, or speculation on future demand for food and fiber, or future payment for environmental services including for carbon sequestration. Some stakeholders, including many host-country governments, welcome such investment as an opportunity to overcome decades of under-investment in the sector, create employment, and leapfrog and take advantage of recent technological development. Others denounce it as a ”land grab” (Zoomers 2010). They point to the irony of envisaging large exports of food from countries which in some cases depend on regular food aid. It is noted that specific projects’ speculative nature, questionable economic basis, or lack of consultation and compensation of local people calls for a global response (De Schutter 2011).  In a context of diametrically opposite perceptions, the objective of the present paper is to provide greater clarity on the numbers involved and the factors driving such investment. This is done by quantifying demand for land deals, and exploring the determinants of foreign land acquisition for large-scale agriculture using data on bilateral investment relationships. This work is an important first step to assess potential long-term impacts and discuss policy implications.

The analysis of large-scale land deals is relevant for a number of key development issues.  One such issue is the debate on the most appropriate structure of agricultural production. The exceptionally large poverty elasticity of growth in smallholder agriculture (de Janvry and Sadoulet 2010, Loayza and Raddatz 2010) that is reflected in rapid recent poverty reduction in Asian economies such as China, and the fact that the majority of poor are still located in rural areas led observers to highlight the importance of a smallholder structure for poverty reduction (Lipton 2009, World Bank 2007). At the same time, disillusion with the limited success of smallholder-based efforts to improve productivity in sub-Saharan Africa (Collier 2008) and apparent export competitiveness of “mega-farms” in Latin America or Eastern Europe during the 2007/8 global food crisis have led to renewed questions about whether, despite a mixed record, large scale agriculture can be a path out of poverty and to development.

Whatever the envisaged scenario, renewed pressure on land raises the issue of whether there is sufficient competition and transparency to ensure that land owners or users are able to either transfer their land at a fair price or hold on to it as opposed to having it taken away without their consent and in what may be perceived an unfair deal. This resonates with recent contributions to the literature that suggest that resource abundance can contribute to more broad-based development only if well-governed institutions to manage these resources exist (Oechslin 2010). This is borne out by empirical evidence both across countries (Cabrales and Hauk 2011) and within more specific country contexts where resource booms may have fuelled widespread rent-seeking and corruption (Bhattacharyya and Hodler 2010) or even violence (Angrist and Kugler 2008) rather than economic development.

To better understand this phenomenon and its potential impact, an empirical analysis of the factors driving transnational land acquisition is needed. To this end, we constructed a global database with country-level information on both foreign demand for land and implemented projects as documented in international and local press reports. We complement it with country-specific assessments of the amount of potentially suitable land and other relevant variables. We then use bilateral investment relationships from the database to estimate gravity models that can help identify determinants of foreign land acquisition. Results confirm the central role of agro-ecological potential as a pull factor but suggest that, in contrast to what is found for foreign investment more generally, rule of law and good governance have no effect on the number of land-related investment. Moreover, and counterintuitively, we find that countries where governance of the land sector and tenure security are weak have been most attractive for investors. This finding, which resonates with concerns articulated by parts of civil society, suggests that, to minimize the risk that such investments fail to produce benefits for local populations , the micro-level and project-based approach that has dominated the global debate so far will need to be complemented with an emphasis and determined action to improve land governance, transparency and global monitoring.  The paper is organized as follows. Section 2 puts recent land demand into broader context, highlighting the importance of governance in attracting investments. It draws on an analysis of how foreign direct investment (FDI) is treated in the macro-literature to suggest a methodological approach, and outlines how we address specific data needs. Section 3 presents our cross-sectional data on land demand, outlines the econometric approach, and briefly discusses relevant descriptive statistics. Key econometric results in section 4 support the importance of food import demand as motivations for countries to seek out land abroad (‘push factors’) and of agro-ecological suitability as key determinants for the choice of destination (‘pull factors’). They also highlight the extent to which weak land governance seems to encourage rather than discourage transnational demand for land. Section 5 concludes by highlighting a number of implications for policy.


Buy the paper here: http://www.imfbookstore.org/ProdDetails.asp?ID=WPIEA2011251

Thursday, October 27, 2011

The Strategic Implications of Closer Indonesia-China Relations

Growing Convergence, Greater Consequence: The Strategic Implications of Closer Indonesia-China Relations. By Greta Nabbs-Keller. Security Challenges Journal. Volume 7, Number 3 (Spring 2011), pp. 23-42. http://www.securitychallenges.org.au/TOCs/vol7no3.html

Indonesia’s relationship with China has been characterised by a history of enmity, but residual concerns belie increasing economic and foreign policy convergence boosted by the positive effects of democratisation on Indonesia’s perceptions of the Chinese. This article will argue that the growing convergence of interests between Indonesia and China is a positive development for Australia. China’s rise has provided the engine of growth for Southeast Asia’s largest economy and has increasingly cemented Indonesia’s importance in the ASEAN-centred regional order. For Australia, it means a stronger, stable, and more prosperous neighbour next door with natural ‘antibodies’ against Chinese assertiveness.

Excerpts (edited):

In a 2008 book on the rise of Asia and the transformation of geopolitics, William Overholt, the Director of Rand Corporation’s Centre for Asia Pacific Policy, made the following argument about Indonesia:
A reviving Indonesia, with its vast territory, large population, and determination to lead the region, still zealously guards against any hint of emergent Chinese hegemony. Even more than other countries in the region, Indonesia has powerful antibodies to any hint of strong Chinese assertion.
It was Overholt’s contention that although the US “had lost stature in Southeast Asia … [this] did not presage Chinese dominance”. Overholt is absolutely correct about Indonesia’s wariness of China and indeed relations have been characterised traditionally by high political drama and a history of enmity. But residual Indonesian concerns about China are only part of the story. They belie ever closer economic and foreign policy convergence boosted by the positive effects of democratisation on Indonesia’s perceptions of the Chinese. Relations between East Asia’s two largest states have undergone a remarkable transformation in the period of Indonesia’s democratisation, with significant implications for the broader security and prosperity of the Indo-Pacific region.

The article will argue that the growing convergence of interests between Indonesia and China evident over the last decade is a positive development for Australia. China’s rise has provided the engine of growth for Southeast Asia’s largest economy and has increasingly cemented Indonesia’s importance in the Association of South East Asian Nations (ASEAN)-centred regional order. For Australia, it means a stronger, stable, and more prosperous neighbour next door with Overholt’s natural antibodies against Chinese assertiveness. Although Indonesia’s relationship with China remains characterised by dichotomous elements—friendship versus residual distrust, economic complementarity versus competition—Indonesia has sought to maximise the opportunities inherent in China’s rise, whilst continuing to hedge against the strategic uncertainties posed by China.



Greta Nabbs-Keller is a PhD candidate at Griffith Asia Institute researching the impact of democratisation on Indonesia’s foreign policy. Her broader research interests include Indonesian civil-military relations and Australian regional foreign policy. Before joining Griffith University, Greta worked for the Department of Defence in Canberra and Jakarta.

Wednesday, October 26, 2011

IMF: Outlook for Mideast, with Oil-Importing Countries Facing Continued Economic Pressures

IMF Sees Varied Outlook for Mideast, with Oil-Importing Countries Facing Continued Economic Pressures
Press Release No. 11/378
October 26, 2011

Excerpts:

The economic outlook for countries across the Middle East and North Africa region varies markedly, with the oil-exporters seeing a mild pickup in growth in 2011 on the back of higher oil prices, and the oil-importers experiencing a dramatic slowdown, the IMF says in its latest assessment of the region. The IMF’s Regional Economic Outlook for the Middle East and Central Asia, released today, projects growth in the Middle East and North Africa region, including Afghanistan and Pakistan, at 3.9 percent in 2011, down from 4.4 percent in 2010.

The region’s oil-exporting countries (excluding Libya)—Algeria, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, Sudan, the United Arab Emirates, and Yemen—are forecast to expand by 4.9 percent in 2011, thanks to higher oil prices and oil production. But growth among the region’s oil importers—Afghanistan, Djibouti, Egypt, Jordan, Lebanon, Mauritania, Morocco, Pakistan, Syria, and Tunisia—will register just under 2 percent (see table).

“Since the beginning of this year, a deterioration in the international economic outlook and the buildup of domestic social pressures have resulted in an economic slowdown in many of the region’s oil-importing countries. But we should not lose sight that the ongoing historical transformation holds the promise of improved living standards and a more prosperous future for the people in the region,” Masood Ahmed, Director of the IMF’s Middle East and Central Asia Department, said at the launch conference of the report in Dubai today.



Higher oil prices benefiting oil exporters

Economic activity in the region’s oil-exporting countries has clearly improved, bolstered by continued high energy prices. This expansion is driven by the high level of activity in the countries of the Gulf Cooperation Council (GCC), where growth is projected at 7 percent in 2011, the report shows. Several countries—Saudi Arabia in particular—have stepped up oil production temporarily in response to higher oil prices and shortfalls in production from Libya. “The decision to increase oil production in the wake of disruptions in Libya was an essential contribution toward global energy market stability and enhanced activity,” Mr. Ahmed noted.

Increased oil revenues have created additional room for government spending in the GCC. Several countries announced spending programs early in the year, covering a wide spectrum of measures, such as subsidies, wages, and capital expenditure. At current projected oil prices and levels of production, revenue gains will more than offset the high levels of public spending. In 2011, the oil exporters’ combined external current account balance is expected to increase from $202 billion to $334 billion (excluding Libya), and from $163 billion to $279 billion for the GCC.

But fiscal vulnerability has also increased substantially, as break-even oil prices have risen steadily and are now approaching observed oil prices (see Chart 1). “Oil-exporting countries have understandably increased fiscal spending to address social needs. Looking forward, the widening of non-oil fiscal deficits makes many countries more vulnerable to swings in oil prices, at a time when the world economy is facing heightened risks,” Mr. Ahmed added.

[http://www.imf.org/external/images/pr11378a.gif]

Turning to the financial sector, the report sees a continued gradual recovery. GCC banks in particular, which showed considerable resilience during the global crisis, are now registering capital adequacy ratios in excess of 15 percent, with nonperforming loans below 10 percent. But private-sector credit growth remains cautious.

Looking ahead, the IMF’s assessment foresees a moderation in growth for the region’s oil exporters to about 4 percent in 2012, and notes that these countries also face some downside risks. The most immediate would be the impact of a sharp slowdown in Europe and the United States. Global oil demand could contract substantially, possibly leading to a sustained drop in oil prices. Other risks include further regional unrest and an economic downturn in key trading partners, such as India and China.



Meeting social needs, restoring confidence key priorities for oil importers
As for the region’s oil-importing countries, the political and economic transformations occurring in several of them are advancing slowly and are expected to extend well into 2012. Together with a worsening economic outlook in Europe and globally, the region is seeing a sharp drop in investment and tourism activity. As a result, the recovery in 2012 is expected to be weaker than anticipated, with growth projected at just over 3 percent, according to the IMF report.

“Undoubtedly, the year ahead will be challenging for many countries, with continued political uncertainty, a deteriorating global economic outlook, and higher financing costs impeding a quick economic recovery. Measures aimed at restoring confidence and fostering more inclusive growth will help countries enhance activity and ultimately address the needs of the population,” Mr. Ahmed said.

In response to growing social unrest, the economic downturn, and higher commodity prices, governments in the region have significantly expanded subsidies and transfers. The cost of this social spending remains high, exceeding 10 percent of GDP in Egypt and more than 5 percent of GDP in most other countries. As a result, oil importers’ fiscal deficits are widening by about 1.5 percent of GDP in 2010–11 (see Chart 2).

[http://www.imf.org/external/images/pr11378b.gif]

In the near term, such spending measures are appropriate to lessen the impact of the downturn. But from an efficiency and equity standpoint, it is better for governments to gradually replace universal subsidies with social safety nets that are targeted at the less well-off part of the population, the IMF report states. Resources can then be used for critical investments in infrastructure and education and for supporting much-needed reforms.

Meeting the rising demands of the population will not be easy, the report notes—particularly as most countries have already used their fiscal and international reserve buffers to respond to deteriorating economic conditions in the wake of the Arab Spring, and have less room left to respond to future shocks. Regional partners and the broader international community can facilitate this transition through financing and greater market access for exports.

Conflict has taken a massive human toll in addition to its enormous economic costs in Libya, Syria, and Yemen. The immediate priority for these countries is to avoid further humanitarian crisis and, post conflict, to pursue an agenda of reconstruction and reform.


See tables of selected economic indicators for Middle East, North Africa, Afghanistan, and Pakistan (MENAP) at http://www.imf.org/external/np/sec/pr/2011/pr11378.htm

Tuesday, October 25, 2011

Under Sec for Internt'l Affairs Lael Brainard Testimony on the U.S.-China Economic Relationship

Under Secretary for International Affairs Dr. Lael Brainard Testimony Before the House Committee on Ways and Means on the U.S.-China Economic Relationship

http://www.treasury.gov/press-center/press-releases/Pages/tg1336.aspx

Oct 25, 2011

Chairman Camp, Ranking Member Levin, distinguished members of the Committee, thank you for the opportunity to testify today on our economic relationship with China.


Challenges and Opportunities
Since the outset, President Obama has placed a high priority on pursuing a more balanced and fair economic relationship with China.  This is central to our goal of doubling exports in five years and supporting several million U.S. jobs.  And, indeed, since 2009, U.S. exports to China have grown by 61 percent, nearly twice as fast as our exports to the rest of the world.  Despite this progress, the playing field is still uneven.  To secure the future for our children, the Administration will continue working hard to get the economic relationship right.

China needs to take action at an accelerated rate, so that the potential of our relationship translates into real near-term benefits for our companies and workers.  China’s leaders understand that China must shift to domestic consumption-led growth, provide a secure environment for the protection and enforcement of intellectual property rights, level the playing field between state-owned and private enterprises—domestic and foreign, and liberalize the exchange rate and financial markets.  China needs to take these actions to sustain its own growth, as well as to address the concerns of its trade partners.  On these issues, we have actively pressed China to accelerate the pace of reform in order to achieve more balanced growth and create fairer competition, and there has been some progress, but there are strong interests within China that favor a go-slow approach.   

In the wake of the financial crisis, with American households saving more and demand weak in Europe and Japan, our exports increasingly will be directed at the fast-growing emerging markets if we are to create the good jobs with good wages that we need to grow our economy.  For the next decade, China is expected to be the biggest source of demand growth in the global economy.  The International Monetary Fund (IMF) forecasts that China’s growth will average 9.4 percent per year over the next five years, and the Organization of Economic Cooperation and Development (OECD) estimates that China’s share of global imports will increase from six percent in 2008, to over nine percent in 2012.  This is a market opportunity that we must seize.

Foreign investment also is playing an increasingly important role in supporting jobs in the United States, and we expect this trend to continue.  In 2009, majority-owned U.S. affiliates of foreign companies were an important contributor to U.S. economic activity, employing approximately five percent of the U.S. private workforce and 17 percent in the U.S. manufacturing sector.  In the decade ahead, China will be a fast-growing source of foreign direct investment among major economies.  Indeed, the stock of Chinese foreign investment in the United States more than doubled last year alone.  Protecting national security is always our first concern, but where Chinese investment does not affect national security, we should welcome it.  To create jobs here at home, it matters whether Chinese investment ultimately ends up in Anhui province, Argentina, or Alabama.

In order to derive a better balance of benefits from trade and investment opportunities with China, we need to see progress on three key challenges.  First, in many sectors in which the United States is competitive globally, China must address a range of discriminatory policies, including those that favor domestic state-owned enterprises through barriers to foreign goods, services, and investment, as well as the provision of subsidies and preferential access to raw materials, land, credit, and government procurement.  Second, rampant theft of intellectual property in China lowers the return to investments in research and development and innovation that represent a fundamental source of our country’s national competitive edge.  Third, China must shift to a pattern of growth that can be sustained, drawing on home-grown demand rather than excessive dependence on exports.  This requires that China bring its exchange rate into alignment with market fundamentals.


China’s Reforms
China’s current headline growth rate may look enviable right now, but China will face daunting challenges in coming years.  We have a tremendous stake in ensuring that China deals with those challenges in a way that fundamentally reorients its growth pattern through greater balance and fairer competition.

China has had remarkable success in lifting hundreds of millions of its citizens out of poverty.  But it has come at some cost, including large-scale environmental degradation and an economy that spends much more on investment than goods and services for its people.  Chinese leaders understand that, with per capita income of around one-tenth of that of the United States in 2011,[1] and per capita household spending less than one-twentieth of that in the United States, the way China grew in the last two decades will not get them to the next stage of development.  Instead, China will face what economists call the “middle income trap.”

China’s excessive dependence on growth driven by exports to advanced economies and investment will need to change.  During the 2008-2009 global crisis, China was able to sustain growth through a massive credit-fueled investment boom.  This will leave a financial hangover for years.  China risks repeating the experience of other fast growing Asian economies that experienced sharp falls in growth soon after their investment-to-gross domestic product (GDP) ratios peaked.  With investment reaching an all-time high of almost 48 percent of GDP, however, China’s peak is higher than other Asian economies.

China already is seeing rapidly slowing labor force growth, and the number of workers in China soon will be on the decline.  While China maintains many advantages, a study by KPMG concluded that rising labor costs in China are shifting a rising market share of light manufactured goods to other producers in Asia.[2]  A recent study by the Boston Consulting Group similarly concluded that China’s cost advantage is rapidly eroding.[3]

In the face of overinvestment and rising wages, China will need to move up the value chain.  But China’s weak protection and enforcement of intellectual property rights threaten to retard the development of Chinese innovation and Chinese brands.

And the adjustment process – whether to greater consumption-led growth, higher value services, or innovation-intensive activities – is hampered by China’s continued excessive reliance on administrative controls, such as credit quotas to maintain price stability and intervention to temper exchange rate adjustment, that are subject to political determinations and thus leave policy making behind the curve.  These controls are reflected in a financial system that fails to offer Chinese households financial assets that keeps up with inflation, let alone economic growth, and starves China’s most innovative firms and sectors of capital, despite massive domestic savings, while also depriving foreign competitors of the opportunity to offer a full range of products and services.  Relying more on market-based prices, such as exchange and interest rates that facilitate adjustment to changing conditions, would make China’s growth more resilient, and avoid an excessive build-up of foreign exchange reserves. 

For sustained growth, China wants greater access to U.S. technologies and high-tech dual use exports, to make progress on bilateral investment, and wants their exports to be accorded the same terms of access as exports from other market economies.  We are willing to make progress on these issues, but our ability to move will depend in part on how much progress we see from China on issues that are important to us.


U.S. Engagement and Enforcement
We have worked tirelessly across the Administration to pursue a tight set of priorities with China – using the Strategic and Economic Dialogue (S&ED), as well as the Joint Commission on Commerce and Trade (JCCT).  And since many other countries share our concerns, we also pursue these issues through multilateral channels, such as the G-20, the IMF, and the World Trade Organization (WTO), which are critical complements to our bilateral engagement.  To advance our goals, whether it is faster appreciation of the exchange rate or reduced barriers to U.S. exports, we need to work smartly with our partners around the world and with China.  And when engagement proves insufficient, this Administration will continue to be more aggressive than any of its predecessors in using all appropriate tools to address the particular problem, such as going after China’s unfair trade practices by taking China to the WTO and vigorously applying U.S. trade remedy laws.

While we face substantial challenges, and our job is far from finished, we have made important progress towards leveling the playing field and making the bilateral relationship more beneficial for American companies and workers.  China’s trade surplus has declined from 7.7 percent of GDP in 2008, to 3.9 percent in 2010, and has declined further in the first half of this year compared to the same period last year, though an important part of the decline was due to slower growth in China’s export markets.  In both its latest Five-Year Plan and the recent S&ED, China committed to targets to promote consumption-led growth, including raising household incomes, increasing minimum wages, and increasing services relative to GDP.

On the exchange rate, since China resumed exchange rate adjustment in June 2010, the renminbi has appreciated about seven percent against the U.S. dollar and about ten percent taking into account China’s higher rate of inflation relative to inflation in the United States.  China’s currency has appreciated nearly forty percent against the dollar over the past five years in real terms.  But the continued rapid pace of foreign reserve accumulation and the ongoing decline in the share of Chinese consumption in GDP indicate that the real exchange rate of the renminbi remains misaligned despite recent movement, and a faster pace of appreciation is needed. 

Renminbi appreciation on its own will not erase our trade deficit.  But allowing the exchange rate to adjust fully to reflect market forces is the most powerful near-term tool available to the Chinese government to achieve two of its top economic goals:  combating inflation and shifting the composition of demand towards domestic consumption.  By contrast, persistent misalignment holds back the rebalancing in demand needed to sustain the global recovery both in China and the world, and gives rise to substantial international concerns and ultimately to trade frictions.  Further, emerging markets that compete with China resist appreciation of their own currencies to maintain their competitiveness vis-à-vis China. 

At the G-20 earlier this month, surplus emerging markets such as China committed to accelerate the rebalancing of demand towards domestic consumption, and to move toward more market-determined exchange rates through greater exchange rate flexibility.

We also are making progress on our bilateral trade and investment priorities, in close collaboration with the Office of the U.S. Trade Representative and the Department of Commerce.  At the most recent S&ED, after commitments made during the January state visit of President Hu and the prior December JCCT, China pledged to rescind all of its government procurement indigenous innovation catalogues, including by provincial and municipal governments.  So far, the Central government has repealed four key measures that underpinned the indigenous innovation product accreditation system, and a number of local governments have taken positive steps.  China also pledged to increase inspections of government computers to ensure that agencies use legitimate software, and to improve its high-level government coordination and leadership mechanisms to enhance long-term protection and enforcement of intellectual property rights.  And last year, China met its S&ED pledge to raise the threshold for central government review of foreign investments from $100 to $300 million, leaving more foreign investment approvals to the mayors and governors who better understand the benefits of foreign direct investment.

Reforming and opening up China’s financial sector also remains a key priority.  This not only would provide Chinese households with savings and insurance products to meet their financial goals without having to save so much of their income, but also would level the playing field with China’s state-owned enterprises for access to credit.  We will continue pushing hard to address market access barriers in China’s financial sector, and we are seeing modest signs of progress.  China now allows foreign banks to underwrite corporate bonds and is creating more opportunities for our financial services firms to manage investments in China as well as manage Chinese investments abroad.  At the most recent S&ED, China committed to allow foreign firms to sell mutual funds, provide custody services, and sell mandatory auto liability insurance.

In short, while we will stand up to unfair and discriminatory practices and demand change, we will continue to engage with and encourage China as it pursues its reforms.  And to meet this generational challenge, we must continue to work to strengthen the multilateral system that governs trade and finance, and not turn away from it.  I believe this is the best way to promote American interests.

Thank you.


References
[1] September 2011 IMF World Economic Outlook Database, using market exchange rates.

[2] KPMG International, Product Sourcing in Asia Pacific 2011, pp. 7-9.

[3] Boston Consulting Group, Made in America, Again, August 2011, p. 5.

Are businesses run by women less productive than businesses run by men?

Where You Work: How Does Gender Matter?
Mary Hallward-Driemeier
Oct 2011

Are businesses run by women less productive than businesses run by men? If we perform a very simple comparison of the average productivity of female and male-owned enterprises, we might answer “yes”. But if we look a bit more closely at the data, a large part of this gap is explained by the fact that women and men are doing different things. If you compare women and men in the same sectors and in similar types of enterprises, the gap shrinks dramatically. Where you work is more important than gender in accounting for the observed productivity gap.

Using data on over 9000 registered enterprises from 32 countries in Sub-Saharan Africa, we see a productivity gap of 6 percent. However, controlling for sector, size and capital intensity, the gap disappears (see chart 1). If we include unregistered firms in the analysis, the unconditional productivity gap widens, as women are disproportionately in the informal sector where productivity is even lower. Nevertheless, the same pattern holds: there is little gender performance gap between similar enterprises.


Chart 1: The Gender Gap in Average Firm Labor
Controlling for enterprise characteristics removes the gender gap in productivity (registered firms in 32 Sub-Saharan African countries)
Once comparing like with like, the finding of no or few significant differences between female and male entrepreneurs in performance is encouraging. It confirms that Sub-Saharan Africa has considerable hidden growth potential in its women, and that tapping that potential—including improving women’s choices of where to be active economically—can make a real contribution to the region’s growth.

A similar story emerges when we look at the obstacles faced by men’s and women’s businesses. Once the characteristics of the enterprise are controlled for, gender differences in obstacles are generally not significant. Access to electricity is a constraint, particularly for smaller and medium firms, and issues of skills and regulations for larger firms, regardless of the gender of the entrepreneur. There are, however, two exceptions that have a direct gender angle. First, women report having a harder time accessing credit. This is not only due to their running smaller firms (which itself may be a result of this constraint), women often have less access to collateral. This is correlated with a country’s gender gaps in formal property rights and practical constraints in accessing justice (this topic will be elaborated in an upcoming blog).

Second, women often face greater difficulties in dealing with government authorities. They may be expected to pay higher amounts to get things done, may be less likely to get things done even having paid – and the ‘payment’ sought may not only be monetary. Indeed, over a quarter of respondents, male and female, reported that they had heard of sexual favors being requested to obtain licenses, receive credit or in dealing with the tax authorities.

If where you work rather than gender is associated with performance and the main constraints to firm growth, policy makers need to understand why the observed gender patterns of entrepreneurship persist. One of the most significant predictors of whether an entrepreneur joins the formal or informal sector and the size of their enterprises is education. What we find is that across sectors, there are large gaps in education, but few gender education gaps within a sector. Women and men in the formal sector have very similar educational backgrounds, likewise in the informal sector (see Chart 2). However, where gender comes in is that women have fewer years of education, helping explain why fewer women are in the formal sector.


Chart 2: Education varies more by formal/informal sector than by gender

To expand women’s opportunities, more women need to be able to shift where they work. Tackling underlying disparities in access to human capital and assets are key to these efforts. With the same backgrounds, women are able to run the same types of firms as men with equal results.

See full story: https://blogs.worldbank.org/allaboutfinance/where-you-work-how-does-gender-matter to view full story.

Friday, October 21, 2011

The Case Against Global-Warming Skepticism

The Case Against Global-Warming Skepticism. By Richard A Muller
There were good reasons for doubt, until now.
http://online.wsj.com/article/SB10001424052970204422404576594872796327348.html
WSJ, Oct 21, 2011

Are you a global warming skeptic? There are plenty of good reasons why you might be.

As many as 757 stations in the United States recorded net surface-temperature cooling over the past century. Many are concentrated in the southeast, where some people attribute tornadoes and hurricanes to warming.

The temperature-station quality is largely awful. The most important stations in the U.S. are included in the Department of Energy's Historical Climatology Network. A careful survey of these stations by a team led by meteorologist Anthony Watts showed that 70% of these stations have such poor siting that, by the U.S. government's own measure, they result in temperature uncertainties of between two and five degrees Celsius or more. We do not know how much worse are the stations in the developing world.

Using data from all these poor stations, the U.N.'s Intergovernmental Panel on Climate Change estimates an average global 0.64ºC temperature rise in the past 50 years, "most" of which the IPCC says is due to humans. Yet the margin of error for the stations is at least three times larger than the estimated warming.

We know that cities show anomalous warming, caused by energy use and building materials; asphalt, for instance, absorbs more sunlight than do trees. Tokyo's temperature rose about 2ºC in the last 50 years. Could that rise, and increases in other urban areas, have been unreasonably included in the global estimates? That warming may be real, but it has nothing to do with the greenhouse effect and can't be addressed by carbon dioxide reduction.

Moreover, the three major temperature analysis groups (the U.S.'s NASA and National Oceanic and Atmospheric Administration, and the U.K.'s Met Office and Climatic Research Unit) analyze only a small fraction of the available data, primarily from stations that have long records. There's a logic to that practice, but it could lead to selection bias. For instance, older stations were often built outside of cities but today are surrounded by buildings. These groups today use data from about 2,000 stations, down from roughly 6,000 in 1970, raising even more questions about their selections.

On top of that, stations have moved, instruments have changed and local environments have evolved. Analysis groups try to compensate for all this by homogenizing the data, though there are plenty of arguments to be had over how best to homogenize long-running data taken from around the world in varying conditions. These adjustments often result in corrections of several tenths of one degree Celsius, significant fractions of the warming attributed to humans.

And that's just the surface-temperature record. What about the rest? The number of named hurricanes has been on the rise for years, but that's in part a result of better detection technologies (satellites and buoys) that find storms in remote regions. The number of hurricanes hitting the U.S., even more intense Category 4 and 5 storms, has been gradually decreasing since 1850. The number of detected tornadoes has been increasing, possibly because radar technology has improved, but the number that touch down and cause damage has been decreasing. Meanwhile, the short-term variability in U.S. surface temperatures has been decreasing since 1800, suggesting a more stable climate.

Without good answers to all these complaints, global-warming skepticism seems sensible. But now let me explain why you should not be a skeptic, at least not any longer.

Over the last two years, the Berkeley Earth Surface Temperature Project has looked deeply at all the issues raised above. I chaired our group, which just submitted four detailed papers on our results to peer-reviewed journals. We have now posted these papers online at www.BerkeleyEarth.org to solicit even more scrutiny.

Our work covers only land temperature—not the oceans—but that's where warming appears to be the greatest. Robert Rohde, our chief scientist, obtained more than 1.6 billion measurements from more than 39,000 temperature stations around the world. Many of the records were short in duration, and to use them Mr. Rohde and a team of esteemed scientists and statisticians developed a new analytical approach that let us incorporate fragments of records. By using data from virtually all the available stations, we avoided data-selection bias. Rather than try to correct for the discontinuities in the records, we simply sliced the records where the data cut off, thereby creating two records from one.

We discovered that about one-third of the world's temperature stations have recorded cooling temperatures, and about two-thirds have recorded warming. The two-to-one ratio reflects global warming. The changes at the locations that showed warming were typically between 1-2ºC, much greater than the IPCC's average of 0.64ºC.

To study urban-heating bias in temperature records, we used satellite determinations that subdivided the world into urban and rural areas. We then conducted a temperature analysis based solely on "very rural" locations, distant from urban ones. The result showed a temperature increase similar to that found by other groups. Only 0.5% of the globe is urbanized, so it makes sense that even a 2ºC rise in urban regions would contribute negligibly to the global average.

What about poor station quality? Again, our statistical methods allowed us to analyze the U.S. temperature record separately for stations with good or acceptable rankings, and those with poor rankings (the U.S. is the only place in the world that ranks its temperature stations). Remarkably, the poorly ranked stations showed no greater temperature increases than the better ones. The mostly likely explanation is that while low-quality stations may give incorrect absolute temperatures, they still accurately track temperature changes.

When we began our study, we felt that skeptics had raised legitimate issues, and we didn't know what we'd find. Our results turned out to be close to those published by prior groups. We think that means that those groups had truly been very careful in their work, despite their inability to convince some skeptics of that. They managed to avoid bias in their data selection, homogenization and other corrections.

Global warming is real. Perhaps our results will help cool this portion of the climate debate. How much of the warming is due to humans and what will be the likely effects? We made no independent assessment of that.

Mr. Muller is a professor of physics at the University of California, Berkeley, and the author of "Physics for Future Presidents" (W.W. Norton & Co., 2008).

Thursday, October 20, 2011

BCBS: Basel III definition of capital - Frequently asked questions

BCBS: Basel III definition of capital - Frequently asked questions
Oct 20, 2011

The Basel Committee on Banking Supervision has received a number of interpretation questions related to the December 2010 publication of the Basel III regulatory frameworks for capital and liquidity and the 13 January 2011 press release on the loss absorbency of capital at the point of non-viability. To help ensure a consistent global implementation of Basel III, the Committee will continue to review frequently asked questions and to periodically publish answers along with any technical elaboration of the rules text and interpretative guidance that may be necessary.

The frequently asked questions (FAQs) published in this document correspond to the definition of capital sections of the Basel III rules text. These FAQs are in addition to the first set of FAQs published in July 2011. The questions and answers are grouped according to the relevant paragraphs of the rules text. FAQs that have been added since the publication of the first version of this document are shaded yellow; the earlier July 2011 FAQs that have been revised are shaded red.


Contents

Paragraphs 52-53 (Criteria for Common Equity Tier 1)
Paragraphs 54-56 (Criteria for Additional Tier 1 capital)
Paragraphs 60-61 (Provisions)
Paragraphs 62-65 (Minority interest and other capital that is issued out of consolidated subsidiaries that is held by third parties)
Paragraphs 67-68 (Goodwill and other intangibles)
Paragraphs 69-70 (Deferred tax assets)
Paragraphs 76-77 (Defined benefit pension fund assets and liabilities)
Paragraphs 79-85 (Investments in the capital of banking financial and insurance entities)
Paragraphs 94-96 (Transitional arrangements)
Press release 13 January 2011 (Loss absorbency at the point of non-viability)
General questions

http://www.bis.org/publ/bcbs204.htm

Rapid Credit Growth: Boon or Boom-Bust?

Rapid Credit Growth: Boon or Boom-Bust? By Selim Elekdag & Yiqun Wu
IMF Working Paper No. 11/241
October 01, 2011 
http://www.imfbookstore.org/IMFORG/WPIEA2011241

Summary: Episodes of rapid credit growth, especially credit booms, tend to end abruptly, typically in the form of financial crises. This paper presents the findings of a comprehensive event study focusing on 99 credit booms. Loose monetary policy stances seem to have contributed to the build-up of credit booms across both advanced and emerging economies. In particular, domestic policy rates were below trend during the pre-peak phase of credit booms and likely fuelled macroeconomic and financial imbalances. For emerging economies, while credit booms are associated with episodes of large capital inflows, international interest rates (a proxy for global liquidity) are virtually flat during these periods. Therefore, although external factors such as global liquidity conditions matter, and possibly increasingly so over time, domestic factors (especially monetary policy) also appear to be important drivers of real credit growth across emerging economies. 


Executive Summary

This paper is motivated by rapid credit growth across many emerging economies, particularly those in Asia. It presents the results of a comprehensive event study which identifies 99 credit booms, of which 39 and 60 originated in advanced and emerging economies, respectively. Episodes of excessive credit growth—credit booms—lead to growing financial imbalances, and tend to end abruptly, often in the form of financial crises. In particular, relative to booms in other emerging economies, credit booms in emerging Asia were associated with a higher incidence of crises historically.

Three other main conclusions include the following:
  • First, as credit booms build, they are jointly associated with deteriorating bank and corporate balance sheet soundness, and symptoms of overheating including: large capital inflows (including less stable bank flows), widening current account deficits, buoyant asset prices, and strong domestic demand.
  • Second, while credit booms are associated with episodes of large capital inflows, international interest rates (a proxy for global liquidity), are virtually flat during these periods, which suggests the important role of domestic factors in driving credit growth across emerging economies. This may reflect, in part, that capital inflows are being channeled into other asset classes including real estate, equity, and corporate bonds, for example.
  • Third, loose macroeconomic policy stances seem to have contributed to the build-up of credit booms. In particular, this seems to be the case for monetary policy across both advanced and emerging economies. For emerging economies, while international interest rates were essentially flat, domestic policy rates were below trend during the pre-peak phase of credit booms. Therefore, although external factors such as global liquidity conditions matter, and possibly increasingly so over time, domestic factors (especially monetary policy) also appear to be important drivers of real credit growth across emerging economies including those in Asia.

Chellaney: Hydro-control turning China into dreaded hydra?

THE WATER HEGEMON

Hydro-control turning China into dreaded hydra? By Brahma Chellaney
Bangkok Post, Oct 18, 2011 at 12:00 AM
With Beijing controlling the sources of Asia's most important rivers, water has increasingly become a new political divide in China's relations with neighbours like India, Russia, Kazakhstan, Nepal and the Mekong River countries.

http://www.bangkokpost.com/opinion/opinion/261849/hydro-control-turning-china-into-dreaded-hydra

International discussion about China's rise has focused on its increasing trade muscle, growing maritime ambitions, and expanding capacity to project military power. One critical issue, however, usually escapes attention: China's rise as a hydro-hegemon with no modern historical parallel.

The Mekong River, whose water level last March dropped to only 33 centimetres, the lowest in 50 years. People living downriver in Thailand, Laos and Cambodia attributed the fall in water level to newly constructed dams in China.

No other country has ever managed to assume such unchallenged riparian pre-eminence on a continent by controlling the headwaters of multiple international rivers and manipulating their cross-border flows. China, the world's biggest dam builder _ with slightly more than half of the approximately 50,000 large dams on the planet _ is rapidly accumulating leverage against its neighbours by undertaking massive hydro-engineering projects on transnational rivers.

Asia's water map fundamentally changed after the 1949 Communist victory in China. Most of Asia's important international rivers originate in territories that were forcibly annexed to the People's Republic of China. The Tibetan Plateau, for example, is the world's largest freshwater repository and the source of Asia's greatest rivers, including those that are the lifeblood for mainland China and South and Southeast Asia. Other such Chinese territories contain the headwaters of rivers like the Irtysh, Illy and Amur, which flow to Russia and Central Asia.

This makes China the source of cross-border water flows to the largest number of countries in the world. Yet China rejects the very notion of water sharing or institutionalised cooperation with downriver countries. Whereas riparian neighbours in Southeast and South Asia are bound by water pacts that they have negotiated between themselves, China does not have a single water treaty with any co-riparian country. Indeed, having its cake and eating it, China is a dialogue partner but not a member of the Mekong River Commission, underscoring its intent not to abide by the Mekong basin community's rules or take on any legal obligations.

Worse, while promoting multilateralism on the world stage, China has given the cold shoulder to multilateral cooperation among river-basin states. The lower-Mekong countries, for example, view China's strategy as an attempt to "divide and conquer". Although China publicly favours bilateral initiatives over multilateral institutions in addressing water issues, it has not shown any real enthusiasm for meaningful bilateral action. As a result, water has increasingly become a new political divide in the country's relations with neighbours like India, Russia, Kazakhstan, and Nepal.

China deflects attention from its refusal to share water, or to enter into institutionalised cooperation to manage common rivers sustainably, by flaunting the accords that it has signed on sharing flow statistics with riparian neighbours. These are not agreements to cooperate on shared resources, but rather commercial accords to sell hydrological data that other upstream countries provide free to downriver states.

In fact, by shifting its frenzied dam building from internal rivers to international rivers, China is now locked in water disputes with almost all co-riparian states. Those disputes are bound to worsen, given China's new focus on erecting mega-dams, best symbolised by its latest addition on the Mekong _ the 4,200-megawatt Xiaowan Dam, which dwarfs Paris's Eiffel Tower in height _ and a 38,000-megawatt dam planned on the Brahmaputra at Metog, close to the disputed border with India. The Metog Dam will be twice as large as the 18,300-megawatt Three Gorges Dam, currently the world's largest, construction of which uprooted at least 1.7 million Chinese.

In addition, China has identified another mega-dam site on the Brahmaputra at Daduqia, which, like Metog, is to harness the force of a nearly 3,000-metre drop in the river's height as it takes a sharp southerly turn from the Himalayan range into India, forming the world's longest and steepest canyon. The Brahmaputra Canyon _ twice as deep as the Grand Canyon in the United States _ holds Asia's greatest untapped water reserves.

The countries likely to bear the brunt of such massive diversion of waters are those located farthest downstream on rivers like the Brahmaputra and Mekong _ Bangladesh, whose very future is threatened by climate and environmental change, and Vietnam, a rice bowl of Asia. China's water appropriations from the Illy River threaten to turn Kazakhstan's Lake Balkhash into another Aral Sea, which has shrunk to less than half its original size.

In addition, China has planned the "Great Western Route", the proposed third leg of the Great South-North Water Diversion Project _ the most ambitious inter-river and inter-basin transfer programme ever conceived _ whose first two legs, involving internal rivers in China's ethnic Han heartland, are scheduled to be completed within three years.

The Great Western Route, centred on the Tibetan Plateau, is designed to divert waters, including from international rivers, to the Yellow River, the main river of water-stressed northern China, which also originates in Tibet.

With its industry now dominating the global hydropower-equipment market, China has also emerged as the largest dam builder overseas. From Pakistani-held Kashmir to Burma's troubled Kachin and Shan states, China has widened its dam building to disputed or insurgency-torn areas, despite local backlashes.

For example, units of the People's Liberation Army are engaged in dam and other strategic projects in the restive, Shia-majority region of Gilgit-Baltistan in Pakistan-held Kashmir. And China's dam building inside Burma to generate power for export to Chinese provinces has contributed to renewed bloody fighting recently, ending a 17-year ceasefire between the Kachin Independence Army and the Burmese government.

As with its territorial and maritime disputes with India, Vietnam, Japan and others, China is seeking to disrupt the status quo on international river flows. Persuading it to halt further unilateral appropriation of shared waters has thus become pivotal to Asian peace and stability. Otherwise, China is likely to emerge as the master of Asia's water taps, thereby acquiring tremendous leverage over its neighbours' behaviour.

Brahma Chellaney is Professor of Strategic Studies at the Centre for Policy Research and the author of "Water: Asia's New Battleground." Project Syndicate, 2011.