Business as Usual: Thailand Back in Crisis Mode

There is an anarchic quality to Thai politics that has to be seen to be believed. At regular intervals, mass protests, military coups and other forms of upheaval toss out leaders whether they are democratically elected or otherwise. Since the turn of the century, media mogul Thaksin Shinawatra--sort of an Asian Silvio Berlusconi--has dominated the political scene, being PM from 2001 to 2006, when he was ousted in a military coup. Since 2006, he has lived largely outside the country to avoid criminal prosecution. However, his allies have held office most of the time, including his sister Yingluck Shinawatra who was elected in 2011:

Although Thaksin or his allies have won every election in the past decade, the judiciary often undercuts him, illustrating how the billionaire former telecommunications tycoon and populist hero remains one of the most polarising figures in modern Thai history.

Since the 2006 coup, court rulings have removed two prime ministers, disbanded four parties, jailed three election commissioners and banned 220 politicians. The military will be watched closely. A major force in politics since Thailand became a democracy in 1932, the military has staged 18 coups - some successful, some not - and made several discreet interventions in forming coalition governments, almost all with the tacit backing of the royalist establishment that now reviles Thaksin.

Now Yingluck Shinawatra finds herself in trouble. She recently tried to ramrod legislation that would grant Thaksin amnesty, but to no avail. Instead of bringing big brother home, she has raised the ire of the middle class Bangkok-based opposition. I've already called her Badluck Shinawatra for her terribly expensive and quite frankly unaffordable populist policies of supporting rice farmers in Thailand's north and northeast. Aside from trying to bring home their bete noire Thaksin home scot-free, Thailand's deteriorating economic situation is driving much unrest as ten of thousands have, well, Occupied Thailand's Government Offices:

Thousands of anti-government demonstrators kept up pressure on the Thai government Wednesday by surrounding more official buildings amid the highest tensions the country has seen since deadly unrest three years ago. The protesters in Bangkok continued to occupy the finance ministry building, which they stormed Monday and turned into their secondary command center.

They plan to send groups to a range of other ministries and government offices around the capital Wednesday, said Akanat Promphan, a spokesman for the protesters. Their objectives include the public health, labor, industry, social development and science ministries, as well as a government complex that houses multiple agencies, notably the Department of Special Investigation. The number of demonstrators, led by the opposition Democrat Party, has declined from the huge gathering of roughly 100,000 people that assembled in Bangkok on Sunday.

So those are the politics; now for the economy part. The Thai baht and the stock market are both plunging. Part of the pressure comes from Yingluck trying to auction bonds to pay the rice subsidies she vows will remain in place. Since October (harvest season), the government has failed to pay the farmers. These auctions have not succeeded either in selling the entire amount on offer, raising fears among Yingluck's allies. After all, if the farmers desert her due to non-payment of subsidies, the Thaksinite political base will be angry:

At least four sales of three-year debt in Thailand have failed to raise the targeted amounts in July and August. The notes yesterday were sold at a yield of 3.53 percent, 39 basis points higher than similar-maturity sovereign bonds, Chularat Suteethorn, head of the Public Debt Management Office, said. The securities were issued on behalf of Bank for Agriculture & Agricultural Cooperatives, which is helping to support farmers by purchasing rice at above-market prices. 

There is another large auction scheduled for Friday, November 29. If that too fails (and it looks like it will), you can bet more economic turmoil will hit Thailand and add fuel to the protester's ire at the government. Call this another example in how democracy does not always work. Sure these Southeast Asian equivalents of (Venezuelan) Chavistas are very good at winning elections, but their policies are largely unsustainable redistributive initiatives.

In the end, you got the government you deserve if you vote for this kind of nonsense.

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Does US Discourage PRC FDI? Uncle Sam Sez No

This is a follow-up to a recent post about the Chinese food conglomerate Shuanghui International attempting to purchase US pork producer Smithfield. If it pushes through, this deal will be the largest Chinese acquisition of an American firm to date. However, as I mentioned earlier, there are all sorts of dubious "national security" concerns which many believe the US deploys as an excuse for blatantly discriminatory attitudes towards China. I have called it "hog farm protectionism" in this case. Recently, Greg Gilligan, chairman of the American Chamber of Commerce in China, weighed in on these goings-on back in the US of A prior to the completion of the CFIUS process for this acquisition. He too believes that making pork a "national security" issue is, well, hogwash at a time when the United States needs job-creating FDI...even from [gasp, choke!] China:

American policy makers need to ask why the U.S. is not attracting more job-creating Chinese investment. While weakness in European economies has certainly played a role in this recent trend by offering Chinese investors bargain asset prices, we can't ignore the perception that the U.S. harbors an underlying hostility to Chinese investment. Recent political opposition to Shuanghui's acquisition of Smithfield reinforces this perception. Indeed, the response to this deal is representative of several worrying trends.

One is Washington's tendency to define American national security interests unreasonably broadly. Some opponents of the Smithfield deal have suggested that pork production is a national security issue. It's hard to credit that argument in an economy where Americans already have access to an unimaginable array of foods, including a wide range of meats. Another is Washington's lack of transparency in its approach to vetting these deals. Politicians and policy makers are starting to move the goal posts with each deal. One example of this is the CFIUS process itself, the results of which aren't published. Earlier this year, a U.S. district court judge refused to throw out a claim by Chinese-invested Ralls Corporation that it had been denied due process when, without adequate explanation, regulators demanded that it divest its interests in four wind farms. The lack of clarity about how Washington will decide investment issues is a problem.

Meanwhile, back in DC, the folks at the US Treasury replied to what they believed to be a mischaracterization of Committee on Foreign Investment in the US (CFIUS) procedures by Mr. Gilligan. Assistant Secretary for International Markets Marisa Lago counters:

Greg Gilligan, in "America Needs the Smithfield Deal" (Sept. 4) mischaracterizes the role and processes of the Committee on Foreign Investment in the United States (CFIUS) and inaccurately describes the U.S.' policy on foreign investment.Contrary to Gilligan's claims, the CFIUS review process is non-discriminatory and transparent in its rules and procedures [...]

Unlike other countries that place restrictions on investments in broad swaths of the economy, impose ownership caps, or review foreign investment for economic and other considerations unrelated to national security, CFIUS applies the same rules to each transaction that it reviews, regardless of the country of the investor or the economic sector of the investment. We welcome investment in our entire economy and from all countries, and from private and state-owned investors alike. Unless a transaction presents a national security risk, we welcome it.

And while we are required by law to keep information filed with CFIUS confidential, the rules that govern the CFIUS process, including its governing statute and regulations, are publicly available and fully disclosed online. It is a process that enables us to protect national security in a manner fully consistent with our policy to encourage foreign investment.

Her response reminds me of Robert S. McNamara's: answer the question that you wish to answer, not what was actually asked. Many discussions that make or break PRC investment are conducted in backroom, informal meetings and not in public deliberations. So, saying that the rules are disclosed does not necessarily mean that the investors-to-be have a fair opportunity to air their views during deliberations. More importantly, she skirts the problem that "national security" is made to cover pretty much everything they can think of: If the Chinese purchase is unpopular with the political classes, they will find a way to relate it somehow to "national security."

Going back to Gilligan, the evidence he cites for Chinese contempt is that the PRC is increasingly resorting to similarly vague and open-ended reasons that may be used to discourage US investment in the future:

Rules passed in 2011 allow the Ministry of Commerce to review a transaction's national security impact based on considerations of "economic stability" and "social order," without defining what these terms mean. Beijing also imposes an opaque and unpredictable review process on many foreign investments. It is hard for American businesses, or our government officials, to persuade Beijing to change such rules when Washington increasingly behaves in the same way.

At any rate, the CFIUS has since cleared the way for the Shuanghui-Smithfield deal. Whether through embarrassment if it went ahead with "hog farm protectionism," do remember that past years have witnessed US opposition over what I would argue are similarly specious "national security" grounds. Consider the cases of Huawei-3Com and CNOOC-Unocal where the prospective Chinese investors pulled out knowing they would be turned down anyway.

Still, the Smithfield deal shows improvement on the part of the US, but keep in mind that the more relaxed Canadians have permitted far larger deals with the Chinese in industries supposedly subject to "national security" concerns. Me? I will reserve judgment until a larger mooted purchase of an American firm in energy or high-technology sectors by a Chinese one comes around.

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Subsidies or Thailand's Descent Into Egyptification

One of the biggest (fiscal) drags on the Egyptian economy is its continued use of massive subsidies for food and energy. At a touch less than a third of the national budget, it eats up a lot of money arguably better spent elsewhere. Moreover, you can hardly say that these subsidies have bought the country peace as the natives have been restless for years and years now and seemingly enjoy killing each other for the heck of it. Having (temporarily) exhausted Detroitifaction as a metaphor for industrialized countries descending into Hades, let us now talk of something happening in the developing countries. You guessed it--Egyptification.

Unfortunately, there is something of the sort going on right here in Southeast Asia. A few weeks ago I discussed the mounds and mounds of rice being hoarded by the Thai government. Not only is the national purse being hurt by this open-ended commitment to buy these crops at well over market prices, but so much food is simply spoiling away since this massive stockpile cannot be sold without significantly denting prices commanded by rice. Thai PM Yingluck Shinawatra tried to roll back the price at which rice was purchased, but quickly chickened out once rice farmers complained. Since her electoral base lies not among city slickers in Bangkok but rather farmers in rural areas, she knew better than to commit political suicide. No matter how economically ruinous, there is little turning back from rice subsidies.

Almost unbelievably, instead of backing down, Yingluck and Co. are now extending subsidies to include rubber. As one of it not the world's largest producers of natural rubber, Thailand is also buffeted by global price fluctuations of this commodity.

Thailand has offered 30 billion baht ($959 million) in aid to rubber farmers to help offset a plunge in the price of the commodity, the latest in a string of costly populist policies the government has aimed at rural communities. Farmers are welcoming the promised funding, though marches are still planned across the country for Monday aimed at keeping up pressure on Bangkok and to ensure the policy is enacted. 

This effort comes on top of (unsuccessful) initiatives to buoy rubber prices by withdrawing supply alongside other major Asian exporters Indonesia and Malaysia given slack global demand. Having caved in to key constituencies alike rice and rubber farmers, the fear is that the Yingluck government will now be obligated to entertain every other agricultural interest group:

The government is walking a tightrope—providing subsidies and other benefits to farmers as soft commodity prices fall while trying to keep a lid on expenditures, which are nevertheless booming. This week's subsidy offer comes in the wake of an aborted government effort to pull back on its rice subsidization program, which has led to massive stockpiles of the staple grain.

The worry, though, is that withholding money from farmers may risk fueling social unrest in a country prone to political violence. "Now that rice farmers and rubber farmers get subsidies from the government, farmers of other crops will want to have their share," said Aat Pisanwanich, director of the Center for International Trade Studies at Thai Chamber of Commerce University. "The government has to come up with longer-term measures because this subsidy isn't sustainable."

These subsidies tend to be self-perpetuating: once granted, they are hard to rescind--especially in light of the current trend towards softening commodity prices. You wish the Thais well, but I do not see a smooth transition out of these subsidies. Already, Thailand has slipped into recession, and you can only imagine calls for these market-distorting measures to increase from agricultural interests whom the Shinawatras have become exceedingly obsequious towards lest they lose this key constituency.

UPDATE: Not that the rubber farmers are content already as they are out in force to, well, ensure the government buys rubber at uncompetitive prices. 

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'Like Saudi Leaving OPEC': Russians Ditch Potash Cartel

Potash Corp of Saskatchewan Share Price

Fertilizer may not be the sexiest of industries, but make no mistake: Given its widespread agricultural applications which span virtually the entire globe, nearly every nation with such industries need the stuff. In the past few years, a duopoly has emerged between Russian/Belarusian firms on one hand and US/Canadian firms on the other represented by BPC and Canoptex, respectively. Until recently, both were actually successful in cornering the global market and jacking up prices. However, with the Russian BPC partner Uralkali defecting from its Belarusian one, commodity markets for potash have been rocked hard:

Russia's Uralkali quit one of the world's two big potash cartels on Tuesday, heralding a price war for the key crop nutrient and pummeling the shares of companies that produce it. The break-up of the Belarusian Potash Company (BPC), a joint venture with Belarussian partner Belaruskali, leaves North America's Canpotex as the dominant potash export venture.

It could lead to cancellations of projects by rivals as the industry weighs the effect of lower prices, but may bring better deals for farmers. "It is as if Saudi Arabia decided to leave OPEC - oil prices would fall immediately," said Dmitry Ryzhkov, equity sales trader at Renaissance Capital. In negotiations with big buyers like India and China, BPC and Canpotex usually settled for deals at similar prices, and they had no qualms about turning off the supply spigot when the buyers looked likely to gain the upper hand. Together the two accounted for almost 70 percent of global potash sales.

Divvy up two-thirds of the global market and the world's your oyster. Alike in a "stag hunt" game, though, the defection of a major player from the cartelized duopoly is wreaking havoc on the expected profits of the would-be profiteers as the fallout from Russia reaches Canada and the US:

That clubby system is now under threat after a falling out between BPC's members. Uralkali promised to bolster production and sales, even as potash prices are already in decline. U.S.-listed shares of the Canpotex owners - Potash Corp of Saskatchewan, Mosaic Co and Agrium Inc - plummeted, cutting their market value by nearly $12 billion by early afternoon [see chart above]. In the last few years, BPC and Canpotex raised potash prices well above their production cost, a senior official at a major Indian potash firm said, asking not to be identified because of the sensitivity of the matter.

There are broader geopolitical questions at stake here since Russia and Belarus are (were?) the closest of authoritarian allies. Does this indicate a wider split between the two nations? With potash being the main export earner of Belarus, this move by a Russian company to dissolve their cartel and try to make it up through volume will surely have negative effects on the Belarusians as prices normalize. Belarus has experienced economic difficulties in recent years, and this event is not a good omen:

Potash is the main export product for Belarus, Russia's staunchest ally among the former Soviet republics whose economy is stagnating after a financial crisis in 2011. Belaruskali was a partner to Uralkali for eight years in BPC, which once held 43 percent of the global potash export market. Uralkali was at one point rumoured to be interested in buying a stake in Belaruskali - which now looks unlikely.

Their joint venture started to crumble this year as rumors emerged that both were selling potash outside the partnership. The two firms previously denied those rumors. Uralkali said it pulled out because Belaruskali had made key fertilizer ingredient deliveries outside the partnership.

Me? I'm rather glad about the welfare effects of potash prices dropping worldwide for LDC farmers who've been victimized by the major producers' shenanigans these past few years. While the $20B potash market will not entirely be "freely traded" for the first time in eight years as some headlines suggest--there's the matter of the other cartel--things are definitely headed in a better direction.

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Badluck Shinawatra's Failed Global Thai Rice Empire

I suppose that Thai PM Yingluck Shinawatra has received as much grief over her first name as Nigerian President Goodluck Jonathan. But oh, Yingluck, how your name has proven to be unworthy of your fate as of late! Let me explain...

Since her election, Yingluck Shinawatra has continued to court populist support from more receptive constituencies of her brother, the controversial exile Thaksin--folks in rural areas as opposed to the snooty Bangkok city slickers who have long been the most vicious Shinawatra haters. Given the need to enlist their support, what better way is there than to guarantee that the government would purchase agricultural produce at well above market prices? Thinking that they were smarter than your average global rice producer, Yingluck's advisers came up with a grand strategy whose logic went like this:

1. Thailand is the world's largest rice exporter, therefore its price-setting power is unmatched;
2. To court rural votes, the government would subsidize above-market purchases of rice;
3. Thailand would then hoard rice by not exporting it;
4. By withholding Thai rice from world markets, global prices commanded would increase significantly;
5. When a certain price level was reached, the Thai government would then be able to recoup earlier losses from buying farmers' rice at above-market prices (and even make a tidy profit).

As it turns out, Thailand vastly overestimated its influence on global prices since the slack was easily picked up by other producers. Further, India ruined Thailand's grand plans by re-entering the global market just as Thailand was hatching its plans. So, the Thai government is now sitting on a huge unrealized loss in the form of an estimated 17 million tonnes worth of rice reserves purchased at above-market cost:

The plan was simple: Thailand’s government would buy rice from local farmers at a generous price, some 50 percent above the market rates. It would hold the rice in warehouses, cutting off exports to the rest of the world. The sudden shortage from the world’s heavyweight champion of rice exports would cause a spike in global prices. Then, payday for the government as it swung open the warehouse doors and sold its stockpile to the world at a premium. Farmers win, the government wins, foreign consumers lose, but then they don’t vote in Thai elections, so what do they matter? The plan was a political no-brainer, except for one problem: Thailand’s government underestimated how quickly the market can kick back at any would-be puppeteers...

And it was Thailand’s great misfortune that exactly one week after it slashed exports, India lifted its export ban, flooding the market with 10 millions tons of rice. Rather than orchestrate a price hike, Thailand helplessly stood by as global prices sank.

All credit to a rating agency (yes, it is surprising) for noting the true cost of Thai shenanigans and calling them out. But still, the farmers have seemingly gotten used to selling at these ridiculously high prices so there's little turning back:

For a year, the government has shied away from public scrutiny of the program, but Moody’s, the credit rating agency, blew the lid off of the story last month when it warned that the program could swallow up an astonishing 8 percent of the national budget, forcing the agency to reevaluate the government’s credit rating. For a government already mired in debt, the warning shot from Moody’s “crystallized their thinking,” Dawe says.

Yingluck, whose Pheu Thai Party draws its support from the country’s rural northeast, has said the program has achieved its goal of boosting incomes for poor, rural farmers. She has now urged them to now give her administration the flexibility to modify the program. In a public address on a local television series, “Yingluck Government Meets the People,” she said the program would remain in place, and that the government would continue to purchase rice, but it may have to reduce its purchase price to make the program sustainable.  As for the Moody’s report, she has promised to rebut the findings with a government investigation into the true cost of the program.

Thai politics remain as contentious as ever, with Thaksinite "red shirts" alike sister Yingluck & company still slugging it out with royalist "yellow shirts." I shudder to think what the backlash from the opposition will be once those losses are realized given that Yingluck vows the programme will continue. I suppose Thais have gotten used to perpetual regime change by now, so what else is new?

Markets are already on alert that Thai rice dumping on world markets may occur as soon as next week in preparation for the government having to buy the upcoming harvest:

Bangkok’s rice buying policy, designed to boost farmers’ incomes, has led to a stockpile of 17m-18m tonnes. With the new crop set to be harvested in October, the Thai government needs to dispose of its existing inventory to raise money for the new purchases. 

Rice market experts are on high alert as Bangkok could issue tenders for about 350,000 tonnes of its rice as early as next week. Concepción Calpe, senior rice analyst at the Food and Agriculture Organisation in Rome, warns the effects on world prices could be serious if Thailand floods the market with its rice. “It could potentially have catastrophic consequences,” she said.

 At any rate, damage control is already underway to minimize the financial fallout--including a mooted ratings downgrade.

7/31 UPDATE: Thai authorities tried selling some of the stockpiles this week, but bidders are few since there are doubts about the quality of rice that has been stored for quite some time now:

The commerce ministry said Monday that the government's first sale from its stockpile this year is likely to move less than 100,000 tons, compared with a goal of 350,000 tons, as most offers to buy were too low. Traders said market prices are about $480 a ton, while bids for government sales are coming in at about $380 a ton because of concerns over quality.

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Is the 2013 US Farm Bill "WTO Legal"? Nope

Ho hum--another US Farm Bill, another round of fat agricultural subsidies for American producers that hurt farmers in the developing world. Just as Brazil successfully sued the US for its cotton subsidies a couple of years back [DS 267], the 2013 Farm Bill under consideration does not do away with actionable subsidies in the form of price supports if crop prices drop significantly. Senator Pat Roberts (R-Kansas) recognizes this, although it should be pointed out that his state is not a major producer of the most-contested crops--rice and peanuts:

I also have longstanding WTO concerns. The United States lost the cotton WTO case to Brazil in part because of the decoupled target price program. It simply isn’t right to force that same risk onto other commodities when we already know the potential pitfalls. The WTO stove is hot. We should not reach out to touch it again.

The domestic debate over the inclusion of food stamps aside that is still holding up the Farm Bill, the bone of contention with America's international critics remains. Sure they may have renamed the price supports, but in this case it truly is a case of old wine in new bottles:

Both bills retain a counter-cyclical price program that makes a farm payment when prices for covered crops decline below certain levels.It is renamed Adverse Market Payments or AMP in S. 954 and Price Loss Coverage or PLC in H.R. 1947. To better protect producers in a market downturn, the price guarantees (called “reference prices” in both bills) that determine payment levels are set in statute and increased relative to current parameters (called “target prices”). 

To be fair, there was some effort made last year in the Senate to remove such subsidies on all but the most sensitive agricultural products, but it all came to naught and either Senate of House versions will now retain them:

The [stillborn] 2012 Senate-passed farm bill (S. 3240) did not provide for a counter-cyclical price program, and an amendment to eliminate AMP for crops other than rice and peanuts failed during committee mark-up of S. 954. S. 954 continues current policy by making payments on 85% of historical plantings (or “base acres”), a provision designed to minimize the program’s effect on planting decisions. In contrast, the House bill pays on 85% of planted acreage to better align payments with producer risk.

All in all, the US is still living dangerously with regard to WTO-actionable subsidies. It remains a case of putting a large "KICK ME IN THE WTO" sign on yourself and hoping you avoid a swift one in the hiney.

Given how the US further disadvantages already disadvantaged farmers in the developing world while claiming it's "free trade," somebody should really make a WTO case against it soon. 

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Agrodiplomacy: PRC-Ukraine $3B Loans-for-Corn

It's no big secret that Ukraine has been on the ropes financially for the past few years. Alike every sort of commodity exporter nowadays, however, it's found itself in luck as the the world's banker du jour and its voracious appetite have come to the rescue. That is, troubled countries can of course go to the conditionality-laden IMF as Ukraine has. But, if they're lucky, they have commodities to offer that other creditor of note which couldn't care less about economic management, governance and other Western hang-ups.

Actually, there's more to this story than "Ukraine will guarantee its annual output of maize exports to go to China at a set price in exchange for loans from the PRC." Why is there suddenly such a voracious Chinese hunger for corn? Well, that's an easy one to answer. Consider that China is by far the world's most voracious consumer of meat. Treehugger puts it well in the following chart and excerpt:

More than a quarter of all the meat produced worldwide is now eaten in China, and the country’s 1.35 billion people are hungry for more. In 1978, China’s meat consumption of 8 million tons was one third the U.S. consumption of 24 million tons. But by 1992, China had overtaken the United States as the world’s leading meat consumer—-and it has not looked back since. Now China’s annual meat consumption of 71 million tons is more than double that in the United States. With U.S. meat consumption falling and China’s consumption still rising, the trajectories of these two countries are determining the shape of agriculture around the planet.

That's a nice way to put it. The outlines of the deal involve China's Export-Import Bank facilitating this exchange go like this:

Ukraine is set to sign an unusual loan-for-crops contract with China that will see Kiev access $3bn in credit lines in exchange for supplies of corn, a commodity that Beijing has started to import in large quantities...

Mykola Prysyazhnyuk, Ukraine agriculture minister, said in an interview that the deal with the Export-Import Bank of China would be signed in mid October. “China is asking for about 3m tonnes of corn each year ... to be supplied at market prices that are set at the time of export,” Mr Prysyazhnyuk told the Financial Times. 

And yes, it does create trade ties between two countries that don't have so many right now. With global corn prices exploding upwards, it's also a fairly astute move on the part of Beijing. Meanwhile, Ukraine intends to plow back loan proceeds into improving its agricultural technology. Remember especially that corn is an important feed for pigs and cows as meat demand in China keeps rising:

The deal between Kiev and Beijing comes as China has rapidly become the world’s fifth largest importer of corn. The country will buy overseas about 8.3m tonnes of the commodity between 2011 and 2013, or as much as it imported in the previous 15 years combined, according to estimates from the US Department of Agriculture.

Corn is a key feedmeal to fatten cows, sheep and pigs as consumption of meat in China continues to grow, analysts said. “This market is important and attractive for us. We have not yet exported crop there,” Mr Prysyazhnyuk said...

Mr Prysyazhnyuk said the Chinese loans will be used to finance the purchase of Chinese agriculture technologies, herbicides and pesticides. “We will use these investments to boost our harvest and, in turn, fulfil export obligations to China.”

It's a bit unusual, but it's a potential trade win-win nonetheless. It makes you wonder why so many Westerners think the Chinese lack creativity in the practice of diplomacy when they can think of things like this instead of merely getting chased out alike certain others.

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Thailand Still Dreams About an 'OPEC of Rice'

I guess there are few truly novel ideas in international political economy. Since the formation of OPEC, developing nations have envied its perceived success in buoying oil prices. As such, there have been any number of cartels for other commodities which have been mooted or even made. Bauxite, anyone? However, it should immediately be apparent that the prospects of a successful cartel depend on a number of things such as (a) the centrality of a commodity to modern life, (b) the price elasticity of demand for the commodity, (c) the global market share of the countries within a cartel and (d) the willingness of cartel members to stick to production quotas.

In 2008, the literally cooking Thai Prime Minister Samak Sundaravej proposed that Thailand group together with four other Southeast Asian nations--Vietnam, Myanmar, Cambodia and Laos--to form a rice cartel. Rice being a staple food in Asia, it definitely meets the criterion of being an important commodity in everyday life in our part of the world. The global rice industry is somewhat unique though in that most production is consumed domestically. Given that situation, countries that do export have a greater say in global rice prices which may belie their comparatively lesser output compared to the likes of, say, China and India. The world's top two rice exporters, #1 Thailand and #2 Vietnam, would have been included in the mooted cartel

As it so happens, the Thais have once again been clamouring for the creation of this cartel, demonstrating the durability of the idea through various leadership changes there. However, there appears to be a fly in the rice as India has become more oriented toward exporting rice as well and is purportedly poised to overtake Thailand as the world's #1 rice exporter this year. Just as Russia is the spoiler to OPEC by being a major energy exporter that is not within the organization, so too does India pose a rice "threat":

An alliance of Thailand, Vietnam, Cambodia, Laos and Myanmar will aim to share information and cooperate in production and marketing, with the goal of increasing rice export prices, Yanyong Phuangrach, Thailand's permanent secretary for commerce said in Bangkok Wednesday. The aim is to form the alliance by the end of the year, he added.

Thailand and Vietnam usually control close to half of the global rice trade. But the London-based International Grains Council estimates their combined share will fall to 38% this year, as India has become the world's biggest exporter. This week's move to create a cartel is seen as a response to India's increased market share, which came after it lifted a 3½-year ban on exports of "ordinary" rice last September.

For obvious reasons, getting Vietnamese cooperation is crucial to Thailand's effort. Vietnamese officials are also wary of the sensitivities involved in raising food prices worldwide at a time when high food prices causing hunger in LDCs is causing concern:

If this new effort is to succeed, it will need to keep Vietnam on board, said Chiaki Furui, chief executive of Agrow Enterprise, a Bangkok-based commodities brokerage. Indeed, Vietnam responded to India's lifting of the export ban last year by cutting its own export prices, despite Thailand's lobbying of other exporters to keep prices high, and some are skeptical that the latest push for an alliance can work.

"A cartel on rice trade won't succeed. Vietnam already has a minimum rice export price, but traders continue to sell at lower prices to be competitive in the global market," said Tejinder Narang, an executive with New Delhi-based trading company Emmsons International. An official with state-run Vietnam Southern Food Corp., the country's largest rice exporter, warned that efforts to boost prices could trigger world-wide protests, given that many people around the globe are starving.

Further, it is very important to keep in mind that Thailand's proposed cartel is not an ASEAN effort. Alike in other regional groupings, there usually are importers and exporters of certain commodities. Hence, while the proposed membership is entirely composed of ASEAN members, higher rice prices in international markets are most likely to harm other ASEAN members that import much rice to meet domestic demand alike Indonesia and the Philippines (which are more populous than any of the mooted cartel countries):

But the push for higher rice prices could put Thailand at odds in this case with Indonesia, a major rice importer. Indonesia's response to possible higher global prices will be to expand local buying and stockpiling by raising the domestic purchase price, said Mohammad Ismet, a former consultant to Indonesia's state-run buyer, Bulog. "There is no reasonable basis to form such an alliance. Clearly, traditional importers such as Indonesia and the Philippines feel threatened by the unreliability of the world's rice market," Mr. Ismet said.

In the interest of third world solidarity, I do not favour this cartel since rice-consuming nations are predominantly developing ones. Fellow Southeast Asians, you won't be "sticking it to the (white) man" but rather ourselves.

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Speculation, Food Prices & Firm Reputation Risk

In any number of commodity classes, there is the accusation that speculators and other sorts of profiteers are driving up prices to a degree unwarranted by economic fundamentals. You often hear this with regard to oil, but it's also an accusation heard with regard to foodstuffs as their prices have exploded upwards. (Developing countries are supposed to be especially vulnerable to these shocks since food expenditures take up more of a poor households's expenditures.) And, of course, the normative issues behind speculating in food are much greater than those in oil since you cannot live without the former.

I recently came upon an interesting Reuters article reminding how diversion of corn crops for ethanol is causing the price of this crop to increase Stateside. This concern is especially salient this year when yields of crops alike corn have been hurt by drought conditions. Almost as an aside, the article also mentions controversies over commodity speculation in foodstuffs. Given that many commodity traders were blamed for inflating food prices--there remains considerable controversy over this accusation--many have nevertheless become wary of being blamed this time around.

One of the solutions that traders have devised is to simply avoid inclusion of food-related commodities in various indices and investment funds that may tempt certain parties to speculate on food prices. In any case, many financial services firms which do not wish to subject themselves to this form of reputation risk are avoiding the inclusion of these commodities:

The price surge is also reviving a debate over the role of financial speculators in commodity markets. Big banks and institutional investors were often blamed for inflating prices back in 2008, although academic and government studies have offered conflicting views over the cause. Commerzbank said it had joined two of its German peers in restricting food-related investments by stripping agricultural products from its ComStage ETF CB Commodity EW Index TR, a small $145 million commodity index fund.

The bank declined to say why it had made the change, but lobby groups and traders said the motive seemed clear. "Climbing prices are creating reputational risk for banks," said Alexis Dawance, former manager of the agriculturals-focused Global Agricap Fund. "The big grain traders probably have much more impact in food and commodity trading, but this is part of the bigger picture, with all the fat cat bashing that has been taking place. ... If food prices continue to rise you will see this happening more and more."

These, my friends, are the real hunger games in a globalized world. 

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Is Being Fat Related to Being Dumb? The US Case

Being apart from the Anglo-Saxon blogging crowd allows me to probe questions they are generally uncomfortable with but need to be asked. Yesterday we considered the general unresponsiveness of Anglophone academia to reforming higher education despite producing so many unemployed and unemployable graduates. Today I consider the unpalatable combination of being overweight and intellectual underachievement. Is there a link between the two? Once more, let us consider the United States which exemplifies much of both.

It is not exactly a secret that the performance of the United States' education system is middling at best compared to other developed nations' systems despite considerable spending on the godforsaken thing. What's more, recent OECD data suggests some from developing nations alike China are walloping American kids. Which is not difficult to do, really, but to see some PRC youth topping OECD league tables is a warning sign. Further evidence is shown in other standardized tests. Not only does the United States' youth underperform their international peers, but they are falling behind in exams administered by Americans themselves. Witness continuously falling test scores on the Scholastic Aptitude Test (SAT) which high school students wishing to enter college must take. While some apologists have claimed this was due to more young people taking SATs alike minorities who haven't done as well as white and Asian students, that scores have been falling while No Child Left Behind (NCLB) is being implemented suggests a link between poor K-12 and test performance.

Meanwhile, today I came across an interesting feature on how already-fattening sugar impairs cognitive performance. As with most studies of this sort, there are generalizability questions insofar as the subjects were lab rats. However, it does point out future directions for study given the massive amount of sugar Americans consume:

"Because insulin can penetrate the blood-brain barrier, the hormone may signal neurons to trigger reactions that disrupt learning and cause memory loss," [UCLA researcher] Gomez-Pinilla said. In other words, eating too much fructose could interfere with insulin's ability to regulate how cells use and store sugar, which is necessary for processing thoughts and emotions.

"Insulin is important in the body for controlling blood sugar, but it may play a different role in the brain, where insulin appears to disturb memory and learning," Gomez-Pinilla said. "Our study shows that a high-fructose diet harms the brain as well as the body. This is something new." In the US, high-fructose corn syrup is commonly found in soft drink, condiments, applesauce, baby food and other processed snacks. The average American consumes more than 40 pounds (18 kilograms) of high-fructose corn syrup per year, according to the US Department of Agriculture.

That American kids are among the portliest in the world is well-known.and utterly unsurprising. What is new here though may be that a source of their obesity and mediocre academic performance may be traced to the same source: excessive consumption of sugars, more specifically high-fructose corn syrup. It's an eminently researchable question that may help in answering why the US is in such a wretched state educationally, financially, and unhealthily. There's certainly a good chance these are all linked. In academic jargon, portliness and thick-headedness should covary.

Reminiscent of the tobacco lobby denying negative health effects from consuming too much of their products, we too have similar interests doing the same for sugar. According to lobby group The Sugar Association, sugar is not the cause of obesity, nor is it a primary factor to increased caloric intake.Their wording is careful in avoiding the more readily verifiable observation that sugars do contribute to both problems. However, such PR is aided by heavy-handed lobbying to preempt legislation that may attach more health warnings to sugar. Lest you doubt their capacity for political machinations, they reportedly even petitioned US lawmakers not to fund the UN after the World Health Organization accused this lobby of watering down a report on the harmful effects of consuming excessive sugar.

Again, I wouldn't be so keen on criticizing the United States if it didn't hold itself up time and again as a shining example for the rest of the world. American exceptionalism, they call it. Truth be told, there are far better systems to emulate instead of following certain hubris-filled folks. For findings jobs for young people, study the German example. For improving academic performance at all levels, study Singapore.

True, there is no magic bullet to solving American mediocrity. However, it does help pointing out to these folks that they are mediocre in so many things and are thus not worthy of emulation but condemnation. Making tidy profits for sugar lobbies is all well and good, but if it comes at the expense of national health and even intelligence, well, tough. American society is broken, and there's no one fixing it in this respect as in so many others. But hey, sugary treats are cheap, so what the heck! Twinkies for all (kids especially).

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Bizarre Agropolitics Triangle: US, PRC & Philippines

Political science types--yours truly included--tend to think of nations as unitary actors when it's seldom the case: "What is China thinking?" or "What is American policy on this matter?" are but two examples. But, it is often the case that "reifying" nation-states or thinking of them as all but "personhoods" is misleading. Today, I offer you a case in point.

Those following US-China relations realize that the upcoming Strategic and Economic Dialogue in Beijing on Thursday and Friday should be more exciting than most. First, there's the matter of the blind Chinese dissident who is rumoured to be under US protection in China. Second, there's the old favourite Sino-American irritant of selling more arms to Taiwan popping up again. Third, there's the Philippines asking for American support over its dispute with China over dominion over energy-rich islands in the South China Sea causing PRC discomfort over the US returning Douglas "I Shall Return" McArthur-style to its former colony. All these ongoing tussles have prompted some to believe that Treasury Secretary Tim Geithner and Secretary of State Hillary Clinton would forego a trip to Beijing, but they probably won't.

Focusing on the third matter, you'd think it's a slam-dunk thing that the US charm offensive in the Pacific is gaining strength with Manila having little choice but to renew strong ties with Washington. But, that's not necessarily the case. While the Philippines is clearly at loggerheads with China concerning territorial disputes, it's more of the PLA that's especially belligerent about the matter. Meanwhile, Chinese trade authorities still seek to use commerce to improve relations-especially with its neighbours.

The agricultural matter in question concerns the Philippines attempting to renew exemptions granted by the WTO on liberalizing the importation of rice. Alike with China, the Philippines' food staple is rice. However, a good indicator of its developmental laggard status is its inability to achieve self-sufficiency in rice production. Embarrasingly, many of its Southeast Asian neighbours alike Thailand and Vietnam have become rice exporters from using advances in agricultural techniques developed in the Philippines such as those by the well-known International Rice Research Institute (IRRI). So, to achieve self-sufficiency, an agricultural policy has been to keep out (more price-competitive) imports.

The Philippines is now seeking a rice import quota extension from the WTO for another five years (albeit with gradually relaxed provisions) as the current one is set to expire in June :

A five-year waiver for rice import quotas due to expire in June has been requested from the World Trade Organization (WTO) by the Philippines, which in exchange will reduce the applicable tariff...The country wants quantitative restrictions (QR) on rice, due to expire on June 30, 2012, extended to 2017, claiming "exceptional circumstances" such as food security and continuing efforts to make rice production more market-oriented. The current 40% in-quota tariff will be reduced to a still-unspecified level, and Manila will agree to annual reviews that could lead to modification or termination of the waiver.

It again shows you how there are different political actors at play in the US when agricultural producers and trade authorities there want this quota struck down pronto, indicating discontinuities in US policy towards a minor power:

The Philippines’ appeal at the World Trade Organization (WTO) to stop the influx of imported rice is facing opposition from the United States government, which recently protested the country’s stricter regulations on meat handling, Agriculture Secretary Proceso Alcala said. Alcala, in an interview with the media on Thursday, said the US government has decided to block the Philippines’ bid to limit the entry of foreign rice in the local market, a regulation meant to protect Filipino farmers from competing with cheap and subsidized foreign rice...

To the surprise of some Philippine officials, though, Chinese authorities are relaxed about granting an extension of these import quotas for rice:

China has expressed willingness to support the Philippine request before the World Trade Organization (WTO) to extend its special treatment through quantitative restrictions on rice imports. In a high-level meeting with National Food Authority (NFA) administrator Angelito Banayo in Beijing on April 26, Deputy Minister for International Trade Yu Jianhua said his country will support the Philippine request, citing the importance of economic cooperation between the two countries. This came as a pleasant surprise to the Philippine delegation led by Banayo and Agriculture Assistant Secretary Romeo Reside, along with NFA lawyer Gilbert Lauengco, who came to the Chinese capital to start formal bilateral negotiations seeking to extend quantitative restrictions on rice imports, which are otherwise due to expire on June 30, 2012.

It indicates how security and economic policy are not as closely linked as many believe. The persons involved are different, as well as the interests at play. While the US seeks to pry open more foreign markets for (likely subsidized) rice, China has no real interest in exporting rice to the Philippines and sees a way to establish goodwill in trade over an issue it's not directly involved in but can influence given its increasing presence in Geneva.

All in all, it's an interesting case study which throws caution to blanket statements about the Philippines being "in the pocket" of the US or "moving away" from China. Again, the issues and context matters. I believe that the contest for Asia-Pacific hegemony between the US and China will be conducted in this fashion--small power by small power, minor issue by minor issue. Attention to detail will be key in winning over the Philippines and the rest.

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Bad Habits Die Hard: On USAID "Relaxing" Tied Aid

Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime - Chinese proverb

Give LDCs subsidized American foodstuffs and you can feed them for a while, albeit with the risk of decimating unsubsidized local food production. Help develop their food self-sufficiency by buying food locally...well, to hell with that - paraphrasing US aid policy

Here's a very important development you may have missed: I certainly did because it wasn't widely publicized at the beginning of the year--even in development circles where I assume it's groundbreaking news. The US Agency for International Development (USAID) has repeatedly been cited as one of the most flagrant offenders in the tied aid sweepstakes. That is, this aid agency has been encouraged to give business to American contractors for various development and emergency relief projects. The pitfall here is obvious: instead of supporting budding enterprises in developing countries, USAID has traditionally obtained supplies from stateside since it was obligated to do so regardless of cost.

The argument many USAID folks make nowadays is that this is no longer so. The proportion of tied aid to untied aid is supposedly falling. More recently, the (mostly unreported) news concerns the US government now allowing for procurement from non-US suppliers of aid goods and services. Not only should inefficiencies due to distance such as spoilage be minimized, but USAID should be able to procure these more inexpensively. Times have changed, or so they say:

Because of the end of the Cold War and the subsequent globalization of the economy, this [tied aid procurement] approach has become increasingly difficult to administer and, in some respects, obsolete. The costs of compliance with the complex regulation, and of the self-imposed and unnecessary restrictions on procurement in recipient and developing countries means that the foreign assistance dollar does not go as far as it would with a more straightforward regulation that reflects the statutory authority to procure in the recipient country and other developing countries, in addition to the U.S.

Which is all well and good, but the most symbolic of all forms of aid is excluded. Just as Live Aid's refrain was "feed the world" and USA for Africa zeroed in on hunger, particular attention will be placed on alleviating food scarcity. Unfortunately, untying aid does not extend to that particular area. From the Guardian, we are provided an exclusion list:

But last month, USAid revised its procurement regulations. The new rules...will allow the agency to purchase most goods and services from developing countries, with notable exceptions including US-funded food aid, motor vehicles and US-patented pharmaceuticals...

The new rules do not extend to US-funded food aid. Under federal law, the vast majority of American food aid must be bought from US suppliers and transported on US ships. Also exempt from the new regulation are motor vehicles, which must be made in America, and US-patented pharmaceuticals, which can only be manufactured outside America with express permission from the patent holder. The procurement changes do not extend to other US agencies that spend foreign assistance. 

The motor industry's capture of the US government is obvious given the huge bailouts of GM and Chrysler during the subprime crisis. That pharmaceutical firms would allow the US government to purchase generic drugs only over their dead bodies should be plenty obvious, too. However, it is galling that the most symbolically important aid of all, food, continues to be so influential in the formation of US aid policy. It returns us to that chestnut of a debate over rich world farm subsidies hurting LDC farmers. Just in time for the 2012 Farm Bill come these aid controversies. As the proverb above suggests, what lasting good does temporary aid consisting of US foodstuffs (which are likely highly subsidized and may hurt poor farmers who cannot compete with American giveaways to rural interests besides) do?

I suspect the main reason why this untying of aid has received so little attention is because it doesn't really address these grievances concerning American government policies that support overzealous IP protection over pharmaceutical products and the continuing unavailability of support for overseas food procurement.

Moreover, does USAID really aid represent goodwill on the part of the American people given that federal outlays like aid are significantly funded by others? I guess it's white man, forked tongue...and tied food aid.

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TPP is Ludicrous: US Auto, Canadian Agri Edition

Here are two more examples of the rather enormous roadblocks to the US government attempting to expand an APEC PTA to counterbalance growing Chinese trade dominance in the region. In their own ways, they are rather ludicrous examples of how Trans-Pacific Partnership (TPP) enlargement is infeasible at the current time given the policies of certain aspirant nations:

(1) Having largely survived via government bailouts, American automakers are now encouraging the US government not to let Japan join TPP enlargement negotiations for the reason that the Japanese supposedly throw up "non-tariff barriers." Having tried to pry open the Japanese market before via the blunt route of trade negotiations, it seems these automakers haven't yet learned their lesson. That is, selling big, gas-guzzling left-hand drive cars in a market where almost all cars are small, frugal and right-hand drive doesn't work. Quoting from a Japanese official on these alleged NTBs:

A Japanese government source in Tokyo rejected Detroit's contention that regulatory and other hidden or structural barriers keep U.S. cars out of the Japanese market. "Japan has no tariffs on cars and our acknowledgment is Japan has no non-tariff barriers either," said the government source, speaking on condition of anonymity.

"U.S. cars do not fit Japan's market or Japanese consumers' requirements because of size, high fuel consumption and higher prices. They need to have a line-up that suits Japanese consumers' preferences," the source added.

American consumers may have an enduring appetite for crapmobiles from Government Motors, but that does not necessarily mean that Japanese consumers are similarly gullible. I will not even get into the matter of agriculture where the TPP will supposedly offer no opt-outs.

(2) It appears that Canada in the TPP too looks like a long shot given its liberal use of agricultural supports. Canadian Trade Minister Ed Fast is looking to gain the approval of ANZ countries in particular of this matter while in Singapore:

A tariff structure that supports domestic farmers should not be a barrier to Canada's entry to a pan-Pacific trade pact, although all issues are up for negotiation, Canada's trade minister said on Wednesday. Ed Fast, interviewed in Singapore at the end of a tour of Southeast Asia, said most of the nine countries working toward the conclusion of a Trans-Pacific Partnership (TPP) deal supported Canada's entry into the negotiations.

He declined to say which countries did not back the plans. News reports have suggested Australia and New Zealand are unhappy about Canada's supply management support program for poultry and egg producers, a network of marketing boards and quotas intended to keep markets stable and ensure farm incomes.

It may be the case that TPP will be shot through with opt-outs if the likes of Canada and Japan come on board without significant changes in agricultural policy, negating the American assertion that it is a "high standard" FTA in the process. (See a recent post on Japan in the TPP.)

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