What the China Stock Market Crash Really Tells Us (and What It Doesn’t)

Monday morning headlines were more sobering than a double shot of espresso, adding anxiety to an already tumultuous few weeks in China. The Shanghai index dropped 8.5%, in one day, again. This after a see-saw struggle to regain momentum with similar drops from mid-June’s dizzying peak of over 5,000.

The consequences of such a serious correction, with a Monday close at 3209.91, are neither dire nor surprising and the ensuing panic will likely bring out a host of incorrect linkages.

Here are three misconceptions of what the crash seems to mean, but doesn’t.

1. The China market crash will destroy the U.S. economy

U.S. exports to China totaled a mere 7% of total U.S. exports year to date. Canada and Mexico represent a combined 34%.

Exports in general make up an extremely small percentage of the U.S. $18 trillion economy (about 8%) and exports to China represent an even smaller amount.

Over two-thirds of all U.S. economic activity is driven by consumers. The biggest impact on that activity is whether people feel they have more money to spend today than yesterday, not on whether day traders in Pudong are pulling their money out of Sinopec shares.

2. Shanghai and Shenzhen stock markets represent the broader Chinese economy  

Usually a broad-based stock market sell-off represents a belief that the underlying economy isn’t going to do as well going forward as it has in the past. That’s the rational explanation assuming near perfect knowledge of economic conditions. Even the U.S. market doesn’t work that efficiently (there are sell-offs even without new negative economic information.)

In China, knowledge of the broader economic slowdown has been around for a while. If the markets were rational they should have been dropping when the government announced lower growth targets back in March. They should have dropped as alternate economic measures hinted that the official 7% growth rate might not be reached.

Instead they continued to climb based primarily on two non-economic beliefs. The self-fulfilling prophecy that the market could only go up and that the Chinese government would prop up any market weakness. Win-win.

Since domestic savers have very limited choices of where to put their money, once the real estate two-step dance was over (buy one to live-in, buy one to hold) the stock market became the only game in town attracting a flood of capital. That rush caused prices to rise which attracted even more investment, much of it borrowed on margin. Thus the illusion of a perpetually rising market.

The Shanghai composite has now dropped below the magical 3,500 level where many believed the Chinese government would step in with massive buying to push prices back up. The illusion of invincibility appears to be faltering. Meanwhile online sales in the real economy continue to expand.

In this market there is no irrational exuberance with Chinese characteristics, just irrational exuberance as rationality returns to the market.

3. The China sell-off is similar to previous Asian financial crises   

In 1997 the Thai Baht came under heavy pressure resulting in large scale contagion throughout the region. A heavily reliance on trade with a market-determined exchange rates drove this spread. China has neither.

China’s yuan, despite recent changes, remains a managed currency. The government still decides on its opening daily price. That means speculators cannot significantly alter its value beyond a government imposed trading band of +/- 2 percent per day.

China’s economy is also far less reliant on trade than in the past as government investment in infrastructure as well as real estate development have become main drivers of growth. Of those industries dependent on trade China’s recent devaluation made Chinese exports cheaper (a dollar or euro buys more today than in the recent past).

What does the recent sell-off really tell us?

The Chinese government is going to have an increasingly difficult time trying to stop the carnage. Despite conventional wisdom, it does not have unlimited power. By even trying to manage the sell-off, policymakers have placed themselves in an extremely difficult situation.

If they can’t right the market as people expect the government looks weak. If they impose even more draconian rules to stop sellers from liquidating they may kill interest in the market as a whole. Lose-lose.

Apple’s Tim Cook, for one is not that concerned about purchasing habits in China. Let’s hope that the nascent middle class has more cash stashed at home that they’re willing to spend than most people think.

Meanwhile the China market crash has caused a flash sale on a host of solid U.S. equities.

China Devaluation Latest Sign of Market Weakness

The People’s Bank of China (PBOC) devalued the renminbi yesterday in the latest sign that market forces continue to weaken in the world’s second largest economy.

Exports have fallen. Growth is likely far slower than the official 7% rate. Electricity usage is down. Steel production has declined. Infrastructure investment yields less impact. Even demographics highlight a shrinking workforce (enter the robots). And then there’s the stock market, largely divorced from the underlying economy and gyrating like hips at a hula hoop competition.

Currency devaluation will do little to reverse these trends.

As a short term fix it may help exporters whose goods are now cheaper to buy abroad, slow capital flight (it costs more to convert renminbi into other currencies) and potentially attract more foreign investment into the country (a U.S. dollar today buys more renminbi than a dollar yesterday).

But the underlying economic uncertainty in China’s partial transition to domestic led growth will continue to weigh heavily on the minds of international investors and policymakers alike.

If China truly wants to make the renminbi a global reserve currency the PBOC will have to reverse itself and let the currency float freely like the yen, euro and pound. That requires giving up managing a trading band around a fixed daily rate. Economic conditions would have to improve significantly before moves in that direction resume (almost certainly a gradual step-by-step process).

None of this means a hard landing for China’s go-go economy, but resorting to a currency devaluation highlights the limited policy options left for a government navigating increasingly choppy waters.

Remaining moves (and ones largely ignored to date) include government heavily investing in a social safety net, improving health care coverage and promoting more affordable housing. That will allow households to free up some of their savings to spend and spur new business creation.

Until this happens expect more partial solutions and continued volatility.

Despite Global Slowdown, Prosperity on the Rise

Despite Global Slowdown, Prosperity on the Rise

The Legatum Institute, an “independent, non-partisan, public policy organization” based in London came out with their annual Prosperity Index this week. Among the key findings in an analysis of 142 countries around the world: From 2009 to 2012 prosperity* rose in every region despite the global economic downturn. Central Asia and Southeast Asia top the charts with index scores rising approximately half a point followed closely by Sub-Saharan Africa and East Asia. Unsurprisingly the U.S., Asia Pacific (including Japan and South Korea) and Europe round out the bottom. Other findings include:

  • Prosperity may not be growing at the highest rates in North America, Europe and the Asia Pacific writ large, but advanced economies in these regions still dominate the upper echelons of overall rankings  ( 40 out of the top 50).
  • However, the U.S. fell to #12 overall and out of the top ten for the first time with a lackluster showing in Economy (#20) and Safety/Security (#27) sub-indices. Of particular concern “Fewer US citizens agree that working hard results in success.”
  • A country on the move, Indonesia jumped 26 spots since 2009 finishing 63rd overall this year. China finished at #55 with a strong showing on Economy and Social Capital indicators but failed to break into the top category across all other sub-indices with a particularly poor showing in Personal Freedom (#129) and Safety/Security (#101).
  • The largest sub-indice gains were found in Entrepreneurship/Opportunity and Health while Social Capital and Governance barely changed. Safety/Security declined driven by the Arab Spring and high rates of theft and assault in Latin America.
  • Accountable government was seen as a “key stepping stone to prosperity” with the notable exception of India, where corruption concerns continue to grow, falling ten places. Twenty-seven of the top thirty countries in the index are democracies.
  • A strong correlation was also found between tolerance indicators and high overall prosperity rankings. Win won for immigration and integrative social values.

* Prosperity was defined as income and wellbeing which include both numeric data and survey results standardized for statistical comparison. Details on their methodology can be found here and their full press release.

Post-Debate Wrap-Up: The Candidates on Asia

Post-Debate Wrap-Up: The Candidates on Asia

The final 2012 U.S. Presidential Debate went off without a hitch last night as both candidates stuck closely to their foreign policy talking points. China was meant to feature prominently with time devoted explicitly to the bilateral relationship. After brief opening remarks both Obama and Romney veered off topic and returned to the jobs question, a perennial favorite whenever China comes up.

What we know of the candidates’ positions from last night’s sometimes testy exchange paint a picture of a complicated U.S. relationship with the world’s second largest economy. These include concerns over the loss of domestic manufacturing, rule of law and growing military strength balanced against commercial opportunities half a world away (see full transcript starting with the China question here.)

Romney came out swinging with the now somewhat antiquated claim that China is a currency manipulator. In his own words:

“We’ll also make sure that we have trade relations with China that work for us. I’ve watched year in and year out as companies have shut down and people have lost their jobs because China has not played by the same rules, in part by holding down artificially the value of their currency. It holds down the prices of their goods. It means our goods aren’t as competitive and we lose jobs. That’s got to end.

They’re making some progress; they need to make more. That’s why on day one, i will label them a currency manipulator, which allows us to apply tariffs where they’re taking jobs. They’re stealing our intellectual property, our patents, our designs, our technology, hacking into our computers, counterfeiting our goods.

They have to understand we want to trade with them. We want a world that’s stable. We like free enterprise, but you got to play by the rules.”

Technical issues aside (as the Treasury Department has ruled against that legally very specific manipulator charge in the past), inexpensive Chinese manufactured goods are the result of low cost labor, economies of scale and exchange rates.

No matter what happens the jobs lost to China (and many other countries including Mexico, Turkey, India, and Bangladesh), including low-end garment production, household goods, and assembly work won’t be returning. If Chinese products became more expensive production would shift to other low-wage countries. Check the labels the next time you go shopping and you might be surprised where clothing is manufactured these days.

Even if Romney as President labeled China a currency manipulator, the remedy includes tariffs against Chinese goods. As the moderator Bob Scheiffer accurately pointed out, that would risk a trade war with China. Romney replied that China exports more to the U.S. than the other way around so they have more to lose. This simplistic version of trade does not reflect the realities of international commerce.

Sudden tariff increases would be a particularly reckless course of action which does absolutely nothing to solve the core problems facing U.S. labor, namely better paying U.S. jobs. The effects of punitive action would wreak havoc with trade on both sides of the Pacific and the intricately linked global supply chain.

China’s currency has also been appreciating over the past several years and labor costs are rising as well. Romney’s missive, along with the ear-catching phrase that they “must play by rules” which Obama also reiterated, did little to address real trade frictions like further opening of Chinese markets to U.S. goods, greater Chinese enforcement of intellectual property rights protection, and cracking down on counterfeits entering the U.S. That’s more of what we needed from both candidates.

Obama countered with his own “get tough” strategy including an increasing number of WTO cases levied against China (most of which are won by the U.S.) that did give temporary advantage to U.S. manufacturers of tires and steel. Both industries, however are slow growth and lacking in innovative strategies to remain globally competitive.

Clear examples and real world solutions were needed, only the solutions part was sorely lacking.

On the security front there was precious little mentioned about China’s rise, the U.S. pivot to Asia, tensions in the South China Sea, North Korea, or recent China-Japan disputes. Obama did say:

“We believe China can be a partner, but we’re also sending a very clear signal that America is a Pacific power; that we are going to have a presence there. We are working with countries in the region to make sure, for example, that ships can pass through; that commerce continues. And we’re organizing trade relations with countries other than China so that China starts feeling more pressure about meeting basic international standards.”

And then the conversation veered off into Detroit autos and cuts to education. There was no grand U.S. policy towards Asia offered by or asked of the candidates.

For the most part U.S. voters aren’t even that concerned about U.S. foreign policy when it comes to picking the president. What they want to see is a candidate capable of securing the country against threats, decisiveness and calmness under pressure. The real concern remains jobs, jobs, and then jobs. That’s why the debate consistently put foreign policy back into the domestic context.

All the candidates really needed to do was get in a few good verbal punches here and there and stay off the ropes. That’s what the debate delivered, but little else.

 

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U.S. Presidential Debate – A Foreign Policy Primer

U.S. Presidential Debate – A Foreign Policy Primer

With two weeks left before election day candidates Obama and Romney tackle foreign policy issues tonight. If last week’s battle royale over the economy is any indication this promises to be a no-holds-barred verbal slug fest. Tremendous changes have occurred over the last four years in the Middle East, Europe and Asia. Osama Bin Laden is dead, the wars in Afghanistan and Iraq are over. Dictators have fallen from decades in power. China continues to rise.

Still, the global economy has yet to fully recover with Europe teetering on the edge of recession and Japan mired in stagnant economic waters. Middle East political movements struggle to sustain new democracies and China’s economic and military advances raise questions about Asia’s future balance of power.

Here’s a primer on some of the big issues likely to be addressed and a few questions that need to be asked. The debate begins at 9:00pm EST.

Middle East

Since Obama took office four years ago a surprise Arab Spring swept across the region. Libya, Egypt, and Yemen saw leadership changes brought about by popular uprisings. Syria is still mired in its own civil war with little hope of quick resolution. While nascent democracies sprung up after the overthrow of decades of dictatorships serious questions remain about their stability and policies going forward.

For now the Muslim Brotherhood in Egypt holds a tentative control with the military watching from behind the scenes for any signs of the nominally secular government turning into an Islamist stronghold. Libya meanwhile struggles with establishing a strong central government as events in Benghazi, where the U.S. Consulate was destroyed and diplomats killed by a terrorist attack, demonstrate.

In Iran a nuclear standoff continues with enrichment activities racing ahead and Israel threatening attack (though as sanctions take a deeper bit out of the Iranian economy Israeli President Netanyahu has eased off the war rhetoric).

The U.S. military withdrawal from Afghanistan marks the end of major U.S. operations in the region, closing a decade-long period of intervention initiated by the former Bush administration. The Afghanistan government still struggles with providing basic services to its people and countering threats of Taliban violence.

What will Obama or Romney do to further promote democracy in the Middle East without inflaming anti-U.S. sentiment? How can Iran’s nuclear ambitions be eliminated? Is Afghanistan going to slip into chaos once U.S. troops leave?

Asia

China’s inexorable rise gathered speed since January 2009. It completed construction on its first aircraft carrier, became the world’s second largest economy, and has survived the worst of the global economic meltdown with one of the world’s best growth rates. U.S. economic ties with China remains strong which has helped keep domestic inflation low.

Potential flare-ups, however in the South China Sea (with neighbors Vietnam and the Philippines) and East China Sea (with Japan) linger behind the facade of China’s “peaceful rise”. A once in a decade political transition is also underway with China’s new leaders expected to be officially acknowledged on November 8th and installed in March, 2013. Trade frictions are on the rise with increased WTO cases on goods ranging from tires to solar panels. The economy has slowed considerably from the unsustainable double-digit sprint of years past. Some economist predict much tougher times ahead as China’s new leadership faces a country in transition unlike any other time in recent history.

North Korea too has changed since Obama first took office. A young and relatively untested new leader, Kim Jong-Eun rose to power seizing every major military, political and governmental role in quick succession since his father’s passing. In one of the world’s most isolated regimes the family political dynasty remains intact. Hopes for significant economic liberalization have so far failed to materialize and tensions persistent on the world’s last Cold War front.

What does China’s rise mean for U.S. security and economic growth? Is China’s strategic intent to replace the U.S. as main regional influence and what will the U.S. do about it? What will you do as President to reduce tensions on the Korean peninsula and end the decades-long hostilities between North and South Korea?

Europe

Germany, the powerhouse of the continent, has lowered growth forecasts to a barely treading above water 1% for 2012. Most were hoping that the manufacturing giant could sustain strong growth against the headwinds of Spanish, Greek, and Portuguese recession along with a lackluster UK and newly integrated eastern European economies.  As the world’s engines of growth stall one-by-one, the threats of a larger global recession increase, as the IMF has warned with increasing regularity.

How will the European slowdown affect the U.S. economy and can the U.S. avert even more economic troubles if Europe stalls?

Terrorism

Attacks on the U.S. Consulate in Benghazi and a recently thwarted attempt in Jordan in addition to continued fronts in Yemen and now Mali show that the treats of terrorism have not abated. As long as arms continue to flow into the hands of radical groups and weak or failed states remain the threat of violence will continue. Concerted and sustained action can, however minimize the depths of the threat and seriously disrupt organizations bent on destruction.

What can and should the U.S. do to further combat terrorist organizations? Is the Al-Qaeda threat still a focal point of U.S. foreign policy?

For updates from Klein’s Commentary connect via email, Facebook or Twitter (links above).

China’s Global Leadership Gap – CNN Commentary

China’s Global Leadership Gap – CNN Commentary

(Also on CNN’s Global Public Square here.)

In a rare and telling diplomatic snub this week China refused to send People’s Bank of China Governor Zhou Xiaochuan to the IMF/World Bank meeting held in Tokyo. The slight, related to the continued stand-off with Japan over a disputed island chain in the East China Sea says more about China’s prospects for greater global leadership than a bilateral territorial disagreement.

For several years running China’s economy has grown along with its ambitions for recognition. Internationalizing the yuan as a reserve currency, more influence over international lending institutions and respect as a leading business and financial center have been chief among them.

The meeting boycott marks the latest in a string of retaliatory acts, including using informal trade measures meant to punish countries acting in ways China dislikes. Imports from the Philippines were suddenly subjected to enhanced inspection and quarantine over a dispute in the South China Sea Rare earth exports critical to Japan’s electronics industry were also suspended in a 2010 island conflict. These steps mark a troubling and regressive tendency in Chinese foreign economic policy.

Since joining the World Trade Organization back in 2001 Beijing has enjoyed many of the benefits of membership while at the same time using protectionist measures to give domestic industries significant advantage. Trade has been used increasingly as a political tool contravening over a decade of engagement to keep these two policy spheres apart.

Refusing to attend the annual international finance meeting will further damage China’s hopes for greater recognition. At a time when the risks of global recession are increasing retrenchment adds doubts about a potential leadership role. While Beijing might think its status as the world’s second largest economy makes it increasingly vital to any discussion, the world continues to turn without it.

Xi Jinping and the rest of China’s new leaders in waiting inherit a country in transition. Rising domestic wage pressure, a slowing economy, and renewed doubts about the security of joint venture intellectual property suggest China’s global economic influence may soon be waning, not continually rising. If slower growth becomes a trend rather than a temporary blip and anti-Japanese business sentiment grows into a broader missive against foreign companies, the lure of China’s growing market would dim significantly.

Embracing the complexities of international discourse rather than shying away from them mark an important maturing stage. Equally important are policies that further opening and reform increasing international participation in China’s domestic economy. This enhances both the perception and reality that China is dedicated to continued global integration. Pulling a no-show at an international gathering in a neighboring country does not.

 

Photo: Tiananmen Square looking north to the Forbidden City. Brian P. Klein.
Slogan by Mao’s portrait reads “May the Communist Party of China Live for Ten Thousand Years” (a former imperial saying re-purposed after the 1949 revolution).

 

U.S. by the Numbers – Recovery Still a Mixed Bag

U.S. by the Numbers – Recovery Still a Mixed Bag

A torrent of headlines came out today on the latest U.S. jobs numbers. Unemployment fell to 7.8%, below the psychologically important magic number eight. Hitting a four year low this certainly marks a change in the right direction, but we’re still talking baby steps (hand holding a toddler comes to mind.)

To have a substantial impact on the millions still unemployed this really needs to be closer to five or six percent. With only 114,000 jobs created we’re a far cry away from solid recovery. Numbers like 250,000 per month bring back better times from the abyss.

Still, current figures often underestimate the number of new jobs created (note the upward revisions of late) and the situation might be better than reported. We won’t know until after the November presidential election so whatever right direction/wrong direction spin the candidates want to put on these figures now’s their chance. Here’s what it looks like without the spin.

Bureau of Labor Statistics – Non-Farm Payrolls 2002 – 2012).

The gauge for recovery can’t really be measured solely by pre-financial meltdown levels anyway. Many jobs, especially in real estate and construction were unsustainably inflated by easy money sloshing around and unscrupulous mortgage lenders, traders and quantitative charlatans, but that’s another story.

What’s new is the housing slump appears to be in tentative recovery. The National Association of Home Builders/Wells Fargo Housing Market Index has been climbing for several months running now, albeit from a very low base and below even 1990’s levels. There’s ample room for improvement.  Considering the flack the U.S. economy has been hit with since 2008, especially among proponents of the inevitable decline meme (and the dozens of books it spawned) let’s stick with the glass half full version. That same glass used to be cracked, leaking and irreparable.

Other data points show that the economy as a whole can be about as undecided as some American voters with only four weeks to go. The Institute for Supply Manufacturers gauge hit a four month high of 51.5 indicating expansion had returned to the economy.  Alas, the Markit Index of Manufacturers fell slightly to 51.1 (still expanding but at a slower rate), from 51.5 in August.

These pesky social sciences. Conflicting data sometimes relegates the field more to a numbers running racket than say the mechanical precision of physics. Getting billions of electrons marching in single file across a TV screen remains far easier than accurately predicting the hiring and purchasing activity of a few hundred million people.

Since about 70% of the U.S. economy is driven by consumption and the holiday season represents a significant portion of consumer purchases for the year, perhaps better numbers are inventories and retail sales for October and November.

Wherever they end up, we still have a long slog ahead of us until the engines of American prosperity kick into high gear. On the bright side, innovation and ingenuity in the material sciences, biotech, information services and healthcare are expanding at tremendous rates. Once these go mainstream they’ll power an American renaissance sometime down the line. Just don’t ask for a firm date yet.

 

Photo: Depression Era Soup Kitchen, Wikimedia Commons

The Presidential Debate We Needed, but Never Saw

The Presidential Debate We Needed, but Never Saw

One question for the undecided voters of America – are you better off now than you were 90 minutes ago?

Despite a Romney landslide 67% “win” among CNN debate watchers and pundits parsing the candidates words in excruciating detail (worse than the actual number-laded debate itself), undecided voters remained decidedly, undecided.

What voters needed from the debate, a clear idea of the candidates’ plans for American renewal, remained lost in the thicket of questionable facts, long-winded replies, and tired rhetoric.

The debates did little to address the most pressing issues facing the U.S. economy. What can government actually do, in the short-term, to help increase employment, get the deficit under control, and ensure the social safety remains intact.

There was no clear vision for America, no soaring oratory, no sense of mission or purpose. Just two men, talking past each other through volleys of competing accounts of their opponents’ views and saccharine human touch stories. Remember the Denver woman with child in hand whose husband hasn’t had a full-time job in years? Or was it a man in (insert name of swing state here) who lost his insurance coverage and can’t get the operation he needs?

What seemed to get the most rise out of Colorado undecideds were phrases like “stop shipping jobs to China” and discussions on the importance of education. Old wine, new bottles.

How much do the candidates’ facts even matter? Probably not as much as we’d like to believe. Who is going to remember whether the Romney plan (with or without details) will actually add $5 trillion to the deficit. Did green energy companies really receive $80 billion in tax breaks and oil companies only a few billion? How many licks does it take to get to the center of that tootsie pop … no one really cares.

The fact checking cycle will run for the next few days and when the October truths come out they’ll be forgotten by November 6th. One zinger worth holding onto — Romney loves Big Bird, but won’t use taxpayer money to fund PBS.

Moving on to the next debate a youthful Paul Ryan faces off against the seasoned and outspoken Vice President Biden. In this match-up will an elder statesman school his less experienced upstart or does a Gen X politician goad the VP into saying something outlandish and damaging to the Obama campaign? It’s reality television on sedatives.

For the most expensive election in U.S. history one would have expected a better show. Maybe in the third and last debate the gloves will finally come off and we’ll get to see a real battle of ideas that make a difference.

Asia by the Numbers

Asia by the Numbers

(UPDATE 10/8/12: Both the World Bank and Asian Development Bank have lowered 2012 growth forecasts for China and Asia.)

Remember those halcyon days of unending Asia growth and the re-birth of a Silk Road century? Cherish the memories.

Nothing but negative news keeps flowing out of regional giants these days. Expert debates rage on about China’s hard vs soft landing while recent data just keep disappointing. HSBC China Manufacturing Purchasing Manager’s Index wallowed below the critical 50 threshold again. Political intrigue aside, China’s next generation of leaders are facing significant economic headwinds and challenges unknown to their predecessors.

From the September 29th HSBC Purchasing Manager’s IndexTM:

 

“Data in September signalled a stronger decline in Chinese manufacturing output, as the volume of new orders fell for the eleventh consecutive month. New export orders declined at the sharpest rate in 42 months amid reports of weak international demand…”

 

 

Historical numbers show a long decline since late 2010 (and a wild ride starting with the 2008 U.S.-led financial crisis).

Japan’s Tankan business sentiment survey showed more general weakness (negative views of business for the past 12 months and worsening in the last quarter). Unsurprising considering the weak overseas demand, yen troubles making exports more expensive and now troubles with China over the East China Sea. ANA airlines reported 40,000 cancelled flight reservations for September through November sparked by dueling territorial claims and violence on the mainland targeting Japanese factories, stores and restaurants.

Add to that Australia’s struggles with shrinking exports and a surprise Reserve Bank of Australia rate cut to 3.25% (Philippine’s central bank has cut rates as well), Vietnam’s slowdown, and rising South Korean consumer debt.

With the U.S. caught in a “slow-growth” trap of its own making and greater Europe still flirting with renewed recession, trade is now a back seat driver for most of Asia. The slowdown in China is especially concerning for southeast Asia’s and Australia’s resource-intensive exports since China became their main market over the past several years.

Prospects aren’t all negative of course, though finding bright spots in an increasingly overcast night’s sky is tough. Indonesia keeps generating solid six plus percent growth. High investment and sustained consumer demand (accounting for over 32.9% of GDP last quarter ending in June) are driving economic expansion.

Jakarta has so far managed to avoid the massive over-building in China which will drag down the middle kingdom for some time to come. The infrastructure needs throughout the island nation of over 200 million people, if well managed, might provide sustained growth for a while.

Prognosis: Substantial western growth isn’t coming back anytime soon. For Asia to prosper domestic demand (read: consumers) has to expand and that means further market liberalization and access to capital that has often been denied, mainly for political reasons.

The China model of controlled growth and U.S.-style unchecked market excess both have their discontents, but policies favoring middle class growth and expansion remain key. Balance will be the buzzword going into 2013.

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Iran’s Economy at the Edge

Iran’s Economy at the Edge

(UPDATE: 10/3/12 – BBC reporting protests in Tehran.)

Months of tightening U.S. sanctions appear to be taking their toll on Iran’s economy. The rial plunged against the dollar (losing 25% in street value in the past week and down some 80% since 2011). Imports, paid for in dollars, have become increasingly expensive. Inflation approached 24% in August alone. Oil exports, a major revenue earner for the regime have plummeted as well. Shrinking dollar reserves make financing whatever remaining trade even more difficult.

These extensive sanctions include all imports, exports and financial transactions with U.S. entities. With Europe’s participation Iran can now barely function in the international banking system.

The main goal, however remain stopping Iran’s nuclear enrichment activities, not destroying the livelihoods of the general population.

Here’s the gambit: Ratchet up non-lethal economic force on Iran while avoiding a military conflict (including keeping Israeli jets on the ground and averting a regional war). This in turn should cause a political crisis that either forces Ahmadinejad to capitulate or a new leader to replace him ready to negotiate. Regime change a la an “Iranian Autumn” of popular discontent might follow, but seems unlikely at the moment and has not been a core objective. Then again stranger things have happened in the Middle East since 2011.

Iran’s nominally “elected” ruler, Ahmadinejad would carry the full blame of his country’s increasing isolation, not the behind-the-scenes clerics who really run the country. His decidedly more sedate tone in a recent UN speech (no tirades against the U.S. and calls for the end of Israel) suggest his popularity has taken a hit. With barely nine months left in his final term of office he might be more ready to negotiate. The deal on the table before this latest round of provocation still gave Iran access to nuclear material for fuel and medical-grade uses.

Unintended consequences in international affairs are a constant risk. Influencing extremely complicated systems, including tens of millions of people reacting to sudden economic hardship and political machinations of theocratic leaders chief among them.

The flip-side of this strategy could include a backlash against the West for causing economic harm, a more radicalized government, and nuclear enrichment accelerating as a result. No one said this was going to be easy. Still since Iran’s economy already faces home-grown problems from years of serious mismanagement current troubles probably won’t radicalize secular Iranians while hard-liners gain one more reason to run riot.

Either way results should be in soon. Israeli Prime Minister Netanyahu, complete with an almost comical bomb illustration during his UN speech, continued to warn of a point of no return and Israel’s readiness to strike. The U.S. meanwhile re-affirmed its commitment to never allow Iran to possess a nuclear bomb, which could take less than a year once a decision to pursue weaponizing had been made. Iran’s economy gets closer to breaking point by the day and sanctions won’t be lifted without a deal while its nuclear race continues. The specter of destruction (economic, political or military) is coming to head in the not-so-distant future. Let’s hope the sanctions gambit pays off.

 

Photo: Wikimedia Commons