lifestyle leader

- Health care bill: check. For some, it is a landmark in reform that aims to provide to millions of Americas health coverage of the kind the rest of the rich world takes for granted; for others, it is “one of the most offensive pieces of social engineering legislation in the history of the United States.” Potato, potahto.

- Last week, political uncertainty grew in Latvia after a member of the ruling coalition pulled out of government. This leaves the current government in a minority position while it attempts to impose reform measures to comply with EU/IMF assistance. The good news: the IMF says it intends to carry on working with the current government and talks are set to begin for another party to join the government, returning it to majority status. Given the small Baltic country's serious economic woes (and the fact that 90% of their debt is denominated in foreign currency), maintaining EU/IMF assistance is going to be essential in containing the damage.

- Facing rising inflation, India is beginning to raise rates again. The markets dropped a bit, perhaps surprised at timing but not the outcome of the decision. Update: FT Alphaville ponders whether this is a "dry run" for China's expected monetary tightening (but concludes probably not).

- According to El Nacional, purchasing power in Chavez' Venezuela has fallen 162%. That's a lot. Some perspective: "So if, pre-Chavez, you could buy 100 potatoes, you can now only afford 62 anti-potatoes."
Wait, disregard: "Math" suggests that it has only fallen by 22%.

Hillary Clinton, prior to her trip to India, had this to say:

"Everything is on the table," Clinton said on Wednesday. "We're going to do
everything we can to broaden and deepen our engagement."

The last time the US showed up in India with that approach, they managed to completely undermine the fragile credibility of the nuclear non-proliferation treaty and the comprehensive test ban treaty. I hope this particular trip isn't nearly so short-sighted.

Manmohan Singh is the first Indian prime minister since Jawaharlal Nehru to be returned to office following a full five-year term (that's since 1964, for those keeping track at home).

Note: I heard this little anecdote on the BBC this morning, and in trying to confirm its validity came across Singh's Wikipedia page. Sure enough, it appears in the introduction. Which got me thinking: is the venerable BBC really relying on Wikipedia for its research? Or was some Wiki nerd really quick to update Singh's page this morning? Either scenario highlights the remarkable velocity with which information is disseminated and distributed in the Internet age.

We have spent a considerable amount time on this blog defending the merits of globalization in general and free trade in particular. One of the key selling points of opening up trade relations is that consumers get access to more variety and cheaper products. You would need only to compare the variety of cuisine offered in major cities like London, Beijing and Tokyo to what it was 30 years ago for a vivid illustration of this change.

Globalization has also produced some interesting effects on markets for alcoholic beverages. For instance, I enjoy quizzing Guinness drinkers on which country consumes the most of Ireland's famous black liquor. They are usually surprised to learn that Nigeria has taken over the largest share of the Guinness market, with more sales than either Ireland or the UK. In fact, a reliable source suggests that Africa accounts for 40% of Guinness' brew and sales.

So globalized markets are great for beer connoisseurs in Africa. However, I'm sorry to say that there are limits to the globalization of alcoholic beverages, and we've reached them. The line has been crossed. If this trend is not corrected, then I'm leaving the globalization fan club. I'll be handing in my members mug and hoisting a poorly-designed placard, donning my gas mask and joining an anti-globalization rally somewhere. Because, you see, this morning I learned that the Asians are drinking all the scotch.

I was in the liquor store inquiring about why a certain bottle of single malt was no longer being carried, and was it possible for it to be ordered. Following a Q & A, I learned that, despite being one of the largest purchasers of alcoholic beverages in the world, my government-monopoly-owned liquor store is losing its market share of single malt scotch to Asia. Not only has the selection declined, but the prices of the remaining scotches is going up. Indeed, I have watched in horror as the price of one particular bottle - Lagavulin - has increased 25% over the past 6 months. The same trend repeats itself across the shelf, although in varying degrees.

There are some basic economic factors at play here. First, demand in Asia is waaaay up. So much so that suppliers are having a difficult time keeping up with their orders. The high-growth markets are the BRIC countries (Brazil, Russia, India, China) as well as Singapore, South Korea and other smaller markets. Furthermore, I was told by the manager of the aforementioned liquor store that the profit margins are higher in East Asia when compared to the more mature markets of North America - this, despite the fact that they need to ship the booze further and that Asian consumers are less-wealthy, as a group. I wonder if the lack of competition helps as well: in North America, (Scottish) scotch has to compete with Irish whiskey, Canadian whiskey, bourbon and similar products. I doubt the same is true of South Korea.

Thus, by harnessing some of the benefits of globalization, major emerging markets have grown wealthy and have begun importing products on which to spend that wealth. The effect, perversely, is that the globalization of markets has actually made products in my part of the world both less available and more expensive.

A few more points are worth pondering:

- First, is this trend going to repeat itself with other luxury goods like Persian rugs, French wine and German cars?

- Second, given the way things are going lately, this trend makes distilling scotch one of the few areas of UK business where things are looking good (that, and bankruptcy law). In fact, several new distilleries have been built to deal with the surge in demand. Will these new distilleries be able to ride the wave long enough to compete with more established brands? The Asian Generation of single malts, perhaps.

- A final, and related, point is that Asia is set to be very hard hit by the fallout from the current financial turmoil. Will that curb their enthusiasm for delicious scotch? It's reasonable to suspect that it will, but only temporarily. As Frank the Tank put it so eloquently: "Once it touches your lips..."

...on protectionism. First off we have the indefatiguable free-trade defender Jagdish Bhagwati who is, well, defending free trade. Even if the US enacted measures that were WTO-consistent, Bhagwati points out that other countries could do the same:

Nothing would prevent India and China from choosing to raise tariffs thus on items of export interest to the US. Besides, they could shift their own purchases of aircraft away from Boeing to Airbus, and of nuclear reactors from American to French companies. The response would, of course, be for the enraged US congressmen to start enacting their own retaliation. The game would become lively.

In the interest of balance, I point you to a column by Oxfam's Duncan Green that argues that protectionism is not all bad, particularly for developing countries. I had the pleasure of having Duncan give a guest lecture in one of my graduate school classes - he offered a refreshingly blunt assessment of what it was like to work for an NGO, both good and bad.

As far as his argument goes, I think he's in good intellectual company when he points out that the poorest developing countries may need trade barriers to help them escape from a poverty trap. I think the well-respected development economist Paul Collier argues as much in The Bottom Billion. To be fair, however, we've been focusing our criticism on the Buy America, Buy China and Buy India type policies enacted by members of the G20. For these countries, at least, Duncan thinks protectionism is a rotten idea.

...and on fiscal stimulus. There's no end to the material provided by all sides of this lively discussion, but I particularly enjoyed this sarcastic op-ed by Benn Steil:

Citing Keynes gives us special licence to talk economics without using any. To paraphrase the lawyers’ dictum, when the facts are on our side, we pound the facts; when theory is on our side, we pound theory; and when neither the facts nor theory are on our side, we pound Keynes – and to great effect.

I think that Keynes is right when it comes to the need compensate for market downturns through active policy measures, rather than simply waiting things out, and Stein takes Keynes' quote about how "in the long run we are dead" out of context. But his target is not so much some long-dead economist but rather the people who are inclined to use the name of some long-dead economist as justification for spending our money. Just because there is a clear need to "do something" significant doesn't mean our legislators should be given a free reign. With huge stimulus packages being proposed by almost every major Western government, it has become more important than ever to ensure that the money is A) being spent on what's being promised, B) having the effect that's promised, and C) not mortgaging our financial future in the process.

Easier said than done.

Update: Brad DeLong retorts to the Steil piece.

For those you with short memories: a reminder about the G20 meeting from late 2008. Among the many fine words put forward following the November summit, there is one collection that seems worth revisiting. Declaration #13 reads (ahem):

We underscore the critical importance of rejecting protectionism and not turning inward in times of financial uncertainty. In this regard, within the next 12 months, we will refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organization (WTO) inconsistent measures to stimulate exports.

Given the near-universal consensus on the detrimental contagion effects that protectionist measures have on global trade and material well-being, this was not particularly earth-shattering. Still, it was nice to see our political leaders re-affirming their commitment to...

Oh bugger! it took only three days before we heard serious talk in America about bailing out the automotive industry. This was followed shortly by the lawmakers considering a "buy US steel provision" for TARP funds. Meanwhile, in China, there is the small matter of currency manipulation and using the fiscal stimulus plan to promote domestic industries.

Not to be outdone, India has stepped up to the protectionist plate (wicket?) to take a few swings. Yesterday, India's government banned Chinese toy imports for six months - all six which fall into the twelve month period of no-import barriers promised above. From Free Exchange:

What the [Indian] government is thinking is unclear. In a grave speech at the G20 meeting in November, India’s prime minister urged the group to "forestall any protectionist tendencies which always surface in times of recession". The G20 seems to take India seriously. But India doesn’t seem to feel the same way about the G20.

Unfortunately, the same can be said for many of the G20's members. Of course, if all Chinese toys posed a serious health hazard in some way maybe this could be justified. But is it likely that all Chinese toys are dangerous? If so, India's government should be presenting their evidence to the WTO, not taking the path of least domestic political resistance and implementing a complete ban. Incidentally, this is also the path towards a trade war with one of the world's largest exporters.

Now I'm guessing the toy industry does not represent a significant portion of China's GDP, but that's not really the point. As The Economist's in-depth look at the infamous Smoot-Hawley bill of 1930 made clear, the real damage comes from how such laws sour trade relations, leading to retaliatory effects. Just look at what happened last week with French cheese.

So let's leave aside for the moment how such actions undermine the G20 and provide yet further evidence for the calculated hypocrisy of our political leadership. The real danger is that tariffs/bans on stuffed kittens and fancy cheese are the first snowballs that kick off an avalanche of protectionism that smothers trade and damages geopolitical relations. It is precisely now, in this economic turmoil, when international cooperation is needed more than ever.

IPE Journal looks back at the political events, people and trends that defined our world in 2008.

- The worst financial crisis since the Great Depression sets in motion a paradigm shift in global power and authority. The state reoccupied the commanding heights of the global economy through stimulus packages, banking nationalizations and automotive bailouts. The IMF regained relevance, and political fortunes were turned in response to the crisis. The G20 replaced the G8 (but for how long?), and the WTO sadly threw in the towel for 2008.

- Barack Obama was elected the 44th President of the United States in one of the largest electoral landslides in decades. He is the first African-American elected to the highest office. He quickly established a "team of rivals" cabinet, bringing together the best, brightest and (slightly) bipartisan to implement his foreign policy and economic agenda. This agenda will likely be defined by what has been called a "21st century New Deal".

- Russia invaded and briefly occupied much of Georgia. The conflict reasserted Russian influence in its "near abroad", exposed EU divisions over Russian relations and raised tensions over NATO expansion and US missile defense in Eastern Europe. It also exposed the real power dynamics in Russia, with Putin effectively orchestrating, commanding and negotiating throughout the conflict. However, by the end of 2008, the financial crisis would for the first time raise questions over Putin's rule as the country was forced to devalue the rouble and ripples of unrest began to sprout up.

- Parts of Africa continue their descent into hell. Kenya erupts, Somalia struggles, and Darfur is a humanitarian disaster. Fighting has resumed in the DRC with Rwandan support, and Mugabe has maintained his iron grip on power, squeezing Zimbabwe dry in the process. Mbeki left office in South Africa, paving the way for Zuma in 2009. The world now looks to Ghana in the final days of 2008, and hopes for a victory for African democracy.

- The Treaty of Lisbon, an attempt to streamline and bolster the EU, is rejected by Irish voters, temporarily killing the process. While certainly a setback for further European integration, Europhiles promise to continue holding referendums until the voters get it "right." A December summit laid out the blueprint/compromise for Lisbon's revival in 2009, and, for possibly the first time in EU history, ended with universal praise of a French president.

- Attacks in Mumbai: as of yet, not a defining geopolitical event since Pakistan and India worked hard to prevent the situation from escalating. Nevertheless, this is a potential touching-off point for the nuclear rivals in 2009. It also might (by design??) divert Pakistani attention away from fighting terrorism in the northwest tribal areas, and reignite violence in Kashmir. The implications of Mumbai are vast, and potentially destabilizing for the entire world.

- Israel, in response to repeated rocket attacks, and in advance of national elections, pounds Hamas and infrastructure in Gaza. The year's final week produced one its most explosive events, as the fighting in Gaza risks wider political instability and a humanitarian crisis in the territory. Many analysts believe that Israel's overwhelming aerial assault is an attempt to dictate a new truce with Hamas, but its military establishment is signalling that the shock and awe may be only the first phase in a wider operation aimed at removing Hamas from power.

***Co-written by Dave Hart

Politique
-US President-elect Barack Obama unveils details of his "21st century New Deal". The Economic Recovery Plan is preliminarily based on 5 pillars: energy, roads and bridges, schools, broadband, and electronic medical records. Many, including prominent members of his own party, are becoming increasingly frustrated with his "there is only one president at a time" line, as the sitting President appears to have checked out while Rome burns.
-The terrorist attacks on Mumbai end, the Indian investigation expands, and at least 29 people die from a car bomb in the Pakistani city of Peshwara. Blame for the attacks has focused on Pakistan-based Lashkar-e-Taiba (the likely perpetrators), the Indian government (early warnings, poor response, failure to hold Pakistan accountable), and the Pakistani regime (failure/inability to address sources of terrorism and militancy within its borders).
-A deliciously intriguing affair in the British House of Commons has ignited a fierce debate over Parliamentary independence, opposition politics, and police powers. Meanwhile, Canada has its own legislative controversy to deal with (find Dave's take here).

Economia
-The US learned it has been in recession since December 2007 (something everyone but this guy has been well aware of) and lost 533,000 jobs in November, the largest jobs decline in 34 years.
-Angela Merkel grew increasingly isolated in Europe as French President Sarkozy unveiled a €26bn stimulus package. UK Prime Minister Brown and Sarkozy will meet in London on Monday to renew their call for a coordinated European stimulus.
-An historic week in European central banking: BoE cuts 100 basis points to 2.0% (lowest level since 1951), ECB goes with 75 basis points to 2.5% (its largest single cut ever), and Sweden slashes a record 175 basis points to 2.0%.

The Rest
-In the Prem: Arsenal continue form following famous win at Stamford Bridge, Liverpool stay top, and ManU and Spurs on track for Carling Cup final. In Europe: Cristiano Ronaldo wins Ballon d'Or, reveals he was "an inch away" from being a Gunner in 2003.
-This week in Japanese innovation: omelets with the Motoman SDA10.
-"Experienced bandits" steal €85mn in luxury jewels from Harry Winston store in Paris. According to Reuters, the heist occurred almost a year to the day of a similar $16mn robbery at the store.

Politique
-G20 leaders arrived in Washington for a summit that had been hailed Bretton Woods II. With President-elect Obama avoiding the summit, and sharp differences between world leaders on the reforms needed to repair the international financial and economic systems, the summit ends like so many before it- with a consensus on principles, little coordinated action, and an agreement to meet again. Declaration text here.

-A regional war looms as the situation in the DRC deteriorates. African peacekeepers are impotent and declared targets by Nkunda, the number of foreign troops/mercenaries in the country grows by the day, and southern African leaders are threatening full-scale military involvement. The NYT looks at the role of minerals in the DRC's history of conflict.

-The EU agreed to restart talks on a strategic partnership agreement with Russia following an EU/Russian summit at Nice. Russia hasn't met the EU conditions set out as a prerequisite to talks following the conflict in Georgia, and it seems only Lithuania has the spine to say so.

-Iraq's cabinet approves new security pact with the US. The agreement extends US troop mandate through 2011.

Economia
-Paulson shocks congress with plan to spend remaining TARP money on capital injections into troubled institutions and companies and consumer spending. The Treasury will no longer purchase illiquid assets, and congressmen/women of both parties are screaming "bait and switch". Paulson deputy Kashkari testified before an angry House, with Rep. Elijah Cummings asking him, "Is Kashkari a Chump?"

-Treasury v. FDIC. FDIC's Bair wants to directly assist 1.5 million homeowners in the US, while Paulson resists a (*cough-cough*) "government spending program"- Paulson believes that his actions are "investments".

-Is a sterling run imminent? That's what George Osborne, Tory shadow chancellor, implied this week in criticizing Gordon Brown's fiscal plans. Osborne's political career is likely done. Sterling has hit a 6-year low against the dollar at $1.49, and Simon Derrick at BoNY Mellon believes sterling's position is now worse than Sept. 1992.

-Eurozone enters its first official recession.

The Rest
-India celebrates first lunar landing.

-This week in Japanese innovation: a robot that feeds you, and bionic legs.

-Arsenal's Prem title run is dead in the water.

-Gordon Brown: control freak.