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  THE
KWR INTERNATIONAL ADVISOR September
2003 Volume 5 Edition 4
In this issue:
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U.S. Markets and Economy: The Bulls Want To Run, Baby!
By
Scott B. MacDonald
 Summer
is over and it is time to go back to work. We think that September
is going to be a good month for the equity and corporate bond
markets. The bulls clearly want to run. Despite the summer meltdown
in U.S. Treasuries, the power blackout and the vacation season,
corporate bond spreads were driven tighter in August by a combination
of good economic news, the possibility that the new bond issue
pipeline could be relatively light due to incrementally higher
borrowing costs and the absence of any major negative geo-political
news. This combination also proved to be a tonic for the stock
market, with the Dow consistently staying above the 9,000 mark
for several months now – and recently even surpassing 9,500.
The NASDAQ has also perked along, reflecting renewed investor
interest in technology. Equally significant, the IPO market is
beginning to show signs of life. According to Bloomberg, IPOs
over the last two months totaled $10 billion, four times the first
quarter of 2003 and higher than the $9.1 billion seen in the second
quarter. We expect these trends to continue through the fall --
possibly into next year. At the same time, we also see a lot of
things that remain problematic and portend tough challenges later
in 2004.
First, at least on the surface, the outlook for the U.S. economy
is looking better. Durable goods orders are up; new home sales
reached their second highest level in history during July and
early August; and manufacturing in August expanded at the strongest
pace in eight months. Inventories are also being depleted at a
faster pace than earlier thought. Even global semiconductor sales
are up, rising 10.5% in July, the fifth straight monthly gain.
All of this is reflected in GDP numbers: real GDP for Q2 was revised
from 2.4% to 3.1%, well above consensus. We think real GDP will
be in the 3.6% range for the rest of the year, moving our estimate
of growth from 2.4-2.6% to around 3%. There is something to be
said about pumping liquidity into the system. Even the World Bank
is more bullish, looking to stronger growth next year based on
a revival of world trade, stronger domestic demand in most countries
and an ebbing of international tensions.
In addition to more positive economic data, the geo-political
environment – while remaining fraught with peril – has
not heated up to the point that it is disturbing the fervor of
investors who remain intent on bidding up equities – which
continue to trade at historically high valuations. Yes, terrorist
attacks are occurring in Southeast Asia and the Middle East, and
North Korea remains a challenge. However, negotiations with North
Korea continue, key Islamic radicals were arrested in Southeast
Asia and Saudi Arabia, and some form of Israeli-Palestinian dialogue
continues. We also expect the United Nations will eventually assume
a greater role in Iraq, which could help to stabilize the situation.
From equity and corporate bond market standpoints, the improvement
in economic data and a perceived reduction in international tensions
are sending the signal that the recovery is sustainable.
Nevertheless, while we think that economic growth has room to
run, not everything is positive. For a full-fledged recovery we
still need to see sustainable gains on the employment front. We
take note of a recent statement by the National Association of
Manufacturing that the recovery for U.S. manufacturers is "the
slowest on record since the Federal Reserve began tracking industrial
production back in 1919." Some 2.7 million manufacturing
jobs were lost over the past 36 months. What is needed to reduce
unemployment and stabilize manufacturing employment is a long
awaited and still anemic return of capital spending. If this occurs
during Q3, the recovery could gain further momentum in Q4 and
2004. In addition, the U.S. deficit is heading into record numbers.
While this is not a concern in the short-term, it could have long-term
consequences, especially if measures are not taken to deal with
the situation.
 There
is also the issue of the state of U.S. utilities. The August power
outage that hit the United States and Canada was a major shock
to the American public and demonstrated that the North American
utility sector has problems. In fact, the blackout indicated that
the U.S. system of regulating utilities, a mix of feudal-like
local authorities and a less than forceful federal regular, the
FERC, combined with some poor management teams sprinkled across
the country, is dangerously offline. The result was that billions
of dollars of business was lost, either in closed restaurants,
spoiled grocery store goods or powerless factories. Idle factories
do not produce durable goods. It is now estimated that $60-100
billion is needed to upgrade the U.S. utility system.
While everyone agrees the system is in need of repair, consensus
ends when it comes to who should pay and want kind of system is
required. For much of the U.S., utility industry times are hard.
Many of the companies already have large debt loads, are cutting
costs, and selling non-core assets. Rating agencies have been
bearish. While these same companies often purchase energy on deregulated
markets, they sell power at controlled prices (and are unable
to pass on any price increases). Local political establishments
are active in protecting the consumer. Consequently, Washington
has the potential to be a gridlock on utility reform – with
the Democrats declaring that the Republicans are in the pocket
of greedy utility companies and want to pass reform legislation
that will open up federally protected lands to oil and gas exploration.
For their part, the Republicans are grousing that the Democrats
want state intervention and control – basically a socialist
approach to an already troubled industry. To some extent both
sides are right. Therefore, we expect a lot of talk over the utility
industry in the months to come, but real action with big price
tags will be slow. In this case talk is indeed cheap – at
least until the next power outage.
Despite the concerns over unemployment (still in the 6% area),
growing budget deficits, and potential energy problems, the Bush
administration is geared on pushing enough liquidity into the
system to make certain the recovery gets its feet and moves –
at least until the November presidential election. As we have
stated all along, the impact of the federal government pumping
billions of dollars into the economy will stimulate growth. The
trick is to have enough stimuli to allow the consumer an opportunity
to consolidate debt and rebuild savings, which must be balanced
with renewed capital spending. The latter is beginning to happen
very gradually. For the Bush administration the bottom line is
to grow the economy and win re-election. Beyond that policy priorities
are focused on the war against international terrorism and stabilizing
Iraq. Dealing with the federal deficit is a low priority, though
this could become a major drag to the economy in the medium to
long term. However, the Bush administration’s request for
emergency spending of $87 billion to finance operations in Afghanistan
and Iraq and the probability that the budget deficit could be
equal to 4.7% of GDP, are not positive signals on fiscal management.
This puts the upcoming fiscal deficits in the same ball park as
the record fiscal deficits of the early 1980s. Fiscal prudence
is being sacrificed for political expedience.
The bottom line is we are constructive on both the equity and
corporate bond markets in the short term. For the latter the probable
scenario is one shaped by generally tighter spreads, a modest
new issue pipeline, and generally positive economic headlines.
Although some companies have probably opted not to go to the market
to issue debt due to slightly higher rates, we think that rates
remain historically low and are likely to go up as the year continues.
While the improving economy is likely to pull money out of the
bond market and into equities, there will still be enough money
in bonds to make September a positive month for bond market returns.
As for the stock market, the bulls want to run and they will in
the short term. If the momentum continues through September and
sentiment becomes firmer in the belief of a sustainable recovery,
the bulls could continue to run through the end of 2003 and 2004.
By early 2004, the main concern for economic policymakers will
no longer be deflation, but the possibility of looming inflation.
Indeed, in 2004 the U.S. economy could be heading into a period
of stagflation, in which a rising fiscal deficit and rising prices
are matched by little or no growth in the employment area. Consequently,
we say ”Viva los toros!”; at least for now.
By
Darrel Whitten
Investors
who are doubtful of the budding economic recovery in Japan point
to the fact that the recovery is almost entirely export-driven.
If the U.S. economic recovery sputters, they fear, Japan's recovery
will also be nipped in the bud.
The debate about the sustainability of Japan’s economic
recovery revolves around the fact that the growth in the April-June
quarter was driven by exports (+0.4% Q-Q), that domestic demand
continues to shrink (-0.3% Q-Q), and therefore whether Japan's
economy can continue recovering if the U.S. recovery sputters.
This is to a degree true for the tech space, where Japan's major
electronic majors, with a few exceptions, turned in a very disappointing
April-June quarter. Indeed, Sony's nasty earnings surprise and
the downgrading of Fujitsu's credit to junk status by Standard
& Poor's shows that the recovery of earnings and cash flows
has been much slower than investors had hoped.
But it is a misperception that that the recovery in Japan's
is being driven entirely or even mainly by the U.S. recovery.
Looking at Japan’s cumulative exports for the January-June
period, total exports were up a strong 13.9% YoY, but exports
to the U.S. actually declined by 0.3% YoY, and accounted for
27.1% of the total. Exports to the EU were 15.9% of total exports,
and contributed 3.2 percentage points to the overall 13.9 percentage
point gain. Conversely, exports to Asia accounted for 9.4 percentage
points of the 13.9 percentage point rise, with China alone accounting
for 4.4 percentage points of this growth, in surging 49.4% YoY
and accounting for 11.6% of Japan’s total exports. Moreover,
exports to Asia have accounted for the majority of the growth
in Japan's exports this year and for the past several years,
and they now account for 45.1% of Japan's total exports.
On the other side of the coin, the U.S. reported total import
growth of 9.7% YoY during the first six months of calendar 2003,
with imports from Asia rising 10.4% YoY, and the trade deficit
with Asia rising to $267.7 billion versus $232.7 billion a year
earlier. Imports from China rose by 25.0% YoY, and the U.S.
trade deficit with China rose to $107.9 billion, versus $86.3
billion a year previous. Conversely, imports from Japan fell
by 0.5% YoY, and the trade deficit shrank from $66.2 billion
a year ago to $64.4 billion.
In addition, the claim that exports to Asia are really derived
from U.S. demand is also no longer true. Some 34% of the output
of Japanese companies in China, for example, is sold in China,
while 34% is sold back to Japan. Only 32% is exported to third
countries, ostensibly the U.S. and Europe.
The Japanese media has changed its tone regarding China's position–from
portraying China as "the world's factory" to describing
it more as "the world's market," following China's
entry into the World Trade Organization. This is because that,
while China figures very large indeed in U.S. and Japanese imports,
China’s imports are actually growing faster than exports.
The People’s Daily is reporting that imports are expected
to grow 12% to 15% percent to $330 to $340 billion, while exports
are seen rising between 8% and 13% percent to $350 to $360 billion
in 2003. This compares to growth in imports and exports of 21.2%
and 22.3% percent respectively last year.
Indeed, China’s Commerce Minister has been quoted as saying
that China will import over $1,000 billion worth of goods in
the next three years. This growth of course is attracting throngs
of foreign companies. By 2002, over 420,000 foreign and overseas
funded enterprises were registered in China, and the total volume
of actually used foreign direct investment hit $448 billion.
The top imported items into China include; industrial and power
generating equipment, electrical/television and radio goods,
textiles/fibers and fabrics, iron and steel, plastic articles,
mineral fuels, fertilizers, cereals, optical/clocks and precision
goods, and organic chemicals. By far the two largest import
commodities for the first half of calendar 2003 are mechanical
& electrical equipment and high-tech products, where imports
are growing at around 50%. Imports of crude oil, rolled steel
and TV components, while smaller, are also soaring between 80%
and 100% YoY.
The Japanese media's shift from describing China as the world's
factory to describing it as the world's market reflects the
shift in perception by Japanese companies, particularly after
China's entry into the WTO. The media is getting their cue from
Japanese firms, who are shifting the focus of their business
with China from utilizing it as a production base for exports
to selling their products locally.
As of 2002, some 60 Japanese companies had local production
in Asia, of which 20 were in China/Hong Kong. As of the first
quarter of 2003, China sales of the local operations of Japanese
companies accounted for 8% of total overseas sales; 34% of which
was sold in China, 34% of which was exported to Japan, and 32%
of which was exported to third countries, according to METI
data. Sales within the China market were up 12.4% YoY during
the quarter, while exports back to Japan were up 10.9%. Exports
to other countries were up 19.6%.
This "China Card" appears to be having an impact on
Japanese stock prices, if not as noticeably on Japan's GDP growth.
For example, the second up-leg of the current rally in Japanese
stocks is noticeable for its lack of "New Japan" companies,
ostensibly because the weak April-June quarterly numbers have
made investors leery of the traditional tech stocks.
Instead, there has been a focus on cheap "domestic-oriented"
companies. But a look at the top gainers of these "domestic-oriented"
companies indicates that the real play in these stocks is not
their domestic orientation, but China-related demand–particularly
in mature industries where the China business is: a) a life-saver
for the company/industry, and/or b) the Japanese company has
a competitive edge vis-à-vis their global competition
that is also flocking into China.
Snow in Beijing and What it Means for Gold
U.S. Treasury Secretary John Snow visited Beijing recently to
raise the Renminbi (RMB) re-valuation issue with China’s
senior leadership. While the media focus was on currency values
and unfair trade advantages, what is sometimes overlooked is
the potential implications it has for gold.
Firstly, let’s us consider the background behind the pressure
for RMB revaluation, and why for the foreseeable future, both
U.S. and China's interest are interlinked. At the root of the
international unhappiness with China’s currency level is
the country’s rapidly growing trade surplus created by
its “rented economy”. The term “rented economy”
applies since foreign investment controls much of China’s
low cost production. China is becoming the “workshop/factory”
of the world and is holding down global inflation.
China’s senior leadership might still call themselves “Communists”,
however, in reality the country is run the like a holding company
along strict reporting lines with one clear objective, namely
7 to 8 % annual growth. The currency peg between the RMB and
the U.S. dollar is facilitating this growth objective while
at the same time it results in lower interest rates in the United
States. This is because, in order to keep the RMB at the 8.3
% level, China needs to buy up surplus dollars and re-invest
them abroad, foremost in U.S. Treasury bonds. The peg is mutually
beneficial to both China’s growth target and Alan Greenspan’s
need to keep long-term interest rates and inflation low.
As of last month China’s holdings of U.S. Treasury bonds
rose to a record $122.5 billion, less then Japan’s but
far more than any other country. Together Japan and China hold
41.9% of the $1347.2 billion debt the U.S. government owes the
world.
Even though hot money is not allowed in, an unprecedented amount
of foreign currency is flowing into China, to buy land, construction
material and to pay workers to build new factories. These factories
start producing, much of their production is exported and sold
for U.S. dollars, while the raw materials used and the workers’
wages are priced in RMB. As more foreign exchange flows into
the current account, the People’s Bank of China (PBC),
buys up these dollars because the government is committed to
keeping the exchange rate stable.
If it were to stop buying the dollars, the value of the RMB
would quickly appreciate. But the PBC has a problem. If it simply
uses new RMB – creating a liability on its balance sheet
against the dollar assets – the extra money in circulation
within China would soon cause inflation, as indeed happened
in the mid 1990s. That would damage the economy and eventually
hurt China’s export industries, since the prices of Chinese
goods would rise.
So instead of causing inflation inside the country, China is
exporting deflation.
This in turn allowed the Fed to spark an economic revival by
lowering interest rates to 45 year lows without risking inflation.
One weak spot of the recovery, however is the stubbornly high
U.S. unemployment rate. And this is where Mr. Snow comes in.
President Bush has already seen 2.7 million factory jobs disappear
on his watch and he needs to be seen to be doing something about
it in order to be re-elected. Viewed from this perspective,
Mr. Snow’s visit to Beijing is more about U.S. domestic
political issues rather than seriously forcing China to un-peg
the currency.
All of the above leads us to the question what full RMB convertibility
eventually means for gold prices.
China can press onward toward convertibility on the capital
account, which would allow Chinese people more freedom to move
their savings abroad, counterbalancing the inflow of U.S. dollars.
In many ways that is the best option and it is already being
implemented, but it would threaten the steady increase of savings
put in low interest accounts at the state banks. This is the
one thing that keeps China’s financial system stable at
the moment. Historically, the less trust there is in the financial
system the more demand there is for gold.
In addition, strong capital inflows and rising Forex reserves
are already sharply boosting official demand for gold in China.
This is because if the PBC is to retain its proportion of gold
holdings at the current 2.4% of total reserves (European Central
Bank standard: 15%), it would need to increase its gold holdings
by an estimated 120 tons or 60% of gold consumption in China
in 2002.
China already enjoys with 40% one of the highest savings rates
in the world. The closer we get to revaluation, the more USD
dollar savings will be converted into gold.
In order to pave the way, the PBC last year relinquished its
monopoly on imports and exports of gold, the Shanghai Gold Exchange
was established and many Chinese commercial banks are planning
to launch personal gold investment businesses.
The
way forward for China’s central bank and savers in the
coming years is, surely, to diversify out of their huge dollar
holdings and move to back its currency by gold as it heads slowly
but surely towards convertibility on the capital account.
After the Beijing Olympics when the snow falls in the winter
of 2008, Gold might truly glitter.
Michael
R. Preiss serves as Chief Investment Strategist at CFC Securities.
“Zaibatsu” and “Keiretsu” - Understanding
Japanese Enterprise Groups
By
Andrew H. Thorson
Anybody
who is familiar with Japan will recognize the words zaibatsu
and keiretsu. Few, however, know of their meaning and historical
significance. This is the first of several articles that will
explain the origin, historical significance and the current
circumstances of Japan’s enterprise groups, all of which
we loosely tend to refer to as zaibatsu and keiretsu.
This initial article explains the origins of the zaibatsu.
Zaibatsu Formation in the Meiji Era (1868 – 1912)
Zaibatsu generally refers to the large pre-WWII clusterings
of Japanese enterprises, which controlled diverse business sectors
in the Japanese economy. They were typically controlled by a
singular holding company structure and owned by families and/or
clans of wealthy Japanese. The zaibatsu exercised control via
parent companies, which directed subsidiaries that enjoyed oligopolistic
positions in the pre-WWII Japanese market. These economic groupings
crystallized in the last quarter of the 19th century during
the Meiji Reformation.
Zaibatsu first became a popular term among management and economics
experts when the term appeared in the book History of Financial
Power in Japan (Nihon Kinken Shi) as published late in the Meiji
Era. Even in Japan, the term was not commonly used until the
mass media adopted it in the late 1920’s.
The zaibatsu were formed from the Meiji government’s policies
of state entrepreneurialism, which characterized the modernization
of the economy during that era. To understand the significance
of zaibatsu, one must consider at the onset of the Meiji era,
agriculture comprised 70% of Japan’s national production,
and approximately three quarters of Japan worked in farming
related jobs. The government used land tax revenues to fund
the state planning, building and financing of industries determined
by bureaucrats to be necessary for Japan’s economic development.
Meiji bureaucrats did not rely on the free market in reforming
the economy, but they also did not develop the economy alone.
In the 1880’s the Meiji government sold some government-owned
enterprises on special terms to a chosen financial oligarchy
implicitly entrusted with the public interest in developing
the national economy. These enterprises were entrusted to the
influential concerns known as the Mitsui, Mitsubishi, Sumitomo,
Yasuda, Okura and Asano groups.
These private parties and enterprises crystallized over time
into large, integrated complexes steered by the government bureaucrats
into areas of development desired for the reformation of Japan.
To secure compliance, the government provided inducements such
as exclusive licenses, capital funding, and other privileges.
Although Japan badly needed foreign technology, know-how and
capital, the government adopted a policy of shutting out foreign
entrepreneurs with few exceptions in favor of domestic development.
After WWI, when Japan’s economy made huge strides in economic
reformation, the zaibatsu interests began to enter the political
arena to support their interests. Their activities became entwined
with the government in wartime Japan. Eventually, the Potsdam
Declaration that was signed in 1945 required the liquidation
of the zaibatsu as one step to democratize Japan’s post-war
economy.
Zaibatsu Control Structures
Unlike the current situation in Japan, it is said that the zaibatsu
stockholders were relatively strong. While zaibatsu holding
companies directed the enterprise complexes in a pyramid fashion,
stockholding relations cemented together the companies within
zaibatsu complexes. Characteristics of the complexes included
holdings by members of more than half of the holding company’s
stock, and the position of the holding company as the overwhelmingly
largest shareholder of companies within the complex. The stock
of members was rarely sold by other members to third parties.
Under this structure, zaibatsu and their leading holding companies
drove the finance, heavy industry and shipping sectors that
forged the heart of Japan’s economy.
By the 1920’s zaibatsu economic power engulfed the sectors
of finance, trading and many major large-scale industries. From
1914 to 1929, three zaibatsu (Mitsui, Mitsubishi and Sumitomo)
controlled 28% of the total assets of the top 100 Japanese companies.
Even as of 1945, the same complexes possessed 22.9% of the total
assets of all Japanese stock companies.
As will be explained in Part II of this series, subsequent to
the liquidation of the zaibatsu pursuant to the Potsdam Declaration,
new enterprise complexes and groups that resembled the zaibatsu
were resurrected in Japan. There are, however, significant differences
that distinguish the zaibatsu from the modern keiretsu. These
differences and the subsequent formation of the keiretsu will
be discussed in later articles.
Andrew H. Thorsen serves as a Partner in the Tokyo Office
of Dorsey & Whitney LLP, a U.S. law firm. The views of the
author are not necessarily the views of the firm of Dorsey &
Whitney LLP, and the author is solely and individually responsible
for the content above.
THE TIES THAT BIND
The (limited) significance of Thailand’s withdrawal from
the IMF
By
Jonathan Hopfner
Thais are often quick to remind visitors to their country
theirs is the only nation in Southeast Asia that escaped being
colonized by a Western power. It thus comes as little surprise
the early repayment of the $12 billion loan the country secured
from the International Monetary Fund (IMF) in 1997 to cope
with the devastation wrought by the Asian financial crisis
was unveiled with such fanfare. This is because in the eyes
of many Thais the terms and conditions that the IMF attached
to the disbursement of the funds constituted a grave threat
to Thailand’s cherished sovereignty.
Against a backdrop of a massive national flag and patriotic
theme songs, Prime Minister Thaksin Shinawatra announced that
Thailand had repaid the loan in full on July 31, one year
ahead of schedule. He swore to his rapt audience that this
was the “last time the country would be indebted to the
IMF” and remarked that the debt had been a “pain
to the nation.” Soon after, the IMF announced it would
close its Bangkok office in mid-September. While it insists
its officials will continue to visit Thailand regularly to
discuss policy with local officials, there is little doubt
the lender’s influence here is on the wane.
Some of Thailand’s more opportunistic lawmakers have
seized on the country’s recent freedom from the IMF’s
shackles. Calls have increased for the repeal of 11 laws,
including those governing bankruptcy and property ownership,
that were introduced by the previous government partially
to conform with the IMF’s loan conditions and are widely
alleged to favor foreign over local investors.
So is this, as some observers have surmised, the end of an
era? Was the Prime Minister’s characteristically nationalistic
bombast yet another indication of Thailand’s growing
determination to assert its full economic, as well as political,
independence? Will Western policymakers and investors find
their views are no longer taken into account by a government
determined to pursue its own goals?
The short answer is no, not really, because Thailand took
little of the IMF’s advice to heart to begin with. In
a 1998 letter of intent outlining the steps the government
should take in the following year the IMF called on Thailand
to draft plans for the full privatization of the state energy,
tobacco, transport and utility monopolies, as well as the
freeing up of the telecom market. Five years later, the government
has taken some very tentative steps towards these goals –
a stake in Thai Airways has been floated on the Stock Exchange
of Thailand, and the Petroleum Authority of Thailand and Telephone
Organization of Thailand are now, in name at least, private
entities – but for the most part the privatization and
liberalization of these crucial sectors remain as elusive
as they were five years ago.
Even the changes instituted under the IMF’s auspices
– the tightening up of Thailand’s bankruptcy legislation,
for example – have hardly proven as sweeping as expected.
While the new laws may have been designed to boost the rights
of creditors, they seem to be less than adept at fulfilling
this task in practice. Witness the ongoing saga of debt-ridden
Thai Petrochemical Industry (TPI). Throughout a seemingly
endless proliferation of suits and counter-suits, the Thai
courts have allowed founder Prachai Leophairatana to maintain
nominal control of the company despite the objections of creditors
such as Bangkok Bank and Germany’s KfW, who apparently
have the right to appoint the administrators of an insolvent
firm under Thailand’s bankruptcy laws.
The reality is the economy at its strongest point since the
1997 crisis – growth surged to 6.7 percent in the first
quarter of this year, and Thailand’s bourse has recently
ascended to its greatest heights since 1999. Any changes to
Thailand’s investment and ownership policies are likely
to be a result of the government’s perception that it
is, for the first time in years, in a position of strength,
as opposed to a desire to test the country’s newfound
“freedom” from its IMF obligations.
There is every possibility, then, that the government may
indeed introduce legislative changes that appear less than
friendly to foreign investors – but only to a point.
IMF or no IMF, Thailand’s commitments as a member of
the World Trade Organization (WTO) and Association of Southeast
Asian Nations (ASEAN) will keep the country squarely on the
path of reform and openness – the telecom sector, for
example, must be completely liberalized by 2006 if Thailand
is to conform to its WTO obligations.
Healthy competition within Asia for foreign capital is also
likely to prevent the Thai government from implementing any
laws that would severely limit the rights of multinationals
doing business there. With concerns rising about an outflow
of foreign business operations to China and other countries
in the region taking steps to deal with this threat –
Singapore recently amended its pension system to reduce its
notoriously high labor costs – Thailand will have little
choice but follow suit.
Many historians argue that the country’s then-rulers
saved Thailand from being colonized by exhibiting a healthy
amount of pragmatism. They simultaneously made necessary concessions
to foreign powers while fostering a sense of unity among their
own population. Despite the passing of the IMF and its increasingly
nationalist rhetoric, the current government will likely do
the same.
Indonesia and Islamic Terrorism – More Than a Thorny
Problem
By
Scott B. MacDonald
In early August, the JW Marriott Hotel in Jakarta was bombed.
The bomber was an Islamic radical, who drove a van into
the front of the hotel, killing 12 people and wounding over
a hundred others. Most of those killed or injured were Indonesian.
The Marriott bombing follows the Bali bombing of October
2002, two other bombings in Jakarta (one at the parliament)
and an alleged plot to kill the country’s president
Megawati Sukarnoputri. Although Indonesian authorities are
reluctant to admit it, the rise of Islamic terrorism runs
the risk of polarizing society and endangering the relatively
secular nature of the government. It also casts a large
shadow over the future of the country’s fledgling democracy
as well as the attractiveness of Indonesia as a place for
foreign investment. While the Indonesian government is a
considerable distance from being ousted from power, local
radical Islam and its foreign links to al-Qaeda and Jemaah
Islamiah (JI) represent a very challenging problem with
long-term implications for Southeast Asia’s largest
country as well as the rest of Asia.
There are two sides of the coin in looking at Indonesia
and Islamic terrorism. On one side of the coin, Indonesia
has a long tradition of a tolerant form of Islam, which
has functioned as a support for political stability. It
has also been a pillar of Indonesian nationalism, a force
that helps bind the country together. This was especially
the case during the struggle for independence during the
1940s. During the Suharto years, Islam was carefully controlled
and there was an emphasis placed maintaining a secular society,
able to accommodate a Muslim majority, but carving out a
tolerance for the Hindu, Christian and other smaller religious
communities. With the end of the Suharto years and the advent
of Indonesian democracy, the role of Islam in society suddenly
became more central. Indeed, with the departure of East
Timor, the overall numbers of Muslims as a percentage of
the total population increased.
The other side of the coin is that as the Islamic face of
Indonesian society has become more distinct and more mainstream,
the door has also opened for radicals within the same community
to emerge from the shadows, developing international ties
to like-minded groups and recruiting more followers. Certainly
the shift to a more open political system has brought about
a higher degree of uncertainty in Indonesia. Together with
the round-robin of presidential leadership since 1997 and
tough economic times until recently, radical Islam has become
attractive as it projects a clear-cut, simple answer to
complicated issues.
Another aspect of the rise of radical Islam in Indonesia
is that the political class is seeking to manipulate this
force. With the unpopularity of the American war against
Iraq and the close U.S. alignment with Israel vis-à-vis
the Palestinians, another Islamic people, radical Islamists
have been quick to articulate their views and to find a
sympathetic audience in the majority of Indonesians. This
by no means infers that most Indonesians favor radical Islam,
the creation of a theocratic state along the lines of Iran,
or are inclined to attack the West and its allies. What
it does mean is that radical Islam touches a sensitive spot
in the country’s identity – the West has long
looked down on Islamic peoples. In a sense, there is a sense
of grievance. After all, the Dutch long colonized Indonesia
and took its natural resources. Western companies made money
in the country, and Suharto was long supported by the United
States. In addition, it is argued the IMF made life miserable
for many Indonesians with its poorly conceived economic
policies.
The danger is that elements of the political elite are still
playing to radical Islamic groups, or at the very least
pandering to public sentiment vis-à-vis the unfairness
of an international order dominated by the United States.
The comments of Vice President Hamzah Haz in calling the
United States, the “king of terrorists for its war
crimes in Iraq” certainly must be seen in this context.
Haz was responding to international criticism that Indonesia
had been lenient in sentencing Abu Bakar Bashir, the spiritual
leader of JI, to only four years of jail. Haz is the leader
of the conservative Islamic United Development party (PPP).
He has in the past been willing to be seen courting some
of the country’s more radical Islamic figures.
While some groups are playing to the Islamic radicals, others
remain strongly opposed or are waiting for their turn to
take advantage of potential weakness in central authority.
President Megawait Sukarnoputri is conducting a war against
Islamic separatists in Aceh (on the northern tip of Sumatra)
and is seeking to contain separatists in other regions.
At the same time, presidential elections loom in early 2004.
If the President slips in conducting the war, if she pushes
too hard on Islamic groups in a predominantly Islamic country,
or if she appears to be in the lap of the United States,
her political prospects are likely to weaken. Moreover,
she must tread softly with the military. Any loss of power
from the civilian part of the political spectrum could be
gained by the military, one of the few cohesive institutions
in the country. In the past, it has also been one of the
most influential. If civilian leadership is inadequate,
there are leaders within the armed forces that might be
tempted to step into the picture, probably in the shadows,
much like Indonesian puppet plays.
What complicates matters for Indonesia is that it is not
a small, insignificant country. Rather, it is a pivotal
nation, located astride major lines of communication and
trade between East Asia and the Middle East and Europe.
It is also the world’s largest Islamic nation and a
major producer of oil and natural gas. For all these reasons,
what happens in Indonesia matters. Consequently, the approach
of the Megawati government to radical Islamic terrorism
is a concern to more than just the local population. It
is a point of concern to Washington, Tokyo, Beijing, Manila,
Singapore and Manila. The failure to implement Financial
Action Task Force (FATF) money-laundering regulations, which
are aimed at hurting illegal financial activities in the
country -- which could aid Islamic terrorist groups -- gives
the impression that Indonesia is soft on tackling the problem.
Perceptions remain important in a globalized world –
like it or not. This is important for attracting foreign
investment as well as how the country interacts with the
rest of the region. While the U.S. has often pushed too
hard on Indonesia and certainly played to the sense of Islamic
grievance, Indonesia’s political elite also has to
consider its responsibility to its citizens in providing
sustainable economic development, a better standard of living,
and clear government. Supporting men with bombs willing
to kill their fellow Indonesians in grisly acts of violence
is not going to build a better future for the country.
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By
Andrew Novo
Following the lead of the United States, the Italian economy
dipped into recession in the beginning of August after
posting negative growth for the second quarter of 2003.
More recently, France and Germany have joined the ever-growing
list of nations suffering economic contraction. In Italy,
as in many other countries, the recession was an expected
phenomenon based on consequences from the war in Iraq
and “a poor international climate.” Shrinking
exports due to a strong euro and decreased tourism have
not helped matters and the outlook among most economists
in Italy, and throughout the world, is for little or no
growth for the rest of the year. Once again, the Berlusconi
government is forced to deal with an economically challenging
situation at a time of increasing political volatility.
Over the past summer, Berlusconi’s coalition, Casa
delle Liberta, suffered a defeat in local elections in
Friuli-Venezia Giulia (a region in the northeast) to the
opposing left-wing L’Ulivo coalition. More significantly
for Berlusconi’s government, the incumbent candidate
for the regional council, from the Prime Minister’s
own Forza Italia party, did not run. Instead, the Lega
Nord, the right-wing coalition partner of Forza Italia,
insisted that its own candidate, Alessandra Guerra, stand
for election. Guerra was defeated. Violent recriminations
within the Casa delle Liberta resulted in threats from
the leader of the Lega Nord, Umberto Bossi, to pull out
of the Prime Minister’s coalition. At the end of
August, Berlusconi and Bossi have been at odds again,
this time over the issue of reforming Italy’s pension
system.
Italy’s weakened economic position has further complicated
matters between the Prime Minister and his separatist
northern ally. With Italy’s monetary policy governed
by the European central bank, the Berlusconi government
is left to make due with fiscal policy in order to bring
about a return of economic growth. During his 2001 campaign,
Berlusconi promised tax cuts and decreased government
spending, the latter objective to be achieved primarily
through a streamlining of the turgid and wasteful Italian
bureaucracy. The federal tax cuts put forward in the 2003
and 2004 budgets came about through the creative bookkeeping
of Finance Minister Giuliano Tremonti in the face of skepticism
and concern from the European Union which is wary of Italy’s
burgeoning deficit. The federal tax cuts (in excess of
five billion dollars) will be countered by decreased government
transfers to local governments. This will result in increased
local taxes. The net gain for Italian citizens will be
minimal.
In keeping with his platform of reform and decreased government
spending, Berlusconi has most recently set his sights
on reducing the bloated Italian pension system. The Prime
Minister hopes to tighten the budget by decreasing government
spending in this area. However, this measure has stoked
the smoldering embers of contention with the Lega Nord.
Berlusconi’s announcement of his desire to raise
the retirement age from fifty-seven to sixty years of
age by 2010 has met with staunch opposition from the Lega
Nord. The Lega draws considerable support from voters
who retire on pensions at fifty-seven after thirty five
years of work. Eighty percent of such government pensions
are received by people in the north. The issue draws important
battle lines. If Berlusconi chooses to proceed with his
pension plan it could well cost him the support of the
Lega, which has already withdrawn from cabinet activities
in the wake of the June election defeat. It should be
remembered that differences over pension reform caused
the withdrawal of the Lega Nord from Berlusconi’s
first government in 1994 resulting in its collapse. It
seems that history is repeating itself – a dangerous
proposition for the Berlusconi government. If the withdrawal
of the Lega induces an exodus of the extreme right from
the Casa delle Liberta, the Prime Minister will no longer
hold a majority in the Italian parliament.
Further complicating the situation of ifs and ands is
the present recovery of the American economy. Just as
Italy followed America into recession, it will likely
drag itself out on the coat tails of the United States.
If this happens swiftly enough, the pressure to cut government
spending by reforming the pension system will surely dissipate,
the voices denouncing Mr. Berlusconi will soften and the
Prime Minister will ride the recovery into the re-election
campaign.
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 Israel
and Globalization
By
Jonathan Lemco
Israel is one of the few, if not the only, democracy in
the Middle East. It also has the most dynamic economy
and most vibrant entrepreneurial culture. Its economic
policy-makers are proactive and its workforce is one of
the most technologically innovative in the world. This
is best evidenced by its success in devising new materials
and techniques applicable to the defense, electronic and
other industries. Not surprisingly, Israel has benefited
enormously from globalized trade and investment. This
is despite Israel’s relatively small population base
and its precarious strategic position. Of course, as the
largest recipient of financial aid from the United States,
Israel enjoys a particular advantage.
Since its inception in 1948, the Israeli economy has been
fairly open to international markets. In the 1990s for
example, the information technology and communications
sector in Israel grew five-fold, reaching 14% of GDP.
On the other hand, technologies are spread around the
world through multinational companies, an area in which
Israel is weak. The number of Israeli multinationals in
the high-tech sector, as expressed in company size, is
low. By definition, most Israeli high-tech companies are
small firms. And they are vulnerable to a highly volatile
global high technology sector.
Broad Macroeconomic Issues
To compete in a globalized world, Israeli policy-makers
must seek price stability as a primary monetary policy
goal, with a second goal of tempering business cycles.
The main policy tool is short-term interest rates. In
Israel there were two clear deviations from stable interest
rate parameters; in 1998 and again in 2001. Both times,
lowering the high interest rate created turmoil. Interest
rate policy in a globalized world economy must be stable
while adhering to medium- and long-term inflation targets.
With regard to budgetary policy, the Ministry of Finance
must continue its policies of fiscal prudence. At present,
Israel has a moderate external debt burden due to capable
Central Bank management and strong capital inflows since
the mid-1990s. Israel’s ample reserves of $24 billion
cover its external financing gap. Direct international
investment in Israel is up in 2003 as well. But Israel
does have high government deficits of 5% of GDP and public
debt burdens. Unemployment is too high at 10.8% as of
April 2003. Many of Israel’s domestic costs are due
to external shocks associated with its complex security
situation. Future budgets should be rigid when it comes
to government expenditures, and flexible regarding the
impact on the business cycle through infrastructure investments.
Otherwise, the risk of recession increases.
Israel is a trading nation, and this has contributed to
lower prices and a higher standard of living. As a small
nation, pursuing international trade agreements are the
only way it can ensure its relatively high levels of prosperity
can be sustained. Indeed, Israel’s export oriented
economy has generated per capital income that is similar
to some EU countries. It is a virtual par with Spain and
higher than Greece and Portugal. The Israeli per capita
income is much higher than the 10 countries that will
join the EU in 2004. However, most of these countries
are growing economically while Israel is in the third
year of a recession.
That said, if there is progress attained by the internationally
sponsored ‘Road Map” aimed at resolving the
Israeli-Palestinian conflict, coupled with a global economic
recovery, then the Israeli economy should emerge from
recession in 2003. At 0.5% in real terms this year however,
growth remains below potential.
Globalization’s Reach into Israel
As of August 2003, 2.2 million Israelis (32.8% of the
total population), use the Internet. This is one of the
most wired nations in the Middle East. Further, the telecommunications
market in Israel is growing rapidly. Data communications
is the growth engine, and the forecast for Israeli data
communications growth is 31.2% through 2007. Wireless
data communications revenue accounts for half of the data
communications total and should expand by an average of
43% per year until 2007, according to the Israel High-Tech
and Investment Report.
Also, according to the Israel High-Tech and Investment
Report, the Israeli telecommunications market revenue
amounted to $3.78 billion in 2002, of which $2.6 billion
came from cellular communications and $1.17 billion from
fixed line communications. Clearly, this is a burgeoning
industry poised to benefit from greater international
ties.
Israel’s biotech sector is also a growing force to
be reckoned with. BioTechnology General, InterPharm Laboratories,
and especially Teva Pharmaceuticals are the largest of
the approximately 140 firms developing world class pharmaceutical
and other products and technologies. The biotech industry
in Israel employs about 40,00 people and its output, as
of June 2003, was in excess of $800 million per year.
Teva Pharmaceuticals alone was responsible in 2002 for
more than $550 million in exports of its Multiple Sclerosis
Copaxone drug.
The number of biotech startups is high and equals the
number of companies in such countries as Switzerland,
Sweden and France. Furthermore, Israel’s medical
device industry, numbering more than 400 companies, is
growing as well and is a world leader in the production
of cardiac stents.
Finally, Israeli defense exports hit an all-time record
in 2002. Signed contracts for defense industry deals with
foreign armies reached $4.18 billion, a nearly 70 percent
rise compared to 2001. The main customers for Israeli
weapons systems are the U.S., followed by India and various
Southeast Asian countries. Not surprisingly, the identity
of many of the countries acquiring weapons systems are
not revealed. As of July 2003, Israel is fifth as a military
exporter behind the U.S., EU, Russia and Japan. But it
is also among the leaders in exporting electronic equipment
and high-tech military equipment.
Conclusion
Israel is a small country faced with a challenging strategic
environment. But its population is educated and its industries
have produced goods and services that are in demand worldwide.
The Israeli economy has demonstrated an ability to compete
with much larger competitors. In short, globalization
has offered opportunities to Israel that have allowed
it to transcend its small size and realize a standard
of living for its citizens that are among the highest
in the middle east.
eMergingPortfolio.com
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markets for corporate and financial Internet sites. For more information,
contact: Dwight Ingalsbe, Tel: 617-864-4999, x. 26,
Email: ingalsbe@gipinc.com.
BUSINESS
Russian Tycoons Face the Heat
By
Sergei Blagov
MOSCOW - The ongoing controversy around Russia's top oil
company, Yukos, has prompted fears that the Kremlin might
review the privatizations of the 1990s. Meanwhile, Russian
official statements remain somewhat ambiguous. Notably,
President Vladimir Putin has called for a crackdown on
economic crimes but said individual rights should be respected,
carefully avoiding taking sides in a dispute around Yukos.
Putin's previous comments were marked by his characteristic
ambiguity and avoided any direct reference to Yukos. However,
Putin spoke out against the use of detention for suspects
accused of economic crimes.
The probe into Yukos began with the arrest in July of
Platon Lebedev, a right-hand man of Russia's richest man,
Yukos chief executive Mikhail Khodorkovsky. Lebedev is
the billionaire chairman of the board of Group Menatep,
the holding company that owns 61 percent of Yukos.
Prosecutors have charged Lebedev with defrauding the state
of $283 million in the 1994 privatization of the Apatit
fertilizer company. His arrest was followed by criminal
investigations into its alleged tax evasion and role in
several murders of officials and businessmen.
Khodorkovsky, who has backed some political parties that
compete with the main pro-Kremlin party in December's
parliamentary elections, has dismissed the accusations
against his company and blamed a power struggle within
President Putin's administration.
In 1995, Khodorkovsky bought Yukos, the second biggest
oil company in Russia, and the fourth largest in the world,
thus becoming a billionaire almost overnight. In oil reserves
(11.4 billion barrels) Yukos is close to British Petroleum
(about 12 billion barrels), which is worth some $180 billion.
Khodorkovsky bought 78 percent of Yukos shares for $170
million and even this money was believed to be budget
funds operated by Menatep Bank. Menatep Bank, which belonged
to Khodorkovsky, had been entrusted with holding the auction
to sell Yukos. There is therefore no big suprise that
Khodorkovsky proved to be the winner.
Because the privatization laws that were in place in the
1990s left much to be desired, companies that were won
in rigged auctions, like Yukos, are now open to attack.
Recent public opinion polls, conducted in the wake of
the first moves against Yukos, show that the vast majority
of Russians are still bitter about that. One poll found
that 77 percent think that privatization should be reviewed.
Arguably, there are people in the Kremlin who agree.
Meanwhile, Russian Prime Minister Mikhail Kasyanov has
publicly spoken out against jailing those found guilty
of economic crimes. Kasyanov's open siding with Yukos
is a sign that the struggle between Yukos and the prosecutors
is only part of a bigger battle for economic leverage
and power between the old elite that obtained power and
vast wealth under President Boris Yeltsin and the former
KGB colleagues of President Putin. Kasyanov, who has been
a key government player since the early 1990s, is seen
as a member of the old Yeltsin elite, also known as the
Family.
The dispute around Yukos has been seen as an assault on
Khodorkovsky for supporting opponents of Putin's allies
in this December's parliamentary elections.
Even Guennady Zyuganov, leader of the Russian Communist
Party, has described the assault on Yukos as an action
in "barbarous forms." "As soon as Yukos
leadership indicated their political ambition, a strike
ensued," he told the journalists in Moscow earlier
this month.
Until recently, Zyuganov has repeatedly denounced the
1990s privatizations as a sham. Yet earlier this year
media reports have suggested that Khodorkovsky provided
financial backing for Zyuganov's Communists, but he has
denied this.
There should be no surprise that there have been warnings
against reshaping corporate ownership rights in Russia.
Undoing privatizations of the 1990s would be "suicidal"
for Russia, Economic Development and Trade Minister German
Gref has stated.
Moreover, yet another Russian oligarch, Vladimir Gusinsky,
51, was detained in August at the Athens International
Airport on his arrival from Tel Aviv, where he has been
living in self-imposed exile since fleeing Russia in 2000.
Russia's Prosecutor General's Office has reportedly filed
a request to extradite Gusinsky from Greece. The charges
are linked to the alleged embezzlement of a $250 million
loan extended by state-controlled Gazprom to Gusinsky's
former Media-MOST empire in the 1990s. The team investigating
Gusinsky is headed by Salavat Karimov -- the same person
who is investigating Yukos on suspicion of stealing state
property.
In April 2001, Spain turned down a request from Russia
to extradite Gusinsky, who holds Russian and Israeli passports
and was living there after fleeing Moscow to escape what
he called politically motivated prosecution over his media's
critical reports of the Kremlin. Authorities denied they
were muzzling independent media, saying they instead were
investigating financial wrongdoings at Media-MOST.
The Kremlin crackdown on one of the country's business
moguls is not just another twist in the ongoing political
struggle -- it says a lot about the very nature of the
political system, argues Lilia Shevtsova, a senior associate
of the Carnegie Endowment for International Peace. Putin
nor his praetorians had any intention of starting nationalization
-- the president's hungry wolves were just hoping for
a slice of the pie, she said.
It has been understood that by launching criminal probes
President Vladimir Putin's administration wants to remind
the tycoons that the should stick to business and stay
out of politics.
"Should the state decide to launch a second bolshevik
revolution, the consequences would be severe, yet that
does not mean that nothing can be done to redress the
abuses associated with privatization," said Marshall
Goldman, associate director of the Davis Center for Russian
and Eurasian Studies, Harvard University. "The state
could raise, and make a strenuous effort to collect, taxes
on both production and exports, but such measures would
probably not be enough to satisfy public anger and resentment,"
Goldman said.
The odds then are that there will always be the threat
that not only Putin, but future Russian leaders will also
periodically feel tempted or pressured to harass other
oligarchs, he said.
 |
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KWR Viewpoints
 Creating
Value Key to Korea's Long-Term Success
This article was originally published in the Korea Times
on August 31, 2003
Despite
its underlying attractiveness and reasonably strong macroeconomic
fundamentals, international investors remain cautious about South
Korea.
While the SK Global situation is largely resolved, and growth
prospects and fiscal flexibility are high by regional standards,
too many uncertainties prevail.
This is true both on the peninsula and in global markets as a
whole.
South Korea suffers from a greater threat from the North, the
effect of a strengthening China, a still weak Japan and an unclear
economic outlook in the United States and Europe.
This is compounded by concerns over consumer debt, labor tensions,
and worries over the sustainability of reform and the ability
of the new government to operate in an effective manner.
Recent announcements that South Korea has entered a recession
for the fourth time in history and that its fiscal surplus has
dramatically declined only leads to further concern.
To reassure investors, many stress South Korea's ability to restore
growth and momentum as a recovery takes shape in the U.S. While
possible, this is dangerous as it presupposes there will be a
U.S. recovery and creates a scenario where Seoul's success is
dependent upon events beyond its control.
It also contributes to a perception of South Korea as a high beta
economy, that is more a leveraged play on growth in the U.S. rather
than a promising story in and of itself.
Therefore, in the present environment, where investors seek to
lower their risk exposure, South Korea suffers in comparison with
other investment destinations, including China, Japan, and even
India, Russia and Thailand, which many believe offer better value
as well as a lower dependence on U.S. markets.
To minimize this reliance on U.S. economic performance, Seoul
needs both to focus on the development of value-oriented strategies
and to explain these developments in an effective manner.
Business theory holds a competitive advantage is defined through
lower cost or greater value, preferably both. Companies such as
Samsung and LG Electronics and Hyundai Motor are learning this
lesson.
They are building market share - irrespective of the underlying
contraction and deflationary pricing trends troubling the global
electronics, technology, auto and other industries.
For example, market research firm Display Research noted Samsung
Electronics took a 30.2 percent market share in North America's
LCD TV market and 34.3 percent of Europe's during the second quarter.
It surpassed Japan's Sharp, estimated to have held 25.9 percent
of the U.S. market and 17.5 percent of Europe's.
Samsung officials also express confidence the firm will soon beat
Sharp in the Japanese LCD TV market.
Similarly, Hyundai Motor is also achieving success, recently announcing
that rising exports had countered an 11 percent contraction in
domestic sales, and its first-half net profit jumped 10.6 percent
year-on-year to an all-time high of 988.5 billion won.
Korean firms are also gaining market share in cellular handsets
at the expense of Nokia, Motorola and other long-established competitors.
In addition to a keen commitment to product development, it is
no coincidence these firms are also among South Korea's savviest
marketers. They devote large amounts of funding to building an
extremely important intangible - brand image.
Their success is reflected in Interbrand and BusinessWeek magazinesrecent
designation that Samsung Electronics possesses the fastest growing
brand value in the world - rising about 30 percent over each of
the past two years.
The long-term success of Korean firms will largely be determined
by their ability to move beyond the tendency to base their competitiveness
almost exclusively on cost-efficiency.
Enhanced brand value not only increases demand and economies of
scale, but also leads to higher margins and profitability. Combined
with additional attention to financial communications, investors
are also more content to maintain a long-term commitment.
Once again, one can observe this phenomenon in the performance
of Samsung Electronics. It reported a 41 percent decline in its
second quarter earnings, yet continues to trade at an all-time
high.
South Korea as a whole must also incorporate these lessons if
it is to successfully reposition itself as the "Dynamic Hub
of Asia" and to realize the vision of becoming an international
service and logistics center.
The nation must do a much better job of defining and telling the
"Korea Story" and the capabilities of individual firms
and its population. This requires ongoing planning and outreach.
It will not be achieved by the occasional ad hoc announcement,
advertisement, road show or short-term domestically-focused efforts
that have been organized in the past when some emerging problem
or issue was deemed worthy of an immediate response.
While many of these efforts have been well organized and well
received by participants, they do little to create sustainable
value.
Rather insufficient follow-up and thought has been allocated to
the ongoing communications and interaction that is part of every
successful public and investor relations initiative.
The fact is while the nation possesses a wealth of characteristics
that makes it, and its individual firms, an attractive investment
story, U.S. investors and opinion leaders - beyond the small,
dedicated group of Korea watchers and members of the Korean-American
community -remain largely unaware of its potential.
Therefore, while South Korea has done far more than most other
Asian nations in implementing reforms and the measures to promote
a more dynamic and competitive business environment, U.S. investors
and businesses continue to view it as a difficult and unapproachable
market that is extremely dependent on growth in the U.S.
Similarly, Korean firms possess real technological and other advantages
in many industries, yet with few exceptions these achievements
go unrecognized and the firms do not benefit from the additional
market share, pricing power and valuation premium that should
result.
Brand value and investment sentiment are not made, nor are major
transactions contemplated, simply on the basis of one-day conferences
or seminars. They require ongoing communications and interaction.
Just as a U.S. company would be unlikely to achieve success in
South Korea through occasional visits to Seoul, it is not possible
to communicate complex messages and to manage relationships in
the U.S. simply on the basis of random, disconnected activities.
In spite of its underlying attractiveness, it is by no means clear
why foreign investors, businesses and consumers should buy into
the Korea story as a whole or, with a few notable exceptions,
as individual firms.
It is therefore the challenge of every Korean company and government
organization to invest in the activities needed to overcome this
important obstacle.
Otherwise, while there will inevitably be cyclical upturns, South
Korea's economic competitiveness will be eroded over the long-term
in favor of lower-cost and more value-oriented competitors.
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individuals, our most recent edition was accessed by readers
in over 60 countries all over the world. For more information,
contact: KWR.Advisor@kwrintl.com
|
Emerging Market Briefs
By
Scott B. MacDonald
 Chile
– Unemployment Falls: The Chilean economy has made
a substantial recovery in 2003, though high unemployment has remained
a lagging point of concern. It now appears that the employment
picture is beginning to brighten. The government announced in
late August that the jobless rate fell to 9.1% in the three months
to July, from 9.4% at the end of the similar period in 2002. Pushed
along by additions in manufacturing, building and retailing, employment
grew by 3.3.%. Real GDP in 2002 was 2.1%, reflecting tough global
markets for most goods exported by Chile. For 2003, real GDP is
expected to be 3.5%, well ahead of most of Latin America.
India
– S&P Upgrades the Outlook on Banks: Like many
developing countries, India’s track record in banking has
not been stellar. The practice of stuffing state-owned banks with
bad loans to money-losing state-owned companies was well rooted
in the system. In addition, competition was long kept under control.
Although there are still issues of inefficiency, bad loans and
the need to upgrade technology in many banks, there have been
positive changes in recent years. Standard & Poor’s in
early September 2003 changed the outlook of the banking system
from negative to stable. In doing so, the rating agency commented:
“Key watershed structural reforms in India so far have improved
the health of the banking sector’s asset quality, profitability,
and capital adequacy.”
Malaysia – Growth on the Upside: Malaysia’s
real GDP for Q2 2003 expanded at a faster rate than expected,
hitting stride at 4.4%. The median forecast by economists had
expected 3.9%. Economic growth was fuelled by rising demand for
commodities and higher prices, which boosted exports. This more
than compensated for a decline in electronics exports and the
impact of SARS. A government stimulus package, launched in May,
also helped stimulate growth.
Pakistan
– Earning Praise: The management of the Pakistani
economy has never been easy. Beyond facing ongoing problems that
almost always threaten political stability, the economy has struggled
to find a competitive nitch in the global economy and attract
foreign investment. Consequently, when there is good news it should
be acknowledged. In late August, the Asian Development Bank (ADB)
commended Pakistan for its economic recovery. The ADB’s annual
economic update for the South Asian country forecast economic
growth in the year to next June (Pakistan’s fiscal year)
would rise to 5.3%. In the fiscal year that just ended in June
(2002-2003), real GDP was a robust 5.1%, up from a more modest
3.1% in 2001-2002. Helping stimulate economic expansion over the
last few months has been the early monsoon rains, which significantly
ended a brutal three-year drought. The expectation is that with
a more regular pattern of weather, the agricultural sector will
have a much stronger performance. This is important as agriculture
accounts for a quarter of GDP and more than two-thirds of the
nation’s 145 million people rely directly or indirectly on
farm incomes.
The ADB also noted that a sharp fall in interest rates has reduced
borrowing costs for the corporate sector and the better business
environment has helped fuel a recovery in the Karachi Stock Exchange,
up more than 60% in 2003. Remittances from overseas Pakistanis,
worth around $4 billion last year, are helping to fuel growth.
Although Pakistan faces tough political issues, there has been
a greater degree political stability under the current Musharraf
government over the last couple of years. This does not ignore
the challenges of radical Islamic groups that have conducted their
own war against the West in a series of bombings. However, the
political issue is a point of concern to the ADB going forward.
The ADB warned that if relations between the government and opposition
remain tense over the position of General Pervez Musharraf, the
country’s leader, some of the economic gains could be jeopardized.
Pakistan remains one of the more geo-politically significant countries
in Eurasia, with its borders touching Afghanistan, Iran and India
and being close to the Persian Gulf. Progressive economic development
is critical if this pivotal state is to remain anchored as an
ally of the West. Clearly grinding poverty and inequality are
the breeding conditions for radicalism, be it Islamic or another
ideological passion. Pakistan has made economic gains over the
last couple of years. It is important for that process to continue.
If not, the door to more political instability opens, something
that would not be benefit the majority of the Pakistani people
or the neighborhood.
Romania – IMF Targets at Hand: It has been a long
haul for the Romanian economy since the fall of its communist
dictator Nicholae Ceausescu in 1989. After a number of false starts,
the Balkan country now appears set to successfully complete its
two-year $413 million IMF program. Romania has done much to meet
IMF targets for reform of public sector finances and restructuring
publicly-owned companies. The government plans to end the IMF
program in September and to start a new one, though its need for
IMF financing has declined..
Taiwan
– Q2 Real GDP Disappoints, but…: As the number for
the second quarter of 2003’s real GDP was announced, there
was a sense of disappointment in trading rooms in Taipei. Real
GDP contracted by 0.1% year-on-year, largely due to the negative
impact of SARS. This was evident in the pronounced downturn in
domestic demand (-2.6%) and fixed asset investment (-10.2% year-on-year).
Simply stated, SARS drove consumers out of the stores and helped
add to the uncertainty facing many companies, forcing them to
curtail business travel and postpone corporate investment. Despite
the disappointing second quarter results, it is likely that the
Taiwanese economy has hit the bottom of the cycle. Prospects for
the second half of 2003 look better due to pent-up consumer demand
and corporate investment. Reflecting this, the Taiwanese government
raised its 2003 forecast for real GDP from 2.9% to 3.1%, while
2004 growth is expected to accelerate to 3.8%.
Thailand – Slower Industrial Production…: After
several months of very robust industrial production, the pace
slowed down in July. Usually slowing industrial production would
be a sign of something to worry about. In the case of Thailand
it is probably a good thing – industrial production in July
was 10.3%, down from a blistering 11.2% in June. This was the
tenth straight month of industrial production in excess of 10%
in 2003, reflecting the fast pace of growth in Thailand. Slowing
down and taking stock is perhaps not a bad thing.
 |
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Book
Reviews
 Mary
Anne Weaver, Pakistan – In the Shadow of Jihad and Afghanistan
(New York: Farrar, Straus and Giroux, 2002). 284 pages. $24.
Reviewed
by Scott B. MacDonald
 Click
here to purchase "Pakistan
- In the Shadow of Jihad and Afghanistan"
directly from Amazon.com
Without
any doubt, Pakistan, sitting in strategically located South
Asia, has become a pivotal nation. What happens in Pakistan
will have an impact on India, Afghanistan and the Middle East.
The ripples will extend outward into Europe and, of course,
into Washington, D.C. Yet, Pakistan is a relatively poor nation,
divided by ethnic, regional and religious differences, and
has a long history of political upheaval. What elevates the
South Asian country is its location next to Afghanistan, a
former base to al-Qaeda and India, its long-term rival. Add
in the importance of location is the fact that Pakistan is
the only Muslim country to be a declared nuclear power. Consequently,
there are pressing reasons to have a better understanding
of this country. Mary Anne Weaver, a foreign correspondent
for The New Yorker, provides an excellent tour de force in
her Pakistan – In the Shadow of Jihad and Afghanistan.
Weaver’s book is well worth reading. The style is easy,
though at times, meandering, as one door after another is
opened to the reader through various interviews with Pakistanis
of all levels – from prime ministers and generals to
mullahs and workers. Weaver has a strong love for her subject
matter. One ultimately walks away from Pakistan with an understanding
of how this country was transformed by the decade-long war
fought against the Soviet Union in Afghanistan. In particular,
the creation of militant Islamic groups fighting a jihad against
the godless Soviet invaders had a massive impact on radicalizing
Islam in Pakistan.
As Islamic groups became involved in Afghanistan, Pakistan
was the ideal base – predominantly Muslim, extensive
and porous borders, and a culture supportive of weapons. Indeed,
Pakistan became an attractive recruiting area for radical
Islam. Poverty is widespread, central authority is often weak
or inept, and corruption is widespread. While Weaver is critical
of the Pakistanis for allowing this situation to evolve, she
is equally critical of the United States, with its poorly
thought-out policies in Afghanistan and Pakistan. Weaver has
done an admirable job in presenting Pakistan, a country that
sports nuclear weapons and at the same time runs the risk
of becoming a failed state. Although hopeful about the future,
she is savvy enough to understand that Pakistan’s challenges
remain substantial.
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