CNBC: The Growing Risks from ASEAN’s Asset Bubbles

EVEN mainstream media appears to have caught up with my warnings. This lone nut's insights have began to spread. 

Here is the CNBC:

The risk of asset bubbles in Southeast Asia's fastest-growing emerging economies is rising, warn economists, pointing to red flags including surging domestic credit growth and rapidly rising property prices.

"We have long argued that monetary policy has been kept too loose for too long in Indonesia, but the policy authorities in the Philippines, Thailand and Malaysia are in significant danger of making the same mistake. In our view, evidence of overheating is set to become more obvious," said Robert Prior-Wandesforde, head of India & Southeast Asia economics at Credit Suisse.

Prior-Wandesforde, who expects central banks in the region will start tightening monetary policy in late 2013 or 2014, says policymakers are getting a false sense of security from benign inflation levels, and ignoring the excesses being built elsewhere in their economies.

"We expect interest rates to move higher and it is at that point that history suggests we should worry about possible bubbles turning to bust," he said.

The mix of U.S. monetary policy and relatively low levels of inflation have led many ASEAN nations to adopt "inappropriately" low interest rates, according to economists.

The World Bank and the IMF has recently recommended that easy money policies be reversed.

As I noted yesterday on the IMF’s prescription:

This means that putting a brake or policy tightening would also expose on the mirage brought about by statistical growth pillared from "strong credit growth". Doing so would effectively takes away the foundations of the “defied” status from which the political class and central bankers have been piggybacking on.

In short, reversing the “easy financing conditions” would go against the political and personal interests of those involved, particularly the political class and their cronies, and therefore will most likely be rejected or dismissed or ignored.

Easy money conditions will likely be pushed to the limits until the markets expose on them.

Developing events seem to be upholding my theory. 

Thailand’s government will likely address the rising baht mostly perhaps by paring down interest rates.

This is fresh from the Bangkok Post

The MPC is under pressure from the Finance Ministry and exporters who want it to implement measures to weaken the baht. The Federation of Thai Industries (FTI) chairman Payungsak Chartsutthipol has called on the MPC to cut its policy interest rate from 2.75% by 1% to weaken the baht.

He said the central bank will use foreign exchange and capital inflow management as the main instruments to keep the baht from rising too high.

Translation: Risk of bubbles? Who cares. Blow more of them.

World Bank: Developing Asia Should Put a Brake on Easing Policies

Interesting call from the World Bank. 

From the Jakarta Globe:

The World Bank is urging developing economies in East Asia and Pacific, including Indonesia, to put a brake on monetary and fiscal policies that boost consumer demand, arguing that such actions would add to inflationary pressures as the global economy gradually recovers.

“Most countries in developing East Asia are well prepared to absorb external shocks, but continued demand-boosting measures may now be counterproductive, as it could add to inflationary pressures,” said World Bank East Asia and Pacific chief economist Bert Hofman in a report on Monday.

“A strong rebound in capital inflows to the region induced by protracted rounds of quantitative easing in the US, EU and Japan, may amplify credit and asset price risks,” he added.
 

Developing East Asia and Pacific include China, Indonesia, the Philippines, Thailand, Vietnam, Cambodia, Malaysia, Laos, Mongolia, Myanmar, East Timor, Fiji, Papua New Guinea, Solomon Islands and other smaller island economies in the Pacific.

So the World Bank finally admits or acknowledges of the existence of the Asian-ASEAN bubbles which they couch in technical gobbledygook as “demand-boosting measures may now be counterproductive”. 

“Counterproductive” is really about capital consumption from malinvestments that will be unraveled by inflationary pressures. Mainstream terminology for this is "overheating".

This has been a dynamic I have been pointing out since last year.

The World Bank also puts into proper context  the role of capital inflows as “may amplify credit and asset price risks”. Yes this is an acknowledgement of my assertion that all bubbles are inherently domestic.

Glad to hear some forthrightness from a taxpayer funded multilateral agency.

Yet, be careful of what you wish for.

If the boom in ASEAN economies has mainly been derived from counterproductive “demand boosting measures”, then a policy brake (tightening) would translate to a reversal of such speculative, unproductive, wealth consuming activities: particularly such will likely be ventilated through economic recession, crashing markets and possibly a financial/banking crisis.

A “brake” in easing policies, for instance, will essentially expose on the underlying reality behind the supposed Philippine economic miracle labeled as “Aquinomics” along with political façade from other ASEAN nations whose economic growth has been cosmetically boosted by credit expansion.

Thus, will ASEAN politicians acquiesce to a virtual exposé of their pretentious policies that risks undermining their political privileges and of their supposed popular moral standings? 

I doubt so.

Yet more institutions appear to recognize implicitly, slowly but surely, my concerns of a coming crisis from today’s bubble policies.

World Bank to China: Economic Freedom or Bust

To read about the departure from traditionalist policies by the multilateral agency the World Bank, who usually espouse on more regulations and bigger governments, but now recommends Economic FREEDOM for China or else risks a collapse in the face unsustainable state based Keynesian policies, is certainly a refreshing development.

The mainstream seems to be more and more assimilating the reality that only economic freedom (laissez faire capitalism) is the key to prosperity.

From the CNN Money

The World Bank and a Chinese think tank will have a stern warning in store for China's government on Monday: Transition to a freer commercial system, or else face an impending economic crisis.

As first reported by the Wall Street Journal, the "China 2030" report recommends China enact reforms promoting a freer econom. Those reforms include a major overhaul turning China's powerful state-owned companies into commercial enterprises.

The World Bank confirmed it will release the report Monday in Beijing.

The report is compiled by the World Bank and the Development Research Center, a research group that reports directly to China's State Council. According to the Wall Street Journal, it encourages China to also promote innovation, competition and entrepreneurship as a means of economic growth, rather than allowing growth to be primarily government engineered.

The world's second largest economy has been rising rapidly, averaging around 10% growth a year for the last three decades. Much of that momentum has come as China's rural population moves into the cities and as the government has funded massive infrastructure projects and retained a powerful influence over the country's biggest companies.

State-owned companies dominate China's banking, energy, telecom, health care and technology sectors. Overall, they account for about 40% of the country's gross domestic product, estimate Andrew Szamosszegi and Cole Kyle, who have researched the topic for the U.S.-China Economic and Security Review Commission.

Their latest report to the commission puts it bluntly: The Chinese government has not "expressed an interest in becoming a bastion of free market capitalism."

Yeah. The last statement seems like an epiphany for the World Bank.

Here is the official press release from the World Bank, where you can download on the report

China should complete its transition to a market economy -- through enterprise, land, labor, and financial sector reforms -- strengthen its private sector, open its markets to greater competition and innovation, and ensure equality of opportunity to help achieve its goal of a new structure for economic growth.

These are some of the key findings of a joint research report by a team from the World Bank and the Development Research Center of China’s State Council, which lays out the case for a new development strategy for China to rebalance the role of government and market, private sector and society, to reach the goal of a high income country by 2030.

The report, “China 2030: Building a Modern, Harmonious, and Creative High-Income Society”, recommends steps to deal with the risks facing China over the next 20 years, including the risk of a hard landing in the short term, as well as challenges posed by an ageing and shrinking workforce, rising inequality, environmental stresses, and external imbalances.

While I agree that current policies by the Chinese government have been merely blowing bubbles—which eventually would meet its fate—paradoxically, much of the world have been pursuing the same policy template, albeit at varying degrees. (yes the Philippines too)

In particular, crisis afflicted nations led by the US and key developed economies seem to be reversing their embrace of the market economy paradigm as inflationism has emerged as the dominant trend in policymaking.

Add to this are the numerous regulations being imposed, aside increases in taxation that suppresses and inhibits ‘competition and innovation’.

Selective censures would only be discerned as politicking that may cause insulation and would likely be ignored by the Chinese authorities.

The World Bank has to make Economic Freedom (laissez faire capitalism) the foundation of their economic development model for everyone.

As the great Ludwig von Mises once wrote,

A society that chooses between capitalism and socialism does not choose between two social systems; it chooses between social cooperation and the disintegration of society.

World Bank Blames Higher Food Prices on Everything Else But Central Bank Policies

World Bank says elevated food prices are driving many people to poverty.

From the World Bank’s press release

Driven in part by higher fuel costs connected to events in the Middle East and North Africa, global food prices are 36 percent above their levels a year ago and remain volatile, pushing people deeper into poverty, according to new World Bank Group numbers released today.

“More poor people are suffering and more people could become poor because of high and volatile food prices,” said World Bank Group President Robert B. Zoellick. “We have to put food first and protect the poor and vulnerable, who spend most of their money on food.”

According to the latest edition of the World Bank’s Food Price Watch, a further 10 percent increase in global prices could drive an additional 10 million people below the $1.25 extreme poverty line. A 30 percent price hike could lead to 34 million more poor. This is in addition to the 44 million people who have been driven into poverty since last June as a result of the spikes. The World Bank estimates there are about 1.2 billion people living below the poverty line of US$1.25 a day.

The World Bank’s food price index, which measures global prices, is 36 percent above its level a year earlier and remains close to its 2008 peak. Key increases compared to a year ago include maize (74 percent), wheat (69 percent), soybeans (36 percent) and sugar (21 percent), although rice prices have been stable. In many countries, vegetables, meats, fruits and cooking oil continued to rise with potentially adverse nutritional consequences for the poor.

Aside from high fuel costs, the World Bank blames higher food prices on other factors as the weather.

Food prices have soared due to severe weather events in key grain exporting countries, export restrictions, the increasing use for biofuel production, and low global stocks. The food price hike is also linked to surging fuel prices -- crude oil increased 21 percent in the first quarter of 2011as a result of unrest in the Middle East and North Africa.

chart from World Bank’s Food Price Watch "Correlation isn't causation"

The World Bank isn’t being forthright.

Since agricultural products have been the least globalized this means that any localized imbalances should translate to local and not to higher global prices.

Say a drought happens in country A, then A suffers higher food prices (and possibly some trading partners who depend on A for specific agri or food based products) but not the world and certainly not most of the commodities.

Furthermore, if price signals work in the domestic markets then such imbalances should translate to an anomaly or an ephemeral event and not sustained price increases.

Alternatively, general price increases in commodity prices won’t happen if the imbalance engendered have been caused mainly by non-monetary factors. That's because higher spending in some areas will be offset by lower spending in others. Only central bank inflationism can bring about generalized price increases.

Obviously, like almost all governments, all the blame will fall on the weather, corporate greed, Middle East crisis, fuel prices, and etc… but never on the inflationism applied by central banks. (The Bank of Japan is an exception in admitting monetary policies as responsible for food price hikes, but they have been responsible for inflationism too)

The World Bank mentions ‘exports restrictions’ (which deserves applause) but keeps mum on who has instituted "increased biofuel production". This only implies that distortive administrative policies (subsidies, tariffs, price controls et. al.) have partly been responsible (as aggravating factors).

All these “anything-but-the-government/central bank-to-blame” appears to be part of the public conditioning for the next step—massive price controls.

Microfinancing Goes Facebook

Microfinancing goes Facebook....but a different version; it's a Facebook for farmers, says James Davison of the World Bank.

Technology has been introducing innovative ways of connecting capital and people. This should lead to more productivity and progress.

From Mr. Davison, (accompanying video likewise from the World Bank)

``Wokai has been dubbed by some as a “Facebook for farmers,” yet it may be more comparable to well-known microfinance sites like Kiva, which allow people with an Internet connection to give loans directly to entrepreneurs in developing countries. Wokai, however, focuses solely on impoverished people living in rural China.

``The site has been around for about two years and says it has raised $45,000 from about 500 contributors. The money has gone to more than 160 rural Chinese entrepreneurs, who put loans to a variety of uses, such as pig farming, furniture making and starting a restaurant.

``The comparison to Facebook is made because individual donors and borrowers have profiles on the site, and contributors can read about (and watch the progress of) the people their loans go to. Casey Wilson, one of the site’s founders, explains more about the organization in this video shot by a reporter based in China." (emphasis added)

Facebook for Farmers from grubbylens on Vimeo.

Less Costs and More Freedom Drive Informal Economies

Interesting commentary from World Bank’s East Asia & Pacific Blog on the informal economy (bold highlight mine)…

``Recently my colleague Ryan Hahn of the PSD blog wrote about an interesting story on sweatshops. This refers to an op-ed of Nicholas Kristof, a columnist for the New York Times, titled "Where Sweatshops Are a Dream". On his own blog, he clarifies: "My point is that bad as sweatshops are, the alternatives are worse. They are more dangerous, lower-paying and more degrading."

``This is indeed part of a more general point about the so-called informal economy. Creating strict standards for the formal economy – to improve working conditions and living standards – often acts as a disincentive to become formal. These standards create a barrier that prevents many workers from having a job in the formal sector and leaves them without protection in the informal sector (or even worse, without job). This is something all countries, including developed countries, are struggling with: How to encourage the upgrading of standards without being counterproductive?”

We think the unstated problem is about costs. If the cost of doing business is substantially higher in a regulated ‘formal’ economy, then obviously it becomes a disincentive, especially for low capital intensive businesses. And by costs we see it in the context of both monetary and utility/convenience from “compliance costs”.

And in terms of convenience, informal economies could also signify thefreedom to operate, to quote Stefan Karlsson ``since informal markets are markets where people do not have their freedom restricted by the state this should if anything be counted as something positive. The larger the informal market the greater chance people have to conduct their business without being taxed and regulated by government officials. In countries with a small informal sector it is far more difficult to find other people with whom you can do business and practice division of labor without having your freedom restricted by the state.”

World Bank’s Doing Business in the Philippines 2008

Some important highlights from the World Bank’s Doing Business in the Philippines 2008

Best equity returns belong to countries with the most number of positive reforms.

Since many emerging markets have likewise been undertaking reforms, the competition to attract investments should be a continuing dynamic. Increasing competitiveness means constant in-depth reforms relative to our competitors. Tentativeness or lackluster actions translate to a decline in relative performance or our attractiveness as a place for viable investments decreases.

Aside from the national levels, reforms can also start with the local (LGU) levels.

The table above shows of the best performing “Doing Business” categories in the Philippines. At the right side of the table is the equivalent ranking based on global standards. This shows that there is much room for needed improvements.

For our leaders and prospective leaders this should be a great starting point for a meaningful governance agenda.

Good luck to them.