Philippine Politics: South Korean War Jets Means Bigger Taxes and More Financial Repression

From Today’s Inquirer headlines

Move over. The big boys are coming.

President Benigno Aquino III said the Philippines was close to finalizing a deal with a state-owned Korean aerospace firm to buy a squadron of FA-50 fighter jets worth P18.9 billion—a move seen to bolster the country’s aerial power and defend its territory in the disputed West Philippine Sea (South China Sea).

Mr. Aquino said he discussed the procurement of 12 brand-new multirole combat aircraft from the Korea Aerospace Industries Inc. (KAI) when he met with South Korean President Park Geun-hye at the Blue House, South Korea’s seat of power.

He said it was part of the commitment of both countries to improve their military cooperation, in line with a memorandum of understanding they entered into on Thursday.

The first statement should have read 

Filipino taxpayers beware. The big taxes are coming

Funny how media glamorizes what has been sold by political agents to the public as patriotic mirage of defending domestic territories. In reality, the territorial dispute has served as smoke screen for expansionist government via bigger deficit spending, more political control (lesser civil liberties), promoting US bases and the military industrial complex (here and abroad)

As the recent Zamboanga City crisis has revealed, superiority and capability plays little in the way the Philippine military operates. The sordid Zamboanga episode exhibits how the much 'superior' Philippine military bungled their operations relative to a much ill equipped, inferior in numbers and in training insurgents (Wikipedia note; MNLF participants 500, Philippines army participants 5,000 with tanks personnel carriers, and air support—attack aircraft, helicopters). 

Yet it took 16 days for the military to crush the insurgents (casualties Philippine military: 25 dead 184 wounded, MNLF: 183 dead, 292 captured). This is hardly an example to justify the government's claim to increase defense spending.

And it seems no more than wishful thinking for anyone to believe that new ‘modern’ armaments will serve to neutralize the far superior nuclear and drone equipped Chinese army. A chart comparing the US and Chinese military in Asia, I have previously posted here.

The reality is that invoking nationalism to defend “insignificant scrubby rocks” (John Keller) which supposed ‘rich’ resource reserves will only be beneficial to politically connected allies (cronies) via service contract permits issued by the government.

Societies hardly get rich from resources, they get rich from free trade, the market economy or economic freedom. 

Natural resources have in fact been a blight to many countries. This has been known as the resource curse. Resource revenues tend to cover up on government's mismanagement. Also the ruling elite who control these resources tend to pushback on economic reforms.

Yet politicians have been agitating for war, whose benefits will accrue to a few and whose costs will be distributed and paid for by the productive agents of the Philippine society.

Spurious nationalism will be funded by bigger taxes and by more financial repression (inflationism, negative rates, deposit caps and other capital controls)

Of course in case of actual shooting encounters, it won’t be the politicians life whom will be at stake but the lowly foot soldier, who either earnestly believe they are fighting for a righteous cause or out of the lack economic opportunities. Unfortunately they serve as unwitting pawns of grandstanding politicians.

But the best way to resolve such impasse will be to deepen trade and commercial relationships that will promote deeper social interactions that would empower the citizenry rather than brinkmanship politics from politicians.

As I have been saying, all these has partly been about promoting the return of the US military bases—a legacy the incumbent administration wishes to fulfill which had been terminated in 1992 during the incumbent’s mother’s administration. 

Despite denials by the US to seek permanent presence, the US wants extended access to Philippine bases. The rehashed US-Philippine military relationship has been framed in the context to become palatable to public opinion.

The Left has alleged that the Philippine government has spent Php 500 million in building base infrastructure in Palawan to accommodate US military. If true, then this has been foreordained as popularity ratings will be used to formally bring back US bases. Except of course, the pork barrel scam has frayed into these populist ratings.

While it is true that Philippines will be buying these jets from a Korean state defense industry, what has not been revealed is that the FA-50 has essentially been powered, equipped and armed by mostly the US-Israel military industrial complex 

From the Wikipedia (bold mine)

The FA-50 is the most advanced version of the T-50. It is equipped with a modified Israeli EL/M-2032 pulse-Doppler radar with further Korean-specific modifications by LIG Nex1, and has more internal fuel capacity, enhanced avionics, a longer radome and a tactical datalink The radar selected for the FA-50 has a range two-thirds greater than the TA-50's radar. The EL/M-2032 was initially chosen over Lockheed Martin's preferred AN/APG-67(V)4 and SELEX Vixen 500E AESA radars. Other AESA radars such as Raytheon Advanced Combat Radar and Northrop Grumman's Scalable Agile Beam Radar are options for future production, and will likely be shared with the same AESA radar chosen for the USAF and ROKAF F-16 fighters. Samsung Thales is also independently developing a domestic multi-mode AESA radar for FA-50/ In December 2008, South Korea awarded a contract to Korea Aerospace Industries to convert four T-50s to FA-50 standards by 2012. In 2012, The Republic of Korea Air Force has ordered 20 FA-50 fighters to be delivered by the end of 2014 The maiden flight of FA-50 multirole fighter variant took place in 2011. The 60 FA-50 aircraft are to be produced from 2013 to 2016. Korea Aerospace Industries (KAI) received a 1.1 trillion won ($1 billion) order for FA-50 fighter aircraft in May 2013.

The T-50 is the proposed base for the more advanced F-50 fighter with strengthened wings, AESA radar, more internal fuel, enhanced electronic warfare capability, and a more powerful engine. The proposal is designated as T-50 Phase 3 program by KAI. Wing strengthening is required to support three underwing weapons pylons, compared to two underwing pylons on the TA-50 or FA-50. The AESA radar was expected to be RACR, which has 90% commonality with the AESA radar of the Super Hornet, or SABR, both of which are competing for KF-16's AESA radar upgrade program. Samsung Thales' AESA radar is also a possible option. The aircraft was altered to a single-seat configuration to allow more space for internal fuel and electronic warfare equipment. The engine could be either Eurojet EJ200 or General Electric F414, upgraded to 20,000 lb or 22,000 lb thrust, which is about 12-25% higher than the F404's thrust. The engines are already being offered for the baseline T-50 for future customers. A similar Korean-led international fighter program exists named the KAI KF-X.

TA-50/FA-50 armaments again from Wikipedia

The TA-50 version mounts a three-barrel cannon version of the M61 Vulcan internally behind the cockpit, which fires linkless 20 mm ammunition. Wingtip rails can accommodate the AIM-9 Sidewinders missile, a variety of additional weapons can be mounted to underwing hardpoints. Compatible air-to-surface weapons include the AGM-65 Maverick missile, Hydra 70 and LOGIR rocket launchers, CBU-58 and Mk-20 cluster bombs, and Mk-82, −83, and −84 general purpose bombs.

FA-50 can be externally fitted with Rafael's Sky Shield or LIG Nex1's ALQ-200K ECM pods, Sniper or LITENING targeting pods, and Condor 2 reconnaissance pods to further improve the fighter's electronic warfare, reconnaissance, and targeting capabilities. Other improved weapon systems over TA-50 include SPICE multifunctional guidance kits, Textron CBU-97/105 Sensor Fuzed Weapon with WCMD tail kits, JDAM, and JDAM-ER for more comprehensive air-to-ground operations, and AIM-120 missiles for BVR air-to-air operations. FA-50 has provisions for, but does not yet integrate, Python and Derby missiles, also produced by Rafael, and other anti-ship missiles, stand-off weapons, and sensors to be domestically developed by Korea

The South Korean army has also essentially been supported (28,000 troops) by the US, as well as armed and equipped (from army, navy, air force to marine corps mostly by the US military and US defense contractors. 

So the Korean defense industry represents a token of real defense spending $31.7 billion (2013), where according to Wikipedia arms exports totaled $183 million (2012) compared to imports at $1.131 billion (2010). 

In July 2013, the South Korean military appealed to the Parliament for an increase 13.7% of the military budget which translates to $38.5 billion to beef up the nation's missile defense. 

The point is South Korean defense industry has been deeply tied with the US military complex. So this reflects on the dynamics behind the Philippine government's proposed buying of South Korean jets.

Bottom line: The fantasy of arming for defense by the Philippine government to protect against the far more powerful China serves as economic privileges for the US-Israel defense industry (also Korea’s KAI), the Philippine bureaucracy and the Philippine military as well as the US military. 

The first three will be charged to us, the Philippine taxpayers. The US military base/s will be charged to the American taxpayers but whose subsequent social and environmental costs will a burden to local communities in the Philippines who will serve as host/s to the base/s.

Why the Shale Gas Revolution will go on…

...because the benefits enormously outweigh the costs.

Prolific author Matt Ridley writing at the UK Telegraph enumerates them

1. Cheap and abundant energy should help spur economic growth

Cheap energy is the surest way to encourage economic growth. It was cheap coal that fuelled the Industrial Revolution, enabling British workers with steam-driven machinery to be far more productive than their competitors in Asia and Europe in the 19th century. The discovery, 12 years ago, of how to use pressurised water (with less than 1 per cent kitchen-sink chemicals added), instead of exotic guar gel made from Indian beans, to crack shale and release gas has now unleashed an energy revolution almost as far-reaching as the harnessing of Newcastle’s coal.

2. Environmental Friendly

And if cutting carbon emissions is what floats your boat, you will like shale gas even more. The advent of cheap gas, by displacing coal from electricity generation, has drastically cut America’s carbon dioxide emissions back to levels last seen in the early 1990s; per capita emissions are now lower than in the 1960s. 

3. Market driven energy and less baggage on taxpayers compared to political driven alternatives

Britain’s subsidised dash for renewable energy has had no such result: wind power is still making a trivial contribution to total energy use (0.4 per cent) while most renewable energy comes from wood, the highest-carbon fuel of all.

4. Alter geopolitical environment

Best of all, the shale revolution is causing consternation in Moscow and Tehran, which had expected to corner the natural gas market in decades to come. As a sign of the panic it is inducing, a forthcoming Matt Damon anti-fracking film was financed partly by a company owned by the United Arab Emirates government. (The film’s plot had to be rewritten after the authorities absolved a gas company of causing pollution in a well-publicised case in Dimock, Pennsylvania.)

I might add that the Shale gas revolution will likely compel authoritarian resource rich, or might I rather say resource curse, economies to liberalize, knowing that their stranglehold on energy supplies faces stiff competition.

(chart from Danske Bank)

The Shale boom will also put tremendous pressure on the authoritarian regimes' energy based welfare states, which has been the main source of the political existence.

So the shale gas revolution will likely bring on more trade, more reforms and lesser welfare states

5. Safe technology

Exploiting shale gas is safe, according to the Royal Society and the Royal Academy of Engineering. Fracking of one kind or another has been used here for decades; the earthquakes it causes are no worse than a bus going past; it does not use much water compared with other industries; it’s not responsible for flammable tap water; and methane leakage is not as bad as has been claimed. Nor, with a mile of rock between the fractures and the aquifers, does it cause groundwater contamination. Last year there were 125,000 fracs in the United States. According to the Environmental Protection Agency, no frac has ever contaminated groundwater.

The Shale gas boom will initially benefit the US and Canada, but will most likely spillover to the rest of the world.

Shale gas reserves can be found in many countries. The Wall Street Journal notes that

U.S.-government contracted study of 32 countries estimated they held 6.6 quadrillion cubic feet of shale gas, more than 50 years worth of current global consumption. The U.S. held 862 trillion cubic feet, or just 13% of the estimated resource

The study didn't offer an estimate of either the volume of oil in global shales or the size of massive shale deposits in Russia and the Middle East. Other estimators have suggested this figure could be high, but nonetheless expect there is vast untapped energy in shales world-wide.

Although the boom has several obstacles to overcome mostly in terms of politics: government ownership of mineral rights, environmental concerns and the lack of infrastructure.

For instance, countries like France and Bulgaria has banned hydraulic fracking. China huge shale reserves are situated in arid or heavily populated areas where accessibility to water poses as constraints.

There are also technology constraints or access to technology which so far has limited market participants.

Nevertheless, the shale revolution has been estimated to shift energy consumption and trade patterns globally.

The US may reach self-sufficiency and become an exporter by 2035

Notes the Economist,

the same technology is unlocking shale oil, which along with fuel efficiency measures, could slash America's dependence on oil imports. With all sources of energy taken together (including nuclear, renewables, etc) the country could hit net self-sufficiency by 2035. The rest of the world is set to rely even more heavily on imports, with the exception of Japan and South Korea, which already import all their oil and gas, and the ASEAN region, which will have less of a surplus to export

Recently I pointed out that Asians have began piling on on Shale gas boom through record corporate takeovers of Shale companies

Mr. Ridley is right, countries that turn their backs on cheap energy will lose out

Natural-Shale Gas Revolution Spreads to Israel

The natural-shale gas boom spreads to Israel.

Reports the Financial Times (hat tip Carpe Diem’s Professor Mark Perry)

With reserves of almost 10 trillion cubic feet of natural gas, the Tamar field is a hugely valuable asset for the Israeli economy. Discovered in January 2009, it was the biggest gas find in the world that year, and by far the biggest ever made in Israeli waters. But the record held for barely two years. In December 2010, Tamar was dwarfed by the discovery of the Leviathan gasfield some 20 miles farther east – the largest deepwater gas reservoir found anywhere in the world over the past decade. The two fields, together with a string of smaller discoveries, will cover Israel’s domestic demand for gas for at least the next 25 years, and still leave hundreds of billions of cubic feet for sale abroad. The government take from the gasfields alone is forecast to reach at least $140bn over the next three decades – a staggering sum for a relatively small economy such as Israel’s.

It’s not just in Israel but as I previously pointed out the Natural-Shale gas revolution will become a world wide phenomenon.

And we are seeing some evidence of such progress. Again the FT,

Experts are convinced that Tamar and Leviathan will not be the last big Israeli discoveries. They point to the US Geological Survey, which estimates that the subsea area that runs from Egypt all the way north to Turkey, also known as the Levantine Basin, contains more than 120 trillion cubic feet of natural gas. Israeli waters account for some 40 per cent of the total. Should these estimates be confirmed through discoveries in the years ahead, Israel’s natural gas reserves would count among the 25 largest in the world, on a par with the proven reserves of Libya and ahead of those of India and The Netherlands.

Earlier Israel seems to have been devoid of energy resources.

For decades a barren energy island, forced to import every drop of fuel, Israel today stands on the cusp of an economic revolution, fuelled by the vast riches that lie below its waters.

left chart from Financial Times, right chart from Financial Post

But thanks to human ingenuity, massive advances in technology have transformed what was once resources of little economic value to become abundant highly economically valuable commodities.

Hopefully Israel’s newly discovered energy resources will serve as blessings than a (resource) curse. But this will depend on how the domestic and geopolitical trends in Israel and the Middle East will evolve.

Resource Curse: Rare Earths bankroll North Korea’s Despotism

Abundance of natural resources can serve as deterrent to economic development, a phenomenon which has widely been known as the resource curse.

That’s because plentiful resources provides the wherewithal to the political class to thrive on a politically repressive system without the need for economic liberalization reforms.

Thus the tendency for resource rich nations has been concentrate wealth on the politicians and their cronies at the expense of the nation.

Apparently rare earth exports may have bankrolled North Korea’s isolated economy which has so far allowed the regime to survive.

From the Asia Times Online,

In fact, North Korea is sitting on the goldmine. The northern side of the Korean peninsula is well known for its rocky terrain, with 85% of the country composed of mountains. It hosts sizeable deposits of more than 200 different minerals, of which deposits of coal, iron ore, magnesite, gold ore, zinc ore, copper ore, limestone, molybdenum, and graphite are the largest and have the potential for the development of large-scale mines.

After China, North Korea's magnesite reserves are the second-largest in the world, and its tungsten deposits are almost the world's sixth-largest. Still the value of all these resources pales in comparison to prospects that promise the exploration and export of rare earth metals.

Rare earth metals are a group of 17 elements found in the earth's crust. They are essential in the manufacture of high-tech products and in green technologies, such as wind turbines, solar panels or hybrid cars.

Known as "the vitamins of high-tech industries," REMs are minerals necessary for making everything that we use on a daily basis, such as smartphones, flat-screen TVs, and notebook computers. Some rare earth metals, such as cerium and neodymium, are crucial elements in semiconductors, cars, computers and other advanced technological areas. Other types of REMs can be used to build tanks and airplanes, missiles and lasers.

South Korea estimates the total value of the North's mineral deposits at more than US$6 trillion. Not surprisingly, despite high political and security tensions, Seoul is showing a growing interest in developing REMs together with Pyongyang.

In 2011, after receiving permission from the Ministry of Unification, officials from the Korea Resources Corp visited North Korea twice to study the condition of a graphite mine. Together with their counterparts from the DPRK's National Economic Cooperation Federation they had working-level talks at the Kaesong Industrial Complex on jointly digging up REMs in North Korea. An analysis of samples obtained in North Korea showed that the type of rare earth metals could be useful in the manufacture of liquid crystal display (LCD) panels and optical lenses.

The joint report also revealed that there are large deposits of high-grade REMs in the western and eastern parts of North Korea, where prospecting work and mining have already begun. It also reported that a number of the rare earth elements are being studied in scientific institutes, while some of the research findings have already been introduced in economic sectors. The North built a REM reprocessing plant in Hamhung in the 1990s but has been unable to put the plant into full operation due to power and supply bottlenecks.
Rare earth minerals are becoming increasingly expensive, as China, the world's largest rare earth supplier, puts limits on its output and exports. In February, China's exports of rare earth metals exceeded the price of $1 million per ton, a nearly 900% increase in prices from the preceding year.

China, which controls more than 95% of global production of rare earth metals, has an estimated 55 million tons in REM deposits. North Korea has up to 20 million tons of REM deposits but does not have the technology to explore its reserves or to produce goods for the high-tech industry. Nevertheless, in 2009 the DPRK's exports of rare metals to China stood at $16 million, and as long as someone invests, exports will continue to expand.

This growing rise in REM prices and strong demand gives the young leader Kim Jong-Un a good chance to improve the economic standing of North Korea without actually reforming its economy.

Any “improvements of North Korea’s economic standing” “without reforming its economy” will likely reflect on statistically chicanery rather than from real economic growth.

Real productivity gains through trade and capital accumulation, and not from overdependence on finite resources and redistribution, are the way to lasting economic progress.

The idea that resources will function as a wealth equalizing elixir will be exposed as a socialist’s dogmatic fantasy as it has always been.

Will Soaring Agricultural Commodity Prices Bring about Stagflation to Asia?

Over the past few weeks, US dollar prices of key agricultural commodities have soared.

Prices of corn, wheat and grains have reached their highest levels in 3 years.

And this has alarmed economic experts from Africa.

From Reuters, (bold emphasis mine)

Rising food prices could hit commodity producers in Africa with a dangerous "double whammy" when combined with an economic slowdown in Europe and China reducing African exports of oil and raw materials, a leading African economist said on Tuesday.

Mthuli Ncube, Chief Economist and Vice President of the African Development Bank (AfDB), saw the threat of a food price spike casting a shadow over an otherwise positive growth outlook for Africa that will outpace much of the rest of the world.

"Certainly, there is a lot of reason to worry," Ncube told Reuters, recalling a food and fuel prices squeeze in 2008 that touched off social unrest and food riots in several African nations and also directly affected the continent's growth.

Global economic slowdown compounded by surging food prices would mean stagflation.

From the same Reuters article,

Despite Africa's comparatively strong economic expansion rates, the continent was experiencing "jobless growth", particularly in relation to its huge reservoir of unemployed youth, Ncube said.

Youth represented 60 percent of Africa's unemployed, and despite recording world-topping growth rates between 2000 and 2008, the continent was failing to create the number of jobs necessary to absorb the 10-12 million young and increasingly educated people entering the labor market each year.

Ncube said a major obstacle to more job creation was the persistence of what he called "one-sided economies" in Africa that exported oil and raw materials instead of moving decisively to diversify into job-multiplying manufacturing, commercial agriculture or agro-processing.

"It's a painful slog to diversify," he said.

"We need entrepreneurs to do it. We need to spend the time to build that business culture, the entrepreneurs," he added.

While Africa has taken important steps towards embracing liberalization, their hefty dependence on commodity exports remains an impediment to economic freedom which is the reason for the dearth of entrepreneurs.

This serves as more evidence where the supposed blessing from abundant resources can in fact translate to disadvantage—resource curse. Politicians and their cronies who benefit from commodities have little incentive to open their respective economies until forced by economic reality.

Although the bright side is that multilateral experts from Africa, who provide policy recommendations to political leaders, have exhibited increased recognition of the importance of entrepreneurship and of a political friendly business environment to economic development.

Yet while news tell us that drought in the US has mainly been the catalyst for the spike in prices of agri commodities, others share my insight that an integral element of these price surges has been because of central bank actions.

From yesterday’s Bloomberg article, (bold emphasis mine)

For the first time in more than two years, commodities, equities, bonds and the dollar posted gains, as the U.S. drought sent corn prices to a record and European Central Bank President Mario Draghi’s pledge to protect the euro buoyed stocks.

Raw materials led the increase as the Standard & Poor’s GSCI Total Return Index of 24 raw materials rose 6.4 percent in July, the most since October. The MSCI All-Country World Index of equities rallied at the end of the month for a 1.4 percent gain. The Dollar Index, a measure against six currencies, added 1.3 percent. Bonds of all types returned 1.4 percent on average, the most since December, Bank of America Merrill Lynch’s Global Broad Market Index shows.

The last time all four measures rose for a month was in April 2010, when concerns about Greece were heating up and U.S. economic reports were improving. While corn rose the most last month in almost a quarter century and wheat reached a four-year high, financial assets gained as policy makers worked to boost global growth. Federal Reserve Chairman Ben S. Bernanke said he’s prepared to take more steps, and Draghi pledged to do “whatever it takes” to preserve the euro.

“A lot of the rally in everything is central-bank led,” said Jason Brady, a managing director at Thornburg Investment Management in Santa Fe, New Mexico, which oversees $80 billion. “So now we have a world where central-bank actions are really what people are looking at, and those actions are really positive for all asset prices and negative for savers and folks who are looking to put money in at reasonable levels over a longer period of time.”

And Africa’s stagflation concerns should also haunt Asia, and the Philippines, whom have been major agricultural commodity importers

As Zero Hedge points out, (bold original)

The level of inventories were already low going in and as Bloomberg notes, consumers around the world will feel the effect of higher food prices as the worst drought in 50 years impact the world's largest exporter of corn and wheat (and 3rd largest of soymeal). Within Asia, Korea and Malaysia will be most adversely affected, considering direct effects referenced in per capita and GDP terms. Indonesia and Japan are Asia’s largest importers of wheat, both importing roughly 5.7 million metric tons on average. China is by a wide margin the region’s largest importer of soy, with average imports of 49.9 million in the last five years. The impact on headline inflation in Asia will be stronger for the economies with lower per capita incomes — Vietnam, India, the Philippines and Indonesia — where food and food products account for a larger share of the typical consumption basket. Even in places where incomes are high, such as Singapore, food accounts for 22 percent of the consumer price index.

This only means that high commodity prices will be transmitted to Asia, whom has been inflating too (mostly through negative real interest rates).

And that a prolonged environment of elevated prices in agricultural commodities will likely induce an adverse impact to the region’s domestic economies too. (chart from Financial Times)

Stagflation risks therefore represents as another potential source of contagion.

Yet the most likely political response from the risks of a food crisis will be protectionist in nature (couched through cries of “self sufficiency”) that will only exacerbate such conditions.

In the Philippines, the risks of global and local food crisis may have been amplified by the desire by the Philippine central bank, Bangko Sentral ng Pilipinas’ (BSP) to stoke inflation through the recent cut of policy interest rates to new lows.

As the Inquirer reported last week,

Lower interest rates are expected to spur demand for loans which, in turn, could help boost purchases of goods and services. Higher demand, if supply remains constant, will help accelerate inflation.

The BSP said preventing the consumer price index from falling below target was as important for the economy as avoiding a higher-than-target inflation. Depending on variables, a very low inflation rate can be just as bad for business as high inflation, according to economists.

The BSP shares the same demand side interventionist creed as her international contemporaries.

They believe that the stealth redistribution of resources from the society (which includes the poor) to the cronies and to the political class will ‘help the economy’. In reality, this functions no more than a political setup, where markets will eventually get the blame, and thus lays the groundwork for more interventionism.

The great Ludwig von Mises presciently warned of this in his Theory of Money and Credit (bold highlights mine)

The undesirable but inevitable consequence of inflation, the rise in prices, provides them with a welcome pretext to establish price control and thus step by step to realize their scheme of all-round planning. The illusory profits which the inflationary falsification of economic calculation makes appear are dealt with as if they were real profits; in taxing them away under the misleading label of excess profits, parts of the capital invested are confiscated. In spreading discontent and social unrest, inflation generates favourable conditions for the subversive propaganda of the self-styled champions of welfare and progress. The spectacle that the political scene of the last two decades has offered has been really amazing. Governments without any hesitation have embarked upon vast inflation and government economists have proclaimed deficit spending and 'expansionist' monetary and credit management as the surest way towards prosperity, steady progress, and economic improvement. But the same governments and their henchmen have indicted business for the inevitable consequences of inflation. While advocating high prices and wage rates as a panacea and praising the Administration for having raised the 'national income' (of course, expressed in terms of a depreciating currency) to an unprecedented height, they blamed private enterprise for charging outrageous prices and profiteering. While deliberately restricting the output of agricultural products in order to raise prices, statesmen have had the audacity to contend that capitalism creates scarcity and that but for the sinister machinations of big business there would be plenty of everything. And millions of voters have swallowed all this.

So the next time a food crisis erupts, you should know the real culprit.

Canadians Have Overtaken Americans in Wealth

From the USNews.com

For the first time in recent history, the average Canadian is richer than the average American, according to a report cited in Toronto's Globe and Mail.

And not just by a little. Currently, the average Canadian household is more than $40,000 richer than the average American household. The net worth of the average Canadian household in 2011 was $363,202, compared to around $320,000 for Americans.

If you're thinking the Canadian advantage must be due to exchange rates, think again. The Canadian dollar has actually caught up to the U.S. dollar in recent years.

"These are not 60-cent dollars, but Canadian dollars more or less at par with the U.S. greenback," Globe and Mail's Michael Adams writes.

To add insult to injury, not only are Canadians comparatively better-off than Americans, they're also more likely to be employed. The unemployment rate is 7.2 percent—and dropping—in Canada, while the U.S. is stuck with a stubbornly high rate of 8.2 percent.

Besides a strengthening currency and a better labor market, experts credit the particularly savage fallout from the financial crisis on the U.S. economy and housing market, which torpedoed home values and gutted household wealth. According to the report, real estate held by Canadians is worth more than $140,000 more on average and they have almost four times as much equity in their real estate investments.

In contrast to most of mainstream reporting, Canada’s strong currency has been imputed as manifestation of a relatively “superior” performing economy than the US.

Of course commodity exports have been partly responsible for the this but has barely been an indication of the resource course: the Dutch Disease.

Canada’s strength, according to the report, has been founded on two aspects: one relatively “better” labor market, and two, America’s boom bust cycles which has “torpedoed home values and gutted household wealth”.

While there are many other factors to consider for comparison, I would focus on three;

One, Canadian banks has outperformed the US. Like in the great depression, the US financial crisis of 2008 barely dinted on Canada’s banking system.

Two, Canada tops the US in Economic Freedom…

Canada ranks 6th in the Heritage Foundation’s world’s country ranking of economic freedom index compared to the US…

The economic freedom in the US has been in a steady descent.

Finally, Canada’s government has been relatively fiscal prudent than her neighbor.

As Cato’s Chris Edwards writes

The spending reforms of the 1990s allowed the Canadian federal government to balance its budget every year between 1998 and 2008. The government's debt plunged from 68 percent of GDP in 1995 to just 34 percent today. In the United States federal debt held by the public fell during the 1990s, reaching a low of 33 percent of GDP in 2001, but debt has soared since then to reach more than 70 percent today.

Bottom line: Economic freedom and fiscal prudence are once again depicted as key to economic prosperity.

Philippine Resource Curse: The Mindanao Security Problem

Most of the people don’t realize that the abundance of natural resources can pose as an impediment rather than a blessing for a political economy.

Wikipedia.org defines one of the main adverse effects of the resource curse as provoking social conflicts: (bold highlights added)

Natural resources can, and often do, provoke conflicts within societies (Collier 2007), as different groups and factions fight for their share. Sometimes these emerge openly as separatist conflicts in regions where the resources are produced (such as in Angola's oil-rich Cabinda province) but often the conflicts occur in more hidden forms, such as fights between different government ministries or departments for access to budgetary allocations. This tends to erode governments' abilities to function effectively. There are several main types of relationships between natural resources and armed conflicts. First, resource curse effects can undermine the quality of governance and economic performances, thereby increasing the vulnerability of countries to conflicts (the 'resource curse' argument). Second, conflicts can occur over the control and exploitation of resources and the allocation of their revenues (the 'resource war' argument). Third, access to resource revenues by belligerents can prolong conflicts (the 'conflict resource' argument).

The continuing insurgency and violence in Mindanao has been a manifestation of such political pathology, although this can be argued as piggybacking on the religious schism brought upon by again the earlier political persecution of Muslims during the Marcos regime.

Today’s Bloomberg article has an apropos observation,

Mindanao is no stranger to murder, with a four-decade insurgency in which as many as 200,000 people have died, frustrating efforts by companies including Xstrata and Sumitomo Metal Mining Co. (5713) to tap an estimated $312 billion in mineral deposits. Death squads that human-rights groups have linked to police and the military, contract killings over land disputes, and al-Qaeda-affiliated terrorists add to the mix of violence.

While Philippine economic growth is accelerating, stocks are close to a record high and the country pursues its first investment-grade credit rating, failure to resolve the unrest and murders in Mindanao damages President Benigno Aquino’s efforts to further boost foreign investment, surveys show.

“There is no evidence of a strategic solution to the security problems in Mindanao,” said Steve Vickers, chief executive officer of Hong Kong-based Steve Vickers & Associates, a corporate-intelligence and security-consulting company. “Some of the activities are truly well-organized terrorism, but much of it is feudalism or out-and-out criminality, which needs to be stamped on hard.”

Business Cost

The Philippines ranked 130th of 142 countries in the World Economic Forum’s latest survey on the cost to business of terrorism; and 112th in terms of crime and violence -- the worst in Southeast Asia. Fifty-four percent of mining companies said issues such as attacks by terrorists, criminals and guerrilla groups are a strong deterrent for investors in the Philippines, the second highest among 93 jurisdictions in a Fraser Institute poll released in February.

The violence also exacerbates poverty, a Jan. 26 report by the foreign chambers of commerce in the country said. Sixty-five percent of respondents in Mindanao, home to about a quarter of the Philippines’ 100 million people, described themselves as poor, according to a May survey by Manila-based polling company Social Weather Stations. That was the highest among the three main regions in the country, and up from 39 percent in March 2010, before Aquino was elected.

I think that the causal link has been reversed; instead of violence exacerbating poverty, it is poverty through political distribution of resources (compounded by politically fueled religion based conflict) that has been exacerbating violence.

This represents another example of the failure of political solutions whose stealth objective has been to advance the interests of the political class and their favorite businesspeople through claims on these resources.

Yet violence, in truth, represents an attack against property, as the great professor Ludwig von Mises warned, (Socialism p.44-45)

All violence is aimed at the property of others. The person – life and health -is the object of attack only In so far as it hinders the acquisition of property. (Sadistic excesses, bloody deeds which are committed for the sake of cruelty and nothing else, are exceptional occurrences. To prevent them one does not require a whole legal system. To-day the doctor, not the judge, is regarded as their appropriate antagonist.) Thus it is no accident that it is precisely in the defence of property that Law reveals most clearly its character of peacemaker. In the two-fold system of protection accorded to having, in the distinction between ownership and possession, is seen most vividly the essence of the law as peacemaker - yes, peacemaker at any price. Possession is protected even though it is, as the jurists say, no title. Not only honest but dishonest possessors, even robbers and thieves, may cIaim protection for their possession.

This brings us to the most viable solution: protection of private property and the promotion of the division of labor, again Professor Mises, (Socialism page 374)

The desire for an increase of wealth can be satisfied through exchange, which is the only method possible in a capitalist economy, or by violence and petition as in a militarist society, where the strong acquire by force, the weak by petitioning. In the feudal society ownership of the strong endures only so long as they have the power to hold it; that of the weak is always precarious, for having been acquired by grace of the strong it is always dependent on them. The weak hold their property without legal protection. In a militarist society, therefore, there is nothing but power to hinder the strong from extending their wealth. They can go on enriching themselves as long as no stronger men oppose them.

Media, experts and politicians can fantasize about political solutions, when the market approach has barely been given a chance to succeed.

Saudi’s Welfare State In Jeopardy

The resource curse which has spawned Saudi Arabia’s welfare economy seems in jeopardy.

From the Business Insider,

The share of Saudi workers employed by the government increased to 90 percent in 2010, up from 83 percent in 2000, according to a profile in The Economist (via @steven_strauss).

Saudi Arabia also increased unemployment benefits and other handouts during the Arab Spring.

The combination of the resource curse and relatively low oil prices and geopolitical tensions is bad for the regime. Says The Economist:

Saudi Arabia’s rulers are painfully aware that, should the region’s democratic wave leave lasting change and a new order in its wake, the kingdom will stand out as a peculiar and seemingly untenable anomaly. Even if the wave recedes leaving nothing but a mess, it has undermined any assumptions of rule by divine right. At the same time the kingdom’s most important alliance, with America, may face increased pressure. The United States is no longer reliant on Saudi Arabia for more than a small fraction of its energy needs. It has pulled out of Iraq and, soon, Afghanistan. It abandoned Egypt’s Hosni Mubarak. This raises doubts about its strategic intentions.

Oil prices at $80 below, for a prolonged period, will exert tremendous financial pressure on the oil dependent welfare based political economy of Saudi Arabia. This is yet another example of how the abundance of resources prevents economies from being competitive and productive.

Also the shale oil revolution will alter the dimensions of geopolitical relationships.

The Business Insider also has an interesting presentation of conflicts that had been caused by the geopolitics of oil.

Resource Curse: Iraq’s Property Bubble

Excess cash from Iraq’s oil wealth have led to massive spending on the property sector.

The New York Times observes, (bold highlights mine)

American-style malls, fixtures in most of Iraq’s wealthy Persian Gulf neighbors, have come late to war-torn Baghdad, but Iraqis are taking to them now like Valley Girls, as a consumer society fueled by the country’s booming oil profits begins to flourish here.

Big malls are being built across the capital. The largest will include a five-star hotel and a hospital, and at one already in operation, a truck arrives each week carrying frozen Big Macs from a McDonald’s in Amman, Jordan.

The construction boom is generally hailed as proof of Iraq’s progress and return to normalcy, more than nine years after the American invasion and six months after the last combat troops departed. But economists and other experts see a dark side. They say the emerging consumer culture masks fundamental flaws in an economy that, like those of other energy-rich countries like Saudi Arabia and Qatar, stifles productive enterprise by relying almost solely on oil profits and the millions of government salaries those profits finance as part of the country’s vast patronage system.

“Basically, Iraq is trying to build a consumer society, not on state capitalism like in China, but on socialism,” said Marie-Hélène Bricknell, the World Bank’s representative in Iraq.

One of Washington’s principal aims was to develop a free-market economy here. Yet with so much oil wealth at hand, Iraq’s leaders have taken few steps to develop a private sector. More than 90 percent of Iraq’s government revenues derive from oil, and with oil production rapidly expanding, the country’s annual revenues could triple over the next five years, to more than $300 billion. With that kind of wealth rolling in, one of the greatest questions the country faces is what it will do with all that cash.

Given the statist mentality of most top Iraqi officials and widespread corruption, diplomats are generally pessimistic that the expected boom in government revenues will be used either to help develop a private sector or to pay for an ambitious public works program — something the country, where 40 percent of the population still lacks access to safe drinking water, desperately needs. Instead, experts worry it will finance more of what Iraq already has: corruption and a huge government work force.

Most of the major industries remain in the hands of the state, and the greatest ambition of many Iraqis is to secure a government job. According to statistics from the Iraqi Ministry of Planning, almost a third of the labor force works for the government. That is more than five million people, and the number is rising, as political parties that run government ministries use paychecks to expand their constituencies.

“The state’s payrolls have massively expanded, not with technocrats but with party functionaries, because the state has become a way of funding party loyalty,” said Toby Dodge, a professor at the London School of Economics, at a recent panel discussion in London about Iraq. “That’s directly undermined and hindered the state’s ability. So we have a huge state.”

Because government salaries are much higher than those in the private sector, independent businesses operate at a disadvantage because, among other disincentives, would-be entrepreneurs cannot afford to hire the most skilled workers. The World Bank ranks Iraq 153rd out of 183 countries on the ease of doing business.

“Building a consumer society on top of nothing is like building a bubble that will burst in the future,” Ms. Bricknell said. With the shopping malls, she said, “you are putting a veneer over a rotting core, basically.”

This is an example of what has typically been called as the resource curse.

According to Wikipedia.org a resource curse is the paradox that countries…with an abundance of natural resources, tend to have less economic growth and worse development outcomes than countries with fewer natural resources.

For as long as there remains resources from which politicians can prey and feast on, channeled through the welfare state, the bureaucracy and state spending, then there will be less incentive to liberalize or make the economy competitive and productive. For now this has been free lunch to the political leaders, bureaucracy, technocrats and their political allies.

To the contrary, oil revenues leads to growing dependency on government and the accompanying spendthrift behavior by political agents, which also contributes to the economic imbalances.

Yet the combination of rapid expansion of parasitical relationship and finite resources (oil) eventually extrapolates to a speed bump or the law of diminishing returns.

Aside from the crowding out effect, government spending undermines the private sector by pricing them out.

Iraq’s resource based economy are reminiscent of the fabled Potemkin Villages or a façade of prosperity or progress.

In reality, Iraq’s oil generated progress from statism and cronyism constitutes no more than a property bubble, again from government policies, which like always, will have a tragic outcome.

Singaporization’ of Georgia: The Economic Freedom Model

A fundamental pillar for the deepening of the global wealth convergence trend is that developing or emerging markets are likely to loosen up on their economies from politics as opposed to the financially desperate developed nations.

Sovereign Man’s Simon Black seems bullish with Georgia, (bold emphasis mine)

One of the biggest reasons for this is that there is hardly any natural wealth in the country. Like Hong Kong or Singapore, Georgia has figured out that it can’t get rich by becoming a resource powerhouse.

Consequently, the last several years has seen what they call the ’de-Sovietization and Singaporization’ of Georgia.

Georgia has shot up in the ranks of international business… from slumming with the likes of Pakistan just a few years ago, to besting places like Estonia and Switzerland.

They’re doing it by tearing down worthless, extractive economic institutions and making things easy for business and investors.

At a 15% flat rate, for example, corporate taxes are essentially as low as Singapore or Hong Kong. Capital gains, in many cases, is zero.

Regulation has been reduced dramatically– registering a property or starting a business, for example, are easier in Georgia than just about anywhere in the world.

And with both a US and UK comprehensive tax treaty (sorry Canada, Australia, and New Zealand), Georgia could make an excellent place to establish a tax efficient international business structure.

Ultimately, its ease of doing business is going to be one of the major growth catalysts for this economy– just like Panama, Dubai, or Estonia before.

Georgia is surrounded by places that are marred in obscene regulatory minefields, Byzantine tax codes, and corrupt officials. In the future, this will make Georgia the natural choice to do business in the region.

What’s the point: Prosperity does not emanate from sheer resources. To the contrary, resources may lead to a resource curse—where economic growth has been impeded by the abundance of resources due to lack of competitiveness. This has mostly been due to cronyism, economic fascism and or state capitalism.

This applies to the Philippines whom has been blessed by resources but has failed to take off economically. Yet instead of focusing on what is needed, politics keeps diverting people's attention to the superficial.

For instance, having Scarborough or Spratly’s has NOT and will not lead to prosperity. This only shows how such political controversies are really a waste of time and energy.

More, such disputes serves only to stir up nationalism and increase the risks of military conflagration at the expense of everyone.

In reality, territorial disputes over supposed resources (which is more a propaganda than reality) represents a façade meant to protect the interests of domestic cronies than of the average Filipinos. (Guess who will get the service contracts for resource extractions once the dispute is settled?)

Add to that the interests of foreign military industrial industries.

What truly is required are reforms ala Georgia: Economic freedom or the Singaporization’ of the Philippines.

The Geopolitics of Oil and Russia’s Knowledge Economy

Writes the Institutional Investor at the Minyanville

All it would take for Russian President Vladimir Putin’s regime to begin to crumble would be for the price of oil to slump to the $70-a-barrel range, former Secretary of State Condoleezza Rice told an audience last week.

Speaking at Everest Capital’s Emerging Markets Forum in Miami, Rice said that if the price of oil remains above the $100-a-barrel mark during the next few years, Putin’s Kremlin would have the means to continue paying off cronies and keeping the current regime — which she described as an “oil syndicate” — intact. With crude currently hovering around $110 a barrel, she said, there is no incentive for Russians to change the nature of their economy.

But the days of a Russia fueled exclusively by petrodollars is waning, especially if the price of crude begins to fall, she said. Ready to replace Putin’s petrostate is a knowledge-based economy crying to break free, said Rice, also a former national security adviser to President George W. Bush and an expert on the Russian political economy. “Wouldn’t it be refreshing to see that the basis of Russian power is the knowledge and creativity of its people? They could be a very big part of the 21st century,” she said.

Rice told the audience at the emerging markets summit a story about how the former president, Dimitri Medvedev, once boasted to her that Russia produced the world’s finest mathematicians. Her response: What if they were actually working in Moscow instead of in Palo Alto and Tel Aviv? She said that Medvedev acknowledged that Russia needed to provide an ecosystem in which its homegrown talent would remain at home and help the country flourish. “The arts and sciences in Russia have been legendary even in the worst of times. Can you imagine how remarkable their economy could be if their leading scientists weren’t leaving for Silicon Valley?” she said.

Besides being extraordinarily dependent on oil, Putin’s regime has done little to censor or monitor the Internet compared to, say, China, according to Rice. The former KGB agent focuses his attention on producing state television broadcasts reminiscent of the Cold War Era — an old-line communist activity that matters little to a younger generation of Russians who receive their news over the Internet, she said.

There are two things of note here:

1. The geopolitics of oil simply posits that the survival of many of the resource dependent welfare states have been moored to high oil prices. That’s because the political leadership uses revenues from resources to buy off the public’s support to maintain their privileges (usually known as the resource curse).

The same desire to use revenues to finance pet projects of politicians also serves at the main incentive for the political leadership around the world, including the Philippines, to engage in resource nationalism during commodity booms

Yet take away the lofty price oil, say by allowing free markets to work and all these autocratic regimes, such as Iran, Venezuela and etc…, collapses. So war will never be necessary for any regime changes. Just allow free markets to clear and despots and tyrants will subsequently vanish.

But the problem is that many western friendly autocratic welfare states are also dependent on elevated oil prices like the GULF states.

Also Obama’s green energy/jobs policies depends on high oil prices too.

The Investor’s Business Daily recently noted that

Energy Secretary Steven Chu admits the administration has no interest in bringing them down…At a hearing this week, Rep. Alan Nunnelee, R-Miss., specifically asked Chu if "the overall goal" of the administration is to "get our price down." Chu's answer was no.

Since this implies that deeply entrenched vested interest groups are in command of the political environment—whose survival again greatly depends on lofty oil prices—the geopolitical imperatives will focus on the manipulation of oil supply and demand, war mongering and importantly inflationist policies. In short, oil politics greatly influence, not only national welfare politics, but also foreign policies.

So while governments may pretend to express care about consumers affected by high oil prices (say by imposing subsidies, cash giving out cash transfers and etc.) and subsequently pin the blame on private companies for greed, in reality, the geopolitics of oil is about the preservation of political entitlements through redistribution of resources from consumers to the political clients (mostly oil producers and allied industries) and their political leadership patrons.

Only free markets will undo such political economic inequality.

2. Russia’s growing knowledge economy is a demonstration of how the internet has been functioning as a pivotal force in reshaping the world’s political economy.

The internet helps spur the development of commercial activities that operates in circumvention of stifling regulations that fosters more underground economy.

Chart from pyramid research

Underground or informal or shadow economies are symptoms of arbitrary and unenforceable laws, lack of property rights, byzantine red tape, high tax regimes, choking bureaucratic regulations, corruption, weak institutions and other political impediments to commerce.

The share of informal economy to Russia’s economy is one of the highest in the world. So as with the Philippines.

I recently quoted the investment guru Doug Casey which I find relevant in the discussion of informal economies,

If you're going to have a ridiculous number of impossible laws, corruption is a good thing. Increasingly, what matters is not the number or even nature of laws on the books in the place you live, but the amount of actual control the state has over private individuals. Corruption subverts idiotic laws; it's the next best thing to abolishing them.

Aside from corruption, big informal economies are to paraphrase Mr. Casey, symptomatic of the subversion of “idiotic” laws. The other way to say this is that anarchy emerges, as expressed by the existence of informal economies, out of the abject failure of the incumbent political order for these political economies.