May 17, 2005: Profuse Domestic Liquidity Will Eventually Flow to the Philippine Stock Market

I just find it quite amazing anent the correlation between the movements of our currency vis-a-vis the US dollar and the stock market, as I have pointed in the past.

Yesterday, as the Peso depreciated quite substantially, our market dropped. Last night, as the US dollar fell against the Euro and Yen, Wall Street recorded a ferocious rally. Meanwhile our Peso was trading modestly higher this morning and the Phisix rallied moderately. It just shows how money flows have been a big influence to the stockmarket's trajectory.

Talking about money flows, if you read today's newspaper about the recent Philippine domestic bond offering, the 91-day T-bill rates have sunk by as much as 14 basis points while the one year coupon dropped by a notable 17.2 basis points. The 91-day papers was almost 6 times oversubscribed (bidded volume was P 11.28 billion against an offer of P 2 billion.)! To quote Businessworld, "Liquidity is at an all-time high, you can see it in the bids," National Treasurer Omar T. Cruz told reporters after the auction." With all these local money sloshing around in an era of low yields it is quite a puzzle why the risk aversion towards the Philippine stock market considering that a 'home bias' is a natural predesposition among investors in general. (Maybe Filipinos simply don't trust in themselves.) Albeit, today's gains in the Phisix was largely fueled by local investors.

Nevertheless, historically, the previous bullmarket was driven by the locals before foreign money joined the bandwagon, could it be the other way around this time? Well, I am inclined to think that despite the warts and all, the Asian Growth story whereby the Philippines is constituent of, should eventually goad local investors back to their domicile market. By then the bull market phase would have been greatly amplified.

That's the way it looks from here,

Benson

Gail Jarvis A 'Benevolent Dictator'

This article published by lewrockwell.com reminds me of the clamor of certain sectors of the society to install a 'benevolent dictatorship' to rule the country, in the hope that, despite the past miserable outcome under the same fold of government, they may turnout to be a better solution to the country's malaise. This insightful piece by Mr. Javis should make us see through these illusions...

A 'Benevolent Dictator'
by Gail Jarvisby Gail Jarvis

In a recent discussion of the problems our country is facing, someone suggested that we need a "benevolent dictator" like Abraham Lincoln. A comment like this is usually made by a person who, like many Americans, has neither the time nor the inclination to look beyond the establishment’s portrayals of history. And court historians with the help of a complicit media, have prevented the true Lincoln from being unmasked for a generation or more. They admit that Lincoln was a dictator, but try to sanitize his actions as being those of a "benevolent dictator," dismissing his illegal and cruel acts as simply minor abuses of power.

Of course, with politicians, abuses of power are a common occurrence. Not a day goes by that we do not read about an elected official’s involvement in some kind of scandal. The more flawed the individual, the more serious the breach of ethics. But these unethical lapses do not usually threaten lives nor cause death. And that is the difference between a corrupt public official and a tyrant. The actions of dictators often cause the loss of lives, yet dictators believe that their actions are defensible because the end justifies the means, however harsh they may be.

Dictators do not feel bound by rules of law; their actions must not be questioned, they do not negotiate, and they silence or eliminate those who oppose their policies. Unfortunately, no form of government has been designed that can prevent the emergence of a tyrant. Dictators simply ignore or circumvent established laws by using cunning verbal platitudes. And too often, those with influence do not speak out against them until it is too late.

But, contrary to what court historians claim, there is no such thing as a benevolent dictator. A brief look at some of history’s more famous tyrants will show that they all were cast from the same mold and they were not benevolent.

Although he was Emperor of Rome for only four years, that was enough time for Caligula to create a legacy of barbaric cruelty. Caligula had been raised by his uncle, the Emperor Tiberius, who decreed that Caligula and his nephew, Tiberius Gemellus should succeed him as joint emperors. But Caligula had his nephew murdered in order to become sole emperor. Caligula soon depleted the treasury and had to impose heavy taxation, including a tax on prostitutes, in order to maintain his lavish, debauched lifestyle. Like most dictators, he aggressively silenced and eliminated any opposition, - primarily with "treason trials" for those he accused of "disloyalty." Conviction of treason was a foregone conclusion and those convicted were executed and their property confiscated. (So many so-called "criminals" were executed that there weren’t enough criminals to fight lions in the arena. On one occasion, Caligula became so peeved by the inadequate number of criminals that he literally ordered spectators to be dragged from their seats and placed in the arena to face the lions.)

Many believe that Caligula was insane and as evidence they cite his attempt to make his horse a senator. But this may have been the Emperor’s way of expressing what he thought of the Roman senate. Caligula created so many enemies that a member of his own guard finally assassinated him.

It shouldn’t surprise anyone that someone who becomes the absolute ruler of a nation at age three would eventually develop despotic tendencies. So it was with Ivan the Terrible who assumed the throne when he was three years old and became Russia’s first tsar at age sixteen. There were positive aspects of Ivan’s reign but they are overshadowed by his tyrannical actions. He enacted laws restricting the freedoms of peasants that eventually reduced them to virtual serfdom. Also, Ivan created the infamous Oprichnina; a personal security force whose purpose was to suppress those, primarily members of the nobility, who offered opposition to his actions. The Oprichnina murdered both nobles and peasants as Ivan viewed his rule as absolute and would not tolerate dissenters. Ivan murdered his own son during an argument. And history reports that a secret dose of poison caused Ivan’s death.

America’s founders thought they had fashioned a republic resistant to a dictatorship. But President Abraham Lincoln brushed aside the Constitution and the Bill of Rights that the Founders had so carefully constructed. "Saving the Union" was Lincoln’s excuse for refusing to meet with representatives from Southern states in order to attempt a negotiated compromise to the impending war. In true despotic fashion, Lincoln decided that there was only one way, his way, to save the Union. (Can you imagine George Washington, Thomas Jefferson or any of our other presidents refusing to attempt a negotiated compromise to a war; especially an internal war that would eventually cost the lives of over 600,000 young men?) Apparently, "saving the Union" was also Abraham Lincoln’s justification for waging war against defenseless civilians in Georgia, South Carolina and other parts of the South. In doing so he established a bloody precedent. Lincoln also shut down newspapers, arresting and imprisoning newspaper editors for being "disloyal."

An infamous example of Lincoln’s oppressive and illegal acts against civilians occurred in October 1862, in Palmyra, Missouri. The Union relied on secret informers to disclose the locations of Confederate sympathizers so they could be arrested. When their informer in Palmyra suddenly disappeared, General John McNeil ordered that a public decree be issued warning that if the informer was not returned within ten days, military forces would execute ten Palmyra civilians. The townspeople didn’t take the threat seriously because they couldn’t believe the federal government would ignore due process and certainly would not slaughter innocent civilians. However, when the informer was not located within the allotted time, ten civilians were selected by lottery and executed. (One was a nineteen year old man whose wedding had been scheduled for the day following his execution.) Newspapers in the South, the North and even Europe furiously condemned this murder of innocent civilians, labeling General McNeil the "Butcher of Palmyra." But President Lincoln rewarded McNeil by promoting him to Brigadier General of the United States Volunteers.

Lincoln conducted his presidency using the same techniques he had used as a country lawyer. He would support one position in one case, and the opposite position in another. And, although a non-believer, he laced his compassionate speeches to jurors with biblical quotations. His passionate, high-flown and manipulative rhetoric worked well with jurors and seems to be the only basis for today’s "Lincoln mythology." But Lincoln’s tyrannical behavior earned him the hatred of thousands of Americans and, as we know, one of those enraged Americans assassinated him.

The designation of history’s most notorious dictator might come down to a contest between Joseph Stalin, Benito Mussolini and Adolph Hitler. Although the enormity of Hitler’s atrocities still amazes us, his method of operation was no different from other dictators.Like Lincoln, Hitler also utilized the military to suppress any opposition to his policies. He shut down newspapers; had books burned, spied on and harassed ordinary citizens, and created concentration camps. Adolph Hitler also borrowed a page from Lincoln’s play book and converted the "saving the Union" ploy to "lebensraum" - living space - as justification for war. Whereas Lincoln had made Southern secessionists his scapegoat, Hitler blamed Germany’s problems on the Jews. So successful was Hitler’s propaganda machine that he was able to eliminate millions of European Jews. But Hitler’s grand scheme was too grandiose and unrealistic to succeed and when it eventually collapsed, the demoralized dictator took his own life.

Smaller nations have also been plundered by dictators as evidenced by Francois (Papa Doc) Duvalier of Haiti. One of Papa Doc’s first acts was the creation of a secret police force, the Tontons Macoute, that was used to silence and eliminate his opponents. In addition to the Tontons Macoute, Duvalier also had a Palace Guard and his own personal army. Like Lincoln, Papa Doc, claiming "seditious acts," arrested and jailed the country’s leading newspaper editors and radio station owners. Duvalier had his opponents executed and even went so far as to execute his own allies if he felt they were becoming too ambitious. Papa Doc was able to terrify the uneducated mass of Haitians into subservience by claiming to be a voodoo spirit of the dead. For years Duvalier duped Washington into giving him larger and larger sums of foreign aid, usually playing the race card by accusing America of leaving his "poor Negro Republic out in the cold." Although during his lifetime Papa Doc took in enormous amounts of foreign aid, he died leaving Haiti in financial ruin; a land of miserable slums filled with a homeless and starving populace.

These tyrants I’ve mentioned were all cut from the same cloth, all were seriously flawed individuals, and all are distinguished by their arrogance, an insistence on the absolute rightness of their opinions and a refusal to negotiate differences. History will remember them for their inhumane treatment of others, especially those who opposed their actions. The fickleness of destiny thrust each into a position of power for which they were unsuited, either by temperament or ability. Consequently, the lives of those they ruled were made worse by their appalling abuses of power.

But there are those who say that we mustn’t forget that Mussolini made the trains run on time; that Hitler planned and constructed the Autobahn, or that Lincoln "freed" the slaves. These rationalizations are supposed to mitigate the barbaric actions of these dictators. However, intelligent people are not fooled. Also these justifications are not true. Mussolini did not make the trains run on time. The corrections to Italy’s railway system began long before Mussolini came to power and even during his reign they were still sub-par. The construction of the German Autobahn began years before Hitler came to power. And, not a single slave was freed during Lincoln’s presidency as a result of any initiative of his - some slaves were voluntarily manumitted by their masters but not as a result of any government directive. Slaves were finally freed as a result of the 13^th Amendment. When it was ratified, Lincoln had been dead for almost a year.

America’s current court historians are doing a great disservice to our country by trying to elevate a malicious dictator like Abraham Lincoln into sainthood. And the continued justification of the dictatorial acts of this president can only encourage the acceptance of dictatorial actions of current and future leaders.

Robert Prechter: The Primary Preconditions for Deflation

Famed contrarian and deflationist advocate, Mr. Robert Prechter of the Elliot Wave International, seems to gloat over the recent US dollar’s successful breakout from its 3-year downtrend. In an article defining the preconditions of a deflationary environment, he implies that the rallying dollar and falling assets elsewhere are probable indications of these. Quoting at length Mr. Prechter...

Deflation requires a precondition: a major societal buildup in the extension of credit (and its flip side, the assumption of debt). Austrian economists Ludwig von Mises and Friedrich Hayek warned of the consequences of credit expansion, as have a handful of other economists, who today are mostly ignored. Bank credit and Elliott wave expert Hamilton Bolton, in a 1957 letter, summarized his observations this way:

In reading a history of major depressions in the U.S. from 1830 on, I was impressed with the following:

(a) All were set off by a deflation of excess credit. This was the one factor in common.

(b) Sometimes the excess-of-credit situation seemed to last years before the bubble broke.

(c) Some outside event, such as a major failure, brought the thing to a head, but the signs were visible many months, and in some cases many years, in advance.

(d) None was ever quite like the last, so that the public was always fooled thereby.

(e) Some panics occurred under great government surpluses of revenue (1837, for instance) and some under great government deficits.

(f) Credit is credit, whether non-self-liquidating or self-liquidating.

(g) Deflation of non-self-liquidating credit usually produces the greater slumps.

Self-liquidating credit is a loan that is paid back, with interest, in a moderately short time from production. Production facilitated by the loan – for business start-up or expansion, for example – generates the financial return that makes repayment possible. The full transaction adds value to the economy.

Non-self-liquidating credit is a loan that is not tied to production and tends to stay in the system. When financial institutions lend for consumer purchases such as cars, boats or homes, or for speculations such as the purchase of stock certificates, no production effort is tied to the loan. Interest payments on such loans stress some other source of income.

Contrary to nearly ubiquitous belief, such lending is almost always counterproductive; it adds costs to the economy, not value. If someone needs a cheap car to get to work, then a loan to buy it adds value to the economy; if someone wants a new SUV to consume, then a loan to buy it does not add value to the economy.

Advocates claim that such loans "stimulate production," but they ignore the cost of the required debt service, which burdens production. They also ignore the subtle deterioration in the quality of spending choices due to the shift of buying power from people who have demonstrated a superior ability to invest or produce (creditors) to those who have demonstrated primarily a superior ability to consume (debtors).

Near the end of a major expansion, few creditors expect default, which is why they lend freely to weak borrowers. Few borrowers expect their fortunes to change, which is why they borrow freely. Deflation involves a substantial amount of involuntary debt liquidation, because almost no one expects deflation before it starts.

US Dollar Breaks Out!

World Bank Press: "A Paradox for Poor Nations: Inventors Face Big Barriers Where Entrepreneurs Are Most Needed"

A Paradox for Poor Nations: Inventors Face Big Barriers Where Entrepreneurs Are Most Needed
World Bank Press

The World Bank has begun an annual survey cataloging the hazards of starting a business in 145 countries. It discovered that, in many poor nations, heavy regulation and red tape impede enterprise. It takes 153 days to start a business in Mozambique, for example, but two days in Canada. Enforcing a contract in Indonesia can cost more than the contract's actual value; doing the same in South Korea costs just 5.4 percent of a contract's value, reports The Wall Street Journal (05/09).

The Philippines exemplifies the World Bank's central finding, writes the business daily: Poor countries with the greatest need for entrepreneurs to speed growth and create jobs also put the most obstacles in their way. Corruption is a large part of why these bureaucratic logjams persist: The more roadblocks there are, the more opportunities for underpaid government officials to secure kickbacks. But there are other impediments to regulatory overhaul. The World Bank report noted that trade unions prevented Peru from reducing mandatory severance payments, while notaries in Croatia for years have stalled its efforts to simplify procedures to start businesses.

While many other Asian countries have produced successive generations of self-made business leaders since World War II, the people who dominate business and innovation in the Philippines are either foreigners or well-entrenched local business families, frequently led by ethnic-Chinese patriarchs such as beer-and-tobacco tycoon Lucio Tan. With the possible exception of Tony Tancaktiong, founder of the successful Jollibee Foods Corp. fast-food chain, a kind of Philippine McDonald's, few others have joined the country's wealthy elite in decades. The upshot is that the Philippine economy is unusually shallow in terms of vibrant home-grown commercial enterprises. Electronic components made there by foreign companies account for 70 percent of all exports, largely because there are few indigenous products to export except bananas, fish and furniture made from local timber. Former Trade Secretary Cesar Purisima, in an interview before his recent appointment as the Philippines' finance secretary, says the country's business culture is flawed. "Traditionally, Filipinos have sought high-paying jobs in banks and corporations rather than setting out on their own," Purisima says. "We have to try to change that and make it easier for entrepreneurs to emerge."

For the Philippines, excessive regulation and the banking system are two big obstacles to local entrepreneurship. The World Bank's business survey found it took 50 days to establish a new business in the Philippines at a cost of 20 percent of the country's average per capita gross national income. That compares with eight days and 1.2 percent of per capita income in Singapore and 33 days and 6.7 percent in Thailand. And banks here traditionally have been more reluctant to lend to up-and-coming entrepreneurs than banks elsewhere in Asia, economists say. In recent years, the country has also been slow to clean up nonperforming loans originating during Asia's financial crisis in 1997-98, further crimping banks' ability to lend to people who often have little more than their ideas to offer as security.

Dow Jones to Underperform Relative to Emerging Markets Over the Coming Years

Even with the recent bounce in the US equity markets it is my view that over the coming decade or so they will underperform relative to Emerging Markets.

Dow Jones 200 Year chart courtesy of BCA Research

Looking at the BCA Research 200-year chart, the US Dow Jones Industrial Averages periodically hits critical points and fluctuates within the level for a span of years before advancing. This suggests that returns would likely be in low single digits or even negative. BCA expects the 10,000 to hold gyrate within the decade. Quoting BCA, “This level has been a barrier this decade, and a broad trading range around the 10,000 level should persist for many years. We are cyclically bearish on U.S. equities, and the Dow should drop below 10,000 before a Fed rate pause and lower bond yields provides relief. The longer-term outlook remains uninspiring, because stocks are not cheap, and the post-1981 era of plunging interest rates and rising P/E ratios is mature. Bottom line: equity investors must play the cycles in order to generate decent returns, and our current advice is to stand aside.”

Where money moves where it is treated best, it looks as if emerging market assets would benefit from a US underperformance



 

The Cure Is Worse Than The Disease

The Cure Is Worse Than The Disease

``A government that is big enough to give you all you want is big enough to take it all away.” - Barry Goldwater, (1909-1998) ex-US Senator

I would like to point out that in spite of the bunch of incorrigible weenies crying for the scalp of the government, the firming Peso and the buoyant Philippine Stock Market is proving these naysayers wrong, thus far.

Yes, we Filipinos are soooOOOooo endemically fragmented to find pleasure in intrigues and controversies such that a foreign writer once labeled us as having a ‘Damaged Culture’. Why so? Not simply because bad news sells, but in the Philippine setting, perpetual gloom and doom is deeply ingrained in our culture because alot of us try to be self styled improvers.

Like political butterflies that jump from one party to the other, there won’t be satisfaction unless power is bequeathed upon them. As Eric Hoffer wrote in his book the True Believer (p.14), ``A man is likely to mind his own business when it is worth minding. When it is not, he takes his mind off his own meaningless affairs by minding other people's business.' This minding of other people's business expresses itself in gossip, snooping and meddling, and also in feverish interest in communal, national, and racial affairs. In running away from ourselves we either fall on our neighbor's shoulder or fly at his throat.” Yes for a start maybe we should comprehensively identify and accept our shortcomings, and work for the collective betterment instead of simply minding someone else’s business.

Take the case of the recent group of improvers or messiahs agitating for an ouster of the incumbent government. These seditious buttheads offer NO CONCRETE viable alternative programs on how to manage the government yet, in the pursuit of power, they would opt to risk the already tenuous financial position that the country is into.

Let me cite an example, because high energy prices have percolated to the consumer goods and services (headline inflation), they clamor for a repeal of the Oil Deregulation Act and to either reinstitute the defunct Oil Price Stabilization Fund (OPSF) or worst, Nationalize the oil industry to head off higher consumer prices.

They expect the government to takeover the buying and selling functions of oil at prices fixed or predetermined and not on market terms. If oil prices in the world market falls below the pegged levels oil companies then will have to pay the difference so the government could shore up its buffer, and if oil prices moved higher than the pegged prices then the government would have to draw out from its buffer to pay the oil companies. The idea looks theoretically plausible but is predicated upon a stable/less volatile global oil price environment. For if oil prices continue to race higher and the buffer is depleted then the government’s recourse would be, needless to say, to borrow money to cover the buffer.

In effect, they are asking for more government subsidies in an era of RISING oil prices (Crude Oil is in a bullmarket for already about 5 years~ with more to come!!!). This translates to BOATLOADS of ADDITIONAL DEBTS for a country at the throes of an economic ‘crisis’. They are prescribing short term gains (relief) at the cost of the future. It is a case of the ‘cure is worst than the disease’.



3 year Chart of New York’s Crude Oil WTIC

Even while their representative economist acknowledges that India and Indonesia have been undertaking policy changes to lift energy subsidies, their pronounced leader have steadfastly espoused on this feckless government interventions.

Yet, in the same mold they refuse to bite bullet with increased taxes (VAT) while the members of clergy included in the group are staunchly opposed to the MINING Act. Imagine, crying for an ouster of the government on xenophobic grounds, of course, they have not directly said it (albeit outspoken detractors during the recently ratified Mining Act of 1995 last December) but instead used the public’s angst on higher consumer prices to promote their outmoded leftist ideals. Nonetheless, the typical scapegoat of corruption remains as the byword for the touted radical change.

So what solutions do they offer?

On the revenue side, they refuse the direly needed additional Taxation and yet reject access and development to an industry that may uplift and alleviate the country’s economic status.

On the spending side, they espouse on more government subsidies to pacify the public’s present predicament which is a result of an intricate WORLDWIDE phenomenon and NOT of a domestic one, and cries to expand government presence to cleanse itself.

The probable result, La plus ca change, la plus c'est la meme choses. The more things change, the more things stay the same.

In addition, how can they curb the de rigueur culprit the ‘corruption’ malaise when expansive government is one of its major causes? According to economist Christopher Lingle, in his article Graft Goes Hand in Hand With Big Government (also posted at my blogsite)…

``Instead of expanding political power to eradicate corruptive practices, the opposite is needed. An essential problem with corruption is that it most often promotes excessive government power, so reducing political intervention in people's lives is the right direction. A distrust of the private sector and unfettered markets invites regulation by public officials that issue licences and permits. But these monopolistic powers meant to serve citizens create power imbalances that can impose harm on citizens that face incentives to protect themselves through bribery. Instead of moralising to prevent public graft, it is better to undertake legal reform of the institutional infrastructure. A fundamental change in political culture combined with a shift away from granting governments with extensive powers of intrusion can help root out corruption.”

Finally, these self-righteous imbeciles should as well train their guns on the following:

1. US Federal Reserve for expanding credit to an unprecedented scale and its negative real interest rate policy which fueled massive speculative positions globally,

2. The excess printing of paper monies by the collective governments stoking an inflationary environment,

3. The OPEC members for nationalizing their respective oil industries thereby misallocating capital investments that led to the present underinvestments,

4. The Chinese government for adapting a market-based economy (from less than 100,000 cars in 1994 to over 2 million cars 2004),

5. The US dollar-remimbi peg that accelerated an infrastructure and real estate boom thereby increasing demand for oil,

6. The war on terror that has disrupted oil supplies,

7. The Bush administration for the continually loading up the Strategic Petroleum Reserve, and

8. The lawyers and environmentalists for increased regulations on explorations and oil refinery requirements.

Does a change in the administration alter any of these landscapes? I guess not.

 

Christopher Lingle: Graft Goes Hand in Hand With Big Government

In the local arena, media brims with dreary news articles spotlighting on widespread and endemic corruption as the major deterrent to the Philippines economy. Yet, for all these self-righteous cavilers, it appears that the only known solution to the current predicament is an outright change of government (Quo Vadis?). In other words, self-styled messiahs preaching motherhood solutions, which practically reinforces corruption's vicious cycle. It is a case of having a 'cure that is worse than the disease'.

This propitious article from Christopher Lingle singles out Big Government as the main culprit to the systemic graft culture…

Graft Goes Hand in Hand With Big Government

By Christopher Lingle*
Bangkok Post

March 22, 2005

Some of the most corrupt governments in the world are in Asia, according to Transparency International. Bangladesh is second from the bottom with Indonesia, Pakistan, Vietnam, Papua New Guinea, India and the Philippines hovering near the abyss. An annual survey of executives by Hong Kong-based Political and Economic Risk Consultancy, or Perc, identifies the most corrupt Asian governments. While Indonesia tops the chart for the region, India is close behind, with oppressive bureaucracies demanding bribes at all levels of government that range from payment for admission to better schools to payment for installation of basic services.

While China is third on the Perc list, it falls in the middle of the Transparency International ranking. In all events, Beijing reports that there are record inflows of foreign direct investment despite costs of corruption estimated at 3-5% of gross domestic product. Official Chinese sources cite cases of more than 4,000 corrupt officials that absconded with a total of at least $600 million (23.2 billion baht). Managers of the Guangdong branch of the Bank of China stole over $483 million (18.6 billion baht) in 2001 before fleeing the country. Other senior managers, including the head of the Bank of China, authorised large loans to friends or family members that became non-performing.

This sort of corruption is also a structural and deep-rooted problem in many emerging market economies outside of Asia. In some countries, illicit payments had a benign beginning that was interpreted as an expression of generosity. This perception probably contributed to a general tolerance of low levels of corrupt and illegal actions. A wide agreement on corruption points to the abuse of authority and misuse of discretionary power in pursuit of personal interests. However, considerable confusion and disagreement exists over the impact of corruption.

One flawed perception of bribery is that it acts as a lubricant to facilitate the management of political affairs. This bizarre view suggests that bribing officials can be beneficial to economic activity and increases the efficiency of the bureaucratic system. But corruption tends to undermine political stability. Japanese prime ministers and other high officials have been forced from office and President Joseph Estrada of the Philippines was jailed for corruption. China executed two top officials for taking bribes, and South Korea has recorded many high-level bribery scandals.

Similarly, corruption pollutes society by lowering the authority of public officers. And it offends a sense of social justice, since a disproportionate burden of corruption falls upon lower income groups that are most vulnerable to rapacious public officials. What is perhaps worse is that corruption can reinforce the survival of dishonest officials or dictators by providing them with illicit funds. And allowing corruption can be a means for despots to control their citizens since those that engage in corrupt activities are less likely to object to abuse of power by rulers.

It is a mistake to characterise the economic effects of bribery as beneficial. This nonsense ignores large economic costs. For example, corruption reduces economic efficiency by destroying the notion of fair competition and by imposing costs on the private sector that include higher costs for international credit. According to officials with the Asian Development Bank, as much as one-third of public investment in some Asia-Pacific nations has been lost to corruption. A UN report estimated that eliminating corruption would boost India's economic growth by 1.5 percentage points a year.

The financial turmoil in Asian emerging markets in 1997-98 can be attributed to a reassessment of risk that resulted in a crisis of confidence and net outflows of capital. Governments unable to provide an environment to protect asset values or with domestic financial institutions seen as non-responsive to market signals were punished.

There is also confusion over how to end corruption. Many observers see corruption as a moral issue and blame greed. This moralistic perspective emphasises the increased moral standards of public servants or the imposition of severe punishment on violators to eliminate graft. But self-righteous pleas to end corrupt practices do not alter flawed incentive structures that arise from legal and cultural institutions. Even moral people may act improperly when facing warped incentive structures. Similarly, immoral and imperfect individuals tend to act more appropriately if the incentive structure rewards them for doing so.

Instead of expanding political power to eradicate corruptive practices, the opposite is needed. An essential problem with corruption is that it most often promotes excessive government power, so reducing political intervention in people's lives is the right direction. A distrust of the private sector and unfettered markets invites regulation by public officials that issue licences and permits. But these monopolistic powers meant to serve citizens create power imbalances that can impose harm on citizens that face incentives to protect themselves through bribery. Instead of moralising to prevent public graft, it is better to undertake legal reform of the institutional infrastructure. A fundamental change in political culture combined with a shift away from granting governments with extensive powers of intrusion can help root out corruption.

Corruption and other abuses of government are more likely to occur when individual rights and freedoms are sacrificed to promote collective goals or collective rights. For example, apartheid excluded blacks from political and economic participation by giving special rights to the South African white community. These abuses could not have occurred if individual rights were protected. Individuals wishing to live in a free and open society with less corruption should promote free and open economies with less government involvement in their lives. Competition in open markets involves legitimate actions and not unlawful means, so that corruption between consumers and suppliers is unlikely with both parties having equal power. When governments are constrained by the rule of law that protects individual rights, there will lead to less corruption and greater freedom of actions for all citizens.

About the Author: Christopher Lingle is global strategist for eConoLytics.

World Bank Press: Support Deal 'Could Become Asian IMF'

World Bank Press: Support Deal 'Could Become Asian IMF'

The currency swap agreements in East Asia providing mutual protection from financial emergencies could develop into an Asian monetary fund (AMF), Masahiro Kawai, a leading Japanese proponent of regional financial integration, said yesterday, The Financial Times reports.

Agreed after the 1997-98 Asian financial crisis, and known as the Chiang Mai Initiative, the $39 billion in bilateral support arrangements between Japan, China, South Korea and 10 south-east Asian countries are expected to double in value and may be transformed into a multilateral system, Asian finance ministers said on Wednesday. "The Chiang Mai Initiative has the potential to become an Asian monetary fund," said Kawai, a former Japanese finance ministry official and World Bank economist who will head a new regional financial integration office at the Asian Development Bank (ADB). He was speaking in Istanbul, where the ADB was holding its annual meeting until Friday. Kawai is an adviser to Haruhiko Kuroda, the ADB president who has made it his mission to promote financial co-operation in Asia.

The suggestion of an AMF is controversial because it was proposed by Japan and others after the Asian crisis but rejected by the US and the International Monetary Fund. Critics argued that a regional fund would duplicate the IMF's work and might be unwilling to impose the harsh financial conditions on Asian governments that could be required in an emergency. Kawai said the idea of a secretariat for the Chiang Mai Initiative - a first step in the creation of a fund - was "clearly on the table", although there would inevitably be arguments about where it should be based.

East Asian governments have already begun loosening their adherence to IMF "conditionality". The finance ministers agreed this week to double the proportion of emergency funds that could be disbursed without the beneficiary implementing an IMF program to 20 percent from 10 percent. Kawai acknowledged that the Chiang Mai states did not yet have the bureaucratic structure to conduct the sort of detailed economic surveillance done by the IMF.

Despite receiving multi-billion dollar bail-outs, some Asian governments criticized the IMF for its handling of the 1997-98 crisis, and Kawai said the IMF's expertise in monitoring national economies could be complemented by a fund with an understanding of the region and how it interacted. "The Asian crisis experience told us that this purely country-focused approach doesn't work, because of contagion (between one crisis-hit country and another)," Kawai said. Among the next steps suggested by Kuroda and Kawai was the creation of a mechanism to link Asian currencies, as the European currencies were in the run-up to European monetary union.

Kyodo (Japan) reports that East Asian countries achieved a major milestone on a long road to a European Union-type regional monetary union at the ADB Annual Meeting. A principal pillar of their agreement is to substantially increase the total amount available for bilateral currency swaps. Ministers said in a joint statement that they agreed on a "significant increase in the size of swaps" and that they "favored an enhancement of up to 100 percent increase of the existing individual arrangements."

"When it comes to expanding the size, we must try to conclude bilateral negotiations as soon as possible, because we need to send a clear message that we will never let a crisis like the Asian crisis, or a liquidity crisis, happen again," Japanese Finance Minister Sadakazu Tanigaki said. Another is to evolve the network of currency swaps into one to be operated multilaterally, rather than bilaterally, so as to prevent any future financial crisis in one country from spreading into a regional one.

****

Prudent Investor says…

It would be natural for the US to oppose any form of regional financial integration, considering that its economy, particularly the consumers which makes up about 70% of the country’s GDP, have been indirectly subsidized by Asian Central Banks. With more than a trillion dollars in cumulative foreign exchange reserves, the purported financial integration means less demand for US dollars which also translates to diminished economic, financial and political hegemony.

On the other hand, Asia stands to benefit from increasing trades and growing capital flows within its borders, which could be accentuated by the proposed integration.

In a nutshell, the denouement of the current wealth redistribution from the US to Asia would take its form via Asia's economic and financial integration.

Reuters: Emerging debt-Market shrugs off GM, Ford downgrades

During the past month or so, while rising interest rates anxieties increased the risk aversion profiles of investors thereby affecting emerging assets values, flagging US corporate debt status as that of General Motors and Ford exacerbated these conditions. However, with the recent downgrade of the debt ratings of GM by S & P 500 the sentiment appears to have shown that investors have learned to distinguish between the fundamental profiles of US corporate debt from emerging market assets as demonstrated by emerging markets holding ground in spite of the downgrades.

Quoting a Reuters report…

"Today encapsulated the scene of the last few months, which is a tug of war," said Mohamed El-Erian, who manages $23 billion in emerging market debt as chief emerging markets portfolio manager at PIMCO, the world's largest bond fund.

"On the one hand you have pressure on the market coming from external factors ... the other side of the tug of war is improving fundamentals and the general maturation of the asset class, which is bringing in more investors."

"The selloff, which was the typical kneejerk to bad credit news, immediately produced buyers," he said. "We snapped right back and we're ending the day stronger."

"The more internal resilience the asset class shows, the less willing hedge funds are to short the asset class," he said. "The roller coaster (rides) are becoming much shorter."

World Bank: Manila Ponders Securitization Of Remittances.

Finally, an innovative way to access unexploited reserves.....

World Bank: Manila Ponders Securitization Of Remittances.

The Philippine government is looking to use securitization to tap into the billions of dollars of foreign currency sent home each year by the 7.5 million Filipinos living or working overseas, The Asian Wall Street Journal reports.

Among the ideas being touted by foreign and local banks, as well as supranational bodies such as the Manila-based Asian Development Bank and the World Bank, is securitization whereby future remittance flows would provide the assets behind a bond issue. The structure has been used successfully in places such as Mexico, Brazil and Turkey, but never before in Asia -- surprising, perhaps, since India and the Philippines are the world's largest recipients of remittances after Mexico.

In February, Filipinos working outside the Philippines sent back $720 million to their families, 19 percent more than a year earlier. The Philippine central bank projects remittances to reach $9 billion this year, compared with a record $8.54 billion set in 2004, as more Filipinos seek work overseas and are increasingly taking higher-paid jobs as nurses, engineers or musicians. Repatriated funds last year accounted for about 10 percent of nominal gross domestic product and 15 percent of total current-account receipts.

For decades, that cash has gone -- through banks, remittance centers or in suitcases -- back to workers' families to be spent on food, education and homebuilding or, if there is any left over, on excess consumption or to idle in the bank. But the government, for one, has been considering a better use for the remittances. Iluminada Sicat, officer-in-charge in the Economic Statistics department at the Finance Ministry, suggested they could be channeled to invest in small businesses. Overseas workers' earnings also could be used to finance the country's foreign-exchange requirements, she said. The ADB also is pushing the Philippines to find ways of harnessing the cash flows to support developmental needs. In 2003, one-quarter of the 86 million Philippine population still lived below the poverty line. National Treasurer Omar Cruz said last month the government was again studying the idea.

Bloomberg's John Berry: U.S. Shows Some Parallels With Argentina of '90s

While the Philippines’ economic and financial landscape may be vulnerable to a cataclysmic debt default ala Argentina, it represents only an iota to the building seismic movements underneath the global financial and economic setting. Bloomberg Federal Reserve analyst John Berry notes that a book ``And the Money Kept Rolling In (And Out)'' (published by Public Affairs) written by his colleague, Washington Post financial reporter Paul Blustein, of the US turning into an Argentina ``It could happen here,'' Blustein writes.

``The words of Miguel Kiguel, Argentina's former finance undersecretary, are apropos: `Once you know the markets are there, and there is financing, you behave as if financing will be there forever.' This is a stark reminder of the current complacency among incumbent political and administrative leaders.

China Signs Trade and Investment Deals With Philippines Worth $1.5 billion

China sealed a $1.5 billion trade and investment deal with the Philippines today. Most of which were centered on the MINING and Energy and OIL exploration industry. Yet if you look at our Phisix these are the main issues being jettisoned and disgorged by local investors as if these industries are condemned to perpetual damnation. I wonder who is accursed? This is the report from BBC...

That includes agreeing investments and loans worth more than $1.5bn, to fund Philippine infrastructure and mining projects.

Mining is a key growth area as President Arroyo tries to cut debt, improve the economy and restore investor confidence.

The government says the Philippines is home to vast reserves of mining wealth, most of it unexploited.

China's state oil firm also agreed to a possible $10m investment to look for oil off the coast of Palawan island in the western Philippines.

As Chinese firms look to fuel an economy that is expected to grow 8.5% this year, the Philippines hopes to benefit from that enormous appetite for resources.

World Bank: Nigeria At Risk Of $33 Billion Default

It has been a de rigueur to brand the Philippine economic setting as having segued into a state of crisis or of concerns of the possibility of ending up in an Argentinean-like morass. While the domestic financial balance sheets do reflect an exigent impasse requiring urgent reforms, it is not time to push on the panic button.

Because most of us are too confined with the domestic perspective this press release from World Bank would show that there are countries that have even more pressing problems than us…take for example Africa’s largest oil producing country, Nigeria…

World Bank: Nigeria At Risk Of $33 Billion Default

Nigeria is heading towards an Argentinean-style default on its $33 billion of overseas debt unless western creditors accept a deal to alleviate the country's financial burden, The Guardian (UK) reports a delegation from west Africa's biggest economy said in London yesterday.

As part of a four-country visit, the senior politicians warned that public unrest was growing over the hard-line approach adopted by the west and that time was running out for negotiations. Farouk Lawan, the chairman of the finance committee in Nigeria's house of representatives, said: "It is unconscionable that Nigeria has paid GBP3.5 billion in debt service over the past two years but our debt burden has risen by GBP3.9 billion - without any new borrowing. We cannot continue. We must repudiate this debt." Lawan, who moved a resolution last month calling on the government of president Olusegun Obasanjo to repudiate the debt, said parliament might trigger a crisis by refusing to sanction the funds to pay creditors.

"We are getting close to saying that we won't pay."

Britain is Nigeria's largest creditor, with 21 percent of its debt, and Gordon Brown has been backing an initiative to use Nigeria's windfall from higher oil prices to pay the creditors a fraction of what they are owed. Treasury sources in the UK said that no figures were at present on the table, although the starting point for negotiation has been a paper from a Washington think-tank suggesting that Nigeria should pay 30 cents for every dollar owed. That would mean Nigeria paying around $9 billion from its $17 billion reserves. The UK believes a strong Nigeria is vital for growth in the whole of west Africa, and has been seeking to broker a deal.

Other creditors have questioned whether Nigeria has really overcome the corruption that has bedeviled the country for decades and have expressed concerns about the lack of an International Monetary Fund economic reform program.

The group said Nigeria's plight was far worse than that of Argentina, which this year presented its creditors with a take it or leave it offer to pay 30 cents for each dollar owed. Lawan said 79,000 children under five were dying every month through a lack of healthcare, clean water, food and shelter. Todd Moss, of the Center for Global Development in Washington which came up with the proposals for the debt write-down, said the creditors should accept an offer. "In 2005 Nigeria has an unusual amount of cash on hand and an opportunity finally to resolve its problem. The creditors also have solid political, strategic and humanitarian reasons to cut a deal. Missing this opportunity will not only lose creditors their best chance to collect this debt but could also threaten the economic and democratic reforms in one of Africa's largest and most pivotal countries."

Meanwhile, in a special report on Nigeria, The Financial Times writes that the stakes have been rising in Nigeria's bid for relief on its foreign debt which, at almost $36 billion, is the largest in Africa. The government wants a deal from the Paris Club of bilateral government creditors, which holds the bulk of the debt, for a two-thirds reduction.

But arguing the case for debt forgiveness has been hard at a time when Nigeria has been using high oil export prices to build record foreign exchange reserves, now equivalent to abut 60 percent of its outstanding external debt. But Ngozi Okonjo-Iweala, finance minister, insists: "We don't want to wait until oil prices crash." Britain, the leading creditor with about $8 billion outstanding, has been Nigeria's chief supporter.

Nigerian negotiators say the US has also been sympathetic, with the strongest reservations coming from the Netherlands, Germany and Japan. Paris Club negotiators, however, want first to see proven results of Nigeria's reforms, especially in tackling corruption.

The Financial Times also writes in a separate piece that Nigeria has been growing in real terms at an annual rate of six percent or more but is still searching for a more diversified economy that would create jobs and make a decisive impact on poverty. The counterweight to Nigeria's position as Africa's largest oil producer is its growing population of more than 130 million. Oil revenue per head is less than any of the other top exporters. Last year's, after deduction of its share of production costs, worked out at $0.53 per day for each Nigerian. The windfall from oil prices last year brought savings of $5.9 billion from revenues above the budgeted price level of $25 a barrel. Half of this is earmarked for priority spending areas this year, such as education, health and vital infrastructure facilities, the remainder kept as a buffer against future oil price volatility, in an effort to avoid the zigzag growth pattern Nigeria has suffered in the past.

Philippine Crisis Pales in Comparison to Exploding Global Imbalances

Philippine Crisis Pales in Comparison to Exploding Global Imbalances

Yes, the Philippines does look as if it is in a perennial state of quagmire. However if one would compare the current global imbalances with that of the Philippines, our so called ‘crisis’ pales in comparison to whatever we are facing internationally. In a strongly worded article ex-Fed Chairman Paul Volker warns that “We (US) are skating on THIN ICE” which I strongly suggest that you read.

Moreover, if Argentina, which we are unjustifiably lumped with (according to diverse views of various renowned economists-pegged exchange rate, raising taxes during economic slowdown, rigid IMF conditionalities as possible culprits for its default-totally dissimilar to our economic landscape), is the paragon of the economic turmoil that we are currently faced with, then Buenos Aires’ successful renegotiation of its debt default, the largest ever in the world of more than $100 billion, makes one wonder if this default option would also present to be viable for the Philippines. For your information about 76% of the total sovereign creditors accepted a haircut of about 30 cents to a US dollar. This means that creditors took in about 70 cents loss!

And to think that this should lead Argentina to an economic pariah is certainly a misconception! Well, the debt negotiation resulted to IMF infusing $3billion, post negotiations we note that China, South Korea and several regional private firms have been investing, and remittance from its overseas workers are ballooning, it looks as if Argentina, despite its economic woes has progressed a lot and beyond any expert’s expectations!

Let me quote Larry Rohter of New York Times, ``The Brazilian oil company Petrobras bought a stake in a leading energy company. Another Brazilian company, AmBev, has acquired a large interest in Quilmes, Argentina's leading beer brand, and a Mexican company has bought up control of a leading bread and cake maker…Asian countries, with China and South Korea in the lead, have begun to move in. During a state visit last month, the Chinese president, Hu Jintao, announced that his country plans to invest $20 billion in Argentina over the next decade…But the bulk of the new investment comes from Argentines who are beginning to spend their money at home, either bringing their savings back from abroad or from under their mattresses. For the first time in three years, more money is coming into the country than is leaving it.”

Just look below at Argentina’s key benchmark index, does it manifest of a crisis after its debt default in December 2001?

Argentina Merval Index

In fact Argentina has been bouncing back strongly on strong commodity prices and investments from foreign private and state firms, and local overseas remittance money as stated above.

So if you guys really want to consider the Argentine option then I would suggest that you read an article by Grant Nülle of the Ludwig Von Mises institute who advocates debt repudiation for the Philippines in ``Raiders of the Taxpayer’s Money”, although I do not support such moves because it is fraught with risks, especially in a global monetary environment which appears to be slowing in liquidity growth.

Finally, the appreciating peso should help alleviate our debt burdens. (Haven’t you noticed the paradox, despite the worrisome debt burdens the peso continues to appreciate?)

Again global macro developments call for Asian currencies to adjust relative to the overvalued US dollar to be able to mitigate the growing current account imbalances and bubbly credit markets worldwide, and thus the Peso should benefit from the regional flows despite being by plagued by its domestic debt burden.

Vital fiscal and governance reforms are thus required. However, worst comes to worse there is always an option for some kind of settlement (restructuring) and we must not to be hoodwinked by spooky headlines.

The Economist: Unrest that riles Tokyo and worries Beijing

Growing tensions between China and Japan underscores emerging geopolitical risks...According to the Economist…

China’s government worries that if it is seen as too weak towards Japan, or cracks down too hard, the protesters could turn against the party. In the last century, pro-democracy unrest in China was often closely linked with patriotic demonstrations. Many participants in the recent protests have been university students, a group kept under particularly close watch by the authorities since the student-led protests in Tiananmen Square in 1989. The internet and mobile phones have enabled rapid mobilisation (organisers say more than 20m people have signed an electronic petition against Japan’s UN bid). The nationalist genie, once unbottled, could prove hard for China to restrain.

Is China showing signs of losing grip?

A Whiff of Stagflation?

Too much rate hikes pricks the bubble, a slowdown would probably compel the US Fed to ease; the probable consequence…stagflation. Discerning excerpts from Mr. Paul Krugman published on the New York Times entitled “A Whiff of Stagflation”

``What's driving inflation? Not wages: labor costs have been falling, because wages are growing less than productivity. Oil prices are a big part of the story, but not all of it. Other commodity prices are also rising; health care costs are once again on the march. And a combination of capacity shortages, rising Asian demand and a weakening dollar has given industries like cement and steel new "pricing power."

``It all adds up to a mild case of stagflation: inflation is leading the Fed to tap on the brakes, even though this doesn't look or feel like a full-employment economy…Can the Fed stop raising interest rates and go back to rate cuts without causing the dollar to plunge and inflation to soar?

``Or suppose that there's some kind of oil supply disruption - or that warnings about declining production from Saudi oil fields turn out to be right. Suppose that Asian central banks decide that they already have too many dollars. Suppose that the housing bubble bursts. Any of these events could easily turn our mild case of stagflation into something much more serious.”

How serious, hyperinflation or deflation?

Newsday's James Pinkerton: 3 signs of impending 'Asian Century'

James Pinkerton: 3 signs of impending 'Asian Century'

James Pinkerton writes in the Newsday that geopolitics have been shaping into `three wheels’, ``First, China gets closer to India, as the two nations seek a New Asian Order. Second, China grows more hostile to the United States and Japan. Third, China bolsters nuke-crazy North Korea.

In Favor of A National ID System?

In Favor of A National ID System?

The following presentation of a fictional pizza ordering scenario demonstrates of how GOVERNMENTS intends to run our lives. Turn on your speaker and click on link:

http://georgetoft.com/presentations/information_privacy/pizza_order.swf