Vietnam’s Relative Policy Success Is Mostly Premised On Less Interventionism

In a recent comment at a social web platform, a local politician commented that the reason for the marginal improvements in Vietnam relative to the Philippines had been due to the “effective implementation of their policy”.

While it is true that political policies serve as fundamental framework to social activities, the question that needs to be identified is the kind of policies involved and to what extent the so-called ‘effective implementation’ which results to positive externalities.

For instance, the politician further noted that domestic agricultural issues had signified as a seemingly timeless unresolved imbroglio which needs to be addressed. Unfortunately, he didn’t say how.

Yet in citing Vietnam, what was not elaborated was that the so-called the ‘effective policies’ in agriculture had been the decollectivization or privatization of agricultural lands which served as a crucial step in the transition to a market economy.

As World Bank’s Martin Ravallion and Dominique van de Wallel wrote,

Vietnam's land reform of 1988 abandoned the collective farming system that had been introduced in the 1960s. The 1988 Land Law and its key implementation directive-"Resolution 10"-gave individual households long-term use rights over the collectives' land and other resources. Four million hectares of land were thus scheduled for effective privatization.

Opaque generalized political statements frequently leads to confusion. Statements like this would seem mellifluous to hear for the economic ignorant, yet lack the teeth in terms of specific actions.

Essentially, the fundamental reason for the apparent relative policy success of Vietnam is because of the thrust towards trade liberalization or economic freedom, which implies less government interventionism or political meddling in distributing scarce resources. And this runs contrary to the intone of the local politician.

This from McKinsey Quarterly,

Vietnam began to liberalize its economy in the 1980s, when the country’s leaders launched doi moi (or “renovation”). It was only after President Clinton lifted the US trade embargo in 1994, though, that multinationals began to pile in. Since then, Vietnam has taken off. In 2007, it joined the World Trade Organization (WTO)—just in time for the global financial crisis. The country weathered the storm well, posting 5 percent growth in 2009.

The remarkable embrace of globalization by Vietnam has prompted for a sharp recovery from a once war ravaged economy.

The following chart from the KOF Index of Globalization

Vietnam has undertaken substantial steps to reduce bureaucratic red tape.

The following chart from World Bank’s Doing Business presentation

Vietnam has also reduced and streamlined taxes.

According to World Bank’s Doing Business 2010

Vietnam cut the corporate income tax rate from 28 percent to 25 percent and eliminated the surtax on income from the transfer of land. It also adopted a new enterprise income tax law and value added tax law. In addition, increasing competition in the logistics industry and the application of new customs administration procedures as part of the World Trade Organization (WTO) membership reform program have reduced trade delays.

So overall, the marginal edge Vietnam has over the Philippines isn’t because of more politics but because of MORE TRADE.

As one would note from the above illustration, Vietnam has surpassed the Philippines in attracting investments by reducing hurdles to investments or has made the political and legal environment more conducive to trade and investments.

And the following chart from Google’s Public data seems to corroborate this.

Vietnam’s external trade (% to GDP) has sharply surpassed the Philippines. (Caution: currency values appear less of an influence compared to ease of business environment)

Economics shapes politics.

It is true that Vietnam remains politically a one party authoritarian regime, where according to the Heritage Index of Economic Freedom, “political repression and the lack of respect for basic human rights remain serious concerns.”

Chart above from KOF Index of Globalization

Nevertheless if economic trends should continue to influence politics, political trends may also gradate towards more openness or democracy. But this isn’t certain, specially not over the near term, as Vietnam may be following China ‘dualistic’ model.

Meanwhile, economic freedom is also reflected on social freedom.

Again from KOF Index of Globalization

And here is more proof that Vietnam’s society have been integrating with the world, this from McKinsey Quarterly,

In 2009, the General Statistics Office estimated that Vietnam had 5 million Internet subscribers and 18 million Internet users. Those figures are impressive for a country at a relatively early stage of digital development, and other estimates suggest the number is even higher. In Hanoi and Ho Chi Minh City, for instance, up to half of the population is now online, spending more than two hours a day, on average. Expenditures on digital marketing for the country as a whole, however, are still very low: only $15 million, according to Cimigo, a market research firm. As Mai Huong Hoang, the chairwoman of one of Vietnam’s leading advertising agencies, the local branch of Saatchi & Saatchi, noted, “TV is still king in Vietnam, because women are the decision makers in the family and they spend a lot of time watching TV.” However, recent McKinsey research in other emerging markets, such as China, India, and Malaysia, suggests that the pace of digital change can be rapid, especially with younger people. Therefore, businesses—particularly consumer goods companies—shouldn’t ignore digital media in their marketing plans.

Bottom line: “Effective policy implementation” means less political interventionism, where people will be incented to harness their innate talents and skills in an environment fertile for business growth.

In other words, Vietnam’s success formula has been the relatively more aggressive adaption of economic freedom compared to the Philippines.

And more politics won’t serve as the elixir to the Philippines’ dismal and lagging performance.

Power of Slow Change: Dying Mass Media, Endangered Traditional Politicians

Another marvelous stuff from marketing guru Seth Godin (all bold highlights mine)

Now, though...When attention is scarce and there are many choices, media costs something other than money. It costs interesting. If you are angry or remarkable or an outlier, you're interesting, and your idea can spread. People who are dull and merely aligned with powerful interests have a harder time earning attention, because money isn't sufficient.

Thus, as media moves from TV-driven to attention-driven, we're going to see more outliers, more renegades and more angry people driving agendas and getting elected. I figure this will continue until other voices earn enough permission from the electorate to coordinate getting out the vote, communicating through private channels like email and creating tribes of people to spread the word. (And they need to learn not to waste this permission hassling their supporters for money).

Mass media is dying, and it appears that mass politicians are endangered as well.

As the information based economy deepens, knowledge will likely be more dispersed, aided by the web. And that the power of traditional influences will get diminished, as the public’s attention gravitate towards niche based interest groups, founded on fragmented and specialized knowledge.

And as we long been saying, politics is NEVER static, they always evolve. The reshaping or the ‘digitalization’ of the economy will likewise reconfigure politics. Perhaps, seen in the line of niche marketing which could likewise evolve into realm of niche politics.

The Silent Revolution: Election Boycotts

In reading Frank Chodorov’s fantastic article, it dawned upon me that I have been an unwitting 6-year practitioner of Mr. Chodorov’s ‘silent revolution’: I haven’t exercised my rights to suffrage in protest to what I perceive as the current farcical ‘social democracy’ which hallmarks the Philippines’ political system.

Here are some rudimentary reasons how and why election boycotts could be utilized as one avenue to institute political change.

These great excerpts from Mr. Chodorov: (all bold highlights mine):

Why should a self-respecting citizen endorse an institution grounded in thievery? For that is what one does when one votes.

In the quiet of his conscience each citizen pledges himself, to himself, not to give moral support to an unmoral institution, and on election day he remains at home.

the fact that every election is a seizure of power. The balloting system has been defined as a battle between opposing forces, each armed with proposals for the public good, for a grant of power to put these proposals into practice. As far as it goes, this definition is correct; but when the successful contestant acquires the grant of power toward what end does he use it — not theoretically but practically? Does he not, with an eye to the next campaign, and with the citizens' money, go in for purchasing support from pressure groups? Whether it is by catering to a monopoly interest whose campaign contribution is necessary to his purpose, or to a privilege-seeking labor group, or to a hungry army of unemployed or of veterans, the over-the-barrel method of seizing and maintaining political power is standard practice

Remember that the proposal to quit voting is basically revolutionary; it amounts to a shifting of power from one group to another, which is the essence of revolution.

All this would change if we quit voting. Such abstinence would be tantamount to this notice to politicians: since we as individuals have decided to look after our affairs, your services are no longer needed. Having assumed social power we must, as individuals, assume social responsibility — provided, of course, the politicians accept their discharge.

Revolutions starts with the individual.

By refusing to exercise our rights to suffrage we should put notice to the everyone, especially to the power hungry politicians, that we expect genuine “change” by fundamentally allowing individuals to assume greater social power and not some pretentious cycles of ‘personality based welfare-free goodies based politics’.

All it takes is to stay home.

Will A Weak US Dollar Boost The US Economy?

Conventional thinking says that a weak currency should boost the economy via promoting exports.

But the Wall Street Journal Blog argues otherwise. (bold highlights mine)

The financial markets are focused on how nations, including the U.S., would prefer weaker currencies in order to make their exports cheaper on global markets. Indeed, multinational companies Caterpillar and McDonald’s reported Thursday that their bottom lines benefited from stronger international sales.

The flip side of that weak-currency strategy, however, is that imports into the U.S. become more expensive. If so, that will be a problem for millions of companies that don’t have an export presence. These companies, especially small and medium-sized firms, will see their profit margins squeezed because of higher costs…

Michael Trebing, senior economist who oversees the survey at the Philly Fed, says that in the past, respondents have said the prices-received index is weak because of competition and the inability of businesses to pass along cost increases. As a result, profitability is under attack.

“Accounting 101 tells us that if a company’s input costs go up, and they are unable or unwilling to pass those costs on to the consumer, their margins get squeezed,” says Dan Greenhaus, chief economic strategist at Miller Tabak.

The squeeze could get worse as import prices adjust to a weaker dollar because U.S. business depends on imported supplies. Excluding energy commodities, industrial materials and supplies account for 14% of all U.S. imports. In the first eight months of 2010, nominal shipments of these imports increased 30% compared with the same period in 2009.

To be sure, many global contracts are priced in U.S. dollars. But as the dollar weakens, foreign producers themselves will soon come under margin pressure when the dollars are translated into local currency. Over time, new contracts will carry higher prices for the components and materials that are important inputs for U.S. manufacturers and service-providers.

In one respect, higher import prices would please the Fed because bank officials want to see overall U.S. inflation head higher.

Some quick stats: (all charts from Google's public data explorer)

Exports make up only 12% of the US economy (above chart) compared to imports at 17% (below chart)

Overall, US merchandise trade constitutes only 24% of the US economy.

A weak dollar policy not only punishes imports, which ironically represents a much larger component of the US economy, importantly, it would hurt domestic trade which comprises 76% of the GDP.

So when Fed officials say they would like to see higher inflation through a weaker currency, they are simply implying that exporters should be subsidized, shouldered by the rest of the economy, at the cost of vastly lowered standard of living through higher consumer prices.

Of course, as mentioned above, instead of adding jobs, a profit squeeze on domestic non-export enterprises, through higher prices of inputs, would translate to high unemployment.

And an environment of high prices and stagnating economy is called stagflation, a dynamic the US had encountered during the 70s to the 80s.

Yet that’s how ‘subtle’ protectionism works, the rhetoric and ‘noble’ intentions depart from real events, where a few politically handpicked winners would emerge at the cost of everyone else.

Update: I forgot to add: There is another unstated beneficiary here, i.e. holders of financial assets. And the sector that requires an asset boost is no more than the banking sector, which have been severely distressed by the recent crisis. And this is why I think that a weak dollar isn't directed mainly at bolstering exports but to keep the banking system afloat.

Profits And Social Responsibility

In a book review, the Economist hits the nail on the head.

``In poor countries the problem is not that businesses are unethical but that there are too few of them.”

More from the Economist, (bold highlights mine)

Ann Bernstein, the head of a South African think-tank called the Centre for Development and Enterprise, thinks that advocates of corporate social responsibility (CSR) tend to miss this point. In her new book, “The Case for Business in Developing Economies”, she stresses the ways companies benefit society simply by going about their normal business. In a free and competitive market, firms profit by selling goods or services to willing customers. To stay in business, they must offer lower prices or higher quality than their competitors. Those that fail disappear. Those that succeed spread prosperity. Shareholders receive dividends. Employees earn wages. Suppliers win contracts. Ordinary people gain access to luxuries that would have made Cecil Rhodes gasp, such as television, air-conditioning and antibiotics.

These are not new arguments, but Ms Bernstein makes them fresh by writing from an African perspective. Citizens of rich countries often fret about the occasional harm that corporations do, yet take for granted the prosperity they create. People in developing countries do not have that luxury.

If you pay heed to the mainstream, you’d have the impression that “labor costs” ultimately determines economic activities. Hence, the undeserved fixation towards currency values.

Of course in real life this is only fractionally true.

Economic activities are mainly about business enterprises seeking to serve consumers in return for the prospects of profits, where labor costs signify as one of the many factors or inputs necessary to produce a service or a good.

What ultimately determines profitability are respect for property rights and the rule of law which serves as the cornerstone for free trade to exist.

While the Economist article assails the issue of corporate social responsibility, the implied message is that poor countries have not sufficiently been exposed to competition for the anti-business environment reasons mostly out of the prevailing political or legal regime.

On the other hand, what needs to be understood is that profits are not necessarily “selfish”.

Since businesses are mostly established towards achieving long term relationships, profits have inherent social responsibility aspects such as maintaining or enhancing social relationships via charitable actions (donations and charities) or even addressing environmental concerns.

As Murray N. Rothbard wrote, (bold emphasis mine)

Whereas the opportunity for voluntary charity acts as a spur to production by the able, coerced charity acts as a drain and a burden upon production. In fact, in the long run, the greatest “charity” is precisely not what we know by that name, but rather simple, “selfish” capital investment and the search for technological innovations. Poverty has been tamed by the enterprise and the capital investment of our ancestors, most of which was undoubtedly done for “selfish” motives. This is a fundamental illustration of the truth enunciated by Adam Smith that we generally help others most in those very activities in which we help ourselves.

Hence, capitalism equates to mutually beneficial actions.

Integrating Asia: Japan-India Trade Pact

More signs that Asia continues to deepen her trade ties with each other.

This from the Japan Times

Prime Minister Naoto Kan and visiting Indian leader Manmohan Singh officially agreed Monday in Tokyo to activate an economic partnership agreement as soon as possible and to speed up talks on civilian nuclear cooperation.

The deal to strengthen economic ties between Japan and India, a fast-growing democratic nation with a population of 1.2 billion, comes at a time when Asian nations are becoming increasingly concerned about China's activities in the East China and South China seas….

The two countries will continue working-level preparations for signing the EPA. Tokyo aims to sign it around the end of the year so it can be submitted to the Diet early next year for ratification, Japanese officials said.

Under the EPA, the two countries will abolish a wide range of tariffs on products ranging from car components and electronic goods to bonsai plants. Broader than a free-trade agreement, the EPA is a more comprehensive pact on economic and trade cooperation that also includes promoting investments.

"This is a historic achievement that signals the economic alignment of two of the largest economies in Asia," Singh said. "It will open up new business opportunities and lead to a quantum increase in trade and investment flows between our two countries."

Japan and India began discussing the possibility of a civilian nuclear energy deal in June that would allow Tokyo to export its nuclear power technology to New Delhi. But India is not a signatory member of the Nuclear Non-Proliferation Treaty, and it is unclear how soon the two nations can conclude a deal, given the strong antinuclear sentiment here…

The EPA will eliminate tariffs on 94 percent of two-way trade in 10 years after the pact takes effect. The tariffs to be abolished include those on Indian exports of car components, DVD players, video cameras, peaches and strawberries to Japan, while Japan would improve access to most industrial products, as well as durian, curry, tea leaves and shrimp.

If there is anything to be bullish about, it is that the direction of geopolitics seems headed towards embracing broader ‘free’ trade.

Popular Sentiment Over Deflation Recedes

Aside from failed effects of the fiscal stimulus, one of the factors that could have been swaying political sentiment against Keynesian economics is the inordinate focus on “deflation”.

Yet for all the supposed threats that deflation would bring, there has been little signs of the emergence of the bogeyman since the culmination of the crisis.

This popular sentiment may have reached a "tipping point".

This from the Wall Street Journal Blog,

Deflation anxieties may be about to spur the Federal Reserve to do more to help the economy, but for bond traders, fears of a downward spiral in prices appear to be pretty low.

A paper published Monday by the Federal Reserve Bank of San Francisco said that based on pricing levels in the inflation indexed government bond market — the securities are commonly called TIPS — investors are sanguine the economy can escape a crippling bought of falling prices…

Fed officials fear that while growth remains positive, it is not powerful enough to overcome the ground lost over the course of the recession, leaving inflation at dangerously low levels, and unemployment unacceptably high. They want to act to help get growth levels higher, even though many economists and some in the Fed wonder if the institution can be effective in boosting activity, given that borrowing rates are already near historic lows and the financial system is flush with liquidity.

The TIPS market has long been one of the ways policymakers, economists and market participants could get a handle on the outlook for inflation. That said, the use of TIPS to tell a broader story is a complicated task.

The rap against the TIPS market goes like this: It is a relatively new market sector, and it has less liquidity than other parts of the Treasury trading world. That means price movements can be signaling something other than a shift in investors’ inflation outlook. In the market’s favor, however, is the fact that it at least represents a real money bet on something — an investor can lose cash if they predicted the pricing outlook incorrectly. In any case, Christensen argued his model compensates for these factors.

The gold market has been saying this ever since.

And as we long been saying here, false premises will eventually be unmasked.

Consumption-Led Growth Is A Myth

Even experts from the World Bank seem to be getting it, this from Ivailo Izvorski, (East Asia & Pacific On The Rise) [bold highlights mine]

“Consumption-led” growth is a myth. Output growth results from the accumulation of factors of production – capital, labor, land and others – and from technological progress. Consumption is not a factor that drives growth, it is the residual. And at early stages of development, rapid consumption growth – as we have observed in East Asia – is possible only with rapid investment growth. Cut down on investment to boost consumption and given the low level of capital in the region, output growth will plummet, and with it consumption growth.

Read the rest here

More signs that the mainstream appears to be moving away from Keynesian economics.

Differentiating Cheerleading Biases From Predictions

``In the modern world, science and society often interact in a perverse way. We live in a technological society, and technology causes political problems. The politicians and the public expect science to provide answers to the problems. Scientific experts are paid and encouraged to provide answers. The public does not have much use for a scientist who says, "Sorry, but we don't know". The public prefers to listen to scientists who give confident answers to questions and make confident predictions of what will happen as a result of human activities. So it happens that the experts who talk publicly about politically contentious questions tend to speak more clearly than they think. They make confident predictions about the future, and end up believing their own predictions. Their predictions become dogmas which they do not question. The public is led to believe that the fashionable scientific dogmas are true, and it may sometimes happen that they are wrong. That is why heretics who question the dogmas are needed." - Freeman Dyson "The Need for Heretics"

People often confuse cheerleading for predictions.

Most mistakenly think that they are seeking for the “right” answers on specific dilemmas when in fact they are only latently searching for confirmations on particularly predetermined perspectives.

When we watch a sports game and take sides with one of the protagonists, we don’t “predict” the outcome, rather we “cheerlead” or desire that our handpicked team wins or accomplishes a particular goal, regardless of extraneous ‘analysis’. Faith precedes the rational.

So whether we apply this way of thinking into sports or into analyzing financial markets or the economy or the political spectrum; faith based preferences represent no more than our inherent biases that should not be confused with objective predictions or opinions or studies.

Causality versus Superstition

Yet everyone has their innate way of seeking for answers for real life activities, as Ludwig von Mises wrote[1] in his magnum opus,

There are for man only two principles available for a mental grasp of reality, namely, those of teleology and causality. What cannot be brought under either of these categories is absolutely hidden to the human mind. An event not open to an interpretation by one of these two principles is for man inconceivable and mysterious. Change can be conceived as the outcome either of the operation of mechanistic causality or of purposeful behavior; for the human mind there is no third way available. It is true, as has already been mentioned, that teleology can be viewed as a variety of causality.

And faith based analysis are mostly anchored on teleology or the doctrine or the belief that holds purpose and design as a part of or are apparent in nature[2].

Where people cannot ascertain or relate with the cause and effects of a phenomenon, they submit to the teleological interpretation usually by attributing these to some mysterious, cosmic or mystical forces.

As Professor Mises described[3], ``They invented deities and devils to whose purposeful action certain phenomena were ascribed. A god emitted lightning and thunder. Another god, angry about some acts of men, killed the offenders by shooting arrows. A witch's evil eye made women barren and cows dry.”

There seems little difference even in the modern world.

In making predictions, the same phenomenon seems to take effect: Where most people can’t ascertain valid causal linkages, they frequently ascribe to various mental heuristics and or use sloppy reasoning (logical fallacies)—and this applies even to institutional analysts or professionals. Have you ever wondered why the mainstream ‘experts’ had largely missed out on anticipating the occurrence of the last crisis? Mainstream economists had even been implicitly chastised by the Queen of England[4] for failure to predict and stop the crisis!

Yet since predictions are basically interpretations of current and past events which are extrapolated into the future, prediction essentially deals with methodology.

So whether it is about prophecy—via water divining, astrology, numerology, fortune telling, interpretation of dreams, and many other forms of divination or about prediction science—statistical probabilities, mathematical equations and models, computer simulated models[5] or the physici[6] or the search mechanistic explanations, the methodology for prediction matters.

Of course as stated above, objective predictions and biased faith based predictions can be distinguished.

Objective predictions are mostly premised on the methods that generate potential outcomes or using the ‘means to establish potential ends’. Whereas cheerleading or biased or analysis are mostly ‘cart before the horse’ reasoning or selectively choosing theories or facts to retrofit into a desired outcome.

As stated above, in cheerleading, analysis serves to cosmetically embellish or improve on the seeming cogency of the issue. To put bluntly, analysis acts only as a façade.

Critical Changes Occur At The Margin

Let me further state that mainstream predictions are largely mistaken for their idée fixe on current events, whose key players or factors they see as the main driving factors, which impels them to bypass the several other critical variables that affect the ongoing changes.

For instance, in the advent of the 20^th century the mainstream hardly predicted the US to supplant Britain as the world’s economic and military power.

On the other hand, hardly anyone had also seen how Argentina, one of the most prosperous nations then, degenerated into a third world country or an emerging market economy[7] as her economy was gutted by protectionism and rampant cronyism.

In the same context, when Japan became the world’s economic and financial cynosure in the 1980s, there had been little notice of how China would emerge as an economic power a decade forward. And some of the geopolitical angst then had been focused on Japan’s resurgent economy, which turned out to be an illusion.

And now that China has gotten into everyone’s radar screen, political talking points and political correctness have been transfixed towards China, as if China holds the world by the jugular.

While I do not discount the growing importance of the role of China, I see the excessive focus on her as missing out the other important variables at work.

And today, the same people (mostly the politically blind) who claim to know what should be ‘morally’ good for the world, are the same people whom has constantly misread the future.

Of course these people, who presume to hold the moral high ground, have not seen or predicted the explosion of mobile telecoms technology (see figure 1) and how it has substantially affected and altered people’s lives.

Figure 1 ITU[8]: The Rise of 3G

How big an impact of the rapid progress and evolution in the telecom world to the real economy?

This from the ITU, (bold highlights mine)

-By the end of 2010, there will be an estimated 5.3 billion mobile cellular subscriptions worldwide, including 940 million subscriptions to 3G services.

- Access to mobile networks is now available to 90% of the world population and 80% of the population living in rural areas.

- People are moving rapidly from 2G to 3G platforms, in both developed and developing countries.

-In 2010, 143 countries were offering 3G services commercially, compared to 95 in 2007.

- Towards 4G: a number of countries have started to offer services at even higher broadband speeds, moving to next generation wireless platforms – they include Sweden, Norway, Ukraine and the United States.

Question: Have these so-called experts and the political ideologues seen how the explosion of technological innovation in various fields, such as the telecoms, has transformed or revolutionized the way people has conducted commerce or the how these changes has influenced the political playing field or how 86% of the world’s wired population has reconfigured their lifestyles based on these new instrument and platforms? The simple answer is HARDLY.

Du jour politics have largely obscured the contribution of technology in today’s current developments. In other words, while substantial changes has been happening at the margins, the mainstream tunnels in on what is quite evident (trading patterns misconstrued as imbalances, debt as impeding growth).

Of course from the hindsight, everything has not only been fait accompli but looks linear or deterministic such that we simplistically presume to know how history is made, which has been used by many to make flimsy and tenuous arguments.

History is mostly narrated from the lens of a single observation, rather than taken into consideration the underlying conditions and the alternative options which had been available at the time that had led to such an outcome.

As Nassim Taleb explains[9] along the lines of assailing teleology,

``While we know that history flows forward, it is difficult to realize that we envision it backward…Our minds are not quite designed to understand how the world works, but, rather, to get out of trouble rapidly and have progeny.”

Legg Mason’s Michael J. Mauboussin[10] sees the importance of critical points (or changes at the margin) in identifying trends,

``Many complex systems, including markets, have critical points where small incremental condition changes lead to large-scale effects. Researchers in both the physical and social sciences have known about these critical points for a long time; so much so that terms like phase transition and tipping point have slipped into our day-to-day language. Still, critical points throw a monkey wrench into our mostly linear cause-and-effect thinking.

Bottom line: In a world of complex systems, predictions should be anchored on the ongoing changes at the margins that could snowball into a major trend than to excessively fixate on popular issues frequently regurgitated by media and their phalanx of experts with terrible batting averages in terms of prediction.

Here is more evidence on the evolving paradigm shifts at the margins from which the mainstream has vastly ignored (see figure 2)

Figure 2: McKinsey Global Institute[11]: Economic Freedom Spurs Growth In Africa

People today see the growing role of emerging markets in the global economy for mostly the wrong reasons: they have overlooked the role of economic freedom as fuel to economic growth.

As the McKinsey illustration shows, as many nations in Africa have undertaken vital reforms in the direction of economic freedom, trade exposure has been bolstered and vibrant economic growth has followed.

And how has progress in technology coped with the ongoing reforms in Africa? (see figure 3)

Figure 3: ITU: Africans Online Likely To Catch Up

Mobile penetration level is reportedly at an estimated 41% at the end of the 2010 compared with the global average of 76%, whereas only 21% are online compared to 71% in developed economies.

According to ITU[12], ``By the end of 2010, Internet user penetration in Africa will reach 9.6%, far behind both the world average (30%) and the developing country average (21%).”

Since Africa has lagged the world in terms of economic development, the recent economic reforms has translated to a catch up role even in the realm of connectivity. Nonetheless a promising room for growth for industries.

Yet these are examples of “changes at the margins”…important changes that may be gradual but could play a substantial role in shaping the future.

Conclusion

In conclusion:

-We should not confuse predictions with that of cheerleading or biased analyses that are influenced or shaped by political or economic dogma.

For views ossified by such biases, hardly any amount of valid or worthwhile reasoning will be sufficient to apostatize a recalcitrant ‘faith’ based outlook. It’s like debating religion which is usually a futile exercise that would only lead to strained personal relationships.

Instead, people with such biases ought to put money where their mouth is. For instance, if they believe that the world is on path to a meltdown then they should just ‘short’ the markets or the economy/-ies or just run to the hills for cover. Let convictions be parlayed into monetary votes than unduly spread political canard. Some use their ivory tower positions to spread miasma.

-Many cheerleaders look for ‘expert’ opinion only either to CONFIRM their biases or to get ENTERTAINED. If they are not pleased with what they read about, they scrounge for opinions that match with their biases.

-The framework of any forms of predictions depends on methodology. Applying the wrong method would likely bring about misdiagnosis, and consequently misguided conclusions and erroneous predictions. Being accurate then, will account for as a product of lady luck or provident coincidence, rather than having their analysis to conform with actual or the “run of mill” developments[13].

-Quality predictions avoid biases, particularly generalizations predicated on limited sample/s, data mining and selective use of theories and facts in order to justify a preconceived conclusion. Prediction analysis should consider objectively, the broader picture, aside from the micro developments that incorporates interpretation from sound theory, which are supported by evidences.

-The most important changes or ‘critical points’ are happening at the margins, something which most predictions don’t discover until they become major trends.

---

[1] Mises, Ludwig von Human Action: Chapter 1. Acting Man: The Alter Ego, Mises.org

[2] Dictionary.com Teleology

[3] Mises Ludwig von, Theory and History Positivism and Behaviorism, Chapter 11, Mises.org

[4] Guardian.co.uk This is how we let the credit crunch happen, Ma'am ... July 26, 2009

[5] Wikipedia.org, Prediction

[6] Lilburne, J. Grayson Prelude to Natural Philosophy, Mises Blog, March 17, 2010

[7] Glaeser Edward L. What Happened to Argentina?, New York Times Blog, October 6, 2009

[8] Itu.int The Rise of 3G, The World In 2010, ICT Facts and Figures

[9] Taleb, Nassim Nicolas Fooled By Randomness, Random House Trade, p.56

[10] Mauboussin Michael J. Fat Tails and Nonlinearity, Legg Mason Capital, December 20, 2007

[11] McKinsey Global Institute: Lions On The Move The Progress and Potentials of the African Economies, June 2010

[12] Itu.int, Op cit. P.4

[13] See Distinguishing Luck From Skills In The Financial Markets, September 19, 2010

An Overextended Phisix, Keynesians On Retreat And Interest Rate Sensitive Bubbles

``The belief that a sound monetary system can once again be attained without making substantial changes in economic policy is a serious error. What is needed first and foremost is to renounce all inflationist fallacies. This renunciation cannot last, however, if it is not firmly grounded on a full and complete divorce of ideology from all imperialist, militarist, protectionist, statist, and socialist ideas.-Ludwig von Mises

The Philippine benchmark, the Phisix, remains overextended. (see figure 4) However, deep into major trends, periods of overextension happens, thus this shouldn’t be a surprise.

Figure 4 stockcharts.com: Phisix, Gold and Asian Markets On The Uptrend

And it appears that we could be, perhaps, in one of these unique periods.

I have been expecting the overheated ASEAN markets and the Philippine Phisix (see Relative Strength Index in top window) to take a breather. Apparently this hasn’t been so. My suspicion is that expectations of more monetary accommodation in developed economies may have prevented this from taking place.

Yet for some, this would seem as unsustainable, from which I agree, except that unsustainable can last several years before suffering from a major implosion or a regression to the mean.

The reason for such is that I understand global inflationism as giving rise to serial bubbles. And I don’t share the view that the world is hounded by lack of aggregate demand or liquidity traps or deflation in a world of central banking unless the later would see global monetary authorities submit to the market forces, a political dynamic of which has yielded no indications whatsoever.

And as the conditions of the Phisix (PSEC main window) and of the ASEAN bellwethers have shown, a financial asset boom signifies one of the symptoms of diffusing inflationism taking hold.

And it is also why chart reading cannot be consistently relied upon because they incorporate past data and performances which do not account for the next or prospective actions by the public and the officialdom, as well as their feedback mechanism, given the ever fluid conditions.

And as one would note, the outperformance of the Phisix shadows an equally vibrant Asian ex-Japan markets (P2DOW) and the gold market (GOLD), which means that NONE of the above has manifested the strains of what mainstream permabears calls as the “deflation menace” which is no more than a mainstream Keynesian bugbear that gives justification for authorities to engage in “inflationism”.

The Last Straw For Keynesians: Serial Bubbles

Of course, the prevailing dominance of the Keynesianism seems to be receiving a well deserved smackdown and a comeuppance in Europe as leaders there have opted to observe fiscal discipline[1] than wantonly engage in wasting taxpayer resources on non-market unproductive ‘pet’ projects of politicians in order spruce up the strawman of “aggregate demand” which for them translates to “employment”.

Contra Keynesians, needless consumption of resources on non-productive politically designated activities translates to a loss of capital, a reduction of productivity and subsequently lowered standards of living.

This may be just one of the evolving paradigm shifts that perhaps could serve as an epiphany over the limitations and the hazards of excessive government interventions.

And in contrast to permabears, the adaption of fiscal discipline is surely a path towards sound recovery and a vital source of optimism.

And as the US heads towards elections in the first week of the coming month, we may also see the same results.

Hence, the last straw for Keynesianism following the political retreat will likely be channeled towards the unelected bureaucrats, the central banks.

And for us, central banks are the clear maestros or engineers when fostering bubbles.

And bubble cycles are steeply sensitive to interest rates movements.

Emerging Markets And Fed Policy Rates

BCA Research has an interesting perspective on how emerging markets have reacted to Fed policies (figure 5).

Figure 5 US Global Funds[2]/BCA Research: Emerging Market Correlations

They posit that correlations with the US interest rates had been negative during the mid 90s and positive during the last crisis, where the BCA infers that a dismal global economic growth won’t likely buoy emerging market equities in spite of a Fed liquidity booster.

My comment is that the supposed divergences may not be all that persuasive.

One, the negative correlation in the 90s (left window) may be a function of lagged effects.

Half-way through the rising Fed rates has shown an equally strong emerging market performance which eventually peaked as the Fed rates continued to rise. Hence, the negative correlation may be skewed more towards the interpretation by the analyst more than evidence of strong correlation.

The second but most important factor is that in the 90s, bubbles were centered outside of the US particularly in Emerging Markets—the Tequila (Mexican) Crisis of 1994 and the Asian Financial Crisis of 1997. This implies that the transmission mechanism from Fed policies may have been eclipsed by unsustainable internal imbalances, seen in the said emerging markets, which imploded even as the US economy and her financial markets were left unscathed and continued to perform robustly.

It’s an entirely different story during the period of supposed positive correlation (right window), where the US had been the epicenter of the crisis which essentially rippled throughout the globe and thus the positive correlation.

In short, the major difference between the performances of the emerging markets and the US Fed policy rates, over the two time zones, has been source of the bubbles. Hence the economic growth story relative to Fed rates, for me, seems largely irrelevant.

Overall, interest rates will likely be the most critical factor in ascertaining the sustainability of financial asset inflation in emerging markets, ASEAN, the Philippines and elsewhere, as previously discussed[3].

For as long as the artificially suppressed rates stay low in real and nominal terms and remain unaffected by rising demand for credit or a surge in inflation or that the credit quality or credit ratings of crisis stricken highly levered developed nations remain beyond doubt, then these would be signs of the sweetspot of inflationism.

Interest rates will only start to impact the financial system and the markets once rising rates would render many highly levered unsound projects or speculative endeavors as unprofitable. We are nowhere near this point.

And even if there could be some interim reprieve in the markets, this means for now, party on!

---

[1] New York Times, Europe Seen Avoiding Keynes’s Cure for Recession, October 20, 2010, Wall Street Journal, Britain's 'Austerity' Lessons, October 22, 2010

[2] US Global Funds, Investor Alert October 22, 2010

[3] See Interest Rates As Key To Stock Market Trends, October 2010

Video: Spontaneous Versus Planned Orders

This is an insightful video showing why and how spontaneous orders are superior and more efficient in allocating resources than a hierarchy. The secret: it's all about the maximizing the use of knowledge. --hat tip Greg Ransom

Prohibition: Even Jails Can’t Stop Them

Jeremiah Dyke at the Mises Blog has an interesting post showing how contraband items have not been contained by the authorities even in jails!

Mr. Dyke writes,

Like contraband, drug paraphernalia, sharp objects and the various other illegal objects that make it into our prison system on a daily basis, prison systems can’t seem to keep cell phones out of the jail cells. It’s reached a point now where prison systems are seeking outside assistance from mobile phone companies, asking them to jam mobile phone signals by flooding the prison systems with airways.

Well such phenomenon isn’t isolated in the US.

We see a similar dynamic here in the Philippines. This from the Philippine Inquirer

A surprise inspection of inmates’ cells at the Quezon City jail Sunday morning yielded more than 200 sachets of drugs, drug paraphernalia, cell phones and deadly weapons.

The operation, which was ordered by Senior Supt. Emilio Culang, city jail warden, led to the seizure of at least 250 grams of dried marijuana leaves, 206 sachets of marijuana and shabu, several bottles of solvent and paint thinner and drug paraphernalia.

Also confiscated were 70 cell phones, lewd magazines, playing cards, a bottle of wine and dozens of improvised deadly weapons.

These included spoons, forks, toothbrushes and pencils with sharpened points. There were also needles, lighters, belts, electrical wires, scissors, hammer, assorted ropes and nail cutters.

It’s seems to be a perpetual cat and mouse game even under highly controlled environment by the government.

To share Mr. Dyke conclusion,

The lesson that won’t be learned is of course, if we can’t keep illegal items out a fully secured prison facility, with 8×10 jails cells, how in the world can we expect to keep these items out of a nation with over 9,000 miles of border?

In short, most of prohibition laws can only signify as government failure.

Recipe To Canada’s Miraculous Transformation: Less Government And More Economic Freedom

David Hay CIO of Evergreen Capital Management enumerates how Canadians miraculously transformed her economy from one of a near basketcase “an honorary member of the Third World in the unmanageability of its debt problem” to a first world economy (hat tip John Mauldin)

(all bold emphasis mine)

• Paul Martin, the finance minister for the national Liberal Party, unveiled a budget in early 1995 that shocked all the cynics accustomed to smoke-and-mirrors accounting. It reduced program spending by 8.8% over two years (and our politicos quiver over a mere hint of spending freezes).

• As part of this radical spending rationalization, federal government employment was reduced by 14%.

• Federal grants to the provinces were reduced by 14% as well, but the trade-off was that they were allowed to control how the money was spent. Provincial governments also needed to provide half of all funding (i.e., put skin in the game).

• While some taxes were raised (and, according to the authors, these worked against the recovery), spending cuts were 4 ½ times tax hikes.

• Canada’s welfare system was dramatically modified. Rather than just providing a blank check to the provinces (which administered the welfare programs), Ottawa incentivized them to put the funds to better use. Benefits were cut for single, employable individuals and aggressive efforts were made to get them back in the work force.

• Despite accusations from the far left that the poor would suffer due to these changes, the percentage of welfare recipients fell in just a few short years from 10.7% of the population to 6.8% by 2000. From 1997 to 2007, the percentage of Canadians classified as low-income plunged by over 30%.

• The tax structure was dramatically redesigned. Corporate tax rates were cut by nearly a third, taxes on corporate capital were abolished, and personal income and capital gains taxes were reduced.

• The General Services Tax (basically a consumption tax or VAT) was instituted to pay for the tax cuts described above. While initially very unpopular, it was a key part of the rehab plan.

• The Canada Pension Plan (CPP), the country’s version of Social Security, also underwent major surgery. Instead of payroll taxes gradually rising to 14%, the increases were pulled forward but capped at under 10%. This produced immediate surpluses that were invested in higher-returning corporate securities. (As noted in past EVAs, this is a huge defect with our Social Security system; its many trillions are tied up in low-yielding US government bonds that simply add to our overall national indebtedness.) The CPP today is well-funded and actuarially sound.

• As a result of these actions, and many others I’ve left out, the federal budget was balanced within three years.

After achieving this remarkable feat, Canada went on to produce 11 straight budget surpluses. This allowed our northern neighbors to reduce their federal debt from 80% of GDP to 45%. Further demonstrating how quickly good policy can turn things around, the provinces enacted similar measures.

For most of the permabears, whose economic outlook have been framed on utter dependence on government, they seem to be afraid of their own shadows—they recognize that too much reliance on government is unsustainable, yet they subscribe to the very same prescriptions that has led to the current predicaments of unwieldy debts and perilous fiscal imbalances.

However, as the Canadian model has shown, less government is the answer to any economic recovery or the path to prosperity.

It goes with less taxes, minimal interventionism, fiscal discipline via reduced government spending and the empowerment of the entrepreneurs.

The above also shows that politics evolves—transitions are never smooth. Yet, people learn to adapt to the changes brought about by economic liberalism.

Again David Hay…

in case you think that Canadians universally supported these rational reforms as they were first enacted, consider how similar our northern friends are to us. They are every bit as fractious as we are. There was a cacophonous chorus of extreme Keynesians (those who believe government spending should never be cut) who predicted Canada’s grand experiment would be an abject failure. Yet, despite all those who were sure that downsizing government would do the same to their growth rate, Canada’s economy grew at 3.3% per year versus the developed-world average of 2.7%. Notwithstanding Canada’s undeniable success, should we decide to follow in its footsteps, be prepared for folks like NY Times columnist Paul Krugman to wax apocalyptic. Come to think of it, given his forecasting track record, that would be a good thing.

Bottom line: there will be hope if the incumbent leaders realize, accept and adapt to what are needed most: reforms towards greater economic freedom and the broadening of free trade.

Czech President Vaclav Klaus: IMF A Barbaric Relic

Here is a strong statement from Czech Republic President Vaclav Klaus:

The IMF is a different topic. As someone who in January 1990 – as a newly appointed minister of finance – sent his very first letter abroad asking for the renewal of our IMF and World Bank membership and who was extremely honored to sign our accession treaty to both of these institutions in Washington, D.C. in September 1990, I hope I can afford to say something critical and politically incorrect. I consider the IMF a barbaric relic from the Keynesian and fixed-exchange rate era. I know it is a harsh verdict but Keynes himself repeatedly used similar strong statements about his colleagues which justifies my using such a terminology.

I am convinced the IMF should be dismantled or radically restructured as soon as possible. To do the opposite, to increase its role as it happened as a result of the last year’s G20 decision in the middle of the panic connected with the then looming crisis or to speculate about creating similar institutions on individual continents (especially in Europe) is a wrong way to go. It is yet another manifestation of a mistaken and dangerous global governance mindset which – to my great regret – has been getting more and more support in the intellectual and political circles these days. To whom and how at all can the IMF be held responsible for its activities? And if its proposals or measures turn out to be mistaken (and this can happen very easily), who will face the consequences? Certainly not the IMF.

Signs of evolving times.