The Great Debate UK

from The Great Debate:

The G20 summit should commit to growth

By Gordon Brown The views expressed are his own.

The build-up to the G20 summit has been dominated by the euro's failings. With Europe now the epicenter of the global crisis, its continued weakness will dominate the G20 discussions. Even now, uncertainties about Greece’s future -- and about the real strength of Europe’s commitment to its new stability fund -- has left little opportunity for a focus on the global economy as a whole.

But even if the state of the world economy has featured less than the euro in the preparatory work for the summit, the decisions world leaders will make on the global economy will dictate the mood of the coming two years. President Sarkozy has major global initiatives he will unveil to improve global food security, and may even force his plan for a global financial levy on the agenda. But there is a big choice the G20 must make. Either the world will come together and agree on a coordinated growth plan -- or we will retreat into a new, more acrimonious protectionism.

Already the head of the World Trade Organization is warning of a return to protectionism, and every day we find yet another new country following Brazil, Switzerland, Indian, Korea, and Japan in introducing either new tariffs, currency controls, or capital controls. In response, the draft G20 communiqué assumes a free trade world where each continent steps up what it is doing in order to achieve sustained growth.

But a G20 that was really working would take countries far beyond the current draft communiqué -- which is a set of bland statements about what each country is doing on its own to foster growth. Instead it would focus on coordinated  measures under which countries would agree to support and complement each other's contribution. If , under an agreed growth pact, China increased consumer spending and Asia opened its markets, and if this was balanced by America and Europe investing more in infrastructure,  then over a three year period -- as the IMF has suggested -- there could be 5 percent more growth and 25-50 million more jobs, with 100 million people taken out of poverty.

A ccordinated  approach is desirable because under current policies every country wants to export its way to growth and no one wants to import. But cooperation is not just an option; it is, in my view, a necessity because the world is precariously balanced between a west that consumes the most, and the rest of the world which now produces the most. For 150 years until now, Europe and America monopolized the world’s output, exports, manufacturing, investment and consumption. But in 2010 for the first time America and Europe were out-produced, out-exported, out-manufactured and out-invested by the rest of the world. Today they account for just 41 percent of output, 43 percent of manufactured goods, 47 percent of trade, and 40 percent of investment. But they account for 55 percent of consumption and, if we added other advanced economies, the figure would be 70 percent.

A better understanding between the consumer countries and the producer countries would make for more balanced and more sustainable growth. Indeed, if  China was confident its export market could be sustained then it might be more willing to increase domestic consumption, and if America was confident its export markets could flourish then we would have a more confident American consumer and more  private  investment at home. This was what was envisaged by the April 2009 summit of the G2O and then in the detail of the growth pact agreed to at the Pittsburgh summit in autumn 2009.  Unfortunately in 2010 the growth pact has descended into a dispute over currencies, with the American senate now calling China a currency manipulator. A brave attempt by Korea to break from the currency dispute and accelerate growth by putting ceilings on surpluses and deficits failed.

from MacroScope:

Building BRICs in Africa

Some eye-catching numbers from Standard Bank out today on the influence of BRICs countries -- Brazil, Russia, India and China -- on Africa.

First off, the bank says the global recession and its recovery have been nourishing these so-called South-South ties. But it is all now ready to take off. The bank estimates:

-- By 2015, BRIC-Africa trade will have incresed threefold, to $530 billion from $150 billion this year.

-- BRICs share of Africa's total trade will increase from one-fifth today to one-third in the next five years.

-- BRICS foreign direct investment stock in Africa will swell to more than $150 billion from around $60 billion today.

Standard Bank bases these assertions partly on estimates for BRICs growth over the next five years -- eg, domestic output, global output and a doubling of BRICs trade with the world in general. But it also sees Africa growing rapidly -- for example, a per capita real annual growth rate of 5.7 percent between now and 2015, and a doubling of private consumption in Africa's 10 largest economies. And it adds:

Crucially, a host of global-minded corporates is emerging from the BRICs. In 2010 231 (11.5 percent of the total) companies listed in the Forbes Global 2000 originated in the BRICs, up from only 83 companies (4 percent) in 2005. Recent trends are a harbinger of deeper potential.

Is there a way out of the currency war?

Competitive devaluation is no longer a possible danger – it is already here. Many people are worried that, after global stock market crashes and a collapse of most of the world’s banking system, a war over exchange rates completes a sequence of events that looks awfully like a rerun of the 1930’s. There is however one crucial difference. The Chinese role certainly makes matters more complicated, though it is as yet unclear whether it makes the outlook better or worse.

The key point to understand about the belligerents is this. In the context of purely self-interested beggar-my-neighbour economic policy, devaluation makes good sense for the Eurozone countries as a whole, the British, the Japanese, Swiss, Koreans… for everyone except the Americans. Whether they are deficit countries, like Britain, or surplus countries, like Switzerland, Korea or Japan, devaluation will increase demand for their exports and make their imports more expensive, giving a boost to their output and employment. And if other countries retaliate by counter-devaluation, they can tell themselves that their situation would have been worse if they had not taken the initiative and got their retaliation in first.

By contrast, America’s situation is very different. As long as China keeps its exchange rate more or less fixed, the dollar is not a wholly US currency – it is the currency of two countries, one massively in deficit , and one massively in surplus. The fact that they are separate countries in every other respect makes no difference. De facto, China and USA share a single currency every bit as much as France, Germany, Italy, Greece and the rest share the same currency, the Euro. The only difference is that in the Eurozone everyone uses Euros, whereas in the dollar zone the overwhelming majority use a dollar-certificate, a piece of paper bearing a picture of Mao Tse-tung and exchanging for about 15 U.S. cents.

It is hard to understand why China has voluntarily accepted this arrangement, which forces it to accept whatever monetary policy the U.S. Federal Reserve chooses. In any case, the implication is that the dollar cannot be devalued against one of its most important trading partners, because the two of them are bound together in a de facto currency union. In its desperate attempts to shake China off, like a celebrity trying to shake off a stalker, the Fed is printing more and more dollars, which are used by America’s consumers to buy more and more Chinese exports, thereby sending the new dollars flooding into China to swell the reserves of the People’s Republic, which must now be approaching $3trn.

There are two consequences of this linkage. First, it is the struggle over the dollar/RMB which has caused the other countries to devalue their currencies. The more the US drives down the value of the dollar, the more the exchange rate of the RMB is dragged down relative to all the other currencies, so the harder it is for third countries to live with the competition from ever-cheaper Chinese products. It was hard for them before, but with a cheaper RMB, life becomes impossible – so the Japanese try to devalue the Yen, the Swiss start to push down the value of their currency, and the Pound had already fallen a lot by the end of last year. In a sense, these other currencies are caught in the crossfire of the U.S.-China war.

The second consequence is this. China has now made a heavy investment in disaster. In the last few years, the world’s supply of dollars has expanded many many times faster than the U.S. economy. The result would have been a collapse in the value of the dollar, if China had not chosen to accumulate the massive excess supply in its own reserves.

Like second marriages, fixed exchange rate systems represent the triumph of hope over experience. History shows that in the end the dike never holds back the flood. When the dollar’s value collapses and the upward pressure on the RMB can no longer be resisted, China will suffer double pain – facing increased trade competition from a near-bankrupt USA with the dollar at its lowest-ever level, and at the same time losing hundreds of billions, possibly even a trillion dollars or more through the fall in the value of its reserves in terms of RMB (or indeed in terms of any currency other than dollars).

from Breakingviews:

U.S. trade thaw may leave China out in cold

The retaliatory China currency bill passed in the U.S. House helps brand this Congress as one of the more protectionist in years. The next one might switch gears and embrace trade by passing several stalled pacts. But Beijing shouldn't expect that to translate into a friendlier Washington.

A companion bill in the Senate also meant to pressure China to allow a faster rise in the yuan is unlikely to succeed. And it would probably be vetoed by President Barack Obama if it did.

Yet the overwhelming vote in the lower chamber does reflect a further fraying of the free trade consensus. It's not just frustration over the weak yuan policy, blamed for costing U.S. jobs. Congress also has failed to ratify trade agreements signed with South Korea, Colombia and Panama. Those deals would increase American exports by an estimated $12 billion a year. That may be just a small drop in U.S. trade, but would still be a big help for the likes of Boeing , Caterpillar and Oracle in a weak economy.

Enough pro-trade Republicans might enter Congress come November to pass the three deals. The political turnabout could be particularly head-snapping if the GOP was to actually retake the House. Chairmanship of the key trade-related Ways and Means Committee, for one, would shift from a Big Labor-backed Democrat to a Republican who has already pledged to make the outstanding trade agreements a top priority.

The GOP is less likely to take the Senate. But Max Baucus, chairman of the Senate Finance Committee, is a free trade supporter. And the new ranking Republican would be Orrin Hatch, considered more supportive of trade than his predecessor, Charles Grassley.

But there's common ground when it comes to China. Trade advocates in both parties are coming together on the idea that Beijing needs to be pressed harder on the currency issue, as well as on market access. The latter also resonates with U.S multinationals, traditional members of the open trade lobby. And the Obama administration will probably continue to file anti-dumping and countervailing duty cases against China at the World Trade Organization.

None of this amounts to a trade war. But the risk is that another year of high U.S. unemployment pushes politicians to ratchet tensions to a level that unnerves markets and business.

from Breakingviews:

China’s yuan: a guide for the perplexed

By John Foley and Wei Gu

China's plans to make its currency global could change the world -- if they get off the ground. More international use of the yuan might increase China's trade clout, unseat the mighty U.S. dollar and make a lot of financiers very rich in the process. But it can be hard to separate the facts from the fable. Here are some questions answered.

Why are people talking about an international yuan?

China is the world's second-biggest economy. But its currency doesn't nearly match its size. For most international dealings, China relies on the dollar, which leaves it beholden to the United States. Beijing wants more influence on the global stage, so it has been taking baby-steps to turn the yuan into an internationally used currency.

The pace has picked up lately. In August, Beijing decided to let foreign banks use yuan they already hold to invest in the domestic interbank market; it allowed some trading of yuan for Malaysian ringgit; and it let fast-food giant McDonald's issue a bond in yuan on the Hong Kong market, making it the first foreign non-bank to do so.

There is one big obstacle: capital controls. China's currency is not convertible, unlike the dollar or euro. It can only leave the country through select official channels, so the amount of yuan outside of China is small. What you can't get, you can't use. Until that changes, a global yuan will be a pipe dream.

What is an international currency anyway?

Sluggish U.S. economy may threaten UK business development

- Paddy Earnshaw is the Director of Customer Relations at Travelex Global Business Payments. The opinions expressed are his own.-

British importers and exporters’ confidence in the economy leapt in July, as positive economic data fuelled hopes for a return to strong economic growth. According to the Travelex Confidence Index (TCI), which jumped 12 points in July to 116, from 104 in June, strong gains were driven by quarter 2′s GDP figure, as it showed the UK grew at its fastest pace in four years.

Momentum seems to be building in the UK economy – only 6 weeks ago, we feared the worst for Europe, as the sovereign debt crisis unfolded. Now it is the U.S. which seems to face the steepest challenge. Certainly, we expect the deteriorating picture in the U.S. to crimp importer and exporter confidence in the upcoming months, as 8 out of 10 respondents (84 percent) feel the threat to business development comes from the health of the global economy.

U.S. employment data was worse than expected on Friday, revealing that the U.S economy shed 131,000 jobs in July – roughly double what had been expected by economists. The poor set of unemployment results has only heightened the sense of dread from across the Atlantic – is this the clearest indication that the U.S recovery, in contrast to the UK, is running out of steam?

Despite importers and exporters renewed confidence in the UK economy, I think it is too early to say whether their optimism has been accurately placed, as many uncertainties remain for British importers and exporters. Even as the UK recovery broadens, June’s dip in confidence suggested businesses are fearful of the upcoming austerity measures and the impact they will have on consumer buying power.

So, in the short-term, I would expect to see continued support for the pound as UK data continues to out-perform that in the U.S.

Britain must adjust to new relationship with India

-Vikas Pota, Author of India Inc: How India’s Top Ten Entrepreneurs Are Winning Globally. The views expressed are his own. -

Last week, on his first Prime Ministerial visit to the United States, David Cameron conceded that Britain was the “junior partner” in the special relationship. Next week, I fear that at the end of the much anticipated visit to India, he may yet again, have to concede that Britain is the junior partner in this ever increasing important relationship.

I attended an event some years ago in which the then Director General of the Confederation of British Industry (CBI) — Digby Jones — evangelised the need for UK Plc to embrace India, not for nostalgic or historic reasons, but to secure their survival. He explained “in the fullness of time, the past 250 years will be seen as a mere blip, an anomaly, in which India was subjugated. The future belongs to a resurgent India”.

It’s difficult to argue otherwise, just take a look at some of the statistics that stand out:

•    Almost 25 percent of the world workforce will reside in India within the next 15 years. The average age of its citizens will be a youthful 29 in 2020, whereas in Western Europe the average stands at 45. India’s demographic profile provides a huge opportunity for her in the next century.

•    India has a middle class larger than the entire population of the US — some 300 million residents, armed with a disposable income and looking for new avenues to spend their cash. The spectacular thing is that India’s middle class isn’t confined to its big cities or metros as they refer to them, but to far flung corners of the country in what are second and third tier cities, representing new markets — the Holy Grail as far as some of the world’s biggest fast moving consumer goods companies are concerned.

•    Just today, I read a tweet from someone I follow on Twitter about how the Indian Prime Minister’s Economic Advisory Council has forecast GDP growth at 8.5 percent this year and nine percent next year. Now, compare that with all the talk of Britain having avoided a double dip recession as a result of the growth in our economy at a measly 1.1 percent.

A hung parliament offers sterling little comfort

-Mark Bolsom is head of the UK Trading Desk at Travelex, the world’s largest non-bank FX payments specialist. The opinions expressed are his own.-

The final results are almost fully in and despite months of intense speculation the hung parliament outcome has come as an almighty shock to the financial markets.

As the likelihood of a decisive majority began to ebb away early this morning, sterling fell to a 12 month low against the dollar ($1.4476). And despite the euro’s weakness, sterling plummeted 3 percent in the middle of the night against the single currency, an unprecedented drop at that point during the day.

A hung parliament verdict was always going to be the markets worst nightmare and it really is a spectacularly disappointing result. Rightly or wrongly, the financial markets believe a hung parliament will hamstring the government when they come together to create a workable plan for reducing the deficit.

It is difficult to assess whether this is a legitimate concern – certainly there is wide acceptance across the political spectrum that tackling the deficit is the main priority – so it would seem strange for the parties to delay any decision making.

However, whilst it is very unlikely a similar situation will occur in Britain, the crisis in Greece does show what can happen if the markets do not accept the debt-reduction plan.

If we are to avoid a similar reduction in credibility and a resulting downgrade in our credit rating, it is crucial the government cooperates in the early stages of next week.

New gateway for British business opens in Asia

- Ash Verma is Chairman, Gateway Business Consultants Limited and Founder of Gateway Asia. The opinions expressed are his own. -

London has long had a reputation as a city where entrepreneurs from Asia have come to seek their fortune.  From its early 19th century roots when Sake Dean Mahomed opened up Britain’s first Indian restaurant and introduced the city to shampoo, London’s Indian diaspora has now grown into one of the largest communities outside the country. The Chinese community in London, too, is Europe’s oldest and largest.

London’s entrepreneurs should therefore be among the best placed in the world to export back to massively expanding markets in India and China. However, despite these powerful diasporas, we are not as a city or country doing as well as we should as exporters to these countries.

UK exports to India did increase last year but that was only because the values of diamonds shot up as a result of the global economic downturn. Only around one percent of the UK’s total exports go to India despite the UK having a Diaspora of one million people.  In its exports to China the UK is still a long way behind countries including Australia and Germany. Nine out of ten businesses in Britain don’t export at all.  And it is many of these companies that could find fertile markets if they looked east.  While there is no shortage of initiatives branded as helping exporters, they do not always offer the business to business hands-on help that research shows that companies want before exporting to India and China.

Even for those with family links, these countries remain difficult places to do business.  According to a report from the Department of Business, Enterprise and Regulatory Reform, India and China rank 122nd and 183rd respectively in estimates of their ease for businesses  – compared to a sixth place ranking for the UK. Our research shows that companies are being put off by practical obstacles – from coping with exchange rate fluctuation to understanding letters of credit and preparing goods for transport. Many fear that they will see their property rights get lost in a thicket of bureaucracy. Though much Olympic-related attention goes to the multiculturalism in the east of the City, it is in the western boroughs around Heathrow where Chinese, Gujurati, Tamil, Punjabi and Pakistani minority communities have built up strong small and family businesses that offer the greatest potential for trade links. We have attempted to fill the gaps in provision for SMEs by establishing “Gateway Asia” – the largest and most coordinated attempt to help West London’s small businesses build on their “family connections” to export to India and China.

The 1.2 million pound Gateway Asia Programme, which provides free support to any SME under 250 employees, funded by a mixture of public and private sector partners including HSBC, BAA, TCS and the Mayor’s London Development Agency, is expected to help around 250 businesses. The initiative will give free hard-nosed practical advice through ten workshops and one-to-one advice on the practical obstacles that exporters to the East will face – from transport to packaging.  One of the partners, HSBC, are using their branch network across London and overseas to support trade delegations and to spot potential collaborations between their clients. Meanwhile, thethe Confederation of Indian Industry will put London businesses in touch with potential trading partners in India. Among the first to sign up is the American Muffin Company, a business based in West London that wants to export its range of luxury brownies and cookies – currently supplied to UK supermarkets – into India.   And Bina Mistry, the writer and singer of  Indian hit “Hot, Hot, Hot” from Bend it Like Beckham is being helped by Gateway Asia’s help to export singing and dancing shows back to Bollywood. This could be a lucrative export market for the wealth of film producers, actors, scriptwriters, animators and events management companies working in West London. Napoleon once said of China. “Let her sleep, for when she awakes she will shake the world”.  China and India have long-since awakened as powerful traders; it is London’s businesses that need to rise from their slumber if they are to use their natural advantages to prosper in the East.

Election may be fought on peak between dips

By Ian Campbell

LONDON, April 13 (Reuters Breakingviews) – Gordon Brown says his Labour party will “secure the recovery” if it wins the UK election in May. The opposition Conservatives would kill the upturn, he says. Brown is right in one sense: the “recovery” can easily be broken. But only because it is so fragile in the first place.

The UK’s data looks more encouraging than it actually is. The UK needs exports and production to surge ahead. Trade figures released on April 13 might appear to herald that: February’s trade deficit was its smallest since June 2006.

But comparing the past three months with the three preceding months, the UK’s export volumes are up by a timid 1.5 percent, while imports rose by 3.8 percent. The UK needs an export charge. It simply hasn’t got one yet — in spite of the much weaker pound.

What the UK has had is a sustained charge in fiscal spending. The UK’s old stalwart, house prices, joined the advance last year. But here, the signs are turning down again. House prices in England and Wales rose at their slowest rate in March since last July, according to the Royal Institution of Chartered Surveyors.

Home-owners are starting to sell. Buyers are thin on the ground, ill-served by lending that remains soft.

Mortgage approvals were cut back in February and lending to businesses dropped in January, the Bank of England says. Money printing has not stimulated lending. True, the British Retail Consortium has reported an apparent surge in total retail sales in March. But this was after a depressed start to the year. Government data for the three months to February show sales down on the previous three months. Overall, first quarter GDP growth looks set to be weak.