Coming Soon to a Central Bank Near You

The Governor of the Bank of England announced yesterday that the Bank will begin to engage in a policy of “quantitative easing.”  If just reading that phrase makes your head spin in an array of economics you cannot understand, I have found just the thing for you.  This excellent interactive feature by the Financial Times clearly explains how monetary policy usually works, and why in bad times, Central Banks occasionally attempt to do “unorthodox” (economic jargon for “crazy”) things, and what the benefits and risks of doing so are.

Quantitative easing is one of these unorthodox things.  It is often described as printing money, but actually has to do with the Central Bank creating money to intervene more actively in the economy.  I’ll let the FT explain further, as they do a good job at it.   The added bonus of listening to the end is that the video features the phrase “willy-nilly,” a term you don’t often hear in the context of Central Bank policy.

Big foot

My one year old son’s foot fits comfortably in the palm of my hand, yet his carbon footprint is huge.  Using an online carbon emissions calculator, I calculated the carbon emissions from the flights that he had taken in his young life.  Turns out his per capita emissions based on his flights alone are greater than those of approximately 70% of the world’s, despite the fact that he weighs less than 25 pounds and his entire vocabulary is comprised of “mommy,” “daddy” and “juice.”

So, how does N.’s carbon footprint stack up?  Well, like I said, I only calculated his emissions from flying, as the calculations from the house and ground transport seemed too complicated and were likely to be much smaller as we don’t own a car and have a small apartment.  This chart, which shows per capita distribution of carbon emissions, shows that N.’s 6.31 tonnes of carbon emitted through his flights puts him exactly on par with the average Iranian (in 2004).   And therefore his emissions are larger than the average French, Mexican, Thai or even Chinese citizen.  Quite sobering.

Of course, N. is an innocent victim of his parent’s irresponsible travel habits, which are contributing to global warming.  He didn’t ask to go to Texas for Christmas, though he definitely enjoyed playing with his grandparents and harassing their dog.  And that’s my only excuse.  Since his grandparents live in two different countries, and we live in a third, almost all of his flights are explained away by visiting them.  Since he was born in November 2007, he’s flown round-trip to the US three times from London, taken one domestic US flight, flown round trip to Italy four times and flown once from Italy to Germany and from Germany back to the UK to attend a wedding.  Makes me wonder if there is a special offset mechanism for keeping globalised children in touch with their grandparents…

Risky Business

There’s an audacious and unfounded claim circulating in the world of development finance, perpetuated by the World Bank.  And while you might not be kept up at night by it (and frankly neither am I), I’m here to debunk the myth.

The myth is that when developing countries invest in other developing countries, they are immune to political risks because they understand political risk in other developing countries better.  The entire argument relies on cultural affinity and shared business practices, despite the fact that the evidence does not support this argument at all.  If you’ll allow me to draw on some of my research and consultancy work on political risk and rant for a moment…

The amount of so-called “south-south investment”, foreign direct investment from one developing country to another, has increased over the past decade.  While in 1995 south-south FDI was 15% of total FDI flows, in 2003 it was almost 37%.   This was more than northern countries invested in southern countries (nonetheless, the bulk of FDI is still between developed countries).   The World Bank claims that the majority of these south-south flows are within region.  But there are some important exceptions.

According to their own data, China’s investment in South-East Asia (its “southern region”) only accounts for 20% of total south-south FDI.  India’s investment in South-Asia is only 25% of its total.  Even Russia, whose investment is often argued to be extremely regional, still invests more than 60% of its south-south FDI out of its region. Data for Brazil wasn’t as easily available, but as we’ve now shown that 3 out of 4 so-called “BRIC” countries do not have FDI flows predominantly within their region, the idea that political risk for south-south investment is mitigated by the fact that southern multi-national corporations invest in  “countries that share the same cultural and ethnic  links and heritage, frequently neighboring ones where they are already familiar with the local business environment through trade” seems a bit far fetched.

The World Bank stretches this invalid argument to its very limits, arguing that developing countries are more likely to disregard weak institutions when investing:  “Banks from developing countries are more likely to enter developing countries with weak institutions. This result seems to indicate that banks from developing countries, being more familiar with working in domestic environments where institutional development is low, are more suited to investing in such markets.”  I find it incredible that this was even published, seeing as it is complete conjecture, and makes limited sense.

Nonetheless, the branch of the World Bank that provides political risk insurance reports that, when asked, CEOs of southern MNCs investing in other developing countries report less concern about political risk than CEOs of Northern firms investing in developing countries.  I think that there are only two plausible, non-cultural (and therefore non-bogus) explanations of why developing country MNCs might perceive political risk to be lower when they invest in other developing countries.

The first is that particularly in the case of China, many of the firms doing the investing are state-owned.  Having the explicit backing of the central government makes firms more risk-acceptant, and increases the chances that the Chinese government will go to bat for the firm in question if its operations in another developing country suffered expropriation or interference via other types political action.  A US firm operating in Angola may not enjoy the automatic support of the American government in the same way.

The second reason seems to be that southern MNCs have not yet been burned, and therefore have little to fear.   Why perceive political risk as being important if everything has been smooth sailing to date?  This is, after all, a new investment trend.   As south-south investment becomes more established, the number of cases of political interference in these investments will increase, and so will perception of risk.

Two examples seem to be a case in point: when a leftist government was elected in Bolivia and began to renegotiate foreign contracts for natural resource extraction, the neighbouring left-leaning Brazilian government believed that its petroleum investments would remain untouched out of “cultural and ethnic  links and heritage.”  But oops!  The first company the Bolivian government expropriated was Petrobras.  Additionally, an article I read recently about Chinese energy security argued that “Chinese energy companies… have only a short history of managing the political risks of venturing into an overseas market,” citing mismanagement of deals in the Caspian as evidence.

So all of this to say that political risks are not magically erased through some sort of third-world solidarity or secret poor country handshake.  South-south FDI is as prone to politically-induced losses as north-south FDI.  It’s just not as big of a problem… yet.

Making Babies

An article in the January 19th edition of the New Yorker about the history of breastfeeding and the recent trend to accommodate breast-feeding women in the workplace was sent to me by a friend.  She and I later traded comments about how much maternity leave each of us had received: she lives in San Francisco and had 12 weeks of leave at 60% pay for her first baby, and only 6 weeks at 60% pay for her second baby.  I live in London and had 6 months of leave – 3 at full pay, 3 at half pay – and the rights for an additional 6 months of state maternity leave (which is about $300 a month), which I did not take.

American women who take less maternity leave, and work until the day they give birth, are applauded rather than looked at with skepticism: Sarah Palin was given big plaudits for coming right back to work after her little one was born, and the representative taking Hillary Clinton’s New York Senate seat, Kirsten Gillibrand, got a standing ovation by her colleagues on the House floor for working up the day her second child was born. The point that the New Yorker article was making is that having corporate policies which allow women to comfortably pump breast milk during the working day is not the same thing as having pro-family policies.

Thus I got all worked up this morning when I read a letter in this week’s New Yorker responding to the article.  The author of the letter stated: “Six to twelve months of maternity leave per child would be a personal, professional, and economic disaster for plenty of women and families.  It is worth noting that the countries that have these types of policies also tend toward abysmally low birth rates.”

Au contraire, dear Jill Foley from Princeton, N.J.  The first sentence just seemed to me silly, and not at all consistent with my experience or that of others.  Ms. Foley states that “The ability to economically support myself and my family, to contribute to society by pursuing the discipline that I studied for more than a decade to become qualified to practice…are all opportunities that I heartily thank the women’s movement for.”  But why must a woman go back to work within 6 weeks of giving birth to “contribute to society” and support their families?  I too studied for nearly a decade, and going back to work after 6 months presented me no problems as my organisation was happy to have me out for that period of time to spend some important months with N.

But the thing that bothered me more about Ms. Foley’s letter was the second sentence, which is empirically false.  Research has demonstrated that low birth rates are the result of a bad combination of policies.  In countries where state support for maternity and childcare are high (like in Scandinavia), people have more babies.  In countries where the job market is flexible and women can leave and re-enter the workforce relatively easily (e.g. the UK and US), birth rates are also high, regardless of state provision of pro-family policies.  Birth rates are low are in places where state provision is insufficient and the market for work is not flexible – e.g. Italy and other parts of Southern Europe.

So Ms. Foley is wrong.  It it not worth noting that countries that provide their female employees with six to twelve months of maternity leave have abysmal birth rates.  It is worth noting that some countries have a bad mix of policies, which is contributing to their very low birth rates.  Presumably increasing maternity and childcare benefits in the US would have no impact on the birth rate unless the move was coupled with a de-flexibilisation of the workforce.

All the King’s Horses

London is a paradox.  Though it is undoubtedly one of the world’s most globalised cities, it is also a very old city, steeped in history.  And every once and a while, these two aspects of its personalities come into sharp contrast.   I’ve mentioned in a previous post that my work is occasionally disturbed by the very loud bells of a 17th century church which is just outside my office.  Today, my walk to the tube was disturbed by a parade of cavalry.  Crossing Elgin Avenue, the beautiful main street of our neighbourhood (pictured above), I was faced with 100 or so horses, their military mounts and several 13 pounder guns (small cannons).  They passed down my street, leaving in their wake a lot of horse poop and a good deal of backed up traffic.

In fact, this is not the first time that I’ve seen the horses.  They belong to the King’s Troop Royal Horse Artillery, which are barracked just 5 minutes from our house in St John’s Wood.  They perform ceremonial state services (firing the guns on state holidays, for example), but also have active duty soldiers as members.    And of course, they also bock traffic and messy the street every once a while.

Animals in the city always seem a bit out of place.  Often, riding my bike home from LSE, I see one lonely giraffe in Regent’s Park (where the London Zoo is located).    He looks cold, and very out of place.  And once, one the way home from work at JPMorgan at 2am in New York City, my cab driver was stopped so a parade of elephants could cross Park Avenue.  They were walking tail to trunk, about 20 of them, including babies.  If I hadn’t read the next morning that the circus in town, I would have thought it was a late- night figment of my imagination.