China's rise calls for cool heads

China’s economy has grown 18-fold since 1980 and is expected to surpass the United States in 2016. 

Australia has every reason to be close friends with Beijing and Washington.
The rise of China and, following it, India is a massive realignment of economic and, in due course, political and strategic power at an unprecedented speed and scale.
By any measure China’s growth has been extraordinary – from 1980 to 2010 its economy grew 18-fold, an annual average of 10 per cent. China has been the world’s second largest economy since 2002 and according to the IMF’s forecasts will overtake the US in 2016.
India’s reforms started after those in China and its re-emergence as a global economic power has been more gradual. Still, from 1980 to 2010 India’s GDP increased six-fold, an annual average of 6 per cent. In 1990 western Europe and North America produced 49 per cent of world GDP, but by 2030 their share will almost halve to 26 per cent, according to Willem Buiter at Citigroup.

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Emerging Asia – excluding Japan – produced 14 per cent of world GDP in 1990, but will more than triple its share to 44 per cent in 2030 according to Buiter. Those are much bigger shifts in the location of global production than were recorded after the Industrial Revolution, and they are occurring over much shorter time frames.
More than almost any other country, Chinese leaders draw strength and guidance from history. Deng Xiaoping reached back to the trade and exploration of Admiral Zheng He in the 15th century when, in 1979, he began to open China to foreign trade. He reminded the hardliners that when China had engaged with the world it had been strong. When in the 16th century it closed off the world, this began a decline that ended with 150 years of humiliating invasion, colonisation and exploitation by stronger nations.
The world may be amazed by China’s dramatic rise, but the Chinese recognise this as very much a return to the natural order of things.
China represents a unique challenge to the US. Americans, imbued with a deep sense of their own exceptionalism, have assumed they will always be the strongest, richest and cleverest nation on earth. But now Americans everywhere feel the core of their economy is being hollowed out. Their pessimism has a basis: 42,000 factories closed in the US between 2001 and 2010 and 5.5 million manufacturing jobs disappeared. China now makes more cars than the US and Japan combined.
It is becoming all too clear that in the developed world the rising tide of convergence and globalisation will not lift all boats, and certainly not at the same rate. The key, if obvious, insight is that a converged global economy is much larger and much more competitive but with many more opportunities. Within two decades there will be more middle class consumers in Asia than in the rest of the world.
The firms and nations that will succeed will be the most efficient and innovative, and the highest quality. For high-wage countries that seek to remain so, the pursuit of excellence was never more important. Our schools and universities should be turning out the world’s top students – not settling for middle of the pack, which is where one measure suggests many advanced nations find themselves.
Just as research, education and infrastructure are long-term investments, so too is there a need in my country to recognise our terms-of-trade windfall will not last forever. There is a view that it will, especially in Canberra, and that is dangerous complacency.
As worrying as the shift of manufacturing and economic output to Asia, in the eyes of many in the West, are the transfers of political, institutional and military influence that will surely follow. Shifts in economic weight and military potential are a legitimate cause for anxiety. Previous threats to more than a century of US economic primacy were not credible: the USSR of the late 1950s and Japan of the late ’80s, the two alleged challengers, had economies only 40 per cent as large. So the stakes are high, and this time the challenger is real.
Yet most Americans appear utterly flummoxed by the swiftness of China’s rise, which was not on their horizon until recently. As late as the 2004 US presidential race, for instance, China’s economic rise barely rated a substantive remark from either candidate in three hours of debate over America’s future watched by a combined audience of 160 million.
Economic anxiety has been felt before in America and Europe – over the rise of Japan, for example. But this time there is also strategic anxiety in the West, particularly the US, over China, reflecting a concern that the Middle Kingdom has a very different understanding of the way in which world affairs should be ordered than the West.
It is important to note China’s growth in power, economic and military, has not been matched by expansionist tendencies beyond reuniting Taiwan. Large areas in China’s north-east taken by Russia under duress have not been left unresolved as a possible future casus belli, but instead were legitimised in new treaties.
The central role of trade in China’s prosperity also argues for its rise to remain peaceful. China’s trade was 55 per cent of its GDP in 2010 – five times larger than the role of trade in the US economy of the 1950s and 1960s, when US economic dominance was greatest. China has more to lose than most from any conflict that disrupts global economic flows.
With its energy and resource security depending on long global sea lanes, it is hardly surprising that China would seek to enhance its naval capacity. Suggestions that China’s recent launch of one aircraft carrier and plans to build another are signs of a new belligerence are wide of the mark.
It makes no sense for America, or its allies, to base long-term strategic policy on the contentious proposition that we are on an inevitable collision course with a militarily aggressive China. I disagree with the underlying premise of the 2009 Australian white paper that we should base our defence planning on the contingency of a naval war with China.
Cool heads are required on all sides. China needs to be more transparent about its goals in the region and on the basis of that build confidence with its neighbours so that misunderstandings can be avoided.
As China rises to become the world’s largest economy and in time a military rival of the US, we in Australia are presented with a nation whose institutions and culture are very different to ours. Yet China is our largest trading partner, and largely responsible for our prosperity.
We have every reason to remain, and every prospect of remaining, close friends of both these giants. But as Australia adjusts to a multi-polar world, we have much to do to draw closer to the other nations in our region, including India, as we deepen our relations and trust with our neighbours.
This is an edited extract from a speech given by opposition spokesman for communications Malcolm Turnbull to the London School of Economics.

Read more: http://www.smh.com.au/opinion/politics/chinas-rise-calls-for-cool-heads-20111005-1l9k8.html#ixzz1ZzR7tBuo

Whats the Point behind This inflationnary situation in Uganda

 Is Dual Circulation of Uganda Bank Notes  the Cause of Inflation now?.....
Economic reasonings and analysis needed for assessment.

personally is would suggest that its currently a monetary inflation ( 2011 elections) with a dummy variable as the international Fuel prices. among other relevant factors but those are much pressing ccurrently? How do you see things.

Central Bank sets new borrowing rates

THE governor of the Bank of Uganda, Emmanuel Tumusiime-Mutebile, has announced a 13% Central Bank rate for July, the first in a series of monthly rates aimed at clamping down inflation through adjusting the cost of borrowing.

Commercial banks will have to pay the 13% interest up from 11% on money borrowed from the Central Bank and in turn transfer the burden to their loan clients thereby making borrowing more expensive during the month of July.

“To tighten monetary policy, the Central Bank rate will be set at 13% for the month of July. The interest rate will be used to guide the seven–day interbank interest rates,” the governor said while addressing journalists at the Central Bank in Kampala.

The seven-day interbank rate is the rate of interest one bank charges another for money borrowed for a week.

Mutebile said the Central Bank would use its daily secondary market operations in the money market to steer the seven-day interbank rate as close as possible to the Central Bank rate.

He pointed out that the shortfall in supply of commodities that has seen prices of food and fuel shoot up is soon subsiding to bring down core inflation currently at 12.2% by the end of the year. “The Bank of Uganda intends to maintain a tight monetary policy stance to curb demand for credit and thus dampen inflationary pressures over the next six to 12months,

“This will ensure that core inflation is pulled back towards the target of 5%,” he explained.

Adam Mugume, the BoU director for research, said tight monetary stance would inevitably slow the country’s economic growth even while reducing demand for loans and the core inflation.

“We believe that in the next three months the tight monetary stance will drive down core inflation to a level between 10% and 12% and core inflation between 12% and 14%. This should increase interest rates and slow the country’s economic growth momentum,” he explained.

Some analysts said they had expected a higher Central Bank rate given one-week interest rates are running above 16%, but given the Central Bank’s stated determination to tackle inflation, it should be positive in the long run.

“With the promise of more tightening still to come, market expectations will be firmly geared towards further policy rate increases, especially if the foreign excahnge threat to the inflation target remains sustained,” said Razia Khan, an economist at Standard Chartered Bank in London.

“For now, the policy rate is at least positive with respect to core inflation. From an economic perspective, the Central Bank is delivering what is needed. Real interest rates are positive with respect to core inflation and given the substantial impetus to inflation as a result of supply-side shocks, yes, there is a requirement not to overdo the pace of tightening” he remarked..

How to live During Inflation

Of the various ills the economy can face, inflation is simultaneously the worst for society as a whole, and yet the easiest for individuals to deal with successfully. The strategies for dealing with inflation are pretty straightforward.
In theory, inflation shouldn't matter at all, "as long as it is predictable". If you know that inflation is going to be 10% next year, you demand a 10% raise (and your boss gives it to you, because he knows that 10% inflation means that the raise doesn't cost him anything). Everybody else does the same and prices, wages, interest rates, stock market returns, etc. are all 10% higher, even though in real terms everyone is standing still.
In practice, of course, it isn't so simple:

• Just because you demand a raise that matches inflation doesn't mean you'll get it.
• When inflation is bad, prices go up every month (maybe every week), but wages and salaries generally only go up once a year. People are always feeling like they're playing catch up.
• Inflation is never really predictable. Everybody has their own guess about what inflation will be, and most of them will be wrong. Whether your estimate is high or low, you'll have problems to the extent that you're wrong. Even if you're wrong in a good way, such as having negotiated a 10% raise when inflation turned out to only be 8%, you're still in trouble (maybe your company has to lay you off).
• Taxes are imposed on nominal returns, so you can find yourself in the perverse situation of losing money in real terms, and yet still paying taxes on supposed profits.

For individuals, the strategies for dealing with inflation are:

1. Be careful about holding cash. This is a big change for people who have come of age since 1981 or so--since then, holding cash has been a perfectly reasonable thing to do. People whose saving and investing experience includes the 1970s, though, remember having a bank account that was earning 5% interest rates that was nevertheless worth 5% less at the end of the year.
2. Don't make long-term, fixed rate loans. Until the inflationary period is over, don't buy bonds. High inflation rates completely destroy the value of long-term bonds. The flip side of this is that borrowing money on a long-term, fixed rate basis (such as a mortgage) can make good sense, if you can get good rate. There are a lot of people who bought a house with a 30-year mortgage at a fixed 6% or 7% and held as rates went up to 14% or higher. They made out like bandits.
3. Invest in "stuff" rather than in money. This can be gold (although I'd hesitate to establish a position at these prices). Even better is stuff that you're going to use anyway. If you're going to use it anyway, and you can get it at a good price now, it makes a great deal of sense to buy stuff now, rather than save cash and then buy it later.
4. Invest for long-term capital gains. Inflation tends to produce illusory profits: you look like you're making a profit even when you're just keeping up with (or even failing to keep up with) inflation--and you have to pay taxes on those profits. This makes investing for income (where a large fraction of the income is really just keeping you even with inflation) a bad deal. It also makes short-term capital gains a bad deal for much the same reason--you have a big (taxable) gain, even if in reality you're just breaking even. Investing for long-term capital gains helps with these issues.
5. Use barter and the informal economy. If your neighbor hires you to help him create a website and you hire him to help you cut down a diseased tree next to your driveway, you both owe income taxes on whatever you're paid. If you instead swap these services informally, you still owe the taxes, but you're expected to declare the income at its fair market value. It's perfectly reasonable, though, to declare the income at what the service would have been worth the previous year.

For businesses, the strategies are similar, except that it's possible to greatly expand on that last point--use barter and the informal economy--by vertically integrating the company so that the steps of producing your product are all internal transfers rather than cash transactions with another company.
If company A produces raw materials, company B refines them, company C builds sub-assemblies, company D makes consumer goods, company E ships them, company F wholesales them, and company G sells them to consumers at retail, imagine what happens as inflation forces prices up at each step along the way--producing illusory profits that each company has to pay taxes on. On the other hand, if one company handles the entire production chain, the only cash transactions are things like salaries and rents--that can be fixed for a year at a time. All the other transactions can be dealt with as an internal accounting matter, with no taxes due.
In addition to vertically integrating, it also makes sense for businesses to reverse the trend toward outsourcing--instead of paying someone else to haul the trash away (a taxable transaction), haul your own trash away (an internal transfer that doesn't incur any taxes). Likewise, in-source anything you can--accounting, legal, maintenance, facilities, etc.Inflation works its harm on the economy in several different ways. None of them are really due to the inflation itself, which is why economists always insist on pointing out that mere inflation does little harm. The harm is done, though. It's just one step removed.

Watch our Expenditure.

Uganda’s economy on track – IMF

THE International Monetary Fund (IMF) has endorsed Uganda’s Policy Support Instrument (PSI), saying it aims at maintaining macroeconomic stability and alleviating constraints to growth.

The endorsement, which was announced yesterday after IMF’s executive board completed the second review under the PSI for Uganda, means that the country is on the right path towards economic development.

IMF deputy managing director and acting chairperson Naoyuki Shinohara in a statement said: “Thanks to generally sound macroeconomic policies, Uganda withstood the global financial crisis and other shocks. Economic growth has recovered and is expected to strengthen, although inflation risks, mostly related to rising food prices, have increased.”

He added that the modest intervention by the Central Bank had mitigated volatility of the exchange rate, helping the financial sector to remain sound.

Reacting to the endorsement, the finance ministry permanent secretary and secretary to the treasury, Chris Kassami, said the endorsement shows that the economy is being competently managed.

A successful policy support instrument, he added, was important for the credibility of Uganda’s budget and attracting foreign investment.

“This endorsement gives a signal to investors and donors. Even Ugandans living abroad have the confidence that the money they send back home is safe,” Kassami said yesterday.

Policy support instruments are designed for low-income countries that may not need, or want IMF assistance but still seek the organisation’s advice, monitoring and endorsement of their policies.

“A PSI review is, therefore, an important tool in giving signals to the international community and investors about soundness of the economic policy framework,” Kassami explained.

PSIs are voluntary and demand-driven. The PSI for Uganda was first given a green light on May 12, 2010.

Shinohara said the main challenge facing economic policy makers at present is to adjust fiscal and monetary policies to safeguard macro-economic stability and rebuild policy buffers, including international reserves.

He noted that scaling up infrastructure investment will be key to faster growth in Uganda over the medium term.

Kassami said the Government will continue to invest in infrastructure, value addition, agriculture and human resource to improve competitiveness and exports growth.

Commenting on the depreciation of the shilling against the dollar, Kassami said the current problems of the shilling were temporary and would be handled.

He said international factors had affected Uganda’s exports thereby reducing foreign exchange inflows.

The shilling hit an all-time low of sh2,725 against the dollar on Wednesday due to the increasing global demand for the dollar.

“The Government is taking measures to improve exports to increase foreign exchange inflows and resolve the shilling problem in the short term,” Kassami explained.

But, he said, redeeming the shilling was a collective responsibility where all Ugandans have a role to play through working hard and exporting more.
source.  http://newvision.co.ug/D/8/12/758991

Today's inflation figures: this could cost you even more than the banking collapses.

Inflation is hitting savers harder than they realise (Photo: Alamy)

The latest inflation numbers were out today: 5.2 per cent again for the change in the cost of living (the RPI); 4.5 per cent for the change in the Bank of England’s policy index (CPI). The combination of high inflation and the policy response to have cost savers just as much as (if not more than) if they had had money in banks that were liquidated.
First, let’s see how much savers have actually lost. The banking crisis has been going on since mid-2007. Let’s call that four years. The natural equilibrium rate for UK interest rates – the rate that would be set if policymakers were not trying to manage short-term macroeconomic disturbances – is about 5 per cent. The inflation target is 2 per cent.  If inflation had 2 per cent and interest rates 5 per cent for the past four years, then £10,000 invested in 2007 in an account paying out at Bank Rate would now be worth about £12,200, or about £11,200 in real terms (at 2007 prices).
In fact, interest rates have average just 2.3 per cent in real terms over the past four years, whilst CPI inflation has averaged 3.3 per cent.  So £10,000 invested in 2007 at Bank Rate would now be worth £10,900 or £9,600 in real terms (at 2007 prices). So in real terms, savers’ money is only worth about 86 per cent (£9,600/£11,200) of what it would have been worth had policy been neutral and inflation kept under control – a loss of 14 per cent.
In 2007, the first £2,000 of depositors’ money was insured 100 per cent, and the next £33,000 was insured 90 per cent.  If depositors had been preferred creditors of banks, as they should be, then no depositor could conceivably have lost a penny in 2007, and the state insurance scheme would not have been called upon.  But let’s ignore that for now, and consider a case in which your deposit insurance is required. Then our £10,000 saver would have lost 10 per cent of the difference between £10,000 and £2,000, i.e. £800.  So she would have recovered 92 per cent (or lost 8 per cent) – well ahead of the 86 per cent value (14 per cent loss) she has experienced under our low interest rates/high inflation policy.
Consider a more extreme case. Suppose that there hadn’t been any deposit insurance and that depositors hadn’t been preferred creditors.  Then what?  Well, in the early 1930s banking collapses in the US, typical depositor recovery rates were above 80 per cent. So if there had been no insurance at all, depositors had not been preferred creditors, and the UK banks in 2007-9 had been just as bust as the US banks of the early 1930s, then depositor losses would have been about the same as they have been over the past four years under our low interest rates/high inflation policy.
One of the implications of all this is that if you were a saver in a bank that wouldn’t have collapsed, such as HSBC, you have made a very considerable loss from this policy. Depositors in robust institutions have a clear interest in opposing bailout/low interest rate/inflate away the debt schemes.

Andrew kyambadde

Least Developed Countries: Reservoirs of Untapped Potential by Ban Ki-moon

Ban Ki-moon addresses UN-LDC forum UN Photo/E.Schneider

In 1971, the international community identified 25 Least Developed Countries: the poorest and weakest members of our global family, those in need of special attention and assistance.  Today there are 48 LDCs, home to nearly 900 million people, 12 per cent of the global population, half of whom live on less than $2 a day.

They suffer disproportionately from largely preventable diseases.  They are most vulnerable to natural disasters, environmental change and economic shocks.  They are the least secure.  Eight of the United Nations 15 peacekeeping operations are in least developed countries.  In the past decade those nations have produced some 60 per cent of the world’s refugees.

The facts are plain.  We live in an unbalanced world, an unfair world.  With 12 per cent of the global population, LDCs account for just 1 per cent of world exports, and less than 2 per cent of global direct investment.  Recent years have seen a transformation of the global economic landscape.

Since the 2001 Brussels Programme of Action was adopted, many LDCs have benefited from this changing environment.  But others have seen little progress or have even slid back.  We risk a splintered world economy, a widening gap between haves and have-nots, between those who have hope and those who do not.

This cannot continue.

I have painted rather a bleak picture.  But there is another one, a landscape of opportunity.  It is this outlook that I want to present to you today.  It is time to change our mindset.  Instead of seeing LDCs as poor and weak, let us recognize these 48 countries as vast reservoirs of untapped potential.  Investing in LDCs is an opportunity for all.

First it is an opportunity to relieve the world’s most vulnerable people of the burdens of poverty, hunger and needless disease.  This is a moral obligation.  Second, investing in LDCs can provide the stimulus that will help to propel and sustain global economic recovery and stability.  This is not charity, it is smart investment.  Third, it provides a massive opportunity for South-South cooperation and investment.  The world’s rapidly emerging economies need both resources and markets.  LDCs can provide both — and are increasingly doing so.  Fourth, the LDCs represent a vast and barely touched area for enterprise, for business.We have all the ingredients for success, for a genuine partnership for development. 

I would like highlight some broad areas where we can reap the maximum benefits for LDCs and the global economy.

First, productive capacity.  Most LDCs are rich in resources.  All have young and vibrant populations.  These men and women need decent jobs, education, training, so they can make the most of their country’s assets — minerals and other commodities, farmland, rich stores of biodiversity and tourism potential.

However, enhanced productive capacity will only be achieved with a dynamic and thriving private sector.  One of the most significant aspects of this Conference is the enthusiastic engagement of the business community.  Let us ensure that business has the right environment to thrive.  It is no coincidence that the three countries that have graduated from the LDCs also score high on governance and democratic principles.

Let me now turn to the issue of aid.  Official development assistance (ODA) to LDCs has nearly tripled in the past decade.  But it remains below agreed targets.  Yes, it is true that we live in times of austerity.  But as I have said, assistance to LDCs is not charity, it is sound investment.  Many also argue that current aid places too little emphasis on economic infrastructure and productive sectors.  Furthermore, many LDCs are still saddled with unsustainable debt burdens.  I urge lenders to revisit this issue.

Let me now turn to agriculture, which employs as much as 70 per cent of workers in LDCs.  This is perhaps the most important sector for development.  We need to invest more in smallholder farmers and the infrastructure they need.  This means transferring appropriate technologies, supporting climate change adaptation and protecting ecosystems.  We need to invest, too, in basic social protection and safety nets.
Global food prices are at new record levels.  LDCs face a real prospect of a new crisis in food and nutrition security.  In many LDCs, the poor spend more than half their incomes on food.  More than 40 per cent of children in LDCs have had their growth and development stunted by malnutrition.  A country that cannot feed its children cannot thrive.

My final point concerns trade.  The international community has failed to follow through on global commitments in the Monterrey Consensus and the Doha Declaration on Financing for Development.  I call again for a successful conclusion to the Doha Development Round of multilateral trade negotiations.  There is little point in helping LDCs to grow food and other commodities, manufacture products and develop services if they cannot trade fairly in the global marketplace.

The United Nations system will continue to prioritize LDC issues throughout its programmes.  We will work diligently with all partners to help implement the new Istanbul Programme of Action.

A measure of any society is how well it looks after its least fortunate.  The same is true of the international community.  Now is not the time to turn our backs, but to increase our support.

The past two decades saw spectacular progress among emerging economies.  The LDCs are poised to be the next wave of development achievement.  Let me emphasize again, ladies and gentlemen: I am not arguing for charity, but investment.  The returns can be profound — not just for the people living in LDCs, but for all people — for the global economy.  Success for the LDCs is ultimately success for all.

Let us try our best to make this world harmonious, balanced and better for all.

By Ban Ki-moon
UN Secretary-General.

Bank of Uganda should reign in speculators

THE Bank of Uganda (BOU) should reign in on speculators that it accuses of driving the shilling to record lows against the dollar.

Our neighbours Kenya have already started auditing and restricting their interbank transactions and as of close of last week, Njuguna Ndung’u, the governor of the Central Bank of Kenya, said he had discovered improper interbank trading and taken action against five giant banks.

In fact, up to $260m (sh648trillion) was exported by the five banks, pushing the exchange rate to 91.90, the lowest Kenya ever recorded.

Ndung’u said this pointed to speculative positions. He also noted that four big banks were holding large overseas positions.Within the same period, borrowing from the Central Bank of Kenya by strong banks went up.

The same could be happening in Uganda since most of the big banks are foreign.

Given the high global demand for the dollar, it can be tempting for anyone to make a quick buck through speculation.

Much as dollar inflows are not substantial to offset the demand, the erratic behaviour of the shilling does not reflect trading fundamentals. For example, do all the dollars that the Central Bank inject into the market go into traceable transactions or does it just go to some few financial institutions, which airlift it out of the country?

Even if we are a fully liberal economy, times like these require that we tighten our supervision. As Tumusiime Mutebile, the BOU governor indicated recently, he needs to effectively burn speculators’ hands.

He should walk the talk. The public should see something being done in terms of predictability of the exchange market.

Since the Central Bank surely knows where the loopholes are, they should quickly fix them up to prevent our businesses from going under due to the increasingly unpredictable exchange rate