Building BRICs of growth

THE biggest investment boom in history is under way. Over half of the world’s infrastructure investment is now taking place in emerging economies, where sales of excavators have risen more than fivefold since 2000. In total, emerging economies are likely to spend an estimated $1.2 trillion on roads, railways, electricity, telecommunications and other projects this year, equivalent to 6% of their combined GDPs—twice the average infrastructure-investment ratio in developed economies. Largely as a result, total fixed investment in emerging economies could increase by a staggering 16% in real terms this year, according to HSBC, whereas in rich economies it is forecast to be flat. Such investment will help support economic growth this year as America’s economy stalls—and for many years to come.

Compounding this year’s figure, Morgan Stanley predicts that emerging economies will spend $22 trillion (in today’s prices) on infrastructure over the next ten years, of which China will account for 43% (see left-hand chart). China is already spending around 12% of its GDP on infrastructure. Indeed, China has spent more (in real terms) in the past five years than in the whole of the 20th century. Last year Brazil launched a four-year plan to spend $300 billion to modernise its road network, power plants and ports. The Indian government’s latest five-year plan has ambitiously pencilled in nearly $500 billion in infrastructure projects. Russia, the Gulf states and other oil exporters are all pouring part of their higher oil revenues into fixed investment.

Good infrastructure has always played a leading role in economic development, from the roads and aqueducts of ancient Rome to Britain’s railway boom in the mid-19th century. But never before has infrastructure spending been so large as a share of world GDP. This is partly because more countries are now industrialising than ever before, but also because China and others are investing at a much brisker pace than rich economies ever did. Even at the peak of Britain’s railway mania in the 1840s, total infrastructure investment was only around 5% of GDP.

Infrastructure investment can yield big economic gains. Building roads or railways immediately boosts output and jobs, but it also helps to spur future growth—provided the money is spent wisely. Better transport helps farmers to get their produce to cities, and manufacturers to export their goods overseas. Countries with the lowest transport costs tend to be more open to foreign trade and so enjoy faster growth. Clean water and sanitation also raise the quality of human capital, thereby lifting labour productivity. The World Bank estimates that a 1% increase in a country’s infrastructure stock is associated with a 1% increase in the level of GDP. Other studies have concluded that East Asia’s much higher investment in infrastructure explains a large part of its faster growth than Latin America.

A recent report by Goldman Sachs argues that infrastructure spending is not just a cause of economic growth, but a consequence of it. As people get richer and more of them live in towns, the demand for electricity, transport, sanitation and housing increases. This mutually reinforcing relationship leads to higher investment and growth. The bank has developed a model that uses expected growth in income, urbanisation and population to forecast future infrastructure demands.

Urbanisation has the biggest impact on electricity requirements. Goldman calculates that a 1% increase in the share of people living in cities leads to a 1.8% increase in demand for installed capacity. A 1% rise in income per head leads to a 0.5% increase in demand. Putting this together, electricity capacity may have to surge by 140% in China and by 80% in India over the next decade (see right-hand chart). Air travel—and hence airports—will see the fastest growth in demand, because it is by far the most sensitive to income: a 1% increase in income per person leads to a 1.4% increase in the number of passengers travelling by air. The number of air passengers could jump by more than 350% in China and by 200% in India over the next decade.

China’s faster growth in income per head and its more rapid pace of urbanisation mean that it is likely to pull even further ahead of India on most infrastructure measures. China could add 13 times as many fixed-line phones as India over the decade, seven times as many air passengers and six times as much electricity capacity. Brazil and Russia, which are already much more urbanised and relatively richer (implying slower growth in income), will also see more modest growth in infrastructure.

A boom in fumes

How will emerging economies finance all this spending? The fiscal finances of most emerging economies are in good shape. As a group, they are close to having a balanced budget, although a few, notably India, have large deficits. Even so, the vast scale of investment will require more private-sector money. To attract that, emerging economies will need to offer investors a decent return and that will require reform of their regulatory systems and a move towards market pricing. In India only about half of all electricity generated is paid for, because power is stolen and bills are left unpaid. In turn, the financing needs of massive infrastructure investment could encourage the development of domestic bond markets, bringing additional long-term benefits.

The infrastructure boom has global implications. Increased investment means more imports of capital equipment, which will help to slim current-account surpluses in China and elsewhere, and so reduce global imbalances. Rising demand for building materials will keep commodity prices high.

Last, but not least, will be the negative impact on the environment. An expected 75% increase in emerging economies’ electricity demand over the next decade will worsen air pollution and global warming. Many fear that China’s Three Gorges Dam, the world’s largest hydroelectric project, could cause massive environmental damage. China’s national bird, the red-crowned crane, is an endangered species. Some people may wish that the construction crane was also breeding less rapidly.

Fonte: Economist

Latin America’s Free Trade Market Struggles

Trago um artigo da revista World Trade Magazine. Espero que gostem

If U.S. trade negotiators had their wish, the Western Hemisphere would be organized into a single, massive trading bloc, the Free Trade Area of the Americas (FTAA). But for years, the FTAA dream has been checked by the “Market of the South,” known in Spanish as Mercosur.

On paper, Mercosur is South America’s response to both NAFTA and the European Union. Like those groups, it is a common market, comprising Brazil, Argentina, Paraguay, Uruguay, and Venezuela, with five other continental neighbors as associate members.

It has four times the land area as the EU (though with 250 million people covered, about half the population.) And while its $1.1 trillion combined GDP pales in comparison with those of Europe and North America, it is growing fast, as is internal trade, reaching $26 billion in 2007—up from just $1 billion 17 years ago, before it was signed.

But what works on paper isn’t always so rosy in the harsh light of reality. Mercosur, most analysts conclude, is struggling—and may not last much longer. If recent events mean anything, U.S. trade negotiators should be sleeping a little better at night.

The trading bloc actually predates NAFTA, having been established in March 1991 under the Treaty of Asuncion. Another pact four years later, the Treaty of Ouro Prieto, formalized parts of the original deal and cemented a customs union, traditionally the first big step toward regional integration. Internal tariffs were to be reduced gradually, and the members would work toward longer-term goals like a common currency.

At the time, this seemed like a big deal—after all, not even NAFTA has a common customs union. But soon cracks began to appear.

Unlike Europe, where several large economies can balance each other, Brazil utterly dominates the Mercosur economy, making up $800 billion of its $1.1 trillion GDP. In many ways, Mercosur is actually a bilateral trade deal between Argentina and Brazil—they account for 90 percent of its internal trade—with a few minor players thrown in for fun.

Nor does Mercosur have the advantage that NAFTA does, in which three relatively advanced, integrated economies, representing three relatively harmonious governments, have been able to easily synchronize their trade policies.

On the contrary, Mercosur has been unable to revolve even basic trade issues between members, many of which derive from the vast differences in economic and political agendas among the member states. In 1999, when Brazil’s car industry was becoming internationally competitive, Argentina responded by slapping tariffs on its neighbor’s steel imports.

More recently, Argentina and Uruguay have seen bilateral relations plummet over the so-called “cellulose war,” in which Argentina demands that Uruguay shut down a dilapidated, Finnish-owned cellulose factory on the Uruguay River, which runs along the countries’ mutual border. The dispute has gotten so bad that Cristina Kirchner, the new Argentine president, attacked her country’s neighbor in her inaugural address.

Argentina has also raised import barriers to Paraguayan banana growers, whose fruit is cheaper than the domestic variety. But in a telling sign of Mercosur’s weakness, Paraguay decided not to fight it out using the trade pact’s dispute-resolution mechanism, but rather through the World Trade Organization.

As Uruguayan Economic Minister Danilo Astori said late last year, the pact can no longer “hide the existing difficulties. They are several and are being exacerbated because Mercosur is in its sixteenth years and we still have many problems to resolve.”

Unfortunately, his words, coming just before the most recent summit of Mercosur presidents, didn’t do much to clear the air—one observer called the meeting the “worst summit in years.”

Mercosur was born with sharp elbows; to be a member, a country cannot participate in any other free trade agreement. But that is a problem with it comes to expanding west and north. Chile, a Mercosur associate in negotiations to join as a full member in 2002, saw its application frozen when it inked a free trade deal with the United States.

And Bolivia, Colombia, Ecuador, and Peru are all members of the Andean Community of Nations, another free-trade area known by its Spanish acronym CAN. Venezuela left CAN to join Mercosur in 2006, but Bolivia, which is negotiating to join, has said it will not leave CAN, setting up a critical test of Mercosur’s principles.

But perhaps the biggest dilemma for Mercosur is Venezuela. There is a strong case for including the country in the group’s ranks: It is a leading global oil exporter, it has a strong domestic economy, and its Caribbean ports would give Mercosur easier access to U.S. and European shipping lanes.

On the other hand, Venezuela, led by the fiery Hugo Chavez, is hardly a normal negotiating partner, and many observers fear he wants to use Mercosur as a political stump. “Venezuela’s accession to the pact adds a decidedly anti-American factor and may complicate both Mercosur’s internal balance and regional trade relationships,” concluded a 2007 Congressional study.

Chavez’s interest in joining a free trade agreement seems philosophically out of sorts with his own socialist leanings. But it is clear he wants a new brand of Mercosur—he has already promised to “cleanse” Mercosur of “neoliberalism.”

 “We need a Mercosur that prioritizes social concerns,” he said. “We need a Mercosur that every day moves farther away from the old elitist corporate models of integration.”

Chavez has at times treated Mercosur with the petulance of an eight-year old, skipping one summit meeting—while still a candidate—to meet with Vladimir Putin, while demanding that his country’s application be fast-tracked within three months.

He did, however, later relent, and he is now resigned to a schedule that has his country receiving formal membership in 2008. Ultimately, he needs Mercosur more than it needs him—as he rocks relations with North America and Europe, he needs economically friendly neighbors on which he can fall back.

That’s not to say that Mercosur doesn’t need Venezuela. Expanding north is a critical step in its build-out as an effective counterweight to the economic and political power of the United States. It has already flexed its muscle in this regard: Mercosur played a critical role in the 2005 failure of the FTAA negotiations in Mar de la Plata, Argentina.

And the push to bring in Venezuela was made all the more important by U.S. efforts to complete a free trade agreement with Colombia, which would give it open access to yet another of the continent’s largest economies (that deal is, however, currently stalled in Congress).

The problem is that so far Mercosur has yet to make the convincing case that its members can exist without the United States, FTAA or not. Even though internal trade is booming, it is dwarfed by trade between each member and the rest of the world, including the United States and the EU, which each claim about 25 percent of the bloc’s total trade. As of 2005 internal trade accounted for a mere 13 percent of total Mercosur trade, a poor showing for a 17-year-old pact.

As a result, on the horizon loom negotiations to allow a wide variety of exemptions to the Mercosur rulebook. Uruguay has already signed a Trade and Investment Framework Agreement with the United States, the first step toward a full free trade agreement.

According to the rules, in that case Mercosur would have to expel Uruguay, not only an embarrassing move—the Mercosur headquarters are located in the Uruguayan capital of Montevideo—but also a risky one: Uruguay may not be the largest economy in Mercosur, but with only five members, every little bit counts.

In all likelihood, Uruguay will receive a pass, setting a precedent for other members to do the same. This would probably save Mercosur in the short term. But it would also render it a side show to the enormous trade flows that would open up with the United States.

Mercosur isn’t giving up yet, though. At happier moments, its members talk about establishing a $100 billion development bank, and even working toward a common currency. And Brazil has repeatedly floated the idea of “relaunching” the entire pact, presumably with more workable rules.

But this all may be beside the point. With or without formal trade deals, the United States and, to a lesser extent, Europe and Asia dominate Latin American trade, and so far Mercosur has been almost completely ineffectual at providing a counterbalance. wt

Clay Risen
Contributing Editor Clay Risen is a Washington-based journalist specializing in international affairs

Alitalia, Air France to merge

$1.1 billion takeover offer by Air France-KLM is accepted by struggling Italian national airline 

ROME (AP) — Alitalia’s board on Sunday unanimously accepted Air France-KLM’s bid valued at $1.1 billion in a move to save the struggling national carrier.

The Air France-KLM offer values the airline at $216 million, far less than expected, based on a share swap of 1 Air France share for every 160 Alitalia shares. The Franco-Dutch carrier also said it will pay $946 million for convertible shares.

The Franco-Dutch carrier says it will inject $1.56 billion in capital once the deal is complete.

Alitalia’s board issued a statement accepting the offer after a marathon meeting that went some 16 hours into early Sunday. Air France said it was “happy” with Alitalia’s decision.

Air France has said it wants to have union approval before the deal is finalized. It also must be approved by the Italian government, which is selling its 50% share, as well as the stock market regulator and EU competition authorities.

Air France said it expected to have necessary government and regulatory approvals within the first half of 2008.

Air France said it plans to relaunch Alitalia with an industrial and restructuring plan that will allow the Italian carrier “to rediscover the means of its development and to consolidate its status as a national leader.” Alitalia will maintain its national identity within the Air France-KLM group, the carrier said in a statement.

The Franco-Dutch carrier said it expected to achieve operational profits in 2009.

Alitalia has been losing $1.56 million a day, and its cash reserves were down to just $439 million at the end of January, nearly a 25% drop from a month earlier.

The outgoing center-left government of Romano Prodi has been trying for more than a year to sell Alitalia. It’s decision to enter exclusive talks with Air France has been met with opposition by unions concerned about jobs and backers of Milan’s Malpensa airport, which would lose its status as a hub. Air France intends to maintain just one hub for Alitalia, at Rome’s Leonardo da Vinci airport.

Opposition leader Silvio Berlusconi, who is favored to win national elections next month, recently said he could accept an Air France-KLM purchase of Alitalia if the Italian carrier maintains its national identity, backing down from his opposition to the deal.

Fonte: CNN

Experts: Don’t fear the weak dollar

The dollar keeps hitting new lows against the euro. But some say this won’t hurt the economy unless the greenback enters a prolonged slump

NEW YORK (CNNMoney.com) — Concerns about the weak dollar are mounting. But even as the greenback sinks to new lows against the euro and other global currencies, some experts say this is not necessarily a bad thing for the U.S. economy.

The anemic dollar does pose plenty of hurdles for an economy that some argue is already in a recession. Most notably, the weak dollar is raising more fears about the very visible impact of higher inflation.

Textbook economics suggest that a weaker dollar forces consumers to pay more for imported goods like toys made in China or a bottle of wine from France’s Bordeaux region.

Moreover, it also drives up the price of commodities priced in dollars. And unless you’ve been living under a rock lately, that’s already happening across a broad range of commodities including wheat, gold and oil, which now hovers at record levels just below $110 a barrel.

But the inflation fears may be a bit overblown.

Late last week, Federal Reserve Governor Frederic Mishkin said in a speech that the dollar’s decline only poses a limited inflation threat to the United States, arguing that there is little correlation between consumer inflation and changes in the exchange rate.

Still, there are other reasons to be fearful of a weak dollar. If the dollar declines further, this may erode interest by international investors in buying dollar-denominated securities.

Although many foreigners are still buying more U.S. securities than they are selling, there are signs that some overseas investors are slowly shifting away from assets tainted by the dollar, such as U.S. Treasurys.

According to the most recent Treasury International Capital report, a monthly reading on foreign investment flows, net foreign purchases of long-term U.S. securities were $69.1 billion in December, down from net purchases of $70.3 billion in November and $118 billion in October.

If this trend continues and overseas investors actually start selling more securities than buying, that could hurt the economy since a sell-off in Treasurys would lead to higher long-term bond rates. That would be a problem since longer-term bond yields have an influence on mortgage rates. Bond prices and yields move in opposite directions.

“Foreigners continue to buy U.S. securities,” said Jay Bryson, global economist with Wachovia. “If there was a massive exodus, you would see a major impact on Treasurys.”

The economy and exports

But two key factors temper economists’ fears about the lasting impact of a sunken dollar: a surge in exports and expectations that the economy will begin to show signs of the growth during the second half of the year.

The dollar has helped lift sales at U.S. manufacturers that export their goods, large multinational companies like Boeing (BA, Fortune 500), General Motors (GM, Fortune 500) and Apple (AAPL, Fortune 500). Trade numbers published Tuesday by the Commerce Department showed that exports jumped 1.6% percent in January.

And with some economists and policymakers, including Federal Reserve Chairman Ben Bernanke and Treasury chief Henry Paulson, talking about the economy bouncing back during the second half of 2008, that should also be good news for the dollar.

That’s because the Fed would probably stop lowering interest rates if the economy shows signs of resuming a healthier level of growth. Many on Wall Street say the Fed’s rate cuts are partly to blame for the weak dollar because lower short-term rates have helped fuel the rise in oil and other commodities and undermine confidence in the dollar.

But right now, the near-term outlook for the dollar is still troubling since some pretty ugly economic numbers likely lay ahead.

“You don’t have to be a rocket scientist to see how many issues the domestic economy has right now,” said Benedikt Germanier, currency strategist at UBS.

The dollar is trading around $1.53 against the euro and some currency strategists anticipate the greenback could shatter the key psychological mark of $1.60 against the euro in the next month or two.

Wachovia’s Bryson warns that if the dollar hit that level as the result of a sudden move, that would be a big deal since it could force already skittish foreign investors to dump their dollar-denominated securities. But if the dollar gradually moves towards the $1.60 range in the next few months, he does not see this as a problem.

And even the most bearish currency experts agree that the dollar should perk up against the euro later in the year if the sluggish U.S. economy starts to pick up and the Fed winds down its rate-cutting campaign.

But some worry that if the economy doesn’t rebound in the second half of the year, the dollar would remain sluggish, which would limit the appeal of assets like Treasurys to foreign capital.

“If the dollar would stay this way over a period of several years, it would be a negative,” said David Resler, chief economist at Nomura Securities in New York.

In other words, temporary weakness of the dollar isn’t a reason to fret. But it’s still up in the air whether the health of the dollar will improve anytime soon.

Fonte: CNN