Monday, 13 April 2015

Limited prospects for EU to diversify natural gas imports

Russia will remain a major supplier of natural gas to the EU as projects to find alternative sources face headwinds from escalating costs and political meddling from Moscow. Whereas Europe is attempting to limit natural gas imports from Russia, few source countries have the reserves and infrastructure to meet demand from Brussels. Moreover, Russia relies on internal EU division to maintain the status quo.
Over the past year, many have clamored for the EU to reduce its energy reliance on an increasingly revanchist Russia. As approximately 30% of its natural gas imports stem from Russia, it seems logical that the EU should lower its dependence on Moscow. Russia does not enjoy a steadfast export reputation, as it has a history of cutting off supplies to neighbors.
However, there is little evidence that the EU can significantly limit its Russian energy imports in the foreseeable future. With EU near-term consumption expected to rise slightly, and internal production set to decline, there is little room for Europe to manoeuvre. Moreover, cutting Russian imports while adding to the EU’s already significant reliance on Norway or Algeria does little to aid the cause of diversification. Just because Russia is a thorny trading partner today, does not prevent another nation from assuming that role in the future.
Even if Norway is viewed as a stable friend of the EU, it has limited scope to diminish the influence of Russian energy. At present all Baltic countries and Finland are utterly dependent on Russian gas: a further nine EU members also obtain more than 50% of their supplies from Russia.
Efforts to change this dynamic are hindered by the fact that Russia has the world’s largest natural gas reserves, is (conveniently) adjacent to the EU, and already has significant infrastructure in place. Alternate source countries do not have these advantages and as such are hard-pressed to replace Russia’s share in the EU natural gas market.
Alternate ideas such as increasing imports of liquefied natural gas (LNG) also seem unattractive in the current economic climate due to higher costs relative to conventional natural gas. Central Asia and the Caspian region have vast natural gas deposits that remain untapped, yet pipeline infrastructure remains limited and construction plans have been beset by skyrocketing costs and political wrangling.
Russian State Companies as Extensions of Kremlin Policy
Russia, via state-owned Gazprom, has played a key role in obstructing the EU’s efforts to find alternative suppliers. It has used various tactics such as offering European companies stakes in competing projects. Russia has also used its political clout to dissuade some of its neighbors from participating in EU plans. Furthermore, Russia has attempted to draw attention to the environmental hazards associated with unconventional natural gas projects.
The Trans Anatolian Natural Gas Pipeline (Tanap), which started construction last month, encapsulates the many headwinds faced by the EU in finding alternative gas sources. Aiming to bring gas from the Caspian region to Europe, Tanap has had a turbulent history. Originally announced in 2011, Tanap has had a high turnover rates of investor countries and companies. Notably,  Tanap suffered the loss of two key players in 2013 when European oil companies Total and Statoipulled out amid concerns about the soaring costs.
Russia later criticised the project and questioned its feasibility via its ambassador to the EU, thus only increasingly uncertainty. Afterwards, in a related move, Gazprom announced in December 2014 that it had abandoned plans for the South Stream pipeline, a project which was intended to run under the Black Sea to supply southern and central Europe.
Competing Voices Undermine EU Bargaining Power
It should be noted that dependence on Russian gas is not a universal concern across the EU. Indeed, some of Europe’s largest energy companies have sizable financial interests in maintaining the steady flow of gas from Russia. Crucially, various European companies have contractual obligations to import certain minimum amounts.
The Oxford Institute for Energy Studies notes that European companies are contractually obligated to import at least 115 billion cubic meters (bcm) a year of Russian gas,(approximately 75% of the 2013 import level), until the mid-2020s. Failure to adhere to these obligations would be result in said EU companies becoming subject to international arbitration.
Additionally, Russia benefits from the competing interests and differing gas import levels present among EU members. In order to gain bargaining power and present a united front, the EU has made some steps towards an energy union. Specifically, such a pact intends to make gas contracts more transparent in the hope of weakening Russia’s influence. While said endeavor is well intentioned, it has so far only served to highlight divisions among EU members.
Russia will continue to loom over the European gas market for years to come. Limiting its influence will be a slow process fraught by setbacks, while achieving full diversification of natural gas imports seems nothing more than a pipe dream.

Sunday, 29 March 2015

US sanctions on Venezuela may strengthen Maduro regime

This article originally appeared on Global Risk Insights

The US decision to impose sanctions on seven Venezuelan officials earlier this month seems innocuous enough. But the language accompanying the imposition does little to help US objectives, and may strengthen Nicolás Maduro’s authoritarian regime.

The effectiveness of sanctions has long been debated. At worst they can act as a useful signaling tool, but as with everything in international relations, timing is vital.

Coming one week after Venezuela ordered the US to remove the majority of its diplomatic staff from the Caracas embassy, the sanctions were not a major surprise. However, the exercise seemed to have backfired after the US described the declaration as an “emergency” and labeled Venezuela a “security threat.”

Such claims lack credibility and seem bizarre in the current climate. Officials from the Obama administration explained that the language was a legal formality necessary for the sanctions to be applied and that the assessment of the Maduro government is no more severe.

Even so, the presence of such inflammatory statements does not make the sanctions worthwhile. Relations between the two countries are already at their worst since 2010 when each nation called back their respective ambassadors. Yet, bizarre claims that Venezuela is a “security threat” provides Maduro with a vehicle to turn attention away from his declining popularity and the nation’s economic chaos.

Maduro has used the language as an opportunity to attack the US and its attempts to “govern Venezuela by decree.” In addition, it gave Maduro an excuse to allow the National Assembly to grant himself decree powers for the rest of 2015, under the guise that he needs such control to protect Venezuela against US aggression.

The ruckus has also given Maduro some respite from anger about 90% inflation and another currency devaluation. Polls this year indicated that Maduro’s approval rating had fallen to 22%, but it is not yet clear what impact recent developments have had.

While likely providing a short-term boost to Maduro, the US actions create a headwind to the opposition.

As Maduro rallies against the US, his political opponents find themselves in a difficult position. The US rhetoric has given Maduro a platform from which to spur nationalist anger, meaning that any criticism of Maduro from the opposition could be viewed as support for the US and an affront to Venezuela. Indeed, the opposition felt a need to denounce the US actions by issuing a statement that said “Venezuela is not a threat to any nation.”

National legislative elections are expected sometime this year. While there are some concerns that the socialist government may postpone the vote due to Maduro’s low popularity, the US-inspired tumult could see the newly confident administration proceed with a summer election.

This could be the opposition’s best opportunity to defeat the government. And even if the executive takes control of authority before the elections, a strong performance at the ballot box would increase pressure on Maduro to relent from his march toward dictatorship. But the opposition’s hopes have been dented over the last couple of weeks.

The needless sanctions and accompanying language used by the US have merely served to solidify Maduro’s grip on power, while leaving the opposition looking hamstrung. In addition, other Latin American leaders will be reluctant to speak out against Madura in the current environment, and the latest spat will be an unwelcome overhang at next month’s Summit of the Americas in Panama.

Sanctions can be useful, but this is another example of how bad timing can make them a liability to the imposing nation.

Thursday, 26 March 2015

Resurrection of the Machines?

From the 19th century Luddites’ destruction of labor-saving equipment to Deep Blue’s defeat of chess Grandmaster Garry Kasparov in 1997, humans have historically had an uneasy relationship with machines. So perhaps it should not have been a surprise that the plight of computer-driven hedge funds was welcomed with a sense of glee in recent years. Throughout 2013 and most of last year a plethora of press articles described how systematic trading strategies were “broken” and unable to interpret post-crisis financial markets.

Yet there are signs that the trading machines are ready to rise again. After three straight years of negative returns, performance rebounded in 2014 and has continued into this year, with the group gaining 17% over the past 12 months according to Hedge Fund Research’s HFRI Systematic Diversified Index. In contrast, the broader hedge fund universe returned 4%.

Proponents of these systematic or “trend-following” funds blamed easy monetary policies for the lackluster performance. They noted that the intervention of central banks created an artificial cushion that dampened market volatility and limited the sharp moves that these strategies typically capitalise on. Indeed, most gains in recent months came from the unexpected crash in oil and surprising decision by the Swiss National Bank to remove the franc’s peg to the euro.  

Also referred to as “quants” or “black boxes”, systematic funds occupy a niche space in the hedge fund world. The strategies, which manage a total of $317 billion according to BarclayHedge, generally trade futures contracts in financial and commodity asset classes and profit from sustained price trends. Whereas many traditional fund managers analyse economic data and scrutinize corporate balance sheets, systematic trend-following strategies largely focus on historic price behavior and are agnostic about the direction of markets.

It is sometimes forgotten that computerized systems often require vast teams of humans to improve their efficiency. One of the most successful systematic managers, Winton Capital, spends $30 million annually on research. Accordingly, there is little room for a macho trading-room culture, with the highest paid employees often programmers and quantitative researchers. Winton’s founder, David Harding, has no interest in giving opinions on markets and until his dog Cosmo’s passing, allowed the cocker-spaniel stay in the boardroom during meetings with investors.  

Aside from some eccentricity, many investors dislike the volatile returns from systematic funds; a consequence of the strategies staying in markets during tumultuous periods when most logically-minded humans get out. However, the absence of emotion paid off in 2008 as many high-profile systematic strategies made double-digit gains when stocks and commodities plummeted. Similar selloffs may not occur in 2015, but diverging monetary policies could lead to market disruptions and an extension of recent profitable opportunities, says Anthony Todd of Aspect Capital, which manages $5 billion.

Even so, investors will not easily forget painful memories of three consecutive losing years. Instead of a replacement for human managers, computer-driven strategies will likely be categorized as a good complement to investment portfolios. The machines are not ready to take over just yet.

Sunday, 22 March 2015

Nuclear deal offers only a glimmer of hope for Iran’s economy

This article originally appeared on Global Risk Insights

Between crippling sanctions and plunging oil prices, Iran’s economy has been under severe pressure in recent years. While the potential for a nuclear deal has caused optimism, entrenched interests of the Revolutionary Guard will likely prevent Iranians from feeling the full benefit of sanctions being lifted.

While still volatile, Brent crude oil prices seem to have reached a floor around $50 a barrel. With renewed hope that a nuclear program agreement with the US could result in the lifting of sanctions, speculation grows over a potential resurgence in Iran’s energy sector and an influx of foreign inventors.

Holding the world’s second largest natural gas reserves, there is great potential for Iran to develop lucrative resources and diversify away from oil, which accounts for more than 40% of government revenue.

Aside from exporting gas, Iran has shown a desire to change its domestic energy mix from oil to gas and free up more crude for export.

However, the sanctions have limited the potential for energy investment and exports, as foreign investors have stayed away from Iran fearful that banking sanctions could lead to the freezing of assets.

Iran’s president, Hassan Rouhani, has said that he is seeking the removal of all sanctions if a nuclear agreement is to be reached. The apparent nearing of a deal by the end of March has led to hope of an imminent removal of sanctions.

Prospects of an agreement have stopped the free fall of the the TIPEX Index, a broad measure of Iran’s stock market.

Easing inflationary pressures have caught on, with the current rate now around 17%, down from 40% in 2013. Add to this the Iranian central bank’s claims that the economy has grown in the past year, and the end to two years of contraction set the stage for a positive turn in the immediate future.

Then again, such optimism seems excessive. Apart from the fact that Iran’s youth unemployment rate is around 24%, the lifting of sanctions may not be a dramatic tailwind. If a deal is reached at all, the lifting of sanctions could be a gradual process spread over many months.

And there is the Revolutionary Guard. Established to protect Iran’s Islamic system, the role of the Revolutionary Guard has morphed over the years to include deep interests in the nation’s business activities.

Under former president Mahmoud Ahmadinejad, the Guard’s influence grew markedly, while the impact of sanctions added to the group’s power. As foreign energy firms exited Iran, the Guard’s engineering companies stepped in to take control of oil resources.

It is unlikely that the Guard views the prospect of easing sanctions and return of foreign energy investors as a welcome development. Conservative Iranian hardliners have already been blamed for slowing progress in the nuclear talks, and have highlighted the ineffectiveness of last year’s partial easing of sanctions in alleviating hardships faced by average Iranians.

An inefficient energy sector free from foreign influence is much more desirable to the Guard than a flourishing industry that would benefit the broader economy.

Even if a nuclear deal is reached and sanctions are lifted, it is doubtful that the Guard will immediately give up its clout in Iran’s business affairs. Foreign companies should not expect a warm welcome back to Iran, despite the efforts of a pragmatic Rouhani to build relations with the West.

China forced to rethink role in Middle East

This article originally appeared on Global Risk Insights

In recent years, China’s presence in the Middle East has taken on greater significance through deepening economic ties. China is now the second largest trading partner with Arab nations, jumping to US $238.9 billion in 2013 from $25.5 billion a decade prior. A strategy of remaining agnostic to political ideology has helped China foster relations in the Middle East, but signs of growing instability in the region could force Beijing to rethink its approach.

Aside from its ability to use cash from $4 trillion of foreign currency reserves, China has been granted access to energy by a variety of Middle Eastern nations due to its perceived neutrality. A negligible military presence in the region, an absence of recent colonial history, and seemingly high regard for state sovereignty have all contributed to China’s burgeoning presence. Such factors have been particularly important in developing links to states that are ideologically opposed to each other, like Saudi Arabia and Iran.

Middle Eastern countries have appeared to welcome China as a diversifier to US influence. China’s willingness to do arm sales and bilateral trade with countries hostile to the US acts as a balance to US hegemony. Of course, access to energy is China’s primary goal. Roughly 60% of China’s oil imports, 2.9 million barrels per day, came from the Middle East in 2013 and the nation has increased its ties to the region via tools such as energy-backed loans and joint ventures involving investment in refineries, exploration and pipelines.

China’s rise in the Middle East is coinciding with a declining US presence. While that may not seem like a major issue to the US given the domestic oil boom, it must be remembered that net imports still account for about 30% of the petroleum consumed in the US, with 30% of those net imports coming from the Persian Gulf. Moreover, estimates generally see US energy independence as several decades away.

However, China still has the ability to expand influence in the Middle East and maintain relations with Washington. Its capacity to import oil from multiple ideologically diverse sources in the region means that Beijing can afford to suspend trade with a nation that falls severely afoul of the US, if it so chooses.

Despite a lack of clear policy, China seems to have an optimal setup in the Middle East – but there are signs that this could change. The fragile nature of some regimes could bring headaches to Beijing. An unwillingness to intervene in the region’s political matters does not suggest that China can escape criticism. After Gaddafi’s removal from Libya, the new leadership said that it would have difficulty dealing with China, given that Beijing did not support NATO involvement in 2011. And China’s veto on UN resolutions censuring Assad’s regime in Syria resulted in reports of Chinese flag burning in several Middle Eastern cities.

Moreover, China may have to react to the expansion of Islamic militancy. The nation already faces threats from radical Islam in its Xinjiang province, and would not welcome the spread of ISIS influence towards its borders. Western relations with the Middle East have centered on a challenging balancing act between political ideals and the realism of energy requirements. China has to-date focused on the latter, and it has paid off. But changes in the tumultuous region may force Beijing into making difficult decisions that risk upsetting its image as the antithesis to a meddling United States.

Friday, 27 February 2015

Why Azerbaijan does not fear criticism from the West

The following article originally appeared on Quartz

The West’s renewed difficulties with Russia have once again highlighted the importance of cutting resource-dependency on antagonistic states. No one can disagree that Europe surely must find alternative sources of natural gas. And it is vital that the US establish strong links with former Soviet republics. Accordingly, the US and Europe have turned to Azerbaijan as an ideal diversifier to Russia. The young nation has abundant energy resources and a highly strategic geographic location—wedged between Russia and Iran.

But it turns out there are plenty of reasons to be uneasy about the West’s blossoming relationship with Azerbaijan. Political repression and antagonism toward weaker neighbors make the nation seem like a miniature Russia. Yet aside from empty rhetoric, there is little evidence that the US or Europe will slow their courtship of president Ilham Aliyev and his authoritarian regime.

Azerbaijan’s aspirations for global prominence are abundantly clear. Three flame-shaped towers dominate the skyline of the capital, Baku, each outfitted in sparkling orange-and-blue-tinted glass. On the highway to the airport, foreign businessmen are transported by black-cab taxis imported from London. The nation’s leadership want Baku to be a magnet for global investment, and over its short history, it has shown an ability to prosper in a world of decentralized global order.

Yet, just a couple hundred miles west of the glittering capital, things are not so glamorous. For nearly 30 years, the mountainous terrain of the autonomous Nagorno-Karabakh Republic has been a scene of dire hostility. Legally part of Azerbaijan, the territory has been governed by ethnic Armenians since a war of secession, stoked by neighboring Armenia, broke out in the late 1980s. While a 1994 ceasefire is technically still in place, skirmishes along the border with Azerbaijan proper are common, and tensions between the two nations have been steadily escalating of late. In July of 2014, border violence reached an all-time high since 1994, leaving eight Azerbaijani and two Armenian soldiers dead, according to Reuters; and both nations pointing fingers as to who violated the ceasefire first.

In January, the mediating Organization for Security and Co-operation in Europe, or Minsk Group, headed by France, Russia and the United States, called for a bilateral de-escalation and ordered Azerbaijan to honor its commitments to a peaceful resolution of the conflict. Aliyev bit back, demanding that “measures must be taken” by the Minsk Group to push Armenia out of the territory—saber rattling that no doubt irritated the Russians, who maintain a mutual defense agreement with the Armenians.

Nagorno-Karabakh has been just one of several cases in which an increasingly assertive Azerbaijan has upset both its neighbors and the West. The country’s burgeoning confidence and geopolitically strategic importance means that such trends are likely to continue, with little retort from the US or Europe.

Much of Azerbaijan’s ascendance—both in concrete and self-proclaimed terms—can be attributed to an incredibly dynamic economy. Between 2006 and 2008, it was the fastest growing in the world, expanding at an average annual rate of 28%—inspiring massive foreign investment, capped off by the launch of a Condé Nast glossy. Expansion has since remained relatively robust, helped by large oil and gas reserves in the Caspian Sea. However, with about half of the economy reliant on oil exports, the 50% fall in prices over the past seven months will inflict a significant drag on growth. Estimates generally indicate that the economy increased just 4% last year, and a similar figure is expected for 2015.

Strengthening political and economic relations with China and increased focus on gas should help boost revenue in future years, but the near-term sharp deterioration in growth could could provoke disquiet in a population defined by starkly contrasting levels of income inequality.

But Aliyev has a number of tools at his disposal for effectively neutralizing criticism. First, there’s the State Oil Fund of the Republic of Azerbaijan (SOFAZ), which is a $40 billion sovereign-wealth fund that the government has been using to fill gaps in the annual budget, sometimes accounting for more than half of government revenue. Such use of the fund should help ease the impact of declining oil income over the short-term.

The second tool, which has been more frequently employed since Aliyev’s reelection in 2013, involves summary crackdowns on all signs of dissent. Azerbaijan’s growing middle class has become increasingly attuned to the behavior of elected leadership, particularly signs of corruption, and repression of political opposition. Aliyev’s response to criticism has involved arresting investigative journalists and civil-society activists, in addition to targeting NGOs that promote democracy, including the US-funded International Research and Exchanges Board (IREX). The most newsworthy recent instance was the Dec. 26 raid on the local bureau of Radio Free Europe/Radio Liberty (RFE/RL), a US government-funded news service.

Aliyev showed little regard for ensuing international criticism. In September, the European Parliament adopted a resolution condemning human-rights offenses in the country. Azerbaijan responded that, “if this attitude continues, Azerbaijan will be forced to once again discuss cooperation with the European Parliament.” Perhaps most egregious, the raid on RFE/RL came several days after John Kerry spoke with Aliyev by telephone, beseeching the leader to ease his repressive tactics. Clearly, Kerry’s words went unheeded.

In recent weeks, there have been more calls from within the EU and US for sanctions against Aliyev and his regime. But the likelihood of any actual reprisals is remote. This is because condemnation from the US and Europe carries little weight in Baku. Azerbaijani leadership knows it has something Europeans need. Gas imports from Azerbaijan took on new significance in 2014 as Europe sought to dampen reliance on Russia. A $45 billion Shah Deniz II gas field project will allow Azerbaijan to at least double gas exports by 2020, and correspondingly increase its role in European markets by a substantial margin. While Azerbaijani gas will probably meet only 2% of European demand over the next several years, a further deterioration in relations with the Kremlin could see a swift escalation in dependence on Azerbaijan’s resources. Moreover, the US will be reliant on Azerbaijan as a key transit point when it transports troops out of Afghanistan.

Notably, Azerbaijan has been unafraid of rankling its more powerful neighbors—Russia and Iran; a trend that has proven attractive to Western interests for obvious reasons. The country has angered Iran by allegedly allowing Israel access to bases near the Iranian border. Additionally, along with Kazakhstan and Turkmenistan, it has been in dispute with Russia and Iran for more than 20 years over maritime boundaries in the Caspian Sea. And when it came to a 2012 United Nations resolution condemning the actions of the Assad regime against Syrian revolutionaries, Azerbaijan sided with the US, and against a vocally pro-Assad Russia and Iran.

But a special affinity for taking jabs at Putin or the Ayatollah does not make Azerbaijan an unquestioning doormat to Western interest. In a short letter to The Wall Street Journal published in early January, the Azerbaijani ambassador to the US, Elin Suleymanov, claimed that criticism of the country’s handling of the RFE/RL case was an “ideological misinformation campaign.” He added that “financial mismanagement” spurred an investigation into RFE/RL, but did not say why that somehow warranted a raid. The letter also denied that world-renowned Azerbaijani human-rights activist, Leyla Yunus, was suffering from ill health while governmental detention, and did not explain why she was arrested in the first place.

Other methods to deflect negative attention have been more subtle, but nonetheless disreputable. Last September, The New York Times revealed that, in 2012, Azerbaijan’s government hired a Washington, DC-based public relations and lobbying firm with the purpose of expanding its relationships with US thinktanks—an effort to bolster public opinion of the republic and highlight its important role as a security partner in a notoriously fraught region. Former British prime minister Tony Blair has led a highly criticized public-relations campaign on behalf of the country.

Such audacity has so far been tacitly encouraged. On January 20, Germany welcomed Aliyev for a two-day visit that concluded with a meeting with chancellor Angela Merkel. Issues of human rights and Nagorno-Karabakh were treated with benign, almost sympathetic language, and the German leader instead focused on the practicalities of energy security. Merkel noted the growing role that Azerbaijan plays in Europe’s energy-sourcing, and added that Germany intends to further develop relations between the two nations. Merkel cannot be blamed for focusing on the German national interest. In a world where Western influence is in decline, domestic issues take precedence.

Azerbaijan’s ability to profit from a growing uncertainty of global order looks set to continue for now. However, relying disproportionately on the energy sector for economic growth, stifling the middle class, and behaving like an indiscriminate gadfly toward large powers are not viable strategies for long-term stability. It seems that Aliyev is modeling himself on Vladimir Putin, despite frequently butting heads with the Russian leader. One would think that, should it continue to mirror the repressive policies of its bearish neighbor, Baku would be subject to the same level of international pushback as Moscow. But, for the time being, Mr. Aliyev will get away with what he can.

Thursday, 26 February 2015

OPEC’s influence has long been exaggerated

This article originally appeared on Global Risk Insights

The nearly 50% decline in oil prices questions the future of the Organization of the Petroleum Exporting Countries (OPEC) and casts doubt on its ability to influence prices. However, the role of OPEC has historically been overplayed, and the latest tumult is merely further evidence of the group’s weakness.

Formed in 1960 “to coordinate and unify petroleum policies” and offset the influence of major multinational oil companies, OPEC enjoyed the peak of its geopolitical influence in 1973 when it cut production and stopped shi
pments to the U.S. and countries supporting Israel in the Yom Kippur War.

Yet, the impact of the embargo was amplified by bad U.S. energy policies. Rather than OPEC, inappropriate schemes such as price controls and Congress’s allocation of oil to various regions and industrial sectors were the primary drivers of the disruption.

Ironically, OPEC’s most influential moment inspired changes in Western energy policy that have eroded the group’s power. A combination of smarter U.S. domestic energy policies, increased investment in alternative energy, improvements in energy efficiency, and innovation in oil technology outside of OPEC regions has boosted the West’s independence from the organization.

The frailty of OPEC and its changing roles were evident long before the recent jump in North American production. After surviving the price slump of the mid-1980s, OPEC had a difficult time in the following decade when weak demand growth and large spare capacity limited its ability to collude. An inability to punish members that refused to adhere to quotas was clearly exposed.

The group regained some footing from 2000 to 2008 as rising prices provided an environment more conducive to collusion. However, even during this time OPEC was largely a residual supplier, adjusting its output at market prices rather than acting as a price setter.

Importantly, since the financial crisis Saudi Arabia has taken on a more commanding role, which has been particularly apparent in recent months. OPEC is most effective when limiting supplies, but that option has been by put aside by Saudi Arabia’s decision to battle for market share.

At its November 27 meeting, OPEC surprised markets by agreeing to maintain its production target at 30 million barrels a day. The group’s reasoning behind the move was that the lower prices will force U.S. drillers to cut output as their business models become unsustainable.

The decision, driven by Saudi Arabia, was likely unpopular with other OPEC members. Yet in challenging times, national interest takes precedence.

Saudi Arabia has about 85% of global spare production capacity, with an estimated 1.5 to 2 million barrels per day of spare capacity on hand to aid it in the market share battle. Conversely, other members have limited ability to cut exports and lack the cohesion to reduce supplies in the face of Saudi Arabia’s opposing intentions.

The loss of market share and price decline of the mid-1980s was particularly costly to Saudi Arabia, and the Kingdom seems to have no intention of remaining passive in the current environment. Its ambitions marginalize other OPEC members, and highlight the fickleness of the group’s solidarity. OPEC’s influence has often been exaggerated and recent events may prove to be the catalyst for the group’s decline of influence.

Wednesday, 7 May 2014

Obamacare will be vindicated by history: From JFK to FDR, here’s how the nation’s memory works

The following piece originally appeared on Salon

Not everyone viewed the introduction of Obamacare as cause for national celebration, but that doesn’t mean history won’t remember it as such. Time has a habit of changing the perception of presidential initiatives.

The Gettysburg Address may be the most iconic speech made in America, but not everyone shared that sentiment in 1863. Far from being revered as an affirmation on human equality, Lincoln’s words were roundly criticized by the Democrats of the day, while the Chicago Times described the president’s efforts as “silly, flat and dishwatery utterances.” Moreover, Lincoln’s words weren’t even the actual Gettysburg Address; they were brief dedicatory remarks following on from Edward Everett’s two-hour oration.

Many moments that seemingly define American ideals have been repackaged as occurring in a society much different from their time. Often, the prevailing political landscape has been toned down to allow the depiction of a nation unified by positive thought.

Today, John F. Kennedy’s space exploration efforts of the 1960s are rightfully spoken of in the context of the successful moon landing, an effort that confirmed America’s unyielding ambition. Yet the public scorn of the era’s numerous failed rocket launches is long forgotten.

Many commentators unfavorably compare Obama’s foreign policy struggles to Ronald Reagan’s supposedly sterling record. Reagan’s foreign achievements are highlighted by bold initiatives that weakened the threat of the Soviet Union and ultimately brought victory in the Cold War. But the passing of time has faded memories of the clandestine Iran-Contra weapons affair in which the Reagan administration supplied weapons to Iran and aided the contras in Nicaragua.

Such unsavory incidents are inconveniences to a rosy narrative. Instead, it brings great comfort to look back at great achievements of the past and nostalgically reminisce of a time when America cheered on the enterprise of its leaders. Rarely is it mentioned that throughout the 1960s a majority of Americans did not believe NASA’s Apollo project was worth the cost. Nor is attention given to the hawks within Reagan’s own party that lambasted his decision to ease tensions with Soviet leader Mikhail Gorbachev.

While seemingly difficult to imagine, decades from now history will note that the Affordable Care Act symbolized one of the great presidential efforts to fight inequality in America. Long forgotten will be today’s headlines of a temperamental website, deadline delays and mixed messages about keeping existing plans. Instead, it will be heralded that Barack Obama made a superior healthcare service available to the masses.

It may be noted that the initiative was not an instant success and needed retooling in subsequent years, but only one man will be given credit as its instigator.

The short version of Barack Obama’s bio will not reference the failure to implement his intended education and energy reform, or that a reset of Russian relations went sour. Perceptions of the Afghanistan and Iraq withdrawals may change with time, but Obama will still be remembered as a fighter against society’s widening income gap.

Thankfully for Republicans, the manner of their opposition to affordable healthcare will become a minor footnote. History will record that Obamacare passed both houses of Congress, was signed by the president and approved by the Supreme Court. Long forgotten will be the details of how Republicans ignored the legislative process, did everything in their power to repeal the law and bowed to extremist elements who forced a government shutdown for the first time in 17 years.

Romanticism will prevent people from caring about such details. We like to look back on great moments and imagine ourselves as part of a unified society bounded by optimism. Who doesn’t like to think they would have saluted Lincoln’s words, cheered on the bold Apollo missions and admired Reagan’s bravery in opening the Iron Curtain? It can seem incongruous that monumental changes occurred without universal support. But they do because humans are not of one mind. And in a land where ideas can be expressed freely, such a state of unity can never exist.

Moreover, future generations will struggle to believe that one party so vigorously opposed affordable healthcare without presenting a coherent alternative.

The Obamacare system may be flawed, but it is a start. Some people have lost their existing coverage and must enroll in a plan that meets the improved standards demanded by Obamacare. This can incur greater costs for the individual, but subsidies are needed to provide healthcare for those uninsured with low incomes. It will be a moot point in years to come; popular history looks favorably on inconveniences of the few for the benefit of the many.

The only viable conservative alternative to Obamacare is no system at all, but nobody will want to think that such a large portion of the political establishment was happy with such a state. Even if some believe that the previous situation of 48 million uninsured without any prospect of coverage is better, repeal is unattainable. Republicans were aware of this before the government shutdown, but the party bowed to fanatics and went on a campaign for maximum disruption for the sake of an unattainable goal. The current political system, effective for more than 200 years, means that changes to law cannot be made without going through the legislative process.

With more than 7 million enrolled, Obamacare is here to stay. Regardless of future modifications, of which there will be many, affordable healthcare has been instituted in the United States, dragging millions away from the threat of imminent bankruptcy and terminal illness.

Those opposing Obamacare may not be as ignoble as the politicians who opposed the Civil Rights Act of 1964, but the racial significance of affordable healthcare will not be lost. At present 55 percent of the uninsured are non-white. In time Obamacare will help break down the barriers between rich and poor.

Obama will be appreciated as the first black president who also made healthcare a reality for everyone. It will define his legacy, with his political missteps whittled from his narrative. Republicans are on the wrong side of history, but their obstructionism will fade from public consciousness. We like to think that a time will return when the nation supported the conviction of its leader. But great achievements aren’t born from support from the masses, they happen when someone risks derision to surpass the status quo.

As President Kennedy said: “We choose to go to the moon in this decade and do the other things, not because they are easy, but because they are hard.”

Tuesday, 6 May 2014

A Doctrine of Indecision

He rarely ventures down the back of Air Force One, but during an April visit to Asia, President Obama felt the need to address reporters on recent criticism of his foreign policy. The conversation was presumably intended to be off the record, but the exchange has been widely reported in the media. Regardless, the president’s utterance of one short phrase gave greater insight into his foreign policy approach than countless immaculately delivered speeches. His mantra? “Don’t do stupid s**t.”

Barack Obama came to power with one of the most ambitious agendas of any president and his ideologies were touted loudly. Vows to change the domestic landscapes of healthcare, education and energy have met with mixed success, but his efforts to push a principled vision have not relented. Yet after more than five years, Obama’s approach to foreign policy still seems vague and often inconsistent.

By stopping in Ankara, Turkey on his inaugural European tour, Obama sought to live up to his billing as a worldly leader keen to establish America’s role as a sophisticated, benign global hegemon. He has succeeded in distancing the nation from Bush-era belligerence, but in its place a vacuum has formed, calling into question the President’s appetite to act as a global leader. In essence, it seems the Obama Doctrine calls for not doctrine at all.

Foreign policy doctrines have not always been advertised as such, but presidents have typically established an initiative that defined a stance; effectively outlining the principles that they would go to war for. The first recognized presidential doctrine, by James Monroe, was defined by a warning that any further interference by European states in the American continent would result in US intervention. In more recent times, Reagan’s doctrine set out intentions to aid and arm global resistance movements against the threat of communism. Some presidents have not needed a definitive doctrine. Following the collapse of the Soviet Union, the 1990s was an era of relative calm, meaning that the Clinton Doctrine largely revolved around a brief and successful intervention in Yugoslavia.

Yet the subsequent policies of George W. Bush ultimately shaped the attitude of Obama. Foreign policy received little attention when Bush came to power, but 9/11 necessitated a strong reaction. Irrespective of the popularity of the Bush policies, there was little doubt regarding that administration’s eagerness to depose regimes that harbored security threats. In essence, Obama’s outlook has been a reaction to the Bush administration’s reaction to terror.

Conscious of the subsequent backlash to Bush’s interventionism, Obama seems to think that being different from his predecessor disallows him from adhering to rigid policy. Yet a doctrine need not be systematic nor aggressive; Reagan’s policy did not call for the arming every rebel group that opposed communism. Obama’s outlook seems less a case-by-case approach and rather a disconnected set of actions mired by fuzzy logic.

No obvious upside
Foreign policy has not been a disaster under Obama and perhaps he believes there is little upside to building a clear doctrine. On the surface he may seem correct. Polls during of the 2012 presidential campaign showed that less than five percent of voters deemed foreign policy their priority. Reflecting the public’s consciousness is useful when seeking election, but can be harmful when in power. While foreign policy may not be everyone’s priority, getting it wrong carries great reputational risk. A PEW poll last December that showed Obama had garnered the lowest level of support for an active American foreign policy since Lyndon Johnson escalated US involvement in the Vietnam War in 1964.

Unfortunately for Obama, not every presidential decision is subject to a national vote. In the role of commander in chief he has been eager to point out that he is neither an interventionist nor isolationist. Commentators have subsequently struggled to identify his style, at first portraying him as an idealist and latterly a realist. Obama may believe that he has successfully eschewed extremes and probably expected to receive plaudits for scaling back America’s global presence. He must be disappointed.

Some conservative media outlets have given particular attention to the Bengazhi embassy attack. The administration’s miscommunication on the affair has been loudly condemned as its biggest foreign policy failure. Such rhetoric is hyperbole. The situation may have somewhat damaged his reputation domestically, but the issue of whether the administration initially categorized the attack as an act of terror has done little to harm America’s international reputation. Several other cases have had a far greater impact on the nation’s global standing.

Damaging rhetoric
Trying to avoid mistakes is always sensible, but inaction is not. Even worse is promising action but delivering nothing. Such was the situation with Syria. Drawing a metaphorical “red line” can be an effective tool in defining future policy responses, but brings ridicule at home and anxiety abroad if the line can be freely crossed. The ultimate issue with Syria was not that America failed to pursue military action after Assad used chemical weapons, but that Obama signaled a harsh response and then didn’t deliver. Moreover, in the resulting consternation Russia stepped in to mediate the chemical disarmament, saving Obama some embarrassment while boosting the ego of Vladimir Putin.

Obama’s initial desire for intervention in Syria seemed to mirror his stance with Libya, which was labeled a humanitarian mission. But the protection of humanity now seems to be disregarded as Assad has been allowed to kill with impunity as long as he doesn’t use chemical ammunition. The invention of the “red line” and subsequent ignorance to it indicates not just a lack of clear direction, but carelessness toward setting agendas. In recent weeks the president’s desperation has been evident through plans to arm Syrian rebels; an initiative he rejected three years ago. He may have started with good intentions, but his stance on Syria has descended into a jumbled web of indecision.

Russia’s facilitation of the Syrian chemical disablement may have helped Obama in the short-term, but it likely emboldened Putin ahead of his usurpation of Crimea. Interfering in Ukraine was supposed to be the catalyst that would result in Russia’s “isolation”, according to Obama. The president’s modern method of punitive sanctions worked well with Iran and he must have thought they would have similar effectiveness against Russia. But Iran has long been on the global economic fringes; Russia has not. Ignoring the threat, Putin claimed Crimea and seemingly extended Russia’s influence into eastern Ukraine too. Obama responded with targeted sanctions, but has seemed unable to muster anything damaging as EU and US businesses are too intertwined with the Russian economy. Crimea remained vanquished and the incident served as another example of strong vows but little action to dissuade a rogue nation from serious infractions. Enforceable threats do nothing but weaken the global perception of America.

At least the president’s stance on Crimea was clear, if ineffective. With Egypt, the Obama administration repeatedly flip-flopped, clouding any intended support for democratic stability. When the Arab Spring took hold in 2011, Obama seemed to be in idealist mode and called for the resignation of Honsi Mubarak, a long-time US ally. Obama’s decision went against the more seasoned advice of his security adviser Tom Donilon, Defence Secretary Robert Gates and Secretary of State Hillary Clinton, who were all worried that encouraging the removal of a long-time leader, without any post-Mubarak plan, would bring anxiety to neighboring US allies in the most unstable of regions. Mubarak left and in came the intolerant Muslim Brotherhood.

The new leadership brought even more instability, stopped only by a military coup that the Obama administration somehow described as “restoring democracy”. Obama has welcomed the subsequent ascension of former military chief Abdel Fattah el-Sisi, who came to power in elections that were far from free and fair. Egypt will effectively be under military rule for the long-term; a situation little different to when Mubarak reigned, except with even more brutality. Along the way the US has appeared indecisive and willing to switch allegiances overnight, something that has likely unnerved vital allies such as Jordan, Saudi Arabia and the Gulf states.

With a presidential campaign in mind, Hillary Clinton has sought to clearly distance herself from Obama’s foreign policy. She reportedly took a sturdier stance on most issues, and not just in reactionary events such as Egypt. Recognizing burgeoning developments in the Far East, the then-Secretary of State called for a pivot to Asia. Yet after her departure the Obama administration tried to force more Israel-Palestine peace talks at a time when neither side had any appetite for a deal. The nine-month talks, which ended without a deal in April, involved a Palestinian leadership that was wracked by internal Fatah-Hamas divisions and an Israel enjoying relative calm, expanding settlements and a stable economy that galvanized hardliner sentiment.

In effect, the forcing the Israeli and Palestinian leaderships into talks seemed to heighten animus between the sides and spurred Fatah into closer links with Hamas, boosting the relevance of the latter. The current outbreak of hostilities is not a direct result of the faltering peace negotiations, but they ultimately served to bolster the bravado of Hamas and draw further ire from Israel.

Withdrawals from Afghanistan and Iraq
From day one, Obama’s goal was to withdraw US presence from Afghanistan and Iraq. He cannot be blamed for inconsistency there. Obama always made it clear that he opposed the Iraq war and viewed the whole mission as a blemish on American foreign policy. But his explicit eagerness to remove troops gives the perception that he didn’t try too hard to reach agreement with Prime Minister Nuri al-Maliki to leave behind a residual US force. Undoubtedly, even a lingering US presence would have helped neutralize this year’s turmoil. Moreover, knowing that the American president had a keen aversion to the Iraqi project was a likely boost of encouragement for militants, who were safe in the knowledge that the US presence would be a long-term vacancy. The vacuum could yet allow Iran to save the day, providing an ideal foil to extend influence throughout its oil-rich neighbor.

It is chilling to think that the current state of Iraq might be the future for Afghanistan. Of course, there are some fundamentally different factors, but it is not unreasonable to imagine a battle-hardened Taliban assailing the neophyte Afghan security services. Moreover, the timing of the turmoil is already set. Obama has established a timetable that will climax with all US troops, save for some security personnel at the Kabul embassy, withdrawing from Afghanistan by the end of 2016. By no coincidence this date also corresponds with Obama’s retirement from the White House. Giving a troop withdrawal pledge so far in advance is dangerous enough from a security perspective, but timing this with a departure from office seems naive at best.

Acutely aware of the warmonger stigma attached to George W Bush, Obama has sought to build his image as the antithesis of an antagonistic president. A worthy objective, but everything else in global affairs has seemed to be an inconvenience. Such an attitude can be attributed to inexperience or the boldness of relative youth. He admitted a reluctance to foreign policy earlier this year when he outlined his approach as: “You hit singles, you hit doubles; every once in a while we may be able to hit a home run.”

Even so, that doesn’t mean Obama has always been gun shy. He has presided over a sharp increase in drone strikes against alleged terrorists in Pakistan, Somalia and Yemen. And he approved the military “surge” into Afghanistan in his first term, but this seemed another example of indecisive policy. As former defense secretary Robert Gates concluded three months after the surge: “[Obama] doesn’t believe in his own [Afghanistan] strategy, and doesn’t consider the war to be his. For him, it’s all about getting out.”

False expectations?
Perhaps Obama thought that he could write-off the two wars and then be free to focus on domestic issues. His line of thinking may have led him to believe that with the two wars wound down, his presidency would mirror the international environment of Bill Clinton. Yet history says that the calmness of the 1990s was a rare occurrence; a mere blip within a century of conflict. Scaling back America’s influence in global affairs does not mean it will be left alone by the antagonists of the world. Unfortunately for America, a hegemon is always a target.

Barack Obama is a man of contradictions. He has achieved so much, securing two terms as the first black president, making healthcare more affordable. But he still must feel like an underachiever given the lofty expectations. He has a rare oratory ability to engage with a large audience, yet as president he is known for preferring his own company and being lukewarm to leaders of America’s allies.

Obama underestimated the importance of building a coherent doctrine and has been stung by recent criticism. Domestic agendas may be the preference of voters, but neglecting foreign policy carries great risk and can define a legacy. Inconsistency breeds doubt; something no leader should be associated with. In the twilight of his tenure, Barack Obama seems to be learning that lesson.

The future for America's stagnant incomes: How the US must react to global convergence and technology

The following piece originally appeared on

It took five years, but the US has finally recovered all the jobs lost following the 2008 recession. Indeed, the economy has been growing since June 2009; its fifth longest expansion in history. House prices have jumped sharply and the unemployment rate has tumbled. Yet it hardly feels like boom times for many Americans.

While stock markets reached record highs and large companies amassed record profits over the last few years, wage growth stagnated. And it is not a recent phenomenon; the inflation-adjusted median household income peaked in 1999 at $56,080. It is now $51,017. Listless wage growth has become such a norm that manufacturing corporation Caterpillar, despite announcing bumper profits, was able to implement a six-year wage freeze on many of its blue collar workers in 2012.

It seems an anomaly that so many important economic indicators have shown such strength while incomes remain static. In the post-recession years consumption has grown about 2% annually, well below its 3.5% long-term rate. That doesn’t bode well for an economy that relies on consumption as its engine. The gravity of the problem was masked in the pre-crisis years as consumers availed of easy credit and could afford to cut back on savings. But with many households now drowning in debt, stagnant incomes will become a bigger drag on economic activity.

An improving job market may bring some relief, but not much. The unemployment rate has reached its lowest rate since September 2008, but the number is flattering. It isn’t so impressive when the labor force participation rate is at a 35-year low due an increase in discouraged jobseekers, retirees, college returners and disability claimants; all categories that are typically boosted when an economy is weak.


But even if more employment is available, entering the workforce may not be attractive when so many jobs provide depressed incomes. The stagnation in wages does not appear to be part of a normal business cycle; it was evident long before 2008. The causes are more than just credit availability and a short-term drop in demand.

Median household incomes rose steadily between 1970 and 1999, but the pace was considerably slower than the 1950-1970 period. The picture gets even worse when the increased participation of women is considered; a strong trend that took off in the 1980s. The full extent of the problem is evident when it’s considered that the median male worker earned an inflation-adjusted 8% less per week in 2013 than in 1979. 

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The forces contributing to wage suppression have been surging for more than two decades and show little sign of abating. Globalization and technology have brought much prosperity to the world economy, narrowing the gap between rich and poor nations. Yet their influence seems to be doing the opposite in America. An interconnected world powered by technological advances means that many labor-intensive jobs have moved to countries with cheaper costs, leaving behind a large supply of lower-skilled workers. It has also provided jobs that bring demand for highly-skilled workers, but there isn't a sufficient supply at home.

The share of American employment in manufacturing has declined precipitously since the 1950s. It housed 30% of the workforce then, but that has now dropped below 10%. The share of services jobs has jumped sharply, but they too are coming under threat from technological advances and alternative markets. As a result the superior wage gains are going to those who can afford exorbitant college fees. The share of wages going to the 1% has more than doubled since 1976.

Such a skewed distribution of income isn’t just bad for the average worker; eventually it will impact the economy as a whole. Theory indicates that the marginal propensity to consume decreases as income levels rise, meaning that wealthy people have a greater tendency to save and invest income, thus spending less per dollar earned than do the less well-off. Moreover, the Federal Reserve’s response to the financial crisis with large-scale quantitative easing has allowed asset prices to balloon, benefiting wealthy owners, but providing little comfort to the average American. Growing inequality can generate social instability too, polarizing political ideologies s and limiting the potential for those not born into wealth to join the powerful elite.

Consumers seem desperate to maintain spending habits, as evidenced by a declining savings rate and sizeable withdrawals from retirement funds (the IRS said about $57 billion was taken out in 2011). But such measures cannot be done for much longer. Moreover, if the 1% continue to eat into the income pie, the corporations that rely on consumer spending will suffer. Corporate profits have been strong in recent years, but much of the gains have come from cost-cutting measures rather than robust revenue growth. Cutbacks can only be reduced so much. Many corporations will soon need to boost revenue and sell more to the consumer if they want to maintain profit margins. Stagnant incomes won’t be much help then.

The ability of American multinational companies to readily move operations between countries poses another risk to US employment. In recent years several corporations, especially high-tech pharmaceutical firms, have sought to relocate their headquarters overseas to take advantage of lower tax rates. A continuation of this trend will lead to the loss of more high-paying jobs and billions in tax revenue. The US will be forced to change its corporate tax structure to prevent the practice from escalating.
Many argue that the overall benefits brought by technology and globalization to modern lifestyles more than offset declining incomes. It is true that the ability to import goods from anywhere in the world and efficiencies from of high-powered machinery instead of back-breaking manual labor have untold benefits to society. Moreover, the cost of home appliances and automobiles has become more affordable in recent decades. But many things have not. College fees have soared and many graduates are suffocated by student loan debt. House prices remain elevated. And the US remains only a political crisis away from a spike in food and fuel prices. 

It may be tempting to propose measures to slow the rapid changes that pose risks to American employment and incomes. Trade barriers could keep jobs at home, while a pause in adopting new high-tech equipment would preserve roles that might otherwise become redundant. Such initiatives may slow the advances of globalization and technology, but they won’t be applicable to the rest of the world and US corporations will simply move their operations to nations that allow greater efficiency. Instead, the global changes must be embraced and the US must adapt to the changes in global wealth.

In recent times, its share of the economy has been reduced by the expansion of China and India, but two hundred years ago those countries were the world’s superpowers. Changing political systems and debilitating wars later saw their shares of global wealth decline, resulting in generations of obscurity. History shows that once-powerful economic leaders lose influence as their attention turns from boosting productivity to enacting laws that focus on preserving wealth, excessive borrowing to finance wars and tighter labor regulations that reduce competitiveness.

Great Britain took over from China and India around the 1850s as the Industrial Revolution drove productivity, but a hundred years later, two World Wars and immense reconstructive spending resulted in over-indebtedness, allowing the comparatively lean US become the global leader. Enjoying debt levels that were low relative to rising income, the US rode the wave of prosperity for decades. But US economic dominance has been in slow decline since the 1970s as Japan and Germany recovered from post-war stagnation, a commodity boom boosted Latin America, China adopted market-oriented policies, and India has opened its economy and lessened bureaucracy.

In the coming years the US may get some respite from the negative pressures of globalization as the catch-up by China and other Far East nations has already resulted in middle classes that demand higher wages. But the rate of technological change shows no signs of diminishing, and may widen America’s inequality gap over the coming decades. Along with manufacturing roles, the numbers of secretaries, bank clerks and even brick-and-mortar retailers look set to dwindle.

History may provide some hope for America. Britain’s Industrial Revolution brought much of the population from low income agricultural jobs to a higher standard of living via manufacturing roles in cities. Yet benefits were not immediate. The industrialization began around 1750, but 70 years later real wages had grown little.

Despite some social resistance, innovation continued and between 1820 and 1870 the average real wage jumped 60% as the supply of skilled workers increased and political reforms saw labor’s share of income rise relative to that of capital owners. Some jobs were lost along the way, but advancements in machinery generated demand for new goods and services, creating new roles that compensated for displaced workers.

Of course, America’s current situation may not signal the second coming of the Industrial Revolution. There are concerns that this is not similar to the transition from physical labor to human-operated machines, but more like an elimination of workers in place of full automation. Such fears are overblown. The levels of automation will depend on economics, not just the ability to automate. The current cheap cost of labor makes laying-off workers in times of stress a more attractive option than the burden of monthly payments for a new tech system.

Yet even if we are entering a new Industrial Revolution, few will take comfort from the prospect of a half century of stagnant income. Again, such a scenario seems unlikely. Eighteenth century Britain underwent a transformation from the type of manual labor that was done for centuries. Physical toil is no longer a significant part of the American economy when so many jobs already involve usage of modern technology. The impact of accelerated innovation figures to be less dramatic, and social reforms are easier to implement today than 300 years ago.

The benefits of globalization and technology can be immense. Relatively low barriers to entry have seen tech startups flourish in recent years, create booming companies in a short period. Moreover, they allow young people who were not born into significant wealth to become wealthy and influential, providing new voices among the nation’s most powerful figures.

Embracing new technology and trading partners has enabled countries such as Ireland and Germany emerge from decades of economic stagnation partly by investing in the skills of their workforce. Neither nation is a perfect economic role model, but their commitment to education and pro-employment initiatives has helped Ireland become a global tech hub and Germany an exporter of high-quality goods.

A more educated US workforce would help tighten labor markets. As job vacancies rise and the supply of workers shrinks, power would shift to employees, enabling them to pressurize firms into higher wages. However, there are many obstacles to boosting employability. In the past decade, the average cost for tuition and fees at a private nonprofit college jumped 25%. To facilitate attendance, government-backed loans have been doled out freely, but that has resulted in a student debt burden of $1.1 trillion, which will have its own drag on the economy. Government assistance must be scaled back, which will limit the excessive spending of colleges. The lack of easy credit will also make many people think twice before enrollment. A study by the OECD showed that less than half of all US college students actually graduate; indicating that many attendees would be better focusing on non-academic skills.

In addition, both colleges and employers must embrace three-year bachelors degrees; the traditional four years is an arbitrary number that just extends the time in education. Institutions can also reduce costs by adapting to the modern age and offer more online learning. Policymakers should also look at Germany’s “dual system” of vocational training, which combines classroom instruction with work experience. Almost half of Germany’s high-school students go on to training in one of hundreds of trades, with many of the courses set by unions and employers' federations.

As economic theory suggests, the best strategy to increase the earnings of low skilled workers is to have fewer of them. Aside from education, other options include tax credits to incentivize lower paid workers to stay in the labor force and increase their skills, and schemes to boost savings accounts that may help more people to purchase assets and benefit from rising prices. Higher minimum wages will be largely ineffectual. While helping some of those workers at the margins, they will not pressurize employers into raising wages further up the pay-scale and may prove a disincentive.

The US is still the global superpower, but its influence is waning. The economic share between the developed and emerging nations is now nearly even as a shrinking world allows easier navigation around the barriers to prosperity. For nearly a century the US has been the center of the economic world due to its ability to consume and produce. The British Empire enjoyed that status for a hundred years before it. Environments change and bring new obstacles that once seemed fictitious. But a global convergence of wealth is underway, with the prospect of a sole superpower gradually diminishing.

The US must compete with the new challenges by moving away from a reliance on credit-fuelled spending and instead focus on innovation as a method for generating economic activity. It has achieved this in the past, but has yet to prove it can do so in the future.

Wednesday, 30 April 2014

Canadian Economy Headed for a Wake-Up Call?

The Canadian dollar, commonly known as the loonie, derives its nickname from the North American loon, an aquatic bird known for diving to great depths. Similarly, the currency has taken a plunge since the start of 2013, falling 10 percent against its American counterpart from parity to C$ 1.1.

The period marks a sharp reversal for the Canadian dollar, which enjoyed a strong rally in the aftermath of the global financial crisis. Last month the loonie declined to its weakest in nearly five years, reflecting an increasingly fragile economy.

Canada proved an attractive safe haven for investors in the post-crisis years, with the currency being viewed as a reliable alternative to the uncertainty surrounding the US dollar and euro. A stable environment underscored by relatively robust banks and a global commodity boom allowed the central bank maintain higher interest rates than the US for much of the past five years, meaning that holders of Canadian assets could obtain a greater yield.

However, in recent years the commodity rally has stalled and despite a pickup over the last few months, prices remain far from the lofty levels of 2010. While a focus on commodities once gave Canada an advantage over other nations, it could now prove a detriment. Too much reliance on exporting its natural resources has resulted in reduced investment in the manufacturing sector.

Over the past decade the number of Canadian manufacturing firms has fallen by 20% and the sector’s share of GDP has shrunk from 16% to 12%. It is a worry trend, possibly indicating that the commodity boom has masked vulnerabilities in the core economy; something that could be painfully highlighted if food and energy prices tumble.

Improving US growth should boost demand for Canadian goods (it takes in about 70% of Canada’s exports) but the central bank recently warned that Canada’s non-commodity exports were becoming uncompetitive, even at C$1.1. The country’s growth outlook isn’t particularly encouraging either, with real GDP expected to increase 2.4% this year after rising 2% in 2013, marking a third straight year of slowing growth.

Canadian policymakers face a difficult challenge in supporting the economy while trying to manage an overheating housing sector. House values have ballooned, with the average price of a home more than doubling since 2002. Moreover, household debt has climbed to record levels of about 100% of GDP, on par with the US at the peak of its housing bubble. Similarly, at 7% of GDP, residential investment has become an unhealthily large part of the economy, outdoing the pre-crash US and rising much faster than population growth. The sector is undoubtedly on an unsustainable trajectory.

While interest rates were kept at 1% last year, the central bank had a tightening bias, intimating that it would raise rates in the near future to cool excessive spending. But new governor Stephen Poloz adopted a neutral stance in October, recognizing weakness in the broader economy. His dilemma is that low rates could add fuel to the housing boom, encouraging indebted households to increase borrowing, while higher rates could strangle business activity.

Inflation pressures are minimal at present, with the consumer price index rising 1.1% in February from a year earlier, well below the central bank’s 3% upper target. This has built up expectations that rates will be maintained at 1% until at least mid-2015. The prospect of no rate hikes should keep the Canadian dollar at relatively weak levels, helping boost the competitiveness of exporters.

This will help with a necessary longer-term goal of shifting the economy’s growth drivers, which have been imbalanced over the past decade. A transition is needed from reliance on debt-driven household consumption and residential construction to an export-led economy boosted by strong manufacturing investment.

Such a goal involves discouraging housing speculation through tighter mortgage conditions and limits on residential investment, hopefully resulting in a gradual stabilization of house prices. Policies targeted at revamping the much-neglected manufacturing sector will also help provide sustainable growth, effectively sheltering the economy from fluctuating commodity prices.

The deleveraging from an excessively indebted economy will take time and be somewhat painful, but that is the consequence of years of largess. Action now can prevent a severe hemorrhage later. For inspiration, policymakers just need to remember what happened to the housing market south of the border.

Monday, 14 April 2014

What’s Behind America’s Soaring College Costs?

Article originally appeared at Quartz and The Atlantic

The growing $1.1 trillion student debt burden in the US has been well documented, yet concerns are subdued. That’s because the burden, unlike the housing crisis, won’t cause a sudden economic crash. Instead, it will prompt a slow strangulation of spending spread over many years. Congress has made some minor efforts to reduce interest rates on debt, but the necessity for such large loans must be scrutinized. And that means confronting the indulgences of colleges.

Tuition costs have soared in recent decades. In 1973, the average cost for tuition and fees at a private nonprofit college was $10,783, adjusted for 2013 dollars. Costs tripled over the ensuing 40 years, with the average jumping to $30,094 last year. Even in the last decade the increase was a staggering 25 percent.

The ability of colleges to raise costs has been facilitated by a sharp increase in federal student aid. Lenders freely dispense credit to students, safe in the knowledge that all loans are guaranteed by the government. Between 1973 and 2012, federal aid (inflation-adjusted) increased more than 500 percent. Looking at a shorter period, between 2002 and 2012, total federal aid to students ballooned an inflation-adjusted 106 percent to $170 billion.

Colleges have effectively been guaranteed an income stream and have used that certainty to partake in an arms race against each other by constructing lavish facilities and inflating administrative processes. The pursuit of education has turned into a vicious circle in which students need bigger loans to pay for higher costs, and colleges charge higher costs because students are getting bigger loans.

Notably, hours spent preparing for classes fell at a similar rate, while there was little change in time devoted to research. Administrative bloat fueled by excessive spending seems to be diminishing the focus on what college is supposed to be about, with the study showing that almost a quarter of professors at four-year universities do not consider teaching their “principal activity.”The apparent escalation in college bureaucracy may be reflected in changing patterns of teaching hours. A national survey conducted by the Higher Education Research Institute found in 2011 that 43.6 percent of full-time faculty members spent nine hours or more per week teaching (roughly a quarter of their time), which is a down from 56.5 percent in 2001 and a considerable decline from a high of 63.4 percent in 1991.

Time spent teaching may be declining, but compensation for those at the top has increased sharply in recent years. Presidents are now paid like the CEOs of successful businesses, as evidenced by the Chronicle of Higher Education’s latest report. The findings showed that 180 presidents at private colleges earned more than $500,000 in 2011, compared with just 50 in 2004. Moreover, the top two highest paid presidents each received more than $3 million.

All this spending has been encouraged by a flawed student loan system that enables unwieldy inefficiencies. Today’s loan model was built with good intentions, tracing its roots back to Lyndon Johnson’s Great Society ambitions, but it was not designed for extended periods of stagnant wage growth and a widening gap in pay scales.

Education is more important than ever, with the comparative return on a degree still high relative to those without college qualifications. But to lower the costs of tuition, government support must be reduced. Lending institutions are too lax in giving out credit, knowing that the taxpayer will support 100 percent of defaulted loans. Without that firm safety net, lenders will be more discerning about borrowers’ fields of study; the expected income for a humanities graduate is not the same as an engineer. Less student aid will also make colleges think twice about their excesses.

Moreover, loans should not be an entitlement. There are too many colleges offering too many places to students. A study last year indicated that more likely to default than graduate, while about 40 percent of students have to take at least one remedial course during their studies, slowing their possible graduation date and increasing debts. These stats indicate that many students are not prepared or capable for college-level academics.

Both colleges and employers must embrace three-year bachelors degrees; the traditional four years is an arbitrary number that just extends the time in education. Institutions can also reduce costs by adapting to the modern age and offer more online learning. But they will only do this is if the government limits the ability of students to pay the prevailing high tuition costs.

The current model has inflated spending beyond the nation’s means, with colleges reaping the rewards while the government takes all the risks and graduates drown in debt. With an abrupt crisis unlikely, hard action may be delayed for years, allowing the noose to tighten on an already fragile economy.