The Next North Eastern Boom

After years of being ravaged by the war the North-East is set for more Booms. But this time we are hoping for a good boom. As in an economic boom.

With the opening up of the territory, firms have already begun to show interest in expanding into the North East. The obvious beginning would be to start with production, like agriculture and fisheries. Once these base industries are developing then there will be more room and demand for industries such as banking and telecommunications to enter the fray.

Tourism is looking positive with firms like John Keells, Softlogic Holdings and some foreign parties expressing interest to invest (FT). Although we will still be under the gloomy canvas of low tourist turnover due to the global financial crisis there should be enough demand to justify large investment in North-Eastern tourism.

Marketing will play a big role in making tourism a success and this is the perfect time for the industry to seize a chance for a comprehensive international campaign. Tourists are more picky with their destinations and will need a lot of convincing to invest their money in a particular alternative, the SL industry must fight now to create the worldwide buzz and top of the mind awarenss of a top tourist destination. I blogged about another possible marketing angle here.

Other industries set to boom include construction and engeneering consultancies. There will hopefully be a lot of inflow of funds with China and Iran already pledging some USD 1 billion and 1.9 billion respectively (FT). Construction funds must be used wisely and wherever possible, local firms should be enlisted to contracts in a way that efficiency is not compromised.

On the topic of efficiency, everyone is now worried about corruption and the mishandling of development funds by corrupt government officials. Of the tsunami aid scenario was anything to go by the Rajapakshe administration will have to ensure that none of that occurs this time around. But this may be asking for too much.

Government revenues are dropping, while expense is set to increase a lot according to Dr. Srimal Abeyratne senior econ lecturer at the Colombo University speaking to the Financial Times. The governments expected revenue increase of Rs. 200 billion is said to be too optimistic as the industries on which it relies on for tax income are suffering too much as a result of the global crisis.

The government needs to ensure optimum efficiency gains and ensure it uses its current strong position to make some concrete changes in the public framework that will improve the government services sector. This includes cutting staff and saying no to loss making departments. '..In the long term, these painful changes will strengthen the government's traditionally weak financial position' says Dr. Abeyratne.

A mini credit crunch in the local banking system is not helping anyone either. With the central bank's reduced interest rates not being translated into cheaper commercial lending rates. leasing companies have jacked up their deposit requirements and the velocity of money is down because of high saving rates and low consumer spending. This needs to be eased up.

Whether these changes happen or not, it is apparent that we may have a shot at having a better chance of riding out the ill effects of the global financial crisis if we experience (and more importantly, take advantage of) a mini boom in Sri Lanka. Hopefully when the boom begins to subside the global system would have reached a more stable position, helping to prolong it.

Social Ponzi Scheme: The US Social Security System

There is a trillion dollar scam happening in the US and its spelt like P-O-N-Z-I.

Except that the perpetrator is no Bernard Madoff type investment fraudist, it is the US government itself. The Social security system wroks like a very large Ponzi scheme according to this Mises Inst article, and its hitting deep deep trouble.

The Social Security program is much like a mass pension scheme akin to the one we have here in Sri Lanka. except for the fact that workers across all industries and sectors contribute to it. As such, it nets massive revenues. But the ratio of workers to non workers is decreasing due to various reasons, and new measures are needed for the system to sustain itself.

This will either involve a reduction in SS benefits or an increase in SS taxation, or a combination of both.

There is little reason why SS schemes shouldn't succeed IMO. As long as the revenue of the funds outstrips its outflow. But how fair are these on the people they tax?And there they really making as much return on their investements as they could be doing investing the money elsewhere? And is the government taking undue advantage of the existence of such a massive source of idling funds?

Most Ponzi schemes falter due to being unable to meet bulk withdrawals, this factor does not exist in a Social Security system, but it is also subject to the laws of the time value of money and relies on a share of its potential recipients never being able to claim their pension, prompting the writer's sarcastic suggestion that perhaps the government should rethink its tobbaco policy.

Oil Hike on the way?

Looks like we'll be soon confronting higher oil prices again. But the paradox is that the prices will remain low as long as the economy is in a slump. The moment it picks up the pace and starts wanting more fuel to power its machine the prices will start flying.

This Economist report quotes analysts as predicting the arising of more 'super cycles' where the usual boom bust commodity cyles are interrupted and longer periods of price increases are seen as developing economies start absorbing and draining resources and thereby initiating prolonged (and potentially destructive) demand cycles.

The main reasons behind the initial price hike have apparently remain unchanged. All the easy-to-access oil fields are in the hands of governments and the Big Oil firms are having to increasingly resort to drilling in nooks and crannies to find more oil. Also a slump in oil prices back in the 80s have limited investment in oil reserves amd therefore most of current sites not new ones.

The Big oil firms claim to be heavily investing in new oil fields and technology although the benefits will only be reaped in a decade or so. Government companies Like Saudi's Aramco and Brazil's Petrobas have invested heavily in more capacity but other governments like Iran and Venzuela are reluctant to do this due to the current low prices in the market.

Countries like Russia and Venezuela are facing serious cash flow problems and are pressurizing private investement and sub-contractors with more taxes and no wages. In Nigeria the fighting around the Niger Delta with forces such as the MEND are creating some serious barriers to development of production

So oil firms have no new oil to speak of and other pressures on goverment firms will prevent them from increasing output. All except for the Saudi's who have about three times the current capacity of production up their sleeves.

McKinsey, the consultants, argue that governments can help overcome this problem with a few simple measures. The more practical of which are increasing lorry load limits to increase fuel efficiency, increasing emmission standards and efficiency standards even more in the long run will undoubtedly help to curb demand.

Other measures that have been carried out in the past include investment in alternate energy sources, but the disastrous impact of bio fuels should have taught us a thing or two about the importance of thinking out such steps in detail. Electric cars are also a good option and it is encouraging to see quite a few global car makers coming out with models.

But all this has taken a back seat to the financial crisis. When the oil prices dropped so drastically everyone stopped thinking of the 'oil problem' in the classic short termist fashion characteristic of world governance. Bigger problems were at hand and opportunities to perhaps lay a foundation for a whole new energy culture were probably too far fetched and unimportant to care about then.

So now as the economy picks up again we may be confronted with bigger problems because now we won't have a sub-prime morgage crisis to pull us away from strangling each other in a scramble for natural resources. Already oil futures markets are indicating a potential rise in prices.

Which brings me to McKinsey's other suggestion; convincing developing economies to remove oil subsidies. This is something that these economies will definitely not agree to. They will argue that subsidies are essential to their growth. Moreover, they will question the fairness of such a request as economies that are 'developed' today got to such a state by the unrestricted consumption of all the resources they could lay their hands on.

China's Oil demand has risen to pre-crisis levels (and unrelated note: their military prowess has arisen to previously unheard of levels), but global demand is still on a downward trend as decline is still apparent from other big world economies. But as long as oil remians a critical resource, the problem faced a few months ago will materialize again, and specultion will drive the prices even higher, with a corresponding increase in other commodity prices worldwide.

Steps need to be taken starting immeditely to make sure that oil is not a  critical resource, but to this end there is also a lot of disincentive for powerful oil economies and lobby groups. There is always money to be made for the oligarchs, and high oil prices are something they will definitely welcome with open arms.

UN to press for access

The UN, in the wake of the visit of Mr. Ban Ki Moon has said that they will press for access to the IDP camps. Overall i think this is a very good thing. Now obviously there are reasons why the government is not allowing them in but we are hearing of goings on in IDP camps that smack of horrible things. These people need help, and it is our duty to ensure they get it.

There is the question of children being abducted from the IDP camps, strories of horrible crimes being conducted by the various paramilitary groups afilliated with the army, who apparently enjoy unfettered access to these camps. I saw a BBC write up on this on Thursday but havent been able to locate it since.

The thing is, if the government has nothing to hide, they should allow the UN in, let them at least establish a firm presence to distribute aid, afterall, we dont need no peacekeeping forces there right?

Processing with regard to possible child soldiers is important but hell man, you cant follow these cloak and dagger abduction policies with kids! why can't a transparent processing procedure be implemented now that the 'war is over' so that everyone can ensure these kids are given the proper care and attention they need?

More horrifying are the stories that some kids are being kidnapped for ransom. Ransome! and mothers are sometimes able to negotiate their release then and there by trading what little jewellery they posess.

There is no smoke without fire, and this may all be deemed to be nothing less than fabrications. But credible/ semi-credible reports and rumours won't fly around without anything to back them up.

We can't also forget that terror begets terror. And the foundations have to be set right away to avoid another ethnic conflict ever occuring on this island again. Then there may be cause for some real celebration too.

Making Sense of Stimulants

The Watchtower's W.A Wijewardena again offers a great piece on the basics of stimulus packages. A must read for anyone trying make sense of this burgeoning phenomenon.

Fear Factor

The Illusion of rational man, enter the economics of fear; by W.A Wijewardena, is a great read.

He offers a simple look into a basically intrinsic assumption in economic theory, that of the existence of the rational man. Rational man as we all practically know, is a figment of the collective imagination. Everything thinks they are rational, but our rationality is also based on our emotions. So we are bringing in our emotions in the consideration of choices and decisions.

But are emotions completely devoid of rationality? Aren't emotions signals from the gut so to speak?

The problem may lie with the basic definition of economic rationality. The Economic man or the Rationl man is generally described to be one who pursues self interest in his actions decisions and thoughts, therefore exercising that self interest and furthering his improvement is a product of his rational mind. As Adam Smith says in the Wealth of Nations

"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest."

Mr. Wijewardena goes on to state that as fear is avoided by rational man due to the fact that it creates 'disutility' (the opposite of utility, which Rational Man is said to pursue) and due to the fact that it is a product of risk (or the fear of the unknown) it is irrational and 'does not tally with the concept of the rational man'.

His argument, if i am correct, is that fear is an irrational emotion and therefore should not fit in to the concept of the rational man.

But here, i feel that we are stuck in the orginal economic definition of 'rational man'. Where the original concept of rationality is one of reason. So does reasoning secificaly have to take place based only on known facts and figures? If man did that, ignoring his gut feeling and emotions, he would surely fall prey to the unknown. Calling gut instincts or emotions a part of 'rationality' or reasoning may seem absurd but in reality, that is exactly how reasoning takes place.

Man is a rational creature, meaning that man engages in reasoning. But trying to label that reasoning within narrow categories that cannot include emotions or any of the other tools that economists feel are not 'rational' as they see it will only lead to problems later on.

As for Mr. Wijewardena's argument that fear is irrational, it is irrational in the context of the 'old' rational man. The man meant to purely base his decisions on 'fact and reason'.

But fear does have its benefits. Fear is a signal and will only improve your ability to respond to events more accurately. But fear can also be irrational, when you are obviously more content to blindly fear things and adopt remedies to counter these fears without stopping to examine if these fears have any credibility. Like fearing antagonism in the job market just cos your skin is a darker shade.

This is a scary prospect and as MR Wijewardena says, has been present in society for a long time and is especially present in the 'era of fear' that we are living in.

Frankensteining the Economy

heres a quick fix to the financial crisis.

The whole thing happened cos the housing market failed right? So people defaulted on their loans and cleared outta their homes. Leaving banks stuck with useless debt and unsellable houses. So what do they do? They sell the houses to the Indians! and the Chinese and the Sri Lankans! im sure we'll (speaking for all Asians) be glad enough to lap up good houses going cheap in the most developed nation of the world.

But then they'd have to grant us VISAs. Otherwise whats the point? no ones gonna buy a house they cant live in. So they give us VISAs and a million or so more immigrants enter the US. In case ur thinking people over here cant afford to buy US homes, thats not true. Theres a lot of money around these parts. The Indian ocean is gleaming with it.

So the Zombie banks sell their houses cheap and recover most of their money. The people who went to the US are happy cos they are now in 'the land of the free'. The US doesn't mind a coupla million more immigrants as long as they work hard and pay their medical insurance. The defaulters can rent rooms in the houses being bought. OR the owners can stay in Asia and rent their new homes out to homeless Americans.

The crisis will be nullified due to all the toxic assets being taken care of (because every house will be sold to clamouring Indians and Chinese - and the odd Lankan politician - with bulging pockets), banks will be standing on their own two feet again, and soon theother banks wont be so suspicious anymore of lendng out money, and the velocity of money going around the economy will slowly increase and permeat the air with some green crispness.

Trade will pick up as credit eases and confidence increases. Recruitment will start and people will find work again. And we shall all start living life as normal. The rich will once again become richer at a steady pace. no more uncertainty for them. And the poor will once again be poor in confidence. No more uncerainty for them either.

There. problem solved.
Stay tuned for; Conspiracies of the Crunch - predicting possible future credit crunch conspiracy theories (cue ominous music).

Obama's Plan; Just Glitz and Glam?

So what has Obama done so far? Where is this 'change' that has been going around apparently for the whole world to see? Only change I see is a darker tone of skin in the white house.

People are still dying in Iraq, casualties have only increased lately including those of US soldiers. Violence has exacerbated in Pakistan, the Taliban has expanded its control. The Gaza Strip and the West Bank are no better. Sure, you may say that the 100;1 ratio of Palestinian to Israeli deaths officially still happened during Bush's last days but Obama was still president elect, and in the name of humanity, he could have said something or raised a protest. Reasonably supposing that he really knew what was going on.

The UN security council was going to pass a motion, simply a statement condemning the Israeli attacks, but even a mere statement against the war crimes being committed by Israel was vetoed by the United States. This was the same United States whose public was caught up in the wave of 'change' and 'Rebranding America' etc. Obama didn’t even raise a finger in protest. Hiding behind his 'presidential elect' status to absolve himself of any responsibility.

His flumbering beginnings in handling the 'Financial Crisis' have proven inadequate to say the least. The much harped about G20 produced nothing less than 'heroic hypocrisy, unreliable sums, weak promises, meaningless language and self-serving commitments other than a very few worthwhile achievements' (read more of Miles Saltiel's report). His 'stimulus' packages have drawn widespread criticism from many economists (big names like Krugman and Stiglitz) as being extremely inappropriate given the current banking system.

It is increasingly looking like the boom-bust cycle will need to run its course until markets make their own recovery and Keynesian style hole digging and re-filling stimulus plans may or may not get us there quicker, but they will not work in the US is pumping its money into largely inefficient and loss making banks.

Also, where is the inquest into what happened in the Bush years? Where is all the war crime and 9/11 conspiracies that need to be investigated? The advent of Obama and his main calling card 'change' served the most effective purposes of brainwashing the world community into forgetting all about the previous years of US rule. It had the effect of making them think that 'hey, here's a new guy, let’s just forget the old guy, let’s change and move on'. But that change itself was insubstantial and mostly made up of clever and emotionally appealing rhetoric. And those of us who expected some actual substance from the man after he gained office will soon be sorely disappointed.