Brookings: Topics - Foreign Direct Investment

Africa Answers: Five Questions for Lawrence Bategeka about Uganda’s New Oil Law

Anne W. Kamau and Andrew Westbury — Wed, 01 May 2013 15:10:00 -0400

Earlier this month, Ugandan President Yoweri Museveni signed into law the “Petroleum (Exploration, Development and Production) Act 2013.” This bill establishes how Uganda will govern its new oil resources and clears the way for what is certain to be extensive commercial production. Passage of the new bill also ends an extended period of public scrutiny about the new law, during which the international community and Ugandan civil society groups expressed grave concerns about transparency in the sector and future use of oil revenues.

We recently discussed the bill and its ramifications with Lawrence Bategeka, acting principal research fellow at Ugandan think tank Economic Policy Research Center (EPRC). EPRC is an excellent resource on Uganda’s oil industry and the general economy of East Africa. You can follow them on Twitter at @EPRC_official. Brookings recently held a joint conference in Kampala with EPRC on natural resource management in East Africa.

Please read Lawrence’s answers to our questions below.

1. What are the implications of signing the new oil bill into law?

LAWRENCE BATEGEKA: Implementation of the National Oil and Gas Policy that Uganda prepared in 2008 required a legal framework. The policy goal is “to use Uganda’s oil and gas resources to contribute to early achievement of poverty eradication and to create lasting value to society.” The two laws—(1) The Petroleum (Exploration, Development and Production) Act 2013, and (2) The Petroleum (Refining, Gas Processing and Conversion, Transportation and Storage) Act 2013—provide the framework for implementation of the National Oil and Gas Policy. These two laws make it possible for industry stakeholders to proceed with the development stage of extracting Uganda’s new oil and gas resources since roles and responsibilities for every stakeholder are now well defined. Uganda should begin to see increased foreign direct investment in its oil and gas sector. However, Ugandans will have to wait until around 2016 to start seeing revenues from oil extraction since there is a minimum period of time it will take to accomplish each stage (e.g., a minimum of three years is required for the construction of an oil refinery).

2. Oil was discovered in Uganda a while back but to date there have been no revenues from the new discoveries. Has the delayed signing of the bills had any impact in delaying revenues from the oil industry?

BATEGEKA: Yes, the delayed enactment of the laws adversely impacted Uganda’s progress in oil and gas production and therefore delayed the realization of oil revenues. Uganda discovered oil and gas in 2006, but seven years later oil production has not yet started. It is prudent to note that the country would not move forward without a legal and regulatory framework. As such, the delay allowed Uganda to understand the oil and gas industry and thus try to avoid the mistakes that other oil-rich African countries have made. The first lesson learned is that operating outside the law would have raised issues of accountability and transparency, which could have possibly led to the “Dutch Disease Syndrome.” The second lesson is that, when civil society organizations work closely with lawmakers, there is likely to be more public debate and engagement on oil matters. This is attributed to the fact that the Petroleum Exploration and Production Bill was the most debated piece of legislation with nearly eight caucuses of the ruling party and an unprecedented use of the media by both those in support of and opposed to the bill. The third lesson is that the political institutions and culture in place have a key bearing on Uganda’s natural resource path regarding the management and utilization of the oil and gas resources.

3. Uganda’s public finance bill will state how oil revenues will be used in the country. Will expediting the signing of this bill have any impact?

BATEGEKA: The public finance bill is yet to be passed by parliament for assent by the president.

Expediting the public finance bill in its current form will have adverse effects due to inconsistencies with the current Public Finance Act and other regulations. In addition, there is lack of general consensus among all stakeholders on the various clauses pertaining to the management and sharing of oil revenues, the intergenerational fund, the creation of oil districts and the distribution of royalties, among others. While the proposed law aims at reforming the public finance sector and provides for fiscal and macroeconomic policies, the public perception is that the debate on the policy may be tilted away from oil issues and emphasis on transparency and accountability or vice versa. Furthermore, the proposed bill is silent on penalties for the abuse of public funds which was clearly emphasized in the current Public Finance Act (now being repealed). The proposals to increase the threshold for supplementary budget from the 3 percent currently provided for in the Public Finance Act to 10 percent in the new draft bill raises suspicions, considering that currently much of the supplementary budget is about 85 percent allocated to State House. If approved, this clause is bound to sideline Parliament as regards approval of what the funds should be spent on.

4. In view of regional integration initiatives going on across Africa, have the bills incorporated the regional integration initiatives? Why or why not?

BATEGEKA: None of the legislation has incorporated regional initiatives or perspectives. The enactment of the laws was based on the National Oil and Gas Policy, which was prepared for Uganda. It only tacitly takes into consideration regional integration initiatives especially from the perspective of building an oil refinery to serve the energy needs of some countries in the region. Since the National Oil and Gas Policy was prepared in 2008, there are other regional developments in the oil and gas industry that may require cooperation from other countries. The laws enacted do not inhibit nor do they enhance cooperation among countries in the region in matters of oil and gas development.

The bills are silent on the competition between countries partly because they feed into the security paradigm. It is also envisaged that negotiations among countries would make the oil production process slower than it already is. There is strong desire to speed up production and realize returns on investment. The government of Uganda has considered floating its oil refinery shares to regional states including East African Community partner states in order to generate funds for the construction of the proposed refinery.

5. Has the discovery of oil in Uganda had any significant shift in the structure of the Ugandan economy?

BATEGEKA: The discovery of oil is yet to have a significant shift in the structure of the Ugandan economy. Uganda’s economy remains largely agricultural and rural. Much of the labor is still employed in agriculture (66 percent of population) and the sector contributes 22 percent to GDP. The largest contributor to GDP is the services sector at 51 percent. However, due to the speculation of oil revenues, the mid-western part of the country where the oil was discovered has experienced an increased inflow of potential investors. As a result, there is now demand in this region for services such as banking, accommodation, food and transport, among others. In response, some local entrepreneurs in the Hoima and Buliisa districts have opened up small hotels, restaurants and recreation facilities to tap into these new opportunities. The government has recently released its Vision 2040 Strategy in which oil and gas are projected to partially finance the transformation of Uganda from peasantry to a modern and prosperous country within 30 years.

Authors

Anne W. Kamau
Andrew Westbury

Image Source: © Handout . / Reuters

China’s Increasing Interest in Africa: Benign but Hardly Altruistic

Yun Sun — Fri, 05 Apr 2013 14:42:00 -0400

China’s new leader President Xi Jinping has completed his foreign debut tour as the head of state after visiting Russia and three African countries: Tanzania, South Africa and the Republic of Congo. As the Chinese media hailed his “tremendous victory” and the “successful practice of great power diplomacy with Chinese characteristics”, the issue of China’s role and activities in Africa were once again put under the spotlight. Right before Xi embarked on his trip, Nigerian Central Bank Governor Lamido Sanusi criticized China’s engagement in Africa publicly in the Financial Times. His most quoted charge says “China takes from us primary goods and sells us manufactured ones. This was also the essence of colonialism.”

Sanusi’s comment cast a negative shadow to Xi’s first foreign visit and was met with ferocious rebuttals from an infuriated Beijing. China’s Ministry of Commerce pointed to the western countries’ “exploitation of African resources, trade of African people, occupation of African land and destruction of African culture” as the “essence of colonialism” and argued that it is China, not the West, that has provided support for Africa’s economic and social development. China’s Ministry of Foreign Affairs dispatched the head of its Africa Department, Lu Shaye, to deliver a formal demarche to a Hong Kong media outlet. He defended China’s role in Africa and argued that China has improved Africa’s international status by offering it a powerful alternative market and collaborator, delivering to Africa concrete benefits and treating it as an equal partner. In comparison, he argued, the West only “takes resources from Africa” and treats Africa with a condescending attitude.

The drastically diverging perceptions of China’s role in Africa are an interesting phenomenon. The polarization stems from the focus on different aspects of China’s activities on the continent. For example, dragon-slayers emphasize China’s selfish quest for African natural resources and how it sabotages international efforts to keep unpalatable African regimes in check. On the other hand, panda-huggers applaud China’s contribution to Africa’s economic development through infrastructure projects and revenue creation.

Unfortunately, neither reflects the nuanced, mixed nature of what China means to Africa. China enjoys unique financial and political advantages in promoting Africa’s growth through vast financing with little or no strings attached. However, these short-term benefits should not form a cover-up for the potential long-term negative consequences associated with neglecting issues of governance, fairness and sustainability.

On the positive side, China’s economic engagement in Africa has created significant benefits for African countries. Most importantly, Beijing has considerable capacity and willingness to provide financing to fuel Africa’s growth. During his recent trip, Xi reconfirmed China’s commitment to provide another $20 billion in financing to Africa. China usually attaches a significant amount of such funding to infrastructure projects, which forms the foundation for Africa’s industrialization and economic development. Many of these projects require large investment and long pay-back terms that traditional donors are reluctant to provide.

It is true that China does not emphasize the governance side of the story. This is a reflection of China’s own philosophy on the prioritization between economic development and political progress. Many Chinese officials, analysts and businessmen find the West’s overwhelming emphasis on democracy, governance, transparency in Africa amusing. To the West, they would ask an innocent but critical question: “for people who do not have food on the table, what’s the point of having democracy?” Using its own experience of subjugating political liberalization to the “higher cause” of economic development, China finds its approach to Africa as one that prioritizes the provision of basic elements of development, completely legitimate and fully justified.

In this way, China’s intention in Africa is benign. Beijing has no intention to colonize the continent, dictate the politics or economy of the local countries or deprive them of development opportunities. On the contrary, China truly sees itself as Africa’s “brother” and hopes to help African countries develop through infrastructure projects. Beijing seeks an approach different from that of the West, one that avoids the “meddling” with the internal affairs of African countries through conditional aid. In the last several years, China has contributed significantly to the economic growth of some of Africa’s poorest nations. China wants to see a prosperous Africa, which is beneficial to China’s interests as well.

However, this does not mean China is being altruistic. Helping Africa is important, but China would not do so if it had nothing to gain. Indeed, China emphasizes that any bilateral relationship has to be mutually beneficial. And China’s investment in Africa does pay itself back in multiple ways economically: development and exploitation of Africa’s natural resources, access to local market, employment opportunities for Chinese labors and service contracts for Chinese companies on infrastructure projects that China funds. When Chinese officials emphasize that China also invests substantially in countries that are not rich in natural resources to defuse international criticisms, they often forget to mention that China also has its eyes on other things that these countries can deliver, such as their support of Beijing’s “one China” policy, of China’s agenda at multilateral forums and of China as a “responsible stakeholder”. While there is nothing wrong with not being altruistic in one’s motives, it should be noted that China is not helping Africa in exchange for nothing.

In analyzing the nature of China’s activities in Africa, another important voice to examine is that of Africa itself. Many African countries and officials welcome China’s approach and fiercely defend China internationally. This seems like fairly powerful pushback to western criticisms of China’s role in Africa since African countries should know what they need more than anyone else. Africa’s approval of China poses an intriguing question for those in the West who disapprove of China’s activities in Africa: should the West reexamine its approach to Africa in order to better address what African countries truly need?

Authors

Yun Sun

Image Source: © Siphiwe Sibeko / Reuters

The New Cuban Economy: What Roles for Foreign Investment?

Richard Feinberg — Sun, 09 Dec 2012 00:00:00 -0500

The Cuban revolution defined itself in large measure in terms of what it was not: not a dependency of the United States; not a dominion governed by global corporations; not a liberal, market-driven economy. As the guerrilla army made its triumphal entry into Havana and the infant revolution shifted leftward, a hallmark of its anti-imperialist ethos became the loudly proclaimed nationalizations of the U.S.-based firms that had controlled many key sectors of the Cuban economy, including hotels and gambling casinos, public utilities, oil refineries, and the rich sugar mills. In the strategic conflict with the United States, the “historic enemy,” the revolution consolidated its power through the excision of the U.S. economic presence.

For revolutionary Cuba, foreign investment has been about more than dollars and cents. It’s about cultural identity and national sovereignty. It’s also about a model of socialist planning, a hybrid of Marxist-Leninism and Fidelismo, which has jealously guarded its domination over all aspects of the economy. During its five decades of rule, the regime’s political and social goals always dominated economic policy; security of the revolution trumped productivity.

Fidel Castro’s brand of anti-capitalism included a strong dose of anti-globalization. For many years, El Comandante en Jefe hosted a large international conference on globalization where he would lecture thousands of delegates with his denunciations of the many evils of multinational firms that spread brutal exploitation and dehumanizing inequality around the world.

Not surprisingly, Cuba has received remarkably small inflows of foreign investment, even taking into account the size of its economy. In the 21st century, the globe is awash in transborder investments by corporations, large and small. Many developing countries, other than those damaged by severe civil conflicts, receive shares that significantly bolster their growth prospects. The expansion of foreign direct investment (FDI) into developing countries is one of the great stories of recent decades, rising from $14 billion in 1985 to $617 billion in 2010.1 While FDI2 cannot substitute for domestic savings and investment, it can add significantly to domestic efforts and significantly speed growth.

Today’s ailing Cuban economy, whose 11.2 million people yield the modest GNP reported officially at $64 billion3 (and possibly much less at realistic exchange rates), badly need additional external cooperation—notwithstanding heavily-subsidized oil imports from Venezuela. As with any economy, domestic choices made at home and by Cubans will largely determine the country’s fate. Yet, as Cubans have been well aware since the arrival of Christopher Columbus, the encroaching international economy matters greatly; it can be a source of not only harsh punishments but also great benefits. In the Brookings Institution monograph Reaching Out: Cuba’s New Economy and the International Response, I explored the modest contributions already being made by certain bilateral and regional cooperation agencies and the larger potential benefits awaiting Cuba if it joins the core global and regional financial institutions— namely the International Monetary Fund, the World Bank, the Inter-American Development Bank, and the Andean Development Corporation. This sequel explores the contributions that private foreign investments have been making, and could make on a much greater scale, to propel Cuba onto a more prosperous and sustainable growth path.

Download » (English PDF)

Download the executive summary » (Spanish PDF)

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Authors

Richard Feinberg

Image Source: © Enrique de la Osa / Reuters

Obama in Burma

Lex Rieffel and Yun Sun — Fri, 16 Nov 2012 13:44:00 -0500

Barack Obama will be the first sitting U.S. President to visit Burma/Myanmar since the country gained its independence in 1948. The visit has important implications for U.S. foreign policy toward China and for U.S. foreign assistance to countries in transition from authoritarian to democratic rule.

If anyone had said a year ago to the best foreign policy analysts in China that President Obama would be visiting Myanmar in November 2012, the reaction would have been total disbelief. The same reaction would have come from most Asian experts. Myanmar’s president, Thein Sein, in a near-miraculous collaboration with opposition leader Aung San Suu Kyi, has made the impossible into a reality.

For China, Obama’s imminent Southeast Asia visit is a signal that the “rebalancing toward Asia” strategy that was a hallmark of Obama’s first term will remain a top priority in his second. The countries Obama will visit—Thailand, Myanmar and Cambodia—are considered by Beijing to be “China-friendly” neighbors. Yingluck’s government has rejuvenated Thailand’s relations with Beijing after a period of turmoil. China was Myanmar’s “best friend” during the two decades Myanmar was ruled by General Than Shwe. Cambodia saved China from a major diplomatic embarrassment when it ardently defended China’s position on the South China Sea issue at the ASEAN foreign ministers’ meeting this past July. Regardless of what Washington claims to be its peaceful aims, Obama’s visit to these three countries as his first post-election foreign trip will inevitably fuel anxiety that America’s rebalancing toward Asia is at least partially, if not completely, about curtailing China’s regional influence.

Among the three countries, Obama’s visit to Myanmar will be the one watched most intently by China due to three distinct concerns. One is the evolution of U.S. policy toward Myanmar, especially how rapidly the U.S. moves to eliminate sanctions, ramp up aid to strengthen democratic institutions, and promote foreign direct investment by American companies. A second is any threat to the completion in 2013 of the dual gas and oil pipelines across Myanmar from the Indian Ocean to Yunnan Province in China. A third is the unresolved fate of the Myitsone dam, a large hydroelectric power dam that is under construction on the Irawaddy River in Myanmar. One of President Thein Sein’s early moves was to suspend construction of this Chinese financed and built project designed to export electricity to China. Pressure from the United States might persuade Thein Sein’s government—supported by Aung San Suu Kyi’s opposition party—to terminate not only this project but other hydroelectric dams that China wants Myanmar to build in order to supply China with the energy it needs to fuel its rapidly growing economy. Since President Thein Sein’s inauguration in March 2011, Myanmar has jumped from a pro-China tilt to an ostensibly non-aligned position vis-à-vis the world’s super powers. Any further movement by Myanmar away from China and toward the United States during Obama’s visit will ring alarm bells in Beijing with potentially serious consequences for U.S.-China relations.

The Obama visit to Southeast Asia does, however, complicate the policy challenge of keeping U.S.-China relations on an even keel as China’s economic and political power rises and the global role of the United States remains constrained by domestic problems.

This is not to say, of course, that the United States should prioritize China’s feelings over its own policy objectives in Myanmar. The Obama visit to Southeast Asia does, however, complicate the policy challenge of keeping U.S.-China relations on an even keel as China’s economic and political power rises and the global role of the United States remains constrained by domestic problems.

If President Obama could step beyond his “bubble” and beyond the main streets during his visit to Myanmar next Monday, he would find himself in neighborhoods much like those he ran through while growing up in Jakarta in the 1970s. In some ways, the democratic transition underway in Myanmar today represents a bigger leap than the transitions in East Europe and the former Soviet Union 20 years ago or the transitions in the Middle East that began two years ago. It certainly represents a much bigger leap than the democratic transition that began in Indonesia in 1998.

How the United States can best support Myanmar’s transition is no simple matter and its track record in supporting other transitions is mixed at best. In Indonesia, for example, millions of U.S. tax dollars have been spent since 1998 to strengthen Indonesia legislature and build a first class judicial system. Yet today Indonesia’s legislature is arguably the single biggest obstacle to progress in the country and its judicial system appears to be more corrupt than it was in 1998. Now Congress more than the Obama administration seems eager to allocate millions of U.S. tax dollars to fix Myanmar’s legislative and judicial systems, with the same kinds of assistance used in Indonesia.

Another example is the peace process in Myanmar, the country’s existential challenge. Norway has rushed in to be the lead donor in helping Thein Sein’s government end the insurgencies of a dozen ethnic minorities that started within days of the nation’s independence and have never been resolved. Despite its admirable expertise and its best intentions, some of Norway’s early moves have been ham-handed. Now the United States with a rather dubious record of peace building is starting to weigh in.

The main challenge for the United States in designing a sensible foreign aid program for Myanmar, however, is simply how to “do no harm” at a moment when Myanmar is drowning in offers of foreign aid. The best and brightest in every aid agency in the world are flocking to Myanmar determined to make a difference. With no experience in managing such a range of donors, including international NGOs, and an understandable reluctance to say no to visitors offering aid, senior officials in the Myanmar government are being diverted from the crucial tasks of making and implementing policies. In short, there is a risk that Obama’s visit will raise expectations that the Myanmar government will be unable to meet, which could contribute to some big bumps in the road ahead for the country.

Authors

Image Source: © Stringer . / Reuters

If You Want to Buy an American Company, Ask Permission, Not Forgiveness

John Villasenor — Wed, 14 Nov 2012 00:00:00 -0500

If you want to buy an American company, ask permission, not forgiveness.

Unfortunately, that seemingly sound advice may not have reached Ralls Corporation, a Chinese-owned company that named President Obama, Treasury Secretary Geithner, and the Committee on Foreign Investment in the United States (CFIUS) in a lawsuit recently filed in a District of Columbia federal court. Ralls, which purchased four Oregon windfarms near a sensitive Navy flight area earlier in 2012, is fighting government actions that have declared its purchase prohibited on national security grounds.

To understand the mess in which Ralls now finds itself, it’s helpful to start with some background about CFUIS, which is a U.S. government committee “authorized to review transactions that could result in control of a U.S. business by a foreign person.” While pre-transaction CFIUS clearance is not generally required, it is a very good idea in advance of any foreign acquisition of an American company that has even the slightest possibility of raising national security concerns. An acquirer that obtains CFIUS approval can proceed to close the transaction knowing that a safe harbor provision usually protects it from future CFIUS actions. Conversely, when advance approval is sought and denied, the would-be buyer can call off the deal before too much water has flowed under the bridge.

But when foreign buyers decline to seek pre-transaction approval, things can get far more complicated. CFIUS is empowered to unilaterally initiate a review of all transactions – including those that have already closed, and following an unfavorable recommendation from CFIUS, companies may need to unwind acquisitions or otherwise divest the resulting assets. In May 2010, for example, Huawei paid a reported $2 million to acquire intellectual property and other assets from technology company 3Leaf Systems. According to media reports, the news of the deal raised concerns within the Department of Defense, and Huawei was subsequently asked to file for CFIUS approval. After CFIUS recommended against the transaction, Huawei voluntarily divested the 3Leaf assets rather than wait for a presidential order that would almost certainly have forced a divestiture.

When Ralls purchased the four Oregon windfarm companies, there was no operating wind energy business at the sites. There were, however, assets in the form of approved permits to erect wind turbines, easements from landowners, and agreements to connect to the power grid and to other local windfarms. After Ralls completed the purchase, it prepared to install wind turbine generators made in China by a company called Sany Electric.

One of the windfarm locations lies on land directly underneath restricted airspace used by the Navy for low-level aircraft flights, a fact that the Navy observed in a letter to the Oregon Public Utility Commission “may have negative security implications.” The other windfarms are close to (but not under) the restricted airspace. In June, after Ralls had begun construction of wind turbine foundations at several of the sites, CFIUS invited Ralls to submit a filing regarding the purchase. Ralls made the filing later that month, and in late July CFIUS ordered Ralls to cease construction and operations at the sites. Just over a week later, after Ralls informed CFIUS that it intended to sell the windfarms, CFIUS issued a new order prohibiting Ralls from completing the sale without government approval. Then in late September, President Obama, acting on a report received from CFIUS earlier that month, issued an order declaring Ralls’ purchase of the windfarms to be “prohibited” and requiring Ralls to divest its interests within 90 days.

Ralls’ lawsuit contains a litany of charges, including “arbitrary and capricious agency action” and “unconstitutional deprivation of property without due process.” It is also almost certain to fail, most fundamentally because presidential decisions to suspend or prohibit a transaction “that threatens to impair the national security of the United States” are statutorily exempted from judicial review. In addition, as the government noted in an October 29 motion to dismiss the lawsuit, “no well-advised purchaser would proceed with a transaction that raises potential national security concerns without first seeking CFIUS clearance.” To proceed otherwise is to invite exactly the kind of unwanted outcome that Huawei faced with 3Leaf and Ralls now faces with its windfarms.

Given this backdrop, here are some takeaways that prospective foreign acquirers and owners of US assets they are considering purchasing would do well to keep in mind:

First, it may not always be easy to know whether a transaction will raise concerns. If there are Navy jets routinely flying a few hundred feet above a rural site that is part of a contemplated transaction, the potential for government objection may be clear. But many business assets have a less direct tie to national security. Thus, if there is any possible national security implication, however slight, a foreign acquirer would be well advised to make CFIUS approval a condition of closing the deal. Relative to the blizzard of legal work that accompanies most acquisitions, the additional burden to make a voluntary filing with CFIUS is likely to be relatively modest. The safe harbor protections that accompany successful navigation of the CFIUS review process can provide an important boost to the value of the asset.

Second, prospective foreign buyers and American sellers should proactively think about all of the potential applications of the intellectual property and other assets that would be transferred in a transaction, including those well outside the scope of current product lines. Consider, for example, an American startup-up company that has developed sophisticated new data-mining technologies for social networking applications. Initially, that may appear to have nothing at all to do with national security. However, if those technologies can easily be repurposed to efficiently mine data in a military context, then national security concerns could arise in a sale to a foreign buyer.

Finally, companies should not rely on the apparent lack of CFIUS objections in relation to other similar transactions as indicative. If the purchase by a foreign company of your competitor received CFIUS clearance two years ago, that doesn’t mean that a foreign buyer of your company shouldn’t worry about seeking clearance.

In an increasingly globalized market, mergers and acquisitions with an international component are routine, and most foreign purchases of American business assets will raise no national security issues. But for the small fraction that do, it’s in everyone’s interest to find out as early in the process as possible.

Authors

John Villasenor

Publication: Forbes

Image Source: © Jason Reed / Reuters

Foreign Investment, Economic Growth and Job Creation

Mon, 01 Oct 2012 10:00:00 -0400

Event Information

October 1, 2012
10:00 AM - 11:30 AM EDT

Falk Auditorium
Brookings Institution
1775 Massachusetts Avenue NW
Washington, DC 20036

Register for the Event
A Conversation with Volkswagen Group of America President and CEO Jonathan Browning

Investment in the United States by both domestic and foreign businesses is a major engine of economic growth and job creation, and the United States attracts more foreign direct investment (FDI) than any other nation worldwide. FDI supports more than 5.6 million American jobs, including over two million in manufacturing. Manufacturing jobs tend to pay better – on average one-third more than the national average. These investments also help drive U.S. exports. Foreign affiliates also invest in innovation, spending over $40 billion each year on research and development in the United States.

But the United States faces increased competition for these investments and the jobs they bring with them. Can policymakers help keep America at the top and create even more jobs through these foreign investments?

On October 1, the Initiative on Business and Public Policy at Brookings hosted a forum examining the key factors policymakers should consider in trying to attract global investment in America. President and CEO of Volkswagen Group of America Jonathan Browning gave the keynote address. He was followed by a panel including Assistant to the President and the Principal Deputy Director of the National Economic Council Jason Furman; Brookings Senior Fellow and Director of the Initiative on Business and Public Policy Martin Baily; Executive Director of SelectUSA Steven J. Olson; President & CEO of the Organization for International Investment Nancy McLernon; and New York Times columnist Eduardo Porter, who will served as moderator.

Video

How Foreign Direct Investment in Retail Changed the Face of Indian Politics

Mobashar Jawed Akbar — Fri, 21 Sep 2012 00:00:00 -0400

On the afternoon of Tuesday, September 18, when a deceptive calm over Delhi had begun to sink into torpor, TV channels floated a story that the men in charge of the Congress machine had yet again deflated a Mamata Banerjee insurrection, this time over the diesel price hike and FDI (foreign direct investment) in retail. Politicians will plant a few weeds in the information jungle when they can; it is less understandable when media begins to fertilise weeds.

But the real problem is not a mistake, which can happen in any vocation. Our capital's elite gets it wrong because it is in the grip of those who look at Calcutta from Delhi, while real power has shifted to the grasp of those who look at Delhi from Calcutta. Pranab Mukherjee was ubiquitous to UPA because he was that rare politician who could absorb the view from both directions. In UPA 1 the Prime Minister and Mrs Sonia Gandhi outsourced political management to Mukherjee; he brought the ship of state through some historic storms because he never forgot his compass.

Neither Dr Manmohan Singh nor Mrs Gandhi seem to fully comprehend the extent to which they have alienated allies as well as potential partners. Where an ego needed some massage, it was rubbed the wrong way. Where a financial commitment could have been made with grace, it was made with a growl. It takes unique ability to manoeuvre Mamata Banerjee and Marxists into an alliance, albeit unacknowledged, against the Centre; or force Karunanidhi to join a protest against his own Government; or turn CPI(M) and BJP into partners in parliamentary inquiry committees over the 2G scam. Gurudas Dasgupta, the veteran Communist leader, actually thanked Mamata Banerjee on primetime television.

The Congress weakness is due not to the rancour of parties but the alienation of voters, fed up with unprecedented corruption and sustained inflation. Congress politics now revolves primarily around the 750-odd men and women who are Members of Parliament. Other parties are more worried about the 700 million who are voters. When Mamata Banerjee sounded out her base, she heard the overwhelming view that the price of associating with Congress now far outweighs the cost of leaving UPA.

If the Congress had been more observant, it would not have been shocked when the Bengal ultimatum was delivered through a press conference. Till then, the mood in the Prime Minister's Office was actually one of self-congratulation, with much talk of Mamata as a package of disposable bombast. The flip side of overestimating your worth is that you inevitably underestimate others. No one is a patsy. Life has changed. Congress hasn't.

At the moment of writing, Dr Singh and Mrs Gandhi have a choice: They can either save their Government with genuflection through a partial rollback, or protect the Government's credibility. This might be the ultimate Hobson's choice, since governance is a mirage without credibility. Mamata has left open a technical window through which she can return to Government, but rhetoric on the airwaves indicates that the relationship will never be fully repaired. Marriages do survive their crisis moments, but too much spouse-battering is taking place in this one.

Even if UPA manages to scramble the necessary numbers during a problem in the next session of Parliament, it will be a fluctuating advantage, purchased on daily barter. It could be a demand-a-week story. Taunts are already in the air. Bihar CM Nitish Kumar used an eloquent term, jugaad, or the ability to "manage" through suitable compensation, to describe this aspect of Congress core competence. An opposition leader can joke; it doesn't seem quite as funny when you are in office. No decision made by an uncertain government carries credibility; even a popular gesture invites the sneer that it is being done for partisan benefit.

Congress General Secretary Digvijaya Singh was frank enough to admit that the only realistic option now was a General Election. One wonders if he is also optimistic. Congress is facing not only the opposition from traditional foes but also isolation from traditional friends. Mamata Banerjee, Karunanidhi and Sharad Pawar have announced a first round of talks through their trusted nominees. You can be confident that they will not meet to discuss T20 cricket.

It is always one stone that sets off an avalanche. We do not yet know if FDI in retail will change the face of India's economy. What is certain is that it has changed the face of India's politics. My sympathies go out to the many MPs who had been promised a place in Government in the next reshuffle. It is not the errant minister who is in danger, but the Government itself. To appoint new ministers today would be an invitation to a Barmecide's feast.

Authors

Mobashar Jawed Akbar

Publication: India Today

Image Source: © Rupak De Chowdhuri / Reuters

China's Currency Policy Explained

Arthur R. Kroeber — Wed, 07 Sep 2011 09:28:00 -0400

Arthur Kroeber expands upon a recent paper, answering questions about China's monetary policy on the valuation of the renminbi and the political issues this raises.

1. The Chinese currency, or renminbi (RMB) has been a contentious issue for the past several years. What is the root of the conflict for the United States and other countries?

The root of the conflict for the United States—and other countries—is complaints that China keeps the value of the RMB artificially low, boosting its exports and trade surplus at the expense of trading partners. Although the U.S. Treasury has repeatedly stopped short of labeling China a “currency manipulator” in its twice-yearly reports to Congress, it has consistently pressured China to allow the RMB to appreciate at a faster pace, and to let the currency fluctuate more freely in line with market forces. The International Monetary Fund, the World Bank and many economists have also argued for faster appreciation and a more flexible exchange rate policy. Partly in response to these pressures, but more because of domestic considerations, China has allowed the RMB to rise by about 25% against the U.S. dollar since mid-2005. Yet the pace of appreciation remains agonizingly slow for the U.S. and other countries in Europe and Latin America whose manufacturing sectors face increasing competition from low-priced Chinese goods.

2. What impact does exchange rate control have on the economy?

According to foreign observers, consistent intervention by China to keep its exchange rate substantially below the level the market would set is a price distortion that prevents international markets from functioning as well as they could. This price distortion also affects China’s own economy, by encouraging large-scale investment in export manufacturing, and discouraging investment in the domestic consumer market. Thus, it is in the interest both of China itself and the international economy as a whole for China to allow its exchange rate to rise more rapidly. However, Chinese policy makers do not agree with this view, and believe the managed exchange rate is broadly beneficial for economic development.

3. What is the Chinese view of their policies toward exchange rate control?

Chinese officials see the exchange rate—and prices and market mechanisms in general—as tools in a broader development strategy. The goal of this development strategy is not to create a market economy but to make China a rich and powerful modern country. Market mechanisms are simply means, not ends in themselves. Chinese leaders observe that all countries that have raised themselves from poverty to wealth in the industrial era, without exception, have done so through export-led growth. Thus, they manage the exchange rate to broadly favor exports, just as they manage other markets and prices in the domestic economy in order to meet development objectives such as the creation of basic industries and infrastructure.

Since they perceive that an export-led strategy is the only proven route to rich-country status, they view with profound suspicion arguments that rapid currency appreciation and markedly slower export growth are “in China’s interest.” And because China is an independent geopolitical power, it is fully able to resist international pressure to change its exchange rate policy.

4. What are some misconceptions about China’s large-scale reserve holdings and investments in U.S. Treasury Bonds, specifically the idea that China is “America’s banker?”

Because China’s central bank is the single biggest foreign holder of U.S. government debt, it is often said that China is “America’s banker,” and that, if it wanted to, it could undermine the U.S. economy by selling all of its dollar holdings, thereby causing a collapse of the U.S. dollar and perhaps the U.S. economy. These fears are misguided. China is not in any practical sense “America’s banker.” China holds just 8% of outstanding US Treasury debt; American individuals and institutions hold 69%. China holds just 1% of all US financial assets (including corporate bonds and equities); US investors hold 87%. Chinese commercial banks lend almost nothing to American firms and consumers – the large majority of that finance comes from American banks. America’s banker is America, not China.
It is more apt to think of China as a depositor at the “Bank of the United States:” its treasury bond holdings are super-safe, liquid holdings that can be easily redeemed at short notice, just like bank deposits. Far from holding the United States hostage, China is a hostage of the United States, since it has little ability to move those deposits elsewhere (no other bank in the world is big enough).

5. What are the implications for U.S. policy and how should policymakers react?

China’s exchange-rate policy is deeply linked to long-term development goals and there is very little that the United States, or any other outside actor, can do to influence this policy. Also, the same suspicion of market forces that leads Beijing to pursue an export-led growth policy generating large foreign reserve holdings also means that Beijing is unlikely to be willing to permit the financial market opening required to make the RMB a serious rival to the dollar as an international reserve currency.

In substantive terms, there is little to be gained from high-profile pressure on China to accelerate the pace of RMB appreciation, since the United States possesses no leverage which can be plausibly brought to bear. U.S. policy should therefore de-emphasize the exchange rate, and instead focus on keeping the pressure on China to maintain and expand market access for American firms in the domestic Chinese market, which in principle is provided for under the terms of China’s accession to the World Trade Organization.

Authors

Arthur R. Kroeber

Image Source: Â© Petar Kujundzic / Reuters

Rebuilding America: The Role of Foreign Capital and Global Public Investors

Fri, 11 Mar 2011 00:00:00 -0500

Executive Summary

Sovereign wealth funds, foreign state managed social security plans, foreign currency reserve funds, foreign government employee pension funds, state-controlled operating companies and other foreign investing vehicles today collectively control trillions of dollars in assets and are projected to maintain significant growth over the next decade. These disparate foreign government entities－characterized in this report as Global Public Investors (“GPIs”)－are becoming increasingly influential players in the world economy. In the volatile contemporary global financial environment, the investment strategies of these foreign entities will impact capital flows and affect markets around the world.

Despite their growing salience in the international economy, policy-makers and political leaders in the United States have only a partial understanding of the investing practices, management and governance of these sources of foreign capital. There is finite knowledge regarding their strategic, political and regulatory implications and limited appreciation of their enhanced role in the deployment of global capital.

In this report, participants in the Brookings Institution Project on Foreign Capital and Global Public Investors have drawn on a variety of resources regarding how this class of international financial actors defines its core objectives, assesses and manages risk, and deploys capital.[1] We attempt to analyze what foreign capital and GPIs mean for the United States and what regulatory, political, and governance issues flow from their expanding size and pace of investment activity. In preparing this report, project participants interviewed senior investment professionals from sovereign wealth funds and other GPIs; consulted investment bankers who originate and execute investment opportunities for GPIs on a global basis; engaged some of the world’s leading public policy researchers tracking the activities of sovereign wealth funds; held off-the-record conversations with former senior U.S. government officials; and also analyzed government data, surveyed think-tank literature and reviewed recent media and academic articles.[2] Based on these disparate sources, we seek to discern broad patterns of response by GPIs to the recent financial crisis and to assess the impact on long-term American interests.

Our goal is to fill the gaps in understanding within the policy and political communities. We aim to look beyond current paradigms of foreign direct investment in the United States to explore new models of how international entities, including sovereign wealth funds and other GPIs, might invest capital that would earn competitive risk-adjusted returns and also fund vital public priorities during a protracted period of budget deficits and dramatically enlarged national debt.

With America’s 2009-10 federal budget deficit projected to total $1.5 trillion and its public debt expected to rise to about $13.5 trillion this year, the need for foreign investment－properly focused and thoughtfully structured－is high. This report therefore identifies potential approaches to address long-term financial needs in partnership with foreign capital.

Participants in this study understand the anxiety triggered by certain kinds of foreign capital investment in the United States. Many worry about the influence of non-U.S. money and question the investment strategies and goals of foreign entities. It was not long ago, for example, that an attempted investment in America’s shipping infrastructure by DP World, a state-owned company in the United Arab Emirates, sparked a nationwide backlash as critics emphasized the potential national security risks of a foreign entity managing maritime trade hubs. This report acknowledges that there are certain sectors that may be perceived as particularly sensitive, such as the military and defense industries, as well as selective natural resources and technology sectors and some U.S. infrastructure assets.

Yet there is an economic logic for expanding global capital investment in the U.S. According to the Congressional Research Service, foreign investment declined sharply after 2000, when $300 billion was invested in U.S. businesses and real estate. In 2008 foreign investment in the United States had surged to $351 billion but fell in 2009 to $269 billion, far below its peak.[3] In the aftermath of the financial crisis and a severe recession, the United States has pervasive capital needs for infrastructure development to enhance U.S. economic competitiveness, business investment to spur job creation, and technological innovation to fuel growth. There are multiple examples of other nations, such as Canada, the United Kingdom and Australia, that leverage foreign investment in infrastructure and other projects to finance and advance critical national priorities. While state governments generally preclude direct control or full ownership of those assets by foreign entities, minority investment agreements have proven both durable and mutually advantageous.

Our research dispels a number of myths and misperceptions about foreign capital practices and investment priorities. Based on the multitude of data-points we examined, this analysis concludes that the preponderance of sovereign wealth funds and other Global Public Investors are inherently cautious, focused on capital preservation, asset diversification, predictable returns, and the mitigation of political risk. As noted, most limit their equity ownership stake in public companies, financial institutions and private businesses to minority status and eschew direct management responsibility.

Based on our review of the practices and policies of Global Public Investors, we make a number of recommendations intended to improve the climate for foreign direct investment in the United States and strengthen the broader relationship between American policy-makers and political actors and foreign authorities with responsibility for the allocation of state sources of capital. Among our central conclusions are the following:

Acknowledging the Value of Foreign Capital to the United States: America’s massive public debt and chronic budget deficits, compounded by projected periods of limited GDP growth of 2 to 3 percent annually, underscore the need for foreign capital－properly structured and deployed－to meet vital needs and promote long-term economic development. Xenophobic or paranoid reactions to foreign capital are not warranted given the generally conservative investment and management practices of leading Global Public Investors.

Driving Policies and Programs that Facilitate GPI Capital Deployment: The United States requires enhanced policies and innovative new programs that encourage GPI capital deployment to meet both public and private sector needs. America has a long tradition of foreign investment from European nations throughout our history, Japan in recent decades, and a variety of countries during the contemporary period. Today a surplus of capital from Global Public Investors is deployed around the world, its allocation determined not simply by the prospect of favorable risk-adjusted returns but also by calculations about the political and regulatory environment of host countries. America must compete aggressively in the contest for capital from the new class of Global Public Investors that are deploying greater resources in a diverse range of asset classes and public-private partnerships. In an integrated global economy public capital, like private capital, will inexorably find its highest and best use, based on the competitive dynamics of the global investment marketplace. The benchmarks for global capital investment, however, include but are not necessarily limited to the highest risk-adjusted return. Other inducements, protections and considerations that government can structure can influence investment decisions. The United States therefore requires a dynamic twenty-first century policy architecture to realize the potential represented by the increasingly broad reach of GPI capital deployment.

Promoting Investment in U.S. Infrastructure: It is widely acknowledged that the United States is in the midst of a crisis afflicting its outdated and crumbling national infrastructure, the rehabilitation of which is vital to American economic competitiveness. It is similarly acknowledged that federal and state sources of funding, today exacerbated by a growing pattern of acute municipal deficits, are wholly inadequate to address the scope of the challenge. Foreign capital, including sovereign wealth funds and other Global Public Investors, can aid infrastructure development through direct investment, public-private partnerships and other financial vehicles that facilitate GPI investment in local, state, and federal infrastructure projects. While the need for policies to support infrastructure development is acute, there may be a corresponding opportunity to attract Global Public Investor capital. As an asset class, infrastructure has attributes historically attractive to Global Public Investors, including relative transparency and predictability of returns on invested capital due to generally stable cash flows. Innovative public policies and government sponsored programs that support and encourage such investments could further attract Global Public Investors to U.S. infrastructure development.

Supporting Green Technology Development: Foreign capital from Global Public Investors can play a constructive role in helping to finance a Green Bank for the development of low-carbon and energy efficiency technologies, including the provision of financing for companies not currently well served by the conventional project finance market. In addition to emerging as a vibrant new industry with promising long-term growth prospects, clean technology or “cleantech” investment has become a focal point of environmental policy ambitions for both industrialized and emerging market economies. A Green Bank financing vehicle backed by the government with loan guarantees buttressing private capital investments could be potentially attractive to Global Public Investors.

Encouraging Best Practices: As Global Public Investors become increasingly central players in the international economy, expanded implementation of principles of transparency and disclosure will help to alleviate the political tensions surrounding their investing agenda and practices. Today there is great variability in adherence to the so-called “Santiago Principles” adopted on a voluntary basis in 2008 by the countries represented in the International Working Group of Sovereign Wealth Funds sponsored by the International Monetary Fund. Recently, some of the world’s most prominent GPIs issued their first public disclosures. In 2010, the China Investment Corporation filed its first voluntary report with the U.S. Securities and Exchange Commission outlining its American holdings and the Singapore Government Investment Corporation and Abu Dhabi Investment Authority published their first annual reports. Looking ahead, it is possible to imagine that increased transparency by GPIs could be incentivized by new marketplace mechanisms that reward relatively greater levels of disclosure.

Stimulating Dialogue and Building Partnerships: To foster a climate that encourages investment and partnership between Global Public Investors and the United States, transparency and disclosure are principles that must be embraced by all relevant stakeholders. Amidst a period of legislative and policy activism on financial regulation in Washington, one of the most common concerns we observed was a lack of clarity among GPIs about the long-term regulatory and political environment in the United States.[4] Administration and congressional actors in Washington have ad hoc and extremely narrow channels of communication with Global Public Investors, which in turn exacerbates uncertainties about the rules and regulatory structures that will govern foreign direct investment in the United States. The absence of meaningful dialogue further limits the evolution of potential investment partnerships and new innovations in foreign financing mechanisms to deploy capital from GPIs in the United States. To remedy this problem, one of the most important yet easily implemented recommendations of this study is to create the Global Public Investors Roundtable, an informal group of administration policy-makers from the White House, Treasury, State and Commerce Departments and a range of congressional actors and their staff from both sides of the aisle in Washington who would meet with the world’s leading Global Public Investors, Sovereign Wealth Funds and representatives of other international financial institutions on a periodic basis to share information and stimulate dialogue on economic, regulatory, tax, national security and political issues central to foreign investment in the United States. Such meetings could engender dual benefits: foreign investors could gain greater clarity into rules, regulations and policy directives that would contribute to predictability and stability while government actors could develop more robust strategies to encourage sources of foreign direct investment that have a near-term impact on job creation and competitiveness.

The following analysis describes the sources of foreign capital and the functional and geographic diversity of Global Public Investors, including modes of regulation, mechanisms for capital deployment, and contrasting investment strategies. We look at the impact of the financial crash on investment horizons and risk assessment, and note the caution many GPIs observed in the aftermath of the financial crisis. In examining the behavior and investment philosophies of Global Public Investors, we investigate common concerns ranging from the perceived political interests of state investors, the scope and degree of control associated with equity stakes, and relative levels of fund transparency. In general, we find limited evidence of political interference in investment decisions, a tendency to avoid controlling stakes in foreign companies and some improvement in fund transparency and disclosure. In the remainder of the paper, we explore the role that Global Public Investors can potentially play in vital spheres of the U.S. economy, such as investments in infrastructure development and low-carbon and energy efficiency technologies. Our analysis concludes with a proposal to stimulate a substantive and continuing dialogue between Global Public Investors and the American political and policy communities to explore issues of common interest related to foreign capital investment in the United States.

[1] The authors would like to gratefully acknowledge the substantive contributions to this study made by Derek Kirkland, Alicia Ng, Ken Miller, and Jenny Lu, and the valuable assistance provided by Mark Murtagh on global and American infrastructure investment. Views of the authors are their own and do not reflect the views of the institutions with which they are affiliated.
[2] Where a publicly available source can be cited, this report attempts to do so. But some of the analysis contained here flows from discussions with experts who required that their views and opinions be conveyed privately and not be publicly attributed to them.
[3] “Foreign Direct Investment in the United States: An Economic Analysis,” Congressional Research Service, February 1, 2011.
[4] This frustration was expressed repeatedly but privately in multiple confidential discussions with senior managers of Global Public Investors, including sovereign wealth funds and state foreign reserve funds.

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Authors

Gordon M. Goldstein
Rick Kimball
Joel H. Moser
Raffiq Nathoo
Vijaya Ramachandran
Darrell M. West
Daniel Zwirn

Image Source: © Robert Galbraith / Reuters

Rebuilding America: The Role of Foreign Capital, Sovereign Wealth Funds and Global Public Investors

Fri, 11 Mar 2011 10:00:00 -0500

Event Information

March 11, 2011
10:00 AM - 11:30 AM EST

Falk Auditorium
The Brookings Institution
1775 Massachusetts Ave., NW
Washington, DC

Sovereign wealth funds, foreign government employee pension funds and foreign currency reserve funds control trillions of dollars in assets and are projected to maintain significant growth over the next decade. In today’s volatile global financial environment, the investment strategies of these global public investors will impact capital flows and influence markets around the world. Despite their growing salience in the international economy, many U.S. policymakers and political leaders have only a partial understanding of the investment practices, objectives, management and governance of global public investors.

On March 11, Brookings hosted a public forum that looks beyond current paradigms of foreign direct investment in the United States to explore new models of how state investment entities, including sovereign wealth funds, state-owned operating companies, and other public investors, might produce returns and ease U.S. budgetary shortfalls. Governance Studies Vice President and Director Darrell West presented key findings from a Brookings report about the economic, regulatory and political implications of foreign direct investment in the United States and the potential opportunities.

After the program, speakers took audience questions.

Audio

Rebuilding America: The Role of Foreign Capital, Sovereign Wealth Funds and Global Public Investors

Transcript

Uncorrected Transcript (.pdf)

Event Materials

20110311_sovereign_wealth

Participants

Panelists

Gordon Goldstein

Senior Vice President
Silver Lake

Richard Kimball

Managing Director, Goldman Sachs Group, Inc.
Trustee, The Brookings Institution

Vijaya Ramachandran

Senior Fellow
Center for Global Development

Daniel B. Zwirn

Managing Member, Zwirn Family Interests, LLC
Trustee, The Brookings Institution

U.S. – Brazil Relations: A Fresh New Start?

Mauricio Cárdenas — Tue, 08 Feb 2011 14:57:00 -0500

U.S. Treasury Secretary Tim Geithner’s visit to Brazil appears to be the launching pad of a renewed era of U.S.-Brazil relations. The visit comes after recent notable differences between the Obama and Lula administrations, the most conspicuous of which was the disagreement on the way to handle Iran’s nuclear program.

Other contentious issues were more regional in scope, such as Washington’s willingness to accept the election results in Honduras and the U.S. agreement to use military bases in Colombia (both of which Brazil opposes). In addition, trade issues, from intellectual property and pharmaceuticals to U.S. subsidies for cotton growers and ethanol producers, complicated the bilateral agenda during the last years of the Lula administration.

In this context and despite her affinity to Lula, Brazil’s newly-elected president, Dilma Rousseff, has taken careful steps to highlight her administration’s willingness to re-calibrate the U.S.-Brazil relationship. Surprising many analysts, Rousseff has spoken with a new voice and is bringing fresh air to the bilateral relationship.

The announcement of President Obama’s trip to Brazil is a clear sign that Washington got the message. Under Rousseff’s tutelage, Brazil’s Foreign Ministry has ordered its embassies and UN mission to prepare a review assessing the state of Brazilian foreign policy. The report will address human rights in countries with authoritarian regimes and also focus on Brazil's relationship with the United States. Moreover, Rousseff has stated that her government would be a staunch defender of human rights around the world in a clear effort to distance her government from Iran.

On international economic policy, Brazil has two main concerns. One is the recent wave of capital inflows that has severely overvalued the Real and is causing serious inflationary pressures. The Brazilian authorities see this unwelcomed economic overheating as a consequence of the dollar tsunami derived from QE2 policies in the U.S. The second issue has to do with China. The competitiveness of Brazil’s industrial sector is compromised by China’s undervalued currency. Imports to Brazil of manufactured goods from China increased by 60 percent in 2010. The deficit in manufactured goods between China and Brazil was a staggering $23.5 billion, up from only $600 million seven years ago. Brazilians do not want to deepen their economy’s dependence on commodity exports. They know that a robust economy requires a healthy manufacturing sector that is able to compete with China.

Another major bone of contention has to do with foreign direct investment. Brazil is not happy with the treatment that the Chinese authorities have given to the emerging multilatinas operating in China. One of the issues of contention is the requirement for these Brazilian corporations to engage in the transfer of technology, which Brazilian companies have acquired through a long and costly process. This contrasts with Brazil’s openness to Chinese investments, especially in natural resources.

The U.S. and Brazil can find some common ground. On the issue of China, Brazil’s voice resonates loudly and credibly in today’s multipolar world. China has for the most part ignored U.S. calls for a revision of its exchange rate management. But, in the process, China is alienating other emerging market countries that are also trying to develop their economies. The new Rousseff government has decided to abandon the view of not quarreling with its number one client, so entrenched in Lula’s presidency. How much is China going to listen remains to be seen, but it is important to remember that China also needs Brazil as a reliable source of primary goods, from agriculture to mining.

However, a solid relation between the U.S. and Brazil will not be cemented on their respective views on China. The bilateral agenda is broad and needs to move forward more decisively, especially in issues related to trade, energy and investment. Both countries have homework to do by lifting protectionist barriers that are a legacy of the past that have impeded a firmer integration between these two economies.

Authors

Mauricio Cárdenas

Image Source: © STRINGER Brazil / Reuters

In India, A Healthy Financial System Is Essential for Progress

Eswar Prasad — Wed, 26 Jan 2011 00:00:00 -0500

The Indian economy is at a critical juncture in its growth trajectory. It is benefiting from market-oriented reforms that started in earnest 20 years ago. Now, after a decade of blazing growth, the economy is at an inflection point. Today’s policy choices will determine whether this growth surge remains sustainable or fizzles out.

Finance holds the key to achieving India’s long-term growth potential. As the economy becomes larger, more complex and market-oriented, the financial sector will play a crucial role in underpinning growth by channelling domestic and foreign capital into productive investments. Increasing access to the financial system is also a priority for making growth more balanced and sustainable, from both economic and social perspectives.

A system that provides credit, savings instruments and insurance to a broad swathe of the population is essential for distributing the fruits of growth more evenly.
Progress on financial reform has been uneven and slowed by the global crisis. Like many other emerging markets, India weathered the crisis far better than the advanced economies, with only a modest dip in growth. This has spawned two dangerous notions. First, that it is desirable to keep much of the banking system under state control as that makes the economy resilient to crises. Second, relatively insulated financial markets will protect the economy from outside shocks.

It is true that state-owned banks did better during the crisis, with stronger deposit growth and more credit expansion. A different interpretation is that, during a period of turmoil and uncertainty, deposits fled to banks that had implicit government backing and these banks were in turn emboldened and indeed encouraged to keep lending.
What is missing from the calculus are the long-term economic and social costs of a banking system that is inefficient and narrow.

Despite all the strictures they operate under, some government-owned banks have managed to compete effectively, holding their own against domestic and foreign private banks. It is time to cut these banks loose from government control and reduce barriers to the entry of new private banks.

As India continues to deepen its integration into world trade and finance, it will be more exposed to external shocks. Rather than going into a defensive crouch, the right approach is to manage the process of globalisation to the country’s benefit while containing the risks.

Dependence on foreign capital certainly leaves an economy at the mercy of the whims of foreign investors. Despite India’s sizeable war chest of foreign exchange reserves, the current account deficit of more than 3 per cent of gross domestic product is a serious concern.

At the same time, India has enormous financing needs, especially for rectifying its woefully inadequate physical infrastructure.

So, foreign capital is welcome but the question is whether the financial system can absorb these funds effectively rather than just fuelling asset bubbles and adding to macroeconomic volatility. Controls to limit surges in capital inflows are a seductive solution but they are largely ineffective.

Besides, the last thing India needs is policy uncertainty that frightens away foreign investors and causes financing problems.

Here again, financial market development is the answer. A broader set of markets can help absorb foreign funds and channel them towards more productive uses. For instance, the development of corporate bond markets would help channel foreign capital (and domestic savings) into long-term financing for infrastructure projects.

Opening up sectors such as the retail trade to foreign direct investment would also bring in more stable funds, along with technology transfers and the ancillary benefits of greater competition.

To the government’s credit, financial reforms continued even during the crisis period. India has introduced currency derivatives, interest rate futures and even credit default swaps in a cautious manner with tight regulations.

The Reserve Bank of India has wisely resisted the introduction of capital controls and made it a priority to increase financial access. These steps are welcome but the broader financial reform agenda remains vast.

Moreover, finance does not operate in a vacuum. Institutional reforms and good macroeconomic policies are essential for a financial system to work well and deliver high growth. In addition to its corrosive effects, rampant public corruption scares away long-term foreign investors and shifts the composition of inflows towards more short term and less stable forms of capital.

Large budget deficits and the high level of public debt constitute another source of vulnerability. Roping in banks to help finance deficits by forcing them to buy government bonds makes a bad problem worse by imposing a huge cost on the banking system and crowding out lending to the private sector.

Unless the government can tackle these problems, they will erode India’s growth potential.

Eswar Prasad is a professor of economics at Cornell University and a senior fellow at the Brookings Institution. He is the co-author (with M. Ayhan Kose) of Emerging Markets: Resilience and Growth Amid Global Turmoil (Brookings Institution Press, December 2010).

Authors

Eswar Prasad

Publication: Financial Times

Image Source: © Stringer India / Reuters

Liability Legislation for Indian Nuclear Energy Business is Enacted

Urjit R. Patel — Wed, 01 Sep 2010 10:42:00 -0400

Both Houses of India’s Parliament have passed the Civil Liability for Nuclear Damage (CLND) bill, which establishes and allocates liability on diverse stakeholders participating in the nuclear power industry. Previously, I observed that key contentious issues had to be resolved in order to move forward with the bill, including a stronger compensation regime; broadening the “actors” beyond operators of the facility who would be liable for compensation; and extending the statute of limitations.

After intense debates, backroom negotiations between the two main political parties and important redrafting, the following five points are noteworthy:

The overall maximum amount of liability in respect to each nuclear incident is assessed at Special Drawing Rights 300 million (21 billion rupees), except where the government changes the maximum amount through a notification.
The operator of a nuclear plant of 10 MW and above is liable for compensation up to 15 billion rupees.
The central government is liable for damage in respect of a nuclear incident where the liability exceeds the amount of liability of an operator.
The period over which victims can claim damages for injuries is 20 years.
Even if an operator does not have a contractual right for recourse vis-à-vis a supplier, the CLND bill provides for recourse to compensation if the nuclear incident has occurred due to a supplier’s actions. In other words, supplier’s liability is part of the legislation.

In the run up to the voting on the CLND bill, a fair amount of discussion focused on the fifth point above. There was strong representation from the industry that supplier’s liability will make India an outlier in the nuclear power sector, and consequently Indian operators will find it difficult to source equipment and service vendors from abroad and domestically. Several observations are pertinent in this context.

First, even if the supplier’s liability clause (# 17b in the bill) were not included, the operator through an apposite contract could hold a supplier liable. Regardless of the lack of precedent, good housekeeping on the part of the operators to protect their investors’ interests should include channelizing some liability to vendors; after all, this is generally the case in the energy sector. (It is instructive that in South Korea there is right of recourse to suppliers unless excluded by contract.)

Second, it is important to conceptually assess the industry position against supplier’s liability. The primary reason why the subject of liability is important in the nuclear business is the potential for a large negative externality, regardless of the cause, if matters go awry—a ceiling on damages is needed precisely because they can be astronomical. Therefore, liability clauses that impart responsibility on a stakeholder who is best placed to assume a specific risk is optimal. In this sense, the CLPD bill distinguishes between a broad operational risk and a (relatively) narrow supplier-related risk. To further underscore this point, it is noteworthy that an operator does not bear risk on account of natural disasters, act of war, terrorism etc.—past experience suggests that in these instances it is usually left to the government to bell the cat!

Lastly, the world is on the verge of a nuclear energy renaissance, hence suppliers’ order books will witness robust growth, and thus it may be beneficial to “sharpen” incentives against cutting corners by suppliers (regardless of how small the possibility is due to adverse reputation effects). In fact, inclusion of supplier’s liability is a model that other countries may emulate in due course as it is not without merit, irrespective of industry clamour against it in the Indian context.

Authors

Urjit R. Patel

Image Source: © Babu Babu / Reuters

Crucial Deadline for Nuclear Energy Business in India

Urjit R. Patel — Tue, 17 Aug 2010 11:59:00 -0400

Introduction

Over the last two years, India has signed bilateral nuclear power agreements with several countries, including the U.S., France, Russia, Kazakhstan and Canada. On July 30, a prerequisite for U.S. nuclear fuel suppliers to conduct business with India was concluded with the two countries signing an agreement on the reprocessing of American nuclear spent fuel by India, marking the final steps toward implementation of the landmark 2008 civil nuclear deal. These latest arrangements and procedures will enable reprocessing by India of the U.S.-obligated nuclear material at a new national reprocessing facility to be established by India and dedicated to the reprocessing of safeguarded nuclear material under International Atomic Energy Agency (IAEA) safeguards.

Efforts by foreign companies to enter the Indian market will not be successful in the absence of a Civil Liability for Nuclear Damage (CLND) legislation, which is necessary for investors who are unwilling to accept unquantified risks of nuclear energy without some limitation on their liability. Specifically for the U.S., progress toward two nuclear reactor park sites designated by India for U.S. technology in the states of Andhra Pradesh and Gujarat has been held up in the absence of a CLND Act. Both the U.S. and India would like to have the legislation in place prior to President Obama’s visit to India in November.

It is noteworthy that the legacy of cooperation and deals between state-controlled enterprises in Russia and India is bearing fruit. The much-delayed 1,000 MW first unit of Kudankulam nuclear generating station in Tamil Nadu, being built with Russian collaboration, will be active by December. The plant will be made operational irrespective of whether the proposed nuclear liability legislation is enacted. The second unit of the Kudankulam power plant is envisaged to come on stream within six months of commissioning the first unit by June 2011. Russia does not seem overly anxious about the passage of the liability bill before its companies conduct business in India.

Background

Given the legacy of the present energy profile, growing energy demand in emerging markets, broad availability and the evolution of prices, fossil fuels will continue to comprise a significant part of the global energy mix until 2030, even for developed blocs like Europe and the US. India will be no different (see Table 1 for India’s electricity projections by fuel). The single largest fossil fuel in the energy mix is coal at 40 percent of India’s energy consumption and is the most abundant and domestically available primary energy resource other than thorium and solar insolation.

Table 1: Generation Capacities and Load Factors, 2031/32

Source	Capacity (GW)
Coal	270
Natural Gas	70
o/w Coal bed methane	28
In-situ Coal gas	22
Nuclear	63
Hydro	150
IGCC pet coke	3
Wind – onshore	32
Wind – off-shore	1
Biomass gasification	1
Biomass combustion	50
Solar	10
Total	700

Note: 1 GW is equal to 1,000 MW.
Source: Report of the Expert Committee on Integrated Energy Policy, 2006.

Although hydrocarbon-based power is likely to remain the mainstay for India’s power sector at a construction cost in the median range of $1.4 – 2.5 million per MW, the potential size of India’s nuclear business is huge. In two decades, India hopes to more than double the share of nuclear power in its electricity portfolio from 4.2 percent at present to 9 percent, a 14-fold increase in installed capacity to 63 GW over the next two decades.

India’s Nuclear Energy Strategy

Nuclear energy theoretically offers India long-term energy security. Achieving this goal is crucially dependent on India implementing its long-standing strategy of nuclear fuel recycle as compared to the preponderant once-through fuel cycle. This entails the realization of the multi-stage development process to tap into India’s vast thorium resource – about a quarter of known global reserves.

Continuing support to the three-stage development of India’s nuclear potential is essential. India is extracting uranium from extremely low grade ores, often as low as 0.1 percent, compared to ores with up to 12-14 percent uranium in certain geographies elsewhere; this makes Indian nuclear fuel 2-3 times costlier than international supplies. The substantial thorium reserves can be used but only if it can be converted to fissile material. In this context, a three-stage nuclear power program has underpinned India’s objectives in the sector:

Establishing pressurised heavy water reactors (PHWRs) in the first stage – which has now reached maturity – since these reactors are efficient users of natural uranium for yielding plutonium fuel. Capacity addition supplemented by electricity generation through light water reactors (LWRs), initially through imports of technology from Russia but with the long-term objective of indigenization.
Fast breeder reactors (FBRs) in the second stage based on plutonium yield from the first stage. The FBRs will also recycle spent uranium from PHWRs to breed more plutonium fuel for electricity generation. FBR technology is critical to developing stage two of India’s nuclear power program, otherwise it will find it difficult to go beyond 10,000 MW installed capacity based on domestic uranium resources. Deployment of FBR technology would enable indigenous uranium resources to support a much larger nuclear power program by 2020 and more importantly thorium used as blanket material in FBRs will produce uranium 233.
The third stage deploys reactors based on the uranium 233-thorium 232 cycle. The “resource multiplier” for power generation of the three-stage strategy is summarized in Table 2.

Table 2: Approximate potential available from nuclear energy in India

	Amount (tonnes)	Electricity (MW)
Uranium:	61,000
in PWHR		10,000
in FBR		500,000
Thorium:	225,000
in Breeders		Very large

Against this background, the 2008 civilian nuclear agreement with the U.S. has catalysed for India autonomy and choice along three dimensions:

Access to secure long-term uranium supplies from abroad to close the gap between capacity factor and availability factor of existing PHWRs.
Add PHWR capacity through imports of up to 40 GW.
Harness external innovation in both equipment and fuel that would allow India to use its ample indigenous supply of thorium.

The Legislative Challenge

In the current monsoon session of India’s Parliament, an important piece of legislation essential for foreign investment and commerce into India’s energy sector will be discussed by the Parliamentary Standing Committee on Science and Technology and then voted upon by both houses of India’s Parliament. It is unclear whether all this will be accomplished in the month-long session, which ends on August 27. The CNLD bill – which will become an act after it is passed by Parliament – has been caught in a controversy with several opposition political parties demanding its redrafting.

Key contentious issues for resolution at the Parliamentary committee stage include: enhancing ceiling on damages – the Supreme Court’s judgement on the Bhopal gas calamity has triggered a demand for a stronger compensation regime in industrial accident cases; broadening the “actors” beyond operators of the facility who would be liable for compensation; extending the statute of limitations; and whether a separate dispensation for liability should be given to Indian nuclear energy operators, which would in effect bias the sector somewhat against foreign investment.

The current draft of the CNLD bill stipulates in clause six the maximum financial liability of the operator of a nuclear power plant at five billion rupees. If the damage is assessed to be more than this, the additional money has to be provided for by the government up to Special Drawing Rights 300 million (21 billion rupees) in congruence with the 1997 Convention on Supplementary Compensation for nuclear damage, developed under the auspices of the IAEA. This amount is felt to be inadequate in India partly because of the recent paltry damages awarded in the Union Carbide case; for example, the Price Anderson Act 1957 in the U.S. established a no fault insurance-type system in which the first $10 billion is nuclear industry-funded, and any claims above the $10 billion would be covered by the federal government.

There is the prospect that outstanding matters before the Parliamentary Committee could be resolved, albeit not exactly, along the following lines:

A doubling of the operator compensation cap to 10 billion rupees could be recommended.
Since the full effects of cancer caused due to exposure to radiation could take 10-15 years to be known, the Parliamentary Committee is also likely to suggest extending the period of victims claiming damages in clause eighteen of the bill from the current 10 years from the time of a nuclear incident to more than 15 years.
From the perspective of expanding the scope, even as it is contemplated that clauses may be inserted to cover eventualities like accidents during transport of nuclear materials or in their handling at domestic and even foreign ports, it is unclear whether pressure from proponents to insert a supplier liability clause will be successful.

In conclusion, while the deadline is tight relative to the process that still has to be traversed before the CLND bill is legislated, it is possible for hard work and compromise over the next two weeks to bear fruit and further unlock business opportunities in the Indian nuclear power sector.

Authors

Urjit R. Patel

AGOA at 10: Challenges and Prospects for U.S.-Africa Trade and Investment Relations

Thu, 29 Jul 2010 09:48:00 -0400

This year’s Africa Growth and Opportunity Act (AGOA) Forum, held on August 2-3, 2010 in Washington, DC, recognizes 10 years of trade and development cooperation between the United States and Africa. The forum brings together senior government trade officials from 38 African nations with senior leadership in the U.S. government to discuss “New Strategies for a Changing World.” AGOA has thus far been a significant step in encouraging African reform efforts and prompting greater investment and growth for Africa; however, critics charge that AGOA could do more to benefit more diverse sectors of African economies and needs to be greatly extended beyond its 2015 expiration date.

Experts from the Brookings Africa Growth Initiative examine the current AGOA framework and the progress made over the past 10 years and provide recommendations on how African and U.S. policymakers should strengthen and extend AGOA in order to realize greater positive gains.

Download the full report » (PDF)

Articles

Consolidating Gains from the Africa-U.S. Trade: Post-AGOA Options Beyond 2015 » (PDF)
Mwangi Kimenyi, with Stephen N. Karingi, Laura Páez, and Mekalia Paulos review the challenges inherent in the possible expiration of AGOA preferences in 2015 and what could happen to U.S.-Africa trade should they not be extended.

Addressing Uncertainty to Spur Investment in Africa » (PDF)
John Mutenyo and Nelipher Moyo examine the current pitfalls, which have limited foreign direct investment (FDI) in Africa under AGOA, and provide policy recommendations to mobilize private investment in all sectors of African economies.

AGOA and the African Agricultural Sector » (PDF)
Emmanuel Asmah and Olumide Taiwo investigate the demand-side constraints affecting AGOA agricultural exports and discuss the potential for U.S. and African policymakers to encourage greater growth in this vital sector for Africa’s overall development.

AGOA and Regional Integration in Africa: A Missed Opportunity » (PDF)
Nelipher Moyo and John Page analyze the importance of regional integration in Africa and how AGOA can contribute to strengthening regional trading blocs.

Improving U.S. Trade Assistance under AGOA » (PDF)
Ezra Suruma and Zenia Lewis tackle aid for trade issues in the context of AGOA legislation. They provide recommendations on how U.S. aid for trade should be better organized and linked to specific countries and firms within Africa in order to fully realize the potential gains from AGOA.

Trade Logistics: AGOA’s Next Frontier » (PDF)
Nick Krafft and John Page examine the supply-side constraints that have limited the competitiveness of African exports, despite AGOA preferences. They discuss how the U.S. and Africa can work through AGOA channels to improve trade logistics in Africa.

Downloads

Image Source: Thomas Mukoya / Reuters

African Land Grabbing: Whose Interests Are Served?

Ernest Aryeetey and Zenia Lewis — Fri, 25 Jun 2010 11:35:00 -0400

The subject of transnational land acquisitions, infamously referred to as land grabbing, has increasingly become an important policy concern in Africa as acquisitions have grown in scale and number. The practice involves the purchase or lease of large tracts of land by foreign nations, companies or individuals for agricultural production. These land acquisitions differ from most foreign agricultural investment of the past because, as the Food and Agricultural Organization’s (FAO) also notes, the investors are resource seeking instead of market seeking. Therefore, they are effectively using the land or water of a country solely for agricultural repatriation and not for commercial export. The scale of such land acquisitions has increased greatly. From 2004 to early 2009, at least 2.5 million hectares were transferred in five African countries alone (IFPRI). Recent estimates point to land acquisitions that each encompass millions of hectares of land. Of concern is that the land leased by African governments to foreign interests was previously occupied by poor local and indigenous populations who have little control over such land transfers.

Such practices are undoubtedly reminiscent of the colonial era with foreign nations again staking a claim on the continent. However, since African governments are partnering with foreign investors in the land grab, onlookers are left to question if this is another case of corrupt African leaders selling their citizens short or simply governments pursuing an economic development opportunity. Evidence suggests a marked disparity in the benefits received by those involved in and affected by these transnational land acquisitions, particularly for those originally dwelling on the land. Such a problem deserves both increased international attention and country-level debate to ensure such agreements provide more equal benefits to all parties involved.

The scale of recent land transactions: Who is involved and in what form?

There is a diversity of international participants involved in these land transactions. However, Middle Eastern countries, like Saudi Arabia, Qatar, Kuwait and Abu Dhabi are some of the biggest investors. A study by the Wilson Center states that these nations and East Asia were estimated to be controlling over 7.6 million cultivable hectares overseas by the end of 2008.

The list of host countries participating in these land transactions is somewhat lengthy; a 2009 study by the International Food Policy Research Institute (IFPRI) lists Ethiopia, Kenya, Malawi, Mali, Mozambique, Sudan, Tanzania and Zambia as all being involved in allotting foreign land leases or purchase agreements. In addition, the report from the UN Special Rapporteur on food security lists the main target countries in Africa as Cameroon, Ethiopia, the Democratic Republic of Congo, Madagascar, Mali, Somalia, Sudan, Tanzania and Zambia. A March 2010 article by the U.K. Guardian states that more than 20 African countries are part of such transnational land transactions.

Unlike Latin America and Eastern Europe, the land deals taking place in Africa predominantly involve government allocated land leases or land-use rights being distributed instead of land sales. The types of land agreement are ultimately determined by the status of land ownership within countries, which in Africa often involves collective ownership. In fact, an estimate from the World Bank states that between only 2 and 10 percent of land across Africa is held under formal land tenure, which is normally just in urban settings. Many African countries also have restrictions on whether non-nationals can own land, which further determines the types of land agreements that are legally permissible. Due to these factors, foreign investors often arrange long-term land lease agreements; Sudan, Angola, Ethiopia and Mali have all taken part in land leases that are 50 years or more in length.

Another important feature and the most poignant source of complaints with the land transfers is the insecurity and poverty that is often experienced in the host countries, which are often marred by political conflict, war and food shortages. As stated by Odenda Lumumba, the coordinator of the Kenya Land Alliance, “Isn’t it the height of recklessness in leadership for the government to give out land to Qatar when Kenya is food insecure and we are literally being fed? Where is the logic?” Similarly, a large proposed land lease with Daewoo in Madagascar sparked political concerns because of the large portion of the population living in poverty, and the state of food insecurity in the country. A May 2009 article in The Economist noted the irony of Saudi Arabia spending almost as much money on agricultural investments in Ethiopia as the UN World Food Program was spending on food aid there. In addition, a Wilson Center study observes that very few host governments have strong and independent democratic institutions. This information paints an important picture of the African nations involved in such land agreements.

Why is it happening?

While this phenomenon is not new, the practice has accelerated in the last few years. The trend is attributed to numerous causes. One widely recognized cause is the world food crisis of 2007 and 2008, where from the start of 2007 through the middle of 2008 The Economist index of food prices rose by 78 percent. As expected, the increase in food prices coincided with a large increase in the price of farmland. According to IFPRI, in 2007 alone the price of farmland rose 16 percent in Brazil, 15 percent in the Midwestern United States and 31 percent in Poland. This increase in farmland prices has triggered the increased global interest in obtaining cheaper farmland. Other factors include: an increase or desired increase in the production of biofuels; limited resources in some countries, particularly water shortages in regions like the Middle East; and an overall lack of confidence in the international food market. According to Olivier De Schutter, the UN Special Rapporteur on the Right to Food, developing countries and specifically sub-Saharan Africa are targeted by foreigners because of the perception that large amounts of land are available, along with desirable climates and inexpensive local labor.

Expected benefits to African countries

While the benefits for international actors are obvious, the benefits to African countries may not be as apparent. For example, one of the most important patterns to notice in these transnational land acquisitions is the limited importance of financial transfers. A recent report (FAO, IIED and IFAD) revealed that the main benefit to the host country is perceived to be investor commitments like employment creation and infrastructure development. Similarly, the study indicates that such land agreements can provide macro-level benefits like GDP growth and greater government revenue, raise local living standards, and bring technology, capital and market access. In addition, improving the productivity of African agriculture undoubtedly serves as a huge point of interest for governments seeking foreign investment and in turn transnational land leases.

Unfortunately, many land lease contract provisions tend to lack substantive details for enforcement. Thus, the anticipated benefits may not necessarily be provided. In addition, concrete evidence regarding the impact of such land acquisitions is scarce partly due to the difficulty in disaggregating investment information, which makes quantifying the effects challenging. Potential benefits for host countries are, however, still very plausible, and hopes of job creation, infrastructure development and increased productivity are immensely important to a developing Africa.

A highly criticized process

Despite the possibility for benefits associated with such land transfers, reactions have been highly critical and the perceived costs to the local land users appear high. First of all, complaints about the lack of transparency in land agreements are widespread, a problem which can easily spur corruption and unfair negotiations. Many reports describe unbalanced power relationships where rich governments or international companies have an obvious advantage in negotiating with African nations that may not always be politically stable or respectful of the rights of their citizens and may lack the institutional frameworks necessary to enforce contracts.

Similarly, the issue of land tenure comes up repeatedly, as African governments are criticized for failing to protect their agricultural workers from exploitation in this regard and accused of leasing land that they only “nominally own.” Land deals are often done in secret without informing the current land users, which causes them to be suddenly dispossessed. Meinzen-Dick of IFPRI told IPS in an interview that such fears are defensible because "in Africa, where much of the land is held under customary tenure… the government is the ‘owner’ of the land, and they may not always consult with or get the consent of people who will be affected." The leasing of such land, when statistics indicate that 70 percent of Africans work in agriculture – a sector which provides 50-70 percent of Africa’s GDP, is obviously a fiercely sensitive issue.

Existing international norms

Despite many injustices in negotiating such land agreements, and the fact that land tenure varies from country to country, there are some existing international norms that address this issue. First, Article 11 of the International Covenant on Economic, Social and Cultural Rights obliges states to respect, protect and fulfill the right to food. This would indicate that any land transfer that is obviously increasing food insecurity for the original land users is unjust. Article 8 of the UN Declaration on the Rights of Indigenous Peoples mandates that states should provide mechanisms for preventing any action, which could potentially dispossess indigenous people of their lands. Article 10 states that indigenous people are guaranteed not to be forcibly removed without prior and informed consent, and then only after having an agreement regarding just and fair compensation. Article 32 formalizes the idea of free, prior informed consent (FPIC), stating explicitly that “states shall consult and cooperate in good faith with the indigenous peoples concerned through their own representative institutions in order to obtain their free and informed consent prior to the approval of any project affecting their lands or territories and other resources, particularly in connection with the development, utilization or exploitation of mineral, water or other resources.” All of these international norms are excellent if only African countries complied with them in the process of transnational land acquisitions; however, this is not always the case.

How can African governments deal with the challenges associated with land grabbing?

All of this begs the question of how to make transnational land agreements consensual endeavors as opposed to unwelcomed “land grabbing” that infringes upon the rights of local land holders. While there are definite possibilities for macro level economic benefits for African countries from foreign investment in agriculture and land development, these gains may not be felt by those originally dwelling on the land. The issue must be seriously and immediately debated by African governments and civil society. While some issues are not debatable, like respecting land rights of local small holder and subsistence farmers and not exacerbating food insecurity, the possible economic benefits and costs to each party – foreign investors, African governments and local land dwellers – must be transparently and openly analyzed before agreements are finalized.

The conversation has recently revolved around imposing international regulations upon transnational land agreements, but at a national level such regulations might be difficult to enforce, especially considering the secretive manner in which many negotiations take place. By no means is this a bad idea, but ultimately individual African nations need to address this issue. The land policies of individual African countries should account for the important subject of transnational land use and serve to protect the rights of land users and small holder farmers. Attempting to reform land tenure systems so that the contracting power in such agreements is in the control of local land users would also aid in addressing the issue. Civil society groups and organizations that advocate for effective land use policies are of utmost importance in pushing this agenda, which requires immediate attention. Mutually beneficial decisions need to be made, and this cannot happen when land agreements continue to take place in an opaque manner and without the involvement of the public.

Authors

Ernest Aryeetey
Zenia Lewis

The U.S.-China Economic Relationship: Shifts and Twists in the Balance of Power

Eswar Prasad — Thu, 25 Feb 2010 00:00:00 -0500

Editor's Note: The uneven nature of financial flows and trade between the U.S. and China has complicated their bilateral relationship, tightening the economic entanglements between the two economies and making them more contentious. In testimony to the U.S.-China Economic and Security Review Commission, Eswar Prasad discusses the implications of rising Chinese ownership of U.S. debt for the relationship between the two countries.

Data in this testimony was updated on March 10, 2010.

Chairmen Wessel and Cleveland, and honorable members of the Commission, thank you for the opportunity to share with you my views on the implications of rising Chinese ownership of U.S. debt for the relationship between the two economies.

The lopsided nature of trade and financial flows between the U.S. and China has complicated this relationship, tightening the economic entanglements between the two economies and making them more contentious. The U.S. receives a large volume of low-cost imports from China and has also gotten help in financing a significant part of its budget and current account deficits. China remains quite dependent on U.S. export markets and continues to look to U.S. Treasury bond markets to park a large portion of its rapidly rising stock of foreign exchange reserves.

Over the past year, the U.S. has become less dependent on China’s financing of its deficits, particularly as the U.S. private saving rate has gone up and the current account deficit has fallen. Nevertheless, given the sheer scale of the U.S. deficit financing requirement—a budget deficit of about $1.6 trillion in 2010 and prospects of nearly $9 trillion of deficits over the next decade—sentiments in bond and currency markets are fragile. A precipitous action by China to shift aggressively out of U.S. dollar-denominated instruments, or even an announcement of such an intention, could act as a trigger that nervous market sentiments coalesce around, leading to a sharp fall in bond prices and the value of the U.S. dollar.

However, such a move would not be without cost for China. Certainly, China would like to tear itself away from the U.S. Treasury market but faces the prospect of a capital loss on its large accumulated stock of holdings (on a mark-to-market, domestic currency basis) if U.S. Treasury bond prices were to fall as a result of a spike in interest rates or if the renminbi were to appreciate in value relative to the U.S. dollar. But the U.S. leaves itself vulnerable as China might well view these costs as worth bearing in order to preserve its national sovereignty or if trade and other economic disputes with the U.S. came to a head. Indeed, I will argue that the direct costs could in fact be rather modest from the Chinese perspective.

The prospect of economic and political disputes ratcheting up has been elevated by an increasing imbalance in this relationship. For instance, in recent months, China has aggressively sought to shift the narrative about the financial crisis and its aftermath by arguing that global current account imbalances had little or nothing to do with the crisis. Moreover, even as the world economy is recovering, China has argued that it is loose U.S. monetary policy alone that may be fueling asset price bubbles around the world. Whatever the merits of these arguments, the forcefulness with which Chinese leaders have put forward these narratives indicates their strong perception that the balance in the bilateral relationship has shifted decisively in their favor. This assertive tone is likely to continue as China’s economy becomes larger and its influence both in the Asian region and abroad becomes more pervasive.

In fact, the bargaining strengths of the two countries are finely balanced. But the changing perceptions set up a dangerous game of chicken that could spin out of control if unrealistic expectations and the desire to pander to domestic audiences trumps rational collective policymaking in one or both countries.

In my testimony, I will lay out some key facets of this complicated bilateral relationship, present my prognosis for how this relationship is likely to evolve, and then discuss how to manage some of the potentially contentious aspects of this relationship.

Trade and Financial Dependence between the Two Economies[1]

Trade between the two economies has continued to increase in volume and the U.S. remains one of China’s major export markets. Chinese exports to the U.S. rose from $100 billion in 2000 to $296 billion in 2009, while imports rose from $16 billion to $70 billion.

A central question is whether rising volumes of trade between the two economies have made them more important as mutual trading partners. Interestingly, exports to the U.S. accounted for a relatively stable share of about 21 percent of China’s overall exports from 1998 to 2006 (Figure 1). During 2007-2009, the share of China’s exports going to the U.S. fell to about 18 percent. The share of U.S. exports going to China has risen gradually over the years but is still under 5 percent.

These numbers probably understate the true importance of China’s dependence on the U.S. export market. In terms of sheer volume, U.S. imports still account for a significant share of world final consumption demand. Moreover, a great deal of intra-Asian trade is the result of proliferation of cross-country supply chains facilitated by falling costs of transportation and logistics. IMF analysis suggests that about one-third of the value added component of exports from Asia is still accounted for by the U.S. Thus, a slowdown in U.S. demand could lead to slower growth in other economies that export large quantities to the U.S. and thereby have indirect knock-on effects on Chinese export growth to those economies as well.

As a source of U.S. imports, China’s share has increased steadily, climbing to 15 percent of total U.S. imports by 2009. China’s dependence on U.S. imports, by contrast, has fallen over time, with imports from the U.S. accounting for about 7 percent of China’s imports since the mid-2000s.

Many of the thorny issues in the bilateral relationship between these two countries can be traced to the evolution of the rising bilateral U.S. trade deficit with China. This deficit rose from about $84 billion in 2000 to nearly $227 billion in 2009 (about 1.6 percent of U.S. GDP). In 2009, the deficit with China amounted to nearly two-thirds of the overall U.S. trade deficit of $365 billion, compared to about one-third in 2008 (see Figure 2).

The U.S. current account deficit, which had hit $800 billion in 2006, declined slightly in 2007-08. The crisis-induced recession in the U.S. has shrunk the deficit to $370 billion in 2009. China’s current account surplus fell to $284 billion in 2009 (Table 1). But, as discussed below, it is likely that, as the U.S. and global economic recoveries become entrenched, structural forces will again lead to an expansion of the U.S. current account deficit and China’s current account surplus. The IMF, for instance, forecasts that the U.S. current account deficit will rise to about $400 billion in 2011 while China’s current account surplus could top $500 billion.

China’s nominal exchange relative to the dollar was flat for a decade until July 2005, when there was a step appreciation of 2 percent of the renminbi (see Figure 3). Over the next three years, the renminbi racked up a cumulative nominal appreciation of 18 percent against the dollar and a slightly lower appreciation in real effective terms. However, since July 2008, the renminbi has remained tightly pegged to the dollar, riding up with the U.S. dollar as it strengthened due to the safe-haven effect during the global financial crisis and down with the U.S. dollar since March 2009, when that effect began to wear off. This has reversed some of the appreciation of the trade-weighted measure of China’s real effective exchange rate, which is now up about 14 percent relative to its level in July 2005.

Chinese currency policy, which involves heavy intervention in the foreign exchange market to prevent the renminbi’s appreciation against the U.S. dollar, has resulted in a rapid rise in foreign exchange reserves (see Figure 4). After a tiny net increase in the first quarter of 2009, reserve accumulation picked up in pace and remained strong for the remainder of the year. At the end of 2009, China’s total stock of foreign exchange reserves stood at $2.4 trillion. China’s international investment position has improved steadily to a net asset position of $1.5 trillion at the end of 2008 (Table 2). The value of China’s foreign assets now far exceeds the value of its external liabilities. Foreign exchange reserves account for about two-thirds of China’s gross foreign assets.

It is not easy to estimate the “equilibrium” value of the renminbi—the level it would settle at if China’s capital account were open and there was no government intervention in the foreign exchange market. The fact that the People’s Bank of China has consistently intervened in just one direction and by massive amounts—as indicated by its accumulation of foreign exchange reserves—suggests that the renminbi would appreciate significantly, conditional on capital outflows being relatively restricted, if China’s central bank stopped intervening in the foreign exchange market.

Private and Official Financial Flows

Financial flows between the two economies have increased but, while private flows remain modest, official flows have become more lopsided over time. The major financial link between the two countries remains Chinese official purchases of dollar-denominated financial assets.

Contrary to the popular notion of U.S. firms investing heavily in China, official foreign direct investment (FDI) flows from the U.S. to China peaked at $5.4 billion in 2002 and have remained at a modest level around $3 billion a year since 2005 (Figure 5). This low number could partially be due to American companies’ use of offshore financial centers to channel FDI flows to China. Nevertheless, all available data indicate that most FDI flows to China are from other Asian countries that are integrating their supply chains with China. FDI from China to the U.S. remains very modest.

China does not make public the currency denomination or composition of its foreign exchange reserves. U.S. data from the government’s Treasury International Capital System (TIC) database are potentially misleading as they capture the location rather than identity of a purchaser of U.S. instruments. For instance, China’s purchases of Treasury bonds routed through a U.K. bank would be counted as a purchase by a U.K. resident or institution. Notwithstanding these caveats, the TIC data capture some interesting trends.

Estimates based on TIC data suggest that Chinese holdings of U.S. Treasury securities amounted to about $895 billion at the end of 2009 (see Table 3, Panel B). More than one-third of China’s holdings of foreign exchange reserves are in U.S. Treasury securities. The true proportion is likely to be higher for the reasons noted above.[2] It is intriguing that, even based on these data, the share of China’s reserve accumulation going into U.S. Treasuries in 2008 was much higher than during the period 2004-07. During 2009, there was initially some month-to-month whipsawing from net sales to net purchases of U.S. Treasuries. In the latter half of the year, there was a discernible shift away from short-term Treasury bills to longer-term Treasury notes (see Table 3A for monthly TIC data related to China).

Apprehensions, based on TIC data for the last few months of 2009, that China may be dumping U.S. Treasuries might be an overstatement. Some analysts have argued that China might simply be shifting out of U.S. short-term Treasury bills, which currently have a very low yield, to longer-term Treasury notes that have a higher yield and that these purchases of Treasury notes are being channeled through intermediaries in the U.K. and elsewhere. This is plausible but not entirely convincing. Given the relatively flat U.S. yield curve and the high levels of U.S. deficits and debt, which the Chinese have expressed considerable concerns about, this hardly seems like a propitious time to lock into long-term U.S. government bonds for the sake of modestly higher returns.

Prognosis for the Bilateral Economic Relationship

Paradoxically, the crisis is likely to intensify the awkward embrace between the two economies. In the short run, China needs export growth in order to maintain job growth and preserve social stability. As China continues to run current account surpluses by exporting to the U.S. and other advanced country markets, it has little alternative to buying U.S. Treasuries with the reserves it accumulates while managing its exchange rate. The U.S. will continue to need willing buyers for the debt issued to finance its budget deficit, especially if the household saving rate starts drifting back towards pre-crisis levels.

Hasn’t the Chinese economy’s dramatic growth performance during the crisis shown that it has become less dependent on export markets in the West, especially as GDP growth remained strong despite a decline in the trade surplus during 2009? Answering this question requires a retrospective look at the Chinese growth model. There are two distinct features of the Chinese growth process in the decade before the crisis, when GDP growth averaged about 10 percent per annum.[3] First, investment accounted for more than half of overall GDP growth, with net exports playing an important role as well since 2005 (see Figure 6). Private consumption, by contrast, has not been a key driver of growth. Second, even high GDP growth has not translated into much employment growth, with overall net employment growth averaging only about 1 percent over the last decade.[4] Thus, the Chinese government has had to cope with the twin challenges of rebalancing growth towards domestic consumption in order to make growth more welfare-enhancing for its citizens and of generating higher employment growth in order to maintain social stability.

To counter the aftershocks of the crisis, the Chinese government embarked on a massive fiscal and monetary stimulus program in the latter half of 2008. In addition to a large expansion of government spending, it directed the state-owned banks to make credit freely available. The banks dutifully went on an unprecedented lending spree, amounting to nearly $1.5 trillion (or about one-third of China’s GDP) in 2009, a pace that has continued into January 2010. It’s a good bet that most of this lending went to large state enterprises, favored clients of the state banks. With cheap and plentiful money, along with subsidized inputs such as energy and land, conditions were ripe for a massive investment boom, which amounted to nearly 90 percent of GDP growth in 2009.[5]

This investment boom is creating excess capacity in many industries such as steel, aluminum and glass that already had some spare capacity to begin with. Down the road, this could dampen employment and household income growth. Banks fear a resurgence of bad loans on their books if consumption demand doesn’t grow fast enough to soak up the output from the new factories. Moreover, the Chinese household saving rate has trended upward in recent years; the economic uncertainty associated with the crisis and the weak global economic recovery are likely to increase saving for precautionary purposes.[6] In short, the stimulus could end up actually worsening the balance of growth by tilting it even more towards growth led by investment rather than private consumption. The only solution then is to export the fruits of this investment. Thus, investment-led growth sets the stage for export-led growth, exactly the reverse of the balanced private consumption-led economy that Chinese leaders want. The reliance on exports, as noted earlier, is also because it is a key source of net job growth.

As the U.S. recovery strengthens, imports are likely to rise, leading to a further deterioration of the U.S. overall trade deficit as well as its bilateral trade deficit with China. China’s overall current account balance is likely to continue to increase and, as the global economic recovery progresses, China will continue running large trade surpluses and accumulating foreign exchange reserves at a rapid rate. Thus, we could be in for a repeat of the global current account imbalances in 2006-07, typified by large U.S. current account deficits and Chinese current account surpluses.

How Dependent is the U.S. on Financing from China?

Based on data from TIC and other U.S. sources, it is possible to construct a profile of the owners of U.S. government debt held by the public, which stood at $7.8 trillion at the end of December 2009. China’s share of total outstanding U.S. government debt held by the public has risen steadily over the years, but fell slightly in the latter half of 2009 and now stands at 11 percent (or about one-quarter of all U.S. debt held by foreigners). This represents about a 0.6 percentage point increase relative to the share in August 2009, consistent with the rise of about $100 billion in China’s overt holdings of U.S. Treasuries from August to December 2009. Debt issued by government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac, which amounted to about $7.2 trillion as of September 2009, represents a liability of the U.S. government as well. China’s share of outstanding U.S. agency bonds was 6.4 percent in 2007 but fell below 6 percent in 2009.

In short, even based on official data that probably understate the true picture, China has contributed to a significant proportion of U.S. government debt financing in recent years. If one were to take the TIC data literally, China has apparently cut its shares of holdings of net U.S. public and agency debt in the latter half of 2009. As noted earlier, this conclusion based on TIC data should be interpreted with considerable caution.

While it is difficult to ascertain exactly what share of U.S. government debt is held by China, the TIC data do allow us to put some bounds on this calculation. Identified Chinese holdings of U.S. Treasuries and GSE debt amounted to about $1.3 trillion at the end of 2009 ($895 billion + $405 billion; see Table 4, last panel). Based on the widely-held assumption that about 70 percent of Chinese foreign exchange reserves are in dollar-denominated bonds and also assuming that the remainder that are not accounted for in TIC are all in Treasuries, this would imply an additional holding of about $380 billion in Treasuries.[7] This would amount to a total of $1.34 trillion, or 17 percent of outstanding U.S. net public debt (excluding GSE debt).[8] In other words, it is a significant but not overwhelming share.

Is it a credible threat that China could dump a significant share of its holdings of U.S. Treasuries? Many analysts argue that any threat by China to shift a large portion of its reserves out of U.S. government paper is just bluster as such a move would impose huge costs on China itself. But these costs tend to get overstated in popular discussions of the matter. Let us examine each aspect of these costs.

If interest rates in the U.S. spiked as a consequence of Chinese actions, there would be a capital loss to China on the value of its Treasury bond holdings. This is correct on a mark-to-market basis, but it is likely that China has a hold-to-maturity approach on its bond portfolio, given that it has such a large stock of reserves and has no immediate liquidity needs. Hence, the actual capital loss may not be significant enough to feature in the political calculus.
A plunge in the value of the dollar against other major currencies would reduce the domestic currency (renminbi) value of China’s dollar-denominated holdings. This is indeed accurate. But only if the renminbi appreciated relative to the dollar. Otherwise, China would lose a modest amount on the value of its euro and yen holdings and this would be more than made up for by the benefits of higher trade competitiveness if the renminbi rode down with the dollar against other major currencies.
Currency appreciation would lead to a big loss on reserve holdings in local currency terms. If the renminbi appreciated substantially relative to the dollar, as economists believe it eventually must given the much higher productivity growth in China relative to the U.S., China would certainly take a capital loss. But this is likely to be at least partially offset by seigniorage revenue that China can get as it moves forward in tandem on exchange rate flexibility and capital account liberalization. By preparing the ground for the internationalization of the renminbi, China stands to gain some of the benefits that accrue to an international reserve currency, although this might happen only over a period of a decade or so. China is already taking measures to foster the adoption of the renminbi in trade and financial transactions in Asia.

In short, any Chinese threat to move aggressively out of Treasuries is a reasonably credible threat as the short-term costs to the Chinese of such an action are not likely to be large. But can China make a big difference to U.S. interest rates given that its share of the financing of the U.S. budget deficit has fallen over time? The answer lies not in the absolute amounts of financing that China brings to the table, but in how its actions could serve as a trigger around which nervous market sentiments could coalesce. Given that there are no clear prospects of reining in exploding deficits and debt in the U.S., especially if one factors in rising health care and entitlement costs, changes in availability of deficit financing at the margin can have potentially large consequences.

The real constraint to any Chinese desire to shift significantly out of investing in U.S. Treasuries may actually have more to do with the sheer size of the U.S. Treasury bond market relative to other available investments, including euro and yen government bonds. Through the China Investment Corporation--its sovereign wealth fund, which has a capital base of $200 billion--China has been seeking to diversity its investments into a broader range of asset classes. But this is a modest amount relative to the overall size of China’s foreign assets. The reality is that, so long as China continues to accumulate reserves at a pace of around $400 billion a year, there are few relatively safe investments other than U.S. government bond markets that are deep and liquid enough to absorb a significant portion of such massive inflows.[9]

Getting the Balance Right

The U.S. has been supportive of China getting its rightful place on the global economic stage. The Obama administration has actively supported a more prominent role for China at the IMF and other multilateral institutions such as the Financial Stability Board. The administration has also played a key role in supporting the ascendance of the G-20 rather than the G-7 as being the agenda-setting body on the global economic stage, effectively giving China a more prominent seat at the table in key policy discussions.

These are logical—indeed, necessary—steps to make these institutions more inclusive and effective in dealing with the many global challenges that lie ahead. While greater Chinese influence in international economic affairs is inevitable, the U.S. has played an important role in speeding up this realignment.

The question remains whether the U.S. is gaining sufficient leverage from its importance to the Chinese economy and its initiatives to give China a more prominent place on the world stage. Indeed, the shifting narratives noted earlier seem to have put the U.S. administration on the defensive in its dealings with China.

Here are some steps the Obama administration needs to take to rebalance this relationship:

Get real on deficit reduction. The simple reality is that the U.S. has to summon the political will to decisively tackle its mammoth budget deficit and rising public debt, which have contributed to its current account deficits and dependence on funds flowing in from the rest of the world. Otherwise, the U.S. will become increasingly vulnerable to external influences. In the absence of a clear commitment and a credible plan to bring down the deficit through a combination of revenue increases and expenditure reductions, the U.S. will face a worsening balance of power in its relationship with China.
Be more assertive in this bilateral relationship. My view is that mollification of China on economic and political issues is no longer the right approach. The administration’s actions—including certain statements by Secretary Geithner and Secretary Clinton during their respective visits to Beijing—have fed into the perception that the U.S. is on the defensive in this bilateral relationship. On human rights issues, in particular, the U.S. cannot be seen to be backing down as a result of economic pressures.
Elicit the support of other emerging markets and developing countries in influencing Chinese currency and other economic policies. Rather than focusing on the effects of China’s currency on the U.S.-China bilateral trade balance, the implications of China’s currency policy for its own economic stability and those of other emerging markets should be highlighted. Greater currency flexibility could have considerable long-term benefits for China by allowing its monetary policy to become more independent, reducing its dependence on exports and rebalancing its economy towards domestic consumption. This would be good for China’s growth and would also make a useful contribution to the stability of the international financial system.[10] It would also ease the pressure on other emerging markets that are facing a dire loss of competitiveness relative to China if their currencies appreciate while China’s doesn’t, complicating their macroeconomic policy management.
Continue to foster high-level engagements among leaders of the two nations through the Strategic and Economic Dialogue and other avenues. Building up trust at these higher levels will be important to ensure that low-level disputes with minor direct ramifications don’t spin out of control as pandering to domestic constituencies could lock the two nations into a cycle of confrontation that escalates disputes to a more damaging level.

Setting the China-U.S. relationship on an even keel is important not just for the principals but also for the broader world economy as the cooperative or conflicted nature of this relationship will set the tone for progress on a number of multilateral issues, including global macroeconomic stability, reform of the international monetary system and tackling climate change.

[1] This section and the next one draw on Eswar Prasad and Grace Gu, 2009, “An Awkward Dance: China and the United States,” Brookings Institution Policy Note.

[2] This footnote has been amended in the revised version. Analysts believe that the actual stock of Chinese holdings of U.S. Treasury instruments is likely to be about $150-200 billion higher than the reported number. For example, see Brad Setser and Arpana Pandey, 2009, “China’s $1.7 Trillion Bet,” Council on Foreign Relations Working Paper.

[3] For more details, see Eswar Prasad, 2009, “Is China’s Growth Miracle Built to Last?” China Economic Review, Vol. 20, pp. 103–123.

[4] The annual growth rate of non-agricultural employment averaged around 2.5 percent during this period, although this in turn has to be set against the growth rate of non-agricultural output, which has been 2-3 percentage points higher than that of overall GDP.

[5] Increases in private and government consumption demand amounted to about 45 percent of GDP growth, but this was offset by a large negative contribution of net exports to growth as the trade balance fell sharply in 2009 relative to 2008.

[6] See Marcos Chamon and Eswar Prasad, 2010, “Why Are Saving Rates of Urban Households in China Rising?” American Economic Journal: Macroeconomics, Vol. 2, No. 1, pp 93–130.

[7] $2.4 trillion x 0.70 = $1.68 trillion - $895 billion - $405 billion = $380 billion.

[8] China’s share of total foreign holdings of U.S. Treasuries would then be about 36 percent. Of course, the total share of all foreign holdings of U.S. Treasuries would not be affected under the assumption that all of China’s purchases were through non-U.S. intermediaries.

[9] A related point is made by Goldberg (2010), who documents the prominent role of the dollar in international debt markets. She notes that the dollar has maintained its dominance in the issuance of international debt securities despite all the talk about the decline in the role of the dollar in world capital markets. See Linda Goldberg, 2010, “Is the International Role of the Dollar Changing?” Federal Reserve Bank of New York Current Issues in Economics and Finance, Vol. 16 No. 1, January.

[10] See “Exchange Rate Flexibility in China: Why it Really Matters and How to Make Progress” Eswar Prasad’s testimony at the Senate Finance Committee hearing on “The Role of Currency in the U.S.-China Relationship” March 28, 2007. Available at http://prasad.aem.cornell.edu Also see Eswar Prasad and Raghuram Rajan, 2006, “Modernizing China’s Growth Paradigm,” American Economic Review, Vol. 96, No. 2, pp. 331-36.

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Eswar Prasad

Publication: U.S.-China Economic and Security Review Commission

Turkey, Russia and Regional Energy Strategies

Wed, 15 Jul 2009 09:30:00 -0400

Event Information

July 15, 2009
9:30 AM - 3:45 PM EDT

Saul/Zilkha Rooms
The Brookings Institution
1775 Massachusetts Avenue, NW
Washington, DC 20036

Historically, relations between Turkey and Russia have been characterized more often by competition—if not outright war—than by cooperation. Yet centuries of imperial rivalry and decades of Cold War hostility have recently given way to quite different dynamics. Russia has become Turkey’s largest trading partner and a major target of Turkish foreign investment. Since Vladimir Putin became the first Russian leader to visit Turkey in 500 years, engagement between the two countries has increased in intensity and seriousness. Some analysts have seen a convergence of perspective between Ankara and Moscow on issues ranging from Palestine to Iran to the Caucasus. Further, as energy looms larger in the domestic and regional calculus of both countries, especially in terms of their respective European relationships, the strategic importance of their rapprochement has grown.

On July 15, the Center on the United States and Europe and the Energy Security Initiative at Brookings hosted leading experts from Turkey, Russia and Europe for a conference focusing on Turkey’s and Russia’s roles in European energy security and the role of energy in shaping cooperation and stability in neighboring regions. Richard Morningstar, special envoy for Eurasian energy at the U.S. Department of State, provided a keynote address.

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20090715_turkey_russia_energy

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Panelists

Moderator: Ömer Taşpınar

Nonresident Fellow and Director, Turkey Project, The Brookings Institution

Stephen Larrabee

Senior Political Scientist, RAND Corporation

Vladimir Milov

President, Institute of Energy Policy, Russia

Volkan Vural

Counselor to Chairman, Doğan Holding, Turkey

Alexandros Petersen

Fellow for Transatlantic Energy Security and Associate Director, Eurasia Energy Center
Atlantic Council of the United States

Moderator: Steven Pifer

Acting Director, Center on the United States and Europe, The Brookings Institution

Mithat Balkan

Former Turkish Ambassador to Iran and Austria

Jeff D. Makholm

Senior Vice President, National Economic Research Associates, Inc.

Moderator: Mark Parris

Visiting Fellow, The Brookings Institution

Keynote Address: Richard Morningstar

Special Envoy for Eurasian Energy, U.S. Department of State

Moderator: Martha Brill Olcott

Senior Associate, Russia and Eurasia Program, Carnegie Endowment for International Peace

Saban Kardas

Research Assistant, Sakarya University, Turkey

Cory Welt

Director, Eurasian Strategy Project, Georgetown University

Victor Nadein-Raevsky

Senior Scientific Research Fellow, Institute for World Economy and International Relations (IMEMO), Russia

Brookings Trade Forum 2007 : Foreign Direct Investment

Susan M. Collins, ed. — Thu, 01 May 2008 00:00:00 -0400

2008 210pp.

Foreign direct investment plays a critical and growing role in the global economy. For a host country, FDI promises a source of new resources and new technologies that could spur economic growth and development. For multinational firms, FDI offers the promise of new markets and less expensive production facilities. But there are clearly risks involved as well as legitimate concerns about the extent to which potential benefits are appropriately shared.

This tenth issue of the Brookings Trade Forum examines a variety of dimensions of FDI. On balance, have developing countries benefited from FDI inflows? To what extent has FDI played an important role in China's impressive economic performance? How do tax and productivity differences between source and host countries affect bilateral FDI flows? How have profits been shared between multinational corporations and host country governments in resource-rich economies? Why do U.S. investors appear to earn substantially higher returns on their investment abroad than foreigners earn on their investments in the United States?

Contributors: Laura Alfaro, Barry Bosworth, Gabriel Chodorow-Reich, Mihir A. Desai, Beata Smarzynska Javorcik, Nicholas R. Lardy, Margaret McMillan, Theodore H. Moran, Assaf Razin, Efraim Sadka, Deborah Swenson, Cédric Tille, Andrew R. Waxman, Shang-Jin Wei, John Whalley, Wing Thye Woo, Xian Xin

ABOUT THE EDITOR

Susan M. Collins

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{9ABF977A-E4A6-41C8-B030-0FD655E07DBF}, 978-0-8157-1298-5, 36 Order