China flexes its muscles- a new Cold War?

China's creation of an air zone around the disputed Senkaku (Diaoyu) islands (the dispute is with Japan) in the East China sea is undoubtedly a fresh sign of an emerging superpower flexing its muscles. The move provoked the US into sending two B-52 strategic bombers over the air zone by way of poking China in the eye.

China has ignored the poke. That doesn't mean it has lost its case. Far from it. The US may defy the Chinese air zone but China's own neighbours- and their airlines- are unlikely to do so. An article in the FT indicates how the Chinese hope to slowly alter the status quo:

For a start, the US cannot keep flying bombers over the region and say they are part of “long-planned exercises” (as they claimed this week’s flyovers were).
Doing so would quickly lose impact as a statement of principle and evolve into needless provocation, especially in the eyes of the Chinese public, who draw most of their opinions on such matters from tightly controlled state media.

...From now on they will start asking other countries to force their airlines to identify themselves to Chinese authorities when passing through the disputed airspace, thereby implicitly acknowledging that the territory belongs to China.The pressure will be much greater on individual airlines hoping to capitalise on the tens of millions of new Chinese tourists flooding out of the country every year.
When they cave they can always justify their compliance on safety grounds.

 An article in Asia Times blasts the US action as "criminally reckless and phenomenally stupid". It proceeds to explain why:

In contrast to the aging and completely overstretched US armed forces, the Chinese armed forces are catching up and catching up really fast. Yes, in the 1980s the Chinese military did look at lot like the Soviet military of the late 1950s, but the economic boom of China has deeply changed this, and today the Chinese armed forces are gradually acquiring more and more 21st century characteristics; soon, they will easily surpass the capabilities of South Korea and Japan.

Next, and before the folks in the White House fully understand it, the US will be facing a large and technologically equal or even superior Chinese military. China is also being very smart in forging an informal but truly strategic alliance with Russia, which, unlike the US, does every effort possible to show respect and support for its large neighbor.

Should it ever come to a shooting match between the US and China, there is no doubt in my mind whatsoever that Russia will offer its fullest support for China short of actually attacking US targets.

One thing is for sure. For China to have ratcheted up the stakes in the region knowing that it would provoke a strong US reaction points to a certain self-assurance in the Chinese leadership. But the Chinese are dealing here not only with the world's leading power but also with a nationalistic leader in Japan in Abe. Many analysts that the chances of a fracas arising from a small error of judgement are pretty high.

Just when we thought that the US- Iran rapprochement had made the world a little safer.....

Cash transfers- conditional versus unconditional

A recent issue of the Economist has an excellent analysis of cash transfers, based on a range of research on the subject. The bottomline is compelling: unconditional cash transfers (UCTs) - simply handing out cash to the poor without strings attached- seems best suited to alleviating poverty.

When do UCTs work best?

They work when lack of money is the main problem. The people who do best are those with the least to start with (in Uganda, that especially means poor women). In such conditions, the schemes provide better returns than job-training programmes that mainstream aid agencies favour. Remarkably, they even do better than secondary education, which pushes up wages in poor countries by 10-15% for each extra year of schooling. This may be because recipients know what they need better than donors do—a core advantage of no-strings schemes. They also outscore conditional transfers, because some families eligible for these fail to meet the conditions through no fault of their own (if they live too far from a school, for instance).

And what about conditional cash transfers (CCTs)? They are less expensive than UCTs because they typically hand out less cash than UCTs. They have other virtues:

Moreover, CCTs can focus on something which UCTs leave to chance: helping the next generation. Healthier, better educated children earn more throughout their lifetimes, so the requirement to attend school or clinics should cut future poverty. UCTs aim to reduce poverty now. So conditional and unconditional schemes are not always comparable. That said, a lot of effort has gone into making comparisons, and the results are now emerging. CCTs have their drawbacks but—at least where governments are concerned, and if you take a broad definition of poverty reduction to include health and education—they usually do a better job.

The broad conclusion?

In short, UCTs work better than almost anyone would have expected. They dent the stereotype of poor people as inherently feckless and ignorant. But CCTs are usually better still, especially when dealing with the root causes of poverty and, rather than just alleviating it, helping families escape it altogether.

The article does not, however, address the key issue of how the poor are best identified and the related issue of leakages in reaching the cash to the poor. How does one ensure that money reaches the intended beneficiaries? Do the countries surveyed have the equivalent of UID? Or is it done through some other means such as mobile accounts? Simply handing out cash does not seem a sensible thing to in a place like India where the problem of leakages is a real one.

Teaching economics in today's world

FT has an article on how the teaching of economics to today's students can be made useful and relevant. What is taught apparently does not help students to relate to stuff such as the Eurozone crisis. Students want to know about climate change, financial instability and economic disparities- the author says we have the tools to address these in economics.

That's fine. What I would like to know is how these topics can be incorporated in basic courses in Micro or Macro-economics. I look forward to seeing the curriculum the author says her Centre proposes to make available on open access. I have a suggestion: just take the core course outline of any leading institution and tell us what new topics you would like to incorporate - and how you want these taught at the basic level. 

Let me add that I'm also tired of people telling us how B-school curricula need to change to cope with the new world. We are constantly being told that the courses are not relevant,  they don't provide soft skills, they don't deal with the organisation of tomorrow. Alright, so please take the curriculum of IIMA or any other leading B-school and tell us the following: which courses to delete, which courses to add, and how existing courses need to be modified. Please do this session by session and mentioning topics and text books/ references. Now, that would be a serious contribution.

Any takers?

Two fascinating interviews

FT carries two fascinating interviews. One is with Henry Blodget, the analyst who was disgraced during the dotcom burst of the early 2000s. Blodget now runs a successful business news and analysis website. The other is with scientist Paul Davies about the three fundamental questions in science.

Banks will benefit from more capital, not less

Banks in the western world have been crying themselves hoarse over the increase in bank capital mandated under Basel 3. They say higher capital will mean costlier lending, it will cause banks to cut back on asset growth or even shrink assets. One way or another, they say, it will end up hurting the economy.

Worse, higher capital risks causing an erosion in investor interest in banks. Who would want to invest in the face of falling return on equity?

Well, the reality is that banks in the US have moved to meet the higher Basel 3 requirements well ahead of the deadline of 2019. And with what result?Their share prices are soaring. Swedish regulators have mandated a tier I capital ratio of 12%, way above the 7% mandated by the regulators. And Sweden's banks are producing a return on equity of 15% compared to 10-12% produced by their better known European counterparts.

How do you end up increasing return on equity with greater capital? Well, you get the benefit of cheaper borrowings. As for share prices, the markets end up giving a higher price to earnings (or book) multiple because they see banks with higher capital as being safer. Here's the bottom line: don't try to keep bank capital down to the regulatory minimum or even lower based on your own risk modelling. Hold capital more than what regulators require. After the financial crisis, the advantage lies squarely with banks with more capital, not less.

Read this excerpt from an article in FT:

Here is the problem: banks have spent a lot of time, energy and money warning of the potential ill-effects of ramping up regulation. But since the crisis, international regulators have kept demanding more capital, including a surcharge for the biggest banks. Lenders have doubled their capital levels as a result, hitting the new Basel III targets six years early in some cases and, yet, where are the ill effects? The best of them continue to set new profit records.

J P Morgan hiring in Asia under scrutiny

I read with some astonishment a news item about the US authorities looking into JP Morgan's hiring practices in India, South Korea and Singapore. This follows similar investigations into hiring in China by the anti-bribery unit of the SEC and other federal authorities.

As I understood the report, the allegation seems to be that JP Morgan hires sons and daughters of influential people - and using less rigorous standards than are applicable to other applicants- so that it can win business.

The average person is bound to ask: so what is new? How many companies will the US authorities likewise investigate? And how exactly do you establish a nexus between such hiring and improper winning of business? As the report indicates, JP  Morgan also hires consultants. So do a number of other companies.

I cannot say about  JP Morgan but very often consultants hired by companies are retired government bureaucrats, regulators, ambassadors and others. This practice is rampant in the US itself. And the idea in hiring such people is not just to understand processes in government but to influence outcomes by using the contacts of influential people. The US is notorious for its "revolving door" syndrome- government officials moving into Wall Street and then back into government.

In India, one method used is to give business contracts to children of those in power. The easiest thing to do for politicians' children is to get into the real estate business.The private sector provides the finance; the children provide the clearances through their contacts. It's a terrific arrangement. Nothing unofficial or even illegal about it.

Getting close to influential people- whether by hiring them as consultants or their kith and kin as employees- is an integral part of crony capitalism. How far do the US authorities propose to go in tackling it?