Recommended Weekend Reads

June 7 - 9, 2024

Here are our recommended reads from reports and articles we read in the last week.  With the EU elections now underway, we offer several resources to help understand how the elections work and what and who is trending.   We hope you find all these useful and that you have a relaxing weekend.   And let us know if you or someone you know wants to be added to our distribution list. 

EU 2024 Elections

• An American’s guide to the 2024 European election   Politico EU

  The EU elections have begun, choosing a new EU Parliament with more than 400 million Europeans eligible to vote.  But, as Politico EU points out, the EU is complicated, and so they break it down for “our cousins across the Atlantic.”
  

• European Elections 2024: All You Need to Know  European Elections 2024 (European Parliament Official Site)

  The EU Parliament offers this site to voters, giving them all the information, country by country, of who is running, which Parties are on the ballot, how the votes are tallied, and where they can find the election results.

• Europe’s center-left struggles to hold back surge from the right   BBC

  Only four EU member states have center-left or left-wing parties in government, and recent performances at the ballot box have been poor. The omens for the coming days are not good.  The EU’s center-left makes up the second-largest group in the outgoing European Parliament. Known as the Progressive Alliance of Socialists and Democrats (S&D), they are projected, at best, to cling on to their 139 seats in the 720-seat parliament. It is Europe's parties on the right that have the wind in their sails, and any success the center-left achieves is likely to be offset by losses elsewhere.

U.S. 2024 Elections

• An Unsettled Electorate: How Uncertainty and Apathy Are Shaping the 2024 Election American Enterprise Institute’s Survey Center on American Life

  With just under six months until the 2024 presidential election, a new survey of more than 6,500 adults finds considerable uncertainty among the American public, with few paying close attention to issues that may define the election. Americans are evenly divided between Donald Trump and Joe Biden. At this stage in the election cycle, neither candidate is particularly well-liked: Comparable numbers of Americans hold negative opinions of Trump or Biden as say they favor either candidate. Half of voters say things will get worse if either Biden or Trump wins reelection. Still, Americans tend to believe that the candidate options for the 2024 presidential election present an easy choice, though young voters, especially young women, are less certain.  Optimism about the state of the country is in short supply. Americans are primarily pessimistic about the national economic outlook, their local economic outlook, and the American Dream as a whole. More than six in 10 (61 percent) Americans say the national economy is worsening. Half (49 percent) say their local economy is getting worse. Most Americans, including large percentages of young Americans, say the American Dream is not easy for people like them to achieve.

• Cultural Issues and the 2024 Election   Pew Research Center

  The 2024 presidential campaign is taking place amid intense debates over topics such as immigration, growing racial and ethnic diversity in the United States, the changing American family, crime, and reproductive issues. These topics are sometimes grouped together as “culture war” or “woke” issues. On most—but not all—of these topics, voters who support President Joe Biden and former President Donald Trump have starkly different opinions. Yet, in many cases, Biden and Trump's supporters are themselves sharply divided.

Global Markets & Geoeconomics

• BRICS and De-Dollarization, How Far Can It Go?   Responsible Statecraft

  Although much U.S. media attention was paid to the enhancement of military and political cooperation during the summit between Russian President Vladimir Putin and Chinese President Xi Jinping in Beijing earlier this month, financial issues also figured high on the agenda.  The Russian delegation included Elvira Nabiullin, Governor of the Central Bank of Russia and she rarely travels with Putin abroad.  As the current chair of the BRICS, Putin is pursuing a rather extensive agenda related to finance that includes enhancing the role of member countries in the international monetary and financial system and developing interbank cooperation and settlements in national currencies – and part of that is the possibly created a BRICS currency.
  

• Risky Oil: It’s All in the Tails   Christiane Baumeister, Florian Huber & Massimiliano Marcelino/National Bureau of Economic Research

  The substantial fluctuations in oil prices in the wake of the COVID-19 pandemic and the Russian invasion of Ukraine have highlighted the importance of tail events in the global market for crude oil which call for careful risk assessment. In this paper we focus on forecasting tail risks in the oil market by setting up a general empirical framework that allows for flexible predictive distributions of oil prices that can depart from normality. This model, based on Bayesian additive regression trees, remains agnostic on the functional form of the conditional mean relations and assumes that the shocks are driven by a stochastic volatility model. We show that our nonparametric approach improves in terms of tail forecasts upon three competing models: quantile regressions commonly used for studying tail events, the Bayesian VAR with stochastic volatility, and the simple random walk. We illustrate the practical relevance of our new approach by tracking the evolution of predictive densities during three recent economic and geopolitical crisis episodes, by developing consumer and producer distress indices that signal the build-up of upside and downside price risk, and by conducting a risk scenario analysis for 2024.
  

• The Simple Macroeconomics of AI   Daron Acemoglu/National Bureau of Economic Research

  This paper evaluates claims about large macroeconomic implications of new advances in AI. It starts from a task-based model of AI’s effects, working through automation and task complementarities. So long as AI’s microeconomic effects are driven by cost savings/productivity improvements at the task level, its macroeconomic consequences will be given by a version of Hulten’s theorem: GDP and aggregate productivity gains can be estimated by what fraction of tasks are impacted and average task-level cost savings. Using existing estimates on exposure to AI and productivity improvements at the task level, these macroeconomic effects appear nontrivial but modest—no more than a 0.66% increase in total factor productivity (TFP) over 10 years. The paper then argues that even these estimates could be exaggerated because early evidence is from easy-to-learn tasks, whereas some of the future effects will come from hard-to-learn tasks, where there are many context-dependent factors affecting decision-making and no objective outcome measures from which to learn successful performance.

China

• How China Could Quarantine Taiwan  Center for Strategic & International Studies

  In this interactive report, CSIS China has significantly increased pressure on Taiwan in recent years. Its military ships and aircraft now operate around Taiwan on a near-daily basis, stoking fears that tensions could erupt into outright conflict.  Much of the world’s attention has focused on the threat of a Chinese invasion, but Beijing has many options besides an invasion to coerce, punish, or annex Taiwan. One major step China could take is a “gray zone” quarantine led not by the military but by the coast guard and other law enforcement forces.  Rather than sealing off the island, a quarantine would aim to demonstrate China’s ability to exert control over Taiwan.
  

• How is China’s Economic Transition Affecting Its Relations with Africa?    Carnegie Africa Program/Carnegie Endowment for International Peace

  Amid increasing tensions with the United States and domestic pressures, China has been more motivated to reorient its economic and diplomatic relations with the Global South. China’s economic transition is already affecting its relations with Africa in several domains, including trade, investments, and people-to-people ties.  The authors of this study provide insights into the implications of China’s economic transition for Africa, as well as the roles for third parties like the United States to shape how these changes unfold.

Russia/Ukraine

• Russia’s Soaring Wartime Salaries Are Bolstering Working-Class Support for Putin   Carnegie Politika

  Many formerly badly paid Russian blue-collar workers have seen their salaries skyrocket since the full-scale invasion of Ukraine, far outpacing inflation.  he reasons for rising incomes in Russia have been well documented: a labor shortage, hefty payments to soldiers and their families, and an unprecedented level of state spending that has obliged defense sector factories to work around the clock. However, whether standards of living have actually improved is open to debate, given the record military spending, high inflation, Western sanctions, and limits on hydrocarbon exports.  The second trend is the booming gambling market. The income of legal bookmakers rose 40 percent in 2023, and active gamblers (those who bet at least once a week) numbered some 6.6 million people. In total, more than 15 million people gambled (about one in seven Russians over the age of 18) over the course of the year. At the same time, inflation means the size of the average bet is growing. Current trends have even led to calls to raise the legal limit on a single bet from 600,000 rubles to 1.4 million rubles.

• One year after the Kakhovka dam disaster, a Ukrainian photographer captures the exposed riverbed and ruined villages left behind  Meduza.com

  The destruction of the dam at Ukraine’s Kakhovka Hydroelectric Power Plant on the morning of June 6, 2023, caused the flooding of about 80 towns and villages in the country’s Kherson and Mykolaiv regions. Kyiv and Moscow blamed each other for the collapse and the resulting humanitarian and environmental disaster (though the dam has been controlled by Russian forces since the start of the full-scale invasion). In addition to inundating communities downstream from the facility, the dam’s breach caused catastrophic shallowing further upstream, devastating communities in the Zaporizhzhia region that used to rely on fishing and river transport for their livelihoods. For Meduza, Ukrainian photographer Pavel Korchagin traveled to the region to capture the way its landscape has changed in the year since the dam burst.

Recommended Weekend Reads

May 24 - 27, 2024

Here are our recommended reads from reports and articles we read in the last week. We hope you find these useful and that you have a relaxing weekend.   And let us know if you or someone you know wants to be added to our distribution list. 

European Union Elections 2024

• European Parliament Elections 2024: What Is at Stake?    Intereconomics: Review of European Economic Policy/ZBW/CEPS

  In June 2024, EU citizens will vote in the European Parliament elections – two years into Russia’s war in Ukraine and on European values, after the COVID-19 pandemic and the finalization of Brexit, and with the possibility of Donald Trump winning the US presidential election later this year. In a turbulent geopolitical environment, the European Parliament elections will reshape the political landscape in Brussels, where traditional parties are being challenged and an increasing tilt towards right-wing governance is unmistakable. The current European Commission has adopted several major legislative initiatives, but a new Commission may set new priorities and take a different political direction. In the lead-up to the elections, this Forum focuses on some of the issues that will take center stage for voters and define the next phase of European politics.

• EU Election 2024: Complete Guide to News, Polls, and Key Players   Politico EU

  The 2024 European Parliamentary elections are going to be held from June 6 – 9.  It is the first European Parliamentary election since Brexit (of which the UK’s previous seats were distributed to other countries)and will elect 720 members of the European Parliament to choose the European Commission President and help to decide the makeup of the European Commission going forward.  This election is expected to be one of the more contentious as a number of far-right parties have emerged as ahead in polls.  This site carries all the latest polls and analysis of what is going on election-wise.

• Winds of Change: The EU’s green agenda after the European Parliament election   European Council on Foreign Relations

  The next European Commission and Parliament are likely to place security and competitiveness at the center of their quest for a more geopolitical Europe.  With concerns about the costs of the green transition, growing trade tensions between the US and China, and uncertainty surrounding the outcome of the US presidential election and Russia’s war on Ukraine, the EU will probably find it much harder to make further progress on climate action over the next five years. These geopolitical developments – and the way the EU responds to them – will have far-reaching consequences for the EU’s trade and technology decisions, fossil fuel phase-out, and climate diplomacy. The case for climate action remains clear, including its role in European security and competitiveness. In this challenging context, climate progressives will have to deploy compelling narratives, strategic resourcing, and diplomatic engagement to advance the best possible climate agenda during the EU’s next institutional cycle.
  

• The Front-Runners for the Next European Commission   Politico EU

  The European Commission’s top jobs will all soon be up for grabs again after next month’s European election. Which country will get the all-powerful trade commissioner job and oversee the EU’s impending trade war with China? Will the Poles secure a newly created defense portfolio to square up to their arch-rivals, the Russians? And who will get to police U.S. tech giants like Apple and Google as Europe’s next competition chief? Even before the June 6-9 election, maneuvering is underway to net the prize slots. Each of the EU’s 27 countries gets a commissioner job in the highly political post-election carve-up, but there’s a tooth-and-nail fight to determine who gets what. Trade and competition are the blue-ribbon portfolios with genuine power; those involving sport, education, and multilingualism are the kiss of death.   

India

• India’s Engagement with the Middle East Reflects New Delhi’s Changing Worldview   War on the Rocks

  In the early 1990s, India responded to the end of the Cold War with a new “Look East” policy, which it subsequently rebranded as “Act East” in 2014. Today, India has developed a “Think West” policy focused on what those in the West call the Middle East. So which way is India thinking, looking, and acting today?

Africa

• Rethinking US Africa Policy Amid Changing Geopolitical Realities   Texas National Security Review

  Since 2020, Africa has seen more political unrest, violent extremism, and democratic reversals than any other region in the world. A wave of coups has washed across the Sahel and West Africa, leaving authoritarians in power in numerous countries. In addition, the continent has served as a stage for the escalating great-power competition between China, Russia, and the United States. U.S. engagement with Africa has long been deprioritized in Washington, with successive administrations devoting scant attention and resources to advancing democracy and resolving conflicts. Thus far, the Biden administration has maintained this pattern, which reflects the persistent tension between an interests-based and values-based U.S. foreign policy. Nevertheless, there are a few actions the United States can take to reinvigorate democracy and stabilize the region, such as emphasizing development and diplomacy over military responses and stepping up cooperation with allies and partners to reduce the influence of China and Russia.

Political Economy

• Austerity, economic vulnerability, and populism    American Journal of Political Science

  Governments have repeatedly adjusted fiscal policy in recent decades. We examine the political effects of these adjustments in Europe since the 1990s using both district-level election outcomes and individual-level voting data. We expect austerity to increase populist votes, but only among economically vulnerable voters, who are hit the hardest by austerity. We identify economically vulnerable regions as those with a high share of low-skilled workers, workers in manufacturing, and in jobs with a high routine-task intensity. The
  analysis of district-level elections demonstrates that austerity increases support for populist parties in economically vulnerable regions,  but has little effect in less vulnerable regions. The individual-level analysis confirms these findings. Our results suggest that the success of populist parties hinges on the government’s failure to protect the losers of structural economic change. The economic origins of populism are thus not purely external; the populist backlash is triggered by internal factors, notably public policies

• Social Security’s Financial Reality is Worse Than Reported   American Enterprise Institute

  The Social Security Trustees recently released their annual Report on the projected finances of the program. The media, advocates, and the Commissioner himself trumpeted that the Report had good news: The program’s finances have improved over the prior year, the projected Trust Fund exhaustion date had moved out a year to 2035, and the automatic benefit cuts upon insolvency were smaller, 17 percent instead of the 20 percent estimated in the prior year’s Report.  A closer look, however, reveals this optimism is misplaced.  The report fails to accurately reflect long-term declines in fertility rates. When the trend toward lower fertility is incorporated accurately in future Reports, the picture of the program’s finances will look much worse, and therefore, the realistic cost of needed reforms will rise.

• Consulting Firms Have Stumbled Into a Geopolitical Minefield   Foreign Policy

  Not so long ago, consultancies and other information brokers could work easily with different clients in different countries. Just as they talked to competing firms, they advised competing governments. But what may have seemed banal then may now be depicted as smoking gun evidence that companies are helping the enemy. For decades, business leaders assumed that globalization meant market expansion. Their big worry was gaining and keeping market share and competing with their rivals. Now, they are being thrown unprepared into a world where globalization means geopolitical risk—and information is the riskiest asset of all.

• How Do US Firms Withstand Foreign Industrial Policies?   National Bureau of Economic Research

  China’s industrial policies (“Five-Year Plans”) displace U.S. production/employment and heighten plant closures in the same industries as those targeted by the policies in China. The impact was not anticipated by the stock market, but U.S. companies in the "treated industries" suffered a valuation loss afterward. Firms shift production to upstream or downstream industries benefiting from the boost or offshore to government-endorsed industries in China. Such within-firm adjustments offset the direct impact. U.S. firms are better able to withstand foreign government interventions provided that they enjoy flexibility, including preexisting business toeholds in the "beneficiary" industries, financial access, and labor fluidity.

Recommended Weekend Reads

March 15 - 17, 2024

Here are our recommended reads from reports and articles we read last week. We hope you find these useful and that you have a relaxing weekend. Also, let us know if you or someone you know wants to be added to our distribution list. 

Americas

• “Annual Threat Assessment of the U.S. Intelligence Community”  Office of the Director of National Intelligence

  The Director of National Intelligence (ODNI) released their annual global threat assessment.   The report outlines how, in the coming year, the United States will face an increasingly fragile global order strained by accelerated strategic competition among major powers, more intense and unpredictable transnational challenges, and multiple regional conflicts.  The report details the US Intelligence Communities unclassified assessment of China, Russia, Iran, and non-state actors and the risk they pose to the US.

• “Redefining US Strategy with Latin American and the Caribbean for a New Era”   Atlantic Council

  The Atlantic Council launched this study because of the perception of waning US interest, and the rise of external influence necessitates a rejuvenation of and renewed focus on the region.  The study focuses on what can be done in four areas: 1) economy, investment, and commerce, 2) energy security, 3) regional migration and security, and 4) democracy, institutions, and governance.

• “How banking regulations affect US foreign policy”  The Atlantic Council

  Economics, finance, and national security overlap. Obvious areas of convergence include sanctions and trade policy. But the average US foreign policymaker is now also expected to develop at least rudimentary knowledge of critical minerals and what constitutes a reserve currency. Banking regulations may seem a step too far, but they must be added to the list because they, too, carry foreign policy implications.

• The Puzzling Persistence of Financial Crises”  National Bureau of Economic Research

  The high social costs of financial crises imply that economists, policymakers, businesses, and households have a tremendous incentive to understand and try to prevent them. And yet, so far, we have failed to learn how to avoid them. In this article, we take a novel approach to studying financial crises. We first build ten case studies of financial crises that stretch over two millennia and then consider their salient points of differences and commonalities. We see this as the beginning of developing a useful taxonomy of crises – an understanding of the most important factors that reappear across the many examples, which also allows (as in any taxonomy) some examples to be more similar to each other than others. From the perspective of our review of the ten crises, we consider the question of why it has proven so difficult to learn from past crises to avoid future ones.

• Driving Under the Influence of Allergies: The Effect of Seasonal Pollen on Traffic Fatalities  National Bureau of Economic Research

  Traffic fatalities are the leading cause of mortality in the United States despite being preventable. While several policies have been introduced to improve traffic safety, and their effects have been well documented, the role of transitory health shocks or situational factors in explaining variations in fatal traffic accidents has been understudied. Exploring daily variation in city-specific pollen counts, this study finds novel evidence that traffic fatalities increase on days in which the local pollen count is particularly high. We find that the effects are present in accidents involving private vehicles and occur most frequently on the weekends, suggesting potentially a missed opportunity to avoid these fatalities. We do not find similar effects for fleet vehicles. These findings remain robust to alternative specifications and alternative definitions of high pollen count. Taken together, this study finds evidence that a prevalent and transitory exogenous health shock, namely pollen allergies, increases traffic fatalities. Given our lack of evidence of avoidance, these effects are not mechanical and are likely driven by cognitive impairments that arise as a result of seasonal allergies.

European Union

• “EU-US relations after the Inflation Reduction Act, and the challenges ahead”  European Parliamentary Research Service

  In this paper, Bruce Stokes, visiting senior fellow at the German Marshall Fund of the United States, and associate fellow at Chatham House, offers an overview of US-EU relations since the passage of the US Inflation Reduction Act of 2022.  This paper is based on the author’s interviews with leading European and US experts and published analysis by major think tanks and journalists on both sides of the Atlantic.  The paper discusses current efforts to manage longstanding pre-IRA disputes, the Trade and Technology Council, the US Chips and Science Act and the EU’s response, looming issues such as CBAM and critical minerals, and how politics in both the US and Europe may affect the handling of these issues.

• “Opening Shots: What to Make of the European Defense Industrial Strategy”  European Council on Foreign Relations

  The European Commission’s new defense industrial strategy sets out to strengthen the EU’s defense industry through common and local procurements. But it will need both financial and political buy-in to succeed. Firstly, money matters. The €1.5 billion mobilized to establish the European Defense Industrial Policy (EDIP) between 2025 and 2027 represents a fraction of European spending (roughly 0.2 percent), which will make it difficult to shape the market. Significant additional money could only be allocated under the EU’s next multiannual financial framework in 2028.

  Secondly, the commission needs to clarify the functioning of different financial tools, including the Fund to Accelerate Defense Supply Chain Transformation (FAST) to support small- and medium-sized enterprises; the Structure for European Armament Programme (SEAP), which bolsters cooperation in part through a VAT exemption; and the European Military Sales mechanism (which is apparently modeled on the US Foreign Military Sales tool, though focused on the availability of EU equipment).

  Thirdly, as it grows, this effort needs to be well aligned with defense planning priorities, which are primarily defined at the national level or in NATO. This will require much closer NATO-EU engagement. Fourthly, member states, especially the larger ones, have traditionally been reluctant to Europeanize defense policies and could resist a perceived power grab by the commission. The EU will have to convince them – and their industries – of the added value of this approach, including, for some, the choice to buy European. 

  Finally, given the money initially allocated and the usual timeframe before implementation, EDIS and EDIP will not address the immediate requirements of Ukraine or short-term capability shortfalls.

NATO

• NATO’s decision process has an Achilles’ heel  By Eric S. Edelman, David Manning, and Franklin C. Miller The Atlantic Council

  In Washington this July, the most successful political-military alliance in modern history will celebrate its seventy-fifth anniversary.  Today, the Alliance stands as a barrier to Russian President Vladimir Putin’s ambition to recreate a “Russian world,” bringing Russophone citizens back into something like the borders of the Soviet Union by reabsorbing Ukraine and possibly Moldova and the Baltic states. The Russian autocrat’s invasion of Ukraine has strengthened the Alliance by adding two very capable members (Finland and now, finally, Sweden), and by strengthening the will of member states to stand together against Russian aggression. But the fact is the principle of consensus which holds the alliance together, except in the case of accession, is not enshrined or codified in any Alliance document. What worked for the Alliance earlier, when all of its members were like-minded states facing an overwhelming military challenge, and the memories of World War II were fresh in the minds of both the public and leaders, may not be fit for purpose today with a broader and much more diverse membership.

China

• “Export controls: China’s long game to defend its tech advantage”   Merics

  Rather than abruptly pulling the plug on certain exports, Beijing is gradually sharpening an instrument to better control global tech supply chains and pursue a range of other goals. Chinese export controls came into focus in the summer of 2023 when the Ministry of Commerce (MOFCOM) announced new licensing requirements on the export of gallium and germanium, critical minerals in semiconductor manufacturing. Some saw this as a response to the Dutch government’s new export restrictions – under pressure from the US – on products made by ASML, a major supplier of chipmaking tools to China.  And retaliation it was – just not in a simple, tit-for-tat manner, and likely not aimed at that target. If the past year is of any indication, it is plausible that these mineral controls – which do not constitute an export ban – were chiefly aimed at US companies. While germanium is used in fiber optics and solar panels, and gallium in consumer electronics and 5G telecommunications, both are key for the aerospace and defense industries. In 2023, the Chinese government added US defense contractors Lockheed Martin and Raytheon to its Unreliable Entities List – companies China marks for punitive action. It also deemed memory chips from US defense contractor Micron to pose a risk to its domestic critical information infrastructure. 

• “China’s Food Security: Key Challenges and Emerging Policy Responses”  Center for Strategic & International Studies

  Feeding China’s vast population is a priority issue for Beijing, given the historic ramifications of famines and food crises for social and regime stability. Yet the task is vast—China must feed nearly 20 percent of the global population but is home to under 10 percent of the world’s arable land—and the challenges to stable food supply are many. These include inefficient agricultural practices, supply chain bottlenecks, changing consumption habits, international trade dynamics, domestic environmental degradation, corruption and data misrepresentation, and a history of food safety scandals. Diagnosing a more contentious international environment, Xi Jinping has placed greater emphasis on agricultural self-sufficiency and diversified sourcing of critical inputs, foodstuffs, technology, and know-how. This brief explores key trends, challenges, and policy measures in China’s pursuit of food security. It is part of a joint CSIS-Brookings Institution project, Advancing Collaboration in an Era of Strategic Competition, which seeks to explore and expand the space for U.S.-China collaboration on matters of shared concern.

Russia

• “All the autocrat’s men: the court politics of Putin’s inner circle”  The Atlantic Council’s Eurasia Center

  There will be very little suspense surrounding Russia’s presidential election this month. Vladimir Putin will certainly win a fifth term as Kremlin leader. This is because Russian elections are not elections. Instead, they are mobilization and legitimization rituals in which the results are preordained. And even such a shock as opposition leader Alexei Navalny’s death probably won’t change this.

  However, the lack of suspense surrounding the result of the vote does not mean that it will not be meaningful. On the contrary, this ritual is a political watershed that will determine the landscape in Russia for years to come—and possibly what Russia will look like after Putin finally passes from the scene. That is because, in the absence of institutions, Russian politics are effectively court politics, dominated by the clan battles within the Kremlin leader’s inner circle.  What is the state of the “Putin court?” And how has Russia’s war against Ukraine influenced the clan battles that define it? Why does the Kremlin seek to leverage traditional conservative values and the Russian Orthodox Church? This report is based on extensive interviews with dozens of current and former Russian officials who spoke on condition of anonymity to discuss the inner workings of the Kremlin power elite without fear of reprisals.

Statistics and Map of the Week

Which Chinese Local Governments Are Facing The

Most Severe Debt Obligations?

The Financial Times recently reported how officials from China’s most indebted provinces and cities were recently brought into meetings with state bankers in Beijing to attempt to accelerate the renegotiation of debt payments on billions of dollars in outstanding liabilities.  Infrastructure spending drove up much of the local debt – much of it now unserviceable.   And it is now a severe drag on China’s overall economy and threatening to add new pressure on the country’s effort to get its struggling economy back on track.  Most of the provinces are on the outer rim of China and tend to be the poorest areas.  It is estimated that 18 local governments have amassed as much as $13 trillion in debt, with a growing number of their public bonds coming due by the end of 2024.

Recommended Weekend Reads

December 22 - 24 2023

Here are our recommended reads from reports and articles we read in the last week. We hope you find these useful and that you have a relaxing weekend.   And let us know if you or someone you know wants to be added to our distribution list. 

We hope you have a Merry Christmas!

Global Perspectives

• "“Is Geopolitical Risk Getting Worse?”   Peterson Institute for International Economics

  As 2023 draws to an end, major wars are raging in Europe and in the Middle East, between Russia and Ukraine and between Israel and Hamas. According to the Uppsala Conflict Data Program, there are more active armed conflicts involving sovereign states than ever since World War II. The same can be said of displaced persons. With tensions rising in the South China Sea, geopolitical risk seems higher than at any point in recent memory. Things, as they say, have been better. But are conditions worse, or at least riskier, than ever? The Geopolitical Risk Index (GPR), developed by Dario Caldara and Matteo Iacoviello to assess risk in broader historical perspective, suggests otherwise.

• “Attitudes on an Interconnected World”   Pew Research Center

  How close do people feel to others around the world? How much do they want their countries involved in international affairs? How do people’s experiences with travel and feelings of international connectedness relate to their views about the world? These are among the questions Pew explored in a recent 24-nation survey. We found that while most respondents feel close to people in their countries and their local communities, they are more divided over how close they feel to others across the globe.

United States

• “Other Countries’ Activities During the 2022 Election Cycle”  Office of the Director of National Intelligence

  The US intelligence community observed other countries engaging in efforts to either support or undermine specific US candidates during the 2022 elections.  This NDI report relays how China, Iran,  Russia, and Cuba were the leading agents perpetuating these efforts to undermine American democracy.

European Union/Critical Materials

• “Critical Material: The EU’s and Chile’s New Relation in the Multipolar World”  European Council on Foreign Relations

  The EU’s relationship with Chile is a test case for the EU’s capacity to navigate the emerging “à la carte” multipolar order, in which countries pragmatically choose their partners depending on the issue at hand. Chile is the world’s largest producer of copper and the second largest producer of lithium, a domination that is set to last, given its proven reserves of both metals. From the vantage point of Europe, Chile could provide immense assistance in powering the green transition – literally, by supplying the materials to power the batteries that Europeans are relying on to digitize and electrify their economy. The EU already imports 80 percent of its lithium from Chile – a crucial dependency in the rapidly evolving world economy.

Israel/Gaza War

• “Life in Israel After October 7 in 5 Charts”  Gallup

  Gallup surveyed Israelis between Oct. 17 and Dec. 3, just weeks after Hamas launched its attack on Israel on Oct. 7. As the war between Israel and Hamas continues, here are five key insights into public opinion in Israel.  There were five key takeaways from the survey:

  1.     Israelis no longer support a two-state solution

  2.     Hopes for peace grow further out of reach

  3.     Negative emotions soar after the attack

  4.     Approval of US leadership reaches new high

  5.     Approval of Israel’s leadership remains flat

China

• “Why are so many young Chinese depressed?”   Australian Strategic Policy Institute

  China’s high youth unemployment rate and increasingly disillusioned young people—many of whom are ‘giving up’ on work—have attracted much attention from global media outlets and Chinese policymakers. The standard narrative is to associate the problem with the country’s recent growth slowdown. In fact, the issue goes much deeper. 

  The rise of youth depression has been decades in the making and owes much to China’s rigid education system, past fertility policies, and tight migration restrictions. Chinese youth are burned out from spending their childhood and adolescence engaged in ceaseless, intense study. Attending a good university is seen as necessary for securing a good job, and for rural children, a university degree is the only path to legal residence in cities under the hukou registration system. In a city, the average household annual disposable income is US$6,446, which enables a middle-class lifestyle.

  By contrast, in rural areas, an income averaging only US$2,533 means living in relative poverty.  As if the pressure to get into a university wasn’t bad enough, the rigid structure of the school system makes matters worse. After nine years of compulsory schooling, children must pass an exam to enter an academic high school, and only 50% of them are allowed to pass. Teenagers who don’t make the cut attend vocational high school and are destined for low-paying jobs.

• “Five big uncertainties facing the Chinese economy in 2024” Peterson Institute for International Economics

  The Chinese economy’s rebound started slowly last spring, shaking off the effects of an estimated 1.41 million excess deaths from the pandemic and China’s zero-COVID policies. Today, although growth will likely meet the government’s 5 percent target for 2023, the Chinese economy remains troubled, plagued by flat private investment, flagging consumer confidence, and high youth unemployment. Falling prices and depressed business and consumer confidence are flashing warning signs about the year ahead.  Here are five big uncertainties about Chinese economic performance and the government’s policy responses that will determine whether growth can be sustained in 2024.

Recommended Weekend Reads

December 1 - 3, 2023

Here are our recommended reads from reports and articles we read in the last week. We hope you find these useful and that you have a relaxing weekend.   And let us know if you or someone you know wants to be added to our distribution list. 

Americas

• “Import Substitution and the Economic Downfall of Argentina”   OMFIF

  At the beginning of the 20th century, Argentina was the fifth-largest economy in the world. Many at the time expected it to rival the US economy. In the 1950s, Argentina’s gross domestic product per capita was twice that of Spain and three times that of Japan. Today, Argentina is a completely different story. It has defaulted nine times in total and three times in the 21st century alone. What went wrong for Argentina? How did it lose its way?

• “On the Uses and Misuses of Venezuela Sanctions” Center for Strategic and International Studies

  Over the last month, the Biden administration has presided over a sea change in U.S. policy toward Venezuela. The recent lifting of sanctions on the Maduro regime is the most significant alteration of Venezuela's policy in the last several years, coupled with routine deportation flights started on the same day as the sanctions relief to address a torrent of Venezuelan irregular migration. Gone is the policy of “maximum pressure” that Biden inherited from his predecessor, which had garnered bipartisan support on Capitol Hill. From its earliest days, the Biden administration signaled its discomfort with a maximum pressure campaign and its intent to unwind sanctions in exchange for concessions from the Maduro regime toward a free and fair election.

• “Henry Kissinger, Colossus on the World Stage”  Foreign Policy

  Henry Alfred Kissinger, one of the most influential statesmen in American history, died on Nov. 29 at age 100 after a long and tumultuous career in which he helped author some of the greatest triumphs—as well as some of the most tragic failures—of U.S. foreign policy. He was credited with several of the most epoch-making diplomatic achievements since World War II. These included launching detente with the Soviet Union to preserve peace during the Cold War and, along with his boss, President Richard Nixon, dramatically altering the terms of that 40-year conflict by opening relations with communist China in 1972.

• “What America Wants from China”  Foreign Affairs

  Brookings Institution John Thorton China Center Director Ryan Hass writes that Washington needs to set an objective on China that would enjoy durable domestic support and be compatible with foreign partners’ priorities, allowing them to anticipate the direction of U.S. policy and its guiding logic.  He then presents a smart and highly compelling strategy for keeping Beijing entangled in the World Order and keeping peace globally.

The Middle East

• “The Gaza War and the Rest of the World”  Malcolm Kerr Carnegie Middle East Center

  Scholars from Carnegie’s global network comment on how the ongoing conflict between Israelis and Palestinians is affecting their areas of interest and what the implications of this may be.

• “Why Israel Won’t Change”  Foreign Affairs

  Almost from the moment Hamas broke through Israel’s security barrier with the Gaza Strip on October 7 and began its rampage, it felt as if Israel would never be the same. Within hours, Israelis were forced to confront the reality that many of the assumptions that had long guided Israeli policy toward the Palestinians had crumbled. Yet, in one major way, Israel remains unchanged. Although Israelis blame the country’s leadership for the catastrophic security failures surrounding the attacks, their basic political orientation seems unlikely to budge. Prime Minister Benjamin Netanyahu may well be forced to step down when the war is over—if not before since the war has no clear endpoint. But as Israeli history has repeatedly shown, especially in recent decades, episodes of war or extreme violence like the current one have only reinforced a rightward tilt in Israeli politics.

• “Stormy Waters for Saudi Arabia: Regional Conflict and Red Sea Security”  Carnegie Endowment for International Peace

  In recent years, Red Sea security has become a key pillar of Saudi Arabia’s domestic and foreign policy. Driven by geostrategic ambitions and plans to diversify its oil economy, the kingdom has strengthened security relations in the area by building alliances with Israel and coastal African countries and by de-escalating conflicts with Iran and Yemen’s Iranian-backed Houthis. There have been efforts made to modernize the Royal Saudi Naval Forces, particularly the Western Fleet, which operates in the Red Sea, and to tighten naval cooperation with Egypt. Multilateral initiatives have seen Riyadh at the forefront—including the Saudi-led Red Sea Council and U.S.-led task forces deployed in the Red Sea to counter smuggling and train local navies. 

North Asia

• “Modest Beginnings: North Korea Launches Its First Reconnaissance Satellite”  38 North

  North Korea conducted a satellite launch on November 21, first reported by Japanese and South Korean sources. The next day, North Korean media announced a successful launch from the Sohae Satellite Launching Ground of the “Chollima -1” space-launch vehicle (SLV) orbiting the “Malligyong-1” reconnaissance satellite. This was the first successful launch of the Chollima-1 SLV after two previous failures.  What does this mean for regional and global security?  And what could North Korea do next?

• “A Look at China’s Overseas Security Partnerships”  American Enterprise Institute Podcast

  In this episode of the U.S.-China Nexus Podcast, Sheena Chestnut Greitens and Paul Nantulya examine the motivations and implications of China’s broadening overseas security partnerships.

• “How China’s Belt and Road Projects Are Shaping Global Trade and What to Expect from the Initiative in its Second Decade”   MERICS China Global Competition Tracker

  Having celebrated the end of the first decade of his signature foreign policy at the Belt and Road Forum in October, Xi Jinping has wasted little time in doubling down on China’s global economic ambitions. On November 29th, a follow-up document was released in Beijing to map out the goals of the Belt and Road Initiative (BRI) for the coming ten years. 

Global Finance & Economics

• “What We Heard: Bank of Canada Publishes Report on Digital Dollar Consultations, Outlines Further Engagement Plans”  Bank of Canada

  In a public update on the prospects of moving the Canadian dollar to digital, the Bank of Canada reports they heard: 1) Financial sector stakeholders generally wanted more concrete details about how a digital dollar would work so they could better understand the potential impacts on their business models and overall financial stability. 2) Focus group participants largely accepted the potential need for a digital dollar in the future but wanted more information on how exactly it would work. 2) Civil society groups mainly supported a digital dollar if its design would remove existing barriers to accessibility and financial inclusion. 3) Respondents to the public questionnaire were largely opposed to a digital dollar and to the Bank of Canada researching it. They were concerned about the impacts that a digital dollar could have on their rights.

Chart of the Week 

America’s High Schoolers Are Running Out of Time

Bloomberg’s editorial board writes that America’s high schools face a growing crisis: Millions of students who entered ninth grade in the fall of 2020, at the height of the pandemic, are set to graduate this spring, with little hope of recovering from the learning loss incurred while schools were shut. Simply put, they’re running out of time.

They note that since 2022, the average scores on ACT exams were the lowest in 30 years and the number of students receiving failing grades has soared.

This comes as the U.S. rapidly ramps up the re-shoring of hi-tech manufacturing – via the CHIPS Act and the Inflation Reduction Act –  which demands a massive new workforce proficient in science and math.  Clearly, the challenges of meeting those needs are obviously becoming starker.

Recommended Weekend Reads

November 3 - 5, 2023

Here are our recommended reads from reports and articles we read in the last week. We hope you find these useful and that you have a relaxing weekend.   And let us know if you or someone you know wants to be added to our distribution list. 

Middle East

• “Why Russia and Hamas Are Growing Closer”  Carnegie Endowment for International Peace

  The Kremlin purports to take a hard stance on terrorism. Yet since the massacre in southern Israel carried out by Hamas militants on October 7, it has only grown closer to the group.  Moscow’s relationship with the militant group Hamas is part of a Middle East strategy meant to boost its standing in the Global South: an effort that has long involved building ties with both Israel and its sworn enemies.

• “What Can the IDF Do about Hamas Tunnels?”  The Urban Warfare Project Podcast

  As the Israel Defense Forces (IDF) conduct a ground campaign in Gaza, the threat of Hamas tunnels  - estimated to be as much as 600 miles long – will be one of the most significant challenges to contend with. But how many of these tunnels are there? What can Israeli forces do about the tunnels when they encounter them? In this episode, host John Spencer talks to Dr. Daphne Richemond-Barak, the world’s preeminent expert on tunnel warfare. She is a professor at the Lauder School of Government, Diplomacy, and Strategy at Reichman University, author of the book Underground Warfare, and creator of the International Working Group on Subterranean Warfare.

• “The Persian-Russian Connection”  Lawfare

  Tehran’s ties to Russia are growing, making Iran a stronger force in the region and increasing the danger it poses to the United States and its allies. From Tehran’s perspective, an informal alliance with Russia is ideologically and historically odd, but it is strategically enticing. Iran and Russia have been rivals for almost two centuries, and Iran’s former Supreme Leader, Ruhollah Khomeini, hated the Soviet Union almost as much as he hated the United States. Moscow’s interest in Tehran is a bit harder to explain. It starts with a range of common interests that are generally anti-U.S., opposed to democratic values, and wary of Sunni Muslim fundamentalism. 

• “The Decolonization Narrative Is Dangerous and False”  The Atlantic

  It does not accurately describe either the foundation of Israel or the tragedy of the Palestinians. The decolonization narrative has dehumanized Israelis to the extent that otherwise rational people excuse, deny, or support barbarity. It holds that Israel is an “imperialist-colonialist” force, that Israelis are “settler-colonialists,” and that Palestinians have a right to eliminate their oppressors. (On October 7, we all learned what that meant.) It casts Israelis as “white” or “white-adjacent” and Palestinians as “people of color.”  This ideology, powerful in the academy but long overdue for serious challenge, is a toxic, historically nonsensical mix of Marxist theory, Soviet propaganda, and traditional anti-Semitism from the Middle Ages and the 19th century. 

China 

• “China Expands Its Political Influence in Russia East of the Urals”  The Jamestown Foundation

  Beijing is increasing its political influence in Siberia and the Russian Far East to better support its expanding economic activities. These efforts are directed at the political and business elites, who are the major stakeholders in deciding which firms can operate in their respective regions. These tactics have generated both local and regional concerns in Russia. Chinese efforts are generating resistance from the local populations that resent their regional leaders kowtowing to China.

Political Economy

• “The New Economy Security State”  Foreign Affairs

  In the past decade, economics and national security have collided, turning government inside out and upside down. The definition of security has expanded beyond matters related to warfare and terrorism, as previously disregarded economic and environmental problems such as food insecurity, energy shortages, inflation, and climate change have moved to the “very core” of the official U.S. National Security Strategy. To address the new problems of economic security and avoid a downward spiral that could threaten the global economy, U.S. officials must reckon with a major task: nothing less than a transformation of the U.S. government. The past offers the wrong guidance, and the current predicament calls for an exacting reassessment.

• “Long Live Globalization: Geopolitical Shocks and International Trade”   IMF Working Papers

  Are geopolitical tensions leading to a reversal in globalization? Using U.N. voting patterns from 1948 to 2021 to measure geopolitical similarity, Serhan Cevik of the International Monetary Fund finds that trade relationships were “resilient to occasional shifts in the geopolitical landscape” and that the geopolitical alignment between countries had statistically insignificant effects on their level of trade. The physical distance between countries and their respective levels of income were much more important factors, with proximity and higher incomes predicting increased trade between countries. Cevik argues that despite recent shocks, “the widely used indicators of globalization...have rebounded strongly,” and thus, “there is no systemic retreat in trade globalization due to geopolitical developments.”

Chart of the Week

Talking Politics at Work is Increasingly Cool for Gen Z

Bloomberg reported recently how various generations feel about talking about politics at work.  According to a recent survey by Glassdoor, “Gen Z” (those born in the late 1990’s and early 2010’s) are increasingly comfortable bringing up the topic of politics.  According to Glassdoor,  three in five US workers have done so with colleagues over the last year.  Millennials (born in the early 1980s to the early 200’s) and Gen X (born in the late 1960s to early 1980s) feel even more comfortable beating Baby Boomers (born from 1946 to 1964). 

Interestingly, roughly 50 percent of Gen Z workers said they would not apply for a job at a company where the CEO supports a political candidate they disagree with – in contrast with Millennials (40 percent taking that stance) and Gen X and Baby Boomers (both roughly at 30 percent with that view).

Recommended Weekend Reads

October 20 - 22, 2023

Here are our recommended reads from reports and articles we read in the last week. We hope you find these useful and that you have a relaxing weekend.   And let us know if you or someone you know wants to be added to our distribution list.

Latin America 

• “The Only Threat of Violence in Venezuela’s Opposition Primaries Comes from the Regime”   Center for Strategic and International Studies

  The Biden Administration has brokered a deal with the Venezuelan regime easing sanctions on oil production in return for allowing free elections.  But the risk of this deal falling apart is high. On August 18, Venezuela’s President Nicolás Maduro appeared on television to denounce the October 22 primaries planned by Venezuela’s opposition parties, which are uniting behind a single candidate ahead of the country’s 2024 presidential elections. Through “lies, hate, and violence,” Maduro claimed the opposition would use the primaries to “sow fascism” in Venezuela (author’s translation). The accusations, parroted by other high-ranking regime authorities, represent a disturbing narrative in the midst of an already fraught electoral season, which has seen attacks and intimidation against political candidates and the arbitrary disqualification of leading figures, most notably opposition frontrunner María Corina Machado. The Maduro regime’s narrative of violence portends a possible intervention in the opposition’s independently organized primary process on public security grounds.

• “A (Relatively) Bullish Case for Latin America”    Americas Quarterly

  Far from global crises but near vital markets, the region has what the world needs right now. The bottom line is basically this: The external context for Latin America/Caribbean (LAC) right now is so favorable on a variety of fronts that it is overcoming other headwinds. If the policy mix was better, the region might be growing by 4% or 5% a year. But 2% or perhaps a little better still feels like progress. That growth, plus the investments being made, might be enough to create a little more well-being among the region’s citizens—which could, in turn, help the politics get better. 

The United States

• “America’s Strategic Posture: the Final Report of the Congressional Commission on the Strategic Posture of the United States”

  On October 12, the Strategic Posture Commission released its long-awaited report on U.S. nuclear policy and strategic stability. The 12-member Commission was hand-picked by Congress in 2022 to conduct a threat assessment, consider alterations to U.S. force posture, and provide recommendations. In contrast to the Biden administration’s Nuclear Posture Review, the Congressionally-mandated Strategic Posture Commission report is a full-throated embrace of a U.S. nuclear build-up. It includes recommendations for the United States to prepare to increase its number of deployed warheads, as well as increase its production of bombers, air-launched cruise missiles, ballistic missile submarines, non-strategic nuclear forces, and warhead production capacity. It also calls for the United States to deploy multiple warheads on land-based intercontinental ballistic missiles (ICBMs) and consider adding road-mobile ICBMs to its arsenal. The only thing that appears to have prevented the Commission from recommending an immediate increase in the U.S. nuclear weapons stockpile is that the weapons production complex currently does not have the capacity to do so.

Africa 

• “How a Fertilizer Shortage Is Spreading Desperate Hunger”  The New York Times

  The war in Ukraine reduced the region’s grain exports and sent the price of staples like wheat soaring from Egypt to Indonesia. The world’s food supply is also menaced by the ravages of climate change — heat waves, drought, floods. Now, scarce and expensive fertilizer  - much of normally imported from Ukraine – is combining with these other forces to threaten livelihoods.

Chart of the Week

Spanish Olive Oil: It’s Going to Cost You More Because of Yet Another Poor Harvest Yield 

Many of us are great fans of Spanish olive oil.  Unfortunately, Spain – the top producer of olive oil – is having yet another poor harvest year.  Higher than normal temperatures and a prolonged drought have led to the trees either dropping their fruit too soon or producing significantly smaller olives.  According to Bloomberg, it is the 3rd lowest than the four-year average.  Making the situation worse is a growing crime wave where thieves are targeting stored oil reserves, the actual freshly picked olives, and even trees.  So, if you find the prices have spiked at the grocery store or at your favorite restaurant, now you know why.

Recommended Weekend Reading

September 29 — October 1, 2023

Here are our recommended reads from reports and articles we read in the last week. We hope you find these useful and that you have a relaxing weekend.   And let us know if you or someone you know wants to be added to our distribution list.

Political Economy

• “Can Economists Predict Recessions?”   St. Louis Federal Reserve Bank Research

  When people ask questions about the economy, they often ask about predictions. Will there be a recession soon? When will inflation come down? Why didn’t economists see the 2008 crisis coming? And perhaps most importantly: Do economists have any idea what’s going to happen to the economy?  These questions have taken on particular importance recently. In the past four quarters, economic forecasters have, on average, predicted a 42% probability of a contraction in the U.S. economy in the next quarter, according to the Survey of Professional Forecasters (SPF) conducted by the Federal Reserve Bank of Philadelphia. So far, no recession has occurred, although the forecasted risk of a downturn in the fourth quarter remains elevated at 34.4%.

• “Did Pandemic Unemployment Benefits Increase Unemployment?  Evidence from Early State-level Expirations”  Glenn Hubbard/Harry Holzer/Michael Strain, Economic Inquiry

  Abstract: During the 2021 pandemic year, the generosity of Unemployment Insurance benefits was expanded (Federal Pandemic Unemployment Compensation [FPUC]), and eligibility for benefits was broadened (Pandemic Unemployment Assistance [PUA]). These two programs were set to expire in September 2021. In June 2021, 18 states exited both FPUC and PUA, and three states exited FPUC (but not PUA). Using Current Population Survey data and a wide range of estimation methods, we find that the flow of unemployed workers into employment increased by around two-thirds following early exit among prime-age workers. We also find evidence of reductions in state-level unemployment rates, increases in employment-populations ratios, and reductions in the share of households that had no difficulty meeting expenses.

Americas

• “The Coming Crisis for Latin America’s Left-Wing Leaders”  Americas Quarterly

  Social democrats now rule much of the region—but anti-incumbency, weak parties, and more may soon make them an endangered species.  Despite their sinking poll numbers, they vow to make a comeback.  The big question is: What does all this political change mean for Latin America and the markets?

• “Americans’ Weak Economic Ratings Slip Further in September”   Gallup

  Americans’ already negative assessments of the U.S. economy have become slightly worse in September, both in their perception of current economic conditions and their outlook for the economy’s direction. In this month’s update, 20% of U.S. adults say economic conditions are “excellent” or “good,” while 32% call them “only fair” and 48% “poor.” The overall positive rating is down slightly from 23% in August, while the poor rating is up from 42% and is the highest Gallup has seen in a year.

• “Tracking Transatlantic Drug Flows: Cocaine’s Path from South America Across the Caribbean to Europe”  Center for Strategic and International Studies

  This interactive report, with superb graphics, shows that the global cocaine trade has seen seismic shifts in the last decade as drug traffickers looked beyond the United States to set their sights on more lucrative markets in Europe.  Cocaine consumption in Europe has increased significantly over the last decade. The rise of cocaine has caused an unprecedented wave of drug-related violence across Europe, especially in port cities like Rotterdam. As drug use has increased, so have drug overdose deaths.

Indo Pacific

• “China is Growing Old Before It Becomes Rich: Does It Matter?”  Big Data China

  In 2022, after six consecutive years of declining birth rates, China recorded its first annual population decline since the early 1960s. According to a forecast by the United Nations, China’s population is set to fall from 1.426 billion in 2022 to 1.313 billion in 2050 and drop below 800 million by 2100. The problem for China, though, isn’t simply a falling population but rather the worsening ratio of retirees to individuals of working age, which will increase the burden on income earners to support the rest of the population. Every estimate and forecast we found (see Figure 1) shows that China’s old-age dependency ratio will continue to rise in the coming decades.

Middle East

• “Inside Iran’s influence operation”  Semafor

  In the spring of 2014, senior Iranian Foreign Ministry officials initiated a quiet effort to bolster Tehran’s image and positions on global security issues — particularly its nuclear program — by building ties with a network of influential overseas academics and researchers. They called it the Iran Experts Initiative.  The scope and scale of the IEI project have emerged in a large cache of Iranian government correspondence and emails reported for the first time by Semafor and Iran International. The officials, working under the moderate President Hassan Rouhani, congratulated themselves on the impact of the initiative: At least three of the people on the Foreign Ministry’s list were, or became, top aides to Robert Malley, the Biden administration’s special envoy on Iran, who was placed on leave this June following the suspension of his security clearance.

• “Nagorno-Karabakh: The Broader Implications”    Carnegie Middle East Center, Carnegie Institute for International Peace

  Beyond the tragedy of the Armenians, many countries in the region and internationally have a stake in what happens in the territory.  Specifically, Azerbaijan’s military takeover of the region has significant longer-term political and economic implications for Russia, Turkey, Israel, and the EU.

Africa

• “Political unrest in Africa threatens global critical mineral supplies and their futures”  Peterson Institute for International Economics

  The recent coup in Gabon exacerbates the challenge facing mineral-rich African countries, where political instability undermines their development prospects. Gabon is the world’s second largest producer of manganese, which is used to produce iron and steel and is key to the production of electric vehicles. Mineral-rich countries must develop processing facilities that turn raw metal ores into refined, usable products in order to create good manufacturing jobs and expand economic opportunities in the service sector.  The Gabon coup is the eighth in West and Central Africa in the past three years, following government overthrows in Burkina Faso, Chad, Guinea, Mali, Niger, and Sudan. But until recently, Gabon had experienced no armed conflict since the end of the Cold War and just one failed coup attempt in 2019.

Map of the Week 

While Everyone Worries About China’s Intentions Toward Taiwan, the Philippines Is Where Markets Should Watch Closely Now

Markets have been keenly focused on the increased tensions between Beijing and Taipei but they have not paid particularly close attention to the increasing tensions and military activity on the Scarborough Shoal off the coast of the Philippines.  By way of background, in 2012 China claimed the Shoal as their own, redrawing established maritime boundaries.  Asa result, the Philippines taking China to the International Court in the Hague.   The Philippines won the case in 2016.  However, then-President Rodrigo Duterte, as part of his move away from U.S. influence,  tried to sooth things with China but with little real effect. 

In a reversal of policy, current Philippine President Ferdinand Marcos Jr., who has warmed up relations with the US since taking office, changed tactics and recently reasserted the Philippines rightful claim to the Shoal.  He went so far as to instruct the Philippine Coast Guard last week to remove a floating barrier installed by China to block Philippine fishing boats from entering the area.  

One critical question the financial market should consider as tensions between the two countries rise is what will the U.S. do?  Like Taiwan, the U.S. has a mutual defense treaty with the Philippines.

Recommended Weekend Reads

September 15-17, 2023

Here are our recommended reads from reports and articles we read in the last week. We hope you find these useful and that you have a relaxing weekend.   And let us know if you or someone you know wants to be added to our distribution list.

Indo Pacific

• “Electric Shock: Interpreting China’s Electric Vehicle Export Boom”  Center for Strategic and International Studies

  China’s rise as an automotive exporter is fueled by the growing importance of the country’s globally leading electric vehicle (EV) industry. However, despite the rapidly increasing sales by domestic firms like BYD, many of the EVs exported from China are made by Western companies like Tesla that have significant production capacity in the country. Exports of EVs made in China have critical implications for both legacy carmakers and policymakers in regions like Europe and the United States that have strived to diversify clean tech supply chains away from China while also advancing decarbonization. For the United States and Western Europe, focusing on boosting domestic innovation and manufacturing will continue to be an important tool to face this challenge.

• “Measurement Muddle: China’s GDP Growth Data and Potential Proxies”  Big Data China

  How fast is China’s economy growing? Or, given the recent trends, how much is it slowing down? Obtaining a reliable answer to these seemingly straightforward questions has proved amazingly elusive. Despite the production of mountains of official data and a plethora of unofficial estimates, these are questions for which there are no consensus answers. There has long been a concern that China’s statistical officials have inflated the country’s data for its gross domestic product (GDP), which is ascribed to political incentives to present a rosy economic picture to its populace and the rest of the world (see Figure 1). Another recurring concern has been the undercounting of the contribution of the private sector to the country’s growth and employment, which may be due to its second-class citizen status, which may make it harder for statistical authorities to monitor effectively, and the large share of economic activity that comes from the service sector, which is inherently harder to count than produced goods.

Africa

• “Gabon coup complicates country’s critical mineral ambitions”  Peterson Institute for International Economics

  Gabon, a former French colony, is best known for its oil exports and on-again, off-again membership in the Organization of Petroleum Exporting Countries (OPEC). But it is also the world’s second-largest producer of manganese. Manganese is an important input to iron and steel but also the production of electric vehicle (EV) batteries, with some calling it “the key” to lowering consumer costs and driving widespread EV adoption. Manganese is on the critical minerals/resources lists of the United States, European Union, and South Korea. As recently as 2021, Gabon accounted for 65 percent of US manganese ore imports.

Geo-Economics 

• “The Origins and Efficacy of the Price Cap on Russian Oil”   Russia Matters/Harvard Kennedy School Belfer Center for Science and International Affairs

  In the wake of Russia’s illegal invasion of Ukraine, the international community levied a series of sweeping and unprecedented sanctions designed to disrupt the Russian economy and limit Russian President Vladimir Putin’s ability to wage war. This effort included a price cap on Russian oil, a novel sanctions regime collectively imposed by the G-7, the European Union, and Australia, designed to simultaneously lower Russian revenue while preserving the supply of oil in the global markets. Preliminary assessments, such as an Aug. 3, 2023, analysis by the U.S. Treasury Department, suggest that the price cap has largely achieved these goals to date. Global supply remains mostly stable, and Russian oil continues to be sold at a discount relative to similar products produced by other countries.

Global

• “Five Things to Watch for at the UN General Assembly Opening”   Carnegie Endowment for International Peace

  The coming days will reveal whether the UN can remain relevant in a divided world. Top of FormBottom of Form  When world leaders convene next week for the annual opening of the UN General Assembly, the assembled nations will be anything but united. Geopolitical rivalries, political grievances, economic upheaval, and ecological crises are testing the legitimacy and credibility of the seventy-eight-year-old body. 

Graphic of the Week 

Where is Your Cup of Coffee Coming From?

 We are addicted to it in many forms.  But do you know where your coffee was grown?  It might surprise you. Bloomberg did a deep dive this week in the coffee industry.  Coffee is grown in about 70 countries, with five of them — including Brazil and Vietnam — making up about 85% of the world’s output. The rest comes from some 9.6 million growers in smaller producers around the world.

Recommended Weekend Reads

August 11 - 13, 2023

Here are our recommended reads from reports and articles we read in the last week. We hope you find these useful,  and have a great, relaxing weekend.   And let us know if you or someone you know wants to be added to our distribution list or sign up via the website.

Global Political Economy 

• “Vassals vs. Rivals: The Geopolitical Future of AI Competition”   Lawfare

  The U.S. should use an AI-competitive world as an opportunity to lead in developing an open, rule-bound, and balanced global AI ecosystem. For its part, it is in the U.S.’s national interest to encourage global AI competition and use it as a catalyst for creating a global AI ecosystem that is more open, rule-bound, and balanced than it would be in an AI vassal future.

Indo Pacific 

• “Support Provided by the People’s Republic of China to Russia”  Report from Office of the U.S. Director of National Intelligence

  The US DNI issued this report in late July, detailing how China “is pursuing a variety of economic mechanisms for Russia that mitigate both the impact of Western sanctions and export controls.  The PRC has increased its importation of Russian energy exports, including oil and gas supplies rerouted from Europe.”  The report goes on to detail Beijing’s increased use of its current and its financial infrastructure with Russia.

• “The End of China’s Economic Miracle”  Adam Posen/Foreign Affairs Magazine

  Posen, the President of the Peterson Institute for International Economics and a former voting member of the Bank of England’s rate-setting Monetary Policy Committee (MPC), points out that the first quarter of 2020, which saw the onset of COVID, was a point of no return for Chinese economic behavior, which began shifting in 2015, when the state extended its control: since then, bank deposits as a share of GDP have risen by an enormous 50 percent and are staying at that high level. Private-sector consumption of durable goods is down by around a third versus early 2015, continuing to decline since reopening rather than reflecting pent-up demand. Private investment is even weaker, down by a historic two-thirds since the first quarter of 2015, including a decrease of 25 percent since the pandemic started. And both these key forms of private-sector investment continue to trend still further downward.  

Russia

• “A War of Attrition: Assessing the Impact of Equipment Shortages on Russian Military Operations in Ukraine”   Center for Strategic and International Studies

• This report examines the impact of Russia’s growing military equipment and ammunition shortages on the Kremlin’s ability to prosecute the war in Ukraine and to carry out operations in other areas. In doing so, it focuses on the availability of artillery ammunition, as well as five weapons categories of central importance for Russia’s ability to sustain operations: tanks, artillery, uncrewed aerial vehicles, electronic warfare systems, and long-range precision strike weapons. 

Americas 

• “Meet the Candidates: Argentina”   Americas Quarterly

  Argentines head the polls on Sunday, August 13th, to vote in presidential primaries.  With inflation raging at historic rates, the stakes are high as the ruling Peronist Unión por la Patria coalition is struggling to retain power and right the nation’s abysmal economic conditions.

• “Latin America could become this century’s commodity superpower”   The Economist

  Latin America is no stranger to supplying the world with raw materials, but it could be on the verge of a boom. Three forces are pushing the region to become this century’s commodity superpower. The green transition is increasing the demand for metals and minerals that Latin America has in large supply, as well as the renewable energy to process them. The region already supplies more than a third of the world’s copper, used in wiring and wind turbines, and half of its silver, a component of solar panels.

• “What Should College Athletes Be Paid?  Market Structure and the NCAA”  Federal Reserve Bank of St. Louis

  This interesting Teachers Guide written by the St. Louis Fed asks: What should college athletes be paid? The debate over the compensation for student-athletes in the US is not new, but recent policy changes and court cases have once again brought the issue to the forefront. This issue looks at how the market structure underlying college athletics has taken this debate all the way to the Supreme Court. 

Charts of the Week 

The U.S. Pandemic Geographic Income Shift  

There has been a lot of talk about the great migration of 2020-2021 because of the Pandemic.  But how did that break down in terms of income shifts?  Axios, looking at a new analysis of tax data from the Economic Innovation Group, shows a surge in incoming that arrived in many rural and exurban cities as well as popular vacation spots.  Big cities were, as we all know, the big losers.  And of those who left, disproportionately, it was those with higher incomes. 

Axios reports that San Francisco’s outbound migration caused a 20 percent drop in adjusted gross income from 2020 to 2021.  In Manhattan, it dropped 13 percent, and in Boston, 11 percent – and overwhelmingly, it was high earners who left.  San Francisco’s leavers had an average taxable income of $240,000. 

The biggest winners in terms of wealth moving in?  Walton County, Florida, in the Florida panhandle, saw a 51.6 percent increase in income per person.  Other places that were big winners; Naples, Florida; Collier County, Florida; and Pitkin County (Aspen), Colorado – all up by 31 percent or more.

Recession or Not? Where Do the Banks Stand? 

As markets debate whether we are headed for a soft economic landing or a recession of some sort is already built in, it is always interesting to see where the major Wall Street investment banks stand.  While it seems to us that overall sentiment is leaning toward no recession, Bloomberg this week offered a scorecard, and surprisingly, most of the big banks are still in the camp a recession is coming.