F1 in Reverse: Drop India/Korea, Add Austria/Russia

Sochi Grand Prix come October: welcome to irredentist F1.

There has been a drive in Formula One to broaden its audience to the developing world. In recent years, the likes of Bahrain, China, India, Malaysia, Turkey, and the United Arab Emirates have been added to the F1 calendar along with Singapore and South Korea. While Brazil remains a long-term fixture, others that have hosted FIA-sanctioned events include Mexico, Morocco and South Africa. Given prevailing demographic trends (populations are still increasing in the developing world) and economic trends (the world's center of economic activity is shifting eastward) you'd expect more races to be held in emerging markets, but not so.

Looking at the 2014 F1 calendar, I thus found it weird that India and South Korea have been dropped simultaneously. Sure F1 honcho Bernie Ecclestone is rather mercurial about scheduling, but still. While India is of course the mother of all growth markets with a population of 1.1 billion-something people, the beef F1 has with it hosting a race has been the traditional Indian "license raj" vice. That is, incomplete reform makes it very hard for foreigners to come and go with ease such as F1 with its platoons of equipment and personnel. [Cue fat customs fees and import taxes.] The outgoing Indian Prime Minister Manmohan Singh has been faulted for pandering to special interests in not opening up the economy. As it turns out, lack of liberalization is also to blame for the F1 circus departing (at least this year):

[F1 impresario Bernie Ecclestone] said the Indian GP promoters have not fully complied with the race contract to put the 2015 race in jeopardy. It now seems that the tax and bureaucratic hurdles cited for the uncertainty over the race returning to the Buddh International Circuit (BIC) were not the only reasons.

Ecclestone's revelation comes days after he said that he wants the race to be pushed to 2016 so that the country "gradually gets over all the bureaucratic and the tax issues to improve the general financial conditions". His statement fuelled speculation whether the race will ever see through the remaining two races of the contract.

Quite frankly, F1 does not particularly care about governance--unless it is being hamstrung by limits on bringing in people and equipment necessary to make the greatest racing show on Earth possible. In this respect, India's inability to accommodate F1 is symptomatic of broader difficulties with liberalization.

After four years of races in South Korea's Yeongam circuit, we must also bid it goodbye. Unlike the Japanese, the Koreans did not take to F1 as attendance was poor and the track was not particularly well-liked by the drivers and teams. So, away it goes:

The poorly-attended Korean race, one of the least popular among Formula One's travelling fraternity, has sustained heavy losses. Organisers, whose race at Yeongam in the far south was due to be moved from Octoberto April, had sought a contract re-negotiation with Ecclestone. 

Now, to the races added to the calendar replacing India and Korea. You must be joking if you consider Austria a "growth market" with its relatively small and not exactly booming population. Money talks, however, and Red Bull--winners of the last four constructors and drivers championships--brought the race back after over a decade in abeyance:

The Austrian Grand Prix is set to return to the Formula 1 calendar in 2014, after Spielberg's owner Red Bull revealed a deal had been struck for a July 6 date. The energy drinks company issued a short statement to Austrian media outlets on Tuesday morning saying that it had concluded negotiations for F1 to return to the circuit.

The former A1 Ring has been renamed--wait for it--the Red Bull Ring. The more things change, the more things stay the same as money talks more than anything else in this most commercially oriented of sports. Lastly, the appearance of Russia on the calendar will do nothing to dispel accusations that F1 favors authoritarian regimes--especially after its extracurricular activities in Ukraine after the Sochi Olympics. Speaking of which, we are beating a path back to Sochi for the race. It turns out Bernie is quite the Putin admirer...

Who do you ask for help if you need to turn a muddy hole in the ground into a futuristic grand prix track? "He's my sort of man," Formula One supremo Bernie Ecclestone says of Russian president Vladimir Putin's influence in the project to stage the nation's first grand prix this October in Sochi.

"He knows what he wants to do and he gets on and does it. I've never had any fear that what he agreed to do wouldn't happen. I think (Russia has) done a first-class job for F1 and a super job for the Olympics," Ecclestone told CNN. It's the kind of ringing endorsement that stands out like an oasis in a desert for a politician much derided for many of his policies by a large swathe of the international community.

But then, the 83-year-old Ecclestone has a reputation for favoring those who he believes can deliver on their promises and thereby aid F1's further expansion. The growth of motorsport's elite division into one of the world's most valuable sport franchises has been built on such relationships and Ecclestone's shrewd 40-year management of them.

So yes, Russia is an emerging market, but no, there is nothing quite so novel about it, really. There is some debate about whether Russia has really arrested its demographic decline, but you have to wonder if there really is an emergent consumerist "middle class" there as opposed to a bunch of state-sponsored oligarchs and everyone else with not much of any spending power. Putin's money talks, but what if the average Russian isn't well off enough to buy ludicrously overpriced F1 paraphernalia? 

Let's just say Russia's place in the F1 calendar is not secure--just as so many other developing countries that have been added and dropped now understand since Bernie's clearly a "what have you done for me lately" sort of chap. The show must go on.

Europe's Refugee Crisis: Made in the USA

Not being in range of MENA emboldens Americans to #$%^ up the region for others to deal with.

How does the saying go... With "friends" like the United States, who needs enemies? American offenses against Europe are countless. In the economic realm, they induced a global financial crisis that subsequently walloped marginal European economies. Meanwhile, in the security realm, they spy on EU leaders remorselessly. However, this security issue--inducing disorder in the Middle East and North Africa (MENA) region, causing refugees to flow into Western Europe in droves--has received less attention.

The Council on Foreign Relations is usually a fine source for international relations-related news. However, I have a quibble this time around with their description of wave after wave of people deserting MENA as a "Europe's migration crisis." To be accurate, it is a refugee crisis caused by political displacement induced by the Americans. Let us go back to 2009 when US President Barack Obama effectively invoked the right to revolt against MENA governments, a "new beginning," that did not live up to expectations:

But I do have an unyielding belief that all people yearn for certain things:  the ability to speak your mind and have a say in how you are governed; confidence in the rule of law and the equal administration of justice; government that is transparent and doesn't steal from the people; the freedom to live as you choose.  These are not just American ideas; they are human rights.  And that is why we will support them everywhere. 

Yippee! America #1 and all that jazz. All this subsequent Arab Spring tomfoolery--Western intervention on behalf of anti-Qaddhafi rebels, continued arming of Syrian rebels by the US and so forth are but continuations of American meddling which famously began with the invasion of Iraq on false pretenses. The difference is that they got the locals to do some of the dirty work, but the disastrous results are the same. Go ask the refugees. Insofar as European countries have played along with the US, it's partly their fault. However, the EU countries most gung-ho about intervening in the affairs of other countries--Great Britain and France--do so from a position of safety, knowing that they aren't on the Mediterranean coast of Europe where these refugees often land:

The EU member states hardest hit by the economic crisis—Greece, Italy, Malta, Cyprus, and Spain—have also served as the main points of entry for migrants and refugees because of their proximity to the Mediterranean Basin. The Eastern Mediterranean route has seen the highest level of irregular migration since 2008. In 2012, 51 percent of migrants (PDF) entering the EU illegally did so via Greece. That shifted in 2013 after Greek authorities enhanced border controls under Operation Aspida (or "Shield"), which included the construction of a barbed-wire fence at the Greek-Turkish border.

Increased Spanish patrols in the waters off western Africa have curbed migration along the Western Mediterranean passage in recent years. However, 2013 saw an uptick in activity along the Strait of Gibraltar, with new reports surfacing of migrants traveling in dinghies to elude detection.

With the resurgent popularity of the Central Mediterranean passage in 2013, Italy and Malta have borne the brunt of the most recent wave of irregular migration. According to Frontex, there were more than 31,000 illegal border crossings along this route during the first nine months of 2013, almost quadruple the number of detections there compared to the same period in 2012. Several major incidents of boats capsizing off the coast of Lampedusa last year, including one in October 2013 that claimed more than 360 lives, garnered global attention and elicited calls from human rights activists, Pope Francis, and policymakers for a united European response to the migration crisis.

And so it is that the US screwed over the "Club Med" countries in both the economic and security realms. First the US-made subprime crisis sunk their already-fragile economies, inducing a credit crisis. Having made them quite hard up, the next step was to shower them with refugees by messing up MENA countries whom they could hardly accommodate financially. 

Following the Pottery Barn principle, two substantial financial transfers are overdue here. First, within the EU, the British and French who meddled in MENA should compensate the Mediterranean countries affected by the destabilization they have wrought elsewhere. Second, the US should also foot the bill for Greece, Italy, Malta, Cyprus and Spain insofar as its dastardly deeds induced people to leave their home countries in MENA. It's the humane thing to do having caused so much misery in that part of the world people are now fleeing in droves.

Where does Obama get this wet-behind-the-ears speechwriters plying all this 'freedom 'n' growth nonsense? The honest truth is that the idiots dumb enough to try it have made their countries worse off--witness the thousands now fleeing them as a result of Made in America busybodying. Make the bastards foot the bill for sticking their noses where they don't belong.

BTW: Bulgaria also needs financial help due to refugee flows from the American-financed Syrian civil war.

IMF's Bad Guys: Quota Reform Without the USA

As any number of blog posts in the IPE Zone will attest, there is no finer pantomime villain than the United States [insert your favorite villain sound effect here]. From inventing reasons to invade other countries to showering the world with death from the skies via drone strikes, it is the country decent people love to hate--and that its own people often loathe. Turning to the economic realm, its offenses against mankind are no less lengthy. Today, let us focus on American indifference to giving poor countries a greater voice at the IMF.

For a long time, the developing world has clamored for a larger role at the IMF commensurate with their growing stature in the world economy. Having contributed much to beefing up IMF resources during the recent (American-sourced) global financial crisis--witness the odd phenomena of poor countries contributing to the bailout of ostensibly "rich" countries such as Greece and Portugal--you would think these poor countries deserved a greater say in IMF governance.Well, tough. In 2011, the Europeans got to appoint the institution's next managing director in Christine Lagarde to replace the rather frisky DSK instead of choosing someone from the developing world to break up the monopoly. Meanwhile, plans to implement IMF reforms that take away voting powers from Europeans and redistributes them to poor countries have been indefinitely delayed by the US.

This package of IMF reforms--increased funding accompanied by greater voting powers for developing countries--was supposed to be done in 2012. Due to American intransigence, however, it has gone nowhere. To his credit, Senate majority leader Harry Reid (D-NV) recently tried to bundle this reform package with Ukraine aid, only for it to be questioned by Republicans in congress. Meanwhile, at the recently-concluded IMF spring meetings, Lagarde (gently) chided the Americans for delaying reforms pretty much everyone else is agreed upon in bolstering resources and redistributing governance:

Both Tharman [Shanmugaratnam of Singapore, chairman of the International Monetary and Financial Committee or IMFC] and Lagarde expressed regret for the continued delay in advancing the IMF quota and governance reforms agreed in 2010. “These reforms to the Fund are not just institutional reforms, they’re reforms that will enable us to have a safer and better world, because the Fund provides critical public goods,” Tharman said.

At the G-20 press conference on April 11, Tharman said that there was “significant goodwill” among ministers to find a way forward on the quota issue and that there was consensus on the absolute importance of maintaining a strong and adequately resourced IMF. “We have a way forward,” said Lagarde, noting that the IMFC set an end-2014 deadline for ratification of the 2010 reforms. If this deadline is not met, the IMF will develop options for next steps.

Considering that the US uses the IMF to fulfill its policy objectives, what reasons are offered for delayed American efforts to finalize the reform package? The average American has no idea whatsoever what the IMF does, while politicians may not fully appreciate the institution's usefulness in pursuing American interests. At any rate, the IMFC also gave the US an ultimatum at the recently-concluded meetings: either the US moves on the matter or the rest will go on without it if nothing is done by year end:

We are deeply disappointed with the continued delay in progressing the IMF quota and governance reforms agreed to in 2010 and the 15^th General Review of Quotas (GRQ) including a new quota formula. We reaffirm the importance of the IMF as a quota-based institution. The implementation of the 2010 reforms remains our highest priority and we urge the United States to ratify these reforms at the earliest opportunity. We are committed to maintaining a strong and adequately resourced IMF. If the 2010 reforms are not ratified by year-end, we will call on the IMF to build on its existing work and develop options for next steps and we will schedule a discussion of these options.

Meanwhile, here is a laundry list of excuses for US delays:

The U.S. Congress has refused to sign off on the overhaul, which was agreed to in 2010...Some Republicans have complained the changes would cost too much at a time Washington was running big budget deficits. The reforms also ran afoul of a growing isolationist trend among the party's influential Tea Party wing. If Washington does not ratify the reforms this year, the G20 advanced and emerging economies said they would ask the IMF to develop possible next steps. 

A source said Brazil had pushed for a harder line. It wanted to require the Fund to begin work now to determine options to be implemented if the United States failed to act, a notion that was floated in an early draft of the communiqué. "The end of the year for me is the final limit," Guido Mantega, the Brazilian finance minister, said later through a translator. "Four years waiting for me is just too much."

How to "move forward" is complicated by the IMF requiring at least 85% of all shareholders to agree on something, i.e. taking steps without the US. However, the US currently has 17 point something-something shares, enabling it to veto any such move in theory. Surprisingly, some of those calling for the IMF to move on without the US are the folks over at the (Washington-based) Institute for International Economics. I guess "America Sucks"  is a broader church than I thought...

The time has come to think the unthinkable: The Fund should move ahead without the United States. If the United States does not want to participate in reforming the IMF, it should get out of the way...we propose two ways for the Fund to move ahead by raising funds from others while depriving the United States of some or all of its longstanding power to block major Fund actions.

One way would be to make permanent the 2012 initiative by IMF managing director Christine Lagarde to arrange temporary bilateral credit lines of nearly $500 billion from 38 countries, augmenting the Fund's capability to finance its lending [and in so doing reduce the United States' quota shares below 15% by regularizing the New Arrangements to Borrow without US contributions]. The United States opposed that proposal, but the IMF and other countries could convert it into a permanent arrangement, placing decision making in the hands of the funding countries, not the United States.

A more radical approach would be to increase total country quota subscriptions in a manner that would also not allow the United States on its own to stop the Fund from reforming its governance. The United States deserves to lose influence if it continues to fail to lead. Washington obviously should not withdraw from the IMF. But its historic leadership role deserves to decline unless the Congress reverses itself. It should let the rest of the world pick up the reins and move ahead if they are prepared to do so.

IIE lays out more details in a blog post for getting around the 85% requirement. I have included the table above comparing current and proposed quota shares. The curious thing is that the US would still retain its effective veto power (over 15% of shares) after the reforms. Yet, it chooses to risk falling below that mark by not moving on the matter while the rest of us do. The political calculations are fascinating: perhaps the US is counting on Lagarde not going that far in terminating the United States "first among equals" status? Like Darth Vader flinging the Emperor into the abyss at the cost of his own [political] survival, perhaps even she can be brought to her senses.

An Interview with Mark Gertler

Words of wisdom from the NYU macroeconomist.

Foxconn's Terry Gou & OEM's Global Pecking Order

Designed in the US, manufacturing logistics determined in Taiwan, made in China.

Actually, the post's title is a bit inaccurate insofar as all except two of the world's top electronics contract manufacturers--otherwise known as original equipment manufacturers (OEM)--are Taiwanese in origin. Both Flextronics (which makes XBox One among other things) and Jabil have American roots, but the rest hail from Formosa. Something they all share, though, is that they have been among the biggest winners from setting up shop manufacturing electronics in the PRC. The global value chain is eerily familiar regardless of the OEM concern in question: Some Western firm comes up with new designs--say, a tablet or smartphone that rotates images together with screen orientation--and then these OEM manufacturers devise ways of producing such designs on a large scale. Once they figure out how to efficiently manufacture these widgets, the grunt work of assembling and finishing them is then transferred to China.

In the value-added chain, then, Taiwanese occupy the middle position. They don't quite harvest the largest profits like Apple does by virtue of having a commercial monopoly on a globally recognized brand name. At the same time, they aren't just stuck with the grunt work either which is Chinese manufacturing, Rather, they represent fairly sophisticated middlemen who are able to translate others' designs into production on a large scale together with distribution to key consumer markets such as North America. Their place in global value chain governance is thus modular or relational in that they are able to deal with complex transactions given their formidable and expanding capabilities as suppliers. According to Terry Gou (founder and chairman of Foxconn - Hon Hai Precision, the world's largest OEM concern):

Our company grew from being a mere EMS (electronics manufacturing service) provider, or assembler, quite a while ago. Today we do upstream processes for our customers. For instance, we provide BlackBerry with IIDM (innovative integrated design manufacture) services, in which we take over from the product planning. We also work with the Canadian company in sales in Asia as well as customer support. We make our own smartphones under the InFocus brand by engaging in all stages, from planning to sales, and this helps to bolster our IIDM service.

There are some questions here, though. For one, wouldn't the likes of Foxconn want to take the next step in the supply chain and be the next Apple instead of just making stuff for them? Terry Gou rightly points out that there are very few name brands that have made it globally--readers of a certain age will remember consumer electronics forays by Nixdorf and Olivetti--both of whom now just display those wares in museums. By leaving marketing challenges to those brave enough to take risks, Foxconn remains in a safe position insofar as many of them will have their products made on an OEM basis anyway. In other words brands will come and go, but the (Taiwanese) folks who actually make these things remain the same:

Foxconn aspires to become a high-tech service company for the information age. We do not have to be a brand name. The business results of brand companies justify that. Except for a handful of them, these companies haven't generated sizable profits.

In the information age, a long-established brand can't necessarily retain consumer trust and adoration. Tesla Motors of the U.S. is a case in point. Its history is far shorter than that of Toyota Motor, or Germany's Daimler and Porsche. Nevertheless, Tesla cars are gaining popularity against those brand automakers at bay area. I myself own two Teslas. The vehicles offer a totally new driving experience.

Quibble if you will with his business practices, but few would doubt that Terry Gou knows what direction to take his business in. He is obviously a smart guy, and the other Taiwanese aren't too far behind. BTW, kudos to Nikkei Asian Review for another fine article with this interview. It is becoming a go-to source for Asian business news.

Is Malaysia Airlines Flying Towards Another Bailout?

"Please fasten your safety belts...we are encountering financial turbulence."

Make no mistake: prior to the MH 370 disappearance, Malaysia Airlines had a sterling safety record and a reputation for fine service. Now that the former has been placed in question especially in the court of public opinion, its less-obvious challenges have been put in the international spotlight. Before, it was mostly followers of Asian political economy that were interested in its performance like yours truly, together with other Malaysian state-owned enterprises. With an long-established blog like this one by Internet standards, there is nowhere to hide as the archives show.

Among countries in our region, Southeast Asia, Malaysia has been one of the firmest believers in state control over the commanding heights of the economy. Although few outside the region keep close tabs on Malaysian SOEs, there is actually quite a lively domestic debate surrounding them. Witness a blog solely dedicated to finding management solutions [!] for this airline such as full privatization. Like many Western national carriers that have been hurt by the introduction of low-cost carriers--Southwest Airlines in the US as well as (Greece's) EasyJet and (Ireland's) Ryanair in Europe--Malaysia Airlines has been taking it on the chin with the arrival of Kuala Lumpur-based AirAsia in 2001. There was actually an arrangement struck a few years ago for the successful budget carrier to help streamline Malaysia Airlines. However, special interests--namely, its bloated payroll--complained loudly and effectively scuttled the deal. To read more from the labor's perspective, refer to yet another blog run by "Malaysia Airlines Families."

So special interests with considerable leverage on the government kept the airline in public hands when disaster struck. With industry conditions being unpromising with the exception of, say, Middle Eastern carriers, Malaysia Airlines may be headed for another bailout. It has lost money more often than not during recent years. First, the challenging operational situation.

In the fiscal year through December 2013, it posted a net loss of 1.17 billion ringgit ($356 million), although passenger numbers increased by almost 30% and sales grew by around 10% from the previous year. According to a source close to the airline, the loss is largely attributable to discount marketing that did not take costs into account. With its operating cash flow in the red for three straight years, the company has little chance of earning a profit from its mainline airline operation...

The airline has recorded losses since the Asian currency crisis in 1997, and the company has been trying to restructure its operations for the last 15 years through a continuous pumping in of government money in the form of capital injection and low-interest loans. CEO Ahmad Jauhari Yahya previously said that the company aimed to generate a profit by fiscal 2014, but the market is largely of the opinion that the disappearance of Flight 370 has erased this hope.

Next, we move to "legacy" costs such as overstaffing for vote-winning reasons added to the aforementioned rise of AirAsia that is providing stiff competition, especially over domestic routes:

There are two underlying factors squeezing the company: increasingly tough competition with budget carriers and the difficulty of streamlining a state-owned company. Malaysia-based AirAsia was founded in 2001 and has almost doubled its sales in the last five years. Its success is down to its ability to offer ultracheap fares, about half what Malaysia Airlines charges. AirAsia has also lured domestic passengers from its state-run rival by increasing the number of flights between local cities.

As for cost-consciousness, the national airline has not streamlined its payroll in recent years, retaining around 20,000 employees. Its largest shareholder is Khazanah Nasional, a government investment fund. Employees of state-owned enterprises are valuable voters for the ruling party, which is increasingly losing support. The government must also listen to the voice of labor unions.

 Malaysia Airlines received a capital injection from AirAsia in the summer of 2011 and tried to apply its rival's low-cost know-how to its own operations. However, it had to scrap the capital alliance due to protests from labor unions in May 2012. In 2013, Mahathir bin Mohamad, former Malaysian prime minister, suggested that the company reduce costs through privatization, but labor unions opposed the suggestion, forcing current Prime Minister Najib Razak to reject the proposal.

The current stalemate suggests that if operating conditions do not improve, Malaysia will have to again bail out the airline like it did in 2001 when it was renationalized the carrier. I guess some things never change since state managers were too chicken to rationalize labor force size even then.

UPDATE: The WSJ has a similar feature which came later on Malaysia Air's plight.

Very Sad News

A friend at the University of Chicago reports to me that Gary Becker died last night.  He was 83.

Gary was one of the greatest economists of the past half century. You can read about his contributions here.  I did not know him well, but based on every interaction I had with him, it seems that he was a truly nice man as well as a path-breaking scholar.  He will be missed.

Update: The Times obituary.