The Market Process in Action
A quick scan of any newspaper suggests that high fuel prices have disrupted our daily affairs. While politicians and pundits across the political spectrum are fretting about the need for a national energy policy, wringing their hands about the apparent un-American-ness of our dependence on foreign oil, and worrying that the massive run-up in gas prices in recent months will lead to an economic downturn, market forces are quietly adjusting so as to soften the blow and solve the problems that arise.
In a market economy, profits and losses are the signals that tell entrepreneurs whether they are choosing wisely or choosing poorly in their undertakings. Profits and losses also tell entrepreneurs how to adjust these undertakings to ever-changing conditions. The changes Toyota is making to its car and truck lineup illustrate this important principle.
When you do a lot of driving, $4 gas eats up a pretty big chunk of your disposable income and requires a few adjustments to the way you live. So how does the market coordinate these changes? Toyota is responding in a predictable fashion: their plant in Blue Springs, Mississippi (which is under construction) will produce the gas-sipping hybrid Prius, not gas-guzzling SUVs. They are also going to consolidate their truck production operations in their San Antonio plant. Paraphrasing an analyst quoted in the July 11 Memphis Commercial Appeal, no one, not even Toyota, is immune from the pressure of gas prices hovering at or above $4 per gallon.
The myriad adjustments to expensive gas show us how market processes change our activities and behavior. We use less of some things and more of others, and we innovate. In more concrete terms, we drive less and walk more, and we invest in alternative sources of energy. Perhaps we telecommute instead of driving to the office. The number of venture capital firms focusing on alternative energy sources has increased rapidly in the last few years, and blueprints for do-it-yourself solar iPod chargers, solar lawnmowers, and other solar technologies are all over the Internet. Some students at my institution made a solar iPod charger as part of a year-end project this past semester. The list of innovative responses to high gas prices goes on and on.
Some of these ideas will work well and some will not. It is not the specific technologies and ideas that are important; rather, it is the process that matters. Some ideas will work and others will fail; it is the profit-and-loss mechanism of the market process that helps us separate the good ideas from the bad. Scholars like F.A. Hayek have referred to "competition as a discovery procedure," and in an article that appeared in the Business and Society Review in 2006, Walter Block, Stephen W. Carson, and I referred to the market as a "discovery process." Competition in the market economy separates the good ideas from the not-so-good and helps us economize on scarce resources. We cannot predict which technologies will emerge or how problems will be solved, but we can understand the institutional conditions under which this process will emerge.
Toyota's decision to consolidate truck production in San Antonio and to produce the Prius in Blue Springs is one way to adjust to higher gas prices. Whether this is a wise choice or not will be determined over time. Toyota announced the changes on Thursday. The stock ticked upward slightly and then back down again the day after, suggesting that we can't draw too much information about how the market is assessing the move right now. The market, though, is a process by which information about successes and failures will be revealed.
"The market" is not an outcome, nor is it an end unto itself. Rather, the market is a process by which people discover effective (and not so effective) ways to satisfy our needs and wants. Entrepreneurship is essential; this consists of appraising the factors of production in the market and undertaking new production plans based on the expectation that such an endeavor will be profitable. Those who choose wisely are rewarded with profits. Those who choose poorly are punished with losses.
Toyota did not need to follow the diktat of a centralized bureau of automobile construction and distribution. They made their decision based on their expectations of the future structure of prices for inputs and outputs, complements and substitutes. They decided that their resources were better spent improving and building hybrids rather than larger vehicles. Money talks, and firms have to listen.
Even a large concern like Toyota has to yield to the wants and wishes of consumers. Consumers are the ones who pay the piper and are therefore the ones who call the tune. As gas gets more expensive, people want to purchase smaller, more fuel-efficient vehicles. Any company that wishes to remain profitable must listen and respond, and any company that refuses to listen to consumers does so at its peril.
Make Ourselves Miserable Now
The local Swiss press carried a summary of a report compiled by a panel of so-called "experts" of the Swiss Academy of Engineering Science (SATW) under the startling rubric that motor gasoline "should" henceforth be priced, by fiat, at no less than four francs per liter — roughly double the current market price and representing what, to an American, must seem like the eye-watering equivalent of around $14 a gallon.
The reason given by these cloistered killjoys for recommending such a brutal curtailment of people's material well-being? Nothing less than the incredibly convoluted one that since — in their lofty estimation — Swiss demand for petrol will inevitably outstrip the available supply sometime in the next two decades, it is better to anticipate the resultant economic stress by "discouraging" consumption now, rather than to allow such a painful (if utterly hypothetical) disappointment to be postponed until later.
Presumably, on this basis, in order to lessen the chance he might run over a cliff during the next mass migration, we should prevail upon the prudent lemming to fling himself out of a skyscraper window today.
Nor is this the only instance of such right-on rhetoric to emanate from a Swiss officialdom clearly at odds with the solid, Bürgerlich level-headedness which typifies a nation whose engineering talents and entrepreneurial skills have long allowed them to flourish in a tiny land, hemmed in by sterile, icy peaks and endowed with all too few natural resources to support them in any sort of comfort.
No, far from regarding the achievement of their fellow citizens as a matter for well-merited praise, the governmental authors in Bern sourly condemn it as an act of despoliation and robbery. Certainly, one can put no other construction on the following, highly patronizing passage, taken straight from the pages of the official statistical yearbook for 2008:
Switzerland's ecological footprint is three times as great as its biocapacity… The ecological footprint expresses consumption in terms of how much surface area (in global hectares) is required to sustain this consumption. It shows whether and to what extent our use of natural resources exceeds the regenerative capacities of the biosphere…
When consumption exceeds our biocapacity, natural resources at home become depleted or have to be imported from other countries. In such cases, we end up living at the expense of other regions of the planet or of future generations.
Several pages of argument could be spent dispelling the woeful economic ignorance being expressed here about such basic matters as supply, demand, opportunity costs, and price signaling, but let us limit ourselves to one simple observation that seems to have escaped our earnestly-PC engineers and bureaucrats: though we all routinely suffer wants that far exceed our means to satisfy them, most of us have reluctantly come to accept that it is our earthly lot to have to forego some delights in order to sample a range of others — an epiphany we reached somewhere between becoming fully toilet trained and realizing that Santa Claus was only a figment of a toy salesman's fertile imagination.
Even if there is any validity to the "Peak Oil" scare (a rather large hypothetical, in this author's estimation), the Swiss — just as all other peoples — will adapt much more readily through allowing what we call the I²E²S² process (Innovation, Economization and Substitution, leading to Investment guided by Entrepreneurialism and fueled with Savings) to percolate through the free market than by means of anything policy wonks and political wastrels may dream up, respectively, in their ivory towers and smoke-filled rooms.
It is critically important, moreover, to recognize such an instance of "fatal conceit" as being all too characteristic of those who pander to the modern day danse macabre of exhaustionism and collectivist penury which so infuses both the anti-humanist Greens and the rent-grubbing business types who hypocritically seek to line their pockets by pandering to these latter-day Savonarolas.
For example, far across the Atlantic, a truly sinister cabal seems to have been hatched between the Republican "Swift Boat," corporate raider-turned-windmill wannabe, T. Boone Pickens; the Democrat serial fantasist and climate alarmist, Al Gore; and the One World–elitist media mogul, Ted Turner — this unholy trinity setting aside their supposed ideological differences for no higher purpose than to be better able to shear the flock of credulous sheep they have frightened with their intertwined tales of killer storms, melting ice sheets, and maniacal terrorist oil sheikhs.
One is tempted to ask whether old man Noah also managed to cow an ill-informed citizenry into subsidizing his little floating zoo, or whether the Ark — which would deliver the fruits of the Earth to him and his seed alone — was already disporting the misleadingly cute-panda motif of the genocidally aspirant theme park owners of the WWF at its masthead.
But though all this seems so frightfully contemporary and in tune with the suburban Gaian's zeitgeist, the despairing tyranny of inefficient ersatz, the drive to autarky, and the quest for Lebensraum that lies beneath it possess a very dark precedent, indeed.
To see this, we must first recognize that the serpent tongue of propaganda employs a different semiotics today.
Thus, "ersatz" is dressed up in the clothes of "alternative energy" and "sustainable technology" while "autarky" translates into such concepts as low "food miles" and reduced "carbon footprints." In turn, the same old Malthusian fears that there are not enough natural resources to go round have been inverted from justifying an outward drive to win precious living space through armed conquest to the promotion of population control measures aimed at reducing the "cancerous" impact of man, the "pest species" on our "fevered" mother planet instead.
Already, our use of the older phrases may have alerted the reader to their provenance, but, to show that more than a pat generalization is involved, let us quote a few specifics from Adam Tooze's magisterial study of Nazi economics, The Wages of Destruction, by way of corroboration.
Though undoubtedly a genius of industrial chemistry, as Tooze relates, it was Carl Bosch's ineffably modern fixation that the world was on the brink of "Peak Oil" no less than eighty years ago which led directly to the devil's bargain sealed between his sprawling conglomerate, IG Farben, and the incoming Hitler regime:
[I]n 1928, at its Leuna facility … IG Farben embarked on the construction of the world's first facility for coal hydrogenation, the alchemical process through which coal was transformed into petrol… The RM330 million investment … would pay off when the oil wells ran dry and fuel prices rocketed.
Sadly for Bosch, that same prospect of an imminent shortage inspired a wave of entrepreneurialism which resulted in major new oilfield developments in Venezuela, California, Oklahoma, and the Permian Basin of Texas, culminating in the discovery of the famous "Black Giant," late in 1930 — and hence to a glutted world market.
For Carl Bosch this was clearly a severe setback, but IG could certainly have retreated from hydrogenation. Losses of a few hundred million would not have broken the company. Such a retreat would, however, have run completely counter to Carl Bosch's vision of the firm, which now depended on the willingness of the German government to impose high taxes on imported oil.
One cannot fail to be struck by the similarities not just with Pickens and his cynically populist campaign for wind energy, or with Gore and his multibillion-dollar "eco" hedge fund, but also with today's avid subsidy grubbers among the advocates of solar power and the members of the vast biofuel lobby who have found a novel way of penalizing plain, hard-working consumers of cereals, and oilseeds in order to feather the luxurious nests of the Midwestern agribarons.
Nor do the parallels end there, because, in the 1930s, having once started down this route, both parties became hopelessly wedded to the need to keep fuel prices artificially elevated at what were, by a neat coincidence with the SATW's latest ideas, roughly double world prices.
This imperative — which provided corporate welfare to Bosch while raising revenues for the Reich — forged a tangled chain of unintended consequences, as all such "initiatives" de haut en bas tend to do. Not least was that it was later to have a disastrous impact on Hitler's ambition to emulate the accomplishments of "Fordism" by providing an affordable car for every German household.
A triumph of enduring engineering design Ferdinand Porsche's Volkswagen "Beetle" may well have been, but because petrol was so unnecessarily expensive, ways had to be found to reduce the capital cost of the car itself, so that the total running cost could fit within the meager budget of the average family. The resonance with current proposals to offer a range of tax breaks and state subsidies for the production of hybrid cars is just too striking to ignore.
Finding the talismanic ceiling of 1,000 Reichsmarks per car impossible to achieve in a purely commercial setting (Porsche's brainchild was, in fact, no less pricey than Opel's cheapest existing model), production of the vehicle was soon entrusted to a plant to be specially built using the captive funds that had originally been donated to the now-proscribed trade-union movement and supplemented by an ongoing compulsory levy on all German manual workers.
Plagued by the cost overruns that are inevitable in a closed society, over-reliant on home-produced goods and already straining to afford its mountainous rearmament program, the responsible entity, the Deutsche Arbeitsfront, further tried to finance itself by offering its members an installment savings plan, backed up with a sizeable, mandatory subscription to a two-year insurance policy on the vehicle, payable by its would-be owners.
Although some 340,000 trusting souls eventually signed up to the scheme, the schedule slipped further and further into arrears and the hidden losses continued to mount.
Ultimately, despite all the podium posturing and hysterical flag-waving, not one single VW was ever delivered to a member of the German public. The half-finished factory was eventually converted to military use and the 275 million Reichsmarks in savings so arduously scraped together fell victim to the horrendous postwar inflation.
All this should warn us to be on our guard when we hear the honeyed words of today's politicians and the blandishments of their corporatist allies when they twist the commendable desire to avoid the wanton destruction of our environment into an instrument of imperial expansion, state control, and undue self-enrichment.
Nor should we allow ourselves to be browbeaten by the IPCC carbophobes when they use dubious science and worse economics to make us believe that the entire planet is in imminent danger of a cataclysmic collapse unless we ordinary folk (though, naturally, not the cosseted members of the Green Sanhedrin itself) give up all hope of a better standard of living.
More emphatically, we should reject all suggestions that, in the Canute-like arrogance that they can somehow prevent this faux millennium, the central planners will offer a route not only to earthly salvation, but also to faster economic growth and greater material prosperity as we forcibly struggle to overcome the handicaps they seek to impose upon us. If every adult male has his right leg amputated by order of the state, the fact that more artificial limbs will then come to be sold is not exactly a mark of progress.
To fortify our resolve to resist such insidious schemes, we might also do well to think upon the sorry fate of a previous people who, having lost their faith in free exchange and the international division of labor amid a tempest of monetary insanity, became converted instead to a messianic vision of impending scarcity and unavoidable strife — and brought the wrath of heaven down upon their heads as a result.
Democrats turn to foreign policy
 Mr Clinton's speech is keenly awaited by convention delegates |
The US Democratic convention in Denver, Colorado, is to turn its focus on foreign policy and security with speeches by Joe Biden and Bill Clinton.
Senator Biden, Barack Obama's chosen running-mate for the presidential race, is to deliver the keynote speech.
Former President Clinton is to take to the stage a day after his wife Hillary, Mr Obama's defeated rival for the race.
Mrs Clinton called on Democrats to unite behind Mr Obama, saying she was his "proud supporter".
Foreign policy is seen by some observers as not being Mr Obama's strong point.
However, according to the Democratic National Convention website, Mr Obama "offers a new, tough foreign policy that is neither Republican nor Democratic, but is a strong, smart American foreign policy".
 |   She is the quintessential steely politician now - nothing that has happened to her since New Hampshire (including losing!) has done her anything but good  BBC North America editor Justin Webb, on Hillary Clinton  |
Mr Biden is a veteran foreign policy expert chosen by Barack Obama as his running mate partly on account of his experience.
Mr Clinton is expected to launch attacks on Mr Obama's Republican rival for the presidency, John McCain, and on the Bush administration, particularly on the state of the US economy.
His speech will be closely scrutinised for signs of lingering resentment over the bruising primary Democratic campaign, which ended in defeat for his wife, correspondents say.
'Unite'
| CONVENTION AGENDA Wednesday: Speeches by Bill Clinton and Joe Biden; vote to confirm Barack Obama as party's candidate Thursday: Barack Obama to accept nomination with speech in stadium |
Speaking at the party's nominating convention on Tuesday, Mrs Clinton said the Democrats could not afford to lose to the Republicans:
"Whether you voted for me or voted for Barack, the time is now to unite as a single party with a single purpose."
The roll-call vote, in which delegates will have the chance to vote for either Mr Obama and Mrs Clinton as the party's nominee, also takes place on Wednesday.
Mr Obama will join the convention shortly, having spent the first part of the week campaigning in battleground states.
He is to formally accept the party's nomination on Thursday night for the election on 4 November.UK urges tough response to Russia
 Mr Miliband said Russia's declaration had inflamed an already tense situation |
UK Foreign Secretary David Miliband has called on the EU and Nato to initiate "hard-headed engagement" with Russia in response to its actions in Georgia.
In a speech in Ukraine's capital, Kiev, he urged them to bolster their allies, re-balance the energy relationship with Russia and defend international law.
Mr Miliband also warned the Russian president not to start a new Cold War.
His visit came a day after Dmitry Medvedev recognised the independence of Georgia's two breakaway regions.
Earlier, Ukraine's president said it was a hostage in a war waged by Russia against countries in the old Soviet bloc.
| The most important thing was to prevent a humanitarian catastrophe Russian President Dmitry Medvedev |
Victor Yushchenko told Mr Miliband that the brief conflict between Georgia and Russia earlier this month had exposed serious weaknesses in the powers of the UN and other international bodies.
He called for Ukraine's defences to be strengthened and said his country would consider increasing the amount of money Russia pays for the lease of the port of Sevastopol, where it stations its Black Sea Fleet.
Fighting between Russia and Georgia began on 7 August after the Georgian military tried to retake its Russian-backed breakaway province of South Ossetia by force.
Russian forces subsequently launched a counter-attack and the conflict ended with the ejection of Georgian troops from both South Ossetia and Abkhazia and an EU-brokered ceasefire.
Russia 'unreconciled'
After holding talks with President Yushchenko, Mr Miliband told a group of students in Kiev that the Georgia crisis had "provided a rude awakening".
|  The Russian president says he is not afraid of a new Cold War... He has a big responsibility not to start one David Miliband UK Foreign Secretary |
Mr Miliband said Moscow's "unilateral attempt to redraw the map marks a moment of real significance".
The Russian president, he said, had a "big responsibility not to start" a new Cold War.
The foreign secretary said the response of the EU and Nato to such "aggression" should be one of "hard-headed engagement".
"That means bolstering our allies, rebalancing the energy relationship with Russia, defending the rules of international institutions, and renewing efforts to tackle 'unresolved conflicts'," he explained.
Mr Miliband again rejected calls for Russia to be expelled from the G8, but did suggest the EU and Nato needed to review relations with it.
He also reiterated the British government's support for Ukraine's application for full Nato membership.
European warnings
China has meanwhile expressed "concern" for the first time about developments over South Ossetia and Abkhazia, and urged dialogue.
| SOUTH OSSETIA & ABKHAZIA  South Ossetia Population: About 70,000 (before recent conflict) Capital: Tskhinvali President: Eduard Kokoity Abkhazia Population: About 250,000 (2003) Capital: Sukhumi President: Sergei Bagapsh |
The comments came as the Chinese leader, Hu Jintao, met President Medvedev in Tajikistan ahead of a regional summit.
In other developments
- Georgia moved to reduce its diplomatic presence in Moscow, confirming its ambassador would not return
- German Chancellor Angela Merkel said the continued presence of Russian forces in Georgia proper was a grave ceasefire violation. She also agreed to send up to 15 military observers to Georgia as part of an expanded OSCE mission
- Russian Foreign Minister Sergei Lavrov said Moscow would support the presence of more international monitors in the buffer zones
- French President Nicolas Sarkozy said any settlement had to be based on international law, dialogue and respect for Georgia's territorial integrity
Preventing 'catastrophe'
On Tuesday, Russian President Dmitry Medvedev said Moscow had been obliged to recognise the independence of South Ossetia and Abkhazia following the "genocide" started by Georgian President Mikhail Saakashvili in South Ossetia in August.
Russia Is Brazen, Europe Weak
The future of Russia's excursion in Georgia remains to be determined. But some conclusions can already be drawn:
- Russian power is extraordinarily brutal in the post-Soviet era, as we have already seen in Chechnya. This brutality has been confirmed -- although on a smaller scale -- in the spectacle of the Russian army occupying a sovereign country, moving through it as it pleases, advancing and retreating at will, and casually destroying the military and civilian infrastructures of a young democracy as an astonished world watches. Today it is Georgia. Tomorrow will it be Ukraine? Or, in the name of the same solidarity with the supposedly persecuted Russian-speaking populations, will it be the Baltic countries? Or Poland?
- The new Russia is indifferent to international protests, admonishments and warnings. The Cold War had its rules, its codes. It was a time when signs were carefully deciphered. There was a kind of half-warrior, half-pacifist hermeneutics in play, during which we spent our time reacting to what philosopher Michel Serres called "the signal fires and foghorns" of the adversary. In this new-look Cold War, there are no more signals. No more codes. Instead, Russia offers a permanently obscene gesture to "messages" we know will have absolutely no effect. Was it not at the same moment Condoleezza Rice was in Tbilisi that Vladimir Putin, with a cynicism and aplomb that would have been unthinkable in yesterday's world, chose to advance his troops as far as Kaspi, only 30 kilometers from the capital?
- Russia has no shame when it comes to twisting principles and ideals. It brandishes the "precedent" of Kosovo -- as if there could be anything in common between the case of a Serbian province hounded, battered and broken by ethnic purification which lasted for decades, and the situation of Ossetia, victim of a "genocide" that, according to the latest news (a report by Human Rights Watch) consists of 47 deaths. And look how they turn to their profit -- as well as that of the same Russian-speaking minorities they want to bring back into the bosom of the Empire -- the argument of the "duty to intervene" that might justify the exactions, in Gori and elsewhere, of the Russian army and its militias. This is a fine, grand principle dear to the French foreign minister and a few others. How daring! Well, Mr. Putin dared, Mr. Putin thought about it and did it.
- European -- and in this instance French -- diplomacy is weak. We expect a great democracy to condemn and sanction the aggressor, without nuance. But in effect the opposite was done. The party that was attacked was the one sanctioned. The weak, not the strong, was made to yield. Just as 15 years ago in Dayton, Bosnian leader Alija Izetbegovic was forced to sign, with a heavy heart, the agreement laying out the dismemberment of his country. Mikheil Saakhashvili, the Georgian president, was also forced to ratify a document that the Russians speak of as the "Medvedev document." Not a word in it mentions the territorial integrity of the country.
Then there are the famous "additional security clauses" acknowledging the Russian army's right to be stationed there and to patrol, as scandalous in principle as they are vague in their modalities of application. Has the world turned upside down? This must be a dream.
- Western public opinion fell with disconcerting facility for the thesis advanced -- from the very first day -- by the Kremlin's propaganda machine. We know now that the Russian army had been hard at work on its war preparations since before Aug. 8. We know that it massed at the "border" between Georgia and Ossetia a considerable military and paramilitary logistical presence. We know the Russians had methodically repaired the railroad tracks that the troop-transport trains were to take, and we know that at least 150 tanks went through the Roky tunnel separating the two Ossetias the morning of Aug. 8. In other words, no one can ignore the fact that President Saakhashvili only decided to act when he no longer had a choice, and war had already come. In spite of this accumulation of facts that should have been blindingly obvious to all scrupulous, good-faith observers, many in the media rushed as one man toward the thesis of the Georgians as instigators, as irresponsible provocateurs of the war.
We must re-examine all of this. We must analyze in greater depth the mechanisms of a blindness that may, if we are not careful, perpetuate the Western "decline in courage" denounced in his time by Alexander Solzhenitsyn, but which we thought belonged to the past. Reason, if not honor, demands that we go to the rescue of Europe in Tbilisi.
Mr. Lévy's new book, "Left in Dark Times: A Stand Against The New Barbarism," will be published next month by Random House. This piece was translated from the French by Sara Sugihara.
Ended revels
The Olympics will not change China’s behaviour
JOURNALISTS moaned about China’s internet controls and thuggish police. Human-rights groups complained that it broke promises to allow protests. Spectators and residents alike grumbled about tight security and visa restrictions that kept people away from Beijing. But the Olympics earned more than enough praise to bolster China’s confidence in its ability to impress the world.
From the world’s biggest airport terminal, where the athletes and visitors arrived, to the colossal new “bird’s nest” stadium and the lavish opening and closing ceremonies involving thousands of costumed soldiers drilled to perfection, China wanted to inspire awe, and leave visitors and viewers alike impressed by the country’s grandeur, immensity and a national will to succeed.
Back to normal?Few would dispute that this goal was achieved. President George Bush and dozens of other world leaders showed up. Beijing’s perennial smog lifted for at least a few days. And breaking the hold that America and Russia (or the Soviet Union) had long enjoyed on the top gold-medal position allowed China’s pride to glow even brighter. As Chinese leaders see it, the Olympics could hardly have gone better.
But will a proud and confident China interact with the world any differently? Diplomats have long complained about a “victim mentality” among Chinese bureaucrats that dwells on China’s sufferings at the hands of foreign powers before the Communist takeover in 1949, and perceived attempts by the West to impede its rise today. The games should have helped to change this. The decision by Mr Bush, Britain’s Gordon Brown and even France’s President Nicolas Sarkozy to attend (Mr Sarkozy having hinted at a possible boycott over Tibet) demonstrated that no major power was prepared to risk annoying China.
Ardent nationalists in China may be temporarily quieted by the medals and the praise (even if ambiguously couched in the case of the statement by Jacques Rogge, the International Olympic Committee’s president, who described the Beijing games as “truly exceptional”). But China’s leadership is unlikely to abandon its rhetoric of victimhood, which it sees as a useful way of bolstering its legitimacy.
For foreign consumption no reference was made to Mao Zedong or the party at the Olympic ceremonies, despite their heavy emphasis on China’s achievements. But the party still promotes itself to a domestic audience as the organisation that helped China “stand up” after decades of subjugation.
In the buildup to the games China tweaked its foreign policy behaviour. It tried to seem more engaged in helping to resolve the conflict in Darfur. It suggested democracy might be a good thing for Myanmar. One reason for these gestures was probably a concern that international criticism of China’s attitude towards human rights in Myanmar and Sudan might overshadow the Olympics. More important is a growing belief by Chinese diplomats (regardless of the games) that as a big power China cannot entirely ignore such crises. But it continues to resist much more than token efforts. The Communists fear that prodding a country like Myanmar provides a precedent for prodding China, and the party is not confident enough to risk that.
In the coming months, China will likely turn inward. It has much soul-searching to do over recent domestic crises such as upheaval in Tibet, militancy in Xinjiang and a deadly earthquake in Sichuan. It worries about balancing a growing economy with the need to control inflation. China is unlikely to behave like a self-assured power globally unless it feels stable internally. The ban on protests and lavish security precautions during the Olympics showed how vulnerable the party still feels itself to be.
China’s stockmarket
In the bird’s-nest soup
Chinese shares enjoy a brief moment of respite
INVESTORS had long ago seen their hopes dashed of a pre-Olympic boom in China’s stockmarket. Indeed, among the shares hardest hit this summer were those that unscrupulous brokers had touted as sure-fire winners from the games: restaurants selling Peking duck, hotels, and the like. But after a sudden 8% gain on August 20th, an even more tantalising idea emerged: could they benefit from a post-Olympic bounce?
A number of foreign fund managers have begun poking around the market, impressed by the valuations. Even after this week’s rally, stocks were trading at 14 times 2008 earnings—not a steal, but still far cheaper than the 40 times earnings at which they traded at their 2007 peak.
The catalyst for this week’s rally was a pervasive rumour that often crops up when sentiment becomes too jaded: government intervention, either to prop up the market or the economy. One of the cheerleaders, Frank Gong, JPMorgan’s chief economist in Asia, said China’s top officials were “carefully considering” an economic-stimulus package of 200-400 billion yuan ($29 billion-58 billion), or about 1-1.5% of GDP. There was also talk of repatriating some Chinese money that had been tied up in American dollar assets, including Fannie Mae and Freddie Mac, the troubled mortgage agencies; of reinstating rebates for exporters; and of rolling back appreciation of the yuan. Among the stocks that rose strongly were Baosteel, China Railway, and some beleaguered property stocks. All are potential beneficiaries of strong growth.
But for all the excitement, there were plenty who wanted to throw cold water on the party—indeed, the market fell back on August 21st. Those included people bullish on China’s economic outlook, who reason that with reported GDP still growing above 10% and inflation high, the government has no intention of intervening in the economy. Indeed, they argue, such stimulus could be inflationary.
Meanwhile, those more pessimistic on China’s prospects said such measures would do no good anyway. Trade is the main vulnerability. They note that container traffic to Europe has stalled after double-digit growth earlier this year, and that it has been contracting to America since 2007. The outlook for trade with Japan is none too bright, either.
Meanwhile, estimates for the growth of company earnings, though still high, are coming down, too. In January profits were expected to rise by 22% this year; now growth looks more like 14% and dropping, says Markus Rosgen, Asia strategist for Citibank. The only silver lining to all this, he adds wryly, is that a bottom, even if not in sight yet, is a lot closer than it was.
Pakistan
Breaking up is easy to do
Pakistan's government splits; its probable next president, Asif Zardari, is said to be ill
ALWAYS incredible, Pakistan’s governing coalition sundered on Monday August 25th when its second biggest component, the Pakistan Muslim League (N) walked out. Nawaz Sharif, the PML(N)’s leader, objected, among other things, to Asif Zardari, who leads the coalition’s main member, the Pakistan People’s Party (PPP), making himself a candidate for a presidential election due on September 6th.
With its other smaller allies, the PPP-led government will not fold. And if Mr Zardari is elected president, with the dictatorial powers that the job confers, as seems likely, the government will look more solid. If so, Mr Zardari might be seen to have bested both Pervez Musharraf, the former president, who resigned on August 19th to escape impeachment, and Mr Sharif, leader of the PPP’s biggest rival. For a man who recently stepped into the shoes of his dead wife, Benazir Bhutto, the PPP’s murdered leader, and who is reported to have serious mental illnesses, this would be an Olympian achievement.
Given a historic rivalry between them, the PPP and PML(N) always looked likely to split. But this is still a blow to a country badly in need of the political stability and co-operation that they had promised. Pakistan is facing an ever-worsening Taliban insurgency and an economy in crisis.
Alas, if anyone can stop the rot, it is surely not Mr Zardari. He is among Pakistan’s most discredited politicians, having been accused of extortion and corruption on a huge scale during Ms Bhutto’s two terms in power during the 1990s. He received a controversial amnesty from these charges last year, at a time when Mr Musharraf, was considering recruiting the PPP as an ally. And he faces allegations that he is mentally unfit: on Tuesday August 26th a British newspaper, the Financial Times, suggested that Mr Zardari had been treated for illnesses including dementia and depression, which he had developed during 11 years spent in jail on corruption charges.
It is therefore alarming that Mr Zardari appears set to become an extraordinarily powerful president. If elected to the job, he assumes the swollen powers Mr Musharraf grabbed for the post: which would, for example, allow him to dissolve parliament on a whim. And he will also control the government, through his role as the PPP’s leader. Mr Zardari has promised to divest the presidency of its dictatorial powers after he is elected. But on recent form, his word is not worth much.
Crucial to the PML(N)’s alliance with the PPP was Mr Zardari’s promise to restore some 60 judges who were sacked last November by Mr Musharraf during a state of emergency. Mr Sharif, who returned from a seven-year exile last year, has made their restoration his most urgent policy objective. He has already profited from this (apparently principled) demand: opinion polls suggest he is Pakistan’s most popular politician and his support is surging.
He hopes to profit more: Mr Sharif needs some grateful judges to overturn a ban on his candidacy for election. This owes to his criminal record, including a conviction for hijacking incurred soon after Mr Musharraf toppled him in a coup in 1999. But Mr Zardari is reluctant to reinstall the deposed judges. Many Pakistanis believe this is because he fears they might reconsider the legality of his amnesty.
Mr Zardari has implored Mr Sharif to return to the government. But it is more likely that the two parties will resume their damaging habit of undermining each other by any means.
To shore up his strength, Mr Sharif will try to woo the support of Mr Musharraf’s erstwhile allies, the Pakistan Muslim League (Q), whose members were mostly recruited from his own party after the 1999 coup. For its part, the PPP will consider withdrawing from the coalition government that Mr Sharif’s party leads in Punjab, Pakistan’s richest province, leaving it with a minority in the assembly there. In the 1990s, when Mr Sharif and Ms Bhutto alternated in power, such manoeuvring, viciously pursued, made Pakistan almost as unstable as it is now. Ultimately, this led to the army’s takeover, as, in Pakistan’s history, political instability always has done.
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