GLOBAL

ECONOMICS
RESEARCH
2013
The Langley
Intelligence Group
Network
Brent M. Eastwood, PhD

Contents
TO REVIVE JAPAN, ABE'S ‘ARROWS’ MUST FIND THEIR TARGET ............................... 3
October 25, 2013 | Global Economics | Asia-Japan .............................................. 3
FRANCE AIMS EU TAX CUDGEL AT US TECH GIANTS ............................................... 8
October 3, 2013 | Global Economics | Europe-France .......................................... 8
WHY ‘ECONOMICALLY FREE’ COUNTRIES ARE OFTEN ‘POLITICALLY FREE’.............. 12
October 3, 2013 | Global Economics | Asia and the Pacific ................................. 12
TRANS-PACIFIC TRADE PACT OFFERS TEMPTING ALTERNATIVE TO WTO ............... 17
October 2, 2013 | Global Economics | Asia and the Pacific, The Americas .......... 17
HOW WE KNOW THE ERA OF SECRET SWISS BANK ACCOUNTS IS OVER .................. 21
September 17, 2013 | Global Economics | Europe .............................................. 21
ROGUE CRIME WAVE KNOCKS MALAYSIA OFF BALANCE ........................................ 25
August 30, 2013 | Global Economics | Asia and the Pacific ................................ 25
TINY NONPROFIT CASTS WIDE NET IN HUNT FOR SANCTIONS VIOLATORS ............ 30
August 28, 2013 | Global Economics | Middle East-Iran ..................................... 30
EUROPEAN POLITICIANS STUMPED BY HORDES OF JOBLESS YOUTHS ..................... 34
August 26, 2013 | Global Economics | Europe .................................................... 34
GREECE CAN KEEP THE LIGHTS ON, BUT COLD WINTER AWAITS ............................ 38
August 2, 2013 | Global Economics | Europe ...................................................... 38
HOW THE EMERGING MARKETS CRASH IS HURTING GLOBAL GDP .......................... 43
July 5, 2013 | Global Economics | Asia and the Pacific ........................................ 43
CHINA: DESPITE ‘PLAN,’ SWEEPING ECONOMIC REFORM DIFFICULT ....................... 47
June 12, 2013 | Global Economics | Asia and the Pacific ..................................... 47
BITCOIN VIRTUAL MONEY OPENS DOOR FOR TERROR FINANCE ............................ 52
April 15, 2013 | Security, Global Economics | Asia and the Pacific, The Americas 52
SOUTH KOREA WILL RECOVER QUICKLY FROM NORTH’S ECONOMIC WARFARE ...... 57
April 11, 2013 | Security, Global Economics | Asia and the Pacific ...................... 57

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ARGENTINA: DAMAGE FROM KIRCHNER WRECKING BALL PILING UP ...................... 62
February 27, 2013 | Global Economics | South America...................................... 62

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TO REVIVE JAPAN, ABE'S ‘ARROWS’ MUST FIND THEIR TARGET
October 25, 2013 | Global Economics | Asia -Japan
Summary
After two decades of stagnation, Japan’s latest economic recovery strategy relies on
three policy “arrows” — very loose monetary policy, new government stimulus plans
and structural reforms, including deregulation. Dubbed “Abenomics,” after Prime
Minister Shinzo Abe, the three-pronged approach has plenty of audacity but likely
lacks the political will to ensure it has a lasting impact.
Abenomics aims to spur growth, inflate wages, boost consumer spending and
increase exports, primarily by making the Japan’s central bank the economic policy
driver. Yet the plan relies on many politically unpalatable reform initiatives, such as
government spending, taxes, welfare reform and changes to labor law. In the end,
Abenomics may turn out to be just another experiment in quantitative easing that
results in artificial asset price growth.
Background
Prime Minister Shinzo Abe’s second term began in December 2012. It has been
noteworthy for its daring plan to get the country’s economy moving again after more
than 20 years in the doldrums.
The idea is to increase gross domestic product growth to an annual level of between 4
percent and 5 percent by elevating Japan out of deflation, which has stifled
consumption and investment, to an inflationary era of rising wages and higher-paying
jobs. Abe claims his plan will add 600,000 jobs in just two years, according to a
report published this month by the Council on Foreign Relations.
The focus will be on giving the Bank of Japan a level of firepower never before seen,
featuring both quantitative and qualitative easing. The quantitative easing will double
the number of bonds the Bank of Japan buys with a goal of doubling the country’s
money supply. Japanese QE consists of about $71 billion a month in mostly shortterm debt purchases.

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BOJ’s qualitative easing has to do with the type of asset purchases the bank takes on
its balance sheet. It will now own a greater amount of less liquid, riskier assets, such
as exchange-traded funds (ETFs) and real estate investment trusts (REITs), according
to research conducted by the Swiss National Bank in April. The Bank of Japan also will
hold longer-term Japanese government bonds and it will pump up its loan program to
get more cash in circulation.
The fiscal prong of Abenomics includes a huge investment of $116 billion, mostly
targeted at the same infrastructure improvements Japan has tried in the past. Other
parts of the package will focus on renewable energy and encourage private
investment in nascent industries.
These first two provisions are generally uncontroversial, but at $10 trillion and 245
percent of GDP, Japan’s mammoth debt problems have forced Abe to prescribe bitter
medicine: To pay Japan’s health care and social welfare expenses, estimated at
around 24 percent of GDP, he has decided to raise the country’s national
consumption tax to 8 percent from 5 percent beginning in April 2014.
The tax would go up to 10 percent in October 2015. Such gigantic tax hikes are
expected to cut the budget deficit in half by 2016 and balance the budget five years
later, Reuters reports.
The third policy lever of Abenomics is a program of economic structural reforms. Abe
will attempt to deregulate industries bogged down in red tape, such as energy,
environment and health care, according to the Council on Foreign Relations.
Next, he will encourage more women to join the workforce by providing better day
care opportunities. This reform is designed to foster growth of two-income families
that can spend more on consumer goods.
Abe also will target Japan’s antiquated labor laws. An estimated 5 million redundant
employees are now subsidized by corporations. Allowing firms to lay off these
workers would promote a more efficient allocation of capital and encourage
investment, according to Abe’s economic advisers.

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Trade is on the agenda as well. Abe decided in March to join negotiations for the
Trans-Pacific Partnership (TPP) trade pact with the United States and 11 other
countries, spanning the Pacific from North America to the Far East. For more on this
issue, see LIGNET’s Oct. 2 report: “Trans-Pacific Trade Pact Offers Tempting
Alternative to WTO.”

Mixed Results
Japan’s GDP has reacted positively so far, with first-quarter annualized growth at 4.1
percent and the second quarter at 3.8 percent, according to The Economist. The
Nikkei stock index has risen by more than 35 percent year to date, although down
from a mid-May peak.
Japan’s loose monetary and fiscal policy was meant to devalue the yen, and it has
worked: The yen has fallen 13.2 percent this year against the U.S. dollar. Thirty-year
and 10-year government bond yields are down, making it easier for Japan to service
its debt.
On the other hand, the hoped-for rise in exports has lagged. Economists had
predicted a 15 percent rise in Japanese exports last month, but growth only hit 11.5
percent year-over-year, according to Reuters. Inflation hit 1.1 percent in September,
but wages are not rising and consumer prices have increased mainly due to higher
energy costs. This type of inflation is not what Abe promised.
Analysis
Global economists generally agree that the monetary policy aspect of Abenomics is
unprecedented. Greg Ip of The Economist believes that Bank of Japan Governor
Haruhiko Kuroda has a “vociferous and full-throated commitment to achieving these
goals, as opposed to constantly making excuses.”
The financial markets have shown their approval of Abenomics, especially the
quantitative and qualitative easing. This has translated into the best business
sentiment in Japan in six years.

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Stimulus spending on construction has been less robust and in the past has not
trickled down to create jobs, improve capital investment nor promote consumer
spending. The disbursement of construction contracts over the years often results in
waste, fraud and abuse.
Abe’s remaining policies are problematic. Raising consumption taxes to pay for health
care and welfare spending may sound like the right type of austerity plan, but it
causes political problems. Some detractors of Abenomics believe the tax hikes could
be disastrous. Critics say the last time Japan tried to raise the sales tax in 1997 the
move put Japan on the road toward financial crisis.
Japan’s deficits and debt problems are not likely to go away no matter how much Abe
tinkers with fiscal policy. Japan has an aging society that will force the government to
continue to borrow and service debt at an unsustainable level for the next decade.
Labor laws need reform but, like Social Security and Medicare in the United States,
changes to these entrenched practices face resistance and only help Abe’s political
opponents. The parliament has already indicated that labor reform is off the table.
Legislators have expressed willingness to experiment with “special economic zones,”
where pilot projects with new labor policies might be undertaken. The zones are still
at the conceptual stage, but they could help create a surge in small-business
entrepreneurship, something Japan wants to encourage.
Abe has taken an interesting position in terms of workforce development with his
goal of attracting more women to the labor force. Japan is clearly stuck in the 1950s
in terms of gender equity. Women hold only about 6 percent of management
positions in Japan’s top companies.
Women are expected to quit their jobs when they have children. If Abe could increase
the number of women in high-paying jobs, he might move the needle on GDP growth.
Japan’s entrenched special-interest groups, such as rice growers and beer makers,
are no fans of free trade, so the TPP trade pact will face political headwinds as well.

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Even if Japan eventually joins the bloc, it may not create the expected growth in
exports or new jobs.
Meanwhile, the Abenomics currency devaluation gambit has not achieved export
growth either. It has produced the wrong type of inflation, economists say, without
the needed increases in wages and consumer spending.
Conclusion
One way to look at Abenomics is to evaluate the policies on the merits of its threepronged approach. In this view, Abenomics would receive high grades on monetary
policy, low grades on fiscal policy, and mediocre grades on economic reform. The
structural change aspect of Abenomics, often called the “third arrow,” is encountering
political pushback. Abe’s arrows are simply not sharp enough to pierce that
resistance and create an economic environment that will result in rapid GDP growth
over the next several years.

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FRANCE AIMS EU TAX CUDGEL AT US TECH GIANTS
October 3, 2013 | Global Economics | Europe -France
Summary
France is attempting to whip up support in the European Union for tighter rules and
new taxes on some of the biggest U.S. technology companies, including Google
(NASDAQ: GOOG), Apple (NASDAQ: AAPL), Facebook (NASDAQ: FB) and Amazon
(NASDAQ: AMZN). The French government, meanwhile, owns equity stakes in
domestic Internet companies that would stand to benefit from taxes on foreign
competitors.
So far, French ideas for a “data tax” are mostly talk, but there is a chance that some
punitive measures for privacy failings and levies on digital services could become
proposals to be reviewed by the European Commission and Parliament next year.
French bureaucrats, however, appear mainly interested in giving national companies a
boost at the expense of U.S. tech titans.
Background
French regulators met with their European counterparts at the end of September to
get more countries on board with its new oversight plan, which includes restrictions
on Internet privacy and levies on data use. The EU will hold a leadership summit on
Oct. 24, at which France is expected to push adoption of its agenda.
French technology and telecommunication ministries, along with privacy watchdogs
that oversee the Internet in France, want their demands turned into policy across the
Continent. Their ideas could become specific proposals that the European
Commission and European Parliament would review and potentially vote on in the
spring of 2014.
The proposals include revenue sharing between EU states for profits earned on
European soil, according to a Sept. 19 Wall Street Journal report.
France, Germany and other European countries also are concerned about personal
privacy in the wake of the Edward Snowden affair and allegations that the U.S.

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National Security Agency used online data from personal accounts in Europe for
intelligence collection and analysis.
Facebook could become the subject of the data tax and privacy rules if the proposals
are enacted. The EU also could regulate Amazon’s e-books and take Apple to task
over its app store. It might require Apple to allow European users to have “portable
user profiles” that can be shared, a measure that would give smaller Internet firms in
the euro zone greater access to new customers in the digital economy.
Google already has been targeted by EU regulators for antitrust issues regarding its
search rankings of European companies. The EU has been studying Google’s
advertising and data mining practices over the past three years, allegedly for
infringing on civil liberties.
The head of the EU antitrust agency, Joaquin Almunia, said Oct. 1 that a tentative deal
was in the works that would require Google to give higher visibility to competitors’
information during Internet searches instead of blocking them, as European tech
firms allege.
Another oversight body, French data privacy commission CNIL, told Google in June
that it had three months to comment on how it is complying with data protection laws
in France or face a fine. So far Google has not “implemented the requested changes,”
said a CNIL spokesman, IDG News Service reported on Sept. 27.
Google contends that it is following European law and working in good faith with
CNIL.
It’s worth noting that France's sovereign wealth fund, Fonds Stratégique d'
Investissement, invests and holds equity stakes in domestic Internet companies. In
2012, the fund invested about $32 million in Viadeo, a Paris-based social network
that is similar to LinkedIn.
France also had investments in French tech firms such as Dailymotion (video sharing)
and Skyrock (blogging) at that time, the New York Times reported in April 2012.

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“We want to regulate a small number of Internet platforms that are blocking
innovation from all other actors. The current situation makes it difficult for European
champions to emerge at a global scale . . . We need to make sure there is a level
playing field for everyone,” French Technology Minister Fleur Pellerin said Sept. 19.
Analysis
One can understand the need to make sure all foreign firms pay the appropriate
amount of corporate income tax and the inevitability of host governments imposing
new types of tax revenue for data usage. Europe, after all, is mostly in recession and
living under austerity measures, so more revenue is needed and can be rationalized
by European lawmakers.
Internet privacy concerns that France, Germany and other European countries have
also are understandable. Google and Facebook are much more than search or social
media companies; they are massive data collectors that attempt to convert user data
into advertising dollars. European regulators cannot be completely faulted for
demanding more transparency and compliance with privacy rules in this area.
However, there appears to be another reason why France is so enamored with an EUwide regulation and a taxation campaign aimed at Google, Facebook, Apple and
Amazon. It may be protecting its own nascent Internet sector.
French cabinet ministers use phrases such as “leveling the playing field” for “European
champions.” That likely means that the French government fears the country is falling
behind larger foreign competitors.
Clearly, it is the American technology firms that are the real “champions” in this
space. U.S. corporate leaders would say they should not be targeted by governments
because their companies have better user experiences, loyal customers, unrivaled
competitive advantage, more productive economies of scale and ingenious intellectual
property.

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It is interesting that the French government does not often publicly disclose that it is
a major investor in French Internet companies. Such conflicts of interest are rarely
noted when French politicians accuse American companies of antitrust violations and
suppressing competition.
U.S. Internet companies have not commented on the French push for more EU-wide
regulations and taxation. Privacy regulations and new taxes in various countries are a
cost of doing business for American technology companies when they expand into
global markets.
The new French regulatory and taxation agenda could be mere saber rattling and
political posturing. It also is not clear what views individual European Parliament
members hold on the subject.
The British government already has expressed opposition to a European Internet
“financial transaction tax,” according to a Sept. 20 report in the UK Telegraph. Critics
in Britain already are questioning how the data-tax measures could be enforced, if
they are passed.
Conclusion
The French pursuit of regulation and taxation targeted at U.S. technology companies
is not so surprising. Foreign businesses expect to face fees and oversight when
operating overseas. But the proposed rules may be over-reach by French bureaucrats
attempting to protect their own Internet startups. French leaders also often fail to
mention that the government owns equity stakes in domestic Internet ventures, a
clear conflict of interest.

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WHY ‘ECONOMICALLY FREE’ COUNTRIES ARE OFTEN
‘POLITICALLY FREE’
October 3, 2013 | Global Economics | Asia and the Pacific
Summary
Countries that are ranked near the top for economic freedom are often the most
politically free, according to report cards released by two major policy institutes this
year. The report cards can serve as an indicator of whether a country can successfully
adapt to economic development.
Economic freedom refers to the extent to which an economy adheres to free market
principles. Political freedom is measured by one watchdog group as the level of
individual rights and civil liberties. It is not unusual for the same countries to finish in
the top 10 or bottom 10 of each list. But the report cards are not without surprises.
Mauritius, a tiny island nation off the coast of Madagascar, is one of the most
economically free governments in the world. Meanwhile, the United Kingdom is
considered less economically free than Bahrain and Estonia. Despite a few unexpected
outcomes, these lists seem to back up free market economists who have always
claimed that a nation’s level of economic freedom reflects its measure of political
freedom.
Background
Every year the Heritage Foundation and the Wall Street Journal release their Index of
Economic Freedom. The index ranks 185 countries based on 10 benchmarks that
place a quantitative value on tenets of economic freedom such as the rule of law,
limited government, regulatory efficiency, and open markets. Economic Freedom,
according to Heritage, is defined as:
“The fundamental right of every human to control his or her own labor and
property. In an economically free society, individuals are free to work, produce,
consume, and invest in any way they please, with that freedom both protected

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by the state and unconstrained by the state. In economically free societies,
governments allow labor, capital and goods to move freely, and refrain from
coercion or constraint of liberty beyond the extent necessary to protect and
maintain liberty itself.”
Following is a chart showing the countries that ranked in the top ten for economic
freedom, beginning with the “most free” – Hong Kong.
2013 Index of Economic Freedom- Heritage Foundation and Wall Street Journal
1

Hong Kong

2

Singapore

3

Australia

4

New Zealand

5

Switzerland

6

Canada

7

Chile

8

Mauritius

9

Denmark

10

United States

The New York City-based democracy watchdog Freedom House conducts an annual
study that evaluates countries based on the extent to which their governmental
institutions embrace political rights and civil liberties.
The Freedom in the World survey ranks 195 countries on political aspects of the
electoral process, democratic pluralism and participation and how well the
government functions. It also grades states based on civil liberties regarding freedom
of expression and beliefs, the right to associate and organize, rule of law and
personal autonomy and individual rights.
This year’s list appears to show that countries that do well on the Heritage Economic
Freedom rankings also score high on political and individual freedoms as measured
by Freedom House. Eight of the 10 top nations on the economic freedom index also
got top ratings from Freedom House in 2013.

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Two of these states, Hong Kong and Singapore, received only mediocre rankings in
political rights and civil liberties from Freedom House.
There also seems to be a relationship between countries that are the least
economically free and their low scores in political freedom. The 10 bottom dwellers in
economic freedom also receive some of the worst grades from Freedom House.
These countries include North Korea, Iran, Cuba, Burma, Eritrea, Equatorial Guinea,
Democratic Republic of Congo, Republic of Congo, Turkmenistan and Zimbabwe.
Analysis
There appears to be a positive correlation between country rankings on economic
freedom and scores on political freedom and individual liberty. The rankings on both
lists link authoritarian and totalitarian regimes such as North Korea, Cuba and Iran
with low levels of economic freedom.
This would come as no surprise to free-market economists such as Milton Friedman,
Friedrich Hayek and Ludwig von Mises. These pioneers advocated government
institutions that encourage increased levels of economic and individual liberties.
Friedman especially believed that economic and political freedoms go hand in hand
and that countries cannot have one without the other. Many of his writings concluded
that developing economies that emphasized free-market ideals often resulted in a
more democratic and open political climate.
Friedman went on a lecture tour to Chile in the 1970s and encouraged Chilean
dictator Augusto Pinochet to enact free-market reforms. While Friedman has been
criticized for his work there, the country slowly transitioned from the dark days of
Pinochet to a country that scores well on both economic and political measures of
freedom.
What causes the link between economic freedom and political freedom? Freidman
would say that the “freedom to choose” – the individual freedom to vote in elections
or associate freely in a pluralist democratic system – also brings people to power who

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guarantee the rule of law, the enforcement of contracts and the protection of property
rights.
These traits often produce a higher level of economic freedom. Alternatively,
countries with statist or authoritarian governments often have political leaders and
institutions that do not promote individual rights and civil liberties. Most countries fit
somewhere in the middle and are an amalgam of varying degrees of freedom.
Transitioning or developing countries known as the BRICS – Brazil, Russia, India,
China and South Africa – get mixed grades on the rankings. China and Russia finished
136th and 139th on the Economic Freedom Index. Both are considered “not free” by
Freedom House, with poor rankings on political freedom and civil liberties.
Brazil, India and South Africa are considered “free” by Freedom House and,
surprisingly, South Africa had the best economic freedom score among the trio –
finishing 74th in the world. India, the world’s largest democracy, is still hobbled by
corruption, according to Heritage. Brazil, ranked 100th in economic freedom by
Heritage, struggles with an inefficient legal and bureaucratic system.
The most unexpected developing country to appear at the top is Mauritius. The small
African island in the Indian Ocean east of Madagascar has developed strong
institutions in which “all the pillars of economic freedom are solidly maintained.”
Mauritius is considered “free” politically even though it has endured plenty of public
corruption over the years.
In what can be considered a disappointing finish, the UK was ranked by Heritage as
only the 14th freest economy in the world, even though its political environment is
believed to be top notch, according to Freedom House. Despite such a healthy level of
democratic governance, the UK still finished behind Bahrain and Estonia in economic
freedom.
Ironically, former British colonies and Commonwealth nations such as Hong Kong,
Singapore, Australia, New Zealand, Canada and the United States all ranked better
than Britain in economic freedom. Even Ireland finished better this year.

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After the global economic crisis of 2008, much discussion has been devoted to the
rise of authoritarian or “state capitalism.” Countries that have poor ratings on both
economic and political freedoms, such as China and Russia, would fit under this
banner.
Countries with mixed results (high economic freedom and low political freedom) such
as Hong Kong and Singapore can also be considered states with authoritarian
capitalist tendencies.
Ian Bremmer, Robert Kagan and others have written about governments that believe
in more central command over their economies. It may be too early to say if this trend
will continue or if these countries will grant more political freedoms to their citizens.
The future of governance in China greatly depends on solving this puzzle.
Conclusion
Some correlation appears to exist between countries that score high on both
economic and political freedoms. Similar comparisons can be made with countries
that have totalitarian governments and controlled economies. It can be difficult to
make generalizations based on the range of grades a country may receive in any
given year from various policy institutes. But lists of freedoms reveal much about a
given state’s economic and political institutions. They can also be a useful barometer
to forecast whether a country can successfully adapt to improvements in economic
development, income distribution, human development and environmental health.

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TRANS-PACIFIC TRADE PACT OFFERS TEMPTING ALTERNATIVE
TO WTO
October 2, 2013 | Global Economics | Asia and the Pacific, The Americas
Summary
An ambitious free trade agreement that spans the globe with participation ranging
from tiny emerging markets to world economic leaders has free trade believers
hailing it as the “gold standard” and free trade opponents crying foul. The TransPacific Partnership would form a coalition of willing countries that are frustrated with
the stalled Doha Round of World Trade Organization talks and who are now willing to
make a monumental deal that will break down trade barriers and cut regulations for
40 percent of the global economy.
The TPP is basically NAFTA plus Peru and Chile combined with much of Southeast Asia
along with Japan, Australia and New Zealand. It is an impressive mix of allies hailing
from the Eastern and Western hemispheres. China hates the idea and thinks
Washington is trying to bully Beijing with new economic alliances. The White House is
treating the TPP as one of its signature economic reforms and part of its Asian pivot
strategy. President Obama believes that the trade pact will help American exports
soar to stimulate job growth. Congress is worried that some Asian countries unfairly
manipulate their currencies and steal U.S. intellectual property.
Background
The United States announced it would officially participate in the Trans-Pacific
Partnership (TPP) in 2009. This trade pact initially included four countries: Brunei,
Chile, New Zealand and Singapore, but when the United States expressed interest in
collaborating with the early adopters in 2008, the negotiations gained momentum.
Now the Trans-Pacific Partnership has seven more members: Australia, Canada,
Japan, Malaysia, Mexico, Peru and Vietnam. The addition of Japan on July 23 gave
participants ample confidence about future talks.

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TPP countries represent about 40 percent of the world’s gross domestic product and
about one-third of all international trade. According to the U.S. Trade Representative
(USTR), the United States exported goods, agricultural products and services worth
nearly $1 trillion to the Asia-Pacific region in 2012. That comes to about 61 percent
of all American exports.
The TPP is a very broad agreement that seeks to energize trade negotiations for
certain countries that became frustrated with the stalling of the Doha Round of World
Trade Organization (WTO) talks. These talks have produced few results since they
started in 2001.
TPP participants, according to World Bank President and former U.S. Trade
Representative Robert Zoellick, are the “can-do countries” as opposed to the “won’tdo countries,” the Financial Times reported Sept. 22.
The USTR explained in July how the Trans-Pacific Partnership will create rules that
cover “market access, rules of origin, technical barriers to trade, investment, financial
services, e-commerce and transparency.” However, progress has been slow as the TPP
has endured 19 rounds of negotiations since 2009. The latest talks were held in
Washington from Sept. 18-21 to prepare for Round 20 scheduled for Bali, Indonesia,
Oct. 3-8.
In a report published Sept. 25 by Japan’s Yomiuri Shimbun, analysts said that
intellectual property concerns in the United States could derail the negotiations. “The
results of the meeting here suggest the outcome of the talks for the multinational
framework has become even more unpredictable ahead of the negotiation’s targeted
year-end conclusion.”
The White House, on the other hand, thinks the Indonesia round will yield a major
breakthrough and that the agreement can be reached before the end of 2013.
The U.S. Congress is less optimistic and wants the president to address the issue of
Japan and other Asian countries’ practice of currency manipulation. Some members of
congress believe Japanese currency manipulation makes its imports to the United

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States artificially cheaper -- creating an unfair disadvantage for American
manufacturing.
“Currency manipulation can negate or greatly reduce the benefits of a free trade
agreement and may have a devastating impact on American companies and workers,”
60 U.S. senators wrote in a letter to the Obama administration that was printed in the
Wall Street Journal on Sept. 24.
Analysis
The TPP has many merits. Its participants form a winning combination of various
population sizes and stages of economic development – from emerging to fully
developed economies. The TPP is a “coalition of the willing” and a credible alternative
to the WTO’s failed Doha Round of negotiations, at least on paper.
But the TPP also has glaring problems. It omits any country from the European Union
and, more importantly, it leaves out China. Critics from these governments believe
that the United States joined the TPP to avoid other contentious trade negotiations.
U.S.-EU trade talks have lost momentum in the wake of the National Security Agency
spying controversy, while U.S.-China conversations on trade are hardly ever
harmonious.
China has also implied that that Washington is using the TPP to forge an economic
alliance against Beijing. This development, along with America’s existing military
alliances with numerous countries in the region, threatens Chinese interests.
Labor unions and other free trade opponents describe the TPP as a series of secret
talks that will result in a giant corporate power grab. American nonprofits such as
Food & Water Watch are highly skeptical of the accord. This group said that, despite
numerous free trade agreements, median wages in the United States “have hardly
budged in the last 40 years” and that the TPP “will do no better.”
For Obama, the TPP is the capstone of his Asian pivot strategy and promises to be an
enormous job creator that can rewrite the narrative of his presidency. He stresses that
the pact will open up markets for U.S. companies that have been closed until now.

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Along with these difficulties, making all parties completely satisfied with the outcome
will be impossible without substantial compromises. Intellectual property alone is
probably a show-stopper, even if the participants could agree to mitigate patent
disputes regarding the use of generic drugs in developing countries. Patent issues
with technology and entertainment are a whole different set of stumbling blocks.
In Asia, state-owned enterprises have many advantages over private businesses in
terms of subsidies and other forms of government support – a type of economics
known as “authoritarian capitalism.” Vietnamese businesses are especially dependent
on government, so those advantages will have to be navigated somehow.
Every TPP participant protects favored industry and agriculture in one way or another.
Nearly all agricultural commodities will likely be considered non-negotiable by one
country or another.
Conclusion
Despite the hurdles it faces, the Trans-Pacific Partnership is actually fairly good trade
policy. It’s inclusive, it spans the globe and it awards free-market principles.
Negotiations will probably not be settled until late in 2014, but as other countries
notice the TPP’s momentum and advantages, participants may find other countries
are willing to join. Beijing can be expected to continue to agitate as the proceedings
develop. A successful TPP negotiation could convince the European Union that the
United States is serious about international trade and may allow a future EU-U.S. free
trade agreement that could jump-start the global economy.

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HOW WE KNOW THE ERA OF SECRET SWISS BANK ACCOUNTS IS
OVER
September 17, 2013 | Global Economics | Europe
Summary
U.S. citizens who are hiding money in bank accounts in Switzerland are in for a shock
if they have not heard already: Their Swiss cash stash is now out of the shadows. Tax
evaders using Swiss banks are either already facing prosecution or becoming
witnesses in criminal investigations by the U.S. government. Law enforcement is
showing little mercy, as one elderly widow has already been sentenced for Swiss bank
tax evasion and fined more than $21 million.
Now a new deal forged between American and Swiss authorities has even sharper
teeth that will bite both individuals and banks that are involved in this type of
financial deception. The improved policing effort is a culmination of earlier
crackdowns on Americans who park money offshore to avoid paying taxes on
earnings. Swiss bankers have to give up information on tax cheats and pay fines in
proportion to the illegal deposits they hold. Swiss banks even issued a rare and
candid public apology for hiding American money all these years.
Background
The U.S. Department of Justice began looking into wealthy Americans’ offshore
banking habits in 2008 when a U.S. Senate investigation revealed that evasive foreign
accounts cost the U.S. Treasury more than $100 billion in lost tax revenues each year.
Since 2009, 68 Americans who hid money in Swiss banks have been indicted or
prosecuted in some way. Three Swiss banks have paid huge fines and at least 30
enablers such as individual bankers and attorneys have also been brought to justice.
Another 38,000 Americans with Swiss accounts were given a choice – either face legal
action or become government witnesses and agree to move their money back to the
United States, Bloomberg News reported Sept. 8. An estimated $5.5 billion has been
repatriated.

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Swiss banks, which hold an estimated $2 trillion in foreign deposits, have also been
targeted by U.S. investigators. UBS, the largest Swiss bank, agreed to avoid an
indictment in 2009 in return for a “prosecution agreement” that included a $780
million fine and required the disclosure of account information on 4,500 individuals,
the New York Times reported Aug. 29.
Another historic Swiss financial institution, Wegelin and Co., pleaded guilty to
conspiracy charges at the beginning of the year and was fined $74 million. Wegelin
closed down for good in January after being in business since 1741. Fourteen other
Swiss banks are under investigation, including Credit Suisse Group, HSBC Holdings
and Julius Baer, the Economist reported Sept. 7.
As a result of this dogged pursuit by the Justice Department and the Internal Revenue
Service, the Swiss government agreed to a “voluntary disclosure” deal involving the
other 285 financial institutions located there. Swiss authorities will now force banks
to close American accounts that are determined to be used for tax evasion, require
Swiss banks to divulge information about transfers of American money to other tax
havens, and assist U.S. investigators in other ways. They have until the end of the year
to cooperate or face legal consequences.
But disclosing information is only part of the amnesty program. Offending banks also
have to pay fines in proportion to the amount of money that has been hidden from
the IRS since 2008. These penalties can be from 20 percent to 50 percent of the
dollar value of the illegal accounts.
The 14 banks already under suspicion will not be granted amnesty by the Justice
Department, and they will still face criminal prosecution.
“If someone has an account in Switzerland, it is beyond foolish to think that that
account is going to remain secret…Swiss bank secrecy never should have been viewed
as a mechanism to commit criminal acts,” Assistant Attorney General Kathryn Keneally
told Bloomberg.

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Keneally said her battalion of 360 lawyers will now go after other countries where
Americans try to hide money, including India, Israel, Liechtenstein and Luxembourg.
Banks in Caribbean nations will also be investigated.
The Swiss financial sector has been so shocked by the legal storm that an industry
representative apologized this month for banks that had helped people hide money
and cheat on their taxes. “We acted wrongly and we displayed wrong conduct,”
Reuters quoted the chairman of the Swiss bankers association as saying Sept. 3.
Analysis
It is nothing new for politicians to shake their fists at foreign governments that
illegally shelter money, but the relatively quick expansion of the law enforcement
efforts against Swiss banks and their depositors is noteworthy. In five years, this
crackdown went from an obscure Senate report on overseas tax evasion to a
watertight, comprehensive enforcement program that affects all 300 Swiss banks.
The U.S. Justice Department even got an unexpected public apology from the Swiss
banking industry, and perhaps more important, U.S. law enforcement sent a message
to the world that the Swiss reputation for privacy, secrecy and discretion for their
clients did not mean account holders can break the law.
Other Swiss banks may be forced into bankruptcy similar to Wegelin’s fate, but the
sector should be able to survive with fewer members. The U.S. government also
resisted an easy fix that the Swiss government first proposed – for the banks to pay a
one-time lump sum fine to make all their legal problems go away. The Justice
Department refused to back down and ended up getting an enforcement mechanism
with real teeth and global reach.
What is not being discussed is American secret funds in Swiss banks that could have
been tied to money laundering for terrorists and criminals. HSBC Holdings already
paid a $1.9 billion fine to the United States in 2012 for allegedly laundering cash for
terror groups and drug cartels. A former employee named Everett Stern opened the
curtain on HSBC’s wrongful dealings. HSBC’s Swiss accounts are currently under

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investigation and it is plausible that other dirty deals perpetrated by the British bank
could emerge.
Unfortunately, American tax evaders have had plenty of time to pull assets out of
Switzerland and park them in other countries that allow safe havens. The Justice
Department will have its hands full dealing with governments that may not be such
close allies with the United States. But the Swiss should be able to assist investigators
on following the money trail, especially if it has to do with transnational crime, drug
dealing and terrorism. Israel, Lichtenstein and Luxembourg will likely cooperate if
their banks are implicated.
FBI counterterrorism agents could be brought into the mix if they find enough
evidence pointing toward crime and terror in connection with secret bank deposits.
Governments such as Israel may already be assisting the FBI in this realm.
Conclusion
The publicity from U.S. investigations and prosecutions regarding Switzerland may
have a deterrent effect on other individuals and banks around the world from hiding
cash and laundering money illegally. The era of the secret numbered Swiss account,
so often referenced in movies and popular culture, could be over. However, it is very
likely that depositors have found other countries that look the other way when it
comes to secret accounts. This will be a significant challenge for the U.S. government,
but Swiss authorities are likely to cooperate in further investigations that will shine
light on tax cheats or criminals in other countries.

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ROGUE CRIME WAVE KNOCKS MALAYSIA OFF BALANCE
August 30, 2013 | Global Economics | Asia and the Pacific
Summary
As the emerging-market economies of Southeast Asia are buffeted by investor flight
driven by distant U.S. monetary decisions, Malaysia has been maintaining a steady
course with low levels of unemployment and inflation. Yet policymakers in normally
peaceful Kuala Lumpur now face an unexpected rise in another type of statistic:
violent crime.
The worst should be over for Southeast Asia's third-largest economy. The Malaysian
currency has stabilized and stock market losses have leveled off. But a new storm is
rocking this sleepy Asian backwater. A nation known for its calm, law-abiding citizens
is battling a crime wave in which deadly shootings have become an almost daily
occurrence.
Background
The Malaysian economy is slowing. During the second quarter of 2013, gross
domestic product grew at a worse-than-expected 4.3 percent. The first quarter was
about the same, with GDP growth at only 4.1 percent. These lower rates compare
unfavorably to 2012, when Malaysia’s GDP hit 5.6 percent. Government economists
and other forecasters have predicted Malaysia’s GDP will remain below 5 percent for
the rest of the year.
Like many emerging-market countries over the past two decades, Malaysia has
depended on its ample natural resources to fuel expansion. Oil and gas, palm oil and
rubber have paved the way for relative prosperity. This year has been different,
though. Compared to the boom times of the last decade, global commodity prices are
mostly lower. China is going through a period of slower growth, reducing global
demand for Malaysia’s raw materials.
Nevertheless, by many measures the Malaysian economy is healthy. Unemployment in
June was just 2.8 percent. Consumer prices are stable, with a relatively benign
inflation rate of 1.7 percent from January to July, compared to the previous year.

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Analysts at CIMB Group, one of the country’s leading financial institutions, believe
“strong foreign reserves, high national savings and low external debt” will allow the
country to withstand any coming financial turbulence.
Yet other observers warn that a financial storm is brewing in Southeast Asia. Malaysia,
according to this view, could have difficulty maintaining the level of foreign
investment that previously supported frothy asset prices among the emerging
economies of Asia.
Investors who have turned bearish on Malaysia cite four problematic trends. First, the
Malaysian ringgit is foundering. The currency has been in a broad decline since May
against the dollar, British pound and euro, off by around 11 percent against each.
Secondly, Malaysia’s benchmark stock index is down by nearly 6 percent from recent
highs set in late July and is up a disappointing 3.5 percent over the latest 12-month
period.
Third, investors are reducing exposure to Malaysian bonds. More debt instruments
have been sold than bought, resulting in negative outflows over the past 12 weeks, a
danger to the ringgit. Finally, lower exports could give Malaysia its first trade deficit
in 16 years.
Malaysia’s policymakers insist these conditions are cyclical and that the country has
ample foreign reserves to fend off global “currency vigilantes” who may be shorting
the ringgit on a bet the currency will fall. Stunned by the rapid declines of currencies
in India and Indonesia this month, Malaysia’s central bankers quickly intervened on
Aug. 20, reportedly selling more than $1 billion of its reserves to steady the ringgit.

Violent Crime Wave Sweeps Country
Meanwhile, a new domestic problem has bubbled up that has nothing to do with
monetary or fiscal policy — violent crime. Native Malaysians and tourists alike have
learned to deal with run-of-the-mill urban crimes, such as pickpockets, purse
snatchers and injury-free muggings.

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Now, however, some crimes have turned violent. Dozens of fatal shootings have been
reported this year, including daylight executions thought to be related to drug deals
or criminal gang activity. Knife-wielding robbers are suddenly wounding and
terrifying their victims.
Gunfire is common. In the city of Penang, 19 shootings have been reported so far in
2013. According to The Economist, 38 violent crimes occurred in one four-month
period across Malaysia, all involving firearms.
Business leaders worry that rising crime could affect the economy and discourage
foreign investment. “People feel scared and they don’t commit to investments,” said
Datuk Lim Kok Cheong , local president of the Chinese Chamber of Commerce.
“Even our own people don’t come out at night. The government has to take the
necessary steps, there are firearms everywhere,” the chamber leader said, according
to a report posted Aug. 26 on The Malaysian Insider website.
Analysis
Malaysia’s economy is a puzzle. It sends both encouraging and discouraging signals.
Its current maladies could be a bump in the road or the beginning of a downturn.
Foreign investors sense that Malaysia might be at a tipping point and many of them
have already removed their money from the country.
However, there are larger forces at work. Malaysia might instead simply be getting
punished by being lumped in with larger, struggling emerging markets, such as India
and Brazil. Capital flight is affecting emerging economies from Latin America to the
Far East.
This flight can be attributed to the U.S. Federal Reserve and the general perception
among investors that the Fed soon will wind down its easy-money policy. Central
bankers in the United States have engaged in buying U.S. Treasuries and mortgage
securities from the financial markets, an activity known as “quantitative easing.” This
policy lever is used to suppress interest rates in the United States. Monetary easing

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thus encourages investors to seek higher-yielding investments in other countries,
including Malaysia.
The Fed recently indicated that it could reduce the level of easing, so investors have
pulled money out of emerging market stock and bond funds in anticipation of higher
returns at home. Malaysia may be getting unfairly targeted as a result. According to
economists and some financial analysts, its current difficulties are temporary.
Malaysian Prime Minister Najib Razak is acutely aware how painful a rapid devaluation
would be. A sudden devaluation of the ringgit decimated the Malaysian economy
during the 1997 and 1998 Asian financial crisis. This time around, Kuala Lumpur has
large currency reserves, enabling it to intervene and strengthen the ringgit before it
has a chance to drop precipitously.
The government also has correctly diagnosed the source of its GDP contraction —
falling exports. It thus has decided to spur consumer spending by sending cash
payments to citizens, giving bonuses to civil servants and raising the minimum wage.
The idea is to have consumer spending drive the economy until exports recover.
This prudent and nimble use of monetary and fiscal policy is based on lessons
learned from earlier crises and should save Malaysia’s economy from stumbling into a
death spiral. With current low unemployment and low inflation, Malaysia should be
able to endure a short-term decline in GDP growth.
One problem the government did not foresee, however, is the high percentage of debt
held by foreigners. At nearly 50 percent foreign ownership, there is always a chance
of a rapid sell-off in the bond market. Fear of political instability or other worries
could fuel a momentum swing against Malaysian bonds. This development would put
added pressure on the currency and affect interest rates at home.
The current crime wave is not the type of crisis that spurs such mass capital flight.
Malaysia certainly does not expose investors to the same political risk that they face
in, say, Egypt or Greece. But its domestic problems are unsettling.

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Pundits have offered various explanations for the rise in crime. Gangs are stronger
and more sophisticated. A mass prisoner release in 2011 put many hardened
gangsters back on the streets. Police are perceived as corrupt and not trained in
modern crime-fighting techniques.
In response, citizens have begun to form neighborhood watch groups bordering on
vigilantism. Business leaders, too, are pressuring the government to act, so law
enforcement reform is likely on the way, provided that a cyclical downturn in foreign
investment doesn’t upset the apple cart.
Conclusion
It appears that Malaysia may have survived short-term turbulence stemming from an
across-the-board Asia sell-off by foreign investors. This time around, Malaysia’s
central bankers were ready with enough reserves to prop up the ringgit. GDP growth
is disappointing but not catastrophic and employment and inflation are still at
manageable levels. Fiscal stimulus has put more money in the pockets of consumers,
alleviating a drop in exports. The increase in crime is troublesome but could serve to
educate Malaysian politicians that thorny problems can arise at inopportune moments
in the economy.

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TINY NONPROFIT CASTS WIDE NET IN HUNT FOR SANCTIONS
VIOLATORS
August 28, 2013 | Global Economics | Middle East -Iran
Summary
A low-budget American nonprofit has pioneered an ingenious software program that
tracks ships that are violating Iranian sanctions – and it seems to be more successful
at catching violators than some government agencies in the United States and Europe.
One recent case involved a Swedish shipping firm that was so brazen in its extralegal
maritime activities that it was accused of dispatching one of its tankers on regular
ports of call near Iranian military bases – and actually posted photos of Iranian vessels
on its website.
Tougher maritime sanctions against Iran passed went into effect July 1, and already a
handful of larger shipping lines from East Asia stopped doing business there. But
some smaller firms are still able to sneak around the new regulations, and industry
analysts believe that Iranian ships regularly use fake names and false flags to hide the
actual owners of the vessels and confuse investigators. Oil and other goods shipped
under these deceptive ploys are difficult to trace to Iran.
Background
The Swedish ship Persia has been operating near Iran full time and is allegedly
shipping fuel to Iranian ports that may include military depots and other defense
installations. The Swedish transportation company Stockholm Chartering AB is
responsible for the ship’s activities. An Iran sanctions watchdog group says this
vessel regularly docks at Iranian ports that are “known as hubs for petrochemical
exports and its military,” according to a July 18 Associated Press report.
If these reports are correct, the company would be in violation of international
economic sanctions levied against Iran over its nuclear program.
United Against Nuclear Iran (UANI) is a nonprofit advocacy organization with
headquarters in New York. The group monitors maritime operations around the world

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and looks for violations of sanctions against Iran imposed by the United States, the
European Union and the United Nations. The group has a proprietary analysis
program that maps satellite surveillance data of ships at sea around the world.
UANI's ship-tracking data revealed that the Persia often sails to Iranian facilities and
ports at Bandar Imam Khomenei, Lavan Island and Chah Bahar. UANI has told the UN
about the ship’s routes and believes that shipments carried by the Swedish vessel
could assist Iranian navy and air force units stationed nearby.
Sweden and Stockholm Chartering are not the only countries and companies
appearing to skirt Iran sanctions. UANI discovered that three ships owned by
Germany’s Medallion Reederei GmbH have also regularly sailed to Iranian ports
managed by Tidewater Middle East Company, an Iranian firm subject to sanctions.
Medallion Reederei’s managing director said he was not aware of any violations and
that his firm always respects international sanctions, according to a June 20 New York
Times report.
UANI has told other media outlets that shipping companies engage in subterfuge to
mask their maritime relations with Iran. These scams include operating a ship under a
false flag or renaming the vessel to confuse record keepers. The watchdog group
alleges that the Iranian ship Parisan and other vessels have engaged in “mysterious
link-ups in the Red Sea” with other ships from Iran, Egypt and Turkey.
In March of this year, the U.S. Treasury Department caught and blacklisted a Greek
shipping magnate named Dimitris Cambis for an alleged complex crime that violated
sanctions against Iran. The Treasury Department, which is responsible for enforcing
U.S. sanctions, accused Cambis of buying oil tankers in collusion with Iran and then
shipping and selling oil for Tehran while disguising the tankers’ real ownership.
The U.S. Congress acted this year to better ensure that Iranian ships along with
commercial vessels from other countries would not violate sanctions. The latest
National Defense Authorization Act included language that specifically blacklisted
Iran’s “shipping, shipbuilding, energy and port management sectors,” according to a
July 2 Reuters report. This latest round of sanctions went into effect July 1.

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In response, several Asian shipping companies decided to cease maritime transit
dealings with Iran. Two Chinese companies – China Shipping Container Lines and
COSCO Container Lines – reportedly have stopped doing business with Iran.
Two Taiwanese shippers – Evergreen and Yang Ming Marine – are also done working
with Iran. Singapore’s Pacific International Lines and two other shipping companies
from South Korea have pulled out of Iran as well, according to Reuters.
The sanctions are painting Tehran into a corner by limiting Iranian shipping routes,
according to Platts, an energy industry analyst. A managing director of Islamic
Republic of Iran Shipping Lines told Platts on July 5 that U.S. sanctions have worked to
essentially close Iranian lines between the Persian Gulf and East Asia and Europe.
However, the Iranian shipping manager said that some Iranian goods are still being
shipped to Europe despite the sanctions, and goods from abroad are being imported
with help from other states in the Middle East. “Domestic private companies and some
small foreign companies are helping us with maritime transportation,” Mohammad
Hossein Dajmar told Platts.
Analysis
So far, maritime enforcement of international sanctions against Iran has been a mixed
bag, with varying degrees of success and effectiveness. The Swedish shipping firm
has been “outed” by media and its alleged operations have been reported to the UN.
The Swedish company apparently had photos of Iranian ships on its corporate
website, and when questioned by UANI did not deny its ship’s movements to Iranian
ports near military bases.
Many shipping companies from China, Singapore, Taiwan and South Korea are no
longer doing business with Iran. A Greek shipping tycoon has been blacklisted for
nefarious acts related to Iranian oil exports.
However, most of these investigations have been conducted by nonprofit groups
rather than by government agencies in the United States and Europe. Sweden is an EU

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member, but the Swedish ship’s travels to Iran were discovered by the American
watchdog group and apparently were not known to European law enforcement.
UANI’s ship-monitoring software uses publicly available data that the U.S. and
European governments can also access. But an Iranian shipping director said that
smaller companies are still able to transport Iranian goods by vessel to Europe and
Asia – implying that there are ways to get around trade sanctions.
Conclusion
When it comes to detecting violations of trade sanctions against Iran, it would appear
that one small nonprofit with an annual budget of about $1.5 million is doing a lot of
the investigative heavy lifting. Congress has tightened restrictions on Iranian
shipping, and this has led some large Asian shippers to discontinue shipments to and
from Iran. Smaller companies may still be getting around the sanctions. Moreover,
Iran is likely to continue using fake names and false flags on its ships. More law
enforcement agencies in Europe and the United States may need to be enlisted to
combat these persistent violations of maritime sanctions.

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EUROPEAN POLITICIANS STUMPED BY HORDES OF JOBLESS
YOUTHS
August 26, 2013 | Global Economics | Europe
Summary
European leaders finally have taken notice of alarming levels of youth unemployment
— more than 50 percent in places — created by labor imbalances, high payroll taxes
and restrictive hiring laws, yet their solutions fail to address those basic causes.
Germany and France have some well thought-out reforms, but the southern European
countries reporting the highest rates of jobless young offer few policy innovations.
Germany wants its banks to provide capital to small businesses in Italy, Portugal and
Spain to kick start hiring. France plans to pay 75 percent of wages for new hires
between the ages of 16 and 25. The European Investment Bank would have a
significant role in addressing the problem, allocating more than $10 billion for new
hiring and training programs on the continent until 2020. Unfortunately, there are
just too many economic problems in Europe for a one-size-fits-all strategy.
Background
Overall, a quarter of Europeans under the age of 25 are unemployed. First, the
“good” news: Youth unemployment in France stands at 27 percent, and 120,000
French young people graduate from secondary school each year with no specific job
qualifications. The United Kingdom has a 20 percent youth unemployment rate.
For southern European youths, however, the problem is much worse. In Spain, the
jobless rate for people ages 15 to 24 is almost 60 percent. An estimated 40 percent
of this age group in Portugal and Italy are without jobs. In Greece the figure is about
58 percent. The problem is so acute that economists have created a new jobless
category called NEET — young people who are “Not in Employment, Education, or
Training.” There are 8 million NEETs in Europe, The Economist reported on July 20.
That works out to one in seven young Europeans idle.

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Chronic joblessness has made it difficult for young people to afford separate living
arrangements. And it is not just youths between 15 and 24 who live with their
parents. Many Europeans ages 25 to 34 remain at home. In Italy and Greece, between
40 percent and 50 percent of adult children cannot move out, according to estimates.
Policymakers have made tackling youth unemployment a high priority. German
Chancellor Angela Merkel and French President Francois Hollande have been the most
outspoken leaders on the issue, with Merkel calling it Europe’s “most pressing
problem.”
A recent summit on youth unemployment in Berlin achieved some policy clarity.
Europe will soon create a “youth guarantee” in which young people will either have a
job or be enrolled in a university or some type of employment training program.
The plan sets aside $10.5 billion from 2014 to 2020 for various policy measures to
make this happen. Most of the funds will go to the European Investment Bank, which
will be responsible for helping small businesses finance industry training. One
proposal would enable young people to more easily change residences from a country
with high unemployment to one with lower unemployment and where jobs,
internships and apprenticeships are more plentiful.
Merkel and German economists believe the problem can best be addressed in
southern European countries by fortifying lending where bank allocation of capital is
inadequate. Merkel proposes that Germany’s development bank offer working capital
to small and medium-sized businesses in countries such as Spain, Portugal and Italy.
These enterprises could use the low-interest loans to hire more young people.
In France, Hollande has promoted a jobs program in which the French government
will pay up to a 75 percent subsidy of a young person’s wages to small businesses
who hire them. France also attempts to subsidize companies with “generation
contracts.” The scheme gives money to companies who hire in certain age brackets,
including under the age of 26.

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European leaders have discussed the need for structural reforms when labor supply
does not match demand in a particular industry or location. Many college majors or
secondary school vocational programs in Europe are not meeting the need for
workers. Placing trainees in so-called “green jobs,” for example, has not succeeded in
reducing youth unemployment.
Economists also bristle at labor laws that make laying off or replacing workers
difficult in many European countries. This discourages the practice of replacing
unproductive older employees with more productive younger workers. High payroll
taxes discourage hiring, and welfare programs do not make benefits contingent on
looking or training for a new job.
Analysis
The youth unemployment crisis in Europe is creating what many are calling a “lost
generation.” Young people start their working lives burdened by student or consumer
loan debt and are forced to live with their parents longer than usual. Research on the
effects of early-career unemployment concludes that these late starters will earn
much less in their future jobs.
Idle youths are more prone to social problems as well, including higher rates of crime
and substance abuse. They can be more likely to feel politically disenfranchised and
subscribe to extremist worldviews or ideologies.
Europeans do not agree on whether unemployment should be solved by more
government stimulus spending, continued austerity or labor reform. Germany has
been successful with austerity thanks in part to a domestic labor force able to quickly
respond to changing employer needs, reforms that it undertook several years ago.
Most other countries, however, are not used to enforcing austerity measures. Their
workforces are dominated by labor unions and their laws discourage firing.
Berlin points to its highly flexible and effective vocational training programs, which
match workers with an industrial sector at an early age instead of waiting until they
reach their 20s. However, even the most successful vocational education initiatives
cannot foresee economic changes that eliminate jobs in a particular industry. The

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green technology sector, for instance, was undercut by low-cost manufacturing in
China.
Sweeping government programs that target young people have a poor track record in
Europe. In France, every government since 1995 has attempted to solve the youth
unemployment problem. President Nicolas Sarkozy in 2009 attempted to offer
companies tax breaks to hire youth, but his incentives met with mixed results, the
Christian Science Monitor reported in May.
Conclusion
European policymakers have been slow to recognize the youth joblessness problem
and do not offer solutions that address its myriad causes, including business cycles,
restrictive laws, payroll taxes, labor imbalances, uneven allocation of business capital,
inadequate training, over-reliance on welfare programs, protective subsidies and
uncompetitive industries. In any case, the European Union as a whole is not really
attempting sweeping, innovative reforms. The $10.5 billion set aside over the next six
years to fund Europe’s “youth guarantee” is unlikely to make a difference. It appears
that each country is on its own to make incremental changes. Meanwhile, young
people will have to rely on their parents and temporary jobs to get by.

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GREECE CAN KEEP THE LIGHTS ON, BUT COLD WINTER AWAITS
August 2, 2013 | Global Economics | Europe
Summary
By barely passing legislative reforms and getting a summertime bonus of European
financial aid, Greece has somehow avoided exiting the euro zone and has enough
funding to make it through this year. Many difficulties remain, however, and there is
no single remedy for its ailing economy. Unemployment in Greece stands at 27
percent, youth joblessness has topped 60 percent and the national debt is nearly
twice the gross domestic product.
Greece is forecast to have another budget shortfall between 2015 and 2016. The one
bright spot is growing revenue from tourism, but persistent deflation could erase
those gains. Greek legislators are worn out and are offering no solutions. Some
disaffected voters are signing up with extremist political parties or abandoning the
country for better economic opportunity abroad.
Background
The International Monetary Fund (IMF) gave the green light on July 29 to another
$2.29 billion loan package to Athens after the fund carried out its fourth review of
Greece’s bailout plan. Athens had finally implemented the last items of required
legislation that will hopefully begin the mandatory fiscal and economic reforms to rein
in runaway government salaries and bloated pension obligations.
Greece received its first bailout in 2010. The IMF has now appropriated nearly $11
billion in aid in accordance with the bailout measures adopted by the European Union
and the European Central Bank in March 2012.
On July 26, the EU agreed to pay Greece $3.3 billion as part of that bailout. The ECB
also opted to grant Greece $2 billion in profits the central bank accrued when it sold
its stake of Greek sovereign debt on the open market. This largess is contingent on
approval by various European legislatures but Greece is expected to get the check.

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These funds should allow Athens to meet its fiscal and budgetary obligations until
winter. But EU economists predict Greece will face another budget shortfall of $5.1
billion (2 percent of GDP) in 2015 or 2016.
The latest aid has some Greek policymakers sounding optimistic. Finance Minister
Yannis Stournaras believes that Greece can plug future budget shortfalls since higher
levels of tourism should send more tax revenue to the government. Although Greece
is in a difficult recession, Stournaras believes his country will transition to GDP growth
next year and could even forgo some of its future bailout funding and use greater
amounts of private credit instead.
“If we have a positive growth rate for one or two quarters and at the same time have a
primary surplus, then anything is possible – even to tap markets next year,”
Stournaras said, according to a July 30 Reuters news report.
Stournaras, however, has glossed over some inconvenient facts. With a current
unemployment rate of 27 percent, Greece has lost an estimated 1 million jobs since
2008. Two out of three young people are believed to be out of work. The recession
may lower GDP in 2013 to minus 5 percent. Overall Greek debt stands at a whopping
160 percent of GDP.
Moreover, Greece is fighting deflation for the first time in 45 years. Deflation in
Greece is the worst in the EU as consumer prices dropped by about 0.6 percent in
April. The rate of deflation improved slightly in May to 0.3 percent but remains a
nagging problem.
While protests and political violence have subsided somewhat, the country is still
unstable. Austerity measures including cutting government jobs and pay rates remain
highly unpopular. Protests flared in Athens on July 7 when the mayor was attacked by
a mob outside a government office. He sustained injuries that required a brief trip to
a hospital.
Extremist groups have cropped up during the past few years, capitalizing on the
unrest. One ultra-nationalist party, Golden Dawn, is increasingly in vogue. Critics call

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it fascist and say its members greet each other with Nazi salutes. Party members have
also been arrested for attacks on immigrants.
Meanwhile, the government has increased police powers to counter unrest. After
months of riots, police have been given greater permission to stop and search people
without probable cause. Some suspects reportedly are jailed without due process.
Analysis
Certain European and Greek policymakers and economists should be given credit for
keeping Greece afloat and avoiding a Greek exit from the euro zone. EU and IMF
efforts, along with lower costs to service its debt, should give Greece the funds it
needs to operate through 2013.
Except for tourism, however, Greece’s economy is not getting better. There is simply
no way that gains in tourism can grow the country out of recession.
The lack of private-sector jobs is debilitating and forces frightened citizens to hang
on desperately to their civil service jobs. Young people have few options. They can
stay in Greece without a job and join street protests against austerity, or they can
leave the country and find a better life.
The exodus of youth that is occurring in Greece bodes poorly for the nation’s future.
And young people aren’t the only ones who are leaving; retirees are looking at a
future in which the government may not be able to pay them enough to live on.
Greek members of Parliament have faced economic crises for years now. They are
tired and produce few new ideas. Policymakers are conducting very little strategic
economic planning, having grown accustomed to reacting to the latest crisis that
greets them each day.
Some think tanks, including the Levy Economics Institute at Bard College in New York,
have proposed a huge international stimulus program for Greece that would be
similar to the Marshall Plan that rescued the German economy after World War II.

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This “shock therapy” would entail the Greek government embarking on an audacious
New Deal type of public works initiative, funded by the European Investment Bank,
which would put people to work as quickly as possible. The institute estimates that if
Greece can create at least 200,000 new jobs, deficit and debt reduction goals could
be met and positive economic growth could be attained.
Many observers immediately grasp that sustained high levels of debt and joblessness
along with negative GDP growth will destroy Greece’s economy. Deflation should be
added to this list.
Long periods of deflation can hamstring economic growth by hurting internal
consumption and tax receipts. If consumers believe that prices will fall in the future,
they will put off major purchases. And for governments like Greece that depend on a
value added tax on the purchase price of consumer goods, lower prices mean lower
tax revenue.
Greece’s inability to collect income taxes and its citizens’ habitual practice of refusing
to pay taxes or cheating the tax collector has often been cited as a key contributor to
the nation’s deficit and debt problem.
Greece has also been known to misrepresent economic and budget statistics and to
fudge forecasts, so the country’s deficits and revenue projections could be worse that
what is being reported.
Conclusion
Greece has likely avoided an exit from the European Union. It appears that the EU and
the European Central Bank are satisfied, at least for now, that Greek politicians have
passed the needed reforms to stop the bleeding. This means that there should be
enough operating funds to prevent the government from imploding this year.
However, in order to meet expected budget shortfalls in 2015, Greece’s finance
minister is betting that the recession will end in 2014 and the country will enjoy
positive GDP growth once again. This is an optimistic scenario that is unaccompanied

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by a longer-term economic plan that solves the problems of deflation, high
unemployment and declining consumer spending.

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HOW THE EMERGING MARKETS CRASH IS HURTING GLOBAL GDP
July 5, 2013 | Global Economics | Asia and the Pacific
Summary
Nose-diving commodity prices and loose monetary policies in the developed world
have combined to create a pincer effect on emerging markets, one powerful enough
to slow the world’s economic growth. Major emerging markets are falling across the
board, with annual GDP growth in China now below 8 percent after several years in
double digits; India down to 5 percent economic growth down from 9 percent last
year, and Russia and Brazil at below 3 percent growth, according to the International
Monetary Fund.
As a result of the slow-down in the growth of these emerging markets, economists
now call for 2 percent global GDP expansion in 2013, compared to nearly 5 percent in
2010. Falling commodity prices are an obvious problem for an economic model based
on export growth, but the emerging world also must face up to evaporating demand
for its finished goods and fickle foreign investors who fear instability and often bail
out of emerging debt and equities markets at a moment’s notice.
Background
In 1981, while working for Salomon Brothers, an international economic analyst
named Antoine van Agtmael came up with an idea for a new mutual fund that would
invest in stocks from developing countries. He called it the “Third World Equity Fund.”
A critic pointed out that people avoided investing in the Third World during the Cold
War, so Agtmael rebranded his concept as an “emerging markets” product.
Capital International started the first emerging markets mutual fund in 1986. Today,
U.S. investors have placed an estimated $420 billion in emerging markets
investments, The Wall Street Journal reported in April. In 2001, British economist Jim
O’Neill, then head of global economic research at Goldman Sachs, coined the term
“BRICs,” a catchy acronym for the red-hot economies of the largest emerging markets
of Brazil, Russia, India and China.

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Until the global economic crisis of 2008, investments in the emerging markets and in
BRIC countries surged on an export boom led by commodities and manufactured
goods. Recently, however, the Word Bank has turned pessimistic on the global
economy. A slowdown in the emerging markets is cited as one reason. The bank has
cut its growth forecast for the global economy to 2.2 percent, slightly lower than the
2.3 percent of last year and lower than the 2.4 percent it predicted in January.
Instead of the 5.5 percent growth clip predicted for emerging economies at the
beginning of the year, the World Bank believes that rate will fall to 5.1 percent.
China’s growth will dip to 7.7 percent. Brazil’s economy has cratered to an annual
growth rate of 2.9 percent expected in 2013. India also will limp through the rest of
the year at 5.7 percent rather than the 6.1 percent growth forecast earlier this year.
Analysts at Capital Economics, a research firm in London, believe that emerging
markets in aggregate will grow at a 4 percent rate, a sluggish number not seen since
2009.
As a result, many investors are heading for the exits. On July 1, The Wall Street
Journal reported that $6 billion has been pulled from emerging market bond mutual
funds. Bloomberg News reported that almost $14 billion left emerging market stock
funds in late May and early June.
According to Bloomberg Businessweek reporting in June, seven of the 10 worstperforming stock markets of recent weeks were in developing markets. Brazil’s stock
market has dropped 22 percent year-to-date. Turkish equities fell 11 percent in the
first quarter. Developing countries’ currencies have taken a beating. Brazil’s real and
India’s rupee have fallen by double digits against the U.S. dollar.
Long-term forecasts, however, are more bullish. The World Bank, despite its current
skepticism, thinks emerging countries will see growth increase to 5.7 percent by
2015, reported Bloomberg News. The Financial Times reported on June 4 that by
2018, emerging markets will produce more than 55 percent of the world’s goods and
services.

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Analysis
Export-driven emerging markets depend on commodity prices, which have mostly
contracted in recent years compared to the first half of the previous decade. Demand
for copper and iron ore used in construction is not what it was before the financial
crisis. Global electricity production is down, so the need for coal and natural gas has
abated. Russia is probably the emerging market most affected by price volatility in the
energy sector.
China’s problems with its banking system and the availability of credit have negatively
impacted its manufacturing sector. In addition, China’s growth depends primarily on
government investment. Consumer spending alone is still not enough to drive its
economy forward.
In the developed markets — particularly in the United States, Europe and Japan —
loose monetary policies have driven down “safe money” bond yields. In such times,
global investors typically look to emerging markets bonds for better yields.
On May 22, U.S. Federal Reserve Bank Chairman Ben Bernanke announced that the
U.S. central bank could end or curtail its monetary stimulus, although nothing about
policy has changed. Central banks in other countries, including Japan, England and
Switzerland, are continuing their own accommodative monetary policies, using lower
interest rates to boost growth.
Such expansive policy efforts artificially devalue a country’s currency, making imports
expensive. The result is lessening export growth in emerging markets such as Brazil.
Slow economic growth and unemployment in Europe also has hurt demand for
manufactured goods from China and demand for services from India.
Under economic pressure, some emerging market countries find that weak governing
institutions lead to instability. Brazil, Egypt, Turkey and South Africa have endured
violent protest marches, demonstrations and labor strikes this year, shaking investor
confidence.

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Emerging economies in the Association of Southeast Asian Nations (ASEAN) seem to
be doing better in terms of political stability and growth. Indonesia, Malaysia, and the
Philippines expect 5-6 percent growth over the course of 2013. Thailand and Vietnam
should report similar results.
Overall, struggling emerging markets mean global economic growth could continue to
be in the 2 percent range in the coming years, not a high enough rate to bring more
into the middle classes, where they might consume more, nor enough to lift people in
less-developed countries out of poverty.
Conclusion
Slow economic growth in the United States and Europe has reduced demand for
exports of commodities and manufactured goods from emerging markets, hitting
those countries hard, particularly Brazil, Russia, India and China, the “BRIC” nations.
Loose monetary policy in the developed world helps emerging economies by driving
global investors toward their higher-yielding bonds and growth stocks. But those
same policies also put emerging nation currencies at a disadvantage, killing export
growth in BRIC countries such as Brazil. Political instability and violent protests often
prompt investors to pull money out of emerging markets and discourage new foreign
direct investment. Global economic growth fades as a result.

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CHINA: DESPITE ‘PLAN,’ SWEEPING ECONOMIC REFORM
DIFFICULT
June 12, 2013 | Global Economics | Asia and the Pacific
Summary
As many of the world’s economies struggle with low growth and high unemployment,
some look to China to power a sustained global recovery, an effective strategy after
9-11 but one that did not work as well following the 2008 credit crisis. The relatively
green Chinese political leadership team has carefully publicized a new “seven-point
blueprint” economic plan to confront slowing growth, to be unveiled at a party
summit this autumn, but LIGNET believes wholesale change is unlikely.
Rather than a robust, transformative package, however much one might be needed,
the blueprint is likely to offer a few pilot programs and policy trial balloons. That’s
because Beijing generally prefers its own hybrid form of “authoritarian capitalism”
over adherence to free market ideals and rapid change, while many Chinese believe
their economic system simply works better than Western models.
Background
China’s economy is slowing. Gross domestic product growth for the first quarter of
this year cooled to a 13-year low, ringing in at just 7.7 percent. China’s
manufacturing data has struggled to keep the pace it established over the last
decade.
Various surveys conducted in China have offered different conclusions, but it is clear
that manufacturing output growth has been mediocre. Reported measurements have
struggled to remain at a score of 50, the threshold that indicates contraction or
expansion.
For years, China depended on government-led investment and stimulus spending to
stoke the economy and create jobs. Meanwhile, private capital formation is a much
different process in China. Cronyism and political connections play a big role in
determining who will be awarded financing. On top of that, the government has

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begun to clamp down, restricting borrowing because a huge stimulus package after
the global financial crisis has led to runaway asset price growth, particularly in the
real estate sector.
Most people and small businesses in China instead rely on “shadow” banking, off
balance-sheet lending that gets around government quotas, including high-interest
borrowing from loan sharks and pawnshops. JP Morgan recently estimated that this
underground part of China’s finance economy is worth almost $6 trillion (or 69
percent of total GDP), Bloomberg Businessweek reported on May 8.
China President Xi Jinping and Premier Li Keqiang are quite aware of slowing growth
due to structural problems in the economy and the danger of not creating enough
new jobs. They reportedly have assigned economic planning expert Liu He the
unenviable task of creating a “seven-point blueprint” for economic reform for the
next Communist Party plenary session in October, reported The Atlantic on May 14.
Liu is the architect of China’s current five-year plan.
Many international economics consultancies, think tanks and academics believe that
China must liberalize its capital account. Government capital controls now strictly
limit monetary flows in and out of the country.
A country’s capital account affects investors, who look for the highest return on
investment while assuming a manageable level of risk. Part of a country’s capital
account is the total of its foreign direct investment. That could be in the form of a
new factory, portfolio investments in stocks and bonds, speculative loans or
conservative bank account savings. Chinese savers also seek a return on investment,
increasingly outside of China.
The Chinese government must keep its capital account from running either too hot or
too cold. State planners want a stable money supply that will keep the currency
exchange rate steady. It’s still a command-and-control economy, after the age-old
communist model.

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The government in 2002 instituted what it believed were generous “capital controls,”
allowing its citizens to send some money outside China to chase higher returns.
Currently, an individual is limited to exchanging $50,000 a year into a foreign
currency. This is not much money among the nouveau riche class in China, which
desperately wants to send much more of its assets abroad. The new middle class also
is interested in investing overseas.
Sometimes investors can be certified as “qualified foreign institutional investors,”
giving them access to foreign markets. As one can imagine, this coveted designation
is difficult to attain and often based on political connections.

Why Capital Account Reform is Desirable
If Beijing liberalizes its capital controls, China could become a more modern,
balanced and conventional economy, according to proponents of this theory. The
volatility of economic “booms, bubbles and busts” could be mitigated. Floating
exchange rates would be possible, rather than fixed rates. Interest rates also could
float, depending on the market forces of credit supply and demand.
China could then sell its sovereign bonds on the international market with predictable
maturities of 20 year and 30 years and thus finance its debt in a way similar to the
United States and other countries. Shadow banking would be curtailed naturally,
rather than by government fiat. China then could aspire to becoming an international
reserve currency, like the dollar, yen and the euro are today.

Potential Reforms
Other important reforms are possible, although unlikely, in the blueprint expected in
October. Tax reform would allow local governments to collect revenue by levying
taxes on retail sales and capital gains, rather than relying on property taxes.
The loosening of labor laws, too, would allow people to move around to take better
jobs in different parts of China. As it stands now, residents only receive government
welfare benefits in their hometowns. If they move, they lose those benefits. With

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reform, more people in rural areas could move to cities, get higher paying jobs and
start spending money on consumer goods.
Analysis
Despite all these rosy scenarios, broad-based structural economic reform is not likely
for such an entrenched communist country. Xi and Li, in their first year at the helm,
are not expected to shake up the economy through capital account modifications.
There are many reasons for this, but mostly it is political inertia and communist
orthodoxy. Economic philosophy is a major obstacle to change. The Chinese simply
think that their current version of “authoritarian capitalism,” along with the many
perceived benefits of a centrally planned command economy, is just flat-out better.
Why should they change to the “Washington consensus” of free-market mechanisms
when that very same Western model nearly brought down the global economy in the
2008 financial crisis? The Chinese generally think their way is superior. Drastic
change would suggest that communism with capitalist characteristics is flawed.
The plenary session, however, is indeed an interesting symbolic forum, one fit for
announcing sweeping reforms. If anything dramatic happens, it would probably be
rolled out in this venue. This is where Deng Xiaoping introduced the “shot heard
round the world” economic vision in 1978, which eventually opened up the closed
Chinese economy.
Xi is much less charismatic and is more cautious than Deng. This year’s reform
blueprint is likely to be incremental rather than sweeping.
Policy incrementalism, however, may be a good thing, according to some scholars.
Revered Chinese economist Yu Yongding believes that it was China’s capital controls
that kept the country from imploding during the Asian financial crisis of 1997 and
1998.
Yu supports very slow changes to China’s economy because he thinks enabling a
floating exchange rate would eliminate an important policy lever. Think about how

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little control a U.S. president has over the domestic economy. Xi may not want to
surrender this power to market forces.
Yu also thinks relaxing capital controls would encourage too many Chinese to
expatriate funds all at once, an outcome he considers disastrous. The lack of clear
property rights in China could encourage a scary environment of money laundering
and other financial tricks that might lead to economic turbulence and anarchy,
destabilization that order-loving Chinese fear.
Conclusion
Handicapping the rate of political and economic reform has become a cottage
industry for China watchers. Numerous observers, for instance, have pointed out that
free market reforms in China could lead to more democracy and an accompanying
increase in political rights and individual liberties. Such predictions, however, often
are proven wrong. By the same token, self-styled policy gurus prescribe various
“tune-ups” for the Chinese economy based on the Washington free-market
consensus. LIGNET believes that the current old-guard, change-resistant policy
environment in China will not allow major reforms. Many Chinese, too, cherish the
thought that their brand of authoritarian capitalism is the best in the world and thus
see no reason for change.

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BITCOIN VIRTUAL MONEY OPENS DOOR FOR TERROR FINANCE
April 15, 2013 | Security, Global Economics | Asia and the Pacific, The
Americas
Summary
Bitcoins, a virtual, digital, peer-to-peer currency traded over the Internet, are an
alternative to traditional currencies that provide secrecy and anonymity for
international financial transactions. These features are worrying governments since
they have made the virtual currency popular with criminals and potential terrorists.
In response to the growing popularity of bitcoins, the U.S. Department of Defense
(DOD) is coordinating with other agencies to form a new anti-terror mechanism called
“counter threat finance.” This is the catch-all term for law enforcement, intelligence
and military organizations created to disrupt and defeat terrorist financial networks.
Unfortunately, the “Bitcoin economy” has a head start on American law enforcement
agencies.
Background
The Bitcoin is a virtual currency used online for a dizzying array of goods and services
around the world, from digital music to drugs and more. There are nearly 11 million
Bitcoins moving around the web and about 25 of them are produced every 10
minutes, according to an April 10 report in The Weekly Standard. Bitcoins can be
found or “mined” by specialized software. People who own Bitcoins have an electronic
wallet to hold them.
To enable a Bitcoin transaction, users download software that provides a unique
address of 36 random characters. The software talks to another user with this
anonymous address.
When two users want to exchange the currency for a product, the Bitcoins are passed
by a peer-to-peer network that completes the transaction. Bitcoins can also be
exchanged for dollars, pounds or euros on a web site called “Mt. Gox”

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(www.mtgox.com). Mt. Gox is operated by Japanese company Tibanne Ltd. and
handles more that 70 percent of Bitcoin trading.
Bitcoins were launched in 2009 by an unknown person or group called “Satoshi
Nakamoto.” It was born in response to upheaval from the global financial crisis.
Bitcoins thus were designed to be independent of any country’s economy. The coins
are supposed to stop being produced by servers once the number in circulation
reaches 21 million.
The digital currency became suddenly popular in recent weeks following the banking
crisis in Cyprus, where many savers were restricted from accessing their accounts.
Panic, fear and greed has attracted speculators into the Bitcoin market and the
currency has become volatile.
Spot prices for Bitcoins have ranged as high as $260. Last week, the Bitcoin to U.S.
dollar exchange rate plummeted due to high volatility and several denial-of-service
cyber-attacks that caused trading to be suspended. On April 10, Bitcoins plunged in
value more than 60 percent before leveling out to a 37 percent drop. The next day,
however, it dropped another 35 percent.
Bitcoins closed on April 12 at $77.56, causing Bitcoin owners to lose about $2 billion
last week. Monday morning trading of Bitcoins on mtgox.com in Tokyo (10:30 PM EDT
April 14) was about $95.
Due to the secretive nature of bitcoins, international criminals and terrorists are
attracted to the online currency. The FBI compiled a comprehensive report that was
leaked to media outlets in 2012, entitled “Bitcoin Virtual Currency: Unique Features
Present Distinct Challenges for Deterring Illicit Activity.” Click HERE to read this
report.
“Bitcoins might logically attract money launderers, human traffickers, terrorists, and
other criminals who avoid traditional financial systems by using the Internet to
conduct global monetary transfers,” according to the FBI report.
U.S. Ready to Fight Financial Terror Networks

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Since 9-11, numerous U.S. government agencies have fought financial terror
networks on many fronts. Recently, the DOD has categorized these efforts into a
program called “Interagency Counter Threat Finance,” an umbrella concept for efforts
to target financial networks used for terror.
Since Bitcoins are a nearly perfect tool for money laundering, it is likely that the DOD
and other departments already monitor the ebbs and flows of such online currencies
and their links to terror cells.
In 2012, the U.S. Army War College published the most comprehensive overview of
counter-threat finance activity at the Pentagon. The report, written by Marine Lt. Col.
Jennifer E. Carter, describes how DOD coordinates with federal departments such as
Treasury, State and Justice, along with various intelligence agencies, to “attack or
block financial lines of communications and disrupt networks.”
An example of counter-threat finance would be the Defense Intelligence Agency’s
“Global Harvest” program, which specializes in rooting out financial terror. Global
Harvest had fallen under the Air Force’s oversight for several years but is currently
transitioning to the responsibility of Secretary of Defense, reported Defense News on
November 29, 2012.
Defense News reported that Global Harvest “provides timely all-source fused
intelligence assessments on terrorist organizations and illicit finance,” according to a
DOD contracting document.
Analysis
LIGNET believes that anonymous electronic wallets full of Bitcoins are likely to become
a popular tool among international criminals and terrorists. Nevertheless, the FBI
realizes that online manhunts for criminal figures who seek to exploit Bitcoins will
divert time and resources away from other investigations.
There are too many ways to foil investigators attempting to discern who is behind
virtualized financial transactions. Terrorists and criminals could use hackers to steal

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Bitcoins from other users by installing malware on computers, for example. In
addition, simple add-on code could make an already anonymous bitcoin trail literally
untraceable, Forbes.com reported last week.
Online black markets, such as one named “Silk Road,” offer contraband items,
including illegal drugs, in exchange for Bitcoins. It is easy to see how terrorists could
profit in the real-world drug trade and then conceal these earnings by laundering
money through Bitcoin exchange sites.
Terrorists long have used underground banking schemes, charities and dummy
companies to hide or redistribute illegal funds. The U.S. government has been
moderately successful in disrupting these types of financing networks. Bitcoins move
the goal posts and make such techniques viable once again.
State sponsors of terror, meanwhile, could have a heyday with Bitcoins. Governments
who back terrorists would be able to create multiple accounts and use third-party
services to secretly consolidate these accounts in order to launder money. They then
could send Bitcoins to terrorist cells around the world without a trace.
The development of the counter-threat finance concept to fight financial networks is
a significant innovation for the Pentagon. Many government contracts, job listings
and training sessions use the label, but there is so far few little to show in the way of
major busts or infiltration that has resulted in bringing terrorists who use Bitcoins to
justice.
Nevertheless, it is likely that interagency task forces have been created to monitor
Bitcoin activity around the world.
One of the problems with interagency counter-threat finance, however, is assigning
responsibility for handling the Bitcoin issue. Is it a law enforcement problem to be
handled in jails and courtrooms? An intelligence strategy that could be used to find,
capture and question terrorist kingpins? Are online currencies a U.S. Treasury
problem that needs to be shut down in America by the Secret Service? Or should
bitcoin networks somehow be destroyed by cyber-warfare units of the DOD?

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One theoretical advantage of Bitcoin proliferation would be what the Army War
College calls the “first strike option” for pre-emptive attacks against terror groups. As
cyber warfare, this type of virtual combat would not risk death or injury in the
traditional sense. In theory, fighting terror online through finance could reduce the
necessity for raids using real soldiers against a hard target.
Conclusion
Bitcoins may be considered a gimmick now, but their use could easily become the
basis of a major shift in terrorist financial activities, one that can be used to hide state
sponsors of terror and line the pockets of terrorist cells. Counter-threat finance
groups are gearing up to meet the challenge, but many unanswered questions
remain. More human capital and expertise from different agencies is beneficial, but it
is not clear how best to overcome the early advantage Bitcoins give underworld
figures. Counter-threat finance does have the potential advantage, however, of being
able to preempt online activity without losing real agents or soldiers in the field.

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SOUTH KOREA WILL RECOVER QUICKLY FROM NORTH’S
ECONOMIC WARFARE
April 11, 2013 | Security, Global Economics | Asia and the Pacific
Summary
The stream of rhetoric from North Korea over the last few weeks has been mainly
focused on military aggression, but there has also been an economic dimension and
the drumbeat of threats has hurt South Korean financial markets. The effect, however,
is likely only temporary, while even a small military conflict would have significant and
lasting economic consequences for South Korea.
LIGNET believes that Kim Jong Un is attempting to wage economic warfare against the
South, but that the South's economy is strong enough to prevent serious damage.
Many automotive, electronic, and industrial firms in South Korea are global leaders
with strong earnings and are resilient enough to overcome bad news days. LIGNET
judges that the South Korean economy, due to its low interest rates, tame inflation,
and minimal unemployment figures, will finish 2013 strongly and that its stock prices
will begin rebounding by this autumn.
Background
South Korean stock and currency markets have been volatile almost the entire year.
Various funds tracking South Korean electronics, automotive, and industrial equities
have moved downward since North Korea tested a nuclear device on February 12.
Escalating tensions since the UN Security Council imposed more extensive sanctions
on the North on March 7 put more downward pressure on South Korean stock prices
and encouraged investors to sell Korean equities and bonds.
Investors have sold around $3.5 billion in South Korean stocks and bonds this year
according to the Wall Street Journal. Foreign investors unloaded nearly $330 million
dollars of equities in just one day on April 8.

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The Korean Composite Stock Price Index (KOSPI) includes major corporations such as
Samsung Electronics, Hyundai Motor Co., Kia Motors, and LG Chemical. Stocks for
these companies trade on the over-the-counter market.
The KOSPI took a huge dive last week when it endured its worst five-day trading
period since May 2012. A volatility that tracks the KOSPI -- the KOSPI 200 Volatility
Index -- surged 29 percent last week on April 5, an indication that there is ample
anxiety among traders in the South Korean market.
The benchmark KOSPI index has fallen nearly 4 percent since the beginning of the
year, but the big sell-off has been in more broadly traded funds that contain some of
the same holdings as KOSPI.
For example, EWY (AMEX:EWY), the iShares exchange-traded fund for South Korea
that tracks Samsung, Hyundai, and others, is off 11.8 percent year-to-date. The
Korea Fund (NYSE: KF), a closed-end fund of large South Korean firms, is down 9.7
percent for the year.
The South Korean won has also taken a beating in the foreign exchange markets. The
won hit its lowest level against the dollar in almost nine months on April 8. It has lost
around 6 percent versus the dollar since the beginning of the year. The government
said it is watching won exchange levels closely and will intervene in the foreign
exchange markets to prop up the nation’s currency if needed.
Some investors have also become rattled by North Korea’s threat to close the joint
industrial complex at Kaesong. North Korea has blocked South Korean workers from
the complex for about a week and withdrew North Korean workers from its factories
on April 8. Kaesong has 120 South Korean companies who employ cheap North
Korean laborers.
Analysis
Most attention on the Korean peninsula has been focused on the military aspect of
the conflict, but LIGNET believes that the North is also practicing a form of economic
warfare against the South.

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Kim Jong Un would love to believe he is responsible for sabotaging South Korean
financial markets and discouraging foreigners from investing in the South. If he could
scare away foreign direct investment with North Korea’s distinct mix of purple
rhetoric, propaganda, strategic communications, and psychological operations, he
could hurt Seoul without firing a shot.
Kim also understands that increased fear and the perception of greater market risk
can intensify stock, bond, and currency price reactions that will hurt South Korea
financially.
However, experienced South Korean traders and financial analysts have endured
crises on the Korean peninsula before and they are unlikely to overreact to North
Korean provocations.
In 2010, after a North Korean torpedo sunk the South Korean navy ship, the Chenoan,
killing 46 South Korean sailors, financial analysts referred to the ensuing market
turbulence as the “North Korean Risk.”
Foreign investors dumped South Korean stocks, bonds, and won for several days. The
won-dollar exchange rate rocketed upward 9 percent in four trading days. But this
disruption was short-lived and not widely covered by the media.
Like most markets around the world, South Korean financial markets have a way of
quickly pricing in actions during the 24-7 news cycle. Even though media outlets
trumpet even the slightest happening as a major newsflash, after a while, traders get
used to the patterns and are more likely block out the daily news churn as
background noise.
If North Korea launches attacks on the scale of 2010, there is a potential for South
Korean retaliation which could lead to a ‘hot war.’ (Click HERE to read a special
LIGNET analysis of this issue.) Such a development would have devastating effects for
South Korea and possibly Japan, both in terms of loss of life but also for their

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economies. While many experts believe North Korea could still conduct attacks similar
to 2010, it appears intent at this time on demonstrating its military might.
New launches of North Korean ballistic missiles that go harmlessly out to sea will have
no significant effect on South Korean or Japanese financial markets. There could be a
short-term effect if any missiles happened to come down on South Korean or
Japanese territory. This effect would be greater if an errant missile caused loss of life
in another country.
A more serious and continuing risk to the South Korean economy from North Korea
may come from cyber-attacks. North Korean intelligence is believed to operate a
capable and effective cyber-terrorism unit employing over 3,000 computer hackers.
On March 20, around 48,000 personal computers and servers at three major banks
and three television stations were infected by malware. South Korean investigators
announced April 10 that they believe North Korea was behind these cyber-attacks.
This type of economic warfare could be devastating to a country such as South Korea
that is considered one of the most wired places on the globe.
North Korea has been blamed for other cyber-attacks against South Korea and for
disrupting airline flights into and out of Seoul’s airport (Incheon) by jamming GPS
signals.
Kim Jong Un is also trying to frighten tourists from visiting Seoul and other vacation
sites even though the Korean Tourism Organization recently announced that a record
number of visitors came to South Korea in March according to CNN on April 9. The
U.S. embassy in Seoul has not changed its security posture nor has it delivered any
new travel advisories.
Not every investor is heading for the exits either. Many financial analysts note that the
South Korean economy is fairly strong with low interest rates and relatively low
inflation. The unemployment rate was only 3.5 percent in March.

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Moreover, several of the companies on KOSPI, especially Samsung, have strong
fundamentals. Samsung is leading the world in mobile phone market share -- even
besting Apple in recent estimates. Bargain hunters may be able to find some
appealing equity prices now and then wait for tensions to subside on the peninsula
later -- enabling them to make a decent profit.
Asian markets also have a history of roaring back to life after downturns. Thailand’s
equities recovered strongly after the 2011 floods and Japan’s markets came back
after the huge earthquake and nuclear disaster at Fukushima in 2011.
Conclusion
South Korea’s financial markets, particularly funds that track companies on its
benchmark index, have been negatively affected by this year’s crisis on the Korean
peninsula. This can be partially attributed to Kim Jong Un’s ham-handed attempts at
economic warfare. Obviously, any type of armed action or focusing event such as a
nuclear test or missile launch would make for very volatile trading days. But military
incidents on the scale of North Korean attacks in 2010 would likely only have shortterm market consequences. South Korea’s economy is strong enough to “take a
punch” and companies on its major stock index should overcome current losses and
finish the year in positive territory.

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ARGENTINA: DAMAGE FROM KIRCHNER WRECKING BALL PILING
UP
February 27, 2013 | Global Economics | South America
Summary
The economic policies of President Cristina Fernandez de Kirchner have damaged
Argentina’s economy to such an extent that a turnaround is unlikely in 2013, or even
2014. Ratings agencies say Argentina is headed for another default on its debt and
international investors are running for the exits. A LIGNET analyst led a trade
delegation to Argentina last year, and gives a first-hand account of the situation
there.
Kirchner is promoting a statist, isolated, and closed economy that is allied with leftist
governments in Latin America. In the last 12 to 18 months, Kirchner’s government
has insulted its former allies, raised protective trade barriers, thumbed its nose at
creditors, and hurt its own middle class by ignoring inflation and restricting currency
exchange.
Background
Argentina’s economy enjoyed an excellent run during the last decade. The average
gross domestic product (GDP) rose 7.7 percent a year from 2004 to 2010. This boom
was fueled by the global bull market in commodities and exports from soybeans,
grain, and beef. However, according to the CIA World Factbook, 2012 saw a marked
slowdown for Argentina’s economy. Fourth quarter 2012 GDP growth rate dipped to
0.6 percent while annual growth dropped to 2.6 percent.
President Kirchner was re-elected in 2011 with 54 percent of the vote, but the wife of
the late president, Nestor Kirchner, saw many constituent groups turn against her
controversial economic policies. Kirchner has battled the media, farmers, the oil and
gas industry, unions, business executives, the military, and the judicial branch. She
has witnessed mass strikes and protests while her approval rating has sunk to 39
percent, according to the Economist.

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Inflation is the most serious economic problem for Argentina. Kirchner claims the
official inflation rate is below 11 percent while independent economists estimate
consumer prices have actually spiked between 25 and 30 percent. The International
Monetary Fund (IMF) censured the Argentinian government early this month for
fudging economic data.
With one of the highest inflation rates in the world, Argentines are struggling to keep
up with high prices. The government has adopted a prize freeze on food at
supermarkets that will be in place until April 1. All products at major grocery store
chains including Wal-Mart are required to keep prices at current levels and consumers
can report any non-compliant price hikes to the Argentine commerce ministry.
Wages are another thorny issue as unions harden their positions on salary
negotiations. The country’s largest trade federation wants raises for workers to go
beyond the wage cap of 20 percent. The food industry union and the teachers’ union
want at least 30 percent pay increases and have threatened to strike.

Argentina’s Protectionist Trade Policies
Kirchner instituted harsh protectionist policies on trade in January 2012. Tariffs
increased to a maximum rate of 35 percent on 100 products including popular
consumer goods such as motorcycles, computers, printers, telephones, and mobile
phones. Argentina also has a value added tax (VAT) on imports. There are additional
duties if an imported good is already manufactured in Argentina.
Non-tariff barriers are also troublesome for importers. Anyone who wishes to import
must request a license from the country’s tax and custom authority. The application
process is daunting and requires companies to sign a sworn affidavit that explains all
the details of the import shipment including why the good is needed. Firms are
reporting numerous delays in the application process.
Argentina also has an array of quotas and price controls on imports. Major
corporations are sometimes required to invest in new domestic manufacturing
operations before they are allowed to introduce new product lines.

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As a result, the United States, the European Union, and Japan have complained to the
World Trade Organization (WTO). The WTO is currently investigating Argentina’s free
trade violations and the organization is also looking at the government’s seizure of
assets of a subsidiary of the Spanish oil company Repsol SA in April 2012. Repsol has
also petitioned the World Bank over the matter.

Struggling to Reduce Capital Flight
These economic policies have led investors to pull money out of Argentina. Almost $2
billion was withdrawn during the second quarter of 2012, according to Bloomberg.
Economists estimate that a total of $87 billion has flowed out of the country since
2003.
Kirchner has attempted to impose tight currency and foreign exchange controls to
prop up and increase levels of foreign currency at Argentina’s central bank because
dollars are used to pay back foreign debt.
Foreign debt has dogged Argentina for decades. Last November, Fitch downgraded
the country’s long-term credit rating from CC to B, one level above default. Argentina
experienced a default on its sovereign debt of around $132 billion in 2001 and 2002.
Private investors have taken the government to court in the United States in hopes of
recovering some repayment.
At a recent Hudson Institute conference, former U.S. ambassador to Argentina Lino
Gutierrez lamented the economic mishaps of the Kirchner administration. “It didn’t
have to be this way. Today you could have an Argentina that is much more developed
with real economic statistics, cordial relationships with the international community,
and good prospects for growth.”

LIGNET Experiences in Argentina
When the LIGNET analyst travelling in Argentina tried to exchange $37 for Argentine
pesos, he had to consult with two tellers under the watchful eyes of an armed guard,
pacing back and forth, in a transaction that took 30 minutes. It was a taste of the wild
inefficiency and tangled bureaucracy that now characterize the Argentine economy.

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At the time of the analyst’s visit, inflation in Buenos Aires was taking off. Restaurants
were making daily changes to their menus and revising prices upward by writing them
in pen. Some eateries did away with menus and required diners to ask the waiter the
prices for each item knowing that costs would be higher than the previous day.
An exasperated U.S. Commercial Service officer at the American embassy in Buenos
Aires described, in detail, the government’s new import tariffs, and warned that
Argentina can be extremely challenging for even the most experienced exporters to
South America.
Analysis
The damage to the Argentine economy at the hands of Cristina Kirchner since she was
re-elected will be long-lasting and difficult to reverse. One only has to walk the
streets of Buenos Aires to see how the Kirchner wrecking ball has affected a oncethriving market economy.
Inflation and currency controls are hurting the middle class, particularly those who
are on fixed salaries and pensions. These citizens have seen their purchasing power
decline. Savers have watched their bank accounts dwindle in real value.
The food price freeze will be a short-lived public relations gambit and is not expected
to help consumers much. Store managers, after all, can always pull higher profit
margin items off the shelves. And since the end date of the price controls has already
been announced, stores could have a run on staples such as milk, bread, and eggs
after April 1.
Kirchner’s political orientation as a member of the far-left Peronists has led her to
seek alliances with socialist governments in Latin America such as Venezuela and
Bolivia. She has also recently traveled to Cuba and Vietnam to make statements of
solidarity with communist governments there.
Argentina is in many ways a tragic case. It had transformed itself into one of the most
modern, diversified, and international economies among the emerging states. In just
12 to 24 months, the Kirchner administration has reversed those gains.

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Argentina will likely find a way out of its current debt crisis and is not intimidated by
its creditors. By keeping dollars in the central bank, the government has just enough
foreign currency to make loan payment installments. Legal rulings that have required
the country to pay back bond holders from the last default are difficult to enforce.
Argentina is also a crafty negotiator and is often successful at persuading the United
States and other powers to forgive piles of debt.
However, the complaints filed against Argentina at the WTO may have deeper
repercussions. The WTO could impose retaliatory “tit for tat” punitive tariffs on
Argentine exports, and this could hit the agricultural sector hard. If Kirchner loses the
urban middle class and the rural vote at once, she may face even lower approval
ratings, larger and more intense demonstrations, and a difficult path to another term
of office that would require a constitutional change.
Conclusion
Argentina’s economy is a ship that is taking on water, and with Kirchner at the helm,
it looks like things will not improve until a new president is elected. Argentina has
often run itself on “luck and soybeans” and other people’s money. Agricultural
commodity prices have swung downward off their highs from the last decade and
more creditors are demanding the South American country pay its debts. The
Argentine government has been unlucky at fighting inflation. The enormous gains
that Argentina had made during the boom times, such as diversifying its economy
away from agriculture and attracting high-tech manufacturing have sadly been
undone by autarkic policies. These protectionist trade practices have created bad will
with its trade partners and could force the WTO to retaliate with trade sanctions that
could hit Argentina hard and continue to punish its middle class.

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