To Cut Down Air Pollution China Will Switch To Natural Gas For Power Generation – Right Now Good Business For Exporters, But China Will Soon Develop Large Domestic Shale Gas Deposits

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By Paolo von Schirach

December 21, 2011

WASHINGTON – Qatar may not be too pleased that the US is now self-sufficient in terms of natural gas production. In fact America has so much shale gas, (extracted through hydraulic fracturing), that it may even become an exporter. But not to worry. There is the whole of Asia to compensate for the loss of the US market. Bloomberg reports that China is focusing now on natural gas as an alternative to polluting coal for power generation. Chinese economic growth entails a huge increase in electricity demand. But if future demand is to met only through coal fired plants, as it is now the case, China air quality, already very bad, would probably get to be intolerable.

Most electricity from coal

Pennenergy reports that: ”Gas-fired generation accounts for a minuscule portion of China’s power supply, with less than 1 percent of total capacity. According to the International Energy Agency, China drew nearly 80 percent of its electricity from coal fired power in 2008, with nearly another 17 percent from hydroelectricity“.

Given this very small base, gas fired plants will have to grow exponentially in order to make a difference in overall air quality. And this is a real challenge.

New environmental standards

The English language China Daily reported that the Institute of Public and Environmental Affairs recently released a report suggesting that smog is caused mostly by industrial pollution. Power generation represents about 1/4 of total noxious emissions. The Chinese government is trying to force change by imposing much stronger environmental standards that will force the switch to less polluting fuels, such as gas. So expect a boost to natural gas production and imports from major producers such as Russia and Qatar.

Sustainable development

Bottom line, starting now, the issue for China is no longer ”growth at all costs“. It has to be “sustainable growth“; and natural gas will have to play a much larger role, given its more benign impact on the environment.

Down the line there may be a silver lining for China, as the country, according to most estimates, has the largest (yet still untapped) shale gas deposits in the world. In the US, abundant and cheap shale gas has proven to be a major energy and economic gift. China has four times the US population, therefore the natural gas benefits will be spread more thinly. But all that new cheap energy will help.

Italy’s Debt Is Also About Patronage, Wasted Funds, Corruption And Low Ethical Standards – 952 National Italian Law Makers Collect Huge Salaries, Do Little – Can Monti Reform This?

By Paolo von Schirach

December 20, 2011

WASHINGTON – Italy’s fiscal and debt crisis is not just about bad management and unfortunate policy choices. It is the most visible manifestation of a country in which the vested interests of groups, (often in open conflict with other factions), have always prevailed over any notion of the public interest. Everybody claims a piece of whatever wealth is within reach as their entitlement. Not because they earned it, but because this is the way the spoils system works.

In Italy widespread illegality and unethical behavior

Combine this deeply ingrained rent seeking attitude with corruption, widespread illegality, an inefficient judiciary, over paid public servants, fake disability pensions, public funds diverted, large development projects that have zero economic value and you see how the national debt accumulated. The debt is the sum total of unpaid bills left behind by those who used public resources for their own ends instead of governing.

It is not an accident that, just when professor Mario Monti was about to get started as Prime Minister, a new political scandal, all about bribery, state run companies and illicit financing of political parties broke out. And now there is a new chapter to be added to an old national scandal involving fixed soccer matches and illegal betting. The debt is the result of decades of waste, patronage creating bloated bureaucracies, absconded funds and plain bad management.

Law makers do well, for themselves

Last but not least, do consider how well the governing elites treat themselves. Exhibit one is the impressive array of salaries and benefits enjoyed by Italian law makers. First of all, have look at how many there are, happy to eat and prosper at tax payers expenses. In America, a country of 310 million, there are 535 federal law makers. In Italy, a country of 60 million, there are 630 in the Lower House and 322 in the Senate, for a grand total of 952. So, their numbers are absurdly large. On top of that, they do really well. Their pay ranges from $ 18,000 to $ 27,000 a month. Plus they get medical insurance, free domestic travel and sometimes a car and driver. And they also collect pensions, even if the served only for a few years.

Bad examples from the top encourage more illegal behavior

Clearly the money spent to keep this grandiose legislative power happy is not critically large. But the lavishness of the treatment is a clear indication that the Parliament first priority seems to be to legislate in the interest of its members. “First we take care of ourselves, then, time permitting, we shall deal with other business“. It is obvious that Italy could easily cut the number of its law makers by at least 50% without jeopardizing the survival of the republic. And it is obvious that the salaries collected, in some cases for doing almost nothing, while outrageous any day, look particularly offensive in these times in which people are told that they need to make huge sacrifices.

Can Monti reform this?

In many ways, this issue of tolerated absurd parliamentary privileges, akin to those of enjoyed by medieval aristocracies, explains the prevailing unethical behavior of so many Italians. “If the public servants openly use public funds to feather their nests, why should’t I try and use all possible means, legal and illegal, to stay ahead?” I am not sure that Professor Monti has legislation in store that will change any of this. And yet, until this changes, forget about modernizing Italy.

India Will Not Liberalise Retailing – Country Will Keep Ancient Food Distribution System – Failure To Carry Out This and Other Needed Reforms May Doom Growth

By Paolo von Schirach

Related piece:

December 19, 2011

WASHINGTON – In a previous piece, (see link above), I had expressed concerns about the strong opposition against the announced decision by the Indian Government led by Prime Minister Manmohan Singh to open the country to large international supermarket chains. The purpose of this reform was to attract experienced foreign investors who would modernize an archaic Indian food distribution system that is costly and inefficient. In India layers of middle men and a myriad of small shops make everything more expensive, while fueling price rises and thus inflation.

No foreign supermarket chains

Well, the opposition won. Much to the dismay of Walmart and Tesco and with harm for the Indian people who deserve better the market opening and the consequent needed modernization of this huge sector serving an enormous population of more than one billion will not take place. At least not now. And so the Indians will continue to rely on a fragmented and costly universe of small shops that cannot possibly offer good prices as they cannot afford and are not equipped to buy large quantities, thus lowering prices. Food will continue to be more expensive than it need be, while it will to continue to spoil on route to market because of bad infrastructure and an ancient distribution system that lacks sufficient numbers of refrigerated trucks and warehouses.

Other reforms needed

But this is not all. As noted by Eswar Prasad of Cornell University in an op-ed piece in The Financial Times, (India must not let slip its shining moment for reform, December 19, 2011), this new set back needs to be added to endemic corruption, the ill effects of subsidies for food and energy, rigid labor markets and an antiquated financial system that fails to properly capitalize new enterprises.

Resistance to change

While India’s economic liberalization of the 1990s gave impetus to vigorous growth, in order to sustain it, India needs to go to the next level, and it appears incapable to do so. The political process is maddeningly complicated and there is genuine resistance to change. However, by keeping the old social stratification more or less intact, the government cannot enlist the poor among the supporters of reform. This way only some elites benefit from economic growth and the phenomenon is too narrowly focused to engineer real change within a country that is still mostly very poor.

Cash payments instead of subsidized items

As Prasad argues, just by providing cash payments instead of subsidized food and energy, the government would vastly reduce the graft and corruption involved in the supply and delivery of subsidized items. Besides, India “needs desperately needs a more efficient financial system to channel domestic and foreign capital into productive investments“. And then in Prasad’s list there are labor market and education system reforms, and a lot more.

Indian government cannot provide leadership

Quite clearly, even in the most optimistic scenario, it would be a daunting task to engineer fundamental change in any large third world country. And India is especially large and mostly poor. But India seems to have run out of political steam right when its economy needs bold reforms and skilled leadership to see them implemented.

A well run democratic system helps growth and opportunity. Unfortunately, while India has all the trappings of a democratic system, the institutions alone are no guarantee of good stewardship. Modern capitalism needs to be sustained by people who believe in open markets and free enterprise. Not enough of them where it counts in India.

If The Republicans Want Obama Re-elected, They Should Nominate Newt Gingrich – The Former House Speaker Is Smart and Has Ideas, But His Style Is Too Abrasive To Win Over The Independents Who Always Decide Elections

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By Paolo von Schirach

December 13, 2011

WASHINGTON– If the Republicans really want another four years of Barack Obama, they should nominate former House Speaker Newt Gingrich as their candidate, as opposed to picking Mitt Romney or any other moderate centrist. Without a doubt, of all the self-described conservatives who have emerged so far from within the Republican camp, Gingrich is by far the most accomplished. Quite frankly it does not take much to surge past Michele Bachmann, Rick Perry or Herman Cain, all of them amateurs with no depth of knowledge or experience and shockingly simplistic, bumper sticker, policy positions, whose implication they would not know how to explain.

Gingrich is no light weight

Still, beyond this easy comparison, let’s be clear: Gingrich is no light weight. Just like Bill Clinton, Gingrich knows issues, from Medicare to education to defense spending, and he has real and often original ideas about them. But he is also erratic and theatrically controversial. He loves hyperbole and exaggeration, much of it just for the pleasure to hit his audience with something outrageous. On foreign affairs, he just declared that the Palestinians are “an invented people”. One can imagine how popular this would be in the Arab world and with wider foreign audiences generally sympathetic to the Palestinian statehood cause. He also indicated that, as president, he would pick John Bolton, UN Ambassador under George W. Bush, (2005-2006), as his Secretary of State. Of course, Bolton was known for his undiplomatic style and he was let go because his abrasive manners were causing headaches and he did not have the votes to be confirmed by the Senate. (He had been placed at the UN by Bush via a recess appointment that was about to expire).

Personal vulnerabilities

Besides, in this silly world in which politicians have to be paragons of absolute virtue in the most conventional sense, Gingrich is vulnerable. Despite his proclaimed deep religiosity, he had extra marital affairs and three marriages. And he exhibited questionable behavior. His enormous (almost half a million) bill with Tiffany’s and his substantial and lucrative consulting activities with the very government supported Freddie Mac that he condemns politically, will be attacked as serious character and ethical flaws in a national campaign.

The base likes Gingrich because he is tough

Gingrich is liked by the Republican base because of his abrasive style and bold, unadorned language. The Republican conservatives like an attack dog who espoused conservative principles unconditionally and who also has intellectual sophistication; meaning that Gingrich can stand up in a debate and not be easily outwitted or outmaneuvered be a clever Barack Obama.

It seems obvious that Gingrich is rising now in the polls because the conservative Republicans cannot bring themselves to embrace a middle of the road centrist like Romney who, try as he may, just does not sound like one of them and does not seem to be able to cross the 25% barriers in opinion polls taken among likely Republican primary voters.

Electability is the issue

This is all very well and good. But the real problem for the Republicans is to nominate not just someone they are in love with but an electable candidate. The conservatives that tend to dominate the process may rejoice in nominating one of their own. But in the end, in November 2012, as in all other elections, the final result is decided by the independents who tend to shun a bomb thrower who just looks and sounds too extreme. Whatever the substance of policies, style matters a great deal in TV politics. Gingrich sounds abrasive and confrontational. Unfortunately, while this trait pleases conservatives seeking a champion, it will offend and turn off millions of independents.

Gingrich will not be able to get enough independents

I just do not believe that Gingrich will ever be able to secure the conservative base that may very well give him the nomination, broaden his appeal to the entire Republican party and, beyond that, secure the support of the political middle that he absolutely needs in order to get elected. I just do not think that he could pull this off.

Many things can change between now and November 2012, including a substantial worsening of the US economy, something that would damage Obama. The point is that Obama, however unpopular, is still the incumbent and thus he has an immense advantage. In order to win, Obama needs to say that no matter what he is still better than the Gingrich alternative. And so he will portray Gingrich as dangerous, erratic, inconsistent and morally questionable.

Gingrich easy target for a negative campaign

If Obama’s strategists are smart, Gingrich, with all his personal baggage and controversial positions, will be an easy target. I believe that, with the enormous advantages of incumbency and massive amounts of funds that will be relentlessly used to go negative on Gingrich, Obama, whatever his dismal economic stewardship, has an excellent chance to be re-elected if Gingrich will be his opponent.

So, in a sense it is up to the Republican rank and file conservatives to determine whether Obama gets another 4 years or not. They can use the primary process to pick someone they are in love with like Gingrich, or someone they are cool about, like Romney, who however has a far better chance of getting elected.

Italy and Greece Have A Bad Transparency International Score On Corruption, Matched By Bad “Doing Business” Grades – Poor Public Finances Go Together With Bad Governance, Corruption And Weak Economies

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By Paolo von Schirach

December 6, 2011

WASHINGTON – Bloomberg recently reported that Italy and Greece have the lowest scores within the Eurozone in an international ranking on “corruption perception” compiled by Transparency International, the leading organization in this field . The story tells us that Italy is number 69 in the world and Greece is in the number 80 slot, out of 183 countries, in a ranking in which 183 is the worst score. If one considers that emerging and poor countries get the worst scores, because of inherently weak governance and high corruption levels, Italy and Greece now are sliding into the third world, at least on corruption levels. In fact, Italy is now at the same level of Ghana and worse than Saudi Arabia.

Corruption, bad governance, weak economy

By contrast, the countries with the least amount of corruption world wide are New Zealand, Denmark and Finland. It is no accident that the most honest countries also have efficient governments and relatively prosperous economies.

Is there a connection between large and inefficient public sectors, a weak private sector and corruption? Arguably yes. An efficient, performing private sector would not tolerate corruption. But a weak private sector would be searching for ways to cut corners and obtain special treatments. As I noted in a previous piece on Italy, it is no accident that the Monti Government, instead of focusing immediately on the urgent debt crisis, on day one had on its plate a major corruption scandal about political favors, kickbacks and awards of major public contracts. Finmeccanica, otherwise known as one the best Italian industrial conglomerates, is in the middle of all this.

Bad World Bank “Doing Business” Scores

If we combine the Transparency International scores with the World Bank “Doing Business” rankings, the picture gets even worse. Out of 183 countries, (in a scoring system where 1 is the best and 183 the bottom), Italy is down to 87 from 83 last year. Greece is steady at number 100. And what is worse, if we look at key areas within this ranking, we see that Italy ranks 134 in the “paying taxes” category, 158 in “enforcing contracts” and 109 in the more mundane but equally important category of “getting electricity”. Well, these are third world scores.

Monti Government should deal with governance, beyond the debt crisis

Which is to say that the Monti government would have to do a lot more than just raising taxes to fix Italy’s problems. The emergencies measures just passed may do for the short term. But Italy, just as Greece, would need a fundamental reform of the entire public sector and governance in order to inspire enterprise and investments. And this is what Italy ultimately needs: enterprise and investments to grow the economy. Otherwise, it will be more of the same.

Disaster will be avoided, but Italy will continue to be weak

Sure enough, through a combination of higher taxes, spending cuts and the inevitable helping hand from the European Central Bank that will have to intervene to support Italian bonds, it may be possible to avoid disaster in Italy. This is possible, and I assume that eventually the acute phase of this crisis will be over. But, as these data indicate, the problems are much deeper. No way that a country with third world corruption levels and with a judiciary essentially incapable to enforce contracts will have smooth economic development. There is just no way. And Mario Monti is just one man, a “technocrat” placed there as an emergency care taker, with no political following.