Shadow Government

President Correa's chutzpah hurts Ecuador-U.S. relations

Last month, I wrote how Ecuador's radical populist President Rafael Correa has tasked his ambassador in Washington with launching a charming offensive to secure congressional renewal of trade preferences under the Andean Trade Preferences and Drug Eradication Act (ATPDEA), which expire next year. Ostensibly, the campaign is designed to make policymakers forget about some of President Correa's more egregious anti-American actions, such as embracing Iran and unceremoniously expelling the U.S. ambassador from Ecuador last year.

One would think then that a looming congressional vote on ATPDEA extension would cause President Correa to rein in his provocative behavior. Far from it. In fact, in the past couple of weeks, he has continued apace his efforts to sever normal ties between the two countries.

First, he announced Ecuador's withdrawal from the Western Hemisphere Institute for Security Cooperation (WHINSEC), where Ecuadorean military officers traditionally received U.S. military training. The facility, formerly the School of the Americas, has been a target of leftist agitation for decades.

At the same time, Correa has begun a campaign threatening to now expel the U.S. Agency for International Development mission from Ecuador, which he has accused of "funding the opposition."

Yet, through it all, his ambassador in Washington has been maintaining a brave face. In a recent interview with the Ecuadorean press, she claimed that a recent U.S. Trade Representative report on ATPDEA extension concluded that Ecuador "met all the criteria for eligibility." In fact, it did no such thing.

In one key passage, the report notes, "developments in the past few years give rise to concerns about the government's long-term commitment to international arbitration for the settlement of investor disputes." According to The Hill, "The report could make it harder for lawmakers to renew the program."

The embassy also apparently snookered the American Bar Association Rule of Law Initiative into hosting next week a senior Ecuadorean official to expound on Correa's efforts to "transform" Ecuador's judiciary, no doubt to assuage U.S. companies concerned about their treatment there. The Ecuadorean judiciary has indeed been transformed by Correa -- into another arm of the executive.

Today, he has the majority of the Supreme Court in his pocket and the politicization of the judiciary was laid bare in Correa's recent $40 million lawsuit against a newspaper for a critical op-ed column. It turns out, for example, that the sentencing documents were not written by the presiding judge, but by Correa's own lawyers.

The incongruence between Correa's behavior and the apparent goal of securing the extension of U.S. trade preferences is striking. As I have written previously, no matter on what front Ecuador is evaluated, the Correa government does not merit a renewal of ATPDEA benefits. At the end of the day, such programs are meant to elicit cooperative, positive behavior from the beneficiaries. Why else would they exist? The Obama administration and Congress ought to make clear to the Correa government that they are no longer interested in subsidizing his bad behavior.


Shadow Government

Why China's economic opacity is a serious problem

An interesting thing has happened on the way from strategic competitor to regional ally (or whatever it is that President Obama labels China these days). During the economic malaise of the world's largest economy, and during Japan's lingering inability to escape the grips of recession, the Chinese economy has grown to become the world's second largest, behind only the U.S. (Japan's former position).

Of course this is not necessarily a bad thing. Economic growth hopefully will bring more freedom to China's people. At a minimum it'll allow more of its citizens to buy widgets that help them get around the Great Firewall.

The part that is troubling is that China's economy is not becoming more transparent. All of their statistics come from a national statistics bureau ultimately beholden to political leadership. The numbers are spartan, and even if the numbers are accurate they are far too broad to dissect an economy as complex as China's. The traditional data sources for the Chinese economy have remained the same and are no longer sufficient for the world's second largest economy, not for the financial world. The shortcomings of the NBS is a topic covered in depth here), here or here. If you're not interested in reading more there, just consider that China's quarterly stats, for an economy of 1.3 billion people, is tabulated in just two weeks. By comparison, the same tabulation takes the U.S. over a month. Amazing given China's size and the very restricted resources of the statistical bureau. Likewise, the headline numbers often seem to be edited to match other economic indicators -- and yet, the quarter-on-quarter and year-on-year numbers often don't make a lot of sense when compared. There is also no attempt to report stats like urban and rural employment. The Statistical Bureau makes revisions but they are only upward revisions and always create a discrepancy between revised and unrevised reports. Most obviously, there's a built in incentive for provincial officials to report higher numbers. You see the result of this in the creative math used in tabulating GDP for China's 32 administrative regions. Every single region reported forecasts of 8 percent of GDP or higher last year. Yet, the nationwide forecast was 8 percent.

But before Tom Friedman or Ray Lahood can say that it's just because China is better managed or uses better math, let me posit the obvious: China is publishing numbers to fit a set storyline and not vice versa. (Full disclosure: I am co-founder of a company that publishes The China Beige Book, a private quarterly survey that uses exclusively independent data to produce an accurate, real-time snapshot of the Chinese economy -- the views here are my own and do represent those of CBB, LLC). In a healthy economy, the government will publish data, and hoards of private companies will do their own research to either support or argue with the official results. That's not happening in China.

It's a real problem because of China's importance to the world market. Bad data begets bad policy. The White House is making decisions based on a limited view of what China's policy freedom of action may be because they're reacting to inadequate economic data -- and we know U.S. policymakers don't have better data. All over the world decisions are made on the perceptions -- not facts -- about what is going on.

How many G20 meetings have there been since the financial crisis during which this issue -- better and more transparent data -- was raised (Hint: Zero)? How about any special point raised by the IMF or World Bank -- all institutions the West controls? This is the world's second largest economy and every leader on earth may be flying blind, and doesn't seem to care. This has ripple effects throughout the financial world. National-level policy makers, hedge and pension fund managers, and even people controlling their own 401k all need better data. Yet, we seem all to be ok flying blind.

With the U.S. locked in horrific growth, no demand from Japan, and the eurozone's fiscal profligacy having made it a ticking time bomb, China's economic growth -- and how it deals (or does not deal) with the serious imbalances in its economy -- is becoming more important to the world economy, not less. The world of finance (including the Treasury Department and the Fed) are hanging their hat on world GDP growth impacted greatly by China's economy. Those decisions will impact your pocketbook directly. Like it or not China is deeply integrated into the world economy and into the U.S. economy in particular.

The fact is that we can't be sure what's going on there (is the bottom falling out of the real estate market, are unregulated non-banks easing credit, are they stockpiling valuable commodities?) We think we know the answer to some of these questions but we're not sure. Just this morning, the Wall Street Journal's Tom Orlick, one of the best commentators on this subject, penned a piece guessing about China's current inflation rate.

It's a very serious issue because the reality -- not the perception -- of China's economic health will impact the world economy. Decisions regarding U.S. government policies, Fed policy, world stock markets plays, and even your 401k are all made based on those perceptions. But the outcome will be based on reality. Tiny Greece is a good lesson -- it's a different situation but the same concept. Europe was cruising along blissfully on the perception that Greece was doing fine. But when the Greek government decided to come clean about the reality of debt off the books the euro crisis began in earnest. I'm not suggesting China necessarily has something to come clean about (though China's non-performing loans make for interesting reading) or that we are at some inflection point. But this is a dangerous time to be leaning on such dubious statistics.