My Deepest Condolences Message to our King Father Norodom Sihanouk

Dear all,

Photographer: Bo, Royal Embassy of Cambodia to Brunei

Our nation and people are currently of greatest sadness for the loss of our beloved King Father Norodom Sihanouk who passed away on 15 October 2012. Millions of Cambodian people sadly joined His Majesty's procession ceremony from the airport to the Royal Palace to respectfully pay tributes to our King Father with a heavy heart, heartfelt love and respect, and with deepest sadness in the country as a whole. This has shown a truly emotional unity from our people from different provinces and places in our country including the monks, the old and the young who held mourning ceremony for our beloved King Father.

On behalf of the Cambodian Economist Group (http://groups.yahoo.com/group/CamEconomistGroup/) and the Cambodian Development Network (http://www.angkeara.blogspot.com/), I would like to sincerely express my deepest and heartfelt condolences to our King Father Norodom Sihanouk. His Majesty's great success and achievements have led our country into peace, unity, and prosperity over the past decades till present. Therefore, His Majesty's glorious achievements and honor will never be forgotten and always be in our sincere heart. In this sense, I am strongly confident that our King Father will be a good and respected model in our history for our next generation in the future. Further information on our King Father's bio, please feel free to go through His Majesty's website: http://www.norodomsihanouk.info/

May our beloved King Father's soul rest in eternal peace... His Majesty King Father is always in the heart of Cambodian people forever...

Please kindly accept my deepest condolences, sincere love and respect on this occasion.

Brunei Darussalam, 31 January 2013,

Yours Sincerely,
Bong Angkeara

220 Scholarships for Cambodian Students

How important are crises and conflict, even sometimes wars, for stimulating development?

Many countries around the world have debated about development issues such as social and economic development so as to bring development for their countries and to get rid of poverty and hunger. Therefore, some definitions of development have been defined such as the development is an expansion of economy and increase of economic development (Peter, 2008). Others defined that it is an increase of people’s choices (Sen 1999, p. 36). The development is divided into two main types. That is, spontaneous and intentional development. The negative and positive outcomes refer to the spontaneous development and the intentional development deals with the negative of spontaneous development. On this topic of development, there are some opinions states that ‘Conflicts and crises, even sometimes wars are significant for stimulating development’.

Regarding this statement, I will argue these opinions due to three main reasons such as war generally brings holocausts, death, and poverty, et cetera. But at the same time, it can be seen both positive and negative effects for both sides. Another reason is that governments’ policies and actions are more important after the crisis, conflicts and wars. Having said that, the necessity of crises and conflicts, even sometimes wars just shape the development but it does not stimulate the development. The other reason is that, crises and conflicts lead to instability and underdevelopment in the society. In order to support my argument, I will discuss about the effect of crises and conflicts, and war. Some evidences and examples will be provided.

First, the positive effect of war can shape economic development in the countries. For instance, the war on poverty, which is the United States (US) government’s strategies, aims to eliminate hunger across the country. Then the poverty reduction plan is created by the government to enhance the living condition of the people and promote full employment and equal opportunity for the African Americans to end poverty in the United States. Nevertheless, it is sometimes unsuccessful to solve this problem because of the inequality of income and job opportunities. So the government will then announce a war state in order to fight poverty and hunger. As evidence, Lyndon in the United States announced the war on poverty in 1964 due to the unemployment issues and the inequitable income of the black and white people. By using this strategy, it can be seen that there is a notably decrease of unemployment rate between the blacks and whites. The blacks were 17.4 percent; which dropped to 3.4 per cent. the whites were 7.1 percent which dropped to 1.6 percent in 1961 after the war on poverty (Fine 1988, p.72). Therefore, it can be seen that the war on poverty can help to improve the people’s living standard in the country. Another example of the positive effect of the war is the fall of Berlin Wall in 1989. There are two different systems in Germany called capitalism and communism prior to the fall of Berlin Wall. Then, it has been combined into a one system after the Berlin fall; which the economy’s condition was changed from the top down to bottom up (Friedman 2005, pp. 53-55). It is not only the changes of the economy’s condition but also the combination of the West and East Germany as Germany. Since they have united, the development in Germany has been notably improved. Therefore, the Berlin Wall fall is a positive effect which can shape development.

Furthermore, the positive outcome from crises is lessons-learnt. The government sometimes realizes that there are problems, which will affect the development and economic growth, needed to be addressed and solved, but they seem to ignore the problems and no actions have been taken. As a result, crises appear. As an example, in late 1990s in England, the sexuality became a crisis due to an increase of sexual transmission. Thus, a high demand for health care services is needed. Concurrently, the National Sexual Health Strategies was issued by the government of the United Kingdom, which aims to protect the transmission across the society (Laverty 2005, pp. 37-43). Moreover, the war of independence is also another positive effect. Many countries around the world had been colonized by the other countries. So, it is impossible to make development happens in that country. Thus, the war of independence is created such as Algeria and Zimbabwe (Arnold, 1992).

However, if we look at the negative effect of the war, it causes severe consequence with high casualties. That is: many people die and injure; the infrastructures were destroyed; and most of the sectors were damaged in the whole society. For instance, the First World War; It was a global war and primarily occurred in Europe from 1914 to 1918. Coming to the end of the war, the total estimated casualties both the civilian and military was more than 40 million; which 20 million were killed including about 10 million civilian and 9.7 million military were died. Around 21 million were wounded (National Archives, 2008). Thus, we can see that war brought about big holocaust for the whole country and the globe. That is, how many people were died and how many infrastructures were destroyed, et cetera. Similarly, the Second World War, It was a conflict global military, which began in Europe from 1939 to 1945. The world's nations were split by this global conflict. There were around 100 million military soldiers mobilized across the state of the war. During the closing days Second World War, the nuclear weapons were detonated by the United States. On 6 August 1945, the first nuclear weapon was detonated by the US on the Hiroshima’s territory, which is a one of the major Japanese city. Three days later, the second bomb occurred on Nagasaki which is another major Japanese city. Around 120,000 people and even more over time were immediately killed by these bombs. Seriously, not only these people died but also the bombs’ effect impacts on the rest of the Japanese people as a whole till present. At the end, the total estimated human loss was approximately 72 million people. About 25 million military soldiers were killed including around 4 million prisoners’ death of war. About 47 million civilians were killed including roughly 20 million died due to the war which related to the disease and famine. (National Archives, 2008). So, we can see that how much casualties due to the war killed the human beings and the effect of war; which leads to a poverty and crises for the whole world. As a result, there was no development during the war but living in hunger and poverty. If we look the war in Algeria, 141,000 Algerian were killed during the war in1954. 51,800 French were wounded and 17,250 were killed. Not only many people die or wounded but also the other sectors and infrastructures in the whole society were severely damaged and destroyed. That is, roads, bridges, schools, et cetera (Arnold 1992, pp. 10-12). Similarly, in 1965 in Zimbabwe, 45,000 were killed during the war. So, the people were forced to be in the military service which means that they need almost all males to be soldiers in order to support war. Therefore, we can see that there is no development almost all sectors in Zimbabwe during this period (Arnold 1992, pp. 68-70).

After war, some countries can develop their countries faster than the others. As evidence, the infrastructure, poverty and socioeconomic development in Cambodia still poor after getting peace in 1989 (Annear, 1997). According to (Koubi, 2006), researched the war impact on economic growth between 1975 and 1989. That is, most of the countries, which do not have involvement in the war, always have more economic growth than countries involved. Moreover, the average of the expenditure of government, the economic growth of GDP, real income, and investment rate were used to measure the effects of the economy of the war. But due to some other factors, which also could contribute to the growth of the economy, it was difficult to measure (Lindgren 2005, pp. 84-87). It is hard to state that war stimulate development as there are some factors, which contribute to development. Generally, wars produce severe casualties and holocaust in the society.

After the Asian financial crisis in late 1990s, social policies attentions were taken into account by the government. The governments started adopting some strategies such as employment services improvement, financial assistance for poor families, and training (Chan 2000 pp. 520-522). Before the crisis, the progress of democracy in South Korea, Thailand and Taiwan were not well connected to the social policy. Nevertheless, this trend has been improved by this economic crisis (Croissant 2003, pp. 520-523). On the other hand, they were linked to the response of good government policies (Martin 1998, pp. 30-33). That is, it does not result from the crisis alone. Moreover, an example of Indonesia was shown due to the situation of finance remained inadequate such as depreciated currency and floating rates. So, we can see that it is vital for the government’s policies which were used in crises’ responses. Therefore, after the crisis and conflict, even sometimes war, it is good or bad based on the government’s policies used to bring development. In addition, economic development also needs good policies as it is necessary to development efforts success (Stiglitz 1998, p. 5).

In contrary, if a bad policy was used by the government, the crises and conflicts will bring about underdevelopment and violence in terms of social, economic and political instability. As evidence, a conflict between Pol Pot and Lon Nol in 1975 in Cambodia, when he came to power, Pol Pot used his bad and cruel policies which made the whole country’s infrastructures destroyed and all the people live in hunger and horror. That is, all the people, who were living in the city, were evacuated to the rural areas and provinces to work in the rice fields almost all days and nights without giving enough food. They forced the innocent people to work like animals. Moreover, more than two million innocent people were killed during his cruel regime. In addition, Cambodia was isolated from the international (Sina and Zimmer, 2005, pp. 330-333). As evidence, we can see that it was underdevelopment during this period because the infrastructures were destroyed and families have been separated from their parents and siblings. That is, people, who lived under his regime, only know the word ‘Angkar’ (which means organisation). Moreover, there was no freedom for people to express their ideas. Thus, it is contradicted to Sen’s development definition which it is as the real freedoms that people enjoy and people’s choices enlargement (Sen 1999, p. 36).

In addition, conflicts sometimes bring about violence in the society causing a decrease of economic development. According to (Lindgren 2005, pp. 70-75), ‘Different conflicts would result in different impacts. There are of four types of armed conflict’. The internal armed conflict is chosen to explain in this context. This conflict occurs between the opposition groups and a state itself. It does not get involved from the other countries. As an example, in 1997 in Cambodia, two political parties were in the conflict both political wordings and fighting afterwards. That is, the current political party called the Cambodian People’s Party and Funcinpec party. The political conflicts were then become a fighting in the central city of Phnom Penh. Like a war in the city by using all soldiers and military forces to fight each other which make the whole country into political and economical instability and people’s horror. At the end, the current political leading party was hardly got controlled the situations. So some people, who are in the conflict areas, moved to the other areas for a while. Concurrently, there were a lot of robberies from the innocent people and business people and killings because of this conflict. Some business properties have been destroyed and robbed. Then, the current leading party got controlled the situation. However, it took long times to secure the social security and public order. Not only the political and economic instability but also the impact on the other sectors in the country such as international and local business and investment stopped. Some companies were completely destroyed during that time. Specially, most of the major international business and investment companies moved to the neighboring countries such as Thailand and Vietnam (Springer, 2004). Similarly, in Thailand, there was a conflict of political party - between the current leading party and opposition party. Then a coup detat was established by the opposition party by using military forces to evacuate the current prime minister. Then, they came to power. As a result, the political situation was severe instability in the whole country. It effects on the economic development and other sectors et cetera. That is, the rising of inflation rate, interest rate and a decrease in tourism after this conflict. Four percent decreased compared to Malaysia and Indonesia due to this conflict. While the economic growth of Thai government was well increased before the coup and the international relations were well connected to the other nations. According to Ockey, the relation between Thai government and the international still remained poor after this conflict (2006, pp. 148-149).

Finally, based on my arguments, evidences and examples, I disagree with the topic as the conflicts and crises, even sometimes wars are significant for stimulating development. First, the war generally brings holocausts, death, and poverty in the whole society. Thus, there is no development for almost all sectors during conducting the war. Concurrently, it can be seen both positive and negative effects of the war. However, it does not stimulate development but it just shapes development. Second, the good policies and actions of the government are more important to bring development for the country after the crises and conflicts. Third, the crises and conflicts lead to the instability and underdevelopment in the society. Evidently, a result of the conflict and crisis will be underdevelopment rather than the development. As the above evidence from Cambodia and Thailand’s cases, which show the conflicts, bring about violence and strong impact on the development of the economy and the political instability in the whole country.

(Writer: Bong Angkeara)

Higher education graduates in East Asia: Too few? Too many?

The number of people with higher education credentials has never been higher in East Asia and the Pacific (EAP), according to a new World Bank website on higher education. Over the past two decades, the number of university graduates in the region has increased significantly. In countries like Thailand, Indonesia, and China, the percent of tertiary level graduates in the workforce is now about 20%, double from what it was 15 to 20 years ago.

At the same time, employers fret that they are not getting the skilled workers they need to compete in a global economy. Investment climate assessments report that 20% of employers feel that skills availabilities are a major impediment to business, as much as, if not more than, meeting onerous regulations.

Such employer frustrations must puzzle the many higher education graduates report having trouble getting jobs. And some who get jobs are the first to lose them during economic downturns, as two of my nephews living on either side of the Pacific Ocean recently found out. Unemployment rates among tertiary graduates are as high as 10% in countries like Indonesia and The Philippines. As an unemployed 21-year old newly-minted Vietnamese BA groused in a recent consultation: “I expected to find a job easily since I have a degree in computers. But, after going to multiple interviews, I found out that firms are hesitant to hire me because despite my degree, they have to train me to meet their work requirements. It is easier for these firms to hire a graduate with a couple of years of experience instead.”

What’s going on? Getting this puzzle sorted out may not only determine whether low-income countries (LICs) can become middle-income countries (MICs) and MICs, high-income countries (HICs). They may also affect social stability as young people’s expectations are at an all-time high. It is thus not surprising that governments are considering investing a great deal of their national wealth on expanding and improving their higher education systems.

I would like to know what readers think about this puzzle: lots of graduates, not enough skilled workers, high rates of graduate unemployment, frustration all around despite high rates of economic growth. Let me advance just a few hypotheses (conveniently labeled as “H” to give our discussion a veneer of academic respectability) to get the discussion going:

H1: Despite the higher number of graduates, enrollment rates in most EAP countries are actually low when compared to countries with similar income levels and growth rates. Enrollment rates are 24% in EAP, much lower than regions such as Latin America and the Caribbean, where it is 35%, and Europe and Central Asia where it is 55%. So, governments should spend more on access because, even without university degrees, having some years of tertiary education, including in polytechnics or community colleges, pays off.

H2: The high unemployment rate of graduates is due, not to their oversupply, but to the fact that too much of tertiary education in EAP is of low quality and has irrelevant curricula. Young people are learning the wrong things. For example, employers are seeking ‘softer skills’ such as team-building and communications and technical skills such as computer familiarity. This would argue that increased investment should focus on quality rather than just quantity.

H3: High unemployment may be due to the unrealistic expectations of graduates that they are entitled to ‘white collar’ jobs in offices and that ensure lifetime security. In contrast, in the US, the average college graduate will have had 7 jobs in the first two years after graduation, and many of them in areas that are unrelated to their field of study or in what are seemingly menial jobs but which teach invaluable life skills. Societies need to prepare the expectations of young people about labor market realities and about the need to get good basic experience early in their careers.

Do you think these hypotheses are valid? Do you have any that you’d like to advance yourself?
(Source: Emmanuel Jimenez)

Far from home in China: conversations with migrant workers searching for opportunities in urban centers

While traveling through China recently, I had an opportunity to visit the Shanghai Urban Environment project in the emergent suburban district of Qingpu and spoke to a number of workers responsible for the implementation and completion of the project.
As with many infrastructure and urban development projects in China, the speed and magnitude can be astonishing, with hundreds of employees working around the clock to ensure timely completion. Work on the facility runs 24 hours a day, 7 days a week with construction workers from all over China contracted to work and live onsite until its completion in 2011. Once finished, it will improve water service, coverage, and waste water management in the region which will be essential for sustaining the increasing population and living standards.
I was curious about the lives of the migrant workers who often move thousands of kilometers away from their homes to urban centers such as Shanghai in search of employment opportunities. China is experiencing unprecedented urbanization with an estimated 1.5 million people that move from rural areas to urban ones each month and an urban population rate that has increased from 17.9% in 1978 to 46% in 2008 and is expected to continue increasing to 60% by 2020. Large urban centers are seen as beacons of opportunity as the average income levels in urban areas were  3.28 times higher than rural areas in 2006 and is especially evident when comparing relatively prosperous Shanghai where GDP per capita levels are almost 10 times higher than lesser developed provinces such as Guizhou.

Huge machinery is used to dig through the earth in order to install new water pipes and to retrofit existing ones.

I had very insightful conversations with the manager of labor, Chen Aixing, quality control supervisor Jiang Peng, and laborer He Jiming among many others. Their joint inspiration for working on the project was an interest in urban development and to make more money in order to uphold familial responsibilities and aspire to more prosperous futures. To them, moving to Shanghai offered the greatest opportunities for attaining these goals.
The elder Mr. Chen and Mr. He were very satisfied with their work; they said that conditions had improved over the years with the addition of enhanced safety equipment, higher pay, better food, and more opportunities due to economic growth. They also note that workers are entitled to performance bonuses and have free food and housing onsite while they are working.
The manager, Mr. Chen, only attained a 5th grade education and became a migrant worker at 16. He was extremely optimistic and said that his standard of living has increased immensely since leaving his home of Liyang in neighboring Jiangsu province in the 1980’s. I noticed while chatting and drinking tea with him in his office that it was air-conditioned, had a computer, and he had the latest model Samsung cell phone; unimaginable luxuries in his youth. He beamed with pride as he told me that his son had managed to become an engineering student at Shanghai’s prestigious  Science and Technology University and his daughter aspires to be an English teacher. Over the years, he has been able to save enough to build a beautiful home in his hometown and is looking forward to a retirement with a pension. “As long as my children are successful and my parents are taken care of, I can be at peace,” Chen concluded.
Mr. Jiang, the quality control supervisor was young and well educated with a debonair aura.  He studied accounting but grew tired of crunching numbers at a desk. According to Jiang, things have become more equal since he sees migrant workers willing to work harder than native Shanghai residents, creating a more equal urban environment. Jiang uses the money he earns for himself and he’s not sure if he will stay in the future as opportunities in his native town of Jiaohe in Jilin province are increasing. He noted that you must physically and mentally prepare yourself to work extremely hard. He plans on saving money, marrying, and then having children in the near future. “I believe people, irrespective of where they are from, share the same hopes and dreams.”

Employees take a break from their day to thank and toast the God of Earth for blessing their work.

Mr. He is a laborer from central China near Chongqing and said that workers are increasingly drawn to better food and pay. He says he works on the project to earn as much as possible for his children’s education. He was heartened to have a niece that was the first university graduate in the family, which provides an inspiration for his children to work hard and persevere in school.  Mr. He feels guilty being away from his wife as she has to take care of the children, which requires waking up early and going to bed late to accompany them in their coursework and extracurricular activities. “My motto in life is to work diligently and be a good person. We’re all in it together and our assignment is a joint effort.”
I was touched by the strength, openness, and thoughtfulness of their responses while chatting with them about their lives. In the face of strenuous challenges --working seven days a week, only going home once a year, and living 12 to a room-- the interviewees were proud and enthusiastic about the project and their contributions. Everyone exhibited such an incredibly strong work ethic and sense of personal responsibility, a depth difficult to completely grasp through an outsider’s lens.
I walked away stunned, refreshed, and inspired to blaze my own trail with more gusto.
(Source: Joe Qian)

Why has developing East Asia led the global economic recovery?

Only a few expected in late 2008 that East Asia would lead the world economy out of the crisis. Skeptics pointed to the continued dependence of the region on exports to advanced economies. And skeptics and believers alike were predicting that all countries in the region would rethink their growth models to focus more on domestic demand rather than exports and investment. What a difference a year and a half makes. East Asia has recovered from the economic and financial crisis, with output, exports and employment mostly at pre-crisis levels. Leading the global economy, real GDP in developing East Asia is set to grow 8.7 percent in 2010, up from 7 percent in 2009, according to the World Bank’s East Asia and Pacific Update report launched today (and of which I’m the lead author, full disclosure here). The projected growth rate for 2010 is almost a percentage point higher than our own forecast made six months ago, and is higher than the 8.5 percent expansion recorded in 2008.
Firstly and most importantly, the recovery has been influenced by China. The Chinese authorities swiftly implemented a large monetary and fiscal stimulus starting in the last quarter of 2008 (through 2010) that exceeded the one introduced after the 1997-98 Asian financial crisis. The package helped boost government-led investment by nearly 6 percent of GDP in 2009, accounting for the bulk of the 8.7 percent growth in real GDP. The surge in investment, in turn, led to a sharp increase in imports for domestic use, notably from East Asia. This surge was most pronounced in the first half of 2009, when import demand among the advanced economies was contracting fast. 
Secondly, the other countries in developing East Asia also implemented timely fiscal stimulus packages, coupled with prompt and effective monetary easing. Even the low-income countries, notably Lao PDR and Cambodia, injected a discretionary fiscal stimulus of about 3 percent of GDP each in 2009, helping cushion the impact of the crisis on economic activity.
Thirdly, the countries of developing East Asia entered the crisis in fundamentally solid economic health. Heeding the lessons of the 1997-98 Asian financial crisis, countries had reduced government debt and fiscal deficits, cut external debt and ensured robust balance of payments positions, boosted foreign exchange reserves, and substantially improved financial supervision. The region’s well-capitalized banks helped substantially limit financial contagion and the transmission of forces of the global recession and continued to lend through the crisis, albeit at a slower pace in most countries.  
Fourthly, and this is a factor common for most developing regions, is the rebound in advanced economies. Developed countries joined the rebound in the third quarter of 2009, and their contribution to regional exports began to outpace the contribution from China.  
Last but not least, there is the importance of remittances. Unlike other developing regions and in contrast to most projections from early 2009 that suggested large contractions, remittances to developing East Asia continued growing through the crisis. In the Philippines, for example, remittances grew about 6 percent in dollar terms in 2009, while forecasters earlier in the year worried about a contraction of 10-20 percent. And such better-than-projected performance appears to have been observed in other countries heavily dependent on remittances in the region, including many of the Pacific islands.
(Source: Ivailo Izvorski)

Economic Performance

The U.S. has lost 5.7 million jobs in the past 16 months. The six months between October 2008 and March 2009 saw the U.S. economy contract more rapidly than during any other half-year since 1958. In April the unemployment rate reached a 25-year peak and it is forecast to rise through at least the end of this year. In short, the U.S. economy today is mired in a deep recession.
Even worse, the current recession follows an anemic recovery. The business cycle that ran from 2001 to the end of 2007 saw essentially every economic indicator except corporate profits turn in its weakest performance since World War II. Most damaging to working and middle-class households was that the percentage of the adults employed did not grow at all even during the expansion phase of the cycle (from November 2001 to December 2007) - the first time this has ever happened.
Median household income has never recovered from the recession of 2001. It ended 2007 at a lower level than where it stood in 2000. Given that median household income invariably falls during recessions and recovers only slowly as economic growth returns, it is all but guaranteed that median household income will see no growth at all during the current decade.
Even strong corporate profits, the only area of comparative strength in the last economic cycle, may prove to have been illusory. The share of corporate profits accounted for by the financial sector rose dramatically in the 2000s - from 25% in the business cycle of the 1990s to 37% in the 2000s. We now know that these financial profits were largely the result of investments whose value will be progressively written down. In short, the economic strategy of recent years -- based on deregulation, tax cuts for the most well-off, and concerted efforts to weaken the bargaining power of American workers -- clearly led to dismal economic performance across-the-board.
For the moment it seems clear that economic performance in general and the labor market in particular will get substantially worse before they get better. As the country looks for any sign of encouraging economic news, it's important to not set standards too low. As of May 2009, 16 months into the recession, almost 8 million jobs will be needed just to return the country to pre-recession unemployment rates, and this number of required jobs grows every month that the U.S. economy fails to create the 125,000 jobs needed just to keep pace with population growth.
The 4.7% unemployment rate that prevailed in December 2007 was already too high to spur across-the-board wage increases like those seen in the 1990s. In short, returning to the status quo that prevailed before the start of the current recession is far too modest a goal - this country needs a fundamentally different policy strategy to generate acceptable economic performance in coming years.
In their 2008 report, A Feeble Recovery, Josh Bivens and John Irons examine why most Americans failed to benefit from the most recent recovery. Another EPI report by Josh Bivens, Upside surprise in consumption spending doesn't stem sharp decline in economic growth, discusses the historically weak GDP numbers of late. In addition, EPI every month provides an exhaustive look at the unemployment data, examining not just the total jobs lost, but which sectors of the population are feeling the most pain. The May jobs picture can be found here.
(Source: Economic Policy Institute)

America's carmakers make a comeback

Rinsed and raring to go

After a terrible year there are signs of hope for Detroit

AMERICA’S carmakers appear to have returned from the grave. This week the three big ones—Ford, General Motors and Chrysler—all had good news to report. Ford recorded a wholly unexpected profit for the third quarter of nearly $1 billion, thanks in large part to a huge improvement in its North American operations. Sergio Marchionne, boss of Fiat and now Chrysler, laid out a detailed five-year plan for restoring the American company to health in a seven-hour presentation. Most sensationally, GM’s board, citing both the improving business environment and the firm’s own recovering financial health, reversed its decision to sell a majority stake in Opel/Vauxhall, its European subsidiary, to Magna International, an Austrian-Canadian partsmaker, and Sberbank, a Russian bank. Both GM and Ford were also able to post year-on-year increases in sales in October, of 4.7% and 3.3% respectively.

A year ago, such a turnaround seemed unimaginable. GM had declared losses of $4.2 billion in the third quarter and Ford of $2.7 billion. Both firms had burned their way through nearly $7 billion of cash each during the quarter. The smallest of the three, privately held Chrysler, did not say how much it had lost, but an educated guess was about $2 billion.

The rest is history. The government stepped in to prevent a potentially catastrophic collapse of GM and Chrysler with $62 billion of Treasury loans and then shepherded both firms through “quick-rinse” bankruptcies that shrank their debt, cut the cost of obligations to retired workers and pruned their sprawling dealer networks. Italy’s Fiat was recruited to take over the management of Chrysler and share its advanced technology for small cars in exchange for a 20% stake. Ford struggled on, completing its restructuring without help either from the taxpayer or bankruptcy, thanks to the $23.6 billion it had raised in 2006, before the credit markets froze, by pledging all its North American assets as collateral.

All three firms will now be helped by what may be a quicker and stronger recovery in car sales, particularly in America, than most people are expecting. It will be a long time before sales return to 17m a year, the level until recently regarded as “normal” by an industry accustomed to pumping up demand with cheap credit and suicidal pricing. But Adam Jonas, an analyst with Morgan Stanley, points out that previous recoveries in car sales have been “V-shaped” (see chart), and that this one is likely to be too.

After sales hit a low this year of only 10.5m, Mr Jonas is forecasting sales of 12.8m next year and 14.5m in 2011. He is relying on the combined effects of broadly based economic recovery, especially in the housing market, and the unprecedented age of the car fleet, which has typically peaked after seven years of consecutive increases in cycles going back to 1970 (the last inflection point was in 2001).

Since emerging from bankruptcy GM and Chrysler have reduced the level of annual sales at which they can break even from more than 16m to 10m. Assuming that neither loses much more market share, both should start making an operating profit next year. Meanwhile Ford’s chief executive, Alan Mulally, said this week that he was changing his guidance for 2011 from break-even to “solidly profitable”.

There the similarities end. Of the three, unquestionably the best performer has been Ford. In America its market share has leapt by 2.2 percentage points over the past year to 14.6%, helped by the acclaim it has earned by avoiding bail-out and bankruptcy and by the good reception given to new models such as the F-150 pickup, the Taurus and the Fusion Hybrid.

However, the decision to forgo the fresh start of bankruptcy means that Ford’s debt will rise to around $35 billion after payments are made to a retired workers’ health-care fund. Ford is also paying a price for its independence in another way. Under the terms of the overhaul of GM and Chrysler in bankruptcy, the autoworkers’ union made substantial cost-cutting concessions in return for a big share of the equity in both companies—concessions that the union this week voted heavily against extending to Ford.

As for GM, fears that bankruptcy might terminally undermine customer loyalty appear to have been overdone. GM’s product portfolio, although some two years behind Ford’s in competitiveness according to Mr Jonas, is steadily improving and has the potential to make a similar turnaround. Better quality, advertising targeted on only four brands and the improvement in used-vehicle values that is coming from no longer chasing volume at all costs should all speed GM’s revival.

The decision not to part with Opel/Vauxhall, although infuriating to the German government and the unions, is a sign of GM’s growing confidence. It had never wanted to sell Opel, which despite being lossmaking is GM’s main repository of expertise in technologies for smaller cars. But it felt it had no option until the European Commission forced the German government to promise that a proposed €4.5 billion ($6.7 billion) loan would be available to any investor, and not just Magna. Keeping Opel will allow GM to mimic Ford, which plans to meet growing demand for small and medium-sized cars by manufacturing in America products first developed in Europe, such as the new Fiesta.

Despite a typically bullish performance by Mr Marchionne on November 4th, doubts about the future of Chrysler will be harder to dispel. In contrast to Ford and GM, Chrysler’s sales last month were 30% down on a year ago. It is hamstrung by an absence of new models and negative reports on the quality of its vehicles.

Perhaps the best news that Mr Marchionne delivered was that Chrysler had $5.7 billion of cash at the end of September, compared with $4 billion when Fiat took over in June, and that it should make a small operating profit next year—testimony to phenomenal cost-cutting in bankruptcy. The relentlessly upbeat presentations by a succession of Chrysler executives (nearly all them new to their posts) provided a road-map of how the partnership with Fiat will transform the company and its ability to develop at speed cars that customers will want to buy.

Together they made Mr Marchionne’s target of doubling worldwide sales to 2.8m by 2014 sound almost achievable. The worry is that there is no quick fix for the lack of new products. For the next couple of years Chrysler will have to rely mainly on facelifts of existing models and urgently-needed improvements in quality. The biggest question is whether that will be enough to lift Chrysler’s market share well above its current 6% before a range of new products based on Fiat’s platforms and powertrains starts to appear in 2012. If Ford and GM are in the recovery ward, Chrysler remains on the critical list, for now at least.

(Source: From The Economist print edition)

Future dreaming

France, Germany and the European Union

French hopes for new Franco-German leadership in Europe may yet founder on disagreements about policies and priorities

TO MOST people, the prospect of an end to the European Union’s institutional navel-gazing is welcome. Once the Czech holdouts ratify the Lisbon treaty, goes the line, there should be no new grand schemes. Yet this is not how things are seen in France. Indeed, the French have been laying the ground for their next big idea: a deepening of the Franco-German axis to entrench their dual leadership and make Europe “one of the principal players of the 21st century”.

In a speech to his ambassadors in August, President Nicolas Sarkozy declared that he wanted “Europe once again to make history instead of enduring it”. His model was “Franco-German understanding” built on his friendship with Angela Merkel, the German chancellor. His Europe minister, Pierre Lellouche, is zealously spreading the message. “More than ever, the relationship between France and Germany will form the heart of what I would call the third phase of post-war European history,” he recently wrote in Le Monde.

The French are not suggesting a new EU treaty, but they have plenty of other wheezes. The celebration with Germany of the 20th anniversary of the fall of the Berlin Wall next month may make up for François Mitterrand’s lack of support for German unification. The French want a joint commemoration of Armistice Day on November 11th. There is talk of marking the 50th anniversary in 2013 of the Elysée treaty on Franco-German co-operation.

Plenty of policy ideas are being kicked around as well. The French want to persuade the Germans to back a new industrial strategy to promote European champions, a common investment in clean technology, a European plan for energy independence, greater tax co-ordination and more. They see common ground in opposition to Turkish membership of the EU, as well as reform of laissez-faire capitalism. There is talk of a joint Franco-German government minister. Mr Lellouche has asked his team to prepare “a new Franco-German agenda for Europe”, ahead of a joint cabinet meeting before the end of the year. “In the new European configuration,” he said last month, “the Franco-German relationship will be central, because only it combines both political will and the capacity to push grands projets forward.”

There are many impulses behind this new Gallic offensive. One is Europe’s changing politics. The French realise that the British are likely to be unhelpful friends if the Eurosceptical Conservatives win the election next spring. “David Cameron makes Maggie Thatcher look like a veritable federalist,” comments one aghast French politician. At the same time, the re-election of Ms Merkel at the head of a centre-right coalition, instead of her former unity government with the Social Democrats, boosts French hopes of a more decisive German government.

Another factor is the view that, when the French and the Germans agree, Europe makes its voice heard. The French list the G20 agreements to curb bank bonuses, strengthen bank capitalisation and squeeze tax havens as examples.
No bridge across the Rhine

As it happens, Mr Sarkozy, never an instinctive Germanophile, got off to a fractious start with Ms Merkel, falling out over French plans for a Mediterranean Union; and it took time for Ms Merkel to get used to Mr Sarkozy’s tactile chumminess. But Mr Sarkozy knows he cannot impose his ideas on Europe. Early on he spotted a chance to use the anti-capitalist mood against the “Anglo-Saxons”, and sought an ally. “There has been a spectacular conceptual rapprochement between Merkel and Sarkozy,” insists a French official.

Yet across the Rhine the preference is for plodding progress rather than grands projets. The German foreign ministry recently held a one-day meeting to discuss relations with France, but there was little debate about Mr Lellouche’s proposals. After all, there is still no new German government in place. The Social Democratic foreign minister, Frank-Walter Steinmeier, will go, but his successor, almost certainly Guido Westerwelle of the Free Democratic Party, has not yet arrived. If Mr Lellouche “honestly wanted his proposal to happen, he wouldn’t have launched it in an article in Le Monde,” noted one Berlin-based observer of Franco-German relations.

Nor is a new golden age likely when Ms Merkel and Mr Westerwelle take office. The EU’s biggest member has acquired a reputation for looking after itself—whether over saving the Opel carmaker or over euro-area bank rescues. Mr Westerwelle’s party will be charier of an activist industrial policy than were the Social Democrats.

Germany has other foreign-policy priorities besides France, such as improved relations with Poland and other central European countries. On nuclear power and Turkish membership of the EU, Ms Merkel’s new government is closer to French positions, although even here agreement may be elusive. It will keep nuclear-power stations open longer, but the two countries may not agree on a lot else over the EU’s energy policy. Nor is it clear that Ms Merkel will want to obstruct membership negotiations with Turkey.

Economic issues may be no easier. Germany’s new balanced-budget amendment to its constitution will force it to pursue a tight fiscal policy, unless the coalition circumvents it to permit tax cuts. France, on the other hand, plans to grow out of its deficit at a leisurely pace. Differences in debt and competitiveness will make it harder to manage the euro area. Germany will preach thrift and reforms to boost competitiveness. But if it just lectures its partners rather than co-ordinating policies, it risks aggravating tensions within the euro group rather than alleviating them.

Nor is there yet a Franco-German agreement on how to take the EU forward after Lisbon. A ruling in the summer by Germany’s constitutional court means the government must consult the legislature more often about EU initiatives. It is not clear if Germany means to give the EU greater scope for action or treat it, as many others do, as the mere servant of national governments. There is no sign of a bilateral deal on the allocation of the senior jobs being created by Lisbon.

The French are not starry-eyed. They know they are heading for possible rows over deficit-cutting. On industrial matters, the two countries often compete. The French are not happy that German trains, not French ones, will run on the soon-to-open high-speed link between Moscow and St Petersburg, nor that Siemens is pulling out of its nuclear joint venture with Areva. And the French are not blind to the need for other ties in Europe. They still hope to draw the British into a common European defence policy, even under a Conservative government. It is far harder for two countries to steer an EU of 27 members than one of 12. Yet the French expect the most from Germany—and it is not clear they will get much.

(Source: From The Economist print edition, BERLIN AND PARIS)