Tuesday, March 29, 2005

Indian Acapella Group 

Sometime back AC had made a post on Petra Haden using nothing but her voice. Here's another group that uses just that. Check out their version of Desert Rose here. Whats perhaps notewrothy is that the group is essentially a bunch of Penn/Wharton undergrads with 5 CDs out!

Monday, March 28, 2005


I have just heard from multiple news sources that a huge earthquake has hit the coast of Sumatra. The earthquake has a magnitude of 8.2-8.5 apparently and the Pacific Tsunami Warning Center has put out a serious Tsunami warning for all the countries previously affected by the Dec 26th Tsunami. Not much any of us can do except hope that if the Tsunami does materialise (and it may well not), people are better protected than the last time.

UPDATE: Here are the details from NOAA.

ORIGIN TIME - 1610Z 28 MAR 2005


UPDATE: The general warning is that people 1000 miles from the earthquake epicentre need to evacuate. Heard from some folks in Thailand saying that all the beaches are being evacuated and people being moved to higher ground.

UPDATE: We're past 19:10 Zulu now. I hope this means the chances of a Tsunami occuring are now non-existent.

Saturday, March 26, 2005

Swami Vivekananda's speech in MP3 format 

Via Desi Geek, I made this terrific find today. Divyesh has put up MP3 versions of Swami Vivekananda's famous speech at the World Parliament of Religions in Chicago in 1893. What's more, it's very good quality audio given when it was recorded. Thanks Divyesh, for a real gem.
The Speech -- Part 1 (7.16 MB)
The Speech -- Part 2 (4.78 MB)

Friday, March 25, 2005

The Patent Bill is almost law 

As most of you may have noticed, the new patents bill in India was passed by a voice vote in the Rajya Sabha on Wednesday. Only the president's signature now stands between the bill and what I think will be trouble. The new patents bill, which covers everything from software to pharmaceuticals, attracted the most attention for what it would do to drug prices. Rightly so. I am all for liberalisation, but to succumb to the intense lobbying of the pharmaceutical companies without thinking through the consequences is pretty dumb. Health care is not software and should not be treated as if it was.

My question is why there isn't more concern in the Indian media about this or am I missing something? Yesterday, the New York Times carried two full-length stories about this. In particular, the stories shed light on what may happen to AIDS patients as a result, not just in India but all over the world.

"It's very disappointing, but it could have been worse," said Daniel Berman, a coordinator of the global access campaign for the medical charity Doctors Without Borders. "All generics could have been removed from the market." Instead, all the generic drugs already approved in India can still be sold, though sellers must now pay licensing fees. There are also provisions allowing companies that make generics to copy drugs in the future.But there are relatively tough criteria for such copying, and activists predicted that prices for newly invented drugs will be much higher, because drug makers will have the same 20-year patent monopolies as they have in the West. As AIDS patients develop resistance to old drugs, new treatments will become less affordable, they said.

Under the new law, a maker of generics can apply to copy a patented drug, but only after it has been marketed for three years. In addition, the patent owner can object. Also, the generic's maker must pay a "reasonable" royalty, although the law does not define reasonable. Two years ago, Mr. Berman noted, the London-based company GlaxoSmithKline demanded 40 percent of the sales proceeds of an AIDS drug it licensed to a South African company. (Under pressure from South African regulators and activists, it later licensed it to three rival companies for only 5 percent.) In 2003, the Swiss drug maker Novartis forced Indian competitors to stop making generic versions of its leukemia drug Glivec, which the Indian companies sold for $2,700 a year. Novartis then priced its version at $27,000 a year, while giving free treatment to a few poor patients. If a drug is desperately needed, the new law allows the government to declare an emergency and cancel its patent. But Mr. Berman said India had never declared such an emergency, and for years resisted admitting that it had an AIDS problem. In Africa, exports by Indian companies, especially Cipla and Ranbaxy Laboratories, helped drive the annual price of antiretroviral treatment down from $15,000 per patient a decade ago to about $200 now. They also simplified therapy by putting three AIDS drugs in one pill. D

These are the two paragraphs that should worry every Indian.

Before 1970, India's patent laws came from its colonial days, and it had some of the world's highest drug prices. Process patents on drugs, fertilizers and pesticides have extended life expectancy and ended regular famines.

With the new law, analysts said, prices on patented breakthrough drugs would most likely rise to nearly the level in the United States, while prices on more commonly used drugs would most likely rise only moderately. The government has said it would step in if price rises were excessive but has not said how that would be determined.

If you were looking for a silver lining, here is one.

The Indian bill was amended to prevent "evergreening," in which patent owners try to get a new 20-year monopoly by patenting a variant on the same molecule. To win a new patent, the applicant will have to prove the variant works better.

Has the government deliberately left loopholes in the law? Perhaps, given the number of times the word 'reasonable' appears in the law ('reasonable affordability,' 'reasonable pricing,' 'reasonable royalty etc). Even folks at Pfizer India agree that the controller of patents is going to have enormous discretionary power to decide what the term 'reasonable' really means.

Will the patents bill help the domestic (as opposed to Indian subsidiaries of MNC's) pharmaceutical industry?

Smaller generic drug makers could be priced out of the market and disappear, analysts said. Yusuf Hamied, the chairman of Cipla, a company known for supplying AIDS cocktails in Africa for a third of the price in the West, cited the experience of Italy, which instituted drug patents in 1984. "What is the position of indigenous Italian industry today?" he asked. "Zilch. They've all been taken over. And from being a net exporter, they've become a net importer of drugs."

Selling F-16's to Pakistan 

While we are on the topic of aviation, I might as well let you know that the U.S. just announced that it is going to sell two dozen F-16 fighters to Pakistan, never mind what Larry Pressler thinks. No real surprise there. Unlike several other analysts, I don't think this sale does anything to upset the conventional balance of power on the sub-continent, especially since India is on the verge of making a mega purchase of 125 advanced jet fighters. To soften the blow for India, the U.S. has offered it both F-16's and F-18's, as I understand it. The added bonus being that India can manufacture the F-16's in India, which will mean significant technology transfer.

To me, the more interesting question is what the U.S. is upto vis-a-vis stability on the sub-continent. During her visit to Asia, Condi Rice was doing her damndest to scuttle the Iran-Pakistan-India pipeline. As I see it, the pipeline could potentially be one of the biggest guarantors of peace on the sub-continent. Pakistan will earn substantial amounts of money from rights-of-way revenue from the pipeline. Therefore, they have strong incentive to keep the peace. Effectively, the U.S. is trying to scuttle an excellent guarantor of peace and at the same time, trying to sell the exact same weapons systems to the two parties involved.

At this point, the US's rhetoric about maintaining stability on the sub-continent rings a bit hollow. This is as good a time as any to revisit Atanu's excellent essay on dollar auctions and deadly games.

The Air Fare Wars have begun 

The Telecom wars in India settled the issue of whether competition was good for the consumer. I have been predicting for a while now that civil aviation will go the telecom way as new airlines learn to compete not just among themselves, but also with the Indian Railways. Air Deccan started the trend with Rs 500 tickets, but the battle has now been joined in earnest by Spice Jet, a new low-cost carrier that is expected to start flying in May. Apparently, their introductory offer includes tickets priced at Rs 99.

Though this is clearly an introductory offer and prices will eventually climb to A/C II or III class levels, this is still great news for the Indian consumer. Indians travel in very large numbers. The Indian Railways carries about 11-13 million passengers a day. Assuming that about 1% of these passengers pay upper class fares, that's about 110,000 passengers a day or about 40 million passengers that the airlines can potentially persuade to take to the skies. This is on top of the 20 million passengers flying currently. Of course, at Rs 99-Rs 500 levels for no-frills flying, the airlines can potentially capture the upper end of the second class passenger market too.

Finally, if the airlines start to compete with the railways, the railways will have no option but to cut fares on its upper class seats, which means more people will be able to travel upper class.This is all back of the envelope stuff and may well be off-target, but it still gives you an idea of what could occur in the civil aviation sector if liberalisation goes the path of the telecom sector.

PS: The caveat to all of these expectations is that to fly these many passengers, you need a hell of a lot of planes. Jet Airways has 42 planes and Air-India has about 34. Even if you ball-park the numbers for all the private airlines, I don't think there are more than 200 commercial aircraft in India today, compared with 6000+ in the United States. This obviously means that India needs a LOT more aircraft, and buying them will require a LOT of money. Maybe it's time to revise those FDI norms for the aviation sector where foreign investment is capped at 49% and foreign airlines aren't allowed to invest?

Thursday, March 24, 2005

Gandhi at the EPICA awards 

Here's another post that should have been made some time ago. Many of you may have already heard of an ad for Telecom Italia featuring Mohandas Gandhi, which won Europe's EPICA awards recently. The ad attracted some controversy since it used parts of a speech (without permission, i presume) made by Gandhi in 1947 Inter-Asian Relations conference. Whatever. In my opinion, it's a brilliant, brilliant ad and goes to show what an amazing director Spike Lee is. You can watch the ad in its entirety here.

The ad was created by Young and Rubicam Italy and the creative directors are Aldo Cernuto and Roberto Pizzigoni. The background score is by Lisa Gerrard and Pieter Bourke. As mentioned above, the director is Spike Lee.

Tuesday, March 22, 2005

US, India and Pakistan 

Should US send F-16 jet fighters to Pakistan? Larry Pressler, an ex-senator who, in 1990, was pivotal in preventing sales of 28 F-16 jets to Pakistan writes an opinion piece in the New York Times.

Pakistan is a declared ally in the fight against terrorism, and thus we give it huge amounts of military aid. But F-16's have nothing to do with fighting Al Qaeda and the Taliban. So what is really going on here?

He uses this particular case to argue that US policy in the region is misguided.
Meeting with Pakistani leaders last week, Secretary Rice did say she looked forward to "the evolution of a democratic path toward elections in 2007." But she neither asked for nor received any sort of guarantees about elections, human rights or freedom of the press. She did bring up nuclear proliferation, but only in a perfunctory way. Likewise, President Bush had General Musharraf as a guest at Camp David in 2003, apparently without ever mentioning the administration's democracy program. This all makes a mockery of President Bush's inaugural speech in January, and is a prime example of the sort of dictator-coddling that, eventually, always comes back to haunt us.

We need a fundamental policy shift for the subcontinent. First, we should enthusiastically improve our treatment of India. We should not reject Pakistan entirely - we need it as an ally - but to treat India and Pakistan the same is a great mistake. Instead, we need to speak frankly in public about Pakistan's democratic and human-rights failures, as well as acknowledge that we can achieve our objectives in Pakistan with a much lower level of aid and a closer eye to ensuring that it goes toward the fight against terrorists. And we should not sell it any F-16's.

Pressler studied India as a Rhodes Scholar back in 1962 (?) and spent time focusing on Asia when in the senate. So perhaps he knows what he's talking about - but then he is also a frequent traveller to India owing to his board memberships there (Pressler is on the board of Infosys)- so is this biased? I don't think so.

Sunday, March 20, 2005

India-Pakistan : Second Test 

To return to truly important matters : the Mighty Indians have done it again. The Indians handed Pakistan another defeat in the second Test at Eden Gardens. The win must come sweet for Ganguly in his home stadium, after talks of replacing him as captain.

In a second innings dominated by the Indian batsmen, the Indians declared at 407 to exactly match their first innings total. I wonder if this is going to be tagged as one of Ganguly's little superstitions. Ganguly has every right to be superstitious as countless other sportspeople have been before him, of course, as long as it doesn't directly impact team strategy. Ganguly has been a pretty shrewd, even inspired, judge of when to declare in the past, and I am not going to second-guess Ganguly on this decision. It's been Kumble and Dravid all over this match. Hurrah to the men in blue!

Blackhole in the lab 

[From Roberto Almanza] A fireball observed at the Relativistic Heavy Ion Collider (RHIC) in New York shows certain characteristics of a black hole, says physicist Horatiu Nastase in a paper that appeared on the pre-print website arxiv.org.

Ten times as many jets were being absorbed by the fireball as were predicted by calculations.

The Brown researcher thinks the particles are disappearing into the fireball's core and reappearing as thermal radiation, just as matter is thought to fall into a black hole and come out as "Hawking" radiation.

Knuth on NPR 

Amit had posted before on Donald Knuth's near-completion of Volume Four of The Art of Computer Programming. There was a wonderful story on him on NPR earlier this week, where you can hear him talk about it.

From Don Knuth's page on The Art of Computer Programming at Stanford :

At the end of 1999, these books were named among the best twelve physical-science monographs of the century by American Scientist, along with: Dirac on quantum mechanics, Einstein on relativity, Mandelbrot on fractals, Pauling on the chemical bond, Russell and Whitehead on foundations of mathematics, von Neumann and Morgenstern on game theory, Wiener on cybernetics, Woodward and Hoffmann on orbital symmetry, Feynman on quantum electrodynamics, Smith on the search for structure, and Einstein's collected papers.

Saturday, March 19, 2005

American Social Security System - Lessons for a developing country? 

As the difference between the average life span and average retirement age has moved from a negative number in 1939 (when social security was introduced) to around 15 today, it is no surprise that outflows will soon be higher than inflows. With that in perspective, let us revisit the origins of social security. I quote from an interesting essay.

The earliest known use of the term “social security”—albeit as an abstract concept—was by Simón Bolivar, the South American revolutionary and politician, in an 1819 speech about the proper functions of government.

Today, in the US, Social Security is a combination of three social insurance programs: retirement insurance (originally known as old-age insurance), survivor insurance, and disability insurance. Should something like this be introduced in India? First, note is that such a scheme is nothing new:

Social security-like government programs had already been around for two millennia. Confucius, who lived from 551 to 479 BCE, wrote that the Chinese empire of his time provided “regular allowances” to orphans, widows and widowers, and “old men without sons.” Imperial Germany began the first modern social insurance system under the auspices of Chancellor Otto von Bismarck. As a countermeasure to more radically socialistic proposals, Bismarck established mandatory old-age and invalidity (disability) insurance in 1889. Great Britain started unemployment and disability insurance in 1911 and added old-age and survivors insurance in 1925. By 1933, at least 39 countries operated social security programs of some kind for old-age and/or unemployment. Belgium, Bulgaria, Czechoslovakia, France, Germany, Great Britain, Greece, Hungary, Luxembourg, Netherlands, Poland, and the USSR all had compulsory social insurance for old-age, disability, and survivors—social security systems more advanced than the American system would be until 1956.

Second, it is also important to note that social security was introduced in America at a time when, beginning in 1880, America gradually changed from rural to urban, and from agricultural to industrial. As a result, the family farm with its multi-generational extended family—a traditional source of economic security for the aged and disabled—began to disappear. As Seager (a professor of political economy at Columbia University and author of one of the first books on the subject) notes

In the country household there is a place for the aged parent or grandparent. The family has a settled abode, and economic interest reinforces filial regard in securing to old people proper care and consideration. So long as any strength remains, there is useful work about the house or farm which they may do. Moreover, the cost of maintaining an aged relative in the country is so small as to seem an insignificant burden. In the crowded tenement house of modern cities the situation is very different.

As India moves in this direction, with smaller families and more urbanization, perhaps there is a need for social security then? This is not so clear – for one, individual saving goes down when social security is in place. So the total saving in the economy might still be the same.

Also, adults may now have lesser incentives to have offsprings (the countries with social security have some of the fastest aging populations). So in some sense, there might be a perverse effect of accelerating the disintegration of a family system. Even abstaining from any ethical arguments, this can have important implications for development (much has been said, though not enough, on the effect of China’s aging population on its future growth). Finally, this can cast doubt on the sustainability of social security programs. Remember outflows will then outweigh inflows, a problem US now tries to handle.
The issue is clearly not simple enough to be captured in a few paragraphs but here's a start.

East Coast Blogger meet 

We have organised a get-together for bloggers of South Asian origin/writing about South Asia in New York city on April 2nd. The get-together will be held at the Bay Leaf restaurant mid-town from 1:30 pm onwards. Expected to attend are Prashant Kothari, Kaushik Bannerjee, Amardeep Singh, Seshu Badrinath, Manish and Anna from Sepia Mutiny, Shashwati Talukdar, Kerim Friedman, Sonal Vaidya, Atanu Dey and hopefully some Zoo Station bloggers.

If you would like to attend, please send me a note since we have to make reservations at Bay Leaf accordingly. If you know of any east coast bloggers who have been left out of this list, please let me know and please let them know too. Hope to see some of you on April 2nd.

Thursday, March 17, 2005

The end of culture! 

Today, I walked 20 blocks down Madison Avenue from 64th Street to 44th Street. I did not come across a single Starbucks the entire distance. Does this signal the death of cafe culture in the United States?

Wednesday, March 16, 2005

The snows of Kilimanjaro. Gone. 

Providing possibly the most dramatic proof of rising global temperatures, the snows atop Africa's tallest mountain and one of the most recognisable natural wonders of the world, Mount Kilimanjaro, are virtually gone. About 15 years before scientists predicted this would happen at that.

Wolfowitz it is! 

A couple of weeks back, we were discussing who would succeed Jim Wolfensohn at the World Bank. Looks like the Bush administration has managed to go with the most controversial nomination (as is their wont) -- Paul Wolfowitz. A man so hawkish that the Economist called him a velociraptor, since calling him a hawk would not not do him justice. The nomination worries me, partly because I think what the World Bank needs is a realist, not an uber idealist neo-con. Nevertheless, I'd still say give the man some time. If nothing else, he has a wealth of experience in formulating policy, even if none of it has been in the development/poverty alleviation domain.

I have read a few edits criticising the choice of a defense department person becoming head of the biggest development institution of the world. They seem to be forgetting the background of the Bank's longest serving president, Robert McNamara. And for those of you who remain unconvinced by my cautiously optimistic prognosis, look at the bright side. This means that Wolfowitz is no longer at the Defense Department.

Sunday, March 13, 2005

Labour reforms by another name? 

If you can't get fight them, subvert them seems to be the tactic of choice for India's trade and commerce minister Kamal Nath. For long, several reform minded ministers have tried to reform India's intractable labour laws. To no avail. There are enough left-wingers within India's polity who don't seem to see (or don't want to see) the obvious long-term benefits (increased investments for starters) of having a more flexible labour policy. The answer that Kamal Nath seems to have come up with? Chinese-style special economic zones.

The Indian government is planning to allow the country's 29 states to bypass the country's strict labour laws through the creation of special economic zones. Mr Nath said the proposed legislation would be enacted by May. Mr Nath said the legislation would allow state governments to decide what labour regulations to apply to their own planned SEZs. Critics could accuse the Congress-led government of circumventing a pledge to communist allies not to dilute India's inflexible labour regulations. The creation of SEZs, a concept pioneered in China more than two decades ago, is a central plank of the Indian government's plans to encourage faster inflows of foreign direct investment and boost employment.

If pushed through, the measure would prove popular with foreign companies, many of which say India's labour laws deter them from investing in the country. To lay off workers under existing laws, companies with more than 100 employees need the permission of the state government. They are also prevented from employing contract workers for extended periods without offering permanent employment. However, the new latitude available for SEZ is likely to be subject to a time-limit or “sunset clause” to encourage immediate FDI by overseas companies

Martin Wolf on the Indian budget 

Here's another op-ed on the Indian budget that ought to have been posted a lot earlier. Martin Wolf of the Financial Times follows up his India/China piece with his take on the Chidambaram budget.

"First do no harm" is an excellent motto. The budget did, indeed, do no obvious harm. It even did some good.Between 1960 and 1980 a moving average of the previous 10 years of economic growth oscillated between 3 per cent and 4 per cent a year (see chart). Since the early 1980s, however, these 10-year moving averages have been on a rising trend. In the most recent period (the 10 years that includes fiscal year 2003-04, April to March), growth of net national product per head has reached 4.4 per cent a year. At that rate, incomes per head will double every 16 years.

The challenge is to sustain, if not accelerate, this growth. For a poor country, this is a necessary condition for eliminating mass poverty. Fortunately, the signs are good. Any country whose incomes (and so output) per head are far below those of the world's leaders enjoys a catch-up opportunity. The speed with which that opportunity is exploited depends on increases in the quality of "human capital" (above all through education), on the rate of capital accumulation, on the speed with which technology and other forms of knowhow are transferred from the more advanced economies and on the overall efficiency with which resources are used. On all these fronts, there is progress.

A moving average of the previous 10 years' household savings has risen from 7 per cent of gross domestic product in 1959-60 to more than 20 per cent in the most recent period (see chart). Private corporate savings have also risen from below 2 per cent of GDP in the 10 years to 1990-91 to 4 per cent. Even though the public savings rate has deteriorated sharply, the overall gross domestic savings rate has risen to a 10-year moving average of 24 per cent, against 10 per cent in the years up to 1959-60. The actual savings rate in 2003-04 was 28 per cent of GDP. The overall rate of investment has risen with the savings rate, from an average of 12 per cent of GDP in the 10 years up to 1960-61 to close to 25 per cent in the latest period. The return on capital has also been rising.

Mr Chidambaram also had to plead with his own side for greater openness to inward direct investment. "On foreign direct investment", he remarked, "I would urge honourable members to take a pragmatic view. At the recent meeting of the finance ministers of the G7 countries . . . the finance minister of China looked in my direction and told the gathering that China had received Dollars 500bn (Pounds 260bn) worth of foreign investment since China opened its economy in 1980. Of this nearly Dollars 60bn came in calendar 2004." Yet even if the budget offered no dramatic transformation, it contained valuable elements: reductions in peak tariffs on non-farm imports to 15 per cent; removal of 108 items from the list of products reserved for production by small-scale enterprises; a reduction in corporation tax; use of India's foreign currency reserves to fund investment in infrastructure, and increased spending on highways, rural infrastructure and primary healthcare.

Chidambaram op-ed from the WSJ 

In the immediate aftermath of the Indian budget, finance minister P.Chidambaram had written an op-ed in the Wall Street Journal selling the India story to American policy makers and investors. It should have been posted on here a lot earlier given that it's been several weeks since the budget. Better late than never, I figured.

The enshrining of democratic principles in a newly independent country might have involved some initial "fixed costs." But democracy is the only legitimate and stable foundation for a society. India, having paid those "fixed costs," now appears to be reaping the dividends. There are two aspects to the "emergence of India." First, there are signs of vigorous growth in manufacturing. High growth rates in exports have been extended beyond the now-familiar services story to skill-intensive sectors like automobiles and drugs. Manufacturing growth accelerated every month after May 2004 to reach double-digit levels in September and October. Merchandise export growth in the first 10 months of 2004-05 was 25.6%. For three quarters running, revenue growth in the corporate sector has been above 20% and net profit growth has been around 30%. Second, there is a pronounced pickup in investment. From 2001-02, the investment rate in India, low by East Asian standards, rose by 3.7 percentage points to 26.3% of GDP in 2003-04. There are signs of an investment boom in the high growth in production and imports of capital goods in late 2004.

The growth in the investment rate is excellent news, though keeping China's 40% investment rate in mind offers perspective. Chidambaram also addresses the fiscal situation and the creation of better incentives for firms, while hinting at the potential returns to investing in physical infrastructure in India.

The two big elements of the macroeconomic balance are the fiscal deficit and the balance of payments. We are committed to eliminating the federal revenue deficit -- the excess of current expenditure over current revenues -- by 2008-09, as mandated by our fiscal responsibility law. It is currently 2.7% of GDP. The federal fiscal deficit -- which is required to be reduced to 3% by 2008-09 -- is currently 4.3% of GDP. A special feature of the current year has been a change in intergovernmental fiscal devolution, between the federal and state governments. The Indian Constitution uses a neutral and expert Finance Commission, every five years, to govern this relationship. The latest Finance Commission report places a large burden upon federal finances, amounting to 260 billion rupees ($6 billion) or 0.75% of GDP in 2005-06. As a consequence, we have been constrained to press the "pause" button on fiscal consolidation for 2005-06 only.

We are steadily isolating barriers to competition and removing them. India once had a peak customs rate of 300%. In the recent budget, the peak rate has come down to 15%. Another element of this is heightened competition through foreign direct investment. India has limits on foreign ownership in a few sectors, and we have steadily made progress on raising these limits. India had earmarked certain items which only small firms are allowed to produce. We have steadily made progress on shortening this list. The budget this week removed 108 items from this list.

Friday, March 11, 2005

Farewell to a Giant 

Garry Kasparov has retired from professional chess. With his retirement, an era has passed.

Was Kasparov the greatest chess player of all time? Comparisons across the ages are bound to be subjective, since the game itself has evolved so much over the years; nonetheless, Kasparov has as good a claim as any (and better than most) to be called the best ever. Francois-Andre Philidor invented ‘modern’ chess strategy in the 1750s, and is considered the first true great of the game. A century later, the American prodigy Paul Morphy destroyed all comers both in the US and on a triumphant European tour. After Morphy, Emanuel Lasker and Jose Raoul Capablanca have both had their share of admirers – Lasker was World Champion for a record 27 years, while Capablanca had a spell of 8 years (from 1916 to 1924) in which he lost just one game. Closer to the present day, Bobby Fischer captured hearts and minds with his victory over Boris Spassky and the ‘Soviet Chess Machine’ at the height of the Cold War.

But nobody ever bought the same combination of strategic insight, tactical precision and above all psychological mastery to the chess arena as did Garry Kimovich Kasparov. His opening repertoire was vast, and few could match the depth of his positional analysis in the middle game. He was a brilliant, audacious attacker – the sharper the line, the better he played – but he could also defend tenaciously and accurately when called to do so. Above all it was his ruthlessness over the board that set him apart from his contemporaries – he had the killer instinct, the appetite for the big occasion, that won him games even before the first pawn was pushed forward. In an era where impregnable defence and the careful accumulation of minute advantages were threatening to destroy the aesthetics of the game for the viewing public (see Karpov, Kramnik, Leko; see also Kramnik’s rebuttal of this argument), Kasparov’s dynamic, aggressive and always exciting style rescued chess.

Political shenanigans and unseemly disputes about prize money have meant that Kasparov is no longer the undisputed world champion – he lost the PCA title to Vladimir Kramnik in 2000, and FIDE has been unable to organize (as yet) the long-awaited match between Kasparov and FIDE champion Rustam Kasimdzhanov that would presage any reunification bout. But there’s little doubt that he remains the strongest player in the world. After a two-year dry spell in which he didn’t play many games (“protecting his rating”, said the critics), he returned triumphantly to action with a runaway win in the 2004 Russian Championship; at times he seemed to be toying with his opponents on his way to a dominating +5 score. He followed that up with an astounding 9th win (in 14 attempts) at the Category 20 Linares tournament, which ended yesterday (no other player has won more than thrice). His ELO rating remains above 2800, higher than any other player in the history of the game. If there is such a thing as going out at the top, then Kasparov is the perfect example.

Thursday, March 10, 2005

Mittal No:3 on Forbes list 

Lakshmi Mittal has vaulted an incredible 59 places (yes, you read that right) to become the third wealthiest man in the word behind Bill Gates and Warren Buffet. For a brief while during the peak of the dot-com boom, Azim Premji had made it to the Forbes top 5, but that proved to be a very transient affair which ended with the busting of the bubble. I suspect Mittal's presence on the list may prove to be a more enduring affair, given the incredible growth in the steel market, something Thomas alluded to in an earlier post.

Interestingly enough, Mittal is not the only developing country presence in the top 5. Carlos Slim Helu of the Mexican telecom giant, Telmex, follows right behind Mittal at No:4, with a fortune estimated at $23.8 billion compared to Mittal's $25 billion. Carlos Slim, however, made most of his money while being based in Mexico City.

Either a borrower or a lender be 

Way overdue but finally here, is a website where lenders can get in touch with borrowers and choose commonly agreeable rates. Since financial intermediaries typically take a significant margin on such activites, it was only a matter of time before someone used an internet business model that removes the need for intermediaries (think ebay) in this context. ZOPA, named after 'Zone of Possible Agreement', attempts to address most issues that spring to mind - from concerns of getting ripped off to pricing. Head over to the website to get answers but here is something to note:

An individual lender doesn't lend to an individual borrower because that’s too risky. Instead a lender lends their money across at least fifty Zopa borrowers, and similarly a borrower borrows from a group of Zopa lenders. So the risk is well and truly spread.

This is common practice in collaterized markets where, for example, different high risk loans are put together in a basket. The basket is then organized in several layers (tranches) that are typically organized in terms of seniority (who gets paid first). Each layer is then sold separately.

The reason I highlight this aspect is because of its potential application in reducing the interest rates that many poor people, especially in India, have to pay when they borrow money (Reuben has probably said something on this earlier?). For example, in India, a physical version of ZOPA can cut the profits of individual money lending sharks.

Meanwhile, in South Africa... 

The capital of the most important economy of Africa, Pretoria, has been renamed without too many people taking notice. The capital of South Africa will from now on be called Tshwane, after an ancient black tribal leader. The World Briefing section of the NYT provides some background.

Pretoria was named after Andreas Pretorius, an Afrikaner best known for the 1838 Battle of Blood River, so named because the river ran red with the blood of 3,000 Zulus killed by Voortrekkersettlers. Tshwane (pronounced t'SHWAN-ay) is the African name for another local river and for an Ndebele chief who ruled there before the arrival of whites. The city says the word means "we are all together."

Wednesday, March 09, 2005

Google Desktop Search 

Reuben mentioned Google Desktop Search when it came out in Beta. Google Desktop Search is now out of Beta. The security concerns raised at the time of Beta's launch have been addressed - password-protected documents and other secure content on the computer are not indexed. Also, users can disallow indexing of content from secure web-sites. GDS comes with an SDK for developers to extend support, and has been released on Windows 2000 and Windows XP.

Google has heavy competition in the consumer desktop arena. Not only have its top rivals, Yahoo and Microsoft's MSN, introduced similar tools recently, but a litany of upstarts have emerged to compete for Web surfers' attention. Some are even having success; Blinkx said Friday that its desktop-search tool is now fielding 100 million searches daily.

All the search companies are hoping to lock in new visitors with desktop applications because they believe it will help them drive more Web searches--and hence more advertising sales. Search-related advertising is expected to be worth between $4 billion and $5 billion this year.

Microsoft should be able to achieve tighter integration as they own the platform and the APIs, greater flexibility as they can probably better index Office and other file types, and perhaps also faster searching, since their search and file system components can integrate better. Desktop search is still anybody's game.

In other developments, it was pleasing to see Google's new weather service. You can now type the keyword "weather" followed by city and state information (or zip code) to get weather and weather-related search information on the area. When will Google integrate their weather, news and other services into a, um...., portal?

The Bloggies 

The fifth annual Weblog Awards are scheduled to be announced in a few days. Voting is closed. Time magazine featured the Bloggies in their newly created "Blogwatch".

The Bloggies are the Web's answer to the Oscars, but this is one award show you can attend in boxers, not Bulgari. The fifth annual annual Weblog Awards, to be posted March 14 on BLOGGIES.COM, will name winners (chosen by reader votes) in 30 categories, ranging from Most Humorous to Best Designed.

I've got to say that while the site Bloggies.com says that the ceremony will be held as part of South by Southwest 'in Austin, Texas, USA on Monday, March 14 at 12:30 PM', the site itself is a little open on when the results will be posted - 'sometime between Sunday, March 13 and Tuesday, March 15'. Time magazine might still be right, but I wouldn't be a good pajamahideen if I didn't point that out. Oh well, couldn't resist it. Not in my pajamas.

The nominees include the timely, fabulous "South-East Asia Earthquake and Tsunami Blog". SEA-EAT has been nominated for "Best non-weblog content of a weblog site", "Best topical weblog", "Best new weblog" and also for the title of "Weblog of the year"! I know that Suhit, one of our readers, has been associated with at least one of the tsunami blogs. There are some other familiar names at SEA-EAT as well (Sakreha). The SEA EAT bloggers put together a great site in double-quick time in the days following the tsunami. Here is wishing all the tsunami bloggers the very best!

Tuesday, March 08, 2005

IISc's windfall 

A few days back, as part of India's latest Union Budget, Chidambaram proposed a gift of INR 100 crore (approx USD 22.9 million) to the Indian Institute of Science (IISc) with the stated goal of creating a world class Indian university. The relevant section of Chidambaram's budget speech follows:

Institutions of Excellence

92. On January 6, 2005, the Prime Minister spoke about his intention to set up a Knowledge Commission to look into the issue of building quality human capital. Government believes that investments in institutions of higher education and Research and Development organizations are as important as investments in physical capital and physical infrastructure. What we need are world class universities, and we must make a beginning with one institution. We must have a university that will be ranked alongside Oxford and Cambridge or Harvard and Stanford. I am happy to inform the House that we have selected the Indian Institute of Science (IISc), Bangalore, which enjoys a high reputation as a centre of excellence in research and development. We shall work to make IISc, in a few years, a world class university. I propose to provide an additional sum of Rs.100 crore as a grant for this purpose.

The IISc, a 96-year-old Bangalore institution, is far less of a household name than the IITs, both in and out of India. However, the choice of IISc is inspired and sound as it has a decidedly stronger research focus than the IITs whose main role is undergraduate education. Indeed, the IISc does not even have an undergraduate program. Need I say that this is terrific news for researchers in India, or looking to relocate to India?

Of course, there will always be some naysayers, such as the writer of this letter to the editor of the Deccan Herald:
Sir, I don’t agree with the Union Budget’s proposal to give a Rs 100 crore grant to the Indian Institute of Science (IISc) in order to bring it on par with world-class institutions like Oxford and Cambridge. Oxford and Cambridge are raising their own corpuses rather than relying on the government. Also, most IISc professors are running their own private trusts using the IISc’s name to obtain funds from donor agencies. How many Nobel Prizes have the IISc alumni won in the last 50 years? This itself speaks for the tall claims made by the IISc about its world ranking.

There are all sorts of reasons why this is wrong-headed, especially the question about Nobel prizes, but I trust that our readers can see them, putting everything in perspective. If anything, it points out that Chidambaram should have had second thoughts before dropping the Oxford and Cambridge names in that speech.

A more meaningful criticism of the IISc is what I alluded to earlier: it's been far less successful at building its brand name than the much younger IITs. As a very young prof working far away from India I can hardly lay claim to knowing the solution but it's clear to me that the 100 crore gift can only help. For starters, perhaps the IISc would consider hiring someone to create a professional website for the institute that actually announces this generous gift? Come on, IIsc! It doesn't take Nobel prize winners to get your website up to Oxbridge standards.

Full disclosure: My father has spent almost his entire career as a professor at IISc.

Breaking the Technology Barrier 

The IIT's (Indian Institutes of Technology) have traditionally concentrated on strong engineering fundamentals in their curriculum. As a result, most degree programs are heavily overloaded with technical classes. The Social Sciences or the Liberal Arts make only a rare and rather watered-down experience in an IITians education. This of course has prompted many students, alumni, politicians, industrialists etc to complain about the narrow focus of education that is being given to the 'cream of the crop' in India. However, there are signs that things could be changing.

In an article today, the Times of India says:

Go the MIT way, the HRD ministry has told the Indian Institutes of Technology (IITs). They have been asked to expand base, without restricting themselves to just engineering courses any longer.

This would mean introduction of courses in economics and business administration, in addition to strengthening and diversifying existing programmes in linguistics and pure sciences.

Of course, this is not the first time that such a voice has been raised, but the article seems to indicate that the government is actually quite serious about developing new programs that are not centered purely around technical disciplines and have substantial involvement from the Social Sciences. I'll leave you to judge this, but in my opinion, the sooner this happens, the better!

Terrorists in Bangalore 

Interesting story from The Register about Lashkar-e-Toiba militants targeting tech firms in Bangalore. From the article:

Police found documents suggesting the group visited Bangalore in November last year and were finalising arrangements to rent a house there. The group had a detailed map of the offices of one firm, according to the Star of Mysore.

Apart from maps of call centres police also recovered 100 kilos of dynamite, 10.5 kilos of RDX explosive, 450 detonators, three AK-56 rifles and a satellite phone.

Some more from Sify News.

Monday, March 07, 2005

Who's covered 

(Via Graham) Petra Haden, a name previously unknown to me, has shot straight into my "people to admire" list by taking the most daring approach to a cover version of a rock album I've ever seen. She reinterprets The Who's breakthrough 1967 album "The Who Sell Out" using only her voice for everything from vocals (of course) to guitar and bass lines (wow!) to drums (what?!!). NPR recently featured her and you can listen to some samples of her work on their page.

A web search revealed this interesting blog post about the album, which is high on my seek list right now.

Saturday, March 05, 2005

The Economist India/China special 

The current issue of the Economist has a special section on India and China. This is their second India/China special in less than 2 years, the last being in June 2003. In addition to the special section, you can also listen to an interview with the author of the special section, South Asia bureau chief of the Economist, Simon Long.

Thursday, March 03, 2005

Globalization and Wal-Mart 

There are some implict trade-offs involved in globalization. People in the U.S. get cheaper goods while the Chinese and the Indians get jobs. At the same time however, workers in the U.S. get squeezed as more jobs head overseas. It has been my position on this blog that the benefits of globalization far exceed the downsides, especially when you look at it from an Indian perspective. A few days back, former labor secretary Robert Reich wrote one of the most thoughful op-eds I have seen on the subject of trade-offs, using Wal-mart as an example.

Wal-Mart has lured customers with low prices. "We expect our suppliers to drive the costs out of the supply chain," a spokeswoman for Wal-Mart said. "It's good for us and good for them." Wal-Mart may have perfected this technique, but you can find it almost everywhere these days. Corporations are in fierce competition to get and keep customers, so they pass the bulk of their cost cuts through to consumers as lower prices. Meanwhile, many of us pressure companies to give us even better bargains. I look on the Internet to find the lowest price I can and buy airline tickets, books, merchandise from just about anywhere with a click of a mouse. Don't you? The fact is, today's economy offers us a Faustian bargain: it can give consumers deals largely because it hammers workers and communities.

We can blame big corporations, but we're mostly making this bargain with ourselves. The easier it is for us to get great deals, the stronger the downward pressure on wages and benefits. Last year, the real wages of hourly workers, who make up about 80 percent of the work force, actually dropped for the first time in more than a decade; hourly workers' health and pension benefits are in free fall. The easier it is for us to find better professional services, the harder professionals have to hustle to attract and keep clients. The more efficiently we can summon products from anywhere on the globe, the more stress we put on our own communities. But you and I aren't just consumers. We're also workers and citizens. How do we strike the right balance? To claim that people shouldn't have access to Wal-Mart or to cut-rate airfares or services from India or to Internet shopping, because these somehow reduce their quality of life, is paternalistic tripe. No one is a better judge of what people want than they themselves.

Reich then lists some possible solutions to this conundrum.

The only way for the workers or citizens in us to trump the consumers in us is through laws and regulations that make our purchases a social choice as well as a personal one. A requirement that companies with more than 50 employees offer their workers affordable health insurance, for example, might increase slightly the price of their goods and services. My inner consumer won't like that very much, but the worker in me thinks it a fair price to pay. Same with an increase in the minimum wage or a change in labor laws making it easier for employees to organize and negotiate better terms. I wouldn't go so far as to re-regulate the airline industry or hobble free trade with China and India - that would cost me as a consumer far too much - but I'd like the government to offer wage insurance to ease the pain of sudden losses of pay. And I'd support labor standards that make trade agreements a bit more fair.

I personally don't have a problem with Reich's suggestions as long as they stay within the borders of the United States. The minute he talks about labor standards, that becomes a problem because he's effectively proposing that trade barriers be errected. I think the issue of domestic labor standards are best decided by the people and governments of China, India, Mexico etc just as they're best decided by the people and govt of the U.S. within U.S. borders.

Wednesday, March 02, 2005

Choosing the President of the World Bank 

On Zoo Station, we have discussed several times the process behind the selection of the heads of the World Bank and the IMF. In particular, the American and European ability to carve up the job between themselves without really giving a damn what the rest of the world thinks is a serious problem. Especially since the World Bank has ostensibly been set up to help people who reside entirely outside of Europe and the United States. Someday, this will change, as will the makeup of the Security Council of the United Nations. Until then, we have no option but to wonder what will happen when Jim Wolfensohn steps down at some point this year, under pressure from the Bush administration.

Wolfensohn has been one of the best things that happened to the World Bank. He helped change its focus from mega projects (giant hydel dams etc) to more manageable, community-oriented projects. More importantly, the World Bank learnt that bottom-up development may be a better solution than top-down, centrally planned development. They also learnt to consult with NGO's and other constituents on the ground rather than just depend on economists sitting in Washington D.C. Finally, they learnt that development was a process that could not be viewed entirely through the prism of economics. Of course, the critics of the Bank remain trenchant in their criticism, and to some extent they have a point, in that the Bank probably needs to reform its development agenda a great deal more. But, even they have to admit that under Jim Wolfensohn the World Bank did turn a corner.

So, what happens when Wolfensohn retires? Will the Bush administration appoint a right-wing ideologue, for instance? It was initially thought that Robert Zoellick would be Bush's choice, but Zoellick is out of the running now that he is underling to Condi Rice at the State Dept. Who then? Today's New York Times ran a speculative piece on the names being considered by the administration and there are some HUGE surprises in there. Namely, Carly Fiorina and Paul Wolfowitz.

Carleton S. Fiorina, who lost her job as chief executive of Hewlett-Packard almost three weeks ago, has emerged as a strong candidate to become president of the World Bank, according to an official in the Bush administration. Paul D. Wolfowitz, the deputy secretary of defense, was also under serious consideration, according to the official, who refused to be identified because discussion about the candidates is continuing.

The short list also includes Randall L. Tobias, global AIDS coordinator for the White House, who is a former chief executive of Eli Lilly & Company, and John B. Taylor, under secretary of the Treasury for international affairs. M. Peter McPherson, former president of Michigan State University, is no longer considered a leading candidate. A long shot is Representative Jim Leach, Republican of Iowa, who is a specialist on aid and development. The decision rests on several factors, including the results of consultations with members of the World Bank, politics within the Bush administration and a closer scrutiny of the candidates.

Now, will the Defense Dept's gain (if Wolfowitz were to leave) become the World Bank's loss? For that matter, does it make sense for Carly Fiorina, fresh from nearly running HP into the ground, to become the leading spokesperson for the world's poor? Okay, maybe I am being facetious here. Wolfowitz does have some formidable international policy experience and he may in fact be a half decent choice at the Bank, if the Bush administration can contain the huge worldwide protests that are a certainty if the chief architect of the Iraq War becomes president of the Bank. Carly Fiorina, on the other hand, I am less hopeful about. Sure, she's glamorous and probably is a reasonable communicator, but I am not sure that's qualification enough.

Meanwhile, the Los Angeles Times lead editorial throws up an entirely unlikely name into the fray -- Bono. Mind you, this is not the Bush administration's idea, but simply an idea the LAT has thrown up.

Don't be fooled by the wraparound sunglasses and the excess hipness. Bono is deeply versed in the issues afflicting the least-developed nations of the world, as former Treasury Secretary Paul H. O'Neill learned when he traveled the continent with the musician. O'Neill, an uber-wonk, came back singing Bono's praises. Bono even brought ultra-conservative Sen. Jesse Helms to tears by relating poverty in Africa to passages in the Bible. Bono may not have a PhD in economics, but he'd have plenty of real economists around the bank to consult. Bono is the most eloquent and passionate spokesman for African aid in the Western world. And given that both ex-President Bill Clinton and British Prime Minister Tony Blair have in recent years made Africa one of their focuses, that's saying something.

Bono led the Drop the Debt campaign in 2000, seeking to forgive billions in loans to the Third World, and in 2002 he co-founded Debt, AIDS and Trade in Africa, a serious group that seeks to raise awareness of Africa's problems and lobby governments to help solve them. It could hardly ask for a better spokesman than its founder, whose fame has helped open doors that other lobbyists spend decades trying to crack. Bono could enhance the World Bank's image and sell its poverty-reduction mission far more effectively than the other deserving candidates being mentioned for the job, which traditionally goes to an American — a tradition that deserves to be broken, even if not in favor of the Irish rock star.

It's an interesting idea, but that's all it is. There is no way the LAT or anyone else will convince the Bush administration to hand the job to anyone but an American. There's no way, I think, anyone is going to convince Bono to leave U2 either. And so it should be. However, I read a few letters published in the LAT in response to this editorial, and some of them seemed to suggest that the biggest problem with Bono's candidature is that he has no international development experience. I suppose Carly Fiorina does?

Tuesday, March 01, 2005

On Einstein and Gödel 

This year marks the 100th anniversary of Einstein's pathbreaking papers on the photoelectric effect, on Brownian motion, and of course on relativity. The New Yorker has a fascinating article on Albert Einstein and Kurt Gödel, titled "Time Bandits". What is well known is that these two men were responsible for reshaping philosophical ideas in their respective fields. Slightly less well known is their having spent a significant portion of their lives at the Institute for Advanced Study in Princeton (not to be confused with Princeton University). Much less well known are Gödel's crippling paranoia, his ideas about the fictitiousness of time and his very special relationship with Einstein. Do read the article even if you think you've already heard enough about these men, because you probably haven't.

Also, the Historisches Museum Bern will be running a special Einstein exhibition starting this June, Bern being the place where Einstein made the aforementioned pathbreaking discoveries.

For me, personally, the article brought back nostalgic memories of my days at the Institute and in Princeton in general. Davidson's food market, alluded to in the article, vanished during my first month in Princeton (Sep 1997) and has since been replaced by a Wild Oats market. Incidentally, Landau's store in Princeton, which, as far as I could tell, was permanently in liquidation sale mode, had some interesting Einstein memorabilia in its back room. Can someone in Princeton check if they still do?

Commodities and China: An Addendum 

On the heels of Thomas' post, here is a paper, co-authored by a colleague at Wharton that summarizes commodity price movements and returns over the last 45 years. I recommend reading it (with a warning that it might be a tad technical), to get a better idea of how these prices change with inflation.
As pointed below, the growth in China is likely to help the bullish view on commodities - some private equity firms have already benefited from some great commodity related investments (specifically coal) that have paid off due to such macroeconomic factors. This brings me to a concern that I have considered important in the discussion of China's growth - population trends. The Economist has similar concerns

Projections by Asian Demographics, a research organisation, show China's total population, which hit 1.3 billion in January, inching up to 1.31 billion in 2019 and declining rapidly thereafter. The number of people aged under 40 may already have peaked at 800m and is forecast to decline by one-third, or 250m, over the next 20 years. By contrast, those aged over 40 will grow by 270m, or more than half, over the same period (with those aged 60 and older growing the fastest). By 2024, they will make up 58% of the population, up from 38% today. By then a full three-quarters of Chinese households may be childless.

As a result, Asian Demographics forecasts average annual increases in GDP of only 4.8% over the next ten years, and of below 4% thereafter. Yet foreign corporations are currently pouring $60 billion of investment a year into China on the basis of 7-8% annual economic growth during the coming decades. If demography really is destiny for China's economy, those investments could prove disappointing.

While this will change the nature of products sold (expect drug companies to do well), what is relevant here is the impact on demand for commodities. Given that India continues to grow (both economically and demographically), I won't be surprised if the growth in commodities is driven by demand in India, that is, if commodities are still on their way up!

Coffee Trees Take Time to Grow – an Essay on Commodities, China, and Jim Rogers 

Most people are skeptical of efforts to predict the future, and understandably so: fortune-telling has a long and for the most part disreputable history. It is a curious paradox, then, that the same rational individuals who would cavil at paying a psychic five dollars to shuffle a pack of tarot cards are more than happy to trust their life savings to various questionable investment schemes – simply because their financial analyst tells them to. And there’s never a shortage of questionable investment schemes on offer, promoted by a variety of hucksters and conmen (aka ‘Wall Street’) who range from the merely incompetent to the actively unethical. Buyer beware!

Typically, Wall Street predictions involve the extrapolation of recent events to ludicrous extremes; more than most people, the financial industry drives while looking into the rear-view mirror. Equities outperformed bonds in the last 20 years, ergo, they will always outperform bonds. Inflation has been low of late, hence it will always remain low. The Dow goes from 5,000 to 10,000, and pundits rush to predict 36,000 or even 100,000. When it is pointed out to these pundits that economics tends to follow cycles, and that equally strong previous trends have always eventually come to an end, they say "this time it will be different".

Alas, it never is. Human psychology remains the same, in every era and every market. When prices are high, producers rush to increase their production. Meanwhile, consumers strive to reduce their consumption. As supply rises and demand drops, prices invariably head lower, and the savants who predicted a never-ending bull market are left looking silly.

Unfortunately, this does not prevent a new crop of crystal-ball gazers from grabbing the headlines with their next set of zany predictions. Moreover, the mass media ensure that it is always the most outrageous predictions that hog the spotlight; nobody wants to hear that the future will by and large resemble the past.

In all this charlatanry, it’s refreshing to hear the voice of calm reason and common sense. For me, that voice belongs to a poor kid from Alabama who became one of the greatest investors of all time – Jim Rogers.

Who is Jim Rogers? George Soros once called him "the greatest analyst ever", and he should know: in 1973, Soros and Rogers formed an investment partnership that would be the 20th century’s most successful. The Quantum Fund, as their partnership was labelled, would average a return of over 30% a year for nearly 30 years, a remarkable record by any standards. Soros would continue trading into the 90s, but Rogers, having amassed a small fortune, retired in 1980, after less than 10 years at the top table. Since then, he’s been travelling the world, teaching finance at Columbia, and writing the occasional book on investing.

I state the above, not to buttress my argument with an appeal to authority, but merely to point out that – unlike the vast majority of writers on investing – Rogers has actually put his money where his mouth is; furthermore, he’s been more successful at it than almost anybody else in the world. No armchair academic or CNBC quotesmith he.

So what, precisely, is Jim Rogers’ latest thesis? In a nutshell, it is this: we are in the early stages of a multi-year bull market in commodities.

The word ‘commodity’ is a short-hand for a variety of goods, all of which share one important property – they are physical and real. Iron ore is a commodity. Gold is a commodity. Coffee and orange juice are commodities. Oil is a commodity – the most important one of all. The raw materials that go into every industry in the world are all commodities of various kinds.

By way of contrast, stocks and bonds are not commodities – they’re financial assets. Stocks represent a share of the future income of a company; bonds represent a stream of future interest rate payments. By themselves, stock and bond certificates have no intrinsic value; their value is implicit in the future obligations they represent. Commodities, however, represent real present value in themselves.

Real estate is also not considered a commodity, because it’s not fungible; an acre of land in Wyoming is very different from an acre of land in California. Iron ore, however, is pretty much the same no matter where it comes from.

How unglamorous, I hear you say. Iron and steel, nickel and aluminium, coffee and cotton – where’s the excitement in these markets? They’re old news: the inputs into a moribund manufacturing sector that will at best be a bit player in our digital future.

Ah, but it was not always thus. Twenty-five years ago, commodities were the darling of Wall Street. A combination of double-digit inflation and persistent shortages in supply (hint: ‘OPEC embargo’) fuelled a huge speculative boom in the market for real assets. Where today’s analysts wait with bated breath for the non-farm payrolls report, for company earnings numbers, and for the wisdom of Alan Greenspan, their predecessors in the 70s used to wait with equally bated breath for OPEC production quotas, for Florida crop growers’ reports, and for the utterances of Saudi oil ministers. Commodity traders became celebrities. Egged on by the media, teachers and truckdrivers alike quit their day jobs to punt on pork belly futures. In short, it was a mania.

So what happened? How and why did commodities lose their exalted position? What happened was what always happens. The investment boom turned into an investment bust. Tempted by higher prices, producers invested heavily in production infrastructure: the first oil rigs in the North Sea and in Alaska date to this period, as do the first modern ‘industrial’ farms. Meanwhile, consumers adjusted their preferences away from their old habits: gas-guzzling monstrosities from Detroit were outflanked by smaller, cheaper and above all more efficient compacts from Japan. The resultant glut in everthing from oil to orange juice caused commodity prices to fall precipitously. Speculators who had bought at the peak of the market (and there was no shortage of them) were ruined; many vowed never to buy commodities again. Meanwhile, helped by a triple delight of falling input prices, falling inflation and falling interest rates, the financial markets (ie, stocks and bonds) embarked on a spectacular 20-year bull run. The commodity markets languished in obscurity, commodity news was banished to the inside pages of the financial press, and the pork belly traders returned to teaching and driving trucks.

But the tide may be turning. Just like high prices in the 70s caused overinvestment and a glut in production, low prices in the 80s and 90s have resulted in a tremendous shortfall in supply relative to demand. The Commodity Research Bureau’s handbook for 2004 paints a sobering picture. Worldwide production of lead, for instance, has fallen every year since 2000. Global oil production (from existing fields) is forecast to hit Hubbert’s Peak before the decade is out, and no major new oil field has been discovered anywhere in the world for more than 35 years; the US has not built a new oil refinery since 1976. Hurt by low prices for agricultural products, farmers worldwide are leaving the countryside and migrating to cities in greater numbers than at any time in human history, leaving their farms fallow and unproductive. And so on.

A legitimate question at this point is, won’t market forces change the supply dynamic just like they did in the last commodities boom? Won’t high prices stimulate additional production, thus planting the seeds of their own collapse? The answer is yes, they will – but not for some time yet. The crucial point to understand here is that commodities, to a far greater extent than other asset classes, take time to bring to market. Oil fields take years if not decades to develop; OPEC cannot simply wave a magic wand and double global petroleum production instantly, no matter how high crude prices go. Similarly, a newly-planted coffee seedling has to grow for several years before it can yield the beans for your morning latté. Aluminium smelters and steel plants cannot be fabricated ovenight. So while it is true that in the long run rising commodities prices will create their own supply, in the short run there is still tremendous potential for growth in this market. In any case, commodity prices are still well below their previous bull market peak in real terms (ie, after adjusting for inflation); there’s plenty of room to grow.

Another reason to be bullish on commodities, at least for US-based investors, is the issue of valuation. Most international trade in commodities is denominated in dollars, and the greenback is a fundamentally unsound currency. The US government is running a large deficit which appears poised to grow even larger thanks to costly entitlement programs such as Medicare and Social Security, thanks to tax cuts and fiscal indiscipline, and thanks to the ongoing ‘war on terror’. The private savings picture is not much better; America’s savings rate is close to zero. The country also runs the largest trade deficit in history.

At the moment, these multiple deficits are financed by overseas money. Asian central banks buy dollars to keep their own currencies from appreciating (in classic mercantilist practice). They then invest the proceeds in US Treasury bonds, thus plugging the US fiscal deficit and keeping long-term interest rates artificially low. Low long rates help finance private debt via the channel of home equity withdrawal, thus fuelling further American consumption. Alan Greenspan, meanwhile, supports the domestic economy by flooding the system with liquidity: despite the rapid GDP growth of the last couple of years, the real Fed Funds rate remains negative.

This equilibrium will not last. Sooner or later, overseas investors will refuse to finance America’s twin deficits. Interest rates will soar, as no one will want to buy US debt. And the dollar will plummet. Needless to say, both of these developments will be very positive for commodities: real assets tend to do very well in inflationary environments.

You’ve heard about supply, and you’ve heard about valuation. Now it’s time to turn to the 800-lb gorilla in the room: China. In recent years, the Chinese economy has grown at an astonishing clip, and much of this growth has been in the manufacturing and industrial sectors. But China is a relatively resource-poor country; it needs to import most of the raw materials that feed its relentless expansion in every sector from kitchen appliances to plastic toys to cars. It’s no surprise that, with fresh supply still to come on line, much of the recent increase in global commodity prices can be correlated almost perfectly with the growth in Chinese imports. China accounted for 37% of the increase in world oil consumption between 2000 and 2004, putting it second only to the US in total consumption of energy products. And China is already the world’s number one consumer of copper, steel, iron ore and soybeans.

Would a global economic slowdown cramp China’s demand for raw materials? Not likely. China’s domestic growth will prove a sufficiently powerful engine to drive commodities prices higher on its own. The pace of urban migration in China is such that the equivalent of a Houston or a Philadelphia has to be built every month. Can you imagine the demand for coal, steel, cement, glass and asphalt that such fantastic growth would engender? And having moved into these new supercities, the Chinese middle class (estimated to be comfortably twice the size of the entire American population) will soon demand the same creature comforts that their compatriots in Hong Kong and Taiwan already enjoy. China’s per capita consumption of coffee is estimated to be less than 20 cups annually, while the Taiwanese consume close to 100 cups a year. If the Chinese middle class were to increase their coffee-drinking to comparable levels, that alone would necessitate a 10% rise in global coffee production. And as I’ve already mentioned, coffee trees take time to grow.

Postscript: Regular readers of the financial press will know that none of this is particularly ‘new’. Popular measures such as the DowJones-AIG Commodity Index have nearly doubled since the start of 2002, and the supply squeeze – China – inflation story has been receiving a fair bit of coverage of late. I make no assertions of either originality or timeliness in this essay. Jim Rogers, however, can lay claim to both: he launched a raw materials index fund in August 1998, just a few months before the DJAIG hit a multi-year low. Since inception, his has been the best performing index (fund) in the world, bar none. Likewise, he has been writing about supply shortages, incipient dollar inflation and the rising influence of China for several years, both on his website and in his books (which, if you haven’t guessed by now, I strongly recommend).