Art museum to close and all paintings sold: Another economic fallout

by Jamie Rhein on

The Rose Art Museum at Brandeis University in Waltham Massachusetts is in danger of being closed and all its paintings sold as a way to pump up its endowment. From reading the story in the New York Times, it seems this is another fallout to partially attribute to Bernard Madoff who ran the Ponzi scheme that snagged rich folks (and the rest of us) in its disastrous financial net. Because donors are hurting, they’re tightening their purse strings, thus they are not giving as much money–if at all.

Universities and colleges that rely on donors to keep their endowments bolstered are needing to find new ways to make ends meet. Brandeis has cast its eye on its vast collection of art that includes works by Robert Rauschenberg, Jasper Johns, Andy Warhol and Roy Lichtenstein. The collection, in a good economy, could fetch up to $400 million. In this economy, the total may not come close to that at all.

The university’s board is not happy with the plan–they weren’t consulted about the decision, and it’s not even clear if closing the museum and selling the artwork is legal. Either one depends on the agreements made when the museum opened and when donations were given. There is a fear that this museum’s closing may signal other universities to follow suit. What a shame.

Personally, I hope this doesn’t set off a trend. University art museums are some of the more interesting places to see art and they are often free–or if not free, very inexpensive. Also, what does this mean for people who are looking for places to donate art?

Interestingly, an exhibit that opened at the museum on January 15 is called “Saints and Sinners.” Kind of fitting for the times, I think. The painting in the photo is by Hans Hoffman, an American abstract painter. Several of his works, never seen before in the U.S., are also on exhibit until April 5.

What the financial meltdown means for the future of globalization

by Jerry Guo on

There’s been a lot of chatter recently over what the global financial crisis and impending recession means for the future of globalization. You see, critics have latched onto the recent failures of markets as the perfect argument for why we need to curb international economic integration.

Although many economists strongly argued for the impending dominance of emerging economies, I think the ongoing global financial crisis has really shown us that these developing countries have not decoupled from the developed ones. We haven’t seen an unwinding of the US current account deficit, for instance, and in fact, in the last month, there has been a flight to safety to the dollar.

Thus, one detail to keep in mind is that while the relative growth of these emerging economies is quite impressive, their absolute economic power still does not yet rival that of the US, Japan, EU, etc for dominance. Furthermore, the spread of the global financial crisis to emerging economies (salient examples include Russia and China) signal that these markets have not achieved a degree of magnitude large enough to have decoupled from developed markets.

So what’s really at stake here? It’s pretty much accepted science that globalization, taken as a whole, has helped mankind to an unimaginable extent. That’s not really being debated now. But that doesn’t mean there aren’t losers.
For me, one salient question is whether globalization helps or hurts the poor. But what makes this debate so difficult is that both sides tend to pick and choose their evidence. For instance, depending on whether the poverty line is set at $1/day or $2/day, income inequality can be made to appear like it is shrinking (using the former) or expanding (using the latter). The same goes for calculating income distribution using household surveys (increasing income gap) versus national accounts (decreasing income gap).

Thus, there is this ever-shifting line in the sand for determining when globalization helps and when it hurts. So I think this debate really becomes a framing problem. That is, are we talking about a Rawlsian “veil of ignorance”, a bottoms-up view where gains for the majority must not come from losses to the minority, or a Millsian utilitarian approach to social welfare, a top-down view where the greatest good to the greatest number of people is what counts.

What we find from behavioral economists is that the Rawlsian paradigm (anti-globalization in this context) may be hard to fight, as “people are reluctant to harm some people in order to help others, even when the harm is less than the forgone help. Although there were certainly authors who championed the all-powerful forces of free markets to do good, I tend to side with the critics who say we need to move beyond utter reliance on markets.

“Most academic agree that markets, by themselves, do not lead to efficiency; the question is whether government can improve matters,” said Economics Nobel Laureate Joseph Stiglitz. When it comes to alleviating poverty and income inequality, I believe the government must be a force greater than the invisible hand.

Now, with any discussion on globalization, we can’t help but talk about China. As I read the gushing hyperboles on China, one big question I keep asking myself is “Can anyone compete with China?” They have an enviously high savings rate, a huge foreign reserves warchest, and the world’s largest population. Obviously, they do not hold a comparative advantage in everything (especially in industries requiring heavy skilled labor), but, some economic models indicate China’s growth will lead to some global losers, such as Singapore, the Phillipines, much of South Asia, and Europe.

We also know from recent research that Africa hasn’t been able to compete with China. Yet the only recipe for growth for many of these lower-end third-world countries, such as India, is an export model based on labor-intensive manufacturing. Ironically, China’s wild success with this model may remove it as a long-term competitor, as we’ve already seen wage rates on the coast skyrocket. Thus, there just may be hope yet for other countries looking for a piece of the pie.

A related question is if China’s rise detract investment elsewhere? Would Vietnam be more seeing higher growth if it wasn’t so close to such a global star? Upon closer introspection, I would argue this is not the case if global savings is liquid and we do not presume there is only X dollars to go around. Now that China is moving into more skilled industries, textiles may move to Vietnam, and thus, investors may move capital (that they may not have invested at all otherwise) there to seek higher returns. One caveat that many of the author failed to explore, furthermore, is that China’s growth means a burgeoning middle class (45% of its population by 2020 some estimate) that will stimulate global demand and consumption.

Another topic definitely worth addressing is the rise of multinationals from emerging markets. An Economist “special report” on globalization from this Sept said that 62 of the global Fortune 500 are from emerging markets this year, up from 31 in 2003, and expected to “rise rapidly.” Here’s why this trend is significant: we are no longer seeing globalization as a one-way street from the developed to the developing world. Rather, these emerging markets are actually investing and expanding into the US and Europe. Take Lenovo, which bought out IBM and discarded the IBM logo last year, confident that its Chinese-brewed brand was good enough to go global.

One surprising study from a couple months ago is turning the idea that China’s growth harms American workers (by depressing wages or even shuttering jobs) on its head. A must read!

I would say globalization, either through trade or capital flows, cannot pull a country out of poverty. Two-thirds of India’s children drop out of school before 8th grade. And thus, social improvements (such as education and healthcare) and physical infrastructure improvements (roads, telecom, energy grid, etc) need to be prioritized by the government, and this in turn enables globalization to power the engines.

I think an interesting lens to examining globalization’s impact on emerging markets is to look at the differences behind China and India, where China’s recent growth has been doubled that of India. Before doing the readings, I had thought it was mainly due to the greater trade liberalization of China. But China has fundamentally better infrastructure, not just socially and physically, but also in regulatory and financial aspects. Other reasons for why China has achieved greater success include the lack of protectionism for small-scale industries, looser labor laws, and the most intellectually-surprising possibility, a more homogeneous society (Sweden and Japan are similar models).

Should we be worried about China’s rising economic dominance?

by Jerry Guo on

There’s been a growing chorus of China watchers who have been saying–for years now–that one day, it won’t be annoying Americans overflowing the world’s greatest cities, but equally annoying Chinese tourists. But there’ll be even more of them, as China’s middle class is predicted to explode from something like 6 percent of their 1.3 billion population right now to 45 percent in 2020.

I don’t doubt that this will be true one day. The question is, though, will that day be any time soon? Given the recent global meltdown, many have seen a monumental shift in economic power, from America and the west to China and the east (as well as other regions with emerging markets, such as Russia and South America). But the market crashes in a wide swatch of developing countries have really brought this “decoupling” theory–in which emerging markets are no longer linked to the fate of the US economy–into question.

I think to examine this shift in economic power and to answer the bigger question of should we be worried, it may be effective to look at one small part of the puzzle: initial public offerings (IPOs). You remember those from the heady tech-bubble days, right?
By most measures, the US IPO market had a tremendous year in 2007, with the most capital raised ($53 billion) since 2000. But compared to China’s $90 billion haul, the US seems to be losing its financial dominance. In 2007, for the first time, Chinese IPOs raised more capital than their American counterparts.

Yet this does not suggest an immediate collapse of US financial dominance, for China’s IPO market has been disproportionately inflated by a slew of mega SOEs. As the three domestic Chinese markets mature, however, they face a daunting array of challenges to maintain recent paces of IPO fundraising. In the long-term, with China’s increasingly deep capital pool and continued high economic growth, the US must significantly reform its legal and regulatory structures to remain competitive.

The dramatic year-to-date declines in the Shenzhen (65%), Shanghai (60%), and Hong Kong (45%) indexes suggest that China has not decoupled from the US economy. Last month, China’s Securities Regulatory Commission (SRC) announced they would stop processing IPO applications in an effort to bolster lagging capital markets, a call back to 2005 when the commission froze offerings for an entire year.

At a fundamental level, investors expect higher returns on the Hong Kong, Shenzhen, and Shanghai exchanges because of the country’s record economic growth and low capital market penetration relative to the EU and US. Perhaps more important, China has only recently opened its monolithic state-owned enterprises (SOEs) to partial privatization, most often through IPOs; for instance, five companies raised 39% of Chinese equity capital in 2007, with each IPO greater than the largest US IPO, Blackstone ($4.1 billion).

Before the freeze, Chinese IPOs only raised $7.3 billion this year-to-date, in part because three-quarters of its largest state enterprises have already publicly listed. Now with the devastating global credit crunch, the IPO market in China should significantly contract in the short-term. There are also several systemic cracks that pose barriers to maintaining China’s recent pace in growth.

  • Pervasive insider trading. Chinese courts do not have the ability to handle complex insider trading cases, and in fact, almost never pursue punitive actions. This vulnerability to manipulation will deter foreign investors from the market.
  • Poor corporate governance. Because state-run enterprises are notoriously opaque, preparations to bring their accounting processes to international standards for an IPO may take up to three years. Even publicly listed companies do not exhibit the same level of transparency as their US counterparts, which again deters investors.
  • Decline in secondary market interest. According to an analysis by JPMorgan, the secondary IPO market is not attracting sufficient interest, in large part due to the influx of “stock flippers,” with firms unable to assemble adequate order books.
  • Collapse of confidence. Declining corporate profits, fear of oversupply, and significant volatility of the Shenzhen, Shanghai, and Hong Kong exchanges have already led to a crash in the 2008 IPO market, with the short-term outlook equally dim.

In the short-term, China’s IPO market does not pose immediate danger to US financial dominance since their recent transactions have been inflated by a slew of mega SOEs being brought “online” to the three domestic exchanges; three-quarters of the major SOEs are now listed, so supply should dramatically decrease. The country’s capital markets also suffer from several fundamental flaws, discussed above. On the US side, a 2007 study indicates that there still exists a significant listing premium for the New York exchange, as firms receive a “governance benefit” from being more closely regulated than in Shenzhen, Shanghai, and to a lesser extent, Hong Kong.

“[Chinese companies] ask, ‘Do we list on London’s AIM now, or do we bite the bullet and spend the next six months making our company better and stronger, and try to meet US stock requirements and list in the US?'” explains Jocelyn Choi, a senior vice president at Lehman Brothers in Asia explains. Ultimately, there remains and will remain for the near future a tangible prestige cachet for any small and mid-cap firm to list on an US exchange.

However, in the long-term, China’s burgeoning middle class and ever-increasing pool of capital and foreign reserves present tremendous risk to the US’s ability to raise equity, particular from multinational firms. Furthermore, while Chinese firms continue to favor American capital markets (half of the 25 top-performing US IPOs in 2007 were companies based in China), increased capital liquidity back in the home market would make such a move unnecessary. I recommend two policy changes to be implemented for the US to remain competitive:

  • Revisit Sarbanes-Oxley. While proper disclosure provisions have attracted investors, and hence multinational firms, to the US IPO market, the excessively burdensome regulatory practices within Sarbanes-Oxley is at the same time driving private firms to raise equity in London or Hong Kong. The $4.36 million cost for the average firm to stay SOX-compliant can often be a deal-breaker in itself.
  • Address frivolous litigations. Multinational firms see the high risk of class lawsuits and legal liabilities of a US listing as an important reason to list in London or Hong Kong. We need to reform the legal system to prevent frivolous and excessive litigation.