Currency Trading - Strategies for the Global Markets

Currency Trading - Strategies for the Global Markets

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  • Andrei Knight
    Andrei Knight    Group moderator
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    Where Will Tomorrow's Investors come From?
    Here's a topic to kick this area off..

    We're fortunate to have quite a collection of experts in this group, so I'm curious to get everyone's thoughts & opinions. My colleagues and I have been discussing and debating this all year. It is quite clear that wealth is currently being created quickly in 3 main regions: Eastern Europe, Asia, and the Middle East. Logically this would also lead to an increase in investments (not so much IN the countries, though that follows as well, but by citizens in those regions looking to invest their growing wealth).

    So, I pose to you...

    WHICH countries will most likely take the lead? What are the emerging trends in these areas? In investment? In regulation? In taxation? And how will all these factors interplay with one another?

    Hoping this leads to some lively discussion,

    -=A
    • 20 Feb 2008, 10:52 pm
  • Juliaena Victoria
    Juliaena Victoria
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    Re: Where Will Tomorrow's Investors come From?
    We should concentrate the investment for Poverty Reduction via Globalization

    In defining globalization, I pointed to integration in several dimensions. There are sharp
    differences between countries in many of these dimensions. For example, countries have
    embraced (or have been able to embrace) the Internet and open communications to very different
    degrees: while more than 30 percent of the population in the United States has access to the
    Internet, Only 1 to 2 percent of the population in the Middle East, North Africa, Latin America, Eastern Europe, and Asia as a whole (as well as India specifically) enjoys the same service. Developing countries — many of which 20 years ago had quite restrictive policies toward foreign trade and investment — have opened up to the global market to quite different extents. These differences across countries provide evidence for the examination of the impact of globalization on development.

    Country experiences: India, China, and others

    The evidence from the two largest developing countries, India and China, is of particular
    importance. Both countries have chosen to become much more open to foreign trade and
    investment in the past two decades. There are other significant examples of countries moving
    strongly to open their economies that I would highlight: most of the Southeast Asian countries;
    Argentina and Mexico in South America; Hungary and Poland in Eastern Europe; and Ghana and
    Uganda in Africa.

    Growth rates for these recent globalizers have generally accelerated as they have become
    more open. This trend is clearest for India and China. These are the two countries with which I
    have been most involved personally in my research . As you know, taken together, their population comprises more than one-third of the world’s total, and more than two-fifths of that of the developing countries.

    The growth in China and India’s aggregate per capita income has accelerated from
    roughly 2 percent in the 1970s to 3 percent in the 1980s and 5 percent in the 1990s. This
    acceleration is all the more remarkable because the growth rates of the rich countries slowed
    down over this period, from 3 percent to 2.5 percent to 2 percent. Many of the other globalizers
    have seen their growth rates accelerate as well: Mexico, Uganda, and Vietnam are all examples.

    The developing country’s own policies on trade and investment can be damaging to integration and development.
    It is sometimes tempting to push for market-opening in other countries while protecting domestic
    industry and services. Such a strategy is more likely to impede development than to spur it.
    Countries benefit from their own market-opening in many ways. One is technological and
    managerial: foreign direct investment brings with it innovations in product, process, and
    organizational technologies, while importation of goods brings embedded technologies and
    access to lower-cost production inputs and consumer goods. Another benefit is greater
    efficiency: competition from abroad spurs domestic industry to make productivity
    improvements, promoting growth and employment over the medium term. It would therefore be
    a mistake if hypocrisy in the trade policies of rich countries were used by developing countries as
    an excuse to delay market-opening. Liberalization — if accompanied by appropriate policy and
    institutional reforms — will help the liberalizing country, notwithstanding the fact that the gains
    would be still greater if the richer countries reduced their protection. Indeed, one need only look
    to India’s recent history for convincing evidence of the benefits that come from unilateral
    reductions of high trade barriers

    The issue of the investment climate is highly relevant for India. It is instructive to look at
    the World Competitiveness Yearbook to put India in an international context on these matters.
    This Yearbook ranks 47 countries — the members of the OECD plus 18 emerging market
    economies — on a range of factors, with rank 1 given to the top performer. Out of the 47
    countries, India ranks 43rd overall, while China receives a ranking of 31. While India scores very
    well on such measures as supply of skilled workers (ranked 12th), those areas identified as
    particularly in need of reform are key elements of a good investment climate: curbing corruption
    (ranked 45th), improving the effective implementation of government policies (ranked 42nd) and
    infrastructure (ranked 47th). These figures are based on the opinions of 3000 executives around
    the world. These executives should not be taken as the only or even most relevant judges of a
    country’s investment climate — domestic entrepreneurs are at least as important a group — but
    their views do provide some insight into why India has attracted so little foreign direct
    investment. In 1998, China received 5 percent of GDP in FDI, Brazil 4 percent, and Mexico 2.5
    percent, but India got less than half of 1 percent. Thus, while China’s GDP is twice that of India,
    it received 20 times as much FDI.

    Investigating the key determinants of the investment climate, and how to improve it, is
    one of the important areas where I am trying to expand the research agenda at the World Bank.
    We have been trying to understand better the investment climate by helping clients systematically
    survey private firms, focusing especially on small and medium enterprises. It is usually small
    and medium enterprises that suffer most when the investment climate is hostile — even though it
    is foreign and large investors whose voices are sometimes heard the loudest. The development
    experience of some countries of East Asia, notably Japan and China, have shown us the great
    importance of SME growth in overall economic development; more recently, Poland’s
    experience has reaffirmed the same lesson.

    On a survey of 1,000 manufacturing and software firms in ten Indian states. The survey covers ten states across India. One question we asked was for entrepreneurs to identify the best-climate states and to estimate the cost saving from operating in these locations relative to the worst-climate states. I recognize that this is
    subjective, but it is a starting point for looking at differences in the investment climate.

    Certain states (such as Maharashtra and AP) were identified as better places to produce, while others (such as UP and West Bengal) were identified as worse. The estimated cost difference between producing in the best and the worst was about 30 percent, which is a very large cost hurdle for the poor-policy states to overcome in trying to attract investment.

    The objective data on productivity match these subjective views quite well: entrepreneurs — even of small firms — are pretty well informed about variations in problems and bottlenecks. So, in the same sector and controlling for size, we find firms in the good-climate states to have about 30 percent more value added per worker than
    do firms in poor-climate states.

    Firms in the good-climate states also have higher total factor productivity, which is
    basically a measure of how well capital and labor are being combined to produce value. More
    importantly, we can trace these productivity differences back to specific problems in the
    investment climate. Some of the poor-climate states have particularly acute problems with the
    public power grid: in those states, virtually all of the firms we surveyed had their own generators
    (compared with less than half in the best states). Those firms collectively got only 50 percent of
    their power from the public grid. Clearly, heavy reliance on generators is a sign of weakness in
    the investment climate: for small firms in particular, own-power-generation is extremely
    expensive and capital-intensive. Uncertainty of the power supply has created major costs for
    these firms.

    Important factor in the investment climate is the regulatory burden imposed by government. Obviously, all countries need to regulate firms in some ways, for example on fire, safety, pollution and monopolistic practices; this happens in every market economy. But the extent and nature of regulation, its efficiency and transparency, and the corruption associated with it all vary across countries. To take one example: we find in the World Business
    Environment Survey, which covered a large range of countries, that managers report spending
    about 5 percent of their time dealing with government officials in Latin American countries and
    about twice that amount in the transitional economies of Eastern Europe, many of which are well
    known for bureaucracy and corruption. In India, the average reported in the survey was much
    higher: 16 percent of management time. Within this high overall average, there is substantial
    variation across Indian states. My survey reveals that government officials visit firms twice as
    often in the poor-climate states as in the good-climate states

    The investment climate is a key determinant of whether an economy is able to respond dynamically to the opportunities offered by globalization

    International markets can be used to strengthen institutions and policies. The importance of building complementary institutions and policies to reap the benefits from global integration inevitably raises the question, should countries first make sure all their institutions are strong before opening up? The answer is clearly “no”.
    Developing countries that have done well have taken a step-by-step approach to liberalizing different types of exchange.

    I think that there is broad agreement now that one factor behind financial crisis was the lethal combination of an open capital account, weak domestic financial institutions, and weak economic governance. We know now, and perhaps should have known before, that this combination can lead to serious problems of currency
    volatility and banking crises. Russia’s experience is another important example of weak
    institutions combining with an open capital account to cause trouble.

    We can think of this as a sequencing issue. Intelligently utilized, the international market
    for financial, legal, and accounting services can help develop a sound financial sector and better
    economic governance. Thus, the practical issue is which steps to take first, not integration versus
    isolation. Trade in financial services is not the same as, and indeed need not be tied to, trade in
    financial claims. The evidence, however, is that participation of foreign financial institutions strengthens the financial system.

    The rapid growth of trade in services is one of the interesting developments of the past
    decade. These markets can be used to improve provision of power and telecommunications,
    accounting services — even customs and tax administration — as well as financial services. By
    increasing the efficiency and reducing the costs of core business services, openness in these areas
    feeds directly into improved productivity and competitiveness for other downstream
    manufactures and services.

    What are the implications for India? On the financial-market side, further liberalization
    remains a priority. India took great strides taken in the 1990s with its first round of
    reform: the emergence of new sources of capital has spurred competition and reduced interest
    spreads, helping make non-financial firms more productive and competitive. Nevertheless,
    Indian producers continue to pay more for capital than they would if faced with a more
    competitive financial system. There are further steps that India could take to address this
    problem: creating better legal and judicial frameworks for loan recoveries, providing better
    incentives for lending quality, and improving regulation and supervision. Over the longer term,
    India will likely want to move in the direction of liberalization of the capital account, but it may
    be sensible to move gradually.

    The investment climate —urban and rural, at both the national and state level — is key to achieving sustained poverty reduction. Some states are now responding to the challenge and are beginning to provide an
    environment characterized by good governance, dependable infrastructure, skilled human
    resources, and sound financial institutions; in those states, not surprisingly, firms are taking
    advantage of economic opportunities both here and abroad. As the success of these reforming
    states becomes increasingly evident, other states are likely to follow their lead. At the same time,
    there is a challenge throughout India to ensure that poor people are able to participate in growth
    — that they receive an education, that they have some protection or help during transition, and
    that they have access to the rural infrastructure and anti-discrimination protection that will allow
    the growth of non-farm employment.

    I hope this info will help.

    Thanks
    Juliana Victoria
    • 21 Feb 2008, 04:05 am
  • Andrei Knight
    Andrei Knight    Group moderator
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    Re^2: Where Will Tomorrow's Investors come From?

    Ms. Victoria,

    Thank you very much for such a detailed and thought-provoking repose. This is precisely the sort of dialog I was hoping to initiate, as so many of us in this group are financial professionals who are both responding to and in a position to help influence these sorts of trends.

    I agree very much with your statements on regulation, taxation, and corruption. These elements are perhaps the most important factors in sustained growth, which can maintain the momentum that investments help kick start. Dmitry Medvedev, who many say is likely to succeed Putin in Russia, has said that lessons from all over the world have taught us that a country's economy is directly linked to that country's movement towards democracy and openness. A policy which in some ways seems to contradict Putin's own.

    The Indian and Chinese situations are very interesting ones to watch indeed, and I think we will also see some exciting growth coming from the Central Eastern countries, provided they can steer their policies in the right directions to support that growth. Certainly there is lots of talk about Poland and Hungary, and I'm wondering who else might emerge in the region.

    Likewise, in the Middle East - the money is certainly there, but where are the reforms coming from in order to open up those markets to the rest of the world? Bahrain and Saudi Arabia seem to be entering the investment world in full force, but will they be favorable climates? Who else?

    And in Asia... is China still king? The government is making strides towards openness, allowing in foreign companies, but there still seems some reluctance to let their own people or their investment capital out (the people's, I mean - there's been no shortage of Chinese government investments, especially in buying US debt). Malaysia has shown interesting growth again (directly linked to policy changes), and as you mentioned Vietnam. Who else in the region, and what's spurring it?

    I also agree with your statements regarding globalization and poverty. While people generally look at the money flowing IN to a country in these sorts of discussions, or the growth of businesses there, I thought it might be more interesting (and more representative) to discuss which countries are showing the greatest rise in investors FROM that country (meaning the economy has grown enough so that regular people are earning enough to have extra money left over after their cost of living in order to be able to begin investing.)

    This is a fascinating discussion, and I hope more people join in to share their own experiences and opinions!

    -=A
    This post was modified on 21 Feb 2008 at 01:56 pm.
    • 21 Feb 2008, 1:51 pm