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Hard Power Rising Means Less for U.S. or China: Cutting Research

“Hard power” -- military and economic might -- is dispersed across more countries than at any period since 1815, curbing the dominance of the U.S. and China and throwing up challenges for economic stability, according to a study by SLJ Macro Partners LLP, a London-based hedge fund.

The research by SLJ co-founders Stephen Jen and Fatih Yilmaz was based on an index combining a country’s steel and iron production, energy consumption, military expenditure and total and urban populations.

The results showed that while China and the U.S. now wield the most might, the dispersion of power is greater than it once was. In the early 1800s, for example, continental Western Europe and the U.K. held 70 percent of the world’s hard power. Combined, China and the U.S. now have about a third of it.

“Our best guess is that the lack of a dominant hard power could be bad for stability due to a lack of leadership,” said Jen and Yilmaz in the Nov. 13 report.

The recent financial crisis risks sapping the leading economies, leaving them under pressure to deal with public debt and rebalance themselves away from old drivers such as exports in the case of China, the writers said. Failure to heed those lessons threatens countries with a loss of global importance similar to that suffered by the U.K. and former Soviet Union.

It is also vital for investors not to ignore so-called soft power components, such as the rule of law and democracy, Jen and Yilmaz said, in part because they help drive the development of financial markets. Given that the U.S. has plenty of soft power, the dollar will remain the world’s leading reserve currency, they said.

China, whose military and economic strength have surged since the 1990s, now ranks similar to where the Soviet Union did in the 1980s. It will need to further develop soft power if its financial markets are to keep up with economic development, the report said.

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As if central banks don’t have enough to worry about, along come “virtual currencies.”

Technological developments and the increased use of the Internet have spawned digital communities in which consumers can transact using money peculiar to those worlds. Examples include Bitcoin, which can be used to trade goods and services on some websites, and Linden Dollars, which feature in the online game Second Life.

While these currencies provide no unit of account or physical manifestation with legal tender status, the European Central Bank says the increased use of them bears monitoring by policy makers.

That’s because the legal uncertainty surrounding the monies’ use could represent a challenge for authorities if they are adopted by criminals to perform illegal activities such as money laundering. Their existence may have a negative impact on central banks’ reputations, assuming the growth of such currencies continues and the public blames any transaction difficulties on central banks.

On the positive side, the October study said, virtual monetary systems don’t pose a threat to price stability provided that the growth of such currencies remains slow.

“Although these schemes can have positive aspects in terms of financial innovation and the provision of additional payment alternatives for consumers, it is clear that they also entail risks,” said the report. “As a consequence, it is recommended that developments are regularly examined in order to reassess the risks.”

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China’s new leaders are taking control of an economy witnessing the end of the cheap labor that has long given it a competitive edge.

That’s the conclusion of a study in this quarter’s Journal of Economic Perspectives by China-based academics Hongbin Li, Lei Li, Binzhen Wu and Yanyan Xiong. They show at the beginning of China’s opening toward freer markets in the late 1970s, urban workers earned the equivalent of $1,004 a year, or 3 percent of an average U.S. pay packet.

By 2010 they were taking in $5,487, similar to wages earned in the Philippines and Thailand and much more than those earned in India and Indonesia. If the average rate of wage growth of 13.8 percent over the past decade is maintained, the average Chinese wage will reach $20,000 by 2020, the same as a U.S. manufacturing worker in 1980.

Among the drivers: policies introduced in the late 1990s to establish greater flexibility by enabling firms to pay workers according to productivity. China’s labor force also may have peaked in 2011 and rural-to-urban migration will probably slow, the study said.

“The ‘underpricing’ of Chinese labor appears to be coming to an end,” wrote the economists. “China is becoming a middle- wage country.”

At the same time, China is ready to transition to higher value-added industries. Productivity is increasing amid more spending on research and educational attainment is improving. One study estimated 40 percent of the labor force can be expected to hold a university degree by 2050.

“In short, the end of cheap labor in China does not mean the end of Chinese economic growth,” the report concluded.

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The central banks of Sweden and Turkey are among the most transparent, according to a study by economists at Hungary’s central bank.

Their report, published this week by four economists, used three different ways to rank monetary policy makers by how open they are, using such variables as forecast accuracy. Sweden came in on top in two of the leagues and Turkey topped the other.

The U.S. Federal Reserve ran third in one ranking and as low as seventh in the other two. The European Central Bank ranked no higher than fifth in any of the three.

The more transparent a central bank, the less the degree of disagreement among forecasters as to what it will do, the authors said.

“Enhancing central bank transparency is favorable,” they said.

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The two ways of funding higher education in the U.K. -- levies or tuition fees -- are more similar than many imagine and the shift to paying upfront may ease tax burdens, according to Richard Barwell, an economist at Royal Bank of Scotland Group Plc.

With U.K. inflation accelerating more than economists forecast in October as higher university tuition fees took effect, Barwell wrote in a Nov. 12 research report that “the biggest myth” is that a university education used to be free.

In the old system, students got the benefit up front through free tuition and then paid taxes to the Exchequer, he said. Now, students still get a benefit up front by studying, then they repay their loan once they leave university.

“The differences between the old tax-funded regime and the new loan-based regime are grossly overstated,” said Barwell, a former Bank of England official. “A university education was never free -- it is just that in the old days you paid for someone else’s tuition, not your own.”

With about 36 percent of teenagers having a chance of attending university, up from 6 percent in 1960, there is pressure on the public purse, he said. The result is fees that can now be as high as 9,000 pounds ($14,260) a year.

“The critical observation is that as we move to a scheme where students pay for a greater share of their own tuition costs, the taxes that the government needs to raise to fund a given quantity and quality of higher education are correspondingly smaller,” Barwell said.

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Investors choosing stocks are better off going for a recognized brand name, according to a study by Citigroup Inc. (C)

Using six years of surveys of the most respected companies and their reliance on brands, Chris Montagu found that a portfolio based on those listed by Millward Brown Optimor’s BrandZ study enjoyed an annualized return of 7.16 percent against a 3 percent gain in the MSCI All-Country World Index. (MXWO)

“In terms of common characteristics, these brands and companies appear to have higher growth, lower risk,” said Montagu, Citigroup’s London-based head of European quantitative research, in a Nov. 14 report. “They also tend to have higher international exposure and higher dividend yields than the market.”

In a separate survey released yesterday by The Boston Consulting Group, more than 80 percent of American consumers and over 60 percent of Chinese shoppers said they are willing to pay more for products labeled “Made in USA” over those branded “Made in China.”

To contact the reporter on this story: Simon Kennedy in London at at skennedy4@bloomberg.net.

To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net.

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