Global Trends by Martin Khor

Monday 9 January 2005

Eventful start to new year

In an eventful start to 2006, the Israeli Prime Minister was brought down by a stroke, throwing Middle East politics into even more uncertainty.  Also, three children died from bird flu in Turkey, marking the first cases of human cases outside Asia.  And China indicated it may diversify its foreign exchange reserves from the US dollar.

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It has been quite an eventful start to the new year.  Last week the Israeli Prime Minister Ariel Sharon was fighting for his life after a massive stroke and two major operations, throwing Middle East politics into uncertainty.

And ominously, three Turkish children in the same family died of the human form of the avian flu virus, marking the first human cases and sparking concerns not only that the virus had spread but that a human-to-human variant of the virus may have been formed.

On the economic front, there were reports that China is considering diversifying the composition of its foreign reserves, giving rise to speculation that it may keep less of its newly acquired assets in US dollars, and that this could weaken the dollar as the year proceeds.

As Sharon fought for his life, it was clear that an era in Israeli politics had ended.  What will come after is most uncertain.

Sharon had become Israel’s most entrenched political leader.  He was expected to win the elections in March, even though he left the Likud party and formed a new party, Kadima,  just months ago.

He has been reviled by the Arab public, due to his brutal treatment of Palestinians, earning him the title of “butcher” in the Arab media.  In particular, he is blamed for the massacre of thousands of Palestinian refugees in the Sabra and Shatila camps in Lebanon in the early 1980s. 

However there is now concern that his successor may be worse.  Recently, Sharon had been making moves such as pulling Israeli settlements out of Gaza and indicating that some Israeli settlements in the West Bank may also be closed.  The Gaza pullout was opposed by many in the Likud party, prompting him to leave and set up his own party, considered to be more “centrist.”

Were these steps to box in the Palestinians and eventually offer to them an inadequate independent state with limited land, still under Israeli control?  Or could they be the start of a more genuine offer for a viable Palestinian state in exchange for security?

No one really knew, as the Israeli prime minister kept his ultimate goal to himself.   His deputy, Ehud Olmert, is acting premier but being an unknown quantity, there are doubts whether he or the new party will win the elections.

Thus the hardline Likud leader, Benjamin Netanyahu, is now seen as having a chance to take over the premiership.  He is believed to have a more repressive policy towards the Palestinians.  Most analysts consider a Netanyahu electoral victory to be a setback to peace efforts.

There is thus much confusion and uncertainty in the relations between Israel and the Palestinians, as well as with its Arab neighbours.

In another important development, three children from the same family died of the H5N1 bird flu in East Turkey.   Aged 11, 14 and 15, the children are thought to have contracted bird flu after playing with the heads of dead chickens at the family’s poultry farm.

The children were admitted with high fevers, coughing and bleeding in their throats.  These were the first cases of bird flu deaths in Europe.  Another 30 people are in hospital with symptoms similar to bird flu.

Until now all known 142 cases of human bird flu have been in East Asia. Most have been lone cases in families, and about half of them have died.

A spokesperson for the World Health Organisation in Geneva said the children must have got the disease through direct contact with poultry.  She said:  "If there is an outbreak of avian flu in poultry then eventually there will be human cases, especially if people touch infected chicken blood, feathers or insides."

Some 30 people are in the same Turkish hospital with bird flu-like symptoms.  The disease in birds has also been discovered in Romania, Russia, and Croatia.

Health officials in Europe are concerned that the unusual cluster of human cases raises the possibility that the H5N1 bird virus has become more contagious to human beings.

At present there has not been a confirmed case of human-to-human transmission of the H5N1 virus.  Health experts are worried that the virus will mutate to incorporate this human-to-human trait and that when that happens it will lead to a dangerous pandemic, in which millions of people could die.

In an unrelated development, Chinese financial authorities hinted the country is thinking of diversifying its foreign exchange reserves away from assets held in US dollars.    If this shift happens, it will have an important impact on the value of thje US dollar and on world financial markets.

The US is estimated to have a trade deficit of US$712 billion in 2005.  But this was more than covered by inflows of foreign capital.  In the 12 months to October 2005, US1,100 billion of foreign capital flowed into long-term US securities.  Thus the US dollar even strengthened last year.

China has been among the largest supplier of foreign capital to the US.  Its reserves are expected to approach US $1,000 billion this year.   It is estimated that 70% of the reserves are placed in US dollar assets, which has been helping to cover the deficit and thus sustain the level of the US dollar.

If China were to place a significantly higher share of its foreign reserve in  other currencies, the US dollar would come under pressure.

Last Thursday, the Chinese government’s foreign exchange regulator said a 2006 target was for it to explore better ways to “improve the currency structure and asset structure of our foreign exchange reserves.”

This is taken by some analysts to mean that China is planning to move from US dollar into other currencies.  If this happens, the US dollar will fall sharply, which in turn could cause some turmoil in financial markets.

But this has not happened, mainly because of large inflows of foreign capital.  Many will keep a close watch this year whether these flows will at last reduce this year, affecting the level of the US dollar.