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Tuesday, December 30, 2003

Worrying About Demand

According to economic theory, demand will equal supply at the "equilibrium" price level. In practice, lack of demand in the economy might now and then become a threat to employment, and even force nations to spiral down into depression. Lack of demand is currently a topical issue, both for economists and participants in the financial markets. Liberals like Krugman often mention how the current US administration's policies have failed to spur demand from middle class households. I came here trying to start a wider discussion of what factors - apart from the often discussed fiscal and monetary policies - we need to worry about in this context.

Today's offshoring, and fast technological change makes fundamental prices of labor more volatile. However, labor is (thankfully since the Civil War) traded only under heavy restrictions. This combined with low inflation and the traditional or psychological constraint on nominal wage changes to be at or above zero - some labor are becoming overpriced. Too high a price drives demand down - this would be my first factors threatening demand. And as Mark Fiore states in one of his cartoons - workers avoiding being overpriced by working harder and long hours puts pressure on relative demand by increasing supply.

The second set of demand threats I would propose is the productivity increase from technological change and employee's learning-by-doing. According to standard theory, anticipation an of productivity increase would make households save some work for the more efficient future, while tending to consume some of the future gains in advance. But if a large part of the economy's capital is represented by worker's skill, they would probably like to work more when new technologies arrive, in order to add to that capital. Workers would tend to work more rather than less, again increasing supply rather than demand.

Another factor coupled to these is the non-standard but not unheard of 'keeping-up-with-the-joneses-utility'. If household's perceived standard of living is linked to how much they earn relative to what their neighbors earn rather to actual number on the paycheck, this could (if you have IE 6.0 shrink this window somewhat before clicking the link) diminish the tendency to consume future productivity gains in advance. As technological change means increased wage variablility, it could instead make households save for the future, to prepare for the increased risk of earning significantly less than their neighbors.

Finally, again non-standard, but not entirely exotic: 'habit-persistence'. The households that benefit from increased wage variability (Chinese, Indian middle class?) might still keep some of their own habits, failing to demand all the gains from their new higher paying jobs.

Admittedly, this discussion is biased towards looking at the threats to demand. But insofar these links between faltering demand and low-inflation, good productivity gains, offshoring and 'learning-by-doing' have some validity, there is room for worrying. We actually have quite a lot of those factors in place today.

Saturday, December 27, 2003

Offshoring: don't break the links

In The New York Times (free registration required), Bob Herbert writes:

""Offshoring" and "outsourcing" are two of the favored euphemisms for shipping work overseas. I.B.M. prefers the term "global sourcing." Whatever you call it, the expansion of this practice from manufacturing to the higher-paying technical and white-collar levels is the latest big threat to employment in the U.S."


"Most of the millions of white-collar workers who could be affected by this phenomenon over the next several years are clueless as to what they can do about it. They do not have organized representation in the workplace. And government policies overwhelmingly favor the corporations. Like the employees at I.B.M. whose holiday cheer has been dampened by uncertainty, these hard-working men and women and their families have little protection against the powerful forces of the global economy."

Matthew Iglesias and Brad DeLong already have made some valid points against Herbert’s view. In essence they say that many groups are better of thanks to outsourcing: consumers (lower prices for software and thus higher real incomes), Indian software engineers (who gets jobs for higher wages), Americans working in export industries and in construction or capital goods industries (thanks to capital inflows coming from countries like India). On the other hand we have indeed hard working people at I.B.M. but who are nevertheless very well paid. Why should they be protected to the detriment of those large groups of Indians, American workers and American consumers who benefit by offshoring?

The outsourcing of white-collar jobs is not "the latest big threat to employment in the U.S.". In the past, the offshoring of manufacturing jobs, did not lead to a net loss of employment in the American economy as a whole. Neither did NAFTA, a treaty that did unleash those powerfull forces of globalization. Indeed, in the nineties the U.S. created millions of new jobs, offshoring and Nafta notwithstanding (or maybe thanks to...). And there is no reason why this should be different now or in the future:

"When some production of software and services is done abroad, some jobs will be done abroad too. Recent efforts to quantify IT-related and other white collar job loss "offshore" frequently use the peak of the economic and technology boom as the base for analysis, thus ignoring the business cycle, trend decline in manufacturing employment, dollar overvaluation, and technology bust. Cutting through the technology boom and peak of the business cycle and comparing end-1999 with October 2003, employment in architecture and engineering occupations is stable, that in computer and mathematical occupations is 6 percent higher and in business and financial occupations, 9 percent higher. Going forward, broader diffusion of IT throughout the economy points to even greater demand for workers with IT skills and proficiency. In the 1990s, investment in IT propelled job growth for workers with IT skills to twice the rate of job growth in the overall economy. Over the next decade, the Bureau of Labor Statistics (BLS) projects that job growth to 2010 in occupations requiring IT skills will be more than three times the rate of job growth in the overall economy."

As Chatherine L. Mann explains, the "globalization of IT Services and white collar jobs" will be "the next wave of productivity growth" and so very beneficial to the American economy, American consumers and American workers (and for the world economy as a whole). Indeed, productivity growth is the basis of wealth and welfare:

"Although technological change is the most important driver of IT price declines, globalized production and international trade made IT hardware some 10 to 30 percent less expensive than it otherwise would have been. These lower prices translated into higher productivity growth and an accumulated $230 billion in additional GDP (1995–2002). Real GDP growth might have averaged 0.3 percentage points less per year from 1995 to 2002, if globalized production of IT hardware (and the globalization of jobs in IT hardware, IJ) had not occurred.(...)Just as for IT hardware, globally integrated production of IT software and services will reduce these prices and make tailoring of business-specific packages affordable, which will promote further diffusion of IT use and transformation throughout the US economy."

Mann concludes:

"Globalization of software and services, enhanced IT use and transformation of activities in new sectors, and job creation are mutually dependent. Breaking the links, by limiting globalization of software and services or by restricting IT investment and transformation of activities or by having insufficient skilled workers at home, puts robust and sustainable US economic performance at risk."

Fransis also right however: we should be thinking about real policies to cushion the blow to those white-collar workers who will lose their jobs. But his view of Herbert is, i think, a little naïve. Herbert at least is implying that those white-collar workers should be protected against the forces of globalization. Let’s just hope that people like Herbert are not giving to much credit to the view that we should "break the links", for instance by restricting the globalization or offshoring of software-industries. That we should not do.

Wednesday, December 24, 2003

Merry Xmas to Everyone

Just to wish everyone a merry xmas, and what better way to do it than by blogging this walking disaster. The piece from Forbes is interesting, as it focuses on the international dimension of the thing. I am off on holiday now till 1st January. No more blogging from me till then (although others please feel free to do so, and if you really are bored, I just left a pretty tangled xmas riddle down in the comments on the Joseph Bosco post). I am sure I'll have more, much more, to say on this when I get back.

Parmalat will soon have protection from its creditors, but that may not be enough to keep the global milk and cookie empire from crumbling. With $11 billion in reported debt, a black hole in off-balance sheet obligations and $5 billion in cash missing, Parmalat will have to sell either a lot of milk or a lot of assets.

Parmalat's Italian dairy business will likely remain intact -- especially after Prime Minister Silvio Berlusconi's weekend pledge to save jobs and factories. But Berlusconi won't see it as a priority to save jobs and factories in Brazil and North America, two of Parmalat's biggest markets. The most likely scenario: The global empire that Calisto Tanzi assembled will eventually be broken up and sold to the highest bidder, much as Europe's other global disasters: Vivendi Universal (nyse: V - news - people ) and Ahold (nyse: AHO - news - people ).

In the 40 years he ran the company, Tanzi made over a hundred acquisitions and borrowed billions to do it. Parmalat is a global brand, but most of its businesses remain local. The company, with sales of $9.4 billion last year, still markets scores of acquired brands in 30 different countries. Even Parmalat's signature long-life milk tends to be procured, processed and sold as close to the source as possible.

Now, with Tanzi under investigation, Parmalat's debt is trading for 20 cents on the dollar and its shares have fallen 95% in the last week. It's difficult to see how Parmalat will hold together. As auditors discovered late last week, the company's cash pile was a mirage.

The dairy silos, bakeries and juice businesses are real, but valuing them now is difficult. If the company's balance sheet was a sham, why should anyone trust cash flow or earnings reports? Parmalat's assets could be marked down to distress levels and that will bring out the vultures.

The first assets on the block will be of the non-dairy variety. Even before the hole was discovered in Parmalat's balance sheet, the company had been laying off workers and closing down bakery plants in the U.S. for the past year, preparing its business, which will have an estimated $1 billion in sales for 2003, for sale.

The company paid $250 million for Mothers Cake & Cookie Company and Archway Cookies three years ago. Citigroup (nyse: C - news - people )'s Citigroup Smith Barney values the bakery business, including a few Italian brands, at $531 million, but it could fetch much less than that.

One former Kraft (nyse: KFT - news - people ) executive says that the Illinois-based company should look at Parmalat's Mothers brand of cookies, which is strong in the western U.S. states where Kraft is weak. But how much appetite will Kraft have for junk food given its own troubles?

Eventually, Parmalat's dairy business could end up on the block as well. National Foods of Australia said last week that it would be interested in Parmalat's business down under. Dean Foods (nyse: DF - news - people ), America's largest milk processor, grew to a $9 billion-a-year company by consolidating dairies across the country. The Parmalat brand may not be worth what it once was, but the Italian dairy company owns some expensive European packaging lines that Dean may find interesting.

Creditors may wish to see Parmalat -- and their investments -- rescued and intact, but that is an unlikely scenario. Its also unlikely the company could be swallowed whole. Andy Smith, an analyst with Citigroup Smith Barney in London wrote in a December 17 report: "We could see a strong strategic fit between parts of Parmalat with either Kraft, Nestlé or Danone ... But which potential trade buyer would be prepared to countenance any form of due diligence when the company is in so much apparent distress?" Nestlé (otc: NSRGY - news - people ) and Groupe Danone (nyse: DA - news - people ) have said publicly they are not interested in Parmalat, at least for now.

Private equity buyers may be more willing to take the risk on a tarnished brand, providing the cash flow is there. Hicks, Muse, Tate & Furst is among the most aggressive in the food business. In Europe, PAI Partners has a stable of food investments, including Panzani and United Biscuits. Doughty Hanson, which holds U.K. baking and milling group Rank, Hovis, McDougall, and BC Partners with Galbani are two British private equity firms that like food brands.

Good thing the holidays are a time for over-eating.

China, soot and soybeans

There have been a number of posts about China’s appetite for soybeans some of them also mentioned that China’s crop yields have been dropping for several years. I’ve been meaning to post this link about China, soot and climate change.

Soot is mainly the result of incomplete combustion of some fuels – particularly coal. In China, coal is used extensively for home heating & cooking. These home furnaces tend to burn less completely than large industrial-size plants and are a major source of soot.

The researchers fed aerosol (soot) concentrations into their models. The models’ results match up well with observations; increased rainfall/flooding in south China, drought in northern China, decreased crop yields due to both precipitation changes and reduced sunlight. To add insult to injury, drought means less water for hydropower. The effects aren’t limited to China either: Central Asia (e.g. Afghanistan) has been suffering from drought for the last five or so years.

The link underscores the fact that development, energy and climate are all interrelated. [Put in standard disclaimer involving any climate research here.]


The good news is that since soot is relatively short lived, actions taken to reduce soot would yield results in a short time (months to years). Unfortunately, it will take longer to develop and implement a viable solution.

To paraphrase Edward, these are complex, interesting issues.

Christopher Anderson

Monday, December 22, 2003

The Logic of Relative Prices

In a retrospectively obvious development, China is going to rent 17,300 acres (7,000 hectares) of arable land from Kazakhstan.

In a way, this isn't that much different that buying soybean from, say, Argentina: the soybean trade could be seen as the Chinese renting both land and labor from the Argentines. Not because Argentine labor is cheaper than the Chinese, but because soybean-bearing land is (at least at the prices dictated by Chinese demand), and sending Chinese labor to South America would be not only politically delicate, but also too expensive in any case. Kazakhstan sharing a border with China, and having ample almost unhabited zones, its "land for rent" is unbundled from its labor, and Chinese labor probably beats the local one in terms of wages.

Given the economic and demographic forces at play, I´d be surprised if this where the last of these deals.

Fear and Loathing in China

In a weekend edition of the New York Times, Nicholas Kristof asks: Is China a Threat to the Rest of the World? It is a continuation of a series of columns he is writing on his journey of exploration of the 'New China', along with a reader's forum on the series in his semi-weblog 'Kristof Responds'.

His major thrust today is concern over the "nationalism" he finds stirring in the belly of many if not most young Chinese people, university students in particular, which he finds directed most openly towards Japan and the Japanese people.

Below is an extract from Joseph Bosco's response.

In his argument, he mentions two very recent events as examples of this phenomenon: An ugly, and outrageous, incident over a skit performed by Japanese exchange students at a university in Xian in the early part of this semester; and the arrests and adjudication in a case involving several hundred Japanese businessmen and their mega-tryst with several hundred Chinese prostitutes at a hotel in the southern port city of Zhuhai (for which two Chinese citizens received life sentences just this past week).

Readers of these pages and other China-based weblogs will be familiar with both of these aberrations. His third example is the ever-upward creeping revisionism of the death toll of the Japanese atrocity in 1937, commonly known as the 'Rape of Nanjing.'

Being a visiting professor at one of China's elite universities, without qualification, I can attest to the accuracy of Mr. Kristof's underlying findings. The loathing of Japan and, to a lesser extent, the Japanese people, is quite palpable. It manifests itself whenever Japan, and things Japanese, are the focus of class lectures or discussions, any time Japan is in the news, and most vehemently in private conversation..............

Where I somewhat disagree with Mr. Kristof, is in what it actually means, and that it is fore-shadowing a potential military confrontation with Japan. I also disagree on how much of it is orchestrated by the central government as a way of using 'nationalism' as a cohesive factor in holding China together as ideology increasingly diminishes with the rush into capitalism and, yes, the beginnings of a form of 'Democracy with Chinese Characteristics' which is fact and not just dissident radicalism.

If it is possible for most people in the west to understand, the Communist Party of China itself is a burgeoning democracy, with peacefully competing wings' left, right and center, amongst the 60 million party members.

It is these two engines that are driving China, and also holding it together. While they often exercise their prejudice of Japan, what the young Chinese people spend most of their time doing is chasing what we used to call the 'American dream': a good life that includes a home of their own, a car of their own, a good education for their one child, vacations that include travel, and of course the good, steady job that provides for all of these things. Going to war with anyone seriously gums up that future and they know it.................

Another reason I do not believe that China is a military threat to Japan, or any of its other neighbors, is that while they may viscerally loathe Japan, they are not afraid of Japan, or even mistrustful of Japan. Who my students fear and mistrust is America. While they love Americans, and almost all things American, they truly believe that an administration such as George W. Bush's would in fact attack China in a heartbeat if it was in any way politically or geopolitically advantageous to what the neocons might one day believe to be American interests............

You see, Chinese students study a great deal more history than American students. The Korean war is not a 'forgotten war' to them. And the war in Vietnam isn't something they culturally want to forget as do American students. They know that war well; they know that our air force came all too close to unloading B-52s on Hainan Island, China's southern most province and its 'Hawaii', only about 100 miles of South China Sea away from North Vietnam.

This is probably not the kind of thing Mr. Kristof and other Americans want to hear—I damn sure did not like it when I first became aware of it (which was about a day after arriving in China). But it is fact: America is the only country Chinese young adults fear and mistrust. Japan they can hate, and even haze and all but terrorize its visiting citizens when they are not extremely careful regarding China's over sensitivity towards Japan's behavior during the first half of the 20th Century. They can do this because they do not fear or mistrust them; they just don't like them.

On the other hand, we Americans are treated with almost embarrassingly special attention. As long as our students are testing well and getting into graduate schools in America and Great Britain, we can almost get away with murder. Being an American 'Foreign Expert' in China is a ticket to a life of special favors in almost every sector of life. We are loved, feted, wined, dined and lavished with presents and invitations home.

But our government? Particularly this government? They don't trust it any farther than they can throw it. And they fear it greatly. It wasn't just one student who wondered aloud that if we could force the acknowledged leader of a country like Iraq into a rat-infested hole in the ground for weapons of mass destruction he did not have, or for supporting terrorists who were not in country much before he went into that hole, what might we Americans do to the leaders of a country that absolutely does have weapons of mass destruction, a country that has made serious military threats against a runaway province that America is sworn by law, not treaty, to defend?

No amount of explaining how that is all but impossible, even for this administration, can dissuade them, and many of their Chinese professors, from their deep and basic mistrust of American unilateralism. And this is not just since that term became a buzz word after 9/11 and Bush's strike-first doctrine. They have feared American unilateralism all of their young lives.

Italy Struggles With Growth

In marked contrast to the previous post, the economic news from Italy is decidedly not good. First there is the Parmalat scandal, where the financial black hole could in fact be bigger than €7bn. Berlusconi is remaining calm, saying that the government would take measures to "above all save the industrial part of the company and jobs" and "separate finance from industry". Those who may well not be so calm are the people who have an interest in the financing of Italy's growing national debt, the largest in Europe and the largest in the OECD outside Japan - as a % of GDP that is. The nervousness will only be reinforced by this news that Italy is having even more difficulty crawling out of the recessionary hole than the other large European economies. And while it is certainly far too soon to say told you so, I was suggesting this earlier in the year. Italy is the prime candidate (alongside Germany) for noting the Japan ageing factor - if indeed this is what it is, and with it arthrosis of the growth process.

Italian business confidence unexpectedly fell in December to a five-month low as the euro's rise to a record against the dollar weighed on exports and manufacturing stagnated.

An index based on a survey of 4,000 executives fell to 91.2 from a revised 94 in November, the government statistics office said in Rome. The index was expected to rise to 95, according to the median forecast of 18 economists polled by Bloomberg News. "The euro's strength is starting to get scary,'' said Renzo Belcaro, chief executive officer of car-finishings maker Silmet SpA and president of an association of 4,500 small and medium- sized companies in northeast Italy. ``If we don't export, we're dead.'' Italy, the third largest of the 12 economies using the euro, is struggling to recover from its first recession in almost a decade as the currency's appreciation makes it harder for companies such as Fiat SpA to sell to foreign customers.

The five-year-old euro's rise poses ``remarkable difficulties to the speed of recovery,'' European Commission President Romano Prodi, a former Italian prime minister, said last week. Italian exports outside the European Union fell almost 11 percent in November.

Fewer Italian manufacturers plan on boosting production in the next three months, Isae said. Inventories rose, and foreign demand fell. An index measuring orders from abroad dropped to minus 17 from minus 14 in November, a sign the increased value of the euro is squeezing exporters.

The survey coincides with growing woes at Parmalat Finanziaria SpA, Italy's biggest food company. Parmalat may file for bankruptcy protection as early as today after admitting that a 4 billion-euro ($5 billion) bank account didn't exist, people familiar with the situation said.

Parmalat failed to pay investors 150 million euros of bonds, Standard & Poor's cut its credit rating to below investment grade and founder Calisto Tanzi resigned as chairman. Parmalat's financial troubles put 36,000 jobs at risk.

``2004 isn't going to be an easy year,'' said Giovanni Burani, chief executive of Mariella Burani Fashion Group SpA, owner of the Mila Schon fashion label, in a televised interview with Bloomberg News.

Italy, which emerged from recession in the third quarter, faces other obstacles to a recovery. Labor unrest kept production unchanged in October. In Germany and France, Italy's two biggest trading partners, production jumped in the same month.

Plans by Prime Minister Silvio Berlusconi to force Italians to work longer to collect a full pension have triggered nationwide protests. Earlier this month, more than 1 million demonstrators took to the streets of Rome.

An October general strike forced Alitalia SpA to cancel flights and thousands of workers at Fiat didn't show up to work. The lower house of parliament had to vote confidence in the government three times to pass Italy's 2004 budget to the Senate for final approval.
Source: Bloomberg

Drop in Brazil's Unemployment Rate

Just when you all must have been thinking that I'd sneaked off for xmas without saying goodbye, here I am back again. Just a bit of good economic news from Brazil to back up Frans last post:

Brazil's jobless rate fell for the first time in three months as retailers hired personnel to staff stores for the year-end holiday season and manufacturers such as Fiat SpA looked to boost output to prepare for an economic recovery in 2004.

Unemployment in Brazil's six-largest metropolitan areas fell to 12.2 percent, from 12.9 percent in October, the government said. The median estimate in a Bloomberg News survey of six economists forecast the jobless rate would fall to 12.65 percent. The rate was 13 percent, a two-year high, in August.
Source: Bllomberg

Saturday, December 20, 2003

Realism without cynicism

Brad deLong quotes The New York Times on Lula being Brazil's president for one year now. "Panicked by Mr. da Silva's past as a fiery labor leader, traders sent Brazilian bonds and the currency tumbling last fall. Banks shut off credit lines to companies, leaving the country all but dependent on support from the International Monetary Fund. When Mr. da Silva took office Jan. 1, he surprised many by choosing a market-friendly economic team that promptly reined in galloping inflation by raising interest rates and cutting more than $4 billion from the government budget. "Many believed, and with reason, that Brazil would not survive the crisis," Mr. da Silva told government ministers, lawmakers, generals and labor leaders gathered at Planalto, the presidential palace.

But now, Mr. da Silva said, listing his government's achievements -- falling interest rates, booming exports, a stable currency -- "the time of uncertainty has passed." He added: "We have reversed the worst expectations. We have won back confidence in our economy and in the capacity of this country to grow."

The encouraging aspect in my opinion is this: "He has always tried to explain to ordinary Brazilians in speeches and in public appearances why their economic sacrifices were needed. As he said Thursday: "The bitter decisions were taken consciously and with an eye on the future." In terms of his popularity, his up-front approach seems to have worked: a poll this week showed Mr. da Silva's approval rate buoyant at 66 percent, just three percentage points lower than three months ago."

Remarkable that neither in the NYT-article nor in Brad DeLongs review is there mention of Lula's role in the preparation and the meeting of Cancun. This will have contributed greatly to his popularity at home. And deservedly.

One person reacting at deLongs site wonders:"What is the significance of the answer to this question?" referring to deLongs closing sentence: Cardoso did a lot of heavy lifting. Now Lula da Silva is doing his share. But will it be rewarded by rapid economic growth?"I share this guy's (Bulent's) curiosity. Or to put it in other terms: WHO is going to reward Brazil with rapid economic growth?

The traders that sent Brazilian bonds and the currency tumbling last fall ? I'm afraid that is the implicit answer.

Reminds me of the terrible dilemma when faced with the arrest of mr Khodorkovsky (the multi-billionaire who dared Putin and was imprisoned for that reason). I don't have the slightest sympathy for the guy, -you simply cannot have grown from communist-youth-organizer to billionaire in Russia in a few years and be a decent guy-, but he should be supported still.

(we witnessed how Khodorkovsky and the likes of him figured in the recent Russian elections....
Sometimes it's hard to be "realistic but not cynical". Lula's example offers some hope on that. )

Friday, December 19, 2003

Argentian Growth Continues

Argentina continues to go forwards - on the back of the China boom? But then, when you've been so low the only way is up.

Argentina's economy likely expanded for a third consecutive quarter in the July through September period, led by an increase in investment and consumption.

Gross domestic product, a measure of a country's output of goods and services, probably rose 8.6 percent in the third quarter from the same year-ago period, it's biggest increase since the fourth quarter of 1996, according to the median estimate of 16 economists surveyed by Bloomberg. Argentina's economy grew 7.6 percent and 5.4 in the past two quarters.

``We have invested $2.5 million to increase output as we've been working at full capacity,'' said Rosana Negrini, chief executive at Agrometal SA, an agricultural equipment manufacturer in the central province of Cordoba, 500 kilometers (311 miles) west of Buenos Aires. ``We expect to increase production 50 percent next year to respond to higher demand,'' she said. The government plans to publish GDP figures today.

The government raised its 2003 economic growth forecast to more than 7 percent, the fastest pace in Latin America, based on a pickup in consumption and investments, said Economy Minister Roberto Lavagna this month. The government had forecast 3 percent growth in its proposed 2003 budget after the devaluation and default on $95 billion in debt led to an 11 percent contraction in 2002. Central bank chief Alfonso Prat-Gay yesterday said the economy will grow more than 5 percent in 2004.

``The country's devaluation and lower costs in U.S. dollars prompted new investments to increase production,'' said Matias Silvani, a director of Latin American Macroeconomic and strategic research at UBS Warburg LLC in Stamford, Connecticut. The country's exports have risen 16 percent this year, led by a boom in soybean shipments, which rose to 8.4 million tons from 5.9 million tons in 2002, according to the cereal stock exchange in Buenos Aires.

Industrial production, construction activity, car sales and supermarkets sales all are up this year as slower inflation and a stable exchange rate helped lift demand, the government said. Inflation has risen 3.6 percent in 2003 from 41 percent in 2002.
Source: Bloomberg

Reality Check

This AP story is mostly about the enviromental effects of Brazil's soybean boom, but please look, really look at the very first phrase:

A new variety of soybean developed by Brazilian scientists to flourish in this punishing equatorial climate is good for farmers, putting South America's biggest country on the verge of supplanting the United States as the world's leading exporter.

And then look at this (old, by 'Net standards) post in BoingBoing:

DNA sequencing for children
Discovery toys is selling an $80 toy called the DNA Explorer, which allows small children to extract and sequence the DNA from a variety of foodstuffs.

You are living in a world where Brazilian scientists use biotechnology to develop soybean varieties to sell to (probably) Chinese manufacturers that build a DNA sequencer for children that sells for $80 in the USA. And nobody even thinks any of this is other than business as usual.

Moral of the day: If your plans for the future didn't take into account a world where kids can sequence DNA and Brazil competes with the US, you need to go back to the drawing board. I know I do.

Thursday, December 18, 2003

ECB Begining to Interest Itself in the High Euro Problem

The euro continues its rise, and some of the potential consequences are begining to sink in. The idea, I think, is that a rising euro will make pressure for structural reform. This is why the talk is of a 'controlled rise'. The problem is if the dollar declines with a jolt in some moment accompanied by a run for the door. Then the impact could be important. We watch and wait.

A member of the governing council of the European Central Bank has warned that a "too rapid strengthening" of the euro could threaten the fragile recovery under way in the eurozone.

Nout Wellink, the president of the Dutch central bank, said the single currency's appreciation - the euro surged on Wednesday to an all-time high against the dollar - was "one of the risk factors" for the European economy. He warned that a "sudden movement" in foreign exchange markets could dent eurozone growth prospects.

In an interview with the Financial Times and FT Deutschland, Mr Wellink said the ECB wanted to see a "smooth appreciation" of the euro, "one that does not disturb the economic process." He added: " What I do not like to see are sudden movements."

ECB officials have tended to play down the strengthening of the euro, preaching the benefits of a strong currency and insisting it is not far removed from its long-term average value, a point reiterated yesterday by Otmar Issing, the bank's chief economist.

He told Bloomberg News that the euro "is essentially back where it started." As a result ECB officials claim the euro's rise should not have major consequences on European company competitiveness. They also say the effects of euro appreciation are being offset by strong global growth.

However economists believe the ECB is concerned about the risks of a stronger euro and are braced for further appreciation. The huge US current account deficit is unsustainable and is expected to lead to persistent dollar weakness as global imbalances adjust.

The Bundesbank, Germany's central bank, warned this week in its monthly report that the US current account deficit posed a substantial risk of sudden currency movements which could dent growth prospects in the eurozone's biggest economy.
Source: Financial Times

Brazil: Inflation and Interest Rates Down one More Time

Brazil has just reduced the benchmark lending rate for the seventh straight month, with inflation adjusted rates looking like they could fall below 10 percent next year, thus becoming the lowest since Lula da Silva took office. The 12-month inflation rate in November fell to 11 percent from 17.2 percent in the 12 months to May, while the monthly inflation rate has declined to 0.3 percent from 3 percent in November 2002, a month after Lula won election. The interesting question is why is this happening, and why is it happening in Turkey and numerous other places. The phenomenon seems to be global. So it isn't just a question of domestic good housekeeping. So what then is it?

Central bank policy makers cut the overnight target rate 1 percentage point to 16.5 percent to help revive economic growth. Based on Welch's assumption that the overnight rate averages 15 percent next year and inflation averages 6.2 percent, real rates would fall to 8.3 percent in 2004 from 12.7 percent this year.

The central bank's ability to reduce interest rates every month since June underscores Lula's success in fighting inflation during his first year as president. The lower rates are starting to revive South America's largest economy, which contracted in both the second and third quarters this year.

Welch, a former senior economist for the Federal Reserve Bank of Dallas who grew up in Brazil, expects inflation to continue to decline next year, enabling the central bank to lower rates further. He predicts real interest rates will drop to 4.1 percent in 2005, the lowest level in at least a decade, as the average inflation rate climbs back to 9.1 percent and the benchmark lending rate falls to an average 13.5 percent.................

Brazil's economic conditions may be changing in ways that will allow real interest rates to decline further, said Henry Stipp, who helps manage about $5 billion in emerging-market assets, including Brazilian bonds, at Threadneedle Asset Management in London.

Brazil had a current account surplus of $82 million in October, compared with a deficit of $7.7 billion in 2002. In the first 11 months of 2003, Brazil posted a record $22.1 billion trade surplus, compared with $13.1 billion last year and a deficit of $1.28 billion in 1999.

``We don't face a rush of having to finance our external needs in horrible conditions so that's paving the way for lower interest rates,'' said Stipp. ``People believe that this time real interest rates will remain for some time below 10 percent and the reason for that is because times have changed.''

An increase in U.S. interest rates from 45-year lows in the second half of next year might endanger Brazil's ability to keep cutting its own rates, said Ruggero de Rossi, who helps manage about $4 billion in emerging-market debt at OppenheimerFunds Inc. in New York. Growing demand in the economy may also turn Brazil's current account surplus into deficit and start to fuel inflation, putting pressure on interest rates.

``The difficult task will be in the second half of 2004 when the Fed hikes,'' said de Rossi.
Source: Bloomberg

And if the Fed doesn't hike?

Wednesday, December 17, 2003

Running On Empty

In this case I'm not talking about the US economy, I'm talking about me. At least that's how I feel. Hopefully xmas is coming and we're all going to have a ball. Meantime this article deals with something which is more-or-less important. Real and Nominal GDP, and chain indexes: as I have said before, it depends what you want the numbers for. Chain-based indexes provide a measure of what is happening to living standards, they do not tell us much about what happens inside the black box. You can have rising 'real' GDP, and falling nominal GDP Japan-style, what good it does you is another matter. As we know you run out of monetary policy points. So important as hedonic prices are in some contexts, we need to think a lot more about how we use them. More will have to wait for January (at least).

Sometimes, you can have too much information. That is what the government statisticians have decided in their latest revamp of U.S. economic figures.
Stung by criticism from economists over how they adjust the value of computers and software for changes in inflation and quality, the number crunchers have simply decided not to publish the figures anymore.

The Bureau of Economic Analysis on Wednesday issued large-scale revisions to the quarterly gross domestic product (GDP (news - web sites)) report, the broadest snapshot of how the economy is faring.

But, buried among the changes, the new report leaves out altogether the usual figure of how much was spent on computers in the most recently revised quarter, the April-June period, in inflation-adjusted terms.

That's because, after adjusting for inflation and quality changes, computers contributed over half of the economy's growth in the second quarter. But, by another measure, computers accounted for less than a tenth of it.

The problem was that for various parts of the economy, the BEA publishes current, or actual dollar, spending as well as a "real" or inflation-adjusted measure. And because computer prices have been falling for years at the same time as their computer power has grown, the discrepancy between the two measures is larger for computers than for any other category.

"The basic thinking is that (inflation-adjusted measure) creates a dollar value that is quite misleading because of the very rapid price declines for computers," said Brent Moulton, who is in charge of compiling the GDP report for the BEA.

"And it's particularly misleading if people are trying to determine the impact of changes in computer investment on total GDP," he said.

In actual dollars, investment in computers edged up by a meager $6.7 billion to an annualized $93.5 billion in the second quarter.

The original report for the second quarter, by contrast, showed in inflation-adjusted terms that same category of investment surged by $35.8 billion to $354.9 billion, or close to half of the growth in GDP.

But now, in the revised report released on Wednesday and in all future GDP reports, that line is just left blank.

The decision to remove the conflicting information was reported by Reuters in September.

The way the figures are adjusted for inflation involves a "chain-price" measure, which refers back to 1996 dollars.

As the BEA noted in a recent article, the use of 1996 dollars significantly overstates the impact of computers on the economy "during the last half of the 1990s when computers experienced explosive growth and during the second and third quarters of 2003, when computer sales accelerated." "We're trying to give our users a gentle reminder not to add and subtract chain dollars," Moulton said. And as for the discrepancy of some $261.4 billion between the two measures of computer spending? In the world of statistics, it will be as though it never existed in the first place.
Source: Yahoo News

Not Telling It like It Is

This article from the Financial Times, while not being completely without interest, doesn't get anywhere near the heart of the problem:

Strong industrial production and housing market data bolstered optimism over the US economy on Tuesday as the first fall in core inflation for 21 years suggested the Federal Reserve was under no pressure to raise interest rates.

Industrial production grew by 0.9 per cent in November - almost double expectations. The strength was most obvious in the technology sector, where output rose by 4.1 per cent following a 4 per cent increase in October and a 2.3 per cent rise in September.

New homes were built last month at the fastest pace in 20 years, with construction starting on 2.07m homes in November on an annualised basis.

The data failed to cheer the dollar, which was little changed against the euro at $1.232 by the middle of New York trading.

Economists said the strengthening of the US economy was failing to attract more funds from international investors. Tuesday's current account figures showed net financial inflows into the US fell by $26.7bn in the third quarter to $123.3bn.

The reaction to the data from other markets was relatively muted, with the Dow Jones edging 61 points higher to 10,084. The yield on the 10-year Treasury bond slid from 4.27 to 4.23 per cent.

Yet in spite of the strengthening of the economy analysts said it would be some time before the Federal Reserve would need to apply monetary brakes. Consumer prices - excluding the volatile energy and food sectors - fell by 0.1 per cent in November, the first decline since December 1982.

This takes the core year-on- year rate to 1.1 per cent, the lowest since May 1963. Core service prices, which sparked early fears over inflation by rising 0.4 per cent in October, fell back to zero in November.

"These very low figures are likely to be reversed next month and I don't think we are seeing a revival of the deflationary threat," said Steve Cochrane, director of US research at Economy.com.
Source: Financial Times

Econ 101 on China

Obviously the 'great China economy debate' is simply set to run and run: it won't be over till it's over as they say. But one thing thing is curious, the line up that it creates. These days I seem to find myself more and more with Greenspan. First the deflation danger in the US, and now China. Greenspan, speaking of all places in Texas, last week appeared to soundly reject the argument that an undervalued yuan poses a problem for the U.S. economy. According to Greenspan "a rise in the value of the (yuan) would be unlikely to have much, if any, effect on aggregate employment'' in the U.S.

On Greenspan's view a yuan revaluation, would simply transfer production to other low-wage countries. Of course I agree. On the margin this would only cause China to outsource downwards. As Bloomberg's William Pesek says: "It's not China's fault the U.S. isn't creating millions of jobs. The blame goes to a rich economy that's becoming less competitive in an age of globalization".

Greenspan's view: A yuan revaluation, as the White House has demanded, would simply transfer production to other low-wage countries. And he's right. It's not China's fault the U.S. isn't creating millions of jobs. The blame goes to a rich economy that's becoming less competitive in an age of globalization.

No doubt the White House would love to pin its job- challenged recovery on communists in China. But it's been hard to keep a straight face as executives and politicians in the U.S. increasingly scapegoat China the way they did Japan a dozen years ago.

Forgotten is that this year's 20 percent rally in the Dow Jones Industrial Average is partly a byproduct of China's rise. Companies have rushed to China because of its cheap labor and land costs. The shift resulted in a ``giant sucking sound'' not unlike the one H. Ross Perot feared from Mexico during the 1992 U.S. presidential election.

Yuan's Value

U.S. companies have pumped up profits by firing workers and moving jobs to China. The cheaper yuan allows them to set up plants, buy machines, hire staff cheaply -- and make more money. And now, the U.S. is upset that, well, China is stealing its jobs. Such hypocrisy explains why Beijing is unmoved by Washington's claims that its rich economy is being victimized by poor China.

Rickety institutions, a troubled banking system and poverty continue to plague China. Eight percent growth aside, it also faces history's greatest development challenge: introducing 1.3 billion people into the global economy. China just isn't ready to let traders decide the value of the yuan. Because of its shaky financial system, the yuan could just as easily fall as rise.

Thankfully, Greenspan exposed the disingenuousness of the China debate. Often seen as a close ally of the Bush team, he may be anything but on this issue. The Fed chairman is looking at it in purely economic terms, not political ones, like the White House.

That doesn't mean this issue is going away. Last Friday, U.S. Treasury Secretary John Snow said: ``It's awfully important the Chinese respond in coming months. They have committed to a float and that's positive.''

Keeping the Peg

Here, let's hope Greenspan's Economics 101 lesson on China gets its due of attention. Yes, Greenspan said Beijing may need to end its 8.277 peg to the U.S. dollar, but not because such a shift would lead to more U.S. jobs and exports. Rather, the step might keep its economy from overheating.

China's money supply has grown at an annual rate of over 20 percent this year because currency and bank reserves have increased. Realizing that pace may be unsustainable in the long run, its central bank has countered much of its dollar buying by reducing loans to commercial banks, selling bonds, and boosting reserve requirements.

Continued buying of dollars to maintain the peg, ``unless offset, threatens an excess of so-called high-powered money expansion and consequent overheating of the Chinese economy,'' Greenspan said. Thus, it's ``important to all of us that they succeed in navigating through their current economic and financial imbalances.'' A more flexible currency regime might do the trick.

Yet Greenspan admits that even this part of the China-should- let-the-yuan-rise argument is debatable. That's a far more useful angle from which to come at the issue, and one to which Beijing will be more receptive. China fancies itself a rising power and isn't about to let the Bush administration rush it into a major economic policy shift.

Election Year

It's no use telling that to the Bush team or U.S. senators working to impose tariffs on Chinese imports unless Beijing floats its currency. It's also no use telling them that China is buying an increasing amount of the world's exports. This campaign can be explained with two words: election year.

In 2004, many elected officials -- including President George W. Bush -- will need to explain why the U.S. isn't creating jobs. The last thing politicians want to admit is that their efforts aren't boosting U.S. living standards. They're also loath to remove U.S. farm subsidies. China makes a convenient scapegoat.

Corporate America used to blame the Japanese for its deficiencies. The Chinese are now playing that role. And U.S. politicians know it could be a winning strategy at the polls. Chances are, more than a few voters from Los Angeles to Miami will buy the idea that communists in Beijing are stealing their livelihoods.

So far those blaming China for U.S. woes haven't listened to reason. Perhaps they'll listen to Greenspan.
Source: William Pesek Jr, Bloomberg

Tell It Like It IS: Part Two

While I'm in the mood, here's another one for the tell it like it is list. I don't 'read' newspapers anymore (except maybe the FT and the electronic versions Bloomberg and Yahoo Business - if you can call them newspapers - just to track the day-to-day data) I glance down the google aggregator and latch onto what catches my eye. This is a sort of 'intuitive' component I guess. At the same time Google gives meta data to work from, since you can also use it to guage how large numbers of people are seeing things. Usually most of what you see there is 'clonic'. Then, just once in a while, a story hits the top of the pile which actually has something to say. Like this one from the Toronto Globe and Mail:

Hussein's capture opens deep rifts

The tribal and religious divisions Saddam Hussein fostered during two decades in power erupted anew Tuesday, with southern Shiites continuing to celebrate his capture while supporters staged bloody ambushes of U.S. troops and Sunnis carried out violent protests.

In 24 years as president, Mr. Hussein, himself a Sunni, brutally repressed the country's Shia majority, assassinating top clerics and filling the country's prisons with their followers. His arrest has sparked outbreaks of unabashed joy in Shia areas, with parades still going on 48 hours after word first leaked that he had been caught.

The favour he showered on those who shared his tribal and religious roots seems to have bought Sunni loyalty as deep as the Shia enmity. As many as 19 people were killed in two days of violence, mostly in the so-called Sunni Triangle of towns around Baghdad, the area from where Mr. Hussein and his Baath Party sprang and which he later made the most affluent part of the country.

Incensed by pictures of a humiliated Mr. Hussein submitting to medical tests by a U.S. Army medic — and in some cases believing it was not actually the former dictator but a look-alike — residents confronted U.S. troops in the towns of Ramadi and Fallujah to the west of Baghdad, and Tikrit and Samarra to the north.

"This humiliation [of Mr. Hussein] has only made people angrier with the Americans," Baghdad resident Said Abu Mohammed said. "There will be more attacks, and more suicide bombings."

The U.S. military said a convoy came under attack near Samarra on Monday, and 11 people were killed as troops repelled what they called a "complex" ambush that began with a roadside bomb and was followed up with machine-gun and rocket-propelled grenade fire.

Police and residents were contesting that version last night, however, saying just one Iraqi had been killed, and that the Americans were the only ones shooting, opening fire on a residential area in retaliation for the bombing. Neither side reported U.S. casualties.

Another bomb and grenade attack on U.S. troops in Khalyiyah resulted in the deaths of two insurgents after soldiers fired back at gunfire coming from a group of trucks.

Shortly after the Samarra ambush, U.S. troops, acting on a tip, arrested 73 suspected insurgents, including an alleged financier identified as Qais Hattam.

Tanks and helicopter gunships could be seen in the area of Fallujah and Ramadi yesterday afternoon, hours after U.S. soldiers opened fire on a pro-Hussein demonstration in Ramadi, killing at least three people.

A statement from the U.S. military said protesters fired repeatedly on troops, injuring one soldier. Television pictures aired last night by the British Broadcasting Corp. and several Arabic news stations, however, showed only bullets streaking through a crowd of Iraqis running away from the scene.

In Fallujah, crowds celebrated a rumour, started by an unknown source, that U.S. forces had captured someone who looked like their former president but was not Mr. Hussein himself.

U.S. troops moved in after demonstrators stormed a police station, and the troops reported one Iraqi killed. Police, however, said they removed two bodies. There was also a violent demonstration in support of the deposed dictator in the northern city of Mosul that resulted in the death of at least one policeman.

In Mr. Hussein's ancestral hometown of Tikrit, meanwhile, U.S. troops moved to break up another demonstration on his behalf after a bomb injured three U.S. soldiers. Troops warned they would use force to break up any future protests.

"They will not be allowed to go around kissing pictures of Saddam," said Lieutenant-Colonel Steven Russell, who commands a battalion of the U.S. 4th Infantry Division in Tikrit. He backed up the statement by deploying 30 Abrams battle tanks and 300 infantry soldiers in the centre of the city yesterday.

"We cannot hand out lollipops in this city," Col. Russell said. "It does not work here."

The scenes in the Sunni areas contrasted sharply with the celebrations in Shia parts of the country.

In the southern city of Basra, where Mr. Hussein mercilessly crushed a 1991 uprising against him, hundreds marched through the streets, still celebrating Mr. Hussein's arrest two days after U.S. soldiers found him hiding in a small pit behind a farmhouse near Tikrit.

"Death to Saddam," the crowd chanted. Many marchers waved newspaper photographs of a haggard-looking Mr. Hussein in U.S. captivity.

Baghdad Shiites also held a celebratory march yesterday.

"I'm so happy they got him," said Issam, a currency trader with a table on Paradise Square, where a statue of Mr. Hussein was famously toppled eight months ago after U.S. troops first entered the capital.

"Now we can finally stop talking about him. Now we can stop worrying about him."

My feeling is that this reporter has it so right. The big danger now is that of uncorking the bottle. People seem to forget what happened after the death of that other 'great dictator' Tito. Many have speculated over the intelligence quotient of GWB, I try not to do this. But collectively, what they are doing as an administration, seems to be the height of studpidity. All this reminds me so much of what I have been watching here in Spain over the last decade with the problem of Basque terrorism (and what I saw in the UK in the time of Ms Thatcher). You simply don't address the problems that give rise to terrorism by mounting a discourse directed at home consumption. This produces a feeling of humiliation, rage, and possibly a good deal more. This has been Aznar's 'folly' here in Spain. He has on every occasion sought to capitalise on ETA terrorism to gain political advantage. This makes the folks back in Madrid feel warm and comfortable inside, but also means that next year voters in the Basque region could actually vote for independence, something which would have been unthinkable when he came to power. Now it seems to me all this is about to repeat itself 'a lo grande' with the 'iraq problem' and US voters. I can't for the life of me understand why Hussein didn't meet with the same fate as Adolf Hitler or his own sons.

Tuesday, December 16, 2003

Tell It Like It Is

Some call themselves economists, others work hard to try and be one, and others have the responsibility thrust upon them. Mine is tha latter case. I'd far rather read a good piece of literature, or start investigating the origins of Greek thought: but needs must. Now look carefully everyone at last months US consumer prices. This is much faster than even I had imagined, and with the dollar falling fast. Certainly Bernanke wasn't expecting this for another year. With the dollar at its old level, my guess is the US would be already mired in deflation. Also this has to be the response to all those who talked about China's growth fiction. Well fiction is becoming reality, and in the good ol' US of A. Of course this is still early days. But don't expect a rate increase any time soon. And keep watching the CPI!

U.S. consumer prices took an unexpected tumble last month, pulling the underlying rate of inflation down to a nearly 38-year low, a government report showed on Tuesday. Separate reports showed groundbreaking for new homes surged in November, while the shortfall in the U.S. current account, the broadest measure of America's trade with the rest of the world, shrank in the third quarter.

Reaction in financial markets to the spate of data was muted, with prices for U.S. Treasury securities edging higher as investors welcomed the lack of inflation. Economists said the absence of upward price pressures meant the Federal Reserve (news - web sites) could hold interest rates at 1958 lows for a long stretch. The consumer price index, the most widely used gauge of U.S. inflation, slipped 0.2 percent in November, the Labor Department said.

The so-called core rate, which strips out volatile food and energy prices, fell 0.1 percent -- its first drop since December 1982. Wall Street economists had expected both the overall CPI and the core index to tick up 0.1 percent. Closely watched core inflation has risen just 1.1 percent over the past 12 months, the slowest rate of advance since the 12 months ended January 1966. "This is certainly a surprise," said Parul Jain, economist at Nomura Securities in New York. "This is a reminder that there still is deflation in the system. We should still be concerned about downward pressure on prices."
Source: Yahoo News

The Noose Tightens

There is still something I don't understand about this type of process: if it is a sound argument that the EU budget will have to be restrained like the national budgets themselves, why should this change if Poland and Spain come into line on the constitution?

Six of Europe's biggest paymasters on Monday called for a freeze in the European Union budget until 2013, in a move that could cut aid payments to poorer countries including Spain and Poland.

The leaders of Germany, Britain, France, the Netherlands, Sweden and Austria, all net contributors to the EU, said in a joint letter that the union's budget should be subject to the same "painful consolidation" as national budgets.

The warning, following immediately after Spain and Poland blocked the deal on a new EU constitution, steps up the pressure on Madrid and Warsaw to fall into line.

Germany, which contributes 22 per cent of the EU's €100bn budget, has warned of "certain parallels" between the budget negotiations and finalising a deal on the constitution.

Poland and Spain are expected to be the biggest net beneficiaries of the next EU budget round from 2007 to 2013, with subsidies benefiting agriculture, industry and infrastructure projects.
Source: Financial Times

Iraq Update: Joan Cole Says it All

When the dust finally settles on what happened on Sunday, I fear that what Cole says may prove to be extremely prescient, especially the part which comes from his wife. The serious newspapers here in Spain go along these lines too.

What is the significance of the capture of Saddam for contemporary Iraqi politics? He was probably already irrelevant.

The Sunni Arab resisters to US occupation in the country's heartland had long since jettisoned Saddam and the Baath as symbols. (See "Sunnis gear up" below.) They are fighting for local reasons. Some are Sunni fundamentalists, who despised the Baath. Others are Arab nationalists who weep at the idea of their country being occupied. Some had relatives killed or humiliated by US troops and are pursuing a clan vendetta. Some fear a Shiite and Kurdish-dominated Iraq will reduce them to second class citizens. They will fight on, as Mr. Bush admitted today.

My wife, Shahin Cole, suggested to me an ironic possibility with regard to the Shiites. She said that many Shiites in East Baghdad, Basra, and elsewhere may have been timid about opposing the US presence, because they feared the return of Saddam. Saddam was in their nightmares, and the reprisals of the Fedayee Saddam are still a factor in Iraqi politics. Now that it is perfectly clear that he is finished, she suggested, the Shiites may be emboldened. Those who dislike US policies or who are opposed to the idea of occupation no longer need be apprehensive that the US will suddenly leave and allow Saddam to come back to power. They may therefore now gradually throw off their political timidity, and come out more forcefully into the streets when they disagree with the US. As with many of her insights, this one seems to me likely correct.


Looking over a bit more the Econ4Dean site I, like Frans, am pleased to see that they are not a group of uncritical whimps. One of the difficulties I have with supporting a political party is the apparent need to put up and shut up. It is also, as I now understand, not an official campaign site, but rather a group of Dean-supporting bloggers with an economy oriented site. As such I have no difficulty at all putting them in my sidebar. Additionally they are dealing with the revelant issues:

One aspect of the outsourcing debate that I think has been overlooked by most sides is that it is not just lower-level IT jobs that are being outsourced to India. Because of India's preeminent technology universities, the country is producing workers who are able to do the kind of innovative high end research and development work that is done in the U.S............

On the one hand, this high-level outsourcing implies a tremendous source of productivity growth through cost savings that results in lower prices for consumers, greater profits, higher exports of goods and also eventually some offsetting job creation in this country. It also does a tremendous amount for India, whose workers have devoted themselves to the kind of intense training that is required to perform at the highest standards in the world. Why should they be deprived of the opportunity to earn their rewards?

On the other hand, as with international trade, generally, this outsourcing has created a geographically concentrated set of dislocated workers in specific industries (e.g. software engineers in the Bay Area) . Only these workers are workers who are already quite high-skilled and for whom its not so obvious what the next rung on the ladder is. This makes the standard economist line of job assistance, retraining and relocation seem somewhat out of place. Still, what exactly are the policy alternatives? While the transition will certainly be painful --as it has always been for blue-collar workers-- eventually a growing economy will provide the new jobs that are not always apparent to us now. The most sensible policy is to make a real effort to cushion the blow through programs like trade-related unemployment assistance and health care subsidies which are currently vastly underfunded and not applied to the service sector that has been hit by outsourcing. America's demographic shift in the coming years will also provide new opportunities as many skilled workers will be leaving the labor force.

Incidentally, love him or hate him, I think you have to recognise that his supporters are doing interesting things internet wise. The latest evidence of this: someone has just produced a 'desktop Dean' RSS news aggregator.

Monday, December 15, 2003

The Semantic Web

Maybe it would be interesting to start this piece off with a little quote from Dave Winer:

The important thing is winning in a way that sets up the conditions that make it possible for the president to ask the American people to accept sacrifice, collaborate and share, and innovate and create in order to make a better world.

On a day that is full of what is to me fairly incomprehensible euphoria (although of course, I like everybody else, am glad that Hussein has been finally captured: I just don't see that it changes that much, and in fact I can see things which may now become more difficult in the short term, but this is for another post) on such a day, I think this piece from Dave is really to the point: sacrifice, collaborate and share, innovate and create. This is a pretty good working agenda.

Now on the collaborate and share end, and following on from the original Warehouses of Brains piece, Marcello wrote me this last weekend:

Besides the intrinsic facilities of the medium, blogs tap into the underused networked brainpool [Edward, if Bonobo doesn't work out of a virtual "Warehouse of Brains", I don't know what does :-)]. Supply+Hipereficient channels of distribution=Prices go down like stones. Software, business processes, call handling, manufactures... and information. Stuff like RSS only makes it easier to bypass the distributors and go to the sources, perhaps one of the drivers of the well-known log-distribution pattern of links in blogs.

So, in a world where anybody can begin a blog in 15 minutes, why am I exited about the "Living in XXX" blogs? In short: because we're aggregating brains, not feeds [ok, we aggregate RSS feeds too, but I wanted to make it sound catchy :-)]. Blogs are, to put it somehow, interfaces to brains. The, in my humble opinion, brilliant thing about group blogs is that you're interfacing to a whole warehouse of brains, but from the point of view of the reader there is only one --- *a really* bright one, awake 24hs a day and reading pretty much everything at the same time.

Isn't that a mind you'd pay attention to?

And once you've mastered the art of adding people to a warehouse and make it keep working [only now a tad better], you can extend to new geographic zones, topics, modalities, whatever. Witness the "Living in" sites growing up like mushrooms.

OK, this was a bit hurried, breathless and buzzword-happy, the now dreaded mark of bubble-speak. If anybody thinks it useful, I might write it in a more coherent, less 3AMish style. Although I don't think I've said anything new, specially for this group

Now reading through this I found it sounded remarkably similar to something Nova Spivack has been saying:

Metaweb postings can be hosted like Web pages in particular places and/or they can be shipped around the Net using RSS in a publish-subscribe manner. Webloggers for example create microcontent every time they post to their blogs. Each blog posting is a piece of microcontent. End-users can subscribe to get particular pieces of microcontent they are interested in by signing up to track "RSS channels" using "RSS Readers" that poll those channels periodically for new pieces of microcontent..........

RSS is poised to become The Next Big Thing. There are many reasons for this -- for one thing, e-mail is no longer useful as a content distribution, alerting and marketing medium. E-Mail's rapidly eroding signal-to-noise ratio is leading content providers and end-users to seek alternative, more mutually-effective avenues for interacting with one another. Another force that is driving RSS adoption is the rise of Weblogging.

But RSS is just the first step in the evolution of the Metaweb. The next step will be the Semantic Web. RSS begins the process of getting end-users and content providers to use metadata. The next step is to make that metadata more interoperable, more understandable, more useful. This takes place using ontologies and emerging tools for working with "semantic metadata" -- metadata for which formally defined semantics exists. Just providing metadata is not enough -- the meaning of that metadata has to be defined somewhere in a formal, rigorous, manner that computers can understand automatically. The Semantic Web transforms data and metadata from "dumb data" to "smart data." When I say "smart data" I mean data that carries increased amounts of information about its own meaning, structure, purpose, context, policies, etc. The data is "smart" because the knowledge about the data moves with the data, instead of being locked in an application. So the Semantic Web is a web of "smart data" -- a Web of semantically defined metadata. The Semantic Web is already evolving naturally from the emerging confluence of Blogs, Wikis, RSS feeds, RDF tools, ontology languages such as OWL, rich ontologies, inferencing engines, triplestores, and a growing range of new tools and services for working with metadata. But the key is that we don't have to wait for the Semantic Web for metadata to be useful. The Metaweb is already happening. RSS is already useful and it's happening now.


What we have here is the actual collective consciousness of humanity thinking collective thoughts in real-time, and we get to watch and participate! We are the "neurons" in the collective minds of our organizations, communities, marketplaces. Our postings comprise the memes, the thoughts, in these collective thought processes. Already the Metaweb is thinking thoughts that no individual can comprehend -- they are too big, too distributed, too complex. As the interactions of millions of people, groups and memes evolve we will see increasing layers of intelligence taking place in the Metaweb.

Japan Deflation Set to Continue

Slow blogging only today I'm afraid. It isn't so much that winter is setting in here in Barcelona, as the fact that I have a pile of admin on my desk! So on the more mundane topic of the future of the global economy, this snippet from Japan does seem to confirm the picture: deflation will continue, and will logically increase if there is any slowdown in global growth:

Japan's central bank will probably keep interest rates almost at zero today to fight deflation and bolster a recovery from a 12-year slump, economists said.

Governor Toshihiko Fukui and his eight policy board colleagues, meeting in Tokyo, will also keep monthly purchases of government bonds from banks at 1.2 trillion yen ($11.1 billion), 13 of 15 economists surveyed by Bloomberg News said.

The Bank of Japan's Tankan survey last week showed confidence among large manufacturers at its highest since June 1997 as accelerating global economic growth boosts demand for cars, DVD players and mobile phones. Retailers and service companies that rely on the Japanese market were pessimistic as consumer spending and prices fell.

``An export-driven recovery will continue, but that won't be enough to stamp out deflation,'' said Ryutaro Kono, chief economist at BNP Paribas Securities Ltd. ``So the bank's choice is the status quo.''

Fukui and other board members have said consumer prices will extend their slide after rising in October for the first time in 5 1/2 years. October's rise was caused by temporary factors such as higher rice prices and increased tobacco taxes, they said.

The bank lowered interest rates to almost zero in March 2001 and promised to keep them there until nationwide consumer prices stop falling for at least several months and the bank is sure they won't slide again.

Board members projected on Oct. 31 that core consumer prices, which exclude fresh food, would fall 0.2 percent in the fiscal year ending March 31 and 0.3 percent next fiscal year.

Fukui said last week that the world's second-largest economy is on a ``fragile basis'' and that ``considerable time'' is needed before Japan can overcome deflation.
Source: Bllomberg

Another Great Leap

Martin Wolf has an excellent article in Financial Times. He comes out strongly for the China growth camp. The catch-up potential is simply enormous he argues, and there could be another 2 ½ decades of fast growth. As he puts it, “Will the journey ahead be an easy one? No. Is sustained rapid growth a certainty? No. But it is going to be substantially easier than most doomsayers suppose.”

I can’t agree more, especially with the last bit. Coming from Singapore and growing up in the 70s and 80s, that was how it was. Exceptional growth was the norm, and it didn't seem that difficult to achieve. Now the torch has passed on. China is much bigger of course, and if we are to be surprised, it might well be that growth in this catch-up process comes faster than even Martin assumes.

While there are those who remain skeptical about actual growth rates achieved in China, they are burying their heads in the sand. There is more than enough anecdotal evidence. I came across another bit over the weekend. Shanghai will ban bicycles from all the important streets next year. Bicycles have been king of the road for decades. Now, local police say bikes are 'getting in the way' and will jack up fines tenfold for traffic offenders. 'Progress' has always meant saying goodbye to a previous way of life.

All this growth means China's savings is also rising. While that’s partly a function of the rapid growth rate, there are other reasons.

Yuan Gangming, director of the Institute of Economics at the Chinese Academy of Social Science (CASS) explained to my colleague that in the past when the State took care of everything, nobody saved. Earnings were mostly spent. So a lack of investment meant inflation occurred easily. Now that the state no longer provides free benefits, the Chinese are starting to save – whether it’s for the down payment on mortgages, hospital bills or for retirement.

I wonder. It’s a massive increase in savings (savings rate is over 40% of GDP), reminiscent of that renown Asian propensity to save. And that leads me to think that if there is to be a question mark over China’s long-term future, you could wonder, after the catch-up potential is realized, whether its economy can successfully transform into a truely mass-consumer society (ala the US). It’s a stage of growth where the other Asian economies have largely faltered. But that's another story.

Now here's an excerpt from Martin ..

China can make another great leap forward
Today China's GDP per head, at purchasing power parity (PPP), is only about a sixth of that of the United States. But evidence from South Korea and Taiwan indicates it is easy for a catch-up country to sustain very rapid growth until its GDP per head is more than half the US level. Japan did even better than that. If the US economy continued to perform as it has done over the past half century, with a growth of GDP per head at just over 2 per cent a year, while China also managed to continue to grow at just over 6 per cent a year per head, the Asian giant would not achieve the magic halfway point until shortly before 2040. On this basis, therefore, another 2 1/2 decades of growth as fast as the last 25 years' is perfectly feasible.

Read more

Friday, December 12, 2003

Memory Overload - or Increasing Capacity?

I think this is about to become 'Topic du Mois':

Information boom causes memory overload

One of the greatest challenges facing delegates attending the World Summit on the Information Society in Geneva - which closes on Friday - is how to preserve the immense "digital heritage". The sheer speed of technological change and the daily flood of data make it virtually impossible to keep track of all this material.Millions of words and images circle the globe every second, using a web of subterranean cables, optical fibres, antennae and satellites.

It’s not only users who are being put to the test with this mass of information – experts are also beginning to despair. Archives, libraries, museums and all the other institutions with the task of preserving this heritage complain that they are no longer able to keep pace.“We’re legally bound to keep a record of everything [relating to Switzerland] that’s printed on paper, every web page, every radio and television broadcast. It is impossible,” says Jean-Frédéric Jauslin, director of the Swiss National Library. “Not even the world’s major libraries, in France, Britain or the United States, are up to the task.”

Mission impossible

Not only is it no longer possible to safeguard all the information; it is becoming impossible even to quantify the mass of data produced each day on our planet. “Since 1996, an American company, Internet Archive, has been attempting to store all the pages published on the web,” Jauslin explains. “In seven years, it has accumulated 300 terabytes of information – a mind-boggling figure, which exceeds all the pages of the books produced in the history of mankind.”

Unesco, the United Nation’s cultural and education agency, has recently sounded alarm over the fact that a lot of information is also being lost every instant. It has set the preservation of our digital heritage as one of its priorities. “People are not very concerned about preserving things,” laments Fontana. “All they want is rapid access to information that will provide short-term benefits. Knowledge has become part of our throw-away society.”

In fact, while there may be no 'solution' in the classical sense to this problem, and while it isn't exactly easy to see where to go, I think there are some pointers. We in the 'livings' initiative are certainly getting into this in a big way. Structuring and facilitating a wide variety of information is both the potential of and challenge to blogging. Reading between the lines on the warehouses of brains piece the point should be more or less clear. We have, in fact, set up a global development team to try to work on the topic of weblogs and information aggregation. Anyone interested in participating should contact me.

Here Comes Another Early Relative

Scientific American is running this story:

Oldest Known Ancestor of Marsupials Discovered in China

A mouse-size, tree-climbing animal that lived with the dinosaurs is the oldest known ancestor of modern marsupial mammals, scientists say. A report published today in the journal Science describes the fossil, dubbed Sinodelphys szalayi, which is 15 million years older than the previous record holder.
Zhe-Xi Luo of the Carnegie Museum of Natural History (CMNH) and Nanjing University and his colleagues discovered the largely-intact skeleton in China's Yixian rock formation, which dates to 125 million years ago. The find included well-preserved impressions of fur and carbonized soft-tissue, which aided the reconstruction of what the animal looked like (see image). "This mammal could be the great grand aunt or uncle, or it could be the great grandparent of all marsupial mammals," Luo says. The creature was about 15 centimeters long and weighed about 30 grams, or one ounce. Its foot structure, in particular, indicates that it was capable of climbing trees.

"Interestingly, the more primitive mammals of the Yixian feathered dinosaur fauna were adapted to terrestrial or ground dwelling living," explains study co-author John R. Wible of CMNH. According to the team, this suggests that adaptations that favor climbing may have been important for the earliest divergence of marsupial lineage (whose living representatives include opossums, kangaroos and koalas) from the placental one. Because similarly-aged fossils of placental mammals have been recovered from the same area, the scientists propose that the two groups originated in Eurasia. Richard L. Cifelli of the University of Oklahoma and Brian M. Davis of the Oklahoma Museum of Natural History, however, classify the issue in a related perspective as "open but ripe for testing through new discoveries."

Thursday, December 11, 2003

When are soybeans like software?

One of the main Argentine trends that I've been following in Southern Exposure is this:

  • 1. China Grows.

  • 2. China Needs More Soy Products.

  • 3. Argentina Sells More Soy Products At A Higher Price To China

  • 4. Profit! (And the Kirchner administration has enough cash to pay the IMF and keep the social picture under some sort of control for the moment).

It's an interesting story because it ties global threads (China's growth and its impact on commodity prices) to local situations (the Argentine government's social and economic policies). This sort of connections make blogging fun, and allows me to write "happy" stories about Argentina, which is not something one often gets to do.

Of course, for every country that gets into a train, there's one or two that misses it. In this particular story, oddly enough, the country that's getting behind is the United States...

Yesterday it was made public a press release about research from the University of Illinois regarding the United States' soybean industry.

The press release indicates that the US share of world soybean production "has declined from about 50 percent to less than 40 percent" since the early '90s, while Brazil and Argentina's have risen to about 25 and 15 percent respectively.

Most interesting is the following paragraph:

"The dominant trend in processing plant location is a shift away from mature markets, such as in the U.S. In those markets, the plants tend to be older and smaller, the technology is more dated, farmer suppliers are smaller, and regional production is flat. By investing in the new growth areas, companies can employ the latest technologies, improve economies of scale, and have access to growing supply base."

The authors of the report also indicate that competing countries often enforce weakly or not at all Intellectual Property rights (granted, that tends to happen in the Third World) and end it by warning of the dire effects that will result if soybean research is slowed down or halted because of its diminishing profitability in the US.

Translation: We're being beaten in economic and organizational terms, and our whole business model now depends on the international enforceability of some patents and government subsidies. But what will the world do without the research paid by our artificially high margins?

Minus the government hand-outs, this sounds very much like every just-about-to-go-broke software company's statements in the last four years. Which is -or should be- very worrying for US farmers (where the heck is their can-do, "Our plan is to get better than them at growing soy!" attitude?), and quite interesting for everybody interested on the effects of global competition in commoditized, networked markets like soybean and software.


Overall, though, I don't see this as necessarily bad for the United States. I think we're far enough into the 21st century to safely say that neither agriculture, nor basic business processes, nor most software development are anymore high-margin activities that can easily support First World standards of living. Leaving those to people in the developing world is -again, in the big picture- advantageous for both sides.

It's sad having to restate it at this point, but Japan didn't raise its living standards by protecting their fishermen's jobs. Roughly speaking, they did it by turning fishermen into small industry manufacturers, and later small industry manufacturers into robot plant managers. India is turning its craftsmen into programmers and call center operators, which is, I think, a very good move. Instead of trying to keep these no longer cutting-edge jobs, the US might be well advised in trying to figure out what to turn its programmers and farmers into.

A lot of folded U$D 20 bills

According to the latest World Bank figures, around 5 per cent of worldwide GDP is lost due to corruption.

Let's go beyond the natural half-hopeless, half-indignant response to this number. Still using data from the World Bank, global GDP in 2002 was around 32 trillion dollars. Using sophisticated mathematical calculations, that leads me to conclude that about 1.6 trillion dollars were "misplaced" due to corruption. That's more than the GDP of the UK. Almost half of Japan's.

To put it this way: if it were a country's GDP, it would be the fourth richest in the world.

After the BCCI, Enron, Halliburton and just plain living in Argentina for twenty four years, I thought I could no longer be shocked by reports about corruption. But the sheer magnitude of this World Bank report forces me to reconsider my mental model about how the world works.

It's the UK's entire GDP...

Outsourcing and surplus capital

Edward’s recent post “Warehouses of Brains” and a much earlier post China's

Real Manufacturing Revolution
touched on how outsourcing not only results in lower

operating costs due to lower wages but also lower capital costs as well. Most of the time

discussions of globalization fixate on the effects of reduced product prices or wages. The

effects of reduced capital costs were something I hadn’t considered before.

A micro picture:

A firm liquidates a factory in a developed country, freeing up capital, Kf. It moves the factory

to China. This move imposes transaction costs T. The new factory, is built for a capital

commitment, Kc, where Kf > Kc. (This assumes that each factory can produce the same

quantity of goods.)

If Kf > Kc + T then there is surplus capital.

[Even if Kf < Kc + T, the lower operating/wage advantages may still justify a move.]

The earlier post also touched on another aspect – the transaction cost, T, drops as firms

become more adept at outsourcing. Over time, transaction costs shrink and the surplus

capital increases. The reduction in transaction costs makes outsourcing more attractive. This

positive feedback would tend to accelerate outsourcing over time – at least until wages (

operating costs) in the destination country started to rise. That is an interesting conclusion in

its own right – but what happens to the surplus capital?

For the sake of simplicity assume that this surplus is either returned to investors or invested in

increasing the new factory’s capacity. If the firm is a price-taker and that there aren’t

decreasing economies of scale, then economic incentives for further investment don’t

diminish. In this case, it’s hard to see why the firm wouldn’t invest in additional capacity.

A macro picture:

For the reasons outlined above, industries undergoing rapid outsourcing would be susceptible

to excess investment in capacity. This excess capacity would be an additional deflationary

pressure, atop the global wage and price pressures.

Even if the capital isn’t invested in additional capacity, it could be invested elsewhere. If the

flows were large enough, this could fuel speculative bubbles (e.g. real estate).


To be honest, I don’t have numbers to support this hypothesis (too lazy). It happens to jibe

with many of the recent posts so I thought I would throw it out.

Oh, Why Oh Why is Nothing Ever What it Seems to Be?

Oh, I know, I know. I don't go into type M arguments, and I won't. But this is very rich indeed.

A week after dropping one set of tariffs on steel, the Bush administration is considering giving new protection to U.S. steelmakers by changing how other duties are calculated.

The proposal, being reviewed by the Commerce Department, would raise the duties on $1.7 billion in steel imports determined to have been ``dumped'' in the U.S. at prices lower than those in the producer's home market. Revenue from the increased penalties would go to companies such as International Steel Group, U.S. Steel Corp. and Nucor Corp., which asked the department for the changes.

The idea is triggering new tensions between the U.S. and European steelmakers. ``It's a back-door way to keep the tariffs in place,'' said Richard Cunningham, a Washington lawyer who represents steel importers such as Corus Group Ltd., Europe's third-largest steelmaker.
Source: Bloomberg

US Growth 2004 2.5 - 3% Forecast

The material from Leamer that I've seen I've liked. The arguments seem sound. Couldn't have put it better myself. Now lets see if it's accurate!

The U.S. economy will grow modestly next year, keeping the unemployment rate stuck near 6 percent and the Federal Reserve on hold as it watches for any inflationary pressure from a weaker dollar, according to a closely watched forecast released on Thursday. Edward Leamer, the director of the UCLA Anderson Forecast and one of the first economists to flag the most recent recession, said the sustained surge in U.S. growth next year that some Wall Street analysts expect will not emerge.

Instead, the economy will grow at a rate of 2.5 percent to 3 percent in 2004, rather than the 4.5 percent to 5 percent pace typical of normal rebounds from recession, Leamer said. That slower growth, the result in part of the pressure on household balance sheets and local government budgets, will not do much to lower the unemployment rate, he added. "We should get about a 1 million new jobs over the next year. But the unemployment rate sticks around the 6 percent level," Leamer said, adding that will give the Federal Reserve reason to keep interest rates down.

Unless the job market substantially improves or the falling value of the dollar raises inflation, the Fed will hold steady the federal funds target rate, the main short-term rate the Fed uses to influence the economy, Leamer said. The Fed's policy-makers voted unanimously on Tuesday to hold the federal funds rate at 1 percent, its lowest level since 1958. The Fed also vowed to keep borrowing costs down for "a considerable period."

Leamer noted that a number of factors are making the outlook for the U.S. economy hazy and difficult to forecast. Higher productivity made the third quarter "feel like a Twilight Zone episode" as a blistering 8.2 percent rise in the economy was paired with a weak job market, Leamer said. "The data are so unusual with all that economic growth and no employment," Leamer said. "It's some kind of mysterious force out there delivering products to our door." For instance, there is reason to expect a pullback in spending by consumers as well as state and local governments will emerge as drags on the economy, Leamer said. Consumers have bought enough cars and houses to last for some time, and they "need to begin to repair their own troubled balance sheets," Leamer said. Meanwhile, productivity gains of recent years and stimulus from tax cuts may run their course next year, he said.
Source: Forbes