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Thursday, November 27, 2003

Puzzling Times

For a simple, albeit serious, amateur politician ready to face the political and economic issues from a compassionate, cosmopolitan and realistic point of view, times are puzzling.

Apparently inspired by the 2004 presidential elections, the US-administration gives clear signals of a protectionist nature: the textile quotas on China, the steel-tariffs against Europe and Japan (Japan now too has announced to possibly impose the WTO-legitimated sanctions) and let’s not forget the way the implosion of the WTO-Cancun-conference left the issue of US-cotton-subsidies (so cruel against the economical prospects for a number of poor African nations) untackled.

And along with this the economic growth looks impressive according to this Financial Times article. We are talking about an annual growth rate of 8 %.

Inspired by the homeland electoral considerations France and Germany in the meeting of the Euro-ministers of Finance, Ecofin, seemed to have achieved yet another indulgence towards their non-compliance with the Stability and Growth Pact. China continues to show an astounding growth. Who remembers the would-be devastating effects of the SARS-outbreak? Brazil gets back to growth.

But today my newspaper has a story about the perplexing practice in China, especially in the building industry, where lots of workers are not getting paid for many months now. Only reaching my newspaper because the Chinese government wants to act against it. Is this a part of the bubble-character of the Chinese miracle? Andy Xie chief economist for Greater China of Morgan Stanley wrote about a soft or hard landing already:

"…China’s growth is due to slow down quite sharply in the next two quarters, as a consequence of authorities turning off the easy credit tap. In addition to the weakening of domestic demand that should follow the credit tightening, the de facto re-evaluation of the renminbi in January 2004, by means of the removal of export tax breaks, is likely to amplify the slowdown: we believe that Chinese exporters are currently front-loading exports to beat the tax change. The important point for China’s suppliers is that Chinese exports have a very high import content. Hence, imports, too, are likely to have been swollen artificially by the anticipation of the tax change. "

I am not sure to what extent US-growth has a bubble-character too. Brad deLong quotes the Economist:

"...investors sense a chill beneath the warm glow of the numbers. One cold wind blowing across this particular recovery is that Americans are up to their necks in debt. With short-term interest rates at a 45-year low, households are spending some 13% of their disposable income on servicing their debts; a higher number even than in the sharp recession of the early 1980s, when the Federal funds rate topped 13%. How much longer can they carry on spending at this rate, let alone increase it? If they don't, then someone else will have to spend on their behalf.

The government, perhaps? The Bush administration has turned a budget surplus of 2.4% of GDP into a deficit that official numbers say will amount to 4.3% of GDP next year. Not much room, in other words, to raise spending"

Somewhere else I read that a great part of US-growths is related to houses; probably related to Bush tax-policy to help the rich. Reminds me someway of the Dutch economical “miracle” in the late nineties that turned out to be based for at least 50% on the rise of house-prices that in turn was stimulated by the rapid slow down of subsidized building (according to a report of the National Bank).

In my search for wise words on economic stability and growth (we need some kind of global stability and growth pact in my opinion) I found reports of a conference on Rethinking stabilization policy where Alan Greenspan said in his opening words:

"In conclusion, the endeavors of policymakers to stabilize our economies require a functioning model of the way our economies work. Increasingly, it appears that this model needs to embody movements in equity premiums and the development of bubbles if it is to explain history. Any useful model needs to credibly simulate counterfactual alternatives. We must remember that structural models that do a poor job of explaining history presumably also will provide an incomplete basis for policymaking. (…..) The recent importance of movements in equity premiums and asset bubbles suggests the need to better understand and integrate these concepts into the models used for policy analysis."

The central study that supported the conference (by Romer and Romer) concluded from their research that:

"changes in economic understanding have been central to the evolution of stabilization policy. Throughout the postwar period, policymakers. fundamental goals have been the same: high growth, low inflation, and stability. But as policymakers. understanding of the economy evolved, the policies they adopted in pursuit of those fundamental objectives evolved."

I am trying to keep that in mind (what is the appropraite emotion for understatement?)

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