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Friday, September 12, 2003

US Economy Roundup

Various bits and pieces of data as the week draws to a close. The main news of the day is probably the slight drop in consumer sentiment. At the same time producer prices, excluding food and energy, are not only tame, but hovering nervously round the !% inflation mark. August retail sales didn't rise as much as expected, but the big news of this week is undoubtedy the continuing high level of new unemployment signings. In fact the Labor Department report said 422,000 people filed for benefits in the week ended Sept. 6, that's considerably over the 'magic' 400,000, and way beyond the 350,000 or so Brad reckons the US needs just to stand still. Now while we have to wait a little bit to see how this develops, it has to be a very preoccupying situation for the US.

I was sufficiently puzzled by all this as to go over to the BLS site and check out the details. I found, going back to the August numbers, that employment in the information sector fell by 16,000 over the month. In fact since the peak in March 2001, the number of jobs in this sector has declined by 459,000, or about 12 percent. At the same time computer systems design lost 8,000 workers during August and, since peaking in March 2001, employment in this industry has declined by 232,000. I was puzzled why the sum of manufacturing job loss and service job loss was more than the net job loss, and I found, logically enough, that two areas gained employment. There was a gain of 25,000 jobs in health care and social assistance in August, which was about in line with its average monthly employment increase over the prior 12 months. Construction employment also went upwards over the month, and since February, the industry has added an average of 20,000 jobs per month. (This rise in construction would have nothing to do with the low interest rates and mortgaging boom, now would it?) Apart from the rise indebtedness in housing, can anyone notice anything else interesting about these numbers? (Hint, there are more old people).

I also went over to the BEA to look at services in the trade balance and found that the surplus on services decreased to $14.4 billion in the first quarter from $16.1 billion in the fourth of last year. Services receipts decreased to $74.6 billion from $75.3 billion. Large declines in travel and passenger fares, reflecting concerns about the war in Iraq and the SARS virus, were partly offset by increases in "other" private services (such as business, professional, and technical services, insurance services, and financial services) and in royalties and license fees. At the same time services payments increased to $60.2 billion from $59.2 billion. Declines in travel and passenger fares, largely reflecting concerns about the war in Iraq and the SARS virus, were more than offset by increases in all other services categories combined.

Bottom line: looking this over across the board, it looks like the US has sprung a leak and it needs fixing. I think the point is not so much where we are now, as where we might be going. How do you protect high-value jobs in the US from becoming cheaper high-value jobs outside? Saying no to globalisation? That sort of about-turn on the part of the US would look even more silly than the current Iraq one. I think we need to understand Roach's point and start to think think about how to correct global imbalances without sending everything to hell on the way.

On The Generation Gap 5

Some feedback from my son on what has been my main post of the week. God I remember the days when fathers were incrementalists and sons revolutionaries. How times have changed! BTW I fell into the trap, the theatre he mentions wasn't Ibsen or anything like that, it was working on another below-the-knee amputation, or something por el estilo. Still, I think we're agreed on the main issue, things are changing, and this time, for once, they might change a little bit in favour of some of the relatively poorer countries.

i'll be honest i think you overstate the case a little. In my opinion- sure there are changes that unfold as the days pass but I wouldn't describe them as revolutionary (i think incremental would be a better description here for want of a better word... however I don't think that i would really describe any of it as so sudden, radical, or complete as to be considered a revolution? maybe I'm wrong but this whole process of globalisation or even technological 'advancement' has of course been going on for a long time now. I mean the wheel isn't actually that old really! ...............I am however not missing your point here that there might be a shift in favour of some 'developing countries' re economics/capital of whatever form etc, but this isn't anything new... i mean it was me who pointed out that bottled water in guatemala apparently uses the purest and most modern system of purification going... moving on...

the point i suppose i'm making (and I'm never usually clear on this part) is that you can't really be surprised that there are new opportunities arising for other countries which are being realised purely as a consequence of service (et al) developments in the OECD... for instance you point out that 'India is by no means the only provider in the game - a recent Forrester report mentions the Philipinnes, Russia, the Baltic countries, Mexico and Costa Rica - and I personally can add Bulgaria to this list on the basis of my own research' but i bet you could add a whole list more countries to that (based on who-evers research... i told you that when you fly over laos or vietnaam the only lights you'll see in the jungle at night are those coming from internet cafes). The world's- a- changin' sure but at its own pace I think.

Do you not see a whole load of darwinian type actions going on here... the question i suppose is one of resources and how to use them. Look, i can go teach myself basic programming and web design on the net if i want to... but i'm not interested in it so I don't. When i need to i can.. easily. and it won't ever be too late to learn because i just learn the most modern up to date stuff putting me right at the front of the technology curve. So if i can do that so can the rest of the world and the resources required to do it are actually pretty limited (essentially the main one is time... and then you have a skill (and i do realise this is exactly the same as the example of the fixed cost entrace fee of a factory (or in fact worker).. ie your entry cost is low wrt to some service provisions). Now i think what you are saying from here is that finally many countries (india being the best example) are getting a more cohesive infrastructure, and essentially organisation, to allow them to actively compete in an efficient way against their more developed counterparts.... not just compete but essentially shift to a position where the OECD's are actually reliant upon them and as such the positions start to shift further. Now I am of course no sooth-sayer (or economist for that fact... please note the natural link here) so I can't offer any expertise on all of this other than my own interpretation (and as it is such a large area you are covering I'll ignore the Gats stuff for now- oh and are you REALLY surprised an anthropologist knows Huizinga... human culture is after all their area of expertise....). and another thing do you honestly think that the intellectual distance between the middle classes of any country, developed or not, has ever been that great? Georgia has probably got more doctors per head than america.

Got to be quick now as have theatre to go to, so: "Yahoo's chief executive in India Venkat Panchapakesan as saying that the R&D facility will indeed hire more people soon.--- well he would wouldn't he? Malaysia has always been hot on all this IT stuff so it makes sense to invest there (intel)- i see your point. I spent a day in malaysia on my way over here interestingly enough and it struck me as a very british place (the old colonial influence i imagine....India, malasyia... there might be something in that?). by the way over 30 or 40% of the people at imperial college are probably from S.E asia.

"But then I am also interested in the economic welfare of all the population of this fine planet."-- dad, c'mon. I'm a bloody cynic- don't waste my time with stuff like that-I'm afraid its too self indulgent for my palette...........

The Smoot-Hawley Fallacy

In an otherwise excellent post about the dangers of China Bashing and global trade retrenchment, Stephen Roach repeats the point that Andy Xie was making yesterday, about protectionism and the 1930's recession.

In tough economic times, politicians always need a scapegoat. That’s what this wave of China bashing is really all about. It has little to do with economics and everything to do with the blame game. Yet this politically-inspired foray is symptomatic of a much deeper macro problem that now confronts an unbalanced world. The world’s sole growth engine is encumbered with the largest current account deficit in recorded history. Not only does that reflect the inherent pitfalls of a saving-short US economy but it also is a by-product of an utter lack of autonomous domestic demand growth elsewhere in the world. As America pulls the world economy along for the ride, it goes deeper and deeper into the quagmire of trade deficits, budget gaps, saving shortfalls, and excess debt accumulation. This is hardly a sustainable outcome for the US or for the rest of the world. It speaks of a worrisome and dangerous build-up of tensions in the global macro environment. Like steam in a teapot, ultimately these pressures need to be vented. Two options are available -- the economics of a US current-account adjustment or the politics of trade frictions and protectionism. The interplay between America’s jobless recovery and the presidential election cycle is shifting the odds from the economic to the political remedy. Right now those odds are low. But the risk is that they will rise.

In 1930, Senator Reed Smoot and Representative Willis C. Hawley jointly sponsored legislation that significantly raised the level of US tariffs. Courtesy of a recently popped equity bubble, the US economy was in recession, and a Republican administration favored the protectionist remedy as a means to provide relief for hard-pressed American workers. President Herbert Hoover signed the Smoot-Hawley Tariff Act into law in June 1930. Global trade retaliation quickly followed, as did a downward spiral of world trade. Many believe that was the decisive trigger for the Great Depression that was soon to follow. Such painful lessons should not be ignored in today’s post-bubble era. Yet that’s precisely the risk as politics now comes face to face with stresses and strains of globalization. Are we forever doomed to repeat the mistakes of history?
Source: Morgan Stanley Global Economic Forum

Now my point is: why follow-up an extremely good line of attack, with a very questionable one, all you do is weaken your argument. The idea in question: that it was the Smoot-Hawley tarrif that was the 'decisive trigger' for the Great Recession. This argument was advanced by Lloyd Metzler in the 1970's but has never been widely accepted by historians of the problem. My source and guide on this question is, as ever, Christopher Dow

The Hawley-Smoot tarriff of June 1930 has - erroneously, I think - been held responsible by Metzler for 'converting a sizeable recession into a severe depression'. (By June 1930, however, the depression was already severe). Metzler claims that the tarriff altered the 'division of national income', ie it raised the price of final output so that (he argues) output had to fall more. This reasoning assumes that the volume of nominal income in total (price and real components taken together) is fixed and predetermined - a style of logic which I dispute.............The effect of the tarriff was surely the opposite of what Metzler contends. The tarriff increased the effective rate of duty paid on imports by almost 50% between 1929 and 1932. By reducing foreign competition it will have diverted demand from imported to domestic supplies, and raised output.

In other words two things should be apparent. The earlier wave of globalisation did not come to an end in 1930 - most analysts date the change from the end of the first world war, and certainly by the time the US put a cap on immigration in 1922, and secondly, in the context of 1930 it is not clear what the impact of the tarriff was. The traded component at this stage was nothing like it is today. Now here we don't need to reach a final decision about whether Metzler or Dow is right, what we do need to see is that this comparison is ill-founded in that the situations are not comparable (the US is, at least officially, not even in recession) and because it opens the door to a whole host of arguments which are not helpful. Politics loves to get sidetracked.

Now there is one more argument available which might be more important, and that is the one of political credibility. The US has been one of the foremost champions, at least on paper, of globalisation. If the US was to make a U-turn now, apart from the direct economic impact of slowing down the growth of world trade, what - we should be asking - would be the geo-political impact? This argument could be a much more fruitful one to follow up.

Electra Glide in Blue

This seems important. It will definitely be of interest to Strogatz . Even our domestic lighting will change, it seems.

Researchers from Brigham and Women's Hospital (BWH) in Boston and Jefferson Medical College have found that the body's natural biological clock is more sensitive to shorter wavelength blue light than it is to the longer wavelength green light, which is needed to see. The discovery proves what scientists have suspected over the last decade: a second, non-visual photoreceptor system drives the body's internal clock, which sets sleep patterns and other physiological and behavioral functions.

"This discovery will have an immediate impact on the therapeutic use of light for treating winter depression and circadian disorders," says George Brainard, Ph.D., professor of neurology at Jefferson Medical College of Thomas Jefferson University in Philadelphia. "Some makers of light therapy equipment are developing prototypes with enhanced blue light stimuli." "In the long range, we think this will shape all artificial lighting, whether it's used for therapeutic purposes, or for normal illumination of workplaces, hospitals or homes – this is where the impact will be," he says. "Broad changes in general architectural lighting may take years, but the groundwork has been laid."

In theory, he says, "If a clinician wants to use light therapeutically, the blue wavelengths may be more effective. If you wanted built-in illumination that would enhance circadian regulation, you might want this wavelength region emphasized. It is interesting that natural daylight – the blue sky – is rich in this part of the spectrum." Dr. Brainard and his co-workers previously discovered that wavelengths of light in the blue region of the visible spectrum are the most effective in controlling the production of melatonin, which plays an important role in the body's circadian rhythms.
Source: Science Daily News

Computing the Global Climate

Here we go. Here's another piece on the rise and rise of grid computing. This time it's to work on trying to model the weather. Maybe one day we'll see voluntary grid computing used for economic forecasting!

The users of personal computers around the globe are being asked to help predict the world’s climate over the next 50 years. The climateprediction.net project, which is being launched today by British scientists, will harness the combined power of thousands of personal computers to generate the world’s most comprehensive forecast of 21st century climate. The project will allow climate researchers to assess the probability of different patterns of climate change in the next half-century - a complex process that would otherwise require long and expensive simulations on supercomputers.

“There are far too many [simulations] for us to run them ourselves,” says Myles Allen of the University of Oxford. “Together, the participants’ results will give us an overall picture of how much human influence has contributed to recent climate change and of the possible changes in the future.” Computer users who want to be part of the project can download a version of the UK Meteorological Office’s state-of-the-art climate model – which simulates several decades of the Earth’s climate – from the website www.climateprediction.net. The computers will run the programme in the 'background', without affecting normal computing processes. The project follows a similar initiative in which more than a million volunteers scanned radio-telescope data on their personal computers for signs of extraterrestrial intelligence.

The climateprediction.net system has already been tested by more than 1,500 people across the world, in locations that include the United States, Argentina, India and Zimbabwe. Participants will be able to view the climatic patterns being simulated on their computers, and are being encouraged to comment on the results in an online forum. At the end of each simulation, the results will be sent to researchers via the Internet. The climate scientists behind the new project – a collaboration between three British universities, the UK Meteorological Office, the CCLRC Rutherford Appleton Laboratory and Tessella Support Services plc – say that it will significantly advance understanding of future climate.

“While many model studies in the past have made plausible predictions of climate change, it hasn’t been possible to quantify our confidence in these predictions,” says David Stainforth of the Atmospheric, Oceanic and Planetary Physics Department at Oxford University, and the experiment’s chief scientist. “We hope to be able to say, for the first time, what the climate probably will and, more importantly, probably won’t do in the future.” The scientists hope to obtain initial results before the end of the year, and will submit their final results to the 4th Assessment Report of the Intergovernmental Panel on Climate Change in 2007.
Source: SciDev.Net

Commercial Weblogging

The Washington Post had an article yesterday - rather contemptuously entitled 'Making Blogs More Than Just What's For Dinner - about corporate weblogs. The justification for the article: the New Media Society's panel on that same topic. Now before I get into the more substantive detail, I would like to cite one curious anomaly in the article. The WP writer Ellen McCarthy informs us that - "One theory tossed around at the New Media Society event Tuesday night was that e-mail marketing is dead and business blogs are rising up as the replacement. While the medium may not be in its grave yet, powerful spam filters that block out corporate e-mails have certainly limited its effectiveness. But some proponents of blogging say the new business-development tool can succeed in ways e-mail never could." - and then goes on directly to quote panellist Bill Kearney to the effect that:

"I don't think e-mail is dead. I don't think it's any more difficult than it was two years ago; I just don't think it was ever that effective.........It's definitely sort of a nontraditional public that has largely wised up to marketing speak -- they can smell it from a hundred yards away."

. This quote is interesting (apart from the fact that they have an old link for Kearney) because it is about blogs and traditional media on the meta-level. It definitely gives one impression. But then go to the blog. In a post today, Bill Kearney says the following:

There's a buzz going on about lately claiming that e-mail is dead and that weblogs and/or RSS are a better alternative. This is bunk. Flat out wrong. Totally incorrect. Absolute nonsense. Claptrap. Or in other words, don't you believe it. There's a part of me that wants to say you can't call e-mail marketing dead if it was never alive. But I'm not quite that cynical. It would appear a great many efforts that have failed in their attempts to use e-mail marketing. This doesn't mean the medium was at fault. A lot of TV, radio and even newspaper campaigns have failed to garner the results expected. Yet nobody's running around chanting of their demise.

Think of it this way, does the existence of television mean radio is dead? Hardly. Likewise can be said for various forms of online activities. I'm reminded of the old saying "if your advertising campaign didn't work you obvious didn't do enough advertising." Weblogs and RSS are just another form of delivery for your message. Just as you wouldn't use only one form of traditional media to spread your message, you shouldn't think there's only 'one true way' to communicate your message electronically.

Suffice to say, take a hard look at who's trying to promote the idea that one form of delivery is somehow better than existing ones.... Yep, it's the people bent on selling you on the new tools and techniques. Do not be deluded into thinking e-mail is dead and that weblogs are it's replacement. They're complementary; something you should be using in parallel. But here's an important concept to think about: authenticity. How authentic is the message you deliver to your audience? How likely, on consuming that message, are they to come away with a feeling that you're the source of on-going value and leadership?

Now this is not the diametrical opposite, but certainly Kearney does seem to be saying something slightly more subtle. The WP gives the impression that weblogs could replace e-mailing, Kearney is actually arguing that the various techniques can run in parrallel. There are two possible reasons for this difference in emphasis: either, Kearney changed his mind between one moment and the next, or, the WP quote is a gross ovesimplification. In either case this is something which is far more likely to slip past in the old media than in the new. One up for weblogs. I'm sure Tacitus would be very happy to be able to get off the hook so easily. (NB this comes from a journalist who in the same article asserts: that blogs have "acted as a sounding board for would-be political pundits and pseudo-experts on any given topic". And what, one may ask, have the old media served as a sounding board for. There's a Spanish expression that comes to mind: poner-se en evidencia!) Incidentally that this is an inherent difficulty in old media can be verified by comparing/contrasting the economics content of Krugman's NYT column and Brad's posts and comments over at semi-daily journal. Apart from the difference in depth, there is the give and take evolution of a point through commenting). I suspect that this is repeated, time after time after time. It is even true when I observe my own behaviour. I would never read a political/ gossip columnist, but when I need some light relief I often check out Calpundit or Tacitus. Especially the 'open tread', yes especially that, this week 250+ comments on no topic whatsoever.)

Now for the meat. The interesting point here is Kearney's last one, that of 'authenticity'. This is what the old school marketing lacks, and what blogging can appear to offer. Blogger Scott Knowles, who is also cited, puts another perspective on the debate:

Last night's Conversations with Your Market blogging panel went well. The audience was surprisingly light on bloggers -- most were just interested in learning more about "what all the hype" has been about. I'd say the break down was about 40% bloggers, 40% blog "voyeurs" (a term used by panelist Mike Hazzard), and 20% just curious.

The panel discussion was engaging and typical at the same time. It was probably the right mix for audience we had. No new ground was broken and Debbie Weil (who I realized I had been mispronouncing her name since subscribing to her newsletter --- its 'wile' not 'weel') said as we were leaving "It went well, but I'm not sure what we accomplished" to which I replied "Isn't that what blogging is all about?"

One of the topics included whether aggregators will replace email newsletters. Not until recently have I thought perhaps. But it makes total sense to me. Why not subscribe to RSS feeds and have them pulled from a website when email is overwhelming in its volume of not only spam but legitimate email. I give it 2 years until most email newsletters are delivered via RSS. Some of the audience members gasped when Bill Kearney, RSS guru, suggested such a thing.

Bottom Line: congratulations to Scott, since he manages to do what I thought was impossible, make a blog about marketing readable. I think the whole key to the situation here can be found in two earlier texts from the dot-com heydey the cluetrain manifesto (mentioned by Kearney in his blog) and the attention economy . Re-reading these today it is possible to see that many of the ideas advanced in the 'heady' days of the late nineties, were not so much wrong as ahead of their time.

Cluetrain's thinking is based on two ideas: that 'markets are conversations', and that - at least starting with the early adopters and moving out - 'coach potatoeing' is a dying art. (Six-pack Joe is getting bored, or as Brad used to say: 'you can get tired eventually of watching something which only marginally better than looking straight up at the ceiling). Both of these ideas come together, in a strange sort of way, in the idea of the attention economy. The conversation - and here authenticity and trust, the medium of the message - has a high value in attracting attention, and the large attention time-spans needed to reach people over the tradtional TV platform are getting more and more difficult to obtain in the era work flexibilisation and 'less for more', at least among the higher income groups who, ironically, probably put a higher value on their time.

In case you haven't read it, Michael Glodharber's piece in First Monday is well worth the effort:

This is a conference on the "Economics of Digital Information." My guess is that most of the speakers, and most of the listeners interpret that title to mean that while "digital information" requires special consideration enough to justify a special conference, the basic meaning of the word "economics" can be taken for granted. What we are to be concerned with is how prices, costs, productivity, and so forth apply to digital information.

My vantage point is quite different. What we mean by economics cannot be taken forgranted if what we are taking about is the economics which applies, say, to the Internet, or more generally to cyberspace, or more generally still, to life in the foreseeable future. We are moving into a period wholly different from the past era of factory-based mass production of material items when talk of money, prices, returns on investment, laws of supply and demand, and so on all made excellent sense. We now have to think in wholly new economic terms, for we are entering an entirely new kind of economy. The old concepts will just not have value in that new context.

Of course, there is nothing so new about the insight that the Internet is part of a revolutionary change in the way we do things and also in why we do them. Many names for the new era have been invoked: the information age, the Third Wave, the move towards cyberspace, all of which point, vaguely at least to the fact that new patterns of activity and of interrelationships among people are now emerging. The trouble with that insight is that it is so vague that you can easily agree with it without feeling the necessity of changing your economic thinking in the least. My effort over the past several years - it's embarrassing to admit how many - has been to overcome that vagueness, to come up with specifics about what this revolution actually implies. My conclusions are that we are headed into what I call the attention economy.

Thursday, September 11, 2003

China: At Last the Voice of Reason

Phew, what a relief. I've spent half the week arguing with people who believe the China growth phenomenon is 'pure hype' (I will post on this tomorrow). Suddenly comes the voice of reality. Thank god for Andy Xie, giving us some facts about China:

Several US congressmen are reportedly proposing legislation that would impose punitive tariffs on Chinese imports.

In the media reports, one reads “unfair”, “illegal”, “manipulation”, “deception”, and “out-of-control” in quotes from politicians on Capitol Hill describing China. Indeed, it appears that those whipping up negative sentiment know how easy the old prejudices against China could be rekindled. But, strangely, the indignant congressmen are not smashing Chinese products on the Hill for TV cameras. I can still recollect the vivid images of the US congressmen smashing made-in-Japan tape recorders in the mid-1980s. This is the clue why I believe the furore on the Hill will not lead to any substantive measures.

China’s development model shares its upside with everyone who can contribute. More than US$500 billion in foreign direct investment has flowed into China. The supply chain from an industrial park in Suzhou to a hypermart in Chicago, for example, is full of different participants from all over the world. A Singapore company may own the real estate. A Hong Kong company may own and manage the factories. A Japanese company may supply the equipment. A US brand owner may design, brand, and import the products from China. A Korean shipping company may take the goods to the US. A US chain store may arrange the logistics and retail to the consumers in Chicago. “Made in China” is fundamentally different from “Made in Japan”. Japan’s keiretsu system kept the value chain for export production among Japanese businesses. The value chain for China’s export production is spread across the globe. Most of value added in China trade actually goes to Americans and other countries.

For each dollar of China’s exports to the US, American businesses add on about four dollars in value before the goods reach the US consumers. My estimate is based on the disclosed information from export companies listed in Hong Kong or Taiwan. China’s exports to the US, according to US government statistics, reached US$125 billion last year and grew by 25% in 1H03. If the trend continues, US imports from China would reach US$156 billion this year. US businesses would then add US$625 billion in value before the Chinese goods reach US consumers. This amount of value would be the equivalent to 5.8% of the US GDP. Moreover, this portion of the US GDP is probably more labor intensive than the US economy as a whole. I estimate it would imply that more than 8 million American jobs are tied up with the Chinese imports.

Could the US quickly switch to other sources? Who else has the scale and low-cost base to replace China? Since 1997, American consumers have already saved US$100 billion a year in the import bills just on the decline in the price of goods from East Asian relative to those from other regions. These savings have come as other countries in East Asia relocated their production to China. Would American consumers be willing to pay so much again to switch to another supply source? Now you can see why I believe congressmen are not smashing made-in-China products on Capitol Hill. If they were to do so, they would be smashing American jobs, American businesses, and American prosperity.

Let’s take the US statistics on China trade and see how much damage any disruption would hurt China. The value of the materials China imports to produce its exports to the US represents about 30% of the final value of the exports. The Hong Kong, Taiwan, American, or Japanese businesses that own the factories take away about another 15% of the gross sales as profits. This leaves 55% to represent the value added that benefits China, or about US$86 billion this year. China’s GDP should reach US$1.4 trillion this year. These exports to the US would be about 6.1% of China’s GDP. If the trade between the two countries were seriously disrupted, the extent of damage would be similar for China as it would be for the US. Furthermore, I believe US financial markets are much more vulnerable to any disruption in US-China trade. Profits for companies in the US retail and IT sectors depend on keeping supplies from China cheap. The market values of these companies would be severely affected if trade were disrupted. This is why I do not believe that the US Congress will bludgeon China into doing something harmful to the interests of the US. And, why I say it would hurt the US more than China.

The irony is that East Asia, including China, is losing market share in the US. The region’s share of US imports peaked at 40% in 1994, falling to 32.5% for 1H03. China’s exports to the US are rapidly rising, mainly because Japan, Taiwan, and other East Asia economies are shifting their production of goods destined for the US market to China. The relocation is generating cost savings that are being passed onto US consumers. The political rhetoric, however, could be ominous for the global economy in the long run. It could mean that the US commitment to free trade is not as solid as it was. It also reminds me of what the US did after the crash of 1929, when the bursting of the financial bubble led to high unemployment. The US Congress eventually legislated to restrict trade to protect jobs at home. As other nations also resorted to protectionism for the same purpose, it became a negative-sum game for the global economy that caused the Great Depression.
Source: Morgan Stanley Global Economic Forum

I'm not convinced that Andy is right about the last point. I don't think the Hawley-Smoot tarrif caused the Great Depression, which was anyway primarily a US phenomenon - I don't mean there wasn't depresion elsewhere, but that what Lionel Robbins called the Depression has very specific characteristics in the US. On the other hand, I think it is impossible to foresee whether there could be a US withdrawal from globalisation. I do, however, agree, that the consequences would be quite important, especially since it would probably lead to a less US centric global economy, and the US itself would probably have difficulty financing its debts. Something like shooting yourself in the foot, perhaps. But with the ideological climate in the US these days, virtually anything is possible. We may yet even get to see Bush and co joining forces with José Bose.

More for Less

Just googled into Eddie's latest piece over at Singapore's Straits Times. Keep up the good work! (BTW, have you noticed that the US administration wants to change the overtime rules).

Longer hours, fewer MCs - but it's not labour of love

By Eddie Lee

SOMETHING strange is happening in the workplace. In Germany, workplace absenteeism has fallen to its lowest level since reunification in 1990. Researcher Klaus Zok of the AOK public health fund told Frankfurter Allgemeine Zeitung in July that he had no doubt people are thinking twice about taking medical leave, even when they are quite ill. He based that conclusion on a study by the AOK's WIDO research unit, in which every second respondent said 'I'm worried about my job', while 74 per cent said fear of losing their job caused them to come to work even when they were very sick.

In the United Kingdom, one in six workers puts in more than 60 hours a week compared to one in eight just two years ago. The number of women working a 60-hour week has doubled during the same period. And while three-quarters of employees work overtime, only a third get extra cash for it. These are not phenomena arising from recent stagnant economic conditions, although that surely aggravated the situation.

A 1999 United States government study found that, on average, Americans work about eight weeks longer per year than a generation ago, for about the same income in real terms. But, as Ms Linda Rosenstock, director of The National Institute for Occupational Safety and Health noted, even as they work harder, 'more people are worried about being laid off'. Last week, a survey by the International Labour Organisation (ILO) found that the productivity gap between the US and the rest of the world widened last year - partly because American employees worked longer hours and took fewer holidays.

But despite the higher productivity and longer hours, the US economy's ability to create jobs deteriorated. The employment-to-population ratio in the US, which measures the proportion of an economy's working-age population that is employed, declined from 64.3 to 62.7 per cent during the period 1999 to 2002.

These trends point to an increasing polarisation of labour markets around the world. At one end are those full-time workers who have to work more intensively and for longer hours. At the other end are those who are unemployed or underemployed in part-time work. What all these add up to is a growing misallocation of work and leisure. Increasingly, people either have little leisure because of the amount of work they have to do, or have too much leisure because of the lack of work opportunities. Several factors contribute to the increase in work intensity. First, there is the decline in the bargaining position of workers to ask for shorter hours.

Employers, on the other hand, tend to demand long working hours. It is a reason why they are not inclined to favour flexible wages: Since wages are 'sticky' in the short term, every increase in work intensity or unpaid working hours represents a pure gain for employers. Longer hours mean fewer staff are needed for the same amount of work. Employers save on overheads like desks and computers.

Labour market policy has reinforced employers' hands. In Singapore, guidelines on wage bargaining stress the need for all wage increases to be justified by productivity gains. But not all industries are capable of productivity improvements at the same rate. In service industries, which have a lower capacity for productivity improvements, wage increases have to be justified by longer work hours.

A survey of 17 countries conducted earlier this year by the US-based Right Management Consultants found that employees in bigger economies are generally more downbeat about the job market and their careers than those in smaller economies, since hiring and firing are more freely practised in bigger economies. The exception was Singapore. The Right survey noted that, while tiny, Singapore has labour practices more akin to the bigger economies. Two in five middle and senior executives here live in fear of losing their jobs, among the highest ratio anywhere. The cost of this to the economy is seldom recognised. In the US, the American Institute of Stress estimates that it costs US industry a staggering US$300 billion (S$530 billion) a year in health costs and programmes to help workers manage stress.

A commitment to achieve substantial and sustained reductions in unemployment must be an immediate goal. There should be an attempt to improve working conditions that meet the needs and desires of workers rather than just the requirements of employers.

Just consider the hero worship of businessmen, which has reached cult status in this country. At last count, there were at least 13 awards for entrepreneurs. The Minister of State in charge of entrepreneurship, Mr Raymond Lim, believes 'the presence of more awards is a good thing as it underscores the growing social acceptance of entrepreneurs in Singapore'. Underlining the proliferation of such awards, ornamental fish breeder Kenny Yap was not even aware that he was in the running for the Most Creative Entrepreneur award until he received an SMS from a friend. Mr Yap remarked: 'People put my name up for a lot of awards, so I asked him which award this was.'

Contrast this with the state of employers. Thus far, there is little recognition at the national level for model employees. The only one that comes close is the award given by Hewitt Associates, which debuted two years ago. Just as entrepreneurs are being encouraged, shouldn't employers be encouraged to help their employees balance their work and home life, and adopt flexible and innovative work patterns? Recognising those who believe that such practices are good for their businesses can only be good for the economy.
Source: Straits Times

News in Brief

Microsoft's problems continue, the day they have a serious rival I have the impression it will be all up for them. The repercussions of the French Government bailout of Alstom continue to make waves , while China Telecom looks more and more each day like its European equivalents (hint: this comparison isn't meant to be flattering). And don't miss this: the US is set to front up four African heavyweights - Benin, Burkina Faso, Chad and Mali - in a tussle over cotton subsidies. Last minute update: Argentina has an agreement with the IMF (thanks Frncisco, and here's direct Spanish link from Argentina for those who want it).

In Memory of Anna Lindh

I would just like to take the opportunity to express my deep sadness and regret for what happened in Sweden yesterday and to send my condolences to the family of Anna Lindh and all the people of Sweden. Violence will not triumph.

Wages and Deflation in China

In the mailbox, Stephen makes some comments on this . Some very interesting points, and he should know, since his job is researching this area.

Your 2 Sept 03 piece on China's 'reserve army' is interesting, but you may want to talk to factory owners in China before you start generalising about internal wage deflation. I take your points regarding xiagang, SOEs, etc, but minimum wages in China have shown pretty steady growth over the last decade (with Guangzhou - for instance - raising min wages five or so times in the last five years). Whether workers get paid those rates is another question, but given that we're now witnessing the migration south of garment factories (from Guangdong to Vietnam) might tell us something about Chinese wages. HK businessmen moving to Vietnam will tell you that high wages in China's south have had at least some influence on their decision to move, though of course there are many other reasons why someone shuts down a factory in Dongguan and moves to rural Vietnam. Shenzhen and other manufacturing centres in Guangdong have the highest minimum wages in the country (574 yuan per month for Shenzhen - off the top of my head...).

The interesting story, and one not often told, is about the competition between counties, townships and other administrative units over investment. Minimum wage competition is ongoing, with adjacent counties attempting to use lower wages to attract investment. People often quote stories about Malaysia losing contracts to China and so on, but wages competition is a much greater issue internally.

Second: everyone is talking about China sucking investment out of Southeast Asia, but far fewer are talking about China's outward FDI. It's growing rapidly and is making waves in Southeast Asia in particular. With large investments in Cambodia, Burma and Laos, the Chinese state is now in a position to influence ASEAN, much to the consternation of the Singaporeans and others. That China is probably (it's hard to know for sure) the largest investor in Cambodia is not widely understood, but the ramifications of this are pretty interesting.

09/11 Two Years On

A little confession here, although my father was an American citizen when I was born, and so technically I think I could have opted for US citizenship, I have never been to the United States. (My father had US citizenship because he was a 'returning immigrant': in fact during WWII he had to report on a weekly basis to a Liverpool police station about 200 metres from the house where he was born since he was officially classified as an alien. Today, I guess, many would classify me as an 'alien', but this would be for other reasons). Since I have never been there, it is hard for me to imagine what it feels like to be 'American', or what the impact of this tragedy is. As such I have little to say. Instead, I will simply point you to the opinions of others, in this case to Peking Duck :

I was supposed to send out a press release tomorrow, but the client called and told me she wasn't comfortable sending anything out on September 11th. Not even in Singapore. It's really unprecedented, the way a date has been seared on the psyche of the world. I don't know on what day Pearl Harbor or Hiroshima were bombed. Come to think of it, I've never known of any date, the mere mention of which would instill a rush of feelings and pictures and thoughts. And fears.

Right now, CNN is interviewing the CEO of Cantor Fitzgerald on the eve of the big anniversay. I remember how, living in Hong Kong at the time, the whole thing seemed kind of abstract and unreal. I couldn't process it using traditional logic, even as I watched the holocaust unfold on cable news. It was nearly a year later that I suddenly, unexpectedly came to understand the tragedy in all its vastness. It was a casual moment, when my mother mentioned how one of her friends had lost a son on September 11. He worked for Cantor Fitzgerald. And suddenly, instead of an inconceivable number like 3,000, 911 was reduced to one young man, 31 years of age, the son of a friend of my mother's. And then I felt, for the first time, just how huge this tragedy really was.................

September 11. It wasn't just one of history's catastrophes, it was a date. We don't refer to it as the World Trade Center attack, it is always September 11th, that one day, the day, after which things could never be the same. We can forget the anniversary of Hiroshima because we don't remember it as a date. But every year we'll have to deal with the next anniversary of September 11. Will there ever be a year when that date arrives when we don't think of That Day?

Being here in Asia I have learned a lot about how America is perceived by others. I have all but given up arguing why September 11 was such a monumental event. Always the locals tell me how things like that have happened all the time in their histories, and it was only 3,000 people and what's the big deal. And I only wish more Americans were aware of just how many people around the world, even in nations counted among our friends, were glad to see it happen, glad to see The Great America brought, for once, to its knees.

Two years ago since my mobile phone rang as I sat alone finishing my meal in a Japanese restaurant in Hong Kong, to hear my dearest friend tell me what had just happened. And here we are, two years and two wars later, the future of America looking more precarious and confused than ever, the perpetrators as motivated and evil as ever. I guess I don't have a point or a conclusion or an answer. I wanted to capture some of my thoughts while they were fresh. I'll just let it go here. Let's hope that as the years go by, memories of "that day" become a bit less acute.

Finally, I'd just like to add one point: there is no power that comes without responsibility: When Richard says "I have all but given up arguing......." he is simply recounting a reality, a reality that is all too obvious to anyone living outside the United States. So I would like to add another 'hope', the hope that as the years go by, and as the memories become 'less acute', that Americans will find the strength and the courage to start the process of reflection as to why it is that people like Richard have 'all but given up', why it is that there is so much resentment, and in the light of this to ask 'what is to be done'? Asking this question would really be the best way of serving the memory of those who died. What was it Wittgenstein reputedly said on reading Heidegger: 'The pain, the pain, the wound that cannot heal'.

Wednesday, September 10, 2003

New Indian Economy Weblog

I can't resist it, I've fallen into my own trap, I've created a new weblog:

Welcome to India Economy Watch.

This is an economics blog, and not a systematic source of information on the Indian economy. The objective is not to replace the existing sources of information, but to complement them. To complement them in that unique and highly personal fashion that is so characteristic of weblogging. My aim here is to provide some kind of focus, and hopefully forum, for refections on the evolution of the Indian Economy (and of course on Indian society and culture). I do not claim any special expertise on any of these topics. Just enthusiasm and a willingness to learn. In part that is what blogging is, a learning experience. But blogging is also about sharing. As you learn you share with others (including, sometimes, your mistakes!!).

Japan Growth Spurt?

This will please Joerg, who back in the summer predicted 4% Japan growth this year. If things continue like this I will have to eat my hat. The thing is I don't expect them to continue like this. And remember, there is still 2.5% deflation registering on the GDP deflator, which means in nominal (current prices) terms GDP only grew 1.4% (provisionally). I think we should wait a little before we start jumping to conclusions:

Japan has been growing faster than the US for the first time since 1991, according to revised second-quarter gross domestic product figures released on Wednesday. The data showed that the economy grew by a real 1 per cent between April and June and 3.9 per cent on an annualised basis, largely thanks to higher-than-estimated capital spending. That compared with an annualised second-quarter growth in the US of 3.1 per cent. The data are better than Japan's earlier announcement in August that the economy grew 0.6 per cent, or 2.3 per cent on annualised basis, in the second quarter. The world's second largest economy also returned to nominal growth in the second quarter after two straight years of decline, with nominal growth rate of 0.5 per cent. Japan's lacklustre real growth had until recently been wiped out by deflation. As a result, the economy is smaller now than it was in 1997. The GDP deflator, the most reliable measurement of deflation, has been negative since 1995 and is now standing at about minus 2.5 per cent. “From now on we need to pay attention to nominal growth,” said Richard Jerram, economist at ING, who said this could have a strong effect on corporate profits. “This might be the most significant aspect of the GDP release.”
Source: Financial Times

News in Brief

Going back to the end of my last post, this ruling seems to suggest that the cost of health care may be about to shoot up. More lay-offs and outsourcing down at 3Com. Meanwhile China's energy consumption seems to be rocketing And while we're on China, WalMart seems to be having trouble with the unions there. And in Argentina things don't seem to be looking up . I'll try and post something more reflective on this later in the week.

Japan: Older Workers Moving to China?

Eddie writes from Spore:

I’ve attached an article that I thought was pretty interesting. A reverse labour flow - older workers to younger countries. If we had an even flow in either direction, it would really breakdown ethnic barriers. Imagine Shanghai having as many Japanese as Tokyo had Chinese. That would balance out the demographics in the 2 cities. There was a story a month back about a Singaporean private collage looking to employ ‘retired’ teachers and civil servants to teach in China. But right now, the balance of flow is of course one-sided. Growth attracts more growth. And the stagnant economies just see a hollowing out.

Japanese job-seekers heading to China

Older Japanese workers with skills and experience but who have lost their jobs at home are turning to work in China
By Kwan Weng Kin

TOKYO - Shanghai-based human resources executive Sun Liping, 40, has a dream. He wants to boost the competitiveness of Chinese manufacturing companies in his native Shanghai, and hopes to do so by matching them with veteran Japanese workers who have the skills to share. Mr Sun, president of human resources firm Shanghai Chuangjia Consulting, knows the situation in Japan well, having studied here in the early 1990s. 'Shanghai's economic development has been very rapid. Some companies in our manufacturing sector are now very good but many are still far behind the Japanese,' Mr Sun told The Straits Times in a telephone interview. 'On the other hand, many Japanese middle managers, product development experts and so on are losing their jobs due to corporate restructuring. So there are Chinese companies which can benefit from their expertise. 'My company can help bring the two sides together.'

Fortunately for Mr Sun, there has been a steady number of Japanese in their 40s and 50s seeking second careers in China. As the percentage of jobless in Japan continues to hover around 5 per cent, China presents bright prospects for older Japanese workers forsaken by their employers. By last April, Mr Sun had received the details of some 1,400 Japanese job seekers, 70 per cent of whom have experience in the manufacturing sector, his main target. PaHuma Asia, a Japanese job placement firm headquartered in Hong Kong, has also seen a leap in applications from Japanese for jobs on the Chinese mainland. According to PaHuma's Tokyo office, 42 per cent of Japanese registered with it want to work in China. PaHuma also attests to the growing number of job opportunities in China for Japanese workers, not only in China-based Japanese companies but also in Chinese firms.

Ms Tomoko Hata, manager of PaHuma's Tokyo office, said: 'In the year ended August 2003, 35 per cent of our available positions were for jobs in China.' Most were in sales or technical fields. A survey released in May last year by the Japan External Trade Organisation (Jetro) noted that while Japanese companies were trimming expatriate staff throughout East Asia, they were hiring more Japanese personnel on local terms, particularly in China and Asean.
And while job placement agencies saw less demand for Japanese workers in Singapore and Hong Kong, they were dispatching more veteran Japanese workers to China and Thailand, said Jetro. Statistics compiled by the Japanese Foreign Ministry show that the number of Japanese residents in China has been rising in recent years, totalling nearly 38,000 as of October last year. Although technology industry workers draw higher salaries in Japan, the lower cost of living in China means they can live comfortably on their Chinese pay packets and still have ample savings. But as Mr Sun pointed out, problems in hiring Japanese go beyond monthly salaries. 'There are often language problems, issues with food and housing, even pensions. But we hope to be able to solve them,' he said. The Sars crisis earlier this year was also a major setback. 'We were unable to arrange interviews in China,' said Mr Sun. With Sars on the wane, he is looking to go full speed ahead to bring to Shanghai companies the Japanese talent they need to compete.

A report last year by chinanews.com said there was a shortage of personnel in the Shanghai area among the 20-to-40 age group who were familiar with leading technology.To plug the gap, Chinese companies are said to be willing to pay monthly salaries ranging from 20,000 yuan (S$4,200) to 50,000 yuan for a Japanese expert.This is several times what they would pay Chinese workers.Many companies have been able to attract workers previously at Japanese blue-chip firms, particularly in the electronics sector, which has shed thousands of jobs over the past few years through early-retirement schemes.Although such workers draw far higher salaries in Japan, the lower cost of living in China means they can live comfortably on their Chinese pay packets and still have ample savings.

Funnily enough this is something I often discuss with my wife. Spain in ten years time will be one of the oldest countries on the planet. In a society where everyone is old, the premium will be on young people, older people will, almost inevitably be less respected. That, in part explains why so many companies want to recycle their over 50 workforce. In contrast, those societies where there are still a disproportionately large number of young people (just sufficient, not tooooo many) will need the experience of older people, older people will be more valued and respected. Apart from relieving the burden on the welfare system (ironically, in a slightly poorer, but younger society, hospitals may be fewer in number, but access may be easier) it may be a good practical proposition for those over 55 who find themselves prematurely 'released' from their obligations in the west to recycle themsleves, and start a new life in one of the younger 'developing' economies. Apart from anything else, with the internet to accompany you, it might feel just like home.

Spectral Imaging

A spectre, it was once said, is haunting Europe. Fastforwarding a little, perhaps it would be more appropriate to say that at the present time there is a spectre haunting the entire OECD. But this spectre - surprise, surprise - is not, at least this time round , a demographic one. It is for all that a no less revolutionary one. The spectre I have in mind has little in common with the obsessions and broodings of the expression's Teutonic creator: except, that is, insofar as the reflections of the former on the demise and plight of the Indian handloom weaver might now justly be deflected towards those who every day seem more likely to become their modern-day equivalent, the run-of-the-mill IT sofware professionals who work in America's great 'valley of opportunity'.

The 'efficient cause' of this current reflection: well Friday's latest round of US employment statistics, with the glaring presence of a total of 67,000 service jobs lost in August, begin to give us the clue, and perhaps Ben Bernanke has given us the name - the job-loss recovery. Now that the US economy is losing jobs in the agricultural and industrial areas would neither be new nor shocking. These sectors - at least in the information age - are assumed to be in decline across the OECD world. That the world's most advanced economy is a net loser of jobs in manufacturing industry is entirely comprehensible - anti-China xenophobia notwithstanding. But, at least according to normal economic theory, what should accompany the historic decline of the industrial and agricultural sectors should be a growth in activity in the relatively higher-value services sector. And it is precisely here that the problem is to be found. As the late Walt Whitman Rostow said: it's all about sectors.

Interestingly enough, recent research by the New York Fed has highlighted the way the characteristics of the job creation process in the recovery phase may be changing, and this may well indicate a long term structural trend, which deserves more analysis in its own right. This may be important since we may well find with the benefit of hindsight that the US has been on this path for longer than we imagine. But today I am going to limit myself to 'efficient' not 'final' causes.

As you will all have probably noted by now, the US press is full of almost daily articles on the 'employment drift' off-shore. And when it isn't wasting it's amunition firing off at the distinctly non-impressionable Chinese, it lets off a salvo in the direction of India. The two cases are in fact quite distinct, since the majority of activity being sourced in China is manufacturing (although this may, as I am noting in the blog, lead to longer term technological issues) while the case in point with India is the displacement of services. (BTW don't miss the irony in all the fuss over the rinban valuation, the Indian rupee is actually floating and going up, from 49 to 45 to the dollar in recent months: see how 'they've all gone quiet over there'). Recognition for identifying this 'services' issue really deserves to be given to Morgan Stanley's Stephen Roach, who has long been flagging the question in connection with the deflation debate and the lack of resilience in US service prices. There is no immunity platform underneath services, as we are now finding out. (Incidentally India is by no means the only provider in the game - a recent Forrester report mentions the Philipinnes, Russia, the Baltic countries, Mexico and Costa Rica - and I personally can add Bulgaria to this list on the basis of my own research). The critical 'intitial condition' which precipitated what may well now be the present point of no-return may well have been the internet boom and the Y2K problem, both of which placed an overload on US (and other OECD) IT capacity and lead to the need to find alternative supply sources. As Forrester's Stephanie Moore says: " for them, Y2K and the Internet was their Trojan horse..........They got into the companies and did a good job." Now the dynamics work the other way round, and the same offshore providers who benefited from the supply shortage of the mid-1990s are providing the cost savings and efficiency that U.S. companies need and can't find at home in the 'slow recovery' of the early 2000's. And the leak hasn't just sprung in IT. According to press reports, companies like San Diego-based Chembridge and New Jersey-based Pharmacopeia show the trend may have started seeping into biotechnology. Chembridge, which does chemistry work for drug companies, employs more than 300 chemists in Russia, another locale where doctoral degree-level professionals are paid a fraction of what they would receive in the United States. Pharmacopeia, the parent company of San Diego-based Accelrys, has information technology operations in Bangalore, India.

(Can I sneak a personal detail here, I am, as I keep mentioning, working a project on Bulgarian immigration in collaboration with anthropologists from the university of Sofia. Staff there earn around 150 euros a month, here in Barcelona university researchers get at least 10 times that amount. Last week I was in Valencia with a young Bulgarian research student - who at this point is even working on a voluntary basis, amor del arte, as they say. But the interesting point is that as an ethnographer he works much better than I do. The quality of information he was able to extract was much better than I could have gotten alone. The trouble is all the material is in Bulgarian. No problem, he said, we can send it back home and they will do the translations, real cheap. Not only this, anyone who has ever done qualitative reasearch knows that the real drag is typing-up the transcripts, well he said, we could also have that done there. The only important difference in attitude that I noticed was that the high cost of buying books makes it difficult to be on the sharp-end of knowledge. However an afternoon of in-service-training over at my place means that he is now reading Strogatz-Watts-Cavalli Sforza and has learnt to move much better in the internet (where most of this is free). You see, I said, the important principal here is play. Ah, 'homo ludens' he replied. You know Huizinga, I said surprised. Yassen is 23, the same age as my own son, who sure as hell doesn't know Huizinga, yet. I doubt many of my colleagues at work do either. Bottom line: the intellectual distance between the relatively poor and the relatively rich economies is not as great as it seems, and the distance is much more easily closed in the information age than it was in the industrial one. Forgive my self-indulgence).

This services outsourcing trend is not only evident in the private sector. The US government-funded San Diego Workforce Partnership, which ironically provides training to local residents and helps them find work, reputedly hired computer engineers in India to finish a data management project. In fact they paid more than $200,000 to Karna Global Technologies for engineers in India to re-write one of the organization's computer programs. Larry Fitch, chief executive of the Workforce Partnership, was quoted as saying that the organization generally hires domestic companies, but Karna was hired when the original contractor from Orange County suddenly folded.

What started off in many cases as a low-end routine-based operation, may in fact now be moving upwards. Intel for example which has invested $2.3 billion in its Malaysian operations, and which has always included some R&D in this work, now plans to build a new $80 million R&D facility there. Or try Yahoo, who have denied reports of a new R&D facility in Bangalore by insisting that the 150-person R&D facility has been around since 1996 and that the recent "news" merely refers to a reinauguration of the existing facility. A view which is not shared by India's Rediff.co which in reporting the same story quotes Yahoo's chief executive in India Venkat Panchapakesan as saying that the R&D facility will indeed hire more people soon. "We will have about 150 professionals at the center by the end of 2004. These will be new jobs created to outsource our global requirements". In fact the relative importance of the phenomenon in India can be appreciated by the fact that Rediff have a special page dedicated to the question of business services outsourcing.

How to make sense of all this, that is the question. The first point that comes to mind is that history, apparently, is not kind to its beneficiaries: it is, one might rather say, bitter sweet. The root of the 'evil' here is not money, but globalisation. Now don't get me wrong, this is not just another one of those standard anti-globalisation tirades. I am a globaliser at heart. But then I am also interested in the economic welfare of all the population of this fine planet. What seems clear to me is that, while there are many pros and cons on either side, the developed world did have something of a natural advantage when it came to the globalisation of industrial products. The third world also needed industrial globalisation, since it needed both capital and technology. But, at the same time, this was an area in which, by moving up the value chain, the 'incumbents' could always keep ahead of the pack. In the knowledge economy, as we can now see, things may not be so simple.

One of the reasons why this may be the case is the question of set-up costs. The cathedral of the industrial age was the factory, and the factory implied a high fixed-costs entrance fee. Today the situation is very different. According to economic historian Joel Mokyr:

"the 'factory' as a system is in retreat not only as a physical central location of activity, but also as a time-organising institution in which work begins and ends at given times and the lines bewteen labour and leisure are firmly drawn. Instead, work is dispersed over space as well as time, allowing workers to calibrate their trade-offs to reflect their preferences.............For services, a similar phenomenon is increasingly visible on the horizon. The twentieth century witnessed the virtual demise of the household-sized mom-and-pop corner stores, replaced by large scale department and speciality stores. The trend towards e-tailing may well encounter some teething problems, but if it continues, little in the industry besides warehouses and shipping cannot be outsourced to independent agents or assigned to employees working from their homes. The same holds true for banks, law firms, insurance companies, and higher education."
(The Gifts of Athena, pages 153/157: the whole of chapter 4 Technology and the Factory system is thoroughly recommended).

Two problems then, kept the developing countries at a distance during the industrial age, the cost of entry (and the lack of capital), and the absence of the adequately trained work-teams. In the knowledge economy things are a little different. Look, for example at Google and the low tech use of PC's in parrallel, or the rise of blogging, or home-made video clips, or the uses of grid-computing. Entry costs are not what they used to be, and a little strategic capital goes a long way. Also the labour force difference is nowhere near what it was. Maybe there is still a difference between the Indian IT or accountancy graduate and the US one, but it is nothing like the difference you can find in the comparative wages. The difference is also more transparent, and hence more easily closed, than it was in the days of machine manufacture. There is tacit knowledge, but it may well be less, and it may be more easily learnt. It seems a three to five year stay in Silicon valley on a temporary contract may work wonders in this context.

Which brings me to my principal point. On 10 Sptember in Cancun the next session of the Doha round will begin. High on the agenda will be what is known as the General Agreement on Trade in Services (GATS), and central to this negotiation will be the question of of what is known as mode 4 sevices delivery: the temporary movement of natural persons (mode 1 is the delivery of the service from one country to another, cross-border supply, mode 2 is the use by a company in one country of a service in another, consumption abroad, mode 3 is the setting up of a branch or subsidiary to deliver the service, commercial presence). Already (3 September) modalities have been established to prioritise the special treatment of LDC's in these negotiations. These modalities were welcomed by Dr Toufiq Ali, Ambassador of Bangladesh, speaking on behalf of the 30 LDC Members of the WTO, at the Special Session of the Council for Trade in Services.
There are numerous estimates that indicate that the potential benefit of free trade in services may be several times that of free trade in goods..........the most important means of supplying services is through the export of services supplied by less skilled persons...........a temporary visa scheme that amounts to no more than 3 per cent of the OECD labour force would yield economic benefits for both developed and developing countries equivalent to almost US$150-200 billion.

Now the numbers referred to here were developed by Alan Winters of the University of Sussex (see 3 and 4 below), and they constitute in themselves a fairly dramatic example of how one tiny little meme can go a very very long way. In fact the call for liberalising the movement of natural persons has been taken up this week by the World Bank in its Global Economic Outlook and is also under active consideration at the OECD (see 5 below). So in some ways the 'more developed countries' (ie the OECD) are actually hoist on their own petard here. Unwilling for cultural reasons to accept third world immigrants on a legal basis to address the growing demographic shortfall, they have collectively indicated a willingness to accept temporary migrant labour. From the third world point of view this may well be a preferable alternative. Here it is necessary, I feel, to distinguish two classes of migrant worker, the skilled and the unskilled. In the case of the unskilled, the situation is not very different than that - in muanufacturing - of the direct cross-border import of the finished product. The service is simply provided in-situ by the citizen of a foreign state.

As Alan Winters puts it:

Unlike with the mass migration of less skilled workers, fears for cultural identity, problems of assimilation and the drain on the public purse are hardly relevant to TMNP. The biggest concern it raises is its competitive challenge to local less skilled workers. This is neither more nor less than the challenge posed to such workers by imports of labour intensive goods from developing countries, which has been overcome by the weight of economic gain that trade could deliver and by policies to ease adjustment among local less skilled workers in developed countries. Applied with the same sensitivity and the same sorts of policies as trade policy reform in goods has received in the past, the temporary movement of less skilled workers between countries would offer the chance to reap some very large gains from trade.

The arrival of these workers inevitably exerts downward pressure on wages in the unskilled sector (a point that is normally made forcefully by US economist George Borjas before the US Congress whenever a hearing on immigration provides him with the opportunity so to do). But these same cost reductions make things cheaper for the majority of middle-income consumers by facilitating the provision of any number of otherwise unthinkable services (like the proverbial taking the dog for a walk). They also, in a growing economy facilitate the possibility of low inflation rapid growth. From the third world point of view, they reduce pressure in the local labour market and they help the balance of payments due to the remmitances home of the migrant workers (which again are a reality, as I know only too well from my own research: it is estimated that during the first years around one third of wages earned are sent home). BTW, again both the inflow of low-skilled worker, and the outflow of mode 1 outsourcing will contibute to the generally deflationary environment inside the US as the 'sevices immunity' gradually factor falls apart.

At the other end of the scale are the skilled temporary workers, and it is here I think, more than anywhere, that our difficulties in accepting the arrival of those from other countries have lead us - in the west - to shoot ourselves in the foot (Again a disclaimer. I am not especially upset by this, the world is an unjust and unequal place, and anything which helps to 'even the odds' is fine by me. What I am pointing to is the fact that this is the unintended consequence of a selfish act). For temporary high-skill contracts are the perfect, learning-by-doing, training scenario. If this were the old Russia you would probably have to pay a great deal of money to bribe your way out having learnt what you had learnt, and we 'send them back' (xenophobism has always seemed a perverse phenomenon to me). So really here we are in the middle of one of those typical non-linear, up-side/down-side swings produced by what many consider to be the most 'effective monetary policy in history'. And meanwhile - with our central bankers carefully targeting short-term inflation rates as the 'clavis universalis' for economic policy - we have been through an enormous assest boom-bust cycle, a cycle which seems to have carried as one of its side effects the 'freeing' of parts of the third world from their one-sided dependence on us. For as we went up in the cycle we sucked them in, during the ride we trained them up, and now on the way down we have told them to pack their bags and leave for home. Advice which they have meticulously followed to the letter whilst taking part of the business back with them!

That this lesson has not entirely gone unlearnt is shown by the conclusions drawn by Armind Virmani of the Indian Council for Research on International Economic Relations in yasterday's Indian Financial Express

The USA activated the GATS when it perceived that its comparative advantage was shifting from manufacturing to services. At that time the USA and other OECD countries opened up their service sector to cross-border imports (Mode 1), while we had some justification for taking a cautious approach to an area in which the rich countries appeared to have an increasing comparative advantage. More by accident than by design our position has been completely transformed since then. At the beginning of the 21st century, India is poised to become the largest developing country exporter of Service in the World by the end of the decade. What is needed is a change in our mind set, by transiting from a defensive to an activist posture. We must lock-in 'free trade in services' under mode 1, against the emerging threat from the new protectionists in the rich countries, the 'unions of white collar workers'.

This also requires that we be more forthcoming with respect to opening sectors in mode 1 where we have been excessively defensive. We must trade in greater access for FDI from the rich countries under mode 3 against clear and transparent rules for 'temporary migration' of skilled and semi-skilled personnel from India to these countries under mode 4. The focus of the latter (mode 4) must be on facilitation of cross-border export of services under mode 4, not on the export of labour per say.

Tuesday, September 09, 2003

Fiscal Endgame

The world bank in it's Global Economic Outlook raised an interesting question last week:

the scope for substantial further macroeconomic stimulus is rapidly dissipating. Fiscal deficits threaten to become part of the problem instead of part of the solution, especially since a quick reversal of the deficit is not anticipated. The U.S. general government budget position (including Social Security), for example, shifted dramatically from a surplus of 2.3 percent of GDP in 2000 to a deficit of 3.2 percent as of the first quarter of 2003. The Congressional Budget Office projects that the budget position is unlikely to return to surplus until 2012. In Europe, several large countries have breached the 3-percent-of-GDP fiscal deficit limits embedded in the Maastricht criteria for the common currency. And Japan has limited fiscal scope, given persistent deficits in the 6–7 percent range.

There has been a good deal of discussion going the rounds about the difficulties of conducting monetary policy as interest rates approach zero, there has been a good deal less about the possibilities of sustaining fiscal deficits ad-infinitum. In fairness, much of the discussion in the US context has focused on the relation between the looming long term deficits, and the expediency of increasing short term deficit spending. The point is that at some stage the short-run becomes the long-run. Most of the debate to date has assumed that around-the-corner growth can put the numbers back in the black. But what if this 'anticipated' growth just doesn't materialise? What if the 'weak' spot means not recession, but extremely low growth. The consequence of this would mean deficits stretching out as far as the horizon. So it is at least worth asking the question: how far is far here?

At what point would we run out of fiscal leverage as well as monetary leverage. And if we did, what is the policy remedy? And why is this question worth asking? Simply because in the ex-US OECD we have a novel factor, serious population ageing. For GDP to grow either (a) more hours have to be worked or (b) the hours worked need to generate more value. Well at least some of the OECD countries are going to have great difficulty with (a), and (b) is going to get more and more difficult if serious 'global rebalancing' takes place. Simply put: if globalised labour markets become increasingly efficient, and if human capital levels in the developing world begin to seriously close the gap with those in the deveoped one, then (b) also becomes problematic. Doing the sums it's not difficult to see that paying down the debt becomes a bigger and bigger problem. Oh, I know. The easy government solution would be to stoke-up inflation: well try telling that to Japan (oops, that's just what they're doing, but look at the success they're having). So when Morgan Stanley's Eric Chaney tells us:

The Stability Pact is not a good law, because we now have full evidence of our old suspicion, that it is pro-cyclical -- in bad times, the Pact forces governments to raise taxes. If the law is not good, it has to be changed. Over the last two years, every single party has expressed views about what should be changed. These views did not always converge, but this is Europe: Nothing can change without negotiations. It is now time for the European Union to start the re-negotiation of the Pact, and the sooner, the better.

we should be aware that this is just fine, but that it is a reform which will come with a sell-by date, one day or another. Now I am not the first person to have had this thought:

The Limits of Credit: Could Aging Nations Lose the Fiscal Policy Lever?

In Moody's Sovereign Risk Unit, we spend a great deal of time studying and debating the very issues that are before us today. What we are really discussing is whether the industrialized countries can afford the pensions already promised by their respective governments? In some ways, you might find my answer somewhat surprising.

We expect almost every industrialized nation to "default" on its pension promises. What do I mean? We have concluded that it is impossible for almost every major developed nation to meet presently promised public sector pensions, including promised health care for seniors, without further changes in future benefits. In others words, future governments will probably renege on future pension and senior health care commitments as embedded in law today..........

We have looked at many of the most important academic studies, which analyze future pension burdens and their potential impact on government debt. For many of the most highly advanced industrialized countries, the conclusion one must almost inevitably come to is that the public sector debt level needed to fund existing promises over the long-term would raise serious solvency issues if these pension systems are not reformed. On balance, many continental European countries and Japan could not sustain the increased debt burdens implied by their existing pension systems when these future obligations are added to already existing public sector debt.

Pre-World War II experience gives some important insights into dimensioning the problem facing the industrialized world as the baby boom generation retires. Either pensions are paid as promised, implying huge future debt burdens, or the promises are decreased and/or contributions raised significantly, thereby implying much lower debt burdens. If the pensions are not reformed in most Western European countries and Japan, then future governments face the prospect of dealing with debt burdens reminiscent of those faced by post World War Germany, the UK and France. If we assume that such debt burdens will occur in the future, then we have to examine how governments might deal with them, once again by examining the historical record. As a rating agency, we are concerned with determining at what point would such affected governments be forced to default on their debt obligations? It is clear that the consequences of such a financial default would be very different from a "default" on a pension promise.

Once a sustainable recovery has begun, the hope is that the government will also be in a better position to readjust the country's pensions to make them more actuarially sound. The risk this approach presents is that if the economy doesn't respond to the fiscal stimulus and doesn't soon start growing on a sustainable basis, then the country runs the risk of having the worst of all worlds -- a massive public sector debt just as its demographics start becoming quite negative.
Source: Vicent Truglia, Moody's Investor Service, 2000

Chinese Predilections

Oooooops: Looks like I've upset Conrad the Gweilo :

I seem to have become a target this month for invective from varous blogs of which I've never heard. The latest, and lamest (so far), is from something called Bonobo Land, which is appropriate, since the author manages to make a monkey of himself.

What I'm not too sure about is whether it's the "illusory" nature of China's growth he wants to defend or his weekend virtue . Either way, I sure touched a soft spot. Ouch!

Outsourcing and the EU

As the comments below from Siemens CEO Heinrich von Pierer indicate, it isn't only the US who has to think carefully about what is happening in outsourcing. Unfortunately, even the upping of high tech R&D is not necessarily a solution, since with time the routine bench work is always likely to find a cheaper home elsewhere. (Thanks T-Salon for the link):

Mr von Pierer will paint a fairly upbeat picture of the competitiveness of European manufacturers in his speech, for a conference on European industry organised by the German British Forum. He will say many companies have learned how to operate high-class factories within the context of Europe's high labour costs. But, he warns, if more manufacturing operations switch from western Europe to low-cost countries such as China, that would also damage service industries - which account for 60 per cent of European gross domestic product...........

He says that to safeguard the health of European industry, governments and companies should step up research and development spending, particularly in fields such as biotechnology and nanotechnology.
Source: Financial Times

Why This is not a Good Time to Revalue Renminbi

Following up on the China financial reform topic, here's Andy Xie from last Friday:

I believe China must reform its financial system before it can open its capital account and change its currency policy. The reforms are not just about solving the stock of non-performing loans in the banking system, but more importantly, they are also about stopping the banking system from accumulating more bad loans.

The non-bank financial sector also presents a serious risk to China’s stability, in my view. In particular, our strategist believes the stock market is overvalued; I believe it is not a level playing field.

Further, the inefficient financial system reflects the contradiction between the need to narrow the gaps in regional incomes within China and the inability of the government to collect taxes. If China does not streamline its tax system to raise national tax revenue to more than 25% of GDP, the central government will likely have to continue to rely on banks to support investment programs in poor provinces to narrow the gaps in regional incomes.

There is a race between GDP and bad debt in China. If the latter grows faster, as it has been in the past, China may need to devalue the currency when its exports slow down because inflation is needed to reduce the burden from bad debt. Although productivity gains may support a renminbi appreciation at some point, the financial system is distinctly pointing at the other direction. If you are betting on the renminbi today, I say good luck.
Source: Morgan Stanley Global Economic Forum

And don't miss this part:

For each US$1 in value for a product that China exports to the US, a product sells for US$4–5 at the retail level in the US. Therefore, American brand owners and distributors benefit far more from China’s output than the Chinese themselves. Moreover, for each US$1 in value for a product that China exports to the US, businesses in Hong Kong or Taiwan take 20 cents.

and remember, a lot of Chinese exports to the US are of products which originate in Hong Kong or Taiwan, and which have simply been 'processed' (assembled etc) in China. A revaluation of the Chinese currency would have no impact on the underlying value of the core components. So it is not clear that anything other than a sharp correction would have more than a negligible impact on the US trade deficit with China, and a sharp revaluation would surely be deflationary and destabilising (which would also amount to the same thing) inside China.

If the Manufacturing Leakages Hit Services.........

OK, maybe I've been hitting Roach a bit too hard recently, so here's an area in which he really is in a class of his own:

There can be no mistaking the extraordinary external leakages now evident in the US economy. Even in the face of rebounding domestic consumption, incremental product is being sourced offshore at the cost of disenfranchising domestic supply -- both labor and capital -- from the US macro equation.

The role of the Internet is particularly critical in reshaping the service sector dynamic in this cycle. It gives a critical new twist to the outsourcing story. Services have long been dubbed non-tradables because of a high profusion of knowledge-based content that can only be delivered on site. Now, however, courtesy of real-time e-based connectivity, a multitude of increasingly high-value added services can be transferred anywhere around the world instantaneously. That’s increasingly true of the output of software programmers, design and engineering teams, accountants, back-office processing functions, data centers, network infrastructure and management services, and a broad array of business consulting functions. Reflecting this trend, India’s IT-enabled services sector has become one of the fastest growing major industries in the world. One study estimates this segment of the Indian economy will increase by ten-fold between now and 2007 -- rising from US$1.5 billion in 2001-02 to $17 billion by 2008 (see NASSCOM’s The IT Industry in India: Strategic Review 2002).

Manufacturing leakages are one thing, but if they also hit services, it’s a different matter altogether for the US economy. Currently, the services sector accounts for fully 80% of total private employment in the US -- about six times the 13.5% share in manufacturing. To the extent that outsourcing options are now shifting increasingly into services, the jobless bias of the US economy can only increase. Moreover, this development could well be exacerbated by businesses’ persistent lack of pricing leverage in this post-bubble era. That puts unrelenting pressure on continued cost-cutting as the principal means to boost margins and deliver earnings. And that puts a premium on the outsourcing-driven efficiency solutions that lie at the heart of America’s jobless recovery.

All this underscores one of the great ironies of the current cyclical recovery in the US economy. Notwithstanding the temporary impacts of powerful stimuli from tax cuts and home mortgage refinancing activity, America is lacking in sustenance from the job creation and income generation that typically drive the internal dynamics of its business cycle.
Source: Morgan Stanley Global Economic Forum

Bank Lending Rockets in China

Yesterday I was defending the Chinese economy from its sillier critics. Today, to show that I am not blind, a 'balancing piece' which indicates some of what the crtics are worried about: the system does seem flooded with liquidity. Chinese banks are increasing lending fast, and at very low margins (oh, oh!), and foreign banks seem to be shying away. I have to collect two books on Chinese banking and financial reform (courtesy of Amazon) from the post office this morning (thanks to Walter Hutchens for steering me towards them), so maybe I'll be a bit clearer on all this later in the week.

In the face of aggressive lending by local institutions, international banks' share of foreign currency loans fell from 15 per cent in 2001 to 7.4 per cent last year; and their share of total assets of the Chinese banking system dropped from 2 to 1.1 per cent over the same period. The figures, produced by European bankers ahead of the European Union-China summit in Beijing in October, have been taken from the People's Bank of China (PBOC), the central bank.

The market share of overseas lenders is likely to have fallen further in 2003, as Chinese banks' loan books have expanded even faster this year, prompting the PBOC to impose higher deposit requirements on most local institutions late last month. Lending last year rose 15.4 per cent year-on-year, said the China Economic Quarterly. But it has accelerated more rapidly in 2003, rising 71 per cent year-on-year in July alone, the PBOC said. "Chinese banks have a lot of liquidity, and so we are seeing a lot of aggressive lending in large amounts," said one Shanghai-based foreign banker yesterday. "One thing we have to alert clients to, is the fact that this liquidity might at one time end." A number of projects involving multinationals, such as Shanghai's new $12bn deep-water port and an LNG terminal in Guangdong, have been financed almost exclusively by Chinese banks. "It is not uncommon to see a 12-year project financing for less than a 1 per cent margin - there is no justification for us getting into this business," the banker said.
Source: Financial Times