Facebook Blogging

Edward Hugh has a lively and enjoyable Facebook community where he publishes frequent breaking news economics links and short updates. If you would like to receive these updates on a regular basis and join the debate please invite Edward as a friend by clicking the Facebook link at the top of the right sidebar.

Friday, October 03, 2003

Job Data Turns Upwards

It always happens, one day after I post my opinions the market turns the other way.

U.S. employers added jobs in September for the first time in eight months, the Labor Department said on Friday in a surprise twist for financial markets, which had been braced for more losses. The number of workers on U.S. payrolls outside the farm sector grew by 57,000 last month, the first time since January that jobs were created and sharply contrary to Wall Street economists' forecasts for a 30,000-job loss.

The gain was not big enough to bring down the unemployment rate, which was unchanged at 6.1 percent in September, but analysts said it was encouraging after seven straight monthly declines in jobs. The department also said it appears the economy lost about 145,000 more jobs in the year ended March 2003, in a preliminary estimate that will be part of benchmark revisions it issues next February. The department's current figures show 397,000 jobs were scrubbed in that 12-month period. The dollar vaulted higher in the wake of jump in jobs, which implied U.S. economic performance was outpacing other major regions. Stocks were broadly higher in early trading, with the Dow Jones Industrial Average up more than 100 points on investor hopes a strengthening economy will mean fatter profits ahead.
Source: Yahoo News

This is obviously good news if you're out of work and looking for a job, but it is still way too soon to get up on your seat and start cheering. We still need to see more data, and we're going to have to wait months rather than weeks before we can begin to really say anything with the level of confidence most of us would like to have. For the moment the job market remains distinctly weak, and it was this weaknes that was reflected in the consumer confidence index earlier in the week.

One Last Swipe for Good Luck

Well, while we're in the business of farewells, we shouldn't miss the opportunity to say goodbye to dear old Duisy. We shall miss him, especially his special talent for putting both of his feet in it simultaneously. Now he's saying that the foundations of economic and monetary union may be in danger. Of course I agree but for different reasons, structural ones associated with the very idea of the euro itself. On the other hand, I can't say I am exactly inspired by the imminent arrival of his replacement, but then, time will tell.

European Central Bank president Wim Duisenberg yesterday signed off his five-and-a-half year term with an attack on the eurozone countries that have failed to contain their budget deficits. He said the ECB had serious concerns about the situation and warned it could damage the foundations of economic and monetary union.

In his last press conference before he stands down at the end of the month, Mr Duisenberg said: "There is growing evidence that most countries will miss their budgetary targets for 2003 by a significant margin and, in a number of cases, budgetary plans for 2004 are not reassuring." He acknowledged that lower than expected growth was partly to blame. But he added: "It is worrying to see that not all countries with severe imbalances have so far introduced sufficient consolidation measures. It is fundamental that the credibility of the in stitutional underpinnings of EMU be maintained."

Mr Duisenberg defended the stability and growth pact under which governments are supposed to keep their deficits below 3% of gross domestic product but countries such as France and Germany have breached it once and look likely to breach again. Shrugging off criticism the pact was too rigid to cope with the problems thrown up by stuttering economies and rising unemployment, Mr Duisenberg insisted it provided "an appropriate framework for maintaining fiscal discipline within adequate bounds of flexibility". The real problem was the need for structural reform of the eurozone's markets for goods and services to address "the main economic problem of the euro area, namely the high level of structural unemployment". Mr Duisenberg, who will be succeeded by Jean-Claude Trichet, governor of the Bank of France, is signing off with the euro at almost exactly the same level at which it launched in 1999 and with inflation at 2.1% - just above the 2% ceiling that the bank sees as consistent with price stability. Yesterday Mr Duisenberg said the ECB had decided to leave interest rates on hold at 2%. He said the bank expected price pressures within the eurozone to stay subdued and the medium-term outlook for price stability remained "favourable".
Source: The Guardian

Auld Lang Syne

Richard Thomkins gets ready to say farewell to the Italians. My feeling is he is a little premature, but he has certainly got the message. This little meme is begining to go the rounds. His use of the Maslow pyramid isn't quite the way I would look at things, but he has a point. We are looking for more in life than primary need fulfilment, and not all our decisions are economic ones. Bottom line: he doesn't offer a solution, and neither do I.

Arrivederci baby

I am going to miss the Italians. Not that I have known many personally, but when you think what they have given the world - the Roman Empire, the Renaissance, pizza - it is a shame to think they are doomed by their low birth rate to extinction. Even allowing for immigration, the United Nations estimates the country's population will fall 22 per cent between now and 2050. You do not have to be a demographer to recognise that this is a nation spiralling into oblivion.

The Italians are not alone. All across Europe, women have stopped having enough babies to make up for the people who die. Russia's population is forecast to decline 30 per cent by 2050 and Estonia's by a catastrophic 52 per cent. Germany's is forecast to fall by a relatively modest 4 per cent, but only because the country is experiencing massive immigration. There will be plenty of German passport holders in 2050, but they will not be eating bratwurst, drinking beer and telling bad jokes.

As birth rates decline, the immediate problem for Europeans is the rising dependency burden: there are not enough young people to support the old. The looming pensions crisis has prompted calls for quick fixes such as increasing or abolishing the retirement age and encouraging higher levels of immigration. But in the longer term, what, if anything, can or should be done to stop entire peoples and cultures disappearing from the planet?

And why on earth should women produce babies any more? In advanced societies, most people have long since passed the point where life was just a struggle for subsistence. Soaring living standards have left them in a position where their material needs have been more than satisfied. Now their sights and expectations are set on something much higher than the mere fulfilment of some primeval urge to survive and reproduce. They want achievement, recognition, happiness, and to be all they can be.

Yes: for those familiar with the work of behavioural psychologist Abraham Maslow, we are back on the slopes of Maslow's pyramid, more formally known as his hierarchy of needs. According to Maslow, the highest level of human motivation is self- actualisation or self-fulfilment. But before it can be achieved, the lower levels of need have to be satisfied: the need for basic comforts such as food, warmth and shelter, the need for safety and security, the need for love and belonging and the need for respect and self-esteem.

In less developed societies, children satisfy security needs (level two of Maslow's pyramid) and are clearly essential. But it is less obvious where, if at all, they belong on the pyramid for those of us in the developed world. One hopes they will provide their parents with love, self-esteem and a sense of fulfilment, but they are certainly not the only possible sources of such feelings. Love, for example, can come from one's partner or friends, self-esteem from one's occupation and self-fulfilment from the freedom to pursue one's dreams.

In short, parenthood is a lifestyle choice rather than a necessity, and possibly not a particularly rational one. The higher levels of Maslow's pyramid, after all, are achieved not by indulging in the staggering levels of self-sacrifice that motherhood involves, but by satisfying one's inner needs for esteem, fulfilment and freedom. This is an agenda for selfish individualism, not for devoting the best years of your life to the raising and nurturing of others.
Source: Financial Times

The Friends We Used to Have

While I was over at China Media, I also came across this piece whose sentiments I thoroughly endorse. As he says, China's currency future passes through institutional reform:

In the lobby of the Beijing Hotel, there was always a wonderful portrait of Chairman Mao surrounded by a diverse set of smiling people. Entitled: "We have friends all over the world," it is a legacy of the days when China was the political inspiration for the developing world. Today, there are few places around the world where China is not considered a direct economic threat.

The Managing Director of a well-known European firm says he will spend "the remainder of [his] career closing factories in Europe, and opening new ones in China." The North American customers of a well-respected European engineering firm now require them to manufacture 30% of their output in China, and to benchmark the remainder against Chinese prices. Mexico is reported losing jobs to China, and in the U.S. entire industries are at risk of vanishing, leaving only the unemployable behind. The stark reality of China's becoming "the factory of the world" is that factories elsewhere are closing.

This is a big issue! Unemployment is a tragedy wherever it occurs. In the past few weeks, nearly every manager I have met with has had China on their minds - and it's not good. There are no easy answers here, but as this debate grows, it is key to remember several key points:

Revaluation will not be the solution: Despite political pressure for yuan revaluation, this will not happen, or matter, in the short-run. China will not put its own growth at risk; it is as afraid of unemployment as we are. Furthermore, the magnitude of China's manufacturing cost advantages in many industries are well-beyond what any realistic revaluation could correct.

Floating the yuan is even more unlikely as long as China fears significant capital flight once currency constraints are relaxed. Correcting this is about institutional infrastructure.

Chinese factories are now key players in the global supply chains of "our" multinationals: Their success becomes "our" success. "Our" corporations are the beneficiaries of China's cost-advantages, and so are Western consumers! It is not so much that China is taking our jobs away, as it is that "we" are making different sourcing choices in the value-chains that serve us.

Moving-up the value-chain is no longer assured protection: China is becoming a major source of intellectual property - in science, R&D, design, & entertainment. The reality of 1.3 billion people is that China can and will compete on the basis of low-wage labor and high-impact brains, at the same time.

Much of what we have long-wished for in China has occurred: a market economy is growing and Chinese people are better-off than they have ever been. China is presently the best bet for an Asian growth-engine, and a force for political stability. As China integrates into the global economy, some job relocation is to be expected.

Gradually, the Chinese will certainly import more as growth continues. In the meanwhile, look for a lot of political bluster on all sides, but little effective immediate resolution of the dilemma.
Source: Bill Fischer, ChinaBiz Sunday Column

Chinese Teddy Bears, Japanese Cars and Hope

It's Friday, and right on cue Shanghai based ChinaBiz journalist Fons Truinstra has pre-posted his weekly column. One of the week's little treasures.

Shanghai – This week I have purchased an American product made in the US. I thought I should mention this as even the Americans nowadays prefer to buy Chinese teddy bears and Japanese cars, because they are more competitive than American products. There is still hope!

What I bought is anti-spam software (Ihatespam – really good stuff). The number of spam messages I had to delete every morning passed the 100 threshold, so I decided that simply deleting them was not good enough. Maybe I’m more exposed to spam than the average internet user, because much of my work takes place online, but I’m sure that the nuisance of spam will force you too one day to act.

There are other trends in my purchasing habits that I find personally more worrying. This summer I have cancelled the last subscriptions on printed foreign media. I now get everything I need for free through the internet. Actually, I get much more than I need.

I pay 130 renminbi a month to Shanghai Telecom and no dime goes to any media company anymore.
Again, I might ahead of the crowd, because of my specific situation as a journalist in China. For foreign publications we traditionally had to pay a stiff surcharge in exchange for which we would get the publications two or three days after the rest of the world got them. Finding alternatives, mostly over the internet, has been more important here in China than elsewhere in the world. But again I’m quite sure that I’m not that far ahead of you all.

The worrying part of this is that Shanghai Telecom does not pay my bills. When we do not pay media companies for their information anymore, who is in the end going to pay my bills? That is a bit of an existential question for a light column like this, but still worth to consider. It is not only American manufacturers who have to face changing markets it is no different for journalists. I have been walking around with a shield saying “We are Doomed” at a meeting of the Shanghai Foreign Correspondents Club, but I do not think the message came across. We would rather write about other trades going down the drain than about ourselves.

It reminded me of my early lessons in history. Then we were taught the big theories about how cultures emerged and went down, emerged and went down. What was interesting was that the theories varied very much, only the end was similar. Every culture went down too. So when these great thinkers were asked how their theory would apply to their own, existing culture, they were all sure that their own culture was the only exception: their culture would not go down. It is a very human thing: we only like bad news when it is about others, not about ourselves.
Source: China Trade

Thursday, October 02, 2003

US Economy: The Slippery Road to Recovery

My Moneyfiles Column

The US economic data we are seeing this week are a very mixed bag indeed. New claims for unemployment continue to hover round the 400,000 mark, new factory orders declined by 0.8% in August , consumer confidence falls to its lowest level since the start of the Iraq war, and yet apparently we are to believe we are on the verge of an economic recovery.

Somewhere it seems there’s a problem. If this were a normal business cycle, then we should now have that long anticipated upswing waiting, just around the corner, and this, of course, is what the markets are anticipating. But although everything looks set to run it might just be worth asking why things might not be so simple this time round. Everything here is a matter of timing and perspective. Look first, for example, at industrial production. Maybe output has come back to life in the last three months, but that doesn't stop capacity utilization being still at 20 year lows. Then again, and as everyone must surely know only too well by now, there's the little problem of employment. Given the strong productivity performance and the increasing population of working age many estimates suggest that the US economy may need to grow at around 4% simply to start generating net new employment.

Since the official end of the recession in November 2001 the U.S. economy has grown at an annual rate of about 2.6 percent. That may not sound so bad, until you think about the labour market problem (and until you remember that Federal spending has gone from a 2% of GDP surplus to a 4% of GDP deficit in a very short space of time, which is one hell of a stimulus for just 2-3% growth). In fact non-farm payrolls have fallen by, on average, 50,000 per month since the "recovery" began, accounting for 1 million of the 2.7 million jobs lost since March 2001. This problem of ongoing job-loss is compounded by the fact that after heavy immigration over the last 15 years the working-age population in the US continues to grow at a fair clip. (I should strees that mid-term this is an advantage for the US as there will be more people working to pay for the baby boom pensions, but in the short term it represents a problem. As I said before, this is all about timing.) So, just to keep up with this demographic drift the U.S. needs to add about 110,000 jobs per month. Brad Delong recently estimated that the 400,000 new signings a month figure which is seen as critical is probably too high in this context. Any number over 350,000 new signings a month and the US job market continues to weaken.

And not only are the jobs being lost in manufacturing, IT and the internet enabled services sector are also taking a big hit. In fact since the peak in March 2001, employment in the information sector – which lost 16,000 workers in August alone - has declined by 459,000, or about 12 percent. At the same time employment in computer systems design, which lost 8,000 workers during August, has declined by 232,000. Meantime two areas are gaining employment. In August health care and social assistance in gained 25,000 jobs , which was about in line with its average monthly employment increase over the prior 12 months. Construction employment also went up: it has been gaining workers since February at an average of 20,000 jobs per month. Obviously the rise in construction is associated with increased housing demand which is in part produced by US demographics and in part by low interest rates, whilst the growth in health care is a product of the fact that America is an aging society. The important point is that neither of these are the important 'next big thing' area which might enable the US economy to balance it's internal employment and external commerve shortfalls.

Then all of this is compounded by the fact that the economy, when it is working, is highly productive (parodying the late Rudi Dornbusch: the US manufacturing sector isn't working too regularly, but when it is, boy is it productive). Productivity continues to rise at a rate of 5% per annum or more, and this only adds to the pressure. Really, more than any other OECD economy, the US is 'condemned to grow', and this is where we hit the snags.

As I have been trying to argue for several months now, all that outsourcing is fine - and indeed necessary for US companies to try and maintain competitivity given the height of domestic dollar-denominated labour costs - but you need value generating activities to pay for it, you need to be able to export, and to export (as the Japanese have been finding out) you need growth somewhere else. You also need a currency which is competitively valued, but it is here that we discover just how finely balanced the whole global economy actually is. The recent G7 meeting was intended to give a signal (a watershed I think was Snow’s actual expression) that the strong dollar policy is over. But what happens? The dollar begins to drop, US manufacturing begins to see export opportunities, the economy in general starts to rev up, people see growth on the horizon, equity prices start to rise, and back comes the money into the US looking for some action, with the unwelcome consequence that the dollar starts to climb, and the export opportunities start to disappear, and............

Precisely how finely strung everything is can be seen from the treasury and mortgage interconnect. The fed genuflects one way, and down comes the treasury market, in its train sending up long rates and choking the recovery, then the fed genuflects the other, and everyone gets busy buying treasuries waiting for the unconventional tools.

So now let’s look at that other main area of concern for the US economy, deflation. In order to think about deflation you need to keep in mind what we like to call the ‘output gap’. The output gap concept is a complex restatement of what is in fact a very simple idea – that there is a price impact from continuing disparities between aggregate supply and aggregate demand. Economists normally attempt to get at the notion of aggregate supply by assessing the growth of “potential” output (GDP), which could be defined broadly as the sum of labor force growth and trend productivity. In essence, the output gap is calculated as the difference between an economy’s growth potential and its actual level of aggregate activity. If the output gap were at “zero” supply and demand would (theoretically) be in balance with the economy at ‘full employment’ and the inflation rate would be stable. When demand exceeds potential - a positive output gap - inflation can be expected to accelerate. Conversely, shortfalls from potential - a negative output gap - are associated with falling inflation; they reflect excess capacity and this gives rise to a phenomenon we have recently referred to as “disinflation.” As such, recessions are generally depicted as disinflationary macro events, while recoveries are thought to be inflationary. Fed Governor Ben Bernanke in a speech back in August reckoned that given current assumptions about GDP growth and the consequent output gap, core PCE inflation might fall from around 1.2 percent currently to 0.7 percent or so by the end of 2004. That is to say, the deflation clock is ticking.

This in part explains the current US treasury concerns about the value of the dollar. One way to try to reduce deflationary pressure inside the US would be to lower the value of the dollar. But this implies that some other currency or currencies have to rise. Now whatever the ins-and-outs of the current dispute about the value of the Chinese yuan, no-one can surely be suggesting that the Chinese currency is in any position to take the entire strain for the global economy. This responsibility normally should fall on the European or the Japanese. But this is where push definitely comes to shove.

For this is where we enter the realm of what Stephen Roach likes to call the global imbalances. Basically the global economy has become a kind of monoplane flying on a single engine, one that has made in the USA clearly stamped all over it. So when the US starts to run into trouble, there is no ready replacement to hand. The reasons why this situation has arisen are, as they say, many and debateable. Among the most important I would put the changing demography of the OECD world, and the phenomenon known as ‘population aging’. If I am right in this, then it would be unrealistic to expect any miraculous transformation of the global panorama. We are going to have to get used to living in the world we have, not in the one we would like to have. This means there simply is no short term easy solution to the problem. This fact is popular neither with politicians nor with their electorates. But lack of popularity normally isn't a problem for facts, whilst facts all too often are not a special problem for politicians.

At the end of the day the US will need to try to ‘purge its excesses’. It will need to try to accommodate itself to the changing economic reality of the times. But it will need to try and do this without recourse to any easy ‘pillar’ of support. This inevitably means we are in for a bumpy ride. Bringing the dollar down to its competitive level isn't going to be easy, in particular, and this will have to be a topic for another day, due to its role as the reserve currency. Avoiding the pitfalls of protectionism and stimulating the growth of new high-value areas of activity will also need resolve and creativity. Perhaps the final irony here is that in one sense George Bush has got what he always wanted: in the search for solutions the United States can depend only on itself.

It Takes a Fool to Spot One, I Suppose

With Chief economists like this who needs a court jester. I mean what is he talking about. The US has growth of between 3 and 4% and Greenspan is firm on holding rates down for a considerable period. The eurozone is still more-or-less in recession, may be coming out, or may be going in deeper, and Otmar Issing is talking about raising rates. Brad often sounds off about the incompetence of some of the people running things in the US, he should come over and take a look at just who exactly we have running things here. My vote for what it's worth is that the rates should be down more.

The European Central Bank's chief economist on Wednesday warned that interest rates could soon rise in the eurozone if money supply growth started to drive up prices. Otmar Issing's comments came as a rise in purchasing managers' data for manufacturing boosted hopes of an upturn across Europe. Speaking in Zurich Mr Issing, one of the ECB's leading policymakers and a renowned anti-inflation hawk, said money supply growth might become a problem when the recovery started. "We are watching M3 [the broad measure of money supply developments] closely," he said. Economists said the timing of his remarks, just hours before the ECB's rate-setting meeting in Lisbon today, was puzzling. The ECB is expected to hold rates steady at 2 per cent, a postwar low. Neville Hill of Credit Suisse First Boston said that it was "an odd moment" to be concerned about money supply growth as the eurozone economy was only just beginning to show signs of life.
Source: Financial Times

Italian Pensions Battle Looming

With Berlusconi facing internal strife over pension reform, Edward has been posting over at Fistful:

Italy's top three unions on Tuesday called a general strike to protest pension reforms, dealing a blow to Prime Minister Silvio Berlusconi after he made a TV plea for support in changing the bankrupt system. The unions, which have more than 11 million members, declared a four-hour work stoppage for October 24, the third general strike since Berlusconi came to power in May 2001. The media magnate-turned-politician was beamed into Italian homes on Monday night and in almost fatherly tones warned that pension reform was "necessary, fair and wise" if the country's economic and social fabric were to survive.

But the unions gave him short shrift, saying it was not true that Italy's pensions system needed overhauling. "We ask all workers, young people and pensioners to take to the streets and defend a system which is not in trouble," the leaders of the CGIL, CISL and UIL unions said in a statement. "There is no pensions emergency. The government...is dramatizing the pensions problem. It doesn't correspond to reality," they added. The prospect of a united union front will alarm Berlusconi as he struggles to banish the ghosts of 1994, when his first government collapsed over the same pensions issue as millions downed tools in protest. Appearing to pre-empt the union response, he said on Monday that those denying that the system needed altering were "not only doing their country a disservice but were also deceiving themselves."
Source: Reuters

India on the Up and Up?

With latest figures show that the Indian economy grew at an annual rate of 5.7% in the first quarter of 2003, the Economist asks whether India is getting ready to rock'n roll:

because of a confluence of benign trends, economic optimism abounds. India's GDP is expected to grow by at least 6% this year, thanks partly to demand from a more robust global economy, and, more importantly, to the most bountiful monsoon for many years. Almost half of India's GDP still comes from the countryside.

A stockmarket surge has been barely dented by the Supreme Court ruling or even, for more than a few hours, by the deadly terrorist bombings in Mumbai last month. Earlier this month, the index covering the Mumbai exchange touched levels not seen since February 2001, having climbed by more than 50% since April. Profits of companies included in the index were up by an estimated 50% in the second quarter of 2003, compared with the same period in 2002.

True optimists look far beyond the stockmarket. Painful reform and restructuring in the 1990s, they say, is paying off. Shorn of the protections and blandishments of what became known as the “licence raj”, and more open to foreign imports, India is now producing companies that can compete with any in the world. These include not just the well-known successes in information technology and pharmaceuticals, but also businesses in “old economy” industries: cars and car parts, motor-cycles, cement and steel.

In 2002, a subdued year for the world economy, India's exports grew by 19.2%, a rate beaten only by China, whose currency, Indian exporters point out, is notoriously undervalued, whereas the rupee has, unusually, been appreciating against the dollar. However, India's is still, in global terms, an economy that has a long way to go before it looks very much like a tiger. Last year it accounted for just 0.8% of world exports.

It is true that many Indian firms are exhibiting new signs of self-confidence. Indeed, China itself, long seen by Indian businesses as a threat, is now seen by some as an opportunity. The success there of Indian steelmakers, to take an old economy example, has been such that they have been exceeding the quantitative quota (3% of steel imports) that China imposes on them.

Asked to explain the rosier outlook, manufacturers cite one factor above all: the sharp decline in interest rates—from an annual rate of roughly 12% to half that—in the past five years. Besides beautifying company balance sheets, this is encouraging consumers to borrow, to buy cars, for example, and build houses.
Source: The Economist

India to Sign Asean Trade Deal

Hot on the heels of the Cancun fracas, India announces a new trade deal with the south East Asian Nations.

India is to sign an agreement next week with the 10 member states of the Association of South East Asian Nations (Asean) leading to the creation of a full free trade area within a decade. Yashwant Sinha, India's foreign minister, said the framework agreement had been negotiated over the past year, and would be signed next week at the Asean summit in Bali, Indonesia. India is also close to signing bilateral trade deals with both Singapore and Thailand. "We are getting much more deeply engaged in south-east Asia," Mr Sinha told the Financial Times in an interview in London. "This will certainly boost our trade and economic relationship with the region."

Progress on negotiating the framework agreement with Asean has been unusually rapid by Indian standards, in a sign of the importance of the deal to both sides. India has watched with some misgivings neighbouring China's dramatic trade growth with Asean over the past decade. But Indian officials say Asean also wants to counter-balance China's growing economic dominance of the region by strengthening ties with a market the size of India. Indian exports to Asean were $4.8bn (£2.9bn, ?4.1bn) last year, just 8 per cent of its total exports. Officials say this could rise sharply.

The deal would go some way to answer those critics who point out that India imposes higher tariffs on developing country imports than on western ones. India has been criticised for playing an influential role in helping bring about a collapse of the trade talks in Cancún last month. "If we have regional trading arrangements with Asean, they will become beneficiaries of lower tariffs with India," said Mr Sinha.
Source: Financial Times

Bulgaria: Only Pensioners Here

Little by little the Bulgarian reality is sinking into the popular consciousness. My Bulgarian research assistant has sent me this cutting from the Bugarian press:

Unemployment and poverty drove away the young people. In 2 decades Bulgarian population will be of pensioners mostly.

Over 1,000,000 people emigrated from this country in the wake of 1989, the Bulgarian National Radio released, quoting data of the Generalia 21 Youth Organization. Of them, 840,000 were aged under 29. According to the statistics, young people living in Bulgaria are only 1,150,000. Their number is expected to fall down to 1 million in a decade, and in two decades it is expected to be reduced to 670,000. Young people are emigrating en masse for unemployment, dramatically low living standards and social instability. Soon the population of Bulgaria will be constituted of pensioners mostly, commented experts at the discussion on youth policy-making held in Borovets. The other reasons for the fall in population are the low birth rates and high death ones. Annually, Bulgaria's population is decreasing by 45,000 to 50,000 people in average.

Trying to Stay on Top

So Huawei and Cisco have reached an agreement. It's hard to see who will be the main beneficiary here. In the short term it's a victory for Cisco, but at the price of seeing Huawei coming out of China to offer competition. Presumeably later, as Huawei gets its own market share, a clearer identity and more experience it will develop its own legitimate products and then will really be able to comptete. This is another of the details about patents, they sometimes only offer limited protection when a rival has sufficent resources and determination to get round the problem.

won a victory in its battle over technology piracy claims on Wednesday when Huawei, the emerging giant of the Chinese communications equipment business, agreed to modify some of its products. The legal fight is the most prominent recent dispute over intellectual property rights involving the fast-growing Chinese technology industry.

For Cisco, protecting its technology has become increasingly important as Huawei has moved beyond the domestic market to sell switches and router equipment in North America and Europe. The companies said that Huawei had "voluntarily made changes to certain of its router and switch products". The changes will be reviewed by an independent expert. If the changes are accepted by the independent expert, the two sides said they expected the legal action to end.

Cisco had accused the Chinese company of "systematic and wholesale infringement" of its intellectual property, including copying parts of the source code underlying the software that operates its routers. It also claimed that Huawei had gone as far as lifting some passages from its product manuals verbatim. Resolving the legal dispute could free Huawei to compete far more aggressively in overseas markets. It has agreed a partnership with 3Com, the US networking equipment company, to produce and sell equipment jointly.

A preliminary court injunction in the Cisco case has limited Huawei's international expansion. The injunction prohibited the Chinese company from selling products worldwide that included source code that infringed a protocol developed by Cisco. Huawei was also forbidden to let engineers who had seen the Cisco code work on developing a rival version and was ordered to stop distributing user man- uals and online help pages in the US. Wednesday's agreement with Cisco goes much further, blocking any global sales of Huawei products that infringe on Cisco's intellectual property. Huawei has agreed to sell only products that have been amended to deal with the Cisco complaint. The changes that will be submitted for independent review cover amendments to part of Huawei's source code, user manuals and online help screens.

Wednesday, October 01, 2003

The Use and Abuse of Patents

Rajesh Jain via Prayatna draws attention to this piece in the NYT about patent laws and 'developing' economies. The 'received wisdom' is that strengthening patent laws would be good for growth, Petra Moser, in her doctoral thesis begs to differ. It's certainly a question that is worth asking.

Petra Moser, now an assistant professor at the Massachusetts Institute of Technology's Sloan School of Management, has come up with some surprising conclusions [in her Ph. D thesis] that are attracting the attention of fellow scholars.
One of Professor Moser's conclusions is that developing countries like India, which is scheduled to come into full compliance with an international patent treaty in 2005, may be better off without strong patent laws.

The conventional wisdom among economists has been that a robust patent system helped transform the United States into an economic powerhouse. And this may be true. But, Professor Moser concludes, what was good for America and Britain in the 19th century is not necessarily good for emerging, largely rural economies in countries like Denmark, the Netherlands and Switzerland.

"In economics, we are taught that patent laws are what create incentives for innovation," she said. "But many of the best innovators in what was the high technology of the day came from some of the smallest countries in Europe, and these nations did not have patent laws."

The purpose of patents is twofold: to protect the inventor and to speed technological progress. Thus, patent laws require that an inventor, in a quid pro quo exchange for the limited monopoly that a patent provides, disclose his methods to others. "Countries without patent laws have much larger shares of their innovations where patenting would have been a bad idea," Professor Moser said.

So what is the lesson for Brazil, China, India and other countries that are being pressed by industrialized nations to create strong patent systems?

"We try to force patent laws on developing countries and say, This is best for you," she said. "Then we are surprised when they say they don't want patent laws. But they have a point. Such laws could actually hinder innovation in those countries."
Source: New York Times

The Future of Japanese Savings

Well here's Eddie right on call with this week's Straits Times column, giving details on those Japan unemployment numbers, and some interesting and preoccupying background on Japanese saving:

More and more Japanese are dipping into their savings to make ends meet, according to a survey by the Bank of Japan. A record 51 per cent of Japan's households said their savings had dropped during 2003, while the number of families with no savings at all has risen to a 40-year high of 22 per cent, the survey revealed. The results are the latest indication that a decade of economic stagnation and policy mismanagement has not come without cost and will serve to remind new cabinet ministers appointed on Monday of the urgency of their task.The disclosure also raises questions about policymakers' claims that Japan's Y1,400bn ($12.5bn, 10.9bn, £7.6bn) in personal savings will cushion the effects of a downturn.The poll covered 6,000 households, 60 per cent of which said declining incomes were the main reason they were having to use their savings, an increase of 8.4 per cent compared with last year.Figures released yesterday by the National Tax Agency showed average annual remuneration declined 1.4 per cent in 2002 compared with the previous year, the fifth consecutive year of decline. The agency said the number of wage earners decreased by 490,000 to 52.56m in 2002, the first decline in two years. Unemployment in Japan was 5.3 per cent in July this year, down from a record high of 5.6 per cent earlier this year. However, the period of unemployment is increasing, with one in three now jobless for more than a year, according to the latest figures from the Labour Ministry. Unemployment for those under 24 is about 10 per cent.The BoJ survey also unveiled deep disquiet about retirement, with 80 per cent saying they were "worried", rising to nearly 90 per cent of those under the age of 60. They cited a lack of savings and insufficient pensions benefits as the main reasons. Figures released this week by the National Pension Fund Association revealed it achieved a negative yield of 14.5 per cent on assets under management in fiscal 2002, the worst result since its launch in fiscal 1991 and its third consecutive year of negative returns. According to a recent report from Greenwich Associates, assets at employee pension funds in Japan cover only 62 per cent of future payments compared with 103 per cent in the US.Reversing declining incomes, tackling unemployment and ending the erosion of savings will depend on economic recovery - and there are signs of revival.The latest figures showed growth at an annualised rate of 3.9 per cent, although the gross domestic product deflator is running at minus 2.5 per cent and has been in negative territory since 1995.
Source: Eddie Lee, Straits Times

Tax Cuts and Fiscal Stimulus in Asia

Eddie's thoughts, following on from his Japan article, on the debate in Asia about saving, tax cuts, fiscal stimulus and ageing.

Looks like the forex market is bent on testing that 110 Yen level. But Asians appear to be holding on to their US treasuries still. So the 'big one' is stillout there. Situation seems finely balanced at the moment. There’s quite a bit of positive news from the tech front in Asia. Order flows are picking up nicely,etc. But now you have appreciating currencies. And over in euroland, USD/euro could soon be back at 120. I tend to agree with you. I just don't see why a weaker dollar should necessarily force EU and Asia to miraculously have stronger domestic demand. I think the opportunity for the ROW to have stronger demand was the last couple of years when the dollar was strong. Asia should have gone all out to kick-start, and that included weakening their currencies further. Andr eally its Japan, HK and Spore .. the dragon economies. They couldn't and their time has passed.

I’m just quite stunned. 1 in 5 Japanesehave nothing in their kitty. No savings nor insurance;simply no assets to fall back on. Its an awfully large proportion for a first world country. makes the glitter of Ginza all the more hollow. Save till you can save no more, and now there’s nothing left.There’s very little reason to invest. And I don’t see how there can be any pent-up demand to be released by ‘economic reforms’. Is it now a case where any incipient recovery is snuffed out by the vain attempt to 'try to save something' whenever households see signs of economic revival? While it’s a natural instinct for individuals, calls by the authorities to the public to‘save for retirement’ seem pointless at this stage.It’s too late for the economy to save now ... ‘Retirement savings’ will have to come from employment. but for the ageing workforce, what employment? Rifkin talks about the third sector and that may be it. A new job offering a chance at a second or third career. Government budget gets shifted from pension/unemployment benefits to pay the social wage. It just seems that govts are making the mistake in thinking that only fiscal stimulus worthwhile is tax cuts.These are permanent cuts, but they are not thinking about expenditures that will have to increase over time(by keeping ageing population employed in the third sector) Immigration could be more tolerable with lower resident unemployment. Young immigrants fit into 2 desired slots the ageing population can't fill ...physical labour and high-skilled work in new industries. Btw, my colleagues recently interviewed 40 householdsin middle-class Spore. 1 in 3 say they can’t save. It’s a small sample, but I find the results very disconcerting. As you know, the govt have reacted to the recession by calling for wage cuts and reduction in employer contribution to the pension scheme. The reduction is on a staggered basis, so we will continue to see further cuts over the next few years. Their gut instinct to a recession is to cut wages. My gutinstinct tells me we should have tried to preservewages, and then figure some other way of getting round this. As you would say, ‘no easy answers here’. A reader to the local paper recently wrote in to saythe deed is done, its water under the bridge and we should move on. It may be water under the bridge, but the situation is harder to retrieve now. There are some calls for fiscal measures to prop up the economy.But pump-priming, when you have simultaneously undermined confidence with wage and pension cuts, just seems so fruitless.

The Japanese 'Recovery' in Question

blogging has been intermittent, not to say non-existent these last few days as I have been away on fieldwork. The world, however, has not stood still in my absence, and I have the feeling that some of the US data yesterday could turn out to be quitre significant. Certainly it seems that some of the underlying questions about where the principal OECD economies are headed might now start to be clarified. In this context, the latest info from Japan could be read as the beginings of a return to reality. The unemployment numbers need to be read carefully, since the number of people of working age in Japan is now falling, and the drop is to be expected. Morre interesting are the output figures. My feeling is that Japan had revved-up on the hope (and expectation) of a major global recovery, if the wobbly state of the US economy that was revealed yesterday continues to follow this line this will by no means be guaranteed, so expectations in Japan may need to be revsied downwards. Any such revision would simply open up for all to see those 'old problems' which have certainly not been resolved. One last detail: note the comment about the value of the yen not being so high as it seems because of the price effect of years of deflation. Japanese prices, denominated in yen, are a little more competitive each year. However, whatever the fine detail of the situation, a yen at 110 to the dollar is hardly going to help Japan fight the deflation problem.

Unemployment fell to a two-year low of 5.1 per cent in August but industrial output shrank 0.5 per cent in the same month, sending mixed signals about the strength of Japan's recovery. The number of unemployed fell by 280,000 to 3.33m, down 0.2 percentage points from the previous month on a seasonally adjusted basis. This was the first time the monthly jobless number declined by more than 200,000 since 1990. There was also good news in a survey of sentiment among small and medium businesses which showed a surge in confidence close to peaks of the mid-1990s. This improvement in sentiment among Japan's more vulnerable companies comes ahead of today's Tankan business confidence survey, which is seen as one of the economy's most important leading indicators. Revised figures showed growth in the second-quarter at an annualised 3.9 per cent, adjusting for deflation. However, even after revising its growth estimate upwards recently, the government is predicting nominal growth for this year of just 0.1 per cent.

Signs of business confidence and evidence that the economy is at last creating jobs after six quarters of growth were countered by the fall in output. The 0.5 per cent drop came in spite of an increase in shipments, suggesting that manufacturers are still cautious about future growth prospects. Masaaki Kanno, economist at JP Morgan in Tokyo, said: "Manufacturers still do not have the confidence to accumulate inventory." He said the same trend was visible in the US, suggesting that manufacturers might be moving towards a leaner inventory model. Mikihiro Matsuoka, economist at Deutsche Bank, said: "This is not a strong recovery but the upward slope is real." Fears that yen appreciation might choke off recovery were overdone, said Mr Kanno. Because of continued deflation, even if the yen strengthened to Y105 to the dollar, this was equivalent to Y115 in 1999, a competitive rate. He said there was no correlation between corporate profitability and such relatively minor movements in the currency.