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Friday, October 31, 2003

The 'Lump of Structural Reform' Fallacy

I must have had a hard week, since I find myself leaning more and more on Joerg for inspiration. But I really do think he has a good point. Structural reforms are being converted into something quasi-physical, that need to be handed round and round...........and round. Apart from making ourselves all extremely dizzy, isn't there something rather self-defeating in all this. Stephen Roach sums the problem up rather nicely:

To the extent that the road to a renewal of economic growth rests on a foundation of sustained productivity enhancement, market-based reforms become an essential ingredient of the global growth equation. Primary focus on the rhetoric of currency policies deflects attention from this critical objective.

It’s not hard to understand why politicians and policy officials would rather turn their attention elsewhere. The structural reforms required to sustain productivity-led growth are often the toughest medicine for any economy to take. That’s because they usually entail a reworking of social contracts between governments, businesses, and workers. As such, structural reforms can threaten deeply entrenched conventions of job and income security -- threats that have enormous social and political implications. In light of these severe consequences, there is a natural inclination to avoid reforms. Yet in the end there is no other choice. It takes courage and vision to look through the short-term pain and see the long-term gain. In my view, it also takes pressure -- pressure that leaves an economy and its leadership with no option other than reform. To the extent that a strong currency achieves such an outcome, that is a good thing.
Source: Morgan Stanley GEF

Now one of the problems I think many of us (even those of us who consider ourselves 'admirers') have with Roach are those little 'slight of hand' arguments he wheels out from time to time. One of these is the 'world GDP' argument (for new readers, I think 'world GDP' is a nonsense concept: ie it doesn't mean anything). Another is the idea that protectionism caused the great depression (which as Eddie keeps pointing out is just plain false). Now we have another one: that the road to sustained economic growth rests almost exclusively on a foundation of sustained productivity enhancement driven by structural reforms.

Right and wrong. Right, in that productivity is a good thing, and if you can increase productivity by moving your economy out of agriculture and into, say, industry (think France and Japan in the 70's and 80's) then you can obviously live better, or if you can move out of industry into high-end services then ditto. But, and here is the big point, if you move into what are intrinsically low-value labour-intensive services, but gain the productivity by everybody running faster, then what exactly have you gained? Roach is also passing the white rabbit quickly from one hand to the other when he insinuates that recent growth has come mainly from increased productivity: in fact recent growth has come mainly from two sources, increasing the level of 'participation' in the economy (whether through more women working, or because we have a higher proportion of people in the 16 - 60 age group) or from increasing the quantity of capital in play (ie either using more labour or using more capital). So in one sense economic growth depends on imagination and creativity: using our inventive capacities to find ever newer ways of creating wealth and well-being. My real problem comes when Roach starts to talk about 'severe consequences' and 'threats' to income and security. 'Good' productivity doesn't necessarily have to be tough medicine: whilst trying to defend unproductive jobs is. I have just spent the week (virtually speaking) way down south of the Rio Grande. I have set up what I consider to be an extremely interesting working goup (of which you'll hear more later), and all without moving outside the office, except, that is, in search of coffee and light relief. None of this is 'painful'. It isn't painful because we're doing more for less. But too many of the structural reforms involve doing the same for more (effort): I personally don't see what this has got to do with growth. We are going into a difficult adjustment period there is no doubt about that. In view of the sacrifices we may all be called upon to make, maybe it would be better if we were all a little clearer about why we are doing it.

It's the Leadership Stupid: Update

The quality of leadership is not strained: interesting to compare our in-house Bush-watcher - 'Europundit' Joerg - with America's own Calpundit:

This is hardly the first time in history that there's been tension between Congress and the president, but this kind of stuff is being played out in public more and more these days and there's a real edge to it. I can't help but think that even his admirers are starting to see the side of Bush that people like me — and virtually all non-Americans — have always seen: a mean-spirited, bullying personality that reacts with defensive fury to the slightest hint of challenge.

(In fact, the Times quote an anonymous White House source as pretty much admitting this: "...the official expressed frustration at Republicans who praise Bush in general for being a blunt and principled leader — then protest when he is blunt and uncompromising with them.")
Source: Kevin Drum

Meena Auntie and the Winds of Change

While I am busy, some of my 'friends' have been restless, and hard-at-it writing. This time it's my Indian blog colleague, Vivek who gets across the way India is changing extremely effectively in his Meena Auntie piece for the Business Standard:

Meena auntie died a few months ago after a prolonged battle with throat cancer and asthma. She had a tough life and the end wasn't much better. I have thought of her quite a bit in the last few months. Every time I think of her, I think about the fiscal deficit. The International Monetary Fund (IMF) and gang (various economists affiliated to colleges, think tanks, financial markets) have been pressuring the Indian government to reduce the deficit.
Source: Business Standard

It's the Leadership Stupid

I'm up to my eyes in admin today, blogging at the moment is slow and light. However Joerg has not been idle:

Someone sent me a link to an article on the Harvard Business School website (more: here and here )in an attempt to convert me to Bushism. One of the first paragraphs did tell me something about recent American political history that wasn´t absolutely clear to me, but it also demonstrated why the apology would probably go on to fail. Here´s the graf - the rest only merits summarising:

"Bush's leadership in the White House has thus become a national Rorschach test. Depending on our perspective, we are drawn to or repelled by him. Rarely in modern American history has any president become as polarizing. Scholar George C. Edwards III pointed out a decade ago that approval ratings for recent presidents tend to run about 35 percentage points higher among members of their own party than among people identifying with the out party. For Bush Sr., for example, the average gap between Republicans and Democrats was 37 percentage points. Reagan and Clinton, more divisive leaders, often drove the gap to 50 percentage points or more. But George W. Bush's gap is off the charts: his approval rating among Republicans hovers in the high 80s; he's down in the 20s among Democrats - a chasm of more than 60 percentage points. Increasingly, people like him or they don't; the not-certains are disappearing."

On to the summary:

1. "He has embraced a command-and-control style that sharply challenges much of today's conventional wisdom about leadership and indeed is a marked departure from other recent presidents." How does this differentiate him from Putin, Mahathir, DeGaulle or other practitioners of the autocratic style?

2. "Despite his unorthodox style, Bush has been far more daring in setting a national agenda—and achieving it—than any expert thought possible three years ago." And what does the agenda allegedly consist of - according to author David Gergen?

a) The war on terror (Hasn´t that point of the agenda been set by bin Laden?)
b) Tax cuts (It´s not like Krugman has tuned in to the wrong station)
c) Effective power politics at home in order to break the impasse in American politics and enable more change in the future (More of the same? I.e., concentration on the war on terror (excepting its chief perpetrator? Someone please explain to me why everybody and his brother seems to know that the guy is alive and well in Pakistan - yet another Bushite confidence-building measure?) plus further tax cuts at home?)

3. "Even as a backlash grows against him, the qualities of leadership Bush has demonstrated - yes, the qualities of his leadership- have attracted a following that is large, loyal, and intense." How does this differentiate him from your run-of-the-mill nationalist politician anywhere in the world? From - oh, well - Arafat?

4. "Even as it has strengthened his political base, Bush's brand of top-down, assertive leadership also runs clear, deep, and dangerous risks. Over the past year, the dangers have become ever more visible and could eventually be fatal for his presidency." Must be reassuring to every concerned party. I guess such phraseology qualifies as objectivity. Churchill was saved by success - why exactly would Bush be saved by failure?

The finale: Bush "may yet pursue a transformation of the Middle East and the creation of an American empire." And the rest of the world may yet resolve to rebel against the doctrine of limited sovereignty that any notion of an American empire definitely implies. It is dumb not to realize that Bush´s vengeance against the Arab world is the culmination of
a long-practised divide-and-conquer approach (support for fundamentalists in Afghanistan against the Soviets and hated regimes like that in Saudi-Arabia, now possibly a deal with Iran to save face in Iraq - punctuated by self righteous proclamations of a right to remake the Islamic world in the image of Western secularism) that is perceived as such by hundreds of millions of Muslims. Bush is a polarizer at home, but a uniter in the rest of the world. Not only the Franco-German axis attests to that fact. Soon, the Islamic Gold Dinar will kick off another round of currency-driven economic cooperation in a different part of the world - a part populous enough to even rival China in some distant future. A part of the world where religion - as opposed to the Indian case, but closely paralleled by Protestantism - could be a driving force in the creation of economic progress.

Putin's Moves: Weakness or Strength?

I've been trying to keep away from what's been happening in Russia but I think I'm going to have to give up on trying. It's a bit like Iraq really as far as I am concerned: it's turning into an impossible mess, but I'm not sure I have anything useful, or especially interesting, to say about it. On the topics I normally go for, I may get things wrong, but if I do get them wrong, I hope I do it with dignity, based on having some knowledge and understanding of what I am talking about. Now when it comes to Russia, I have to admit I am lost from the start. Apart from the obvious detail that we should all now be able to see very clearly - that it is easier to undo than to remake - I'm not sure where to start. My population thesis perhaps: I can see no good future in front of a country about to lose approximately one third of its population. This means, I am afraid decline and decadence. Then there is the whole of Russian history, and the absence of any important democratic tradition. Then there is the growth of organised crime and corruption which certainly seems to have blossomed from at least the sixtees onwards. The corrupting effect of many years of having an official ideology that everyone professed publicly, and no one believed in privately, seems certainly to have left its mark. The problem is, having something so manifestly unstable running all along our European borders isn't exactly funny. Political - and military - instability seems guaranteed. And Russia may be becoming poor, but the presence of so many natural resources means that, for some, there can be money like never before, and, as we've seen already in other parts of the planet, this combination is not exactly a desireable one.

The Guardian has a fairly reasonable take on the political side, while the Financial Times attempts to offer a more or less 'orderly' interpretation: the principal problem is one of concern about the future of property rights:

Russian financial markets reacted with alarm on Thursday to news that the government had impounded 44 per cent of shares in Yukos. The Russian stock market fell 8.1 per cent, bringing losses since the arrest of Mikhail Khodorkovsky, Yukos' major shareholder, last weekend to 16.5 per cent. Shares in Yukos have fallen 25.8 per cent this week. The slide in share and bond prices comes just weeks after Moscow's stock market bettered the highs recorded before Russia's 1998 financial crisis. It also follows a move this month by Moody's Investors Service to raise the government's credit rating to investment grade, a development that opened Russian financial markets to a new class of international investors. Moody's said the conflict between the authorities and Russia's biggest company did not constitute grounds for a change in its Baa3 credit rating or stable outlook for the sovereign debt. The agency, instead, emphasised Russia's robust public finances.

Jonathan Schiffer, lead analyst for Russia, said: "To service the government's traded debt - about $40bn - in the next three to four years will take no more than 3-6 per cent of the central government's revenues. We consider this to be an investment grade risk."The seizure of Mr Khodorkovsky's shares yesterday, pending criminal investigations, raised fears over property rights and the potential for revisions in the privatisations of state assets in the 1990s.

Philip Poole, head of emerging market research at ING Financial Markets, said: "The question is whether this will become a general redistribution by the Kremlin. The key point is that so far this hasn't been extended beyond Yukos and Khodorkovsky." Yukos is the biggest Russian company by market capitalisation and trading in its shares regularly accounts for about one third of the market's trading volume. Trading in the international bonds of Russian companies was reduced to a trickle as uncertainty about property rights prompted investors to withdraw from the market.

Prices for the government's international bonds also fell, albeit less severely, given Russia's strong public finances and a widespread perception that the conflict between the authorities and Yukos would be contained. The rouble, however, hardly moved - because of intervention by the central bank to support it. Thursday's developments took the markets by surprise, considering that equity prices had recovered some of the losses sustained immediately following Mr Khodorkovsky's arrest. Dominique Audin, senior investment manager at Pictet, Swiss fund manager, said: "It appears to be a lot worse than people were expecting."
Source: Financial Times

Pushing the boat a little further out: according to a press commentary roundup by Radio Free Europe

Writing in "The Times" of London, Anatole Kaletsky asks: "Is Russia moving back towards some form of Stalinist dictatorship? Or is the transition from communism to capitalism now irreversible?" Kaletsky says both options may very well be true. Russia "probably is reverting to an authoritarian society," in which the president and his supporters "keep a tight rein on political activity, as well as maintaining a monopoly on power."

While some observers have expressed concern this trend might frighten away foreign investment and undermine Russia's economic growth, Kaletsky says it probably will not cause major problems for the Russian economy. The "idealistic linkage [between] free markets and 'free peoples' was never more than a rhetorical device," employed by Cold War-era Western leaders like former British Prime Minister Margaret Thatcher and U.S. President Ronald Reagan.

"To judge by recent events, Russia may well turn its back on the experiment with democracy initiated by [former Soviet Premier] Mikhail Gorbachev." But Kaletsky says, "even if this happens, there is no reason that its economy should suffer or Western investors take fright." The real concern is not Russia's economy "but its political development and its pro-Western orientation." Putin "may want to make Russia an orderly one-party state by taking control of the media and making sure that concentrations of wealth are not transformed into rival centers of power." Moreover, his former KGB cronies, the "siloviki," have been nudging him away from his Westward path. "In the end," writes Kaletsky, "it comes down [to] whether the Russian state can tolerate political independence."

while a rather interesting point of view is expressed in the Moscow Times by Dmitrii Furman of the Institute of Europe and the Russian Academy of Sciences

In a contribution to "The Moscow Times," Dmitrii Furman of the Institute of Europe and the Russian Academy of Sciences says recent strong-arm moves by Russian President Vladimir Putin actually betray the weakness of the presidency and not its growing strength.

The continuing territorial dispute with Ukraine over the island of Tuzla in the Kerch Strait, which connects the Aral and Black seas, may have begun based on a unilateral decision by a provincial governor. Krasnodar Krai Governor Aleksandr Tkachev claims it was his decision to begin building the dam to reconnect the island, which is Ukrainian territory, to the Russian mainland. Furman says, "One thing is clear: A major foreign policy decision, which nearly brought Russia to the brink of war with a neighboring country, was made not by the president but by a provincial governor." Tkachev "obviously isn't worried. And Vladimir Putin is staying mum." After the Khodorkovskii arrest, the public looked to Putin to take a stand. But aside from vague murmurings about everyone being "equal before the law," Putin did not have much to offer. "This is not how a leader behaves when he possesses real power," Furman says. He writes: "Putin's actions in the last week cannot be explained away as confusion or the result of his conflicting ambitions. His behavior reveals weakness, pure and simple." Putin is now an "extremely cautious leader who depends excessively on his supporters."

So what actually is going on. Well take your pick, I'm sure your guess is as good as mine. But one thing certainly does continue to puzzle me: why is it that our central bankers, like Duisenberg and Greenspan, have formed the opinion that global political conditions are somehow much more stable than they were last April?

Thursday, October 30, 2003

US Growth at Stongest Quarterly Rate Since 1984

An annual rate of 7.2% during the last quarter, that's quite a pace. Which makes the earlier lack of jobs growth even more mysterious. The numbers are down again this week, but it's still a crawl. Also, I have a feeling that some of Bush's strongest critics kinda stitched-themselves-up by blowing too hard on the lack of front-loading on the stimulus package. Between the war and the tax cheques (and the 1% interest rate) the US economy has been getting a hell of a stimulus kick: the big question now is can this be sustained. At this rate obviously not, but at a more modest 3-4%, only time will tell.

The economy grew at a scorching 7.2 percent annual rate in the third quarter in the strongest pace in nearly two decades. Consumers spent with abandon and businesses ramped up investment, compelling new evidence of an economic resurgence. The increase in gross domestic product, the broadest measure of the economy's performance, in the July-September quarter was more than double the 3.3 percent rate registered in the second quarter, the Commerce Department reported Thursday.

The 7.2 percent pace marked the best showing since the first quarter of 1984. It exceeded analysts' forecasts for a 6 percent growth rate for third-quarter GDP, which measures the value of all goods and services produced within the United States. The economy's recovery from the 2001 recession has resembled the side of a jagged cliff; a quarter of strength often has been followed by a quarter of weakness. But analysts are saying that pattern could be broken, considering increasing signs the economy finally has shaken its lethargy and is perking up.
Source: Yahoo News

The Jury is Still Out

Following my post on sleeping-late-in-Denver yesterday, Joerg is in the mailbox, and asking some pointed questions:

I sure knew I would get to read something like that. What´s it with tough-talking conservatives? Stoiber just told the unions that he shares their opposition against raising the retirement age. Remember the deal the dockers got in the U.S. - after all the posturing by Bush? An increase of more than 20 000 $ in yearly pensions? Granted - previously they had been meagre. But that was really enormous and unprecedented.

And then there is a lot of reductions in weekly hours taking place in private industry. 30-hour week at Opel. A similar offer from Deutsche Telekom to the unions. 4-day workweek at health insurance organizations. But postmen are asked to work an additional eight hours per week.

It´s ridiculous. U.S. unions should ask for more leisure time, and the German ones for money. But they are not the driving force in this development - management is. Disposable income is stagnant or shrinking in both the U.S.and Germany, but in the U.S. the effect is mainly felt by the newly unemployed and an enormous number of temp workers, whereas here it is spread out more evenly.

Meanwhile, Prof. Sinn is once again calling for lengthening the workweek. He seems to be on a mental trip to Baghdad - a place where you have difficulty making phonecalls, getting your car repaired or your illnesses treated.

I am looking at public choice theory in an attempt to make sense of it all. I am seeing more and more evidence of what I would like to call the "lump of structural reform"-fallacy. There is no need to lengthen the workweek - but by calling for it, acceptance of pension reform may have been diminished. Another constraint on structural reform obviously is
that the political decision-making process is itself in need of reform - and may not be able to produce positive outcomes until it has undergone significant change. (But my view of this problem is probably very different from yours - I think that more consensus-oriented countries are actually at an advantage here. To me, it seems likely that the
deteriorating political culture in the U.S. is a major handicap. I am reminded of Weimar. To be sure, there are no street fights - but you wouldn´t expect those in the country of 8-hours-per-day-TV, would you? I would also like to point out that post-crash Japan didn´t go through the equivalent of America´s Great Depression. The jury is still out on how America is going to cope with its own millennial crash. Even if Bush´s deficit spending begets a boomlet, it might still turn out to be short-lived - like the one Roosevelt engineered.)

Anyone Feeling Competitive?

I'm not sure how much deep-down importance to place on this list. It is interesting none-the-less. I mean Finland at the top and Italy at 41, seems reasonable to me. Some people, I imagine, will want to quibble a bit about the other postions in the ranking:

Finland is the world's most competitive economy followed by the United States, Sweden, Denmark and Taiwan, according to a Global Competitiveness Report released on Thursday. Britain dropped four places to 15th and Canada fell off 2002's top 10 list to stand 16th, both penalized for declines in the quality of their public institutions, the Geneva-based World Economic Forum (news - web sites) said in a survey of 102 countries.

The survey among business leaders measured economic competitiveness based on a combination of technology, the quality of public institutions and the macroeconomic environment. Finland, home to mobile phone giant Nokia (news - web sites), remained in first place. The United States scored high on technology but weak on the quality of its public institutions and economic environment, particularly public finances, where it ranked 50th. Germany moved up one notch to 13th and France gained two places to 26th. The WEF said both countries showed improvements driven by better public institutions and technology, despite budgets troubles.

"If there is one lesson from our exercise, it is that the strength and coherence of government policies have an enormous bearing on a country's ranking," Augusto Lopez-Claros, chief economist of the WEF, said in a statement. Italy is the lowest ranked European Union member 41st, down from last year's place at 33. Taiwan and Singapore are Asia's best performing countries. Each moved up one place, with Taiwan rising into fifth place due to its technology strengths, and Singapore into sixth place because of a sound economy and quality of public institutions.
Source: Yahoo News

Truckloads of Soybeans

I've been down for the morning with one of those pesky server outages. Meanwhile stephen has been back to me with some more info on the soya bean situation in Brazil:

Just a quick comment to say, "nice find" about the soybeans piece in Brazil. The reality on the ground is truly spectacular. When I lived in Curitiba, we were about 100 km from the port of Paranaguá, mentioned in the article. The truckloads of soybeans would be queued up for more than that distance (110-130km) waiting to get onto the scales and unload. When you drive past km after km of trucks full of soybeans every day for several weeks, you can start to imagine how big the Brazilian crop is. It was little wonder, given the prices received and the exchange rate at planting, that there was a powerful move to get the crop to market, and also little wonder this brought the R$ back up from nearly R$4 to below R$3 to the dollar.

Where I was working, people said that the R$ was undervalued and that it would recover. The sceptic in me said, "no way, this never happens!", and then it did. Lately it seems that the R$ has decoupled just a bit more from the $, such that the weak dollar globally has meant a stronger R$. This past week has seen us below R$2.90 consistently, which is back around the rate I received when I first came to Brazil in July of 2002.

Wednesday, October 29, 2003

The Problem of Having to Sleep-in Late?

Going back to the topic of the 'baby boomers', John from Denver has sent me this interesting reflection on the coming structural problems which will be produced by so much retirement. Plus the disconnect between the social and the private: corpoartions/institutions take one view, government think-tanks another. Aren't we all supposed to be working longer? Any more thoughts anyone?

However weird California seems, the revenue collections for Colorado now show a definite upward trend. For now.

Unemployment shows no sign of improving, in fact we are probably due for a couple more +1,000 job loss situations in some of the local IT shops before Christmas. But internal to my organization we have come to the conclusion we will not have to cut any more people, and plan on hiring around 5 (for a 5% staff increase), after New Years'.

Significant to your thesis, we are now waking up to a major problem within two years. Because of a mix of incompetence, grand-standing, pandering to special interests, etc. it has been possible for State employees to use their own funds to buy credit for additional years of service in the State retirement system. In fact, it was financially favorable to do so, up until last December, when the pension system management board decided to force the retirement plan to increase the cost. The purchase option wasmodified to increase the cost of purchasing additional years by 50%, withthe date of implementation Nov. 1, 2003.

This has resulted in a stampede of people buying additional time before the deadline. Thousands of state government workers (of an eligible population of 28,000) have bought nearly enough or more to retire, now. In my own case I went from having nine years of service credit, with eleven years of work life remaining, to having twenty years of service credit, and being pension eligible, now (unfortunately, I have my own contributions to future demographics enrolled at two different universities and a wife that would kill me if I retired eleven years before her) I've been working full-time since I was 17, knowing now that the worst that could happen if I lost my job is that I would have to sleep late does funny things to your head - is this what it's like to be rich?

In the last month we have realized we will lose over 50% of our staff within three years, and I am hearing reports of the same thing from all over. I'm a technical manager with +30 years of experience, and pretty typical for my group. All of my peers at my level plan on leaving within no more than five years. Only one of the managers at the next level up will be around for even that long, so in the managerial ranks we will see 70% - 80% turnover in five years. Within our programming group we will lose 50% within two years. On it goes, for health workers, financial analysts, criminalinvestigators, welfare workers, etc.

Mergers are Back in Fashion

This seems worthy to be sitting up and taking note of. Not only for the mergers and acquisitions increase we are seeing (and even looming IPO's: Google) but also for the data on new IT investment and business process outsourcing which will follow on the merger: this is exactly what 'restructuring' is.

The proposed acquisition of FleetBoston Financial Corp. by Bank of America Corp. blends economy-of-scale savings with an ambition to push the envelope in technology. Like Lewis and Clark two centuries ago, the companies seem intent on charting a trail across the North American landscape. With combined assets of about $930 billion, second only to Citigroup Inc., the company that would be created by the deal, announced Monday, continues a trend that began five years ago with deals that created Citigroup, Wachovia, J.P. Morgan Chase, and the present Bank of America. The banks hope to complete the deal in the first half of next year, although regulators from Connecticut and Massachusetts have said they will keep a close eye on it. The new Bank of America would have operations spanning the continent. It would claim 9.8% of bank deposits in the United States and will be among the three largest banks in 21 of the 29 states in which it does business. The entity is "only a stone's throw from the national franchise that the banking industry has been waiting for," says Bill Bradway, an analyst with Financial Insights..................

The game plan disclosed by the companies will generate more than $1 billion in cost savings by eliminating redundant systems, combining data centers, and other efficiency gains. The companies spend a combined $3.6 billion a year on IT. A chunk of those savings will be plowed into strategic investments, company officials say...............The deal comes at a time of renewed vigor in IT investment by banks. According to a report released Monday by the American Bankers Association and TowerGroup, technology investments by U.S. banks are trending away from short-term cost reduction toward longer-range objectives. Investment in branch renewal remains strong, the report says, redeeming the faith banks placed in their bricks-and-mortar assets at the height of the dot-com boom. Among banks with assets greater than $20 billion, technology spending is projected to grow at a 4.5% clip in 2004, up from this year's 4.0% growth rate. Spending on business-process outsourcing is expected to grow 28% next year, while software spending is expected to grow 9.4%. The highest IT priority is customer-relationship-management, according to the ABA/TowerGroup report. The top five technology infrastructure priorities are replacing communications networks, PC and server upgrades, mainframe upgrades, and operations center improvements. Virus protection and intrusion-detection software are also high on the hit parade.
Source: Information Week

The Costs of Adjustment

Eddie's up again on the Straits Times. Maybe the real 'Singapore Issues' seem a bit parochial to some. I think that would be an unwise conclusion: the rest of the OECD have a lot they can learn from what is happening in the 'Asian Tigers' right now, especially Hong Kong, Singapore, Taiwan.

The mixed fruits of growth
By Eddie Lee

THERE is much to cheer about. Last month's 26 per cent leap in non-oil domestic exports was, as the headlines indicated, at boomtime levels.However, one economist expressed reservations. Mr Song Seng Wun, from G.K. Goh Research, told the AFP news agency: 'Our concern is with the quality of the numbers. If they are all coming from the pharmaceuticals sector, how many people will benefit?' There is irony in the observation. It is generally acknowledged that Singapore cannot compete on labour-intensive exports, and has to move up the value chain. This is where the chemicals and chemical products industry matters. In terms of value-added, a worker in the chemicals industry is equivalent to about four in the electronics industry. Last year, value-added per worker in the chemicals sector was a whopping $475,000 compared with just $133,000 in the electronics industry, and $110,000 in the manufacturing sector on average.

So surely rapid growth in the chemicals sector is what we want to see. It didn't disappoint. Shipment of pharmaceutical products last month was truly breathtaking. Exports jumped 144 per cent, led by robust growth in the United States and European Union markets. There is more to come. Merck, the No. 2 US drug maker, opened a new factory in Singapore this month to make a cholesterol-lowering drug. Mr Paul Martino, managing director of its manufacturing operations here, told Bloomberg: 'Our plant is busy producing and we're running at good capacity.' Besides Merck, major players like GlaxoSmithKline, Aventis, Schering-Plough and Pfizer have all based their global manufacturing facilities in Singapore. Weren't we once concerned that the manufacturing industry was too dependent on the electronics industry? That's no longer the case.

The chemicals industry has grown so rapidly, it now accounts for almost a quarter of value-added in the manufacturing sector, up from just 9 per cent in 1995. In contrast, the electronics industry's share of manufacturing dropped to about one-third from about half three years ago. Tomorrow will mark another milestone in the development of the manufacturing sector, with the opening of the $500-million Biopolis to spearhead biomedical research. The Novartis Institute of Tropical Diseases has already booked space there to research tuberculosis and dengue fever. But Mr Song is right to have reservations. He is concerned about the trickle-down effect of last month's figures - or rather the lack of.

Last year, a 40 per cent leap in chemicals output failed to have any sizeable impact on the number of jobs. It sure didn't feel like boomtime. The chemicals sector accounted for a quarter of value-added in manufacturing, but employed just 5 per cent of its workers. Put another way, the chemicals industry can generate $1 million in value-added from employing one worker. That $1 million would require 7.5 workers in the electronics industry. The point to be made here is it is not so much whether growth in the chemicals sector is good or bad - surely it must be good - but who gains and who bears the cost.

For the Biopolis project, the red carpet is being laid out. Mr Philip Yeo, chairman of the Agency for Science, Technology and Research (A*Star), said all resources will be made available to do serious research. There will be libraries, laboratories, state-of-the-art equipment, cafes and shops. To feed Biopolis with talent, A*Star's first batch of local graduate scholars will complete their PhD in 2009. Mr Yeo said: 'We will build a future for them.' However, if you're looking for assembly jobs in the consumer electronics industry, call China. Many of the jobs lost stay lost. Workers may retrain but still face a lack of available jobs.

The unfortunate reality is the workplace is changing, even as investment in education and training increases. For the worker, adjustment costs escalate at a time when his bargaining power in the labour market has diminished. Should displaced workers, for example, bear the full brunt of the loss of income? They can be compensated out of gains from the new growth industries to ensure that they earn a 'decent' living. This would probably involve some form of income distribution, requiring a willingness to be taxed and have transfers made on the part of those who benefit. But care must be made to ensure that the tax system does not overly discourage effort.

The Government may need to resume its role as employer of last resort. The so-called third sector offers the best hope of absorbing seriously displaced workers. These are jobs in largely non-profit activities that range from social services to health care, education and the arts, and civic and religious organisations. If we are to make a smooth transition in response to the inevitable structural changes in the economy, we have to find a way to ensure that benefits from restructuring flow to all. For many workers, adjustment costs are real. They cannot be ignored, for they are large and concentrated on the most vulnerable section of society.
Source: Straits Times

China: Raw Material Impacts I

OK I've got the 'China Impact' safely up on the radar. Anyone with anything interesting to contribute, please forward. Today it's the mining group BHP Billiton:

BHP Billiton, the world's biggest diversified mining group, gave a relatively upbeat outlook for its main commodity markets and said strong demand from China was underpinning volume growth in a number of areas. In its first-quarter results announcement on Wednesday morning, the Melbourne-based group said sales to China's booming economy had grown at an annualised rate of about 50 per cent in the three months to September after rising 126 per cent last year. Chris Lynch, chief financial officer, said Chinese growth was contributing to "very strong demand" for iron ore and coal - a commodity that China recently began importing in large volumes - and to "strong demand" for aluminium and alumina. He said China had also been a factor in the group's decision to bring back its Escondida copper mine in Chile to full production from January, a move that would increase output by 200,000 tonnes a year. The Anglo-Australian group reduced output by as much as 10 per cent over the past two years in a bid to help stem the fall in copper prices.
Source: Financial Times

Tuesday, October 28, 2003

Brazilian Debt: Moving Off the Radar Screens?

Morgan Stanleys Gray Newman - the analyst who called the Argentina 'tipping factors' better than anyone I saw - giving the second round of good news today. Obviously the public borrowing needs careful watching and controlling, but it is interesting to watch how these economies seem to be making a transition to a positive feedback dynamic:

It is remarkable how little is written nowadays on Brazil’s debt situation. Just one year ago, investors focused almost exclusively on debt-sustainability models, which were proffered as evidence that default or capital controls were inevitable. We objected to the “inevitability” thesis (see “Brazil: It’s Not Inevitable” in the Global Economic Forum, June 18, 2002), but still spent the bulk of our time working through the vulnerability that Brazil’s domestic and external public debt both represented, as well as the risks arising from the amortization of private external debt. In contrast, today most of the focus by Brazil watchers is on the timing, the breadth, and the sustainability of a recovery in economic activity.

Given how quickly Brazil’s debt situation has moved off the radar screens of many observers and how important it was a little less than a year ago, we thought it would be worthwhile to review the nature of Brazil’s debt today and highlight potential concerns during the coming 12-18 months. Our conclusion is that despite a potentially disturbing headline number expected in late October on the debt-to-GDP ratio, Brazil is making progress on both the public and private debt fronts. Still, we are cautious about extrapolating from the “virtuous circle” we are seeing in 2003 and likely to see in 2004. Ultimately, more thought should be given to even more rapid debt reduction, perhaps even by unconventional means.................

Brazil’s debt profile is likely to benefit from “overshooting” in 2004 as the virtuous circle of lower interest rates, better prospects for economic growth, and a strong currency replace the vicious circle of higher interest rates, worsened prospects for economic growth, and a weaker currency seen in 2002. Brazil watchers, however, should be careful about extrapolating too much from either 2002 or 2004. Ultimately, only a commitment to prudent fiscal and monetary policy, with further advances on the reform front, can reduce the risks that Brazil’s debt profile poses to its economy.
Source: MS Global Economic Forum

Turkey's Quiet Productivity Revolution

Most commentators are pretty 'bullish' on China and India these days, so as well as the obvious cases, I'm trying to pick some other 'revelation' economies. On my short list: Thailand, Turkey and Brazil. Here's the first of two articles bringing some good news for a change:

The Turkish economy has been enjoying a vigorous rebound. After the great recession that resulted in a sharp break in economic performance and lowered real gross domestic product by 7.5% in 2001, the Turkish economy is once again picking up steam. Real GDP rose by 7.8% last year and 5.8% in the first half of this year. We may indeed be witnessing a paradigm shift triggered by fundamental changes, such as political consolidation and wide-ranging economic and institutional reforms. In our opinion, improving macroeconomic outlook and reforms required for the EU accession process are increasing the country’s potential growth rate. Though the realisation of full potential on a sustainable basis requires productivity-enhancing microeconomic adjustment, we are seeing early, but encouraging signs of a true turnaround.

The surge in productivity growth in recent years supports our positive assessment. As Paul Krugman once remarked, “Productivity isn’t everything, but in the long run, it is almost everything.” There is a discernible improvement in Turkey’s rate of productivity growth the single most important indicator of any nation’s economic performance. Output per worker has increased by 25.8% after the 2001 crisis, and total factor productivity, which reflects increases in productivity due to technological improvements, accelerated from an average of 0.5% in the 1990s to 4.7% in the last two years. In our view, the growth of labour productivity, which surged from less than 4% a year over the previous decade to an annual rate of 8.5%, is a case in point that the Turkish economy is gradually entering a new era with a higher potential growth rate.
Source: Serhan Cevik, MS Global Economic Forum

Asia at the Crossroads

Stephen Roach yesterday, on a topic you've been hearing quite a bit about recently at Bonoboland:

Asia’s wrenching financial crisis of 1997-98 marked a critical turning point for the region that we are only now beginning to understand. The ascendancy of China is the most obvious and important hallmark of the post-crisis era. But the awakening of India is not without potentially profound implications as well. The road has been considerably rougher for the so-called newly industrialized economies of Asia -- Korea, Singapore, Taiwan, and Hong Kong. Meanwhile, Japan has languished in its post-bubble malaise. The balance of economic power is in the process of shifting in Asia. Old Asia is floundering and a New Asia is emerging. That poses profound challenges for the region and for the broader global economy.

Relative growth disparities between New and Old Asia leave little doubt as to the shifting sources of regional economic growth. Since 1990, China’s economy has tripled in size in real terms, while India’s has doubled. Over the same period, 1990 to 2003, the Japanese economy has increased by only 15%. The math of economic development obviously makes it much easier for poor countries to grow far more rapidly than rich ones. Yet China and India still have a long way to go in catching up with Japan. While convergence in overall GDP terms could occur at some point in the next 20-30 years, on a per capita basis -- the most relevant comparison in terms of living standards -- it will take considerably longer. In 2002, real output per capita in Japan was still about 40 times greater than in China and nearly 100 times that of India. Based on an extrapolation of recent trends -- an heroic assumption, to be sure -- Chinese convergence with Japan in per capita terms is unlikely for another 40-50 years; in the case of India, it could take considerably longer.

Outsourcing itself is not the breakthrough. Offshore production options through normal trade channels have been around for decades. What’s new is the breadth and depth of such platforms. What’s also new is the Internet -- the means by which these platforms can now be connected to globalized distribution systems. Moreover, there’s also a new urgency to such outsourcing, driven by the heightened imperatives of cost-control. Lacking in pricing leverage and awash in excess capacity, companies in the high-cost developed world have made the global labor arbitrage a key tactic of competitive survival. In manufacturing, this manifests itself in the form of a massive wave of foreign direct investment into China; FDI into China hit $53 billion in 2002, making it the largest recipient of such flows in the world. In services, the Internet has been the ultimate enabler of technology diffusion and knowledge-based output -- central to new global platforms that open the door to vast legions of low-wage white-collar workers. Courtesy of the global labor arbitrage, the growing role of China and India arises out of shared necessity -- theirs as well as ours.

Nor is there really any effective limit to what the Chinas and Indias of the world can offer up as cost-effective substitutes to the high-wage developed world. Both nations, which collectively account for nearly 40% of the world’s population, have the functional equivalent of infinite supplies of excess labor. China has an urban workforce that amounts to about 400 million, and in India the nonagricultural workforce is estimated at 167 million. Both of these vast nations, of course, still have a large portion of economic activity tied up in traditional agriculture -- 15% of total value added in the case of China and 25% for India. At the same time, they also suffer from a huge deficiency in agricultural productivity; US farm workers, for example, are more than 125 times more productive than their Indian counterparts and 150 times more productive than those in China, according to the World Bank. In many respects, that only enhances the pipeline of candidates for the global labor arbitrage. As agricultural productivity rises and farm workers are displaced, the expansion of low-cost labor pools available for outsourcing platforms has no end in sight.

Wage comparisons are the obvious icing on the cake for the global labor arbitrage: Over the 1995-99 period, World Bank data put Chinese manufacturing labor costs on a per worker basis at about 2.5% of those in Japan and the United States; for India, the ratio works out closer to 4%. Moreover, China’s labor costs are only a small fraction of those in the newly industrialized Asian economies -- 3.5% of those in Singapore and 7% of those in Korea and Hong Kong. Not surprisingly, these wage differentials match up with comparable economy-wide productivity disparities. But that’s precisely the point: Outsourcing platforms are high-performance pockets in low-wage, low-productivity economies such as China and India. Foreign-funded subsidiaries in China now employ some 3.5 million workers, up more than 3.5 times over the past decade; the number is double that if subsidiaries funded in Hong Kong, Taiwan, and Macao are included. Similar trends are evident in services outsourcing. India currently employs about 650,000 professionals in IT services, a figure that is expected to more than triple over the next five years, according to one study (see The IT Industry in India: Strategic Review 2002, published by India’s National Association of Software & Service Companies with McKinsey & Co.). Courtesy of the global labor arbitrage, increasingly well-educated work forces in both countries have become agents of dramatic change in Asia and the broader global economy. Barring a breakdown in trade liberalization and globalization, all this paints a rapidly changing picture of Asia.
Source: Morgan Stanley Global Economic Forum

Google for Books

Another fascinating piece about Amazon's new book search facility. I have been checking this out over the weekend, and it really is interesting. One tip: go to the index first. Then select the topics which interest you and run a search. Eg: I was looking at something about meat eating and evolution, so I tried 'brain'. Fantastic. I suspect that this will help to sell books in most cases, since the same argument applies to the book as applies to software: you don't know what you're missing till you have a try! But there is that other little sub-divide: those who read directly online and those who run printouts. My feeling is that the on-screen readers are still a very very small minority, so we get to be the 'free riders' in what will otherwise probably be a very worthwhile commercial experiment. My book purchasing habits will definitely change: check this space a year from now to find out how.

Call it a Google for books: Amazon's latest feature allows readers to search millions of pages online to browse before they buy. The question now is whether they will buy after they browse.

The nimble search engine unveiled by mammoth online retailer Amazon.com makes 120,000 of its books -- or 33 million pages -- fully searchable for free. When the reader types in a word or phrase, the ``Search Inside the Book'' technology will call up every reference in each book, along with the page numbers. Readers can also call up the two pages before and after, if they sign in and provide a credit card number, which is not charged unless they buy. The feature is already drawing rave reviews from librarians and researchers. "This is a really great feature for the public,'' said Mary McGrath, librarian at the Redwood City Public Library. ``It crosses over into being a real reference tool. Definitely a value add.'' For the reader, at least. Many bricks-and-mortar book stores are mixed about the effect on their sales.

Amazon said it has gained permission from more than 190 publishers to scan their books for use in the search engine. Some publishers are concerned that users will gain too much access to copyrighted text, and it will discourage sales, especially in non-fiction. "If you're only looking for hotels in Beijing that serve hamburgers, and you can find that information by browsing the books on Amazon, then you don't need to buy the book,'' said Karen Pennington, retail director at Menlo Park's Kepler's Books and Magazines. With fiction, Pennington notes, "Online is not the best place to read a novel.'' Calling up several pages from a book can give you a sense of the writer's style, but the electronic format and the limited number of pages make it quite distinct from having the whole book in your hands, she said.

Some publishers are letting Amazon include a limited number of books in the search program. The University of California Press provides 2,000 titles, out of a possible 4,000, to Amazon for the search. The university press denied Amazon the right to access many reference books, as well as books of poetry. "Often an entire poem is on one page,'' said Laura Driussi, assistant marketing director for the University of California Press. "Making that available would deprive the poet of the royalties for the poem.'' However, the feature could also work to UC's benefit, Driussi said. Amazon helps bring attention to books that otherwise don't receive much publicity, she said, and so can only help sales of such books. Readers may now find key words or phrases hidden deep inside books they'd never thought of looking at before. Among some safeguards to encourage buying, Amazon agreed to shut down a customer's access to a book after they scan more than 20 percent of a book in any given month, Driussi said. Also, reference pages cannot be copied or downloaded, although they can be read on-screen and printed.

Amazon is being cagey about its formula for ranking books. Steve Kessel, vice president of Amazon's media group, said only that Amazon would take into account whether a search term is contained in the title or author of a book. The ranking would also take into consideration the number of times a search term appears, and how close the words appear together to each other in proximity, Kessel said. Kessel would not comment on whether price or popularity played a role in rankings. In one test of the feature, the Mercury News searched for ``King James Bible.'' The first four results were King James versions of the bible, with the most expensive one -- for $24 -- coming first. Date or sales ranking didn't seem to play a big role. The technology is the brainchild of Udi Manber, Amazon's search technology guru. His title is chief algorithm officer, and his role is to set the mathematical formula for how results are ranked. "That's our secret sauce, that's the crown jewels,'' he said.

Manber said the company has been busy scanning book texts all summer, but that now that the product has been launched, his technological challenge is over. He said the ``Search Inside the Book'' feature will be expanded in coming months, but did not specify how. He will now focus on launching another Amazon search engine product, this one more similar to the much-hyped search engine Google. The product will be run by a separate company -- owned by Amazon -- called A9 and based in Palo Alto. However, Manber said it is still too early to say exactly what the product's mission will be. He said he is not ruling out competing with Google, but stressed that such competition is not his ``purpose'' for now.
Source: Silicon Valley.Com

"Soybeans are the currency.''

Following my series of posts on the raw-materials impact of Chinese growth, this news from Bloomberg about the soybean impact in Brazil and Argentina is very much to the point. Even though it's long I'm posting the article in full in case the link goes dead. It's the story that has everything: the distorting impact of super-rapid growth from a giant, the ecological impact in Amazonia, genetically modified foods, industrial agriculture, subsidies, our move up the food chain. It's all there. Incredible! Thoughts please.

Vicente Luiz Costa Beber cleared 700 hectares (1,729 acres) of tropical scrub on the edge of Brazil's Amazon to double the size of his soybean farm in five years. This month, he is planting an additional 250 hectares on farms bought from neighbors, encouraged by surging demand from China and the highest prices in six years. "I can sell anything I plant, and that's hard to pass up,'' Beber, 42, said in an interview at his farm in Nova Mutum in Brazil's Mato Grosso state. Farmers from Brazil's rain forests to Argentina's pampas doubled soybean production since 1997 as China boosted soybean imports more than five-fold. At the same time, a shortage of suitable land restricted expansion in the U.S., the world's biggest soybean producer, to 2.2 percent. The U.S. predicts Brazil will surpass it as the No. 1 exporter in 2004. The growth in soybean production in Brazil, where farmers this year increased plantings by an area the size of Israel, means agriculture and related businesses now account for 29 percent of gross domestic product, 46 percent of exports and more than a third of jobs, according to government figures. While the expansion helped boost Brazil's trade surplus and the real to strengthen 24 percent against the dollar, it also makes South America's biggest economy vulnerable to declines in global prices and demand for soybeans, said Zeina Latif, an economist at HSBC Holdings Plc's Brazilian unit in Sao Paulo. "It's a problem for Brazil,'' Latif said in an interview.

On Thursday, Brazil said foreign sales of soybeans will reach $8 billion, or 13 percent of exports, this year and probably rise to at least $8.8 billion 2004. In Argentina, expansion in soybeans accounted for a fifth of the country's 7.6 percent economic growth in the first nine months, according to Luis Secco y Asociados, a Buenos Aires research firm. The boom also boosted revenue of Bunge Ltd., Cargill Inc. and other companies that trade and process soybeans in the two countries. China, which expects to boost soybean imports 10 percent to 22 million metric tons in 2003, on Wednesday bought 454,000 tons of U.S. beans, pushing soy futures prices in Chicago to their highest in more than six years. China's purchases and a drought in the U.S., where this year's harvest is the smallest since 1996, have boosted prices 47 percent since the end of July. China, whose economy is growing at an annual rate of 9.1 percent a year, needs soybeans to produce meal that fattens livestock and oil used to make processed foods such as potato chips and margarine. Soybeans, cultivated in China as far back as 1000 B.C., were introduced in Europe and the U.S. in the 19th century.

"As Chinese become richer they are moving up the food chain and consuming higher protein food, especially more animal protein,'' said Lester Brown, president and founder of Washington- based Earth Policy Institute. ``That requires ever-expanding imports of soybeans to produce soybean meal to supplement grain in livestock and poultry rations.'' Brazil and Argentina have become dependent on soybeans after a record $95 billion default by Argentina caused both nations' currencies to tumble. To achieve higher prices and greater access to world markets the two countries have made ending farm subsidies in the U.S. and Europe a deal-breaker in World Trade Organization talks to reduce barriers to investment, services and commerce. In Beber's town, soybeans lured so many workers that local officials are building three new schools and carving four boulevards leading to new housing developments. In Pergamino, a soybean farming town 300 kilometers (186 miles) north of Buenos Aires, Carlos Genoud's furniture factory, Pergamino Maderas SA, has a three-month backlog of orders from farmers flush with cash.

``This soybean boom has been like Christmas and the lottery wrapped into one,'' Genoud, president of Pergamino's chamber of commerce, said in an interview.

Bunge Ltd, the world's largest oilseed processor, has benefited from rising production, said Raul Padilla, who runs Bunge's business in Argentina. "The soybean boom in the region is very positive for Bunge,'' said Padilla. ``Given the huge interests we have, this allows us to maintain a high level of utilization of our crush capacity, helping reduce costs and maximize the return on our assets.'' Cargill Inc.'s public affairs director in Buenos Aires, Hugo Krajnc, declined to comment. The surge in soybean output has been helped by Monsanto Co.'s genetically modified seeds. In Argentina, 90 percent of the crop is from such seeds, which allow farmers to produce at lower cost by reducing the need for herbicides and increasing the amount of unspoiled soybeans.

In Brazil, President Luiz Inacio Lula da Silva in September waived a ban on the use of the Monsanto seeds and may ask the legislature to make it permanent. Currently, about 10 percent of the Brazilian crop is genetically modified, according to the Brazilian Agricultural and Cattle Farmers Confederation. Soybeans and their products now account for a quarter of Argentina's exports, up from 11 percent 10 years ago, generating foreign currency that helped increase central bank reserves by more than a quarter this year to $13.4 billion. It also helped the peso rise 18 percent against the dollar following last year's 70 percent depreciation of the Argentine currency. For Brazil, farming and agribusiness ``is the country's biggest industry by far,'' Agriculture Minister Roberto Rodrigues said in a speech to farm leaders in Rio de Janeiro on Oct. 21. "If it weren't for agriculture we could have had a recession,'' said HSBC's Latif.

For now, the boom is leading farmers from Para, Goias and other farming states to clear swaths of Amazon forest.

Mato Grosso Governor Blairo Maggi, who, with 113,000 hectares under cultivation, is himself the world's biggest soybean farmer, wants to build a highway from his state to a grain port in Santarem on the Amazon River to overcome what farmers say is the main obstacle to growth of Brazilian agriculture: the country's poor roads, railways and ports. Beber has to send soybeans by truck on a 2 1/2-day, 2,100- kilometer journey to the southern Atlantic port of Paranagua on a two-lane highway so riddled with potholes the size of bathtubs that he loses about 10 percent of each cargo along the way. Construction of the highway would make more of the Amazon vulnerable to deforestation, said Stephan Schwartzman, a Latin America specialist at Environmental Defense. In Acre and Rondonia states in the northwestern Amazon, for instance, farmers have cleared swaths of rain forest along highways to plant soybeans.

In their quest to increase output, Argentine farmers now grow soybeans in fields previously used for corn or cattle and even use patches of wasteland. The municipality of Pergamino is making extra money renting out highway shoulders farmers who want to plant more soybeans. "There isn't an inch of land that is not planted,'' Miguel Saadi, who runs a grain silo, said in an interview in Pergamino. As their soybean production expands, Brazil and Argentina are trying to force the U.S. and Europe to end agricultural subsidies they say reduce market prices and undermine the ability of developing countries to compete in world markets. World Trade Organization talks in Mexico collapsed last month after poor countries refused to discuss proposals to reduce barriers to investment and services such as banking unless the U.S. and European Union agreed to cut farm aid.

In talks to form a free-trade zone spanning the Americas, the U.S. this month accused Brazil of alienating other countries in the region by demanding an end to farm subsidies before negotiating lower barriers on services. Neither Argentina nor Brazil pays subsidies to soybean farmers, while the U.S. paid $671 million in soybean subsidies last year. In Argentina, the government taxes soybean exports 20 percent. "Argentina and Brazil are the most efficient soy production areas in the world,'' Bunge's Padilla said in an interview in Buenos Aires. ``Without the subsidies in the northern hemisphere, both countries could be getting even better prices.'' Beber, in Nova Mutum, produces an average 4.2 metric tons of soybeans per hectare (58 bushels per acre), almost double yields in the U.S., said Agmar Lima, Nova Mutum's agriculture secretary. ``And I do that though this land is really among the worst in the world,'' Beber said. Beber spreads 500 kilos (1,102 pounds) of fertilizer on each hectare of soybeans, a mix of minerals such as calcium and molybdenum that make the orange earth more productive. Like most Brazilian farmers, he plants without tilling the soil to preserve spent soy and corn stalks as organic fertilizer.

In towns such as Nova Mutum, soybeans dominate the economy so much that they have come to be considered as good as cash. The going price for a four-bedroom home with a pool in a new housing development on the edge of town is 10,000, 60-kilo bags of soybeans, each worth about $10. To buy a John Deere harvester, a farmer need only transfer 20,000 of the 60-kilo bags into the dealer's account at one of the silos on the edge of town. "Soybeans are the economy here,'' Lima said in an interview at the two-month-old town hall, which was built with a surge in tax revenue that resulted from rising soybean production. "People have forgotten the value of things in paper money,'' Lima said. "Soybeans are the currency.''
Source: Bloomberg

Monday, October 27, 2003

Disappearing Manufacturing Jobs: A Worldwide Phenomenon

Bloomberg's Caroline Baum re-iterates a fair point here. Manufacturing jobs aren't being stolen from anywhere, since technological change means that even with rising output employment is gowing down: globally. This is why there's no 'lump of labour' to share out. Of course this isn't quite the same thing as saying that articles which were previously made in the US are not now made in China (there is a little slight of hand somewhere here), but still, the reductions in China are impressive. This is why the global impact of China is still likely to be deflationary: all the surplus labour continues to exert downward pressure on wages. On the productivity numbers, we are bound to get the 'usual arguments' that always surround these, but please not the low (very low, and continuingly low) Italian performance:

Last month, in a Labor Day appeal to union workers, President George W. Bush announced the appointment of a new manufacturing czar. He could have saved himself the ridicule. The government doesn't create jobs; the private sector does. A domestic manufacturing czar isn't going to bring back the 2.6 million factory jobs lost on Bush's watch, or stanch the losses, when the problem is global in nature.

So while a figurehead czar will do far less damage than any of the protectionist measures wafting through the Capitol, it won't fix the problem. Manufacturing jobs are disappearing around the world, according to a recent study by Alliance Capital Management, reported in this column two weeks ago. No one is stealing jobs from us. Something -- productivity -- is. Nowhere are manufacturing jobs vanishing more rapidly than in China, the presumed villain in this tale. The study by Alliance's global economic research department, headed up by Joe Carson, created a flurry of interest when it was reported in the Wall Street Journal last week because the results were contrary to what was commonly believed. The Commerce Department, the Treasury, Federal Reserve District Banks, manufacturing trade associations (national and state), lobbyists and the media all wanted the results of the study. (Aren't some of these folks the ones who should be producing the data?)

Prompted by intense interest in what's quickly becoming the No. 1 myth (China is stealing our manufacturing jobs) and what could become the No. 1 problem (protectionist trade sanctions), Carson's group mined international industry data on manufacturing production workers (the folks who actually make things). The economists found that China is even less of a thief than previously thought.

The initial study found a decline of 16 million manufacturing jobs in China from 1995 through 2002. Further digging unearthed a total loss of 25 million. The initial finding of a 2 million increase in manufacturing jobs in China since 1999 morphed into a loss in every year since 1995. "All of China's 28 industry categories showed losses between 1995 and 2002,'' Carson says. ``Only two industries -- garments and electrical and telecom equipment -- experienced positive job growth since 1999.'' China's huge contraction in manufacturing jobs is largely the result of shuttering inefficient state-owned enterprises. Employment at SOEs, both manufacturing and non-manufacturing, fell by two-thirds since 1995, Carson says.

Employment in private enterprises has risen sharply as many workers from the defunct SOEs are absorbed. However, neither China's rapid economic growth -- 9.1 percent in the last year -- nor growing ``number of private sector enterprises has been large enough to offset the drop in factory jobs at state-owned enterprises,'' Carson says. ``Productivity is killing inefficient industries in China in the same way it is here.''

The results of the second Alliance study found more global manufacturing job losses than on first blush. Over 31 million manufacturing jobs vanished worldwide from 1995-2002, versus an initial estimate of 22 million. Factory employment declined in every year in the biggest 20 economies in the world and in almost every year in the three major regions (North America, non-Japan Asia and Europe).

Europe ranked No. 1 -- in terms of the fewest number of manufacturing job losses (2 percent) in the seven-year period of the study. No surprise there: The continent's rigid labor laws deny businesses the flexibility to fire workers during lean economic times.

When it comes to things that really matter, such as the standard of living (an outgrowth of productivity growth), Europe loses its star ranking, based on international comparisons of manufacturing productivity in 14 economies by the U.S. Bureau of Labor Statistics. While the BLS doesn't aggregate country data, Germany, Europe's largest economy, saw output per manufacturing hour increase an average 2.4 percent from 1995 to 2000 and less than 2 percent in 2001-2002. That compares with an average rise of 4.5 percent (1995-2000) and 3.4 percent (2001-2002) in the U.S. One European country, Sweden, topped the U.S. in manufacturing productivity growth, but its weighting isn't big enough to raise the European average by much.

Italy recorded average annual manufacturing productivity growth of less than 1 percent in the last seven years. The U.K. and the Netherlands got the booby prize in 2002 in the BLS comparison, with growth rates of 0.4 percent and 0.5 percent, respectively. Both countries had average annual manufacturing productivity growth of 2.5 percent in 1995-2000. Europe hasn't benefited from the innovations in information technology to the same extent as the U.S. in the past decade. Since the technology itself is available everywhere, the assumption is Europe's structural rigidities are to blame. Europe will have to liberalize its economy in order to reap the full benefits of productivity-enhancing equipment. If companies had more leeway to fire workers, shorten the workweek and cut generous benefits, maybe it would have been the bureaucrats in Brussels who dreamed up the idea of a manufacturing czar instead of President Bush.
Source: Bloomberg

A Very Powerful Finding

I'm looking out of a very grey window here in Barcelona, and into a very bleak panorama across the screen in Baghdad, but I'm sure others will comment on that. What I don't really know what to do with is this piece in the NYT about US citizens who want to buy cheaper prescription drugs from Canada. Something has got to give here, hasn't it? Singapore issues anyone?

Gov. Rod R. Blagojevich will ask the federal authorities to give Illinois special permission to buy its employees' prescription drugs from Canada because, he said Sunday, he now has evidence the move would be safe for consumers and would save the state more than 16 percent of its annual share of drug costs.

According to a report that Mr. Blagojevich plans to share with federal regulators and members of Congress on Monday, as much as $90.7 million a year could be saved if drugs for state employees and retired employees were bought across the border in Canada, where costs are regulated by the government. The state's share of that savings, $56.5 million, represents a significant chunk of the $340 million the state spent on drug costs last year, according to the study Mr. Blagojevich commissioned six weeks ago.

"It's undeniable that you can get drugs cheaper," the governor, a Democrat, said in an interview on Sunday. "The question is really safety, and the fact is that the study comes back and says that Canadian procedures for safety are comparable and sometimes even better. That's a very powerful finding."

Mr. Blagojevich's study is only the latest element in a growing political fight between state and local authorities, who hope drug imports could help rescue their budgets, and officials from the Food and Drug Administration and from the drug industry, who have opposed the idea, citing safety concerns and federal rules banning it.

It's the Services Stupid

Following up on the last post, and pushing as hard as I can, Dutch free-trader and China blogger Fons Tuinstra is going for this from much the same direction that I am. For those of you who don't read the fistful comments section (shame on you!) he has a couple of nice pieces on China itself:

"Yet another signal that China will be hitting the services in a hard way. McDonalds asked Leo Burnett China to do the commercial of their new slogan in a host of languages, writes the Far Eastern Economic Review today. (not for free available).The paper writes: "In McDonald's history, all of our creative direction was led by America. But we now said: "Let the best ideas win'," says Larry Light, the global chief marketing officer of McDonald's. And in a competition for pitches from ad firms from around the world, China came top with half a dozen ideas. The competitors even voted the China team the most imaginative of McDonald's global network."


"It's the services, you stupid!

While the US manufacturers keep on complaining about unfair competition from China, the real battle for jobs is taking place in the service sector, today again the HSBC shows. An article in the Wall Street Journal says that the banking conglomerate will shed 4,000 jobs in the UK over the next three years, because work is going to India, China and Malaysia. No low-end jobs, but data processing and call centers, mainly backoffice work.

I have visited in the past one of the HSBC data processing centers here in Shanghai. While the work in itself is very repetitive and even boring after say, ten minutes, you do need rather good English skills to grasp the meaning of the forms and letters you have to deduct the data from. Call centers seems more a thing for India, although I have heard stories that also neighboring Hangzhou has some of them."

Only Known Export Jobs: Part I

This, it seems, is going to be the title of a new series here at Bonobo. The title is plagiarised: former US Treasury Secretary Paul O'Neill (or was it GWB himself, help, someone?) once said of Argentina that it was a country with no known export industry, and it didn't seem to care. This was before the crash. Well I'm now throwing the jibe back: the only unambiguously successful US export industry right now is the jobs one (if you don't count the dollar bill one that is). Of course the US has enormously successful companies. Of course the US can generate products that are world beaters. But how do you do this at prices that the rest of the world can afford? This is the problem. If you look at the US current account deficit the situation is clear.

In some ways there is analogy here with the energy situation. Energy resources may or may not become depleted before alternatives are available, everything is a question of timing. The jobs market and economic development have been tied to a progressive evolution from agriculture to bottom-end manufacturing, to hi-tech manufacturing to services, to services/information. Now it is these high-end services and intellectual property producing activities that are starting to be outsourced, and the OECD world needs to move to the next-generation activity (whatever that may be, and we are talking structurally here). The question is again one of timing. And just as with the energy tech-fix there is no guarantee, so with the labour market evolution there is none either. This is the point I am making. I could tie all this in to the laxity of attitudes in the present US administration, since I think that with another administration in the White House all of this would be being treated five times more seriously as a problem.

A couple of interesting inks. One I picked up from Fons Tuinstra which, incredibly, describes the outsourcing situation over at Palm, the other a link that Macromouse LLoyd sent me from 'Last Remaining Radical' Ed Strong . Now apart from understanding why he is concerned, and recognising his right to say what he says, I dont go down Ed's road at all. I have already commented at length on Ed's post (comment reproduced below). Nonetheless one detail is worthy of note, and it relates to the notorious Singapore issues. One 'hot topic' among these issues was opening government procurement (transparency I think it is called) to free competition. Well, if you look at what is happening in the US (and I'm sorry this is NOT a US-only issue, it is an OECD issue) you will see that 'procurement' is becoming an 'issue du jour'. Take Shirley Turner, eg:

"After Shirley Turner, a Democratic state senator from New Jersey discovered that a program from her state, Families First, which provides welfare recipients with grocery debit cards had been outsourced to Mumbai, India, she proposed bill No. 1349.Her bill, which was approved unanimously by the New Jersey Senate in December 2002, would require all state contracts to be performed by either US citizens or foreign citizens who work legally in the United States. Following her lead, Connecticut, Maryland, Missouri, and Wisconsin all have similar bills under consideration."

Now for my comments on Ed's post:

Hi Ed.
Interesting post. I'm both for you, and I'm against you I'm afraid. I'm for you since I am convinced you are right to be pre-occupied by what is happening. This is, and is going to be, an enormous issue for the US.

The key to the problem: the value of your currency and the trade deficit. The key to the value of your currency: the reserve role of the dollar. So it seems somewhere deep-down, behind all this we may need to address questions of financial architecture.

You see moving from manufacturing into services isn't (in principle) a problem. It's when you start moving out of high value services and into relatively lower value ones (as you indicate) like the low-tech 'human' end of health, looking after gardens and old people etc, construction attached to all the deficit spending which will be seen as the solution etc etc: it's in this move downstream that the problem starts. This then becomes a historic first, and the 'usual arguments' seem to have less validity.

One intersting side issue is that of procurement and the Singapore issues. Normally the accusation of using restrictive practices to avoid competition is a jibe that is thrown at the third world but here we have your very own Shirley Turner demonstrating just how rife this practice probably is even in the 'good ol' US of A.

I see the US today as very much in the same situation as the UK post WWI (in fact NY university historian Niall Ferguson made just this point in a very perceptive article 'To the Debtor the Spoils' in the NYT just after the Iraq war).

Why this isn't really being picked up inside the US I don't know. The Bushies obviously aren't interested, and the 'opponents' lead by 'road runner' Krugman (who was last seen painting an entrance in the wall to lead the pack down a dimly-lit cul-de-sac) seem obsessed with demonstrating that everything is a consequence of the 'dreaded tax cut'. This leads him (in his recent 'lump of labour' piece) to the absurd extreme of suggesting that those who are pointing to the structural problem are trying to defend Bush!

Another area where I'm not exactly with you is over the accent on the telephone. I got over this as a child in Liverpool trying to make long distance contact via an operator in Scotland! I don't think it matters what accent someone has - or what colour their skin is - if they are doing a good job. And since the American ideal of competition is that who does the best job cheapest wins, looking at you from the outside, I think it's kinda hard to cry 'foul'.

My proposal. Accept the new reality. Asia is on the rise. We in Britain had, eventually to accept the rise of the US. In the end it was good for us, you helped us out in 1939. So accept the reality and learn to live with it. We in Britain may not have the world influence we once had, but we're hardly poor. We are also more mature about money. Despite Ms Thatchers best attempts we still don't value money as much as you do. Come on over, it's not as bad as it looks. And, anyway, at the end of the day I really can't believe that reducing poverty in other parts of the world isn't something important to you as a person.

In case you're interested, here is a recent link to , Monbiot in the Guardian to show how the British seem to be looking at this.


Japan Pensions: Where is the Incentive?

It seems that, little by little, the world is waking up to the importance of all this. Last week it was the Italian Minister of the Interior, this week it is the director of economic policy in Japan's cabinet office. When I started blogging about this, just over a year ago, it was much harder to get a hearing. This change is positive. OTOH too many people are continuing to fool themselves by thinking of this as a linear process. Here, non-linearities will be everything. Two examples in the report: number one, is the cost of having children, and the inability of society collectively to address this because of the scale of the fiscal problem which already exists coping with the elderly. Secondly, young people are dropping out of the pensions system. It is logical: if you put more in than you are ever going to get back, where is the incentive?

Already mired in its worst economic slump in decades, Japan may well see its growth decline even further as its citizens age and its population shrinks, the government said in an annual economic assessment released Friday. The report suggested Japan needs to take stronger measures to encourage people to have more children, and to make its domestic markets more attractive to foreign investment. "Japan is experiencing aging unprecedented in history," said Jun Saito, the director of economic policy and analysis at the Cabinet Office, which authored the report.

Addressing the aging problem for the first time, the annual assessment noted the country's population between the ages of 16 and 54 has already started to slide and added that growing numbers of retirees are trimming the nation's huge savings pool. Economists say Japan's high saving rate was a major factor driving the country's rapid growth in the decades after World War II. The savings households deposited in Japanese banks provided a ready supply of capital that industry borrowed to invest in new plants and equipment. But today, Japan is a net creditor to the world and attracts little in the way of foreign savings - one source of funds countries often turn to when there is a shortage at home, Saito said.

Along with attracting overseas capital and raising labor productivity, the report stressed the need to help women have careers and children, instead of choosing one or the other. Saito said one option would be to set up more day-care centers, a step the government pursues now. The report said the average Japanese woman now faces incentives not to have children: She loses 85 million yen ($772,000) over her lifetime if she quits her job to give birth - even if she returns to work afterward.

Japan's birthrate - which measures the average number of times a woman gives birth during her lifetime - dropped to 1.32 in 2002, the lowest on record, and after peaking in 2005, the population is on track to shrink by nearly a fifth by 2050, the government says. The changing demographic is already straining the country's pension system, with the government forecasting those now in their 20s through 40s will pay more into the system than they will receive due to the large numbers of elderly the country will support in coming years. This is causing more young people to opt out of paying into the system, creating an additional burden on government coffers.
Source: Yahoo News

Coming Home to Roost

Interesting piece in the NYT about the growing rivalry between IBM and Microsoft. E-week also has a timely piece about how the pressure is on MS to get Longhorn right, or the corporate sector might finally give up on them. In a way, vis-a-vis all the security problems they have, it's hard not to feel a bit of sympathy for them. Essentially this is a negative feedback consequence of being No1 and being so disliked (of course the so-disliked bit is of their own making). The consequence produces a whole host of people who spend a good part of their time looking for 'holes', and of course they find them. This is not simply MS incompetence, it seems to be an endemic software problem. It's just that most companies don't have so many bright and dedicated people working against them. There is a kind of strange 'I need you', 'you need me' symbiosis between the parties which is rather reminiscent of the one beteen bacteria and antibiotic.

ONE year ago, almost to the day, Samuel J. Palmisano, the chief executive of I.B.M., delivered a speech in New York that sketched his company's vision of the future of computing, which he called "on-demand computing." Today in Los Angeles, Bill Gates, the chairman of the Microsoft Corporation, will present his company's notion of where things are headed, which the software maker calls "seamless computing."

Behind the marketing shorthand is a kind of war of ideas over what can be thought of as "the Internet, Act II," a technological evolution that has been gathering speed. The next-generation development of the Internet has been helped by the continuing and remarkable progress in hardware. But probably more important has been the embrace of a set of software standards - rendered in a nerdy alphabet soup of acronyms, like XML, SOAP, WSDL, UDDI and so on - that open the door to widespread machine-to-machine communication across the Internet.

Over the last couple of years, I.B.M. and Microsoft have cooperated closely to reach agreement on the software standards, known as Web services, necessary for this next step. The two companies, however, agree on little else. The Internet Act I was mainly about e-mail programs and downloading digital information to look at or listen to - Web pages, animations, video and music. Act II should bring all kinds of automated transactions among businesses and individuals. And those transactions will be able to include a hint of computer-aided intelligence.

An example could be arranging an appointment with your dentist. Your calendar information, with stated time preferences and availability, exchanges data with your dentist's calendar to automatically set up an appointment. Similarly, companies should someday be able to conduct computer-automated auctions with suppliers. The next-generation Internet can be thought of as the beginning of what researchers have said might be possible with software agents, or bots, performing as human assistants.
Source: New York Times