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Friday, November 14, 2003

More signs that we are in 21st century after all

I don't know what a XIXth (or XXth) century englishman would say, if we told him that English unions would one day protest against losing skilled jobs to India.

Indian call centre move 'idiotic'

A union representing UK call centre workers has criticised the chief executive of National Rail Enquiries for saying that Indian staff were better than their British counterparts. Rail enquiries chief executive Chris Scoggins said the service could be improved if outsourced to India. He said the move could also save rail firms up to £25m over several years. But Amicus union said: "This attitude is an example of the idiocy of moving the inquiry service 10,000 miles away."

Source: BBC

And, in the heels of our previous post about Sekhar Kapur interview, today the blogsphere is buzzing with news of the P2P network Kazaa's agreement to distribute (in a pay-per-view fashion) the indian film Supari. If this works out economically, the sidelining of traditional distribution channels might very well enhance the global reach of Bollywood productions, specially among the growing Asian diaspora in the developed world. We are truly living in interesting times.

File-swapping company Sharman Networks on Thursday said it will digitally distribute a feature film from Bollywood, using its peer-to-peer application, Kazaa.

The Hindi-language film, "Supari," will be offered to Kazaa users for $2.99, under the terms of the agreement the Australian company has signed with P2P products distributor Altnet and Indian filmmaker Aum Creates Unlimited.

Songs from the movie will available for 90 cents each, while trailers and production footage can be downloaded for free. The filmmaker will get paid each time the movie file is shared and purchased via Kazaa.


"The Bollywood movie market is growing at twice the rate of Hollywood, in terms of production and revenue. This is where the benefits of P2P technology become really clear," Sharman CEO Nikki Hemming said in a statement. "P2P technology offers the movie industry a huge opportunity to massively enhance its distribution and generate revenue."
Source: CNet

Getting to Like Being Lean and Mean

Useful piece from the LA times about the problems facing the US labour market this time round.

On Friday, the Labor Department announced that employers added a net 126,000 payroll jobs in October. In all, the economy has added 286,000 positions over the last three months — the best showing since early 2001.

But 2.4 million more jobs would be needed to regain all the ground lost since March 2001, when the last recession began. When, or even if, those positions will come back is far from clear. Here's the problem: Many companies like the notion of a jobless recovery. The leaner they can keep their U.S. payrolls — by using overtime, automating the production process and outsourcing jobs overseas — the higher their profits. The murky hiring picture affects not only the 8.8 million unemployed but the 1.6 million who want a job but aren't actively looking for work. It affects millions more who want a full-time job but must get by with part-time work. And it weighs on the more than 130 million employed. "The greatest single concern people appear to have about the economy is jobs," investment house Fred Alger Management Inc. said in its November market review. "We have companies and an economy that can shift gears quickly, but not the kind of job creation and job security that people understandably seek."

Although the economy expanded during the third quarter at its fastest rate in 19 years, people's confidence in the future remains "middling," noted Richard Curtin, who directs the University of Michigan's monthly consumer survey. The tenuous job situation is a big reason. "It used to be understood that when business weakened, layoffs went up. When it improved, people were called back to do the same jobs at the same employers," Curtin said. "Now, if people lose their jobs, they have to find new skills and a new job at a new employer. It's a more daunting challenge." It's one that many stand to face, even as the economy picks up steam. The job placement firm of Challenger, Gray & Christmas reported that planned layoffs at U.S. firms were 171,874 in October, more than double September's total and the highest in a year.

Productivity is up just about everywhere. In the third quarter, nonfarm productivity rose 8.1%, a rate exceeded only twice in the last decade. "If you survived the last few years, you've done it by being really mean and lean," said Scott Montrey, a spokesman for the National Assn. of Manufacturers. "And once you get lean and mean, you don't go back to being fat and lazy." The trouble, economist Nick Perna said, is that "if every company was lean and mean, the economy would be in serious recession." Perna — who is credited with coining the term "jobless recovery" more than a decade ago — is hopeful that, as confidence builds and the economy expands, hiring will follow. After all, the jobless recovery of the early '90s eventually gave way to a lengthy, job-packed expansion. "In the best of all worlds, we'll get rapid productivity growth and, when people are displaced, they're able to find work in other sectors," Perna said. John Challenger, chief executive of Challenger, Gray & Christmas, the placement firm, is more bleak. "My sense is that hiring and job creation will be meager," he said. "There are huge transformative forces at work, with technology and globalization forcing us in different directions. I think we're in uncharted territory."

Welcome to Two New Blogs

At least they're new to me. One of them - from Hans Suter - seems to have been going since September, but I only found it this morning when checking for something (using Google) on my own blog. I love the design Hans.

New networks of economic interconnection.

Wouldn't it be interesting to have a worldwide description ot the remittance thing, Mr. Sucher ?

Breadwinners Who Know No Borders

In Mexico, this research found, fully one-fifth of the adults are receiving remittances from relatives in the U.S., and in El Salvador it is nearly a third. The surveys also show that these funds are reaching every sector of society, not just the poor, and indeed the greatest effect may be in keeping working-class families from slipping into poverty. Though most of the money goes for food and rent, between a quarter and a third of remittance recipients report putting some of it into savings, educational expenses or small investments. Given the size of the flow, these funds far exceed the economic aid and development assistance that wealthy countries like the U.S. are putting into the region.

The second is the Weblog of flemish beerdrinker Ivan Janssens:

French farmer and leftwing nutcase (here i go again!) José Bové wrote:

"We reject the global trade model dictated by the multinationals. Let’s go back to agriculture; less than 5% of agricultural production goes on to the world market. Yet those responsible for that 5% of international trade dominate the other 95% of the production that is destined for national consumption (or neighbouring countries) and force this sector to submit to their logic. It’s a totalitarian exercise. Agriculture should not be reduced to mere trade. People have the right to be able to feed themselves and take precautionary measures on food as they see fit."(Via Frans Groenendijk)

Huh? Agriculture dominated by the logic of international trade? I thought that agriculture was dominated by subsidies, tariffs, outright importprohibitions and so on. It seems that European agriculture policy for instance (but also US and Japan agriculture policy) is dominated by the exact opposite of international trade, it’s dominated by the logic of protectionism. And the theme of precautionary measures is just another symbol of the logic of protectionisme: it’s comes in handy to keep our borders closed to foreign agricultural products. Of course, as Frans says, food is not like any other product. But, these days it seems any product is not like any other product. Bové uses the same logic as Bush. Bush says: steel is not like any other product so we need "safeguards". And Bové: food is not like any other product so we need "precautionary measures".

Welcome to the blogsphere boys. And to my readers: you might have guessed, on day or another they are likely to show up as 'guest arbeiters' (sorry, posters).

Migration is the Theme du Jour

Following on from Marcelo's posts yesterday, there was a post yesterday by Annemarieke Christian & Elga Bartsch in the Morgan Stanley GEF, about the positive benefits on in-migration for an ageing society. When I first started raising this topic 18 months ago (when I set up Bonobo) I felt literally a voice in the wilderness, a madman (an alternative name for the page could have been Diogenes Lantern). Such is the process of diffusion and propagation of ideas in society (although clearly I am not saying that all this comes from me, the UN population division must take the principal credit, and in particular Herve Le Bras), we now find that this idea is much les radical than it once was. Still, the misunderstandings abound. The 'favoured solution' is 'East-West' migration, while the more interesting 'South-North' is barely considered. Yet it is obvious that the Eastern Europe has an even worse ageing panorama than Western Europe. I don't know where the 18.8% figure for the dependency ratio in these societies comes from, but it worth bearing in mind that living espectancy is drastically shorter for these societies, so this may equally reflect an absence of older people and young people of school age. OTOH you have to remember that many in the 25-40 age group may be already out working abroad (this is certainly the case with Bulgaria, where the recent elections only achieved a 34% turnout based on the full electoral census. This must give some measure of how many people are actually 'out') - so really it would be much better to talk about this country by country and in detail.

Given the principle of free movement of citizens across the EU, the geographical proximity and the large income differentials between the current EU members and the Central and Eastern European countries (CEEC), the accession of those countries to the EU will likely lead to substantial migration of labour from East to West. Estimates on the likely influx of migrants vary widely, ranging from 40K to 680K per year[1]. But at 0.4% of the EU-15 labour force per annum, even the largest estimate is unlikely to be enough to offset the demographic trend of a shrinking labour force that is likely to set in in Western Europe from 2010 onwards. Thus, East-West migration is unlikely to compensate for the dramatic ageing of the EU-15 labour force over the next 50 years. In addition, fear of a large influx of immigrants has caused the EU to incorporate so-called transition agreements into the accession treaties, which give the EU member states the option to postpone the implementation of the free movement of labour by up to seven years. According to our estimates, other, bolder measures will be needed to fend off a looming decline in trend growth, which could see trend GDP growth dropping from 2.0% at present to less than 1% by 2040. Our simulations show that Europeans will have to work more years, longer hours, or in greater numbers to prevent a notable decline in the trend GDP growth in the first half of this century.
Source: Morgan Stanley GEF

Eurozone Economy: Over the Worst of it's Woes

I'm sorry, I really don't know whether to laugh or cry when I read journalists putting out this kind of phrase. It's clear that there is some kind of tentative upturn in the eurozone. This is good news, but apart from that it's very much wait and see time. One thing I can say, categorically - although not without fear of contradiction - is that the eurozone (and in particular it's largest economy Germany) is not 'over the worst'. It seems it's going to be more a case of: 'just when you thought it was all over, you found out it was only just begining'. (BTW: it seems my difficulty in knowing when to laugh and when to cry is congenital: see here).

Europe took a tentative first step on the road to recovery on Thursday when the region's two heavyweight economies, Germany and France, expanded at their fastest pace for more than a year. But the upturn, heralded in recent weeks by a flurry of optimistic sentiment surveys, remains on a fragile footing and might yet be stifled by a renewed strengthening of the single currency, economists warned. Germany, the eurozone's biggest economy, shook off its second recession in as many years in the third quarter. It expanded 0.2 per cent, its first growth since the same period of last year. The French economy rebounded strongly in the three months to September, with gross domestic product rising by a bigger-than-expected 0.4 per cent after a 0.2 per cent contraction in the second quarter. The Dutch economy also climbed out of recession, registering growth of 0.1 per cent after three quarters of contraction. Economists said the data suggests Friday's "flash" estimate of third-quarter eurozone growth - which will also include Italian figures showing it, too, returned to growth - would come in at 0.3 per cent. The estimate will confirm the eurozone is now over the worst of its economic woes. But it will also underline the slow pace of Europe's recovery compared with the accelerating pick up in the US and Asia.
Source: Financial Times

Unravelling the Thread

A few weeks ago Arnold kling caused a bit of fuss round the blogs by criticising Paul Krugman for using what he calls 'Type M' arguments. This debate seems finally to be reaching the responsible 'old media' world: the Economist has an article on 'one handed economics'. Now I am not here going to reiterate what I said in my post at the time . I do, however, think that the Economist is right to draw attention to his absurd use of the 'lump of labour' argument in connection with the New York Fed paper he was talking about in his article (incidentally, this argument would be better directed towards domestic US IT workers, often trade unionists, who use this type of point 'Jose Bove style' in connection with Indian outsourcing: but then they aren't normally neo-cons).

To this I would add his article "Argentina: the role of ideology", where he argues the peg etc. was so popular since "a currency board fitted a conservative ideology: by eliminating any discretionary monetary policy", which sails clean past the fact that this idea has been popular all over the place, and especially in Europe, where you could think of the euro as a kind of 'institutionalsied currency board'. As he says, there are arguments either way, the only thing you can't say is that this is produced by a right wing ideology. Or there is a recent interview he gave on US radio - called 'whats left of the New Economy - which is worth listening to in its own right, there are some interesting points about de-regulation, and you can easily see that however hard he tries to be positive, he can't get away from the fact that he is fundamentally a 'new technology skeptic' (no disgrace here, there's a long tradition of this, that's why some have called it the 'dismal science', and it's a legitimate opinion: simply one I don't agree with. As he says, "oh, um, sure, there are some interesting things going on out there, but......).

The point I want to highlight, however, is his generalised turning-up-of-the-nose at one of the greatest of twentieth century economists: Joseph Schumpeter ("I have mixed feelings about Schumpeter, his name used to come up..........economic and business analysis should be about analysis and not poetry". Thank you very much Paul for that enlightening observation!) - which he esentially seems to justify due to the use made of Schumpeter by the 'new economy scam' Enron types in the 1990's. Of course he's so busy mocking Schumpeter, that he loses the main interesting point in the argument. Creative destruction is not only about physical capital, it's also about human capital. For those who haven't had enough with all this, you could try reading his for richer NYT magazine piece, and noting the use made of Galbraith in the argument. Then you should go back to his Ohlin Lectures of 1992 and check the references to Galbraith in the index (published as Development, Geography and Economic Theory). Here you will find a very different appreciation of Galbraith: a much more negative one. To cap it all - and this incidentally is precisely where I came in personally in my wising-up on Krugman, since my first mail to him was about this very point (he, incidentally, replied by sending me back the Fisher velocity equation, which I take it we are all now agreed does not apply in any straightforward way to the situation in Japan). Here he himself describes some of his articles as "diatribes", which "focus more on the question of why Japan's policymakers (and too many economic pundits, Japanese and Western) have been unwilling to break out of the habits of thought that are, in my view, the only reason that predicament persists". Well said. I couldn't sum up his view better. I just don't share it.

Lyinginponds.com, a website that tracks partisanship among American political columnists, rates Mr Krugman second in the overall partisan slant of his columns, behind only Ann Coulter, a fiercely (and often incoherently) conservative polemicist. As the site documents exhaustively, the vast majority of Mr Krugman's columns feature attacks on Republicans; almost none criticise Democrats. Unsurprisingly, this has made him a sort of ivory-tower folk-hero of the American left—a thinking person's Michael Moore. But he may have even more readers among his ideological adversaries, particularly on the internet, where deconstructing his latest column is a kind of twice-weekly parlour game—albeit one so contentious it has spawned talk-show chatter and even legal threats.

He refers to these critics as his “stalkers”. Many of them spend an inordinate amount of time quibbling about minor semantic points, or trivial differences in statistics. But they cannot all be easily dismissed. The more reasonable ones allow that he is a gifted writer and economist, but also argue that these days his relentless partisanship is getting in the way of his argument. Is the American political and economic picture, they ask, really as one-sided as he paints it? And if not, should an economist of Mr Krugman's prominence be telling the public that it is?

A glance through his past columns reveals a growing tendency to attribute all the world's ills to George Bush. Regarding California's energy crisis, for example, he berated the Bush administration and the Federal Energy Regulatory Commission for not imposing price caps sooner—but found no room to mention Bill Clinton, who presided over a similarly inactive FERC for the first part of the crisis, nor to attack California's then Democratic governor Gray Davis for his disastrous refusal to allow consumer prices to rise. After Mahathir Mohamad, the prime minister of Malaysia, recently gave an anti-Semitic speech, Mr Krugman argued that the Bush administration's ham-fisted foreign policy had forced Dr Mahathir to make the remarks in order to shore up domestic political support—most unlikely, given that he was about to step down.

Even his economics is sometimes stretched. A recent piece accused conservatives of embracing the “lump of labour fallacy”, the mistaken claim that there is a fixed quantity of work which governments must strive to allocate equitably. In fact, the paper he cited did not commit the lump of labour fallacy. He used game theory to argue that, by criticising North Korea but not attacking it, and then going after Iraq instead, Mr Bush is “probably” encouraging North Korea to become a more dangerous nuclear power. This probably did not convince most game theorists. Overall, the effect is to give lay readers the illusion that Mr Krugman's perfectly respectable personal political beliefs can somehow be derived empirically from economic theory.

Thursday, November 13, 2003

Letting The Genie Out

I enjoyed reading Chris' postings on oil, although I'm not sure I subscribe to the scarcity argument. I wanted to stick up a slightly different perspective. Scarcity could be right, and I could be guilty of ignoring Cassandra's warnings. I'm no expert, and I don't have my support here with me, but MA Adelman's The Genie Out of the Bottle reformed the way I think about oil economics today.

If I understand him correctly, Adelman says that oil should be considered like any other commodity, only over-politicised, and (to me) over-propagandised - maybe you could argue that the high price includes an information component. Disinformation and windfall profiteering prevent the market from clearing at its true price - royalty income can be win/win for upstream oilcos and countries (remember that x% of a big number is more than x% of a small one).

Before oil will become truly scarce, the true price will rise, the US (biggest user, biggest importer, and, importantly, about the largest producer (warning:xls), depending on what's up in Saudi in a given month) will necessarily respond with innovation and efficiency improvements (there's so much potential in the alternative energy economy, but it's kept out of the marketplace by a perverse favouritism of the oil sector).

Scarcity may come, but it will be met by economic responses and the market will clear; margins will thin; royalties will thin - there is a huge amount of fat in the price of oil today (even inefficient producers can get oil out of the ground for $6/bbl), and it's still as affordable as it was in 1970 at $2.50/bbl. Oil-price inflation has factored through the economy (it took the 70s to do it, and intensive economies are relatively the richer for it). Overpaying for oil through OPEC price-making is more a political decision than anything (in Turkmenistan gasoline costs $0.04 per litre!). Adelman makes the point that at $35 per barrel, there's something like a 150-year supply of proven hydrocarbon reserves. (I am making up the numbers, but they're ballpark). Stuff like shale, oil sands - it all fits in the picture.

Chris was right to include gas as well, but it's worth noting that gas is plentiful and, at high value, liquefaction (through compression, or my preference of condensation) is viable. Gas trades at roughly its fuel oil equivalent price, but it wasn't so long ago that it was just flared as a nuisance (and probably still is in places). At any price level, there are supplies and technologies available to enter the market to lessen the tension of natural or cartel-based scarcity. And there's still a lot of oil out there to find. South America is bringing on new reserves from Ecuador, Colombia and Peru; Brazil and Africa have big off-shore operations; there's a lot of promise in deepwater production. If I'm not mistaken, Kazakhstan has an elephant or near-elephant field under the Caspian sea. Central Asia probably has Middle East-sized reserves, and who knows what's left to find in Russia - it's got a whole lot more oil than it can get to market today.

Further, renewable energy is today available at small multiples of the oil equivalent price. Change focus, or change the price structure, you change the world. Yes, there is a finite supply, but we're not about to reach the limit. I assume oil consumption will continue to grow at roughly world GDP, but production will grow so long as marginal exploration is profitable.

It's been some years since I read Adelman (retired MIT petroleum economist), but since I started thinking about politics in his terms, I've been less surprised about the course of world events, and less persuaded by political action taken in the name of oil scarcity. I recommend this work to anyone who fears we're about to run out of oil.

The (sometimes astonishingly quick) benefits of globalization: Indian pay rises highest in Asia

Again from the BBC:

A new survey by global human resources firm Hewitt Associates says Indian workers gained an average salary increase of 14% in 2003. This was twice as much as second placed Philippines, where pay was up about 7%

As Bonobo readers would have expected, this is directly linked to the ongoing outsourcing of services from Western companies.

A spokesman for Bangalore-based human resources firm Ma Foi Consultants said, "Salaries are going up across the board. "Two sectors which are very aggressive in this area are the IT sector, and the business process outsourcing sector."

Although the article mentions that these rising wages are a symptom of a tightening in the supply of skilled English-speaking workers, the process is far from over in India, which remains one of the lowest-paying countries in Asia.

"No obvious limits" to immigration to the UK

Qualifying my earlier post about immigration, UK's home secretary David Blunkett has expressed that there is "no obvious limit" to immigration, and that the current rate was "permanently sustainable."

Blunkett: No limit on migration

There is "no obvious limit" to the number of immigrants who could settle in the UK, the home secretary has said. David Blunkett agreed some people felt swamped by new arrivals, but said legal migrants brought economic benefits. He said Britain had always been "crowded", and the current net inflow of 172,000 a year was sustainable.

Campaign group Migration Watch attacked his comments, saying this rate plus illegal entries meant two million more people by 2013. This would have a "huge impact" on the country, it said. The latest official migration estimates, published hours after Mr Blunkett's comments, suggest the inflow - the difference between the numbers leaving the UK and those arriving - fell slightly to 153,000 in 2002. Speaking on BBC Two's Newsnight, Mr Blunkett said he was determined to cut the numbers of asylum seekers and illegal immigrants entering the UK. But he wanted more skilled workers to come to Britain legally to plug staff shortages - especially in the catering, hospitality and construction industries. Asked whether there was any limit on the number of skilled migrants who could arrive, Mr Blunkett said: "No, I see no obvious limit. I see a balance in terms of the different forms of entry, migration and residency in this country so that we can get it right." He said he did not believe there was a maximum population which could be housed in the country, saying: "I don't think there is."


Current migration rates were "permanently sustainable" as long as illegal immigration was under control, he added. Economic migrants contributed £2.5bn more in taxes than they took out in benefits, he said.
"If we can get it in balance and make sure that there is a net increase in terms of our GDP, we are onto a winner," he said. He added: "It is a crowded island. We've always been a crowded, vigorous island."


Sir Andrew Green, of Migration Watch, said he was "astonished" by Mr Blunkett's comments. "We have no problem with moderate and managed migration. The problem is that it is neither moderate nor managed," he said. The official Home Office figures, plus illegal immigration, meant at least two million people would be entering the UK over the next 10 years, he said. "England is nearly twice as crowded as Germany, four times as crowded as France, 12 times as crowded as the US. I can't think what they are doing." Shadow home secretary David Davis suggested the government was encouraging legal migration "as a way to cover up their failure to tackle widespread abuse of the asylum system". He said changes to immigration policy should take place only after a debate about the economic, social and environmental consequences.

But Keith Best of the Immigration Advisory Service praised the Home Secretary, saying he believed the comments would ultimately "flush out" those using misleading statistics to oppose migration. "It's a pity that David Blunkett did not say this earlier," said Mr Best. "It is business which wants the workers and the govenrmen's job is to facilitate this.
But the biggest commitment Mr Blunkett needs to make is to improve the statistics so we can have a rational debate."

Source: BBC

Of course, the mere existence of an organization named Migration Watch indicates that not everybody in the UK agrees with Mr Blunkett's views. A few years from now, this could turn out to be the major political issue across developed nations.

The Future of Migration

Harvard lecturer in Public Policy Lant Pritchett argues in the first of a two-part series for YaleGlobal that

Standing on the cusp of the 21st century, it is clear that another wave of mass migration is poised to break down the barricades protecting the world's rich and developed countries.

He goes on to analyze five major forces behind this phenomenon: cross-border wage inequality, differences in job markets, demographic pressures, a more connected world and the rising importance of jobs tied to specific locations, like health care and education.

In the last part of the series, Pritchett argues that the main barrier to this new wave of mass migrations is ideological resistance from the population in developed countries. In a most telling statistic, he notes that as early as 1995, "in no place in Europe was support for any additional migration higher than 10 percent".

This is a theme that Edward has covered for a long while here at Bonobo, and a classic tale of an irresistible force (mass migrations and the socioeconomic gradients driving them) meeting an immovable object (as Pritchett memorably puts it, "technically, migration is prevented by people with guns"). I always bet for socioeconomic gradients against people with guns in the long term, but in the meantime we might see an ugly return to even stronger isolationist forms of nationalism in the developed world.

Pressure on Time

Following up on the points I have been making, you will find more and more guest posts showing up here. One of the people who will be posting from time-to-time is my Indian friend Kaushik. He writes in the mailbox about how the work pressures are getting to he. The comment about what life is like for an Indian developer in the US is, I think, to the point. (I have, of course, changed the names of the companies involved).

Lately, the work front has been a little messy. I am hoping that things will get cleaner by January. I consult for a relatively new joint venture between XYZ Technologies (which I joined a few months back) and ABC Apparel. I dont particularly enjoy the place, but the experience is rich and hard to find. It is a rather chaotic workplace and it has been very hard trying to make this work. (someone once said that policy making is like sausage making. Both look great from outside. The same statement can be applied to consulting or software development). Recently, there has been increasing XYZ ground level antipathy to Indian consultants, and increasing ABC internal pressure to meet year end revenue needs. It has been, kind of, taking its toll. We are hoping to go home to India in January. Hopefully, things will get better by then or I would feel less stressed ...

Living in China 'ambassador' Andrea has something similar to say from a different perspective:

Didn't mean to be so quiet. In fact, I've got a lot to say with regards to various conversation threads that have been going on since last week. But I have a 9.5 hrs work day (plus 1 hr commuting) these days...totally tired by the end of the day. Will write more on weekends. Some of these days, I want to give you technical help for your "Global Economics Blog Forum" - which I think has great potential for making great things happening...Well, I'll definitely write more later on the weekend or so. Now I see the beauty of moblog, MP3 players, etc...they help me to utilize all these "niche" time.

This raises an interesting point. Not everyone writing for Living in China actually does. I, for example, live in Barcelona, and Andrea is a Chinese Canadian.

Going back to the topic of IT outsourcing in India and other places, Prashant has an interesting post on India Economy Watch:

Over 40% of IT Development Work Now Outsourced

India is the preferred offshore provider. According to the META Group, about 41% of all information technology development work for U.S. businesses is now being outsourced, with India continuing to be the preferred offshore provider. The number is up from a year ago, when about 36% of development work was outsourced, META said. The firm said that Russia, the Philippines, Ireland, Israel, and China are "the up-and-comers to watch" in the offshore IT development market.

Question: As per Nasscom total software & services exports (including BPO) was US$ 9.5 billion during 2002-03, out of a global IT services market of more than US$ 600 billion (this doesn't include software products or hardware). So, what does that 40% mean!

Spain and Poland Face Aid Threat

Things are begining to get more complicated in the EU. With the enlargement this was inevitable. This was Ms Thatcher's dream. OTOH I don't see the advantage in delaying the decision about funding. If you want cooperation and agreement about the constitution, given that the two topics have now been publicly 'tied', maybe it would be a more productive tactic to advance on the two in tandem. Again, this is a second best world.

A highly sensitive European Commission paper on the next EU budget - including proposed cuts in regional aid to Spain - is expected to be delayed to avoid disrupting a deal on a new EU constitution. Romano Prodi, Commission president, was supposed to present the paper to EU leaders at their summit in Brussels on December 12-13. But Mr Prodi fears that any debate on EU funding could complicate a fraught final round of negotiations on the constitution. "It could be dangerous to mix up the two issues," said one official close to Mr Prodi. "A slight delay until later in December or until mid-January might be better."

The paper will outline a huge shift of EU aid from existing members, including Spain and eastern Germany, to 10 countries joining the EU next May, mainly from the former communist bloc. Spain, the biggest recipient of European Union aid, could lose billions of euros a year. It is also the country regarded as the biggest obstacle to an agreement on the constitution. Spain and Poland are threatening to block a deal unless they retain their voting power in the Council of Ministers, which gives them almost as much clout as larger countries such as France and Germany.

Some fear that Spain could try to link any concessions on voting weights with demands for more money in the next EU budget round, running from 2007 until 2011 or 2013. Gerhard Schröder, German chancellor, has explicitly warned that if Spain and Poland delay a deal on the constitution, they could expect to suffer financially. "Those who don't see that will have to learn that you cannot neglect such aspects and go unpunished," Mr Schröder said this month. In an attempt to avoid injecting a bitter debate about money into the constitutional talks, Mr Prodi believes it would be better to hold back on giving the first details on how the next EU budget might look. A final decision on timing will be taken next week.

Early drafts of the budget suggest it will be sensitive, since it will identify which regions are set to lose the most money. A total of 18 regions will no longer qualify for the EU's highest aid category - Objective One - simply because the Union's average gross domestic product per head will drop sharply after the "big bang" enlargement next May. They include six regions in the former East Germany and four regions in Spain, all of which would be left with a much lower level of transitional aid from the EU budget.
Source: Financial Times

Wednesday, November 12, 2003

Petrol Depletion and Economics: Part II

Here's part II of my earlier post:

Extraction from an individual field follows a common pattern. Production rises over time until a plateau is reached. Production remains at the plateau for some period of time. Eventually, production begins to decline and will continue to do so until the field is abandoned. The shape of the production curve is both a function of market and physical forces.

A strong market will favor rapid exploitation; a quicker ramp-up, a higher and more extended peak production accompanied by a faster decline. Although market forces determine what is worthwhile to extract, they don’t appreciably change the overall size of the deposit - the area underneath the production curve. Faster exploitation improves the return on capital, but it results in a steeper decline.

The underlying physical forces are straightforward. As oil is extracted from a deposit, the pressure of the reservoir decreases. The pressure drop makes it more difficult to extract at the same rate. There are ways to maintain pressure (e.g. injecting carbon dioxide or seawater), but they add expense. In some cases, the ‘water cut’ of the liquid pumped out of the ground increases over time. Again, the water can be separated out at a cost. To summarize - the incremental costs of extraction rise as the deposit depletes. This is part, but not all, of the reason why the rate of extraction decreases as a deposit depletes.

In order to draw conclusions about the overall resource, the behavior of individual fields needs to be aggregated. This is complicated by many factors. The depletion characteristics vary a great deal across deposits (geology) and countries (public/private ownership, OPEC membership, tax incentives, technology, etc…). A further complication is that standards of reporting also vary from country to country. Generally, the depletion community aggregates production by country. First, it minimizes the risks of counting ‘apples and oranges’ together. Second, it highlights an alarming fact:

Outside of OPEC and the FSU, nearly all countries have peaked and are in decline.

Earlier, it was noted that giant fields held a substantial amount of the overall oil ‘wealth’. They also make up a significant percentage of overall production as well. These fields are old and it will take a lot of smaller fields to replace their production once they begin to decline.

These factors point to increasing market power for the FSU and OPEC. They also imply that in the relatively near future, someone is going to have to invest a great deal of money to replace the supply lost as the giant fields decline.

The depletion community looks at the non-FSU non-OPEC depletion, makes a guess as to what the FSU and OPEC are going to do in order to generate an estimate of when the world supply of oil will peak. The conclusion is that oil production will peak within the next decade. As an aside, other methods have used a ‘shifted discovery’ method. This was based on the observation that the U.S. peaked in the early 70’s, about forty years after the peak of discovery. Since world production peaked around the early 1960’s, this puts the peak sometime in the next few years. Although supported by some observations, the shifted discovery method makes even more assumptions than the first method and should be discounted.

The discussion above effectively ignores the role of technology. Although improved technology can dampen the effects of depletion, it doesn’t negate the overall effect. It should be noted that the drop in world discovery and the peaking of many countries production occurred despite substantial improvements in technology.

There is a critical condition that underlies the observations and analysis outlined above. On their own, deposits or countries, the U.S. included, are price takers. Their production decisions were made in an environment where they couldn’t substantially affect the price. As depletion continues prices should increase (if for no other reason than to reflect the increased average costs of production). A country whose production is declining under current market conditions may be able to, temporarily, reverse this decline if prices were high enough. Of course, this would be followed by an even more rapid decline.

This isn’t a fatal flaw. The general conclusions remain valid, but predictions that show a smooth, slow variation in the oil supply are suspect. The market described above would be prone to wild gyrations. Most predictions get around this by assuming that OPEC will adopt a ‘swing’ role. Thus keeping supply, and by extension price, relatively stable.

My personal opinion is that the underlying instability will be too much for OPEC to manage. Queuing theory provides some insight. Queues are generally well behaved, until demand approaches the constraints of the queue. When that happens, the variation in queue depth can increase dramatically. Even ‘optimal’ algorithms are subject to this. If OPEC’s decision-making suddenly to become optimal, they still would not be able to remove the instability. Noisy, unpredictable variations (e.g. weather) would be magnified by the market, injecting instability.

Furthermore, there is no reason to believe that the boom-bust cycle would disappear. But it takes time to bring a new field online so a bust sets up the market for a boom a few years down the line.

The unstable situation described above is arguably worse than the one usually put forward by the depletion community. There are the considerable costs of the instability itself. More importantly, the instability will hide the market signal that would be desperately needed to correct the long-term imbalances.


That’s it for supply. Let me know what you think. As I said before, I don’t want to turn you into an editor, but I’m amenable to any improvements you suggest. Depending upon interest, I can go through this discussion in more detail and/or continue the discussion by examining demand, investment and international trade. I have tagged on a discussion of natural gas in North America below. I think it ties in with this discussion well.


The same geological processes give rise to oil and natural gas. There are a few key differences, most of which come down to that one is a liquid and the other is a gas.

Since it is a gas, natural gas is more difficult to transport overseas. It has to be liquefied or compressed for transport. The infrastructure to do this is fairly expensive. Because of this, overseas transport makes up a small percentage of the overall market. (There are about four LNG terminals in the U.S.) This means that the world market is effectively broken into independent markets, North America being one of them.

There are many similarities to oil. There is a general consensus on the overall endowment in NA. Some members of the depletion community believe that natural gas supply is NA at, or close to, its peak. Again, the distribution of field size varies dramatically. In some areas, a small fraction of fields make up almost half of production. Also, there have been relatively few discoveries of very large deposits in recent years.

Earlier, it was mentioned that physical forces caused the incremental cost of oil extraction to rise as the deposit depleted. This provides a signal to the producer that the field is in decline. Since it’s a gas and not a liquid, the incremental costs of extracting natural gas remain relatively constant until the field is exhausted. Compared to oil, it is like switching off a light.

The problem comes when one considers that a relatively small number of large fields contribute a large fraction of production. Most of these large fields are old. Unlike oil, there isn’t much advance notice before a field depletes. When these large fields deplete, many small fields to replace them. It isn’t difficult to see how this could result in substantial ‘jitter’ in the supply of natural gas. In turn, this jitter is another source of instability in the market. The NA natural gas market shares the same depletion issues as oil, with two exceptions. It is even more prone to instability and it is closer to entering the ‘exogenous components dominate supply’ phase.

I believe that the effects of depletion are starting to show up in the market now. The natural gas spot market has shown a lot of variation (with one very notable spike) over the last couple of years. Alan Greenspan has weighed in on the subject a few times in his testimony to Congress this year.

Although it didn’t get a lot of press, there were two principal reasons why natural gas prices calmed down over the summer. The weather was very mild, reducing demand for electrical generation. Even so, prices remained high and there was a significant amount of demand-destruction. Many industrial customers simply shut down. Some are even moving operations out of NA permanently.

Here in NA, natural gas is already demonstrating some of the effects of depletion; price increases and spikes and increased price variability. It also demonstrates that reducing demand is a way to mitigate the price swings. Unfortunately, nearly all new electricity generation capacity over the past five or so years uses natural gas (a topic for another day). Like oil demand, electricity demand is relatively inelastic. Even though prices seemed to have calmed down since the spring, it is only a matter of time. Mild weather could help hide this for a year or two. On the other hand, another cold winter, or hot summer, could put the market right back to where it was this spring. This time, there isn’t as much industrial demand to destroy to bring the market back into balance.

Finally, if my predictions over natural gas don’t pan out over the next couple of years don’t be shy about reminding me. If I want to crow when I’m right, I have to eat crow when I’m wrong.

Japan's Export Surge

So the surge in activity in the US has sucked in a lot of imports, despit the rising yen. Let's see what happens next.

Japan's current account surplus unexpectedly widened in September as accelerating growth in the U.S. and Asia propelled exports, reinforcing expectations that a report later this week will show the economy grew for a seventh quarter. The surplus widened to 1.49 trillion yen ($13.7 billion) from 1.46 trillion yen in August, seasonally adjusted, the Ministry of Finance said in a report released in Tokyo. The surplus rose 20 percent to 8.35 trillion yen in the six months ended Sept. 30, a record amount for that period since at least 1985 when accounting methods changed, the report said.

Matsushita Electric Industrial Co. and Sharp Corp. are selling more goods abroad because of demand for flat-screen televisions and DVD players. Those gains are helping cushion a drop in consumer spending in Japan, allowing the economy to grow 0.3 percent in the third quarter from the previous three months, according to a separate Bloomberg News survey. "Manufacturers will continue to lead economic growth, as exports strengthen on the back of recovering overseas economies,'' said Masaki Kuwahara of Nomura Research Institute, whose forecast for a 1.41 trillion-yen surplus was the second-most accurate of 11 economists in the survey. He said net exports accounted for three- fourths of Japan's economic growth in the third quarter.

Canon Corp., Sony Corp. and other exporters are getting a spurt from rising growth in China and the U.S., the biggest markets for Japanese exports. The economy of the U.S., which buys 28 percent of Japanese exports, grew at an annual pace of 7.2 percent in the third quarter, the fastest pace since 1984. China's economy grew 9.1 percent in the third quarter from a year earlier. Exports rose 3.8 percent in September from August, seasonally adjusted, while imports rose for the first time in three months by 2 percent, today's report showed. The September trade surplus compares with a median forecast of 1.25 trillion yen in a Bloomberg survey.
Source: Bloomberg

The Frugal Country's Road to Depression

NOW that there's hope of a global economic recovery, the past three years are best forgotten. But if you bought the argument that Singapore's sound fundamentals put it in the best position to ride the recovery, the Monetary Authority of Singapore has poured cold water on it by warning that the pace of the recovery will be restrained by ongoing 'structural' changes in the economy.

So, just how well-positioned is Singapore to ride this global recovery - if indeed it is one?The official estimate is that we should grow between 3 and 5 per cent next year. While here last week, Mr David Robinson of the International Monetary Fund (IMF) gave an upbeat assessment: 'I see activity picking up solidly, especially in the US and many Asian countries.' The IMF expects Singapore's economy to grow 4.2 per cent.

If you consider that Singapore's economy was the worst-performing among the emerging Asian economies for the past three years, then the projected recovery next year is quite disappointing. It lacks the usual bounce from a low base. According to the IMF, emerging Asia averaged 6.2 per cent growth last year and should grow by 5.9 per cent this year. Singapore, in contrast, grew 2.2 per cent last year, and is expected to grow 0.5 per cent this year. Despite under-performing, Singapore's projected growth of 4.2 per cent next year will still lag behind the region's expected average of 6.2 per cent.

The reason for the poor performance? The usual suspect is the loss of competitiveness due to high wages.
However, consider also that Singapore really has few macro tools at its disposal when the cyclical storms blow. The small domestic market limits the range of corrective action. But we have also tied our own hands. Prime Minister Goh Chok Tong made it clear in a dialogue session last week that the Government's role is to safeguard and grow the country's reserves.

In other words, we should avoid budget deficits. In general, balancing the books is a good principle. To some extent, no matter how efficient the institution, there is always a tendency to waste when it comes to public expenditure. Mr Goh himself admitted to being surprised at the plush facilities in some schools. Certainly, future generations should not pay for present waste. But there are, broadly, two types of government expenditure. One is expenditure required for the effective daily functioning of public services such as enforcement of law and order, military operations, and social services. It is here that we should ensure expenditure does not exceed revenue. Then there is expenditure intended to improve future growth prospects, for example, investments to enhance our infrastructure. Here, borrowing is legitimate since it is future generations that will benefit.

In practice, it can be difficult to differentiate between these two types of expenditure. For example, investment in health care and education should result in a more productive workforce in the future, thus enabling a higher standard of living. At the same time, much expenditure on education and health care should also be considered current charge. So it's a judgment call. Based on the Government's definition, Singapore's operating revenue usually far exceeds operating expenditure. For example, last year, operating revenue (excluding net investment income) exceeded operating expenditure by about $6 billion. It doesn't show up as a surplus because 'development' expenditure is also charged against operating revenue. But there is room for us to run, by our definition, 'large' deficits. This doesn't mean running deficits as we like, just that we do have significant room to manoeuvre when the need arises. We shouldn't be afraid to take advantage of that. There is no question about the virtue of accumulating reserves in good years. But there is a question over just how fatal government debts are.

Economist Christopher Dow, in his 1998 classic Major Recessions, argues that in Britain, debt levels have varied greatly without noticeable effects on the performance of the economy. Britain's debt in relation to GDP was 200 per cent during World War I, and it didn't fall below 150 per cent during the inter-war years. When World War II erupted, Britain's debt shot back to 270 per cent. In the post-war years, it was growth and inflation that led to a steady decline in the debt ratio. Mr Dow writes: 'In the face of such variety, fixed rules about the permissible level of government debt can have little absolute validity.' Singapore is far from running into debt.

The question is only whether deficits should be used as a counter-cyclical tool (and how large they can afford to be).
Given the current volatility in the global economic climate, we end up imposing a deflationary bias on the economy by ruling out deficits but not surpluses. And what about maintaining surpluses to impress financial markets? In this we have largely succeeded, and in doing so, also driven up our currency. The strength of the Singapore dollar is not all hype, of course. It is supported by ever-larger surpluses in our trade account. During the first half of this year, we chalked up a trade surplus of about $23 billion or 30 per cent of GDP. A decade ago, the trade surplus was just 8 per cent of GDP.

We achieved these surpluses by saving a lot more than we invest, thus reducing consumption that could have led to imports. In other words, we forced upon ourselves a greater reliance on exports. But is this savings an evergreen virtue? For a country in a global trading system, there are complications. People in one country can save excessively only to the extent that someone somewhere is willing to borrow and spend. Ultimately, there are limits to the extent that foreigners will borrow and foreign governments will run budget deficits. When these limits are reached, the frugal country necessarily becomes depressed.
First Published in the Straits Times 31 October 2003

Nelson Mandela and Dalai Lama

Funny in the first place but with some serious connotation, this political compass. This is a two-dimensional classification of politicians. One of my biggest objections to political parties is that it's suggested or organized(!) that all members have similar opinions on all issues. So a two-dimensional classification can result in a more realistic distribution but still I have my objections. Beside that the compass is based on questions like:

"It is a waste of time to try to rehabilitate some criminals." Well this can be interpreted in different ways depending on your emphasis: I am abolutely sure that for some criminals this is a waste of time. But how many is "some"?

Still I could not control my curiosity and filled in the questionaire. My scores on the test were Economic Left/Right: -6.88, Libertarian/Authoritarian: -5.33 bringing me closest to Nelson Mandela and the Dalai Lama among the well-known political figures. I can live with that. If it was just the Dalai Lama I had a problem vis a vis the "realistic" part of my motto.

Petrol Depletion and Economics: Part I

Disclaimer: I have no special expertise in the areas of economics, geology or petroleum engineering. I happen to find the intersection of non-renewable resources and economics an interesting area. What follows is my attempt to cover the salient issues without getting bogged down in too much detail. Given my lack of expertise, it’s possible that I’ve made errors.

The problem comes down to one question:

Should oil supply be treated as exogenous or endogenous in economic models?

Here’s my translation of what the depletion community is saying:

Within a decade, the oil market will reach a point where supply will be dominated by an exogenous component. Furthermore this component will decay slowly, a few percent a year. Although the endogenous component may mask this decline in the short term, it will be unable to do so indefinitely. The demand for oil is relatively inelastic and oil is a significant component of international trade for many countries. This combination could result in enormous disruptions to markets and society.

In order to minimize these disruptions, steps need to be taken to adjust the demand side as soon as possible. This will be complicated by the time and investment required to develop alternatives. Another complication is that a relatively large amount of oil-dependent capital stock faces accelerated depreciation.

The rest of the discussion is divided into three parts, supply, demand and ‘other considerations’ - mainly investment and international trade.


Endogenous forces dominate the supply of traditional renewable resources. High prices spur additional development, which yields additional supply, which drives prices down. Although exogenous forces come into play, (e.g. weather) over the long term their effect on the market can be ‘averaged out’. This is not to say these markets are static. They can still exhibit a boom/bust cycle and be subject to shocks.

In the depletion view of a non-renewable resource, the relative magnitude of exogenous and endogenous components changes over time. When the resource is first exploited, supply is dominated by market considerations. Over time as the largest/easiest/highest quality deposits are exhausted, more effort is required to extract the same quantity. This exogenous effect will grow until the resource is exhausted, at which point the supply is zero - regardless of price.

A plot of supply vs. time would start at zero, rise to a peak and then decline. The area underneath the peak would equal the overall endowment of the resource. The shape of the peak would be dictated by both market and depletion forces. The latter would be a function of the distribution of the deposits and the ease of their extraction. A resource whose deposits are concentrated in a few, large, easy to extract deposits would have a different depletion characteristic than one with many deposits which varied widely in size and ease of extraction.

The key determinants of the depletion effect are the overall endowment of the resource, the distribution of the deposits and the ease (costs) of extracting them.

In order to address these questions, it helps to split supply into two stages, discovery and production. Discovery is the location of deposits. Production is the exploitation of these deposits to yield supply. The only ‘hard’ relationship between the two is that one can’t produce more than has been discovered. A look at discovery will answer the first two questions.

The rate of discovery peaked a few decades ago (mid 1960s) and has been declining ever since. At present, we actually produce around three times what we discover in a year. Although it has fluctuated with market conditions, the downward trend is unmistakable. It is clear that we have been in the ‘tail’ of the discovery curve for some time. Because of this, the overall endowment can be estimated with some confidence. Over the years the estimate of ultimate recovery has remained fairly consistent we’ve used up about half of our endowment of ‘regular oil’.

The second question involves the distribution of deposits. Ignoring other factors (e.g. quality and ease of extraction), the size and frequency of deposits follow a power-law relationship, similar to a Pareto distribution of wealth. A significant portion of the oil wealth resides in relatively few giant/super-giant deposits. What is disturbing is that most of these giant/super-giant deposits were found a long time ago. The last discovery of a giant deposit was made almost two decades ago. This is true despite an impressive record of technical progress. One can’t rule out discovering another giant deposit. At the same time, given the power-law relationship, technological improvements and the length of the ‘dry spell’, one can start to put a harsh upper bound on its likelihood.

There are four key points to take from the discovery portion of supply:
1) The estimate of ultimate recovery has remained relatively unchanged about twice what has already been consumed.
2) The size vs. frequency distribution follows a power law relationship.
3) Discovery peaked several decades ago. Although it has fluctuated with market conditions, it has fallen considerably over time. This is true despite improvements in technology.
4) In terms of finding giant/super-giant deposits, there has been a long ‘dry spell’. The likelihood of finding more such deposits is becoming smaller.

Tuesday, November 11, 2003

Vayapuk in Thailand

Morgan Stanley's Daniel Lian is obviously still very much enamoured with Thaksin economics. The jury may still be out, but all this does look very interesting, and well worth taking seriously.

Thailand is set to unveil its Vayupak initiative on November 11, 2003. Vayupak is named after the mythical bird that is an integral part of Thai culture and history, and revered by Thai people. The initiative is likely to grow into several funds and different variants over time. ...........

Thaksin critics and some market participants have expressed skepticism and concern about the Vayupak. Some believe the Vayupak will be used to prop up the market to keep the ruling regime popular. Others think it will be used as a bail-out tool for failed or poorly run government companies or as a captive financing tool for the issuance of new government debt: In other words, household savings are being mobilized to pay for poor public sector management and poor public finance governance. While we understand such concerns, having examined the policy intent of Vayupak, we believe it is not designed to be a market support apparatus, a scheme for bailing out state enterprises, or a financing tool for the government.............

It is clear that Vayupak I will act to strengthen Mr. Thaksin’s macro platform and Thailand’s virtuous upswing, as it is designed to help revive substantial dead capital and help create new capital for both the government and households. However, Vayupak’s potential stretches way beyond its present round of relatively modest capital creation, in our view. We see three additional areas of structural benefits: 1) future funds based on Vayupak I could be rolled out to help monetize the large pool of dead capital that remains in the public sector and the banking system, i.e., Vayupak could become a long-term ongoing capital creation project; 2) variants of Vayupak could become creative management and financing vehicles for certain quasi-public goods, which would greatly facilitate public sector reform and help increase the efficiency of the overall economy; and 3) variants of Vayupak could become a blueprint financing tool for the proposed Asian Bond Initiative.
Source: Morgan Stanley GEF

Showdown at the OK Corral: or Amicable Exit Stage Left?

Given the state of US-France relations this will be an interesting one to watch. But there is just one interesting detail: as reported here earlier in the week, world steel prices are rising significantly as a result of the increase in demand from China. Does this mean that the US will be able to find a dignified way out?

Europe and Asia piled pressure on the United States on Tuesday to scrap steel tariffs outlawed by the World Trade Organization (WTO), with the EU threatening sanctions by mid December. The European Union has said it will slap retaliatory duties on $2.2 billion of U.S. goods if the steel duties, approved by President Bush in March 2002, remain in place after a final confirmation of the WTO ruling early next month. The goods targeted by the EU sanctions plan are designed to have a political as well as economic impact as Bush seeks a second presidential term next year. One group is citrus products from Florida, where Bush's brother is governor and which was the key to the president's 2000 election win.

"We hope, in light of this (WTO) decision, that President Bush will act quickly to remove the 201 (import) restrictions, so that we can get on with supplying our U.S. customers on a fair and equitable basis," said Anglo-Dutch group Corus, Europe's third-largest steel maker. French Finance Minister Francis Mer, a former steel industry baron, said the WTO's highest court had no option but to rule that Washington's so-called "safeguard" measures were inconsistent with WTO requirements. "I welcome it with a certain smile," said Mer. "Because everyone knew that there could be no other conclusion for an initiative that didn't necessarily have just commercial dimensions."

The world trade body's highest court ruled on Monday that the U.S. duties violated international trade laws, raising the prospect of retaliation from the EU and other complainants if they remain. Japan and South Korea said they would delay any retaliatory action pending a formal response from the Bush administration to the final verdict in the case by the WTO's Appellate Body. "The verdict is out and we have already sent out a message that we want them to go by the book. We are waiting to see how they will respond," Japanese Trade Minister Shoichi Nakagawa said. The United States reaffirmed on Monday that it considered the duties were "fully consistent" with trade rules and said it would study the WTO report.
Source: Yahoo News

The State of Play in German Manufacturing

Brad has complained from time-to-time recently about the use and misuse of employment statistics in connection with the way they are presented in the media. Here I have found a peculiar example. I'm not sure I understand this article. Is German manufacturing really recovering or isn't it. Of course, hedging my bets as usual I'd say it is and it isn't. There seems to be an improvement, which would be normal after all the difficulties, but it isn't clear how far or how long this will last. The article seems more based on the expectation of improvement than on the reality: note that in September output fell 1.2% month on month.

German economic sentiment improved sharply in November, helped by rising stock markets and clear rises in manufacturing orders, the ZEW research institute said on Tuesday. The Mannheim-based institute said its economic expectations index, which is compiled from a survey of 300 analysts and institutional investors, rose to 67.2 from 60.3 in October, well above market expectations. ZEW said a significant rise in new orders, combined with rising equity markets and a weaker euro contributed to the increased optimism.

German orders rose by a bigger than expected 0.9 per cent in September, reinforcing signs that the eurozone's largest economy is finally on the mend after three consecutive quarters of contraction. But economists warned that disappointing output data for September, released last week, suggested Germany would see only modest growth in the third quarter of this year. Output fell 1.2 per cent month on month.

The ZEW index had been boosted by its expectations component and appeared to be overstating the growth trend in Germany, economists added. The survey's assessment of current conditions remained unchanged. The ZEW indicator is strongly driven by stock markets and is highly volatile. It fell slightly last month after recent strong rises. Nevertheless, economists said the index rise showed the Germany economy was finally climbing out of recession., and pointed to gradually accelerating growth. Most expect GDP growth of about 0.3% in the fourth quarter.
Source: Financial Times

Petrol Depletion and Economics: Update

I've got a pretty long post from Chris on petrol depletion and economics. Chris has gained the mantle of Bonobo's 'unofficial' energy correspondant. It is long enough to post in two parts, so I'll put the second part tomorrow. I've also done something I should have done a long time ago: put comments. Now you can give Chris any feedback you want (or me).

Update: I've always been a fan of Frans Kafka, and now I find I'm closed in my study undergoing full metamorphosis. They're banging on the door outside, but I can't make out what they are saying. Meantime I've pulled this post, cut Chris a user id, and reposted in his name. I am about to cut some more id's so we will have guest posting from now on. Which means you will have to watch who the post is from. Changes, changes, why are there always changes?

Wage Inflation in China?

According to Xinhua news agency, inflationary trends in China have been recorded for grain, cooking oil, meat, eggs and fodder. Now this situation is hardly surprising. In the first place the acreage in cultivation for the three principal crops has been steadily declining, and productivity has not been keeping pace with this reduction. Secondly farmers, faced with low margins on the staples , have been moving up the value chain into areas like peanuts and cotton. At the same time global production of the crops has been falling: down this year by 63.3 million tons to 2.03 billion tons. With China having to import increasing quantities, short term there only seems to be one direction for the global grain markets to go:up.

The inflationary impact this may have is not as straightforward as it may seem. The increase in the prices of staples will hit the poorest countries and the poorest areas of China hardest. But in some areas at least, wages are on the rise in China. According to a new report by Mercer Human Resource Consulting, Chinese employees are projected to see an average 3.9% growth in annual base pay over inflation in 2004. ( Now before everyone starts jumping up and down on their seats, it is very, very important to note that this survey was very selective: restricting itself exclusively to workers in multi-national enterprises). However this selective improvement does mean for some groups a move away from the monoculture diet. Ironically these groups will notice this impact much less than the others. Generalised wage inflation in China is however a long, long way off: which is one of the reasons the 'Chinese growth spurt' could be a rather long one.

In 2004, Chinese employees are projected to see an average 3.9% growth in annual base pay over inflation, according to a new report by Mercer Human Resource Consulting. This growth rate ranks sixth worldwide.

Average annual base pay in China is projected by Mercer to grow 5.3% next year. However, during the same period, inflation in China is expected to be approximately 1.4%. Thus, Chinese workers are forecast to see an actual base pay rise of 3.9%.

Data used by Mercer for projecting pay increases were compiled from a survey of multinational companies, while inflation data was largely collected from the International Monetary Fund (IMF) and the Organization for Economic Co-operation and Development (OECD). Project growths in base pay were calculated based on salary figures for employees working as operational staff, clerical staff, technical staff, managers and senior executives.

Indonesia ranked as the country forecast to have the greatest growth in base pay next year, with a 6.5% rise after inflation. Bulgaria, Lithuania, South Korea, and Taiwan rounded out the top five with respective growth rates of 5.1%, 5.1%, 4.5%, and 3.9% after inflation. Venezuela ranked last, with workers in the country expected to earn 7.7% less in 2004, after inflation, than they did this year.

Despite this projected increase in earnings potential however, China remains marred by high unemployment rates. According to a new survey conducted by the Institute of Population and Labor Economics, a branch of China's Academy of Science, unemployment rates in some Chinese cities are as high as 14%. Most labor experts believe that China's overall unemployment rate ranges from 10-15%.
Source: Interfax

If You're Surprised By This You Shouldn't Be

Really, much as I would like to see a marked and rapid improvement in the democratic climate in Iraq, forgive me if I can't help considering most of the discussion about the possibilities in the near future a bit like a contemporary revamp of 'innocents abroad'. At the end of the day all these endless 'corruption indexes' that you see published from time to time do actually mean something. Having lived in a society that was relatively less corrupt (the UK) and one that is relatively more (Spain), I do get to note some important differences. One of these relates to the social standing of politicians.

Now many may feel that in the UK, the US, France, Sweden etc, politicians don't have the highest of reputations. This is undoubtedly true: but if you come to Spain, Italy or Greece, you will find that things get markedly worse - this is the point of the Guanxi post yesterday. The more corrupt the society the less important is the official framework for information transit, and the more important are the informal ones. This I can also confirm from my work with Bulgarians. So when you get down to Iraq, you can imagine: how little credence is given to secular politicians (this may indeed provide some of the explanation for the robustness of the religious networks) and how important the alternative apparatus is. When you think about it (and I'm sure Maynard with his 'importance of the cultural' would jump on this) the German post WWII example which is so often cited in connection with reconstruction may well be badly flawed. It may have been something about the very nature of German civil society that made this transition possible. If we do a compare and contrast exercise with Japan, the point should be obvious. I don't know yet just exactly where this argument is leading me, but the short term conclusion isn't exactly an optimistic one:

US authorities in Iraq have put on hold hundreds of millions of dollars worth of mobile telephone contracts, while they investigate allegations that the bidding process was hijacked by associates of the new Iraqi governing council.

When the Iraqi Ministry of Communications last month awarded three Middle Eastern consortia two-year licences to build and operate wireless phone networks, the deals were heralded as a breakthrough for regional operators willing to invest in the new Iraq.

But the US-led Coalition Provisional Authority in Iraq has been advised to postpone signing the contracts, according to a US administration official speaking on condition of anonymity. CPA lawyers in Iraq made the recommendation to delay signing the contracts for 10 days to allow time to investigate claims of cronyism by the Iraqi authorities in awarding the licences, the official said.
Source: Financial Times

Monday, November 10, 2003

Here's Another One: This time it's China and Steel

So steel could be in short supply, while China accounts for 31% of total steel consumption. Didn't I hear someone say that all this growth was a fiction:

Soaring demand for steel - including a huge increase in Chinese consumption - means that a global shortage is likely next year, industry experts are warning. World Steel Dynamics, a US-based consultancy, says there is an 85 per cent chance of a shortage in the first quarter of next year.

Steel prices have been ramping upwards in the past year, together with the outlook for industry profits. Earnings before interest, tax, depreciation and amortisation of a group of 35 large global steelmakers studied by WSD are likely, according to the consultancy, to be up 10 per cent this year compared with 2002.Investors have taken note. The shares of quoted steel companies across the world, relative to the FTSE World index, are up about 40 per cent this year, and by 150 per cent since a low point in late 2000.

This year, the better-performing steel company shares have included Ispat, the Netherlands-based company controlled by Indian steel magnate Lakshmi Mittal. Ispat's shares, relative to the FTSE World index, have risen 128 per cent since January. On a similar basis, shares in Severstal, the Russian steelmaker, are up 94 per cent, while JFE, the Japanese steel producer, has seen a 70 per cent rise.

Helping the upward trend has been the consolidation in the steel industry driven by recent mergers that have increased the size of the largest companies, giving them greater pricing power. The moves were started 18 months ago by the creation of Luxembourg-based Arcelor, the world's biggest steelmaker, from three smaller European groups. President George W. Bush helped the process when in March 2002 he imposed tariffs of up to 30 per cent on US steel imports to help the embattled US steel industry.

The import restraints - although condemned at the time by many non-US steelmakers - have had the general effect of pushing up global prices. Steelmakers from round the world - which were in poor shape in many countries in the late 1990s - have been aided by a surge in steel demand in China, which next year will account for 31 per cent of total steel consumption of 936m tonnes, according to projections from the International Iron and Steel Institute, compared with 22 per cent out of 780m tonnes in 2001.
Source: Financial Times

Some Inflationary Pressures in China

The impact of China growth on commodity prices is definitely upwards. This time the issue is agricultural prices internally as demand rises. This increase in demand will partly be a demographic pressure, and partly a result of rising living standards. As the article notes, this pressure is increasingly going to make itself felt outside China as they start to import. This means the terms of trade will, by and large, move against the OECD countries, and the inflationary pressure will arrive here. This should be good shouldn't it, I can hear you all thinking: that should help stem deflation. Well yes and no. And for the no part, you're going to have to await the explanation another day, since tempus fugit.

Xinhua state information agency reported that China has maintained a "basic balance" between supply and demand for major agricultural products since the late 1990s. Yet, national grain production is down for the fifth consecutive year, say experts. Inflation and decreasing grain reserves are worrisome.

The explosive demand for commodities in China has caused prices to rocket also at global level. Imports of grains and oil-seeds have doubled compared with last year. National grain production is down again for the fifth year consecutively. This year in particular, yields of all three major crops; wheat, rice and corn have dropped. Total national grain output is expected to fall below 450 million tons. If the trend does not change, it could result in a shortage by 2005, said the China daily on Thursday.

Inflationary trends have been recorded for grain, cooking oil, meat, eggs and fodder. The price hikes, which began in Beijing, Nanjing and Zhengzhou, quickly spread throughout the country. Purchase prices for wheat went up by 40 to 80 Yuan (US$ 4.80 - 9.70) per ton in major wheat production areas such as Henan Province. Prices for corn rose by 80 Yuan in northern China, while prices for rapeseed and rice increased by 20 and 10 per cent, respectively, in Anhui Province.

Farmers, who have been suffering sluggish income growth over the years, welcome higher prices. Still, that has its implications on the national agricultural market. The growing demand for grain stimulates imports from abroad that has other implications on the nation's trade balance.

Experts are expecting grain shortages. "China has been using its grain reserves to balance the market for the last four years," said Wan Baorui, vice-chairman of the Agriculture and Rural Affairs Committee of the National People's Congress. "The reserves can be used for, at most, another two years."

Since 2000, annual national grain demand has stood at 480-490 million tons, 25-35 million tons more than the annual output. Fundamental changes have caused that the national grain reserve have diminished. Not only natural disasters but also shrinking acreage slowed down the long years of oversupply. Moreover, rapid urbanization has been eating up grain fields.

In addition to the swift expansion of towns and cities, many regional governments have reserved large parcels of land for "economic development zones" meant to attract foreign investment, but many such zones simply lie empty due to a lack of infrastructure or adequate local investment, said the China Daily.

The low grain prices in the past have led to farmers' declining enthusiasm for planting it. Heavily burdened by various taxes and charges, most farmers would rather grow more profitable crops, such as peanuts and cotton, or migrate to the cities to look for better earnings. The latest government statistics indicate that 80.7 million rural labourers were working in cities at the end of September.

Professor Li noted that total global output of the three major crops this year would come to 2.03 billion tons, down 63.3 million tons from last year, marking the sixth consecutive year that the figure has dropped. The world grain market, meanwhile, experienced its biggest price fluctuations in seven years, said the China Daily.

Due to population growth, increasing consumerism and economic growth the grain demand is rising. Although, China must make every effort to guarantee that at least 90 per cent of demand is met by domestic supply, as grain is a product involving national security, that target is not reached so far.
Source: China Biz

On the Durability of Guanxi

I'm really ripping of this post that I just made over at Living in China. I'm up to my eyes in admin, and even I can't keep up.

Firstly I'd like to congratulate the team at ChinaBiz on the 'facelift' they've recently carried out. I find the result much more attractive. Secondly, I'd like to inform you all that I'm expanding the team quite rapidy on the Business and Economy Section at Living in China, and that in the days and weeks to come a number of new faces should be arriving there. This is partly in the interests of diversity, of both opinions and origins. There is no editorial 'line' in the section, we're going to try and cover the whole gamit of opinion. It is also partly due to the limitations in my own skills. Full disclosure: I am much more an economics than a business person. Still I am trying to learn.

Which is why today I'm bringing you something from ChinaBiz which I found extraordinarily interesting. It concerns the future of Guanxi, or informal trust. This topic is fascinating, and familiar to me more in its Southern European form than it's Chinese one. Bill Fraser is rightly skeptical about the breezy disappearance of this phenomenon. The studies I am aware of in Europe refer to the role of informal trust in the packaging machinery and textile manufacturing industries in Northern Italy, where, as is probably well known, outsourcing into small efficient units has been both speedy and effective. The curious detail is that Italy is the European society that regularly gets the lowest score when it comes to general confidence in the public administration. The interpretation that has normally been put on this is that such micro social informal trust networks normally blossom in precisely these circumstances. Which is why it is we may well find that the concept of Guanxi has a long and healthy life ahead of it in China.

The Premature Death of Guanxi
Lausanne - By Bill Fischer

After several thousand years, guanxi, or the Chinese reliance on trust and partnership within a web of relationships in order to achieve advantages, has finally met its end. Professionalism has triumphed. Merit is king. Performance is now preferred over referrals. Or so I was told last week in Shanghai by several observers of the Chinese managerial scene. As an artifact of modernization, the "new" Chinese manager is apparently much more attuned to merit and objective performance than to kinship, referrals and shared-experiences as a means for judging personnel. As the "Rule of Law" displaces the "Rule of Man," the sorts of favoritism that are characteristic of guanxi will be diminished; maybe even disappear. That is the story that is being told. I hear this, but I do not believe; at least not entirely. If, I ask, guanxi is truly dead, then why do I also hear so much about the children of past and present leaders when new investments are being mentioned?

Respect for guanxi is one of the first things that a foreigner learns about "how to do business in China." In fact, Amazon.com's new "search-inside" feature yielded 504 books when queried about guanxi, most of them describing the utility of relationships in China. Historian Albert Feuerwerker [122 Amazon-associations] considered guanxi to be one of the "five large aspects of doing business in China... whose characteristics tend[ed] to prevail" over a three-century time span1. Such longevity would suggest it considerably unlikely, if not naive, to assume that guanxi could pass from the scene so effortlessly, if ever.

There are excellent and enduring cultural reasons why we should expect guanxi to be around for a long-time to come. Francis Fukuyama has cogently argued that in societies where people cannot trust "the system" for fairness, they put their trust into relationships that they know they can depend upon2. This is as true for my wife's family in Sicily as it is for business people in China. Nisbett, has recently described the absurdity of the very idea of existing in isolation in an Asian society, and the corresponding centrality of relationships as a result3. Reliance on guanxi would appear obvious and natural.

What, then, should the aspiring businessperson know about guanxi? First, it can provide enormous advantages. Guanxi is an entry-way into Chinese society that no other form of "introduction" can rival. During the early-20th century, when the Chinese market was also opening to international competition, some foreign competitors were, in fact, able to use the guanxi of their Chinese partners to build fast and reliable distribution networks of considerable scope. On the other hand, the same studies also show that guanxi could be a formidable constraint to geographic expansion if relationships ran-out before market space did4. Furthermore, because relationships are innately personal, guanxi only gets you so far: guanxi does not globalize easily, nor is it readily transferable. It is not "owned" by the organization, but by the individual and, consequently, its influence can be quite particularistic.

1 Albert Feuerwerker, "Doing Business in China Over Three Centuries," in Gardella, Leonard and McElderry, [eds.] Chinese Business History, Armonk, NY: M.E. Sharpe, 1998.

2 Francis Fukuyama, Trust, New York: The Free Press, 1995.

3 Richard E. Nisbett, The Geography of Thought, New York: The Free Press, 2003.

4 Sherman Cochran, Encountering Chinese Networks, Berkeley: The University of California Press, 2000.

Stephen Roach and the New Paradigm

Stephen Roach puts his finger on something important here. These global imbalances, especially the ones which revolve around the structural role of the US dollar as a reserve currency seem ominously looming. If the dollar ever should 'unwind' there is going to be one very big problem. Perhaps this is the coiled spring Snow was referring to recently.

The current New Paradigm goes something like this: Global imbalances don’t matter. Never mind, America’s unprecedented current account deficit -- let alone massive current-account surpluses in Asia. Pay no heed to the shaky foundations of a saving-short US economy and its runaway federal government budget deficit that lies at the heart of America’s massive external imbalance. Don’t worry about the ever-rising overhang of private sector indebtedness in the US, especially for the household sector. This is what the New World Order is all about. America is supposed to consume beyond its means, as those means are delineated by the economy’s domestic income-generating capacity. Awash in surplus saving, a demand-deficient rest of the world will gladly finance America’s gaping external imbalance -- and will do so willingly and in a relatively costless fashion. The result will be open-ended foreign demand for dollar-denominated assets. US Treasuries -- the most riskless segment of this superior asset class -- will benefit the most. That will keep US interest rates low, providing even more support to American aggregate demand. In a unipolar world, the dollar -- the world’s reserve currency -- can’t fall. After all, what other currency could rise?
Source: Morgan Stanley GEF

Japanese Economy: Between the Deep Blue Sea and the Devil

Initial reactions to this weekends elections don't exactly seem to be too favourable. In the background cis the problem that many Japanese are disappointed by the failure to generate improvement in the real - as opposed to the financial - economy. In the foreground foreign investors are now getting nervous about how the results will affect the 'reform process'. My opinion was that all the optimism has been extremely superficial. Nothing important has really changed in Japan. The deflation problem is still there. 'Painful' structural reforms are not going to win votes. Nor are ageing voters with savings are not easily going to buy the 'inflation targeting' alternative. This week I will try and post a bit more around the Japan topic.

Japan's Prime Minister Junichiro Koizumi may be forced to make more compromises on economic reform after Sunday's Lower House election gave more clout to both the opposition and the old guard within his party. Although the ruling three-party coalition retained control of parliament, Koizumi's Liberal Democratic Party (LDP) lost a large number of seats to the opposition Democratic Party and was unable to retain the Lower House majority it had held on its own.

This shift in the political map may embolden Koizumi's foes within the LDP, who consider his reform policies too hawkish. It also strengthens the opposition Democrats, who support the need for change but think prime minister has his priorities wrong. Koizumi's double-bind means foreign investors, who have led the Tokyo stock market's 40 percent rebound since April, may temper their optimism about an overdue economic turnaround and trim their holdings of Japanese equities, analysts said.

Gross domestic product (GDP) figures due out next Friday are expected to show a marked deceleration in Japan's economic expansion, keeping markets edgy and voters unconvinced about the progress on Japan's overdue economic restructuring. "Given the LDP's weak showing, which could have been even weaker had it not been for the low turnout, I think stocks will come under pressure," said Shuji Shirota, an economist at Dresdner Kleinwort Wasserstein in Tokyo.

"A lot of U.S. funds close their books at the end of November and they have already begun selling off some of the Japanese shares they had bought over the last several months," he said. The Tokyo market's blue-chip Nikkei average closed last week at 10,628.98, up nearly 40 percent from 21-year lows set in April but off about five percent from last month's peaks above 11,000.Shirota said the election results were also slightly negative for the yen, which rose to a three-year high of around 107.85 to the dollar in October before ending last week at around 109.30.Bonds could also come under pressure if Koizumi's weaker position led to a deterioration in his fiscal discipline policy, analysts said......

"What this tells us is that for the voters, Japan's economic recovery has not been tangible. Gross domestic product has not really recovered on a nominal basis and people are tired of hearing about structural reform," said Shirota at Dresdner. Japan's GDP figures for the July-September quarter, due out on Friday, are expected to show the economy narrowly escaped contraction and expanded for the seventh consecutive quarter in real terms, after accounting for price deflation.

But in nominal terms, GDP is likely to have contracted after registering marginal growth for a couple of quarters. A Reuters survey of 26 economists produced a median forecast of a quarter-on-quarter rise of 0.3 percent in real terms. On an annualised basis, the consensus forecast was for a gain of 1.2 percent, markedly slower than 3.9 percent in April-June and U.S third-quarter growth of 7.2 percent in annual terms.
Source: Forbes