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Saturday, November 19, 2005

Sunnyside Up On Europe?

The Economist has an article this week which essentially pushes the theme that "the euro area's economies are in better shape than they look". This may well be true, especially if you think they are in very, very bad shape: everything is relative to the expectations of the beholder.

I find the article a frustrating one, since some of the points it makes are extremely valid, and yet overall it still fails to grasp the underlying 'big picture'.

Things they get right:

1/. Eurozone economies are picking up speed. (Although not all of them, Italy isn't, and picking up speed for how long?).

2/. By American standards eurozone growth looks sluggish.

3/. The main reason - for the extra US growth - is that America's population is increasing much faster than the eurozone's.

4/. Spain has enjoyed the fastest expansion in jobs, 4% a year since 2000. (And Spain has the fastest growing eurozone population, thanks to a 1.5% increase per annum from immigration).

5/. Employment has not grown particularly slowly in the eurozone: "employment has grown a tad faster in the euro area than in America whether one looks at the past five years or the past ten - a striking improvement over the decade to the mid-1990s".

6/. Europe has to learn to live with a shrinking workforce and an ageing population.

Things that it gets not quite right:

1/. The article doesn't look at comparative numbers for changes in productivity. This - eg - is obviously in favour of the US (although this is one of the things which may change).

2/. The Economist claims that "even in Germany there are now signs that domestic demand is stirring". This, I think, is hope against hope. As the article itself notes, "economists at HVB, a big German bank, reckon that private consumption probably shrank for the third quarter running, for the first time on record". I see no reason why this situation is going to change dramatically.

3/ Really they fail to distinguish between France and Spain on the one hand, and Germany and Italy on the other ( See my posts on AFOE here, and on Afem here).

Basically I think their conclusion - "given that Europe's unhappy economies have not been doing so badly compared with America's jollier one, the rewards from further reform might be all the greater" - is a mistaken one.

It is mistaken since in the first place it is not a valid procedure - IMHO - to put all Europe's economies in the same basket in this context, and in the second place, because the whole argument depends on a kind of steady-state prejudice. Simply put, the only reason to assume that the Eurozone economies having grown slower than the US one for sometime may now grow more quickly, is the idea that they all share one common 'steady state' balanced growth path. This I think is a theoretical prejudice and a mistake, and if this assumption falls, then so does the argument. None of which should be taken as implying, of course, that most of the reforms the Economist is advocating aren't badly - and in most cases very badly - needed.

Friday, November 18, 2005

Contradictory Surveys?

The FT reports this morning on the latest survey from the Pew Research Centre to the effect that:

"Some 42 per cent of Americans say the country should 'mind its own business internationally and let other countries get along the best they can on their own'"

"As the Iraq war has shaken the global outlook of American influentials, it has led to a revival of isolationist sentiment among the general public"

On the other hand Brad Setser points us to an Economist article which highlights the fact that:

"In America, China looms enormous in the public's fear of globalisation. According to a recent Harris Poll, four in ten Americans believe that China will be stronger than America within a decade, and most reckon the Asian giant will have a negative effect on the future of America's economy."

Perhaps I am alowing myself to be influenced by the fact that Brad's prime target in his post was how the 'China menace' perception might fuel an Asian interventionist policy from the Pentagon (itself financed by dollars lent by the Chinese themselves), but it does seem to me that the Harris poll would lead you to expect more not less intervention in the future.

Perhaps the way to square the apparent anomaly would be to imagine that it is perceptions of globalisation, and its advantages and disadvantages, which may be changing inside the US.

Thursday, November 17, 2005

India Picks Up The Reform Baton

Well, its not the last word in "open-ness", but it certainly is a step in the right direction. According to the FT, India’s government is about to move forward on package containing sweeping liberalisation of foreign direct investment rules in order to kick start a long-stalled programme of economic reforms.

Kamal Nath, India’s minister for commerce and industry, has proposed allowing 100 per cent foreign direct investment in a range of sectors, including airport construction, oil & gas infrastructure and cash & carry wholesale trading.The cabinet will also debate whether to allow FDI in the exploration and mining of coal, lignite and diamonds, and in the cultivation of important plantation crops such as coffee, tea and rubber....

The measures will disappoint the US and UK government, however, who have been lobbying aggressively for foreign direct investment thresholds to be allowed in the Indian retail sector and for the ownership ceiling to be raised in insurance. Mr Nath, in an interview on Tuesday, said he would be in a position to put a proposal to the cabinet permitting FDI in retail, allowing companies such as Wal-Mart and Tesco to enter into the $205bn Indian retail market, within three months.

Paul Colinvaux and Rivers That Flow Uphill

Here's a new take on the 'living in interesting times' theme: the curse is really that with so many interesting things going-off its hard to concentrate sufficiently on any one of them. The latest case in point is Robert, who wrote me about the size of an acre, and indirectly pointed me towards the work of Paul Colinvaux. As can be seen from the photo, he must undoubtedly be a man after my own heart.

Colinvaux's work is ecological, and he is, of course, interested in population dynamics. Equally interesting, he seems to have attracted the attention of fellow Bonobo enthusiast William H Calvin. Calvin discusses Colinvaux's work in The River That Flows Uphill, which is his river diary of a two-week whitewater trip through the bottom of the Grand Canyon. Again, well worth the read.

Wednesday, November 16, 2005

Fertility Among Foragers and Agriculturalists

Now here's an interesting paper from karen kramer and james boone: Why Intensive Agriculturalists Have Higher Fertility: A Household Energy Budget Approach.

Basically Kramer and Boone look at comparative fertility rates in foraging and agricultural societies:

"It is widely held that human population growth rates began to increase markedly after the Pleistocene/Holocene transition largely as a consequence of the adoption of agriculture and sedentism. A common explanation for this increase in growth rates has been that circumstances associated with food production and/or the accompanying decrease in mobility allowed for higher fertility rates, but over the past decade a number of empirical studies and simulation analyses have revealed that the relationship between mode of subsistence and fertility is more complex than had previously been realized."

"In 1988, Campbell andWood published a cross-cultural compilation of total fertility rates (TFR) of 70 forager, horticultural, and intensive agricultural societies from the contemporary ethnographic record that showed no significant differences in TFRs across subsistence regimes. Hewlett (1991) published a similar analysis of 40 mobile and sedentary foragers and pastoralists that indicated slightly higher fertility rates among pastoralists, although the difference was not significant. In 1993, Bentley et al. published an extensive critique and reanalysis of the Campbell and Wood study, presenting a new cross-cultural comparison of 57 forager, horticultural, and intensive agricultural groups (Bentley, Jasien-ska, and Goldberg 1993, Bentley, Goldberg, and Jasienska 1993). Using a subset of the Campbell andWood sample, excluding nonindependent cases (ethnic groups that were closely related) and populations with high levels of sterility, they found that intensive agriculturalists had significantly higher fertility rates. Interestingly, however, horticulturalists showed slightly lower fertility than foragers in the sample, although the difference was not significant. Using a similar kind of data base, Sellen and Mace (1997) have shown that for every 10%increase in dependence on agriculture there is a 0.4 increase in TFR."

Now a number of points seem to clearly stand out here. Firstly, fertility generally in foraging (hunter/gatherer) societies is not especially high: Hewlett finds a mean TFR of 5.6 with a range of 3.5 - 7.9, while Bentley, Goldberg, and Jasienska find a mean for agriculturalists of 6.6 with a range of 3.5 to 9.9. So fertility in agricultural societies is somewhat higher, now why the difference? Now as Kramer and Boone state circumstances associated with food production and/or the accompanying decrease in mobility might have been thought to account for the difference, but apparently not. So what was it?

"This paper explores the idea that children’s contribution to underwriting the cost of large families may be an important factor conditioning variation in family size and the higher fertility attained by at least some intensive agriculturalists."

In other words it was the role of children as a source of cheap labour which drove the additional fertility. Well, what'd'yu know. Definitely worth a read.

The Full Cantillon Post is Worth Reading

As I suspected, Cantillon didn't write exactly what many have subsequently attributed to him:

In the lower classes of the state also there are men who from pride and from reasons similar to those of the nobility, prefer to live in celibacy and to spend on themselves the little that they have rather than settle down in family life. But most of them would gladly set up a family if they could count upon keeping it up as they would wish: they would consider themselves to do an injustice to their children if they brought them up to fall into a lower class than themselves. Only a few men in a state avoid marriage from sheer flightiness. All the lower orders wish to live and bring up children who can live like themselves. When labourers and mechanics do not marry it is because they wait till they save something to enable them to set up a household or to find some young woman who brings a little capital for that purpose, since they see every day others like them who for lack of such precaution start housekeeping and fall into the most frightful poverty, being obliged to deprive themselves of their own food to nourish their children.

From the observations of Mr Halley, at Breslaw in Silesia, it is found that of all the females capable of child bearing, from 16 to 45 years of age, not one in six actually bears a child every year, while, says Mr Halley, there ought to be at least 4 or 6 who should have children every year, without including those who are barren or have still births. The reason why four women out of six do not bear children every year is that they cannot marry because of the discouragements and difficulties in their way. A young woman takes care not to become a mother if she is not married; she cannot marry unless she finds a man who is ready to run the risk of it. Most of the people in a state are hired or are undertakers; most are dependent and live in uncertainty whether they will find by their labour or their undertakings the means of supporting their household on the footing they have in view. Therefore they do not all marry, or marry so late that of six women, or at least four, who should produce a child every year there is actually only one in six who becomes a mother.

The increase of population can be carried furthest in the countries where the people are content to live the most poorly and to consume the least produce of the soil. In countries where all the peasants and labourers are accustomed to eat meat and drink wine, beer, etc. so many inhabitants cannot be supported.

Men multiply like mice in a barn if they have unlimited means of subsistence; and the English in the colonies will become more numerous in proportion in three generations than they would be in thirty in England, because in the colonies they find for cultivation new tracts of land from which they drive the savages.

A state which has conquered several provinces may, by tribute imposed on the vanquished, acquire an increase of subsistence for its own people. The Romans drew a great part of their subsistence from Egypt, Sicily and Africa and that is why Italy then contained so many inhabitants.

A state where mines are found, having manufactures which do not require much of the produce of the land to send them into foreign countries, and drawing from them in exchange plentiful merchandise and produce of the land, acquires an increased fund for the subsistence of its subjects.

The Dutch exchange their labour in navigation, fishing or manufactures principally with foreigners, for the products of their land. Otherwise Holland could not support of itself its population. England buys from abroad considerable amounts of timber, hemp and other materials or products of the soil and consumes much wine for which she pays in minerals, manufactures, etc. That saves the English a great quantity of the products of their soil. Without these advantages the people of England, on the footing of the expense of living there, could not be so numerous as they are. The coal mines save them several millions of acres of land which would otherwise be needed to grow timber.

It is also a question outside of my subject whether it is better to have a great multitude of inhabitants, poor and badly provided, than a smaller number, much more at their ease: a million who consume the produce of 6 acres per head or 4 million who live on the product of an acre and a half.

Essai sur la nature du commerce en general
Part One: Chapter Fourteen The Fancies, the Fashions, and the Modes of Living of the Prince, and especially of the Landowners, determine the use to which Land is put in a State and cause the variations in the Market price of all things

Cantillon, Mice and China

I am rumaging around trying to find the source of the Cantillon quote:

"Men multiply like mice in a barn if they have unlimited means of subsistence"

I have found it, and the idea behind the quote is, of course, interestingly wrong. It is wrong for self-evident reasons, and it is interesting for the lasting impact it has had on the way some economists see demography and fertility. (More on all this soon, but meantime you can find Cantillon's Essai Sur La Nature Du Commerce En General here).

However, I couldn't help noticing the similarity between what Richard Cantillon argued 250 years ago, and the latest OECD report on Chinese agriculture (see previous post and - plus ça change!).

There is no country where population is carried to a greater height than in China. The common people are supported by rice and rice water; they work almost naked and in the southern provinces they have three plentiful harvests of rice yearly, thanks to their great attention to agriculture. The land is never fallow and yields a hundredfold every year. Those who are clothed have generally clothing of cotton, which needs so little land for its production that an acre of land, it seems, is capable of producing a quantity full sufficient for the clothing of five hundred grown up persons. The Chinese by the principles of their religion are obliged to marry, and bring up as many children as their means of subsistence will afford. They look upon it as a crime to lay land out in pleasure gardens or parks, defrauding the public of maintenance. They carry travellers in sedan chairs, and save the work of horses upon all tasks which can be performed by men. Their number is incredible if the relation of voyages is to be depended upon, yet they are forced to destroy many of their children in the cradle when they apprehend themselves not to be able to bring them up, keeping only the number they are able to support. By hard and indefatigable labour they draw from the rivers an extraordinary quantity of fish and from the land all that is possible.

Nevertheless when bad years come they starve in thousands in spite of the care of the emperor who stores rice for such contingencies. Numerous then as the people of China are, they are necessarily proportioned to their means of living and do not exceed the number the country can support according to their standard of life; and on this footing a single acre of land will support many of them.

Guessing that 0.65 hectares is around an acre, this seems to be the case: "Fully 200m of China’s 248m rural households farm on plots of land of around 0.65ha".
OECD 2005

Update: Robert "the rattlesnake" has just mailed me pointing out the following:

0.65 hectare is 1.6 acres

One hectare is 2.5 acres (actually close to 1% less)
and 1 acre is 0.4 ha (actually a little over 1% more)

In passing I would add two unrelated comments. Firstly I have comments switched off since Blogger has been attracting one hell of a lot of spam, and since posts which may be more likely to attract comments and discussion go on A Fistful of Euros (or Afem) anyway. Secondly, can I recommend Robert's interesting looking tour de force: Choice and Constraint.

OECD on Chinese Agriculture

The OECD has a new report on Chinese agriculture (you can download a free read-only browse copy here).

According to the report agriculture accounts for 40 per cent of China’s workers, but produces only 15 per cent of economic output. This gap that can only be narrowed if farmers are re-deployed to other, more productive sectors sectors.

"The transfer of huge numbers of workers from low productivity agriculture to higher productivity manufacturing is one of the basic ingredients of China’s economic growth"

Fully 200m of China’s 248m rural households farm on plots of land of around 0.65ha. While output is high per unit of land, it is low relative to the number of workers employed. The result of this is that China tends to have a comparative advantage in the production of labour intensive crops, such as fruits and vegetables, and a disadvantage in the production of land intensive crops, such as grains and oilseeds.

The report also suggests that anywhere between 70m and 100m more rural workers will leave agriculture between 2000 and 2010 on current trends. The capacity of businesses in smaller towns to absorb them seems doubtful, so pressure on China’s larger cities is only likely to grow.

Much of the evaluation of progress in Chinese agriculture is positive:

Over the last twenty five years, China has made huge progress in meeting its agricultural policy objectives: agricultural production has risen sharply, rural industries have absorbed a large part of farm labour, poverty has fallen dramatically, and the level and quality of food consumption has improved significantly. In line with the improving economic situation, government priorities have shifted from increasing production, especially of food grains, to rural income support and, most recently, to environmental concerns.

Bernanke To Introduce Inflation Targeting

I suppose this is hardly 'beaking news', but Ben Bernanke made it abundantly clear in his appearance yesterday before the US Senate banking committee that he is an inflation targeting enthusiast. His actual words:

"Providing quantitative guidance about the meaning of ‘long-term price stability’ could have several advantages, including further reducing public uncertainty about monetary policy and anchoring long-term inflation expectations even more effectively....This step would in no way reduce the importance of maximum employment as a policy goal. Indeed, a key justification for this action is its potential to contribute to stronger and more stable employment growth by further stabilising inflation and inflation expectations".

Since he is also a realist and a pragmatist, Bernake also stressed that changes would be gradual and consensual. OK, I tend to be more with Greenspan on this, but now lets see how it works out in practice.

Monday, November 14, 2005

An Orderly Withdrawal?

On one version of events the Bank of Japan is simply dotting the 'i's and crossing the 't's on it road map to exit the massive monetary easing process sometime during the next six months. On another the road itself is fraught with difficulty, and an overly 'inflation wary' central bank might risk upsetting the whole apple cart if it proceeds to rapidly. It is this tension which seems to be reflected in today's FT article from David Pilling about a shouting match which seems to have broken out between the Ministry of Finance and the BoJ. According to Pilling:

Japan’s government on Monday tried to calm a potentially explosive row with the central bank over the timing of monetary tightening, saying there was no “wavering of trust” in its relationship with the Bank of Japan.

The MoF is concerned that any premature monetary tightening could threaten fragile economic growth and limit its ability to conduct what it considers essential fiscal tightening.

MoF officials are also concerned that the central bank may cut its purchases of government bonds, currently at Y1,200bn a month, as part of monetary tightening, a move that could push up long-term rates and damage efforts to roll over huge quantities of public debt.

Hidenao Nakagawa, policy chief of the ruling Liberal Democratic party, is quoted as saying:

The BoJ has no independence when it comes to policy targets.If it does not understand this, we need to consider amending the BoJ Law

Former BoJ board member Nobuyuki Nakahara is also cited as saying that the central bank was “crazy” if it thought the government would let it reduce JGB purchases, since it was a move which “would immediately invite long-term rates to rise.”

Coincidentally or otherwise the FT also has a story today about how Sadakazu Tanigaki, Japan's finance minister, said on television on Sunday that spending cuts and a reduction in debt issuance were not sufficient to restore government finances to sound health, and that an increase in consumption tax was required to tackle the country’s heavy debt burden.

And if anyone is really interested in following where the coincidences end here and the patterns begin, the FT has another piece, about Germany this time, where it notes that the new coalition partners "are poised to preside over one of the most fiscally conservative governments in nearly two decades". Value-added tax is about to rise by three percentage points from 2007, with two-thirds of the proceeds going towards plugging the budget hole. The top tax rate for high earners will rise by three percentage points, and many tax incentives that had allowed Germans to minimise their tax bills will be scrapped. A corporate tax reform intended for 2007 will also be postponed by one year.

Of course both Japan and Germany are countries with export driven economies, running balance of payments surpluses, and where domestic consumption has been running notoriously weakly, so the ecopnomic rational here is peculiar, except for the fact that both have the fical holes due to the presence of rapidly ageing popultaions.

Still, if you want to follow the coincidence through to the end, what's the betting that government representatives in Germany (but this time perhaps diplomatically), are making it known over at the ECB that moving later rather than sooner with any rate rises would be greatly appreciated.