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Friday, June 06, 2003

Tunnelling the Bottom of Japan's Deflation Trap

A really rather unusual article from MS's Takehiro Saito, which argues that the decline in personal savings is not alarming since it is matched by a rise in corporate saving. This corporate saving will continue, he argues, since in deflationary times with a rising currency, and weak demand, cash, or domestic bonds (and in particular JGB's) are about the best investment corporate Japan can make. This is of course an extremely vicious circle, which explains why we should be so wary of deflation, and why talk of Germany only being in danger of 'benign' deflation is complete tommyrot. As Saito suggests: "a powerful equilibrium exists with close links among deflation, private-sector savings surplus (current-account surplus), and home country bias supported by yen appreciation and expect ongoing stability in the government funding base."

Despite considerable anxiety about the future of fiscal deficits premised on the loss of saving-investment surplus, we do not view stress applied by the declining household savings rate as a difficult challenge as long as corporate debt repayment continues spurred by asset price deflation. More disconcerting is the quietly advancing evaporation of the yield curve, which has easily surmounted all challenges thrown its way thus far. We believe all of the factors defining yield curve shape are tied together by the central concept of deflation. For example, sustained strong home-country bias exhibited by domestic institutional investors stems from deflation and the zero interest rate. Since real interest rates at home are always positive under zero interest rate policy (ZIRP) and deflation, investors have less incentive to move capital into foreign-currency-denominated assets. Furthermore, in contrast to the rise in real asset value and decline in cash and bond actual value under inflation, real asset value declines and cash and bond actual value increases under deflation. It therefore makes economic sense to hold home-currency-denominated bonds in a deflationary environment despite extremely low nominal interest rates. Forward discount bias from the constant positive discrepancy between domestic and foreign nominal short-term rates in a zero nominal interest rate situation also places upward pressure on yen value. From this perspective, domestic institutional investors are behaving in an economically reasonable manner within the context of deflation and zero interest rates.

Another factor is that excessive competition among financial institutions under debt deflation interferes with the correct economic behavior of setting loan interest rates based on credit risk. We expect long-term yields to stay at extreme lows as long as loan interest rates are inappropriately restricted to lows from the standpoint of arbitrage between bond and loan markets. The abnormality to us is loan interest rates, not long-term interest rates. We have repeatedly stressed the importance of rectifying loan interest rate levels. Yet this is not happening in reality with steady expansion of the overextended government-affiliated financial institution presence. We believe government policy is actually encouraging long-term interest rates to move even lower.
Source: Morgan Stanley Global Economic Forum

Crossing the Gate of Deflationland

Right, I believe putting your money up on the table time is getting near. What is happening now in Germany is clearly a turning point of a kind. The big ship has struck rock, water is coming in, and no-one really knows how to plug the leak. Of course, suggestions abound, mainly of the structural reform kind. Others commentators suggest more aggressive monetary policy, and yet others relaxation of the growth and stability pact. In some measure all of these are necessary, the problem is to what extent, when and how? Most discussion seems to me to suffer from the shortcoming that they assume that Germany has for some reason (normally this remains strangely unexplained, but occasionally it is put down to the impact of re-unification on Labour prices: this is cleary one case where it is asumed that Harrod-Samuelson-Balassa hasn't worked), anyway, as I was saying Germany has come unhinged from a nice clean constant equilibrium path, and therfore what is needed now is the right policy mix to get things nicely back into place. The problem with this line of thought is that it may well in fact be the case that the German economy might is following some kind of 'equilibrium' path, just not a nice one, and one to which it may well revert after the impact of any government induced endogenous shock has subsided.

What I am suggesting is that we may be looking at all this upside down, or through its reverse image. What we take as divergence from normality, may in fact be normality as we are likely to know it, and what we may be trying to do is shift the path to an 'abnormal' and unsustainable one. (Now I know I don't believe in 'paths' in the naieve sense, but I think my meaning is clear: if not please hit me with questions). If that is so we will surely fail to correct a problem we have misunderstood whatever the medicine we apply. The difficult question is where to begin to peel this particular onion. In my book, unfortunately, EMU is part of the problem, not a route to the cure. Whatever else may be said, Germany needs unshackling from the euro. This I take is the point about loosening the growth and stability pact. Without the euro Germany would be free to sink or swim on its own terms. Like Japan it could commence a skywards run-up in government debt. This alone would not resolve anything. But it would open up the option of 'unconventional' monetary policy and fiscal stimulus to try and get the magneto to turn (imagine trying to get the EU institutions to agree to inflation targeting for Germany). Whether this would make and difference or not would depend whether at its advanced age, German society is capable of coming to terms with its identity problem and opening itself and its labour markets to the world. All this may sound very drastic, but it would be a shot, maybe a long one, and maybe the only one available. For make no mistake about it, the deflation which is already arriving will not be benign, and it will be extremely difficult to shake off. It will need courage, imagination and determination. There is no 'easy' solution, but we are still a long way from taking full measure of the problems which lie in front of us. Are our politicians up to making the change, that is the question?

Now over to Steven Roach and the Morgan Stanley crew who have been applying themselves to exactly these topics in a timely and interesting debate.

Stephen Roach: In a recent Forum dispatch ("Euro-Wreck" dated 2 June), I raised what I believe are some serious concerns about the state of the European economy, fearing that an asymmetrical shock in Germany could tip this key region into outright deflation. I also raised the related point that the EMU-based recipe of fiscal and monetary policy, which focuses on average performance in the euro-zone, may be inappropriate to deal with severe country-specific shocks in the region's biggest economy.

Eric Chaney:

There is an asymmetric shock in Emuland, and it's a big one. Your conclusions Steve are fairly consistent with my own (see State of Emergency Calls for Emergency Remedy, May 16, 2003) proposals: giving Germany (and only Germany) its fiscal freedom temporarily (this is possible under the Stability Pact provisions) under the condition of a complete overhaul of the wage negotiation system. These ideas have circulated among policy makers circles and somebody I met at the G30 last Friday told me: "It's a good idea, Eric, which makes a lot of economic sense, but — this is a big but — it is impossible to sell it to politicians". I will try again.

............the risk I see is that we are not witnessing just another recession. Instead, we might well be crossing the gate of Deflationland, without knowing whether this will be benign and temporary (maybe necessary, as Joachim thinks) or the first symptom of the “quagmire” described by Paul Krugman, the last thing Europe needs. In addition, I am very far from advocating a fiscal stimulus in Germany. I am just saying that circumstances are indeed exceptional and that Germany should only recover the full use of its fiscal stabilisers, instead of trying pathetically to plug gaps in order to get a satisfecit from Brussels. At the end of the day, Germany will enter deeper in deflation and have an ever bigger public deficit. That is the cruel lesson of the Japanese debt deflation. The Pact (this brainchild of Theo Waigel, as you had wittily named it, if I remember well), mentions an outright recession, measured on an annual basis, as a case for not capping deficits. I am sure that you would agree with me on the fact that what matters is not the annual growth number, but the cumulated change in the output gap. German GDP growth was 0.6% in 2001, 0.2% in 2002 and, on our estimates will be around 0% this year. Even assuming that German potential growth is only 1%, then the increase in the output gap since the end of 2000, will be 2.2% at the end of this year. If all that had happened in one year, it would have been much more spectacular and even our dear Mr. Solbes would have conceded “extraordinary circumstances.” The most unrealistic part of my story is to free up Germany while keeping France and others under the Caudine Forks of the Pact. Impossible to sell it to politicians, I am told in Paris. The law is Nash, not co-operative equilibrium. Don't ask me why, maybe because there is another law saying it is forbidden to be intelligent. That is why I think we will go to deflation, and live a re-foundation crisis. Either the EMU will break up, or we will be wise enough to re-think the macro management of EMU. The theoretical solution to cases of externalities is to create a market where the causes of externalities can be traded. A refunded and innovative Stability Pact would allow governments to trade “rights to pollute,” sorry, I meant “rights to run excessive deficits.”

Stephen Roach: What a great debate. The intensity of the exchange is very gratifying. It shows how much we all agree on the importance of this problem and the stakes it holds for Europe and the broader global economy. In the great spirit of free and open intellectual engagement that we have long cherished at Morgan Stanley, you certainly won't find the pabulum of consensus thinking in this group. While I don't pretend to have the final word, I would like to offer just one point of clarification:

The German-specific policy efforts that I support reflect my deep concerns over the risk of a serious asymmetrical shock that could quickly spread to the rest of Europe. They do not represent a wholesale retreat from the long-term discipline of EMU. But one-size policies do little to deal with the extremes that are now evident if Germany is treated the same as Ireland. I would welcome runaway inflation in the latter if that is what it takes to pull Germany away from the abyss. The American analogy that is often used to assess the stresses and strains of Europe is not appropriate. The United States of Europe is very different from the United States of America. California, America's largest state, accounts for 10% to 11% of the US economy. Germany is fully one-third of Euroland and accounts for about 30% of the cross-border linkages that knit Euroland together. As Germany goes, so goes Europe. The risk of a destabilizing shock in Germany is growing larger, in my view. As insurance against that risk, the rules of EMU should be temporarily suspended while Germany gets some powerful medicine. My sympathies to the "Irelands" of Europe, but under the circumstances I'm afraid that such a concession may be well worth the price.
Source: Morgan Stanley Global Economic Forum

Anyone For A Helicopter South?

Joerg is back again. Paying teachers not to teach, as Joerg says, this certainly does seem to be one of the stupider consequences of the structural reforms and the growth and stability pact (or the Bush tax cut come to that) given the imporatnce of human capital formation for all our futures.

I guess you want to find out how many of your site visitors will say that Bush is waging his own version of the Ruhrkampf on the shores of the Tigris. I certainly wouldn´t have thought about that one, but maybe the parallel is justifiable.

But economically speaking, any historical analogies that predate 1971 don´t cut it. Since then, it is the real economic effect of any state expenditure that needs to be looked at - not its accounting cost. Laying off teachers - so they are being paid for not teaching anymore - only does damage, whereas stimulating employment would positively contribute to economic recovery. Am I supposed to believe that printing money is only good as long as the money is not spent for any useful purpose - since that would constitute dreadful debt we might never be able to repay -, whereas having it circulate casino-style - or not circulate that much at all - is an economic panacea because it comes close to seeing Keynes´ prescription of getting the unemployed to dig up mountains of greenbacks coming to fruition?

Murdoch´s publicly stated reason for cranking up his propaganda machine in support of the Iraq war was that he would like to see a decline in the price of oil. Current price action doesn´t vindicate him. While medium-term his wish may be fulfilled, long-term there is the risk of terrorists blowing up newly opened pipelines. Not to mention the absolute silliness of not stretching out a scarce resource like oil for as long as possible by taxing it heavily and thereby incentivizing energy conservation, faster switching to natural gas, renewables and a renaissance of nuclear energy. So Bush may really be debasing America´s future - not in monetary terms, but by limiting the potential for future growth.

Juggling With Our Neo-Classical Balls

Brad Delong has an interesting post on the limitations of neo classical analysis, which while it is directed at another topic, is equally relevant in the context of my output gap arguments. Brad puts it so much better than I can, but the point in fact is the same, the 'balls' in my court are human and embedded capital values, technological change, demography, learning and ageing etc, global divison of labour and value etc, etc. This is just so complex that we need to be clear about what we know, and may not know. To whom the gods would destroy, they first give 'knowledge' in order to drive them mad.

Now economists'--at least, neoclassical economists'--standard methodology is to start from a well-functioning neoclassical market economy, impose one distortion or blockage at a time, and estimate its consequences. This methodology is not very helpful as far as this issue is concerned ............ Any assessment of the value of international capital mobility must juggle six different balls in the air at once: six important deviations from the neoclassical framework: irrational noise traders in financial markets, severe moral hazard weaknesses in banking and other parts of the financial system, excessively short planning horizons on the part of governments, the sociology and economics of technology spillovers and technology transfer, the sociological dynamics of retail corruption and wholesale interest-group politics, the importance of well-functioning market-regulating institutions, and our (currently missing) framework for analyzing government failure (the public-choice parodies of such a framework do not yet count). Oops. That's seven different balls in the air.

We economists don't have the tools or the smarts to juggle more than one or maybe two such balls in the air at any one time. As a result, our analyses of international capital mobility are much more like "Gee, I kept one ball in the air, and I think this one was the biggest ball" than like the Flying Karamazov Brothers juggling routines that they need to be.
Source: Semi Daily Journal

Japan Invests in Dollars

Japan's foreign currency reserves are hitting record highs, so long as the BOJ doesn't sterilise and continues with monetary easing, this could turn out to be one of the best investments in history the day the dollar goes on the rebound. Certainly they could prove to be a lot more interesting for the central bank than Japan government bonds.

Japan's foreign exchange reserves soared by $43.65bn to $543.1bn in May, providing further evidence that the government has sharply stepped up its already massive efforts to weaken the yen. Peter Morgan, economist at HSBC in Tokyo, said the new evidence indicated that Japan might be on the verge of "writing a new chapter in the history of currency intervention in the coming months". So long as the US continued to let this scale of intervention go without complaining, he said, there was no upper limit to the amount of yen Japan could sell. On Friday the yen defied Japan's wishes by strengthening sharply in afternoon trading to ¥117.8 to the dollar from ¥118.8 the previous day. The International Monetary Fund this week scolded Japan for its interventionist policy, saying it was pointless trying to buck market trends. The huge intervention was on Friday matched by a verbal assault from the prime minister down as ministers lined up to say the yen was too strong compared with Japan's economic fundamentals. Exports, which are hindered by a strong currency, were last year one of the few bright spots in Japan's sluggish economy. Heizo Takenaka, economy minister, told parliament: "There are many people who think the yen is strong relative to purchasing power parity and I share that view." Masajuro Shiokawa, finance minister, has said several times in the past few months that the Japanese currency would be worth about ¥150 to the dollar if it were calculated according to purchasing power parity.
Source: Financial Times

Hiding the Finacial Rot at Resona

Japan watcher Richard Katz on the decision to bail-out Resona. Perhaps the most significant thing is that this is happening at all. As Katz says, the ripple effect is just begining. Remember the rice pile!

Theories about Tokyo's decision to inject $17bn into the Resona banking group are polarised. Some see it as yet another bailout of a mismanaged bank and its borrowers. Others predict that banking minister Heizo Takenaka will compel Resona to rid itself of non- performing loans (NPLs), thereby creating a model for other banks. Both poles focus too narrowly on the immediate outcome. Yes, there is a danger of a bailout with only limited action against "zombie" borrowers. It is disturbing that the stock prices of some of Resona's worst-off borrowers are now rebounding sharply. However, if Mr Takenaka intended nothing more than a bailout, why not simply hide Resona's financial rot, as in the past?

What matters in this episode is the process that brought it about. It began with a private struggle among the auditors - so intense that one of the chief auditors took his own life rather than aid a cover-up. Meanwhile, some officials at the Financial Services Agency defied Mr Takenaka's orders not to interfere in the audit. On May 10, according to a transcript prepared by Resona, and obtained by The Oriental Economist Report, Masanori Suzuki, FSA banking division chief, promised Akiyoshi Otani, Resona's managing director, that he would get his superiors "to persuade the auditing firm right away" to show more leniency.There's nothing new in cover-ups. What's new is that it failed. A parliamentary investigation is under way.

This reflects the increasing pluralisation of Japanese policymaking. No longer can a few bureaucrats, bankers, accountants and politicians hatch a private deal. Increasingly, each player has its own interests and aims. Reform has a growing constituency. The contradictory outcome reflects the conflicting pressures. No one is in complete control. The old regime is breaking down. Recent reforms in rules and enforcement now make it risky for auditors to make two plus two look like five. Asahi and Shin Nihon, Resona's main accounting firms, have already run foul of regulators and shareholders for aiding deceptive bookkeeping at failed banks. Neither wants to be Japan's Arthur Andersen.

Resona's claims of sufficient capital hinged on five years' worth of "deferred tax assets" (DTAs), a dubious form of capital based on inflated claims. Without the DTAs, Resona would be bankrupt. Mr Takenaka has been trying to limit excessive reliance on DTAs, which comprise 40 per cent to 60 per cent of core capital at the leading banks. This is Mr Takenaka's big opportunity and test case. The FSA now has unprecedented leverage over a bank. In effect it owns two thirds of the voting shares. It has ousted the bank president, nine top executives and 142 directors of Resona and associated firms. The new president is a Resona insider but the chairman and seven of the 10 directors are outsiders. The FSA has created its own management oversight committee.

Will this leverage be used for reform or stabilisation? The critical test is treatment of bad borrowers. Officially, about 10 per cent of Resona's assets are considered NPLs. It is said the majority will be hived off into a separate division, and then may be sold to government agencies in charge of NPL disposal. However, unless the borrowers are restructured or liquidated, the economy will perform no better - even if Resona's books look better. That is a recipe for creating new NPLs. There are some disturbing signs. The FSA is giving Resona a quota on lending to small and medium-sized borrowers. That, in effect, is an order to keep extending loans to the zombies. Moreover, despite strong urging of reformers, the FSA is not re-examining Resona's assets to see if it has more bad debts than it claims - as is likely. Mr Takenaka wants to take a tough stance on borrowers but he lacks political and legal support. He hopes that each step forwards will create pressure for further moves. But if the balance of power allows him only half-hearted measures, he could end up as an unwitting "enabler" for the continued protection of Resona's zombie borrowers. Fujita Construction - yet another recipient of debt waivers - has announced insolvency after its auditor downgraded its DTA claims. Questions are being asked about reliance on DTAs at other big banks. The ripple effect is just beginning.
Source: Financial Times

Deflation And Sars in Hong Kong

MS's Denise Yam with the deflation story Hong Kong Style:

Deflation is absorbing a meaningful portion of the shock from the SARS crisis. The Hong Kong economy still expanded 4.5% YoY in real terms in 1Q03, although nominal income slipped 0.4%. SARS has inflicted a severe blow on the economy, as visitor arrivals plunged 65% YoY in April. We now see nominal GDP contracting by 2.5% in 2003, revised substantially downwards from 0.1% growth previously. Nevertheless, extreme flexibility in Hong Kong’s price level in response to shocks means that real growth may not decelerate in 2003 by as much as the market expects. We have trimmed our real GDP growth forecast only marginally to 1.8% from 2.1%, as we expect sufficient deflation in consumer goods, investment assets and service exports to absorb a portion of the shock from SARS.
Source: Morgan Stanley Global Economic Forum

It's All in the Name

Ubaid in Bombay is worried about Nationalism, religious intellerance, and Shiv Sena:

Contrary to the spirit of shakespeare's assertion, the big cities in india seem to be as much affected by their names as by the people who inhabit them. in the past few years three of the larger metropolises have had their names changed, calcutta became kolkotta, madras chennai and my beloved bombay became mumbai. i remember being fairly agitated at the name change as was a large portion of the people of my age and class(upper and lower middle). the shiv sena was then in power, a sometimes extremist and unnecessarily violent political party the members of which think nothing of taking the law in their hands as and when the need arises to stir up the masses or to launch a new leader. bombay has been the name of this city for hundreds of years now but was changed, ostensibly, because it was a legacy of the british raj. there are theories on the origin of the name, one being it is an anglicized version of mumbai, the city's current name, which is plausible. the name mumbai is derived from the goddess mumbadevi, deity of the kolis, fisherfolk who were the first settlers of the islands that now constitute bombay.

i'd thought the controversy surrounding the name change, though it was never really consequential, was over but was a little surprised to learn shiv sainiks, grass roots workers of the shiv sena, had protested a prominent mumbaikar's use of the term bombay for the city by stripping in front of his house. the shiv sainiks have perfected the art of intimidation in a way, they use force or the implication of force against law abiding citizens without any real risk of legal persecution. an ad campaign featuring a male and a female model wearing just shoes invoked a similar form of protest, they stripped to their undergarments and protested against vulgarity!!

He also notres that when there are problems with the water, then let them drink coke:

an article in today's times of india talks about how villagers around a coke plant in maharashtra accuse the cola giant of leaving the area parched and of having reduced the water table level there. coca cola refutes the allegations saying the area's historically suffered a water crisis and they were not responsible for the current situation. the complete article is ( here ).

On the Chaebol Culture in S Korea

S Korea is another of the little known demographic 'bombs' waiting to go off. The most staggering part is the enormous drop in the projected dependency ratio. Why economists have never focused before on dependency ratios is a mystery to me. What I need is a domgrapher from 'out there' to help understand the population momentum equations, why there is so much vulnerability in certain countries, and what this is likely to mean for, say, India and Brazil? We can see three clear groups: W Europe, US, Canada, Australia, Japan, Hong Kong, Singapore - the so called Eastern 'transition countries' - and now the 'newly developing countries. In each case the process is slightly different. China may be an 'outlier' due to the one child policy.

The total fertility rate in the Republic of Korea increased from 5.40 births per woman in 1950-1955 to 6.33 births in 1955-1960, because of the baby boom that followed immediately after the Korean War. However, the total fertility of the country showed a sharp decline thereafter, down to 4.28 births in 1970-1975, to 2.50 births in 1980-1985 and to 1.70 births in 1990-1995. Due to significant declines of mortality over time, life expectancy at birth, for both sexes combined, increased from 47.5 years in 1950- 1955 to 70.9 years in 1990-1995. The proportion of the elderly (aged 65 or older) in the total population remained between 3.0 and 4.0 per cent between 1950 and 1980, and started increasing slowly thereafter, to 5.6 per cent by 1995. The potential support ratio of the country dropped from 18.4 to 12.6 between 1950 and 1995.

Historically, the Republic of Korea has been until recently a country of emigration. The medium variant of the United Nations 1998 Revision assumes a net total of 450,000 emigrants from the country between 1995 and 2020 and none thereafter. Thus, it is projected that the population of the country would increase from 44.9 million in 1995 to 53.0 million in 2035, and then decline to 51.3 million 2050 (The results of the 1998 United Nations projections are shown in the annex tables.) The working-age population of the country is projected to increase from 31.9 million in 1995 to 36.3 million in 2020, and then decrease to 30.4 million by 2050. The population aged 65 or older would continue to increase rapidly between 1995 and 2050, from 2.5 million to 12.7 million. As a result of these changes, the potential support ratio in the country would drop extremely rapidly, passing from 12.6 in 1995 to 5.7 in 2020 andto 2.4 in 2050.
Source: UN Report on Replacement Migration

Meanwhile Andy Xie draws attention to another dimension of S Korea's problem, the Chaebol culture:

The government hasn’t completed its structural reforms, and the country’s value-destroying chaebol culture makes the economy even more vulnerable. We believe the country’s current economic difficulties largely result from its bad business culture. The key barrier to a thorough reform, in our view, is economic nationalism. We believe families of value-destroying chaebols hide behind nationalism to assert their control over businesses they can’t run properly............

The chaebol business culture is the culprit, in our view. The business groups are run like ancient tribes to maximize political power for the leading families rather than as normal businesses to maximize profits. Market share and asset size are far more important than profits because size allows them to gain under-priced credits.

The control structure of the groups is tribal. Leading families control the business groups for no legitimate reason. In contrast, Hong Kong’s families at least control their businesses through majority shareholdings. Even though the chaebols’ controlling families do not own majority stakes, Korean culture allows them to control their businesses out of respect for their long associations with such businesses. In this legacy of feudal culture, they are powerful for being who they are. How did Korea become a developed country with such a terrible business culture?

International investors though Korea changed in 1999 and poured money into the market. Sadly, they were proved wrong again. The SK Global scandal reminds how little accountability Korea’s businesses have toward their shareholders. The corporate shareholders of bankrupt credit companies are bailing them out with their shareholders’ monies without consulting them. Foreign investors currently own one-third of the Korean stock market and majority stakes in several leading companies. Whenever foreign investors have a dispute with corporate management backed up by the chaebol families, they always lose.

Foreign investors have consistently lost money in Korea. Why should they continue to invest in Korea? They appear to hope that Korea will eventually reform to reward their patience. Their patience, however, does have a limit. If Korea doesn’t reform its corporate governance to connect corporate control with real stock ownership, foreign investors will eventually leave.
Source: Morgan Stanley Global Economic Forum

Germany in Worst Crisis Since 1945

This is one opinion, and it gives a flavour of the atmosphere which is devloping here in Europe now. One would alsmost say a sense of resignation was setting in.

Germany is in danger of breaching the European Union's budget deficit rules next year because of the country's "worst financial crisis since 1945", finance ministers from Germany's 16 federal states said on Thursday. The warning reflected heightened concern over the country's severe financial problems, following indications by Chancellor Gerhard Schröder on Wednesday that Germany might overshoot the 3 per cent budget deficit limit for the third consecutive year, in 2004. In a unanimous statement issued after a meeting in Berlin, the finance ministers, who include both Social Democrats and Christian Democrats, said: "Adherence to the 3 per cent budget deficit ceiling. . . is in danger". In contrast to Mr Schröder, Hans Eichel, finance minister, has insisted Germany will comply with its commitments to Brussels. Barbara Hendricks, Finance Ministry state secretary, admitted on Thursday, however, that it would be "very difficult to return below 3 per cent" in 2004, and it would only be possible if economic growth reached 2 per cent next year.
Source: Financial Times

At the same time Germany now has the lowest short term interest rates since 1875:

The European Central Bank on Thursday cut interest rates by half a point to 2 per cent, their lowest level since the second world war, amid growing gloom at the state of the eurozone's economy.

Amid fears of deflation in Germany, short-term interest rates in the country have fallen to their lowest level since 1875, when records began. Ten-year US Treasury bond yields briefly fell to a 45-year low, dragged down by poor data on demand for unemployment benefits and factory orders, and expectations of matching Federal Reserve rate cuts.The cuts had been foreseen by markets and were praised by political leaders. Wim Duisenberg (pictured), ECB president, said there had been a "high level" of agreement on the cut, but an even larger one had been "mentioned" during the governing council's meeting.
Source: Financial Times

And obviously there's more to come. Note the subtle nuance: no liklehood of sustained deflation in the 'eurozone' (as a whole). But, of course, if Germany and Italy enter forcefully, this remains to be seen.

Wim Duisenberg, the European Central Bank's president, dismayed many economists on Thursday by playing down what he called the "hypothetical risk of deflation" in the eurozone, and in Germany in particular. In what is expected to be one of his last appearances explaining an interest rate decision, Mr Duisenberg raised hopes of further cuts when he said he expected inflation to remain at about its current level of 1.9 per cent, and then "fall significantly" next year. With the ECB committed to keeping inflation close to 2 per cent, the prospect of a significant fall should prompt further cuts. However, Mr Duisenberg also said there were no forecasts indicating any risk of deflation - a sustained fall in prices - in the eurozone. He said ECB policy aimed to "anchor" inflation expectations close to 2 per cent.
Source: Financial Times

Thursday, June 05, 2003

Holland's Verteilung: Compartmentalization Along Socio-political Lines

A letter from one of the Bonobo's best friends: Frans in Holland. As you can see Bonobo is different. In the first place why only a regime change in the US? Why not a regime change in Europe toooooooooo......... (Oh, how I long for it). And why not having some politicians who don't lie to us, for 'bureaucratic' reasons, who can face the pensions reality and can look us in the eyes and say: 'we're about to go bust'? Unfortunately, for the time being, this kind of debate only goes on in Blogland. But, I'm sure Frans would agree, since he dreams of a 'different' politics'.

Then there is the question of immigration, I am sure Frans is no racist, my son from his own medical practice shares many of Frans experiences about non-integration and of a widespread lack of sympathy with our liberal values (and I am also sure my son is no racist). So we need to understand this problem (this is what my reasearch with Margy is about, the process of identity change). Why: because we are condemned to understand. And if Europe is to have a future we need to overcome our present difficulties, of this I am firmly convinced. But first we need to speak, freely and without fear of abuse. This is why Frans is here.

The issue of necessary global cooperation remains a big (the biggest?) problem. Sometimes I contemplate on a worldwide campaign for regime chance in the US: an appeal to the voters net year from “the rest of the world”.

The political landslide in the Netherlands in 2002 surprised almost all inhabitants, so surely for interested observers from outside the developments in my country must have given rise to complete bewilderment. To at least understand it in retrospect we have to go back in the history of this extraordinary nation (of course going back in history makes every nation extraordinary).

A major phenomenon in Dutch history is called “verzuiling”; this is so strong a Dutch phenomenon that there is no correct translation for the word. The dictionary suggests: “”. An often used example of it is the fact that organizations like the “catholic sheep breeders” existed into the seventies of last century (along protestant, socialist and/or “general” as well). An important feature of this “pillars”, i.e. of the religious ones, was that these were supposed to organize both the catholic working men and the rich Catholics and so, -for many years-, people from both the “left” and the “right” side of the political spectrum. Before 1994 the Christian-democratic party (and its predecessors) CDA, formed a coalition with social-democrats (PvdA) and liberals (VVD) in turn, for more then 70 years. Preferably and more often with liberals then with social-democrats but on some important issues the Christian democrats agreed with “the left” for many decades. Among these for example were a minimum percentage of the GDP for development-aid and the way of dealing with frictions between Muslim-immigrants and the population of the poor(er) districts.

The years the first immigrants from Islam-dominated countries arrived in the Netherlands (the first labour-immigrants after WOII came from Italy and Spain; they quietly acquired their place in the Netherlands) were also years of special political developments. Under the leadership of den Uyl the social-democrats managed to form a coalition government with two small political parties from the left that was also supported by two of the three Christian democratic parties. This was highly remarkable. On the first place while the three of them were already working towards a firm alliance (some years later they indeed merged into the CDA). Secondly because they got a kind of second-class position within the government. In retrospective one could say that the Christian-democrats were completely cut out.

In the same years on the very left side of the political spectrum grew a concern about the environment. The growing prosperity of the working class (den Uyl wished “a car for every working man”) made them look for the “real victims” of capitalism and they were easily found in the poor immigrant labourers. Although they had good reasons to come to the rich countries they indeed lived in shameful conditions. Far from their families; crammed with 4 or 6 in caravans or living in a part of the greenhouse they worked in. The first moment that right-wing extremists targeted these newcomers this gave rise to a very very strong disapproval from all of the political parties; not just the parties from the left. When the socialist party (SP) in the early eighties signaled problems of non-integrating immigrants they met the same reaction: a “cordon sanitaire” was formed with reference to Hitler’s concentration camps as a normal part of the debate. There was a tremendous overprotection of the hardly threatened (at least not by racism) immigrants. For example all governments-communication to the citizens go with Turkish and Arab translations. How this overprotection works can best be illustrated by the fact that not only children from Turkish or Moroccan parents are taught the language of their parents in primary schools: most Moroccan children are taught Arab while most of these children have Berber parents for whom Arab is NOT their mother-tongue!

In the first decades most labor-immigrants considered their stay as temporarily and they stayed with that idea for a long time even when they let their families come over. This contributed to the fact that generally speaking they did not integrate very well. Another import factor explaining this is that these immigrants came from the rural side of their countries and probably would have problems migrating to the big cities in the countries the came from!

A big part of these Islamic people strongly disapprove of the liberal points of view dominating in the western countries. The fact that they don’t face our society seems illustrated by the astonishing number of people with a Moroccan or Turkish descent who are born in the Netherlands but “import” a groom or bride from the country their parents came from: some 60 or 70%! But there is a nuance in this one too. Recent research on this phenomenon revealed that these “imports” have different, even opposite, reasons for men and women. The men want submissive wives, don’t find them enough in their new homeland and go for them in the countryside their parents were born. The women want husbands who respect their freedom and rights don’t find them and go for them in the urban areas of the countries their parents came for! The masculine side of these cultures provide an ongoing influx of problems. So the problem we face here is not “backwardedness of the Islam” but backwardness of the macho-culture (that often goes with the Islam). This also contributes to the high “performance” of the Moroccan (and Antillean) young in crime.

From 1994 to 2002 social-democrats and liberals for the first time formed a government without the Christian democrats. Especially for the traditional voters of the social-democrats the difference between their party and their longtime “enemies” seemed to disappear. Among other things the big ideologically led privatization projects (of railroads, energy) and the creation of quango’s were devastating for the belief that the social democrats was “their party”. And here mr Fortuyn entered the scene. A frustrated man. Once a member of the communist party. Had tried in vain to get an important position in all of the major parties with special resentment for the social-democrats. A very intelligent man. Provocative gay. Millionaire. The media, especially TV, couldn’t get enough of him. Capable of getting under the skin of the establishment. Admirer of Berlusconi. Playing the populist trump of the criminal young immigrants in a very intelligent way. In fact he was no racist -second on his list for national elections was an immigrant from Cape Verde- but he was ready to blow up the real existing problems with not-integrating immigrants and juvenile delinquents and work with extreme-right to get the power he wanted (desperately it seems). He claimed to go (without a party of any significance!) for the highest only: become prime minister. The fact that his panicking opponents kept implying that he was a racist gave his electoral campaign an enormous boost: all people that once had had some tactless remarks on immigrants and were then faced with unjust accusations became absolutely sure Fortuyn was their guy.

The fact that his killer turned out to be a rigid fighter for animal rights (direct reason for the assassination probably the provocative statements of Fortuyn on fur-farms!) worked out as a tremendous blow to the environmentalists and the political parties that are most associated with environmental issues. Nine days after being murdered his party entered parliament winning 15% of the seats. Christian-democrats and liberals included his new party, LPF, in the government. MP’s as well as ministers from his party quarreled so much among them selves that 3 months later they were dropped from government. The resigned government gave “political but not military support” to Bush-Blair in the war against Iraq in spite of a majority in the population strongly disapproving this war. In the elections of 2003 LPF lost 18 of their 26 seats.
The now formed government bears a great resemblance with the governments the Netherlands knew before 1994. Disappointment in politics as such probably has never been greater.

In Bonoboland there is a strong conviction that demography is an important factor, to often overseen, to explain the economical challenges we face; especially in Europe. I don’t argue with that; the suggestion however that labour-immigration could be an important part of the answer I doubt very much.

On Blogging and the dissolution of Form

By a curious turn of events one idea has lead to another. Yesterday I visited a Kandinsky exhibition here in the Gaudi building "La Pedrera", and yes this is different from Liverpool, and, yes, we are lucky (Kandinsky is a master, even if my favourite is Chagall). Now the exhibition was entitled "Kandinsky: The Dissolution of Form". And this has started me thinking, is there a parrallel with blogging. You see, Kandinsky was looking for a new language, and new way of expresssing his inner world. Well, what the hell is blogging but a 'new language' at the meta-communicational level. For some we are just a narcissistic group of navel-gazers, who can't spell, and never bother to correct our texts. Whatsmore we are full of half thought out ideas. Well, isn't this exactly our strength. (This is, after all, my Beta 1.0 idea release concept).We can move quickly, and make enormous conceptual leaps. We make random connections, and from these random node connections, new ideas are born (actually I've a sneaky feeling that that is what goes on in our neuronal networks when we have a 'creative idea', but, oh, never mind. Now writing has always tried to catalog itself into a taxonomy of stylistic procedures, and now the boundaries are breaking, one minute formal, and heavy, the next close-up and intimate, it is the linguistic equivalent of that fushion of form and colour for which Kandinsky so strived. (Next week: what has all this to do with Fernando Pessoa?).

On Veracity and WMD's

Maybe some of Margy's ethnographic reflections would have helped out a bit in the intelligence work!

Oral sources are credible but with a different kind of credibility. The importance of oral testimony may lie not in its adherence to fact, but rather in its departure from it, as imagination, symbolism and desire emerge. Therefore there are no ‘false’ oral sources.’ Portelli (1991: 51) . For Portelli, it is not what is true which is important, as much as what people believe to be true.

A senior Iraqi officer on active service within the country's military provided British intelligence last August with the information that Iraq could fire chemical or biological warheads within 45 minutes of Saddam Hussein giving the order, according to senior Whitehall officials.

The claim, contained in the government's dossier on Iraq's weapons of mass destruction, has become the chief test of whether ministers "duped" the British public over the need for war. Whitehall officials in two departments said last night the evidence of the 45-minute capability had come from a serving Iraqi officer with a record for providing reliable data over years. The information was analysed by Britain's Joint Intelligence Committee and immediately distributed to some cabinet ministers at the end of August, a few weeks before the compilation of the government's WMD dossier. There have been assertions that intelligence about the Iraqi capability had come via the US from an "unreliable" source, a Iraqi defector with contacts with the Iraqi opposition movement.The new revelation came as Tony Blair denied claims that Downing Street had "doctored" the dossier, published last September, saying the allegation was "completely and totally untrue".
Source: Financial Times

Oral Historian's Anxiety Syndrome

Margy is thinking out-loud which, I suggest, is what blogging is all about. This is my Beta 1.0 release proposal. We have put up the Bulagria blog both to draw attention to what is happening in Bulgaria (action research component) and to develop a new style of project work. Margy's methodology of using the messenger for ethnography is truly brilliant. Remember everyone, the price of information is coming down.

Reading today an article I understood what is my major problem! I have Oral Historian's Anxiety Syndrome (that panicky realization that irretrievable information is slipping away from me with every moment). I am sure this is the main push-factor to do my research-related-migrations, both in reality and by Internet tools. I just have realized that I am developing a new methodology in Cultural Anthropology. For now I call it “E-mail-ethnology”. Look for better name, please. My e-mail ethnology has initial problem with very important lack of supporting field-work related information: It does not carry inflections of voice and body language. People are structuring their messages, they are not in natural condition to talk in circles and tell fragments of the same story out of chronological sequence, as it is in real conversation. Will improve.

The Cultural Capital of Europe

I've written to my brother asking him to write something on this, he's so much better at it than I am. Now Edinburgh as the Athens of the North, this I can buy, but Liverpool? As one who packed my bags and got the bus south - looking for culture, which, by the way I still am - I don't see the joke. But perhaps that's just what it is. We are, after all, famous for our sense of humour. Nice one, now I get it. Paul can still remember those gilded mansions of his youthful Golden Age, those large detached houses with the peeling paint, built on the backs of slaving, were already in decay during mine. Maybe that's why we British look at the US and its present hegemonic difficulties with other, 'knowing', eyes. Those who want to get a little flavour of what it was like should consult Distant Voices Still Lives. There was after all the Walker Art Gallery, the Cavern, and those Ferries - with adolescent girls in pumps and bobby socks - Across the Mersey. I always did prefer Brighton Rock.

For much of its 20th century decline, the proud, historic port of Liverpool found itself facing the wrong way, isolated from Continental Europe on the Britain's west coast. In 50 years, the city's population halved. Yesterday, however, the geography seemed to shift, as Liverpool was dealt a potential Continental boost in the form of 2008 European Capital of Culture nomination. Old habits die hard in places that have had a rough time - plenty of Liverpudlians had been braced for failure yesterday.

They were ready to assume that - having been kicked in the teeth over the years - they were going to receive another pasting at the hands of Tessa Jowell, the genteel culture secretary, and Sir Jeremy Isaacs, metropolitan arts guru. The city council had contingency plans to salvage battered morale by refocusing efforts from 2008 to 2007, the 800th anniversary of King John's granting of a charter to Liverpool in 1207. Instead, as the breakfast news began to sink in, cheers rang through the city's Empire Theatre, and the hugging began. Liverpool had beaten other regional contenders to claim a title previously enjoyed by cities such as Stockholm, Bologna and Lisbon. Sir Bob Scott, chief executive of the Liverpool Culture Company, which led the bid, said it was an important day for the city. "It signals the end of the British view of Liverpool as a basket case and the dawn of a new realisation that there is a great city here."

Liverpool was always a city that had played better internationally than nationally, where it had to contend with prejudice and rumour. "Coming to Liverpool is the only solution," he said. At the Walker Art Gallery, one of the art facilities that most impressed the judges, visitor Peter Digby, from Leeds, had done just that and been surprised by the city. "You think of it as being run down. When I told people in Leeds I was coming they all asked why. But once you get here it's absolutely fantastic." Liverpool's media briefing for the bid - Liverpool. Love the Life - described it as an unconventional, pioneering and unpredictable city. Capital of culture would be the "rocket fuel for progress". The city would be a magnificent advertisement for Britain, it said.

Explaining the decision by the 12 independent judges to select Liverpool, Sir Jeremy, chairman, dismissed the suspicion of some rival bidders that Merseyside's selection was thanks to levels of need rather than existing cultural merits. Culturally Liverpool was the best equipped. "We didn't judge it on who had the most to gain," he said. "We were certainly looking for the city that had the most going for it in terms of culture and the arts," he added. Liverpool's strengths included the magnificence of some of its buildings, its visual arts, the Albert Dock waterfront project and wide community involvement.

Liverpool has about 450,000 people. Its population decline has stabilised, says the city council, and city centre living is rising fast. However, it has European Union Objective One status, a sign of economic need, and although its unemployment rate is the lowest for 30 years, it is still almost 6 per cent. The expected £2bn investment in cultural and tourism infrastructure over the next five years will, it is hoped, create new employment for the workers of the future. Yesterday was a day for celebrating in Liverpool. Now, with the nomination secured, it must begin the hard slog of capitalising on this success.
Source: Financial Times

For the masochists among you here is the Amazon review of the Terence Davies film. Postelthwaite plays the 'dad'. My god, is this one familiar.

For those not familiar with his work, Terence Davies (The Long Day Closes, Neon Bible) is more of a painter than a filmmaker, he just happens to use movies as his paint medium! So, in 'Distant Voices/Still Lives' we have a 'painterly' representation of a working-class family in Liverpool circa 1960. The story is told through the thoughts and memories of the various family members, all with different perspectives. In my subject line, I call this movie a musical. That's because there are many scenes of the characters in pubs or at home, bursting into song, and usually the choice of song reflects the person's feelings at that moment. But these are not sequences like those you see in Musicals. There's no instrumental backing, the people are just singing out loud for their own entertainment & to offset the grim 'kitchen sink' reality of their family life. I'd like to add that although Freda Dowie is listed as the star (and she IS a standout as the Mum), another actor who may be more familiar is the father, played by Pete Postlethwaite (Romeo + Juliet, Brassed Off). Although his character is frighteningly unsympathetic, it is a wonderful performance. So, all in all, probably not everyone's cup of tea, but worth the effort if you want a riveting artistic & emotional experience.

Bad Times in Bertelsland

Hard on the heals of the news of the closing down sale at Telefonica's Terra Lycos comes more on Bertelsmann's legal problems. Now we all know the AOL Time Warner story, but the US does have some success stories, something to work with for the future. My question: where are the European success stories? Where is our future?

EMI has become the second large music company to sue Bertelsmann, accusing the German media giant of infringing copyrights through its financial support of Napster, the failed internet song-swapping service. In a lawsuit filed in New York on Wednesday night, EMI's recorded music division claims Bertelsmann's decision to invest in Napster allowed the service to continue operating when the music industry was trying to shut it down. EMI's lawsuit follows a flurry of legal claims seeking compensation from the financial backers of Napster, which filed for bankruptcy last year.

In February, a group of music publishers and songwriters, including the writers of Jailhouse Rock, filed a $17bn class-action lawsuit against Bertelsmann. Last month, Universal Music, the world's largest music group, filed its own claim. Universal and EMI are also both suing Hummer Winblad, the venture capital group that invested in Napster, on the same grounds as they are pursuing Bertelsmann. EMI's suit comes as Bertelsmann and AOL Time Warner are holding discussions about merging their recorded music operations. EMI, which is the only major music group not to be part of a media conglomerate, has previously held merger talks with both Bertelsmann and Warner, but has been unable to agree a deal and now risks being left out.

Like Universal, EMI is claiming damages of $150,000 for every case of copyright infringement. The music industry has so far failed to recover any damages, however, as Napster collapsed into bankruptcy last year after Bertelsmann's bail-out failed. "With this suit, EMI is fighting to protect our rights to control and receive the benefits of our copyrights and the rights of our artists to share in and enjoy the benefits and be compensated for their valuable creative endeavours," EMI said. Bertelsmann declined to comment. EMI's Music Publishing operation, which is the world's largest, is not involved in the current lawsuit, but could join the class-action lawsuit against Bertelsmann. Bertelsmann shocked the music business when its chief executive, Thomas Middelhoff, announced plans to rescue Napster. Mr Middelhoff, who stepped down from Bertelsmann last year, had said he intended to create a legal version of Napster.
Source: Financial Times

Do We Need a Big Hammer For the Big Wedge?

Brad makes the following extremely sensible point.

Reuters expects bad employment news this Friday, but thinks that the rest of the economic news is good--and that the discrepancy is because employment is a lagging indicator. I think that the discrepancy comes from the fact that underlying trend productivity growth is much more rapid than in any recession for the past generation--and this drives a big wedge between the demand news and the employment news.
Source: Semi Daily Journal

I think he's absolutely right, and this is the output gap argument I know and love. But to go from this to saying that for eg. "we are x points short, this should bring down inflation 0.25 per quarter, so in 6 quarters we will be at zero", this is much more difficult, this is the bit I don't like. I have no idea what the underlying 'business cycle trend' looks like right now. This we can only talk about post hoc (remember the owl minerva flys only AFTER dusk). The data is highly erratic, and much more than normal this time round. Better to watch and wait. I think the services 'bounce' needs to be confirmed with more data before reaching any conclusion. The markets are seeing the rebound, but are they just 'wishful thinking'. Time will reveal all. What is clear, is that this is no simple double dip, so argument of the 'past will be our guide' kind has to be a little suspect. So what does this tell us about the US deficit question, is arguing from recent past experience problematic here too? Finally is the drop in long term US rates following Greenspans sattelite conference good or bad news? Thoughts please.

Wednesday, June 04, 2003

German Services Hit Hard

This news on services appears to confirm the general impression that things are getting worse at a more or less rapid clip in Germany.

The eurozone service sector contracted further in May, with a slight pick-up in France and Italy failing to offset falling activity in Germany, according to a survey released on Wednesday. The Reuters/NTC purchasing managers' index for services showed the sector contracting for the fourth consecutive month, but at a slightly slower pace. The headline index rose from 47.7 in April to 47.9 in May. A score of 50 distinguishes expansion from contraction.

The service sector survey follows gloomy data on manufacturing and falling inflation in the eurozone, and is likely to increase pressure on the European Central Bank to cut rates by half a percentage point on Thursday. The case for a cut was also boosted by fresh data on eurozone retail sales. They fell 1.2 per cent in March compared to the previous month, the sharpest monthly drop in almost a year, Eurostat, the statistics arm of the European Commission, said on Wednesday. That added up to the steepest annual fall in retail sales by 1.6 per cent since 1996. The PMI survey also said business confidence fell back slightly in May, following its rise in the immediate aftermath of the Iraq war, and levels of new business shrank at a faster rate, the fifth consecutive month of contraction.

"Demand for services from both consumers and businesses was reported to have remained weak, while the recent strengthening of the euro served to dampen exports of services," the report said. However, it said the headline numbers masked a "growing disparity" between service sector growth across the eurozone's four big national economies. France, Italy and Spain all recorded modest increases in business activity levels in May. In contrast, Germany experienced a further sharp contraction.

The new business index fell from 46.4 in april to 45.6 in May. New business picked up in Spain, and the rate of contraction eased in France and Italy. But once again Germany was a different story - the rate of decline in new business there increased.Employment dropped sharply in May - with Germany again the worst affected of the four big economies. Input costs rose at the slowest rate since November 2001. "The combination of weak demand, lower fuel prices and cheaper imported goods and services arising from the euro's recent appreciation have helped to significantly reduce growth of service providers' costs in recent months," the report said.
Source: Financial TimesLINK

G8 Summit was Definitely not Inspiring

After all the fuss and spectacle, little important seems to have been achieved.

The G8 group of major industrial nations wound up their summit on Tuesday with a lukewarm statement of confidence in a global economic recovery. The final communique talked of "major downside risks" having receded and stated confidently that "the conditions for a recovery are in place".

But the G8 leaders left vague when they believed this recovery was likely to occur and in which of the three major economic areas - the US, the EU and Japan - the recovery is likely to first occur. The US currently is facing weak growth, in Europe the eurozone economies are flat with Germany hovering on recession and Japan is still struggling with a period of prolonged recession. The principal aim of this summit hosted by French president Jacques Chirac was to launch a new message of confidence. But on economic and other issues the summit remained plagued by transatlantic differences.

There was no mention in the final statement of exchange rates and the current sharp depreciation of the dollar against the euro. When pressed about this on Tuesday in his final press conference, President Chirac skirted the issue. This implied the G8 had no formal consensus and was waiting for currencies to find their level. The Europeans await the decision of the European Central Bank later this week when interest rates are expected to be trimmed.

The G8 committed themselves to trying to unblock the stalled trade talks in the Doha round but concessions on agricultural subsidies where not formally made by any of the European countries, particularly France. But one positive sign were the pledges by eurozone members France and Germany to implement structural reform in their economies. This had special relevance when France faces a wave of strikes, including a crippling transport strike on Tuesday, to protests against plans to overhaul the costly pensions system.
Source: Financial Times

How Fast is Fast in China?

I am receiving mails from a friend of Bonobo in China. Lets call him 'Dusty'. Now Dusty works as a software developer for a big B2B portal in Hangzhou, China. But is you want to get an idea of how fast things are moving in China, take a look at how he started out in life. I come from the UK. My father was born in poverty, my son is now at the frontier. This has taken 100 years. In Dusty's case the change has happened in 30. Europe, take note.

I was born in a county close to Kashger, named Shache, but I am not Xinjiang native Uigur people as my parents went to Xinjiang during Culture Revolution, so all the children were born there in my family except for my eldest brother, who was born in zhejiang, my father’s hometown, my mothere is from Shanghai.

It was really poor and hard time when I was a child, but that was true during that time everwhere in china, as far as I remember the chinese new year was the happiest moment for child, as for many familes, that was probably the only time for a kid to get new clothes, I was no exception too.There are five children in my family, I am the fourth one, there was no ONE CHILD POLICY at that time, so for a big family, in a hard time(the whole country), children are kind of victims, my eldest brother never had too much education because of poverty, and my elder brother and sister suspended their schooling also as the reason of poverty, but I think I was a little bit luckier than they were at that time. At least I did not suspend my education without any reasons.

My father was kind of educated person in Shache at that time, as he had middle school education, and there are a few chinese living in that county, and he worked in a construcion company as a designer, it was kind of stated owned company, I somehow remebered his monthly salary was about 30 or 40 RMB(chinese currency) at that time(1970’s), I don’t know the currency exchange rate at that time, but that does not matter, people could buy one Kilogram pork with 0.4 RMB, and my annual fee for the primary school was about 5 RMB, parents would spend 2 RMB for a kid on new clothes once or twice a year.

We all lived in bungalow in Xinjiang, because of arid in desert area, we did not worry rain, so the house was build with mud or just mud brick, simple house, but cheap rent for 10 RMB every month. Almost all my neighbours were Uigurs, all of the familes were very poor, they did not have stable work, except few worked for the government, but Uigur people are talented in trade business. I heard there were a few Uigur people selling clothings or openning resturents etc, they could make 200,000 in early 80’s, that sounded incrediable. As from 1960 to 1982 around, china did not really change too much in my personal rememberance. At least we did not change too much in living conditions, house, food, clothes etc.

Below I reproduce a messenger chat I had with Dusty on Saturday, nothing special, except that people can now communicate accross the planet, and get first had impressions of things like SARS. Also note he cannot access my sites, normally even Bonobo and other blogspot sites are filtered. The 'information revolution' still has some way to travel in China.

routine1234: What is your impression, are things settling down now, or are there still a lot of problems after Sars?
dusty: as i saw a lot of our private companies customers grow fast
dusty: here in zhejiang
dusty: people are not as sensitive as they were one month ago
dusty: but it did affact the economy
dusty: resturants, hotels, travel business are severely damaged in two months
dusty: but recovered so fast now
routine1234: Yes, foreign trade will grow and grow. US and European companies need to outsource desperately. I saw a report that 25% of German companies are looking to outsource more since euro rise.
routine1234: Recovery, this is what I imagined. I am happy. When all comentators said growth down a lot, I argued that this might not happen because of price pressure here and speed of chinese growth.
dusty: but SARS delay some foreign business
dusty: there were a lot of buyers from outside of china in a market close here
routine1234: Yes, delay, but using internet things can continue. Bad news for airline companies. Like you and me with messenger, once you learn, things get easier and quicker.
dusty: but now none here, so there almost no foreign business now
dusty: i agreee
dusty: as a matter of fact
dusty: our company's revenue in May are marvelous good
dusty: as more and more our customers would invest money on interenet
dusty: because they can not go outside to attend the trade show, and no buyers from overseas come here at the moment
routine1234: Yes, this is it. But most of this is not necessary. Most of this business can be done more cheaply using internet. Again, like us, what you need is confidence. I can't see your face, you can't see mine, but we can get to know each other.
dusty: you are exactly right, actually i launch a simple product on the internet for this.
routine1234: This can save companies a lot of expenses, so it will happen. SARS in fact may accelerate things. You see you are already confirming my feelings.
dusty: yes, there was a accident happened in our company
dusty: one of my colleauge was confirmed of SARS, so all the staff were quarantined at home, for like 2 weeks, some of the sales could not meet customers
dusty: but this did not stop our business at all, in fact our monthly revenue broke the record , but we still feel sorry for the colleague

routine1234: I am worried that this is happening too fast, and that many people don't understand how these changes will affect them.
dusty: i agree, but technic really help to educate people, like me, so don't worry, chinese people can learn fast and not complaining too much
routine1234: No, it's the Europeans and Americans I am worrying about. We have had it too easy for too long, and now we are getting old. No pensions, production goes to China, many older Europeans don't like new technologies.
dusty: hopefully this situation will help another revolution in human histry, people have potential to invent new era
routine1234: China is four times bigger than US, when a big boat passes, little boat gets covered in water.
dusty: but we have a lot of problem here too
routine1234: People, potential. I agree. This is why people need to talk, to find new ways to live together, to solve problems.
dusty: maybe like US or Europe, with the new technical applied, more and more people will lose jobs
routine1234: But I agree, Chinese adapt quickly. 5 years ago every chinese family in Barcelona had DVD, many had computers, a lot of Europens still have neither.
routine1234: Technology can create jobs, not lose them, but we had a very unequal world. China and India are very big and growing quickly, all this will need time to find equilibrium.
dusty: east coast in china, grows fast, but most area are still developing slow
routine1234: Yes, this is the picture I have, but the physicists have a term, critical mass. Once coastal situation grows enough this will pull the rest along quite quickly I think.
dusty: i think so, if the country have the right policy in economy
routine1234: We have no idea of time scale. But remember technology goes every time quicker. 10,000 years ago agricultural revolution, 200 years ago industrial revolution, 10 years ago information revolution. And in 2010 what will we have? I don't know. But things get faster, faster.
dusty: but i am happy to see, the government invest a lot in basic infrastructure, like transportation, telecommunication
routine1234: Yes, the infrastrucure is important, it will be the future, if it is done efficiently. You still have to make transition to full market economy.
dusty: except for some major business, like bank, telecom, chem etc, the consumer business are rather market economy here
dusty: as i heard from some of my US and UK colleaugues, they think china is more capitalism in some way than western countries do
routine1234: Yea, but the infrastructure is govt. Don't get me wrong I am not ideological about this. We need good government. But looking here in Spain, many contractors work for the government. We don't need everything they build.
dusty: i agree, the infrastructure is the governmet's responsiblity , and a few chinese leaders in government is kind of stratigic think now, that is good
dusty: besides, if chinese companies' have more qualified managers, especially in marketing roles, that would be great, by the way, do you mind tell me why do you write collumns on the interenet?
routine1234: Sure, I write because I enjoy it. I am also worried about the demographic changes and their consequences. I like technology, I have always liked writing. You can find me on my site edwardhugh.net.
routine1234: Try it and let me know if you can see me?
dusty: ok, wait
routine1234: I don't do this for business.
dusty: haha, do business is not a crime, but i understand , sorry if i asked something wroing
dusty: seems does not work here, your site
routine1234: No nothing wrong, I just want you to know. Obviously business is not a crime, when people are doing business they get to know each other, the world becomes more friendly.
routine1234: can you use google?
dusty: yes
routine1234: can you see my page when you do a google search for edward hugh, try edward hugh deflation
dusty: http://edwardhugh.homestead.com/about.html
dusty: is this your site too
routine1234: yes
dusty: i can not not log onto that
routine1234: I'm sorry. Maybe one day. I will send you some things in e-mail attach.
dusty: ok

The Fed's Deflation Firewall Starts a Fire

There is perhaps less clear economic news coming in at the moment, but what there is seems reasonably serious (see Italian pensions post below). This development following a Greenspan conference call seems to indicate just how nervous everyone is. There is one thing about which I am genuinely confused in the inflation targeters' argument, should a drop in long trem rates be considered a good thing (since it makes borrowing cheaper) or a bad one (since it indicates deflation expectations are setting in)? Meanwhile the Bundesbank President informs us that Germany will not have the 'pernicious' Japan-style deflation, it would be nice if he could provide us with some convincing reasoning as to why not.

The markets drove long-term interest rates sharply lower on Tuesday after Alan Greenspan, chairman of the US Federal Reserve, said the central bank would act decisively to head off the risk of deflation. Speaking by satellite to a conference of central bankers in Berlin, Mr Greenspan said the US economy had stabilised in recent weeks, though it had yet to show clear signs of acceleration. But though he also continued to warn that the risk of a vicious circle of "corrosive deflation" was low, the markets seized his comments about the need to establish a "firebreak" to prevent it taking hold.

Two-year US interest rates fell to a record low of 1.19 per cent, dropping below the current short-term policy interest rate of 1.25 per cent. Expectations of interest rate cuts soon rose sharply, with markets pricing in a chance of more than 80 per cent that the Fed will cut rates by a quarter-point at its next meeting on June 24-25. Mr Greenspan's guarded assessment was underlined by a welcome for the short-term boost from last month's $350bn tax-cut package, due to come into effect next month. "I have to admit that, fortuitously, this particular cut in taxes is happening at the right time, although I doubt very much one could have planned that in advance," he said.

The statement contrasted with remarks Mr Greenspan made earlier in the year, when he said it was not clear that the US economy needed the stimulus from a tax cut. Most economists read Tuesday's statements as a signal that Mr Greenspan, while not committing to a rate cut, was leaving the door open if necessary and cautioning against overoptimism. "He is still on the theme that things are getting better but they will have to get better quickly to validate some of the [economic] projections for the summer," said Robert DiClemente at Citigroup.

Several of the large investment banks have made optimistic forecasts that the US economy could reach 3-4 per cent growth in the third quarter of the year. While more confidence in financial markets suggested "a marked turnround" in the real economy, Mr Greenspan said his best judgment was that such an acceleration had not yet begun. "It is too early to get any real fix on the American economy in the period ahead," he said. At the Berlin conference, Ernst Welteke, the Bundesbank president, also admitted that Germany might suffer a period of falling prices, but not the "pernicious" deflation that had gripped Japan.He said: "We cannot, however, rule out the possibility that Germany might experience mild deflation in the near future."
Source: Financial Times

Sometimes the Velocity Goes Up

Just a snippet from my wise but witty brother, we should remember declining velocity of money circulation is not the only problem, sometimes it can accelerate. Normally after public finances collapse and the credibility of the central bank comes into serious question. The Japan problem does come to mind. If one day government debt implodes, just where will the BoJ be with all that worthless paper as reserves?

One thought that has been going through my mind recently is that everybody remembers the Weimar Inflation but nobody mentions the Hungarian Inflation of 1944-46. The issue of paper money was even more excessive. The circulation of the pengo increased from 12000million in 1944 to 36,000,000million in 1945 and to 1000million times that amount in 1946. When the note issue reached its maximum it was a number consisting of twenty-seven digits. As in Germany in the earlier period, the velocity of circulation also increased, and so prices rose by an even greater amount than the note issue-a number with thirty digits. Then the pengo was replaced by the florint.

You know my view that more research needs to be done on VELOCITY as a way of helping us understand the present problem.

Italian Pensions: Crisis Pending

OK this is a full frontal hit. This guy is saying everything I have been suggesting about the Italian situation and the pensions problems. He is rightly concerned about the democratic implications of 'forcing' the pensions devaluation, but it's hard to see populations with a heavy weighting to older voters, voting for a slashing of their 'virtual' savings. Still apparently they like the thought of having immigrants even less. Henry is away in Stockholm for a conference on codecision and democratic legitimacy, I hope they'll be looking at this problem. For y money much of the discussion about the new EU charter proposals have an air of complete unreality and farce about them in the light of this underlying reality. If we don't find a coherent way of handling this, some important democatic details could seriously be in question. Well, I suppose it is an advance that we're now no-longer going to be called 'Christendom'.

Italy's pension system absorbs the largest share of gross domestic product among industrialised countries and is bound to absorb more over the next 25 years. The total cost of public pensions is equivalent to a tax on labour of 45 per cent, crowding out private pensions and preventing the financing of a decent welfare system. Italy is the European Union country spending least on unemployment insurance and social assistance despite its relatively high jobless rate. Contributions already fall short of payments: the system is running an annual deficit of 3 per cent of gross domestic product.

Silvio Berlusconi's government knows a crisis is pending. Yet despite holding 57 per cent of the seats in parliament, more than any non-emergency coalition in the last 50 years, it does nothing. A draft pension bill, which would not improve the sustainability of public pensions - indeed it would reduce contributions for new employees while maintaining their pensions at the same level - has been stuck in parliament for 18 months.So, predictably, Italian politicians are turning to Europe. With Italy set to take over the EU presidency next month, calls for an agreement on pensions are growing louder. Mr Berlusconi himself has repeatedly advocated a "Maastricht for pensions".

This is a bad idea. There are no sound economic arguments for putting EU supranational authorities in charge of pensions. Public pension systems in Europe are vastly different. A harmonised approach could end up adopting the worst of the various systems. It is much better to allow national policies to compete, encouraging reforms that imitate the best practices.

Public insurance schemes can be better run when decentralised. There can even be disadvantages in scale: the most effective social security systems in Europe are those of the smallest EU member states. Last, previous EU summits have set broad targets for pension reforms such as increasing employment rates for older workers and raising effective retirement ages. They were meaningless for some countries and totally unrealistic for others - and were never taken seriously. The only reason to involve the EU is to shift responsibility on to someone else, far away from domestic pressures.

Italians are well aware that the reforms carried out by the Amato, Dini and Prodi governments in the 1990s must be completed. A recent survey* indicated that two out of three Italians believe that a pensions crisis in the next 10-15 years is likely and consider the reforms of the past decade simply "a first step towards stabilisation". Yet no reform to increase the sustainability of the pension system would enjoy majority support, according to the survey. Workers close to retirement age are not prone to accept compensating transfers to the young generations. On top of this, unions are fiercely opposing further reforms, just as they do in Germany, France and Spain, facing similar problems of long-term sustainability of public pensions.

Why does Mr Berlusconi feel that Italians would be more receptive to pensions changes forged in Brussels? To foist such a sensitive issue on to the EU could prove fatal for fragile supranational institutions lacking accountability. And it could encourage trade unions into co-ordinating Europe-wide resistance to any structural change pension provision.Involving the EU authorities is no remedy for the short-sightedness and inter-generational selfishness of voters. National governments ought to have longer horizons, Italy's included. And younger generations should find stronger representation for their interests in the political process. There is no reason to believe that the decision-making institutions of the EU are any more far-sighted or resistant to the demands of older votes than national governments.

The only way the EU can help alleviate the pensions problem is to change the way it implements its fiscal rules, shifting the focus of the stability pact from year-by-year budget balances to longer-term public debt reductions. This would help pension reforms that allow workers to opt out from public schemes, since these deliver reductions in long-term liabilities but cut revenues in the short-term. But Mr Berlusconi should be warned: implementing the pact on a longer-term basis - and focusing on public debt reduction - would only make things more difficult for Italy.
Source: Financial Times

Tuesday, June 03, 2003

Surfs Down

The original post about Serfs and undocumented labour that has caused some of the discussion today and yesterday. ( here ) and ( here ).

More from the Asian front, this time despatches from 'our man in Singapore' Eddie Lee. The economy situation doesn't look any too brilliant, and the third year of recession is on its way. Singapore is Asia's third oldest country, might there be any connection between this fact and the growth difficulty? Obviously for employment to be maintained or grow the services sector needs to expand, but for this to happen domestic consumption needs to rise. This seems to be the Achilles heal of the Asian development model. It also seems that the expansion of Asian consumption is the key to the dollar/US trade deficit imbalance as Andy Xie was arguing last week. On the domestic services front, as Eddie notes, most of the jobs come in the low-qualified unskilled areas, and here there is another mismatch between the rising educational expectations of the smaller number of children we are having and the kind of work - especially tending old people - which is being created.

The solution here, whether actively pursued (virtually nowhere) or passively 'tolerated', seems to lie along the highroad of immigration. Paul Krugman has asked the interesting question: "why hasn't indentured servitude made a comeback in the modern era". I've a sneaky feeling that his interest in this topic may not be unrelated to the projected 'relative personpower shortage' there will be in the developed world in the coming decades, and thus the potential for shifting relative factor values. My own instincts are that Paul is barking up the wrong tree here if you want to think about the world as we know it (you need Schumpeter - and creative destruction - as well as Keynes, and you need to get to grips with the 'hard problems' of non-linearities as well as the partial equilibrium stuff. En fin, you need to do something about the 'balance sheet effects' of embedded capital in a situation of global over-capacity and accelerating technical change. the idea of 'potential output' may be useful as a rule of thumb guide, but it becomes deeply flawed - for the above mentioned creative destruction reasons - when you want a richer more dynamically oriented analysis: the type of analysis for which neo-classical economics is relatively poorly equipped). But there may be another kind of world which is being produced right under our noses. My former teacher Karl Popper famously used to confuse students by setting them an exercise. 'Observe' he would say: of course the bemused students didn't know what to do. This is the famous 'hermeneutic' circle, you need a knowledge object to work on before you can go to work. So what is the knowledge object which -like Poe's purloined letter - is sitting there on the mantlepiece, awaiting discovery.

The best way to start looking for it might be by going back to the problem of "indentured servitude", and asking why is this not being re-inevted. You see, my response would be to say that it already has. It already has due to the the existence of what is called 'undocumented labour'. This is a strange anomally since it is precisely the absence of documentation which creates the servitude, and the servitude is based on an oral rather than a written contract, enforced either by some fairly nasty looking people, or by the permanent threat of recourse to official judicial procedures. It is a really strange irony this which leads our democratic 'rule of law' to become the infrastructural underpinning for the most extensive abuse of 'wage labour' since the time of feudalism.

I first started thinking about things in this way after a chat with Margy, Bonobo's Sofia-based anthropologist. Regular readers will know we've been having some difficulties with the Bulgarian e-mail filters, and that the problem may relate to our use of the term 'locutorio' or call-centre (this is the place where the illegals send the money home). Now Margy asked me what I new about Bularia's Tsar (you see how I went straight to Krugman in my head) Simeone. Well the interesting detail is that he spent a good part of his exile in Madrid, his wife is Spanish, as are his four children. Now I don't think I'll make explicit what should be clear implicity, I value my health too much. The second little pearl that I got from Margy was her question: do you have a market in your village? Well I was slow, and didn't understand, I think I was thinking about all those nice Provençal village markets my wife so loves. No, she came back, a slave market. And my mind was suddenly down in Andalusia, in Almeria and El Ejido, with the images of all those migrants waiting on street corners for the 'jefe' to arrive and select the meat he needs for the day. I was born in Liverpool, and can still remember the humiliating rituals associated with casual labour (from Ireland, of course) on the docks. And then I thought of slave-slav, and a very interesting piece by the much under-valued Ronnie Findlay. The point here is that Findlay stresses the importance for the evolution of the European economy of the 'white' slave trade, of Slavs via the Netherlands down to Andalucia and North Africa. And then two little neurones suddenly fired-off together. History in a certain sense is repeating itself, only it's tragedy both times, no comedy here. The indenturing system is in fact the nation state with limited legal right to movement. In parallel with this is an enormous modern 'slaving' system, which officially speaking does not exist (nor is its existence treated in any neo-classical model that I've ever seen).

So whole countries are literally converted into 'people farms'. Remember some countries only have one known source of export earnings: their children. Pakistan and Ecuador immediately come to mind, but there are of course others. In the Philipines the topic is taken so seriously that the ministry of labour has a special department to handle 'migrant labour'. Then there are the new countries from the East, the slav/slaves, or the undocumented Kurds in Syria (they have no legal status at all!). Well you can see where all this goes. Indentured labour has just been re-invented (if it ever died out) and on a massive and unprecedented scale. The consequence: a reduction in the relative price of unskilled labour (and incidentally one more reason why deflation is coming). This labour needs to move freely and legally. It is strange how all our ideologues are strangely quiet on one topic where market mechanisms really could work against vested interests. Wage levels would regulate the movement of free people, and equilibrate an unbalanced world. But as Paul says, oh never mind.

So finally, to come back to our starting point. What has all this to do with Singapore? well, I don't know for sure that I am right (and I am sure that Eddie will soon put me straight if I'm not), but my guess is that Spore is just too well regulated (the land where you can't eat chewing gum), so the potential for the mass introduction of immigrants just isn't there.

Domestic economy holds key to jobs
By Eddie Lee

SINGAPORE'S manufacturing output fell unexpectedly by five per cent last month. The war in Iraq probably had something to do with it. But it was unexpected to observers because up until last month, manufacturing output had actually been recovering well. Average growth of manufacturing output from the third quarter of last year to the first quarter of this year was 10.6 per cent, an impressive turnaround from a 10.5-per-cent drop in 2001. Growth in manufacturing output was driven by a 15.5-per-cent rise in non-oil domestic exports. Obviously, the sudden dip sparked concerns that the economy is headed for a double dip as the manufacturing sector is generally regarded as the main engine of growth for the economy.Yet, important as the manufacturing sector remains to economic growth, its significance as a barometer of health for the economy has receded.

It is also why headline economic data seems so detached from everyday experience. Rising export growth doesn't seem to get reflected in an improvement in economic well-being. The reason is that job prospects are what matters to the man in the street. The manufacturing sector, however, is not very good at creating jobs. Despite double-digit growth in manufacturing output in the past nine months, the economy still suffered a net loss of 28,300 jobs over the same period. Growth in today's manufacturing sector just isn't sparking the kind of job creation it used to. In 1999, when manufacturing output rose an average of 12.6 per cent during the first nine months of recovery, there was a net creation of 4,500 jobs in the economy. Even then, this paled in comparison with the 1986 recovery, when an average 13-per-cent growth was enough to drive a net gain of 11,000 jobs in the economy.

It's not that the current unemployment is inflated by a mismatch between jobs and workers. According to the Ministry of Manpower, the job-vacancy rate is now at its lowest in over 10 years. There were nearly four unemployed for every vacancy in the final quarter of last year. There just aren't many jobs around. A reason for the current dilemma is somewhat paradoxical. We have become terribly successful at what we do, making physical goods like electronic components and peripherals. But, increasingly, jobs that grow over time are things we don't do so well. Where it's harder to raise productivity because it requires the intangible - the human touch, like services.

By its very nature, innovative and capital-intensive sectors don't create many jobs. Industries that achieve rapid productivity growth tend to lose jobs, not gain them. And as our manufacturing output and employment data suggests, it's a trend that is growing. Where a task can be automated, jobs can be replaced. This is not a trend that is unique to Singapore. Nor is it unique to the current environment. In 1990, Mr Lois Plunkert of the United States Bureau of Labour Statistics observed the shrinking share of employment in the US manufacturing sector, even as manufacturing output maintained its share of the economy.He noted that after the 1983 recession, 'industry began to take on a leaner look. In an effort to compete in a worldwide market, many factories were modernised during the 1980s, with more and better machines enhancing workers' output'.

So where does a growing labour force find work? Well, even as we become efficient at producing manufacturing goods, it takes as many people to serve a meal or to cut hair as it always did. Actually it requires more, a woman friend tells me. It used to take one person to cut hair in the past; now it takes several: one to trim, one to shampoo, and one to serve tea. Now, that's service for you.Indeed, a far larger portion of the economy employs local labour to provide services for local consumption. When the boom in technology exports drove Singapore's economic growth back in 1990-1997, the manufacturing sector still shed a net 10,000 jobs. The bulk of employment was created in the services sector, particularly in finance, insurance, real estate, business and personal services. There was a net creation of 211,528 jobs. It absorbed two-thirds of the growth in the labour force for the same period.

To be sure, not all services are for local consumption. Singapore's development as a financial centre began back in the late 1960s. There is now a large and diversified group of local and foreign financial institutions offering a wide range of financial products and services for the international market. Indeed, there is a growing tendency towards globalisation in services as well. Aviva, the world's seventh-largest insurance group, announced plans earlier this year to cut jobs in Europe to open a call centre in India. But there's a part that remains inherently localised. This is the people-oriented service component, like social services, personal services, and elderly and health care. These, after all, are the truly difficult tasks that we cannot put into a computer code and automate.

Economist Paul Krugman once pointed out that 'when you look at the economies of modern cities, what you see is a process of localisation: a steadily rising share of the work force produces services that are sold only within that same metropolitan area. 'This process of localisation explains what would otherwise seem a paradox about the world economy: the fact that international trade is not much bigger now as a share of world output than it was a century ago.' Or in Singapore's case, the fact that despite the apparent growth of electronics exports and the international stature of the nation's financial sector, exports of goods and services account for no larger a share than which existed in 1960. Just over half of overall demand.

So even as the demands of the global economy require that the export sector specialise in capital-intensive production, more people will be looking for localised service jobs.This is not to deny that the export sector in Singapore continues to determine the general direction of the economy. The economy still remains vulnerable to a slump in the global electronics industry. But the importance of service-sector jobs simply means that the domestic economy retains its significance even in today's global village. And right now, export growth or not, the domestic economy is in a funk.
Source: Straits Times