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Saturday, October 11, 2003

Monkey Business

I don't know how I missed this one when it first came out. The discovery is a lovely one, and serves to undeline how much of our core behaviour we share with some other animals. It is also very pleasant to blog this, since Frans de Waals was one of the first people to study Bonobos. A quick Google will soon take you to his other work if you are interested. Remember, Darwin had some very dangerous ideas, and we are only now coming to terms with their implications.

Cheated Monkeys Help Explain Economic Puzzle

In an experimental first, researchers have demonstrated that just like humans, nonhuman primates have a sense of fairness. Coupled with previous scientific data demonstrating strong similarities between human and nonhuman primate behavior, the findings suggest that economic decision-making is based as much on a universal sense of fairness as on rational considerations. "People often forgo an available reward because it is not what they expect or think is fair," says researcher Sarah Brosnan. "Such irrational behavior has baffled scientists and economists, who traditionally have argued all economic decisions are rational," she says. "Our findings in nonhuman primates indicate the emotional sense of fairness plays a key role in such decision-making."

Led by Brosnan and Frans de Waal at the Living Links Center and the Yerkes National Primate Research Center of Atlanta's Emory University, researchers conducted four tests, each including sessions of 25 trials on pairs of female capuchin monkeys. First, they gave capuchins cucumber in exchange for a token. Then they gave one capuchin cucumber and one a higher-value grape in exchange for various behaviors. "We showed the subjects compared their rewards with those of their partners and refused to accept a lower-value reward if their partners received a higher-value reward," says Brosnan, "This effect is amplified when the partner does not have to work for the reward."

The capuchins display similar reactions to humans when they feel they are being cheated. The researchers recorded a 95% exchange rate with subjects when both subjects received cucumber as payment for the same work. This fell to 60% during an inequity test, in which subjects observed their partners receiving a higher reward for doing the same work. In an effort-control test, in which partners received a higher reward for less work, the rate fell to 20%.

The results indicate that nonhuman primates respond the same emotionally as humans do to perceived inequity. This provides economists with food for thought as to why humans make decisions they do regarding efforts, gains and losses of others.Brosnan and de Waal will now conduct related studies with capuchins and chimpanzees. The findings from their latest study can be found in the journal Nature.
Source: Better Humans

Here's the abstract of the Nature article, and a link:

During the evolution of cooperation it may have become critical for individuals to compare their own efforts and pay-offs with those of others. Negative reactions may occur when expectations are violated. One theory proposes that aversion to inequity can explain human cooperation within the bounds of the rational choice model, and may in fact be more inclusive than previous explanations. Although there exists substantial cultural variation in its particulars, this ‘sense of fairness’ is probably a human universal that has been shown to prevail in a wide variety of circumstances. However, we are not the only cooperative animals, hence inequity aversion may not be uniquely human.

Many highly cooperative nonhuman species seem guided by a set of expectations about the outcome of cooperation and the division of resources. Here we demonstrate that a nonhuman primate, the brown capuchin monkey (Cebus apella), responds negatively to unequal reward distribution in exchanges with a human experimenter. Monkeys refused to participate if they witnessed a conspecific obtain a more attractive reward for equal effort, an effect amplified if the partner received such a reward without any effort at all. These reactions support an early evolutionary origin of inequity aversion.
Source: Nature

Honeybees: What Governs Here?

I was trying hard not to blog today, but this one is irresistable - the life and times of the honeybee (apis mellifera). Apparently the honeybee turns on and off 40 percent of her genes as she matures from "nurse" to forager in her short, busy life. Now some new research from a team lead by University of Illinois professor Gene Robinson suggests that studying how the factors governing this on-off process (or expression) work is telling us that genes and behavior are more closely related than we often believe, and more specifically that nature and nurture are not counterposed, but closely entwined. According to Robinson "about 40 percent of the genes change as the bee grows up and changes from taking care of baby bees in the hive to graduating and becoming a forager.......These changes are so consistent from individual to individual that a computer program can look at the expression profiles and characterize the individual as a nurse bee or a forager."

Robinson and his team created their own gene chip for the study - a plate on which chemicals react with active genetic products, glowing luminescently when exposed to certain lights, and they were able to track the development of 60 different bees as some genes switched off and others switched on. Honeybees live in colonies dominated by females, and males are used only for mating with the queen. The bees mature into new roles over a period of two to three weeks. Nurse bees care for the young for their first two to three weeks of life, then shift to foraging for nectar and pollen. But if the colony is short of foragers, for example, some of the nurse bees will mature more quickly. All of this happens fast. A honeybee typically lives just six weeks. "They pretty much fly themselves to death."

Robinson is quoted as saying that it is hard to know how much of this information translates to humans, who of course mature more slowly and in more complex ways than bees. But on the genetic level, we humans apparently have plenty in common with bees. In fact many of the genes looked at by Robinson's team have counterparts in humans and other animals. One example given is the MAP kinase gene, which is involved in learning and memory. In bees, this gene becomes more active as they become foragers. Obviously we should be careful in drawing too many conclusions, but the evident association between expression and behaviour is fascinating.

A honeybee's genes can tell you its job. Bees tending the nest have a different set of active genes in their brains to their nestmates out gathering food, researchers have found. There are many biological steps between DNA and deeds, says Gene Robinson of the University of Illinois in Urbana-Champaign. To find the two so closely linked is a surprise. "The genome is more heavily involved in orchestrating behaviour than one might have thought," he says. Bees could help us map similar links in humans. "We share many components in our nervous systems with the honeybee," says bee researcher Greg Hunt of Purdue University in West Lafayette, Indiana. In fruitflies, equivalents to the honeybee job genes are involved in learning, through their control of cell communication.

Robinson's team built a computer chip bearing DNA sequences representing about 5,500 honeybee genes - about half of the bee genome. Genes that are active in a tissue sample stick to their equivalent on the chip, creating a glowing spot. The busier the gene, the brighter the spot. About 40% of genes change their activity between nursemaids and foragers, the researchers found. This pattern is consistent enough to match bees to jobs on genes alone. The team tested samples from the brains of 60 insects from three hives. Such large-scale patterns are the best guide to the complex chemistry behind animal actions, reasons entomologist Robert Page of the University of California, Davis. "We're not going to find a gene for this and a gene for that," he says.

Young worker bees spend their first weeks helping out around the hive. They then swap to foraging in the outside world for the final month of their lives. So ageing influences bee employment. But the switch is not fixed - it can be accelerated, retarded or reversed. For example, old workers prevent an excess of foragers by releasing pheromones that slow younger bees' switching. Working out how honeybees mature might help us understand similar developments in other animals, Robinson points out. Young mammals, from example, switch from play to fighting, or mate-seeking. The honeybee genome, which should be completely sequenced in the next few months, will accelerate the understanding of behaviour and genetics tremendously, says Hunt. The experiments should be repeated with a spread of genetically different bees, to show which genes are most strongly linked to behaviour, he adds.
Source: Nature

Some of the really interesting conclusions of this study are perhaps drawn out in this piece from Science Daily:

Genes and behavior go together in honey bees so strongly that an individual bee's occupation can be predicted by knowing a profile of its gene expression in the brain, say researchers at the University of Illinois at Urbana-Champaign.

This strong relationship surfaced in a complex molecular study of 6,878 different genes replicated with 72 cDNA microarrays that captured the essence of brain gene activity within the natural world of the honey bee (Apis mellifera). Even though most of the differences in gene expression were small, the changes were observable in 40 percent of the genes studied, the scientists report in the Oct. 10 issue of the journal Science.

"We have discovered a clear molecular signature in the bee brain that is robustly associated with behavior," said principal researcher Gene E. Robinson, a professor of entomology and director of the Neuroscience Program at Illinois. "This provides a striking picture of the genome as a dynamic entity, more actively involved in modulating behavior in the adult brain than we previously thought."

Microarrays let researchers get a broad view of gene activity by generating simultaneous measurements of messenger RNA, which reflect levels of protein activity. The mRNA binds to specific sites on the array, allowing for the measurement of expression from thousands of genes.

Robinson, who also holds the G. William Arends Professorship in Integrative Biology at Illinois, and colleagues generated mRNA profiles from 60 different bees who were working either as nurses (taking care of the brood within the hive) or foragers (gathering food outside). A computer program was able to use the profiles to determine correctly, for 57 of 60 the bees, which individual belonged to what group.

Behavioral differences between nurses and foragers are part of an age-related, socially regulated division of bee labor. Nurses perform care-giving duties for their first two to three weeks of life, then shift to foraging for nectar and pollen. As the behavioral transition occurs the bees experience changes in brain structure, brain chemistry, and, as this new study shows, many changes in gene expression.

Robinson, whose research is part of a federally funded project to sequence the honey bee genome, has long been interested in the mechanisms involved in honey bee division of labor as a model to understand the relationships between genes, brain and behavior.

After an initial analysis showed differences between nurses and foragers, the researchers faced the problem of relating these differences to either age or behavior, because foragers are both behaviorally different and older than nurses. So Robinson and colleagues created colonies consisting entirely of same-aged bees. In the absence of older bees, some individuals in a hive will begin foraging up to two weeks earlier than usual while others will grow up normally and act as nurses, making for age-matched young nurses and foragers. Age-matched old foragers and old nurses also were obtained from these colonies.

A dominant pattern of gene expression emerged, and it "was clearly associated with behavior," the researchers wrote. Since precocious foraging is a response to the shortage of foragers, this finding indicates that the genome is responding dynamically to changes in the bee's social environment, Robinson said.

The study was unique, he said, because it focused on individual profiles. Previous studies of gene expression and behavior in mice and flies, for instance, have focused on group tendencies, looking at pools of individuals.
Source: Science Daily

And here is an introductory summary from Gene Robinson's Home Page :

"What is it that governs here, that issues orders, foresees the future...?" - Maeterlinck, 1927

Division of labor is fundamental to the organization of insect societies, and is thought to be one of the principal factors in their ecological success. Division of labor in insect colonies is characterized by two features: different activities are performed simultaneously, by groups of specialized individuals, which is assumed more efficient than if tasks are performed sequentially, by unspecialized individuals.

A key feature of the division of labor in insect colonies is its plasticity. Colonies respond to changing internal and external conditions by adjusting the ratios of individual workers engaged in the various tasks. This is accomplished in large part via the behavioral flexibility of the individual workers themselves. Worker behavioral flexibility contributes to the reproductive success of a colony by enabling it to continue to grow, develop, and ultimately produce a new generation of reproductive males and females during changing colony conditions.

Sensitivity to change within a structured labor system is important to social organization, but only now is beginning to be understood. The regulation of division of labor relates to one of the central problems in insect sociobiology, colony behavioral integration. Some of the most remarkable traits of social insects, such as their elaborate nests, potent defense strategies, sophisticated techniques of foraging, and intricate but flexible systems of division of labor involve the collective endeavors of perhaps thousands, or even hundreds of thousands, of workers. But it is unlikely that each individual can monitor the state of its whole colony and then perform the tasks that are needed most. In addition, it long has been recognized that highly eusocial insect societies function without a key form of control that exists in human societies. Although workers may play special roles in organizing specific tasks, there is no evidence for the occurrence of colony "leaders", i.e., individuals that perceive all or most of the colony's requirements and direct the activities of other colony members from one task to another. The challenge is to understand the mechanisms of integration that enable workers to respond to fragmentary information with actions that are appropriate to the state of the whole colony.

In most species of highly eusocial insects studied to date, there is age-related division of labor. Adult workers exhibit age polyethism, a form of behavioral development in which they perform different tasks at different ages. Young bees labor in the nest, while older individuals forage outside. During each stage of behavioral development a bee performs more-or-less the same kinds of jobs for a sustained period of time.

Friday, October 10, 2003

IS the US Stimulus a Spent Force?

An interesting point emerges from this survey of 53 economists: the short-term stimulus in the US economy may be a spent force. It seems it was considerable while it lasted, but we may expect spending to slow down notably.

A burst of consumer spending fueled by lower taxes and advance refund checks that helped the U.S. economy accelerate last quarter won't be sustained in the final three months of the year, a private survey of economists showed. The world's largest economy probably expanded at a 4.9 percent annual pace from July through September, led by a 5.2 percent jump in consumer spending, according to the consensus estimate of 53 economists surveyed by Blue Chip Economic Indicators this month. Growth will slow to 3.7 percent in the final three months of the year as household spending cools.

Surveys of purchasing managers showing slower growth among both manufacturers including General Electric Co., and service companies last month, concern that consumers have already spent much of the savings from the tax cuts, and a lack of jobs help ``to account for the unwillingness of many panel members to ratchet even higher their estimates of future economic activity,'' the report said. The third quarter ``will give way to much more modest growth in a U.S. economy that has seen little job growth,'' said Jeffrey Rubin, chief economist at CIBC World Markets Inc. in Toronto and a participant in the survey, in an article written for the Blue Chip survey. General Electric Co., the world's second-biggest company by market value, today reported its fourth consecutive quarterly decline in profit, with third-quarter net income falling 11 percent from the same period last year. Northrop Grumman Corp., the world's largest naval shipbuilder, yesterday cut its 2004 sales forecast by at least $300 million because of delays in work on an aircraft.........

The boost from the tax cuts that took effect in July is evident in the forecasts for incomes. Disposable personal income, or the money left over after taxes, probably grew at a 7.9 percent annual rate in the third quarter, according to the survey. Income growth is projected to slow to a 2.3 percent pace in the final three months of the year, less than a third of the previous quarter's pace.

Earnings gains slow as the unemployment rate is projected to average 6.2 percent in the fourth quarter, compared with a 6.1 percent jobless rate in September. Former General Electric Chief Executive Office Jack Welch said on Wednesday the economy would recover more quickly than after past slumps, though it would take longer for jobs to respond. For all of 2003, the economy will expand 2.7 percent, 0.1 percentage point better than estimated last month, the survey showed. GDP grew 2.4 percent last year, the first year of a recovery from the recession that ended in November 2001.
Source: Bloomberg

Wall Street Research Outsourcing

Useful piece from the New York Times about Wall street research firms and Indian outsourcing. (Via my India Economy blog colleague Kaushik).

Global companies have long taken advantage of India's large college-educated, low-cost work force. Now Wall Street firms, including J. P. Morgan, Lehman Brothers and Morgan Stanley, are joining the chase for more highly skilled Indian labor.J. P. Morgan, the investment banking arm of J. P. Morgan Chase, plans to hire a few dozen researchers in Bombay by the end of the year. Morgan Stanley, which already has investment banking and mutual fund operations in India, will employ a similar number of researchers this year, also in Bombay. Both teams will consist of junior-level analysts collecting data, analyzing balance sheets and working on basic financial models.

This shifting of more sophisticated work to India comes on the heels of a rush of call center and other back-office nonmanufacturing jobs here, and is seen by many experts as yet another phase in the latest drift of jobs to low-cost countries that began in the early 1990's with Silicon Valley companies. Some Wall Street firms are just observing the research trend for now, though they already have a presence here. Merrill Lynch has an investment banking, brokerage and asset management joint venture in India as well as a technology development center to build proprietary software for its global operations. And Goldman Sachs plans to establish an Indian unit with 250 employees working on operations and technology. But neither firm has moved any financial research to the country.

Other skeptical firms are, however, being drawn in. Among them is Lehman, "though we are not big fans of business process outsourcing," said Peter Nag, vice president and global program management officer for Lehman in New York. Lehman has cautiously started a few pilot programs in Bombay for research-related tasks like data cleansing and creating presentations. The programs, which began a couple of months ago, are run by boutique Indian firms set up by former Wall Street employees. Other financial giants, like Citigroup, are expanding the Indian side of their corporate and investment banking activities. Citigroup executives did not respond to requests for comment on research being shifted to India. But the company's Web site says: "Citigroup's global corporate and investment bank has expanded in India rapidly over the last two years. Currently, the firm has more than 40 staff based in Mumbai working in investment banking, equities, and equity research departments." Mumbai is the local name for Bombay.

There are two main forces behind the experimentation with research operations in India, experts say. Wall Street revenues are well below where they were when the market peaked, so cost-cutting is imperative. And the investment advice scandal involving 10 big securities firms that was resolved with a $1.4 billion settlement this spring has resulted in a heightened awareness of the need for fair and untainted research. "The downturn in the capital markets has collided with cutthroat competition among Wall Street firms to create pressure on costs," said Christopher Gentle, the research director at Deloitte Consulting in London. Such pressure is being felt across a broad spectrum of industries in the United States, and the farming out of all kinds of work once done only or largely domestically has been increasing rapidly.

The total outsourcing of business-process jobs by American companies is expected to grow to $136 billion by 2015, from $4 billion in 2000, and create 3.3 million jobs, according to Forrester Research of Cambridge, Mass. An estimated one million of these jobs will move abroad - a trend that dismays some American workers. China, India, the Philippines and Russia are expected to gain most of the work. And many people expect India to snare much of the highly prized jobs, like the kind Wall Street is starting to export. "India will see increased outsourcing of research in equities, economics, derivatives and debt research because of cheaper talent as well as language skills," said Andrew Holland, executive vice president for DSP Merrill Lynch in Bombay, a firm 40 percent owned by Merrill Lynch.

India's low real estate costs and salaries make it possible for investment banks to sustain the necessary round-the-clock coverage. On Wall Street, salaries constitute as much as three-quarters of total research costs. But, Dushyant Shahrawat, a senior analyst at TowerGroup, a financial services consulting firm in Needham, Mass., said "a junior sell-side research analyst from an Ivy League school costs $150,000 a year to the company, while an Indian equivalent from a top business school would cost $35,000 a year." Hiring inexpensive junior-level researchers in India will free J. P. Morgan's highly paid senior analysts to spend more time with the companies they cover and with investors, a J. P. Morgan spokeswoman, Joanne Shephard, said.

The number of Wall Street research jobs in India is still small compared with the thousands of back-office jobs being added each year. The National Association of Software and Services Companies, the industry trade group known as Nasscom, estimates that only 200 such jobs have been created in India so far. Sunil Mehta, vice president of Nasscom, said the movement of services jobs followed the model perfected by the auto industry. "In the auto industry, the engine could be built in Brazil, parts could be sourced from India and China, and the assembly line could be in Michigan," Mr. Mehta said. And now, he said, "global corporations, including Wall Street firms, are obtaining portions of the service wherever it is available at the lowest price."

But shifting research is not as easy as shifting many other types of work, Mr. Shahrawat of TowerGroup said, and the trend will be slow growing, particularly for more senior research work. Among the impediments, he said, is that research analysts need to be in close touch with management of the firms they cover. "An analyst sitting in Bombay will find it very difficult to do a competent job writing a report that values Wal-Mart's stock if he has never even been to Wal-Mart and doesn't have a close relationship with Wal-Mart's management," he said. He and other analysts foresee thorny regulatory issues in sending research abroad. "If it is anything more than basic number crunching and comes even remotely close to investment advice," Mr. Shahrawat said, "Indian researchers will be required to be registered as investment advisers, and have other accreditations."

There are other concerns as well. "The feasibility and risk mitigation aspects require much greater due diligence before we make any outsourcing commitments," Mr. Nag of Lehman Brothers said, although the firm's due diligence last year showed that India had a large pool of skilled workers. Still, experts see the trend accelerating. Mr. Gentle of Deloitte Consulting, which has forecast that financial services companies will move a million jobs, mainly back-office and technology-related work, to India by 2008, said, "I see a significant increase in research jobs as well." That, he added, would put the total "in the thousands rather than hundreds." And some consultants say that higher-end and more complicated tasks could eventually shift overseas.

At top Indian business schools, like the Indian Institute of Management, the prospect of a job with Wall Street firms has students excited. Gayatri Srinivasan, 24, in the graduating class of the institute's Bangalore campus, says she dreams of a job with a top American investment bank; she will be competing for her dream job with at least 50 of the 200 students on her campus. "Imagine working directly for a Wall Street firm while continuing to live in India," said Ms. Srinivasan, who interned this summer at Lehman's office in Tokyo. Entry into the institute's four schools is highly competitive - only 1 percent of applicants get in, said Ganesh Prabhu, chairman of placement at the Bangalore campus. Still, the average entry-level salary for graduates last year was just 600,000 rupees, or $13,226, for jobs in India. The jobs may not transport them to Wall Street, but Ms. Srinivasan and her peers feel that does not detract from the glamour of it all."It is not the location," she said, "but the job and the bank that matters."
Source: New York Times

Let a Billion Wallets Bloom

Again via Rajesh the Economist has a piece on Asia's new consumers. Note the importance attached to the changing demographic. The idea is spreading!

All across Asia, consumers are waking up and finding their voices, or at least their wallets. They are younger than their counterparts in the West. They are also growing richer and are less frugal than their high-saving parents. Above all, there are lots of them.

Christopher Wood, emerging-markets strategist at CLSA, a Hong Kong broker, talks of “Asia's billion boomers”: in 2000 there were 1.2 billion Asians aged between 30 and 59. That will rise to 1.7 billion by 2020. Over the same period, the same age group in western Europe, and even in America, will shrink.

Asia's boomers are blessed with increasing spending power. Some 1.4 billion may, by 2020, earn at least $5,000 in today's money—the point at which discretionary spending takes off—compared with 306m now. And Asians are moderating their traditionally high savings rates (see chart). Above all, Asia's growing number of well-educated, sophisticated singles and couples enjoy a sense of confidence in their own rising living standards.

These spending patterns are transforming Asia's hitherto export-led economies. Exports and corporate investment still comprise 38% of GDP on average, according to CLSA, but governments from Malaysia to Thailand are openly encouraging consumer demand to foster domestic growth—often, pointedly, as a counter to foreign direct investment...Asia's consumers may soon replace America's as the drivers of global growth.

Where Does This Leave Television?

A very interesting argument courtesy of Rajesh at Emergic about the future of digital television. All the more interesting since it comes from Ashley Highfield, director of new media at the BBC:

Firstly, consumers are taking control of their media consumption, choosing not just the 'what' they watch but also the when, how and where they watch it. Now most people here probably know that TiVo and personal video recorders dramatically failed to rock anyone's world when they originally launched in the UK. Consumers just couldn't see the benefits for their £10 a month subscription. But in homes with Personal video recorders (or PVRs), around 70 percent of viewing is time-shifted: PVRs will mean we are able to finally break free of the 50 year long tyranny of the TV schedule.

The second trend our research showed was that the audience increasingly wants to join in and get closer to their media...Traditionally we have always thought that TV was about lying back relaxing and at best, half hearted interaction. In fact, recent trials again in Hull proved otherwise -- audiences want a lot more than this. They want to create their own content either from scratch, or perhaps using tools and support that a broadcaster can provide. In a fragmenting society, media becomes a substitute for community.

The third trend is about consuming more media simultaneously -- which is fast becoming the norm. Younger people are watching less TV -- this is a fact. But not only are people watching less TV, they are also less focused on the programmes and ads they do actually watch. Amongst the under 34s, viewing now falls into two distinct camps: high attention and appreciation for a few (and I mean very few) programmes, and much larger scale ambient or even apathetic viewing for the rest of the time the telly is on.

And finally, the last trend -- sharing. Broadband, which is growing exponentially in the UK (up 200 percent year on year to around 2.5 million subscribers now) will make downloading of decent video quality worthwhile, easy and cheap via the net. Downloading and sharing this video is the final piece of the jigsaw and will create a killer combination that I believe could undermine the existing models of pay-TV.

The killer combination is broadband together with digital TV and PVRs, plus the ability to share this video in the same peer-to-peer model with which music files are exchanged on the net. Broadband will provide the rich on-demand content; digital TV through Freeview will make 40 channels and interactive services available to the masses for free; PVRs will provide the means to break from the tyranny of the TV schedule; and sharing will enable file swapping of personal as well as broadcast content. It really doesn't matter if this solution is built into a PC as with the Microsoft's Media Centre, Sony's new PlayStation or a set top box. It all basically adds up to the same solution: a box and a screen -- offering unparalled video, TV, interactive and games content. What I'm certain of, is that this killer combination will be in half of all UK homes, in one form or another, by the end of this decade.

Perhaps the most important point is that young people are watching less TV, and getting involved with forms of media that are compatible with other activities (radio?). This tendency can put the whole TV industry in a negative feedback dynamic, as advertising pays less, and therefore TV needs more, which drives away more viewers etc. Now since the hey day of the TV had a very definite social impact, it is to be expected that it's relative demise will also be noticed.

The Chinese Rustbelt

Today is the day of the hard-look at potential problems in China. Obviously this article identifies one possible negative mix: Lack of marketing experience, bureaucratic state management influence, and absence of propriety technology. Still, learning is the name of the game.

China tumbles in white goods

Many of China's leading washing machine makers have been bought out or gone bankrupt in recent months, confounding expectations the mainland's low-cost manufacturers would become dominant international players. With the exception of Haier, the country's largest white-goods company, Chinese washing machine manufacturers have fallen by the wayside as foreign brands have doubled or in some cases tripled market share in China since 2000.

The foreign share of total washing machines sales in China has gone from about 15 per cent in 2000 to more than 25 per cent in the first six months of this year. But in some of the most profitable lines, such as fully automatic machines, the foreign share has gone from 15 per cent in 1999 to 42 per cent of the national market now. "A few years ago, foreign companies were not very familiar with the Chinese market, but they have made great strides in brand recognition and service," said Xu Jun of China Securities in Shanghai. The foreign brands that have carved out significant market share include Whirlpool, LG Electronics, Samsung, Siemens and Matsushita's National Panasonic.

Even with nearly 20 per cent of the market, Little Swan, one of China's best known brands, plunged into the red this year and the government's controlling stake was sold to a private entrepreneur in Nanjing. "Competition in the home appliance market is cut-throat - it is very hard not to lose money," said Chen Weinong, an investor relations official at Little Swan, in Wuxi, near Shanghai. Royalstar, whose brands are the third-largest sellers in China, has been bought by Elco Industries, an Israeli company, after struggling to maintain profitability for some years.

Another brand, Little Duck, a listed manufacturer in Shenzhen, southern China, is in talks with a local lorry making company after two consecutive years of losses. "We are still doing well in terms of market share, but several years of price wars have cut our margins very thin," said Wang Jinxia, a spokeswoman. "On top of that, since last year, prices of raw materials have risen; steel prices have gone up 40 per cent and plastics by 20 per cent."

Until recently, growing Chinese exports of goods such as washing machines, fridges and television sets had prompted speculation that local companies could become global players in consumer electronics and white goods. While China might still create some global champions, weak brand management, state ownership and lack of proprietary technology has made it difficult for its companies to be anything other than low-cost producers, and vulnerable to aggressive foreign competitors, even in their home market. The restructuring of Chinese industry, however, has been made easier by Beijing's backing of sell-offs of state-owned shares by city and provincial governments.
Source: Financial Times

You're Off the Hook

I've just posted on this over at fistful. The French are to be given an extra year to get their fiscal act together. This is more a sign of impotence than a seal of approval. In the end I agree with this approach, there is really nothing - except ridicule - to be gained from imposing a symobolic fine. But the point is that this should not be necessary. Everything here seems to be calculated. But still Austria, the Netherlands and Finland don't seem too happy. So how fine is the calculation? How often can you take advantage of the impotence of the other before a limit is reached? I have no answer to this, but I know the answer is out there somewhere. I guess we'd better all just hope - although I'm not personally too convinced - that the EU Commission growth provisions are fulfilled, and that we aren't going to see an even worse re-run of this next year.

France is set to be given an extra year to comply with the EU's budget rules, after Francis Mer, finance minister, indicated he will make extra efforts to trim his country's record budget deficit. A majority of European finance ministers now admit there is nothing they can do to stop President Jacques Chirac's government from breaking the EU's stability and growth pact for a third successive year in 2004.

Diplomats yesterday con ceded that France will have to be given until 2005 to comply with the rules, but they still expect Mr Mer to offer something in return. Paris will escape fines potentially worth billions of euros. French officials expect Mr Mer to make his peace offering next month, agreeing to European Commission requests to cut further France's underlying deficit and to make additional structural reforms. The modest concessions will be a belated signal that France is conscious of its responsibilities to other eurozone countries to keep its deficit under control. But they do nothing to disguise the fact that the stability pact - once a feared instrument of fiscal discipline - has been exposed as largely toothless.

Diplomats said that Mr Mer gave a "conciliatory" presentation of his 2004 budget to his 11 fellow members of the eurogroup - the informal gathering of single currency finance ministers - over dinner in Luxembourg on Monday night. "A lot of member states had felt the French weren't taking it [the breach] seriously . . . but that's not the case anymore," said Charlie McCreevy, Irish finance minister. By yesterday it was clear that almost all the finance ministers were now resigned to a "flexible" interpretation of the pact in relation to France. Only Austria, the Netherlands and to a lesser extent Finland maintained a hard line, suggesting the Commission should apply the pact ruthlessly and press for sanctions against France if necessary. "The outcome of the dinner was that everyone agreed we must try to find a reasonable solution to this problem," a French government spokesman said.

Diplomats from other EU countries expect the Commission to propose this month that France tightens its structural deficit by about 1 per cent - slightly more than the 0.7 per cent currently proposed - and to make further economic and social reforms. They expect Mr Mer to comply with the request before the end of the year, although it will not be enough to bring the French deficit below the stability pact ceiling of 3 per cent of GDP. Mr Mer's tone, in sharp contrast to some bullishly nationalistic performances at past eurogroup meetings, has persuaded countries such as Spain and Belgium to adopt a softer approach towards France.

Hans Eichel, German finance minister, also welcomed the change of tone. "It is very satisfactory that France has clearly committed itself to the [EU budget rules], to the discussions and recommendations within Ecofin . . . and wants to do everything to stay within the framework," he said. Mr Eichel's own budget deficit is expected to exceed 3 per cent for a third successive year in 2004, but he has stayed out of the line of fire by making it clear that he would do his best to observe the rules.
Source: Financial Times

An Excellent Choice

Yep, this one gets my vote. A fine choice.

Iranian activist wins Nobel prize

The Nobel Peace Prize has been awarded to Shirin Ebadi, an Iranian campaigner for human rights, noted for her work in promoting the rights of women and children. Ole Danbolt Mjoes, chairman of the five-member selection committee, paid tribute to Ms Ebadi's work both at home and abroad saying that she understood that "No society can be seen as democratic without women being represented".

On hearing of her victory 56-year-old Ms Ebadi, who is in Paris at the moment, said: "I'm a Muslim, so you can be a Muslim and support democracy. It's very good for human rights in Iran, especially for children's rights in Iran. I hope I can be useful." Ms Ebadi, a lawyer well known throughout Iran, was the country's first female judge, but was forced to resign following the Islamic Revolution in 1979. "As a lawyer, judge, lecturer, writer and activist, she has spoken out clearly and strongly in her country, Iran, and far beyond its borders," the Norwegian Nobel Committee said in a statement announcing the decision. The committee said she was a "sound professional, a courageous person, and has never heeded the threat to her own safety".
Source: BBC news

China's Coming Collapse?

Here's another book about China, Gordon G Chang's Coming Collapse of China. Again two Amazon reviews give a good flavour of the argument. An remember, I am not endorsing these arguments, I am simply recognising that they exist:

From 1978 through the mid-1990s, China had the fastest-growing economy in the world, and it appeared poised to dominate Asia, and beyond, in the near future. But after focusing on facts rather than theory and looking at the conditions behind the spectacular numbers, Gordon Chang presents the People's Republic as a study in wasted potential: "Peer beneath the surface, and there is a weak China, one that is in long-term decline and even on the verge of collapse. The symptoms of decay are to be seen everywhere." For a nation that has always taken a long view of history, time is quickly running out. Chang believes China has about five years to get its economy in order before it suffers a crippling financial collapse--a timeline he seriously doubts can be met.
By failing to complete its reformation, China has maintained an illusion of progress, Chang explains, but in reality has caused more problems than opportunities for would-be entrepreneurs and foreign investors. Because reform has not been fast enough or comprehensive enough, China is unable to benefit from its modernization or keep up technologically with much of the world. The government's reluctance to get rid of state-owned enterprises has not only rendered China uncompetitive just as it prepares to join the World Trade Organization, but is causing the banks--which were forced to lend money to SOEs--to fail alongside them. Widespread unemployment, corruption within the Communist party, millions of resentful peasants, and a general lack of leadership further threaten stability. The Communist party "knows how to suppress but it no longer has the power to lead," Chang writes, arguing that the party is maintaining control only through the use of brute force and the people's instinct for obedience--popular support that could deteriorate as soon as the economy plunges. Simultaneously, societal ills such as gambling, drugs, and prostitution have become huge problems.

Stuck between Communism and capitalism, "China is drifting, unwilling to go forward as fast as it must and unable to turn back." It is uncertain what will be in the way when the giant finally falls.
Reviewer: Shawn Carkonen

At a time when almost everybody is enthusing about China and its economic prospects, this is a sobering book. Chang argues that the economic and political system of the People's Republic is teetering on the verge of collapse; in 5 to 10 years after China's accession to the World Trade Organization (WTO) the whole house of cards will finally fall, and the Communist Party will be ousted from power in an eruption of violence. In Chang's opinion, neither the economic nor the political system can be reformed; the regime in Beijing will not win time during a slow process of reform ("crossing the river by feeling the stones"), but just make things worse as even more money is squandered by inefficient State Owned Enterprises and the corrupt Communist Party.

It is usually when people get overly optimistic and write books like "Dow 36,000" or "China as No. 1: The New Superpower Takes Center Stage" that things take a turn for the worse. Therefore, we should be glad that someone provides an antidote to the euphoria. After all, China and its 1.3 billion inhabitants produce an annual Gross Domestic Product (GDP) of just about the size of Italy's GDP. Italy has about 58 million inhabitants - and nobody considers Italy a superpower.

Gordon Chang's diagnosis is to the point. His prognosis, however, is debatable. After working for three years in Shanghai, I can only underline what Chang says about the sorry state of China's State Owned Enterprises and its banks. Doing business in China requires a good portion of sarcasm, and a lot of hope that despite the flaws in the system the whole state simply cannot collapse. In the words of a former executive of ING Bank: "The bad news is that the Big Four [banks] are insolvent; the good news is that they're sovereign." Chang's prognosis that China will collapse after 5 years because the country will honour its commitments to the WTO and open its economy to international competition is not very convincing. China will find ways to curb competition where it sees fit. Japan and the EU have been successful in protecting their agricultural interests for decades, and foreign banks have not managed to get a real foothold in the big Japanese market to this very day. In my opinion, the Chinese will be even more inventive in finding means to keep foreign products and services out of their country. No, the WTO is not the nemesis of Communism in China. Will the Communist Party be overthrown in a violent revolution? I would not bet on it. The Communist regimes in Eastern Europe went with a whimper (not a bang). Which will it be in China? I don't know. I don't pretend to know.

"The Coming Collapse of China" is an angry book written by the son of a man who "left China before the end of the Second World War and [the son] grew up hearing him say that Mao Zedong's regime would have to fall." The son returned to China to work as a lawyer in Shanghai. When he wrote this book - his first - it was a polemic in which he pounded away at the evils of Communism and predicted that Jiang Zemin's regime would have to fall. However, he would have written a better book if he had not tried to play the prophet (and defender of his father's faith). The best parts of the book are the stories in which he lets others speak for themselves, or when he pokes fun at the authorities. Unfortunately, he comes across as self-opinionated too many times. But don't let it irritate you: listen to the message even if you find the messenger annoying at times.
Reviewer: Boyse

The China Trap?

Those of you who are still labouring under the weight of my latest bout of blathering about fertility, fear not. Worse is to come. I am now trying to get into doing some sort of halfway-serious assessment of the China debate. In preparation I am looking round the arguments. One pole can be found in Joe Studwell's The China Dream . In fact I find one of the Amazon reviewers sum this line of argument up pretty well:

There's an incredible amount of hype about China's economic market. Its huge population, high-skilled low-wage work force, and relative political stability for a developing country all act as a powerful lure to multinationals eager to set up shop and begin selling to one-quarter of the world's population. Under tough negotiations from Chinese officials, these companies tend to give away the kitchen sink to ensure they get access to the huge market. But what do they get in return?

Joe Studwell does a service to the informed public by clearly demonstrating that almost all the businesses who have gone to China have gotten next to nothing for their technology transfers, special fees, and tremendous time and effort they've dedicated to the market. Almost uniformly, they have high-balled their expected sales and profits from the Middle Kingdom and found immense barriers such as unseen regulations and fees, corrupt officials, unenforced laws, local spin-offs to their products, etc., that should have sent them packing. Yet almost all of them push on, undeterred.

As Studwell explains, the reason for this is an old phenomenon among Western businessmen he calls "The China Dream." Despite continual setbacks, these hard-headed businessmen are too attracted to the possibility that they have something to sell that even a small percentage of Chinese may want to buy. Those huge potential numbers are too much of an enticement to businesses to easily let go of their foothold in China.

But Studwell's book is more than just about the experience of foreign businessmen in China. It also shows that the China market is becoming a trap for the Chinese people themselves. They work hard and save, and the government confiscates and then destroys their money by trapping it in state-owned banks that are insolvent because they lend to state-owned enterprises that are unproductive.

"The China Dream" is well-written and informative. Its thesis is provocative, but well supported. Studwell argues there is no rational basis for much of China's economic success and that most of its market is as closed and overregulated as the Soviet Union's. This book should be required reading for every CEO of a multinational who dreams of selling in China.
Reviewer: Jeffrey Steele

Thursday, October 09, 2003

EU Commission Predicts Relatively Jobless Recovery

The US isn't the only economy which may experience job creation problems during the year ahead.

More Europeans are likely to lose their jobs in the months ahead even though the economy is expected to recover, the European Union Commission warned Thursday. The EU's statistical office reported the euro-zone economy shrank by 0.1 percent in the second quarter due to slowing consumer spending and decreasing investments and exports. That decline follows two stagnant quarters in a row in the 12 euro-using countries, Eurostat said.

The European Commission issued new predictions for recovery, expecting flat to 0.4 percent growth in the third quarter and 0.2 percent to 0.6 percent growth in the fourth quarter. But it said more European workers are likely to lose their jobs despite the expected improvement. "There may not be much scope" for preventing lay-offs by cutting working hours, the EU said in its 2003 employment report, issued Thursday. It gave no firm predictions of jobless levels. Until now, layoffs in the bloc have been relatively modest, despite the economy's sluggishness. In the 15 EU members, unemployment stands at 8 percent, compared with 7.7 percent in August 2002.

Many economists attribute this to tough labor laws that make it more difficult for European employers to cut jobs than it is for their U.S. competitors. The Commission also pointed to increased availability of new types of job contracts. About 18 percent of European employees work part-time and 13 percent have temporary jobs. In the past few years, EU industries have cut working hours and produced less with the same number of workers, at the expense of productivity. But the Commission warns these techniques may no longer may be sustainable.

"For the EU as a whole there may not be much scope for containing the impact of the slowdown through further reductions in working hours. Also, the decline in productivity growth cannot continue unchecked for much longer," the report said. The second-quarter fall in gross domestic product was most pronounced in the Netherlands, which contracted 0.6 percent. France was down 0.3 percent, followed by Germany, Italy and Belgium, each with 0.1 percent declines. Spain had the highest growth rate at 0.7 percent, according to Eurostat. The statistical office cited slowing growth in household consumption and a drop in investments and exports. For the EU as a whole, including Britain, Denmark and Sweden, GDP was flat for the second quarter in a row.
Source: Yahoo News

Dreaming The Future

Matt has an interesting post over at Fistful of Euros. He asks what is likely to happen to the relative balance of economic power in the world between now and 2050 as a result of changing world demography. The origin of the post, a Global Economics Paper from Goldman Sachs, 'Dreaming the BRICS' (Brazil, Russia, India, China). I haven't had time to read the article itself yet, and I don't really go for this long term speculation - we still don't know all that much about what the world will look like in 2005, but Matt's comments are to the point and interesting. BTW, the big faux pas is to include Russia in the list, they clearly have missed something here, since Russia's population is going in the direction of meltdown, and I imagine its GDP is headed down the same road:

By 2050 Western Europe could be an economic irrelevancy, with its four leading economies, the UK, Germany, France and Italy (note the order…) enjoying a combined output of less than half India’s and a third of China’s. Both Brazil and Russia will be twice as large as any single Western European economy.

This is the implication of a research report, ‘Dreaming with the BRICs’ released by US investment bank Goldman Sachs. The report notes that on what it calls reasonable demographic and economic assumptions, the BRICS (Brazil, Russia, India and China) will have a combined GDP larger than the G6 (US, Japan, Germany, the UK and France) by 2050, when China will be the largest economy in the world (having overtaken the US in 2041). As early as 2009 the report expects the annual increase in dollar GDP of the BRICs to outstrip that of the G6.

The growth in relative economic power comes from three sources. First the report expects productivity growth in the BRICS to outstrip the G6 as they ‘catch-up’ with the leading economies. Second demographics are in their favour (with the partial exception of Russia) as their working-age populations continue to grow quickly. Finally, and importantly, the report expects their exchange rates to appreciate, boosting GDP when measured in US dollars.

The hurt feelings of Americas and West Europeans, used to being in charge, may be soothed by the fact they’ll still be richer than their Chinese or Indian cousins, given in terms of GDP per capita, the G6 economies will maintain a lead, though it will shrink. By 2050 Chinese per capita income is forecast to be 37% of the US level, though it will be over 50% of the UK level and over 60% of French and German. In any case this only suggests that further catch-up (and hence in terms of overall GDP, a larger lead) is possible.

German Unemployment Improves

By rights I should be getting ready to don my 'sackcloth', all the pundits seem to buy the German recovery argument. These employment numbers are certainly better than expected. There is however the small question of how the reforms may be reducing the number of people entitled to benefit. At the end of the day, I fear we may still have a long hard winter out there in front of us.

Unemployment in Germany, Europe's largest economy, unexpectedly fell in September, stoking optimism that the country is pulling out of a recession in the first half. The number of people out of work dropped a seasonally adjusted 14,000 from August to 4.39 million, the Federal Labor Office said in Nuremberg. Economists surveyed by Bloomberg News had expected an increase of 7,000. The jobless rate fell to a seven-month low of 10.5 percent from 10.6 percent. German business confidence rose to the highest since April 2001 last month, the Ifo institute's survey showed. The benchmark DAX stock index has risen 17 percent this year as investors bet on a recovery. Manufacturers unexpectedly received more orders in August as export demand rose, a report on Tuesday showed. "The worst of the slump is definitely behind us now,'' said Klaus Hofer, head of personnel at B. Braun Melsungen AG, a chemical supplies company based north of Frankfurt, with 8,500 workers in Germany. "We still have a few vacancies to fill.'' Infineon Technologies AG, Europe's No. 2 chipmaker, is hiring 145 software engineers from Siemens AG's Information and Communication Mobile wireless communications unit to help expand its telecommunications and services offerings. Business confidence in September rose to the highest since April 2001, driven by future expectations, the Ifo economic institute said last month. Investor confidence gained for the ninth month in September, the longest period of back-to-back gains since 1993, the ZEW institute said.

The unemployment rate, adjusted for European Union standards, was unchanged at 9.4 percent. In August, that was the second highest rate in the dozen countries sharing the euro after Spain. The U.S. jobless rate was unchanged at 6.1 percent in September.

September's unemployment figures were helped by changes the government has made to curb the number of people eligible for benefits, the Federal Labor Office said in a statement.

To improve conditions for hiring, Schroeder has also converted job centers into temporary employment agencies and introduced funding for jobless who set up their own companies.

The Labor Office said 21,000 people without work have been moved into temporary employment this year while 62,000 jobless have set up their own business, subjecting their income to a 10 percent standard tax. Some German companies are hesitating to hire. Juergen Strube, supervisory board chairman of chemicals maker BASF AG yesterday said ``the recovery has not yet materialized.'' Juergen Hambrecht, the company's chief executive officer, told the Tagesspiegel newspaper on Sept. 29 he ``certainly'' won't add any jobs in Germany. The number of people out of work in western Germany, which accounts for more than 90 percent of national output, fell by a seasonally adjusted 11,000, while the number of people out of work in eastern Germany fell by 3,000, the Federal Labor Office said.
Source: Bloomberg

Yahoo for Yahoo

The new economy is alive and well. Long live the new economy!

hen Terry S. Semel took over as chief executive of Yahoo two years ago, a crucial part of his turnaround plan was to diversify the company, the big Internet portal, away from online advertising and into other services that relied on paying users. The turnaround is going quite nicely. Yesterday, Yahoo said that its third-quarter profit more than doubled. But the biggest and the fastest-growing driver of revenue and profit has been advertising, not fees.

Indeed, on Tuesday, Yahoo completed its $1.6 billion acquisition of Overture Services, a leader in the fastest-growing segment of Internet advertising, text advertisements displayed with World Wide Web search results. "When I first came to Yahoo, advertising was a one-trick pony: branded advertising," like banner ads, Mr. Semel said yesterday. "We have a much more expansive way of looking at advertising today." That includes ads with pictures, used by big companies, and the text ads, used mostly by smaller businesses.

In the third quarter, branded advertising increased 20 percent, the company said, and search advertising doubled. Mark Zadell, an analyst with Blaylock & Partners, said the rebound in branded advertising was, in many ways, the bigger surprise. "It shows that the adoption of the Internet as an advertising vehicle by traditional advertisers is truly taking place," Mr. Zadell said. In many ways, the acquisition of Overture, and Yahoo's earlier acquisition of Inktomi, a Web search technology company, bring Yahoo back to its first service, as an index of Web pages. The market is growing rapidly as businesses see positive results from search-related ads.

But Yahoo continues to lose market share to Google, which handled 32 percent of the search traffic in August, compared with 26 percent for Yahoo, according to comScore Networks, a research firm. In January, Yahoo was the top search site, with 29 percent of the traffic, ahead of Google's 27 percent. Mr. Semel said that over the next year, Yahoo would create search products, based on its acquisitions, that would better capitalize on its advantages over Google.

"Search will become more important for Yahoo," Mr. Semel said. "It will allow us to do new things, like the improvements to Yahoo shopping." Yahoo recently expanded its shopping service, using Inktomi technology, to include a search of products offered by anyone on the Web, a response to Froogle, a similar service offered by Google. Previously, Yahoo displayed only products offered by advertisers. Over all, Yahoo earned $65.3 million in the third quarter, up 126 percent from a year earlier. In the recent quarter, Yahoo earned 10 cents a share, a penny more than analysts expected.

The company's revenue was $356.8 million, up 43 percent. The company's profit grew far faster than its revenue, largely because its costs increased only 25 percent. The fastest-growing segment was what it calls marketing services — essentially advertising — with revenue of $245.1 million, up 48 percent. Yahoo's revenue from fee-based services was $79.4 million, a 38 percent increase. Yahoo said it now has 4.2 million paying customers, up 700,000 in the quarter, more than expected. It now expects to have more than five million customers at year-end.

The biggest growth in this area is from Yahoo's Internet access service, provided through SBC Communications in the United States. Yahoo has just started a similar service with the BT Group in Britain. Yahoo has also had growth in online personal ads, paid e-mail services and fantasy sports services. But many other types of service it has talked about offering have not worked or not been introduced. Mr. Semel, a former co-chief of the Warner Brothers studio, has been interested in video content, but Yahoo's experiments in this area have yet to produce a successful service.
Source: New York Times

Is China Underestimating Its Growth?

Now here's a strange one, a very strange one. It has become extremely fashionable recently, and especially in the pages of the WSJ (which I'm proud to say I don't read, but which they do tell me about - this reminds me of a piece of UK Wittgensteinology, he reputedly used to start his lectures with things like: they tell me Kant said.......Ok, Ok, so they tell me the WSJ says..........), as I was saying it has become extremely fashionable to say that China's growth is a fiction. This is a strange claim to make, since if China's growth was pretty much an invention of the Chinese Communist Party I can't for the life of me understand why those at the opposite ideological pole (in the US Republican Party) would be taking it so seriously. It is a strange claim to make, but nonetheless it is being made. Clearly, there is, as we have all seen with SARS, a serious problem with using official statistics. But there are other measures. One of these is power consumption. Another is the level of exports, which are a lot easier to measure. A separate question is whether this growth is sustainable. Clearly China's institutional infrastructure has, to say the least, enormous shortcomings. However it is important to note that China's growth is export driven, it is not simply an internal speculative boom. In addition, the rapid shedding of labour from the more-or-less moribund state enterprises means that inflation does not seem to be a present danger. Bottom line: Andy Xie may well be right, and we may even be underestimating the scale of China's growth explosion.

China's economy may be growing much faster than official economic statistics suggest and is in danger of overheating, according to an emerging consensus among foreign and local economists. The economists say a surge in investment, bank lending, construction and car manufacturing has put the Chinese economy on course to grow at about 11 per cent this year, well above official forecasts of just over 8 per cent. "Right now, it is as high as it has ever been," said Jonathan Anderson, of UBS, in Hong Kong.

Using the bank's own system for measuring Chinese gross domestic product, Mr Anderson said third quarter growth was running at 14.2 per cent and would be close to 11 per cent for the year, once the slower rural economy and other factors were taken into account. Few of the economists believe that the present growth rate is either sustainable or desirable for the central government, which is now tightening credit in an attempt to rein in credit growth.

UBS's view is broadly backed by some of China's best-known economists, including Wu Jinglian, of the State Council's Development Research Centre, and Zhang Jun, of Fudan University, in Shanghai. Mr Wu said at a recent seminar that China's growth for the first six months of 2003 was more than 10 per cent, compared with the official figure of 8.2 per cent, and was likely to beat the government's whole-year forecast. Prof Zhang agreed that the official figures were understating growth, saying the figure for GDP could be "bigger than people have expected".

China's official GDP statistics have long been criticised as inaccurate because they do not measure significant parts of the economy, use outdated methods and rely on questionable provincial data. Local officials, used to meeting targets set in a command economy, have consistently reported growth rates that outstrip the national average. The inconsistencies were most glaring during the late 1990s, when official statistics recorded high-speed expansion at a time of falling energy consumption, weak jobs growth and declining prices. This year, however, most leading economic indicators are pointing steeply upwards.

Exports, property and cars accounted for about one third of the economy in terms of their value-added contribution to GDP, said Andy Xie of Morgan Stanley in Hong Kong, and all three were growing by more than 30 per cent. "One third of the economy is growing by about 30 per cent - that's about 10 per cent already," he said. Power consumption, one of the most important independent indicators of Chinese GDP growth, was up by 15 per cent so far this year compared with 2002, Mr Xie added. China's growth rate this year is especially fast in the light of the crisis over severe acute respiratory syndrome, which brought travel and much retail activity to a standstill.
Source: Financial Times

Wednesday, October 08, 2003

The Great Connundrum: What Can Be Done About Fertility Decline?

My Money Files Column

Because the baby boomers have not yet started to retire in force and accordingly the ratio of retirees to workers is still relatively low, we are in the midst of a demographic lull. But short of an outsized acceleration of productivity to well beyond the average pace of the past seven years or a major expansion of immigration, the aging of the population now in train will end this state of relative budget tranquility in about a decade's time."
Alan Greenspan : Testimony in US Senate 11 February 2003

According to one commonly held opinion, economic theory tells us people invest in children as a protection for old age. Now this proposition may or may not be true, but I don't think we should simply accept it at face value just because some versions of economic theory claim it to be the case. I think why people choose to have children is an empirical question, even though, as we shall see, the reasons people give when asked may only provide a part of the picture.

The principal economic theory which informs our thinking about how many children we end up having is essentially the one originating in the school inspired by Gary Becker, which includes other writers such as Murphy and Tamura, Galor and Weil , Razin and Ben Zion, Barro, and most famously in recent years Robert Lucas. Now my basic problem with this entire school of thought is that they tend to take as a given what I would have thought remained to be established: that in deciding about children economic factors are paramount.

Really in some way or another all of this material goes back to Malthus. Malthus, it will be recalled, held that human populations, like other animal populations, have an innate tendency to increase their numbers exponentially if not held in check by specific restraints. The exponential part is important here since it essentially means that the more people of child bearing age you have the more children you produce, whilst the less you have the less you will produce. For Malthus, as for any demographer, there are only two ways in which population growth rates can change, either through a change in death rates, or through a change in birth rates. As a consequence Malthus argued that the tendency for population numbers to explode was held in check in human societies by the existence of a combination of what he called positive and preventive checks. The positive - or natural - checks are simple enough to understand: for any given population a small increase in living standards will cause the survival of more children, and this increase in population can and will only be maintained should the increase in living standards prove permanent and sustainable - if not a combination of war, plague, pestilence, famine will soon bring numbers back down again. Thus population increase was dependent on the rate of technological change, and since pre the industrial revolution this was slow, then so was the rate of population increase. Malthus's preventive checks - or what he termed 'moral restraint' - are any conscious checks on reproductive activity exercised either individually, or via collective social processes, which limit the number of children per woman. The most important of these checks is variation in the marriage age, and such 'preventive' checks are are often to be found in societies pre-industrial societies and prior to the arrival of the demographic transition.

Curiously enough, and despite the fact that Malthus's ideas would later have considerable influence over Darwin, he never seriously entertained the view that human fertility might be regulated by natural, biological mechanisms, since if such natural feedback mechanisms existed, and birth rates tended to declined naturally as populations grew and resources became more limiting, then exponential growth would slow, and his 'principal of population' would not hold. Putting this another way, for Malthus there were no 'natural' feedback mechanisms to control fertility, such mechanisms only operated by an effect on mortality. This carries with it the implication that such natural regulators as the lactation (or breast feeding) effect (so called because there is a delay in the return to reproductive activity associated with an extended period of breast feeding), or pressure on diet which affects ovulation, are not prime movers in fertility.

Modern anthropological research however, and most notably starting with the work of the French demographer Louis Henry in the 1960's, has begun to open up another dimension in this story. Henry in fact took an unusual step: he considered only the fertility of married women in pre-modern societies. In examining only the fertility of married women he considered human fertility uninfluenced by societal regulation, by social conventions or by conscious decisions. What Henry found was something quite different from what Malthus might have anticipated. He found a twofold spread in the overall fertility levels among the natural fertility populations, a range that has been expanded to more than fourold in the decades since, as the list of natural fertility populations has grown. In particular the lowest natural fertility populations fall comfortably within the range of controlled fertility populations. Thus the basic Malthusian assumption that human fertility would be uniformly high in the absence of deliberate societal and individual control was clearly incorrect. Much could be said about this and subsequent work, but the point I want to stress and extract is that fertility varies substantially across societies, and for reasons which have little to do with conscious individual decision making processes.

Looking at the other end of the scale, at our contemporary fertility problems, a number of studies of women in modern societies have found a relation between exercise related high-energy-flux, dietary input and regularity and suppression of ovarian function. Put another way, even in our modern societies we can find natural (biological) consequences of lifestyle and diet which feed back into fertility. Peter Ellison, whose book 'On Fertile Ground' has been of enormous help to me in understanding what ‘fertility’ in fact means, puts it as follows:

"Together these field studies demonstrate that human ovarian function varies with energetic stress in similar and predictable ways across a broad range of ecological, geographical, and cultural settings. The pattern of variation in ovarian function we observe in response to the energetic constraints and consequences of local subsistence ecology in places like the Congo, Nepal and Poland are similar to the patterns we observe in Boston women in more idiosyncratic circumstances. The consistency of the relationship between energetic condition and ovarian function suggests that it is a general feature of the reproductive biology of our species. The fact that ovarian function varies in a quantitative, dose-response manner across a range of levels of energetic stress that are typically encountered by human beings in the course of their daily lives suggests that it represents functional modulation and not pathological failure of homeostasis in the face of extreme or unusual stress."

Curiously enough this finding does fit fairly comfortably into many of our modern nature/nurture arguments, since it seems clear that one part of our-make up is natural, in that we do have a genetic and biological evolutionary heritage, while at the same time we are cultural, social animals, governed in part by our own history and conventions and in part by our own conscious decisions. Neither the one part nor the other determines us absolutely as individuals.

What I am trying to say here is that you cannot treat fertility simply as an economic issue. How we live, and the rules and conventions we make also influence our fertility, regardless of the individual aspirations we may have as to the numbers of children we want. So effectively, in fertility, there is an economic component, a social component, and a natural component. Hard as we try, it seems it is impossible to reduce fertility to any one of these in isolation. Possibly with the development of more holistic, 'ecological'', systems-based models we may achieve a better understanding of the processes at work, but even were such models to exist it is not hard to see why there still would be no evident 'short term' policy solutions available to our fertility problems.


Japan: Conflicting Signals?

Along with the renewed pressure from the Bank of Japan against the rise of the yen, here is one more small piece of evidence that all may not be as well as the markets imagine:

Machinery orders placed by Japanese companies fell by a bigger-than-expected margin in August, according to official figures released on Wednesday, indicating an uncertain outlook for capital expenditure which has fuelled Japan’s nascent economic recovery. Orders for machinery made by private Japanese corporations, seen as an indicator of capital expenditure about six months ahead, fell 4.3 per cent in August from July, the Cabinet Office said. On a year-on-year basis, they rose 12.2 per cent, a smaller increase than expected. The weak data, together with the strong yen that on Wednesday traded at Y109.5 against the dollar, accelerated the decline in the Tokyo stock market, which fell for the first time in five days. The Nikkei 225 ended 2.6 per cent lower at 10,542.20.
Source: Financial Times

Why Turkey Should Be Put on the EU Fast-track

While I welcome the entrance of the new East European members into the EU, I recognise that, given their serious demographic problem, this is more justified by the need to 'extend a helping hand' than by cñear self-interest. On the other hand Turkey represents a clear opportunity for the EU, an opportunity which should be given the priority it deserves. Morgan Stanley's Serhan Cevik explains why:

We have long argued that the EU accession represents the last stage of Turkey’s 200-year-old modernisation venture and could be the ultimate policy anchor for economic and institutional development. Having said that, we think the process is likely to take no less than a decade to complete and face numerous structural and political challenges.

Recent administrative reforms help to meet the Copenhagen criteria, at least on paper. The ratification of a comprehensive array of laws and constitutional amendments further aligns Turkey’s institutional structure with European standards. Although the so-called ‘harmonisation’ reforms are not entirely adequate to meet the Copenhagen criteria, they address the EU’s primary concerns and cover most of the major issues specified in the Accession Partnership. In our view, there is a good chance that reforms herald the end of the ‘statist’ governing philosophy that has barricaded Turkey’s economic and institutional development and the coming of a truly democratic society that would also lay the foundation for a more competitive market economy. Particularly, improving civil liberties and the demilitarisation of the political landscape are revolutionary moves that are likely to bring a favourable assessment by the European Commission. Of course, there is still a gap between reforms on paper and rigorous execution. Thus, the government needs to complete the remaining legal requirements and establish a record of implementation in the next 12-month period to leave no ambiguity behind that could be used by Europe’s populist politicians again in evaluating Turkey’s progress.............

Turkey is a big challenge for the EU given the financial burden of accepting it into membership. In addition to a wide income gap, the agrarian nature of the society is a limiting factor. Over 40% of the labour force is ‘employed’ in the agricultural sector that produces barely 14% of the country’s gross domestic product. Europeans also perceive Turkey’s growing (young) population as a threat in terms of labour mobility. Indeed, income discrepancies may potentially lead to a wave of Turkish immigration into Europe and entitle today’s Turkey to get up to 15% of the EU budget. However, we believe this is unlikely to happen for two reasons. First, Turkey’s accession process is highly likely to include a phased approach to labour mobility. Second, Turkey’s income growth would naturally limit immigration flows. Though we believe Turkey’s labour force, with an average age of 26, is a demographic opportunity for aging Europe, the EU is likely to opt for an accession process that minimises the amount of transfers from the EU budget to Turkey.............

Turkey is the least popular candidate by virtue of its size and ‘cultural’ differences. Even beyond Hungtingtonian arguments on socio-cultural issues, Turkey is placed in the heart of the ‘widening versus deepening’ debate in Europe. The first-wave accession countries and the EU are already arguing over the fiscal and monetary implications of further enlargement. The political climate in Europe has clearly shifted toward a more reluctant stance on inviting new countries to join the club. Europeans are aware of the fact that once the accession process starts, there is no turning back. However, Europe’s anxiety over economic and social costs of the Turkish membership is based on a static analysis, in our view. Under the auspices of the IMF and the World Bank, the Turkish economy is already evolving toward meeting the core European standards, and by the time Turkey would become an actual member, the country’s economic, social and political conditions are likely to be far from what their erratic nature suggests today.

In our view, Turkey is not a liability, but a pivotal state for Europe’s geopolitical interests. Some Europeans may fundamentally dislike power politics and therefore see no ‘strategic’ value in the Turkish membership. However, we think European leaders would eventually base the accession decision on long-term considerations (such as economic potential and geostrategic capabilities). Turkey offers unique strengths in the Balkans, the Caucus and the Middle East, which are important geopolitical zones for the EU’s security and defence policy, and is also a bridge between Europe and the energy-rich countries of Central Asia and a cultural link to the Islamic world. On the economic front, we believe Turkey’s continuing trade integration with Europe and strong growth potential that could increase its international trade volume to US$250 billion over the next decade would make it an economic powerhouse in the ‘new’ Europe.
Source: Morgan Stanley Global Economic Forum

China Reins-in on Institutional Reform

This is not good news for those who look towards a future of serious and substantial institutional reform in China. It is also further evidence that the current attempts to 'browbeat' China into currency flexibility are likely to prove counterproductive:

China is set to postpone indefinitely a landmark scheme that would have opened the Hong Kong stock market to legal investments by mainland institutions. The setback might also delay progress toward satisfying US demands for a more flexible renminbi exchange regime, officials and financial industry executives said.

Official opposition has been building towards any early approval of the Qualified Domestic Institutional Investor (QDII) plan, under which a crack was to be opened in China's closed capital account to allow some mainland funds to change their renminbi into hard currency and invest in Hong Kong's capital markets. "There is really a lot of opposition to QDII at the moment," said one official. "There is no way it will be approved by the end of this year and probably not early next year either." The postponement will come as a blow to investors and the government of Hong Kong, which first proposed the scheme as one of several means to integrate the territory's lacklustre economy with a booming China.

Last month, another Hong Kong proposal to turn the territory into an offshore centre for trade in the renminbi was also relegated to the backburner by Beijing. The main official reason for opposition to the QDII scheme has been that it would divert funds away from Shanghai's languishing stock market, possibly causing further erosion in stock prices.

Shang Fulin, chairman of the China Securities Regulatory Commission (CSRC), the market watchdog, was one of the main opponents of early approval for QDII, officials said. The People's Bank of China, the central bank, which has pledged to ease capital controls selectively to create a more convertible currency, was broadly supportive of the QDII plan but sympathised with the objections of the CSRC at the moment, officials added.

The mothballing of QDII highlights a dilemma for China. On the one hand, it has promised John Snow, US Treasury secretary, that it will move toward a more flexible exchange regime to allay Washington's concerns over a record $103bn (?88bn, £62bn) Chinese trade surplus last year. But on the other hand, the weakness of domestic markets and financial institutions is frustrating progress in this direction.
Source: The Financial Times

Asean States Create Free Trade Zone

Two points of note her. Firstly, following Cancun, we are likely to see more of these regional agreements. Secondly, the China factor is obviously having an effect in Asia as well as in the United States.

Ten south-east Asian nations yesterday signed a landmark accord to turn their vastly disparate states into an integrated, tariff-free trading and economic community by 2020 that would resemble the early embodiment of the European Union. At a summit on the Indonesian resort island of Bali, the Association of South-East Asian Nations also agreed to complete deals with China, India and Japan by 2012. The pact with Beijing would create by far the world's largest free trade zone.

The Asean vision, dubbed the Bali Concord II, would eliminate tariff and non-tariff barriers, standardise customs procedures, gradually reduce capital controls and abolish visas in a region that is home to 500 million people. "We have just witnessed a watershed in the history of Asean," said the host, Indonesian president Megawati Sukarnoputri. "It will make it possible for our children and their children to live in enduring peace, stability and shared prosperity."

The leaders acknowledged that the diversity of the grouping's economies has and will continue to hamper integration. Asean's members range from the oil-rich autocratic monarchy Brunei, through relatively democratic nations such as Indonesia, Thailand, the Philippines, Malaysia, Singapore and Cambodia to the military dictatorship of Burma and the communist states Laos and Vietnam. Eleven sectors, including electronics, tourism and air travel will be on a fast-track integration by 2010 and some nations, particularly Singapore and Thailand, are keen to liberalise everything as quickly as possible.

"We will take to the dancefloor first to tango," said the Singaporean prime minister, Goh Chok Tong, after meeting his Thai counterpart Thaksin Shinawatra. "When other Asean members join us, we will have a livelier party." Analysts say the sense of urgency is driven by the very real fear that the region will lose out even more to China. Asean attracts only a fifth of the foreign investment going into China while data from the US-Asean business council states that, of all the American investment into east Asia, only 10% is going to Asean, compared with 75% a decade ago.
Source: The Guardian

Tuesday, October 07, 2003

More on Business Process Outsourcing in India

Clearly, as the authors of this piece from Rediff conclude, the party is only just beginning, and, oh yes, everyone is invited.

Stories about US infotech professions losing their jobs to Indians on the worldwide web are mushrooming by the hour. Anti-outsourcing websites, some of which claim to have been constructed purely by American labour, are choc-a-bloc with the financial and emotional distress outsourcing has caused in the US. And with presidential elections round the corner, the heartburn is all set to snowball into a national issue. Is it the beginning of the end of outsourcing? Far from it. A string of recent studies suggest that the phenomenon will not only get deeper with more MNCs outsourcing their infotech requirements to India but will also spread to new areas like automobile components and clinical research.

Consider this: Big Pharma can pare the cost of developing a new drug, currently estimated at between $600 million and $900 million, by as much as $200 million if development work is outsourced to India, according to consultancy firm McKinsey & Co. "The overall cost advantage in bringing a drug to the market by leveraging India aggressively could be as high as $200 million," McKinsey associate principal Peter Pfeiffer said at the inaugural session of a two-day conference on "Clinical Research: Roadmap for India" organised recently by the Confederation of Indian Industry. According to Pfeiffer, pharmaceutical companies in the US and Europe will be pushed to offshore development (clinical trials) of new chemical entities on account of the declining productivity of R&D in those countries.

McKinsey analysis shows that overall R&D productivity has declined by 24 per cent between 1991-95 and 1996-2000. "While R&D spending has increased five-fold between 1986 and 2001, filing for new molecules have increased modestly and development of new chemical entities has remained flat during the period," he said. The decline in R&D productivity, according to Pfeiffer, has happened because of rising development costs, tightening of the regulatory environment and the emergence of complex organisational designs because of the mergers and acquisitions in the sector. At the same time, development is accounting for more and more of the total investment in a new chemical entity. According to McKinsey, while development was 42 per cent of the total cost in 1976, it has risen to as high as 60 per cent by 2000.

"India clearly provides an opportunity for western pharmaceutical companies as a catalyst in addressing the productivity challenge because of the availability of large patient populations, access to highly-educated talent and lower cost of operations," Pfeiffer said adding: "The potential opportunity for savings is $120 million to $200 million on a drug development base of $550 million to $900 million." Pfeiffer says that barriers to outsourcing still exist. These include a lack of real cost pressures as there are still too much "low-hanging fruit" to be picked. For a start, there are existing systems in western pharmaceutical companies and emerging public policy concerns about outsourcing to India. Besides that there's the threat posed by India's generic drug companies.

It isn't only pharmaceuticals where India could score in a big way. The prospects appear equally bright for the automobile component companies -- nine out of ten automotive manufacturers and suppliers surveyed in North America say they intend to move certain non-manufacturing business processes to low-cost offshore locations, according to a recent survey of 40 senior automotive executives conducted by the Global Automotive Practice of management consulting firm A T Kearney. Drivers for the growing momentum in this migration of labour includes fierce competition in domestic and foreign markets; continuing cost reduction pressures; and an industry-wide strategy calling for local presence by automakers seeking growth in emerging markets, such as Asia and South America, and by suppliers in support of their customers.

A T Kearney estimates that the North American automotive industry, including manufacturers and suppliers, spends approximately $9 billion annually on business processes with the potential to be offshored, representing an enormous opportunity for cost reduction and profitability improvement. "Done right, offshoring for select engineering, information technology and other support functions to India, for instance, can reduce automakers' and suppliers' costs by nearly 50 per cent compared with doing the same functions in the US," said Richard Spitzer, vice president in A T Kearney's Global Automotive Practice and co-author of the study.

India emerged as the most popular destination for the migration of business processing activities, according to automotive executives responding to the survey. While 24 per cent of the respondents put India on top, 15 per cent voted for China, 13 per cent for Mexico, 10 per cent for Brazil and 8 per cent for the Czech republic. "India is clearly the destination of choice for business processing services across all industries," said Nagi Palle, co-author of the research and a principal at A T Kearney.

At the same time, IT offshoring is taking deeper roots in the country. Leading IT companies like IBM Global Systems and EDS and consulting majors like PricewaterhouseCoopers, Cap Gemini, Ernst & Young and Accenture have decided to add substantially to their numbers in India. "At the moment, outsourcing accounts for 23 per cent of Accenture's turnover in India. We plan to raise it to more than 40 per cent in the next three years," Accenture country managing director Sanjay Jain told Business Standard. Even the IT-enabled services companies are growing by leaps and bounds in India. For example, GE's original target for its IT enabled services operation in India was 10,000 people by 2005 -- it has now been revised to 20,000 by 2003 end.

"Savings to the US economy by offshoring to India could be $10 billion to $11 billion in 2003-04. In fact the total benefits to the US economy including savings, hi-tech imports from the US to India and contribution by Indian IT professionals to the US social security is projected to be about $16.8 billion, " a recent Nasscom study has pointed out. Outsourcing to India has helped US companies to save as much as $8 billion in the last four years, said the leading market research firm Inductis in a recent study.

So far as the proposed bills banning outsourcing to India by certain states in the US are concerned, Nasscom president Kiran Karnik says there will be no immediate impact as these outsourcing bills have just been introduced and will need to pass through various stages in order to become laws. In fact, outsourcing is now at the heart of all business organisations, says a new book called Rebuilding the Corporate Genome, authored by three top A T Kearney functionaries Johan C Aurik, Gillis J Jonk and Robert E Willen. As a result, business organisations will become smaller in scope, though not in size, as outsourcing occupies centrestage. This, the authors say, is the next stage in the evolution of business.

Corporates the world over are evolving from being organised around strategic business units to organisations driven by their business capabilities, focused on functions, which are crucial and in the discharge of which they have high capabilities, while outsourcing the rest. "These changes are driven by digitisation and connectivity," said Aurik, who was in India along with Willen in the last leg of their tour of Asia to promote the book. While Aurik leads A T Kearney's Benelux unit, Jonk and Willen are principals at the consultancy firm.

The authors have developed a matrix on which a company can plot its functions on the X-axis according to their criticality and its capabilities on the Y-axis. "The criticality of functions could range from necessary to beneficial and crucial, while capabilities could range from laggard to world class performance," Aurik said adding: "A company should stick to what is crucial and where it has world class capabilities and outsource what is necessary but where it does not have high capabilities." Clearly, the party has just begun.
Source: Bhupesh Bhandari and Bipin Chandran, Rediff.com