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Friday, October 17, 2003

'We're in the Dark'

I'm not a big Iraq commentator. I hope everyone knows what I think. I think it is easier to destabilse than it is to construct. This is my lesson from Eastern Europe, which seems to be drifting towards the edge, with no-one being especially pre-occupied. Iraq couldl be another case in point. If there were WMD's, then maybe the best stragegy would have been to destroy them and get out. Maybe it would have been easier to bring about change in Saudi Arabia and Pakistan first. Here I am with Wesley Clark. Time could prove me wrong, but the US army seems to be dug-into a pit of vipers. Just seeing how difficult it is to resolve ethnic-related conflicts in Spain, nearly thirty years after the death of Franco, makes appreciate see how difficult all this is going to be. The feelings run much deeper in Iraq, and resolution is not just round the corner. Meantime I am a Bonobo, I have never been on active service combat duty, but my feelings go out to those guys out there in Iraq. Never knowing, when you get up in the morning, whether today will be your last day on this planet has to be extremely hard. It has to be just as hard for their parents. Meantime, I think it's unrealistic to expect German and French boys to go and die in a war they didn't start. This has been set up all wrong, and unfortunately some, and only some, people are being asked to pay the price. The really difficult part is that it is hard to see how to move forward towards a better situation.

A sizeable portion of US forces serving in Iraq describe troop morale as low, and say they have no intention of re-enlisting, damaging the campaign by the US government to brighten up the image of the postwar occupation. The survey of 1,935 troops, published in a series of special reports on Iraq in the Stars and Stripes newspaper, also found that a significant number of troops were confused about the purpose of their presence, and had lost faith in their mission. Coinciding with the report, the army yesterday admitted that at least 13 US troops had committed suicide in Iraq, representing more than 10% of American non-combat deaths there, and said the army had sent a suicide-prevention expert to Iraq.

Stars and Stripes, which is funded by the Pentagon, says it embarked on the project after receiving scores of letters from disenchanted servicemen. The mailbags belied claims last week by President Bush that increasingly negative public perceptions of Iraq were a product of media spin, and that those who had been there held different views. Not so those for serving up to 12 months in Iraq, according to Stars and Strips, which noted that the troops' views stood in sharp contrast to those of senior officials on brief visits to Iraq.

Yesterday the newspaper quoted an unidentified master sergeant as saying that the delegations of officers and Congressmen only met small groups of specially selected soldiers. "They stacked the deck," he says. Instead, 49% of those who answered the newspaper's questionnaire rated the morale of their unit as low or very low, 49% said it was unlikely they would re-enlist, and 31% said they thought the war had not been worthwhile.

Stars and Stripes noted that soldiers who were open about morale problems had at times faces disciplinary action. Although the malaise appears to be linked to uncertainty about the length of tours of duty in Iraq, pay scales, and conditions on the ground, another significant factor appears to be the meaning of their mission. Stars and Strips said 35% of respondents complained their mission was not clearly defined. It quotes a member of the National Guard as saying: "We're in the dark."
Source: The Guardian

America's 'Productivity Advantage'

Brad had an interesting post some time back that I never got round to commenting on. Now's my opportunity:

The French--and the British (I know: I've shopped in Britain)--are deprived of the opportunity to buy in the equivalent of CostCo and WalMart, and deprived of the opportunity to get lots of good stuff cheap by shopping at high-volume retailers who have taken advantage of the efficiencies of distribution offered by bar codes, POS systems, databases, and all the other information-age inventions that make it possible for retailers and distributors to keep track of stuff.

This doesn't matter much to John Kay: he doesn't have trouble financing his vacation to the Mentonnaise Riviera: "...between Monaco and Italy, the mountains and the sea, Menton is like an island where life flows serenely... Nestled at the foot of the Azur Alps which plunge into the Mediterranean..."

But there are lots of guys living in western Europe for whom the lack of an opportunity to shop at a WalMart equivalent--and thus to shave 50% off the retail margins they pay while shopping in the picturesque marché municipal--is a real loss. True, they would miss out on their "pleasant excursion[s] to pick up some produce in Menton's marché municipal and browse the FT over an espresso in the place Clemenceau." But if they paid less for produce and staples, they might use the money to pay for a better vacation of their own, or perhaps a dishwasher. They are more than picturesque background figures to entertain John Kay's eye: they are people with limited incomes, but with lives and plans of their own.

And it is not a good thing that western Europe today deprives them of their choice. They are not free to choose to shop at Andronico's, Safeway, or CostCo. Even though the fact that they are deprived of that choice does not strike John Kay as a big deal, it is. For them, it is a problem that, in this particular dimension, Europe is not like America.

Now in one sense Brad is right. we don't have the 'drive and shop' model of the Americans, at the same time we don't have the obesity and life expectancy problems (so we may have some positive - if unmeasured 'externalities'). We do, however have (plenty of) bar codes, POS systems, data bases, and we're getting more by the day. My take is that what we're slow on is extending the supply lines - WalMart style - into China, and getting the real benefits of IT leverage, and that is one of the main 'drags' on the living standards of our 'working classes':

Andrew Tsuei's job is to fill the shelves of Wal-Mart, the world's biggest retailer. He heads a chain of 23 buying offices scouting for goods in 50 countries. Mr Tsuei's own sleek silver and grey HQ is in Shenzhen, a Chinese city so new that it was paddy fields just 25 years ago.

Today Shenzhen is the gateway to the world's biggest manufacturing zone. Shipping-firm Orient Overseas Container Line this year named the world's largest container ship after it - the OOCL Shenzhen. The rise of Shenzhen's Pearl River Delta hinterland into a global manufacturing powerhouse has fuelled admiration, and - increasingly - envy among the top developed nations. China's economy is growing at roughly 8% a year, easily outperforming G7 countries. Economists think it could overtake the United States as the world's biggest economy by mid-century. It has a bigger trade surplus with the US than Japan, Asia's last miracle growth story, and last year it displaced Britain as the world's fifth biggest exporter. China has arrived at the world's top table and the hosts are increasingly nervous. It is accused of sucking jobs and growth from somewhere else - usually the US or Hong Kong - and a vociferous US Congressional lobby wants it punished. US demands for forced currency reforms have been echoed by the International Monetary Fund (IMF) and G7 club of advanced economies. Guangdong province, up the Pearl River from Hong Kong contributes 10% of China's economy, pours out one third of China's exports, and has pulled in one third of China's total foreign investment. Few people around the world had heard of this region until it became the birthplace of the deadly Sars flu outbreak.

But its global economic importance has been snowballing since China's Communist rulers decreed an experiment in capitalist economics there in 1980. A visit to Yantian, one of Shenzhen's two ports, brings home the scale of China's trade. Its 40 cranes can load one container every two minutes, up to 1,200 an hour. "We never stop," says general manager Kenneth Tse, who radiates energy and wears a navy silk tie scattered with golden currency symbols. Construction is going on to double Yantian's capacity by end-2004. Hong Kong remains the biggest container port in the world - also thanks to China's trade. But nine-year old Yantian handled the same amount of goods last year as Felixstowe, the UK's biggest container terminal.

How has the Delta achieved such rapid growth? And can it keep going? Cheap labour is one answer. "Basically what you have to pay somebody to be an assembly line worker is what is costs to get them off the farm," says Prof Michael Enright of Hong Kong University. Real wages have been static for a decade, but there is no shortage of workers. Everywhere, blue blouses hang drying outside factory dormitories, home to 20 million migrants. Manufacturers now come here to be near their suppliers and buyers, not because of the tax breaks that fuelled early growth. "What we see developing in the PRD is basically quite a deep economy," says Prof Enright.

The sheer concentration of suppliers is certainly one reason Mr Tsuei stuffs his shopping trolley here. "Many retailers worry about buying the right thing, then they worry about buying enough of it," he says. At Wal-Mart "we worry about buying enough". "Enough" for him means $12bn (£7.2bn) this year, roughly 10% of the $116bn trade deficit the US clocked up with China in the 12 months to July. Vast amounts of what the world wears comes from here - clothing, footwear, watches, jewellery. In 2001, two thirds of shoes imported to the US came from China, says the World Trade Organisation. But China's exports are getting increasingly hi-tech, something that makes its critics nervous. A fifth of Guangdong's industrial output is now consumer electronics. It is the biggest sector, worth 4.3bn yuan ($500m).

One reason is investment from foreign electronics and telecoms giants like Nokia, IBM, Phillips and Siemens. Foreign firms investing in China do so partly to tap its growing consumer market, but overwhelmingly to produce for export, according to Morgan Stanley chief economist Stephen Roach. He thinks tirades against China's cheap exports are scapegoating it for the problems of the world economy. Chinese officials think so too. "We don't understand why Americans are complaining about us. They should feel thankful to us because we're producing low priced goods they can benefit from," says Chen Weilin, the Guangdong province official in charge of IT development.

China's State Council has come up with a plan to double the region's growth, giving the go-ahead to a huge bridge linking the western side of the Pearl River with Hong Kong. The idea is to bring the west shore within a three hour car drive of Hong Kong, its international airport, foreign investors and financiers and pump it up into another Shenzhen. It should also speed the integration of Hong Kong, a city which is struggling economically after decades of viewing mainlanders as poor relations. Wal-Mart's procurement strategy offers a snapshot of the shifting industrial balance. It buys food and trinkets in Europe - gold chains in Italy, olive oil in Spain, wine in France. And what does Wal-Mart buy in Britain? "Almost nothing - except stores!" laughs Mr Tsuei.
Source: BBC News

Gloom and Doom Brigade: Part I

Very interesting link from Francisco. Interesting but problably flawed. Interesting because it tries to situate us in demography, overshoot, and ecology. Flawed probably because it places too much emphasis on resource shortages. As some of my readers will quickly point out (c'mon Joerg!) the resource situation depends in part on the choices we make. Information is not especially resource 'heavy' in terms of consumption. OTOH the Lotka based boom-bust idea is very near to my heart. Probably flawed, but why is it that only people with flawed ideas interest themselves in these (interesting and important) problems.

The Olduvai theory has been called unthinkable, preposterous, absurd, dangerous, self-fulfilling, and self-defeating. I offer it, however, as an inductive theory based on world energy and population data and on what I’ve seen during the past 30 years in some 50 nations on all continents except Antarctica. It is also based on my experience in electrical engineering and energy management systems, my hobbies of anthropology and archaeology, and a lifetime of reading in various fields.

The theory is defined by the ratio of world energy production (use) and world population. The details are worked out. The theory is easy. It states that the life expectancy of Industrial Civilization is less than or equal to 100 years: 1930-2030.

World energy production per capita from 1945 to 1973 grew at a breakneck speed of 3.45 %/year. Next from 1973 to the all-time peak in 1979, it slowed to a sluggish 0.64 %/year. Then suddenly —and for the first time in history — energy production per capita took a long-term decline of 0.33 %/year from 1979 to 1999. The Olduvai theory explains the 1979 peak and the subsequent decline. More to the point, it says that energy production per capita will fall to its 1930 value by 2030, thus giving Industrial Civilization a lifetime of less than or equal to 100 years.

Should this occur, any number of factors could be cited as the 'causes' of collapse. I believe, however, that the collapse will be strongly correlated with an 'epidemic' of permanent blackouts of high-voltage electric power networks — worldwide. Briefly explained: "When the electricity goes out, you are back in the Dark Age. And the Stone Age is just around the corner."

The Olduvai theory, of course, may be proved wrong. But, as of now, it cannot be rejected by the historic world energy production and population data.

Update: Francisco's response:

I've been thinking about this, and like you said, "overshoot" is the operative concept here. On that, I think the new "usual suspects" (China, India, Brasil) will be the ones to make the right choices, and hopefully share with everyone else :). The US is positioning itself to control most of the oil reserves, so they are the most likely to overshoot. Likewise Europe will have Russian oil, which leaves CI&B without, thus developing the necessary tech early on. Not so much a choice as no choice, but hopefully civilization saving :) I know that Brasil is very interested in alternative tech and more ecological ways of doing things, so they are certainly on the right track already.

Blogs and the Face of Journalism

Reuben on how things are changing:

Once again, Andrew pointed me in the direction of the excellent We Media website, which examines closely how participatory journalism is changing the face of journalism as we know it. I had myself posted on how blogs are changing some aspects of Journalism. As John commented, blogs had become some kind of short-to-medium term memory device whereby some stories refused to die. A lot more of the issues, from blogging to opinionisation of news to the future of peer-to-peer news is examined in great detail. Highly recommended if you are interested in the issues.

In the view of futurist and author Watts Wacker, the question is not about greater personalization but about greater perspectives. According to Wacker, the world is moving faster than people can keep up with. As a result, there are fewer common cultural references that can be agreed upon. Ideas, styles, products and mores accelerate their way from the fringe to the mainstream with increasing speed.

If participatory journalism has risen without the direct help of trained journalists or news industry initiatives, what role will mainstream media play? And are mainstream media willing to relinquish some control and actively collaborate with their audiences? Or will an informed and empowered consumer begin to frame the news agenda from the grassroots? And, will journalism's values endure?

Upward Revision on Chinese Growth

Just look at these numbers. I know someone is going to writre and tell me all this is a fantasy, but just let me say it doesn't look like it!

China's economic growth accelerated to 9.1 percent in the third quarter, driven by increased investment as Sony Corp. built factories and China United Telecommunications Corp. expanded its network to meet demand. The rate was higher than the 6.7 percent reported in the second quarter and the 8.7 percent median forecast of five economists surveyed by Bloomberg News. Growth for the full year will probably be about 8.5 percent, the pace achieved in the first nine months, National Bureau of Statistics Deputy Director Qiu Xiaohua, said at a press briefing in Beijing.

China's economy, the sixth largest in the world, is growing more than twice as fast as the five biggest -- the U.S., Japan, Germany, the UK and France. Including Hong Kong, China is now the top export destination for South Korea and Taiwan and one of the three biggest overseas markets for Japan, Thailand and Singapore. "China is really the engine that drives the entire region,'' Ford Motor Co. Chief Executive Officer William Clay Ford Jr. said at a separate briefing in the Chinese capital. ``We do expect to expand aggressively in China.'' Ford, the world's No. 2 carmaker, today said it plans to spend as much as $1.5 billion boosting production at its plant in the city of Chongqing, southwestern China. The company, keen to grab a bigger slice of the world's fastest-growing auto market, said it will add a second factory and an engine-making plant.

Sony, the world's second-biggest consumer electronics maker, said it has invested $8 billion so far in China and predicts the country will become its No. 2 market -- behind the U.S. -- within five years. China Unicom, the nation's No. 2 mobile-phone-service provider, ordered a $139 million code- division-multiple-access network from Nortel Networks Corp. in the third quarter. Fixed-asset investment, which includes foreign direct investment and accounts for about a third of China's economy, rose 31 percent in the first nine months of this year as companies such as Sony invested in new plant and machinery, and the government built roads, bridges and dams. That's helping to create jobs and boost incomes in the world's most populous nation.

The government said 6.25 million jobs were created in the first nine months and the official urban jobless rate at end- September was 4.2 percent. The average disposable income in towns and cities -- home to two-fifths of China's 1.3 billion people -- rose 9 percent to 6,347 yuan ($767) in the first nine months of this year, the statistics bureau said today. Even as incomes climb, Chinese wages are among the lowest in the world. The hourly pay for a Chinese manufacturing worker is 61 cents rather than the $16.14 paid in the U.S., according to a study by economists at the Federal Reserve Bank of Dallas. Cheap labor is helping convince Sony, Siemens AG and other overseas companies to choose China as a hub for their operations. Siemens, the world's biggest engineering company, has invested more than $700 million in the 40 units it has in China. Chief Executive Officer Heinrich von Pierer, in an interview Monday with Der Spiegel magazine, said he could hire 12,000 Chinese software programmers for the cost of 2,000 German ones.

Foreign direct investment into China rose 12 percent to $40.2 billion in the first nine months of this year. This directly accounts for about 5 percent of the nation's gross domestic product and the factories built with these funds produce half China's exports. Overseas sales, which make up about 30 percent of the economy, increased 30 percent in the third quarter and factory production rose 32 percent. Retail sales, which account for more than two-fifths of the economy, rose about a 10th. This strong economic performance may help President George W. Bush argue the case for China to adopt a more flexible exchange rate when he holds talks with his Chinese counterpart, Hu Jintao, at the annual Asia-Pacific Economic Cooperation leaders' summit in Bangkok this weekend. The U.S. says the yuan, pegged to the dollar since 1995, doesn't reflect China's robust fundamentals, giving Chinese exporters an unfair advantage.

Even during the second-quarter outbreak of severe acute respiratory syndrome, a deadly virus that led to a slump in consumer spending, tourism and investment in Asia, China's economy grew more than twice as fast as the U.S. In the first quarter of this year, China posted economic growth of 9.9 percent, it's fastest expansion in seven years. "The economy is back to the trend of strong growth because the central bank has been increasing money supply since the second half of 2002,'' said Yusen Kwoh, chief economist at Millennium Capital Services Co. in Shanghai. Growth of M2, the broadest measure of the money supply, exceeded the bank's 18- percent target for a ninth straight month in September.

Still, economic growth may slow in coming months after the central bank, concerned runaway credit poses a risk to economic growth, in June tightened rules governing lending to the property sector and last month raised banks' reserve requirements, a move it estimated would remove some 150 billion yuan from circulation. A modest slowdown may boost investors' confidence. About three-fifths of 66 chief financial officers employed by companies with operations in China said they are concerned the economy is overheating, with almost a third claiming to have been affected by electricity shortages, according to a poll published Monday by CFO Asia, a monthly magazine. "We have had this year a torrid pace of growth in China,'' said Marc Faber, managing director of Marc Faber Ltd., who manages about $100 million and publishes the monthly newsletter Gloom, Boom & Doom Report. ``The faster an economy is growing, the more likely it is that it will have severe setbacks from time to time.'' China's gross domestic product, the value of the goods and services it produced, rose 8 percent to 10.2 trillion yuan last year. GDP in the first nine months of this year was 7.9 trillion yuan.
Source: Bloomberg

Japan Still On the Deflation Trail

Japan economy minister Takenaka tells us Japan will triumph over deflation. Just one last question: how? No, this isn't fair, he does offer some pointers. But it still remains to be seen what these actually mean in practice......

Heizo Takenaka, Japan's economy minister, said on Thursday that the country could overcome its persistent deflation because the central bank is working more closely with the government. The key reforming minister of Junichiro Koizumi's government said in an interview with the Financial Times that the co-operation followed the appointment of a new governor of the Bank of Japan in March.

On the eve of US president George W. Bush's visit to Tokyo, Mr Takenaka said the BoJ would aim to raise money supply growth from its current 2 per cent to between 3 per cent and 4 per cent. For its part the government would increase demand through deregulation and clean up the banking system so that the BoJ's looser monetary policy was transmitted to the economy as a whole. Mr Takenaka said: "By combining these two, our calculations say that we will be able to overcome deflation."His suggestion that the BoJ was co-operating with government policy comes after years in which many saw the central bank as a stubborn opponent of price stability............

With the economy growing in the second quarter at an annualised 3.9 per cent according to official statistics, now was the time to press home the advantage. The economy minister said: "We hope to create a virtuous circle."

Mr Takenaka praised Toshihiko Fukui, who became bank governor in March, suggesting that he was more determined than his predecessor to halt deflation. "Since Governor Fukui took office BoJ policy is, in my opinion, moving in a good direction," he said.

The consumer price index for August fell just 0.3 per cent from the previous year although, measured by the gross domestic product deflator, prices are still dropping by about 2.5 per cent a year.

Mr Takenaka said that, "even with the CPI nearing zero", the BoJ had signalled its commitment to easy monetary policy for as long as necessary. The BoJ was "contemplating right now" how to signal its long-term commitment to price stability, with some BoJ members advocating a reference rate, a goal just short of an inflation target, he said.
Source: Financial Times

China's New Rich

If you want to know just how lop-sided economic growth in China is right now, just check out Richard Hoogewerf's rich list.

Almost 60 per cent of the wealth collected by the new 100 richest Chinese business people comes from real estate sector, while also new industries on the list like the steel industry ride the building boom, says author Rupert Hoogewerf. IT-entrepreneurs also made their comeback on the list.

William Ding Lei, CEO of www.netease.com is one of the unexpected returnees even as the number one with an estimated capital of 900 million US$. “He is the Bill Gates of China," says Hoogewerf. Ding, together with Charles Zhang of www.sohu.com were also present in the first rich lists Hoogewerf made five years ago, but the dotcom bust wiped much of their capital away. Even last year Ding saw his Nasdaq almost suspended because of accounting problems.

Hoogewerf skirts the question on how sustainable the profits in the IT-industry are nowadays. The IT industry has only four really large Nasdaq-listed players, whose profits are based on SMS and that is under pressure both by government pressure and the fear it might be outdated again soon by more convenient technologies.

“Look at our number ten, Hoogewerf says, “Chen Tianqiao of Shanda Networking only founded his company for online games in 1999. I only noticed him for the first time in the middle of last year.?

The new Rich List shows in more ways the fast changing dynamics. Forty of the top-100 are newcomers. Hoogewerf: “Some people of the old list were pretty upset when they discovered they were listed lower than last year, even though their businesses have been growing very fast over the past year, but others have been growing faster.?The cutoff rate last year was 70 million US$, in 2003 110 million US$. Some businesses double every year, but only now they become sizable, you see them grow very fast, adds Hoogewerf. The higher cutoff rate gives some stability, thinks Hoogewerf. “It is very hard to get that kind of money in one lucky deal.?

About one third of the top-100 has entered politics, either as a member of the CPPCC (23 per cent) or of the National People’s Congress (11 per cent). About a quarter is estimated to be member of the Communist Party. Private business is so large, it cannot ignore politics, and politics cannot ignore the private entrepreneurs, says Hoogewerf.
Source: ChinaBiz

and here's another piece on the same topic from Yahoo:

A new survey shows the fast transformation of China's economy is producing wealth in areas far away from industries dedicated to serving the country's basic needs, which created the country's first multimillionaires.

China's original push two decades ago toward a market economy was led by entrepreneurs such as Larry Rong Zhijian, who built the country's first international investment company Citic Pacific group, while two brothers from rural Sichuan province addressed shortages on the farm with an animal feed operation.

These people remain among the country's richest today, along with self-styled tycoons who snapped up property before most Chinese thought about the need for new housing and offices. Yet, a new survey on the country's rich suggests that as China's drive toward the global economy gains momentum, it has become less obvious where pots of gold might be hidden. Chinese entrepreneurs are making a fortune catering to a new generation, with business interests ranging from the Internet to confectionaries to soccer.

The country's richest man now is a 32-year-old entrepreneur, William Ding Lei, whose Web-based short-messaging service might be considered frivolity if it and others like it weren't the envy of telecommunication companies everywhere. Even valuing Ding's assets is newfangled for China, since his fortune rises and falls in line with the share price on his 52% stake in NASDAQ-listed NetEase.com Inc. (NTES). This week his worth was around US$1.3 billion, up from US$900 million at the end of September, but he wasn't even considered among the country's wealthiest a year ago. The rankings of China's 100 richest were published Thursday by a 33-year-old English accountant, Rubert Hoogewerf, who has been on their trail for five years. "It gives an idea of how far China has developed," he says. Worth US$300 million, Zhang Yin is perhaps the biggest exporter from the U.S., in terms of volume. Her America Chung Nam Inc. buys wastepaper there and sends it around the world, where it is made into products like boxes to hold six-packs of Coke.

Guo Hao's Agricultural Holdings in Fujian has organic farms, giving him a wealth of US$230 million. Wang Chuanfu is worth US$185 million on the back of a rechargeable battery business called BYD Co. (1211.HK). Wahaha Group's Zong Qinghou makes soft drinks and children's clothes, giving him a wealth of US$145 million. The bottom line is US$110 million this year, whereas it was just US$6.0 million when Hoogewerf's first list was published in 1999. But it still doesn't have anyone from the entertainment industry. And the rich tend to be a provincial bunch, with fewer than eight said to speak "passable English."

China's rich are also increasingly close to the government, with 34 holding a party-appointed post, although Hoogewerf waves off a suggestion the entrepreneurs could be fronts for the state. He says they tell him things like, "as our business grows, it's impossible to avoid politics." Hoogewerf is publishing the list with Euromoney Institutional Investor Plc (ERM.LN). He and New York-based Forbes magazine, which will announce its own ranking of China's rich later this month, parted ways earlier this year in a dispute over control of the list.

Forty of the 100 names this year are new compared with the list published last year in Forbes, which goes some way toward underscoring how topsy-turvy China's move toward a market economy has been. Li Zhaohui, a 22-year-old with wealth of US$290 million, became the youngest person on the list and China's first millionaire heir when his father was killed earlier this year in a business dispute. His control of Shanxi Haixin Iron and Steel Group underscores another trend, steel millionaires, with five of the 10 youngest having some interest in the industry. The Li case also underscores how getting onto the list is sometimes seen in morbid terms. Several of the people who came to public view through lists like Hoogewerf's have fallen extraordinarily hard.

Among those dropping right off this year's rankings is Zhou Zhengyi, a now-discredited Shanghai property tycoon arrested in September after being identified as kingpin in a banking and property scandal that touched high-level bankers and bureaucrats. He was ranked No. 11 with a wealth estimated at US$320 million when the list was published by Forbes in 2002.

His fall followed that of Yang Bin, a one-time envoy to North Korea listed in 2001 as worth US$900 million. He is now serving an 18-year sentence for fraud and bribery in northern China. Hoogewerf says he doesn't accept that Chinese entrepreneurs have "original sin," meaning that succeeding in the country's requires dirty dealing. The consistent anchor to riches in China has remained property, with most of the top-10 and nearly 60% of the overall wealth emerging from the sector. But information about these property multimillionaires can be notoriously sketchy, with Guangdong-based tycoon Zhu Mengyi's Hopson Development (0754.HK) said to be China's biggest real estate developer. "Nobody knows him. He's terribly low key. I couldn't find a photograph of him to save my life," Hoogewerf said.
Source: Yahoo News

Immigration and the Future of Europe

I just posted on Fistful about Gianfranco Fini and Italian immigrants (Francisco please note), and also I linked to a couple of useful and interesting articles from the Economist on the subject of immigration: ( here and here ).

Thursday, October 16, 2003

Eurozone Inflation Numbers

The latest Eurozone inflation numbers are out. Francisco writes from Italy top say that the numbers are still causing controversy there (the euro rounding effect). Unfortunately I can't find a good link in English. I think for the tendency we need to get through the winter to see where we are going. There is still a lot of fluctuation on energy and food prices:

The eurozone harmonised index of consumer prices rose by 2.1 percent in September on an annual basis, unchanged from August and in line with analysts' forecasts, the EU statistics office Eurostat said Thursday. Across the full 15-member European Union, inflation decreased to 1.9 percent in September from 2.0 percent in August, Eurostat said. The eurozone rate was slightly higher than the European Central Bank's medium-term target of 2.0 percent. On a one-month basis, prices increased by 0.3 percent in the eurozone, pulled higher by clothing costs, which rose by 4.3 percent. Food prices were up by 0.6 percent but those for hotels and restaurants decreased by 0.9 percent, and energy costs were stable on the month. The highest inflation was seen in Ireland at 3.8 percent, Portugalpercent), Spain and Italy (3.0 percent each). Germany has the lowest rate at 1.1 percent, while Finland posted 1.2 percent and Austria 1.3 percent.
Source: EU Business

At the Asia Summit of the World Economic Forum: Part II

Eddie Lee has also been attending the WEF, although with some rather different priorities:

Attended one of the discussions on trade at the WEF held here in Spore and found an opportunity to slot in some talk on immigration, alan winters and edward hugh.

Yes, andy xie’s piece on property and savings is important. Property plays a big role. But I wonder again what the structural reforms really are. How to reduce the property value to income ratio and what are the consequences? In the end, the results are the same, they are a deflationary force. The one unusual thing I’m feeling right now in this current economic recovery is while the stockmarket is rising, and economic activity is lifting (somewhat), but the property market remains sluggish. It’s unusual because in all previous economic recoveries I know, the property market tends to pick up quite quickly. So is this a good signal (property value rein in, housing is affordable) or bad (lack of long term confidence)?

I have no easy answer to Eddie's question. Only time will show. And meantime Eddies' latest piece for the Straits Times, straight from the WEF:

How vital is free trade? Frankly, it's overstated
By Eddie Lee

Trade talks get the headlines. There's a reason: What's at stake appears to be nothing less than the key to economic prosperity. If anybody had an insider's view of the acrimony that led to the breakdown of the trade talks in Cancun, Mexico, and the likelihood of fences being mended, it was Singapore's Trade and Industry Minister George Yeo, the World Trade Organisation's facilitator for agriculture. But at the World Economic Forum East Asia Summit on Monday, he held little hope that there would be any progress over the next two years. As he described, 'once a bomb has gone off, you can't put it back'.

Philippine Agriculture Secretary Luis Lorenzo called on the United States to exercise leadership in the quest for global free trade, quoting former US president John F. Kennedy's inaugural address in 1961: 'If a free society cannot help the many who are poor, it cannot save the few who are rich.' In fact, the last time a series of global trade talks could be called a huge success was the Kennedy round in the early 1960s. But in the past two decades during which economic integration has occurred, it has been within regions. The two big success stories have been the European Community and the North American Free Trade Agreement.

And the next big story is Asia. In contrast to Cancun, the recently concluded Asean summit in Bali was almost euphoric. The Asean vision, dubbed the Bali Concord II, intends to turn the 10 Asean states into an integrated, tariff-free trading and economic community by 2020. Indonesian President Megawati Sukarnoputri said: 'We have just witnessed a watershed in the history of Asean. It will make it possible for our children to live in enduring peace, stability and shared prosperity.' But it may become inevitable that countries become more restrictive against trade from outside the bloc, with the result that the global economy ends up diverting world trade from between blocs to within blocs. Trade may grow, but it'll be largely within trade blocs.

Sure, trade blocs could eventually be the building blocks of global free trade. But don't hold your breath. The importance of free trade and protectionism's evils tend to get overstated. Protectionism, for example, did not cause the Great Depression of the 1930s. Many respected economists and economic historians have argued this. US economist Paul Krugman calls it the 'dirty little secret in international trade analysis'. The costs of protectionist policies are not that large. In theory, the costs arise from resource misallocation. How large the costs are is an empirical question. Estimates for developing countries rarely exceed 5 per cent of the country's gross domestic product. Put another way, these estimates suggest a protectionist country, by moving to completely free trade, would get a one-time economic boost equal to the growth China achieves in about half a year or so. Now, I'm a free trader at heart, and I'm not arguing for protectionist policies. But the impact of trade in economic debate has often been exaggerated; other aspects of globalisation, like immigration and capital flows, are more important.

This is a point Harvard economist Richard Freeman highlighted in his September Working Paper for the National Bureau of Economic Research in Washington. A consequence of the heavy emphasis on trade is that free traders have not agonised over the architecture of the global financial system as much as, for instance, they did over the risks of adding labour standards to trade treaties. And nobody asked for freer flows of immigrants. Now if you think about why trade is beneficial, it becomes obvious why the issue of immigration is more important. The economic rationale for trade is taking advantage of differences between countries. The bigger the difference, the more there is to gain. If movements of labour are liberalised, the mutual benefits should be great since developing countries have a larger number of young and less-skilled workers compared with developed countries with ageing populations.

But the issue of immigrants is always sensitive. Developed nations are often unwilling to accept Third World immigrants, resorting instead to temporary migrant labour. Mr Alan Winters, of the University of Sussex, estimates a temporary visa scheme that amounts to no more than 3 per cent of the labour force of the Organisation for Economic Cooperation and Development would yield economic benefits for both developed and developing countries of more than US$150 billion (S$260 billion) per annum. The main concern is that temporary migrants will lower wages and/or displace less-skilled workers of the developed countries. There are real adjustment costs. But as Mr Winters points out, the challenge is no different from that posed by imports of labour-intensive goods from developing countries. In the past, such competition was overcome by policies to ease adjustment among less-skilled workers in developed countries.

For example, the 1962 Trade Adjustment Assistance Act was established by the Kennedy administration as a quid pro quo for the wave of liberalisation that came on the heels of the Kennedy round of global trade talks. It offered loans and other assistance measures to support industries affected by liberalisation. There was also income support and training for displaced workers.

If you consider the average skills levels in a developed country must rise, it's clear its demand for and benefits accruing from immigrants with lower skills will increase over time. And as its population ages, higher-order skills will also need to be supplied by migrants. And in the latter area lies a rich irony, best summed up by economist Edward Hugh of the University of Barcelona: 'As we went up the (economic) cycle, we sucked them in; during the ride we trained them up. And now, on the way down, we have told them to pack their bags and leave for home. Advice they have meticulously followed to the letter, while taking part of the business back with them!' The Philippines' Mr Lorenzo may lament developing economies' restricted access to the agriculture markets of the West. But the developed economies will lament ignoring the issue of freeing up the flow of labour.
Source: Straits Times

At the Asia Summit of the World Economic Forum: Part I

Andy Xie was at the WEF meeting in Singapore. He was most impressed with the mayor of Wushi:

I attended the Asia Summit held in Singapore on October 13-14 organized by the World Economic Forum. Most participants were from Southeast Asia. A number of national leaders from Southeast and South Asian countries also attended. The conference mostly focused on microeconomic issues ranging from corporate governance to trade integration. Geopolitical issues attracted most attention, I thought, with China and India looming large over this ASEAN-centered conference.

I noted how few participants at the conference were from China compared to India or Southeast Asia. It reflects how differently China is organized, I thought. India has an established English-speaking wealthy class. So does Southeast Asia. Both have long histories of private sector-driven economies and, less appealingly, regulation-driven profits.

China is quite different from either in two respects. Its development model is about cutthroat competition. When one company becomes profitable in a business, thousands follow. Such a model maximizes GDP but may not be the best for profitability. Because it is so difficult to make profits, riches are often achieved using illegitimate means, usually through defrauding banks.

I was on the same panel as the mayor of Wushi in the session on China. What he said tells much about why China is so different from Southeast Asia or India. In his speech, he talked about nothing but the advantages of investing in Wushi and explained how he could help foreign investors. When the gong sounded that his time was up, he carried on for another five minutes extolling the virtues of Wushi.

Wushi is situated 200 kilometers to the northwest of Shanghai with a population of 4.4 million. Its GDP has increased tenfold since 1990 and its per capita income is four times the national average. Its economic success has been driven by trade. Multinational companies have turned it into a major production center for electronics and other consumer goods. The city has achieved so much because its government is 100% focused on economic development.

The ruling elite in China are bureaucrats who are both salesmen and decision-makers. While the system lacks checks and balances, which could pose problems in the long term, it is extremely efficient at fostering economic development. The mayor of Wushi, for example, promotes Wushi as an investment destination and can make decisions that meet any interested investor’s demands. The ruling elite in other Asian countries tend to be rich businessmen or politicians from the same class. They have to balance between protecting their profits and encouraging economic growth. This handicap makes them uncompetitive against China.

The Chinese do not realize how competitive they are in the world today. Chinese workers are becoming as productive as those in middle-income countries, yet because there are so many of them, their wages are similar to workers in poor countries. The difference is the reason for the current global attention on the Chinese currency. As long as there are hundreds of millions of people looking for work, the Chinese government will not push up its labor costs artificially through appreciating the currency. This would only cause wage deflation.

There are hundreds of cities like Wushi in China. They are learning from the success of cities on the coast and are going all out to develop infrastructure and attract investment. While China will likely experience high volatility, its competitiveness will keep pulling ahead of others, in my view. The tension between China and other competing economies is thus likely to grow, and will only disappear if the Chinese slow down or others step up the pace. I don’t see either as possible.
Source: Morgan Stanley Global Economic Forum

Italy: Doomed to Work?

The phrase comes from Morgan Stanley's Vicenzo Gizzo, not from me. Here he gives the first part of an extremely informative breakdown and analysis of the Italian pensions reform.

On October 3, the Italian government passed a draft for the reform of the pension system. This document will now be submitted to Parliament and amend a previous proposal that had been sitting in the Senate for months. We believe this is the most serious structural reform effort in several years. The unions have called a half-day general strike for October 24, but the chances of the reform succeeding are high, in our view...........

The new reform implies a two-stage process. In the first stage, from 2004 until 2007, the employees who intend to stay at work for longer, beyond the age of 57, will obtain a 32.7% tax-free bonus, equivalent to the standard social contribution rate currently paid by employers and employees. The beneficiaries will have the option of cashing in the bonus, depositing it in their social security accounts, or channelling it into private schemes. In a second stage, from 2008 onwards, the number of years that will give access to seniority pensions will be raised from 35 to 40. Up to the year 2015, pensions for those employees who still want to retire after 35 years of contribution will be heavily penalized.

This is not the first attempt to reform Italy’s generous pension system. It is probably worth reminding our readers that up until the early nineties Italian civil servants could retire with 20 years of contributions and receive a pension equivalent to the compensation of their last year at work. Two major restructuring efforts were delivered during the Nineties. In 1992, Giuliano Amato raised the legal retirement age from 60 to 65 for men and from 55 to 60 for women. That reform lengthened the reference period on which benefits were computed from five to ten years, raised the minimum number of years of contribution to 35, reduced the disparities between private and public sector employees, and replaced wage with consumer price indexation mechanisms. A second significant step was taken by Lamberto Dini in 1995. That reform linked pension benefits to a stream of work-life contributions rather than a reference compensation period.

The impact of the two reforms is clear. Data from the Department of Welfare (Nucleo di Valutazione della Spesa Previdenziale, Gli Andamenti Finanziari del Sistema Pensionistico Obbligatorio, June 2002) show that the annual growth rate of pension spending came down from 12.2% in 1990-92 to 7.3% in 1993-97, and dropped further to 3.4% in 1998-2001. Yet over the same period, pension spending rose in nominal terms from around €70 billion in 1989 to nearly €160 billion in 2001, i.e., from around 11.5% to almost 14% of GDP, at an annual average growth rate of 7.3%. Today, at 13.8%, Italy still shows one of the highest pension expenditure-to-GDP ratios among the industrial countries. The transition from defined benefits to defined contributions took place in an extremely gradual fashion. The defined-contribution system was fully effective only for the new entrants into the labour market in 1996. It was applied on a proportional basis, pro-rata, for those who had been at work for less than 18 years. In contrast, the reform kept the status quo for those who had worked for more than 18 years. It will take until the year 2035 for Italy to shift to a full defined-contribution system.

The baseline scenario assumes an increase in life expectancy of around five years from here until 2050, a slight rise in the fertility rate from the current 1.3 to just above 1.4, and net immigration inflows of around 120,000 a year. The model rests on an eight-percentage-point rise in the activity rate to 72% mainly on a higher female participation rate and a five point drop in the unemployment rate to 4.5% by the end of the reference period. This progress limits the drop in the employment rate to only 14 percentage points over the next 50 years, or 0.25% a year, despite a 28% fall in the working age population. A strong productivity growth rate of 1.7% keeps real GDP on track for an average growth rate of 1.5%. While labour force participation has gone up in the recent past at a pace of more than one-half a percentage point a year, this progress has led to a marked deceleration in productivity growth rates. The combination of higher participation rates and strong productivity, as implied by the RGS model, is an aggressive assumption, in our view, and may hide risks of an even more unpleasant spending dynamic.

Yet, even under such favorable assumptions, the pension expenditure-to-GDP ratio, after some initial stability, goes up rapidly from the current 13.8% to a peak of 16% around 2035 before easing back to 13.6% in 2050. The ratio of pension expenditure to GDP could be conveniently decomposed into the product of a ‘legal-institutional ratio’, given by the average pension to the productivity per employee; and a ‘demographic ratio’, given by the number of pensions to the number of employees. This second ratio could be further broken down into (1) a dependency ratio -- the over-65 population to the working-age population, aged 20-65; (2) an eligibility ratio -- the number of pensions to the over-65 population; and (3) the inverse of the participation rate, which we label here the employment ratio.

In the 2006-15 decade, the dynamic in pension expenditure to GDP is likely to be almost entirely driven by demographics, as the baby-boom generation kicks in. Note that benefits paid during this period are still mainly linked to average earnings, due to the long transition phase imposed by the Dini reform. In other words, expenditure goes up with the number of pensions, while the average pension fails to decelerate quickly enough to offset the boom in retirements. When we move towards the middle of the forecasting period, pension schemes become less expensive as a larger number of employees whose pension is computed on defined contribution retires. This trend extends well into the final part of the reference period when it is also coupled with end of the impact of the baby boomers.
Source: Vincenzo Guzzo, Morgan Stanley Global Economic Forum

Better US Jobs Data

Well, labour market numbers in the US are certainly improving this month. Remember, a number more like 350,000 new signings over a sustained period is what is required for stable jobs growth. But the market is picking up steam. Let's hope it stays that way. And remember, there are any number of 'hiccups' out there just waiting to hit. Ricardo Caballero describes the US economy as 'a coiled spring, just waiting to rebound'. That is hardly the espression I would use.

The number of Americans filing initial applications for unemployment benefits last week fell to the lowest in eight months, adding to signs the labor market may be starting to rebound, a government report showed. First-time jobless claims fell to 384,000 during the week ended Saturday from a revised 388,000 a week earlier, the Labor Department said in Washington. The four-week moving average, a less volatile measure, declined to 390,750 from 395,000. "The labor market is truly healing,'' said Anthony Chan, chief economist of Banc One Investment Advisors in Columbus, Ohio, before the report. ``Of course, healing doesn't mean it's flying, but it tells us for the rest of this year we are going to be seeing a more positive trend in payrolls.'' Companies including International Business Machines Corp. and Pfizer Inc. have announced plans to hire, suggesting the economy may start adding jobs after losing 2.6 million since President George W. Bush took office in January 2001. The economy generated 57,000 non-farm jobs in September, the first increase since January, the government reported earlier this month. The unemployment rate held at 6.1 percent. Economists had estimated claims last week rose to 385,000, based on the median of 46 projections in a Bloomberg News survey, from the originally reported 382,000. Last week was the third in the past four for claims to fall below 400,000, which some economists say is the dividing point between labor market expansion and contraction. Initial filings haven't been as low since 378,000 in the week ended Feb. 8. The number of people continuing to collect state unemployment insurance jumped by 58,000 to 3.674 million in the week ended Oct. 4.
Source: Bloomberg

'Just Another Colectivist Experiment'

More feedback from Joerg:

You are asking for an ironic reply to the robotics story. I will try hard to present an unironic one. I don´t feel like writing it now. Just a preliminary note: I have trouble with the phrase "demographic problem". I think it is empirically demonstrable that this phrase historically always implied a claim that some ethnic group somewhere on earth was redundant and needed to be stripped of its land ownership because some other group´s unchecked demographic development supposedly required this. I just fail to see why falling fertility rates should be discussed under this heading. Falling birthrates are predominantly the result of individual actions and omissions, choices and decisions. Considering those to be a problem will always end in some kind of ideological attack against Western individualism and rationalism. Regarding economic growth - which has always been only one of several desirable goals of economic policy, with currency stability, full employment, high living standards and social justice being other relevant parameters - as the ultimate criterion that should override rights to autonomy and liberty would be just another collectivist experiment that I don´t want to be involved in.

Yesterday I read an article in the NYT that started off by saying that the boomer generation would be the first one whose life expectancy would not rise - due to the increasing health problems caused by the "obesity epidemic". Instead of seeing things getting faster faster, we decide that we don´t want supersonic passenger planes like the Concorde or magnetically levitated trains in Germany. We are getting ever more preoccupied with our immediate needs. In the process, we are losing the ability to expand our horizon toward the future. The end result is imbecility
- as it was put on display by an "Economist" writer recently who really asked who would buy all those TV sets in the year 2100 if populations continued to decline. If the Western world really is an incredibly shrinking civilization, the causes are certainly deeper than one simple statistic denoting how many of us there are could possibly indicate.

I take the point. It's foolish to imagine we are going to need too many TV sets. This still leaves us with the question: what are we going to need in ever larger quantities that it will be profitable for someone to produce? Or put another way, what are we going to be able to produce in large amounts in the OECD world that it will be economically feasible for someone else to consume in the developing world (and don't tell me capital!). Remember Rajesh is already talking about the 50 dollar thin-client computer, I can't see the Hewlett Packards of this world rushing into this market. The big point is, I suppose, that I don't see our demographic situation as a result of individual rational decisions, I think it is systemic, and as is the coming-and-going of populations and civilisations is also systemic. We too form part of nature and evolution, and so form part of nature's 'design', or lack of it.

Eastern Europe's Informal Economy

There is definitely more than a hint of 'positive thinking' in the air. Whether this is unduly biased towards spin remains to be seen. Today two East European economists - Matthew Olex-Szczytowski and Jacek Rostowskitry - try to put a positive tint on the EU accession countries. They have a point. The situation is probably better than many imagine. At the same time it is important to differentiate. We can identify a number of 'groups' in the pack: Poland, Hungary, Czech Republic - Latvia, Estonia, Lithuania - Bulgaria, Rumania - the Ukraine, Russia. Of course there are others I have not mentioned, who do not fall easily into any identifable group. But if you look along the list, from left to right, the feeling you have is one of from bad to worse. All these countries suffer from major structural demographic breaks which make it difficult for them to sustain mid-term economic growth. Obviously those to the left of the list can benefit from migration from those more to the right. Thus there situation might be considered marginally better. Also short-term they seem likely to attract more FDI as the part of the manufacturing sector which can migrates from the Mediterranean fringe (Spain, Greece, Portugal).

But then look at the downside. The element which our two economists identify as a plus: the informal economy (incidentally how do they know it is significantly bigger in the East? We simply have no figures on Spain, Greece and Portugal. According to figures Marcello sent me from the Argentinian government, nearly half a million Latin Americans entered Spain on temporary visas in 2002 alone - this is based on information they extracted from the Spanish government - and few left.). Now the one thing I can tell you from my own research is: work in the informal sector is not high-wage, in fact quite the contrary. And employment in the informal sector is growing in an attempt to remain competitive by keeping salaries and costs down. And today, once you're hooked on this, it's hard to get off. In fact Spain in the 1990's grew rapidly in part because the PSOE economics minister Carlos Solchaga offered a favourable amnesty for firms to 'regularise'. This lead to a spurt of growth which was in fact an incorporation of already existing economic activity into the formal economy (incidentally he was last seen heading for Argentina just before the crash, in an attempt to do the same down there). That is, it was 'statistical growth' - although of course the Exchequer benefited enormously. In the last three years this situation has deteriorated markedly. Faced with a combination of pressure from competition from global outsourcing and from internal inflation in Spain, Spanish manufacturing has increasingly responded by 'informalising', particularly in the hard-pressed textile sector. One example, there are an estimated 10,000 undocumented Chinese workers in Barcelona dormitory towns Mataro and Santa Coloma. How do I know? Because I have a Chinese friend who is an interpreter, and every week the Policia Nacional contact her from the courts to go and interpret for an undocumented Chinese person who has had a brush-in with the law. Usually these are petty offences, domestic arguments, drunk in the streert etc etc, they are never pursued as problems about the lack of the legal right to be in Spain. What I am trying to say is that if the situation in Eastern Europe is as bad as these economists say (and my Bulgarian research suggests it is, although I have no quantitative data), I doubt this is going to change easily - simple cost economics says no - and the pension schemes are never going to be able to operate effectively. So watch out!

There is an unspoken compact underlying the expansion of the European Union. At least, that is what many in the eight central European accession countries believe. They have gone through wrenching reforms at a speed largely determined by the EU and are having to import the acquis communautaire - the EU's body of law, widely seen as an impediment to growth - en bloc. Now as they join and their "riskiness" falls they expect a massive flow of foreign direct investment in compensation.

Perhaps the most serious flaw in the data is the massive under-reporting of gross domestic product, largely because of failure to account for shadow economic activity. Since communist times this has been of a different order of magnitude in central Europe than in the old EU, and is widespread in the fast-growing new entrepreneurial sectors. The phenomenon has been accentuated in recent years by the growth in regulations and social charges. Friedrich Schneider, an economist at Linz University, has estimated that the shadow economy in the eight in 2000-01 averaged 28 per cent of official GDP, up from 23 per cent in the early 1990s. The percentages ranged from "only" 18 per cent in the Czech Republic and Slovakia to 40 per cent in Latvia. It follows that the region today generates well over €100bn ($116bn) in unrecorded output - a shadow Czech Republic plus Slovakia.

Labour markets are also healthier than the headlines imply. Prof Schneider found that the proportion of the working age population involved in shadow output ranged from 13 per cent in the Czech Republic to 33 per cent in Estonia. As with the GDP figures, these estimates are confirmed by local studies. In Poland, a survey last year for the Private Employers' Confederation put the proportion of workers in the shadow economy at 19 per cent.

These doctrines of doom reflect (and infect) mass opinion. In a recent Polish survey, 68 per cent of respondents thought life had become much worse since communism fell. Yet official real consumer expenditure per capita has risen by 55 per cent in the past 10 years (the EU managed 26 per cent).

In the Czech Republic, where irrational pessimism is dubbed blba nalada or "bad mood", about 30 per cent feel they are now poor. However, in recent years fewer than 5 per cent of Czech households have been below the official poverty line. By standard measures such as the Gini coefficient, the Czech Republic, Hungary, Poland and Slovakia, with coefficients in the 20s, are much more "equal" than, say, Italy or the UK, with coefficients of about 35.
Source: Financial Times

Wednesday, October 15, 2003

India and the Second Track

Atanu dey seems to be a very interesting guy. He is a founder member of a project called RISC, whose central objective is to bring the urban to the rural in India via the rollout of ICT. I will be having more to say about the RISC project in the coming days, but for now I'd like an associated idea he has. Atanu draws attention to the skewed development India is experiencing produced by a highly clustered export driven growth, while there is still the backdrop of an enormous agricultural sector which currently provides for over 700 miliion of India's population. Clearly some strategy which takes this reality into account is essential.

Before the Information Age was the Industrial Age. Policy was then focused on ways to make the transition from an agricultural to an industrial economy. Among the various models (such as export-led growth, import-substitution industrialization, and others) there was one that was called 'agricultural demand led industrialization', or ADLI, which was pioneered by Irma Adelman. ADLI recognized that cost-reducing technological change increased agricultural productivity and thus increased rural incomes. Increased rural incomes provided a demand boost for manufactured goods both for consumption as well as for use in agricultural production. The increased demand for domestically manufactured goods raised wages which in turn were spent on the consumption of agricultural output.

On the labor side of the market, as agricultural productivity increased, labor shifted from the agricultural sector to the manufacturing sector. Thus the industrialization of the population was achieved at pace with the labor transition and was based on increased agricultural productivity attained through the use of appropriate technology. The lesson from the ADLI model is directly relevant to the question of ICT production and use in an LDC's economic growth strategy. The ICT sector is very small compared to the rest of the economy for any LDC. While IT exports will only lead to direct gains only for the IT sector, far more gains can be realized through the use of IT in the non-ICT sector and through the production of IT for domestic consumption. The use of IT in the non-IT sector will increase productivity leading to higher incomes and greater demand for consumption goods which will increase employment, and so on. We can call it the 'Growth from IT Adoption', or the GITA model. One institution that I have worked on which operationalizes the GITA model is 'Rural Infrastructure and Serices Commons' or RISC.

Now this argument is very interesting, and curiously enough it is very similar to one being used by Mogan Stanley's Daniel Lian, in connection in particular with the rural consumption dimension of what is increasingly being called Thailand's second track development strategy:

The development challenge for resource-rich Southeast Asia, given the rise of China and its growing dominance in mass manufacturing, is the implementation of a balanced development strategy that lessens its dependence on external demand and mass manufacturing driven by foreign direct investment (FDI) from multinational corporations (MNCs). The key to future economic success and survival for Southeast Asia is better leverage of domestic demand and resources to produce 'inner' economic strength, economic winners and pricing power through the growth of local enterprises that thrive on indigenous resources and skills, rather than positioning their economy as tax havens and cheap labor sites for MNCs. The winning Southeast Asian economies are likely to be niche and nimble, with large parts of its economy residing outside the domain of mass manufacturing, as China seems destined to become the global factory.

The second track of the dual-track strategy that we have consistently been advocating over the past three years has two dimensions (see Twin Dimensions of Mr. Thaksin's Dual Track Mode, May 7, 2003). The first dimension concerns policy initiatives aimed at producing a structural lift in domestic demand. This should alter the mix of external and domestic demand in terms of contribution to growth as well as overall output. The second dimension concerns the creation of a 'local enterprise element' consisting of local enterprise and product development alternatives to mass manufacturing for export.

Local enterprises should not only cater to local demand, but their indigenously created and developed products and services should also be used to open new export markets by leveraging the country's unique skills and resources. Unlike the defunct single development track through mass manufacturing, these local products and services would not conform to supply chains controlled by global industrial MNCs, or be tied to the excessively volatile global capex cycle; instead, sources of external demand for these local products and services would be the discerning tastes of global consumers.

The success of Prime Minister Thaksin Shinawatra's economic program vividly demonstrates the validity and merits of the second track principles............The Thai rural and SME sectors had been vastly underdeveloped. As at end-2000, about 40% of Thai households engaged in farming and other rural activities but contributed just 10% of GDP. In the past 30 years, there has been little government support for vigorous SME development. At the beginning of Mr. Thaksin's economic regime -- early 2001 -- the government administered a small dose of fiscal medicine, for example, the introduction of the village fund and numerous micro credit programs for SMEs. These were not only aimed at stimulating rural demand through private consumption, but chiefly encouraged the formation of rural businesses and the development of SMEs to structurally ignite the underleveraged rural economy and SME sector.
Source: Morgan Stanley Global Economic Forum

Where are All the Manufacturing Jobs Going?

Well the answere seems to be 'nowhere', and fast, if you accept the arguments Caroline Baum advances in this article. And I'm sure in one sense she's right. Global employment in manufacturing is probably on the way down. There is more: one point she doesn't note about the China syndrome, is that as areas like Guandong grow, wages rise, and the really labour intensive, low, low wage stuff migrates, either to other regions, or out to Vietnam, Cambodia etc. This process is now evident here in Spain, one of the countries mentioned as having gained jobs via the EU. Most of the talk in the business community now is about the displacement of this manufactuing work out to the new EU candidate countries. On the other hand, don't miss her 'optimistic' conclusion: "one day human beings will be redundant in manufacturing production. (Hey, that will free up more of them to man customer and technical support hotlines)". Obviously she hasn't noticed what must now be obvious to Bonobo Land readers: these jobs are migrating to. The bottom line here is that no-one knows what is going to happen. We haven't been here before, and all historical analogies can only have limited value. I really can't get all this straight yet. But cheer up, at least it's going to be an exciting ride!

You know all those U.S. manufacturing jobs that have been high-tailing it to China? China sure is doing a lousy job of holding on to them. China lost 16 million manufacturing jobs, a decline of 15 percent, between 1995 and 2002, according to a study of manufacturing jobs in the 20 largest economies by Joe Carson, director of economic research at Alliance Capital Management. In that same time, U.S. factory employment shrank by 2 million, or 11 percent. In fact, in the seven years ended 2002, the number of China's manufacturing jobs fell at more than double the rate --15 percent versus 7 percent -- of the other countries in the study. (Two of the top 20 economies, Mexico and Brazil, report manufacturing employment in index form, not as actual headcount, and weren't incorporated into Carson's analysis. The payroll changes in that time period weren't large enough to alter the conclusions.) Despite China's addition of nearly 2 million factory jobs in 2002, ``the level of factory jobs (last year) was below 1998's and far below 1995's,'' Carson says.

So who's stealing China's manufacturing jobs? It seems that China's advantage as a low-cost producer hasn't halted the insatiable drive worldwide to replace even dirt- cheap labor with productivity-enhancing equipment. Some 22 million manufacturing jobs were lost globally between 1995 and 2002 as industrial output soared 30 percent, Carson says. It seems that devilish productivity is wreaking havoc with jobs both at home and abroad. Carson's investigation found that only five of the 20 countries increased manufacturing jobs between 1995 and 2002. Three of the five -- Canada, Mexico and Spain -- ``seem to have benefited from regional trade pacts or currency agreements,'' he says. The other two, Taiwan and the Philippines, showed a net 300,000 seven-year gain, large for those economies but small on a global scale. Put in a global evolutionary context, the loss of 2.6 million manufacturing jobs in the U.S. since the start of 2001 looks far less ominous -- at least to folks not seeking elective office. Facts about the extent of the decline in global manufacturing jobs would demolish the economic (not the political) argument for protectionist measures. Both houses of Congress have proposed legislation that would impose stiff tariffs on Chinese imports.

Facts about human capital's decreasing relevance in the manufacturing process would expose the silliness of appointing a manufacturing czar, an initiative announced recently by President George W. Bush. They would upend the misplaced notion that China's undervalued currency -- the yuan has been pegged at 8.3 to the dollar for almost a decade -- is giving the country's manufacturers' a competitive edge and ballooning its trade surplus with the U.S. to $103 billion in 2002. No reasonable degree of yuan appreciation could offset the labor-cost differential between the two countries. U.S. manufacturing workers make about 25 times what an average Chinese factory worker earns, according to statistical agencies in the U.S. and China.

The fact that China is losing factory jobs at a faster rate than the countries from which it is supposedly stealing them just might put to rest the notion of China, job thievery nation. The angst over the fate of U.S. production workers, whose numbers peaked in 1979, is not unlike the epitaph for farm workers in the early 20th century, says Steve Wieting, senior economist at Citigroup Inc. "Real manufacturing output has risen 77 percent even though the number of manufacturing workers has fallen 22 percent since the 1979 peak," Wieting says. Similarly, real farm output rose 96 percent since 1979 with 31 percent fewer agricultural workers. Because output equals income, "something was earned with the gains in manufacturing and farm output during the last 25 years of falling employment in these industries,'' Wieting says. A rising supply of food and consumer goods caused prices to rise more slowly than per-capita income, giving consumers more income to spend on other things -- on services that didn't previously exist. "While manufacturing and farm employment has fallen by 22 percent and 33 percent, respectively, since 1979, total U.S. employment still managed to grow 41 percent,'' Wieting says.

Perhaps one day human beings will be redundant in manufacturing production. (Hey, that will free up more of them to man customer and technical support hotlines!) Hard as expendability is on workers themselves, increased productivity is the way progress is made. "Our studies suggest that hunter-gatherer societies offer full employment for all, simply providing the basic necessities of food and shelter,'' Wieting say. Of course, with all of their resources devoted to providing food and shelter, they have little ``income'' left to consume anything else -- made in China or otherwise.
Source: Caroline Baum, Bloomberg

The Future of File Sharing

Clay Shirky has a useful piece on file sharing. He suggests that following a thorough reading of people like Albert Barabasi and Duncan Watts, the RIAA for once are trying to follow a fairly rational policy - which he terms 'crush the connectors' - of trying to break file sharing networks - creating an effect rather like the electricity blackouts - by breaking them at their most vulnerable points. As he suggests, short term this could prove fairly effective, but since this is an action/reaction process (evolving rather like the bacteria/antibiotic one), this won't bne the end of the story. What then could be the impact of the 'crush the connectors' strategy (thanks Rajesh for the link):

Small amounts of social file-sharing, by sending files as email attachments or uploading them to personal web servers, have always co-existed with the purpose-built file-sharing networks, but the two patterns may fuse as a result of the Crush the Connectors strategy. If that transition happens on a large scale, what might the future look like?

Most file-sharing would go on in groups from a half dozen to a few dozen -- small enough that every member can know every other member by reputation. Most file-sharing would take place in the sorts of encrypted workspaces designed for business but adapted for this sort of social activity. Some users would be members of more than one space, thus linking several cells of users. The system would be far less densely interconnected than Kazaa or Gnutella are today, but would be more tightly connected than a simple set of social cells operating in isolation.

It's not clear whether this would be good news or bad news for the RIAA. There are obviously several reasons to think it might be bad news: file-sharing would take place in spaces that would be much harder to inspect or penetrate; the lowered efficiency would also mean fewer high-yield targets for legal action; and the use of tools by groups that knew one another might make prosecution more difficult, because copyright law has often indemnified some types of non-commercial sharing among friends (e.g. the Audio Home Recording Act of 1992).

There is also good news that could come from such social sharing systems, however. Reduced efficiency might send many users into online stores, and users seeking the hot new song might be willing to buy them online rather than wait for the files to arrive through social diffusion, which would effectively turn at least some of these groups into buyers clubs.

The RIAA's reaction to such social sharing will be unpredictable. They have little incentive to seek solutions that don't try to make digital files behave like physical objects. They may therefore reason that they have little to lose by attacking social sharing systems with a vengeance. Whatever their reaction, however, it is clear that the current environment favors the development and adoption of social and collaborative tools, which will go on to have effects well outside the domain of file-sharing, because once a tool is adopted for one purpose, it often takes on a life of its own, as its users press such social tools to new uses.
Source: Clay Sharkey's Internet Writings

The Coming of China and India

The scale of the future impact of China and India continues to make waves. This time it's the turn of Roger Bootle. Whle in principle I agree with him that the expansion of trade is in everyone's interest, I still think there is a question about how we will pay for all the imports (and remember we are talking abut both China and India, and both manufacturing and services). How this will all pan out, only time will tell. Thos who rush in and feel they no all the answers in advance may be making a big mistake. (Thanks to Reuben for the link).

We are by now accustomed to the idea that our national statistics are highly unreliable, but China's are in a different league. Until recently it has been common to suppose that the official accounts of Chinese growth running at 8 per cent per annum systematically overstated the true rate. So it was striking to hear a story last week to the effect that Chinese official statistics may have been grossly under-stating growth. According to some estimates, the Chinese economy may be growing at some 11 per cent real per annum. China is already a burgeoning presence on the world scene so what does the future hold?

The place to begin, I think, is with the past. It is widely known that China was once streets ahead of the West technologically, but when I recently came across the gross domestic product figures, the sheer scale of the discrepancy took my breath away. According to the great authority, Angus Maddison, in 1500, China and India each accounted for about a quarter of the world's output and the UK for only about 1 per cent. By the early 19th century, although India had already begun its long relative decline and the UK its long relative ascent, India's economy was still some three times the size of Britain's. Once I had grasped it, this fact immediately solved something that had puzzled me for years, namely how could the conquest of India have meant so much for Britain? After all, in the modern world, although it has had a huge population, India has had a smaller economy than the UK. But not in the 19th century. In relative terms the Indian economy was enormous. You can readily see how the control of such a large economy by a small set of islands off the European coast was such a sensation. No wonder India was the jewel in the crown.

China, of course, was never formally part of anyone's empire, but for much of the 19th century she was dominated by the Western powers, including Britain, and again the chart shows why she was such a tasty morsel for them to pick over. In the 20th century her relative decline continued, spurred by decades of bad government, unrest, war, civil war and finally communism. This culminated in a period of economic madness and self-destruction under Mao which has no parallel in history. In 1950 China's GDP was below Britain's. But the recent past is a highly misleading guide to China's latent strength. And now China is on the way back. In the decade to 2002 China's average rate was over 9 per cent and India's 6 per cent, compared with 3.2 per cent for the US, 2.9 per cent for the UK and a miserable 1.3 per cent for Germany. At 9 per cent growth, China's GDP will double in eight years. Indeed, if we assume that China's growth rate exceeds that of the United States by 4 per cent per annum, then China will overtake the US as the world's largest economy in about 20 years.

What will the consequences be? Most business people are extremely fearful. What they fear is much lower Chinese labour costs. Many of them, along with the majority of men and women in the street, fear losing just about all of our industries. Indeed, now that India is increasingly attracting service activities, they fear that much of the service sector of the economy will migrate East as well. In that case, what will be left? In short, what they fear is nothing less than complete economic failure and impoverishment.

But their fears are unfounded. Of course, if China grows much faster than us then we will lose relative position - and we will lose political power and influence as a result. But this is not the same thing as economic well-being. Even as we become relatively worse-off we can become absolutely better off. Indeed, we shall become better off because of China's advance. International trade is not a game of winners and losers. Everybody gains.

We will gain from being able to buy Chinese produced goods at lower prices than we can produce them ourselves and we will also gain from being able to sell goods and services into the rapidly growing Chinese market. The truth is that we gain from other countries' enrichment just as they gain from ours. In my book, Money for Nothing,* this is what I call the wealth spiral.

Plenty of business people, though, doubt that they will be able to sell much to China. In particular, they fear that China will be another Japan, taking our markets but not opening up theirs. I am no fan of Japanese trade policy but we should regard the rise of Japan as an economic blessing from which we have benefited greatly. We have enjoyed the flow of cheap and high quality Japanese goods and the flow of Japanese investment. And although their markets could be a good deal more open than they have been, over the years of its economic advance Japan substantially increased its purchases from the West, including Britain.

And China is not protectionist in the Japanese mould. Although we hear much about the huge Chinese trade surplus, particularly from whingeing American manufacturers, the overall Chinese current account surplus is comparatively modest. The bilateral trade surplus with America is large but that owes much to American over-consumption and to the pattern of trade flows. Bilateral balances are for the birds.
Source: Daily Telegraph

Tuesday, October 14, 2003

On the Importance of How you Conduct Arguments

A recent post by Arnold Kling has been causing a fair amount of controversy in blogland. Henry Crooked Timber and Brad Delong for example both have substantial posts on what Arnold ahs to say. The cause of all the controversy: Arnold is not happy with Paul Krugman. Why is he unhappy, because K uses too many 'type M' arguments (attributing motives) and would be better sticking to the 'type C' arguments (concerning consequences).

My take on this: I can't stand what Arnold calls type M arguments, or at least type M when used in a political context, to cause offence or to try to refute - obviously if I say that Brad (for example) is producing a bad argument becasue he is a very good person, I guess nobody is going to complain (in fact I do this all the time, or at least I say that despite being a very good person he produces from time to time a bad argument, as in this case), it's when K say's George Bush is producing bad arguments because he is a bad guy - or because he wants to wreck the social security system, or American democracy - that people start to get nervous, and I think rightly so. Let me say something completely outrageous, I have no idea at all whether George Bush is a good guy or a bad one (in fact I think such Manicheanism belongs to his world and not mine), I don't even care which of the two he is, I have enough with what he says and what he does, and if five minutes from now he denies what he just said, well I'm not following him down that road, I've got better things to do. What I'm saying is that this whole argument for me is old rope.

What really concerns me here is the waste of what was once a very good economic brain. I don't suppose any of this will cut any ice with those who are convinced of K's approach, but for what its worth I could explain that I actually had an exchange of mails some months ago with K on this whole topic: the danger of how you present your arguments. Basically I was playing around - yes playing in the ludic sense - with the idea that you could make a good type M argument that Bush and Co were following K’s own advice, and more specifically advice contained in a doctoral thesis he partly supervised by Gauti Eggerston, to the effect that the best way to avoid deflation is by the politicians over-riding the central bank, and in an enthusiastic bout of crazed irresponsibility provoking a serious inflation fire. Gauti’s paper is called ‘Committing to Being Irresponsible’ (and is now published as an IMF working paper, where you can also find Gauti working as one of the deflation ‘experts’).

This theory is every bit as good as the ‘provoked trainwreck’ one, in explaining the Bush administration economic policy, indeed it is even better, since it offers a central role to K's denunciation in helping make the policy work (everybody has a part to play). But my point is not to advocate it this interpretation. My point simply is that to the educated economic eye it's as good an explanation of why John Taylor, Ben Bernanke, Greg Mankiw are going along with things as the one K is offering, and we have no decision procedure to decide which, if either, of them is correct. So perhaps it's better to stop going round in circles and pitch the argument at another level.

Look, for me the important point is this one: in 2001 K felt he couldn’t speak out too much about Argentina, since he might cause a run on the banking reserves in Argentina. I think he was wrong in this, but that is beside the point, it is a question of judgement. Now K is telling the world that the US is going to have an Argentina style crisis, and it seems from the equity and currency markets that no-one outside the political arena is taking a blind bit of notice. Who is bothering with K now, Arnold Kling and Larry Lindsey? I think it’s a tragedy. If as an economist you are reduced to arguing with Larry Lindsay, I think the best I can suggest is not dropping your argument to his level, but getting out while you're still ahead and changing profession. My take is that there may have been 5 really good economists out there who could hack both the theory and the practice of economics. We lost one earlier this year in Rudi Dornbusch, now we’ve lost another in his own ‘unravelling’. I think this is a high price to pay for handling an argument from Larry Lindsey (whoever he is BTW).

K could have had an impact on Japan, that could have been important. Throwing away your mind like this in a street brawl with GWB and co, it’s so irresponsible. It’s worse it’s self-immolation.

What I'm saying is the loss here is to science. Krugman is doing no original work, the problems are there (and they are not all created by GWB: the US is going to have to make a more or less ‘painful adjustment’ to its present reality whoever is in the White House). You see here we have another problem produced by collapsing economics into politics, politics tends to think in terms of short term fixes, a bit more fiscal here, a shot of monetary policy there, when what we may need is some long term strategic thinking. I happen to think that this is what intellectuals are for, putting the memes into circulation which can change things ten, twenty years from now, that’s why its better for them to stay out of politics, or at least politics with a capital P. The trouble is too many people are confusing policy here with politics, and collapsing the one into the other. This could prove very costly in the long run.

Asia's Property Boom and Deflation

I think Andy Xie is getting his mind round an extremely important issue in this piece. The role of rising property prices in some economic development models, where the restrictions on land use and the favourable demography (lots of young, first-time buyers) create a positive feedback dynamic of tremendous importance. However when the demography turns, and the grwoth slows, this can turn itself into an equal vicious negative feedback process. I fear that this is precisely the outlook that Spain may have right in front of it.

Surplus savings in East Asia resulted from high savings rates in the economies that had fast export-driven growth but have now lost export competitiveness. Their savings rates are no longer compatible with their low-growth reality. Increasing currency values could force down their savings rates through income destruction via deflation. I believe this is a terrible strategy for them and the global economy. The right solution is to go through structural reforms.

The most important reform is to decrease the home value-to-income ratio. High property prices have kept savings rates high in these economies, as new households must save a higher proportion of their income to purchase a home in the future. Keeping property prices high is an effective strategy to keep taxes down and savings rates up. It is a necessary policy tool to maintain an investment/export-driven and high-growth model. It is essentially a leveraging strategy that forces households to subsidize production.

However, the savings rates in such economies become deflationary when they have to stop export-led growth, as they lose export competitiveness. There are two elements to this savings surplus story. First, capital in existing factories must go somewhere as they depreciate over time. Second, household net savings may be right for the property price but are too high for capital formation in industry. Decreasing property prices helps solve both issues. As property prices decline, new households need to save less to purchase homes in future. Lower property prices incentivize households to buy bigger houses. The combination could absorb the surplus savings............However, decreasing the property price has short-term wealth distribution implications, shifting wealth from older to younger households. Politicians are usually motivated to increase property prices in most East Asian economies. Political imperatives appear to conflict with a rational economic solution. Thus, East Asia must continue to buy dollars to keep deflation at bay. They effectively turn their factories into US treasuries.

East Asia is well known for its high savings rates. Cultural factors and demographics are usually cited as the main reasons. However, with the benefit of the hindsight, high property prices are an equally important factor. The Tiger economies experienced a jump in savings rate in the 1980s, accompanied by rapidly rising property prices.

China is now going through what the Tiger economies did in the 1980s. As public housing has been phased out, household savings behavior appears to have dramatically changed. China’s household savings rate has jumped significantly with the introduction of private housing to about 18% of GDP (or 24% of household disposable income) this year from 13% in 1997 -- the last year when public housing was assumed to be available. It appears that the trend of a rising savings rate in China is easing but has not stopped. It is not surprising that investment, exports, and the housing and auto industries have become strong in China, similar to the trends in the 1980s in the Tiger economies.

The politics of property in East Asia require rapid economic growth, which could keep property prices rising in line with or faster than per capita income, to make everyone happy. But high economic growth is possible only when an economy is competitive and has sufficient capital and labor. In the 1980s, for example, a rapidly appreciating yen made the Tiger economies more competitive, which allowed them to have rapid economic growth, high savings rates and rapidly rising property prices. The same phenomenon took place in the 1960s and 1970s in Japan.

Property-induced benefits for economic development are a form of leverage. It induces households to subsidize production during the high-growth period. Unfortunately, when high growth is no longer possible (for example, when an economy runs out of labor surplus and faces diminishing returns on capital accumulation as the capital stock rises), property prices must fall dramatically for the savings rates to be compatible with the low-growth reality. But it would redistribute wealth from older to new households. As most households are old in a mature economy, politics are not in favor of an active adjustment in property prices.

Instead, politicians may fight the inevitable property price decline to curry favor with property owners. That would push the economy into prolonged deflation, as its savings rate remains too high for its growth needs. Turning the surplus savings into foreign exchange reserves is an easy option to alleviate the pain. But, it forces other economies, mainly the United States, to borrow and spend. As the imbalance accumulates over time, it may cause instabilities in the currency market, casting doubts on the sustainability of such a policy.

Japan first slumped into this type of deflation induced by high savings and declining competitiveness. The Tiger economies appear to have followed in its footsteps. Japan’s deflationary adjustment has gone further than any other economy. Its savings rate has declined substantially. However, judging from the norms in other OECD countries, Japan’s adjustment is only halfway through. If its government does not pursue any active policy to adjust its property prices relative to its per capita income, it could face another decade of deflation. While this scenario is not a happy one, it is probably the most likely outcome.

Taiwan was the first Tiger economy to follow Japan. The IT boom covered up its deflation for a few years. Its land prices have declined by one fifth since 1995. There is much talk about stabilization in its property market. I am quite doubtful that Taiwan’s deflationary adjustment is over. Instead, the likely factor for less deflation is its aggressive policy to increase its current account surplus to 10% of GDP in 2002 from 3.8% in 1999. The temporary easing in deflation could only last if Taiwan continues to increase its current account surplus. The question is if its trading partners can tolerate this.

The most bizarre case is that Hong Kong, which has 8.5% unemployment and one-third of the mortgage borrowers in negative equity, is facing appreciating pressure on its currency. Its current account reached 12% of GDP last year from an average of -1.7% during 1995-97. While part of its current account surplus could be China’s capital flight, the trend is unmistakable.

South Korea is the only Tiger economy that has not seen deflation. Its property prices are still surging, as the surplus capital from weak capex tries to get into housing via low-cost mortgages. Korea could avoid the fate of other Tiger economies by expanding land supply dramatically to absorb its surplus savings, while keeping property prices low. Politics in Korea are in favor of stable property prices due to the country’s egalitarian culture. The country is fighting the rapid increase in property prices with discriminatory measures rather than with increasing supply. Korea may well follow other Tiger economies down the path of rising property prices followed by deflation.
Source: Morgan Stanley Global Economic Forum