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Friday, July 08, 2005

London Bombings

I am blogging this issue over at a Fistful of Euros. For what I hope are obvious reasons there will be no posts here till Monday.

Tuesday, July 05, 2005

China's Oil Needs

There is a useful and timely survey of China's oil needs in Bloomberg today:

For now, China's energy demand far outstrips what it can produce at home. The nation's oil imports surged 35 percent last year to a record 122.7 million metric tons as PetroChina Co., China Petroleum & Chemical Corp. and CNOOC -- China's biggest oil companies -- failed to produce enough domestically to meet demand in an economy that grew 9.5 percent. Imports accounted for about 40 percent of last year's consumption.

CNOOC's Unocal bid would be the largest-ever overseas acquisition by a Chinese company, and follows more than $200 million in Canadian oil-sands acquisitions announced by Chinese companies since April.

While owning more overseas oil reserves enables Chinese companies to meet rising demand at home, such acquisitions don't reduce imports because the oil still has to be shipped into China. The nation's efforts to tap more resources at home won't be enough to close the gap between growth in domestic production -- 2.9 percent last year -- and demand, which surged 15 percent.

Insuring Against Terror

The OECD has a 289 page report out today on this difficult but important topic. Unfortunately, as Condoleeza Rice (who I'm not normally in the habit of quoting) says, we have to get it right every day, they only have to get it right once. The impact of a hit from what the OECD terms "mega terrorism" would be enormous. Apart from the human tragedy, and hard as it is to think about these matters, it would be important to contain the knock-on financial consequences.

The report also cautions that insurance policies generally exclude the worst kind of scenario -- in which a chemical or nerve agent, nuclear device or radiation-spewing "dirty bomb" is used to attack a major city -- and government guarantees often don't provide adequate cover.

Even if they did, smaller states could be bankrupted by such a "mega-terrorist attack" -- which the OECD said could incur losses of up to $250 billion, or nearly eight times the $32 billion bill insurers faced after the 2001 attack.

"In some smaller countries, or countries with smaller insurance markets, even if the state came to the rescue it would find it difficult to cover those risks without endangering the stability of its entire economy," Vignial-Denain (of the OECD's financial markets division, which directed the study) said.

Post-September 11 predictions that financial markets would meet the insurance shortfall with new "terrorism bonds" and other risk-spreading products have proven overly optimistic, the OECD report says.

The report suggests that international risk-sharing agreements may be needed along the lines of existing conventions on nuclear disasters -- committing member countries to help meet cleanup and compensation costs for each others' plant accidents -- but concludes that there is not enough political will for a far-reaching deal on terror risk.

Sunday, July 03, 2005

Worth Thinking About

"The IT-producing industries generate less than five percent of gross
domestic income, but have accounted for nearly half the surge in productivity growth since 1995.

by Dale W. Jorgenson. A *must* read.

More points:

"Figure 1.1 also reveals a sharp acceleration in the decline of
semiconductor prices in 1994 and 1995. The microprocessor price decline leapt to more than ninety percent per year as the semiconductor industry shifted from a three-year product cycle to a greatly accelerated two-year cycle.

"Much communications investment takes the form of the transmission gear, connecting data, voice, and video terminals to switching equipment. Technologies such as fiber optics, microwave broadcasting, and communications satellites have progressed at rates that outrun even the dramatic pace of semiconductor development".

Roach On Disinflation

As a long standing Stephen Roach admirer, I am becoming more and more frustrated these days with the seeming montonic nature of his 'bubble' and 'post bubble' explanatory framework. (This reminds me of the joke about even stopped clocks being right twice a day). He clearly hasn't given any thought at all to changing demography and its implications. This means he doesn't understand either Europe or Japan's problems at all (Doesn't he bother to read his colleagues Fels and Guzzo :) ). For similar (but opposite reasons) I think that the Chinese 'long wave' may be so broad and so deep that it will prove more resilient to business cycle ups-and-downs than many expect. However there is still *one thing* I do agree with Roach about:

"The problem arises when that disinflation occurs from a low starting point. The lower the pre-recession rate of inflation, the closer a cyclical disinflation can push the aggregate price level toward outright deflation. That was very much the case with America’s deflation scare of mid-2003: The post-bubble recession of 2001 hit a US economy whose core CPI inflation rate was running at only 2.2% at the prior cyclical peak in early 2000. If a recession were to occur today when core inflation is also running at just a 2.2% pace, the resulting cyclical disinflation could well give rise to yet another deflation scare."

As Bonobo and Afoe readers know I've been arguing this for some time myself. However, I don't think this is simply being 'optimistic' about inflation: either Germany, or the US (depending on the relative currency values) or both could join Japan 'mired in deflation' the next time we bottom, and personally (and here I am very 'Keynesian')I would prefer a larger helping of inflation to that anytime.

Big Trouble in Big Pharma

Following on from the last post, the creation of jobs in high value end activities is a contingent matter, there are no guarantees about time scales here (timing again). Investment in new drugs would be a case in point (or in genetic therapies, or whatever). I have no doubt that in the long run "miracles are possible", but the question is when *will* the future arrive, and if they're all bankrupt before it does? Economics isn't simply technology + innovation + good management. Apparently finding a new drug may cost $2 billion by 2010.

Drug companies do an awful job of finding new medicines. They rely too much on billion-dollar blockbuster drugs that are both overmarketed and overprescribed. And they have been too slow to disclose side effects of popular medicines.

Typical complaints from drug industry critics, right? Well, yes. Only this time they come from executives at Eli Lilly, the sixth-largest American drug maker and the company that invented Prozac.

From this placid Midwestern city, well removed from the Boston-to-Washington corridor that is the core of the pharmaceutical industry, Lilly is ambitiously rethinking the way drugs are discovered and sold. In a speech to shareholders in April, Sidney Taurel, Lilly's chief executive, presented the company's new strategy in a pithy phrase: "the right dose of the right drug to the right patient at the right time."

The Outsourcing Debate Continues

The Economist has an article on outsourcing and the OECD has its global employment outlook (links from New Economist). Mckinsey has its consultants reports, and on-and-on the debate rumbles. I think the jury is still out on whether high value jobs will move off-shore in sufficient quantities to change the employment profile in OECD societies (and hence the net worth of those societies). I tend to be more with Samuelson than Bhagwati on the mid term picture. Of course the issue, as with so many questions in economics the issue turns on timing.

So while the jury remains out, all we are left with is anecdotal evidence, which is why a couple of articles in today's NYT caught my eye:

In the last three years, profits at the seven largest companies in Silicon Valley by market value have increased by an average of more than 500 percent while Santa Clara County employment has declined to 767,600, from 787,200. During the previous economic recovery, between 1995 and 1997, the county, which is the heart of Silicon Valley, added more than 82,800 jobs.

Changes in technology and business strategy are raising fundamental questions about the future of the valley, the nation's high technology heartland. In part, the change is driven by the very automation that Silicon Valley has largely made possible, allowing companies to create more value with fewer workers.

Some economists are wondering if a larger transformation is at work - accelerating a trend in which the region's big employers keep a brain trust of creative people and engineers here but hire workers for lower-level tasks elsewhere.

"What has changed is that Silicon Valley has continued to move up the value chain," said AnnaLee Saxenian, dean of the School of Information Management and Systems and professor of city and regional planning at the University of California, Berkeley.

This last point, about moving up the value chain, is significant and revealing. OECD economies need to have a bigger percentage of 'up the value chain' activities in their employment profile if they are to maintain their 'relative worth'. But these activities need to create increasing employment in terms of absolute numbers. This is what it seems isn't happening in Silicon Valley. Long term having increasing numbers of realtors won't be the same thing.