Deflation Update

Monday, October 27, 2003

Only Known Export Jobs: Part I

This, it seems, is going to be the title of a new series here. The title is plagiarised: former US Treasury Secretary Paul O'Neill (or was it GWB himself, help, someone?) once said of Argentina that it was a country with no known export industry, and it didn't seem to care. This was before the crash. Well I'm now throwing the jibe back: the only unambiguously successful US export industry right now is the jobs one (if you don't count the dollar bill one that is). Of course the US has enormously successful companies. Of course the US can generate products that are world beaters. But how do you do this at prices that the rest of the world can afford? This is the problem. If you look at the US current account deficit the situation is clear.

In some ways there is analogy here with the energy situation. Energy resources may or may not become depleted before alternatives are available, everything is a question of timing. The jobs market and economic development have been tied to a progressive evolution from agriculture to bottom-end manufacturing, to hi-tech manufacturing to services, to services/information. Now it is these high-end services and intellectual property producing activities that are starting to be outsourced, and the OECD world needs to move to the next-generation activity (whatever that may be, and we are talking structurally here). The question is again one of timing. And just as with the energy tech-fix there is no guarantee, so with the labour market evolution there is none either. This is the point I am making. I could tie all this in to the laxity of attitudes in the present US administration, since I think that with another administration in the White House all of this would be being treated five times more seriously as a problem.

A couple of interesting inks. One I picked up from Fons Tuinstra which, incredibly, describes the outsourcing situation over at Palm, the other a link that Macromouse LLoyd sent me from 'Last Remaining Radical' Ed Strong . Now apart from understanding why he is concerned, and recognising his right to say what he says, I dont go down Ed's road at all. I have already commented at length on Ed's post (comment reproduced below). Nonetheless one detail is worthy of note, and it relates to the notorious Singapore issues. One 'hot topic' among these issues was opening government procurement (transparency I think it is called) to free competition. Well, if you look at what is happening in the US (and I'm sorry this is NOT a US-only issue, it is an OECD issue) you will see that 'procurement' is becoming an 'issue du jour'. Take Shirley Turner, eg:

"After Shirley Turner, a Democratic state senator from New Jersey discovered that a program from her state, Families First, which provides welfare recipients with grocery debit cards had been outsourced to Mumbai, India, she proposed bill No. 1349.Her bill, which was approved unanimously by the New Jersey Senate in December 2002, would require all state contracts to be performed by either US citizens or foreign citizens who work legally in the United States. Following her lead, Connecticut, Maryland, Missouri, and Wisconsin all have similar bills under consideration."

Now for my comments on Ed's post:

Hi Ed.
Interesting post. I'm both for you, and I'm against you I'm afraid. I'm for you since I am convinced you are right to be pre-occupied by what is happening. This is, and is going to be, an enormous issue for the US.

The key to the problem: the value of your currency and the trade deficit. The key to the value of your currency: the reserve role of the dollar. So it seems somewhere deep-down, behind all this we may need to address questions of financial architecture.

You see moving from manufacturing into services isn't (in principle) a problem. It's when you start moving out of high value services and into relatively lower value ones (as you indicate) like the low-tech 'human' end of health, looking after gardens and old people etc, construction attached to all the deficit spending which will be seen as the solution etc etc: it's in this move downstream that the problem starts. This then becomes a historic first, and the 'usual arguments' seem to have less validity.

One intersting side issue is that of procurement and the Singapore issues. Normally the accusation of using restrictive practices to avoid competition is a jibe that is thrown at the third world but here we have your very own Shirley Turner demonstrating just how rife this practice probably is even in the 'good ol' US of A.

I see the US today as very much in the same situation as the UK post WWI (in fact NY university historian Niall Ferguson made just this point in a very perceptive article 'To the Debtor the Spoils' in the NYT just after the Iraq war).

Why this isn't really being picked up inside the US I don't know. The Bushies obviously aren't interested, and the 'opponents' lead by 'road runner' Krugman (who was last seen painting an entrance in the wall to lead the pack down a dimly-lit cul-de-sac) seem obsessed with demonstrating that everything is a consequence of the 'dreaded tax cut'. This leads him (in his recent 'lump of labour' piece) to the absurd extreme of suggesting that those who are pointing to the structural problem are trying to defend Bush!

Another area where I'm not exactly with you is over the accent on the telephone. I got over this as a child in Liverpool trying to make long distance contact via an operator in Scotland! I don't think it matters what accent someone has - or what colour their skin is - if they are doing a good job. And since the American ideal of competition is that who does the best job cheapest wins, looking at you from the outside, I think it's kinda hard to cry 'foul'.

My proposal. Accept the new reality. Asia is on the rise. We in Britain had, eventually to accept the rise of the US. In the end it was good for us, you helped us out in 1939. So accept the reality and learn to live with it. We in Britain may not have the world influence we once had, but we're hardly poor. We are also more mature about money. Despite Ms Thatchers best attempts we still don't value money as much as you do. Come on over, it's not as bad as it looks. And, anyway, at the end of the day I really can't believe that reducing poverty in other parts of the world isn't something important to you as a person.

In case you're interested, here is a recent link to , Monbiot in the Guardian to show how the British seem to be looking at this.

Edward

Sending the Jobs Back


As I have said before, many people in Europe seem very complacent about this situation. Seeing the problem as one of call centres and the like, they feel vaguely re-assured that linguistic difficulties will mean that they are protected. But let me suggest another possibility. Having this backroom-office at its disposal, UK companies may become slightly more competitive than some of their continental rivals. Then to overcome the UK language difficulty vis-a-vis Europe may recruit young educated French, German, Dutch people into the UK to facilitate export into the EU. It's just a thought.

If you live in a rich nation in the English-speaking world, and most of your work involves a computer or a telephone, don't expect to have a job in five years' time. Almost every large company which relies upon remote transactions is starting to dump its workers and hire a cheaper labour force overseas. All those concerned about economic justice and the distribution of wealth at home should despair. All those concerned about global justice and the distribution of wealth around the world should rejoice. As we are, by and large, the same people, we have a problem.

Britain's industrialisation was secured by destroying the manufacturing capacity of India. In 1699, the British government banned the import of woollen cloth from Ireland, and in 1700 the import of cotton cloth (or calico) from India. Both products were forbidden because they were superior to our own. As the industrial revolution was built on the textiles industry, we could not have achieved our global economic dominance if we had let them in. Throughout the late 18th and 19th centuries, India was forced to supply raw materials to Britain's manufacturers, but forbidden to produce competing finished products. We are rich because the Indians are poor.

Now the jobs we stole 200 years ago are returning to India. Last week the Guardian revealed that the National Rail Enquiries service is likely to move to Bangalore, in south-west India. Two days later, the HSBC bank announced that it was cutting 4,000 customer service jobs in Britain and shifting them to Asia. BT, British Airways, Lloyds TSB, Prudential, Standard Chartered, Norwich Union, Bupa, Reuters, Abbey National and Powergen have already begun to move their call centres to India. The British workers at the end of the line are approaching the end of the line.

There is a profound historical irony here. Indian workers can outcompete British workers today because Britain smashed their ability to compete in the past. Having destroyed India's own industries, the East India Company and the colonial authorities obliged its people to speak our language, adopt our working practices and surrender their labour to multinational corporations. Workers in call centres in Germany and Holland are less vulnerable than ours, as Germany and Holland were less successful colonists, with the result that fewer people in the poor world now speak their languages.

The impact on British workers will be devastating. Service jobs of the kind now being exported were supposed to make up for the loss of employment in the manufacturing industries which disappeared overseas in the 1980s and 1990s. The government handed out grants for cybersweatshops in places whose industrial workforce had been crushed by the closure of mines, shipyards and steelworks. But the companies running the call centres appear to have been testing their systems at government expense before exporting them somewhere cheaper.

It is not hard to see why most of them have chosen India. The wages of workers in the service and technology industries there are roughly one tenth of those of workers in the same sectors over here. Standards of education are high, and almost all educated Indians speak English. While British workers will take call-centre jobs only when they have no choice, Indian workers see them as glamorous. One technical support company in Bangalore recently advertised 800 jobs. It received 87,000 applications. British call centres moving to India can choose the most charming, patient, biddable, intelligent workers the labour market has to offer.

There is nothing new about multinational corporations forcing workers in distant parts of the world to undercut each other. What is new is the extent to which the labour forces of the poor nations are also beginning to threaten the security of our middle classes. In August, the Evening Standard came across some leaked consultancy documents suggesting that at least 30,000 executive positions in Britain's finance and insurance industries are likely to be transferred to India over the next five years. In the same month, the American consultants Forrester Research predicted that the US will lose 3.3 million white-collar jobs between now and 2015. Most of them will go to India.

Just over half of these are menial "back office" jobs, such as taking calls and typing up data. The rest belong to managers, accountants, underwriters, computer programmers, IT consultants, biotechnicians, architects, designers and corporate lawyers. For the first time in history, the professional classes of Britain and America find themselves in direct competition with the professional classes of another nation. Over the next few years, we can expect to encounter a lot less enthusiasm for free trade and globalisation in the parties and the newspapers which represent them. Free trade is fine, as long as it affects someone else's job.

So a historical restitution appears to be taking place, as hundreds of thousands of jobs, many of them good ones, flee to the economy we ruined. Low as the wages for these positions are by comparison to our own, they are generally much higher than those offered by domestic employers. A new middle class is developing in cities previously dominated by caste. Its spending will stimulate the economy, which in turn may lead to higher wages and improved conditions of employment. The corporations, of course, will then flee to a cheaper country, but not before they have left some of their money behind. According to the consultants Nasscom and McKinsey, India - which is always short of foreign exchange - will be earning some $17bn a year from outsourced jobs by 2008.

On the other hand, the most vulnerable communities in Britain are losing the jobs which were supposed to have rescued them. Almost two-thirds of call-centre workers are women, so the disadvantaged sex will slip still further behind. As jobs become less secure, multinational corporations will be able to demand ever harsher conditions of employment in an industry which is already one of the most exploitative in Britain. At the same time, extending the practices of their colonial predecessors, they will oblige their Indian workers to mimic not only our working methods, but also our accents, our tastes and our enthusiasms, in order to persuade customers in Britain that they are talking to someone down the road. The most marketable skill in India today is the ability to abandon your identity and slip into someone else's.

So is the flight to India a good thing or a bad thing? The only reasonable answer is both. The benefits do not cancel out the harm. They exist, and have to exist, side by side. This is the reality of the world order Britain established, and which is sustained by the heirs to the East India Company, the multinational corporations. The corporations operate only in their own interests. Sometimes these interests will coincide with those of a disadvantaged group, but only by disadvantaging another.

For centuries, we have permitted ourselves to ignore the extent to which our welfare is dependent on the denial of other people's. We begin to understand the implications of the system we have created only when it turns against ourselves.
Source: The Guardian
LINK


The Information Revolution and the Pele/Ronaldo Effect


My Money Files Column


The Information Revolution and the Pele/Ronaldo Effect

One of histories deeper mysteries might revolve around what these two topics have in common, short of the fact that they are flying round my head at the time of writing. Let's see if I can find a connection.

To start at the begining: one of the information revolution's least commented details can be found in the number of US H1B vouchers issued to workers in the technology industry in 2002: this went down, in comparison with 2001, and by a whopping 75% according to a recent department of homeland security (DHS) report. The H1B visa programme, which allows foreigners to work in the US for up to six years, has enabled thousands of Indians to take up well-paying jobs in the US high-tech sector, especially in Silicon Valley. The number of H1B visas for initial employment fell from 105,692 in 2001 to 27,199 in 2002, according to the San Jose Mercury News. The percentage of H1B visas issued to technical workers also declined from 52.5 per cent in 2001 to 26.3 per cent in 2002, the paper said. The news came as the annual limit on the number of visas was about to be lowered from October 1.

Of late, the visa programme has attracted much criticism inside the United States in view of the relatively high unemployment rates currently being experienced there, with opponents of the visas arguing that US workers are losing jobs because companies are hiring less-expensive foreign workers. Now if this is how the situation is seen from within the US, it may be just worth asking, and what about India, what is the impact there? And this is where the situation gets interesting. But in order to appreciate this fully, perhaps we should go back to an older debate, that of the migration of persons from the less developed parts of the world (when I was a kid this used to include Europe) to the more developed part, and in particular to the United States.

This movement had an old name: the 'brain drain'. Now the brain drain is a topic which has produced a larger literature than I care to contemplate reading, but some stylised observations can be extracted. Perhaps one starting point for this would be a Foreign Affairs essay by Indian Economist Jagdish Bhagwati. As Bhagwati suggests:

"The reality is that borders are beyond control and little can be done to really cut down on immigration. At the same time the societies of developed countries will simply not allow it. The less developed countries also seem overwhelmed by forces propelling emigration. Thus, there must be a seismic shift in the way migration is addressed: governments must reorient their policies from attempting to curtail migration to coping and working with it to seek benefits for all."

As Bhagawati indicates:

"emigration occurs after study abroad. The number of foreign students at U.S. universities, for example, has grown dramatically; so has the number who stay on. In 1990, 62 percent of engineering doctorates in the United States were given to foreign-born students, mainly Asians. The figures are almost as high in mathematics, computer science, and the physical sciences. In economics, which at the graduate level is a fairly math-intensive subject, 54 percent of the Ph.D.'s awarded went to foreign students, according to a 1990 report of the American Economic Association.

Of these, about 2,000 come from the Indian Institutes of Technology (IITS), which are modeled on MIT and the California Institute of Technology. Graduates of IITS accounted for 78 percent of U.S. engineering Ph.D.'s granted to Indians in 1990. And almost half of all Taiwanese awarded similar Ph.D.'s had previously attended two prestigious institutions: the National Taiwan University and the National Cheng Kung University. Even more telling, 65 percent of the Korean students who received science and engineering Ph.D.'s in the United States were graduates of Seoul National University. The numbers were almost as high for Beijing University and Tsinghua University, elite schools of the People's Republic of China.He adds -- "A realistic response requires abandoning the "brain drain" approach of trying to keep the highly skilled at home. More likely to succeed is a "diaspora" model, which integrates present and past citizens into a web of rights and obligations in the extended community defined with the home country as the center. The diaspora approach is superior from a human rights viewpoint because it builds on the right to emigrate, rather than trying to restrict it."

Now, as Reuben Abraham points out , Bhagawiti's numbers may well seriously understate the numbers. Reuben points out that the state of Karnataka alone produces something like 15,000 engineers per year. His guess is that India graduates about 150,000 engineers every year of which around 50,000 or so are from IT-related courses.

But what is the real impact of the Brain Drain? Most commentators have assumed that the loss of qualified people is a pure liability for the society which produces them: I think this view is over simplified, and this is where our footballers - Pele and Ronaldo - enter the picture . Well-known footballers have long been leaving Brazil to earn their living with the more lucrative European clubs. Has this had a detrimental effect on Brazilian football? Not that I have noticed. You only have to look at all those young Brazilian children kicking the ball around in the Favellas and on the beaches to realise that there is something wrong with this view. The football exodus is producing more good footballers not less. So: is the 'brain drain' good for you? Well yes and no.Obviously you lose talent. So this is bad. But the success of this talent encourages others. So this is good. To cut a long story short, from very small beginings (isn't this the whole complexity/chaos idea?) you can generate a very big process where everyone copies everyone else.

This seems to have happened in India, with even people from relatively small villages saving money to send their children to college to learn about IT. An enormous education and training industry developed.Then comes the crunch. The Nasdaq crashes. No more H1B's. But there is a river of people as big as the Ganges training-up ready to go. So what happens? The water in the river 'backs up', and gets diverted into tributaries locally. Then the 'boys on the bench' start to arrive home with nothing to do and plenty of experience. So some intelligent entrepreneurs (Schumpeter had it sooooo right) step-in and start the ball rolling. The next thing you know, Silicon valley is dying. Incredible thing globalisation, isn't it?

Now for the other half of the equation: if the 'brain drain' isn't necessarily cerebrally damaging for the sending country, what about 'brain switchback', the mass-bagpack flight in reverse of those trained IT engineers. Is this really so damaging for the former host. Well again, not necessarily. According to a recently released report from India's National Association of Software and Service Companies outsourcing will plug the hole in the US labour market produced by the retiring of the baby boomers.

"The report outlines the cost-savings and increased flexibility that global sourcing will provide to US companies, thereby keeping them competitive in the global marketplace. Forecasts for the US indicate an annual GDP growth of 3.20%, which will lead to an increased demand for labor. However, the US will face a domestic labor shortfall of 5.6 million by 2010 due to an aging population, which can potentially cost the US economy $ 2 trillion if appropriate measures are not taken well in time............ The report also found that offshoring keeps US businesses competitive, creates new markets for US goods and services, and fills the shortfall in services labor that the US is expected to face in the next seven years." Over the next decade, the US economy will mirror the growth of the 1990s leading to an increased demand for labor. There will be a domestic labor shortfall of approx. 5.6 million workers by 2010 due to slow population growth and an aging population. If the labor shortfall is not met, the US economy will lose out on growth opportunities resulting in an estimated cumulative loss of $2 trillion by 2010. Global sourcing in the form of immigration, temporary workers and offshoring can overcome this shortfall. For every $100 of call-center work offshored by US firms, $143 is invested back into the US economy in the form of repatriated profits, increased sales of telecom equipment and cost-savings. Similarly, the amount invested back into the US economy (for every $100 of work) is $133 for IT services, and $142 for high-end knowledge services like equity research, underwriting, tax preparation and risk management."

The figures for $143 dollar return for every $100 dollar spent may seem exaggerated until you take into account the positive feedback effects of growth in India. This activity leads naturally to increased internal demand in India itself, and hence to increased markets. Of course, what proportion of this market goes to the US is another question, there are remember new competitors arriving, like, for example, Huawei. To be able to take advantage of the new Indian market US companies need to become cost competitive. This, of course they can do, by outsourcing manufacturing to China, but then, with their own ageing workforce might they not succumb to the 'Japanese illness'? Bottom Line there is no guarantee here. But that the new found growth boom in India and China potentially offer an opportunity as well as a challenge for the US, I think that this is beyond doubt. The US is reputedly a society that likes risk, and likes the challenge. Well, now's your opportunity.

Strong US Third Quarter GDP Anticipated

A fairly Upbeat piece on the US economy from Caroline Baum in Bloomberg today, even if her immediate prognosis is downbeat: she thinks - as does nearly everone else - that the third quarter GDP numbers will be high, but that they will fall back in the fourth. Nothing really controversial here. She is however fairly positive on what this will mean for mid-term growth. I think that the jury is still out, but that we need to consider all the data, and the arguments carefully. John Snow is making noises about raising interest rates. Short term I think this is just about trying to appear 'bullish'. OTOH: the numbers do give the surprising impression that the summer tax 'stimulus' had more impact on consumption than many foresaw (although, the let-out is that the whole package was a compromise one, so there is something for all parties). With so much shouting going on, it is sometimes difficult to see what the real argument is. The notorious GWB 'tax cut' is primarily a long-term phenomenon. What we have been seeing in September is a short term package to try to lift the economy up into full recovery. Looking at the consumption numbers, it's hard to argue a bigger short-term stimulus was needed, the question is: is this sustainable. Here we enter other areas like the trade deficit, private indebtedness, the level of private saving, the baby boom and long-term fiscal stability. One of the dangers of overly politicising your interpretation of things, is that you may lose-out on the subtlety of your analysis. Of course, some people see what they want to see, and that's it.

With most of the third-quarter economic data reported, economists are honing (read: raising) their forecasts for gross domestic product growth. Last Friday's report of a smaller-than-expected August trade deficit and Wednesday's upward revision to July and August retail sales were the latest data points to raise the consensus GDP forecast to something on the order of 6 percent. With two-thirds of the economy -- consumer spending -- growing at an estimated 6.5 percent rate last quarter, it's hard to manufacture a much weaker GDP number. Tax cuts, auto incentives -- probably the weather -- will be cited as the reason for the strength in third-quarter consumer spending and the reason to expect a fourth-quarter retrenchment. No disagreement here. Real consumer spending has increased an annualized 6 percent or more in only three quarters in the past decade -- none of them back-to-back. It's tough to make a case that the consumer will follow his third-quarter shopping bonanza with a strong second act. That doesn't mean the expansion is doomed. Growth dynamics may change from one quarter to the next without jeopardizing growth itself. Some of what consumers bought in the third quarter came out of inventories. With business stockpiles at an all-time low relative to sales (almost as ``unsustainable'' as the current- account deficit), companies will have to step up production so they don't lose sales.

``A key cyclical dynamic is the boost to growth that comes from the inventory cycle,'' says John Ryding, chief market economist at Bear, Stearns & Co. Not only are inventories at an all-time low relative to sales, but accumulating them is also starting to make good business sense. With industrial commodity prices soaring and the federal funds rate pegged at 1 percent, ``the holding profits on inventory have been rising sharply, which should result in a boost to inventory investment over the next two quarters,'' Ryding says. All-consumer-all-the-time isn't a necessary prerequisite to sustain economic growth. Just as consumer spending started the summer quarter off strong and ended it weak, production went in the opposite direction. Manufacturing output posted its biggest increase (0.7 percent) in September since April 2000. The 2.9 percent annualized third-quarter increase was powered by a 25.6 percent jump in high-tech output. Excluding motor vehicles and parts, the September manufacturing increase was a modest 0.2 percent. Still, the breakdown of that output confirms that businesses are taking some of the load off the consumer. The output of business equipment rose for a fifth consecutive month in September. The third-quarter rise of 5.2 percent (annualized) was the biggest in three years. Business equipment production fell for 15 consecutive months from October 2000 through December 2001, alternating an occasional monthly increase with losses for the next 15 months. From May through September, the changes were all positive, confirming the more optimistic outlook in CEO surveys and the increased demand reflected in new orders. Inventories could easily make a positive contribution to GDP growth in the current quarter and in the first half of 2004, according to Henry Willmore, chief U.S. economist at Barclays Capital Group. In addition, consumer spending should get a boost from ``a significant tax refund because of over-withholding,'' he says. (The tax cut was retroactive to January 2003. Employers adjusted the withholding schedules in July.)

Come the second half of next year, however, ``we'll need to have job growth'' to sustain the expansion, Willmore says. Job growth may already be in the process of accelerating. Weekly unemployment claims fell to an eight-month low last week even as the total number of people receiving unemployment benefits failed to show any improvement. Firing has to stop before hiring can begin. If yesterday's buoyant reading from Philadelphia-area manufacturers is any indication, the latter is in the cards. The employment index rose to a three-year high of 5.5 while the gauge of employment six months from now rose to a two-decade high of 33.3. Employment was only one part of the upbeat Philly Fed survey, with the general activity index at a seven-year high of 28. New orders and shipments showed sizeable increases as well. The regional and national purchasing managers surveys, while qualitative in nature (increase, decrease or no change?), tend to lead quantitative data, such as industrial production. The upswing in a variety of manufacturing indicators, including the rise in commodity prices, ``is normally associated with a resumption in employment growth,'' Ryding says. Strong sustained growth, which isn't relegated to consumer spending, will deliver jobs.
Source: Bloomberg
LINK

IS the US Importing Productivity?


Stephen Roach raises some time honoured measurement problems about the current US productivity 'spurt'. The statistics in question are labour productivity statistics. The growth of oursourcing may be having the consequence of distorting the labour productivity statistics upwards. By how much we do not know. The labour component of the outsourced work may not be being adequately accounted for in the total labour hours part of the denominator. If this is happening systematically this may bias the numbers upwards. Even if this is the case, it is unlikely to be the whole picture, since Robert Gordon's argument about ongoing gains from the IT-internet symbiosis (which is of course what makes possible the outsourcing in the first place ) also is part of the explanation. As I indicated last week, the relatively advanced pace of this process in the US may also provide some explanation for the US-Europe differential, but this is a gap which may well close as Europe itself begins to extract the same benefits. I buy the "US unemployment is in-part structural" argument, and am convinced that a return to strong employment growth hinges on the question of the emergence of new employment sectors, sectors which lie further up the value chain, and which can guarantee the US 'lifestyle differential'. Absent this, a question mark has to hang - Stephen Roach style - over the sustainability of the recovery.

America’s fabled productivity miracle continues to be a key underpinning for much that is special about the US economy. With productivity in the nonfarm business sector up an astonishing 6.8% sequentially (annual rate) in 2Q03 and 4.1% on a year-over-year basis, it’s hard to deny that something quite extraordinary is going on. As I see it, what’s special is an increasingly powerful global labor arbitrage between domestic and foreign labor input that has given rise to a surge in offshore outsourcing. The result is a jobless recovery built on an increasingly tenuous foundation of “imported productivity.” The real issue is whether this new strain of productivity enhancement is sustainable. I have my doubts.

as much as a third of the so-called productivity bonanza of this recovery can be attributed to a shortfall in domestic hiring. Absent that windfall, productivity growth over the first six quarters of this expansion actually would have fallen well short of its typical recovery profile. Obviously, that has not been the case in this jobless recovery. But that doesn’t mean aggregate demand is necessarily being sourced by more efficient modes of global production that require reduced labor content. Instead, courtesy of a cross-border labor arbitrage, it may simply mean that there has been a substitution of foreign labor input for domestic labor input. For America, that has the effect of biasing domestic productivity growth to the upside. That’s because conventional measures undercount the total labor input -- foreign as well as domestic -- required to generate a given product flow. Conversely, for foreign outsourcers, productivity growth may well be biased to the downside, as low-wage employment encourages more labor-intensive production schemes.

Sourcing demand through low-cost, offshore labor input has become an increasingly important tactic to enhance the operating efficiency of US businesses. The IT-enabled global labor arbitrage has become central to this process, giving rise to the imported-productivity paradigm. While this has resulted in a significant improvement in corporate earnings, the American workforce is not sharing the benefits. The resulting clash between the owners of capital and the providers of labor has resulted in profound tensions in the US body politic. Imported productivity, together with the jobless recovery and income leakage it implies, is the stuff of heightened trade frictions, mounting protectionist risks, and a populist assault on Corporate America (see my September 29 dispatch, “Rebalancing Backlash”). The US Congress has already thrown down the gauntlet in this regard, unleashing a bipartisan barrage of China bashing. Absent a political counterweight, there is no telling how treacherous the endgame becomes -- especially as America now enters its presidential election season.

Which takes us to the bottom line: In my view, the income leakages of imported productivity raise serious questions about the sustainability of this recovery from an economic point of view. At the same time, the political reaction to the resulting jobless recovery raises equally profound questions about sustainability from a political standpoint.
Source: Morgan Stanley Global Economic Forum
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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.
LINK


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
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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
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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
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The Indian IT Impact

Will India overtake the US in IT? An interesting question, and Andy Grove answers in the affirmative: by 2010!

Observing that India and China are 'key threats' to continued American dominance in important high technology sectors, Intel Chairman Andrew S Grove has said India could surpass America in software and tech-service jobs by 2010. India's booming software industry, which is increasingly doing work for US companies, could surpass America in software and tech-service jobs by 2010, Grove, one of the founding fathers of America's hi-tech industry and co-founder of Intel, told a global technology summit in Washington via satellite on Thursday.

He warned that America's software and service industries, strong drivers of US economic growth for nearly two decades, are showing signs of emulating the struggles of the US steel and semiconductor industries.

He said that the nation's software and service businesses are under siege by countries like India and China taking advantage of cheap labour costs and strong incentives for new financial investment.

While the US economy as a whole is improving, its high-tech employment is not, he added. According to industry figures, he pointed out, more than half a million technology jobs were lost from mid-2001 to mid-2003. Many of these losses were due to a contraction of the tech sector after the dot.com bubble (in the telecommunications sector) burst in 2000.Grove said the US tech industry itself is responsible for numerous jobs leaving the country, as firms take advantage of considerably cheaper labour costs in India and elsewhere.
Source: Rediff.Com
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and the inevitable backlash is growing:

Information technology experts, chief executives of specialised manufacturing concerns and skilled machinists are among the increasing number of white-collared opponents to free trade, owing largely to the shifting of back-office jobs to India and China.

In a front-page dispatch, The Wall Street Journal reports that these white-collar free-trade opponents are linking up with organised labour and old-line manufacturers, deepening the opposition in the United States to liberalised trade and making Congressional passage of any trade pact more problematic.

"At the focus of their ire are big US companies that have shifted businesses to China and India, which are becoming increasingly successful at nabbing service, information technology and high-end manufacturing work that until recently have been the preserve of US firms," the report said. Pointing out that the new combatants have already made a "surprisingly deep impact" on US policy, the report said the lead comes from an unexpected source, co-founder of Intel Andy Grove who wants government intervention to prevent Indians and Chinese taking away American jobs.

He himself is exporting jobs, because he confesses that his concern for American workers is in conflict with his duty to his shareholders who benefit from outsourcing in countries like India and China. Groups like 'Mad in the USA' (adapted from Made in USA) and TORAW are increasingly reflecting the attitude that free trade is not worth it because local jobs are lost. James Pacew, a computer consultant became and early organiser of information technology workers after he realised that many of his friends were being laid off due to foreign competition. TORAW (The Organisation for the Rights of American Workers), which has attracted members in 23 states in 9 months is one of the grassroots opposition groups that have sprung up within the last one year. It is estimated that 200,000 service jobs, a large percentage in IT, have been shipped abroad to US foreign affiliates during the past three years.
Source: Rediff.Com
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Sunday, October 12, 2003

US Trade Balance With China Deteriorates


Latest data on the US trade deficit shows the balance with China continues to deteriorate. I have a feeling we will be hearing more about this. For the rest, we shouldn't draw too many conclusions, August is definitely an 'untypical' month.

The US trade gap with China widened to a record high in August even as America's overall deficit unexpectedly shrank. Figures released yesterday by the US commerce department showed the US deficit shrank to $39.21bn (£23.4bn) compared with a revised $40.03bn in July. It was the lowest gap in six months and undershot expectations that the deficit would widen to more than $41bn. But the bilateral deficit with China widened to$11.7bn in August, breaking the $11.3bn record set only a month previously. The widening is likely to worry US manufacturers, already concerned about the effect China's currency peg is having on US competitiveness. Most estimates suggest the tightly controlled renminbi is undervalued by at least 20 per cent.

Economists forecast the gap would swell further in the months ahead."Part of the reason is the currency in that the dollar is adjusting lower elsewhere, but it can't against the renminbi," said Ian Morris, economist at HSBC in New York. The National Association of Manufacturers warned that a continuation of the trend - where imports from China are six times greater than US exports to China - would result in the bilateral annual trade gap tripling in five years to more than $300bn. The narrowing of the overall US deficit led analysts to forecast even higher third-quarter growth in the US, with some suggesting gross domestic product could grow by as much as 6 per cent.

"This could take an already good number and turn it into an amazing one," said Carl Weinberg, at High Frequency Economics. Both US exports and imports fell in August. A 2.5 per cent fall in imports was led by a 13 per cent decline in imported cars and car parts. Exports fell 2.7 per cent, the biggest monthly drop since September 2001. Analysts said the August data were likely to have been affected by poor global activity and, more locally, by the blackout that paralysed large areas of the east coast. On the services side, both imports and exports set a new record and the services surplus widened by 5.6 per cent to $5.2bn in August.
Source:Financial Times
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Thursday, October 09, 2003

Driving the Next Wave of Job Creation


Stephen Roach has a very important post today. Really here he gets hold of the central question for the future of the US economy. All the deficits in the world are supportable, if you can pay your way. But it is precisely this capacity to make the pay back which is put in question by the existence of IT-enabled outsourcing. As Roach continually reminds us, the US has a standard of living 'differential' with the rest of the planet. In part this is a 'positive feedback' consequence of the fact that the dollar is the world's reserve currency, and hence people are prepared to hold dollars. But the reason the US can 'enjoy' this possibility is, in the final analysis, a by-product of the high productivity and earning capacity of the US enterprise and the US workforce. It is this latter which is put in doubt by the new global competition. No-one doubts that the US worker is highly productive, but are they as productive as the per capita income differentials suggest? This is the question, and this is the new challenge facing the US.

A US-centric global economy is waiting with baited breath for sustained cyclical revival. Central to such a growth spark is the time-honored vigor of the great American job machine. That’s been missing up until now but there are hopes this piece of the macro puzzle is finally falling into place. Those hopes are not likely to be realized, in my view. At work is a new “global labor arbitrage” -- a by-product of IT-enabled globalization that is now acting as a powerful structural depressant on traditional sources of job creation in high-wage developed countries such as the United States. America’s jobless recovery could well be here to stay.

There is a critical dichotomy between those who accept this premise and those who don’t. At one end of the spectrum is the angst of the American body politic. Consumers and their elected political representatives remain deeply concerned about the persistent perils of a jobless recovery. As a result, the very real and worrisome risks of a protectionist backlash are mounting in the US Congress. At the other end of the spectrum are increasingly frothy financial markets that believe the worst is over and that hiring is now set to resume. The theory is simple: A policy-induced stimulus to aggregate demand will eventually require the supply of new labor. The September labor market survey has given investors great encouragement that such magic is back in the US business cycle and that the carnage on the job front has finally run its course. I couldn’t disagree more. Employment growth of 57,000 is puny when compared with hiring spurts of the typical cyclical recovery that often run in the 200,000 to 300,000 range. Moreover, with nearly 60% of the September gain in payrolls traceable to increases in temporary staffing -- the fifth month in a row of solid hiring in this industry -- it’s a real stretch, in my view, to conclude that the days of this jobless recovery are now nearing an end. Instead, I would argue that America’s increased emphasis on a relatively low-cost contingent workforce is emblematic of a new relationship between aggregate demand and domestic employment that lies at the heart of the global labor arbitrage.

A powerful confluence of three mega-trends is driving the global labor arbitrage -- the first being the maturation of offshore outsourcing platforms. China personifies the critical mass that has now been attained in new manufacturing outsourcing platforms. Built on a foundation of massive inflows of foreign direct investment -- China is now the world’s largest recipient of FDI -- and domestically funded infrastructure, the Chinese factory sector has become a critical ingredient in the global supply chain. Fully 65% of the tripling of Chinese exports over the past decade -- from US$121 billion in 1994 to US$365 billion in mid-2003 -- is traceable to the outsourcing dynamic of Chinese subsidiaries of multinational corporations and joint ventures. Of course, China is hardly alone in the outsourcing business. Similar patterns are evident elsewhere in Asia, as well as in Mexico, Canada, South America, and Eastern and Central Europe. Outsourcing is hardly a new phenomenon. But today’s offshore outsourcing platforms now offer low-cost, high-quality alternatives to goods production and employment on a scale and scope the world has never before seen.

A comparable trend is now emerging in the labor-intensive services providing sector. Long dubbed as “non-tradables,” services are typically perceived as having to be delivered in person, on site. That’s no longer the case. Rapid growth is also occurring in the offshore outsourcing of services. Such activities span the value chain -- from low-value added functions such as transactions processing and call centers to high-value added activities such as software programming, engineering, design, accounting, actuarial expertise, legal and medical advice, and a wide array of business consulting activities. Increasingly, service sector outsourcing is shifting to intellectual capital -- heretofore thought to be the sheltered mainstay of economic activity in the wealthy developed world. India personifies the critical mass that has now been attained in offshore services outsourcing. One study estimates that India’s IT-enabled services exports will increase by ten-fold between now and 2007 -- rising from US$1.5 billion in 2001-02 to US $17 billion by 2008, making it one of the fastest-growing major industries in the world (see The IT Industry in India: Strategic Review 2002, published by India’s National Association of Software and Service Companies in conjunction with McKinsey & Co.). Nor is India alone. Services outsourcing is increasingly prevalent in places like China, Ireland, and even Australia.

E-based connectivity is the second new mega-trend behind the global labor arbitrage. This is the first business cycle since the advent of the Internet. Say what you want about the Web, but I believe it has been a transforming event on the supply side of the global macro equation. For manufacturing, it puts new meaning into the real-time monitoring of sales, inventory, production, and delivery trends that drive the logistics of global supply chain management. And it provides a new transparency to the price discovery of factor inputs and upstream materials and supplies -- offering efficiency breakthroughs never before attainable. For services, the Internet enables outsourcing to penetrate an entirely new realm of economic activity. The intellectual capital of research, analysis, and consulting can now be transmitted anywhere in the world with the click of a mouse. For example, a systems problem in New York can be fixed by a software “patch” written in Bangalore. The results of processing and analysis functions can be fed into real-time information systems from anywhere in the world. The instantaneous connectivity of the Internet has become the new pipeline for the global information flows that drive the service sector supply chain. It allows the knowledge-based output of information workers to be exported instantaneously around the world. That permits well-educated, hard-working, relatively low-wage offshore knowledge workers to be seamlessly integrated into global service businesses, heretofore the exclusive domain of knowledge workers in the developed world.

Outsourcing and globalization go hand in hand. But in an e-based world with instant diffusion of new technological breakthroughs, the rules and role of outsourcing quickly get re-written. Increasingly educated, low-wage work forces in developing nations only enhance the globalization of supply chains. Nor are prices and costs the only considerations in shifting to offshore production. The textbook analysis of outsourcing also stresses a variety of additional factors such as quality, supply flexibility, on-time performance, replenishment lead time, inbound transportation costs, design collaboration capabilities, information coordination resources, supplier viability, as well as exchange rates, taxes, and duties (see S. Chopra and P. Meindl, Supply Chain Management: Strategy, Planning, and Operation, Pearson Prentice Hall, Second Edition, 2004). In my view, enabled by the Internet, the Chinas and Indias of the world can now compete favorably on all of those terms. The result is an accelerated pace of globalization on the supply side of the macro equation -- the essence of the global labor arbitrage.

The asymmetrical impacts of the global labor arbitrage lie at the heart of the great political debate now swirling in the United States and elsewhere in the developed world. The resulting tensions underscore the distinct possibility that jobless recoveries may remain the norm in high-cost developed economies for some time to come. That’s not something to take lightly. The threat to traditional sources of job creation strikes right at the heart of economic security. That has given rise to a political backlash in the US Congress that could prove quite destabilizing for the global economy.

In the end, the choices are stark -- to look inward and protect the “old way” or to look outward and encourage the “new way.” I would dare say this dilemma is quite comparable to what farmers faced in the late 1800s as the Industrial Revolution blossomed. The same would have probably been true of sweatshop workers when confronted with the assembly lines of mass production in the early 1900s. The “rusting” of Smokestack America in the early 1980s is a more recent example. At each of these earlier critical junctures, there were no clear answers at what would drive the next wave of job creation. America’s model -- one that fosters flexibility, entrepreneurialism, innovation, technological change, and investment in human capital -- always found that answer. The global labor arbitrage forces the US and the rest of the developed world to rise to the occasion once again.
Source: Morgan Stanley Global Economic Forum
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More US Labour Market Data to Chew On


Uncertainty over the state of the US labour market continues. Confounding those who felt that the household survey might be flagging a rather better than expected tendency, this latest Labour Department warning seems, on the face of it, to confirm the establishment data. We are talking about last year's data here, so it is difficult to draw andyhard and fast conclusions about the immediate future.

A warning by the U.S. Labor Department that it expects to revise down past employment data pours cold water on the view of some economists who believed the jobs market had been improving for some time, analysts said on Friday. Statisticians at the Labor Department said they expect to revise down U.S. payroll employment by about 145,000 for the March 2003 reference month -- effectively showing even greater weakness in the sluggish labor market than previously thought.


The downward adjustment surprised Wall Street, which had been rife with speculation this week that Labor would adjust the figures up, bringing payrolls more in line with another survey which has shown a recent improvement in the job market. "The expectation was that this revision would be positive, that we would be looking at a number in excess of 300,000," said Anthony Chan, chief economist at Banc One Investment Advisors. An upward revision would have brought the so-called establishment survey, a poll of businesses that has shown a loss of 1.0 million jobs since the recession ended in November 2001, more in line with a smaller household survey of employment which has shown a 1.4 million job gain.


Both surveys are part of the department's closely watched monthly employment report. Markets tend to focus on the payrolls count from the establishment survey, while the unemployment rate is derived from the household survey. The discrepancy between the two surveys has been a hot topic of late, even though veteran economists believe much of the discrepancy can be explained away by differences between the methods used in the two surveys and monthly volatility. Chan, who believes the larger establishment survey provides a more accurate picture of the job market, said the downward revision douses the argument that Labor was underestimating the job recovery with its establishment survey. "That gives more credence to the view that the weakness in the establishment non-farm payrolls is real," Chan said.


James Glassman, senior U.S. economist at J.P. Morgan Chase Securities in New York, said the revision is equivalent to about 12,000 fewer jobs a month than originally thought in the March 2002 to March 2003 period. "Whichever survey you look at, employment has been pretty flat in the last two years, and there is no mystery why -- the economy has not grown (fast enough)," said Glassman. Like many economists, he argues the discrepancies between the two surveys can be largely explained by the different methods used. Unlike the establishment survey, the household survey includes farm workers, the self-employed, unpaid family workers, private household workers and people on unpaid leave among the employed, possibly boosting its count.
LINK

Friday, October 03, 2003

US Economy: The Slippery Road to Recovery


My Moneyfiles Column

The US economic data we are seeing this week are a very mixed bag indeed. New claims for unemployment continue to hover round the 400,000 mark, new factory orders declined by 0.8% in August , consumer confidence falls to its lowest level since the start of the Iraq war, and yet apparently we are to believe we are on the verge of an economic recovery.

Somewhere it seems there’s a problem. If this were a normal business cycle, then we should now have that long anticipated upswing waiting, just around the corner, and this, of course, is what the markets are anticipating. But although everything looks set to run it might just be worth asking why things might not be so simple this time round. Everything here is a matter of timing and perspective. Look first, for example, at industrial production. Maybe output has come back to life in the last three months, but that doesn't stop capacity utilization being still at 20 year lows. Then again, and as everyone must surely know only too well by now, there's the little problem of employment. Given the strong productivity performance and the increasing population of working age many estimates suggest that the US economy may need to grow at around 4% simply to start generating net new employment.

Since the official end of the recession in November 2001 the U.S. economy has grown at an annual rate of about 2.6 percent. That may not sound so bad, until you think about the labour market problem (and until you remember that Federal spending has gone from a 2% of GDP surplus to a 4% of GDP deficit in a very short space of time, which is one hell of a stimulus for just 2-3% growth). In fact non-farm payrolls have fallen by, on average, 50,000 per month since the "recovery" began, accounting for 1 million of the 2.7 million jobs lost since March 2001. This problem of ongoing job-loss is compounded by the fact that after heavy immigration over the last 15 years the working-age population in the US continues to grow at a fair clip. (I should strees that mid-term this is an advantage for the US as there will be more people working to pay for the baby boom pensions, but in the short term it represents a problem. As I said before, this is all about timing.) So, just to keep up with this demographic drift the U.S. needs to add about 110,000 jobs per month. Brad Delong recently estimated that the 400,000 new signings a month figure which is seen as critical is probably too high in this context. Any number over 350,000 new signings a month and the US job market continues to weaken.

And not only are the jobs being lost in manufacturing, IT and the internet enabled services sector are also taking a big hit. In fact since the peak in March 2001, employment in the information sector – which lost 16,000 workers in August alone - has declined by 459,000, or about 12 percent. At the same time employment in computer systems design, which lost 8,000 workers during August, has declined by 232,000. Meantime two areas are gaining employment. In August health care and social assistance in gained 25,000 jobs , which was about in line with its average monthly employment increase over the prior 12 months. Construction employment also went up: it has been gaining workers since February at an average of 20,000 jobs per month. Obviously the rise in construction is associated with increased housing demand which is in part produced by US demographics and in part by low interest rates, whilst the growth in health care is a product of the fact that America is an aging society. The important point is that neither of these are the important 'next big thing' area which might enable the US economy to balance it's internal employment and external commerve shortfalls.

Then all of this is compounded by the fact that the economy, when it is working, is highly productive (parodying the late Rudi Dornbusch: the US manufacturing sector isn't working too regularly, but when it is, boy is it productive). Productivity continues to rise at a rate of 5% per annum or more, and this only adds to the pressure. Really, more than any other OECD economy, the US is 'condemned to grow', and this is where we hit the snags.

As I have been trying to argue for several months now, all that outsourcing is fine - and indeed necessary for US companies to try and maintain competitivity given the height of domestic dollar-denominated labour costs - but you need value generating activities to pay for it, you need to be able to export, and to export (as the Japanese have been finding out) you need growth somewhere else. You also need a currency which is competitively valued, but it is here that we discover just how finely balanced the whole global economy actually is. The recent G7 meeting was intended to give a signal (a watershed I think was Snow’s actual expression) that the strong dollar policy is over. But what happens? The dollar begins to drop, US manufacturing begins to see export opportunities, the economy in general starts to rev up, people see growth on the horizon, equity prices start to rise, and back comes the money into the US looking for some action, with the unwelcome consequence that the dollar starts to climb, and the export opportunities start to disappear, and............

Precisely how finely strung everything is can be seen from the treasury and mortgage interconnect. The fed genuflects one way, and down comes the treasury market, in its train sending up long rates and choking the recovery, then the fed genuflects the other, and everyone gets busy buying treasuries waiting for the unconventional tools.


So now let’s look at that other main area of concern for the US economy, deflation. In order to think about deflation you need to keep in mind what we like to call the ‘output gap’. The output gap concept is a complex restatement of what is in fact a very simple idea – that there is a price impact from continuing disparities between aggregate supply and aggregate demand. Economists normally attempt to get at the notion of aggregate supply by assessing the growth of “potential” output (GDP), which could be defined broadly as the sum of labor force growth and trend productivity. In essence, the output gap is calculated as the difference between an economy’s growth potential and its actual level of aggregate activity. If the output gap were at “zero” supply and demand would (theoretically) be in balance with the economy at ‘full employment’ and the inflation rate would be stable. When demand exceeds potential - a positive output gap - inflation can be expected to accelerate. Conversely, shortfalls from potential - a negative output gap - are associated with falling inflation; they reflect excess capacity and this gives rise to a phenomenon we have recently referred to as “disinflation.” As such, recessions are generally depicted as disinflationary macro events, while recoveries are thought to be inflationary. Fed Governor Ben Bernanke in a speech back in August reckoned that given current assumptions about GDP growth and the consequent output gap, core PCE inflation might fall from around 1.2 percent currently to 0.7 percent or so by the end of 2004. That is to say, the deflation clock is ticking.

This in part explains the current US treasury concerns about the value of the dollar. One way to try to reduce deflationary pressure inside the US would be to lower the value of the dollar. But this implies that some other currency or currencies have to rise. Now whatever the ins-and-outs of the current dispute about the value of the Chinese yuan, no-one can surely be suggesting that the Chinese currency is in any position to take the entire strain for the global economy. This responsibility normally should fall on the European or the Japanese. But this is where push definitely comes to shove.

For this is where we enter the realm of what Stephen Roach likes to call the global imbalances. Basically the global economy has become a kind of monoplane flying on a single engine, one that has made in the USA clearly stamped all over it. So when the US starts to run into trouble, there is no ready replacement to hand. The reasons why this situation has arisen are, as they say, many and debateable. Among the most important I would put the changing demography of the OECD world, and the phenomenon known as ‘population aging’. If I am right in this, then it would be unrealistic to expect any miraculous transformation of the global panorama. We are going to have to get used to living in the world we have, not in the one we would like to have. This means there simply is no short term easy solution to the problem. This fact is popular neither with politicians nor with their electorates. But lack of popularity normally isn't a problem for facts, whilst facts all too often are not a special problem for politicians.

At the end of the day the US will need to try to ‘purge its excesses’. It will need to try to accommodate itself to the changing economic reality of the times. But it will need to try and do this without recourse to any easy ‘pillar’ of support. This inevitably means we are in for a bumpy ride. Bringing the dollar down to its competitive level isn't going to be easy, in particular, and this will have to be a topic for another day, due to its role as the reserve currency. Avoiding the pitfalls of protectionism and stimulating the growth of new high-value areas of activity will also need resolve and creativity. Perhaps the final irony here is that in one sense George Bush has got what he always wanted: in the search for solutions the United States can depend only on itself.

Irving Fisher on Debt Deflation


Deflation and the value of the dollar are two of the topics on the US economy agenda, so I am grateful to Lloyd at Macro Mouse for sending me two links. One an interview with Richard Duncan on the dollar, the other a student essay which really does present an extremely well-argued presentation of Irving Fisher's theory of Debt Deflation.

Irving Fisher developed The Debt-Deflation Theory in 1933 in order to explain the economic mechanism that can lead to a Great Depression such as the one experienced by the US economy from 1929 to 1933. The main point of the theory is that over indebtedness acts in conjunction with deflation to produce a contracting economy causing bankruptcies, rising unemployment and falling profits. Over the last 20 years, one of the US economic policy makers’ goals has been to lower the rate of inflation. However a recent downward trend in the already low inflation, together with an impressive growth in debt, has brought to light Fisher’s theory and triggered fears of a debt-deflation induced depression.

The Debt-Deflation Theory of Great Depressions is an explanation by Fisher of the apparent boom bust pattern prevailing in the economy. He divides the theory into four sections. In the first section, “Cycle Theory in general”, Fisher defines different types of economic cycles and their possible causes. In the second section, “The Roles of Debt and Deflation”, he provides a theory of how excess debt and the consequent deflation play a major role in the boom bust cycle. The third section provides an overview of the Great Depression in light of his new theory and introduces the concept of inflation as a cure to depression and deflation. The last section explores the possible “Debt Starters” that initially triggers a boom economy.

In the first section on cycle theory, Fisher dismisses the idea of the business cycle being a single, simple, self-generating cycle as a myth. In its place he introduces the notion that there are many interacting cycles within the economy also interacting with non-cyclical forces such as growth and haphazard tendencies. He divides cyclical tendencies into two types, forced cycles and free cycles. Forced cycles are imposed onto the economy by outside forces, such as the yearly season cycle, day-night cycle, and monthly and weekly cycles imposed by religion and custom. The free cycle is self-generating and is commonly thought of when referring to the business cycle.
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This Seems Nearer the Mark


At last a report on the US economy which seems nearer to my own impression. Of course, just because I agree with it doesn't make it right.

The U.S. economy faces at least another year of tepid growth despite a growing number of predictions that a stronger recovery is around the corner, according to a forecast released on Wednesday. The widely watched survey issued by the Anderson School at the University of California, Los Angeles said neither consumers nor businesses have the buying or investment power to drive the solid growth seen in typical economic recoveries. While a recent spate of better-than-expected economic data has pushed growth forecasts to 4 percent or more for the second half of the year, the Anderson Forecast pegs growth at a modest 2.5 percent on average through the middle of 2004. That forecast is far less optimistic than the emerging consensus. A panel of 35 economists at the National Association for Business Economics earlier this month raised its forecast for U.S. growth this year, citing tax cuts and very low interest rates. "There is nothing to make you think we will have this spurt of growth," said the report's author, UCLA economist Ed Leamer. "I just don't see it." Leamer said even though business investment is creeping back, consumers -- who have taken advantage of low interest rates to keep spending -- do not have much room left now to help spark stronger growth.


Increased debt and higher debt servicing because of rising long-term interest rates are also likely to further drag down consumer spending, the report said. "We need an improvement of the consumer balance sheets and that takes time," Leamer said. "We are sort of stuck like we were in the early '90s with no significant driver pulling the economy forward." Defense spending, which soared due to the war in Iraq (news - web sites) and helped boost growth to 3.1 percent in the second quarter, will not add much to gross domestic product in the second half of the year, he said. And tight budgets will keep a lid on spending at the state and local level and be a drag on the economy, Leamer said. "State and local is going to contribute negatively where normally it contributes about 0.4 percent to GDP growth," Leamer said.


Leamer said the labor market will remain poor with the unemployment rate rising to 6.4 percent in 2004 from 6.1 percent in 2003. The jobless level was expected to remain above 6 percent through 2005. "This labor market is much worse than it has ever been in terms of post-recession outcome," Leamer said. "The job market is extremely unhealthy." Leamer said the economy will not get much more of a boost from a red-hot housing market because elevated mortgage rates will slow home buying by the end of this year. The UCLA forecast pegged housing starts to rise slightly to 1.78 million in the third quarter before dropping to 1.56 million in the fourth quarter and 1.5 million in the first quarter of 2004. The survey also forecast core inflation -- measured as the consumer price index (news - web sites) minus food and fuel prices -- remaining tame at 2.1 percent in the third quarter followed by 1.5 percent at the end of the year.
Source: Yahoo News
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Currency: Going up anyone........Not Just Yet, After You Please


Now the Economist is joining the curency debate. The G7 message was meant for China, but got lost in the post, and has ended up being delivered to Japan:

Why does Japan want a cheap yen? A history of mercantilism may be part of it. A cheap yen is one way to capture lucrative export markets. But Japan also hopes that selling yen and buying dollars will release it from its “liquidity trap”. Japan cannot stimulate its economy by cutting interest rates, because interest rates are already zero. It therefore has to find an alternative way to reflate the economy. Debasing the currency is one. Every time the Bank of Japan buys dollars, it creates yen to pay for them. Eventually, it is hoped, the supply of yen will outstrip demand. Depreciation is one result—lowering the value of the yen in terms of dollars; inflation is another—lowering the value of the yen in terms of Japanese goods. The last time America was caught in a liquidity trap it did exactly the same thing. President Franklin Roosevelt devalued the dollar by almost 60% in 1934 to help America recover from the Depression.

The yen could never fall quite that far. Nonetheless, the Bank of Japan’s efforts seem to have gained some traction in recent months. Output grew by 3.9% in the second quarter, outstripping even the United States. In the past two months, J.P. Morgan has raised its growth forecast for 2004 from around 1% to as high as 2.6%. Other banks are not far behind. Given this turnaround in Japan’s prospects, relative to those of the United States, it is perhaps no surprise that the yen is strengthening against the dollar.

But Japan’s recovery might be quite fragile. Much of the economy’s dramatic second-quarter growth was driven by strong capital spending, which increased by over 20%. Some of that strength is probably a statistical artifact: the volume of investment looks big because the price of capital goods has fallen so far. The investment boom is, in any case, unlikely to continue if share prices carry on down. The jittery reaction of Nikkei investors to the G7 communiqué suggests that a strong yen was not part of their scenario for a strong Japan.

America, it seems, wants a cheaper dollar; the Europeans don’t want a stronger euro. But no one wants to jeopardise Japan’s nascent recovery. Over time, stronger demand in Japan will translate into a stronger yen, not to mention a stronger world economy. But in the meantime, the Bank of Japan needs to continue its aggressive monetary easing, and the exchange rate is one important channel for this. In his past statements, Mr Snow seemed to understand Japan’s predicament: he gave it a sympathetic hearing, reserving his most trenchant comments for China. Perhaps, then, the G7 communiqué was bound for Beijing, but misdirected to Tokyo. Unfortunately, the markets seem to think the message was intended for Japan, and what the markets think matters, even when they are wrong.

The major foreign-exchange markets are deep and liquid. Central banks wade into them from time to time, but they rarely succeed in turning the tide. In fact, the scholarly consensus is that while central banks can reinforce market trends, they cannot reverse them. Until last week, the Bank of Japan succeeded in keeping the yen above its “line in the sand” of 115 to the dollar. That line is now gone. The Bank hopes the yen will trade at 110 or more to the dollar in the future. That line might soon be swept away as well.
Source: The Economist
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Steeling Jobs


This piece from the Washington post puts an interesting light on the 'new protectionism' US style. The tarriffs help, logically, the steel industry, but the general impact on the economy is negative. In a politically driven economy it all depends on where the votes are I suppose. But please don't let them give me all that cant about believing in free markets, this preaching, it seems, is only for the ears of others.

The steep tariffs that President Bush imposed on imported steel 18 months ago have helped the beleaguered U.S. steel industry regain its footing, but likely have had a modestly negative impact on the overall economy and the woeful U.S. job market, the U.S. International Trade Commission has concluded.

The eagerly anticipated progress report -- completed Friday night, halfway through the tariffs' three-year duration -- will give both steel producers and steel-consuming industries such as automakers and tool companies ammunition for the fierce lobbying battle already underway in Washington over the tariffs' future.

Although the president is not required to make any changes to the tariffs, the World Trade Organization is expected in November to allow the European Union to impose billions of dollars in retaliatory import quotas on U.S. goods. The Bush administration's economic team, which was divided on the tariffs last year, is now united in its call to lift them by then. And some Bush political advisers fear the tariffs may have backfired politically, by costing the president more support in steel-using states such as Michigan and Tennessee than the support he gained in steel-making states such as Pennsylvania and West Virginia.

The reports, totaling three volumes and 890 pages, concluded that the tariffs had cost the U.S. economy about $30.4 million a year, or 0.0003 percent of total output. Steel-using industries did face steeply higher prices at first, but those have declined. Steel-consuming industries have seen their earnings trimmed by $601 million, or 0.01 percent, the reports conclude, while steel producers, mining companies and other beneficiaries saw earnings rise by $67.4 million, or 0.04 percent.
Source: Washington Post
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Will The Dollar Continue its Decline?

After all the fire and fury in the currency markets yesterday, things are much calmer today. I have the impression that everyone is convinced that the dollar needs to come down substantially, but that nobody believes it is actually going to happen. Chinese reticence, Japanese dithering, and euroland alarm are amongst the various reasons one could think of. For the dollar really to come down, everyone has to believe that it is going to happen, and accept it. I'm not sure we're there yet, and when we do get there I'm not sure the consequences will be as benign as many imagine.

Many investors remain wary that the Bank of Japan could restart yen-weakening currency market interventions that would boost the dollar. "We think the BoJ will definitely be back. If they need to intervene, they need to do it this week," said Robert Sinche, global head of currency strategy at Citibank in New York. "People are very hesitant to be long dollars ever since the G7. After such a break (below) key levels on dollar/yen, the only way we could get back to dollar-buying mode would be some BoJ activity somewhere near the 110 yen area," said David Leaver, senior trader with Gain Capital in Warren, New Jersey. Markets seem to view the U.S. endorsement of the G7 statement as an apparent abandonment of the U.S. strong dollar policy, many analysts said. Japan is concerned that a rapid rise in the yen could jeopardize the country's tentative export-led recovery and has spent roughly nine trillion yen ($70 billion) in yen-weakening currency intervention already this year. Comments from Japan's top financial diplomat, Zembei Mizoguchi, that the yen's rise was too rapid did inject some wariness into the market.Mizoguchi, attending IMF meetings in Dubai, said the yen's recent surge had been partly due to speculative buying and Japan would act as needed to stem disruptive exchange rate moves. Some analysts characterized Mizoguchi's talk as "verbal intervention" that has had only limited impact. "The verbal intervention is part of what brought (the dollar) back up above 111 (yen)," said Greg Anderson, senior foreign exchange strategist at ABN Amro in Chicago. "Until the Japanese actually intervene, dollar/yen is going to continue to see the downside."
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Meanwhile over at Morgan Stanley, Andy Xie doesn't seem too convinced:

The G-7 communiqué over the weekend was not another Plaza Accord. In my view, it was more the outcome of a group of the world’s wealthiest nations trying to beat down a large, fast-growing but still poor China without China being present. A new world order is only likely to work with China’s consent.

The United States, Japan and some European countries are focusing on exchange rates to explain their own economic problems. This is confusing the symptom with the cause. The global imbalance is due to differences in savings rates. Savings imbalance and competitiveness are two distinct issues. The situation today is different from that in the 1980s.

Intervention in currency markets is a necessary part of the adjustment process. Mature economies in Asia still have high savings rates but cannot invest as much as previously, as they have lost competitiveness to China. Without intervention in the currency markets, the savings surpluses will cause excessively strong currencies and serious deflation.

Currency intervention allows these economies to adjust their savings rates in an environment without massive deflation. This is ultimately good for global economic stability. As these economies decrease their investment, their savings rates decline with lower capital income............Several mature economies in Asia cannot invest as much as previously as they have lost competitiveness to China. However, their savings rates, determined by demographics and existing capital structures, cannot suddenly decline to reflect the new reality. These economies, therefore, experience capital surpluses...........Waning investment and slow economic growth are lowering savings rates in mature Asian economies. The gross national savings rate in Japan has decreased by 3.9 percentage points, in Korea by 5.6 and in Taiwan by 2.7 in the past three years from 1990s levels. Their savings surpluses are still large because their investment-to-GDP ratios continue to decline. Before the end of the decade, Asia’s savings surpluses should have largely disappeared, in my view. By that time, global rebalancing could have been achieved through slow growth and some deflation among Asia’s mature economies.
Source: Morgan Stanley Global Economic Forum
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I can't believe it. Someone actually mentioned demographics!