from Ian Bremmer:
The secret to China’s boom: state capitalism
By Ian Bremmer The views expressed are his own.
One of the biggest changes we’ve seen in the world since the 2008 financial crisis can be summed up in one sentence: Security is no longer the primary driver of geopolitical developments; economics is. Think about this in terms of the United States and its shifting place as the superpower of the world. Since World War II, the U.S.’s highly developed Department of Defense has ensured the security of the country and indeed, much of the free world. The private sector was, well, the private sector. In a free market economy, companies manage their own affairs, perhaps with government regulation, but not with government direction. More than sixty years on, perhaps that’s why our military is the most technologically advanced in the world while our domestic economy fails to create enough jobs and opportunities for the U.S. population.
Contrast the U.S. and its free market economy with China’s system. For years now, that country has experienced double digit growth. Many observers would say that China’s embrace of capitalism since 1978, and especially since joining the World Trade Organization in 2001, has been responsible for its boom. They would be mostly wrong. In fact, a new study prepared for the U.S. government says it’s not capitalism that’s powering China, but state capitalism -- China’s massive, centrally directed industrial policy, where the government positions huge amounts of capital and labor in economic sectors it intends to nurture. The study, prepared by consultants Capital Trade for the U.S.-China Economic and Security Review Commission, reads in part:
In a world in which central planning has been so utterly discredited, it would be natural to conclude that the Chinese government and, by extension, the Chinese Communist Party have been abandoning the institutions associated with the communist economic system, such as reliance on state‐owned enterprises (SOEs), as fast as possible. Such conclusion would be wrong.
In a G-zero world where no country can claim the mantle of international leadership, China has pulled an accomplished head fake. While the media focuses on China’s special economic zones, like Hong Kong and Macau, and the rise of the banker class and Chinese tech industry, state directed spending is the real engine of growth. Capital invested in infrastructure like factories, heavy industry, roadways, and high speed trains continues to power annual double digit growth in GDP. Reliable data from 2004 shows that 76% of Chinese non-financial firms are classified as State Owned Enterprises (firms with government ownership of greater than 10%).
In short, while the U.S. has spent decades and vast treasure building up its defense system (and yes, by extension, the sectors of the economy that service it), China has spent its time and money building up control over the broad direction of its entire economy. In today’s world, where the first sentence of this essay rings true, which country currently looks better positioned to, pardon the pun, capitalize, in the years ahead?
During last week’s euro zone bailout talks, French President Nicolas Sarkozy went hat in hand to China, painting a stark picture of China’s still-growing economic importance internationally. Never mind that the phone call didn’t result in any particular action; the mere act raised Chinese President Hu’s profile going into the G-20 talks in France this week. Not only that, the entreaty by Sarkozy made plain that China has nothing to hide about the economic path it’s chosen for itself. After decades of hectoring from the West, the tables are perhaps about to turn. After all, what economic model should China emulate? Europe’s? The United States’? “With all due respect,” you can almost hear President Hu saying, “we like the way our system is working, thanks.”
The sad flaw of measuring hurricanes by GDP
Hurricane Irene may not have lived up to all the media hype, but it still did billions of dollars in damage. Some analysts say cleaning up the mess will boost Gross Domestic Product for the second half of 2011. These estimates are surely correct – and remind us why GDP is such a perverse way to measure economic progress.
No number is more closely watched than GDP. Americans walk with more bounce in their step when GDP is rising at a nice clip and turn gloomy when this indicator sinks. While GDP first came into use after World War II as a technical way to measure all economic activity, it has somehow morphed into the nation’s thermometer – the leading gauge of how well we are doing.
Such is the dominance of GDP that we tend to forget just how crude this indicator really is – so crude that it can’t even distinguish between growth caused by a terrible event, like a hurricane, and growth tied to higher productivity or technological breakthroughs.
Hurricane Irene will mean a lot work for contractors and landscapers – just like it meant big sales at Home Depot before it hit – but none of this activity will produce anything new. Instead, billions and billions will be spent just to get homes, roads, and power lines back to how they were before the storm. It’s absurd to dub such running in place as “growth.”
Of course, we didn’t need Hurricane Irene to remind us that GDP measures the wrong things. That became apparent a few years ago when the real estate bubble imploded and the entire country got hit with a financial tsunami. While the early 2000s seemed to be good times judged by GDP, it turned out that much of the consumer spending fueling this growth came from homeowners tapping the equity of over-valued properties. The dark clouds gathering in the go-go years weren’t apparent if you just tracked GDP, which can’t distinguish between growth fueled by borrowing versus real income gains – kind of like a nutrition gauge that can’t tell the difference between cotton candy and protein.
Robert F. Kennedy famously criticized GDP for measuring everything “except that which makes life worthwhile.” This goes too far, since much of the economic activity that GDP counts has positive effects on people’s lives. But Kennedy was among the first to note how GDP doesn’t measure myriad aspects of society’s well-being – like health or education – even as it rises every time a redwood tree is chopped down or another prison is built.
The obsession with GDP reflects America’s worst side – a society that embraces such an extreme form of capitalism that making a buck is more important than how it gets made. Worse, the GDP’s dominance reinforces this trait. As the Nobel-winning economist Joseph Stiglitz has noted “What we measure affects what we do.”
Excellent!
It’s about time someone pointed out that GDP is just a rule-of-thumb measure. It also leads directly to the conclusion that classifying a recession as two, and only two, quarters of less than zero percentage growth in the percentage of GDP, is totally artificial and relatively meaningless.
Every economist who pereforms modelling of our economy knows that the breakeven point in the economy between real growth and lack of growth – however it is measured – is in the range of three to five percent, not zero. Including that fact, whether the number is actually 2.75% or 3.6454% would give us a better indicator that we have been in a recession for over four years – i.e. a depression. Seems Paul Krugman already wrote that last year.
from MacroScope:
Europe’s over-achievers and their fall from grace
Ireland's fall from grace has been rapid and far worse than that of its counterparts, even Greece. But life in the euro zone has still been one of profound growth, as it has for most of the other peripheral economies.
Take a look first at the progress of PIGS (Portugal, Ireland, Greece and Spain) GDP since 2007 when the global financial crisis took hold. In straight comparisons (ie, rebased to the same point) Ireland is far and away the biggest loser. Portugal is basically where it was.
But now take the rebasing back to roughly the time that the euro zone came together. First, it shows that Ireland's fall is from a very high place. The decade has still been one of profound improvement in cumulative GDP even with the last few years' misery. But it is front loaded.
Perhaps most interesting, however, is what the second graph (courtesy Reuters' Scott Barber) says about the PIGS and the euro experiment. Despite major financial and market crises, Greece, Spain and Ireland have all seen their economies accumulate at a higher rate than the euro zone average. Only Portugal has been below average -- a perennial slow grower.
Could any of this outperformance have been attained outside the euro zone? Probably not. But the question now is whether the current troubles are going to wipe out everything that has been achieved.
U.S., China and eating soup with a fork
-The opinions expressed are the author’s own-
Are economists the world over using an outdated tool to measure economic progress?
The question, long debated, is worth pondering again at a time when two economic giants, the United States and China, are sparring over trade, currency exchange rates and their roles in the global economy.
In the run-up to U.S. mid-term elections on November 2, politicians from both parties, for different reasons, blamed trade with China for American job losses. China responded with irritation and hit back by accusing the U.S. of “out of control” printing of dollars tantamount to an attack on China with imported inflation.
Measured by Gross Domestic Product (GDP), the United States tops the list of countries. China overtook Japan in August to become number two. Depending on whose forecasts you believe, China will overtake the United States in 2020, 2035 or 2040 and therefore turn the 21st century into the long-predicted Chinese Century. It’s becoming conventional wisdom that the United States will play a reduced role on the world stage.
Crystal ball gazers might do well to remember that long-range forecasts have often been wrong in the past. At the turn of the 20th century, eminent strategists predicted that Argentina would be a world power within 20 years. In the late 1980s, Japan was seen as the next economic leader, on the strength of supposedly unstoppable progress. Forecasters extrapolated from past GDP growth rates.
They are widely used to compare standards of living in one country with those in another but critics say GDP is too narrow to be a realistic indicator. Joseph Stiglitz, the Nobel-prize winning American economist, has complained that world leaders make a fetish out of it and suffer from GDP-obsession.
Illegal immigration is not a problem for China [and there is much from Afghanistan in the west , Myanmar in the south ,Mongolia in the north ,to North Korea in the east [via the US and EU] Why ? Because it can absorb them into it’s growing economy .
Illegal immigration is a problem for the US because the economy is growing very slowly cannot absorb the influx of people following their dreams [or should that be illusions] .
Cheap Labour is a good thing unless they are cheapening my labour is the cry across the the “developed” [read privileged ] world !
Get real we all must learn to share and coexist !
Quickly Please !
from MacroScope:
The IMF to turn on the rich
The latest International Monetary Fund meeting ended with emerging market powers getting a pledge from the organisation for stronger and "more even-handed" scrutiny of what is going on in large advanced economies.
As Reuters correspondents Lesley Wroughton and Emily Kaiser report here, the decision is a response to long-running frustrations among emerging economies, which reckon the Fund has not been tough enough on its biggest shareholders, led by the United States.
The move reflects a number of things. First, it shows the growing clout of emerging economies within international institutions. The G-20, for example, is arguably now more influential than the old , richer G7. Secondly, it graphically underlines the current world-turned-upside-down state of the global economy, in which profligate rich economies are struggling to keep above water while supposedly poorer and less-developed ones enjoy solid growth and relatively stable finances. This graph makes the point:
One question that has been raised, meanwhile, is whether the IMF is capable of taking rich countries -- its primary paymasters -- to task. A comment from a craigbhill on the Reuters story encapsulates the issue:
This is like the bankers to the Mafia being politely asked to "give scrutiny" to the Mafia.
A bit harsh. But valid?
Taxing spoils of the financial sector
If you want less of something, tax it.
That truism is often used as an argument against a tax on profits, or health benefits, or employment, but in the case of the rents extracted from the economy by the financial services industry here’s hoping it proves more of a promise than a threat.
The International Monetary Fund has put forward two new taxes on banks to pay the costs of future rescues, one of which is a fairly conventional “Financial Stability Contribution,” with an initial flat levy on all banks, to be refined later into something with more precise institutional and systemic risk adjustments.
More interestingly, the IMF is also proposing a “Financial Activities Tax,” (FAT) a tax on bank pay and profits which, if correctly designed, could serve as a tax on rents — the unwarranted spoils — of the financial sector.
In economics the concept of “rents”, essentially the extra money a given individual or industry is able to extract from its clients above what it would if there were perfect competition, is central. If there is only one cable television provider in your neighborhood you will know what I am talking about.
In financial services, the evidence is that rents are huge, in part because of impaired competition and in part because increasingly complex financial services allow banks to sell clients products that they don’t understand, may not need and will almost always be over-charged for. Bank employees in turn charge hefty rents to their bosses, boards and shareholders, each of whom, as you journey up the organizational chart, understand less about the complex services, and like clients, are then less able to defend their own interests.
Some of the best evidence forming the intellectual underpinning of this is provided by economists Thomas Philippon of New York University and Ariell Reshef of the University of Virginia, whose work found that about 30 to 50 percent of the extra pay bankers get as compared to similar professionals is attributable to rents. <http://people.virginia.edu/~ar7kf/paper s/pr_rev15_submitted.pdf>
As a long in the tooth former consultant to Central Banks & Commercial Banks, here is my “old fashioned” view.
Banks are the primary engine driving the world’s economy.
Tax the Banks and they will pass it on their customers.
More expensive money means Less economic dynamism & incidentally more unproductive public service costs to regulate.
Obama must have fools for advisers.
But what do I know, it is 20 years since I was advising governments of the world.
Icelandic, Greek sagas show sovereign risks
– James Saft is a Reuters columnist. The opinions expressed are his own. –
Developments in cash-strapped Iceland and Greece nicely illustrate two themes for 2010: sovereign risk and financial balkanization.
Iceland is balking at crushing terms demanded as part of its making whole overseas depositors in its ruined banking system, while Greece is involved in a game of chicken with the euro zone authorities over how, when and with whose assistance it heals its fiscal difficulties.
Like so many of us paying bills in January we ran up last year, they face a depressing prospect and no easy way out.
First, Iceland, whose president vetoed an agreement with Britain and the Netherlands to pay about $5 billion towards the costs of reimbursing depositors in its failed Icesave bank, saying he would put the bill to a referendum. While British and Dutch officials have mustered up a good show of outrage, President Grimsson’s move should not surprise; he was petitioned by a fifth of the population, each of whom can look forward to helping to pay back their individual $17,000 share of the costs.
Iceland is not refusing to repay the debt, which it acknowledges, but wants repayments tied to gross domestic product through 2024 with the possibility of a renegotiation if the full amount is not repaid by then. It is a brave move, and maybe a foolhardy one, given that the rejection puts in doubt an aid package from the International Monetary Fund and Scandinavia, as well as potentially hurting its bid to join the European Union. Iceland’s debt has already been downgraded to junk status by Fitch Ratings, with similar moves likely.
No one looks good in this saga, certainly not Iceland, which was effectively a hedge fund with a small fishing fleet attached and, you have to say, vastly better controls on overfishing then overlending. The Netherlands and Britain also look silly and incompetent; neither took effective steps to protect their citizens from the menace of Vikings offering higher rates of interest. Last but not least is the credulousness and cupidity of the British and Dutch depositors, including some local governments which not only chased the highest rates of interest but sometimes concentrated the vast majority of their funds with one bank.
So much of this is old news in relation to Greece. The trouble started following the Athens Olympics – the government & the private sector misjudged the lack of demand for products & services when the Olympics ended. Greece, therefore, has been in its current position for years. Its national debt is clearly very high, however it is likely to be in recession for a shorter period than the UK. One of the reasons for this is that income/debt ratio per head is very low ie: each individual or company in Greece has less debt & more income than the average in the UK. From an investment perspective, it can’t get much worse therefore some would argue that investing in Greek companies now is the very best time. Conversely, noone quite knows if we have seen the last of ressecion in the Uk & noone has managed to predict what the future holds – one guess is that a four bedroom terraced house in Chelsea will still set you back £1.2M. Buyers are not stupid – this level is not sustainable going forward & is clearly not value for money. Barclays Bank has a debt equity ratio of nearly 2000% 7 none of the incumbent management seem to have changed at all, SME’s are going bust every day with more to come this year. So Greece has its problems however lets not kick the underdog when they are down when we have not fully recovered. We don’t have anything to gloat about and are not in a position to advise any other country.
from The Great Debate UK:
Why is the UK still in recession when the U.S. isn’t?
Recent U.S. gross domestic product data show the world's biggest economy emerged from recession in the third quarter, while in the UK data show that in the same period Britain's economy contracted.
British economist and author John Kay theorizes that Britain is mired in its worst recession on record in part because government support has not been evenly distributed across sectors.
"We've poured money into the financial sector -- by and large the financial sector in Britain is doing OK," he said. "But very little of that is getting through to small and medium-size businesses out there in the rest of the economy."
Countries differ. It would be unrealistic to expect all countries to march in lockstep. For example, I still do a double take every time I hear someone here refer to the “last recession in 1990″ – as someone whose customers were mostly overseas, I struggle to remember that in here the UK the tech crash did not infect the wider economy as it did elsewhere.
As to small businesses, it’s difficult – clearly some of them will have been given credit they shouldn’t have been given in the first place, and will now have to go to the wall. Giving government largesse to them would merely postpone the day of reckoning. On the other hand, it’s probably at least partly true that the banks no longer have enough people who can accurately assess the creditworthiness of small businesses who want loans. So some babies are likely to be thrown out with the bathwater.
from The Great Debate UK:
Bats and balls the key to economic bounce
-Simon Chadwick is the Director of the Centre for the International Business of Sport at Coventry University, and runs the blog ‘Daily Sport Thought’ in which he addresses many of the important challenges currently facing sport. The opinions expressed are his own.-
I love sport, I have always loved sport, and I make my living researching, writing and talking about sport. As such, I do not need to be convinced about the social, cultural, psychological and health benefits associated with our engagement in sport. I also do not need any convincing about the economic benefits of sport, although some people will always and inevitably exclaim, "he would say that wouldn’t he!"
Well, it is not me it is actually the United Nations which states that sport may account for as much as 3 percent of global economic activity. It is the European Union that estimates sport to be worth 1.5 percent of its gross domestic product (GDP). And it is the British government that has recently acknowledged just how significant sport as an industry has become by commissioning research which will result in the development of robust measures for the contribution that sport makes to the British economy. Previous estimates already indicate that sport may generate as much as 2.5 percent of GDP, in which case this means it is an industry bigger than agriculture and not so far behind manufacturing.
Sport is, indeed, much more important than we realise or acknowledge. It is deeply ingrained in many of our psyches: for some people this dates back to our childhoods and is bound up in our social and geographic identities; for other people, sport allows us to indulge in vicarious achievement (related to the psychological phenomenon of BiRG-ing – Basking in Reflected Glory) and euphoric collective experiences.
The consumption of sport is thus not a rational economic activity, an observation that is particularly pertinent amidst these recessionary times. Whereas other industries continue to suffer the effects of the downturn, sport remains one of the more recession-resistant sectors, buoyed by the inherently unique features that differentiate sport, making it a safe-haven during difficult times.
Sport can be relied upon not to let people down, it provides value for money, not least because of its central proposition: the uncertainty of outcome – you never know what the result is going to be, something absent from virtually all other forms of consumption in our otherwise increasingly homogenised and standardised world. As such, people actively seek out sport and remain loyal to it, even during economically troubled times.
There is clear evidence already that sport has bucked recent recessionary trends; for instance, over the last year, Arsenal reported a profit of almost 37 million pounds; both the Rugby Football Union and the Premier League have announced new, high value, long-term televisions rights deals; Badminton England signed its most lucrative ever sponsorship deal; advertising revenues derived from slots during American Football’s Superbowl broke all records; and television viewing figures for the Champions League Final in Rome were up by 27 percent.
As a cyclist and cycling fan, I am naturally well aware of Mark Cavendish. Just as I am aware too of our great British cycling heritage, taking in riders like Simpson, Boardman, Millar and Millar etc. After Athens in 2004, sales of cycles increased and as you will see from the above text, sales of cycles increased again following our successes in Beijing. I sincerely hope that Cavendish can stimulate further such activity, although he is not mentioned above simply because there wasn’t the space for me to be able to do so.
from The Great Debate UK:
A reality check from Standard & Poor’s
-- Neil Collins is a Reuters columnist. The views expressed are his own --
Standard & Poor's could have chosen a better day to kick the British economy, by placing the UK onto "negative outlook", the usual precursor to a downgrade of S&P's rating of an issuer's debt.
The move came minutes before the Debt Management Office closed its massive auction of 5 billion pounds of 2014 stock, and minutes after the release of figures showing the Public Sector Net Borrowing Requirement leaping to 8.5 billion pounds in April, a sum which not long ago would have been considered high for a whole year.
Economist Howard Archer at Global Insight immediately called the figure "dire, starting the new fiscal year off as it is highly likely to continue."
S&P, meanwhile, now fears that the net general government debt burden "could approach 100 percent of GDP and remain near that level in the medium term."
It's hard to describe the UK public finances as anything other than a disaster area. The forecasts made in last month's Budget looked optimistic within days, and even these require the DMO to borrow 220 billion pounds this financial year, or almost a billion pounds every working day.
Yet while the DMO soaks up cash, the Bank of England is desperately creating it. Its "quantitative easing" programme has been in full swing this week, buying in 1.326 billion pounds of a stock which looks very like the one that the DMO was issuing just one day later.
Finally a global realist speaks of our enormous debt problem!
@parker1227
“But anti-development environmentalists, bidding disputes, union disputes, local politics, and right-of-way land use disputes – have crushed our ability to address large infrastructure needs, much less create much needed heavy industry.”
Was not it just unwillingness from the side of the GOP that stopped Obama from creating at least some jobs that could not be exported and would leave a stronger backbone to the American Society?
Then…laissez faire prohibits import duties, so if you would try to balance out too cheap imports…the only way to recreate heavy industry…you would find the “trade liberals” against you.
I am afraid that if the West will not introduce limitations to the supply side economy we will never survive this game. We only think markets(money), not people (work)