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China’s changing trade dynamics

September 15, 2017 Leave a comment

On 7th April 2008 New Zealand became the first OECD country to sign a free trade deal with China, an economy which in the 1970’s was one of the poorest countries in the global economy. Today China is the world’s second largest economy and the fastest growing at a rate around 7% per year. However China’s trade composition has changed significantly over the years as its economy has developed. Two main trends stand out.

The decline in importance of primary goods (mainly food) as a proportion of China’s total commodity trade.  China’s exports have changed from being dominated by labour-intensive manufactured products in the mid 1990’s to more sophisticated manufactures today. 1994 – 40.6% of exports were miscellaneous manufactured articles. 2014 45.8% of exports were machinery and transport equipment.

A changing comparative advantage

A country’s comparative advantage refers its production of a good or service at a lower opportunity cost than another. Instead of every country trying to produce a wide of goods , countries can grow faster by specializing in the goods they can produce most cheaply and trading for others. Many Asian countries – Japan, Korea, Taiwan – have gone through 4 stages (as shown below) of development through a specialization index. It shows the first stage is the Developing Country stage, where Primary commodities are more competitive than both Other manufactures and Machinery. The second and third stages are the young and mature NIEs (newly industrialised economies) respectively, where for both stages Other manufactures is the most competitive sector, but the ranking of Other manufactures vis-à-vis Machinery is opposite. At the fourth stage – the pinnacle of trade structures – Machinery is most competitive.

Stages of Development.png

*NIE = Newly Industrialised Economy

A country’s trade structure can be classified into any of these 4 stages according to the relative magnitudes of the country’s specialisation indices across 3 sectors:

Three Sectors - China Trade.png

The figure below illustrates the evolution of China’s trade structure during 1984-2014. It can be seen that China became a young NIE in 1990 – when the specialisation index of Other manufactures surpassed that of Primary commodities – and then a mature NIE in 1999 – when Machinery passed Primary commodities. This pattern is consistent with the changing composition of China’s exports, from labour-intensive products to a more sophisticated mix led by various types of machinery and equipment.

China change in specialisation.pngImplications for the global economy
China’s rapid rise poses both challenges and opportunities for other countries as they are exposed to increased competition at home and abroad. For many firms in rich countries, intensifying competition from China’s exports has reduced demand for the goods they produce, with a corresponding decline in workers employed. Such changes in the global economic environment affect the allocation of factors of production and cause sectoral productivity fluctuations, as well as driving changes in comparative advantages among nations. Trade between developing (e.g. China) and developed economies (e.g. US) has been on the rise. Developed countries with high wages and expensive welfare programmes are having trouble coping with the effects of developing countries becoming major global players. It is estimated that 2.0-2.4 million people in the US lost their jobs as a result of increasing Chinese import competition during 1999-2011.

Source: China’s changing comparative advantage: Trends and implications by Murat Ungor. EcoNZ@Otago – August 2016

 

Categories: Development Economics, Trade Tags:

China’s investment in Africa and the Flying Geese Paradigm

July 28, 2017 Leave a comment

I have blogged before on Chinese Investment in Africa and recently came across a very interesting article in the Harvard Business Review ‘The World’s Next Great Manufacturing Center’ by Irene Yuan Sun. It outlines the effects of Chinese investment in Africa and how it could lead to an industrial revolution in the continent.

Investment in manufacturing by privately owned Chinese companies has increased from only 2 in 2000 to well over 150 in 2015 and 2016 and are transforming Africa’s economy by providing millions of jobs and encouraging a new generation of local entrepreneurs as well as attracting support from inspiring African institutions. Investment by the Chinese in Africa has usually been associated with natural resources or services but with manufacturing now being more prevalent industrialization is a growing possibility.

Chinese investment is about supply and demand

China sojourn into Africa is become more prevalent and has a lot to do with supply and demand. A generation under the one-child policy has had an impact on the supply of labour causing shortages to arise and ultimately wages – 12% annually since 2001 and productivity adjusted manufacturing wages nearly tripled from 2004 to 2014.

On the demand side Africa has started to integrate regional markets – in 2105 half the countries in Africa joined the Tripartite Free Trade Area, which will combine 600 million people in a single trading bloc, forming the 13th-largest economy in the world. The six nations of East Africa have created a single customs union – same as FTA but all member nations agree a set of standard tariff levels between themselves and outside nations. This is known as the Common External Tariff (CET). Nigeria boosts an enormous domestic market with high margins for companies as there is little competition. Also Lesotho enjoys tariff-free access to the US market and can take advantage of being close to the South African infrastructure.

Chinese companies in Africa employ locals

According to Justin Yifu Lin, a former chief economist at the World Bank. China is about to graduate from low-skilled manufacturing jobs which will free up nearly 100 million labour-intensive manufacturing jobs, enough to more than quadruple manufacturing employment in low-income countries. To put that into perspective, when manufacturing employment reached its peak in the United States, in 1978, only 20 million people had jobs in American factories. Now five times that number of jobs are about to migrate out of China.

By 2050 Africa’s population will reach 2 billion creating the largest pool of labour in the world. Today though some of the highest unemployment rates are in African countries – Nigeria 12.% with approximately 19% of the labour force being underemployed. However youth unemployment is just over 42%.
Although the media in Africa tend to portray an image that Chinese companies don’t employ local labour, recent analysis shows Chinese factories in Africa employ locals in large numbers – no research sample had a figure of local workers in a Chinese company lower than 78% and in some larger companies the figure exceeds 99%. In Nigeria 85% of workers hired by Chinese manufacturers are locals and 90% of workers in Chinese manufacturing and construction companies in Kenya are local.

The Flying Geese Paradigm

Flying Geese Paradigm.pngIn developing economics the flying geese paradigm was the view of Japanese economists upon the technological development in Southeast Asia viewing Japan as a leading power. It states that manufacturing companies act like migrating geese, flying from country to country as costs and demand change. Factories from a leading country are forced by labour-price pressures to invest in a follower country, helping it accumulate ownership and move up the technology curve. This movement shifts the bulk of economic activity in the follower country from low-productivity agriculture and informal services to high-productivity manufacturing. The follower country eventually becomes a leading country, spawning companies in search of new production locations. The paradigm offers a convincing model of how Asian economies developed—in a chain from Japan to the Asian Tigers to China – see image above.

It describes not only the movement of companies from country to country, but also a process of industrial upgrading from product to product within each country – see image below. First a few companies show up to try their hands at making a certain product. As they learn, their profits attract other manufacturers of the same product. But as the field gets crowded, intensifying competition and thinning profits, some companies look for something else to make—this time something slightly more complicated and thus harder to copy. As the cycle repeats, companies that started by copying and learning are inventing and teaching a mere generation or two later. An analysis of 148 countries shows that as GDP rises, manufacturers within a country predictably move toward ever more complicated products. In another decade or two, factories in Africa will be churning out computers instead of ceramics and clothing.

Flying Geese Paradigm 2.png

Investment in manufacturing key to Africa’s development

For any economy to develop being more productive in the long run is the only way to create a higher standard of living. Manufacturing tends to become more productive over time as there is overseas competition from imports as well as having to compete in the export market. Furthermore manufacturing investment has a big multiplier effect – research shows that for every manufacturing job created, 1.6 service jobs follow.

Conclusion

Industrialization will allow Africa to follow in the footsteps of Japan, South Korea, Taiwan, and China: to build factories that employ its booming population and to refashion its institutions to meet the demands of modern capitalism. Most important, it will provide a real chance to raise living standards across broad sectors of the populace. If Africa could lift just half as many people out of poverty as China has in a mere three decades, it will eliminate extreme poverty within its borders. For nearly 400 million people, that would mean the difference between going hungry and being full, between scrounging for work and holding a steady job, between asking their children to do menial labor and sending them to school. The Chinese showing up in Africa today don’t doubt that this will happen. As one of them, who is working to build a special economic zone in Nigeria, said to me: “This is exactly like my hometown 30 years ago. If we could do it, then so can this place.”

Sources:

Harvard Business Review ‘The World’s Next Great Manufacturing Center’ by Irene Yuan Sun. May-June 2017

ANZ Bank – ‘ASEAN – The Next Horizon’ – June 25th 2015

China – a blessing or curse for Developing Countries of Africa?

May 20, 2017 Leave a comment

I recently read in the New York Times Magazine a very interesting article on China and how it has built up enormous holdings in poor, resource-rich African countries. Although it may seem as a blessing to the local economy it does have its drawbacks. You can read the full article here but I have edited it for students doing Development Economics topic at A Level.
—————————————————————
Everywhere you look on the globe China’s presence can be felt, driven by its insatiable demand for resources and new markets as well a longing for strategic allies. In 2000 China had 5 countries as their largest trading partner but that has increased today to more than 100 countries including New Zealand, Australia and the USA.  Although there has been a slow down in China, President Xi Jinping has indicated that over the next decade approximately $1.6 trillion will be put into infrastructure and development throughout Asia, Africa and the Middle East. This is serious money that makes a bold statement as to their intentions globally.

China hasn’t held back in trying to secure sufficient resources to keep their economy going. Besides oil and gas China’s state-owned companies have bought mines around the world eg:

  • Peru – copper
  • Zambia – copper
  • Papua New Guinea – nickel
  • Australia – iron ore
  • South Africa – iron ore
  • Namibia – uranium

However as the Chinese economy slowed recently the demand for imports of commodities dropped thus impacting on some of these commodity exporting countries – in particular mines in Western Australia, Zambia and South Africa have been forced to close.

When China met Africa
You maybe aware of a previous blog post in which I talked about the DVD documentary  ‘When China met Africa’ which focused on Chinese investment in Zambia – a very good look at the micro environment that businesses operate in.  Investment in Africa by the Chinese started in 1976 with a 1,156 mile railroad through the bush from Tanzania to Zambia but it wasn’t until the 2000’s that Chinese authorities realised that there was a need for resources to fuel its own internal growth. With this in mind Chinese companies were given free reign to go and seek these resources.

With the end of the Cold War and the Middle East becoming a major conflict area, the US involvement in Africa started to dwindle. Furthermore with the Trump administration raising doubts about free trade agreements and global warming there is an opportunity for China to push its own initiatives and push for global leadership. A Trans Pacific Partnership without the US is very appealing to the Chinese authorities as it allows to become a dominant player in negotiations with other members.

husab mine.jpegChina tends to provide no-strings financing that, unlike Western aid, is not conditional on human rights, clean governance or fiscal restraint. The Namibian finance minister welcomed China as an alternative but although the Chinese want you to be masters of your own destiny and dictate what you want, there are conditions which doesn’t necessarily make their presence truly beneficial. Namibia has seen significant Chinese investment especially in the Husab Uranium Mine ($4.6bn) the second largest uranium mine in the world. It is estimated that it will increase Namibia’s GDP by 5% when the mine reaches full production although almost all of the uranium will go to China for nuclear energy and thereby reducing its dependence on coal. Approximately 88% of China’s energy comes from fossils fuels, 11% from hydropower, solar and wind and only 1% from nuclear power. In order to reach clean energy goals and lose the mantle of chief polluter in the world, China has put a lot of emphasis on nuclear power and they have 37 nuclear reactors with another 20 under construction. The aim is to have 110 reactors by 2030 and become an exporter of nuclear-reactor technology.

The Chinese company China General Nuclear (CGN) has a 90% stake in the mine with the Namibian government 10%. Although Namibians are benefitting from all the infrastructure investment by the Chinese they have saddled the country with debt and have done little to reduce the 30% unemployment rate – Namibia has one of the most unequal societies in the world. In China independent unions are essentially illegal but Namibians have the Metal and Allied Namibian Workers Union (MANWU) which accused Chinese state-owned companies of paying Namibian workers only one third of the minimum wage and also using Chinese workers for unskilled jobs that by law should be going to Namibians. As the unions’s secretary said “the Chinese will promise you heaven but the implementation can be hell”. Also scandals involving Chinese nationals  include tax evasion, poaching endangered wildlife, money laundering have done little to enhance the mood of locals.

Over the last decade China has got a reputation for pillaging and pilfering the natural world with its growing demand natural resources as well as the illegal wildlife trade. Chinese businesses have had public backlash over their proposals that could do damage to the environment. One company wanted to clear a 30,000 acre forest so that it could plant tobacco – the soil in the forest is totally unsuitable for this purpose. Another wanted to set up donkey abattoirs to meet China’s demand for donkey meat and skin whilst a Nambian-based Chinese company requested to capture killer whales, penguins, dolphins and shark in Namibian waters to sell to aquatic theme parks in China. Under pressure from activists the Chinese firm withdrew their request.

Is China the World’s New Colonial Power?

Categories: Development Economics Tags: ,

The Doughnut Model of Economics

May 8, 2017 Leave a comment

A recent book entitled “Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist” by Kate Raworth of Oxford University’s Environmental Change Institute, offers an alternative to the all too familiar policy of economic growth to solve the issues of poverty, inequality, unemployment in the global economy. Simon Kuznets, who normalised the measurement of economic growth, stated that national income cannot be a accurate measure of total welfare in an economy as it only measures annual flows of money and not stocks of wealth and their distribution. Raworth states that the current model of endless economic growth using up the finite resources of the planet is not the way forward. Most textbooks refer to the circular flow as the model of the economic system – households, firms, banks, overseas markets and the government which bears little relationship to reality today. Instead Raworth goes beyond this simple circular flow model and includes social and environmental issues – energy, the environment, raw materials, water pollution etc.

The Doughnut
Raworth’s circular flow consists of two rings – see graphic below.

Doughnut Economics.jpeg

Inner Ring – this consists of the social foundation and those things we need for a good life – food, water, health, education, peace and justice etc. People living within this ring in the hole in the middle are in a state of deprivation.

Outer Ring – this consists of the earth environmental limits – climate change, ozone depletion, water pollution, loss of species etc.

The area between the two rings is the “ecologically safe and socially just space” in which humanity should strive to live. As stated in The Guardian review, the purpose of economics should be to help us enter that space and stay there. As the graphic shows we breach both rings as billions of people live below the poverty line and climate conditions, biodiversity loss, land conversion etc are at concerning levels. The video below is a useful explanation.

China and the exodus of cash

March 5, 2017 Leave a comment

Another very good video from PunkFT. As the Chinese economy starts to slowdown by its standards (even at 6% growth) the Chinese are sending their money overseas in search of safer investments. In doing this they are often violating currency controls which are there to keep money inside China. The housing market in many countries have been driven up by the flood of cash from China – Vancover, Sydney, Hong Kong, New York and Auckland. Chinese spent almost $30 billion on U.S. homes in 2015.

How will authorities stop the outflow? One way is to increase domestic interest rates to encourage people to deposit their money in local banks. However this impacts those Chinese companies that borrow money and could prompt some debt-laden companies into deleveraging. Worth a look and great animations.

China’s wages on the increase

February 28, 2017 Leave a comment

Useful new video from the FT showing the increase in China’s wages and how they are catching up with those in the developed world. China’s labour force as a whole, hourly wage is around 70 per cent of the level in weaker eurozone countries, according to data from Euromonitor International. Has China reached the Lewis Point where the abundance of cheap labour has dried up as workers return to the rural areas? Could be used for the A2 Developing Economies topic.

International migration – what about developing to developing countries?

January 21, 2017 Leave a comment

When you look at figures regarding international migration, the movement of people from developing to developed countries is most talked about and is the most common of the four types. Figures issued by the McKinsey Global Institute estimate that 120m people have made this move – see graphic below:

Developing Countries Migration.png

The second largest move is from developing to developing countries with just under 80m. This flow has been a popular option as people leave a poor country for a somewhat less poor country in search of higher wages. For instance the World bank estimated that 1.5m migrants from Bukino Faso live in the Ivory Coast which is proportionately larger than Indians in the UK, Turks in Germany and Mexicans in the US. The Ivory Coast is a poor country but not as poor as Burkina Faso and with wages double what they are in Burkina Faso migration is an attractive proposition. The World Bank estimates that $343m in remittances flowed from Ivory Coast to Burkina Faso in 2015 and accounts for 87% of all remittances.

Another example of movement from a developing to developing country is India and Bangladesh with an estimate of 20m Bangladeshis living in India. The World Bank estimates that more money is remitted to Bangladesh from India than from any other country – $4.5bn in 2015.

Why is developing to developing becoming more prominent?

  • Neighbouring countries tend to share currencies meaning money can be moved more easily in ways that officials do not notice.
  • Poorer people cannot afford travel to the West or the Gulf
  • The poorer people are the shorter the distance they can travel so neighboring countries might be attractive
  • Neighboring countries often share a language
  • Tribes often span borders of developing countries
  • In developed countries most jobs require legal documentation and authorisation. In the developing world informal work is seen as the norm.
  • More less-skilled work is available in developing countries.
  • The West does not have enough jobs for those from developing countries – African, Asian countries may offer more opportunity.

Sources: McKinsey Global Institute, The Economist.

Social Progress Index v GDP per capita

January 14, 2017 Leave a comment

Although GDP has lifted millions of people out of poverty there have been numerous articles/books written on how economic growth alone is not enough to indicate how economies are developing – see previous posts on this topic. An economy that doesn’t account for basic human needs, address educational opportunity, protect the environment, personal freedom etc isn’t achieving success. Therefore understanding the success of countries beyond GDP means inclusion of social progress.

The Social Progress Index aims to meet this pressing need and incorporates four key design principles:

  1. Exclusively social and environmental indicators: The aim is to measure social progress directly, rather than relying on economic indicators.
  2. Outcomes not inputs: Measuring a country’s health and wellness achieved, not how much effort is expended nor how much the country spends on healthcare.
  3. Holistic and relevant to all countries: Creating a holistic measure of social progress that encompasses the many aspects of the health of societies. Knowing what constitutes a successful society for any country, including higher-income countries, is imperative
  4. Actionable: The Index aims to be a practical tool that will help leaders and practitioners in government, business, and civil society to implement policies and programs that will drive faster social progress.

SPI - 12 components.png

Each of the twelve components of the framework (see above) comprises between three and five specific outcome indicators. Indicators are selected because they are measured appropriately with a consistent methodology by the same organisation across all of the countries.

The 2016 Social Progress Index includes 133 countries covering 94 percent of the world’s population. An additional 27 countries are included with results for 9 to 11 of the total 12 components. This brings total coverage to 99 percent of the world’s population.

SPI v GDP per capita

Despite the overall correlation between economic progress and social progress, the variability of performance among countries for comparable levels of GDP per capita is considerable – see graph below. Hence, economic performance alone does not fully explain social progress. The Social Progress Index findings reveal that countries achieve widely divergent levels of social progress at similar levels of GDP per capita. You will notice that Kuwait and the United Arab Emirates have relatively high levels of GDP per capita but don’t rate as well on the SPI. By contrast although Costa Rica’s GDP per capita is below $20,000 the country does rate highly on the SPI.

SPI v GDP.png

SPI - Very High Social Progress.pngThe top 12 countries have tightly clustered overall scores between 90.09 and 87.94. Five of the 12 countries in this group are from the Nordic region, confirming that this model of development delivers social progress. More striking is the finding that the majority of countries in this group do not correspond to the Nordic model. The top performers show that there is more than one path to world-class social progress. New Zealand and Australia are the top two performers, respectively, on Personal Rights. New Zealand achieves strong relative social progress, despite its high GDP per capita. This is a significant achievement given that it is harder for countries with higher GDP per capita to over-perform.

Social progress is about meeting everyone’s basic needs for food, clean water, shelter, and security. It is about living healthy, long lives and protecting the environment. It means education, freedom, and opportunity. Social progress goes far beyond crossing a dollar-denominated threshold. We need a much more holistic view of development.

Source: Social Progress Index Report 2016

Sub-Sahara economies hit by fall in commodity prices.

January 12, 2017 Leave a comment

Commodities have been the engine of growth for many sub-Saharan countries. Oil rich nations such as Nigeria, South Africa and Angola have accounted for over 50% of the region’s GDP whilst other resource-intensive countries such as Zambia, Ghana and Tanzania to a lesser extent.

I have mentioned the ‘resource curse’ in many postings since starting this blog. It affects economies like in sub-Sahara Africa which have a lot of natural resources – energy and minerals. The curse comes in two forms:

  • With high revenues from the sale of a resource, governments try and seek to control the assets and use the money to maintain a political monopoly.
  • This is where you find that from the sale of your important natural resource there is greater demand for your currency which in turn pushes up its value. This makes other exports less competitive so that when the natural resource runs out the economy has no other good/service to fall back on.

However it is the fall in commodity prices that is now hitting these countries that have, in the past, been plagued by the resource curse. As a lot of  commodities tend to be inelastic in demand so a drop in price means a fall in total revenue since the the proportionate drop in price is greater than the proportionate increase in quantity demanded.

The regional growth rate for 2016 is approximately 1.4% but it is not looking good for commodity driven economies:

  • Nigeria – oil – 2016 GDP = -2%
  • Angola – oil – 2016 GDP = 0%
  • South Africa – gold – 2016 GDP = 0%

In 2016 resource rich countries will only grow by 0.3% and commodity exporting countries have seen their exports to China fall by around 50% in 2015. Furthermore, public debt is mounting and exchange rates are falling adding to the cost of imports. With less export revenue the level of domestic consumption has also decreased.

It is a different story for the non-resource countries of sub-Sahara. It is estimated by the IMF that they will grow at 5.6%. By contrast they have been helped by falling oil prices which has reduced their import bill and public infrastructure spending which has increased consumption.

africa-oil-effectAs is pointed out by The Economist numbers should be read wearily as GDP figures are only ever a best guess, and the large informal economy in most African states makes the calculation even harder. Africa may have enormous natural reserves of resources, but so far most Africans haven’t felt the benefit. In Nigeria, for instance, what’s seen as a failure to spread the country’s oil wealth to the country’s poorest people has led to violent unrest. However, this economic paradox known as the resource curse has been paramount in Africa’s inability to benefit from resources. There is a gravitation towards the petroleum industry which drains other sectors of the economy, including agriculture and traditional industries, as well as increasing its reliance on imports. What is needed is diversification.

Remittances – advantages and limitations

November 8, 2016 Leave a comment

Remittances come up in the CIE A2 Economics Syllabus under Developing Economies. The Economist in their ‘Economic and Financial Indicators’ sections has an informative graph and commentary of 2015 remittances. Key points for 2015:

  • Migrants from developing countries sent home $439bn
  • 25% of GDP in Haiti is made up of remittances
  • Flows into Europe and central Asia fell by 23% in 2015 mainly due to the weak Russian economy
  • India received $69bn in remittances – the most of any country.

remittancesThe figures quoted might even be higher as it is a lot harder to track transactions from smaller money shops. Below are some examples of the importance of remittances in some developing countries:

  • Sri Lanka – remittances > tea exports receipts
  • Nepal – remittances > tourism receipts
  • Morocco – remittances > tourism receipts
  • Egypt – remittances > revenue from the Suez Canal

Advantages of Remittances

  • money goes directly to the people it is intend for which means is less opportunity for waste or corruption
  • money can be spent by the individual on areas like education and healthcare which may not be possible with official aid
  • the consumer has considerably more sovereignty
  • the sender is confident that the money will be used effectively which might not be the case with official aid.

Limitations of Remittances

  • the development of infrastructure projects need sizeable funds which individual remittances cannot provide. For instance schools, hospitals, roads, bridges etc. need concentrated funds.
  • relying on remittances may mean that you lose some of your skilled labour force, although money does flow into the economy. However, some suggest that this should motivate others into the same job.
  • they tend not to target those who are desperately in need – both countries and individuals.
  • some countries are too isolated for their population to go and find work and ultimately they earn very little from remittances. To them foreign aid is essential.

     

    Although remittances do generate substantial income they will never replace aid as some poorer countries will always require assistance from their developed counterparts. A challenge to those countries that receive remittances is to guide this flow of money into projects that will benefit their country as whole rather than just the individual.

     

 

US needs a new direction

October 14, 2016 Leave a comment

Jeffrey Sachs wrote a very good piece in the Boston Globe regarding the way forward for the US economy. Some interesting data:

  • 1.4% GDP between 2009-2015 when it was projected at 2.7%
  • 81% of Americans experienced flat or falling incomes between 2005-2014
  • 1980 – top 1% earn 10% of income
  • 2015 – top 1% earn 22% of income
  • 10% unemployment in October 2009 – dropped to 4.9% today. Mainly caused by those of working age leaving the labour force entirely.
  • Employment relative to working age (25-54) in 2000 was 81.5%. In 2015 it was 77.2%
  • US Treasury debt owed:
  • – 2007 = 35% of GDP
  • – 2015 = 75% of GDP
  • – 2026 = 86% of GDP – forecast
  • – 2036 = 110% of GDP – forecast

Issues with the US Economy

US manufacturing jobs have shifted overseas – remember NAFTA. Northern Mexico saw a huge influx of US companies as they took advantage of cheaper labour costs.

Automation – the advent of smart machines seems to be shifting income from workers to capital, driving down wages and leading to frustration of low wage workers.

As well as debt sustainability the US economy needs to shift its reliance on carbon-based energy to non carbon energy sources – hydro, wind, solar etc. Some have argued that the US has simply run out of big new inventions to sustain growth levels but ultimately the world has got to change its model as resources will eventually run out. We can’t keep relying on people buying more and more stuff to maintain growth or the Chinese building more cities and blowing up and rebuilding bridges.

Sustainable Development 

Jeffrey Sachs argues that sustainable development works best when it focuses simultaneously on 3 big issues:

  1. Promoting economic growth and decent jobs
  2. Promoting fairness to women, the poor, and minority groups
  3. Promoting environmental sustainability.

US growth has tended to focus on economic growth and neglect inequality and environmental issues. Future growth needs to focus less on current consumption but investment in future knowledge, education, skills, health, infrastructure and environmental protection. Furthermore if the investment is carried out efficiently the economy can growth in an environmentally safe as well as being fair. Good investment requires two things:

  1. Planning – need to overcome complex challenges for our future – e.g. energy
  2. Public investment  – replacement of a crumbling infrastructure – roads, bridges, water systems, seaports etc

Jeffrey Sachs recent research measured how 150 countries performed with regard to sustainable development and the progress that countries will need to make to achieve the recently adopted SDGs – see image below. The Scandinavian countries came in top – Sweden, Denmark, Norway – the US was 22nd out of the 34 high-income countries whilst Canada was 11th.

Click the link below for an article on income inequality from the Boston Globe by Jeffrey Sachs

Facing up to income inequality

Sustainable Development Goals_E_Final sizes

SEDA a new ‘Well-Being’ measure.

July 28, 2016 Leave a comment

Leaders around the world increasingly recognize that GDP alone cannot give a full picture of a country’s performance. The well-being of citizens is an even more important measure. The Boston Consulting Group’s Sustainable Economic Development Assessment (SEDA) is a powerful diagnostic designed to provide leaders with a perspective on how effectively countries convert wealth, as measured by income levels, into well-being. SEDA also helps identify specific areas where a country is lagging behind others, even after taking into account its income level and growth rate.

SEDA defines well-being through three fundamental elements that comprise ten dimensions.

  1. Economics – Income, Economic Stability and Employment
  2. Investments – Health, Education and Infrastructure
  3. Sustainability – Income equality, Civil Society, Governance and Environment

SEDA

The wealth-to-well-being coefficient compares a country’s current-level SEDA score with the score that would be expected given the country’s GDP per capita. The expected cur- rent-level score is based on the relationship between GDP per capita and current-level well-being scores among all countries in our analysis. (See Exhibit 2.) The coefficient thus provides a relative indicator of how well a country has converted its wealth into the well-being of its population. Countries that sit above the solid line in Exhibit 2 —meaning that they have a coefficient greater than 1.0—deliver higher levels of well-being than would be expected given their GDP levels, while those below the line deliver lower levels than expected. New Zealand sits above Japan in the Exhibit 2.

GDP v SEDA

To understand how countries stack up in terms of well-being, and to see whether they are gaining ground or falling behind, it is helpful to examine both current-level and recent-progress SEDA scores. Countries in the upper-left quadrant of Exhibit 5 below have high current-level scores for well-being, but their recent-progress scores are below the median—meaning that they are in good shape but have been losing ground relative to the rest of the world. Those in the upper-right quadrant have scores that are above the median for both current level and recent progress— their well-being levels are relatively high and have been improving. Those in the lower-right quadrant have relatively low current-level scores but recent-progress scores that are above the median—what we describe as weak but improving. Those in the lower left are the most challenged: they have poor current-level and recent-progress scores, meaning that they have relatively low well-being already and have been losing more ground.

SEDA - improving etc

Check out the website:

SEDA

 

Categories: Development Economics Tags:

Declining labour force threatens Chinese economy

March 14, 2016 Leave a comment

China’s economic miracle is under threat from a slowing economy and a dwindling labour force. The FT investigates how the world’s most populous country has reached a critical new chapter in its history.

The abundance of cheap labour in China is coming to an end. Since the 1980’s low cost Chinese labour has supplied the developed world with cheap goods, which, to some extent, make up for stagnate wages. When China became more industrialised it grew very fast by importing foreign technology and employing capital and plentiful, cheap, unskilled labour from the rural areas. However, a point is reached when no more labour is forthcoming from the underdeveloped, or agricultural, sector and wages begin to rise.  As well as wages increasing China has also experienced labour strikes and shortages, prompting many researchers to debate whether the Lewis turning point has been reached. Below is a very good video clip from the FT on this topic.

The Marshmallow Effect needed to address global economy

February 17, 2016 Leave a comment

marshmallowYou might have heard of the marshmallow experiment that was carried out with young children. A child was offered a choice between one marshmallow immediately or two small marshmallows if they waited for a short period, approximately 15 minutes, during which the the person running the experiment left the room and then returned. Researchers found that children who were able to wait longer for the preferred rewards tended to have better life outcomes, as measured by SAT scores.

Can this experiment be applied to societies today in that by deferring instant consumption (in order to save and invest) people will enjoy greater incomes as they age?

High saving rates = High investment rates

Jeff Sachs, of the Project Syndicate, recommends 4 actions that are needed to rectify this problem:

1. Global economic progress depends on high global saving and investment. In economic development, as in life, there’s no free lunch: Without high rates of investment in know-how, skills, machinery, and sustainable infrastructure, productivity tends to decline (mainly through depreciation), dragging down living standards.

2. Saving and investment flows should be viewed as global, not national. China has a high savings rate which exceeds local investment needs therefore they can support the low income countries which have limited capital and a very young population. These countries can borrow from China to fund education, infrastructure development etc so to secure greater prosperity.

3. Full employment depends on high investment rates that match high saving rates. Although there maybe significant savings in banks this doesn’t necessarily translate into greater investment. In the past banks funded infrastructure project and company start-ups however today money managers tend to focus on short-term speculative activities which resemble a trip to the casino.

4. High private investments by business depend on high public investments in infrastructure and human capital. Although there maybe significant savings in banks this doesn’t necessarily translate into greater investment. In the past banks funded infrastructure project and company start-ups however today money managers tend to focus on short-term speculative activities which resemble a trip to the casino.

Although there maybe significant savings in banks this doesn’t necessarily translate into greater investment. In the past banks funded infrastructure project and company start-ups however today money managers tend to focus on short-term speculative activities which resemble a trip to the casino.

Investments such as low-carbon energy, smart power grids for cities, and information-based health systems depend on government and private sector partnerships. A lot of private investment needs tone backed by the government to get in the buy in from the private sector. Examples of this are the rail networks, aviation, semiconductors, satellites, GPS, hydraulic fracturing, nuclear power and the Internet would not exist but for such partnerships.

Our global problem today is that the world’s financial intermediaries are not properly steering long-term saving into long-term investments. Global investments are falling short of global saving at full employment which results in inadequate demand as short-term investments tend to be volatile to finance consumption and property.

Advice to China fails the Marshmallow Test

Some economists have stated that China needs to boost consumption (C) and let the renminbi appreciate to reduce exports. However this encourages overconsumption and underinvestment in a country that has high savings and industrial capacity which the global economy can make use of.

Central banks and hedge funds cannot produce long-term economic growth and financial stability. Only long-term investments, both public and private, can lift the world economy out of its current instability and slow growth. Jeff Sachs

Refugees: Cash v Handouts

November 18, 2015 Leave a comment

For many countries giving refugees cash has been a low priority as a policy to reduce poverty. Less than 6% of humanitarian aid in 2014 came in the form of cash as the concern has been that refugees in desperate situation may not spend the money on the right goods and services. In theory aid ensures that this is not the case as aid agencies supply goods and services refugees really need. However aid agencies do not always allocate resources efficiently to those in need as there is either too much of some items or not enough of others.

Furthermore, receiving aid in handouts usually involves standing in queues in public which can be embarrassing and have an effect on social acceptance. Aid in cash gives refugees more autonomy over their spending so that they can participate in the life of the community e.g. pay off debts, contribute to ceremonies and other occasion that are culturally important. Handouts does not allow for this. A UN initiative, found that 70% of Syrian refugees in Iraq had traded handouts from aid agencies for cash, including as much as two-thirds of the rice they received.

A concern over the cash methodology is that the injection of money into an economy will appreciate the currency of the receiving country’s currency which makes exports less competitive and imports cheaper – see previous posts on Dutch disease. This could lead to less growth of export-orientated industries and the injection of cash can also push up the price of basic goods and services leaving some refugees worse off. However giving cash need not lead to Dutch disease for various reasons:

  1. The number of refugees in most countries is tiny relative to the host population therefore an influx of money is unlikely to have significant effects.
  2. More cash might increase inflation but contrary to this it may also create jobs and growth in the receiving economy.
  3. Aid in handouts will distort the domestic economy as it acts as competition and drives down prices for local producers who may not be able to compete.
  4. Cash is also fair cheaper to distribute – America’s government has estimated that transport and other overheads eat up 65% of spending on emergency food aid. See graphic.

Changes in technology, growing access to financial services, greater urbanisation, and the emergence of government social safety nets are all creating unprecedented opportunities for humanitarian support to reach people in new ways. For example:

 During the 2011 famine in Somalia, which killed more than a quarter of a million people, aid agencies used remittance companies to provide cash transfers to more than 1.5 million people, helping them to survive and recover.

 In Lebanon, more than a million refugees now use smart card vouchers to buy goods at local shops, or ATM cards to withdraw money instead of receiving in-kind aid.

 In the response to Typhoon Haiyan in the Philippines, half a million people received cash through the extension of an existing government social protection programme.

However cash does have its problems when shops are shut.

Sources:

The Economist – Hard-nosed compassion. Sep 26th 2015 | From the print edition

Centre for Global Development: Doing cash differently. How cash transfers can transform humanitarian aid. September 2015.

Cash v Aid

Categories: Development Economics Tags:

Why increasing taxes in developing economies may help growth.

October 4, 2015 Leave a comment

In order to assist growth higher taxes may seem illogical as they take money out of the circular flow. However developing countries on average collect only 13% of GDP in tax compared to 34% in developed countries. Public investment can encourage private investment and it is estimated that an $1 of public investment increases private investment by $2. At the recent UN conference in Addis Ababa there is a desire to increase the tax take of LDC’s to 20% of GDP.

Why do developing countries not collect much tax?

  1. most of the population have no money
  2. most developing countries have a prevalent informal economy
  3. because of the rural nature of LDC’s the cost of tax collection is often higher than the benefits

The World Bank has suggested improving the tax agencies and tax revenue in Rwanda has increased by 6.5 time after automating the process, which reduced errors and opportunities for fraud. There would be much more tax revenue if LDC’s reduced tax emption and avoidance, including from foreign investors. It is estimated that exemptions have cost developing countries $1bn in lost revenue in 2011 whilst the cost of multinational companies deliberately avoiding tax exceeds $200bn a year.

How multinationals avoid paying tax

The most common way multinationals avoid taxes is through “transfer pricing”, in which their subsidiaries in tax havens buy goods cheaply from arms in more exacting countries, and then sell them on at a higher price, thereby shifting profits to the tax haven. The OECD is trying to combat such schemes by persuading tax authorities to require firms to disclose where they generate their profits and share the disclosures. A proposal from 137 developing-world NGOs goes further, calling for the formation of an international tax agency, although it is unlikely to prosper.

Blatant tax dodging.

This is a major problem as undeclared money transfers, false invoices etc cost developing countries more than $990 bn in 2012 which equates to almost 4% of a developing countries’ GDP.

Source: The Economist 11th July 2015

El Niño and Commodity Prices

September 25, 2015 Leave a comment

Below is a very good video from The Economist outlining the effects of the El Niño weather pattern. It was first called El Niño – the boy (Jesus) – by Peruvian fisherman over a century ago because it became noticeable at Christmas time.

In parts of south east Asia, southern Africa and Australia it produces drier-than-average weather and even droughts. Research has shown that El nino tend to reduce global cocoa production by 2.4% which can lead to a price rise of almost 2%.

In South America heavy rain could threaten zinc, nickel and copper supply. Drought in South East Asia could lead to power shortages and higher prices in those countries that rely on hydropower.

Developing economies – 57% of world GDP but lag behind on GDP per Capita

September 15, 2015 Leave a comment

The growth and stability concerns about China and emerging economies have been well documented in the media of late. So why have these economies grabbed the attention?

According to the IMF emerging and developing economies (E&DE) have grown at more than twice the pace of advanced economies since 2000. The chart below shows that E&DE overtook Advanced Economies in terms of total output in 2008, and at the end of 2014 accounted for about 57% of global output. Advanced economies were the remaining 43%. Back in 1997, when Asia had its currency crisis, E&DE accounted for a lesser 42% of global output.

Devel Econ share of global econ

However concerns in E&D economies have been observed and they include:

1. Their economies have more government intervention and are less driven by the market

Although market forces don’t always result in good outcomes – GFC being a prime example – history suggests that markets are better at allocating factors of production like labour. The IMF and the Federal Reserve are of the belief that a significant amount of capital has been misallocated in emerging economies e.g. an underperforming State Owned Enterprises and a overvalued housing market in China

2. There is less transparency in government policy in that the exact reasons for actions are not obvious. The recent devaluation of the Renminbi caused a lot of uncertainty in markets. Was it a genuine devaluation to try and boost exports?

3. There are concerns over financial stability. If the US Federal Reserve hike interest rates the cost of funding for some countries will rise – Brazil, Turkey, Malaysia, and Indonesia to name a few.

A Positive Outlook – Continued Growth for Decades.

China continues to embrace market reforms; market reform has been a priority since the ruling Communist Party’s “Third Plenum” meeting in late 2013.

Many emerging economies have good support structures for their financial systems
Many have large amounts of FX Reserves – although the likes of Russia and Malaysia have already spent a good portion of their reserves in recent months supporting their exchange rates. China also retains considerable monetary and fiscal flexibility – although less than was the case during the 2008 financial crisis;

A final reason to be hopeful is that Emerging and Developing Economies “potentially” have a long way to run in terms of their development. The chart below shows that in 2014 the IMF calculates E&DE GDP per person was just 22% of those in advanced countries. If E&DE continue to evolve positively – not assured as the “middle income trap” experiences detail – then growth rates in these countries should broadly remain strong in the decades ahead.

Devel Econ GDP per Capita

Source: National Australia Bank – Australian Markets Weekly – 31st August 2015

Categories: Development Economics, Growth Tags:

Is poverty about money or friends?

June 23, 2015 Leave a comment

Social Interaction solutionIn the World Bank survey one stated that “I like money and nice things, but it’s not money that makes me happy. It’s people”. Research has suggested that social integration is more important for well-being than income and it also decreases poverty. By contrast loneliness can be deadly – one study found that it did more damage to health than smoking.

Income can be a misleading measure of need as:
1. Lower income groups end up living in different degrees of hardship depending on their intangible resources.
2. Having strong social integration reduce money hardship.
3. Friends and relatives can lend money, pool risk, mind children and bring news of job openings.

However a lot depends on having the right friends as if this does not eventuate hardship prevails. The more concentrated the poverty, the less helpful social networks tend to be.
A global survey conducted in 2014 by Gallup, a polling firm, found that 30% of people in the poorest fifth of their country’s population had nobody to rely on in times of need, compared to 16% of the richest fifth.

Several countries have experimented with schemes that connect lonely old people and deprived youth. Germany, for instance, has built “multi-generational” community centres where older visitors get computer coaching from teenagers.

Source: The Economist

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