China and the economic centre of gravity

Very good FT video with Martin Sandbu and James Kynge discussing the fact that although the Chinese economy has grown at an alarming rate over the last 40 years, will it become the global superpower? Some of the main points:

• Global economy is now becoming more regionalised
• From 1979 to 2018 China’s GDP growth rate averaged 9.5%
• 2,000 years ago everyone was poor – centre of gravity of global economy followed population size
• Key change in the mid ’90s, when China began to allow the sons and daughters of farmers to migrate from the village to these big factory towns.
• Liberalised global trade in 1980’s helped China access markets
• China still very much a developing nations – ranks 61st in terms average per-capita income but got an excellent infrastructure.
• China’s middle class approx 400m but that means approx 1bn of the population are poor
• Middle income trap – getting from poor to middle income is a very different process from getting to middle income to high income.
• Economy needs to change from a growth model based on accumulating labour and capital to a growth model led by technological development and technological progress.
• China is either a global leader or at least close to the cutting edge, wind and solar power, online payment systems, digital currencies, aspects of artificial intelligence, 5G telecoms, drones, ultra-high-voltage power transmission.
• Three major trading hubs – EU, US and China – with trade being more regionalised. China reluctant to lose export markets in EU and US as they are big drivers of exports
• Three trading blocs will lead to protectionism and decoupling of supply chains. unless the EU, the US, and China can sort out their differences.

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Brexit and “Yes Minister”

With the UK having now left the European Union here is a very amusing clip from the BBC series “Yes Minister” (1982) in which Sir Humphrey and Jim Hacker discuss Brussels and the notion of the UK trying to pretend that they are European. Also discusses why other European nations joined the common market in the first place.

Central and Eastern European (CEE) economies costs and benefits from Covid-19

The impact of Covid-19 on countries like China, and other parts of Asia, has meant that firms in the large economies of Germany and France might not be keen to outsource work to Asia. Although the infrastructure and the resources are available in these countries the Covid-19 risks associated with them means some European companies are looking at options closer to home – also referred to as “nearshoring” (moves by China-wary western European manufacturers to bring production closer to home). CEE countries especially Czech Republic, Hungary, Poland, Slovakia and Romania are particularly strong in the manufacturing sector whilst Estonia, Latvia, and Lithuania (Baltic states) have a comparative advantage in services. Although outsourcing will help these economies it will take a bit of time before there is any significant change.

Post Covid-19, CEE could be set for a resurgence in outsourcing. Emerging Europe

This is an optimistic view but for some Eastern European countries the GDP forecast has been worse than that experienced after the GFC.

With the fall of the Berlin Wall, the transition from command to market systems led to severe recessions within countries – accelerating inflation and very high levels of unemployment – GDP fell by over 40% in the old Soviet-bloc countries. The present recession is proving to be much worse and these Eastern European countries are particularly vulnerable. The Economist came up with three reasons:

• These economies are exported dependent – as a % of GDP exports are 96% in Slovakia, 85% in Hungary.
• Eastern European countries will find it hard to fund deficits as their credit rating tends to be a lot lower than other countries wishing to borrow money. Bulgaria’s rating is BBB compared to say Austria which is AA+
• A lot of these countries rely on tourism as part of GDP therefore with Covid-19 the tourist industry has all but disappeared. For Croatia that is about 25% of GDP.

The outlook looks especially bleak for economies that were in a poor economic condition before Covid-19. Even though there have been radical steps taken to nullify the economic impact of the virus it will take a strong and coordinated response at EU level to steer countries out of their economic hardship.

Source: The Economist – Eastern Europe’s covid-19 recession could match its post-communist one. 28th May 2020

EU’s uncommon Common Agricultural Policy

At the outset of the EU, one of the main objectives was the system of intervention in agricultural markets and protection of the farming sector known as the common agricultural policy – CAP. Throughout most of its four decades of existence, the CAP has had a very poor public relations image. It is extremely unpopular among consumers, and on a number of occasions it has all but bankrupted the EU. The EU’s seven year budget (2021-2027), also known as the ‘multi-annual financial framework (MFF) is currently being discussed and agricultural subsidies are once again a controversial issue although have been reduced from previous years – 70% of the EU budget in 1980 to 37% in 2018 – see graph right from The Economist.

The aim of discussions is to reduce the amount to between 28% and 31% of the MFF. EU support levels are very high when compared to other countries. The graph below shows the support that other countries receive – producer support estimate (PSE), as a share of total farm income. EU is 20.% (2018) above the OECD average and well ahead of China, USA, Russia, Canada, Brazil, and Australia. Norway is at 62.36% whilst New Zealand is 0.48%.

Source: https://www.cgdev.org/publication/new-estimates-eu-agricultural-support-un-common-agricultural-policy

Who gets what from EU farm subsidies?

Source: https://www.cgdev.org/publication/new-estimates-eu-agricultural-support-un-common-agricultural-policy

There is wide variation in the support provided to agriculture within the “Common” agriculture policy. Latvia does the best of any country in the EU with a lot of other more recent eastern European entrants into the EU – of the top 10 Greece and Finland are the only non East European countries. The Netherlands gets a mere 7% of their income from EU support and traditional supporters of agriculture spend like Ireland, Luxembourg, Italy, and Poland are all below the EU average

• Despite being a vocal critic of the CAP (and receiving a separate rebate) UK support is broadly the same as the EU average
• France’s support is only just above average, while Germany’s is in the bottom quarter
• In terms of the “market price support” element—which inflates EU food prices—Belgium, Hungary, Malta, Poland, and UK producers benefit most

The variation seen here reflects a combination of factors, few of which relate to a policy objective. Most payments are distributed on the basis of a farm’s size in hectares—though per hectare rates vary and were often based on the historical value of production. Other payments relate to sustainability of farming methods, numbers of young farmers, or how much farms produce. With agriculture seen as a significant contributor to global emissions should subsidies be tied to those farmers reducing their impact on climate change?

The economics behind CAP intervention price

An intervention price is the price at which the CAP would be ready to come into the market and to buy the surpluses, thus preventing the price from falling below the intervention price. This is illustrated below in Figure 1. Here the European supply of lamb drives the price down to the equilibrium 0Pfm – the free market price, where supply and demand curves intersect and quantity demanded and quantity supplied equal 0Qm. However, the intervention price (0Pint) is located above the equilibrium and it has the following effects:

1. It encourages an increase in European production. Consequently, output is raised to 0Qs1.
2. At intervention price, there is a production surplus equal to the horizontal distance AB which is the excess of supply above demand at the intervention price.
3. In buying the surplus, the intervention agency incurs costs equal to the area ABCD. It will then incur the cost of storing the surplus or of destroying it.
4. There is a contraction in domestic consumption to 0Qd1
   Consumers pay a higher price to the extent that the intervention price exceeds the notional free market price.

Figure 1: The effect of an intervention price on the income of EU farmers.

• 

The increase in farmers’ incomes following intervention is shown also: as has been noted, one of the objectives of price support policy is to raise farmers’ incomes. The shaded area EBCFG indicates the increase in the incomes of the suppliers of lamb.

Sources:

• https://www.cgdev.org/publication/new-estimates-eu-agricultural-support-un-common-agricultural-policy
• The Economist: 23-11-19 – Milking taxpayers

Brexit and the EU explained

No doubt you are aware of the what is happening in the UK with regard to leaving the European Union – Brexit. Below is a very informative video from CNBC which explains the history of the UK when it entered the EEC (as it was formerly known) in 1973 under Ted Heath’s government to today where there is chaos as to the process of leaving the EU.

Output Gap in Eastern European Countries

The Economist had a very good graphic showing the difference between the actual and potential GDP in central and eastern European countries. In Romania a 16% rise in the minimum wage is likely to lift domestic demand and inflation whilst the Ukraine and Bosnia have problems with big negative output gaps where their GDP is well below their potential GDP.

Remember to mention the output gap when doing an essay that involves the business cycle. The output gap is the difference between demand and the economy’s capacity to supply. This is the difference between the ‘actual’ level of output (GDP) and the economy’s ‘potential’ level of output (potential GDP).

• If the economy is running above capacity (GDP > potential GDP) the output gap is positive.
• If the economy is running below its full capacity (GDP < potential GDP) the output gap will be negative.
• There is a sweet spot which is where the level of output is consistent with stable inflation and full employment.

Remember that ‘potential’ output is not an upper limit on the level of output. Rather, think of potential GDP as the economy’s efficient level of output. Running the economy below potential GDP is inefficient because there are some resources that are not employed. Running the economy above potential GDP is also inefficient because resources are over-utilised (eg, machinery is being made to work too hard causing it to wear out too quickly).

While it is efficient to have the economy running at potential, quite often it does not. Resources can be over- or under-utilised, which will translate into inflationary or disinflationary pressure (over-utilisation will push future inflation up, while under-utilisation pushes future inflation down).

The Exchange Rate Mechanism and the Bank of England

I was teaching managed exchange rates with my AS Level class and couldn’t get away from the events in Britain on the 16th September 1992 – known as Black Wednesday. On this day the British government were forced to pull the pound from the European Exchange Rate Mechanism (ERM).

Background

The Exchange Rate Mechanism (ERM) was the central part of the European Monetary System (EMS) and its purpose was to provide a zone of monetary stability – the ERM was like an imaginary rope (see below), preventing the value of currencies from soaring too high or falling too low in realtion to one another.

It consisted of a currency band with a ‘Ceiling’ and a ‘Floor’ through which currencies cannot (or should not) pass and a central line to which they should aspire. The idea is to achieve the mutual benefits of stabel currencies by mutual assistance in difficult times. Participating countries were permitted a variation of +/- 2.25% although the Italian Lira and the Spanish Peseta had a 6% band because of their volatility. When this margin is reached the two central banks concerned must intervene to keep within the permitted variation. The UK persistently refused to join the ERM, but under political pressure from other members agreed to join “when the time is right”. The Chancellor decided that this time had come in the middle of October 1990. The UK pound was given a 6% variation

Black Wednesday

Although it stood apart from European currencies, the British pound had shadowed the German mark (DM) in the period leading up to the 1990s. Unfortunately, Britain at the time had low interest rates and high inflation and they entered the ERM with the express desire to keep its currency above 2.7 DM to the pound. This was fundamentally unsound because Britain’s inflation rate was many times that of Germany’s.

Compounding the underlying problems inherent in the pound’s inclusion into the ERM was the economic strain of reunification that Germany found itself under, which put pressure on the mark as the core currency for the ERM. Speculators began to eye the ERM and wondered how long fixed exchange rates could fight natural market forces. Britain upped its interest rates to 15% (5% in one day) to attract people to the pound, but speculators, George Soros among them, began heavy shorting* of the currency. Spotting the writing on the wall, by leveraging the value of his fund, George Soros was able to take a $10 billion short position on the pound, which earned him US$1 billion. This trade is considered one of the greatest trades of all time.

* In finance, short selling is the practice of selling assets, usually securities, that have been borrowed from a third party (usually a broker) with the intention of buying identical assets back at a later date to return to that third party. The short seller hopes to profit from a decline in the price of the assets between the sale and the repurchase, as the seller will pay less to buy the assets than it received on selling them. Wikipedia.

European Structural Unemployment

Here is a great graphic from the Wall Street Journal which identifies the structural unemployment, productivity levels and the unemployment rate. Structural unemployment refers to unemployment arising from changes in demand or technology which lead to an oversupply of labour with particular skills or in particular locations. Structural unemployment does not result from an overall deficiency of demand and therefore cannot be cured by reflation, but only by retraining or relocation of the affected work-force, some of which may find work at low wages in unskilled occupations. Structural unemployment is distinct from frictional unemployment, which is essentially a short-term phenomenon.

* Spain and Greece have been highlighted as economies with significant unemployment problems.
* Ireland although has high unemployment does have encouraging productivity levels compared to other EU countries
* Norway seems to have things right – low unemployment and high productivity
* Eastern bloc countries tend to have lower productivity levels.

% Change – GDP per person – 1999 – 2014

Useful graphic from The Economist that shows the % change in GDP from 1999 – 2014.
1999 was when the Euro currency was introduced and with Latvia joining the currency bloc at the start of this year that makes 18 members. Spain, Greece, Portugal and Italy have struggled since the GFC especially Italy – negative GDP. Germany’s GDP per person has increased by over 20% since 1999. Benefitting from export revenue in recent times with a weak euro.

CAP reforms unlikely to benefit New Zealand farmers.

A move by the European Union to slash subsidies to farmers isn’t as big a deal as it sounds. The EU has announced cut to the subsidies it pays industrial scale farmers of up to 30% – this is part of the Common Agricultural Policy (CAP) which costs the EU tax payers 50bn a year and is 40% of the whole EU budget. This will be of little benefit to NZ farmers as they will still be denied access through tariffs and quotas on sheep, butter, cheese etc.

Objectives of CAP

At the outset of the EU, one of the main objectives was the system of intervention in agricultural markets and protection of the farming sector has been known as the common agricultural policy – CAP. The CAP was established under Article Thirty Nine of the Treaty of Rome, and its objectives – the justification for the CAP – are as follows:

1. Raise and maintain farm incomes, through the establishment of high prices for food. Such prices are often in excess of the free market equilibrium. This necessarily means support buying of surpluses and raising tariffs on cheaper imported food to give domestic preference.
2. To reduce the wide flutuations that often occur in the price of agriculutural products due to uncertain supplies.
3. To increase the mobility of resources in farming and to increase the efficiency of all units. To reduce the number of farms and farmers especially in monoculturalistic agriculture.
4. To stimulate increased production to achieve European self sufficiency to satisfy the consumption of food from our own resources.
5. To protect consumers from violent price changes and to guarantee a wide choice in the shop, without shortages.

CAP Intervention Price

An intervention price is the price at which the CAP would be ready to come into the market and to buy the surpluses, thus preventing the price from falling below the intervention price. This is illustrated below in Figure 1. Here the European supply of lamb drives the price down to the equilibrium 0Pfm – the free market price, where supply and demand curves intersect and quantity demanded and quantity supplied equal 0Qm. However, the intervention price (0Pint) is located above the equilibrium and it has the following effects:

1. It encourages an increase in European production. Consequently, output is raised to 0Qs1.
2. At intervention price, there is a production surplus equal to the horizontal distance AB which is the excess of supply above demand at the intervention price.
3. In buying the surplus, the intervention agency incurs costs equal to the area ABCD. It will then incur the cost of storing the surplus or of destroying it.
4. There is a contraction in domestic consumption to 0Qd1
Consumers pay a higher price to the extent that the intervention price exceeds the notional free market price.

Figure 1: The effect of an intervention price on the income of EU farmers.

The increase in farmers’ incomes following intervention is shown also: as has been noted, one of the objectives of price support policy is to raise farmers’ incomes. The shaded area EBCFG indicates the increase in the incomes of the suppliers of lamb.

Throughout most of its four decades of existence, the CAP has had a very poor public relations image. It is extremely unpopular among consumers, and on a number of occasions it has all but bankrupted the EU.

Spain tries the German method to reduce unemployment

If you look at the labour market in Spain you would think that it resembles the German economy 10 years ago when Gerhard Schroder was its leader. Schroder was responsible for labour reforms that ignited the German economy into one of the strongest in Europe.

Spain is relaxing labour laws and cutting public spending and there are some positive signs here in that labour unit costs are falling as result of greater productivity. However German’s vocational education sector was a significant factor in its improved performance as the education and training system is more job orientated. Furthermore, with austerity measures in place and more to follow – pressure from the EU to introduce yet another sales-tax rise – Spain will find it hard to generate any sort of growth. But if it does grow will it generate any reduction in unemployment? Because of labour reforms some economists now believe that only 1.5% growth is required to bring about net job creation rather than 2.5% as previous.

Credit Rating Agencies – how countries stack up.

Here is a list of the latest ratings by the three main rating agencies. Notice that Australia and the three Scandinavian countries have top ratings. The UK lost its top rating from Moody’s but maintained the top rating from the other two. New Zealand comes in further down with a top rating from Moody’s but has lost its top grade from the other two. When you get to B status your are talking high risk or junk status and this is quite evident with the PIGS counties.

If you have watched the movie documnetary ‘Inside Job’ you will remember that these 3 credit rating agencies also rated high risk investments – sub-prime mortgages – as AAA, up to a week before they failed. The same could be said about their rating of investment company Bear Stearns.

Ultimately they could have ‘stopped the party’ but delayed ratings reports and made junk status investments AAA rated. But as they testified in front of congress their advice to clients are opinions ‘just opinions’ – I wonder do they share the opinions of those that lost huge amounts of money, including sovereign investments. Recently they downgraded Greece and Spain in the knowledge that the servicing of the debt would now become more costly for those countries and stifle any sort of recovery in the near future.

World Economy: Car driven by a drunk

David A. Rosenberg an economist with Clusken Sheff in Canada, has likened the world economy to that of a car being driven by a drunk – that is the car is moving back and across the centre line just missing the ditches on the side of the road. Currently he sees the car in the middle of the road although he questions as to whether this is due to the driver becoming more sober or steering towards the ditch on the other side.

Recently the US stock market (Dow Jones Industrial Average) went above 14000 for the first time in more than five years for the following reasons:

1. Better job figures – employers added 157,000 jobs in January and hired more workers in 2012 than had previously been thought. See chart below.
2. Corporate earnings have been stronger than expected,
3. US Federal Reserve has indicated that it will keep interest rates at near zero levels as well as continuing their policy of monthly $85 billion purchases of bonds and mortgage-backed securities, which injected $3 trillion into the banking system last week.

This third point is particularly important. In the New York Times, Rosenbery stated that he didn’t see the US economy in a recession as yet but could quickly go in that direction. “Anemic growth is my baseline scenario.” Also how long can the US Fed keep propping up equity markets and pumping money into the system? The conditions in Europe are not much better – unemployment rose to record levels in December last year and currently stands at 26.8% in Greece and 26.1% in Spain. Add to that the austerity measures which have impacted greatly on overall aggregate demand and the consumer slowdown in Germany, the eurozone area has its problems. So the car might be in the middle of the road right now but it might not take too much for it to deviate from a safe path.

Velocity not there for global recovery

The race for countries to devalue their currency (make their exports more competitive) has led to massive increase in monetary stimulus into the global financial system. We are all aware of the three rounds of Quantitative Easing from the US Fed and the indication that they would keep the Fed Funds Rate at virtually zero until 2015. To add fuel to the ‘dim embers’, in 2013 the US is going to inject US$1 trillion into the circular floe. However in China they have also embarked on some serious stimulus:

* More infrastructure development – US$60bn
* Additional credit – US$14 trillion in extra credit since 2009 (equal to entire US banking system)

Nevertheless even with all this artificial stimulus there might be some short-term growth but I can’t see it being sustainable when you consider the extent of global deleveraging. Also IMF figures show that the world saving rates are on the increase (* forecast):

With increased saving rates accompanied by significant austerity measures in many parts of Europe where is the consumer demand going to come from? Unemployment in Spain is 26% and predicted to hit 30% this year- more worrying is 50% of those under 25 are unemployed. Spanish protesters chanted “We don’t owe, we won’t pay” in a march against austerity. So in the US we have massive fiscal stimulus but across the water in Europe it’s all about “tightening the belt” and cutting government spending. Neither seems to be working and are we just putting off a significant downturn for a later date?

Danish Fat Tax in the scraps

After a year in operation the Danish government recently announced that it was to abolish its tax on saturated fats. The idea behind the Fat Tax was to increased the price of unhealthy foods and therefore reduce consumption and improve the health of the population. However in practical terms the tax was a nightmare to administer as it not only targeted chips, burgers, hot dogs etc but also high-end food including gourmet cheeses. According to some critics this was to the worst example of the nanny state. The Economist reported some of the problems:

* Bakers were concerned with fat content in their cakes.
* Pig farmers said their famous bacon would cost more than imports.
* Independent butchers complained that supermarkets could keep their meat prices down as they could spread the cost of the tax across other goods.
* The tax applied on meat was imposed by carcass not per cut, which meant higher prices for lean sirloin steak as well as fatty burgers.
* Before the tax was imposed there was significant hoarding especially in margarine, butter and cooking oil

However there was also a surge in cross border shopping and a study estimated that 48% of Danes had done shopping in Germany and Sweden – sugary drinks, beer, butter etc were no doubt high on the shopping list.

How Germany became Europe’s richest country

Here is a clip from PBS on the German economy as to why it is has been so successful.

* The secret to Germany’s success seems to be evident in small-to-medium-sized family firms that manufacture some highly specialized and indispensable piece of equipment. The Germans like to say, we make the thing that goes inside the thing that goes inside the thing.

* With just a quarter of America’s population and a quarter of its GDP, Germany exports more than the United States in total

* Germany have 1 percent of the labour force of the world, and 10 percent of the world exports.

Do Aussies have fiscal tightening at euro-zone austerity levels?

The table below from the Australian Markets Weekly (Published by National Australia Bank) shows the fiscal position of euro-zone and other developed nations. As you can see the PIIGS (Portugal, Ireland, Italy, Greece, Spain) of the euro-zone countries have very high gross debt to GDP levels except for Spain. Japan has the highest but is also the only economy involved in fiscal loosening – see column 4. Notice the severity of tightening in some euro-zone countries as austerity measures start to be implemented. It does seem a little strange that Australia’s tightening in fiscal policy is greater than that of the UK and the US and not that far from the IMF‟s estimate of “austerity” announced for Italy.

The memo items are also of interest in that they show the nominal GDP, debt and budget balance in $USbn. In nominal GDP you have USA, China, Japan, Germany as the leading economies by output levels. China overtook Japan this year.

Euro-zone back into recession

Western European economies went back into recession (defined as two consecutive quarters of negative GDP) as the injection of demand into the circular flow was more than offset by public austerity programmes in certain countries. The conditions in the Euro-zone don’t seem to be very conducive to any sort of recovery – contractionary fiscal policy is prevalent in many countries and a lack of confidence across the region stifles any upturn.

Greece is still has serious concerns over any recovery – IMF boss Christine Lagarde stated that Greece should be given “a bit more time”.
“This is what I have advocated for Spain, Portugal and what we are advocating for Greece. An additional two years was necessary for the country to actually face the fiscal consolidation programme that is considered.”

However there is still some more hardship to come before any sort of economic recovery. I was surprised at the German growth levels over the last tow quarters. Quite like this graph showing annual GDP in the Euro-zone.

Global Competitiveness Ranking

Here is a great image from The Economist showing the competitiveness and GDP per person. New Zealand comes in at 25th in Global Competitiveness ranking – see red arrow on graph. Notice that Switzerland is the top country followed by Singapore with Finland in third place. Amongst the emerging economies China is top with Brazil in second place.

The most striking fall is the United States, which has dropped in the rankings for four years in a row. It is now seventh. The rankings are based on criteria such as institutions, infrastructure, financial systems, flexible labour markets, economic stability, innovations and public services. Plotting the scores against GDP per person reveals an unsurprising correlation: competitiveness brings wealth, but rich countries can most easily afford to provide the conditions for it. They can squander competitiveness too.

AS Unit 5 – State of Global Unemployment

In Unit 5 of the Cambridge AS course unemployment is a significant area of study. It is also important that you are up to date with current trends worldwide. In the OECD the average unemployment rate was 7.9% whilst the eurozone area showed 11.1%. There are two main features of this unemployment – youth unemployment and those who are long-term unemployed. The graph below shows figures that range from 4.4% in Japan and 24.6% in Spain.

Youth Unemployment
This is a major problem especially for those that are unskilled and looking for employment in blue collar jobs. These countries with high youth unemployment have experienced long-term consequences, particularly for those with limited education. Brian Gaynor in the New Zealand Herald mentioned some consequences of youth unemployment from various sources. They include:

* Being unemployed young resulted in lower earnings by 8.4% – 13% in future years.
* A 1% increase in US unemployment resulted in a 6-7% decrease in the wages of college graduates.
* Youth unemployment raised the probability of unemployment in later life
* Loss of earning up to 21% at age 41 for workers who experienced unemployment in early adulthood.
* Unemployment in early 20’s affected earnings, health and job satisfaction up to two decades later.

Long-Term Unemployed
According to the OECD and since the GFC the rise in numbers who have been unemployed for over one and two years are as follows:
1 year – 1.6% to 2.9%
2 years – 0.9% to 1.5%

One of the major issues that a lot countries face is the number of baby boomers that are remaing in the workforce after 65 and the impact this will have on youth unemployment. Furthermore, it is interesting to note from the OECD that labour’s share of national income in its 34 countries has declined from 66.1% to 61.7% in the last 10 years. According to Brian Gaynor the decline in labour’s share is due to a number of factors:

* Greater productivity gains
* Increased mobility and transfer of low-skilled activities from developed to emerging countries
* Weaker trade unions – impacts bargaining powers
* Privatisation – newly privatised companies are more profitable and have fewer employees

Minimum Wage Increase?
The OECD argue against a higher minimum wage as it will increase prices. Also in the long-term firms respond by increasing productivity levels beyond the wage rise which leads to a decline in labour usage and therefore a greater emphasis on capital.