To its proponents, towering skyscrapers bustling with economic activities encapsulate the progressive nature of the community.They are grandiose architectural successes etching closer and closer to the sky as communities engage in an arms race to boast that only the sky is the limit. To its staunch opponents, they are but hollow phallic symbols showcasing garish extravagence. Fervent supporters of skyscrapers are quick to point out that major global city centers have one - the Empire State Building in New York; Taipei 101 in Taipei etc. Some would even go as far as arguing that the construction of skyscrapers causes economic growth.I am skeptical of such arguments on the basis that correlation is not causation.
Just because skyscrapers are found in major city centers in the way doesn't prove that their construction brings economic growth. In an ironic(and iconic) twist, Burj Dubai, the skyscraper that was to be inaugurated as the tallest skyscraper in the world was renamed Burj Khalifa in gratitude to the U.A.E for bailing Dubai out of a property bust. Using skyscrapers to predict economic boom or gloom would yield a prediction no more accurate then say, flipping a coin.
There is always a "construction lag" between the time investment decisions are made and the time a skyscraper is completed. The fact that skyscrapers tend be completed in times of boom doesn't mean that investment in skyscrapers per se contribute to growth. Rather the macroeconomic conditions were such that investors expected inflation to pose enough justification to invest now in a skyscraper (because their money will be worth much less in the future); or are expecting interest rates to increase as the Reserve Banks try to cool down an overheated market. Either way, the decision to build skyscrapers is an effect of a booming economy rather than the other way around.
Of course, a keen reader might observe that the flip side can also be true. The completion of a skyscraper might also predict a bust. (Hence the Skyscraper Index). If investment decisions are made in a market fuming with irrational exuberance, where nobody entertains the idea that the bubble will burst, then the completion of a skyscraper under such condition is inevitably accompanied with a period of gloom. When the dust settles in the aftermath of the bubble's burst, what we are left with are a glut of towering buildings appraised with low values that would have seemed preposterous months ago.
By now, how confident can we be with the causal relationship between skyscrapers and economic growth?Skyscrapers can't even be used reliably to establish a correlational relationship with a boom/bust outcome. And in what sense is a skyscraper beneficial for growth? In thinking of building one we also have to take into account the high cost in maintenance such buildings incur. If the presence of a skyscraper signals to investors on how serious a party is in the development of an area, as an economics student I have to ask, would the same be achieved by building a vast network of infrastructure connecting to the site?
So hopefully you can all see that not only is it dubious to claim that building skyscrapers drives growth, correlating skyscrapers with specific outcomes is equally questionable.
I am not opposed to growth and I am willing to entertain the idea that skyscrapers can contribute to growth if I am presented with strong evidence. What I am unwilling to accept is the junk-economics people try to sell me by cherry-picking data and packaging dubious correlational arguments into undisputed causal ones.
Thursday, December 9, 2010
Sunday, October 31, 2010
Unabashed self-promotion
Thursday, October 14, 2010
The Microfinance Debate at McGill
So in between academics and getting my life in order I also involve myself in some of the clubs that interest me here at McGill. The student body is very active and discourses are often intellectual or inane, depending on context. (Topics range from changing the world, gender inequality etc etc to well why the Toronto Maple Leaf is suddenly on a hot streak, killing the Pittsburgh Penguins 4-3 yesterday night).
Anyway I have also successfully obtained a position as a contributor to Student Network for Economic Development so the goal is to turn in an article on microfinance every week.
Being the contributor can be a very humbling position because quite often you have to be prepared to answer question and engage in discussions. Sometimes I correspond on behalf of the club with the school's paper and well basically anyone who is interested in anything about Microfinance. This is the interview with SNED and my response on behalf of it.
Do you think that Microfinance, due to its effectiveness, has diminished the credibility of the World Bank and IMF?
Yes, if you look at the resources that the World Bank and IMF have poured into tackling the issue of poverty the results are dismal and even counter-effective at times. What the World Bank and IMF didn't understand was that there is no one-size-fit-all policies when it comes to tackling something as tacky as poverty. Glocalisation would be a more effective way of approaching it. Microfinance is not always successful in all parts of the world, and a good example that comes to mind is India(government mandated loan requirement forces Microfinance Institutions to be reckless in handing out loan and not informing borrowers that these are loans and not handouts). What we have to understand is that any approach in microfinance has to be tailored to the varying needs of different communities. So in terms of incorporating such understanding in their business models, MFIs (Microfinance Institutions) are successful and hence the perceived diminished credibility of the World Bank and the IMF.
Do you think that Professor Yunus, whose area of expertise is in Banking, is going in over his head by now endeavouring to change the health of Bangladeshi Citizens? Shouldnt that be the government of Bangladeshes job?
No, Grameen Bank is a social enterprise that has a different objective compared to other types of firms in the market. A social enterprise is utility-maximising rather than profit-maximising,so the priorities of social enterprises are to maximise community welfare with market-based solutions, rather than to be solely driven by profit and shareholder value per se. You can see a social enterprise as an entity that bridges the efficiency of businesses with the soul of humanity. While governments are mandated by its citizens to implement policies to look after the well-being of society, they are notorious for enacting costly, sinkhole projects in spite of the noble intentions behind such initiatives. What makes it more difficult for any government to function is the scarcity in resources that it has to grapple with, particularly in terms of funding. Fiscal austerity is a perennial concern for foreign investors, or government treasury bond holders; in a similiar vein the issues of taxation, transparency in government also cripples governments in a way. Professor Yunus's initiative is desirable in a way in that it steps up to the expectations that the government failed to meet. If Grameen is able to come up with social-business models that can cater to the health needs of Bangladeshi citizens then it would be a gain to the economy (sinkhole projects are a deadweight loss). Social-enterprises can have a comparative advantage in certain projects (as results in microcredit can attest), and it certainly is better for governments to allow social enterprises to replace them in areas where these social enterprises have a comparative advantage in.What this differs from say,privatising social welfare programmes is that social enterprises still take into account social welfare rather than to be profit driven. So it is one thing to look at privatisation of public goods in askance, but there is a distinction between social enterprises and firms that seek to maximise only profit. In fact I would go as far as saying that part of the government's major objective is to allow an efficient distribution of resources, so having social enterprises replacing them in certain roles in the economy is their job. This is why I don't think Professor Yunus is overeaching in terms of trying to work on this healthcare project
Will social business deter FDI within a country because it will make it appear greedy if they are working for - profit? Is that such a bad thing?
There are no empirical data that I have seen that links FDI flows with the fear of appearing to be greedy, so what I have to offer is plausible conjectures but is nonetheless backed up by my observation (though I ought to remind you that I might have an observer bias in this). What is plausible is that it will probably not have that huge an impact on FDI flows on two grounds. First,at the short and medium run at least, FDI's generally flow to regions that act as manufacturing hubs rather than consumption hubs. So regions that offer cheaper materials and labour are attracting FDIs because they are cheaper to operate and not because they have a potential market that can be tapped into.As in the case of China, it might be the second biggest economy in the world but it is still dependent on exports and the market of potential consumers is not the number of its population, but is estimated to be in the region of 300 million,roughly the size of the population in the USA. So even if they are profit-driven, workers in impoverished regions offering cheap labour to attract FDI will not stop working on accounts that the companies they are working for is profit-driven or greedy, simply because the need for wages is higher.Consumers who are also workers in this region then will exert little pressure on the foreign firms investing in the country, so this is where there is minimal impact on FDI flows. Secondly, under the pressure from "ethical shareholders" and consumer activism, firms seem to be altering their behaviour when it comes to operating their business. While they remain committed to shareholder value and profitability, we are seeing firms who are incorporating some degree of community welfare in their business. (Think of Starbuck's fair-trade policy, environmental-friendly commitment. These are ways to promote themselves as green companies for sure, but at least such marketing efforts is good for the communities that they operate in).
An altered behaviour of firms is not a substitute for social enterprises to be sure. But in their difference in goals, social enterprises are offering consumers around the world to compare the behaviour of social enterprises and the mainstream profit driven enterprises. This gives purely profit-driven firms pressure to put on their best behaviour. So overall I think social business do not affect FDI's flow, but it does provide consumers around the globe to compare the behaviour of social businesses and purely-profit businesses, which in turn altered the behaviour of profit-driven firms to take into account any externalities they impose on the community, and ways to enrich the community that they operate in. So the impact is not only minimal, it also brings about a good change.
Yes, if you look at the resources that the World Bank and IMF have poured into tackling the issue of poverty the results are dismal and even counter-effective at times. What the World Bank and IMF didn't understand was that there is no one-size-fit-all policies when it comes to tackling something as tacky as poverty. Glocalisation would be a more effective way of approaching it. Microfinance is not always successful in all parts of the world, and a good example that comes to mind is India(government mandated loan requirement forces Microfinance Institutions to be reckless in handing out loan and not informing borrowers that these are loans and not handouts). What we have to understand is that any approach in microfinance has to be tailored to the varying needs of different communities. So in terms of incorporating such understanding in their business models, MFIs (Microfinance Institutions) are successful and hence the perceived diminished credibility of the World Bank and the IMF.
Do you think that Professor Yunus, whose area of expertise is in Banking, is going in over his head by now endeavouring to change the health of Bangladeshi Citizens? Shouldnt that be the government of Bangladeshes job?
No, Grameen Bank is a social enterprise that has a different objective compared to other types of firms in the market. A social enterprise is utility-maximising rather than profit-maximising,so the priorities of social enterprises are to maximise community welfare with market-based solutions, rather than to be solely driven by profit and shareholder value per se. You can see a social enterprise as an entity that bridges the efficiency of businesses with the soul of humanity. While governments are mandated by its citizens to implement policies to look after the well-being of society, they are notorious for enacting costly, sinkhole projects in spite of the noble intentions behind such initiatives. What makes it more difficult for any government to function is the scarcity in resources that it has to grapple with, particularly in terms of funding. Fiscal austerity is a perennial concern for foreign investors, or government treasury bond holders; in a similiar vein the issues of taxation, transparency in government also cripples governments in a way. Professor Yunus's initiative is desirable in a way in that it steps up to the expectations that the government failed to meet. If Grameen is able to come up with social-business models that can cater to the health needs of Bangladeshi citizens then it would be a gain to the economy (sinkhole projects are a deadweight loss). Social-enterprises can have a comparative advantage in certain projects (as results in microcredit can attest), and it certainly is better for governments to allow social enterprises to replace them in areas where these social enterprises have a comparative advantage in.What this differs from say,privatising social welfare programmes is that social enterprises still take into account social welfare rather than to be profit driven. So it is one thing to look at privatisation of public goods in askance, but there is a distinction between social enterprises and firms that seek to maximise only profit. In fact I would go as far as saying that part of the government's major objective is to allow an efficient distribution of resources, so having social enterprises replacing them in certain roles in the economy is their job. This is why I don't think Professor Yunus is overeaching in terms of trying to work on this healthcare project
Will social business deter FDI within a country because it will make it appear greedy if they are working for - profit? Is that such a bad thing?
There are no empirical data that I have seen that links FDI flows with the fear of appearing to be greedy, so what I have to offer is plausible conjectures but is nonetheless backed up by my observation (though I ought to remind you that I might have an observer bias in this). What is plausible is that it will probably not have that huge an impact on FDI flows on two grounds. First,at the short and medium run at least, FDI's generally flow to regions that act as manufacturing hubs rather than consumption hubs. So regions that offer cheaper materials and labour are attracting FDIs because they are cheaper to operate and not because they have a potential market that can be tapped into.As in the case of China, it might be the second biggest economy in the world but it is still dependent on exports and the market of potential consumers is not the number of its population, but is estimated to be in the region of 300 million,roughly the size of the population in the USA. So even if they are profit-driven, workers in impoverished regions offering cheap labour to attract FDI will not stop working on accounts that the companies they are working for is profit-driven or greedy, simply because the need for wages is higher.Consumers who are also workers in this region then will exert little pressure on the foreign firms investing in the country, so this is where there is minimal impact on FDI flows. Secondly, under the pressure from "ethical shareholders" and consumer activism, firms seem to be altering their behaviour when it comes to operating their business. While they remain committed to shareholder value and profitability, we are seeing firms who are incorporating some degree of community welfare in their business. (Think of Starbuck's fair-trade policy, environmental-friendly commitment. These are ways to promote themselves as green companies for sure, but at least such marketing efforts is good for the communities that they operate in).
An altered behaviour of firms is not a substitute for social enterprises to be sure. But in their difference in goals, social enterprises are offering consumers around the world to compare the behaviour of social enterprises and the mainstream profit driven enterprises. This gives purely profit-driven firms pressure to put on their best behaviour. So overall I think social business do not affect FDI's flow, but it does provide consumers around the globe to compare the behaviour of social businesses and purely-profit businesses, which in turn altered the behaviour of profit-driven firms to take into account any externalities they impose on the community, and ways to enrich the community that they operate in. So the impact is not only minimal, it also brings about a good change.
After this, the Daily's contributor wrote an article about microfinance and the social changes it has brought.
Of course, not everybody agreed. A graduate student with the pseudonym Ted Sprague disagreed and instead assailed microcredit as a tool in exploiting and enslaving the poor. In it he is also critical of the capitalistic system as a whole and his arguments, while well-intended does strike me as being too dogmatic and not objective enough.
(Note: I consider myself centre-left leaning, so don't get me wrong and think that I am here espousing market-fundamental values, I subject my view to skepticism too and that is why I limit whatever I present).
My commentary will be published on Monday's issue and I will then post a link to this post.
Update: The commentary I mentioned about can be accessed here.
Update: The commentary I mentioned about can be accessed here.
Monday, August 30, 2010
Steroid-fuel growth
I do not share the enthusiasm of China's spectacular GDP growth nor celebrate the "inevitable" rise of the country as the biggest economy of the world. Recently it has usurped Japan as the world's second biggest economy and market sentiments are mixed, with one camp predicting the country to hurtle with the same feverish expansion rate while the other predicting a sluggish growth and possibly a collapse due to speculations and "gluts." I lean towards the skeptics of China's growth in the latter.
The New York times recently published this article on the Chinese government's expansive (and expensive) influence in the economy. To be sure state mediated growth is crucial to a country's development. On the other hand I doubt that the massive clout granted to State-Owned Enterprises in crowding out the private businesses in China is sustainable and efficient. In a country where the Gini Index (measuring income inequality) lingers around 40 (but admittedly improving from 2009 to 2010), I wonder how much of the growth in GDP actually trickles down to improving the quality of life of the working class citizens. Real-estate that is unfortunately plunged in feverish speculation remains out of reach and unaffordable to many.
Which poses an interesting thing to look into. Could the spectacular growth in GDP be mostly a circus performance of State Owned Enterprises exchanging money and overcrowding the domestic and international market with moderate impact in enhancing the quality of life for the workers toiling away in factories?
For fans of history, the Japanese model of Keiretsu could be seen as a classic market failure with severe repercussions on the economy. With a business alliance formed around a bank, corporations are under no pressure from shareholders or alternative capital markets to make wise investments and even worry about sustainable profit (if any at all). So the strategy was to break into the world market by pricing competitors out even though it means taking a hit in the short run. Eventually it all broke down and despite it's technological progress, Japan was caught in a lost decade. (Insight gained from Paul Krugman's "Return of Depression Economics")
Similarly without the limitations imposed by private financial institutions, state-owned banks can dole out money like sugar daddy to state owned enterprises which might make imprudent investment decisions, and all the while crowding out efficient private businesses while they are at it. Apart from that, I wonder if there is really a demand for the capacity of the infrastructures constructed under the stimulus plan. All of these seems to point to a "growth-recession" to me.
Note: "Growth Recession" is when the economy is expanding but not enough to utilise its excess or "glut" of capacity. This is also something I learned from Krugman's "Return of Depression Economics."
I could be very wrong, but I don't see any reason to celebrate China's triumph but plenty of reasons to worry about it.
Thursday, August 12, 2010
Inflate out of Deflation?
Suppose you were the Vice President of Sales for the Coastal Region of Acountrylah of Crazy for Coconuts, a cafe specialising in offering refreshing drinks. Acountrylah has a tropical climate, though the coastal regions are exposed the monsoon season periodically. As it is now a monsoon season, your sales have been plummeting and demand for your drinks has fallen. In order to narrow the gap in sales caused by seasonal variation, you have decided to issue vouchers to stimulate sales.
Even though your vouchers are trading at 10 cents over the Ringgit (So in this case a RM50 voucher costs only RM5) - sales are still not picking up. Perplexed by this response, you spoke to your QC manager and even employed the service of a consultation firm to see if there is something wrong with your product. The customers surveyed assured you that your product is fine and tastes as good as they are accustomed to. So again, you remain confused. If the vouchers are picked up by customers, why isn't anybody using them?
A little bit of investigation shows that most customers are hogging the vouchers so that they can use it when the monsoon season ends. To your greater annoyance, there is a "carry trade" going on where people buy the vouchers from your coastal region and sell it to people in the non-coastal region at a higher price, but still less than the face value of the voucher. (This exploitation of arbitrage opportunity is profitable to those who are exploiting it). Essentially you are trying to sell your drinks for "free" (vouchers can only be used when there are purchases of a certain amount on a single receipt of course). This outcome has stymied, even rendered your efforts to stimulate sales futile. Even though there is a huge amount of vouchers circulating around, nobody is using it and thus your little economy is in caught in a "liquidity trap." (Liquidity Trap = plenty of money around but little transaction)
In a stroke of genius, you decide to choose one of these two options. First, you can declare that vouchers that are worth RM50 will be worth, say only RM5 at the end of the monsoon season. Two, you put an expiry date on the vouchers, and will no longer acknowledge it when it is not a monsoon season. As a result, sales are picking up again and people are using the vouchers. Your cafes are selling drinks and you have successfully narrowed the gap in sales due to seasonal variation.
Of course, the parable above is an exercise in theory on what to do with the US economy. With the Federal Reserve Bank's recent revision of outlook from "moderate" to well, a more gloomy outlook and unemployment rate at an obstinate 9.5%, the Federal Reserve Bank has decided to maintain its monetary base with a $2 Trillion by buying more Treasury Securities with the proceeds from its mortgage backed security that has matured. With deflation now a major source of concern, and that the expansion of monetary base (which must be said, is substantial by historical standards) having no impact on inflation (and spending), it seems pretty likely that the US is now caught in a liquidity trap. The drop in productivity and fall in consumer spending suggest that this is highly likely.
So recall the two options the VP of the Coastal Region of Crazy for Coconut in Acountrylah faced. Option one is essentially a form of inflation (when a voucher worth RM50 is worth only RM5), and what this tells us is that inflation can potentially lift us out of a liquidity trap. So perhaps printing more money (quantitative easing) to induce inflation can help stimulate the economy once again as people will spend now(if they spend later their money becomes weaker because of inflation) instead of hogging it for fear of their money losing its value? Inflation also helps to reduce the real value of debts the US currently holds in addition to paying off some of the outstanding debts.
As sound as this proposal might seem in a hypothetical world, it could lead to serious negative repercussions in the real world, especially when applied to the context of present day US. Inflation and quantitative easing spooks investors and bond-holders. If a inflate-us-out-of-here policy is in place, bond-holders will likely demand higher interest rates to protect their investments (and also a high premium to compensate for the risk assumed). In addition, it is hard to quantify how such a policy will negatively impact on market confidence on the US government's ability to implement and coordinate sounds fiscal policy and how it casts doubt on the Federal Reserve Bank's ability to exercise sound monetary policy. A currency crisis is very likely and a feedback-loop inherent in such currency crises might exacerbate the problem more, provoking a crisis as severe as that of Argentina,Mexico or even the Asian Financial Crisis of 1997.
This sounds like too huge a risk to run.
So now we have option 2. Slightly unlike the parable, I do not suggest pulling out the Greenback out of circulation. Instead, a sub-money can be introduced to the economy in coordination with the tax cuts enacted under the fiscal stimulus programme (American Recovery and Reinvesment Act 2008). Yes,various studies have proven that tax cuts can be more effective than government spending, but this recession is unlike any other and the uncertainties it entails makes it more sensible to many to hold on to their money in lieu of spending. (To be fair I have no empirical data to back this up, though intuitively speaking it seems like this is the case. Perhaps a study on the spending and saving habits of those who received their tax cuts could be useful).
Instead of granting citizens Tax Credits, perhaps the citizens can be made to pay the full amount of taxes they owe, and the tax cuts they are entitled to be given in the form of spending vouchers. Such vouchers should be stripped of their function as a store of value by law (so banks and other financial institutions will not pay interests on it) to prevent an incentive of hogging it. However it must be indexed to inflation by having the government guaranteeing the real value of the voucher when it is pulled out of circulation and transferred into cash to ensure that people will use it as a form of money (but without its function as a store of value). An expectation of inflation in the future and the fact that this sub-money is non-interest bearing is likely to build up the momentum to escape from a liquidity trap, though I will not go as far as saying that this is guaranteed. In short, this sub-money is a medium of exchange and an instrument of accounting. If it were me, since I get no interest in saving this sub-money and that things are relatively cheap (because of deflation), I'd spend/invest right now and get ready to reap rewards in the future.
On whether or not the government has the right to force people to spend their money indirectly (as in introducing a sub-money that cannot function as a store of value to force spending) is beyond the scope of this post.
I must also say that I have not given it thorough politico-economic thought so I am in no position to elaborate on that side of it. Though it must also be mentioned that isn't the Federal Reserve empowered by law to do whatever it takes in extenuating circumstances to prevent a downward spiral of the economy. If that were the case doesn't that also apply to a government trying to veer the economy to recovery?
Even though your vouchers are trading at 10 cents over the Ringgit (So in this case a RM50 voucher costs only RM5) - sales are still not picking up. Perplexed by this response, you spoke to your QC manager and even employed the service of a consultation firm to see if there is something wrong with your product. The customers surveyed assured you that your product is fine and tastes as good as they are accustomed to. So again, you remain confused. If the vouchers are picked up by customers, why isn't anybody using them?
A little bit of investigation shows that most customers are hogging the vouchers so that they can use it when the monsoon season ends. To your greater annoyance, there is a "carry trade" going on where people buy the vouchers from your coastal region and sell it to people in the non-coastal region at a higher price, but still less than the face value of the voucher. (This exploitation of arbitrage opportunity is profitable to those who are exploiting it). Essentially you are trying to sell your drinks for "free" (vouchers can only be used when there are purchases of a certain amount on a single receipt of course). This outcome has stymied, even rendered your efforts to stimulate sales futile. Even though there is a huge amount of vouchers circulating around, nobody is using it and thus your little economy is in caught in a "liquidity trap." (Liquidity Trap = plenty of money around but little transaction)
In a stroke of genius, you decide to choose one of these two options. First, you can declare that vouchers that are worth RM50 will be worth, say only RM5 at the end of the monsoon season. Two, you put an expiry date on the vouchers, and will no longer acknowledge it when it is not a monsoon season. As a result, sales are picking up again and people are using the vouchers. Your cafes are selling drinks and you have successfully narrowed the gap in sales due to seasonal variation.
Of course, the parable above is an exercise in theory on what to do with the US economy. With the Federal Reserve Bank's recent revision of outlook from "moderate" to well, a more gloomy outlook and unemployment rate at an obstinate 9.5%, the Federal Reserve Bank has decided to maintain its monetary base with a $2 Trillion by buying more Treasury Securities with the proceeds from its mortgage backed security that has matured. With deflation now a major source of concern, and that the expansion of monetary base (which must be said, is substantial by historical standards) having no impact on inflation (and spending), it seems pretty likely that the US is now caught in a liquidity trap. The drop in productivity and fall in consumer spending suggest that this is highly likely.
So recall the two options the VP of the Coastal Region of Crazy for Coconut in Acountrylah faced. Option one is essentially a form of inflation (when a voucher worth RM50 is worth only RM5), and what this tells us is that inflation can potentially lift us out of a liquidity trap. So perhaps printing more money (quantitative easing) to induce inflation can help stimulate the economy once again as people will spend now(if they spend later their money becomes weaker because of inflation) instead of hogging it for fear of their money losing its value? Inflation also helps to reduce the real value of debts the US currently holds in addition to paying off some of the outstanding debts.
As sound as this proposal might seem in a hypothetical world, it could lead to serious negative repercussions in the real world, especially when applied to the context of present day US. Inflation and quantitative easing spooks investors and bond-holders. If a inflate-us-out-of-here policy is in place, bond-holders will likely demand higher interest rates to protect their investments (and also a high premium to compensate for the risk assumed). In addition, it is hard to quantify how such a policy will negatively impact on market confidence on the US government's ability to implement and coordinate sounds fiscal policy and how it casts doubt on the Federal Reserve Bank's ability to exercise sound monetary policy. A currency crisis is very likely and a feedback-loop inherent in such currency crises might exacerbate the problem more, provoking a crisis as severe as that of Argentina,Mexico or even the Asian Financial Crisis of 1997.
This sounds like too huge a risk to run.
So now we have option 2. Slightly unlike the parable, I do not suggest pulling out the Greenback out of circulation. Instead, a sub-money can be introduced to the economy in coordination with the tax cuts enacted under the fiscal stimulus programme (American Recovery and Reinvesment Act 2008). Yes,various studies have proven that tax cuts can be more effective than government spending, but this recession is unlike any other and the uncertainties it entails makes it more sensible to many to hold on to their money in lieu of spending. (To be fair I have no empirical data to back this up, though intuitively speaking it seems like this is the case. Perhaps a study on the spending and saving habits of those who received their tax cuts could be useful).
Instead of granting citizens Tax Credits, perhaps the citizens can be made to pay the full amount of taxes they owe, and the tax cuts they are entitled to be given in the form of spending vouchers. Such vouchers should be stripped of their function as a store of value by law (so banks and other financial institutions will not pay interests on it) to prevent an incentive of hogging it. However it must be indexed to inflation by having the government guaranteeing the real value of the voucher when it is pulled out of circulation and transferred into cash to ensure that people will use it as a form of money (but without its function as a store of value). An expectation of inflation in the future and the fact that this sub-money is non-interest bearing is likely to build up the momentum to escape from a liquidity trap, though I will not go as far as saying that this is guaranteed. In short, this sub-money is a medium of exchange and an instrument of accounting. If it were me, since I get no interest in saving this sub-money and that things are relatively cheap (because of deflation), I'd spend/invest right now and get ready to reap rewards in the future.
On whether or not the government has the right to force people to spend their money indirectly (as in introducing a sub-money that cannot function as a store of value to force spending) is beyond the scope of this post.
I must also say that I have not given it thorough politico-economic thought so I am in no position to elaborate on that side of it. Though it must also be mentioned that isn't the Federal Reserve empowered by law to do whatever it takes in extenuating circumstances to prevent a downward spiral of the economy. If that were the case doesn't that also apply to a government trying to veer the economy to recovery?
Friday, May 21, 2010
Unabashed Showoff
Ey! Who is that?
A thank you to the teachers who have nominated me. I am also flattered by those who will stop me just to offer their congratulations.
More posts soon.
Tuesday, January 5, 2010
Is China saving the world?
The obese, financially unrestrained , shopping binging American, the ideal customers for any retailer, is gone. With the world's greatest economy mired in the Great Recession after the 2008/09 Financial Crisis, export-driven economies around the world have been hit badly. This is yet another textbook example on how when American sneezes, the world catches a cold. The world have been pretty much dependent on American Consumers, who consumes 53 times as many products as that of the average Chinese (Green Living Tips).
Obama's visit to China and dialogue with President Hu Jintao on the need to "rebalancing" the global economy underscores the global imbalance that is hitherto too reliant on the consumption of Americans (Surowiecki). Can China be the engine that "hyperspaces" the world out of this recession, "Beam us up Scotty" style?
My favourite economist thinks so.
These graphs are taken from Professor Danny Quah's blog.
These graphs shows the growth of the GDP of the ESE economies prior to and after the 1997 Asian Currency Crisis. It includes the extrapolation of the graph were the 1997 Asian Crisis not to occur and impact on the ESE economies and an actual graph on the growth of the GDP of the aforementioned economies after taking in the impact of the Asian Currency Crisis.
Graph 1 shows the GDP growth of the ESE economies excluding that of Japan's when the Asian Currency Crisis hit. As the graph shows, there is a small cumulated underperformance of GDP caused by the ACC.(Of 5.1% according to Professor Quah).
Graph 2
Graph 2The impact of China's GDP growth on the entire ESE economy is striking over here. Without China, notice how large the underperformance is. The accumulated underperformance is 21% (Quah).
So an implication is that China's share of the GDP growth is 15.9%, by having graph 2 - graph 1.
In short, China has been silently playing the role of the propeller all along, contributing a lot to the GDP growth of ESE Asia and in a way, the world.
The question is, is China's ability to consistently and incrementally increase its GDP output good for the world? What if we indulge in some counterfactual thinking to make an assessment?
It is true that China's GDP growth in theory, should help increase the disposable income of the Chinese, thus increasing their consumption. More consumption means increased aggregate global demand, thus subsequently stimulating increasing aggregate global supply and directly , the global GDP output. The problem is, sometimes looking picture at the aggregate distracts us from peering at things that are fundamentally more important. The purchasing power of Chinese Consumers have increased, but it is still not enough than what it ought to be when its growth is based on the model of artificually reducing costs (not enforcing minimum wage, devaluing the Yuan by pegging it to the US Dollar at a lower rate than what it ought to be).
Counterfactual thinking leads me to think that if the Chinese workers are to be paid more, with higher disposable income, then global economic output could have been higher. Hence, I think there is a "Global Consumption Gap," and consequently a global GDP gap that is caused by not only unemployment and underemployment, but also of China's growth model.
Graph 3
So an implication is that China's share of the GDP growth is 15.9%, by having graph 2 - graph 1.
In short, China has been silently playing the role of the propeller all along, contributing a lot to the GDP growth of ESE Asia and in a way, the world.
The question is, is China's ability to consistently and incrementally increase its GDP output good for the world? What if we indulge in some counterfactual thinking to make an assessment?
It is true that China's GDP growth in theory, should help increase the disposable income of the Chinese, thus increasing their consumption. More consumption means increased aggregate global demand, thus subsequently stimulating increasing aggregate global supply and directly , the global GDP output. The problem is, sometimes looking picture at the aggregate distracts us from peering at things that are fundamentally more important. The purchasing power of Chinese Consumers have increased, but it is still not enough than what it ought to be when its growth is based on the model of artificually reducing costs (not enforcing minimum wage, devaluing the Yuan by pegging it to the US Dollar at a lower rate than what it ought to be).
Counterfactual thinking leads me to think that if the Chinese workers are to be paid more, with higher disposable income, then global economic output could have been higher. Hence, I think there is a "Global Consumption Gap," and consequently a global GDP gap that is caused by not only unemployment and underemployment, but also of China's growth model.
Graph 3
Graph 3 is taken from John Ross's blog, showing China's monthly changes in trade surplus "calculated as a three monthly moving average in order to avoid any purely short term distortions" (Ross).
This shows that the trade surplus of China has been decreasing, precipitiously to during the economic downturn. However, do note that the trade surplus is due to a decrease in export (because global consumption decreased during the financial crisis) compared to its import.
Ross notes that :"Under the impact of the financial crisis both China’s exports and imports have declined. But its imports have declined far less than its exports."
Finally he summed up this wonderful post of his by stating that:
"This trend in China’s exports and imports would be by itself insufficient to offset the depressive effect on world trade of the fall in demand from the US."
Sure, China can save the world, but it could have played a greater role, if only China's consumer have the money...and appetite.
Notes:
I have focused too much on the comparatively lower per capita income of China in the lack of China's consumerism. This could be misleading because I have neglected some Chinese virtues like putting aside money to save, a Confucian value that shapes much of the character of the ethnically Chinese citizens. However, the Surowiecki post places much more weight upon other things, the economic system of China, the limited financing and so on. Ultimately though, Surowiecki and I both agree on the need for the Chinese workers to have higher disposable income, and a different approach towards growth.
This shows that the trade surplus of China has been decreasing, precipitiously to during the economic downturn. However, do note that the trade surplus is due to a decrease in export (because global consumption decreased during the financial crisis) compared to its import.
Ross notes that :"Under the impact of the financial crisis both China’s exports and imports have declined. But its imports have declined far less than its exports."
Finally he summed up this wonderful post of his by stating that:
"This trend in China’s exports and imports would be by itself insufficient to offset the depressive effect on world trade of the fall in demand from the US."
Sure, China can save the world, but it could have played a greater role, if only China's consumer have the money...and appetite.
Notes:
I have focused too much on the comparatively lower per capita income of China in the lack of China's consumerism. This could be misleading because I have neglected some Chinese virtues like putting aside money to save, a Confucian value that shapes much of the character of the ethnically Chinese citizens. However, the Surowiecki post places much more weight upon other things, the economic system of China, the limited financing and so on. Ultimately though, Surowiecki and I both agree on the need for the Chinese workers to have higher disposable income, and a different approach towards growth.
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