The Keynesians and monetarist economists are wrong in trying to stimulate consumption during downturns by fiscal spending and lowering interest rates. Deleveraging is bad in short term but good for the long term as the increased household and corporate savings is channeled into investments in nation's real capital stock, not into unproductive real estate or financial sector. The only productive government spending is in infrastructure (e.g. Indonesia) not in bailing out banks, corporations and households.
Macro economists and investment strategists should monitor the trend in savings for households and overall savings trend for the economy - especially for developed economies. A rising savings/income ratio means consumption/income will automatically fall (Disposable Income = C + S) but eventually build a base for higher domestic investment (e.g. the US where household savings ratio has improved but unless government deleverages and withdraws the fiscal stimulus of sustaining a budget deficit, households will have little incentive to increase savings further in an environment of artificially low yielding savings deposits).
The asset-based wealth effect through elevated property markets (China, Spore, Malaysia) may also play a role in encouraging households to increase debt levels but this is also not productive for the economy. Countries with loan/deposit ratios below 100% and manageable inflation (e.g. Malaysia) may have more room to grow but the leverage should be driven by well managed corporates rather than households.
Thursday, June 23, 2011
Friday, March 25, 2011
Democracy and the Wealth of Nations: A Simple Question of Values
The study of economics today fails to attribute the catalysts of economic development to a crucial combination of human qualities that nurtures a conducive ecosystem for prosperity. What is it that has caused certain peoples in a country to work hard, save and be endowed with entrepreneurial talent? To answer this, we need to look into the psychological mindset and expectations of individuals.
The Individual or the State?
Economists have attributed the rise of modern capitalism to several factors such as the market economy, the utilitarian values of the 19th century or the Protestant ethic. However, they fail to see that behind every burst of economic activity and every technological innovation, is a radical change in the mindset of society. This change is a shift in the social perspective from a culture that puts society’s interest above the well-being of the individual to one that puts the individual’s well-being above that of society.
Which is more important? The individual or the state? Does society exist to serve the individual or does the individual exist to serve society, nation, community or government? The answer is simple: if the individual’s life is finite and death is the ultimate end of the individual, then society and civilization is more important because it will easily outlast human lives. However, if the individual’s soul is eternal, then it is infinitely more important than society, which should rightfully exist to serve man. And this is the foundation of every democratic constitution.
The Individual or the State?
Economists have attributed the rise of modern capitalism to several factors such as the market economy, the utilitarian values of the 19th century or the Protestant ethic. However, they fail to see that behind every burst of economic activity and every technological innovation, is a radical change in the mindset of society. This change is a shift in the social perspective from a culture that puts society’s interest above the well-being of the individual to one that puts the individual’s well-being above that of society.
Which is more important? The individual or the state? Does society exist to serve the individual or does the individual exist to serve society, nation, community or government? The answer is simple: if the individual’s life is finite and death is the ultimate end of the individual, then society and civilization is more important because it will easily outlast human lives. However, if the individual’s soul is eternal, then it is infinitely more important than society, which should rightfully exist to serve man. And this is the foundation of every democratic constitution.
The rise of American capitalism stemmed from a personal strong conviction that all men are born equal and each individual can and should be given equal opportunity to raise his/her economic and social circumstance.
At its best, the free market economy facilitates the individual spirit of enterprise and innovation. At its worst, individualism does lead to a hedonistic society where the rich indulge in ostentatious or unproductive lifestyles while the struggling middle class compete to keep up with their neighbours and peers.
But how do we explain the economic dynamism of Asian countries like China and India where the individual is considered as subservient to society? Social scientists from the West are prone to make the mistake of viewing Asians as placing the community’s interest above the individual’s interest. On the contrary, the typical Asian views the family as an individual unit and upholds the well-being and rights of the family above that of the state/society.
If this were not the case, then Communist China’s transformation into a market economy would not be possible. The economic and social revolution of modern China boils down to many factors but one of the crucial catalysts is this change in the mindset of the people that they can work to improve their economic status. In other words, the well-being of the family (i.e. individual) is as important (officially) if not more important (in practice) than the objectives of the Communist state.
China’s adoption of the free market economy paved the way for the individual family to assert its rights to economic and social progress.
(The gradual opening of the Chinese economy under Deng Hsiao Peng - who was quoted to have said it does not matter whether a cat is black or white as long as it catches mice - in the 1990s paved the way for China to join the World Trade Organisation in December 2001. That landmark event further opened up trade opportunities and helped the country to solidify China's position as a cost-competitive factory for the world.)
Friday, January 14, 2011
China's Increasing Impact on Global GDP
In the past six years, the Chinese economy has started to have a material impact on global GDP growth. Over the 2004-2010 period, China's GDP correlation with global GDP correlation has improved with the R Square rising to 40% from 14% in the 2000-2004 period and 1% in the 1980-2000 period.While the U.S. and European economies, which together account for half of global GDP remains the biggest drivers of the global economy, China's impact on growth is getting larger over recent years.
Being the second largest economy in the world, one would have thought that China's correlation with global GDP would have been higher. But the rebound in the U.S. and G7 economies from the recession of 2009 has pulled up global GDP by a bigger swing than the rebound in China, which is estimated to have grown by 10% in 2010 versus 9.2% in 2009.
Monday, October 11, 2010
Rising Global Currency Instability
The threat of the global currency war that is looming in 2011 is linked to our faith in central bankers and government interference in macro-economic management.
The implict trust of most citizens in the wisdom of government policy makers and central bankers who have sustained the fiat money system is based on our faith that politicians and financiers are basically wise people who know best what is good for their countries.
Unfortunately, the Great Credit Crisis of 2008/2009 has shown otherwise. And following a tepid rebound in global economic activities driven by inventory restocking and cash transfers from the government in the first half of 2010, the global economy started to falter once again. Fears of a double dip caused U.S. Treasury bond yields to fall to the 2.5% level in August.
Following Fed chairman's Ben Bernanke's decision to embark on Quantitative Easing 2 in the fourth quarter of the year, stock markets rallied and bond yields backed up to the 3.3% level.
The irony of the rebound in stock prices is that it only gained momentum in December when U.S. economic data showed some strength. In fact, QE2's aim of lowering interest rates was mitigated by the rise in yields as bond investors priced in higher inflation coupled with stronger economic growth in 2011.
One indicator that shows the increasing lack of confidence in central bank policies is the rise in the gold price, which rose by 27% in 2011.
The implict trust of most citizens in the wisdom of government policy makers and central bankers who have sustained the fiat money system is based on our faith that politicians and financiers are basically wise people who know best what is good for their countries.
Unfortunately, the Great Credit Crisis of 2008/2009 has shown otherwise. And following a tepid rebound in global economic activities driven by inventory restocking and cash transfers from the government in the first half of 2010, the global economy started to falter once again. Fears of a double dip caused U.S. Treasury bond yields to fall to the 2.5% level in August.
Following Fed chairman's Ben Bernanke's decision to embark on Quantitative Easing 2 in the fourth quarter of the year, stock markets rallied and bond yields backed up to the 3.3% level.
The irony of the rebound in stock prices is that it only gained momentum in December when U.S. economic data showed some strength. In fact, QE2's aim of lowering interest rates was mitigated by the rise in yields as bond investors priced in higher inflation coupled with stronger economic growth in 2011.
One indicator that shows the increasing lack of confidence in central bank policies is the rise in the gold price, which rose by 27% in 2011.
Thursday, April 8, 2010
China's Economic Dilemma: Nothing Less Than A 10% Revaluation?
If China's economists and leaders are smart, they will need to see whether this idea of restructuring their economy from less investment-based to more consumer-based is viable in the current currency regime of a managed peg.
About 25% of China's GDP is gross exports while another 40% is investment, of which half is estimated to be for the export sector. So this means up to 45% of China's economy is dependent on global demand for her exports. Consumer spending accounts for 25%-30% and even this sector is supported by the strength of the export sector in terms of wages paid by MNC-related factories.
So the geopolitical and macroeconomic question is this: Can China restructure its economy fast enough before the US economy collapses under the weight of a sovereign debt crisis, a budget deficit funding crisis and a health care crisis?
What the US government has done to keep its economy afloat is the same panacea that the Japanese have tried with fiscal stimulus and quantitative easing. But the US can continue to do this by printing loads of electronic money until foreign investors become totally averse to lending their reserves to the US government.
My view is that China will not dump US Treasury bonds until it has a viable exit strategy, which is likely to entail a strong revaluation of the Renminbi.
Global Rebalancing Dynamics Restated
The official talk about rebalancing the economy is just a smokescreen for delaying the currency adjustment that is needed to contain the recycling of capital from China to the US. Given the low purchasing power of the Chinese consumer (adjusted for end domestic demand), a real rebalancing of the Chinese economy can only happen in five to ten years time.
Just look at the dynamics of global rebalancing: China’s consumer spending is US$1.7 trillion out of a nominal GDP of US$5 trillion. In comparison, American consumer spending is US$10 trillion out of a nominal GDP of US$14 trillion. Hence, a 1% decline in US consumer spending over the 2008-2009 period amounts to US$100 billion in contraction of consumer demand.
Assuming that 80% of that demand is imported, this means a potential loss of US$80 billion for the global economy. Over the same 2-year period, China’s consumer spending rose by an average of 12%. This amounts to US$204 billion of domestic demand. If China imports 30% of this demand, then the gain to global economy is an additional US$61.2bil in spending. So netting off US$80billion of foregone US spending against US$61.2 billion of new Chinese spending, there is a net loss of about US$19bil to the global economy. This scenario will change if Chinese consumers import more foreign products for their own use.
Given the reasonable assumption that US consumer spending falls by 10% in the next five years (i.e. 2% per annum), then the loss to the global economy amounts to US$1 trillion. For China to offset this loss, the Chinese have to import an equivalent of US$1 trillion.
Assuming that the base case scenario of Chinese consumer demand growing by 12% per annum and that the share of imported goods/total consumer spending rises to 35% in five years time from 30% currently, then the additional gain in spending for the global economy is about US$516 billion, which is just half of the total losses in global market caused by shrinking demand from the US consumer.
In order for China to be a viable source of global end consumer demand, its consumer spending has to grow by 18% per annum for the next five years and the share of imports to consumption has to rise to 50%. This will result in a net gain of US$423 bill over the five year period or a gross addition of US$1.4 trillion for global economy (before adjusting for the decline in U.S. global consumption).
The latter scenario suggests that Chinese end consumer demand for global goods has to expand by a whopping 30% per annum, or a doubling every two and half years. This can only be achieved by revaluing the Renminbi exchange rate by 10% per annum, resulting in an exchange rate of RMB 4.24 against one US$ by 2014.
About 25% of China's GDP is gross exports while another 40% is investment, of which half is estimated to be for the export sector. So this means up to 45% of China's economy is dependent on global demand for her exports. Consumer spending accounts for 25%-30% and even this sector is supported by the strength of the export sector in terms of wages paid by MNC-related factories.
So the geopolitical and macroeconomic question is this: Can China restructure its economy fast enough before the US economy collapses under the weight of a sovereign debt crisis, a budget deficit funding crisis and a health care crisis?
What the US government has done to keep its economy afloat is the same panacea that the Japanese have tried with fiscal stimulus and quantitative easing. But the US can continue to do this by printing loads of electronic money until foreign investors become totally averse to lending their reserves to the US government.
My view is that China will not dump US Treasury bonds until it has a viable exit strategy, which is likely to entail a strong revaluation of the Renminbi.
Global Rebalancing Dynamics Restated
The official talk about rebalancing the economy is just a smokescreen for delaying the currency adjustment that is needed to contain the recycling of capital from China to the US. Given the low purchasing power of the Chinese consumer (adjusted for end domestic demand), a real rebalancing of the Chinese economy can only happen in five to ten years time.
Just look at the dynamics of global rebalancing: China’s consumer spending is US$1.7 trillion out of a nominal GDP of US$5 trillion. In comparison, American consumer spending is US$10 trillion out of a nominal GDP of US$14 trillion. Hence, a 1% decline in US consumer spending over the 2008-2009 period amounts to US$100 billion in contraction of consumer demand.
Assuming that 80% of that demand is imported, this means a potential loss of US$80 billion for the global economy. Over the same 2-year period, China’s consumer spending rose by an average of 12%. This amounts to US$204 billion of domestic demand. If China imports 30% of this demand, then the gain to global economy is an additional US$61.2bil in spending. So netting off US$80billion of foregone US spending against US$61.2 billion of new Chinese spending, there is a net loss of about US$19bil to the global economy. This scenario will change if Chinese consumers import more foreign products for their own use.
Given the reasonable assumption that US consumer spending falls by 10% in the next five years (i.e. 2% per annum), then the loss to the global economy amounts to US$1 trillion. For China to offset this loss, the Chinese have to import an equivalent of US$1 trillion.
Assuming that the base case scenario of Chinese consumer demand growing by 12% per annum and that the share of imported goods/total consumer spending rises to 35% in five years time from 30% currently, then the additional gain in spending for the global economy is about US$516 billion, which is just half of the total losses in global market caused by shrinking demand from the US consumer.
In order for China to be a viable source of global end consumer demand, its consumer spending has to grow by 18% per annum for the next five years and the share of imports to consumption has to rise to 50%. This will result in a net gain of US$423 bill over the five year period or a gross addition of US$1.4 trillion for global economy (before adjusting for the decline in U.S. global consumption).
The latter scenario suggests that Chinese end consumer demand for global goods has to expand by a whopping 30% per annum, or a doubling every two and half years. This can only be achieved by revaluing the Renminbi exchange rate by 10% per annum, resulting in an exchange rate of RMB 4.24 against one US$ by 2014.
Sunday, December 13, 2009
Creative Reinvention: The Way To Survive The Chindian Challenge
Small to medium sized Asian economies such as Malaysia, Thailand and other emerging economies which do not have the benefit of China's vast population as a source of domestic demand nor India's head start in information technology have to innovate their ways out of their caught-in-the-middle economic dilemmas.
If these smaller countries do not manage to build a new competitive edge, they face the danger of being peripheral nations whose business cycles depend on China and India's economic engines. Where will the next generation of jobs and domestic economic growth come from? If they can't compete in the manufacturing sector, then they have to compete in services, which is high quality human capital intensive rather than low skilled labour intensive.
The next growth areas in Asia will come from innovation and high-end services such as education, financial services, health care and consumer branding. To generate the next generation of thinkers, innovators and leaders, the education system of Asia needs to be refocused towards creative thinking. Joseph Schumpeter's idea of creative destruction is the answer to Asia's tendency to build a symbiotic relationship with the US. If this traditional relationship continues, the economic decline of the US will bring these Asian economies down with it. Conversely, desperate attempts to ride on the Chinese dragon or the Indian elephant can also backfire.
In fact, China's fledgling attempts to diversify out of the U.S. export market and build up its own domestic demand market have yet to bear fruit. The robust growth of 2009-2010 will continue to be driven by infrastructure spending, which has strong spill-over effects on consumer incomes but which is not sustainable over the long-term. So China, too, has to innovate its way out of its unbalanced relationship with a deleveraging and over-indebted US consumer.
The Chindian challenge is this: if Asia follows China's economic structure, they will be competed away because they can't catch up with China's leap into producing engineering talent. If they follow the Indian model, they also need to start from scratch not to speak of the lack of an English proficiency advantage.
So what can Asia do to stand out of the shadow of the two emerging economic giants? The dependence of the global economy on the vibrant health of emerging countries is both a blessing and a source of future economic trouble. Blessing because if Asia stands up to the challenge of innovation and creative reinvention, it will be able to rebalance the current global imbalances which depend on the developed nations's ability to rescue themselves from rising debt levels. If it fails in the latter, then continued dependence on developed nations' weakening appetite for consumer goods coupled with the potential of sovereign default of developed nation's debt suggests a more polarised and protectionist economic world.
If these smaller countries do not manage to build a new competitive edge, they face the danger of being peripheral nations whose business cycles depend on China and India's economic engines. Where will the next generation of jobs and domestic economic growth come from? If they can't compete in the manufacturing sector, then they have to compete in services, which is high quality human capital intensive rather than low skilled labour intensive.
The next growth areas in Asia will come from innovation and high-end services such as education, financial services, health care and consumer branding. To generate the next generation of thinkers, innovators and leaders, the education system of Asia needs to be refocused towards creative thinking. Joseph Schumpeter's idea of creative destruction is the answer to Asia's tendency to build a symbiotic relationship with the US. If this traditional relationship continues, the economic decline of the US will bring these Asian economies down with it. Conversely, desperate attempts to ride on the Chinese dragon or the Indian elephant can also backfire.
In fact, China's fledgling attempts to diversify out of the U.S. export market and build up its own domestic demand market have yet to bear fruit. The robust growth of 2009-2010 will continue to be driven by infrastructure spending, which has strong spill-over effects on consumer incomes but which is not sustainable over the long-term. So China, too, has to innovate its way out of its unbalanced relationship with a deleveraging and over-indebted US consumer.
The Chindian challenge is this: if Asia follows China's economic structure, they will be competed away because they can't catch up with China's leap into producing engineering talent. If they follow the Indian model, they also need to start from scratch not to speak of the lack of an English proficiency advantage.
So what can Asia do to stand out of the shadow of the two emerging economic giants? The dependence of the global economy on the vibrant health of emerging countries is both a blessing and a source of future economic trouble. Blessing because if Asia stands up to the challenge of innovation and creative reinvention, it will be able to rebalance the current global imbalances which depend on the developed nations's ability to rescue themselves from rising debt levels. If it fails in the latter, then continued dependence on developed nations' weakening appetite for consumer goods coupled with the potential of sovereign default of developed nation's debt suggests a more polarised and protectionist economic world.
Wednesday, December 2, 2009
Getting On The Innovation Highway With A Nation-wide Contest System
I think there are broader benefits of promoting open science forums in Msia across all sectors of the economy. The call for open science comes from Dr Lim Teck Ghee's article, "Positioning Malaysia for open science: Any takers?" (http://english.cpiasia.net/)
The government and private sector can embark on a nation-wide knowledge innovation competition for each sector of the economy ranging from tourism, education to financial services.
The award will be on a quarterly basis and participants can submit their research work anonymously (you know how humble most Msians are when it comes to having a high profile) which focuses on raising productivity and innovation in their industries.
The government should have a grant to promote ideas that will benefit the entire industry and raise global competitiveness. The aim is to raise the productivity of the nation from the bottom-up rather than the top-down.
What are the incentives? The quarterly award could be RM5,000 each for three top prizes for each industry sector. Assuming six sectors, the annual prize money may cost RM360k, which will be subsidized by both the private and public sector. This is not costly in view of the unquantifiable external benefits for the country (excluding advertising and campaign costs.)
Who will be the judges? Like American Idol, the expert judges will be drawn from a panel of industry leaders as well as registered voters from the public through an online poll.
What are the benefits? It will promote out-of-the-box thinking and problem solving skills to short-term and long-term challenges in every industry.
How will it be executed? The biggest challenge will be to standardize the platform/format for the different issues facing 6-7 key industries. For instance, the finance industry will address issues of how consumers/investors can be encouraged to mobilise their savings without taking unwarranted risks, the tourism industry can tackle issues of how tourists can return to Msia in droves without spending too much on new tourist attractions. Simple value-enhancing ideas such as clearer signboards in English or touch screen information counters in hotels showing all the tourist hot spots, etc.
We know that often what benefits the consumer may not benefit the producer. However, competition, local and global, will ensure that both their interests are more aligned.
If done smartly, this innovation competition will put Msia on the map of high income, high productivity nations. Let the politicians handle their corruption problems with debates about the open tender system, we the rakyat need to move fast on the innovation highway and come up with an open innovation system that benefits both consumers and producers alike.
In fact, if the government lacks the initiative, internet bloggers can jumpstart this idea on an Asia-wide basis starting with the more English-literate countries such as Singapore, Hong Kong, Taiwan and Australia. Malaysia is well positioned to be a thought leader due to the potential of its English-speaking population notwithstanding the recent decline in English standards.
The government and private sector can embark on a nation-wide knowledge innovation competition for each sector of the economy ranging from tourism, education to financial services.
The award will be on a quarterly basis and participants can submit their research work anonymously (you know how humble most Msians are when it comes to having a high profile) which focuses on raising productivity and innovation in their industries.
The government should have a grant to promote ideas that will benefit the entire industry and raise global competitiveness. The aim is to raise the productivity of the nation from the bottom-up rather than the top-down.
What are the incentives? The quarterly award could be RM5,000 each for three top prizes for each industry sector. Assuming six sectors, the annual prize money may cost RM360k, which will be subsidized by both the private and public sector. This is not costly in view of the unquantifiable external benefits for the country (excluding advertising and campaign costs.)
Who will be the judges? Like American Idol, the expert judges will be drawn from a panel of industry leaders as well as registered voters from the public through an online poll.
What are the benefits? It will promote out-of-the-box thinking and problem solving skills to short-term and long-term challenges in every industry.
How will it be executed? The biggest challenge will be to standardize the platform/format for the different issues facing 6-7 key industries. For instance, the finance industry will address issues of how consumers/investors can be encouraged to mobilise their savings without taking unwarranted risks, the tourism industry can tackle issues of how tourists can return to Msia in droves without spending too much on new tourist attractions. Simple value-enhancing ideas such as clearer signboards in English or touch screen information counters in hotels showing all the tourist hot spots, etc.
We know that often what benefits the consumer may not benefit the producer. However, competition, local and global, will ensure that both their interests are more aligned.
If done smartly, this innovation competition will put Msia on the map of high income, high productivity nations. Let the politicians handle their corruption problems with debates about the open tender system, we the rakyat need to move fast on the innovation highway and come up with an open innovation system that benefits both consumers and producers alike.
In fact, if the government lacks the initiative, internet bloggers can jumpstart this idea on an Asia-wide basis starting with the more English-literate countries such as Singapore, Hong Kong, Taiwan and Australia. Malaysia is well positioned to be a thought leader due to the potential of its English-speaking population notwithstanding the recent decline in English standards.
Subscribe to:
Posts (Atom)
