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  • EU Leaders Looking East for Trade Pacts

    Patrick Messerlin , professor of economics at the Institut d' Etudes Politiques de Paris, thinks European leaders are right to look to Asia to build new trade agreements. Trade liberalization, Messerlin says, are the right prescription for Europe's stunted economic growth. But new trade agreements must be with the right partners. And you might be surprised as to which Asian economies Messerlin argues make the right partners for the EU. From Vox : The first question focuses on the ‘growth’ dimension of trade policy. Preferential trade agreements will only be able to boost domestic growth if the economies of the EU’s preferential trade agreements partners fulfil three main conditions. They should be big enough to generate economies of scale and scope capable of having a substantial impact on the EU’s relative prices – changes in relative prices are the source of welfare gains. They should also be well regulated because modern economies are intensive in norms and dominated by services, the efficiency of which depend largely on the quality of the regulatory schemes in place. Finally, they should have a wide network of good-quality preferential trade agreements, capable of offering EU firms opportunities to access the economies already covered by those preferential trade agreements (the ‘hub’ quality) without waiting for longish negotiations with the EU. As Table 1 shows, Japan and Taiwan – apart from the US – are the only economies in the world that meet these three conditions since the EU already has a free trade agreement with South Korea. China (possibly India in the long run, but not Brazil or Russia) may offer better growth opportunities when it comes to size. But, it still scores poorly on regulatory quality, while Japan and Taiwan score better than many EU member states. When it comes to the ‘hub’ criterion, Japan has a wide network of preferential trade agreements in east Asia (a region that EU negotiators are very slow to negotiate with) while Taiwan has massive operations in China which have been recently strengthened by a key preferential trade agreement, making Taiwan a privileged hub with respect to China. The capacity of Japan and Taiwan to meet all three conditions indicates the need for a resolute EU pivot to east Asia – an outcome echoed by general equilibrium calculations (Kawasaki 2011). Read The much-needed EU pivot to east Asia here .

  • Stiglitz on Abe-nomics and Hope in Japan

    Things are looking up in Japan, as businesses in the world's third largest economy gain confidence in the economic policies of the Abe government . At The Guardian , Joseph Stiglitz gives Abe credit for tackling big structural challenges that have been holding back growth. And, Stiglitz writes that Japan could become a "ray of light" for advanced economies: Abe is doing what many economists (including me) have been calling for in the US and Europe: a comprehensive programme entailing monetary, fiscal, and structural policies. Abe likens this approach to holding three arrows – taken alone, each can be bent; taken together, none can. The new governor of the Bank of Japan, Haruhiko Kuroda, comes with a wealth of experience gained in the finance ministry, and then as president of the Asian Development Bank. During the East Asia crisis of the late 1990s, he saw firsthand the failure of the conventional wisdom pushed by the US treasury and the International Monetary Fund. Not wedded to central bankers' obsolete doctrines, he has made a commitment to reverse Japan's chronic deflation, setting an inflation target of 2%. Deflation increases the real (inflation-adjusted) debt burden, as well as the real interest rate. Though there is little evidence of the importance of small changes in real interest rates, the effect of even mild deflation on real debt, year after year, can be significant. Kuroda's stance has already weakened the yen's exchange rate, making Japanese goods more competitive. This simply reflects the reality of monetary policy interdependence: if the US Federal Reserve's policy of so-called quantitative easing weakens the dollar, others have to respond to prevent undue appreciation of their currencies. Some day, we might achieve closer global monetary-policy co-ordination; for now, however, it made sense for Japan to respond, albeit belatedly, to developments elsewhere. Monetary policy would have been more effective in the US had more attention been devoted to credit blockages – for example, many homeowners' refinancing problems, even at lower interest rates, or small and medium-size enterprises' lack of access to financing. Japan's monetary policy, one hopes, will focus on such critical issues. But Abe has two more arrows in his policy quiver. Critics who argue that fiscal stimulus in Japan failed in the past – leading only to squandered investment in useless infrastructure – make two mistakes. First, there is the counterfactual case: how would Japan's economy have performed in the absence of fiscal stimulus? Given the magnitude of the contraction in credit supply following the financial crisis of the late 1990s, it is no surprise that government spending failed to restore growth. Matters would have been much worse without the spending; as it was, unemployment never surpassed 5.8%, and, in throes of the global financial crisis, it peaked at 5.5%. Second, anyone visiting Japan recognises the benefits of its infrastructure investments (America could learn a valuable lesson here). The real challenge will be in designing the third arrow, what Abe refers to as "growth". This includes policies aimed at restructuring the economy, improving productivity, and increasing labour-force participation, especially by women. Read Japan banks on success of Abenomics here .

  • Skepticism About China's Official Statistics on Consumer Spending

    Global economic growth is going to depend more and more on Chinese consumers and their growing buying power. So it would be nice if we felt like could rely on official figures about consumption in China. An article in the latest edition of The Economist raises some doubts: In 2012, according to estimates by Jonathan Garner and Helen Qiao of Morgan Stanley, a bank, the Chinese spent over 2.3 trillion yuan ($370 billion) on domestic tourism alone. And yet China’s GDP statistics captured only a tiny part of that spending, they argue, as well as missing spending on financial services, health care and housing. As a result, official figures show private consumption languishing at around 35% of GDP. Morgan Stanley’s “bottom-up” calculations, by contrast, imply that it has grown since 2008 to almost 46% of GDP (see chart). Mr Garner and Ms Qiao draw on company reports and industry studies to fill gaps in the official data, which, they say, undercounted consumption by $1.6 trillion in 2012, more than Australia’s entire GDP. Their calculations echo earlier studies, which also found that official statistics undercount consumption, albeit by a smaller margin. As well as stuff bought offshore, spending online is also undercounted, the two economists argue. On a single weekend in November, Chinese consumers spent more than $3 billion on two websites, Taobao and Tmall (both part of Alibaba, an online giant), in celebration of “singles’ day”, the bachelor’s equivalent of Valentine’s day. But official statistics have failed to keep pace with changing consumer habits, Ms Qiao argues, neglecting entire categories of e-spending. Online gaming, for example, is largely missing. Yet it amounted to 53 billion yuan ($8.5 billion) last year, according to Morgan Stanley’s tally of revenues earned by online gaming firms. China’s statistics have long been viewed with scepticism or worse. Some economists worry that they fail to reflect reality, others that they slavishly reflect political imperatives. In 2002 Thomas Rawski of the University of Pittsburgh complained about a “tornado of deception”. Five years later Carsten Holz, then of Princeton University, said that official statistics should be taken with a “rock of salt”. When Li Keqiang, now China’s prime minister, was party chief of Liaoning province in 2007, he called the province’s output figures “man-made” and “for reference only”. Read Bottums up here .

  • IMF's Lipton Calls for Arab Countries to Open Up Economies

    One could not fully grasp the Arab Spring without recognizing the extent to which it was an economic story. Now, two years after the people of Tunisia set off what would become a regional movement, the transition to democracy is proving very difficult (note: as it always is, regardless of where in the world it is happening). Successful next steps will require a coherent economic strategy. IMF Deputy Managing Director David Lipton argues that countries in North Africa and the Middle East now need to open up their economies and achieve greater integration with the global economy. He offers up needed reforms: 1. Stronger emphasis on trade: The overarching strategy to deliver growth on a scale and timetable that would create enough jobs and prosperity for the rapidly growing populations in these countries is economic integration. More trade integration would not only create growth and jobs, it would provide discipline and incentives to help get the reform strategy right. A country that opens up to international competition will inevitably find a greater logic in the other reforms listed below because they will help it compete.­ 2. Improving the business environment and facilitating access to finance: Complex regulations hold back job creation and growth in the region. Take Egypt, where no less than 36,000 regulations currently affect the private sector. And Egypt is by no means the only country afflicted by burdensome legislation. Indeed, many new political parties are grounded in support from people running small businesses who see improvement of the business climate as a key priority. Another major constraint on economic growth in the Arab countries in transition is companies’ lack of access to finance. Now, private credit mainly benefits large established companies, and only 10 percent of firms use banks to finance investment. This is the lowest share of bank financing in the world.­ 3. Enhancing the labor market and improving education: Youth unemployment ranges from 18 to 30 percent in Egypt, Jordan, Morocco, and Tunisia. In Egypt, 650,000 people enter the labor force each year. Women face particular problems in finding jobs—only about a quarter of the female population in Egypt, Jordan, Morocco, and Libya is employed. The public sector dominates the job market, and labor laws are rigid. Governments should reduce disincentives to hiring, while still protecting workers. The labor force is also inadequately educated and lacks technical skills in engineering and science. The education system must shift its focus from training young people for entry into the civil service to preparing them to work in the private sector.­ 4. Replacing untargeted subsidies with a modern social safety net: Price subsidies in the Middle East and North Africa cost around $210 billion in 2011, more than 7 percent of regional GDP. Besides being very costly, such subsidies do a bad job of supporting the poor. Safety nets targeting people who really need them are more efficient and effective. To build public support, reforms must be clearly explained, with credible commitments that subsidy savings will be spent on investment and that vulnerable people will be protected.­ Read the full article here .

  • Economic History Lessons for 'Leaderless Global Economy'

    At Vox , Peter Termin and David Vines argue that policymakers need to spend a little time on economic history for guidance on how to best manage the global economic challenges they now face. The lessons to take from global economic growth over the last 200 years, they say, are that international cooperation is key, and that it is best to deal with unemployment first and deficits second. But the most important step seems to be to recognize that we are going through a period of transition. In our recent book (Temin and Vines 2013), we argue that the transition from British to American hegemony was not made quickly or easily. Britain was exhausted by the war, Germany was burdened by reparations. Even though the US intervention was critical to Allied success in World War I, the US abandoned its European interests after the war. War debts led to hyperinflations in the early 1920s and this was followed by an interim period of lending to Germany in the mid 1920s and some consequent recovery. But the reparations problem had not been solved. The departure of Germany from the gold standard in the currency crisis of 1931, followed by Britain’s exit, and then by tight policies in the US, ultimately led to the Great Depression in the 1930s. The absence of a hegemon to restore cooperation and prosperity was all too evident. Massive unemployment persisted, only ending with the beginning of World War II. We are now in a similar transition. The US squandered its leadership with two elective wars and massive tax cuts, and with low interest rates and a property boom. Countries normally raise taxes to fight wars, although seldom far enough to avoid inflation. The US went in the opposite direction, under the idea that ‘deficits don’t matter’, at the same time as tolerating a property boom, simply because inflation did not rise. Since the boom collapsed, Americans have been left wondering how to deal with their resulting fiscal debts. Europeans started this century not with new wars, but a new currency. As a result, Germany has squandered its leadership within Europe, because the architecture of the new currency union was flawed. The idea was that international capital flows would become internal capital flows and, because of this, would cease to be an object of worry. We now know that this was wrong. The money which northern European banks lent to southern peripheral countries in Europe led to a boom there, as well as rising costs. And the money was not well used; it supported speculative property booms and consumption, rather than investment in productive tradable good industries. All went well during the ‘Great Moderation’ – the reduction in the volatility of business cycle fluctuations starting in the mid-1980s – but the system broke down during the Global Crisis. The money which banks lent to countries in the European periphery ended up as fiscal debts (once the banks had been rescued), and some of these fiscal debts have since became the obligations of the ECB. It is not clear within the Eurozone which countries will end up being responsible for resolving these fiscal debts. Read The leaderless economy: Can economic history suggest lessons here .

  • Michael Porter on U.S. Competitiveness

    Michael Porter sat down with Charlie Rose last week to discuss the state of the U.S. economy. They hit many of the key issues, but the most interesting facet of the conversation centered on what Porter sees as the central challenge: making America more competitive within the changing global economy. It is an issue that Porter has been driving as an institutional goal for Harvard Business School , where Porter teaches. In this excerpt, Porter discusses the business school's U.S. Competitiveness Project : Watch the full interview here .

  • Visualizing the Global Economy

    James Glattfelder studies complexity theory. Two years ago he applied this theory of thinking to the economy (rather than the brain, say, or a flock of birds), and came out with a report provocatively titled The Network of Global Corporate Control . He spoke about the study at TedX Zurich, and in his talk he shared some helpful ways of understanding highly complicated global networks.

  • The Economist calls Nordics 'The Next Supermodel'

    What is it with the Nordic countries? They seem to dominate the top of most of the it-lists these days. Sure, they are joined frequently by New Zealand, Singapore, Switzerland, and even Germany, but whether it comes to happiness or stability, Finland, Denmark, Norway, and Sweden are always there. In a special report, The Economist refers to them collectively as "the next supermodel." After hitting economic decline in the 90s, the Nordics decided to reform their balance sheets. The Norwegians were helped quite a bit by their oil wealth, but Sweden--once one of the world's wealthiest nations--had some serious course correcting to do. As did Denmark. And while Finland had always been an afterthought to its more powerful Scandinavian neighbors, that country started a run of economic growth by getting more practical in its economic approach. On public services the Nordics have been similarly pragmatic. So long as public services work, they do not mind who provides them. Denmark and Norway allow private firms to run public hospitals. Sweden has a universal system of school vouchers, with private for-profit schools competing with public schools. Denmark also has vouchers—but ones that you can top up. When it comes to choice, Milton Friedman would be more at home in Stockholm than in Washington, DC. All Western politicians claim to promote transparency and technology. The Nordics can do so with more justification than most. The performance of all schools and hospitals is measured. Governments are forced to operate in the harsh light of day: Sweden gives everyone access to official records. Politicians are vilified if they get off their bicycles and into official limousines. The home of Skype and Spotify is also a leader in e-government: you can pay your taxes with an SMS message. This may sound like enhanced Thatcherism, but the Nordics also offer something for the progressive left by proving that it is possible to combine competitive capitalism with a large state: they employ 30% of their workforce in the public sector, compared with an OECD average of 15%. They are stout free-traders who resist the temptation to intervene even to protect iconic companies: Sweden let Saab go bankrupt and Volvo is now owned by China’s Geely. But they also focus on the long term—most obviously through Norway’s $600 billion sovereign-wealth fund—and they look for ways to temper capitalism’s harsher effects. Denmark, for instance, has a system of “flexicurity” that makes it easier for employers to sack people but provides support and training for the unemployed, and Finland organises venture-capital networks. The Economist's Adrian Wooldridge discusses the special report in this interview . Read more from the special report here .

  • Medium and Long Term Growth in China May Depend on Structural Reform

    Yu Yongding is not surprised that China's economic outlook has begun to look rosier, with the growth rate picking up this quarter. But the past President of the China Society of World Economics and Director of the Institute of World Economics and Politics at the Chinese Academy of Social Science warns China's leaders not to get complacent. At Project Syndicate , Yu writes: The true challenges facing China lie in the medium and long term. Indeed, the current economic rebound is not an achievement worthy of much celebration, especially if it comes at the expense of further reform and structural adjustment. First, as China ages rapidly, the disappearance of its demographic dividend will lower potential growth significantly. Moreover, other things being equal, the extremely rapid rise in fixed-asset investment has eroded China’s investment efficiency and capital efficiency, reducing potential output growth further. And, as China’s economy approaches full technological modernization, its latecomer’s advantage will be exhausted, and its inability to innovate and create may become an important bottleneck to further growth. Although active participation in global production networks has brought significant benefits, it may have locked China into the lower end of the value chain, reducing its scope for future progress. Other constraints loom as well. Rapid economic expansion implies that supplies of energy and raw materials will increasingly limit potential growth. At the same time, the public’s demand for environmental protection and other basic rights will inevitably increase production costs. Similarly, the external environment may become less favorable, as the long process of global deleveraging impedes economic recovery in China’s key foreign markets. Finally, despite China’s status as one of the world’s largest net creditors, it has been running a deficit on its investment balance for years. If this pattern persists, China may well face a balance-of-payments constraint on growth in the future. Read China's Coming Growth Tests here .

  • OECD Report on Long Term Growth Prospects

    Earlier today the OECD released a new report on growth prospects for the global economy, and for OECD member countries. The report projects the global economy to grow at a rate of roughly 3% per year. Emerging economies will continue to see much more rapid growth than developed economies. And that will usher in a significant shift in the balance of economic power over the next fifty years. The report makes this clear by showing how much smaller the U.S., Europe, and Japan shares of the global GDP will be in the coming years: Read the full report here , and watch this summary of the OECD findings:

  • The Potential Impact of Slowing Growth in China on Global Economy

    China's GDP grew at a rate of 7.4% over the last quarter . That's a rate of growth that would be welcome most places, but it is down from 7.6% the previous quarter. With the rate of growth in China slowing for nearly two years, some are concerned about what that means for the global economy. The Wall Street Journal's Yun-Hee Kim and Bob Davis discuss the impact of the new growth figures from China on the economy here and elsewhere:

  • Odd Arne Westad on China's Rise

    London School of Economics professor Odd Arne Westad says China's rise to being a world power stands out in comparison to the rise of other powers, but not for the reasons we may think. In a talk from the Carnegie Council , Westad--author of Restless Empire: China and the World Since 1750 --cautions us to not focus on how different China is culturally from other nations, but rather how effective China has been at integrating its economy within the global economy. Here's an excerpt: Watch more of the talk here .

  • Gallup: Blue Collar Workers Most Pessimistic About Job Prospects

    Workers around the world on not very optimistic about their job prospects. And blue collar workers are especially pessimistic. According to a Gallup survey conducted globally last year but released this week, 33% of blue collar workers worldwide thought that it was a good time to look for a job. 38% of white collar workers thought it was a good time to look for a job. Not surprisingly then, there is a strong correlation between education levels and optimism. Workers around the world who did not complete secondary school are the least optimistic--with the notable exception of the Americas: From the survey release: The global recession continued to affect many economies throughout the world in 2011. However, the economic downturn has not always influenced global residents' perceptions of their ability to find a job in their local city or area. Women have historically been less positive than men about the local job market, and those with more education are more likely to find sustainable employment than those with less. With the exception of Latin America, white-collar workers have fared better worldwide than blue-collar workers. In 2011, residents in the Americas -- except in the U.S. -- have generally remained more positive about the job market because of lower unemployment, economies driven by a growing middle class, natural resource exports, minerals and commodities, and less integration of their financial sectors with those of the recession-hit U.S. and Europe. Despite generally more positive perceptions in selected regions and countries, world residents have historically struggled to be more positive than negative when it comes to local job prospects. Economic uncertainty and rigid policies, systemic unemployment, political unrest, and corruption contribute to negative perceptions. However, these negative perceptions might also be an indicator of something positive -- that global residents are not satisfied with the status quo and continue to strive to make better lives for themselves and their families through good jobs. Read the full release here .

  • OECD: Europe Dragging Down Global Recovery

    The OECD released an interim assessment of the global economy late last week, and it contains little reason for optimism. Among other key predictions, it projects the U.S. will be in recession early next year unless "political parties agree on detailed medium-term consolidation plans that will avoid this outcome and reduce uncertainty regarding the fiscal outlook." But Europe gets the most attention--or blame--for the weakening global economy. For example, the lead line of the report reads: The global economy has weakened since spring, led by developments in the euro area where recession is again taking hold. Economies both inside and outside the OECD area have been adversely affected by the euro area crisis through trade and confidence channels. OECD Deputy Secretary-General and Chief Economist Pier Carlo Padoan addresses the European deadweight in this summary of the assessment: Read the full report here .

  • Richard Duncan on The New Depression

    In The New Depression: The Breakdown of the Paper Money Economy , Richard Duncan paints a grim picture of what is to come for the global economy. In this interview with The Economist , he presents his analysis, and makes the case for debt as a trigger for a deeper global economic crisis.
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