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  • A New Primer on China From McKinsey

    Do you have an hour for China? That is, do you have an hour you can spare to understand the leading economic story of the century? McKinsey's Jeffrey Towson and Jonathan Woetzel have written The One Hour China Book in an effort to bring us all up to speed on the key pieces to understanding what is happening in the world's most populous country and the impact of activity there on life everywhere. If you can't spare an hour just yet, here are the "six big trends" from the book, as shared at McKinsey Insights : Here's a little more on trend number 3: The American middle class was the world economy’s growth engine throughout the 20th century. Now, the engine is the Asia–Pacific region, which will account for two-thirds of the world’s middle class by 2030. While Chinese consumers’ focus on “value for money” has driven the rise of companies such as apartment builder China Vanke and Tingyi Holding Company—the business behind China’s dominant instant-noodle brand—buying habits are changing. As urbanization accelerates, consumer spending is becoming more like that of the West’s middle class. Urban Chinese are shopping to meet emotional needs, driving a skyrocketing demand for middle-class goods, food, and entertainment. As an example, China consumed more than 13 million tons of chicken in 2012—more than the United States. Tyson Foods’s China operations has facilities able to process more than three million chickens per week, and Chinese chicken consumption, which grew by 54 percent from 2005 to 2010, is expected to grow an additional 18 percent annually during the next five years. For additional evidence, look no further than the fact that the largest Chinese acquisition of a US company had nothing to do with technology, cars, or energy. In 2013, Chinese Shuanghui International spent $7.1 billion to buy American Smithfield, the world’s largest pork producer and processor. It’s not surprising, then, that agribusiness is one of China’s hottest new industries. Almost every aspect needs to be improved, from land and water use to logistics and retail. Legend Holdings, the parent company of Lenovo, now lists modern agriculture as one of its five core areas, with a portfolio that includes kiwi and blueberry farming. Read All you need to know about business in China here .
  • Dani Rodrik on 'Premature Deindustrialization' in Developing Economies

    At Project Syndicate , Dani Rodrik tries to make sense of "an unexpectedly large gap in productivity between large firms and small firms," in Mexico and other developing economies. This isn't what is supposed to happen. At least it doesn't follow the industrialization model of the last century and a half. "When economies develop the productivity gap between the traditional and modern parts of the economy shrinks, and dualism gradually diminishes, Rodrik writes. Today, the picture is very different. Even in countries that are doing well, industrialization is running out of steam much faster than it did in previous episodes of catch-up growth – a phenomenon that I have called premature deindustrialization. Though young people are still flocking to the cities from the countryside, they end up not in factories but mostly in informal, low-productivity services. Indeed, structural change has become increasingly perverse: from manufacturing to services (prematurely), tradable to non-tradable activities, organized sectors to informality, modern to traditional firms, and medium-size and large firms to small firms. Quantitative studies show that such patterns of structural change are exerting a substantial drag on economic growth in Latin America, Africa, and in many Asian countries. There are two ways to close the gap between leading and lagging parts of the economy. One is to enable small and microenterprises to grow, enter the formal economy, and become more productive, all of which requires removing many barriers. The informal and traditional parts of the economy are typically not well served by government services and infrastructure, for example, and they are cut off from global markets, have little access to finance, and are filled by workers and managers with low skills and education. Even though many governments exert considerable effort to empower their small enterprises, successful cases are rare. Support for small enterprises often serves social-policy goals – sustaining the incomes of the economy’s poorest and most excluded workers – instead of stimulating output and productivity growth. The second strategy is to enlarge opportunities for modern, well-established firms so that they can expand and employ the workers that would otherwise end up in less productive parts of the economy. This may well be the more effective path. Read The Growing Divide Within Developing Economies here .
  • China's Premier Says No to Stimulus Measures

    If you are waiting on China's government to make some policy moves to jump-start growth, you may want to find something to do with your time. As Aileen Wang and Adam Rose report for Reuters , Chinese Premier Li Keqiang has quashed any rumors of pending fiscal and/or monetary policy shifts. The almost unabated run of disappointing data this year has fuelled investor speculation the government would loosen fiscal or monetary policy more dramatically to shore up activity. But authorities so far have resisted broad stimulus measures. On Wednesday, the top economic planning agency said the government had less room to underpin growth because it did not want to inflate local debt risks. Still, authorities have take some steps to bolster growth. Earlier this month, they announced tax breaks for small firms and plans to speed up some infrastructure spending, including the building of rail lines. The national railway operator now plans to raise its annual investment by 20 billion yuan (1.9 billion pounds) to 720 billion yuan in 2014. There have also been moves to cut down on bureaucracy and to open up state-dominated sectors to private investors. In his speech, Li said China was positioned to sustain a reasonable level of growth over the long term. "We have set our annual economic growth target at around 7.5 percent," he said. "It means there is room for fluctuation. It does not matter if economic growth is a little bit higher than 7.5 percent, or a little bit lower than that." Read the full article here .
  • Zachary Karabell on Making Statistics More Meaningful

    Zachary Karabell is on a quest. He wants us to have a healthier relationship with economic statistics. And that means not placing too much pressure on those statistics to tell us more than they are designed to. In his latest book, The Leading Indicators: A Short History of the Numbers That Rule Our World , Karabell knocks some of the magic shine off of GDP and other key data that we follow closely. He recently spoke about GDP, income per capita, and other headline stats at the Carnegie Council . Here is an excerpt: For more information on the event, and to listen to the full talk, click here .
  • Planet Money: Greece's Economy May Stop Shrinking

    Greece's economy has a had a bad six years. At times, very very bad. But it may be getting better. The latest Planet Money podcast focuses on Greece, because the government there has put out a less-than-bad economic forecast. If the forecast is accurate, "the amazing shrinking economy will finally stop shrinking."
  • Pew: Americans Remain Bearish About the Economy

    Americans don't seem to be letting traditional economic indicators get in the way of their feelings about the economy. Andrew Kohut --Founding Director of the Pew Research Center --looks at some of the latest survey data he and his team has gathered, and calls citizens' "bearish" views of the economy as a big puzzle. As the new year began, the Associated Press summed up the optimistic outlook of experts succinctly: “Consumers will spend more. Government will cut less. Business will invest more. And more companies will hire.” In that regard, the Bureau of Labor Statistics first report of the year showed that the unemployment rate fell to a five-year low of 6.7 percent, and essentially remained at that level in February. But even so, much of the American public is still not over the Great Recession. And the factors that drive economic pessimism are not easily mitigated. Surveys show that a complex combination of partisanship and widening socio-economic gaps are in play, undermining chances of an improvement in the public mood any time soon. At the outset of what appeared to be a brightening economic climate, the Pew Research Center’s January national survey found just 16% of the public rating the national economy as excellent or good while a whopping 83% rated it as only fair or poor. This is little different than a year earlier when the survey found 12% giving the economy a positive rating and 86% rating it negatively. In fact, this is only modestly better than at any point since the onset of the Great Recession. The same pattern is seen in how Americans size up their personal finances. While Americans have a better opinion of their own finances than of the national economy, ratings of personal financial well-being remain well below what they were pre-recession. In 2007, and for much of the decade before it, about half of Americans rated their finances as excellent or good. Today, just 39% do. While there is a significant split on Americans' views about the economy based on political party affiliation, the split on personal finance issues is based on what Pew terms an education gap: Read the full article here .
  • Harvard Business Review: 'Why Is Ukraine's Economy Such a Mess?'

    Harvard Business Review editor Justin Fox looked at growth in Ukraine since independence and compared it to neighboring, former Soviet bloc economies, and was surprised by how much it lagged: So he called up Chrystia Freeland , former FT correspondent and now member of Canadian Parliament. Freeland was in Ukraine when it became an independent nation, and, Fox notes, her mother helped "craft the country's constitution." Here is an excerpt from the interview: Fox: The East has this old industrial base. What does the Ukrainian economy consist of on the whole? Is it heavily agricultural? Freeland: The industrial base is important, particularly in eastern Ukraine. We all know about Ukraine as the breadbasket of Europe, and it is indeed an incredibly fertile country. There’s been a lot of Chinese investment in that part of the Ukrainian economy. There is also a technology outsourcing industry. And then finally, in some parts of Ukraine, tourism has been becoming more important. Why is the economy such a mess? Because of very bad, kleptocratic governments. That is 90% of the reason. In terms of the economy, Ukraine only accomplished maybe half of the things that you need to do, when the Soviet Union collapsed and they moved to a market economy. They did do privatization. There are now a lot of private companies, and there is a market. It’s important for us to remember that not so long ago even selling a pair of jeans was illegal. But what they failed to do was build an effective rule of law and government institutions. Corruption, in the Yanukovych era at least, was absolutely rampant. And some important reforms of state finances haven’t happened. In particular, energy prices are still subsidized. Of course, when you move to free-market prices that’s a huge shock to the society. But Ukraine’s failure to liberalize energy prices is part of the reason that it has this great dependency on Russia. Having said all of that, and having been in Kyiv* last week, I think there’s a bit of an Italian phenomenon going on, where you actually have a highly educated, very entrepreneurial population, but because you had this incredibly corrupt state, a lot of the Ukrainian economy has gone underground. Walking through the streets of many Ukrainian cities — Kyiv, Lviv in Western Ukraine, Dnipropetrovsk in the East — you feel yourself to be in a much more prosperous society than the official data reflect. The official data is incredible. Poland on the one side and Russia on the other are both in the low twenty-thousands in GDP per capita, and Ukraine is officially at $7,298. There is no doubt that Ukraine has fared much, much worse than Poland. That is a testament to how important government decisions are. These countries were not so far apart in 1991 when Ukraine became independent, and the Poles by and large have done the right things, and the Ukrainian government has not. Read the full interview here .
  • Gallup Economic Confidence Index Level in February, Remains at Pre-Shutdown Level

    Americans' confidence in the economy remained flat in February. Confidence had plummeted in October with the partial shutdown of the federal government, but recovered significantly in the three months following. Gallup 's Economic Confidence Index : is now at -16, roughly where it was last spring when it began a climb to a 5 year peak of -7. Here's a look at the monthly averages since the start of 2008: From the report: The end of consecutive monthly climbs in Gallup's Economic Confidence Index is not an auspicious sign, particularly as Americans remain more negative than positive about the economy overall. After the government shutdown wreaked havoc on Americans' confidence in both the government and the economy in October, a parade of monthly improvements offered some hope that economic confidence might finally escape negative territory. But the readings have plateaued at the pre-shutdown level -- in other words, they are back to "normal." However, if 2014 is anything like 2013, good things could be in store as the seasons change. Last spring and summer saw some of the highest economic confidence index readings Gallup has recorded since it began tracking these measures in 2008. And with contentious gridlock on fiscal matters temporarily out of the way for the president and Congress, political sideshows should be less of a threat to economic confidence in the near future, giving confidence a fighting chance of reaching positive territory.; Read the full release here .
  • Rogoff on Potential Blocks to Sustained Economic Progress

    When you look at the collective rise in the quality of living for most people over the last century, it is easy to understand why Warren Buffett says he will continue to bet on economic prosperity. But, writing at Project Syndicate , Kenneth Rogoff warns that "past growth performance is no guarantee that a broadly similar trajectory can be maintained throughout this century." And he lays out four problems to consider: The first set of issues includes slow-burn problems involving externalities, the leading example being environmental degradation. When property rights are ill-defined, as in the case of air and water, government must step in to provide appropriate regulation. I do not envy future generations for having to address the possible ramifications of global warming and fresh-water depletion. A second set of problems concerns the need to ensure that the economic system is perceived as fundamentally fair, which is the key to its political sustainability. This perception can no longer be taken for granted, as the interaction of technology and globalization has exacerbated income and wealth inequality within countries, even as cross-country gaps have narrowed. Until now, our societies have proved remarkably adept at adjusting to disruptive technologies; but the pace of change in recent decades has caused tremendous strains, reflected in huge income disparities within countries, with near-record gaps between the wealthiest and the rest. Inequality can corrupt and paralyze a country’s political system – and economic growth along with it. The third problem is that of aging populations, an issue that would pose tough challenges even for the best-designed political system. How will resources be allocated to care for the elderly, especially in slow-growing economies where existing public pension schemes and old-age health plans are patently unsustainable? Soaring public debts surely exacerbate the problem, because future generations are being asked both to service our debt and to pay for our retirements. The final challenge concerns a wide array of issues that require regulation of rapidly evolving technologies by governments that do not necessarily have the competence or resources to do so effectively. We have already seen where poor regulation of rapidly evolving financial markets can lead. There are parallel shortcomings in many other markets. Read Malthus, Marx, and Modern Growth here .
  • Buffett Forever Bullish on U.S. Economic Future

    Warren Buffett has always bet on economic growth in America, and he is not stopping now. In his annual letter to Berkshire Hathaway shareholders, Buffett comes across as being as bullish as ever, despite the impact of the Great Recession and the slow recovery. Here is an excerpt that explains his thinking: Late in 2009, amidst the gloom of the Great Recession, we agreed to buy BNSF, the largest purchase in Berkshire’s history. At the time, I called the transaction an “all-in wager on the economic future of the United States.” That kind of commitment was nothing new for us: We’ve been making similar wagers ever since Buffett Partnership Ltd. acquired control of Berkshire in 1965. For good reason, too. Charlie and I have always considered a “bet” on ever-rising U.S. prosperity to be very close to a sure thing. Indeed, who has ever benefited during the past 237 years by betting against America? If you compare our country’s present condition to that existing in 1776, you have to rub your eyes in wonder. And the dynamism embedded in our market economy will continue to work its magic. America’s best days lie ahead. With this tailwind working for us, Charlie and I hope to build Berkshire’s per-share intrinsic value by (1) constantly improving the basic earning power of our many subsidiaries; (2) further increasing their earnings through bolt-on acquisitions; (3) benefiting from the growth of our investees; (4) repurchasing Berkshire shares when they are available at a meaningful discount from intrinsic value; and (5) making an occasional large acquisition. We will also try to maximize results for you by rarely, if ever, issuing Berkshire shares. Those building blocks rest on a rock-solid foundation. A century hence, BNSF and MidAmerican Energy will still be playing major roles in our economy. Insurance will concomitantly be essential for both businesses and individuals – and no company brings greater human and financial resources to that business than Berkshire. Moreover, we will always maintain supreme financial strength, operating with at least $20 billion of cash equivalents and never incurring material amounts of short-term obligations. As we view these and other strengths, Charlie and I like your company’s prospects. We feel fortunate to be entrusted with its management. Read the letter here .
  • Federal Open Market Committee Policy Action From the January Meeting Minutes

    The Federal Reserve released the minutes from the January Federal Open Market Committee meeting yesterday. While we already knew the big takeaway from the meeting-- the plan to the Fed's bond-buying quantitative easing program by roughly $10 billion --the minutes allow bankers, investors, and policymakers around the world to get a sharper view of the FOMC's collective thinking. Here are a few key paragraphs from the minutes on policy action: Committee members saw the information received over the intermeeting period as indicating that growth in economic activity had picked up in recent quarters. Labor market indicators were mixed but on balance showed further improvement. The unemployment rate had declined but remained elevated when judged against members' estimates of the longer-run normal rate of unemployment. Household spending and business fixed investment had advanced more quickly in recent months than earlier in 2013, while the recovery in the housing sector had slowed somewhat. Fiscal policy was restraining economic growth, although the extent of the restraint had diminished. The Committee expected that, with appropriate policy accommodation, the economy would expand at a moderate pace and the unemployment rate would gradually decline toward levels consistent with the dual mandate. Moreover, members continued to judge that the risks to the outlook for the economy and the labor market had become more nearly balanced. Inflation was running below the Committee's longer-run objective, and this was seen as posing possible risks to economic performance, but members anticipated that stable inflation expectations and strengthening economic activity would, over time, return inflation to the Committee's 2 percent objective. However, in light of their concerns about the persistence of low inflation, many members saw a need for the Committee to monitor inflation developments carefully for evidence that inflation was moving back toward its longer-run objective. In their discussion of monetary policy in the period ahead, all members agreed that the cumulative improvement in labor market conditions and the likelihood of continuing improvement indicated that it would be appropriate to make a further measured reduction in the pace of its asset purchases at this meeting. Members again judged that, if the economy continued to develop as anticipated, further reductions would be undertaken in measured steps. Members also underscored that the pace of asset purchases was not on a preset course and would remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the efficacy and costs of purchases. Accordingly, the Committee agreed that, beginning in February, it would add to its holdings of agency mortgage-backed securities at a pace of $30 billion per month rather than $35 billion per month, and would add to its holdings of longer-term Treasury securities at a pace of $35 billion per month rather than $40 billion per month. While making a further measured reduction in its pace of purchases, the Committee emphasized that its holdings of longer-term securities were sizable and would still be increasing, which would promote a stronger economic recovery by maintaining downward pressure on longer-term interest rates, supporting mortgage markets, and helping to make broader financial conditions more accommodative. The Committee also reiterated that it would continue its asset purchases, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. In considering forward guidance about the target federal funds rate, all members agreed to retain the thresholds-based language employed in recent statements. In addition, the Committee decided to repeat the qualitative guidance, introduced in December, clarifying that a range of labor market indicators would be used when assessing the appropriate stance of policy once the unemployment rate threshold had been crossed. Members also agreed to reiterate language indicating the Committee's anticipation, based on its current assessment of additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments, that it would be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee's longer-run objective. Read the full release here .
  • CEA Final Report on the Effect of Recovery Act

    On the occasion of the fifth anniversary of the American Recovery and Reinvestment Act, the Council of Economic Advisers has released a report to Congress on the economic impact of the act. The CEA stands firmly behind the act, and the report points to several measures as signs of the effectiveness of the government's plan. Among the evidence presented: GDP per capita returned to pre-crisis levels in four years, an the economy has added over 2 million jobs a year since ARRA. The estimates for the long term impact of ARRA are bullish, with the CEA touting a significant multiplier effect from overall fiscal policy: CEA Estimates of the Recovery Act and Subsequent Fiscal Measures Combined. The combined effect of the Recovery Act and the subsequent countercyclical fiscal legislation is substantially larger and longer lasting than the effect of the Recovery Act alone. The Recovery Act represents only about half of total fiscal support for the economy from the beginning of 2009 through the fourth quarter of 2012. Moreover, as shown in Figures 7 and 8, the bulk of the effects of the other fiscal measures occurred as the Recovery Act was phasing down. These other measures thus served to sustain the recovery as effects of the Recovery Act waned. The CEA multiplier model indicates that by themselves these additional measures increased the level of GDP by between 1.0 and 1.5 percent per quarter from mid-2011 through the end of calendar year 2012. Altogether, summing up the effects for all quarters through the end of calendar year 2012, the Recovery Act and subsequent fiscal measures raised GDP by an average of more than 2.4 percent of GDP annually—totaling a cumulative amount equal to about 9.5 percent of fourth quarter 2008 GDP. The contribution of all fiscal measures to employment is equally substantial. Other fiscal measures beyond the Recovery Act are estimated to have raised employment by 2.8 million job- years, cumulatively, through the end of calendar year 2012. Adding these jobs to those created or saved by the Recovery Act, the combined countercyclical fiscal measures created or saved more than 2.3 million jobs a year through the end of 2012—or 8.8 million job-years in total over the entire period. Estimates from Private Forecasters. Private forecasters and domestic and international institutions have used large-scale macroeconomic models, mostly to estimate the effects of either the Recovery Act by itself or other policies in isolation. The models used by these individuals and organizations generally employ a similar multiplier-type analysis as is found in CEA and CBO work, although they vary considerably in their structure and underlying assumptions. Although no outside estimates of the total impact of all the fiscal measures are available, Table 6 displays the estimates of the impact of the Recovery Act offered by several leading private-sector forecasters before the Act was fully implemented. Despite the differences in the models, these private-sector forecasters all estimated that the Recovery Act would raise GDP substantially from 2009 to 2011, including a boost to GDP of between 2.0 and 3.4 percent in 2010. Read the full report here . For a helpful summary, read a summary from CEA chair Jason Furman here .
  • An Optimistic Take on Japan's Weaker Than Expected GDP Data

    Japan's economy grew at a disappointing rate to close 2013, expanding at an annualized rate of 1 percent during the fourth quarter. That has some analysts disappointed and worried about the short term prospects for Japan, but not Dalju Aoki . Aoki, economist for UBS, tells the Wall Street Journal's Deborah Kan that he is still optimistic about growth in Japan this year. And he explains what he looks at as helpful economic indicators:
  • Strobe Talbott: Jean Monnet and Economic Integration in Europe, Past and Present

    Though never elected to political office, Jean Monnet was one of Europe's most important politicians of the last 100 years. As a young businessman, he set to work on strengthening economic ties between European economies, and strengthening a European economy well before the birth of the European Union. In a new essay, Brookings Institution president Strobe Talbott calls Monnet the "master architect" for the "European Project," and he argues that Monnet's thinking is very much relevant today. He died 35 years ago, long before the euro went into circulation. Still, he would have understood the purpose that monetary union is meant to serve: binding up the wounds of the most bloodstained continent in modern history and turning it into a zone of peace, prosperity, democracy, and global clout, animated by common values and governed by common policies and institutions. That is the European Project. As its master architect, Monnet would also have understood the mistakes, dilemmas, and dangers that threaten the project now. The method that guided him throughout his long life put a premium on the careful sequencing of innovations in economic policy so as to make irreversible the overall process of political integration. Unlike Monnet, however, the leaders responsible for the adoption of the euro in the 1990s failed to ensure that the necessary political conditions and institutions were in place, thus making the current troubles of the European Union all but inevitable. The relevance today of this historical figure is all the more striking in the light of his idiosyncratic career. Monnet spent much of his life as a private citizen. He never held elective office or a ministerial post. He was an effective advocate, who used his carefully cultivated mellifluous speaking voice and forensic skills to good effect in interviews and declarations. But it was primarily from behind the scenes that he influenced generations of major actors on the world stage: in his youth, Georges Clemenceau, Arthur Balfour, Neville Chamberlain, Winston Churchill, and Franklin Roosevelt; in his middle years, Dean Acheson, Konrad Adenauer, and John F. Kennedy; in old age, Willy Brandt, Helmut Schmidt, and Shimon Peres. At crucial moments and on vital issues, these leaders and others took his counsel and adopted his ideas as their own. In a sense, Monnet is once again exerting his influence, this time from beyond the grave. The crisis in the eurozone has focused minds in key capitals on cobbling together institutional measures of the sort that he believed were necessary for monetary union. As a result, his vision of a united Europe may well survive and, over time, succeed. You can read the full essay here . And watch Talbott discuss Monnet and the economic integration of Europe in this interview:
  • Growth Picks Up the Pace in Europe

    The rate of growth picked up in Europe at the end of the year. According to data released by Eurostat this morning, GDP across the euro area rose 0.3% in the fourth quarter of 2013. That's following third quarter growth of 0.1%. For the EU overall, the numbers were better. GDP for the EU28 rose by 0.4% in the fourth compared with 0.3% for the third quarter. . The Czech Republic and Romania had standout quarters, with growth rates of 1.6% and 1.7%, respectively, for the quarter. Cyprus, on the other hand, had the biggest drop at -1.0%, and Finland came in at -0.8%. The data for each country is available here .
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