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Archive for October, 2013

This article suggests that different moods may trigger different thinking styles, and bad moods might not be all that bad. I don’t know whether the findings will hold up, but I do think sadness is an essential part of being human. CK Louis said “sadness is a lucky thing to feel,” and Ben Casnocha agreed.

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I just finished Michael Pettis’ new book on China recommended by Tyler. He uses a neat framework to think about China’s growth and how it fits in the global system. I’m probably more optimistic about China’s long-term growth outlook than Michael Pettis, although we might be thinking in a different time horizon.

Things I agree:

1) Continue rising debt to GDP is not sustainable, and at some point debt will be rising faster than debt-servicing capacity.

2) The structure of the economy (implicit government guarantee, distorted price signal, etc.) makes it vulnerable to capital misallocation, and the surge in credit and investment to GDP ratios suggest there are lots of wasteful investments.

3) Economists are bad at predicting turning points and adjusting their expectations during major turns in growth cycle.

Things I don’t necessarily agree:

1) The assumption that China must rebalance toward a greater reliance on consumption. I don’t think consumption is inherently better than investment from a growth prospective (it matters for income distribution and social welfare, but that’s a different question). A debt-fueled consumption boom is probably worse than a debt-fueled investment boom. Michael Pettis noted that wasting money is always value destroying, but consumption is about spending money with no monetary return, while bad investment might still earn some returns. In general the classification between consumption and investment is not well-defined (housing, education, types of investments, etc.).

One could argue that investment is more likely to be debt-financed relative to consumption and hence less sustainable, or that stronger consumption could encourage investments in the service-producing sectors that are likely less capital intensive. Those are valid points for rebalancing but don’t change my view about consumption versus investment. I think investment helps drive long-run productivity growth, while consumption is the ultimate end, and there is a trade-off to be made by each country. I see debt-financed investment and types of investments as the main problems, not investment per se.

A few other issues regarding consumption share: Data are not very good so we probably should assign less weight to the level of consumption to GDP. Singapore also has a very low consumption share but its model seems to be sustainable. Admittedly Singapore is a small economy and China probably won’t get away with the type of current account surplus Singapore has. My point is that for sustainable economic growth, institutions are likely the key, not consumption level.

2) I think China’s growth is more likely to slow sharply at some point as the economy deleverage, but I don’t think a lost decade of very slow growth is a necessary outcome. Reforms are key, and China is slowly moving forward. FX appreciation and strong wage growth have been happening, There are also some limited progress on improving social safety net and hukou reforms, while gradual liberalization of interest rates, further hukou and land reforms, and energy price reforms are also on the agenda. These are all steps that should help redistribute income to the households.

I think the party leaders’ main objective is to stay in power. As long as reforms are consistent with this goal, I think they will continue to pursue them. The progress might be too slow to solve the existing problems, with lots of powerful vested interests trying to stifle reforms. But there are not many emerging economies where the top leaders seem to be serious about reforms.

Assuming China hits the debt limit and growth slows down sharply, my base case is that this will help trigger some serious and difficult reforms, like what happened during Zhu Rongji’s time. The government and state-owned enterprises will likely have to shoulder the bad debts, and they seem to have enough resources to do so (i.e. selling assets).

I’m more worried about political and social instability, a topic Michel Pettis doesn’t focus on in the book. Barring major instability, I’m relatively optimistic about China’s long-term economic outlook.

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paper by Dani Rodrik summarizing his recent works on growth & development. In his view the two dynamics behind growth are 1) development of fundamental capabilities in human capital and institutions [structural reforms], and 2) structural transformation [industrialization and moving labor into high productivity industries]. The first is slow and difficult, and most successful catch-up stories follow the second method until they reach middle-income [resource rich countries exception]. At that point the first dynamic would also be needed to break into high income level.

He noted that successful economic transitions rarely grown rapidly because of across the board institutional reforms, but most marked by sequential relaxation of one binding constraint after another, using policy tools that are tailored to local circumstances.

He noted six stylized facts about economic growth: 1) Growth has increased over time. Asia growth rate is incredible/unprecedented. 2) Convergence has been the exception rather than the rule [no tendency for poor countries to growth faster than rich countries]. 3) Economic development goes with productive diversification [not specialization]. 4) Industrialization and manufacturing exports have been the most reliable levers for rapid and sustained growth in the past. 5) Manufacturing industries are special in that they tend to exhibit unconditional convergences. 6) Most successful economies have not been ones with least state intervention

He is less optimistic about catch-up in other developing economies (like Africa or India) in the future due to 1) weaker Western growth which could lead to less tolerance for industrial policies, 2) change in manufacturing industries towards more capital and skill intensive, and changes in global supply chains with less positive spill-over for developing countries, 3) increased global competition, esp. from China, and 4) increased environmental awareness/concerns.

Applying Rodrik’s framework, China needs to continue to reform its institutions to move up. I think it fares well on the human capital front. India is more concerning. Its rigid labor law & socialist policies hinder growth in the manufacturing sector. It’d need to find sectors that can help employ large numbers of relatively unskilled workers, absorb foreign technology, and build linkages with domestic economies. Otherwise it’d likely continue to perform below its potential. Opening up to multi-brand retail would be a good start, but so far no international multi-brand have entered yet, likely due to policy & political uncertainty and unclear requirements.

Abstract: Developing countries will face stronger headwinds in the decades ahead, both because the global economy is likely to be significantly less buoyant than in recent decades and because technological changes are rendering manufacturing more capital and skill intensive. Desirable policies will continue to share features that have served successful countries well in the past, but growth strategies will differ in their emphasis. Ultimately, growth will depend primarily on what happens at home. The challenge is therefore to design an architecture that respects the domestic priorities of individual countries while ensuring that major cross-border spillovers and global public goods are addressed

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The Economist has a special report on Korea this week, touching on the social issues it faces. Here‘s the concluding article.  It cited a report by McKinsey Global Institute and also a highly readable book “The Impossible Country“. Both are good reads to understand Korea better. The former focuses more on structural economic issues, while the latter provides good information on politics, culture, and the economy.

Korea is a highly stressful country to live in. It has one of the highest suicide rates, very long working hours, and alcohol consumption well above Japan’s. This all stems from a very competitive society, starting when one is a child all the way up. Beside needing to spend a lot on children’s education (private + extracurricular) to get ahead, parents also spend a lot to live in a good district, on branded accessories, expensive alcohol for guests, and plastic surgery, all to look good among peers (luxury sales growth in Korea is among the highest in world). Hence a lot of middle income households are feeling stressed and running high household debt. There seems to be a shift in sentiment in recent years toward improving living standards, but I don’t think much has changed yet. Korea will probably need to change its growth model going forward.

I read the McKinsey report a while back. Below are some stylized facts I saved. There are also many interesting charts in the report.

PS: Going to Seoul next month and looking forward to try the ideal bibimbap.

Korea has gone from a nation where divorce was almost unheard of to having one of the highest divorce rates among OECD. It has the highest suicide rate in the world (31.7 per 100,000 people in 2011).

Only about 44% of Korean households have two incomes (vs 57% across OECD). Koreans also shoulder high monthly payments for housing loans and spend more on private education than almost any society on earth. More than 60% of respondents cited burden of education and child care as the reason not to have children.

Korea’s household saving rate has fallen from around 19% in 1988 to 4% in 2012, among the lowest in OECD, and the proportion of middle-income households operating in deficit (paying out more in expenses every month than they take in) has jumped from 15% to 25%. If monthly principal payments for mortgages were counted, nearly 55% of middle income households could be considered in deficit.

Wealth of Korean families is nearly 3 times as concentrated in real estate as wealth of US families. Real estate makes up about 74% of household assets. About 90% of loans have floating interest rates. Monthly debt service averages 25% of income, more than twice the debt service ratio of US households. The average mortgage is for 51% of home price, and many purchasers take out additional higher cost loans from 2nd tier banks. The spread on a loan to cover 80-90% of a purchase price is 4pp over a 50% LTV loan, or twice the premium charged in the US.

Overall, service sector productivity (valued added per employee), is 30-57% below levels in the US, UK, and Germany. Service wages are 55% of manufacturing wages, larger gap than in Germany, Japan, UK, and US.

Korean economy is dominated by SMEs. In SMEs, which account for 88% of employment, pay is about 62% of large-company rates. The productivity of Korea SMEs is only 35% of that of large companies. SMEs account for 99.9% of estimated 3 million plus companies in Korea, and 96% are small companies with fewer than 50 employees.

Manufacturers shifted 17% of their production to overseas plants in 2010.

According to Hyundai Research Institute, unemployment rate would be closer to 11% if full accounting were made of the unemployed and underemployed. It estimates that about 803,000 Koreans are involuntary part-timers. Part-timers make only about 65% of full-time pay. Some 30% of labor force is self-employed, compared with 10% in other advanced economies. More than 80% of self-employed work in local services, including a large number of older workers who launch their own business after retirement.

Korea’s college entrance was the highest in OECD in 2011, but graduates are having more trouble find good jobs than graduate from vocational high schools. McKinsey estimates that the net present value of the lifetime earnings of a Korean who goes through private school and university is less than the NPV of the earnings of a high school graduate.

Nation ranks highest on internet accessibility, airport one of the best, and highest smartphone penetration in the world. -Tourism revenue accounts for only 2.4% of GDP compared with OECD average of 3.8% (ranges as high as 10.2% in Spain). Employment in tourism accounts for 2.2% of jobs compared with 5% across OECD.

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Interesting debate on the future of education. My experience is similar to Peter Boettke’s. A few good teachers and peers did wonders in shaping my intellectual and personal developments, although nowadays the blogosphere plays a similar role.

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Time to read

I tend to read more books (vs. emails/blogs/magazines) while traveling. Queuing and waiting are both good time to read; same for traveling in train/subway. As long as I’ve my Kindle with me I don’t mind waiting nowadays. But I try to avoid reading when I’m travelling in a new place, so I can pay more attention to my surrounding.

On the plane there are more temptations, and I don’t always read as much as I would like. I often waste too much time trying to optimize what movies to watch or music to listen vs. what to read.

I also tend to read more books in countries where I don’t have easy internet access and often enjoy it. This suggests I probably still spend too much time reading blogs and checking emails (or do them too frequently) in my daily life.

Here‘s Shane Parrish on finding time to read. Finding time to do anything is mostly about willingness and trade-offs, and develop simple rules/habits help sustain the process.

Here‘s an infographic on whether you should check your email.

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Conversations with David Foster Wallace – a good book to learn about the life of DFW, how he thinks, and the inner struggles he had. The last article “The Lost Years and Last Days of David Foster Wallace” is especially poignant.

Thoughts from David:

“Writing fiction takes me out of time,” he explains. “I sit down and the clock will not exist for me for a few hours. That’s probably as close to immortal as we’ll ever get.

……

The writers I know, there’s a certain self-consciousness about them, and a critical awareness of themselves and other people that helps their work. But that sort of sensibility makes it very hard to be with people, and not sort of be hovering near the ceiling, watching what’s going on. One of the things you two will discover, in the years after you get out of school, is that managing to really be an alive human being, and also to do good work and be as obsessive as you have to be, is really tricky. It’s not an accident when you see writers either become obsessed with the whole pop stardom thing or get into drugs and alcohol, or have terrible marriages. Or they simply disappear from the whole scene in their thirties or forties. It’s very tricky.

……

But there are a few books I have read that I’ve never been the same after, and I think all good writing somehow addresses the concern of and acts as an anodyne against loneliness. We’re all terribly, terribly lonely. And there’s a way, at least in prose fiction, that can allow you to be intimate with the world and with a mind and with characters that you just can’t be in the real world.

……

I had a teacher I liked who used to say good fiction’s job was to comfort the disturbed and disturb the comfortable. I guess a big part of serious fiction’s purpose is to give the reader, who like all of us is sort of marooned in her own skull, to give her imaginative access to other selves. Since an ineluctable part of being a human self is suffering, part of what we humans come to art for is an experience of suffering, necessarily a vicarious experience, more like a sort of generalization of suffering. Does this make sense? We all suffer along in the real world; true empathy’s impossible. But if a piece of fiction can allow us imaginatively to identify with characters’ pain, we might then also more easily conceive of others identifying with our own. This is nourishing, redemptive; we become less along inside. It might be just that simple. But now realize that TV and popular film and most kinds of “low” art–which just means art whose primary aim is to make money–is lucrative precisely because it recognizes that audiences prefer 100 percent pleasure to the reality that tends to be 49 percent pleasure and 51 percent pan. Whereas “serious” art, which is not primarily about getting money out of you, is more apt to make you uncomfortable, or to force you to work hard to access its pleasures, the same way in real life true pleasure is usually a by-product of hard work and discomfort.

……

One thing TV does is help us to deny that we’re lonely. With televised images, we can have the facsimile of a relationship without the work of a real relationship. It’s an anesthesia of form. The interesting thing is why we’re so desperate for this anesthetic against loneliness. You don’t have to think very hard to realize that our dread of both relationships and loneliness, both of which are like sub-dreads of our dread of being trapped inside a self (a psychic self, not just a physical self), has to do with angst about death, the recognition that I’m going to die, and die very much along, and the rest of the world is going to go merrily on without me.

……

There is the anecdote about all Jane Austen’s friends being terrified to talk around her because they knew they would end up in a book. I’m not sure how fiction and poetry work, but part of it is that really we notice a lot more than we notice we notice. A particular job of fiction is not so much to note things for people but rather to wake readers up to how observant they already are, and that’s why for me as a reader the descriptions or just toss offs that I like the most are not the ones that seem utterly new but the ones that have that eerie “good Lord I’ve noticed that too but have never even taken a moment to articulate to myself.”

……

Probably all jobs are the same and they’re filled with horrible boredom and despair and quiet little bits of fulfillment that are very hard to tell anyone else about. That’s just a guess.

……

He told me a joke: What does a writer say after sex?  Was it as good for me as it was for you? There is, in writing, a certain blend of sincerity and manipulation, of trying always to gauge what the particular effect of something is gonna be,” he said. “It’s a very precious asset that really needs to be turned off sometimes. My guess is that writers probably make fun, skilled, satisfactory, and seemingly considerate partners for other people. But that the experience for them is often rather lonely.

……

Fiction’s job used to be to make the strange familiar, to take you somewhere and let you feel that this was familiar to you. It seems that one of the things now is that everything presents itself as familiar, so one of the things the artist has to do now is take a lot of the familiarity and remind people that it’s strange.

……

Success can be as difficult to recover from as failure. “You know the tic big-league pitchers have,” his mother says, “when they know that they’ve pitched a marvelous game–but gee, can they do it again, so they keep flexing that arm? There was some of that. Where he said, ‘OK. Good, that came out well. But can I do it again?’ That was the feeling I got. There was always the shadow waiting.”

……

In late 2001, Costello called Wallace. “He was talking about how hard the writing was. And I said, lightheartedly, ‘Dave, you’re a genius.’ [DWF won the MacArthur genius award.] Meaning, people aren’t going to forget about you. You’re not going to wind up in a Wendy’s. He said, ‘All that makes me think is that I’ve fooled you, too.”

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