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Archive for the ‘Economics and Culture’ Category

Pritchett and Summers wrote that “regression to the mean is the single most robust finding of the growth literature and the typical degrees of regression to the mean imply substantial slow-downs in China and India relative even to the currently more cautious and less bullish forecasts.”

Some thoughts/takeaways:

  • Our understanding on economic growth & development remains poor: “super-rapid growth is due in part to a large residual or unexplained component.”
  • Japan, Korea, and Taiwan fit the regression to the mean story, but that doesn’t mean they fail to transit to higher income economies.
  • Economists are bad at forecasting growth (near or long term) and often miss major turning points. Most forecasts are based to a large extent on recent growth figures.
  • The regression to the mean is a long-term argument so we shouldn’t use it to forecast growth in the near or even medium term (it would probably draw the same conclusion every year over the past decade). Similarly, perhaps we shouldn’t be too bearish on countries that seem to be making lots of poor decisions (e.g. Brazil, Russia, Argentina) if our horizon is long enough.
  • In the country specific section, the authors resort to “institutional quality” to argue why emerging market growth tends to be less persistent than developed market growth (which tends to grow at mean rate). So the bottom line seems to be whether China succeeds in its reform plans (reduce corruption, improve the rule of law, etc.). Given predicting politics is difficult even in the short term, let alone decades, today’s growth tells us little about future growth in places where institutional reforms are needed. 
  • My guess is that Singapore’s political system is the model China wants to move towards. Whether it can manage the transition well is an open question, and I think prolonged political instability is the biggest risk to its long-term growth outlook. On the positive side, China is taking reforms more seriously than most other emerging markets, so on net I’m optimistic that China will become a high-income country someday. 

 

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The Cult of Overwork – “Overwork has become a credential of prosperity” even though we know “long hours diminish both productivity and quality”. The puzzle is why we (at least for those living in relatively high income places) still work so much, and don’t enjoy more leisure as Keynes wrote back in the 1930, or as Bertrand Russell recommended in In Praise of Idleness (excerpts below).

What Chinese officials learn from the Party training school – Some officials are impressive indeed, though not sure how much can be attributed to the training. 

How I made sure all 12 of my kids  could pay for college themselves – Sensible parenting principles that seem to strive a balance between the extreme generalizations of the free-range Western style and the Asian tiger parenting style. Remind me of the highly recommended book How to Talk So Kids Will Listen & Listen So Kids Will Talk

Memoirs of a Would-be Macroeconomist by Arnold Kling- Good coverage of the recent debates and development in macroeconomics from various schools of thought. I especially enjoy the description of his experience working at CBO and the Fed.

Excerpts from Russell’s In Praise of Idleness:

I think that there is far too much work done in the world, that immense harm is caused by the belief that work is virtuous, and that what needs to be preached in modern industrial countries is quite different from what always has been preached.

……

It will be said that, while a little leisure is pleasant, men would not know how to fill their days if they had only four hours of work out of the twenty-four. In so far as this is true in the modern world, it is a condemnation of our civilization; it would not have been true at any earlier period. There was formerly a capacity for light-heartedness and play which has been to some extent inhibited by the cult of efficiency. The modern man thinks that everything ought to be done for the sake of something else, and never for its own sake.

……

When I suggest that working hours should be reduced to four, I am not meaning to imply that all the remaining time should necessarily be spent in pure frivolity. I mean that four hours’ work a day should entitle a man to the necessities and elementary comforts of life, and that the rest of his time should be his to use as he might see fit. It is an essential part of any such social system that education should be carried further than it usually is at present, and should aim, in part, at providing tastes which would enable a man to use leisure intelligently. I am not thinking mainly of the sort of things that would be considered ‘highbrow’. Peasant dances have died out except in remote rural areas, but the impulses which caused them to be cultivated must still exist in human nature. The pleasures of urban populations have become mainly passive: seeing cinemas, watching football matches, listening to the radio, and so on. This results from the fact that their active energies are fully taken up with work; if they had more leisure, they would again enjoy pleasures in which they took an active part.

Excerpts from Keynes’s Economic Possibilities for our Grandchildren:

Thus for the first time since his creation man will be faced with his real, his permanent problem-how to use his freedom from pressing economic cares, how to occupy the leisure, which science and compound interest will have won for him, to live wisely and agreeably and well.

The strenuous purposeful money-makers may carry all of us along with them into the lap of economic abundance. But it will be those peoples, who can keep alive, and cultivate into a fuller perfection, the art of life itself and do not sell themselves for the means of life, who will be able to enjoy the abundance when it comes.

Yet there is no country and no people, I think, who can look forward to the age  of leisure and of abundance without a dread. For we have been trained too long to strive and not to enjoy. It is a fearful problem for the ordinary person, with no special talents, to occupy himself, especially if he no longer has roots in the soil or in custom or in the beloved conventions of a traditional society.

……

Of course there will still be many people with intense, unsatisfied purposiveness who will blindly pursue wealth-unless they can find some plausible substitute. But the rest of us will no longer be under any obligation to applaud and encourage them. For we shall inquire more curiously than is safe to-day into the true character of this “purposiveness” with which in varying degrees Nature has endowed almost all of us. For purposiveness means that we are more concerned with the remote future results of our actions than with their own quality or their immediate effects on our own environment. The “purposive” man is always trying to secure a spurious and delusive immortality for his acts by pushing his interest in them forward into time.

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Indian mothers-in-law – Interesting article on Indian family culture.

Why the French are miserable – Excerpts below, much more in the article.

Romantic miserabilism was experienced as a form of pleasure. “Melancholy”, wrote Victor Hugo, “is the happiness of being sad.” It was treated as a noble state, a higher aesthetic condition. “I do not pretend that joy cannot be allied with beauty,” wrote Baudelaire in his diary. “But I do say that joy is one of its most vulgar ornaments; whereas melancholy is, as it were, its illustrious companion.” Much of this tradition is firmly fixed in today’s French mind. Hugo’s poem “Melancholia” is required reading for French lycée students, as is Alfred de Musset’s “La Nuit de Mai”, whose narrator laments that “Nothing makes us so great as great sorrow.”

……

Perhaps the best exemplar of miserabilism among contemporary French fiction writers is Michel Houellebecq, the controversial Goncourt-prize-winning novelist, in such nihilist works as “Whatever” or “Atomised”. His characters invariably lead empty, often sordid, always disillusioned lives. “In the end,” writes Mr Houellebecq in “The Elementary Particles”, “there’s just the cold, the silence and the loneliness. In the end, there’s only death.”

……

Perhaps the French need dissatisfaction and thrive on doubt. “There is a certain pleasure taken in being unhappy: it’s part of an intellectualism of French culture,” says Ms Senik. “Malaise and ennui are to France what can-do is to America: a badge of honour,” wrote Roger Cohen in the New York Times recently. Pessimism does not preclude pleasure. All that sitting around at pavement cafés, looking fashionably discontented, can be fun. Optimism is for fools; sophisticates know better. Bleak is chic—especially when opening another bottle of Saint-Emilion and reaching for the three-tier cheese trolley.

A short history of hotels – I must have visited dozens of hotels this year and spent lots of time there (business travel, meeting, personal travel, dining, sightseeing, etc.), so it’s interesting to learn more about the industry.

In the future the hotel may offer neither bland uniformity nor authentic warmth but a proliferating number of experimental worlds in which to insert yourself. Who do you want to be next time you hand over your passport and check in?

Special report on museums –  Are we in the golden age of museums? The museum boom in China seems wasteful. I just realize from the article that I’ve visited all the top 3 most popular modern art museums, and 6 of the top 10. But I still don’t understand contemporary art. Think I should read up more before visiting next time.

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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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Nobel in Economics

Links to economists’ comments on the winners. Good opportunity to brush up on the efficient markets hypothesis and behavioral finance. This might be a good place to start. I guess the bottom line for those who ask “what should I invest in?” type of questions is stick with low-cost index fund.

Scott Adams’ Secret of Success: Failure

Key points: Success caused passion more than passion caused success; have a system, not goals; stay in the game.

TED talks are lying to you

Excerpts:

…society had no interest in new ideas at all unless they reinforced favorite theories or could be monetized in some obvious way. The method of every triumphant intellectual movement had been to quash dissent and cordon off truly inventive voices.

……

Using Vincent van Gogh as an example, the author declares that the artist’s “creativity came into being when a sufficient number of art experts felt that his paintings had something important to contribute to the domain of art.” Innovation, that is, exists only when the correctly credentialed hivemind agrees that it does. And “without such a response,” the author continues, “van Gogh would have remained what he was, a disturbed man who painted strange canvases.” What determines “creativity,” in other words, is the very faction it’s supposedly rebelling against: established expertise.

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