Sunday, June 17, 2018

Japan, PRC & Dumbly Shooting Down Flying Geese

6:22 PM

The migration of the so-called "Flying Geese Model" has been responsible not only for integrating more regional economies into the world economy's fold but also raising living standards in East Asia as the centre of economic gravity is rapidly heading towards our part of the world. The essentials of this story are well-known: high production costs due to a strong yen and dearer labour have encouraged Japanese firms from the first wave of industrialization in our region to set up shop elsewhere as long as comparative or competitive advantages are found. In turn, the likes of Taiwan and South Korea have followed in Japan's wake by extending their production facilities elsewhere in the region such as Southeast Asia when their production costs in turn increased. And so on down the line, with China being the largest beneficiary of this process in recent years.

Hence, it was with no small amount of displeasure that I noted the re-emergence of territorial disputes in Asia flaring up, especially in mainland China. While the politics of territorial disputes have until now been fairly contained, there has always been the danger of these tensions spilling over into economic disruptions. With tightly integrated production schedules alike "just in time" processes nowadays, such disruptions could easily affect the global availability of important consumer alike automobiles or consumer electronics if prolonged. The cause this time, though, does not involve an earthquake, a tsunami, or a torrential downpour but simple human insensibility.

These past few days have witnessed Chinese protests spilling over into outright hostility against Japanese foreign investment and investors--or factories and expatriate personnel alike. Left with few alternatives, many Japanese companies operating in China have closed offices and factories. The BBC reports on this across-the-board demolition derby prompting widespread Japanese closures that threaten $345B in bilateral trade between these two giants of the region:
  • Panasonic - shut factory in Qingdao
  • Canon - suspended operations at three plants
  • Honda and Nissan - stopped production for two days
  • Mazda - stopped production at Nanjing factory for four days
  • Toyota - suspended some production
  • Sony - closed two of its seven plants and is discouraging non-essential travel to China
  • Seven & I Holdings - closed 13 supermarkets and 198 convenience stores
  • Fast Retailing - shut 42 Uniqlo clothing stores and advised Japanese employees to stay at home
  • Aeon - closed 30 out of 35 supermarkets
  • Komatsu - the construction equipment maker has halted work at three plants in Shandong province
As I said, it's not a small incident as there has emerged a witch hunt against all things Japanese in many Chinese cities. In turn, I've given some thought about how we can settle quell disputes, but it will require compromises from all sides:
  1. Japan would do itself a lot of favours if it finally issued an apology to all the countries it rather savagely occupied during WWII. Germany did so long ago, and it is never too late for Japan to follow suit since Asians apparently have very long memories. The grievances extend practically everywhere--from China to South Korea and on to Southeast Asia--while the offences are undoubtedly grave--forcing women into prostitution, [subsequently American exploited] human experimentation, arbitrary torture and execution, etc.
  2. OTOH, the others--Chinese, Koreans and Southeast Asians in particular--ought to discourage obtaining cheap political points by distracting people from more significant matters. Unpopular at home? There is always the temptation to "blame Japan."
  3. Insofar as territorial disputes in Asia will not likely be solved through arbitration at bodies alike the International Court of Justice due to the reluctance of certain parties, the promise of much-needed fuel supplies in the East China Sea can be brought to fruition by joint exploration. Yes, there will be issues as to what each party will contribute and get in return, but such matters are comparatively trivial to the gains from exploiting these resources in the here and now and easing territorial disputes in the process.
Just my two cents' worth for now. Meanwhile, what's going on is beyond comprehension since there is tacit approval of such senseless violence that threatens to destroy what has taken years of cooperation to build in the aftermath of WWII. Economic ministers whose role is to create trade ties may shake their heads in disgust, but rest assured that there are others who believe their political standing may rise by stoking the flames a wee bit more.

UPDATE: Also see the Lowy Interpreter on the possible demise of "Factory Asia."

The World's Best Central Bankers Don't Do QE3

6:19 PM
The definition of insanity is doing the same thing over and over again and expecting different results - Albert Einstein
Here in the rest of the world, Fed Chairman Ben Bernanke is regarded somewhere between a joke and a menace. It thus comes no surprise that the world's most infamous central banker is nowhere to be found among this year's rankings of the world's top practitioners in this art. As observant American T-shirt makers have noted, "let them eat cash" is not quite an economically progressive move either at home or abroad.

On its present trajectory, the US escaping the "new normal" of 1-2% annual growth is a distant pipe dream. Various QEx stimuli--there will probably be more Stupid American Monetary Tricks--have done nothing to improve US economic prospects as Americans still won't believe in America if you actually paid them to spend increasingly worthless dollar-denominated detritus. Meanwhile, the rest of the world is girding up for another round of dollar devaluation via the latest US salvo in "international currency war."

Dear readers, there is no real skill involved in giving money away for free...and not achieving any sort of economic growth sufficient to reduce mass unemployment in the process. Any half-wit could do that. The only reason why Ben "Choplifter" Bernanke managed to get a grade of "B" this year instead of last year's "C" is because he didn't embark on QE3 prior to the announcement of the 2012 rankings. So roll on 2013 and possibly even his replacement by another hapless figure if the Republicans win. One thing's for sure, though: the (dark?) arts of central banking can do next to nothing to reverse America's slide into its sunset years.

But, enough of lousy central banking. To paraphrase another set of (misguided) American leaders, the high art of central banking is pivoting towards Asia, where people learned from their crisis while the haughty Yanks didn't. Instead of throwing away unlimited amounts through buying mortgage-backed securities and whatever else the Fed is purchasing nowadays, Asian countries structurally adjusted themselves--as the Americans used to prescribe to errant economies. When faced with their own crisis, the Americans have of course chosen to double down on things which have led them astray alike trying to revive the moribund housing market and running up unprecedented fiscal deficits. As it so happens, two of the worst crisis-affected countries in Malaysia and the Philippines now have two of the world's six top central bankers, while half of those taking home As including them are from Asia.

Actually, this year's "A" list is identical to last year's, bar one change: Australia's Glenn Stevens, Canada's Mark Carney, Israel's Stanley Fischer (formerly the IMF's No 2 man), Malaysia's Zeti Akhtar Aziz, the Philippines' Amando Tetangco, and Taiwan's Fai-Nang Perng. The criteria are: inflation control, economic growth goals, currency stability and interest rate management

Sound money principles in central banking. What a revolutionary idea as we contemplate QE77 a few years down the line. Some people just don't get it, and probably should get to writing "How to Lose an Economy and Offend Other Central Bankers," pronto instead of sticking around in a job they obviously gave no skill in. A mandate of full employment? Don't make me laugh. If today's best central bankers are not delusional enough to think they can achieve it through monetary shenanigans, then I think it's high time the Fed amateurs followed suit.

What Euro at $1.31 Says About Western Economies

6:14 PM

Not to my particular surprise--I too believe that the world should worry about the dollar and not the euro--the common currency went back up to $1.31 after the Federal Reserve announced QE3. Oh, the irony. Here we were supposing that old Europe had been left for dead, yet even this currency used by various troubled peripheral nations alike Greece, Ireland, Italy, Portugal and Spain has managed to bounce back despite everything.

To cut a long story short concerning the battle of the moribund Western economies, consider:

  1. If subprime growth [U-S-A!] combined with unlimited deficit spending is preferable to fiscal retrenchment resulting in (a hopefully short-lived and transitional) recession [E-U!], then why is the currency of the latter preferred to the former?
  2. As per point (1), does the market prefer policies that involve tackling fiscal problems head-on despite the immediate costs over delaying any meaningful effort to address deficits?
  3. Considering that the bond yields of the aforementioned PIIGS range from 5.01% to 20.90%, then what would the market-determined yield of US treasuries be without such heavy Fed buying distorting the market?
Both Europe and the US happen to be in sorry shape, but the latter is the biggest loser hands down--together with those poor sods dumb enough to hold its currency.

An Economic Case for Catalan Independence?

6:11 PM

Nothing stokes popular discontent like economic malaise, and Spain's current plight of enduring, among other things, borrowing costs characteristic of a third world country instead of a first world one is now the Catalan cause. Never fond of Spanish central government to begin with, the rallying cry for independence is in not being weighed down by that economically regressing nation:
For the first time, polls this year revealed that a majority of Catalans now want an independent state – a demand that will reach full voice on Tuesday in mass rallies marking the Diada, Catalonia’s national day, under the banner of “Catalonia: a new state in Europe”.

The critical date, however, falls the week after, when Artur Mas, the Catalan president, meets Mariano Rajoy, Spanish prime minister. Mr Mas, a mainstream nationalist from Mr Pujol’s Convergencia i Unio party, is seeking Madrid’s commitment to fiscal autonomy – the right of Catalonia to collects its own taxes, as the Basques do – the pledge upon which he was elected.
Almost no one believes Mr Rajoy’s centre-right Partido Popular government is either ideologically willing or fiscally able to concede this demand. Most analysts therefore anticipate an early Catalan election, probably in the spring, which will become a de facto referendum on independence.
A further argument is that if Catalunya had fiscal authority, it would not find itself in as bad a shape financially as it does now:
Catalans always accepted that as a relatively rich part of the country, they “needed in justice to contribute” to a central budget channelling resources to less developed regions such as Andalucia, says Mr Pujol. But they “fell into the solidarity trap”, and “this has led to the total abuse of our [fiscal] situation”, he argues.

Catalonia last month had to seek a €5bn rescue package from Madrid, which Cristobal Montoro, the Spanish finance minister, has indicated will come only with increased central control of its government. But the Catalans argue they could refinance their €42bn debt and manage their budget deficit – 3.9 per cent of GDP last year – if they could collect their own taxes and keep more of their revenue.
Alike many Eastern European nations still wanting in to the European Union, what I find remarkable is that Catalunya still wants to be an EU state. The mass protests last Tuesday for instance championed "Catalonia: A New European State." In so many words, the Catalans are more after fiscal autonomy from Spain than political autonomy from the European Union when you could of course argue that the problems besetting it stem from the latter at least as much as from the former.

Also consider that Catalunya would itself have to re-apply for EU membership and the idea of independence becomes even more far-fetched. Indeed, letting go of Spain may mean losing economies of scale and markets that outweigh any potential gains from fiscal autonomy:
Whether Catalonia would be viable as an independent state is an open question. Much of Catalonia's wealth comes from tourism, but there are major industries in the region, as well as a significant multinational presence. Whether these firms would want to remain in a small state that was not part of Spain is unclear.   

If the region continues to pursue independence, boycotts could follow, analysts warn. There was a damaging cava boycott in 2005, when Catalonia refused to back Madrid's bid for the 2012 Olympics. The economist Xavier Cuadras warned: "A large-scale boycott could cause a 40% drop in exports of consumer goods to Spain, and a sustained boycott could cost Catalonia 4% of its GDP." Spain accounts for 54% of the region's exports.
So no, I doubt whether this move is a sensible one even given Spain's current woes

Roll Over Reagan: On Naming US EEZ After Ronnie

6:06 PM

Readers familiar with maritime disputes will of course know that the United States has not signed on to the UN Convention on the Law of the Sea (UNCLOS) even now. While UNCLOS was introduced by the United Nations during the term of President Reagan, he was one of the leading voices against signing on since it would limit American sovereignty. Reflecting that quintessentially conservative American tone, he derided UNCLOS as "socialism run amok" and a "third world giveaway." Unfortunately, this sort of self-interested reasoning is also behind the US not signing on to several other meaningful UN conventions alike those on gender equality and the use of land mines. What's the point in having UN headquarters in a country which doesn't particularly like the institution?

To be sure, there are political-economic costs to this sort of American isolation. Witness Hillary Clinton's wishes that Asian nations contesting the dominion over the South China Sea resolve their conflicts by applying international maritime law. Which, of course, is exceptionally hypocritical even by US standards of incredulity since the US has not even ratified UNCLOS. There is also the danger of the Yanks losing out in the Arctic land grab as warmer temperatures up north makes it more feasible to drill for fossil fuels in the near future since they have no legal justification for making territorial claims.

Interestingly though, some US lawmakers are keen on honouring Reagan by naming the Exclusive Economic Zone (EEZ) he identified after him--which is actually similar to that under UNCLOS provisions of extending 200 nautical miles from the US coastline. In effect, it would be another celebration of the US flouting international law--the sponsor is a Republican--and making rules for itself. Aside from being amenable to signing on to UNCLOS in general, Democrats reflexively abhor all this Ronnie-mania:

Rep. Henry Waxman (D-Calif.) isn’t on board with fellow Californian Rep. Darrell Issa’s (R) push to name millions of square miles of ocean waters after the late Republican President Ronald Reagan. “I never thought they should have re-named National Airport [after Reagan], so I don’t think they ought to be re-naming large bodies of water after him,” Waxman said in the Capitol Wednesday.

Issa is pushing legislation that would name the United States’ Exclusive Economic Zone – which extends 200 miles off U.S. coastlines – after Reagan, who established the EEZ by presidential proclamation in 1983. Waxman called Issa’s effort part of a broader trend. “There has been a campaign for deification of Ronald Reagan by the Republicans for some years now, since he has passed away particularly, and this is part of that effort,” he said.

“They would like to name everything on earth that they can get a hold of ... because his legacy is the only thing they have going for them,” Waxman said Issa’s bill is before the House Natural Resources Committee, and a committee aide said it is not yet clear if it will receive a vote.
It's odd but Americans not only like being isolated but many of them actually celebrate it. Why do Republicans in particular waste time on such frivolities when they could actually be working towards signing up to UNCLOS? Alike in so many other things, their priorities are warped.

Jobless USA: Industry Training vs College Education

6:02 PM

Ho hum, another month, another jobs disaster Stateside as less than 100,000 jobs were created --a pace which only prolongs what is already the most protracted recovery from job losses suffered from a recession. While the unemployment rate "dipped," this artifactual occurrence is largely down to many leaving the labour force for one reason or another.

Although many Americans--including largely self-serving academics--repeat the mantra that college is the solution to US job woes, I remain unconvinced. Not only are college graduate wages falling, but college expenses are rising at a rate far outstripping inflation. If college was the magic bullet to the employment situation Stateside, then the situation should not be so dire to begin with given that enrollment is at or near all-time highs. It does not compute.

In addition to college's worsening cost-benefit proposition, another thing the "college fundamentalists" (education's equivalent of religious and market fundamentalists) haven't adequately explored is the the prevalence of job-skill mismatches. That is, colleges cannot answer the simple question of whether they are equipping their graduates with skills useful to modern employers. Hence my continuing support for the Geman apprenticeship system as opposed to what I call the US/UK uni-jobless system. While snooty Anglos may like their hoity-toity degrees as opposed to vocational qualifications, it ultimately boils down to employment outcomes (BLS statistics included). Or, more accurately for America, the lack thereof.

Thankfully, even the stubborn (and stubbornly unemployed) Yanks are seeing the light. A recent FT article highlights how industrial employers' groups are copying elements of the German example in providing skills that are actually useful:

While larger groups can afford in-house training schemes, small and medium-sized US industrial companies facing a lack of qualified young workers are increasingly taking the situation in to their own hands and forming partnerships with educational institutions to train workers with the skills they need.

Only one in five employers use training and development programmes to fill the skills gap internally, while only 6 per cent team up with outside educational programmes, a recent survey by Manpower Group has found...

Such partnerships are still unusual, however. Although 93 per cent of manufacturers said they faced some kind of skills shortage, in a survey last year by the Manufacturing Institute, an industry body, only 14 per cent are working with technical and community colleges. But the institute’s Jennifer McNelly says the numbers are increasing. “We are seeing it become part of the solution,” she says.
Again, the larger point is that it's high time that folks questioned the utility of a college education as more and more employers perceive such education as being quite pointless to them in addition to being cost-ineffective for students: 
The focus on four-year college degrees is a perennial gripe of US industrial companies, many of which argue that technical training would better serve young people when they come to look for employment.
According to Ms McNelly, many college courses that offer training for manufacturing jobs are not actually helping, because they are not designed in consultation with industry. “A lot of people go through manufacturing education but are they achieving industry certifications? Not all are right now,” she says.

In response, the Manufacturing Institute has developed its own national credential to teach a set of standard competencies for industrial jobs. The US federal government is encouraging companies to train young people, asking them to commit to taking on a certain number. More than 300,000 commitments have been secured this year, says Adriana Kugler, chief economist at the Department of Labor.
The Manpower report mentioned in the article enumerates further instances where employers are taking the initiative to deal with the obviously deficient products of the American education system. Alike its other quaint institutions, I ultimately think the US university system will soon be subject to the gales of creative destruction as its economic rationale is quickly eroding.

As with many things wrong in America, let Germany--a country that actually works--show them the way. That so many other countries have followed the US rather than the German education system should likewise be rectified as employment outcomes tell the tale.

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