Find following an excellent Econbrowser post about China's need to rebalance towards an economy which is also focussing on increasing domestic consumption:
"From Arthur Kroeber, in China Economic Quarterly "Economic rebalancing -- Twin peaks: fiscal and financial reform" [not online]:
A major theme of recent discussions of China's economy is the need for "rebalancing" -- a shift away from an investment- and export-intensive growth model that created excess industrial capacity, big trade surpluses and bloated corporate profits, to a more domestically-driven growth pattern where consumer spending plays a bigger role.
The house view on this hot topic is straightforward. We believe that China's external "imbalance" -- a current account surplus that peaked at over 11% of GDP in 2007 -- mainly reflected domestic structural problems. The undervalued exchange rate that obsesses foreign analysts was decidedly secondary. The path to rebalancing therefore lies in comprehensive domestic reforms, including increased social service spending (to reduce household precautionary saving), deregulation of service markets (to encourage more private investment in non-tradable sectors), infrastructure investment (to better integrate domestic markets) and financial and fiscal reforms to discourage excessive investment in heavy industry and real estate. If these reforms occur -- and some are already underway -- then exchange-rate policy can play a useful supporting role. If they do not, currency revaluation by itself will accomplish little."
WSJ: The Global Jobs Competition Heats Up; In a new study, corporate leaders say the U.S. business environment is losing its edge when compared countries like China, India and Brazil, by Martin Neil Baily, Matthew J. Slaughter and Laura D'Andrea Tyson, July 1, 2010
For generations, coal miners gauged the health of their workplace with a critical indicator: canaries. Any buildup of carbon monoxide and other gases would silence the singing canaries before reaching levels toxic to humans.
Today, another leading indicator—multinational companies headquartered in the U.S.—is signaling widespread and legitimate concerns about the health of the U.S. economy. A new McKinsey report that the three of us advised argues that all Americans should heed their message.
U.S. multinational companies have long been among America's strongest firms. Although they comprise far less than 1% of U.S. companies, they account for about 19% of all private jobs, 25% of all private wages, 48% of total exports of goods, and a remarkable 74% of nonpublic R&D spending. For decades, U.S. multinationals have driven an outsized share of U.S. productivity growth, the foundation of rising standards of living for everyone. They are responsible for 41% of the increase in private labor productivity since 1990.
Despite the common allegation that multinationals simply "export jobs" out of the U.S., research shows that expansion abroad by these firms has tended to complement—not substitute for—their U.S. operations. More investment and employment abroad have tended to create more American investment and jobs as well. From 1988 to 2007, employment in foreign affiliates rose to 10 million from 4.8 million. During that same period, employment in U.S. parent companies rose to 22 million from 17.7 million. read more
The U.S. economic recovery appears to have been solid through second quarter 2010. However, with fiscal stimulus measures and the inventory correction nearing an end, there are reasons to be concerned that growth will slow in the second half of the year.
Moderate Second-Quarter Growth Likely
The outlook for second-quarter growth is bright. Gross domestic product (GDP) grew by 3 percent in the first quarter and is expected to grow at an even faster pace in the second. This outlook is supported by the Institute for Supply Management (ISM) manufacturing and nonmanufacturing indexes (Chart 1). The indexes are good early indicators of GDP growth because they are timely, subject to minimal revision and cover a broad portion of the economy. The averages for both indexes are estimated to be higher in the second quarter of 2010 than in the first, suggesting an acceleration in economic activity. (Any ISM reading above 50 indicates growth. The higher the reading, the faster is the implied growth rate). read more
After a brief lull, during which the crisis seemed almost forgotten, the financial market reverted to crisis from, with what FT Alphaville called a generalised bloodbath across major equity markets. Overnight, Asian markets continue to lose.
One of the reasons for the panic was concern about the state of the European banking system, and the surprising news was that the ECB’s €55bn fixed-term deposit flopped spectacularly, as it managed to managed to raise only €31.866bn at an average interest rate of 0.54%. This means that financial institutions continue to hog liquidity.
Another reason was an unexpected decline in the Conference Board consumer confidence indicator, the latest indicator to suggest that the global recovery is running out of steam. There is a lot of gloom in the US at the moment. We have no time today to go in detail, but here some pointers. Robert Shiller says another housing recession is possible, and Paul Krugman is getting really, really gloomy and angry. US 10-year bond yields were down to below 3% last night. read more
To understand the challenge government economists have faced over the past year and a half, it is useful to imagine the case of a physician trying to treat an ill patient. The patient presents herself in terrible shape; the physician has never treated a condition with symptoms quite like hers before; and the causes of the ailments are unclear. The doctor remembers reading about a similar case in medical school — and, trying to recall as much of his training as possible, he endeavors to come up with a theory as to why the patient is sick and to determine what will make her better. read more
Fears that government austerity packages will hinder global growth have combined with fresh anxiety about the health of European banks to hammer investor confidence.
Shares on both sides of the Atlantic dropped heavily amid warnings that markets were on a "cliff edge".
In jittery trading ahead of a crucial repayment by Europe's banks of a €442bn (£362bn) European Central Bank loan on Thursday the rates at which banks lend to each other in euros rose to their highest levels in eight months as rumours swirled that some banks were finding it difficult to raise funds in the money markets. read more
here are the 10 commandments by Blanchard and Cottarelli:
•Commandment I: You shall have a credible medium-term fiscal plan with a visible anchor (in terms of either an average pace of adjustment, or of a fiscal target to be achieved within 4–5 years).
•Commandment II: You shall not front-load your fiscal adjustment, unless financing needs require it.
•Commandment III: You shall target a long-term decline in the public debt-to-GDP ratio, not just its stabilisation at post-crisis levels.
•Commandment IV: You shall focus on fiscal consolidation tools that are conducive to strong potential growth.
•Commandment V: You shall pass early pension and health care reforms as current trends are unsustainable.
•Commandment VI: You shall be fair. To be sustainable over time, the fiscal adjustment should be equitable.
•Commandment VII: You shall implement wide reforms to boost potential growth.
•Commandment VIII: You shall strengthen your fiscal institutions.
•Commandment IX: You shall properly coordinate monetary and fiscal policy.
•Commandment X: You shall coordinate your policies with other countries.
NORTH AFRICANS risk their lives to try to cross the Mediterranean to southern Europe. Mexicans pay “mules” to get them across the border with the United States. Afghans camp outside Calais in filthy surroundings, waiting to cross into Britain. Everywhere, it seems, there are people trying to get into another country. Even those who seek to move legally in order to work face huge barriers to entry in certain countries. People on work visas account for 70% of legal migrants to Germany, for instance, but only 5.6% of those entering America, the original land of opportunity. Most of the rest get in because a member of their family is already in the country. America’s annual quota of visas for the highly skilled can run out in a matter of weeks. More people want to move to rich countries than are able to. read more
All our newspapers agree that the G20 watered down their commitment to implement new bank rules, but with respect to the other critical issue, deficit reduction, the FT is by far the most pessimistic. The G20 countries committed to halve their budget deficits by 2013 and stabilise their debt to national income ratios by 2016. The FT writes that “these targets are not likely to require new policy action because G20 countries are already planning austerity measures on this scale, according to the recent International Monetary Fund fiscal monitor.” read more
TORONTO — There is a consensus within the industrialized members of the G-20 to halve budget deficits by 2013 and achieve balanced budgets by 2016, German Chancellor Angela Merkel claimed Sunday.
Ms. Merkel told reporters ahead of a meeting of G-20 heads of government Sunday that a corresponding commitment would be in a final communique after the meeting.
"We are very happy that it is being made clear — and the Canadian presidency has supported us very much here — that the developed industrial countries should halve their budget deficits by 2013 and begin reducing debt levels from 2016," Ms. Merkel said. "That means having balanced budgets and then taking on the question of cutting overall debt levels.
Ms. Merkel admitted that Sunday's meeting is likely to be a "transitional" one, largely to prepare the groundword for more far-reaching decisions at a summit meeting in Seoul, South Korea, later this year. She noted again that she didn't expect to win support for a global levy on banks, in line with proposals backed by the EU members of the G-20.
"The move itself is a meaningful one in the economic as well as the political context, and represents a possible first step towards a more flexible exchange rate regime in the medium term. From this perspective, we believe that the new renminbi regime is a welcome development for domestic rebalancing in China, and for global rebalancing as well."
"Like China for the past two years, Germany has also pegged its exchange rate—to the euro. No one is accusing the European Central Bank of manipulating the currency, but the euro’s slide implies that the zone’s members will be relying on foreign demand, not their own, to restore their fortunes. Goldman Sachs expects the euro area’s current account to show a surplus this year, which will only grow next year. Perhaps Mr Schumer should demand the interdiction of Frankfurter sausages."
"China's new currency policy, writes columnist Paul Krugman, doesn't address the real issue, which is that China has been promoting its exports at the rest of the world's expense. China needs to deliver real change. And if it refuses, it's time to talk about trade sanctions."
"With extensive global supply chains and outsourcing, a modest Chinese revaluation will also raise costs for US firms and thus harm US competitiveness everywhere except in the Chinese market. This cost-raising effect mutes the current account improvement and, by our estimates, may result in 424,000 jobs losses in the US."
"I am dubious about the wisdom of both America's complaints about China's currency policy and of China's responses. On the whole, I believe that most Americans benefit rather than are hurt by China's long standing policy of keeping the renminbi at an artificially low exchange value. For that policy makes the various goods imported from China, such as clothing, furniture, and small electronic devices, much cheaper than they would be if China allowed its currency to appreciate substantially in value. The main beneficiaries of this policy are the poor and lower middle class Americans and those elsewhere who buy Chinese made goods at remarkably cheap prices in stores like Wal-Mart's that cater to families who are cost conscious."
Well known and respected German economist Hans-Werner Sinn thinks that the Euro has a lot of merits and criticises Sarkozy’s recklessness:
It is worth to read the whole article (linked to above). Here are some excerpts:
"Proclaiming a systemic crisis of the euro, Sarkozy seized the opportunity and took Germany by surprise. He asked for huge sums of money and, as Spanish Prime Minister José Luis Zapatero reported, threatened to pull France out of the euro and break up the Franco-German axis unless Germany opened its purse."
"Germany’s political elite are in an uproar, and serious voices advocate splitting the eurozone into northern and southern tiers, with France relegated to the latter.
I do not share this view. The euro has successfully protected Europe against exchange-rate risks, and it is a useful step towards further European integration. Moreover, the stability provided by the Franco-German axis is indispensable for Europe."
"Nevertheless, the tensions created by Sarkozy’s recklessness threaten Europe’s political stability, heightening market uncertainty relative to what a more prudent, coordinated rescue program would have implied."
"The market adjustment will end when appropriate spreads are found. Any political attempt to stop this process any sooner is bound to fail. There is no reason for panic, and every reason to stay calm and wait for the new equilibrium to emerge."
Paul Krugman requires real change in Chinese currency policy:
Last weekend China announced a change in its currency policy, a move clearly intended to head off pressure from the United States and other countries at this weekend’s G-20 summit meeting. Unfortunately, the new policy doesn’t address the real issue, which is that China has been promoting its exports at the rest of the world’s expense.
In fact, far from representing a step in the right direction, the Chinese announcement was an exercise in bad faith — an attempt to exploit U.S. restraint. To keep the rhetorical temperature down, the Obama administration has used diplomatic language in its efforts to persuade the Chinese government to end its bad behavior. Now the Chinese have responded by seizing on the form of American language to avoid dealing with the substance of American complaints. In short, they’re playing games.
To understand what’s going on, we need to get back to the basics of the situation.
China’s exchange-rate policy is neither complicated nor unprecedented, except for its sheer scale. It’s a classic example of a government keeping the foreign-currency value of its money artificially low by selling its own currency and buying foreign currency. This policy is especially effective in China’s case because there are legal restrictions on the movement of funds both into and out of the country, allowing government intervention to dominate the currency market. read more
Airtime: Thurs. Jun. 24 2010 | 10 07 00 ET
For Eurozone politicians it might get more and more difficult to communicate as representatives of a single economic area:
"This did not come as a news story, but in a small comment hidden deep inside the Financial Times, written by Jonathan Stubbs, the equity strategist for Citigroup, who makes the extraordinary point that investors would be unwise to continue to treat the eurozone as a single economy. He writes that European fund managers and global asset managers have in the past treated the eurozone as a single investment entity. But Citi’s economics team (headed by none other than Willem Buiter) believes that the south will persistently underperform against the north. He also writes that countries with weak balance sheets would try to arbitrage the strong corporate sector balance sheet by raising taxes and increasing regulation. But the troubles of the south will keep a lid on eurozone interest rates. Hence his advice to investors is to get exposure to the beneficiaries of cheap money – i.e. the north of the eurozone.
(We are including this not because we agree or disagree with his advice, but because it shows how investors are already lining up to exploit the widening imbalances of the eurozone. This is something of which the EU’s political class is largely unaware off.)"
Source: EuroIntelligence (see link above)
The authors of following article believe that Eurozone politicians have major room for improvement in communication:
As the recent austerity measures can testify, Europe’s leaders are acutely concerned about government debt. This column tracks policy announcements from the start of the Eurozone crisis in December 2009, arguing that governments may have contributed to turmoil with their public display of confusion – ultimately undermining credibility. But if Eurozone governments show unity of purpose, this credibility can be restored.
Despite multiplying good news from the real economy, the past six months have been the most trying times for the euro – certainly the most testing since the height of the financial crisis in late 2008. Mounting doubts concerning the sustainability of sovereign debts and the fragility of Eurozone banks have pushing spreads over the German bund rates to unprecedented heights (Eichengreen 2010).
The sustainability of sovereign debts is a serious issue that must be confronted. The combination of large public sector deficits to support economic activity and persistently weak private demand raises questions of debt sustainability in the medium term (Fatás and Mihov 2010).
Financial markets, however, seem to have blown these fears out of proportion, leading to a full scale confidence crisis. After all, Greece’s public debt is a tiny proportion of Eurozone GDP and banks’ capital and there is no serious grounds to believe that another Eurozone member can become insolvent any soon. read more
Recommended search items and names(click on terms):
BIS Quarterly Review, Case Shiller Index, IFO Outlook, Institute for Supply Management, Michigan Consumer Sentiment Index, Philadelphia Fed Regional Index,
ECONOMIC INDICATORS AND OUTLOOKS (click on names):
George A. Akerlof, Bernanke, Olivier Blanchard, Alan S. Blinder, Buffett, Tyler Cowen, Niall Ferguson, Bruno S. Frey, Milton Friedman, Herb Greenberg, Greenspan, Michael Jensen, L.S. Karp, Charles Kindleberger, Krugman, Gregory Mankiw, Robert C. Merton, Nouriel Roubini, Kenneth Rogoff, Carmen Reinhart, David Rubenstein, Schumpeter, Anna Schwartz, Amartya Sen, Robert J. Shiller, Jeremy Siegel, Hans-Werner Sinn, George Soros, Joseph Stiglitz, Paul Volcker, Martin Wolf, Janet Yellen, Luigi Zingales, _________________________________________________________________________________ ________________________________________________________________________________________________________ _________________________________________________________________________________
RECOMMENDED SEARCH NAMES(click on names):
LEADING ECONOMISTS DEBATE THE CRISIS:
ECONOMICS AND BUSINESS:
ECONOMICS, LAW AND POLITICS:
LINKS TO SELECTED WORKING PAPER SITES:
|<< <||> >>|