Puerto Rico

For students of economics the situation in Puerto Rico is a goldmine. You could find any section of any syllabus at play as recently their bond ratings went to junk. Government debt is huge, deficits are shrinking, unemployment is up, crime is up, taxes is up, utilities are  monopolized, firms are shutting down, people are migrating to find better opportunities and the schools in the country are falling apart. 

It makes me wonder what Puerto Rico will look like in 10 years. Recently a new governor has taken over and the actions that Mr. Padilla have taken such as overhauling public pensions and raising taxes do seem to be correct moves, but the bleeding hasn't stopped yet. 

Yellen FTW

Last week Janet Yellen was confirmed as the next head of the US Federal Reserve. The move is no surprise as Yellen has long been known to be taking over from Bernanke. Yellen’s idealogy seems to tie in pretty closely with that of Bernanke and I wouldn’t expect any sudden change of policy. The FED will likely continue to wind down its stimulus as the US economy recovers with Yellen at the head. This appointment isn’t a controversial one and it isn’t a surprise, but it still is big news because Yellen is a woman.

It is hard to overstate the importance that carries. Christine LeGarde is head of the IMF, Merkel chancellor of Germany, so women are represented in what would be considered  economic positions of power in the world, but not that often. At the University of Chicago, a well respect economics program, women represent 4 of the 35 faculty in the Economics department. Not exactly an even spread.

I teach IB economics and would assume that most students take the class first for interest, but second to fill a requirement they will need in university.  I find that while about half of my classes are girls when we talk about university plans the ratio of those going into economics related fields tilts heavily towards males. Why is this so?

India’s Current Account deficit shrinks! Yeah

Good news for India whose currency has had an abysmal year.

BBC reports that the deficit has shrunk from 5% of GDP to 1.2% of GDP quarter on quarter compared to last year. Since the CA is a measure of inflows and outflows of a country based on trade in visible, invisible, transfers, and income we can expect that one of these has had a dramatic change in comparison to GDP. It could be that GDP has changed dramatically in a positive direction which would close the deficit if that growth occurred in exports. It seems that there is a bit of this as exports have picked up quarter on quarter. However, the largest change is in the imports, specifically gold.

Indians are notorious… er… well known for their amour of gold. As The Economist reported recently  Indians have many reasons for their love of gold. Part of that being the instability of the currency and the inability to participate in banking for many of India’s poorest. That paradigm has been shifting recently as more Indians embrace mobile payments. ”The region consisting primarily of Bangladesh, India and Pakistan accounts for the largest number of offices actively providing mobile money services, 3.8 million compared with 805,000 in all of Africa and 1.8 million in East Asia and the Pacific. After only four years in operation, Pakistan’s wireless network, Easypaisa, is moving some $3.5 billion annually” However the demand for gold is still strong and many Indians put their savings into illiquid gold rather than more liquid savings accounts.

So what can the Indian government do to close the gap? Well, they have slapped duties and quotas on to gold and it has worked. Imports for gold are down to 3.9 billion usd from 16.4 billion usd in the previous quarter. With the reduction in gold imports and overall import to export ratio sliding closer to a balance of payments we should see the rupee strengthen which it does seem to be doing. 

 Perhaps this is one step toward a more stable economy, a more stable rupee, and sustainable growth. On the other hand this is government intervention in a market and may result in an over correction on the governments part.

Removal of Malaysian Petrol Subsidy

Recently the Malaysian government removed part of the subsidy provided on petrol, reducing the amount by 20sen (roughly 6cents usd) per liter. The fuel subsidy, plus other subsidies on things like cooking oil, sugar, and rice is a drag on the government's budget each year. The reduction of this subsidy is predicted to result in a 3.3 billion MYR savings (about 1billion USD), but will continue to subsidy petrol to the tune of 24.8bil MYR a year. The reason the subsidy is being removed is because of a desire to reduce deficits and to moderate the balance of payments. In 2012, Malaysia's budget deficit was 4.5 percent of gross domestic product, the second highest in emerging markets after India. Prime minister Najib is quoted as saying, "Currently, our subsidy system benefits everyone, including the higher income group and foreigners."

He is absolutely right. I have quite enjoyed the subsidy, but noticed the hike when I went to the pump a few days ago. It used to cost me about 65 MYR to fill my tank, now its about 75. This will occur not only in transportation costs, but also ripple through costs for most consumer goods. Still, by western standards a very cheap price to pay, but this will hit Malaysians more than just at the pump. Many people complain about cost of living increases, a sign of a reduction in AS due to inputs. There is also the hope that this will ebb capital outflows that have occured recently as SEA markets have become more unstable.

The Falling Rupee

A couple of weeks ago a friend of mine asked if I had noticed anything about the SEA economies, such as Malaysia where I live, slowing down. I hadn’t really given it much thought, but since then have kept an eye on the news. The crash of the Rupee has been one of the biggest economic stories lately. A number of things have caused this fall in currency.

Manmohan Singh, the prime minister, addressed parliament on the matter. While part of the currency slump is a “natural” correction to reflect high inflation, he said, “foreign exchange markets have a notorious history of overshooting. Unfortunately this is what is happening”. I would agree with that a bit, but the recent vote on Syria, the US potentially unwinding QE have certainly also had an impact as reasons why the currency is fluctuating and falling recently.

India has long wrestled with inflation. With a reluctance to increase interest rates to tame the inflation, which could further reduce growth (already fell 0.4% this quarter), India has to try to find other ways to appreciate the currency and slow inflation.

The central bank of India could raise interest rates which would attract foreign investors to come back, as they are now fleeing, which would raise demand for the currency and cause it to appreciate. However, this would also harm domestic industry. An expanding AS would cause a decrease in overall price levels and increase GDP, but it has been pointed out that India does not have a sector which could show that kind of growth in the short term even with the export growth one might enjoy with a weaker currency. That would potentially help with India’s current account deficit.

Unfortunately I don’t think there is an easy answer as the country is facing. There is somewhat of an impossible trinity here in that India cannot have control over all the currency value, monetary policy, and the free movement of capital. So far the new chairman, Raghuram Rajan, has expanded borrowing limits for banks. I can see that this might keep interest rates low allowing the economy to expand, but won’t this also cause further inflation and depreciation of the currency? In the meantime, at least it is good for some people who could stand to gain from this.

China Airborne

A couple of months ago one of my graduating Econ students was heading into finals (and presumably because he was such a good student had free time) and was asking me if I had any good books on China. I didn’t and it made me think, damn I should get some books on China! The problem; there are so many lame books about China that say the same thing. Either people claim “China, the new frontier!” or “China, growth forever!” or sometimes, “China, how they will fail!”. So a few weeks after that when I saw China Airborne in the book store I grabbed it as I was familiar with Fallows other work and liked it.

Having lived in Shanghai for a couple years I could relate to a lot of what Fallows was saying, and more or less I didn’t learn too much new information about China, but a lot about the aviation industry. Its very readable, engaging, funny, and informative and if that student was still with me I would thrust that into his hands. Maybe not the most comprehensive book, but a “fun” read for economics.

Chinese are wonderful at soft skills, not so much at hard skills. This has also followed my personal experience in China. The Chinese population, as recently as 30 years ago was largely unskilled, closed and burdened with the heavy hand of state control and has slowly shed those characteristics. However, China is reaching the end of its labor dividend. There are still about 7 years until it reaches the peak. From that point forward the vast labor pool that has helped drive China’s growth strategy will begin to shrink. That gives a bit of breathing room to figure this out, but soon a new strategy will have to be found.

 Its always been a question in my mind if the Chinese would perhaps turn to domestic consumption during that time rather than the export driven market it has relied on. Then again, those who are consuming their goods aren't really changing their behavior, so why should the Chinese? The real answer may be not to turn away from exporting, but to change what is being exported to jump that middle income gap. Hence the idea of up-scaling what you are producing. Aviation is a good industry to focus on to determine the level of hard skills that the Chinese have the ability to conform industry standards to that level which is demanded in most of the rest of the world. Watching the news on the Asiana air crash last week I was reminded again of how safe this industry has become, but that is because of the procedures that go with it and the level of precision that goes into each craft and operation. If the Chinese can achieve not only air service that is at international standards (getting pretty close) and a domestic industry for the construction of planes then they will certainly have proven themselves yet again. 

The Phillips Curve

I stumbled across this articlethis article the other day as I was looking for information on EU unemployment numbers. One could assume that the disinflation and rising unemployment numbers in the EU are connected. 

 Though the Phillips Curve  is not a perfect tool it is still taught in many economic curriculums as it shows an inverse relationship  between inflation and unemployment. In the Euro zone we can see just that, not that I could say for certain that its causation or correlation, but for purposes of teaching the PC it will do just fine. The bit at the end about interest rate cuts is a nice movement into monetary policy to boot. (mirrored Japan Phillips Curve included just for fun)