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)

TP or not TP?

Shortages enter the public mind in the form of war time rationing of butter or gasoline, but many countries of the world still experience shortages on a regular basis. Even the mighty USA  sometimes experiences shortages of goods and services.What the public mind doesn’t see is that in economic terms there need never be a shortage. The invisible hand will move prices so that whatever goods there are will be allocated most efficiently. Of course there will always be people who try to game the system, buying as much as they can and then re-selling at a higher cost. When this occurs on a normal basis it’s considered good business sense, but when it touches the very fabric of our needs governments usually step in.

On a short term basis this may benefit society as price gouging may be stopped and the necessity made available at a reasonable price, thought quantity doesn’t change and some people will still be without. In the case of Venezuela this toilet paper shortage highlights the very reason why government should largely not interfere with the markets price mechanism. Toilet paper could be produced locally, but because of currency controls

introduced to stop capital flight the Bolivar is greatly over-valued, which causes the imported materials used to make the TP expensive. At the higher costs of production firms are producing less. This makes it necessary to import the additional toilet paper needed, but again the currency valuation makes this difficult as imported TP is expensive. The government can subsidize the production and imports since they have large oil exports, but that can’t last forever and it essentially undermines their intent. Letting the bolivar find it’s true value and then using cash from oil exports to subsidize local necessities might be a better option, or at least one less invasive.

In April many people hoped that the death of Chavez would signal a change in policy, but it seems like the band will play on and the people will suffer. President Nicolas Maduro, who was selected by the dying Hugo Chávez to carry on his "Bolivarian revolution", claims that anti-government forces, including the private sector, are causing the shortages in an effort to destabilize the country. May the revolution carry on.

Currency exchange manipulation or if you like, monetary policy in action

The yen has seen a considerable decline in value to the dollar over the past few months and today it has reached almost 1 yen to 1 cent, a level not seen for about 4 years. This has many different implications for Japan and  its trading partners.

Japan has been experiencing a strengthening yen for some time. This makes buying Japanese exports increasingly less appealing. To paint it in broad strokes, importers need increasing amounts of currency to exchange money into yen in order to buy those goods so foreign consumers are less and less likely to consume them.

Accompanying this strengthening of the yen is deflation. This deflation may also be bad for young workers in Japan as wages are likely to be sticky downward at first (great for them) but declining or stagnate over time (not so great for them). People who borrow and spend are also at a disadvantage as deflation would mean today's yen will be worth more tomorrow in terms of purchasing power, so you are better off saving for that tomorrow than spending today. Every economy relies on spending as a component of GDP and Japan is looking for its citizens to consume more and export more to goose that GDP. Certainly all this government spending will help with that.

However, deflation may seem great if you are a consumer/importer of foreign products in Japan since your yen buys more and more foreign goods and also good if you are someone on a fixed income like a pensioner as the purchasing power of your savings/pension is increasing.

Using quantitative easing, devaluing the currency in this case by injecting 1trillion USD into the economy through asset buying, is aimed at making the yen worth less in terms of currency exchange by boosting supply and causing inflation. This will make Japanese exports seem cheaper, reigniting the demand for those exports and hence a large portion of the Japanese economy as the Japanese goods will appear to get cheaper in foreign markets. It is also aimed at turning a deflationary trend into an inflationary trend, encouraging people to save less and spend more as prices rise and today's yen is worth more than tomorrow's.

Of course this has a flip side too as foreign goods in Japan will begin to seem more expensive and those on fixed incomes will face inflation and hence a lower purchasing power for their yen, essentially making them seem poorer, but Abe's party and the BOJ have decided those are side effects worth risking and I think they are right. In addition, as the BOJ is borrowing money inflation works to their advantage as today's yen is worth more than tomorrow's. This may put a positive spin on the increased debt, but unlikely as Japan is hugely in debt and we live in a world of austerity and fear of debt.
While the impact of this monetary policy is clear, the long term consequences are not. Whether Japan can continue to carry a huge debt burden while in the process of this, I don't know as that is another story with a myriad of factors unknown. 

Game Theory on the Korean Peninsula

To my great delight, recently in Korea there has been renewed tensions along the border. This isn't delightful because I like conflict. It is delightful because recently my class has been studying game theory and this is exactly the type of situation to demonstrate the real life application of mutually assured destruction. Two nations, side by side, a potential powder keg that I don't think will ever go off. At least not until the balance of power changes which essentially means not until the US or China stop backing either side of the line.

Bride Price

During my Sunday morning perusal of the NYTimes I came across this article about the marriage market in China which was especially intriguing to me. When I lived in Shanghai there was a marriage market in the city’s central park and perspective parents and match makers would meet to post and chat about their charges. I had heard of the increasingly desperate plight of the poorer urban and even poorer rural male, but this article points to a whole new market in which brides are hunted in plain sight. Scouts are deployed, databases are kept, and huge bonuses worth a year or two in salary are paid to those who find the right girl. This is no dating service however, the top clients pay 50,000 to 1.5 million USD for a match. As the love hunter put it, “Why shouldn't they pay more to find the perfect wife? This is the most important investment in their lives.”

Recently I have been reading a book, The Price of Everything, which chronicles how things get their price. As an aside, this was very funny because the book still had a sticker on it that said, “Bargain Bin 2 for 1.99” and I had bought the book through Amazon for about 3 dollars. The price of everything indeed.

One of the major issues in the book is the price of girls/marriage. The traditional dowry and all the social implications that go with it can clearly be explained by economics and pricing. More or less, people had to pay to get rid of their daughters. Historically and currently in China males have been preferred to females as they extended the family line and are caretakers for parents in their old age. Some have gone as far as to say that women were maids/slaves for their spouse’s family. Definitely not a desirable position. 

The desire for sons has not changed and in fact has gotten quite a bit more extreme since the introduction of ultrasounds and other devices detecting sex before birth. At its peak in 2004 the sex ratio was about 121 boys to every 100 girls at birth. This is way out of sync with nature and has produced (or not produced) what many have coined as “missing girls”. Estimates differ, but there are expected to be about 25 million unmarried men by the end of the decade. The sex ratio gap has narrowed in recent years and is now 118 to every 100, but that is  still the world’s widest chasm.

As this gap has continued and as China’s economy keeps on pace, more and more poorer men have to remain bachelors as young women are snatched up by those who can afford them. For women the choice is an obvious one. Love or not, men with greater financial power give them and their offspring a better chance of survival and continuing the line. Many factors have contributed to the changing valuation of women, but none so much as the imbalance in the market.

Most interesting of all is not the left over men at the age of 35 or 40 trying to find a match, but the women on the flip side of the coin. Those who have had successful careers, but failed to  marry and find it increasingly hard as men do not desire women whose education or wealth are larger than their own. This to me seems in-congruent with what prices would signal. Why would a man, especially one who may also be a “leftover” be averse to marrying a woman who is of higher financial and educational ranking than he? Yes, there may be some pride or social conditioning there, but prices should change that. However, that does not seem to be occurring as much as I would expect. In one instance the article noted a pensioner, “who was seeking a husband for his eldest daughter, a 36-year-old economics professor in Beijing.” It would seem that there is an over abundance of smart successful Chinese women just waiting for someone decent to agree to marry them. Any single economists out there wishing to benefit from this disequilibrium?  

Plutocrats

About a month ago I almost sent an email to my mother because I had just read this article.

That email started like this, "... reminds me again of how hard children in the developing world, especially China and India but Malaysia too, aspire to have what Americans would consider a living wage. I end up teaching the cream of the crop of these students. Outside of the foreign children I teach I also teach the children of people who for one reason or another are ahead of the curve for their country and are straining for more. Sometimes students on scholarship or students whose parents have scrimped every penny and placed their odds on their kids cross my path and I can't help but to reflect how different American students are. I loved the kids I had in the US, don't get me wrong. I had a lot of hard working kids in the US as well, but it doesn't matter in a comparable sense. The world's playing field is becoming more even. All people of the world are reaching a higher standard of living (though not unilaterally), but standards of living in the US will slow down dramatically as students from places like China, where kids study for 12 hours a day or more, are filling the positions that global demand is asking for." 

In some ways I worry about these kids who constantly study. Its an arms race and I see how the anxiety of their parent’s hopes and efforts hang on them. To their parents it is especially important for them to make it because the parents have nothing or little for them to fall back on in terms of a comparable future prospect. The most difficult aspect for most families in the most quickly developing countries is how the inequality is causing mobility to become even harder. There was a time when hard work paid off in folds for the effort put forth, but that window is slowly closing. Those at the top are not in fact the best and brightest, they are just the richest who are trained hard to be the best and brightest. They benefit from the Great Gatsby curve. Some will make it though, and those parent's who scrimp and toil for their children are the ones who hope and pray for that day. Likely I will one day be one of them, though probably not as much scrimping and toiling, though just as much hoping. 

I started thinking about this email again because I had a holiday recently and while traveling around I was lugging a book that a student had given me. This book I had seen before while perusing economic books, but I didn't actually get it into my hands until one of my clever IB students and I were having a discussion about income inequality and he suggested that he would loan me Plutocrats. Knowing that I had a break coming up and would need reading material I asked him to borrow it. It turned out to be very interesting indeed. In general the book looks at the income gap between the richest and poorest in America, but also examines income inequality overtime in the US and makes connections to the larger world. Some of the more interesting parts of the book for me were the descriptions of the income gaps between those in the top 1% and those in the top .01% of Americans. It is enormous. I was also taken with the idea that today’s super wealthy are largely not the leisurely plutocrats of old, but seem to be a newer breed of working plutocrat. The percentage of high income earners has gone up and inversely the percentage of high income receivers has gone down. In other words, the super rich are working more than ever to be super rich. All that was very interesting, but what really hooked me in were descriptions of the new elite’s children and the expectations of future generations of the super rich. The descriptions of where and how these kids are growing up hit especially near for me. Many of the super rich kids, sometimes known as princelings, were all around me. Though I have rarely seen a child who comes from a home in which they move from gated community to school to home again in the comfort of air condition and tinted windows, I have come close. I can't point to one student I have ever had that I would point to with malice in saying that they were undeserving. Luckily, most of the kids have been very polite and hard working in the schools where I have been. Not so much the children of aristocracy, but the children of the new elite. Then again, I might have  Kim Jung-Un in the classroom and never know it. 

The school I am at now has an annual fee of around 15 to 20,000USD. This private international school has some of the best students I have ever taught, but it’s no wonder. Every day when school lets out a parade of Mercedes Benz, BMW’s, Jaguars, etc. come through the school gates to pick up kids. These kids are largely from somewhere else, know more than two languages, have the means to travel, and will likely all get into top schools.

The same student who lent me the book then sent me the link to this post the other day. Again, I found it especially interesting because this brought it even closer while keeping it in the same context. These children are becoming a society onto themselves. They belong everywhere and nowhere. They are multi-cultured and no culture. This is something new in our times. There have always been the children of the wealthy, but now there are the international children of the wealthy and they will be the ones to guide China, India, Malaysia, Thailand, etc. where much of the growth in the next 25 years is predicted to occur. The children I have in my classrooms today will be the economic leaders of tomorrow in a very real sense.

I couldn’t help but to wonder what, being a princeling, this student thought about all of this. Today in class I thanked him for the article, talked about the book, and then as we were parting I said, “What is your take on all of this?” as I gestured to his classmates and the school. He just said, “Well, I don’t really know, you know? I only came last year, before that I was in local school.” And there, is one who made it. 

(Non-Collusive) Oligopoly or Monopoly?

Today I saw this gem in the NYtimes. Seeing as Anheuser-Busch InBev is a giant in the domestic swill industry of the US and there are relatively few competitors (Miller?... if any) this article is especially interesting to me because of the beer and the econ, two things I often put together. Since Anheuser-Busch seems to recently have been enjoying a collusive oligopoly with Coors and Miller, does the threat of Mexico’s Grupo Modelo not joining in make this a non-collusive oligopoly? 

Then again, who cares about the US beer market? As the article states, the number of small breweries popping up is increasing, while market share for the giants is decreasing. Time to find the untapped markets. 

While I was living in Shanghai I was somewhat amused that Budweiser had shelf space in many of the local convenience stores. Now in Malaysia, Carlsberg is common and Asahi is present, but not too much in the way of Anheuser-Busch. In the end I would love to have other beers enter this market, but I am also concerned with the price of my beer. 

Would the merger of Anheuser-Busch and Grupo Modelo actually create a monopoly or would it just make them more competitive in the global market? 

Carl Shapiro, the former chief economist at the Justice Department said "Markets work best, when everyone has to watch their back." I tend to agree. 

As Yen depreciates, Japan faces the Marshal Lerner condition.

Is this the Marshal-Lerner condition happening in real time? As I was teaching this a couple months ago I didn't find much in the way of real life examples. In fact, of the economics teachers that I know most of them had never, or only in passing, heard of this theory. Needless to say, it makes sense. Japan has recently devalued it's currency through a number of fiscal and monetary measure. This has caused a badly needed depreciation of the currency which should, and was hoped would, boost exports. This seems to have worked. On the flip side of the currency depreciation, imports should become more expensive leading consumers to purchase less. Those two things combined should create a more favorable trade balance and reduce or at least decelerate Japan's enormous national debt as it boosts GDP growth. However, it seems that the Marshal-Lerner condition has not been met. Exports have grown, but imports have not shrunk enough to have the desired impact. Economic thought would predict that consumers need time to adjust their spending habits and hopefully that will occur, otherwise the depreciation may be for naught.

Welcome to my blog

Hello, and welcome to my blog.

Those of you who view this blog in its first few months will invariably see that there are some empty pages and not but a few posts, but in time there will be a lot of information added. It is my goal to maintain a database where IB econ teachers can scoop up videos, articles, and other material relating to their classes in an easily accessible way. On the top of the page are a number of tabs for Micro, Macro, International, and Development Econ. Those will contain pages where I will list articles, videos, and audio files by syllabus section. It takes a lot of time, not only to find the material, but then to post it with the proper information. If you like what you see please let me know, the encouragement will keep me going. If you have suggestions for resources please feel free to add them to the comments section under the appropriate page or blog post. I hope you find this blog useful. Happy searching!

-Sir