Globalisation in BusinessWeek

BusinessWeek has two bloody interesting pieces up on various aspects of globalisation, one American and one Chinese.

First, NAFTA!

… the regional fears Nafta inspired in 1992 have gone global in 2008. In addition to Mexico, most of the world’s dynamic emerging markets, including China, India, and Brazil, have become strong players in the global economic arena. Americans worry about competition from overseas companies and workers from other lands emigrating to the U.S., especially with the economy faltering amid falling home prices, tottering financial markets, and shaky consumer confidence.

The case for freer trade and open markets is overwhelming. Economic evidence and economic history alike support the view that freer trade over time invigorates economic growth by encouraging the spread of new commercial ideas, new technologies, and new ways of organizing everyday life. Consumers enjoy lower prices and greater choice. Competition from overseas rivals encourages corporate efficiency and innovation.

Which is say (in one’s best Mitch Hedberg voice) they’re for it. Diminishing the power of the article somewhat are things like, “give Joe Sixpack credit”. I’m sorry – what?

I imagine, however that, as we move farther into this lunatic’s game called the election, we’re to see a lot more of this. From pols, from pundits, from media generally, from academics. You name it. Expect heat, though – not light.

The Chinese-centred article is similarly bound up in the new world of globalisation.

… many of China’s manufacturers — including Shan Hsing — are undergoing the kind of restructuring that tore through America’s heartland a generation ago. The U.S. housing market, which generated demand for everything from Chinese-made bedroom sets to bathroom fixtures, has plummeted. A new Chinese labor law that took effect on Jan. 1 has significantly raised costs in an already tight labor market. Soaring commodity and energy prices, as well as Beijing’s cancellation of preferential policies for exporters, have hammered manufacturers. The appreciation of the Chinese currency has shrunk already razor-thin margins, pushed thousands of manufacturers to the edge of bankruptcy, and threatened China’s role as the preeminent exporter of low-priced goods.

So new labour laws in China are driving up costs, sending owners to India and God knows where else – this isn’t new. When was Naomi Klein’s No Logo first published? She detailed the Baby-Huey-like migration of multinationals from one Export Processing Zone to the next. Sonia Gandhi was on about this in India 2 years ago.

Chinese policymakers so far profess little concern. The closures are mainly hitting lower-value, labor-intensive exporters that pollute heavily and use energy inefficiently. Beijing now wants cleaner industries that produce higher-quality items for the local market, from cars and planes to biotech products and software.

That emphasis not only helps boost domestic consumption — a key national goal — but also reduces frictions internationally from the ever-swelling trade surplus. “We are not abandoning the [exporters],” said Guangdong Governor Huang Huahua on Mar. 8. “[But] selling domestically is good for the country, good for the collective, and good for the people.”

From an international-macro perspective, this is good news. Slower production/manufacturing means more unemployment in China, which means more pressure from the bottom to do something about government from the top. Who knows? Perhaps China will move even faster to democracy, devolution – all the things we like to think we have. One can only hope.

Export restrictions the way of the future, question mark

The known exacerbator of Peak Oil is the decline in exports (i.e. not only is less oil being pumped out of the ground, but even less of that is being let out of the country, after domestic use). E.g. the Export Land Model (pic is from the Oil Drum)

So to the Financial Times. They put up an interesting article today concerning much the same thing about, in this instance, rice:

Rice prices jumped 30 per cent to an all-time high on Thursday, raising fears of fresh outbreaks of social unrest across Asia where the grain is a staple food for more than 2.5bn people.

The increase came after Egypt, a leading exporter, imposed a formal ban on selling rice abroad to keep local prices down, and the Philippines announced plans for a major purchase of the grain in the international market to boost supplies. Global rice stocks are at their lowest since 1976.

…

The Egyptian export ban formalises a previously poorly enforced curb and follows similar restrictions imposed by Vietnam and India, the world’s second- and third-largest exporters. Cambodia, a small seller, also on Thursday announced an export ban.

These foreign sales restrictions have removed about a third of the rice traded in the international market.

The immediate price effects of course are about as “no” as brainers get. This is an interesting phenomenon to watch, though going forward. Will it expand into other sectors of the agriculture economy? It ought to scatter no end of eggshells beneath international relations.

If the days of tit-for-tat diplomacy (referring to tariffs) were to return, we really ought to ask ourselves, country by country: what can we threaten to withhold in retaliation? Some countries, currently wealthy and powerful, may not much like their answer.

“The endgame of biofuels is price parity between food BTUs and energy BTUs”

This quote comes from a comment beneath a story on Grist, Biodiesel in the dumps – original source (for me) of this article from the Atlanta Journal Constitution.

Biodistillers nationwide now realize that their industry’s survival depends on the vagaries of world trade. Cheaper soy and palm oil from Asia, Africa and Latin America increasingly replace domestically grown soy oil. Environmentally conscious Europe takes most of the U.S.-produced fuel.

Globalization of the American biodiesel industry, though, wouldn’t be possible without lucrative assistance — a $1-per-gallon tax break — from Washington. Alterra and other biodiesel producers receive the excise tax credit for each gallon of alternative fuel that is mixed with regular diesel.

And, since most of the biodiesel is shipped overseas, Congress essentially subsidizes the price European drivers pay for fuel.

“And we’re not really lessening our dependence on foreign fuel supplies,” said Mark Ash, an economist with the U.S. Department of Agriculture.

…

The blame falls mainly on the skyrocketing price of soybean oil used in 80 percent of the nation’s biodiesel production. Soy oil cost 22 cents per pound when Johnson broke ground in Plains. Wednesday, a pound cost 56.4 cents.

It takes 7.7 pounds of soy oil — or $4.34 — to produce a gallon of biodiesel, according to the Food and Agricultural Policy Research Institute. Add overhead and other processing costs (about 70 cents per gallon), federal and state taxes (54 cents) and subtract the dollar tax credit and a gallon of biodiesel could sell for $4.58 at the pump.

Regular diesel sold for $3.86 a gallon Wednesday in Atlanta.

“How’re you going to sell it at that price?” asked Davis Cosey, who owns an idled biodiesel factory in Perry. “The industry’s horrible. It’s in the ditch.”

Farmers aren’t doing producers any favors. In 2006, more than 75 million acres of soybeans were planted in the United States. Last year, only 64 million acres were planted, according to the USDA. Congress’ ethanol mandate — 37 billion gallons annually by 2022 — fueled the switch from beans to corn. In addition, rapidly developing China and India boosted soybean demand, and prices.

Interesting article (“Only federal subsidies keep the industry afloat” – one for the small-government-ers), if including odd lines like

“The American public, with rare exception, is 100 percent price-sensitive,” Johnson said. “They will not pay a penny more to go green.”

I kind of follow the argument – but 100% price sensitive? Dude, we’re all 100% price sensitive. It’s how sensitive we are that defines our markets (and in this “Johnson” is mistaken – of course we will pay more to go green. We just aren’t stupid enough to call something as daft as crop-grown biofuels shipped half-way ’round the bloody world and back “green”).

So US biodiesel manufacturers are importing soy and palm oil (the latter a truly horrible product, vis, the environment) in order to make biodiesel that is shipped to Europe because the market here is too small – meanwhile only surviving thanks to subsidies (meaning your tax dollars are subsidising European motorists).

Stop me when you can’t take the stupidity any longer.

So this would be where the comment came from. Personally I don’t fancy their chances, however much I agree with their sentiment. For a start food BTUs aren’t at all close to being adequately priced – but, then, neither are things like biofuels, oil shale, etc. Maybe one day. One day when we stop IV-subsidies to wasteful industries and make agriculture compete like everyone else.

“How many people does climate change kill, and what proportion is the United Kingdom responsible for?”

Originally from the Guardian.

In April last year, a group of environmentalists shut down the energy company E.ON’s coal-fired power station in Ratcliffe-on-Soar, in the English Midlands. The goal: to reduce carbon dioxide (CO2) emissions and, in their words, “save lives”. On February 25, 2008, Judge Morris Cooper presented a 20-page ruling accepting that there was an “urgent need for drastic action”, but convicted the protestors of aggravated trespass, saying their defence — that their crime was necessary to save lives — could not be substantiated.

In the trial, for which I was an expert witness, crucial questions were: how many people does climate change kill, and what proportion is the United Kingdom responsible for? I was surprised to discover that nobody knows. Scientists such as me are involved in programmes to measure CO2 emissions, air temperatures, sea-ice loss and the much more complex impacts on birds, rainforest trees and coral reefs. We know that climate change-related events are killing people, yet there is no comprehensive global monitoring program to document the lives lost due to climate change. There is no official climate-change body count.

The author, Simon Lewis, is, at least, kind enough to offer a concession, that “Admittedly, the impact of climate change on human health and mortality is difficult to quantify.” No kidding.

Lewis’ position is a little at odds with that of George Monbiot, but I suffer a Health Economist’s prejudice: I will take quantification of any and every outcome I can. Even if it means we go about comparing victims of climate change to victims of queues in airports.

Cafe Hayek, meet the Treasury Department

The US Treasury Department on Thursday said it agreed with Abu Dhabi and Singapore on a set of principles for sovereign wealth funds that specifies politics should not influence their decisions.

The foreign-controlled funds, many based in the Middle East, have aroused U.S. lawmakers’ concern because they have poured billions of dollars into large stakes in Wall Street firms and other businesses and fanned fears the U.S. was losing control of its destiny.

…

The Treasury has been pressing since last autumn for the IMF to develop the ”best practices” guide. The funds have become increasingly active in buying U.S. assets with growing foreign exchange reserves from oil and international trade.

And that would be Don Boudreaux of Cafe Hayek – who would most likely remind us of the practicalities of trade: running up monster deficits, needing and attracting capital, one gets the idea.

Mostly I’m just unsympathetic to such boorishness by a system that desperately needs the food, even while it bites the hand providing it. I sure do like to see tribalism weed its way into both international relations and international finance, though.

The IMF has a sense of humour like you won’t believe…

I mean, I’m assuming this was intended as a lesson to the rest of us about how dry wit can actually be. Right?

Commodity prices part speculative

The strength of commodities prices, such as crude oil, this year is explained in a large part by speculative factors such as investors piling into the new asset class and the weakness of the US dollar, the International Monetary Fund said on Thursday.

…

The IMF said that the constellation of dollar depreciation and falling short-term real interest rates “has pushed up commodity prices through a number of channels, including by enhancing the attractiveness of commodities as an alternative asset.”

“Overall, these financial factors seem to explain a large part of the increase in crude oil prices so far in 2008, as well as the rising prices of other commodities,” it said.

Laugh? I nearly died. Next they’ll be telling us that the problem with fund management is that managers aren’t actually investors – they just get paid to buy and sell things. Maybe their directors will just give a succession of progressively more curmudgeonly interviews in which they reminisce about their day, when markets trading according to fundamentals. Then maybe they’ll apologise to Argentina.

“Everyone wants to eat like an American on this globe”

Don’t ever forget that this is exactly the problem – and why not? Remember the famous words of Oscar Brown Jr: “You so rich and free and fat; Son-of-a-bitch that’s where it’s at!”

Whether an American, Brit, Netherlander – it doesn’t matter. Plenty of people on this Earth are rich and fat and clean. We bang wives made out of girls from Ipanema, buy, wear, drive and eat whatever we like and send our kids off to University to learn how to do even better than us. Good God, man, who wouldn’t want a part of that?

From the New York Times:

Everywhere, the cost of food is rising sharply. Whether the world is in for a long period of continued increases has become one of the most urgent issues in economics.

Many factors are contributing to the rise, but the biggest is runaway demand. In recent years, the world’s developing countries have been growing about 7 percent a year, an unusually rapid rate by historical standards.

The high growth rate means hundreds of millions of people are, for the first time, getting access to the basics of life, including a better diet. That jump in demand is helping to drive up the prices of agricultural commodities.

Farmers the world over are producing flat-out. American agricultural exports are expected to increase 23 percent this year to $101 billion, a record. The world’s grain stockpiles have fallen to the lowest levels in decades.

The article mentions, interestingly, how fortunate farmers are (one, in particular – what’s a newspaper story without an anecdotal anchor, after all?). I’m not so convinced. Costs are increasing for them, also. Fuel and food are big parts of their factor costs and, while they can certainly extract greater rent from Consumer (non-lexicographically-inclined readers, this means jack up the price to make more profit), even the mere perception of this is going to put signficant strain on America’s thoroughly embarassing farm welfare. Meanwhile those costs are appreciating rapidly, just as they are for the rest of us (the NYT does mention this). The only difference is that farmers are producing one of the inflating-price goods: how’s your control over the labour market going, these days? Yeah, didn’t think so.

This – the death of farm welfare – is a good thing, certainly – provided it comes off. More likely is that, with even greater control as a lobbied-for group, farmers will also extract rents from Governments trying to get them to grow basic foodstuffs for the common good (not, for example, mustard seeds – and yes, David, I know ‘the market’ should sort all of that out).

In all this, though, what the writer really nailed was one of the two causes: global demand (the other is crop yields – maybe climate change (I think so), maybe not):

As the newly urbanized and newly affluent seek more protein and more calories, a phenomenon called “diet globalization” is playing out around the world. Demand is growing for pork in Russia, beef in Indonesia and dairy products in Mexico. Rice is giving way to noodles, home-cooked food to fast food.

Though wracked with upheaval for years and with many millions still rooted in poverty, Nigeria has a growing middle class. Median income per person doubled in the first half of this decade, to $560 in 2005. Much of this increase is being spent on food.

Nigeria grows little wheat, but its people have developed a taste for bread, in part because of marketing by American exporters. Between 1995 and 2005, per capita wheat consumption in Nigeria more than tripled, to 44 pounds a year. Bread has been displacing traditional foods like eba, dumplings made from cassava root.

…

Mr. Ojuku, the man who buys fewer loaves, and one of his fellow tailors in Lagos, Mukala Sule, 39, are trying to adjust to the new era.

“I must eat bread and tea in the morning. Otherwise, I can’t be happy,” Mr. Sule said as he sat on a bench at a roadside cafe a few weeks ago. For a breakfast that includes a small loaf, he pays about $1 a day, twice what the traditional eba would have cost him.

To save a few pennies, he decided to skip butter. The bread was the important thing.

“Even if the price goes up,” Mr. Sule said, “if I have the money, I’ll still buy it.”

Eco 1 students, for the extra credit: is Mr. Ojuku behaving rationally?

Free trade: I heard ’em say it was all about the Benjamins

I have a wobbly relationship with Cafe Hayek. Specifically, I’m a screaming leftie tit, and they’re a mite too free trade for my tastes. I’m Austrian only to the extent that governments should be no bigger than they must be to get things done – but we part company on the matter of exactly how much a government should be doing.

That out of the way. They have been discussing the protectionist rhetoric of Presidential candidate-candidates (that seems right) so far. We talked about this in class, back when we looked at comparative advantage and international trade. Having run through the basics of tariffs, quotas, etc., and how protectionism is about restoring Producer Surplus, we consider how much Consumer Surplus is lost in the process. The question is, what price a job saved? Our textbook has a few figures:

Is it worth the loss in Consumer Surplus of this scale? Bear in mind that the cost is spread across the many consumers, but one is hard-pressed to defend USD50-odd million per job in the rice industry.

In class we discussed “dog whistle” politics – the use of coded language that is meaningless to most of us, but appeals directly to a specific sub-set of the electorate. Going to Michigan and talking about bringing back jobs is an example. “We” hear that, laughingly, while poor bastards in Detroit hear it and, not caring at all the cost to the economy as a whole, like what they hear. And so ad infinitum.

Edwards and Kerry caught my attention in 2004, in this regard, as do Obama and Clinton, now – basically all NAFTA-hassling is dog-whistle protectionism: the only way to come good on the rhetoric is to restrict trade; not for the benefit of all (or for the benefit of under-represented workers in our partner-countries in trade), but for the benefit of a few. Remember the quirk of globalisation/outsourcing/etc.: the benefits are spread very broadly, but the costs are felt very acutely. We respond only to the costs at our peril.

Ultimately I do not like Boudreaux’s “letters” – meaning his responses to the issue. I do think they’re worth reading, though: it’s a dialogue not seen elsewhere. Add Cafe Hayek to your bookmarks for the duration of the election campaign.

Subjecting technical efficiency to cost-benefit analysis

While I was at the Wall Street Journal:

In a small, damp factory here, blood-smeared men wring pulp from pig intestines, then heat it in concrete vats.

The activity at Yuan Intestine & Casing Factory is the first step in the poorly regulated process of making raw heparin, the main ingredient in a type of blood-thinning medicine that in recent days has come under suspicion in the deaths of four Americans.

More than half the world’s heparin comes from China. The chemical is often extracted from pig entrails in small factories — many as rudimentary as this one, which also manufactures sausage casings from intestines. The heparin eventually ends up in drugs used world-wide by patients having surgery or who need dialysis.

The growing concern over heparin’s safety brings to the forefront the question of whether the raw materials from which it is made — for that matter, the raw materials for any drug derived from animals — should be more tightly controlled. The FDA’s position is that the purification steps in the drug-making process are sufficient to produce a pure product from pig tissue, and that “companies are responsible for sourcing the materials” and “appropriately processing the material.”

The health of the animals from which heparin is extracted can be important to the safety of the drug. Drug makers in the U.S. and Europe stopped using cows — a once-common heparin source — after the discovery of bovine spongiform encephalopathy, or “mad cow” disease, amid concerns that the illness could be passed on.

In China, not all heparin makers answer to drug regulators. That’s partly because some are registered as chemical makers, not drug producers. It’s a legacy of a regulatory system that focuses on finished drugs, not their ingredients, says Shen Chen, a spokesman for the State Food and Drug Administration in Beijing.

This part was interesting:

Mr. Yuan, the owner of the heparin and sausage-casing factory in the village of Yuanlou, is a gregarious man who takes pride in the business he has built. Now 57 years old, he has earned enough money from heparin to send his two sons to university. Mr. Yuan himself never graduated from high school because his family was too poor to pay for school.

He launched the original business in the mid-1980s making sausage casings from intestines. Later he added heparin production.

Funnily enough (sort of), I was being asked, by colleagues, about a related matter just the other day. As a vegan, how do I respond to prescribed pharmaceutical treatments when those drugs may come from animals (the intestines of about 3,000 pigs are required to produce a kilogram of heparin)?

Honestly, I just didn’t know. I don’t know whether drugs are vegan. My guess is that I would ask, and try to find vegan, yet effective, alternatives. At the end of the day if I needed that antibiotic, I’d take it. I’m vegan – but I’m not an idiot. For now, I think I’ll just keep hoping I stay healthy as a (healthy) horse.

More generally, this is our issue: how do we weight technical/productive efficiency (producing things for the lowest possible cost/price/resource use) with, say the risk of harm being caused by the corners cut? For me, this is an issue relating to the value of information.

The known risk of negative side-effects (say, Adrenal, Ovarian or Retroperitoneal hemorrhage, if you’re taking heparin) can be, and are, built into the model for cost-effectiveness employed by health-care systems the world over (risk-adjusted adverse events are negative benefits).

However, there’s this issue: if we agree that a drug is cost-effective, then go and manufacture it (efficiently, productively) in a weird farmhouse in China (for example) and, as a result, suffer four deaths and around 350 allergic reactions among heparin consumers in the US, that is something not a part of the original information set or decision-making.

How, then, do we proceed? It would seem that complexity needs to be considered more fully. When we say “the cost-effectiveness of this compound is this much”, we should be adding “…if it is made for this much in facilities of this quality in these countries.” Pursuing the lowest costs of production overseas has the potential to devalue the information we already had gathered on the benefits vs. the risks of any given pharmaceutical intervention.

Trade deficits, multiplier effects and where Keynesian maths breaks down

So, from the Wall Street Journal:

The U.S. trade deficit narrowed sharply in December despite a record foreign oil price, shrinking to a gap smaller than expected as overseas sales rose and imports receded.

The U.S. deficit in international trade of goods and services decreased by 6.9% to $58.76 billion from November’s unrevised $63.12 billion, the Commerce Department said Thursday.

The December deficit was smaller than expected by Wall Street. Economists surveyed by Dow Jones Newswires estimated a $61.70 billion shortfall.

For all of 2007, the U.S. ran a trade deficit of $711.6 billion, $46.9 billion less than the 2006 deficit of $758.5 billion.

Remember our handy equation for the macroeconomy:

Aggregate Demand = Consumption + Investment + Government Expenditure + Net Exports

So the trade deficit is still, well, big: NX, or Net Exports, is still heavily negative in the US equation:

That is month-by-month: every month another big negative bar. However NX is not important: the change in NX is what is important. A decrease in NX of USD47bn(ish) means USD50b47bn back in the US economy.

The Multiplier Effect determines the scale of the contribution this will make to US equilibrium GDP. It is defined as 1/MPS, the Marginal Propensity to Save (Marginal Propensity to Save + Marginal Propensity to Consume = 1).

Now, what is the US’ MPC? According to my Eco 1 textbook (somewhere), it’s 97%. According to Kyle Mudry it’s about 97.87%:

Personal savings as a percentage of disposable income is described in column 5. U.S. personal savings rates have experienced a sharp decline over the period. From the 70’s through the mid-eighties, U.S. citizens saved steadily around 9%-11% of their disposable income. From the mid-eighties to the present there has been a drastic decline, with the sharpest decrease coming during the mid-nineties on, dropping below 5% and almost coming to a complete stop at 1% in 2000.

You will note a discrepancy between Consumption, proportional, and Consumption, Marginal Propensity of – think of it is expenditure on financial services (for example), interest on debt, etc. It’s money not saved, at any rate.

So what does this mean for our USD47bn decline in the trade deficit? Well, according to the Multiplier Effect, it means a 47bn/.02 = USD2.35tr increase in equilibrium GDP!

Ah. This would be where our Multiplier runs into problems. Like many things in statistics and economics, the laws of our physics rather break down, near the corners. In this case, as MPC becomes very close to 1, the Multiplier gets somewhat non-realistic.

Extrapolation! As of last December, total Consumer Credit Outstanding was USD2.52tr, having risen 5.5% over the year. Total household debt is USD12.8tr.

The US population is a little over 301 million people – that’s people, not consumers. With an average household size of 2.6 people, Consumer Credit Outstanding becomes something like USD21,000 per household (total debt USD110,000 or so, but that is mostly secured – i.e. a mortgage).

The punchline? In the United State, the Marginal Propensity to Consume is basically greater than 1. So – give us a USD600 cheque, and we’ll spend some USD800. For example.

Now – what happens to the Multiplier Effect when MPC > 1? It would appear that the increase in GDP is infinite (the limit of the Multiplier as MPS approaches zero). In fact equilibrium GDP decreases. Counter-intuitive? Not so much. The Multiplier Effect works on the long-run equilibrium GDP, and in the long run, we have to repay our debt. More income only invites more expenditure and more borrowing, meaning more money lost to interest payments.

So – just think about that, when you get your recession-fixing cheque, or you read about the trade deficit. As long as we’re not saving for our rainy days, we’re really only getting that little bit more rope with which we’re hanging ourselves.