Monday, May 31, 2010

How much profit is enough?

Coal miners to make $80b despite resources rent tax
Sydney Morning Herald

May 31, 2010
COAL miners stand to rake in earnings of more than $80 billion in the first five years of the resources ''super profits'' tax, despite having their returns trimmed by 15 per cent.

As the political brawl over the planned tax heats up, the global energy consultant Wood Mackenzie also says most coal mines planned before the tax was announced will still go ahead.

The firm's modelling found coal miners' earnings between July 2012 and 2016 would slide from $97.1 billion under the current regime to $82.3 billion with the tax. This amounts to a fall of 15 per cent.
The lead coal analyst for Australasia, Ben Willacy, said the tax would only put marginal projects at risk of failure in the short term, but the lower returns would put a question mark over projects planned for further down the track. ''Because it's a profit tax, any project that was profitable before is still profitable under the new regime,'' Mr Willacy said.

''We don't think it will make any projects unprofitable, but it will definitely distort investment decisions in the future.''

The analysis, based on 140 foreign and Australian-owned mines, also found earnings in the first full year of the tax, 2013, would be cut by 17 per cent to $17.3 billion.

Mr Willacy said this was ''pretty sizeable'', and the hit to profits could end up being greater as these were preliminary forecasts only.

Coal rivals iron ore as Australia's most valuable export, and global prices of the product have jumped by up to 55 per cent this year.

The biggest players include BHP Billiton, Rio Tinto and Xstrata, who were among a group of coal miners that last week bid $4.85 billion for Queensland's rail assets.

In opposing the tax, miners have argued it will kill the goose that is laying the golden egg, because weaker investment would undermine a key export.

Mr Willacy said the likely impact of the tax on coal exports was unclear as details were still under negotiation. However, his assessment was far less alarming than that of the resource industry lobbying campaign, which says miners will ditch Australia en masse.

''Most of the projects that were profitable before RSPT are still likely to go ahead,'' Mr Willacy said. ''Australia will still remain a competitive supplier and producer of coal.

''So I don't expect those production and export volumes to tail off significantly, but I wouldn't at all be surprised if there were some impact.

''Obviously we have the companies jumping up and down at the moment, saying they're going to can a lot of projects. In the cold light of day when the dust settles, it may well be that most of these projects remain more profitable than the next best alternative.''

Australia is the world's biggest coal exporter, helpfully located near key markets in Asia. Alternative countries for coal miners to invest in include Indonesia, China, South Africa and Russia.

One of the most contentious aspects in the mining tax debate has been the rate at which it kicks in, currently the long-term government bond yield of less than 6 per cent. Mr Willacy said this was unrealistic for projects seeking bank finance, and a 12 per cent ''uplift rate'' would make more sense.

Monday, May 17, 2010

Resource Super Profits Tax

If there were ever a single graph that showed that miners should pay more in tax, this is the one.

The graph is from the Henry tax review and is reproduced in a May 4 pre-Budget speech by Wayne Swan "Managing Prosperity In The Next Mining Boom - Beyond the 'Lucky Country'"

What it shows is that as profits have increased, Australians share of those profits have declined.
In other words, the existing royalty regime has left the Australian owners of these non-renewable resources relatively worse off over time as the profits of our majority foreign-owned mining sector have boomed.
Now this shouldn't be seen as an excuse to bash foreign investors. I don't think it matters who is earning the profits as long as a fair share is distributed to Australians via the tax system.
Mining operations require more capital than can be provided by Australian investors, so foreign investment is essential, but the government's new tax will not restrict investment once it has been bedded down.
No doubt the mining industry does not want to pay more taxes, but its self interested attempt to maintain its large profits should be taken for what it is, self-interest. The amount of disinformation put out by the mining sector is a disgrace. Spokespeople fail to acknowledge that existing royalties will be refunded and that the govt will provide support while projects are getting to the point where they will make a profit.
Today's debate on  ABC Radio's World Today "Players sift through hype and hyperbole" is worth a listen.
While the form of the proposed tax should be debated, the final outcome that miners should pay more tax on their profits should be set in stone.

Sunday, May 16, 2010

Latest Trade Data

World trade suffered a severe blow from late 2008 to 2009, but the recovery has been fairly robust, contrary to the concerns that we were witnessing a possible re-run of the Great Depression. The above graph, accompanying a story by Floyd Norris in the NYT "A Surge in Trade in Some Countries, but Others Lag", shows (partly) why Australia has done better than other countries.
The figures are based on each country’s reported trade in goods, valued in dollars for the sake of consistency. The chart shows the change for each country’s trade for three-month periods ending in the month shown, compared with the same three-month period a year earlier.
A year ago, trade appeared to be collapsing around the world, in large part because of the credit crisis and the reactions of both companies and consumers to it. Even with the recent surge in trade, none of the countries shown are exporting goods at the highest rate ever, and only one — China — is importing more goods than it ever did.
In the United States, imports are rising a little faster than exports, with both growing around 20 percent in the first quarter, compared with the year-earlier period. It was the first calendar quarter to show year-over-year growth in trade since the third quarter of 2008. It was near the end of that quarter that Lehman Brothers failed and worries of financial crisis grew.
German trade is growing more slowly than in the United States, but the country continues to run large trade surpluses, with exports 21 percent higher than imports in the most recent three months available. By contrast, Japanese exports are 12 percent higher than imports, and the figure in China is just 1 percent. 
Gowth in trade is generally more restrained in the so-called Gips countries of Europe — Greece, Ireland, Portugal and Spain. But their circumstances vary widely. In Ireland, both exports and imports are running lower than they were a year earlier, but the country continues to benefit from a very large trade surplus, with exports 82 percent higher than imports.
In terms of growth in trade, the figures are similar in Greece, with imports falling and exports almost level with those of a year ago. But Greece continues to face a large trade deficit, and would need a real surge in exports to cut into that deficit. For the three months through February, exports were 63 percent lower than imports.
In the United States, which faces chronic trade deficits, the margin is 31 percent, roughly half as large as the one faced by Greece.
Making Greece’s exporters competitive will be a very difficult task while the country remains in the euro zone. If it does, the likelihood is that there will be a prolonged period of deflation, with wages being reduced in an effort to cut costs.

In China and India, imports have been growing at a faster pace than exports and Australia is providing quite a few of those imports. In Japan, however, our second largest export market, imports have not recovered as much as exports. This is partly because Japan now exports so much to China. The US has seen imports and exports recover at roughly the same pace and in the most recent figures the US trade deficit increased slightly.  

Most interestingly, Norris reports that China is no longer running a large trade surplus:
In fact, the monthly average surplus for the most recently reported three months — February through April — was only $683 million. For a country that imports and exports $10 billion a month, that is a negligible number.

Tuesday, May 11, 2010

Data on the Australian Economy

Every month the RBA releases a publication called A Collection of Graphs on the Australian Economy and Financial Markets. It really is quite fabulous although I think that they should release a companion document with the original data so that punters like me can construct their own graphs from the data without having to trawl through different statistical publications. When queried the RBA argued that some of the data was only available on subscription and couldn't be reproduced in its original form. Be that as it may, both the RBA and Treasury are generally very helpful when requests are made for data.

The latest edition of the collection is for May and contains data up to the 29th of April.

A couple of graphs caught my attention (sorry they didn't reproduce that well)

This first one shows China and India's amazing performance since 2000, just how badly they were affected by the collapse of world trade in 2009 and then how quickly they recovered. 

This second graph shows one of the reasons why Australia has done so well in recent times. Growth in Australia's trading partners has outpaced growth in the OECD as a whole. To get an accurate comparison we would need to do similar graphs for individual countries trading partner GDP, but obviously having extensive trade with Asia has served us well in recent times

This messy third graph shows the collapse of trade over 2008-09. This is particularly true for Japanese trade, which fell more than any other trading partner during this period of time and is the reason why it lost its position as Australai's most important export market to China, which didn't fall by quite so much.

This fourth graph shows Australia's sound fiscal position compared to most countries with only the Scandinavians in a better position among developed countries. Despite fears about Spain and its high deficit, it does not have a particularly bad overall debt position. (The deficit is the yearly figure and debt is the accumulation of deficits over time). This figure is the best one (see my earlier post Public Debt (for Nerds) for an explanation) rather than the generally misleading gross public debt figure that is usually trotted out to scare the uninformed!

  This fifth graph shows the important distinction between the public and private components of foreign debt. As it clearly shows, Australia's foreign debt problem is privae in nature, although noone seemes to be that worried about it. The lifting of the super guarantee gradually to 12% will help to bosst Australian savings and make for better retirement for lots of Australians into the future.

Sunday, May 9, 2010

Just How Big are the US, Japanese, Chinese, ASEAN, Korean and Australian Economies?

Percentage of World GDP and the Differences between PPP and USD Measurements

Table 1 shows relativities between countries on the basis of their percentage of the total global economy. It is measured on a current prices basis, which means that the measures are taken at the time and do not account for changing prices. Constant price GDP measures do account for inflation and measure GDP or GDP per capita using a base year, which is then used to measure ‘constant ‘prices. But for our purposes the failure to account for inflation doesn't matter because we're considering the percentage of the total at particular points in time.

Table 1 is constructed on a PPP basis. It shows that the United States’ percentage has fallen slightly but it remains the world’s largest economy by a long way. ASEAN has increased its share from 2.3 per cent of the world economy to 4.1 per cent. China’s growth has been the most dramatic, however, increasing from 2 per cent to 13.3 per cent. Japan’s percentage of the total has declined from 7.9 per cent to 5.9 and India has more than doubled its percentage from 2.2 per cent to 5.2 per cent, as has Korea from 0.8 per cent to 2 per cent.

Table 2 shows the percentage of world economic GDP accounted for by our countries of interest except this time on a US Dollar exchange basis. By this measure the developing countries and ASEAN are much smaller and the figures are profoundly affected by the USD exchange rate. Indeed as a percentage of global GDP ASEAN has not advanced its relative position very far at all, ASEAN accounted for 2.2 per cent in 1980 and 2.8 per cent in 2010. In 1985 at the height of the dollar in terms of its value, the US accounted for 35 per cent of global GDP. In 1995 at the height of the value of the yen, Japan accounted for 17.8 per cent of global GDP, falling to 8.5 per cent in 2010. Australia has advanced considerably, partly because of continuous growth since 1990 and partly because the AUD has increased in value since its low point in 2000.

Measuring the Size of Economies


I just constructed these measurements for selected countries in Asia plus the US and Australia for the sake of comparison. The data is from the IMF. The measurements are for an Open University Course I'm writing called The Political Economy of East Asia. The course should probably be called The Political Economy of Power in East Asia but that's a bit too much of a mouthful. The particular module is called Rising Powers II: ASEAN and India.
Table 10.1 shows the relative size of all relevant economies for our course. It shows the continuing dominance of the US economy and the amazing growth of the Chinese economy since 1990. China will overtake Japan (on USD terms in 2010 – it passed it a while ago on PPP terms). Japan has done poorly since 1995, especially on USD terms as the value of the yen declined after the mid-1990s. On USD terms, the Japanese economy is roughly the same size it was in 1995! The table also shows just how well Australia has done since the 1990 recession.

The countries that make up ASEAN now grew rapidly between 1990 and 1995 but then contracted during 1995 and 2000, showing the major impact of the East Asian financial crisis. The figure for 2010 is an estimate, but is an estimate that factors in recent turmoil in the global economy. The figures were constructed for the April 2010 IMF World Economic Outlook Database.

India too has grown rapidly since 1990 from a smaller GDP on USD terms than Australia in 1990 to considerably larger in 2010.

Table 10.2 measures the size of our selected countries and ASEAN on purchasing power parity terms. It shows that on this basis ASEAN is much larger as is China and India. Indonesia is a considerably larger economy than Australia on PPP terms and ASEAN is nearly four times larger. None of our Asian countries, which contracted between 1995 and 2000 on an exchange basis, contracted when measured in this way. One of the impacts of the financial crisis was a sizeable decline in the se countries exchange rates in relation to the USD.

Saturday, May 1, 2010

Angus Maddison

A giant among economists ...

I once saw him give a lecture in a suit and sneakers ...

In other words a man after my own heart

Here's how he begins one of the best studies of the history of the world economy: The World Economy: A Millennial Perspective.
Over the past millennium, world population rose 22–fold. Per capita income increased 13–fold, world GDP nearly 300–fold. This contrasts sharply with the preceding millennium, when world population grew by only a sixth, and there was no advance in per capita income.
From the year 1000 to 1820 the advance in per capita income was a slow crawl — the world average rose about 50 per cent. Most of the growth went to accommodate a fourfold increase in population.
Since 1820, world development has been much more dynamic. Per capita income rose more than eightfold, population more than fivefold.
Per capita income growth is not the only indicator of welfare. Over the long run, there has been a dramatic increase in life expectation. In the year 1000, the average infant could expect to live about 24 years. A third would die in the first year of life, hunger and epidemic disease would ravage the survivors. There was an almost imperceptible rise up to 1820, mainly in Western Europe. Most of the improvement has occurred since then. Now the average infant can expect to survive 66 years.
The growth process was uneven in space as well as time. The rise in life expectation and income has been most rapid in Western Europe, North America, Australasia and Japan. By 1820, this group had forged ahead to an income level twice that in the rest of the world. By 1998, the gap was 7:1. Between the United States (the present world leader) and Africa (the poorest region) the gap is now 20:1. This gap is still widening. Divergence is dominant but not inexorable. In the past half century, resurgent Asian countries have demonstrated that an important degree of catch–up is feasible.

Nevertheless world economic growth has slowed substantially since 1973, and the Asian advance has been offset by stagnation or retrogression elsewhere.
Here's an obituary from the NYT.

Angus Maddison, Economic Historian, Dies at 83

New York Times
April 30, 2010

Some people try to forecast the future. Angus Maddison devoted his life to forecasting the past.

Professor Maddison, a British-born economic historian with a compulsion for quantification, spent many of his 83 years calculating the size of economies over the last three millenniums. In one study he estimated the size of the world economy in A.D. 1 as about one five-hundredth of what it was in 2008.

He died on April 24 at a hospital in Paris after a long illness, his daughter, Elizabeth Maddison, said. He lived near Compi├Ęgne, about 50 miles northeast of Paris.

Professor Maddison held various senior posts at what is now the Organization for Economic Cooperation and Development, an international research and consulting organization based in Paris. Most recently he was a professor at the University of Groningen in the Netherlands.

He also spent much of his career studying economic conditions in the developing world firsthand, living for extended periods in Pakistan, Ghana, Brazil, Mongolia and Guinea, among other nations. As an adviser, he helped emerging market governments determine how to measure their economic progress and improve policies.

In his research, he tried to reconstruct thousands of years’ worth of economic data, most notably in his 2007 book “Contours of the World Economy 1-2030 A.D..” He argued that per capita income around the globe had remained largely stagnant from about 1000 to 1820, after which the world became exponentially richer and life expectancies surged.

In another influential book, “Chinese Economic Performance in the Long Run,” in 1998, he tracked the history of Chinese growth since 960. The book demonstrated that China’s recent rise was merely a return to economic superpowerdom, as the Middle Kingdom had already dominated the world economy for many centuries.

In his archaeological excavation of the economies of other eras, he was “trying to explain why some countries achieved faster growth or higher income levels than others,” he wrote in an autobiographical essay, “Confessions of a Chiffrephile” published in 1994. He wanted to know what some countries did right and what others did wrong, and to figure out how growth influenced culture, and was influenced by it.

Professor Maddison often referred to himself as a “chiffrephile,” or lover of numbers, a term he invented to characterize economists and economic historians like himself who were prone to quantifying the world.

While macroeconomic research in the last few decades was dominated by elegant mathematical models and technical wizardry, his focus on meat-and-potatoes data and cross-country historical comparisons has come back into vogue in recent years, especially in the wake of the financial crisis.
Social class and inequality figured greatly in his research and personal memoirs, perhaps reflecting his early childhood in economically depressed Newcastle-upon-Tyne, a shipbuilding and mining town in northeastern England, where he was born on Dec. 6, 1926.

His parents both left school at age 12. His father, a railway fitter, and his mother invested in their only child’s intellectual development, taking him to scholarly lectures sponsored by the local cooperative movement. One lecture introduced him to the work of the British economist John Maynard Keynes.

Professor Maddison’s first collegiate pursuit was history, but he was drawn to economics because he realized it was a “useful discipline for solving serious problems,” he wrote in his autobiography.

He enrolled in Cambridge in 1945, on a scholarship supplemented by a part-time job lecturing to German prisoners of war. He later attended graduate school at McGill University in Montreal and the Johns Hopkins University in Baltimore, then decided to return to Britain.

In subsequent years he lectured at universities, including the University of St. Andrews in Scotland, and worked with the what is now the Weatherhead Center for International Affairs at Harvard University. He retired from the University of Groningen in 1996, but he was still pursuing his research until three weeks before he died, his daughter, Elizabeth, said.

Besides his daughter, Professor Maddison is survived by his wife, Penelope; two sons, George and Charles, who is also an economist; and five grandchildren.