Wednesday, November 24, 2010

Rethinking World Trade

In a recent speech, rather dully titled "Globalization of the Industrial Production Chains and Measuring International Trade in Value Added", the Director General of the World Trade Organisation Pascal Lamy made some points that I've been talking about with students in my course Political Economy of East Asia (a title I want to change to "Power in East Asia" to get more students!).* Lamy is concerned that traditional trade statistics skew the real picture of international trade, particularly the bias towards the country where the final product is shipped from, even if it is simply assembled there. He uses the example of the iPOD to make his case.
What we call “Made in China” is indeed assembled in China, but what makes up the commercial value of the product comes from the numerous countries that preceded its assembly in China in the global value chain, from its design to the manufacture of the different components and the organization of the logistical support to the chain as a whole. ... If we continue, in this context, to base our economic policy decisions on incomplete statistics, our analyses could be flawed and lead us to the wrong solutions.
For instance, every time an iPod is imported to the United States, the totality of its declared customs value (150 dollars) is ascribed as if it were an import from China, contributing a bit more to the trade imbalance between the two countries. But if we look at the national origin of the added value incorporated in the final product, we note that a significant share corresponds to reimportation by the US, and the rest to the bilateral balance with Japan or Korea which should be allocated according to their contribution to that added value. In fact, according to American researchers, less than 10 of the 150 dollars actually come from China, and all the rest is just re exportation. In the circumstances, a re evaluation of the yuan — a topic which is very much in vogue these days — would only have a modest impact on the sales price of the final product and would probably not restore the competitiveness of competing products manufactured elsewhere.
Similarly, the statistical bias created by attributing the full commercial value to the last country of origin can pervert the political debate on the origin of the imbalances and lead to misguided, and hence counter-productive, decisions. Reverting to the symbolic case of the bilateral deficit between China and the United States, a series of estimates based on true domestic content cuts the deficit by half, if not more.
He then goes on to make an important point about the US trade deficit with Asia rather than particular countries.
This impression is confirmed by other figures, if we accept to “debilateralize” them: if we look at the US trade deficit with Asia rather than its bilateral deficit with China, we note a remarkable stability over the past 25 years at something like 2 to 3 per cent of the United States’
Increased trade with China has replaced trade with other parts of Asia, but this hasn't necessarily been as negative for the rest of Asia as this simple statement might imply. This is because the rest of Asia has also increased its exports with China, developing what is an increasingly important global production structure.

One of the remarkable facts that proponents of the argument that a higher Yuan will rebalance US-China trade need to think about is in relation to US trade with Japan. Though the Yen strengthened remarkably against the Dollar, from 360 yen to the dollar in the 1970s to as low as 80 to the Dollar in the mid-1990s, the trade deficit with Japan just kept on increasing.

File:JPY-USD 1950-.svg
JPY-USD Exchange Rate

For a  discussion on currency issues see Yipang Huang "A Currency War the US Cannot Win". (See also Martin Wolf "Why America is Going to Win the Global Currency Battle".)

Huang makes the point that:
Experts who are interested in Plaza II should first study carefully the experiences of the original Plaza Accord. The yen/dollar rate dropped from 250 in early 1985 to 150 in early 1988 and further to about 80 in mid-1995. But Japan’s current-account surpluses did not disappear.
Likewise, the real effective exchange rate of the US dollar fluctuated during the past three decades, but the US current-account deficits continued to climb, especially during the ten years preceding the global crisis. If the Plaza Accord did not achieve its original goal, why all of a sudden people became interested in this old idea again?

Now Lamy's brief is to encourage world trade liberalisation and so he has an agenda here, but it's worth thinking about his analysis, especially in relation to employment.
As for the impact on employment — understandably a rather sensitive issue in these times of economic crisis — once again the result can be surprising. Reverting to the case of the iPod, another study by the same authors estimates that on a global scale, its manufacture accounted for 41,000 jobs in 2006 of which 14,000 were located in the United States, 6,000 of them professional posts. Since American workers are more qualified and better paid, they earned more than 750 million dollars, while only 320 million less than half — went to workers abroad.
In this example, case studies have shown that the innovating country earns most of the profits; but traditional statistics tend to focus on the last link of the chain, the one which ultimately earns the least. Don’t get me wrong, I am not saying that this is always the case and that relocations always create more jobs than they destroy. ...
I simply wanted to highlight the paradoxes and the misunderstandings that arise when new phenomena are measured using old methods. Statistical survey experts know very well that “if you ask the wrong person, you will get the wrong answer”. Similarly, if you analyse a phenomenon using the wrong “measurements”, you will reach the wrong conclusions.
What Lamy proposes is a new research agenda to rethink the analysis of world trade.

*The political economy of East Asia course is part of the Bachelor of Asian Studies and Bachelor of International Relations at Griffith University.

Tuesday, November 23, 2010

Bubble, Bubble, Toil and Trouble

The recent disclosure through a freedom of information request by The Australian on Treasury warnings about the risks of a housing market collapse have stirred the pot on house prices once again. I, and many others, have discussed this great debate regularly in recent times (a marker, perhaps, of Australia's obsession with house prices). For previous posts see here and here.

According to The Oz:
Phil Garton, the manager of Treasury's Macro Financial Linkages Unit, sent colleagues a draft paper on the rise in household debt, prospects for further growth in the debt-to-income ratio and the potential implications of slower household debt growth.
His email prompted an exchange with Steve Morling, currently the general manager of the Domestic Economy Division, who argued the paper should "make a bit more about the risks".
"The elephant in the room is house prices or more specifically the risk of a precipitous drop in them, perhaps from an external shock or perhaps from their own internal dynamics when affordability constraints or capacity debt levels see prices and expectations of house prices start to move in the opposite direction," Mr Morling wrote on June 15.
"(I) know there are very supportive fundamentals, but prices rose by 50-60 per cent in three to four years in the early part of this decade, with largely unchanged fundamentals, so they can have a life of their own.
"And given what's happened elsewhere I'm far less sanguine about this - and the interplay with debt - than in the past."
I'm happy to admit that I just don't know what the outcome will be. My position over recent years has been to focus on the concept of vulnerabilities, rather than the certainty of either boom or gloom.

I still think the most likely scenario is a gradual decline (maybe just in a real sense i.e. via inflation, rather than by a marked nominal decline) but with different results for different cities and definitely different results for different market segments i.e. high-end versus first home valuations. Unfortunately that's a moderate position that is not particularly exciting.

But if I had to have a bet, I must admit I find the arguments of the bubblistas (the doomers) more persuasive. That may be because I have been a bit of a negative vibe merchant over the years, especially after the financial crisis. But be warned although I thought the longer-term prospects for the Australian economy were good, I was surprised by the vigorous and quick return of the boom for Australia. We might be right in the long run, but a s a famous economist once said we may have passed away before that long-run comes around.
But not pretending to think that I have the answers is not necessarily a poor position. What it should encourage is a hedging of bets.

We are no doubt in a period of great uncertainty. For risk-takers this means that the time is ripe for gambling on either side of the debate.
For those wanting to gamble on a fall, one position to take would be to short the banks (meaning effectively selling borrowed bank shares in the hope that they will be of lesser value when you have to pay them back). In a fall, this would be a good strategy, not only because banks are so exposed to the housing sector, but indeed because any collapse of house prices might be directly related to problems associated with bank debt! That is to say that the banks overseas borrowing means they are vulnerable to global financial developments. (see David Llewellyn Smith's post a while ago here based on this story.)

According to Clancy Yeates from The Age, the Treasury advised the incoming Gillard govt that
"A key risk for the Australian economy is our reliance on short-term external debt, largely intermediated through the banking system ... Among Australian financial institutions there has been some shift away from short-term funding since the crisis, but exposure to financing risk remains significant.
''Among Australian financial institutions there has been some shift away from short-term funding since the crisis, but exposure to financing risk remains significant."
''Highly indebted households, together with high dwelling prices, further heighten the vulnerability of the economy to shocks. While household finances are in good shape overall, and arrears rates and other financial stress measures remain much lower than in the early 1990s, households are more exposed than previously to adverse shocks.''
There's a recent Goldman Sachs report called "A Study On Australian Housing: Uniquely Positioned Or A Bubble?" by Tim Toohey that I'd like to read but it's not freely available. Reports of the study are located here and hereAccording to this report overseas hedge funds are (were?) shorting Australian banks.

Toohey argues that the banks are 25-35 per cent overvalued. The main risk factor is Chinese growth, which would negatively affect our export earnings. Yeates argues that the Treasury advised the incoming government that  
the rise of India and China were providing a hefty boost to national income, but Australia's increasing exposure to commodity prices were a risk and presented their own dangers. The terms of trade - export prices relative to import prices - are now at record levels, but Treasury pointed out that this could change quickly.
''While the terms of trade may continue to surprise on the upside, there are also downside risks if the global supply of resources responds more quickly than expected or if international market volatility persists. And even if those downside risks do not materialise, it is sobering to reflect on the fact that we have not managed previous commodity booms well.''
China's withdrawal of stimulus also threatened to limit investment spending in the world's most populous country, posing ''particular risks'' to Australia's resources industry, it said. In an attempt to prepare the government for managing the resources boom, Treasury also reiterated predictions that mining's expansion would force other industries to give way, a challenge known as the ''two-speed economy''.

Both the warnings about housing and the view of risks associated with China show that there is substantial disagreement between Treasury and the Reserve Bank of Australia about future economic prospects. While the Governor, Glenn Stevens, is more circumspect, Ric Battellino has long been a boomer. In a recent address he points out just how bad the US housing market is at the moment. (For a longer analysis of Battellino's views see my previous post).

Compare this to the situation in Asia, where house prices are rising reflecting strong economic growth and some bubble action.

Dwelling prices in the Australian house market have been expanding rapidly in recent years, although there was significant growth before this index series from Battellino starts.

Battellino is a housing market bull based on the under-supply theory.
Investment in new dwellings has increased over the past year, though growth in the number of dwellings is still falling short of growth of the population. As a result, rental markets are tightening, with vacancy rates falling and rents rising at a solid pace. At the same time, however, households now seem to be less inclined to increase their gearing in order to trade up to better housing. Auction clearance rates have fallen back to around long-run average levels and house prices have been relatively flat over recent months. This is in keeping with the more financially conservative approach that Australian households have taken recently. These trends are probably most pronounced here in Perth, which is going through a period of adjustment after the euphoria of 2006 and 2007.
Anyone wanting a counter-argument to this should read Leith van Onselen's excellent case for an Australian housing market bubble (especially the section on supply-side arguments). It's hard to go past this analysis.

Especially interesting is the argument for why housing investment is a elaborate Ponzi scheme based on this fabulous graph from the RBA itself (via Leith's blog).

The divergence between house prices and rental yields means that real yields from housing have been falling rapidly and that any gain must be made through capital gains. In other words you must sell your investment property at a higher price to make the investment worthwhile because income is was less than you could get from putting your money in a term deposit.

The graph is from a 2008 article (speech) called "Some Observations on the Cost of Housing in Australia". The author, Anthony Richards, Head of Economic Analysis Department, argued: 
One clear fact is that in the 35 years since 1972, nationwide house prices have risen significantly faster than average household incomes, house-building construction costs, and average rents. Most of the increase in real house prices occurred in two episodes, in the late 1980s boom and the subsequent boom in the late 1990s and into this decade. Growth in prices has been broad-based across the different states and territories. The run-up in prices is likely to mostly reflect an increase in the price of land. 
The increase in housing prices has been a mixed blessing for Australians. At one level, rising housing prices have made many people feel wealthier and have contributed to higher levels of consumer spending than might otherwise have occurred. But they have also resulted in concerns about housing affordability.
The difference in views reflects the fact that housing is not just an asset but also a consumption item. When housing is thought of purely as a consumption item, it would seem that in aggregate we would be better off if its price were lower. Because we all need to consume some level of housing services, either rented or purchased, a higher level of housing prices and rents allows less spending on other items.
But housing is also a long-lived asset, and there are distributional aspects to changes in housing prices and rents. Renters will be worse off when housing prices rise whereas those who own rental property will be better off. Owner-occupiers may be largely unaffected, since they can be thought of as being ‘hedged’ against increases in the cost of housing. There are also generational differences. Younger people who have not yet bought homes will be hurt by higher housing prices. Older owner-occupiers may benefit from an increase in prices if they are intending to extract part of the increased value of their homes. Of course, if older people pass on some of their increased wealth to younger relatives, the gains and losses of these two age groups will be reduced. Indeed, the biggest difference may be between those who benefit from transfers from older relatives and those who do not. Both home ownership and ownership of rental property tend to rise with incomes (Graph 2), so it is lower income households that tend to suffer from rising housing prices and higher income households that tend to gain. (my emphases)
So we can see that there are multiple interests at stake here and it might be the fact that you are now even more confused! But remember a bit of confusion, is probably better than misplaced certainty (unless of course you are a gambler).

For me, as I argued in The Vulnerable Country, debt is the big worry. Not public debt, but private debt and particularly household debt. See my earlier posts on debt. The question I ask myself is just how indebted we can be over the long-run. What level of debt is unsustainable?
Household debt as a percentage of household disposable income is a key variable to watch as are mortgage defaults (which are still very low). A major crisis in the world economy that affects Chinese demand would require a reassessment of my moderate fall story. If house prices fall it'll probably be due to some external shock although it is possible that a price precipitous fall is possible based on the sectors own dynamics as the Treasury memo argues.

Sunday, November 21, 2010

The World and Australian Economies: The State of Play

There are a series of big debates going on in Australia's economic policy bureaucracy about the economy, house prices and the resources boom. Generally the Reserve Bank of Australia has been much more optimistic than Treasury, whose recent Red Book briefing to the incoming government highlighted a series of Australian economic vulnerabilities. A key optimist in the debate about the economy is the RBA's Deputy Governor, Ric Battellino. The RBA provides a wealth of information on the Australian economy and a fantastic amount of economic data. (see, for example, the Monthly Chart Pack)

In a recent address Battellino begins by pointing out how divided the world economy is at present.

He then goes on to show the appalling state of the US housing market with foreclosures accounting for almost 1 in 20 mortgages.

Household net wealth in the US as a percentage of disposable income has fallen enormously and is back at the levels of the late 1980s. This highlights why financially-induced recessions are often so long lasting and recoveries so weak as households deal with the fact that they aren't as rich as they were even quite recently!

As Battellino points out:
the reaction of households to all this has been to stop borrowing, cut back on spending and increase savings, all of which means that US households are not going to be the driving force of the global economy that they were for much of the period since the mid 1990s.
Highlighting why so many in the US are so angry but without mentioning it, Battellino points out that "the US corporate sector, on the other hand, is in pretty good shape".

Profits have recovered strongly and the arrears rate on loans to US corporates has peaked at a level that is quite moderate by historical standards; it is no higher than in the 2001 recession, which, as I have noted, was quite mild. ...
Also, holdings of cash by US corporations are at record levels – almost US$1½ trillion or equivalent to over 20 per cent of corporate debt. This means that US corporations are in a strong position to increase investment when confidence returns.
According to Battellino, the objective of the Federal Reserve's efforts to stimulate the economy through monetary policy (according to Bernanke) or quantitative easing (according to most others) is

to put downward pressure on market interest rates, so as to encourage households and businesses to borrow, and to provide banks with extra liquidity, so as to encourage them to lend. As noted, however, US households have little appetite for debt at present, US corporations are flush with cash and have little need to borrow, and banks appear to be quite happy to leave their extra liquidity on deposit at the Fed, rather than lend it. US banks are currently holding about 8 per cent of their assets on deposit with the Fed, while their loans to households and businesses are falling. (my italics)
With Asia doing so much better than the US or Europe, inflation, especially in food prices, is causing wider concern amongst monetary authorities. Never one to argue that house price rises should be seen as a problem, Battellino argues that they simply reflect "the favourable economic and financial climate" of many countries in Asia. Battellino is a true bull about the sustainability of house pricces and household debt.

One of the major factors behind Australia's excellent economic performance has been rising commodity prices. As the figure below shows after a significant fall during the global recession, iron ore prices have returned to pre-crisis highs, while coking coal prices have also recovered.

Battellino reports that:
As a consequence, Australia's terms of trade – the ratio of export prices to import prices – have surpassed the 2008 peak, and are pretty much at unparalleled levels. The increase in the terms of trade over the past year has added around $25 billion to the Australian economy.
But as he notes, the real issue for Australia is the question of the sustainability of this elevated terms of trade. Historically the terms of trade (see below) has fallen rapidly after booms and it was the continuous decline in the terms of trade from the 1970s to the mid-1980s that made many policy-makers worried that Australia had a third world economy (culminating in Keating's banana republic warning). It was also a major factor in pushing policy-makers to restructure the Australian economy.

Terms of Trade 1901-2009
Source: Treasury

The most recent figures for the terms of trade show just how well Australia has been doing. According to the ABS:
The strong growth in terms of trade over the past ten years reflected over 38.2% growth in Export prices and a fall in Import prices of 12.6% ...  In 2009-10, the Terms of trade decreased by 4.8%.

Terms of Trade ABS 5204.0
But the stats from 5206.0 show that the decline was all in the first part for the year.

Terms of Trade ABS 5206.0
Battellino argues that the RBA has long forecast a gradual decline in the level of the terms of trade and that this remains the consensus, but he also notes that "recent commodity price outcomes have caused us to revise up our forecasts".
Beyond the next couple of years, it is hard to predict what will happen. Both China and India, however, are going through a phase of their development that is very intensive in the use of steel. In the past, other countries have taken up to 20 years to move through this phase. It is likely that China, and more particularly India, will have strong demand for steel for quite some time yet. This, of course, would be a very favourable global environment for the Australian economy.

The India one is most interesting suggesting that if India can continue its development process (with associated urbanisation) then demand for Australian coal and iron ore will continue for sometime (even if its at reduced prices because of increasing supply).

Battellino then turns to the Australian economy and notes that the downturn in Australia was relatively shallow. The year ended growth figures don't go into the negative reflecting the fact that Australia had just one quarter of negative growth (i.e. not a recession) as it did in 2000.

There is, however, a question mark over the Australian consumer.

Consumer spending has grown by a little below trend over the past year. It seems that even though consumer confidence is high, consumers remain cautious in their spending. The household saving ratio has picked up noticeably from the low levels it fell to earlier this decade. As we have said before, a period of consolidation by Australian households, after 10–15 years of fairly robust increases in spending and gearing, is probably no bad thing.
Battellino is a housing market bull based on the under supply theory.  
Investment in new dwellings has increased over the past year, though growth in the number of dwellings is still falling short of growth of the population. As a result, rental markets are tightening, with vacancy rates falling and rents rising at a solid pace. At the same time, however, households now seem to be less inclined to increase their gearing in order to trade up to better housing. Auction clearance rates have fallen back to around long-run average levels and house prices have been relatively flat over recent months. This is in keeping with the more financially conservative approach that Australian households have taken recently. These trends are probably most pronounced here in Perth, which is going through a period of adjustment after the euphoria of 2006 and 2007.
Anyone wanting a counter-argument to this should read  Leith van Onselen's excellent case for an Australian housing market bubble.

Business investment has been strong, particularly in the mining sector.

According to Battellino "information published by the Australian Bureau of Statistics, as well as our own liaison with companies, suggest that it will pick up sharply further over the next couple of years". This will help to sustain Australian growth if it eventuates.

The major weakness in investment is in non-residential building:
Following large increases in gearing and commercial property prices in 2006 and 2007, the commercial property market has since deleveraged and prices have fallen. The bulk of that adjustment is probably now over, though the availability of finance for commercial property development remains very tight.
While lending to households remains moderate, business credit remains weak. This is mainly for big business as lending to unincorporated business has continued to grow.
We have spent a fair amount of time at the Bank looking at the question of why business credit is so soft. It is clear that banks had tightened lending standards sharply following the onset of the global financial crisis, which no doubt contributed to the slowdown in business lending. This has been most acute in the area of commercial property, where there has been a sharp cutting back, particularly by foreign-owned banks.
More recently, there are signs that banks are becoming more willing to lend, at least in areas other than commercial property, but demand for loans, in aggregate, is not very strong. It seems that the investment that is taking place in Australia, particularly in the case of the mining sector, is largely being financed outside the banking sector, either from retained earnings, direct investment from overseas or capital market raisings. (my italics)
Another issue constantly in the news at the moment is the level of the Aussie dollar. A much better indicator of the strength of the Aussie and that is more relevant to Australia's international trade is the Trade Weighted Index.  A higher value for the dollar negatively impacts Australian exports as they become more expensive in overseas markets and also affects import-competing buinesses as imports become cheaper. It also negatively impacts Australian overseas profits that need to be repatriated. (Just ask any Australian with money in English or American banks whether they want to bring their money home at the moment!)

On a 'real' basis (that is allowing for inflation) the effective "exchange rate remains below the levels recorded in the resources boom of the early 1970s", when Australia did not have a freely floating currency (instead the RBA set the value).

According to Battellino there are positives and negatives to a high exchange rate. 
A rise in the exchange rate is a natural consequence of a resources boom and, at the aggregate level, is helpful in allowing the economy to adjust. Nonetheless, some sectors of the economy are adversely affected. A notable example at present is the tourism industry, where there has been a sharp increase in the number of Australians travelling abroad rather than taking holidays domestically. This is having a severe effect on traditional holiday destinations in Queensland, areas which are also suffering from overbuilding in the pre-crisis years. Given this double impact, it is not surprising that these areas are currently experiencing among the highest rates of unemployment in the country. The Bank is monitoring developments in these areas closely.
Overall Battellino argues that the economy is travelling well:

While there are differences between sectors and between regions, the Australian economy overall is doing well. We expect that the economy will continue to grow at a solid pace over the next couple of years, with growth picking up to an above-trend rate towards the end of this period. This will be accompanied by further increases in jobs and falls in unemployment.
With the economy now having grown more or less without interruption for about 20 years, it is understandable that spare capacity is limited. This means that the economy cannot grow much above its potential rate without causing a rise in inflation. With a large amount of money continuing to flow into the country over the next couple of years as a result of the resources boom, the challenge will be to manage the economy in a way that keeps economic growth on a sustainable path, with inflation contained. This is what the Bank is trying to do.
At present, inflation is broadly in the middle of the target range. Over the medium term, though, as growth of the economy picks up, the pressures on inflation are more likely to be upward than downward. This is reflected in the forecasts the Bank recently published, which see inflation tending to rise after a period of near-term stability.

Thursday, November 18, 2010

The Irish troubles and why they could matter to us

A friend of mine posted this on my FB:

"So what is all the fuss about Ireland, the population is about that of greater Sydney, who cares if they go broke, wouldn't the sums involved be just a fart on Wall St?"

Admittedly the first thing I thought about was Greater Western Sydney's new AFL team and how much better it would be to have an Irish team entering the competition!! But seriously ...

He could be right that it's overblown. Indeed, he probably is. The global media is now hyper-sensitive to vulnerabilities (although the Australian media might think the opposite given our stellar performance during the crisis).

Remember the sub-prime property market. How could a small segment of the US property market cause such chaos - it was only poor people's houses after all? How could that affect the global financial system (I mean how did Iceland get involved!)

The word to remember here is contagion. If credit freezes again then solvent borrowers can't rollover their debts and then they get in trouble, meaning they can't buy things and then other businesses can’t sell things, can’t borrow and so on. Around and around we go! This is how a credit crisis spreads way beyond the original problem.

If the crisis spreads again, the problem will be that this time, many governments won't have the ability to bail out investors (although in Australia the situation is different).

Now the Euro could be in trouble with some commentators arguing that it's only a matter of time before the Euro is disbanded ... it means that Ireland can't operate an independent monetary policy ... under the old system, the Irish Pound would be devaluing

The globalisation of finance means it's all connected now (I wrote about all this stuff in 1996 in an article called "The Politics of International Finance" .... what surprised me was that it took so long before the whole edifice got into trouble). But what we've seen over the past 20 years is a series of rolling crises with each one progressively worse than the next.

Most people thought the last one was the big one and I hope they're right, but as Wayne Swan used to say: "we're not out of the woods, yet". We still operate in a global economy and we're still connected to it as is the rest of Asia.

The worst decisions being made now do not involve not the printing of money in the US (so-called quantitative easing), but the premature shifts to cut govt spending.

Tuesday, November 2, 2010

Australia's Dependence on China

The Economist in "The indispensable economy? China may not matter quite as much as you think" argues that while dependence on China is significant and growing, it might be overrated.  
It is hard to exaggerate the Chinese economy’s far-reaching impact on the world, from small towns to big markets. It accounted for about 46% of global coal consumption in 2009, according to the World Coal Institute, an industry body, and consumes a similar share of the world’s zinc and aluminium. In 2009 it got through twice as much crude steel as the European Union, America and Japan combined. It bought more cars than America last year and this year looks set to buy more mobile phones than the rest of the world put together, according to China First Capital, an investment bank. ...
China is now the biggest export market for countries as far afield as Brazil (accounting for 12.5% of Brazilian exports in 2009), South Africa (10.3%), Japan (18.9%) and Australia (21.8%).
But given that exports are only a little bit over 20 per cent of GDP in Australia exports to China as a percentage of GDP "are only 3.4% of GDP in Australia, 2.2% in Japan, 2% in South Africa and 1.2% in Brazil." It's important to remember that domestic spending matters most. While production for exports has a multiplier effect through the wider economy, this should not be exaggerated:
these “multipliers” are rarely higher than 1.5 or 2, which is to say, they rarely do more than double the contribution to GDP. Moreover, just as expanding exports add to growth, burgeoning imports subtract from it. Most countries outside East Asia suffered a deteriorating trade balance with China from 2001 to 2008. By the simple arithmetic of growth, trade with China made a (small) negative contribution, not a positive one.
Multipliers in Australia derivative from Chinese demand might be larger than this in Australia however. What this attempt to downplay the China boom  doesn't capture is the confidence effect of a booming China and the huge expansion of investment in Australia aiming to cater not only for Chinese demand but the considerable increase in demand in Asia as a whole. Let's not forget that Japan and South Korea remain vital sources of demand for Australian exports and India and Indonesia are growing rapidly as well.

There are some countries, however, considerably more trade dependent than Australia as the graphic below shows.

China plays a larger role in the economies of its immediate neighbours. Exports to China accounted for over 14% of Taiwan’s GDP last year, and over 10% of South Korea’s. But according to a number of studies, roughly half of East Asia’s exports to China are components, such as semiconductors and hard drives, for goods that are ultimately exported elsewhere. In these industries, China is not so much an engine of demand as a transmission belt for demand originating elsewhere.
The share of parts and components in its imports is, however, falling. From almost 40% a decade ago, it fell to 27% in 2008, according to a recent paper by Soyoung Kim of Seoul National University, as well as Jong-Wha Lee and Cyn-Young Park of the Asian Development Bank. This reflects China’s gradual “transformation from being the world’s factory, toward increasingly being the world’s consumer,” they write. Gabor Pula and Tuomas Peltonen of the European Central Bank calculate that the Philippine, South Korean and Taiwanese economies now depend more on Chinese demand than American.
Trade is not the only way that China’s ups and downs can spill over to the rest of the world. Its purchases of foreign assets keep the cost of capital down and its appetite for raw materials keeps their price up, to the benefit of commodity producers wherever they sell their wares. Its success can boost confidence and productivity. One attempt to measure these broad spillovers is a paper by Vivek Arora and Athanasios Vamvakidis of the IMF. According to their estimates, if China’s growth quickened by 1 percentage point for a year, it would boost the rest of the world’s GDP by 0.4% (about $290 billion) after five years.
The Economist argues contrary to the general opinion in Australia that a major downturn in the Chinese economy would not be devastating.
Since the crisis, China has shown that its economy can grow even when America’s shrinks. It is not entirely dependent on the world’s biggest economy. But that does not mean it can substitute for it. In April the Bank Credit Analyst, an independent research firm, asked what would happen if China suffered a “hard landing”. Its answer to this “apocalyptic” question was quite “benign”. As it pointed out, Japan at the start of the 1990s accounted for a bigger share of GDP than China does today. Its growth slowed from about 5% to 1% in the first half of the 1990s without any discernible effect on global trends. It is hard to exaggerate China’s weight in the world economy. But not impossible.
Given that so much of the optimism of Australia is based on the view that China (and India's) rise will continue long into the future, I'm not so sure that the impact on Australia would be so 'benign'. Australia would have benefited in the 1990s if Japanese demand had continued to expand. But I might just be a negative vibe merchant, with a vested interest in the concept of vulnerability!

For further commentary on this article see the always insightful Mark Thirwell on the Lowy blog site.

Monday, November 1, 2010

Study Habits

There are lots of theories on what is the best way to study for exams. I've always thought writing notes was a pretty good strategy and then taking notes of the notes.

Doing trial answers is also pretty helpful, learning how to write a concise answer that immediately gets to the point.

Trying not to be too boring is always a good strategy. Those marking exams are often going through hell and so an interesting opening to an exam paper can work wonders. (It still needs to be on topic though)

An article in the New York Times canvasses some ways to improve study outcomes:

In recent years, cognitive scientists have shown that a few simple techniques can reliably improve what matters most: how much a student learns from studying.
The findings can help anyone ...But they directly contradict much of the common wisdom about good study habits, and they have not caught on.
For instance, instead of sticking to one study location, simply alternating the room where a person studies improves retention. So does studying distinct but related skills or concepts in one sitting, rather than focusing intensely on a single thing.
I've always done this naturally partly because I get bored quickly. Now Facebook and email provide nice little distractions. Many people argue that these social networking distractions are bad for study and are making us stupider, but I'm not so sure. Taken for granted assumptions about studying are often wrong.
Take the notion that children have specific learning styles, that some are “visual learners” and others are auditory; some are “left-brain” students, others “right-brain.” In a recent review of the relevant research, published in the journal Psychological Science in the Public Interest, a team of psychologists found almost zero support for such ideas. “The contrast between the enormous popularity of the learning-styles approach within education and the lack of credible evidence for its utility is, in our opinion, striking and disturbing,” the researchers concluded.
psychologists have discovered that some of the most hallowed advice on study habits is flat wrong. For instance, many study skills courses insist that students find a specific place, a study room or a quiet corner of the library, to take their work. The research finds just the opposite. In one classic 1978 experiment, psychologists found that college students who studied a list of 40 vocabulary words in two different rooms — one windowless and cluttered, the other modern, with a view on a courtyard — did far better on a test than students who studied the words twice, in the same room. Later studies have confirmed the finding, for a variety of topics.
The brain makes subtle associations between what it is studying and the background sensations it has at the time, the authors say, regardless of whether those perceptions are conscious. It colors the terms of the Versailles Treaty with the wasted fluorescent glow of the dorm study room, say; or the elements of the Marshall Plan with the jade-curtain shade of the willow tree in the backyard. Forcing the brain to make multiple associations with the same material may, in effect, give that information more neural scaffolding.
“What we think is happening here is that, when the outside context is varied, the information is enriched, and this slows down forgetting,” said Dr. Bjork, the senior author of the two-room experiment.
Varying the type of material studied in a single sitting — alternating, for example, among vocabulary, reading and speaking in a new language — seems to leave a deeper impression on the brain than does concentrating on just one skill at a time. Musicians have known this for years, and their practice sessions often include a mix of scales, musical pieces and rhythmic work. Many athletes, too, routinely mix their workouts with strength, speed and skill drills.