Friday, June 29, 2012

Global Military Spending Revisited

I've always been an advocate for looking at different sources and methodologies for measuring things.

This is especially the case for economic size as I argued here.

It also applies to military spending.

The table from the PDA (Project on Defense Alternatives) below shows different measures for military spending from SIPRI (Stockholm International Peace Research Institute) and IISS (International Institute for Strategic Studies). (H/T Lowy Interpreter)

It also considers PPP (purchasing power parity) measures, which account for discrepancies in the costs of production and consumption in different countries.

What all measures still clearly show is that the United States remains the key military spender by a long way.

Many Australians I think would be surprised about Australia's high position on the table.

Alongside measures of Australia's relatively excellent economic performance, it shows Australia's significance on the world stage, even if, for many, this is not a measure of significance they support.

* International Institute for Strategic Studies
** Stockholm International Peace Research Institute

*** PPP = Purchasing Power Parity, a measure that facilitates international budget comparisons by adjusting exchange rates to reflect the relative domestic buying power of national currencies.

Notes: The IISS column presents officially reported spending in USD at 2010 exchange rates, with two exceptions: China and Russia. For these, the number is an estimate of actual spending. The second column is SIPRI’s estimate of actual expenditures, also shown in USD at 2010 exchange rates. The PPP column converts estimates of actual expenditures into approximate purchasing power, mostly drawn from SIPRI data. For China and Russia, it also shows an IISS estimate of purchasing power, thus producing a range. Purchasing power calculations improve on estimates that use exchange rates alone. However, PPP ratios are based on comparisons between national economies as a whole, not the defense sectors specifically. This can overstate military purchasing power when a nation’s military sector is much more advanced than its economy overall or when a nation depends heavily on international arms purchases.

Sources: International Institute for Strategic Studies, The Military Balance 2012 (London, 2012); Stockholm International Peace Research Institute, SIPRI Yearbook 2011 (Oxford, 2011). 

Thursday, June 21, 2012

Working Harder for Longer? The Past, Present and Future of Retirement

We're living longer, so we're going to have to work for longer. That's the future of retirement, as the trend to lower retirement ages reverses over the coming decades. In contrast, the past up to the present - the period from 1970 to 2010 - was a story of declining retirement ages, as the graphic from The Economist shows.

The story notes that France under Fran├žois Hollande (seen as a major enemy of economic liberalism by The Economist) is an exception in reducing the retirement age from 62 to 60 as rich countries try to deal with the fact that people, especially men, are living longer. (The cost to France of lowering the retirement age is less than many expected because the rules make fewer people eligible.)

In the post-war period, the cost of pensions wasn't too high in many countries in the developed world because bad diets and bad habits meant retired men received the pension for a little while and then dutifully died to ease the burden on the state. Low unemployment until the 1970s also meant that the cost of other social payments was minuscule compared to what happened afterwards.

These days people are unobligingly living much longer making the cost to the state (i.e. taxpayers) more burdensome.

Note the difference in the graphic between official and effective retirement ages and the low 'official' level for Greek retirement, which varies dependent on professions as Michael Lewis points out:

The retirement age for Greek jobs classified as “arduous” is as early as 55 for men and 50 for women. As this is also the moment when the state begins to shovel out generous pensions, more than 600 Greek professions somehow managed to get themselves classified as arduous: hairdressers, radio announcers, waiters, musicians ...
However, the interesting part is the 'effective' retirement age in Greece is much higher than the 'official' figure, although the discrepancy has come down since the 1970s.

The Economist's graphic is based on data from the OECD, which has also produced some nice graphics to show the future state of retirement in the OECD. Basically the assessment is that public pension payments will be less in the future in the order of "20-25% on average". The OECD argues  "countries should focus on two main policies to address the growing pensions gap: later retirement and extending the coverage of private pensions."

The report also notes that the pace of pension reform has accelerated over the past few years. Major changes include:
  • increases in pensionable ages
  • the introduction of automatic adjustment mechanisms 
  • strengthening of work incentives
While "some countries have also better focused public pension expenditure on lower income groups", others in Central and Eastern European countries have pulled "back earlier reforms that introduced a mandatory funded component". These failures to extend pensions put Australia's compulsory system into perspective, where the government aims to increase super to 12% of wages by 2020.

But the pension age increases in the OECD are the biggest change, given the general direction for all countries, except Germany and Japan, over the 40 year period from 1970 to 2010 was for younger retirement ages:
Most OECD countries have already begun to increase pensionable ages, or plan to do so in the near future. Age 65 remains the modal age at which people normally draw their pensions, accounting for 17, or half, of OECD countries for men and 14 countries for women. But 67 – or higher – is becoming the new 65. Some 13 countries (12 for women) are either increasing pension ages to this level or, in the cases of Iceland and Norway, are already there. Italy, which links pension age and seniority requirements to life expectancy from 2013 and Denmark, which plans to link pension age to life expectancy from the mid-2020s, are forecast nearly to reach age 69 in 2050. The United Kingdom has accelerated the increase in the pensionable age, which will move from 65 to 66 by 2020 (6 years earlier than planned) and from 66 to 67 by 2026-28 (10 years earlier than planned).

As many of us with a defined-contribution superannuation profile heavy in equities in Australia realise, investment risk can be a real problem, especially if you are close to retirement (thankfully I'm not!).

Australian pensions are more heavily concentrated in equities than anywhere else in the world. (The figures are from 2009)

I feel for those who put extra capital into their super after Peter Costello's reforms only to see their tax-advantaged potential gains getting swallowed, spat out and then stomped on by the financial crisis.

Just to remind those who don't realise how bad things have been since the peak, here's a little chart of the share market over the past few years. Getting out of equities into cash at over 6000 would have been a very good move.

Note the comparison with the Dow.

Australia is not alone. According to the OECD:
The financial and economic crisis has exerted major stress on private pension arrangements. Most countries’ pension funds are still in the red in terms of cumulative investment performance over the period 2007-11 (-1.6% annually, on average, in real terms). Even when measured over the period 2001-10, the pension funds’ real rate of return in the 21 OECD countries that report such data averaged a paltry 0.1%. Such disappointing performance puts at risk the ability of private pension arrangements to deliver adequate pensions. The United Kingdom follows the general trend, with average real investment returns of pension funds of -1.1% over the period 2007-10 and -0.1% over the period 2001-10.
... one clear goal for policymakers should be to improve the design of default investment strategies so that investment risk is reduced as the worker approaches retirement. Such life-cycle investment strategies may need to be carefully regulated to ensure that workers are offered sufficient diversification and protection from market shocks in old age.

Too right! Australians are forced into super, so they need to take greater care in their asset allocation if they don't want to see their nest eggs diminished just before their retirement. Better to choose to work for longer than be forced to do so.

Wednesday, June 20, 2012

China Compared

I finally got around to reading the World Bank's tome on China, called China 2030: Building a Modern Harmonious, and Creative Society. I thought I'd share a couple of charts that I'm going to use in the lecture on China in my course Power in East Asia. 

Here's another one I'm going to use from the MacroBusiness blog - well worth a look if you haven't seen it already.

Sunday, June 17, 2012

Even more reasons why we're lucky to be living in Australia

My last post argued that Australia hadn't just been lucky, it had been good. It's easy to focus on the shortcomings of policy - the inability of the Howard government to put Australia in a sounder fiscal position despite perhaps the most propitious global economic conditions in Australian history, the failure of the Reserve Bank and the government to put policies in place to restrict the massive expansion of debt, and the failure of the Rudd and Gillard governments to put resource taxation through earlier and at a higher rate.  But given Australia's relatively excellent economic performance I think it's time to accentuate the positives.

Having said that, I still think policy-makers must continue be aware of Australia's three major economic vulnerabilities:
  • changes in international demand for Australia's exports (mainly resources)
  • changes in international financial sentiment and supply
  • rising inequality
Of course we could add a fourth, our vulnerability to climate change and the policies required to deal with them. This fourth vulnerability undoubtedly affects the first one because dealing with climate change will affect our exports of raw materials and particularly coal, although it has and will continue to boost demand for Australian gas.

What it should also do is increase our willingness to fund basic research in renewable energy technologies. Success in this latter category will unfortunately affect our exports of coal.

Recognising these vulnerabilities should be the starting point of any long-term analysis of the Australian economy, but such worries tend to get lost in the euphoria of booms, especially long-lasting booms like this one.

We also need to be aware of the distributional consequences of adaptation to the global economy and changing technology. Openness can underpin productivity and prosperity but the political process must ensure the spreading of benefits and the sharing of costs. 
In light of much of the guff being written about the European crisis and the idea that the welfare state (once again) is the cause of crisis, I would argue that the welfare state is the reason why the crisis is so much less severe than it could be. 
Indeed, the crisis clearly shows that globalisation does not necessitate a smaller role for government. Without the prescient actions of policy-makers and an understanding of the Great Depression this crisis could have been a global catastrophe.

The future of globalisation is ultimately dependent on effective redistribution and compromise between sections of societies. In democracies (and even in authoritarian systems), globalisation must eventually produce the goods (and services) or there will be trouble. Governments can use crises to push through harsh measures, but eventually as we are seeing in Europe right now, there must be something in it for a majority of a population. (see here also for academic account of the mechanisms involved)

Unfortunately, failure of economic policies to eventually 'produce the goods' is just as likely to lead to right-wing populism as left-wing populism.

So ... be thankful that you live in Australia as this graph clearly shows. (h/t Rumplestatskin)

Wednesday, June 13, 2012

Not Just Lucky, Good: The Australian Economy in 2012

Prime Minister Julia Gillard is keen to make the point that Australia is not just lucky, it's good and it's good because of good policy.  At the Prime Minister's economic Forum in Brisbane (I'm still waiting for my invitation) she said:
It probably wasn't Gary Player who first said "the harder I work, the luckier I get" but he certainly made that quote his own. He could have been talking about Australia. If we ever were just a lucky country, we're certainly not now.
It's not luck that makes this a top-10 country on low trade barriers, openness to international ideas, sophisticated and independent economic institutions, a list that goes on.
Luck didn't give us the three triple-A ratings which only seven other economies can claim – which no previous Australian government can claim either.
Luck didn't make us a top-two country on the measures that are most important to us: political stability, social mobility, ease of starting a business.
Luck didn't keep us out of the worst global recession in 80 years. 
And luck won't build us a new economy for the future. We have to make it.
The Gary Player quote is of course an old chestnut that John Howard used when people argued that the good economic outcomes were mainly to do with luck, rather than good policy. 
There’s nothing fortuitous or guaranteed about economic prosperity. That old saying of, was it, Arnold Palmer or Gary Player that … the more I practice the luckier I get … what it really means is that the harder you work at good policy, the better the outcome … economic management is not some kind of automatic autopilot thing.
During the 2007 election campaign, Paul Keating argued that John Howard was the beneficiary of both a booming global economy and Labor’s transformational policy reforms of the 1980s and 1990s.
I think the public are quite wise about the economy and governments now and they know that the structural changes of the ‘80s and ‘90s are working. The real question today with the economy growing so rapidly and unemployment so low is why doesn't the tinder box go off? That is, why don't we get the big bang? The big bang in inflation and in wages back into the old dismal cycle? The answer is because of the structural changes. Nothing to do with Mr Costello's economic management … and everything to do with Labor’s structural changes from the ‘80s.
If it were true that public were wise about the economy, then I imagine that the government would be doing better in the polls.

The determination of whether Australia's current favourable predicament is due to luck or skill is only half the problem for analysts of Australia's political economy. Right now the real problem is that most Australians don't seem to be aware of how well things are going for Australia. Part of this has to do with the fact that some people aren't actually doing that well, particularly in relation to others. The aggregate concepts of GDP, terms of trade and so forth are exactly that: aggregate. 

But many Australians are doing well. And in particular more people (per capita) in Australia are doing well than in other countries. Basically Australia is the best country in the world to be living in right now (that is beyond the non-economic reasons as to why living in Australia is so excellent like Australian rules football) 

So why do we have such a negative view of our economic success. A read of Glenn Stevens latest speech provides some of the answers and I've written previously on why I think there are negative perceptions about Australia's economic predicament. To argue that the mining boom is the major problem is just plain wrong. Without the mining boom we'd be doing a lot worse. But, the mining boom has had a negative impact on other tradable sectors of the economy (that is those parts of the economy that export or compete against imports).

The real problem for the government lies with a series of structural changes that are negatively affecting collective perceptions of future prospects.

The first is the long-running shift away from manufacturing towards services and the more recent revitalisation of the mining sector. This has come, to some extent, at the expense of manufacturing and important service industries such as tourism and international education. The following graphs come from a presentation made by the RBA governor to the PM's economic forum. 

The two sectors that have been in major decline are agriculture and manufacturing. For good or bad these are two sectors of the economy that are seen as 'special' and so when they are doing it tough their problems are amplified through the public sphere. 

The second structural change is the shift away from debt-financed consumption and rising housing prices to a higher rate of saving – generally considered under the description deleveraging or simply the paying off or consolidation of debt. The NSW government in its Budget has tried to boost the housing market once again by giving large sums of money to property sellers.

We should really call this second structural change the end of an earlier structural change towards higher debt that’s been going on since the liberalisation of the financial sector. The inability to continue to grow debt even further undermines an important source of growth over the past 20 years

The problem is that household debt remains at historically high levels. 

The third structural change is the tentative shift towards a less pollution-intensive economy through the establishment of a carbon price and support for renewable energy through a variety of schemes and policies.

The first two structural changes are long-running and largely unavoidable without significant and perhaps costly policy interventions, which could cause more problems than they fix. 

The third involves a greater level of immediate political choice. But it has the ability to encourage a shift towards a more diversified, future oriented economic structure. 

And though the introduction of a carbon 'tax' is only likely to have a minor impact in the short-term, the way that debate has polarised the community has added to negative perceptions of the Gillard government. Despite the government's major efforts to redistribute wealth to compensate voters for the price rises associated with the carbon 'tax', it seems that those same voters focus only on increasing costs, particularly the cost of electricity.

All three structural changes have acted together with popular perceptions of government incompetence, profligacy and duplicity – well prosecuted by the opposition and sections of the media – to undermine optimism and support for the government in opinion polls.

I’m not suggesting that these three structural changes fully explain voter dissatisfaction, but they have made a substantial contribution to it. 

I want to finish with some other graphs that should at least allow us to agree that the Australian economy is doing better than most other countries. 

The first is GDP, which shows just how well we've done compared to other advanced economies.  

Another measure which shows the quality of the growth is GDP per capita, which also shows us leading the pack. The real basket case here is the UK economy, which is showing clearly how well austerity works as a solution to recession. The UK is still behind where it was in 2005. Fabulous performance! Take out the German economy and the Euro area would also be doing very poorly. 


The lucky dimension of Australia's success is explained by the terms of trade, which have sky-rocketed in recent years after being in long-term decline for the whole of the twentieth century (see the red line). The forecast is for a significant decline of the terms of trade in coming years - a prediction that makes more informed punters pessimistic. I must admit that I often find myself wondering just how many years can we go without a recession?

One of the major reasons for the high terms of trade is explained by this fabulous graph form the Governor, which shows the relative decline of the US and Europe and the rise of China and India. 

Relative economic decline has been going on since the end of World War II. See here for discussion.

A long-term look at unemployment, also shows how well we've been doing compared to the period before the last recession. In the early 1990s I thought there was a chance that unemployment would continue to trend upwards over economic cycles. I was certainly wrong about that, but those were days where pessimism was perhaps more justified. 

This improved employment outcome has occurred despite a growing percentage of workers since the 1950s as more women entered the labour market. In coming years, the definition of 'working age population' will change as workers stay in the labour market beyond 65, some by choice, others by necessity. It seems certain that as life expectancy increases that working life expectancy will increase. Indeed it will become a fiscal requirement for the state in all economies. 

So cheer up, things could be worse. We could not be having a mining boom and we could have really bad economic policy-makers like those in the UK and Europe who believe that austerity is the solution to economic stagnation.