China's Growth Potential

Sara Hsu

In the news, we have heard about China’s need to rebalance its economy, its slowdown in GDP growth, its debt buildup, and its government’s vague outline for economic reform. There is a great deal of uncertainty about where the world’s second largest economy will head in the near future.

So, how can we think about how growth might and should occur in the coming years? From an economist’s perspective, there are three questions that we can ask regarding potential growth industries:

  1. Where is the demand? Or, which buyers have the incomes and potential for repeat purchases of the product or input?
  2. What are industries or niches with a global comparative advantage?
  3. What areas have the fewest institutional or regulatory barriers to growth?

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China’s Growth Potential

Sara Hsu

In the news, we have heard about China’s need to rebalance its economy, its slowdown in GDP growth, its debt buildup, and its government’s vague outline for economic reform. There is a great deal of uncertainty about where the world’s second largest economy will head in the near future.

So, how can we think about how growth might and should occur in the coming years? From an economist’s perspective, there are three questions that we can ask regarding potential growth industries:

  1. Where is the demand? Or, which buyers have the incomes and potential for repeat purchases of the product or input?
  2. What are industries or niches with a global comparative advantage?
  3. What areas have the fewest institutional or regulatory barriers to growth?

Read the rest of this entry »

Financial Interconnectedness and Systemic Risk: The Fed's FR Y-15

Nikhil Rao, Juan Montecino, and Gerald Epstein

At the onset of the global financial crisis, many financial institutions that engaged in risky practices were on the verge of bankruptcy as the housing market crashed. Top regulators soon discovered that shocks suffered by large banks spread quickly throughout the financial system and then to the whole economy. Those large firms, colloquially dubbed “too big to fail,” were also highly interconnected. Jane D’Arista, James Crotty, and a few other economists had identified these inter-connections, but most economists and policy makers had remained clueless.

As the crisis worsened, Fed Chairman Ben Bernanke, New York Fed President Timothy Geithner and others tried to come to grips with what was happening. They started referring to Citibank, Bank of America, Goldman Sachs and other banks as “systemically important,” though former regulator Bill Black more aptly referred to them as “systemically dangerous”. A systemically important/dangerous institution is one that is so large and well-connected to other firms that shocks it suffers are transmitted to many other participants in that system. When these systemically important firms were failing, taxpayers bore the brunt of the impact as the government was compelled to inject massive amounts of taxpayer funds, or face massive economic losses, damages, and inefficiencies. This, of course, gave rise to the now well-known problem of moral hazard, where actors that do not directly bear the costs of risks are incentivized to pile on more risk. Taking into account the potential effects of systemically important firms, it is easy to understand why they can be closely associated with institutions that are “too big to fail.”

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Financial Interconnectedness and Systemic Risk: The Fed’s FR Y-15

Nikhil Rao, Juan Montecino, and Gerald Epstein

At the onset of the global financial crisis, many financial institutions that engaged in risky practices were on the verge of bankruptcy as the housing market crashed. Top regulators soon discovered that shocks suffered by large banks spread quickly throughout the financial system and then to the whole economy. Those large firms, colloquially dubbed “too big to fail,” were also highly interconnected. Jane D’Arista, James Crotty, and a few other economists had identified these inter-connections, but most economists and policy makers had remained clueless.

As the crisis worsened, Fed Chairman Ben Bernanke, New York Fed President Timothy Geithner and others tried to come to grips with what was happening. They started referring to Citibank, Bank of America, Goldman Sachs and other banks as “systemically important,” though former regulator Bill Black more aptly referred to them as “systemically dangerous”. A systemically important/dangerous institution is one that is so large and well-connected to other firms that shocks it suffers are transmitted to many other participants in that system. When these systemically important firms were failing, taxpayers bore the brunt of the impact as the government was compelled to inject massive amounts of taxpayer funds, or face massive economic losses, damages, and inefficiencies. This, of course, gave rise to the now well-known problem of moral hazard, where actors that do not directly bear the costs of risks are incentivized to pile on more risk. Taking into account the potential effects of systemically important firms, it is easy to understand why they can be closely associated with institutions that are “too big to fail.”

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More on Argentina, the Vulture Funds, and the Sanctity of Contracts

Matias Vernengo

So the Argentine government decided to negotiate with the Vulture Funds to avoid a default, which is eminent if no agreement is reached, well, basically today [June 30]. This is not necessarily bad news, given the potential consequences of a default. It is also one of the frustrating results of the decision of the very Conservative (and pro-bussiness) Roberts Supreme Court. To preside over the negotiations Judge Griesa chose a Wall Street lawyer (who boasts in his CV to have sued Elliot Spitzer for exceeding his authority in investigating Wall Street fraudsters). Argentina is trying to pay today to the ones that renegotiated, but whether that will happen is still not clear (apparently without success).

Note that the consequences of the default could be dire indeed. It would put more pressure on the exchange rate, lead to further depreciation that would be both inflationary and contractionary, since it would basically reduce real wages. The economy would be forced to continue to grow at very low levels, as it has done since 2011, to avoid a current account crisis. In part, the problem exists even if Argentina does NOT default. Meaning the current account is already close to its limit and the reserves are not sufficiently high (around US$ 28 billions or so), and that’s the reason the government has tried to finish negotiations with creditors that did not enter the previous debt reschedulings, including the Paris Club.

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Can "Natural Capital Accounting" Come of Age in Africa? Part 2

Patrick Bond

This is the second part of a two-part series. Part one is available here.

Two years ago, the Gaborone Declaration on Natural Capital Accounting was endorsed by ten African governments: Botswana, Gabon, Ghana, Kenya, Liberia, Mozambique, Namibia, Rwanda, South Africa, and Tanzania. The reason: GDP has “limitations as a measure of well-being and sustainable growth.” Instead, natural capital should from now on be included in “national accounting and corporate planning.”

Even though the World Bank has traditionally lined up in favour of corporate looting of Africa via its “export-led growth” strategies and dogmatic philosophy of economic deregulation, several Bank staff in the “Wealth Accounting and the Valuation of Ecosystem Services” group played a major role in the Gaborone Declaration. Their view of “adjusted net savings” as an alternative to GDP is instructive.

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Can “Natural Capital Accounting” Come of Age in Africa? Part 2

Patrick Bond

This is the second part of a two-part series. Part one is available here.

Two years ago, the Gaborone Declaration on Natural Capital Accounting was endorsed by ten African governments: Botswana, Gabon, Ghana, Kenya, Liberia, Mozambique, Namibia, Rwanda, South Africa, and Tanzania. The reason: GDP has “limitations as a measure of well-being and sustainable growth.” Instead, natural capital should from now on be included in “national accounting and corporate planning.”

Even though the World Bank has traditionally lined up in favour of corporate looting of Africa via its “export-led growth” strategies and dogmatic philosophy of economic deregulation, several Bank staff in the “Wealth Accounting and the Valuation of Ecosystem Services” group played a major role in the Gaborone Declaration. Their view of “adjusted net savings” as an alternative to GDP is instructive.

Read the rest of this entry »

China's Wealthy Getting Richer in a Declining Economy

Sara Hsu

As China’s economy declines, inequality is growing. A recent study by Yu Xie and Xiang Zhou finds that China’s Gini coefficient surpassed 0.50 in 2010, remaining high through the present period. Despite the decline in investment and production, the sheer number of wealthy is increasing—Forbes states that China had 157 billionaires in 2013. The number of high net worth individuals, individuals with over US$1 million of investable wealth, rose by 17.8% in 2013 to 758,000, according to consultancy Capgemini and RBC Wealth Management.

Rapidly increasing wages in the financial and IT industries, contrasted with stable or slowly increasing wages in most other sectors (for example, utilities, construction, and transportation) has led to a sharp divergence between the income of the average worker and incomes of workers in privileged industries. What is more, the skyrocketing pay of top executives has enriched certain individuals over the masses.

China’s private financial wealth amounts to US$22 trillion, according to the Boston Consulting Group. This is equivalent to well over double China’s GDP in 2013. While the average per capita income was US$6,747 in 2013, Chinese executives averaged well over US$100,000. The poorest workers have also face delayed or partial payment of wages. In many cases, this has led to protests and legal action against employers.

Read the rest of this entry »

China’s Wealthy Getting Richer in a Declining Economy

Sara Hsu

As China’s economy declines, inequality is growing. A recent study by Yu Xie and Xiang Zhou finds that China’s Gini coefficient surpassed 0.50 in 2010, remaining high through the present period. Despite the decline in investment and production, the sheer number of wealthy is increasing—Forbes states that China had 157 billionaires in 2013. The number of high net worth individuals, individuals with over US$1 million of investable wealth, rose by 17.8% in 2013 to 758,000, according to consultancy Capgemini and RBC Wealth Management.

Rapidly increasing wages in the financial and IT industries, contrasted with stable or slowly increasing wages in most other sectors (for example, utilities, construction, and transportation) has led to a sharp divergence between the income of the average worker and incomes of workers in privileged industries. What is more, the skyrocketing pay of top executives has enriched certain individuals over the masses.

China’s private financial wealth amounts to US$22 trillion, according to the Boston Consulting Group. This is equivalent to well over double China’s GDP in 2013. While the average per capita income was US$6,747 in 2013, Chinese executives averaged well over US$100,000. The poorest workers have also face delayed or partial payment of wages. In many cases, this has led to protests and legal action against employers.

Read the rest of this entry »

Climate Policy as Wealth Creation, Part 5

James K. Boyce

This is the final installment of a five-part series on climate policy adapted from regular Triple Crisis contributor James K. Boyce’s March 31 lecture for the Climate Change Series at the University of Pittsburgh Honors College. This installment lays out his case for a cap-and-dividend policy, which Boyce argues would put into practice the “widely held philosophical principle … that we all own the gifts of creation in equal and common measure.”  The first four installments of the series are available here, here, here, and here.

The full lecture and subsequent discussion are available, as streaming video, through the University of Pittsburgh website. Click here or on the image below.

The Case for Cap and Dividend

A carbon price is a regressive tax, one that hits the poor harder than the rich, as a proportion of their incomes. Because fuels are a necessity, not a luxury, they occupy a bigger share of the family budget of low-income families than they do of middle-income families, and a bigger share for middle-income families than for high-income families. As you go up the income scale, however, you actually have a bigger carbon footprint—you tend to consume more fuels and more things that are produced and distributed using fuels. You consume more of everything; that’s what being affluent is about. If you’re low-income, you consume less. So in absolute amounts, if you price carbon, high-income folks are going to pay more than low-income folks.

Well, under a policy with a carbon price, households’ purchasing power is being eroded by that big price increase, that big tax increase. But money is coming back to them in the form of the dividend. Because income and expenditure are so skewed towards the wealthy, the mean—the average amount money coming in from the carbon price and being paid back out in equal dividends—is above the median—the amount that the “middle” person pays. So more than 50% of the people would get back more than they pay in under such a policy. As those prices are going up, then, people will say, “I don’t mind because I’m getting my share back in a very visible and concrete fashion.” I would submit to you that it’s politically kind of fantastical to imagine that widespread and durable public support for a climate policy that rises energy prices will succeed in any other way.

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