1. As the pandemic bites, the Andean economies with private pension systems have been indulging in what FT has noted with concern as "pension populism" by allowing subscribers greater withdrawals from pension pots. Peru has voted to allow a second withdrawal and Chile is following suit.
2. Michael Pettis puts Xi Jinping's plans to double the economy by 2035 in perspective,
Between 1980 and 2010, Chinese GDP doubled four times, but debt levels were low and rose slowly. However, between 2010 and 2020 when GDP doubled again, China did so by tripling its total debt burden to $43tn, so that it now stands, officially, at over 280 per cent of GDP. Assume conservatively that the relationship between debt and growth doesn’t change, and China’s debt-to-GDP ratio will have to rise to over 400 per cent by 2035 if it is to double GDP again. This is a level that would be unprecedented in history. Everywhere else, growth collapsed long before debts reached levels close to this. China can in principle reduce its dependence on debt by shifting domestic demand from investment to consumption, as Beijing has long proposed. Yet this requires that the household income share of GDP rise from roughly 50 per cent today to at least 70 per cent.
And there is the demographic headwind to overcome,
From the late 1970s, China benefited from a rapidly rising working-age population, but this reversed around a decade ago. In fact, over the next 15 years, while China’s population will grow by an estimated 1.5 per cent, its working population will decline by an astonishing 6.8 per cent, and will continue to decline for the rest of the century. To put it in context, while today there are 4.7 Chinese of working age for every equivalent American, by the end of the century there will be only 2.4... Achieving GDP growth of 4.7 per cent with a declining working population requires as much productivity growth per worker as 5.2 per cent GDP growth with a stable working population. Growth in Chinese labour productivity has in fact fallen steadily since 2010. Looking ahead, a declining working population requires that the pace of this decline in productivity drops by nearly two-thirds if China is to double GDP by 2035.
3. A bearer bond issued in perpetuity in 1648 by Stichtse Rijnlanden, a Dutch water authority, and currently owned by Yale University's Beinecke Rare Book and Manuscript Library has received $153 in interest for a period of 12 years. The original interest rate of 5% has since been revised down to 2.5%.
4. The surreal alternative reality of China and its Bigtech. Martin Lau, President of Tencent Holdings and Daniel Zhang, Chairman of Alibaba Holdings have both talked about the need for more regulation of the tech industry.
"As technology companies become bigger and more important to the economy, I would say more regulations to reflect the new reality are needed," Lau said.
Both have welcomed the governments moves to restrict anti-competitive practices by tech companies, including selling at lower than cost.
"Development and governance help each other forward and are mutually dependent," Zhang said. "Relevant government agencies are seeking feedback on policies and regulations to ensure the orderly development of the internet economy. We think this is very timely and necessary."
The State Administration for Market Regulation has released a 22-page document that outlaws some tactics used by internet companies to gain users.
Practices such as selling goods below cost, price discrimination based on customer data analytics and exclusive sales agreements would be in violation of the proposed regulations. According to the document, the guidelines were drafted "to prevent and stop monopolistic practices on internet platforms, reduce the costs of compliance and law enforcement, protect fair market competition, as well as safeguard the interest of consumers."Whatever the underlying motivations, it's impressive that the regime has used the crisis of Ant Financial's aborted IPO to mount this regulatory drive, something which other countries have shied away from.
The result is that between 1990 and 2002, Japan had the lowest average per capita gross domestic product growth rate in the G7, and from 2003 through 2019, it has had the third highest per capita GDP growth rate and the second highest productivity growth rate... Japan may in the end come out back on top in its economic peer group for the next decade, having done a better job on public health management than the EU or US, and having seen the smallest decline in its productivity growth rate since 2003.
On public debt accumulation, this is an interesting departure from orthodoxy,
Japan, however, does herald good news for us all on the fiscal front. A high-income market democracy can respond to secular stagnation with sustained fiscal stimulus, and that can continue to stimulate private demand. Substantial public debt can accumulate to levels previously thought dangerous and the warning sign of fiscal danger to watch is when private investment bids up interest rates, not before. Some public investment can indeed be supply and productivity enhancing; attention should be on assessing the quality, not the spectre of private capital misallocation.
Robin Harding and Chris Giles have a good article on Japanification. The persistent low rates is the foremost sign of Japanification.
7. Raj Chetty interview in Times. This is a good point about Covid job losses in the US,
They have to be outside their house because of the nature of their jobs, whereas high-income folks can typically self-isolate. And so what’s ended up happening is basically, because of this reduction in spending by the rich, it’s lower-income people who’ve borne the incidence of that shock in losing their jobs. And what we’re finding now is we’ve had, essentially, a V-shaped recovery for high-income folks, where their employment levels are back to where they were pre-Covid. Whereas for lower-income folks, you’re still 20% below, like 6 million jobs below where you were... So in the past, in previous recessions, what you’d tend to see is that it’s lower-income folks in less affluent cities who took the hardest hit. Turns out, in this recession, it’s actually flipped. So Silicon Valley, for example, has some of the highest unemployment rates for low-income people.
8. Shankar Acharya has a good cautionary article about the new game in the town, production linked subsidy.
First, the fiscal cost is not trivial, especially in a context of extreme fiscal stress. The “capping” is not easy if the number of qualifying firms and incremental production is substantial in a particular sub-sector. Second, as in the case of sector-specific tariffs, PLIs also beg the basic question: Why does the government want to play favourites with particular sub-sectors? What superior knowledge do civil servants have compared to risk-taking businessmen in competitive markets? Third, how accurately can incremental production or sales be gauged? Conversely, how easy or difficult is it for firms to “game” the system, especially if the production is occurring in existing firms and their “brownfield” plants? Fourth, the implementation of the scheme requires an application/permission system allowing for significant discretionary elements. Fifth, if each PLI scheme is going to be run by different ministries and their PMAs it is easy to envisage a growing and hydra-headed bureaucracy, sprouting different qualifying criteria, incentive structures and their quality of implementation. Each PLI scheme could, over time, degenerate into its own little licence-permit raj, or, more accurately, subsidy-permit raj.
My concerns are less about picking winners etc. The big concern is with its administration where the potential for its degeneration into a subsidy for inefficient producers is very high. An export competition dimension would have addressed that problem. Now with import substitution, there is a real danger of this becoming a prop for inefficient manufacturing.
9. The Amazon Vs Reliance battle over Future Retail appears to be teachable example at multiple levels. In the contest that pits the choices of exploitation by a domestic behemoth or a global behemoth, is there no third alternative? What about adherence to norms of some global rule of law, especially at a time when India is courting foreign investors? What does it tell about corporate governance standards in Indian companies? There appears a compelling case that the false patriotic fervour is being used as a cover to undertake deeply questionable corporate practices.
It is also disturbing that courtroom arguments in the case involving reputed lawyers have degenerated into populist rhetoric.
10. Francis Fukuyama, Barak Richman and Ashish Goel make the case for reining in Big Tech, not on economic grounds, but on being threat to democracy. They point to these companies control over influencing public opinion and control over private data of citizens as being particularly disturbing for the prospects of democracy.
As solution, they point to the use of middleware software,
If regulation, breakup, data portability, and privacy law all fall short, then what remains to be done about concentrated platform power? One of the most promising solutions has received little attention: middleware. Middleware is generally defined as software that rides on top of an existing platform and can modify the presentation of underlying data. Added to current technology platforms’ services, middleware could allow users to choose how information is curated and filtered for them. Users would select middleware services that would determine the importance and veracity of political content, and the platforms would use those determinations to curate what those users saw. In other words, a competitive layer of new companies with transparent algorithms would step in and take over the editorial gateway functions currently filled by dominant technology platforms whose algorithms are opaque.
11. The Bank of Japan has announced an unrealised profit of $56 billion on its stock market investments valued at over $400 bn (end-September 2020), which leaves it owning 6% of the Tokyo Stock Exchange. The BoJ does not directly buy stocks but invests in them through a range of ETFs.
12. Articles by Raghuram Rajan and Viral Acharya, Shankar Acharya, Vijay Kelkar and Arvind Subramanian, Amol Agrawal, and Tamal Badopadhyay on the proposal of giving banking licenses to corporate groups.
13. John O Sullivan makes a very important point about today's startup industry,
But unlike the railways, brewers, distillers and mines of the Fleming era, today’s new firms have no great need of capital. A young technology firm can rent computing power from the cloud, download basic software from the internet and use a range of cheap, outsourced services to help it grow. Startups are staying private for longer. When they list, it is because the founders need to cash out or (as with the latest rash of tech IPOs) when the money on offer in the public markets is simply too good to turn down. It is not to raise capital for the business.
14. India's industrial share of GDP (manufacturing, mining, construction, electricity generation and utilities) continues its disturbing downward trend despite all efforts to revive it.
At 27.5% of GDP, industry's share is the lowest among all major developing countries, far lower than the Asian average of 31.1%. In the past three years, India's industrial output rose by just 17% cumulative in dollar terms, compared to 48%, 38%, and 29% respectively for Bangladesh, Vietnam, and China.
15. Patrick Blagrave and Weicheng Lian (HT: Mostly Economics) have an IMF working paper on India's inflation performance and the role of the flexible inflation targeting (FIT) regime which was announced in February 2015 and adopted in September 2016. They write,
We find that the passthrough of import prices to headline inflation is weaker in India than in other emerging markets. Also, headline inflation was much more backward looking in India than in other countries, mainly driven by the non-core-inflation component. Then, we show that inflation expectations have become more anchored based on two patterns. First, after 2015, core inflation became less likely to converge to headline inflation. Second, we find that medium-term inflation expectations in India were less likely to be revised and became less sensitive to inflation surprises.We argue that domestic factors play a role in these structural changes. We show that food price inflation experienced a shift in its responsiveness to the gap between headline and core inflation, which contributes to more anchored headline inflation. We highlight that this change comes from the domestic rather than the international component of India’s food price inflation... One caveat for our analysis is that we do not rule out a possibility that subdued food price inflation caused by persistent supply shocks stood behind the patterns we document. Nevertheless, our findings support the notion that FIT is performing well in India.
16. Reetika Khera and Meghna Yadav (again HT: Amol Agrawal) do a much-needed analysis of the ratio of executive compensation of the top executive to median employee for the NIFTY 50 companies. Their findings on the ratios only confirm the trends globally. The average ratio of 259 is comparable with those of developed countries.
I am inclined to argue that this ratio will only increase over the years since the salaries of the Indian executives remain very small by global standards (even adjusting for various factors). It is a different matter that salaries of median and lower employees is even more disproportionately lower. As the economic integration proceeds, the rise of executive salaries will far outpace the rise of employee salaries.
17. Finally, Andy Mukherjee's long essay on the history of the Indian economy over the last three decades and pessimism about its prospects.
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