1. Noah Smith has a good compilation on the application of industrial policy in over a dozen developing countries. He's sympathetic to the Joe Studwell-Ha Joon Chang school which strongly believes in the use of industrial policy in achieving economic growth. This blog has been a staunch advocate of the same for a long time.
Smith points to an IMF paper which is a definitive call for industrial policy, albeit with some cautions
We suggest three key principles behind their success: (i) the support of domestic producers in sophisticated industries, beyond the initial comparative advantage; (ii) export orientation; and (iii) the pursuit of fierce competition with strict accountability.
This is essentially a summary of Studwell.
2. Adani too important to fail facts of the day,
It accounts for 7% of the capital spending of India’s 500 biggest listed firms. The group has promised to spend $70bn by 2030 on green investments—part of a cherished government plan to make India a green superpower. The Centre for Monitoring Indian Economy (cmie), a research firm, keeps a database of big current and planned capital expenditures in India, both public and private. Adani accounts for 3% of the full pipeline of projects by value, but almost 10% of the newer projects, announced in the fiscal year that ended in March 2022...Its seven airports handle 23% of India’s passenger traffic; its dozen ports receive or dispatch around 30% of India’s international freight; its recently acquired cement business churns out 14-20% of India’s total; its warehouses hold 30% of Indian grain; it is the country’s biggest private generator of electricity from fossil-fuel plants (and a big one from renewables) and so on.
3. Ruchir Sharma points to the remarkable stability of the Thai Baht since the 1998 crisis as a case study in the success of economic orthodoxy. The country was the epicentre of the East Asian financial crisis, which was triggered by the implosion of the baht, resulting in contraction of the economy by nearly 20%, collapse of stocks by more than 60%, and devaluation of baht against the dollar by more than half.
The baht trades at 33 to the dollar, not much lower than 26 before the crisis. Yet Thailand hardly feels expensive: a foreign visitor can find a 5-star hotel room for under $200 a night, a fine dinner in Phuket for $30. Despite the strong baht, Thailand is globally competitive... After 1998, many emerging societies turned financially conservative, especially those hardest hit in south-east Asia... nowhere in the region did a government turn more economically orthodox than in Thailand, avoiding the excesses that can scare off outsiders and tank currencies... Since 2000, Thailand’s government deficit has averaged 1 per cent of gross domestic product, less than half the average for emerging economies. Its central bank has been similarly cautious, keeping rates relatively high and broad money supply growing at 7 per cent a year, third lowest among major emerging economies. The ultimate pay-off for orthodoxy is low inflation. Thai inflation has averaged just over 2 per cent, the same as the US, a rare feat for an emerging country. Among other emerging economies, only China, Taiwan and Saudi Arabia have had lower inflation than Thailand since 1998...Thailand remains among the most open emerging economies. Trade has risen from 80 per cent of GDP in 1998 to more than 110 per cent today. The external deficits that foretold the crash gave way to surpluses, as Thailand built on its strengths in tourism and manufacturing, which generates a quarter of GDP... Since the crisis, tourism has more than doubled as a share of GDP to 12 per cent, becoming an unusually large source of foreign exchange... its per capita income has more than doubled to nearly $8,000, up from $3,000 before the crisis. Moreover, Thailand has achieved financial stability despite constant political upheaval, including four new constitutions in the last 25 years... the Thai baht has sealed its unlikely claim to be the world’s most resilient currency — and a case study in the upsides of economic orthodoxy.
4. Germany's tri-party coalition government of Social Democrats, Greens, and liberal Free Democrats which assumed power in December 2021 is a great example of political accommodation,
Lars Klingbeil, SPD chief, has driven the SPD to acknowledge the flaws of its Russia policy in a recent policy paper. Berlin suspended the Russian gas pipeline Nordstream 2 two days before the invasion. Shortly after, it lifted a legal ban on sending weapons into war zones. Germany now is the third-largest supplier of weapons, valued at €2.3bn, to Ukraine. Standing up to the Kremlin came more naturally to the human rights-minded Greens, headed by foreign minister Annalena Baerbock and economics minister Robert Habeck. Decoupling from Russian fossil fuel was a welcome step towards the transition to renewables — astonishingly, completed in less than a year. Yet it came at a steep price to their principles: a return, albeit temporary, to coal mining and nuclear power, and begging trips to Qatar and Saudi Arabia for liquid natural gas. The free-market, debt-hating FDP, who secured the powerful finance ministry for Christian Lindner, their leader, found themselves signing off on immense emergency spending bills: a €100bn special investment fund for the armed forces, and a €200bn offset package for German industry and consumers to buffer the impact of the Russian energy cut-off.
5. On the regeneration of Eindhoven, the base for ASML, the world's most advanced chip etching machines,
Eindhoven’s tech sector has attracted EU commissioners, who routinely visit in an effort to understand how a place hit by industrial decline in the early 1990s transformed into a regional tiger economy, expanding by 8 per cent annually. Its companies and academics file almost 500 patents per 100,000 inhabitants annually, one of the highest rates in the world. And a quarter of Dutch private sector research and development, €3bn a year, is spent here. A big chunk comes from ASML, Europe’s most valuable semiconductor company with a market capitalisation of €250bn. Signify, the former Philips lighting division, chipmaker NXP and truckmaker DAF are also innovators based in Eindhoven... ASML’s unique extreme ultraviolet (EUV) lithography machines could not have been built without VDL, a local family-owned company that focuses on solving complex engineering challenges... The most advanced machines are worth about $170mn each and, since 2019, their export to China has been banned by the Dutch government... The company still has a €40bn order backlog and is hiring around 250 people a month in the city and enlarging its factory to meet demand.
Eindhoven's revival is a tribute to the Dutch Polder model of government which brings politicians, companies, and unions together to find joint solutions
By the early 1990s, big employers such as Philips and DAF were shutting factories in the face of cheap competition from Asia. Mayor Rein Welschen invited the head of the local employers’ association, the technical university and business leaders to his home and they came up with a plan to fight back. When Philips shifted its headquarters to Amsterdam in 2001, public and private sectors worked together to repurpose the labs and retained the staff... Another Philips research base became the High Tech campus, home to more than 260 companies including TomTom, Siemens and Huawei. US investment fund Oaktree bought it in August 2021. Companies there are developing artificial intelligence, quantum computing and photonics — microchips powered by light rather than electricity. “This is the smartest square kilometre in the world,” said Johan Feenstra, chief executive of Smart Photonics. It has taken advantage of old Philips clean rooms to set up a production line for photon chips. They can cut power use by data centres and be deployed in remote areas...
Eindhoven University of Technology is one source of recruits. Robert-Jan Smits, the president, said the institution believed in the virtue of involving students in practical projects, such as the world’s longest 3D-printed bridge at Nijmegen. “Eindhoven is unique. Myself, the CEOs and politicians, we see each other often. On my bicycle I can get to ASML, Philips and NXP in no time,” Smits said. “We are for the region, with the region and by the region. Our job is not to make ASML bigger. It is to create more ASMLs.”
6. As Air India does a 470 aircraft order with Airbus and Boeing, it's interesting that all the top 3 and four out of top 10 aircraft orders in the last decade have come from Indian airline operators.
Some serious diplomatic capitalisation appears to have happened around this deal, which is a welcome change in India's foreign policy management.
7. R&D spending facts of the day,
The world invests a little over 2 per cent of gross domestic product (GDP) in R&D. This spending is hugely concentrated. Of the $2 trillion spent on global R&D, the top five (of over 180) countries — the US, China, Japan, Germany and South Korea — account for three-quarters. In-house spending by industry accounts for a little over two-thirds of all R&D investment, with the balance split 60:40 between higher education and government laboratories. Within industry, the top five industries — pharmaceuticals, automobiles, technology hardware, software and electronics — account for 73 per cent of all industrial R&D. And within those industries, it is highly concentrated in a few companies, with the top 20 companies accounting for 22 per cent of global industrial R&D.
And India's R&D expenditures,
In total R&D investment India rank 16th, below Israel, a country with a GDP one-sixth ours, and a population under one-hundredth of ours. In-house R&D by industry lags even further behind, with $7 billion in investments and ranking 22nd between Poland and Singapore. The net effect is that Indian firms invest 0.3 per cent of GDP in in-house R&D, compared to a world average of 1.5 per cent. The European Commission each year gives us a very helpful table that lists the top 2,500 investors in R&D worldwide. These firms account for around three quarters of the global industrial R&D, so are representative of the complete picture. India has 24 firms among the 2,500, against 822, 678, 233 and 114 from the US, China, Japan and Germany, respectively. Considering the Centre for Technology, Innovation and Economic Research (CTIER) list of top 100 R&D spenders, there would be 31 Indian firms in the global 2,500 R&D spenders...
India has no firms in five (technology hardware, electronic equipment, aerospace, general industrials, construction materials) of the 10 top industrial sectors, and just one firm in two (chemicals and industrial engineering). We have a limited presence in three of these 10 sectors (pharmaceuticals, software and auto). Second, and most strikingly, we are missing even one giant investor in in-house R&D. Our top ranked firm, Tata Motors, with an annual R&D spend of $3.5 billion globally, clocks in at number 58 ($400 million of this is in India). The most telling comparison is that each of the top seven firms invests more than all of India (every firm, university and government laboratory put together). And even firms #24 (Honda), #25 (Qualcomm) and #26 (Bosch) each invest more in R&D than all Indian industry combined at over $7 billion each... In software, we have some of our most prominent and profitable companies, but seriously lag in R&D, investing 1 per cent of sales to a global average of 10 per cent. One often hears the argument that our software firms are service firms to the world’s product firms. But most of the top 10 Chinese software firms are also service firms. Our top 10 software firms invest 1 per cent in R&D to 8 per cent in China.
8. A summary of the soft landing case,
Supply chains are operating much more normally, inflation has come off the boil, the Fed is dialling interest rate rises down in size, rather than up, and, on a related note, corporate America is no longer saddled with such an outlandishly strong dollar. The data on employment may also be a little funky, but the direction of travel is clearly positive. Add into the mix: China is emerging from Covid lockdowns and Europe seems to have dodged a frigid and punishingly expensive winter.
9. Are young people falling out of love with driving cars?
By 1997, 43% of America's 16-year-olds had driving licences. But in 2020, the most recent year for which figures are available, the number had fallen to just 25%. Nor is it just teenagers. One in five Americans aged between 20 and 24 does not have a licence, up from just one in 12 in 1983. The proportion of people with licences has fallen for every age group under 40, and on the latest data, is still falling. And even those who do have them are driving less. Between 1990 and 2017 the distance driven by teenage drivers in America declined by 35%, and those aged 20-34 by 18%. It is entirely older drivers who account for still increasing traffic, as baby-boomers who grew up with cars do not give them up in retirement.In Britain the proportion of teenagers able to drive has almost halved, from 41% to 21%, in the past 20 years. Across the countries of the European Union there are more cars than ever. Yet even before the covid-19 lockdowns emptied the roads, the average distance travelled by each one had fallen by more than a tenth since the turn of the millennium... Even in Germany, where the internal-combustion engine is an economic totem, drivers are pushing the brakes. The trend is especially strong in big cities. One study of five European capitals—Berlin, Copenhagen, London, Paris and Vienna—found the number of driving trips made by working people was down substantially since a peak in the 1990s. In Paris the number of trips made per resident has fallen below the levels of the 1970s.
10. Is there a case for bringing back money supply into the central banks' models for rate setting,
Since the 1980s central banks have generally focused on interest rates rather than trying to fix the amount of money in circulation. Money does not even feature in most state-of-the-art models of inflation, which are focused on interest rates, the real economy and inflation expectations. Yet money supply was one of the few indicators to provide advance warning of inflation: across the oecd, a broad measure of it rose by 12% in just six months after February 2020. A recent study by economists at the Bank for International Settlements finds that countries with stronger money growth saw markedly higher inflation, and that incorporating money growth into inflation forecasts would have improved their accuracy.
Proponents of this view feel that inflation may taper off.
Yet this sort of “immaculate disinflation” is possible, claim one group of economists: those who study money. In 2020 they were among the few to worry about a burst of inflation. Today they are among the most open to the idea that inflation—of both prices and wages—could go away relatively painlessly. Their argument is that the world economy has been suffering what used to be called a “monetary overhang”, in which it must work off a one-time change to the supply of money caused by a burst of stimulus. Once that overhang has dissipated, things should return to normal, argues Chris Marsh of Exante Data, a research firm. Monetary overhangs, which were experienced after the second world war in the rich world and in many post-Soviet economies in the 1990s, have not typically led to persistent inflation.
11. Finally, the reinvention of malls in the US, which have been losing business and declining,
During the pandemic, malls found themselves suddenly having to fill thousands of square feet left vacant by struggling retailers like J.C. Penney and Gap. Others realized too much space was allocated to their parking lots. Since the internet disrupted consumer shopping habits, malls have been trying to make a case for their existence. As old anchor stores have downsized, closed or filed for bankruptcy, malls have made space for grocery-store chains, climbing gyms, Covid-19 vaccine sites and dialysis centers in an effort to increase foot traffic and give shoppers a reason to stay longer... mall owners face challenges, including evolving consumer tastes, zoning changes and local resistance...The combination of malls and apartments is not a new concept, but more landlords across the country are rethinking their use of space in this way. The strategy builds on the live-work-play communities that are built to accommodate the needs of its residents and have been become popular in the past decade with young adults seeking amenities within walking distance... The addition of medical services within shopping centers is a popular trend as well.
This is a testament to the strength of the American market and its signals that businesses can reinvent themselves in response to changing market conditions.
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