Monthly Archives: October 2005

China: Eating our Lunch or Taking us to Dinner?

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That’s the dilemna posed by the latest paper from Laurence Kotlikoff Hans Fehr and Sabine Jokisch: Will China Eat Our Lunch or Take Us to Dinner. Simulating the transition paths of economies in the U.S., EU, Japan, and China the paper develops a dynamic, life-cycle, general equilibrium model to study their interdependent demographic, fiscal, growth and current account evolution.

Having taken a close look at the respective population dynamics they point out that as a consequence of relatively high fertility and net immigration rates, the U.S. population is projected to increase from 275 million in 2000 to 442 million in 2100. In Europe – as we all already know – population may well fall over the next century from 375 to 340 million, while in Japan, the population falls from 126 million to 85 million. However the projections show the Chinese population decreasing by even more – from 1.3 billion to 1.2 billion. Although China is in fact aging rapidly, its saving behavior, growth rate, and fiscal policies are currently very different from those of developed countries. Kotlikoff et al find that if successive cohorts of Chinese continue to save like the current cohorts, if the Chinese government can restrain growth in expenditures, and if Chinese technology and education levels ultimately catch up with those of the West and Japan, the developed world’s long run future looks much brighter. China eventually becomes the world’s saver and, thereby, the developed world’s savoir with respect to its long-run supply of capital and long-run general equilibrium prospects.

In a recent article on declining yield differentials William Pesek (Hat Tip Brad Setser) asks “What’s China got to do with all this?”. Perhaps the paper by Kotlikoff et al offers him part of the answer. (I have more on this paper here).

In No Hurry

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The EU Observer reports today on how some states are decidedly tardy in producing their Lisbon Agenda action plans:

Embassies are due to hand in their national plans, consisting of 30-40 page dossiers with statistical annexes, by the weekend, with EU experts flying back and forth to member states in the past few weeks to help finalise the texts.

France, Sweden and Denmark told EUobserver that they will not make the Saturday deadline however, while question marks hang over Germany and Poland as well.

Paris hopes to send in its document by the end of this month, Stockholm is aiming for 21 October and Denmark for the “next few weeks”, citing delays over the late sitting of parliament and translation back home….

The UK, the Netherlands, Greece, the Czech republic, Hungary, Slovakia and Slovenia confirmed that they will get their plans in by the weekend however, with the Czech republic claiming to have had its text finished months ago.

Mind you, we should put all this in some kind of context, according to another EU Observer article the OECD (see this post) is at pains to convince some member states that they really do need to seriously address their early retirement culture!

Europe needs to stop subsidising the early retirement of its citizens, despite social protests caused by pension reforms, according to a new OECD report…….According to the paper, several European countries have been striving to sustain their early retirement culture, introduced in the past as a way to tackle high unemployment among young people

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Feldstein: A Eurosceptic at the Fed?

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Bloomberg this morning has a review of the pros and cons of Marty Feldstein as Alan Greenspan’s successor. One thing they don’t touch on is what the implications might be of having someone at the head of the US Federal Reserve who is pretty much convinced the Euro can’t work.

“Marty has something of a tin ear for politics, and that would be a problem in the Fed chairman’s job,” says William Niskanen, who followed Feldstein as head of the President’s Council of Economic Advisers in 1984 and is now chairman of the Cato Institute, a free-market research group in Washington.

Feldstein finished second only to Ben Bernanke, chairman of the White House Council of Economic Advisers, when 104 financial professionals were asked last month to name Greenspan’s most likely successor. Bernanke got 38 percent of the vote and Feldstein 31 percent in the survey, which was conducted by Stone & McCarthy Research Associates, a Princeton, New Jersey, consulting company. No other candidate received more than 10 percent.
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Hanging In The Balance

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UK property prices have been hovering dangerously around the zero price growth mark for the last couple of months. Year on year growth is of course dropping substantially and we are now just below the 3% annual mark. Definitely one to keep watching.

UK house price inflation fell in August according to the Office of the Deputy Prime Minister, giving further indications of a slowdown in the property market. Annual inflation fell to just 2.8 per cent in August, down from 4 per cent in July and 13.6 per cent a year ago.

The ODPM reported that house price growth in London, which tends to lead overall trends in the market, slowed to 0.8 per cent from 0.9 per cent in July. The average house price in the UK barely changed in August, standing at �186,208 compared with �186,207 in July.

Some analysts have concluded that these numbers suggest that the market might be stabilising at current levels. …But there will be continued concern that as house price inflation on all the main indicators heads towards zero, the current stability in the market will not last. Nervousness is likely to increase as property investors realise they can no longer rely on the prospect of capital gains to offset the reality of low rental yields.

We Was Robbed

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In Brazilian football this seems to be the case, quite literally!

For all that they say about detesting corruption in public life, most ordinary Brazilians do not see it as something with a direct impact on their own lives. But one scandal has caused personal offence to millions.

“I was knocked sideways,” says Catarina Pedroso, an 18-year-old psychology student and dedicated follower of Palmeiras, one of the big São Paulo football clubs. “At matches everyone shouts out juiz ladrão [“referee, you’re a thief”] but you don’t expect it actually to be true.”

Older and Older

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I think this is no longer news, but the OECD held a press conference yesterday to inform us that we are all living longer, but we still aren’t working longer, and that somehow these two facts don’t fit with our existing pension arrangements. Well perhaps it isn’t exactly news, but it still needs to sink-in somewhere. So I guess this is why yesterday the OECD were drawing everyone’s attention to a new report they have prepared on the basis of 21 separate country reports compiled as part of a thematic review of policies to improve labour market prospects for older workers initiated in 2001. The whole thing will get icing and a cherry at what is being called a High-Level Policy Forum to be held next Tuesday (18 October) at Palais d’Egmont. More details on the reports and the accompanying older workers forum can be found here).

At present, many public policies and workplace practices discourage older people from carrying on working. On average in OECD countries, fewer than 60% of people aged between 50 and 64 have a job, compared with 75% of people in the 25-49 age group (see Chart 1).

Such policies and practices are relics of a bygone age and unsustainable at a time when population ageing is straining public finances and holding back higher living standards. If there is no change in work patterns, the ratio of older inactive persons per worker will almost double in the OECD area over the next decades, from around 38% in 2000 to just over 70% in 2050.

This, in turn, would lead to higher taxes and/or lower benefits, coupled with slower economic growth. On the basis of unchanged patterns, OECD analysis shows, GDP growth per capita in the OECD area could shrink to around 1.7 % per year over the next three decades, about 30% below the average annual rates witnessed between 1970 and 2000.

Incidentally, I think this figure for sustained *per capita* growth of 1.7% across the OECD over the next decades is extraordinarily optimistic. If you strip out some of the large economies where the ageing problems are considerably more moderate – US, UK, France – I juts can’t see how the rest are going to sustain any per capita increase at all. What they will be into is damage containment. Unfortunately, as we can see, they seem to be in no special hurry to get on with even this.

Delphi – Consulting The Oracle

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The filing for Chapter 11 bankruptcy last Saturday by Delphi, the No. 1 U.S. car-parts supplier, is making waves, both in the stockmarkets and in the news columns. Stephen Roach had a whole GEF post devoted to the issue yesterday. This morning it is the turn of the FT, which has a (subscription only) piece that cites Delphi CEO Steve Miller to the effect that the pension liability conflicts which lie behind the bankruptcy are only a foretaste of ‘the intergenerational warfare’ that is to come:

“The bankruptcy of Delphi, a car parts maker employing 180,000 people worldwide, marked a “flash point” between the interests of current and former workers, its chief executive said on Monday.

Warning of “hard choices ahead”, Steve Miller, who previously managed US steel and airline bankruptcies, said the conflict offered a foretaste of an “inter-generational warfare” facing much of the industrialised world.“

And then there’s Macedonia

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Slovenian Foreign Minister Dimitrij Rupel has just said that Macedonia has “real chances” to become the next candidate for EU membership.

This would be no big deal — the Slovenes have long had a soft spot for the Macedonians — except that Rupel is wearing two hats right now; he’s also Chairman-in-Office of the OSCE. And he’ll be hosting the OSCE Ministerial Council this December, in Ljublana. That means he speaks with a lot more gravitas than just another small-country foreign minister.

“I cannot say when Macedonia’s entry talks will be launched, but express hope that the country will soon acquire the candidate status,” Rupel said. “Slovenia will support Macedonia’s candidate status, which may happen in December.”
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Kanzlerin

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German media are now reporting that the SPD has agreed to let the largest parliamentary faction put forward the candidate for Chancellor. For three weeks, the Social Democrats had been arguing that as the largest party represented in the Bundestag, they had the right to name the candidate. (Germany’s Christian Democrats come from two parties, one from Bavaria and one from everywhere else, but they work together, mostly, as a single parliamentary faction.)

The SPD has given way on this point, clearing the path for Angela Merkel to become Germany’s first female Chancellor.

In return, the SPD will get eight of fourteen ministires, including finance and foreign affairs. The head of the CSU, who lost to Schroeder in 2002, will go to Berlin as minister for the economy. Since the SPD will head the ministry of finance, which is responsible for the budget, this will ensure that the traditional trench warfare between these two ministries will continue unabated.

None of the reports say anything about what Chancellor Schroeder will be doing next. The political folks I’ve talked with can’t imagine him being #2 behind Merkel, even as foreign minister, but they also have a hard time picturing him just walking away.

We’ll know much more at 2:30 this afternoon, when both parties have press conferences scheduled.

PS: The trial balloon for the weekend was the introduction of tolls on the Autobahn, roughly EUR 100 per year. Between that and a VAT hike, the grand coalition might bring Germany the worst of both worlds.

African Migrants ‘Dumped’ In The Desert

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The scandal of recent days surrounding the ‘policing’ of the EU’s southern frontier in Ceuta and Melilla continues. Yesterday Spanish TV was full of images and reports from a group of 500 or so Africans who were bused and dumped in the desert hundreds of kilometres from reasonable sources of food ands water. The EU observer also reports on a “technical mission” of EU officials who flew to Melilla and Ceuta over the weekend “to investigate illegal immigration patterns” and evaluate the gravity of last week’s clashes, which left a minimum of 10 migrants dead.

A commission spokesman the same day reiterated that pressure is being put on Morocco to re-admit Sub-Saharan immigrants.

But Brussels’ comment came just as Medecins sans Frontieres announced that over 500 mostly Sub-Saharan immigrants had been found “in bad shape” in the desert area of Auoina-Souatar near the Morocco-Algerian border, with the NGO claiming that they had been abandoned there by the Moroccan authorities.

Volunteers of another international NGO, SOS Racisme, said 24 immigrants, out of which many had previously applied for asylum in Spain, had died of thirst in similar circumstances.

On top of this, Javier Sancho of Medecins sans Frontieres told EUobserver that several of the immigrants had “injuries of the kind that are inflicted by sticks or hits, or by the rubber batons used by Spanish border police”.