Friday, 27 February 2009

Minus Six Point Two

It is almost an axiom that data revisions almost never matter, at least not in the short run. Maybe this one will be an exception... If you wanted to have a symbol for how bad things are turning, and how unexpected that is, consider this revision of the US GDP data for the Q4 2008, down from -3.8 to -6.2. And the forecast that we will mention this news a few times, is fairly straightforward.

Wednesday, 25 February 2009

The World As Emerging Market

Mature economies increasingly behave as if they were emerging ones. If you look closely, they are.

When dealing with emerging markets, you always have a problem: figuring out which country is really your subject matter. When does an economy leave utter hopeless poverty and get on the - always bumpy - road towards affluence? When, during its rather rocky past decades, did Cambodia enter the emerging market category, for instance? Or Morocco? Or Colombia?

(Drawing the line at the political transition is always tempting, but often wrong: think about the hopeless early years of the European post communist countries, or, the ultimate example from the other side: China and the Gulf states. The first bunch went through more or less free elections, but did not really get onto the emerging path until the mid-90’s, while the second lot clearly embarked on the typical rapid structural change pattern that characterises the emerging markets, but with, let’s put it this way, no landmark events towards democracy.)

Maturing emerging markets pose similar problems: when do they leave this category and become ‘developed economies'? Isn't it ridiculously silly, for instance, to treat Singapore and South Korea as emerging markets? Or, from the other side of the category: are Portugal and Greece really ‘mature’?

Maybe the term emerging market is not useful after all. At least by the mid 2000’s the line was already blurred: everyone was going through some form of rapid structural change, institutional reforms, and those who did not - we learn these days - should have done exactly that. Was the debate about the role of government in the economy in Germany really that different from that in Central Europe? Was the economic strategy, and the consequent structures, that different in Dubai from Switzerland? Was the role of the financial sector in Iceland really on another planet compared to, say, the UK? And, was the structural dynamics due to the new technologies that different in the US than in India?

Arguably, in all of the above examples, there are large differences between the two sides. But are those large enough, distinct enough, to justify a different category? Or is there, instead, a continuum of behaviours that are associated with integration into the emerging global economy and the adoption of a technology-intensive economic development path?

Thus we end up sceptical about the usefulness of the term emerging market during the past decade, at least retrospectively. But then, consider the behaviour of the mature economies during the current crisis. The ineffectiveness of the policy measures. The lack of proper data. The immature reaction of the political class. The depth of the social consequences. The unanchored systemic risk. And most importantly, the wildly uncertain future. Who is the emerging market now?

Monday, 23 February 2009

Global Thinking Ban

Amazed at the extreme reaction to ideas related to global government institutions.  People treat those who even enter the discussion as if they were obviously nuts. There is hardly any debate involving arguments about potential merits. The recognition, by both sides, that the establishment of effective global government agencies would be politically very difficult, finishes the discussion at the starting point, and is presented as failure of those suggesting the need to think about it.

How silly is that?

Tuesday, 17 February 2009

The Global Ducks of the Oxford Canal

Do you want to know the real mechanics behind the rise of the global technological society? Well, if Bob Allen is correct about the origins of the industrial revolution, it is not geography, nor human capital, nor institutions, nor culture.

His fascinating reading of the origins behind the industrial revolution goes like this. First, discoveries of the 15th century led to increased trade, and that in turn, to increased urbanisation (the expansion of British trade resulted in the population of 16th century London multiplying ten folds). Second, increased volume of urban population changed pre-existing price structures (the demand for heating was too high to satisfy from logging, and thus coal was used en masse; after the initial fixed costs, large coal reserves were tapped, at a low marginal cost, which led to the eventual fall of the price of coal). Third, changed price structures of commodities altered the relative price of labour (especially in Northern England where coal was coming from). Fourth, this made labour-saving technological innovation economically sensible (and thus the industrial revolution was born). Fifth, the same line of argument holds for the adoption of the new technology (and thus the industrial revolution ended up being a primarily British phenomenon for a long while, rather than the emerging technologies spreading rapidly to other parts of the world).

The consequences, if this hypothesis was to be true, would be far-far reaching.

1. What is the upshot for archaic societies? Would the above argument mean that their opening up has more to do with the economic incentive structures embedded in the pre-existing social structure and technology set than either with lack of inventiveness, or cultural norms keeping the society closed to the new. 

This would be supported by the observation from Papua that, contrary to the way I imagined before, there seemed to be a substantial drive to opening up. The impression left was that rather than the base case being a culturally closed human group/tribe etc., it is more that you would need a cultural process introduced to shut down the opening up process. Our cultural diversity sustainability worries would take a completely different lighting. 

2. What is the upshot for development economics? To what extent could this result be translated into a general observation towards a relationship between relative wages and technology spill-over? 

It is striking how different technological adaptation is among developing economies. For instance, the former communist transition countries saw a lot of variation in this regard, despite being rather similar in their base setup. It seems that it has to do more with the effective labour cost than purely the abundance of human capital. Compare the economic transition story of Slovakia to Croatia as an example, in the early 2000’s. Despite the timing of starting the change in earnest was the same, and the initial setup, at least in economic terms, were similar, the high Croatian tourism revenues kept the kuna strong, and resulted in lack of the kind of rapid structural change that was witnessed by Slovakia. A similar point could be made when comparing a transition country to a non-transition emerging economy, say end of 1990’s Hungary to Thailand, and observe that although price levels were not that different, the difference in the cost of effective labour due to differences in human capital led to entirely different technologies being adopted, despite both undergoing substantial structural change.

3. What is the upshot for government innovation policies in economies integrated into the global economy? Would this mean that instead of state support of innovation, governments should meddle with the returns?

In fact, perhaps the argument could be extended into a speculation about the kind of innovations that will be favoured in a fully integrated global economy of the future. We have much better ideas of where individual currencies’ purchasing power is going than before, and thus perhaps about the long term relative prices in the global economy. If the relative prices could be thus somehow guessed, maybe that would have a direct implication towards innovation drives. Could this be used to speculate about new technologies emerging?

4. Is there a minimum wage argument in here? In the early 2000’s I was involved in a debate about the merits of ‘graduate minimum wage’ in the post communist transition process. I hated every bit of the idea. Maybe I was wrong. Maybe the supporters’ point about multiple equilibria referred to discontinuities in the technology set, and thus to an effective labour cost based argument similar to Allen’s. 

Therefore, does this hypothesis mean that the level of effective minimum wage would have an impact on kind of technology the economy adopts? 

What do you think?

-- Bob Allen's book reference: The British Industrial Revolution in Global Perspective (New Approaches to Economic and Social History)


My favourite cycling route goes along the Oxford canal, which is incidentally one of the routes in which coal was taken from North England to London. I will have a new topic in my chat with the ducks next time.

Friday, 6 February 2009

Letter from America

(A guestpost written by Balázs Szendrői.)

Walking across the University of Berkeley campus one sunny afternoon, I could not help but notice two young, scantily dressed people on the grass in front of the Campanile, Berkeley's iconic bell tower. They were engaged in an activity which, in most countries I know, would have counted as sex and therefore strictly forbidden in public places. Not in California; the words "yoga", "acrobatics" and "massage" were whispered amongst the small but reverent group of casual onlookers of whom I was by no means the only one.

America: the Land of Freedom. And the Land of Free Enterprise. Well, you could argue that Free Private Enterprise has not been doing so well here lately. Yet it is clear that even at this hour, is the world's largest economy that the rest of us look to for leadership, growth generation and a general cure to our ills. Despite its evils, in a way the USA still seems to be the best we have.

One way out of the present mess might be a global framework along the lines of the federal structure the USA has successfully adopted over the course of its existence. It might perhaps be of interest to pause and recall one or two factors that played a role in its formation, at least in an impressionistic way.

First, necessity. The cellar of the apartment block where I am staying contains, along with the expected assortment of broken light bulbs and other assorted bric-a-brac, a collection of about fifty leather bound volumes humbly entitled The Annals of America. Volume 1 contains the documents relating to the prehistory of the USA, starting with Columbus' triumphant report of his first encounter with the Indians. Later, there are long descriptions of the now well-known difficulties the first settlers encountered, including loss of crop, hunger, cold and isolation. But one striking aspect was the description of the first encounters between emissaries from Virginia, Massachusetts and other early colonies. It is clear from the excitement of the reports that the settlers thought of unity and cooperation as a necessary virtue.

Second, the Founders, among them the Committee of Five who drafted the Declaration of Independence. John Adams, lawyer and historian. Benjamin Franklin, polymath, scientist and author. Thomas Jefferson, philosopher. Robert Livingston, diplomat who helped Fulton develop the commercially viable steamboat. Roger Sherman, influential lawyer without any formal training. Surely not without their faults, nevertheless these were people of huge intellectual and moral standing. Along with the other Founding Fathers, they were entrusted by their communities with the job of creating a system that would outlive them. This they certainly accomplished.

Third, America's moral Coming of Age: the long civil war, starting with the Civil War itself, and culminating in the Civil Rights Movement of the 1960's. Walking the streets here, talking to people or looking at the newspapers, it seems clear that people of colour get more opportunities, have more freedom and command more respect than anywhere else in the developed world. And this was true (and had to be true) even before one of them became President. Some American (wo)men are more equal than others in many respects, but at least this is decided to a much lesser extent by their racial heritage.

Back to us, then. The necessity for global governance has been amply argued elsewhere, not least in these pages. How about founding fathers? It is clear that the election of President Obama has presented the US and thus the world with a unique opportunity; just imagine attempting to build global institutions with a US president with 20% home and 10% overseas approval ratings. Looking further afield, an unlikely globalization hero has recently emerged in President Ghaddafi of Libya. Bring along President Lula of Brazil, the reluctant European Union, start talking to China, and we would have most continents covered.

Finally, the moral coming of age. If there is to be lasting peace, surely a condition for a successful global governance framework, it is necessary for different communities to accept, trust and value each other to a much greater extent than currently is the case. The Israeli/Palestinian conflict is but one of the starkest illustrations of this. It would be truly tragic if mankind were destined to only achieve moral peace through many more local, or even worse, global wars. Give peace a chance.

Monday, 2 February 2009

A 50,000 Year Old Global Network?

Last Thursday I went to a fascinating talk by Graeme Barker on the shift from hunter gatherer to farming societies on Borneo.

I went along to understand more about the technology dynamics of the Papuan Highlands, but I picked up something very unexpected.

Graeme Barker discussed the orthodox models of the spread of agriculture around the world, and compared it to the new understanding that has been emerging recently. The former model supposes that there were a few migration waves, and a few innovation events. Opposed to that is the new model, based on recent archaeological and ethnographic evidence. This suggests that there was relatively intensive interaction among neighbouring groups that facilitated technology transfer over long distances. Mango from India grown on Borneo, and bananas from New Guinea carried to West Africa - are the suggested evidence for that.

So, based on this, here is my speculation.

What if our (or at least, my) model of the global society is completely wrong. If there really was so much and such constant interaction among neighbouring groups for tens of thousands of years, then maybe a good model would be a network of societal relationships that have existed since the rise of our line of humans. (If you wanted to be truly outrageous, maybe you could extend this argument further back, to some previous homo species.) Then what we'd have is a description of this network, and the rifts along this network, say due to geographic reasons (rise and decline of the sea level, for instance). This network would give a completely different story about globalisation, or what we mean by it now. In this reading, the term ‘globalisation’ would be a reference to the dynamics of a particular network property.

I work on a network model of the global economy, and keep getting into fights with economic historians who claim that the level of globalisation was much higher, say, two hundred years ago, than now. They use macroeconomic measures, which I think misses the point of network complexity. (The latter concept is not really in the toolbox of macroeconomics, so the debate is really futile. It tends to be fun, though...)

But maybe the picture of the global network being there all the way back to the spread of the homos would change the entire discourse. You would have a global network, maybe, with more or less complex structures being built up in different geographical locations. Then the current globalisation would be, perhaps, a build up of a complex structure that covers the entire geographical spread, with any new local complex ‘outgrowths’ necessarily being integrated into the global one. In other words, ‘globalisation’ would not merely refer to the existence of a global network - as that has been around for a while - but the emergence of an overall structure which would encompass all new network build ups in a way that they could not be regarded as separate systems.

What do you think?
(Maybe modelling the global economy’s network structure for the past three decades is an un-ambitious project after all, how about 1700 times longer?)


At the Barker lecture, there was some meat on the expected topic as well. The description of two tribes, living next to each other, with entirely different approaches to their immediate general environment, the technology set they use, and the attitudes towards non-traditional consumption, was extremely interesting. One completely refusing to open up, being very mindful not to harm their forest, sticking to old technologies, and refusing new products, such as rice. The other one, the exact opposite: treating the forest as their ‘property’, quickly adopting new technologies, and taking up new consumption patterns. Beautifully highlights how impossible the quest is to have an economic development plan ‘good’ for all. The ‘incremental, local, community based’ just got an other supporting argument?