Bellerbys Economics - Mr Stephenson

Thursday, January 31, 2008

Swings and Rounabouts

About a year ago, the Chinese government was under a lot of pressure from the US government who argued that the renminbi was undervalued.

"Not true," said the Chinese, "It's the dollar that's overvalued."

Since then, the dollar has devalued by about 20% and today's announcement that interest rates in the US will be reduced to 3% suggests that the dollar will fall even further. (So sell your dollars now before it's too late). So the Chinese were probably right after all.

This is probably a very sensible market correction and will help to make the US economy more competitive - although it will mean Americans getting used to the idea that they are not as rich as they thought they were - and it will almost certainly lead to higher inflation and higher interest rates later - but that will be under the next presidency. President Bush will at least be able to leave the presidency saying he had ridden out recession and the economy was booming (yes, booming as in bomb).

One side effect of this is that it will continue to reduce the real value of the Chinese government's foreign exchange reserve - still mostly held in dollars which the Chinese government will not be able to shift quickly enough.

It's all a matter of swings and roundabouts as we say here.

Wednesday, January 30, 2008

Vietnam Inflation

Vietnam's economy is booming at 8.5% economic growth this year - but a good deal of this growth appears to be coming from easy access to credit. The main problem is that with interest rates at 8.25% but inflation at 14%, there is absolutely no incentive to save - in fact, it makes sense to borrow as the real value of your loan will shrink with inflation.

Consequently, borrowing last year increased by 37% - and believe me it wasn't spent on Vietnam's still rather shaky infrastructure. At the same time, inflation has been fuelled by rising food prices (wheat, pork), the price of imported oil (nearly all of Vietnam's oil has to be imported) and the extra borrowing has also fuelled house price inflation.

Aggregate demand shifting to the right; and aggregate supply shifting to the left - is not a pretty combination.

The Vietnamese government has promised to increase interest rates further - but it probably needs to do more than this - for a start, it could make it much easier to do business in the country. Instead of having to obtain a licence to start a business (a long drawn out procedure involving many visits to officials), it could make it a natural right for any Vietnamese to start their own business (or even more than one business) whenever they want to. This will increase the supply of goods and services dramatically - in fact, it's probably the most basic supply-side policy of all.

Monday, January 28, 2008

Flipping A-Levels

McDonalds has just been granted Awarding Body status by the Qualifications & Curriculum Authority. This means they will be able to introduce their own nationally-recognised qualifications up to A-level standard (called level 3 by the government) within the National Qualifications Framework.

They plan to start by introducing a Shift Manager qualification that may be the equivalent of an A-level. This is part of a wider government strategy to broaden the range of qualifications available to students within a framework recognised by all employers and educational institutions such as universities.

Signup now for your Ronald McDonald advanced clown course!!

Friday, January 25, 2008

Behavioural Economics

Classical economics assumes that people make rational choices based on supply and demand, competition, accessability and so on - economists often refer to this perfectly rational person as homo economicus.

However, in reality we know this is a myth. People often make totally irrational choices (especially when it comes to marriage!) and the rapidly growing field of behavioural economics attempts to analyse the reasons behind this irrational behaviour - in other words to see how rational it can be.

Game Theory can apply to this field like any other. One interesting game is called The Ultimate Game. In this game, there are two people. One person is given £10 and is asked to divide the money between himself and the other person. If the second person agrees with the division, it's fine. However, if the other person does not agree, nobody gets any money.

Reason tells us that if the first person offers the second person £1 and keeps £9, the second person should agree - because after all, both people gain by this. However, in experimental conditions, 93% of people rejected this offer. The minimum that a majority of people would accept was between £3 and £4. Why is this? I'm afraid I don't know - I'm one of the 7% that would have accepted!

A second game is this: If I ask someone the likely probability of throwing a 4 on a dice, most people with any background in Maths would say 1 in 6. However, in experimental conditions, people were told that the last three times the dice had been thrown (and that it was a fair dice) the number 4 had come up. When asked what number would come up next time, nearly 50% said 4.

A third area is in marriage. Ideally, the rational way to choose a marriage partner is to go out with maybe 10 or 20 (or a 100) different girls over a period of time - and then choose the best one - but just you try explaining that to them. Instead, you have to choose your marriage partner heuristically - meaning it has to be the last one you go out with.

Behavioural economics has enormous implications for sales and marketing (fashion fads and so on) but equally so for trading. George Soros once wrote that the moment he realised that traders behaved with a 'pack mentality' on the stock market and not a rational mentality was the day he realised he would soon be rich.

A good book on this subject is "Irrationality" by Stuart Sutherland and the wikipedia entry is also pretty good:

Monday, January 21, 2008

Crazy Guy Alert!

President Bush's pressure to introduce a $150 billion tax rebate to reduce the risk of recession in the US is almost exactly NOT the response that economists would have liked. It is a Keynesian response rather than a supply-side response.

It will increase aggregate demand leading almost certainly to even higher inflation than the current 4% in the US. This in turn will almost certainly lead to higher interest rates and further damage.

There are only two realistic ways in which the $150 billion could be financed - either by reducing the US foreign exchange reserves which stand at $188 billion and which are probably a bit higher than necessary in the modern world - or by borrowing overseas. The latter (and more likely) route will lead to a further fall in the dollar - so if your parents have dollar accounts somewhere - tell them to bail out now. This will also displease the Chinese government who also hold most of their foreign exchange reserves in dollar bonds - the sooner they invest this money in British businesses like Bellerbys, the better for them, that's what I say!

Of course, it's good that the President plans on giving the tax rebate to lower middle income families as they are more likely to spend the money on domestic products than richer people - but that's not much of a compensation in the grand scheme of things.

There is a third way it could be financed - by reducing the $700 billion defence budget - but most of that is already committed to maintaining a US presence overseas.

Friday, January 18, 2008

Leading Chinese Economist Tipper for World Bank

Justin Yifu Lin, China's leading economist (and mentioned in this blog a couple of weeks ago) is being tipped for the job of Chief Economist at the World Bank.

Justin is the founder of the Chinese Centre for Economic Research and is professor at Beijing University and also Hong Kong Institute of Science & Technology. He has a degree in Marxist Political Economy from Beijing and a PhD from Chicago. He has twice won the Sun Yefang Economics Prize - China's top award

Justin was actually born in the province of Taiwan but swam the straight to the mainland in 1979 in search of a better life.

He is the author of eight books, including "The China Miracle - Economic Reform & Development" considered to be the most significant analysis of China's development miracle. The World Bank, conscious of China's increasing influence in African development, will no doubt be reading this very closely. Justin has recently been involved in helping China develop its tenth five-year plan which puts increasing emphasis on IT development, a pet topic of his.

He is also a member of the Copenhagen Consensus, a grouping of economists who work together to analyse the greatest problems facing mankind and seek to offer the best economic solutions

Wednesday, January 16, 2008

Masala Economics

Today's mix of exciting Economics news includes the following:

The German government has introduced a ban on most forms of online gambling. Is this even possible, I ask myself - Germany doesn't have a national firewall in the same way that China has - and even the Great Firewall of China is easily breached by those who know how. The Economics of Gambling is a fascinating subject - so much so, that Salford University actually has a degree in Gambling & Leisure Management. The velocity of money is very important when looking at online gambling - the quicker that money changes hands (expenditure) the faster the economic growth - so you can increase GDP quickly by making it easy for people to gamble. But on the other hand, concepts such as demerit goods and allocative efficiency also come into play - is the development of a gambling industry a good use of money? Let's hear your comments!

It's the Detroit motor show this week and it's Chinese car manufacturers who are making all the news with a wide range of extreme concept cars - one of the most interesting is the Tang Hua from Li Shi Guang Ming Automobile - it looks like a boiled egg. Other impressive cars about to enter the US market are the 4x4 from Chamco which should do well and a convertible from BYD Auto (Build Your Dreams). This could be the start of a good decade for Chinese car manufacturers - now they are in the WTO, they compete on equal terms with Japan, Korea and other Asian manufacturers. Also, in a sign of increasing globalisation, Chamco are considering opening a factory in Indonesia - to take advantage of cheaper labour costs!!

It's good to see China and India coming closer together with the visit of Manmohan Singh to China this week. However, there is still one problem on the horizon: By 2030, both India and China will be importing more oil than the USA - so energy competition is going to become a fascinating topic over the next 20 years! There are alternatives to oil of course - nuclear, wind, biomass, CCT (clean coal technology) and so on - but each of them also brings problems of their own and they are not likely to make up more than 30% of any nation's supply (other than France and Japan) by 2030 - so oil will remain king. You can find out more about this fascinating area of world development in the Bellerbys Brighton Exam Hall on Wednesday, January 23rd at 7.30pm as we play host to LSE and WTO economist Philippe Legrain in a session open to Bellerbys students and the general public - free tea and biscuits will also be provided.

Tuesday, January 15, 2008

The Diminishing Marginal Returns of Economic Growth

Many Bellerbys students progress to Warwick University, which in many ways has been the spiritual home of progressive economic thought for a couple of decades - the new economics that tries to look beyond the narrow confines of a blind rush towards ever greater economic growth as measured in monetary terms - GDP.

Professor Andrew Oswald is one of the UK's most widely read economists and will become a familiar figure to many of our students as they progress through higher education.

As we begin Module 5 of the A-Level, it's interesting to look at his views on the Diminishing Marginal Returns of economic growth. We all know that as you increase your investment in the factors of production, the marginal return you receive from this investment rises at first and then begins to diminish for a number of reasons (the land available to cultivate gets poorer, the quality of the new staff employed will diminish as you recruit from a shrinking pool and so on).

Businesses overcome this problem by making a 'quantum leap' in their use of the factors of production - perhaps by switching investment from labour to more efficient capital (a new machine) or to a cheaper source of labour, or to a country with less environmental regulation perhaps and so on.

Prof Oswald suggests that the dash for economic growth follows this pattern for a whole country. At first, economic growth obviously has major benefits - reducing absolute poverty, providing electricity and clean water and so on - but does society then reach a stage where the returns from economic growth begin to decline - greater pollution, congestion, stress and unhappiness. If so, what do we do about that? It's not really posssible to stop economic growth - so perhaps the solution is to redefine economic growth in terms of other variables - shift the target as our equivalent of a quantum leap. The French President Sarkozy has also begun to think along these lines and has appointed two leading economists - Joseph Stiglitz, formerly of the World Bank and Amartya Sen, leading development economist, to try to produce a new index that puts happiness and well-being at the heart of economic policy in France - a quantum leap in perception you might say - should Britain do the same? Please read Dr. Oswald's views on this here:

Thursday, January 10, 2008

Ta-Ta! to Expensive Cars

News coming in from India about Tata's new car - the Nanocar.

Firstly, it demonstrates a further step in India's development as a major economic superpower - still about 10 years behind China and with some institutional weaknesses that China has avoided - but nevertheless moving in the right direction.

It also demonstrates the importance of world-class companies to the Indian economy, often controlled by a small number of key families - the Hinduja family empire, the Mittal steel empire and the Tata motor company.

The new Nanocar sells for less than £1500. Luckily for western car manufacturers, India is not yet a member of the WTO. If India were a member of the WTO, it would be difficult to keep the Nanocar out of western markets - the tariff would have to be the same as that on - say - Japanese or Korean cars. It's likely that the Nanocar would soon come to dominate the small car market worldwide.

You can find out more about it here:

Even so, a number of trade agreements exist between India and the rest of the world, so the Nanocar will start to filter into other markets fairly quickly - the Chinese car manufacturers may be a bit worried about this.

Environmentalists may also be worried. Even though the Nanocar is very fuel-efficient, the sheer volume planned for production will increase pollution, congestion and world demand for oil - pushing up prices even further.

But of course, you can't turn the clock back. Supply-side economists understand that increased oil prices will promote innovation in the field of alternative forms of energy - although a good deal of work is being done to develop energy sources from biofuels, hydrogen cells and further back in the chain, work is even progressing on fission and fusion reactors, solar energy, geothermal sources, wind and wave sources. Unfortunately, it may take some years for any of these to come to fruition.

Friday, January 04, 2008

Civil Aerospace

One of the most expensive markets is the civil aerospace market. For many years, this was dominated by Boeing, the US aircraft company, which at one stage had 75% of the world wide-bodied market. In the last 20 years, however, this has fallen to 50% as the EU's Airbus consortium has clawed back market share.

But the future is looking a bit shaky for this cosy duopoly. Recently, President Putin ordered the creation of a single Russian aerospace consortium as part of his policy of creating national champions that can compete in world markets. The merged company, to be called the United Aircraft Corporation, will combine Sukhoi, MIG, Tupolev, Irkut, Ilyushin and Yakovlev under one authority. At first, they will only produced regional aircraft, but they are ambitious and hope to re-enter the wide-bodied market within the next 10 years now that the Ilyushin-96 is being phased out.

China is also gearing up to enter the market. The regional jet ARJ-21 will begin service later this year and the Chinese authorities have merged together the civil aviation company (AVIC-1) andf the military aviation company (called I believe AVIC-2) to form one company with the aim of producing a wide-bodied craft by 2020.

Meanwhile, we should not lose sight of Embraer, the profitable Brazilian manufacturer who also concentrate on regional jets. They are also not short of ambition.

Thursday, January 03, 2008

Global Economic Thought

One of the most interesting developments in Economics in the last ten years has been the rise of global economic thinkers.

Many names spring to mind - Joseph Stiglitz, nobel laureate and former head of the World Bank: Jeffrey Sachs, professor of Economics at Columbia University; Joschka Fischer, former German foreign minister; Chen Yuan of the all-powerful China Development Bank; David Daokui Li from Tsinghua University and Justin Yifu Lin of Beijing University and the World Bank.

Many of these are now gathered together in an enterprise called Project Syndicate which seeks to give them a monthly column to sir their views. You can see it here:

Meanwhile, the Wall Street Journal has produced its list of the top 10 most influential Chinese economists. They are:

Qian Yingyi, Lang Xianping, Lin Yifu, Zou Hengfu, Wu Jinglian, Zhang Weiying, Li Daokui, Chen Zhiwu, Tian Guoqiang and Zhang Wuchang.

One of the problems that Chinese economists have is that they are not published in the traditional western journals as often as they would like and so rarely feature in top lists of economists worldwide - hence, the Wall Street Journals attempt to create a separate list.

The most impressive group of Malaysian economists can be found at the Universiti Utara's School of Economics - here:

Many would argue that Malaysia has been the greatest success story in East Asia. Fifty years ago, it was left ethnically-divided and impoverished by a retreating British administration. Since then, it has virtually eliminated poverty, created a strong industrial and financial sector and still remains one of the most equal societies in the world.

There are many world-class Russian economists, of course. Amongst the most interesting are Elvira Nabiullina, the new Finance Minister, following in the excellent footsteps of German Gref. Elvira is an ethnic Tartar and has a brilliant mind - she is just what Russia needs at this crucial stage of its development as it seeks to diversify its small business sector and to integrate more fully into the world economy by joining the WTO in September 2008.