Seventeenth century globalisation story time

Gather round children. Do you know where black pepper comes from? Where it used to come from?

Black pepper is native to South East-Asia and Europeans needed it, because without it the rotten food we ate tasted awful. But Europeans produced nothing much that Asians wanted other than silver and gold, and we didn’t produce much of that. So do you know how we bought pepper?

We sent guns to Africa to buy slaves. We sent slaves to Latin America to dig up shiny metals. We sent the shiny metals via Europe to South East-Asia to buy pepper and they told us to bugger off.

“Bugger off?” Asked Jenkins.

“Yeah,” said Obduluwangay “we’re naked, why do we need these round pieces of metal?”

So we changed tactics. We sent guns to Africa to buy slaves. We sent slaves to Latin America to dig up shiny metals. We sent the shiny metals via Europe to India. In India we hired brokers to hire weavers. The weavers sold us cloths and we took them to South East-Asia and they told us to bugger off.

“Bugger off?” Asked Jenkins, now he was really annoyed.

“Yeah,” said Obduluwangay “I’m not wearing that! Is that chintz?”

“Yes” said Jenkins, “don’t you like chintz?”

Obduluwangay looked offended, “that’s the sort of thing they wear in Bantam, not round here.”

So we changed tactics again. We sent guns to Africa to buy slaves. We sent slaves to Latin America to dig up shiny metals. We sent the shiny metals via Europe to India. In India we hired brokers to hire weavers. The weavers sold us cloths and our brokers told us where to go and we took these specific cloths to specific cities in South East-Asia where specific styles were worn.

“Oh lovely,” Obduluwangay said “have some pepper.”

“Hooray!” declared Jenkins, who promptly died of scurvy.

Thus concludes our story. The world has been a globalised place for a very long time, but it is a significantly better one now than it ever has been before.

Filed under: History, Bantam, India, Indonesia, Jenkins, Obduluwangay, pepper, South East-Asia

The True Meaning of Francois Hollande: As Politics move in the right direction the Economy is about to fall of a cliff

Here is a great graph via David Beckworth showing Nominal GDP for the whole OECD.

Source: OECD Statistics

Looks like we are all still way below trend. The demand shock starting in 2007/8 has not been corrected and although total spending has recovered to above its precrisis levels that masks wide variation in rates of recovery. Canada’s doing great, Spain, not so much.

During the worst of the crisis the fundamentals of developing world helped to drag global growth back up. In fact the late 00s were good for large parts of the world. China, Brazil, many African countries all performed strongly through to 2012, despite a set back in 2008. In fact global GDP per capita has never been higher.

The bad news is that serious problems appear to be developing all around the world. The Eurozone is still in a permacrisis, industrial production is stagnant in India, China has been fighting deflationary pressures for some time and appears to be beginning to lose, Brazilian industrial production has turned negative. The US is facing huge budget cuts in the autumn which will be broadly contractionary through its economy.

The insane European Central Bank‘s policy rate is at 1%. That’s right, despite the Eurozone imploding the insane ECB is has steadfastly refused to ease policy despite even Germany heading towards recession. Other central banks around the world have all done good jobs avoiding anything as horrific as America’s Great Depression, but they all remain wary of using unconventional tools to expand demand.

In 1999, what Ben Bernanke argued was needed in times of great crisis is the willingness to be aggressive and experiment, to show Rooseveltian Resolve to get the economy moving again:

Needed: Rooseveltian Resolve

Franklin D. Roosevelt was elected President of the United States in 1932 with the mandate to get the country out of the Depression. In the end, the most effective actions he took were the same that Japan needs to take—-namely, rehabilitation of the banking system and devaluation of the currency to promote monetary easing. But Roosevelt’s specific policy actions were, I think, less important than his willingness to be aggressive and to experiment—-in short, to do whatever was necessary to get the country moving again. Many of his policies did not work as intended, but in the end FDR deserves great credit for having the courage to abandon failed paradigms and to do what needed to be done.

This is the real meaning of Francois Hollande. He needs to say “non!” to more or less everything Merkel and the insane ECB put forward.  Hard money and austerity have been a disaster in a benign international environment, if demand for European and American exports dries up and deflationary pressures go global we will see a recession inside a depression scarily reminiscent of the 1930s. We need a Roosevelt.

Filed under: Economics, Foreign Affairs, Politics, Ben Benanke, Brazil, China, David Beckworth, FDR, India, the insane ECB

Bulgaria under the yoke of Communism again

Spiegel: Great Wall this week became the first Chinese automobile manufacturer to open an automobile assembly plant inside the European Union…

…Bulgaria, the EU’s poorest country, is attractive as a labor market because it is an oasis of cheap wages and low taxes. Workers are considered well educated and the country is ideal as the site for a company like Great Wall to launch. Given that wages for factory workers have risen considerably in China in recent years, assembly sites abroad have become increasingly attractive for some manufacturers.

(H/T). Some thoughts:

1. Don’t overweight cheap labour and underweight transport costs and clustering in thinking about global trade.
2. There will be more of this. In the end the country with the most people wins – that means China for a while and India afterwards.
3. There should be less of this, trade barriers mean international investments need to be made that would not were the EU a true open borders free trade area.
4. East Asian labour is remarkably low-skilled and poorly educated despite what positive prejudices  you might hold.
5. Technology is highly mobile and drives convergences in incomes all round the world in interesting ways.
6. The future prosperity do the world depends on the rich world restraining its xenophobic hostility to foreign capital, as much as foreign workers. You boss may one day speak another language and earn much of his money in a foreign currency, that should be fine so long as she still pays your wages.
7. We live in interesting times.

Filed under: Economics, Society, China, Free Trade, India, Investment, Outsourcing, Trade, Tyler Cowen

Cameron’s dreadful case for national pride

This is just wonderfully revealing from Cameron today:

Whatever the obstacles to growth today, we still boast some of the best universities in the world, the most favourable timezone in the world, and the world’s first language.

Hundreds of years ago we conquered and colonised a load of places and they and their trading partners now speak our language. Also, by historical fluke, we just so happen to sit in between populus Asia and wealthy North America.

So this is what national pride has come to. No celebration of the English Pub, the centre of the community, no longing for days of imperial grandeur, no ideological fervour for christ, cricket and capitalism. Nope, something more like this…

A cosy 25 million bedroom nation with excellent local amenities, a large secluded garden and great transport links. Comes complete with lovely views of France and neighbours who will begrudgingly speak your language.

Filed under: Economics, Foreign Affairs, History, Politics, Cameron, Capitalism, China, Christ, Colonialism, Cricket, France, FT, India, nationalism, The Pub, USA

Migration as Technology

I was a little confused by this Robin Hanson post. He cites with approval the fact that since 1970 40% of all the extra consumption in the world has occurred in the United States. Below are the top 30 gainers in terms of tens of billions of dollars a year.

United States 583, Japan 183, China 103, United Kingdom 73, Germany 63, France 53, India 47, Brazil 47, Italy 39, Canada 37, Mexico 37, Spain 28, Indonesia 14, Netherlands 11, Greece 9, South Africa 8, Thailand 8, Switzerland 8, Belgium 8, Austria 7, Colombia 7, Sweden 7, Philippines 7, Norway 7, Malaysia 7, Portugal 6, Chile 6, Finland 5, Ireland 5, Denmark 4. (source)

Robin argues that this is argument against Tyler’s notion of a slow down in technological innovation. But the population of the US is 48% bigger in 2010 (310,000,000) than in 1970 (209,000,000). At first I couldn’t see why this would counts as evidence against some notion of a slow down in intensive growth. The US got more from more which is great for all those people involved, but it is not evidence we can get more from less, is it?

Well, in a way it is, although you have to denationalise your perspective. The US does have an overwhelming lead in one “technology”; that of receiving and assimilating migrants. The factors behind this are geographical, historical and cultural, but it still as a really important technology in terms of increasing “our” productive and consumptive capacity.

The productivity of millions of people has been hugely increased simply by them moving across a border. Allowing more migration is an innovation that can make many people better off by improving their productivity. But it is a technology which cannot be excercised by a single firm, it is better thought of as a society-wide innovation akin to germ theory or corporation law.

Filed under: Blogging, Economics, History, Migration, Austria, Belgium, Brazil, Canada, Chile, China, Colombia, Denmark, Finland, France, Germany, Great Stagnation, Greece, India, Indonesia, Ireland, Italy, Japan, Malaysia, Mexico, Migration, Netherlands, Norway, Philippines, Population, Portugal, Robin Hanson, South Africa, Spain, Sweden, Switzerland, Thailand, Tyler Cowen, United Kingdom, United States

Then versus Now: Or, why all the inequality?

Via, via, via. Click to embiggen, commentary below.

A few things are driving this.

1. The entrance of South East Asia, then China, then India into the global division of labour and the global market for consumer goods and services. This pushed up returns for the wealthy who could hirer cheaper and sell more widely and pushed down returns to labour as workers had to compete with their ever poorer neighbours (although many goods were cheaper and inflation lower).
2. A decline in innovation, a la Tyler Cowen. We became much better at doing things from the 1920s-1970s. Most of the modern world was created then and we haven’t created anything like a big a breakthrough as kidney dialysis, chemotherapy, the airplane, TV, refrigerators, air-conditioning, etc., in the last 30 years. The internet is nice, but not a huge boon to GDP.
3. Some combination of declining returns in the real economy and rent-seeking in the financial sector has caused a shift from real production to finance. With attendant crises and diminished growth. As it became harder to profit from real production capital fled to finance. As finance became more dominant it became more difficult to profit from real production, a vicious cycle.
4. The above graph looks at US incomes and so overstates the divergence. Policy may be set in the main at the national level but production occurs globally. Many people worse off than those living in the US have become significantly better off. The deceleration from the 1980s in the west is mirrored by an acceleration in the rest of the world. Little comfort to some, great comfort to others.
5. Policy in the west erred in two ways:
1. It sought to trade equality for more growth. Taxes were reduced on the wealthy to incentivise them to innovate more. Unfortunately the incentive effects of tax cuts on the wealthy are weak, especially compared to how much more difficult it became to innovate (see 2) or produce profitable non-financial firms (see 3).
2. Secondly, the decline of trade unionism didn’t just make workers more “flexible”. It also caused a decline in worker “voice” in the workplace. Compensating for this, and I would argue provoked by this, there was an increase in occupational licensing (from baby-sitter to lawyers) and centralised directives to protect workers. Where workers could have once demanded whatever protection was deemed necessary with union backing, they now had a significantly weaker on site negotiating position. Workplaces became more intimidating for workers, and more regulated for employers.

UPDATE: Read Noahpinion (do it, it is excellent) for an expansion and deepening of the argument I make in point 1.

Filed under: Economics, History, Politics, Bosses, Capital, China, Cosmopolitianism, Equality, Finance, Hong Kong, India, Indonesia, Inequality, Labour, Malaysia, Occupational Licensing, Philipines, Regulation, Singapore, South Korea, Supply Side Economics, Taiwan, Thailand, The Great Stagnation, Trade Unions, Vietnam, Voodoo Economics, Workers