Thursday, May 31, 2012

From invention to innovation

BusinessWeek site, sorry - now Bloomberg BusinessWeek, has a nice slideshow about technology: Technology forgotten pioneers, by Vanessa Wong (24 May 2012). Forgotten inventors include people who invented:
  • remote control for TV (and others)
  • computer mouse
  • telephone
  • television
  • windshield wipers
  • light bulbs
  • flying machines
This makes nice stuff for a course about innovation. These are people who, for one or another reason, has not been themselves able to create a community of users of their novel technology under control of their intelectual property. Others had been able and profited (sometimes immensely) from their novelties and inventions. But others have found the right connections (networks) and conditions to make them "profitable change" (innovation). These are "social battlefields" that determine the success of the invention as innovation and who profits from that.
We have a lot to learn from these cases. Some of their legal battles deserve admiration for the persistence. The windshield wipers is one of my favorites.

Wednesday, May 30, 2012

Europe: lessons from Japan

In my other blog (in portuguese), I have recently (19th April) posted a note about the japonese experience during last two decades and its potential lessons for the eurocrisis, based on the ideas of Richard Koo in his paper "Revitalizing the eurozone without fiscal union" to last INET Conference (Berlin, April 2012).
Today Krugman posted about Japan as "role model" and shows a plot of male employment rate, 15 to 64 years old, of Japan and USA from 1991 (only males in order to avoid eventual cultural bias). And he concludes that Japan has managed a "liquidity trap" situation much better than USA, avoiding a rise in unemployment under those adverse conditions:
  • For all its woes, Japan has never experienced the kind of employment collapse we’ve suffered. That’s the sense in which we’re doing far worse than the Japanese ever did.
I built a similar plot, but including Germany and EU17 data from 2000 (as available in OECD statistics):

Krugman post links to a nice piece of journalism: an interview of Krugman by Martin Wolf, published in weekend FT supplement (Lunch with FT: Krugman). In the interview Krugman has commented about the japonese experience:
  • “What we thought was that Japan was a cautionary tale. It has turned into Japan as almost a role model. They never had as big a slump as we have had. They managed to have growing per capita income through most of what we call their ‘lost decade’. My running joke is that the group of us who were worried about Japan a dozen years ago ought to go to Tokyo and apologise to the emperor. We’ve done worse than they ever did. When people ask: might we become Japan? I say: I wish we could become Japan.”
"We", by Krugman, means USA, of course. It was this comment that suggested him his post. But our figure shows that EU17 performance is not better than USA. The inverse trends of German and EU17, specially after 2008 crisis, are striking: Germany employment is improving and meanwhile UE17 situation is degrading. 
Next figure compares Germany data with the southern countries in crisis (Portugal, Spain, Italy and Greece). Post 2008 crisis data for the four southern countries show a dramatic drop in male employment rate - softer in Italy but very hard for the other three countries. These lines show how the gap in economic environments between these countries and Germany is enlarging very fast, which may transform the situation into a very difficult one. The ghost of the Prussian may happen to return to Europe. (El Pais, the spanish newspaper, publishes today an article about the new Cold EuroWar with the division of UE into two different blocs).

More from Krugman interview to Martin Wolf, about the eurocrisis:
  • “No. I don’t think they can save Greece but they can still save the rest if they’re willing to offer open-ended financing and macroeconomic expansion.” But this would mean persuading the Germans to change their philosophy of economic life. “Well, the prospect of hanging concentrates the mind; the prospect of a collapse of the euro might concentrate their minds.”
  • Would he conclude that the European currency union was a mistake? “Yes, I think we’ve been asking, whose fault is this crisis? And I think it was basically fated, from the day the Maastricht Treaty was signed. Now, I think it might be rescuable with a higher inflation target, which is a poor second best to having a fiscal union. But no, the setup is fundamentally not workable.
  • What’s interesting is that the euro itself created the asymmetric shocks that are now destroying it [via the capital flows it engendered]. Not only have they created something incapable of dealing with shocks but the creation engendered the shocks that are destroying it.”
(Italics our responsibility)

Sources: data from OECD, Short term labour market statistics.

Sunday, May 20, 2012

Two other countries with different fates

Both countries have similar names, both are islands and both went burst due to bank problems after 2008 crisis: Iceland and Ireland. 
Three years later, Iceland is performing much better and becomes a case of fast restructuring following huge banking losses (see WSJ article: In European Crisis, Iceland Emerges as an Island of Recovery). Here is the quarterly data for growth:

The weakness of Ireland versus Iceland recover is well shown by the continuous fall in private spending in Ireland, versus a continuous recovery of private spending in Iceland after mid 2010:

Medium term debt and deficit histories of both countries in next two figures:

Different fates in similar periods of time associated with different currency and policy environments for similar problems and histories. Once again, the same pattern as discussed in previous post.

Update, 30 May: the story from the employment rate point of view, a similar pattern:

(Source of data: OECD.StatExtracts)

(Update, 8 July: more about Ireland versus Iceland, in a post by Krugman:
  • Iceland is a dramatic demonstration of the wrongness of conventional wisdom in these times. Ireland did everything it was supposed to; nobody would describe it as “healing”. Iceland broke all the rules, and things are not too bad.)

Saturday, May 19, 2012

Four countries: two different fates.

Consider two groups of two countries each, one from the eurozone (dashed) and the other not (solid), and let's compare their fates, considering their debt, public deficit and growth record.
Solid blue country is Japan, with has a starring level of debt (as %GDP), higher than debt of the dashed blue country from 2000. Dashed blue line is a eurozone country under bail out and strong austerity measures from 2009: Greece. 
Solid black country is UK, and it also has an higher debt than dashed black country. The dashed black country is Spain, presently under strong pressure from the markets.

In both cases the eurozone countries have lower levels of debt, but they are under strong pressure from markets. This shows that the eurocrisis has not very much to do with debts. Neither with deficits, if you compare the performances of the four countries: Japan has run huge deficits for a long time, and Spain has surplus just before the crisis (2008).

What about the prospects for growth? Japan record has been much worse than Greece. UK and Spain growth histories have been very similar.

Under the usual EU narrative, both Japan and UK should be under austerity policies and strong pressure from markets, much worse than those suffered by Greece and Spain. But they are not. Their fates are very different.
What makes the difference? Eurozone and currency ownership. Both Japan and UK manage their own currencies and their central banks have the needed tools. But Greece and Spain do not. 
Japan could not be an eurozone country due to its high deficits and low growth. 
But both Japan and UK are not in risk of the sort of crisis and collapse that is affecting eurozone countries. Life is possible with high level of national debt. But not in an monetary union where countries do not control the currency of its own debt, and where there is no last ressort bank neither common sharing (mutualization) of debt.

(Update, 19 may: see Martin Wolf post in his FT blog:
  • Members of a monetary union issue debt in a currency over which they have no control. It follows that financial markets acquire the power to force default on these countries. This is not the case in countries that are no part of a monetary union, and have kept control over the currency in which they issue debt.
  • Yet bonds of eurozone member states do have default risk, since in effect, they borrow in a foreign currency, as have many emerging economies in the past.)
(New update, 2 july: again Martin Wolf on FT, about Spain: a very interesting analysis of "what was Spain supposed to have done?". Conclusion:
  • In my view, Spain made only one big mistake: joining the euro. Without that, it would probably now look more like the UK: yes, the economy would be in serious trouble, but its exchange rate and its long-term interest rates would both be far lower.)

Tuesday, May 15, 2012

German exports (part II)

Additional figures to previous post about german exports to periphery (IIGPS) countries in the eurozone.
(1) How much significant are imports from Germany, by IIGPS countries, relative to their total imports? Next figure shows the evolution of german imports by each country as percentagem of their imports from world.

(2) What about German exports as %GDP, instead of nominal value? See next two figures: real trade data

and effect of no growth of imports from German by IIGPS countries after reunification (eurozone and world) to Germany net trade (exports minus imports, % GDP)

Euro crisis: a common problem for southern and northern countries

Eurozone and EU do have a systemic problem. Sorting out the present situation requires an integrated approach by all stakeholders. It is not reasonable to think that unilateral policies and action plans can be effective and politically sustainable.
The actual situation is largely a consequence of imbalances in wages, productivity and trade between northern and southern eurozone countries. The present "prussian approach" by Germany (and others) is unsustainable: it assumes that it is the "others" (periphery) full fault and incompetence that created the present situation. 
But reality is more complex: solution for the euro conundrum will require concerted actions both from northern as southern countries, and both sides are liable to responsible action, and they may be not very palatable for each of them.
Kermal Dervis, from Brookings Institution and from a non EU country (Turkey), posted a good analysis (Rebalancing the eurozone) in Project Syndicate, calling for action by northern countries as well as southern ones:
  • excessive austerity and deflation could defeat its own purpose and make the “reforms” to improve the southern European countries’ competitiveness impossible to implement. The right approach must combine reasonable wage restraint and low (but not negative) inflation with microeconomic policy measures aimed at encouraging productivity increases.
  • In short, internal adjustment in the eurozone is achievable without serious deflation in the south, provided that productivity growth there accelerates, and that the north does its part by encouraging modestly faster wage gains. The smaller current-account surplus in northern Europe that might result from this should itself be welcome. If the north insists on maintaining the low wage growth of the 2000-2010 period, internal adjustment would require significant unemployment and deflation in the south, making it more difficult and perhaps politically impossible to achieve. 
Kermal calls for more inflation, growth of wages and consumption in northern countries, together with restraint from southern (periphery):
  • Reversing the large differential in unit labor costs that has emerged in the euro’s first decade thus requires not only wage restraint and productivity-enhancing reforms in the south, but also higher wage gains in the north. A simulation shows that if German wages grew at 4% annually instead of the 1.5% of the last decade, and if annual productivity growth in Spain accelerated to 2% (it was close to 0.7% in both countries), Spain could reverse the unit-labor-cost differential that emerged with Germany since 2000 in five years, with Spanish wages growing at about 1.7% per annum.
  • This should not be an impossible scenario. It would require restraint in Spain, where wages grew at an average annual rate of 3.4% in 2000-2010, as well as a serious effort to accelerate productivity growth. But it would not require falling wages or significant price deflation: annual wage growth of 1.7% and productivity growth of 2% would be compatible with inflation close to zero. Productivity growth at the historical rate of 0.7% in Germany, with wage growth of 4%, would be compatible with an inflation rate a little above 3%.
The hard austerity policy by periphery may well disintegrate EU: Portugal may be too small to be important, but nobody can argue the same for Italy and Spain. Sooner or later the social tensions within these countries will create a divisive and dangerous clivage in EU. If Greece exits the eurozone, it is Greece fault - but it is also a dramatic political fiasco from inappropriate collective action by the european partners, that failed a balanced policy within reasonable social, human and political costs for greek people. The recessive effects of "austerity only" were easily predictable:
  • Indeed, excessive wage deflation is likely to have negative effects on productivity. Skilled labor is likely to emigrate faster, and extreme austerity, falling prices, and high unemployment – and the resulting likelihood of social tension – are not exactly conducive to investment, innovation, or labor mobility.
  • economic policy should not break a society’s confidence in itself; what economists call “animal spirits” must be able to reflect hope for the future.
End of last post, we cited Stieglitz and others: one sided actions and policies are wrong in an integrated trade system. This analysis well complements the same idea.
Meanwhile, Charles Wyplosz, in a post entitled "The impossible hope of an end to austerity" ( concludes that
  • The madness of holding governments to infeasible debt reductions within a couple of years or so must be replaced by the realisation that this objective will take decades, not years, to be reached.
  • Some countries will have to default, partly at least, entirely for Greece. Inevitably, the costs will be borne by everyone – bondholders, banks and their governments, and the Eurosystem.
  • EIB and Commission money will help a little if they are promptly disbursed. Germany must also conclude that playing the locomotive is in its deep interest and that a little bit of inflation is much more preferable than letting the euro disappear. After all, average German inflation over the roughly 50 years before the euro (1950-98) was 2.7%.
  • Sticking to austerity is bound to lead to more Greek-style elections. This is after all the lesson from German history – voters who suffered and despaired and felt mistreated by foreign powers ended up voting for Hitler.
(Italics our responsibility)

(Update, 16 may: "Only the IMF can break euro logjam", by Charles Goodhart (from LBE) in FT:
  • The current asymmetric and incomplete adjustment plan for the eurozone, which focuses solely on the peripheral economies, is self-destructive.
  • The IMF must also overcome French and German resistance to a deepening of the single market in services. Last but not least, the IMF should demand a clear and credible road map for reforming the functioning of the eurozone.)
(Update, 17 May: Krugman post about the euro crisis:
  • We need a conversion experience here, not in Athens, but in Berlin and Frankfurt. Otherwise, the game is almost over.)

Sunday, May 13, 2012

German exports and euro crisis

Germany plan for Europe is to replicate its own model during last decade. A FT article ("German miracleous machine", by FT correspondent in Brussels, Ralph Atkins) argues that
  • the country has become “a model for Europe . . . The lesson learnt from Spain, Italy, Portugal – not to mention Greece – is that sustainable growth comes only if the economy is flexible enough”.
Well, this is not feasible under present conditions and Germany would not have succeeded his "structural reform" if those reforms were implemented under the actual inflation and growth conditions in the euro zone. IIGPS countries are now in trouble within a very troubled environment. Not like the EU boom period of German restructuring.
Krugman and a lot of others have mentioned it. And "structural reform" in Germany has conveniently avoided opening the retail sector and to reform its services sector - and to restructure the weakness of its banking sector. Another recent article in WSJ (Germany to Euro Zone: Do as We Say, Not as We Do) makes a balanced analysis of the situation, and comments:
  • There is a further aspect of the German response that some economists find difficult to accept: the implicit requirement for Germany to do nothing. They say it's arithmetically impossible for every economy in the world to build growth on the German model of export success; and if every country in the euro zone is to do it, they need to find others willing to run big deficits in the rest of the world.
Yesterday, BBC World showed a nice and balanced documentary about Greece crisis, by Michael Portillo, the british politician well known as an eurosceptic. He made his point riding a new Porsche around Athens streets, in order to stress how much Germany exports (to Greece and eurozone as well) during boom years have profited from Greece (and others) boom years induced by a euro thought to be as safe as a sovereign currency as the american dollar.

We have already seen as Spanish house boom and bust was largely financed by German banks. Exports have been an important part of the story. So, lets have a look at Germany exports.
Let's begin with its value and structure, from 1991 to 2010, last two decades. We have aggregated exports from Germany to four destinations: IIGPS (Italy, Ireland, Greece, Portugal, Spain, the peripheral economies under stress), euro zone behind IIGPS, EU common market behind euro zone, and rest of the world (RoW):

Data shows the "ubber competitivity" (Krugman) of German export machine after internal reunification crisis in Germany has begun to be sorted out, around 2003. Michael Portillo correctly stressed in his documentary that German reunification has been a much more expensive bailout than Greece one, and it has been fully supported by the euro countries - some of them now under strong and disastrous duress policies leaded by Germany.
Data also shows the impact of 2008/9 crisis, really immediately  followed by a recovery. Recovery that Germans and european neoliberals claim to be due to the right reforms performed in german economy during last decade, reforms that provided the flexibility needed to its economy. May be they are (at least, partially) right - but it does not solve anything of the present euro crisis, that is also largely associated with an imperfect and uncompleted, badly designed and flawed financial union with a common currency.

The structure of german exports shows that IIGPS markets bought around 15% of German worldwide exports during last decade. Other non IIGPS eurozone countries contributed close to 30% and remaining European Union (non euro) countries contributed around 20%. Overall, EU was close to 2/3 of German exports (64% in 1999, 63% in 2008) and RoW the remaining share, a bit more than 1/3 (36% in 1999, 37% in 2008).
What about growth per destination? Rebasing data to 1999=100 (reunification year), differences between eurozone and non eurozone appear only clear after 2006 and they are not so dramatic:

From 199 to 2009 German exports grew at 13.2% cagr: only 12% for IIGPS, but 14.5% for EU non euro countries (but only 13.9% for RofW). In nominal values, IIGPS contributed with 12% of German exports growth from 1999 to 2009, against 26% for other euro countries, 23% for EU non euro countries and 39% for RoW countries.
Let's have a look at the detail of IIGPS data: Portugal, Ireland and Greece are in the 1% or less range. But Spain is 4 to 5%, and Italy 6 to 7%:

Considering growth from 1999 to 2009, Greece and Spain had a 13% cagr (compounded annual growth rate), Ireland 14% and Portugal only 9%. In general, a very respectable two digit growth over a decade, not far from overall Germany cagr in the same period.

IIGPS countries represent a significant share of German exports and its growth during last decade. Any multinational would be very cautious to discard around 15% of its sales in a very near shore zone. And German net trade numbers with eurozone would be different if growth of german exports to IIGPS countries is discarded, only from 1999 to 2009 (but keeping their 1999 level):

Even the picture with global worldwide exports would be less rosy, although still impressive:

Stiglitz has argued about the instability of the international trade system in his presentation to last INET Conference (Berlin, 13 April 2012, video here), entitled "Is mercantilism doomed to fail?", claiming that international trade implies that some countries have deficits and others surplus - if some countries have big trade deficits (like IIGPS countries), this implies others should have large surplus (like Germany), and both have shared liabilities:
  • In a global general equilibrium, if some country pursues policies that persistently lead to net exports, then there must be some other country (countries) that have net imports
  • if one country takes action to limit its trade deficit, if surplus countries persist in their surpluses, some other country must face an increased trade deficit
  • Surplus countries lower global aggregate demand and impose costs on all other countries and on systemic stability of the system
  • Whatever the validity of justification, in pursuing their own interests, surplus countries impose
    costs on others
  • Global instability is as much (or more) a result of the behaviour of surplus countries as of deficit countries
This same idea is well captured in the WSJ article:
  • "If the others become more like Germany, at the same time Germany needs to become more like the others."
(Data: OECD Stat.Extracts, International Trade, harmonised system from 1988)

Tuesday, May 1, 2012

Trends among OECD countries: debt, deficit, growth, manufacturing

When talking about macroeconomics variables, we often miss a sense of the overall trends that may help to put data in perspective. In this post we make an exercise with basic OECD data for debt, deficit, growth and manufacturing. We collected data from OECD tables, in the period from 1995 to 2011, for 34 countries, and we offer some comments based on a intuitive and qualitative evaluation of the figures.

(1) Debt (as % GDP)
- Debt higher than 80% is less frequent;
- often between 20% and 60%,
- but inter countries variance was smaller between 2000 and 2007
- variance is now higher, after 2007
- but not very different from 1995 (especially if top 2 or 3 largets debtors are ignored)
- top debtor: Japan. Stock of debt has grown 3 times (as % GDP) from 1995 to 2009.
- top 5 debtors: Japan, Greece, Italy, Belgium and Israel. Belgium is not so far from Italy. Only Israel shows a decrease in debt level after 2008. All the others have increased their debt.
- top 4 less leveraged: Estonia and Luxemburg, Australia and Chile. But Luxemburg went from 1 to 2% to 13% after the 2008 crisis.

(2) Deficit (annual, as % GDP)
- Most of times, the range is from -8% (deficit) to +8% (surplus).
- Only one serious outlier: Norway, with surplus higher than 10% from 2003, and maintaining the level higher than 10% after 2008.
- Chile is the candidate for the second largest surplus
- Ireland is the new outlier, deficit side (but it used to be in the surplus side for most of the last decade).
- Greece is the more consistent lower end boundary (deficit side). Hungary is a second candidate.

(3) Growth (annual, % GDP)
- Negative growth has not been so frequent during this period (1995 to 2011)
- Years with more than 10% growth also have not been frequent among OECD countries
- 2008 crisis effect in growth has affected 2009 growth in almost all countries, and it is the most visible change in data, but post 2009 recovery is also visible for most of the countries
- Estonia had a the top performance before 2008, but also the worst recession during 2009. But also a fast recovery.

(4) Manufacturing (as % GDP)
- The overall trend is that manufacturing share of the economy has been decreasing during last 15 years
- the importance of manufacturing is now from 10 to 20% GDP in most OECD countries
- Ireland used to have the largest share of manufacturing (25 to 30%) until 2002, but decreased very fast after 2002
- Korea seems to be now the top outlier, with 25% GDP and increasing. The increasing trend during the period seems to be unique among ORCD countries. Korea is now the OECD country with the largest manufacturing share in GDP (more than 25%)
- Czech Republic is the second top outlier, and it does not show a clear declining trend
- Luxemburg, Norway and Australia are the three bottom outliers. Iceland used to be, but the importance of manufacturing has increased substantially after 2007 (consequence of busting of financial services, more than an increase in the level of manufacturing activities).

(Source of data: OECD StatExtracts)

Update, 30 May: Unemployment rate, 1991 to 2011

- Spain is one of top lines: it is the blue line, visible until 2000, then disappearing and back after 2008
- meanwhile Poland and Slovak Republic are two top lines in contra cycle to Spain 
- Finland and Ireland are the green lines with high unemployment during the 90's
- After 2008 crisis, top curves below Spain are Estonia, Greece, Slovak Republic and Ireland. 
- Bottom lines are from Korea, Mexico. Switzerland, Iceland and Norway, in different periods of time
- Luxembourg is a regular one in the bottom.