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Monthly Archives: November 2008

Where in the world is Asian Thrift and the Global Savings Glut?

Sometime in the early 1990s the US began to move its international trade account from approximate balance into burgeoning deficit.From then on the US trade deficit grew year on year so that by 2006 the US consumed nearly US$900 billion more than it produced.

Such excess amounted to 7% of US GDP—up from an average of 2% over 1990–1994.For perspective, the US trade deficit in 2006 was nearly as much as the entire annual production of goods and services in the 1.1 billion-peopled economy of India (this was an improvement, though: in 2005, the US deficit was strictly greater than India’s GDP).And a 7% ratio is the same as that Thailand had in June 1997 on the eve of the run on the Thai baht precipitating the Asian currency crisis.

Except for the possibility of trade with outer space, the US deficit has to be matched dollar-for-dollar by trade surpluses in the rest of the world.Correspondingly, therefore, the rest of the world has been saving—consuming less than it has been producing—and accumulating dollar claims against the US as a result.

In this description, however large the global imbalance, a savings glut—wherever or however it might arise on Earth—has no independent existence.It makes as much sense to say the world’s excess savings caused enthusiastic US consumers to flood into Walmart to buy $12 DVD players, as to say US consumer profligacy made hungry Chinese peasants abstain even more and instead plow their incomes into holdings of US Treasury bills.

When two variables have always-identical magnitudes, obviously neither can usefully be said to cause the other.With global savings and consumption, however, looking at a third indicator, namely world interest rates, is suggestive.The Figure shows world money market interest rates falling sharply through the 1990s, as would be suggested by a global savings glut driving the large global imbalance.

(The Figure is for short-term nominal interest rates. Charting this for real long-term rates accentuates the fall. Subtracting actual inflation to construct real short rates makes the decline less obvious although not vanish.But I’m going to dispute this reasoning next anyway, so let’s keep the Figure.)

Many other factors could, of course, have driven down short rates: US monetary policy responded to national economic downturns in 1991 and 2001.Through the 1990s inflation rates worldwide converged and fell, together with short-term interest rates set by central banks everywhere.The burst of the dot-com bubble in March 2000 saw the NASDAQ index decline 77% in the following 18 months, prompting action by the US Federal Reserve.Japan’s monetary policy during its decade-long recession drove nominal interest rates there to zero.

It seems useful to obtain additional evidence on whether the global imbalance was indeed driven by a global savings glut or, in some interpretations, Asian thrift.

The Figure shows that, indeed, Developing Asia in general and China in particular, were running large and growing bilateral trade surpluses against the US.

The next Figure, however, shows that running trade surpluses against the US was pretty much the pattern nearly everywhere in the rest of the world.Both the EU and the bloc of oil-exporting countries, had rising bilateral trade surpluses against the US too, although of course the notion of “EU Thrift” has hardly ever been bandied about in international relations.Summed, the EU and oil-exporters trade surplus against the US moved almost exactly in step with that of China’s.

Dwindling investment opportunities and an aging population in Europe might, indeed, over the longer run, smoothly and gently, end up pushing greater savings in the direction of the US.But why would those same persistent movements cause higher-frequency gyrations in the EU’s trade surplus against the US that match almost exactly that of China’s in particular and Asia’s more generally?It seems to me the most direct and straightforward explanation is that the causal impulse to these trade surplus dynamics is instead the US economy, and everyone else is simply passively responding.

Indeed the ratios to the overall US trade deficit of individual country bilateral trade surpluses—run by each of China, Developing Asia, the EU, and the oil exporters—have time-series profiles that, after the mid-1990s, were essentially flat.Sure, China’s and Asia’s trade surpluses against the US were large and growing.But they were growing only because they remained roughly constant in proportion to bilateral trade surpluses elsewhere and, more to the point, to the US overall trade deficit.

So, yes, of course, there was a global savings glut.It necessarily mirrored exactly US profligacy, both private and public.Looking at these last few Figures, however, one might be tempted to think that excesses in the US economy drove trade surpluses everywhere else in the world, rather than that causality ran from Asian thrift to US trade deficit.

The reality, however, is almost surely that some combination of factors—central bank policy, Asian thrift, US consumer profligacy, US government actions, cheap East Asian goods resulting from a low-wage yet productive workforce (which must be a good thing surely)—was responsible for the large global imbalance of the early 2000s.To put the blame monocausally on Asian Thrift seems both irresponsible and inconsistent with the facts.And it is important to get to the root of this: the resulting global imbalance and its associated massive flows of financial assets likely led to the extreme financial engineering that now everyone claims no one responsible ever really understood in the first place.

In producing the Figures above I found useful the data and discussions in Ben Bernanke (2007) “Global Imbalances:Recent Developments and Prospects”; Thierry Bracke and Michael Fidora (2008) “Global liquidity glut or global savings glut”; Menzie Chinn and Jeffrey Frankel (2003) “The Euro Area and World Interest Rates”;Niall Ferguson (2008) “Wall Street Lays Another Egg”; Paul Krugman (2005) “The Chinese Connection”; Kenneth Rogoff (2003) “Globalization and Global Disinflation”; and Brad Setser (2005) “Bernanke’s global savings glut.

Daniel Gross (2005) Savings Glut” traces the history of the idea that a global savings glut is to blame for many current US economic ills. The subtitle (The self-serving explanation for America’s bad habits) reveals the conclusion that Gross reaches.Fareed Zakaria (2008) “There is a silver lining” describes the profligacy of the US consumer and government since the 1980s, and how the current global economic crisis might turn that around. He remarks that the US “cannot noisily denounce Chinese and Arab foreign investments in America one day and then hope that they will keep buying $4 billion worth of T-bills another day.”

The data I used are from the World Bank’s World Development Indicators (WDI) Online, April 2008; and International Monetary Fund (IMF), Direction of Trade Statistics (DOTS) and International Financial Statistics (IFS), November 2008, ESDS International, (MIMAS) University of Manchester.Developing Asia, in IMF terminology, comprises Bangladesh, Bhutan, Cambodia, China, Fiji, India, Indonesia, Kiribati, Lao People’s Democratic Republic, Malaysia, Maldives, Myanmar, Nepal, Pakistan, Papua New Guinea, Philippines, Samoa, Solomon Islands, Sri Lanka, Thailand, Tonga, Vanuatu, and Vietnam. In the Figures, China refers to China Mainland.

(This post also appears 21 November 2008 on RGE‘s EconoMonitor on Global Macro and Asia.  See also December 2008 discussion on the FT Economists’ Forum on global imbalances.)

Martial arts on the mean streets of East Asia

In his book Angry White Pyjamas Robert Twigger, the prize-winning poet and author, and martial artist, describes how in the 1930s Gozo Shioda would prowl the streets of Kabuki-cho Tokyo, looking to fight street gangs and test his martial arts skills.

Decades after, Gozo Shioda went on to establish the Yoshinkan style of aikido.  In the eyes of some, Shioda and his teacher Morihei Ueshiba were at one point Japan’s greatest martial artists.

Ueshiba used to tell his students “On no account go looking for fights.”  Shioda, like many other good martial arts students, completely ignored his teacher on this.  

Instead, out of the situations in which Shioda constantly found himself, he formulated his own rules, like “In a fight against many, always make the first blow count against the strongest man.”

Shioda felt that you only really understand what aikido is when you have to use it in life-or-death situations.  His own aikido-enlightenment moment came when, cornered by four gang members, he used aikido techniques to break the arm of one of his attackers and the leg of another, and incapacitated a third by a single punch to the solar plexus.  According to Shioda’s autobiography he appreciated only then how aikido wasn’t something you just practiced in a safe environment.

I have friends who train in aikido but I myself do taekwon-do, the birthplace of which is Korea.  So, that balmy July evening in Seoul when my taekwon-do training partner James and I came out of his dojang, we reminded one another of what Ueshiba and Shioda would have said, had they been walking Seoul’s crowded streets alongside us.  James, who has started training seriously in hapki-do as well, pointed out to me how in modern Korean language you say taekwon-do players but hapki-do fighters.

Every street corner in Seoul has over a dozen schools of taekwon-do and hapki-do.  Every shaded doorway has darkened stairwells leading up to a brightly-lit dojang.  Martial arts training is everywhere.

The other thing found everywhere in Seoul is free WiFi.  When you land in most airports in the world, service providers try to sell you a pay-as-you-go SIM card so you can use your cellphone without incurring high roaming charges.  At Incheon and Gimpo, they try to get you to rent a Skype handset instead.  Why call over cellular networks when you can just log in to the Internet on a cellphone handset, and transmit via VOIP for zero marginal cost?

I think that is truly cool.  It just makes so much sense.

South Korea’s 15-year-olds score highest in the world at problem-solving skills, way ahead of the US, the UK, France, or Germany, in the OECD’s 2006 Program for International Student Assessment Surveys.  Fifteen-year-olds in Hong Kong and Japan score well up there too, right alongside South Korea, and again far, far above the US, the UK, France, and Germany.  The same pattern emerges again for science skills and mathematics skills.

South Korea is a country brimming with clever people, knowledge, and technology, of the most exciting, intelligent, and useful kind.  The same holds for Hong Kong, Japan, and Singapore.  [Singapore will only start to participate in PISA surveys from 2009, and so its formidable student strength in mathematics, science, and problem-solving—apparent to anyone who teaches undergraduate students at any good international university— will only appear in the next OECD round.]

When economists estimate TFP (total factor productivity) to be low for countries such as these, whatever it is that we’re measuring more and more accurately as TFP, it simply can’t be technology—at least, not the way technology is commonly understood.  So what is it that we have ended up estimating better and better?

Oh, back in Seoul, James and I felt that before anything else happened that hot July evening we needed sustenance.  So, taekwon-do player and hapki-do fighter together, we went and had really good Tak Galbi for dinner.  I described to James how in February 2005, after giving a talk on the global economy to Rusal executives in Moscow, I was jumped by 3 men while I was wandering about Red Square in the early evening.  I had then nowhere near Shioda’s presence of mind.  The month after that, I broke my nose fighting in a tournament. But I didn’t consider I had yet had a Shioda moment, and I was just as glad not.

So, after dinner, as all good martial arts students eventually must, I followed Gozo Shioda’s example and I broke the law.  I bought a Kung Fu Panda DVD off a street vendor.  All the while, however, I was thinking about the relative sizes of deadweight loss and ex ante incentives in this picture of monopoly pricing under intellectual property rights.

When I got to Kuala Lumpur in late July, I discovered that Sri Hartamas too has dozens of martial arts schools.  So, August there, I trained with several seriously dangerous-looking hapki-do practitioners at Grandmaster Lim’s dojang in Mt Kiara.  (Thanks to my taekwon-do teacher at LSE Kian-lun Wong for making introductions.  Kian-lun and our LSE taekwon-do club are affiliated with Grandmaster Lim’s Korean Martial Arts organization in Malaysia.)

In this same time I presented papers in Singapore and Seoul; made speeches to LSE alumni in Tokyo, Kuala Lumpur, and Singapore; gave lectures at Bank Negara Malaysia and Khazanah Nasional in Kuala Lumpur; and discussed economics and government policy in Ministerial offices and with numerous panellists on radio and TV throughout Southeast Asia (including the first ever webcam telecast for RTM on 29 August 2008).  I am grateful to Governor Zeti at Bank Negara Malaysia, Chairman Zarinah at Securities Commission Malaysia, Minister Shahrir Samad, Tan Sri Dr Munir Majid, Tan Sri Azman Mokhtar, Malaysia’s Finance Minister Nor Mohamed Yakcop, Singapore’s Finance Minister Tharman Shanmugaratnam, Takatoshi Ito, Bart Thia, Khuong-minh Vu, Dato’ Azman Yahya, Dato’ Dr R. Thillainathan, Carmen Chua, and many others who gave generously of their time to talk to me about the economics of the region wherever I went.

Papers I’ve written recently relevant to the preceding discussion include:

Post-1990s East Asian Economic Growth (October 2008)

Knowledge:  The driver of economic growth (June 2008)

while lectures and presentations include:

Khazanah Megatrends Forum (October 2008, KL: “Shifting sands:  The real side longer term“)

Bank Negara Malaysia lecture (August 2008, KL: “Global growth and inflation“)

LSE Tokyo alumni lecture (July 2008, Tokyo: “Post-1990s East Asian economic growth“) [Photos]

LSE Malaysian alumni lecture (May 2008, KL: “The rise and fall of subsidies“) [Ng Wei-Li's photos]

LSE Asia Forum in Singapore (April 2008, Singapore: “Knowledge: The driver of economic growth”) [video]

[The aikido photograph is of my friend Attila Emam, who is third-dan blackbelt in aikido (and LSE-trained economist now at Securities Commission Malaysia), executing a throw.  The taekwon-do photograph, from September 2007, shows me sparring my instructor Mr Read, who is fifth-dan blackbelt in taekwon-do:  I am executing a jump spinning back kick while he is preparing to deliver a hook kick at my head.  The photograph is a still that I extracted from a video of us sparring.  The 2008 May photograph is of a meeting with Finance Minister Nor Mohamed Yakcop in his Putrajaya office.  The 2008 July photograph is from the LSE Tokyo alumni event at the Roppongi Hills Club.  The 2008 August photograph was taken after my lecture at Bank Negara Malaysia.  I obviously wear Vivienne Westwood way too often.]



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