DannyQuah

Making large things visible to the human eye

Category Archives: globalization

UK austerity and growth: Winter is coming

Policy debate in the current recession is often portrayed to be an irreconcilable political battle, pitting those pushing austerity against those advocating growth.  Indeed, substantive real differences do separate groups having different views on what different policies can achieve.  But, equally, uncertainty on the state of the economy clouds judgment on what appropriate policies should be, especially so in times of economic crisis.  This article examines that uncertainty.  By studying one example — UK policy options at the beginning of 2010 — it argues we need to understand better the implications of different measurements on an economy.

“You’re for me or against me. Choose.”

No one wants to live in a stagnant economy. Even those who don’t believe higher incomes make people happier can’t bear to see their honest, hardworking neighbours unable to make monthly rent or mortgage payment, or having to choose uncomfortably between new clothes and shoes for the kids or food for the table.  No one wants to see masses of unemployed on the streets.  Everyone is for growth.

But, at the same time, even the most diehard pro-growth proponents must acknowledge that government efforts to further  increase growth cannot always be appropriate.  If an economy were already close to full employment or were in any other way overheated, then it is right for fiscal and monetary stimulus to withdraw.  Raising tax revenues and lowering government spending — putting the government’s finances to order and restoring to health the nation’s balance sheets — all have a place in sensible, responsible policy-making.

Standing for growth does not mean constant and unwavering support for always high government spending and expansionary monetary policy.  By the same token, backing policies to lower debt and deficits does not mean wanting economic life to be wretched.  Even when the final goal is the same — to have a healthy, prosperous, inclusive economy — depending on circumstances there is a time and place for different approaches to government policy.

A debate on UK growth versus austerity is on one level a debate about what policy transmission mechanisms are most effective for bringing about long-run sustainable economic growth:  People disagree about what works.  But equally important the debate is one about the current state of the economy. Only after the fact will it become obvious what the right policy actions should have been.  Moreover, because of lags in their effectiveness, policy actions need to anticipate:  Will expansionary effects kick in only after the bottom of the economic cycle has already passed, and thus overheat an already healthy economy?

Many observers have firm views, conditioned by sound economic analysis, on the first of these issues, what appropriate growth and austerity policies are.  It strikes me, however, that the second matters much more in extraordinary situations: in those circumstances, knowledge of the current state of the economy necessarily carries far greater uncertainty.  Generally, the range of economic statistics to look at is broad and constantly changing.  External circumstances in a shifting world economy will confound historical regularities.  Economics education in every institution makes students understand mechanisms of how policies affect an economy, but hardly anywhere is there training on how to assess rigorously the state of an economy.  That latter is merely “monitoring”.  Perhaps accurately judging the state of the economy is impossible — but that doesn’t mean zero understanding is where one should stay.

Policy recommendations in a shifting world economy

That this is important is usefully emphasised by looking over a recent turn of events.  In February 2010 twenty economists signed a letter to London’s  Sunday Times supporting a plan to lower steadily the UK structural budget deficit, starting as early as the 2010/11 fiscal year.  (For transparency, I should say here I was one of those 20.)  The letter suggested that failure to do so could, among other things, raise interest rates and undermine UK recovery, given how the economy had entered the recession with a large structural budget deficit.  Not unexpectedly, this proposal was not uniformly accepted, and many distinguished economists suggested instead that such a policy was potentially risky and that the first priority had to be to restore robust growth.  But to bring about growth was never a point of dispute.  So, it might be useful now to look back and assess the balance of risks then extant.

On the one hand, for some observers, there has never been any doubt: “the UK had a depressed economy then, and it still does now.”  (Indeed, that particular writer upon reading that in August 2012 some of the original group of twenty had changed their minds expressed disappointment “to see so many of the prodigal economists asserting that they were responding to changed circumstances rather than admitting that they simply got it wrong.  For circumstances really haven’t changed [...].”  (Again, for transparency, I was one of those reported to have changed my mind, and indeed I was reported to have emphasized changed circumstances.)

Did circumstances really remain fixed, and were they really so transparent? Complicating the picture:  Statistics on recessions become available only with a fixed delay — to be in recession, an economy has to have had negative GDP growth over two successive quarters.   So, to be in a double dip recession, well, it’s not enough just to announce one’s beliefs, the data have to come out just so.

What did the world look like in early 2010?

Things look really bad: Major recession

In September 2008, Lehman Brothers had filed for bankruptcy.  In January 2009 the IMF had predicted world growth would fall to 0.5% for the year ahead, only three months later to revise the figure significantly downwards to -1.3%.  The World Bank had forecast in March that the world economy would contract by an even larger  1.7% in 2009:  This would be the first decline in world GDP since the Second World War.  The International Labour Organization estimated that 51mn jobs would be destroyed in 2009, raising world unemployment to 7.1%.  Growth in China had fallen from 9% in 2008 to an annual rate of 6.1% in the first quarter of 2009, the lowest recorded figure since 1992.  Between July 2007 and November 2008 world stock markets had lost US$26.4 trillion in value, more than half of world annual GDP.  In April 2009, Olivier Blanchard, the IMF’s Chief Economist, had written “the crisis appears to be entering yet a new phase, in which a drop in confidence is leading to a drop in demand, and a major recession.”  The UK had been officially in recession mid-2008, with the last two quarters of 2008 suffering declines in GDP.

Things looked grim.

The return to growth?

By the beginning of 2010, the UK recession was already 18 months in train.  In this modern era, advanced economies (like the US) have only had short sharp downturns: the 11 US recessions since 1945 averaged only 11 months in duration, with the four recessions between 1980 and 2001 lasting 6, 16, and then 8 months twice, respectively.  By 2007, the UK had gone 15 years since the end of its last recession, one that lasted just 15 months.  Of course, with hindsight, we now know it is well possible for slumps anywhere in the world to drag on, but set against both the UK’s own experience and against a broader history (that of advanced economies, like the US, towards which the UK had progressively become more similar), it was not unreasonable to think by early 2010 that the UK was about ready to grow again.

No one would have reckoned in early 2010 that the global economy had regained robust health.  But, equally, was it apparent the international situation was dismal?  By the first quarter of 2009, Brazil was reported to be no longer in recession, having grown 2% after the two previous quarters of GDP declines.  The OECD forecast the Eurozone and the US would show positive growth in the last six months of 2009.

Back on track:  Asia’s recovery by mid 2009

Back on track: By mid 2009 Asia’s industrial producation had recovered not just to pre-crisis levels but to its pre-2008 growth trend.

Early 2010 was six months past when incomes in China and the rest of emerging Asia had already recovered.  Industrial production was not just back to pre-2008 heights, but to its extrapolated pre-2008 growth trend.  The second quarter of 2009 saw a string of astounding figures from across Asia: all at annual rates, the South Korean economy grew by 2.3%, its fastest expansion in over five years; the Chinese economy grew 7.9%; the Malaysian economy expanded by 4.8%; the Thai economy grew 2.3%; both Japan and Hong Kong were showing rising incomes again, after four successive quarters of GDP declines.  Singapore announced its emergence from recession, big-time, with annualized GDP growth of 20% that quarter.

Sure, China’s government had announced in November 2008 a US$600bn (CNY4,000bn) fiscal stimulus package: that by itself was impressive enough, but also most observers at the time believed growth in export-oriented China and Asia occurred primarily from Western demand. The East was growing again.  Surely the West must be demanding.  It was natural to think that, somewhere somehow, the West must have recovered.

Stimulus is an aircraft carrier

That “somewhere, somehow” was not unreasonable to hypothesize in the slew of policy actions undertaken in all the world’s major economies between late 2007 and early 2010.  In September 2008 the US Federal Reserve, the Bank of England, the European Central Bank, the Bank of Japan, the Bank of Canada, and the Swiss National Bank, in concert, added US$180bn of liquidity to international money money markets.  By November 2008, in the space of just four months, the US Federal Reserve had pumped US$592bn into the US$ monetary base, increasing that monetary base by 70%.  In October 2008, US lawmakers approved a US$700bn rescue package to purchase bad debt from US banks; the UK government unveiled a reform package. amounting to £400bn (i.e., again US$700bn) to provide funds to UK financial institutions; the Japanese government announced a US$270bn fiscal stimulus package targeted at families and small businesses.  The following month saw China’s fiscal stimulus of US$600bn (already-mentioned) and the European Commission’s US$260bn recovery plan.  Further add into the mix Japan’s April 2009 stimulus package of US$98.5bn or 2% of that country’s GDP, and we’re talking significant fiscal stimulus in all the world’s major economies.

It wasn’t all just fiscal expansion either.  From a value of 6.25% in early August 2007, the US Federal Reserve discount rate was reduced to 5.75% later that month, to 4.75% the month after, and then again to 4.5% the month after that.  In January 2008 the Fed cut interest rates by 0.75 percentage points, the largest single reduction in over a quarter of a century.  In October 2008, just one month after their concerted action on international money market liquidity, six of the world’s most important central banks coordinated a simultaneous interest rate reduction of 0.5 percentage points.  By the end of October, the US Federal Reserve had again slashed interest rates, this time down to 1%, the lowest level since 2004.  The following month, the European Central Bank cut interest rates by 0.75 percentage points, its largest ever single reduction; Sweden’s Riksbank, by a record 1.75 percentage points; the Bank of Korea by a record 1 percentage point; the Bank of Canada lowered its benchmark rate to 1.5%, the lowest since 1958.  In December, the US Federal Reserve’s discount rate had gotten down to between 0 and 0.25%; Japan’s, 0.1%; China cut interest rates for the fifth time in four months.  The following month, January 2009, the Bank of England reduced its interest rate to 1.5%, the lowest setting in over 300 years of the Bank’s operation.

Monetary stimulus had by then become not just a matter of reducing interest rates.  After all, interest rates were already effectively zero.  In November 2008, the US Federal Reserve injected US$800bn into the economy, buying US$600bn of mortgage-backed securities and applying the remainder to unclog consumer credit channels.  The Bank of England similarly engaged in quantitative easing, buying securities with newly-printed money (£75bn in March 2008, and then £50bn in May and then again in August 2009) to reach a total outlay of £175bn (US$294bn) by the end of 2009.  The European Central Bank, in June 2009, pumped US$628bn in one-year loans into the Eurozone’s banking system.

In the current Eurozone crisis, one hears talk of the troika (the European Central Bank, the European Union, and the IMF) taking a bazooka to the sovereign debt problem.  If so, the collection of 2008-2009 policy actions might seem more akin to sending in an entire aircraft carrier.

The second quarter of 2009 recorded the official end of recessions not just in the East, as described earlier, but also in the two largest Eurozone economies France and Germany, both seeing positive growth again after four consecutive quarters of GDP declines.  Financial institutions reported profits:  notably Goldman Sachs, JP Morgan Chase (profits up 36% from the previous year), Deutsche Bank (up 67% over the same period in 2008), Barclays, RBS, Italy’s largest bank UniCredito, and the Dutch financial services group ING.  By September 2009, the FTSE 100 had again breached the 5,000-point threshold, recovering completely all losses since October 2008.

Time to get ahead of the curve

Arrayed against this monetary and fiscal stimulus worldwide and the evidence of the world economy already growing again (admittedly most strongly in the East), one might conclude that policy-makers ought now cast a cautious eye on government balance sheets.

But that choice for the UK still remained in delicate balance.  In September 2009 the OECD had forecast the UK would be the only G7 economy still to be in recession by year-end, with both the US and the Eurozone predicted to show two quarters of consecutive growth.  Three months earlier, the OECD had suggested the pace of decline among its members was slowing and that the world economy had nearly reached the bottom of its worst post-War recession, but that the UK would continue to show zero growth in 2010. In July 2009 NIESR predicted that UK GDP per capita would not recover pre-recession levels until early 2014.

Effects of policies often only emerge with a lag.  And, generally, government policy-making errs too often by not getting ahead of the curve.  On top of all that, the UK is a small open economy, and its debt and output markets are strongly influenced by international developments.  Was 2010 the right time to start restoring the UK government’s balance sheet?

2010 EU Debts and Deficits

The UK’s debt/GDP ratio was in line with the largest Eurozone economies and therefore larger than Spain’s; its deficit/GDP ratio was worse than all except Ireland’s.

By July 2009, UK government debt had risen to 57% of GDP, the highest ratio since 1974.  That month, the UK’s public sector net borrowing showed its first July deficit in 13 years.  Earlier in the year, Spain had become the first AAA-rated sovereign nation to have its credit rating downgraded since Japan in 2001.  In December 2009, Greece acknowledged sovereign debt exceeding €300bn (US$423bn), the highest in modern history, resulting in a debt/GDP ratio of 113%, nearly double the Eurozone limit.  The chart shows the UK in 2010 right among the pack of the largest European economies (the size of each ball indicates total GDP) in its debt/GDP ratio, i.e., larger than Spain’s, but with a worse deficit/GDP position than all except Ireland.

In February 2010, it didn’t take a lot of imagination to see how, all else equal, UK government borrowing could easily have become just as expensive and as difficult as in the most stressed Eurozone economies.

Backing off from austerity

In retrospect, of course, we know the austerity policy did not work in the UK.  A reversal might well be warranted, because circumstances had changed, not because things were the same.

After the first couple months of 2010, the Eurozone economy went into free fall much faster and much further than one might have expected. This had two effects on the UK fiscal position:  on the one hand, UK debt turned out looking, well, not so bad after all relative to comparable advanced TransAtlantic economies. The fear that UK borrowing would become overly costly had become much less relevant.

Germany trades East

Germany has kept growing exports through a shift in their direction of motion.

On the other hand, the continued inability of both sides of the Atlantic to resume economic growth meant a further dramatic drag on UK economic performance. Unlike, say, Germany, the UK has historically consistently exported mostly to the slowest-growing advanced economies, and so this TransAtlantic slowdown has considerably depressed the UK exports and thus the UK economy. [Germany, by contrast, today exports more to Developing Asia than it does to the US.]

So, the international environment has shifted in such a way that the urgency for UK rapid debt reduction has lessened.

The other large factor is how market perception on the stance of UK monetary policy too has shifted. For most observers now, the Bank of England has made clear how it is willing to put even more resources into monetary easing.

Conclusion

What can one conclude from this?  First, policy-making needs to be sensitive to circumstances, and today in the UK, that means international circumstances especially.  Monitoring and assessing the state of the world economy is needed.  Second, expansionary policies need to be more sharply designed.  While austerity might not, under the current circumstances, any longer command the support it once did, pro-growth proponents need to explain things better. Just throwing money at the problem plainly does not work. Obviously, the world’s expansionary policies over 2008-2009 succeeded out East, but they did nothing to revive the UK economy.  Why will they do so now? How will this time be different?

(Also at Global Policy | Roubini Global Economics EconoMonitor | Blog Sina)

Global Tensions from a Rising East

Will the East slow before it counts? Is the East only big enough to be culpable but not mature enough to be responsible?


[TEDxLSE - Danny Quah - Global Tensions from a Rising East, 17 March 2012]

Today I want to talk to you about the rise of the East, the shifting global economy. Most of us, at different levels, are aware of such changes going on around us. We might have heard about how all iPhones, while lovingly designed in California, are actually manufactured in Shenzhen China. We might have heard about how the Eurozone looked East for rescue on its sovereign-debt problems. We might have read newspaper editorials reflect on how the decade since 9/11 has been one where the three most important words for the US have emerged to be, no, not “major terrorist attack” but “Made in China”.

The questions I want to explore with you are two: Will the East slow down before the East can matter for the world? In the current economic crises that have haunted the world since the mid-2000s, that some have blamed on Asian Thrift and the resulting global imbalances, is the East only large enough to be culpable but not mature enough to be responsible?

The fact is undisputed that the developed economies continue to hold the world’s primary spheres of political influence: Thus, the reasoning goes, if the rise of the emerging economies — the Great Shift East — challenges anything in the global order, that challenge can be only apparent and its perception only transient. The emerging economies’ fast growth is nothing more than their picking low-hanging fruit, i.e., doing the easy things that allow economic development. Emerging economies will slow long before they count. After all, with the export-oriented development strategies that so many emerging economies have undertaken, if the developed countries were to stop consuming and importing, surely growth in the emerging economies would grind to a halt.

In this presentation, I will address two broad sets of issues. First, what are the already-extant contours of the Great Shift East, and what is the likelihood of their reversal? I will conclude that those changes are more pronounced and more entrenched — and thus less reversible — than might at first appear and certainly so when compared to other recent historical episodes. This holds enormous promise for improving the lot of humanity: the Great Shift East will continue to lift out of deep absolute poverty hundreds of millions of the world’s very poorest people.

These changes, however, take nothing away from how it is the developed countries that will remain the centre of global political influence. As a result the Great Shift East will produce massive global economic and political misalignment: the world’s economic and political centres of gravity will separate and drift further apart. And that, in turn, will raise staggering challenges: these latter comprise the other focus of my presentation. How will the global political system adjust to these ongoing economic changes on the scale that have already occurred and will almost surely continue?

Take back from those even poorer

What -ism is it when you castigate your top 1%


From: Vanity Fair, May 2011

and try to aid your middle class …

How the US lost out on iPhone work
From: New York Times, 22 January 2012

… by taking back from those even poorer elsewhere in the world.

From: Asia Development Bank: Asia’s Poor. Financial Crisis? Every day.

The LSE Big Questions Lecture 2011: Organized Common Sense

In June 2011, I was lucky enough to deliver the inaugural LSE Big Questions Lecture. I chose to lecture on whether the East was taking over the world. I felt these changes in the world matter to everyone, and they are developments with important economic ideas surrounding them. The LSE Big Questions Lecture is targeted at 14 year-old school children in a number of London’s schools — hundreds showed up on the day. The lecture itself was televised for subsequent broadcast. The runup to this lecture involved months working with a production team at LSE: these were months of planning and rehearsing, writing and rewriting, arguing and disagreeing — on analytical content and ideas, on what 14 year-olds might find useful and understandable and memorable, on the best ways to communicate different ideas in economics and facts about the world.

Why did we do this?

As an academic economist, I study growth and distribution. I write about the shifting global economy and the rise of the East. I try to make large things visible to the human eye. I want to be considered a valuable REF contributor to my department and to the LSE.

But I also believe that these are times where economic literacy matters hugely, not least in societies that continue to hold to the ideals of liberal democracies. And there are intriguing large-scale parallels between important events now and those some time ago in history.

In 1825 Michael Faraday — perhaps the world’s greatest ever experimental scientist — initiated (but did not himself give) the first of the Royal Institution of Great Britain’s Christmas Lectures. Faraday went on to deliver 19 series altogether of these annual Lectures, his last in 1860, presenting and explaining to the British public ongoing discoveries in chemistry and electricity and magnetism.

1855 Michael Faraday - Royal Institution Christmas Lecture

The Royal Institution Christmas Lectures have continued to the present, interrupted only by World War 2. They are delivered to a general audience, notably including young people, with the aim to inform and entertain. From their beginning, these lectures proved highly popular despite the limited nature to early 19th century organised education. Since 1966 the Royal Institution Christmas Lectures have been televised. For many British households, the Christmas Lectures constitute a highlight of annual holiday family viewing. The energy and the ingenuity that go into the lectures are impressive, not least when, say, someone like Marcus du Sautoy, in his 2006 lectures, explains abstract number theory to a teenage audience.

These Royal Institution Christmas lectures provide the strongest counter-example I know to the conceit that research ideas are too difficult to explain to and too abstruse to excite the general public. Most of us just don’t work hard enough at it. So getting to deliver something the LSE Big Questions Lecture would be a challenge. But there was more.

In 1825, London had just become the world’s leading city by overtaking Beijing — vividly demonstrating the steady ongoing shift then of the world’s economic centre east to west. That year, the first modern economic crisis in history occurred — modern in the sense of not having been caused by a war. The stock market crash of 1825 took out in England alone six London banks and sixty country banks, with the badly-overextended Bank of England having to be rescued by an injection of gold from France. For students of central banking, this event became enshrined afterwards in Walter Bagehot’s Lombard Street principles for the lender-of-last-resort role in central banking.

In 1825, Faraday’s scientific discoveries were not centre-stage for the Industrial Revolution swirling about him at the time. That first Industrial Revolution — perhaps the most important event in the history of humanity — was driven by iron-making, mechanisation, and steam power, more than by electrification and chemical processing. But chemistry and electricity and magnetism — where Faraday’s contributions were manifold and central — pointed to the then-future. These would go on to provide the more enduring engine of growth for modern economic progress, not least down to what today still powers all digital technologies, significant among them cellphones and the Internet.

The Royal Institution Christmas Lectures matter in British science for providing the public knowledge into the most important exciting intellectual developments of the time. They gave the British public insight into what was new. Historians who study why a 14th-century Chinese Industrial Revolution did not occur, despite China’s more advanced science centuries prior to that in 1780 Britain, point to how science in England had always immediately connected to commercial application and public interest. This is exactly the same kind of connection that the Royal Institution Christmas Lectures make. By contrast, in China, science and technology were tightly controlled by a scholarly elite, who saw no reason to disseminate their discoveries. During the 18th-century Industrial Revolution, James Watt and Matthew Boulton had announced the English public “steam-mad”, whereas in Sung Dynasty China, time itself was considered the sole property of the Emperor.

Inaugural LSE Big Questions Lecture

The Inaugural LSE Big Questions Lecture begins

I am under no mad illusion that what I do as an academic is even remotely comparable to the achievements by these giants of scientific and technical progress from 1825. But I don’t think I’m half-bad as a lecturer. I don’t shuffle my lecture notes and lose my place in them [I don't use lecture notes]. I don’t mumble into my beard so that the audience has no idea what I just said [I'm ethnic Chinese and we don't grow beards easily]. I don’t put up Powerpoint slides crammed full with text and then just read them out word-for-word [almost all my slides are just colourful pictures].

I believe, as first told to me by my PhD advisor, economics is just “organized common sense”. I’m passionate about explaining ideas in economic policy to any audience that might remotely be able to influence our national and global conversations on improving the state of the world.

So, when asked, I gave the LSE Big Questions Lecture a go.

Pop music

People ought to enjoy the arts for, err, well personal reasons. To the great disapproval of my friends who live in Hampstead and Islington (and parts of New York City. And Beijing. And Shanghai. Singapore. Mumbai. Helsinki. Rome. Brussels. Oh heck, just about everywhere) I enjoy pop music. For them pop music has no staying power and therefore no redeeming features. For me it is precisely that pop music is transient that gives it value. Because it does not endure, pop music provides an indelible marker in time.

In the same way, valueless data serve useful functions. By providing nonsense values that sweep appropriately through the underlying probability space, such data become indexes that provide balanced access into individual records in a database. These valueless data become keys whose precise values no user will ever want to know. However, simply from being invisibly present, they keep a database from becoming unbalanced, unwieldy, and slow to retrieve.

This blog entry similarly says nothing but I hope it provides balance and a marker in time. Most recently I have already talked too much:

14 November 2007 Confucius Institute for Business London Public Lecture: Knowledge economies in China [Podcast] [Presentation (PDF, 696Kb). The dynamic animation won't show in the PDF file but is available here]

28 November 2007 Queen Mary CGR Public Lecture: Global imbalance, global inequality [Podcast] [Presentation (PDF, 861Kb). The dynamic animations won't show in the PDF file but are available at $1-poverty and $2-poverty]


30 November 2007 BBC2 Money Programme: Superstar, Super-Rich (iPlayer broadcast soon)

04 December 2007 Inequality debate with Richard Wilkinson, at St Mary-le-Bow Church [Opening speech (PDF, 79Kb)]

The Confidence of Nations

In 1993 the New York Times ranked as one of the world’s top 10 restaurants the Far East Asian eatery Din Tai Fung (鼎泰丰): This restaurant specializes in xialongbao (small steamed dumplings).

Overnight, culture snobs everywhere no longer had to hide their inner ethnic hawker stall-foodie.

When I was growing up on a small Far East Asian island—when I say small, I mean 46 miles around—the height of sophistication was to eschew hawker foods like small steamed dumplings. Instead, if you were one of the cool kids, you boasted of having been at least once to an air-conditioned café, to sit there and have lunch comprising a ham sandwich and a salad, with tomatoes in it (although this last cost extra).

These days, of course, you can’t stay in any top international hotel in most countries in the Far East without waking up to a breakfast (or lunch or dinner) of koay teow thng, laksa, nasi lemak, sar hor fun, rojak, char koay teow, murtabak, oh chien, …, and, last but not least, small steamed dumplings. Everyone is now Deckard gesturing for two portions, only sitting in fancy surroundings.


What’s going on here? When did emerging economies acquire the self-confidence that allowed their native foods—for centuries sold only in back alleys and street-side hawker stalls, and served on banana leaf and old newspaper—to assume the mantle of cosmopolitan sophistication? Is it just higher incomes per capita? Is it the lifting of hundreds of millions of their populations out of absolute poverty? Or did the self-confidence come first and it is that that drove the people living in these economies to engage with the rest of humanity through trade and exchange, to clear out corrupt and ineffectual governments, to go to schools and be educated, to organize markets and to engineer efficient production?

I like it that my students at the LSE (including the 70% non-UK ones of LSE’s 8300, from over 150 countries worldwide) have that kind of self-confidence. This year (together with the very personable and prolific Conor Gearty, Professor of Human Rights Law at the LSE) I got to give a welcome lecture to their parents the week before classes began. I talked to them about “Globalization and The Student,” [PDF transcript, podcast coming soon]; I enjoyed tremendously the entire event, the questions the parents asked, and the conversations I got to have with them afterwards at the drinks reception. From everything I’ve seen at the LSE in my time here, their kids—our charges for the next few years—will be as interesting and interested, as delightful and entertaining as those kind people I got to meet Thursday evening.

Global balance and equality

In August 2007 I was part of the opening keynote panel discussion at the Singapore Economic Review Conference (and got to have lunch with LSE alumni and friends in Singapore).

I wanted to show the large forces that drive global inequality and poverty, those changes that affect, in one fell swoop, the quality of life for many of the 6.3 billion people on earth.

I have two candidates for massive worldwide change: First, economic growth; second, China. The graphic illustrates both.

(a larger dynamic animation can be invoked if the inline version above isn’t clear enough in your browser; or just click anywhere in the figure).

The vertical axis measures millions of people living on less than 1 US dollar a day (actually, the threshold is 1 International Dollar a day, but close enough). The horizontal axis is per capita income in the country or bloc of countries: Economic growth means movement rightwards horizontally. The size of a bubble measures the total population. EAP indicates East Asia and the Pacific Region; LAC, Latin America and the Caribbean; MENA, Middle East and North Africa; SAS, South Asia; and SSA, Sub-Saharan Africa. Additionally, China and India are given separately in the graphic.

The animation follows these continental groupings over time, from 1990 through 2004, and shows how as growth occurs, poverty falls.

In principle, if inequality within a continent or within China or India increased sufficiently with economic growth, then the corresponding bubble in the picture might well rise vertically. All that means then is that, in that case, even though average income increases with growth, inequality increases so overwhelmingly that the joint growth-inequality process grinds ever more people into ever greater bone-crunching poverty.

(To be clear, inequality does not have to increase with economic growth. But many people and quite a few economists think it might—hence the so-called tradeoff between equality and efficiency. The data do not speak very strongly on this, in either direction. But I think such a putative regularity is of little consequence for the point here.)

Almost uniformly, the graphic shows inequality is unable to rise enough to overcome the benefits of economic growth. As a matter of logic alone, of course, it might: an actual, large instance in the animation is China between 1996 and 1999: In that 3-year period the China bubble moved rightwards and upwards. So there’s nothing in the arithmetic that rules out the possibility. But it is unusual. As time proceeds, almost uniformly, the bubbles move southeasterly, shifting rightwards and dropping towards the floor. This is a very good thing. Economic growth reduces poverty.

In the animation, right at the start of the sample Eastern Europe and Central Asia (ECA) implodes leftwards, just as post-Communist transition began. But then after that pretty much only the rightwards movement is visible. Compared to China, that other 1-billion people economy India, up through 2004, still hadn’t done very much. Sub-Saharan Africa (SSA) all this time basically did nothing but percolate upwards: It didn’t grow and it saw vast numbers of its people fall ever further into grinding poverty.

In 1981 1.47 billion people on earth lived on less than 1 dollar a day. By 2004 that number had fallen to 0.97 billion, a reduction of half a billion. (If you don’t like these numbers, you come up with better ones. In economic research it takes a model to beat a model, so simply complaining that a model isn’t a good model or is unrealistic doesn’t get you very far. So too whining that an estimate isn’t a good estimate.) The animation shows that pretty much all of that worldwide poverty reduction is due to just … China.

Since this animation, like all digital goods, is infinitely expansible, I also presented it at a British-Malaysia Chamber of Commerce lunch and as part of a lecture at the British Council in Malaysia, both also in August, as part of Malaysia’s 50th anniversary celebration of its independence from Britain. (The animation is also on youtube and you can put a version on your cellphone if you like.)

The underlying data are from Chen and Ravallion (2007) “Absolute Poverty Measures for the Developing World” and from World Development Indicators (2006) online. Further analysis is in Quah (2007) “Life in Unequal Growing Economies”. Related discussion appears in Quah (2003) “One Third of the World’s Growth and Inequality”.

I generated the animation by

latex 2007.08-SERC-lug-dq.tex
dvips -pp 5-10 -o - 2007.08-SERC-lug-dq.dvi | ps2pdf - - | convert -delay 80 - 1-2007.08-SERC-lug-dq.gif

i.e., using standard tools latex, dvips, ps2pdf, and convert.

“3 little syllables”: LSE graduation, July 2007


Given how knowledge is supposed to be just world knowledge—not Korean, Japanese, British, or American knowledge—it is impressive how much gets written comparing to those in the West the sheer numbers employed in Chinese science and technology, or the levels of expertise in Indian engineering. How long will it be, it is implied, before Chinese knowledge or Indian knowledge overtake Western knowledge?

Thomas Friedman describes in The World is Flat how Craig Barret — the current Chairman and former CEO of Intel Corporation — shocks Americans by admitting Intel could well thrive as a company even if it never hired another American, although this of course is neither Intel’s intent or desire. “We still do hire lots of Americans. But today we can hire the best talent around the world and be very successful,” casting his eye over how a lot of Intel investment now takes place in Russia, China, India, Malaysia, and Israel.

Why hold back? Why not hire only the best?

The other story making the rounds is how in many Western firms now, annual prize ceremonies for top performance come with cheat-sheets to help the CEO pronounce the names of 9 out of 10 of the firm’s most outstanding employees. Now and then, of course, “John Smith” from Peoria Illinois surprises.

So it was with some trepidation in early July that, as Head of the LSE Economics Department, I looked over the list of 300 or so graduating students whose names I would have to announce, before an audience of 1,000 in the Peacock Theatre at LSE’s graduation ceremony. As I had previously blogged last December and October, that audience would include friends and family who had travelled vast distances to attend.

LSE has long been and continues to be far more international than any other university I know. Of its student population of 8,000, half come from more than 120 countries outside the European Union. Last year, for the first time ever, China and Hong Kong fielded over 950, the highest number of foreign students at the LSE. Malaysia and Singapore, even when added together manage only a tiny population at home. Yet, somehow they routinely send the LSE almost as many students as does the Chinese mainland now, and one-third more students than does all of Germany.

At the ceremony, I got up to the podium and, following protocol, tipped my hat to Howard Davies, the Director of the LSE, standing across the stage. He nodded, and looked pointedly back at me, for my Department’s students were the bulk of those waiting to be called up on stage to shake his hand. I started down the list, and got smoothly around the first bend with “Igor Cesarec”, “Christina Yuen Kiu Chan”, “Wang Sheair Chua”, “Yahan Li”, “Sulwyn Lim”, “Saravanan Nagappan”, “Hieu Nguyen”, “Sunehra Rahman”, and “Muhammad Kashif Riaz”.

I figured I was doing well. I only had 240 names that morning; some graduates had decided to go home or had had to start work, and couldn’t attend.

I could see the finish line. I headed towards it with “Adrian Zhi Da Wong”, “Sukjai Wongwaisiriwat”, and “Zhi Jia Yap”. I was on the final straightaway now with “Jiaqian Chen”, “Ilja Boelaars”, “Kun Lung Wu”, “Vasileios Gkionakis”, and “Nuarpear Warn Lekfuangfu”.

Then I messed up.

“Linda Peng”. Three syllables. From Malaysia.

These people I have named and others in the Peacock Theatre that morning are friends of mine. Of those who graduated BSc from the Economics Department, three years back I had given them and their classmates, all 850 of them, the very first lecture they ever attended at the LSE. Not by coincidence, that had also occurred in the Peacock Theatre; it was the first lecture on Introductory Economics. These people are members of an amazing and accomplished class. I wasn’t pleased to see them leave that July morning. But I was proud I got to announce their names as they left.

World knowledge it is then.

“So, where again did you say teach now?”

Beginning of the month, 07 December, I was in Delhi, at LSE’s Asia Forum. I’m lucky enough to have gotten to speak at all three of these now, beginning in Bangkok in 2004, then Hong Kong in 2005, and this year Delhi. And it is with some considerable pride when it came clear to me at this event that the LSE in India is no casual flirtation but instead a relationship that has bedded in over decades.

Since the Forum itself has already been written up elsewhere, I won’t rehearse again announcements on how the Reserve Bank of India and the State Bank have helped endow the IG Patel Chair at LSE; how Nick Stern, who’d just authored the Stern Report on the Economics of Climate Change, will leave the UK government to be the Chair’s first incumbent, and so on.

Instead, I’ll just put down what I saw. At the Forum both Prime Minister Manmohan Singh and President Abdul Kalam attended and spoke. President Kalam is the only Head of State with whom I have had dinner who brought along to that dinner a Powerpoint presentation to accompany his speech: a detailed plan to alleviate rural poverty in India. Before becoming President, Kalam had contributed critically to India’s space and missiles programs. He continues to support Open Source Software; and he is popular enough throughout India to have been nominated an MTV India Youth Icon.

Prime Minister Manmohan Singh spoke in the morning. I expected to hear good things about the relationship between LSE and India, and economics more generally, which he addressed sure enough; and about down-to-earth micro infrastructure problems in India, which, surprisingly, he did not. Instead, he talked the big macroeconomics of growth and distribution: the rise of India in the international marketplace; the changing balance of world economic power; the adjustment needed to expectations and well-being worldwide as global distributions of income and consumption shift, eastwards towards India and China.

Perhaps modern macroeconomics can stop being shy in how it saves itself only for bread and butter policy questions in the already developed economies of the world.


That morning I got to chat with Nandan Nilekani, who together with Tarun Das of the Conference of Indian Industry, Sheila Dikshit the Delhi Chief Minister, and Kishore Mahbubani the Dean of Singapore’s Lee Kuan Yew School of Public Policy, had agreed to be on a panel with me for the Forum. In case anyone missed Nilekani on p. 5 of Thomas Friedman’s The World is Flat (credited, no less, with planting the eponymous idea in the author’s mind) Nandan really is as enthusiastic and nice and down-to-earth as is widely reported. He confirmed to me the amount of money spent on Indian publicity at the World Economic Forum last year (2006) in Davos. I told him how much I enjoyed seeing mega-celebrities and multi-billionaires lining up, scrambling, and fighting for the souvenirs his people handed out there. Fighting? Oh, yes, fighting me for those same souvenirs.

In Delhi I met many ex-students of mine, other alumni, and LSE friends. They were all so full of good cheer, I felt awkward inside when I thought about how little time I might have given them when I knew them at LSE. For the past seven years, though, I actually did at least lecture to almost every single undergraduate enrolled at the LSE and definitely to all the MSc Econ students. How do other academics deal with meeting alumni if they have never taught those alumni, but still have to represent their university in financial, intellectual, or policy negotiation with them?

The LSE Asia Forum was replete with goodwill, and rightly generated a lot of press. My own talk appeared in the Times of India 2006 December 13. (The version I prefer, one that points out infrastructure problems elsewhere, is slightly longer. But I still omitted discussion of how avoidable medical errors in the US kill 100,000 a year. Even if that were a gross over-estimate by 50%, say, that’s still more deaths than from automobile accidents, breast cancer, and HIV/AIDS.)

So I’m cheering on all the billion-people economies. What used to be political correctness is now just plain, hard-nosed economic calculation.

It’s just a metaphor!

I missed a September posting on this blog. On the other hand, being Head of Department lets me indulge in talking to large groups in other ways. For instance, I got to address the entering class of BSc Econ students at the LSE. 28 September 2006. So maybe that talk will have to do instead.

Speaking to these cosmopolitan students got me thinking about textbooks that, optimistically, label themselves International Edition, yet still use examples like consuming lobster at a New England clambake. These students of ours have munched fried silkworm while walking down Wangfujing in Beijing. They’ve come in from homes on windswept, treeless plains outside Ulanbataar; or they regularly shop Singapore’s Orchard Road and Shanghai’s Nanjing Road. They’ve bitten into black pudding, for breakfast both in an English cafe and with noodles in soup in a Far East Asian open-air foodcourt. Why does anyone think a New England clambake would hold any resonance for them? But then again why would it hold any resonance even for someone biting into corndog at a Minnesota state fair?

Maybe that was OK when the whole world watched CNN and MTV together. But no one does anymore. They’re too busy looking at 180-second segments of amateur content on YouTube or MySpace, generated by relatively random people from over 130 countries around the world.

Oh, and yes, to the parents of these LSE kids: Sex, drugs, and rock-n-roll is just a metaphor. Like when someone has 243 friends on LSE’s Facebook? They are really working hard at school, and not hanging out with 243 people the entire time. Chill.

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