Michael Cembalest, head of investment strategy at JP Morgan, is famous for his beautiful, insightful charts. His latest (courtesy of Paul Kedrosky) illustrates two millennia of world economic history:
According to the chart, India (orange) and China (red) together comprised more than two-thirds of the globe’s economic activity back in year 1 (well, not so much the globe, but the chosen countries). By 1950, their share had fallen to only one-eighth, thanks to the growth of the United States (green), Western Europe (shades of blue), Russia (gray), and Japan (yellow). Since then, China has been gaining share.
Not surprisingly, the chart has already attracted attention in the blogosphere. Over at the Atlantic, Derek Thompson slices and dices the data to see how much of the pattern reflects the ebbs and flows of population vs. productivity.
At the Economist, meanwhile, K.N.C. channels Edward Tufte, expressing appropriate alarm about the compressed x-axis. The first millennium gets as much real estate as the 1990s. K.N.C. then offers another approach:
Given data limitations, this chart also compresses the x-axis, but using bars and variable-width gaps make it much clearer that there are jumps between years. The focus on a limited number of countries also makes it clear that the chart omits countries that account for 30-40% of world GDP. In Cembalest’s chart, in contrast, one wonders what happened to South America, the Nordic countries, Canada, Africa ex Egypt, etc. His listed countries appear to sum to 100% of world GDP, but large swathes of the world are unaccounted for.
But while foreign investment is mostly a good thing, there are downsides. The abundance of cash has helped fund riskier bank loans and fueled a potential real-estate bubble. By some measures, the Brazilian real is now the world’s most overvalued currency, and many local factories aren’t competitive in global markets.
Daily life has become so expensive that movies, taxis and even a can of Coke cost more in São Paulo than in New York. Rio de Janeiro apartment prices have doubled since 2008, and office space in São Paulo is suddenly more expensive than Manhattan. In many cases, investment banks must pay their Brazilian bankers and analysts more than they would get doing the same job in New York.
Some executives in Brazil fret that the cost of doing business has risen so fast that their country may be unable to become the manufacturing power it has aspired to be for generations. “Ever since I was a little girl I always heard Brazil was the country of the future. Now that the future is here, I am starting to fear it will be brief,” said Cynthia Benedetto, the chief financial officer of Brazil’s flagship manufacturing firm, Embraer SA, the world’s No. 3 jet maker. Embraer, a major exporter, says it is investing in equipment to lower its labor costs at home and opening more plants abroad.
If you are interested in Brazil’s economy, please read the whole thing.
The U.S. expanded at a tepid 1.3% annual pace in Q2, but that was still better than many other developed economies. Italy grew at a 1% pace, Germany at 0.5%, and France at 0.0%. And then there’s Japan, which contracted at a 1.3% pace.
The chart also nicely illustrates just how sharp the GDP declines were in late 2008 and early 2009. Both Germany and Japan, for example, had quarters in which economic activity contracted at a 15% annual pace or more. By contrast, the worst U.S. quarter saw declines at “only” a 8.9% pace.
If all goes according to plan, the hoopla over the debt limit will soon recede. Policymakers and analysts will move on to the next new thing. And, sadly, some fascinating questions will forever go unanswered. For example, which president would appear on the trillion-dollar coin?
But if you are up for one last article about default, yesterday’s piece by Christophe Chamley at Bloomberg is a good one (ht: Donald M.). Chamley recounts Spain’s intentional bond default way back in 1575:
Spain, at the time, was the world’s sole superpower. Contemporaries described it as an empire “over which the sun never sets.” Yet the king needed the cities’ consent to borrow at a reasonable rate. And he needed it for a reason: The cities collected the taxes.
Each of the 18 main cities of Castile levied a special tax earmarked for long-term debt service. The level of this tax was set every six years through negotiation with the king. Tax collections were used first to pay off local long-term bondholders, with the rest sent to the central government. The local long-term bondholders were, in large part, the elderly living in the area. So local taxpayers realized that if they didn’t pay, their parents would be hurt. Thus, this precursor to Social Security had an effective enforcement mechanism — the ire of the elders.
But the king could only exploit this confluence of interests so far. The Cortes set the earmarked tax rate by majority rule, and that limited the king’s issuance of what were, in effect, his AAA securities. The king also issued other bonds secured by other, non-earmarked revenue. These securities were of a lower grade and sold at lower price.
Thanks to Philip’s expensive military adventures in the Netherlands and the Mediterranean, Spain’s debt had reached half of gross domestic product by 1573. At that point, the cities balked at paying higher taxes. For the next two years, they refused to budge in their confrontation with the king.
Finally, in September 1575, Philip took a circuitous route to outmaneuver the Cortes. He suspended payments not on the long-term debt, but on the short-term debt, which was owed primarily to Genoese bankers. The people cheered. Resentment against bankers ran as high then as now — perhaps higher, because the bankers were foreigners. The upshot, however, was default and a full-blown credit crisis.
In Washington’s economic circles, the only animals we usually have to worry about are hawks and doves. (And the occasional raccoon or vole.)
If you’re doing development research in Ghana, however, things are more complicated. Zipping from village to village on her motorcycle, my friend Liz has become intimately familiar with the behavior — often stochastic — of different animals when confronted with a moto rider:
Goats are the ideal animal to encounter on the road in Northern Ghana. Street smart and properly aware of their place in the road hierarchy, they will run away and off the road at the approach of a vehicle. …
While goats are the ideal animal to encounter on the road, sheep are bane of Ghanaian drivers. Dismally stupid, they will invariably run directly into traffic. … The difference in behavior between sheep and goats makes distinguishing the two a key survival skill in Tamale. Remember: tail up, goat; tail down, sheep.
If only it were that easy to distinguish the real budget hawks and doves.
The United States can’t pursue al Qaeda alone. We need help from other nations. To encourage nations to provide that help, the U.S. created the Coalition Support Fund to reimburse coalition partners for the costs they incur fighting terrorism.
As Adam Entous reports in the WSJ, the prospect for such “reimbursement” creates an obvious incentive: our partners may exaggerate how much they are really spending:
The U.S. and Pakistan are engaged in a billing dispute of sizable proportions, sparring behind closed doors over billions of dollars Washington pays Islamabad to fight al Qaeda and other militants along the Afghanistan border.
Washington, increasingly dubious of what it sees as Islamabad’s mixed record against militants, has been quietly rejecting more than 40% of the claims submitted by Pakistan as compensation for military gear, food, water, troop housing and other expenses, according to internal Pentagon documents. Those records, reviewed by The Wall Street Journal, detail $3.2 billion in expense claims submitted to the U.S. for operations from January 2009 through June 2010.
According to the documents and interviews with officials, Pakistan has routinely submitted requests that were unsubstantiated, or were deemed by the U.S. to be exaggerated or of little or no use in the war on terror—underscoring what officials and experts see as a deep undercurrent of mistrust between the supposed allies.
Krugman walks through various ways that struggling Eurozone members might adjust to their ongoing financial crisis.
Along the way, he emphasizes a key point: American housing and mortgage markets were not the only cause of the global crisis:
You still hear people talking about the global economic crisis of 2008 as if it were something made in America. But Europe deserves equal billing. This was, if you like, a North Atlantic crisis, with not much to choose between the messes of the Old World and the New. We had our subprime borrowers, who either chose to take on or were misled into taking on mortgages too big for their incomes; they had their peripheral economies, which similarly borrowed much more than they could really afford to pay back. In both cases, real estate bubbles temporarily masked the underlying unsustainability of the borrowing: as long as housing prices kept rising, borrowers could always pay back previous loans with more money borrowed against their properties. Sooner or later, however, the music would stop. Both sides of the Atlantic were accidents waiting to happen.
In national surveys, insecurity ranks at the top of the most serious concerns of Afghan businesses. However, discussions with local business owners revealed a critical qualification to this finding. Surprisingly, Afghans were more concerned with the uncertainty of the business environment than with physical insecurity. In Kandahar, which is considered one of the most dangerous areas of the country, conversations with business people highlighted uncertainty about the quality and timing of the power supply, about supplies flowing in through the border crossing of Spin Boldak, about the local/national government, about financing,about American force posture and about the sanctity of obligations should political power shift – more than security issues. In Kabul, two manufacturers noted that they had received seven-year tax break guarantees from a minister of finance only to see them rescinded by his successor. This act understandably rendered the companies reluctant to make subsequent investments.
So how do Afghanistan’s entrepreneurs respond to this uncertainty? Cusack and Malmstrom find that “businesses adapt by integrating vertically, emphasizing short-term profits and ‘buying’ security”:
Businesses employ a number of common strategies to adapt to Afghanistan’s uncertain business environment. First, they seek to vertically integrate operations, generally within family and tribe, to minimize reliance on untrustworthy business partners and the government. “We have the most corrupt government and people in the world. I don’t like relying on people outside of my family if I don’t have to,” stated Mohammad Jalil Rahimi, General Manager of the Mazar-based Barakat Group, an import-export conglomerate. The process of vertical integration begins around a central business, often import-export, and grows to include supporting businesses, such as transportation and logistics. It can then grow to include other sectors such as construction, agriculture and light manufacturing.
Second, businesses seek to remain as flexible as possible in order to hedge against uncertainty, valuing short-term but dependable gains over developing long-term productive capacities. A Western official explained, “Afghans go to the highest-margin businesses that require the least amount of capital and that produce benefits in the least amount of time.
This means that they often start in trade, then pick productive business opportunities in services, agriculture and construction. But even then, people are loathe to invest in manufacturing versus trade because it is easier and quicker.” Despite this adaptation, producers continue to face challenges from a variety of sources. For instance, a Mazar cable and wire producer was being put out of business due to competition from cheaper Iranian imports; a Jalalabad-based box manufacturer could not afford his onerous credit payments, was accumulating debt and was unable to sell his business; and a Kandahar beverage company could not convince needed Pakistani technical engineers to visit and repair manufacturing breakdowns.
We observed four primary strategies for managing physical insecurity: 1. shifting operations away from unstable areas; 2. negotiating with government or insurgent power brokers, often through payment of informal taxes and bribes; 3. allocating up to 20 percent of an operating budget to formal security costs, including a security director, guards, etc.; or 4. implementing community-based strategies in cooperation with local elders and staff. The choice businesses make depends on an individual business’ toleration of risk, past experience and influence within society. An Afghan mining executive explained his predicament: “I can’t complain to the police or the government because it will make the problem bigger. My only strategy is to negotiate directly with the Taliban. My last option is to pay them. But I don’t want to pay them because it will make them stronger.”