Archive for year: 2017

It is all about the hunt, the seeking, the thrill of the chase in this little world of ours. And so after many years, countless hours of research, many false leads, we are ecstatic to announce that we have finally found a bialy worth its name here in the Pacific Northwest, the home of the worldwide headquarters of International Need to Know. Wait, what is a bialy you ask? Ahh, a bialy is like a bagel but a thousands times better–baked rather than boiled and rather than a hole, the middle contains onions or garlic. We sampled bialys as a child visiting family in New York and continued to enjoy them over the years whenever we were in the big city. But outside of New York they are hard to find and almost impossible in the Seattle area. A few local bakeries carry something they claim are bialys but they are virtually unrecognizable from the real thing. But then our friend (the now sainted) Pete Gladhart handed us a bialy from The Bagelry in Bellingham, Washington, and as we bit into it the skies opened and glory (and taste) rained down upon the land. For this was a bialy almost as good as Kossar’s on the Lower Eastside of Manhattan. Unfortunately, Bellingham is a long drive from our Seattle headquarters so as we make plans to develop a bialy food truck with a secret method of replicating New York bialys we bring you an explanation for the decline in labor’s share of income, ask whether we’ve been wrong about China’s GDP and tell you where the money is going. It’s this week’s International Need to Know, the new, better, more honest, non-harassing, no-spin zone of international news.

IMF-Splaining of Decline in Labor Share of Income

Earlier this year we pointed out that the global share of corporate income has been decreasing since the early 1980s, noting “it’s not just in developed countries like the U.S., Germany and Japan–China is seeing the same trend.” We did not hazard an explanation for this trend but just in time for kids and anarchists to dance around the May Day Pole, the International Monetary Fund (IMF) does, arguing that “this trend is driven by rapid progress in technology and global integration.” The reasons for the trend differ by type of economy. In advanced economies, the IMF asserts, “half of the decline in labor shares can be traced to the impact of technology. The decline was driven by a combination of rapid progress in information and telecommunication technology, and a high share of occupations that could be easily be automated.” In emerging markets, on the other hand, the IMF states, “We find that global integration, and more specifically participation in global value chains, was the key driver of declines in labor shares in emerging markets.” The IMF’s claim is that such integration is “shifting the production in emerging markets and developing economies towards more capital-intensive activities.” We’re not sure we buy these explanations for the decline in labor’s share of income but since we raised the issue we offer up the IMF’s ideas for the cause of this trend.

Are We Wrong About Chinese GDP?

On more than one occasion we have joked about the validity of official Chinese government statistics on GDP growth, asserting they are higher than the actual growth of the economy. But is the joke on us? A new economic paper tells us we are wrong—not that the government’s statistics are correct but that the official GDP figure is actually undercounting GDP?!!! The method these three economists used was to count satellite-recorded nighttime lights, something that cannot be manipulated the way GDP statistics can be. To vastly oversimplify, these economists found that they could correlate the increase in these lights to increases in GDP and to other variables which simulate economic growth such as electricity use, freight volume and bank loans. Using the nighttime lights variable they calculate that Chinese GDP figures are actually higher than what was reported by the government. The  economists used nighttime light data from 2004 to 2013 before many of us thought China was having economic difficulties. But the paper also examined late 2015 data: ” We find that GDP growth in 2015 Q4, a time when the financial press was awash with stories about a hard landing of the Chinese economy, is somewhat higher, but quite close to the officially reported rate, with a 95% confidence interval…”  We are curious what nighttime lights show for 2016 GDP growth. This paper does note that the growth seems to be driven by credit which could foretell an economic stall when this credit growth is removed. While we await others analysis of this economic paper that is upending our beliefs, we file it in our increasingly large file labeled “China is complicated.”

China’s real GDP Growth. You do the math! Or, maybe not, the math the economists used is a bit complicated:

Where the Money is Going

The world seems to be more volatile than usual, at least if you scan the headlines. But even in the midst of the constant churning, money continues to flow around the world. In which places do investors currently have the most confidence? The 2017 A.T. Kearney Foreign Direct Investment Confidence Index tells us the United States is number one for the fifth year in a row. In fact, Canada, coming in at number five, makes North America an investment destination powerhouse. Rounding out the top five are Germany, which rose to second as China fell to third (but the nighttime lights?) and the United Kingdom comes in fourth. The folks at A.T. Kearney were surprised that the UK did so well given the uncertainty of Brexit. A.T. Kearney explains the the U.K.’s investment destination resilience, by noting that, “U.K. Prime Minister Theresa May has promised they will emerge as a ‘Global Britain,’ one with fewer cumbersome EU-mandated regulations…” We still hope to do a deep dive into Brexit in the coming weeks–in fact, we are assembling our mask and oxygen tanks as we type.

Recently at the gym while exercising, we were watching the Boston Celtics demolish the New York Knicks. It was a rather boring game. We looked across the room and saw a bank of TVs in front of a set of treadmills that were showing a different basketball game. We squinted our eyes to figure out who was playing. Later when we walked over to the TVs we realized the channel was showing a video game of basketball–the treadmillers preferred to watch two people playing a video game simulating a basketball game rather than watch an actual NBA game. I suppose we can’t entirely blame them given the poor entertainment value of the Celtics-Knicks matchup. We took two lessons from this: First, even admitting our bad eyesight, it is clear video game graphics have advanced so much that from a distance it is difficult to tell reality from virtual. Second, we are near a new era when it will be impossible to distinguish real life from artificial. Of course, if the recently popularized theory is true that we are all just a software simulation, then we are building imaginary worlds on top of illusions. Speaking of imaginary worlds, from time to time we will take deeper dives into issues and places, and this week, in honor of President Xi Jinping’s visit to the U.S., we look at the always confusing, confounding, complex China, including China’s role in the world and the state of its economy, finishing up with global population changes. It’s this week’s International Need to Know, using our game controller to keep you apprised of our massively multiplayer online role-playing world.

Without further ado, here’s what you need to know.

Is China Dominant?

Is China Dominant? That giant sucking sound you hear? Many people claim it is the United States abandoning its 70-year role as a global leader. Into that void many people assert (their voices are at least powerful enough that they reach our tender ears) strides China. They are asserting this is true for trade, the environment and the world economy in general. And it is true that China is much more important than it was twenty years ago and even ten years ago. But, as we noted in this space at the beginning of the year, it is difficult for China to be the leader of free trade when its borders remain mostly closed to trade and investment. China is working to clean up its environment and deserves credit for what they have accomplished, but China’s laws and practices have a long ways to go before they reach the standards of developed countries. And finally there is finance. China’s formal and shadow banking systems are murky and we’re not certain anyone, perhaps even the Chinese themselves, completely understand them. And when we look at global financial payments, China still lags far behind the U.S., the EU (the Euro is not gone yet!–soon we will dive deep into the roiling English Channel of Brexit and the EU) and even the British Pound. For that matter, though close, the Renminbi is still behind the Japanese Yen and Canadian dollar in its share of global payments. Barring catastrophe, we expect over the next two decades that China may become a leader in any number of these categories. But for now the world leadership vacuum is exactly that, a dark empty void, for good, bad or between.

China’s Economy is…?

As President Xi sits down to a meatloaf sandwich in Mar-a-Lago, what is the state of his country’s economy? By many measures, the economy is doing fine. After some worries last year, the economy appears to have stabilized. The government has launched a variety of initiatives including a new Silk Road initiative and a new Special Economic Zone in Hebei Province. On the other hand, we have warned before that official data in China is like a cable company saying it will be at your house between noon and three, not always to be trusted. A year ago, we looked at beer sales to see what was really going on in China’s economy and as we often do, we turn to beer again, and noodles. Reuters reports that “Tsingtao Brewery Company, China’s number two brewer, posted its steepest drop in net profit in 20 years last week, blaming tough competition and weak demand. Noodle maker Tingyi saw profits drop by a third.” The stable economic growth also appears to be built on credit which has grown at a much faster rate than the economy. Much of recent investment in China is by state owned companies. For how long can China goose its GDP with credit? Finally, perhaps most relevant to the host at Mar-a-Lago and as we noted in the post above is that China’s economy is still very much closed in many ways. For example, as you see in the graph below, China ranks as the second most restrictive major economy in the world. Or, as former Treasury Secretary Henry Paulson says, China’s market is far more closed today than it was a decade ago when he was negotiating with the Chinese. So China’s ship is doing well but has some rocks and treacherous islands (not necessarily in the South China Sea) to navigate ahead.

As the World Turns

Sixty some years ago in 1950, China, India and the U.S., in that order, were the largest countries in the world by population. The same is true today but many of the other top populous countries are very different. As you see below in the graph courtesy of Robert Ward of the Economist Intelligence Unit, Russia has fallen from fourth to eighth, Japan is barely in the top ten and Britain and Italy are nowhere to be found. Meanwhile places like Indonesia, Nigeria and Bangladesh have climbed into the top ten. If current trends continue, always an iffy proposition, India will be larger than China and Nigeria larger than the U.S. in 40 years. To give a sense on how long ago 1950 was and at the same time how much constancy there is in certain parts of life, this year is the first baseball season without Vin Scully or Connie Mack working in some level of it since 1885. Now graph that! 

   

In recent months, thanks to a client providing us a bus pass, we have been taking the bus more frequently into downtown Seattle. Specifically we have been riding the notorious E Rapid Ride which travels down Aurora Avenue and whose ridership is not, shall we say, the type of people who are members of the Bellevue Club (where we had a meeting yesterday–more on that, perhaps, in the future). In fact, we are fairly certain on one mid-day ride a few weeks ago that we were the only rider not on meth. On various rides, we have had to roust the passenger next to us who was passed out, broker a fight between a homeless woman and the bus driver and walk by a passenger brandishing a sword. At first we were a bit snobbish about all of these rumblings on the bus but now we accept them and welcome them (as long as the sword is not brandished on us or anyone else). We realize these rides are one of our few exposures to people outside of our socio-economic class. A book we are reading, which we highly recommend, The Complacent Class, talks about how the U.S. is more segregated than ever: economically, educationally, socially and racially. We do not agree with everything in the book but its assertions and data are thought provoking. Even as we continue reading the book, we are not complacent about immigration in Canada, or about how China and India measure up on the Internet or even upon discovering some surprising data about forests. It’s this week’s International Need to Know, integrating data, analysis and information as best we can.

Canada First

We have witnessed revolts against immigrants in parts of Europe and have seen it up close here in America as well. Now Canada, the apparently mild mannered country to the north (having been to hockey games I’ve never understood that stereotype), might be joining the raucous fray. A new poll shows a “plurality of Canadians disapprove of the way the Trudeau government is handling the recent illegal border crossings.” 48 percent of those surveyed say those migrants crossing illegally from the United States into Canada should be sent back. One might think these Canadians are merely worried of American blue state refugees wandering into their country with glasses of roséand quinoa kale wraps* (and who wouldn’t be?), but the survey question clearly refers to people “from the Middle East and Africa” as you see in the graphic below. In addition, 46% of respondents disapprove of the way the Trudeau government is handling the refugee issue. In refugee matters, Canada is not an outlier but following other countries attitudes. As we have written before, we live in a new age of fear, and like all such ages, the risks of giving in to such an emotion are ripe for trouble and danger. .

  

*Full disclosure: in the last two weeks we too have sipped rosé and munched quinoa (but not in a wrap!)

Hello India? This is China

Twenty years ago there was a debate about who would develop faster, China or India. China won that argument as easily as Gonzaga will defeat West Virginia later today. China, until recently, averaged higher GDP growth and built up much better infrastructure. It is also way ahead in the digital economy. As you see in the graph below, far more Chinese use the Internet than those in India—71% to 21%.  Not coincidentally, Chinese are also far more likely than Indians to own a smart phone—68% to 18%. As the Pew Research Center reports, this digital advantage is due to China building a larger middle class with more wealth, “Between 2001 and 2011, the share of middle-income Chinese, those making $10.01-$20 a day, jumped from 3% to 18%. In India over the same decade, the middle class share of the population grew from 1% to 3%.” Of course, today China’s economy is growing more slowly (probably slower than official China government reported figures of 6.7%) and India’s economy is growing faster, around 7%. And since all those Chinese on their smart phones will be distracted playing video games and hanging out on WeChat, India’s economy, and digital sphere, may catch up more quickly than we think.

Seeing the forests through trees of new data

We have all read stories about the loss of forests, including the catastrophic loss of rain forests, but did you know in some countries there has been a gain of forest land in recent years? China, Russia* and India all have more forest land today than twenty-years ago, according to the World Bank. There have been huge losses in South America, especially in Brazil which since 1990 has lost 531,000 square kilometers since 1990. Large parts of Africa have also lost forest land. But many countries, especially developed ones, are gaining forest land. In fact, this data provides evidence for a pet (buffalo, as you will see) theory of ours that as more and more people huddle in mega cities, country sides will return to the way they were 200 years ago since no one, or at least few people, will be living in those areas. This will happen in many large countries, including in large swathes here in the U.S. In the future, we may again be singing about where the buffalo roam.   

We are on the road again this week, this time coming to you from the greater Phoenix area where we are keeping a close eye on our beloved Seattle Mariners. When we booked the trip many months ago, we forgot about the World Baseball Classic which started this week. In this tournament, countries play against each other with the winner earning a true world championship. This means some of the Mariners’ best players are off playing for their home countries–Venezuela, Dominican Republic, Canada–and not here for our viewing pleasure. One would think that someone writing something called “International Need to Know” would have kept up to speed on such a world event. But even as we bow our head in shame, take a sip from our beer, watch bright young prospects play in the sun and prepare to bite into a hot sausage sandwich, we bring you an argument worth having, inform you about the country that has the longest economic winning streak and issue information on which country’s passport you would be lucky to have. It’s this week’s International Need to Know, aiming to be at least a .300 hitter in the game of international affairs.

Without further ado, here’s what you need to know.

An Argument Worth Having

People fight about just about anything nowadays, often on social media platforms and even more often vociferously and angrily. So we were gratified to recently come across an argument worth having. Early last year, three economists–David Autor, David Dorn and Gordon Hanson– published a paper asserting China did indeed take away large swathes of jobs from the U.S. from 1990 to 2007. The paper, which was full of data, complicated equations and analysis, forced a re-thinking on trade issues by at least some. However, last week, George Washington University economist Jonathan Rothwell published a paper taking issue with Autor, Dorn and Hanson’s data. He asserts that the loss of jobs to China is not as significant as the original paper claimed. The three authors of the original paper have now shot back at Rothwell, stating, “The main methodological critique provided by Rothwell is unfounded. The critique provided does not follow from his own logic.” We do not have the chops to determine which side is right, but will note that the original paper, as we understand it, claims the negative trade effects were localized. That is, loss of jobs to China might have been very harmful to certain local communities, but the paper does not assert an overall loss of American jobs. In fact, as Kevin Drum recently illustrated, American, German and other countries’ manufacturing job losses have been remarkably steady over the last 50 years (see the chart below). Plus, China is now also losing manufacturing jobs–the U.S. is no longer siphoning jobs on net to China if it ever was (depending on which economist you believe). The economists’ argument regarding how many job were lost to China is definitely worth having but the squabble falls into the category of fighting the last war.

Connecticut Women’s Basketball Team of Countries

The Connecticut women’s basketball team has won more than 100 straight games as it heads into the NCAA tournament. That’s darn impressive for any team not playing the Washington Generals. Australia’s economy has an impressive streak of its own going, having gone more than 25 years without a recession. That’s the current longest streak without a recession in the world. Poland comes in second with 86 consecutive quarters without a recession followed by South Korea (proving I guess that you don’t need an active president to have a successful economy and that a dangerous neighbor next door armed with nuclear weapons can’t stop you either). The mighty Slovak Republic is fourth. These are four fairly disparate economies so there’s probably no big lesson to learn from them as a group. But it should be noted that of the longest economic win streaks since 1970, these four current streaks all rank in the top ten. That so many of the hot streaks are taking place today may, or may not, say something significant about our current world economy. Is the economy better, more resilient, propping itself up artificially or is it just statistical noise? Let’s get Autor, Dorn, Hanson and Rothwell fighting about this.

Passport to Freedom

At the airport last week while standing in the TSA pre-check line, which was longer than usual, passengers pulled out their passports and other IDs. I saw identification papers from many countries which leads to the question: which countries’ passport is the best to have? Nomad Capitalist, a consulting firm that helps people move around the world and pay reduced taxes, offers their Nomad Index which provides one perspective of which is the best passport. Its rankings are based on which countries allow the most visa-free travel, are most lax about collecting taxes overseas, have the best perception, provide the ability to have dual citizenship and provide the most overall freedom. Under those criteria, Sweden tops the index mainly because someone with a Swedish passport can travel to 176 countries without having to get a visa. It is also easier for a Swede living overseas to avoid paying Swedish taxes. As you can see in the table below, all of the countries in the top ten are in Europe. For those of you curious, the U.S. ranks only 35th in this index due to the taxes, perception and freedom categories. Afghanistan comes in last.