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Note: INTN is gone next Thursday, July 21. We’ll be back Thursday, July 28 with everything international you need to know.

Yesterday I had the opportunity to speak with a group of aspiring young entrepreneurs from Mexico. When asked why they want to be entrepreneurs, some answered money, others said they wanted control while several expressed the desire to be creators. But nearly all also said they want to improve Mexico and the world. Much recent news has focused on doom and despair but if this talented group is any indication, the future is in good hands. But even as we get caught up in our own entrepreneurial dreams (an artisanal bialy shop in Seattle), we mind Britain’s productivity gap, welcome China bulls and wonder at the educational prowess of Vietnam. It’s this week’s International Need to Know, which although next week will be distracted and unpublished due to a trip to NYC, this week is loyal like a cat at Ten Downing Street shedding key data about our world you’ll need to vacuum up.

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

Mind the Gap: Britain’s Lousy Workers
Those good for nothing Europeans that just over 50% of British voters recently elected to flee–they may want to say good riddance to the unproductive workers of Britain. Via the always intriguingMarginal Revolution, we learn that British worker productivity lags far behind the rest of the G-7 countries and behind many other EU countries as well. Britain is not even in the same soccer, er, football stadium as Germany and France and is even behind Italy. It’s also behind Spain, Belgium, the Netherlands and Ireland. There are some positive results, however, when looking at subsectors. In manufacturing, “UK output per hour is estimated to be above that of Italy, and UK output per worker is a little higher than equivalent estimates for Germany and France.” But overall, and including Britain’s vaunted finance sector, the country’s productivity lags far behind. Even as the EU needs to make changes to its structure and policies, the UK might want to gaze into the reform mirror itself. It could use a good comb and wash.

China’s Shoppers
China’s bears bullied their way into this space a few weeks ago but it’s time for the bulls to have their time in our China shop, as we delicately examine new numbers on the size of China’s middle class, wealthy cities and online shoppers. China’s middle class is large as in over 100 million people large. Much of this middle class is huddled in China’s big cities. We’ve noted in the past that China’s demographics are aging at a rate faster than America’s, but its urbanites are relatively young with half the population of China’s big cities under the age of 35. If we look at the wealthiest cities, our old friend Shenzhen comes in first, as you see in the chart below. Shanghai surprisingly is far down the list. Shenzhen, of course, is where Tencent is headquartered which createdWeChat a sort of combination of texting, Facebook and Netflix. Tencent and other online companies are profiting from Chinese online spending. From Next Big Future, we learn that “online shopping in China accounts for 16 percent, or $672 billion, of all spending — and about half of that takes place on mobile.”  In the U.S., by comparison, online sales account for about 8% of retail spending. China’s got problems (which we’ll return to soon) but absent a crash, its consumers will continue to beckon companies who want to sell to a large number of hungry buyers.

Vietnam is Good at Tests

As we discussed earlier this year, Vietnam is young, dynamic, larger than you think and embraces trade. They also, it turns out, are good test takers. According to the international education organization, RISE, “Vietnam school children score over 100 points better on comparable tests than the average for low-income countries.” In the chart below, you see Vietnam in all its outlier glory hovering very near high income countries like the United States and Canada and well above low income countries from Peru to India to the Philippines. Vietnam’s children score better on tests than other low income countries from a young age and with each resulting year in school, the gap grows. RISE wanted to know why this was the case. What are Vietnam’s schools doing that is creating such great educational productivity results?  A World Bank study, that should have been titled, “We’re Not Sure,” found that part, but not all of Vietnam’s achievement is a result of higher level of access to pre-school and investment in school infrastructure. The study also claims there are cultural factors involved, including students skipping fewer classes and “teachers appear to benefit from closer supervision of their work by the school principal.” Don’t ever mess with a Vietnamese principal. Do keep an eye on an economy with young demographics and a strong educational system.

Reminder: There will be no International Need to Know next Thursday, July 21,due to a trip to the Big Apple, but we’ll be back July 28th bringing wit and wisdom from the four boroughs of NYC and beyond.      

This week we celebrate the 88th anniversary of the recording of West End Blues by Louis Armstrong and His Hot Five who blew, drummed and scatted with perfection on June 28, 1928. One music critic called it “the greatest record ever made during the 20th century.” In a week filled with hyperbole every bit as hyper as that statement and bursting with legions singing the blues over recent events in the UK and elsewhere*, we celebrate by looking at the compounding ironies of the Brexit vote, peek at another underreported change in our global order and determine whether the US or China is more popular around the world. It’s this week’s International Need to Know, an opening cadenza followed by bars and measures of international knowledge delivered to you each and every week.

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

A Towering Inferno of Irony

There has been much reaction to the Brexit vote last week, including some overreaction. We were surprised by the result having speculated in this very spot two weeks ago that the election might be similar to Scotland’s recent independence vote: lots of talk but in the end people deciding to stay. We are not surprised by overreaction to the event. Markets don’t like surprise and love to chew the scenery like an overwrought William Shatner scene. Brexit, if it ultimately happens, is likely a net negative for the UK, but for the world as a whole it is not a catastrophe unless, as we also worried about two weeks ago, it leads to further exits. Brexit at the least is a wonderful portal into a world towering in contradictions built upon beams and rebar of irony.

• The British Pound took a pounding right after the vote which raised alarms and tremendous concern around the world. But a traditional remedy for economic difficulties is to devalue your currency, making it easier to export and create jobs in the exporting industries. Ironically, the inability of distressed members to devalue has been a major flaw of the EU. In a rational world, countries such as Greece, Portugal and Italy would have seen their currencies devalued after they went into economic crisis seven years ago, allowing them to rebalance their economies by making it easier to export. Maybe the British were smart to leave a consortium with such flaws, right?  Except, of course, that the UK while part of the EU, is not part of the Euro currency zone.
• Anti-EU groups in the Netherlands, France, Austria and Italy are licking their chops at the opportunity to hold similar exit elections in their countries. Two weeks ago we speculated at such possibilities and it is by far the biggest worry of the Brexit result. And yet, upon reflection, Brexit could end up making such further exits less likely if things continue to go badly in the UK as a result of the election. If the UK economy is indeed badly affected and if Scotland separates and Northern Ireland unites with Ireland (additional ironies for the irony pudding that is Brexit), won’t other countries be scared off from taking similar exit actions? Perhaps the best thing that can happen for the EU staying together is for the UK to head into catastrophe. Come on, Brits, we must all make our sacrifices for the good of the world.
• And yet, the EU is badly in need of reform. It cannot succeed as a currency union without instituting a fiscal union. It is also not particularly democratic which leads to our last irony (at least of those that can fit in this space). We must hope the overabundance of direct democracy–a majority referendum taking place on a complicated question of remaining or leaving the EU may not have been the best idea–will lead to democratic reforms of the EU. Perhaps it will take too much democracy harming the UK to bring better democracy to the EU, or at least what’s left of it.

A New Development Bank Sherriff

It would be easy to forget amongst all the hub and bub of crazy world activities that China’s President Xi Jinping announced two years ago that China was establishing an Asia Infrastructure Investment Bank (AIIB), no longer satisfied at playing second (third? fourth?) fiddle at the World Bank and other such institutions. Last Friday, the AIIB approved its first investments, totaling $509 million in four projects. Rather than competing with existing development banks, however, it is cooperating with them. Three of the four projects are co-financed with the World Bank, the Asian Development Bank, the United Kingdom Department for International Development and the European Bank for Reconstruction and Development. The projects are power grid upgrades in Bangladesh, slum renovation in Indonesia and highway construction in Pakistan and Tajikistan. AIIB has 57 founding member countries and $100 billion in committed capital. AIIB plans to invest $1.2 billion this year. The way the world is organized changed a lot this week, in ways both noticed and not.

A Popularity Contest

Every country has its good points and attributes that we may wish were different. This is true even of the two largest economies in the world, China and the United States. However, amongstcountries polled by the Pew Center, the US would receive many more invites to the prom. Other than some strange grudge Greece has against America (maybe they mistakenly think Angela Merkel is president), the US has much stronger favorability numbers than China. Unsurprisingly, China is least popular in Japan. There is an age gap in views of China with younger people far more likely to have a favorable view of China than oldsters. This is especially true in the US, Canada, France, the Netherlands, Poland, Spain and the UK. Pew notes that in Spain, for example, “42% of Spanish respondents ages 18 to 34 give China positive marks, compared with 32% of people ages 35 to 49 and just 17% of those 50 and older.” To bring this full circle, we saw this same age gap in the Brexit vote, where young people voted overwhelmingly to remain in the EU. The world will be very different decades from now when the over 50 set is gone. But already the young see a different world than their elders do.

 *Istanbul is one of our favorite cities, full of wonderful sights, food and people. We send our condolences and best wishes after the latest terror attack there and hope for better times and political reforms in that now troubled country. 

International Need to Know recently stated to someone that by the time we need to purchase a new car, self-driving vehicles will be ubiquitous and with the rise of car sharing platforms we may never need to buy an automobile again. But, the future has a way of making fun of us, and certainly the driver who ran the red light on Sunday and barreled right into our car, mocked our visions of the future. But not even being slightly wounded by a reckless driver nor the trials and tribulations of buying a new car and dealing with insurance companies keep us from fending off Chinese bears, worrying about Brexits and examining where the happy workers are. It’s this week’s International Need to Know, your fully autonomous purveyor of crucial international information.

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

Shooh, bears, shooh

Okay everybody, gather around the campfire–we’re going to tell you a story about…wait, get out of here China bears. Come on, get away from our garbage–Well, I guess we’re going to have to address these rude China bears who came crashing into International Need to Know’s pristine global campground. They are definitely out there spewing out various troubling data about China’s economy. Even the IMF has gotten into the act with concerns about the level of corporate debt in China, which is now 145% of GDP, a very high level indeed. The IMF’s first deputy managing director (just how many deputy managers are there at the IMF? We’re angling for the fourth deputy assistant managing director position) David Lipton said in a speech in Shenzhen earlier this week that corporate debt “…is a key fault line in the Chinese economy . . . And it is important that China tackles it soon.” Lipton notes that this is mostly a state-owned enterprise (SOE) problem with SOE’s accounting for 55 percent of corporate debt, far greater than their 22 percent share of economic output. He further notes that these SOE’s “are also far less profitable than private enterprises.” But it’s not just corporate debt that has the bears riled up. As you see below, China is facing its worst job outlook since the Manpower Group began its surveys in 2005. The China Bears also point out that private investment is now below 4 percent (see 2nd chart below). Of course, public investment has spiked in recent months, but this has the bears worried too since they believe China can’t continue to prime the credit pumps to grow GDP as they have in the past. Certainly China continues to pile money into infrastructure, spending more than the U.S. and Europe combined, but that’s partly a function of underinvestment by the U.S. and Europe. And, of course, others probably think this is smart Keynesian policy in times of an economic slowdown. China’s economy has slowed down and is unlikely to grow at its previous rates. But, at least as of yet, it is not crashing and there is still lots of robust economic activity and economic transition occurring along with its deep challenges. So, we welcome bears to our garbage and may even share some of our food and drink, but we’re not prepared to cede the entire campground to them yet.

Exit Stage…?

A week from today, the good people of the United Kingdom will vote on whether to exit the EU. As we write, the polls show those wanting to leave are in the lead. But we wonder if this will be similar to the Scotland separation election in 2014, where the polls indicated a toss up, but when it came time to pull the lever, voters found it difficult to vote “see ya later”. That being said, there’s a real chance that next week’s INTN will be delivered in a different world, one in which the EU is smaller. An even larger worry than the UK leaving is that their exit could set the stage for additional departures. A new Pew Center poll finds that 61% of the French have a negative view of the EU. That doesn’t mean, of course, that the French will vote to leave the EU. They may just want the EU to be reformed. In fact, one hopes the lesson learned, no matter which way the UK votes, is that the EU needs to reform itself, politically and in how it is structured economically. It is unfortunate that as the world in some ways is becoming more splintered institutionally, we live in an age of more and more transnational issues: climate change, global health challenges like the Zika virus, terrorism, Justin Bieber world tours and more. Perhaps the current institutions and transnational infrastructure are not fit to address these problems. But the answer should be to develop an infrastructure that will, not merely tearing down the ones we have.

Happy Workers

If you’re a tyrannical boss looking for where you can have maximum negative impact, move to India and run a company. That’s where we find the most employees who feel positive about their work. In fact, according to Atlas.com, in India 88% of employees feel positive about their work. The other 12% are more than likely customer service representatives for Comcast. Mexico comes in second and the US of A is third in percentage of positive feeling workers. On the other hand, more than half of Japanese employees do not feel positive about their work. While contemplating how you feel about your labors, examine the full list below.

This week International Need to Know attended a discussion regarding International Conflict on a Cyber Battlefield featuring the author Adam Segal. There was much angst expressed in the audience at the vulnerabilities in our computer systems and how at risk we are to being hacked. We would give you more details but it was an off-the record discussion. Of course, our smartphones were probably hacked and the discussion immediately leaked to Gawker.com. But even as we madly strengthen our passwords and ponder how to convince Peter Thiel to fund our lawsuit against David Stern, we still examine clean energy strides in China, worry about why people don’t get anything done at work anymore, and eye where cigarette smoking is hot. It’s this week’s International Need to Know, the weekly newsletter that knocks down three pointers on important information around the world.

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

China Carbon Dating

China bears continue to circle our campsite but we ward them off for at least one more week as we look at CO2 emissions in China, with the caveat that there is a bear component to it. You may remember, if you pay attention to such things (which is our job here at INTN) that back in 2014, China announced “ambitious” carbon emission reduction targets. In fact, their aim was to limit coal growth use to 3% per year. They so far are easily achieving that goal with coal use actually decreasing in the last year. Now we can definitely view this as another underlying sign that China’s economy is slowing down and not growing at the alleged 6.7% growth rate (back bears, back!). But, there are also signs that growth in renewable energy is also playing a big part. In the graph below you can see non-fossil fuel energy sources (solar and wind mostly) are growing. You won’t be surprised that we believe the dotted projection line is underestimating the future growth of these energy sources as solar installations are growing at an exponential rate. The current total installed capacity of wind and solar reached 180GW in 2015 (the target was 140GW) .Even current installation rates mean that the existing 2020 target of 300GW will be reached by mid-2018, and you can bet that installation rates will increase over the next two years (go ahead, book your flight to Vegas). China also aims to have coal’s share of energy use fall to 62% by 2020. It’s already down to 63%, falling 1% every year since 2010, so the 62% target is likely to be reached before the 2020 goal. The energy world is changing faster than most realize, including in the world’s largest polluter.

Stop Looking at Facebook and WeChat

There are two ways to increase GDP. One is for your working-age population to increase so there are more people working and producing more goods and services. The second is for those workers to produce more than they previously did thanks to improved technology and business processes. As we noted in this space last month, for most countries, other than Africa and India, the working age population is decreasing or about to decrease. So that leaves increasing productivity as the way our world will boost GDP growth rates. Unfortunately, productivity growth rates are increasing at a much smaller rate than usual. There’s been lots of talk lately about U.S. productivity rates lagging but it’s not just in America. The whole world is experiencing a productivity slowdown. As you see in the OECD chart below, productivity is increasing at a slower rate in Japan, Korea, Germany and the UK, not just in the United States.  Automation may change that in future years, with good consequences for GDP but perhaps bad consequences otherwise, at least in the short run.  But the question is what has been going on the last decade that has so reduced productivity gains? Have the technology advances in recent years been ones that do not boost productivity unlike in previous decades?  If economists weren’t so busy watching cat videos on the Internet maybe we’d know the answer.

Where is Smoking Hot?

One of modern’s life’s great pleasures is being able to go to a bar or a concert and not have to come home smelling like cigarette smoke. I once half-joked during the anti-smoking law debates that I’d rather the person at the table next to me in a restaurant was shooting up heroin rather than smoking a cigarette–the former doesn’t particularly affect me but the latter’s second hand smoke certainly does. But, there are still more than 1 billion smokers in the world, the majority of them men.  And, in 27 countries, smoking is actually on the increase. They are mostly countries in the Middle East and Africa. Take a deep, clean breath and see the full list below.

Last night driving back to the worldwide headquarters of International Need to Know, traffic came to a complete halt. This is no longer an uncommon occurrence in this neck of the woods, even though it was after rush hour. We soon learned our delay was caused by a Beyoncé concert. But even Queen Bey was unable to prevent us from turning Lemonades into lemons and worrying about housing prices in China, despairing over endangered flora but ultimately brightening to electrifying news out of Japan. It’s this week’s International Need to Know, not needing to dope up like a Russian athlete to bring you the most important happenings of Beyon–er, our world.

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

Location, Location, Rembrandt

Last week, we were working with some Chinese investors looking for ROI here in the Seattle area. While walking in a residential neighborhood on our way to a meeting, one of the investors asked, “How much does a house cost in Seattle?” It’s a curious question, kind of like asking how much do paintings cost. It depends, of course, on the house–how large, where it’s located, does it have a view, does it have an antique Rembrandt in the attic? Chinese are looking to place their money in “safe” investments overseas now that large returns are no longer guaranteed in-country. China’s economy is definitely slowing, as we’ve pointed out in this space. More evidence of the slowdown came this week when provincial growth rates were reported. Of 31 provinces, 25 reported a slowdown from 2015’s year-on-year growth and 14 are undershooting their expansion targets. And these are the official statistics. What is really going on at the province level may be worse. Housing data is also showing a slowdown, although not in Tier 1 cities, as the chart below shows. Tier 1 cities in China saw huge inflation through 2015. Tier 2 and Tier 3 cities? Not so much. Which brings us back to our Chinese investor’s question. How much does a house cost? Here in Seattle we see housing prices continue to rise. In fact, that worldwide headquarters of INTN that Beyoncé prevented us from reaching in a timely manner? A house kitty-corner from HQ recently sold for about 50% more than its Zillow value. Values here are being driven up by lack of inventory but also by Chinese and other outside investors buying into the market. Seattle is becoming a Tier 1 city. As the world urbanizes, Tier 1 cities around the globe are likely to continue to experience housing inflation…right up ’til the moment they don’t. More on China’s housing situation soon.

Save the Plants

When worried about world encompassing environmental problems, photos of animals–the polar bear, or the Sumatran tiger or some other cute mammal or bird–are often used to make the point of how dire the situation is. But what about the cute fern or lonely lichen or other plants? Because as it turns out, far more plants are endangered than animals in our little world today. In fact, the International Union for Conservation of Nature claims that “there are almost as many threatened species of plants as fish, birds and mammals combined.” The flora may be in more trouble than we fauna which, of course, has implications for we fauna.

Japan is Electrifying

No, not their economy, though Japan’s economy surprisingly expanded by 1.7% in the first quarter, staving off recession worries. What we’re talking about is Japan’s robust electric car infrastructure. Japan now has more car charging stations than gas stations as you can see below courtesy of Forbes. Japan is now the proud home of 40,000 electric vehicle charging stations, more than four times the United States and now outnumbering the 34,000 Japanese gas stations. Nissan, with it’s electric Leaf, is helping to drive this infrastructure build-out. Of course, Japan’s geographic territory is much smaller than the United States, making it easier to develop its electric infrastructure. But this growing and large number of electric charging stations is indicative of the change that is coming to our auto infrastructure. Now the key question is how will Japan generate the electricity to power the cars?