Demystifying Japan

"Yeah, those Japanese love their stimulus bills"

I found four back to back articles relating to Japan which argues for and against (mostly the former) the idea that Japan's economic outlook is a "failure". To make things easier, let me go through each of the articles one by one and summarize the sailent points in which the authors are pointing out.

The Myth of Japan's Failure by Eamonn Fingleton

• Author has the opinion that the Japanese Economy has done very well during the so-called lost decades.
• Average Japanese lives longer than Americans.
• The Japanese has one of the fastest internet services in the world.
• The Yen has risen by 87% against the US Dollar and 94% against the British Pound since 1989.
• Japan's account surplus grew more than threefolds since 1989 to USD$ 129 billion.
• Its citizens seems to be living lavishly with the latest cars and spoiled pets.
• America's higher growth rate compared to Japan is an overstatement as American statisticians have been using a hedonic method of adjusting inflation which distorts the actual growth.
• Electricity output per capita is twice that of America.

Japan, Reconsidered by Paul Krugman 

• Agrees that there is an overstatement of Japan's decline.
• Current account surpluses are not necessarily a sign of success.
• Proposes that GDP Per Working Age is shrunk during the lost decades.
• Concurs that the data doest not match the picture of relentless decline.
• Believes that America is doing worse than Japan ever did.

The Myth of The Myth of Japan's Failure from Tokyo To The World 

• Japan's account surplus is being eroded by the rising yen.
• The Yen's rise is exacerbated by the Dollar & Euro's woes.
• Unemployment figures does not include those who work part time.
• Even if unemployment was lower than america, that might be due to fewer eligible people.
• Japan has the highest Debt to GDP Ratio in the world.

A Reply to Paul Krugman by Eamonn Fingleton

• Argues that GDP Growth is distorted due to Services Sector's contribution to GDP and measurement techniques.
• Differing political agendas; America wants to display strong growth with Japan the other way.
• Argues that the sobriquet "Juggernaut Japan" solidifies the importance of Trade Surpluses.
• Quoted John F. Kennedy's fear of Nuclear War and Trade Deficits.
• How Japanese companies still pioneer high tech industry based on research

Undoubtedly, some very, very good arguments, points and opinions being thrown around. These articles shed a lot of light on my interest as to why Japan has not be performing so well. Some may be disputable, others however, are very interesting. Here are some of the things that I found interesting;

America's overstatement of growth is driven due to statistical measuring techniques.

It has never really occured to me that America could in a way overstate their growth due to differing statistical measuring techniques. I would expect this to come out of my own country but not from America where Transparency is being thrown aloud, which brings me to my second point.

Differing political agendas.

This is undoubtedly try and beneficial to parties who know how to manipulate information being published. America, in all their might, and as the self-proclaimed leader of the world would always want to project an image of a strong economy and stand out against other countries in order to be able to keep the world under its grip. The Japanese however have a different agenda; after being forced to adapt to the Bretton Woods system (which many attributed to their downfall), they would have lesser incentives in showing themselves to be a dynamic and economically influential. Despite still laying low, they are both tempted and sort of being influenced to participate in the latest FTA - the Trans Pacific Partnership.

Unemployment figures does not include those who work part time.

To some extent I would agree to this idea. Normalyl employment figures are based on number of people contributing to national pension funds; which could either be full time or part time workers. Unemployment figures could be manipulated by including figures that would not be taken into account elsewhere; again bringing us to the issue of measurement technique used.

Distortion in GDP's ratio to services and measurement techniques.

I know for a fact that measuring Services Exports itself is a pain; let alone Services Sector's contribution to a country's GDP, measuring techniques used and other variables which can be identified to measure a country's GDP growth. So this would definitely distort the actual figure of a country's overall economic performance.

Throughout the articles, there were a lot of calls on how westerners should actually come and visit Japan itself to see how well they have progressed. But not all of us have the luxury of doing so. So yes, I must say, after reading all the above, my perception towards Japan's performance has undoubtedly changed.

But which side of the fence its on is still a blur.

Pancake Index?

Mmmmm pancake. Dope!

There seems to be some sort of obsession by the team at The Economist; in addition to creating the Big Mac Index in measuring currency over or under valuations (with its own set of limitations of course), they have (unofficially) developed another index based on cost of pancake ingredients; although it seems that they have done this to commemorate Shrove Tuesday rather than planning on doing it on a regular interval.

Still, deliciously informative.

Yen Intervention; Again?

Illustrates the actual situation perfectly.

The Japanese Government is at it again by selling up the yen to ease the appreciation of the Japanese Yen against the dollar. Have they ever thought for the slightest moment that, the problem resides in the depreciation of the US Dollar rather than the appreciation of the Yen? Would selling the Yen increase the circulation of the currency therefore, devaluing their currency? I doubt so; and wouldn't such an intervention be deemed as illegal? How come America's allies always gets away with everything and Iran's so called "Nuclear Programme" suddenly gets a bill banning any financial institution from conducting dealings with them. God damn capitalists.

But the results are apparent, they posted their first Trade Deficit in 31 years, and numerous Japanese companies are feeling the pinch, instances like NEC cutting 10,000 staffs globally, Sony changing their CEO, Toyota posting the largest loss ever since their inception; and so too is Panasonic. To top this off, South Korea; both its citizens and companies are surpassing them in every front. Their people are learning English overseas, creating human capital capable of integrating into the global economy much easier compared to Japanese and its firm. Now they're losing out on their exports; they should either stimulate their stagnating domestic economy or change the perception of their citizens on adapting to globalization.

The question is, are willing to do so?

Linguistics with Trade & Economics

Parle vu Englisheru?

Very thoughtful argument on the impact of language on trade and integration of the economy into the world. I do believe language does have an influence somewhat (e.g. my belief that one of the reasons Korea is surpassing Japan stems from the fact that a lot of Koreans are open / willing to learn English; to the extent that a lot of Koreans spend their highschool years overseas in English Speaking countries) on the economic development of a country. I think claiming that learning other language is "useless" is extremely one-sided. The exchange languages, apart from English, generates economic activities itself; through cultural mediums be it tangible or not. Should the world unify and speak one language; wouldn't it be a dull world?

Be damned if it wouldn't!

State Capitalism

Didnt really get the comic but close enough

Here we have an article about the argument (mostly) against State owned Capitalism; e.g. companies in China, Petrobras etc. Let's get straight to the point; it argues that State owned Companies are ineffecient, breeds corruption and cronnyism, with strong manipulation and control by the government. Not to be a socialist / communist myself, but I think in some critical areas / sectors of a country (e.g. Energy & Utilities, Food Supply) it could be rather useful for a country to manage it from afar by owning a majority of the shares. I blatantly disagree if you were to say that all entities should be privatized as if you did it; you'll end up being like America.

The questions is why? and how?

You want to talk about corruption and cronnyism? What about all those companies and corporations who sponsor Presidential Campaign ads, only in turn, make the President of one of the world's economic powerhouse their puppet - much like corruption? sounds like cronnyism to me too. Companies being ineffecient? Ineffecient in terms of making money; but not necessarily ineffecient in terms of serving the people socially. Manipulation and control by the government is essential since to me, I find that no coporation should be more powerful than the government; else people would suffer; simple cases, America, United Kingdom, South Korea. Fine they have a larger GDP Per Capita - but look at how the underprivellaged are treated (those with no money) and look at how they spend?

But of course, this is a contentious issue.

Still open to discussion.

The Chinese Government; Keeping the World in the Dark

Gotta love them pandas

I recently came across this 10 page article (if you print it out) about how the Chinese Government controls certain economic and political aspects of the country. As I read through two things started to happen; I become more and more curious, at the same time even more clueless about what they are doing - a total paradox. But keeping to the point, let me just elaborat on what they're doing as of now;

Now to put it in simple terms, the Chinese Government has a policy where, for transactions conducted in US Dollars, all the money has to be forwaded to their Central Bank, which is then to be exchanged with the Yuan Renmibi - this is apparently a must as they treat dollars as contrabands! Now what do they do with the money? They buy US Dollar denominatd government bonds. Now, if the buying of bonds were only limited to millions, I can understand, but apparently it runs in the billions (refer to chart below).

This is the prime reason why some governments are crying foul play; as this is the prime reason why their currency is undervaluated - to a point where the American Congress nearly went through the Exchange Control Act, and could be the reason why they've been targeted for Trade Protectionist Policies. If you look at their exchange rate, for a period of two years - there have been miniscule if not no major volatility against their exchange rate with the USD, even during the 08/09 financial crisis.

So what does this show? Clearly, a sign of government intervention. Many had hoped for the Chinese Government to change after their ascension into WTO - but apparently based on two articles from the Economist; much of their economic policies and political structure remains the same despite a significant amount of pressure to become "Westernize" and open up their market. This system apparently is much resented by the Chinese Government who prefers to have a stake (even a small one) in all if not the majority of the private entities running in China; for the sole purpose of control.

Now, in actuality, what the world is concerned about is their transparency - What do they plan on doing with the bond? There have been speculations that once reaching a certain threshold, they would do a firesale - but this would in turn hurt them as well as a healthy American economy would be essential to their Export-Driven economy, to which America is a big customer. So if this isn't the case, why don't they spend the money domestically? Why bother buy bonds when you can build infastructure? Well the answer to this is apparently as they build more and more manufacturing plants, major constructions shifts to public utilities would drive their inflation rate to the moon - and when that happens, a global rise in inflation would eventually come.

I believe that this is something long term - my experience which Chinese people, regardless of where they are born is that they have two distinct characteristics; the natural ability to make money and a very good long term vision. So whatever most pundits perdict in the moment is particularly off track - only the Chinese would know, and I'm pretty sure its something more which would develop within the following decades rather than years.  

In any case, keeping the world in the dark would only result in the Chinese Government open to scrutinization by the Western Media and Government. What I can see is definitely, a clash of ideologies from the Capitalist West, to the Communist / Socialist East. Within the coming decades, we would probably see a second Cold War; using not spies as weapons but rather dollars, purchasing power and economic influence.

Thats something new to look forward to.

Resource-rich Countries; Cursed or Blessed?

True - at least, at the rate we're going.

In a blog post at one of my favorite blogs / author, a recent study was conducted to refute a research paper claiming that countries with natural resources tends to result in slower economic growth compared to those which are lacking in natural resources. The so called Resource Curse (not to be compared to Dutch Disease) claims that the abundance or availability of natural resources within a country would eventually lead to unfavorable economic outcomes compared to countries which are bare stripped. Since I have yet to find the time to read both papers (will probably write up a summary plus my own personal opinion into it), I'll start by analysing both the Resource Curse and Dutch Disease terms to see whether both of them are justified.

Resource Curse essentially states that countries rich in natural resource tend to grow much slower than countries without them. Based on my readings, the curse is meant to affect a country in several ways;

1. Ineffecient Government System - Revenues from natural resources tends to place the government in a complacent position, in addition to not needing to develop an effecient taxation system (therefore, the public will not scrutinize the government as they pay a miniscule amount of tax). Naturally, arguments over budget allocations would also ensue between each government departments and agencies resulting in a further ineffecient system; emphasizing on one's needs rather than the people.
2. Revenue Volatility - During peaks of commodity prices, both the government and private sector will attempt more aggressive and expansionary policies; borrowing excessively without any proper justifications or evaluations. This may result in bankruptcy or large amounts of debts due as a result of the illusion from the high price of natural resource.
3. Non-diverse Economy & Human Capital - Naturally, the country's economy and human capital would encircle around the natural resource due to the high revenue it which it brings in. There are also claims that this would eventually result in the country neglecting its education-infrastructure, as resource-extraction does not require a large number of highly skilled and talented workforce.

On the other hand, the Dutch Disease refers to the relationship between increase in dependance of natural resource exports resulting in a decline within the manufacturing sector. Essentially, the term refers to the shifts from the manufacturing sector, to both the natural resource sector (be it in the form of raw, manufactured goods or service related) in what is coined as both direct (manufactured) and indirect (services)deindustrialization. In order to minimize the effect, the revenues should be stored or invested abroad (through soverign wealth funds for example) and then revenues brought back over time in order to allow a more stable flow of income (something which I think Brunei is doing; rich, prosperous, and definitely resource dependant - they even have their currency pegged to the Singapore Dollar).

So.

What does all of this tell us? That at the end of the day, essentially (the way I see it) is just how you manage your resource. Now apparently the newer paper does not find any correlation or links between natural resource and economic growth (at least not negative; in fact they found some positive relationships). You can either go with a capitalistic approach (Netherlands, America) or a more socialist approach (Brunei) however at the end of the day, its the corruption-free and effecient management that truly matters. Despite America's criticism over Hugo Chaves' move to nationalize their state-owned oil company, if corruption still runs rampat; it would not pay its fair share on the toll. In any case, until I read both of the papers seperately, I can't really jump to a conclusion on this matter.

But I'm really curious as to which of the two I'll end up supporting.

Capitalism 4.0

Damn Socialists 4.0!

An article I found on Chosun Ilbo (my new favorite English-based Korean newspaper) on how Korea is meant to be a model for a new type of Capitalism (hence, Capitalism 4.0). If so, who were meant to be the holders of the previous versions?

Kinda makes me curious now.

Japanese Yen; Up And Away

Exactly what Japan needs to kickstart

Further to my previous post, it seems like the Japanese Yen is continuing its upward trend against the US Dollar. Many see this as a reaction to the financial volatility in the EU and US, opting to use or conduct transactions in Japanese Yen as they're considered to be safer (although in reality, Japan has a much higher Debt-to-GDP Ratio compared to any country in the world) - and many analysts has describe the sudden rise to be abnormal as the actual exchange rate does not reflect the market price. Further to BOJ's efforts by increasing credit easing scheme by a further 5 million yen, the government hopes to stabilize the price and prevent it from going up further, hurting the south heading export-dependant economy. As seen in the picture below ( taken from http://www.xe.com/ ), the Japanese Yen was stable for much of the year until fears on the American Debt ceiling broke out by July / August 2011.

Despite the additional monetary easing planned by Bank of Japan, I doubt that it would carry much effect since the Yen is the 3rd Largest Traded currency in the world, and adding another 5 Trillion yen to the initial 50 Trillion Yen would not be enough to hold the exchange rate still. As much as the government promotes purchasing overseas companies in US Dollars, the exchange rate remains at a still. I think the major issue would be for the massive panic and loss of confidence with the Dollar and Euro - rather than focusing on credit easing, they should be more focused on buying the Dollar or Euro; but the American government is keen on keeping their currency low in order to promote exports (something they should've done before China's rise).

As much as this has turned out to be a disaster for the Japanese, it could bear some fruit in other ways - particularly in terms of overseas investments and cheap prices of imports (domestic consumption). Personally I've always thought that despite the high standards of living, their level of domestic consumption has not been on par with other advanced countries in the West. The Japanese should also learn to stop being such an export dependant country and view other countries as potential markets (much like how Korea has focused on ASEAN and China focusing in Africa). Their failure to change and adopt to new times (particularly in business) was reflected perfectly in a Korean-based newspaper I found the other day.

So where do we go from here?

Export-led Investments; Beneficial?

On the contrary; he's running because of knobheads like you

I found this interesting piece on my new favorite website on how Export-led Investments not only seems to raise living standards in any developing country but also upgrades export quality. Another outcome found by the paper was that there was a positive correlation between FDI and higher unit value of exports. Based on what I read from the paper, Export-led Investments carries the following plus points;

1. Boost exports of mediums killed sectors in developing countries. Apparently the bulk of investments done by companies are more than just low skilled manunfacturing, but more skewed towards medium skilled products (automotive parts, electronics and electricals etc). These form of investments are 14 times higher than low skilled manufacturing.
2. Results in upgrading within the sectors. Done through MNC's superiority - resulting in higher unit values of exports, where local companies can also learn from their operations. Productivity spillovers results in the abundance of higher quality inputs therefore benefiting indigenous producers of final goods.

However, export complexity / structure remains unchanged, and there are tendencies where FDI brought into more advanced / developed countries carries minimal impact on export quality. Now my problem is not that I don't believe this - I just still dont think that export-led investments are the way to go for any developing country wishing to catapult itself into a high-income nation, for instance, Malaysia.

Electrical & Electronics components plays a significant role in the country's exports - and although the foreign companies in Malaysia only amounts to half of the total players, they control over 90% of the exports. As a result, local indigenous players are being squeezed out. They can learn from the MNCs but they will never be as good as them as the MNCs will keep some of the secrets to themselves too. What Malaysia fails to see is in the long term - is that it doesnt help elevating Malaysia to high income status. To me, the matter of repatriation of profit done by these foreign MNCs would also result in a loss from Malaysia; we're pretty much being 'used' by these capitalistic people.

Now I can understand the nature; actually its beneficial to both sides but we could do better by actually learning from them rather than letting them use Malaysia as a temporary base for their operations. Without a strong global domestic company like we see in Korea and Japan, we will never be able to advance to a more developed economy. The key is specialization, protectionism and differentiation from our other Asian counterparts, not by blindly attracting FDI for short to mid term gains and attempting to go all rounder when developing our industrial base; there are no "jack of all trade" millionaires.

So its about damn time we wake up.

China; Inflating Asia Pacific

Its because the west wants it!

Here we have an article explaining the effects of China's rate of inflation; for every 1% increase in rate of inflation in China, this would gradually lead to an increase in inflation of 25 to 50 basis points in the Asia Pacific Region - worse could even drive global commodity prices by 5%. Referring to my previous post (see Assumption 3), I expected for such a thing to happen. See? I told you!

Damn I'm good!

Shared Growth; Enhancing Economic Development

Now thats what I call true teamwork.

Further to my previous article on shared-growth, here we have an article addressing the issue of the declining middle income group in South Korea. Let's give this a thought for a moment; the decline could be caused by;

1) The growth of either class outpacing each other or;

2) The substantial decline in the population growth of the middle class group.

But logically, I find reason 1) to make more sense in this case as we have large conglomerates moving their operations overseas - depriving the middle income group of growth. Can we blame them for doing so for the sake of higher profitability and productivity? The public might throw a fit; why dont they explain it to the shareholders of the companies then.

But one thing I really liked about the article was how it mentioned that Korea has developed this perception that "money would bring happiness"; prevalent in its society due to long working hours and high suicide rates, disregarding any other values which would contribute to an overall better and higher quality of living. I couldn't agree more on this. Their substantial economic growth has indeed resulted in them becoming money grubbing people; a philosophy they have picked up from the Yanks.

Coming back to shared growth, it seems that there are a number of companies who have started to adopt this policy, as can be seen in this article. The importance of SMEs or Trading Companies in the economy of Japan can be seen through their stringent regulations in protecting them from larger corporations, resulting the birth of the term Sogo Shosha - relfecting how the people and government view these small players as an integral part of the econonmy, unlike South Korea.

So in essence, developing pro-shared growth policies without a doubt would foster the economic growth of a country, creating a symbiotic win-win relationship between the smaller companies and their larger counterparts. But as I mentioned in my earlier article; would it be possible to implement? Implementing is one thing, changing people's mind is another.

Bottom line, we'll just have to wait and see.

Household Debts; A Major Concern?

So how long will it take until it goes boom?

There seems to be some concerns by economists after the Budget anouncement; that the government seems to be spending their coffers without taking into account the global conditions - in other words, they're being too optimistic. Economists are concerned about the rising household debt in Malaysia, apparently walking on a trend similiar to the 2008 financial crisis. Apparently the rising debt is attributed to repayment of loans (housing and car) as well as private consumption. Let me just touch on the two; repayment of housing and car loans.

For housing loans, I think its quite evident that the majority of the snowballing rise is attributed to owners purchasing their 2nd or even 3rd house ; leaving to the younger first house buyers outside of the loop. The reasoning? Pure investment. But many people fail to realize that once the market moves into a purchasing frenzy through, driven by pure investment rather than consumption, this could flow into a housing bubble. The result? Those with vision (too much vision) and considerable income have no liquidity; whereas the young ones end up homeless and fighting for a good space. As for car loans, its simply pure manipulation; the government actually wants people to get car loans - to help Proton, much like how they subsidize fuel to keep it cheap, to help Petronas. These two factors inarguably results in citizens not pressuring the government enough to develop a world class effecient public transportation system.

Now apparently, the same problem is happening in Korea, but it is slightly different in the case of Koreans. Based on my readings and observations, the rise in debt is mostly attributed to Jeonse Loans, and unlike Malaysia, they have limited land and twice the number of people. What is similiar to Malaysia is the rising debt is attributed to rising living expenses however there is no market distortion in Korea; no subsidies, no manipulation of preferences - creating a competitive and effecient market driven system. The Korean government was even forced to take measures such as increasing interest rates, with a more extreme method of blocking personal loans. To the least, the government recognizes this issue and is actually formulating a plan to combat and reduce the household debt in the country. What about Malaysia's Government?

Now I hate banks even more.

Miracle of The Han River; South Korea

I dont think that'll be enough for him

This is mainly a compilation article about some of the interesting articles I've found about South Korea. We'll start with the latest one I found off of a Korean Newspaper. This was relating to the current level of debt being taken out by individuals, corporations and the government. To be frank though, I don't think its nowhere alarming yet, but for some reason they're starting to freak out over it. Logically, for any export oriented country who wishes to turn its economy into more of a domestic consumption based structure, then obviously you'll need to debt to rise to generate retail sales. However, for some reason, I think Korea's rising debt is more related to its rising living expenses rather than a showcase of increase in domestic consumption. Now if that was the case, it could be something noteworthy.

The second article I read was actually a compilation of McKinsey; featuring a 6 articles each with its distinctive topic of focus. The first one elaborates on how South Korea spends more on Research & Development Per GDP compared to other advanced nations. The second article touches on Korea's resilient economy with the third talking about its national brand. The fifth details on how Korea should start shifting its economy to a service-based economy, and finally, a four step guide on how Korea can propser further in the future. Rather interesting, but I still think they still lack China's manpower, and Japan's technological superiority over them, not to mention how I think that the people in the region lack English proficiency; an essential component in becoming a globalized economy. But then again, English is without a doubt over-rated.

Annyeong!

Shared Growth; Feasibile? or Detrimental?

Small Businessman with Small Software and a small .... ?

It seem's that Lee Myung Bak is either a people's man or is just desperately trying to gain public support as he came under fire for another one of his antics on shared growth. A feasibility study was conducted by Korea Economic Research Institute (KERI) which claims that the "profit sharing" proposal he came up with does not carry positive impacts on the economy. But despite the report published by KERI, Lee's administration continued to search of areas in which they can help SME's grow, by developing a "Chaebol Shield"; which technically bars certain companies from participating in certain "SME Designated" industries. This however is still criticized by certain parties as the regulation set is non-conforming (not legally binding / entirely up to corporation's discretion). This however did not stop the Korean government from expanding the chaebol shield to include certain products such as tofu, and industries such as expendable office supplies and IT contents with further designation SME-protected industries to be developed in the future. Although many disagree on this policy, there are others who are completely behind it citing that Chaebol's ability to dominate the market through their suppliers and ability to receive cheap financing as factors that should change the non-conforming ordinance into a legally binding one. Not to mention that since most of the Chaebol's are family owned, wealth distribution is narrowed and limited to certain few - something which the Koreans call "top 1%".

Out of curiousity, I did a mini-search on the number of South Korean corporations listed in Forbes 2000, the number of employees in which they employ, and compared the number of employment to the country's population. For benchmarking purposes, I chose Taiwan and Turkey since they have roughly the same GDP Per Capita as South Korea;

	Taiwan	S. Korea	Turkey
Population (Million)	23	49	73
Employees (Per 100 Thousand)	0.8	0.4	0.2
Ratio Population : Employment	3.48%	0.82%	0.27%
Forbes 2000 Listed Companies	42	52	11

The results are quite interesting. We can see clearly from the table that although South Korea have corporations which are more globally recognizable compared to Taiwan (at least from my view), it seems that Taiwan is winning in terms of developing a more distributed form of competition, and that the corporations they develop employ more people according based on the Ratio Population.

So the question now is, would the "Shared Growth", "Profit-Sharing" and "Chaebol Shield" system proposed and implemented by the government would lead to a better wealth distribution system? My personal view would be Yes (with the exception of the Profit-Sharing policy), however, it would take time, and changing such a concept will not be easy. It all depends on what the people want, whether corporations are willing to oblige, and whether South Koreans themselves are willing to shift away from having a "Chaebol-oriented" mentality to a one focusing more on a "United Growth".

But at the end of the day, I guess its just all about greed.

Production vs. Consumption Economy?

O noy weech shud I chooz??

I got bored of reading this 160 paged report on my organization's Strategic Plan so I wandered off on the net and found this really interesting argument on Production-based Economy and Consumption-based Economy. So it started getting my brain running; which is better? Production-based, Consumption-based, (what about Export-based?) or a mixed form of both?

The way I see it, each of the two articles had their own valid points; when it comes to production based economy, you produce goods - which either directly or inadvertently generates jobs and economic activity. The Pro-Production-based cited that the economic slowdown is due to the fact that Americans have developed a sense of debt-funded consumer spending, and have been gearing towards too much spending while moving their productions overseas; resulting in a slowdown of economic activity. So the issue here to him is; they need to increase investments (in production of goods) and get back producing goods rather than outsourcing everything and not encourage consumer spending as that alone is insufficient in getting back an economy on track.

For the consumption based argument the author disagrees by stating that the whole point of moving your manufacturing overseas is so that goods can be manufactured at a cheaper rate - saving consumers money to spend on something else. As manufacturing jobs involve low-skilled workers, this would allow companies in America to focus more on high-skilled jobs and innovation; a much more value producing activity. To put it simply, outsourcing manufacturing jobs overseas actually benefits the economy, and the whole point of economic activity is so that consumers can consume.

Now, I don't really know much about economics but I must say I do enjoy reading about it. These two authors do have their own valid points but the fact right now is simple; America is much more of a Consumption or Domestic based economy rather than a producer - with certain exceptions such as Defense Equipment & Machines, Aerospace Machineries etc. Apart from this, I don't think its such a good thing (intuitively) if a country were to run a straight trade deficit for 40 years. Its a good thing if you move low-skilled workers overseas in order to focus on high-value jobs locally, but that means there won't be any jobs for low-skilled workers (more could be argued on the importance of low skilled workers from countries like Japan where it is heavily automated and Singapore). Although the production aspect of the economic activity is moved overseas, the financial benefits is retained domestically through increased profits; to which could be spent on more investment in other high-value or innovation-based areas.

So it's a bit of a trade-off, I think the best mix is, to mix it. Production driven may result in over-production, which may lead to an export based economy which has its own drawback. Consumption driven squeezes the lower end of the social hiearchy due to lack of jobs, and primarily focuses on benefiting the higher echelons of society. A mixture of both would be perfect however, in a globalized world, specialization is the key to a country's success.

So which would we better?

China's Economy : Export or Domestic Driven?

Y u no tell me teh tru storeh?

    In a recent article by McKinsey Quarterly which I nearly fell asleep reading, the author suggested that the perception that China is turning into a major Export-driven economy (much like South Korea and Japan) is somewhat untrue. The author proceeded to introduce his own theory called Domestic Value Added Exports or simply abbreviated as DVAE which calculates China's exports by subtracting total exports from imports used in the production of goods and services which subsequently are meant to be re-exported. This is done to counter the following issues when dealing with conventional methods;

• Overestimation by failing to remove imported goods (raw materials or components) which are used for manufacturing and subsequently re-exported. This is particularly evident when measuring the contribution of total exports to the GDP.
• Underestimation as a result of the inclusion of finished imported goods which are then used for domestic consumption when using the Net Exports method (export less imports).

    The results from the application of DVAE (see article) in measuring China's actual exports indicated that China's exports seems to be overestimated, and actually slowing down within the past couple of years. Personally, I do think that the perception of China being an export-driven country is somewhat untrue. I think that come 10, 20 years, they would shift away from being a manufacturing-based country into a domestic-led economy, as evident in most developed countries. Let's face it, Chinese people are good at making money. They're a lavish good spender too.

    In another article relating to China's rising domestic consumption and disposable income, much has been discussed about the Chinese mentality of parading their personal belongings, coupled with a thrifty attitude, unlike their western counterparts. This sort of mentality is apparently a direct result from the constant years of the oppression by the communist state. But whether they will continue their domestic consumption will continue or not, much depends on whether the government is competent enough in battling key issues such as the country's inflation rate, risk of overheating, and its fiscal or monetary policies. The last thing the country would want to face after years of constant growth and trade surpluses is to end up in the middle income trap.

That would suck.

Explaining Monetary Economics by Baby Sitting.

Would be difficult to do.

But here we have Paul Krugman explaining how a simple co-op of babysitting through the use of coupons as medium of exchange (where seasonal changes are the variable factor affecting the demand and supply of coupons), could end up in a disaster if there were no 3rd party element in the system to regulate and manage the supply of the coupons (a.k.a Central Banks).

I found Krugman's simplistic approach in explaining Monetary Economics to be very enlightening, and further showcases the importance of financial regulation by Central Banks in any country in order to ensure the stability of its economy as well as manage its currency fluctuations. In terms of governmental intervention in financial regulations, I believe he is a much more competent person as opposed to Alan Greenspan. 

The article written by Krugman also implicates citizens to keep calm during recession times, and hold in the belief that the good times will return, once the Baby-sitting coupons are regulated in an orderly manner.