New Economist

The Economist on outsourcing

Today's Economist features an article on outsourcing,  Getting the measure of it. Drawing mainly on a chapter in the recent OECD Employment Outlook 2005, it warns:

The striking bottom line? According to the OECD, close to 20% of total employment in the 15 pre-expansion EU countries, America, Canada and Australia could “potentially be affected” by the international sourcing of services activities.

Damn. I should have been a dentist.

Poor, but not bereft

The Department for Work and Pension pump out a lot of interesting but often overlooked research. Take for example the research report on Low-income homeowners in Britain by Pam Meadows and Daniel Rogger of NIESR, published this week. Around half of the poor in Britain are homeowners. The authors found quite a high degree of income mobility among this group:

Around half of all low-income homeowner households in one year are no longer low-income homeowner households the following year. Almost all experience an increase in income. Only a small minority become tenants.

And of savings:

Half of all low-income homeowner households have savings. Among low-income homeowner families, two-thirds have savings and a third save regularly.

While car ownership was not much lower than that of other households:

Two-thirds of low-income homeowner households have cars. This compares with the average of 74 per cent for all households...

BIS: "Time might well be running out"

By now quite a few people have noticed the truly impressive annual report from the Bank for International Settlements, the world's central bankers. So far, so good was published on Monday to coincide with its Annual General Meeting. If you have time to read only one report a year on the state of global financial markets, this surely is it.

The good news is that the world economy is on track to deliver another year of subdued inflation and robust growth, approaching 4%. But there is also "a growing sense of unease that it might not last."

Imbalances are the central theme of the report: "there has been little progress in tackling internal and external imbalances." These imbalances "could unwind with a potentially disruptive impact", and "time might well be running out" to tackle them:

One simply cannot ignore the number of indicators that are now simultaneously exhibiting marked deviations from historical norms. Among the internal imbalances that compel attention, real policy rates in many industrial countries and in emerging Asia continue to hover around zero. Nominal rates on long bonds, as well as credit spreads and measures of market volatility, are remarkably low. The household saving rate in many industrial countries has been trending sharply downwards, and debt levels are at record highs. House prices in many countries have never been higher. And in China, the investment ratio has risen to a startling 50% of GDP. Finally, external imbalances have never been larger in the postwar period.

Any or all of these numbers might well revert to the mean, with associated implications for global economic growth. Such an unwinding might be gradual, and possibly benign, but it could also be rapid and disruptive. In large part, what happens will be determined by real-financial interactions that we should not pretend to fully understand.

Both Calculated risk and Macroblog have highlighted the report's call for a smaller US budget deficit, by cutting expenditure and raising taxes. Meanwhile the ever-widening US current account deficit:

...could eventually lead to a disorderly decline of the dollar, associated turmoil in other financial markets, and even recession.

Meanwhile, Brad Setser makes some interesting points about the accumulation of global reserves.

In their concluding chapter the BIS authors highlight a particular concern - achieving a coordinated response to tackling these imbalances:

What might seem evident policy solutions for each country considered alone often stand in mutual contradiction. This raises the issue of whether cooperative solutions might not have a role to play in current circumstances. Those who worry about the unwelcome interaction of otherwise desirable structural changes ask whether the policy framework might not also have to be modified in response. Suggestions can be made as to how both a domestic and an international macrofinancial stabilisation framework could be put into operation. Given the reality of vested sovereign interests, however, an international framework will be much harder to implement.

Daniel O'Connor at Catallaxis calls this problem mutually assured disruption. A second post by Macroblog discusses in more details the suggestions by BIS for rethinking the policy framework, and is well worth reading. As to the scale of the problem, BIS put its quite bluntly at page 146:

If what needs to be done to resolve external imbalances is reasonably clear, it also seems clear that much of it is simply not going to happen in the near term. One reason for this is domestic policy conflicts of the sort noted above. Indeed, even such policies as a reduction in the US fiscal deficit, desirable for both domestic and international reasons, could easily fall prey to political wrangling and entrenched interests. Worse, policymakers who blame the policies of others for causing external imbalances, while denying their own culpability, risk destabilising financial markets in the meantime and
exacerbating the problems that policymakers should be seeking to resolve.

Grim but compelling reading. If only all central bankers were as forthright.

UPDATE: This week's Economist (subscribers only) highlights A wake-up call from the BIS, noting:

The desk of The Economist's economics editor is always piled high with reports on the global economy by official international institutions, central banks, think-tanks and investment banks. But in recent years one publication has towered above the others, thanks to its willingness to question the common complacency of policymakers: the annual report of the Bank for International Settlements (BIS), the so-called central bankers' bank.

Couldn't agree more.

Feldstein for Fed Governor?

In an earlier post I argued that Ben Bernanke is likely to replace Greenspan as the next Fed Governor. But Martin Feldstein is also a serious contendor. On Sunday the Boston Globe ran a profile of him by Robert Gavin, A principal of economics, which makes the case well:

Harvard professor Martin Feldstein advises presidents; collaborates with the world's smartest economists; runs the nation's preeminent center for economic research; and ranks among the leading candidates to succeed Alan Greenspan as Federal Reserve chairman.

But each September for the past 21 years, Feldstein has traded those rarefied circles for a lecture hall filled with college freshmen. There, leading Harvard's introductory economics class, he has invariably started each term with the same heartfelt counsel: ''This is a particularly good year to be studying economics."

Feldstein's decades of introducing students to economics is part of a teaching legacy that has arguably made him the nation's most influential economist. While a brilliant thinker, the author of more than 300 scholarly articles, and an intellectual force behind President Bush's tax cuts and Social Security proposals, Feldstein may have made his greatest impact through the remarkable concentration of his students in top echelons of government and academia.

Hat tip to Newmark's door for the link.

Jackson Hole 2005: The Greenspan Era

Brad DeLong has posted the agenda for the August 2005 Jackson Hole monetary policy extravaganza, sponsored by the Federal Reserve Bank of Kansas City. This year's theme? "The Greenspan Era: Lessons for the Future". It's the usual high-power line-up...

Only reform, not rate cuts, can solve the Eurozone's problems

Following the Swedish Riksbank's 50 bp rate cut on 21 June, there have been calls for the European Central Bank to do likewise. Edward Hugh at A fistful of Euros, for example, agrees with Bill Gross that “disinflationary forces are winning out” (hat tip: Brad DeLong).

While I expect the ECB will eventually follow suit, don't hold your breath - it won't be until current inflationary pressures have abated, which means at least several months away. Today's Lex column in the Financial Times (subscribers only) is even more sceptical about the prospect for Eurozone rate cuts:

In Germany pessimists still outnumber optimists, at least according to Monday's Ifo business confidence survey.

All over the eurozone, domestic demand is slow and investment intentions are weak. So it is unsurprising that, on interest rates, the optimists outnumber the pessimists. With the implied rate on the three-month Euribor December contract down 60 basis points since the end of March, markets are increasingly confident that the European Central Bank is on the verge of a cut.

Such optimism is a triumph of hope over experience. The ECB has made it clear it believes the risks to price stability are on the upside. These risks have increased. The 50 per cent rise in the oil price in euro terms this year is likely to add 0.5 percentage point to headline inflation. Meanwhile, another half a percentage point will come before long from the 10 per cent decrease in the euro's nominal effective exchange rate. Even if the ECB was not worried about inflationary pressures, its own research suggests that the impact on growth of even a 1 percentage point change in the policy-controlled interest rate is small a mere 0.34 per cent change in real gross domestic product in year one.

The ECB has consistently argued that the eurozone's lack of economic dynamism is due to structural, not monetary, factors. If it caved into political pressure to cut rates now, confidence might actually be damaged rather than encouraged. The rate optimists should unplug their ears.

Nonetheless, I hope the ECB eventually do cut rates. Even if the stimulus to growth proves to be modest, it can't hurt (likewise a weaker Euro). But of course what's really needed in Europe is structural reform of product and labour markets, greater competition and the extension of the single market to services.

This makes the findings of new research by OECD economists Romain Duval and Jorgen Elmeskov, delievered at a recent ECB conference, all the more disturbing. Their paper, The effects of EMU on structural reforms in labour and product markets (PDF), points to:

...the apparent slowdown in the reform process after the formal advent of the euro and by the limited ability of EMU countries – with the exception of few small ones and of reforms to retirement schemes – to carry out needed reforms in areas where political resistance is normally strong.

This is consistent with their finding that:

...the absence of monetary policy autonomy seems to be associated with lower structural reform activity in large, more closed economies.

...Obviously these simple findings should not be exaggerated. However, if additional testing suggests that they are robust it would point to a potentially problematic aspect of EMU. In particular, an effect of EMU in the direction of weakening the incentives for structural reform in the larger member countries would be a cause for concern.

Indeed. While these findings suggest that a more co-ordinated approach to structural reform in he Eurozone should be pursued, "this may be more complicated than it sounds." The authors conclude, somewhat despondently, that:

...there may be little alternative to soldiering on with the so-called open method of co-ordination - essentially based on jaw-boning and peer pressure - and trying to make that as effective as possible. It would be sad if structural reform were eventually driven by a factor that empirically is strongly correlated with reform: crisis.

(Hat tip to Ed at A fistful of Euros for the conference and paper links.)

Parlez-vous anglais?

De Gaulle would be spinning in his grave. According to a new study, a majority of big French companies have adopted English as their official language. Adam Sage reports in The Times that the French toast the English language:

“Today, someone who does not know how to speak English is like someone who did not know how to read or write 50 years ago,” said the report from the French branch of Educational Testing Service (ETS) Europe, the language group.

The survey underlined how globalisation is forcing French business and industry to discard centuries of hostility towards their rivals across the Channel, in an effort to compete better internationally.

Among 26 of France’s most important firms questioned by ETS Europe, 16 gave English as their official working language. Of these, nine have dropped French altogether and seven have placed English and French on a level footing.

“This means that documents must be written in English,” said Bertrand Moneger, head of markets at ETS Europe-France. “And if there is one English speaker present at the meeting, then it must be held in English even if everyone else there is French.”

Thierry le Metayer, the head of ETS Europe-France, added: “We expected a lot more reticence from firms. But with the exception of a handful of very insular groups, most say English is essential.”

Not only do most managers speak English as a matter of course, they expect applicants for managerial posts to do likewise:

The report said: “An overwhelming majority of managers, if not all of them, use English daily as their working language and must switch indifferently from one language to another for meetings, e-mails and other workplace exchanges.”

A majority of the firms questioned said that the trend would accelerate. “In five or six years, most personnel managers think all official company documents will be in English.”

The survey also found that an ability to speak English was a basic employment criterion for managerial posts. Without it, applicants stood virtually no chance — whatever other qualifications they possessed. “English is no longer the optional extra . . . It is the minimum.”

Much the same thing is happening in Brussels, where ministers and officials from the new member states - many educated in the US or Britain - are often fluent in English and use it in EU meetings. Very few speak French. It is yet another reason why Blair enrages Jacques Chirac and his cronies.

China in no rush to revalue

Those expecting an imminent revaluation of the renminbi may have to wait a while longer, according to weekend reports. Chinese Premier Wen Jiabao told Asian and European finance ministers on Sunday that China favoured a more flexible currency regime, but would not be rushed into action. Kevin Yao and Yoko Nishikawa of Reuters said he advocated gradual change:

"We must take into consideration both the present needs and the future development and guard against undue haste," he said.  ..."Since this reform involves a wide range of areas and will have a far reaching impact, it still requires a great deal of preparation to help create an enabling environment for all sides to sustain the possible impact".

Bloomberg reported a similar note of caution by People's Bank of China Governor Zhou Xiaochuan, who said in Basel that the "time is not ripe yet" to change the yuan's peg to the dollar. Zhou also pledged to keep interest rates "relatively low" to help lift consumer spending and cut the trade surplus.

Chinese news agency report played down the likelihood of revaluation. For example, today's China Daily report was headlined Exchange rate to stay stable:

China reiterated yesterday that it would keep the renminbi exchange rate basically stable at a reasonable and balanced level.

Addressing the opening ceremony of the Sixth ASEM Finance Ministers' Meeting in Tianjin yesterday, Premier Wen Jiabao said a stable yuan exchange rate was in the interests of economic development not only in China, but also in neighbouring countries and regions.

A stable exchange rate contributes to world financial stability and the expansion of trade, he said. This was illustrated during the Asian financial crisis in 1997, when the stable renminbi helped alleviate pressure on neighbouring countries and regions and contributed to economic and financial stability as well as the development of Asia and the whole world, the premier said. "Every country is entitled to choose its exchange rate mechanism and policies suitable to its own national conditions."

China decided in the early 1990s to gradually establish a market-based and well-managed floating exchange rate system to keep the renminbi exchange rate basically stable at a reasonable and balanced level.

And the country has worked hard on the reform of its exchange rate mechanism and made important progress in the past decade and more, he said. "We must uphold the principles of independent initiative, controllability and gradual progress in pursuing renminbi exchange rate reform."

The nation will independently determine the modality, content and timing of the reform in accordance with China's needs and development, he said.

"We should take account of the possible impact of exchange rate reform on the country's macroeconomic stability, economic growth and job market."

Niall Ferguson (via Tyler Cowen) asks if the Chinese will keep on propping up the dollar? For now, the answer appears to be yes.

Ageing and employment: the policy challenge for US and Australia

Last week saw the OECD release two more reports in its Ageing and Employment Policies series, on the United States and Australia. For the US the country note summary (45k PDF) reports:

As a result of rapid population ageing, the United States faces a risk of slower economic growth, serious labour shortages and rising tax rates over the next few decades. By 2030, almost one-fifth of the population is expected to be over the age of 65. As the baby-boom generation moves into retirement, growing expenditures on social security will have to be financed by taxes on a smaller number of workers relative to the number of pensioners, or by cuts in the value of social security benefits. Public expenditures on Medicare are projected to rise even more rapidly. These problems will be magnified unless there is a significant reversal in the trend towards early retirement.

It also delves into the controversial area of social security reform:

This report goes beyond the narrow focus of the current debate in the United States on individual accounts and calls for a more balanced approach to Social Security reform that encompasses three objectives:
i) improving the long-term financial sustainability of Social Security;
ii) maintaining or improving income adequacy in retirement; and
iii) encouraging older workers to carry on working.

The Australian country note summary (49k PDF) says "older Australians must be encouraged to work longer" through a range of policy measures.

Brown: "Europe must reform and reform quickly"

Chancellor Gordon Brown has been telling it like it is: "Europe must reform and reform quickly", he warned in last night's Mansion House speech:

So questions that Europe might find it easier to avoid – how we reform inefficient state aids, especially in farming; how we might break out of all too the familiar stand off in trade with the one other advanced global power, north America; how, with 20 million unemployed and almost half of them half long term unemployed, we reshape and modernise the European social model – are questions that must be addressed if we are to meet the challenge of globalisation.

..to be fully equipped for the global economy, Europe must itself become global: more open, more outward looking, and then more flexible, more competitive and more committed to reform to enable us to compete worldwide and move to full employment again.

And here he gets to the nub of the Budget problem:

The reason why Tony Blair has made the reform of the budget such an important issue is that the failure to reform the budget impedes the very economic changes we need.

While the priority should be to face up to the science, skills and infrastructure challenges of global change, 55 per cent of the total European budget in 2013 will be spent either on agriculture or on subsidies for the richest countries of the union.

Meanwhile Prime Minister Blair delivered a similar message this morning to Members of the European Parliament when outlining Britain's plans for the UK Presidency of the European Union:

If Europe defaulted to Euro scepticism, or if European nations faced with this immense challenge, decide to huddle together, hoping we can avoid globalisation, shrink away from confronting the changes around us, take refuge in the present policies of Europe as if by constantly repeating them, we would by the very act of repetition make them more relevant, then we risk failure. Failure on a grand, strategic, scale.

This is not a time to accuse those who want Europe to change of betraying Europe. It is a time to recognise that only by change will Europe recover its strength, its relevance, its idealism and therefore its support amongst the people.

With Chirac seemingly intent on wrecking the UK Presidency, one wonders just how much headway Blair and Brown will make in the next six months. But at least they are clearly staking out the case for a more flexible, competitive and modern Europe.