The Coming Indian Summer?

China is grabbing the headlines, but should we perhaps be looking at India instead ? 

Copenhagen, Thursday 16 June 2011.

The Coming Indian Summer? China is grabbing the headlines, but should we perhaps be looking at India instead ? Edward Hugh - Copenhagen: June 2011

• Unlike China and many Asian growth economies India is largely driven by domestic consumption, not by exports and capital investment. Given its large rural population India’s consumption basket has traditionally had a heavy bias towards food and other essentials, but the share has been declining over time. Since 2000 the share of food in total consumption has steadily declined while services, transport and communications have all increased.

In this presentation I will argue that

• In terms of growth rates and global GDP shares India has been overshadowed by the rise of China. Yet, in the longer run, at least in terms of the demography, the future belongs to India. During the coming decade India will steadily convert itself into one of the key engines of global growth.
• In demographic terms, India is undoubtedly the coming global powerhouse. The overall number of both young and prime age workers is growing rapidly and will exceed those in China over the 2025/35 horizon. And India’s demographic dividend will be operative over a very long period, even as China’s working population ages and declines.

In Growth Economics, Size Doesn’t Matter?

For 25 years our institutions have mis-analyzed such world development problems as starving children, illiteracy, pollution, supplies of natural resources and slow growth. The World Bank, the State Department's Aid to International Development (AID), The United Nations Fund for Population Activities (UNFPA) and the environmental organizations have asserted that the cause is population growth - the population "explosion" or "bomb" or "plague." Julian L. Simon, 1985: “WHY DO WE STILL BELIEVE that population growth slows economic development? “

The Great False Trail In 1967 Nobel laureate economist Simon Kuznets , at the behest of the United Nations, carried out a study of population growth and economic growth using a data set covering a wide variety of countries since World War II. The basic methodology, having assembled the data on rates of population growth and rates of economic growth, was to examine whether - looking at all the data in the sample together - those countries with high population growth rates have economic growth rates lower than average, and countries with low population growth rates have economic growth rates higher than average. The study was unable to find any statistically significant evidence that faster population growth is associated with slower economic growth. Taken on average, countries whose populations grew faster did not grow slower economically. Hence was born the idea that population dynamics were not central to economic growth processes.

Finally, The Truth Revealed, It Is Population Structure That Matters Turkey 1995 Japan 1990 Japan 2030 Adolescent Middle Aged Elderly The demographic dividend refers to the rise in the economic growth rate which occurs due to a rising share of working age people in a given population. The phenomenon is usually observed towards the end of the first phase of the demographic transition when the fertility rate has fallen far enough and long enough for the youth dependency rate to decline. During this demographic window of opportunity, output per capita rises since simple arithmetic tells us the population is more productive (as a whole).

So It’s Structure Not Size, You Silly Billy! Brazil Russia India China Right For The Wrong Reasons? The Idea Of BRICS Is JustToo Simplistic

Definitely The Short Term Is All About China On the global stage, India is still overshadowed by the impressive rise of China since 1997. According to figures from the IMF the share of global output for China, India and Brazil respectively are forecast to be 12.2, 2.9 and 3.4 percent in 2015.

But China Is Getting Old Too Fast By 2040, assuming current demographic trends continue, there will be 397 million Chinese over 65 - more than the total current population of France, Germany, Italy, Japan, and the United Kingdom combined. Median Population Age – A Simple Rule-of-Thumb Measure Of Ageing Key Point: While population ageing is universal the short term impact will be much more localised. We may be all headed to the same destination but the trains in which we are travelling are moving a different speeds.The pace of ageing varies greatly across countries and regions. China is an ageing outlier in Emerging Market Terms.

China Will Be One Of The Most Rapidly Ageing Countries in the 2020s The ageing problem goes well beyond the confines of the EU or the G7. In particular China stands out among developing economies, since the degree of ageing we should anticipate, when viewed in terms of absolute numbers and velocity, is simply staggering. It is during the 2020’s that China’s age wave will arrive in full force. The elder share of China’s population seems set to rise steadily from 11 percent in 2004 to 15 percent in 2015, and then leap to 24 percent in 2030 and 28 percent in 2040. Over the same period, China’s median age will climb from 32 to 44.

So In China Both Working Age And Total Population Will Soon Be Declining and Ageing China’s ageing is characterised by the unusual speed with which it is occurring. In Europe, the population over 65 passed the 10 percent threshold back in the 1930s and is not expected to reach the 30 percent mark until the 2030s, exactly one century later. China, on the other hand, will traverse this same distance in a single generation. The magnitude of China’s coming age wave, is simply staggering. India Has A Much Stronger Demographic Profile Than China In India the whole demographic transition is much more balanced. While the proportion of population in the under 14 age group declined from 41 per cent in 1961 to 35.3 per cent in 2001 (that is, by 5.7 percentage points), the proportion of population in the age group 15-59 increased from 53.3 per cent to 56.9 per cent (that is, by 3.6 percentage points). The proportion of those over 60 increased from 5.6 per cent to 7.4 per cent (that is, by 1.8 percentage points).

The increase in the 15-34 age-group population has been quite dramatic: from 174.26 million (31.79 per cent) in 1970 to 354.15 million (34.43 per cent) in 2000. The youth segment of the population is projected to peak at 484.86 million in 2030.

India’s Fountain Of Youth

According to UN Population Division projections the youth segment (15-34 years) of the Indian population starts to decline in absolute terms after 2030, it started to fall as a proportion to the total population in 2010. But proportionately the rate of decline is marginal (from 35.4 per cent in 2010 to 34.5 per cent in 2020, to 32.4 per cent in 2030). However after 2030 the rate of decline will accelerate (to 29.7 per cent in 2040, to 26.6 per cent in 2050). But even given this there will still be a massive 441.1 million people in the group in 2050.

But No One Is Forever Young

This demographic evolution will have important implications for the labour market. India's labour force, which was estimated at 472 million in 2006, is expected to be around 526 million in 2011 and grow to 653 million by 2031. The labour force growth rate will be higher than the rate of increase in total population until 2021. According to Indian government estimates, 300 million young people will enter the labour force between now and 2025, by which time approximately 25 per cent of the global labour force will be Indian.

In The Moden World Ageing Is A constant Phenomenon

Population ageing is a global phenomenon, driven by movements in fertility rates and life expectancy. Ageing essentially comes in two waves, which could loosely be called the first and second demographic transitions. During the first transition fertility falls from very high levels to replacement levels, the proportion of those in the working age groups rises constantly, while life expectancy increases such that the population in the 65 to 80 age group steadily increases. During the second transition, fertility in many countries falls well below replacement level and stays there for several decades. Life expectancy rises such that the over 80 population becomes a significant part of the total population and the working age population goes into permanent decline in both absolute terms and as a proportion of the total.

As far as we are able to understand the mechanisms involved at this point, population dynamics have major economic impacts and these can be categorised under four main headings: i) demographic processes affect the size of the working age population, and through this channel the level of trend economic growth – for better or worse - in one country after another ii) through “life cycle effects” demographic processes affect patterns of national saving and borrowing, and with these the directions and magnitudes of global capital flows iii) through the saving and borrowing path demographic processes can influence values of key assets like housing and equities iv) through changes in the elderly dependency ratio, demography influences pressure on the sustainability levels of sovereign debt, producing significant changes in ranking as between developed and emerging economies.

Economic Impacts Of Demography

Youth – And Economic Growth – Do Not Spring Eternal! Still, Is India Now Headed For Double Digit Growth?

The Importance Of The Prime Age Groups

Estimates of the exact age extension of the different groups vary, but 25-40 would be a good rule of thumb measure of the borrowing range, 40 to 55 for the peak savers, and 35 to 50 for the prime age workers. Beyond this, the question is an empirical one of measuring and testing to determine more precise boundaries and frontiers. The key groups are prime savers, prime borrowers, and prime productive workers. Where these actual age brackets lie, and the extent to which they may overlap, is still a subject of some controversy, One of the key points to grasp, is that the proportion the population which is to be found in one of the ‘prime’ age groups at a given moment in time, is absolutely critical, and much more important for understanding the processes at work than the mere size of the working age population.

In an ongoing process of trial and error calibration, Claus Vistesen and I have recently been working with the age groups 35-54 and 25- 39 as proxies for the prime age (peak growth) and prime borrowing age groups, respectively. On these measures, India comes out among the economies with largest combined increase between now and 2030.

India’s Win-Win Profile

Yet One More Time India And China’s Paths Cross Credit driven expansions in China will soon get harder and harder to come by, while in India the key group doesn’t peak until the mid 2030’s (should we be worried about a housing bubble??) and even then only tapers off slowly.

As A Result Consumption In India Is Strong And Fixed Capital Investment Doesn’t Reach Chinese Proportions

India’s Exports Are Growing Fast But So Are It’s Imports – It Runs A Trade Deficit (well, someone has to!). India's merchandise exports rose sharply in May, helped by a surge in shipments of engineering and electronic products, giving the government a good start towards achieving its export aim for this fiscal year. India's exports in May jumped 56.9% year- on-year to $25.9 billion and totalled $49.8 billion for the first two months of the fiscal year that started on April 1, up 45.3%, Commerce Secretary Rahul Khullar said at a press conference Friday. However, May imports surged 54.1% to $40.9 billion, touching the highest level in four years and raising worries of a widening trade deficit. The trade deficit was at $15 billion in May - the widest since August 2008

As we have seen, the demographic dividend refers to the period in the demographic transition in which the working age share of the population increases. In India’s case, this period is going to last all the way up to 2040. This is shown then in the fact that the peak growth age group (35-54) will continue growing all the way through to 2040. Generally, the conclusion on India’s demographics based on current projections is that the demographic dividend is set to be stretched over a long period. Yet We Should Always Remember - Nothing Is Automatic Despite the widespread perception of India as a country of thriving entrepreneurs, the cost of starting a business is in fact vastly greater than it is in many other key global economies, even those on a comparable income level.

Endemic Inflation India’s current inflation problem is largely a structural one, in large part due to supply side rigidities and low capacity slack in key sectors. This evidently increases the risks that headline inflation will feed into core prices, since unlike in many developed economies, India’s inflation is, in part, a demand driven phenomenon. Of the main components of the wholesale price index, only food manufacturers have seen an unprecedented in inflation since 2008 while increases in industrial and manufacturing input prices have been large but far more modest.

On The Othe r Hand The Central Bank Does Respond

Governor Duvvuri Subbarao said on May 3 inflation will stay at an “elevated level” until September as he raised the central bank’s repurchase rate by half a percentage point to 7.25 percent. Monetary tightening in India will slow growth this year and help ease inflation to 6 percent “with an upward bias” by March 31, 2012, Subbarao said. India’s economy may expand “around 8 percent” in the year through March from 8.6 percent in the previous 12 months, he estimated. And is willing to sacrifice growth for inflation discipline. Since part of the issue is strong internal demand growth Subbarao has some chance of success.

At The Same Time Governance In India Is A Concern While private sector indebtedness is low in India, government debt is high, and very high by emerging economy standards. This year’s budget- deficit target (the total government deficit is around 10% of GDP) is “difficult to achieve,” Chakravarthy Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, told reporters in Mumbai on June 2.

As A Result India Has Trouble In The Current Account Department India reported a current account deficit equivalent to 9.7 Billion USD in the fourth quarter of 2010. India is leading exporter of gems and jewelry, textiles, engineering goods, chemicals, leather manufactures and services. India is poor in oil resources and is currently heavily dependent on coal and foreign oil imports for its energy needs. Other imported products are: machinery, gems, fertilizers and chemicals. Main trading partners are European Union.

Of Course, Part Of The Problem Is Caused By The Usual Culprit QE2 – aka A Surge In Capital Inflows Net private capital inflows to emerging market economies will keep growing this year and next to reach $1.1 trillion in 2012, attracted by economic growth above 6 percent in those countries, a banking industry group said. The Washington-based Institute of International Finance today also raised its estimates for 2011 inflows by $81 billion to $1 trillion to reflect higher forecasts for Brazil and China. “The strength of capital flows is still presenting policy challenges in a number of emerging economies, especially those already facing pressures from rising inflation, strong credit and asset price growth and rising exchange rates,” the IIF wrote in its research note.

We Should Never Forget India Is Still An Emerging Economy • Despite many difficulties India has remained a democracy since independence • Human rights are by and large respected • Institutional quality is improving • The central bank is becoming more and more independent • Corruption is still a BIG problem, but this has solutions • India is a country of individuals, of creativity and strong entrepreneurial spririt • Lastly, a professional bias: India produces economists of extraordinary quality.

And Finally………

Demography We Know Isn’t Everything

But It Sure As Hell Is A Large and Significant Part Of The Picture “If you look at the world, it would inevitably appear India’s growth is preordained. The world needs working hands. The world needs back offices. India seems to be a natural fit…We are producing a workforce which is not only for India, but a global workforce.” Sunil Bharti Mittal, founder and chairman of New Delhi-based Bharti Enterprises

Thank You For Your Attention

You can download the full presentation here.

Small Nations and the Economic Crisis

Exporting Your Way Out Of Trouble Under A Currency Peg – Open University of Catalonia , Presentation during the Conference “Economic Crisis in Small Countries”, Barcelona, Catalonia, May 2011

Baltic Blues - Exporting Your Way Out Of Trouble Under A Currency Peg 
Edward Hugh  - Barcelona: May 2011

In this presentation I will argue that
• Despite some early encouraging signs, it is far from self-evident that the so called “BELLS” (Bulgaria, Estonia, Latvia and Lithuania) are going to be able to export their way out of trouble.
• Unresolved issues may leave a legacy. One which could weigh down any recovery and lead to more serious problems during the next recession In particular: a) The Existence of a Debt Overhang b) The Impact of Ageing and Declining Populations
• The “internal devaluation” process may have been underambitious and allowed to come to a halt far too soon.

Worrying Signs In Latvia Despite a substantial increase in exports

GDP Growth Is Now Slowing

Consumer Demand Fails To Recover

While Industrial Output Languishes And Investment Also Fails To Recover

So What Is The Problem? Well the first problem is debt. How can heavily indebted societies claw their way back to sustainable growth. The Key Point To Grasp – This Process Is Structural, Not Cyclical

Cheap Interest Rates Supported by the Peg Meant Latvian Households and Corporates Got Themselves Heavily Into Debt But Now The Latvian Economy Is Caught In The Vice Of A Credit Crunch

The Problem Now Is That The Credit Bust Economies Are Now Totally Export Dependent For Growth Simplifying: GDP = Consumption + Investment + Government Spending + Net Trade Which means growth in GDP = Growth In the sum of these factors Growth in Net Trade = Growth In Exports – Growth in Imports

Exports Can Grow Rapidly After A Sharp Drop But Once The Former Level Is Recovered It Gets Harder To Obtain Enough Growth To Drive GDP Forward

In Addition Workforces And Population In These Countries Are Shrinking and Ageing

Why Is This A Problem? It Is A Problem Because Your Underlying Trend Growth May Start To Slow And You Still Have To Service The Debts Accumulated When You Were Growing More Quickly.

It Is Also A Problem Because Growth In A Modern Economy Either Comes From Credit Expansion (internal demand) or Exports (paying the credits back). Consumption out of current income isn’t a huge part of the picture.

Population Ageing – A Unique Historical Challenge The economic and social implications of the ageing process are going to be profound. According to a recent report from credit rating agency Standard & Poor’s: • the process is seemingly irreversible. • No other single force is likely to shape the future of national economic health, public finances, and policymaking over the coming decade Strangely, the issue receives only a fraction of the attention that has been devoted to global climate change, even though, arguably, ageing is a problem our social and political systems are, in principle, much better equipped to deal with.

As far as we are able to understand the issue at this point, population ageing will have major economic impacts and these can be categorised under four main headings: i) ageing will affect the size of the working age population, and with this the level of trend economic growth in one country after another ii) ageing will affect patterns of national saving and borrowing, and with these the directions and magnitudes of global capital flows iii) through the saving and borrowing path the process can influence values of key assets like housing and equities iv) through changes in the dependency ratio, ageing will influence pressure on global sovereign debt, producing significant changes in ranking as between developed and emerging economies.

While population ageing is universal the short term impact will be much more localised. The pace of aging varies greatly across countries and regions. The effects of the process are expected to be most pronounced in those countries that remained complacent in the face of ultra-low fertility rates (total fertility rates of 1.5 and under), which in effect means Japan, the German speaking countries and much of Southern and Eastern Europe.

Another way of looking at these demographic changes is in terms of the dependency ratio, which can be defined in a number of different ways depending on the problem being addressed.

Eastern Europe Will Be Very Hard Hit Among emerging economies, the East of Europe stands out as by far the worst case in the short term. In 2025, more than one in five Bulgarians will be over 65 - up from just 13 percent in 1990. Ukraine’s population will shrink by a fifth between 2000 and 2025. And the average Slovene will be 47.4 years old in 2025 – one of the oldest populations in the world.

The Demographics Of Export Dependency As I have been arguing, if economies transit from being consumption driven to export driven, and it would appear that the process is not merely random, then we are not talking about choosing between options or “growth models”. There is not a choice here, since there are deep underlying structural dynamics at work, and these dynamics seems to be intimately associated with the dynamics of the demographic transition

Time To Act – What Can Be Done? Short Term: - Continuing and Continuous Structural Reform • Labour Market Reform • Pension Reform • Heath System Reform • Immigration Longer Term • Raise Fertility Rates • Global Rebalancing Initiatives • Acceptance that the Modern Growth Era – like modernity itself – doesn’t last forever.

You can download the full presentation here.

The Demogaphic Challenge Facing Eastern Europe

The Stockholm School of Economics in Riga invites you to an open lecture: Eastern Europe and the Demographic Challenges Facing Economic Recovery delivered by Edward Hugh*. The lecture will take place on the 7th of April, 2011 from 15.00-16.30, SSE Riga, Soros auditorium, Strēlnieku iela 4a.

The issues raised in this guest lecture – ‘demographic challenges’ and ‘economic recovery’ are obviously highly relevant for Latvia, and the Stockholm School of Economics in Riga is very happy to be able to invite Edward Hugh to address these topics.

*Edward Hugh is an independent macro economist who specializes in growth and productivity theory, with particular emphasis on demographic processes and migration flows and the impact of these on macroeconomic performance.

He is a regular contributor to a number of economy-related weblogs, including A Fistful of Euros, Roubini Global Economic Monitor, Global Economy Matters and Demography Matters. He is also actively and widely followed on Facebook.

His many writings, including predictions of problems for the eurozone long before these emerged, have made Edward Hugh a household name in the blogosphere and elsewhere.

Leaving One Crisis Behind Only To Come Face To Face With The Next One? The Demographic Challenge Facing Eastern Europe
Edward Hugh - Riga: April 2011

In this presentation I will argue that • The most recent crisis was not an arbitrary phenomenon • There is an underlying process we need to understand • The worst is undoubtedly over in the last crisis • Unresolved issues may leave a legacy. One which could weigh down any recovery and lead to more serious problems during the next recession In particular: a) The Existence of a Debt Overhang b) The Impact of Ageing and Declining Populations

What Was The Last Crisis All About? It was all about debt, and about how heavily indebted societies were going to be able to claw their way back to growth. The Key Point To Grasp – This Process Is Structural, Not Cyclical So Just Why Was There So Much Debt? • Badly Structured Financial Products? • Poor Regulation? • Or Was There Something Else Going On?

Case Study: The Eurozone Here is a key part of the puzzle. During the first 10 years of the Euro some European countries borrowed heavily, while others lent. As a result Spain’s households contracted a lot of debt. Yet German households didn’t. Why this difference?

One Conventional Account The “one size fits all” monetary policy didn’t work. Spain had negative interest rates during the key years of the housing boom. But that still leaves us with a question: why didn’t it work?

Credit Driven Private Consumption Booms In fact both Spain and Germany have had these. The only real difference is in the Timing. Germany 1992 – 1999 Spain 2000 - 2008 Why do some countries have these while others don’t?

Current Account Blues Germany didn’t always run a current account surplus. All through the 1990s the current account was in deficit. And Spain won’t always run a current account deficit, even if that seems hard to believe right now. The Key 25 to 49 Age Group This group peaked in Germany – as a % of total population around the turn of the century. And in Spain it peaked towards the end of the first decade of this century.

In The BackgroundThose Famous “Global Imbalances” But Just Why Did The Imbalances Build Up? Japan, Germany and China – the usual suspects – had substantial current account surpluses. While that other group – the debtors, countries like the UK, the US and Spain – ran substantial deficits.

Could Something As Simple As Median Population Age Help Us Understand? Ours is an age of rapidly ageing societies. What is so modern about our current situation is not the ageing itself, but its velocity, and its global extension. Population Ageing – A Unique Historical Challenge The economic and social implications of the ageing process are going to be profound. According to a recent report from credit rating agency Standard & Poor’s: • the process is seemingly irreversible. • No other single force is likely to shape the future of national economic health, public finances, and policymaking over the coming decade Strangely, the issue receives only a fraction of the attention that has been devoted to global climate change, even though, arguably, ageing is a problem our social and political systems are, in principle, much better equipped to deal with. As far as we are able to understand the issue at this point, population ageing will have major economic impacts and these can be categorised under four main headings: i) ageing will affect the size of the working age population, and with this the level of trend economic growth in one country after another ii) ageing will affect patterns of national saving and borrowing, and with these the directions and magnitudes of global capital flows iii) through the saving and borrowing path the process can influence values of key assets like housing and equities iv) through changes in the dependency ratio, ageing will influence pressure on global sovereign debt, producing significant changes in ranking as between developed and emerging economies.

While population ageing is universal the short term impact will be much more localised. The pace of aging varies greatly across countries and regions. The effects of the process are expected to be most pronounced in those countries that remained complacent in the face of ultra-low fertility rates (total fertility rates of 1.5 and under), which in effect means Japan, the German speaking countries and much of Southern and Eastern Europe.

Another way of looking at these demographic changes is in terms of the dependency ratio, which can be defined in a number of different ways depending on the problem being addressed.

In In Germany total population is expected to fall from its current level of 82 million reaching anything between 69 and 74 million by 2050, depending on the future course of life expectancy, immigration and fertility. And the proportion of people aged 65 and older is projected to rise from just under 20% today to just over 33% by 2050. At the same time, the number of very elderly (those aged 80 and over) will nearly triple to as much as 15% of the total population.

Eastern Europe Will Be Very Hard Hit Among emerging economies, the East of Europe stands out as by far the worst case in the short term. In 2025, more than one in five Bulgarians will be over 65 - up from just 13 percent in 1990. Ukraine’s population will shrink by a fifth between 2000 and 2025. And the average Slovene will be 47.4 years old in 2025 – one of the oldest populations in the world.

Importance Of The Prime Age Groups Estimates of the exact age extension of the different groups vary, but 25-40 would be a good rule of thumb measure of the borrowing range, 40 to 55 for the peak savers, and 35 to 50 for the prime age workers. Beyond this, the question is an empirical one of measuring and testing to determine more precise boundaries and frontiers. The key groups are prime savers, prime borrowers, and prime productive workers. Where these actual age brackets lie, and the extent to which they may overlap, is still a subject of some controversy, One of the key points to grasp, is that the proportion the population which is to be found in one of the ‘prime’ age groups at a given moment in time, is absolutely critical, and much more important for understanding the processes at work than the mere size of the working age population.

Life Cycle Effects There is a generally accepted wisdom in academic work known as the “life cycle hypothesis” (Modigliani). This suggests that the population’s financial behaviour changes depending on age. In terms of adult life, those in their twenties and early thirties tend to be net borrowers as they are relatively low earners at the same time as they look to buy housing, expensive durables and fund their burgeoning families. At some point around middle- age this group then tends to move from being net borrowers to net investors as they move into their economic prime and accumulate financial assets to hopefully fund their retirement. As they approach retirement this group then start to shed the financial assets they’ve been accumulating to fund their nonworking days.

The Demographics Of Export Dependency As I have been arguing, if economies transit from being consumption driven to export driven, and it would appear that the process is not merely random, then we are not talking about choosing between options or “growth models”. There is not a choice here, since there are deep underlying structural dynamics at work, and these dynamics seems to be intimately associated with the dynamics of the demographic transition.

Dangers of Sovereign Debt Default? According to the recent Standard & Poor's report, the cost of caring for the growing numbers of dependent elderly will both affect growth prospects and dominate public finance policy debates across the globe, and for many years to come. Even if most governments have long been aware of the need to prepare for the looming problem, the rapid build-up of government debt over the past three years has effectively heightened the need to do more to advance reforms aimed at containing the risks to sovereign budgets, especially in countries with high expected future increases in age-related spending.

And The Numbers Are Daunting Assuming no policy change, Standard and Poor’s estimate that developed country deficits could rise from 5.7% of GDP currently to over 7.4% of GDP by the mid-2020s. The interest cost of the growing debt burden may exacerbate the budgetary impact of demographic spending pressure. And if nothing is done deficits will rise inexorably to 10.1% of GDP in 2030 and 24.5% by the middle of the century. This would lead the general government net debt burden to increase to 78% of GDP through to 2020, only to then accelerate thereafter. By 2030, the net debt burden is projected to be at almost 115%, at the same time as being on an explosive path to which would see average developed country sovereigns hitting 329% of GDP by 2050.

A Delicate Balancing Act Reasonable empirical confirmation exists that the recent surge in global imbalances was, in part, an offshoot of slow-moving underlying demographic determinants of global capital flows. The near-term adjustments will mean more emerging market current account deficits and less developed market ones. At a global level, demographic pressures will continue to imply that the increase in desired saving will exceed the increase in desired investment. This has one clear implication: globally interest rates can be expected to remain low.

Longer, Healthier Working Lives In terms of policies to address the pressures of ‘ageing’, the debate in terms of social security and healthcare often focuses on raising retirement ages to reduce dependency rates and alleviate fiscal pressures. Extending working lives relative to the time spent in retirement will not only help address the pension issue, it should also serve to accelerate the tendency towards larger current account surpluses across most developed economies, in particular in those parts of Europe which are in the process of private sector deleveraging as part of their fiscal sustainability programme. Time To Act – What Can Be Done? Short Term: - Continuing and Continuous Structural Reform • Labour Market Reform • Pension Reform • Heath System Reform • Immigration Longer Term • Raise Fertility Rates • Global Rebalancing Initiatives • Acceptance that the Modern Growth Era – like modernity itself – doesn’t last forever.

You can find the presentation to download here.

Saying Goodbye to One Crisis and Hello To The Next?

SAYING GOODBYE TO ONE CRISIS?

The keynote speaker on the first morning was Mr Edward Hugh, a macroeconomist and informal advisor to the Catalan Government, based in Barcelona. He began his presentation by arguing that the most recent economic crisis was not an arbitrary phenomenon and that, while the worst was undoubtedly over for now, there was an underlying process (with all its implications for future crises) to be understood. He wondered whether we had actually learned the lessons of what had gone wrong. He believed that the last crisis was structural, not cyclical, and was all about debt. It was important for the future for heavily indebted societies to work out how to “claw their way back” to economic growth.

Mr Hugh felt that, while poorly structured financial products and regulation had contributed to debt, there was an underlying problem – demography. Taking the Eurozone as a case study, he said that during the first 10 years of the euro’s existence, some European countries had borrowed heavily, while others had lent. As a result, Spain’s households had contracted a great deal of debt, while German households had not. The ‘one size fits all’ monetary policy had not worked and Spain had suffered negative interest rates during the key years of the housing boom. Both Spain and Germany had had credit-driven private consumption booms but at different times – Spain’s a boom had been between 2000 and 2008 and Germany’s had been between 1992 and 1999. In Mr Hugh’s opinion, the key to understanding this was to look at the 25 to 49-year-old age group. As a percentage of the total population, this group had peaked in Germany, around the turn of the century and in Spain towards the end of the first decade of this century. Economic growth came from one or two sources – a big growth in either credit or exports – and this was related to demography.

Ours was an era of rapidly ageing societies, Mr Hugh commented. What was so modern about the current situation was not the ageing itself, so much as “its velocity and global extension”. The economic and social implications of the ageing process were likely to be profound. According to a report from credit rating agency Standard & Poor’s, the process was seemingly irreversible and no other single force was likely to shape the future of economic health, public finances and policy-making over the coming decade in the same way. Mr Hugh went on to say that (as far as we have been able to understand the issue at this point) population ageing would have a major economic impact and this could be separated out under four main headings.

1. Ageing would affect the size of the working-age population and the level of economic growth in different countries.

2. Ageing would also affect patterns of national saving and borrowing and the directions and magnitudes of global capital flows.

3. Through the saving and borrowing part, the process would influence the values of key assets, such as housing and equities.

4. Through changes in the dependency ratio, ageing would influence pressure on sovereign debt, producing significant changes in ranking as between developed and emerging economies.

Mr Hugh was of the opinion that, while population ageing was universal, the short-term impact would be much more localized as the pace of ageing varied greatly across countries and regions. The effects of the process were expected to be most pronounced in those countries that remained complacent in the face of ultra-low fertility rates (total fertility rates of 1.5 and under) which, in effect, meant Japan, the German-speaking countries and much of Southern and Eastern Europe. He went on to say that another way of looking at these demographic changes was in terms of the dependency ratio, which could be defined in a number of different ways. In Germany the total level of population was expected to fall from its current level of 82 million to reach anything between 69 million and 74 million by 2050, depending on the future course of life expectancy, immigration and fertility. The proportion of people aged 65 and older was projected to rise from just under 20% today to just over 33% by 2050. At the same time, the number of very elderly (those aged 80 and over) would nearly triple to as much as 15% of the total population. Mr Hugh suggested that, among emerging economies, those in Eastern Europe stood out as being by far the worst case in the short term. In 2025, more than 20% of Bulgarians would be over 65 – up from just 13% in 1990. Ukraine’s population would shrink by a fifth between 2000 and 2025, while the average Slovene would be 47.4 years old in 2025 – making the populations of Slovakia one of the oldest in the world. The ageing problem went well beyond the confines of the European Union (EU) or the G7 , he continued. In particular, China stood out among the developing economies. The very elderly share of China’s population seemed set to rise steadily from 11% in 2004 to 15% in 2015, would leap to 24% in 2030 and then to 28% in 2040.

Mr Hugh maintained that there was a generally accepted wisdom known as the ‘lifecycle hypothesis’ which suggested that a population’s financial behaviour changed depending on age. Those in their twenties and thirties tended to be net borrowers, as they were relatively low earners while they were buying houses and expensive durables at the same time as bringing up young families. At some point around middle age this group tended to move from being net borrowers to net investors as they moved into their economic prime and accumulated financial assets in order to fund their retirement. As they approached retirement this group then began to shed their financial assets to fund their non-working days. Those between 25 and 40 he categorized as ‘prime borrowers’, those between 35 and 50 as ‘prime workers’ and those between 40 and 55 as ‘prime savers’. Mr Hugh felt that the proportion of a population to be found in one of the ‘prime’ age groups at any given moment was absolutely critical for understanding the economic processes at work. With this kind of understanding of the demographic component of saving and borrowing patterns it was not hard to see how demographic forces might have played an important role in the run-up to the most recent economic crisis. The transition of economies from being consumption driven to export driven seemed to be intimately associated with the dynamics of demographic transition.

In order to prevent repeat crises, governments would need to make reforms in the short term in areas such as pensions and health systems. In terms of policies to address the pressures of ‘ageing’, the debate in terms of social security and health care often focused on raising retirement ages in order to reduce dependency rates and alleviate fiscal pressures. Extending working lives relative to the time spent in retirement would not only help address the pension issue, but would also serve to accelerate the tendency towards larger current account surpluses across most developed economies, in particular in those parts of Europe that were in the process of private-sector deleveraging as part of their fiscal sustainability programme. In the longer term, fertility rates would need to rise and global rebalancing initiatives be undertaken.

Mr Hugh rounded off by remarking that one of the standard pieces of economic observation about countries recovering from financial crisis was that their recoveries were export driven. At the same time, many developing countries badly needed cheap and responsible credit lines and access to state-of-the-art technologies and he believed that there was room for some sort of new Marshall Plan initiative to generate a “win-win dynamic”. However, he sensed that tackling global climate change was higher up some politicians’ agendas.

You can download the entire presentation here.

Why Economists Got It Wrong

A surprising feature of economic analysis of the current crisis has been the pivotal role played by a small number of bloggers, often positioned far from the academic mainstream. This event will feature one of the top bloggers on the Euro Crisis who will discuss the role the bloggers have played in our understanding of the current Euro Crisis, and in what ways having more data in our hard drive than the sum total of all previous economists changes our understanding of macroeconomics. Edward Hugh is an independent macro economist based in Barcelona. He studied at the LSE, where he obtained his BSc (econ). He then went to Manchester University where he was awarded an MSc in the philosophy and sociology of science. He subsequently persued doctoral studies there for a thesis which was never completed. He is a regular contributor to a number of weblogs, including A Fistful of Euros, Roubini Global Economics Monitor, Global Economy Matters and Demography Matters. He also has an active and widely followed Facebook community. For more information on Edward Hugh see the recent profile in the New York Times. Luis Garicano is a Professor of Economics and Strategy at the LSE's departments of Management and Economics.

Link to Video - How Life in The Internet Changes the Practice of Macroeconomics

Link to Presentation - Why Economists Got It Wrong

Macroeconomics In The Era Edward Hugh Of The Internet London: February 2011

Why Didn’t Mainstream Economists See The Crisis Coming? Three Hypotheses •Over-reliance on consensus •Excessive Belief That Markets Can Never Fail •They Were Mesmerised By Their Own Models

The Case Of The IMF For a long while after the explosion of macroeconomics in the 1970s, the field looked like a battlefield. Over time however, largely because facts do not go away, a largely shared vision both of fluctuations and of methodology has emerged. Not everything is fine. Like all revolutions, this one has come with the destruction of some knowledge, and suffers from extremism and herding. None of this deadly however. The state of macro is good............ there has been broad convergence in vision. Oliver Blanchard , Chief Economist at the IMF

"Part of the problem was the similar mindset of many mainstream economists working at the Fund, with similar background and training and who were not open to dissenting views. Both in and outside the Fund, there were other economists and policy makers with contrarian views. But their views were not encouraged or closely examined within the Fund.“ IMF Performance in the Run-Up to the Financial and Economic Crisis: IMF Surveillance in 2004-07 Background Paper: Summary of Views of the Advisory Group The IEO View (IMF Independent Evaluation Office)

The Heart of the Problem Excess of Confidence – “Feel-good” Effect Too Much Consensus – Inability To Listen The “Storks on the Wire” – false correlation – effect, years of apparent economic stability and a new generation of macro theories (the era of the so-called Great Moderation) lead to the idea that sound application of consenually grounded theory had had something to do with the apparent stability. This later turned out to have been a mistake.

As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth. Paul Krugman This is a widely shared view, and is certainly the case. But Krugman goes further, the world of economics as he sees it is divided between those who believe the economic system regulates itself, and those that don’t. In Krugman’s terminology, freshwater economists are, essentially, market purists. They believe that all worthwhile economic analysis starts from the premise that people are rational and markets work. My question is: are these very strong, and scarcely credible, assumptions really needed to get the game of doing useful macroeconomics started? The Freshwater and Saltwater Approach

On the other hand there are those who believe economic systems don’t run smoothly on their own: “Where the freshwater economists were purists, saltwater economists were pragmatists. ... they found the evidence that recessions are, in fact, demand-driven too compelling to reject. So they were willing to deviate from the assumption of perfect markets or perfect rationality, or both, adding enough imperfections to accommodate a more or less Keynesian view of recessions. And in the saltwater view, active policy to fight recessions remained desirable”. Demand Driven Recessions This argument seems more plausible , since levels of consumer and investment demand do fluctuate, but it still leaves us with the underlying issue as to why such shifts in demand occur. In other words, what drives these movements in demand. Is there any identifiable underlying process?

"What does concern me about my discipline, however, is that its current core —by which I mainly mean the so-called dynamic stochastic general equilibrium approach — has become so mesmerized with its own internal logic that it has begun to confuse the precision it has achieved about its own world with the precision that it has about the real one”. Ricardo Cabellero - Macroeconomics after the Crisis: Time to Deal with the Pretense-of-Knowledge Syndrome The “Core” Versus “Periphery” Argument At this level Caballero’s approach seems similar to Krugman’s statement above, but rather than put the line in the sand between “laissez-faire” and interventionist economists, he tries to differentiate between an increasingly unreal (he uses the word “surreal”) core and a series of “real-world” plug-ins which have been created to in an make the models work by making their assumptions more realistic. As Caballero notes, in fact integration of the plug-ins increasingly poses a threat to the coherence of the models they were meant to rescue. Realism vs Coherence?

But Before Going Further: What Was The Last Crisis About? The recent financial crisis was basically about debt, and about how heavily indebted societies were going to claw their way back to economic growth. In fact mainstream neo-classical economists have often found it extremely difficult to incorporate this deep structural component into their cyclically based models. But Then: Just Why Was There So Much Debt? This is a key part of the puzzle. One of the key parts of the problem is to explain why some societies got into debt, while others didn’t. Spain’s households, for example, contracted a lot of debt. German households didn’t. Why the difference? One theory is that a failure of single-size monetary policy. But is that enough to explain such massive structural divergence?

Then There Were Those Famous “Global Imbalances” – But Just Why Did The Imbalances Build Up? Japan, Germany and China – the usual suspects – had their massive current account surpluses. While that other group - the debtors, like the UK, the US and Spain – ran substantial deficits. So with such mundane macro processes like these as the backdrop, do we really need to start by talking about rare phenomena and “fat tail” events here?

So What Really Are The Problems With Macroeconomics? Surely comprehensive macro theory should be able to handle and explain such general global phenomena. Ricardo Caballero in his paper “Macroeconomics after the Crisis: Time to Deal with the Pretense-of- Knowledge Syndrome” makes some strong assertions, which I think macroeconomics needs to challenge and give a response to. • Complexity Implies Uncertainty • Events Cannot Be Foreseen • Something Is Rotten In The Core of Neo- Classical Theory "The idea is to place at the center of the analysis the fact that the complexity of macroeconomic interactions limits the knowledge we can ever attain. In thinking about analytical tools and macroeconomic policies, we should seek those that are robust to the enormous uncertainty to which we are confined, and we should consider what this complexity does to the actions and reactions of the economic agents whose behaviour we are supposed to be capturing". Does Complexity Really Imply Uncertainty? Really there is uncertainty, and uncertainty. I may be able to identify a housing bubble, but I cannot tell when exactly it will burst (although “x” months after the central bank starts raising interest rates would be a good rule-of-thumb approach - think China now). Multi year GDP forecasts may be the next best thing to useless, but is it completely impossible to identify the level of trend growth for an economy at any given moment in time. Spain’s economy was growing at about 4% a year for the best part of a decade, but would anyone like to bet me we will see average growth rates of over 1% annually between now and 2020? Is The World Really So Uncertain As Caballero Claims?

Really there is uncertainty, and uncertainty. I may be able to identify a housing bubble, but I cannot tell when exactly it will burst (although “x” months after the central bank starts raising interest rates would be a good rule-of-thumb approach - think China now). Multi year GDP forecasts may be the next best thing to useless, but is it completely impossible to identify the level of trend growth for an economy at any given moment in time. Spain’s economy was growing at about 4% a year for the best part of a decade, but would anyone like to bet me we will see average growth rates of over 1% annually between now and 2020? Is The World Really So Uncertain As Caballero Claims?

"In my view, the conviction that one can foretell a severe crisis in advance is mostly a manifestation of pareidolia—the psychological phenomenon. That makes people see faces and animals in clouds and the like.“ Ricardo Caballero Knowing What You Might Know, And What You Almost Certainly Don’t Know In a manner which is extraordinarily reminiscent of the way scholastics treated the move from the closed to the infinite universe, Caballero ridicules attempts to give a predictive edge to economic theory. In Newton’s day appeal to non material forces of attraction (like gravity) was ridiculed as being no better than mere astrological quackery. Today we are faced with a transition in the way we think about things which is every bit as profound as the shift from Newtonian to Einsteinian physics.

But Then What Really Is The Problems With Modern Macroeconomics? "The core approach to macroeconomics, as it is taught in most graduate programs and as it appears in leading journals, begins with a neoclassical growth model. This model is then developed into a stochastic form....“ Ricardo Caballero The Neo-Classical Core So at the heart of modern macroeconomics lies the neo-classical growth model, and the assumption of some form or other of – hard to define – steady state growth. Some notion of this kind has to lie behind all those weird and wonderful RBC models, or the game could never commence. But just how reasonable are the premises which lie behind this assumption?

"All theory depends on assumptions which are not quite true. That is what makes it theory. The art of successful theorizing is to make the inevitable simplifying assumptions in such a way that the final results are not very sensitive.' A "crucial" assumption is one on which the conclusions do depend sensitively, and it is important that crucial assumptions be reasonably realistic. When the results of a theory seem to flow specifically from a special crucial assumption, then if the assumption is dubious, the results are suspect.“ Solow, R. M. (1956). A contribution to the theory of economic growth. Quarterly Journal of Economics 70(February):65-94. Solow’s Simplifying Assumption Now one of those simplifying assumptions for Solow, and the whole neo classical growth approach is based on this is that POPULATION IS AN EXOGENOUS VARIABLE. Just how realistic is this assumption?

What Happens If We Make Population Endogenous? Instead of treating the relative rate of population increase as a constant, we can more classically make it an endogenous variable of the system. Suppose, for example, that for very low levels of income per head or the real wage population tends to decrease; for higher levels of income it begins to increase; and that for still higher levels of income the rate of population growth levels off and starts to decline. Solow: Homogenisis & Steady State Dynamics What Happens If We Make Population Endogenous? Instead of treating the relative rate of population increase as a constant, we can more classically make it an endogenous variable of the system. Suppose, for example, that for very low levels of income per head or the real wage population tends to decrease; for higher levels of income it begins to increase; and that for still higher levels of income the rate of population growth levels off and starts to decline. Solow: Homogenisis & Steady State Dynamics But Do We Really See Homogenisis In Reality? Is there a self correcting “”hidden hand” type mechanism at work here? Do societies converge towards a common steady state income per capita growth rate as they age?

One Size To Fit Them All – Median Population Age Could it really all be as simple as this?

A Simple Model Of Current Account Dynamics Using Demography and Median Age Claus Vistesen If Lions Could Speak, Would We Really Be Able To Understand Them? The Role Of The Internet I – The Arrival of the Sell Side Analyst Nikkei Peak, and Japan Dependents Ratios From The Golden To The Grey Age, Deutsche Bank Special Report. Can Greece Really Pay All That Debt?

The Role Of The Internet II – New Media Universities won't survive. The future is outside the traditional campus, outside the traditional classroom. Distance learning is coming on fast Peter Drucker - I got my degree though e-mail

The Role Of The Internet III – Social Networks

The Role Of The Internet IV – Access To High Volume Data

The Role Of The Internet V – Qualitatative Data Despite the obsession with building robust quantitative models. In real world economics, at the empirical level, Quantitative data – like PMI & Labour Force Surveys – ProvesTo Be Incredibly Useful. The Role Of The Internet VI – Sharing Information & Perspectives The new information technology.. Internet and e-mail.. have practically eliminated the physical costs of communications. Peter Drucker Are There Positive Externalities Associated With Sharing Information?

So What Does The Future Look Like? I’ve seen it, but does it work? The Japanese Case

And What About Spain? And That “Horrid” European Sovereign Debt Crisis?

According to the World Bank, the nine countries that have been attracting the bulk of capital flows since the crisis are Brazil, China, India, Indonesia, Malaysia, Mexico, South Africa, Thailand and Turkey. - World Bank‘: Global Economic Prospects 2011. Can We Really See Nothing In Advance?

Monetary Policy In the Age of A Global Economy Ben Bernanke’s Latest Statement “With regards to commodities inflation in developing economies, Ben Bernanke asserted that central banks there were equipped to deal with it. They could raise interest to quash price pressures and also allow the exchange rates of their currencies to appreciate to counter imported inflation””. Globalization is an ecosystem in which economic potential is no longer defined or contained by political and geographic boundaries. Economic activity knows no bounds in a globalized economy. A globalized world is one where goods, services, financial capital,machinery, money, workers and ideas migrate to wherever they are most valued and can work together most efficiently,flexibly and securely. Richard Fisher , President of the Federal Reserve Bank of Dallas

Thank You Very Much For Your Attention Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past, the ocean is flat again. John Maynard Keynes

Is Spain's Fiscal Correction Sufficient?

¿Qué quiere decir depender de exportaciones en el contexto español?
Edward Hugh - Barcelona: November 2010

El Tema Numero Uno Es Deuda Ahora la gran pregunta es, ¿Cómo volver a bajar los ratios de deuda en el PIB?

La Deuda Española También Ha Crecido En Relación Con El PIB Entre hogares, empresas y gobierno, la deuda ahora esta cercana al 265% del PIB

La Deuda Del Gobierno No Es Excesivemente Alta En Comparasión Con El Promedio Europeo Pero Esta Creciendo Rapidamente Problema: Una Parte Importante De Los Prestamos No Fue Financiado Desde Los Dipositos, Sino Del Mercado Interbancario Europeo Con El Resultado De Que La Deuda Externa Neta Del País Ha Subido De Forma Notable

La Segunda Tema - Los Desajustes Entres Paises Estes estan estrechamente conectados con el problema de endeudamiento a través de los niveles de ahorro y credito de cada país.

La Tercera Tema - Envecimiento Global Although at this point the implications are not completely clear, no other force is likely to shape the future of national economic health, public finances, and policymaking in the same way the irreversible rate at which the world's population is ageing will. According to the UN, the proportion of the world's population aged over 65 is set to more than double by 2050, to 16.2% from 7.6% currently. By the middle of the century, about 1 billion over 65s will join the ranks of those classed as of non-working age. The developed economies are ageing much faster than the emerging ones, and this is producing a dynamic where it seems there is a transition taking place between consumer societies and saver societies.

Aunque este tema esta todavia muy contestado teoricamente, podemos indentificar cuatro vias potenciales de impacto. i) El tamaño de la fuerza laboral, y con este la tasa de crecimiento tendencial ii) Los patrones de ahorros y prestamos nacionales, y con estes la magnitud y direción de los flujos de capital. iii) A través del impacto (ii) el proceso de envejimiento puede influir en los valores de los activos claves tales como las acciones y la vivienda. iv) A través del impacto sobre la relación de dependencia, el envecimineto tendra un impacto sobre la deuda soberana, y su evolución, con la consequencia que el “ranking” de los “ratings” cambiara, y sobretodo entre los paisos emergentes y los paises ya desarrollados. Impactos Economicos Del Envecimento

Un Hipotesi: la relación entre el envecimento de la población y la cuenta corriente puede tener esta forma. Chart courtesy of Claus Vistesen

Japón y Alemania son actualmente las dos sociedades mas viejas de la planeta. Los dos también son fuertemente pendientes de las exportaciones. ¿Este es una casualidad? También ha bajado notamblemente el crecimiento tendencial de ambos paises, haciendo ambos muy sensible a golpes externos de demanda o en los valores de las divisas. Entonces ¿Qué ejemplo seguira España? ¿El de Alemania y Japón?

El crecimiento tendencial de Italia hoy en dia es de menos de 0,5% anual. ¿O Aquello de Italia ? Italia también tiene un edad media de 45, pero la posición de la cuenta corriente ha deteriado mucho desde los años noventa, con un impacto evidente sobre la tasa de crecimiento.

De Hecho El Deterioro En El Balance Externo Italiano Se Corresponde Totalmente Con La Bajada De Crecimiento Tendencial

La Gran Metamorfosis ¿de gusano a mariposa?

Si fijamos en el gráfico de arriba, que muestra el crecimiento anual en el consumo familiar en Alemania, se puede ver fácilmente que no es cierto que los alemanes sean “no consumidores y ahorradores natos". En los años noventa , hubo un" boom" notable en el consumo alemán, un "boom“ que llegaba a su fin un los últimos años de la década. Sólo es a partir del año 2000 cuando el consumo privado carece de vitalidad y es incapaz de tirar de la economía. El “boom” olivadado del consumo alemán

Si miramos el gráfico equivalente del consumo privado español, podemos ver que España disfrutaba de la misma clase de crecimiento en el consumo que Alemania había experimentado en los años noventa.

El Boom De España Se Parece Mucho Al Boom Alemán Anterior

No es de sorprender que la causa sea lo de siempre – un incremento rápido en el recurso a crédito. Una vez más, los gráficos ilustran que es falso pensar que los alemanes siempre han sido una nación de ahorradores meticulosos. Pero más que el boom de consumo en si mismo, lo interesante es lo que lo impulsaba. El Ultimo “Boom” De La Vivienda En Alemania Los gráficos cuentan la misma historia de incremento de hipotecas en España, incluso en una versión aún más exagerada. El Patrón Desarrollado En España Fue Bastante Parecido A un período de crecimiento fuerte en las hipotecas se sigue otro de estancamiento, después de acabar el" boom", lo cual es una de las razones más importantes para no quedar estancado y esperar el renacimiento de otro de expansión, basado en el crédito; pero no llegará.

Y el endeudamiento no fue solo un fenómeno de las familias, las empresas también estaban contratando créditos. Las Empresas También Por lo general, a partir del cambio de siglo las empresas alemanas han sido bastante ahorradoras, con la excepción de un período breve durante la crisis reciente.

Una vez más España se destaca por la magnitud del fenómeno. 

El endeudamiento de las empresas españolas – y no sólo las constructoras – es un problema bastante más serio que su equivalente alemán en su tiempo. Las Empresas Españolas Están Fuertemente Endeudadas Las empresas españolas están, ahora, desapalancando y reduciendo su exposición al crédito. Mirando estos últimos gráficos de crédito, destacan dos características. En primer lugar, el total de deuda privada actual no es tan diferente entre los dos países, pero hay que tener en cuenta que el PIB alemán es el doble del PIB español.

La Deuda Alemana Fue Muy Inferior A Su Equivalente Española De Hoy En Día

En segundo lugar,si se mira la cola larga del cambio de crédito interanual alemán, se puede discernir un poco el futuro que le espera a España. La tasa de crecimiento interanual no volverá a subir a sus niveles de antaño, y tenemos que esperar que se va avanzando pegado cerca de cero, a la medida que el sector privado en España vaya desapalancandose. Todo esto nos lleva a un concepto muy importante, la relación entre "booms" basado en crédito y déficit en cuenta corriente. Tal y como se puede ver en el gráfico, Alemania no fue una excepción. Durante todo su "boom" de consumo, el país llevaba un déficit sistemático, pequeño, pero constante. Es este déficit el que se convierte en superávit en la medida en que el país pasa por un ajuste estructural que acompaña al desapalancamiento, y a la transición hacia un país fuertemente exportador.

El Déficit Inesperado De Cuenta Corriente De Alemania 

Es el camino alemán el que, seguramente, España tendrá que seguir, pero hay que destacar la diferencia masiva de escala entre las dos transiciones. El ajuste español será muy grande, casi sin precedentes históricos. Pero quién permitió que España desarrollase un desajuste tan enorme?

El reto es exportar: ¿Pero qué y dónde?

El sector de exportación español es demasiado pequeño. Tantos años de vivir con el boom fácil de la construcción han dejado su huella. Algunos dicen que el sector de exportación es lo suficientemente competitivo. Pero quizás las cosas no son tan fáciles. Tanto las exportaciones españolas como las alemanas están otra vez a su nivel de antes de la crisis. Pero en el caso alemán el nivel es el doble (pro rata) que en el caso español. Es por eso que el sector español tiene trabajo por hacer, y bastante.

El necesario e ¿incompleto? reajuste. Entonces, ¿Que Puede Hacer España?

Edward Hugh en el Financial Times del lunes:

Asked what Spain and Portugal should do to stop the so-called contagion, Edward Hugh, a Barcelona-based economist, replied: “Not do anything wrong.” He went on: “The only thing you can advise these people to do at this stage is to be absolutely frank and stick absolutely to what they say.” “From this point on, the more you do fiscal austerity, the more you contract and the less you can pay,” said Mr Hugh.

Manuel Campa hablando con Bloomberg el martes:

The best thing “to generate credibility in the Spanish economy is to execute the measures we have announced at the time and in the way they were announced, and that implies not taking additional measures,” Jose Manuel Campa, deputy finance minister for the economy, told reporters in Madrid today. Miguel Angel Fernandez Ordonez declarando en una comisión del senado: “We have to convince people that we’re going to do exactly what we said we were going to do,” Bank of Spain Governor Miguel Angel Fernandez Ordonez told reporters in Madrid after appearing before a Senate committee today. Spain’s deficit- reduction effort is going “very well,” he said. "The outlook for a gradual recovery is surrounded by uncertainties,“ Bank of Spain Governor Miguel Angel Fernandez Ordonez told senators."In an environment where financing conditions will foreseeably remain restrictive and in which the public and the private sector have a pressing need to clean up their financial position, we can expect the pace of recovery in household consumption to slow versus the first half of the year," he said.

Contagión En Los Diferenciales



¿Es Este La Solución? 

ECB's Weber Says Europe Can Go Beyond EUR750B Rescue Axel Weber, German Central Bank president and council member of the European Central Bank, said Wednesday the euro is solid and euro-zone member states will protect it from speculative attacks, even if that means putting more money on the table. He said any speculative attack on the euro would fail as he assumes European countries are ready to increase the EUR750 billion rescue package created in May to fend off threats to financial stability within the 16 member states of the euro zone. "If that amount is not enough, we could increase it," Weber said. "An attack on the euro has no chance of succeeding."

Yo Creo Que No Lo que necesesitamos a) Reducir el coste de la deuda. Que el BCE compra bonos en los mercados primarios en un golpe de “shock & awe”, con el objectivo de bajar el rendimento de bonos de 10 años hacia una franja de entre 1% & 1,5% (tipo Reserva Federal). b) Euro Bonds. Que los paisos de la Area Euro emiten bonos en conjunto, que son de todos y para todos, para asumir una parte del coste de los platos rotos de los primeros diez años de la divisa comuna . c) Condicionalidad. Crear un mecanismo con poderes convincentes para vigilar los deficits y los desajustes externos de los paisos miembros de la Zona Euro.

 Durante Los Primeros Años de Este Siglo La Economia Alemana Tenia que Luchar Para Recuperar La Competitividad Hoy En Dia La Economia Española Se Enfrenta Un Reto Parecido. ¿Estaremos A La Altura De Esta Tarea?

 Thank You For Your Attention

You can download the full presentation here.

Does Norway Need Immigration - TEDXNH Bergen Sept 2010

Is Immigration A Solution To Our Edward Hugh Long Term Pension Problems? Bergen: October 2010



Global Ageing: An Irreversible Truth

No other force is likely hot shape the future of national economic health, public finances, and policymaking as the irreversible rate at which the world's population is ageing. U.N. figures show the proportion of the world's population aged over 65 is set to more than double by 2050, to 16.2% from 7.6% currently. By the middle of the century, about 1 billion over 65s will join the ranks of those classed as of non-working age. The cost of caring for these people will profoundly affect growth prospects and dominate public finance policy debates worldwide.



Second Demographic Transition

This process of rapid ageing is due to the combined impact of two factors
1) Declining fertility Spain Total Fertility Rate
2) Steadily Rising Life Expectancy Spain Male Life Expectancy

• The pace of aging varies greatly across countries and regions,
• Most pronounced and rapid in those countries that for decades have had fertility rates below replacement levels - Japan, German speaking countries, Southern and Eastern Europe.
• The median age of populations in Europe as a whole will increase from 38 today to 49 in 2050 (with significant differences between countries), and at this point it will be over 20 years above the estimated median age in Africa (which will be the youngest continent).
• Spain - with half its population older than 55 by 2050 – is expected to become the oldest country in the world, followed closely by Italy and Austria, where the median age is projected to be 54.

Differential Rates Of Ageing

Not only will populations get older, in many cases they will shrink. According to the latest forecasts, Germany’s total population will shrink from its current 82 million to somewhere between 69 and 74 million by 2050, while the proportion of people aged 65 and older is projected to rise from just under 20% today to just over 33% by 2050, depending on immigration. At the same time, the number of very elderly (those aged 80 and over) will nearly triple to as much as 15% of the total population.

Shrinking As Well As Ageing 

Eastern Europe Especially Badly Affected Among emerging economies, the situation in the East of Europe stands out as by far the worst in the short term. In 2025, more than one in five Bulgarians will be over 65 - up from just 13 percent in 1990. Ukraine’s population will shrink by a fifth between 2000 and 2025. And the average Slovene will be 47.4 years old in 2025—among the oldest in the world. Between 2000 and 2005, the only countries in the world with population declines of more than 5,000 people were 16 countries in Eastern Europe and the former Soviet Union The fastest aging countries on the planet over the next two decades will be in those of Eastern Europe and the former Soviet Union.The entire region is projected to see its total population shrink by about 23.5 million. The largest absolute declines will be in Russia, followed by Ukraine and Romania.

The magnitude of China’s coming age wave, is simply staggering. By 2040, assuming current demographic trends continue, there will be 397 million Chinese over 65 - more than the total current population of France, Germany, Italy, Japan, and the United Kingdom combined. China Too China’s ageing is characterised by the unusual speed with which it is occuring. In Europe, the population over 65 passed the 10 percent threshold back in the 1930s and will not reach the 30 percent mark until the 2030s, one century later. China, on the other hand, will traverse this same distance in a single generation.

Norway Is Ageing More Slowly Than Most 



Fertility has fallen, but never below the critical 1.5 tfr level Life expectancy is also rising With the result that the medium growth Population pyramid doesn’t look like a nightmare.



The secret is maintaining economic growth. Migrants have been attracted by Norways recent rapid economic growth And seem to follow pathways laid down during earlier waves of internal migration.

As far as we understand the issue at this point, population ageing will have impacts which could be categorised under four main headings:

i) it will affect the size of the working age population, and with this the level of trend economic growth in one country after another
ii) it will affect patterns of national saving and borrowing, and with these the directions and magnitudes of global capital flows
iii) through the saving and borrowing path the process can influence values of key assets like housing and equities
iv) through changes in the dependency ratio, ageing will influence pressure on global sovereign debt, producing significant changes in ranking as between developed and emerging economies.

Impacts Of Population Ageing

Most of the literature on the impact of immigration on ageing focuses on the impact of immigration on the labour market and the welfare state. A drawback of this focus then is that the impact of ageing and immigration on capital formation and economic growth usually are ignored. Most “overlapping generations” economic models assume that the younger generation works, borrows to buy a house and pays pension contributions, whereas the older generation lives from previous saving, pension benefits and (later) dissaving. Modern economic growth is increasingly fuelled by either exports and credit growth, and the latter implies that an ageing economy experiences a decline in economic growth. Immigration then might help counter this decline.

Not Just Working Age Population Growth Is Also Involved

Japan and Germany are currently the two oldest societies on the planet. With median population ages of around 45. They are both heavily “export dependent”. Just a coincidence? Also trend GDP growth in both these countries has fallen back strongly, and both countries are now highly sensitive to the impact of external currency and demand shocks.

Germany And Japan: Examples (to try) Not to Follow?

The Counter Argument

“There may be many reasons to favour increased immigration....But it would be wrong to advocate increased immigration as necessary to deal with the fiscal consequences of an ageing population, or as a means to avoid large future tax increases or benefit reductions”. Marty Feldstein - The Effects of the Ageing European Population on Economic Growth and Budgets: Implications for Immigration and Other Policies

Two Principal Points i) immigration is not necessary to deal with the fiscal consequences of ageing populations ii) it is false that immigration constitutes a way of handling ageing which enables you to do so without large tax increases or benefit reductions since increased immigration would do little to reduce the future fiscal burden. The increased revenue from a large rise in immigration would finance only a small part of the coming rise in the cost of pension and health benefits.

My opinion - Feldstein is both right and wrong He is right that immigration alone won’t be enough to address the problems we face. We also need structural reforms in labour markets to encourage higher participation rates. We need to move away from Paygo to fully funded pension systems. But he surely goes too far. Migrants can help keep our welfare systems afloat as we transit from one system hot the other. They help fill the gap of the “missing generation” of contributors. Most migrants are in their 20s and 30s, so they will also form homes and families, helping push the birth rate up a bit.

Two Examples Of What Not Not Do From The South Of Europe 

Italy

Significant migrant inflows since 2000, but no net impact on the decline in trend growth. Trend growth could now be below 0.5% per annum - and could turn negative during this decade.  Human Capital Loss Gives The Key To The Italian Problem

• It is hard hot say why Italy has fared so badly in terms of growth, given the recent strong immigration.
 • A number of factors involved, but one that stands out clearly in the annual brain drain out of Italy.
• Each year somewhere between 5% and 10% of Italian university graduates leave their country, never to return.
• So some of the migration represents a “bad swop” of highly qualified people for people with far lower education levels.
• Reform in Italy’s “insider-outsider” labour market, and changes making it easier for young people to start their own businesses would be a big step forward.

Spain

 Spain’s huge housing bubble lead to a decade and a half of recession-free growth, growth which then came to a dramatic halt after the bubble burst. During the boom nearly five million migrants were “sucked- in” to keep the economy afloat, but now the boom is over many are unemployed and the authorities have no clear idea what to do about this problem.

Initially the new migrants became contributors to the social security system, thus helping to make the PAYGO pension system more sustainable. But as these very same migrants now queue up at the labour offices many Spaniards are asking whether this was the best way to do things.

The Price Of Doing Nothing

Credit rating agency S&P’s estimates that without policy changes U.K. government debt would rise to over 430% of GDP by 2050, while German government debt would rise to more than 400%, French government debt to more than 403%, Italian government debt to over 245%, and Spanish government debt to over 544%.

You can find the full presentation here.

20th Economic Forum (Krynica Zdrój, Poland, 2010)

EU Crisis Zones : Has a Eurozone Domino Effect Been Averted?

It was always known that the eurozone was a less than perfect construction, especially in terms of fiscal policy incentives, yet the magnitude of the crisis that first hit Greece and may yet affect Spain, Portugal, Italy and others still surprised most observers. For the moment the 750 billion euro stabilisation mechanism agreed in May appears to have calmed the markets, but is it enough? Are the stress tests conducted on EU banks credible? What is a proper medium term response and medium-long term strategy to protect the Euro zone and avert a disastrous domino effect. The risks remain high. Are there lessons to be learnt from the non-eurozone countries? Should the euro adoption process be modified? Will Germany and France continue to foot the bill without a reform of eurozone fiscal discipline?

Moderator:  Alfred Vanags - Director, Baltic International Centre for Economic Policy Studies (BICEPS), Latvia

Speakers:

Agnes Benassy-Quere - Director, CEPII (Center for International Prospective Studies), France

Jochen Bittner - European and NATO Correspondent, Die Zeit weekly, Germany

Pawel Dziekonski - Director, Risk Mangement Division, Deloitte, Poland

Morten Hansen - Head of Economic Department, Stockholm School of Economics in Riga, Latvia

Edward Hugh - Macro Economist, , United Kingdom

Commentators:

Sergey Kadochnikov - Dean of the Faculty of Economics, Ural State University named after A.M. Gorky, Russia
Valerii Salyvin - Director, Scientific Research Center for Problems of Social Reproduction, Ukraine