Goodbye BRICS, hello IndoAsia
I never really bought into the BRICs concept. It’s a hodgepodge. Brazil and Russia seem closer to Mexico and Turkey than to India and China. But it did capture the growth spurt in the emerging markets after 2000.
To me the real story was China and to a lesser extent India. And now the NYT says China is beginning to shift to a new trajectory:
Rocketing wages and benefits reflect an acute shortage of manufacturing labor, as a younger generation goes to college instead of heading for factories and as rural China has mostly run out of young adults to send to the cities.
. . .
The trade gains for China are magnified because over the last several years many companies have shifted the production of components from high-wage Asian countries like Japan and South Korea to China itself. So China is producing more of the value in each product, and not just doing the final assembly of products produced elsewhere.
. . .
In separate interviews this week with nearly a dozen Chinese exporters, at Hong Kong trade fairs or by telephone, all said that their biggest problem lay in labor: finding enough blue-collar workers and paying for their soaring wages.
Mr. Cheng said that a decade ago he paid about $75 a month for entry-level industrial workers and provided virtually no benefits. Now, he said, his 200-worker business, the Hangzhou Luyi Arts & Crafts Company, pays $570 a month plus $100 a month in government-mandated benefits.
That works out to compensation roughly three times as high as in Indonesia, four times as high as in Vietnam, five times as high as in Cambodia, and as much as 10 times as high as in Bangladesh. But all of those countries have other problems, such as overburdened, unreliable electricity grids, which force companies to install costly generators and buy expensive diesel instead.
Like many companies in China, Hangzhou Luyi has responded to surging wages with increased investments in automation.
So what does all this mean? First of all Chinese labor costs will continue soaring if China follows the path of South Korea and Taiwan, which seems likely to me, but not certain. So what then? Who makes the world’s sneakers in 2030?
Latin America is already a mature economy. Mexico will keep growing, but it doesn’t have global implications. Africa will grow with a commodity model, manufacturing will come later. The Middle East is only good at doing two things, producing oil and fighting. The developed world is already developed. That leaves places like this (data from The Economist):
Country Population GDP (PPP) per person RGDP growth/2014
Bangladesh 157 m $2130 5.7%
India 1,260 m $4350 6.1%
Indonesia 253 m $5470 5.4%
Philippines 108 m $4620 6.6%
Vietnam 91 m $4020 5.5%
That’s 1.87 billion people. Throw in a bunch of similar smaller places like Sri Lanka, Cambodia, etc., and you have 2 billion out of the global population of 7 billion. By comparison developed East Asia plus China has roughly 1.5 billion, the Western developed world 1 billion, Latin America 1/2 billion, sub-Saharan Africa 1 billion, and the other billion in places like the Middle East, Pakistan, Russia, etc.
Unlike the BRICs, it seems to me that IndoAsia is an actual category of similar countries. It’s the next China, but it won’t be as dynamic as China. I tried to come up with a clever acronyn for those 5 countries but failed. In any case, they share pretty similar GDP growth rates and income levels (except Bangladesh for income.). And while China’s population will soon start shrinking, they will keep growing. IndoAsia will have the young workers of the 2030s that will produce all that cheap stuff that used to be made in China.
If you believe that China depressed wages in the West, do much higher wages in China make that problem go away, or does it simply shift to IndoAsia? I can see arguments both ways. IndoAsia has enough labor to pick up the slack, but does it have the productivity to depress US wages? It seems to me that by the time Bangladesh gets to the point where it could threaten the US autoworkers, those workers will be replaced by robots and 3D printers anyway. So my hunch is that IndoAsia is a nonissue for US inequality going forward. It will be increasingly the case that most US workers do things that need to be done in the US for various reasons, or where we have strong productivity advantages.
Also note that these countries are growing at 6%, not the 10% that China grew when it was that poor. That suggests they’ll get stuck in the middle income trap unless they do more reforms. Or perhaps I should say until they do more reforms. In the very long run all countries may escape the middle income trap, the question is whether in the interim they go through decades of mediocre growth like Latin America.
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19. January 2014 at 09:04
Jim O’Neill is trying to coin the term MINTs:
Mexico
Indonesia
Nigeria
Turkey
http://blogs.ft.com/beyond-brics/2013/11/14/mint-the-new-bric-on-the-block/#axzz2qrgNWn6h
19. January 2014 at 09:23
Jan 11 issue of the economist included a remark that turkey’s central bank was hobbled by the Islamist government. Namely that Erdogan has pronounced that under an Islamic state, the interest rate must not be higher than the inflation rate and the cb has willing obliged.
Until that changes, no turkey will not be a stable growth engine.
Don’t group Mexico with turkey! Mexico has half the inflation and half the unemployment.
19. January 2014 at 09:31
Scott,
If you are looking for an acronym for just those five countries of yours, the best I can come up with is I-B-VIP, pronounced “I be VIP”.
That is not as catchy as BRIC, or as I think of them, the CRIB countries because they promise to grow so fast, but there will be a lot of crying and sleepless nights and stinky poop that needs to be cleaned up along the way….
19. January 2014 at 11:37
Steve, Those countries are vastly different–why group them together? Mexico build components for jetliners. Nigeria . . . not so much.
Jon, I agree they are different, but they are much more similar to each other than they are to India. Both are middle income, similar populations, both have a giant urban area. Both are on the edge of a huge market. Both make stuff like home appliances. Turkey is struggling now, but over the past few decades has done about as well as Mexico, maybe better.
Happyjuggler,
Crib is good, if that grouping made any sense, which it doesn’t.
19. January 2014 at 13:11
Scott,
Yes, at times each has performed well, each poorly. Good investment advice is to look at how CB is done and judge accordingly.
Indexing countries with good CB policy understanding, stable government: Australia, Canada, Singapore, the US, and others has done well. Indexing countries with currency hedges when the CB has been persistently tight in the past leading to collapsed asset values but generally well governed and likely will chance course… euro zone, Japan. Avoid countries with unstable governance.
http://www.imes.boj.or.jp/research/papers/english/me25-s1-3.pdf
19. January 2014 at 13:27
I see a prime opportunity to bring back PIITB by way of PIIVB http://www.urbandictionary.com/define.php?term=PIITB
Poor Vietnam
On a serious note, VIBIP or VPIIB might work, as they can be pronounced “vibip” or “veepibb”
19. January 2014 at 15:27
Anybody, general O/T question about MM:
I understand that an NGDP futures market is the preferred method of doing NGDPLT, but if that solution was not available, would it be possible to replace the decision makers at the Fed with an algorithm to successfully perform NGDPLT? If so, what are the potential problems with that approach?
19. January 2014 at 15:38
… an algorithm to use traditional Fed instruments like OMOs.
19. January 2014 at 16:16
Tom, I’d prefer either the market, or human judgment. Combined with NGDPLT of course. The level targeting makes discretion must more stable.
19. January 2014 at 17:02
You didn’t mention Thailand!
Manufacturing already being shifted to Thailand. Japan told Thai officials to please trsin 750,000 factory hands in 10 years…
Decent infrastructure, work habits.
Almost no unemployment now and very low inflation. Steady growth.
Government okay.
But Thais still have children…I think Thailand gets stuck in perhaps upper-middle trap for a while..
19. January 2014 at 17:03
Any of these countries is capable of surprising us if they are willing to embrace capitalism. The question is which one has a government most likely to respect private property and avoid inflationary finance. Nigeria could become a high tech hub even though 30% of their stock market today consists of one company that makes concrete. Dangote Cement is so large relative to other publicly traded African companies that for all intents and purposes investors view it as an ETF covering sub-Saharan Africa.
Botswana is a tiny country that has been very successful relative to the rest of sub-Saharan Africa. They have a GDP per capita similar to Russia or Mexico.
19. January 2014 at 18:09
Way OT but for Scott Sumner..
In the past I have contended that living standards were higher in L.A. in the 1960s than now.
James Surowieki has a story this week in The New Yorker on the explosion of working hours for professionals. Stereotypes and anecdotes, but today a married middle-class couple works 120 hours a week to live in a smaller house than dad bought in the 1960s, while mom cooked.
19. January 2014 at 19:00
Scott,
Off Topic.
I spent some time researching the many estimates of the effect of the federal fiscal consolidation on yoy RGDP growth in 2013Q4. Here is what I found,
A careful reading of the CBO’s estimates from November 2012 indicates that the fiscal consolidation (the 2% payroll tax increase, the high income tax increase and the sequester) should have subtracted 1.3% from year on year real GDP growth through 2013Q4. Prior to the beginning of 2013, the CBO’s baseline forecast (without fiscal consolidation) was for 1.7% year on year real GDP growth in 2013Q4. Thus we should have experienced only 0.4% growth instead of the 2.6% or so which is likely.
A similar thing applies to the major private forecasters. The effect of the fiscal consolidation (again, the 2% payroll tax increase, the high income tax increase and the sequester) according to Bank of America, IHS Global Insight, Moody’s, Goldman Sachs, Morgan Stanley, Macroadvisers and Credit Suisse ranged from 1.0% to 2.0% of GDP, with the average estimate being about 1.6%. The baseline forecast prior to the beginning of 2013 of these same seven private forecasters was for year on year real GDP growth of 2.0% to 3.5% in 2013Q4 with the average forecast being about 2.7%. Thus the average forecasted real GDP growth adjusted for fiscal consolidation was about 1.1%.
In short, real GDP growth ended up about as high, or higher, than what was forecasted without fiscal consolidation.
It sure looks like monetary expansion offset fiscal contraction to me.
19. January 2014 at 20:28
Mark, what about you? If an NGDP futures market was off the table for some reason, could you devise an algorithm to control traditional Fed tools (like OMOs) to replace the human Fed decision makers? Scott said in this circumstance (no NGDP futures market), he’d prefer human judgement at the Fed over an algorithm. What’s your take? Even if you think human judgement would be better, do you think it’s possible to do NGDPLT with an algorithm? If so, would you publish the details of the algorithm so it was public knowledge?
19. January 2014 at 22:07
Scott,
Off Topic.
This is a riot. Robert Waldmann more or less accuses you of impropriety.
http://angrybearblog.com/2014/01/mike-konczal-vs-market-monetarists.html#comment-366768
“My problem is that I can’t help thinking of whether Konczal’s criticisms amount to a credible accusation of impropriety…I think that suppressing all data from 2013 in a contribution to a collection of “Graphic[s] of 2013″³ is, at least, getting very close to the line.”
Here’s my response to him in comments:
“Beckworth evidently made that particular graph in April before the BEA’s advance release of 2013Q1 GDP on the 26th of that month, so of course it doesn’t contain any data from 2013.
And in the introduction to Atlantic’s “The Most Important Economic Stories of 2013″”in 44 Graphs”, Matthew O’Brien says the following:
“…So, to remind ourselves what did change in the last 12 months, we asked our favorite economists, journalists, and think-tankers for their favorite charts of the year…”
So it simply sounds like Sumner submitted that graph (which was posted during 2013 by Beckworth) as his favorite graph of 2013. If Sumner had changed Beckworth’s April 2013 graph, by bringing it up to date, then that would not at all have been in keeping with the intent of what Atlantic was trying to do, which was obviously a year’s end retrospective of peoples’ favorite graphs of 2013. (Did anyone else alter their favorite graphs before they submitted them? Uh, no, don’t be ridiculous.)
Moreover, what did Sumner actually say in his commentary on the graph?
Scott Sumner:
“The US and the Eurozone did roughly equal amounts of austerity. But the US had some unconventional monetary stimulus whereas the eurozone raised rates several times in 2011 to slow inflation. You can see the results of this natural experiment.”
Does updating the graph dramatically change this conclusion?
http://research.stlouisfed.org/fred2/graph/?graph_id=155911&category_id=0
Em, not really.
Since then the US has significantly surpassed the Euro Area in terms of fiscal austerity. According to the October 2013 IMF Fiscal Monitor, between calendar years 2010 and 2013 the US increased its general government cyclically adjusted primary balance by 4.4% of potential GDP compared to 3.7% of potential GDP in the Euro Area. Furthermore the Euro Area has lowered the MRO rate from 1.5% as recently as early November 2011 to only 0.25% in December 2013.
The gap between the two yoy NGDP lines has narrowed from 3.5% in 2012Q4 to 2.4% in 2013Q3, but the US has only moved down from 3.8% to 3.4% whereas the Euro Area has moved up from 0.3% to 1.0%, meaning nearly two thirds of the narrowing is probably attributable to more expansionary monetary policy in the Euro Area.
Actually, I’m pretty sure Sumner will appreciate you bringing this up.”
19. January 2014 at 22:39
Tom Brown,
Evan Koenig wrote a paper where he shows that the Taylor Rule may be viewed as a special case of NGDP targeting:
http://www.dallasfed.org/assets/documents/research/staff/staff1202.pdf
All in the Family: The Close Connection Between Nominal-GDP Targeting and the Taylor Rule
Evan F. Koenig
March 2012
Abstract:
“The classic Taylor rule for adjusting the stance of monetary policy is formally a special case of nominal- gross-domestic-product (GDP) targeting. Suitably implemented, moreover, nominal-GDP targeting satisfies the definition of a “flexible inflation targeting” policy rule. However, nominal-GDP targeting would require more discipline from policymakers than some analysts think is realistic.”
Pages 7-11:
“Note that the Taylor rule is a special case of nominal-GDP targeting… The chief difference between the two policy approaches is that under nominal-GDP targeting, policymakers look at a longer history of price changes than they do under the Taylor rule when deciding on the appropriate policy setting. Secondarily, the estimate of potential output that enters the nominal-GDP-targeting rule is less sensitive to short-term supply shocks than is the estimate that enters the Taylor rule.”
Moreover, if it was done by an algorithm, of course you would want it to be public knowledge. One of the key virtues of NGDP targeting is its transparency (i.e. expectations). Keeping it a secret would be a little like the following:
http://www.youtube.com/watch?v=2yfXgu37iyI
20. January 2014 at 01:24
>>In the very long run all countries may escape the middle income trap, the question is whether in the interim they go through decades of mediocre growth like Latin America.
All countries can have wealthy people, as well as almost all workers home-owning middle class comfortable.
But the taxes have to be low, regulations stopping workers from working have to be low, and governments must be fairly stable without being too corrupt.
Perhaps, instead, we will see a long term increase ia a dependent, non-working poverty class asking for/ voting for increased gov’t benefits to make their poverty more comfy, along with more robotic production to make things cheaper, and a shrinking working middle class.
20. January 2014 at 06:00
The biggest problem over the last couple centuries is that we inhabit a planet overwhelmingly populated with desperately poor people. In that regard, this post is very encouraging.
20. January 2014 at 07:30
Is Wolfgang Munchau right to be so pessimistic about the Eurozone here?
http://equitablegrowth.org/2014/01/20/1739/must-read-wolfgang-munchau-on-the-real-francois-hollande-scandalthe-real-scandal-is-frances-stagnant-economic-thinking-ft-com
20. January 2014 at 08:47
Scott,
Off Topic.
Here’s Robert Waldmann’s response to my above reply.
“Are you saying that Sumner cut and pasted a graph made by someone else without citing the person who actually made the graph ? That seems to me to be rather serious misconduct…If you had actually looked at the other graphs instead of making an assertion based on a guess you would have noticed that many include data from 2013. I have looked at all the graphs which appear before “Sumner’s” (quotation marks because Sumner presented it as his illustration of 2013 thus claiming it was his even if he copied the graph from someone else without citing the true author). All seem to have the latest available data. Many clearly were made soon before O’Brien assembled them. your statement “(Did anyone else alter their favorite graphs before they submitted them? Uh, no, don’t be ridiculous.)” demonstrates utter disinterest in the facts. You should check a published article (two clicks away) rather than assert what is in it, based on a guess…”
And here’s my reply:
http://angrybearblog.com/2014/01/mike-konczal-vs-market-monetarists.html#comment-366903
“Gee Robert, let’s take a closer look at some of these graphs and see if what you are claiming makes any sense.
1) Binyamin Appelbaum submitted a graph created by Laurence Mishel without any citation. The graph ends in 2011 although Mishel has created one that extends to 2013 which Appelbaum used in an article last year.
2) Jordan Weissmann submitted a graph created by Annalyn Kurtz of CNN without any citation.
3) Heidi Moore submitted a graph which contains no quarterly observations from after 2012.
4) Cardiff Garcia submitted a graph created by Frank Levy and Richard Murnane without any citation. The graph ends in 2009.
5) Adam Ozimek submitted a graph created by the Initiative on Global Markets (IGM) without any citation.
6) The lower half of Brad DeLong’s image contains graphs made by Kathy Ruffing without any citation. They end in 2011.
7) John Carney’s graph ends in 2011.
8) Felix Salmon submitted a graph created by Nikolaus Panigirtzoglou without any citation.
9) Barry Ritholtz submitted a graph created by Carl Swenlin without any citation.
10) John Sides submitted a graph created by Larry Bartels without any citation.
11) Adrianna McIntyre submitted a graph from a paper by Chandra, Gruber and Mcknight that was published in 2011 without any citation.
12) Noah Smith submitted a graph created by James O’Toole of CNN without any citation.
13) David Beckworth submitted a graph created by Michael Darda without any citation.
So by my count there are 11 graphs created by other people which were submitted without any citation. Another nine graphs created by other people were submitted with citation, meaning nearly half the graphs were created by other people, and probably weren’t updated even if more recent data was available. In addition two graphs which evidently were self created did not contain the most recent data.
In short, and in the words of David Glasner (notice my citation?), maybe you really should calm down.”
20. January 2014 at 09:14
Mark, much thanks for the response. That was very interesting.
20. January 2014 at 12:27
Mark, You are keeping me busy–I have two new posts. On the 2013 forecasts, isn’t it plausible that the CBO incorporated some of the fiscal austerity in their forecast? On the other hand, it seems certain that 2013 RGDP growth will be well above 1.7%, Q4 is believed to be pretty strong.
20. January 2014 at 12:28
Ben, I was thinking about including Thailand, and could have, but it’s a bit ahead of the others. Malaysia even more so.
20. January 2014 at 14:05
Scott,
“Mark, You are keeping me busy-I have two new posts.”
It’s not me, it’s your critics. Apparently a Sumner Derangement Syndrome epidemic has broken out and is causing otherwise intelligent people everywhere to behave like total idiots. And everytime you take another victory lap more people fall victim.
“On the 2013 forecasts, isn’t it plausible that the CBO incorporated some of the fiscal austerity in their forecast?”
In a word, no. The 1.7% figure was the CBO’s August 2012 forecast that excluded all acts of fiscal consolidation. It was their rosiest scenario.
“On the other hand, it seems certain that 2013 RGDP growth will be well above 1.7%, Q4 is believed to be pretty strong.”
My current nowcast is for 2.5% RGDP growth in 2013Q4, but Macroadvisers is forecasting 3.9% so I’m a little concerned that my forecast may be too low this time.
20. January 2014 at 15:23
Mark, on that TR2013.pdf doc again and the “present value of GDP projected forward for the next 75 years” … does that have something to do with GAAP accounting techniques? Can you state in words a summary of how a calculation like that (the “present value…blah blah” calc) is accomplished mathematically? Here’s why I ask about GAAP: your response gave me the idea to show that to Vincent, and he responded with this:
http://www.wnd.com/2011/03/278017/
Yeah, I know it’s a WND page, but I took a look around and I didn’t see any Aryan Nation or pro-Militia stuff there, so I think it’s pretty safe.
20. January 2014 at 15:37
… I’m wondering if that “present value …” calc involves an exponential. Something like: annual growth rate of unfunded liabilities = g, inflation rate = i, so then you do a calc like this:
P = present value of unfunded liabilities = integral: t over next T years of K*exp((g-i)*t)
where as long as x-y > 0, you’re guaranteed to have a scary number if you project out far enough (i.e. T is big enough). So you can make the ratio P/T arbitrarily scary.
20. January 2014 at 15:38
oops, I meant “as long as g-i > 0”
20. January 2014 at 17:04
Mark, That’s interesting. Any sense of why they forecast such a low rate? It could be they were using annual data, where the rate is lower because GDP in 2012 decelerated sharply as the year progressed. I find 1.7% an odd forecast given the Fed had been forecasting considerably higher. On the other hand the Fed tends to be overoptimistic.
21. January 2014 at 04:03
Scott,
You’re right. Here is the August 2012 CBO report. See pages 35-36:
http://www.cbo.gov/sites/default/files/cbofiles/attachments/08-22-2012-Update_to_Outlook.pdf
The Alternative forecast was for yoy RGDP growth of 1.7% in 2013Q4. But this assumes the cancelation of extended UI and the expiration of the payroll tax cut. Those provisions were forecast by the CBO in November 2012 to subtract 0.7 points from growth. Thus the benchline forecast (without any fiscal austerity) was really for 2.4% growth, which is only slightly lower than the private forecaster average.
Thanks for pressing me on this, otherwise I would have been spreading misinformation.
21. January 2014 at 05:48
Mark, Thanks, and 2.4% is probably close to the actual rate. Let’s revisit when the Q4 numbers come in.
21. January 2014 at 12:18
Ben Cole,
I think that may be true in big cities where space is constrained and city councils make it worse with zoning laws. New York and San Francisco are good examples of places where living standards may be falling because people are just running out of space. LA has a similar problem where infrastructure isn’t keeping up with population. In most of the rest of the country, people are buying houses that keep getting bigger and bigger. Try driving the best cars from 40 years ago and compare them to the worst new cars today. No comparison. Look at the kinds of food you can buy at a supermarket year round, look at how many more people are playing sports, look at the incredible growth of free online services, free music, movies, videos, etc. People have a bias towards how good the past was but living standards are much much higher today.
21. January 2014 at 15:27
Mark, thanks for that clip: Strangelove is one of my favorites… great scene! It’s been a while.
22. January 2014 at 03:11
How about this PHINBAVIIN….