Over at Demography Matters, Edward Hugh has put up a very thought-provoking piece titled
I think a key point Edward makes is that "there is a shortage of young workers willing to accept the low wages that prevailed in the 1990s." I am fairly certain China's young workers can see that the type of work being done at today's wages isn't rocket science, and that they are aware of what currently employed workers are making. One might say, with tongue in cheek, that the "young workers of China have united" to reject labor arbitrage. Now, workers in other countries such as Vietnam don't have the same leverage regarding wages, which would help explain why electronics production is moving from China to Vietnam, as I mention in a previous piece here at Wasatch Economics.
It seems that now that China has raised the standard of living for a sizable chunk of its workers, the rest of the work force isn't willing to accept the difficult working conditions that gave China its manufacturing cost advantage. This puts China in the same stage of workforce condition as Western countries. By that I mean that holders of capital can't find workers willing to take jobs at the wage on offer, so the country must either import workers willing to work at that wage as the US has done with agricultural workers, or outsource the work to foreign labor. Since bringing foreigners in is politically and practically nonsensical for China, the work goes overseas.
Given the trend in the size of the 15-19 cohort through 2022, the size of the potential highly educated workforce that China will be able to generate to move its manufacturing sector up the value stack is limited.
Finally, I believe that China's infrastructure outside of the coastal regions is fairly weak, so that even if the low value add manufacturing is moved to the hinterlands where workers might be found, the cost of transporting raw materials to the factories and then the finished product back out to ports for export might eat significantly into labor cost savings.
Friday, March 14, 2008
Tuesday, March 11, 2008
Economics and politics inevitably linked throughout history
I found this excellent piece, "Lessons from the history of trade and war" posted yesterday, with this thesis:
"History, however, suggests that globalisation is as much a political as a technological phenomenon, which can thus be easily reversed, and has been so in the past"...
I couldn't agree more. The authors of this piece go on to say:
"The international system has historically done a pretty poor job of accommodating newcomers to the Great Power club. German unification and industrialisation during the late 19th century led to tensions with Britain and France over colonial and armament policy, while Japan's rise to regional prominence during the interwar period, and its search for secure sources of raw materials, ended in war against United States and its allies. Both precedents are worrying, in that similar questions are posed today, both in terms of the rights of emerging nations to rival the established powers’ military capabilities (notably with regard to nuclear weapons), and in terms of the strategic importance to countries like China of ready access to oil supplies and other natural resources."
Given the overwhelming military superiority of the USA, I don't see any country challenging the existing global economic system through military means anytime soon. Saddam Hussein's invasion of Kuwait was just such a challenge in that Hussein made a grab for oil resources, daring the world to do something about it, and the US quashed that. The costs of military action to acquire resources would be too great to justify the economic gains from attaining control of said resources.
The Fed and its prime dealers
I don't see what the problem is with letting one of the Fed's 20 prime dealers fail (e.g. BSC). Other companies could and have stepped in before. Wikipedia's article Primary dealers is well worth a read. A couple of interesting bits from that:
-"Primary dealers are banks or securities broker-dealers who may trade directly with the Federal Reserve System of the United States.[1] They are required to make bids or offers when the Fed conducts open market operations, provide information to the Fed's open market trading desk, and to actively participate in U.S. Treasury securities auctions"...
-"all of the top ten dealers in the foreign exchange market are also primary dealers, and between them account for almost 73% of forex trading volume"...
-the list of dealers as of Nov 2007:
* BNP Paribas Securities Corp.
* Banc of America Securities LLC
* Barclays Capital Inc.
* Bear, Stearns & Co., Inc.
* Cantor Fitzgerald & Co.
* Citigroup Global Markets Inc.
* Countrywide Securities Corporation[1]
* Credit Suisse Securities (USA) LLC
* Daiwa Securities America Inc.
* Deutsche Bank Securities Inc.
* Dresdner Kleinwort Securities LLC.
* Goldman, Sachs & Co.
* Greenwich Capital Markets, Inc.
* HSBC Securities (USA) Inc.
* J. P. Morgan Securities Inc.
* Lehman Brothers Inc.
* Merrill Lynch Government Securities Inc.
* Mizuho Securities Company USA Inc.
* Morgan Stanley & Co. Incorporated
* UBS Securities LLC.
I thought about looking at what the capitalization of each of these dealers was as of the last reporting date, but then realized that that would be futile as such reports are either works of fiction or hopelessly out of date:)
-"Primary dealers are banks or securities broker-dealers who may trade directly with the Federal Reserve System of the United States.[1] They are required to make bids or offers when the Fed conducts open market operations, provide information to the Fed's open market trading desk, and to actively participate in U.S. Treasury securities auctions"...
-"all of the top ten dealers in the foreign exchange market are also primary dealers, and between them account for almost 73% of forex trading volume"...
-the list of dealers as of Nov 2007:
* BNP Paribas Securities Corp.
* Banc of America Securities LLC
* Barclays Capital Inc.
* Bear, Stearns & Co., Inc.
* Cantor Fitzgerald & Co.
* Citigroup Global Markets Inc.
* Countrywide Securities Corporation[1]
* Credit Suisse Securities (USA) LLC
* Daiwa Securities America Inc.
* Deutsche Bank Securities Inc.
* Dresdner Kleinwort Securities LLC.
* Goldman, Sachs & Co.
* Greenwich Capital Markets, Inc.
* HSBC Securities (USA) Inc.
* J. P. Morgan Securities Inc.
* Lehman Brothers Inc.
* Merrill Lynch Government Securities Inc.
* Mizuho Securities Company USA Inc.
* Morgan Stanley & Co. Incorporated
* UBS Securities LLC.
I thought about looking at what the capitalization of each of these dealers was as of the last reporting date, but then realized that that would be futile as such reports are either works of fiction or hopelessly out of date:)
Iraq realizing oil windfall
Per Yahoo and AP...Iraq faces budget surplus
"Iraq isn't spending much of its own money, despite soaring oil revenues that are pushing the country toward a massive budget surplus, auditors told Congress on Tuesday. The expected surplus comes as the U.S. continues to invest billions of dollars in rebuilding Iraq and faces a financial squeeze domestically because of record oil prices.
"The Iraqis have a budget surplus," said U.S. Comptroller General David Walker. "We have a huge budget deficit. . . . One of the questions is who should be paying."
Good question...
A few more bits from the AP piece:
"The U.S. has spent more than $45 billion on rebuilding Iraq"...
"'In recent months, Iraq experienced its highest oil production and export levels since the war began five years ago', said Stuart Bowen, special inspector general for Iraq reconstruction"...
"Whereas Iraqi officials estimated $35 billion in oil revenues last fall, Bowen said the final number is likely to be closer to $60 billion. 'That certainly gives them resources to carry forward with an extensive reconstruction plan," Bowen said'"...
"according to other U.S. officials, a major problem is that Iraq does not have the capacity to allocate the money without it being wasted or pocketed by corrupt officials"...Well, that should be their problem, not ours...on second thought, perhaps the US should be reimbursed for that $45 billion mentioned in the AP article.
"Iraq isn't spending much of its own money, despite soaring oil revenues that are pushing the country toward a massive budget surplus, auditors told Congress on Tuesday. The expected surplus comes as the U.S. continues to invest billions of dollars in rebuilding Iraq and faces a financial squeeze domestically because of record oil prices.
"The Iraqis have a budget surplus," said U.S. Comptroller General David Walker. "We have a huge budget deficit. . . . One of the questions is who should be paying."
Good question...
A few more bits from the AP piece:
"The U.S. has spent more than $45 billion on rebuilding Iraq"...
"'In recent months, Iraq experienced its highest oil production and export levels since the war began five years ago', said Stuart Bowen, special inspector general for Iraq reconstruction"...
"Whereas Iraqi officials estimated $35 billion in oil revenues last fall, Bowen said the final number is likely to be closer to $60 billion. 'That certainly gives them resources to carry forward with an extensive reconstruction plan," Bowen said'"...
"according to other U.S. officials, a major problem is that Iraq does not have the capacity to allocate the money without it being wasted or pocketed by corrupt officials"...Well, that should be their problem, not ours...on second thought, perhaps the US should be reimbursed for that $45 billion mentioned in the AP article.
Global wage arbitrage
With respect to manufacturing, global wage arbitrage has a long way to run. I received an email from In-Stat, a market research company, summarizing a report they are pitching titled "Vietnam Emerging as Key Electronics Manufacturing Base" that states:
"Vietnam is emerging as an important electronics manufacturing destination...Driven by low-cost labor, low-cost operations, favorable government policies, and a strong work ethic, global EMS/ODM companies are increasing their activities in the country. Although Vietnam's current EMS/ODM revenues are just a fraction of China's and much lower than countries like Malaysia or Singapore, the country is experiencing very high growth rates. Aside from EMS/ODM players, Vietnam's high tech manufacturing sector also hosts manufacturing operations of the world's leading OEM companies like Canon, Fujitsu, LG, Samsung, and Sony.
* Semiconductor consumption in Vietnam is projected to grow at a Compound Annual Growth Rate (CAGR) of 23.6% from 2007 to 2012 to reach US$1.9 billion by 2012.
* Computing and consumer electronics accounted for 48.8% and 30.5%, respectively, of total Vietnamese semiconductor consumption in 2007.
* EMS/ODM revenues in Vietnam are expected to grow at a CAGR of 63.1% from 2007 to 2012 to reach US$1.5 billion by 2012."
The way it looks to me is that companies that were relying on China for low cost labor are shifting to other countries rather than further into China's labor pool. In any case, we here in the US need to increase our productivity if we want to see real wage increases. There are a lot of folks throughout the world who are willing to work for a lot less to do the same old, same old kind of jobs.
"Vietnam is emerging as an important electronics manufacturing destination...Driven by low-cost labor, low-cost operations, favorable government policies, and a strong work ethic, global EMS/ODM companies are increasing their activities in the country. Although Vietnam's current EMS/ODM revenues are just a fraction of China's and much lower than countries like Malaysia or Singapore, the country is experiencing very high growth rates. Aside from EMS/ODM players, Vietnam's high tech manufacturing sector also hosts manufacturing operations of the world's leading OEM companies like Canon, Fujitsu, LG, Samsung, and Sony.
* Semiconductor consumption in Vietnam is projected to grow at a Compound Annual Growth Rate (CAGR) of 23.6% from 2007 to 2012 to reach US$1.9 billion by 2012.
* Computing and consumer electronics accounted for 48.8% and 30.5%, respectively, of total Vietnamese semiconductor consumption in 2007.
* EMS/ODM revenues in Vietnam are expected to grow at a CAGR of 63.1% from 2007 to 2012 to reach US$1.5 billion by 2012."
The way it looks to me is that companies that were relying on China for low cost labor are shifting to other countries rather than further into China's labor pool. In any case, we here in the US need to increase our productivity if we want to see real wage increases. There are a lot of folks throughout the world who are willing to work for a lot less to do the same old, same old kind of jobs.
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