Perhaps We Should Cheer the Rising 'China Price'

Uh-oh, here we go again with another one of these "China is pricing itself out of the cheap labour market" stories. Having recently made a mini-roundup of these, let me stick with what's supposedly new in this latest TIME story. At the national level, things are undeniably on the way up:

In what is supposed to be a land of unlimited cheap labor — a nation of 1.3 billion people, whose extraordinary 20-year economic rise has been built first and foremost on the backs of low-priced workers — the game has changed. In the past decade, according to Helen Qiao, chief economist for Goldman Sachs in Hong Kong, real wages for manufacturing workers in China have grown nearly 12% per year. That's the result of an economy that's been growing by double digits annually for two decades, fueled domestically by a frenzied infrastructure and housing build-out — one that, for now anyway, continues apace — combined with what was for a time an almost unquenchable thirst for Chinese exports in the developed world. Add to that the fact that in the five largest manufacturing provinces, the Chinese government — worried about an ever widening gap between rich and poor — has raised the minimum wage 14% to 21% in the past year. To Harley Seyedin, president of the American Chamber of Commerce in South China, the conclusion is inescapable: "The era of cheap labor in China is over."

Regionally speaking, there are beneficial effects. Dearer labour in traditional manufacturing hubs located near Eastern ports makes hiring those in the interior more attractive. A recurring story of Chinese inequality has been that of uneven development between interior and coastal provinces; this new fact of labour life may spur Chinese wage rebalancing of a sort. Plus, there may be less pressure for itinerant workers to travel far to find work:

But higher wages have also improved things in China's western region, where the government has long tried to encourage investment. In the past year, many multinational and Chinese companies have expanded or relocated inland, where labor is still cheap.

From China's perspective, that's exactly the sort of trade-off it seeks. As Andy Rothman, chief China macro strategist at CLSA Securities in Shanghai, says, "People in Sichuan or Henan or wherever can stay closer to home and find a good-paying job" instead of having to flood east each year to live in a company dormitory far away from their families. "How is this a bad thing?"

Lastly there's an interesting inversion underway according to American MNCs operating in China from AmCham surveys. Whereas three-quarters used to believe their China operations were there to serve export markets, the same proportion now believes they are there to sell in domestically in the PRC. A welcome change in helping alleviate global economic imbalances, I say:

Many multinationals, meanwhile, have long since begun to focus their China manufacturing operations on the vast Chinese market. That HP factory in Chongqing produces its laptops only for the home market. In a survey eight years ago, the American Chamber of Commerce in South China found that 75% of its members were focused mainly on export markets. By last year, that number had flipped: 75% of 1,800 respondents now say their manufacturing operations in China are focused on serving the Chinese market. That's mainly because China's workers are steadily getting richer. For them, and pretty much everyone else concerned, that's the rarest of commodities in a troubled global economy: good news.

I have some quibbles with the generalization that Chinese workers are steadily getting richer. Returns to labour in relation to other factors of production leave much to be desired, but more on that later. Still, time moves on.

Labour Costs Pricing China Out of the Market?

I almost forgot about this one. It is with no small trepidation that I mention this bit given that the transition of China out of being the world's low-labour cost producer has been bandied about before. Time and again, in fact. Take this BusinessWeek piece from 2005:

Wait a minute. Doesn't China have an inexhaustible supply of cheap labor? Not any longer. From the textile and toy factories of the south to the corporate headquarters and research labs in Beijing and Shanghai, the No. 1 challenge today is finding and keeping good workers. Turnover in some low-tech industries approaches 50%, according to the Institute of Contemporary Observation, a Shenzhen labor research group. Guangdong Province says it has 2.5 million jobs that remain unfilled, while Jiangsu, Zhejiang, and Shandong provinces say they, too, face shortages of qualified workers. "Before, people talked about China's unlimited labor supply," says Zhang Juwei, deputy director of the Institute of Population & Labor Economics at the Chinese Academy of Social Sciences in Beijing. "We should revise that: China is facing a limited supply of labor."

A WSJ blog piece from last year harps on a similar theme. Still, it is difficult to foresee how China can continually keep a lid on upward wage pressures as the stock of rural workers flocking to industrial work continues apace and reaches...certain limits. Then there's inflation blowback from effectively importing easy money policies from the United States. For what it's worth, here comes TIME magazine with the often-bandied idea that neighbouring countries with even lower labour costs are eager to pick up the PRC's slack. Take Penang, Malaysia for instance:

After ferociously sucking jobs and investment out of Southeast Asia over the past two decades, the China Effect is now lifting once declining industrial hubs like Penang out of their long economic slump. The northern Malaysian state attracted $4 billion in investment for its manufacturing sector in 2010, according to the Malaysian Investment Development Authority, a 465% jump from 2009. "It's been rocky at times," admits Lim Guan Eng, Penang's chief minister. "But being an underdog has kept us on edge and made us work harder."

Penang's nascent boom is partly fueled by Western manufacturers wary of China's rising costs. It also stems from dramatic changes in China's economy that are redirecting trade flows across the region. Not all of the companies relocating to places like Penang are Western multinationals; in fact, many are Chinese firms. As salaries and spending power in China rise, the Chinese are importing more goods from the rest of Asia. At the same time, those rising salaries are forcing China to outsource more of its low-end manufacturing. According to a 2010 Citigroup ranking of 12 Asian countries by manufacturing wages, China was the seventh least expensive and Malaysia the eighth. "The pure-cost reason for being in China for certain economic activities is being eroded," says Sanjeev Nanavati, CEO of Citigroup Malaysia.

The result is a virtuous trading circle for Asia as the Chinese outsource more to and import more from the region. According to HSBC, intra-Asian trade is forecast to grow at an average annual pace of 12.2% until 2020, 40% higher than the rate by which Asia's trade with the U.S. is expected to grow in the same period. Nearly 50% of Asian exports (excluding Japan's) now go to other Asian countries, according to Credit Suisse. That's more than the current demand for Asian exports in the U.S., the E.U. and Japan combined.

I'm all for inter-Asian trade, of course. Try Bangladesh, mayhaps:

Not surprisingly, the manufacturing belt that stretches from Bangladesh's western capital, Dhaka, to its southeastern port in Chittagong has begun to lure investors who sense a mini China in the making. Brummer & Partners, a $10 billion hedge fund and private-equity firm based in Stockholm, recently spent an undisclosed sum to obtain a minority stake in a Bangladeshi garmentmaker that counts such retailers as Gap and H&M among its customers. "We're starting to see these kinds of companies take an interest in Bangladesh," says Kiron Bose, the chief investment officer for Brummer's Bangladesh-focused private equity fund. From stitching jeans and T-shirts, Bangladesh hopes to crack the more complex and lucrative business of making sneakers for companies like Nike and Adidas. "Shoes are still a China story," says Bose. "That's where Bangladesh has to compete next."

The article points out that rule of law and infrastructure also figure into the decision of where to set up (sweat?)shop, but if so, certainly China never figured high on either measure? At any rate, I certainly wouldn't bet on China holding on to its status indefinitely. It's called moving up the value-added ladder--a historical signifier of progress in development.

Meanwhile, we should certainly appreciate a detailed academic study on wage costs in Chinese production centres during recent years. While interesting, the welter of news articles on the subject only paint an anecdotal picture. Comparative studies with wages in other Asian countries over time would also be appreciated.

Egypt Not Alone in Having Demographics of Doom

Back in elementary school, I remember learning how to interpret charts. For today's feature, I'll extend this fond reminisce and explain with a few handy images why Egypt is not alone in having demographic woes in the Middle East and North Africa. Woes that, in certain circumstances as Tunisia and Egypt demonstrate, can result in regime-toppling popular unrest. Many self-absorbed Westerners, particularly those of the neoconservative persuasion, will naturally ascribe these events to downtrodden people yearning for freedom and democracy (nevermind that their leaders helped propped up these tyrants for decades like Mubarak). My explanation is simpler: growing populations of unemployed young people are a hazard to authoritarian regimes. Furthermore, recent events suggest states unable to buy them off with proceeds from energy revenues are particularly vulnerable.

First, while it is true that youth unemployment rates are quite high around the world, such rates are obviously more pernicious in countries with large proportions of young people. Consider the population pyramid of Egypt based on International Data Base figures:

The Egyptian population is very young, indeed, with a median age estimated at 24. Next, have a look at the youth unemployment figures from slide 19 of a recent IMF regional presentation on what it calls "Middle East North Africa Oil Importers" (link c/o Real Time Economics):

Aside from being oil importers, what Egypt and Tunisia share are the highest levels of youth unemployment in this group of countries, being well above the Middle East / North Africa average on the right hand side of the chart above. Coincidence? I'll leave that up to the area studies folks to sort out.

Let's now move to the regional situation. Fortuitously, the International Labour Organization (ILO) recently released the most recent biennial Global Employment Trends for Youth report for 2010. Especially given the backdrop of the global financial crisis, conditions are quite difficult for young folks seeking world not only in these regions but around the world. First, the good folks at the ILO have prepared a youth employment-to-population ratio chart for various world regions from 1991 to 2011. At the foot of the table are North Africa (which Egypt and Tunisia are classified under) and the Middle East with well under 30% of the young being at work:

As a proudly gender-aware blogger, I must point out that exceedingly low employment of young working women contributes quite a lot to the poor showing of the Middle East and North African groupings. From p. 15 of the ILO report:

The portrait of youth employment in the latter two regions is quite similar; while four out of ten male youth were working in 2008 (39.5 and 40.7 per cent in the Middle East and North Africa, respectively), less than two of ten young women engaged in work (14.9 and 15.9 per cent, respectively). There is clear segmentation in youth labour market opportunities in these regions with the result being severe underdevelopment in the productive potential of the economies. Employment opportunities are clearly low for young men in the region and nearly non-existent for young women.

Finally, I will give no prizes for those who've correctly guessed which regions of the world have the highest youth unemployment rates:

Someone with little experience at reading charts (hopefully not you) may complain: "Well, even if the Middle East and North Africa top the youth unemployment tables, rates have been going down even there in recent years. So, some countries should have revolted years ago instead of now." As above, you need to consider (1) the relative share of youth to the overall population in the respective countries and (2) the outright size of the young population. Moreover, unique to the world's regions, the Middle East and North Africa are expected to have rises in this rate in 2010 and 2011.

If you look at the overall macroeconomic picture of Egypt, it isn't too shabby. It has a high growth rate and its foreign debt is decreasing as a percentage of GDP. However, the demographics tell another tale. While I can't say that I could've predicted these events, they make more sense in retrospect given the information present above in chart form. Watch the kids, I tell you, watch the kids.

'Key to Happiness is Work, Not Necessarily Growth'

Well here's another report that should put growth fetishists on the defensive. Before you start talking about endogeneity biases and how employment is related to economic growth, do note that the assertion above ain't mine. Rather, it's that of the International Institute of Labor Studies in Geneva--a research body of the International Labor Organization which, of course, is under the United Nations. International organizations, what'd we do without them?

Anyway, the notable assertion the IILS makes in the 2010 edition of the World of Work report is that life satisfaction is driven primarily by employment outcomes and not economic growth. This being a UN publication, you will not be surprised to note that the policy recommendation is thus to reduce unemployment and to reduce income inequalities stemming from unemployment. The summary concerning this finding is reproduced below, though the section of the report is well worth reading for those with an interest in labor or well-being:

Social cohesion should figure more prominently in the policy debate. The initial policy response contributed to building a sense that employment and social concerns were taken into account. However, continued social cohesion cannot be taken for granted if the strategy became less inclusive.

Already, there is growing evidence of a deteriorated social climate, especially in countries where job losses have been the highest. For example, out of 82 countries with available information, more than three-quarters indicate that in 2009, individual perceptions of their quality of life and standard of living have declined. The unemployment rate in these countries has risen by nearly 3 percentage points more than in the other countries. Even among those with a job, satisfaction at work has deteriorated significantly – in more than two-thirds of 71 countries with data, job satisfaction fell in 2009. Not surprisingly, perceptions of unfairness are growing (46 out of 83 countries) and people have less confidence in governments (36 out of 72 countries) than prior to the crisis. The Report shows that higher unemployment and growing income inequalities are key determinants of the deterioration in social climate indicators. By contrast, economic growth per se is not a very significant factor behind social climate indicators. This result reinforces the importance of job-centered policy action advocated by the ILO Global Jobs Pact.

In sum, adopting a job-centered exit strategy would enhance social cohesion while ensuring sustainable recovery from the crisis. This requires carefully-crafted fiscal support to tackle long-term unemployment, efforts to strengthen the links between labour incomes and productivity developments and financial reforms geared towards the needs of the real economy. As stressed by many observers, the crisis should be used as an opportunity to building a balanced global economy. The employment and social outlook suggests that time is running out to make this opportunity a reality.

Do You Want Fries With That US College Degree?

You've got to hand it to our American friends when it comes to exporting thigh-slapping, mock-serious deadpan humour. Take their econocomedian of a finance minister Tim Geithner with his utterly riotous "Strong Dollar" slapstick routine. Or, if you prefer something more tragicomic, consider the "American Dream" of home ownership that led to the subprime crisis that's messed up the world economy in the process. (Home prices never fall continuously, right?) For kicks, you can also try that Horatio Alger-ish "Land of Opportunity" howler in the OECD country with the second lowest level of income mobility next to one where they still call people "Sir," "Lord," and "Your Majesty." So, there are excellent reasons why Leslie Nielsen hails from America where they perfect this brand of deadpan humour given such patently absurd material to delude themselves with day in and day out.

Today, however, let's consider another truism that will have you rolling on the floor laughing (unless you're a newly minted US college graduate), the "University is the Key to Lifetime Success" shtick. Noted labour economist Andrew Sum offers this lowdown on the prospects of college grads after the US-induced subprime fiasco:

Young college educated workers, particularly those 25 and under, however, have not fared very well over the past three years. They have experienced rising joblessness, underemployment, and malemployment problems (i.e. working in jobs that do not require a college degree). During the January-August period of 2010, we estimate that fewer than 50 of every 100 young B.A.-holders held a job requiring a college degree.

And then come the structural problems that, to me, are highly reminiscent of certain European countries:

This growing problem of malemployment and joblessness among young college graduates has a number of dire economic effects on both the graduates themselves and many other young adults across the country. Those college graduates working in jobs that do not require college degrees are earning substantially less per week (30-40 percent less) than their peers who work in jobs that require college degrees. These substantially lower weekly earnings reduce the private and social economic return to college education for such individuals to close to zero. The presence of large numbers of jobless and malemployed young college graduates provides adverse signals to younger high school students contemplating whether to attend college especially among males living in lower income communities. The non-college labor market jobs obtained by these young graduates displace less educated young adults from employment, increasing joblessness among young adults with only a year or two of college or among high school graduates. This rising degree of malemployment among young college graduates, thus, has adverse consequences on the rest of society, pushing down the growth of real output and employment, wages, and earnings of the non-college educated. There is a critical need for national, state, and local political and educational policymakers and administrators to address this growing labor market problem.

This, of course, comes on top of steadily decreasing incomes among those who've pursued higher education. What to do? For those contemplating college, it's obviously important to look at labour market trends and ensure that you wind up with qualifications for occupations where they're still hiring. (Some of which do not necessarily require a college degree.) For those already with a degree who have trouble finding work, look abroad. And for public policy? I have begun suggesting an American iteration of the PRC's one child policy given the bleak US landscape. A still-growing population + few employment prospects = bad mojo.

Like almost everything else about America, you've been sold...a whopper.

Tired of Austerity? Gas Your Leader (in Ecuador)

Here's another nifty IPE-related article I found just on the front page of Yahoo! It seems that enforcing austerity is difficult all over the world. Here in Europe, there were demonstrations across the continent yesterday over axes falling over and over on the public sector as plotted by EU bigwigs. In Latin America, however, public sector workers have come up with an ingenious strategy to (literally) Stick It to the Man.

A few months back, I wrote about the leftist stylings of Ecuador's President Rafael Correa. However, some on the Ecuadorean police force have apparently not taken kindly to imminent reductions in their pension plans. Where art thou workers of the world uniting and so forth? From the Associated Press comes this remarkable story of the gendarmes beating the stuffing out of Correa:

Hundreds of police angry over a law that would cut their benefits plunged this small South American nation into chaos Thursday, roughing up and tear-gassing the president, shutting down airports and blocking highways in a nationwide strike. Incensed officers shoved President Rafael Correa around, pelted him with water and doused him in tear gas when he tried to speak at a police barracks in the capital. Hours later, surrounded by rebel cops in a hospital, Correa declared himself "practically captive." Correa, 47, was hospitalized after being nearly asphyxiated by the tear gas.

The government declared a state of siege, putting the military in charge of public order, suspending civil liberties and allowing soldiers to carry out searches without a warrant. The insurgent police took over police barracks in Quito, Guayaquil and other cities. Some set up roadblocks of burning tires, cutting off highway access to the capital.

This police-led disturbance is being called a coup by some, though others are more reluctant to do so. Meanwhile, Colombia and Peru have locked down borders in sympathy for Correa. Colombia doing so is remarkable given its right-leaning government:

Colombian President Juan Manuel Santos said on Thursday Bogota was closing the border with neighboring Ecuador where unrest erupted over austerity measures. "I spoke with (Peru's president) and the two countries decided to close the borders with Ecuador as a political sign of solidarity with President Correa and with Ecuador's democracy," Santos told reporters before getting on a flight for a regional meeting in Argentina on Ecuador's unrest.

Now that's what I call real "militant labour." Say what you will, but it certainly looks like a novel manoeuvre to catch the attention of deficit cutters. With law enforcers like these, who needs criminals?

UPDATE: It looks like the military is at least still loyal to Correa as they helped liberate their beleaguered leader:

Ecuadorean soldiers stormed a hospital early today and rescued Rafael Correa from mutinous police who had besieged the president and plunged the country into anarchy. Army units blazed their way into the hospital with automatic gunfire and stun grenades in a battle which left at least two dead, dozens injured and enabled Correa's swift and triumphant return to the presidential palace.

The leftist leader, emotional and euphoric, addressed crowds of cheering supporters from the balcony. "What loyalty, what support," he shouted to loud applause. "This will serve as an example for those who want to stop the revolution not through the ballot box but with weapons..."

The protests were triggered by a law passed by Congress on Wednesday that would end the practice of giving medals and bonuses with each promotion, part of Correa's effort to save costs and slim bureaucracy.

Coming from another country with a long history of these sorts of stunts, I must say it's amazing how vulnerable many states are to such petulance. It only takes a few to seriously threaten any number of governments with existential crises. I feel like having a banana right about now.

Out Now: Proposed EC Changes to Budget Rules

Oh, this day has been very, very hectic on both sides of the Atlantic--and it's not over just yet. As labour demonstrations across Europe protest the current political mood for tightening--Yahoo! has a nifty set of photos--the EC literally intends to lay down the law.

I just wanted to post the legislative proposals the European Commission has come up with regarding economic governance to (hopefully) prevent the recurrence of future Greek or Irish episodes. As they are just proposals to, among other things, tweak the stability and growth pact, we have to see if there are some not-so-conscientious objectors out there who did not reveal themselves just yet. Remember, these proposals must now clear the European Council (the "upper house") and the European Parliament (the "lower house"). Aside from budgetary considerations, there's also new stuff being proposed that deal with "macroeconomic imbalances." Without further ado, here they are:
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EU economic governance: the Commission delivers a comprehensive package of legislative measures

The European Commission today adopted a legislative package containing the most comprehensive reinforcement of economic governance in the EU and the euro area since the launch of the Economic and Monetary Union. Broader and enhanced surveillance of fiscal policies, but also macroeconomic policies and structural reforms is sought in the light of the shortcomings of the existing legislation. New enforcement mechanisms are foreseen for non-compliant Member States. The recently agreed "European semester" will integrate all revised and new surveillance processes into a comprehensive and effective economic policy framework.

The proposals submitted today are the concrete translation of the recent Commission communications on economic governance dated 12 May and 30 June (see IP/10/561 and IP/10/859) into legislative proposals. Following intense preparatory work and consultations with a broad range of stakeholders, including the Task Force on the Economic Governance chaired by President of the European Council Herman Van Rompuy, these policy proposals underline the Commission's strong will to process diligently with the necessary reforms.

All these reforms are compatible with the existing Treaty of Lisbon and should ensure that the EU and the euro area benefit from more effective economic policy coordination. That should give the EU and the euro area the necessary capacity and strength to conduct sound economic policies, thereby contributing to more sustainable growth and jobs, in line with the Europe 2020 strategy.

The legislative package is made up of six pieces of legislation: four proposals deal with fiscal issues, including a wide-ranging reform of the Stability and Growth Pact (SGP), while two new regulations aims at detecting and addressing effectively emerging macroeconomic imbalances within the EU and the euro area.

For Member States of the euro area, changes will give teeth to enforcement mechanism and limit discretion in the application of sanctions. In other words, the SGP will become more "rules based" and sanctions will be the normal consequence to expect for countries in breach of their commitments.

1) A Regulation amending the legislative underpinning of the preventive part of the Stability and Growth Pact (Regulation 1466/97):

The preventive part of the SGP is meant to ensure that EU Member States follow prudent fiscal policies in good times to build up the necessary buffer for bad times. To break off with past complacency in good economic times, the monitoring of public finances will be based on the new concept of prudent fiscal policy-making that should ensure convergence towards the Medium-Term Objective . The Commission may issue a warning in case of significant deviation from prudent fiscal policy for the euro area Member States.

2) A Regulation amending the legislative underpinning of the corrective part of the Stability and Growth Pact (Regulation 1467/97):

The corrective part of the SGP, is meant to avoid gross errors in budgetary policies. The regulation is amended so that debt developments are followed more closely and put on an equal footing with deficit developments as regards decisions linked to the excessive deficit procedure. Member States whose debt exceed 60% of GDP should take steps to reduce it at a satisfactory pace, defined as a reduction of 1/20th of the difference with the 60% threshold over the last three years.

3) A Regulation on the effective enforcement of budgetary surveillance in the euro area:

Changes in both the preventive and corrective part of the SGP are backed up by a new set of gradual financial sanctions for euro-area Member States. As to the preventive part, an interest-bearing deposit should be the consequence of significant deviations from prudent fiscal policy making. In the corrective part, a non-interest bearing deposit amounting to 0.2% of GDP would apply upon a decision to place a country in excessive deficit. This would be converted into a fine in the event of non-compliance with the recommendation to correct the excessive deficit.

To ensure enforcement, a "reverse voting mechanism" is envisaged when imposing these sanctions: this means that the Commission's proposal for a sanction will be considered adopted unless the Council turns it down by qualified majority. Interests earned on deposits and fines will be distributed among euro-area Member States neither in excessive deficit nor in excessive imbalance.

The changes are devised so that they should facilitate the eventual move to a system of enforcement linked to the EU budget as foreseen in the Commission communication of 30 June.

4) A New Directive on requirements for the budgetary framework of the Member States:

Since fiscal policy-making is decentralised, it is essential that the objectives of the SGP are reflected in the national budgetary frameworks, i.e. the set of elements that form the basis of national fiscal governance (accounting systems, statistics, forecasting practices, fiscal rules, budgetary procedures and fiscal relations with other entities such as local or regional authorities). The directive sets out minimum requirements to be followed by Member States.

5) A New Regulation on the prevention and correction of macroeconomic imbalances:

The Excessive Imbalance Procedure (EIP) is a new element of the EU's economic surveillance framework. It comprises a regular assessment of the risks of imbalances based on a scoreboard composed of economic indicators. On this basis, the Commission may launch in-depth reviews for Member States at risk that will identify the underlying problems. For Member States with severe imbalances or imbalances that put at risk the functioning of EMU, the Council may adopt recommendations and open an "excessive imbalance procedure (EIP)".

A Member State under EIP would have to present a corrective action plan that will be vetted by the Council, which will set deadline for corrective action. Repeated failure to take corrective action will expose the euro area Member State concerned to sanctions (see next point).

6) A Regulation on enforcement measures to correct excessive macroeconomic imbalances in the euro area:

Like in the fiscal field, if a euro-area Member State repeatedly fails to act on Council EIP recommendations to address excessive imbalances, it will have to pay a yearly fine equal to 0.1% of its GDP. The fine can only be stopped by a qualified majority vote ("reverse voting", see above), with only euro-area Member States voting.
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What's interesting to me is that reverse majority voting made it as part of the proposals. That is, Germany and the ECB (via Trichet) got their wish that sanctions would automatically kick in and need to be overridden via qualified majority voting instead of the present procedure where a similar majority would need to vote for sanctions. We'll see how chronic offenders react to such legislation; let's just say they likely won't go down without a fight.

Also interesting are the last two bits of legislation concerning macroeconomic imbalances (read: gaping current account deficits) aside from the ones on the budget / stability and growth pact. Again, there is talk of a mechanism for dealing with these imbalances but no hard and fast thresholds alike those for fiscal deficits. Talk about asking for a political quarrel. If you will recall, the likes of Spain and Greece experienced ballooning external imbalances prior to the current phase of readjustment, so that's probably what they had in mind.

Time to Join the Fight Against Maritime Piracy

Later this morning I'll be off to the International Maritime Organization (IMO) headquarters here in London to participate in the launch of a new initiative called Seafarers' Rights International. In essence, it's a response by various stakeholder groups to the plight of seafarers travelling through the volatile Gulf of Aden where still-rampant piracy endangers not only crewmen but also world trade. While I'm not much of an activist, I'll make an exception here since my country sends somewhere between a fifth to a quarter of all seafarers worldwide. Not coincidentally, today (23 September) is also the UN-designated World Maritime Day. Here is a brief description of what we're up against from the press blurb:

Piracy and crime at sea have been problems throughout history. But, in recent years, there has been a dramatic upsurge in the threat to shipping and crews, particularly with attacks originating from the lawless coastal regions of Somalia. 2008 saw an increase in attacks on shipping in the Gulf of Aden from pirates operating out of certain coastal regions of Somalia. In that year 111 ships were attacked. By 2009, the number of ships attacked had increased to 217, with 47 vessels and 867 crew taken hostage.

Currently there are 354 people being held hostage (including Paul and Lynn Chandler). Their nationalities are Indian, Sri Lankan, Greek, Pakistani, Filipino, Sudanese, Ghanaian, Bangladeshi, Ukrainian, Yemeni, Burmese, Turkish, Vietnamese, Kenyan, Indonesian, Chinese, Korean and British. Sixteen vessels are also being held to ransom.

Twenty to twenty five thousand vessels pass through the affected area each year – that’s over 400 vessels and 6,000 seafarers at risk every week. In 2007, a piracy attack was reported approximately every 31 hours. There were 15 piracy related deaths in 2006, 11 in 2008 and nine in 2009. In 2008 the amount paid to pirates in ransoms was estimated at US$150 million. There are an estimated 600 to 1,000 pirates operating out of Somali waters.

And here are more details of the petition which you can of course sign on to online:

The petition (www.endpiracypetition.org) was launched just four months ago as the centrepiece of a campaign to persuade all governments to commit the resources necessary to end the increasing problem of Somalia-based piracy. Originally intended to achieve half a million signatures, it has far exceeded that figure and definitively proves that immediate action is needed.

At a time when 354 seafarers and 16 ships are being held hostage in Somalia, pirates are being released unprosecuted to kidnap, loot and maybe kill again, when it is impossible to use routes via the Suez Canal between Asia/the Middle East and Europe/North America without passing through a high risk area, the campaign calls on governments to:

• Dedicate significant resources and work to find real solutions to the growing piracy problem
• Take immediate steps to secure the release and safe return of kidnapped seafarers to their families
• Work within the international community to secure a stable and peaceful future for Somalia and its people

Since this is the IPE Zone, we must also consider the negative effects of piracy on world trade if ships choose to go around the Cape of Good Hope instead of passing through the Suez Canal or purchase increasingly costly insurance:

As well as the human cost in fear and trauma caused to victims, seafarers and their families, piracy creates additional economic costs which are ultimately passed on to taxpayers and consumers. Apart from military patrols, paid for by a handful of governments, ship operators have to pay to re-route ships, meet higher insurance premiums, hire security guards and install shipboard deterrent/protection equipment.

6.8 billion tons of goods are moved by sea each year, in a global trade cycle worth $7.4 trillion. European economies are those most affected in relation to trade through the Gulf of Aden. In August 2009 the Suez Canal reported a 20% drop in revenues, partly as a result of piracy.

Examples:

Re-routing a tanker from Saudi Arabia to the USA via the Cape of Good Hope means 2,700 extra miles on the voyage. Over a year this reduces the number of voyages the ship can do from six to five round trips (a 26% drop). Additional fuel costs over the year would be $3.5 million.

In 2002 maritime insurers tripled the premiums for tankers passing through Yemeni waters. The cost to insure the ship, not the cargo, for a typical supertanker that carries 2 million barrels of oil jumped from $150,000 to $450,000 for a single trip. That increase translated into an additional 15 cents a barrel on the delivered cost of the oil.

Re-routing on a liner trade would mean adding another ship to the service to maintain the schedule. On a Europe - Far East route, re-routing around the Cape of Good Hope would increase the costs by $89 million per year ($74.4 million in fuel and $14.6 million in charter expenses).

War risk binders for ships transiting the Gulf of Aden cost $20,000 per ship per voyage, excluding injury, liability and ransom coverage. Crew costs while the vessel is in the high risk area can double. The cost of hiring a security escort through the Suez Canal can be as much as $100,000. Yemen’s navy is charging commercial vessels up to $55,000 each for escorted transit through the Gulf of Aden.

Maersk Line is reportedly increasing the amount it charges for cargo in and out of East African ports by $50 to $100 per container. The company’s ‘war risk charges’ for containers transported through the Gulf of Aden are $25 for a 20 foot container and $50 for a 40 foot container.

The breakdown of what a typical ransom costs (Source: Miller Insurance Services Limited) is as follows:
Average ransom $2 to $5 million
Managing the pirates: approx $550,000
Managing the people: approx $600,000
Managing the business: approx $1 million
TOTAL = ransom + $2.15 million

Attacks on energy vessels account for a large proportion of piracy attacks (12% in 2006, 24% in 2007). Over 60% of all oil used worldwide is transported by sea.

It's not fun stuff, I hope you'll agree.

UK Trade Union Chief Dubs Mervyn King 'El Diablo'

Whoa, here's something you don't see everyday. Even if Ben Bernanke is not a favourite in these parts for his easy money policies, the worst jibes I've slung in his direction are those on helicopter drops and whatnot which he of course has spoken of in the past. However, it seems his British counterpart Mervyn King--yes, formerly an instructor at the LSE--has it worse. Much worse. Today, the Bank of England governor gave a speech before the Trades Union Congress (TUC)--the UK equivalent of the AFL-CIO.

Instead of being associated with easy money policies, King is now being associated with--how do I put it--tightwad money policies instituted by the current Liberal-Conservative coalition even if he was a Blair appointee. Apparently, many didn't take very kindly to his message at the TUC. What would happen to so many public sector jobs and so forth? Those voicing ideas supportive of 40% cuts across government departments don't come across well. He incurred the particular wrath of the instigator of subway strikes which aim to paralyze London, General Secretary Bob Crow of the National Union of Rail, Maritime and Transport Workers (RMT). So yes, King has been branded the devil incarnate:

Bank of England governor Mervyn King today faced down union militants to deliver a stern lecture on the need to repair the national finances. Addressing the annual Trades Union Congress, which has been dominated by anger at spending cuts, he told delegates: “I would be shirking my responsibilities if I did not explain to you the risks of failing to do so.”

Mr King softened his message by admitting that policymakers should have prevented the financial crisis. “We let it slip — we, that is, in the financial sector and as policy-makers — not your members nor the many businesses and organisations around the country which employ them.” He also said banks should be in future be “allowed to fail” if they messed up as long as savers were protected.

Despite his conciliatory tone, militants led by RMT leader Bob Crow staged a walkout from the Manchester hall, rubbing salt in the wound by ostentatiously watching children's television at a conference stand [Cbeebies, if you must know]. Mr Crow even compared the softly spoken governor with “the devil”, saying that the speech was like Christians inviting Satan to preach their Sunday sermon.

But Mr King told the unions that neither he nor they could avoid action to reduce borrowing. “It is vital for any Government to set out and commit to a clear and credible plan for reducing the deficit,” he said. Only the second Bank governor to attend the TUC, Mr King was politely applauded by most delegates as he took the stage. But his appearance caused consternation among many who blame him for encouraging the Coalition to speed up the deficit reduction programme, putting public sector jobs under threat.

In questions later, one union official said bankers were “greedy bullshitters” and accused him of failing in his job. There were also demands from the floor for a crackdown on wealthy tax dodgers who cost the country about £120 billion a year, according to the unions.

Mr King said he had “enormous sympathies” with public anger over bank bonuses, adding: “I understand the strength of feeling. In fact I am surprised it has not been expressed more deeply.” He pointed out that the economic stimulus provided by the Bank's quantitative easing had prevented the economic crisis becoming as severe as the Thirties' Depression.

Mr King agreed that it was “unfair” that banks were bailed out when big firms such as Jaguar had to “stand on their own feet or go to the wall”. Calling for the Bank and the unions to work together, he urged: “It will require patience and determination on all our parts, including your members. But the prize of restoring and maintaining economic stability, and a return to sustained rises in employment and living standards, will be worth the effort.”

It's so 1979, dahling. I guess it's good I can walk home instead of having to wait around for the mother of all transport strikes if others join the subway folks in protest. The Winter of Discontent and all that. And imagine what'd happen if the public broadcaster of Cbeebies--the BBC--goes on strike as some indicate. I guess we'll all have to eat Crow then over the still-substantial strength of organized labour. Alas, British politics is child's play.

UPDATE: The thing not many notice was that King was rather apologetic over this admittedly white-collar fiasco:

Said King: “Before the crisis, steady growth with low inflation and high employment was in our grasp. We let it slip — we, that is, in the financial sector and as policy-makers — not your members, nor the many businesses and organisations around the country which employ them.” King went on to attack bank bonuses and said that union members were “entitled to be angry”. Added the governor: “I understand the strength of feeling. In fact I am surprised it has not been expressed more deeply.”

'Yuan Reval Will Make PRC Overtake US Sooner'

Here's a neat continuation from the post immediately before this one: a Reuters article of fairly recent vintage pointed me in the direction of the well-respected work of Louis Kuijs, senior economist at World Bank - China. In it, Kuijs' recent study is cited in which he estimates that the PRC can overtake the United States in outright output--not just in PPP terms--six years earlier if its pace of revaluation is increased. As with all predictions, it depends on a number of things--especially the continued availability of surplus labour:

It is the inflation-adjusted [real] exchange rate, together with the pace of real GDP growth, that dictates how quickly dollar incomes in developing countries catch up with those of rich economies. If China does indeed have little surplus labor left to move off the land, the real exchange rate could rise rapidly as wages sprint ahead, pushing up unit labor costs in services, where the productivity of jobs such as hairdressers and waiters is lower than in manufacturing.

Louis Kuijs, a World Bank economist in Beijing, has doubts whether China's labor market has reached a turning point. This makes it tough to forecast the currency. So Kuijs, in a recent paper, maps two paths. One assumes a rise in the yuan's real, trade-weighted exchange rate of 0.8 percent a year; the other assumes a 3 percent rise, in line with the experience of Japan from 1965-1990 and South Korea from 1970-1996.

What's striking is how little difference this makes. Under the slow appreciation scenario, China overtakes the United States as the world's biggest economy in 2029; if the exchange rate rises faster, it does so by 2023.

China overtaking the US in [nominal] exchange rate terms will obviously be hastened by a stronger yuan. In turn, the pace at which revaluation will occur is closely related to labour availability going forward as wage pressures help determine this rate. I found the discussion quite interesting and dug out Kuijs' article. Here's what he says in full:

However, with substantial wage growth for migrants in recent years, discussions on the possible exhaustion of surplus labor and the “Lewis turning point” [see here] have intensified in China, particularly after some high profile labor disputes and wage increases in May-June 2010. Several observers have concluded that China may soon exhaust its surplus labor. If true, substantial sustained [Balassa-Samuelson] effects in the coming decade may drive up the real exchange rate.

It is not clear how much RER appreciation there will be in the coming decade. Looking at the labor market data, it seems unlikely that China has already exhausted its surplus labor. The official employment statistics suggest that over 40 percent of China’s employees are still employed in agriculture, where labor productivity is 1/6th of that in the rest of the economy. Even after adjustment for possible overstatement of agricultural employment following Brandt, Hsieh, and Zhu (2008) by as much as 10 percentage point, agricultural employment is relatively high. This would suggest that surplus labor is still sizeable, especially considering expected future technological change in agriculture and additional surplus labor in the cities. [T]his would suggest that sustained RER appreciation would still be quite some time away in the future. However, it is possible that China’s upcoming demographic changes, which are going to affect the economy at a relatively early stage of development, will advance substantial trend RER appreciation in China compared to the typical pattern.

Given the uncertainty over the pace of the RER in the coming decade, we present 2 long term paths. In the lower path, we assume average RER appreciation of 0.8 percent per year against the US dollar. This is broadly the average of those countries with RER appreciation against the dollar during this period. In this path, and using the Consensus Forecast growth projections for the US mentioned above, China's GDP per capita in current prices and exchange rates would increase from 8.2 percent of the US level in 2009 to 16 percent in 2020 (Figure 16). China’s total GDP was 35.8 percent of that of the US in 2009. This ratio would increase to 66 percent in 2020. Extending the growth accounting, along this path China would overtake the US as the largest economy in 2029.

Along the upper bound path, the real exchange rate appreciation is assumed to be 3 percent per year. This is broadly in line with what it was in Japan during 1965-1990 and South Korea during 1970-1996. It seems a high rate compared to the experience of most other countries. But, there may be some pent up room for real appreciation in China, after the resistance to it in the previous decade, including from possible adjustment of prices of resources. Along this path, using the same assumptions on real growth, China's GDP per capita in current prices and market exchange rates would increase to 20 percent of the US level in 2020 (Figure 17). China’s total GDP would increase to 82 percent of that of the US in 2020. Along this path China would overtake the US as the largest economy in 2023.

The difference between the 2 scenarios is not so large through 2020, because real GDP catch up is relatively large then. Extending the scenario further out, the differences become larger, as the role of real catch up becomes smaller compared to that of RER appreciation.

And here are figures 16 and 17 if you're curious depicting accelerating rates of nominal growth under 0.8% and 3.0% annual revaluation scenarios, respectively [click for a larger image]:

Does it sound like a date with destiny, then? I remember the hoopla surrounding Japan overtaking the US in the Eighties, but I think China's far larger population and far lower per capita income indicate the PRC still has some ways to go.

Frustrated Investors in PRC II: Japan's Complaints

This post continues on a number of themes we've carried in the past here at the IPE Zone. First is the obvious one of foreign firms believing that their economic freedoms are being limited in the PRC. Previously, they were pressuring the PRC to not implement "buy China" provisions when it comes to government procurement of high-technology goods. So China made concessions on that end, but apparently the Europeans and Japanese remain unhappy about evolving business conditions. Second is another trade-related complaint that China was limiting the export of rare earth metals crucial for the production of certain high-technology products. I opined that China should treat this matter strategically: given its historical grievances over Western countries not being willing to export advanced products to China over their dual use (civilian or military) nature, a deal remains in the offing wherein China would allow export of rare earth metals provided the West reciprocated by removing dual use as grounds for limiting exports to the PRC.

Anyway, on to excerpts from the article from the WSJ:

Japanese Foreign Minister Katsuya Okada warned Thursday China risks losing foreign investments unless it introduces more transparency and consistency into its business rules, including its legal framework to deal with labor issues.

Swinging back at Beijing in an emerging dispute over the treatment of Japanese companies operating in China, Mr. Okada said a lack of comprehensive rules makes it difficult for foreign investors to solve labor disputes and other problems they face with increasing frequency in the nation. "Foreign companies have faced problems in China that are unthinkable in a normal business environment," Mr. Okada said in an interview with The Wall Street Journal. "We will keep bringing up these issues and we hope China will take notice and make corrections."

China repeatedly has defended its policies toward foreign companies, pointing to continued growth in foreign investment as evidence that it doesn't discriminate...Earlier this year, a wave of strikes disrupted local production at Japanese manufacturers, including Honda Motor Co. and Toyota Motor Corp. During his visit to Beijing on Sunday, Chinese Premier Wen Jiabao suggested to Mr. Okada labor disputes were caused by relatively low pay for workers at these factories and requested companies address the situation.

Among other examples of problems Japanese companies have had to deal with, the foreign minister also pointed to abrupt cuts in exports of rare earth metals used in manufacturing hybrid cars, and unfavorable local court rulings and weak implementation of favorable rulings for companies facing intellectual-property disputes.

Mr. Okada said that because China is such an attractive market, recent problems aren't enough to discourage companies from reducing investments or withdrawing from the nation. "But if these problems continue to occur, there will be negative effects on future investments," he warned...

The foreign minister's complaints about the business environment echo those of executives and officials from the U.S. and Europe. Separately on Thursday, the European Union Chamber of Commerce in China urged the Chinese government to allow foreign businesses better access to its vast domestic market, and said regulatory barriers could threaten investment despite the economy's rapid growth.

"China is still one of the most heavily controlled economies in the world," Jacques de Boisseson, the chamber's president, said at a news conference in Beijing to mark the release of its annual position paper on business conditions in China, which pointed to several examples of stringent licensing requirements and arbitrarily enforced legislation that create headaches for foreign businesses.

While the regulatory problems haven't led European companies to shift investment out of China, Mr. de Boisseson said, that could change if the environment doesn't improve. He said he expected the government to take steps, noting that the Chinese premier and other officials have repeatedly welcomed foreign investment in China.

So there's a lot of bellyaching from Europeans and Japanese; that much is clear. However, what does the record for foreign investment inflows to the PRC indicate? It seems FDI in China is, in reality, steadily increasing:

China drew 29 percent more foreign direct investment (FDI) in July than a year earlier, with global firms still flocking to the country to build factories and set up research centers despite a bout of labor unrest. FDI inflows, which surged after the country joined the World Trade Organization in 2001, have recovered steadily this year after being hit hard by the global economic slowdown.

Although China has recently been hit by a series of high-profile labor disputes -- notably, at suppliers to Japanese automaker Honda Motor Co -- it continues to exercise a magnetic pull on foreign businesses setting up production facilities. In July alone, China attracted $6.9 billion in FDI, up 29.2 percent from July 2009, the commerce ministry said. It drew $58.35 billion in foreign direct investment (FDI) in the first seven months of the year, up 20.7 percent from the same period in 2009.

In the latest example of large-scale investment, German chemicals firm BASF said on Tuesday that it would build a new dispersions plant in the southern province of Guangdong. Chinese wages have been rising, but productivity has been rising even faster in most industries and labor costs remain far lower than in developed economies. Investors are also attracted by the country's modern infrastructure and the prospect of tapping its fast-growing domestic demand.

Much of the investment in the past has been concentrated in China's export heartland along the coast, but Yao Jian, a commerce ministry spokesman, said that money was starting to flow to the interior where costs are lower. "The western regions are showing greater potential for attracting foreign direct investment," he told a regular news briefing. Western China attracted $3.89 billion of FDI in the first seven months, up 19.2 percent from a year earlier, according to the ministry.

So, there are two things to keep in mind: First, increases in PRC productivity may be outpacing wage increases, leaving the PRC as an attractive FDI destination. Second, no one seems to be pulling out of China in a big way. I guess the rest of the countries in the region will have to work hard at keeping up with the Jis.

The Knowledge Worker Myth vs Blue Collar Reality

Never let it be said that there's no art to blogging. Alike in the offline world, there are talented folks who know how to weave a compelling narrative out of a mundane story, and there are those who weave a mundane narrative out of a compelling story. Today, I will of course try for the former--as I always do ;-) IMHO, something that separates a good blogger from a pedestrian one is an eye for something everyone else misses...

Once more demonstrating that you don't have to look far for IPE-relevant material, I came across this featured story on Yahoo!'s front page yesterday. There it was staring me in the face: a pretty damning indictment of what I've been taught all my life. Like me, you probably grew up in a generation that disdained blue collar work. That is, work which actually involves physical exertion and being good with one's hands has been frowned upon. It is not that these biases were made up on our own; our parents also had a role in drumming in the message that "manual labour" was something dirty. Hence, many of you are also of a generation told that lawyers, bankers, businessmen, and the like had it made. The white collar life was supposed to promise the land of milk and honey.

Certainly, academia has had an interest in propagating this story since it provides fodder for ensuring a steady stream of tuition-paying students in law, commerce, and business. Various American commentators like former Fed Chairman Alan Greenspan have constructed an entire narrative out of "knowledge workers." In recent times, that has meant training to be a software engineer or some other lofty position that makes the most of conceptualizing abstract ideas and similarly high-faluting rhetoric. The truth, though, is much less compelling. Take America (please). Not only are there scores of unemployed college graduates there, but wages of college graduates have been on a downward trend since 2000. So much for the college myth.

The aforementioned Reuters article rubs it in further by pointing out that, actually, the skills which are most in demand worldwide are not those requiring fancy college degrees but fairly "mundane" blue-collar certification:

Workers with specialized skills like electricians, carpenters and welders are in critically short supply in many large economies, a shortfall that marks another obstacle to the global economic recovery, a research paper by Manpower Inc (MAN.N) concludes. "It becomes a real choke-point in future economic growth," Manpower Chief Executive Jeff Joerres said. "We believe strongly this is really an issue in the labor market."

The global staffing and employment services company says employers, governments and trade groups need to collaborate on strategic migration policies that can alleviate such worker shortages. Skilled work is usually specific to a given location: the work cannot move, so the workers have to.

The shortage of skilled workers is the No. 1 or No. 2 hiring challenge in six of the 10 biggest economies, Manpower found in a recent survey of 35,000 employers. Skilled trades were the top area of shortage in 10 of 17 European countries, according to the survey.

While the short-term way to address to shortages is to embrace migration, the long-term solution is to change attitudes toward skilled trades, Manpower argues. Since the 1970s, parents have been told that a university degree -- and the entry it affords into the so-called knowledge economy -- was the only track to a financially secure profession. But all of the skilled trades offer a career path with an almost assured income, Joerres said, and make it possible to open one's own business.

In the United States, recession and persistent high unemployment may lead parents and young people entering the workforce to reconsider their options. The skilled trades category also includes jobs like bricklayers, cabinet makers, plumbers and butchers, jobs that typically require a specialist's certification.

Older, experienced workers are retiring and their younger replacements often do not have the right training because their schools are out of touch with modern business needs. Also contributing to the shortage is social stigma attached to such work, Manpower argues in its paper published on Wednesday.

A poll of 15-year-olds by the Organization for Economic Cooperation and Development found only one in 10 American teenagers see themselves in a blue-collar job at age 30. The proportion was even lower in Japan. Education could address that stigma. Students should be reminded that blue-collar work can be lucrative: skilled plumbers can make upwards of $75,000 a year, Manpower argues. Overall, Manpower's fifth annual talent shortage survey found 31 percent of employers worldwide are having difficulty filling positions due to the lack of suitable workers available in their markets, up one percentage point over last year...

And there's also the problem of developed countries reluctance to accept more migrants despite a lack of workers with the requisite skills:

Examples of successful, targeted migration include an Ohio shipbuilder that brought in experienced workers from Mexico and Croatia, and a French metal-parts maker that hired Manpower to find welders in Poland.

Obstacles to such migration include differing standards for certification in skilled trades, as well as political barriers to immigration, which remains an "emotive" subject in many countries, Manpower's CEO said. Japanese employers, for example, have difficulty attracting skilled workers. Sweden, on the other hand, is innovative and aggressive about strategic migration, for example by removing obstacles to workers being recertified in their specialty, Joerres said.

Coming from a country that is a large sender of migrants, I myself work on these issues of international certification and similar qualifications. In the end, all I ask is that we be allowed to compete on a level playing field despite obvious disadvantages of relative poverty and the need to traverse often vast distances away from hearth and home. For obvious reasons, though, many of those in the West would rather not extend the opportunity to foreigners to compete for qualifications on similar terms. I prefer to think that hard work will help me overcome prejudices in a white man's world.

At any rate, do read the Manpower publication Strategic Migration - A Short-Term Solution to the Skilled Trades Shortage discussed in the article above as it is quite illuminating, Manpower certainly knows its business as it is the second largest staffing company in the world. While lifting limits on migration in order to combat global slowdown is certainly of interest to me, the fact that much-maligned blue collar work is actually what's in short supply should be a wake-up call to others. Perhaps higher education is a fraud foisted on me that I've helped perpetuate. It's not a comforting thought, but hey, sometimes the truth hurts but needs to be told.

* * *
On my walk home, I usually pass Priscilla: Queen of the Desert, Dirty Dancing, and Legally Blonde. Obviously, the Brits are fond of making musicals out of blockbuster movies. Guess what's opening soon in London's theatre district? I kid you not: Flashdance: The Musical [!] Critics have always disparaged this movie and its plot that beggars belief. IMDB's plot summary sums it up nicely:

Alex Owens is a female dynamo: steel worker by day, exotic dancer by night. Her dream is to get into a real dance company, though, and with encouragement from her boss/boyfriend, she may get her chance. The city of Pittsburgh co-stars. What a feeling!

OK, so I too thought Flashdance was more of a vehicle for the 80s soundtrack than the other way around. The new musical is in the same vein: more a platform for catchy 80s songs than plot-driven drama. Still, it begs the question: if a musical featuring a hackneyed tale about a welder can be made into a London musical, what is there stopping blue collar trades from being made "glamorous" as well? It's a task of changing perceptions that begins with parents who influence their offspring's career choices. I personally believe that unemployment is unglamorous, so the blue collar stigma is undeserved.

Ultimately, perhaps it's those of us with degrees in higher education who are the real dummies. Moreover, I suspect this world would be a much better place if there were more welders than, say, investment bankers--whether they choose to be exotic dancers at night or otherwise. Young son or daughter, in the immortal words of, er, Irene Cara, take your passion...and make it happen.

UPDATE: Kindred over at IPE@UNC suggests that I was mistaken over a "few facts" about US income trends. Now Kindred's a good kid, but he is wet behind the ears as he tends to put words in my mouth and gets embarrassed for it. Anyway, I decided to look up the numbers for myself instead of relying on other's charts. Below are the figures for US income for those 25 and up for the years 2000 to 2008 from US Census Bureau tables P-16 and P-18. It doesn't matter whether it's the mean or the median or if you're male or female; real annual income has been falling there since 2000. It doesn't matter either if you're a college graduate or have a higher educational attainment [click to enlarge image]:

I guess the furriner is more familiar with US stats than the American. Also at grad school, you are taught not to compare apples and oranges, but he does so by quoting another data series and naively suggesting differences have something to do with using "mean" and not "median" data. The table above should shelve that schoolboy howler (and I even use the same data series!) Maybe Kindred should visit Singapore for I suspect the educational standard there isn't declining as markedly as it is in America. R-E-A-D-I-N-G comprehension suggests this post is about college prospects post-(US led) financial crisis, so there you go with regard to time frames. Oh well, it's good he at least recognizes income there isn't rising unlike before. As an educator, I find patience with the recalcitrant to be a virtue. Lastly, the point Manpower makes is that there are technical and vocational degrees that stand you a good chance of landing a job while there are many college degrees that don't. Again for the S-L-O-W learner, it's not college vs. non-college but in-demand technical or vocational degree vs. not-in-demand college degree. And don't get me started on this being a worldwide survey instead of another boringly parochial American one.

You have to wake up pretty early in the morning to put one over ol' Emmanuel, Wizened IPE Buzzard ;-)

PRC Labour Costs Too High? SE Asia May Beckon

Here's another slant on the familiar story of rising labour costs in China. It may indeed be the case that countries in export competition with China are also experiencing labour unrest over low wages. Again, China often sets the standard others have to benchmark themselves against in the wider East Asia region. So, if wage rise in China, the understandable response of others will be to demand similar rises.

Be that as it may, many countries in Southeast Asia are more than competitive with China from the standpoint of wages considered alone. However, labour is but one component in the decision to site manufacturing as you too have to factor in transportation costs, worker productivity, and domestic political stability. Below, the Wall Street Journal focuses on infrastructure development in particular, finding Southeast Asian nations wishing to compete with China lagging well behind. There are no real objections from me to this observation, though it must be noted that efforts are underway to correct this situation.

First is the ASEAN single market scheduled to come into effect by 2015 and remove impediments to the movement of goods, services, capital, and (skilled) labour across the region. Second, regional firms are already busy linking up to create working partnerships. If you're an IPE junkie, that's the difference between regionalism and regionalization. Regionalism involves national governments establishing frameworks for regional cooperation with each other, while regionalization is more organic in that individuals, firms, and other private actors in the region create relationships across national boundaries themselves.

In either case, I do believe things are looking up in Southeast Asia--especially compared to mostly moribund Western developed economies:

A key example is Southeast Asia, a region of nearly 600 million people that was once one of the world's investment darlings until it was eclipsed by China. The average factory worker in Vietnam made about $136 a month last year, in Indonesia, $129 a month, well below the $413 a month in China.

But Southeast Asia also faces enormous hurdles, including underdeveloped legal systems and problems with corruption. There is also the possibility that costs could spiral more than expected as workers learn more about wage gains in China and press for raises.

"Most of the countries, if not all, look to China for pricing direction," said Bruce Rockowitz, president of Hong Kong-based trading company Li & Fung at a recent press conference. Even so, Li & Fung Ltd. has been able to mitigate some of its rising costs by shifting business to places such as Indonesia and Vietnam.

Several Southeast Asian countries—including Cambodia, Vietnam and Indonesia—lack sufficient infrastructure to support much larger manufacturing industries, even though their wages are cheaper than China's. Individual Southeast Asian countries also lack the scale to single-handedly absorb a massive influx of jobs from China.

Leaders in the region are pressing ahead with plans to stitch together the patchwork of nations into a common market and production platform by 2015. If fully realized, the project will include fewer restrictions on the movement of skilled labor from country to country and streamlined customs procedures.

Southeast Asian countries are also making headway on road and rail investments. Efforts funded by the Asian Development Bank and others have created three major overland trade corridors, with improved highway connections across Cambodia, Thailand, Vietnam and Laos.

Many companies are pursuing the same goals on their own. In the garment industry, more than a dozen Southeast Asian suppliers have reached agreements recently to more-closely integrate their supply chains by linking stitching companies in places such as Cambodia with raw-material makers in Thailand or other nearby countries. The companies effectively agree to market goods jointly so that they appear similar to suppliers in China, which often offer all the steps needed to make a whole garment, including access to yarns, fabrics, buttons and sewing, in the same area.

The long-term goal is to make Southeast Asia operate like one country with many states, rather than a region of 10 nations, says Van Sou Ieng, chairman of the Garment Manufacturers Association in Cambodia. "We have huge differences, but we have to make it happen" to grab more business from China, he says.

After PRC, Other Asian Nations See Pay Disputes

Workers of the world unite! (Or, at least some of those in Asia.) After the much-ballyhooed worker suicides at Chinese original equipment manufacturer (OEM) Foxconn, many multinationals sensitive to charges of operating in China to, well, exploit labour arbitrage opportunities quickly followed suit with pay rises. The PRC powers-that-be then mounted an investigation to try and quell matters. Nevertheless, a spectre is haunting Asia--the spectre of labour militancy. In true butterfly-flapping-its-wings-starting-a-hurricane fashion, anecdotal reports now report that countries in the wider region are facing similar howls of protest over insufficient pay. Avast, ye capitalists!

The following FT article focuses on aftershocks being felt in Southeast Asia. Like China, Vietnam and Laos are ostensibly "socialist" regimes that have in recent times adopted measures to solicit foreign direct investment--AKA "market socialism." I'd certainly like to ask Marx what that is...

Chinese labour unrest is being replicated in south-east Asia where factories that compete with China to supply low-cost goods face walkouts as employees demand better pay and benefits. In Cambodia, workers are poised to stage a three-day strike this month in a dispute over the minimum wage while in Vietnam, thousands of workers at a Taiwanese-owned shoe factory staged a strike demanding higher salaries.

The disputes match similar action in China, where growing worker dissatisfaction has led to industrial unrest and higher wages. As a result, foreign factory owners are increasingly moving production from southern and eastern China – long seen as the “workshop of the world” – to the interior and other Asian developing nations. Chengdu in western China has already attracted IT giants such as Intel, Microsoft and IBM while Vietnam has become a manufacturing base for companies such as Foxconn, the world’s largest contract electronic manufacturer, Intel and Canon.

Labour costs in countries such as Cambodia, Vietnam and Laos remain a fraction of those in China. But, while their governments have been jostling to attract foreign manufacturers, unions are keen to protect their members and industrial action is on the rise, together with minimum wages across the region.

The average garment worker in Cambodia, where the minimum wage is one of the lowest in the world, earns $50 (€40, £33) per month plus a $6 living allowance bonus. The government has proposed a $5 increase but the Free Trade Union, which represents more than 80,000 labourers, intends to go ahead with the strike unless minimum pay is increased to $70.

The union represents more than 80,000 workers in factories across the country. Hundreds of international companies, including PCCS Garments, a Malaysian company which supplies goods to Adidas, Puma and Nike, and Korean manufacturer Yakjin, whose clients include Walmart and Gap, may have operations disrupted if the argument is not resolved.

The Vietnamese government increased the minimum wage for workers at foreign-owned companies to 1m dong ($52.50) this year. In Laos, the minimum wage was rose last year from 290,000 kip ($35) to 348,000 kip ($42) per month. Cambodia has a relatively high number of [real, not state-run] active unions and most garment factories are represented, says John Ritchotte, of the International Labour Organisation. However, he points out that industrial unrest is not uncommon across the region. “Even in those countries without independent unions, such as Vietnam and Laos, disputes occur, particularly during periods of high inflation,” he says. “The number of disputes has grown substantially over the past five years.”

At the same time, Cambodia’s open business environment, in which companies can be 100 per cent foreign owned [WOFE--wholly owned foreign enterprise], is expected to attract increasing foreign investment. According to figures from the Cambodian Ministry of Commerce, 290 new foreign companies registered in the country in the first quarter of 2010, an increase of 56 per cent on the same period last year. The World Bank estimates foreign direct investment in Cambodia will grow to $725m in 2010, up from $515m in 2009, partly as a result of an increase in Chinese investment.

Like China, most of Asia is open for business. However, might firms seeking relief from increasing wages in China find themselves having to deal with...workers clamouring for higher pay in Southeast Asia? As gnarly Uncle Karl once wrote, the proletarians have nothing to lose but their chains. They have a world to win.

Dogfight: Of A380s and Emirates vs Lufthansa

The Wall Street Journal has a fascinating article on Dubai's flagship carrier Emirates buying 32 more Airbus A380 superjumbos from EADS, the European aerospace consortium. While the emirate of Dubai is obviously in the dumps as its real-estate megaprojects are finding few financiers and takers at the current time, its airline is doing just fine, thank you. Certainly, the advantageous location of Dubai between Europe and Asia is a considerable advantage.

Importantly, the article points out that the announcement of this $11.5B purchase was held in Berlin. Apparently, the (money-losing) German carrier Lufthansa is reluctant to allow Emirates more slots in Germany as it would increase the competition for this unprofitable carrier. It's the same old story: look at these furriners stealing our airline jobs! Landing rights have been a point of contention between Dubai and Germany for quite some time now. What Emirates wants to make clear is that, contrary to Lufthansa's brand of protectionism, manufacturing these planes will create jobs in Deutschland:

Dubai's Emirates Airline ordered 32 additional Airbus A380 superjumbo jetliners, and deliberately announced the $11.5 billion deal in Germany's capital to fight a trade battle with flag carrier Deutsche Lufthansa AG.

Emirates, which had already ordered 58 of the world's largest passenger plane, wants Berlin to grant it greater access to the huge German aviation market. Lufthansa argues that its home market of 80 million people shouldn't be thrown open to a carrier from one of the United Arab Emirates. Dubai has a population of roughly 3.5 million people. Carriers from the UAE may now serve at most four German cities.

Lufthansa has effectively lobbied Berlin not to raise the limit, so Emirates is playing a new card: jobs. Emirates is one of Airbus's biggest customers. Its new total of 90 A380s on order accounts for almost 40% of the 234 orders Airbus has signed for its two-deck plane.

The fight between Emirates and Lufthansa pits service jobs against manufacturing employment and shows how hard it can be to define markets in a global economy. Airbus, a unit of European Aeronautic Defence & Space Co., says that the A380 program in Germany supports more than 30 suppliers and creates 40,000 jobs directly and indirectly. Each Emirates A380 generates €20 million ($24 million) in work for German suppliers, an Airbus spokesman said. He declined to comment on the spat between its customers.

Lufthansa says it supports far more German employment than Emirates does. "It's up to the government to decide whether they want to create jobs here or export them," said Lufthansa Chief Executive Wolfgang Mayrhuber. Andrew Parker, Emirates senior vice president for international affairs, said the airline chose to announce its order at the Berlin Air Show "to illustrate pretty powerfully that we're a big part of Airbus's future..."

A spokesman for Germany's federal transport ministry said the government has no plans to allow Emirates to fly to more than four cities. Emirates' rivals say it unfairly benefits from government support that has allowed it to grow far larger than its home market would allow by poaching foreign traffic. Officials at the fast-growing airline deny the charge.

Emirates is owned by the government of Dubai, which also owns the emirate's airports. The ruling family has developed its aviation policies to promote Dubai as a global hub connecting far-flung markets. It allows almost any airline to land at its airport, which charges low fees. Dubai has no income tax or corporate tax. The low costs help Emirates against rivals in higher-cost markets.

Emirates, established in 1985, has expanded quickly over the past decade with giant orders from Airbus and U.S. rival Boeing Co. In addition to the A380 orders placed Tuesday, Emirates has 143 aircraft on order, with a catalog value of $48 billion, although large customers such as Emirates generally receive large discounts.

Emirates officials say they haven't faced trouble funding their operations amid Dubai's recent financial woes. The largest carrier in the Middle East, Emirates last month posted a fivefold rise in full-year net profit to 3.5 billion United Arab Emirates dirhams ($953 million) and said it expects double-digit growth to continue this year...

A similar spat is ongoing between Air Canada and Emirates as Canada deregulates its market. Air Canada's Chief Executive Colin Rovinescu even makes a risible analogy to Emirates dumping [!] on the Canadian market of Emirates' gains in seating capacity:

"The fact that they've purchased all these A380s and have all this capacity means they're basically manufacturing seats in massive quantities," Mr. Rovinescu said. "In any other industry, this would be considered dumping." Aviation isn't covered by World Trade Organization rules, so ordinary dumping criteria don't apply.

Mr. Parker at Emirates said the opposition from Air Canada and Lufthansa is a result of outdated thinking about airline markets. "It's predictable that the same-old, same-old is bandied about by legacy carriers. We just get on with it," he said.

There are any number of interesting questions here that trade wonks haven't really looked at pertaining to the airline industry. Litigation at the WTO has concerned state support for commercial aircraft manufacture (most prominently Airbus vs Boeing but also see Embraer vs Bombardier), not for airlines. Let's begin with accusations levelled against Emirates by Lufthansa and Air Canada:

• Does Dubai's funnelling of state funds into Emirates together with tax breaks and other incentives constitute "actionable subsidies"?
• Does increased seating capacity in excess of that necessary to serve the "domestic market" (howsoever defined) constitute "dumping"?

More interestingly from my point of view...

• Can the UAE take on Emirates' case against German or Canadian restrictions on landing rights?
• If the UAE prosecutes a WTO case against Lufthansa, what effect would that have on Emirates' order for 32 superjumbos?

As I said, it's interesting stuff. The trouble here is that analogous extant cases apply to trade in goods, not in services, so we're literally in uncharted aerospace here as far as international trade law is concerned.