Tuesday, 7 April 2015

Misunderstanding Singapore - Lee Kwan Yew memorial edition

Predictably, there was a lot of irrelevant noise after the passing away of Lee Kwan Yew. Nearly all the obituaries I read were wide of the mark, The Economist's being the least bad. You would think that because an event is highly predictable and has been so for some time (Lee was 91), journalists would have had time to research their papers properly and would have bothered to do so. Well, sorry, no.

Je maintiendrai

As the media often do when they report on economic subjects, most of them overstated the role of individual people, in this case Lee, and ignored that of long term market forces. Indeed, the worst obituary I read was the one on the front page of Le Monde, which started with: "Lee (...) turned a declining British warehouse into a regional centre for financial services and technology." A declining warehouse? Really? Like Hong Kong, I suppose?

Of course, when you do look at the figures (*), something which a journalist at France's leading daily newspaper would apparently not think of demeaning himself to do, Singapore, purposely founded by the British as an economically important harbour, had been already booming for a long time when the rest of Asia took off post-WWII. Ship tonnage grew by 79% from 1913 to 1939, a notable feat as world trade was then stagnating, and by 102% from 1939 to 1959, nearly exactly at the same insane rate by which it would be growing over the next 10 years when Lee was starting to be in charge. As to the city's population, it grew by 68% from 1931 to 1947 and then by 80% between 1947 and 1961.

So, if anything, Singapore was already experiencing huge growth when Lee took over. And prior to that, and more importantly, it had been equipped by the British with a large physical infrastructure and a well-established free trading and financial culture. Those were very valuable endowments. Lee thus rode the economic tide, he did not create it.

And indeed, a major part of Lee's achievements lies in what could be described as "not changing anything", i.e. in perpetuating the spirit of colonial Singapore - very much like what was happening in Hong Kong, which was still under British rule. Policing and enforcing were rightly the government's primary goals. Lee's other important and visionary achievement, which has been spectacularly boosting growth for the last 20 years, is Singapore's long term investment into education, which initially was a drag.

But then, Le Monde, being not only French but also left-wing, would think that economic growth is a thing decreed by governments and implemented via five-year plans, state enterprises and the like, wouldn't they?

And also, as France is a country where national myths reign supreme (France won WWII, is more than a country, has a civilizing mission, etc) they would buy at face value any national mythmaking like the one that has been promoted for obvious political reasons by Singapore's government and which you can find on display at the Singapore History Museum, namely that Singapore was "dirt poor" when it became self-administered. The convenient and soul-lifting implication of that story is that Singaporeans owe their later success solely to their own hard work (implementing Lee's vision, one could add). But that is only half-true. Yes, Singapore was slightly poorer than Hong Kong in 1959, but it was nearly as well-endowed and had the same kind of potential.

Singapore Pte Ltd

The second thing that struck me is that no obituary I read stressed the fact that Singapore is a big city, not a standard country. Now, that really matters, because it is in large cities that productivity growth and thus wealth creation has been, still is, and, for the foreseeable future, will still be occurring.

For instance, Paris' per capita GDP is now roughly 75,000€ for its 2.5 million inhabitants, while that of the Paris area's 11 million people is 50,000€ and that of provincial France (54 million people who live and work in smaller cities and in the countryside) is less than 25,000€, a third of that of Paris.  So, yes, Singapore's PPP wealth levels are very impressive, but much less so if you compare them to those of other biggish cities. And of course, they become even less so if you take into account the fact that, unlike in a "normal" country, where people are born, live and die, a very large part of Singapore's manpower is permanently made of temporary imports, who will thus not be counted as residents during their unproductive years, i.e. in youth and in old age. By importing this temporary manpower, Singapore in fact outsources poverty - which is absolutely brilliant if you are a citizen, but maybe not so much if not. Right now, there are only 3.3 million citizens for a total population of 5.3 million, and out of the 2 million temporary immigrants, nearly all of them in employment, only 500 000 ("permanent residents") have any sort of retirement rights. Only the surrounding regional poverty makes that possible. As the old phrase goes, "Don't try this at home."

Following Adam Smith, who once famously quipped that "there is a lot of ruin in a country", i.e. there is necessarily a lot of dead weight, Paul Krugman is fond of arguing that countries are closed systems, not open systems like companies, where you can get rid of unwanted personnel or equipment, and hire or acquire new ones. In a country, you are stuck with the same citizens and the same physical capital, whether you like them or not. And you just can't close down the activity either. Krugman also stresses that running a country, where you trade with yourself 95% or so of the time, is very different from running a company, where you mostly trade with the outside world, and that, for all the aforementioned reasons, being a politician is thus in essence extremely different from being a CEO.

Well, thanks to its unique position as a transport and finance hub, plus Lee's policies, Singapore has probably become the closest that a country can get to being a company.

Overall, Lee Kwan Yew's main achievement thus probably lies in having got rid politically of his Malaysian hinterland, which would have been a huge drag on growth, and would have prevented Singapore from turning into an open system run by a CEO.

However, quite paradoxically, he is supposed to have strongly opposed independence at the time, in 1965.

The Jerusalem of the East

This in turns brings us to the thing that ALL the obituaries I read got really wrong. They  more or less repeated the Government's mantra that Singapore is a multi-ethnic society. Sure, that is not untrue internally, as, among residents, Malay and Indian minorities are treated not very differently from the Chinese majority, which represents 75% of the permanent population. But, more importantly, it is wrong externally and historically and it totally misses the big picture.

There are currently slightly more than 20 million ethnic Chinese (**) in the Muslim South-East Asian region which, these days, is politically split into Indonesia, Malaysia, and Singapore. They make up 7% of the population of the area. Historically, they are what Yuri Slezkine (***) has called a "mercurial people" playing, because of their own rootlessness, commercial intermediaries between local populations who consider themselves the "sons of the soil" and its rightful owners. In other words, they are in a way the Jews of South-East Asia, a rich and industrious population held in contempt by the Muslim majority.

After 1949, anti-Chinese sentiment became more violent, as the communist threat superimposed onto economic and ethnic resentment. There indeed was a mainly-Chinese communist insurrection in Malaysia. This, incidentally, parallels the rise of anti-semitism in Europe after the Bolshevik revolution, whose leaders were for a noticeable part Jewish.

Discriminatory measures and violent pogroms multiplied and have remained a staple of the region. In 1965, Singapore itself went independent because of particularly violent anti-Chinese riots in Malaysia.     

So, yes, Singapore is technically multi-ethnic, but it is foremost the redoubt of the Chinese diaspora in a hostile part of the world, and it owns a lot of its current prosperity to being the refuge for the better-off ethnic Chinese if things again go wrong in their home country, where they own a holiday flat, park their money and go to hospital. And this is why it spends so much on defence, has a two year national service and, with a permanent population of less than 4 million people, is the world's fifth-largest arms importer.

(*) See W. G. Huff - The Economic Growth of Singapore: Trade and Development in the Twentieth Century - Cambridge University Press, 1994

(**) Nearly 3 million in Singapore itself, 7 million in Malaysia and probably 10 to 12 million in Indonesia, half of these in nearby Java.

(***) Yuri Slezkine - The Jewish Century - Princeton University Press, 2005

Friday, 20 February 2015

The vanishing ability to take risks

These graphs are taken from an excellent new working paper [pdf] by Stephanie Schurer that analyses risk attitudes on a very large - 135K people - German sample and can thus make do with the "life experience" generational problem (e.g. people that came of age during an economic downturn tend to be more risk-averse) that plagues smaller samples. So, basically, we now have a fairly clear idea of what people's appetite for risk is throughout their adult life, and, in view of present demographic trends, there is nothing here for anyone to celebrate.

The obvious consequence is that the greying of rich, western societies is going to lead to a diminishing ability to innovate and disrupt, and thus to probably fewer productivity gains (*).

But wait, the worst is to come: there is little hope of being rescued in that respect by emerging economies, as risk appetency is also hugely correlated with both income and education.

Secular stagnation, here we come?

(*) There have been numerous papers these last few years purporting to show that there is no empirical link between a workforce's age and its productivity, which I find somewhat, er, baffling.

Monday, 2 February 2015

The worrying feminization of psychology

I have been reading a social psychology textbook recently and, when I last opened Goodreads, this is what greeted me:

Weird, right? OK, so maybe their algorithm is not very smart, but it most probably is not lying either: the data must be strongly pointing to a hefty correlation between reading psychology and, er, knitting. And, sure, as women nowadays routinely outnumber men 3 to 1 among psychology graduates (click to enlarge),

in fact this should not even be considered as surprising.

Now, I am a strong believer in diversity. On financial markets, for instance, I have seen culturally homogeneous banks run into trouble like clockwork. The dangers caused by groupthink should never be underestimated - and especially so in a soft science like psychology, where well-established, sobering facts are not that numerous and where quite a few of the results taught in undergraduate textbooks remain controversial.

So I do find this slightly worrying.

Wednesday, 21 January 2015

L'an prochain à Monte-Carlo? (*)

(*) Translates as: Next year in Monte Carlo?

A thoroughly ineffectual President, who lied his way into office and who had become extremely unpopular well before mid-term, indeed breaking unpopularity records as reality progressively caught on with him, is landed with a surprise large-scale terrorist attack, which gives him a huge popularity boost. Hollande, right? Yes, correct, as this graphic confirms:

But think, with hindsight, this is also close to what happened to one G.W. Bush after 9/11:

and ... the rest is history. To keep that external conflict-induced popularity, Bush went on to start a war with the first villain available in the Middle-East, Iraq, even though it was totally unrelated to 9/11 and a deep foe of Al Qaeda.

Now, G.W. Bush started from a much higher popularity level than Hollande, who is truly desperate, garnering not even 20% job approval in the months before Charlie Hebdo was attacked, and who needs any additional boost he can get before the next presidential election in a little more than two years.

So, a relevant question has suddenly become: who will France invade next year?

It has to be close to home, as the French are used to shrug off their numerous military expeditions in Africa, which never boost any incumbent's popularity, however spectacular they may be.

If I were Luxembourg, Andorra or Monaco, I'd start worrying.

Tuesday, 30 December 2014

If you teach economics, this may be the most important book published in 2014

I once taught economic policy in France to civil servants for several years in a row. Of course, I always considered that the most important part of the course was the one about the Solow model and productivity growth. As Paul Krugman once pithily and famously put it: "Productivity isn’t everything, but in the long-run it’s almost everything." (*) If I had been restricted to giving only one lecture in the course, this would be the one I would have given.

What was surprising is that, a couple of times, I stood in for colleagues towards year end, professional civil servants who taught the same course than I did but had unexpectedly had to quit teaching, having been called to a higher job, and then I discovered that they had skipped this all-important bit, and that I did have in fact to give their students that lecture.

That set me thinking and I made a quick survey of soft economics textbooks, which showed me that growth theory was not always, even seldom, taught to non-economics majors. So not only was productivity growth all-important, it was also under-taught.   

In the medium term, the main driver of productivity growth, of course, is technological progress, something which happens in a very unruly and haphazard manner - and cannot be centrally planned, contrary a misconception quite common among politicians and mandarins. To make that very fundamental point clear, I used to give out to students a short but quite illuminating text, Innovation, Components and Complements [PDF] written in 2003 by the great Hal Varian, who authored in the 1980s what is still the standard graduate Microeconomics textbook and then went on to become Google's chief economist.

So I was delighted to stumble this month on another text, How we got to now, [WSJ review, NYT review] book-sized this time but extremely entertaining, which raises nearly all the important questions about innovation while being very accessible, a compulsive,  beach-compatible and exhilarating read.  

Its author, Steven Johnson, a polymath with a literary degree, has already written several popular books about the history of technological innovation, but this one, companion to a PBS series, is the most thought-out and pedagogical. If I was still teaching, it would be on the top of the required holiday readings list for students, probably together with Tim Harford's Adapt

Highly recommended.

(*) The Age of Diminished Expectations, 1994

Thursday, 27 November 2014

Misunderstanding China, an ongoing topic

China is very large by most geographical standards. It is the most populous country on the planet. It now has arguably the largest single national economy - besides having an extremely ancient and distinct culture. So, well, it sort of does matter.

So, you would think that basic facts about China would be rather well known.

Think again. Misunderstanding it seems to be one of the most commonplace things on earth. Everyday journalists, politicians of all hues, academics of every possible kind of tenure, plus a huge number of self-declared pundits sprouting every kind of improbable brain colour or texture, brandish unchecked facts and gratuitous theories about China without having even bothered to check the country's all-important demographics and having tried to understand what they actually mean.

I was especially reminded of this yesterday when, looking for something that would fit into my new treadmill's narrow pulpit, I took out from a dark corner at the bottom of my shelves a book from 2005, which I had once unwisely bought on the strength of its enticing title (What Does China Think?) and of its flip-jacket recommendations (notably Chris Patten's - may he be cursed for an appropriate number of generations) then soon banished to down there.

It perfectly exemplified that what most "experts" fail to understand is that China will be old before it actually gets rich. Because they have not even heard of basic economic growth theory and, most of the time, do not even know what a partial derivative is (which makes them unable to understand the concept of productivity), nor have looked at what spectacularly happened to Japan post-1990 (blue line), or is now happening to Europe (green) though less to the more adaptable US (brown),

they cannot conceive that China's technocratic leadership, in front of all that well-grounded evidence, decided long ago that what really mattered was maximising per capita GDP in 2022 or whereabouts, when what is usually known as the 'Lewis turning point' is scheduled to occur: 

(This last graph is from one of Bei Xu's numerous papers for Natixis on the Chinese economy, all of them greatly recommended).    

So, yes, China is in a hurry to get rich and powerful - before declining, as a country's total factor productivity is unambiguously negatively linked to population ageing

This being a heavily managed economy, where local authorities play the role venture capitalists and institutional  investors play in genuine market economies, there are thus probably no worries to be had about Chinese economic growth in the next few years - though the obvious danger is that they try to artificially beef up growth in the run-up to 2022, a bit like what Japan spontaneously did in the run-up to 1990, to disastrous later effects.

As to why today's China - in spite of its huge frustraded hordes of angry nationalist young males created by the single child policies - is so unagressive compared to what Wilhelmine Germany used to be at a comparable economic development stage a hundred years ago, look no further: China could sure enjoy the sound of marching boots today and bask in an orgy of nationalism, but in 20 years' time, it will have to rely mostly on slipper-wearing pensioners for its defense. No enticement to go out, conquer and make enemies there.    

Having at last renounced Twitter and all his works and pomps, I will now endeavour to start posting seriously again on selected financial and economic misconceptions, a bottomless treasure trove of topics. I do apologize for the 18 month hiatus to the surprisingly high number of you that, according to Google, seem to have bothered to check this soon abandoned blog. I had no idea.  

Sunday, 17 March 2013

After Cyprus: what time the short squeeze?

There has been for the last 24 hours widespread hysteria among the commenting classes about the supposed Lehman II, The Sequel-type significance of the 6.5% to 9.9% haircut imposed this week-end on Cypriot account holders.

According to their myopic and apocalyptic reading, a moderate haircut on a few people who were getting large deposit rates (6% etc) for the best part of the last 3 years in order to compensate for the obvious and well-known risk of leaving their money in long-economically bankrupt Cypriot banks, will in fact trigger the mother of all bank runs in Southern Europe.

Obviously, the fact that the Eurozone crisis is foremost a political and institutional crisis, not a financial one, has been lost on them. I can understand the boringly traditional - I have seen it at work so many times - North American incomprehension at the complicated workings of a Continent with not one but - how mind-boggling! - several different national states. This failure to encompass European political issues basically makes Americans today routinely translate the Cyprus thing as the pan-European equivalent of the FDIC suddenly closing down for the whole of the US.

Well, as those guys probably will find out quickly enough next week, this ain't the US and this ain't the FDIC. Sell on Monday morning and get short-squeezed by XXXday afternoon is probably how it will run again, especially as the bank run in Southern Europe already happened a few years ago, remember those Target 2 balances? And getting short on old news is one of the surest recipes for disaster I know.    

In fact, the EU-wide decision of not getting European taxpayers to pay for the governance-free, intentional free-riding of another midget-state is probably the best medium-term news to come out of Brussels for a long, long time and shows some realism finally creeping into what has been so far a globally denialist management of the crisis. It at last shows national states that their responsibility actually starts somewhere and that not everything is permissible for ever, a healthy warning.

Greece was peripheral to European construction, and European taxpayers have paid dearly, but Cyprus is not even that. Frankly, who cares about it at all, except because we have to, thanks to some reckless accession treaty we once signed to please ... Greece. And as to the domestic political consequences of  the marginal difference of some "ordinary" Cypriots being taxed 6.5% of their cash holdings, instead of all law-abiding "ordinary" Cypriots - i.e. taxpayers - getting taxed, well, who could care? 

Tuesday, 5 February 2013

Did I hear the words "exchange rate policy"?

A quick reminder that anyone mad enough to want to meddle with the world's major currency pair, the euro vs the dollar, ought to be locked up for life in a lunatic asylum.

The last time a "concerted exchange rate policy" was put in place on the dollar was at the Louvre agreement in February 1987. G7 countries decided then that the dollar was "low enough" and that they would intervene if it did go any further.

The problem was that, in retrospect, it turned out to be not that low at all. And since it was "blocked" on the way down, then something else had to give, namely interest rates.  So up they went. 10y Treasuries, which yielded 7% in January, went down 17% in price, to a yield of 9.50% in late September. Then everything exploded and yields on Treasuries climbed up to 11% intraday on October 19th, causing the Dow to drop by an unprecedented 22.5% on that day.

And that is not all, since among the Louvre agreement's long term casualties was Japan, forced to keep domestic interest rates low in spite of a huge asset bubble, from which it has not yet recovered... 

Friday, 25 January 2013

Poll shows that the core values of French society are 1) envy, 2) distrust, 3) greed and 4) xenophobia.

What a beautiful country! Le Monde commissioned a poll from Ipsos along lines not that different from those of the World Values Survey. Full results are available here (in French) and they sure are a depressing read. This, basically, is the same society that gave overwhelming support to Vichy France, there can be no mistake about it. Nearly 70 years of economic growth since the end of WWII have brought just one small change, namely which semitic people the French have decided to hate: Jews are now sort of OK but Muslims (a nickname for Arabs) are the new arch-enemy.

While other societies can have greed without too much envy, the latter here is foremost. The French profess to hate money and take a moralising view towards it: 82 % agree to the proposition that "money has corrupted the traditional values of French society". But that is just about other people's money since
  1. 71 % of them also agree to the proposition that "it is a good thing to want to earn a lot of money"
  2. 58 % agree to "in order have social justice, money should be taken from the rich and given to the poor".
Now, the use of the conditional in proposition 2 is weird, but highly telling, since France is the country that assigns the largest share of GDP (around 1/3) to social transfers. Basically, it shows the strength of moral imperatives inherited from both catholic and marxist religions.

Please note that those who agreed to both propositions (up to 13% of French population) look like sort of uneasy about their relative status (too poor to be taxed or too rich to be left untaxed). I can't help but wish them an uneasy sleep...  

Also, but that's nothing new, 78% distrust deeply other people - though only 62% think their politicians are corrupt. So that should indicate that they think that ordinary people are more corrupt than politicians. And then, 65% want to increase the power of French politicians over Brussel's... A logical bunch they sure are.

And as to foreigners, 70% think there are "too many of them in France" although France is quite below the European, let alone OECD, average for the proportion of foreign-born residents. Particular spite is directed toward Muslims, which 74% deem intolerant.

Oh, and 87% think France needs a strong leader to put everything back in order. Marshall Philippe Pétain was not immediately available for comment. 

Wednesday, 23 January 2013

50 years of Françallemagne

The Elysée Treaty turned 50 this week, a grand occasion for official hypocrisy, reporting ineptitude and a garish mixture of flonflons and umpah. Here is my attempt to make some sense of what is being celebrated.

France always tried to think of itself as a Great Power on the world stage, which is all the more surprising since  it spent most of its modern life as clearly the underdog  in the (numerous) fights it picked up: with the Habsburgs in the 16th and 17th centuries, with Britain in the 18th century, with everyone in Europe under Napoleon and finally, to tragic consequences, with Germany after 1870, a silly border dispute that caused two world wars and resulted in 60 million deaths or so.

But then, in under twenty years, in spite of all the noise it kept making, it clearly became  a dwarf  in international politics. There were three stages in that fall:

  • first, 1940-45, when its legitimate government, Vichy's Etat français, sank into collaboration with Nazi Germany before being swept away with it. To cover-up, De Gaulle started the official lie that France was part of the victors, with a seat on the UN's Security Council, which prevented France from looking hard at its fabric and has greatly concurred to keep-it reform-free.  

  • second, Suez in 1956, when the United States told it, as well as Britain and Israel, to pack up their field victory, go play in their room and stop bothering grown-ups. Suez  was a defining moment for all three countries, all of them wowing for such a thing to nether happen again to them, but choosing widely different paths towards that goal. Britain and Israel cozied up to the US, hence the "special relationship", while France decided to go it alone and build its own nuclear might.  

  • and finally when it gave up the last remnant of its colonial Empire, Algeria, in 1962. It was then left as a moderately significant European country, a tad larger than the European average, for sure, but with little real clout left.

Nevertheless, it went on pretending being a world power, thanks to two crutches:

  • blackmailing the US, a "bribe me or else" strategy initiated by De Gaulle, which was particularly effective and credible in view of the impressive size of the "enemy within" in France, namely a huge and highly organized French Communist Party, which used to and collect between 20 and 25% of the popular vote and to this day has never been blacklisted by French society as an enemy of democracy.

  • making use to its own advantage of Germany's terrible criminal record. In the 1950s, the FRG, slightly more populated than France but economically much better organized, was denied a formal role in international institutions because of its past. It desperately wanted a new, clean reputation, and being friends with its former arch-enemy seemed a no-brainer to that effect. Moreover it refused on principle, for commendable therapeutic purposes, to do anything that could in any way remind of its pre-1945 militarism. It was thus clearly anxious to acquire an ally that could speak for it on the international stage and eventually use force, which it had so thoroughly renounced. It thus went out of its way to please France, claimed to be its equal or even its vassal, paid for every French whim, even the most harmful (like the absurd Common Agricultural Policy, which ate up most of the EU's budget for 35 years in subventions to mainly French farmers and ... did in fact a lot of long term harm to France by keeping its agriculture backward) and allowed France to continue to travelling first class with a second class ticket both militarily and diplomatically.

The Elysée Treaty of 1963 is cynical transcript of those policy imperatives, a mere consequence of the balance of power that resulted from 1945, 1956 and 1962. So, is there a lot to celebrate? Well, not really, as its vaunted achievement, peace between France and Germany, was brought not by it but rather by a general disgust for war after the orgy of killings that took place in WWII, and kept by demographic forces, foremost of which is Germany's aging, and by economic integration.