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Why is Asia doing so badly?
Here is more bad economic news from Asia. Yet those countries don't have banking crises as many other nations do. So what exactly is up?
The usual story is that these nations are "heavily dependent upon exports." But if I may wear my Don Boudreaux hat for a moment (or more), is not the state of Kentucky also heavily dependent upon exports? Is not the Cowen household heavily dependent upon exports? Why is being dependent on exports so especially bad for parts of Asia?
One answer is that Asian exports, which travel great distances, are often consumer durables and such purchases are especially easy to postpone. Services are often more robust.
Another answer is that many Asian producers have chosen high fixed costs in a way that requires steady or rising revenue over time. That is their version of being highly leveraged without taking on much explicit debt. Again a central lesson of this depression will be how many different ways there are to leverage.
Last week I was surprised to read this:
“For a long time, Harvard had a negative 5 position,” she said. “That means that 105 percent of the assets are invested at most times.”
So far it seems that the least leveraged parts of the world -- all things considered -- are South America and sub-Saharan Africa. Brazil, Chile, and Peru are a few of the countries which, in relative terms, are suffering least. If you wish to understand the course of events, keep your eye on those locales.
Posted by Tyler Cowen on March 5, 2009 at 08:12 AM in Economics | Permalink
Comments
didn't harvard just start providing tons of financial aid for low-income students? I wonder if that's going to change.
Posted by: ardyan at Mar 5, 2009 8:29:49 AM
Tyler, Thanks for posting this question. Earlier you indicated that you had read all through my blog, so I'm guessing that you can anticipate my response. Since October I have been arguing with anyone who would listen (Greg Mankiw, Robert Barro, Larry Ball, John Cochrane, Robert Lucas, James Hamilton, etc.) that we have tragically misdiagnosed the problem. What's driving the entire world economy down is not the banking crisis, but rather falling AD (Showing up in much lower nominal GDP.) This is a failure of monetary policy, and can only be fixed by expanding the supply of money a bit faster than the demand. Yes, the banking crisis triggered the rise in money demand, but the falling AD (which did not occur for the first 10 months of the crisis), is an entirely separate issue.
Posted by: Scott Sumner at Mar 5, 2009 8:33:44 AM
Some day microeconomics texts writers will wake up to the fallacy of fixed vs. variable costs. You won't find it in accounting, and business managers and investors don't recognize the distinction. All costs are fixed at the moment they are incurred, and all costs are variable if you wait long enough. Rothbard has a good smasheroo of this in Man, Economy, and State.
Re: service industries vs. consumer durables, what matters more is that the latter are more capital intensive and require greater initial investment, hence often more debt.
Posted by: anarchy is peace at Mar 5, 2009 8:55:59 AM
Your Boudreaux hat baffles me. Sure we can think of Kansas as an exporter, but aren't there pretty obvious reasons why "export" demand in Kansas is going to behave differently than "export" demand in China?
Posted by: Luis Enrique at Mar 5, 2009 9:17:12 AM
Mr. Sumner-
Perhaps I'm missing your point.
Are you saying that the money supply was expanded too quickly and that has led to our current problem? If so, I would definitely agree. It's so very easy to expand the money supply when all you have to do is print it or punch a button on a computer.
The AD didn't fall immediately because people don't change their habits overnight. Excessive consumption is like excessive eating or drinking, once you get used to it it's hard to stop. It took awhile for people to realize that their jobs were in jeopardy. It took awhile to find out that their houses weren't just overvalued by 5 or 10%, but by much, much more. It took awhile for their 401k's to take a major beating. Only once the picture of just how badly the Fed and the gov't has screwed things up did people stop buying and start saving. The AD has shifted from a demand for more stuff to a demand for savings (i.e. safety). Even now- many people put on a brave face and expect that things will start to turn around by year's end- but it doesn't take much probing to get them to confess that they don't really believe it and they know that they've been swindled.
I am (for as long as I can be) a residential remodeling contractor. I'm no economist or academic. I began building my business at roughly the same time as Greenspan flooded the country with cheap, easy credit. The new bubble formed- and I hired employees to keep up. I spent a small fortune training them. I learned lessons the hard way (any business growing at a clip of 30-50% per year probably will)- these lessons always come with a price tag. I worked hard to help my clients live the good life- with gourmet kitchens, luxury master baths, additions to their homes so their kids would have 'their own space',etc. Was this wise investment by them or me? Was it useful for the suppliers and subcontractors to gear their business to the economy that was created by Greenspan? I used to have 14 employees with family wage jobs and benefits- now I have zero.
However, I'm not complaining. I'm not looking for a handout, bailout, stimulus plan, subsidy or whatever. I merely want the waste and excess to be flushed from the system. I want there to never be an opportunity for a man or small group of people to be able to do so much damage again. I do not want AD spurred through a political process that rewards the few and destroys many. I don't want the game to be rigged anymore. I want there to be real capital invested in real tangible assets that have real value.
Again- perhaps I'm missing the point. I'm, after all, just a (public) high school educated regular schmoe.
Posted by: BK at Mar 5, 2009 9:21:40 AM
anarchy, "All costs are fixed at the moment they are incurred, and all costs are variable if you wait long enough"
Precisely. No contradiction here. If you don't have to wait very long, it's a variable cost. If you have to wait relatively much longer, it's a fixed cost. In the very long run, they too are variable. Service industries tend to have a higher proportion of variable costs. Large scale goods manufactures tend to have a higher proportion of fixed costs over any given time period you might look at. If you reduced your output last month and it had a large impact on your total costs, you are probably not a large scale manufacturer. If you had a large reduction in output last month and it barely touched total costs, people hours are probably you biggest input.
Posted by: clinton at Mar 5, 2009 9:36:03 AM
I believe this is the link you are looking for.
Chinese Factory Worker Can't Believe The Shit He Makes For Americans
"Often, when we're assigned a new order for, say, 'salad shooters,' I will say to myself, 'There's no way that anyone will ever buy these,'" Chen said during his lunch break in an open-air courtyard. "One month later, we will receive an order for the same product, but three times the quantity. How can anyone have a need for such useless shit?"
Indeed.
Posted by: 8 at Mar 5, 2009 10:22:01 AM
I believe that the only countries in the world to do better in 2008
than in 2007 were certain of the better managed sub-Saharan African
ones, exporting higher priced commodities while largely disconnected
from the crashing, global financial system. The stock market in Ghana
rose 60% last year. Of course, now that most of those commodity prices
are down, they may also be suffering some.
Posted by: Barkley Rosser at Mar 5, 2009 11:16:19 AM
Raivo Pommer
raimo1@hot.ee
Gegen krise
Die norddeutschen Länder wollen gemeinsam beim Bund für ihre Verkehrsprojekte kämpfen. Hamburgs Bürgermeister Ole von Beust (CDU) sagte heute nach einem Treffen mit den Regierungschefs von Schleswig-Holstein, Niedersachsen, Bremen und Mecklenburg-Vorpommern, Berlin müsse sich der Hinterlandanbindung der Häfen und der Infrastruktur mehr widmen: "Wichtig ist uns, dass der Bund verstärkt einsteigt." Aus dem Konjunkturprogramm I sei nicht genug angekommen. "Da geht es darum, das aufzustocken." Bremens Bürgermeister Jens Böhrnsen (SPD) betonte: "Dazu gehört auch, dass wir (...) deutlich machen, dass der Anteil des Bundes an Hafeninvestitionen und vor allem auch an der Hafenunterhaltung viel zu gering ist."
Posted by: böhrsens story at Mar 5, 2009 3:18:26 PM
Brazil? I had to rub my eyes, Tyler; their banks stopped lending too. The FT sprang to mind instantly:
"Brazil was widely said to have decoupled from the rest of the world because its increasingly vibrant economy has become less vulnerable to destabilising forces from overseas. Thrown off course by the Russian and Asian crises of the late 1990s, it had until recently weathered the current global crisis better than many expected.
But decoupling came under severe questioning this week after the release of some alarming economic data. . . .investors were rattled this week when figures for December showed Brazil’s economy apparently hitting a brick wall.
Industrial output slumped by 14.5 per cent year on year while, seasonally adjusted, more than 200,000 jobs were lost in the month, mostly in manufacturing. Both figures reversed recent steady gains, and were the worst on record."
Posted by: wha? at Mar 5, 2009 10:42:46 PM
wha?
Posted by: Delirious at Mar 5, 2009 10:43:42 PM
Exports? When was the last time the US depended on exports of other than currency? Forty years ago?
Posted by: Lord at Mar 6, 2009 12:42:21 AM
What is AD?
BK - great post.
Posted by: bill at Mar 7, 2009 10:00:18 AM
Asians play their own corrupt leveraging games. Its always been known that their banking and financial systems are more opaque and corrupt than ours. This is why they had the currency crisis in 1998. Remember how the U.S. finance industry was held up as a paragon of transparency and efficiency during the Asian currency crisis and how something like that could "never happen here? Remember that? Because I sure as hell do. I was living in Japan and Malaysia at the time and remember hearing about how much better our finance people and system was supposed to be. Famous last words.
Since our finance system turned out to be completely over-leveraged and corrupt, and Asia's economy falls more than expected, one can only assume that they were playing some kind of leverage game and got bit in the ass (again) when our system came down. In other words, they learned nothing from 1998.
At least this is the most plausible explanation I can think of.
Posted by: kurt9 at Mar 7, 2009 4:24:30 PM
Japanese banks are also doing poorly. Masaaki Shirakawa, President of the Bank of Japan, announced today they will consider providing up to JPY 1 trillion (approx USD $10 billion) in subordinated loans to help banks shore up capital bases. Mr. Shirakawa explained that with banks' falling stock prices, they may be falling short on cash and be reluctant to lend. The policy is aimed at improving willingness to lend.
Sound familiar?
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