Chinese Development Follows a Well-Worn Path
And that May Be Good News for China and Her Neighbors
“The rapidly growing economy produced a high demand for labor, especially among young workers such as the rural migrants. The possibilities for sales outstripped the ability to produce (given the relatively labor-intensive techniques of the time), bringing about a labor shortage. This produced relatively high wages, even for those without a high school education.”
That quotation sounds like a perfect description of the contemporary situation in China. But it’s not; it’s a comment by Ikuo Kabashima, political economist and governor of Japan’s Kumamoto Prefecture — discussing Japan’s post-war rise as the “world’s workshop.”
China’s economic success is driving higher wages and a shift from an export-driven manufacturing economy to one more balanced by the consumer and service sectors, and by innovation and high value-added production. We shouldn’t be surprised by this process; it’s the same one that Japan and South Korea followed before China. Just as the mantle of the “world’s workshop” passed to China after Deng’s reforms, China’s economic success is already pushing manufacturing to other developing nations in Asia and beyond. Those countries may not yet have the synergy of infrastructure and production ecosystems that China has — but eventually they will, and the current migration of low-cost manufacturing will help them build it.
The Service Sector Climbs in the Chinese Economy
Rising Labor Costs Put Pressure on Manufacturers
Manufacturers are paying higher costs in China, for many reasons: land prices are rising; environmental legislation is becoming more stringent; the Yuan has appreciated in value, etc…
Looking For the Next Workshop
What are the economies to which manufacturing is migrating?…
Who is Reaping the Rewards?
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Ethanol Tanks on Fuel Consumption Decline
The high-point of U.S. gasoline consumption was in 2007. Since then, high global oil prices, sluggish growth during the aftermath of the Great Recession, and increasing fuel efficiency have all worked together to keep consumption down. This summer, we’ll be about where we were 12 years ago:
Source: Energy Information Agency
In that peak year, the Bush administration mandated the blending of ethanol into the nation’s gasoline supply. The mandate failed to envision a future in which consumption might be falling, and is set to grow each year in absolute terms — potentially exceeding the 10 percent national threshold of ethanol in a gallon of gasoline. Although refinery output of gasoline will increase just 20,000 barrels a day from 2012, ethanol blending will mechanically tick up by 5,000 barrels a day…
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Another Swing at “Too Big To Fail”
In the U.S., anti-big-bank sentiment is heating up. Legislators and Fed officials alike are mooting plans that go beyond U.S. regulations and international financial standards in their pre-emptive response to the risk of future financial crises.
The potential effects of such stringent requirements are unclear. The requirements may address some of the risks that Dodd-Frank and Basel III have both failed to tackle — but they may also turn out to hamstring banks in crucial ways.
A bipartisan bill in the U.S. Senate, sponsored by David Vitter and Sherrod Brown, proposes that banks with more than $500 billion in assets would need to up their capital reserves to 15 percent. Goldman Sachs analysts calculate that this requirement would mean an additional $1.2 trillion for the banks affected, implying years of foregone dividends for shareholders and a permanently lower return on their equity.
If the largest banks didn’t like that, they could always break themselves up — which is perhaps the motivation behind the proposed law. The Senators sponsoring it believe that Dodd-Frank doesn’t contain the risk — and they say they have 40 votes in the Senate already.
Further, they want to go beyond the capital requirements of Basel III — the new voluntary international standards being adopted globally in the wake of 2008’s crisis. While Basel III’s capital requirements differentiate in their weighting between more solid assets (such as U.S. Treasuries) and less solid assets (such as asset-backed securities and corporate paper), U.S. regulators are proposing scrapping such distinctions and treating capital requirements very simply…
Personally, we disagree that more capital is bad, and that interconnectedness is the main issue. Yes, banks are interconnected. So what? They have always been interconnected. More capital, and less risk-taking is good; it is good for the U.S. and good for the world economy.
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