The Flying Geese Paradigm (FGP) is the graphic presentation of the three time series curves of import, production and export of a product. It is a dynamic situation in which a follower, in pursuit of development, emulates the industries of advanced economies in a manner compatible with its own factor and technological endowments at a given specific time.
In simple terms, it means that an underdeveloped country starts to import foreign goods. Over time, the entrepreneurs in the country understand the function and benefits of making the product themselves. They set up plants to manufacture the product either on their own or in collaboration with foreigners. This undertaking is called import-substitution production. As the production process gets more familiar and streamlined, the output is increased. Also, more investment is made to set up more plants. Beyond the domestic consumption threshold, the output is exported, thereby making foreign exchange for the country. This whole cycle of evolution is known as the FGP.
The FGP doesn’t seem to work in this country especially in the case of Proton. After 27 years of operation, they are still unable to come up with their own product. What they are doing is literally rebadging foreign made cars. This means they are still stuck in the first phase of importing cars. Exporting their own cars remains a pipe dream.
Wednesday, October 27, 2010
Monday, October 25, 2010
Economic malaise
The 2008 mortgage credit crisis caused massive wealth destruction – especially in the developed nations. The people generally became poorer. Consumption diminished and the economies moved into lower gear. To revitalize the economies, the governments resorted to fiscal expansion, monetary loosening and quantitative easing.
Fiscal expansion is the action of the government to speed up the implementation of physical projects. The government pumps in more money to construct better infrastructure. As a result, jobs are created and this will give consumption a boost. Hopefully, the economy will improve. The flip side of fiscal expansion is that the government will run a budget deficit. The bigger the deficit, the more venerable is the currency to depreciate.
Monetary loosening is the lowering of interest rate in an economy. It is hoped that with a lower cost of funds, entrepreneurs will borrow more money to expand their business. This will create jobs and hopefully stimulate the economy. Again, ‘cheap’ money is weak money. There is no incentive for holding this currency. Hence, its tendency to depreciate.
If the above measures don’t work, then the last resort is quantitative easing. QE is the printing of new money and pumping it into the system. The intention is to make money easily available so that businesses will boom. However, with the economy still sluggish and job creation slow, this extra money is not helping much.
Instead, this money is finding its way to the developing economies. With interest rate at near zero at home, it is more profitable to invest in countries that have positive interest rates, such as the BRIC countries. The movement of this money has the effect of driving up the currency of the investee countries. Indirectly, this is driving down the currency of the countries that practiced QE.
So, willy-nilly, if you have huge budget deficits (especially those funded by foreign borrowings), low or no economic growth and high unemployment, you currency will be under pressure. That is market forces at work.
Fiscal expansion is the action of the government to speed up the implementation of physical projects. The government pumps in more money to construct better infrastructure. As a result, jobs are created and this will give consumption a boost. Hopefully, the economy will improve. The flip side of fiscal expansion is that the government will run a budget deficit. The bigger the deficit, the more venerable is the currency to depreciate.
Monetary loosening is the lowering of interest rate in an economy. It is hoped that with a lower cost of funds, entrepreneurs will borrow more money to expand their business. This will create jobs and hopefully stimulate the economy. Again, ‘cheap’ money is weak money. There is no incentive for holding this currency. Hence, its tendency to depreciate.
If the above measures don’t work, then the last resort is quantitative easing. QE is the printing of new money and pumping it into the system. The intention is to make money easily available so that businesses will boom. However, with the economy still sluggish and job creation slow, this extra money is not helping much.
Instead, this money is finding its way to the developing economies. With interest rate at near zero at home, it is more profitable to invest in countries that have positive interest rates, such as the BRIC countries. The movement of this money has the effect of driving up the currency of the investee countries. Indirectly, this is driving down the currency of the countries that practiced QE.
So, willy-nilly, if you have huge budget deficits (especially those funded by foreign borrowings), low or no economic growth and high unemployment, you currency will be under pressure. That is market forces at work.
Thursday, October 21, 2010
Snippets on Japan
The Nikkei stock index hit an all time high of 38,915.87 on 29 Dec. 1989.
Nikkei 225 reached a 26-year low of 6994.9 in October 2008.
In Ginza district, choice property fetched US$1.0 million per sq. metre in 1989. By 2004, it had slumped to 1 % of its peak. Similarly, residential prices in Tokyo shed 90 % of its value during the period.
In 1990, Japan accounted for 14 % of the world economy. Today, it account for just 8 % of the pie.
The population of Japan is 127 million today. It is expected to fall to 100 m by 2050.
Japan’s debt to GDP is 200 %. USA’s is about 100 %.
Liquidity trap – interest rate is set at zero and aggregate demand consistently falls short of aggregate supply potential. In simple language, the money supply is increased and the interest rate kept near to zero to encourage borrowing and spending. However, the corporations preferred to pay down their debts with their earnings and consumers deferred their spending in the hope of cheaper goods in the future. Japan was in such a situation during the lost decade.
The lost decade – from 1991 to 2000 when the Japanese economy went into a recession as a result of the asset bubble bursting.
Nikkei 225 reached a 26-year low of 6994.9 in October 2008.
In Ginza district, choice property fetched US$1.0 million per sq. metre in 1989. By 2004, it had slumped to 1 % of its peak. Similarly, residential prices in Tokyo shed 90 % of its value during the period.
In 1990, Japan accounted for 14 % of the world economy. Today, it account for just 8 % of the pie.
The population of Japan is 127 million today. It is expected to fall to 100 m by 2050.
Japan’s debt to GDP is 200 %. USA’s is about 100 %.
Liquidity trap – interest rate is set at zero and aggregate demand consistently falls short of aggregate supply potential. In simple language, the money supply is increased and the interest rate kept near to zero to encourage borrowing and spending. However, the corporations preferred to pay down their debts with their earnings and consumers deferred their spending in the hope of cheaper goods in the future. Japan was in such a situation during the lost decade.
The lost decade – from 1991 to 2000 when the Japanese economy went into a recession as a result of the asset bubble bursting.
The Yuan conundrum
The US is accusing China of artificially depressing the value of the Yuan. They said that China uses this to gain a competitive advantage on the world market for its exports. The more hawkish congressmen even alleged that China’s cheap export is causing job losses at home. The US manufacturers are unable to match China on the price of their produce.
So, is the Yuan really undervalued? The answer is probably yes. By how much is anybody’s guess? But, one thing is clear. A revaluation of the Yuan will in no way solve any of the US economic woes.
For China, the constant pressure from the west on its exchange rate is a big bugbear. How can it engineer a strategy and will pacify the rest of the world and at the same time not cause civil strife and economic slowdown in the country.
China has a foreign reserve of about $2.65 trillion. Of this, about 65% is held in US dollars. If China were to revalue its Yuan, then it would suffer a huge loss on its dollar holdings. If it decides to sell dollar to buy Yen or Euro, it would depress the value of the greenback. This would again result in losses for China.
The only way out is for China to revalue its Yuan slowly. Agradual increase in the value of the Yuan will result in higher household consumption. Exports will be affected slightly. On balance, the lost of foreign consumption would be compensated by domestic ones. This would have minimum impact on employment.
China cannot act in haste because of the foreign pressure. If it revalues too quickly, exports would be badly affected. This would force exporters into bankruptcy or move abroad. Workers would lose their jobs and their aggregate household income would drop. This would result in reduced domestic consumption. That would be the dreaded double whammy for China.
So, is the Yuan really undervalued? The answer is probably yes. By how much is anybody’s guess? But, one thing is clear. A revaluation of the Yuan will in no way solve any of the US economic woes.
For China, the constant pressure from the west on its exchange rate is a big bugbear. How can it engineer a strategy and will pacify the rest of the world and at the same time not cause civil strife and economic slowdown in the country.
China has a foreign reserve of about $2.65 trillion. Of this, about 65% is held in US dollars. If China were to revalue its Yuan, then it would suffer a huge loss on its dollar holdings. If it decides to sell dollar to buy Yen or Euro, it would depress the value of the greenback. This would again result in losses for China.
The only way out is for China to revalue its Yuan slowly. Agradual increase in the value of the Yuan will result in higher household consumption. Exports will be affected slightly. On balance, the lost of foreign consumption would be compensated by domestic ones. This would have minimum impact on employment.
China cannot act in haste because of the foreign pressure. If it revalues too quickly, exports would be badly affected. This would force exporters into bankruptcy or move abroad. Workers would lose their jobs and their aggregate household income would drop. This would result in reduced domestic consumption. That would be the dreaded double whammy for China.
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