Blogs: Kathleen M. Packard
Hungary is heating up. The country’s nationalist government has gotten its share of criticism for its erratic policies in the past, but the country’s economy has unexpectedly accelerated. “Hungary’s economy grew faster than economists estimated in the first quarter as manufacturing and construction output improved, providing a boost for the freshly re-elected government of Prime Minister Viktor Orban,” according to Bloomberg News. “Gross domestic product rose 3.5 percent from a year earlier, the quickest pace since 2006, the Budapest-based statistics office said today, citing preliminary data.” And business and consumer confidence has been growing apace as the economy outperforms projections.
Still, there are doubters. Low inflation, falling FDI and an enfeebled banking sector are fuelling concerns over Hungary’s economic outlook,” wrote Elliott Wilson in Emergingmarkets.com. “Hungary’s economy is facing a toxic combination of low inflation, tumbling foreign direct investment and an autocratic government determined to interfere in the country’ banking system, analysts have warned. Foreign direct investment (FDI), a key measure of the strength of this outward looking economy, was negative in the first nine months of 2013, according to the OECD.”
The Wall Street Journal reported: “Hungary's central bank will revamp its monetary policy tools to push local banks to buy more Hungarian forint-denominated government bonds with the aim of reducing external borrowing and boosting growth.” The central bank wants to reduce the level of foreign currency debt.
The architect of the new banking policy and economic growth is generally considered to Gyorgy Matolcsy, who was Economics Minister until recently. The New York Times’ Danny Hakin wrote: “Few central bankers are as quotable as Gyorgy Matolcsy.”
There was the time Mr. Matolcsy, head of Hungary's central bank, said, "Hungarian tribes 1,500 years ago were well known for their three unique skills: brain surgery, hospitality and gastronomy." Or when, echoing the views of a Korean economist, he wrote that "the telegraph and the washing machine have made a real revolution in society," but "the Internet hasn't." Or when he proclaimed that the Hungarians and the Japanese are related because some of their babies have red dots on their backsides.
His policies are equally unorthodox.
Having previously served as economics minister, Mr. Matolcsy is the financial architect of the populist and autocratic Fidesz party, which consolidated its power in elections this past Sunday. The government, led by Prime Minister Viktor Orban, has promoted the nation's improving economic outlook, falling unemployment rate and easing deficit.
But critics have assailed Mr. Matolcsy for his initiatives as central bank chief and economics minister, and wonder whether they will catch up to Hungary in the long run — and undermine the democratic ideals and free markets that are supposed to underpin the European Union.
Matolcsy seems concentrated on the short run. The long run will have to wait.
Germany gets a lot of criticism these days. That is the price of success and economic health. Critics thinks you should be doing things better – even if what you are doing is much better than whatever everybody else is doing.
The New York Times economics correspondent Neil Irwin has argued: "Europe has been forced to fix its internal imbalances.... largely [by forcing] steep cuts in wages and benefits on the southern European countries so that they can regain competitiveness against Germany.
But there’s an easier way (or what should be an easier way). Middle-income German workers could be paid more. They could use those higher salaries to consume more, whether German-made widgets, vacations in Greece or Spanish wine. That would mean lower trade surpluses for Germany, lower trade deficits for Southern Europe, and less German savings being recycled into Greek or Spanish debt. Higher incomes for working-class Germans would mean a more prosperous, financially stable Europe — and it wouldn’t be too shabby for German workers, either.
Reuters reported: “Germany should pursue reforms to narrow the social divide in employment and pave the way for more sustainable growth, the Organisation for Economic Co-operation and Development (OECD) said on Tuesday. Europe's biggest economy has proved resilient amid global financial turmoil and the euro zone debt crisis, and German unemployment stands at post-unification lows even as job losses mount elsewhere in Europe.” OECD Secretary General Angel Gurria declared: "Germany is doing very well, but our aim is to make sure that everybody is on board.
The same day, “German Chancellor Merkel hosted a star-studded group of A-listers on Tuesday in Berlin. The meeting in the Chancellery included the heads of the Organization for Economic Cooperation and Development (OECD), more commonly called the 'club of rich countries'; the International Monetary Fund (IMF), the World Bank, the World Trade Organization (WTO), and the International Labor Organization (ILO),” reported DW.com. In their post-meeting press release, the world leaders declared that it was their goal “to improve living conditions for all people worldwide and to protect the natural resource base and the Earth's systems … also for future generations."
Meanwhile, there has been an increasing chorus over the last year about whether Germany is spending enough to replace its aging infrastructure. Last June, Der Spiegel reported: “From the outside, Germany appears to have a robust economy. But a new study by a leading economic institute reveals that the country is investing far too little in infrastructure and its future, effectively saving itself to death....Germans save more money than most living in the industrialized world, but they invest very little in their future, making them much weaker economically than leading politicians realize. But according to a new study by the German Institute of Economic Research (DIW), Germany is saving itself to death. One area in serious need of investment is the country's roadway system.”
So under the new economics, German thrift is bad. Perhaps a little more thrift around the world would have saved the world from the great Recession of 2008.
It’s spring but the world is gloomy. There may be plenty of bulls on Wall Street, but their still a lot of bears around the bears – bears worried about the fate of kidnapped girls in Nigeria, student protestors in Venezuelan, religious tolerance in India, and bombed out towns in Syria. Many are also depressed by the state of the world’s economy.
The headline in the Financial Times told part of the story: “Survey shows gloomy mood of EU voters.” The article by Gordon Smith began: “Two-third of French voters believed the state of their country’s economy was worse than it was a year ago and felt less secure in their jobs, according to an opinion survey conducted for the Financial Times.”
The French are on the leading edge of gloom, according to Jean-Daniel Levy who led the survey team: “French people have no confidence in politics and are worried about unemployment and they think they will not have enough money for tomorrow.”
In Europe, Euroskepticism – as reflected by parties like the UK Independence Party – is one of the few growth industries. As Tony Barber wrote in the Financial Times: “The reality is...that citizens have learnt from the mismanagement of Europe’s monetary union not to trust politicians and technocrats who blithely promise that ‘more Europe will automatically deliver economic prosperity and stability.” Barer wrote: “The paradox of European unity remains today....The ultimate purpose of this idealistic cause is to enrich, in the widest sense, the lives of Europe’s people, in ever larger numbers, are resisting what is deemed best for them.”
Things are not much better in Asia where courts have recently removed Thailand’s prime minister. Before President Barack Obama embarked on a tour of Asia, the New York times’ Mark Landler wrote: “From South Korea, where public outrage is surging in the wake of a ferry accident that has claimed the lives of scores of teenagers, to Malaysia, where the authorities face harsh scrutiny over their handling of a missing jetliner, Mr. Obama will encounter leaders under pressure from angry, often grief-stricken constituents.”
In the Phillippines, the government has labored to recover from withering criticism of its response to Typhoon Haiyan last fall. Even here in Japan, Prime Minister Shinzo Abe was tripped up by the 2011 Fukushima nuclear disaster and faulted last summer for playing down the leaking of highly radioactive water from the plant.
So the recent emergence in Ohio of Jillian and Jenna Thistlethwaite, monoamniotic twin babies holding hands offered a rare ray of hope. May Jillian and Jenna be sheltered from central bank monetary policies as long as possible.
Debate continues about the role of the Chine renminbi as a reserve currency. As the portion grows of the world economy in Chinese hands, so does the portion of world trade settled in Chinese currency. Reality confronts worry.
Back in February CNBC reported that a “survey of 200 institutional investors - 100 headquartered in mainland China and 100 outside of it - published by State Street and the Economist Intelligence Unit on Thursday found 53 percent of investors think the renminbi will surpass the U.S. dollar as the world's major reserve currency.” Ansuya Harjani wrote that “skeptics of yuan internationalization argued that the renminbi will never be liquid enough across all asset classes to serve as a viable reserve currency, and that people will not trust the renminbi as a store of value.” The survey itself reported:
The Economist’s Banyan columnist has written: “Some 18% of China’s foreign trade is now settled in yuan, a proportion the Hong Kong Monetary Authority expects to reach 30% next year. Some central banks already hold a small chunk of their countries’ foreign-exchange reserves in yuan. Economists even talk of an emerging “yuan bloc”, encompassing China, Hong Kong, Taiwan and the ten members of the Association of South-East Asian Nations. The globalisation of the yuan seems remorseless and unstoppable.
Eswar Prasad, an economist and author of a new book on the global monetary system, “The Dollar Trap”, is less sure. He points out that the internationalisation of a currency has three essential aspects. In the first, its use in settling trade and financial deals, the yuan is well advanced. But it has barely started on the second, the liberalisation of China’s capital account so that the yuan can be freely converted with other currencies at market rates. Without that convertibility, much deeper domestic financial markets and a floating exchange-rate, the yuan will not achieve the third essential—becoming a global reserve currency, such as the dollar, euro, yen, sterling or Swiss franc. For now, the yuan’s exchange rate is tightly managed, to the irritation of trading partners, which believe it is kept artificially cheap.
In an interview with the New York Times, Prasad argued: “I expected the dollar to weaken because the crisis exposed problems in the U.S. financial system. Moreover, the U.S. racked up a lot of government debt and the Fed began flooding the global financial system with dollars. The more dollars there are out there, the less value they should have. But the exact opposite happened. The dollar, if anything, gained slightly in value.
Contrary to all expectations, the U.S. dollar’s position as the world’s dominant reserve currency has been strengthened by the crisis. The world became even more dependent on the dollar than it had been before the crisis.
What the renminbi debate ignores is that substituting one reserve currency for another simply changes the evil. It does not transform the evil. Only a gold standard can do that.
“New data from the World Bank suggests China could surpass the U.S. as the world’s biggest economy as early as this year, a day that was always meant to arrive after China began its quest for wealth in the 1980s, but it will just veil the reality of its economic weaknesses,”reported TIME’s Michael Schuman
China’s economy is catching up to the U.S.’s much more quickly than anticipated. That’s according to a new report from the International Comparison Program of the World Bank.
The study recalibrates GDP statistics based on updated estimates of “purchasing-power parity” — a measure of what money can actually buy in different economies. In the process, the economy of China comes out far larger than we had previously thought. Its GDP surges to $13.5 trillion in 2011 (the latest year available), compared with the $7.3 trillion calculated using exchange rates. That catapults China’s economy much closer to that of the U.S. — at $15.5 trillion. Forecasting ahead, these figures show that China could overtake America as the world’s largest economy as early as this year.
Before it gets bigger, China has been slowing, however. “China's economy is slowing as it shifts away from growth based on exports and investment in real estate and factories and toward growth fueled by consumer spending,” reported the Associated Press’s Paul Wiseman and Joe McDonald. “The country is also contending with a surge in debt fueled by loans from state-owned banks. Outstanding credit has surged from the equivalent of 130 percent of China's economy in 2008 to 200 percent last year, according to Capital Economics.”
China, meanwhile, has been putting its money to work in the United States. It is easier for Chinese companies to operate in the United States than the reverse – as the recent public offering of Alibaba demonstrated. In reviewing the success of Alibaba, Bloomberg Businessweek reported: “While the Chinese government doesn’t ban U.S. companies from operating in China, it doesn’t make their lives easy. Regulators seem eager to target foreigners for alleged misdeeds. Walmart is a particularly juicy target; the government has penalized the retailer for offenses such as mislabeling fox meat as donkey meat.”
The Chinese economy did show new signs of life in April – boosting both exports and imports after showing a trade deficit unexpectedly in February. China itself seems to be downplaying its growing economic muscle. The Wall Street Journal’s Paul Magnier blogged: “In a Monday editorial by the state-run Global Times, the paper said the idea that China’s economy tops the world “is not nonsense,” but doesn’t reflect the way most Chinese feel.”
The official Xinhua news agency echoed this sentiment, explaining that PPP is of secondary importance, since China continues to lag far behind the U.S. economically. Its GDP per capita, for instance, is less than one-seventh that of the U.S. “This country has come a long way,” the agency said. “But it remains — undeniably — a developing country with too many fish to fry.”
Fish or no fish, what’s going on here? It appears the “world’s largest economy” headlines have hit a nerve with China’s leadership. With growing employment concerns, rising social stress and the challenge of dealing with the country’s pollution, the new leadership team under President Xi Jinping is trying to focus attention more on the quality of GDP output rather than on growth for its own sake, analysts said.
While it is at it, the Xi government might try leveling the economic playing field.
BY KATHLEEN M. PACKARD: