Economy
U.S. Should Increase Exports To Avoid Another Recession and Financial Crisis
Howard F. Rosen of The Peterson Institute for International Economics presented a testimony on International Trade to the Senate Finance Committee Subcommittee this month. He argues that “In order to avoid another financial crisis and recession, it is imperative that America produce more than it consumes and increase the amount of goods and services it exports.”
The following are some of the key takeaways from his interesting testimony:
- Only 4% of the U.S. companies export
- Just five hundred companies account for 60% of all U.S. exports
- 58% of exporting companies trade with only one country
- Exporting firms produce twice as much and employ twice as many workers as nonexporting companies
- US exports of Goods and Services account for just over 10% of the GDP. This is much less than the figure for other countries such as China, Canada, Japan, etc. as shown in the table show below:
- The US economy is dependent on foreign capital due to low household savings and rising government and private debt
- Since 2000, the US net debtor position has been increasing at a rate of 23% per year which is more than four times the annual growth of the US economy
- The only way the US can get out of the economic mess is to increase exports significantly
- Since 1977, we have been consuming more than we produce and hence the gap between consumption and production rose to 5% of the GDP in the last three decades
- To reduce our dependence on foreign capital, we must increase the national saving rate and reduce the federal budget deficit
- Printing more money is not an option since it “brings back images of Germany in the 1920s, Hungary immediately after World War II, and Argentina, Bolivia, and Israel during the 1980s, when store prices changed several times a day.”
- Individuals must reduce their own debt since the total outstanding household debt is $13.7 Trillion, a little less than our Total GDP
- Increasing exports would create plenty of high-paying and sustainable jobs thereby eliminating the “jobs deficit” currently weighing down the economy
- Since the US has comparative advantage in many products, we must improve both the quantity and quality of products and services we export
- Similar to other countries the US should offer more incentives for firms to export. Funding for export promotion efforts must be raised since it fell by an average of 8% every year from 2004 thru 2008
Singapore Leads the Top 10 Asian Cities of the Future List
The fDi Magazine has published the Asian Cities of the Future 2009/10 list. Singapore tops the rankings followed by Tokyo and Shanghai.
The selection methodology:
“fDi Cities of the Future shortlists are created by the independent collection of data by fDi Benchmark across 133 Asia-Pacific cities. This information was set under six categories: economic potential, human resources, cost effectiveness, quality of life, infrastructure and business friendliness. A seventh category was added – FDI promotion strategy. In this category, 24 Asia-Pacific cities submitted details about their promotion strategies and this was assessed and scored by the independent judging panel.
Cities could score up to a maximum of 10 points for each individual criteria, which were weighted by importance to give the overall scores. Where data was available only at a national rather than city level, a lower weighting was generally applied.”
Hong Kong came in at 4th and Seoul was ranked the 5th. In addition to Shanghai the two other Chinese cities included in this list are Guangzhou and Beijing.
The Latest External Debt Position of European Countries
The credit rating agency Standard & Poors downgraded Greece’s credit rating today.Last week Fitch downgraded Greece’s rating. Both the agencies cut the credit rating due to the country’s huge debts. The public debt of Greece stands at $442B and its public deficit is about 13% of GDP.
In Debt Fears rattle Europe the Journal notes that the Euro tumbled to $1.4505 yesterday. Austria nationalized Hypo bank on ECB’ s orders and there are new fears that another Austrian lender may be in trouble as well. Hypo bank is the sixth largest bank in Austria and ran into trouble due to hidden losses from its exposure to Eastern Europe.
The European countries with huge budget deficits are Portugal, Ireland, Italy, Greece and Spain which are now dubbed as “PIIGS” by traders.
The External Debt of Greece stands at $552B at the end of Q2,2009 as the table shows below. The external debt rose a massive 481.87 % in 2008 due to wasteful spending by Greek politicians.Most of the money went to fund social spending and high wages paid to public workers many of whom were hired by politicians to show their gratitude for electing them.This is why Greece continues to be the poorest country in Europe and its credit rating
was downgraded.
Gross External Debt Position (in US$ millions)
| Country | 2008Q4 | 2009Q2 | Change in percentage |
|---|---|---|---|
| Austria | 832,753 | 832,416 | -0.04% |
| Belgium | 1,354,299 | 1,271,796 | -6.09% |
| Bulgaria | 51,456 | 51,811 | 0.69% |
| Croatia | 54,769 | 57,678 | 5.31% |
| Czech Republic | 80,428 | 80,074 | -0.44% |
| Denmark | 588,776 | 607,375 | 3.16% |
| Estonia | 26,843 | 25,332 | -5.63% |
| Finland | 339,454 | 364,850 | 7.48% |
| France | 4,935,009 | 5,021,325 | 1.75% |
| Germany | 5,158,439 | 5,208,468 | 0.97% |
| Greece | 504,612 | 552,791 | 9.55% |
| Hungary | 215,265 | 220,295 | 2.34% |
| Ireland | 2,355,639 | 2,386,612 | 1.31% |
| Italy | 2,328,235 | 2,567,067 | 10.26% |
| Latvia | 42,257 | 39,597 | -6.29% |
| Lithuania | 32,473 | 32,263 | -0.65% |
| Luxembourg | 2,020,065 | 1,994,299 | -1.28% |
| Netherlands | 2,461,402 | 2,452,293 | -0.37% |
| Norway | 475,919 | 548,104 | 15.17% |
| Poland | 243,477 | 248,689 | 2.14% |
| Portugal | 484,710 | 507,002 | 4.60% |
| Romania | 102,181 | 106,677 | 4.40% |
| Russian Federation | 480,479 | 475,561 | -1.02% |
| Slovak Republic | 52,527 | 63,429 | 20.76% |
| Slovenia | 54,608 | 53,204 | -2.57% |
| Spain | 2,316,545 | 2,409,516 | 4.01% |
| Sweden | 617,309 | 669,097 | 8.39% |
| Switzerland | 1,304,956 | 1,338,732 | 2.59% |
| Turkey | 278,146 | 268,559 | -3.45% |
| Ukraine | 101,654 | 100,576 | -1.06% |
| United Kingdom | 9,041,357 | 9,087,661 | 0.51% |
Source: The World Bank
Portugal, Ireland, Italy and Spain also have high external debt levels. Italy’s external debt increased by over 10% from the start of the year thru 2Q,2009.
High Economic Growth Does Not Guarantee Strong Investment Returns
Is there a strong correlation between high economic growth and strong investment returns?. A recent study of economic growth in 14 industrialized countries by Orbis, the global asset management partner of investment management firm Allan Gray of South Africa, proves that there is very little correlation between growth in real dividends per share over the 20th century and economic growth.
Chart - Real Dividend Growth Per Share and Economic Growth
Via Equinox.co.za
Many investors mistakenly believe that high-growth countries will deliver high investment returns. The study used real dividend growth per share instead of earnings since earnings are impacted by accounting changes over the years. Dividend growth is a good indicator of returns delivered to shareholders.
From the chart above, we can infer that Japan had an annual real GDP growth of 4.2% in the 20th century. But it had a negative dividend growth rate of 3.3% per year during the period. Italy, Belgium, France, Germany, Spain, the Netherlands, Switzerland and Ireland also had positive GDP growth but negative real dividend growth.
Even when the real GDP and dividend growth rates were going in the same direction, the differences between the two rates were too high.Canada, USA, the UK and Australia had this scenario.
Overall it is not the high-level economic or industry conditions that affect a company’s performance. Rather it is the competition and individual performance that determines a company’s financial success.
The above theory holds true when we look at the high growth economies of India, Brazil and China. Very people invest in the companies domiciled in these countries for their dividend growth. Similarly in the US, during the dot com era people invested for the overall GDP growth and a company’s earning growth rather the real dividend growth.
Household Savings in China, India and South Korea
The household saving rate in Asian countries like India and China continue to be much higher than the U.S. personal saving rate. In the U.S., the personal saving rate as a percentage of disposable income was just 4.4% in October this year. This rate is actually higher than where it stood in 2008. In the first quarter of last year it was just over 1%. From 2008, the rate has been increasing and reached 5% in the second quarter this year as consumers saved more of their disposable income and reduced consumption.
Source: BEA
The latest edition of Finance and Development magazine from the IMF, has an interesting article titled “Rebalancing Growth in Asia”.
National and Household Savings
The following is a summary of main points about household savings in China, India and South Korea:
- In India, since the 2000s household savings have remained the major source of national savings, amounting to about 20 percent of GDP
- In South Korea, household savings has fallen as a percentage of GDP since the 1990s
- China’s household saving rate reached 28% in 2008 after rising consistently from 1991
- The household saving rate as a percentage of disposable income in India has increased to an incredible 32% in 2008 from about 20% in 1998
- South Korea’s saving rate has fallen from about 30% in the 90s to just 7% in 2007
It is interesting to note than during periods of tremendous economics growth in India and China, the household saving rate has increased nicely.This is in sharp contrast to the US where the personal saving rate actually decreased to almost negative levels during the high growth period of the 1990s.
USA Ranks 114th in the Happy Planet Index
The GDP is the most commonly used standard to measure the growth and development of countries. It has many flaws such as the exclusion of variables like the quality of life. Another factor that is also widely recognized is the Human Development Index (HDI). It measures the average of income measured by GDP, health measured by life expectancy and education measured by literacy/enrollment. Similar to GDP, the HDI is also not a complete representation of all aspects of growth and development of any economy since it ignores variables such as the quality of life, the relationship between current income and growth, etc.
The London-based independent think-and-do tank New Economics Foundation(NEF) developed a new measure called the Happy Planet Index (HPI) back in 2006. It measures “the ecological efficiency with which human well-being is created around the world. The HPI reflects the average years of happy life produced by a given society, nation or group of nations, per unit of planetary resources consumed. Put another way, it represents the efficiency with which countries convert the earth’s finite resources into well-being experienced by their citizens. The Global HPI incorporates three separate indicators: ecological footprint, life-satisfaction and life expectancy.”
HPI = (Life Expectancy x Life Satisfaction)/Ecological Footprint
where Life Satisfaction is calculated based on surveys and others are hard variables.
According to this index, Costa Rica is the happiest country in the world. The USA stands at 114 just one step above Nigeria and one rank below Madagascar.
The 2009 Happy Planet Index Rankings are shown in the graphic below:
Click to Enlarge
Rich countries fall in the middle of the rankings. The Netherlands is the highest ranked among Western countries and comes in at 43. Similar to Costa Rica, many of the countries that top the list are small islands including Jamaica, Dominican Republic, etc.
A few important take-aways from the THE ^UN HAPPY PLANET INDEX 2.0 report are:
- No country successfully achieves the three goals of high life satisfaction, high life expectancy and one-planet living.
- Whilst most of the countries studied have increased their HPI scores marginally between 1990 and 2005, the three largest countries in the world (China, India and the USA) have all seen their HPI scores drop in that time.
- It is possible to live long, happy lives with a much smaller ecological footprint than found in the highest-consuming nations.
- More dramatic is the difference between Costa Rica and the USA. Costa Ricans also live slightly longer than Americans, and report much higher levels of life satisfaction, and yet have a footprint which is less than a quarter the size
In the executive summary the authors of the report write “In 2008, Americans voted for ‘change’ and ‘hope’ above else.” With one year in office, is our President Obama fulfilling their expectations?
