Tuesday, May 31, 2011

The Perils of a Two-Speed Union

I always learn a lot from cab drivers, if only by hearing perspectives first-hand.  My latest lesson came from a cab driver in northern Italy.  This older gentleman had been a project engineer for a very prestigious German corporation, but when it moved he chose to eschew the big city life and stay home, taking over his father's cab.  Such a choice would be virtually unthinkable in the U.S.  This gentleman was no stereotypical welfare state European as imagined by American minds, though.  A question about local cuisine prompted a lengthy and welcome lesson on Italian history.

"Italy is imaginary," the cab driver told us.  He explained the familiar story of the geographic lines that historically divided the peoples of Italy into separate entities, often organized as city-states, each of which had its own dialect, or even its own language.  A town 15 kilometers away from his, he asserted, really had its own language that he could not understand.  I do not know enough about Italy to know if these dialects are still widely known, but I do know that this was the case in many of the countries of Europe until the not-too-distant past.  The Discovery of France, by Graham Robb, is a wonderful story of the localism of France, for example.  So, the cab driver continued, it was only during football matches or questions of national insults that he declared himself Italian, thumping his chest with the word.  Otherwise, identity was much more local.  This is no surprise.

But add to this a political and economic dimension and perhaps the local particularities are growing.  The north-south split in Italy has long been recognized.  Robert Putnam, for example, wrote about it in Making Democracy Work: Civic Traditions in Modern Italy, for example.  Our driver continued, explaining about the hard working nature of the north and the industry there, yet, "Our taxes are the highest in all of Europe.  They all go to Rome, and foof," blowing in his hand he mimicked their disappearance.  Politics, he suggested, had failed in their accountability to people like him, the voters.  Instead, the various local and regional iterations of the mafia, along with the Vatican, held veto power over the political realm and kept it in a dysfunctional stasis.

This is only one perspective, but it is representative of a larger sentiment that resents the redistribution of progressive tax policies.  This engenders support for what The Economist calls "secession of the successful."  This thought is applicable from the level of local municipal policies, where the rich (from California to Brazil and elsewhere) choose to provide their own services through private contract, whether in the form of schools or gated communities with security, to countries (e.g. the feelings of this northern Italian), to international unions like the E.U. where Germans bemoan the redistribution of their structural funds to profligate southern European states.  Where unions are perpetually two speed, I do not see how this centrifugal force can be counteracted.  Even so, respected academics addressing, for example, the imperative for the EU to accept the immigrants coming from the North African disaster, insist that Europe will have to figure out how to make the best of the situation and accept these unskilled refugees, while completely ignoring the existing centrifugal forces that reside within the union.  The confluence of these issues with upcoming domestic elections in Europe may prove explosive.

Monday, May 23, 2011

The Changing Distribution of Per Capita GDP Over Time

Another way of looking at the data I'm working with on GDP per capita at PPP.  The below graphic shows the distribution of GDP per capita in 1980, 1990, 2000, 2010, and forecasts for 2015.  Using per capita figures takes out the disparity in population size, showing a truer measure of prosperity.  I broke the distribution of incomes down into blocks of 5000.  That is, the plot for 5000 represents all countries with a per capita figure of 5000 or less.  In the chart, you can see that the world is growing more prosperous:  Fewer countries reside at the lower end and are spreading out across the distribution.  There is also a "lump" breaking away from the pack in the middle income category between 1980 and 2000.  Between 2000 and 2015, that middle income lump is splitting into two.  What is harder to see on this plot (I'll work on it) is that there are a few mega-rich states (the leader being the oil and gas sheikdom of Qatar) running far away from the pack.  The line trailing out is at zero, but the few bumps on their way to 115,000 are individual countries breaking far ahead of the pack.

In the second figure, each country's per capita GDP is plotted in sequence.  Here, the jumps in the line show discontinuities between groups of countries with the growing peak at far right showing those few mega-rich states.

The data show that the world is clearly growing richer, but also that it is doing so at several speeds.  This should be no surprise.  It does, however, heighten inequality between countries.  Instead of being mostly poor and remaining that way, countries are growing richer, but at different rates.  While this is a good outcome, for some (cynics, realists, and opportunists) it is a second-best outcome after growing rich right now quicker than everyone else.  Also, while individuals may be content as they grow richer, inequality in progress alters regional and global power structures, which may have some disconcerting effects for zealots that will be manipulated by populists or opportunists.  Inequality may drive discontent and may drive conflict, even in a world that is getting richer across the board.

All data is from the IMF's World Economic Outlook dataset.

Distribution of Per Capita GDP at PPP in 1980, 1990, 2000, 2010, and 2015
Per Capita GDP at PPP Plotted Sequentially

Sunday, May 22, 2011

Visualizing Inequality

Stemming from a comment on my last post, I've put together some preliminary data on inequality.  The first two figures concern interstate inequality.  The charts are based on the IMF's World Economic Outlook dataset.  I've charted four different measures of data variation:  standard deviation, variance, skew, and range.  I have divided some of the parameters by factors of ten so that all can be charted on the same axis.  The intent is to show the trend in the data.  All measures of inequality are on the increase except for skew, which is relatively static, but positive.  This means that the tail of the distribution is on the right.  That is there is a larger group of low-income countries and a smaller group of higher income countries.  The first figure shows the measures for GDP at purchasing power parity (PPP) for all 185 states in the dataset.  The second figure shows the measures for per capita GDP at PPP.  The statistics are not very fancy.  If anyone has any comments for better measures, I'm all ears.

Causality is a different question, but I would argue that, for many reasons, countries benefit from global competition and trade differently, leading to increases in interstate variation.  Within some countries, economic development lowers inequality, while in others it sharply increases it.
Measures of variation of GDP at PPP
Measures of variation of per capita GDP at PPP

Saturday, May 21, 2011

Thoughts on Globalization from the Azores

Patio de Alfandega - Linked from Wikipedia in Portuguese

Accidents of geography, the Azores Islands are the verdant peaks of nine towering mountains in the middle of the Atlantic Ocean.  Situated at the confluence of the African, North American, and Eurasian tectonic plates, the islands are a product of the volcanoes that spurted from these seams.  Centuries ago, these scars on the seam of the earth helped link the continents together commercially under the leadership of the Portuguese Empire.  The museum at Angra do Heroismo on Terceira Island boasts that Portugal led the way to globalization.  While this is a stretch, it is certainly true that Portugal presided over the widest trade network to the time, and the Azores were a critical pivot.
The islands hosted major trading and resupply ports for the routes linking Europe, Africa, North and South America, and even India.  The explorer Vasco da Gama stopped in Angra on the return trip from his expedition to India.  His brother, Paulo, who had grown sick on the journey, died in Angra and is buried in a church there.  Standing at the Pátio da Alfândega (Customs Courtyard), which overlooks the port and is flanked by an imposing cathedral (the Igreja da Misericórdia) and the old customs house, one can imagine the bustling activity as caravels came and went to exotic destinations, as well as the mainland ports of Europe, bringing all manner of wares.  The port and the city are sleepy, now, as global trade has moved on.  Even the airbase there, once a necessary stopping point for military and commercial aircraft alike, is used much less.  Technology and new trends in trade are the hallmark of the new wave of globalization.  While they make many new champions, some nodes become obsolete and decay.  More than just the Azores, the North Atlantic as a whole is becoming passé in some minds as trade thickens between the global south.  Far from being a great equalizer, globalization lays some old heroes low while exalting others.  Some, too, remain untouched by this wave, as they have been by past waves.  It seems that, if anything, globalization and rapid development heighten inequality within and across borders.

Saturday, May 14, 2011

The Saudi Oil Sinkhole

Friday's Financial Times reported on Saudi Arabia's booming oil consumption, which threatens to eat ever larger portions of its vast production.  Saudi currently uses 3.2 million barrels of oil per day, making it the eighth largest petroleum consumer in the world.  The chart above uses 2009 data, which is the latest dataset available from the U.S. Energy Information Administration, at which time Saudi's consumption was only 2.4 million barrels per day.  The 30 percent increase over the past two years is not reflected in the chart.  If reforms are not enacted, Saudi consumption is projected to grow to 8 million barrels per day in 2028, against a current production that bounces around 9 million barrels per day.  By comparison, the U.S. consumes 18.8 million barrels daily.  When you consider the population of each country, the U.S. uses only half of what the Saudis do per capita; despite being a far more advanced economy with greater industrial and transportation needs.  In the 2009 dataset, Qatar, UAE, and Kuwait outstripped Saudi consumption per capita, but it seems that Saudi has since caught up to all but Kuwait.  All but Oman and Bahrain use far more than the U.S.  A significant culprit in this is the subsidies that Gulf states pour into energy for domestic consumption, encouraging wasteful practices (like having an indoor ski slope in one of the world's hottest and driest places).  Yet, the Gulf monarchs are probably not eager to remove these props at a time when they are especially sensitive to stirring up any more public dissent.  The problem with the current Gulf model of development is that it is predicated on heavy industries, opulent developments with lush grass in the middle of the desert, massive buildings, and so forth, all of which require petroleum to fuel and run on utilities that are heavily subsidized. Once these supports are removed, the model will change entirely, making it far more difficult to sustain a model that has already been over-speculated.

What is more, these sectors are staffed largely by expatriate specialists (from the West and some high-skilled professionals from the developing world) and laborers (mostly from south Asia).  The heavy industry and real estate projects are an attempt to balance the oil sector with new rent opportunities.  Unfortunately, the projects are not creating sufficient job opportunities for local nationals with respect to their skill level and desired mode of employment.  That is, the local educational systems are not putting out enough skilled professionals to displace those upper level expats, while the locals do not want to do the labor that will displace the low-skilled expats.  The transformation required is significant and will take some time to enact.  Really, it will be a generational change and likely will be significantly destabilizing until a new mode of socio-economic and political organization is found in the Gulf.

The data comes from the U.S. Energy Information Administration for consumption data and World Bank and U.S. Census Bureau for population statistics.

Saturday, May 7, 2011

More Charts - GDP Shares 1990-2016

Here are some more charts to ponder.  These ones are drawn from IMF data, showing various countries/groups percentage of global GDP, first at current dollars, then at purchasing power parity (PPP) from 1990 to 2016 (IMF forecasts after 2010).

The charts show the declining share of world GDP of the advanced economies (83% 1990, 63% today, 58% projected 2016), the Euro area (25, 19, 16), and the U.S. (27, 23, 20).  In contrast the BRICs (5, 18, 22), emerging Asia (5, 15, 19), and particularly China (1.8, 9.5, 12.4) are on the rise.  You'll note that China's numbers certainly don't come close to America's, but the gap has been closed very quickly.  Also, India, one of the BRICs, still lags in the single digit percentages even into mid-decade.

At PPP, the numbers read a little differently, largely owing to the distortions in currency valuations, particularly the Chinese renminbi.  This has the U.S. with a smaller share (24, 19, 17) and China with a significantly larger percentage (3.9, 13.6, 17.99).  The Euro area, too, has a smaller percentage (21, 14.5, 12.4), while the advanced economies as a whole (69.2, 52.3, 46.5) dip below the 50 percentile range by the end of the forecast period.  These are significant statistics that point to the relative decline of both the U.S. and particularly her allies in the face of emerging world powers.  Throughout the period, U.S. GDP has risen significantly on both measures, so the U.S. is not in absolute decline.  Its absolute economic power continues to grow, but the emerging world is closing the gap.

Current dollars


Friday, May 6, 2011

Labor Participation Rates - Updated

Look at these trends for civilian labor participation rates from the Bureau for Labor Statistics.  Time period covered is 1948 to 1Q 2011.



Total Population

If the images don't come through, here's a quick description.

Labor force participation rate for both sexes peaked at 67.1 percent in 1997-2000, declining thereafter to a low of 64.7 percent in 2010, bringing participation down to a level last seen in 1985.  When you look only at males, removing the effect of more females joining the workforce over time, the trend is shocking.  Labor force participation has been on a steady decline since 1948, when it stood at 86 percent, to today’s rate of 70.4 percent (1st quarter 2011).  Women’s participation climbed steadily through most of the period from around 33 percent in 1948 to a peak of 60 percent in 1999 and 2000.  Their participation, too, has trailed off slightly since then to 58.3 percent in the first quarter of 2011.

Participation began to drop in 2Q 2001, before the recession and before 9/11.  So what explains this inflection point?  9/11 did not sharpen the drop.  The overall rate remained in the 66 percent range until 4Q 2008 (with one previous dip to 65.9), when it began a steady decline to the current 64 percent.  So the recession sharpened the drop, but did not start the decline.  I need to do more research to come up with plausible explanations, which I'm sure have already been offered.

Here's a chart of compensation per hour increases from Greg Mankiw's blog (see right side menu for a link).  This shows a sharp drop in the rise in compensation per hour starting at around 2000, roughly coinciding with the beginning of the decrease in labor force participation.  What caused the drop-off of wage increases?  Is it related to the change in participation?  Previous inflection points in this chart came when labor force participation was still increasing or steady.

Wednesday, May 4, 2011

A Time of Violence

A major theme of my new book is inequality.  No socialist am I, however I believe that inequality is a driver of instability and conflict.

E.H. Carr, who is strangely characterized as both the author of the textbook of realism, The Twenty Years' Crisis, and a leftist, spoke to this in his work.  He wrote, "The inequality which threatened a world upheaval was not inequality between individuals, nor inequality between classes, but inequality between nations."  On the last page, he concluded, "The more we subsidize unproductive industries for political reasons, the more the provision of a rational employment supplants maximum profit as an aim of economic policy, the more we recognize the need of sacrificing economic advantage for social ends, the less difficult will it seem to realize that these social ends cannot be limited by a national frontier..."  Yet, the national welfare state, or the lip service paid to it, does delimit these social ends at a national frontier.  Thus, we have extremely sharp gradients of inequality across borders, leading to a great degree of insecurity and instability.  Here, I am not arguing for global communism, but only making an observation.

At the same time, inequality is growing within nations at a significant rate.  These trends, combined, yield a growing feeling of insecurity, political polarization, and violence.  This was noted by Hector Abad Gomez, a Colombian doctor and human rights activist, in the last article he penned before militants assassinated him in 1987.   “We are living in a time of violence.  A violence born of the feeling of inequality.  We could do away with violence if the world’s riches, including science, technology and morality – those great human creations – were distributed more evenly across the Earth.  This is the singular challenge facing all of humanity today.”[1]

Consider the following, summarized from a recent OECD paper.

From the mid-1980s to the late 2000s, while income grew in OECD countries by an average of 1.7 percent per year, countries’ top earners’ incomes grew faster than those at the bottom of the economic ladder, leading to growing inequality.  On average in OECD countries, the top 10 percent of the population earns 9 times that of the bottom tenth.  Israel, Turkey, and the U.S. have a 14 to 1 ratio, while in Chile and Mexico, the inequality is 27 to 1.  This inequality can be measured by a statistic called the Gini coefficient, where a zero means perfect equality and 1 means that one individual earns all the nation’s income.  This coefficient increased in 17 of 22 OECD countries during the period in question.  Interestingly, some of the more equal countries, such as Finland, Sweden, and Germany, recorded the largest jumps in inequality, meaning that the level of inequality is converging between the 0.25 and 0.35 levels.[2]

[2] “Growing Income Inequality in OECD Countries:  What Drives It and How Can Policy Tackle It?” OECD Forum on Tackling Inequality, (Paris, May 2, 2011),, (accessed May 4, 2011), 5-6.

[1] Hector Abad Gomez, “De Donde Proviene La Violenca,” El Mundo, (Medellin, Colombia: August 26, 1987).