Month: April 2004

What happens if we extrapolate current trends to 2050? What will debt to gdp ratios look like around the world? A few estimates:

1. For 25 major OECD economies, the ratio will rise to 47 percent by 2010 and 139 percent by 2050. Most of these countries would risk eventual downgrading to junk status.

2. In 2050 Japan would have the highest debt to gdp ratio, namely 718 percent. The Czech and Poland would have the next most serious problems.

3. Among the current Eurozone countries, Germany would fare the worst with a ratio of 307 percent. The ratio in the US would be 158 percent.

4. For purposes of contrast, Great Britain, right before WWII, a fiscally pressed time, had a debt to gdp ratio of 188 percent.

5. The countries with the smallest future ratios include Luxembourg, the UK, Sweden, Spain, Ireland, and Australia. Those countries have more favorable demographics and smaller burdens from their pension systems. Those ratios lie in the range of 40 to 60 percent.

6. The fiscal impact of aging far outweighs the costs of German unification.

OK, this is crude extrapolation. But keep in mind that social security benefits are often fixed by law or politically hard to alter. Growth rates might improve, but on the other hand longevity could increase.

The estimates are from Standard and Poor’s, reported in The Financial Times of 1 April 2004, “Sovereign Ratings Under Threat.” Sorry I have no permanlink from this antiquated Parisian computer terminal but it is subscription only anyway.

Addendum: Alex suggests I could have titled the post “r>g,” don’t worry if you don’t get the joke.

The Dow Jones Industrial average will be dropping AT&T, Kodak and International Paper. Welcome Pfizer, Verizon and AIG, an insurance group. Verizon was once part of AT&T which is something like Ken Griffey, Sr. being benched in favor of his son, Junior. Reuters reports that it has happened before:

Both Verizon and SBC Communications Inc., added in 1999, were among the seven companies carved out of AT&T in an antitrust ruling in 1984. Mr. Prestbo said this is the third instance in which descendants have taken the place of broken-apart parent companies to represent their respective industries in The Dow. ExxonMobil Corp. is a combination of two descendants of Standard Oil Co. (New Jersey), broken up in 1911. Boeing Co. and United Technologies Inc. trace their lineage to United Aircraft Corp., which was split in 1934.

The Dow Jones average started in 1896 with 12 stocks. Only General Electric is still around in its original name from those halcyon days, a tribute to GE (though it has dropped out and come back as this nice historical summary from the Motley Fool points out) and the dynamic nature of the American economy.

I don’t trust the figures, but did you know that China’s per capita income has been estimated at $890 a year, circa 2002, well under that of Guatemala ($1670) or Morocco ($1180)? Guest blogger Russ Roberts cites a slightly higher and more recent figure of about $1000.

That being said, how might you expect growing trade between China and Japan to affect the Japanese economy? The wage differential for semi-skilled labor is about a factor of twenty. Russ also cites worries that trade with China will weaken or impoverish the United States.

Here are a few simple facts:

1. In 2003 Japan’s trade with China, including Hong Kong, rose by nearly a third to $162 billion.

2. Exports to China leaped 40 percent in this same year.

3. A few years ago accepted wisdom was that trade with China would destroy Japan’s manufacturing base. Now observers say that “Even Japan’s “old economy” industries, such as steel, pulp, chemicals, shipbuilding and construction equipment, have been handed a new lease of life.” (Financial Times, March 30, “Crossing the Divide” ($)).

4. Trade with China is widely viewed as bailing out Japan, which was otherwise stuck in more than a decade of virtually zero growth. Japan buys cheap Chinese inputs, and supplies the Chinese manufacturing boom.

5. It is estimated that only about 20 percent of Japanese and Chinese products compete in the same markets. For the most part the two countries produce complementary goods.

The information is from the Financial Times article cited, here is a related link with some roughly comparable statistics.

My take: Won’t any facts convince individuals of the merits of free trade? Surely if any set-up would lead to falling wages in Japan, trade with China should do the trick. In reality it has been a godsend to the Japanese economy. That being said, the Japanese should expect more volatility. In the long run I am bullish on China, but I expect a bubble to burst within the next five years. Has any country made the climb into modernity without a collapse along the way?