The three major trends that shaped the global economy for decades are about to change

DEMOGRAPHICS CAN explain two-thirds of everything, University of Toronto professor David K. Foot famously quipped.

And according to Charles Goodhart, professor at the London School of Economics and senior economic consultant to Morgan Stanley, demographics explain the vast majority of three major trends that have shaped the socioeconomic and political environments across advanced economies over the past few decades. Those three would be declining real interest rates, shrinking real wages, and increasing inequality.

Goodhart & Co.’s contentions aren’t necessarily novel, with versions of these conclusions having been articulated by Toby Nangle, head of multi-asset management at Columbia Threadneedle Investments, and given a US focus by Matt Busigin and Guillermo Roditi Dominguez, portfolio managers at New River Investments.

But Goodhart’s work is a particularly thorough and forceful manifesto.

The conditions that fostered these three intertwined major developments are nearly obsolete, writes the former member of the Bank of England’s Monetary Policy Committee and other analysts from Morgan Stanley, and this has profound implications for the framework of the global economy in the decades to come.

Goodhart argues that since roughly 1970, the world has been in a demographic sweet spot characterized by a falling dependency ratio, or in plainer terms, a high share of working age people relative to the total population. At the same time, globalization provided multinational companies the ability to tap into this new pool of labor. This positive supply shock was a negative for established workers, forcing down the price of labor as capital flowed to these areas.

“Naturally, and quite properly, the West supplied much of the management; the East supplied the labor,” wrote Goodhart.

Outsourcing labor to less costly locales kept wages at home from rising too fast. This, in turn, entailed that inflationary pressures were benign, as best depicted by the concept of the Great Moderation, or the idea that central bankers were better able to stabilize the business cycle.

As companies were encouraged to boost capacity with workers rather than capital equipment, this put downward pressure on the cost of the latter.

“Access to a new reserve army of cheap global labor through globalization has encouraged companies to invest in this workforce rather than in capital at home. A garment company, for example, could choose to build a highly automated, capital-intensive factory in the U.S. or build a low-tech, high-labor factory in the Far East,” said Nangle, who published a column on the connection between labor power and interest rates in May. “For years, companies have been choosing the latter option, which reduces the requirement for capital in the West, thereby reducing the price of that capital.”

Subdued inflation -- attributable to the ability to access cheaper workers outside domestic borders -- also ensured that monetary policy did not get too restrictive. This was conducive to asset price appreciation. The wealthiest segment of the populace own the vast majority of financial assets, and saw the value of their portfolios rise at a rate far faster than wages at the lowest end of the scale. This exacerbated income and wealth inequality within advanced economies.

And if demographics can explain two-thirds of these phenomena, then the particular policy mix instituted by China’s authorities surely explains the remainder.

“China’s economic markets joined the global economy but its financial markets did not,” writes Goodhart. “When China’s labor force joined the global economy with a capital/labor ratio that was well below global standards, the relatively closed financial markets allowed China’s domestic real interest rate to remain very low in order to drive capital accumulation at home.”

The ensuing savings glut in China was recycled back into US Treasuries, and put downward pressure on real interest rates. As such, the abundance of cheaper labor was only one avenue by which the world’s second-largest economy contributed to these global trends.

So what now, as the conditions that fostered these long-decades-defining demographic trends dissipate?

As dependency ratios rise, with a greater share of retirees relative to workers, “all three trends could reverse,” argues Goodhart.

One implication, elucidated by FT Alphaville’s David Keohane, is that intergenerational warfare, rather than battles drawn between class lines, is poised to rear its ugly head.

And as for Thomas Piketty? Well, his thesis may have reached its best-before date -- if it was even on the mark to begin with.

“So, we believe that demographic trends were one of the main causes of rising (within country) inequality in recent decades; and it was nothing to do with some innate tendency for returns to capital to exceed growth,” wrote Goodhart’s team in a direct challenge to the French economist’s tome, Capital in the Twenty-First Century.

The anatomy of income inequality over the past few decades has been increasing within countries, and decreasing between countries. Goodhart sees income inequality falling in both cases going forward.

A shrinking labor force relative to dependents in advanced economies will work to quell income inequality within countries, while a stretch of stronger growth from emerging economies versus the Western World will continue to help income equality increase between nations.

Perhaps most importantly, Goodhart and his predecessors’ works offer a compelling rebuttal to the theory of secular stagnation -- essentially that we’ll need negative real interest rates to achieve subpar growth and full employment.

“It puts that in contention, and it puts it in contention with reference to data rather than hyperbole, and puts it in a theoretical framework that people can engage with,” said Threadneedle’s Nangle. “We can start to think about what data we should be looking for to test this, and luckily enough, we’re looking to the fact that dependency ratios in developed markets and some emerging markets have already reached inflection points just about now.”

So the Japanification of advanced economies is far from set in stone.

Unlike many other economists, Goodhart does not believe the demographic backdrop of an aging population is inherently deflationary. The pool of labor around the globe that kept wages suppressed domestically on the island nation has nearly run dry; Japan, in other words, was a victim of circumstance. More generally, in order to meet the obligations of the state, the shrinking pool of workers will be forced to pay higher taxes at the same time that they’ll be in a position to haggle for better wages.

“This is a recipe for a recrudescence of inflationary pressures,” wrote Goodhart. “The present concerns about deflation are fleeting and temporary; enjoy it while it lasts.”

All the while, it’s not as though septuagenarian retirees will have a particularly high savings rate.

Nangle also explained what how shifting demographic dynamics could affect portfolio management going forward.

“Somewhat annoyingly, one of the key takeaways from this analysis is that actually, core duration, government bonds, may not be such a good portfolio diversifier,” he said. “If [the] backdrop is for secularly rising real bond yields, back towards old fashion levels, and discount rates rises, correlations are likely to be somewhat higher between risk assets and government bonds.”

And while this theory of what drives interest rates and inequality is gaining traction, it’s still far from the mainstream view.

“Monetary policy makers, particularly in the U.S., do not view the economy in this lens at all, yet,” said New River’s Matt Busigin, who wrote “A Non-Monetary Explanation for Inflation” in November 2013. “The next five to 10 years stand a high chance of being dominated by policy errors on the way to adjusting to a demographically driven policy function.”

BLOOMBERG

Fewer OFW families save, BSP survey shows

Fewer remittance-receiving families want to save money, a new Bangko Sentral ng Pilipinas (BSP) survey showed, presenting a setback to the regulator’s efforts toward financial inclusion.

The number of savers among households that rely on cash from migrant workers suffered the sharpest drop since 2010 as those favoring major purchases remained steady, a BSP survey on family income showed.

Basic needs such as food and other household expenses remained the most pressing concern for families of overseas Filipino workers (OFW).

Nearly all OFW-supported households or 96.6 percent said money from abroad would be used for basic needs—indicating that cash transfers were still the main source of income for many Filipino homes.

The BSP conducts quarterly surveys on the intended uses of money from OFWs. One closely-tracked use of remittances is setting part of the money aside, which indicates growing financial maturity among households.

More money being saved by families, especially if the cash is put in banks, means the robust remittances that enter the country can be used for more than just fueling domestic consumption, but also for financing productive sectors of the economy.

Of the 563 households covered by the BSP’s third quarter survey, 38.2 percent said some part of money from OFWs would be set aside for saving.

This proportion was down from 49.7 percent in the previous survey.

The 11.5 percentage-point drop was the biggest since the second quarter of 2010, when the amount of savers declined from 50.4 percent to 38 percent.

In 2007, when the survey on OFW families began, only 7.2 percent of respondents said a portion of the money they received from overseas would be set aside for rainy days.

Other popular uses of remittances include education (71 percent), medical expenses (63.1 percent) and the purchase of houses (11.5 percent). All indicators were ready in the third quarter.

More OFW households said they planned to use remittances for debt payments at 45.3 percent (from 43.1 percent last quarter).

Remittances to the Philippines are expected to rise by 5 percent to a record high of $25 billion in 2015. Last year, remittances accounted for about a tenth of the gross domestic product (GDP).

source:  Philippine Daily Inquirer

Taxpayers shell out P2 B daily for government salaries – report

Taxpayers are shelling out more than P2 billion a day for the salaries of the 1.2 million government officials and employees.

The amount does not include the hefty allowances that officials receive. The Commission on Audit (COA) report on compensation for 2014 shows that in some cases, allowances are five times the basic pay of an official.

Budget documents submitted to House appropriations committee chairman Rep. Isidro Ungab of Davao City show that the government will spend a total of P810.8 billion for salaries for 365 days next year, or P2.22 billion a day, including Saturdays and Sundays.

The allocation for salaries is 27 percent or nearly a third of President Aquino’s proposed P3.002-trillion national budget for 2016 and is the biggest expense item.

The other expense items are infrastructure and other capital outlays, P645.4 billion or 21.5 percent of the national budget; maintenance and other operating expenditures (MOOE), P534.6 billion or 17.8 percent; allocations to local government units, P464.5 billion or 15.5 percent; loan interest payments, P419.3 billion or 14 percent; and support to government corporations, P127.1 billion or 4.2 percent.

Allocations for salaries for 2016 will increase by P64.8 billion from P746 billion this year. The 2015 appropriation translates to P2.044 billion a day.

Despite the fact that salaries are the biggest expense item in the national budget, the administration is planning another round of pay increase for its officials and personnel.

If the plan pushes through, Sen. Ralph Recto is proposing that the pay hike be limited to those with Salary Grades 11 to 13, or those receiving between P18,549-P19,887 and P21,436-P22,982 a month.

Recto said most state personnel are clustered around these three salary grades.

Three years ago, the government completed a four-year pay adjustment program that saw bureaucrats’ salaries double. For instance, the President’s salary went up from P60,000 to P120,000 a month.

The hiring rate for public school teachers is now P18,549 (Step 1 of Salary Grade 11). It used to be P3,000 only.

The Department of Education will have the biggest increase of P44.5 billion in allocations for salaries, from P229.6 billion this year to P274 billion next year.

The Department of the Interior and Local Government, which includes the Philippine National Police and Bureau of Fire Protection, will have an increase of P19.2 billion, from P75.1 billion to P94.3 billion.

Funding for salaries for the Department of Health will nearly double to P22.282 billion from P11.449 billion.

The Department of National Defense will have an additional P9.8 billion, from P53.7 billion to P63.5 billion, while in the judiciary, funding for compensation will go up by P2.3 billion, from P15.8 billion to P18.1 billion.

Compared to the judiciary, the Commission on Elections will have a bigger increase of P5.8 billion in allocation for salaries, from P3 billion to P8.8 billion.

The Office of the Ombudsman will have a small adjustment of P9 million, from P1.492 billion to P1.501 billion.

Congress (Senate and the House of Representatives) will have 150 million more for compensation, from P5.823 billion to P5.973 billion; while the Office of the President will have an additional P134 million, from P672 million to P806 million. 

source:  Philippine Star

Pantawid, politics and that P19-B figure

Recently, the Conditional Cash Transfer (CCT) Program implemented by the Department of Social Welfare and Management (DSWD) came under attack. Again. More popularly known as 4Ps or Pantawid (Pantawid Pamilya Pilipino Program), political commentators seized on a report by the Asian Development Bank (ADB) which stated that close to P19 billion of the 4Ps budget did not go to the poor.

What?! I have been a member of the program’s National Independent Advisory and Monitoring Committee for over two years now and was shocked by the figure. So I did my own research.

It seems that the media’s source was the ADB publicationLearning Lessons, which said: “The inclusive growth study noted that improvements are needed in the program’s targeting system.” Where did the P19-billion figure come from? This is where it gets amazing. The footnote of the ADB document referred to a study by the Philippine Institute for Development Studies (PIDS), which estimated a leakage rate of nearly 30% using 2009 data.

In 2009, the CCT Program’s budget was P8.3 billion, and the total number of beneficiaries was 777,500. Assuming the PIDS estimate of 30% was correct, then the amount of the purported leakage (based on the 2009 budget) would be P2.4 billion. How did the media come up with P19 billion? Simple. They applied 30% to the current budget (P62 billion). Voila! -- P19 billion, give or take P400 million. I may not be that great at math, but even a 4Ps high school beneficiary would know better than to use an outdated 2009 figure and apply it to 2015 data.

Assuming a 30% leakage is correct, the actual amount would be only 13% of the P19 billion figure thrown about by some so-called political commentators.

However, the estimate of 30% is a matter that requires investigation. As Yul Brynner as the King of Siam said, “It’s a puzzlement!” I have asked the CCT Secretariat to find out what the formula was, since its own monitoring in 2010 actually delisted some 15% of the beneficiaries for noncompliance of the requirements.

What is the CCT all about, anyway? Why is the government, from the time of President Gloria Macapagal Arroyo to the present, supporting it with billions of pesos? Is it a poverty alleviation program, like so many before that threw money at the poor?

An inspired and useful program initiated by the Arroyo administration, the CCT adapted the programs implemented by Mexico and Brazil to help reduce poverty by subsidizing poor families with school-age children. To me, it seems like a scholarship program for poor grade-school kids.

How does it work in the Philippines? A poor family with no steady income, with children aged six to 14, can get up to P1,400 monthly for five years. The family gets the subsidy for a maximum of three children, as a health grant and the rest as educational assistance. The family needs to make sure the kids are healthy and attend school. Thus, the grant really is more like a scholarship for the kids. No kids, no grant. Kids fail in school, reduce the grant. Further, pregnant women are required to get pre- and post-natal check ups. To make sure that the beneficiaries really do accomplish the conditions set, the monitoring of Pantawid is quite strict. The public schools provide proof of enrollment and the grades of the kids, the Department of Health centers monitor the health of the babies, kids and mothers. Children up to five years old are required to undergo check-ups and vaccines.

Further, Pantawid has implemented a values formation program through the Family Development Services (FDS), where the beneficiaries in a community gather regularly to participate in capacity building on parenting, health and literacy, among many topics. Local nongovernment organizations are partners of the DSWD, with local coordinators acting as municipal links who facilitate the FDS. Parents are required to attend the FDS. Anecdotal information to date tells us that the transformation of the parents has been remarkable.

Launched in 2008 with 380,000 poor households, it doubled after a year. Today, the program has expanded to cover 4.4 million families this year. About 11 million school children are being supported. To date, the DSWD has reported that compliance of the beneficiaries with the conditions is high: 93% for health, 98% for education, and 96% for family development services.

With regard to the need to improve the selection of its beneficiaries, DSWD Secretary Dinky Soliman has been quite zealous. Several years ago she invited leaders from civil society, academe, business and the religious sector to be part of the National Independent Advisory and Monitoring Committee (NIAMC) to help improve the CCT operations. Currently chaired by Evelyn Singson, the NIAMC members are as zealous as Secetary Dinky. I have attended several meetings where NIAMC members, like Economist Winnie Monsod, investigated DSWD monitoring reports the way the Senate conducts its hearings (without the harassment, bullying and disrespect).

When we analyzed the accomplishments to date, we were impressed by the impact of the cash grants. In education, near-universal enrollment of elementary age children (6-11 years old) and the enrollment rate for children aged 12 -- 15 was six percentage points higher among Pantawid households than non-Pantawid ones. Child labor among Pantawid households has decreased by an average of seven days per month. Further, Pantawid mothers are more likely to seek pre- and postnatal care and deliver babies in health facilities.

Richard Bolt, ADB country director for the Philippines, has issued three statements to date to correct the misimpression that today’s 4Ps is so poorly managed that P19 billion has been lost.

Acknowledging that there were leakage issues in 2009, Bolt wrote: “The targeting issue raised in the PIDS report has been addressed by the Department of Social Welfare and Development and the Conditional Cash Transfer Program and related ADB support. As such, we are confident that the issue raised is dealt with in the ongoing Conditional Cash Transfer Program.”

He goes further and states that the ADB Independent Evaluation report is “strongly positive and supportive of the program and its achievements including improved health outcomes and increased school participation, as well as its likely effect on the employability of the beneficiaries, and their chances for breaking the inter-generational cycle of poverty.”

Will Bolt’s statements arrest the attacks on 4Ps? I have heard the line of attack of some of the so-called commentators. Sadly, I doubt if they will give equal air time for the official ADB statements. Its just so much more rewarding to stoke the anger of the masses by repeating, ad nauseum, that the government has thrown away P19 billion. I do hope and pray that Congress will be guided by fact, not politicking, when they deliberate on the budget of the Pantawid program. After all, over 4.4 million families and 11 million school children, their constituents, will benefit. Hope springs eternal.

Amina Rasul is a democracy, peace and human rights advocate, and president of the Philippine Center for Islam and Democracy.

aminarasul@yahoo.com

source:  Businessworld

PHL mostly ‘untouched’ by main global risk factors due to remittances, BPO earnings, economist says

THE PHILIPPINES is “pretty untouched” in terms of risks posed by China’s economic slowdown, declining oil prices, and an expected Federal Reserve interest rate hike, a visiting European economist said.

Pedro Videla, economist and professor at IESE (Instituto de Estudios Superiores de la Empresa) Business School at the University of Navarra, said that the Philippines is “pretty untouched by all these effects,” and identified as the source of its relative immunity “the Philippines (having) more sources of dollars from overseas.”

“The income in dollars is unrelated to these [risks]. There are two main sources of income in dollars; overseas remittances and BPO (business process outsourcing),” he said at a seminar yesterday held in Makati City.

Preliminary data from the Bangko Sentral ng Pilipinas show that remittances from Filipinos working overseas grew 5.6% during in the first half of this year.

Cash remittances amounted to $12.08 billion in the six months to June, compared with $11.45 billion a year earlier.

On the other hand, the BPO sector, which is expected to overtake remittances in terms of contribution to the economy by 2020, posted $18.99 billion in revenue last year, up roughly 16%. The industry accounted for 1.07 million jobs in 2014, making it the largest private-sector employer.

Mr. Videla also noted that the Philippines has seen a “substantial decline in poverty” since 2004.

He pointed out that export-driven economies such as South Korea, Taiwan, and Thailand, which have “close links” with China are the ones that will be affected by the latter’s slowdown.

Coupled with the yuan’s devaluation in August, China’s poor trade performance has rattled global economies.

Imports fell for the 10th straight month in August, by 13.8% year on year, raising concerns among global investors that China may be slowing more sharply than earlier expected. Exports also dropped by 5.5% in August from year-earlier levels.

Recent employment data from the US showed that US employers generated 173,000 jobs in August, which came in less than forecast, but the gains were enough to pull the unemployment rate to 5.1%, the lowest since April 2008.

This jobs report was the latest major piece of economic data before the Sept. 16-17 Federal Open Market Committee meeting, which was long expected to produce a rate hike, though recent market turbulence has introduced doubts as to whether the Fed will act.

Other countries expected to be vulnerable to the macroeconomic risks cited by Mr. Videla are Brazil, Turkey, South Africa, India, South Korea, Taiwan, Thailand, Indonesia, Mexico, Russia, Peru, Colombia, Malaysia and Chile.

source:  Businessworld

Earth’s trees now at 3.04 trillion only

HOW many trees are there on planet Earth? A new study estimates the number at somewhere around 3.04 trillion.

That’s about 400 trees for every person. And while that may seem like a lot, the researchers say that before humans began clearing forests, the Earth was home to nearly twice as many trees.

“The number of trees cut down is almost 3 trillion since the start of human civilization,” said Thomas Crowther, a postdoctoral fellow at the Yale School of Forestry and Environmental Studies who led the study. “That is an astronomical figure.”

Previous estimates of the Earth’s current tree population put the number of trees at 400.25 billion—nearly an order of magnitude less than the new tally.

(And just so we are all on the same page, the authors define “tree” as a plant with a woody stem that is at least 10 centimeters wide at breast height.)

Scientists say the discrepancy has to do with how the two estimates were calculated. Earlier studies used satellite data to determine how many trees were living on Earth, but it was tricky because, while satellites can accurately detect what areas of the planet are forested, in most cases they cannot see individual trees.

“Satellite images can tell you a lot about the forest area and canopy cover, but what we provide is a more detailed understanding of what is going on beneath the surface,” Crowther said.

The new study, published in Nature, incorporates satellite imagery, but it also relies on 429,775 ground-based measurements of tree density, where a physical person counted the number of trees in a given area.

“That is truly an amazing amount of field data,” said Marc Simard, a senior scientist in the Radar Science and Engineering section of Jet Propulsion Laboratory who was not involved with the study. “And it enables the discovery of relationships between tree density, remote sensing measurements and environmental factors.”

The ground-based data mostly came from national forest inventories. The authors were able to track them down from every continent except Antarctica.

Once the researchers had these ground-based data points, they could then use computer models to predict how many trees would be in a given area where only satellite and climate information was available.

Crowther and his colleagues report that more than 40 percent of the trees on our planet (1.39 trillion) are located in tropical and subtropical forests.

The next largest percentage of trees (24.2 percent) can be found in the boreal and tundra zones of Canada, Russia and northern China, where hearty coniferous trees grow in the densest forests on Earth.

The remaining tree population (21.8 percent) can be found in more temperate parts of the world, including the United States and Europe.

To determine how many trees used to be on the planet, Crowther’s team overlaid its new map of tree density on top of the United Nations Environment Program’s (Unep) prediction of where forests used to be based on the climate conditions of the pre-Pleistocene period.

“Using our map, we could then identify how many trees were within this area,” Crowther said.

The team used a similar technique to estimate that the planet is losing 15 billion trees a year, and replacing only 5 billion of them.

“If you do the math, the net loss is about one-third of a percent of all trees globally,” said Harry Glick, a postdoctoral student at Yale who also worked on the study.

“That’s not insignificant.”

Crowther added that one of the most dominant themes of the study is how large an effect humans are having on the tree population on the planet.

“Human activity came out as the strongest control on tree density across all biomes,” he said. “It really highlights how big of an impact humans are having on the Earth on a global scale.”

DOTC teams up with British firm to ease Naia air traffic

THE Department of Transportation and Communications (DOTC) has tapped the consultancy services of British firm NATS—renowned worldwide for its air-traffic management expertise—to maximize runway use at the Ninoy Aquino International Airport (Naia). 

Transportation Secretary Joseph Emilio A. Abaya said the P66-million runway optimization deal awarded to the joint venture between NATS Services Limited and Schema Konsult Inc. will help ease congestion at the country’s primary gateway.

Over the contract’s 12-month span, the group will aim to increase hourly air-traffic movements (ATMs) from 40 to 60 by determining the optimal configuration for the airport’s intersecting runways. 

“We are excited to work with one of the world’s best firms in the industry toward optimizing Naia’s runway capacity. With NATS—which has worked on the Dubai, Singapore  and Heathrow Airports—we can expect safer, more efficient operations, and much less flight delays and cancellations,” he said. 

NATS provides air-traffic navigation services to the world’s busiest single- and dual-runway airports: London Gatwick handles 53 ATMs per hour and over 250,000 flights per year; and London Heathrow handles 90 ATMs per hour and over 470,000 flights per year.

It has boosted runway capacity at the Hong Kong International Airport by 30 percent. It also redesigned Dubai’s Al Maktoum International Airport’s airspace, and is now tasked to increase ATMs at the Singapore Changi Airport.  

Abaya noted that the “road map for short- and long-term improvements will focus on the optimization of runway capacity by cutting aircrafts’ occupancy times; the development of Air Traffic Controllers’ (ATC) surveillance capabilities through technology and determining needed alterations to access points; and the maximization of available airspace by reducing restrictions and making procedural improvements to tighten intervals between aircraft movements.

During the first six months of its contract, NATS will conduct a comprehensive evaluation of the airport’s current airspace, runway, and terminal capacities; air traffic and surface operations; runway access points; and ATC training. 

The Manila International Airport Authority and Civil Aviation Authority of the Philippines will then implement the recommended improvement measures over the ensuing six months.

These agencies have also implemented measures to help ease runway congestion, such as the reactivation of Runway 31 last July and the relocation of general aviation activities.

Manila’s main gateway has been plagued  by issues on inefficiency and congestion brought about by the lack of investments in infrastructure. 

The Japan International Cooperation Agency has predicted that this year would mark the start of the main gateway’s dark days. The airport is expected to handle some 37.78 million passengers, way beyond its 30-million annual passenger capacity and a few notches up from its maximum capacity of 35 million passengers per year.

Japanese consultants had proposed that the new international gateway be constructed in Sangley Point in Cavite to meet the parameters set by the transportation agency. The future airport will boast of four runways, which can handle 700,000 aircraft movements per year. It will have a rated capacity of 130 million passengers annually.

The deal is expected to be implemented under the government’s key infrastructure program, mixed with funding from official development assistance.

Commercial operations of the new airport should start by 2025 just about 10 years from now.

source:  Business Mirror