About that coal in Kosovo

In comments to the post on Kosovo, Alex Harrowell asked the following reasonable question:

“How can you have something that’s both a “mineral resource grab” and an “economic black hole”?”

The short answer: you can, because it’s Kosovo.

Here’s why. There has been no serious investment in those mines since the Yugoslav economy hit the skids in 1986.

A modern coal mine is not a hole in the ground full of guys with picks. It’s a major industrial installation. You have huge drills, borers, grinders, driers, fans, pumps, you name it. A big coal mine uses as much power as a good-sized town. A big modern coal mine uses cutting-edge, state-of-the-art materials technology and software. It’s not guys digging coal any more. It’s guys operating and maintaining big, complicated machines that dig coal. In the United States, the majority of coal miners have four-year college degrees, and need them.
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Serbia: That Incredible Shrinking Country

This weekend’s election results in Serbia, and in particular the gridlock state of the political process and the resilience of the vote for the nationalist Serbian Radical Party (as ably explained by Doug in the previous post), pose new, and arguably reasonably urgent questions for all those who are concerned about the future of those European countries who currently find themselves locked outside the frontiers of the European Union. What follows below the fold is a cross-post of an entry I put up earlier this afternoon on the new global economy blog: Global Economy Matters. I don’t normally like cross-posting, since I would prefer to put up original Afoe content, but my time is a bit pressed at the moment, and I feel the issues raised are important enough to merit a separate airing on this site.
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The Czech Car Growth-Engine?

News today which is of more than passing interest from the Czech Republic. The South Korean industrial group Hyundai has announced that it is going to build its first European car plant at Nosovice. The factory – which is scheduled to cost around one billion euros – should begin production in October 2008 with full capacity of 300,000 vehicles a year being reached in 2009. This new output, when added to added to the 600,000 cars or so produced annually by Volkswagen’s Skoda Auto and the Franco-Japanese joint venture, TPCA, will bring the Czech Republic into the front line – along with Germany, France and Italy – of the European automotive industry.

As elsewhere this will have its good and its bad side.
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When The Curves Invert

Two bits of news this week appear to be unrelated. The interesting question is whether appearances are once more deceptive.

Firstly the US Treasury note situation:

At 6:23 am ET. the 10-year note yielded 4.393 percent while the two-year note yielded 4.396 percent.

Or as the FT puts it:

Yields on 10-year US Treasuries briefly fell below those on two-year notes on Tuesday for the first time in five years – a rare event that in the past has often heralded a recession.

Now there is – more or less – a consensus of opinion that this is not a harbinger of imminent recession this time round. So what then does it mean? Aha, would that we knew! There has however been another curve inversion was officially announced during the last week. According to this AFP report:

Japan’s population fell for the first time in 2005, the government said, calling it a “turning point” that will force the world’s second largest economy to adapt to a rapidly aging society….Deaths are likely to outnumber births by about 10,000 this year, the first decline since 1899 when Japan began compiling the data, health ministry figures showed


The data suggest that Japan’s population may actually have been falling since October 2004.So where might the connection be? Well, back in April the soon-to-be Fed Chairman Ben Bernanke made his now notorious Global Savings Glut speech. In that speech he said the following:

one well-understood source of the saving glut is the strong saving motive of rich countries with aging populations, which must make provision for an impending sharp increase in the number of retirees relative to the number of workers. With slowly growing or declining workforces, as well as high capital-labor ratios, many advanced economies outside the United States also face an apparent dearth of domestic investment opportunities. As a consequence of high desired saving and the low prospective returns to domestic investment, the mature industrial economies as a group seek to run current account surpluses and thus to lend abroad

So he was arguing that ageing populations tend to increase the savings motive and produce an investment dearth. This flow of savings looking for investment tends to nudge down global interest rates. Perhaps the best discussion I have seen anywhere of the inversion phenomenon is this one from the Morgan Stanley GEF team. Clearly this is a complex problem, and they themselves have no consensus, but I did note this point from the Japan-based Robert Feldman:

In how many of the eight inversions over the last 40 years were international markets as closely intertwined as they are today? My point is that, as long as Bank of Japan still has huge quantitative easing in place and the yen carry trade is alive and well, part of the yield curve flattening in the US will be due to international factors and doesn’t necessarily signal a recession


Here there are two points, the increasing efficiency and integration of global capital markets, and the special situation in countries like Japan. So to return to where I started, are the two inversions related. My answer would be a qualified yes. There is some relation. The hard part is to determine the nature and extent of the relation.

China: 20% Bigger Than We Thought?

The Chinese economy could be 20% bigger than previously estimated. Since almost everything about Chinese data should have ‘best guess’ status, this probably hardly comes as a surprise, and indeed the estimate itself should be treated with the customary caution, but yes, that is the conclusion which is apparently being drawn from the latest national economic census conducted by the National Bureau of Statistics earlier this year.

A spokesman for the National Bureau of Statistics said on Tuesday it will announce the findings of the census and its impact on the calculation on gross domestic product at a press conference next week.

The NBS refused to say by how much it would revise the GDP figures, but it is expected that the new measure will show the economy is larger by about 20 per cent.

Also in the news, China has now become the world’s largest exporter of information and communication technology goods, according to an OECD reported out today

China overtook the United States in 2004 to become the world’s leading exporter of information and communications technology (ICT) goods such as mobile phones, laptop computers and digital cameras, according to OECD data.

China exported USD 180 billion worth of ICT goods in 2004, compared with U.S. exports in the same category valued at USD 149 billion. In 2003, the U.S. led with exports of ICT goods worth USD 137 billion, followed by China with USD 123 billion.

China’s share of total world trade in ICT goods, including both imports and exports, rose to USD 329 billion in 2004, up from USD 234 billion in 2003 and USD 35 billion in 1996. By comparison, the U.S. share of total world trade stood at USD 375 billion in 2004, USD 301 billion in 2003 and USD 230 billion in 1996..

Evidently China is still on the up and up, and rather faster than we anticipated. As well as being the number one exporter of ICT equipment, China is also the world’s number one investor, as Stephen Roach reported a few days back:

Despite its relatively small share in the global economy — only about 5% of world GDP (at market exchange rates) — China now spends more on fixed investment than any country in the world. In dollar terms, China’s fixed asset investment was running at an annual rate of close to $1,100 billion in the first three quarters of 2005 (at market exchange rates) — in excess of annualized 2005 investment totals in the US ($987 billion), Japan ($733 billion), and the Euro-zone ($651 billion). If China’s investment boom remains unchecked and its currency continues to appreciate, its dominance in shaping the global investment cycle will only grow.

Investment Dearth?

The idea that there was a global savings glut now having gone out of fashion, some are presently arguing that what we have is an investment dearth (my own view is that these two effectively mean the same thing, since the issue is a relational one). More evidence for this investment dearth hypothesis comes today from the UK.

UK Business investment grew sluggishly in the third quarter, official figures showed, confirming survey evidence that British-based companies are cautious about capital spending even though profit levels are high.

As the FT also notes:

Just as in other European countries, companies have decided to save most of the money they have been making rather than risk investment in new opportunities to generate profit in the future. The reluctance of companies to invest when interest rates are low and the return on the existing capital stock is high has puzzled economists for some time.

Dave Altig had a piece earlier in the week about the BoE rate decision wher he tries to put a brave face on the UK data. This investment news is another little bucket of cold water for the upside optimists. I’m more or less neutral here. The monetary policy committee intimate that the weakening of investment intentions “may also reflect uncertainty about the near-term outlook for the economy in the face of sluggish consumer spending and higher energy prices”. Dave concludes that “Perhaps the uncertainty will lift sooner than later”, and I agree, I’m sure it will: I’m just not sure which way the resolution of the quandry will lead us.

FDI in France and Germany

John Snow obviously had had sight of the document ( and here pdf ) when he went round lecturing us that Europe may become a non-favoured environment for US FDI:

Foreign investment in France and Germany fell sharply in 2004, reinforcing concerns that inflexible labour practices and weak domestic demand are driving investors elsewhere.

In France, inward investment almost halved from $43bn (?35.44bn) to $24bn, according to figures released yesterday by the Organisation for Economic Cooperation and Development, the group representing the world?s most industrialised countries“.

But as much as the facts, the reasons behind the facts are interesting.

Mark Zandi, chief strategist at Economy.com, the consultants group, said the data showed US companies the main source of direct investment funds in 2004 were spending their cash piles mainly on Asian investments.

?US companies are attracted to Asia partly because the currencies remain competitive, but also as low cost bases for production destination and as growing markets in their own right,? he said.

Actually there is little realistic way that the EU or the US can reasonably expect to compete with China for FDI on China’s own terms, we both have to find another way.

Hyundai Goes to Slovakia

South Korean manufacturing giant Hyundai has picked Slovakia as the site for a new $870m (?466m) car plant, one of the biggest deals in the car sector this year. The factory, which will open in 2006, is intended to produce up to 200,000 vehicles a year under Hyundai’s Kia brand. The north Slovak city of Zilina beat a Polish location in what had been a long-running contest to get the plant. Both countries offered incentives for the investment, but Slovakia boasts slightly lower costs for manufacturers. In fact Slovakia has arguably the lowest business cost base of any of this year’s new EU members, and enjoys a strategic location on the border with Austria. All of which means that it is rapidly converting itself into an auto manufacturing hub since this is the second big car project that Poland has recently lost to Slovakia: last year, France’s PSA Peugeot Citroen said labour costs had persuaded it to pick Slovakia for a new plant roughly the same size as Kia’s.

This of course is neither outsourcing, nor is it job-migration. But it certainly is a news item which doesn’t go down too well here in Spain, which feels it is rapidly losing its pride of place as the European car components centre.
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Back to the Future in Cancun

I’ve been trying to understand exactly what happened at the WTO ministerial conference in Cancun. That they’ve come apart is pretty clear, but there is a certain amount of ambiguity about why and who is to blame. The crux of the matter appears to be the “Singapore issues”, for which you can find a more detailed discussion at Crooked Timber.

What are the “Singapore issues”? In most of the world, national governments get to write the laws regulating investment and taxing economic activity, and usually government contracts are, at least to some degree, offered preferentially to locally controlled or operated businesses. It seems that some combination of countries – the US, the EU and Japan – want to extend the WTO’s mandate to globalising investment and procurement rules. Apparently, the whole business first came up at the WTO ministers’ meeting in Singapore after the death of the Multilateral Agreement on Investment in 1998 – a treaty intended to address exactly these questions of government procurement and investment security.
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