6/82012: A Spooky Chart of Decade?

A spooky chart of decade? Why, this one of course:

The chart comes from The Great Leveraging, by Alan M. Taylor, CEPR DP 9082.

Yes, folks, the upward path in the red line - the dependency ratio for more developed regions - is scary enough. Fair play. Although we all knew it. The really monstrous bit is the green line rise from 2030 on and the relative flattening of its decline from 2015 onward. Why is it "monstrous"? Because until recently, immigration into the advanced economies from developing economies was taken as a given. Now, not so much anymore. So, as the dolphins sign in my favorite film: "So long & Thanks for all the fish / So sad that it should come to this / We tried to warn you all but oh dear..." Never say we haven't told you (Europeans) that abandoning family for the sake of social benefits and improved consumption of holidays is not a good idea, but it is even dafter when one thinks that the sources of cheap labour might just run out pretty soon... in and around 2010-2025...

6/8/2012: Russian reforms: Atrophy or Revolution?

Journal of Democracy has 5 articles covering various aspects of the political grass-roots transformations undergoing in Russia (link here):


In "Putinism Under Siege: Implosion, Atrophy, or Revolution?", Lilia Shevtsova argues that the "Putin's regime is clearly now in decline, but it is unclear whether the death knell has sounded for the "Russian System" - a combination of personal rule, the merger of power and assets, and a self-perpetuating stalinist-militarist model. One can conclude, however, that the Russian system cannot be reformed from the top and that real transformation will come only through pressure from citizens."

I am not so sure, this wishful thinking - ranging from rather over-reaching definition of the "Russian System" (which does include the first two of the features outlined in the article, yet hardly resembles a stalinist-militarist model at all) to nostalgia for some sort of a populist, bottom-up transformation (which never happened in the history of Russia before, and given the dire quality of opposition is not about to happen either) - is either a realistic assessment of the near-term (predictable or forecastable) future or a desired path to transformation.

But the article does point to some interesting changes in social dynamics that have led to recent protests and are exposing the dire need for modernization and reforms in the system as well as the fact that since 2006 Russian leadership has had an awfully hard time in attempting to deliver any real change on core political and social changes:


"Discontent with Putin’s regime among educated urbanites has been building for some time as people have witnessed the cynicism, brazen corruption, official high-handedness, and general stasis on display in their government. By the last part of Putin’s second term (between 2006 and 2008), the foundations of his implicit deal with the country were starting to erode. The most active and dynamic sectors of society wanted more than the Kremlin’s offer of stability based on looking to the past and staying within the narrow bounds of old myths about Russia and the world. People began to tire of the notion
that they should be content so long as the authorities let them make a living in return for staying out of politics and recognizing the authorities as having the final say on questions of property ownership, making corruption an essential lubricant when frictions appeared."

"But there inevitably came a moment when Putin’s formula for “social peace” no longer satisfied much of the populace. Too many had come to see that this pact could guarantee them neither opportunity nor prosperity nor even basic security. Moreover, Putin lacked any sense of the kinds of social improvements that might give young people a leg-up in life and a chance to better themselves. The financial and economic crisis of 2008—and the way that Putin and his team reacted to it by guarding their own wealth and that of the oligarchs close to them—cast into especially high relief the flaws in Putin’s model."

So far - plausible, albeit over-rhetoricized account.

The article real failings are in the projections for the Putin 2.0 and gradualist reforms paths, which, the author feels, cannot deliver significant enough change. At this stage, the arguments are purely speculative, based on "why didn't Putin do so before?" reasoning which ignores both the core objectives of pre-2006 path (consolidation of power and stabilization of fragmented institutions) as well as the need for transition to Putin 2.0 regime.

Again, on has to read the entire article in the context of attempting to remove over-extending rhetoric from the fact.

"The authorities’ tactical maneuvers and the myths spread by Kremlin propagandists can no longer stave off a crisis that has already begun. [In my view, this is correct, albeit the word 'crisis' is hardly properly descriptive of current events - the word 'pressure' comes to mind as more apt]. The alleged adaptability of the “Russian system” has been exposed as an illusion—cosmetic changes can no longer hide a more fundamental rigidity. The system guarantees Russians neither personal security, nor
economic well-being, nor a sense of civic dignity. The system works only to satisfy entrenched interest groups at the expense of society at large; the “golden parachutes” that the elites maintain in the form of
assets stored in the West prove that even they do not believe in the sustainability of the current political order. [Well put, in my view... but not warranting subsequent:] The paradox is that propping
up the status quo is speeding up the system’s decline, but attempts to update this status quo without liquidating its basis (personalized power) threaten to cause system breakdown."

In my opinion, the status quo is degenerative. However, change of the status quo requires a long period of building effective, functional democratic opposition. Not a 'personal cult 2 displacing a personal cult 1' system that is currently the only feasible alternative were another equivalent to Putin found somewhere. This process can only be carried out with simultaneous co-existence of the current consolidated regime and constant pressure on this regime to reform. The recent protests have shown this much: there is no alternative to Putin 2.0 transformation for the embryonic democratic forces - which have offered no real policies alternative or leadership options to the current regime, and for the regime itself - which cannot be assured of normal and functional transition of power. In other words, Russia currently has no alternative to the gradualism in transformation. To the author, this means that neither transformation, nor gradualist approach to it are feasible. To me it means that both are inevitable in the long run.

In other words - it is neither Atrophy, nor Revolution that await Russia in the near term future. It is a gradual re-shaping of the Kremlin rule accompanied by the maturing of the democratic alternatives. We better brace ourselves for a much longer term process than the ones we experienced in Russia since 1988. And that is a good news.

I will be blogging on the remaining articles in the issue in time, so stay tuned.

4/8/2012: IMF Article IV assessment of Russia

Latest IMF Article IV paper for Russia was published this week. The link is here.

A number of points worth highlighting:

1. "The current account has strengthened in 2011 aided by high oil prices, but net capital outflows persist, broadly mirroring the current account surplus." In effect, this is continued worrying trend, although one has to recognize that some of the outflows get recycled back into Russian investment via off-shore companies. Nonetheless, the Government efforts to-date to reduce outflows have been unsuccessful. While no one expects capital controls, it is likely that to lower incentives to ship capital out of Russia, absent deep and effective reforms of the legal protection for investors, Russian authorities will need to raise internal interest rates and strengthen the ruble. These measures will, however, reduce growth capacity in the economy.
2. "Following two years of stagnation, credit growth rebounded strongly in 2011. This partly reflected a switch by the corporate sector from external to domestic funding. Consumer credit also grew strongly. On the credit supply side, improving bank balance sheets (with declining nonperforming loan ratios and improving profitability) and funding conditions (reflecting solid deposit growth and the Central Bank of Russia’s liquidity provision) allowed for the expansion of lending." In other words, there is increased stability within the internal financial system. While the process of weeding-out weaker banks is ongoing, this is now organic, rather than disruptive as in the earlier stages of the global financial crisis. Expect no significant adverse surprises in the sector, as consistent with rating agencies position on Russian banks.
3. "Fiscal policy tightened in 2011, but it remains procyclical. The federal non-oil deficit declined from 12.7 percent of GDP in 2010 to 9.8 percent of GDP in 2011. This improvement was due to both non-oil revenue overperformance and expenditure under-execution. Some of the windfall oil revenues from 2011 were deposited in the Reserve Fund in early 2012. However, the 2012 budget implies an increase in the federal non-oil deficit of about 1 percent of GDP." This is consistent with the policy stance announced during the last Presidential elections and is a short-term positive for the economy that is still recovering from the capex slowdown. We have to keep in mind that Russia will have to undergo twin spikes in demand for capital in the next decade or so. The first one will be driven by rapidly accelerating depreciation of the core capital stock - with replacement rates on capital only starting to catch up with amortization and depreciation since 2003-2004. The second one will be driven by the need to lift up overall productivity in the industrial and manufacturing sectors. Parts of this will have to be financed off the private sector investment pools, but parts will have to come from the state coffers.
4. In line with (3) above and also noting that the Central Bank has put on hold further tightening of the monetary policy during the second half of 2011, IMF advised the CB to continue tightening monetary policy. Again, in my view this puts a clear contradiction into the policy mix. Federal Government objective is to push through aggressive investment and modernization programmes over the next few years. This can be aided on supply of capital side by raising rates of return, including by strengthening the ruble. Alas, the demand side will suffer. As will exports. On the positive side, imports of capital equipment will be cheaper, but in the long run, this will also mean fewer imports substitutes emerging in the process of modernization. In other words, Russian monetary, fiscal and development policies are now somewhat out of synch, but they can become even more so, should Russia listen to the IMF advice. 

4/8/2012: Links to my analysis of ECB's policy shift

My thoughts on Mario Draghi's quiet coup are on FTAlphaville (here) and in The Globe & Mail (here). BusinessInsider also picks on my comments (here).

4/8/2012: Business Confidence in Ireland: KBC/ICA v PMI

As promised in the previous post covering the Services PMIs, I wanted to provide some analysis of confidence survey component of the PMIs. This is in light of this week's absolutely bizarre Business Confidence Survey report from KBC/ICA covered briefly here. The reason for why I am giving this survey so much attention is a simple one: the survey authors, in particular KBC, should have done their basic homework before they released the results. This homework would have entailed linking current activity to future business expectations to find out the size of the bias in the later induced by the former.

Here's the core point: businesses (not only in Ireland) tend to report upbeat expectations compared to current activity. And they tend to do so on average - independent of the current conditions. In addition, their expectations of the future are driven by the present conditions, which also implies systemic biases. To see this, simply link current activity to future expectations:

Not to induce any judgement on causality direction - the above pretty clearly shows that on average, expectations are more upbeat than actual activity: a 1 point change current activity is associated, in Irish services firms case, with 14.6 points higher expectations. In other words, we can have a tanking economic activity consistent with deep recession (as signaled by current activity PMI of, say 40) and yet business expectations on average will be reading 54.9 - a robust expansion.

Run through these numbers:

• Since January 2008, Confidence reading for PMI averaged 60.2 - a massively 'upbeat' indication taken on its own. Meanwhile, actual PMI reading averaged 46.8 - a recessionary level reading for the Services sector.
• In last 6 months, actual PMI averaged 50.8, Confidence for the 6 months period through January 2012 is 60.7.

Funny thing, this Confidence survey data is...  

3/8/2012: Irish Services PMI: Disappointing July

So following cracking Manufacturing PMI performance in July (see posts here , here and here on the subject), it was only predictable (based on all indicators relating to the sector activity) that Services PMI will put a boot into our hopes for growth. In that, the PMIs did not deviate from forecast.

Irish Services activity continued to decline in July, with headline PMI for Business Activity falling to 49.1 from 49.4 in June. This marks third consecutive month of sector activity below 50 reading. 12mo MA is now at 50.7, well ahead of the current reading. 3mo average through July is at 49.2 - signaling mild contraction, previous 3mo average through April is at 52.5. In 2011 3mo average for the same period was 51.5 and in 2010 it was 54.5. Not good dynamics for 2012 since May.

New Business activity also slowed down to 49.5 from barely expansionary 50.3 in June. 12mo MA is at 50.2 - effectively showing zero growth, while 3mo average through July is at 49.8 (ditto, but to the downside risk) and this contrasts with relatively robust 52.8 3mo average through April 2012.

Looking at the snapshot of the recent activity clearly shows lack of any breakout momentum in the series from the flat growth trend established around Q4 2010.

Other sub-series were all over the place.

• Employment tanked to 48.3 from already abysmal 49.2 in June. This is not surprising, as the sector has been signaling employment losses pretty much uninterrupted since the beginning of the crisis. 12mo MA is now at 48.1.
• Output prices continued to contract at 44.2 from 44.6 in June, while input costs rose at 52.3 on foot of 52.7 in June. Which means profitability tanked.
• New export business indicator jumped to 55.7 in July from 54.2 in June, but this is hardly surprising, since the index has been showing robust expansion for 12 months now, following a surprise drop to 49.6 in July 2011. 12mo MA is at 53.2, 3mo average through July is at 54.2. These are really hardly credible numbers, or rather, these are the numbers showing that our Services sector exports have very little to do with employment or overall business activity in the sector itself. In other words, this shows that our services exports are as captive to MNCs as our manufacturing exports.
• Profitability - as measured by PMI (note, I produce my own metric, which will be reported later) - tanked again to 43.8 in July against 43.0 in June.

In the next couple of posts I will be covering combined results for Manufacturing and Services PMIs and a special note on Confidence metric - in honor of the KBC/ICA 'survey' results released yesterday.