Krugman is wrong about China

If you believe Krugman's last column, you would think that China is like the US (or Japan he says; I would add Spain or Ireland), i.e. growing as a result of a housing bubble. His analogy seems to follow from the 'weakness' of consumption, that is, the fact that consumption is only 35% of GDP. He says:

The obvious question is, with consumer demand relatively weak, what motivated all that investment? And the answer, to an important extent, is that it depended on an ever-inflating real estate bubble.

He forgot to check real wages. The graph below shows that, in contrast to the US, Chinese wages have expanded incredibly fast. Since the Asian crisis, real wages have grown at more than 10% per year.

Consumption as a share of GDP remains low simply because a lot of investment is State driven and exogenous, and incredibly large. Even if there is a real state estate bubble, growth is led by government spending and by rising real wages. And by the way, there is no significant foreign debt, so a collapse of a bubble could be handled by domestic authorities without a sweat. Krugman is just wrong on this one.

PS: Data is from the Economics Intelligence Unit (subscription required). Check also ILO's Global Wage Report.

A call for a higher minimum wage

Jamie Galbraith on Bloomberg yesterday (here). That would be something for people to thank!

One graph is worth...

The graph below shows the relation between the percentage change in hourly wages across all sectors of the economy in local currency adjusted for inflation and real GDP growth between 2003 and 2011 (last year is obviously a forecast), using data from the Economic Intelligence Unit (EIU, access is restricted).

Even if one does not completely trust the data on real wage growth in China and India, or the relevance of real wages (considering the size of informal markets) in developing countries when compared to the developed countries closer to the axis like France, Germany, Japan and the US. But clearly one way out of the crisis is to redistribute income, and promote a healthier increase of real wages and domestic demand.

Tom Palley on a global wage policy

Tom Palley suggests that wages should be higher in surplus (current account) countries, to help re-balance the global economy.  In the case of Europe, it seems really unlikely that Germany will expand the economy, and promote nominal wage increases to help the European periphery.  With respect to the rest of the world it seems that Tom still believes that export-led growth is the engine of growth.  In China it seems clear that domestic demand has taken over and that real wages (including minimum wages) have been increasing at a fast pace (see ILO's Global Wage Report).  The world economy needs more growth in the US and Germany, China and other developing countries are actually doing their job to help in a global recovery.  Tom believes that competition from low wage countries has had a negative impact in labor conditions in the North.  I tend to believe that the problems have more to do with political economy problems in the North, in particular the ascendancy of conservatism since the 1980s. But nothing against high minimum wages, which is Tom's main point!

The wageless recovery and the two-speed recovery

Is this a wageless recovery? No doubt in the United States, and also in a good part of the rest of the developed world (e.g. Europe and Japan).  In the case of the US real wages have stagnated since the 1970s.  The recovery may very well be wageless, but in all fairness that has been a perennial characteristic of the American economy.  In Europe there were marked differences between Greece and Iceland, where real wages were growing until the crisis, and Germany, where they have basically stagnated.  So the wageless recovery is basically an American, German and Japanese story.

In developing countries, however, the story is quite different.  The graph below shows real wages in advanced, Latin American and Asian economies (there are also significant variations between and within the two sub-regional groups).  The graphs come from the International Labour Office's Global Wage Report 2010/11 (available here).



Note that both in Asia and Latin America real wages did not fall in 2008, and started to recover in 2009.  In Latin America, according to ECLAC (in the Preliminary Overview Statistical Annex Table A-18, p. 150) in 2010 real wages increased on average 1.7 per cent.  Essentially at the same pace than the previous years.  Also, it seems that wages continue to grow in Asian countries (particularly in urban China).  Perhaps, the reason for the so-called two-speed recovery is associated to the different patterns of real wage dynamics, and not just about commodity prices.  Expansion of domestic demand in the periphery (or at least in some countries) might be relevant too. Just saying.

Real Wages in Argentina

So there has been some fuss about whether Argentina default was good or not for the economy, because of a terrible article in the New York Times (here). Krugman correctly noticed that this was nonsense and was praised by Dean Baker. I think that it is important to note the role of devaluation (and noted that in comments to both blogs), but wouldn't disagree with Krugman that it's important to emphasize that defaults are not followed by catastrophes and that Argentina is actually a terrible example if one wants to make the opposite case.

At any rate, an Argentine reader (using a pseudonym) got really angry with me, and said some obviously incorrect things about Argentina (and Brazil to boot). But one of his points shows that it is important to clarify at least one fact. The graph below shows real wages in Argentina, with official data, and data from alternative sources that can be obtained in a paper by Roberto Frenkel and Mario Damill (here).

Note that real wages in Argentina have grown irrespective of what inflation index you use. And yes, in Brazil they did stagnate. The recovery of real wages is central to understand, not just the evolution of the economy, but some of the political events that lead to people, like the anonymous blog commentator, to be so angry. But as I told him, using Moynihan's fantastic dictum, a person is entitled to their opinion, not their facts.

PS: The data for real wages comes from ECLAC; the alternative index for Argentina was calculated by deflating the series with the inflation data in the Frenkel and Damill paper.