Bryan Caplan  

Isn't That Just an Asian Effect?

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Over at Freakonomics, Justin Wolfers shares a graph showing how different nations are faring during this recession. His take: "the greater your involvement in producing high-value goods, the harder the fall."  My take on the same graph: Asian economies are doing worse.  Drop them out, and Wolfers' slope looks like a vertical line to me.

Am I wrong?


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COMMENTS (9 to date)
Blackadder writes:

You'd have to take out Germany too.

Richard writes:

It is true that all of the manufacturing-intensive countries are Asian. But the converse is not true: not all Asian countries are manufacturing-intensive. Therefore, Wolfers's focus on manufacturing is more precise, and more useful, than Caplan's focus on geography.

JD writes:

I'm just a lowly engineer, but I see some problems:

1) Limited (selected) data set?
2) Correlation = Causation?
3) Sensitivity to other parameters (open any macro text and take your pick)?

But then, what do I know ...

Cheers

Smith writes:

If the Asian economies are in more trouble because of manufacturing, it's because of the much reviled Austrian Capital Theory, which ties into the the Austrian Business Cycle theory. Under their capital theory, the further from the end consumer an industry is, the more likely it will be affected by a bubble collapse.

The structure of production for Austrians: Everyting starts with Materials/Mining, and then Manufacturing/Building, then Wholesale, then Retail, Services and then finally consumption. Sometimes production is years out.

Say you want to create product X: It takes a 8 months of product development, 4 months to go through the local zoning board, a year to build the factory, a month to train workers, another month for quality control and getting it to wholesalers. From the wholesaler, it takes maybe a week to get to retailers and from them, a few days to get to the consumer, etc.

My numbers above are totally arbitrary, but as the manufacturer, it is true you are (most of the time) going at least a year away from the consumer. For example, the iPhone, was being planned in mid 2005, didn't get to consumers until June 2007. And that's just for consumer goods. A capital good, like a machinist drill press or a semiconductor etching tank, is going to be even further out (in time) on the production structure.

Bank interest rate manipulation along with the practice of fractional reserves cause the business cycle in any economy. In the case of the current crisis, central banks have done the same but on a much, much larger scale.

With those things in mind, your production will be affected because of the interest rate policies (interest rates being the price of money over time.) Since production takes years, any loan you take out is greatly affected by the interest rate, a few percentage points on a 6 year loan for a $15 million dollar factory re-tooling is going to mean a big deal to you.

So in our scenario, to get to the capital, you'll have to play the game of boom-bust. Now, some are aware of the bubble, some not. But those that are aware, have a choice: Be conservative and hope that your competition doesn't swallow you during the expansive time of the bubble; Or ride the wave, get in, make massive bank and get out, before possibly getting caught playing musical chairs when the music stops.

In the end, manufacturers are more affected because it takes more time to plan for production than other sectors of the economy. If you worked in services, like say a hair salon, you can more easily adjust your costs and materials than an auto plant. As a hair salon owner, your business is immediate, takes ten minutes to an hour to do and you receive customer feedback and your income within that timeframe. As a factory owner, it will be months (at minimum) before you see income and unless you have your customers in the factory supervising production, you aren't going to get feedback right away either.

Asian economies that are tied heavily to manufacturing/building are further down the structure of production, so they are more likely to be hurt when a bubble bursts. I haven't checked but I would think that if research was done on materials/mining industries, you would probably see they were hurt just as badly or maybe even worse.

Chris writes:

Just glancing at the graph, I would say that *if* there is a relationship there, it is related to how open the nation's economy is. The more open the nation's economy is, the harder the recession is hitting them. It makes sense intuitively, given how much world trade has decreased, and would explain Germany.

happyjuggler0 writes:

Smith,

Thanks for your insight regarding Austrian Capital Theory.

I haven't checked but I would think that if research was done on materials/mining industries, you would probably see they were hurt just as badly or maybe even worse

If you check the link within the link (pdf), i.e. where the graph originated, and check out "Graph 1", you'll see an aggregate total for the listed countries broken down by "Consumer non-durables", "Capital goods", "Intermediate goods", and "Consumer durables". Nothing in "materials/mining" though, which is a bit bizarre for a paper regarding Australia.

"Graph 3" lists China's share of Australian exports (merchandise only!). Since China is still growing, this helps Australia's economy. Of course, I think all of those other Asian countries export a lot to China too....

happyjuggler0 writes:

Canada also has a high percentage of its economy in natural resources.

Jared writes:

Prof Caplan,

Take out the Asian countries, and you won't have a vertical line, but a very steeply negative one. That is, remove the Asian countries, and the change in GDP is *even more sensitive* to the level of "high-value goods" production.

I haven't looked at the second link (the one that goes back to the Fed), but if it has the raw data, we can actually attempt the correlation and see what falls out.

Jim Glass writes:

The article also confuses "high tech" with "high value".

Back in his pre-NY Times days, when Krugman used to bash the left, he regularly riduculed guys like like Thurow and Reich who proposed national industrial policy initiatives on the premise that "high tech = high value".

Of course, many many high value things have no high tech to them, and high tech items tend to rapidly fall in price as they become commodities.

It may well be that economies that depend on "high tech" exports are sufferring as world demand for commodities such as circuit boards, dvds, etc., plunge.

That's rather different from saying economies with "high value" exports are suffering.

Though from that graph, yeah, it may be just that those four Asian economies are suffering disproportionately for a regional reason of their own.

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