Friday, April 10, 2009

Unwinding Global Imbalances

As a quick follow-up to my last post, the BEA last night posted Febuary data on US international trade. There's been a marked improvement in the trade balance:

That's the lowest level in the trade deficit since November 1999. The bad news is that it's been driven by a sharp contraction in trade:

Interpreting this in light of my last post, I don't think there's any question that global trade and savings imbalances are being unwound right now and fairly rapidly, without a big adjustment in the USD (although I think that's probably still on the cards). Right now funding the deficit has fallen to an average of $1 billion a day, rather than the $1.9 billion required last year.

As to how sustainable this is, about half the reduction in y-o-y imports comes from a lower oil bill, and another sixth or so from lower imports of cars. If and when growth resumes, both these categories are likely to pick up again, so we're not out of the woods yet.


  1. Hi HishamH,

    Wonder whether you can shed some lights on :

    Which do you think is happening ?
    The rise is due to:

    US appreciates (abrupt sharp rise, then inverted J-curve)- the rise is the abrupt sharp rise
    US depreciates (abrupt sharp drop, then J-curve)- the rise is the J-curve.

    How can we tell whether the theory explains the phenomenon ?

  2. It's neither. Nothing to do with exchange rates at all. I note that the USD has been generally appreciating for the last year, which should generally indicate an increase in the deficit, rather than a drop.

    The way I'm reading the numbers, I think the drop is about one half demand destruction, and the other half cheaper oil. Thus my comment on whether this is sustainable.

    A resumption in growth should push demand for oil (and thus it's price) back up. Same for demand for other imports.

    What's not clear is how much of what we're seeing is a shift in demand (demand curve shifts left), or a move down the slope. The former implies a permanently lower equilibrium point, the latter a temporary disequilibrium which can revert to the old deficit levels when things return to 'normal'.

    To what extent either effect is happening I don't know.

  3. Hi Hishamh,my name is Yeam.I was introduced to your blog by Wei Liang (A Piece of My Mind).Like him, I am also an Economics Student in ANU, currently in my 3rd undergrad year.

    I'm writing an 2000-word essay on a topic relating to labour economics and am given the freedom to choose. I'm planning to write about the number of scholars (JPA, Petronas, etc) who actually come back and serve the country and whether or not it is still worthwhile providing scholarships if our government does not benefit from the additional human capital in long term (brain drain).

    do you think this topic is viable? Will it be difficult to look for sources of relevant information? please do not hesitate to share if you have any other interesting topics I can consider.

    Thanks, Hishamh.

  4. Yeam, thanks for dropping by. Do you have an IM account or email I could contact you by? I have about 50MB of research papers, data and newspaper references on this topic. Unfortunately they're all old (circa 2004), but it shouldn't be difficult to find new sources.

    Actual hard data is not easy to come by with respect to no. of actual scholars not returning home, although my gut feel is that this is exclusively a JPA problem, and not with the others e.g. Petronas, BNM and the like.

    Having said that, the topic is a good one, and particularly pertinent considering the Vision 2020 objective. It's also something that should be revisited, since advanced economies are going through a severe downturn, and coming home becomes more attractive.

  5. Hello Yeam & HishamH,

    Sorry for interrupting on the subject discussed.. I'm interested on the topic too.

    I'm in semiconductor industry.

    Does JPA scholarship not come with a bond after the student graduation ? If that is the case, then it's really a institutional flaw.

    I wonder how to define "additional human capital in long term (brain drain)". Though some overseas student may not come back for work, they may still contribute knowledge diffusion/formation to the country through networking (formal or informal) with countrymen (e.g friends, classmate, relatives, or even forum/blog friend). The network effect can be tremendous. E.g overseas Indian network, overseas Taiwanese network which help India/Taiwan IT/semiconductor industry in the form of knowledge flow, job opportunities, venture capital etc..

    2 books that I find useful:
    1. Creating regional wealth in the innovation economy: model, perspectives, and best practices
    2. Made by Taiwan: booming in information technology era

  6. Examples of such groups:


  7. Hi Hishamh,
    Thanks for your prompt response. This is my email:

    Hi WY,
    What's your email address? perhaps we can discuss this further. Your view is certainly a fresh perspective to look at this topic from.

  8. Hi syyeam,

    I'm just an amateur in econs :-)
    I think M'sian should go to advanced countries to learn advanced knowledge + network.

    Knowledge + network benefit may be hard to quantify.

    Related econs concept I can think of:
    endogenous growth theory;
    network externality

  9. WY,

    Yes, JPA students are typically under bond. However, if they're hellbent on staying on especially illegally, there's little JPA can do. The reason why I think this is specifically a JPA problem is because they have so many students, it's impossible to monitor everyone. Not so for other public-private scholarship providers. In addition, JPA is also least likely to insist students come back after the end of their term of study.

    On the other hand, the biggest loss in terms of brain drain to Malaysia are not those under public/private loan/sponsorship i.e. non-students. It's these people we can least afford to lose, which is supported by the fact that they are also the most likely to be welcomed as immigrants elsewhere - they have knowledge and skills everyone wants.

    Your point regarding overseas networks is more applicable for these groups. They are correspondingly the hardest to persuade to come back as their reasons for immigration is seldom economic but usually social or political. One of the hidden costs of the NEP if you will.


    I'll email the stuff I have after I get home from work.

  10. Hi HishamH,

    I have the same view: JPA’s problem.
    I think it’s both contract design and the will to enforce it.

    Some ideas of “strict” contract:
    1. non-satisfactory academic performance -> scholarship converted to loan (with interest charged on outstanding amount)
    2. loan non-payment -> made bankrupt; passport non-renewal
    3. clause on breaking of bond -> cost payback + interest + penalty; penalty on guarantor;

    It should be more like business, not charity; no free lunch :-)

    The amount of data should be trackable. Academic performance needs to be tracked too.

    I would hope “brain drain” eventually can be brain stored and grew overseas, waiting to be gained back when local environment become conducive for them.
    Many of such success stories: China, India, Korea, Taiwan etc..

  11. This comment has been removed by the author.

  12. Sorry I accidentally left a comment under my friend's name.

    Just wanna let you guys know that Wei Liang wrote a letter to The Star about this topic.

    Here's the link:

  13. Yeam,

    Files are now on the way to your email. There are nine parts altogether, and you'll need a good zip program to open them. I recommend IZArc.


    Spot on, although I think the main reason for success of those other countries in the reverse brain drain has simply been better economic performance and rising incomes. We've got social and political factors on top of that. Nevertheless, now is probably the right time to stress attracting back our expatriates.


    Wei Liang's points are all very good. One thing I would disagree with is the issue of getting out of the contract. The purpose of PSD scholarships isn't restricted to providing for new entrants into public service.

    There are positive externalities from scholars leaving for the private sector, rather than remaining within the public system. In fact it's arguable that these benefits far outweigh the cost involved, which in any case is counterbalanced by the probable higher income tax collection accruable to the government.

  14. Hi Hisham,
    I've safely received the files but they keep coming in. I'm currently still receiving the files, like every 10 minutes, I'll receive an email from you.

    How do you find out about the objectives? I've tried googling for objectives of PSD scholarships but to no avail. Is there any other way our govt can benefit from scholars who work in private sector besides tax collection? While I admit that this situation is definitely better than scholars not coming back at all, public service need them in its mission to become more efficient and effective (though I'm not sure how long it will take for our public sector to actually change for the better)

  15. Hi HishamH,

    I just read the Star article.
    I wonder whether I read it right.
    Is the scholar complaining of scholars not being allocated only to public sector, but also to govt agencies/U or even private sector ?

    My opinion is "wider/better pool of allocation choices" is better than "allocation only to public sector"; and "freer market" is better than "allocation".

    e.g of methods:

    maybe make it like method of "application to university" where candidates name their 1st choice, 2nd choice...preferences etc. ; together with their academic/non-academic achivement, course studied etc..

    Public sector/agencies/GLC bosses then choose based on scholars' choice & merits.
    Priority of Public sector/agencies/GLC will depend on govt policy.

  16. Hi syyeam,

    My opinion on your question on private sector:
    Better quality of pool of talents available to private sector ->
    can use to attract better quality of FDI ->
    better clustering, network, knowledge spillover
    -> better revenue and tax

    My advice to scholars:
    Within your choice/constraint, go where you can add value for yourself and thus your institution. The "invisible hand" will add value to M'sia. Don't add constraint to yourself if there isn't any.

  17. WY,

    "Is the scholar complaining of scholars not being allocated only to public sector, but also to govt agencies/U or even private sector?"

    No, he's not complaining about the above. In fact, he's happy with it. His point is, even when jobs in public sector is not limited to only PSD, its scholars still refuse to serve.

    It's understandable, really. If given a choice, not many overseas graduates would wanna work in public service if they can work in private sector.

    Wei Liang basically prefers scholars to work and contribute direct via public sector, not private.

  18. Hi syyeam,

    Thx for the clarification.

    I share the same view that "refusal to serve" is wrong. Must honour the contract.

    Also can understand "If given a choice, not many overseas graduates would wanna work in public service if they can work in private sector. ".
    This is rational but they may not have a choice. This choice depends on PSD decision.

    "Wei Liang basically prefers scholars to work and contribute direct via public sector, not private."
    This is the part I don't share the same view.

  19. Yeam, sorry about the emails - something wrong with my email client today. It's fixed now.

    The "benefits", if you can call it that, to the government does not lie purely in terms of increased revenue.

    Insofar as the objective of government is to sustain and increase the welfare of the people, the investment in education is beneficial even if it represents a "dead" cost - essentially WY's points.

    Highly educated citizens are (presumably) more productive, and generate higher economic activity which directly contributes to higher employment of other citizens, even those of lower educational attainment -> ergo, greater social welfare.

    On that score, you should view PSD scholarships not just from the viewpoint of meeting the staffing requirements of the government, but rather as an instrument of development policy.