Using Export Complexity to Explain Income Inequality

An image of a cargo ship, a port, and some air planes.

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Researchers from MIT have developed a new method for predicting the economic success of countries around the world: the complexity of that country’s export economy. For the last decade or so, Professor César Hidalgo and his colleagues have been doing research and writing papers to back up this idea. They argue that “not just [the] diversity but the expertise and technological infrastructure required to produce [exports] is a better predictor of future economic growth than factors economists have historically focused on, such as capital and education.”

And what’s more, the most recent research shows that this complexity can also say a lot about income equality in those countries as well. Basically, countries with greater export complexity have lower income inequality because there are more workers in more industries that are generating exports and, subsequently, income. Looking at data collected between 1963 and 2008, researchers found that “countries whose economic complexity increased, such as South Korea, saw reductions in income inequality, while countries whose economic complexity decreased, such as Norway, saw income inequality increase.”

This research comes at a time of renewed interest, both politically and scientifically, in the issue of income inequality in many parts of the world. There are a number of factors that can be used to determine the current or future success of an economy, but not all of those factors are equally important. Relying solely on GDP, which is often the case, is much less useful than combining it with export complexity, education, and population. However, relying just on export complexity seems to work almost as well as using all of the aforementioned methods.

This development could be extremely useful to both governments and businesses in the future, as they seek to do right by their citizens and employees, respectively. Essentially, finding a new niche isn’t just good for a company, but it can help the country as well.

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Wall Street Shows Recovery After Brexit

Word "BREXIT", US dollar, British pound, and red arrow pointing down

Brexit has definitely hit the worldwide economy hard, but Wall Street at least shows signs of recovering.
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As pretty much everyone knows, during the “Brexit,” vote wherein a small majority of UK citizens voted to leave the European Union, the British pound plummeted to a 31-year low and took the stock market with it. Wall Street didn’t suffer as hard a blow, but there was still a pretty significant drop of stock values. The Bank of England is bracing for whatever comes next as the United Kingdom decides how to handle leaving the EU. Chances are no matter what they do, it’s going to hurt their economy, and the global economy, in the long run.

In the days following the initial slump, though, Wall Street reported gains that have taken back some of the ground lost following the vote. The campaign to leave, though it did claim some economic advancements, was quite obviously a political one, and the reality of the resulting economic issues weren’t put forth.

It’ll take some time to recover. Recovery will likely be slow until the “divorce” is finalized, and even then, things might not go all that well. It’s too early to know. But it’s not too early to start planning for the future, and there’s one simple rule that everybody needs to remember: don’t panic!

Don’t dump your stocks, or bail on the market, or buy a ton of gold and hide it around your property. That sort of activity is what made the Great Depression hit so hard so fast, making recovery that much harder. This is a different situation. The economy likely won’t hit nearly as hard. But Brexit will have an impact on the global economy, and cutting and running will only start a chain reaction that exacerbates the problem. Be wise with you investments, as always, but don’t overhaul your entire portfolio or your strategy because of this. Keep calm and carry on, as the British are fond of saying.

China’s Non-Bailout Could Strengthen China’s Financial Structure

China

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China has finally, for the first time ever, allowed an onshore company to default on a bond payment rather than bailing it out. China, still struggling with the fallout of a credit boom that began back in 2008 from stimulus packages, has slowly begun to allow small, commonly privately owned, businesses to default on their debts.

The reason behind this, says China’s premier Li Keqiang, is to address the issue of “moral hazard” in the economy. While he says the government is taking steps to ensure it doesn’t pose a threat to a broader financial structure, many analysts are concerned it might prompt a “Lehman moment” and cause investor panic.

With China likely to see a series of defaults as its government accelerates financial deregulation, the government hopes to take steps to ensure they do endanger wider financial systems.

Many rating agencies have given their opinions on what this could mean for China’s economy. Moody’s CEO Raymond McDaniel and his team have given their two cents: “People believe that if you let a LGFV [local government financing vehicle] default, there could be a chain reaction,” said Ivan Chung, a credit officer with Moody’s. “So they believe the government will do something and not let them go under at this moment.”

With the clear indication from China that they will indeed let some business go under, some are saying the perception of the financial sector is strengthened, not hindered, by such decisions. With the world economic collapse in 2008 still firmly in most investors minds of the United States’ “too big to fail” bailouts happening at taxpayer expense, many believe the knowledge that such a bailout won’t ever happen again can bolster confidence in the government and in turn, its financial sector. Banking practices having become much more secure with the understanding that the US government will not allow such bailout to happen again.

Top 8 Retailers That Are Suffering and Closing the Most Stores

With the increase of online retailers (Amazon really did a number on retailers) and slow economic activity, some retailers have been suffering. Weakened companies cannot afford the real estate and personnel costs for certain stores that just aren’t bring in profits. A great example is Radio Shack’s recent decision to close more than 1,000 stores.

Radio Shack is of course not the only one to close several stores. Barnes and Noble was one of the first companies affected by Amazon, along with Borders, which of course has already gone out of business. Amazon accounted for 44% of book sales in 2012, according to Bowker, a bookseller consultancy. Staples is a recent example of a company losing business from Amazon. Following two years of sales declines, it was announced that it will close 225 stores by 2015, 12% of it’s total store count.

8 retailers that are closing the most stores:

  1. Abercrombie and Fitch – While this store was very popular during my time as a teen, the “preppy” look isn’t as big anymore. In its most recent quarterly report, the company said it had closed 10 stores by November of last year and would close another 40 stores by the end of its fiscal year.
  2. Barnes and Noble – Barnes & Noble announced plans to shut a third of its stores over the next 10 years. People were sad (including me) when the they chose to close its one-time booming store in New York City this winter.
  3. Aeropostale – Again like Abercrombie, Aeropostale is not as popular with teens today. This store is the in the middle of closing 40 to 50 stores in 2014, and plans to close around 175 stores in total over the next couple of years.
  4. J.C. Penny – When their sales started to decline, the company brought in a new CEO, Rob Johnson. While they thought this change up and store makeover would help, sales got even worse. The company recently announced it would be shutting down several stores.
  5. Office Depot – Office Depot actually merged with their competitor, Office Max in November. While this was helpful, they are still cutting back jobs and stores. The company had 1,912 stores at the end of its latest fiscal year, including 823 OfficeMax stores. Since the merger, the company has closed 15 of its Office Depot stores and seven OfficeMax locations.
  6. RadioShack – While RadioShack is working on updating itself (did you see the Super Bowl commercial?) it may be too late. A previous attempt at rebranding itself as “The Shack” never caught on, and the retailer recently announced it would close 1,100 out of its more-than 5,000 stores.
  7. Sears – Sears has been declining in sales since the merger with Kmart in 2005. About 300 stores have been closed since 2010, and Cowen analyst John Kernan recently noted that he expected Sears Holdings to close an additional 500 stores as well.

Economic Opportunity in 2014: An Interview With Vance Serchuk and David Petraeus of KKR

Economic Opportunities

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What do global economic opportunities look like for 2014? Privcap recently interviewed Vance Serchuk and David Petraeus of KKR’s Global Institute. Serchuk is a national security expert, while Petraeus is a retired four-star general and former Director of the CIA; both men joined up with the private equity firm in 2013. Petraeus serves as chairman of KKR Global Institute, while Serchuk is its executive director.

Here are a few highlights from the interview with Privcap’s David Snow:

Petraeus says that demographics in North America are pretty good compared to countries like Japan and China. “We have a number of advantages,” he says, “the manufacturing revolution, the IT revolution and the life-sciences revolutions are also endeavors in which the United States and North America at large are in the lead.”

Serchuk adds that, in North America, one of the greatest advantages is that we’re still a very young country with a young population—especially compared to China, whose population is aging.

In Europe, it’s all about Serbia. Says Serchuk, “KKR just did the largest-ever private equity deal in Serbia. The story in Serbia is of courageous decisions on the part of political leadership there to confront difficult issues so that they can move forward towards the EU.”

Both Petraeus and Serchuk agree that Japan’s main challenge is reforms for the labor and agriculture industries. Competition with and concern over China has “spurred a greater willingness to contemplate” such reforms, says Serchuk.

In regards to the Middle East, Petraeus says that there has been a lot more progress than some people realize. He emphasizes, “there have been far more reforms than I think most people recognize. You have to understand the culture. You have to understand the conflicting tensions in these countries to appreciate how much, say, King Abdullah in Saudi Arabia has really done in a state where there is a lot of conservative sentiment.”

The KKR Global Institute was created to help KKR better understand, track, and respond to emerging markets across the globe. It keeps in mind geopolitical and macro-economic trends, technology changes, and more.

2014 Economic Predictions Say Latin America Is in an Upswing

Brazil

Sao Paulo view from Morumbi Bridge – Brazil.
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With the New Year officially here, market analysts and economists are in full “prediction mode,” working hard to determine which economies will do better, worse, or about the same as they did in 2013. One area of the world that’s garnering a lot of attention in Latin America, where analysts say things look generally positive despite some instability.

Though economic growth actually declined last year, the UN’s 2014 World Economic Situations and Prospects report predicts that better economic growth is in store for 2014. An upswing in private consumption and manufacturing will prompt growth. And if that happens, this may be an ideal time to invest in those economies.

“It’s an ideal opportunity,” said Geoffrey Dennis, who is the head of global emerging markets strategy at UBS. “People are saying ‘It was a terrible year in 2013, it has to be better in 2014.” Indeed, the recent economic slump means buying is cheaper than normal—and will pay off if, indeed, the economies in question do see better times in 2014.

But this new positive outlook for Latin American economies does not come without several grains of salt. Brazil, for example, is facing a potential credit rating drop. Ray McDaniel-run ratings agency Moody’s says the country needs to get its debt under control and see stronger economic growth to keep its Baa2 investment grade rating

“The path debt-to-GDP takes will strongly influence Brazil’s sovereign credit outlook,” Moody’s wrote, noting that it is concerned with the trends that take form this year. “An important question to sovereign credit quality is whether authorities can restore conditions that will eventually lead to a declining trend in the debt ratio.” Indeed with the country’s upcoming elections, there may be changes to Brazil’s economic policies—whether for better or worse.

What predictions do you have for the coming year?

The Government Shutdown: Did it Hurt or Help the Job Market?

Government Shutdown: Did it hurt or help the job market?

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Many people were upset about the Government shutdown. Some people found it petty and unnecessary, some people were affected even more when their jobs were furloughed, and others were worried what the cost was doing to the economy.

Numbers that were released last Friday show that the government shutdown didn’t have much affect on employers, who hired 204,000 people for jobs regardless.

Government workers were furloughed for 16 days, but reports are finding that somehow that might have improved the job market; although these numbers may be inflated. This is because job numbers are usually announced the first Friday of the month. Due to the shutdown, the Bureau of Labor Statistics delayed reporting the numbers, which allowed more time to collect payroll and household data.

The average participation rate by employers in payroll surveys for the nine months before October was 76.4 percent. In October with an extra week, the numbers were up to 83.5 percent.

“It seems that when the initial response rate is high, the initial payroll number is often, though certainly not always, stronger than the prior trend,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a research note.

According to AP, this means that, “if the jobs numbers in prior months were based on a lower participation rate, a stronger participation rate would skew the number up.”

Some economists think that this higher October number could result in a decrease for November.

“Businesses may have inadvertently counted employment for an extra week. That could juice up the number. That may mean that we actually get surprised next month with a much weaker number,” according to Mark Zandi, a chief economist at Moody’s Analytics. Moody’s, whose CEO is Raymond McDaniel, is one of three top credit rating agencies alongside Fitch and S&P.

Even though there is data showing more hiring in November, President Barack Obama on Friday continued portraying his views that the shutdown harmed the job market.

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