Daily Archives: 03/13/2011

Japan Update


By requests, a few links …
From the LA Times: Japan quake toll could number in tens of thousands
From the NY Times: Death Toll Estimate in Japan Soars as Relief Efforts Intensify
From the NY Times: Partial Meltdowns Presumed at Crippled Reactors
Before and after satellite photos from the NY Times.
The Nikkei is off 5%. From the WSJ: Japan Stocks Drop 5% Early Monday
Update: From Bloomberg: Japan Adds $86 Billion to Stabilize Markets After Quake
Earlier on U.S. economy:
Summary for Week ending March 11th
Schedule for Week of March 13th
Preview of Tuesday FOMC Meeting


Japan Update
Mon, 14 Mar 2011 00:31:00 GMT

James Hamilton isn’t panicked about Libya, oil prices, and the economic outlook

This from James Hamilton of UC San Diego.  He basically argues that events in Libya won’t tank the economy, but leaves open the question of what happens if other oil producers become inflamed.   This is premised on Libya being only 2% of world production, though he doesn’t explore if the low sulfur of Libyan crude could make it more crucial.

What will be the economic effects of this week’s developments in Libya? We have a fair amount of historical experience from which to try to answer that question.

In a recent paper, I surveyed the history of the oil market with a particular focus on major price movements and their economic effects. The table below summarizes the six episodes since World War II in which geopolitical events led to significant disruptions in the supply of oil. The last column reports the amount by which global oil supplies were reduced as a percent of world production at the time. The first five of the episodes listed in the table were followed by economic recessions, whereas the last was not.

Significant historical supply disruptions

Lost output

Suez Crisis
Nov 1956

OPEC embargo
Nov 1973

Iranian revolution
Nov 1978

Iran-Iraq War
Oct 1980

Persian Gulf War I
Aug 1990

Venezuela and Persian Gulf War II
Dec 2002

The table just reports the reduction in the flow of oil from the countries immediately affected by the events. In each case, there were production increases elsewhere in the world that offset some of the declines. For example, the Venezuelan strikes in 2002 and losses in Iraqi production in the Second Persian Gulf War in 2003 were pretty quickly made up for elsewhere.

Oil production after the Venezuelan unrest and the second Persian Gulf War. Dashed line: change in monthly global crude oil production from November 2002 as a percentage of November 2002 levels. Solid line: change in monthly oil production of Venezuela and Iraq from November 2002 as a percentage of global levels in November 2002. Horizontal axis: number of months from November 2002. Source: Hamilton (2011).


Libya recently accounted for a little over 2% of global oil production. If this is entirely knocked out, it would represent a shock that is only 1/3 the size of the smallest of the first 5 historical disruptions summarized above, and perhaps comparable to Venezuela-Iraq in 2002-2003.

Oil production in October 2010 (thousands of barrels per day). Data source:


Oil production
% of world total










Saudi Arabia

Next let’s take a look at the likely economic consequences for the U.S. Americans consume about 140 billion gallons of gasoline each year. I use the rough rule of thumb that a $10/barrel increase in the price of crude oil translates into a 25 cents per gallon increase in the price consumers will eventually pay for gasoline at the pump. Thus $10 more per barrel for crude will leave consumers with about $35 billion less to spend each year on other items, consistent with a decline in consumption spending on the order of 0.2% of GDP in a $15 trillion economy. The recent turmoil in North Africa has been associated with perhaps a $20/barrel increase in the price of crude and so might be expected to shave half a percent off GDP from this rough calculation.

After the first five events listed in the first table above, the actual drop in consumption spending was considerably larger than rule-of-thumb calculations like these would suggest. My interpretation is that these arise from multiplier economic interactions. For example, one of the things we would see historically is a sharp drop in sales of domestically manufactured, less fuel-efficient vehicles. As employment and income in the auto sector declined, the individuals affected cut their spending on other goods, and the final drop in spending was significantly larger than that attributable to the burden of higher energy costs alone. Rising consumer pessimism that correlates with the higher energy prices also seems to have played a role. The figure below, adapted from my 2009 Brookings study, is an estimate of the degree to which these kind of nonlinear multiplier effects of the oil price increase of 2007:Q4-2008:Q2 could have contributed to the initial phase of the most recent U.S. recession. The solid line is a simple forecast for GDP over 2007:Q4 to 2009:Q4 based solely on what had been happening to GDP over 2006:Q4 to 2007:Q3 and extrapolation of the trend. The red line is a forecast based solely on GDP over 2006:Q4 to 2007:Q3 and the observed behavior of oil prices over 2007:Q4 to 2009:Q4, as predicted by a model I published in an article in the Journal of Econometrics in 2003. The dashed line is the actual behavior of GDP as we subsequently observed it.


How big might we expect those multiplier effects to be in the current setting? Detroit is selling more SUVs than it did at the low point of the downturn, but nowhere near back up to the levels of 2007. There just isn’t as far to fall, and not as much a bite autos can take out of GDP, given current conditions. Having recently seen $4 gasoline, I don’t think creeping back above $3 has the same psychological shock value. That suggests to me that the erosion of consumer confidence should be less severe. The gains in employment that I believe are underway are another important offsetting plus in terms of what’s going to happen to consumer sentiment.

U.S. national average retail gasoline price. Source: NewJerseyGasPrices.com.


The particular dynamic model from which the above Brookings figure came builds in quite strong nonlinearities and threshold effects. Interestingly, according to that specification, one wouldn’t begin to anticipate significant effects on U.S. GDP until the price of oil got above about $130 a barrel, or until the second half of this year. Prior to that, according to that specification, we’re still ok.

I don’t want to make too strong a claim about those particular details. It’s very hard to claim precise statistical evidence in support of one choice of a threshold over another. But, this particular model has held up fairly well since its original publication in 2003. So I’m not about to abandon it just yet.

My bottom line is that events as they have unfolded so far are not in the same ballpark as the major historical oil supply disruptions, and are unlikely to produce big enough economic multipliers that they could precipitate a new economic downturn. They might shave a half percent off annual GDP growth, but I don’t anticipate a whole lot worse than that.

But the worry of course is that the big geopolitical changes we’ve been seeing didn’t stop with Tunisia, and didn’t stop with Egypt. So maybe it’s not a good idea to assume it’s all going to stop with Libya, either.

Source: Google maps.


Libya, oil prices, and the economic outlook
James Hamilton
Thu, 24 Feb 2011 00:39:55 GMT

Francis Fukuyama on China


[CHINA inside] Agence France-Presse/Getty Images

Surveys show that a majority of Chinese feel their lives have gotten better economically in recent years. Above, a worker at a construction site in Suining, China.

Over the course of three short months, popular uprisings have toppled regimes in Tunisia and Egypt, sparked a civil war in Libya and created unrest in other parts of the Middle East. They also have raised a question in many people’s minds: Are all authoritarian regimes now threatened by this new democratic wave? In particular, is China, a rising superpower, vulnerable to these forces?


The Communist government in Beijing is clearly worried. It has limited news coverage of the recent uprisings and has clamped down on democratic activists and foreign reporters, acting pre-emptively against anonymous calls on the Internet for China to have its own "Jasmine Revolution." A recent front-page editorial in the Beijing Daily, an organ of the city’s party committee, declared that most people in the Middle East were unhappy with the protests in their countries, which were a "self-delusional ruckus" orchestrated by a small minority. For his part, President Hu Jintao has urged the strengthening of what has been dubbed the "Great Firewall"—the sophisticated apparatus of censorship and surveillance that the regime uses to control access to the Internet.


China’s middle class, unlike its counterparts in the Middle East, has benefited from dramatic economic growth and the government’s focus on creating jobs for the educated. Pictured here, a Chinese businesswoman shops for sunglasses at a boutique in a Beijing shopping center.



No social scientist or intelligence analyst predicted the specific timing or spread of the Arab uprising—the fact that it would start in Tunisia, of all places, that it would be triggered by an event like the self-immolation of a vegetable seller, or that protests would force the mighty Egyptian army to abandon Hosni Mubarak. Over the past generation, Arab societies have appeared stolidly stable. Why they suddenly exploded in 2011 is something that can be understood only in retrospect, if at all.

But this doesn’t mean that we can’t think about social revolutions in a more structured way. Even unpredictable things take place in a certain context, and the present-day situations of China and the Middle East are radically different. Most of the evidence suggests that China is pretty safe from the democratic wave sweeping other parts of the world—at least for now.

Perhaps the most relevant thinker for understanding the Middle East today and China tomorrow is the late Samuel Huntington—not the Huntington of "The Clash of Civilizations," who argued that there were fundamental incompatibilities between Islam and democracy, but the Huntington whose classic book "Political Order in Changing Societies," first published in 1968, laid out his theory of the development "gap."

Anti-government protesters have chased presidents from office in Tunisia and Egypt and have sparked a civil war in Libya.



Observing the high levels of political instability plaguing countries in the developing world during the 1950s and ’60s, Mr. Huntington noted that increasing levels of economic and social development often led to coups, revolutions and military takeovers. This could be explained, he argued, by a gap between the newly mobilized, educated and economically empowered people and their existing political system—that is, between their hopes for political participation and institutions that gave them little or no voice. Attacks against the existing political order, he noted, are seldom driven by the poorest of the poor in such a society; they tend to be led, instead, by rising middle classes who are frustrated by the lack of political and economic opportunity.

All of these observations would seem to apply to Tunisia and Egypt. Both countries have made substantial social progress in recent decades. The Human Development Indices compiled by the United Nations (a composite measure of health, education and income) increased by 28% for Egypt and 30% for Tunisia between 1990 and 2010. The number of people going to school has grown substantially; Tunisia especially has produced large numbers of college graduates. And indeed, the protests in Tunisia and Egypt were led in the first instance by educated, tech-savvy middle-class young people, who expressed to anyone who would listen their frustrations with societies in which they were not allowed to express their views, hold leaders accountable for corruption and incompetence, or get a job without political connections.

Mr. Huntington stressed the destabilizing power of new social groups seeking political participation. People used to be mobilized by newspapers and radio; today they are spurred to action by cell phones, Facebook and Twitter, which allow them to share their grievances about the existing system and to learn about the possibilities of the larger world. This change in the Middle East has been incredibly rapid, and it has trumped, for now, old verities about the supposed passivity of Arab culture and the resistance of Islam to modernization.

But do these remarkable developments tell us anything about the possibility for future instability in China?

It is certainly true that the dry tinder of social discontent is just as present in China as in the Middle East. The incident that triggered the Tunisian uprising was the self-immolation of Mohamed Bouazizi, who had his vegetable cart repeatedly confiscated by the authorities and who was slapped and insulted by the police when he went to complain. This issue dogs all regimes that have neither the rule of law nor public accountability: The authorities routinely fail to respect the dignity of ordinary citizens and run roughshod over their rights. There is no culture in which this sort of behavior is not strongly resented.

Egyptian anti-government protesters celebrated in Cairo after president Hosni Mubarak stepped down on February 11.



This is a huge problem throughout China. A recent report from Jiao Tong University found that there were 72 "major" incidents of social unrest in China in 2010, up 20% over the previous year. Most outside observers would argue that this understates the real number of cases by perhaps a couple of orders of magnitude. Such incidents are hard to count because they often occur in rural areas where reporting is strictly controlled by the Chinese authorities.

The most typical case of outraged dignity in contemporary China is a local government that works in collusion with a private developer to take away the land of peasants or poor workers to make way for a glittery new project, or a company that dumps pollutants into a town’s water supply and gets away with it because the local party boss stands to profit personally. Though corruption in China does not reach the predatory levels of certain African or Middle Eastern countries, it is nonetheless pervasive. People see and resent the privileged lives of the nation’s elite and their children. The movie "Avatar" was a big hit in China in part because so many ordinary Chinese identified with the indigenous people it portrayed whose land was being stolen by a giant, faceless corporation.

There is, moreover, a huge and growing problem of inequality in China. The gains from China’s remarkable growth have gone disproportionately to the country’s coastal regions, leaving many rural areas far behind. China’s Gini index—a standard measure of income inequality across a society—has increased to almost Latin American levels over the past generation. By comparison, Egypt and Tunisia have a much more equal income distribution.

According to Mr. Huntington, however, revolutions are made not by the poor but by upwardly mobile middle-class people who find their aspirations stymied, and there are lots of them in China. Depending on how you define it, China’s middle class may outnumber the whole population of the United States. Like the middle-class people of Tunisia and Egypt, those in China have no opportunities for political participation. But unlike their Middle Eastern counterparts, they have benefited from a dramatically improving economy and a government that has focused like a laser beam on creating employment for exactly this group.

Anti-government protesters in Libya have sparked a civil war.



To the extent that we can gauge Chinese public opinion through surveys like Asia Barometer, a very large majority of Chinese feel that their lives have gotten better economically in recent years. A majority of Chinese also believe that democracy is the best form of government, but in a curious twist, they think that China is already democratic and profess to be satisfied with this state of affairs. This translates into a relatively low degree of support for any short-term transition to genuine liberal democracy.

Indeed, there is some reason to believe that the middle class in China may fear multiparty democracy in the short run, because it would unleash huge demands for redistribution precisely from those who have been left behind. Prosperous Chinese see the recent populist polarization of politics in Thailand as a warning of what democracy may bring.

The fact is that authoritarianism in China is of a far higher quality than in the Middle East. Though not formally accountable to its people through elections, the Chinese government keeps careful track of popular discontents and often responds through appeasement rather than repression. Beijing is forthright, for example, in acknowledging the country’s growing income disparities and for the past few years has sought to mitigate the problem by shifting new investments to the poor interior of the country. When flagrant cases of corruption or abuse appear, like melamine-tainted baby formula or the shoddy school construction revealed by the Sichuan earthquake, the government holds local officials brutally accountable—sometimes by executing them.

Another notable feature of Chinese government is self-enforced leadership turnover. Arab leaders like Tunisia’s Zine al-Abidine Ben Ali, Egypt’s Mr. Mubarak and Libya’s Col. Moammar Gadhafi never knew when to quit, hanging on 23, 30 and 41 years, respectively. Since Mao, the Chinese leadership has rigidly adhered to terms of about a decade. Mr. Hu, the current president, is scheduled to step down in 2012, when he is likely to be replaced by Vice President Xi Jinping. Leadership turnover means that there is more policy innovation, in sharp contrast to countries like Tunisia and Egypt, which have been stuck for decades in the rut of crony capitalism.

The Chinese government is also more clever and ruthless in its approach to repression. Sensing a clear threat, the authorities never let Western social media spread in the first place. Facebook and Twitter are banned, and content on websites and on China-based social media is screened by an army of censors. It is possible, of course, for word of government misdeeds to get out in the time between its first posting by a micro-blogger and its removal by a censor, but this cat-and-mouse game makes it hard for a unified social space to emerge.

A final critical way in which China’s situation differs from that of the Middle East lies in the nature of its military. The fate of authoritarian regimes facing popular protests ultimately depends on the cohesiveness and loyalty of its military, police and intelligence organizations. The Tunisian army failed to back Mr. Ben Ali early on; after some waffling, the Egyptian army decided it would not fire on protesters and pushed Mr. Mubarak out of power.

In China, the People’s Liberation Army is a huge and increasingly autonomous organization with strong economic interests that give it a stake in the status quo. As in the Tiananmen uprising in 1989, it has plenty of loyal units around the country that it could bring into Beijing or Shanghai, and they would not hesitate to fire on demonstrators. The PLA also regards itself as the custodian of Chinese nationalism. It has developed an alternative narrative of 20th-century history that places itself at the center of events like the defeat of Japan in the Pacific war and the rise of a modern China. It is very unlikely that the PLA would switch sides and support a democratic uprising.

The bottom line is that China will not catch the Middle Eastern contagion anytime soon. But it could easily face problems down the road. China has not experienced a major recession or economic setback since it set out on its course of economic reform in 1978. If the country’s current property bubble bursts and tens of millions of people are thrown out of work, the government’s legitimacy, which rests on its management of the economy, would be seriously undermined.

Moreover, Mr. Huntington’s scenario of rising but unfulfilled expectations among the middle class may still play out. Though there is a labor shortage among low-skill workers in China today, there is a glut of the college educated. Every year into the future, China will graduate more than seven million people from its universities, up from fewer than a million in 1998, and many of them are struggling to find work suitable to their self-perceived status. Several million unemployed college graduates are far more dangerous to a modernizing regime than hundreds of millions of poor peasants.

There is also what the Chinese themselves call the "bad emperor" problem. China’s historical achievement over the centuries has been the creation of high-quality centralized bureaucratic government. When authoritarian rulers are competent and reasonably responsible, things can go very well. Indeed, such decision-making is often more efficient than in a democracy. But there is no guarantee that the system will always produce good rulers, and in the absence of the rule of law and electoral checks on executive power, there is no way to get rid of a bad emperor. The last bad emperor, commonly (if quietly) acknowledged as such, was Mao. We can’t know what future tyrant, or corrupt kleptocrat, may be waiting in the wings in China’s future.

The truth is that, much as we might theorize about the causes of social revolution, human societies are far too complex, and change too rapidly, for any simple theory to provide a reliable guide. Any number of observers dismissed the power of the "Arab street" to bring about political change, based on their deep knowledge of the Middle East, and they were right every year—up until 2011.

The hardest thing for any political observer to predict is the moral element. All social revolutions are driven by intense anger over injured dignity, an anger that is sometimes crystallized by a single incident or image that mobilizes previously disorganized individuals and binds them into a community. We can quote statistics on education or job growth, or dig into our knowledge of a society’s history and culture, and yet completely miss the way that social consciousness is swiftly evolving through a myriad of text messages, shared videos or simple conversations.

The central moral imponderable with regard to China is the middle class, which up to now has seemed content to trade political freedom for rising incomes and stability. But at some point this trade-off is likely to fail; the regime will find itself unable to deliver the goods, or the insult to the dignity of the Chinese people will become too great to tolerate. We shouldn’t pretend that we can predict when this tipping point will occur, but its eventual arrival, as Samuel Huntington might have suggested, is bound up with the very logic of modernization itself.

—Mr. Fukuyama is a senior fellow at the Freeman Spogli Institute for International Studies at Stanford University. His new book, "The Origins of Political Order: From Prehuman Times to the French Revolution," will be published next month