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Articles for the ‘Economics 9e: Ch 27’ Category

Measuring wellbeing

GDP is often used as a measure of wellbeing, even though it is really only a measure of the market value of a nation’s output or an indicator of economic activity. But although higher consumption can improve living standards, it is only one contributor to wellbeing, whether at individual or social level.

There are essentially four types of problems from using GDP as a measure of how society is doing.

The first is that it does not include (as negative figures) many external costs, such as pollution, stress and family breakdown related to work.

The second is that it includes things that are produced to counteract the adverse effects of increased production, such as security, antidepressants, therapy and clean-up activities.

The third is that it ignores things that are produced and do contribute to wellbeing and yet are not traded in the market. Examples include volunteer work, the ‘output’ of clubs and societies, work within the home, production from allotments and various activities taking place in the ‘underground economy’ to avoid taxation.

The fourth is the sustainability of economic growth. If we deplete natural resources, the growth of today may be at the cost of the wellbeing of future generations.

Then there is the question of the distribution of the benefits of production. Although GDP figures can be adjusted for distribution, crude GDP growth figures are not. If a few wealthy get a lot richer and the majority do not, or even get poorer, a growth in GDP will not signify a growth in wellbeing of the majority.

Then there is the question of the diminishing marginal utility of income. If an extra pound to a rich person gives less additional wellbeing than an extra pound to a poor person, then any given growth rate accompanied by an increase in inequality will contribute less to wellbeing than the same growth rate accompanied by a decrease in inequality.

The first article below criticises the use of crude indicators, such as the growth in GDP or stock market prices to signify wellbeing. It also looks at some alternative indicators that can capture some of the contributions to wellbeing missed by GDP figures.

Articles
Want to know how society’s doing? Forget GDP – try these alternatives The Guardian, Mark Rice-Oxley (27/1/17)
The Increasingly Inadequate Measurement Of Productivity The Market Mogul, Chris Woods (20/1/17)
Why GDP fails as a measure of well-being CBS News, Mark Thoma (27/1/16)
Limitations of GDP as Welfare Indicator The Sceptical Economist, zielonygrzyb (31/7/12)

Questions

  1. Should GDP be abandoned as an indicator?
  2. How could GDP be refined to capture more of the factors affecting wellbeing?
  3. Go through each of the indicators discussed in the first article above and consider their suitability as an indicator of wellbeing.
  4. “Everywhere you look, there are better benchmarks than these tired old financial yardsticks.” Identify three such indicators not considered in the first article and discuss their suitability as measures of economic performance.
  5. How might the benefit you gain from free apps be captured?
  6. Consider the suitability of these alternatives to GDP.
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Perspectives on poverty

In this post we focus on three aspects of poverty around the world. The first is the definition of poverty. Is it an absolute or a relative concept? Does its definition change as the world develops. The second is the extent of poverty. Is the problem getting worse as inequality deepens, or are the numbers (absolutely or proportionately) getting smaller despite increased inequality? The third is policy to tackle the problem. What can be done and is being done? What answers are being given by policymakers in different parts of the world?

As far as the measurement of poverty is concerned, the simplest distinction is between absolute and relative poverty. Absolute poverty could be measured as income below a certain real level deemed necessary to achieve a particular standard of living. This could be specified in terms of sufficient income to have adequate food, shelter, clothing and leisure time, and adequate access to healthcare, clean water, sanitation, education, etc. An obvious problem here is what is considered ‘adequate’, as this is partly culturally determined and will also depend on physical and geographical features, such as climate.

The World Bank defines extreme absolute poverty as living on under $1.90 per day in purchasing-power parity terms. However, even after adjusting for purchasing power, what is considered the poverty threshold differs enormously from country to country. As the Wikipedia entry states:

Each nation has its own threshold for absolute poverty line; in the United States, for example, the absolute poverty line was US$15.15 per day in 2010 (US$22,000 per year for a family of four), while in India it was US$1.0 per day and in China the absolute poverty line was US$0.55 per day, each on PPP basis in 2010.

Relative poverty is normally taken to mean when a person’s income falls below a certain percentage of the mean or median. Thus in richer countries, for a given percentage, the poverty threshold would be at a higher absolute income. In the EU, people in relative poverty are defined as those with disposable income (after monetary benefits) less than 60% of the median.

Both approaches focus on consumption. Other approaches include social and cultural exclusion as dimensions of poverty.

What is clear is that poverty has a number of definitions. One problem with this is that politicians can focus on whatever definition suits them. Thus in the UK, with relatively high levels of employment, but often at low wages and only part-time employment, the Conservative government has redefined poverty as where no-one in a family is in work. Yet many working families have very low levels of income, considerably below 60% of the median.

The second aspect of poverty is its extent and whether it is growing. According to the United Nations, globally ‘extreme poverty rates have been cut by more than half since 1990. While this is a remarkable achievement, one in five people in developing regions still live on less than $1.25 a day, and there are millions more who make little more than this daily amount, plus many people risk slipping back into poverty.’

Despite this progress, in many countries extreme poverty is increasing. And in others, although the number in extreme poverty may be declining, it is still high and inequality is increasing so that more people are living only just above the extreme poverty line. The articles look at dimensions of poverty in different countries.

For example, the first The Conversation article argues that the financial crisis of 2008–09 led to a substantial increase in poverty across the European continent.

The impoverishment of Greece, Italy, Cyprus, Spain and Portugal has been so severe that these southern European countries, taken together, had higher levels of poverty and deprivation than many of the former Communist nations that joined the European Union in 2004.

The third aspect is how to tackle the problem of poverty. There are three broad policy approaches.

The first is the use of cash transfers, such as unemployment benefits. The second is providing free or subsidised goods and services, such as healthcare or education. The ability of a country to support the poor in either of these ways depends on its tax base. Also, clearly, it depends on its priorities. There is also the issue of incentives. Do benefits encourage or discourage the recipients from seeking work? This depends on the design of the system. For example, if childcare is subsidised, this may both aid poor parents and also encourage parents responsible for looking after young children to seek work.

The third is to attempt to improve the earning power of the poor. This may in part be by the second approach of improving education, training and health. But it may also involve removing restrictions to employment, say by making various forms of discrimination illegal. It may also involve increasing land rights. In many developing countries land is very unequally distributed; redistribution to the poor can make a substantial contribution to relieving poverty. Another approach is to encourage agencies which supply microfinance for poor people wishing to set up their own small business.

The articles below look at a number of dimensions of poverty: its measurement, its extent and its alleviation. They look at the problem from the perspective of different countries. It is interesting to see to what extent the problems and solutions they identify are country-specific or general.

Articles
Extreme poverty affects 1 in 8 globally Buenos Aires Herald (20/7/16)
How poverty has radically shifted across Europe in the last decade The Conversation, Rod Hick (20/7/16)
The economics of poverty The Tribune of India, S Subramanian (22/7/16)
Poverty Chains and Global Capitalism. Towards a Global Process of Impoverishment Global Research (Canada), Benjamin Selwyn (20/7/16)
Asia’s cost of prosperity The Nation, Karl Wilson (24/7/16)
Private rental sector is the ‘new home of poverty’ in the UK The Guardian, Brian Robson (20/7/16)
Challenges in maintaining progress against global poverty Vox, Martin Ravallion (23/12/15)
California, sixth largest economy in the world, has highest poverty rate in US wsws.org, Marc Wells (22/7/16)
How gross inequality and crushed hopes have fed the rise of Donald Trump The Conversation, Nick Fischer (21/7/16)

Information
Sustainable Development Goals – Goal 1: End poverty in all its forms everywhere United Nations
Children of the Recession: Innocenti Report Card 12 UNICEF, Gonzalo Fanjul (September 2014)
Listings on Poverty Joseph Rowntree Foundation
Poverty The World Bank
Hunger and World Poverty Poverty.com

Questions

  1. Distinguish between absolute and relative poverty. Give examples of specific measures of each and the extent to which they capture the complex nature of the problem.
  2. Discuss the appropriateness of the seven measures of poverty used in the first The Conversation article.
  3. How did the financial crisis affect the proportion of people living in poverty? Explain.
  4. What is the relationship between poverty and inequality? Does a more unequal society imply that there will be a greater proportion of people living in poverty?
  5. How has international poverty changed in recent years? What explanations can you give?
  6. What are the advantages and disadvantages of using income per head as a measure of poverty, whether absolute or relative?
  7. Why is poverty so high in (a) the USA as a whole; (b) California specifically?
  8. How does globalisation affect poverty?
  9. Are adverse environmental consequences an inevitable result of reducing poverty in developing countries?
  10. Is freer trade likely to increase or decrease poverty? Explain
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Trade wars looming

According to the law of comparative advantage, trade can benefit all countries if they export goods which they can produce at lower opportunity costs than their trading partners. Trade enables all countries to consume beyond their production possibility frontier. What is more, trade can increase competition, which encourages firms to be more efficient.

That trade is beneficial has been generally accepted by governments around the world since the Second World War, with the General Agreement on Tariffs and Trade (GATT) and then the World Trade Organization (WTO) advocating the dismantling of trade barriers. Countries have participated in a series of trade ’rounds’, such as the Uruguay Round (1986–94) and most recently the Doha Round (2001–15). But since the financial crisis of 2008, there has been waning enthusiasm for freer trade and growing calls to protect strategic and/or vulnerable industries. To some extent this mirrors the growth in protection after the Great Depression of the early 1930s as countries sought to boost their own industries.

After some progress in the Doha round talks in Nairobi in December 2015, the talks effectively marked the end of a fourteen-year road for the round (see also). There was a failure to agree on a number of items and chances of resurrecting the talks seem slim.

The classic response to calls for protection is that it can lead to a trade war, with a net loss in global output as less efficient domestic industries are shielded from competition from lower-cost imports. Consumers lose from no longer having access to cheaper imported goods. Trade wars, it is argued, are a negative sum game. Any gains to one country are more than offset by losses elsewhere. In fact, it is likely that all countries will lose.

One argument for protection recognises the efficiency gains from free trade, but argues that current trade is distorted. For example, countries may subsidise the export of products in which they have a comparative disadvantage and dump them on the rest of the world. The WTO recognises this as a legitimate argument for tariffs, if they are used to offset the effect of the subsidies and make import prices more reflective of the cost of production.

But increasingly arguments go beyond this. Industries that are regarded as strategic to a country’s future, such as the steel industry or agriculture, are seen as warranting protection. With protection, investment may flow to such industries, making them more efficient and even gaining a comparative advantage at some point in the future.

Then there is the question of income distribution. Trade with poor countries may help to close the gap somewhat between rich and poor countries. The reason is that poor countries, with an abundance of labour, are likely to have a comparative advantage in labour-intensive products. The demand for exports of such products will help to drive up wages in such countries. However, income distribution within the rich countries may become less equal. Cheap imports from developing countries may depress the wages of unskilled or low-skilled workers in the rich countries.

Another argument concerns the devastation caused to communities by the closure of plants which are major employers. Workers made redundant may find it hard to find alternative employment, especially if their skills are specific to the plant that has closed. At least in the short term, it is argued that such industries warrant protection to allow time for alternative employers to be attracted into the area.

Arguments such as these are being used today in many countries as they struggle with slowing growth in China, a glut of global resources and overcapacity in certain industries.

The steel industry is a case in point. The announcement by Tata Steel that it intends to close the Port Talbot steel works has been met with consternation and calls for protection against subsidised Chinese steel imports. The USA already imposes tariffs of 256% on corrosion-resistant Chinese steel. The EU has proposed raising tariffs on Chinese steel to the full amount of the subsidy, but the UK has blocked this, not wishing to trigger a trade war with China. In the meantime, China has announced the imposition of a tariff of 46% on a particular type of hi-tech steel imported from the EU.

On the other side of the Atlantic, there have been growing protectionist calls from presidential front runners. Donald Trump and Ted Cruz on the Republican side, and Bernie Sanders and now Hilary Clinton on the Democratic side, are opposed to the trade agreement that President Obama has been seeking with the EU – the Transatlantic Trade and Investment Partnership (TTIP). Donald Trump has proposed imposing tariffs of 45% on all Chinese imports.

The following articles look at the growing calls for protection, especially against China, and at the arguments about what should be done to protect the UK and EU steel industry.

Articles
Defiant China slaps steel tariffs on Britain as trade war looms The Telegraph, Ambrose Evans-Pritchard (1/4/16)
China’s soaring steel exports may presage a trade war, The Economist (9/12/15)
Trade, at what price? The Economist (30/3/16)
Free trade in America: Open argument The Economist (2/4/16)
Can the British steel industry be saved? Financial Times (2/4/16)
Steel crisis: UK government plays down China tariff fears BBC News (2/4/16)
The dogmas destroying UK steel also inhibit future economic growth The Observer, WIll Hutton (3/4/16)
UK accused of leading efforts to block limits to Chinese steel dumping The Guardian, Frances Perraudin (1/4/16)
There’s always an excuse to justify suspending free trade – Tata is the latest The Telegraph, Allister Heath (1/4/16)
Can one of the world’s top economies live without making steel? Bloomberg, Thomas Biesheuvel (1/4/16)
Trade policy is no longer just for political nerds: it matters in the UK and US The Guardian, Larry Elliott (27/3/16)
Steel shrivels while Britain’s balance of payments crisis grows The Observer, WIlliam Keegan (3/4/16)
Trump’s tariff plan could boomerang, spark trade wars with China, Mexico Reuters, David Lawder and Roberta Rampton (24/3/16)
Analysis: A Trump trade war could cost the U.S. millions of jobs Daily Herald (Chicago), Jim Tankersley (3/4/16)

Questions

  1. What is meant by the ‘law of comparative advantage’? Does the law imply that countries will always gain from totally free trade?
  2. Demonstrate the gains for each of two countries which choose to trade with each other (see, for example, pages 711–3 in Economics, 9th edition).
  3. What is meant by ‘strategic trade theory’? How would such theory relate to the case of steel production in south Wales?
  4. What are the arguments for and against the EU imposing tariffs on Chinese steel imports equal to the subsidy given by the Chinese government?
  5. Is protectionism always a negative sum game? Explain.
  6. Assess the validity of various arguments for protection.
  7. Why did it prove impossible to complete the Doha round?
  8. What is meant by the ‘Transatlantic Trade and Investment Partnership (TTIP)’? Why is there so much opposition to it?
  9. Are bilateral trade deals, such as the TTIP, the best way of moving forward in reaping the gains from freer trade?
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City life

Two surveys have been released looking at the quality of life in cities and the levels of happiness of their residents. The first is a three-yearly Eurobarometer survey by the European Commission focusing on 83 European cities/conurbations. This survey finds that, despite growing concerns about immigration, terrorism and stagnant real incomes, levels of satisfaction have remained stable since the 2012 survey. In all except six cities, at least 80% of respondents say that they are satisfied to live in their city. The highest scores (above 98%) are in the north of Europe.

The second is the 2016 Quality of Life Survey (an annual survey) by the consultancy firm, Mercer. This looks at cities worldwide, particularly from the perspective of employees of multinational companies being placed abroad. The survey found that the top ten cities by quality of life include seven in Europe, and that the five safest cities in the world are all in Europe.

So what is it that makes the quality of life so high in many European cities, especially those in Germany, Austria, Switzerland, the Netherlands and Scandinavia? Is it that income per head is higher in these cities? In other words, is the quality of life related to GDP?

The answer is only loosely related to GDP. What seems more important is people’s income relative to other people and whether their income relative to other people is rising.

But people regard the quality of life in cities as depending on other factors than simple relative income. One factor common across all cities is household composition. People are least happy if they live on their own.

Other factors include: a feeling of safety; how well integrated different ethic and social groups are felt to be; the quality of public transport; the cleanliness of the city; health care provision and social services; the quality of schools and other educational establishments; sports facilities; cultural facilities; parks and other public spaces; the quality of shops, restaurants and other retail outlets; the quality and price of housing; the ease of getting a job; trust in fellow citizens; environmental factors, such as air quality, noise, traffic congestion and cleanliness; good governance of the city. The top three issues are health services, unemployment and education and training.

Although cities with higher incomes per head can usually afford to provide better services, there is only a loose correlation between income per head and quality of life in cities. Many of the factors affecting quality of life are not provided by the market but are provided publicly or are part of social interaction outside the market.

Articles
Happiness in Europe The Economist (25/2/16)
Happiness in Europe: What makes Europeans happy? It depends on where they live The Economist (27/2/16)
Rating Europe’s Most and Least Happy Cities CityLab, Feargus O’Sullivan (9/2/16)
Europe’s Nicest Cities Aren’t Its Happiest Ones Bloomberg, Therese Raphael (2/2/16)
Vienna named world’s top city for quality of life The Guardian, Patrick Collinson (23/2/16)
Vienna named world’s best city to live for quality of life, but London, New York and Paris fail to make top rankings Independent, Loulla-Mae Eleftheriou-Smith (23.2.16)
The world’s most liveable cities: London and Edinburgh rank in top 50 The Telegraph, Soo Kim (23/2/16)

Reports
Quality of Life in European Cities 2015 Flash Eurobarometer 41 (January 2016)
Quality of Life in European Cities 2015: Individual Country Reports Flash Eurobarometer 41 (January 2016) (This may take a short while to download.)
Quality of life in European Cities 2015: Data for Research Flash Eurobarometer 41 (January 2016)
2016 Quality of Living Rankings Mercer (23/2/16)
Western European Cities Top Quality of Living Ranking Mercer, Press Release (23/2/16)

Questions

  1. Why, do you think, is the quality of life is generally higher in (a) most northern European cities than most southern and eastern European ones; (b) most European cities rather than most north American ones?
  2. To what extent is (a) absolute real income per head; (b) relative real income per head an indicator of quality of living in cities?
  3. Why, do you think, are Italians less satisfied with the quality of life in their cities than residents of other western European countries?
  4. What factors affect your own quality of living? To what extent do they depend on the city/town/village/area where you live?
  5. Look at the list of factors above that affect quality of life in a given city. Put them in order of priority for you and identify any other factors not listed. To what extent do they depend on your age, your background, your income and your personal interests and tastes?
  6. Identify a particular city with which you are relatively familiar and assume that you were responsible for allocating the city’s budget. What would you spend more money on, what less and what the same? Provide a justification for your allocation.
  7. Discuss the following passage from the Bloomberg article: “What is striking is that there appears to be a correlation between those who report high levels of satisfaction and those who view foreigners in their city as an advantage. Conversely, respondents who complained loudest about transportation, public services, safety and other issues tended to view the presence of foreigners far less favorably.”
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Taxing times for Google

Some of the largest companies around the world operate in multiple locations. This allows them to take advantage of wider markets, cheaper transport and of course, lower taxes. In many cases, we see companies selling in one country, but locating their Headquarters in another, where tax rates are cheaper and hence their tax bills are lower. Much criticism has been levelled at such companies, who are accused of not paying their fair share in tax. There has been a crackdown on these companies and the UK is playing a leading role in this tightening of tax laws. Google is the latest company to face a large payment in backdated taxes.

This is a company with a complex structure, which has involved Bermuda as a key location, with its zero rate of corporation tax and a Irish European base. Though locating its business in different countries is legal, it has now agreed to pay HMRC £130 million in back taxes from 2005, following a 6 year investigation. Google will also change its accounting system such that it pays more tax in Britain for sales in this country.

Google may be the first in a line of companies making such changes to its accounting practices following a global drive to tackle the low levels of taxes paid by these large companies. This change in tax rules may bring welcome relief to government coffers, though criticisms remain about the ‘real’ figure that Google owes. As an example of this: in 2013, Google’s UK revenues were $5.6bn. Yet it only paid £20.5m in tax on its UK profits. The Head of Google Europe, Matt Brittin said:

“The rules are changing internationally and the UK government is taking the lead in applying those rules so we’ll be changing what we are doing here. We want to ensure that we pay the right amount of tax.”

Mr Brittin was clear in saying that these back dated taxes are not evidence that they had been paying too little tax in previous years. He confirmed that they were abiding by tax laws at the time and that tax laws are now changing and hence so will the amount of tax they pay. He continued:

“I think there was concern that international companies were paying only in respect of profits that they make and those were the rules and the pressure was to see us pay in respect of the sales we make to UK customers – and the same for other companies…So, we are making a change because we want to continue to comply with the rules and the rules are changing.”

As the push to tighten tax laws changes, with firms paying more tax on sales as well as profits, we may observe more companies changing their accounting structures. The OECD has taken a big step in simplifying international tax laws and the coming years will tell us just how big an impact this will have and whether companies such as Google will face tax bills in other European countries as well. The following articles consider this taxing matter.

Google agrees £130m UK tax deal with HMRC BBC News, Kamal Ahmed (23/01/16)
Google strikes £130m back tax deal Financial Times, John Gapper (22/01/16)
Google strikes deal with UK tax authority Wall Street Journal, Sam Schechner and Stephen Fidler (23/01/16)
Google agrees to pay HMRC £130m in back taxes The Guardian, Kevin Rawlinson (23/01/16)
Google tax labelled ‘derisory’ by Labour’s John McDonnell BBC News (23/01/16)
Google to pay £130 million UK back taxes, critics want more Reuters, Tom Bergin (23/01/16)
Google to pay UK £130m in back taxes The Telegraph (22/01/16)
Google says it will pay £130m in back taxes Independent, Adam Barnett (23/01/16)
Google ‘agrees’ to pay £130m in extra UK tax after outrage when it coughed up just £20m on UK sales of nearly £4bn Mail Online, Imogen Calderwood (22/01/16)
Google agrees to pay $185 million in UK tax settlement Bloomberg, Brian Womack (23/01/16)

Questions

  1. What is the difference between a tax on sales and a tax on profits?
  2. How can companies legally avoid tax? Do you think they have a moral duty to pay tax?
  3. If firms face higher rates of taxation, how will this affect their costs and profits?
  4. Why are the larger multinationals, such as Google more able to engage in tax avoidance schemes?
  5. Do you think the problem of tax avoidance is one of the negative consequences of globalisation?
  6. Is the criticism about the ‘low’ amount of taxes paid to HMRC justified?
  7. The OECD has taken a leading role in tightening international tax policy. Do you think this will negatively impact the competitiveness of the global market place?
  8. What are the costs and benefits to a country of having a low rate of corporation tax?
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The outlook for emerging markets

Are emerging markets about to experience a credit crunch? Slowing growth in China and other emerging market economies (EMEs) does not bode well. Nor does the prospect of rising interest rates in the USA and the resulting increase in the costs of servicing the high levels of dollar-denominated debt in many such countries.

According to the Bank for International Settlements (BIS) (see also), the stock of dollar-denominated debt in emerging market economies has doubled since 2009 and this makes them vulnerable to tighter US monetary policy.

Weaker financial market conditions combined with an increased sensitivity to US rates may heighten the risk of negative spillovers to EMEs when US policy is normalised. …

Despite low interest rates, rising debt levels have pushed debt service ratios for households and firms above their long-run averages, particularly since 2013, signalling increased risks of financial crises in EMEs.

But there is another perspective. Many emerging economies are pursuing looser monetary policy and this, combined with tighter US monetary policy, is causing their exchange rates against the dollar to depreciate, thereby increasing their export competitiveness. At the same time, more rapid growth in the USA and some EU countries, should also help to stimulate demand for their exports.

Also, in recent years there has been a large growth in trade between emerging economies – so-called ‘South–South trade’. Exports from developing countries to other developing countries has grown from 38% of developing countries’ exports in 1995 to over 52% in 2015. With technological catch-up taking place in many of these economies and with lower labour and land costs, their prospects look bright for economic growth over the longer term.

These two different perspectives are taken in the following two articles from the Telegraph. The first looks at the BIS’s analysis of growing debt and the possibility of a credit crunch. The second, while acknowledging the current weakness of many emerging economies, looks at the prospects for improving growth over the coming years.

Articles
‘Uneasy’ market calm masks debt timebomb, BIS warns The Telegraph, Szu Ping Chan (6/12/15)
Why emerging markets will rise from gloom to boom The Telegraph, Liam Halligan (5/12/15)

Questions

  1. How does an improving US economy impact on emerging market economies?
  2. Will the impact of US monetary policy on exchange rates be adverse or advantageous for emerging market economies?
  3. What forms does dollar-denominated debt take in emerging economies?
  4. Why has south–south trade grown in recent years? Is it consistent with the law of comparative advantage?
  5. Why is growth likely to be higher in emerging economies than in developed economies in the coming years?
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Has the yuan passed?

There is a select group of countries (areas) that have something in common: the USA, the UK, Japan and the eurozone. The currency in each of these places is one of the IMF’s reserve currencies. But is China about to enter the mix?

The growth of China has been spectacular and it is now the second largest economy in the world, behind the USA. It is on the back on this growth that China has asked the IMF for the yuan to be included in the IMF’s basket of reserve currencies. The expectation is that Christine Lagarde, the IMF’s Managing Director, will announce its inclusion and, while some suggest that the yuan could become one of the major currencies in the world over the next decade following this move, others say that this is just a ‘symbolic gesture’. But that doesn’t seem to matter, according to Andrew Malcolm, Asia head of capital at Linklaters:

“The direct impact won’t be felt in the near term, not least because implementation of the new basket won’t be until Q3 2016. However the symbolic importance cannot be overlooked…By effectively endorsing the renminbi as a freely useable currency, it sends a strong signal about China’s importance in the global financial markets.”

Concerns about the yuan being included have previously focused on China’s alleged under-valuation of its currency, as a means of boosting export demand, as we discussed in What a devalued yuan means to the rest of the world. However, China has made concerted efforts for the IMF to make this move and China’s continuing financial reforms may be essential. The hope is that with the yuan on the IMF’s special list, it will boost the use of the yuan as a reserve currency for investors. It will also be a contributor to the value of the special drawing right, which is used by the IMF for pricing its emergency loans.

Although the Chinese stock market has been somewhat volatile over the summer period, leading to a devaluation of the currency, it is perhaps this move towards a more market based exchange rate that has allowed the IMF to consider this move. We wait for an announcement from the IMF and the articles below consider this story.

Chinese yuan likely to be added to IMF special basket of currencies The Guardian, Katie Allen (29/11/15)
‘Chinese yuan set for IMF reserve status BBC News (30/11/15)
IMF to make Chinese yuan reserve currency in historic move The Telegraph, James Titcomb (29/11/15)
China selloff pressure Asia stocks, yuan jumpy before IMF decision Reuters, Hideyuki Sano (30/11/15)
IMF’s yuan inclusion signals less risk taking in China Reuters, Pete Sweeney and Krista Hughes (29/11/15)
Did the yuan really pass the IMF currency test? You’ll know soon Bloomberg, Andrew Mayeda (29/11/15)

Questions

  1. What is meant by a reserve currency?
  2. Why do you think that the inclusion of the yuan on the IMF’s list of reserve currencies will boost investment in China?
  3. One of the reasons for the delay in the yuan’s inclusion is the alleged under-valuation of the currency. How have the Chinese authorities allegedly engineered a devaluation of the yuan? To what extent could it be described as a ‘depreciation’ rather than a ‘devaluation’?
  4. Look at the key tests that the yuan must pass in order to be included. Do you think it has passed them given the report produced a few months ago?
  5. The weighting that a currency is given in the IMF’s basket of currencies affects the interest rate paid when countries borrow from the IMF. How does this work?
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The best news in the world: but just how good is it?

According to a an article in The Guardian, The best news in the world, by the president of the World Bank, Jim Yong Kim, there has been a dramatic fall in global poverty over the past two decades. The number of people in extreme poverty is projected to fall this year to below 10% of global population for the first time. This has been made possible, he claims, by unprecedented economic growth, especially in China.

But this raises three questions.

The first is whether, in the face of falling growth rates, progress in poverty reduction can be maintained.

The second is whether the World Bank is measuring extreme poverty in the right way. It is now defined as living on less than US$1.90 a day in 2011 prices – until a few weeks ago is was $1.25 in 2005 prices. As a result of this rebasing, global poverty falls from 14.5% of the world’s population (or 1011 million people) under the old method to 14.2% (or 987 million) under the new.

The third question is whether countries can improve their data collection so that a truer estimate of poverty can be made.

As far as the first question is concerned, Kim states that to stimulate growth, ‘every dollar of public spending should be scrutinised for impact. Every effort must be made to improve productivity.’ What is more, three things must happen:

Economic growth must lift all people. It must be inclusive.
Investment in human beings is crucial – especially investing in their health and education. Malnourished and poorly educated children will never reach their full potential and countries, in turn, will fall short of their economic and social aspirations.
We must ensure that we can provide safety nets that prevent people from falling back into poverty because of poor health, economic shocks, or natural disasters.

As far as the second question is concerned, there are many who argue that $1.90 per day is far too low a measure of the extreme poverty threshold. It is a purchasing-power parity measure and is equivalent to what $1.90 would buy in the USA in 2011. But, according to the Jason Hickel article linked below, ‘the US Department of Agriculture calculates that in 2011 the very minimum necessary to buy sufficient food was $5.04 per day. And that’s not taking account of other requirements for survival, such as shelter and clothing.’ Peter Edward of Newcastle University, claims Hickell, ‘calculates that in order to achieve normal human life expectancy of just over 70 years, people need roughly 2.7 to 3.9 times the existing poverty line.’

But even if living on below $1.90 a day is defined as extreme poverty, it is important not to see the problem of poverty as having been solved for people who manage to achieve an income slightly above that level.

The third question is how to improve data. There is a paucity and unreliability of data in many developing countries. According to Kim:

Our report adds that data is sparse and inconsistent across the region and globally. Some 29 countries around the world had no poverty data from 2002 to 2011, so they could not track their progress. Another 28 had just one survey that collected poverty data during that time.

This is a situation that must change to improve the world’s ability to tackle poverty. In fact, we can’t accomplish our goal if we do not have enough information to know whether people are actually lifting themselves out of poverty. For that we need to address huge data gaps. We need robust data.

Articles
The best news in the world: we have made real progress towards ending extreme poverty The Guardian, Jim Yong Kim (3/11/15)
Could you live on $1.90 a day? That’s the international poverty line The Guardian, Jason Hickel (1/11/15)
Making international trade work for the world’s poorest The Guardian, Jim Yong Kim and Roberto Azevêdo (30/6/15)
Global Poverty Will Hit New Low This Year, World Bank Says Huffington Post, Lydia O’Connor (23/10/15)
The international poverty line has just been raised to $1.90 a day, but global poverty is basically unchanged. How is that even possible? World Bank blogs, Francisco Ferreira, Dean Mitchell Jolliffe and Espen Beer Prydz (4/10/2015)
Why Didn’t the World Bank Make Reducing Inequality One of Its Goals? World Bank blogs, Jaime Saavedra-Chanduvi (23/9/13)
$1.90 Per Day: What Does it Say? Institute for New Economic Thinking, Rahul ​Lahoti and Sanjay Reddy (6/10/15)

Reports and papers
The Role of Trade in Ending Poverty WTO and World Bank (2015)
Poverty in a Rising Africa World Bank (1/10/15)
Ending extreme poverty and sharing prosperity: progress and policies World Bank, Marcio Cruz, James Foster, Bryce Quillin and Philip Schellekens (October 2015)

Questions

  1. Explain how the World Bank calculates the extreme poverty line.
  2. Why, if the line has risen from $1.25 per day to $1.90 per day, has the number of people recorded as being in extreme poverty fallen as a result?
  3. Why has the number of people in extreme poverty been rising over the years and yet the percentage of people in extreme poverty been falling?
  4. What policies can be adopted to tackle poverty? Discuss their practicality?
  5. Are reduced poverty and increased economic growth consistent policy goals? (See the blog post Inequality and economic growth.)
  6. What are the inadequacies of using income per day (albeit in ppp terms) as a measure of the degree of poverty? What other indicators of poverty could be used and how suitable would they be?
  7. How could international trade be made to work for the world’s poorest?
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A major new trade deal – the Trans-Pacific Partnership

Governments of twelve Pacific rim nations, including the USA, Canada, Japan and Australia have just agreed to a trade deal – the Trans-Pacific Partnership (TPP). This represents the most significant trade deal since the completion of the Uruguay Round and the creation of the World Trade Organisation in 1994. Together these countries account for some 40% of global GDP. The deal must still be signed by the leaders of the TPP countries, however, and, more importantly, ratified by their legislatures, where, to put it mildly, agreement is not universal.

The deal is hailed as a move towards freer trade in a number of areas, including agriculture and services. But it also provides greater protection for owners of intellectual property. Proponents of the deal argue that it will to lead large-scale reductions in tariffs and other trade restrictions. As the Economist article states:

For American exporters alone, 18,000 individual tariffs will be reduced to zero. Much the same will be true for firms in the other 11 members. Even agricultural barriers, usually among the most heavily defended, will start to come down. Foreigners will gain a toehold in Canada’s dairy sector and a bigger share of Japan’s beef market, for example.

But despite this being the biggest trade deal for some 20 years, it has been highly criticised by various groups. Freer trade threatens industries that will face competition from other countries in the TPP. This unites both corporations and unions in trying to protect their own specific interests. However, the agreement gives ground to many special industries by retaining protection in a number of areas, at least for several years.

It has also been criticised by environmentalists who worry about the removal of various environmental safeguards. In answer to these concerns, there are several provisions in the agreement that provide some measure of environmental protection so as to slow things such as deforestation, overfishing and carbon emissions. But environmentalists argue that these provisions do not go far enough.

Others are concerned that the agreement will allow corporations to challenge governments and undermine the ability of governments to regulate them.

The articles look at some of the details of the agreement and at the arguments for and against ratifying it. Some of these arguments go to the heart of the age-old free trade versus protection debate.

US, Japan and 10 countries strike Pacific trade deal Financial Times, Shawn Donnan and Demetri Sevastopulo (5/10/15)
What Trade-Deal Critics Are Missing Wall Street Journal, Zachary Karabell (8/10/15)
The Trans-Pacific Partnership: Weighing anchor The Economist (10/10/15)
A trade deal is no excuse to milk taxpayers Globe and Mail (Canada), Yuen Pau Woo (7/10/15)
What Is the Trans-Pacific Partnership Agreement (TPP)? Electronic Frontier Foundation
Wikileaks release of TPP deal text stokes ‘freedom of expression’ fears The Guardian, Sam Thielman (9/10/15)
TPP’s clauses that let Australia be sued are weapons of legal destruction, says lawyer The Guardian, Jess Hill (10/11/15)

Questions

  1. Who are likely to benefit from the TPP?
  2. Why are American republicans generally opposed to the agreement?
  3. What are the objections to the TPP’s provisions for the protection of intellectual property rights?
  4. Would the current twelve members of the TPP gain if China joined?
  5. What are the objections of environmentalists to TPP?
  6. What effect will the TPP on European countries?
  7. Other than a reduction in tariffs, what other types of measures are included in the TPP?
  8. What is the Investor-State Dispute Settlement mechanism and what criticisms have been made of it? Are they justified?
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The effect of cutting greenhouse gas emissions on economic growth

Is slower economic growth a cost of cutting greenhouse gas emissions? Apparently not – at least according to two studies: one by DIW Econ, a German institute for economic research, and the other, earlier this year, by the International Energy Association (see reports below).

The IEA study found that, despite global GDP having grown by 6.4% in 2014, global emissions remained flat. The DIW Econ study found that from 2004 to 2014, OECD countries as a whole grew by 16% while cutting fossil fuel consumption by 6% and greenhouse gas emissions by 6.4%.

But what does this mean? If growth accelerated, what would happen to greenhouse gas emissions? Would they begin to rise again? Probably.

The point is that various developments, largely independent of economic growth have been reducing the greenhouse gas emissions/GDP ratio. These developments include: technological advances in energy generation; the switch to alternative fuels in many countries, thanks, in large part to lower renewable energy costs; increased energy efficiency by consumers; and a continuing move from energy-intensive manufacturing to less energy-intensive services.

So if governments forced more radical cuts in greenhouse gases, would this reduce the rate of economic growth or have no effect? For a given level of technological advancement, the initial effect would probably be a reduction in economic growth. But to the extent that this encouraged further investment in renewables and energy saving, it might even stimulate economic growth over the longer term, especially if it helped to bring lower energy prices.

A big problem in decoupling economic growth from fossil fuel usage is that developing countries, which are taking a growing share of world manufacturing, are more heavily dependent on coal than most developed countries. But even here there seems to be some hope. China, the biggest manufacturer in the developing world, is rapidly increasing its use of renewables. As the IEA press release states:

In China, 2014 saw greater generation of electricity from renewable sources, such as hydropower, solar and wind, and less burning of coal.

If the world is to tackle global warming by making significant cuts in greenhouse gases, there must be a way for developing countries to continue growing while making less use of fossil fuels.

Article
Cutting greenhouse gas emissions won’t slow global economic growth — report The Guardian, Bruce Watson (26/9/15)

Reports
Turning point: Decoupling Greenhouse Gas Emissions from Economic Growth DIW Econ, Lars Handrich, Claudia Kemfert, Anselm Mattes, Ferdinand Pavel, Thure Traber (September 2015)
World Energy Outlook Special Report 2015: Energy and Climate Change International Energy Agency (June 2015)

Questions

  1. What are the possible causal relationships between cutting greenhouse gas emissions and the rate of economic growth?
  2. What incentive mechanisms can governments or other agencies adopt to encourage reductions in greenhouse gas emissions without reducing economic growth?
  3. Can a cap and trade system, such as the European Emissions Trading Scheme help to achieve a given level of emissions reduction at minimum cost to economic growth? Explain.
  4. How might the developed world support developing countries in moving to a low carbon technology?
  5. What factors lie behind the falling costs of renewable energy? Are these the same factors that lie behind the falling cost of oil?
  6. What political problems might hinder the greater production of renewable energy?
  7. How might an economist set about determining a socially optimal amount of fossil fuel production? What conceptual and philosophical problems might there be in agreeing what is meant by a social optimum?
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