Category: Economics for Business: Ch 24

27 January 20155 February 2015

The rich discuss poverty

The World Economic Forum has been holding its annual meeting in the up-market Swiss ski resort of Davos. Many of the world’s richest and most powerful people attend these meetings, including political leaders, business leaders and representatives of various interest groups.

This year, one of the major topics has been the growth in inequality across the globe and how to reverse it. According to a report by Oxfam, Wealth: Having it all and wanting more:

The richest 1 per cent have seen their share of global wealth increase from 44 per cent in 2009 to 48 per cent in 2014 and at this rate will be more than 50 per cent in 2016. Members of this global elite had an average wealth of $2.7m per adult in 2014.

Of the remaining 52 per cent of global wealth, almost all (46 per cent) is owned by the rest of the richest fifth of the world’s population. The other 80 per cent share just 5.5 per cent and had an average wealth of $3851 per adult – that’s 1/700th of the average wealth of the 1 per cent.

Currently, the richest 85 people in the world have the same amount of wealth as the poorest 50% of the world’s population. It might seem odd that those with the wealth are talking about the problem of inequality. Indeed, some of those 85 richest people were at the conference: a conference that boasts extremely luxurious conditions. What is more, many delegates flew into the conference in private jets (at least 850 jets) to discuss not just poverty but also climate change!

Yet if the problem of global inequality is to be tackled, much of the power to do so lies in the hands of these rich and powerful people. They are largely the ones who will have to implement policies that will help to raise living standards of the poor.

But why should they want to? Part of the reason is a genuine concern to address the issues of increasingly divided societies. But part is the growing evidence that greater inequality reduces economic growth by reducing the development of skills of the lower income groups and reducing social mobility. We discussed this topic in the blog, Inequality and economic growth.

So what policies could be adopted to tackle the problem. Oxfam identifies a seven-point plan:


•	Clamp down on tax dodging by corporations and rich individuals;
•	Invest in universal, free public services such as health and education;
•	Share the tax burden fairly, shifting taxation from labour and consumption towards capital and wealth;
•	Introduce minimum wages and move towards a living wage for all workers;
•	Ensure adequate safety-nets for the poorest, including a minimum income guarantee;
•	Introduce equal pay legislation and promote economic policies to give women a fair deal;
•	Agree a global goal to tackle inequality.

But how realistic are these policies? Is it really in the interests of governments to reduce inequality? Indeed, some of the policies that have been adopted since 2008, such as bailing out the banks and quantitative easing, have had the effect of worsening inequality. QE drives up asset prices, particularly bond, share and property prices. This has provided a windfall to the rich: the more of such assets you own, the greater the absolute gain.

The following videos and articles look at the problem of growing inequality and how realistic it is to expect leaders to do anything significant about it.

Questions

Why has inequality increased in most countries in recent years?
For what reasons might it be difficult to measure the distribution of wealth?
Which gives a better indication of differences in living standards: the distribution of wealth or the distribution of income?
Discuss the benefits and costs of using the tax system to redistribute (a) income and (b) wealth from rich to poor
Go through each of the seven policies advocated by Oxfam and consider how practical they are and what possible objections to them might be raised by political leaders.
Why is tax avoidance/tax evasion by multinational companies difficult to tackle?
Does universal access to education provide the key to reducing income inequality within and between countries?

6 January 20157 January 2015

WTO rules over China

One thing that economists often argue for is free trade. It promotes competition, allows greater choice and generates efficiency gains through specialisation to name a few of the advantages. Barriers to trade have gradually been brought down across the global economy, but some do still exist.

Although free trade does have many advantages, there are also arguments for barriers to trade, especially for developing or emerging economies. In some cases, barriers to trade can help a country to develop a particular industry or offer protection to a new sector from the giants of the world. In the case of China, it had a quota system in place since 2009 to restrict exports of ‘rare earth materials’, such as Tungsten and Molybdenum. Many of the hi-tech products that China specialises in require these rare minerals during production and, as the dominant producer of these minerals, Beijing had imposed restrictions on exporting them in an attempt to develop these industries.

However, other countries had raised concerns about the quota system being used, suggesting that by restricting exports of rare earth minerals, China was driving up their price. It was also suggested that the restrictions benefited domestic producers, at the expense of foreign competitors, given that domestic producers were able to access the raw materials at cheaper prices.

A complaint was made to the World Trade Organization in March 2014 by the USA, supported by the EU, Canada and Japan. Following an investigation by a WTO panel, the panel found that China had failed to show sufficiently that the quotas were justified. After an appeal by China, the panel’s findings were upheld in August by the WTO.

In response to the failure of its appeal, China has just announced that it is removing the quotas on exports of rare earth materials. However, this is unlikely to be the end of the story, as other policies may well be imposed, including a resources tax; and an export licence is still required. The following articles consider this battle.

China axes rare earth export quotas Financial Times, Lucy Hornby (5/1/15)
China scraps quotas on rare earths after WTO complaint BBC News (5/1/15)
China ends rare-earth minerals export quotas Wall Street Journal, Chuin-Wei Yap (5/1/15)
China scraps rare earth export controls after losing WTO appeal Bloomberg (6/1/15)
China abolishes rare earth export quotas: state media Reuters (4/1/15)

Questions

What are the benefits of free trade?
Why do some countries choose to impose protectionist measures and what type of measures can be put in place?
Using a diagram, explain the impact that export quotas would have on Chinese firms using these rare minerals and also on foreign firms.
Why have other countries argued that export quotas push up prices of these minerals?
What other policies might China put in place in order to protect its industries?

10 March 2014

Economic shocks and the Ukrainian crisis

One of the reasons why it is so hard to forecast economic growth and other macroeconomic indicators is that economies can be affected by economic shocks. Sometimes the effects of shocks are large. The problem with shocks is that, by their very nature, they are unpredictable or hard to predict.

A case in point is the current crisis in Ukraine. First there was the uprising in Kiev, the ousting of President Yanukovich and the formation of a new government. Then there was the seizing of the Crimean parliament by gunmen loyal to Russia. The next day, Saturday March 1, President Putin won parliamentary approval to invade Ukraine and Russian forces took control of the Crimea.

On Monday 3 March, stock markets fell around the world. The biggest falls were in Russia (see chart). In other stock markets, the size of the falls was directly related to the closeness of trade ties with Russia. The next day, with a degree of calm descending on the Crimea and no imminent invasion by Russia of other eastern parts of Ukraine, stock markets rallied.

What will happen to countries’ economies depends on what happens as the events unfold. There could be a continuing uneasy peace, with the West effectively accepting, despite protests, the Russian control of the Crimea. But what if Russia invades eastern Ukraine and tries to annex it to Russia or promote its being run as a separate country? What if the West reacted strongly by sending in troops? What if the reaction were simply sanctions? That, of course would depend on the nature of those sanctions.

Some of the possibilities could have serious effects on the world economy and especially the Russian economy and the economies of those with strong economic ties to Russia, such as those European countries relying heavily on gas and oil imports from Russia through the pipeline network.

Economists are often criticised for poor forecasts. But when economic shocks can have large effects and when they are hard to predict by anyone, not just economists, then it is hardly surprising that economic forecasts are sometimes highly inaccurate.

What Wall Street is watching in Ukraine crisis USA Today (3/3/14)
Ukraine’s economic shock waves – magnitude uncertain Just Auto, Dave Leggett (7/3/14)
Ukraine: The end of the beginning? The Economist (8/3/14)
Russia will bow to economic pressure over Ukraine, so the EU must impose it The Guardian, Guy Verhofstadt (6/3/14)
Russia paying price for Ukraine crisis CNN Money, Mark Thompson (6/3/14)
Ukraine Crimea: Russia’s economic fears BBC News, Nikolay Petrov (7/3/14)
How Russia’s conflict with Ukraine threatens vital European trade links The Telegraph, Szu Ping Chan (8/3/14)
Will a Russian invasion of Ukraine push the west into an economic war? Channel 4 News, Paul Mason (2/3/14)
Who loses from punishing Russia? BBC News, Robert Peston (4/3/14)
Should Crimea be leased to Russia? BBC News, Robert Peston (7/3/14)
The Ukraine Economic Crisis Counter Punch, Jack Rasmus (7-9/3/14)
UK price rise exposes failure to prepare for food and fuel shocks The Guardian, Phillip Inman (2/3/14)

Questions

What sanctions could the West realistically impose on Russia?
How would sanctions against Russia affect (a) the Russian economy and (b) the economies of those applying the sanctions?
Which industries would be most affected by sanctions against Russia?
Is Russia likely to bow to economic pressure from the West?
Should Crimea be leased to Russia?
Is the behaviour of stock markets a good indication of people’s expectations about the real economy?
Identify some other economic shocks (positive and negative) and their impact.
Could the financial crisis of 2007/8 be described as an economic shock? Explain.

24 January 2014

Global vision

World leaders are meeting at the World Economic Forum in Davos, in the Swiss Alps. This annual conference is an opportunity for politicans, economists and businesspeople from around the world to discuss the state of the world economy and to consider policy options.

To coincide with the conference, the BBC’s Newsnight has produced the following slide show, which presents some economic facts about the world economy. The slide show provides no commentary and there is no commentary either in this blog – just some questions for you to ponder.

Using the economics you’ve learned so far, try answering these questions, which focus on the reasons for the patterns in the figures, the likely future patterns and the policy implications.

Slide show
Davos: 22 facts people should know BBC Newsnight (23/1/14)

Data

For additional international data to help you answer the questions, see:
Economic Data freely available online Economics Network

Questions

Go through each of the slides in the Newsnight presentation and select the ones of most interest to you. Then, as an economist, provide an explanation for them.
Identify some patterns over time in the statistics. Then project forward 20 years and discuss whether the patterns are likely to have changed and, if so, why.
What policies could governments adopt to reverse any undesirable trends you have identified? How likely are these policies to be implemented and how successful are they likely to be?

7 December 20138 December 2013

A new trade deal

The 159 member countries of the World Trade Organisation have reached an agreement on liberalising trade. The deal, which was reached on 6 December 2013 at a meeting in Bali, is the first substantial agreement since the WTO was formed in 1995 (see Timeline: World Trade Organization for other agreements).

It involves simplifying customs procedures and making them more transparent, limited reductions in tariffs and quotas and allowing greater access to WTO members’ markets for exporters. It also permits developing countries to continue subsidising their agriculture in order to promote food security, provided the practice does not distort international trade. According to the WTO:

The trade facilitation decision is a multilateral deal to simplify customs procedures by reducing costs and improving their speed and efficiency. It will be a legally binding agreement and is one of the biggest reforms of the WTO since its establishment in 1995. …The objectives are: to speed up customs procedures; make trade easier, faster and cheaper; provide clarity, efficiency and transparency; reduce bureaucracy and corruption, and use technological advances. It also has provisions on goods in transit, an issue particularly of interest to landlocked countries seeking to trade through ports in neighbouring countries.

In a report published by the Peterson Institute in Washington, it is estimated that the extra trade will add some $960bn to world GDP and create some 20.6m extra jobs. But how fully does it meet the objectives of the Doha Development Agenda, the yet-to-be-concluded trade round started in Qatar in November 2001?

According to the EU’s trade commissioner Karel De Gucht, about one quarter of the goals set for the Doha Round have been achieved in this agreement. This, of course, still leaves a long way to go if all the Doha objectives are to be met. World trade, although now likely to be somewhat freer, is still not free; developing countries will still find restricted access for their agricultural products, and manufactures too, to many markets in the rich world; rich countries will still find restricted access for their manufactured products and services to many markets in the developing world.

Articles

A ‘lifeline’ to the world’s poor: Cameron hails WTO historic global trade deal Independent, Kashmira Gander (7/12/13)
Timeline: World Trade Organization BBC News (7/12/13)
WTO Seals Deal for First Time in 18 Years to Ease Trade Bloomberg, Neil Chatterjee, Brian Wingfield & Daniel Pruzin (7/12/13)
WTO agrees global trade deal worth $1tn BBC News, Andrew Walker (7/12/13)
WTO: Government’s tough stand helps clinch deal in its favour Economic Times of India (7/12/13)
India Inc, exporters welcome WTO pact on trade The Hindu, Sandeep Dikshit (7/12/13)
WTO: Pact will help poor Bangkok Post (7/12/13)
WTO overcomes last minute hitch to reach its first global trade deal NDTV Profit (7/12/13)
WTO reaches ‘historic’ trade deal in Bali Aljazeera (7/12/13)
WTO agrees global trade deal worth $1tn BBC News, Karel De Gucht (7/12/13)
Why the WTO agreement in Bali has finally helped developing countries The Guardian, Paige McClanahan (6/12/13)
WTO agreement condemned as deal for corporations, not world’s poor The Guardian, Phillip Inman (7/12/13)
Bali trade agreement: WTO set the bar high but has achieved little The Guardian, Larry Elliott (6/12/13)

Reports and documents
Payoff from the World Trade Agenda, 2013 Peterson Institute for International Economics, Gary Hufbauer and Jeffrey Schott (April 2013)
Days 3, 4 and 5: Round-the-clock consultations produce ‘Bali Package’ WTO (7/12/13)
Draft Bali Ministerial Declaration WTO (see, in particular, Agreement on Trade Facilitation) (7/12/13)

Questions

According to the law of comparative advantage, there is a net gain from international trade. Explain why.
What are the likely gains from freer trade?
Is freer trade necessarily better than less free trade?
Who is likely to gain most from the WTO deal reached in Bali?
What were the goals of the Doha Development Agenda?
In what ways does the Bali agreement fall short of the goals set at Doha in 2001?
Why is it so difficult to reach a comprehensive international deal on trade liberalisation that also protects the interests of poor countries?
Do you agree with the World Development Movement (WDM) that the Bali Package is “an agreement for transnational corporations, not the world’s poor”?
Would it now benefit the world for individual countries to pursue bilateral trade deals?

Category: Economics for Business: Ch 24

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