International trade brings various benefits to an economy. One is that it can stimulate economic growth – something the UK government would very much like to achieve in current circumstances.
As one of the components of aggregate demand, net exports is a key variable that can create jobs and growth in an economy, and it is this variable that is being directly targeted in a trade agreement between the UK and South Korea. Growth in developing countries is far outstripping that in the West and through this trade deal, the UK is hoping to benefit from some of this growth – to the tune of about £500m per year.
South Korea already trades a huge amount with the UK – we are its second largest European trade partner after Germany. The Free Trade Area that has been agreed will put British firms in a stronger position when negotiating contracts, especially in relation to sporting events, such as the Asian Games in 2014, the World Student Games in 2015 and the Pyeongchang Winter Olympics in 2018. Nick Clegg, who announced the agreement said:
‘The best of British design, innovation and services will have even greater opportunity to show their strength in South Korea. UK and Korean companies will be able to form alliances on multi-billion pound projects across the world.’
Some of the benefits of this agreement may be seen relatively soon, as the South Korea National Pension Service has announced plans to set up a base in London, which would create a much need injection of investment into the stagnant economy. This latest trade deal is very much a part of the Coalition’s strategy of creating stronger ties and trade links to the fast growing emerging markets. The size of these potential benefits and the speed with which they emerge can only be estimated, but if they do materialise they will undoubtedly have positive effects on economic growth. The following articles consider these ‘economic opportunities in the UK’.
Nick Clegg hails Korean trade deal as £2bn opportunity for Britain Telegraph, Anna White (25/3/12)
South Korea trade deal ‘may bring £500m to UK economy’ BBC News (26/3/12)
South Korea’s $320bn pension fund to set up London base Guardian (26/3/12)
S Korea pension fund to set up London office Financial Times, Elizabeth Rigby (25/3/12)
Nick Clegg boosts British business in South Korea The Economic Voice, Jeff Taylor (26/3/12)
Questions
- What are the benefits and costs of trade? To whom do they accrue?
- The articles talk about a free trade area. What are the characteristics of such an agreement?
- What other types of trade agreement are there? In each case, find examples of that type of agreement.
- Why is trade seen as an engine of growth? Think about aggregate demand and how this can explain a boost to national income.
- If the South Korea National Pension Service does create a base in London, explain how the multiplier effect might create additional benefits to the UK.
After a marathon 13-hour session in Brussels, ending at 5am on 21 February, eurozone finance ministers agreed a second bailout for Greece. The aim was to lighten Greece’s debt burden and prevent the country being forced to default.
Under the deal, Greece will have some €107bn of its debt written off. The main brunt of this will be borne by private creditors, who will see the value of their Greek bonds fall by 53.5% (some 70% in real terms). Old bonds will be swapped for ones with longer maturities and lower interest rates. In addition, Greece will be given further loans of more than €130bn through the EFSF on top of the €73bn already lent. The monies will be put in a special escrow account and can be used only to service the debt, not to finance general government expenditure.
In return, Greece must reduce its debt to GDP ratio from the current 160% to 120.5% by 2020. It must agree to continuing tight austerity measures and to significant supply-side reforms to reduce the size of the public sector and increase efficiency. Implementation of the measures would be overseen by an EU Task Force based in Greece.
But while governments in the EU and around the world are relieved that a deal has been finally agreed and that Greek default seems to have been averted – at least for the time being – the problems for Greece seem set to get worse. The further austerity measures will deepen the recession, now in its fifth year. Growth is not expected to return until 2014 at the earliest, by which point real GDP is expected to have shrunk by some 17% from the start of the recession. The question is whether the Greek people will stand for further cuts in income and further rises in unemployment, which had reached 20.9% in November 2011 and is still rising rapidly.
Articles
Eurozone backs Greek bailout Euronews (21/2/12)
Greece Wins Second Bailout as Europe Picks Aid Over Default Bloomberg, James G. Neuger and Jonathan Stearns (21/2/12)
Eurozone agrees second Greek bail-out Financial Times, Peter Spiegel and Alex Barker (21/2/12)
Greece secures bailout to avoid debt default Independent, Gabriele Steinhauser and Sarah DiLorenzo (21/2/12)
EU tells Greece to cut more jobs, sees 2014 growth Reuters, Gabriele Robin Emmott and Nicholas Vinocur (21/2/12)
Eurozone agrees €130bn bailout for Greece The Telegraph, Bruno Waterfield (21/2/12)
Greece averted nightmare scenario – finance minister BBC News (21/2/12)
Greece: Dangerous precedent? BBC News, Robert Peston (21/2/12)
The end of the marathon? The Economist, Charlemagne’s notebook (21/2/12)
What Analysts Think of the Greek Deal The Wall Street Journal, Alexandra Fletcher (21/2/12)
Three steps to a strong eurozone Guardian, Henning Meyer (21/2/12)
Opinion: the eurozone is just buying time Deutsche Welle, Henrik Böhme (21/2/12)
Greece must default if it wants democracy Financial Times, Wolfgang Münchau (19/2/12)
Eurozone’s Greece deal: debt and delusions at dawn Guardian. Editorial (21/2/12)
€130bn plaster leaves Greece independent in name only Guardian, Larry Elliott (22/2/12)
The Greek debt deal: Thumbs down The Economist, Buttonwood’s notebook (21/2/12)
Webcasts and podcasts
Are Greeks’ euro days numbered? Channel 4 News (21/2/12)
Wolf and Authers on Greece Financial Times, John Authers and Martin Wolf, (21/2/12)
Greece ‘unlikely to meet targets’ BBC Today Programme, Ngaire Woods, Guntram Wolff and Alistair Darling (21/2/12)
Austerity-hit Greeks scorn bailout deal Euronews (21/2/12)
Greek Bail Out Could Lead To More Violence Sky News (21/2/12)
Official Press Release
Eurogroup statement Europa Press Release (21/2/12)
Questions
- Outline the features of the bailout on offer to Greece. What is Greece expected to do in return for the bailout?
- To what extent has the deal lightened Greece’s macroeconomic problems?
- Why does granting a bailout create a moral hazard? How has the ECB/IMF/EU Commission Troika attempted to minimise the moral hazard in this case?
- Has Greece’s financial problem been essentially one of liquidity or solvency?
- What supply-side measures is Greece being required to implement? Will they have any demand-side consequences?
- From where is Greek growth likely to emanate after 2014?
- What are the downside risks of the deal?
- How likely is it that there will have to be a third bailout?
Germany is the world’s fourth largest economy and Europe’s largest. Part of its strength has come from its exports, which last year increased by 11.4% to $1.3 trillion – the first time it had ever exceed the $1 trillion mark. Germany, however, is by no means the country with the largest export sector – that mantle was taken from them by China, whose exports rose 20.3% last year to reach $1.9 trillion.
At the same time as exports have been rising from Germany, imports have also increased, showing a recovery in domestic demand as well. Despite this, Germany’s foreign trade surplus increased slightly to €158.1 billion (from €154.9 billion).
However, in the last month of 2011, its export growth did slow – the fastest drop in nearly 3 years – and that is expected to signal the trend for 2012. As the eurozone debt crisis continues to cause problems, German exports have been forecast to grow by only 2% this year, with economic growth expected to be as low as 0.7%. This is a marked change from last year, where the Germany economy grew by some 3%. Help for the eurozone is unlikely to come form Europe’s second largest economy, France, where growth in the first 3 months of 2012 is expected to be zero and figures have shown a widening trade deficit, with issues of competitiveness at the forefront. The following articles look at Germany’s prowess in the export market and the likely developments over the coming year.
German exports drop is steepest in nearly 3 years Reuters (8/2/12)
German exports set record of a trillion euros in 2011 BBC News (8/2/12)
German exports broke euro1 trillion mark in 2011 The Associated Press (8/2/12)
Surprise drop in German industrial output Telegraph, Angela Monaghan (7/2/12)
French trade deficit hits high, competitiveness at issue Reuters (7/2/12)
French trade deficit casts shadow on campaign Financial Times, Hugh Carnegy (7/2/12)
German exports fall at fastest rate in three years, sparks fears over Europe’s bulwark economy Telegraph, Louise Armitstead (8/2/12)
Questions
- What is meant by a trade surplus?
- Briefly examine some of the factors that may have contributed to Germany’s rising exports throughout 2011.
- How has the eurozone debt crisis impacted the Germany economy and in particular the export sector?
- The articles that look at France refer to a growing trade deficit, with competitiveness being a key issue. What is meant by competitiveness and why is the French economy suffering from a lack of it?
- Does France’s membership of a single currency reduce its ability to tackle its competitiveness issues?
- Why is German growth expected to remain sluggish throughout 2012? Given that Germany is a member of the eurozone, what government policies are open to the government to boost economic growth?
- China has overtaken Germany as the largest exporter, with growth of 20.3% in 2011. What factors have allowed Chinese exports to grow so quickly?
Last October (2011) we considered the case for a Tobin tax: also known as a financial transactions tax (FTT) or a ‘Robin Hood tax’. Since then there have been increased calls for the world to adopt such a tax.
It was promoted by President Sarkozy and supported by many other leaders at the G20 conference in Cannes on 3 and 4 November 2011. It has also been publicly supported by Bill Gates, the Archbishop of Canterbury and the Vatican, as you can see from the video clips and articles below. It is also one of the demands of protesters at St Pauls in London and at other places around the world.
However, the introduction of such a tax is vehemently opposed by many banks and by the US, UK, Canadian and Australian governments, amongst others. In the articles below, we consider the latest arguments that are being used on both sides. With such strong feelings it looks as if the arguments are not going to go away.
Update
On 29 January 2012, French President, Nicolas Sarkozy, announced plans to introduce a 0.1% levy on financial transactions. Naturally, by taking the lead, he hopes that other EU countries will follow suit. The final set of articles consider his move.
What is a Tobin Tax? BBC News, Andrew Walker (2/11/11)
Rowan Williams: St Paul’s protest has ‘triggered awareness’ BBC News (2/11/11)
Bill Gates explains his support for a Tobin tax BBC News (2/11/11)
Robin Hood tax: What is the Tobin tax? BBC Newsnight, Andrew Verity (17/11/11)
Q&A: What is the Tobin Tax on financial trading BBC News (2/11/11)
Head-to-head: the Robin Hood tax BBC News, Gemma Godfrey and Prof Avinash Persaud (9/12/11)
Time for us to challenge the idols of high finance Financial Times, Rowan Williams, Archbishop of Canterbury (1/11/11)
Gates says ‘Robin Hood’ tax has part to play Financial Times, Chris Giles (3/11/11)
Sarkozy Pledges Fight for Transaction Tax Bloomberg, Rebecca Christie and Helene Fouque (4/11/11)
Financial Transaction or Speculation Taxes: Not Quite What They Seem Forbes, Tim Worstall (4/11/11)
Is a Robin Hood Tax the Answer? Forbes, Kelly Phillips Erb (3/11/11)
Bill Nighy takes Robin Hood tax to the G20 Guardian, Patrick Wintour and Larry Elliott (3/11/11)
G20 tax moves disappoint charities Press Association (4/11/11)
Jamaica should support the Robin Hood Tax Jamaica Observer (6/11/11)
World Leaders Need to Agree to the Robin Hood Tax at G20 Huffington Post, Bill Nighy (3/11/11)
Obama, the G20, and the 99 Percent Huffington Post, Jeffrey Sachs (1/11/11)
Now is the moment to bring banks to heel This is Money, Jeffrey Sachs (3/11/11)
Note on financial reform from the Pontifical Council for Justice and Peace The Vatican Today
Tobin Tax would cost £25.5bn and cause job losses says think-tank London loves Business, Rebecca Hobson (4/11/11)
The Spurious Case Against A Financial Transactions Tax – Analysis Eurasia Review, Dean Baker (2/11/11)
Update
Sarkozy Says France to Impose Transaction Tax From August Bloomberg Businessweek, Helene Fouquet and Mark Deen (30/1/12)
Struggling Sarkozy unveils financial transactions tax Sydney Morning Herald, AFP (30/1/12)
Sarkozy announces French financial transaction tax BBC News (30/1/12)
French president announces unilateral financial transaction tax Deutsche Welle Spencer Kimball, Andrew Bowen and Nicole Goebel (30/1/12)
Questions
- What are the main arguments in favour of a financial transactions tax?
- What are the main arguments against a financial transactions tax?
- To what extent is the debate a normative one and to what extent could evidence be used to support one side or the other?
- What would determine the extent to which the tax would be passed on to consumers?
- Would a financial transactions tax impede growth? Explain.
- Would financial intermediation be made more efficient by the imposition of such a tax?
With the fall of communism in eastern Europe between 1989 and 1991, many hailed this as the victory of capitalism.
Even China, which is still governed by the Chinese Communist Party, has embraced the market and accepted growing levels of private ownership of capital. It is only one or two countries, such as North Korea and Cuba, that could be described as communist in the way the term was used to describe the centrally planned economies of eastern Europe before 1990.
But whilst market capitalism seemed to have emerged as the superior system in the 1990s, may are now questioning whether the market capitalism we have today is fit for the 21st century. Today much of the world’s capital in the hands of big business, with financial institutions holding a large proportion of shares in such companies. And the gap between rich and poor is ever widening
The market system of today, is very different from that of 100 years ago. In fact, as John Kay agues in his article “Let’s talk about the market economy” below, it would be wrong to describe it as ‘capitalism’ in the sense the term was used in the debates of the 19th and early 20th centuries. Nonetheless, the term is still used and generally refers to the market system we now have. And it is a market system that many see as failing and unfit for purpose. It is a system that coincided with the bubble of the 1990s and early 2000s, the credit crunch of 2007–9 and the recession of 2008/9, now seeming to return as a double-dip recession
With the political and business leaders of the world meeting at the World Economic Forum at Davos in Switzerland on 25–29 January 2012, a central theme of the forum has been the future of capitalism and whether it’s fit for the 21st century.
Is there a fairer and more compassionate capitalism that can be fostered? This has been a stated objective of all three political parties in the UK recently. Can we avoid another crisis of capitalism as seen in the late 2000s and which still continues today? What is the role of government in regulating the market system? Does the whole capitalist system need restructuring?
It’s becoming increasingly clear that we need to talk about capitalism. The following webcasts and articles do just that.
Webcasts and podcasts
Davos 2012 – TIME Davos Debate on Capitalism< World Economic Forum (25/01/12)
Can capitalism be ‘responsible’? BBC Newsnight, Paul Mason (19/01/12)
Capitalism ‘nothing to do with responsibility’ BBC Newsnight, Eric Hobsbawm (19/01/12)
Are there alternatives to capitalism? BBC Newsnight, Danny Finkelstein, Tristram Hunt and Julie Meyer (19/01/12)
America Beyond Capitalism The Real News on YouTube, Gar Alperovitz (27/12/11)
The future of capitalism CNBC, Warren Buffett and Bill Gates (12/11/09)
Capitalism Hits the Fan (excerpt) YouTube, Richard Wolff (2/1/12)
Panel Discussion “20 years after – Future of capitalism in CEE” Erste Group on YouTube, Andreas Treichl, Janusz Kulik, Jacques Chauvet, and media Adrian Sarbu (24/2/11)
The Future of Capitalism: Constructive Competition or Chaos? YouTube, Nathan Goetting, Tony Nelson, Craig Meurlin and Judd Bruce Bettinghaus (24/1/11)
Capitalism in Crisis Financial Times, Various videos (24/1/11)
Bill Gates: Capitalism a ‘phenomenal system’ BBC Today Programme, Bill Gates talks to Evan Davis (25/1/12)
Capitalism (See also) BBC The Bottom Line, Evan Davis and guests (28/1/12)
Articles
Meddle with the market at your peril Financial Times, Alan Greenspan (25/1/12)
The world’s hunger for public goods Financial Times, Martin Wolf (24/1/12)
When capitalism and corporate self-interest collide JohnKay.com, John Kay (25/1/12)
Let’s talk about the market economy JohnKay.com, John Kay (11/1/12)
A real market economy ensures that greed is good JohnKay.com, John Kay (18/1/12)
Seven ways to fix the system’s flaws Financial Times, Martin Wolf (22/1/12)
To the barricades, British defenders of open markets! The Economist, Bagehot’s Notebook (26/1/12)
Community reaction to doubts about capitalism in Davos CBC News (26/1/12)
Capitalism saw off USSR, now it needs to change or die The National (UAE), Frank Kane (26/1/12)
Words won’t change capitalism. So be daring and do something Observer, Will Hutton (22/1/12)
A political economy fit for purpose: what the UK could learn from Germany Our Kingdom, Alex Keynes (20/1/12)
Debate on State Capitalism The Economist (24/1/12)
Questions
- How has the nature of capitalism changed over recent decades?
- Can capitalism be made more ‘caring’ and, if so, how?
- What do you understand by the term a ‘fair allocation of resources’? Is capitalism fair? Can it be made fairer and, if so, what are the costs of making it so?
- Can greed ever be good?
- How does the ‘Anglo-Saxon’ model of capitalism differ from the European model?
- What do you understand by the term ‘crony capitalism’? Is crony capitalism on the increase?
- John Kay states that “Modern titans derive their authority and influence from their position in a hierarchy, not their ownership of capital.” Explain what this means and what its implications are for making capitalism meet social goals.
- In what ways can governments control markets? Have these instruments and their effectiveness changed in effectiveness over time?
- What are the costs and benefits to society of the increasing globalisation of capital?
- To what extent was the financial crisis and credit crunch the result of a flawed capitalist system and to what extent was it a failure of government intervention?
- Why is it important for the success of capitalism that companies should be allowed to fail? Consider whether this should also apply to banks. How is the concept of moral hazard relevant to your answer?
International trade brings various benefits to an economy. One is that it can stimulate economic growth – something the UK government would very much like to achieve in current circumstances.
