Many developing Asian countries have experienced rapid and yet relatively stable economic growth over a number of years. In other words, this has not been a short-term unsustainable boom associated with the expansionary phase of the business cycle – with aggregate demand expanding more rapidly than aggregate supply. Rather it is the result of a rapid growth in aggregate supply.
Over the period from 2000 to 2011, several Asian countries experienced average annual growth rates of over 4% and some, such as China and India, much more than that, as the following table shows. The table also shows forecasts for the period from 2012 to 2017. The high forecast growth rates are based on a continuing rapid growth in aggregate supply as the countries invest in infrastructure and adopt technologies, many of which have already been developed elsewhere.
But for aggregate supply to continue growing rapidly there must also be a stable growth in aggregate demand. With the recession in the developed world, some of the more open economies of Asia, such as South Korea, Taiwan, Malaysia and Singapore themselves suffered a slowdown or recession as demand for their exports fell. The Malaysian economy, for example, contracted by 1.5% in 2009.
Given the continuing macroeconomic problems in the developed world, many Asian countries are seeing the need to rebalance their economies away from a heavy reliance on exports. China, for example, is putting more emphasis on domestic-led demand growth. Others, such as Indonesia, have already embarked on this route. As The Economist article states:
Household consumption contributed half of the growth of just over 6% Indonesia enjoyed in the year to the third quarter (its eighth consecutive quarter of growth at that pace). Exports have fallen from about 35% of GDP ten years ago to less than a quarter in 2011. Developing Asia’s combined current-account surplus, which reflects its dependence on foreign demand, more than halved from 2008 to 2011 and is expected to fall further this year.
The continuing success story of many developing Asian economies thus lies in a balance of supply-side policies that foster continuing rapid investment and demand-side policies that create a stable monetary and fiscal environment. A crucial question here is whether they can emulate the ‘Great Moderation’ experienced by the Western economies from the mid-1990s to 2007, without creating the conditions for a crash in a few years time – a crash caused by excessive credit and an excessively deregulated financial system that was building up greater and greater systemic risk.
10 of the 17 eurozone countries have agreed to adopt a financial transactions tax (FTT), often known as a ‘Tobin tax’ after James Tobin who first proposed such a tax back in 1972. The European Commission has backed the proposal, which involves levying a tax of 0.1% on trading in bonds and shares and 0.01% on trading in derivatives.
The 10 countries, France, Germany, Austria, Belgium, Greece, Italy, Portugal, Slovakia, Slovenia and Spain, and possibly also Estonia, hope to raise billions of euros from the tax, which will apply whenever at least one of the parties to a trade is based in one of the 10 (or 11) countries.
As we noted last year in the blog Is the time right for a Tobin tax?, the tax is designed to be too small to affect trading in shares or other financial products for purposes of long-term investment. It would, however, dampen speculative trades that take advantage of tiny potential gains from very short-term price movements. Such trades account for huge financial flows between financial institutions around the world and tend to make markets more volatile. The short-term dealers are known as high-frequency traders (HFTs) and their activities now account for the majority of trading on exchanges. Most of these trades are by computers programmed to seek out minute gains and respond in milliseconds. And whilst they add to short-term liquidity for much of the time, this liquidity can suddenly dry up if HFTs become pessimistic.
Supporters of the tax claim that it will make a major contribution to tackling the deficit problems of many eurozone countries. Critics claim that it will dampen investment and growth and divert financial business away from the participating countries. The following articles look at the arguments.
China has been one of the success stories of the past 20 years, with rapid growth in domestic and export demand. This has created the second largest economy in the world. From 1992 to 2007 annual GDP growth averaged 10.7% and annual export growth averaged 18.9% (see chart).
However, with the credit crunch and ensuing recession, growth rates in China have fallen somewhat. Annual GDP growth has averaged 9.6% and annual export growth has averaged 7.4%. Such growth rates may not seem bad, given that many Western economies have been struggling to achieve any growth, but they have been causing concern for this booming economy.
In its May Outlook, the World Bank forecast China’s growth for the year at 8.2%, but it has since been reduced to 7.8%. A key part of China’s success story has been its export market, but it has been this market that has caused concerns for the mainland economy. In August of this year, its year-on-year export growth was at only 2.7%, but exports last month grew by more than expected, at approximately 7.4%. China has had a consistent trade surplus and according to government figures, this has widened to $27.67 billion in September from $26.66 billion in the previous month.
Recovery in this market will be crucial for the continued success of the economy, as a means of alleviating the fears of a slowdown. This higher growth of exports may be a misleading indicator, perhaps influenced by seasonal factors and thus may not be a sign of what’s to come. Indeed, many analysts have said that they are not convinced that these healthier trade figures will remain. Alistair Thornton, from IHS Global Economics said:
“It’s safe to say we are overshooting the trend here and we expect (the data) to come back in line in the months ahead.”
Citigroup economist, Ding Shaung also confirmed these sentiments:
”The trade data is a positive sign for the Chinese economy … But it remains to be seen whether import and export growth can remain at these levels.”
Part of this pessimism is due to the uncertainty surrounding the growth prospects of its biggest two trading partners – the US and the European Union. Exports to the former have remained relatively high, but exports to the European Union have suffered, falling by over 5.6%. It is likely that weaknesses in the global economy have held back China’s growth prospects in both exports and national output. The Chinese government was aiming for growth of 7.6% in 2012. Not a bad rate you may say, but when compared with growth rates for 2011 (9.3%) and 2010 (10.4%), it does represent a significant fall. The future of the Chinese economy is crucial for the recovery of the world economy, in part as it represents a big demand for imports from other countries, such as the US and Europe. The following articles consider the trade and growth prospects of the world’s second largest economy.
Which factors have influenced Chinese exports and imports?
Why is China’s growth rate such an important variable for the UK and other Western economies?
Why has export growth in China fallen recently? Can you use the same explanation for its lower growth in national output?
Explain why analysts remain pessimistic about the sustainability of these improved trade figures.
Using a diagram, illustrate the effect that higher Chinese growth rates will have on GDP in a country such as the UK. Could there be a multiplier effect?
The ECB president, Mario Draghi, has announced a new programme of ‘Outright Monetary Transactions (OMTs)’ to ease the difficulties of countries such as Greece, Spain, Portugal and Italy. The idea is to push down interest rates for these countries’ bonds. If successful, this will make it more affordable for them to service their debts.
OMTs involve the ECB buying these countries’ bonds on the secondary market (i.e. existing bonds). This will be limited to bonds with no more than three years to maturity. Although restricting purchases to the secondary market would not involve the ECB lending directly to these countries, the bond purchases should push down interest rates on the secondary market and this, in turn, should allow the countries to issue new bonds at lower rates on the primary market.
The OMT programme replaces the previous Securities Markets Programme (SMP), which began in May 2010. This too involved purchasing bonds on the secondary market. By the time of the last actions under SMP in January 2012, €212 billion of purchases had been made. Unlike the SMP, however, OMTs are in principle unlimited, with the ECB president, Mario Draghi, saying that the ECB would do ‘whatever it takes’ to hold the single currency together. This means that it will buy as many bonds on the market as are necessary to bring interest rates down to sustainable levels.
Critics, however, argue that this will still not be enough to stimulate the eurozone economy and help bring countries out of recession. They give two reasons.
The first is that OMTs differ from the quantitative easing programmes used in the UK and USA. OMTs would not increase the eurozone money supply as the ECB would sell other assets to offset the bond purchases. This process is known as ‘sterilisation’, which is defined as actions taken by a central bank to offset the effects of foreign exchange flows or its own bond transactions so as to leave money supply unchanged.
The second reason is that OMTs will be conducted only if countries stick to previously agreed strong austerity measures. This is something that it looking increasingly unlikely as protests against the cuts mount in countries such as Greece and Spain.
What are the key features of the OMT programme? How does it differ from the former Securities Markets Programme (SMP)?
In what ways does the OMT programme differ from the quantitative easing programmes in the USA and UK?
How will the ECB’s buying bonds in the secondary market influence the primary bond market? What will influence the size of the effect?
How does sterilisation work in (a) the bond market; (b) the foreign exchange market?
Why is it claimed that the OMT programme is a necessary but not sufficient condition for solving the crisis in the eurozone? What additional measures would you recommend and why?
What are the risks associated with the OMT programme?
The US Federal Reserve bank has launched a third round of quantitative easing, dubbed QE3. The hope is that the resulting growth in money supply will stimulate spending and thereby increase growth and employment.
Ben Bernanke, the Fed Chairman, had already said that the stagnation of the labour market is of grave concern because of “the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years”. Not, surprisingly, the markets were expecting strong action – and that is what they got.
Under QE3, the Fed will buy mortgage-backed securities of $40bn per month. And this will go on for as long as it takes for the employment market to show significant improvement. It is this open-ended commitment which makes QE3 different from QE1 and QE2. Under these earlier rounds of quantitative easing, the Fed purchased a fixed amount of assets – $2.3tn of bonds.
QE3 also comes on top of a policy in operation since September 2011 of buying long-term government bonds in the market and selling shorter-dated ones. This ‘funding’ operation is known as ‘Operation Twist’.
The markets responded favourably to the announcement of QE3, especially to the fact that its size and duration would depend on the state of the real economy. Nevertheless, there are real questions about its likely effectiveness. The most important is whether the increase in narrow money will translate into an increase in borrowing and spending and hence an increase in broad money; or whether the rise in narrow money will be offset by a fall in the velocity of circulation as banks seek to increase their liquidity ratios and to recapitalise.
The following articles look at the details of QE3 and whether it is likely to achieve its desired result. Will the Fed be forced to raise asset purchases above $40bn per month or to introduce other measures?
Many developing Asian countries have experienced rapid and yet relatively stable economic growth over a number of years. In other words, this has not been a short-term unsustainable boom associated with the expansionary phase of the business cycle – with aggregate demand expanding more rapidly than aggregate supply. Rather it is the result of a rapid growth in aggregate supply.
