Each year world political and business leaders meet at the World Economic Forum in the Swiss resort of Davos. The aim is to assess the progress of the global economy and to look at challenges ahead and what can be done about them.
Cynics claim that the round of presentations, discussions, Champagne receptions and fine dining rarely leads to anything concrete. Those who are less cynical argue that the Forum gives a unique opportunity for considering policy options and helping to shape a global consensus.
This year the mood was more optimistic. Many believe that the worst of the financial crisis is behind us. Stock markets are buoyant; the banking system seems more secure; the eurozone has not collapsed; growth prospects seem a little brighter.
But perhaps ‘optimistic’ is an overstatement. ‘Less pessimistic’ might be a better description. As Christine Lagarde, head of the IMF, pointed out in her speech:
The recovery is still weak, and uncertainty is still high. As the IMF announced just a few hours ago in our World Economic Outlook, we expect global growth of only 3½ percent this year, not much higher than last year. The short-term pressures might have alleviated, but the longer-term pressures are still with us. (Click here for transcript).
In both her speech and her press conference, she went on to outline the policies the IMF feels should be adopted to achieve sustained global growth.
The articles below summarise the outcomes of the Forum and some of the views expressed.
Articles
Too soon for sighs of relief Deutsche Welle, Andreas Becker (27/1/13)
Davos 2013: The icy economic chill begins to thaw The Telegraph, Louise Armitstead (26/1/13)
IMF Projects Modest Pick-up in Economic Growth in 2013 IMF videos, Olivier Blanchard, IMF Chief Economist (23/1/13)
Managing Director’s New Year Press Briefing IMF videos, Christine Lagarde, IMF Managing Director
Mark Carney in Davos: what’s up next for the global economy Maclean’s (Canada), Erica Alini (26/1/13)
World Economic Forum ends on warning note over ‘complacency’ The Guardian, Graeme Wearden (26/1/13)
Angela Merkel tells Davos austerity must continue The Guardian, Graeme Wearden and Larry Elliott (24/1/13)
Davos 2013: A ‘sigh of relief’ at the World Economic Forum BBC News, Stephanie Flanders (27/1/13)
Happy talk The Economist (27/1/13)
Davos Man and his defects The Economist, Schumpeter (26/1/13)
Davos: are the captains of capitalism finally paying attention? The Observer (27/1/13)
Official site
The Global Agenda 2013 The World Economic Forum
IMF projections
Modest Growth Pickup in 2013, Projects IMF IMF Survey Magazine: In the News (23/1/13)
World Economic Outlook Update IMF (23/1/13)
Questions
- Why was the mood at the WEF less pessimistic than in 2012?
- What threats remain to sustained global recovery?
- What policies are being recommended by Christine Lagarde of the IMF? Explain the reasoning behind the recommendations.
- What disagreements are there between global leaders on the scope for fiscal and monetary policies to stimulate economic growth?
- In her press conference, Christine Lagarde stated that “the teams here have concluded that the fiscal multipliers were higher in the context of that unbelievable international crisis”. Do you agree with this statement? Explain.
The exchange rate for sterling is determined in much the same way as the price of goods – by the interaction of demand and supply.
When factors change that cause residents abroad to want to hold more or fewer pounds, the demand curve for sterling will shift. If, instead, factors change that cause UK residents to want to buy more or less foreign currency, then the supply curve of sterling will shift. It is these two curves that determine the equilibrium exchange rate of sterling.
There are concerns at the moment that sterling is about to reach a peak, with expectations that the pound will weaken throughout 2013. But is a weakening exchange rate good or bad for the UK?
With lower exchange rates, exports become relatively more competitive. This should lead to an increase in the demand for UK products from abroad. As exports are a component of aggregate demand, any increase in exports will lead to the AD curve shifting to the right and thus help to stimulate a growth in national output. Indeed, throughout the financial crisis, the value of the pound did fall (see chart above: click here for a PowerPoint) and this led to the total value of UK exports increasing significantly. However, the volume of UK exports actually fell. This suggests that whilst UK exporters gained in terms of profitability, they have not seen much of an increase in their overall sales and hence their market share.
Therefore, while UK exporters may gain from a low exchange rate, what does it mean for UK consumers? If a low exchange rate cuts the prices of UK goods abroad, it will do the opposite for the prices of imported goods in the UK. Many goods that UK consumers buy are from abroad and, with a weak pound, foreign prices become relatively higher. This means that the living standards of UK consumers will be adversely affected by a weak pound, as any imported goods buy will now cost more.
It’s not just the UK that is facing questions over its exchange rate. Jean-Claude Junker described the euro as being ‘dangerously high’ and suggested that the strength or over-valuation of the exchange rate was holding the eurozone back from economic recovery. So far the ECB hasn’t done anything to steer its currency, despite many other countries, including Japan and Norway having already taken action to bring their currencies down. Mario Draghi, the ECB’s president, however, said that ‘both the real and the effective exchange rate of the euro are at their long-term average’ and thus the current value of the euro is not a major cause for concern.
So, whatever your view about intervening in the market to steer your currency, there will be winners and losers. Now that countries are so interdependent, any changes in the exchange rate will have huge implications for countries across the world. Perhaps this is why forecasting currency fluctuations can be so challenging. The following articles consider changes in the exchange rate and the impact this might have.
A pounding for sterling in 2013? BBC News, Stephanomics, Stephanie Flanders (17/1/13)
UK drawn into global currency wars as slump deepens Telegraph, Ambrose Evans-Pritchard (16/1/13)
Foreign currency exchange rate predictions for GBP EUR, Forecasts for USD and NZD Currency News, Tim Boyer (15/1/13)
Euro still looking for inspiration, Yen firm Reuters (16/1/13)
Daily summary on USD, EUR, JPY, GBP, AUD, CAD and NZD International Business Times, Roger Baettig (16/1/13)
UK inflation bonds surge on Index as pound falls versus euro Bloomberg, Business News, Lucy Meakin (10/1/13)
Questions
- Which factors will cause an increase in the demand for sterling? Which factors will cause a fall in the supply of sterling?
- In the article by Stephanie Flanders from the BBC, loose monetary policy is mentioned as something which is likely to continue. What does this mean and how will this affect the exchange rate?
- Explain the interest- and exchange-rate transmission mechanisms, using diagrams to help your answer.
- If sterling continues to weaken, how might this affect economic growth in the UK? Will there be any multiplier effect?
- What is the difference between the volume and value of exports? How does this relate to profit margins?
- Why are there suggestions that the euro is over-valued? Should European Finance Ministers be concerned?
- Should governments or central banks intervene in foreign exchange markets?
- If all countries seek to weaken their currencies in order to make their exports more competitive, why is this a zero-sum game?
Many rich countries have made repeated commitments to the United Nations to give at least 0.7% of their gross national income (GNY) as international aid – or ‘official development assistance (ODA)’ as it is known. The first such commitments were made in 1970. Despite this, many of these countries’ aid to developing countries falls well short of the target.
In fact the average amount given in aid in 2011 by the 23 donor countries which are members of the OECD’s Development Assistance Committee (DAC) was a mere 0.31% of GNY, with the USA, the biggest donor in absolute terms, giving only 0.2% of GNY. (Click here for a PowerPoint of the chart.) Since 2003, the DAC average has been 0.29% as compared with 0.30% between 1970 and 2002.
In 2005, at the Gleneagles G8 summit, the 15 members of the EU which are Development Assistance Committee members committed themselves to reaching an ODA target of 0.51% of GNY in 2010 and to reach the 0.7% target by 2015. In 2011, the UK’s ODA/GNY ratio stood at 0.56% and so was above the EU target.
Section 18 of the Coalition agreement pledges that the UK government will meet the 0.7% target by 2013 – a pledge initially made by the Labour government. So far, the government has stuck to this pledge and the aid budget has escaped cuts.
But with other parts of government expenditure facing cuts, pressure is mounting on the government to reduce the aid budget. There are two main parts to the argument. The first is that aid should face its ‘fair share’ of the cuts. The second is that aid is often an inefficient way of tackling poverty in developing countries and, when discussing aid, the focus should be on getting value for money rather than on the simple total amount of aid.
The following articles look at arguments for and against meeting aid targets and examine ways of making aid ‘smarter’.
Articles
Money may be tight, but ‘smart aid’ to developing countries can really work The Guardian, Larry Elliott (13/1/13)
International aid, but not as we know it The Guardian, Andy Sumner and Richard Mallett (31/12/12)
One in four support Britain’s foreign aid policies The Telegraph, Ben Leach (29/12/12)
Why is so much UK aid money still going to companies based in Britain? The Guardian, Claire Provost and Nicola Hughes (21/9/12)
Is the 0.7% aid target still relevant? The Guardian, Niels Keijzer (2/8/12)
What’s wrong with foreign aid? The Spectator (3/1/13)
Five reasons to deliver and legislate on international aid bond, UKAN (6/12)
The Political Economy of Bilateral Foreign Aid Working Knowledge, Harvard Business School, Eric D. Werker (4/1/13)
Misconceptions about aid Dawn (Pakistan), Niaz Murtaza (8/1/13)
Why political short-sightedness and randomised control trials can be a deadly mix for aid effectiveness Vox EU, Anders Olofsgård (13/10/12)
Aid in troubled times DfID, Paul Collier (2/7/12)
Data and information
Aid Effectiveness data World Bank
Aid statistics OECD
Aid effectiveness OECD
Aid Wikipedia
Questions
- What was agreed at the Gleneagles G8 summit?
- Examine the argument that aid crowds out private investment.
- Compare the relative benefits of tied and untied aid.
- Give some examples of ‘smart aid’.
- How would you establish whether or not it is ‘fair’ to cut the aid budget?
- Give three arguments for maintaining the aid budget and three arguments for cutting it. On which side do you come down and why?
While the Western world has struggled with economic growth for the past 6 years, emerging economies such as China, Brazil and India have recorded some very high rates of growth. Throughout 2012, there were signs that these economies were not going to be the saviour of the global economy that we all thought. But, as we enter 2013, is it these economies that still hold the hope of the West for more positive figures and better economic times?
The article below from BBC News, in particular, considers the year ahead for the Asian economies and what it might mean for the Western world. Although these countries are by no means safeguarded against the impending approach of the US economy to their fiscal cliff or the ongoing eurozone crisis, they have seemed to be more insulated than the rest of the world. A crucial question to consider is whether this will continue. Furthermore, are the growth levels and policies of a country such as China sustainable? Can it continue to record such high growth rates in the face of the global economic situation?
The Japanese economy has been in serious trouble for a couple of decades, but measures to boost growth for this economy are expected. If these do occur, then western economies may feel some of their positive effects. At present, there is a degree of optimism as we enter the New Year, but how long this will last is anybody’s guess. The following articles consider the year ahead.
Asian economies face regional and global challenges BBC News (1/1/13)
Asia faces hard road ahead China Daily, Haruhiko Kuroda and Changyong Rhee (31/12/12)
Asia to continue rise despite US fiscal cliff Economic Times, Sugata Ghosh (1/1/13)
‘3.6% growth’ for global economy next year China Daily, Alvin Foo (28/12/12)
Asian economies surge ahead despite global slowdown Coast Week, Ding Qilin and Hu Junxin (4/1/13)
Global grind The Economist, Robin Bew (21/11/12)
Questions
- Why have the Asian economies been more insulated to the global economic conditions over the past few years, in comparison with the Western world?
- What challenges will the global economy be facing over the coming year?
- What challenges are the Asian economies facing? How different are they from the challenges you identified in question 3?
- Why is the rate of exchange an important factor for an economy such as Japan?
- What does a low exchange rate for the yen mean for European countries? Is it likely to be seen as a good or bad thing? What about for South Korea? Use a diagram to help you answer this question.
- Why is the economic situation in countries such as China and India so important for the rest of the global economy? Use a diagram to illustrate this.
Japan’s general election on 16 December was won by the centre-right Liberal Democratic Party (LDP), led by Shinzo Abe. It gained a two-thirds majority in the lower house. It returns to power after losing to the Democratic Party in 2009. Previously it had been in office for most of the time since 1955.
The LDP has promised to revive the flagging Japanese economy, which has been suffering from years of little or no growth and returned to recession last quarter. Economic confidence has been damaged by a dispute with China about the sovereignty over some small islands in the East China Sea. The economy, whose exports make up some 13% of GDP, has suffered from the global slowdown and a high yen. The yen has appreciated against the dollar by around 40% since 2007.
The economy has also suffered from the shutdown of all its nuclear reactors following the earthquake and tsunami last year. Nuclear power accounted for over 30% of the country’s electricity generation.
Mr Abe promises to revive the economy through fiscal and monetary policies. He plans a fiscal stimulus package in early 2013, with increased government expenditure on infrastructure and other public-works. He also wants the Bank of Japan to increase its inflation target from 1% to 3% and to achieve this through various forms of monetary easing.
The initial reactions of markets to the election result were favourable. The stock market rose and the yen fell.
However, as the following articles discuss, there are dangers associated with Mr Abe’s policies. The expansionary fiscal policy will lead to a rise in the country’s general-government debt, which, at some 240% of GDP, is by far the largest in the developed world. This could lead to a loss of confidence in Japanese debt and a fall in the price of bonds on the secondary markets and a rise in government borrowing costs. Also, a depreciation of the yen, while welcomed by exporters, would increase the price of imports, including food and raw materials.
Changing of guard in Japan as PM concedes vote CNN, Yoko Wakatsuki, Brian Walker, and Hilary Whiteman (17/12/12)
LDP Win Clears Pipes for Japan Fiscal Spigot Bloomberg Businessweek, Toru Fujioka (17/12/12)
Economic implications of Japan’s election Huffington Post (16/12/12)
Japan economy contracts again Taipei Times (11/12/12)
Japan elections: Shares rise and yen weakens on Abe win BBC News (17/12/12)
Shinzo Abe’s challenges in reviving Japan’s economy BBC News, Puneet Pal Singh (17/12/12)
Can Shinzo Abe Save Japan? Slate, Matthew Yglesias (30/11/12)
Deflation only natural when politicians refuse to fix oversupplied Japan Japan Times, Teruhiko Mano (17/12/12)
New Year messages from Japan BBC News, Stephanie Flanders (18/12/12)
Japan – Muddling On Or Growing Stronger? Seeking Alpha, Anthony Harrington (12/12/12)
Japanese government unveils £138bn stimulus package The Guardian (11/1/13)
Questions
- Using macroeconomic data from sources such as sites 6, 7 and 9 in the Economics Network’s Economic Data freely available online, describe Japan’s macroeconomic situation over the past 10 years.
- Why has the Japanese yen appreciated so much in recent years?
- What forms could monetary easing take in Japan?
- Why might it prove difficult to stimulate the Japanese economy through fiscal and monetary policies?
- What undesirable side-effects might result from expansionary fiscal and monetary policies?
- What structural weaknesses are there in the Japanese economy that have hindered economic growth? What policies might the new Japanese government pursue in tackling these structural weaknesses?