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.
UK Unemployment figures for the July to September period have just been published. Perhaps surprisingly, the rate has fallen to 7.8% from 8.0% in the previous 3-month period. What is more, there have been similar 0.2 percentage-point falls in each of the two 3-month periods prior to that (see chart below).
This would normally suggest that the economy has been growing strongly and faster than the growth in potential output. But, despite positive economic growth in quarter 3 (see A positive turn of events?), the economy has been experiencing a prolonged period of low or negative growth.
So what is the explanation for the fall in unemployment? (For a PowerPoint of the chart, click here)
One reason is a greater flexibility in the labour market than in previous recessions. People are more willing to accept below inflation wage increases, or even nominal wage cuts, in return for greater job security. Others are prepared to reduce their hours.
The other reason is a fall in productivity (i.e. output per hour worked). One explanation is that people are not working so hard because, with a lack of demand, there is less pressure on them to be productive; a similar explanation is that firms are ‘hoarding’ labour in the hope that the market will pick up again.
Another explanation is that employment growth has often occurred in the low productivity industries, such as labour-intensive service industries; another is that when people leave their jobs they are replace by less productive workers on lower wages; another is that workers are making do with ageing equipment, whose productivity is falling, because firms cannot afford to invest in new equipment. An range of possible explanations is given on page 33 of the Bank of England’s November 2012 Inflation Report.
But with many predicting that growth will be negative again in 2012 quarter 4, the fall in unemployment may not continue. Britain may join many other countries in Europe and experience rising unemployment as well as falling output.
What possible explanation are there for the latest fall in unemployment?
What has been happening to employment, both full time and part time?
What are the different ways of measuring productivity? Why will they be affected differently by a fall in the average number of hours worked?
Why might it be in firms’ interests to maintain the level of their workforce despite falling sales?
Assume that there has been a fall in aggregate demand. Compare the resulting effect on consumption of (a) a fall in wages rates; (b) a rise in unemployment. How might the design of the benefit system affect the answer?
Countries differ considerably in terms of the number of hours people work.
Despite the criticisms levelled at Greece, with some claiming that Greek workers are ‘lazy’, according to 2010 figures, the average worker in Greece worked 2109 hours per year – more than in any other European country. The average German worker worked 1419 hours and the average Dutch worker only 1377.
Internationally, amongst developed countries, Korea has the highest number of working hours per worker at 2193 per year. In the USA, the figure is 1778 hours and in the UK it’s 1647. (Click on chart below for a larger version.)
But working long hours does not mean working more productively. Generally the countries in which people work longer hours have lower output per hour.
The following podcast and articles look at the relationship between hours worked and productivity and consider which way the causality lies. They also look at related issues such as the proportion of part-time working and the length of annual paid holidays.
Podcast Hardest Working Nations (also at) More or Less: BBC Radio 4, Tim Harford talks to Jon Messenger from the ILO (18/5/12)
Would cutting working hours, either through legislation or by agreement with companies, allow more people to be employed? Explain why it might be more complicated than this.
What is the relationship between labour productivity per hour and the average number of hours worked per worker? Do people work longer hours because they are less productive or are they less productive because they work longer hours?
Why factors determine labour productivity?
Why may average hours worked be deceptive in terms of assessing how hard people are working?
Why do US workers work more hours per year on average than UK workers?
How much value do you place on that wonderful long weekend that a Bank holiday brings? The extra lie in; the ensuing 4 day week; the time you spend with your family. Some would say it’s invaluable – you can’t put a price on it. But those some people would not be economists! Each Bank holiday is worth about £2bn – at least that’s how much it costs the economy.
According to the Centre for Economics and Business Research, if the UK got rid of its Bank holidays, GDP would increase by approximately £18bn.
Some businesses will do well out the Bank holidays, but according to the research, the sectors of the economy that suffer are far greater, causing losses in productivity and hence in GDP. Indeed, the extra Bank Holiday we had last year for the Royal Wedding is thought to have been part of the cause for the slow down in growth to 0.1% during the second quarter of 2011.
Based on this data, there are unsurprisingly concerns that the extra Bank holiday this year for the Queen’s Diamond Jubilee could also cost the economy. Not particularly good news, considering how vulnerable the economy currently is. Although the Queen’s Diamond Jubilee will undoubtedly generate huge amounts of spending, it is thought that this will be more than offset by the sectors that are expected to lose out because of the loss in working hours and hence productivity.
Given the cost of Bank holidays to the economy, the CEBR says that they should be spread more evenly throughout the year. Is this the solution &ndash if one is needed – or should they be abolished altogether! The following articles consider the issue.
“There are ‘incredible economies of scale in cloud computing’ that make it a compelling alternative to traditional enterprise data centers.” According to the first article below, cloud computing represents a step change in the way businesses are likely to handle data or use software. Rather than having their own servers with their own programs, they use a centralised service or ‘public cloud’, provided by a company such as Microsoft, Google or Amazon Web Services. The cloud is accessed via the Internet or a dedicated network. It can thus be accessed not only from company premises but by mobile workers using tablets or other devices and thus makes telecommuting more cost effective.
There are considerable economies of scale in providing these computing services, with the minimum efficient scale considerably above the output of individual users. By accessing the cloud, individual users can benefit from the low average costs achieved by the cloud provider without having to invest in, and frequently update, the hardware and software themselves.
In the case of large companies, rather than using a public cloud, they can use a ‘private cloud’. This is hosted by the IT department in the company and achieves economies of scale at this level by removing the need for individual departments to purchase their own software and servers. Of course, the costs of providing the cloud is borne by the company itself and thus the benefits of lower up-front IT capital costs are reduced. This is clearly a less radical development and is really only an extension of the policy of many companies over the years of having centralised servers holding data and various software packages.
The Cebr’s research calculates that €177.3 billion per year will be generated by 2015, if companies across Europe’s five largest economies continue to adopt cloud technology as expected.
The Cebr found that the annual economic benefit of cloud computing, by 2015, will be: • France – €37.4 billion • Germany – €49.6 billion • Italy – €35.1 billion • Spain – €25.2 billion • UK – €30.0 billion
Will the ability of cloud computing to drive down the costs of IT mean that a new revolution is underway? Just how significant are the economies of scale and are they likely to grow as cloud providers themselves grow in size and experience? The following articles look at some of the issues.
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.
