Here is a great image from The Economist showing the competitiveness and GDP per person. New Zealand comes in at 25th in Global Competitiveness ranking – see red arrow on graph. Notice that Switzerland is the top country followed by Singapore with Finland in third place. Amongst the emerging economies China is top with Brazil in second place.
The most striking fall is the United States, which has dropped in the rankings for four years in a row. It is now seventh. The rankings are based on criteria such as institutions, infrastructure, financial systems, flexible labour markets, economic stability, innovations and public services. Plotting the scores against GDP per person reveals an unsurprising correlation: competitiveness brings wealth, but rich countries can most easily afford to provide the conditions for it. They can squander competitiveness too.
Here is the first of a four part documentary that showcases the District Economic Development Strategies for the cities of Multan and Bahawalpur in Pakistan, developed by the USAID FIRMS Project. It highlights the many sectors identified by the strategies and presents a roadmap which, when implemented, can open up new avenues of economic growth and prosperity for these districts. While bringing out the crux of the strategies — the tremendous potential of the region — the documentary touches upon each individual sector, highlighting its advantages. In doing so, it reveals the untapped potential for economic opportunities and presents the two districts as being poised on the brink of a journey to progress and development, where the possibilities are endless and the destinations, unlimited!
Just completing the Unit 6 of the A2 course and updating my notes on the current issue of debt hangover from the Global Financial Crisis. The FT recently reported that there are worrying signs of private sector credit in emerging economies.
Turkey Brazil Russia - private sector credit in year to April 2012 up 20%.
China – private sector credit in year to April 2012 up 15%.
Poland – private sector credit to GDP 49%
This is seen as inevitable if an economy is going to grow but there needs to be investment in capital which will ultimately increase a country’s productive capacity and long-term development. However a lot of this borrowing has gone into consumer goods rather than capital infrastructure projects. This is especially worrying in Brazil as the transport system needs a major overhaul if it is going to cope with the demands of the Olympic Games in 2016. According to the FT misdirected credit can produce two damaging consequences:
1. When too much money is directed into the housing market bubbles can occur – subprime for instance and more recently China.
2. Poor credit allocation can harm economic growth, both in the short and in the long term.
Although China and Brazil has loosened monetary policy this needs to be accompanied by a process that ensures it is directed to where it is most needed. Jeffrey Sachs in his book “End of Poverty” talked about how a country needs six major kinds of capital:
1. Human capital: health, nutrition, and skills needed for each person to be economically productive
2. Business capital: the machinery, facilities, motorized transport used in agriculture, industry, and services
3. Infrastructure: roads, power, water and sanitation, airports and seaports, and telecommunications systems, that are critical in-puts into business productivity
4. Natural capital: arable land, healthy soils, biodiversity, and well-functioning ecosystems that provide the environmental services needed by human society
5. Public institutional capital: the commercial law, judicial systems, government services and policing that underpin the peaceful and prosperous division of labor
6. Knowledge capital: the scientific and technological know-how that raises productivity in business output and the promotion of physical and natural capital
Figure 1 shows the basic mechanics of saving, capital accumulation, and growth. We start on the left-hand side with a typical household. The household divides its income into consumption, taxation, and household savings. The government, in turn, divides its tax revenues into current spending and government investment. The economy’s capital stock is raised by both household savings and by government investment. A higher capital stock leads to economic growth, which in turn raises household income through the feedback arrow from growth to income. We show in the figure that population growth and depreciation also negatively affect the accumulation of capital. In a “normal” economy, things proceed smoothly toward rising incomes, as household savings and government investments are able to keep ahead of depreciation and population growth.
Source: The End of Poverty: How we can make it happen in our lifetime by Jeffrey Sachs (2005).
Another interesting graphic from the Begg Textbook. Comparative advantage need not depend on technology differences. It may also reflect different factor supplies. The US has more capital per worker than China. Even though China’s vast size may mean that it has absolutely more capital than the US, the US has relatively more capital than China. Where they is an abundance of supply of a variable factor (labour) it is relatively cheap and the opposite applies if the variable is scarce. Therefore labour intensive industries in China tend to be more competitive that similar industries in the US. The graph below supports this view. It emphasises skills, or human capital, rather than physical capital, although the two are usually correlated. Countries with scarce land but abundant skills have high shares of manufaturing in their exports. Countries with lots of land but few skills typically export base materials. The figure also shows regional averages. Africa lies at one end, the industrial countries at the other end.
The Economist recently focused on the significance of emerging countries over developed countries – a useful article for the Development Economics part of the Cambridge A2 course. As output in most of the developed world contracts, amidst the pressure of austerity measures, those economies that are less developed or emerging have seen the output increase by approximately 20%. Nevertheless how big are emerging markets relative to the developed world?
As successful emerging economies graduate to developed status the prevalence of the emerging economies is eroded. Therefore to appreciate the true shift in global economic power, The Economist looked at numbers using the IMF’s pre-1977 classification. Developed economies based on 1990 data: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom, United States. Newly industrialised countries such as South Korea count as emerging.
From the graph below you can see that the combined output of emerging countries accounted for 38% of world GDP in 2010 twice its share in 1990. If GDP was measured at purchasing-power parity, emerging economies overtook the developed world in 2008 and are likely to reach 54% of world GDP this year. Other key indicators are:
- in 2010 emerging economies accounted for over 50% of world exports
- in 2010 they accounted for over 47% of world imports – domestic demand up markedly
- they attracted over 50% of world foreign direct investment (FDI).
- they consume 60% of world energy, 65% of copper, 75% of steel, 55% of oil
- they make up 46% of world retail sales, 52% of purchases of new cars, and 82% of mobile-phone subscriptions
But maybe more importantly emerging economies are only responsible for 17% of all outstanding debt – one indicator that you don’t want to at the top. With less debt, a growing middle class and huge potential to lift productivity, emerging economies will become the drivers of global growth.
Hans Rosling is a Professor of International Health at Karolinska Institute and also founder of Gapminder which shows graphically the worlds most important trends. This BBC4 programme shows brilliantly how the last 200 years has seen huge increases in life expectancy and inequality between nations. He also features on TED Talks
A report from the Economic Freedom of the World (EFW) measured the degree to which the policies and institutions of countries are supportive of economic freedom. Forty-two data points are used to construct a summary index and to measure the degree of economic freedom in five broad areas:
1 Size of Government: Expenditures, Taxes, and Enterprises;
2 Legal Structure and Security of Property Rights;
3 Access to Sound Money;
4 Freedom to Trade Internationally;
5 Regulation of Credit, Labour, and Business.
The research shows that individuals living in countries with high levels of economic freedom enjoy higher levels of satisfaction, greater individual freedoms, higher GDP per capita and a greater life expectancy. Below are the top and bottom 10 countries in the research (10 = perfect freedom)
With my A2 class we are looking at policies to help developing economies. Earlier in the year economist Jeff Sachs called for a tax on every deal conducted by the financial industry to curb the excessive power of Wall Street, and pay for the west’s unfulfilled promises to poor countries.
“Wall Street has had the most profitable year in its history. It made profits of $55bn (£37bn) in the midst of the biggest downturn since the Great Depression,” Sachs said. This was due to the 0% interest rate policy by the Fed Reserve and the bailouts paid by the taxpayer. Sachs is quite rightly disappointed with the G8 countries as they promised in 2005 to double the aid to Africa which would equate to $60bn – they are $20bn short. To put it in perspective the credit default swap (CDS) market was worth $62tn which is the output of the global economy. CDS – the buyer of a credit swap receives credit protection, whereas the seller of the swap guarantees the credit worthiness of the product. Below is a very good discussion of the Robin Hood Tax.
Lord Nicholas Stern is the delivering the Sir Dougla Robb Lectures 2010 at the University of Auckland early next month. His focus is on managing the risks of climate change, overcoming world poverty and creating a new era of growth and prosperity: The challenges for global collaboration and reationality. He was the Chief Economist and Senior Vice-President of the World Bank from 2000 to 2003, and was recently a civil servant and government economic advisor in the United Kingdom. He also wrote The Stern Review on the Economics of Climate Change – a 700-page report released for the British government on October 30, 2006. There are 3 lectures – 8, 9, 10 September at 7pm. For more information and to register click here. Worth a visit.
The graphic below I found useful in explaining how developing countries find it so hard to grow. All of the impoverished household income goes to consumption, just to stay alive. There are no taxes and no personal savings. Nonetheless, depreciation and population growth continue relentlessly. The result is a fall in capital per person and a negative growth rate of per capita income. That leads to still further impoverishment of the household in the future. The figure depicts a vicious circle of falling incomes, zero savings and public investment, and falling capital per person as a result. This graphic is taken from Jeff Sachs’ book – The End of Poverty – a good read.
Just finishing off Development Economics with my CIE A2 class and below is an interesting clip from the Commanding Heights DVD series. Peruvian economist Hernando de Soto sees a main obstacle to the development of markets and capitalism within developing countries being linked with the lack of property rights. The result of this is that most people’s resources are commercially and financially invisible. Nobody knows who owns what or where, who is accountable for the performance of obligations, who is responsible for losses and fraud, or what mechanisms are available to enforce payment for services and goods delivered. Consequently, most potential assets in these countries have not been identified or realized; there is little accessible capital, and the exchange economy is constrained and sluggish. However in the West, where property rights and other legal documentation exist, assets take on a role of securing loans and credit for a variety of purposes – building capital with capital.
De Soto estimates that about 85% of urban parcels in Third World and former communist nations, and between 40 and 53 % of rural parcels, are held in such a way that they cannot be used to create capital. The total value of the real estate held but not legally owned by the poor of these countries is at least $9.3 trillion. This is approximately twice as much as the total circulating U.S. money supply and nearly as much as the total value of all the companies listed on the main stock exchanges of the world’s twenty most developed countries. The lack of such an integrated system of property rights in today’s developing nations makes it impossible for the poor to leverage their now informal ownerships into capital (as collateral for credit), which de Soto claims would form the basis for entrepreneurship. However, in reality, it cannot be seen as the panacea. Titling must be followed by a series of politically challenging steps. Improving the efficiency of judicial systems, rewriting bankruptcy codes, restructuring financial market regulations, and similar reforms will involve much more difficult choices by policymakers.