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Will there be a recovery in global dairy prices?

April 9, 2017 Leave a comment

Dairy prices fell dramatically in 2014 and 2015, prompting the RBNZ to reverse 2014 OCR increases in 2015. Average prices on the GlobalDairyTrade auction fell by 38% in 2014/2015 and 20% in the 2015/2016 to mid-March.

Inconsistent Chinese demand and increased European/US dairy supply causing the perfect storm of plummeting whole milk powder prices. Thankfully, for dairy farmers and the NZ economy dairy prices recovered in late 2016 but can it be maintained into 2017? Here are some reasons why prices may recover:

  1. EU production is slowing down
  2. New Zealand production is also likely to fall
  3. Demand from China is likely to increase
  4. ASB rural economist Nathan Penny noted three things that would impact the price of milk. One as the fact that milk production was held back before the removal of annual quotas at the end of March 2015 as countries avoided paying penalties associated with producing above quota. Two, after the April removal of quotas, production surged in the EU with April production rising over 3% on a month-by-month basis. Three that post-quota surge has now passed, with production growth slowing, particularly since July, as farmers have struggled with low milk prices.

Once supply is more aligned to demand, global prices are expected to rise again. Europe collectively is the world’s largest dairy exporter, accounting for nearly a third of global export sales. EU exports increased by 6% in milk equivalent last year.

GDT 2012-26.png

 Sources: National Business Review and PWC

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Categories: Growth, Trade Tags:

A2 Economics – Keynesians vs Monetarists

March 29, 2017 Leave a comment

Just been going through this part of the course with my A2 class and came across a table from some old A Level notes produced by Russell Tillson (ex Epsom College Economics and Politics Department) to help them understand the principal differences.

Options for taking on Trump – the Japanese Model.

February 7, 2017 Leave a comment

trump-abeA colleague alerted me to a Terrie Lloyd a New Zealand businessman in Japan who writes a weekly newsletter. With the election of Donald Trump his recent writing looked at bullies and ways in which you deal with them. Shinzo Abe, the Japanese prime minister, has been proactive in getting to know Trump and his team and how the two countries can work together.

Research on bullies

Lloyd suggests that there are generally three ways to deal with a bully.

Run – UK seem to be taking this option
Fight – Chinese will do this
Suffer and appease – Japan, having a bullying culture already, will go for appeasement

Abe will be meeting with Trump on 10th February for a second time in as many months and will want to convince him that Japan is one of the good guys and if he has to pick on someone in the area he should pick on China. For this to work Abe also needs to feed Trump’s ego publicly

Lloyd looks at the work of Dacher Keltner who has written about appeasement and related
human emotion and social practice. He looks at two general classes of appeasement.

1) reactive – the person provides appropriate responses after incidents and these responses are usually public displays of embarrassment and shame.
2) anticipatory appeasement where a person is proactive and engages in certain strategies to avoid conflict. Polite modesty and shyness are also considered anticipatory appeasement.

Japanese Model for dealing with bullies

With Japan taking the latter option, Keltner is suggesting that Abe must appease Trump with gifts of value and that they are seen publicly to assist Trumps power and reputation. Last month the Japanese gave access to US car manufacturers but will that be enough to keep Trump happy? At the meeting on 10th February Abe will propose a package that could generate 700,000 U.S. jobs and help create a $450-billion market. It includes the building of infrastructure projects such as high-speed trains in the northeastern United States, and the states of Texas and California, and renovating subway and train cars. It also includes cooperation in global infrastructure investment, joint development of robots and artificial intelligence, and cooperation in cybersecurity and space exploration, among others.

Toyota the car manufacturer has also been taking the appeasement option after the Trump administration criticised their building of a second car assembly plant in Mexico and also threatened to impose a 20% tariff on Japanese automobile and auto parts makers with plants in Mexico. Toyota quickly announced it would invest $10 billion in its U.S. operations over the next five years.

Abe has definitely been massaging the ego of Trump not only being the first international leader to visit Washington after his election but also telling Trump that he “hopes the United States will become a greater country through (your) leadership,” adding Japan wants to “fulfill our role as your ally.” It will be interesting to see what happens after their meeting on Friday 10th February.

Sources: Terrie Lloyd,  The Japan Times

Do we need another measure of economic prosperity?

February 2, 2017 Leave a comment

I have written on this blog about the limitations of GDP as a measure of the standard of living in a country and would recommend reading Diane Coyle’s book ‘GDP: A Brief but Affectionate History’. Edoardo Campanella wrote a piece for Project Syndicate about abandoning GDP and how people have concerns with the pace of growth and how it is defined. He mentions two specific reasons for this:

1. Growth in the developed world has brought little benefit to the vast majority of citizens – the recovery in 2010 say the top 1% earn 93% of income growth.
2. Growth doesn’t actually take into consideration a lot of those things that contribute to human wellbeing. There is nothing about environmental conditions, the benefits of communities, the stability of individual and group identities etc

However today GDP determines a country’s status and access to clubs such as the OECD, G8, G20 thereby affecting the balance of global power.

Limits of GDP

GDP is a measure of the market value of all final goods and services produced in a year however it leaves out things that make us richer as people. For instance:

GDP declines if energy-efficient products reduce electricity consumption but rises with polluting activities that deplete the stock of natural resources. Also if we invest in anti-smoking campaigns or fight global terrorism, GDP will increase, without creating any wealth.

GDP is fixated on more not better – a car with air conditioning and a state of the art stereo system and GPS may be the same as one with no gadgets, regardless of differences in users’ experience. How do we measure the success of medical advancements especially in heart surgery that lead to greater life expectancy and a much better quality of life. One of the aspects that GDP misses are those things that are free in society, most notably the services provided on the Internet whether it be Wikipedia, Facebook, Twitter etc. But some have argued that innovation actually reduces GDP even though it may increase the welfare of individuals. Today you can book accommodation, flights, buy products etc online and at a cheaper price than before as the middle person is now excluded from the process. Another example is the price of a smartphone is lower than the prices of its components that used to be sold separately.

Adjusting the numbers

In an effort to update their methodologies, countries add new activities to its calculations. Most recently drugs, prostitution, and other undercover activities have been included in the calculation. However as Edoardo Campanella points out these changes can distort the value of GDP across time. In 2010 Ghana announced a 60% increase in GDP after updating its data-reporting methodology but the the standard of living for Ghanaians hadn’t changed. Likewise the changes in the tax domicile of some multinationals in Ireland resulted in an increase in GDP by 16% but no one felt any richer.

Cross Country Comparisons using GDP – China v USA

There are problems in the cross-country GDP comparisons. 2014 saw the overall GDP of China surpass that of the USA. But a more accurate indicator would be GDP per person and China’s per person income amounts to only 27% of the USA. See figures below:

gdp-china-v-usa
Source: IMF

Are we any happier with more growth?

Countries maximize their output through technology, free trade (with comparative advantage) with the belief that greater GDP improves the well-bing of its population. Herek Bok of Harvard observed that “people are essentially n happier today than they were 50 years ago, despite a doubling or quadrupling of average per capita income”.

Another area that GDP does not consider is the distribution of income – two countries may be equal in overall GDP figures but differ greatly when you consider individual welfare. The elite have been rewarded disproportionately while many have been made worse off – the income of the top 1% has doubled since the late 1970’s at approximately 22% of GDP.

The way forward

As Edoardo Campanella suggests, rather than getting rid of GDP it should be refined and include socioeconomic indicators including GNH*. GDP cannot measure much of what people would consider crucial for a ‘good’ life – community, relationships, security etc.

*GNH – Bhutan is famous for its Gross National Happiness indicator which revolves around four pillars:
1. Sustainable Development
2. Preservation and promotion of cultural values
3. Conservation of the natural environment
4. Good governance

Categories: Growth Tags:

Contributions to world GDP 2013-16

January 30, 2017 Leave a comment

The Economist produced a graph showing world GDP data and made the following points:

  • India and China account for 65% of world growth
  • Emerging markets contributions in 2016 were down to its lowest figure since 2008 – falling commodity prices would have been a factor
  • Norway contributed less to global GDP with lower oil prices being prevalent.
  • USA with increased government spending and greater export volumes improved its position
  • Brazil has been in negative territory since mid 2014 – interesting point with significant government spending on hosting the Football World Cup and the Olympics.

Maybe a good starter for your classes asking the question who contributes most to world GDP?

World GDP 2013-16.png

 

Categories: Growth Tags: , , , , ,

The economic legacy of Obama

January 16, 2017 Leave a comment

Here is a good overview of President Obama’s economic legacy from PBS’s Paul Solman. Did his efforts to turn the country around after the 2008 financial crisis constitute a robust recovery, or too little, too late? Economics correspondent Paul Solman assembled a panel of economic experts to discuss employment across racial groups, the types of jobs created and the obstacles the president faced in enacting his economic agenda. Some of the comments are as follows:

  • He saved us from a great depression.
  • Over 15 million jobs have been added; 22 million more people have health insurance coverage than they did before.
  • If we characterise an economy as being in a catastrophe at unemployment rates greater than 8 percent, the black unemployment rate is still above 8 percent. So, frankly, black Americans are still in a great depression, or great recession at the very least.
  • The failure by the Obama administration to focus on economic growth.
  • A long-term infrastructure program would have made a great deal of sense, and frankly still does today. But that’s not what the Obama administration proposed. I think we need to have a more holistic structural agenda for lower-income Americans, rather than just treating it as a problem of recession and recovery.
  • We needed bolder, stronger, more fundamental, not tinkering, ideas to really structurally change the U.S. economy.

Social Progress Index v GDP per capita

January 14, 2017 Leave a comment

Although GDP has lifted millions of people out of poverty there have been numerous articles/books written on how economic growth alone is not enough to indicate how economies are developing – see previous posts on this topic. An economy that doesn’t account for basic human needs, address educational opportunity, protect the environment, personal freedom etc isn’t achieving success. Therefore understanding the success of countries beyond GDP means inclusion of social progress.

The Social Progress Index aims to meet this pressing need and incorporates four key design principles:

  1. Exclusively social and environmental indicators: The aim is to measure social progress directly, rather than relying on economic indicators.
  2. Outcomes not inputs: Measuring a country’s health and wellness achieved, not how much effort is expended nor how much the country spends on healthcare.
  3. Holistic and relevant to all countries: Creating a holistic measure of social progress that encompasses the many aspects of the health of societies. Knowing what constitutes a successful society for any country, including higher-income countries, is imperative
  4. Actionable: The Index aims to be a practical tool that will help leaders and practitioners in government, business, and civil society to implement policies and programs that will drive faster social progress.

SPI - 12 components.png

Each of the twelve components of the framework (see above) comprises between three and five specific outcome indicators. Indicators are selected because they are measured appropriately with a consistent methodology by the same organisation across all of the countries.

The 2016 Social Progress Index includes 133 countries covering 94 percent of the world’s population. An additional 27 countries are included with results for 9 to 11 of the total 12 components. This brings total coverage to 99 percent of the world’s population.

SPI v GDP per capita

Despite the overall correlation between economic progress and social progress, the variability of performance among countries for comparable levels of GDP per capita is considerable – see graph below. Hence, economic performance alone does not fully explain social progress. The Social Progress Index findings reveal that countries achieve widely divergent levels of social progress at similar levels of GDP per capita. You will notice that Kuwait and the United Arab Emirates have relatively high levels of GDP per capita but don’t rate as well on the SPI. By contrast although Costa Rica’s GDP per capita is below $20,000 the country does rate highly on the SPI.

SPI v GDP.png

SPI - Very High Social Progress.pngThe top 12 countries have tightly clustered overall scores between 90.09 and 87.94. Five of the 12 countries in this group are from the Nordic region, confirming that this model of development delivers social progress. More striking is the finding that the majority of countries in this group do not correspond to the Nordic model. The top performers show that there is more than one path to world-class social progress. New Zealand and Australia are the top two performers, respectively, on Personal Rights. New Zealand achieves strong relative social progress, despite its high GDP per capita. This is a significant achievement given that it is harder for countries with higher GDP per capita to over-perform.

Social progress is about meeting everyone’s basic needs for food, clean water, shelter, and security. It is about living healthy, long lives and protecting the environment. It means education, freedom, and opportunity. Social progress goes far beyond crossing a dollar-denominated threshold. We need a much more holistic view of development.

Source: Social Progress Index Report 2016

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