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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

Sub-Sahara economies hit by fall in commodity prices.

January 12, 2017 Leave a comment

Commodities have been the engine of growth for many sub-Saharan countries. Oil rich nations such as Nigeria, South Africa and Angola have accounted for over 50% of the region’s GDP whilst other resource-intensive countries such as Zambia, Ghana and Tanzania to a lesser extent.

I have mentioned the ‘resource curse’ in many postings since starting this blog. It affects economies like in sub-Sahara Africa which have a lot of natural resources – energy and minerals. The curse comes in two forms:

  • With high revenues from the sale of a resource, governments try and seek to control the assets and use the money to maintain a political monopoly.
  • This is where you find that from the sale of your important natural resource there is greater demand for your currency which in turn pushes up its value. This makes other exports less competitive so that when the natural resource runs out the economy has no other good/service to fall back on.

However it is the fall in commodity prices that is now hitting these countries that have, in the past, been plagued by the resource curse. As a lot of  commodities tend to be inelastic in demand so a drop in price means a fall in total revenue since the the proportionate drop in price is greater than the proportionate increase in quantity demanded.

The regional growth rate for 2016 is approximately 1.4% but it is not looking good for commodity driven economies:

  • Nigeria – oil – 2016 GDP = -2%
  • Angola – oil – 2016 GDP = 0%
  • South Africa – gold – 2016 GDP = 0%

In 2016 resource rich countries will only grow by 0.3% and commodity exporting countries have seen their exports to China fall by around 50% in 2015. Furthermore, public debt is mounting and exchange rates are falling adding to the cost of imports. With less export revenue the level of domestic consumption has also decreased.

It is a different story for the non-resource countries of sub-Sahara. It is estimated by the IMF that they will grow at 5.6%. By contrast they have been helped by falling oil prices which has reduced their import bill and public infrastructure spending which has increased consumption.

africa-oil-effectAs is pointed out by The Economist numbers should be read wearily as GDP figures are only ever a best guess, and the large informal economy in most African states makes the calculation even harder. Africa may have enormous natural reserves of resources, but so far most Africans haven’t felt the benefit. In Nigeria, for instance, what’s seen as a failure to spread the country’s oil wealth to the country’s poorest people has led to violent unrest. However, this economic paradox known as the resource curse has been paramount in Africa’s inability to benefit from resources. There is a gravitation towards the petroleum industry which drains other sectors of the economy, including agriculture and traditional industries, as well as increasing its reliance on imports. What is needed is diversification.

Keynes v Hayek with Chinese characteristics.

December 3, 2016 Leave a comment

You will no doubt have heard about the battle of ideas – Keynes v Hayek. In the 1930’s this was probably the most famous debate in the history of economics – the battle of ideas -government v markets.

Now there is Chinese version of the debate:

Justin Lin (Keynes) versus Zhang Weiying (Hayek) – both are Professors at Peking University. Lin is on the right of the image below.

lin-v-zhangTheir latest debate is about industrial policy and the concept that the government can set the example of how to run successful industries – in the 1980’s textiles and today renewable energy. Although China’s growth record would seem to justify this some have seen these state run industries produce little innovation. Lin believes that countries that have a comparative advantage should receive help from the government whether it be in the form of tax cuts or improved infrastructure. Furthermore, because resources are limited the government should help in identifying industries which have earning  potential. This assistance includes subsidies, tax breaks and financial incentives — aimed at supporting specific industries considered crucial for the nation’s economic growth.

Zhang sees this industrial policy as a failure in that he believes government officials don’t know enough about new technologies.  He uses the example in the 1990s, when the Chinese government spent significant money on the television industry only for the cathode ray tubes to become outdated. He is also concerned about industrial inertia with local officials following the central government’s direction which tends to lead to an overcapacity. Zhang, however, credited the free market — not politically motivated government subsidies — with game-changing innovations that benefit society eg. James Watt and the steam engine, George Stephenson’s intercity railway, and Jack Ma’s innovative online marketplaces under Alibaba.

China’s ongoing transition to a market-based economy has relied on labour, capital and resource-intensive industries. But the transition’s negative side effects have included structural imbalances and excess capacity in certain sectors. Moreover, some state-owned enterprises such as telecoms have been challenged by disruptive innovators, such as social networks.

Zhang said industrial policy can foster greed. For example, companies may collude with government officials to win special favours. And policymakers can make mistakes, given that even the most well-informed intellectual cannot always predict market trends. Other economists have contributed to the debate stating that a lot of the most successful companies have not had any government assistance in their early years.

However the debate is sure to continue – what works best ‘Markets or Governments’?

Sources:

The Economist – 5th November 2016

CaixinOnline 

A2 Economics – Actual versus potential growth in national output

October 11, 2016 Leave a comment

Remember to mention the output gap when doing an essay that involves the business cycle. The output gap is the difference between demand and the economy’s capacity to supply. This is the difference between the ‘actual’ level of output (GDP) and the economy’s ‘potential’ level of output (potential GDP).

If the economy is running above capacity (GDP > potential GDP) the output gap is positive. Conversely, if the economy is running below its full capacity (GDP < potential GDP) the output gap will be negative.

Remember that ‘potential’ output is not an upper limit on the level of output. Rather, think of potential GDP as the economy’s efficient level of output. Running the economy below potential GDP is inefficient because there are some resources that are not employed. Running the economy above potential GDP is also inefficient because resources are over-utilised (eg, machinery is being made to work too hard causing it to wear out too quickly).

While it is efficient to have the economy running at potential, quite often it does not. Resources can be over- or under-utilised, which will translate into inflationary or disinflationary pressure (over-utilisation will push future inflation up, while under-utilisation pushes future inflation down).

Business Cycle.png

Categories: Growth Tags:

New Zealand and Global Economy Update for exams.

October 10, 2016 Leave a comment

It is important that you are aware of current issues to do with the New Zealand and the World Economy. Examiners always like students to relate current issues to the economic theory as it gives a good impression of being well read in the subject. Only use these indicators if it is applicable to the question.

Indicators that you might want to mention are below. Notice how low global interest rates are as economic conditions have warranted greater borrowing and spending in the world economy.

New Zealand

The New Zealand economy expanded by 2.8 percent over the year ended in the June quarter driven mainly by an increase in household consumption of 1.9 percent over the quarter, while exports of goods and services rose by four percent. The construction industry expanded by a further five percent in the quarter, while the retail, hiring, and real estate services industry expanded by 1.3 percent. The annual current account deficit totalled $7,383 million in the year ended June 2016, equivalent to 2.9 percent of gross domestic product (GDP). nz-economy-oct-16

Global Economy 

The OECD in its September Interim Economic Outlook comglobal-growth-and-unemp-ratesmented that the world economy remained “in a low-growth trap”, with GDP growth of 2.9 percent predicted for 2016, before rising slightly to 3.2 percent in 2017. Subdued economic growth is forecast for the major advanced economies, with growth for the United Kingdom expected to drop from 1.8 percent in 2016 to one percent in 2017. The Chinese economy is expected to grow by 6.5 percent in 2016, easing to 6.2 percent in 2017 as it moves from an investment-led to a consumption-led growth model. In mid-2009, the unemployment rate for both the Euro area and the United States was approximately ten percent. Since then the unemployment rate for the United States has fallen to 4.9 percent, while the unemployment rate for the Euro area peaked at over 12 percent in 2013, and currently sits just above 10 percent.

Low interest rates internationally have resulted in asset price inflation, particularly in share and house prices. Monetary policy can only do so much but with global interest rates at approximately zero there needs to be the support of the politicians to enlist a much more stimulatory fiscal policy.

central-bank-rates-oct-16

Source: Monthly Economic Review: New Zealand Parliamentary Library

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