Transcript Ch. 17 Government Leadership written by Marshall Pomer

CH. 17 GOVERNMENT LEADERSHIP
WRITTEN BY MARSHALL POMER
SUMMARIZED BY ROSS PIEPER AND MATT KNIPPENBERG
OUTLINE
I.
II.
III.
IV.
V.
Intro: The need for Government Leadership
Macroeconomics of an Open Criminalized
Economy
Industrial Policy: Potential and Pitfalls
Quality of Government
Conclusion
THE NEED FOR LEADERSHIP
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As we have seen from Parts One and Two of our book
“government leadership is indispensable.”
Broad responsibilities of the government include:
 Shape market institutions
 Regulate essential services when competition does not
suffice
 Meet social needs
OUTLINE
I.
II.
III.
IV.
V.
Intro: The need for Government Leadership
Macroeconomics of an Open Criminalized
Economy
Industrial Policy: Potential and Pitfalls
Quality of Government
Conclusion
OPEN CRIMINALIZED ECONOMY = RUSSIA
The state of the nascent Russian market
economy has been well described
 Pomer defines the Heuristic model to clarify the
macroeconomic consequences of an open
criminalized economy
 Major variables of interest are aggregate
demand, inflation, and multipliers of both
exports and exogenous spending

GOALS OF HEURISTIC MODEL
Find parameter estimates for endogenous
variables that best restore demand for Russian
production = increase GDP
 Reducing corruption and capital flight are
paramount to accomplish this increase within
the constraints of the model
 The outcome on the multipliers is a major
component on the simulation analysis
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WHAT IS A MULTIPLIER
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foreign trade multiplier (equations 29-34 in
appendix)
“The ratio of the resulting increase in domestic product to an
addition to exports. This is a class of formula rather than any
one specific formula. In the simplest possible economy with
only one form of leakage, say a savings propensity s, the
foreign trade multiplier (FTM) is 1/(1 − s).” (Oxford dictionary of
Economics, 12/4/09, http://www.enotes.com/econencyclopedia/foreign-trade-multiplier)
HEURISTIC MODEL
•Main
equations to note:
Y  C  I  (1  sBG )G  X  M
GB  sBGG  sBGP GP  sBGW GW

•Capital
flight, Spending functions and
multipliers are all interdependent
•Quick explanation of the appendix using the
book to demonstrate the effects of a one-fifth
reduction in import propensities
LESSONS FROM HEURISTIC MODEL
Important NOTE: The model is a simulation
used to analyze consequences of various
actions. The model has NO predictive value.
 Model was run using data from 1997, why not
1998?
 In general the model describes intuitive results,
i.e. a reduction in criminal activity or capital
flight has a positive effect on the multipliers
thus increasing GDP (also import propensities)
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OUTLINE
I.
II.
III.
IV.
V.
Intro: The need for Government Leadership
Macroeconomics of an Open Criminalized
Economy
Industrial Policy: Potential and Pitfalls
Quality of Government
Conclusion
INDUSTRIAL POLICY
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Helping industries that have a certain strategic or
social significance maintain demand is an important
role of the government.
Certain industrial sectors are not likely to grow without
the governments help.
Japan and Southeast Asia used industrial policy to
help achieve rapid growth.

A couple of these industrial policies were protecting
domestic markets and investment subsidies.
TARIFFS
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During the transition period in Russia meaningful import
protection would have lead to the adjustment of domestic
industry.
5 months after the removal of trade barriers in Russia import
tariffs were put in place.
The tariffs rates were low and had a low compliance rate.
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Less Than 1 percent of GDP came from import duties, when imports
were 20 percent of GDP.
Another significant part of restraining imports was the drastic
decline of the ruble’s real exchange rate.
Compliance with tariffs is a large issue for Russia.
DEVELOPMENT LOANS
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Government loans can help a countries economy.
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They can forestall dismissal of surplus employees
Corruption was a large part of the problem with
government lending in post soviet Russia
When giving out loans there needs to be a “strategic
vision” that emphasizes technological growth.
Instead of giving loans the government could also
subsidize interest payments.
Regardless the repayment of loans should be strictly
enforced
AIRCRAFT INDUSTRY
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The Russian airplane technology was not able to keep up
with Boeing and Airbus, this lead to the industries collapse.
If the industry were revitalized it would provide many jobs
and a boost to Russia’s economy.
Ilyushin Aviation Complex designed a 350-seat wide-body
jetliner.
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They planed to build 20 of these jet liners with a billion dollar loan
the company received from the U.S. import export bank.
Boeing got worried it would lose competition this lead to the Clinton
administration temporarily suspending Russia’s 30 percent import
tariff on foreign planes.
To allow Russian airline companies to finance the purchase
of Russian made planes the government could subsidize
leases on Russian made aircraft.
"export credits to promote foreign sales of Russian aircraft"
AUTOMOBILE INDUSTRY
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Many other countries protect there automotive
industry.
 Japan
and Korea practically prohibit purchase of
foreign made cars.

The Russian government should be careful in
helping the automotive industry.
 An
example of bad handling of helping the auto
industry is Ukraine and how they took on a joint
venture with Korea’s Daewoo corporation.
OUTLINE
I.
II.
III.
IV.
V.
Intro: The need for Government Leadership
Macroeconomics of an Open Criminalized
Economy
Industrial Policy: Potential and Pitfalls
Quality of Government
Conclusion
QUALITY OF GOVERNMENT
Really intuitive
 Industrial policy is not socially optimal if
government is corrupt or serving special
interest
 Conflict of interests is another obstacle in
providing sound industrial policy, especially in
US where politicians need financial support to
win elections and are then responsible for
industrial policy. (ex. Fossil fuels)

OUTLINE
I.
II.
III.
IV.
V.
Intro: The need for Government Leadership
Macroeconomics of an Open Criminalized
Economy
Industrial Policy: Potential and Pitfalls
Quality of Government
Conclusion
CONCLUSION
The Russian government prior to 1998 had a
narrow focus on eliminating inflation.
 Corruption and capital flight have greatly
hindered Russia’s economic growth.
 The Russian government needs to support
certain industries carefully because support
can be good but it can just prolong the life of
failing industries.
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