Transcript ECONOMICS 3150B

ECONOMICS 3150N
Winter 2013
Professor Lazar
Office: N205J, Schulich
[email protected]
736-5068
1
Lecture 6: February 28
Ch. 21, 22, 2
2
European Union
• Treaty of Rome, 1957
– Customs union
• Single European Act, 1986 – amended Treaty of Rome
– Eliminated internal barriers to trade, capital movements and labor
migration
• Maastricht Treaty, 1993
– Single European currency and central bank
– Convergence criteria:
• Country’s inflation rate in year before admission must be no more than 1.5%
above average of three EU members with lowest rate of inflation
• Government deficit < 3% of GDP
• Government debt below or approaching 60% of GDP
3
European Union
• Financial crisis: Round 2
• Does Greece meet conditions for currency area?
• Would Greece be better off outside Eurozone with ability to have own
currency depreciate – to offset negative impacts of restrictive fiscal
policy?
• No fiscal transfers within EU – compare to US and Canada
4
Sovereign Debt and Defaults
• Private debt – CCAA, ch. 11
– Convert debt into equity
– Convert into new debt with
lower face value and lower
interest rates
– Receive cash for fraction of
value at maturity (pennies on
the dollar)
•
Sovereign debt
– Conversion into equity not an
option
– Convert into new debt with lower
face value and lower interest rates
– Defer interest and principal
payments, possible reduction in
interest rate
– Receive cash
• IMF: provides new loans to make
payments on outstanding debt –
loans generally made with
conditions (re. macroeconomic
policies – reduce debt, low
inflation rate targets;
microeconomic policies –
privatization, deregulation) 
beneficiaries are current creditors
5
European Union
• Greece: remaining in Eurozone
– Labor mobility
– Lower interest rates when investors have confidence in government
– Spreads over Germany (long-term government bonds):
• 2007 – 28bp
• Q3, 2009 – 136bp
• Q2, 2010 – 552bp
– No danger of depreciation threatening survival of borrowers in Euros
(Southeast Asia crisis in 1997)
• Greece leaving Eurozone
– Depreciation of currency to improve competitiveness – major export is
tourism
6
European Union
• EU members created US$1 T fund to assist members roll-over
maturing debt and finance budget deficits
• Interest rates set higher than borrowing costs for Germany
• Bail-out largely of EU banks who held most of debt of PIIGS
• Reluctance of ECB to be lender of last resort to countries although
doing indirectly as lender of last resort to banks who hold sovereign
debt
• ECB finally caved – strings attached
7
Income Gaps
Income group
GDP per capita
(2008 US $)
Life expectancy
(years)
Low income
$523
60
Lower middle
income
2,073
70
Upper middle
income
7,852
75
High income
39,688
83
8
Income Gaps
Income group
Least free quartile
GDP per capita
(2009 US $)
GDP per capita
growth (1990-2009)
$4,545
1.2%
Third quartile
6,464
2.3
Second quartile
14,961
2.4
Most free quartile
31,501
3.1
9
Income Gaps
• Average annual growth rate, 1960-2007 in real output per
capita
–
–
–
–
Industrialized countries in 1960: 2.1 to 3.9%
Africa: -0.2 to 0.6%
Latin America: 0.8 to 2.5%
Asia: 2.9 to 6%
10
Bottom 20 Countries, Economic Freedom
Index, 2011
179: North Korea (NA)
178: Zimbabwe ($757)
177: Cuba (5,397)
176. Libya (9,957)
175: Eritrea (482)
174: Venezuela (10,810)
173: Myanmar (NA)
172: Dem. Rep. of Congo (231)
171: Iran (4,526)
170: Equatorial Guinea (27,478)
169: Timor-Leste (896)
168: Turkmenistan (5,497)
167: Rep. of Congo (3,485)
166: Chad (823)
165: Comoros (810)
164: Uzbekistan (1,546)
163: Ukraine (3,615)
162: Solomon Islands (1,517)
161: Lesotho (1,106)
160: Angola (5,318)
11
Economic Freedom Index
• Other Notables
–
–
–
–
–
–
–
–
–
–
–
Singapore (2)
Canada (6)
UK (14)
US (10)
UAE (35)
Germany (26)
Ireland (9)
Taiwan (18)
South Korea (31)
France (67)
Bahrain (12)
–
–
–
–
–
–
–
–
–
–
–
Spain (36)
Portugal (68)
Thailand (60)
Italy (92)
Turkey (73)
Greece (119)
Russia (144)
China (138)
India (123)
Brazil (99)
Hong Kong (1)
12
Bottom 20 Countries, Corruption Index,
2010
•
•
•
•
•
•
•
•
•
•
Somalia (NA)
Myanmar (NA)
Afghanistan (543)
Iraq (3,501)
Uzbekistan (1,546)
Turkmenistan (5,497)
Sudan (1,435)
Chad (823)
Burundi (271)
Equatorial Guinea (27,478)
•
•
•
•
•
•
•
•
•
•
Angola (5,318)
Venezuela (10,810)
Kyrgyzstan (1,075)
Guinea (498)
Dem. Rep. of Congo (231)
Tajikistan (935)
Russia (13,089)
Papua New Guinea (1,845)
Laos (1,320)
Kenya (808)
13
Corruption Index
• Other Notable
Countries
–
–
–
–
–
–
–
–
–
–
Singapore (1)
Canada (6)
UK (20)
US (22)
UAE (28)
Germany (15)
Ireland (14)
Taiwan (33)
South Korea (39)
France (25)
–
–
–
–
–
–
–
–
–
–
Spain (30)
Portugal (32)
Thailand (78)
Italy (67)
Turkey (56)
Greece (78)
Russia (154)
China (78)
India (87)
Brazil (69)
14
Developing Countries
• Africa
– Scarcity of capital, skilled labor
– Political instability, insecure property rights, corruption
• Strong positive correlation between GDP per capita and
inverse index of corruption
– Debt
• Bono’s recommendation: debt forgiveness by rich countries
• What was the debt used for? Will forgiveness contribute to
correcting underlying structural problems?
– Resource wealth – oil, minerals
• Squandered through theft and military spending
• Compare to Emirates – long-term visions even with limited
democracy
15
Developing Countries
• Russia
– Collapse of Communist state followed by anarchy – no
rules, no enforcement
– Cannot graft Western market onto country with no
history with such markets
– Markets defined by rules
– Putin:
•
•
•
•
Introduced rules and enforcement
Benefited from high oil and gas prices
Long-term plan to turn around the economy
Importance of democracy?
16
Developing Countries
• Dependence on external sources of capital
– Herd effects, contagion effects
– Instability of short-term capital flows
– Asian crisis in 1997; Russia crisis throughout most of
1990s; Argentina in 1980s and 1990s
– China: more than US$3 trillion in reserves
– Sovereign funds and ability to avoid most of fallout
from sub-prime mortgage fiasco in US
• Germany considering law to restrict takeovers by sovereign
funds (particularly from China, Russia and Middle East) that
may jeopardize Germany’s “public order and safety”
17
Developing Countries
• Doha Round
– Rich vs. poor countries
– Importance of eliminating trade barriers for agricultural
products
• Rich countries spend US$ 260 B in support of agriculture and
farmers
• Agriculture accounts for 2% or less of economies of rich
countries; 5.5% in Brazil, 11.3% in China, 17.6% in India and
Nigeria, 32% in Sudan
– Tradeoff: reduction of tariffs on manufactured products
by poor countries
• Tariffs an important source of revenues for governments in
many poor countries
18
Internal and International Trade
•
•
•
•
Mobility of factors of production
Trade costs including information
Tastes – language, culture
Market rules – laws (domestic, international), regulations;
effectiveness
• Currencies – financial risks
• Domestic policies
–
–
–
–
Taxes, subsidies, tariffs
Procurement
Ownership restrictions
National interest – politics and trade policies
19
International Trade Theory: Objectives
•
•
•
•
•
•
Gains from trade
Patterns of trade
Volumes of trade
Intra-corporate vs. inter-corporate/firm
Protectionism – trade policies
Free trade agreements – NAFTA, GATT
20
Critique of Traditional Trade Theory
• Competitive markets – underlying logic flawed
• Imperfect competition – competitive advantage
• Role of technology and risk taking – importance of market
structure
• Culture, bureaucracy, hierarchy
• Politics and power – case of the US
• Bottom line: trade theory cannot explain RIM in Canada,
Airbus in Europe, HSBC, Arcelor-Mittal in India,
Emirates, IKEA, Samsung in South Korea, etc.
21
Overview
• 2010:
– Global GDP: US$ 63 T
– Global trade in goods and services: US$ 19 T
• World trade – merchandise exports (2010)
– Total exports: US$14.9 T
•
•
•
•
•
•
•
NA: $1.965 T (13%)
South and Central America: $0.577 T (4%)
Europe: $5,632 T (38%)
Commonwealth of Independent States: $0.588 T (4%)
Africa: $0.508 T (3%)
Middle East: $0.895 T (6%)
Asia: $4.686 T (32%)
22
Overview
• World trade – merchandise imports (2010)
– Total exports: US$14.9 T
•
•
•
•
•
•
•
NA: $2.508 T (17%)
South and Central America: $0.587 T (4%)
Europe: $5,844 T (39%)
Commonwealth of Independent States: $0.399 T (3%)
Africa: $0.453 T (3%)
Middle East: $0.561 T (4%)
Asia: $4.216 T (28%)
23
Overview
• Regional destinations of merchandise exports
NA
NA
S&CA
Europe CIS
Africa
ME
Asia
49%
8%
17%
1%
2%
3%
21%
S&CA
24
26
19
1
3
3
23
Europe
7
2
71
3
3
3
9
CIS
6
1
52
19
2
3
15
17
3
36
0
12
4
24
ME
9
1
12
1
3
10
53
Asia
17
3
17
2
3
4
53
Africa
24
Overview
• World trade – merchandise exports
1953
1973
1993
2010
NA
25%
17%
18%
13%
S&CA
10%
4%
3%
4%
Europe
39%
51%
45%
38%
CIS
4%
4%
2%
4%
Africa
6%
5%
2%
3%
Middle
East
3%
4%
4%
6%
Asia
13%
15%
26%
32%
GATT
70%
84%
89%
94%
$0.084
$0.579
$3.676
$14.851
WORLD
25
Overview
• World trade – merchandise imports
1953
1973
1993
2010
20%
17%
21%
18%
S&CA
8%
4%
3%
4%
Europe
44%
53%
45%
39%
CIS
3%
4%
1%
3%
Africa
7%
4%
3%
3%
Middle
East
2%
3%
3%
4%
Asia
15%
15%
24%
30%
GATT
67%
86%
90%
96%
$0.085
$0.594
$3.786
$15.077
NA
WORLD
26
Overview
• World trade – merchandise exports by major
product groups (2010)
– Total exports: US$14.4 T
• Agricultural products: $1.362 T (9%)
• Fuels & mining products: $3.026 T (20%)
– Fuels: $2.348 T (16%)
• Manufactures: $9.962 T (67%)
–
–
–
–
–
–
Iron & steel: $0.421 T (3%)
Chemicals: $1.705 T (12%)
Office & telecom equipment: $1.603 T (11%)
Autos: $1.092 (7%)
Textiles: $0.251 T (2%)
Clothing: $0.351 (2%)
27
Overview
World trade: Merchandise exports by major product
groups (2010) – Regional shares
Agricultural
products
NA
Fuels &
mining
products
Manufacture
16%
10%
14%
S&CA
12
8
2
Europe
42
21
43
CIS
3
12
1
Africa
4
11
1
Middle East
2
20
2
22
18
37
Asia
28
Overview
Regional shares of merchandise exports by major
product groups (2010)
Agricultural
products
NA
Fuels &
mining
products
Manufacture
11%
15%
69%
S&CA
28
42
26
Europe
10
11
76
8
64
24
11
66
19
Middle East
2
68
22
Asia
6
12
79
CIS
Africa
29
Overview
• Canada’s trade, by product (2010)
– Exports
• Industrial goods and materials (metals and alloys;
chemicals, plastics and fertilizer, etc.): $96.5 B
(24%)
• Energy products: $90.9 B (22%)
• Machinery & equipment (includes aircraft): $76.1 B
(19%)
• Automotive products: $56.8 B (14%)
• Agricultural and fishing products: $36.9 B (9%)
30
Overview
• Canada’s trade, by product (2010)
– Imports
•
•
•
•
•
Machinery & equipment: $113.9 B (28%)
Industrial goods & materials: $86.9 B (21%)
Automotive products: $68.7 B (17%)
Other consumer products: $57.7 B (14%)
Energy products: $40.5 B (10%)
31
Overview: Trade as % of GDP, 2008
Australia
24%
Norway
38
Belgium
85
Portugal
33
Canada
34
Slovak Rep.
84
Finland
45
Spain
30
France
28
Sweden
50
Germany
44
Switzerland
51
Ireland
78
Turkey
26
Italy
29
Russia
26
Japan
17
UK
30
S. Korea
54
US
15
156
EU 27
41
29
OECD
29
Luxembourg
Mexico
32
Overview: Current Account Balance as %
of GDP, 2010
Australia
-2.6%
Belgium
1.0
Canada
-3.1
Finland
3.1
France
-1.8
Norway
12.9
Portugal
-9.7
Slovak Rep.
-4.0
Spain
-4.6
Sweden
6.3
Germany
5.6
Switzerland
14.6
Ireland
0.5
Turkey
-6.4
-3.2
Russia
NA
Italy
Japan
3.6
UK
-3.2
S. Korea
2.8
US
-3.2
Luxembourg
7.5
Mexico
-0.6
33
Overview: Services Balance as % of GDP,
2010
Australia
-0.2%
Norway
-0.5
Portugal
3.9
Belgium
1.5
Canada
-1.4
Finland
1.2
Spain
2.6
France
0.5
Sweden
3.4
Slovak Rep.
-1.2
Germany
-0.9
Switzerland
8.8
Ireland
-4.6
Turkey
NA
Italy
-0.6
Russia
NA
Japan
-0.3
UK
3.4
S. Korea
-1.1
US
1.0
Luxembourg
54.7
Mexico
-0.9
34