Globalization & Its Discontents

My aim here is not to simply provide a summary of the book, nor regurgitate what has already been written and argued. My aim is to examine some of the examples used, and the merit of Stiglitz argument relative to the economic situation of the time.

Joseph Stiglitz has become a renowned economist, notably winning the Nobel Prize for Economics in 2001. He has had a wide experience, serving on the Council of Economic Advisors under Bill Clinton, and also as chief economist and vice-president of the World Bank. He was fortunate to witness the transition of Russia into a free market, and also the peril of South-East Asia.

Globalization & Its Discontents provides a critique of not only the IMF but “Washington” in the policy making that threatened and created economic disaster. The book is unique by maintaining Stiglitz’s academic nature, but delivering a narrative of events which develops a convincing argument for the negligence and malpractice of the IMF and coinciding “special interests”.

Just to save explaining in the following posts, globalization is not only defined as the spreading of “western” culture like finding a McDonalds in Beijing. But instead a definition of economic globalization which sees the breakdown of trade barriers, free market transitions, opening new markets, and handling macro level economic policy of developing nations.

I will break the book into three sections, which will be published separately in order to appreciate the vast economic ground Stiglitz covers.

  1. The Perils of Africa
  2. South-East Asian Crisis
  3. Who Lost Russia?
  4. The Nature of “Global” Economics
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The Buzz Around Abenomics

japan

Shinzo Abe over the past couple of months has become the most prominent figure in global economics. He has received praise and criticism from all sides of the economic spectrum. Regardless of his international image, he has vigorously backed his “three-arrow” approach. This is the use of comprehensive monetary, fiscal, and structural policies to pull Japan out of its chronic deflation.

The base of the macroeconomic strategy is simple, but what is incredible is the turnaround seen in Japanese politics and the increase in domestic confidence. Before Abe it had seemed like the Japanese government and cooperating technocrats had called it a day in attempting to solve the countries chronic deflation, and suddenly Abe becomes prime minister and confidence is restored. Coupled with his three arrow approach he has used invigorating nationalism to spur the domestic market, and this may be the true long lasting effect of his spirited endorsement of his macroeconomic policy.

The use of such radical policy such as doubling the money supply has revitalised the economy in a manner that is difficult to quantify. It can be argued that purely the willingness of the government to pursue radical policy has restored confidence and boosted consumer and firm spending rather than the actual effect of the change in money supply. The Yen has already weakened from Y77 to a dollar to now bouncing around Y100 to a dollar. This has had a positive effect on exports and reinvigorating the market. The markets have recapitalised at around $1.5 trillion, the biggest rally in the past decade. Japan is beginning to boom, and it is this galvanisation that had driven market confidence which is proving to be the major factor in taking Japan out of deflation.

For years deflation had increased the real debt burden in the economy, and Japan has suffered. But through his stance and that of Haruhiko Kuroda (Bank of Japan’s Governor) they have increased the velocity of money and re-liquidated the market. But there is also the fiscal aspect; Abe has called for firms to increase wages while introducing straightforward tax breaks. This is simple expansionary fiscal policy in the form of maximising injection and limiting withdrawals. So far the short term effects are following through and it looks like the inflation target may be met, however the question stands on whether or not the economy will overheat and induce an inflationary burden.

Shinzo Abe can be identified as particularly patriotic and holds very strong nationalist sentiments, what he is tapping into is what was once the strength of a country that held an empire. Japan has also had continuing issues with its “favourite” neighbour China which has raised questions about security. There was also the tsunami which created a short term energy crisis, and had brought to the surface issues amongst Japans biggest firms. They felt that they could no longer operate with uncompetitive exports, and high corporation tax. This assimilates Abe to the Japanese term “Fukoku-kyohei” which means “rich country, strong army”. Deflation has proven to be the weakness in the economy, and the bane to Japanese industry, but now with this invigoration of fiscal and monetary policy the economy can move forward.

Japan already has the correct economic infrastructure in place, and is also notable for its well educated labour force, the sustainable increase in efficiency and productivity of workers, and suitable regulation. Joseph Stiglitz is a strong advocate of Abe’s approach; he notes that through continued structural investment and future investment into research and education that the growing confidence will be vindicated by reaching inflation and growth targets.

Japan has always been renowned for its commitment to research and development, as well as leading in structural investment. Now the government is backing it with vigorous policy, but there is still the question of what impact this will have as it failed to bring Japan out of deflation during the “lost decade”.

In the coming years it will be interesting to see if Abe can bring the economy to a state where all the strong elements of infrastructure, workforce, and the introduction of drastic monetary and fiscal policy all work cohesively to achieve the target of a once again sustainably booming Japanese economy, without giving up on its strict environmental and working standards and regulations.

As Stiglitz notes “Japan could become one of the few rays of light in an otherwise gloomy advance-country landscape”.

For more reading look at:

Financial Times:

http://www.ft.com/cms/s/0/717274d0-b687-11e2-93ba-00144feabdc0.html#axzz2TkNQ4I9J

Project Syndicate:

http://www.project-syndicate.org/commentary/shinzo-abe-and-soaring-confidence-in-japan-by-joseph-e–stiglitz

We Are All Dead

“In the long run we are all dead”

-John Maynard Keynes

Over the past couple of days I have taken a greater focus on long run aggregate supply (LRAS) and short run aggregate supply (SRAS). I quickly fell upon the arguments posed by both the Monetarists and Neo-Classicists versus those of Keynesians.

I felt quite comfortable with the monetarist and neo-classicist outlook, as it followed what I would consider as logical. The markets will manage to clear themselves, yes there will be unemployment and other economic repercussions, but in the “long term” the economy will be better off. This is on the basis that inefficient and unproductive firms will fall out of the market, whereas the firms that are stronger will maintain their position. The fall in prices will encourage investment and renewal if the industry if there is still demand within that market.

I personally agree with above, but in that sense I could also agree with Communism. Theoretically it is a very sound and strong argument, however when put into practice the results are not as comforting. It will take a long time for the market to clear itself, and during this period there will be social unrest (as a result of unemployment), lack of rational decision making (human quality), and depending on the case an economic standstill until the market forces begin moving again. There is also the issue of downward inflexible prices (sticky) which means that suppliers will wait out the market and won’t drop their prices, thereby further delaying the clearing process.

With continued unemployment there is almost an inevitable drop-off in aggregate demand, so the overall sight of the economy by leaving the market forces to clear it does not seem too bright.

Keynes would argue that it is essential to “prop up” demand through government spending, with this it is important to note that this is the only point at which Keynes argues that government spending is vital (he is a free marketer). Keynes would further mention the need to keep maximum employment, ensuring that there is effective demand which would push aggregate demand along the Keynesian LRAS curve.

As usual with economic theory it is difficult to argue which one is in a sense “correct”, as we tend to always end up intervening. This is a result of the nature of government and democracy, as it is unlikely a party will be voted into power during the market clearing period.

On most occasions, I take a monetarist point of view, but at this point I would prefer to take the Keynesian stance. This is as a result for the overall benefit of the people functioning in the economy, as economics mainly seeks to maximize welfare. A true monetarist would argue that in the long term the market is not better off as unproductive and inefficient firms have been allowed to survive.

This brings me on to an issue that seems to almost be at the heart of all economic theory, and one I find myself running into often. It is the issue of human frailty, and furthermore our inability to truly consider the long term.

Fiscal Policy Basics

Government Spending

Discretionary Spending: The government chooses to do it.

Automatic Spending/Stabiliser: The government has no choice to pay, such as interest on debt, and benefits (e.g. law insures unemployment benefits).

With benefits they are automatic at any given moment, they become discretionary when the government changes policy, and creates new law. This would affect the level of automatic spending.

Taxation

Direct: It is taxation on income, which an individual is obliged to pay, such as income tax.

Indirect: This is done on the basis of consumption, the more you consume the more tax you pay. So in a sense the individual “chooses” to pay it. This can take the form of VAT, sales tax, etc.

The main factors can be classified as injections and withdrawals

Injections

  • Government Spending
  • Exports
  • Loans (increased amount of investing)

Withdrawals

  • Tax (indirect or direct)
  • Imports
  • Savings (ISA, IISA, etc.)

Expansionary Fiscal Policy

This is fiscal policy which is designed to expand the output of an economy. This can be done through increasing aggregate demand, or increasing aggregate supply.

The simplest manner of achieving this is from “spending more, taxing less”. Spending can take the form of government spending, or increasing loans and investments. Increasing exports can also be seen as expansionary.

It is necessary to keep factors such as tax, imports, and savings to a minimum to insure increased economic activity.

Contractionary Fiscal Policy

This is a fiscal policy which is designed to reduce the output of an economy. This is in order to “cool-off” an economy that is overheating (i.e. too much economic activity, pushing inflation rate over a sustainable level).

The simplest manner to do this would be to cut government spending, raise interest rates (make borrowing more difficult), and decrease exports. This would lead to a decline in economic activity. More withdrawals can also be made through encouraging personal savings, increasing tax, and imports.

An example of expansionary occurring would be an outwards shift in aggregate demand, and an example of contractionary occurring would be an inwards shift in aggregate demand. This would determine price levels, and the output of an economy.

Growth & Structural Reform

Production Possibility Frontier & Aggregate Supply:

There are many determinants for a shift in aggregate supply; this would mean an increase in real output without an increase in the price level.

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Some examples of the determinants are:

  • Education: Increased productivity, capabilities, and efficiency of the labour force
  • Innovation/R&D: The product may become more useful or easier to manufacture
  • Government Regulation or Subsidy: Encourages production, or deregulates an immobile market.
  • Transport/Infrastructure: If there was better transport then people could work more often rather than waste time in traffic,  development of infrastructure develops efficiency.

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Analysis from Article:

Using Evidence from the Article Explain the Impact of Investment on the UK’s PPF?

Increasing the quality of university education and teachers may mean that the workforce becomes more efficient and productive. The article highlights the need to invest in human capital. This would lead to an outward shit for the PPF because there is a greater potential for production. If this potential were to be realised there would be a shift to the right for the aggregate supply curve.

The article mentions that the government should target investment towards equipment rather than property, increasing government investment into R&D and general innovation. The lack of innovation is identified through the lack of patents submitted. The issue surrounding R&D and capital investments are the long pay-off periods, whereas financial products pay-off in the short term. If more money were to be invested in long term research and development projects there is an outward shift for the PPF as there is a higher possibility of products being manufactured with greater efficiency.

Finally, the article recognises that British infrastructure is considered “mediocre” being ranked 24th in the world. It relates this to government failure, and the amount of time it takes to get energy bills through and the time it takes for projects to come to fruition. If there were to a boost in infrastructure spending, then there is the potential for an increase in productivity leading to an outward shift in the PPF.

Evaluate the Argument That Structural Investments Alone Are Not Enough to Stimulate Growth?

There are many theories and manners of approaching how best to stimulate growth, the article heavily leans toward the Salter Cycle. This can be summarised as an increase in productivity and efficiency, resulting in reduced inputs of land, labour, and capital while achieving a great output. This what the article highlights as structural investment, i.e. improving education, improving transport, and stimulating research and development. This does work to stimulate growth however it must be realised that humans can only ever be so efficient or productive, and that factors such as capital and land become scarcer in developed countries.

It is true that the government needs to stimulate development within Britain; it is unacceptable to continue supporting financial institutions that don’t contribute to growth. Energy and energy efficiency are two factors which are integral to stimulating growth within an economy, simply because when there is a greater quantity of energy and at a cheaper price more is used. This is where the American government unlike the British government took a lead and has effectively introduced shale fracking to slash gas prices down and increase consumption. The British government has been slow to develop supporting infrastructure and R&D for the implementation of fracking, when a recent geology report displayed the abundance of shale formation across Britain. This highlights the need for structural investments, but into sectors that have optimistic prospects for the future.

The other methods of approaching growth stimulus can be equally as effective. There is the classical approach of increasing free trade between countries, and the development of trade agreements to stimulate production resulting in general economic growth. In the article there is a display of a real GDP per person graph, it shows that Britain had the highest real GDP in 1870. This was a time when Britain had abundant trade from its colonies (without restriction due to naval dominance and to an extent exploitation), and the expansion of trade into the “new world”.

Structural investment will assist Britain in re-modernising; however it can be argued that it is best suited to developing economies that still have a greater abundance of land, labour, and emerging capital. One possible route is the development of military infrastructure; this would mean creating more aircraft carriers and submarines. This has worked to an extent to help stimulate American growth as it announced that two new aircraft carriers are going to be developed, and the roll out of the successor to the F-22 Raptor.

Another possible approach to growth stimulation is to induce a state of semi-isolationism which had worked for East-Asian economies in the 90s. The crash for the East-Asian economies can be attributed to the liberalization of markets which had stifled growth due to speculation. Creating a state of semi-isolation reduces the inefficiency of market speculation, and makes a country more self-dependent, and this may be realised through structural investment. Overall, it can be recognised that structural investment are a necessity, but it must be coupled with a new economic approach to achieve not only growth but sustainable growth.