Wednesday, 15 June 2011

Bailouts of the PIIGS

Greece was the first eurozone country to require a bailout, receiving 110bn euros last may from the IMF and the EU. It may also require another bailout, with talks of a figure around 172bn being required for the second rescue package. This second bailout is a rather contentious issue however, with Germany and the ECB disagreeing on the requirements that will have to be met in order for Greece to receive the aid.

Reasons for the bailouts
The biggest problem for the Greek government is that of tax evasion leading to a high budget deficit and therefore high overall debt. One in three Greeks are regularly evading tax, and the government's budget deficit is around 22m euros annually; interestingly around the same amount that the government is losing in tax revenue due to the high levels of evasion.
Another of the problems was that Greece were effectively lying about the levels of debt they had, meaning that the EU authorities didn't know how severe their problem was, and so by the time they were made aware it was too late. This calls for a reform of the way in which government deficits are measured and the transparency of the government's budget condition.

Ireland took 85bn euros last year from the EU and the IMF. It has also had a total of 5 bank bailouts, and there is a risk of default if the banking sector doesn't stabilise.

Reasons for bailouts
Ireland had the highest levels of growth out of any EU country before the recession, and it fell the hardest (as shown in fig 2.1 of the extract). One argument as to why Ireland was hit so hard in the global recession is that it did not have any sort of control over monetary policy or its exchange rate. While it is true that this should affect all EU countries, Ireland was growing much faster than them so the effects were more pronounced.

Portugal has already been bailed out.. (I think.. It seems hard to find out about..) and there is talk of a second one being needed, despite claims for a long time by the Portuguese that it wouldn't be necessary.

One of the reasons Portugal has experienced a worse downturn than most in the global recession is due to the condition in the economy of its main trading parter (Spain). This only goes part-way to explaining the problem, another reason would be the reliance on tourism; the demand for which has fallen sharply in the recession as it is a luxury item that people don't feel they need when their incomes fall.

Spain has yet to be bailed out, despite fears that it may need one in the future, and despite the recent poor economic performance. One of the major fears of the EU is that they probably couldn't afford to bail out an economy as big as Spain's.

Potential reasons
The reasons why Spain may require a bailout are not to do with bad governance, more to do with bad luck (as well as over-reliance on certain sectors). It was thought that more than 1/10 Spanish people were employed in the construction sector, and another large proportion were employed in the tourism industry; both of which were hit hard by the recession for the same reasons as Portugal's tourism sector - it's heavily income-elastic.
Also, Portugal's worsening economy is doing Spain no favours.

None yet, and the Italian government are adamant that they will not be needing one.

Possible reasons
Italy, like the rest of the PIIGS, is suffering from reduced levels of international competitiveness. It also has a high tourism sector, just like Spain, and the president has freely admitted that the aim of achieving the target of "zero percent deficit and GDP ratio" looks a "long way off"

EDIT: Here's an interesting link I was shown by a friend:
It highlights some of the problems, especially with Greece, and goes into more detail about the bailouts

Tuesday, 7 June 2011

Supply-side policies.

I'm going to be doing a list of every supply-side policy (that I can think of) with brief analysis and one evaluative comment.

Education increases the adaptability of the workforce, making labour markets more flexible by improving the transferable skills of the workers.
But it is very costly to implement, and comes with a time-lag. Also any effects on AS depend on the quality of the education provided.
Training raises the MRP (or productivity) of each worker, increasing AS by reducing unit labour costs as well as increasing output.
But it suffers from similar problems to education, it is quite expensive, and the time-delay means that there's a chance that once the workers have been fully trained may no longer be needed (example: people trained to write in shorthand, just before technology replaced it.)
Subsidies can be used to increase the productivity of firms, or help increase their price competitiveness by paying a part of the cost of production (thus increasing AS).
But it may lead to a dependence of the firms on the subsidies, which makes them inefficient.
Reducing trade union power helps to reduce the levels of bargaining power that workers have over employers, which makes labour markets more flexible as firms can hire and fire workers when necessary without fear of repercussions.
But many people would argue it's not fair for workers, and may reduce their productivity (as they could get depressed or less motivated to work if they feel their employer is exploiting them).
Reducing import tariffs, especially of raw materials. This would have the effect of reducing the costs of production for firms.
But there was probably a reason the tariffs were there in the first place, perhaps to improve the balance of trade, which would worsen, as imports would increase (providing they are price-elastic).
Reducing unemployment benefits should help reduce unemployment (through the unemployment trap).
But it may reduce consumption.
Improving transport infrastructure would improve labour mobility and reduce transport costs to firms.
But it's costly and can take a long time.

While there are more, these are the first ones that came to my head.. Lots of the other ones have rather boring  evaluative comments.. "time lag, high cost"...

Sunday, 5 June 2011

Why is Spain’s generous welfare system seen as a problem?

The extract mentions that Spain, fearing the social consequences of high unemployment as a result of the recession, has opted to increase unemployment benefits. This means that annual government spending on unemployment benefits now account for over 3% of Spain's total GDP. That figure is huge when put in context; especially when we consider that the stability and growth pact (as discussed in an earlier post) allows no more than a 3% total spending deficit annually.

This is certainly seen as a rather large problem, as high levels of government spending are difficult to sustain, as they have to be financed with lots of borrowing. Similarly, the money could be spent on something else, such as healthcare (opportunity cost is a common criticism of any government spending).

Furthermore, a generous welfare state often leads to dependence of people on those benefits, as well as a reluctance to find work - known as the unemployment trap. The unemployment trap is a big problem for governments as the dependence it creates can easily lead to longer-term unemployment problems, with people becoming used to being unemployed, as well as becoming unemployable as they lose their skills, along with the routine of getting up to work etc.

Saturday, 4 June 2011

Flexible/inflexible labour markets

For businesses to perform efficiently, one of the requirements is a flexible labour market.

For a labour market to be flexible, a number of conditions have to be met. Firstly, wage flexibility on the part of the workers needs to exist. This means that workers are willing to accept lower wages in times of recession etc, and that firms are willing to grant higher wages if MRP increases or something similar. In practice, this is one of the hardest conditions of a flexible labour market to be met; often wages are described as "downwards sticking", which highlights the reluctance of the workers to accept low wages in the fear that they may never rise back up.

The other conditions of a flexible labour market are somewhat more common. The second condition is high levels of labour mobility, including a workforce rich in transferable skills (to eliminate occupational immobility), and enough information and transport opportunities for people to get work in other areas of the country (to minimise geographical immobility). High levels of labour mobility can be achieved by investing in supply-side policies such as education and transport infrastructure.

Finally, for complete flexibility in the labour market, workers have to be willing to work more or less hours when needed, or to switch to a shorter or longer term contract. In reality, this condition of flexible labour markets is rarely fully achieved, because people normally have other commitments that mean that they can't simply switch to part-time without considerable warning.

Friday, 3 June 2011

Explain the Prebisch Singer Hypothesis

(Since i had no idea what this was, i thought i should maybe do a bit of research on it).

The Prebisch Singer hypothesis is an economic theory developed by Raul Prebisch and Hans Singer. The theory states that the terms of trade between primary goods and manufactured products deteriorate over time. What this means is that countries that export primary goods that do not have the means to manufacture goods to export will lose out in the long-run, as their goods will become relatively cheaper than the manufactured ones. A common explanation for the phenomenon is the observation that the income elasticity of demand for manufactured goods is greater than that for primary products - especially food. Therefore, as incomes rise, the demand for manufactured goods increases more rapidly than demand for primary products.

The worry with this is that the main exporters of primary goods are developing countries. If we take this hypothesis as fact, then that does not bode well for developing countries because it means that any hope of ever industrialising without borrowing large amounts (which is hard with a low credit rating) are slim - as they will not be making much profit on their exports, while being faced with higher costs of imports. 

How is human development measured?

Human development is a relatively new concept; it is the main focus to "development economics" - a modern branch of economics. While human development used to be measured simply by increases in real GDP per capita, economists have now realised that this is not particularly accurate. This is because for human development to increase, it is necessary to increase the overall welfare and living standards for the people in the economy, and GDP per capita merely shows increased average income (which tells us nothing about the quality of life, the distribution of the income, the liberty of the citizens... etc.).

The more accepted measure of human development, then, is the HDI (Human Development Index). Measuring the HDI is rather more complicated than GDP per head, as it involves giving a score (between 0-1) for each of the 3 main indicators of human development, and then averaging them to get the HDI score for a country. The three areas are: life expectancy at birth; adult literacy rates/number of people in education and finally the GDP per head. It is believed that the HDI is a more accurate measure of human development because it takes into account more than just incomes.

It is not, however, without its criticisms. The first problem with the HDI is that it only measures 3 indicators of human development; there is no mention of the range of products available to consumers, or the condition of the government/freedom of the people. This ties in with the theory of human development that states that for an economy to be truly developed, the population have to be able to freely make a wide range of economic choices. The counter-argument to this is that if there were, say, 10 different indicators in the HDI then it wouldn't give an accurate picture of the change in development, as it would be very difficult for countries to improve all 10 areas.

The second criticism of the HDI is that it gives an equal weighting to each indicator, where some would argue that perhaps less should be given to GDP per head and more should be given to literacy rates or the other way around. This also ties in with the argument that says that the indicators should be more specific; it's no good having 100% of the population in education if the quality of that education is bad. Similarly, life expectancy may be high, but at what cost? Perhaps cigarettes, alcohol, fast food, fizzy drinks (things people like) are banned, meaning that the population are more healthy, but in no way meaning they are happier. Finally, the measure of GDP per capita has the same problem as mentioned earlier - it doesn't show income distribution. 

Why is trade seen as such an important source of growth?

International trade describes the purchase and sale of goods and services between counties. Pascal Lamy, leader of the World Trade Organisation, believes that trade is one of the most important ways of achieving long-term growth. Ricardo's theory of comparative advantage highlights one of the key benefits of international trade, namely that specialisation and trade leads to mutual gain for the countries involved. Comparative advantage says that even if England has absolute advantage in the production of two goods, they can still trade Zimbabwe given that that Zimbabwe has a lower opportunity cost of production for one of the goods. After trading, then, both the UK and Zimbabwe would be producing more goods than they were before, and, assuming they were producing at full capacity, that means they would be producing outside their PPC. 

Trade, therefore, increases productive capacity, as well as overall production, which is the definition of growth. There are other benefits to trade, including increases in domestic efficiency as markets become more competitive. International trade (particularly between developing and developed countries) can lead not only to better political relations, but also to technological advancements being made by the developing country as a result of importing technology that they don't perhaps have the resources to innovate themselves.