ECONOMICS 3150N

Winter 2013 Professor Lazar

Office: N205J, Schulich [email protected]

736-5068

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Lecture 6: February 28 Ch. 21, 22, 2

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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

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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 Low income Lower middle income Upper middle income High income GDP per capita (2008 US $)

$523

Life expectancy (years)

60 2,073 70 7,852 39,688 75 83 8

Income Gaps

Income group Least free quartile Third quartile Second quartile Most free quartile GDP per capita (2009 US $)

$4,545

GDP per capita growth (1990-2009)

1.2% 6,464 2.3

14,961 31,501 2.4

3.1

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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?

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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.

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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 S&CA Europe NA

49%

S&CA

8%

Europe CIS

17% 1%

Africa

2%

ME

3%

Asia

21% 24 7 26 2 19 71 1 3 3 3 3 3 23 9

CIS Africa ME Asia

6 17 9 17 1 3 1 3 52 36 12 17 19 0 1 2 2 12 3 3 3 4 10 4 15 24 53 53 24

Overview

• World trade – merchandise exports

NA S&CA Europe CIS Africa Middle East Asia GATT WORLD 1953

25% 10% 39% 4% 6% 3% 13% 70% $0.084

1973

17% 4% 51% 4% 5% 4% 15% 84% $0.579

1993

18% 3% 45% 2% 2% 4% 26% 89% $3.676

2010

13% 4% 38% 4% 3% 6% 32% 94% $14.851

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Overview

• World trade – merchandise imports

NA S&CA Europe CIS Africa Middle East Asia GATT WORLD 1953

20% 8% 44% 3% 7% 2% 15% 67% $0.085

1973

17% 4% 53% 4% 4% 3% 15% 86% $0.594

1993

21% 3% 45% 1% 3% 3% 24% 90% $3.786

2010

18% 4% 39% 3% 3% 4% 30% 96% $15.077

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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

NA S&CA Europe CIS Africa Middle East Asia Agricultural products

16%

Fuels & mining products

10%

Manufacture

14% 12 42 8 21 2 43 2 22 3 4 12 11 20 18 2 37 1 1 28

Overview

Regional shares of merchandise exports by major product groups (2010)

NA S&CA Europe CIS Africa Middle East Asia Agricultural products

11%

Fuels & mining products

15%

Manufacture

69% 28 10 42 11 26 76 8 11 2 6 64 66 68 12 24 19 22 79 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 Belgium Canada Finland France Germany Ireland Italy Japan S. Korea Luxembourg Mexico 24%

85 34 45 28 44 78 29 17 54 156 29

Norway Portugal Slovak Rep.

Spain Sweden Switzerland Turkey Russia UK US EU 27 OECD

26 30 15 41 29

38

33 84 30 50 51 26 32

Overview: Current Account Balance as % of GDP, 2010

Australia Belgium Canada Finland France Germany Ireland Italy Japan S. Korea Luxembourg Mexico -2.6%

1.0

-3.1

3.1

-1.8

5.6

0.5

-3.2

3.6

2.8

7.5

-0.6

Norway Portugal Slovak Rep.

Spain Sweden Switzerland Turkey Russia UK US 12.9

-9.7

-4.0

-4.6

6.3

14.6

-6.4

NA -3.2

-3.2

33

Overview: Services Balance as % of GDP, 2010

Australia Belgium Canada Finland France Germany Ireland Italy Japan S. Korea Luxembourg Mexico -0.2%

1.5

-1.4

1.2

0.5

-0.9

-4.6

-0.6

-0.3

-1.1

54.7

-0.9

Norway Portugal Slovak Rep.

Spain Sweden Switzerland Turkey Russia UK US -0.5

3.9

-1.2

2.6

3.4

8.8

NA NA 3.4

1.0

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