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ECONOMICS 3150M

ECONOMICS 3150M. Winter 2014 Professor Lazar Office: N205J, Schulich flazar@yorku.ca 736-5068. Lecture 13: February 26 Ch. 21, 22, 2. European Union. Greece: remaining in Eurozone Labor mobility Lower interest rates when investors have confidence in government

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ECONOMICS 3150M

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  1. ECONOMICS 3150M Winter 2014 Professor Lazar Office: N205J, Schulich flazar@yorku.ca 736-5068

  2. Lecture 13: February 26Ch. 21, 22, 2

  3. 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

  4. 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

  5. Income Gaps

  6. Income Gaps

  7. 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%

  8. 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)

  9. 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)

  10. 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)

  11. 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)

  12. 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

  13. 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?

  14. 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”

  15. 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

  16. 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

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