CH-6-9 Endogenous Growth And Convergence – Macroeconomics: Understanding the Global Economy : Book Guide

This Document Contains Chapters 6 to 9 INTRODUCTION This is a central chapter offering a synthesis of competing growth theories and combining various elements of previous chapters. Students also normally find the progression into development issues of particular interest. Although the labor market is not covered in detail until the next chapter, this chapter effectively concludes the treatment of the determinants of sustained economic growth. Since endogenous growth theory offers some contrasting predictions to the neo-classical propositions discussed in previous chapters, it may be a little confusing for students at first. This is nevertheless a key chapter for courses that have a development economics slant. Teaching Tips ALTERNATIVE ROUTES THROUGH THE CHAPTER The approach to this chapter is dependent on the orientation of the course. For students with an interest in development economics, this chapter is important and can be extended into two lectures (one on endogenous growth and the other on African development and aid). For a more domestically or developed economy oriented course, this chapter can be merged into other lectures. Focusing on the development of the theories around the issue of convergence is a good way of motivating student interest. As with previous chapters, the material here can be given as a case study (e.g. on African development), with the theoretical material being introduced as necessary. CHAPTER GUIDE 6.1 Endogenous Growth. Since endogenous growth theory suggests that government intervention can help improve growth prospects, it has been widely cited by social democrat politicians as a justification for enhancing the role of government. (In the UK, one of New Labour’s leading politicians – Gordon Brown - famously made a speech extolling the virtues of the new theories of endogenous growth. Kenneth Clarke, the Conservative Chancellor at the time, deliberately misquoted this idea as “erogenous” growth theory). 6.2 Poverty Traps. Normally, a poverty trap describes a situation where the tax and benefit system causes people on low incomes to find that increases in their pre-tax income reduce their post-tax (or post-benefit) income. This situation discourages effort to find work or better-paid work. The parallels of this situation with that of increasing returns are strong since poverty traps discourage effort/investment only when income is below a certain threshold. CHAPTER 6: ENDOGENOUS GROWTH AND CONVERGENCE This Document Contains Chapters 6 to 9 A good way to motivate this topic is to talk about urban areas i.e. why some persist as ghettos while others remain rich. Discussing ways of overcoming such problems covers many of the key issues at an intuitive level. 6.3 Convergence or Divergence? Having focused on decreasing marginal product for four chapters, students might be a little confused at this point by the introduction of constant and increasing returns. This section should help resolve that confusion by distinguishing between developed and developing countries. Certainly, it is hard to explain Africa’s low income and poor growth performance without moving beyond decreasing returns. 6.4 Determinants of the Steady State. The Background Material below looks at the determinants of the steady state from a historical perspective - assessing how the US overtook the UK as the leading economy in the late 19th century. 6.5 Why is Africa So Poor? As well as its importance to the welfare of millions of people, the disappointing economic growth of Africa is a real challenge to economists and economics. A brief look at the UN HDI tables (see chapter 2 for details shows that the bottom 19 countries in those table are all in Africa (The lowest scoring country outside Africa is East Timor). Given the focus of aid on the poorest countries, the effectiveness of aid is of key importance for Africa. For example, in 1999, of the 22 officially designated HIPC (Heavily Indebted Poor Countries), 17 were in Africa. 6.6 The Curse of Natural Resources. Students are usually very interested in this topic, the is more on natural resources in chapters 8 and 21 6.6 Does Aid Work? The case study examines overseas aid and debt relief CASE STUDY: AID AND DEBT RELIEF IN THE 21st CENTURY. Introduction Over most of the 1990’s, aid declined significantly as a percentage of developed country GDP. Not only did the end of the Cold War reduce politically motivated aid programs, but an increasing body of evidence suggesting that aid was not effective in stimulating growth or reducing poverty reduced the incentive to donate aid. In particular, the US, which among the major economies gives the smallest share of GDP in aid, has deployed this argument. Aid as a share of GDP for the major economies Source: World Bank By the end of the 1990’s however, the level of aid again began to increase (the UK, for example, committed to increase aid to 0.33% of GDP by 2003-4). However, the maintenance of these aid commitments will depend upon improvements in its allocation which lead to significant reductions in poverty. This has now become the major objective of the larger development agencies like the World Bank. The Impact of Aid World Bank research suggests that, in terms of stimulating domestic investment, aid is as successful as foreign direct investment (see Background Material to Chapter 5). Every dollar of aid stimulates almost an equal amount of domestic investment. However, unlike foreign direct investment, this extra investment rarely seems to generate improved productivity. It seems that the issue of absorptive capacity (whether the country has the necessary social and physical infrastructure to benefit from more investment) is, once again, vital. Since aid is usually targeted at the very poorest countries with low educational attainment and poor government, it fails to foster growth. Equally, it seems that aid cannot ensure good government policies, although in countries already pursuing such policies aid can be effective. The new approach to aid is based on three principles. The first and most important is that aid shall be directed to countries with good economic policy ratings (the ratings are based on macro-economic policies; other anti-poverty programs; the quality of governance; and institutional capacity). As the charts below show, in the period between 1992 and 1994, more aid went to countries with a low policy score than to those with a high score. By 1998 however, the situation had been reversed. Some models predict that this development will increase the effectiveness of aid for poverty alleviation by more than two and a half times. 0 0,1 0,2 0,3 0,4 0,5 0,6 0,7 1986-87 average 1991-92 average 1998 1999 2000 2001 2002 France Germany Japan United Kingdom United States Aid receipts as a percent of GNP relative to policy and income indicators 1992 to 1994 1998 Source: World Bank The charts above also give an indication of the second important criterion for aid – the extent of poverty. Although this is not a new criterion (the poorest countries have always received the highest levels of aid as a percentage of their GNP), the share of aid going to the poorest nations has increased in recent years. The third key criterion is aid as an offset to specific structural weaknesses such as vulnerability to economic shocks The HIPC Initiative In addition to directing aid towards countries with better policy performance, the HIPC (Heavily Indebted Poor Countries) initiative has attempted to encourage debt relief for the poorest and most indebted countries. Before 1996, countries with an unsustainable debt burden could negotiate re-scheduling of their bi-lateral debt (i.e. private sector and government-to- government) through the “Paris Club” - a talking shop for agreeing the terms of debt repayment. However multi-lateral debt (i.e. loans from the IMF and World Bank) was not negotiable - it had to be paid on time and in full. The HIPC initiative allows debt relief on all types of debt for countries whose debt burden is judged to be unsustainable. The main sustainability criterion used in assessing HIPC is the debt/exports ratio (in fact, it is the net present value of debt that is used). Under the original initiative, a country with a debt-export ratio greater than 200%-250% was eligible for debt relief (open economies could get more favorable terms). In 1999, the enhanced HIPC program reduced that threshold to 150%. The main economic justification for the HIPC initiative lies in the debt relief Laffer curve. This curve relates the level of debt to repayment. As with other Laffer curves, the key insight is that when the burden of debt becomes excessive, there is no point in trying to pay it back. At that Top Third Middle Third Bottom Third High Middle Low 0% 5% 10% 15% 20% 25% Country Policy Rating Income Group Aid/GNP. Top Third Middle Third Bottom Third High Middle Low 0% 5% 10% 15% 20% 25% Country Policy Rating Income Group Aid/GNP. point, debt relief will actually improve debt repayment and help the country institute poverty reduction programs. The Debt Relief Laffer Curve Debt repayment Debt repayment Debt Stock The debt relief Laffer Curve is not just a statement about debtors’ willingness to repay debt when the burden becomes excessive, it also relates to the countries’ economic ability to pay. Since high debt levels will tend to reduce spending on areas such as education and health which are known to promote growth, a country with a longstanding debt obligation will tend not to be able to engender the growth rate that would facilitate debt repayment. The chart below gives an example of this effect for Mozambique – one of the early beneficiaries of the HIPC initiative. Mozambique: Expenditure on Social Programs and Debt Service (US$ million) 0 50 100 150 200 1995 1996 1997 1998 1999 2000 Debt Service Social Spending Source: World Bank On this basis, the $30 billion projected to be spent on the HIPC initiative seems like money well spent, potentially benefiting both borrower and lender. However, it has a drawback. Since debt relief is an attractive option to the lender, the incentive for borrowers to overborrow is enhanced. Discussion Questions 1) Should the aid budgets of the developed countries be increased? 2) Is debt relief an efficient way to spend aid funds? Additional Questions Question 1) How did the US overtake the UK at the beginning of the 20th Century? THE US AND UK ECONOMIES – 1870 to 1913 1990 US$ equivalent Average annual growth rate Income per Capita 1870 Income per Capita 1913 Per Capita income TFP US 2457 5307 1.82% 0.8% UK 3263 5032 1.01% 0.5% Answer1) In the late 19th and early 20th century, the US drew level with and then overtook the UK as the richest major nation in the world. Whilst convergence easily explains how the US came to join the richer nations of the world during the 19th century, convergence cannot explain why the US overtook those nations. Before endogenous growth theory, the only explanation available was that the UK investment rate was too low and the US therefore acquired a larger capital stock. However, this explanation implies that the UK economy had gone through a period of stagnation which seems inconsistent with the fact that the UK investment rate was at it highest ever level over this period. Endogenous growth offers a different explanation. Partly because of its endowment of natural resources, the United States found itself with a comparative advantage (see Chapter 9 for a detailed definition) in some key growth industries such as car production and electricals. The UK, on the other hand, was still specializing in textiles, rail and ships. The US industries not only had growth potential, they also tended to enhance human capital through learning by doing (for example, the introduction of mass production techniques). This know-how then spilled over into other industries and encouraged further growth. Why didn’t the UK simply copy US techniques? There are two key reasons. First, as communications were less advanced, international knowledge spillovers were limited. Second, the UK management and union structure was better suited to craft-based production which made mass-production techniques more difficult to introduce. Source: Crafts (1996) “Endogenous Growth: Lessons for and from Economic History” CEPR Discussion Paper No. 1333 Question 2) Calculate aid as a share of GDP for a range of donors and recipients. Aid figures (Official Development Assistance of ODA) are available on stats.oecd.org [under Development- >Aggregate Aid Statistics]. GDP data are available in the World Development Indicators database [http://data.worldbank.org/data-catalog -> WDI databank]. Be careful to match, currencies, current/constant price and units (millions vs. billions) Answers to Analytical Questions Chapter 6 Endogenous Growth and Convergence 1. Let output, Y, be a constant proportion of capital, K. Y = aK Investment, I, is a constant proportion of output: I = bY With depreciation at rate  the net change in the capital stock is: I - K = bY - K = baK - K The proportionate change in the capital stock is: (baK - K) / K = ba -  The impact of b changing from 0.1 to 0.2 clearly depends upon the size of a. If a = 0.4 and  = 0.03 then a move in b from 0.1 to 0.2 raises growth from 1% (0.01) to 5% (0.05). If a = 0.5 then this shift in b will raise growth from 2% to 7%. 2. If the size of the gap between the countries is Gt at time to then the gap evolves according to G t+1 =0.98 Gt In the next period G again falls to 98% its original level so that G t+2 =0.98 Gt+1 = (0.98)2 Gt After 20 years the gap is (0.98)20 = 67% its original level. The gap has fallen by about one third. After 40 years the gap is (0.98)40 = 45% its original level. The gap has fallen by about 55% of its original level. 3. Output for the economy with high investment and higher level of TFP is at B whilst low TFP economy with low investment is at A. Allowing only for differences in investment understates extent of inequality across countries. 4. Under these assumptions the MPK schedule looks like Countries to the left of A will receive no investment as their MPK is less than the interest rate and so investment earns a negative return. These countries are stuck in a poverty trap and will see their capital stock decline through depreciation. The only investment funds they should receive will be through aid, assuming that aid is given irrespective of a required return. Countries to the right of C will also not receive funds and will remain rich. Countries between A and C will receive investment funds. Countries at B will receive large amounts of investment, as their MPK is so high, and further because their MPK is high this investment will generate rapid growth. Countries at B will therefore show rapid catch up. This chart predicts a group of established rich countries (C), a group of fast growing emerging markets (B) and then a group of Least Developed Countries who are stuck at very low levels of GDP. INTRODUCTION Although the beginning of this chapter reflects the previous four chapters on growth, it is mainly concerned with the determinants of the natural rate of unemployment. It is therefore largely a stand-alone chapter tackling many issues that students should find relevant and stimulating. It is however worth pointing out the link with other chapters as it continues the focus on long run supply side issues and the level of output an economy can produce. Teaching Tips ALTERNATIVE ROUTES THROUGH THE CHAPTER Given the link with previous chapters, the first two sections could be covered in an earlier lecture. This would leave a lecture dedicated to unemployment. European students will probably find the material on unemployment of greater interest. US students, on the other hand, may wish to spend more time on inequality issues. In a shorter course, this chapter would most naturally be paired with Chapter 16. Starting the lecture with a discussion of different unemployment experiences in different countries or over time is an effective way of approaching the subject. This is particularly true if there are clear indications why unemployment is so low/high in your own country. CHAPTER GUIDE 7.1 Labor Market Data. The distinction between unemployment and labor market participation is not as clear cut as it first seems. Many people choose not to join the labor force if employment prospects are not good. They may choose to stay in education, retire early or stay at home. This discouraged worker effect leads to a negative correlation between the unemployment rate and the growth of the labor force. (See Additional Questions below). 7.2 A Long-Run Model of the Labor Market. The diminishing marginal product of labor will be very familiar from the discussion of capital in previous chapters. Fortunately, constant returns and increasing returns are not an issue in this case which is a simple examination of the quantity of labor not its quality (i.e. human capital). Although the vertical labor supply curve is easy to communicate, the idea of a backward- bending supply curve may be interesting to some. As the chart shows, the curve is based on the idea that as the real wage rises, the income effect begins to dominate the substitution effect. This curve is consistent with historical facts but offers the alternative prediction that average hours worked will now steadily decline as real wages rise. CHAPTER 7: UNEMPLOYMENT AND THE LABOR MARKET Hours worked Wage Rate 7.3 The Natural Rate of Unemployment. Students may be a little surprised to learn that they are the ones with monopoly power over their employers through their threat to resign. In some cases this is a hollow threat, as the prospect of prolonged unemployment will make resignation more costly to the employee than to the employer. Clearly, the employment prospects for the employee are crucial here. If a new job is easy to find, then the monopoly power rests with the employee. A good way of introducing this section is to discuss the remuneration of sports stars or entertainers. Actors in the hit series “Friends” were rumored to be seeking $1 million per episode. Getting students to explain how this can happen gets them to reflect on wider labor market issues. 7.4 A Diagrammatic Analysis. The fact that inflation has a tendency to rise if unemployment is below the natural rate and fall if unemployment is above it explains why the natural rate of unemployment is also called the “Non-Accelerating Inflation Rate of Unemployment” (NAIRU). The inflationary consequences of deviation from the natural rate are discussed in detail in Chapter 16. 7.5 Determinants of the Natural Rate. The impact of long-term unemployment on the natural rate is an example of hysteresis. Hysteresis occurs when a short-term deviation has long- term consequences. Thus, in the case of long-term unemployment, a severe recession can raise the proportion of long-term unemployed and so permanently raise the natural rate. The hysteresis effect was one of the concepts used to explain why unemployment in many countries failed to fall significantly after the late 1970’s recession. 7.6 What Lowers Unemployment? The Background Material below contains charts showing the relationship between centralization of wage bargaining and unemployment found in Calmfors and Driffill(1988). 7.7 A Flow Approach to the Natural Rate of Unemployment. The minimum wage is another labor market measure that is widely supposed to have an important impact on unemployment. (See Case Study below). 7.8 Labor Market Reform. More detail on the UK and Dutch experience of reducing unemployment can be found in the Background Material. Certain countries with very low unemployment (e.g. in 2001 - Switzerland with 2%, Iceland with 1% and Norway with 2.5% unemployment) rely on a pool of overseas workers to keep real wages low in the more unpleasant occupations. CASE STUDY: MINIMUM WAGES, POVERTY AND UNEMPLOYMENT. Introduction Despite being a highly controversial area of labor market policy, almost all the developed economies have some form of minimum wage legislation, though its level varies greatly (see table). In principle, minimum wages look like an effective way of reducing poverty that has little impact on overall employment - but is this true? Minimum Wages in selected economies (1997) Minimum wage per hour in US$ Minimum wage as % of average pay in manufacturing. US $5.15 39% Japan $5.11 45% Franc e $6.82 71% UK $5.73 50% Canad a $4.65 39% Minimum Wages and Poverty As a starting point, the evidence that a minimum wage reduces low pay is quite strong. A number of studies in different countries have confirmed this. The chart below demonstrates the relationship between low pay and the minimum wage for a range of countries. Minimum Wages and Low Pay (mid 1990’s). Belgium France NZ Netherlands Japan Canada Hungary US Spain Korea Czech Rep. 5 10 15 20 25 30 20 30 40 50 60 70 Incidence of low pay. Minimum Wage Index Incidence of low pay = % of full-time workers receiving less than 2/3’s of median earnings Minimum wage index = Minimum wage as a % of median full-time earnings However, the evidence becomes far weaker when we move on to overall poverty. Many studies have found an equalizing effect on the incomes of working households (i.e. households with at least one working member), but have not found any significant impact on the overall poverty rate of all households (since a substantial number of poor households have no working members). Minimum Wages and Employment. Until the late 1980’s, the US consensus on the impact of the national minimum wage held that it had a small but significant negative effect on employment (with a larger negative effect on youth employment). However, at the beginning of the 1990’s, the federal minimum wage was increased substantially (after having been kept constant through the 1980’s) but most studies could find no employment impact of this increase, thereby undermining the previous consensus. In countries with a very high minimum wage the evidence seems stronger. In France, for instance, most studies have found a significantly negative employment impact of the minimum wage (the Salaire Minimum Interprofessionnel de Croissance - SMIC). For example, the OECD finds that a 10% rise in the SMIC leads to an increase in structural unemployment of about 0.9%. Conclusion On the basis of these results, the OECD has made the following recommendations to countries considering introducing a minimum wage 1) Above a certain level, a statutory minimum wage reduces employment. 2) A lower minimum should be set for young workers. 3) Since a minimum wage can reduce low pay but has less impact on overall poverty, it should be seen as part of an overall poverty alleviation policy along with changes in the tax and benefit system. Source: “OECD Submission to the Irish National Minimum Wage Commission” WP No. 186, 1997 Discussion Questions 1) Is there a minimum wage in your country? How does it operate? 2) If you have one, do you think it should be increased lowered or abolished?. If not should one be introduced and at what level? Background Material CENTRALIZATION OF WAGE BARGAINING Calmfors and Driffill (1988) examine the idea of a hump-shaped relationship between the centralization of wage bargaining and labor market performance. Their argument is based on the general idea that organized interests (in their case - unions) are at their most harmful when they are strong enough to cause major disruption but not sufficiently encompassing to bear their share of the cost of their actions. They suggest that an intermediate level of centralization will be associated with higher real wages and higher unemployment. The two charts below show empirical estimates of their proposition using their rankings of centralization (1 equals most centralized) and unemployment. The first simply shows the relationship between the level of unemployment (1974-85 average) and centralization, while the second looks at the rise in unemployment between the 1963-73 average and the 1974-85 average. This measure can be seen as a quantification of labor market flexibility in response to an adverse supply shock (the oil price rises of the 1970’s). .Unemployment and Centralization The Rise in Unemployment and Centralization Both charts show some hump-shaped relationship though it appears stronger for the change in unemployment (perhaps because this relationship effectively strips out other idiosyncratic influences on unemployment). The charts include the R-squared for the fitted relationship (a 2nd order polynomial); this is a measure of the total variation explained by the fitted line. In the case of the change in unemployment, the hump-shaped relationship explains over 30% of the total variation of unemployment between countries. Further evidence for the hump-shaped relationship comes from the Dutch and UK experience described below. As the chart shows, in the 1970’s and early 80’s both the UK and Netherlands (Neth.) were at average levels of centralization. The reforms they introduced in the 1980’s and Austria Norway Sweden Denmark Finland Germany Neth. Belgium NZ Australia France UK Italy Japan Switz. US Canada R 2 = 0.141 0 2 4 6 8 10 0 5 10 15 20 Centralization Ranking Level of unemployment (%). Austria Norway Sweden Denmark Finland Germany Neth. Belgium NZ Australia France UK Italy Japan Switz. US Canada R 2 = 0.301 0 2 4 6 8 0 5 10 15 20 Centralization Ranking Rise in unemployment (% points). 1990’s sent the UK towards greater decentralization and the Netherlands towards greater centralization. Both experienced a dramatic fall in unemployment. Source: Calmfors and Driffill (1988) “Centralization of wage bargaining” Economic Policy No. 6 DUTCH AND UK EXPERIENCE OF LOWERING UNEMPLOYMENT The pattern of Dutch and UK unemployment has been remarkably similar for many years. Having both had unemployment above the EU average in the early 1980’s, they matched the average by the mid 1980’s and are now (2001) both well below it with unemployment of around 4% as compared with the EU average of around 8% (see chart). Unemployment Rates In UK, Netherlands and EU UK Unemployment Dutch Unemployment EU Unemployment Source: EcoWin 8858687889990919293949596979809001 2 3 4 5 6 7 8 9 10 11 12 However, their paths to lower unemployment have been completely different. The key to the Dutch success was a collaboration between unions, employers and the government. This co- operation began with the Wassenaar Agreement of 1982. With unemployment rising and employment falling, employers agreed to a shortening of the workweek and unions agreed to moderate wage claims. It was also agreed that obstacles to temporary work should be removed. Whilst the government was not directly involved in the Wassenaar agreement, they were committed to stabilize government finances and reform social security. Additionally, government reductions in unemployment benefit and substantial investment in active labor market programs (about 1.4% of GDP) supported the approach embodied in the Wassenaar agreement. The government’s co-operative approach stemmed from the conciliatory attitude of ex-union Prime Minister Wim Kok. The UK approach was far less co-operative and far more free market – as different from the Dutch approach as Margaret Thatcher was from Wim Kok. It involved a substantial reduction in union power (most notably around the time of the miner’s strike in 1984), dramatic reductions in unemployment benefit and the tax wedge. Although labor market programs were less substantial than the Dutch example, they did amount to around 0.5% of GDP and were targeted at reducing long term unemployment. Which approach was more successful? On paper at least the ‘Dutch miracle’ was more impressive as it was accompanied by large increases in employment and dramatic reductions in the numbers claiming invalidity benefit (invalidity had been a form of hidden unemployment in the Netherlands). In the UK, the suspicion remains that ‘the English fiddle their figures’ (as Jacques Chirac put it). Certainly, the issue of the rising number of people claiming invalidity benefit is only now being addressed in the UK. However, the ‘Dutch miracle’, based as it was on a highly co- operative approach between formerly opposed institutions, seems unlikely to be widely applicable to other larger European countries. Additional Questions Question 1) what explains the apparent negative correlation between unemployment and labor force growth shown in the chart below? US Labor Force Growth and Unemployment Growth of Civilian labor force, % p.a. (RHS) Unemployment % of total labour force (LHS) Source: EcoWin 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 3 4 5 6 7 8 9 10 11 Answer 1) The chart demonstrates the ‘discouraged worker’ effect whereby the labor force shrinks when unemployment is high. The effect occurs because higher unemployment means lower prospects of finding work. Workers are thereby discouraged from even looking for a new job and leave the labor force altogether (e.g. early retirement). Question 2) Look at forecasts for employment as a share of total population and unemployment as a share of the labor force for a selection of countries using the latest World Economic Outlook (WEO) database produced by the IMF. www.imf.org [under Data and Statistics]. Answers to Analytical Questions Chapter 7 Unemployment and the Labour Market 1. a. The woman works 20/15 times the hours of the man at the initial wage. If we denote male hours by mh the target of earning $1500 a week means the following equation must hold: 1500 = 15 x mh + 20 x (20/15) x mh Re-arranging this equation yields: mh = 1500 / [ 15 + 400/15] which means that mh = 36. If the man works 36 hours the woman works (20/15) x 36 = 48 hours. b. If the woman's wage rises to $24 the budget equation becomes: 1500 = 15 x mh + 24 x (24/15) x mh Re-arranging this equation yields: mh = 1500 / [ 15 + 576/15] which means that mh = 28.1. If the man works 28.1 hours the woman works (24/15) x 28.1 = 44.9 hours. c. If both adults get a 20% wage rise her wage is $24 per hour and his is $18. The budget equation becomes: 1500 = 18 x mh + 24 x (24/15) x mh Re-arranging this equation yields: mh = 1500 / [ 18 + 576/18] which means that mh = 30. If the man works 30 hours the woman works (24/18) x 30 = 40 hours. 2. Yt = At Kbt L1-bt The marginal productivity of labor (MPL) is: 1-b.( At (Kt / Lt)b) where b is initially 0.3 a. if A increases by 10% then so does the MPL b. If K increase by 10% then K/L is 10% higher and MPL is higher by a factor of (1.10)0.3 = 1.029. Thus MPL rises by 2.9% c. If L increase by 10% then K/L is 10% lower and MPL is lower by a factor of (1/1.10)0.3 = 0.972. Thus MPL falls by 2.8% d. If b were 0.4 and then fell to 0.3 (its current level) the new level of MPL relative to the old level is: (1-0.3).( At (Kt / Lt)0.3) / (1-0.4).( At (Kt / Lt)0.4) = (0.7/0.6). (Kt / Lt)-0.1 This is greater than one (and so MPL rises) if (K/L) is less than 4.67. If K/L is greater than 4.67 then the MPL falls as b declines from 0.4 to 0.3. 3. The price setting behavior of firms implies: P = 1.2 x W Or W/P = 1/1.2 The negotiated real wage is: W/P = 1-2u Setting the two equations equal implies: 1-2u = 1/1.2 or u= (1-1/1.2) / 2 = 0.0833. Thus the unemployment rate is 8.33% 4. With a 15% income tax the wage negotiating relation becomes: (1-0.15)W/P = 1 - 2u or W/P = (1 - 2u)/0.85 The price setting of firms implies that with a 20% profits tax and a net of tax profit target at 20% of wages we have : (P-W)(1-0.2) = 0.2W or P/W = 0.2/0.8 +1 and so W/P = 1/(1.25) = 0.8 Using this in the first equation implies: 0.8 = (1 - 2u)/0.85 so u = 0.16; unemployment is now 16%. 5. Let total employment be E. The number of people entering unemployment each year is 0.02 x E. The number of people leaving unemployment each year is 0.4 x U , where U is the number unemployed. The total labor force, L, is U + E. Thus: 0.02 x (L - U) = 0.4 x U Dividing by U we have: 0.02 x (L/U - 1) = 0.4 This implies that : L/U = 20 + 1 So U/L, which is the unemployment rate, is 1/21 = 0.048 (4.8% unemployment). If we double both the chances of job loss and of finding a job we now have: 0.04 x (L/U - 1) = 0.8 This implies that : L/U = 20 + 1 So U/L is unchanged. 6. Let us measure the wages of the low skilled as 1. In the original situation the highly skilled get a wage of 2. Perhaps the simplest measure of inequality is the ratio of high skilled to low skilled wages. This is initially 2 and rises to 3 after technical progress. So on this measure inequality has increased substantially. An alternative measure is the variance of incomes and this takes account of the numbers who are skilled and unskilled. Let the proportion of the unskilled be p and the wages of the skilled be ws (unskilled wages are always 1). The variance of incomes is the average squared deviation from mean incomes. Mean incomes are p + (1-p)ws. The variance of incomes is: p x (1 - p - (1-p)ws)2 + (1-p) x (ws - p - (1-p)ws)2 In the initial situation mean incomes are 1.5 and the variance of incomes is 0.25. After technical progress mean incomes are 0.25 + 0.75 x 3 = 2.5; the variance of incomes is 0.75 So the variance of incomes is also significantly higher. But a third measure of inequality is the proportion of people with below average wages. In the original situation this is 50%. After the technological advance that proportion falls to 25%. So on that measure inequality has fallen. INTRODUCTION Despite the introduction of a number of theoretical concepts, this should be an easy chapter to teach. By and large, students tend to be interested in trade issues. It should be easy to find good current examples to motivate this material as there is almost always some important trade dispute going on. Teaching Tips ALTERNATIVE ROUTES THROUGH THE CHAPTER Although the historical perspective on trade is a good introduction, you may prefer to start by referring to current events such as recent trade talks and disputes, or recent protectionist measures. Showing how comparative advantage works then highlights the potential gains from trade. The Case Study on globalization below could be used to generate useful discussion. CHAPTER GUIDE 8.1 Introduction: Patterns of World Trade. The Background Material includes more data on the share of services in trade. 8.2 Comparative Advantage – How Countries Benefit from Trade. The discussion of US and UK comparative advantage before the second World War links with the Background Material of Chapter 6 (How did the US overtake the UK at the beginning the 20th century?). 8.3 The Terms of Trade. The Prebisch-Singer Thesis is discussed in more detail in Chapter 9. Also, some of the issues are discussed in the case study on Vietnamese Coffee Production. 8.4 What Goods Will Countries Trade In? Note that the tendency for developed countries to import and export similar goods means that their terms of trade are very stable. Only huge commodity price shocks like the oil price inflation of the 1970’s have a significant effect. Developing countries on the other hand tend to have much more specialized trade patterns and therefore face far more volatile terms of trade. Macroeconomic policy-making is accordingly far more problematic. 8.5 Distributional Impacts of Trade. The analysis in this section parallels the discussion of immigration in the previous chapter. In economic terms immigration and trade have almost identical effects in terms of equalizing factor returns (i.e. raising wages and lowering the return on capital in labor abundant countries whilst lower wages and raising the return on capital in capital abundant countries. 8.6 Competitiveness. Krugman cites many examples of politicians who misuse the idea of competitiveness. President Clinton described a nation as being “like a big corporation CHAPTER 8: INTERNATIONAL TRADE competing in the global marketplace”. Jacques Delors (former head of the EU) ascribed Europe’s unemployment problems as being due to a “lack of competitiveness with the US and Japan” 8.7 Strategic Trade Theory. Another possible economic justification for protectionism is the establishment of industries that have important knowledge spillovers into the rest of the economy (e.g. Technology). Certainly, the example of the US and UK at the beginning of the 20th century shows the benefits of being in the right industries (see Background Material to Chapter 7). The track record of such policies, however, is not good. 8.8 Political Economy and Vested Interest. In practice, the two areas most subject to protection by developed countries are agriculture (through systems like the European Common Agricultural Policy - CAP) and textiles (through restrictions like the Multi-Fiber Arrangement, MFA). Although these are amongst the lowest paid industries in the developed world they have strong pressure groups in support. They are also key industries for developing countries. Textiles in particular have been important growth industries for countries in the early stages of development. As a result, pressure to remove restrictive protection is growing, and the MFA is now virtually dismantled. CASE STUDY: ANTI-DUMPING Introduction Although trade restrictions such as the European protection of agriculture (the CAP) and worldwide restriction of textile trade (the MFA) are widely discussed and disputed, both of these have now probably been overtaken, in terms of economic impact, by the use of anti- dumping legislation as a way of restricting trade. Not only do the number of anti-dumping cases dwarf all other trade disputes (Between 1995 and 2000, WTO members reported 61 safeguard investigations, 115 countervailing duty investigations, and 1441 antidumping investigations), their impact can be substantial – the duties imposed after a successful case often reduces trade from the affected country by over 50%. Added to this, although other forms of restriction on trade are gradually being eliminated, as the chart below shows, anti-dumping cases are steadily rising. Number of Anti-Dumping Cases Filed 0 200 400 600 800 1000 1200 1400 1600 1980-84 1985-89 1990-94 1995-99 2000-04 What is Anti-Dumping and can it be justified? Anti-Dumping legislation is used by a country who suspects that goods being exported to their country are being sold at bargain basement prices as a way of driving out the local competition (i.e. dumped on their market). If the recipient country can prove that the price of the imported good is in some sense too low, then it can impose special duties on that exporting country with the full blessing of the WTO. On the face of it, anti-dumping legislation seems justified as an extension of normal competition policy (anti-trust). In most countries, the government can act against predatory pricing when a large company tries to kill of the competition by setting its price below cost for a temporary period. Therefore it seems a logical extension to say that a government can stop a foreign company doing the same. However, a more detailed look at anti-dumping shows that is goes a lot further than predatory pricing. In predatory pricing, a company is usually only convicted if it can been shown that it set prices below marginal cost (i.e. below the cost of producing one extra unit). In anti-dumping cases, not only are average costs used as a benchmark (i.e. not just the cost of producing an extra unit but also a share of the fixed cost of the business – such as the cost of buildings etc.) but often a ‘normal’ level of profit is added as well. As a result, a company making profits can be found guilty of dumping (in fact if anti-dumping criteria were applied to judge domestic predatory pricing cases then it is likely that most companies could be convicted!). This system can easily result in a company being charged with dumping in foreign markets even if the price it sells good abroad is higher than in its home market. With this system, it is perhaps unsurprising that that most anti-dumping cases are successful and over the last 25 years around 98% of US anti-dumping cases have been successful. Trends in the use of Anti-Dumping Given its weak economic justification, it is perhaps surprising that anti-dumping cases are so prevalent. One argument for their success is that, up until recently, almost all cases were brought by four major economies (largely against Asia) - 25 years ago Canada, US, EU, and Australia brought 98% of all cases. Thus it is possible that anti-dumping was effectively protectionism by the back door for these countries. Recently, however, new users such as India and China have become active users of anti-dumping legislation so that the original four now only account for 40% of all cases. Growth in Anti-Dumping (AD) legislation No. of countries with AD statute No. of countries filing actions % of cases from ‘new users’ 1980- 84 34 8 1% 1985- 89 38 10 11% 1990- 94 45 24 36% 1995- 99 61 32 61% 2000- 02 87 30 60% Notes: countries with statute calculated at beginning of period, ‘New users’ = not US, EU Canada Australia Whilst these new users have been responsible for the dramatic rise in anti-dumping cases filed in recent years, it is possible that now most countries have anti-dumping legislation, the perceived economic advantage the original users saw from it use is now declining suggesting perhaps that some international agreements to curtail it may be on the way Discussion Questions 1) Should Anti-Dumping legislation be abolished? 2) Do you think Anti-Dumping is an example of how the rich countries write the rules in their favor? Source “The Growing Problem of Anti-Dumping”(2004) Prusa R. © NBER International Trade, East Asia Seminar on Economics Volume 14 Background Material TRADE-SPEAK GLOSSARY Some additional terms not covered in the main text : ACP Countries A group of African, Caribbean, and Pacific less developed countries that were included in the Lomé Convention and now the Cotonou Agreement. As of July 2000, the group included 77 countries. Cairns Group A group of agricultural exporting countries, currently (2001) numbering 18, that was formed in 1986 to act as a counterweight especially to the EU in international negotiations on agriculture. Named after the city in Australia where the group first met. Common Agricultural Policy (CAP) The regulations of the European Union that seek to merge their individual agricultural programs, primarily by stabilizing and elevating the prices of agricultural commodities. The principal tools of the CAP are variable levies and export subsidies. Countervailing Duty. A retaliatory duty placed on imports from a country that subsidizes its exporters. Dumping. Selling surplus goods overseas for less than it costs to produce. Entrepot trade The import and then export of a good without further processing. European Economic Area (EEA) The group of countries comprising the EU and EFTA. The two groups have agreed to deepen their economic integration. European Free Trade Association (EFTA). Free trade area made up of countries in Europe that have not joined the European Economic Community. EFTA was established in 1960 between Austria, Denmark, Norway, Portugal, Sweden, Switzerland, and the United Kingdom. As of 2000, it includes only Iceland, Liechtenstein, Norway, and Switzerland. General Agreement on Trade in Services (GATS) An agreement that brings international trade in services into the WTO.. Generalized System of Preferences Tariff preferences for developing countries, by which developed countries let certain manufactured and semi-manufactured imports from developing countries enter at lower tariffs than the same products from developed countries. Marshall-Lerner condition The condition that the sum of the elasticities of demand for exports and imports exceed one. Under certain assumptions, this is the condition for a real exchange rate depreciation to improve the trade balance. Mercantilism An economic philosophy of the 16th and 17th centuries which held that international commerce should primarily serve to increase a country's financial wealth - especially of gold and foreign currency. To that end, exports are viewed as desirable and imports as undesirable unless they lead to even greater exports. MERCOSUR A common market comprising Argentina, Brazil, Paraguay and Uruguay, known as the "Common Market of the South" ("Mercado Comun del Sur"). It was created by the Treaty of Asunción on March 26, 1991, and added Chile and Bolivia as associate members in 1996 and 1997. Most Favored Nation (MFN) status Countries charged the lowest tariffs. Multifiber Arrangement An agreement between developed country importers and developing country exporters of textiles to regulate and restrict the quantities traded. It was negotiated under GATT as an exception to the rules that would otherwise apply. Nontariff barrier Any policy that interferes with exports or imports other than a simple tariff, prominently including quotas and Voluntary Export Restraints (VERs). North American Free Trade Agreement (NAFTA) A free trade area comprising the United States, Canada, and Mexico that went into effect January 1, 1994. Quota A government-imposed restriction on quantity, or sometime total value. An import quota specifies the maximum amount of an import per year - typically administered by import licenses that may be sold or directly allocated to individuals or firms, domestic or foreign. Section 301 The provision of U.S. trade law that permits private parties to seek redress through the U.S. government if their commercial interests have been harmed by illegal or unfair actions of foreign governments. Tariff A tax on trade, usually on imports but sometimes used to denote an export tax. World Trade Organization A global international organization that specifies and enforces rules for the conduct of international trade policies and serves as a forum for negotiations to reduce barriers to trade. Formed in 1995 as the successor to the GATT, it had 136 member countries as of April 2000. Additional Questions Question 1) The chart below shows the share of trade taken by commercial services over a range of countries. What explains the share of trade in services in the UK and US. Is this the same explanation as for countries like Egypt and Turkey? Commercial Services as percentage of total trade 0 10 20 30 40 50 60 70 World Canada United States Brazil Mexico France Germany Italy Spain Sweden Switzerland Turkey United Kingdom Egypt South Africa Tunisia Australia China Hong Kong India Japan Korea, Rep. of New Zealand Singapore Thailand Source: WTO Answer 1) The US and UK also have high proportions of trade in services largely due to the financial sector. For the others, tourism is the main contributor. Question 2) Study the table below Productivity per Worker in each good (number of units produced per worker) Good 1 Good 2 Good 3 Country A 4 4 4 Country B 2 1 1 Country C 3 2 3 a) Spot each country’s comparative advantage b) Which country will end up poorest? c) Can any country be made worse off with trade than without it? Answer 2) a) Country A’s comparative advantage is in good 2, Country B’s comparative advantage is in good 1 and Country C’s comparative advantage is in good 3 b) Country B will end up poorest since despite the fact it has a comparative advantage in good 2 it has no absolute advantage in anything. It will have to sell good 1 at quite a low price in order to stop countries A or C producing it themselves, but since productivity is quite low, wages will have to be very low. c) No, since no country is forced to engage in trade. Question 2) Analyse the trade profile of a selection of countries using the WTO trade profile tool http://stat.wto.org/Home/WSDBHome.aspx?Language=E. How important is trade to each of these countries? What are theirs main exports and trading partners? Answers to Analytical Questions Chapter 8 International Trade 1. Production and Trading Sets for Country A Country A faces a better set of possible consumption choices when it trades and specialises in producing cars, some of which it sells at a price of 2000 toy cars per real car. Production and Trading Sets for Country B Country B also faces a better set of possible consumption choices when it trades and specialises in producing toy cars, some of which it sells at a price of 2000 toy cars per real car. Even if the country is poor and feels unable to consume toys it would be better to produce toys and the sell them overseas to get 1.5 real cars rather than use the same resources to produce domestically only 1 car. 2. Country B places a 50% tariff on car imports. This increases the price (in terms of toy cars) from 2000 to 3000. At these prices the cost of producing cars domestically is the same as the after-tariff price of an imported car. If, as a result, domestic consumers switch to domestic produced cars (perhaps because, other things equal, they like to support home industries) then the government will raise no revenue from the tariff. It will have achieved the establishment of a domestic car production industry. But domestic consumers are worse off. The net effect is the same as moving the consumption possibility frontier from the trading line to the domestic production line in the previous figure. This makes domestic residents worse off. the terms of trade and competitiveness. 3. Let us assume that there is no change in productivity levels across the two countries after the border is opened for trade. The centrally planned economy is large relative to the industrialised country so we might assume that whatever trade is undertaken after the economy opens, and whatever inward investment might come for the industrialised economy, it is not very large relative to the size of the big country. In that case the knock on effect upon wage levels in the big country following the economy being opened up might be limited. The same would not be true of the small industrialised country where the existence of cheaper workers next door in large numbers would influence wage levels. If wages stay at $5 and $2 for skilled and unskilled workers in the big country then factor price equalisation means they will need to be 5 times greater in the small industrialised country where productivity is five times greater. So wages in the industrialised country stay at $25 for skilled workers but fall from $12 to $10 for unskilled workers. In practice we might expect productivity improvements in the centrally planned economy following liberalisation and wages of unskilled workers might rise a bit. 4. If the EU increases its subsidy by $100 to $300 the new payoff matrix is Airbus Enter Don’t Enter Boeing Enter $100mn,$200mn $700mn,0 Don’t Enter 0,$800mn 0,0 With a larger subsidy Airbus could cut prices further to try and attract market share from Boeing or force Boeing to engage in a price war. With Airbus receiving a larger subsidy this price war could eventually lead to Boeing exiting. What would a CEO of Boeing try and do? No doubt many things including investigating taking this behaviour to the WTO. They would probably also try and persuade the US government to engage in a poker game and also raise its subsidy to match that of the EU. INTRODUCTION A hot topic that should be easy to teach. However, since the anti-globalization lobby does not have a clearly argued case against globalization, the economic discussion often ends up being somewhat one-sided. Teaching Tips ALTERNATIVE ROUTES THROUGH THE CHAPTER Both chapters 8 and 9 could be put into one lecture under the heading globalization. Asking the question what are the anti-globalization protestors concerned about – and are they right to be concerned. The Case Study on globalization below give more detail on the impact of the first wave of globalization in the 19th and early 20th century. CHAPTER GUIDE 9.1 Globalization – A Long-term Perspective. The case study below gives more analysis of the first wave of globalization. 9.2 The Benefits of Trade Liberalization. The issue of whether variable X (in this case trade liberalization) causes variable Y (growth) is one of the key empirical issues in economics. The problems discussed in this case are general to almost any empirical study of causality 9.3 Foreign Direct Investment and Multinationals. The background material to chapter 5 gives more material on the impact of FDI. Two other criticisms often leveled at MNE’s are their poor labor standards in developing countries (sweat shops) and transfer pricing (avoiding tax). On the question of labor standards, many economists would argue that it is precisely the cheaper labor, longer hours and limited employment protection that encourages firms to locate in developing countries in the first place, and the fact that the local population willing take jobs in these ’sweat shops’ implies that the alternative (e.g. long hours and low pay in farming) is worse than working for the MNE. Many labor organizations accept this point but argue that MNE’s could dramatically improve working standards without reducing their profits (e.g. a healthy workforce is more productive so a company sponsored health plan could actually raise labor standards and profits). Transfer pricing occurs because the profits of an MNE can be taxed differently in different countries. So, for example, if country A has a very low rate of corporation tax (tax on profit) while country B has high corporation tax, an MNE located in both countries might wish to report low profits in country B and so higher profits in country A. It can do this by an internal pricing scheme that means that intermediate goods produced in country A and sent on to country B are pricing at such a high level that the subsidiary in country B reports no profits. CHAPTER 9: GLOBALIZATION 9.4 Immigration Data on source of net emigration and destination of immigrants is shown in pie charts after the index of the book 9.5 Problems of Globalization. Some more background on the IFIs The World Bank. Note that IDA assistance is financed by grants from the shareholders whilst IBRD loans are financed from the World Bank’s own borrowings. The millennium development targets are described in more detail in the background material. The IMF. It is hard to go into much detail about the operation of the IMF before having reviewing currency issues in chapters 19 20 & 21. Discussion of the HIPC initiative is also contained in the case study of chapter 6. Mission Creep. The most remarkable case of mission creep by an IFI is the Bank for International Settlements (BIS). This was set up after the First World War to help administer the payment of reparations by Germany to the allies. However, it still exists today even though it stated purpose was completed well over fifty years ago. The BIS has managed to re-invent itself as a forum for Central Banks and for the discussion of Banking Issues. 9.6 The WTO and the future of Trade Liberalization. While some anti-globalization protestors argue that the WTO is biased against developing countries, there is little evidence for this in practice. However, a more valid criticism is that developing nations do not have the resources to use the mechanisms of the WTO effectively. Certainly, most cases brought to the WTO for adjudication come from developed countries (see additional questions below). CASE STUDY: GLOBALIZATION AND INEQUALITY. Introduction Over the last two centuries, the world economy has become more unequal. Moreover, this phenomenon is entirely due to increases in inequality between countries. Within country inequality has barely changed. Over the same period, the world economy has become more integrated - prima facie evidence that the globalization has caused greater inequality. However, a more detailed look at trends in globalization and inequality seems to contradict that conclusion and reveals three key points 1. Income gaps have probably been reduced rather than increased by globalization – at least, for those countries that have been integrated into the world economy. 2. Inequality between countries rose most rapidly during the period of isolationism between 1914 and 1950. 3. The era of dramatic globalization in the 19th and early 20th century increased equality for labor-abundant countries and reduced it for the labor-scarce countries – as the Stopler- Samuelson theory predicts. We now look at these three lessons in turn Growth and openness We have seen in previous chapters (e.g. Chapter 7) that although economic convergence does not seem to be manifest at the global level, there is convergence between the rich and poor nations with more open economies. The table below gives a further demonstration of the growth benefits of openness for developing nations Trade orientation and growth in developing countries Average growth of GDP per capita 1963-73 1973-1985 1980-1992 Strongly open to trade 6.9% 5.9% 6.4% Moderately open 4.9% 1.6% 2.3% Moderately anti- trade 4.0% 1.7% -0.2% Strongly anti-trade 1.6% -0.1% -0.4% Inequality since 1820 Long run trends in inequality show a surprising pattern. Although global inequality has been on a steadily increasing trend, inequality between countries accelerated in the protectionist period between 1914 and 1945 but inequality within countries fell dramatically over the same period. As a result, although it is clear that the retreat from globalization in the middle of the 20th century did not decrease inequality between countries, its effects on overall inequality are unclear. Global Inequality trends 0 0.3 0.6 0.9 1820 1840 1860 1880 1900 1920 1940 1960 1980 Global inequality Inequality between countries Inequality within countries Coefficent of inequality. Inequality and initial factor endowments If we characterize the owners of land as rich and workers as poor, then the Stopler-Samuelson theory gives us a clear prediction about the impact of globalization on inequality. Increased international trade will tend raise the price of the most abundant local factor and so land- abundant countries will tend to see internal inequality increase with globalization (since the owners of land see their property increase in value). Labor-abundant countries will see inequality decrease as wages rise. The charts below demonstrate this effect for the 19th / early 20th century period of globalization. Rent to Wage ratios Land-abundant Countries Labor-Abundant Countries The first two charts illustrate how the opening up of the land-abundant New World allowed rents to rise relative to wages in the New World and wages to rise relative to land in the Old World. This process ended and was partially reversed as a result of protectionism in the 1913-1945 period GDP per capita to unskilled wage ratio Land-abundant Countries Labor-Abundant Countries The charts above show how the factor price equalization effect caused inequality to rise in the New World and fall in the Old. The ratio of per capita GDP to the unskilled wage is a crude measure of inequality. 50 70 90 110 1870 1875 1880 1885 1890 1895 1900 1905 1910 1915 1920 1925 1930 1939 Australia USA Canada Rent to wage ratio . 50 100 150 200 250 1870 1875 1880 1885 1890 1895 1900 1905 1910 1915 1920 1925 1930 1939 Denmark Sweden UK Rent to wage ratio . 40 60 80 100 120 140 160 1870 1875 1880 1885 1890 1895 1900 1905 1910 1915 1920 1925 1930 1939 Australia USA Canada GDP per capita/unskilled wage . 40 60 80 100 120 140 160 1870 1875 1880 1885 1890 1895 1900 1905 1910 1915 1920 1925 1930 1939 Denmark Sweden GDP per capita/unskilled wage . Source: Lindert and Williamson (2001) “Does Globalization make the world more unequal?” © NBER WP 8228 Discussion Questions 1) Do you think Globalization is increasing or decreasing inequality within developing countries? 2) Is it increasing inequality in developed countries? Background Material MILLENIUM DEVELOPMENT TARGETS Goal 1. Eradicate extreme poverty and hunger Target 1. Halve, between 1990 and 2015, the proportion of people whose income is less than one dollar a day Target 2. Halve, between 1990 and 2015, the proportion of people who suffer from hunger Goal 2. Achieve universal primary education Target 3. Ensure that, by 2015, children everywhere, boys and girls alike, will be able to complete a full course of primary schooling Goal 3. Promote gender equality and empower women Target 4. Eliminate gender disparity in primary and secondary education, preferably by 2005, and in all levels of education no later than 2015 Goal 4. Reduce child mortality Target 5. Reduce by two thirds, between 1990 and 2015, the under-five mortality rate Goal 5. Improve maternal health Target 6. Reduce by three quarters, between 1990 and 2015, the maternal mortality ratio Goal 6. Combat HIV/AIDS, malaria and other diseases Target 7 Have halted by 2015 and begun to reverse the spread of HIV/AIDS Target 8. Have halted by 2015 and begun to reverse the incidence of malaria and other major diseases Goal 7. Ensure environmental sustainability Target 9. Integrate the principles of sustainable development into country policies and programmes and reverse the loss of environmental resources Target 10. Halve, by 2015, the proportion of people without sustainable access to safe drinking water and sanitation Target 11. By 2020, to have achieved a significant improvement in the lives of at least 100 million slum dwellers Goal 8. Develop a global partnership for development Target 12. Develop further an open, rule-based, predictable, non-discriminatory trading and financial system. Includes a commitment to good governance, development and poverty reduction - both nationally and internationally Target 13. Address the special needs of the least developed countries. Includes: tariff and quota-free access for least developed countries' exports; enhanced programme of debt relief for heavily indebted poor countries (HIPC) and cancellation of official bilateral debt; and more generous ODA for countries committed to poverty reduction Target 14. Address the special needs of landlocked developing countries and small island developing States (through the Programme of Action for the Sustainable Development of Small Island Developing States and the outcome of the twenty-second special session of the General Assembly) Target 15. Deal comprehensively with the debt problems of developing countries through national and international measures in order to make debt sustainable in the long term. TAX REGIMES AND FDI As a simple demonstration of how net inflows of foreign direct investment are encouraged by lower corporation tax, the chart below shows net FDI for the developed countries by tax regime. Net FDI and tax regimes for OECD countries (% of GDP) -5 -4.5 -4 -3.5 -3 -2.5 -2 -1.5 -1 -0.5 0 1990 1991 1992 1993 1994 1995 1996 1997 Low Tax Countries High tax Countries Source: OECD Additional Questions Question 1) Who has a higher rate of tariff protection, the high income or developing countries? Would you answer differ for agricultural goods as opposed to manufactured goods? Answer 1) Developing countries have a high rate of protection for both agricultural goods and manufactured goods. Overall protection against agricultural goods is significantly higher than against manufactured goods Question 2) Who brings the most disputes to the WTO? Do developing countries have more cases brought against them than they bring against other countries? Answer 2) Over the period 1995-2000 the US brought most cases to the WTO closely followed by the EU. In fact, the US brought more cases than all developing countries put together. Developing countries have many more cases brought against them than they bring against other countries. Some argue that this shows that the system is biased against developing countries because they do not have the resources to bring cases to the WTO for adjudication. . Question 3) find that latest data on global capital flows in McKinsey Global Institute “mapping global capital markets” report. http://www.mckinsey.com/Insights/MGI/Research/Financial_Markets. What are the key differences between developed and developing market flows. Solution Manual for Macroeconomics: Understanding the Global Economy David Miles, Andrew Scott, Francis Breedon 9781119995715