Final 3

Question

Describe the criteria for membership in the European Union. Given the criteria, what are some of the major challenges with expanding the EU eastward? What are the potential problems of Turkey joining the EU?💭The criteria for membership include that the nation must be a stable, functioning democracy, have a market-based economy, and formally adopt the common laws. As the EU expands east, the nations have large agricultural sectors, which creates issues for the Common Agricultural Policy. Concerns about migration, given labor mobility are also a problem. How to govern to bigger blocks as well as general practice with governance for nations in transition can be questions. A major issue remains the difference in income between the old EU members and the new members. Turkey is especially difficult because it has a large population relative to other members, its GDP per capita is about 20 percent of the EU average at market rates, and it has issues in terms of whether it represents a "stable democracy," especially in terms of freedom of speech, torture in prisons, and civilian control over the military. Turkey has troubled relations with Cyprus, an EU member that can veto its accession.

Question

Describe the history and consequent deepening as the European Union developed. Which treaties created which level of economic integration? Do countries have the ability to participate in some levels of integration and not others? Give specific examples.💭The Treaty of Rome created the basics for a free trade area as well as a political infrastructure for noneconomic integration. The Single European Act created a common market among the participants and dealt with an outstanding customs union issues. The Treaty on European Union (or Maastricht Treaty) brought the participating countries into economic union. Some countries (such as Norway and Switzerland) participate in the common market but are not members of the EU. Only 12 countries currently participate in the treaty on European Union. For example, the UK, Denmark, and Sweden will never be required to use the euro.

Question

Explain why China and India are considered disruptive to the world's status quo.s💭History tells us that when world powers emerge, it usually creates economic, political, and military challenges for other nations and leads to a period filled with transitions and tensions. This is particularly true in the case of China. China's enormous size, as the second largest economy in the world, together with its aggressive foreign investment and trade policies, and its historically unprecedented rate of growth, have caused it to be more disruptive of the status quo as it has become integrated with world markets.

Question

Identify at least three key factors in the high-growth Asian economies' economic success.💭These would include macroeconomic stability; strong, credible commitments to sharing economic growth across all levels of society, including an emphasis on education that helped raise productivity in the labor force; high levels of savings; an emphasis on exports but an openness to imports

Why did the USSR collapse and China succeed? Explain.

In contrast to the Russian experience, the Chinese economy did not decline at all during its transition from communism to capitalism. The proponents of rapid reform see China as a special case. First, central planning was less extensive in China, with the result that its economy was less distorted and less overconcentrated on heavy industry. Second, and most importantly, China's economy is much more agricultural. In 1978, when China began its reforms, 71 percent of the labor force was in agriculture. The figure for Russia in 1990 at the beginning of its transition was 13 percent. China's heavier concentration in agriculture gives it a large rural labor force with very low productivity. If these workers leave the countryside, the resulting loss of output is small, while the offsetting productivity gains from employment in urban and village industrial enterprises are significant. Hence, China can move labor from agriculture into the new enterprises, but Russia had to take labor out of heavy industry to staff the new enterprises.

1980s debt crisis

Policy makers learned that their management of the macroeconomy had to improve (don't ignore budget and trade deficits); that markets need to play a larger role in resource allocation to increase competitiveness and attract capital; that ISI policies were no longer best for industrial development, and to instead follow more traditional ideas of comparative advantage. President Salinas continued working to bring the federal budget under control, increased the rate of privatization of state-owned businesses, put Mexico in line to qualify for U.S. debt relief under the Brady Plan, reduced tariffs and important licensing requirements, and proposed a free trade agreement with the United States. He hoped to tie up the domestic economic reforms Mexico had made through an international treaty and to attract foreign capital for the development of Mexico's economy.

Can U.S. manufacturing job losses be attributed to the growth of manufacturing in China

The rise of Chinese manufacturing is correlated in time with the decline of manufacturing employment in the United States and Western Europe. We do not know with certainty if China's rising manufacturing sector is responsible for the decline in manufacturing in the United States and elsewhere, but cities and communities that compete directly with Chinese exports have not fared well in recent years, and that this is directly a result of Chinese exports. But it is uncertain what might have happened to manufacturing in the United States and elsewhere if China had remained isolated. The question that cannot be answered is whether manufacturing employment in high-income countries would have declined more slowly, or not at all, if China had not grown so fast. Some of the forces shaping the economies of advanced industrial nations are completely independent of China. Technological advances in manufacturing such as the increasing use of automated processes and robotics would probably have proceeded anyway. Telecommunications and transportation advances, which enable firms to locate parts of their production in different countries, would also have occurred.

What evidence is there that industrial policies were a major influence on East Asian success

There is no clear answer to this question. One camp is represented by the World Bank's research. In its view, some government interventions fostered economic growth (export promotion and directed credit), but in general industrial policies did not. The World Bank's analysis rests on two pieces of evidence. First, it compares the growth rates of productivity in the targeted and nontargeted sectors in the three countries with sufficient data (Japan, Korea, and Taiwan). In general, it finds that productivity change in the promoted sectors was high but no higher than in the rest of the economy. Second, it examines the change over time in the industrial structure of the countries. If industrial policies worked, they should have led to a different pattern of industrial growth than the pattern caused by a change in factor endowments. The World Bank concluded that industrial policies were at most marginally effective, because the sector-by-sector growth pattern is as expected, given the national endowments of labor and the high savings and investment rates. Critiques of the World Bank's findings usually rest on two points. First, the fact that productivity growth was generally no faster in promoted sectors is irrelevant, according to the critics. The important issue is what the growth rates would have been without promotion. It is conceivable that without industrial policies, growth in the targeted industries would have been much slower than with the policies. Second, the critics point out that the World Bank analysis is overly general. In their view, it is based on industry groupings that are too broad to uncover the details of selective targeting.

Question

Three forces played a significant role in preparing Indian policy makers for economic reform. Describe them.💭India's primary trade partner, the USSR, suffered a number of setbacks and finally dissolved; other Asian countries were experiencing economic success, particularly Korea; a financial crisis that resulted from heavy government borrowing.

Question

Why is it difficult to estimate job gains or losses due to free trade agreements?💭It is possible to estimate the number of workers needed to produce a given quantity of exports, and to estimate the number of jobs that would be created if imports were produced at home, but these values are not the same as job creation and destruction due to a trade agreement. Imports may supply a firm with capital or intermediate goods that make the firm more competitive and better able to survive; and exports may supply a firm that previously produced the entire value of its goods at home but after offshoring some production, it exports to its foreign affiliate. Hence, some imports create jobs, while some exports exist only because jobs at home have been moved abroad. Thus it is not really possible to determine the number of jobs that would exist without the free trade agreements, and so there is no real basis for comparison.

The Maastricht Treaty

negotiated in 1991 in the Dutch town of Maastricht-Officially creates an economic union💭Establishes a common currency, the euro, under the monetary authority of the newly created European Central Bank (ECB)💭Accomplishes a number of other lesser goals in the areas of tax laws, health and safety, etc. •The euro was introduced in stages:💭First stage: Lift restrictions on the movement of financial capital within the EU (1990)💭Second stage: Creation of the European Monetary Institute, which would eventually become the ECB💭Third stage: Phased introduction of the euro beginning in 1999 •convergence criteria:💭A set of monetary and fiscal targets💭Goal: Ensure that each member's policies are balanced and under control

Currency Maastricht Treaty

💭Benefits of the single currency: 💭Reduced cost of currency conversion: perhaps 0.4 percent of GDP saved💭Reduce exchange rate uncertainty, causing more trade and investment 💭Not much evidence here, since traders and investors can use forward markets to hedge against currency fluctuations 💭Costs of the single currency: 💭Loss of monetary policy 💭Cannot use flexible exchange rate as buffer against external shocks

The NAFTA: Canada & U.S.

💭Canada and the U.S. have the largest bilateral trade: $671 b 2015 🗯️Shared border, common language, similar histories & cultures🗯️Three stages of economic integration in the last 50+ years🗯️Auto Pact, 1965, created free trade in autos and automotive product 🗯️Canada-U.S. Free Trade Agreement (CUSTA), 1989, created free trade in most goods and services.🗯️North American Free Trade Agreement (NAFTA), 1994, extends CUSTA to Mexico. 💭WHy Closer ties: 🗯️obtain economies of scale & increased competitiveness from emerging markets, 🗯️To prevent U.S. escalating its use of antidumping&countervailing duties🗯️extremely close political & military relationship 💭Canadians worried about free trade: 🗯️culture might be dominated by U.S. cultural industries 🗯️firms might be less competitive 🗯️undermine social programs like universal health care

Economic Reform in China and India

💭Chinese economic reforms began in 1978 under the leadership of Deng Xiaoping💭The reforms moved China away from a communist system where government controlled all aspects of the economy, towards a system with a mix of government and market forces💭Indian reforms began in the 1980s and accelerated in 1991 under the leadership of Manmohan Singh💭The reforms reduced trade barriers and began to remove some layers of bureaucracy and regulation💭The Chinese had no master plan💭Deng Xiaoping described Chinese reforms as "feeling the stones with your feet to cross the river."💭This approach was pragmatic and cautious, partly because on one knew how to transition from socialism to capitalism, and partly to avoid a backlash against the reforms by hardliners💭Initial reforms in agriculture: 💭Small farmers were given more control over production and allowed to sell some output in local markets💭Trade reforms created additional foreign trading companies (FTC) to relax the grip of the existing 12 FTC on trade 💭The most important reforms created several Special Economic Zones (SEZ) in coastal areas where local officials were allowed to experiment with new policies💭These zones were highly successful in creating inward foreign direct investment, increased trade, and economic growth💭They served as demonstration effects for the rest of China💭China applied to join the GATT in 1986, but its application was not approved until 2001💭The first set of Indian reforms were targeted on reduction of regulations and permits required to do business💭The Indian economy was heavily regulated with many state-owned enterprises, and many in the major industrial sectors💭targeted the privatization of many enterprises💭State-owned enterprises in India (and elsewhere) are often allowed to operate even in the face of continued losses💭Firm losses are covered out of the state's budget, and reduce funds available for other purposes💭targeted international trade and investment💭India followed ISI policies, the same as Latin America and other areas of the world💭Domestic firms were highly protected from foreign competition and foreigners were restricted in the their ability to invest💭The reforms began to dismantle restrictions on trade and foreign investment

Practice Question

💭Contrast the economic experience of the high-growth Asian economies with the experience in Latin America, especially with regard to the 1980s and in terms of weathering financial crises.💭The high-growth Asian economies have grown more steadily and consistently and with a broader effect on all income levels in society. The high-growth Asian economies successfully emphasized land reform, free public education, free basic health care, and significant investments in rural infrastructure, such as clean water, transportation, and communication systems, that helped bring a broader sector of society along in terms of development. The difference in growth is especially notable in the 1980s, when growth in the high-growth Asian economies continued and even accelerated while Latin America was experiencing the "Lost Decade." In terms of handling financial crises, the time periods were different, but the high-growth Asian economies tended to keep budget deficits and foreign debts at generally manageable levels. Governments were committed to low inflation, which helped avoid severe real appreciations in the exchange rate. In the HPAE, differences between the real exchange rate, the real interest rate, and the inflation rate were relatively low, fostering greater security in the minds of investors.

The Institutional Environment

💭Countries generally have strong institutions in support of economic growth 💭Secure property rights 💭Contracts are enforced 💭Regulations are clear and well-publicized 💭Bureaucracies are relatively competent and efficient 💭Strong institutions does not imply democratic institutions💭Countries vary in terms of individual freedoms, civil liberties, and political rights 💭Strong fiscal discipline 💭Institutions for strengthening business-government relations: 💭Deliberation councils help coordinate investment decisions 💭Discouragement of rent seeking by individual interests 💭Deliberation councils helped avoid rent seeking by providing a forum for discussion 💭Widespread use of performance requirements in return for government assistance 💭Commitment to shared growth indicated that everyone would benefit💭Case Study: Institutional Quality 💭quality of governance institutions in six dimensions: 💭Political stability and the absence of violence/terrorism: A measure of the absence of political instability, violence, and terrorism 💭Regulatory quality: A measure of government's ability to implement effective and necessary regulations 💭Another indicator of institutional quality is the World Bank's Ease of Doing Business index 💭Measures how easy or difficult it is to operate a business 💭Ten dimensions, multiple indicators for each dimension 💭Start a business, obtain permits, pay taxes, import necessary items, hire workers, enforce contracts, other essential steps

Deepening and Widening in the 1970s and 1980s

💭Deepening: Increasing the degree of integration 💭Moving from an FTA to a customs union to a common market to an economic union 💭Includes exchange rate coordination before the single currency was adopted 🗯️Widening: Adding new members 🗯️Growing from 6 members to 28 in separate waves 🗯️Political events, such as the collapse of the Soviet Union and the fall of the Berlin Wall played essential roles💭In 1979, EC members linked their currencies -European Monetary System (EMS) 💭The EMS created the exchange rate mechanism (ERM)•The purpose was to prevent competitive devaluations🗯️The EMS worked relatively well until the fall of the Berlin Wall in 1989🗯️The challenge for other countries was to stay within the EMS band when their currencies were demanded less💭The EMS crisis of 1992 was resolved in different ways by different countries: 🗯️France raised its interest rates and went into recession 🗯️Italy and the UK abandoned the EMS and returned to floating exchange rates 🗯️Spain devalued but stayed in the EMS 1.Stabilize exchange rates 💭Maintain currency within the ERM band 🗯️Control inflation 🗯️Reduce it to less than 1.5 percent above the average of the three lowest rates 🗯️.Harmonize long-term interest rates 🗯️Bring to within 2 percent of the average of the three lowest rates🗯️.Reduce government deficits 🗯️Make less than 3 percent of national GDP 🗯️Reduce government debt🗯️Make less than 60 percent of national GDP

The Role of Manufactured Exports

💭Exports of manufactured goods seem to be correlated with high growth rates 💭What are the links from production of manufactured goods for export and overall economic growth?•Potential growth effects of producing manufactured goods for export: 💭Economies of scale: Production is for a world market rather than a domestic one 💭Competitive effects of selling in foreign markets 💭Export revenues enable the purchase of imported capital equipment 💭Export targets encouraged inward FDI that bring new technologies

Is There an Asian Model of Economic Growth?

💭Free-market economists: 💭Growth was due to openness, private markets, and strong macroeconomic fundamentals 💭Activist economists:💭All of the above were critical, but other factors helped push growth above what it would have been:💭Export promotion, industrial policies, deliberation councils💭Some East Asian politicians argue that limits on civil and political liberties were beneficial💭Recall that labor productivity is defined as the ratio Q/L, where Q is output and L is labor input💭Growth accounting breaks this down into the share of the increase in labor productivity that is due to:💭Increased labor skills💭More capital at work💭An unexplained factor that is not due to increases in labor skills or capital inputs: Total factor productivity (TFP)💭Labor productivity growth in East Asia is predominantly due to increases in capital💭This implies that the causes of growth are the same as in other high income regions of the world💭The achievement of East Asian economies is not due to a different model of growth, but is remarkable nonetheless 💭East Asian economies were able to create and harness:💭High savings which were invested in productive activities💭A skilled and literate labor force💭Strong institutions💭Macroeconomic stability

U.S. New and Old Agreements

💭Generalized System of Preferences (122 countries) 💭Caribbean Basin Initiative (17 countries) 💭African Growth and Opportunity Act (39 countries 💭Preferential agreements offer market access to the U.S. for many goods and services and do not demand reciprocity •U.S. is currently negotiating three FTAs: 💭Trans-Pacific Partnership (TPP) comprising 12 Pacific basin countries 💭Asia-Pacific Economic Cooperation (APEC) comprising 21 Pacific basin countries 💭APEC has become a forum for discussing issues and seems unlikely to develop into an FTA includes China 💭Transatlantic Trade and Investment Partnership (T-TIP) comprising the European Union and the U.S. Labor and environmental clauses are included as side agreements to all the FTAs 💭each country enforces their own rules, but rules must be enforced 💭Outside parties cannot investigate or take actions for non-enforcement -The rules are effective only if public awareness can force a government to take action 💭Labor and environment are in the agreements and not side agreements 💭It allows for trade sanctions if countries are not enforcing their standards💭It defines labor standards consistent with the ILO standards 💭It defines environmental standards as consistent with international commitment💭The U.S. has bilateral investment agreements with 42 countries 💭nvestor-state relations rules are included in nearly all FTA agreements signed by the U.S. 💭Investor-state relations clauses are designed to avoid unfair treatment by a host government 💭They are one of the most controversial elements of trade agreements because the explicitly let private firms sue governments💭The goal is to create a level playing field where domestic firms are subject to the same rules and standards as foreign owned firms The African Growth and Opportunity Act 💭The AGOA is an example of a preferential trade agreement💭The U.S. has unilaterally offered duty-free access to its market to a group (39) of low and middle income African countries 💭Not all goods are covered, but most are•Most AGOA nations export less than $1 million to the U.S. 💭Many of the exporters sell oil, not manufactured goods 💭Distance limits trade 💭As does the fact that 14 of the 39 countries are land-locked

The Single European Act

💭In 1987, leaders adopted the Delors Report in an attempt to reinvigorate the EC💭The Single European Act, or the Single Market Program (SMP) included 279 steps towards the creation of a common market💭The 'four freedoms" were the basis of the SMP: Freedom of movement for goods and services (outputs) and capital and labor (inputs) •the 279 steps had been achieved; the steps fell into three separate areas:💭Elimination of physical barriers (borders)💭Elimination of technical barriers (harmonization of standards)💭Elimination of fiscal barriers (harmonization of taxes, subsidies, public procurement)•ains from the SMP were expected to come from two main sources:💭Increased competition💭Economies of scale•results would be achieved through:💭More trade, lower prices, increased firm concentration💭These effects were observed and GDP rose 1-1.5 percent over what it would have been •Implementation of the SEA was not without problems:💭Restructuring of firms and industries caused some less efficient firms to close; this happened throughout the manufacturing sector, in particular Harmonization of technical standards included more than 10,000 cases, some of which were culturally sensitive -Value added taxes were impossible to harmonize Implementation of the SEA was not without problems -Value added taxes were impossible to harmonize -Rules for public procurement were also impossible to harmonize:

Four Issues

💭Issue 1: Will the growth of Indian services trade lead to the outsourcing and off-shoring of services production in the United States and other high income countries?💭Issue 2: How much will China's strength in manufacturing disrupt the growth of similar activities in other parts of the world?💭Issue 3: How will shifts in Chinese growth patterns affect commodity producers that sell to it?💭Issue 4: Will China adapt to existing multilateral institutions or insist on creating new ones that it has a larger voice in managing?💭These issues are supplemented by a series of additional unresolved issues facing the international economy:💭Increased environmental pressures as more of the world develops energy sources to power their economies💭The tension between privately and publically owned firms that compete in the same industries💭Regardless of how these issues are resolved, growth in China and India pulls hundreds of millions of citizens out of poverty

EU system

💭Subsidiarity principle leaves to individual nations the policies that do not have a strong international dimension and centralizes those that do:💭EU policies: Trade, competition, environment, regional development, research and technology development, economic and monetary union💭National policies: Labor standards, health care, social safety nets -The European Commission, the primary executive body💭The European Parliament, the largest legislative body, and growing in influence -The European Council of Ministers, the most influential legislative body💭Participants vary by topic:💭When labor issues are under discussion, labor ministers meet💭when it is financial matters, ministers of finance, etc.

A Changing World Economy

💭The economic success of China, followed by India 💭The rise of emerging markets as active players in the world economy 💭The break-up of the Soviet Union 💭Composition of trade has changed 🗯️Services have grown from 20% in 1980 to 30 % today 🗯️Merchandise goods other 70 % of exports 🗯️U.S. is second largest exporter -China 🗯️Manufactures are over 50% of all exports

The NAFTA: Mexico and the U.S.

💭U.S. is by far Mexico's largest export market & its largest source of imports💭Mexico is the U.S. second most important export market & its third most important source of imports. 💭move towards free trade with the US driven by: 🗯️economy performed well after WW2 up until the 1980s 🗯️1982,fell into a debt crisis which resulted in a period known as the Lost Decade (1982-1989) 💭Migration issues are not covered in the NAFTA💭Drugs and drug violence are not covered in the NAFTA

Recent U.S. trade strategy

💭downgraded the priority of multilateral negotiations and upgraded bilateral and plurilateral negotiations 💭The WTO has become too cumbersome due to the large number of countries 💭end of the Cold War changed the U.S. strategic uses of trade 💭As quotas disappeared and tariffs were reduced, more contentious issues have arisen|Agricultural subsidies |Intellectual property rights |Trade in services |Government procurement |Labor standards, etc. 💭The U.S. continues support WTO but turned towards bilateral and plurilateral agreements as an alt.🗯️ FTAs with 20 🗯️Most small economiess, trategic partners for military or geo-political reason🗯️Exceptions: Canada, Mexico, Korea🗯️FTA-related trade is about 47% exports and 34 % imports 💭The U.S. continues to have a large manufacturing sector 🗯️It peaked in 1979 in terms of employment 🗯️It continues to grow in terms of value added 🗯️The share of the labor force has fallen significantly (productivity advances, offshoring, trade, relocation)

Mexico's Collective Agriculture and the NAFTA

💭implemented three policies 💭One, subsidies to small farmers were cut 💭Two, the collective arms were allowed to be privatized and sold off 💭Three, corn tariffs that were scheduled to be reduced over a 15-year period were quickly eliminated 💭Large farms increased corn output, small farms were unable to compete 💭led many to blame the trade agreement rather than Mexican policies

China and India in the World Economy

💭received increasing shares of the world's FDI💭Both countries have increased their share of world exports💭Chinese goods exports in particular have grown dramatically since 1990💭Indian services exports have also grown significantly💭Chinese and Indian trade partners can be explained by distance and GDP💭The gravity model of trade hypothesizes that trade between any two countries is directly related to the size of the market (GDP) and inversely related to the distance between the markets💭China trades mostly with the U.S. and EU, both large markets, and Hong Kong, Japan, and Korea which are large and close by💭India's main trading partners are similar, but also include China and the oil-rich United Arab Emirates💭Both countries have relatively open markets, although Indian agriculture remains highly protected💭Agricultural protection in India is a result of having over one-half its labor force in agriculture, much of it in very low productivity, inefficient, activities💭Chinese growth and trade have had many effects on other countries💭Some argue that it has deindustrialized parts of the U.S. and other countries💭The impact of the growth of Chinese manufactured exports is subject to much debate and analysis💭The impact of China is difficult to assess independently from technological changes such as automation💭The counter-factual (what would have happened in the U.S. and elsewhere if China had not grown) is unclear💭Chinese growth and trade have had many effects on other countries💭Latin American commodity producers experienced a boom in the demand for their goods in the first decade of the 2000s💭The impact of Chinese trade surpluses is one main concern💭looking forward, China is moving quickly to develop a more sophisticated manufacturing sector and to become less dependent on foreign suppliers for its technological components💭It has had a notable increase in patent activity💭Spends heavily on infrastructure and university education💭A main part of its strategy is to encourage foreign investors to bring their technology to China💭India's service exports are concentrated in information technology and other business services💭These are both high-growth areas that rely on English language skills💭Business services include medical consultations, data entry, legal briefs, and many other high and low skilled services💭A fundamental question about the Indian economy is whether it can skip industrialization and manufacturing stages and become a rich country based on a core of services

: The Financial Crisis of 2007-2008

💭the banking crisis was severe;💭It also turned into a deep recession 💭The recession depressed tax revenue and required more government spending on social programs 💭In addition, government were called on to bailout the banks that held assets that had fallen in value 💭Large deficits in several countries rapidly increased 💭Countries lack an independent monetary policy and their own exchange rate; they were forced to use contractionary fiscal policies to try to balance their budgetsebt levels to unsustainable levels