EC104 Topic 11

amarjotsidhu's version from 2015-06-05 19:45

Section 1

Question Answer
Asia in 1950 vs. now (compared to Africa)Even poorer than Africa in 1950 but not its is 3 times as rich per head as Africa
How did Asia get rich?unorthodox institutions and pro-active state (e.g. China); strong role in allocating capital; outward orientation but not free traders (initial tariffs to protect infant industries); better at resisting rent seeking than most LDCs; transition by some to neo-liberal orthodoxy through financial liberalisation; impressive factor accumulation; productivity growth; impressive factor accumulation; demographic transition (quick since 1950s)
Supergrowth1950-73 = Japan ; 1973-2015 = Malaysia, Thailand China and Asian Tigers (singapore, hong kong, south korea and taiwan)
South Korea gdp/capita growthnearly 7% growth between 1973-2010 (annual)
Consequences of high rates of investmentaiding mechanisation and specialisation = movement towards high end manufacturing e.g. Singapore and Japan
Constrained, uncaptured, strong state= functioning democracy, developmental state - very rare but demonstrated in SK, Taiwan
Political states in AsiEast Asian Tigers = mostly developmental (constrained but not captured strong states). China not a democracy and has very low rule of law score but is a 'constrained strong state' with the need for growth = tight constraint on Communist Party; India has a long-standing democracy but until recently was captured by an elite
Differences in FDISome rely on FDI e.g. Singapore and China while some don't e.g. Japan, South Korea - these use internal funds and technological development to fuel growth
East Asian Development Model (EADS) interaction between government and large firms on strategic issues (e.g. govt. offers firms lands, special access to ports e.g. Korean aiways has special rights and access= has became a major airline in the world), govt. direction of credit to specific sectors (export-oriented), govt. direction of credit to specific firms (merit/connections), good at assembling and mobilising investment to the correct sectors; effectively especially for early growth if govt. is not corrupt BUT, may allocate capital to prestige sectors rather than productive ones, may allocate capital on the basis of connections rather than efficiency = high investment and low TFP growth
EADS usageSouth Korea, Malaysia, China, used this while Japan and Singapore move towards more market policies and Hong Kong and Taiwan = always market oriented
Chinese Communist Market Economy - post 1978big acceleration post 1978, based on capital and TFP growth = catch up for a very low initial productivity level
Chinese labour productivity growth in China (1993-2004)1993-2004 = 11% a year -> down to mass mechanisation
Different interpretations of Chinese growthgradualist - not big bang ; unorthodox - not 'washington consensus' ; mainstream - importance of incentive structures and competition
Measures used by Chinese to promote growthde-collectivisaton of agriculture (reversal of Mao trends); establishment of township and village enterprises (TVEs) to revitalise industry; outwardly orientated policies = exceptional growth in imports and exports; encouraged FDI but has not fully liberalised capital account; entered WTO in 2001; officials in China more pro business and less into rent seeking than other developing countries (partly down to incentives for officials - they get promoted if their region's growth is high = incentives to pursue growth but also fiddle numbers + ghost towns)
Incomplete reforms in China China has yet to establish a modern financial system or democratize; danger that catch up may falter when far from complete; inefficient investment, falling TFP growth, problem of transition to 'orthodoxy' ic common to fast growing Asian latecomers
Indian growth after 1990under performer pre-1980 but outperformer post 1990
Features of Indian growthTFP growth central (2.3% post 1993); strong contribution of the service sector; became #1 location in world for call centres; pro business post 1980; move to much less protectionism in 1990s (effective tariff rate from 125% to 40%)
Incomplete reforms in Indialabour regulation still a big problem for manufacturing (vested interests happy to hold reform back); not enough people in industry and services, still too many in agriculture = holding India back; not yet fully completed demographic transition; infrastructure provision is seriously impaired; politicians still make money off top of system (oligarchy) = no incentives to change labour regulation, infrastructure, etc.
Asian financial crisisa result of mis-managed financial liberalisation (Korea vs Singapore); GDP losses in twin crises severe; Asia moved forward too fast;
Asian financial crisis: capital account crisis 'sudden stop' of private capital inflows; big balance of payments deficit and fall in demand; reflect worries about bank balance sheets and possible defaults; these frequently follow capital account liberalisation; countries had high levels of imports funded by capital account = when capital stopped -> major problems
Asian financial crisis: banking crisisconnected to capital crisis; deteriorating bank balance sheets = adverse fiscal news; too many people borrowing money on too attractive terms = can't pay it back
Policy outcome of Asian crisisshows importance of sequencing reforms - you want to keep capital controls for a long time to let money accumulate rather than remove these (as in China); does not detract from strong growth fundamentals
Post crisis growthstrong recovery; everyone comes back to growth within a 2 year period
IMF role in crisisout of its depth; pushed austerity = has damaged growth

Section 2

Question Answer
What happens in a sovereign debt crisis?sovereign debt crisis; illiquidity rather than insolvency, outcomes depend on bargaining power; decision to default depends on credible sanctions, debt fatigue, outward orientation; debt relief can be in the collective interest of lenders but free rider problem (e.g. countries in Africa)
Stabilisation in debt crisismacroeconomic shocks undermined public finances and external capital flows; inflation threat; stabilisation with debt service, lower demand, fiscal cuts, stronger trade balance, investment squeezed ; alternative = repudiate debt and avoid lost decade e.g. Argentinians in 1930s went back on debt ; austerity reduces demand and puts country backwards = it is bad
Latin America in the 1930sdebt service became more onerous as export prices fell steeply and real interest rates rose, debt default = widespread; recovery remarkably rapid
Causes of success in 1930sin the short term, withdrawal from the world economy = successful strategy. defaulters recovered faster (and most countries in LA did default); quick recovery down to high demand for raw materials
1930s' Sovereign Debt Default default was at the expense of private bondholders ; countries that didn't pursue austerity policies recovered faster
1980s' debt crsisiLA was highly indebted and being given aid to ensure they were meeting their debt repayments ; early 1980s = US banks exposed (200% of their capital) , arithmetic overoptimistic (too favourable terms); late 1980s, UK banks off the hook, potential of debt forgiveness understood; Mexican deal of 1989 signals new approach;
Mexican deal of 1989Brady bonds backed by US treasuries (12% haircut) = Latin America agrees to reduce its debt. Us banks sell their debt at full value to other organisations. US backed these with treasury bills, etc.; World Bank took responsibility of this
Growth in 1980s Latin Amerixapoor growth as no one wanted to invest in Latin America due to debt crisis. Once Brady bonds were issued, LA debt was cut = investors happy to start investing
Requirements for successcommitments necessary for win-win results = debtors had to come to agreement to use relief to overcome crisis. Both creditors and debtors had to realise they were in permanent battle. It was politically impossible for US to bail out its own banks and let Latin America off the hook; debtors must use relief to finance productive investment and creditors can't renege on foregone payments; both sides better if IFIs able to provide commitment mechanism using loans to finance buybacks conditional on policy actions and other lenders' haircuts
Baker planIFIs and banks each to make new loans over 3 years (1986-88); US would support big increase in World bank capital; structural reforms (WC) by debtors
Brady Plandebt relief for 16 countries, forgive debt using loans from IMF and WB. bought at 1/2 price; followed by big net private capital inflows and 1.9% increase in capital deployed in business; worked because the obstacle to growth was debt overhand rather than really bad institutions; fall in debt and debt service/gdp = more investment; *this has not worked elsewhere
Failure of other debt relief schemes1979-97 - debt forgiveness for HIPCs = $33bn but net indebtedness rose; HIPCs continued to run large twin deficits and to experience declines in income per head; debt relief only works if you change 'equilibrium indebtedness' of the ruling elite; countries with 'high discount rates' always 'over borrow' and 'under invest'
Original Washington Consensus listfiscal discipline, redirect public spending, trade liberalisation, openness to FDI, tax reform, privatisation, financial liberalisation, deregulation, realistic exchange rate, secure property rights
Liberalisers vs non liberalisers - LAliberalisers accelerated after 1990s; 2 groups distinguished by their tariff policies on capital and intermediate goods; fall in price of capital goods raises income level; structure of protection matters - tarrification of trade barriers and low tariffs work; Latin America turned outwards, started to pay its bills
WC in LASubstantial reforms, disappointing results - small positive impact on growth. same in Africa
Problems with WC in Africafaulty implementation (World Bank not good at enforcement); fundamental flaws (one size fits all policies do not work); omissions (world bank cannot change politics);
Acceptance in 1990s of important omissions in 1980s policy packagegood governance, financial regulation, prudent capital account opening, social safety nets; acceptance that institutions need to underpin growth
Goldman-Sachs (2003) - BRICSbased on catch up and convergence in these economies; these countries have particulalrly large catch up gains as capital stock growth keeps pace with effective labour supply and output growth;
Problems with BRICSmarketing tool; says nothing about continuing need for reform; ignores political economy of development in diverse countries;
Future of BRICSBrazil and Russia do not have the social capability to catch up ' natural resource curse' ; Indian and South African institutions = mess; Chinese growth will slow down as scope for catch up diminishes and labour force falls; Eurozone = crisis affects output levels but not trend growth rate (back to normal after 2018) = catch up growth resumes
BRICS prediction re. output per worker in 2050China = 55% American output per worker.
China growth limits after 2030Chinese share of world GDP stable at about 28% post 2030