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The NTV Model for Total Factor Productivity
Andrew Smithers, World Economics, June 2019
The consensus model for total factor productivity is unsatisfactory; the alternative, non-technology variables (‘NTV’) model resolves the objections to it and should therefore be preferred by economists. The key objections to the consensus model are that it is untestable, its assumption about corporate behaviour is falsified when tested and, for the accounting framework to function, the labour/capital ratio has to be as flexible on old capital as it is on new: an assumption which seems most unlikely. The differences in the results are non-trivial and the NTV model has positive implications for economic policy by showing how they could be changed to boost growth. NTV comprises all the variables, other than changes in labour and technology, that determine the level of investment and the capital stock. Changes in NTV are the net impact on the incentive to invest resulting from changes in the individual constituents, which are profit margins, the cost of equity, the cost of debt, leverage, corporation tax and the hurdle rate, which is the minimum expected return on equity needed to make new investment worthwhile in the opinion of management. The consensus model assumes that investment is partly determined by changes in the cost of capital while ignoring the impact of changes in the cost of equity and debt and in leverage. I show that this assumption is unjustified and why it is preferable to use NTV.
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National Output as Interest on National Capital
John Hartwick, World Economics, June 2019
Current national output can be consider as deriving from a collection of capital goods, including a natural capital good. A model is created which considers Net National Product as interest on capital in the economy: a new approach which touches in a non-trivial way on green national accounting. One important implication is that trading nation draws in part on the capital, including natural capital, of its trading partners and exports in part some of its own capital in its exports. It is also necessary to incorporate pollution spillovers Net National Product which is a hugely vexing issue.
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A Modest Challenge to GDP Reforms: An Economist’s View
Mitsuhiko Iyoda, World Economics, June 2019
This paper explores the importance and possibility of GDP reform by examining the weaknesses of the current GDP concept. The GDP concept itself involves flawed metrics; there are more effective measures of economic and societal well-being. Here we limit our argument to economic well-being. The weaknesses of GDP can be broadly divided into two primary categories: market workability and the GDP framework. We present four types of GDP reform, among which, we consider further, is a modest improvement on current GDP. If not dealt with, the misleading aspects of GDP are likely to produce a misguided economic growth strategy and reduce the likelihood of a ‘positive sum’ result.
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Did Rating Agencies Make the Euro Crisis Worse?
Colin Ellis, World Economics, June 2019
There is a commonly held belief that the euro debt crisis was exacerbated by a spiral of higher yields resulting from rating agencies downgrading euro area sovereigns, but there has been little formal analysis of this hypothesis. Data on ratings and market signals on credit can be made comparable by transforming market metrics into measures that correspond to the same rating scale, known as ‘market-implied ratings’. These signals can be based on bond yields, credit default swaps (CDS) or equity prices. The available data provide no consistent evidence that sovereign rating downgrades led to greater market stresses across so-called ‘peripheral’ euro-area countries. Sovereign ratings were relatively slow to react when the crisis erupted, compared with market signals, but there is also no evidence that they amplified the crisis in terms of triggering further increases in sovereign yields and CDS prices.
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Estimating Loss-in-Output as a Cost of a Financial Crisis
Vighneswara Swamy, World Economics, June 2019
The global financial crisis caused a huge loss of economic output, depletion of financial wealth, extended unemployment, psychological consequences and other significant costs. A quantitative exploration of modelling loss-in-output as a cost of financial crisis using macroeconomic indicators is useful in understanding the impact of a crisis. The conservative estimates for India suggest that, over a period of ten years, a financial crisis can cause a cumulative loss-in-output ranging from 48% of GDP to 59% of GDP after discounting at 0.025 and 0.07 respectively. Intermediate values are also explored. Estimating loss-in-output in terms of GDP simplifies estimation of the impact of financial crises. Policymakers and regulators must be more prudent and alert in sensing the early indicators of a financial crisis and act swiftly in containing its perils.
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How Accurate are Global Trade-Finance Data?
Brian Sturgess, World Economics, June 2019
Over 80% of international trade is financed by some form of credit, but the size of the trade finance market has received little attention by economists. It has been estimated that there is currently a world trade finance gap of around US$1.5 trillion acting as a drag on international trade and GDP growth. Survey-based estimates of traditional trade finance provided by banks at US$4.6 trillion in 2017 are highly inconsistent and are based on flawed data and opaque methodologies. The problem of collecting reliable data needed to promote trade growth and to monitor financial stability is being exacerbated as the trade finance sector is undergoing rapid structural change.
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Income Inequality and Foreign Direct Investment in Australia: A Comprehensive Review
Anna Ploszaj, Tarlok Singh & Jen-Je Su, World Economics, June 2019
Income, wealth and consumption are three main factors that determine people’s standard of living. Many organisations in Australia report that in recent years the Australian standard of living has been changing, with some people falling behind. This paper examines the magnitude of and the factors contributing towards the growing income inequality in Australia. The data shows that income inequality, which in Australia in the mid-1990s was around the same level as in other developed countries, has recently outpaced their levels. The data on FDI shows that, at the same time as income inequality was on the rise, the amount of FDI inflows to Australia increased and despite a higher FDI restrictiveness index than the average for OECD countries Australia holds its position in the top ten countries in terms of the preferred destination of FDI.
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Why Do Currency Crises Recur?: Lessons from Argentina and Turkey
Graham Bird, Graham Bird & Graham Bird, World Economics, June 2019
Argentina and Turkey experienced currency crises in 2018, having also had crises in 2001. Why do crises recur? There are three generations of model that help to explain in theory why currency crises occur, although in practice the theories need to be amalgamated. The recurrence of currency crises implies that either appropriate lessons have not been learnt or, for some reason, countries have been unable to convert learning into actions. Key lessons are first, avoid excessively large fiscal deficits, rapid credit creation and debt accumulation, and second, reduce economic and financial vulnerability and create better insulation from external shocks. Empirical analysis shows that the causes of the crises in Argentina and Turkey in 2018 were different from those in 2001.
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Inequality: Concepts, Data, Perspectives and Solutions
Michael Chibba & John M. Luiz, World Economics, March 2019
A comprehensive treatise on inequality from economic, social, business and metrics/data perspectives is lacking in the literature and this treatise fills that void. We posit that: (a) neoclassical economics has failed to address inequality within nations; (b) the social theories on inequality are of ancillary importance; (c) businesses have contributed to inequality in several ways but have also made a positive contribution towards a fairer, more equitable society; (d) data on inequality is not up to date. Taxation and social programs offer an inadequate approach to tackling inequality without a proper framework and supporting approaches. In addition, complementarity between neoclassical economics and behavioural economics would be a positive factor in addressing inequality and should be pursued. Issues of inequality metrics and data reliability have moved to the forefront of discussions as the data currently available is the basis of much dissent. Robust metrics and reliable and up to date inequality data (as well as related statistics) are indispensable for designing, implementing, monitoring, and evaluating inequality interventions and policies.
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On Measuring the Money Supply
Steve H. Hanke, World Economics, March 2019
Oskar Morgenstern warned in The Limits of Economics (1937), that the formulation of economic policy was handicapped by the lack of relevant data and errors in its measurement. In this paper, the measurement of the money supply is used to illustrate Morgenstern's point. The most relevant measure of money for purposes of nominal national income determination is an inclusive, broad money metric. Most central banks fail to report the most inclusive broad money metrics, and what is reported are measured with the use of simple-sum aggregates. Divisia monetary aggregates are superior to simple-sum aggregates. These superior measures are used and data are reported for the United States by William A. Barnett at the Center for Financial Stability in New York.
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The Informal Economy: Who Wins, Who Loses and Why We Care
Giovanna Maria Dora Dore, World Economics, March 2019
The informal economy is one of the most complex economic and political phenomena of our time. It exists in rich and poor countries alike, and currently employs almost half of the world’s workers, about 1.8 billion people. •At a value of US$10 trillion, the informal economy is the second-largest economy in the world, after the economy of the United States (at US$14 trillion) and before that of China (at US$8.2 trillion). High taxes, labour costs and social security infrastructures, undeclared work and underreporting are among the most powerful drivers of informality. Measures promoting behavioural changes can help counter its growth, even though controls and penalties remain more popular as tools in the fight against the informal economy. The informal sector remains the fastest-growing part of the world economy and we need a better understanding of what it means for business and society and why it is the preferred operating sector for many entrepreneurs.
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Mobility in Income Poverty Between 2010-2015 in Egypt
Heba Farida Ahmed Fathy El-laithy & Dina Magdy Armanious, World Economics, March 2019
This study assesses poverty dynamics in Egypt during 2010-2015 and examines the characteristics of transient poor people. Reliability Index, Relative and Absolute mobility are used to assess mobility. The results showed that there is a substantial amount of mobility between 2010 and 2015 and deterioration in the relative positions is larger than the improvement in the same period. Households with uneducated heads, with temporary jobs, outside establishments and with no social protection are more likely to remain poor.
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The European Union Must Defend Andreas Georgiou
Nicolas Véron, World Economics, March 2019
In August 2010, Andreas Georgiou, former President of the Hellenic Statistical Authority, was charged with having harmed Greece's national interests. In this paper, Nicolas Veron argues that the relentless prosecutions against Georgiou are more than a matter of shameful harassment by Greece. Georgiou’s case also raises disturbing questions about the integrity of European statistical processes. The European Union also needs to consider reforming its statistical framework to ensure a similar scandal cannot recur.
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The Comparative Analysis on the Population Control Policies in China and India
Min-kyung, KIM, World Economics, March 2019
Population is a source of a nations’ strength and national security, but some overpopulated countries in Asia are trying to lower their population growth, even implementing population control policies. This paper conducts a comparative study of China and India to explore the effectiveness of their population control policies, and its findings suggest that education can be one of the strongest methods to curb the population explosion, reducing its side effects by giving Kerala case. This study suggests that further attention must be given to more cases in China and India related to the correlation between the level of education and population growth. Also, the case of Kerala will be needed to be researched more in-depth and yield more concrete recommendations to facilitate an added value to this field.
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Davos 2019 in the Uncharted Waters of Digital Globalization
Theodore Pelagidis, World Economics, March 2019
Western world leaders in Davos 2019 seemed unable to handle changes propelled by the wave of digital globalization. Geopolitical tensions and “wealth gap politics” are among the major concerns for the current global economy. Risks are related to the extent of the expected hard landing of the global economy.
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Saudi Arabian Labour Market Data Outlines the Challenges of Reform
Brian Sturgess, World Economics, March 2019
Saudi Arabia’s Council of Ministers approved an ambitious National Transformation Programme (NTP) in June 2016 with the aim of carrying out a complete restructuring of the economy. The implementation of Vision 2030 has major implications for the structure of Saudi Arabia’s labour market with the creation of 1.2 million non-oil private sector jobs, most of which are expected to be taken up by citizens. Official data shows the labour market has a number of distinctive features which will challenge the implementation of Vision 2030: an overreliance on expatriate labour; a preference by nationals for public sector jobs; a gender imbalance; persisting structural unemployment and problems in balancing labour supply and demand. The government is attempting to change the operation and structure of the labour market by a set of policies involving quotas, subsidies, taxes, penalties and the provision of information services, but for a number of reasons change is unlikely to proceed smoothly in the next few years.
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How Can Sovereign Wealth Funds Mitigate Natural Capital Depreciation in Developing Countries?
Edward B. Barbier & Jo Burgess, World Economics, December 2018
Key indicators of economic performance for resource-rich developing economies are net national income and savings that are adjusted for natural capital depreciation. These indicators vary inversely with the reliance of developing countries on primary product exports, suggesting that highly resource-dependent economies are not expanding physical and human capital sufficiently to compensate for declining natural capital. Natural resource-based sovereign wealth funds can mitigate the impacts of natural capital depreciation on the economic performance of resource-dependent developing economies. But to do so, the overall management practices, governance and transparency of these funds must improve.
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Leveraging the African Private Sector to Enhance the Development Impact of the African Continental Free Trade Area Agreement
Hippolyte Fofack, World Economics, December 2018
By July 2018 the African Continental Free Trade Area had been signed by 49 African governments, accounting for over 86% of total African trade and 77% of combined GDP, and a total population of 1.2 billion. The Agreement has the potential to accelerate the process of diversification of sources of growth and trade, but it is a necessary, not a sufficient condition for transforming African economies. The transformational power and development impact of the Agreement depend on the capacity of African governments to leverage the African private sector to address supply-side constraints. Success also depends on regional cooperation and symbiotic nature of public-private partnerships in a region where adverse global shocks and market fragmentation have undermined economic integration and weakened the trade bargaining power of countries.
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Analysing Intra-African Trade: AFCFTA: Much Ado About Nothing?
Peter Draper, Habtamu Edjigu & Andreas Freytag, World Economics, December 2018
In March 2018, most African heads of state gathered in Kigali to sign the African Continental Free Trade Agreement (AfCFTA), marking the culmination of intense negotiations. A number of central issues remain unresolved: it is an agreement with a substantial sensitive/exclusion list for tariffs on goods, with strict product-specific rules of origin and institutions for remedying trade that could be abused to protect domestic lobbies. The regulatory content of the AfCFTA could be described as ‘WTO-minus’, although it does bring non-members of the World Trade Organization into the fold. The level of ambition in the services negotiations seems to be low so it is likely that further liberalisation will be pursued over time, encompassing new areas such as e-commerce.
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Growth in Oil- and Non-Oil-Producing Countries: Domestic Policies and External Spillovers
Magda Kandil, World Economics, December 2018
Using data for a sample of oil- and non-oil-producing countries this article studies determinants of growth to assess the relative importance of domestic policies and external spillovers. For net oil exporters, a higher price of oil helps increase resources for spending and available liquidity to support real growth. For net oil importers it increases the cost of imports and government spending on fuel subsidies with a negative effect on real growth. The mechanism transmitting the oil price shock is more evident in developing countries than in advanced oil-producing countries, attesting to less diversified economies in the first group. Across the samples of countries under investigation, advanced and developing oil- and non-oil-producing countries, domestic policies have considerable ability to counter the spillover effects of external shocks.
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Designing a Global Financial Safety Net
Graham Bird, World Economics, December 2018
It often is neither possible nor sensible to immediately correct the underlying macroeconomic disequilibria that a financial and economic crisis reveals. To cushion the process of adjustment a global financial safety net is needed: owned reserves, regional financing and borrowing from the International Monetary Fund. Since the Asian crisis of 1997/98 there has been an accumulation of owned reserves amongst emerging economies as a form of self-insurance, along with the development of regional financing arrangements. There are advantages and disadvantages of the various components of all these arrangements and reform needs to take these into account.
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CryptoRuble: From Russia with Love
Zura Kakushadze & Jim Kyung-Soo Liew, World Economics, December 2018
A large number of decentralized cryptocurrencies has emerged since the inception of Bitcoin in 2009, with a total market size exceeding $170bn. Recent reports suggest that Russia will issue its government-backed cryptocurrency, CryptoRuble, in the middle of 2019. Russia’s primary goal in issuing a government cryptocurrency is to free its monetary system from the controls exerted by the Federal Reserve and their allied central banks. Government-issued cryptocurrencies will increase: Large sovereign states have the technological know-how and means to do this, but small and/or developing countries may be forced to outsource issuance of their government-backed cryptocurrencies to larger states.
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US-China Trade War Data: Truth and Post-Truth
Anirban Sengupta & Siddhartha K. Rastogi, World Economics, December 2018
Data on the importance of US–China trade and fundamental trade theory suggest that the USA is in a relatively weak position in its trade war. Not only will the protectionist measures of the Trump administration reduce the welfare of American citizens (theory of competitive advantage) but they also pose a threat of triggering an inflationary cycle. The imposition of tariffs on soybeans by China has strategically hit core Republican voters in states like Iowa, risking the political prospects of Republicans in future elections. Thus, the current administration should reconsider the feasibility of continuing the trade war against China given the economic and political risks.
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An Economic Comparison of Greece and Italy
Theodore Pelagidis, World Economics, December 2018
In Greece and Italy, populist parties have taken power in recent years, a result of coalition between radical left and far-right parties. Both countries are of concern to the European Commission—Greece’s ‘enhanced surveillance’ could end in another bail-out program; Italy is pursuing its budget deficit dispute. Greece and Italy share many economic structural weaknesses in the size of public sector deficits, in the taxation of labour, corporate taxes, and high levels of regulation. Finally, the current and future growth rates of both Greece and Italy are inadequate and the political climate is highly polarized, radical, with no culture of compromising.
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David Henderson: 1927-2018: A Personal Memorial
Ian Byatt, World Economics, December 2018
David Henderson was both a scholar and a practising economic adviser. He was always concerned with what was going on in policy analysis and in the technical economics, or other thinking, which lay behind economic policy. He was widely and deeply read, not only in economics: he published many books, was a prolific contributor to policy journals and gave many lectures, including the Reith Lectures of 1985. He was an active networker, always reaching out to those who could help him or those he wished to influence. I have first written about the man I knew and second about the contribution to policy advice contained in his writings.
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