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Economic News, Data and Analysis

WTO – The Movie

Who says there’s nothing good on TV?

I’ve been watching this great mini-series on television for the past
several nights. It’s a Star Wars meets The X-Files extravaganza!

It has a fantastic cast of characters and a great plot. The story centers
on a mysterious group of powerful leaders who have a habit of meeting behind
closed doors and who are believed (although falsely) to be able to over-rule
laws in any country with the stroke of a pen. Fighting this group are the
band of ragged forces who have put aside their past differences and have
united to fight this common enemy.

There is also a town mayor apologizing for the police. There are anarchists
who just can’t wait for that cup of coffee and have to go through the front
window of the local Starbucks. There is that French guy who hates BigMacs
who decided to make Seattle’s McDonalds his next victim – he couldn’t have
found one closer to home? There is a president trying to invite the protesters
inside, (although he does sound a bit like someone who ran into an acquaintance
on his way to a party, “Oh, you’re invitation must have been lost in the
mail.”) There is the reform party presidential candidate who is trying
hard to resist saying “See, I told you so,” more than 50 times a day. Add
confused delegates, riot gear, a couple hundred journalists, and (my personal
favorite) one thousand sea turtle hats.

My popcorn’s popping – it’s almost time for the news!

Ok, I feel slightly bad about making light of the situation – there
are high stakes all around. But, it was either this or become the 243,563rd
economist to explain why Free Trade is Good – and since you are lurking
around the internet looking for economics rather than for the newest video
game strategy
or some dating advice,
I am assuming that you know the basics of comparative advantage.

We’ve got issues

There are myriad serious economic and social issues surrounding free
trade and “globalization” in general and tons of more minor problems when
it come to the World Trade Organization (WTO).

The millions of dollars in lost holiday business suffered by downtown
seattle are a drop in the bucket when compared to the potential gains from
trade which would result from reducing barriers across countries. Any cases
of excess force by the police are a mole hill when compared to the mountain
of suffering by workers and children in sweatshops. And, the canisters
of smoking tear gas (which make for great pictures on TV) are a fine representation
of the smog choking many of the world’s largest cities.

I sympathize both with the free trade side as well as with (most of)
the protesters, and I believe that there is common ground to be found.

It’s not about trade

Free trade is only a catalyst – it only magnifies the problems that
already exits. There are two primary complaints that have cropped up at
the protests: 1) free trade in general, and the WTO in particular, is harmful
to the global environment, and 2) free trade is harmful to the workers
of the world who are not protected by reasonable labor standards.*

[*There is also an segment that points out the free trade hurts groups
of U.S. workers - which it does do in certain industries - and that
it is therefore bad for the country - which is both a non-sequitor and
wrong. The obvious gains from trade to consumers and the fact that workers
in other countries benefit tend to make this a very dubious and mostly
nationalistic point of view.]

The real “problem” then is not free trade. For the environment, the
problem is relatively loose environmental regulations. For the workers,
the problem is relatively loose labor laws. Free trade makes these underlying
problems worse since it increases production, but trade is not the underlying
problem. Free trade is just one possible tool that environmental and labor
groups can use to try to affect change in governments that might not otherwise
be willing to listen.

As is usual, there seem to be only two sides to the debate portrayed
in the press – the protesters are labeled “Anti-trade” while the WTO is
“Free-trade”.

If we could get beyond the false front of a debate on free trade, then
maybe we can get to the real issues – such as whether it is appropriate
to insist that other countries follow certain environmental or labor standards.
And if so, what specific form should these (world?) standards take?

Well, my popcorn is ready, maybe we can talk about the real issues after
the movie is over.

More
Features


WTO
- Got to go?
Post in the Forum.

More Links

For details on the meetings and the issues discussed see the official
sites:

For all of the anti-WTO info see:

Also see:

Comparative Advantage: Very Simple Example

– Adam can make 2 hot dogs or 6 buns in an hour.

– Eve can make 6 hot dogs or 2 buns in an hour.

With 2 hours till the super bowl starts…

No Trade:

Adam makes 3 hot dogs (1.5 hours) and 3 buns (0.5 hours) = 3 hot dogs/buns.

Eve makes 3 hot dogs (0.5 hours) and 3 buns (1.5 hours) = 3 hot dogs/buns.

With Trade:

Adam makes 12 buns (2 hours).

Even Makes 12 hot dogs (2 hours).

They trade 6 buns for 6 hot dogs, and they each eat 6 hot dogs.

With trade, consumption is twice as much as with no trade.

The same logic holds for countries in addition to biblical characters.

 

Filed under: International

Asian Crisis: An Interview with Nouriel Roubini

Nouriel Roubini has generously agreed to answer a few questions about
the causes and consequences of the on-going Asian currency and economic
crisis. He also shares some thoughts on the implications for policy and
for the analysis of currency markets.

 

 






Roubini is an Associate Professor of Economics and International Business
at the Stern School of Business, New York University.  He is the author
most recently of Political Cycles and
the Macroeconomy
as well as numerous academic papers. Some of his recent
work has focused on the causes and consequences of the Asian currency crisis.
He received his Ph.D. from Harvard in 1988 and was previously an Assistant
and Associate Professor in the Economics Department at Yale University.
Roubini is also a research fellow at the National Bureau of Economic Research
and the Center for European Policy Research; and is a visiting Economist
at the IMF and consultant to the World Bank.

 

Impact of the Crisis

 






Q:  Is the currency crisis likely to impact the long-run performance
of the Asian economies? Is this the end of the Asian miracle?

 

The Asian miracle might have been over even without the crisis. These
countries could not possibly grow forever at 8-10% per year rates, as diminishing
returns at some point kick in. Also, the evidence in Young, popularized
by Krugman, suggests that the role of total factor productivity growth
was limited in Asian growth; a lot of growth was due to inputs growth (labor
and capital especially). Rate of investment of 40% of GDP per year are
not sustainable forever and savings rate are bound to fall over time.

So, even if these countries whether the crisis, the growth rate might
not return to the high levels pre-crisis; 4-5% per year may be more reasonable.

Mexico was back to growth in 1996 after the 1995 recession following
the 1994 collapse of the Peso. A recession might be deeper and persist
for much longer in Asia for several reasons:



  1. The Tequila effect did not spread so dramatically from Mexico to the rest
    of Latin America while in Asia as Argentina’s and Brazil’s pegs resisted;
    however in Asia one after the other most currencies collapsed with the
    ensuing recession that is going to follow being exacerbated by the recession
    in the neighboring countries.


  2. The US was in a strong cyclical upswing in 1994-95, something that helped
    Mexico and the rest of Latin America while growth in Japan, the main regional
    economy, has been stagnating close to zero since 1991.


  3. The US had cleaned up its banking problem (the S&L crisis) by 1994
    while the Japanese banking problems are still unsolved and Japan is heavily
    exposed in Asia.


  4. The game of competitive devaluation that has been observed in Asia was
    largely avoided in Latin American following the Peso collapse; most currencies
    in L.A. resisted and this presented a recessionary competitive devaluation
    game (as the one currently observed in Asia that is similar to that in
    the 1930s depression).


  5. There was a lot of over investment and capacity glut in Asia; for example,
    Korea overbuilt in low-tech semiconductor (DRAM) plants whose profitability
    is going to be very low in the medium term; same thing for shipping, steel
    and other traded goods. Also, the glut of non-traded goods, especially
    real estate will lead to low returns in these sector for a long time.


So it is not clear whether Asia will look ex-post more like Mexico that
had a one-year severe recession and then resumed growth or more like Japan
whose economic model has stalled and whose growth has stalled  since
1991.

 





Q:  How much of an impact will the Asian currency crisis have on the
economies of the US and other western economies? How long will it take
before this impact will be felt?

 

Growth in US and Europe will be reduced by about a 1/2% point in 1998
unless Japan, who is already stagnating, plunges in a deeper recession.

Causes

 






Q:  In your paper What
Caused the Asian Currency and Financial Crisis
, you point to the moral
hazard problem as being one of the main contributors to the crisis – is
this feature stronger in the Asian crisis versus other past crises? If
so why? 

 

Most episodes of Balance of Payment crisis in emerging economies are
episodes of Twin Crises where a balance of payments crisis is associated
with a Banking crisis (see the evidence in Kaminsky
and Reinhard (1996)
. And most of these banking crises are caused over
borrowing and over lending due to poor regulation poor supervision following
financial liberalization and the presence of a moral hazard problem deriving
form implicit and/or explicit government promises of a bail-out in case
things go wrong. So moral hazard is important but is only a part of the
story.

The crisis is not just a debt crisis, it is also a currency crisis.
By 1997 most of the regional currencies were overvlalued and fixed rate
regimes and excessive short-term capital inflows led to significant real
appreciation. The current account deficits were very large and driven both
by the overvaluation and the (moral hazard driven) overinvestment. So,
we are talking of a currency AND debt crisis where moral hazard was one
factor, among several other fundamental problems and policy mistakes.

 






Q:  Your paper describes the “investment boom” as “excessive and often
in the wrong sectors of the economy”. You also conclude that a significant
portion of the borrowing was used for speculation rather than real productive
investment in capital goods. Should lenders be more careful about specifying
and monitoring the uses of their loans?

 

Of course, they should be, but moral hazard at various level led to
the lack of monitoring.

International creditors did not monitor and overlent to domestic banks
and financial intermediaries under the implicit or explicit promise that
they would be bail-out, either by the governments and/or via IMF supported
packages. Domestic banks and financial intermediaries did not monitor for
many reasons, mostly related to the implicit promise of a government bail-out
in case things went wrong:



  1. Their risk capital was usually small and owners of banks risked relatively
    little (by lending to excessively risky projects) if the banks went bankrupt;


  2. Several banks were public or controlled indirectly by the government that
    was directing credit to politically favored firms, sectors and investment
    projects;


  3. Depositors of the banks were offered implicit or explicit deposit insurance
    and therefore did not monitor the lending decisions of banks;


  4. The banks themselves were given implicit guarantees of a government bail-out
    if their financial conditions went sour because of excessive foreign borrowing.


The outcome of all this was twofold: first, banks borrowed too much from
abroad and lent too much for investment projects that were too risky; second,
because of these implicit public guarantees of bail-out, the interest rate
at which domestic banks could borrow abroad and lend at home was low (relative
to the riskiness of the projects being financed) so that domestic firms
invested too much in projects that were marginal if not outright not profitable.
Once these investment projects turned out not to be profitable, the firms
(and the banks that lent them large sum) found themselves with a huge amount
of foreign debt (mostly in foreign currencies) that could not be repaid.
The exchange rate crisis that ensued made things only worse as the currency
depreciation dramatically increased real burden in domestic currencies
of the debt that was denominated in foreign currencies.

In summary,  fixed exchange rates regimes, capital inflows and
moral hazard jointly led to real appreciation, an investment boom in wrong
sectors, an asset price bubble and large current account deficits that
led to accumulation of a large stock of short-term foreign liabilities.
Such deficits were financed mostly through banking system intermediation
(given the lack of developed securities markets in the region): banks borrowed
abroad in foreign currency and their borrowings were mostly short-term.
These large currency positions were mostly unhedged as firms and banks
expected the fixed exchange rates to be maintained and/or to be bailed-out
if things went wrong.

Once the firms’ investment projects turned out not to be very profitable,
the firms and the banks found themselves with a huge amount of currency-denominated
foreign debt that could not be repaid. The exchange rate crisis that followed
made things only worse as the currency depreciation increased the real
burden of the foreign-currency denominated debt. The behavior of weak and
not very credible governments that were not committed to structural reforms
exacerbated the policy uncertainty and the financial panic that followed.

Policy

 






Q:  You argue that, in conjunction with other factors, large current
account imbalances coupled with fixed exchange rates lead to a overvaluation
of several Asian currencies. Should we have seen speculative attacks and
a crisis coming? Could it have been prevented?

 

If you looked carefully at the fundamentals you should have seen that
a currency crisis had to occur. For example Thailand and Malaysia had all
the symptoms of Mexico by early 1997: huge current account deficits (close
to 10% of GDP for a decade), real appreciation, asset bubble, overinvestment
in wrong projects, weak and fragile banking systems.

 

As in the case of Mexico, by the time we got close to the crisis it
was very hard to prevent it. Policies should have been different several
years earlier: i.e. avoid excessive capital inflows via controls on hot
money inflows; a more flexible exchange regime aimed at maintaining a stable
real exchange rate; greater supervision and regulation of the financial
system; policies to avoid short term foreign debt borrowing by banks and
firms; development of securities markets (debt and equity) to prevent that
most of the capital inflows be intermediated through the short-term channels
of the banking system.

 





Q:  There has been some debate over the role of the IMF in providing
stabilization funds for currency crisis. Bailing out failing organizations
obviously contributes to the moral hazard problem mentioned above. Is there
some balance we can strike between legitimate stabilization programs and
generating the moral hazard problems? (i.e. can the time consistency problem
be addressed in a useful way?)

 

There is some tradeoff: repeated bailouts signal to creditors that
they can take risky gambles and pay no cost, a huge incentive to repeat
the same mistakes over and over again. On the other side, the IMF should
have a role of lender of last resort. Unfortunately, the bailouts in Asia
suggest that no country seems to be too small (not too big) to be allowed
to default. That’s a bad signal for the future; the IMF might have lost
some credibility in the process.

Probably, the only way to avoid future mistakes is to make sure that
international creditors pay some costs for their risky decisions: they
should not be fully bailed out. For example, Korea, Indoenesia and the
other countries should not give new public guarantees for the debt of private
companies; also, for the debt of the banks, any rescheduling agreement
should imply some losses for the international creditors. Unless the US,
Japanese and European banks get burned with fire, they will play with fire
again.

Analysis

 






Q:  The volume of media coverage and analysis (probably primed by the
Mexican crisis) has been extraordinary. Are there any common misperceptions
about the causes and consequences of the crisis?
 

 

One misconception about the causes is that it was all due to irrational
speculation and irrational contagion. Fundamentals were quite weak in the
region and these fundamentals triggered the crisis. Of course, there has
been a certain amount of overshooting once financial panic ensued. The
rupiah had to devalue, but a 15,000 rate to the US dollar is pure folly
and not justified, even when you weigh in the important role of policy
and political uncertainty. So there has been an overreaction of asset markets
but based on bad fundamentals to begin with: a strong wind can collapse
a big tree only if its roots are rotten.

 





Q:  You also suggest that traditional models of currency crisis are
inadequate to the extent that they do not emphasize the moral hazard or
the multi-country “contagion” effects. What do you think will be the main
policy implications of a “third generation” of models.

 

‘Third generation’ models are still work in progress as many of us
are working on these ideas. The systemic multi-country nature of the problems
and the twin-crisis phenomenon suggest several policy implications:



    1. There should be more credible monetary policy cooperation and coordination.
      In the case of the ERM in 1992-93 there was a breakdown of cooperation
      (as the recent monograph by Buiter,
      Corsetti and Pesenti (1998)
      suggests). In Asia cooperation was harder
      as these countries has unilateral pegs to the US dollar and were not tied
      in a formal cooperative exchange rate regime like the ERM.


    2. Excessively volatile capital flows are a serious problems and can exacerbate
      a crisis. Controls on excessive short-term inflows, such as those imposed
      in Chile look more and more appealing; short-term borrowing by banks and
      governments should be avoided. More extreme solutions such as a Tobin tax
      on capital flows should be considered more seriously.


    3. Moral hazard problems should be avoided via prudential regulation and supervision
      and avoidance of government bail-out promises. Opening domestic financial
      system to foreign banks, as done in Argentina and Mexico, can only help.


    4. Fixed rate regimes are fragile, even more so when many regionally integrated
      economies have a formal or informal system of pegged rate. As the 1990s
      crises (ERM in 1992-93, Mexico and Tequila in 1994-95 and Asia in 1997-98)
      suggest some degree of exchange rate flexibility is beneficial. If countries
      really like fixed rates, then they should go to the extreme: give up a
      domestic currency and form a monetary union. Even currency boards, a strong
      form of fixed rates, are fragile: if the currency board in Hong Kong collapses,
      quite likely now that all the regional currencies have devalued, Argentina
      could go under too. Also, currency boards are likely to be phased out in
      East Europe, especially Lithuania and Estonia as they have led to severe
      overvaluation.


    5. Fixed rate regimes may be useful in early stages of a stabilization program
      when, starting from high inflation, they focus expectations on a low inflation
      equilibrium. After that, it is better to switch to a more flexible regime.



 





Q:  Do you see currency crisis as a permanent fixture on the economic
landscape or will we eventually learn how to effectively stabilize international
financial markets?
 

 

A cocktail of greater international capital mobility, financial liberalization,
short-term-oriented trigger-happy and sleep-deprived fund managers and
currency traders, and fixed exchange rates can be deadly.  Some broad
international effort to stabilize markets, enforce prudential regulation
and supervision of otherwise unsupervised offshore financial institutions
and poorly supervised onshore ones should be considered.


See Also:


Filed under: International

The Asian Currency Crisis

It seems like every day a new story breaks on the financial and economic
crises in Asia. Aside from being a good source for news on the Asian currency
crisis, the Internet can also be a good place for finding quality analysis
of the problems.

Below I present some useful sources of information and anaylsis on the
causes and consequences of the crisis as well as analysis of the International
Monetary Fund’s policy response.

Causes

The consensus that seems to be emerging is that short term loans from
foreign banks coupled with poor investment strategies created a fundamental
instability in the region’s currencies. The poor investments are seen to
be largely a consequence of financial intermediaries which had an (implicit)
government guarantee on their liabilities and the resulting moral
hazard problem
.

non technical

Economists
Blame Short-Term Loans for Asian Crisis
in the New York Times.
Paul Krugman
on the causes of the crisis
in Slate from August. Jeffrey
Sachs on the causes of the crisis
from early on in the melee, July
30, from the Financial Times.

research oriented

Nouriel Roubini, Giancarlo Corsetti and Paolo Pesenti have a longer
research paper
on the causes of the Asian Crisis.

Krugman also has a more recent and detailed research
note
on the topic. For background into the theory and past crisis I
would also recommend his background
paper
from a NBER conference in October.

Consequences

Will the crisis spread to other economies? The so called contagion
effects are getting more attention this time around.

How
the financial crisis could affect you
is a series of BBC reports on
how the crisis will effect the world’s economies. Greenspan’s
Testimony to the House on 11/13/97
also has some thoughts on the possible
effect on the US economy. For more the contagion effects of the past latin
american crisis see the listings
in Roubini’s page.

IMF Response

There has been quite a bit of debate over the role of the International
Monetary Fund (IMF) and its handling of the crisis. A recent discussion,
Online
NewsHour: The IMF and Asia
, asks Lawrence Kudlow, Robert Hormats, Jeffrey
Sachs, and Mary Bush about their views. The background
segment
is also a good place to start in assessing the IMF’s actions.

Another good place to look for information is to directly to the IMF
for their analysis of the situation in the IMF
World Economic Outlook Dec. 1997–Crisis in Asia: Regional and Global Implications
.

other critiques

Jeffrey Sachs on the IMF and the Asian crisis from the New
York Times
and the Financial
Times
Kill
or Cure
is The Economist‘s take on the IMF plans.

defense

IMF
Bail Outs: Truth and Fiction
contains a defense against the charge
that the bailout targeted preferred groups.

Crisis hotline – where to stay in touch

The crisis is not over yet, there are sure to be new developments just
around the corner. Here are some places to keep in touch.

The
Asia Crisis Homepage
by Professor Roubini at the Stern School of Management
contains many more links on the Asian crisis as well as issues related
to currency crashes in general. This is a great source for deep analysis
into the issues.

New
York Times
Homepage on the Financial Crisis in Asia
is a good starting
point for reviewing both past news events and keeping up with new developments.
The Washington Post also maintains a similar site with news and
analysis at washingtonpost.com:
Asian Financial News
.

NewsHour Online:
Asia
presents news and commentary on the crisis as well as links to
other NewsHour coverage of the topic. See also Online
NewsHour Forum: Asian Turmoil
.

For a more detailed view of the crisis see OTN
explores Asia’s economic crisis: country by country guide
.


See Also:


 




Moral Hazard Problem 

If you spend much time around economists you will start to hear the
phrase “moral hazard” or “moral hazard problem” with great frequency. Below
is an example of the problem for investment decisions 

Say that an investor has the choice between two projects. The first
project is “safe” in that it will with certainty earn a small amount of
profits. The second project is risky and will either get the investor large
returns or larger losses. 

If the size of the losses are large enough for the risky project, the
investor will choose the safe project to maximize her expected profits. 

The moral hazard problem arises when some outside authority (such as
the government, parent company, or some other organization) provides a
guarantee against losses, but is unable to specify or monitor the type
of investments. The investor – now facing a choice that includes a risky
project with a limit on the losses – may choose to invest in the riskier
project. 

In general the term moral hazard is used when some incentives are introduced
that distort the optimal behavior of some economic agent in an environment
where the actions of the agent are unknown to the person or organization
providing the incentives. Because the actions are know to only the agent,
she can alter her behavior in such a way as to best take advantage of the
incentives offered. 

 


 

Filed under: International

Evaluating NAFTA

This past week marked the three year anniversary of the hotly debated
North America Free Trade Agreement (NAFTA). 
The debate over the agreement began anew with the release of the White
House’s review of the economic impacts of the NAFTA, and the finding that
the pact has had a “modest positive effect” on the economy. The debate
has changed from whether or not the NAFTA will be harmful to whether
or not is was harmful over the past three years. What is missing
from the debate is the following question: By what criteria should we judge
the success of the new policy?

The two sides of the debate have remained unchanged as have most of
the arguments. The proponents claim that NAFTA will create jobs and help
the economy via free trade, while opponents claim that jobs will be lost
to low wage workers in Mexico. The new report seems to have left the primary
debate substantially unaltered – proponents take it as evidence that the
agreement is good for the economy (since 311,000 trade-related jobs associated
with Mexico and Canada were created); and opponents site a swing from a
trade surplus to a trade deficit and a loss in worker bargaining power
as evidence that the economy (or a large subset of it) has been hurt.

There seems to be evidence supporting both sides of the debate. So how
are we to evaluate the net effect of NAFTA. In general, how should we evaluate
the economic effect of a major policy shift? The first necessary step is
to move away from the simple idea that the NAFTA is either “good” or “bad”.
As with any other major policy change there will be those who benefit from
the policy and those that lose.

“Good for the Economy”

When we say that something is “Good for the economy” what are we really
taking about? The net number of Jobs? The gross number of
jobs lost? or gained? The change in economic efficiency/productivity? The
average wage of Americans? The median wage of Mexicans? The total change
in GDP? The change in consumer prices?

Evaluation would be simple if the agreement were able to help (or harm)
everyone. But this is not the case – some benefit from the agreement (e.g.
shareholder and employees of companies that find new consumers in mexico,
and consumers that can purchase cheaper products) and some lose (employees
of companies that move plants to Mexico). Unfortunately, in this case the
economists favorite concept of a Pareto superior policy outcome (a policy
that helps at least one person with out hurting anyone else) does not apply.

Economists and Philosophers have invented a number of criterion with
which to evaluate alternative policies. For example we use the the Utilitarian
or Benthamite criterion where we would “add-up” or average the welfare
of the population and pick the policy which maximizes this sum. Another
possibility is the Rawlsian, or “maxi-min”, objective of maximizing the
welfare of the worst off individuals in the society. Another criteria would
be the equalization of welfare across every member of society, the so called
egalitarian outcome. This objective then runs into the problem of determining
what should in practice be equalized – incomes? opportunity?

Choosing from the criteria above is like asking who would win in a fight
- Batman or Spiderman. The concepts cannot be purely applied due to the
obvious problems of measuring and comparing individuals’ welfare; but we
can frame the debate in terms of who is helped or hurt by the policy rather
than whether or not the policy is “Good for the economy” in an abstract
and imprecise way.

For further reading on social objectives see the following.


Unknown Baseline

Another part of the problem we have in evaluating the effectiveness
of a policy change like NAFTA is that we are not running a controlled experiment.
It we had a economic laboratory we could take two identical North Americas
in 1994 – give one a NAFTA and leave the other one alone. We could then
compare the NAFTA-ized subject with its untouched counterpart to assess
the impact of the policy.

However, such experiments cannot be run and we are only left with one
subject to examine. The economic “baseline” of a NAFTA free North America
is unknown, we only have one set of numbers to use. So when we see some
statistic about, say, the number of jobs lost to NAFTA, we cannot be sure
if they were lost as a result of NAFTA, or whether they would have disappeared
anyway (say to China instead).

The economy is constantly in a state of flux, and it is very tricky
to isolate the impact of a single policy change independent of all the
other stuff going on. Since we do not know precisely what would have happened
with out the policy, even the “facts” of the NAFTA’s policy effects are
not clear cut.

Debate Continues

However the facts are eventually interpreted, it would be beneficial
to the debate to have a clear idea the criteria by which we will judge
the policy to be a success. Right now we have the two sides of the debate
using different welfare criteria to judge the policy – so it should be
no surprise that there is continued debate over the success of the policy.


See Also:


Filed under: International

Summit of the Eight: America on Top?


The so called “Summit of the Eight” has just rapped up its meeting in
Denver, and the United States – according to the U.S. media at least -
has been boasting of its economic superiority. I imagine that the other
seven countries find this more than a bit annoying, but for now the US
seems to have earned bragging rights. You can examine some of the foreign
media reaction
for yourself.

First things first, let’s get the terminology down. The “Summit of the
Eight” is the G7 plus Russia. The G7, or “Group of Seven,” consists of
seven large economies: Canada, France, Germany, Italy, Japan, the United
Kingdom, and the United States. Incidentally, there is also a G3 (Germany,
US, Japan), G11 (G7+ 4 others), and probably many more G’s. Russia is pressing
to become a permanent member, creating the G8 or perhaps Russia’s suggestion
of “Big Eight”. Russia has been involved in the meetings since 1992.

To confuse things slightly, there are really nine participants at the
summit – the extra representative is from the European Union.

For future reference, and to throw some more letters into the soup,
here are some other economic groups to remember: the OECD countries (the
Organization for Economic Cooperation and Development: G7 +many others),
the NIEs (Newly Industrialized Economies), OPEC (Organization of Petroleum
Exporting Countries), and finally the ROW (Rest of the World).

Economic performance

So, how is the US doing relative to the other major industrialized countries?
The following graphs show the performance of the G7 in terms of the inflation
and unemployment rate.

So why is the US seen as being on top? From above, it looks like Japan
is still the leader among this group. The next graph shows the performance
of GDP growth from 1990 to 1996. Until this past year, Japan ()
has been experiencing a bit of an output slowdown; thus leaving the US
on top.

Source: OECD

See Also:

Filed under: International

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