1. 1 ECONOMICS 3150M Winter 2014 Professor Lazar Office: N205J, Schulich flazar@yorku.ca 736-5068

2. 2 Lecture 13: February 26 Ch. 21, 22, 2

3. 3 European Union Greece: remaining in Eurozone –Labor mobility –Lower interest rates when investors have confidence in government –Spreads over Germany (long-term government bonds): 2007 – 28bp Q3, 2009 – 136bp Q2, 2010 – 552bp –No danger of depreciation threatening survival of borrowers in Euros (Southeast Asia crisis in 1997) Greece leaving Eurozone –Depreciation of currency to improve competitiveness – major export is tourism

4. 4 European Union EU members created US$1 T fund to assist members roll-over maturing debt and finance budget deficits Interest rates set higher than borrowing costs for Germany Bail-out largely of EU banks who held most of debt of PIIGS Reluctance of ECB to be lender of last resort to countries although doing indirectly as lender of last resort to banks who hold sovereign debt ECB finally caved – strings attached

5. 5 Income Gaps Income groupGDP per capita (2008 US $) Life expectancy (years) Low income$52360 Lower middle income 2,07370 Upper middle income 7,85275 High income39,68883

6. 6 Income Gaps Income groupGDP per capita (2009 US $) GDP per capita growth (1990-2009) Least free quartile$4,5451.2% Third quartile6,4642.3 Second quartile14,9612.4 Most free quartile31,5013.1

7. 7 Income Gaps Average annual growth rate, 1960-2007 in real output per capita –Industrialized countries in 1960: 2.1 to 3.9% –Africa: -0.2 to 0.6% –Latin America: 0.8 to 2.5% –Asia: 2.9 to 6%

8. Bottom 20 Countries, Economic Freedom Index, 2011 179: North Korea (NA) 178: Zimbabwe ($757) 177: Cuba (5,397) 176. Libya (9,957) 175: Eritrea (482) 174: Venezuela (10,810) 173: Myanmar (NA) 172: Dem. Rep. of Congo (231) 171: Iran (4,526) 170: Equatorial Guinea (27,478) 169: Timor-Leste (896) 168: Turkmenistan (5,497) 167: Rep. of Congo (3,485) 166: Chad (823) 165: Comoros (810) 164: Uzbekistan (1,546) 163: Ukraine (3,615) 162: Solomon Islands (1,517) 161: Lesotho (1,106) 160: Angola (5,318) 8

9. Economic Freedom Index Other Notables –Singapore (2) –Canada (6) –UK (14) –US (10) –UAE (35) –Germany (26) –Ireland (9) –Taiwan (18) –South Korea (31) –France (67) –Bahrain (12) –Spain (36) –Portugal (68) –Thailand (60) –Italy (92) –Turkey (73) –Greece (119) –Russia (144) –China (138) –India (123) –Brazil (99) –Hong Kong (1) 9

10. Bottom 20 Countries, Corruption Index, 2010 Somalia (NA) Myanmar (NA) Afghanistan (543) Iraq (3,501) Uzbekistan (1,546) Turkmenistan (5,497) Sudan (1,435) Chad (823) Burundi (271) Equatorial Guinea (27,478) Angola (5,318) Venezuela (10,810) Kyrgyzstan (1,075) Guinea (498) Dem. Rep. of Congo (231) Tajikistan (935) Russia (13,089) Papua New Guinea (1,845) Laos (1,320) Kenya (808) 10

11. Corruption Index Other Notable Countries –Singapore (1) –Canada (6) –UK (20) –US (22) –UAE (28) –Germany (15) –Ireland (14) –Taiwan (33) –South Korea (39) –France (25) –Spain (30) –Portugal (32) –Thailand (78) –Italy (67) –Turkey (56) –Greece (78) –Russia (154) –China (78) –India (87) –Brazil (69) 11

12. 12 Developing Countries Africa –Scarcity of capital, skilled labor –Political instability, insecure property rights, corruption Strong positive correlation between GDP per capita and inverse index of corruption –Debt Bono’s recommendation: debt forgiveness by rich countries What was the debt used for? Will forgiveness contribute to correcting underlying structural problems? –Resource wealth – oil, minerals Squandered through theft and military spending Compare to Emirates – long-term visions even with limited democracy

13. 13 Developing Countries Russia –Collapse of Communist state followed by anarchy – no rules, no enforcement –Cannot graft Western market onto country with no history with such markets –Markets defined by rules –Putin: Introduced rules and enforcement Benefited from high oil and gas prices Long-term plan to turn around the economy Importance of democracy?

14. 14 Developing Countries Dependence on external sources of capital –Herd effects, contagion effects –Instability of short-term capital flows –Asian crisis in 1997; Russia crisis throughout most of 1990s; Argentina in 1980s and 1990s –China: more than US$3 trillion in reserves –Sovereign funds and ability to avoid most of fallout from sub-prime mortgage fiasco in US Germany considering law to restrict takeovers by sovereign funds (particularly from China, Russia and Middle East) that may jeopardize Germany’s “public order and safety”

15. 15 Developing Countries Doha Round –Rich vs. poor countries –Importance of eliminating trade barriers for agricultural products Rich countries spend US$ 260 B in support of agriculture and farmers Agriculture accounts for 2% or less of economies of rich countries; 5.5% in Brazil, 11.3% in China, 17.6% in India and Nigeria, 32% in Sudan –Tradeoff: reduction of tariffs on manufactured products by poor countries Tariffs an important source of revenues for governments in many poor countries

16. 16 Internal and International Trade Mobility of factors of production Trade costs including information Tastes – language, culture Market rules – laws (domestic, international), regulations; effectiveness Currencies – financial risks Domestic policies –Taxes, subsidies, tariffs –Procurement –Ownership restrictions –National interest – politics and trade policies