1. 1 ECONOMICS 3150N Winter 2013 Professor Lazar Office: N205J, Schulich flazar@yorku.ca 736-5068

2. 2 Lecture 6: February 28 Ch. 21, 22, 2

3. 3 European Union Treaty of Rome, 1957 –Customs union Single European Act, 1986 – amended Treaty of Rome –Eliminated internal barriers to trade, capital movements and labor migration Maastricht Treaty, 1993 –Single European currency and central bank –Convergence criteria: Country’s inflation rate in year before admission must be no more than 1.5% above average of three EU members with lowest rate of inflation Government deficit < 3% of GDP Government debt below or approaching 60% of GDP

4. 4 European Union Financial crisis: Round 2 Does Greece meet conditions for currency area? Would Greece be better off outside Eurozone with ability to have own currency depreciate – to offset negative impacts of restrictive fiscal policy? No fiscal transfers within EU – compare to US and Canada

5. 5 Sovereign Debt and Defaults Private debt – CCAA, ch. 11 –Convert debt into equity –Convert into new debt with lower face value and lower interest rates –Receive cash for fraction of value at maturity (pennies on the dollar) Sovereign debt –Conversion into equity not an option –Convert into new debt with lower face value and lower interest rates –Defer interest and principal payments, possible reduction in interest rate –Receive cash IMF: provides new loans to make payments on outstanding debt – loans generally made with conditions (re. macroeconomic policies – reduce debt, low inflation rate targets; microeconomic policies – privatization, deregulation)  beneficiaries are current creditors

6. 6 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

7. 7 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

8. 8 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

9. 9 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

10. 10 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%

11. 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) 11

12. 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) 12

13. 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) 13

14. 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) 14

15. 15 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

16. 16 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?

17. 17 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”

18. 18 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

19. 19 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

20. 20 International Trade Theory: Objectives Gains from trade Patterns of trade Volumes of trade Intra-corporate vs. inter-corporate/firm Protectionism – trade policies Free trade agreements – NAFTA, GATT

21. 21 Critique of Traditional Trade Theory Competitive markets – underlying logic flawed Imperfect competition – competitive advantage Role of technology and risk taking – importance of market structure Culture, bureaucracy, hierarchy Politics and power – case of the US Bottom line: trade theory cannot explain RIM in Canada, Airbus in Europe, HSBC, Arcelor-Mittal in India, Emirates, IKEA, Samsung in South Korea, etc.

22. 22 Overview 2010: –Global GDP: US$ 63 T –Global trade in goods and services: US$ 19 T World trade – merchandise exports (2010) –Total exports: US$14.9 T NA: $1.965 T (13%) South and Central America: $0.577 T (4%) Europe: $5,632 T (38%) Commonwealth of Independent States: $0.588 T (4%) Africa: $0.508 T (3%) Middle East: $0.895 T (6%) Asia: $4.686 T (32%)

23. 23 Overview World trade – merchandise imports (2010) –Total exports: US$14.9 T NA: $2.508 T (17%) South and Central America: $0.587 T (4%) Europe: $5,844 T (39%) Commonwealth of Independent States: $0.399 T (3%) Africa: $0.453 T (3%) Middle East: $0.561 T (4%) Asia: $4.216 T (28%)

24. 24 Overview Regional destinations of merchandise exports NAS&CAEuropeCISAfricaMEAsia NA49%8%17%1%2%3%21% S&CA24261913323 Europe72713339 CIS6152192315 Africa17336012424 ME9112131053 Asia173 23453

25. 25 Overview World trade – merchandise exports 1953197319932010 NA25%17%18%13% S&CA10%4%3%4% Europe39%51%45%38% CIS4% 2%4% Africa6%5%2%3% Middle East 3%4% 6% Asia13%15%26%32% GATT70%84%89%94% WORLD$0.084$0.579$3.676$14.851

26. 26 Overview World trade – merchandise imports 1953197319932010 NA20%17%21%18% S&CA8%4%3%4% Europe44%53%45%39% CIS3%4%1%3% Africa7%4%3% Middle East 2%3% 4% Asia15% 24%30% GATT67%86%90%96% WORLD$0.085$0.594$3.786$15.077

27. 27 Overview World trade – merchandise exports by major product groups (2010) –Total exports: US$14.4 T Agricultural products: $1.362 T (9%) Fuels & mining products: $3.026 T (20%) –Fuels: $2.348 T (16%) Manufactures: $9.962 T (67%) –Iron & steel: $0.421 T (3%) –Chemicals: $1.705 T (12%) –Office & telecom equipment: $1.603 T (11%) –Autos: $1.092 (7%) –Textiles: $0.251 T (2%) –Clothing: $0.351 (2%)

28. 28 Overview World trade: Merchandise exports by major product groups (2010) – Regional shares Agricultural products Fuels & mining products Manufacture NA16%10%14% S&CA1282 Europe422143 CIS3121 Africa4111 Middle East2202 Asia221837

29. 29 Overview Regional shares of merchandise exports by major product groups (2010) Agricultural products Fuels & mining products Manufacture NA11%15%69% S&CA284226 Europe101176 CIS86424 Africa116619 Middle East26822 Asia61279

30. 30 Overview Canada’s trade, by product (2010) –Exports Industrial goods and materials (metals and alloys; chemicals, plastics and fertilizer, etc.): $96.5 B (24%) Energy products: $90.9 B (22%) Machinery & equipment (includes aircraft): $76.1 B (19%) Automotive products: $56.8 B (14%) Agricultural and fishing products: $36.9 B (9%)

31. 31 Overview Canada’s trade, by product (2010) –Imports Machinery & equipment: $113.9 B (28%) Industrial goods & materials: $86.9 B (21%) Automotive products: $68.7 B (17%) Other consumer products: $57.7 B (14%) Energy products: $40.5 B (10%)

32. Overview: Trade as % of GDP, 2008 Australia24% Belgium85 Canada34 Finland45 France28 Germany44 Ireland78 Italy29 Japan17 S. Korea54 Luxembourg156 Mexico29 Norway38 Portugal33 Slovak Rep.84 Spain30 Sweden50 Switzerland51 Turkey26 Russia26 UK30 US15 EU 2741 OECD29 32

33. Overview: Current Account Balance as % of GDP, 2010 Australia-2.6% Belgium1.0 Canada-3.1 Finland3.1 France-1.8 Germany5.6 Ireland0.5 Italy-3.2 Japan3.6 S. Korea2.8 Luxembourg7.5 Mexico-0.6 Norway12.9 Portugal-9.7 Slovak Rep.-4.0 Spain-4.6 Sweden6.3 Switzerland14.6 Turkey-6.4 RussiaNA UK-3.2 US-3.2 33

34. Overview: Services Balance as % of GDP, 2010 Australia-0.2% Belgium1.5 Canada-1.4 Finland1.2 France0.5 Germany-0.9 Ireland-4.6 Italy-0.6 Japan-0.3 S. Korea-1.1 Luxembourg54.7 Mexico-0.9 Norway-0.5 Portugal3.9 Slovak Rep.-1.2 Spain2.6 Sweden3.4 Switzerland8.8 TurkeyNA RussiaNA UK3.4 US1.0 34