Tag Archives: economy

Turkey Grows and Grows

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One of the few real IMF success stories, the Turkish economy continues with what Serhan Cevik calls its spectacular normality:

The Turkish economy is now in its fourth year of uninterrupted growth, with an average real GDP growth rate of 7.5% per annum. Indeed, the trend growth rate surged from 3.9% in the 1990s to 5.8% in the post-crisis period and to an impressive 7.8% last year. And we project 7.2% growth for Turkey in 2005 and 6.8% next year, compared with average OECD growth rates of 2.6% and 2.8%, respectively. Obviously, this is an unusual performance for a country that had long failed to keep the economy close to its potential on a sustainable basis. In fact, the growth rate of real per capita GDP decelerated from 2.3% per annum in the 1970s to 1.7% in the 1980s and then to 1.3% in the 1990s leading to the 2001 crisis. However, with prudent fiscal and monetary policies and structural reforms, real per capita income increased by 18.9% on a cumulative basis in the last three years, and should remain on an above-trend growth trajectory in the coming years.

Italy: Devaluation or Deflation

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Italy is in recession. There is nothing extraordinary about this, as Donald Rumsfeld notoriously said ‘stuff happens’, and economies do have their ups and downs. But this recession is a little different, since it is structural and not cyclical. For the Italian economy to return to a better trajectory something has to be done, but what? Morgan Stanley’s Vicenzo Guzzo offers two alternatives: devaluation, or deflation (actually the way he puts the alternatives it sounds to me more like a case of: “with which instrument would you prefer I cut your throat sir, the stanley knife or the chain saw”?).

“If Italy intended to restore the pre-1999 competitiveness level, it would have to experience a 25% currency depreciation. While the euro is now down over 5% from the start of the year, such a large correction appears unlikely at this stage. In addition, the economy has steadily lost ground also vis-?-vis its euro area trading partners, as the breakdown of the trade data suggests. Euro depreciation would provide no oxygen on that front. In order to return to pre-1999 competitiveness levels, Italy would have to abandon the current exchange arrangements. To put it bluntly, it would have to drop out of EMU. A 25% devaluation is equivalent to what the economy experienced between 1991 and 1995. Exports scored double-digit gains in the aftermath of the realignment, but domestic demand fell heavily and debt services costs hit 12.5% of GDP. In a replay of those years, Italy would either default on its debt or run toxically tight fiscal policy. This is simply not an option, in my view.”

So Italy is caught. To devalue it would have to leave EMU. But then even if it could and did, it would go bust. So, on Guzzo’s reading, the only remedy left is substantial deflation, that is an ongoing reduction of wages and prices which would enable competitiveness to be restored. This sounds very much like the 1930’s and an Italy stuck with a modern version of the gold standard. It also sounds like going through a recession which could turning out lasting for a number of years, even if this was politically feasible it would be extraordinarily painful for many of those most immediately affected.

This, of course, is a question which is widely treated in the textbooks. So would anyone like to suggest a rival ‘escape strategy’?

Bonfire Of The Textbooks?

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The Greeks had a word for it ‘:aporia‘. That state of ignorance and confusion you are condemned to pass through before you can entertain even the vaguest hope of achieving clarity and real knowledge. Well, taking a long hard look at what we know, what we think we know, and what we know we don’t understand for sure, I would say that this expression gives us a working definition of where economic science may be right now: in a state of ‘aporeia’.

Essentially we are in the frustrating condition of repeatedly finding that what is taught in the textbooks, and what we are encountering ‘out there in reality’, don’t make easy bedfellows. Above all it is China that has caused most of the head scratching. Morgan Stanley’s Andy Xie may have started it off by having the guts to come out and urge us to: “throw away the textbooks”, later an influential paper by Dooley Falkerts-Landau and Garber argued that conventional macro was all at sea when looking at goods and financial flows between China and the US. Today it is the turn of Robert Samuelson to say toss the textbook.
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Czechia: Too Dependent On Automobiles?

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This article asks an interesting question: is the Czech economy becoming too dependent on the car indusrty?

Helena Horsk?, an economist at Raiffeisenbank, said a concentration of investment in one industrial sector could be dangerous. One of the biggest risks, she said, is that as the economy becomes more reliant on the automotive sector, ?the economy [as a whole] will suffer when the industry hits a downturn in the business cycle.?…….Raiffeisenbank?s Horsk? added that GDP, employment levels and even the crown would be hit if or when a downturn comes to the automotive sector.”

Europe’s ‘Tiger’

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Last Friday Eurostat released the 2004 data on comparative per capita PPP’s (purchasing power parities) across the EU. Perhaps the most surprising fact which emerges is that Ireland is now in second place (after Luzembourg) with a PPP 40% above the EU average. For a country that not so long ago was considered one of the ‘poorer’ EU members this is truly stunning.

It is generally well known that Ireland had (and continues to have) one of the highest fertility and population growth rates in the EU, but this has not been regarded as especially important since conventional neo-clasical growth theory (and the new ‘super-duper’endogenous growth theory for that matter) argue that increased population means a bigger economy, but not necessarily an increase in per capita income. However, as I said yesterday, it’s all about population structure. What we are now understanding is that the right age structure can produce very rapid increases in per capita income, and Ireland is, of course, a good case in point.

In the case of the ‘Celtic Tiger’, New Economic Paradigm theorists David Bloom and David Canning, who have made a specific study of the Irish case, reached the following conclusions:
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The Week Ahead

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This week promises to be another ‘busy’ one. Today the EU finance ministers (Ecofin) are meeting in Luxembourg, to discuss the condition of the common currency after last week’s ‘battering’ in the press and in the financial markets. Also headed for Luxembourg is EU Economics Commissioner Joaquim Almunia. Amongst other items he will have one in particulr which is high on his agenda: a meeting with Italian Ecomy Minister Domenico Siniscalco. Almunia is due to present a report on Italy’s deficit situation to the Commission tomorrow, and will almost certainly recommend the initiation of an excess deficit procedure under the revised terms of the stability and growth pact.
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The Mysteries of Growth: France & Germany

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The latest data on French household spending show that it rose rather faster than expected in April. This suggests that consumer spending is still supporting economic growth in sharp contrast with the pattern in Germany. In Germany the domestic economy actually *contracted* in the first quarter. True the German economy grew, but this was due exclusively to the export sector. So while the German domestic economy has been struggling France has been one of the eurozone’s best performing economies, with consumer spending and a booming housing market supporting growth. The French consumer is, it seems, considerably more robust than the German one.

So the big question is why the difference? They are both economies which according to the criteria of the Lisbon agenda are badly in need of reform. My own view, almost inevitably, is that this might well have something to do with the differing demographies of the two countries. Fertility is much higher in France – at nearly replacement rate – and over the years France has had a lot more long term immigration. Surely other factors are important: but which ones are they? Any constructive suggestions anyone?

Human Capital And Trade Deficits

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Michael Mandel had an interesting take on the US trade deficit in Business Week earlier this month (btw: he also has a weblog).

His opinion is that the US trade deficit isn’t as big a deal as people often think. One of the reasons: that the ongoing import of human capital into the US (which of course isn’t measured in the trading accounts ledger) more than compensates for the deficit:

“But get with the 21st century, folks. The trade in goods and services represents only one part of America’s connection with the rest of the world. What’s equally important — and what the trade numbers miss completely — is the incredible flow of people into the country. Each year, the U.S. receives about 700,000 legal immigrants, as well as a host of temporary skilled workers and undocumented immigrants.

Now I wouldn’t go down the same road as Mandel with the deficit question per se, but he obviously raises an interesting point here – and one, of course, that immediately strikes a chord with me.
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Immigration: Evidence and Opinion

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Following-up on my extensive post last week, some more evidence of the ongoing ‘reappraisal’ of the positive growth consequences of immigration that is taking place among economists: Immigration, Jobs and Wages Theory, Evidence and Opinion by Christian Dustmann and Albrecht Glitz.
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European GDP Numbers

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Provisional GDP numbers for eurozone countries in the first quarter are out today. The German economy surprisingly bounces back, whilst Italy is now officially in recession after two quarters of contraction. Also worthy of note is that the Dutch economy contracted slightly in the first quarter, which may have some implications for the forthcoming constitution referendum there.
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