Economic Analysis

Here are two articles on Pigouvian Taxes and The Coase Theorem - I have shown you a picture of the former and will discuss the latter next week. The first article provides various examples of the use of these taxes to deal with externalities. The Coase theorem has applications beyond externalities.

It is the foundation of the transactions cost literature and the literature on contracts. This literature also provides us another way to look at markets and suggests that firms are substitutes for markets. They are both 'governance mechanisms' - they govern the conduct of transactions and the costs of using these two governance mechanisms determines which one is more likely to be used.

It also helps us to understand contracts and vertical integration. For example, we should expect to observe long term contracts or vertical integration in the aluminum value chain. This is because an alumina refinery can only accept a particular grade of bauxite and and aluminum smelter can only accept a particular grade of alumina. This type of exchange cannot be carried out using markets.

Automation and its potential impact on jobs is a much debated issue. A company which makes robots for use in the garment industry and their likely impact. Leather made using biotechnology.

The Adidas "Speedfactory" in Germany which uses 3-D printing and robots and has very few employees.

Here is a video.

Two articles on inequality. One on the role of government and taxes and the other on how employee benefits have changed over the years and how outsourcing cleaning services has contributed to income inequality.

Here is an article from The Economist on emerging markets - Brazil and Russia are in trouble.  And another, another which is about the high levels of corporate debt in these countries - this debt is issued in places like the Cayman Islands, partly to get around capital controls.

We are discussing Brazil for the next two weeks so I am posting some articles from The Economist.

A special report on Brazil: September 2013

Some more recent articles

Custo Brasil

And the IMF's change of heart about Capital Controls ... although it would appear they still are no substitute for good macro policies and a sound financial system.

Bottom line is that many governments look to demand side policies to fix business environment or supply side problems - it just does not work. This is funny because fixing the supply side is 'in the hands of the government' as it were - the issues are purely domestic, yet they appear to make little progress on infrastructure, education, taxes, institutions, corruption ....  instead they call for 'global regulation' and 'international coordination' of demand side issues.

In 2016-17 things are looking up for Brazil (at some point things are so bad, that they do have to get better) and the government has tried to do something about the labour market and pensions.

Just in case you are optimistic about the world economy.  Don't be.  There are risks of deflation in Europe.  This article explains why positive inflation is a good thing.

Here are some articles from the NYT and The Economist on Spain and an interesting podcast from Planet Money (NPR) on one Caja in Spain.

This article explains the different types of unemployment: Frictional, Cyclical, Structural.

And then I have a series of articles on Spain from 2009 to 2014.  The 2009 article is explaining the dual labour market in Spain (something we talked about).  The more recent articles (2012-2014) are about reforms.

This is a recent article on the Spanish recovery from the NYT, apparently things are finally back to where they were before the crisis.  So it has taken a decade.

And a podcast from NPR on Cajasur in Cordoba

Here is the article I mentioned in class about the decline in Argentina.

The Economist magazine has write-up on the Big Mac Index and an interactive tool/map.  There is also a standard of living comparison (per-capita GDP relative to the price of a Big Mac).

The data are for July 2016 and pretty much all Asian and emerging market currencies are undervalued (relative to the US$).  Switzerland, Norway and Sweden on the other hand, have overvalued currencies.

Here is the article from The Economist magazine on India. I am reminded of the Philippines.  Although the Philippines has a very favorable demographic profile (which means it has a lot of people who are young, or in the working age group), the country has been exporting labor to other countries.  Their happy smiling faces, good social skills and command of English are highly sought after in the hospitality industry for example.  The IMF estimates that "more than 10 million Filipinos are now abroad, equivalent to around 10 percent of the total population, 18 percent of the working age population, and 25 percent of the labor force."  Personal remittances amounted to US$ 23.8 billion in 2012 (according to official estimates) and the IMF indicates that official estimates under-report remittances - the actual amount could be 50% higher than official estimates.

The Philippines government is happy about this.  This article provides some more data.   In 2011 remittances were as high as 44% of the value of merchandise exports (exports of goods).  In the same year remittances were 1.35 times the value of earnings from export of services (recall that service exports are quite high for the Philippines because of the export of IT-enabled services or the BPO sector).  Remittances help the balance of payments; they are least sensitive to business cycles and show some counter-cyclical characteristics ... so they smooth things out, not just in the balance of payments; but they also smooth out consumption expenditure.

Why is this happening in the first place?  Probably because the Philippines is not able to create enough jobs, or enough well paying jobs or both.  And who is working abroad?  Apparently workers come from the higher income regions of the country and they are also likely to be better-educated.  Is this good for the Philippines?

What appears to be happening in India is the 'business' version of the Philippines story.  Indian people are not leaving (yet) but Indian businesses are leaving or at least conducting a lot of their activities abroad.  So why would foreign firms set up shop in India?

Why is this happening?  It appears (from the article) that India has a poor (microeconomic) business environment.  So I am also reminded of Michael Porter - the patron saint of competitiveness who says that business creates prosperity (not government).  Prosperity here means higher per-capita income.  So what is the role of government?  To improve the business environment (or at the very least, get out of the way) ... so business can do what it is supposed to do - create jobs and higher incomes.