1. National debt/ budget deficit/ Public Sector Net Debt/ Austerity in UK/ euro:
A. Arguments in favour of austerity measures:
a) National debt is at record high level and this is yet to include PFIs, payment to pensioners and the bailing out of troubled banks (UK)
b) To prevent a further divergence between stable economies like France and Germany with the periphery areas of Euro (Portugal, Italy, Greece and Spain). Otherwise, policies initiated at central level will be suitable for some and not for others e.g. interest rate set by ECB
c) Does not necessarily affect growth. Between 1993-96, Canada managed to tame its national debt by slashing public spending and raise taxes. Similar experience for Estonia and Latvia in recent times. Some economists argue that efficiency spending is so much more important than how much money is been thrown into public sectors
d) Governments should not spend the money that they do not have
e) To prevent a cut in credit rating. UK may risk losing its gold-plated AAA rating if the national debt is not brought to a more sustainable level. May follow the same fate like the USA
f) To prevent a rise in bond yields/ long term interest rates. May happen if national debt increases to an unprecedented level where individual governments find it almost impossible to further attract lenders. The only solution is to offer higher rates of return on gilts/ bonds/ securities
g) Euro and pound are at record low level against the greenback and other currencies. No investors/ speculators/ investment managers would be interested in holding currencies which are of no value
B. Arguments against austerity measures:
a) During recession, consumption, investment and exports which largely made up the aggregate demand will fall. Public spending needs to increase to offset the fall in these three
b) Austerity will most likely lead to further contraction of the economy. Assuming that the level of national debt is unchanged, a shrinking GDP indicates that national debt as a % of GDP will increase
c) Austerity leads to the worsening of the state of economy. People save more money to protect themselves but in the end they ended up worse-off than before. Related to the Keynesian's paradox of thrift
d) If it leads to deflation, then the value of national debt will be inflated
e) Canada is very much different from Euro. It has huge advantage in terms of macroeconomic stability e.g. independent central bank, ability to spend/ inflate itself out of debts and devalue its currency something which euro economies can only dream off. Even the recent economic miracle by Estonia and Latvia masks many things amongst rising double-digit unemployment
f) Politically unpopular and may cause the government to lose votes. Street protests are expected to take place everyday in the most affected areas e.g. Greece and Portugal
2. Economic effects of banking crisis:
a) Banks unable to generate lending. Fall in consumption and private investment will stifle growth
b) Banks unable to facilitate international trade. Inability to issue the Letters of Credit (LOCs) for trade finance and export credit. Period of de-globalisation
c) Rising unemployment in banking, investment and construction sectors
d) Housing bubble burst
e) Worsening of government finances as the UK government steps in to buy up the toxic debts and part nationalise some of the most troubled financial institutions e.g. RBS, Northern Rock etc
f) Falling inflation as measured by both CPI and RPI
g) Run on the pound-denominated assets
h) Reversal of FDIs from Western Europe, USA and BRICs
3. Economic effects of global recession onto SSA economies:
a) Reversal of FDIs especially from developed economies
b) Fall in the amount of remittances since many African workers who work abroad are laid off
c) SSA countries that heavily rely on tourism are adversely affected. YED >1. When income falls, quantity demanded for international tourism falls too
d) Countries that have poor diversification in their economy e.g. Nigeria with oil and Zambia with copper are very much affected due to fall in global demand
e) Foreign banks based in SSA repatriate most of their profits to HQ resulting in lower investment and cut in lending
4. Reasons for the fall in euro against pound in recent years:
a) Continuous increase in the bond yields of periphery economies within the Euro like Greece, Spain and Italy. It is a sign of economic instability where governments in concern are facing grave difficulty to raise finances. Fear of economic collapse, speculators bet the euro to fall against the pound
b) Fiscal austerity is taken to another height in troubled economies. Both actual and potential GDP are expected to contract further. No investors willing to hold currency of unstable economies
c) UK has the BOE to act as a lender of last resort. ECB is clear on its stance that it will not intervene to purchase the bonds of countries like Greece and Italy thus resulting in liquidity crisis. These governments will not have sufficient funding to meet its short term commitments. Market observers/ speculators may worsen the condition by creating a panic in financial market as if the governments would turn insolvent. Euro depreciates
d) Euro has very little macroeconomic flexibility to deal with economic shocks. It cannot alter the prime rate, devalue the euro to provide competitiveness and also spend itself out of recession unlike the UK which still at least have independent central bank and the option to export itself out of debts. ECB is heavily criticised for having zero tolerance against inflation. It maintains high interest rate of 1% despite calls to become more lenient in times of crisis. Recession is hence expected to be prolonged and therefore resulting in heavy selling of euro
5. Economic effects of rising oil prices onto UK economy in 2010/2011
a) Cost-push inflation. All firms will be affected through the increase in the costs of logistic
b) Lower competitiveness since British-manufactured goods will cost more. May be reflected in the worsening of trade balance
c) Companies are already badly hurt because of the financial/ banking crisis. Any further increase in operating costs will most likely be dealt with large scale rationalisation
d) Prospect of double-dip recession. Badly timed since this will worsen government finances e.g. more payments of dole, bailouts (banks, airlines etc) and servicing higher interest rate on debts
e) Regressive effect. Low income people will have to spend a bigger portion of their income for transports
f) People will have higher inflation expectations and this will be used as a rough guideline to bargain for higher wages. Wage-spiral inflation may happen
g) Prospect of higher interest rate. If the CPI goes beyond the targeted level, BOE may raise the interest rate despite the economic malaise
6. Primary product dependency in developing economies
A. Arguments in support of:
a) Able to reduce unemployment on a large scale especially in rural areas since farming is labour intensive. More people will be absorbed during the peak of harvesting season
b) Comparative advantage especially huge acreage of arable lands, suitable weather and most importantly large number of cheap unskilled workers. Prerequisite for farming
c) Can yield high profits for farmers especially cash crops like corn, rice, tobacco, sugar and coffee. Farmers practice mono-cropping where single crop is grown on the same piece of land to fully exploit EOS. Very different from subsistence farming. Improve their livelihood
d) Lucrative export revenue especially from commodities trade like oil (Nigeria, Congo-Brazzaville etc), copper (Zambia) and minerals like diamonds (Botswana etc). May help to reduce current account deficit and also boost governments' revenue. More budget to develop the nations
e) Explorations of minerals and metals are usually done by collaborating with multinationals. Catalyst of growth since large companies can contribute towards both actual and potential growth
B. Arguments against primary product dependency:
a) Very volatile prices. Nature of PED < 1 since they are necessities and PES < 1 because it may take a long time to grow crops or discover new mines. Any demand or/ and supply shock may cause a large price fluctuation. Unstable income for farmers. In 2000, when prices of coffee fell by 40%, Uganda which is Africa's second largest coffee producer was severely affected. For risk-adverse farmers, it may hinder investment
b) Minerals and metals are scarce in nature. Developing economies cannot forever depend on them as an engine of growth. Economies which are least or slow to diversify may find themselves vulnerable
c) Exports of commodities like copper may lead to appreciation of home currency. Importers will need to demand for kwacha (Zambia's currency) in order to pay Zambian exporters. As kwacha rises, it will gradually erode the competitiveness of its manufacturing sector. This is known as the Dutch Disease
d) High dependency on lucrative agricultural/ mining sectors may hinder investment in other more important areas like education and healthcare which can add to the stocks of national assets. Does not assist in long term growth and development
e) Jobs creation on the farm are very seasonal in nature. Once harvesting season is over, these people will be made unemployed once again
f) Cash crops are meant for profits. Some or most of them are sold off leaving nothing much for local consumptions. Famine is expected to increase
g) Falling terms of trade. Historically, prices of manufactured goods have been relatively steady while the prices of food and raw materials have been declining. Low export prices to high import prices, resulting in lower terms of trade (fall in earnings but rise in import expenditures). Often associate with problems like large BOP deficit, declining foreign reserves and rising foreign debt
7. Factors that lead to de-globalisation post crisis:
a) Global recession especially in the first world economies. Falling income hence lower appetite for imports of consumer goods. Declining profits and business confidence have undermined imports of capital equipments
b) Fall in the value of euro and pound. Foreign goods appear to be artificially expensive
c) State governments impose protectionism e.g. tariffs and quotas onto imported goods. The aim is to prevent job losses, bankruptcies and also to collect some tax revenue to pay for national debts
d) Banking crisis means that financial institutions will be unable to provide trade finance e.g. issuance of the LOCs (Letters of Credits) and facilitate export credits. Fall in the level of international trad
e) Countries in Asia that are unaffected begin to reduce their dependencies on troubled economies. Increase their shares of trade with other emerging economies where the volumes of trade are no longer at pre-crisis level
8. Factors that lead to rising protectionism post crisis:
a) Governments of the most affected economies are calling for protectionism e.g. President Obama called for Buy American program and President Sarkozy's idea of relocating car production back home were under severe fire.Rising protectionism is therefore an act of retaliation
b) To protect local jobs. If not millions of jobs will go in case UK/US/ Euro people still buy imported goods
c) To prevent bankruptcy which will worsen the economic condition. Also as a reaction to garner supports from the grassroots
d) To improve government finances. Higher tax revenues from tariffs can be used to pay off some of the debts. Simultaneously such act can prevent the governments from paying more doles and bailouts
9. FDIs (Foreign Direct Investments)
A. Arguments for:
a) Agent of growth. When multinationals build new roads, new factories or purchase capital equipments, they inject money into the circular flow of income. Actual growth is achieved. Building of infrastructure like bridges, rail links and proving telephone lines will contribute towards the stocks of national assets. Boost supply side of the economy. Either way growth can be achieved
b) Job opportunities usually with higher pay
c) Provides state government with tax revenue
d) Transfer of resources like technical and technology
e) Improve the trade performance of a country. Usually goods manufactured will be of better quality
B. Arguments against:
a) Investment is only at the initial. Once the operation is stable and turn profitable, most of the profits will be sent home. Creates a mirage that developing economies can continuously benefit by leveraging on their investment
b) Imports of capital goods and raw materials which are not available locally will worsen the current account balance
c) Limited transfer of knowledge. Very often, local workers are placed in front-line production processes, where tasks are repetitive/ monotonous. In mining, some of them work under very unsafe conditions e.g. rock falls, heat exhaustion and tunnel collapses. This will reduce their welfare
d) Tax revenue may not increase in the short term. Developing economies are racing ahead against one another to attract foreign investors. As such offer attractive tax exemptions
e) Modern colonialism. Minerals are plundered using the most intensive method. Once exhausted, the MNCs may just leave the country and move on to another areas which are rich in resources
f) Redistribution of income from third world to first world. It only benefits factory/mine owners and corrupted state leaders. People who work are paid much lesser than thought. Taking advantage due to monopsonist power and considering that the people are too poor to reject an employment opportunity
8. Factors that lead to rising protectionism post crisis:
a) Governments of the most affected economies are calling for protectionism e.g. President Obama called for Buy American program and President Sarkozy's idea of relocating car production back home were under severe fire.Rising protectionism is therefore an act of retaliation
b) To protect local jobs. If not millions of jobs will go in case UK/US/ Euro people still buy imported goods
c) To prevent bankruptcy which will worsen the economic condition. Also as a reaction to garner supports from the grassroots
d) To improve government finances. Higher tax revenues from tariffs can be used to pay off some of the debts. Simultaneously such act can prevent the governments from paying more doles and bailouts
9. FDIs (Foreign Direct Investments)
A. Arguments for:
a) Agent of growth. When multinationals build new roads, new factories or purchase capital equipments, they inject money into the circular flow of income. Actual growth is achieved. Building of infrastructure like bridges, rail links and proving telephone lines will contribute towards the stocks of national assets. Boost supply side of the economy. Either way growth can be achieved
b) Job opportunities usually with higher pay
c) Provides state government with tax revenue
d) Transfer of resources like technical and technology
e) Improve the trade performance of a country. Usually goods manufactured will be of better quality
B. Arguments against:
a) Investment is only at the initial. Once the operation is stable and turn profitable, most of the profits will be sent home. Creates a mirage that developing economies can continuously benefit by leveraging on their investment
b) Imports of capital goods and raw materials which are not available locally will worsen the current account balance
c) Limited transfer of knowledge. Very often, local workers are placed in front-line production processes, where tasks are repetitive/ monotonous. In mining, some of them work under very unsafe conditions e.g. rock falls, heat exhaustion and tunnel collapses. This will reduce their welfare
d) Tax revenue may not increase in the short term. Developing economies are racing ahead against one another to attract foreign investors. As such offer attractive tax exemptions
e) Modern colonialism. Minerals are plundered using the most intensive method. Once exhausted, the MNCs may just leave the country and move on to another areas which are rich in resources
f) Redistribution of income from third world to first world. It only benefits factory/mine owners and corrupted state leaders. People who work are paid much lesser than thought. Taking advantage due to monopsonist power and considering that the people are too poor to reject an employment opportunity
Heard that Unit 1, 2 and 3 were rather 'easy' this time around. Doesn't sound like the typical Edexcel to me. Anyway, just be well prepared in case if Unit 4 turns out to be a heavy storm. Best wishes
Cheers :)
