Economists and Sustainable Development
The OECD report is almost exclusively about environmental policy (on which it
contains a mass of useful data and discussion). There is, commendably, hardly
any discussion of the implications of the usual core condition in consensus
definitions of sustainable development, namely that there should be no future
decline in per capita welfare. Economists would also do well to ignore this
condition, and hence the problem of a possible conflict between optimality and
sustainability. And, insofar as it is believed that there is a conflict, we should opt for optimality since the ethical grounds for not doing so—e.g. that pure time preference over generations is unethical or that we have to respect the rights of future generations—are weak. A second major omission is more serious and is the report’s failure to get to grips with crucial constitutive and instrumental components of sustainable development, notably civil and political liberties.
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What Do We Know About the Shadow Economy?Estimates of the size of the shadow economy in 21 OECD countries are
presented. The average size of the shadow economy (as a percentage of ‘official’
GDP) over 1999/2000 in these countries is 16.7%. The author concludes that it is
the increasing burden of taxation and social security contributions, combined
with rising state regulatory activities, that are the driving forces for the recent growth in size of the shadow economy in the countries concerned.
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What Happened to the Washington Consensus?At the beginning of the 1990s it appeared that there was considerable agreement
about the kind of economic policies that countries turning to the IMF and the
World Bank should pursue. These included macroeconomic stabilisation,
microeconomic liberalisation and openness, and were summarised by the concept
of a ‘Washington Consensus’. How has the Consensus stood up to the passage of
time? This article briefly assesses the track record of Consensus-type policies and shows how the Consensus has evolved. With regards to some of its components, a greater sense of agnosticism may now prevail. Moreover, issues that were little or no part of the Consensus have come to the fore. The implications of these changes for institutional design are also investigated.
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Championing Free Trade in the Second Age of Globalisation Author: An interview with introduction by Brian Snowdon, December 2001
Professor Jagdish Bhagwati is without question one of the world’s leading
economists and an authority on the principles and practice of foreign trade. In his extensive research over the past forty years he has made seminal contributions to trade theory and policy, public finance, the new political economy, development theory and policy and India’s economic development. Recently, Professor Bhagwati has been an outspoken critic of US trade policy, capital account liberalisation in developing countries and the global trend towards establishing preferential trade agreements and regional trade blocs. He also continues to champion the case for free trade against the ‘anti-globalists’ who, in order to achieve a variety of social and environmental agendas, advocate various forms of protectionism. Professor Bhagwati gives his views on these, and several other important global issues.
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Cohabiting with GoliathThe surviving legacy of the Long Term Capital debacle of October 1998 is an
increased preference for liquidity among international investors. This process has
a self-fulfilling element with liquidity following investors out of the less liquid
markets and into the more liquid. A closer examination of this issue, however,
suggests liquidity is not just an issue of size. There is some evidence that some markets have become bigger, yet thinner. In this paper the author focuses on the characteristics that can be used to better identify liquidity risk when a crisis hits.
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Why is There No AIDS Vaccine?This paper provides an economic explanation for the non-existence of a vaccine
against AIDS. It comments on previously claimed economic reasons why private
laboratories do not have incentives to invest in an AIDS vaccine and provides a
new one: private companies already operate in the market for treatment of
already infected patients, which market is threatened by the eventual emergence
of a vaccine that cuts the cycle of infection. Finally, the paper discusses some
mechanisms to provide incentives for further private research in diseases where a treatment product already exists.
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Prohibition and the Market for Illegal DrugsOver the past 25 years in the United States, enforcement of drug prohibition has
expanded dramatically. Over the same period, however, the trends in drug
production and consumption have been essentially flat, and the real, purityadjusted prices of both cocaine and heroin have more than halved. This
combination of facts raises questions about the effectiveness of prohibition
enforcement, and it constitutes a puzzle that is interesting to explain. In this
paper the authors document these facts and explore possible explanations. They
do not claim to provide a complete answer, but shed light on which explanations
are likely to be important.
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Measuring Global Drug MarketsThe continuing demand for measures of the size of global drug revenues has
produced a supply of numbers that consistently overstate international financial
flows. This paper shows that, rather than $500 billion, the annual figure in trade
terms may be about $25 billion. As with many refined agricultural products, most
of the revenues go to distributors rather than to primary producing countries. The
authors explore the need for estimates of the global drug markets, address the
difficulties of obtaining ‘good’ numbers, and describe opportunities for
developing better estimates of flows and revenues. There are at least three
reasons for caring about the numbers: they can help to improve understanding of
the drug production and consumption problem and identify appropriate policy
responses.
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Up for the CupMeasured by attendance of football fans, the FA Cup is in decline. This paper
reviews the evidence of this decline and suggests that the underlying cause may
be the growing imbalance of competition in the Cup. The paper considers the
drastic innovation that the FA introduced in 2001 to stem that decline: the
allocation of prize money. The prize money scheme is described and its likely
impact on the outcome of the competition is discussed.
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Economic GlobalisationThe concept of globalisation has received a great deal of popular attention in
recent years. However, the term is often used quite loosely. When defined to
mean closer international economic integration, the evidence shows that the
extent of globalisation may easily be exaggerated. This article examines the
evidence and assesses the benefits from, and costs of, globalisation. It goes on to discuss how the costs might be mitigated, and briefly examines the role of the principal international trade and financial institutions.
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Wealth as a Criterion for Sustainable DevelopmentIn this article the authors define sustainable development as an economic
programme along which social well-being does not decline over time. It can be
shown that the requirement is equivalent to the maintenance of a comprehensive
measure of wealth, where an economy’s wealth is defined to be the social worth
of its entire array of capital assets, including natural capital. Using data published by the World Bank on the world’s poorest regions, countries which would be regarded as having performed well if judged on the basis of such indices as GNP
per head or the Human Development Index are found to have grown poorer, a few alarmingly so.
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Redefining the Role of the State Author: An interview with introduction by Brian Snowdon, September 2001
An interview with introduction by Brian Snowdon
Professor Joseph Stiglitz is without question one of the world’s leading
economists. In his extensive research he has made seminal contributions to the
analysis of the economic consequences of incomplete information and
uncertainty. This work has greatly enhanced economists’ understanding of the
welfare properties of markets and the sources of market failure. His research has
also contributed to the development of better microeconomic foundations for
Keynesian macroeconomic models. Most recently Professor Stiglitz has been
heavily involved in controversial public policy debates relating to the East Asian crisis, problems of transition from communism to capitalism, the limitations of
the ‘Washington consensus’, and globalisation and development. A common
theme in all of these debates relates to the role of government and legitimate
borders of the state in both developed and developing economies. In this
article/interview Professor Stiglitz gives his views on these and several other
important global issues.
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Global Income InequalityWhile several international organisations have argued that income gaps between
countries have increased during the last decades, the opposite conclusion is
obtained if countries are weighted according to their population size, and if price-level-adjusted income data are applied. Inequality measures that give higher
weight to the poorest countries also support this conclusion. Due to falling
incomes in a number of poor countries, however, the gap between the richest and
poorest countries has widened, and unambiguous conclusions about welfare are
difficult to draw.
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The Debt-Relief Initiative for Poor CountriesThis paper reviews the new debt-relief initiative for Highly-Indebted Poor
Countries (HIPCs) designed to reduce the debt burden of potentially 36 poor
countries. It finds that the HIPC initiative is not likely to make a major
contribution to the problems of the world’s poor. It offers limited and highly
conditional resources, most of which are not likely to be additional to existing
resource flows; the resources are not distributed according to need; and the policy packages accompanying HIPC are unlikely to do much for the major
development problems that are constraining these countries’ development
efforts. A major problem with the initiative is that it excludes all the populous poor countries, so that the vast majority of the poor of the world will not be
touched by it.
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NGOs and International Economic Policy-MakingNGOs and other citizens’ groups are enjoying an unprecedented upsurge in their
profile and influence in global debates over international economic policy. Public
opinion polls show this to be a popular trend, but the outcome of greater civil
society involvement depends on whose voices are actually represented in global
debates, how competing interests are reconciled, and whether NGOs are effective in playing their roles in the international system. Unless the process of
civil society engagement is properly managed, the result may be gridlock. This
article outlines the strengths and weaknesses of NGO involvement and suggests
a number of avenues for improvement in the future.
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Policy-Making in Resource-Rich CountriesEconomic development depends upon resource availability, resource allocation,
and the efficiency of resource use. One would presume that countries with an
abundance of natural resources would stand a better chance of developing than
resource-poor countries. Recent experiences in less developed countries show,
however, that countries with an abundance of natural resources have grown at a
slower pace than countries with scarce natural resources. Zambia is a case in
point. Its economy has been based on copper mining, but over the last three
decades per capita incomes in Zambia have been halved. This paper shows how
policy-making in such a resource abundant economy is biased by the availability
of resource rents. It further discusses the implications for the policies of
international financial institutions and other donors in such a setting, and the
possibilities for the domestic process to sustain a system of good governance.
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The International Arms Industry Since the End of the Cold WarThis article surveys the evolution of the international arms market since the end of the Cold War. It begins with the policy context, the choices made by the
national Ministries of Defence and the constraints they faced. It then looks at the choices available to the arms producers: convert, diversify, divest, co-operate or
concentrate. These choices, by governments and firms, produced a large increase
in the degree of concentration. The share of the five largest firms increased from just over 20% in 1990 to 45% in 1998, and it has increased further since then. Finally, the author looks at the economic adjustment in response to these shocks.
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A Night at the OperaThis paper considers how the behaviour of the two London opera houses differs
from profit-maximisation, possibly in response to the high level of government
funding and private donations. The opera houses put on more innovative and
artistically rewarding operas than would be the case with profit-maximisation.
They also have clear access policies in offering low-price and discounted tickets.
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Bad Market DaysThere are a large number of misconceptions regarding the great stock market
crash of 1929 and the crash of 1987. Both crashes occurred when the general level of business was good and getting better. In 1929 there were very few hints that the great depression was two years away. In fact, in recognition of the favourable business climate, by the end of 1929 the market had recovered most of its October losses and was down only 11.9% from its highs (the major losses were to occur in 1930–1932). There were several causes of the 1929 crash. Two of the most important causes were the campaign by the Federal Government against
the orgy of speculation taking place in New York City and an action by the Public Utility Commission of Massachusetts that triggered a collapse of inflated public utility stock prices. That, in turn, triggered a collapse of other stock prices.
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Is Public Spending Good for You?Studies by psychologists, sociologists and economists indicate that increases in incomes beyond about US$4,000 are not related to happiness nor significantly with the objective quality-of-life indicators (which increase with scientific and technological breakthroughs at the global level). Yet everyone wants more money.
This may be explained by environmental disruption, relative-income effects, inadequate recognition of adaptation effects, and the materialistic bias due to our accumulation instinct and advertising. These factors cause a bias towards private consumption, making public spending, especially on research and environmental protection (with their long-term and global public-good nature) well below optimal. This is made worse by economists’ emphasis on the excess burden of taxation, ignoring the negative excess burden on the spending side.
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Negotiating TradeIf unilateral free trade is the best policy, then why are international treaties
needed to achieve it? The reason may be found in the Becker theory of
competition among political pressure groups. By entering wide-ranging
negotiations, nations shift the political question from one of protecting a single
industry to one of protecting many industries. This makes it less likely that a
narrow interest in favour of protection will prevail over the general national
interest in favour of free trade. Economy-wide negotiations frame the question of
free trade versus protection in a way that favours free trade. Although Becker’s
theory points to an inherent bias in favour of the political success of economically
efficient policies, the force of his theory is most evident in the possibly rare
instances in which that bias is in fact overcome. Two examples are the special
conditions attaching to Japan’s accession to the GATT and the US protectionist
response to Japan’s rising imports.
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IMF Programmes: Is there a conditionality Laffer Curve?The long-standing debate over IMF conditionality has received a new lease of
life in the context of the debate over a new international financial architecture.
Conditionality has increased in recent years and some proposals for reform envisage a continuation of this trend. However, by emphasising the importance
of implementation as well as design it may be argued that increased
conditionality will have a negative effect on final out-turns; there may be a
conditionality Laffer curve. The policy issue is whether conditionality has
reached or gone beyond its optimal level. There is some evidence that is
consistent with the claim that conditionality has become excessive.
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Is the Internet Better than Electricity?This article looks at the economic impact of electrification in the United States to
gain insights about the possible consequences of today’s information
technologies. A close study reveals that electrification significantly raised
productivity growth by spurring a redesign of the optimal factory but, strikingly,
neither the firms producing the new technology, nor those using it, were able to
increase their share of profits in GDP. The authors conclude that even in the
unlikely event that the internet and IT matches electricity in economic terms,
the only unambiguous beneficiaries would probably be consumers who are able
to enjoy lower prices of goods and services and newer products.
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The Rebirth of the Corporate Bond MarketThere has been a major switch from equity to debt finance in recent years,
associated with a fall in the long-term rate of interest. The paper explores the
macro-economic causes of the sea change in interest rates (lower budget deficits,
independent central banks, lower inflation expectations) and the micro-economic
consequences. Firms are taking on more debt partly for tax reasons and partly
because at lower interest rates they have better interest cover. This means they
can increase their borrowing at lower risk and hence at lower cost.
An examination of a cross section of UK firms from the FTSE 350 shows two
major influences on the debt-to-value ratio of large firms. Firms with healthy cash
flow are allowed to borrow against that income; and firms whose income is
relatively invariant across the economic cycle (as measured by a low asset beta)
can afford a higher level of debt.
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Keeping the Keynesian Faith Author: An interview with introduction by Brian Snowdon, June 2001
This wide-ranging discussion takes in the development of macroeconomics and the influence of ideas and events on that development, the nature and causes of the Great Depression, Keynesianism, lessons from the high-inflation period of the 1970s, the role of macroeconomic policy, and the idea of the ‘new economy’.
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Latin America: The Long and Winding Road to GrowthThis paper reviews recent economic reforms carried out in Latin America and
relates them to the long-run economic trends in the region. After a brief overview
of growth and income distribution patterns of Latin American countries in the
nineteenth and twentieth centuries, the paper addresses some of the reasons for
the region’s economic decline. Milestones such as the debt crisis of 1982, the
failure of heterodox stabilisation programmes in the 1980s and the consequences
of liberalisation in the 1990s are discussed at length, as also are the lessons drawn
from the financial crises of the 1990s for the current process of economic
transformation.
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Revisiting The Death of EconomicsPaul Ormerod achieved notoriety, even opprobrium among orthodox economists,
with the publication in 1994 of his best-selling book The Death of Economics.
Ormerod’s aim was to provide a critique of conventional economics which was
accessible to general readers. He described orthodox economics—with its
assumptions of ‘rational’ behaviour in a mechanical, linear world of equilibrium—
as in many ways an empty box. “Its understanding of the world is similar to that
of the physical sciences in the Middle Ages. A few insights have been obtained
which will stand the test of time, but they are very few indeed, and the whole
basis of conventional economics is deeply flawed.” No wonder the prescriptions
offered by conventional economists regarding big questions like inflation and
unemployment are, according to Ormerod, at best misleading and at worst
dangerously wrong.
A secondary objective of the book was to suggest how economics could be
developed to give a better understanding of how the world actually operates. A
necessary starting point is a wider appreciation of human society as a non-linear
system of huge complexity. Here, the approaches of the biological sciences—or of
subjects such as palaeontology, astronomy and climatology which tend to build
theories around the facts from the outset rather than pursuing abstract theories of
how a rational world ought to operate—are likely to reveal more light than can the
restrictive analytical tools of economic orthodoxy.
World Economics asked the author whether, eight years on, he still stood by his
original theses, or whether he has had cause to revise his ideas. In this invited
article, Paul Ormerod revisits ‘the death of economics’.
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Promotion and RelegationOne of the most distinctive differences between team sports in Europe and
North America is the institution of promotion and relegation. This paper looks
into the history of why this institution developed in Europe but not North
America, and considers what effects it may have on the competitive balance of the leagues. While dominance of the leagues by a small number of wealthy teams
is a more severe problem in Europe, its effects are mitigated by the opportunity
for new teams to enter from below and the excitement generated by the struggle
for survival among the weaker teams.
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Wanted: Measures of Economic ChangeEconomic growth may involve change, but there can be change without
economic growth insofar as outputs of some products or employment in some
regions or industries grows while there are equal decreases elsewhere. National
accounts data do not reveal such shifts, yet they may involve investment and
disinvestment, require the acquisition of new skills and cause changes in the
location of economic activities. Some simple examples are provided,
demonstrating that the rate of growth and the pace of change are by no means
perfectly correlated. Hence separate measures of change are required if we are to
understand what is happening in the economy.
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How Clear is the Crystal Ball?Two salie nt features of growth forecasts are discussed. First, recessions generally arrive before the forecast. Slowdowns are predicted but forecasters are unable or unwilling to call recessions. Second, private sector forecasts tend to be similar to those of official agencies. Some tips for forecast users are provided.
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The Modern Motor IndustryThe motor industry is experiencing one of its periods of massive change. This
involves considerable micro- and macroeconomic effects, reflecting the structure
and behaviour of the industry and its scale of operations within an economy. The
industry is a highly rivalrous oligopoly, where although there is product
differentiation, competition, both price and non-price, is considerable. This
impacts upon the nature of vehicle demand, including environmental issues.
Supply conditions in the industry generate interesting data on short-run and long-run economies of scale issues. The analysis is on a global basis, where new
manufacturing centres are appearing. Continued consolidation has occurred and
this affects the UK which is representative of most auto making centres in that
enterprises are controlled by foreign owned multinationals.
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Can Bettors Win?In this paper, a survey is undertaken of studies that examines the extent to which systematic patterns of behaviour in betting markets can generate above-average
or even abnormal returns, the latter being most conveniently defined for these
purposes as a profit. The paper concludes that although betting markets do tend
to process efficiently the information available to them, there are clear
opportunities to earn above-average returns. Moreover, there is significant
evidence that some bettors are able to profit by withholding and subsequently
utilising superior information.
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Eastern Enlargement and EU Labour MarketsThis paper summarises the key findings of a recent study on the impact of
Eastern Enlargement of the European Union (EU) on labour markets in the
current Member States. The study focuses on three main channels along which
enlargement may affect labour markets in the EU, namely i) trade, ii) foreign
direct investment, and iii) migration. A main conclusion of the study is that trade
and capital movements are very unlikely to lead to an equalisation of factor
prices. Thus, strong economic incentives to migration are bound to be present.
The study indicates that such an influx of migrants will have only a moderate
impact on wages and employment even in Austria and Germany. European
leaders will soon have to formulate a joint position regarding this fundamental
issue. The authors argue for keeping actual migration flows under control for a
transitional period.
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Child LabourThe purpose of this paper is to pull together the emerging theoretical and
empirical literature on the economics of child labour, and to draw out the
underlying commonalities between various contributions in this field. In doing
so, the authors also identify various policy options and their relative merits.
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On Understanding MoneyFiat money is a creation of both the state and society. Its value is supported by expectations which are conditioned by the dynamics of trust in government, the socio-economic structure and by outside events such as wars, plagues or political unrest.
The micro-management of a dynamic economy is not far removed in difficulty
from the micro-management of the weather. However, money and the financial
institutions and instruments of a modern economy provide the means to
influence expectations and bound behaviour. The control of the fiat money
supply, together with rules on the granting of credit and the bankruptcy, default and reorganisation rules are public services. They provide lower and upper bounds for the price level in the economy. They also determine the innovation rate of the economy. An innovation may be regarded as an economic mutation; the less costly failure is, the more likely an innovation will be risked.
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E-money: Will it Take Off?The growth of the Internet and e-commerce raises some interesting questions for those interested in the monetary system. Is a new Internet-based digital
transactions medium likely to evolve and what would the consequences of this
be for taxation, monetary and financial stability? This article reviews the
problems that have so far prevented the adoption of digital money and the ways
in which these are now being tackled. It concludes that take-off is likely in the near future and considers the consequences for policymakers.
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Is Dollarisation a Viable Option for Latin America?In the aftermath of the East Asian financial crisis there has been much discussion of exchange rate policy in developing countries. Some observers have suggested that they should opt either for flexible exchange rates or for firmly fixed rates. Adopting the US dollar as legal tender and abandoning the domestic currency is one possibility. In conditions of economic crisis Ecuador dollarised in early 2000. Will other Latin American economies follow or will Ecuador live to regret the decision? This article assesses the arguments.
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Russia’s Post-Communist EconomyTen years after the break-up of the Soviet Union, Russia’s measured output was still showing a net decline of around 40 per cent – but with no comparable
decline in average living standards, both because the output drop affected mainly the defence sectors and because Russia’s participation in international trade had increased. At the same time there was greater inequality. And despite expansion of small businesses and the service sector, industrial restructuring had made only slight progress. This reflected geographical problems as well as
underdevelopment of key market institutions such as property rights, hard
budget constraints and the banking system, which meant that capital and labour
markets barely functioned.
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The Emerging Northeast–Southeast Asia Divide and Policy ImplicationsSince the outbreak of the Asian financial crisis in mid-1997, the gulf between the Northeast Asian economies and Southeast Asian economies has widened as measured by GDP growth rates and size, direct and portfolio investment flows,
stock market capitalisation and trading turnover, as well as foreign exchange reserves. The growing divide between the two regions can be explained by four
factors, namely: political-risk differentials; different paces in economic
restructuring and financial reforms; China’s allure in post-WTO entry; and the
technological gap between the two regions. To recapture competitiveness, the
Southeast Asian economies need to pursue the following policy responses with
some urgency: re-establish a more stable political environment; accelerate
market-oriented reforms and liberalisation; and fine tune incentives to attract
foreign investment.
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