Sovereign Wealth Funds
Sovereign Wealth Funds (SWFs), much in the news of late, are a new and growing class of funds that are already large in size, and will likely grow very rapidly in the coming years. How they will operate, both in terms of their portfolio allocation and the way in which the managers of these funds communicate and interact with the private sector will have great implications for the financial markets. The author addresses some of the key features and implications of SWFs including how big they are, their likely investment strategies, their possible impact on the financial markets, the risk of financial protectionism arising as a political reaction, and issues of transparency of the funds (greater transparency by the SWFs could help restrain the rise of financial protectionism).
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The Opium Economy: A Possible Approach to ReformThis paper reviews options for reform of the opium economy within a holistic world context, emphasising the economic forces at work at each stage of the marketing chain. Rather than choosing between prohibition and legalisation, the paper proposes an incremental approach that would move steadily from a prohibitionist framework to one that was increasingly liberalised. The approach focuses on squeezing-and ideally eliminating-the profits earned in the illicit trade. It would do this by: diverting trade from illicit traffickers to public agencies; enhancing illicit costs by continued active interdiction; and, in due course, adopting forms of predatory pricing to further squeeze illicit profits. As the illicit trade withered, local markets in consuming countries might become feasible, which-as in the case of alcohol and tobacco-could be regulated and taxed with the aim of minimising harm, suppressing demand and promoting appropriate treatment and education.
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Keynes in the Long RunIn the light of recent market volatility, this essay asks: is Keynes dead or alive? The broad conclusion is that while macroeconomic models are still used, very little survives of Keynes’s original theory. 'New Keynesians' have replaced his key concept of radical uncertainty by models of imperfect information and 'sticky prices'. These can be used to justify policy interventions, but they attract only a minority of economists. By contrast, Keynesian policy is much more alive, and most monetary authorities and Treasuries are prepared to counter potential output gaps. This is for political rather than for theoretical reasons. A worrying gap, therefore, exists between economic theory and economic policy. At the same time Keynes remains alive in unexpected places and ways: notably in developing countries (though he never addressed development issues) and through occasional, less theoretical writings like his Economic Possibilities for Our Grandchildren. His reflections on the link between economics and ethics are important for our day, and his actual life remains exemplary.
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Exploring the Present Through the Past Author: An interview with introduction by Brian Snowdon, December 2007
Claudia Goldin is one of the world’s leading economists and economic historians, and has made a series of outstanding and original contributions particularly to the cliometric (or ‘The New Economic History’) literature. In this interview, Professor Goldin discusses with Brian Snowdon (who first provides a background introduction) several important issues relating to her research on economic history and cliometrics, the economics of slavery, US economic history, corruption in America, the role of human capital and education in US economic development, wage inequality, female labour force participation and the 'Quiet Revolution', the influence of the contraceptive pill, women's surnames, the reversal of the college gender gap, and women in the economics profession.
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HIV/AIDS: A Growing Concern to BusinessRecent years have seen calls for the private sector to become more involved in the fight against HIV/AIDS. Business has valuable skills and other resources that could assist government and civil society efforts, and some firms (although by no means all) also have strong reasons for involvement. HIV/AIDS hits hardest the working-age individuals who make up the bulk of the private sector’s workforce and consumer base. As well as a moral case for action, deflecting the virus's impacts on employees and economies can avert business costs and strengthen corporate reputations. This article presents some of the key arguments for business action on HIV/AIDS and provides examples of where business has less reason to be concerned about the impact of the epidemic in specific situations. It also outlines findings from the World Economic Forum's 2006 Executive Opinion Survey, which polls the views of over 11,000 business leaders in 125 countries. It finds a small proportion of firms reporting that the virus is seriously affecting their operations, with the greatest effects felt in Sub-Saharan Africa. A much larger proportion of firms believe the virus will affect them in the next five years. Despite this growing worldwide concern, it is primarily companies in the hardest-hit countries that have developed policies to cope with the threat. It is noteworthy that most firms are basing their action or inaction on a subjective perception of the risk posed by HIV/AIDS, rather than on a formal risk assessment.
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The Uneven Build Up of Global ReservesThe universal, large and uneven build up of international reserves is both a cause and a symptom of fundamental problems in the international financial system. The phenomenon represents several interlinked processes at play, so that "root cause" sorts of arguments must be treated with care. There are broadly two sets of solutions to unwind the status quo, which is also not sustainable. One set deals with the economic imbalances between the US and East Asia. The other, which contains two distinct elements, deals with re-building the multilateral institutional arrangements that govern the provision of international liquidity by [a] reforming the IMF and [b] creating a multilateral facility into which nationally held reserves might be channelled. These proposals complement each other. Addressing the macro-economic imbalances will stem the continuing rise in reserves in East Asia, calls for protection against that region’s exports to the US, and over-heated asset markets in both regions. IMF reform will re-create the global institution that is needed to survey and analyze trends in macro-economic and financial sectors the world over, and meet periodic episodes of illiquidity. It will also enable the creation of an SDR-based facility into which countries may place their reserves, for their own and the global good. Both tackle the phenomenon of excessive self-insurance. An effective international monetary fund is as much a global public good today as it was when considered at Bretton Woods sixty years ago.
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Multilateral SurveillanceThe IMF presents multilateral surveillance as one of its core responsibilities and has recently sought to enhance this role via a series of multilateral consultations with systemically important countries, designed to coordinate exchange rate and macroeconomic policy in order to reduce the global economic imbalances that threaten the stability of the international financial system. The authors examine the evolution of the IMF's multilateral surveillance and assess what it has achieved. They also investigate what may reasonably be expected from surveillance and, in the light of this analysis, evaluate the outcome of the multilateral consultations. Concluding that there are strict limits on what the Fund can achieve in terms of using multilateral surveillance to avoid economic and financial crises, they also explore areas relating to crisis management where the IMF might be able to make a more important contribution. The Fund needs to temper ambition with reality if it is to maintain credibility as an international financial institution.
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The Role of the IMF in Low-Income CountriesThe question of whether the IMF should effectively engage with its low-income member countries has recently generated a wide debate among development economists, policymakers, and advocates from nongovernmental organizations. This note elaborates on the important role that the IMF can play in its lowincome member countries, points to some current problems with the Fund's engagement with these countries, and suggests avenues for future improvement.
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Leonardo Martinez-Diaz on Carol Lancaster, Foreign Aid: Diplomacy, Development, Domestic Politics Author: , December 2007
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New Light or Fixed Presumptions?Two leading international agencies, the OECD and the IMF, are now becoming more closely involved with climate change issues, in conjunction with finance and economics ministries within their member countries. This broader official involvement opens up an opportunity: it could lead to a more informed and less presumptive treatment of the issues. At present, however, there is no sign that the opportunity will be perceived as such. In both the agencies and national capitals, it is taken for granted that ‘the science’ can be viewed as ‘settled’, and that the established advisory process which governments have created is objective and authoritative. For reasons set out here, this is not the right point of departure. A new framework is needed—less presumptive, more inclusive, more watertight professionally, and more attuned to the huge uncertainties that remain. Besides dealing with specifically economic aspects, work in both agencies should be directed more broadly to creating such a framework.
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How to Tackle PovertyThere has been an unprecedented political focus on economic development and poverty reductions since the Gleneagles Summit of 2005, yet it seems economists have been unable to agree on how to capitalise on the opportunity. Is more aid the solution? Or the problem? This article argues that, beyond the headline-grabbing generalities, development economists are building up a detailed body of empirical evidence specific to individual countries which will shape more effective policy interventions in the years ahead. As in many other areas of applied economics, there is a quiet revolution in what economists know and consequently in their policy advice.
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A Dynamic Theory of China–U.S. TradeChina's trade surplus with the U.S. is now more than a quarter of the U.S. trade deficit and, with China growing faster than the U.S., raises questions about its future course. Some media commentators term the chronic trade surplus "mercantilist" but offer no persuasive motive for it. Academics taking the classical static view regard the trade surpluses as a policy error. The authors offer a rudimentary model in which trade surplus in the early years is central for an optimal growth trajectory. The novelty derives from two features of underdevelopment shaping trade between backward economies like China and advanced economies like the U.S. First, the initial comparative disadvantages in China are an artifact of the uneven technical advances made by the U.S., so China may be able to erase those disadvantages through technological transfers bought with surpluses of exports over imports in goods and services. Reserves may be accumulated to pay for large lumps of know-how. Second, the diffusion of new products requires learning, which takes time, so the initial dearth of familiarity in China with a range of U.S. consumer goods operates as a drag on import demand for them, which may tip trade balances into surplus.
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The Future of North Korea is South KoreaNorth Korea's famine was in significant part a product of state failure, and unleashed an unintended grassroots process of marketization. Reforms undertaken in 2002 are more usefully interpreted as a response to this development than as a pro-active attempt to improve efficiency, and the government’s stance remains ambivalent. The economy is progressively more integrated with those of China and South Korea, but the modalities differ: involvement with China increasingly occurs on market-conforming terms, while interaction with South Korea has a growing official transfer or subsidy element. Recent floods will contribute to a political context for enhanced South Korean government support.
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The Power of Ideas Author: An interview with introduction by Brian Snowdon, September 2007
Joel Mokyr is one of the world’s leading economic historians, known internationally for his numerous publications on the history of technology and the Industrial Revolution. He has also written extensively on demographic issues and Irish economic history. In this interview, Professor Mokyr discusses with Brian Snowdon (who provides a background introduction to set the interview in context), a wide range of issues relating to economics, economic history, technology, the Industrial Revolution, and the influence of the ‘Industrial Enlightenment’.
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Monetary Policy, Governance and Economic DevelopmentBotswana is at a crossroads, as economic growth has slowed significantly in recent years while social problems remain largely unresolved. Exacerbating this situation is a monetary policy in crisis as over a decade of generally high interest rates have failed to address inflationary pressures. Thus, the Botswana experience challenges generally accepted wisdom on the relationship between interest rates and inflation. The main lessons learned highlight the need for (i) enhancing the knowledge and information base; (ii) tempering monetary policy to prevailing mores; and (iii) ensuring the provision of good governance at the central bank. Policy and programme recommendations that are offered are relevant not only to Botswana but also to other developing countries that face similar challenges.
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Do Current Assessments Underestimate Future Damages From Climate Change?While the economic debate on climate policy focuses on discounting, we do not know yet what to discount. The potential (non-discounted) socio-economic cost of climate change, indeed, is still unknown. Only a few studies have tried to estimate socio-economic costs of climate change. Most of them concluded that, for a warming of a few degrees, damages will be limited to a few percent of GDP. All these studies, however, have disregarded important mechanisms and have only considered the cost of a stabilized new climate. This article claims that the climate change issue should instead be framed in terms of the adaptation of socio-economic systems to a changing climate. Doing so, it calls for the taking into account of (1) the interaction between the uncertainty on future climate and the inertia of important economic sectors; (2) the short-term economic constraints that will be key in the response to climate shocks. Finally, the impacts of climate change cannot be estimated assuming that societies will always be able to manage in a perfect way the subsequent change in risks, as past experiences demonstrate our poor ability to do so. These mechanisms suggest that the uncertainty on future climate change damages is even larger than is usually acknowledged, and calls for additional research on climate change impacts.
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Managerial Performance and Contract Instability in the Market for National Football CoachesIn this paper, the authors investigate the relationship between managerial performance of national football coaches and their length of contract term to consider the extent to which relatively higher turnover may have affected team performance outcomes. The contract periods of coaches from the top twenty national teams during a thirteen year period from 1993 to 2006 are examined alongside their respective Fédération Internationale des Football Associations (FIFA) team performance rankings. The findings are evaluated in comparison with some of the main theoretical viewpoints traditionally relied upon to assess this phenomenon. The results suggest that broadening both theoretical and methodological approaches is needed to assess more adequately the complexity of these activities.
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Economic Drivers of Pharmaceutical Investment LocationThe article examines the range of economic factors that underlie decision making about the location of investments by research-based pharmaceutical companies. Set in the context of the commercial challenges facing the industry, structured interviews with 34 senior executives in pharmaceutical companies examined hypothetical investment scenarios. Unsurprisingly, both cost and quality factors are important to decision making, but their nature and relative importance depend heavily on the type of investment being considered. For some investments, particularly in high value research, quality may be paramount. In other matters quality remains important but a wide and increasing range of locations are able to deliver acceptable levels of quality, so cost becomes much more relevant.
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Colin I. Bradford and Johannes F. Linn reply to Graham Bird’s review in the last issue of World Economics [8(2): 285-287] of their co-edited volume, Global Governance Reform: Breaking the Stalemate Author: , September 2007
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James Raymond Vreeland responds to Graham Hacche’s review article [World Economics, 8(2): 97-118] on his latest book, The International Monetary Fund: Politics of Conditional Lending Author: , September 2007
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Tim Lankester on Paul Collier, The Bottom Billion: Why the Poorest Countries Are Failing and What Can Be Done About It Author: , September 2007
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Joe Perkins on Peter Diamond & Hannu Vartiainen (editors), Behavioral Economics and Its Applications Author: , September 2007
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Jack Goldstone on Gregory Clark, A Farewell to Alms: A Brief Economic History of the World Author: , September 2007
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Prospects for Commodity ExportersThose low-income countries that export non-agricultural commodities are in the midst of a resource transfer. It is undoubtedly the biggest opportunity for transformative development that these societies have experienced, dwarfing both aid and previous commodity booms. To get it in proportion, in 2004 commodity exports from Sub-Saharan Africa accounted for 146 billion US dollars or 28 percent of the region’s GDP, while aid amounted to 5 percent of GDP. Compared with the boom of the 1970s many more countries are beneficiaries: the push to diversify sources of supply has resulted in exploitable discoveries in places that were previously political no-go areas. Further, whereas the boom of the 1970s was conjured up by the OPEC cartel, this one is grounded in Asian growth and so is intrinsically less precarious. In this paper, the authors draw on a range of new research that provides a prognosis of prospects, a diagnostic of likely problems, and prescribes an agenda for international action. The paper is organized around these three objectives.
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Can China Learn from Sweden?China is undergoing a very rapid process of structural and institutional transformation, which has led to dramatic increases in income levels. During this process, the country is facing a series of development challenges that need to be dealt with in order to sustain growth. The question posed in this paper is whether China has anything to learn from the Swedish process of development, or the ‘Swedish Model’. The author first describes the emergence of the Swedish Model, and then summarises its main features and the various institutions, both economic and political, that have sustained it. He discusses governance issues, the welfare state, and policies towards the private sector. He contrasts the situation of China with that of Sweden, in order to try to ascertain whether an analysis of the Swedish Model gives insights that are of relevance to China.
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How Many Wildebeest do You Need?The catastrophic decline of wildlife in Kenya—some 60% over the last 30 years—finally galvanised the government into a review of wildlife policy. But what should have been a sober discussion of market failures, institutional failures, policy failures and conservation failures was hijacked by the international animal welfare lobby and degenerated into a sterile shouting match about the reintroduction of consumptive utilisation and sport hunting. The resulting Wildlife Act, by pandering to the welfare lobby, removes all remaining incentives for communities and landowners to keep wildlife on their land.
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Reform of the IMF and World BankReform of the IMF and World Bank has been the focus of discussion since the middle of the last decade when efforts began to adapt the two institutions to deal with new problems of financial globalization associated with a series of financial crises among emerging markets. What began as a mainly “top-down” approach to institutional reform led by the major industrial countries has been broadened to a more comprehensive assessment of the role of the two Bretton Woods institutions in the international economic system, partly in response to “bottom up” pressures from international NGOs and other external stakeholders. Improvements have been made in the role of the two institutions in crisis prevention and crisis management, but a number of other important reforms have been under active debate and require implementation. Most importantly, changes in the governance structure of the Bank and Fund are required to restore the legitimacy and effectiveness of these institutions in the international system.
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A Non-Definitive Guide to the IMFThe recent book by James R. Vreeland, The International Monetary Fund: Politics of Conditional Lending, is meant to provide “a definitive guide to the organization”. This review article argues that it falls well short of this ambitious aim. It is already somewhat dated. It is almost entirely about IMF lending, largely neglecting surveillance, arguably the Fund’s most important activity. And although it provides a useful survey of the literature, its critique of IMF lending is based on interpretations of the empirical evidence and arguments of some IMF critics many of which are questionable. The book also suffers from various confusions and misunderstandings. It is therefore an unreliable guide to the organization.
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On Solving the World’s Economic Problems by Doing Something UnfashionableThe world currently faces a number of economic problems. These include the large global economic imbalances that may prove to be unsustainable; international poverty, where projections suggest that it is unlikely that the Millennium Development Goals will be achieved; and stalled multilateral trade talks that threaten a return to more aggressive protectionism. Although very unfashionable, a new allocation of Special Drawing Rights by the IMF could help to alleviate all of these problems. Clearly, it is most unlikely that one simple policy will resolve all the world’s economic ills, but, at the same time, if the benefits from it could be substantial and the costs minimal, it is worthy of consideration.
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Response to ‘The Stern Review: A Dual Critique—Part I: The Science’In their comments on part one of the ‘Dual Critique’ [Vol. 7, No. 4] the authors draw attention to a number of instances where the treatment of sources and evidence is selective and biased, and perhaps where it reveals a modest understanding of the vast amount of conventional and well-established literature on climate science and allied topics. The purpose of this record is not fundamentally to dissect all the main points made by the Dual Critique authors. Rather, Simmonds and Steffen have confined themselves to commenting under a few headings on issues which they found particularly striking (grossly misleading, inconsistent with the workings of the climate system, or just plain wrong).
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A Stern Reply to the Reply to the Review of the Stern ReviewTol and Yohe point out that, in their reply [Vol. 8, No. 1] to Tol and Yohe’s review [Vol. 7, No. 4], the Stern team demonstrates the fragility of the numerical findings of the cost–benefit analysis in the Stern Review. At the same time, the Stern team puts less weight on cost–benefit analysis as a guide to policy making on climate change. Tol and Yohe show that the Stern Review allows several, mutually contradictory interpretations of the model that underlies the cost estimates; and argue that each interpretation implies that Stern’s cost estimates have a severe downward bias.
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Climate Science and the Stern ReviewFundamentals of the climate science dispute and common misunderstandings of some issues raised about Part 1 of the Dual Critique of the Stern Review [Vol. 7, No. 4] are discussed. One consideration is that a distinct anthropogenic greenhouse gas signal has not yet been identified within natural climate variations. The slight warming that has occurred in the late 20th century, falling within previous natural rates and magnitudes of warming and cooling, is a priori unalarming. Empirical evidence shows that the warming effect of increasing carbon dioxide at the rates of modern industrial emission and accumulation is minor, noting the established logarithmic relationship between gas concentration increases and warming. No global increase in temperature has occurred since 1998 despite a 15 ppm (4%) increase in carbon dioxide concentration, and an expectation of continued warming even at constant CO2 levels. The key issue is assessment of risk, but that includes the risk of future coolings as well as warmings, as well as their significance relative to other factors. This is why an adaptive policy towards climate change is the most sensible response option.
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Governments and Climate Change IssuesGovernments, and in particular the governments of the OECD member countries, are mishandling climate change issues. Both the basis and the content of official policies are open to serious question. Too much reliance is placed on the established process of review and inquiry which is conducted through the agency of the Intergovernmental Panel on Climate Change. This process, which is wrongly taken to be objective and authoritative, has been made the point of departure for over-presumptive conclusions which are biased towards alarm, in the mistaken belief that ‘the science’ is ‘settled’. Rather than pursuing as a matter of urgency ambitious and costly targets for drastic further curbing of CO2 emissions, governments should take prompt steps to ensure that they and their citizens are more fully and more objectively informed and advised. This implies both improving the IPCC process and going beyond it. As to the content of policy, it is not the case that the choice now lies between two extremes, of no action and the immediate adoption of much stronger measures to curb emissions. The orientation of policies should be made more evolutionary and less presumptive, with actual policy measures focusing more on carbon taxes rather than the present and prospective array of costly and intrusive regulatory initiatives.
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Right for the Right ReasonsFour authors of the Stern Review on the Economics of Climate Change, and Dennis Anderson who provided advice and background papers for the Review, make a final rejoinder on the debate about the Review that has occupied recent issues of this journal. They respond to comments in the present issue by Carter et al., by Henderson, and by Tol and Yohe. Carter et al. continue to argue against a growing body of scientific evidence and a growing consensus on that same evidence. The source of their critique is, first, a distinctly partisan, and increasingly untenable, position on the broad range of available scientific evidence and, second, a mistrust of the international consensus-building exercise centred on the Intergovernmental Panel on Climate Change. Henderson is also largely preoccupied with the latter, procedural issues. Tol and Yohe focus on economic arguments. Their critique is rather narrower in focus and concerns the way in which abatement costs were calculated in the supporting work carried out by Dennis Anderson. It rests on basic confusions and misconceptions, many of which were explained in previous contributions. However, readers of World Economics might be more interested in a broader reflection: how would the Stern team, following the debate of the last eight months, assess the approach, policies and arguments set out in the Review? Their view is that their analyses and policy proposals, and the arguments in support, are sound and have stood up well to scrutiny. In other words, they were right and for the right reasons. Central to many critiques of the Review is a fundamental misunderstanding of the role of formal, highly aggregated economic modelling. Nevertheless, the Stern team have argued strongly and in their view convincingly that, even within the confines of formal economic modelling, the concerns raised by a small group of commentators do not overturn their basic conclusion that the cost of action is much less than the cost of inaction. The critics here fall short by failing to simultaneously afford the necessary importance to issues of risk and ethics.
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Losses and Gains to Developing Countries from the Migration of Educated WorkersThis paper synthesizes and extends recent research on “The New Economics of the Brain Drain”. In a unified framework, the paper shows that while recently identified adverse repercussions of the brain drain exacerbate the long-recognized negative impact of the brain drain, longer-term consequences turn the brain drain into the harbinger of powerful gains. These gains have been studied already in recent research, or merit attention in future research.
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Does China Still Need Hong Kong?As the Hong Kong Special Administrative Region reaches the 10th anniversary of the territory’s reunion with its sovereign in China this year, it faces several looming competitive challenges from its ambitious and aggressive “sister” cities on the mainland. Going forward, without a credible counter-measure strategy, Hong Kong’s economic role as the uncontested interface between China and the rest of the world will be usurped by some of the mainland’s first-tier cities.
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Tim Lankester on Andrew Glyn, Capitalism Unleashed: Finance, Globalization, and Welfare Author: , June 2007
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Fabian Eser on Joseph Stiglitz et al., Stability with Growth: Macroeconomics, Liberalization and Development Author: , June 2007
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Graham Bird on Colin I. Bradford Jr. and Johannes F. Linn, editors, Global Governance Reform: Breaking the Stalemate Author: , June 2007
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Challenges to the Multilateral Trading SystemEver since the GATT was established in 1948, the growth in international trade and economic growth has been remarkable. The traditional mercantilism of trade relations is less and less appropriate for the global economy. Bilateral trade deals make the business environment more complex and unpredictable. Preferential trading agreements erode the principle of non-discrimination. They distort trade away from the underlying comparative advantage; create rents which are appropriated by special producer interests; multiply the complexities associated with aspects such as rules of origin, technical regulations, health and safety standards and administrative arrangements. They are also far harder to enforce than WTO rules, whose resolution mechanism has been very effective. Partial agreements outside the scope of the WTO lack the power of universal rules and legally binding commitments. Regarding the Doha Round of WTO negotiations, a key contradiction from the start was its construction as a ‘development’ round. This concept gave developing countries unrealistic expectations and opened the way for a damaging emphasis on the idea that they should not be required to make the same commitments to WTO rules as the developed countries. But avoiding WTO commitments almost always operates against the long-term economic interests of developing countries. The true development agenda lies in making commitments to WTO rules, rather than in seeking exemptions from them under the rubric of ‘special and differential treatment’. The steps needed to move forward are practical measures to reform the WTO and its processes, as well as longer-term steps towards enhancing political commitment to the framework of multilateral trade.
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Aid for TradeThe paper argues that increased Trade and Aid are both essential to enhance the development of many developing countries. It argues further that trade-related technical assistance and capacity building is not only an essential element of the concept of special and differential treatment but is also a core element of the development dimension of the multilateral trading system. The paper provides an overview of the history of the GATT/WTO with a specific focus on capacity building and the developments in 2005 and 2006 that have contributed to the momentum for increased Aid for Trade. The issue of additionality of overall ODA and Aid for Trade is considered and the broad trends in the trajectory of ODA and Aid for Trade are assessed. In the conclusion, three reasons are discussed for developed countries to consider increasing their overall Aid commitments and additional Aid for Trade as a contribution to the successful conclusion of the Doha Round.
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The EU, the Middle East, and Regional IntegrationThe European Union’s venture into enhancing trade linkages with the Middle East, as conceived by the 1995 Barcelona Process, had high hopes but failed in producing the intended political and economic deliverables. The Euro–Mediterranean Partnerships were flawed, as they created a hub and spoke trading relationship offering few of the welfare or (often forgotten) political benefits envisioned by the Europeans. The 2004 Agadir Agreement, however, may help rectify some of these problems by helping to stimulate intraregional trade.
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Globalisation and InflationIn this paper, Charles Bean, Executive Director, Chief Economist and member of the Monetary Policy Committee of the Bank of England, discusses the impact of globalisation on the industrialised countries and in particular the inflation process. He explains how globalisation has affected the returns to labour and capital, and the location of production in the world economy. Globalisation has also influenced relative prices, lowering the prices of imported goods but boosting the prices of oil and other commodities. And it may have changed the inflationary process, flattening the trade-off between domestic activity and inflation through a number of channels. Although globalisation has provided a benign backdrop for monetary policy, it poses a number of challenges going forward: the beneficial tailwind has waned and changes in product and labour markets have altered the determination of prices and wages in ways central bankers do not yet fully understand.
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How Can Norway Become A Climate-Friendly Society?In March 2005, the Norwegian Government appointed a seven-person expert Commission on Low Emissions and asked it to describe how Norway could cut its greenhouse gas emissions by about two–thirds below its Kyoto obligation, by 2050. The Commission delivered its unanimous recommendation in October 2006 (NOU 2006:18 Et klimavennlig Norge—Norwegian White Paper No. 18, 2006: A climate-friendly Norway) which states that such cut is not only necessary, but also feasible and not unreasonably expensive. In its report, the Commission proposed a package of 15 measures to achieve such steep cuts by 2050, largely within Norwegian territory, and indicated what must be done in the short term to start moving towards this goal. This paper summarizes the Commission’s report.
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Addressing Climate ChangeGlobal climate change has moved high on the agenda of key policy makers in many industrial countries. As a “global public good,” a coordinated global response in terms of efforts at mitigation will be critically necessary. Equally, many countries will face serious economic harm in the absence of adaptation efforts. As one of the key global institutions with responsibility for global economic stability and growth, this paper argues that climate change should be on the economic surveillance agenda of the International Monetary Fund, with the focus principally on the macroeconomic implications. While the IMF’s role would be necessarily limited, the paper raises questions about the adequacy of the financing and organization of current global coordination mechanisms to address climate change.
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REFLECTIONS ON THE STERN REVIEW (1) A Robust Case for Strong Action to Reduce the Risks of Climate ChangeThose who deny the importance of strong and urgent action on climate change essentially offer one of, or a combination of, the following arguments. First, there are those who deny the scientific link between human activities and global warming; most people, and the vast majority of scientists, would find that untenable given the weight of evidence. Second, there are those who, while accepting the science of anthropogenic climate change, argue that the human species is very adaptable and can make itself comfortable whatever the climatic consequences; given the scale of the outcomes that we now have to regard as possible or likely under business-as-usual (BAU), this must be regarded as reckless. Finally, there are those who accept the science of climate change and the likelihood that it will inflict heavy costs, but simply do not care much for what happens in the future beyond the next few decades; most would regard this as unethical. This paper deals primarily with the latter two arguments. An appendix addresses confusions and misconceptions about The Stern Review and responds to points made by critics in previous issues of this journal and elsewhere.
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REFLECTIONS ON THE STERN REVIEW (2) A Growing International Opportunity to Move Strongly on Climate ChangeThis paper highlights the basic economic principles behind the policy recommendations in the Stern Review and takes forward the analysis and proposals of the Review. It is written in the light of developments since the Review was published, reflecting on interaction with policy makers and analysts around the world and other commentators on the Review. Its authors argue that across the world, progress of understanding and developing the necessary policy response to climate change has been especially rapid in the last few months. Building on these developments and the Review team’s initial analysis, they outline a policy programme going forward for international collective action to tackle climate change.
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Ethics of the Discount Rate in the Stern Review on the Economics of Climate ChangeAny comparison of the costs and benefits of climate change is dominated by the chosen discount rate. But, although the Stern Review emphasises the ethical nature of the parameters entering into its choice of a relatively low discount rate, its discussion of the ‘pure time preference’ parameter is unbalanced. In particular, no consideration is given to the role of ‘agent-relative ethics’, which (i) has a wellestablished philosophical pedigree going back to David Hume; (ii) is likely to correspond closely to world-wide public attitudes towards intergenerational welfare; and (iii) would entail discounting a unit of welfare accruing to future generations compared to an equal unit accruing to people alive today at a positive rate. The authors also discuss the other ethical parameter upon which the discount rate depends, namely the elasticity of marginal utility with respect to consumption. In the conventional model, this simultaneously reflects different aspects of inequality aversion as well as risk aversion, which complicates its interpretation. Finally, they discuss the divergence between market rates of discount and the low rate chosen in the Review, and the limitations—on the one hand—on the normative significance of market rates, as well as the danger—on the other hand—of relying on rates chosen by elites or philosopher kings.
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The Stern Review and the Costs of Climate Change MitigationResponding to the ‘Dual Critique’, and the Tol and Yohe paper in the previous issue of World Economics, Professor Anderson counters a number of assertions made in those papers including the claims that the Stern Review is ‘alarmist’ or scaremongering, biased in its estimates and was not reviewed by peers. He points to a number of areas where the authors either got it wrong or seriously misrepresented the Review.
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Response to Carter et al.This article has been written at the initiative of UK climate scientists, from both the academic sector and the Hadley Centre for Climate Prediction and Research, in response to an article in the previous issue of World Economics by Carter et al., which was part of a ‘Dual Critique’ of the Stern Review of the Economics of Climate Change. The criticisms of Carter et al. concerning the Stern Review’s presentation of the climate science have been challenged and found to seriously misrepresent the current state of knowledge. Furthermore, the latest Report of the Intergovernmental Panel on Climate Change, whose Summary for Policy Makers was published in February 2007, vindicates the approach used in the Stern Review. The authors show in this paper that the Stern Review did not use an exaggerated response to increases in greenhouse gases nor did it overstate the certainty with which current warming can be attributed to human activities. They therefore conclude that the findings of the Stern Review with respect to the science of climate change are fundamentally sound and form a proper basis for the subsequent analysis of economic risk.
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Response to ‘The Stern Review: A Dual Critique’This article is a response to the articles in the previous issue of World Economics by Carter et al. and Byatt et al., which criticized the Stern Review of the Economics of Climate Change’s assessment of the potential impacts of climate change. The authors demonstrate that the Stern Review does not underestimate the extent of uncertainty, and does not introduce bias by ignoring the effects of adaptation. The assessment does represent the effects of different socioeconomic futures on impact, and does explain the key sources of uncertainty. The indicators of impact used in the assessment either take adaptation into account (food security, coastal flooding) or represent exposure to impact, and hence indicate a demand for adaptation if impacts are to be avoided.
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A Response to ‘The Stern Review: A Dual Critique’Any consideration of the potential economic consequences of climate change depends critically on the physical evidence for this process. In this response, Andrew Glikson questions the Dual Critique authors’ understanding of the science. Also, the paper’s repeated use of the term ‘alarmist’ and other derogatory language reflects adversely on the professional integrity of climate scientists, whose ethical duty it is to draw attention to observations of potential concern to society, and does nothing to advance the science or logic of the criticisms made. ‘Scepticism’ is inbuilt into the scientific method, where working hypotheses are subjected to tests based on a range of perspectives. By contrast, inherent in ‘climate change scepticism’ is a pre-conceived negation of anthropogenic climate change, followed by a search for real or imagined errors in climate science—an approach reminiscent of that used by creationists who attempt to challenge Darwinian evolution.
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Is Suicide Terrorism a Novel Economic Phenomenon?Read Full Paper >
Reply to Aldo Matteucci, ‘Is Suicide Terrorism a Novel Economic Phenomenon?’Read Full Paper >
Shalendra D. Sharma on the Sachs–Easterly debate. Author: , March 2007
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Alan Budd on Diane Coyle, The Soulful Science: What Economists Really Do and Why It Matters Author: , March 2007
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