Opinion

The Great Debate

from Breakingviews:

Ecuador economic “miracle” meets maturity

By Rob Cox

The author is a Reuters Breakingviews columnist. The opinions expressed are his own. 

Turn on state television here, and within an hour or so a public service message will appear extolling the “Ecuadorean miracle” of President Rafael Correa. The advertisements highlight big new infrastructure projects and endorsements by experts, even an American or two.

Coming on one of the many formerly private channels that Correa tucked under government control during his seven years in office, it’s easy to dismiss this as propaganda. Yet here’s the thing: nearly every ordinary Ecuadorean I met during a recent stay was able to answer the Reaganesque question, “Are you better off now?” in the resounding affirmative.

To the amazement of Correa’s critics, Ecuador has undergone a relatively sustained period of economic progress since he took office in 2007. Annual growth in gross domestic product has averaged 4 percent. Unemployment is below 5 percent. Wages are up. Inflation is a tame 3.1 percent thanks to the dollarization of the economy before his accession. The percentage of Ecuador’s 16 million people living below the poverty line has dropped to 25 percent from some 45 percent before Correa became president.

The infrastructure improvements are evident everywhere, from the shiny new Quito airport and the highway that leads to the capital, to the 95 new bridges spanning the jungle chasms of the Amazon region. Regional hospitals are being built, and universal education has been made more accessible to everyone, its quality improving. Infant mortality rates shrink every year.

from Edward Hadas:

Why the global recovery is so slow

By Edward Hadas

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The International Monetary Fund recently engaged in what has become an annual ritual. For the fourth year in a row, it reduced its forecast for world GDP growth. The 0.7 percentage point average decline from the earlier estimate to the new 3.4 percent growth projection is not huge, but the persistent disappointments make many economists uneasy.

Larry Summers has an explanation for the problem in rich countries, which he calls secular stagnation. The former U.S. treasury secretary’s argument has several strands, but his main thesis is that investment has been too low for almost two decades because prevailing interest rates have been too high and because politicians have not permitted sufficiently large government deficits. Controversially, he suggests that growth has been painfully slow whenever financial bubbles are lacking, as in the years since the 2008 crisis.

from Breakingviews:

Review: Brazil’s toughest tests lie off the pitch

By Dominic Elliott 

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Michael Reid’s astute new book has a stark warning: the country of samba, sex and soccer is teetering on a knife-edge. “Brazil: The Troubled Rise of a Global Power” explains why protests against this year’s World Cup are turning increasingly violent. Reid, a journalist for The Economist, persuasively urges a return to the broad liberal consensus that served Brazil so well between 1994 and 2006.

Brazil taxes and spends like a European country and shares other bad habits with the West. Yet it produces “distinctly Latin American” results, says Reid. GDP per person is still a disappointing $12,000, about two-thirds of the level of Argentina, and it remains the world’s twelfth most unequal country. The masses understandably want more opportunity, as well as better hospitals, schools and public transport.

from Ian Bremmer:

The secret to China’s boom: state capitalism

By Ian Bremmer
The views expressed are his own.

One of the biggest changes we’ve seen in the world since the 2008 financial crisis can be summed up in one sentence: Security is no longer the primary driver of geopolitical developments; economics is. Think about this in terms of the United States and its shifting place as the superpower of the world. Since World War II, the U.S.’s highly developed Department of Defense has ensured the security of the country and indeed, much of the free world. The private sector was, well, the private sector. In a free market economy, companies manage their own affairs, perhaps with government regulation, but not with government direction. More than sixty years on, perhaps that’s why our military is the most technologically advanced in the world while our domestic economy fails to create enough jobs and opportunities for the U.S. population.

Contrast the U.S. and its free market economy with China’s system.  For years now, that country has experienced double digit growth. Many observers would say that China’s embrace of capitalism since 1978, and especially since joining the World Trade Organization in 2001, has been responsible for its boom. They would be mostly wrong. In fact, a new study prepared for the U.S. government says it’s not capitalism that’s powering China, but state capitalism -- China’s massive, centrally directed industrial policy, where the government positions huge amounts of capital and labor in economic sectors it intends to nurture. The study, prepared by consultants Capital Trade for the U.S.-China Economic and Security Review Commission, reads in part:

In a world in which central planning has been so utterly discredited, it would be natural to conclude that the Chinese government and, by extension, the Chinese Communist Party have been abandoning the institutions associated with the communist economic system, such as reliance on state‐owned enterprises (SOEs), as fast as possible. Such conclusion would be wrong.

The sad flaw of measuring hurricanes by GDP

By David Callahan
The opinions expressed are his own. 

Hurricane Irene may not have lived up to all the media hype, but it still did billions of dollars in damage. Some analysts say cleaning up the mess will boost Gross Domestic Product for the second half of 2011. These estimates are surely correct – and remind us why GDP is such a perverse way to measure economic progress.

No number is more closely watched than GDP. Americans walk with more bounce in their step when GDP is rising at a nice clip and turn gloomy when this indicator sinks. While GDP first came into use after World War II as a technical way to measure all economic activity, it has somehow morphed into the nation’s thermometer – the leading gauge of how well we are doing.

Such is the dominance of GDP that we tend to forget just how crude this indicator really is – so crude that it can’t even distinguish between growth caused by a terrible event, like a hurricane, and growth tied to higher productivity or technological breakthroughs.

from MacroScope:

Europe’s over-achievers and their fall from grace

Ireland's fall from grace has been rapid and far worse than that of its counterparts, even Greece. But life in the euro zone has still been one of profound growth, as it has for most of the other peripheral economies.

Take a look first at the progress of  PIGS (Portugal, Ireland, Greece and Spain) GDP since 2007 when the global financial crisis took hold. In straight comparisons (ie, rebased to the  same point) Ireland is far and away the biggest loser. Portugal is basically where it was.

Scary

But now take the rebasing back to roughly the time that the euro zone came together.  First, it shows that Ireland's fall is from a very high place. The decade has still been one of profound improvement in cumulative GDP even with the last few years' misery. But it is front loaded.

U.S., China and eating soup with a fork

-The opinions expressed are the author’s own-

Are economists the world over using an outdated tool to measure economic progress?

The question, long debated, is worth pondering again at a time when two economic giants, the United States and China, are sparring over trade, currency exchange rates and their roles in the global economy.

In the run-up to U.S. mid-term elections on November 2, politicians from both parties, for different reasons, blamed trade with China for American job losses. China responded with irritation and hit back by accusing the U.S. of “out of control” printing of dollars tantamount to an attack on China with imported inflation.

from MacroScope:

The IMF to turn on the rich

The latest International Monetary Fund meeting ended with emerging market powers getting a pledge from the organisation for stronger and "more even-handed" scrutiny of what is going on in large advanced economies.

As Reuters correspondents Lesley Wroughton and Emily Kaiser report here, the decision is a response to long-running frustrations among emerging economies, which reckon the Fund has  not been tough enough on its biggest shareholders, led by the United States.

The move reflects a number of things. First, it shows the growing clout of emerging economies within international institutions. The G-20, for example, is arguably now more influential than the old , richer G7. Secondly, it graphically underlines the current world-turned-upside-down state of the global economy, in which profligate rich economies are struggling to keep above water while supposedly poorer and less-developed ones enjoy solid growth and relatively stable finances. This graph makes the point:

Taxing spoils of the financial sector

If you want less of something, tax it.

That truism is often used as an argument against a tax on profits, or health benefits, or employment, but in the case of the rents extracted from the economy by the financial services industry here’s hoping it proves more of a promise than a threat.

The International Monetary Fund has put forward two new taxes on banks to pay the costs of future rescues, one of which is a fairly conventional “Financial Stability Contribution,” with an initial flat levy on all banks, to be refined later into something with more precise institutional and systemic risk adjustments.

More interestingly, the IMF is also proposing a “Financial Activities Tax,” (FAT) a tax on bank pay and profits which, if correctly designed, could serve as a tax on rents — the unwarranted spoils — of the financial sector.

Icelandic, Greek sagas show sovereign risks

– James Saft is a Reuters columnist. The opinions expressed are his own. –

Developments in cash-strapped Iceland and Greece nicely illustrate two themes for 2010: sovereign risk and financial balkanization.

Iceland is balking at crushing terms demanded as part of its making whole overseas depositors in its ruined banking system, while Greece is involved in a game of chicken with the euro zone authorities over how, when and with whose assistance it heals its fiscal difficulties.

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