High inequality makes it tougher to reform economies: Swedish Finance Minister
Americans are all too acquainted with the shouting-match politics that tends to accompany any debate over economic policy: everyone is yelling and nobody is listening. The toxic political discord in Washington has become so familiar it is almost a cliché.
It turns out high levels of income inequality, which the United States is also famous for, could be to blame. According to Anders Borg, the Finance Minister of Sweden, a large wealth gap makes it harder to achieve political consensus because the debate is poisoned by mistrust. Speaking at the Peterson Institute this week, Borg said high inequality in Southern Europe was a factor preventing those countries from achieving agreement as they struggle with a deep financial crisis:
You need to deal with the social cohesion issue. You cannot have a society where the conflicts that are built in become so strong that you undermine the political ability to deal with problems. If I compared Sweden with Spain or Italy or Greece, one of the reasons we have been able to these reforms is that our income differences are substantially lower which also means that the political tension is on a completely different level.
from Global Investing:
Can Eastern Europe “sweat” it?
Interesting to see that Poland wants to squeeze out more income from its state-owned enterprise (SOE) sector in the face of slowing economic growth and financing pressures.
Warsaw wants to double next year's dividends from stakes in firms ranging from copper mines to utility providers to banks.
Fellow euro zone aspirant Lithuania has also embarked on reforms aimed at increasing dividends sixfold from what UBS has dubbed "the forgotten side of the government balance sheet". It wants to emulate countries such as Sweden and Singapore where such companies are managed at arm's length from the state and run along strict corporate standards to consistently grow profits.
The impetus isn't entirely ideological. Poland and Lithuania are desperately trying to balance their books and under European Commission rules, privatisation proceeds cannot be taken into account when calculating the budget deficit but SOE dividends can.
But "sweating" government assets to yield higher profits doesn't always come easy for central and eastern Europe. After all, this is a region where state ownership has been synonymous with inefficiency and stagnation.
Even so, the track record of emerging European governments on privatisation is mixed.
The haste at which state resources were sold off following the collapse of the Soviet Union had disastrous repercussions for economies such as Russia and Croatia. Recent efforts at state divestment from Poland to the Czech Republic to Romania have run aground on unrealistic price expectations, corruption or regulatory obstruction.
Will Fed policy go the Swedish route?
The Federal Reserve’s long-quiet doves are becoming increasingly louder about championing more aggressive forms of monetary easing, including possibly setting employment and inflation targets and/or engaging in another round of bond purchases. Most prominent among these have been Charles Evans, the Chicago Fed president who openly favors more transparent policy guidance and Eric Rosengren, who told CNBC on Wednesday a third round of monetary easing could be in store:
If the economy were to be weaker than most people are forecasting, that would certainly be cause for doing additional monetary policy.
Rosengren also said he favors more explicit policy targets, which could take a rather controversial form known as price-level targeting. Under this arrangement, the Fed would temporarily shoot for higher inflation to make up for the almost deflationary readings seen late last year, in an effort to boost investment, spending and hiring.
Looking for precedents, Goldman Sachs offers up the interesting example of Sweden — in the 1930s. Citing the findings of Claes Berg and Lars Jonung in a 1999 edition of the Journal of Monetary Economics, Goldman economists determine that the program was successful because it was relatively simple and also temporary:
Sweden’s experience highlights a number of issues involved in adopting a price level targeting framework.
Definition of price stability: The authorities decided to stabilize the price level at the price level of the third quarter of 1931, to take place at once. Despite various requests, policymakers decided not to attempt to return the price level to pre-crisis levels and did not allow for a drift in the price level over time. Also, the Riksbank was not given any other goals, such as output or employment stabilization.
Temporary vs. permanent: The introduction of the price level target was intended and announced as a temporary step by the government. Once the conditions were at hand, a return to gold was planned for.
Choice of price index: The Riksbank primarily targeted the CPI, and started publishing consumer prices on a weekly basis to allow for better monitoring. However, it did not tie its policy solely to stabilizing consumer prices and announced that “other price indices besides the Riksbank’s own index of consumer prices will also be taken into consideration.” For example, the Riksbank also paid attention to wholesale prices.
Treatment of special factors: Policymakers stressed the need to disregard temporary factors like indirect taxes, customs duties and seasonal effects influencing inflation.
Implementation: Changes in the discount rate and operations in the foreign exchange market were the most important instruments. Immediately after leaving the gold standard, the Riksbank did not intervene in the foreign exchange market and allowed the krona to float freely. But from July 1933 the Riksbank established a successful peg of the krona to the British pound that lasted until World War II.
Winners in a trade war
Trade protectionism – or at least the threat of it — has raised it head as the global economy has declined, bringing with it all the historical fears about the Great Depression. Consider the flurry of concern about a “Buy American” clause in one of the U.S. stimulus bills.
It is traditionally assumed that widespread protectionism would most hurt the biggest economies, the United States and Japan. But Barclays Capital analyst David Woo says this is not so and that Russia, Canada, Australia and Sweden are the most vulnerable.
Woo studied various factors that would play on the effect of protectionism on a country, from openness and flexibility to its dependence on trade and it savings.
Japan turned out to be the least vulnerable. “Its relative closeness, relative flexibility of its labour market, and its terms of trade more than outweigh the negative contribution to its growth from a narrowing of its trade surplus in a global protectionist environment,” Woo writes.
As for the United States, “the only reason why it failed to take first place is because of its extremely low saving rate, which will limit the scope for domestic demand to offset falling exports.”
Mexico, India and China took the third, fourth and fifth places, respectively. So it’s not all about emerging markets.
