Sunday, March 31, 2013

Eartheconomics: An alternative introduction

This paper  sets out the didactical and logical arguments for using  the closed economy concept at the start of introductory courses to discuss our planet’s economy. The paper illustrates how observations at the level of planet Earth can be used while teaching relationships that are studied in a closed economy setting. It provides an overview of internet resources with world data and some practical examples that can readily be used in teaching.

Book: pp. 1-8, 11-18 (updated tables), 71-72 (exercise 6.5) and 126-128 (exercise 10.7)

Friday, March 29, 2013

Global Public Goods Supply and Conditional Transfers

KAREN PITTEL, CESifo (Center for Economic Studies and Ifo Institute for Economic Research) - Ifo Institute for Economic Research

Basque Centre for Climate Change (BC3), Basque Government - Basque Foundation for Science (IKERBASQUE)
In order to overcome the underprovision of global public goods various different policy approaches have been proposed. In the climate policy arena, international transfers are frequently seen as an effective means to raise the provision of the global public good ‘climate change mitigation’. This paper focuses on a specific type of international transfer that aims at raising mitigation while also reducing the damages from climate change: conditional adaptation support. Especially since the COP in Copenhagen 2009, preparations are on-going to significantly expand international transfers that help developing countries to adapt to climate change. While there are extensive discussions in the policy arena about the required amount of adaptation funding and the best ways to raise, manage and disburse these funds, hardly any attention is paid to the international allocative effects of these transfers. The answer to the question of ‘why’ international adaptation transfers are paid at all, is often relegated to fairness considerations only. As adaptation benefits are largely local and adaptation transfers reduce the recipients’ incentives to contribute to climate change mitigation, one would, however, expect at least unease in donor countries about plans to significantly expand international adaptation support. In this study, we compare two alternative conditional transfer schemes: one plainly subsidizes mitigation efforts, while the other provides adaptation support which is conditional on other agents’ mitigation contributions. Disregarding distributional and fairness aspects the paper evaluates and compares the allocative effects of either policy scheme. It is shown that while both policy schemes can be beneficial for developing as well as industrialized countries, this outcome relies strongly on the productivity of mitigation and adaptation technologies.

Book: pp. 149-160.

Monday, March 18, 2013

Planet Earth is Wage-Led!

 Özlem Onaran takes us through an analysis of the effect of a decline in the wage share in GDP. The author asserts that when wage moderation and austerity measures are being formulated, it is important to realise that wages not only affect costs on one side but also affect demand on the other. According to Onaran through its effect on aggregate demand, a wage-led recovery is economically feasible as a way out of the global recession.

Book: p. 61 and 106.

Tuesday, March 12, 2013

A set back for globalization

The KOF globalization index released in March 2013 shows the impact of the Great Recession. Before 2008 there was a steady increase, but the index for 2009 and 2010 show that that progress halted.

Book: Section 13.1, pp. 152-3.

See also this video



Sunday, March 10, 2013

Educating civil servants pays

Using the CVs of 131,877 of civil servants from 178 countries who applied to the IMF for training between 1981 and 2011, Rabah Arezki and Marc Quintyn("Degrees of Development" in Finance & Development, March 2013, Vol. 50, No. 1) are able to show that the better the level of education of a country's civil servants the better a country’s economic performance. Development is education; education is development.

Book: Exercise 10.3, p. 122.


World oil demand and supply

A recent OECD study of the world oil market investigates price and volume changes up till the year 2020. The study does not estimate a truly global demand function but works on the basis of regional aggregates. The graph below derived from Fournier, J. et al. (2013), “The Price of Oil – Will it Start Rising Again?”, OECD Economics Department Working Papers, No. 1031, OECD Publishing. shows the impact of the 2008/9 crisis and assumes that world growth after being a broadly stable 2011-2012 will recover.

While the growth trajectory has a small confidence interval the oil price predictions are less accurate and depend on risk premium and the elasticities of income and price. The price development over the  simulation period could be almost stable to a treefold increase.

The price path also illustrates nicely the pre-crisis sharp increase due to (perceived) scarcity and the impact of the crisis.

Book: Sections 3.3 pp. 33-34 and 12.3, pp. 144-146.

Two tales of global financial governance

Peter van Bergeijk gave a presentation at the annual conference of the AIV, the Dutch advisory council in international security. His presentation dealt with the public good aspect of international economic governance and with the often forgotten plight of the Least Developed Countries
Get the presentation Two tales of global financial governance

Book: Chapter 13.

Wednesday, March 6, 2013

Earth economics. Because it’s the only one we’ve got

Take a look at the World Development Report or the World Economic Outlook.  It will be difficult to find anything on the Earth economy in these flagship publications: the World Bank and the IMF analyse world issues by aggregating nations into regions and regions into even larger entities. Starting at the nation state, they expect to arrive at the the world economy, but it is more probable that they actually lose sight of the whole. What can you tell about beehives if you study only the bees? That’s why there is an increasing demand for a new, truly global approach.

 Why on Earth?

The reason to study Earth on its own is because Earth is a closed economy. Earth cannot lend or borrow. Neither can Earth export or import. Earth will thus have to resort to its own natural resources, its own factors of production, its own saving and investment. Indeed, Earth cannot rely on others to provide raw materials, labour, knowledge or capital. The message is clear: if you want to understand Earth you have to study the planet as a stand-alone.

 Trade with Moon or Mars

It is not simply interesting to use this perspective. It is also the only logical approach and it is a challenging line to attack economic processes. Eartheconomists study short-term fluctuations and long-run growth in the Earth economy. They use this highly aggregated level of analysis because the world economy is the only economy where the concept of a closed economy – one that does not trade with other economies – makes perfect sense. After all Earth does not trade (yet) with Moon or Mars.

Of course this does not mean that there is no international trade on Earth. The countries of our globalized world trade with each other. The point is simply that our world does not trade with other worlds and in this sense it is and remains a closed economy.

 Nagging questions

The Earth perspective provides a different and stimulating viewpoint than the usual analyses based on the aggregate findings for the individual countries in the world economy. This is because the Earth perspective shows the big picture and asks nagging questions:

·         What would be the best course of action for a world government?

·         How can we increase Earth’s human, natural and physical capital?

·         How to distribute Earths proceeds? (and to whom?)

·         How could we improve the well-being of all earthlings?

·         How can we ensure that the earthling – now and in the future – develops, learns, gets work, produces…?

 These key questions for humanity emerge in the eartheconomic  framework as it critically challenges many of the mainstream policy analyses and recipes.


Many object to the analysis of Earth as a closed economic system. They say that the simplicity of the closed economy is unrealistic in view of the complexity of the real world. It is true that eartheconomics  ‘neglects’ that countries can learn from, cooperate with and help each other, but also that countries differ to a large extent, focus on national interests and may not agree on the appropriateness of some considered economic, monetary and/or financial policy. These costs should not be neglected, but they should also not be exaggerated and – importantly – be balanced against the benefits of a new manner of framing policy questions that are important for world development.

Down to Earth

Eartheconomics is no l’art pour l’art. The questions that eartheconomists study are relevant because economic policies influence large numbers of people around the globe in a very concrete way: unemployment, growth and inflation influence our daily lives. The important issues are to understand:

  •  the causes and consequences of short-run fluctuations (the business cycle),
  •  the determinants of long-run economic growth (increases in national income) and the long economic waves, and
  • what we can and, equally importantly, cannot do to stimulate development and prevent or remedy downturns of the economy.

Answering the last question (what we can and cannot do) always requires a close examination of actual economic variables, their development and relations with other economic variables. This is why Earth Economics is as much about theory and empirical research as it is about policy. This book respects the heritages of Keynes (short-term demand management: the ISLM model) and Solow (long-run neoclassical growth). I do so not out of economic respect, but because these tools are very useful to understand the Great Recession and also because they are in a down to earth manner elementary to analyse the policy responses to that crisis. 

Global public goods (and bads)

Earth’s economy cannot flourish without global public goods, such as human health care, the environment, universal education and peace. Likewise global public bads are a threat to Earth’s economy: pandemics, climate change, financial instability and widespread poverty are clear examples. Global public goods include global rules and regulations that are highly important for the proper functioning of the Earth economy. Examples are the rules against economic discrimination provided by the World Trade Organization, the labour standards provided by the International Labour Organization and the health and food safety requirements set by the World Health Organization and the Food and Agriculture Organization. The Security Council of the United Nations sets political norms and values backed up by economic sanctions and peace-keeping missions. These forms of governance are important facilitators if not drivers for global economic cooperation and the global division of labour. Eartheconomists therefore study the developments of the economic conditions for the provision of global public goods. This also provides the basis for understanding the prospects for policy coordination and multilateral rules and regulations.

 Let’s become earthlings!

Obviously, it is from an economic theoretic point of view important to realize that we can and actually should use the closed economy model to teach and understand eartheconomic developments: unlike many economists think, closed economy models do not only serve a didactic purpose, but actually make sense empirically. This is a nice point, but that is not the only reason to become an eartheconomist.  Eartheconomics frames the major issues in (economic) policy in a context that goes beyond nations, nationalities and nationalism.

Friday, March 1, 2013

How to make appropriate comparisons over time?

Question: the World Development Indicators (WDI) do not provide constant price numbers for: (i) bilateral aid flows, (ii) FDI and (iii) remittances. These variables are only available in current US$. is there a way to convert current to constant so that I can analyze the data over time

There are three strategies that you can follow.
The first strategy is to express these variables in terms of nominal GDP for which the WDI provides the current US$ values. This will not give you constant price numbers of course but it will provide you with a number that is not influenced by inflation as both the numerator and the denominator are influenced in the same way by inflation. The proper interpretation of a series in per cent of GDP is that it reflects the importance of the flow for the economy. (If the economy grows and all else remains equal the ratio of flow to GDP decreases).
The second strategy is to divide the series in current US$ by an appropriate deflator (index number). Here you have to chose an appropriate indicator, for example, the US Consumer Price Index and the US GDP deflator. You can get the US CPI from the WDI (current base year 2005 = 100). (The US GDP deflator could be used in the same way; the WDI provides annual percentage changes - so the inflation rates - that you should use to calculate the indexnumbers). Deviding the current US$ values by the index numbers will provide you with a constant price series in 2005 US prices. This corrects for US inflation but in some cases that may not be what you need.
The third strategy is to express the series in another currency and then use the appropriate price index number related to that country. For example if you want to know how much goods and services could be bought by the foreign finance flow to which the question refers in the recipient country the you should use the local currency unit. This recipe requires two steps
  • Use the WDI DEC alternative conversion factor LCU per US$ (The DEC alternative conversion factor is the underlying annual exchange rate used for the World Bank Atlas method. As a rule, it is the official exchange rate reported in the IMF's International Financial Statistics (line rf). Exceptions arise where further refinements are made by World Bank staff. It is expressed in local currency units per U.S. dollar.)
  • Divide the LCU value by the country CPI index (the base year will differ by country)
You know have a constant price series that expresses the amount of goods and services that could be bought with the foreign finance.

Book: Section 3.2 pp. 29-33.