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CRE: North America, Europe and East Asia

* Some parts of this note are summary of the references for teaching purpose only.

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Comparative Regional Economy <Lecture Note 3 > 12.04.16

Semester: Spring 2012 Time: Monday 2:00-5:00 pm Class Room: 115 Professor: Yoo Soo Hong Office Hour: By appointment Mobile: 010-4001-8060 E-mail: yshong123@gmail.com

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I. North Amer-ica

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The Landscape

Canada– Second largest country in the world.– The longest non-militarized border in the world (8,900 km).– Trade agreement since 1989.– Several similarities but different societies. US– Fourth largest country in the world.– 48 continental (conterminous or contiguous) states. Mexico– Longest border between a developed and a Third World country– Border problems related to illegal immigration and drug traffic.– Trade agreement since 1992.– An advanced and a transitional (Third World) country.

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Settling the Territory

Colonization of the The North American Territory– Colonized by three major colonial powers. Spain– Occupied the south of the United States, including Florida, California,

Arizona, New Mexico and Texas.– Part of the Spanish Empire of Mexico.– Massive organization of the native labor. France– Controlled the St. Lawrence, the Great Lakes and the Mississippi basin– More interested in fur trade than in colonization. England– Occupied the Atlantic Coast with 13 colonies (1620 and 1681).– Strong emphasis on agriculture and economic development– High population densities constrained by the Appalachians. Holland– Bought Manhattan Island (New Amsterdam) for $24 (1626).– Conquered by the British and renamed New York (1664).

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Territorial Definition

The Anglo-American cultural space– Prominence of English institutions.– Opposed to Latin America (Spanish and Portuguese cultural origin).– A few exceptions:French Canada, Hawaii, US/Mexico border regions,

southeast Florida, First Nations and the Black population.– Immigration is changing this space.– English remains the language of power and business.

North America Economy

Characteristics

- Economies are very similar to Europe

- Developed world: Have many industries

- ‘Clean Industries’- computer manufacturing, financial services, information and communica-tion

- ‘Dirty Industries’ - manufacturing automobiles, power, textiles, petroleum processing, paper

- North America is a major exporter of: - Technology - Consumer goods - Information Systems - Foodstuffs

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North American Economic Integration

- Although EU is undoubtedly the most successful and well-known integrative effort, integration efforts in North America has gained momentum and atten-tion.

- North American integration has an interest in purely economic issues and there are no constituencies for political integration.

- U.S.-Canada Free Trade Agreement - North American Free Trade Agreement (NAFTA)

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Regional Economic Integration in North America

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NAFTAEstablished in 1992Implemented in 1994

World's largest free trade area Tri-national (Canada, Mexico, and the United States) market area

Combined annual purchasing power of about $6.5 trillion

- Dismantles trade barriers for industrial goods, agreements on services, investments, intellectual property rights, and agriculture- Side agreements on labor adjustments, environmental protection, import surges, child labor, minimum wages, productivity, and health and safety standards

- It promotes trade and economic growth by allowing free trade between the 3 member countries (US, Canada, Mexico)

- Supports trade and business around the world

The North American Free Trade Agreement (NAFTA)

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Characteristics of the North American Economy

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The North American Economy

Enormous market, larger than the EU

Vast income differences between Mexico on the one hand, and the U.S. and Canada, on the other – However, purchasing power parity gap is smaller– On average, the North American market is very rich

The North American economy is marked by numerous difficult policy ques-tions on migration and environmental and labor standards, for example

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Trade Flows in North America

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The North American Free Trade Agreement (NAFTA) of 1994

Tariffs on about half of goods traded between U.S. and Mexico were eliminated immediately– Most dramatic changes in Mexico: average tariffs on U.S. goods fell from

10% to 2.9% between 1993 and 1996, while U.S. tariffs on Mexican goods fell from 2.07% to 0.65%

NAFTA specified content requirements for goods subject to free trade NAFTA established a system of trade dispute resolution NAFTA reignited contention on trade policy in the U.S.

– Blue collar labor unions feared that jobs would migrate to south given Mex-ico’s lower labor costs

– Environmental groups feared that (1) polluting U.S. and Canadian firms would move to Mexico, and (2) pollution would increase along U.S.-Mexico border

Political opposition forced Canada, Mexico, and the U.S. to attach labor and en-vironmental side agreements to NAFTA

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The Impact of NAFTA

Local effects of NAFTA on trade and economy are dramatic, especially in the U.S.-Mex-ican border

Mexico’s economy is 5% of U.S. Economy so that NAFTA has had a very modest im-pact on overall U.S. trade balance and current account or on jobs and wages

The growth in trade between all three NAFTA partners indicates increased specializa-tion, economies of scale, and efficiency

The exact impact of NAFTA is hard to assess– Bilateral trade has expanded already since 1989 thanks to Mexico’s economic re-

forms.– Mexico’s 1994–1995 peso crisis and recession caused U.S. exports to decline

momentarily to Mexico.

Canada: trade with Mexico is growing, but still represents a small part of Canada’s trade

The U.S.: NAFTA has had local effects especially along the border, but had a small im-pact on the overall U.S economy

Mexico: NAFTA has had an important impact on trade flows and solidified economic reforms

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Other Impacts of NAFTA

NAFTA has boosted cooperation in North America on numerous fronts.– Tri- and bi-lateral institutions have been created to address mutual chal-

lenges– Cooperation extends beyond labor, environment, and migration issues

to the area of business, sports, arts, and education

In 2001 and 2002, summits proposing the expansion of NAFTA into the Free Trade Area of the America’s (FTAA) were pursued, and meet with much re-sistance.

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Source: Adapted from IMF, Direction of Trade Statistics Yearbook, 2003 and 2006

Direction of US Trade

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Source: Adapted from IMF, Direction of Trade Statistics Yearbook, 2003 and 2006

Direction of Canada’s Trade

19Source: Adapted from IMF, Direction of Trade Statistics Yearbook, 2003 and 2006

Direction of Mexico’s Trade

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Canadian Economy

Canada’s 33 million people enjoy one of the highest standards of living in the world.– Gross domestic product in 2004 was around $994.1 billion, in US dollars

and at current exchange rates.– Over the last 15 years, the rate of economic growth has deviated from 2–

4%.

80 percent of manufacturing activity is located in Ontario and Quebec, includ-ing the entire motor vehicle industry– One-quarter of all Canada’s manufactured exports (and imports) are in au-

tos and auto-related products.

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Canada’s industrial climate:– Characterized by private enterprise.– Some industries, such as broadcasting and public utilities, are gov-

ernment owned or subject to substantial government regulation.– A trend toward privatization and deregulation.– Firms that have been privatized include Canadair, the deHavilland Air-

craft Company, Canadian National Railway’s trucking division, Fish-eries Products International and Air Canada.

– Small business is a major part of the economy and accounts for al-most 80% of all new employment in manufacturing.

– The service and retail trade industries are characterized by a large number of companies that vary in size.

– 70% of Canadians work in service industries.

Canada’s Business Environment

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The 50 Largest Firms in North America

Note: These data were compiled using only the top 100 Canadian companies based on revenues for 2006. The data for foreign sales are limited and some large companies that might otherwise be in the list might be excluded. Ipsco Inc. became a wholly owned subsidiary of SSAB, a Swedish steel company. Intra-regional sales stand for a company’s home-region salesSource: Authors calculations, individual annual reports, and “The Financial Post 500,” National Post, June 5, 2007

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Mexican Economy

Mexico has the strongest economy in Latin America. Labour

– Relatively plentiful and inexpensive;– Shortage of skilled labour and managerial personnel;– Turnover is a serious problem;– 40% of the labor force is unionized. In large operations, 80% of the labour force is

unionized;– Three-tier minimum wage;– At least 90% of the firm’s skilled and unskilled workers must be Mexican nationals.

The six major ones, in order of importance are:– petroleum/chemicals;– automotive;– housing and household;– materials and metals;– food and beverage;– semiconductors and computers.

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Prospect on the U.S. Economic Recovery

• Net exports will contribute to growth and housing will stop being a drag by mid-year; nonresidential construction has turned the corner.

• The pace of consumer spending has also accelerated, thanks to a gradual improvement in the employment outlook and diminished worries about a double-dip.

• Business optimism is the highest in three years and cash flow remains very strong.

• The new tax package will add around 0.6 percentage point to growth in 2011, but much of the recent rebound is not stimulus related.

• Growth in the next few years will average 3% to 3.5%.

− US• The recent trends show that the pace of growth averaged only ¼ %, well

below potential.• Since the summer of 2007, declining residential investment has been a

major drag on output, inventories have been compressed, and consump-tion has slowed.

• Current drags on growth include falling employment, tightening credit, and declining net worth, as well as rising fuel and food prices.

− Canada• Although the resource-intensive sectors have benefited from high com-

modity prices, the lagged effect of past real appreciation of the Canadian dollar, together with the US slowdown, has hit manufacturing hard.

• Risks still remain given the strong economic and financial linkages with US.

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Crisis Effects on US and Canada

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Crisis for the US

- The new international situation has affected the United States. However, US power remains strong and unmatched. Its per-capita GDP was $46,800

in 2008 and the US share of world trade was 14% for goods and 18% for services. The population is growing faster in the US (with a pro-jected 10% increase by 2025) than in Europe.

- With President Barack Obama in the office, USA restored the luster of the tarnished American model, repairing the enormous damage done to the country’s image under the Bush administration. But the United States moves into the new decade with two weaknesses.

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- Globalization has eroded American power – and the power of the West as a whole – in comparison to other international players now in the ascendant. China is now a major potential competitor. The US is also laboring to repair a decade of misguided policy. The two pillars of American power – mili-tary supremacy and economic success – can no longer be taken for granted.

- Strategically, the US may account for half of the world’s military spending, but it has been unable to eradicate terrorism, emerge victorious from the conflicts into which it has ventured or achieve progress in the Middle East.

- In this region, crucial to international security, the United States has virtually no room for maneuver, constrained as it is by the legacy of decades of American policy. In the Middle East, a power such as China paradoxi-cally has more leeway than the United States. In the economic arena, the subprime crisis caused by the excesses of the financial system and the American growth model produced one of the deepest recessions since World War II.

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- This double-edged development should prompt the United States to thoroughly reassess the effectiveness, legitimacy and credibility of its leadership. US unilateralism has come and gone. The Obama administra-tion acknowledges the need for international cooperation to boost world growth and address the strategic challenges of the coming decade.

- The United States is widely perceived as being responsible for international tensions (Russia, Iran, Middle East), the economic crisis and accelerating climate change and the new American administration has decided to tackle this legitimacy problem.

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II. EU

The European Union: Member states of the European Union

Candidate countries 493 million people – 27 countries

Expansion of the European Union

- May 200475 million customers

10 countries

- January 2007Bulgaria and Romania29 million more customers

- Total EU – current situation480 million customers27 countries

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Eight Enlargements

1952

1973

1981

1986

1990

1995

2004

2007

27 member countries of EU – as of April, 2011

- Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Fin-land, France, Germany, Greece, Hungry, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom

Candidate countries

- Croatia, Iceland, Macedonia, Turkey

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How Many People Live in the EU?

Population in millions, 2007497 million

82.4

63.4

60.9

59.1

44.5

38.2

21.6

16.3

11.2

10.6

10.5

10.3

10.1

9.0

8.3

7.7

5.4

5.4

5.3

4.3

3.4

2.3

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0.8

0.5

0.4

Fran

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Finl

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GDP per Inhabitant: Spread of Wealth

GDP per inhabitants in Purchasing Power Standards, 2007Index where the average of the 27 EU-countries is 100

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144131129127123121118117113113

104102100 94 89 8779 77 75

67 66 63 58 56 5338 37

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Gap 1: North vs. South; Gap 2: EU vs. US GDP per hours worked (United States =100) 

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40

60

80

100

1950 1960 1970 1980 1990 2000 2010

EU15 North EU15 Continental EU15 South EU12 BGR+ROM

Note: EU15 North = Denmark, Finland, Sweden, and the United Kingdom; EU15 Continental = Austria, Belgium, France, Germany, and the Netherlands; EU15 South = Greece, Italy, Portugal, and Spain.Source: World Bank staff calculations, based on Conference Board. 2011.

Two Productivity Gaps in EU

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(Un)employment

- Unemployment rates have increased further in a large number of Member States after the financial crisis, reaching dangerous level (Spain, Ireland, Slovakia, Portugal, France)

US

EUUS surpasses EU

(March 2009)

Figure 6 Harmonized unemployment rates, August 2007–October 2009Source: OECD Labor Force Statisticshttp://www.iie.com/realtime/?p=1059

Annual Average Growth of Trade as Part of GDP

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Risk for the EU: Weakness and Marginalization

Economy: A Major Player

- In 2007, EU accounted for 17,5% of world trade (42% when intra-EU trade is included). With its population of nearly half a billion, it is demo-graphically smaller than Asia but it represents a far larger market than the United States or Japan by any standard. With its enlargement to 27 members, the EU has become the world’s largest zone of democratic stability and prosperity, with per-capita income of nearly €24,800.

- EU has indisputably lost ground within the international order. The 2008-2009 economic crisis hit Europe’s economies hard. In 2009, world growth was driven by the Asian economies alone and a number of the stability pact rules that are compulsory in the eurozone countries had to be suspended. Europe’s population is also declining and ageing.

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- These trends herald a decline of Europe’s ranking among the great technological powers in terms of innovation and competitiveness. The EU is in an alarming state of energy dependence: economically, the EU relies on the three most unstable zones in the world – Russia, the Middle East and Africa –to cover more than 60% of its oil and gas needs, while its ability to exert political influence in these three strate-gic regions is extremely limited.

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Politics: Risks of Marginalization - EU’s ability to wield influence in the emerging multi-polar world is

constrained by its weak political integration. The EU has no voice as such in the major international economic and political institutions, with the exception of the World Trade Organization (WTO), the United Nations (UN), the International Monetary Fund (IMF) and the G20.

- European states are often out of step with each other, even when they have drawn up a common position ahead of time – as witnessed during the difficult discussions, at various G20 meetings, concerning global finan-cial oversight.

Western Europe

− Many countries in Western Europe are moving close to or into recession.

− Economic growth is being slowed by a number of factors, initially mainly by rising oil prices but now increasingly by tightening financial condi-tions.

− Although headline inflation is high, wages have generally remained sub-dued, and slowing activity and rising unemployment fears should restrain demand for pay hikes.

− The specific reform recommendations under the Lisbon Agenda that con-cern the euro area as a whole appropriately emphasize accelerating ser-vices market reform and financial integration since large parts of the ser-vices sector remain unaffected.

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Emerging Europe

− A significant slowdown is expected.

− Weaker external demand, especially owing to the cooling of demand in western Europe, and tighter external conditions are weighing on in-vestment and exports, while private consumption has slowed in the face of soaring food and energy prices.

− Growth is expected to continue to decelerate markedly, including on account of diminishing capital inflows and tighter financial constraints.

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European Union (EU) - Aggregate Rankings

- Economies are ranked on their ease of doing business, from 1 - 183, with first place being the highest. The ease of doing business index averages the economy's percentile rankings on 10 topics, made up of a variety of indicators, giving equal weight to each topic. The rankings are from the Doing Business 2010:- Reforming through Difficult Times report, covering the period June 2008 to June 2009. * Singapore is shown as a benchmarkSource: Doing Business 2010

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20.219.0

33.0

0

5

10

15

20

25

30

35

EU25 euro area United States

0.00

0.05

0.10

0.15

0.20

0.25

1990 1992 1994 1996 1998 2000

All Europe

U.S.

The EU Remains a Less Integrated Market than the US

- Lower degree of price dispersion for tradeables between main US cities than that between EU capitals

-Lower degree of trade integration in the EU than in the US

Intra-trade in manufactured products 2002(intra exports as a percent-age of GDP)

CPI-weighted

Price dispersion in tradeables

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Labor productivity from a long run perspective

• The EU-25 is made up of a heterogeneous array of countries

• The New Member States (EU-10) are the ones that have experienced the highest rate of productivity growth.

• In the EU-15 Ireland had the highest rate and Italy the lowest.

Labour productivity. Annual rate of growth. EU-25. 1995-2009 (percentage)

Source: TCB (2010) and EU KLEMS (2009).

EU-15

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3,85 3,783,43

3,012,46

1,70 1,62

EU-10

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An Economic and Social European Model?

− Different from the US model, a strategy would be to build a European model based on solidarity, public services and public spending. The European Union is a large closed area. The euro gives significant room to lower the cost of capital. Europe may refuse fiscal and social competition and may introduce harmonized taxation on persons, companies and capital income.

− The Scandinavian example: it is possible to promote competitiveness based on a strong social cohesion; on a high level of public spending; on performing public education and health systems. An appropriate management of social security and public services is a source of so-cial efficiency.

− At the world level, Europe has a special role, to work towards better global governance, in term of development, fight against tax evasion, speculation and financial instability.

Enhancing Economic Growth in Europe

− The Brussels-Frankfort consensus dismisses the idea that a more active macroeconomic management would boost European growth. However, in 2001, European growth did not come to a halt because of supply con-straints, which could have been disappeared under the effects of structural reforms.

− The current European economic policy dogmas are ‘sacred’. However, they impede national governments policies, without providing the impulse needed to support activity in slowdowns, or to boost growth durably.

− Active macroeconomic policy would allow for the detection of potential fac-tors constraining supply and for appropriate measures to be taken. It is eas-ier to undertake reforms in times of strong growth than in times of economic stagnation.

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Why the EU?

- To become a “United States of Europe” with one economic/political sys-tem on par with the United States of America.

- For European nations to stop being their own worst enemies in trade & politics.

- Vision + Infrastructure + Cooperation + Regionalism over nationalism + Power Centralization = THE WORLD’S LARGEST ECONOMY & MARKET (30% share of world gross product)

Economic Advantages of the USA That the EU wants to Emulate.

- One currency - One banking system - Uniform commercial laws - No tariffs between states - Federalism over states rights - These are referred to as the 4 EU freedoms: freedom of goods, ser-

vices, movement of labor & capital

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EU Economic Potency

- 7% of the world’s population—28% of the global GDP (larger than the USA)

- 454M population & 60% more consumers than the USA

- The 12 member nations using the Euro exclusively account for 67% of the population & 74% of the EU GDP %

- One third of the world’s 100 largest corporations are European

- Population of 454M for EU, 1.5 times larger than U.S.

- EU gross regional product of $12.5T vs. $11.7T for U.S

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The Benefits of European Integration

- Lowered incidence of war due to increased economic interdependency - The EU’s single market opens up a huge new sales opportunities - Merged EU corporations are becoming the largest in the world - Poorer member nations benefit from the economic pull of richer members - Democracy & capitalism are promoted in weaker EU nations

The Cost of European Integration - Diminished national sovereignty of member nations - Loss of national identity in in the EU’s uniform laws & standards - Increased competition for corporations less protected from their cross-bor-

der rivals - Increased organized crime enabled by removed border controls - Head-butting among members over agricultural subsidies

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Political Evolution of EU

- The economic unification of Europe began after WWII (1951) with 6 nations (Bel-gium, France, Germany, Italy, Luxembourg, & the Netherlands) forming the Euro-pean Coal & Steel Community (the “Common Market”) to prevent another war via trade cooperation.

- In 1957, the European Community (EC) was established by the Treaty of Rome, which pledged cooperation towards “four freedoms”: free movement of goods, ser-vices, capital, & people.

- Britain, Ireland, Norway, & Denmark joined the EC in 1972. Greece, Spain, & Por-tugal joined in the 1980s.

- The European Union emerged in 1992 with the Maastricht Treaty.

- The Euro was adopted the sole currency of 11 EU members in 1999.

- New EU members in 2004 included: Estonia, Latvia, Lithuania, Poland, Czech Re-public, Hungary, Slovakia, Slovenia, Malta, & Cyrus. Bulgaria & Romania joined in 2007.

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EU POPULATIONS

• Austria: 8M• Belgium: 10M• Cyprus: 1M• Denmark: 5M• Estonia: 1M• France: 60M• Finland: 5M• Germany: 83M• Greece: 11M• Hungary: 10M

• Italy: 58M• Ireland: 4M• Latvia: 2M• Lithuania: 3M• Luxembourg: 16M• Poland: 38M• Portugal: 11M• Spain: 42M• Sweden: 9M• UK: 60M

2003 per capita incomes:

- Germany: $27,600- Poland: $5,400- Romania: $4,084- Bulgaria: $3,735- Ukraine: $1,000 (potential future member)

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EU Outliers

- Four Western European have declined to join the EU: Iceland, Liechtenstein, Nor-way, Switzerland

- The 3 official candidates for the next round of enlargement: Croatia, Macedonia, Turkey

- Future potential candidates: Albania, Bosnia, Herzegovina, Montenegro, Serbia

- The following 4 “micro-states “ lack formal membership status but are part of the Euro-zone: Andorra, Monaco, San Marino, & the Vatican

- 16 of 27 EU members that have adopted (1999) the Euro as their official national currency

- “PIIGS”: Core EU govt. deficit nations Portugal, Ireland, Italy, Greece, Spain

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PIIGS governments are in financial jeopardy due to high social welfare (vote-buying) deficits & the high value of the Euro. Their rotten economies endanger the value of the Euro & the existence of the EU.

- PIIGS economies are too poor to afford the Euro on their own (like living in New York or Tokyo on a Waco income).

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Economic Progress

- Lisbon agenda: for the EU to be the world’s strongest economy by 2010

- EU integration added only 1.3% to the region’s GDP during the 1990s, but since 1992,

EU output increased 2.2%, creating 2.75M new jobs.

- EU’s competitiveness has been limited by (1) Lower work hours vs. the USA; (2) High welfare state benefits (3) Slow population growth

- $500B of trade between EU & USA annually U.S. companies employ 6M EU workers vs. 4M Americans who work for EU companies

- The per capita income of Ireland went from 62% of the EU average in 1981 to 121% in 2002

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EURO Damage by Greek Financial Crisis

- The EU’s efforts (in partnership with the IMF) in the first quarter of 2010 to provide a financial bail-out for the 150% of GDP federal deficit of Greece caused the Euro to drop about 20%. Currency traders inside & outside the EU recognize that “there is no instruction manual for rescuing a euro-zone country nearing default.”

- Northern EU nations subsidize their use of the Euro & hence PIIGS social welfare benefits.

- Germany & the USA have pushed the EU to create an emergency bailout fund to use should any of the PIIGS go bankrupt.

- EU & USA leaders worry that this fund will not be adequate & that the world doubts the stability of the Euro & thus trade with the EU.

- Germany, France, & Italy are the big 3 economic powers in the EU, accounting for 70% of the region’s total GDP.

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II. East Asia

• Large de-gree of variance between the indi-vidual economies

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Territorial Map

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From Ashes to Riches - How does Pacific Asia compares economically with other regions of the world, now and then?

Development Factors - What were the major reasons behind the success of many Pacific Asian countries?

Globalization and Trade - What is the importance of the region in global trade?

Development Problem - What are some specific development problems the region is facing?

Pacific Asian Development

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Geopolitical issues– Around 1950, Pacific Asia was in ruins with limited development

prospects.– Almost the whole continent was at war, revolution or under famine be-

tween 1930 and 1960. China

– Wars– 20 million Chinese killed during the war with Japan (1937-45) and the

civil wars (1920-37; 1945-49)– China tried to invade Vietnam in 1979– China - USSR border clashes (1965-1985).– Demagogy– 40 million died of starvation during the “Great Leap Forward” (1958-62).– Around 10 million killed during the Cultural Revolution (1967-76).

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Southeast Asia– Indochina War (1945-76)– Involved guerrilla between Communists and non-Communists, including

France and the United States.– France pulled out in 1958.– United States pulled out in 1973.– Hundred of thousands of refugees.– Indonesia– Invasion of East Timor in 1975.– Ethnic clashes– Around 500,000 ethnic Chinese were killed in 1965 during a failed coup

in Indonesia.– Genocide– About 1 million Cambodians (15-20% of the population) were killed by

the Khmers Rouges between 1975 and 1978.

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Regional conditions (1960)– Africa might have been better off than Pacific Asia.– Japan had income 1/8 of the US.– South Korea and Taiwan as poor as Sudan and Zaire (DR Congo).– China was three times poorer than Taiwan.– Hong Kong was a struggling, cheap labor-oriented colony facing mas-

sive influxes of refugees from China.

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Accelerated development– From the 1950s, economic development accelerated.– Led to the biggest accumulation of wealth in human history.– Fastest rise in incomes for the largest number of people ever recorded.– Between 1970 and 1990 number of very poor persons fell from 400 mil-

lion to 180 million in East Asia.– Population climbed by 425 million.– Around 650 million people escaped poverty.

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Outcome– Fast growth rate of the GDP per capita (1965-1990)– 5% for Japan, the Four Tigers and several other Pacific Asian

economies– 2.3% for the bulk of developed countries.– In 1990, 10% of East Asians were very poor – 25% for South America– 50% for Africans and South Asians.– Africa failed its combined GDP in 2000 was less than Switzerland.

From Ashes to Riches

Waves of Pacific Asian Develop-ment– First Wave, 1950s (Japan).– Second Wave, 1960s (The

Four Dragons).– Third Wave, 1970s (Malaysia,

Thailand, China and Indone-sia).

– Fourth Wave, 1980s (The Philippines and Vietnam).

– Fifth Wave, 1990s (Growth and recession).

1940

1950

1960

1970

1980

1990

2000

Japan

WWII

Korean War

Four Dragons

Great LeapForward

Vietnam WarCultural Rev.

China, Malay., Thai., Indo.

Philippines, Vietnam

AFTAAsian Crisis

China joins WTO 68

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Industrial Revolution and Time to Double National In-come

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47

34

11

9 9

1780 1830 1880 1930 1980

United Kingdom

United States

Japan

Korea

China

Year

70

Development Factors

United States - Initial role - Marshall Plan also applied in Asia after WWII. - South Korea and Taiwan would not have survived without the support of the

United States - Between 5 and 10% of the GDP in foreign aid in the 1950s. - Direct aid ended at the beginning of the 1960s. - Freed internal financial capacity and promoted savings

- Contemporary role - The United States has become an important market for Asian products.Sup-

porter of the export-oriented development.

71

High savings rates– Savings were preferred over consumption.– Ranges around 20 to 30% of GDP.– Many societies offer little if any social security– Responsibility of the individual / family to cover expanses such as health

care, education and retirement.– Government mandatory saving and insurance policies.– The average American has an income of about $40,000 a year– The personal savings rate is about 1% (negative in 2006).– The average Chinese earns around $1,500 per year– The personal savings of 45% of his income.– A poor Chinese saves more than a wealthy American.

72

Abundance of labor– Numbers do not guarantee industrialization, but an advantage in labor

intensive activities.– Demographic growth help maintain low labor costs– Exports are more competitive.– Foreign investment is attracted.– Productivity often grows faster than wages.– Usage of women labor– In the manufacturing sector.– Notably 15-25 years old.– Often account between 40 and 50% of labor.– Lower wages and more disciplined.

73

Globalization– Development models vary greatly in the region.– Diversity of economic and political systems.– Convergence towards the capitalist model.– Pacific Asia took advantage of the emerging global economy– Opening of foreign markets.– Liberalization of trade.– Export-oriented development.– Significant improvements in the welfare of the population.– Development of international transportation– Pacific Asia accessible a lower costs– Containerization.

74

– Foreign Direct Investments (FDI)– Related to the speed of development.– Massive transfers of technology and investment.– FDI are mostly undertaken as joint-ventures:– The foreign firm often provides capital and technology.– The Asian firm provides labor and raw materials.– About 60% of FDIs are occurring in the manufacturing sector.– United States and Japan:– Account for more than 50% of FDIs.– Japan massively investing in China; lower production costs.– China accounts for 50% of all FDIs going to developing countries.

75

– Sub-contracting– High production / labor costs in developed countries:– Corporations looking at ways to reduce costs and compete.– A increasing share of production is done by sub-contracting.– Transfer of a manufacturing process.– Technology transfers– Mostly done by licensing (Taiwan, South Korea):– A firm has the authorization to use a technology.– Pays a royalty.– Asian countries have become innovators:– Japan and the Tigers first.– China: substantial potential for innovation.

76

– Government and industrial development– Asian governments tend to be of small size:– Lower taxation on the society; less social safety nets.– Notable exceptions; China, Vietnam.– Often account for less than 20% of GDP (about 45% for the US).– Involvement of the government:– Defines the strategic orientation of the economy; Favor export-oriented

strategies.– Developing projects and providing financing (preferential loans).– Significant regulatory involvement (misallocations and some corruption).– Special economic zones:– Enclave where foreign corporations are given specific privileges (mainly

taxation).– Attract foreign investments, new industrial activities and technologies.– Hong Kong is a free trade zone since 1841.

77

– Confucianism– Important imprint in most Pacific Asian societies.– Basis of most social structures, especially in the Chinese world.– Main values:– Hard work as a symbol of achievement.– Thriftiness.– Obedience to authority and respect of hierarchy.– Benevolent leadership.– Consensus, harmony and common interest.– Education as a tool of social promotion.– Possible to make accept difficult living conditions to justify future devel-

opment.– Its importance is argued.

78

Development Factors (Synopsis)

FactorUnited States Initial role (1950s). Marshall Plan. Financial support. Military protection

(Japan, South Korea, Taiwan). Major market outlet.

Savings High saving rates (about 30% of GDP). Availability of national capital.

Labor Large labor pool. Wages kept relatively low. Reliance on women. Development of skills through education.

Globalization Increased participation to international trade. Lower tariffs. Lower transport costs.

Foreign direct investments

Transfers of production and manufacturing capacities. Mainly from Japan and the United States. Joint ventures. Transfer of technology.

Sub-contracting Access to foreign markets.

Government Special economic zones. Export-oriented development strategies. Mandatory savings.

Confucianism Social order. Work ethics. Consensus. Respect of authority. Its role is argued.

79

Trade and Globalization

– Colonial period– Pacific Asian countries mainly traded commodities (notably raw materi-

als) with Europe.– After WWII– The United States became the major trading partner.– Trade mainly involved labor-intensive manufacturing goods.– Recent changes– Emergence of Japan and China.– Growing share of world trade.– Increased intra-regional trade, especially between China and Japan.– The USA still accounts for about 50% of the value of trade.

80

Development Problems

– Questioning the “Asian Miracle”– Used to be called “Miracle Economies” by the World Bank.– Two crisis:– Financial crisis of 1997-98.– Financial crisis of 2008-– The Asian Financial crisis of 1997-98– The bursting of a bubble, mainly based on real estate.– Exacerbation of social problems.– Inequalities.– Loss of spending power.– Especially true in countries depending on imports (Indonesia).– Political unrest (fall of the Suharto government in 1998).

81

Development Problems

– The role of governments– Governments regulate massively their economy:– Industrial control; the appeal of an export-oriented strategy.– Preferential loans.– Informal “Black” market: Avoid government regulation creating artificial

scarcity.– Corruption:– Where there is government there are misallocations.– Corruption is a form of misallocation (using public power to regulate, co-

erce and confiscate).– Corruption becomes a source of income for low paid bureaucrats.– Cronyism (favoritism shown to friends and associates).– Lack of transparency.– Weak legal systems leaving limited recourse.– Institutions did not develop with the economy.

82

Development Problems

– The currency leverage game (2000-2008)– Systematic positive export balance:– Increase of the value of a national currency.– Eventually exports slow down has they become more expensive.– Asian currencies should have increased substantially.– Maintaining the exports:– Continue the export-oriented system.– Japan and Korea bought large amounts of US securities to recycle their

foreign reserves (T-bills, bonds, stocks, etc.).– China pegged its currency (Yuan) to the US dollar at 8.2 and also pur-

chased US securities.– Inflated US assets (housing) and kept consumers buying.– Transfer of wealth from the West to the East.

83

– The limits of the export-oriented model– Pacific Asian development strongly dependent on exports to North

American and European markets.– Correlated (“coupled”) with the dynamics of these markets.– Decoupling thesis:– Development of an internal market.– Less dependency with North America and Europe.– A business cycle with a large bust phase that began in 2008:– Sharp drop in exports (China, Korea and Japan).– The decoupling thesis turned out to be inaccurate.– The export-oriented model is being questioned.

84

Assessment of the East Asian Economy

Driven by continued rapid growth in China, economic recovery in Japan, and strong growth in India, plus robust inflows of foreign investment, average GDP growth across Asia of 7% is well ahead of the global average of 4.7%. Consumer demand is increasing as incomes rise across Asia, further supporting economic growth in many states.

- China surpassed the United Kingdom and France to become the world’s fourth largest economy in 2005 and remains the second largest in purchasing power parity terms.

- Japan’s economy is recovering from its decade-long stagnation, prompting the first interest rate rise—from a base rate of zero—in almost six years.

- Despite recent corruption scandals, the South Korean economy is improving as the service sector strengthens along with increasing consumer demand.

85

Trade Dependency

Most Asian states are highly dependent on trade, particularly many of the smaller Southeast and East Asia states. Asia accounts for 21% of world exports, and intra-regional trade comprises 40% of Asia’s exports. While export-driven expansion has greatly contributed to these states’ economic development, their high dependency on trade suggests structural vulnerabilities, including susceptibility to global financial shocks.

- China’s merchandise exports growth continued to expand by nearly 30% in 2005, but import growth was nearly halved at 17.6%. - Though high in Northeast and Southeast Asia, intra-regional trade and investment are significantly lower in South Asia, where lack of complementarities in trade and cool political relations remain stumbling blocks to regional integration.

86

Investment

Investment is a crucial component of economic growth in Asia. While investment in China is higher than in any other state in the region, Russia, India, and Australia are also attracting increasing amounts of foreign investment. Japan, South Korea, and China are leading sources of FDI in developing Asia, particularly in Southeast Asia.

- Asia is attracting nearly 25% of global FDI. Inflows are highest in China, Russia, and Asia’s newly industrialized economies—Hong Kong, South Korea, Singapore, and Taiwan.

- In Southeast Asia, Thailand, Vietnam, Indonesia, and Malaysia have relaxed foreign ownership controls to attract greater inward FDI.

- Inward FDI growth in Russia is rapid, totaling $14.1 billion in the first half of 2006—almost equal to the $14.6 billion total gain in 2005.

87

Asia’s Success

During 1980-2010, annual GDP growth in emerging Asia averaged 7 percent.

- 8-fold increase in GDP.

- Accounts for ¼ of world economy.

- Success based on outward-oriented growth. (E.g., China’s “reform and opening up”).

- But, over time, unduly reliant on external demand.

- Need now to develop private domestic demand.

88

Global Imbalances Remain Sizable

Global Imbalances(Percent of World GDP)

89

Asia is Highly Dependent on External Demand

Share of Export Value Added in GDP(percent)

Selected Asia: Average Contribution to Real GDP Growth

(percent of real GDP growth)

90

Exports are Concentrated in a Few Industries, and They Influence Investment Patterns

Selected Asia: Share of Export Value Added in GDP

(percent of GDP)

Asia: Share of Medium and High-Tech Exports in Total Exports

(percent; average over 2000-08)

Chinese Export-led Growth may Face Constraints, Highlight-ing Need for More Domestic Demand

91

China: Consumption and Disposable Income(In percent of GDP)

Selected Asia: Export market share (In percent of world exports)

92

Future Direction

- Asia’s growth remains generally export-dependent

- But the rebalancing challenge varies across economies.

- Some (in particular China) will need to boost consumption, others will have to fo-cus on investment. Many would need reforms to boost services-sector growth.

- Comprehensive and coordinated reforms are needed to achieve successful re-balancing in Asia and globally.

93

East Asian Regional Arrangements

Source: Asia Society Task Force Report

94

IV. Compari-son

95

Income Level by Region and CountryWorld Bank Scheme- ranks countries on GNI/capita

96

World Nominal GDP, 2007

0 2 4 6 8 10 12 14

United States

Japan

Germany

China (PRC)

United Kingdom

France

Italy

Spain

Canada

Brazil

Russia

India

South Korea

Australia

Mexico

조

97

GDP Growth

- Since 1975, EU economies have stopped catching-up with the US in terms of GDP per head. Average per head GDP in EU is still 70% of the US level.

- Since 1990, GDP growth has been lower in the European Union than in the US, both in high and low growth periods.

98

Trade Balance

– A nation’s trade is an important indicator of the overall competitiveness of its economy relative to the rest of the world.

– Although it is true that a growing share of trade involves foreign affiliate sales or intra-firm trade, a nation’s trade deficit still reflects a nation’s re-duced competitiveness, even if it does not reflect a reduced competitiveness of a nation’s firms.

– Europe vs. U.S.• In terms of trade balance,

EU-25 clearly leads US.

Economic Performance

US Trade Balance with EUYear Balance ($ millions)

2010 -79,7802009 -61,2012008 -95,807

99

Foreign Direct Investment Inflows

– FDI cannot only bring to a nation new higher-value added production but also increased competitive forces that spur domestic firms to become more innovative and productive.

– Europe vs. U.S.

• EU-25 enjoys almost 50% more inward FDI (from outside Europe) than does US. • Some EU-10 nations (e.g. Poland) have about four times higher levels than US.

The reason, in part, is that as most of these nations have transformed to market-based economies, they have made concerted efforts to attract FDI, facilitated by a relatively educated workforce with relatively low wage levels.

• FDI declined in most nations after the peak years of the end of the 1990s. But FDI declined in EU-25 about 1/3 as much as it declined in US, where it declined by almost 2/3.

100

FDI to NA and EU

101

Top FDI Hosting Countries

102

Labour Productivity - Despite the structural reforms implemented in the 1990s, with the single

market and the deregulation processes, labour productivity growth has been decelerating in EU when accelerating in US.

- At the same time, potential labour force has grown more rapidly in the US (1.3% per year versus 0.8%).

2007 = 100Source: BLS LPC Database; ECB Labor Market Indicators.

103

- The complexity inherent in globalization raises a new paradox: the EU’s in-fluence is predicated on unity, but unity alone no longer suffices.

- For lack of a common foreign policy on major strategic issues, the EU is unable to influence the course of events outside its borders: mem-ber states are divided on Russia and the Middle East conflict, incapable of taking action on Iran, and irresolute or silent on the other major problems the world faces

- The Euro-American partnership, specifically the Atlantic Alliance, still serves as an excuse for Europeans to shirk their strategic responsibil-ities and delegate their own regional security and global stability to the United States, notwithstanding the fact that US power alone is no longer sufficient to guarantee security or stability in a globalised world.

104

EU, USA’s Share of Global Economy

Comparison of Europe vs. United States

Overall Assessment

- U.S. ranks No. 4 in global competitiveness for year 2010-2011.

- Six of the top ten global competitive countries are from EU members.

105

106

Labor Productivity

• In the Eurozone-12 unit labor cost had a positive sign which originated in wages growing at higher rates than productivity.

• In the US unit labor cost growth rates were even higher despite its strong productiv-ity growth, while Japan experienced an improvement in its competitiveness thanks to the slow rate of wages growth.

Unit labor cost. Annual rate of growth, 1995-2009 (percentage)

¹ 1995-2008 for this country.Source: ECB (2010), EU KLEMS (2009) and Fundación BBVA-Ivie.

Eurozone-12 USA Japan¹-2

-1

0

1

2

3

4

5

0,69

1,74

-1,44

1,73

3,67

0,471,04

1,93 1,91

Unit labour cost Wages Productivity

107

Impact of the Crisis on Growth

• The first 3 years of the crisis hit Japan harder than the EU or the USA

• The contraction in terms of GVA was more intense in the EU-15 than in the USA, while the New Member states maintained a positive growth rate

GVA. Annual rate of growth. 1995-2007 and 2007-2009 (percentage)

Source: TCB (2010) and EU KLEMS (2009).

EU-25 EU-15 EU-10 USA Japan-4-3-2-1012345

2,44 2,31

3,623,02

1,34

-1,65 -1,87

0,34

-1,05

-3,13

1995-2007 2007-2009

108

Impact of the Crisis on Productivity

• The US maintained its rate of productivity growth thanks to the intense reaction of its labor market, while in the EU-15 it had a negative growth rate as a consequence of labor maintenance.

• In Japan productivity slowed down in spite of its strong labor contraction.

Labor productivity. Annual rate of growth, 1995-2007 and 2007-2009 (percentage)

Source: TCB (2010) and EU KLEMS (2009).

EU-25 EU-15 EU-10 USA Japan-1

0

1

2

3

4

5

1,671,41

3,52

1,93 2,06

-0,43 -0,46

0,57

1,95

0,23

1995-2007 2007-2009

109

Sources of productivity growth

- The higher labor productivity growth in the USA as compared with EU-15 had a double origin: a higher rate of ICT capital deepening and a higher rate of growth of technical progress (MFP).

Labor productivity Growth by Source. 1995-2007 (percentage)

¹ The EU-15ex consist of Austria, Belgium, Finland, France, Germany, Italy, Netherlands, Spain and the United Kingdom.² 1995-2006 for this country.Source: EU KLEMS (2009) .

Labour composition ICT capital deepening per hour worked Non ICT capital deepening per hour worked TFP

110

EU vs. USA in Competitiveness

- 61 of the top 140 global corporations are European vs. 50 for the U.S. & 29 in Asia.

- 14 of the 20 largest commercial banks in the world are Euro; 3 of the top 5 engineer-ing/construction firms; 5 of the top 10 food & drug retailers; 6 of the top 11 telecommunications firms; 5 of the top 10 pharmaceuticals (with the U.S. having the other 5)

- In a recent survey by Global Finance magazine, 49 of the 50 companies judged best in the world were European.

- Europe now has a larger share of small-to-medium size entrepreneurial firms (67% of the total Euro economy) than the U.S. economy (46%).

- The EU lags behind the U.S. in value-added to high tech products, number of high tech patents, & % of workers with a high school degree. The U.S. lags behind Europe in number of science/engineering college grads; government-financed R&D; & in new capital raised.

- The U.S. consumes 1/3 more energy than Europe.

111

- European markets (especially in the “big 3” economies of Germany, France, and Italy, which produce 1/3 of the EU’s entire regional GDP) are over regulated and inflexible due to unions, high employee benefits, and complex government regulations.

- Europeans seem to look to the future with more fear than hope. The core fact is that the European model is foundering under the fact that billions of people are willing to work harder than the Europeans are. The recent Western European standard of living is about a third lower than the American standard of living, and it’s sliding.

112

• America’s population is rising more than twice as fast as the EU’s. In the 20th century, America’s population increased by 250% vs. just 60% in

France and Britain.

• America has freer markets and U.S. companies capitalize on new technol-ogy at a faster rate.

• America spends twice as much as Europe on higher education.

• ANGLO-SAXONs: High employment rates but significant economic inequal-ity

• CONTINENTALS: Good at helping people avoid poverty (due to generous social benefits), but sub-par job creation

• MEDITERRANEANS: Sub-par performance in both elimination of poverty & avoiding unemployment

• NORDICS: Successful in both economic performance areas of poverty re-duction + achieving high employment

113

Where EU Leads America in Quality of Life

- Better income distribution: High income Americans average 5.6 times more income than low-income Americans vs. 3 times more in Northern Europe & 3.3 times more in Central Europe. Overall, the U.S. has the highest income inequality of the 18 wealthiest nations

- During the 1980s, the U.S. had the least growth (-0.3) in total workforce compensation among developed nations

- 48M (mostly working) Americans currently lack health insurance, even though America spends more on per person on health care ($4900) than any other nation (primarily due to higher administrative costs associated with a complex net of private insurers).

- The premiums of corporate-provided health care policies are rising by about 12% annually, and Medicare recipients about 15%.

- “America’s future Medicare costs will be a tsunami compared to the a mere tidal surge caused by Social Security.”

114

Percentage of the Population Living on Less than $2 per Day, 1981-2002

0

10

20

30

40

50

60

70

80

90

100

1980 1985 1990 1995 2000 2005

East AsiaSouth AsiaSub-Saharan Africa

115

Personal Savings Rate, United States and China

0

5

10

15

20

25

30

35

40

45

50

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

USAChina

116

National Savings Rates (as % of GDP)

0 10 20 30 40 50 60

Singapore

China

Hong Kong

Thailand

South Korea

Indonesia

Taiwan 20011995

Hourly Compensation in Manufacturing, 2004 ($US)

$32.53

$22.87

$2.50

$21.42

$5.97

$11.52

$7.45

$0.91

0 5 10 15 20 25 30 35

Germany

United States

Mexico

Japan

Taiwan

South Korea

Singapore

China

117

118

Value of Chinese Exports and Received FDI, 1983-2007 (Billions of $US)

0

10

20

30

40

50

60

70

80

90

0

200

400

600

800

1,000

1,200

1,400

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

FDI

Expo

rts

ExportsFDI Inflows

119

Share of Global Manufacturing Output, 1993-2003

0 1 2 3 4 5 6 7

China

South Korea

ASEAN

Taiwan

India

20031993

120

Share of World Goods Exports, Selected Countries, 1950-2007

0%

5%

10%

15%

20%

25%

30%

35%

40%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

United StatesJapanGermanyChinaFour large traders (Right axis)

121

Exports and Import Partners

Source : Central Intelligence Agency, The World Factbook, 2006

122

Corruption Perception Index, Selected Countries, 2006 (10 = the least corrupt)

0 1 2 3 4 5 6 7 8 9 10

Finland

Singapore

Hong Kong

United States

Japan

Taiwan

Malaysia

South Korea

China

Thailand

Philippines

Vietnam

Indonesia

Myanmar

123

Yuan Exchange Rate (per USD), 1981-2008

0

1

2

3

4

5

6

7

8

9

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

Yuan per USD

124

Major Foreign Holders of U.S. Treasury Securities, 2008

0 100 200 300 400 500 600 700

China

Japan

U.K.

Caribbean Banks

Oil Exporters

Brazil

Hong Kong

Taiwan

Thailand

Singapore

Korea

Billions

125

Asia Outperforms Other Regions, all Expect Solid Growth

Source: IMF WEO, October2010

Real GDP growth, period averages

-4

-2

0

2

4

6

8

10

1992 – 2001 2002 – 2007 2008 – 2011 2011

%

Central and Eastern Europe Commonw ealth of Independent StatesDeveloping Asia Latin America and the CaribbeanMiddle East and North Africa Sub-Saharan Africa

126

Growth in Emerging / Developing Economies

0

1

2

3

4

5

6

7

8

1992 – 2001 2002 – 2007 2008 – 2011

%

WorldAdvanced EconomiesEmerging and Developing Economies

-1

0

1

2

3

4

5

6

7

1992 – 2001 2002 – 2007 2008 – 2011%

Advanced Economies

Emerging and Developing Economies

Real GDP growth, period averages

GDP per capita growth rate, period averages

Source: IMF WEO, October 2010

127127

Prospects on Growth in Europe and Japan

• The pace of growth in Europe will be quite slow.

• Fiscal austerity and sovereign debt/banking jitters will be major drags on the recovery.

• Export growth (thanks to a weaker euro) and stronger consumer spending in Germany will provide some support to the recovery.

• Northern Europe (with the exception of Ireland) will continue to see decent growth, whereas Southern Europe will grow a little and some economies (Greece and Portugal) will contract.

• Japan’s recovery was unsustainably strong in 2010 (4.3%) and will deceler-ate considerably to only 1.5% to 2%.

128

-8

-6

-4

-2

0

2

4

6

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

United States Eurozone Japan

(Real GDP, percent change)

The United States Outpaces Eurozone and Japan

129

-9

-6

-3

0

3

6

9

NAFTA OtherAmericas

WesternEurope

EmergingEurope

Mideast-N. Africa

Sub-Saharan

Africa

Japan OtherAsia-

Pacific

2009 2010 2011 2012 2013-20

(Real GDP, percent change)

A Multi-Speed World

References

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