Fuchs,
Appreciate the discussion on growth & development. 2013 is shaping up to be a very interesting year in that the struggle over (scarce?) resources by various factions becomes ever more visible. Apparently, Malthus may be alive and well.
Europe: Burnt and abandoned, by James Fontanella-Khan, January 2, 2013 6:44 pm, Financial Times, www.ft.com
Obama Fights Republicans on Debt as Investors Seek Growth, By Mike Dorning - Jan 3, 2013 6:19 PM MT, Bloomberg News, http://www.bloomberg.com/news/2013-0...ek-growth.htmlBetween 2007 and 2011, annual investment in the 27 countries of the EU dropped by more than €350bn, vastly outpacing falls in other economic indicators, according to a study published last month by McKinsey, the US consultancy. The decline was 20 times the fall in private consumption, for example, and four times the decline in the overall economy.
That lost investment means companies in Europe will not generate €543bn in revenues they would otherwise have churned out between 2009 and 2020, the study estimated.
Fresh from a budget fight so raw that the Republican speaker of the U.S. House cursed the Democratic leader of the Senate outside the Oval Office, President Barack Obama and Congress are heading for an even bigger confrontation over raising the nation’s debt limit.
U.S. Treasury bond investors -- who most directly bear the risk of a government default -- aren’t alarmed. In a sign of the disconnect between Washington and Wall Street, investors remain confident the two sides will compromise rather than inflict what Obama called “catastrophic” consequences. Yields on long-term U.S. debt are near record lows.The decline of western dominance, by Samuel Britton, January 3, 2013 5:31 pm, Financial Times, www.ft.com“Heretofore, they’ve been playing with a cherry bomb in economic terms,” said Steve Bell, a former Republican Senate budget aide. “When they start playing with the debt ceiling in February, they are starting to play with C-4,” he said, referring to the powerful plastic explosive material.
Indeed, what has to be explained is not the west’s looming relative decline but its temporary pre-eminence. Of a world population approaching 7bn, the US and western Europe together account for a mere 770m. Their gross domestic product per head – a very approximate guide to living standards – is three times the world average. Such discrepancies can hardly be expected to last in an increasingly globalised planet. In 1500, just after Christopher Columbus’s voyages of discovery, China and India were both estimated to have had a total GDP considerably higher than western Europe’s and GDP per head only slightly lower. Earlier still, in about 1000, living standards were fairly uniform – and low – throughout the world but the estimates show China slightly in the lead.Why doesn’t Capital Flow from Rich to Poor Countries? An Empirical Investigation, Laura Alfaro, Sebnem Kalemli,-Ozcan Harvard Business School, University of Houston, and NBER, Vadym Volosovych, University of Houston, November 2005, http://www.people.hbs.edu/lalfaro/lucas.pdfMany commentators see the reverse flow out of developing countries as unnatural, by which they mean immoral. There are clearly special factors at work such as state management of the Chinese economy and the large surpluses of oil producers. But these do not look like going into reverse at all soon, and we had all better learn to live with the new direction of capital flows, which is apparently known in academic literature as the Lucas Paradox.
The intriguing question is what the emerging nations will do with their accumulating surpluses. There are already many signs that they have had their fill on holdings of dollars and other western currencies that earn low or even negative real interest rates. The next stage is both portfolio investment and direct investment in areas such as Africa, but also in America and Europe. For the moment, they can be assured of a welcome but what will happen as their stake grows?
There are almost bound to be tensions. Zillions of words have already been written about the declining real power of western governments. Even more will need to be written as they become responsible for ever smaller proportions of their own economies. The main sufferers are not likely to be ordinary citizens, but the hitherto governing and business classes.
We examine the empirical role of different explanations for the lack of flows of capital from rich to poor countries—the “Lucas Paradox.” The theoretical explanations include differences in fun- damentals across countries and capital market imperfections. We show that during 1970−2000 low institutional quality is the leading explanation. For example, improving Peru’s institutional quality to Australia’s level, implies a quadrupling of foreign investment. Recent studies em- phasize the role of institutions for achieving higher levels of income, but remain silent on the specific mechanisms. Our results indicate that foreign investment might be a channel through which institutions affect long-run development.
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