Bellerbys Economics - Mr Stephenson

Friday, February 15, 2008

Behavioural Licence

Traditionally, the way we deal with demerit goods - such as petrol, alcohol and tobacco is through taxation. Higher prices deter people from using that product and so social welfare increases.

But in many ways, taxation can be very ineffective -demand for merit goods is extremely inelastic - even when taxes are high - such as the nearly 70% tax on wine in the UK.

Why is this? The main reason is 'tax illusion' - the consumer doesn't really appreciate the level of tax on the product and simply assumes the price he pays is the 'correct price' for the product. There are other factors involved - the percentage of overall income represented by the purchase, the level of private benefit assumed by the user, whether the product is bundled with other products - eg a celebration - and so on.

A new idea suggested by the London School of Economics is that licensing may be a more effective solution. Take tobacco consumtion for example. If smokers had to buy a licence - let's say £50 before they were allowed to buy cigarettes from a shop, that might deter many from doing so. If a motorist had to pay a licence of £1000 before being allowed to buy pertrol, the use of public transport might suddenly increase. If the licence had to be purchased every year, there could be a fairly substantial dropping off in the use of merit goods.

There are drawbacks of course. In essence, this is a 'poll tax' that would hurt poorer people more than the rich, promoting inequality. It might lead to illegal stores selling contraband tobacco or petrol. It could lead to arbitrage with people travelling to France and Ireland to buy stocks for re-sale (or maybe people would just buy through e-bay, making the scheme difficult to enforce.

It's an interesting idea, however, and perhaps worthy of further public debate.

Monday, February 11, 2008

Banana Wars

The 14-years-old banana war between the USA and the EU appears to be coming to an end with the WTO finding in favour of the USA.

What's it all about? Well, back in the 1970s, the EU agreed with 71 small African, Caribbean and Pacific nations a set of rules for tariffs that would give them preferential treatment with regard to products vital to their economies - such as bananas.

Now only 7% of the EU's imported bananas come from these countries so it doesn't seem like a big deal really. The preferential tariff, however, is vital to the nations concerned. Exports to the EU soak up nearly all of their products and without the preferential treatment, the small, rocky farms of the Caribbean islands could not compete with the vast banana growing savannahs of south america. This new ruling will be devastating for their economies.

The South American banana plantations are owned by the big American corporations such as Chiquita and UFS who moved into the area about a century ago and bought up just about everything. They can't really be too worried about the business but it is more a question of principle from their point of view. The US government seems happy to go along with what they are saying, probably because they have no direct interest in the caribbean islands.

The EU may lodge an appeal against the decision which will take another two years but it does look as though the tide is turning against them in this case.

The South American bananas, by the way, are the big tasteless ones - the small tasty ones (about to disappear) are the ones from the Caribbean.

Wednesday, February 06, 2008

Ukraine in the WTO

Our Ukrainian students will be pleased to hear that the Ukraine joined the WTO today in a ceremony attended by President Viktor Yushenko.

This will mean that every other country in the WTO must treat the Ukraine now as an equal member - so if it imposes a 30% tax on Japanese cars, it must have a 30% tax on Ukrainian cars and so on.

Also, as a member of the WTO, the Ukraine will not be able to increase tariffs in future - only reduce them. The world is slowly moving towards a tariff-free trading system - although it will of course be many years, centuries perhaps before all trade barriers were removed - even assuming that this is desirable.

The Ukraine is hoping that membership of the WTO will increase GDP by an extra 3% a year for the next three years in addition to its normal growth rate of about 6%. This is a welcome bonus for a country that has a low per capita GDP (around $7,000 per head).

Generally, however, Ukraine's economy is in good shape - due to high world prices for steel and wheat, it's two key exports. Inequality is low in the country and educational standards remain high. The one big weakness at the moment is inflation which is running at 12% with little sign of it being brought under control.

The other problem that Ukraine has is population leakage - the population is falling by about 300,000 a year - largely due to Ukrainians leaving the country for better paid jobs elsewhere.

What's next for the Ukraine? Should it turn west towards the EU - or east towards the Federation? Only time will tell......

Tuesday, February 05, 2008

Heterodox Economics

The title sounds like a magical curse or something - but in fact, it's the latest fashion in Economics.

For much of the 1980s, economics was dominated by the Washington Consensus - a broad swathe of what might be described as libertarian or monetarist economics which believed that small government was best, free trade was paramount, businesse knew best. Based on the Chicago school of economics, this had a strong theoretical basis and was related to the earlier works of economists such as Hayek in the 1930s where economics and politics were closely linked and Hayek saw the more libertarian economics he was proposing as a way of combating the destructive nationalist forces sweeping Europe at the time.

This facade began to crack in the early 1990s when it became clear that purely monetarist interpretations of the economy were making the boom-bust of the economic cycle worse, causing immense damage and social conflict during the downturn - and when the free trade policies of the IMF and World Bank were discovered to be destructive to developing countries with weak governance and capacity, the consensus began to crack further.

This led to the pre-eminence of supply-side policies as a way forward and in the last couple of years to the development of a view that different countries should develop in different ways, building on the best of their traditions and resources - so China has developed by following through on government-led strategies (the Beijing Consensus); Russia and Kazakhstan by building their economies around their energy resources; India through a form of chaotic creativity and so on. This is the heterodox view of econmic development.

Leading proponents of this view centre around Harvard and MIT and include the late Robert Heilbronner, Paul Krugman, Dani Rodrik and Thomas Palley and Joseph Stiglitz, the former head of the World Bank, and Larry Summers

But these views are not necessarily new - as always in Economics, ideas often resurface after decades - much of what is currently being said echoes the views of earlier economists such as Thorsten Veblen and Joseph Schumpeter.

Friday, February 01, 2008

Russian Oil Wealth Spilling out all Over

With Russian foreign exchange reserves climbing rapidly due to rising oil prices, the Russian government has been wondering what to do with it all - of course, it could use some of it to subsidise more Russian students at Bellerbys.......perhaps someone should mention this to them.

Meanwhile, it has decided to divide some of it into two new funds - one for investing in structural development in Russia itself (a good supply-side policy) and another $32bn fund for investments overseas. By doing this, it hopes to secure the long-term future of Russia - in the same way that the Arab nations have succeeded in doing over the last thirty years.

In addition to this, Russia's soon-to-be new president, Dmitry Medvedev has been urging Russian companies to buy overseas companies - for much the same reason and also as a way of integrating Russian businesses and the Russian business class more into the world economy prior to Russia joining the WTO in September, or thereabouts.

Gazprom is held up as a shining example of what can be achieved. In recent weeks alone, Gazprom has negotiated significant deals to create energy hubs in Bulgaria, Serbia and Kyrgyzstan, extending its energy-supply dominance (particularly in the field of natural gas) over most of southern Europe and eastwards into China.

Russia's GDP grew by 8.1% last year but with inflation running at 12% not everything is rosy - the main cause of inflation being too many oil revenues being pumped too quickly into the economy. However, foreign direct investment in Russia is increasing (Peugeot announced it would build a new factory in Russia this week) and that is a good sign for the future.