By Eswar Prasad and Karim Foda
The global economic recovery remains stuck below takeoff speed, unable to achieve liftoff and facing the risk of stalling. Half-hearted fiscal austerity measures are proving to be a drag on growth and doing little to rebuild investor and consumer confidence.
Monetary policy continues to shoulder the burden of limiting downside risks and has kept financial markets buoyant even in the face of weak growth prospects.
The Brookings-FT Tiger index shows growth momentum remains weak in nearly all major advanced and emerging market economies. The best that can be said about the weak pace of economic activity is that it has bottomed out in some key economies. However, prospects of a strong cyclical pickup in growth are likely to be hampered by continued policy uncertainty and concerns about further financial market turbulence, with the simmering eurozone debt crisis once again coming close to boiling over.
By Lenos Trigeorgis
EU politicians have been locked in myopic and often self-defeating policies regarding bailout of troubled eurozone countries. They have insisted, in principle correctly, that troubled countries bring their finances to a sustainable path. But the austerity measures used are killing the growth prospects of these countries and damaging their ability to repay the lenders. The less able-to-pay the borrowers become, the tougher the repayment terms imposed, leading to a vicious cycle of further deterioration.
An alternative would be to tie the coupon paid on rescue loans to the growth of the country’s economy. When the economy is in recession, the debt interest burden will be lower, helping the country to boost growth; when economic growth picks up, GDP-linked payments will be higher precisely when the country can afford it. Read more
By Michael Pomerleano
Paradigms accepted as self-evident truths occasionally need to be re-examined. Corporate taxation is one of them. While governments are looking more and more for fiscal resources to fill budget gaps under the auspices of “rationalizing” the corporate tax systems, this article argues that a new, minimalistic approach to corporate taxation can yield surprising benefits. Read more
European court ruled that stability mechanism was not contrary to EU law. Image by Getty
By Professor Simon Deakin
Courts don’t often try to decide the direction of economic policy. However, in effect, this is what the European Court has recently done. In its Pringle judgment the court made a number of important decisions on the legality of bail-out policies being pursued by the European Union.
It ruled that the establishment of the European Stability Mechanism – the fund through which financial assistance will in future be channelled to eurozone states facing the possibility of bankruptcy – was not contrary to EU law. By implication, the ruling also supports the recent attempts by the European Central Bank to shore up the euro by buying the government bonds of debtor states on secondary markets (that is, buying them from commercial banks that have first purchased them from governments). Read more
By Kevin P. Gallagher
Negotiators will meet in Singapore this week for yet another round of talks on a Trans-Pacific Partnership – it is the 16th time in just a few years. A TPP would bring together key Pacific-rim countries into a trading bloc that the US hopes would counter China’s growing influence in the region.
Among other sticking points, talks remain stalled because the US insists that its TPP trading partners dismantle regulations for cross-border finance. Many TPP nations will have nothing of it, and for good reason. The US stance stands on the wrong side of country experience, economic theory and guidelines issued by the International Monetary Fund. Read more
By Heleen Mees
With anger directed towards bankers and rating agencies alike, this may be a good time to remember that low interest rates, rather than faulty mortgage products, are the root cause of the financial crisis and ensuing Great Recession.
I once quipped that to understand the origins of the financial crisis and recession, one should not read Michael Lewis’s The Big Short, but economist and Nobel Laureate Arthur Lewis’s Economic Development with Unlimited Supplies of Labor instead.
The Big Short provides an entertaining account of how low-income households in the US were force-fed unaffordable subprime mortgages, for the sole purpose of adding to the fortunes of Wall Street bankers. But if less subprime mortgages had been originated in the 2000s, the bubble (and bust) in the prime US mortgage market would arguably have been more extensive than it was. Read more
By Mthuli Ncube and Michael Fairbanks
Which is more probable: Africa becomes a virtual international province of China, the main source of its sub-soil assets, and the major component of China’s strategy for its own domestic stability; or China becomes a way African nations upgrade their economies and integrate into the global value chain for manufacturing. The answer lies in the demographics of China, and what African nations decide to do next.
The greatest challenges facing China are an ageing population, gender disparity, migration to cities, rural health care and income inequality. Poverty declined from more than 60 per cent to less than 7 per cent since 1978, eradicating more poverty than in the rest of human history. That happened because of China’s “going out” into the world strategy and Africa is, arguably, the most important part of that strategy. Read more
By Catharine B. Hill
The recession continues to create challenges for higher education in the US. Appropriate responses depend on expectations for the economy in the future, and whether the shocks we have experienced are short- or longer-term trends. Moody’s US Higher Education Outlook Negative in 2013 report does little to address these issues.
The optimal response to a cyclical change is to not allow significant changes to the structure of the colleges and universities. But if a change is permanent, adjustments are warranted. Of course, it is difficult to know whether shocks are permanent or temporary – there is a tendency to assume positive shocks are permanent and negative ones temporary, leading to inappropriate policy responses when wrong. This explains some of the problems facing many colleges and universities. Read more
By Dr Miles Livingston
The legendary John Bogle, founder and former chief executive of The Vanguard Group, recently met with the US Securities and Exchange Commission to urge it to propose a rule that would require anyone providing retail investment advice to act as a fiduciary.
Mr Bogle and two other representatives of The Institute for the Fiduciary Standard argued that investment advisers at large mutual fund companies and other financial institutions often operate with conflicts of interest and do what is best for themselves rather than their shareholders. The Investment Company Act of 1940 requires that mutual funds be organised and managed in the interest of shareholders, rather than their managers or directors, but Mr Bogle pointed out that in practice, the spirit of the law is violated. Read more
By Professor Simon Deakin
Under the government’s current proposals for employment law reform, employees will be able to give up rights concerning unfair dismissal, redundancy pay, flexible working and time off for training in return for receiving shares in the company that employs them, gains on which will be exempt from capital gains tax.
It is right for the government to be encouraging worker ownership in companies; there is abundant evidence suggesting this improves labour productivity. What is completely unnecessary and counterproductive is to link this to the loss of employment protection rights. Read more