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October 25, 2014

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Posted: 25 Oct 2014 12:06 AM PDT

'What Path for Development in Africa -- and Elsewhere?'

Posted: 24 Oct 2014 11:11 AM PDT

Tim Taylor:

What Path for Development in Africa -- and Elsewhere?: As I've pointed out from time to time, the countries of  sub-Saharan Africa have been experiencing genuine conomic growth for the last decade or so, and not just in oil- and mineral-exporting countries, creating what is by the standards of developing economies an expanding middle class. But here comes Dani Rodrik to ask some realistic tough questions in his essay, "Why an African Growth Miracle Is Unlikely," written for the Fourth Quarter 2014 issue of the Milken Institute Review. Rodrik also argues this case in "An African Growth Miracle?" given as the Richard Sabot lecture last April at the Center for Global Development.

As Rodrik readily acknowledges, many nations of Africa have seen  both sustained growth and positive reform of their economic institutions. ...

But Rodrik's focus is not on whether a per capita growth rate of 3% is sustainable. Given continuing investments in human capital, infrastructure investment and building better trade ties across the continent, Africa's economy's can continue to grow. The question is whether sub-Saharan African can experience a growth "miracle" similar to that of many nations around south and east Asia--Japan, Korea, China,  India, and others--where per capita economic growth veers up into the range of 7% per year or more, which is enough to double average living standards in a decade.

Here, Rodrik argues, Africa's prospects are shakier, because that kind of growth miracle requires some manner of structural transformation of the economy--and just how the nations of Africa might transform their economies in this way is quite unclear. How will Africa's jobs of the future be generated? Rodrik writes:

"To generate sustained, rapid growth, Africa has essentially four options. The first is to revive manufacturing and put industrialization back on track, so as to replicate as much as possible the now-traditional route to economic convergence. The second is to generate agriculture-led growth, based on diversification into non-traditional agricultural products. The third is to kindle rapid growth in productivity in services, where most people will end up working in any case. The fourth is growth based on natural resources, in which many African countries are amply endowed."

The problem with the manufacturing approach is that economic through a transformation that involves low-wage manufacturing is getting harder. Rodrik writes:

On the other hand, the obstacles to industrialization in Africa may be deeper, and go beyond specific African circumstances. For various reasons we do not fully understand, industrialization has become really hard for all countries of the world. The advanced countries are, of course, deindustrializing, which is not a big surprise and can be ascribed to both import competition and a shift in demand to services. But middle-income countries in Latin America are doing the same. And industrialization in low-income countries is running out of steam considerably earlier than was the case before. This is the phenomenon that I have called premature deindustrialization.

... Rodrik's bottom line is that while the nations of sub-Saharan Africa can surely continue to experience moderate rates of economic growth, it will need to invent its own path to find a growth miracle: "If African countries do achieve growth rates substantially higher than I have suggested is likely, they will do so by pursuing a growth model that is different from earlier miracles, which were based on industrialization. Perhaps it will be agriculture-led growth. Perhaps it will be services. But it will look quite different than scenarios we have seen before."

I would add that the U.S. economy and the world face their own version of Africa's economic growth problem. In the U.S., the old-style manufacturing jobs have been steadily diminishing. We aren't likely to build the future of the U.S. economy primarily on growth in agriculture. Although the emergence of the U.S. economy as the world's oil and gas production leader should offer real benefits to the U.S. economy in the next couple of decades, it isn't likely to be enough to drive the bulk of the $17 trillion U.S. economy. The core challenge facing the U.S. economy is how to combine its own service-sector workers, especially its low- and middle-skill workers, with the new possibilities of technology in a way that leads to well-paid jobs, as well as to the kind of rising productivity and evolving skills that are behind a satisfying career path.

Market Power, 'the Profits-Investment Disconnect,' and the Mal-Distribution of Income

Posted: 24 Oct 2014 10:02 AM PDT

Maybe we'll finally start discussing something I've been writing about for years with little traction, how market power affects the distribution of income (the disconnect between income and the contribution to final product that occurs when market power exists):

The Profits-Investment Disconnect, by Paul Krugman: I caught a bit of CNBC in the locker room this morning, and they were talking about stock buybacks. Oddly — or maybe not that oddly, given my own experiences with the show — nobody brought up what I would have thought was the obvious question. Profits are very high, so why are companies concluding that they should return cash to stockholders rather than use it to expand their businesses?
After all, we normally think of high profits as a signal: a profitable business is one people should be trying to get into. But right now we see a combination of high profits and sluggish investment...
What's going on? One possibility, I guess, is that business are holding back because Obama is looking at them funny. But more seriously, this kind of divergence — in which high profits don't signal high returns to investment — is what you'd expect if a lot of those profits reflect monopoly power rather than returns on capital.
More on this in a while.

'Redistribution Between Generations'

Posted: 24 Oct 2014 09:41 AM PDT

Simon Wren-Lewis:

Redistribution between generations: I ought to start a series on common macroeconomic misunderstandings. (I do not watch zombie films.) ... Here is one that crops up fairly regularly - that government debt does not involve redistribution between generations. The misunderstanding here is obvious once you see that generations overlap. ...

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