Comparative Regional Economy <Lecture Note 3> 12.04.16 CRE: North America, Europe and East Asia * Some parts of this note are summary of the references for teaching purpose only. Semester: Spring 2012 Time: Monday 2:00-5:00 pm Class Room: 115 Professor: YooSoo Hong Office Hour: By appointment Mobile: 010-4001-8060 E-mail: email@example.com 1
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.
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).
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 communication • ‘Dirty Industries’ - manufacturing automobiles, power, textiles, petroleum processing, paper - North America is a major exporter of: - Technology - Consumer goods - Information Systems - Foodstuffs
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 attention. - 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)
Regional Economic Integration in North America
The North American Free Trade Agreement (NAFTA) • - 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 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 questions on migration and environmental and labor standards, for example
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 Mexico’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 environmental side agreements to NAFTA
The Impact of NAFTA Local effects of NAFTA on trade and economy are dramatic, especially in the U.S.-Mexican border • Mexico’s economy is 5% of U.S. Economy so that NAFTA has had a very modest impact 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 specialization, 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 reforms. • 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 impact on the overall U.S economy Mexico: NAFTA has had an important impact on trade flows and solidified economic reforms
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 challenges • 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 resistance.
Direction of US Trade Source: Adapted from IMF, Direction of Trade Statistics Yearbook, 2003 and 2006
Direction of Canada’s Trade Source: Adapted from IMF, Direction of Trade Statistics Yearbook, 2003 and 2006
Direction of Mexico’s Trade Source: Adapted from IMF, Direction of Trade Statistics Yearbook, 2003 and 2006
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, including the entire motor vehicle industry • One-quarter of all Canada’s manufactured exports (and imports) are in autos and auto-related products.
Canada’s industrial climate: Characterized by private enterprise. Some industries, such as broadcasting and public utilities, are government owned or subject to substantial government regulation. A trend toward privatization and deregulation. Firms that have been privatized include Canadair, the deHavilland Aircraft Company, Canadian National Railway’s trucking division, Fisheries Products International and Air Canada. Small business is a major part of the economy and accounts for almost 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
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 sales Source: Authors calculations, individual annual reports, and “The Financial Post 500,” National Post, June 5, 2007
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.
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%. 24
Crisis Effects on US and Canada • 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 consumption 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 commodity 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.
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 projected 10% increase by 2025) than in Europe. - With President BarackObama 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.
- 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 – military 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 paradoxically 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.
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 administration 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.
The European Union: Member states of the European Union 493 million people – 27 countries Candidate countries
Expansion of the European Union - May 2004 75 million customers 10 countries - January 2007 Bulgaria and Romania 29 million more customers - Total EU – current situation 480 million customers 27 countries
Eight Enlargements 1952 1973 1986 1981 1990 1995 2004 2007
27 member countries of EU – as of April, 2011 - Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, 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
How Many People Live in the EU? Population in millions, 2007 497 million 82.4 63.4 60.9 59.1 44.5 38.2 21.6 16.3 11.2 10.5 10.6 10.3 10.1 9.0 8.3 7.7 5.3 5.4 5.4 4.3 3.4 2.3 2.0 1.3 0.8 0.5 0.4 Italy Spain France Poland Finland Sweden Estonia Germany Denmark Latvia Greece Belgium Slovakia Malta Hungary Luxemburg Bulgaria Netherlands Ireland Romania Austria Cyprus Slovenia Lithuania United Kingdom Portugal Czech Republic
GDP per Inhabitant: Spread of Wealth GDP per inhabitants in Purchasing Power Standards, 2007 Index where the average of the 27 EU-countries is 100 280 144 131 129 127 123 121 118 117 113 113 104 102 100 94 89 87 79 77 75 67 66 63 58 56 53 38 37 Malta Ireland Sweden Portugal Estonia Hungary Slovakia Poland Austria Finland France Latvia Romania Bulgaria Spain Italy EU-27 Cyprus Greece Belgium Germany Denmark Slovenia Lithuania Luxembourg Netherlands United Kingdom Czech Republic
Two Productivity Gaps in EU Gap 1: North vs. South; Gap 2: EU vs. US GDP per hours worked (United States =100) 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.
(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 EU US surpasses EU (March 2009) Figure 6 Harmonized unemployment rates, August 2007–October 2009Source: OECD Labor Force Statistics http://www.iie.com/realtime/?p=1059
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 demographically 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.
- 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 strategic regions is extremely limited.
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 financial 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 conditions. • Although headline inflation is high, wages have generally remained subdued, and slowing activity and rising unemployment fears should restrain demand for pay hikes. • The specific reform recommendations under the Lisbon Agenda that concern the euro area as a whole appropriately emphasize accelerating services market reform and financial integration since large parts of the services sector remain unaffected.
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 investment 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.
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 benchmark • Source: Doing Business 2010
Lower degree of trade integration in the EU than in the US 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 Intra-trade in manufactured products 2002 (intra exports as a percentage of GDP) Price dispersion in tradeables CPI-weighted
Labor productivity from a long run perspective Labour productivity. Annual rate of growth. EU-25. 1995-2009 (percentage) • 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. Source: TCB (2010) and EU KLEMS (2009).
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 social 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 constraints, 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 factors constraining supply and for appropriate measures to be taken. It is easier to undertake reforms in times of strong growth than in times of economic stagnation.
Why the EU? - To become a “United States of Europe” with one economic/political system 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, services, movement of labor & capital