Author Archives: Mark

Central and Eastern European (CEE) economies costs and benefits from Covid-19

The impact of Covid-19 on countries like China, and other parts of Asia, has meant that firms in the large economies of Germany and France might not be keen to outsource work to Asia. Although the infrastructure and the resources are available in these countries the Covid-19 risks associated with them means some European companies are looking at options closer to home – also referred to as “nearshoring” (moves by China-wary western European manufacturers to bring production closer to home). CEE countries especially Czech Republic, Hungary, Poland, Slovakia and Romania are particularly strong in the manufacturing sector whilst Estonia, Latvia, and Lithuania (Baltic states) have a comparative advantage in services. Although outsourcing will help these economies it will take a bit of time before there is any significant change.

This is an optimistic view but for some Eastern European countries the GDP forecast has been worse than that experienced after the GFC.

With the fall of the Berlin Wall, the transition from command to market systems led to severe recessions within countries – accelerating inflation and very high levels of unemployment – GDP fell by over 40% in the old Soviet-bloc countries. The present recession is proving to be much worse and these Eastern European countries are particularly vulnerable. The Economist came up with three reasons:

  • These economies are exported dependent – as a % of GDP exports are 96% in Slovakia, 85% in Hungary.
  • Eastern European countries will find it hard to fund deficits as their credit rating tends to be a lot lower than other countries wishing to borrow money. Bulgaria’s rating is BBB compared to say Austria which is AA+
  • A lot of these countries rely on tourism as part of GDP therefore with Covid-19 the tourist industry has all but disappeared. For Croatia that is about 25% of GDP.

The outlook looks especially bleak for economies that were in a poor economic condition before Covid-19. Even though there have been radical steps taken to nullify the economic impact of the virus it will take a strong and coordinated response at EU level to steer countries out of their economic hardship.

Source: The Economist – Eastern Europe’s covid-19 recession could match its post-communist one. 28th May 2020

Barriers to trade not the answer during the pandemic

The WTO has warned that the reduction in global trade could be bigger than that following the GFC in 2008 – see graph below. For countries to start reducing the volume of imports because export volumes have been decreasing is not seen as the right way forward. With countries dependent on the global supply chain for PPE and pharmaceuticals, it would be wrong to focus on being self-sufficient in these essential products.

Source: WTO

As Martin Wolf of the FT pointed out the issue is not with trade but a lack of supply. Export restrictions merely relocate the shortages, by shifting them to countries with the least capacity. The natural response might be to become more self-sufficient in every product but free trade and globalisation does have its advantages:

What causes a recession? TED-Ed

Showed this to my IGCSE class today – great video which is well put together with good examples that explain a recession and its causes. Particularly apt for today’s economic environment. Makes good use of supply and demand graphs as well as supply side and demand side variables. Detailed explanation of the business cycle. Useful for NCEA Level 2 growth standard.

The Paradox of Aid – dumping in developing countries.

Although a few years old now the video below is a good example of dumping – where the exporting country is able to lower its prices below that of the domestic price in the market it is selling into. Useful to show when teaching barriers to trade.

The U.S. spends approximately $37 billion dollars a year on foreign aid – just under 1% of our federal budget. “The Foreign Aid Paradox” zeroes in on food aid to Haiti and how it affects American farming and shipping interests as well as Haiti’s own agricultural markets. The fact that the US dump rice exports on the Haitian market below the equilibrium price severely affects the revenue of local farmers. Should there be a trade-not-aid strategy for developing countries? Below is a very good video from wetheeconomy

The trade-not-aid strategy is based on the idea that if developing countries were able to trade more freely with wealthy countries, they would have more reliable incomes and they would be much less dependent on external aid to carry out development projects. International trade would raise incomes and living standards as poor countries would be able to export their way to economic development by selling their products to rich countries eager to buy their goods.

Source: http://www.globalization101.org/trade-not-aid/

Low income groups struggle in post Covid-19

From The Economist – very good explanation on the impact of COVID-19 on the entertainment / service sector. Often it is the low income groups that would be severely affected as they tend to work in the service industry especially – also not being able to work from home. As these groups tend to live from pay check to pay check they will struggle to maintain any quality of life. They are unlikely to have savings to call upon and will depend on handouts form the government in the form of unemployment benefit or the wage subsidy. What happens when government support runs out? The video is well worth watching.

King’s College student economics magazine

Click here to view ‘Marginal Utility’ a publication by economics students at King’s College, Auckland. Contents below

  • FUTURE OF THE NEW ZEALAND ECONOMY
  • COVID-19 AND THE AIRLINE INDUSTRY
  • ECONOMICS QUIZ
  • COVID-19 AND DEVELOPING ECONOMIES
  • OPTIONS FOR NEW ZEALAND TOURISM
  • ECONOMICS BOOKSHELF
  • TOILET PAPER HOARDING IN COVID-19
  • ECONOMICS PODCASTS
  • THE PARADOX OF NORWAY
  • FAMOUS ECONOMISTS
  • CROSSWORD

New Zealand Tourism will take a hit.

Tourism accounts for approximately 10% of GDP but the forecast doesn’t look good even with the success of eliminating Covid-19. NZ growth totalled $40.9bn last year of which $16.2bn – 5.8% GDP – came from tourism – see graph below. Tourism also helped the retail and hospitality sectors to the tune of $11.2bn – 4% GDP. But there are a number industries which have been hit hard by the lack of tourism due to Covid-19. The food and beverage industry relies on tourism and it accounts for 24% of the total food and beverage serving services.

Of visitors to New Zealand the three main ones are:

  • Australia – 23%
  • China -13%
  • Rest of Asia – 13%

New Zealand is more exposed to tourism than a lot of other countries; we rely more heavily on this sector for employment, income and GDP. In 2019, 229,566 people were directly employed in tourism (8.4% of the labour force). This is a significant portion of the labour market and is considerably higher than many other countries. It has estimated that 100,000 jobs could be lost in the tourism sector as a result COVID-19 – that is 40% of those employed in the sector. On 22nd April 2020 visitor numbers fell to zero – see graph below – as a result of the border closures. However the lockdown has given the tourism sector the chance to restructure the sector into a more sustainable model and be less reliant on overseas visitors. But the future is very fragile.

Arrivals to New Zealand

Source: ANZ Research – New Zealand Weekly Focus – 25th May 2020

A2 Eco – Indifference curves and GIN

Teaching my A2 class the most complex theory in the A2 CIE Economics course – indifference curves. This year one student has come up with a novel way of remembering the position of the indifference curve when the price of one good falls. The three types of goods that eventuate from a price fall are: Giffen, Inferior and Normal – GIN.

G – Giffen – price falls negative income effect outweighs the positive substitution effect – point L would then be to the left of point J on the graph below.
I – Inferior – price falls positive substitution effect outweighs negative income effect – point L would then be between points J and K
N – Normal good – price falls both income and substitution effect are positive – point L will be to the right of point K – as shown below.

Below is a mindmap on indifference curves explaining all the effects of increasing and decreasing prices on different types of goods.

US dollar under pressure as the reserve currency.

In doing most introductory courses in economics you will have come across the four functions of money which are:

  • Medium of exchange
  • Unit of Account
  • Store of Value
  • Means of deferred payment

Since the Bretton Woods Agreement in 1944 the US dollar was nominated as the world’s reserve currency and ranks highly compared to other currencies in the above functions. As a medium of exchange the US dollar is very prevalent:

  • 60% of the world’s currency reserves are in US dollars
  • 50% of cross-border interbank claims
  • After the GFC, purchases of the US dollar increased significantly – store of value.
  • Around 90% of forex trading involves the US dollar
  • Approximately 40% of the world’s debt is issued in dollars
  • n 2018 banks of Germany, France, and the UK held more liabilities in US dollars than in their own domestic currencies.

So why therefore is there pressure on the US dollar as the reserve currency?

The COVID-19 pandemic has closed borders and will inevitably lead to more regionalised trade, migration and money flows which suggests a greater use of local currencies. However China has made its intention clear that the Yuan should become a more universal currency. Some interesting facts:

  • Deposits in yuan = 1trn yuan = US$144bn
  • Yuan transactions have grown in Taiwan, Singapore, Hong Kong and London.
  • Investment by Chinese firms into Belt and Road project = US$3.75bn which was in yuan
  • China settles 15% of its foreign trade in yuan
  • France settles 20% of its trade with China in yuan
  • 2018 – Shanghai sock market launched yuan-denominated oil futures.
  • The IMF suggest that the ‘yuan bloc’ accounts for 30% of Global GDP – the US$ = 40%

However if the past is anything to go by the US economy has gone through some very turbulent times but the US dollar has remained firm. This suggests that how we perceive the US economy doesn’t seem to relate to the value of its currency.

Source: The Economist – China wants to make the yuan a central-bank favourite
7th May 2020