Post on 27-Mar-2015
Trade, exchange rates and income
distribution
IPC, Brasilia Alphametrics Co., Ltd.
A research topic and reflection on global
governance
IDEAS Beijing
CERF and Alphametrics
The starting pointThe starting point
exchange rates cannot solve exchange rates cannot solve problems of global imbalanceproblems of global imbalance
nominal exchange rate changes nominal exchange rate changes tend to be offset by changes in the tend to be offset by changes in the price levelprice level
real exchange rates are closely real exchange rates are closely related to the level and distribution related to the level and distribution of income in each countryof income in each country
CERF and Alphametrics
Global imbalances - Global imbalances - incomeincome
Countries in the Countries in the top top 2020% by per % by per capita income capita income receive receive 6060% of % of world incomeworld income
Those in the Those in the bottom bottom 5050% % receive less than receive less than 2020% of world % of world incomeincome
0
20
40
60
80
100
0 10 20 30 40 50 60 70 80 90 100
Income Population
Distribution of population and income by country, 2005
CERF and Alphametrics
... and exports... and exports
Countries in the top Countries in the top 2020% by p.c. income % by p.c. income produce produce 7575% of % of world exportsworld exports
Those in the Those in the bottom bottom 5050% by p.c. % by p.c. income produce income produce 77% % of world exportsof world exports
Distribution of world population, income and exports by country, 2005
0
20
40
60
80
100
0 10 20 30 40 50 60 70 80 90 100
Income Exports Population
CERF and Alphametrics
Three views about how Three views about how the imbalances may be the imbalances may be resolvedresolved Market forcesMarket forces: low income countries will : low income countries will
catch up provided their institutions do not catch up provided their institutions do not obstruct globalisationobstruct globalisation
National interestNational interest: each country or country : each country or country group must look after its own interests group must look after its own interests within the global market systemwithin the global market system
World governmentWorld government: market-driven : market-driven globalisation must be complemented by globalisation must be complemented by structural policies to redistribute structural policies to redistribute resources and promote convergence.resources and promote convergence.
CERF and Alphametrics
Why exports matter so Why exports matter so muchmuch
The balance of The balance of payments identity payments identity and its implication and its implication for incomefor income
X – m Y + K = RX – m Y + K = R
Y = [X + K-R] / mY = [X + K-R] / m
X K-R m Y
USA 4,334 2,637 0.167 41,807
China 915 -88 0.475 1,743
Africa 309 -53 0.321 798
$ per capita, 2005
CERF and Alphametrics
The drivers of export The drivers of export performanceperformance
Market control by Market control by international international companies (global companies (global oligopoly)oligopoly)
Innovation and Innovation and branding are the branding are the instruments of instruments of market controlmarket control
Countries need a Countries need a BBB rating to qualifyBBB rating to qualify
Country Rating
France AAA
Chile AA
Malaysia A+
China A
India BBB-
Brazil BB+
Turkey BB
Nigeria BB
Venezuela BB-
S&P, May 2007
CERF and Alphametrics
Many countries have Many countries have succeededsucceeded
20
30
40
50
60
70
70 75 80 85 90 95 00 05 10 15
TY Theil: income
20
30
40
50
60
70
70 75 80 85 90 95 00 05 10 15
TH Theil: expenditure
20
30
40
50
60
70
70 75 80 85 90 95 00 05 10 15
TED Theil: energy use
20
30
40
50
60
70
70 75 80 85 90 95 00 05 10 15
TEP Theil: energy production
20
30
40
50
60
70
70 75 80 85 90 95 00 05 10 15
TXM Theil: manufactured exports
20
30
40
50
60
70
70 75 80 85 90 95 00 05 10 15
TXS Theil: service exports
Inequality measures Baseline Units: index
CERF and Alphametrics
Why many countries cannot Why many countries cannot succeed so easilysucceed so easily
They cannot They cannot provide the provide the necessary human necessary human capital and capital and infrastructureinfrastructure
Their income Their income distribution is too distribution is too unequal to provide unequal to provide political stability political stability and security for and security for global investorsglobal investors
CERF and Alphametrics
The exchange rate The exchange rate paradoxparadox High income countries have the highest High income countries have the highest
real exchange ratesreal exchange rates
Income per capita at market prices against real exchange rate, 2005
USA
Poland
Hong kong
Bangladesh
IndiaViet Nam
PhilippinesChina exc HK
ThailandArgentina
Pakistan
Other AfricaOther Asia
Kenya
Other MENigeria
Iraq
EcuadorJamaica
LebanonVenezuela
U. Arab Emirate
Kuw ait
Norw aySw itzerland
Qatar
2.00
2.50
3.00
3.50
4.00
4.50
5.00
5.50
-0.80 -0.60 -0.40 -0.20 0.00 0.20 0.40
CERF and Alphametrics
The slope has become The slope has become steepersteeper
In 1970 the slope was 0.1 and there In 1970 the slope was 0.1 and there was very wide dispersionwas very wide dispersion
By the late 1990s the slope had By the late 1990s the slope had increased to 0.3 and dispersion was increased to 0.3 and dispersion was much reducedmuch reduced
Since then the slope and dispersion Since then the slope and dispersion have remained about the samehave remained about the same
CERF and Alphametrics
The price of tradeablesThe price of tradeables
Unit labour costs Unit labour costs and profit mark-and profit mark-upup
Components of Components of unit labour costunit labour cost
Equalisation of Equalisation of prices at market prices at market exchange ratesexchange rates
The profitability of The profitability of exportsexports
p = u (1 + m)p = u (1 + m)
u = w / bu = w / b
p = 1p = 1
s = 1 - us = 1 - u
CERF and Alphametrics
DevaluationDevaluation
Unit labour costs Unit labour costs are reduced are reduced relative to relative to international pricesinternational prices
The gain to The gain to exporters comes at exporters comes at the expense of the expense of higher import priceshigher import prices
The cost is paid by The cost is paid by wage-earners in the wage-earners in the export sector and export sector and incomes in all other incomes in all other sectorssectors
In the longer run In the longer run these effects tend these effects tend to unwind as to unwind as domestic prices domestic prices and incomes rise and incomes rise to compensateto compensate
Real depreciation Real depreciation can also be can also be achieved by achieved by productivity productivity growth passed growth passed through into through into pricesprices
CERF and Alphametrics
RevaluationRevaluation
Profits in the Profits in the tradeable sector tradeable sector are reducedare reduced
If exports are not If exports are not sufficiently sufficiently profitable the profitable the remedies are remedies are downward downward pressure on wages pressure on wages and rationalisation and rationalisation leading to job cutsleading to job cuts
In the longer term In the longer term the consequence the consequence is likely to be is likely to be reduced growth of reduced growth of income and income and deflationdeflation
Real appreciation Real appreciation can also be can also be achieved by low achieved by low productivity productivity growth passed growth passed through into through into pricesprices
CERF and Alphametrics
0%
20%
40%
60%
80%
100%
120%
0% 20% 40% 60%
The impact on non-The impact on non-tradeable sectorstradeable sectors Available income Available income
has to be shared has to be shared across the across the segment of the segment of the labour force that labour force that does not obtain does not obtain employment in employment in tradeable sectorstradeable sectors
yn/yt = (1 – a) / ayn/yt = (1 – a) / a x et / enx et / en
Per cent of labour force in tradeable sectors
Income per person
in non-tradeables
as per cent of
tradeables
(assuming 50% of income is spent on tradeables)
CERF and Alphametrics
The sharing mechanismThe sharing mechanism
Imperfect Imperfect competition means competition means that there are few that there are few barriers to entry as barriers to entry as each business can each business can attract local attract local customerscustomers
Sharing is uneven Sharing is uneven and regulation may and regulation may prevent some prevent some people from finding people from finding employmentemployment
CERF and Alphametrics
0%
20%
40%
60%
80%
100%
120%
140%
160%
0% 20% 40% 60%
The price of non-The price of non-tradeablestradeables
The price of non-The price of non-
tradeables depends tradeables depends
on productivity as on productivity as
well as the share of well as the share of
expenditure and expenditure and
employmentemployment
Taking the price of Taking the price of
tradeables as 1tradeables as 1 pn = (1-a)/a et/enpn = (1-a)/a et/en x bt/bnx bt/bn
(assuming 50% of income is spent on tradeables)
Price of non-
tradeables as per cent of
tradeables
Per cent of labour force in tradeable sectors
bn/bt = 2/3
bn = bt
CERF and Alphametrics
0%
20%
40%
60%
80%
100%
120%
140%
0% 20% 40% 60%
Purchasing power parity Purchasing power parity (PPP)(PPP)
PPP compares PPP compares prices across prices across countriescountries
In the general In the general case if the price case if the price of tradeables is of tradeables is equalisedequalised
ppp = 1/a xppp = 1/a x 1/(1 + en/et 1/(1 + en/et
bn/bt)bn/bt)
(assuming 50% of income is spent on tradeables)
PPP
Per cent of labour force in tradeable sectors
bn/bt = 2/3
bn = bt
CERF and Alphametrics
A wrong explanationA wrong explanation
Neo-classical Neo-classical economists expect economists expect differences in relative differences in relative prices to derive from prices to derive from differences in differences in productivity (Balassa productivity (Balassa and Samuelson)and Samuelson)
ppp = 1/(a+(1-a)bn/bt)ppp = 1/(a+(1-a)bn/bt)0%
20%
40%
60%
80%
100%
120%
140%
0% 200% 400% 600%
(assuming 50% of income is spent on tradeables)
PPP
Productivity in non-tradeable sectors
CERF and Alphametrics
A wrong explanation A wrong explanation (continued)(continued)
Subsequent authors Subsequent authors put the story the put the story the other way round by other way round by saying that as an saying that as an economy modernises economy modernises productivity in productivity in tradeables increases tradeables increases rapidly while rapidly while productivity in non-productivity in non-tradeables stagnatestradeables stagnates
This explanation This explanation is implausible is implausible today given the today given the high level of high level of automation in automation in service industries service industries in rich countriesin rich countries
CERF and Alphametrics
Inequality and migrationInequality and migration
Income Income generated by generated by oligopolistic oligopolistic tradeable tradeable sectors is sectors is concentrated concentrated in specific in specific locations, locations, typically large typically large cities.cities.
This has caused massive This has caused massive inter-regional and rural-inter-regional and rural-urban migrationurban migration
CERF and Alphametrics
There is an end to the There is an end to the storystory
As income risesAs income rises a larger proportion a larger proportion
is spent on servicesis spent on services tradeable tradeable
production production becomes more becomes more geographically geographically disperseddispersed
internal income internal income transfer systems transfer systems are developed.are developed.
Citizens of rich Citizens of rich countries buy security countries buy security through public through public investments in investments in infrastructure, infrastructure, education and health education and health designed to promote designed to promote cohesion within their cohesion within their borders - financed by borders - financed by proportionate proportionate taxation.taxation.
CERF and Alphametrics
A global economy requires A global economy requires global governmentglobal government
Standards of Standards of governance governance endorsed by rich endorsed by rich countries at countries at national level are national level are not perceived as not perceived as being necessary being necessary or relevant at the or relevant at the global level.global level.
Government must be Government must be representative of representative of people, not market people, not market powerpower
Executive bodies are Executive bodies are subordinated to and subordinated to and accountable to the accountable to the legislaturelegislature
Compliance with the Compliance with the law is enforced by law is enforced by the judiciarythe judiciary
CERF and Alphametrics
Global governanceGlobal governance
Generalised Generalised preferences (GSP) and preferences (GSP) and common standards are common standards are essential to counteract essential to counteract the dynamic of global the dynamic of global marketsmarkets
How long will it take to How long will it take to reform the global reform the global governance system ?governance system ?
Accountability of all Accountability of all UN institutions to UN institutions to the General the General AssemblyAssembly
Financial Financial contributions based contributions based on ability to payon ability to pay
International law to International law to govern the conduct govern the conduct of international of international businessbusiness