Greece: Growth after Collapse!

In my recent post, I argued that Greece as a peripheral Euro country will suffer severely from a collapse of the Euro. Depreciation of the new domestic currency will extirpate national savings – this expectation will trigger a bank run and a capital flight leading to bankruptcies in the private sector especially for banks. Workers will suffer from low real wages and high unemployment. Also the government’s burden of liabilities denominated in Euro will grow by the devaluation of the domestic currency; a default of the government is not unlikely. Still, Greece will return to economic growth a few years after the crisis!

Is trade liberalization good for the Democratic Republic of Congo?

In the 1960 at the time of independence, the Democratic Republic of Congo (DRC) was one of the most industrialized countries in Africa – only surpassed by South Africa. After two major wars and five million deaths, its economy is devastated, it lost its leading position and fell back to place twenty in GDP (PPP) ranking in 2010 in Africa. Should the government adopt strong trade liberalization policies now to return to its leading position in Africa? Although trade theory claims that no country can get worse off by allowing free trade, this conclusion depends on crucial assumptions. For the DRC, imperfect capital and prohibitively high transportation costs suggest that trade liberalization can have adverse effects. Rather, measures of protection for selected industries would allow the creation of a competitive manufacturing sector ensuring sustainable long-term growth – similar to policies in Asia in the last decades.

Costs of a collapse of the Euro

A collapse of the European Monetary Union (EMU) and a return to their previous currency for each member country would have severe economic impacts. With focus on monetary effects, I will discuss the pros and cons of a collapse of the EMU. Based on these effects, costs can be estimated and put into perspective to a bailout. Costs of a collapse of the EMU significantly outweighs costs of a bailout.

MPA at LSE and SIPA

The Master of Public Administration program at London School of Economics (LSE) and School of International and Public Affairs (SIPA) at Columbia University in New York allows to pursue a dual degree option with the first/second year at the partner institution. Some more institutions like Hertie School in Berlin, Lee Kuan Yew School of Public Policy at National University of Singapore  and Science Po in Paris participate in the program. Since I studied my first year at LSE and the second year at SIPA, I will only compare those two – hoping that this is helpful for students considering the dual degree option. To begin with, I am very convinced that attending two schools with all their differences rather than one school is generally very advantageous. It broadens the perspective, exposes you to different cultures and personalities and allows to pick / focus whatever each school is best at. Therefore, I would always go for a dual degree option if I have the chance. And as I will explain in more detail below, I would recommend to study the first year at LSE because of its rigorous training in fundamental skills and switch to Columbia for the second year because of its applied perspective and good career services.

Effect of rich countries’ subsidies on Uganda

The agricultural sector in Uganda contributes a major fraction of GDP and employment. Food crops are the main fraction of agricultural GDP with bananas followed by cereals, root crops, pulses and oilseeds. Despite the domestic production, wheat and rice are imported to serve the urban population. Exports are dominated by cash crops like coffee, cotton, tea and tobacco. In recent years, Uganda also increased sugar production for export. How does export subsidies of rich countries affect Uganda? First, farmers producing food crops will lose because of lower prices. However, a new initiative Everything but Arms (EBA) of the European Union (EU) allows access to the higher priced EU domestic market quota- and tax-free supporting food crops exporters in Uganda recently. Second, food consumers will gain from lower food prices. Third, food security was reduced and world price fluctuations could lead to insufficient food supply before the advent of the EBA initiative.

Japan’s intervention in the foreign-exchange market

Since years, the yen appreciates against the dollar, which makes Japan’s exports more expensive. Repeatedly, Japan’s government intervened in the foreign exchange market via the Bank of Japan with the most recent intervention in October 2011. An intervention to depreciate the exchange rate is done by purchasing foreign currencies / assets. In the case of Japan, this increases the supply of the Yen and, thus, leads to a decrease in its price. However, the past interventions only had very short-term effects and the exchange rate always bounced back to its original value – similar to the past interventions.

China with a pegged currency successfully maintains an underappreciated currency with all the benefits for its exports. Another example is Switzerland, which suffered from appreciation of CHF making exports more difficult. Recently, SNB announced to maintain by all means a weaker CHF and that it would be prepared to buy unlimited foreign assets to sustain the exchange rate of 1.20 franc per euro. Subsequently, the exchange rate indeed stabilized at the announced rate.

One of the main differences between the case in Japan and Switzerland is the determination of the bank. The Japanese one-time intervention is contrasted by the announcement of a permanent lower limit of the exchange rate in Switzerland. Why did Japanese choose a one-time intervention with the risk to be not effective similar to its previous interventions instead of a full-scale stabilization of the exchange rate?

Greece’s Referendum: An Opportunity.

The Euro crisis continues. After the summit last week, most Germans (>80%) believed that this would have been the end of the crisis. Although the package of the summit for Greece and other EMU countries could have been more comprehensive, it was sufficiently substantial to calm the markets. The positive reaction the next days confirmed this convincingly. Then, Papandreou made the surprising announcement of a referendum in Greece about achieving a fiscal balance in exchange of help from the EFSF. Greeks already felt overwhelmed with the current fiscal measures. It is very unlikely that they will vote for more. Without a positive referendum, it will be difficult to disburse money from the fund to Greece. A drop-out from the Euro zone appears more likely. Although I am convinced that a negative referendum will throw Greece into deep misery and will also harm the other Euro countries, there are opportunities to deal with the referendum given that the decision is made.

Fiscal Austerity

Fiscal austerity contracts the local economy. Without monetary adjustments, the local economy is hit even harder. Therefore, there is an upper bound of feasible austerity measures – but it is hard to assess whether the current demands from the EU already reached the limit. Also, the resulting current account balance of a country caused by fiscal austerity is relative to the deficit / surplus of other countries. Only countries with an unsustainable deficit should reduce fiscal expenditures. Countries like Germany with a surplus should do the opposite – otherwise, they reduce the effect of fiscal measures in their partner countries.