purchasing power parity

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GDP: A Brief but Affectionate History by Diane Coyle

"Robert Solow", Asian financial crisis, Berlin Wall, big-box store, Bretton Woods, BRICs, business cycle, clean water, computer age, conceptual framework, crowdsourcing, Diane Coyle, double entry bookkeeping, en.wikipedia.org, endogenous growth, Erik Brynjolfsson, Fall of the Berlin Wall, falling living standards, financial intermediation, global supply chain, happiness index / gross national happiness, hedonic treadmill, income inequality, income per capita, informal economy, Johannes Kepler, John von Neumann, Kevin Kelly, Long Term Capital Management, mutually assured destruction, Nathan Meyer Rothschild: antibiotics, new economy, Occupy movement, purchasing power parity, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, Silicon Valley, Simon Kuznets, The Wealth of Nations by Adam Smith, Thorstein Veblen, University of East Anglia, working-age population

What is needed is a conversion rate that takes account of these substantial differences in purchasing power when nontraded goods and services are taken into account. It did not take long for this problem to become clear as statisticians and economists constructed GDP figures for more and more countries in the 1950s and 1960s. The solution was to construct “purchasing power parity” (PPP) exchange rates, which use data on all prices in the economy to adjust the actual exchange rate to one that reflects living standards more realistically. These rates are applied to convert GDP for every country into PPP dollars in the tables of international comparisons. The idea of purchasing power parity dates back to the early twentieth century and Colin Clark was the first person to try to calculate PPP conversion rates, in 1940. Further work continued alongside the development of national accounts after the war. The OEEC published the first PPP-adjusted GDP figures in 1954, based on the work of Milton Gilbert and Irving Kravis.

There is no question but that economists will continue to use the World Bank data on GDP converted at purchasing power parity, on its methodology. Few people have either the expertise or the time to do anything else. The comparisons do provide useful information. But the large margin of uncertainty around this information should never be forgotten. WHAT DID THE INTERNATIONAL COMPARISONS SHOW? It would be easy to apply hindsight and superimpose what economists know now about international patterns of GDP growth over the decades since 1945 onto this description of how the raw material for those comparisons came to be assembled. But even as late as the mid-1970s, GDP data were available on a comparable basis, adjusted for purchasing power parity, for only a small number of countries. In the 1950s, when the economic theory of growth was in its early stages, the figures were available for just a few of the most developed economies.

See also fiscal policy; government role in economy; monetary policy Portugal, 71 potential growth rate, 82–83 poverty: in Africa, 31–33, 72, 93; globalization and, 93–94; measures of, 31–33; PPP and perception of, 51 PPP. See purchasing power parity price indexes: chain-weighted, 33–34; hedonic measurement in, 35, 88–90; and inflation measurement, 31; for real GDP calculation, 31 prices, influence of technological innovation on, 35, 87–90 privatization, 66 production and productivity: boundary on, 38, 105–6, 131; as GDP measure, 25, 26t, 126–31; measurement issues concerning, 28–29, 37–39; postwar, production and productivity 44–45; in public-sector services, 85; puzzles of, 38, 81–82, 105–6, 126–31; qualitative improvement as factor in measuring, 34–35; technological influences on, 44–45, 81–82, 94; valuation of, 38 production boundary, 38, 105–6, 131. See also labor, productive vs. unproductive purchasing habits, 37 purchasing power parity (PPP), 49–55 quality, as factor in output measurement, 35 R&D.


Triumph of the Optimists: 101 Years of Global Investment Returns by Elroy Dimson, Paul Marsh, Mike Staunton

asset allocation, banking crisis, Berlin Wall, Bretton Woods, British Empire, buy and hold, capital asset pricing model, capital controls, central bank independence, colonial rule, corporate governance, correlation coefficient, cuban missile crisis, discounted cash flows, diversification, diversified portfolio, dividend-yielding stocks, equity premium, Eugene Fama: efficient market hypothesis, European colonialism, fixed income, floating exchange rates, German hyperinflation, index fund, information asymmetry, joint-stock company, negative equity, new economy, oil shock, passive investing, purchasing power parity, random walk, risk tolerance, risk/return, selection bias, shareholder value, Sharpe ratio, stocks for the long run, survivorship bias, technology bubble, transaction costs, yield curve

We then take the perspective of an international investor and analyze common-currency investment returns, measured using a common numeraire such as dollars, or dollars adjusted for changes in purchasing power. We start in section 7.1 with a survey of exchange rate behavior over the 101 years from 1900– 2000, followed in section 7.2 by a review of the evolution of the international monetary system. In section 7.3 we turn to evidence on long-run purchasing power parity, and discuss deviations from purchasing power parity in section 7.4. In section 7.5 we examine the volatility of real exchange rates. We then present real, common-currency returns on equities and bonds in section 7.6. We then summarize our discussion of exchange rates, purchasing power parity, and common-currency returns in section 7.7. 7.1 Long-run exchange rate behavior Figure 7-1 compares the exchange rates against the US dollar for our sample of countries. On the left-hand side of the graph we record the dollar value of 5.21 Swiss francs, £0.20 sterling, and the equivalent sums in other currencies that equate, at that date, to US$1.00.

To Helen, Steff, and our parents Contents Preface xi Part One: 101 years of global investment returns 1 Chapter 1 3 Introduction and overview 1.1 Need for an international perspective 3 1.2 The historical record 5 1.3 Inside the markets 7 1.4 The equity premium 1.5 Sixteen countries, one world Chapter 2 8 10 World markets: today and yesterday 11 2.1 The world’s stock markets today 11 2.2 The world’s bond markets today 14 2.3 Why stock and bond markets matter 18 2.4 The world’s markets yesterday 19 2.5 The US and UK stock markets: 1900 versus 2000 23 2.6 Industry composition: 1900 versus 2000 23 2.7 Stock market concentration 28 2.8 Summary 32 Chapter 3 Measuring long-term returns 34 3.1 Good indexes and bad 34 3.2 Index design: a case study 36 3.3 Dividends, coverage, and weightings 38 3.4 Easy-data bias in international indexes 40 3.5 Measuring inflation and fixed-income returns 43 3.6 Summary 44 Chapter 4 International capital market history 45 4.1 The US record 45 4.2 The UK record 48 4.3 Stock market returns around the world 50 4.4 Equities compared with bonds and bills 51 4.5 Investment risk and the distribution of annual returns 54 4.6 Risk, diversification, and market risk 56 4.7 Risk comparisons across asset classes and countries 59 4.8 Summary 61 vii viii Chapter 5 Inflation, interest rates, and bill returns 63 5.1 Inflation in the United States and the United Kingdom 63 5.2 Inflation around the world 65 5.3 US treasury bills and real interest rates 68 5.4 Real interest rates around the world 71 5.5 Summary 72 Chapter 6 Bond returns 74 6.1 US and UK bond returns 6.2 Bond returns around the world 79 6.3 Bond maturity premia 81 6.4 Inflation-indexed bonds and the real term premium 84 6.5 Corporate bonds and the default risk premium 87 6.6 Summary 89 Chapter 7 Exchange rates and common-currency returns 74 91 7.1 Long-run exchange rate behavior 91 7.2 The international monetary system 93 7.3 Long-run purchasing power parity 95 7.4 Deviations from purchasing power parity 96 7.5 Volatility of exchange rates 98 7.6 Common-currency returns on bonds and equities 100 7.7 Summary 103 Chapter 8 International investment 105 8.1 Local market versus currency risk 105 8.2 A twentieth century world index for equities and bonds 108 8.3 Ex post benefits from holding the world index 111 8.4 Correlations between countries 114 8.5 Prospective gains from international diversification 117 8.6 Home bias and constraints on international investment 120 8.7 Summary 123 Chapter 9 Size effects and seasonality in stock returns 124 9.1 The size effect in the United States 124 9.2 The size effect in the United Kingdom 126 9.3 The size effect around the world 129 9.4 The reversal of the size premium 131 9.5 Seasonality and size 135 9.6 Summary 138 ix Chapter 10 Value and growth in stock returns 139 10.1 Value versus growth in the United States 139 10.2 Value and growth investing in the United Kingdom 142 10.3 The international evidence 145 10.4 Summary 148 Chapter 11 Equity dividends 149 11.1 The impact of income 149 11.2 US and UK dividend growth 152 11.3 Dividend growth around the world 154 11.4 Dividend growth, GDP growth, and real equity returns 155 11.5 Dividend yields around the world and over time 157 11.6 Disappearing dividends 158 11.7 Summary 161 Chapter 12 The equity risk premium 163 12.1 US risk premia relative to bills 163 12.2 Worldwide risk premia relative to bills 166 12.3 US risk premia relative to bonds 169 12.4 Worldwide risk premia relative to bonds 171 12.5 Summary 173 Chapter 13 The prospective risk premium 176 13.1 Why the risk premium matters 177 13.2 How big should the risk premium be?

Exchange rate changes thus impact performance, and are critical for measuring and comparing the returns from different countries. In chapter 7, we report on the exchange rate fluctuations that were experienced by our sixteen countries over the course of the 101 years from 1900–2000. Chapter 1 Introduction and overview 7 Chapter 7 also examines the extent to which purchasing power parity has held over the long run. Purchasing power parity implies that goods and services will have a similar price experience in different countries, but this is a poor description of year-to-year foreign exchange fluctuations. Over the long run, however, we find that changing relative price levels do tend to be reflected in changes in exchange rates, and that real exchange rates are relatively stable. This means that when we compute the common-currency returns on equities and bonds across our sixteen countries, and compare these with the earlier rankings from chapter 4 based on the real, inflation-adjusted returns within each country, we find a very similar picture.


pages: 935 words: 267,358

Capital in the Twenty-First Century by Thomas Piketty

"Robert Solow", accounting loophole / creative accounting, Asian financial crisis, banking crisis, banks create money, Berlin Wall, Branko Milanovic, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, central bank independence, centre right, circulation of elites, collapse of Lehman Brothers, conceptual framework, corporate governance, correlation coefficient, David Ricardo: comparative advantage, demographic transition, distributed generation, diversification, diversified portfolio, European colonialism, eurozone crisis, Fall of the Berlin Wall, financial intermediation, full employment, German hyperinflation, Gini coefficient, high net worth, Honoré de Balzac, immigration reform, income inequality, income per capita, index card, inflation targeting, informal economy, invention of the steam engine, invisible hand, joint-stock company, Joseph Schumpeter, Kenneth Arrow, market bubble, means of production, mortgage debt, mortgage tax deduction, new economy, New Urbanism, offshore financial centre, open economy, Paul Samuelson, pension reform, purchasing power parity, race to the bottom, randomized controlled trial, refrigerator car, regulatory arbitrage, rent control, rent-seeking, Robert Gordon, Ronald Reagan, Simon Kuznets, sovereign wealth fund, Steve Jobs, The Nature of the Firm, the payments system, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, trade liberalization, twin studies, very high income, Vilfredo Pareto, We are the 99%, zero-sum game

I used this parity rather than the exchange rate to convert American GDP to euros in Table 1.1, and I did the same for the other countries listed. In other words, we compare the GDP of different countries on the basis of the actual purchasing power of their citizens, who generally spend their income at home rather than abroad.25 FIGURE 1.4. Exchange rate and purchasing power parity: euro/dollar In 2012, 1 euro was worth $1.30 according to current exchange rate, but $1.20 in purchasing power parity. Sources and series: see piketty.pse.ens.fr/capital21c. The other advantage of using purchasing power parities is that they are more stable than exchange rates. Indeed, exchange rates reflect not only the supply and demand for the goods and services of different countries but also sudden changes in the investment strategies of international investors and volatile estimates of the political and/or financial stability of this or that country, to say nothing of unpredictable changes in monetary policy.

This is chiefly a result of the fact that the prices of goods and services that cannot be traded internationally are lower, because these are usually relatively labor intensive and involve relatively unskilled labor (a relatively abundant factor of production in less developed countries), as opposed to skilled labor and capital (which are relatively scarce in less developed countries).28 Broadly speaking, the poorer a country is, the greater the correction: in 2012, the correction coefficient was 1.6 in China and 2.5 in India.29 At this moment, the euro is worth 8 Chinese yuan on the foreign exchange market but only 5 yuan in purchasing power parity. The gap is shrinking as China develops and revalues the yuan (see Figure 1.5). Some writers, including Angus Maddison, argue that the gap is not as small as it might appear and that official international statistics underestimate Chinese GDP.30 Because of the uncertainties surrounding exchange rates and purchasing power parities, the average per capita monthly incomes discussed earlier (150–250 euros for the poorest countries, 600–800 euros for middling countries, and 2,500–3,000 euros for the richest countries) should be treated as approximations rather than mathematical certainties. For example, the share of the rich countries (European Union, United States, Canada, and Japan) in global income was 46 percent in 2012 if we use purchasing power parity but 57 percent if we use current exchange rates.31 The “truth” probably lies somewhere between these two figures and is probably closer to the first.

For example, global inequality would be markedly higher if we used current exchange rates rather than purchasing power parities, as I have done thus far. To understand what these terms mean, first consider the euro/dollar exchange rate. In 2012, a euro was worth about $1.30 on the foreign exchange market. A European with an income of 1,000 euros per month could go to his or her bank and exchange that amount for $1,300. If that person then took that money to the United States to spend, his or her purchasing power would be $1,300. But according to the official International Comparison Program (ICP), European prices are about 10 percent higher than American prices, so that if this same European spent the same money in Europe, his or her purchasing power would be closer to an American income of $1,200. Thus we say that $1.20 has “purchasing power parity” with 1 euro. I used this parity rather than the exchange rate to convert American GDP to euros in Table 1.1, and I did the same for the other countries listed.


pages: 296 words: 87,299

Portfolios of the poor: how the world's poor live on $2 a day by Daryl Collins, Jonathan Morduch, Stuart Rutherford

Cass Sunstein, clean water, failed state, financial innovation, financial intermediation, income per capita, informal economy, job automation, M-Pesa, mental accounting, microcredit, moral hazard, profit motive, purchasing power parity, RAND corporation, randomized controlled trial, The Fortune at the Bottom of the Pyramid, transaction costs

See net present value “obligatory” lending and borrowing, 50–51 O’Donahue, Ted, 255n.13 Pakistan, 120 Participatory Wealth Ranking (PWR) manual, 262n.10 Patole, Meenal, 252nn.6–7, 257n.7, 261n.5 Pauly, Mark, 253n.22 Peru, 249n.17 Philippines, the, 120, 123, 183, 249n.17, 256n.22 poor, the: assumptions that can mislead regarding, 12–13, 17; commonalties across households, 15–17, 31, 46–47, 49, 100–1; definition of, 1, 5, 7, 190, 195–97; festivals, spending on, 254n.7; financial and nonfinancial challenges facing, 174–75, 184; as a market, 62; number of, 1; opportunities that could assist, 177–80 portfolios: complexity of, reasons for, 19–20; diversification of, prices and, 151–53; examples of, 34, 211–41; extant knowledge of, 14; of funeral coverage in South Africa, example of, 81; informal transactions as dominant in, 53 (see also informal financial sector); large cash flows as common feature of, 31 (see also short-term cash-flow management); methodology for study of the functioning of (see methodology); opportunities for improvement of, 177–80; partial solutions from different sources, perspective on, 67; prices understood through, 21–23 (see also prices); savings as common feature of, 46–47 (see also savings); of transactions and relationships, 49–52. See also financial diaries PPP. See purchasing power parity exchange rates Prahalad, C. K., 62, 251n.12, 256n.2 prices: the complex derivation of, 134–36; context of, diversification of poor households’ portfolios and, 151–53; discounting of, social relations and, 141–44; microfinance interest rates, 279 INDEX prices (cont.) 132–34, 144–45; in “poorworld” banking, interest rates seen as a fee, 136–37; puzzles regarding, portfolio approach reveals, 21–23; from the saver’s perspective, 145–49; sensitivity to interest rates, study of, 257n.4; stated vs. actual, term of the loan and, 137–41; unreliability of informal service providers regarding, 152–53 Proctor and Gamble, 62 pro-poor insurers, 207 purchasing power parity (PPP) exchange rates, conversion factors and use of, 5–7, 248n.6 Qubeka, Nomthumzi, 261n.6 Rabin, Matthew, 255n.13 Ramuse, Zanele, 261n.6 RAND, Family Life Surveys, 261n.2 reciprocity: in burial societies, 77; in lending and borrowing, 50, 54, 208; in savings clubs, 118–19 regulated financial companies (South Africa), 77 Reille, Xavier, 260n.3 “relationship” banking, 250n.9.

. ∞ press.princeton.edu Printed in the United States of America 1 3 5 7 9 10 8 6 4 2 Contents List of Tables vii List of Figures ix Chapter One The Portfolios of the Poor 1 Chapter Two The Daily Grind 28 Chapter Three Dealing with Risk 65 Chapter Four Building Blocks: Creating Usefully Large Sums 95 Chapter Five The Price of Money 132 Chapter Six Rethinking Microfinance: The Grameen II Diaries 154 Chapter Seven Better Portfolios 174 v CONTENTS Appendix 1 The Story behind the Portfolios 185 Appendix 2 A Selection of Portfolios Acknowledgments Notes 243 247 Bibliography 265 Index vi 273 211 Tables Table 1.1 Purchasing Power Parity Comparisons Table 1.2 Hamid and Khadeja’s Closing Balance Sheet, November 2000 Table 2.1 Year-End Financial Asset Values and Annual Cash Flows through Financial Instruments for Median Households Table 2.2 Portfolio Summary for Subir and Mumtaz over the Research Year Table 2.3 Annual Income of the Median Diary Households Table 2.4 Regular versus Irregular Income Households, South Africa Table 2.5 One-on-One Interest-Free Borrowing and Lending Table 3.1 Most Frequent Events Causing a Financial Emergency, by Country Table 3.2 Stages in Holding a Funeral, South Africa Table 3.3 Thembeka’s Portfolio of Funeral Coverage Table 3.4 Sources and Uses of Funds for Xoliswa’s Mother’s Funeral Table 3.5 Sources and Uses of Funds for Thembi’s Brother’s Funeral Table 4.1 Nomsa’s Typical Monthly Budget Table 4.2 Lump Sums from a Single Instrument Spent in the Research Year, by Country vii 6 9 33 34 38 45 50 68 76 81 83 85 99 102 L I S T O F TA B L E S Table 4.3 Types of Instruments Used to Form Lump Sums Table 4.4 Primary Use of 298 Large Sums Table 4.5 Primary Use of 194 Large Sums Used for Opportunities Table 4.6 Where Large Sums Were Formed Table 6.1 Grameen II Diaries: Total Disbursed Value of Loans, by Source Table 6.2 Grameen II Diaries: Number and Disbursed Value of Microfinance Loans, by Use Category Table A1.1 Areas in Which Financial Diaries Households Resided Table A1.2 Average PPP Dollar Per Capita Daily Incomes for Selected Diary Households Table A1.3 Microfinancial Instruments, Services, and Devices Table A2.1–15 Sample Portfolios: Financial Net Worth at the Start and End of the Research Year viii 102 103 108 112 165 166 191 198 206 213 Figures Figure 2.1 Income-earning categories of financial diaries households Figure 2.2 Incomes of two Indian occupational groups, aggregated monthly Figure 2.3 Revenues and inventory expenses of a South African small businesswoman Figure 4.1 Cash-flow schematic for Nomsa’s saving-up club Figure 4.2 Cash-flow schematic for Nomsa’s RoSCA Figure 5.1 Monthly internal rate of return Figure 5.2 Accumulating savings with bank interest rate Figure 5.3 Accumulating savings with ASCA interest rate Figure A1.1 Margin of error in reported cash flows, South Africa ix 37 39 41 115 117 139 146 147 209 This page intentionally left blank This page intentionally left blank Chapter One THE PORTFOLIOS OF THE POOR P ublic awareness of global inequality has been heightened by outraged citizens’ groups, journalists, politicians, international organizations, and pop stars.

They are adjusted to capture the fact that the cost of living varies between countries; that is, a dollar goes farther in Delhi, Dhaka, or Johannesburg than it does in New York. The standard “market” exchange rates used at the bank or airport to convert between dollars and rupees, takas, or rand do not always adequately capture that fact. So adjustments are made by the UN using a set of conversion factors known as “purchasing power parity” (PPP) exchange rates. The PPP-adjusted dollars attempt to account for the greater purchasing power in the countries we study than market rates would imply. Calculating the PPP conversion factors has been a major research project in itself, housed at the World Bank International Comparison Program, and the numbers continue to be refined.6 5 CHAPTER ONE In our context, one limitation of the PPP factors is that they are based on lists of goods and services meant to reflect the consumption patterns of the entire population of each country, rich and poor.


pages: 337 words: 89,075

Understanding Asset Allocation: An Intuitive Approach to Maximizing Your Portfolio by Victor A. Canto

accounting loophole / creative accounting, airline deregulation, Andrei Shleifer, asset allocation, Bretton Woods, business cycle, buy and hold, buy low sell high, capital asset pricing model, commodity trading advisor, corporate governance, discounted cash flows, diversification, diversified portfolio, fixed income, frictionless, high net worth, index fund, inflation targeting, invisible hand, John Meriwether, law of one price, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low cost airline, market bubble, merger arbitrage, money market fund, new economy, passive investing, Paul Samuelson, price mechanism, purchasing power parity, risk tolerance, risk-adjusted returns, risk/return, Ronald Reagan, selection bias, shareholder value, Sharpe ratio, short selling, statistical arbitrage, stocks for the long run, survivorship bias, the market place, transaction costs, Y2K, yield curve, zero-sum game

See also benchmarks; indexing active management and, xx, 166-168, 180-182, 252-255 hedge funds, 235-239 reasons for, 164-166 size cycles active versus passive management during, 170-172, 175, 271-272 equal-weighted versus cap-weighted indexes, 175-180 performance of asset classes, 16-18 UNDERSTANDING ASSET ALLOCATION performance indicators, CEM (capitalized earnings model) and, 96-100 periodic table of asset returns, 6-11, 46 Phillips curve, 98 portable-alpha strategy, 256-257, 260-264, 269-270 portfolio volatility. See volatility portfolios, 3, 253 positive incentives, 81 PPP (purchasing power parity), 57, 97 free trade and, 185-187 violations, 191-192 price earnings ratio. See P/E ratio price rule, 90 price-rule targeting, 48-49 probabilities investor convictions calculations, 129-132, 137-142, 275-281 LJE quantitative model, 134-136 probability density function, 129 purchasing power parity. See PPP pure-alpha strategy, 256-257, 260-264, 269-270 Q-R qualitative method, investor convictions calculations, 132-137 quantitative method. See empirical method Reagan, Ronald, 55, 73-74, 76-77, 83, 90, 95 real GDP growth rate, 95-100 real interest rates, equity/fixed-income cycles and, 53-54 real rates-of-return, 190-192 regional companies, 190 regional factor, 191 regional stock indices, location effect and, 198-202 regulatory fixed costs, 184-185 residual risk, 3 Resolution Trust Corporation, 76 retirement planning, asset allocation and, 3-4 return-delivery vehicles, tax-rate changes and, 69-70 capital gains, 76-79 debt financing, 73-76 incentive structure effects, 70-73, 80-84 reward-to-risk ratio (hedge funds), 228-230 risk, systematic risk, 113 risk measurement, 2-3, 19-21.

Add to that low and steady inflation and there was little uncertainty during the mid- and late 1990s. When the corporate scandals broke, and the stock market bubble popped, uncertainty crept back in and value stocks reigned once again. The Location Cycles Before I get into location cycles, I need to make some assumptions about exchange rates. In the long run (by this, I mean the economy will approach its equilibrium in the long run), purchasing power parity (PPP) will be restored. PPP is the point at which exchange rates have adjusted based on the purchasing power of currencies.7 If the world we live in were frictionless, all adjustments would be instantaneous. This is, unfortunately, not the case. Shocks give rise to temporary disturbances that push economies away from old equilibriums and into new ones. There are adjustment costs to this process, meaning it can take some time for the economy to reach its new equilibrium.

The valuation of the short-term fixed-income instrument is captured in the following equation (TB denotes the short-term fixed-income instrument— that is, three-month T-bills—and s the short-term yields): Equation 5: TB = 1/(1 + s) As before, the short-term yields conform to the Fisher equation. The modified CEM’s equity-valuation formula (see Equation 2) also applies to foreign equities—with one caveat: If one uses foreign interest rates and inflation rates, the model’s results are denominated in foreign currencies. Hence, to translate these returns to domestic returns, one needs to know whether purchasing power parity (PPP)—the point at which exchange rates have adjusted based on the currencies’ purchasing power—holds or not. If PPP holds, the differential inflation rate between two countries matches exchange-rate fluctuations. If (on the other hand) PPP does not hold, real rates of return for the two countries match the exchange-rate fluctuations.2 We previously established a link between inflation and real GDP growth rates and the relative valuation of equities and fixed-income instruments.


pages: 436 words: 76

Culture and Prosperity: The Truth About Markets - Why Some Nations Are Rich but Most Remain Poor by John Kay

"Robert Solow", Albert Einstein, Asian financial crisis, Barry Marshall: ulcers, Berlin Wall, Big bang: deregulation of the City of London, business cycle, California gold rush, complexity theory, computer age, constrained optimization, corporate governance, corporate social responsibility, correlation does not imply causation, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, Donald Trump, double entry bookkeeping, double helix, Edward Lloyd's coffeehouse, equity premium, Ernest Rutherford, European colonialism, experimental economics, Exxon Valdez, failed state, financial innovation, Francis Fukuyama: the end of history, George Akerlof, George Gilder, greed is good, Gunnar Myrdal, haute couture, illegal immigration, income inequality, industrial cluster, information asymmetry, intangible asset, invention of the telephone, invention of the wheel, invisible hand, John Meriwether, John Nash: game theory, John von Neumann, Kenneth Arrow, Kevin Kelly, knowledge economy, light touch regulation, Long Term Capital Management, loss aversion, Mahatma Gandhi, market bubble, market clearing, market fundamentalism, means of production, Menlo Park, Mikhail Gorbachev, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, Naomi Klein, Nash equilibrium, new economy, oil shale / tar sands, oil shock, Pareto efficiency, Paul Samuelson, pets.com, popular electronics, price discrimination, price mechanism, prisoner's dilemma, profit maximization, purchasing power parity, QWERTY keyboard, Ralph Nader, RAND corporation, random walk, rent-seeking, Right to Buy, risk tolerance, road to serfdom, Ronald Coase, Ronald Reagan, second-price auction, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, Steve Jobs, telemarketer, The Chicago School, The Market for Lemons, The Nature of the Firm, the new new thing, The Predators' Ball, The Wealth of Nations by Adam Smith, Thorstein Veblen, total factor productivity, transaction costs, tulip mania, urban decay, Vilfredo Pareto, Washington Consensus, women in the workforce, yield curve, yield management

But market exchange rates are subject to large short-term fluctuations, and in 2001 the value of the euro was extremely low, so the rankings by purchasing power parity (PPP) in Table 4.7 are a better overall guide to the underlying levels of productivity in the various countries. However measured, Norway has much the highest productivity of any country in the world. It combines large and profitable oil extraction with an efficient industrial sector. The range of productivity among the remaining countries at market exchange rates finds Japan at the top ($43 per hour) and Australia at the bottom ($23 per hour), but the less misleading purchasing power parity basis discloses a narrower range, from Belgium's $46 per hour to around $30 per hour in the still emerging Hong Kong and Singapore. Average output of about $40 per hour is what a productive modern economy with current technology can expect to achieve.

We buy and sell different currencies in foreign exchange markets; we exchange money at different dates in money markets. In chapter 4, I described how comparisons between countries could be made using either market exchange rates or purchasing power parities, which compare the cost ofbuying the same bundle of goods in different countries. If it costs less than a dollar in another country to buy goods that cost a dollar in the United States, then people will tend to do exactly that. Market exchange rates cannot therefore vary by too much, or for too long, from purchasing power parity. And they do not. The numbers in Table 4.8 show the cost of buying in dollars, in other countries, the goods that would have cost you one dollar in the United States. Most of them are not very different from one dollar. And if, in 2001, you had looked at the data in Table 4.8 and bought the currencies with figures below one and sold those above it, most of your trades would have made money.

The more distant comparisons are in space and time, the more strained they become. Nathan Rothschild, probably the richest man in the world in 1836, died despite the best medical attention money could buy. The infection that killed him could today be cured by antibiotics available even to Sicelo for a few coins. 10 Isn't Sicelo, alive, better off than Nathan Rothschild, dead? Despite these difficulties, international agencies make estimates of "purchasing power parity" (PPP), the cost of maintaining a given material standard of living in different countries. 11 These comparisons suggest that international disparities in material living standards are less wide than international disparities in productivity. Services and property are generally cheaper in poor countries than in rich countries. Services and property are also cheaper in Australia and North America than in Europe or Japan.


pages: 561 words: 87,892

Losing Control: The Emerging Threats to Western Prosperity by Stephen D. King

Admiral Zheng, asset-backed security, barriers to entry, Berlin Wall, Bernie Madoff, Bretton Woods, BRICs, British Empire, business cycle, capital controls, Celtic Tiger, central bank independence, collateralized debt obligation, corporate governance, credit crunch, crony capitalism, currency manipulation / currency intervention, currency peg, David Ricardo: comparative advantage, demographic dividend, demographic transition, Deng Xiaoping, Diane Coyle, Fall of the Berlin Wall, financial deregulation, financial innovation, fixed income, Francis Fukuyama: the end of history, full employment, G4S, George Akerlof, German hyperinflation, Gini coefficient, hiring and firing, income inequality, income per capita, inflation targeting, invisible hand, Isaac Newton, knowledge economy, labour market flexibility, labour mobility, liberal capitalism, low skilled workers, market clearing, Martin Wolf, mass immigration, Mexican peso crisis / tequila crisis, Naomi Klein, new economy, old age dependency ratio, Paul Samuelson, Ponzi scheme, price mechanism, price stability, purchasing power parity, rent-seeking, reserve currency, rising living standards, Ronald Reagan, savings glut, Silicon Valley, Simon Kuznets, sovereign wealth fund, spice trade, statistical model, technology bubble, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Market for Lemons, The Wealth of Nations by Adam Smith, Thomas Malthus, trade route, transaction costs, Washington Consensus, women in the workforce, working-age population, Y2K, Yom Kippur War

There are many different ways of assessing the size of economies. On the most conservative estimates, which merely measure the size of each economy in dollars, low- and medium-income economies (which include all the emerging markets) are, collectively, about the same size as the US economy. If we pretend that the identical product should have the same cost across different countries and geographies (using either formal purchasing power parity calculations or The Economist’s Big Mac index), the emerging economies are, collectively, about twice the size of the US.10 The emerging economies have come a long way since the 1970s, a result of rapid economic growth year-in, year-out. Yet they still have a long way to go. Per-capita incomes are in some cases only a tiny fraction of those in the US or in the developed world more generally.

As we have seen, in modern economic history China is the first economy to be both poor in per-capita terms but large in terms of its global influence. China’s expansion has, to date, been very commodity-intensive. China is now the second-biggest energy consumer in the world, behind the US but ahead of the European Union. In 1980 it was an economic minnow, with its national income only 7 per cent of America’s in dollar terms and only 9 per cent using purchasing power parity. Already, China’s expansion has had a huge impact on demand for basic materials. In the early years of the new millennium, China absolutely dominated the consumption of metals, accounting for almost all the increase in global demand for tin and nickel and more than all the increase in global demand for lead and zinc. For aluminium and copper, China accounted for around half of the increase in global consumption.

As noted in Chapter 1, simple back-of-the-envelope calculations suggest that, at current growth rates, China would be attempting to consume the equivalent of all of the world’s current oil production by the middle of the twenty-first century. As the IMF explained in the September 2006 World Economic Outlook, ‘historical patterns suggest that consumption of metals typically grows together with income until about $15,000–$20,000 per capita (in purchasing power parity adjusted dollars) as countries go through a period of industrialization and infrastructure building … So far, China has generally tracked the patterns of Japan and Korea during their initial development phase.’11 Meanwhile, like other countries before it, China’s economic success is prompting a shift to protein-based diets, which will have a major long-term effect on the demand for grain.


pages: 209 words: 53,236

The Scandal of Money by George Gilder

Affordable Care Act / Obamacare, bank run, Bernie Sanders, bitcoin, blockchain, borderless world, Bretton Woods, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, Claude Shannon: information theory, Clayton Christensen, cloud computing, corporate governance, cryptocurrency, currency manipulation / currency intervention, Daniel Kahneman / Amos Tversky, Deng Xiaoping, disintermediation, Donald Trump, fiat currency, financial innovation, Fractional reserve banking, full employment, George Gilder, glass ceiling, Home mortgage interest deduction, index fund, indoor plumbing, industrial robot, inflation targeting, informal economy, Innovator's Dilemma, Internet of things, invisible hand, Isaac Newton, Jeff Bezos, John von Neumann, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, Law of Accelerating Returns, Marc Andreessen, Mark Zuckerberg, Menlo Park, Metcalfe’s law, money: store of value / unit of account / medium of exchange, mortgage tax deduction, obamacare, Paul Samuelson, Peter Thiel, Ponzi scheme, price stability, Productivity paradox, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, Ray Kurzweil, reserve currency, road to serfdom, Robert Gordon, Robert Metcalfe, Ronald Reagan, Sand Hill Road, Satoshi Nakamoto, Search for Extraterrestrial Intelligence, secular stagnation, seigniorage, Silicon Valley, smart grid, South China Sea, special drawing rights, The Great Moderation, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Tim Cook: Apple, time value of money, too big to fail, transaction costs, trickle-down economics, Turing machine, winner-take-all economy, yield curve, zero-sum game

CHAPTER 4: THE CHINESE CHALLENGE 1.David Stockman, “The Great China Ponzi—an Economic and Financial Trainwreck Which Will Rattle the World,” David Stockman’s Contra Corner, August 16, 2015, http://davidstockmanscontracorner.com/the-great-china-ponzi-an-economic-and-financial-trainwreck-which-will-rattle-the-world/; and Stockman, “China’s Monumental Ponzi: Here’s How It Unravels,” David Stockman’s Contra Corner, March 31, 2014, http://davidstockmanscontracorner.com/chinas-monumental-ponzi-heres-how-it-unravels/. 2.George Gilder, “Let a Billion Flowers Bloom,” in David Boaz, ed., Toward Liberty: The Idea That Is Changing the World (Washington, DC: Cato Institute, 2002), 180–81. 3.Purchasing power parity calculations, widely criticized as inaccurate, showed China as the largest economy in 2014, though by per capita standards the United States remained more than 40 percent ahead in 2015. In a world with no reliable monetary standard, purchasing power parity is the only way to compare different economies. Economists evidently agree that currency prices fail to gauge actual values. 4.These statistics comparing foreign exchange market (forex) trading with total stock market and goods and services trade are calculated from the total of daily foreign exchange transactions published every three years by the Bank for International Settlements (BIS).

Although Jiang is not Christian himself, his son Jiang Mianheng conditioned his launch of a microchip foundry in Shanghai, called Grace Semiconductor, on the willingness of local authorities to allow a Christian church to be built on the premises. Back in 1988 I anticipated none of this. But I said that a Chinese revival of freedom would make China the world’s largest economy by 2015, the year in which I am now writing. By measures of purchasing power parity (PPP), this prediction has come true.3 So what does this success have to do with monetary policy? China’s success is a major empirical rebuke to Friedman’s monetarism. China never adopted Friedman’s monetarism or belief in floating currencies. Instead, it fixed the value of the yuan on the dollar, much to the chagrin of American monetarists, and adopted as its favorite economist Milton Friedman’s intellectual foe and fellow Nobel laureate Robert Mundell.

That is already happening in the world of the dollar, with “hedonic” adjustments and other technical adaptations of the CPI. It takes armies of accountant-economists, in several branches of the U.S. government and similar entities at the Organisation for Economic Co-operation and Development, the United Nations, the World Bank, and other institutions, to track all the price movements in the market. Pursuing the calculation of “purchasing power parity,” they try to gauge which changes signify the “real” level of prices. MIT includes literally millions of prices around the world in its comprehensive index called “Beta.” Giving up on all these perplexities, the Economist sometimes throws up its hands and resolves on a global “Big Mac” index. Others prefer a “Brooks Brothers Index” tying the price of a business suit to an ounce of gold.9 Under the “hayek” regime, the management of the basket on which all valuations and arbitrage will rely becomes all-important.


The Ages of Globalization by Jeffrey D. Sachs

Admiral Zheng, British Empire, Cape to Cairo, colonial rule, Columbian Exchange, Commentariolus, coronavirus, COVID-19, Covid-19, cuban missile crisis, decarbonisation, demographic transition, Deng Xiaoping, domestication of the camel, Donald Trump, en.wikipedia.org, endogenous growth, European colonialism, global supply chain, greed is good, income per capita, invention of agriculture, invention of gunpowder, invention of movable type, invention of the steam engine, invisible hand, Isaac Newton, James Watt: steam engine, job automation, John von Neumann, joint-stock company, Louis Pasteur, low skilled workers, mass immigration, Nikolai Kondratiev, out of africa, packet switching, Pax Mongolica, precision agriculture, profit maximization, profit motive, purchasing power parity, South China Sea, spinning jenny, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, trade route, transatlantic slave trade, Turing machine, Turing test, urban planning, Watson beat the top human players on Jeopardy!, wikimedia commons

China’s per capita GDP is still only around one-third that of the United States in purchasing-power-parity terms, and roughly one-fifth the U.S. level at market exchange rates and prices. Because China’s per capita income is still far lower than that of the US and other high-income countries, China still has the opportunity for rapid “catching-up” growth, albeit at a pace that is slower than during 1978–2015. As China continues to narrow the relative gap in GDP per capita with the US, China’s economy will become significantly larger than the US economy in absolute size, given that China’s population is roughly four times larger. 8.7 Changing Places: Chinese and U.S. Shares of World Output, 1980–2018 Source: International Monetary Fund. “China: Gross domestic product based on purchasing-power-parity (PPP) share of world total (Percent)”, World Economic Outlook (April 2019).

See Patent Cooperation Treaty Pearl Harbor, 159 Pederson, Neil, 91 Peloponnesian Wars, 75 Peloponnesian Wars (Thucydides), 75 People’s Republic of China, 147 per capita GDP: in Britain and Holland, 141; of China, 180; of countries, 142; of developing countries, 178, 179 permanent settlements, 41 Persia, 74, 76, 83 Persian-Greek Wars, 75 petroleum, 145 Philip of Macedon, 75 philosophers, Islamic, 78 philosophy, 70 Phoenicians, 72–73 physical geography, 1, 19 plague (yersinia pestis), 45 planetary boundaries, 187–92, 189, 197 plantations, 117 Plato, 69–70, 73, 75 Pleistocene age, 57 polar regions, 22 politics, 4, 69 Pope, Alexander, 136 population: agriculture and, 135; CIS, EU and Asia density of, 113; in Classical Age, 11; climate zones distribution of, 83–84, 84; of countries, 209, 209–10; data on, 219–20; of Eurasia, 44; Eurasian climate zones, 24–25, 25; of Europe, 27; of Han Empire, 82–83; of Japan, 150; land use and, 222–23; lucky latitudes and world, 83; nomadic, 43–45, 60; of North America, 102, 103; river areas density of, 26; of Roman Empire, 82–83; urbanization and, 130; world, 8, 10, 83, 135 Portugal, 97–98; Cape Verde islands colonized by, 108; discovered lands divided with, 109; global empires of, 110, 110–11 potatoes, 42 PPP. See purchasing-power-parity precious metals, 117 primary energy reserves, 27–28 primary sectors, 14–16 Prince, The (Machiavelli), 105 Princep, Gavrilo, 157 printing, 105, 131 print shops, in Europe, 105 private goods, 203–4 private law, 19 privately owned corporations, 107 production: Eurasia’s share of, 21, 21; food, 4, 135; of goods, 14; industrial, 14; Paleolithic Age activity in, 15; sectors of, 14–16; systems, 107; world, 21, 21 profits, capitalism seeking, 115–16 Ptolemaic Kingdom, 77 public goods, 203–5 public law, 19 purchasing-power-adjusted prices, 180 purchasing-power-parity (PPP), 180, 225n4 Qin Dynasty, 80 Qing Dynasty, 111, 146–47 Qin Shi Huang, 80 quinine, 152 railroads, 19, 134–35, 139, 160 R&D spending, 182, 182, 199 recombinant growth, 139 Reformation, 105 regime change operations, 162 regional groupings, 205 religions, 69–70, 211–12, 214 renewable energy, 13, 187–88 Republic (Plato), 73 Rio Earth Summit, 197 river areas, 25–27 river barges, 134 riverine cities, 26, 47–48 robots, 185–86 Roman emperor (Diocletian), 77–80 Roman Empire: Diocletian dividing, 77–80; fall of, 85–88; German tribes defeating, 156; population of, 82–83 Romanov Empire, 158 Romer, Paul, 139 Roosevelt, Franklin, 159 Royal Navy, 153 Royal Society of Edinburgh, 136 ruminants, 55 Russian Empire, 27, 112–14 Russo-Japanese War (1904-5), 151 sabertoothed cats, 55 Safavid Empire, 111 sailboats, 47 Saint-Domingue slave rebellion, 121 Satsuma Rebellion, 151 Savery, Thomas, 131 scholarship, 105 Science (Bush), 160 Scythians group, 65 SDG.

Kees Klein Goldewijk, Arthur Beusen, and Peter Janssen, “Long-Term Dynamic Modeling of Global Population and Built-up Area in a Spatially Explicit Way: HYDE 3.1,” Holocene 20, no. 4 (2010): 565–73. 4. Extreme poverty signifies a level of deprivation at which basic human needs (nutritious diet, safe water, sanitation, clothing, shelter, and so forth) are not ensured. The World Bank has regularly established metrics to measure extreme poverty. The World Bank’s current poverty line is per capita consumption at or below $1.90 per day measured in 2011 prices using purchasing-power parity (PPP) exchange rates. Academic studies of poverty throughout history propose their own respective poverty lines for coherence with the recent World Bank data. 5. For the scale of forager communities, see Tobias Kordsmeyer, Pádraig Mac Carron, and R. I. M. Dunbar, “Sizes of Permanent Campsite Communities Reflect Constraints on Natural Human Communities,” Current Anthropology 58, no. 2 (2017): 289–94. 6.


Falling Behind: Explaining the Development Gap Between Latin America and the United States by Francis Fukuyama

Andrei Shleifer, Atahualpa, barriers to entry, Berlin Wall, British Empire, business climate, Cass Sunstein, central bank independence, collective bargaining, colonial rule, conceptual framework, creative destruction, crony capitalism, European colonialism, Fall of the Berlin Wall, first-past-the-post, Francis Fukuyama: the end of history, Francisco Pizarro, Hernando de Soto, income inequality, income per capita, land reform, land tenure, Monroe Doctrine, moral hazard, New Urbanism, oil shock, open economy, purchasing power parity, rent-seeking, Ronald Reagan, The Wealth of Nations by Adam Smith, total factor productivity, trade liberalization, transaction costs, upwardly mobile, Washington Consensus, zero-sum game

Countries in the upper right portion—that is, countries 142 The Politics of Underdevelopment in Latin America Number of Regime Changes 8 Panama 7 6 5 Ecuador Argentina Bolivia Brazil Dominican Republic Paraguay Peru 4 Venezuela El Salvador 3 Colombia Guatemala 2 Costa Rica Uruguay 1 Nicaragua 0 0 Chile 2000 Mexico 4000 6000 8000 10000 Average Annual per Capita Income ($) figure 6.4 Per Capita Income and Regime Change in Latin America, 1940–1970. Note: Income per capita expressed in 1996 purchasing power parity dollars. Sources: Data elaborated from the Penn World Table, http://pwt.econ.upenn.edu/php_site/pwt_index.php; and the Third World Government Stability database, http://colfa.utsa.edu/govstability. Number of Regime Changes 8 7 6 Argentina Panama 5 4 Bolivia 3 2 Nicaragua El Salvador Dominican Republic Peru Ecuador Brazil Guatemala Chile Mexico 1 Colombia 0 0 2000 4000 Costa Rica Uruguay Venezuela 6000 8000 10000 Average Annual per Capita Income ($) figure 6.5 Per Capita Income and Regime Change in Latin America, 1970–2000. Note: Income per capita expressed in 1996 purchasing power parity dollars. Sources: Data elaborated from the Penn World Table, http://pwt.econ.upenn.edu/php_site/pwt_index.php; and the Third World Government Stability database, http://colfa.utsa.edu/ govstability.

Of course, such 170 Institutional Factors in Latin America’s Development Log PPP GDP Per Capita in 2000 Constant USD 12 11 10 ARG CHL CRI URY BRA DOMPAN COL VEN PER SLV PRY GUY GTM NIC ECUJAM HND BOL MEX 9 8 HTI 7 6 5 0 1 2 3 4 5 6 7 8 1990 – 2003 Average Constraints on the Executive Index (Polity IV) Log PPP GDP Per Capita in Constant 2000 USD figure 7.4 Log Gross Domestic Product (GDP) Per Capita (2004 Purchasing Power Parity) vs. Constraints on the Executive. Source: Polity IV Project on Political Regime Characteristics and Transitions, 1800–2004, Center for Global Policy, George Mason University and Center for International Development and Conflict Management, University of Maryland (dynamic dataset by subscription). 12 11 10 PAN PER JAM 9 CHL URY ARG MEX BRA VEN ECU DOM COL BOL 8 7 6 5 0 5 10 15 20 25 Number of Procedures to Create a Business figure 7.5 Log Gross Domestic Product (GDP) Per Capita (2004 Purchasing Power Parity) vs. Number of Procedures Needed to Create a Business. Source: Simeon Djankov, Rafael La Porta, Florencio López-de-Silanes, and Andrei Shleifer, “The Regulation of Entry,” in Quarterly Journal of Economics 117 (2002): 1–37.

In addition, as indicated in table 4.3, teachers with 15 years of experience in primary schools in Brazil receive salaries that are less than half table 4.3 South Korea Spain United States OECD Thailand Argentina Chile Malaysia Colombia Mexico Brazil Enrollment in Secondary Education and Public Primary School Teacher Salaries, 1995–1998 % Net Enrollment in Secondary Education, 1995 Public Primary School Teacher Salary ($), 1998 96 94 89 nd nd 59 55 nd 50 46 19 39,921 29,590 33,973 28,441 15,759 9,442 15,233 10,876 nd 12,450 6,451 Notes: nd = no data available The salary is for a teacher with 15 years experience, in U.S. dollars, expressed as per the purchasing power parity (better known by its acronym in English, PPP). The enrollment figure shows enrollment as a percentage of the secondary school–age population. OECD = Organisation for Economic Co-operation and Development. Source: Partnership for Educational Revitalization in the Americas, Lagging Behind: A Report Card on Education in Latin America, 2001 (Washington, DC: Inter-American Dialogue, 2001), pp. 29, 42, based on UNESCO and OECD data.


Capitalism, Alone: The Future of the System That Rules the World by Branko Milanovic

"Robert Solow", affirmative action, Asian financial crisis, assortative mating, barriers to entry, basic income, Berlin Wall, bilateral investment treaty, Black Swan, Branko Milanovic, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carried interest, colonial rule, corporate governance, creative destruction, crony capitalism, deindustrialization, dematerialisation, Deng Xiaoping, discovery of the americas, European colonialism, Fall of the Berlin Wall, financial deregulation, Francis Fukuyama: the end of history, full employment, ghettoisation, gig economy, Gini coefficient, global supply chain, global value chain, high net worth, income inequality, income per capita, invention of the wheel, invisible hand, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, labor-force participation, laissez-faire capitalism, land reform, liberal capitalism, low skilled workers, Lyft, means of production, new economy, offshore financial centre, Paul Samuelson, plutocrats, Plutocrats, post-materialism, purchasing power parity, remote working, rent-seeking, ride hailing / ride sharing, Silicon Valley, single-payer health, special economic zone, The Wealth of Nations by Adam Smith, Thorstein Veblen, uber lyft, universal basic income, Vilfredo Pareto, Washington Consensus, women in the workforce, working-age population, Xiaogang Anhui farmers

Estimated global income inequality, 1820–2013 IR = Industrial Revolution; ICT = information and communication technologies. Data source: Data for 1820–1980 are based on Bourguignon and Morrisson (2002), with their GDPs per capita replaced by new data from the Maddison Project (2018). Data for 1988–2001 are based on Lakner and Milanovic (2016) and my own update. All incomes are in 2011 PPP dollars (purchasing power parity) (the latest round of International Comparison Project at the time of writing in 2018). For additional technical details, see Appendix C. After the end of World War II, global inequality stood at its highest level ever, at about 75 Gini points, and it remained at that high plateau until the last decade of the twentieth century. During this time the gap between the West and Asia—China and India in particular—did not grow any further, as Indian independence and Chinese revolution were setting the stage for the growth of these two giants.

Performance of socialist versus capitalist economies in Europe, 1950–1989 Country abbreviations: Socialist countries: BUL Bulgaria, CZ Czechoslovakia, GDR German Democratic Republic, HUN Hungary, POL Poland, ROM Romania, USSR Soviet Union, YUG Yugoslavia; Capitalist countries: AUT Austria, BE Belgium, CH Switzerland, DK Denmark, ESP Spain, FIN Finland, FRA France, GER West Germany, GRE Greece, IRL Ireland, ITA Italy, NL Netherlands, NOR Norway, POR Portugal, SWE Sweden, UK United Kingdom. GK dollars are Geary-Khamis PPP (purchasing power parity) 1990 dollars. Data source: Vonyó (2017, 255). Reproduced with permission. A comparison between capitalist and socialist (that is, communist-run) countries is extremely important not only because it shows the inferior performance of socialist countries, but because it enables us to decompose the inferior performance of the richer socialist countries into two parts: (1) the part due to economic convergence (that is, the non-system-specific part which exists whether we compare the performance of the United Kingdom to that of Spain, or of Czechoslovakia to Bulgaria), and (2) the part that is system-specific and is reflected in the much worse performance of the richer socialist countries than the richer capitalist countries.

But we do not know if it would slow down all the way to the level of today’s rich countries, or if the slowdown would—despite the truly remarkable journey of these countries, which have gone in the span of a couple of generations from very poor to very rich—make them less of a model for others to follow. FIGURE 3.2. Growth rates of GDP per capita in China, Vietnam, and the United States, 1990–2016 Growth rates are in real terms, based on 2011 PPP (purchasing power parity) dollars. Data source: World Bank World Development Indicators, 2017 version. 3.2c Is China Capitalist? But is China really capitalist? This is a question that is often asked—sometimes rhetorically and sometimes genuinely. We can dispose of it quickly if we use the standard Marx-Weber definition of capitalism introduced in Chapter 2. To qualify as capitalist, a society should be such that most of its production is conducted using privately owned means of production (capital, land), most workers are wage-laborers (not legally tied to land or working as self-employed using their own capital), and most decisions regarding production and pricing are taken in a decentralized fashion (that is, without anyone imposing them on enterprises).


pages: 401 words: 109,892

The Great Reversal: How America Gave Up on Free Markets by Thomas Philippon

airline deregulation, Amazon Mechanical Turk, Amazon Web Services, Andrei Shleifer, barriers to entry, bitcoin, blockchain, business cycle, business process, buy and hold, Carmen Reinhart, carried interest, central bank independence, commoditize, crack epidemic, cross-subsidies, disruptive innovation, Donald Trump, Erik Brynjolfsson, eurozone crisis, financial deregulation, financial innovation, financial intermediation, gig economy, income inequality, income per capita, index fund, intangible asset, inventory management, Jean Tirole, Jeff Bezos, Kenneth Rogoff, labor-force participation, law of one price, liquidity trap, low cost airline, manufacturing employment, Mark Zuckerberg, market bubble, minimum wage unemployment, money market fund, moral hazard, natural language processing, Network effects, new economy, offshore financial centre, Pareto efficiency, patent troll, Paul Samuelson, price discrimination, profit maximization, purchasing power parity, QWERTY keyboard, rent-seeking, ride hailing / ride sharing, risk-adjusted returns, Robert Bork, Robert Gordon, Ronald Reagan, Second Machine Age, self-driving car, Silicon Valley, Snapchat, spinning jenny, statistical model, Steve Jobs, supply-chain management, Telecommunications Act of 1996, The Chicago School, the payments system, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, transaction costs, Travis Kalanick, Vilfredo Pareto, zero-sum game

If we are interested in measuring the global clout of a country—its gross domestic product (GDP), for example—then overall growth is what matters. For instance, when comparing the relative worldwide influence of the US and China, we would want to use total Chinese GDP versus total US GDP. But if we want to understand how the average Chinese consumer feels, we would want to use per-capita GDP estimated at purchasing power parity (PPP). Chapter 7 explains how PPP exchange rates are computed and how to use them. And sometimes GDP itself is not the right measure. In the case of Russia, for instance, there is a large discrepancy between its semiglobal influence and its relatively small economy because of the hypertrophy of its armed forces. TABLE 1.1 Growth Rate of Real US GDP per Capita Decade 1950s 1960s 1970s 1980s 1990s 2000s 2010–17 Average growth 2.4 3.1 2.1 2.1 2.0 0.8 0.6 Data source: FRED, real gross domestic product per capita, continuously compounded rate of change If we are interested in happiness and standards of living, however, then per-capita growth is what matters.

In general, higher prices have two effects: they lead to lower demand and to lower standards of living. As it turns out, however, even seemingly concrete concepts like “getting richer” or “getting poorer” have very different meanings, depending on context. To compare incomes around the world, we need to convert them from local currencies into a common currency, using either foreign exchange market rates (FOREX) or purchasing power parity exchange rates (PPP). The FOREX exchange rate is the one that you read about in the newspapers or online. It is the rate that says, for instance, that 1 euro equals 1.2 dollars. The PPP exchange rates are more complicated and more interesting. PPP rates are defined in such a way that one unit of currency can purchase the same amount of goods and services everywhere. Let us illustrate the idea with an example.

If they live in different places instead, we need to consider the fact that they have different needs (think of heating costs in Anchorage versus San Juan) and that they face different local prices. If Pierre lives in France, he pays $35 per month for his broadband internet connection, and Karen pays $80 per month in the US. With his income, Pierre can buy more internet access than Karen. In that sense, we would say Pierre is richer. A more useful way to assess who is richer, then, would be to compute income at purchasing power parity (PPP) rates, i.e., income divided by the price of a common set of goods and services. This is easier said than done, as you can imagine. For a start, Pierre and Karen consume many goods and services, not just goods and services accessed on the internet. When we make international comparisons of real income, we need to look at the prices of the items that people actually consume. So how do we proceed?


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The Haves and the Have-Nots: A Brief and Idiosyncratic History of Global Inequality by Branko Milanovic

Berlin Wall, Branko Milanovic, colonial rule, crony capitalism, David Ricardo: comparative advantage, deglobalization, Deng Xiaoping, endogenous growth, Fall of the Berlin Wall, financial deregulation, full employment, Gini coefficient, high net worth, illegal immigration, income inequality, income per capita, Joseph Schumpeter, means of production, open borders, Pareto efficiency, plutocrats, Plutocrats, purchasing power parity, Simon Kuznets, very high income, Vilfredo Pareto, Washington Consensus, zero-sum game

See Citizenship Plato Poland Political parties Poor education and global inequality and government spending and investment and redistribution and social arrangements and taxation and Poor countries globalization and migration from technology and trade and Portugal Poverty alleviation of PPP. See Purchasing power parity dollars Prices Pride and Prejudice (Austen) Principles of Political Economy (Ricardo) Private property Production of goods Proletariat Provence Purchasing power parity (PPP) dollars Rawls, John Reagan, Ronald Reciprocity Redistribution beneficiaries of fiscal interpersonal inequality and justice and middle class and poor and voting and Rentiers Republican Party, Republicans Ricardo, David Rich investment and savings and social arrangements and Rich countries, migration to Rockefeller, John D.

This is the same thing as saying that to each haircut in China, to each meal eaten in a cafeteria in Hunan, we attach not their actual prices but international prices—thereby valuing each haircut in China the same as a similar haircut in the United States. The end product is that the Chinese and American GDPs per capita will now be expressed neither in yuan nor in U.S. dollars, but in what is called PPP (purchasing power parity) dollars, an imaginary currency that in principle has the same purchasing power in China and the United States. The same calculation is, of course, performed for each and every other country that participates in the International Comparison Project: When we say $PPP 1, we mean that a unit of such imaginary currency can buy the same basket of goods in India as in China as in France, Argentina, or Zambia.

This was estimated by Branko Milanovic, Peter Lindert, and Jeffrey Williamson in “Preindustrial Inequality” (Economic Journal, forthcoming; previous version published as Measuring Ancient Inequality, National Bureau of Economic Research Working Paper 13550 [National Bureau of Economic Research, October 2007]) to have amounted to a GDP per capita in 1990 international prices of $PPP 633 (PPP stands for “purchasing power parity”; see Essay II). Angus Maddison’s estimate is somewhat lower, $PPP 570 (Contours of the World Economy, 1-2003 AD [Oxford: Oxford University Press, 2007], chap. 1). 6 This is simply given as an example. The Colosseum was built under Titus, more than one hundred years after Crassus died. 7 According to the New York Times obituary from 1937 and Wikipedia. Alan Nevins says the amount did not exceed $900 million (Study in Power: John D.


pages: 283 words: 73,093

Social Democratic America by Lane Kenworthy

affirmative action, Affordable Care Act / Obamacare, barriers to entry, basic income, business cycle, Celtic Tiger, centre right, clean water, collective bargaining, corporate governance, David Brooks, desegregation, Edward Glaeser, endogenous growth, full employment, Gini coefficient, hiring and firing, Home mortgage interest deduction, illegal immigration, income inequality, invisible hand, Kenneth Arrow, labor-force participation, manufacturing employment, market bubble, minimum wage unemployment, new economy, postindustrial economy, purchasing power parity, race to the bottom, rent-seeking, rising living standards, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, school choice, shareholder value, sharing economy, Skype, Steve Jobs, too big to fail, Tyler Cowen: Great Stagnation, union organizing, universal basic income, War on Poverty, working poor, zero day

Boarini and Mira d’Ercole create a summary measure of deprivation by averaging, for each country, the shares of the population reporting deprivation in each of these seven areas. FIGURE 3.2 Low-end household incomes and material deprivation P10 household income: posttransfer-posttax income of households at the tenth percentile of the income distribution. Measured in 2005 or as close to that year as possible. Incomes are adjusted for household size (the numbers shown here are for a household with three persons) and converted into US dollars using purchasing power parities (PPPs). Data sources: Luxembourg Income Study, www.lisdatacenter.org, series DPI; OECD, stats. oecd.org. Material deprivation rate: share of households experiencing one or more of the following: inability to adequately heat home, constrained food choices, overcrowding, poor environmental conditions (e.g., noise, pollution), arrears in payment of utility bills, arrears in mortgage or rent payment, difficulty in making ends meet.

The actual years vary somewhat depending on the country. Household incomes are posttransfer-posttax, adjusted for household size (the amounts shown are for a household with four persons). The income data are averages for households in the lower half of the income distribution. Household incomes and GDP per capita are adjusted for inflation using the CPI and converted to US dollars using purchasing power parities. “Asl” is Australia; “Aus” is Austria. Ireland and Norway are omitted; both would be far off the plot in the upper-right corner. Data sources: OECD, stats.oecd.org; Luxembourg Income Study, www.lisdatacenter.org. What are the prospects for earnings going forward? Household earnings can rise in two ways: higher wages and more employment. From the 1940s through the mid- to late-1970s, much of the growth in household incomes for working-age Americans came from rising wages.52 But as figure 3.7 shows, since the late 1970s inflation-adjusted wages in the bottom half have barely budged.

From the 1940s through the mid- to late-1970s, much of the growth in household incomes for working-age Americans came from rising wages.52 But as figure 3.7 shows, since the late 1970s inflation-adjusted wages in the bottom half have barely budged. FIGURE 3.6 Change in lower-half households’ earnings and net government transfers, 1979–2005 Earnings and net transfers are adjusted for inflation using the CPI and converted to US dollars using purchasing power parities. Data source: Luxembourg Income Study, www.lisdatacenter.org. FIGURE 3.7 Wages Hourly wage at the fiftieth (median) and tenth percentiles of the wage distribution. 2011 dollars; inflation adjustment is via the CPI-U-RS. Data source: Lawrence Mishel et al., The State of Working America, stateofworkingamerica.org, “Hourly wages of all workers, by wage percentile,” using Current Population Survey (CPS) data.


pages: 209 words: 80,086

The Global Auction: The Broken Promises of Education, Jobs, and Incomes by Phillip Brown, Hugh Lauder, David Ashton

active measures, affirmative action, barriers to entry, Branko Milanovic, BRICs, business process, business process outsourcing, call centre, collective bargaining, corporate governance, creative destruction, credit crunch, David Ricardo: comparative advantage, deindustrialization, deskilling, disruptive innovation, Frederick Winslow Taylor, full employment, future of work, glass ceiling, global supply chain, immigration reform, income inequality, industrial cluster, industrial robot, intangible asset, job automation, Joseph Schumpeter, knowledge economy, knowledge worker, low skilled workers, manufacturing employment, market bubble, market design, neoliberal agenda, new economy, Paul Samuelson, pensions crisis, post-industrial society, profit maximization, purchasing power parity, QWERTY keyboard, race to the bottom, Richard Florida, Ronald Reagan, shared worldview, shareholder value, Silicon Valley, sovereign wealth fund, stem cell, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, Thomas L Friedman, trade liberalization, transaction costs, trickle-down economics, winner-take-all economy, working poor, zero-sum game

Indeed, an overall decline in global economic inequalities is the flip side of widening social inequalities in affluent economies.41 Nevertheless, various attempts have been made to assess the growth of a global middle class, which depends on how the middle is defined, such as by income level preferred by economists or occupation preferred by sociologists. Invariably, studies attempting to assess the growth of the global middle class treat the world as a single country and use income data ranging somewhere between the rich and poor. High Skills, Low Wages 129 These definitions are also based on purchasing power parity (PPP) that offers a better indication of what you can buy with your dollars in different countries; a far lower level of income is required in China to achieve purchasing parity with people living in the United States. Given wildly different definitions of middle-class income, it is unsurprising there is little agreement about the size of the global class.42 Maurizio Bussolo and colleagues at the World Bank define the global middle class as those living between the per capita incomes of Brazil and Italy.43 Using this definition, they calculate that it will expand from 7.6 percent in 2000 to 16.1 percent in 2030, which includes over a billion people in emerging economies able to buy cars, enjoy international tourism, and demand world-class products and quality higher education.44 Figure 8.4 reveals the dominant role of the Chinese economy in explaining the rise of this new class.

Williamson, (2007) Dragons at Your Door: How Chinese Cost Innovation Is Disrupting Global Competition (Boston, Mass.: Harvard Business School Press, 2007), 2. Ibid., 89. Ibid., 14. See Manjeet Kripalani and Josey Pullyenthuruthel, “India: Good Help Is Hard to Find,” Business Week, February 14, 2005. Notes to Pages 50–59 171 19. World Bank, Global Economic Prospects. Managing the Next Wave of Globalization (Washington, D.C.: World Bank, 2007), 41. These figures are based on a measure of purchasing power parity (PPP). 20. UNCTAD, World Investment Report, 2006, 92. 21. This is based on figures for 2002; see Dieter Ernst, Why Is Chip Design Moving to Asia? http://www.eastwestcenter.org/research/research-projects/?class_ call=view&resproj_ID=182 22. Accenture, “The Kindest Cuts: The Vital Role of Cost Optimization in High Performance Financial Services,” The Point, 9, no. 2 (2009): 3. 23. China Today, “Chinese Cities and Provinces”; based on 2005 data from the Ministry of Construction. http://www.chinatoday.com/city/a.htm 24.

See also knowledge wars; knowledge workers 194 labor arbitrage, 97, 99, 106–7, 111, 159 Index Brazil, 182n43 China, 2, 130 corporate profits, 110 downward mobility, 138 emerging economies, 130–31 erosion of benefits, 121–22 financial crash of 2008, 6 global, 128–29, 130, 131 Nike, 102 global poverty, 182n43 globalization, 47–48 growth of, 18 income inequalities, 9, 118–19, 120 income stagnation, 5 Obama, Barack, 3, 23, 27, 147 OECD (Organisation for Economic Co-operation and Development), 31, 35, 91, 109, 149, 168n2 office management, 72, 127 India, 2, 30, 34, 130 Italy, 130, 182n43 mechanical Taylorism, 81 offshoring, 109, 152 offshoring, 8, 46, 51–52, 55–56, 60, 73, 75, 77–78, 90–93, 99, 107–11, 119, 129, 152, 170–71n2, 180n17 Ohmae, Kenichi, 104–5 opportunity bargain, 132 opportunity gap, 141 opportunity bargain American Dream, 27, 132 oasis operations, 64 opportunity trap, 143 politics of more, 186n16 positional conflict, 134 bidding wars, 183–84n22 corporate profits, 124 credentials, 184–85n2 prosperity, 2 purchasing power parity (PPP), 129, 131 development of, 4–6 digital Taylorism, 65, 155 quality-cost revolution, 59 salaries, 118–19, 120 soft currencies, 140–41 economy of hope, 148–49, 164 education and, 4–6, 27–28 and the global auction, 132 war for talent, 84, 91, 96–97 Mills, C. Wright, 83 globalization, 99 government, 25, 27, 154–57 minimum wage, 160 minorities, 118, 119, 138 The Mismanagement of Talent, 143 high-skill, low-wage workforce, 13–14, 112, 147 human capital, 132, 152 mobility, 23, 138, 146 modernization, 157 income inequalities, 151–52 innovation, 65 modular corporation, 76–79, 99–100, 102–3, 174n33 Morgan Stanley, 43 knowledge economy, 25 knowledge wars, 23, 164 middle class, 132 Motorola, 42, 54 Muzio, Daniel, 85 nationalism, 4 neoliberalism, 6, 14–15, 24, 98, 151–52, 164 Nanjing Automotive, 42 nanotechnology program, 44–46 new untouchables, 114 opportunity trap, 12, 133, 135–36 path dependency, 185n5 A Nation at Risk, 27–28 national debt, 150–51, 154 National Health Service, 122 National Science Foundation, 38 nationalism, 4, 151 Nature, 145–46 political policy, 149 productivity, 163–64 prosperity, 152 remaking of, 154–57, 163–64 renewal of, 13–14 shareholders, 98 neoliberalism, 4–6, 12, 14–15, 23–24, 30, 35, 98, 149–52, 158, 160, 164 New Deal, 125 new untouchables, 114 niche skills, 154 social conflict, 13, 146 social justice, 152 transnational companies, 98 war for talent, 90, 96 winner-takes-all, 160 Index 195 opportunity gap, 133–35, 141 opportunity trap, 12, 131–33, 135–38, 141–44, 146 purchasing power parity (PPP), 59, 129, 131 purists’ tactics, 143 O’Reilly, Charles, 97 outsourcing, 8, 56, 60, 103–4, 115 over-the-counter (OTC), 73 Oxford University, 134 quality standards, 103, 105 quality-cost revolution, 8, 46, 49–64, 103, 105, 170–71n2 R&D (research and development), 36, 39–40, 196 paper chase, 139, 162 patents, 45, 58 paternalism, 19 path dependency, 63, 185n5 42–45, 44, 52–53, 56–57, 99, 101, 107–8, 153, 157, 163 race to the bottom, 112, 159 racism, 89, 117–18, 133 pensions, 7, 25, 114, 121–22, 180n25 permanent employability, 142 Reagan, Ronald, 4, 24, 125 real estate, 148 personal capital, 140, 142–43 personal freedom, 135–36, 156 Peterson, Peter, 180n25 recessions, 4, 24, 31, 38, 47, 89, 103, 106, 111, 117–18, 121, 144, 148, 151, 169n24 re-engineering, 73, 77 Pfeffer, Jeffrey, 97 pharmaceutical industry, 56–57 Reich, Robert, 15, 20 resentment, 34 Philippines, 92–93 platform architecture, 76–77, 174–75n34 players’ tactics, 143–44 Retirement USA, 121 return on investment (ROI), 149, 160 reverse auction, 6–8, 55, 104–5, 114, 119, Poland, 35 political policy, 149 121, 137, 157, 159 reverse engineering, 41–42 politics of more, 186n16 populism, 13 portfolio careers, 79 The Revolt of the Elites, 161 Ricardo, David, 20 Rifkin, Jeremy, 163 positional conflict, 134 positional goods, 136 riots, 10, 41, 47 The Rise of the Meritocracy, 133 post-industrial society, 18 poverty, 10, 47, 133–34, 163, 178n21, 182n43 PPP (purchasing power parity), 129, 131 Ritalin, 145–46 Roach, Stephen, 111, 178n21 ROI (return on investment), 149 Prasad, G.


India's Long Road by Vijay Joshi

Affordable Care Act / Obamacare, barriers to entry, Basel III, basic income, blue-collar work, Bretton Woods, business climate, capital controls, central bank independence, clean water, collapse of Lehman Brothers, collective bargaining, colonial rule, congestion charging, corporate governance, creative destruction, crony capitalism, decarbonisation, deindustrialization, demographic dividend, demographic transition, Doha Development Round, eurozone crisis, facts on the ground, failed state, financial intermediation, financial repression, first-past-the-post, floating exchange rates, full employment, germ theory of disease, Gini coefficient, global supply chain, global value chain, hiring and firing, income inequality, Indoor air pollution, Induced demand, inflation targeting, invisible hand, land reform, Mahatma Gandhi, manufacturing employment, Martin Wolf, means of production, microcredit, moral hazard, obamacare, Pareto efficiency, price mechanism, price stability, principal–agent problem, profit maximization, profit motive, purchasing power parity, quantitative easing, race to the bottom, randomized controlled trial, rent-seeking, reserve currency, rising living standards, school choice, school vouchers, secular stagnation, Silicon Valley, smart cities, South China Sea, special drawing rights, The Future of Employment, The Market for Lemons, too big to fail, total factor productivity, trade liberalization, transaction costs, universal basic income, urban sprawl, working-age population

To reach the said goal comfortably, India would require high-​quality per capita growth of income of around 7 per cent a year for a period of 24 years, from 2016.2 By ‘high quality’ growth I mean, firstly, growth that is inclusive. If per capita growth were 7 per cent a year, then high-​quality growth would require that the incomes of poor people also rise by at least 7 per cent a year (or preferably by quite a lot more). Secondly, by high-​quality growth, I mean growth that is environmentally friendly. If India were to maintain 7 per cent a year per capita growth until 2040, India’s per capita income at purchasing power parity (PPP) would rise from its current level of about $5600 to five times its current level, i.e. to about $28,000. (All the income figures in this paragraph are in constant 2011 PPP dollars.)3 This would make India firmly a high-​income country by today’s standards, with a per capita income comparable to countries such as Greece and Portugal that are at the top of the lowest quartile of high-​income countries today.4 If, in addition, growth was inclusive, the incomes of the poorest Indians would also increase by at least a multiple of five and probably a lot more, a change that would obviously make a huge positive difference to their lives.

The average Rupee-Dollar exchange rate in 2014 and 2015 was $1 = Rs. 61.1 and $1 = Rs. 65.5 respectively. 3. The book was completed in December 2015. However, just before it went to press, some footnotes were added in the last chapter to comment on some relevant events in the first three months of 2016, such as the Central government budget for 2016/​17. NOTES 1. India is the third-​largest economy, behind only the United States and China, in terms of ‘purchasing power parity’ (PPP) dollars, and the ninth largest economy in current dollars. But its per capita income rank is 123rd in PPP dollars and 143rd in current dollars, among 185 countries. These are all World Bank figures. Measurement in PPP dollars provides a rough comparison of standards of living across countries. (PPP rates of exchange are calculated by comparing the prices of similar goods and services across countries.) 2.

(PPP rates of exchange are calculated by comparing the prices of similar goods and services across countries.) 2. It would be idle to pretend that rapid improvement in the living standards of poor people could be secured without rapid growth. Growth is not a sufficient condition for widespread prosperity but it is in practice a necessary condition. Only if growth is rapid does it become politically feasible to make it inclusive. 3. The most recent World Bank figures for cross-​country incomes at purchasing power parity are in constant 2011 PPP dollars, and relate to the year 2014. I have taken the liberty of adopting these figures as representative of 2016. 4. Though the World Bank provides per capita income data for countries in both current and PPP dollars, it classifies countries into ‘low-​income’, ‘lower-​middle-​ income’, ‘upper-​middle-​income’, and ‘high-​income’ on the basis of per capita income in current dollars, not PPP dollars.


pages: 221 words: 55,901

The Globalization of Inequality by François Bourguignon

Berlin Wall, Branko Milanovic, Capital in the Twenty-First Century by Thomas Piketty, collective bargaining, Credit Default Swap, deglobalization, deindustrialization, Doha Development Round, Edward Glaeser, European colonialism, Fall of the Berlin Wall, financial deregulation, financial intermediation, gender pay gap, Gini coefficient, income inequality, income per capita, labor-force participation, liberal capitalism, minimum wage unemployment, offshore financial centre, open economy, Pareto efficiency, purchasing power parity, race to the bottom, Robert Gordon, Simon Kuznets, structural adjustment programs, The Spirit Level, too big to fail, very high income, Washington Consensus

However, since the prices, in dollars, for the same goods differ from one country to another, the numbers this would give us would not be truly comparable in terms of purchasing power; $100 does not buy the same volume of goods in New York that it does in Delhi when converted into rupees. We therefore need to adjust official exchange rates so that the conversion into dollars takes into account differences in the price of the same bundle of goods in various countries. International price comparisons make it possible to fine-­tune indicators of “purchasing power parity,” which in turn enable us to express standard of living in different countries in dollars and the purchasing power of a dollar in the United States in a given year. This adjustment is smaller for developed countries than for developing countries because prices are relatively similar and not too far from prices in the United States in the former. It may be sizable for developing countries, especially the poorest ones.

It uses estimates ofGDP per person provided by Angus Maddison (in Monitoring lhe world Eronomy. Paris: OECD Development Centre. 1995). The recent data represent an update of the article by Fran'JOis Bourguignon. 'A Turning Point in Global Inequality ... and Beyond; in Rm arcb ()1J ResfXJnrihility. Reji«lions on Our Common FUlUrt. ed. Wilhem Krull (Leipzig: CEP Euro paische Verlagsanstalp. 2011). The indexes of purchasing power parity that Angus Maddison used for the historical data referenced the year 1990. The data for the recent period usc purcha.singpower parity data based on price statistics that were collected in 2005. which sometimes resulted in significant revisions to the parity indexes. Thisexplains much of the discontinuity between the two series in 1990. Ciln higher than the poorest 10%; by 1980, this number would be three times larger.

Ciln higher than the poorest 10%; by 1980, this number would be three times larger. The Gini coefficient in 1820 was around 0.5, similar to a relatively unequal country today. By 1980 it was 0.66, higher than any existing level of national inequality. The second striking point that this graph shows is a sharp d ecline beginning in 1990 (the "recent period " in fig- 28 Chapter 1 ure 1). Changes in datasets and purchasing power parity measurements resulted in a change in the estimation of global inequality—hence the discontinuity in the series shown in figure 1. Nonetheless, in relation to the historical series, the drop in inequality is both undeniable and sizable. In the last twenty years, the Gini coefficient and even the relative gap between the two extreme deciles decreased almost as much as they had increased since 1900. The turn of the millennium therefore marks a watershed moment in the evolution of global inequality.15 There has also been a parallel reversal in terms of absolute poverty.


pages: 374 words: 114,660

The Great Escape: Health, Wealth, and the Origins of Inequality by Angus Deaton

"Robert Solow", Admiral Zheng, agricultural Revolution, Branko Milanovic, BRICs, British Empire, call centre, clean water, colonial exploitation, Columbian Exchange, creative destruction, declining real wages, Downton Abbey, end world poverty, financial innovation, germ theory of disease, Gini coefficient, illegal immigration, income inequality, invention of agriculture, invisible hand, John Snow's cholera map, knowledge economy, Louis Pasteur, low skilled workers, new economy, purchasing power parity, randomized controlled trial, rent-seeking, rising living standards, Ronald Reagan, Simon Kuznets, Steve Jobs, Steven Pinker, structural adjustment programs, The Spirit Level, too big to fail, trade route, very high income, War on Poverty

See also global poverty; incomes poverty lines: absolute, 183–84; global, 220, 223–24, 249, 256; in India, 223, 248, 254–55, 256–57; national, 220, 248–49; relative, 184; in United States, 181–84, 185–86, 197, 256–57; of World Bank, 223, 248–49 poverty reduction: in China, 44, 46, 247, 250–51, 253; economic growth and, 41–42, 273, 312; global, 44–46, 45f, 167, 247, 249–51; government programs, 184–85, 186, 306; in India, 44, 46, 247, 250, 253–55; recommended strategies for, 312–13, 318–19, 321–22, 323–24. See also foreign aid PPP. See purchasing power parity exchange rates prehistory: agriculture in, 78–80; hunter-gatherers, 73–79; life expectancies in, 77, 79, 80 President’s Emergency Plan for AIDS Relief (PEPFAR), 307, 309 Preston, Samuel, 29, 41, 98, 106–7 prices: commodity, 286–87, 297–98; of drugs, 319, 320; as incentives, 246. See also purchasing power parity Princeton University, 98 Pritchett, Lant, 167, 310 progress: inequality and, xiii, 1, 4–6, 10–11; knowledge and inventions, 9–11, 41; measuring, 15–16; technological, 327–28. See also medical innovations public health: aid programs, 309, 311–12; campaigns, 86, 93, 95–96, 97–98, 115, 120; in cities, 94–95, 100; factors in, 91; politics and, 97–98.

In fact, according to the latest estimate, the price level in India is only about 40 percent of the price level in the United States, so that, if we take a typical bundle of things people buy, the bundle in India costs only 40 percent of what it costs in the United States. Put another way, prices would be the same in both places if the exchange rate were 20 rupees to the dollar, not 50 rupees. This “correct” exchange rate, the one that would make a dollar worth the same in both places, is called, appropriately enough, the purchasing power parity exchange rate or, for short, the PPP exchange rate. The PPP rate is the exchange rate from dollars into rupees that would give the same purchasing power in both places. If the price level is lower in Delhi than in New York, as it is in most poor countries, the PPP rate will be lower than the foreign exchange rate. How do we know these numbers? There is no market in which currencies are converted at PPP rates, so there is no alternative but to go and find out what the prices are.

Ronald Dworkin, 2000, Sovereign virtue, Harvard University Press, p. 6. Quoted in Thomas Nagel, 2005, “The problem of global justice,” Philosophy and Public Affairs 33(2): 113–47, p. 120. CHAPTER SEVEN: HOW TO HELP THOSE LEFT BEHIND 1. These numbers and calculations are from the World Bank’s website for poverty calculations, http://iresearch.worldbank.org/PovcalNet/index.htm?3. 2. Angus Deaton and Olivier Dupriez, 2011, “Purchasing power parity exchange rates for the global poor,” American Economic Journal: Applied Economics 3(2): 137–66. 3. http://www.givingwhatwecan.org/. 4. Richard Attenborough, “17p to save a child’s life,” The Observer, March 4, 2000, http://www.guardian.co.uk/world/2000/mar/05/mozambique.theobserver. 5. Smith, 1767, Theory of moral sentiments, p. 213. 6. David Hume, 1912 [1777], An enquiry concerning the principles of morals, Project Gutenberg edition, part I (originally published in 1751). 7.


pages: 312 words: 91,835

Global Inequality: A New Approach for the Age of Globalization by Branko Milanovic

"Robert Solow", Asian financial crisis, assortative mating, Berlin Wall, bitcoin, Black Swan, Branko Milanovic, Capital in the Twenty-First Century by Thomas Piketty, centre right, colonial exploitation, colonial rule, David Ricardo: comparative advantage, deglobalization, demographic transition, Deng Xiaoping, discovery of the americas, European colonialism, Fall of the Berlin Wall, Francis Fukuyama: the end of history, full employment, Gini coefficient, Gunnar Myrdal, income inequality, income per capita, invisible hand, labor-force participation, liberal capitalism, low skilled workers, Martin Wolf, means of production, mittelstand, moral hazard, Nash equilibrium, offshore financial centre, oil shock, open borders, Paul Samuelson, place-making, plutocrats, Plutocrats, post scarcity, post-industrial society, profit motive, purchasing power parity, Ralph Nader, Second Machine Age, seigniorage, Silicon Valley, Simon Kuznets, special economic zone, stakhanovite, trade route, transfer pricing, very high income, Vilfredo Pareto, Washington Consensus, women in the workforce

See also global governance Posner, Eric, 152 PPP (purchasing power parity) exchange rates, 15–16, 17, 18, 33–34, 121, 244n24 Prados de la Escosura, Leandro, 59, 62, 63, 81 predictions, 5–6, 21, 28, 155–161, 257n1. See also twenty-first and twenty-second centuries preindustrial period: Piketty and, 48–49; Kuznets cycles and, 50–51, 58, 76, 98; rich countries and, 53; benign/malign forces and, 55–57; catastrophic events and, 56, 57, 62–65, 69, 98; borderline of, 58; Kuznets hypothesis and, 59–61, 70–73; Spain (1326–1842), 60; plague and, 62–64, 247n16, 247n18; Italy and Low Countries, 62–63, 65, 247n16; inequality increases and, 65–66, 69–70; output per capita and, 247n15 pre-transfer and pre-tax income. See market income price levels, 14–15, 17, 173, 242n11, 244n24. See also PPP (purchasing power parity) exchange rates Pritchett, Lant, 148, 149, 153, 237–238, 262n42 private sector, 259n17 privatization, rule of law and, 137–138 production, 112, 116, 181–182, 251n39 productivity: technological progress and, 55; socialist great leveling and, 101; low-skill-biased technological progress and, 115–116; scalable jobs and, 223–226, 263nn5,7; preindustrial, 247n15; US service sector and, 253n52 Prokopovitch, Sergey N., 245n1 property: income from, 48, 64, 100; socialist great leveling and, 101; Kuznets cycles and, 111; rights to, 111, 138–139; broader ownership of, 221.

This second building block relies on an exercise called the International Comparison Project (ICP) that is conducted at irregular intervals (the last three rounds were done in 1993, 2005, and 2011) and whose objective is to collect price data in all countries of the world and to use these data to calculate countries’ price levels. The ICP is the single most massive empirical exercise ever conducted in economics. Its final products are the so-called PPP (purchasing power parity) exchange rates. The PPP exchange rate is the exchange rate between, say, the US dollar and the Indian rupee, such that at that exchange rate a person could buy the same amount of goods and services in India as in the United States. To give an example, consider the results for 2011. The market exchange rate was 46 Indian rupees for 1 US dollar. But the estimated PPP exchange rate was 15 rupees per dollar.

Estimates of the level of global inequality from these sources are higher than estimates by Bourguignon and Morrisson (2002) (see Figure 3.1) because the new data include many more countries (some 120 countries vs. 33 geographical areas in Bourguignon and Morrisson) and many more income groups within each country (often 100 percentiles or at least ventiles [20 groups of 5 percent each] obtained from microdata vs. 11 income fractiles in Bourguignon and Morrisson). In addition, the underlying purchasing power parity exchange rates (PPPs) are different. The availability of PPP exchange rates, which adjust for the differences in price levels between countries, is absolutely indispensable for the calculation of global inequality (see Excursus 1.1). Without PPPs, we would be assuming that people in India face the same prices as people who live in the United States. But PPPs themselves are not stable from year to year, particularly for Asian countries.


pages: 892 words: 91,000

Valuation: Measuring and Managing the Value of Companies by Tim Koller, McKinsey, Company Inc., Marc Goedhart, David Wessels, Barbara Schwimmer, Franziska Manoury

activist fund / activist shareholder / activist investor, air freight, barriers to entry, Basel III, BRICs, business climate, business cycle, business process, capital asset pricing model, capital controls, Chuck Templeton: OpenTable:, cloud computing, commoditize, compound rate of return, conceptual framework, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, discounted cash flows, distributed generation, diversified portfolio, energy security, equity premium, fixed income, index fund, intangible asset, iterative process, Long Term Capital Management, market bubble, market friction, Myron Scholes, negative equity, new economy, p-value, performance metric, Ponzi scheme, price anchoring, purchasing power parity, quantitative easing, risk/return, Robert Shiller, Robert Shiller, shareholder value, six sigma, sovereign wealth fund, speech recognition, stocks for the long run, survivorship bias, technology bubble, time value of money, too big to fail, transaction costs, transfer pricing, value at risk, yield curve, zero-coupon bond

Global CAPM The disagreement between investors about the return and risk of international investments disappears if purchasing power parity (PPP) holds across all currencies. In that case, changes in exchange rates perfectly match differences in inflation between currencies:2 ( Xt = Xt−1 where 1 + iA 1 + iB ) Xt = exchange rate of currency B expressed in units of currency A at time t iA , iB = inflation rate for currency A, B As a result, the expected return and risk in real terms for any asset will be the same for all investors, regardless of their domestic currency. In this 2 Technically, this is so-called relative purchasing power parity, referring to changes in prices and exchange rates. Absolute purchasing power parity requires that prices be the same across currencies (see, for example, Brealey et al., Principles of Corporate Finance, chap. 27). 496 CROSS-BORDER VALUATION example, any appreciation of the U.S. dollar relative to the euro would make the nominal bond return for U.S. investors lower.

In most of those years, the value of those assets would have been within 20 percent of the original investment measured in U.S. dollars, as purchasing power parity kept the currency rate in line with inflation differences over the long term. Nevertheless, there would be significant deviations in other years. For example, at the end of 2013, the Brazilian assets would have been worth approximately $175 million. To some extent, such deviations may be specific to the exchange rate with the U.S. dollar—which itself could be undervalued in terms of PPP with other currencies. For a more balanced view, the so-called real effective exchange rate (REER) reflects the purchasing power of the Brazilian currency versus an index of foreign currencies with more dampened deviations from PPP, at least for the past 20 years (see Exhibit 23.5). Analysis of purchasing power parity indicates that in general, currencies INCORPORATING FOREIGN-CURRENCY RISK IN THE VALUATION 505 Brazilian Inflation-Adjusted Exchange Rates EXHIBIT 23.5 Real exchange rate (RER) index and real effective exchange rate (REER) index, 2000 = 100 160 RER to U.S. $ 140 REER 120 100 80 60 20% 35% Average RER 1964–2016 40 20 0 1964 68 72 76 80 84 88 92 96 2000 04 08 12 14 Source: World Bank, MGM Consultants, Bank for International Settlements.

It becomes all the more important that forecasts be based on an integrated set of economic and monetary assumptions of future inflation, interest rates, exchange rates, and cost of capital (see Chapter 23 for more details). For instance, make sure that the same inflation rates underlie the financial projections and cost of capital estimates for the company. Exchange rates are one parameter that deserves special attention. Although exchange rates converge to purchasing power parity (PPP) in the long run,3 3 For an overview, see A. M. Taylor and M. P. Taylor, “The Purchasing Power Parity Debate,” Journal of Economic Perspectives 18, no. 4 (Fall 2004): 135–158. 708 EMERGING MARKETS EXHIBIT 31.1 ConsuCo: Key Historical Financial Indicators reais, million 2004 2005 2006 2007 2008 Invested capital Current operating assets Current operating liabilities Net operating working capital 4,769 (2,650) 2,119 4,833 (2,953) 1,880 5,194 (3,596) 1,598 5,936 (4,051) 1,885 6,133 (4,304) 1,829 Net property, plant, and equipment Other net operating assets Operating invested capital (excluding goodwill) 6,322 3,427 11,868 5,517 3,683 11,080 6,059 5,006 12,662 6,886 5,258 14,028 7,059 5,756 14,645 Goodwill plus cumulative goodwill written off Operating invested capital (including goodwill) 2,067 13,935 2,104 13,184 1,940 14,602 2,221 16,249 2,319 16,964 Excess marketable securities Other nonoperating assets Total investor funds 1,326 818 16,079 2,061 652 15,897 1,434 449 16,485 1,094 451 17,795 1,807 518 19,289 Total interest-bearing debt and operating leases Other nonoperating liabilities Adjusted equity Total investor funds 8,299 1,318 6,462 16,079 7,662 1,538 6,697 15,897 8,127 1,728 6,630 16,485 8,965 1,737 7,093 17,795 9,664 1,774 7,851 19,289 NOPLAT Sales Cost of goods sold Other operating costs EBITDA 17,950 (12,702) (3,864) 1,384 19,162 (13,483) (4,119) 1,560 19,829 (14,233) (4,349) 1,247 21,290 (15,321) (4,523) 1,447 25,762 (18,971) (4,933) 1,858 Depreciation and amortization Adjusted EBITA (498) 886 (631) 929 (442) 805 (447) 1,000 (588) 1,269 Cash taxes NOPLAT (43) 844 (207) 722 (324) 481 (179) 821 (329) 940 Nominal indicators, % Sales growth Adjusted EBITA/sales NOPLAT/sales Invested capital (excluding goodwill)/sales Invested capital (including goodwill)/sales ROIC (excluding goodwill) ROIC (including goodwill) 16.3 4.9 4.7 58 69 7.1 6.1 6.8 4.8 3.8 64 74 6.5 5.5 3.5 4.1 2.4 66 76 3.8 3.3 7.4 4.7 3.9 57 66 5.9 5.1 21.0 4.9 3.6 54 62 6.4 5.5 Approximate real indicators, % Sales growth (inflation-adjusted) Gross profit/sales EBITDA/sales Sales/store (reais million) Sales/square meter (reais thousand) 1.4 29.2 7.7 32.7 15.8 0.1 29.6 8.1 32.5 15.0 –3.1 28.2 6.3 31.9 14.4 3.0 28.0 6.8 31.3 13.5 16.8 26.4 7.2 35.2 15.5 Key financial ratios FORECASTING CASH FLOWS 709 EXHIBIT 31.2 Economic and Monetary Assumptions % 2006 2007 2008 2009E 2010E ... 2014E Real GDP growth Brazil United States 4.0 2.7 5.7 2.1 5.1 0.4 –0.7 –2.7 3.5 1.5 ... ... 3.7 2.1 Inflation (consumer prices) Brazil United States 4.2 3.2 3.6 2.9 5.7 3.8 4.8 –0.4 4.1 1.7 ... ... 4.5 2.2 Source: International Monetary Fund World Economic Outlook.


pages: 386 words: 122,595

Naked Economics: Undressing the Dismal Science (Fully Revised and Updated) by Charles Wheelan

"Robert Solow", affirmative action, Albert Einstein, Andrei Shleifer, barriers to entry, Berlin Wall, Bernie Madoff, Bretton Woods, business cycle, buy and hold, capital controls, Cass Sunstein, central bank independence, clean water, collapse of Lehman Brothers, congestion charging, creative destruction, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, Daniel Kahneman / Amos Tversky, David Brooks, demographic transition, diversified portfolio, Doha Development Round, Exxon Valdez, financial innovation, fixed income, floating exchange rates, George Akerlof, Gini coefficient, Gordon Gekko, greed is good, happiness index / gross national happiness, Hernando de Soto, income inequality, index fund, interest rate swap, invisible hand, job automation, John Markoff, Joseph Schumpeter, Kenneth Rogoff, libertarian paternalism, low skilled workers, Malacca Straits, market bubble, microcredit, money market fund, money: store of value / unit of account / medium of exchange, Network effects, new economy, open economy, presumed consent, price discrimination, price stability, principal–agent problem, profit maximization, profit motive, purchasing power parity, race to the bottom, RAND corporation, random walk, rent control, Richard Thaler, rising living standards, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, Sam Peltzman, school vouchers, Silicon Valley, Silicon Valley startup, South China Sea, Steve Jobs, The Market for Lemons, the rule of 72, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, transaction costs, transcontinental railway, trickle-down economics, urban sprawl, Washington Consensus, Yogi Berra, young professional, zero-sum game

It turned out that my guide book was old; the Chinese currency had been steadily losing value ever since publication. I had swapped my $100 for the Chinese equivalent of about $13.50. Purchasing power parity is a helpful concept. It is the tool used by official agencies to make comparisons across countries. For example, when the CIA or the United Nations gathers data on per capita income in other countries and converts that figure into dollars, they often use PPP, as it presents the most accurate snapshot of a nation’s standard of living. If someone earns 10,000 Jordanian dinars a year, how many dollars would a person need in the United States to achieve a comparable standard of living? In the long run, basic economic logic suggests that exchange rates should roughly align with purchasing power parity. If $100 can be exchanged for enough pesos to buy significantly more stuff in Mexico, who would want the $100?

In theory, rational people would continue to sell dollars for pesos until there was no longer any economic advantage in doing so; at that point, $100 in the United States would buy roughly the same goods and services as $100 worth of pesos in Mexico—which is also the point at which the exchange rate would reach purchasing power parity. Here is the strange thing: Official exchange rates—the rate at which you can actually trade one currency for another—deviate widely and for long stretches from what PPP would predict. If purchasing power parity makes economic sense, why is it often a poor predictor of exchange rates in practice? The answer lies in the crucial distinction between goods and services that are tradable, meaning that they can be traded internationally, and those that are not tradable, which are (logically enough) called nontradable.

So, in theory, we ought to be willing to exchange $1 for however many yen or pesos or rubles would purchase roughly the same amount of stuff in the relevant country. If a bundle of everyday goods costs $25 in the United States, and a comparable bundle of goods costs 750 rubles in Russia, then we would expect $25 to be worth roughly 750 rubles (and $1 should be worth roughly 30 rubles). This is the theory of purchasing power parity, or PPP. By the same logic, if the value of the ruble is losing 10 percent of its purchasing power within Russia every year while the U.S. dollar is holding its value, we would expect the ruble to lose value relative to the U.S. dollar (or depreciate) at the same rate. This isn’t advanced math; if one currency buys less stuff than it used to, then anyone trading for that currency is going to demand more of it to compensate for the diminished purchasing power.* I learned this lesson once—the hard way.


pages: 329 words: 102,469

Free World: America, Europe, and the Surprising Future of the West by Timothy Garton Ash

Albert Einstein, battle of ideas, Berlin Wall, BRICs, British Empire, call centre, centre right, clean water, Columbine, continuation of politics by other means, cuban missile crisis, demographic transition, Deng Xiaoping, Doha Development Round, Eratosthenes, European colonialism, failed state, Fall of the Berlin Wall, Francis Fukuyama: the end of history, illegal immigration, income inequality, Intergovernmental Panel on Climate Change (IPCC), James Watt: steam engine, Kickstarter, Mikhail Gorbachev, Nelson Mandela, Peace of Westphalia, postnationalism / post nation state, Project for a New American Century, purchasing power parity, reserve currency, Ronald Reagan, shareholder value, Silicon Valley, Thomas Malthus, trade liberalization, Washington Consensus, working poor, working-age population, World Values Survey

The oldest symbolic meanings of West and East are now revived: the West as the evening country, where the setting sun goes in search of Elysium, the East as the realm of the rising sun. Just how quickly that sun will rise is disputed. How big are the economies of China and India, and how fast are they likely to grow? Depending on your level of distrust in official statistics, and whether or not you use “purchasing power parities,” you can put China as the sixth or the second largest economy in the world today, India as the eleventh or the fourth.56 You can have the Chinese economy growing at an average of 9.5 percent between 1979 and 2001, or much less than that.57 These varying assessments imply important differences in timescales; none casts doubt on the basic direction. The eastern economic sun is rising. What does this mean for politics?

Jean-Marie Colombani, “Nous sommes tous Américains,” Le Monde, September 13, 2001. 3. Quoted by Martin Walker, UPI’s Chief International Correspondent, in a UPI report from Washington, D. C., February 4, 2003. 4. Charles A. Kupchan, “The End of the West,” Atlantic Monthly, November 1, 2002. 5. Robert Kagan, Of Paradise and Power: America and Europe in the New World Order (New York: Alfred A. Knopf, 2003), p. 3. 6. Note that these rankings are based on purchasing power parities. See the table, based on 2002 World Bank figures, in Strategic Audit: Discussion Document, November 2003, prepared by the British government’s Strategy Unit, and available on http://www.strategy.gov.uk. At market exchange rates, it would be first (America) and fourth (Britain) against third (Germany) and fifth (France). 7. Libération, February 11, 2003. 8. George Orwell, Collected Essays (London: Secker & Warburg, 1961), p. 281.

.: Center for Transatlantic Relations, 2003), calculates that 1.3 million British jobs depended on American affiliates in 2000. 28. See http://www.lakenheath.af.mil/home.htm. 29. Stated with some authority by a former head of the Joint Intelligence Committee, Sir Rodric Braithwaite, in Prospect, May 2003, pp. 20–23, at p. 21. 30. James Woolsey, quoted on the BBC Today program, and in The Economist, April 29, 2000. 31. The fourth largest at market exchange rates, but only the seventh using purchasing power parities. See the table, based on 2002 World Bank figures, in Strategic Audit: Discussion Document, November 2003 prepared by the British government’s Strategy Unit, and available on http://www.strategy.gov.uk. 32. “Aber dieses groteske Österreich ist nichts anderes als ein besonders deutlicher Fall der modernen Welt.” Robert Musil, Tagebücher: Band 1 (Reinbek bei Hamburg: Rowohlt, 1983), p. 354.


pages: 306 words: 78,893

After the New Economy: The Binge . . . And the Hangover That Won't Go Away by Doug Henwood

"Robert Solow", accounting loophole / creative accounting, affirmative action, Asian financial crisis, barriers to entry, borderless world, Branko Milanovic, Bretton Woods, business cycle, capital controls, corporate governance, corporate raider, correlation coefficient, credit crunch, deindustrialization, dematerialisation, deskilling, ending welfare as we know it, feminist movement, full employment, gender pay gap, George Gilder, glass ceiling, Gordon Gekko, greed is good, half of the world's population has never made a phone call, income inequality, indoor plumbing, intangible asset, Internet Archive, job satisfaction, joint-stock company, Kevin Kelly, labor-force participation, liquidationism / Banker’s doctrine / the Treasury view, manufacturing employment, means of production, minimum wage unemployment, Naomi Klein, new economy, occupational segregation, pets.com, post-work, profit maximization, purchasing power parity, race to the bottom, Ralph Nader, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, Silicon Valley, Simon Kuznets, statistical model, structural adjustment programs, Telecommunications Act of 1996, telemarketer, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, total factor productivity, union organizing, War on Poverty, women in the workforce, working poor, zero-sum game

Ireland Sweden Denmark Spain UK Japan Hong Kong Singapore Taiwan Portugal Korea Thailand GDP per hour worked 0 200 400 600 800 1,000 1,200 1,400 1,600 +71% +80% +72% +63% +20% 9-+60% D +66% ^ +76% ^ +111% w +94% i +180% g +155% ON +262% +53% +229% _+?9% 0 5 10 15 20 25 30 35 Work hours per person are the number of paid hours worked in a national economy for the entire year divided by the population. GDP per hours worked is expressed in international dollars—converted at so-called purchasing power parity (PPP) exchange rates, which attempt to equalize buying power across borders, rather than depending on volatile market rates of exchang—divided by the total number of hours worked. Numbers at the right of the second graph show the real change betweeen 1 973 and 1 996. Source: Crafts 1999. The mysticism begins with defining output. In many economic fables, the commodity chosen for illustration is the nonexistent widget—things typically produced in quantity, one indistinguishable from another.

Urdike the Luxembourg Income Study (of which more in a bit), which makes an effort to massage national data into an internationally comparable form, Milanovic had to take what was on offer. Price levels also vary around the world—and within countries, too; an income of $20,000 would mean very different things in Manhattan and rural Mississippi, as would $20,000 converted at market exchange rates into Russian rubles. 131 Milanovic uses purchasing power parity (PPP) exchange rates, which attempt to equalize buying power across borders, ignoring the distortions frequently introduced by financial market fashions.^^ PPP rates typically boost the incomes of poor regions compared to market rates, since prices are generally lower in poorer countries than in rich ones (the same effect is responsible for the differences in buying power between Manhattan and rural Mississippi).

But the rapid growth in average incomes of over 1.2 billion Chinese has the effect of lowering world income inequality. 4 Globalization 1. Quoted in Engardio et al. (2003). 2. The report and supporting data can be gotten from <wv^rw.foreignpoUcy.com/issue^an-feb_2003/data.zip> and <www.atkearney.com/main.taf?site=l&a=5&b=4&c=l&d=64> (visited February 26, 2003). 3.The controversy is very nicely reviewed for the nonspecialist by Laura Secor (2003). 4. These measures use so-called purchasing power parity (PPP) exchange rates rather than market rates; PPP techniques attempt to estimate the actual living standards that money incomes can buy, which are often quite different from what happens on foreign exchange markets. 5. The precise measure used for labor costs is relative unit labor costs (RULC), the cost per unit of output valued in a common currency. What's measured is not the absolute level of costs, but the changes over time in each country's costs relative to all other members.


Principles of Corporate Finance by Richard A. Brealey, Stewart C. Myers, Franklin Allen

3Com Palm IPO, accounting loophole / creative accounting, Airbus A320, Asian financial crisis, asset allocation, asset-backed security, banking crisis, Bernie Madoff, big-box store, Black-Scholes formula, break the buck, Brownian motion, business cycle, buy and hold, buy low sell high, capital asset pricing model, capital controls, Carmen Reinhart, carried interest, collateralized debt obligation, compound rate of return, computerized trading, conceptual framework, corporate governance, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-subsidies, discounted cash flows, disintermediation, diversified portfolio, equity premium, eurozone crisis, financial innovation, financial intermediation, fixed income, frictionless, fudge factor, German hyperinflation, implied volatility, index fund, information asymmetry, intangible asset, interest rate swap, inventory management, Iridium satellite, Kenneth Rogoff, law of one price, linear programming, Livingstone, I presume, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, market bubble, market friction, money market fund, moral hazard, Myron Scholes, new economy, Nick Leeson, Northern Rock, offshore financial centre, Ponzi scheme, prediction markets, price discrimination, principal–agent problem, profit maximization, purchasing power parity, QR code, quantitative trading / quantitative finance, random walk, Real Time Gross Settlement, risk tolerance, risk/return, Robert Shiller, Robert Shiller, shareholder value, Sharpe ratio, short selling, Silicon Valley, Skype, Steve Jobs, The Nature of the Firm, the payments system, the rule of 72, time value of money, too big to fail, transaction costs, University of East Anglia, urban renewal, VA Linux, value at risk, Vanguard fund, yield curve, zero-coupon bond, zero-sum game, Zipcar

According to the expectations theory, what is the expected spot rate for yen in three months’ time? g. According to purchasing power parity theory, what then is the expected difference in the three-month rate of price inflation in the United States and Japan? 2. Terminology Define each of the following theories in a sentence or simple equation: a. Interest rate parity. b. Expectations theory of forward rates. c. Purchasing power parity. d. International capital market equilibrium (relationship of real and nominal interest rates in different countries). 3. Purchasing power parity In March 1997 the exchange rate for the Indonesian rupiah was R2,419 = $1. Inflation in the year to March 1998 was about 30% in Indonesia and 2% in the United States. a. If purchasing power parity held, what should have been the nominal exchange rate in March 1998?

Similarly, those goods that can be bought more cheaply in the United States will be exported, and that will force down the price of the foreign products. This is often called purchasing power parity.7 Just as the price of goods in Walmart stores must be roughly the same as the price of goods in Target, so the price of goods in Ruritania when converted into dollars must be roughly the same as the price in the United States: Purchasing power parity implies that any differences in the rates of inflation will be offset by a change in the exchange rate. For example, if prices are rising by 1.0% in the United States and by 11.1% in Ruritania, the number of pesos that you can buy for $1 must rise by 1.111/1.01 – 1, or 10%. Therefore purchasing power parity says that to estimate changes in the spot rate of exchange, you need to estimate differences in inflation rates:8 In our example, Interest Rates and Inflation Rates Now for the fourth leg!

Review of Financial Studies 8 (1995), pp. 709–742. Interest rate parity K. Clinton, “Transaction Costs and Covered Interest Arbitrage: Theory and Evidence,” Journal of Political Economy 96 (April 1988), pp. 358–370. Purchasing power parity K. Froot and K. Rogoff, “Perspectives on PPP and Long-run Real Exchange Rates,” in G. Grossman and K. Rogoff (eds.), Handbook of International Economics (Amsterdam: North-Holland Publishing Company, 1995). K. Rogoff, “The Purchasing Power Parity Puzzle,” Review of Economic Literature 34 (June 1996), pp. 667–668. A. M. Taylor and M. P. Taylor, “The Purchasing Power Parity Debate,” Journal of Economic Perspectives 18 (Autumn 2004), pp. 135–158. ● ● ● ● ● PROBLEM SETS Select problems are available in McGraw-Hill’s Connect Finance. Please see the preface for more information.


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The Shifts and the Shocks: What We've Learned--And Have Still to Learn--From the Financial Crisis by Martin Wolf

air freight, anti-communist, Asian financial crisis, asset allocation, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Black Swan, bonus culture, break the buck, Bretton Woods, business cycle, call centre, capital asset pricing model, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collateralized debt obligation, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, deglobalization, Deng Xiaoping, diversification, double entry bookkeeping, en.wikipedia.org, Erik Brynjolfsson, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial deregulation, financial innovation, financial repression, floating exchange rates, forward guidance, Fractional reserve banking, full employment, global rebalancing, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, inflation targeting, information asymmetry, invisible hand, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, mandatory minimum, margin call, market bubble, market clearing, market fragmentation, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mortgage debt, negative equity, new economy, North Sea oil, Northern Rock, open economy, paradox of thrift, Paul Samuelson, price stability, private sector deleveraging, purchasing power parity, pushing on a string, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, Richard Feynman, risk-adjusted returns, risk/return, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, shareholder value, short selling, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, too big to fail, Tyler Cowen: Great Stagnation, very high income, winner-take-all economy, zero-sum game

Figure 49 shows that the US fully recovered its long-term trend level and rate of growth of GDP per head at purchasing power parity (which was 1.9 per cent a year from 1870 to 2007) after the Great Depression and the Second World War. Since the 2007–09 crisis, however, it has been below that rate. Figure 50 shows that the UK did far better than recover its growth trend after its desperately poor interwar performance. Trend growth of the UK’s GDP per head was a mere 1 per cent a year from 1870 to 1950. From 1950 to 2007, it jumped to 2.3 per cent. Since 2007, the growth rate has looked more like the pre-Second World War trend. This had not changed by 2014, despite the recovery, since productivity growth remained worryingly absent. Figure 49. US GDP per Head (purchasing power parity, at 1990 Geary Khamis dollars) Source: Maddison project and the Conference Board Figure 50.

Between 2007 and 2012, the gross domestic product of the high-income countries, in aggregate, rose by 2.4 per cent, in real terms, according to the International Monetary Fund, with that of the US rising by 2.9 per cent and that of the Eurozone falling by 1.3 per cent. Over the same period, the real GDP of the emerging countries grew by 31 per cent and those of India and China by 39 and 56 per cent respectively. Such a speedy transformation in relative economic weight among important countries has no precedent. It is plausible that China’s economy already is the biggest in the world, at purchasing power parity, in the middle of this decade, and will be the biggest in market prices by the early part of the next decade. The crisis has accelerated the world economy towards this profound transition. The coincidence of a huge financial and economic crisis with a prior transformation in relative economic power also occurred in the 1930s. The rise of the US as a great economic power in the early twentieth century and the overwhelming strength of its balance of payments after the First World War helped cause both the scale of the global economic crisis and the ineffectiveness of the response in the 1930s.

US GDP per Head (purchasing power parity, at 1990 Geary Khamis dollars) Source: Maddison project and the Conference Board Figure 50. UK GDP per Head (purchasing power parity, at 1990 Geary Khamis dollars) Source: Maddison project and the Conference Board Thus, even when financial crises cause huge recessions, financial crises need not leave permanent marks on the level of output, even though it will take a substantial number of years to return to the prior trend. But to achieve such a positive result would require fiscal and monetary policies of the type risked during the Second World War: huge fiscal deficits combined with monetary policies aimed at keeping both short- and long-term interest rates extremely low. That is beyond anybody’s peacetime imagination, just as it was during the 1930s. As a result, it now looks as though crisis-hit economies might never regain pre-crisis trend levels of output or even their pre-crisis rates of economic growth.


pages: 665 words: 146,542

Money: 5,000 Years of Debt and Power by Michel Aglietta

bank run, banking crisis, Basel III, Berlin Wall, bitcoin, blockchain, Bretton Woods, British Empire, business cycle, capital asset pricing model, capital controls, cashless society, central bank independence, collapse of Lehman Brothers, collective bargaining, corporate governance, David Graeber, debt deflation, dematerialisation, Deng Xiaoping, double entry bookkeeping, energy transition, eurozone crisis, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, forward guidance, Francis Fukuyama: the end of history, full employment, German hyperinflation, income inequality, inflation targeting, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invention of writing, invisible hand, joint-stock company, Kenneth Arrow, Kickstarter, liquidity trap, margin call, means of production, money market fund, moral hazard, Nash equilibrium, Network effects, Northern Rock, oil shock, planetary scale, plutocrats, Plutocrats, price stability, purchasing power parity, quantitative easing, race to the bottom, reserve currency, secular stagnation, seigniorage, shareholder value, special drawing rights, special economic zone, stochastic process, the payments system, the scientific method, too big to fail, trade route, transaction costs, transcontinental railway, Washington Consensus

Expectations for inflation form on the exchange market: = log êt – loget where et is the spot exchange rate and êt is the expectation of the future exchange rate. Expectations on the exchange market are guided by a focal point ēt with the effect that log êt = Et log et+1 = a + β log ēt The demand for money is And to differentiate the demand for money: In a hyperinflationary process, nominal developments are much greater than real variations. We can overlook these latter and focus on relative purchasing power parity (PPP): It is the exchange market that guides the revision of expectations for inflation. From this we deduce the inflation dynamic: Depending on whether β < 1+1/α or β > 1+1/α we find two diferent inflationary regimes: one is directed by monetary expansion, and the other is self-referential. Following this same theoretical schema, let us now discuss some of the famous episodes of hyperinflation: Germany in 1922–23, China in 1947–48 and the Latin American hyperinflation of the 1980s.

Given that the payment system is the operator of value, finality of payment must be established across the ensemble of international exchanges for the macroeconomic coherence of these exchanges to be established. What Is an Efficient International Monetary System (IMS)? For the ‘standard’ theory of financial efficiency, there is no complication. It is necessary and sufficient that the prices of all goods equalise across all their sites of sale (at purchasing power parity) and that the expected yields on all assets equalise. This amounts to an equalisation of anticipated real capital yield rates, wherever in the world this capital is invested. It is as if capital were everywhere homogeneous! We find, here, the same aporia as in the theory of pure economics, highlighted in Chapter 1. It is presumed that there exists some general equilibrium – in this case extended to the global level – for this theory is constructed as if there were just one single economic agent and one single commodity in the world, and thus one single country.

- There must be financial efficiency on the currency markets, extended across all of the world’s currencies. This means that the exchange rate variations observed on forward markets are unbiased estimates of anticipated variations in these rates. It follows from this that the forward markets offer the best possible forecasts of future exchange rates. - The nominal prices on goods markets, corrected by exchange rates, must be the same for all baskets of goods and for all currencies. Purchasing power parity is the name for the general integration of markets and goods, meaning that there is a single world price for each good or service. It goes without saying that, in empirical terms, these conditions are never realised. But this is not what is at stake here. The essential thing is that, in theoretical terms, this definition of economic and financial integration outlines a world without money, for it does not take account of what is exclusive about money and what distinguishes it from financial assets: namely, liquidity.


Super Continent: The Logic of Eurasian Integration by Kent E. Calder

3D printing, air freight, Asian financial crisis, Berlin Wall, blockchain, Bretton Woods, business intelligence, capital controls, Capital in the Twenty-First Century by Thomas Piketty, cloud computing, colonial rule, Credit Default Swap, cuban missile crisis, deindustrialization, demographic transition, Deng Xiaoping, disruptive innovation, Doha Development Round, Donald Trump, energy transition, European colonialism, failed state, Fall of the Berlin Wall, Gini coefficient, housing crisis, income inequality, industrial cluster, industrial robot, interest rate swap, intermodal, Internet of things, invention of movable type, inventory management, John Markoff, liberal world order, Malacca Straits, Mikhail Gorbachev, mittelstand, money market fund, moral hazard, new economy, oil shale / tar sands, oil shock, purchasing power parity, quantitative easing, reserve currency, Ronald Reagan, seigniorage, smart cities, smart grid, South China Sea, sovereign wealth fund, special drawing rights, special economic zone, supply-chain management, Thomas L Friedman, trade liberalization, trade route, transcontinental railway, UNCLOS, UNCLOS, union organizing, Washington Consensus, working-age population, zero-sum game

for them from Eurasian continental neighbors to the east. Driving the recent transformation from an Atlantic to a Eurasian-centered global political economy has been an even broader transcontinental dynamic, spearheaded by Chinese growth, Soviet collapse, logistical advances, and European transformation. The People’s Republic of China (PRC) in 1973 accounted for less than 5 percent of global GDP in purchasing power parity (PPP) terms. That share more than tripled to 17 percent in 2015, by which time China had already passed the US as the world’s largest economy. Together with the twenty-eight independent, mostly advanced members of the European Union, as well as China’s Asian neighbors, the collective GDP of the Eurasian continent in 2015 had climbed to almost 70 percent of the global total, as Figure 1.1 suggests.

The mathematics of its formidable population size, multiplied by its modest but rising per capita consumption, especially in the east of the continent, clearly drive this simple equation. With energy consumption and GDP levels that are both much lower in nominal terms than those of the United States, it is only a matter of time before China and possibly India will surpass America along both dimensions—in the calculus of nominal GDP as it already has in the scales of purchasing-power parity. What do these historic economic changes concretely signify for the world in broader terms? If a more interactive Eurasian playing field is emerging, what does that mean for the profile of world affairs? These are the central questions that we confront. It is important to remember that the question is not developments in any one country alone. Connectivity among nations is increasingly pervasive, synergistic with intranational change, and imparts increased momentum to developments in any one nation.

China’s double-digit GDP expansion continued and then accelerated as G-7 growth fell below zero, sharply increasing China’s share of global production. China also gained acclaim from influential Western financiers, including Tim Geithner, Hank Paulson, and Roger Altman, for its role in stabilizing the world economy as a whole.53 China’s day as a major global player, and as the principal driver of Eurasian continentalism, had arrived, with its GDP in purchasing-power parity terms passing the US in 2013. The Ukraine Crisis and the Making of Eurasia Kiev is a long way from Beijing, Tokyo, Seoul, and New Delhi. One might legitimately wonder what Ukrainian developments have to do with Eurasian integration, especially as the Ukraine has shrunk economically under the ­impact of domestic political uncertainties and the protracted conflict with Russia. The indirect effects of the Ukraine crisis have been quite important, however, and demonstrate concretely the steady reconnection of Eurasia across the past decade.


pages: 272 words: 71,487

Getting Better: Why Global Development Is Succeeding--And How We Can Improve the World Even More by Charles Kenny

"Robert Solow", agricultural Revolution, Berlin Wall, British Empire, Charles Lindbergh, clean water, demographic transition, double entry bookkeeping, experimental subject, Fall of the Berlin Wall, germ theory of disease, Gunnar Myrdal, income inequality, income per capita, Indoor air pollution, inventory management, Kickstarter, Milgram experiment, off grid, open borders, purchasing power parity, randomized controlled trial, structural adjustment programs, The Wealth of Nations by Adam Smith, total factor productivity, Toyota Production System, trade liberalization, transaction costs, very high income, Washington Consensus, X Prize

At my local takeout in Washington, DC, the cheapest noodles are about 7 US dollars. Using market exchange rates will give you a misleading picture of what an income per capita of $1,000 will buy you—143 bowls of noodles in Washington compared to 1,666 bowls in Laos. The question, then, if we want to perform a proper comparison, is how to align the numbers so they come close to matching. The GDP and income figures used in this book are based on an idea known as “purchasing power parity” and adjusted for inflation. In other words, they are meant to account for the difference in the power of a dollar to purchase goods and services in different countries at different times. But such an adjustment, as necessary as it might be, adds an additional source of uncertainty. People in poor countries buy less stuff than people in rich countries, but also different stuff. And people in the past bought different things than do people today.

difficulties in models for “Do no harm” principle for education’s impact on effect of political reforms on Harrod and Domar’s theory of Lewis’s model for measuring success with neo-Malthusianism and unsustainable New Institutional Economics theory of relation to quality of life setting governmental policies for Solow’s theory of Tolstoy and Smith’s vision of war’s effect on Washington Consensus See also Economic stagnation; GDP; Global development Economic stagnation applying concept of failed search to cure quality of life and role of aid in Economist, The Education Africa’s literacy and conditional cash transfers supporting cultural views on women’s demand-side influences on economic growth and ensuring affordable global progress in improving quality of increasing primary enrollments Millennium Development Goals for offering scholarships to girls other trends influencing promoting community sanitation radio-disseminated teaching health treatments TV’s effect on in wealthier vs. poorer countries Ehrlich, Paul Eichmann, Adolf Elections, establishing free Empathy Ends of the Earth, The (Kaplan) Engels, Freidrich Engerman, Stanley Environment demand for safe water misleading product ads neo-Malthusian concerns about quality of life’s effect on supporting sustainability of Essay on the Principle of Population, An (Malthus) European Convention for the Protection of Human Rights Exogenous growth model Expeditions Lewis and Clark’s Mungo Park’s West Papua Farewell to Alms, A (Clark) Fay, Marianne Felipe, Jesus Ferguson, Niall Fertility effect of cable TV on rates of global declines in linking lower child mortality and lower Malthus’ view of poor’s reproductive health practices Filmer, Deon Fink, Carsten Food and Agriculture Organization Food production Green Revolution health gains with improved increasing quality of life and output increases of See also Malthusian trap Frankel, Herbert Freeman, John Friedman, Thomas Gartner, John D. Gates Foundation Gates, Jr., Bill Gates, Sr., Bill GDP (gross domestic product) defined East Asian Miracle and income divergence revealed by linking to quality of life Malthusian trap and measuring mortality rates and per capita income in Africa purchasing power parity and relation to quality of life technology central to Gender equality Millennium Development Goals for quality of life and Western vs. Muslim views on See also Women Germ theory Glaxo SmithKline Global colonization climate’s effect on development effects on quality of life Malthusian trap and Mungo Park’s expeditions patterns of disease and wealth in Global development climate’s effect on costs of first contact divergence in income growth economic growth vs.

See Richest-poorest gap; Poverty Population consumption and sustainability of declining fertility of increases in life expectancy links between lower child mortality and family size Malthus’s linking of income and growth in See also Food production; Malthusian trap Population Bomb, The (Ehrlich) Poverty advantages of poor in wealthy countries effect on quality of life fear of illnesses resulting in health effects of Malthusian model of birth rate and Millennium Development Goals for trends reversing See also Global income; Richest-poorest gap Preston, Samuel Pritchett, Lant Prizes PROGRESA Purchasing power parity Putnam, Robert Quality of life balancing with economic growth cause for optimism colonial history’s effect on improved costs of improving East Asian Miracle educational quality and environmental effects of good gender equity and getting cheaper global health improvements government’s role in improvements in income and limits to progress in lower rates of violence measuring improvements in need for global development policies policies supporting economic Polity scores and poverty’s effect on progress in political and civil rights promoting demand for reasons for caring about for rich and poor countries stagnant economies and technologies improving technology lowering cost of See also Changes in quality of life; Happiness Quarterly Journal of Economics Rajan, Raghuram Ravallion, Martin Realistic optimism Rede Globo network Renelt, David Report card of citizen services Reproductive health practices Reynol-Querol, Marta Richest-poorest gap advantages in wealthy countries divergence between Britain and India global divergence in income health care and sustainability and consumption of rich and poor Robinson, James Rodriguez, Francisco Roland, Gerard Romer, Paul Russia.


Growth: From Microorganisms to Megacities by Vaclav Smil

2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, 3D printing, agricultural Revolution, air freight, American Society of Civil Engineers: Report Card, autonomous vehicles, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Bretton Woods, British Empire, business cycle, colonial rule, complexity theory, coronavirus, decarbonisation, deindustrialization, dematerialisation, demographic dividend, demographic transition, Deng Xiaoping, disruptive innovation, Dissolution of the Soviet Union, endogenous growth, energy transition, epigenetics, happiness index / gross national happiness, hydraulic fracturing, hydrogen economy, Hyperloop, illegal immigration, income inequality, income per capita, industrial robot, Intergovernmental Panel on Climate Change (IPCC), invention of movable type, Isaac Newton, James Watt: steam engine, knowledge economy, labor-force participation, Law of Accelerating Returns, longitudinal study, mandelbrot fractal, market bubble, mass immigration, McMansion, megacity, megastructure, meta analysis, meta-analysis, microbiome, moral hazard, Network effects, new economy, New Urbanism, old age dependency ratio, optical character recognition, out of africa, peak oil, Pearl River Delta, phenotype, Pierre-Simon Laplace, planetary scale, Ponzi scheme, Productivity paradox, profit motive, purchasing power parity, random walk, Ray Kurzweil, Report Card for America’s Infrastructure, Republic of Letters, rolodex, Silicon Valley, Simon Kuznets, South China Sea, technoutopianism, the market place, The Rise and Fall of American Growth, total factor productivity, trade liberalization, trade route, urban sprawl, Vilfredo Pareto, yield curve

The logistic curve had its inflection point in 1993 and its asymptote is at 37.5% of the total population. British growth has been nearly as bad. Between 1993 and 2013, the percentage of obese males doubled and that of obese women rose by nearly half, and in 2013 67.1% of British men, and 57.2% of women, were overweight or obese, rates only slightly lower than in the US (HSCIC 2015). And China’s rapid post-1980 economic advances—making the country the world’s largest economy (in terms of purchasing power parity) and lifting its average daily per capita food availability above that in Japan (FAO 2018)—have resulted in notable increases of childhood and adolescent overweight and obesity, from just 4.4% for the cohort born in 1965 to 9.7% by 1985 and 15.9% in the year 2000 (Fu and Land 2015). The first global analysis of trends in BMI looked at 28 years of data (1980 to 2008) for adults 20 years of age and older in 199 countries, and it found an increase in male BMI in all but eight countries, with the global mean rising by 0.4 kg/m2/decade, and female BMI rising slightly faster at 0.5 kg/m2/decade (Finucane et al. 2011).

After almost four decades of post-imperial turmoil (including prolonged civil war and Japanese aggression), the Communist state established in October 1949 quickly integrated all traditional non-Han territories (Tibet, Xinjiang, Inner Mongolia, Manchuria), and only Taiwan (lost in 1895 to Japan) remained under Nationalist control. Then, after 27 years of Maoist orthodoxy and economic misery, Deng Xiaoping set China on a reformist course that boosted GDP (in constant 2010 dollars) from about $0.3 trillion to $10.2 trillion between 1980 and 2017 (World Bank 2018), making the country the world’s largest economy in terms of purchasing power parity and leading to the adoption of many policies strongly resembling ancient imperial practices (Frank 1998; Bergsten et al. 2009; Morrison 2017). China, once again, has strong and unyielding central control over 9.6 million km2 (slightly larger than the US) and its leadership, once again, refers to millennia of imperial history in superlative terms. And it does not tolerate any real dissent, it exercises pervasive social control, it pressures its smaller neighbors, it exhibits territorial ambitions that run counter to international norms (claiming sovereignty over virtually the entire South China Sea), and its grandiose plans of a new Silk Road are to put many nearby and more distant Asian (and African) economies firmly within Beijing’s economic control: Qing dynasty strategists would approve.

US trajectory had its inflection point in 1996 but compared to 2015 it indicates roughly a further 30% gain by 2050, while China’s inflection point came in 2016 and by 2050 the country’s inflation-adjusted GDP could be twice as large as it was in 2015 (figure 5.29). Figure 5.29 Growth and logistic outlook of GDP (expressed in international $2011) in four major economies—France, Japan, and the US since 1870, and China since 1950. Data from World Bank (2018). In order to appraise actual standards of living, international comparisons of these achievements are now commonly done in values converted to purchasing power parity (PPP). If comparisons based on exchange rates mislead (they may work well for financial flows but not for food or nontraded goods), those based on PPP—relating one currency to another by buying the same amount of goods and services—are far from perfect either. In order to be meaningful, a comparative basket must be fairly capacious but that means that it cannot be made identical: if so, it would ignore, or at least greatly distort, too many specific and qualitative differences that reflect national dietary and consumption peculiarities, expectations, and preferences.


pages: 370 words: 112,602

Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty by Abhijit Banerjee, Esther Duflo

Albert Einstein, Andrei Shleifer, business process, business process outsourcing, call centre, Cass Sunstein, charter city, clean water, collapse of Lehman Brothers, congestion charging, demographic transition, diversified portfolio, experimental subject, hiring and firing, Kickstarter, land tenure, low skilled workers, M-Pesa, microcredit, moral hazard, purchasing power parity, randomized controlled trial, Richard Thaler, school vouchers, Silicon Valley, The Fortune at the Bottom of the Pyramid, Thomas Malthus, urban planning

Notes Foreword 1 Throughout the book, we use the collective “we” whenever at least one of us was present in an interview. 2 The key reference we follow for our definition of poverty is Angus Deaton and Olivier Dupriez, “Purchasing Power Parity for the Global Poor,” American Economic Journal: Applied Economics, forthcoming. How do we know how much prices need to be adjusted to reflect the cost of living? The ICP project, led by the World Bank, has collected a comprehensive set of price data in 2005. Deaton and Dupriez have used those to calculate the cost of a basket of goods typically consumed by the poor in all the poor countries for which they have data. They do the exercise using the Indian rupee as the benchmark and use a price index in India compared to the United States to convert this poverty line into dollars, adjusted for the purchasing power parity. They propose the 16-rupee poverty line as the average of the poverty line of fifty countries where the vast majority of the poor live, weighted by the number of poor in those countries.

They propose the 16-rupee poverty line as the average of the poverty line of fifty countries where the vast majority of the poor live, weighted by the number of poor in those countries. They then use the exchange rate, adjusted for the price index between India and the United States, to convert the 16 rupees into a figure in dollars, which comes to 99 cents. Throughout this book, we present all prices in local currency and in 2005 Purchasing Power Parity–adjusted dollars (which we will note as “USD PPP”), using Deaton and Dupriez’s numbers. In this way, the price of anything mentioned in the book is directly scalable to the standard of living of the poor (for example, if something costs 3 USD PPP, it is roughly three times the poverty line). Chapter 1 1 United Nations, Department of Economic and Social Affairs, The Millennium Development Goals Report (2010). 2 Pratham Annual Status of Education Report 2005: Final Edition, available at http://scripts.mit.edu/~varun_ag/readinggroup/images/1/14/ASER.pdf. 3 Deborah Small, George Loewenstein, and Paul Slovic, “Sympathy and Callousness: The Impact of Deliberative Thought on Donations to Identifiable and Statistical Victims,” Organizational Behavior and Human Decision Processes 102 (2007): 143–153. 4 Jeffrey Sachs, The End of Poverty: Economic Possibilities for Our Time (New York: Penguin Press, 2005). 5 William Easterly, The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good (Oxford: Oxford University Press, 2006); and William Easterly, The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the Tropics (Cambridge: MIT Press, 2001). 6 Dambisa Moyo, Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa (London: Allen Lane, 2009). 7 Everywhere in the book, whenever we present an amount in a country’s local currency, we give the equivalent amount in dollars, adjusted for the cost of living (see Endnote 1 in the Foreword).

Chapter 1 1 United Nations, Department of Economic and Social Affairs, The Millennium Development Goals Report (2010). 2 Pratham Annual Status of Education Report 2005: Final Edition, available at http://scripts.mit.edu/~varun_ag/readinggroup/images/1/14/ASER.pdf. 3 Deborah Small, George Loewenstein, and Paul Slovic, “Sympathy and Callousness: The Impact of Deliberative Thought on Donations to Identifiable and Statistical Victims,” Organizational Behavior and Human Decision Processes 102 (2007): 143–153. 4 Jeffrey Sachs, The End of Poverty: Economic Possibilities for Our Time (New York: Penguin Press, 2005). 5 William Easterly, The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good (Oxford: Oxford University Press, 2006); and William Easterly, The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the Tropics (Cambridge: MIT Press, 2001). 6 Dambisa Moyo, Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa (London: Allen Lane, 2009). 7 Everywhere in the book, whenever we present an amount in a country’s local currency, we give the equivalent amount in dollars, adjusted for the cost of living (see Endnote 1 in the Foreword). This is denoted by USD PPP (USD at purchasing power parity). 8 Todd Moss, Gunilla Pettersson, and Nicolas van de Walle, “An Aid-Institutions Paradox? A Review Essay on Aid Dependency and State Building in Sub-Saharan Africa,” Working Paper No. 74, Center for Global Development (January 2006). Still, eleven countries out of forty-six received more than 10 percent of their budget in aid, and eleven got more than 20 percent. 9 Peter Singer, “Famine, Affluence, and Morality,” Philosophy and Public Affairs 1 (3) (1972): 229–243. 10 Amartya Sen, Development as Freedom (New York: Knopf, 1999). 11 Nicholas D.


pages: 264 words: 76,643

The Growth Delusion: Wealth, Poverty, and the Well-Being of Nations by David Pilling

Airbnb, banking crisis, Bernie Sanders, Big bang: deregulation of the City of London, Branko Milanovic, call centre, centre right, clean water, collapse of Lehman Brothers, collateralized debt obligation, commoditize, Credit Default Swap, credit default swaps / collateralized debt obligations, dark matter, Deng Xiaoping, Diane Coyle, Donald Trump, double entry bookkeeping, Erik Brynjolfsson, falling living standards, financial deregulation, financial intermediation, financial repression, Gini coefficient, Goldman Sachs: Vampire Squid, Google Hangouts, Hans Rosling, happiness index / gross national happiness, income inequality, income per capita, informal economy, invisible hand, job satisfaction, Mahatma Gandhi, market fundamentalism, Martin Wolf, means of production, Monkeys Reject Unequal Pay, mortgage debt, off grid, old-boy network, Panopticon Jeremy Bentham, peak oil, performance metric, pez dispenser, profit motive, purchasing power parity, race to the bottom, rent-seeking, Robert Gordon, Ronald Reagan, Rory Sutherland, science of happiness, shareholder value, sharing economy, Simon Kuznets, sovereign wealth fund, The Great Moderation, The Wealth of Nations by Adam Smith, Thomas Malthus, total factor productivity, transaction costs, transfer pricing, trickle-down economics, urban sprawl, women in the workforce, World Values Survey

And after my speech, the minister of education said, ‘This professor shows that Cubans are the healthiest of the poor.’ And everyone applauded,” Rosling said, chuckling quietly at the minister’s false logic. “On the way out, a very bright, brave young statistician whispered in my ear, ‘We are not the healthiest of the poor,’ he said. ‘We are just the poorest of the healthy.’ ” * So-called purchasing-power parity is a way of comparing income per capita—or GDP per capita—across nations by making adjustments for the fact that prices vary from country to country. A haircut in Mumbai is likely to cost less than a haircut in New York—partly because the hairdresser will earn less—which means that a dollar in India goes farther than a dollar in the US. The method makes it easier to compare incomes internationally but has many technical problems of its own. 9 BLACK POWER, GREEN POWER They called it the Airpocalypse.

George Ward, “Is Happiness a Predictor of Election Results?,” Centre for Economic Performance, April 2015: cep.lse.ac.uk. 9. John F. Helliwell, et al., World Happiness Report, 2012: worldhappiness.report/​download. 10. World Happiness Report, 2016, chapter 2, “The Distribution of World Happiness”: worldhappiness.report/​download. 11. IMF data for 2015, with GDP per capita expressed in purchasing-power parity terms. 12. Ibid. 13. Results cover 90,000 people in 46 countries. Richard Layard, Happiness, Penguin Books, 2005, p. 65. 14. Ibid., p. 64. 15. Ibid., p. 79. 16. “Carrie Fisher’s ashes carried in Prozac-shaped urn,” January 7, 2017: www.bbc.co.uk. 17. Author interview with Richard Layard. 18. Layard, Happiness, p. 233. 19. Ibid., p. 154. 20. Layard cites research from Robert Sampson and Byron Groves of Harvard University, “Community Structure and Crime (1989)”: dash.harvard.edu. 21.

Paul Ormerod, “Against Happiness,” Prospect Magazine, April 29, 2007: www.prospectmagazine.co.uk. 22. Richard Layard, “Paul Ormerod Is Splitting Hairs,” Prospect Magazine, June 2007. 23. Cited in World Happiness Report, 2012, p. 111. 24. Gardiner Harris, “Index of Happiness? Bhutan’s New Leader Prefers More Concrete Goals,” New York Times, October 4, 2013. 25. Ibid. 26. According to 2016 IMF figures, it has a GDP of just over $8,227 in purchasing-power parity terms, which adjust for local prices. 27. All figures from Unesco. 28. Bill Frelick, “Bhutan’s Ethnic Cleansing,” New Statesman, February 1, 2008: www.hrw.org. 29. Bhutan’s 2015 Gross National Happiness Index, Centre for Bhutan Studies and GNH Research, November 2015: www.bhutanstudies.org.bt. CHAPTER 13: GDP 2.0 1. Tobin became most famous for his proposed tax on foreign exchange transactions to reduce risky and what he considered useless speculation. 2.


pages: 192

Kicking Awaythe Ladder by Ha-Joon Chang

Asian financial crisis, business cycle, central bank independence, clean water, colonial rule, Corn Laws, corporate governance, creative destruction, David Ricardo: comparative advantage, fear of failure, income inequality, income per capita, joint-stock company, joint-stock limited liability company, land reform, liberal world order, moral hazard, open economy, purchasing power parity, rent-seeking, short selling, Simon Kuznets, The Wealth of Nations by Adam Smith, trade liberalization, Washington Consensus

This means that today's developing countries need to impose much higher rates of tariff than those Used by the NDCs in the past, if they are to provide the same degree of actual protection to their industries as that once accorded to the NDC industries.245 In other words, given the greater productivity gap they face, today's developing countries need to use much higher tariffs compared to the NDCs in earlier times, just to get the same protective effects. Before we show this, we must admit that it is not simple to measure international productivity gaps. Per capita income figures are obvious, although rough, proxies, but it is worth debating whether to use incomes measured in current dollars or in purchasing power parity (PPP) terms. Incomes measured in current dollars are arguably better reflections of the productivity gap in the tradeable sector, which is more relevant in determining tariff levels. However, they are subject to the vagaries of exchange-rate fluctuations that may have nothing to do with productivity differentials. PPP income figures are better reflections of a country's overall productivity, but they tend to underestimate, often greatly, the productivity differentials in the tradeable sector."

For example, per capita incomes measured in 1990 dollars in Japan and Finland in 1820 were $704 and $759 respectively, while those in the UK and the Netherlands were $1,756 and $1,561 - a ratio of less than 2.5 to 1. By 1913, the gap between Japan ($1,334) or Portugal ($1,354) and the UK ($5,032) or the USA ($5,505) increased to a ratio of around 4 to 1. For further details from Maddison's historical income estimates, see table 3.7 in Chapter 3 of the present volume. 248. In purchasing power parity terms (in 1999 dollars), per capita income in the USA, Switzerland, and Japan were $31,910, $28,760, and $25,170 respectively, whereas those in Tanzania and Malawi were $500 and $570 respectively. In terms of current dollars, the gap is in the region of 100 or 400 to 1. In current dollars, 1999 per capita incomes were $38,380 in Switzerland, $32,030 in Japan, and'$31,910 in the USA, while they were $100 in Ethiopia, $180 in Malawi, and $260 in Tanzania. 249.

Africa 133, 136t, 138t see also individual countries agriculture 52 Denmark 109, 112-13 France 38 Germany 23, 33 Sweden 39, 40 UK 4, 13, 23, 61 USA 5, 26, 29, 30 aid 140 America see USA 'American System' 28, 32 anti-trust regulations 11, 93-5, 117 Argentina 79t auditing 91-2, 115, 117, 121t, 123t Australia income, per capita 79t, 124,126t, 127t, 134, 135t social welfare institutions 106t, 117, 122t suffrage 75t, 76, 116 Austria 17, 49, 85 child labour 108,110c, 122t income, per capita 79t, 124,126t, 127t, 135, 135t intellectual property rights 57, 86, 114 protectionism 43, 60 social welfare institutions 106t suffrage 75t tariffs 17t Bangladesh 79t, 124, 126t banking 16, 95-9, 114-16, 117, 121t, 123t see also central banking bankruptcy laws 89-91, 114, 115, 121t, 123t, 124 Belgium 19-21, 23, 42-3, 44, 56 banking 48, 96, 97-8, 99t bureaucracy 81-2 child labour 109, llOt, 116 income, per capita 79t, 126t, 127t, 135t intellectual property rights 86 limited liability 89,115 social welfare institutions 106t suffrage 75t tariffs 17t, 60 tax, income 103 Bhagwati 2, 15, 29 'big push' theory 15 Brazil 15, 68, 79t, 102, 116, 124, 127t Britain see UK Bulgaria 79t bureaucracy 1,73,78-82,114,115,120,121t UK 80, 124 USA 80-2, 103, 116-17 Burma 79t, 126t Canada income, per capita 79t, 126t, 127t, 134, 135t intellectual property rights 121t social welfare 106t, 117, 122t suffrage 75t cartels 66, 93, 94, 117 East Asia 49-50 Germany 14, 35, 117 Sweden 40 central banking 1, 3, 10, 11,16, 96-9,119, 1231 Italy 117, 124' note issue monopoly 114, 115 Sweden 121t UK 118, 121t, 124 USA 117, 118, 121t, 125 child labour 107-10, 114, 116, 118, 122t, 123t, 124-5 Chile 79t, 104 China 133, 141 . income, per capita 124, 127t unequal treaties 16, 54 Classical economics 32 Clay, Henry 28, 32 Cobden, Richard 23,38,52, 61 Cobden-Chevalier treaty (1860) 23, 38 Colbert, Jean-Baptiste 36, 62 Colombia 68, 79t, 116, 124, 127t colonialism 16, 21, 22, 25, 52-3, 139-40 Communism 15, 72, 89, 99, 133 Competiton law see anti-trust regulations copyrights 52, 84, 86-7, 121t, 123t, 125 Corn Laws Belgium 43 UK 13, 16, 23, 29, 43, 52, 61 Cote d'lvoire 124, 126t Defoe, Daniel 20-1 democracy 1, 71, 73-8, 84, 121t, 124, 141 Denmark 56, 95 child labour 109, llOt income, per capita 79t, 126t, 127t, 135t labour regulations 111, 112-13 social welfare institutions 106t, 117 suffrage 75t, 115 tariffs 17t, 68-9 tax, income 103, 114 deregulation 1 dirigisme 4, 14, 62 disclosure of corporate information 91-2, 115, 117, 121t, 123t East Asia 15, 22, 25, 41, 46-51, 61, 64 see also individual countries East India Company British 43, 88, 118 Dutch 43 economic growth 2, 8, 9, 132-3, 134-8, 142-3, 144 and property rights 84-5 and social welfare institutions 104 education 18, 104 East Asia 51 France 37 Germany 34 Japan 48, 64 Netherlands 45 Sweden 41 USA 30-1 Edward III 19-20, 61, 130 Egypt 79t, 124, 126t Elizabeth I 20-1 employment 14, 48, 105, 106t England see UK espionage, industrial 18, 34, 36, 41, 56, 65 Ethiopia 68, 79t, 126t exports 2, 18, 66 East Asia 50 France 38 Prussia 33 Sweden 39 UK 19-23, 52, 55, 61 USA 32 Finland 40 income, per capita 68, 79t, 124, 126t, 127t, 135t social welfare 106t, 117 suffrage 75t, 76, 77 First World War 14, 28-9 foreign investment 46, 51, 99, 140-2 France 8, 10, 16, 23, 35-9, 56 bankruptcy law 90 banks 95, 97, 99t bureaucracy 80, 81 child labour 108, llOt competition law 93 free trade 33, 62 income, per capita 79t, 124,126t, 127t, 135t intellectual property rights 57,86,114 interventionism 1, 2,13 judiciary 83 labour regulations 112 limited liability 89, 115 nationalization 85, 135 social welfare 105, 106t, 117, 122t subsidies 38 suffrage 74,75t, 76,77,115,116,118, 121t tariffs 17t tax 80 Frederick the Great 33^1, 56, 82, 130 Frederick William I 33, 81-2 free trade 1, 7-8, 53, 65-6, 131, 144 Belgium 42 France 36-7 Germany 37 Netherlands 44 Sweden 39 Switzerland 46 UK 3-5, 13-14, 16, 23-4, 61 USA 2, 27-8, 29, 32, 62 GATT (General Agreement on Trade and Tariffs) 14 GDP (Gross Domestic Product) 30, 40, 132-3, 138t German Historical School 6, 105 Germany 3-4, 14, 24, 32-5, 40, 65, 129 see also Prussia, Saxony, Wiirttemberg banks 96, 98, 99t, 115 bureaucracy 80-2, 114 child labour 107, 108, llOt competition law 94, 117 income, per capita 45, 79t, 124,126t, 127t, 135, 135t intellectual property rights 46, 58-9, 85, 87, 115 judiciary 83 labour regulations 111 limited liability 89 social welfare 105-6, 106t, 122t subsidies 33, 35, 63 suffrage 75t, 116 tariffs 17t, 49, 61, 63, 66 zollverein (customs union) 4, 32-3 Ghana 79t, 124, 126t Gladstone, William 24, 103 globalization 15, 99, 140 Gold Standard 14 Great Depression 1, 14, 29, 49, 94, 98 Greece 126t Gross Domestic Product see GDP Hamilton, Alexander 25, 26, 61, 98, 130 health see social welfare institutions Henry VII 20-2, 61 Holland 109, llOt see also Netherlands Hong Kong 43, 50 Hungary 79t, 133 IDPE (international development policy establishment) 71, 131, 134, 138, 140, 142-4 banks 95 democracy 74, 141 IMF 104, 140, 145 imports France 37 Sweden 39 UK 19-20, 21, 22, 37, 52, 61 USA 25, 26-7, 28 income, per capita 67-9, 79t, 120, 124, 126-7t, 134-5 India 15, 22-3, 53, 137, 142 income, per capita 68, 79t, 124, 126t tariffs 68 Indonesia 79t, 124, 127t industrial espionage 18, 34, 36, 41, 56, 65 Industrial Revolutions 8, 60 Belgium 42 Switzerland 45 UK 21, 22 industrial, trade and technology policies see ITT policies industrialization 7, 54, 105, 113-18 France 36, 37, 39 Japan 47 Netherlands 43-5 Sweden 42 Switzerland 45 UK 21 USA 52 infant industries 130 protection of 2,3,10,15,18,61,67,131 France 62 Germany 32, 63 Japan 48-9, 60 Sweden 40, 60 Switzerland 46 UK 3, 20, 21, 65 USA 5, 24-6, 28, 30, 31, 62 inflation 11 infrastructure 18 Belgium 43 France 37 Japan 47 Netherlands 45 Sweden 40, 64 USA 31, 62 insurance, social 105,106,112,116-7,119, 122-3t Germany 105, 116 USA 112 intellectual property rights 1, 2, 57, 84-7, 115, 121t see also copyrights; patents; trademarks international development policy establishment see IDPE International Monetary Fund see IMF interventionism 3, 15, 16-18, 130-1, 132 see also tariffs; protectionism, infant industries France 1, 2, 13, 36, 62 Germany 34-5, 63 Japan 64 Netherlands 45 UK 19 investment planning 16 IPR see intellectual property rights Iran see Persia Ireland 79t, 106t, 117, 126t, 127t Italy 3, 4, 50, 124 banks 96, 98, 99t, 114, 115, 117 bureaucracy 81 child labour 109, HOt, 116 income, per capita 79t, 126t, 127t, 134, 135, 135t intellectual property rights 121t judiciary 83 labour regulations 112 social welfare 106t suffrage 74, 75t tariffs 17t I T T (industrial, trade and technology) policies 9, 59-60, 66-7, 130-2, 144 Belgium 43 East Asia 50, 51 Japan 61, 64 UK 18, 61 USA 18 Japan 8, 14, 22, 46-51, 100 banks 16 cartels 14, 49-50 income, per capita 68, 79t 126t, 135 intellectual property rights 86 ITT policies 61 judiciary 83 property rights 85 subsidies 47, 64 suffrage 75t, 121t tariffs 17t, 44, 54, 66 joint stock companies see limited liability judiciary 1, 71, 82-3, 121t Kenya 79t, 124, 126t Keynes, John Maynard 99-100, 135 Korea 16, 50, 51, 61, 65, 79t, 85 tariffs 22, 39, 54 labour regulations 72, 111-13, 114, 118— 19, 122t laissez-faire 13-16, 65-6 France 36, 37 Germany 33, 63 Netherlands 44-5 Switzerland 46 UK 1, 14, 19, 24, 61-2 Latin America 15,16, 54,132-3, 136t, 138t see also individual countries liberalism 3, 13-14, 15, 29, 37-8 liberalization of trade 1,14,15,16,23-4,69 limited liability 3,10, 88-9,114,115,118, 121t, 123t France 37 UK 92,117 Lincoln, Abraham 27-8, 32 List, Friedrich 3-6,25,32,44,52,61,129-30 Low Countries 19, 20, 42 see also Belgium; Netherlands Malawi 68 manufacturing 18 France 38 Germany 33 Japan 48 Sweden 39 UK 20-4, 26, 52, 61 USA 25, 26, 28-9, 52, 62, 89 Marxism 15 McCulloch, John 88,103 mercantilism 13-14, 23, 33, 43 Mexico 15, 79t, 116, 124, 127t monopolies 66, 87, 93, 94-5 banknote-issue 97, 98, 99, 114, 115 East Asia 50 Germany 33 Netherlands 44 UK 85 USA 31 Morocco 124, 127t NAFTA (North American Free Trade Agreement) 15 Napoleonic Wars 8, 39, 60, 103, 114 nationalization 16, 47, 85, 135 see also state-owned enterprises Neoclassical economics 6, 7 Neo-liberalism 15, 59, 132-3 Netherlands 43-5, 60, 131 banks 97, 99t bureaucracy 80 income, per capita 68, 79t, 126t, 127t infant industry protection 18 intellectual property rights 9, 57-8, 86-7, 121t social welfare 106t, 117 subsidies 44, 45 suffrage 75t tariffs 17t tax 80 technology 55-6 New Zealand income, per capita 79t, 124, 127t social welfare 105, 106t, 117 suffrage 75t, 76, 116, 121t Nicaragua 68 Nigeria 79t, 124, 126t Norway 17, 56, 92, 94-5 child labour 109, llOt, 116 income, per capita 79t, 126t, 127t, 135t labour regulations 111 social welfare 106t, 117 suffrage 75t, 76, 77 Ottoman Empire 16, 54 see also Turkey Pakistan 79t, 124, 126t patents 2, 18, 57-8, 65, 85-7, 114-15, 121-2t see also intellectual property rights Netherlands 9, 44 Switzerland 9, 46 pensions 105, 106, 106t, 117, 119, 122t Persia 16, 54 Peru 79t, 124, 127t Philippines 79t, 124, 127t Poland 5,133 Portugal banks 95, 97, 99t child labour 109, llOt, 122t income, per capita 79t, 126t intellectual property rights 86 limited liability 89,115 social welfare 106t, 117 suffrage 75t tariffs 67 tax, income 103 PPP (purchasing power parity) 68-9 property rights 1, 2, 83-5, 114, 139, 141 see also intellectual property rights protectionism 15, 16, 59, 67, 107, 130-1 see also infant industries Belgium 43 France 37, 38 Japan 46, 48-9 Netherlands 60 Sweden 39 Switzerland 60 UK 4 - 5 , 1 3 , 24 USA 1, 5, 24-5, 27-31, 62 Prussia 8, 17t, 32-5, 47, 56, 62 see also Germany banks 95 bureaucracy 80-2, 114, 115, 121t child labour 108, llOt, 116, 122t intellectual property rights 86 suffrage 75, 77 tariffs 32 quotas 29 R & D see research and development race 75, 76, 77, 124 railways 16, 27, 40, 47, 112 Raymond, Daniel 25, 31, 61 research and development 18, 56, 66 East Asia 51 France 37 Sweden 40, 41, 64 USA 30-1, 62 resources 11 Ricardo, David 13-14, 32 Roosevelt, Theodore 78, 93-4 Russia 17t, 28, 39, 56, 67, 86 Saxony 75-6, 85-6, 89, 108, llOt see also Germany Schmoller, Gustav 105 Second World War 8, 39, 60,103, 114 securities 99-102, 114, 116-17, 121-3t slavery 27-8, 142 Smith, Adam 4, 5, 13-14, 24, 88 Smoot-Hawley Tariff 1-2, 14, 29 social welfare institutions 72, 103-6, 114, 116-17, 122t, 142 Soviet Union 133,140 Spain auditing 93 banking 97, 99t bureaucracy 81, 116 child labour 109, llOt income, per capita 126t, 127t intellectual property rights 86, 121t labour regulations 112 limited liability 89 social welfare 106t, 117 suffrage 75t, 76 tariffs 17t, 67 tax, income 103 state-owned enterprises 39, 40, 47-8 see also nationalization stock market see securities structural adjustment 72 structuralism 15 suborning 55 subsidies 2, 18, 63, 66, 67, 130, 145 East Asia 50, 51, 61 France 38 Germany 33, 35, 63 Japan 47, 64 Netherlands 44, 45 Sweden 39, 40 UK 22, 52, 61 USA 26, 29, 31 suffrage 74-8,79t, 105,113,115,116,121t see also democracy Sweden 39-42, 56, 60, 66 banking 95, 97, 99t, 121t child labour 107, 108-9, llOt, 116 income, per capita 79t, 126t, 127t, 135t intellectual property rights 86 labour regulations 111, 112 limited liability 88, 115, 121t social welfare 106t, 117 suffrage 75t tariffs 17t, 38, 63-4 tax, income 103 Switzerland 10, 18, 23, 45-6, 60, 131 banks 98, 99t, 115 child labour llOt income, per capita 68, 79t, 127t intellectual property rights 2 , 9 , 5 7 - 8 , 86, 87, 121t patents 2, 9, 58, 87 social welfare 106t, 117, 122t suffrage 75t, 76, 118, 119, 121t tariffs 17t Taiwan 16, 22, 50, 51, 61, 79t, 85 Tanzania 68, 79t tariffs 3, 9, 17t, 53, 54, 65-6, 67-9 Belgium 43 East Asia 57 France 38 Germany 33, 35, 63 Japan 46-7, 48-9, 50-1 Netherlands 44 protection 3, 59,130 Sweden 39, 40, 64 UK 22-4 USA 1-2, 14, 16, 25-7, 62 tax 16, 19, 28, 43, 80, 101, 120 income 102-3, 104, 122t, 141, 142 technology 7, 18, 55-7, 60, 65 Belgium 42 France 36, 39 Germany 34 Japan 48, 50 Sweden 40, 41 Switzerland 45-6 UK 20, 22, 23, 54, 55 USA 31 Thailand 16, 54, 116, 124, 127t trade-related intellectual property rights (TRIPS) 57, 86, 87 trade sanctions 29, 107 trade unions see unions trademarks 58, 65, 84, 86, 87, 121t TRIPS (trade-related intellectual property rights) 57, 86, 87 Turkey 16, 54, 79t, 116, 127t see also Ottoman Empire UK 1, 19, 24, 51-9, 121-3t, 132 anti-trust regulations 94 auditing 92, 117 banking 95-6, 97, 99t, 114, 118, 121t bankruptcy law 90-1, 115 and Belgium 19-21, 23, 42 bureaucracy 80, 82 child labour 107-8, llOt, 116, 122t and East Asia 22, 50 and France 23, 36, 37t, 38, 39, 55, 56 free trade 3-5, 7 - 8 , 1 3 - 1 4 , 1 6 , 61, 62 income, per capita 68, 69, 79t, 124, 126t, 127t, 135t and India 22-3, 53 and Ireland 22, 53 infant industry protection 65 intellectual property rights 85-6,114, 121t judiciary 83 labour institutions 111 limited liability 88, 115, 117 and Netherlands 43, 44 property rights 85 securities 100-1, 116, 117 social welfare institutions 106t suffrage 74, 75t, 77 and Switzerland 45-6 tariffs 17t, 39 tax 80, 102 income 103, 114, 122t technology 18, 20, 22-3, 54-5 unemployment see employment unions 41, 94, 105, 107 and the USA 5, 23-6, 28, 32, 52-3 USA 1-2, 3, 24-32, 102, 115-18, 121-3t banking 96, 98, 99t bankruptcy laws 90-1 bureaucracy 80-1, 82, 119 child labour 107, 109-10, llOt civil war 2, 25, 27-9 competition law 93-4 disclosure 92 free trade 7-8, 65 income, per capita 68, 79t, 124, 126t, 127t, 135t, 142 industrialization 52 infant industry protection 5,61-2,66, 131 intellectual property rights 57, 58, 114 judiciary 83 labour regulations 111-12, 113 limited liability 89 securities 99-100, 101 social welfare 104, 106t subsidies 26, 29, 31 suffrage 75t, 77-8 tariffs 16, 17t, 47, 66, 67 tax, income 103 Venezuela 79t Vietnam 133 voting see democracy; suffrage Walpole, Robert 21, 25, 52, 61,130 wars 102, 103 America Civil War 2, 25, 27-9 War of Independence 26 First World War 14, 28-9 Napoleonic War 39, 60 Second World War 8,14,17, 49 Washington consensus 1, 13 Weber, Max 6, 80, 82 welfare state see social welfare institutions women 111-12, 116, 118, 124 workers, migration of 54-6, 57, 65 World Bank 71, 104, 136t, 138t, 140, 145 tariffs 17t, 53-4, 67 World Trade Organization 2, 15, 71, 107, 131-2, 140, 145 intellectual property rights 57, 86, 87 tariffs 67, 68-9, 145 Wiirttemberg 86, 89 see also Germany Zaire 79t Zimbabwe 68 zollverein (German customs union) 4, 32-3


pages: 555 words: 80,635

Open: The Progressive Case for Free Trade, Immigration, and Global Capital by Kimberly Clausing

2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, active measures, Affordable Care Act / Obamacare, agricultural Revolution, battle of ideas, Bernie Sanders, business climate, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, corporate social responsibility, creative destruction, currency manipulation / currency intervention, David Ricardo: comparative advantage, Donald Trump, floating exchange rates, full employment, gig economy, global supply chain, global value chain, guest worker program, illegal immigration, immigration reform, income inequality, index fund, investor state dispute settlement, knowledge worker, labor-force participation, low skilled workers, Lyft, manufacturing employment, Mark Zuckerberg, meta analysis, meta-analysis, offshore financial centre, open economy, Paul Samuelson, profit motive, purchasing power parity, race to the bottom, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, Silicon Valley, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transfer pricing, uber lyft, winner-take-all economy, working-age population, zero-sum game

It took the United Kingdom centuries to industrialize, but industrial revolution in the United States was faster, in part due to the adoption of earlier English inventions. Japan’s industrialization proceeded at an even quicker pace, South Korea and Singapore accelerated from there, and China has been the fastest of them all. Figure 3.5: Growth in China Results in Huge Falls in Poverty Headcounts Note: The poverty line used is the current standard, $1.90 per day in 2011 purchasing-power-parity adjusted dollars. Data source: World Development Indicators, World Bank. Figure 3.6: Economic Growth in China and India Has Been Spectacular Data source: World Development Indicators, World Bank. How Do Countries Compete? The gains from trade have been recognized for centuries. These gains hold even if wages differ across countries, and even if one country is more productive than its potential trading partners in making all things.

The United States has a long history of successful global corporations that continues to the present day. Even before the tax cuts of 2018, there was no need to ease tax or regulatory burdens to attract investment or economic activity. For example, across fifteen years of Forbes Global 2000 rankings, the United States is consistently home to a disproportionate share of the world’s largest corporations. Our economy is about one-fifth the size of the world economy—16 percent in purchasing power parity (PPP) terms and 22 percent in US dollar terms—yet we have larger fractions of the world’s top two thousand firms: 28 percent by count, 33 percent by sales, 37 percent by profits (consolidated worldwide), 24 percent by assets, and 44 percent by market capitalization (fig. 7.9).34 Some observers caution about the threat of corporate inversions, which occur when companies restructure to change their headquarters locations for tax purposes.

See Market power Most favored nation status, 315n13 MSCI, 277 Multinational Companies: benefits of, 145–147; effects on competition, 145–149; effects on labor bargaining power, 149–152; headquarters, 143; importance of, 141–142; international trade of, 141–143; and offshoring, 155–156; and tax avoidance, 157–159 Murray, Alan, 332n20 National Academy of Sciences, 184 National Institutes of Health (NIH), 236 National Science Foundation (NSF), 236 Negative income tax, 247, 327n2 Net international investment position, 134 New products, 22 New Zealand, 269 Nike, 272 Nontraded goods, 129–131 North American Free Trade Agreement (NAFTA), 78, 95–98; effects on US economy, 96–97; and peso crisis, 103; and relations with Mexico, 103 North Carolina Growers Association, 197 Obama, Barack, 332n19 Obama Administration, 78, 169–170, 214, 256, 274 OECD, 226–227 Outsourcing, 151–152, 280 Paris Agreement on Climate Change, 161, 225, 299 Patrimonial capitalism, 253 Perot, Ross, 96 Piketty, Thomas, 254 Pittsburgh, 233 Place premiums, 189, 220 Polarization, 288–293 Political power, 25–26 Population growth, 185–188 Populism, 25–26 Postel, Hannah, 196 Pre-K education, 235 Prisoner’s dilemma, 226 Profit shifting, 158–159, 166–174, 250–252, 276–278 Public Law, 115–97. See Tax Cuts and Jobs Act Public opinion, 292–293 Purchasing power parity (PPP), 320n34 Race to bottom, 154–155 Reagan Administration, 265 Reemployment Trade Adjustment Assistance (RTAA), 228–229 Regulation, 164, 273–275 Reinventing Government, 273–274 Relocation assistance, 229–230 Remittances, 206 Reputation Institute, 277 Research and Development, 176, 235 Ricardo, David, 70 Rising-tide tax system, 247 Robinson, James, 64, 189–190 Rules of origin, 315n12 Sanders, Bernie, 25, 76 Savings glut, 151 Secular stagnation, 40, 151 Showdown at Gucci Gulch, 264–265 Silicon Valley, 181–182 Smith, Adam, 284, 316n1 Social Norms, 42–44, 276–278, 282 Social Security, 241–242 Stateless income, 159 Statue of Liberty, 212 Summers, Lawrence, 151, 307n29 Sunshine labor report, 278–283 Sunshine tax report.


pages: 523 words: 111,615

The Economics of Enough: How to Run the Economy as if the Future Matters by Diane Coyle

"Robert Solow", accounting loophole / creative accounting, affirmative action, bank run, banking crisis, Berlin Wall, bonus culture, Branko Milanovic, BRICs, business cycle, call centre, Cass Sunstein, central bank independence, collapse of Lehman Brothers, conceptual framework, corporate governance, correlation does not imply causation, Credit Default Swap, deindustrialization, demographic transition, Diane Coyle, different worldview, disintermediation, Edward Glaeser, endogenous growth, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, Financial Instability Hypothesis, Francis Fukuyama: the end of history, George Akerlof, Gini coefficient, global supply chain, Gordon Gekko, greed is good, happiness index / gross national happiness, hedonic treadmill, Hyman Minsky, If something cannot go on forever, it will stop - Herbert Stein's Law, illegal immigration, income inequality, income per capita, industrial cluster, information asymmetry, intangible asset, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Jane Jacobs, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, light touch regulation, low skilled workers, market bubble, market design, market fundamentalism, megacity, Network effects, new economy, night-watchman state, Northern Rock, oil shock, Pareto efficiency, principal–agent problem, profit motive, purchasing power parity, railway mania, rising living standards, Ronald Reagan, selective serotonin reuptake inhibitor (SSRI), Silicon Valley, South Sea Bubble, Steven Pinker, The Design of Experiments, The Fortune at the Bottom of the Pyramid, The Market for Lemons, The Myth of the Rational Market, The Spirit Level, transaction costs, transfer pricing, tulip mania, ultimatum game, University of East Anglia, web application, web of trust, winner-take-all economy, World Values Survey, zero-sum game

Besides, as Steven Pinker has written: “When psychologists say ‘most people’ they usually mean ‘most of the two dozen sophomores who filled out a questionnaire for beer money.’ ” Pinker (2008). 5 List (2008). 6 Haidt (2006). 7 Trivers (1971). 8 Dawkins (1976). 9 Pinker (2008). 10 De Waal (2008), 18. 11 Ibid., 162. 12 Sigmund et al. (2002). 13 Hume (1739). 14 Sala-i-Martin (2002a, b). 15 Heshmati (2006). 16 Milanovic (2005). 17 Bourguignon and Coyle (2003). 18 Milanovic (2005). 19 These updated figures convert local currencies to dollars (so they can be compared) at purchasing power parity exchange rates, which differ significantly from earlier estimates, and the effect is to reduce the figures in “PPP dollars” for incomes in countries such as India and China. So whereas earlier figures suggested global income distribution had changed little in the late twentieth century, they now point to increasing inequality. This doesn’t mean the massive gains in income and reductions in poverty in these Asian economies are illusory.

., 127–28 Calculus of Consent, The: Logical Foundations of Constitutional Democracy (Buchanan and Tullock), 242 call centers, 131, 133, 161 Cameron, David, 288 capitalism: China and, 234; communism and, 96, 182–83, 209–13, 218, 226, 230, 239–40; community and, 27, 51, 65, 117–18, 137, 141, 152–54; cultural effects of, 25–29, 230–38; current crisis of, 6–9; democracy and, 230–38; Engels on, 14; fairness and, 134, 137, 149; growth and, 268, 275, 290, 293, 297; happiness and, 25–29, 33, 45, 53–54; historical perspective on, 3, 6, 14; institutions and, 240; market failure and, 226–30; Marx on, 14; measurement and, 182; mercantile economy and, 27–28; nutrition and, 10; profit–oriented, 18; Protestant work ethic and, 13–14; protests against, 211–13; rethinking meaning of, 9; social effects of, 25–26; values and, 209–13, 218, 226, 230–32, 235–36; well-being and, 137–39 carbon prices, 70–71 celebrities, 33 charitable giving, 33, 141 Checkpoint Charlie, 147 China, 161, 262, 280; capitalism and, 234; carbon emissions and, 63; changed demographic structure of, 90; convergence and, 122; declining population in, 98; energy use in, 63, 65; global manufacturing and, 149; inequality and, 125–26; Mao and, 10; middle class of, 125–26; as next major power, 94; one–child policy and, 95–96; population growth and, 95–96; purchasing power parity (PPP) and, 306n19; rise in wealth of, 81, 122–23, 125, 212; savings and, 87, 94, 100, 108; wage penalties and, 133; World Bank influence and, 163 cities, 308n29; face-to-face contact and, 165–68; size and, 165–66; structural changes in, 165–70; urban clustering and, 166 City of London, 147, 221 Clemens, Michael, 81 climate change, 5–7, 17, 24, 90, 238; carbon prices and, 70–71; Copenhagen summit and, 62, 64–65, 68, 162, 292; domestic dissent and, 66–71; future and, 75–83; geological history and, 69; global warming and, 57, 64, 66, 68; greenhouse gases and, 23, 29, 35, 59, 61–63, 68, 70–71, 83; Himalayan glaciers and, 66–67; incandescent light bulbs and, 59–60; InterAcademy Council and, 66–67; Intergovernmental Panel on Climate Change (IPCC) and, 59, 66–69, 82, 297; Kyoto Protocol and, 62–64; lack of consensus on, 66–71; Montreal Protocol and, 59; policy dilemma of, 58–62; policy recommendations for, 267, 280, 297; politics and, 62–65; social welfare and, 71–75; technology and, 59–60, 198 Coachella Value Music Festival, 197 Cobb, John, 36 Coca Cola, 150 coherence, 49 Cold War, 93, 112, 147, 209, 213, 239, 252 Collier, Paul, 77–78, 80, 82 Commerzbank, 87 Commission on the Measurement of Economic Performance and Social Progress, 37–38 communism: Berlin Wall and, 182, 226, 239; capitalism and, 96, 182–83, 209–13, 218, 226, 230, 239–40; Cold War and, 93, 112, 147, 209, 213, 239, 252; fall of, 209–13, 226, 239–40, 252; Iron Curtain and, 183, 239, 252; Leipzig marches and, 239; one-child policy and, 95–96; Velvet Revolution and, 239 community: civic engagement and, 140–41; globalization and, 148–49; intangible assets and, 149–52, 157, 161 (see also trust); public service and, 295; Putnam on, 140–41, 152–54 commuting, 45–47 Company of Strangers, The (Seabright), 148–49, 213–14 comprehensive wealth, 81–82, 202–3, 208, 271–73 consumerism, 22, 34, 45, 138 consumption: conspicuous, 11, 22, 45, 236; consumerism and, 22, 34, 45, 138; cutting, 61; downgrading status of, 11; downshifting and, 11, 55; Easterlin Paradox and, 39–44; global per capita, 72; of goods and services, 7, 10, 24, 35–36, 40, 82, 99, 161, 188, 191, 198, 214, 218, 228–29, 282; green lifestyle and, 55, 61, 76, 289, 293; growth and, 280, 295; happiness and, 22, 29, 40, 45; hedonic treadmill and, 40; increasing affluence and, 12; institutions and, 254, 263; Kyoto Protocol and, 63–64; measurement and, 181–82, 198; missing markets and, 229; natural resources and, 8–12, 58, 60, 79–82, 102, 112, 181–82; nature and, 58–61, 71–76, 79, 82; posterity and, 86, 104–5, 112–13; reduction of, 105; Slow Movement and, 27; trends in, 138; trilemma of, 13–14, 230–36, 275; values and, 229, 236 convergence, 5, 122 Copenhagen summit, 62, 64–65, 68, 162, 292 Crackberry, 205 Crafts, Nicholas, 156–57 credit cards, 2, 21, 136, 138, 283 Csikszentmilhalyi, Mihaly, 45–49 Cultural Contradictions of Capitalism, The (Bell), 230, 235–36 Czechoslovakia, 239 Daly, Herman, 36 Damon, William, 48 Dasgupta, Partha, 61, 73, 77–78, 80, 82 David, Paul, 156 Dawkins, Richard, 118 debit cards, 2 decentralization, 7, 159, 218, 246, 255, 275, 291 defense budgets, 93 democracy, 2, 8, 16, 312n19; capitalism and, 230–38; culture and, 230–38; fairness and, 141; growth and, 268–69, 285–89, 296–97; institutions and, 242–43, 251–52, 262; nature and, 61, 66, 68; posterity and, 106; trust and, 175; values and, 230–35 Denmark, 125 Dickens, Charles, 131 Diener, Ed, 48, 49 Discourse on the Origin and Basis of Inequality among Men (Rousseau), 114 distribution, 29, 306n22; Asian influence and, 123; bifurcation of social norms and, 231–32; consumerism and, 22, 34, 45, 138; Easterlin Paradox and, 39–44; fairness and, 115–16, 123–27, 134, 136; food and, 10, 34; of goods and services, 7, 10, 24, 35–36, 40, 82, 99, 161, 188, 191, 198, 214, 218, 228–29, 282; income, 34, 116, 123–27, 134, 278; inequality and, 123 (see also inequality); institutions and, 253; measurement and, 181, 191–99, 202; paradox of prosperity and, 174; policy recommendations for, 276, 278; posterity and, 87, 94; trust and, 151, 171; unequal countries and, 124–30; values and, 226 Dorling, Danny, 224, 307n58, 308n34 Douglas, Michael, 221 downshifting, 11, 55 downsizing, 175, 246, 255 drugs, 44, 46, 137–38, 168–69, 191, 302n47 Easterlin, Richard, 39 Easterlin Paradox, 39–44 eBay, 198 Economics of Ecosystems and Biodiversity project, The (TEEB), 78–79 economies of scale, 253–58 Economy of Enough, 233; building blocks for, 12–17; first ten steps for, 294–98; growth and, 182; happiness and, 24; institutions and, 250–51, 258, 261–63; living standards and, 13, 65, 78–79, 106, 113, 136, 139, 151, 162, 190, 194, 267; Manifesto of, 18, 267–98; measurement and, 182, 186–88, 201–7; nature and, 59, 84; Ostrom on, 250–51; posterity and, 17, 85–113; values and, 217, 233–34, 238; Western consumers and, 22 (see also consumption) Edinburgh University, 221 efficiency, 2, 7; evidence–based policy and, 233–34; fairness and, 126; Fama hypothesis and, 221–22; happiness and, 9, 29–30, 61; institutions and, 245–46, 254–55, 261; limits to, 13; nature and, 61–62, 69, 82; network effects and, 253, 258; productivity and, 13 (see also productivity); trilemma of, 13–14, 230–36, 275; trust and, 158–59; values and, 210, 215–16, 221–35 Ehrlich, Paul, 70 e-mail, 252, 291 “End of History, The” (Fukuyama), 239 Engels, Friedrich, 14 Enlightenment, 7 Enron, 145 environmentalists.

See also markets goodwill, 150 Google, 195, 291 Gore, Al, 60, 74 governance: definition of, 16; growth and, 270, 275, 288, 292; institutions and, 242, 247, 255–58, 261–62; measurement and, 183, 186; sense of, 18; technology and, 17; trust and, 151, 162–65, 173–77; values and, 211, 217, 238; wider crisis of, 255–58 government: bailouts and, 1, 88, 91, 99–100, 145; communism and, 96, 182–83, 209–13, 218, 226, 230, 239–40; debt and, 3–4, 11, 84–86, 89–94, 98–105, 108, 150, 248, 271, 275, 286–87, 294; decentralization and, 246; defining, 15–16, 269; distrust of, 150, 157, 162, 172, 175–76, 247; failure of, 183, 240–44, 257; fairness and, 121, 123, 131, 136; first ten steps for, 294–98; growing challenge to authority and, 245–46; growth and, 268–72, 275–89, 293–97; happiness and, 22–26, 29–32, 38–40, 43–45, 50–54; higher social spending and, 243–44; influence of over social norms, 280–84; infrastructure spending and, 93; institutions and, 240–63; interest groups and, 242–43, 285; Intergovernmental Panel on Climate Change (IPCC) and, 59, 66–69, 82, 297; intrusive regulatory practices and, 244; market control and, 14–15; measurement and, 182–88, 191, 193, 196, 202–3, 206; nature and, 58–62, 65–71, 82–84; New Public Management and, 245–47; OECD countries and, 4, 11, 38, 52, 60, 68, 87, 93–94, 97–99, 112, 125–26, 160, 171, 201, 212, 243–44, 246, 273–74, 281, 283, 287, 291, 293; online access of, 287–88; as organizing economy, 218–19; police service and, 5, 35, 163, 193, 200, 247; policy and, 2 (see also policy); posterity and, 85–95, 98–113; as shareholder, 88; stimulus packages and, 91, 100–103, 111; values and, 14, 210–11, 215–20, 225–26, 229–30, 234 government debt, 3–4, 84, 150, 248; cradle-to-grave social systems and, 104; credibility and, 101; default on, 110–12; deficit spending and, 101, 203, 287; demographic implosion and, 95–100; Gross on, 287; higher retirement age and, 106–7; importance of, 100–104; increased saving and, 105–6; legacy of, 90–92; less leisure and, 106–7; migration and, 108–9; policy for, 104–12, 271, 275, 286–87, 294; posterity and, 85–86, 90–94, 98–100, 105, 108; productivity improvements and, 107–8; reduced consumption and, 105–6; retirement age and, 98; as social issue, 113; Stein’s Law and, 104; as time bomb, 104 Great Crash, 28 Great Depression, 3, 28, 35, 61, 82, 109, 150, 208, 281 Greece, 3, 260, 276, 287, 295 greed, 248; bankers and, 277–78; fairness and, 129; happiness and, 26, 34, 54; high salaries and, 130, 143–44, 193, 223, 277–78, 286, 296; option pricing theory and, 222; policy recommendations for, 277–79; posterity and, 88; trust and, 150; values and, 221–23 Green, Stephen, 279 greenhouse gases, 23, 29, 35, 59, 61–63, 68, 70–71, 83 green lifestyle, 55, 61, 76, 289, 293 Greenspan, Alan, 129 Gross, Bill, 287 gross domestic product (GDP), 10, 12; Easterlin Paradox and, 39–44; fairness and, 127; growth and, 270, 274, 281, 294; happiness and, 22–23, 28, 32–42, 51–53; logarithm of, 41–42; measurement and, 41–42, 187–91, 198, 201–8; nature and, 56–60, 75–76, 80–82; policy recommendations for, 270, 274, 281, 294; posterity and, 91–94, 98–99, 103, 108, 111; trust and, 157, 160; values and, 212, 218, 232 Gross National Happiness, 36, 40 growth: antigrowth alternative and, 39–44; capitalism and, 268, 275, 290, 293, 297; Commission on the Measurement of Economic Performance and Social Progress and, 37–38; community and, 27, 51, 65, 117–18, 137, 141, 152–54; comprehensive wealth and, 81–82, 202–3, 208, 271–73; consequences of inequality and, 135–36; consumption and, 280, 295; cultural suspicion of capitalist, 26–29; democracy and, 268–69, 285–89, 296–97; downgrading consumption and, 11; fairness and, 114–16, 121, 125, 127, 133–37; governance and, 270, 275, 288, 292; government and, 268–72, 275–89, 293–97; gross domestic product (GDP) and, 270, 274, 281, 294; happiness and, 9–12, 22–29, 32–44, 51–53; increasing affluence and, 12; Industrial Revolution and, 27, 149, 290, 297; of information, 205, 291; innovation and, 201–7, 271–73, 281, 290–92; institutions and, 258, 261, 263; limits to, 13, 190, 231; Manifesto of Enough and, 267–98; measurement and, 181–85, 188–90, 194, 201–5, 208; mercantile economy and, 27–28; morals and, 275–76, 279, 293, 295, 297; nature and, 56–59, 62–66, 69–72, 76, 79–82; new conventional wisdom on, 23–24; paradox of prosperity and, 174; as policy goal, 22; politics and, 33; population, 29, 63, 70, 81, 89, 95–96, 108, 168; posterity and, 90, 95, 97, 99, 102, 105–8, 111; productivity and, 189–90, 194, 199–201, 206–7 (see also productivity); public goods and, 185–86, 190, 199, 211, 229, 249, 261; statistics and, 270–74, 290–94; sustainability and, 240, 244, 248 (see also sustainability); trust and, 152–56, 160, 174; values and, 13, 210–13, 222, 231–36; welfare and, 9–12 Groysberg, Boris, 143 Gutenberg press, 7 Haidt, Jonathan, 45–49, 117 Haldane, Andrew, 174 Hall, Peter, 140–41 Hamilton, Kirk, 81 handcrafting, 11, 55 happiness: absorbing work and, 10, 48–49; anomie and, 48, 51; anxiety and, 1, 25, 47–48, 136–38, 149, 174; capitalism and, 25–29, 33, 45, 53–54; charitable giving and, 33; choice and, 10–11; coherence and, 49; Commission on the Measurement of Economic Performance and Social Progress and, 37–38; commuting and, 45–47; conflict in relationships and, 47; consumer electronics and, 36–37; consumption and, 22, 29, 45; as correct guide for life, 29–32; cultural suspicion of growth and, 26–29; Easterlin Paradox and, 39–44; efficiency and, 9, 29–30, 61; emotional response to, 21; fairness and, 53; formula for, 46; freedom and, 10, 13, 26, 42–44, 50–53; globalization and, 24; government and, 22–26, 29–32, 38–40, 43–45, 50–54; gross domestic product (GDP) and, 22–23, 28, 32–42, 51–53; Gross National Happiness and, 36; growth and, 9–12, 22–29, 32–44, 51–53; health issues and, 24, 33–38, 42–43, 48, 50; Human Development Index (HDI) and, 36; inequality and, 25, 36, 42, 44, 53; innovation and, 37; lack of control and, 47; literacy and, 36; measurement and, 35–39; mercantile economy and, 27–28; morals and, 22, 26, 30, 34, 43, 48–49; more money and, 56; movement of, 10; nature and, 56–59, 75–76, 80–84; new conventional wisdom on, 23–24; noise and, 47; philosophy and, 21, 27, 31–32, 49–50; politics and, 22–30, 33, 43–44, 50–54; productivity and, 27, 38, 42, 51; psychology of, 44–50; religion and, 32–33, 43, 50; sense of flow and, 48–49, 51; shame and, 47; Slow Movement and, 27–28, 205; social engagement and, 10; social welfare and, 25–26, 30–32, 35, 39–42, 50–53; statistics and, 35–42, 51–52; technology and, 24–25, 35–37, 44, 53–54; unemployment and, 56; utiltariansim and, 31–32; volunteering and, 46–49 Happiness: Lessons from a New Science (Layard), 39 Happy Planet Index, 36 Harvard, 100 Hayek, Friedrich von, 215–16 health care, 4–5, 11; fairness and, 137–43; happiness and, 24, 33–38, 42–43, 48, 50; institutions and, 247, 252–53; measurement and, 181, 188–93, 200, 207; Obama administration and, 285; policy reform and, 285, 290, 293; politics and, 269; posterity and, 89, 93–94, 97–99, 103, 106, 111–13; trust and, 172 hedonic treadmill, 40 Henderson, David, 68 Himalayan glaciers, 66–67 hippies, 27 Hirsch, Fred, 190, 213 Hobbes, Thomas, 114 HSBC, 279 Hugo, Victor, 131 human capital, 81, 203–4, 282 Human Development Index (HDI), 36 Hume, David, 120 Hungary, 239 hybrid cars, 61 hyperinflation, 110–11 Idea of Justice, The (Sen), 43 illegal downloading, 196–97 incandescent light bulbs, 59–60 income. See distribution Inconvenient Truth, An (Gore), 60 Index of Sustainable Economic Welfare (ISEW), 36 India, 212; emerging middle class of, 125; fairness and, 122–26, 133; inequality and, 125–26; nature and, 63, 65, 81; posterity and, 108; purchasing power parity (PPP) and, 306n19; Satyam and, 146; trust and, 146, 149, 163, 172; wage penalties and, 133; World Bank influence and, 163 Industrial Revolution, 27, 149, 290, 297 inequality, 4–5, 11, 17, 84, 306n19, 308n34; Bush and, 127–28; consequences for growth, 135–36; decline in trust and, 139–44; dramatic increase in, 126–27, 131; extraction ratio for, 124; fairness and, 114–16, 122–43; fractal character of, 134; Gini coefficient and, 126; globalization and, 122–24, 127, 131, 155; happiness and, 25, 36, 42, 44, 53; high salaries and, 130, 143–44, 193, 223, 277–78, 286, 296; historical perspective on, 126–27; institutions and, 116, 127–31, 141; measurement of, 126; policy recommendations for, 267, 276, 295–97; poverty and, 43, 55–56, 100, 125, 128, 138, 142, 168–69, 261, 267; reduction of, 276–77; Republican administrations and, 127–28; social corrosiveness of, 139–44; structural causes of, 131–35; superstar effect and, 134; taxes and, 115–16, 123, 127–28, 131, 135–36; trends in, 125–30; unequal countries and, 124–30; United Kingdom and, 125–30; United States and, 122, 125–31, 135, 276; values and, 223–24, 234–36; well-being and, 137–43; within/between countries, 123–24 inflation, 37, 43, 61, 89, 102–5, 110–11, 189, 281, 305n17 information and communication technology (ICT), 6–7, 15, 17; data explosion and, 205, 291; decreased cost of, 254; fairness and, 133; happiness and, 24–25; institutional impacts of, 252–53; structural effects of, 194–98; trust and, 156–60, 165–67, 174 innovation, 6–7, 12; consumer electronics and, 36–37; fairness and, 121, 134; growth and, 271–73, 281, 290–92; happiness and, 37; institutions and, 244, 258, 263, 290–91; measurement and, 183, 196, 201–8, 273–74; musicians and, 195; nature and, 69–70, 81; policy recommendations for, 290–91; posterity and, 102; statistics and, 201–7; trust and, 157; values and, 210, 216, 220, 236 In Praise of Slowness, 27 institutions, 18; anomie and, 48, 51; balance and, 12–17; blindness of to financial crises, 87–88; broad framework for, 249–52; capitalism and, 240; consumption and, 254, 263; decentralization and, 246; democracy and, 242–43, 251–52, 262; downsizing and, 175, 246, 255; economies of scale and, 253–58; efficiency and, 245–46, 254–55, 261; extinction crisis and, 288; face-to-face contact and, 7, 147, 165–68; failures of, 240–44, 257, 262–63, 267, 289–90; fall of communism and, 226, 239–40, 252; freedom and, 244, 262; globalization and, 244; governance and, 242, 247, 255–58, 261–62; government and, 240–63; growth and, 258, 261, 263; health care and, 247, 252–53; high salaries and, 130, 143–44, 193, 223, 277–78, 286, 296; impact of new technologies and, 252–54; importance of, 261–63; inequality and, 116, 127–31, 141; innovation and, 244, 258, 263, 290–91; legitimacy and, 8, 16, 50, 66, 68–69, 162–63, 213, 226, 269, 274, 292, 296–97; managerialism and, 259; morals and, 254; nature and, 66–69, 82–84; New Public Management and, 245–47; outsourcing and, 159, 161, 175, 219, 287; policy recommendations for, 269, 284–91; politics and, 239–48, 251, 256–63; pollution and, 15, 35, 228; productivity and, 244–47, 257, 263; public choice theory and, 242–43; public deliberation and, 258–60; reform and, 245–48, 256, 285, 288–91, 296–97; responsibility to posterity and, 296; shareholders and, 145, 248, 257–58, 277; statistics and, 245; technology and, 244–46, 251–54, 257–63 (see also technology); values and, 240–42, 246–47, 258–60 intangible assets: measurement and, 199–201, 204–6; satellite accounts and, 38, 81, 204–6, 271; social capital and, 149–52, 157, 161, 199–201 InterAcademy Council, 66–67 interbank market, 1–2 Intergovernmental Panel on Climate Change (IPCC), 59, 66–69, 82, 297 International Monetary Fund (IMF), 90, 101–3, 111, 162–64, 176, 211, 287, 297 International Price Comparison, 124 International Telecommunications Union, 219 Internet, 155, 195, 245, 260, 273, 287–89, 291, 296 invisible hand, 209 iPods, 195 Ipsos Mori poll, 66, 247 Ireland, 172 Iron Curtain, 183, 239, 252 Italy, 95, 97–98, 146, 152 Jackson, Michael, 198 Japan, 42; debt of, 102; equal income distribution in, 125; fairness and, 125–26, 140–41; inequality and, 126; lost decade of, 102; posterity and, 91–92, 95, 97–98, 102; savings rates in, 280; trust and, 169, 175; voter turnout and, 175 Jazz Age, 127 Jefferson, Thomas, 184, 253–54 Johns, Helen, 41 Johnson, Simon, 256–57 Johnson, Steven, 187 Justice (Sandel), 237 Kahneman, Daniel, 215 Kamarck, Elaine, 247–48 Kay, John, 139, 245–46, 257 Kennedy School of Government, 247 Keynes, John Maynard, 101, 183–84, 190 Kleinwort, Dresdner, 87 knowledge economy, 191 Kobayashi, Keiichiro, 102 Korea, 126 Krugman, Paul, 100–103, 127–29, 232, 282 Kyoto Protocol, 62–64 labor: absorbing work and, 10, 48–49; call centers and, 131, 133, 161; creativity and, 166–68, 205–7; downsizing and, 175, 246, 255; global cities and, 165–70; globalization and, 131, 149 (see also globalization); human capital and, 81, 203–4, 282; measurement and, 189–99; migration and, 108–10, 172; outsourcing and, 159, 161, 175, 219, 287; pensions and, 4, 25, 85–86, 90, 92–100, 103–7, 111–13, 174–76, 191, 203, 243, 269–71, 275, 280, 286, 289–90, 293; Protestant work ethic and, 13–14, 236; retirement age and, 94, 97–99, 106–7, 112; skilled, 132–33, 159, 166–67, 276; specialization and, 160–61; technology and, 131–33; unemployment and, 3, 10, 43, 51, 56, 89, 107, 169, 207, 212–13, 243; unions and, 15, 51, 224, 249; unskilled, 132–33, 158, 172, 193; well-being and, 137–39; Whitehall Studies and, 139 lack of control, 47, 138–39 Lawson, Neal, 26 Layard, Richard, 31, 39–40, 43 Lehman Brothers, 1, 85, 87–88, 145, 211, 275–76 Leipzig marches, 239 Leviathan (Hobbes), 114 light bulbs, 59–61 Linux, 205 Lipsky, John, 102, 111 List, John, 117 literacy, 36 Live Nation, 197 living standards, 78–79, 106, 113, 136, 151, 162, 190, 194, 267 lobbyists, 15, 71, 247, 257, 276, 285, 289, 296 Lolapaloozza, 197 Louis Vuitton, 150 Luxury Fever (Frank), 40 Mackenzie, Donald, 221 Madonna, 194 Malthusianism, 95 Mama Group, 197 managerial competence, 2, 16, 150, 209, 259 Manzi, Jim, 231–32 Mao Zedong, 10 markets: asymmetric information and, 17, 186, 214, 219–20, 229, 248, 254, 262–63; black, 225; boom–bust cycles and, 4, 22, 28, 93, 102, 106–9, 136–37, 145, 147, 213, 222–23, 233, 277, 280, 283; capitalism and, 182, 230–38 (see also capitalism); culture and, 230–38; declining population and, 86, 89–90, 95–99, 103, 113; democracy and, 230–38; deregulation and, 7, 212; evidence–based policy and, 233–34; exchange advantage and, 214; externalities and, 15, 70, 80, 211, 228–29, 249, 254; failures of, 226–30, 240–44, 257, 262–63, 267, 289–90; Fama hypothesis and, 221–22; flaws of, 215–16; fractal character of, 134; free market model and, 14, 121, 129, 182–83, 210–11, 218–24, 232, 240, 243, 251; fundamentalism for, 213; gift economy and, 205–7; interbank, 1–2; international trade and, 110, 148, 159, 163; invisible hand and, 209; mathematical models of, 214; merits of, 211–17; missing, 229; moral, 210, 213, 220–25, 230–33; music, 194–98; network effects and, 253, 258; options, 222; as organizing economy, 218; performativity and, 224–25; Protestant work ethic and, 13–14, 236; public choice theory and, 220, 242–45; public domain and, 196; rational calculation and, 214–15; satellite accounts and, 81; shorting of, 86; social, 217–20; stability issues and, 2–4, 25, 70, 101, 124, 135, 140–41, 174, 176, 218, 296; trilemma of, 230–38; values and, 209–10 (see also values); winner take all, 134 Marx, Karl, 14, 28, 131, 221 McDonalds, 27 McKitrick, Ross, 68 Mean Fiddler Group, 197 Measuring Australia’s Progress, 274 measurement: asymmetric information and, 17, 186, 214, 219–20, 229, 248, 254, 262–63; Australian model and, 271, 274; balance and, 12–17; bankers and, 193, 200; capitalism and, 182; challenges of, 188–93; consumption and, 181–82, 198; distribution and, 191–99; evidence–based policy and, 233–34; GDP, 10 (see also gross domestic product [GDP]); Gini coefficient and, 126; governance and, 183, 186; government and, 182–88, 191, 193, 196, 202–3, 206; growth and, 181–85, 188–90, 194, 201–5, 208; happiness and, 35–39; health issues and, 181, 188–93, 200, 207; hedonic techniques and, 274; importance of, 184–85, 187–89; of inequality, 126; innovation and, 183, 196, 201–8, 273–74; intangible assets and, 199–201, 204–6; labor and, 189–99; less publication of, 271–72; living standards and, 13, 65, 78–79, 106, 113, 136, 139, 151, 162, 190, 194, 267; Measuring Progress exercise and, 294; policy recommendations for, 270–74; politics and, 182–84, 191, 193, 203, 208; productivity and, 189–90, 194, 199–201, 206–7; resources for, 294; social capital and, 154; statistics and, 187–89, 198–208; technology and, 181–85, 188–91, 194–201, 204–6; time constraints and, 204–7; trust and, 152–57; uncertainty of accuracy and, 273; unmeasurable entities and, 187; values and, 209, 212–13, 224 Medicare, 93–94 Meek, James, 26 metrification, 184 Metropolitan Museum of Art symposium, 100–101 Mexico, 226 Microsoft, 253, 258 migration, 108–10, 172 Milanovic, Branko, 123–24 Mill, John Stuart, 31–32 Minsky, Hyman, 226 monopolies, 196, 245, 252, 254 Montreal Protocol, 59 Moore’s Law, 156 morals: bankers and, 90, 277–78; criticism of poor and, 142; fairness and, 116–20, 127, 131, 142, 144; greed and, 221 (see also greed); growth and, 275–76, 279, 293, 295, 297; happiness and, 22, 26, 30, 34, 43, 48–49; institutions and, 254; nature and, 55, 70–72, 76, 78; performativity and, 224–25; posterity and, 90; trust and, 149, 174; values and, 185, 210, 213, 220–25, 230–33 MP3 players, 195 music, 11, 194–98, 204, 208, 229, 254 nature: Brundtlandt Report and, 77; carbon prices and, 70–71; climate change and, 57–84 (see also climate change); consumption and, 58–61, 71–76, 79, 82; Copenhagen summit and, 62, 64–65, 68, 162, 292; democracy and, 61, 66, 68; efficiency and, 61–62, 69, 82; environmentalists and, 29, 55–59, 69–70, 99; freedom and, 79; future and, 75–83; global warming and, 57, 64, 66, 68; government and, 58–62, 65–71, 82–84; greenhouse gases and, 23, 29, 35, 59, 61–63, 68, 70–71, 83; green lifestyle and, 55, 61, 76, 289, 293; gross domestic product (GDP) and, 56–60, 75–76, 80–82; growth and, 56–59, 62–66, 69–72, 76, 79–82; happiness and, 56–59, 75–76, 80–84; health issues and, 81; hybrid cars and, 61; innovation and, 69–70, 81; institutions and, 66–69, 82–84; InterAcademy Council and, 66–67; Intergovernmental Panel on Climate Change (IPCC) and, 59, 66–69, 82, 297; Kyoto Protocol and, 62–64; light bulbs and, 59–61; Montreal Protocol and, 59; morals and, 55, 70–72, 76, 78; natural capital and, 79–81, 151, 271, 273; philosophy and, 69–70; plastic and, 61; politics and, 57–71, 75, 77, 82–84; population issues and, 99; productivity and, 78, 82; satellite accounts and, 81; self-interest and, 65; squandered natural wealth and, 181–82; statistics and, 66, 81–82; stewardship and, 78, 80; technology and, 69–72, 76–77, 80, 84; TEEB project and, 78–79 network effects, 253, 258 New Deal, 129 New Economics Foundation, 36 New Public Management theory, 245–47 Newton, Isaac, 214–15 Niger, 122 Nobel Prize, 18, 60, 102, 215, 220, 236, 250, 261 noise, 47 No Logo (Wolf), 34 Nordhaus, William, 37, 70, 73, 156 North, Douglass, 261 Northern Rock, 1, 146 Obama, Barack, 62–63, 87, 173, 260, 285, 288 Oberholzer-Gee, Felix, 197 obesity, 137–38, 279 Office for National Statistics, 274 Olson, Mancur, 242 opinion formers, 61 option pricing theory, 222 Orchestra of the Age of Enlightenment, 194 Organization for Economic Cooperation and Development (OECD), 4, 11, 201, 305n11; happiness and, 38, 52; inequality in, 125–26; nature and, 60, 68; policy recommendations for, 273–74, 281, 283, 287, 291, 293; posterity and, 87, 93–94, 97–99, 112; trust and, 160, 171; values and, 212, 243–44, 246 organized crime, 277 Ormerod, Paul, 41 Orwell, George, 56 Ostrom, Elinor, 17, 220, 250–51, 261–63 Pakistan, 81, 226 Paradox of Choice, The (Schwartz), 10–11, 40 Parmalat, 146 partisanship, 2, 16, 101, 128, 269, 285 Peake, Mervyn, 9 pensions, 4, 25, 243; burden of, 92–95; Chinese savings and, 94; measurement and, 191, 203; policy recommendations for, 269–71, 275, 280, 286, 289–90, 293; posterity and, 85–86, 90–100, 103–7, 111–13; retirement age and, 92, 97–99, 106–7, 112; trust and, 174–76 performativity, 224–25 Persson, Torsten, 136 Pew surveys, 140 philanthropy, 33 philosophy, 16; fairness and, 114–15, 123; freedom and, 237; happiness and, 21, 27, 31–32, 49–50; nature and, 69–70; utilitarian, 31–32, 78, 237; values and, 237–39 Pickett, Kate, 137–40 Piereson, James, 183 Piketty, Thomas, 127, 129 Pimco, 287 Pinch (Willetts), 98–99 Pinker, Steven, 118, 305n4 Poland, 239 police service, 5, 35, 163, 193, 200, 247 policy: Commission on the Measurement of Economic Performance and Social Progress and, 37–38; deregulation and, 7, 212; errors in standard, 8; evidence–based, 233–34; first ten steps for, 294–98; future and, 75–83, 291–98; Intergovernmental Panel on Climate Change (IPCC) and, 59, 66–69, 82, 297; legitimacy and, 8, 16, 50, 66, 68–69, 162–63, 213, 226, 269, 274, 292, 296–97; measurement and, 187–89; OECD countries and, 4, 11, 38, 52, 60, 68, 87, 93–94, 97–99, 112, 125–26, 160, 171, 201, 212, 243–44, 246, 273–74, 281, 283, 287, 291, 293; population growth and, 95–100; practical recommendations for, 269–91; reform and, 8, 82–83, 85 (see also reform); stability issues and, 2–4, 25, 70, 101, 124, 135, 140–41, 174, 176, 218, 296; stimulus packages and, 91, 100–103, 111; sustainability and, 57 (see also sustainability); tradition and, 9; transparency and, 83, 164, 288, 296; trilemma of, 13–14, 230–36, 275; World Forum on Statistics, Knowledge, and Policy and, 38 political correctness, 173, 231 political economy, 27–28 pollution, 15, 35, 228 Population Bomb, The (Ehrlich), 70 population issues: aging, 4, 95–100, 106, 109, 206, 267, 280, 287, 296; baby boomers and, 4, 106, 109; declining population and, 86, 89–90, 95–99, 103, 113; demographic implosion and, 95–100; environmentalists and, 99; global cities and, 165–70; Malthusianism and, 95; migration and, 108–10; one-child policy and, 95–96; posterity and, 89–90, 94–95, 105–6, 109, 112–13; retirement age and, 94, 97–99, 106–7, 112 Porter, Roy, 184 Portugal, 126, 287 posterity, 298; aging population and, 89–90, 94–95, 105–6, 109, 112–13; bankers and, 85–91, 94, 99–102; consumption and, 86, 104–6, 112–13; current generation’s debt to, 90–92, 112–13; declining population and, 86, 89–90, 95–99, 103, 113; default and, 110–12; democracy and, 106; demographic implosion and, 95–100; freedom of investors and, 108; globalization and, 108; government and, 84–95, 98–113; gross domestic product (GDP) and, 91–94, 98–99, 103, 108, 111; growth and, 90, 95, 97, 99, 102, 105–8, 111; health issues and, 89, 93–94, 97–99, 103, 106, 111–13; higher retirement age and, 94–98, 106–7, 112; innovation and, 102; institutional responsibility and, 296; less leisure and, 106–7; Medicare and, 93–94; migration and, 108–9; morals and, 90; pensions and, 85–86, 90, 92–100, 103–7, 111–13; politics and, 86–94, 98, 101–8, 111–13; poverty and, 100; productivity and, 88, 97–99, 102, 105–8, 112; public debt and, 85–86; reform and, 85–86, 98, 111–12; savings and, 86–87, 94, 98, 100–101, 105–8, 112; Social Security and, 93–94; social welfare and, 85, 100, 112; sustainability and, 79 (see also sustainability); taxpayer burden and, 85–91, 94, 99, 103–5; technology and, 107; welfare burden and, 92–95 poverty, 261, 267; desire to spend and, 55–56; fairness and, 125, 128, 138, 142; happiness and, 43; posterity and, 100; trust and, 168–69 printing press, 7 productivity, 16; balance and, 268, 271, 273–76, 281, 287; bureaucratic obstacles to, 285–86; Commission on the Measurement of Economic Performance and Social Progress and, 37–38; fairness and, 131, 135; globalization and, 131 (see also globalization); governance and, 173–77; happiness and, 27, 38, 42, 51; improvements in, 107–8; institutions and, 244–47, 257, 263; measurement and, 189–90, 194, 199–201, 206–7; nature and, 78, 82; posterity and, 88, 97–99, 102, 105–8, 112; public services and, 257; Soviet method and, 246; technology and, 107–8, 157–59, 268; trilemma of, 13–14, 230–36, 275; trust and, 156–59, 162, 166–67, 170, 174 property rights, 80, 174, 195–96, 261 Protestant work ethic, 13–14, 236 psychology: altruism and, 118–22; anomie and, 48, 51; anxiety and, 1, 25, 47–48, 136–38, 149, 174; behavioral economics and, 116–17, 121, 282; choice and, 10–11; coherence and, 49; commuting and, 47; conflict in relationships and, 47; Easterlin Paradox and, 39–44; face-to-face contact and, 7, 147, 165–68; freedom and, 237 (see also freedom); game theory and, 116–18, 121–22; gift economy and, 205–7; greed and, 26, 34, 54, 88, 129, 150, 221–23, 248, 277–79; happiness and, 9–12, 44–50 (see also happiness); lack of control and, 47; noise and, 47; paradox of prosperity and, 174; positive, 9–10, 49–50, 303n51; public choice theory and, 220, 242–45; rational choice theory and, 214–15; shame and, 47; Slow Movement and, 27–28, 205; thrift education and, 283–84, 294–95; well-being and, 137–43 Ptolemy, 274 public choice theory, 220, 242–45 Public Domain, The (Boyle), 196 public goods, 185–86, 190, 199, 211, 229, 249, 261 purchasing power parity (PPP), 306n19 Putnam, Robert, 140–41, 152–54 Quiet Coup, The (Johnson), 256–57 Radio Corporation of America (RCA), 195 Rajan, Raghuram, 136 Rank, Robert, 40 rational choice theory, 214–15 Rawls, John, 31 Reagan, Ronald, 93, 121, 127, 211, 240, 243, 247–48 recession, 9, 11–12, 275; happiness and, 22, 24, 41, 54; nature and, 55–56, 66; plethora of books following, 55; posterity and, 85, 88, 91–93, 100–101, 108, 110; recovery from, 3, 103; trust and, 182; values and, 209–10, 213, 222 reciprocal altruism, 118–22 reform, 8; benchmark for, 218; bankers and, 277–79; bonus taxes and, 278; collective assent to, 269; courage needed for, 203; first ten steps for, 294–98; health care, 285; improving statistics and, 271; institutions and, 245–48, 256, 285, 288–91, 296–97; nature and, 82–85; New Public Management and, 245–46; politics and, 287–88; posterity and, 98, 111–12; public sector, 288–90; trust and, 162–64, 176–77; values and, 218, 233, 275–78, 295 Reinhardt, Carmen, 111 religion, 10; happiness and, 32–33, 43, 50; nature and, 76, 78; Protestant work ethic and, 13–14, 236; trust and, 147 Renaissance, 7 retirement age, 94, 97–99, 106–7, 112 revalorization, 275 Road to Wigan Pier, The (Orwell), 56 Rodrik, Dani, 136 Rogoff, Kenneth, 111 Romantic Economist, The (Bronk), 28 Romanticism, 27 Rothschilds, 147 Rousseau, Jean–Jacques, 114 Royal Bank of Scotland, 146 runs, 1 Ruskin, John, 27–28 Russia, 97–98, 123; Cold War and, 93, 112, 147, 209, 213, 239; Iron Curtain and, 183, 239, 252; production targets and, 246; as Soviet Union, 228, 246 Saez, Emmanuel, 127, 129 salaries: high, 130, 143–44, 193, 223, 277–78, 286, 296; measurement and, 191–99; paradox of, 193; superstar effect and, 134; technology and, 2, 89 Sandel, Michael, 224–25, 237 Sarkozy, Nicolas, 37, 202, 274 satellite accounts, 38, 81, 204–6, 271 Satyam, 146 savings, 1, 280–82, 293; China and, 87, 94, 100, 108; necessary increasing of, 105–6; negative, 105; policy recommendations for, 280–84; posterity and, 86–87, 94, 98, 100–101, 105, 108, 112; thrift education and, 283–84, 294–95 savings clubs, 283 Schumpeter, Joseph, 14 Schwartz, Barry, 10–11, 40 Seabright, Paul, 148–49, 170, 213–14, 228 self-interest: fairness and, 114–22; greed and, 26, 34, 54, 88, 129, 150, 221–23, 248, 277–79; moral sentiments and, 119–20, 142, 221; nature and, 65; reciprocal altruism and, 118–22; values and, 214, 221 Selfish Gene, The (Dawkins), 118 Sen, Amartya, 18, 37, 43, 82, 202, 237, 274, 310n25 shame, 47 shareholders, 88, 145, 248, 257–58, 277 Silicon Valley, 166 Simon, Herbert, 249–50, 254, 261, 270 Simon, Julian, 70 Singapore, 126 Sloan School, 256 Slow Food, 27 Slow Movement, 27–28, 205 smart cards, 252–53 Smith, Adam, 119–20, 209, 221, 255 Smith, Vernon, 215 social capital, 8, 12, 17; definition of, 152–53; fairness and, 116, 121, 139–43; intangible assets and, 149–52, 157, 161, 199–201; measurement of, 154, 185; policy recommendations for, 267, 271, 273, 276; Putnam on, 152–54; trust and, 5, 151–57, 168–74, 177; values and, 223–25, 231, 257 social justice, 31, 43, 53, 65, 123, 164, 224, 237, 286 Social Limits to Growth, The (Hirsch), 190, 231 social markets, 217–20 social networks, 260, 270, 288–89 Social Security, 93–94 social welfare.


Green Economics: An Introduction to Theory, Policy and Practice by Molly Scott Cato

Albert Einstein, back-to-the-land, banking crisis, banks create money, basic income, Bretton Woods, Buy land – they’re not making it any more, carbon footprint, central bank independence, clean water, Community Supported Agriculture, congestion charging, corporate social responsibility, David Ricardo: comparative advantage, deskilling, energy security, food miles, Food sovereignty, Fractional reserve banking, full employment, gender pay gap, income inequality, informal economy, Intergovernmental Panel on Climate Change (IPCC), job satisfaction, land reform, land value tax, Mahatma Gandhi, market fundamentalism, mortgage debt, passive income, peak oil, price stability, profit maximization, profit motive, purchasing power parity, race to the bottom, reserve currency, the built environment, The Spirit Level, Tobin tax, University of East Anglia, wikimedia commons

Its emphasis is not on competition for the cheapest but on cooperation for the best.’5 As Jeremy Seabrook writes, ‘It is time to rescue what true internationalists have always worked for from the clutches of a rapacious, expansive, colonising globalization,’ a task in which he is joined by Doreen Massey.6 The following opinion 142 GREEN ECONOMICS 35 30 25 20 15 10 5 0 Germany Canada US France UK Japan South Korea Brazil Mexico Figure 9.2 Comparison of wage rates in a selection of countries, based on purchasing power parities, 2005 (Hourly manufacturing wages in US dollars) Note: Purchasing power parities are a way of comparing the value of money in different economies in terms of their ability to buy goods, by removing the distortions caused by fluctuations in exchange rates. Source: Data from the Jus Semper Global Alliance: www.jussemper.org. from J. M. Keynes is frequently and favourably quoted by greens: I sympathize with those who would minimize, rather than with those who would maximize, economic entanglement among nations.

Citizens’ Income and people’s pensions A health service, not an illness service 171 171 173 176 179 181 183 12 Land and the Built Environment Land and economics Taxing land Building on land Growing on the land 187 187 190 193 197 13 Summary and Further Resources 205 Index 219 List of Photographs, Figures, Tables and Boxes PHOTOGRAPHS 1.1 2.1 The men who devised the existing financial system 4 James Robertson with his wife and co-worker Alison Pritchard 22 2.2 Richard Douthwaite 28 3.1 The author modelling a ‘bioregional hat’ 43 3.2 The convivial economy: Stroud farmers’ market 44 4.1 Crests of the London livery companies associated with textiles 67 5.1 Labour note as used at Owen’s Equitable Labour Exchange in 1833 73 5.2 Chiemgauer note, showing the stamps that have to be added to preserve its value over time 82 6.1 Conviviality: Building the bread oven at Springhill co-housing, June 2008 100 9.1 Stroud farmers’ market 144 9.2 The Cuban ‘camel’: Improvised urban public transport in Havana 153 12.1 Springhill Co-housing, Stroud 197 12.2 Stroud Community Agriculture: Weeding in the cabbage path 200 FIGURES 1.1 2.1 2.2 3.1 3.2 3.3 5.1 Widening the consideration of economics beyond the classical economists’ ‘circular flow’ Hazel Henderson’s illustration of the love economy The relationship between economic activity and carbon dioxide emissions Three is a magic number: Re-imaging the relationship between society, economy and environment Permaculture flower Rainwater harvesting system for a domestic property Total debt service of low- and middle-income countries, 1990–2005 6 27 29 37 47 49 76 x 5.2 6.1 7.1 7.2 7.3 7.4 8.1 8.2 8.3 9.1 9.2 9.3 9.4 10.1 11.1 11.2 11.3 12.1 12.2 12.3 12.4 GREEN ECONOMICS Growth in broad money (M4) compared with growth in the economy (GDP), UK, 1970–2001 The carbon cycle The Passivhaus Illustration of the contraction and convergence model for global CO2 emissions reductions Sharing of ‘universal dividend’ from sale of carbon permits and its impact on incomes in different groups of the US population A comparison of GDP and ISEW in the UK, 1950–2002 Fair trade sales in the leading consumer countries in 2006 and 2007 Relationship between growth in trade and growth in CO2 emissions Production grid illustrating trade subsidiarity Trade gap in agricultural products in the UK, 1990–2005 Comparison of wage rates in a selection of countries, based on purchasing power parities, 2005 NEF’s image of the ‘leaky bucket’ local economy Margaret Legum’s design for building prosperity globally Revenues from environmentally related taxes as a percentage of GDP in various OECD countries Relationship between infant mortality and carbon dioxide emissions Human well-being and sustainability: Ecological footprint and Human Development Index compared, 2003 Illustration of the ability to provide for one’s individual needs over the productive life-course Equity creation through a CLT Agricultural and economic systems of sustainable agriculture Percentage of energy used in different aspects of food production and distribution The turning of the year: The annual cycle of growing and celebration on the land source 79 99 108 111 112 118 129 130 132 141 142 146 154 167 175 178 183 196 198 199 201 TABLES 1.1 1.2 1.3 3.1 Comparison of different strands of economics with a concern for the environment Ecological footprinting and shadow pricing compared The negative consequences of economic growth for quality of life Comparison between the HE (hyper-expansionist) and SHE (sane, humane, ecological) possible futures 8 9 10 41 LIST OF PHOTOGRAPHS, FIGURES, TABLES AND BOXES 3.2 3.3 6.1 7.1 7.2 7.3 7.4 8.1 10.1 10.2 10.3 10.4 10.5 10.6 12.1 Indicators of consumption and population in different regions of the world Valuation of activities and functions within the patriarchal economy Success of various sectors within a low-carbon economy Percentage of firms engaged in various waste-management activities in UK and Germany, 2001 Comparison of costs to society of various psychological ‘escape routes’ compared with spending in various areas, UK c. 2001 Additions and subtractions from GDP to arrive at the ISEW HDI and HPI rankings for the G8 countries and other nations with high gross GDP Changes in the terms of trade of some country groups, 1980–1982 to 2001–2003 Share of UK wealth owned by different sectors of the population Impact of the congestion charge on traffic in London Examples of environmental taxes and charges Types of installations resulting in tax credits for Oregon citizens in 2006 Examples of ecotaxes in a range of EU countries Revenue from environmental taxes in the UK, 1993–2006 Experiences with LVT in various countries xi 45 46 99 109 116 118 120 127 160 163 165 166 166 167 192 BOXES 1.1 3.1 3.2 4.1 4.2 4.3 5.1 5.2 5.3 5.4 6.1 6.2 6.3 6.4 Inequality in the UK, 1994–2004 Sustainability values Douthwaite’s criteria for ‘green’ growth Creating a million extra jobs through a green industrial revolution Policies to encourage voluntarism and self-help The expansion of worker cooperatives in Argentina Traditional money in Vanuatu The parable of the South African talents The Chiemgauer local currency in Chiemgau, Germany New Zealand’s complementary currencies Shell and CSR: A cynical view Cooperation for sustainability: The alternative food economy in the UK Principles of production to match the metabolism of the natural world Principles for achieving sustainability according to the Natural Step 3 36 40 58 64 65 77 81 82 84 93 95 97 100 xii 7.1 7.2 8.1 8.2 8.3 9.1 9.2 9.3 9.4 9.5 10.1 10.2 10.3 11.1 12.1 12.2 12.3 12.4 12.5 GREEN ECONOMICS The European Union Packaging Directive Norway’s experience with national resource accounting Trade and inequality The fight-back: Trade-related direct action in India Key provisions of the General Agreement on Sustainable Trade Provisions of the UK’s Sustainable Communities Act (2007) Essential features of a sustainable territory The Thames Gateway Development as an example of a non-self-reliant community A sufficiency economy in Thailand Kirkpatrick Sale’s essential elements to guide a bioregional economy The London congestion charge Energy tax credit programme in Oregon, US Pesticide taxation in Scandinavia Enduring terrors: The war against terror in global context MST: The land rights campaign in Brazil Land tax in Australia Co-housing in Denmark The principles of permaculture Stroud Community Agriculture 109 119 127 133 135 145 147 148 149 151 163 166 167 179 189 192 197 199 200 Acknowledgements My first and deepest gratitude must be for all those, named and unnamed, who have taxed their minds and spirits to clear the path towards a way of living more comfortably within our environment.


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How to Speak Money: What the Money People Say--And What It Really Means by John Lanchester

asset allocation, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, blood diamonds, Bretton Woods, BRICs, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collective bargaining, commoditize, creative destruction, credit crunch, Credit Default Swap, crony capitalism, Dava Sobel, David Graeber, disintermediation, double entry bookkeeping, en.wikipedia.org, estate planning, financial innovation, Flash crash, forward guidance, Gini coefficient, global reserve currency, high net worth, High speed trading, hindsight bias, income inequality, inflation targeting, interest rate swap, Isaac Newton, Jaron Lanier, joint-stock company, joint-stock limited liability company, Kodak vs Instagram, liquidity trap, London Interbank Offered Rate, London Whale, loss aversion, margin call, McJob, means of production, microcredit, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, negative equity, neoliberal agenda, New Urbanism, Nick Leeson, Nikolai Kondratiev, Nixon shock, Northern Rock, offshore financial centre, oil shock, open economy, paradox of thrift, plutocrats, Plutocrats, Ponzi scheme, purchasing power parity, pushing on a string, quantitative easing, random walk, rent-seeking, reserve currency, Richard Feynman, Right to Buy, road to serfdom, Ronald Reagan, Satoshi Nakamoto, security theater, shareholder value, Silicon Valley, six sigma, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, sovereign wealth fund, Steve Jobs, survivorship bias, The Chicago School, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, trickle-down economics, Washington Consensus, wealth creators, working poor, yield curve

Big Mac index The Economist’s attempt to answer the question of how expensive it is to live in different countries. Since currencies, living costs, food, rents, wages, and many other factors vary so much from place to place, how can you reliably compare the cost of living? The magazine’s answer: by using the price of something that is in essence the same everywhere, the Big Mac. In economics, the thing they’re trying to measure is called purchasing power parity, or PPP, i.e., how much you can buy in different places with a given amount of money. (That might sound an easy thing to measure, but establishing agreed figures for PPP in fact involves a huge international survey in which thousands of economists fan out all over the world collecting and collating data.) There used to be something called the Mars bar index, which tried to do something similar with the effect of inflation in the UK, but one of the problems with it is that Mars bars (unlike Big Macs) have changed size over time.21 See if, without looking at it, you can guess the most and least expensive countries in the world.

It is a measure of how rich the country’s citizens are on average—though it is a very very rough measure of that, since a country’s wealth is often very unevenly distributed. Also, a country’s population could be rising sharply so that its GDP in total is going up even as each individual citizen is becoming poorer. The list of countries in order of total GDP and GDP per capita is interestingly different. Data are from the IMF for 2012, adjusted for purchasing power parity (which is why it’s different from the G8 list above): GDP per capita GDP total 1. Qatar 1. EU 2. Luxembourg 2. USA 3. Singapore 3. China 4. Norway 4. Japan 5. Brunei 5. Germany 6. Hong Kong 6. France 7. United States 7. UK 8. United Arab Emirates 8. Brazil 9. Switzerland 9. Russia 10. Canada 10. Italy 11. Australia 11. India 12. Austria 12.

Still, the United States had very rocky banks before Glass-Steagall was brought in, and has had very rocky banks since Glass-Steagall was repealed, so maybe it’s right to draw the obvious conclusion—that the period when Glass-Stegall was in force was safer for banks. GDP world The total GDP of the world—so that would be all the economic activity on Earth—is $71,830 billion, or $71.83 trillion. This is according to the CIA, so it must be true.41 Note that the number adjusted for purchasing power parity is $83,120 billion. Planetary GDP per capita is $12,700, the unemployment rate is 8 percent, the employment balance is 35.3 percent work in agriculture, 22.7 percent in industry, and 42 percent in everything else, or, in economist-speak, “services.” The world’s total burden of debt, government and personal and corporate all added together, is 313 percent, or $223.3 trillion. That means our planet has the equivalent of a mortgage three times its income.


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23 Things They Don't Tell You About Capitalism by Ha-Joon Chang

"Robert Solow", affirmative action, Asian financial crisis, bank run, banking crisis, basic income, Berlin Wall, Bernie Madoff, borderless world, Carmen Reinhart, central bank independence, collateralized debt obligation, colonial rule, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, deskilling, ending welfare as we know it, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, full employment, German hyperinflation, Gini coefficient, hiring and firing, Hyman Minsky, income inequality, income per capita, invisible hand, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, labour market flexibility, light touch regulation, Long Term Capital Management, low skilled workers, manufacturing employment, market fundamentalism, means of production, Mexican peso crisis / tequila crisis, microcredit, Myron Scholes, North Sea oil, offshore financial centre, old-boy network, post-industrial society, price stability, profit maximization, profit motive, purchasing power parity, rent control, shareholder value, short selling, Skype, structural adjustment programs, the market place, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, Toyota Production System, trade liberalization, trickle-down economics, women in the workforce, working poor, zero-sum game

Index active economic citizenship xvi, xvii Administrative Behaviour (Simon) 173–4 Africa see Sub-Saharan Africa AIG 172–3 Air France 131 AOL 132–3 apartheid 214–16 Argentina education and growth 181 growth 73 hyperinflation 53–4 Austria geography 121 government direction 132 protectionism 70 balance of payments 97–100, 101 Baldursson, Fridrik 235 Bangladesh entrepreneurship 159–60 and microfinance 161–2, 163, 164 Bank of England 252 (second) Bank of the USA 68 Bank for International Settlements (BIS) 262 bankruptcy law 227–8 Barad, Jill 154 Bard College 172 Bateman, Milford 162 Baugur 233 Baumol, William 250 Bebchuk, Lucian 154 behaviouralist school 173–4 Belgium ethnic division 122 income inequality 144, 146 manufacturing 70, 91 R&D funding 206 standard of living 109 Benin, entrepreneurship 159 Bennett, Alan 214 Besley, Tim 246 big government 221–2, 260–61 and growth 228–30 see also government direction; industrial policy BIS (Bank for International Settlements) 262 Black, Eugene 126 Blair, Tony 82, 143, 179 borderless world 39–40 bounded rationality theory 168, 170, 173–7, 250, 254 Brazilian inflation 55 Britain industrial dominance/decline 89–91 protectionism 69–70 British Academy 246–7 British Airways 131 brownfield investment 84 Brunei 258 Buffet, Warren 30, 239 Bukharin, Nikolai 139 Bunning, Senator Jim 8 Burkina Faso (formerly Upper Volta) 121, 200 Bush, George W. 8, 158, 159, 174 Bush Sr, George 207 business sector see corporate sector Cameroon 116 capital mobility 59–60 nationality 74–5, 76–7 capitalism Golden Age of 142, 147, 243 models 253–4 capitalists, vs. workers 140–42 captains of industry 16 Carnegie, Andrew 15 Case, Steve 132–3 Cassano, Joe 172–3 CDOs (collateralized debt obligations) 238 CDSs (credit default swaps) 238 CEO compensation see executive pay, in US Cerberus 77–8 Chavez, Hugo 68 chess, complexity of 175–6 child-labour regulation 2–3, 197 China business regulation 196 communes 216 economic officials 244 industrial predominance 89, 91, 93, 96 as planned economy 203–4 PPP income 107 protectionism and growth 63–4, 65 Chocolate mobile phone 129 Chrysler 77–8, 191 Chung, Ju-Yung 129 Churchill, Winston 253 climate factors 120–21 Clinton, Bill 143 cognitive psychology 173–4 collateralized debt obligations (CDOs) 238 collective entrepreneurship 165 communist system 200–204 Concorde project 130–31 conditions of trade 5 Confucianism 212–13 Congo (Democratic Republic) 116, 121 consumption smoothing 163 cooperatives 166 corporate sector importance 190–91 planning in 207–9 regulation effect 196–8 suspicion of 192–3 see also regulation; transnational corporations Cotton Factories Regulation Act 1819 2 credit default swaps (CDSs) 238 Crotty, Jim 236–8 culture issues 123, 212–13 Daimler-Benz 77–8 Darling, Alistair 172 de-industrialization 91 balance of payments 97–100, 101 causes 91–6 concerns 96–9 deflation, Japan 54 deliberation councils 134 Denmark cooperatives 166 protectionism 69 standard of living 104, 106, 232–3 deregulation see under regulation derivatives 239 Detroit car-makers 191–2 developing countries entrepreneurship and poverty 158–60 and free market policies 62–3, 71–3, 118–19, 261–2 policy space 262–3 digital divide 39 dishwashers 34 distribution of income see downward redistribution of income; income irregularity; upward redistribution of income domestic service 32–3 double-dip recession xiii downward redistribution of income 142–3, 146–7 Dubai 235 Duménil, Gérard 236 East Asia economic officials 249–50 educational achievements 180–81 ethnic divisions 122–3 government direction 131–2 growth 42, 56, 243–4 industrial policy 125–36, 205 École Nationale d’Administration (ENA) 133 economic crises 247 Economic Policy Institute (EPI) 144, 150 economists alternative schools 248–51 as bureaucrats 242–3 collective imagination 247 and economic growth 243–5 role in economic crises 247–8 Ecuador 73 Edgerton, David 37 Edison, Thomas 15, 165, 166 education and enterprise 188–9 higher education effect 185–8 importance 178–9 knowledge economy 183–5 mechanization effect 184–5 outcome equality 217–18 and productivity 179–81 relevance 182–3 Elizabeth II, Queen 245–7 ENA (École Nationale d’Administration) 133 enlightened self-interest 255–6 entrepreneurship, and poverty 157–8 and collective institutions 165–7 as developing country feature 158–60 finance see microfinance environmental regulations 3 EPI (Economic Policy Institute) 144, 150 equality of opportunity 210–11, 256–7 and equality of outcome 217–20, 257 and markets 213–15 socio-economic environment 215–17 equality of outcome 217–20 ethnic divisions 122–3 executive pay and non-market forces 153–6 international comparisons 152–3 relative to workers’ pay 149–53, 257 US 148–9 fair trade, vs. free trade 6–7 Fannie Mae 8 Far Eastern Economic Review 196 Federal Reserve Board (US) 171, 172, 246 female occupational structure 35–6 Fiat 78 financial crisis (2008) xiii, 155–6, 171–2, 233–4, 254 financial derivatives 239, 254–5 financial markets deregulation 234–8, 259–60 effects 239–41 efficiency 231–2, 240–41 sector growth 237–9 Finland government direction 133 income inequality 144 industrial production 100 protectionism 69, 70 R&D funding 206 welfare state and growth 229 Fischer, Stanley 54 Ford cars 191, 237 Ford, Henry 15, 200 foreign direct investment (FDI) 83–5 France and entrepreneurship 158 financial deregulation 236 government direction 132, 133–4, 135 indicative planning 204–5 protectionism 70 Frank, Robert H 151 Franklin, Benjamin 65–6, 67 Freddie Mac 8 free market boundaries 8–10 and developing countries 62–3, 71–3, 118–19, 261–2 labour see under labour nineteenth-century rhetoric 140–43 as political definition 1–2 rationale xiii–xiv, 169–70 results xiv–xv, xvi–xvii system redesign 252, 263 see also markets; neo-liberalism free trade, vs. fair trade 6–7 Fried, Jesse 154 Friedman, Milton 1, 169, 214 Galbraith, John Kenneth 16, 245 Garicano, Luis 245 Gates, Bill 165, 166, 200 General Electric (GE) 17, 45, 86, 237 General Motors Acceptance Corporation (GMAC) 194, 237 General Motors (GM) 20, 22, 45, 80, 86, 154, 190–98 decline 193–6 financialization 237 pre-eminence 191–2 geographical factors 121 Germany blitzkrieg mobility 191 CEO remuneration 152–3 cooperatives 166 emigration 69 hyperinflation 52–4 industrial policy 205 manufacturing 90 R&D funding 206 welfare state and growth 228–9 Ghana, entrepreneurship 159 Ghosn, Carlos 75–6, 78 globalization of management 75–6 and technological change 40 GM see General Motors GMAC (General Motors Acceptance Corporation) 194, 237 Golden Age of Capitalism 142, 147, 243 Goldilocks economy 246 Goodwin, Sir Fred 156 Gosplan 145 government direction balance of results 134–6 and business information 132–4 failure examples 130–31 and market discipline 44–5, 129–30, 134 share ownership 21 success examples 125–6, 131–4 see also big government; industrial policy Grameen Bank 161–4 Grant, Ulysses 67 Great Depression 1929 24, 192, 236, 249, 252 greenfield investment 84 Greenspan, Alan 172, 246 Hamilton, Alexander 66–7, 69 Hayami, Masaru 54 Hennessy, Peter 246–7 higher education 185–8 Hirschman, Albert 249 History Boys (Bennett) 214 Hitler, Adolf 54 home country bias 78–82, 83, 86–7 Honda 135 Hong Kong 71 household appliances 34–6, 37 HSBC 172 Human relations school 47 Hungary, hyperinflation 53–4 hyperinflation 52–4 see also inflation Hyundai Group 129, 244 Iceland financial crisis 232–4, 235 foreign debt 234 standard of living 104–5 ICT (Information and Communication Technology) 39 ILO (International Labour Organization) 32, 143–4 IMF see International Monetary Fund immigration control 5, 23, 26–8, 30 income per capita income 104–11 see also downward redistribution of income; income inequality; upward redistribution of income income inequality 18, 72–3, 102, 104–5, 108, 110, 143–5, 147, 247–8, 253, 262 India 99, 121 indicative planning 205 indicative planning 204–6 Indonesia 234 industrial policy 84, 125–36, 199, 205, 242, 259, 261 see also government direction Industrial Revolution 70, 90, 243 infant industry argument 66–8, 69–70, 71–2 inflation control 51–2 and growth 54–6, 60–61 hyperinflation 52–4 and stability 56–61 Information and Communication Technology (ICT) 39 institutional quality 29–30, 112–13, 115, 117, 123–4, 165–7 interest rate control 5–6 international dollar 106–7 International Labour Organization (ILO) 32, 143–4 International Monetary Fund (IMF) 54–5, 57, 66, 72, 244, 262 SAPs 118 International Year of Microcredit 162 internet revolution 31–2 impact 36–7, 38, 39 and rationality 174 investment brownfield/greenfield 84 foreign direct investment 83–5 share 18–19 invisible reward/sanction mechanisms 48–50 Ireland financial crisis 234–5 Italy cooperatives 166 emigrants to US 103 Jackson, Andrew 68 Japan business regulation 196 CEO remuneration 152–3 deflation 54 deliberation councils 134 government direction 133–4, 135, 259 indicative planning 205 industrial policy 131, 135, 242–5 industrial production 100 production system 47, 167 protectionism 62, 70 R&D funding 206 Jefferson, Thomas 67–8, 239 job security/insecurity 20, 58–61, 108–9, 111, 225–8, 247, 253, 259 Journal of Political Economy 34 Kaldor, Nicolas 249 Keynes, John Maynard 249 Kindleberger, Charles 249 knowledge economy 183–5 Kobe Steel 42–3, 46 Kong Tze (Confucius) 212 Korea traditional 211–13 see also North Korea; South Korea Koufax, Sandy 172 Kuwait 258 labour free market rewards 23–30 job security 58–60 in manufacturing 91–2 market flexibility 52 regulation 2–3 relative price 33, 34 Latin America 32–3, 55, 73, 112, 122, 140, 196–7, 211, 245, 262 Latvia 235 Lazonick, William 20 Lenin, Vladimir 138 Levin, Jerry 133 Lévy, Dominique 236 LG Group 129, 134 liberals neo-liberalism xv, 60, 73 nineteenth-century 140–42 limited liability 12–15, 21, 228, 239, 257 Lincoln, Abraham 37, 67 List, Friedrich 249 London School of Economics 245–6 LTCM (Long-Term Capital Management) 170–71 Luxemburg, standard of living 102, 104–5, 107, 109, 232–3, 258 macro-economic stability 51–61, 240, 259, 261 Madoff, Bernie 172 Malthus, Thomas 141 managerial capitalism 14–17 Mandelson, Lord (Peter) 82–3, 87 manufacturing industry comparative dynamism 96 employment changes 91–2 importance 88–101, 257–9 productivity rise 91–6, 184–5 relative prices 94–5 statistical changes 92–3 Mao Zedong 215–16 Marchionne, Sergio 78 markets and bounded rationality theory 168, 173–6, 177, 254 conditions of trade 5 and equality of opportunity 213–15 failure theories 250 financial see financial markets government direction 44–5, 125–36 government regulation 4–6, 168–9, 176–7 participation restrictions 4 price regulations 5–6 and self-interest 44–5 see also free market Marx, Karl 14, 198, 201, 208, 249 Marxism 80, 185, 201–3 mathematics 180, 182–3 MBSs (mortgage-backed securities) 238 medicine’s popularity 222–4 Merriwether, John 171 Merton, Robert 170–71 Michelin 75–6 microfinance critique 162 and development 160–62 Microsoft 135 Minsky, Hyman 249 Monaco 258 morality, as optical illusion 48–50 Morduch, Jonathan 162 mortgage-backed securities (MBSs) 238 motivation complexity 46–7 Mugabe, Robert 54 NAFTA (North American Free Trade Agreement) 67 National Health Service (UK) 261 nationality of capital 74–87 natural resources 69, 115–16, 119–20, 121–2 neo-liberalism xv, 60, 73, 145 neo-classical school 250 see also free market Nestlé 76–7, 79 Netherlands CEO remuneration 152–3 cooperatives 166 intellectual property rights 71 protectionism 71 welfare state and growth 228–9 New Public Management School 45 New York Times 37, 151 New York University 172 Nissan 75–6, 84, 135, 214 Nobel Peace Prize 162 Prize in economics 170, 171–2, 173, 208, 246 Nobel, Alfred 170 Nokia 135, 259–60 North American Free Trade Agreement (NAFTA) 67 North Korea 211 Norway government direction 132, 133, 205 standard of living 104 welfare state and growth 222, 229 Obama, Barack 149 OECD (Organization for Economic Cooperation and Development) 57, 159, 229 Oh, Won-Chul 244 Ohmae, Kenichi 39 Opel 191 Opium War 9 opportunities see equality of opportunity Organization for Economic Cooperation and Development (OECD) 57, 159, 229 organizational economy 208–9 outcomes equality 217–20 Palin, Sarah 113 Palma, Gabriel 237 Park, Chung-Hee 129 Park, Tae-Joon 127–8 participation restrictions 4 Perot, Ross 67 Peru 219 PGAM (Platinum Grove Asset Management) 171 Philippines, education and growth 180, 181 Phoenix Venture Holdings 86 Pigou, Arthur 250 Pinochet, Augusto 245 PISA (Program for International Student Assessment) 180 Plain English Campaign 175 planned economies communist system 200–204 indicative systems 204–6 survival 199–200, 208–9 Platinum Grove Asset Management (PGAM) 171 Pohang Iron and Steel Company (POSCO) 127–8 pollution 3, 9, 169 poor individuals 28–30, 140–42, 216–18 Portes, Richard 235 Portman, Natalie 162 POSCO (Pohang Iron and Steel Company) 127–8 post-industrial society 39, 88–9, 91–2, 96, 98, 101, 257–8 Poverty Reduction Strategy Papers (PRSPs) 118 see also SAPs PPP (purchasing power parity) 106–9 Preobrazhensky, Yevgeni 138–40, 141 price regulations 5–6 stability 51–61 Pritchett, Lant 181 private equity funds 85–6, 87 professional managers 14–22, 44–5, 166, 200 Program for International Student Assessment (PISA) 180 protectionism and growth 62–3, 72–3 infant industry argument 66–8, 69–70, 71–2 positive examples 63–5, 69 PRSPs see Poverty Reduction Strategy Papers purchasing power parity (PPP) 106–9 R&D see research and development (R&D) Rai, Aishwarya 162 Rania, Queen 162 rationality see bounded rationality theory RBS (Royal Bank of Scotland) 156 real demand effect 94 regulation business/corporate 196–8 child labour 2–3, 197 deregulation 234–8, 259–60 legitimacy 4–6 markets 4–6, 168–9, 176–7 price 5–6 Reinhart, Carmen 57, 59 Renault 21, 75–6 Report on the Subject of Manufactures (Hamilton) 66 The Rescuers (Disney animation) 113–14 research and development (R&D) 78–9, 87, 132, 166 funding 206 reward/sanction mechanisms 48–50 Ricardo, David 141 rich individuals 28–30, 140–42 river transport 121 Rogoff, Kenneth 57, 59 Roodman, David 162 Roosevelt, Franklin 191 Rover 86 Royal Bank of Scotland (RBS) 156 Rubinow, I.M. 34 Ruhr occupation 52 Rumsfeld, Donald 174–5 Rwanda 123 Santander 172 SAPs (Structural Adjustment Programs) 118, 124 Sarkozy, Nicolas 90 Scholes, Myron 170–71 Schumpeter, Joseph 16, 165–7, 249 Second World War planning 204 (second) Bank of the USA 68 self-interest 41–2, 45 critique 42–3 enlightened 255–6 invisible reward/sanction mechanisms 48–50 and market discipline 44–5 and motivation complexity 46–7 Sen, Amartya 250 Senegal 118 service industries 92–3 balance of payments 97–100, 101 comparative dynamism 94–5, 96–7 knowledge-based 98, 99 Seychelles 100 share buybacks 19–20 shareholder value maximisation 17–22 shareholders government 21 ownership of companies 11 short-term interests 11–12, 19–20 shipbuilders 219 Simon, Herbert 173–6, 208–9, 250 Singapore government direction 133 industrial production 100 PPP income 107 protectionism 70 SOEs 205 Sloan Jr, Alfred 191–2 Smith, Adam 13, 14, 15, 41, 43, 169, 239 social dumping 67 social mobility 103–4, 220 socio-economic environment 215–17 SOEs (state-owned enterprises) 127, 132, 133, 205–6 South Africa 55, 121 and apartheid 213–16 South Korea bank loans 81 economic officials 244 education and growth 181 ethnic divisions 123 financial drive 235 foreign debt 234 government direction 126–9, 133–4, 135, 136 indicative planning 205 industrial policy 125–36, 205, 242–5 inflation 55, 56 job insecurity effect 222–4, 226, 227 post-war 212–14 protectionism 62, 69, 70 R&D funding 206 regulation 196–7 Soviet Union 200–204 Spain 122 Spielberg, Steven 172 Sri Lanka 121 Stalin, Josef 139–40, 145 standard of living comparisons 105–7 US 102–11 Stanford, Alan 172 state owned enterprises (SOEs) 127, 132, 133, 205–6 steel mill subsidies 126–8 workers 219 Stiglitz, Joseph 250 Structural Adjustment Programs (SAPs) 118, 124 Sub-Saharan Africa 73, 112–24 culture issues 123 education and growth 181 ethnic divisions 122–3 free market policies 118–19, 262 geographical factors 121 growth rates 73, 112, 116–19 institutional quality 123 natural resources 119–20, 121–2 structural conditions 114–16, 119–24 underdevelopment 112–13, 124 Sutton, Willie 52 Sweden 15, 21–2 CEO remuneration 152 income inequality 144 industrial policy 205 industrial production 100 per capita income 104 R&D funding 206 welfare state and growth 229 Switzerland CEO remuneration 152–3 ethnic divisions 122 geography 121 higher education 185–6, 188 intellectual property rights 71 manufacturing 100, 258 protectionism 69, 71 standard of living 104–6, 232–3 Taiwan business regulation 196 economic officials 244 education and growth 180 government direction 136 indicative planning 205 protectionism 69, 70 Tanzania 116 TARP (Troubled Asset Relief Program) 8 tax havens 258 technological revolution 31–2, 38–40 telegraph 37–8 Telenor 164 Thatcher, Margaret 50, 225–6, 261 Time-Warner group 132–3 TIMSS (Trends in International Mathematics and Science Study) 180, 183 Toledo, Alejandro 219 Toyota and apartheid 214 production system 47 public money bail-out 80 trade restrictions 4 transnational corporations historical debts 80 home country bias 78–82, 83, 86–7 nationality of capital 74–5, 76–7 production movement 79, 81–2 see also corporate sector Trends in International Mathematics and Science Study (TIMSS) 180, 183 trickle-down economics 137–8 and upward distribution of income 144–7 Trotsky, Leon 138 Troubled Asset Relief Program (TARP) 8 2008 financial crisis xiii, 144, 155–6, 171–2, 197–8, 233–4, 236, , 238–9, 245–7, 249, 254 Uganda 115–16 uncertainty 174–5 unemployment 218–19 United Kingdom CEO remuneration 153, 155–6 financial deregulation 235–6, 237 NHS 261 shipbuilders 219 see also Britain United Nations 162 United States economic model 104 Federal Reserve Board 171, 172, 246 financial deregulation 235–8 immigrant expectations 103–4 income inequality 144 inequalities 107–11 protectionism and growth 64–8, 69 R&D funding 206 standard of living 102–11 steel workers 219 welfare state and growth 228–30 United States Agency for International Development (USAID) 136 university education effect 185–8 Upper Volta (now Burkina Faso) 200 upward redistribution of income 143–4 and trickle-down economics 144–7 Uruguay growth 73 income inequality 144 USAID (United States Agency for International Development) 136 vacuum cleaners 34 Venezuela 144 Versailles Treaty 52 Vietnam 203–4 Volkswagen government share ownership 21 public money bail-out 80 wage gaps political determination 23–8 and protectionism 23–6, 67 wage legislation 5 Wagoner, Rick 45 Wall Street Journal 68, 83 Walpole, Robert 69–70 washing machines 31–2, 34–6 Washington, George 65, 66–7 Welch, Jack 17, 22, 45 welfare economics 250 welfare states 59, 110–43, 146–7, 215, 220, 221–30 and growth 228–30 Wilson, Charlie 192, 193 Windows Vista system 135 woollen manufacturing industry 70 work to rule 46–7 working hours 2, 7, 109–10 World Bank and free market 262 and free trade 72 and POSCO 126–8 government intervention 42, 44, 66 macro-economic stability 56 SAPs 118 WTO (World Trade Organization) 66, 262 Yes, Minister/Prime Minister (comedy series) 44 Yunus, Muhammad 161–2 Zimbabwe, hyperinflation 53–4

They are cheap in countries with cheap workers, such as Mexico and Thailand. When it comes to internationally traded things such as TVs or mobile phones, their prices are basically the same in all countries, rich and poor. In order to take into account the differential prices of non-traded goods and services across countries, economists have come up with the idea of an ‘international dollar’. Based on the notion of purchasing power parity (PPP) – that is, measuring the value of a currency according to how much of a common consumption basket it can buy in different countries – this fictitious currency allows us to convert incomes of different countries into a common measure of living standards. The result of converting the incomes of different countries into the international dollar is that the incomes of rich countries tend to become lower than their incomes at market exchange rates, while those of poor countries tend to become higher.


pages: 421 words: 125,417

Common Wealth: Economics for a Crowded Planet by Jeffrey Sachs

agricultural Revolution, air freight, back-to-the-land, British Empire, business process, carbon footprint, clean water, colonial rule, corporate social responsibility, correlation does not imply causation, creative destruction, demographic transition, Diane Coyle, Edward Glaeser, energy security, failed state, Gini coefficient, global pandemic, Haber-Bosch Process, income inequality, income per capita, Intergovernmental Panel on Climate Change (IPCC), intermodal, invention of agriculture, invention of the steam engine, invisible hand, Joseph Schumpeter, knowledge worker, labor-force participation, low skilled workers, mass immigration, microcredit, oil shale / tar sands, old age dependency ratio, peak oil, profit maximization, profit motive, purchasing power parity, road to serfdom, Ronald Reagan, Simon Kuznets, Skype, statistical model, The Wealth of Nations by Adam Smith, Thomas Malthus, trade route, transaction costs, unemployed young men, War on Poverty, women in the workforce, working-age population

Of course, this scenario is highly optimistic in that it assumes the world avoids any prolonged crisis, that the United States grows at the historical average, and that all other countries achieve convergent growth. Figure 2.2(a): The Convergence of Global Income per Capita through 2050 Source: Calculated using data from World Bank (2007) Note: Vertical axis on logarithmic scale. Income is measured in purchasing power parity (PPP) to adjust for difference in price levels across countries. More People and Higher Incomes Not only will most of the world be richer, but there will be a lot more people around enjoying those higher incomes. The world’s population continues to grow rapidly, even though the proportional rate of population growth (each year’s increase relative to the size of the global population) has declined.

China, the recipient of about $60 billion in aid from all donors since 1980, has already graduated from grants and subsidized loans from the World Bank because it has become too rich to need them. Any new credits come at market terms. Here is a rule of thumb: an economy can generally graduate from the need for aid when the national income has reached around $4,000 per person, measured at purchasing power parity (PPP) or roughly $1,000 at market prices. China’s income in 2003, for example, had reached $5,000 per person (PPP). This graduation point compares with current incomes in sub-Saharan Africa of roughly $1,400 per person (PPP). Africa needs, roughly, to triple its per capita income per person to graduate from aid. At a 7 percent per annum per capita growth rate, Africa would triple its per capita income in sixteen years.

GATT General Agreement on Tariffs and Trade GDP gross domestic product GEF global environmental facility GFATM Global Fund to Fight AIDS, Tuberculosis and Malaria GNP gross national product GROCC Global Roundtable on Climate Change GWP gross world product HDI Human Development Index HIPPO habitat destruction, invasive species, pollution, population increase, and overharvesting ICPD International Conference on Population and Development IMF International Monetary Fund I= P × A × T or I-PAT equation: Environmental impact = population × per capita income × the environmental impact per dollar of income IPCC Intergovernmental Panel on Climate Change MDGs Millennium Development Goals MENA Middle East and North Africa MVP Millennium Village Project N2O nitrous oxide NGO nongovernmental organization NRR net reproduction rate PAI Population Action International ppm parts per million PPP purchasing power parity PPPs public private partnerships R & D research and development RD & D research, development, and demonstration TFR total fertility rate UN United Nations UNCCD United Nations Convention to Combat Desertification UNDP United Nations Development Program UNEP United Nations Environment Program UNFCCC United Nations Framework Convention on Climate Change UNFPA United Nations Population Fund (formerly UN Fund for Population Activities) UNICEF United Nations Children’s Fund USAID United States Agency for International Development WHO World Health Organization WTO World Trade Organization Notes CHAPTER 1: COMMON CHALLENGES, COMMON WEALTH 4 social insurance and transfer schemes: Peter Lindert, Growing Public: Social Spending and Economic Growth since the Eighteenth Century, vol. 1 (New York: Cambridge University Press, 2004). 10 “For peace is a process”: John F.


pages: 462 words: 129,022

People, Power, and Profits: Progressive Capitalism for an Age of Discontent by Joseph E. Stiglitz

"Robert Solow", affirmative action, Affordable Care Act / Obamacare, barriers to entry, basic income, battle of ideas, Berlin Wall, Bernie Madoff, Bernie Sanders, business cycle, Capital in the Twenty-First Century by Thomas Piketty, carried interest, central bank independence, clean water, collective bargaining, corporate governance, corporate social responsibility, creative destruction, Credit Default Swap, crony capitalism, deglobalization, deindustrialization, disintermediation, diversified portfolio, Donald Trump, Edward Snowden, Elon Musk, Erik Brynjolfsson, Fall of the Berlin Wall, financial deregulation, financial innovation, financial intermediation, Firefox, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, George Akerlof, gig economy, global supply chain, greed is good, income inequality, information asymmetry, invisible hand, Isaac Newton, Jean Tirole, Jeff Bezos, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John von Neumann, Joseph Schumpeter, labor-force participation, late fees, low skilled workers, Mark Zuckerberg, market fundamentalism, mass incarceration, meta analysis, meta-analysis, minimum wage unemployment, moral hazard, new economy, New Urbanism, obamacare, patent troll, Paul Samuelson, pension reform, Peter Thiel, postindustrial economy, price discrimination, principal–agent problem, profit maximization, purchasing power parity, race to the bottom, Ralph Nader, rent-seeking, Richard Thaler, Robert Bork, Robert Gordon, Robert Mercer, Robert Shiller, Robert Shiller, Ronald Reagan, secular stagnation, self-driving car, shareholder value, Shoshana Zuboff, Silicon Valley, Simon Kuznets, South China Sea, sovereign wealth fund, speech recognition, Steve Jobs, The Chicago School, The Future of Employment, The Great Moderation, the market place, The Rise and Fall of American Growth, the scientific method, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, trickle-down economics, two-sided market, universal basic income, Unsafe at Any Speed, Upton Sinclair, uranium enrichment, War on Poverty, working-age population

The World Income Database is used for data on average income and income shares of various groups in the income distribution (top 1 percent, top 0.1 percent, bottom 50 percent.). For all these sources, the most recent versions and the most recent data points available when the book went to press were used. 6.Source: United Nations, for the latest year available, 2017. Based on IMF and World Bank data, the United States ranks 7th in per capita income. These compare incomes using market exchange rates. Using purchasing power parity, the US ranking, according to the IMF and World Bank, slips to 11th. 7.World Bank Human Capital Index, available at https://www.worldbank.org/en/data/interactive/2018/10/18/human-capital-index-and-components-2018. 8.Source: PISA (Program for International Student Assessment) tests for the year 2015, the latest year available. The differences are quantitatively large. Someone with only a 10th-grade education in the best performers (Shanghai, China) has an equivalent education to a 12th grader in the best-performing US state, Massachusetts. 9.Source: OECD data for the year 2016. 10.

Someone with only a 10th-grade education in the best performers (Shanghai, China) has an equivalent education to a 12th grader in the best-performing US state, Massachusetts. 9.Source: OECD data for the year 2016. 10.“Hours Worked,” OECD, 2017 or latest available, available at https://data.oecd.org/emp/hours-worked.htm. 11.US total growth in productivity over the period was 2.3 percent, while the average for the OECD was 4.9 percent. Source: OECD, available at https://data.oecd.org/lprdty/gdp-per-hour-worked.htm#indicator-chart. 12.In terms of purchasing power parity (PPP). This measure takes into account that different goods cost different amounts in different countries. China’s GDP overtook that of the US in 2015. Comparisons are also often done on the basis of current exchange rates, which can fluctuate a great deal. In these terms, China’s GDP is still below that of the US. However, in terms of the standard metrics, China is still a developing country, with a per capita income roughly a fifth that of the US. 13.Not surprisingly, because developing countries have to catch up, they have higher growth rates—in 2016, the latest year for which data is available, America ranked 139th. 14.World Bank data for this and the numbers moved out of poverty cited below. 15.World Inequality Database, www.wid.world.

., 56 perfect price discrimination, 318n17 Petersen, Matthew Spencer, 17 Pew Mobility Project, 45 pharmaceutical companies, See Big Pharma Phishing for Phools: The Economics of Manipulation and Deception (Akerlof and Shiller), 63–64 Piketty, Thomas, 278n38 place-based policies, 187–88 Pledge of Allegiance, 202 polarization, of job market, 119 political action committees (PACs), 169, 171, 172 political manipulation, 128 political opinion, 75 political parties, public disenchantment with, 174 political power, market power and, 77 politics failures of, 5–7 to manage economic consequences of innovation, 121 power of financial sector in, 116 reforming rules of, xxvi pollution, 143; See also environment population growth, 9, 11 populism, 26 postindustrial world, facilitating transition to, 186–88 poverty education and, 200 and inequality of opportunity, 44–45 intergenerational transmission of, 200 life expectancy and, 41 power abuses of, See abuses of power competition vs., 22, 23 market, See market power PPP (purchasing power parity), 272n12 predatory behavior, 145 predatory pricing, 69 pre-distribution, xxv, 198 preemptive mergers, 60–61, 70, 73 price discrimination, 57, 64, 125 pricing power, 48, 50 principal agent problem, 291n58 prisons, See incarceration privacy, 127–30, 135 private equity, 258n6 private prisons, 323n8 private sector, government’s efficiency compared to, 142 productivity human/physical capital investment and, 36–37 improving, 182–83 knowledge and, xxiv, 183–86 restoring, 181–86 in US vs. other advanced countries, 36–37 wages no longer correlated with, 38 wealth of nations and, 9 working hours and, 191 profits from bank fees, 110 in China, 95 competition as threat to, 48 explaining increase in, 54–62 fractional reserve banking and, 111 globalization and, 80 from mergers, 107–8 as source of rent wealth, 54 progressive agenda and party reform/rebuilding, 175–76 in Preamble to the Constitution, 242 to promote general welfare, 242–47 Progressive Era, 12 progressive movements, 175–76 progressive taxation, 198 property rights, trade agreements and, 83, 84 protectionism, 35, 79, 89–92, 94, 240 Protestant Reformation, 10 public education, 200–201 public good(s) data as, 131 markets’ failure to provide, xxiii, 140–41 media as, 11, 133 nongovernmental organizations and, 148–49 research and, 184 public institutions, fragility of, 230–36 Public Interest Doctrine, 352n21 public option(s), 210–11, 220 and Affordable Care Act, 213 for mortgages, 216–18 for retirement savings, 215–16 public–private partnerships, 142 public sector, 115–16; See also government public transit, returns on, 195 public utility, reclassifying Facebook as, 134 purchasing power parity (PPP), 272n12 Putin, Vladimir, 235 Qualcomm, 59 quality of life; See also standards of living access to health care, 212–13 education, 219–20 ensuring decent life for all, 209–21 home ownership, 216–18 secure retirement, 214–16 racial discrimination, 40, 125, 180–81, 201–4; See also discrimination racial inequality, 40 racial justice, economic justice and, 176, 203–4 racism, 203, 241; See also discrimination; racial discrimination rate of return on capital, 53 Reagan, Ronald, and administration economic dogma, 112 financial liberalization, xiii and growth of inequality, 45 laws enabling greater market power, 78 redirection of values, 28 tax cuts, 25 Trump’s parallels with, xvi Reaganomics, xiv–xv, 26–27; See also supply-side economics real estate interests, 168–69 real estate taxes, 206 reason, 11, 228–29 Reconstruction, 241 redistribution, xxv, 122, 156, 198 regressive taxation, 267–68n41 regulation checks and balances on, 232–33 of data, 128–31 failure to keep pace with changing economy, 146–47 2008 financial crisis and, 101–2 financial sector, 115 freedom and, 144 government and, 143–48 importance of, 150 innovation and, 134 process of, 145–46 restoration of, 146–48 of social media, 134–35 of tech giants, 124–25 trade agreements and, 83, 84 regulatory harmonization, 88 regulatory takings, 301n8 relationship banking, 110 religion, 10, 145 religious Right, 223 Renaissance, the, 8 rents and appropriation of wealth by the 1 percent, 244 capitalized, 282n17 failure to share with workers, 282n19 and national income pie, 51–52, 54 profits as source of, 54 taxation of, 206 rent-seeking, xxiv, 52, 113, 169, 229, 244 representative democracy, 6 Republican Party and Affordable Care Act, 213 anti-science stance, 20 and Citizens United, 170 composition of, 175 and corporate tax rates, 85 fiscal stimulus during Great Recession, 121 and gerrymandering, 6, 159 indifference to those left behind by globalization/technology, 186 and lack of consequences for elites in Great Recession, 152 and money in politics, 168 power-seeking objectives, 160 and Supreme Court’s loss of status as fair arbiter, 165–67 and 2017 tax bill, 237 Trump vs.


pages: 504 words: 139,137

Efficiently Inefficient: How Smart Money Invests and Market Prices Are Determined by Lasse Heje Pedersen

activist fund / activist shareholder / activist investor, algorithmic trading, Andrei Shleifer, asset allocation, backtesting, bank run, banking crisis, barriers to entry, Black-Scholes formula, Brownian motion, business cycle, buy and hold, buy low sell high, capital asset pricing model, commodity trading advisor, conceptual framework, corporate governance, credit crunch, Credit Default Swap, currency peg, David Ricardo: comparative advantage, declining real wages, discounted cash flows, diversification, diversified portfolio, Emanuel Derman, equity premium, Eugene Fama: efficient market hypothesis, fixed income, Flash crash, floating exchange rates, frictionless, frictionless market, Gordon Gekko, implied volatility, index arbitrage, index fund, interest rate swap, late capitalism, law of one price, Long Term Capital Management, margin call, market clearing, market design, market friction, merger arbitrage, money market fund, mortgage debt, Myron Scholes, New Journalism, paper trading, passive investing, price discovery process, price stability, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, Renaissance Technologies, Richard Thaler, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, selection bias, shareholder value, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, stocks for the long run, stocks for the long term, survivorship bias, systematic trading, technology bubble, time value of money, total factor productivity, transaction costs, value at risk, Vanguard fund, yield curve, zero-coupon bond

., the carry—and the currency appreciation (plus a small adjustment that disappears with continuous compounding). Empirically, exchange rate changes over time are hard to predict, and therefore the foreign interest rate gives a simple measure of the expected short-run return of the currency.10 This idea forms the basis of the currency carry trade, as discussed further below. To get an idea of the long-run return of a currency, note that purchasing power parity (PPP) holds approximately in the long run. That is, while the real price of a car is not exactly the same in different countries, the prices tend to converge in the long run. This happens more quickly for items that are easy to ship, like an iPhone, and more slowly for goods that are hard to ship. The convergence may not happen at all for goods that are associated with significant service costs if the labor costs differ persistently across countries.

In other words, if you can value each of the stocks, just add up their value to get the fundamental value of the index and compare it to the overall price. One simple measure is the price-to-book ratio for the overall market (or other valuation ratios). Hence, one macro value trade is to buy “cheap” equity indices in countries with low price-to-book ratios while shorting equity indices with high ones. • Currency value trade: For currencies, one measure of value can be derived using purchasing power parity (PPP). PPP says that goods should cost the same in all countries. Hence, if a burger (or a diversified basket of goods) costs more in euros than in US$, then the euro should fall in value going forward, resulting in a short-euro value bet.4 A simpler way to trade on currency value is to trade on long-term reversal, betting that currencies that have experienced large real appreciation (over five years, say) will eventually see a partial reversal of this move

See also strategic asset allocation political events: global macro developments and, 199–200; Soros on importance of, 204 portfolio, replicating, 234–35, 237, 239–40 portfolio construction, 54–57; Ainslie on, 110; Asness on, 133, 160; Chanos on, 131; components of, 167; in event-driven investment, 292; in fundamental quantitative investing, 144–45; industry-neutral, 144; in merger arbitrage, 303–4; in quantitative investing, 133. See also asset allocation portfolio insurance, trends and, 212 portfolio optimization, 56–57; Asness on, 164; Harding on, 229 portfolio rebalance rule, 47–48, 50. See also rebalancing of portfolio portfolio sort, as predictive regression, 51–53 position limits, 55, 60 post–earnings-announcement drift, 41 PPP. See purchasing power parity (PPP) predatory trading, 83–84 predictive regression, 50–53 preferred habitat theory, 249 present value model. See dividend discount model price. See market price price-dividend ratio, 176–78 price manipulation, 108, 123 price surplus, 178, 178n6, 179 price-to-book (P/B) value, 99, 104, 139; for overall market, 197 pricing period, of floating exchange ratio stock deal, 301, 302f prime brokers (PBs), 25f, 26; of cash instruments, 80; hedge fund balance sheet and, 76; margin call from, 79; of OTC derivatives, 80; predatory trading by, 84; profit earned by, 78–79 Prince, Chuck, 201 private equity, 293; illiquidity of investments in, 170.


pages: 268 words: 89,761

Unhealthy societies: the afflictions of inequality by Richard G. Wilkinson

attribution theory, business cycle, clean water, correlation coefficient, experimental subject, full employment, fundamental attribution error, Gini coefficient, income inequality, income per capita, Indoor air pollution, invisible hand, land reform, longitudinal study, means of production, purchasing power parity, rising living standards, twin studies, upwardly mobile

In order to get a clearer idea of whether health really is responsive to rising living standards among the rich countries on the flat part of figure 3.1, let us move from cross-sectional data to look at changes over time. Figure 3.2 shows the relationship between percentage changes in GNPpc and changes in life expectancy over the twenty years 1970–90 among the rich market countries belonging to the Organisation for Economic Cooperation and Development (OECD). Among these countries it is possible to compare GNPpc at purchasing power parities rather than according to the vagaries of changing exchange rates between currencies. This means that pounds, francs, yen, etc. are converted into dollars according to the comparative cost of the same basket of goods in each country. In other words, the changes in GNPpc shown in figure 3.2 are more accurate reflections of changes in real purchasing power in each country. The twenty-year span over which change is measured means that comparisons are less likely to be upset by unknown lag periods between changes in GNPpc and life expectancy.

Such a change would do nothing to improve the ordering of countries or to produce anything like the smooth gradient seen in figure 5.1. As the points in figure 5.2 are whole countries, there is no possibility that the lack of a clear gradient has something to do with problems of sampling error or random variation. Nor could it be that the international data are more influenced by national differences in culture than by differences in the standard of living. The GNP figures used are converted at purchasing power parities rather than at the rather arbitrary currency exchange rates. This Income distribution and health 75 means that they give a more accurate reflection at least of comparative differences in purchasing power. If a much stronger relationship was merely hidden by cultural differences between countries, then that should have been revealed by the correlations of changes over time between 1970 and 1990 (see figure 3.2, p. 37) unless cultures changed radically in different directions during the period.

They go through the possible sources of this remarkable achievement, looking for changes in Japanese diet, smoking and other behavioural factors affecting health, in health services and preventative health policies. None of these provides a plausible explanation. Although Japanese diets are healthier than many Western diets, they did not change during this period in ways that might explain the health improvement. Although Japanese economic growth has of course been rapid, not only have we seen that increases in GNPpc are not so important in the developed world but, on the basis of purchasing power parities used to compare living standards more accurately, Japanese GNPpc was only 15 per cent higher than the British in 1990—still considerably less than the United States and a number of Western European countries. It is not just since 1970 that the Japanese experience has testified to the health importance of narrowing income distribution. There is also some fragmentary data which shows an earlier association between narrowing income differences and the rapid improvements in life expectancy in Japan (Wilkinson 1992).


pages: 287 words: 44,739

Guide to business modelling by John Tennent, Graham Friend, Economist Group

business cycle, correlation coefficient, discounted cash flows, double entry bookkeeping, G4S, intangible asset, iterative process, purchasing power parity, RAND corporation, shareholder value, the market place, time value of money

Many modellers, however, simply make an assumption for the average exchange rate for the first year and develop a forecast for the subsequent years. The initial assumption acts as the seed. Behaviour As with all the variables in this chapter there is no consensus among economists about the determinants of exchange-rate movements. Furthermore, many economies and groups of economies actively manage their exchange rates. A simple theory of exchange rates is purchasing power parity (ppp), which argues that exchange rates move to ensure that the relative purchasing power of one currency against another remains constant. Exchange rates, therefore, are assumed to move in response to differential movements in inflation rates between the respective economies. If one country is experiencing more rapid inflation than another country, the cost of a basket of goods in the country with the higher rate of inflation will increase faster than the cost of the same goods in the other country.

140–41 capital gains tax 258 cars 131 cash 198, 202 deficits 157 surpluses 154, 157 cash breakeven point 146 cash flow 13, 33, 60, 130, 130, 136, 141, 172, 189 adjusting 153 anticipated 151 cumulative project cash flow 152 and equity value 186 forecasts 70 free (FCF) 163, 173, 173, 180 net 146 operational 147, 152 projected 257 short time intervals 180 sign convention 176 statements 156, 157, 159, 161, 169 tax and 127, 174 timing 164, 176–7, 177 cash flow cycle 140, 140, 141, 141, 202, 202 causative techniques 85 cell comments 251–2 chart wizard button 53 check boxes 223–4 circular references 159, 211 COC see cost of capital coefficients 97, 100, 103 collinearity 105 colour scheme 67 column consistency 210 column widths 69 company acquisitions 146 company law 70 company valuation model 190–92 competition 4, 15, 257 compounding 182 computers crash 36, 39 purchase 131 CONCATENATE function 44–5, 50, 263–4 conceptual errors 206 conditional formatting 52–3 Consolidate box 37–8, 38 consumers credit 78 expenditure 14 spending patterns 88 consumption proportion 131 INDEX control toolbox 222 convertibles 149, 155 corporate decision-making 13 corporate planning pyramid 12–13, 12 corporation tax 163, 164, 167, 172, 174, 258 cost of capital (COC) 204, 205 costs 147, 172, 173, 257 capital 60, 117 drivers of 123–7 fixed 122–3, 122, 123 inflexible 125, 125 operating see operating costs COUNT IF function 47, 48, 48, 264 covenants 156 CPM see Critical Path Method credit agencies 151 credit controllers 123, 123 creditor days 145, 202 creditors 145, 145, 147 critical factors 15, 16, 17, 23, 29 Critical Path Method (CPM) 11 currency 14, 46, 46, 80, 168 current liabilities 147 customer segmentation 112–13, 113, 114 cyclical component 89 D data assumptions 6, 7 collection 6, 7, 8, 22–3, 24 labels 38, 54 scenarios 61 warehousing 8 data collection manager 9 data screens 240, 240, 241 DATA VALIDATION function 53 DCF analysis see discounted cash flow analysis de minimus rule 128 debentures 148 debt 147, 150, 151, 155, 157, 204 bad 160–63 doubtful 160–61 funders 155 funding 152 instruments 157, 157 net 155 debt to equity ratios 155–6, 156, 190 debtor days 142, 162, 202 debtors 142–3, 147, 160, 161 debugging see testing and debugging decision-making analysis 1 273 INDEX choice 2 corporate 13 implementation 2 defining the outputs 12–18 alignment with the business’s overall objectives 12–13 business model output checklist 18 creating an output template 16, 17 defining the outputs required to answer the question 13–14 establish the basics 14 model outputs and corporate decisionmaking 13 real versus nominal forecasts 14 specify the time frame and period length 13–14 identifying the critical factors that determine the outputs 15 running a workshop 17–18 demand 75, 107, 108 demand curve 87 downward-sloping 86, 87 demographic shifts 18 dependencies 258 dependency ranking 242–4 depreciation 33, 34, 46, 118, 128, 129, 187, 203 other depreciation methods 131 reducing balance 130, 130, 137, 137 straight line 129–30, 130, 132, 136, 136 development log 35, 38 dialog boxes 252 discount factor 191 discount rates 45, 180, 183 discounted cash flow analysis 172, 181, 185, 188 company valuation example 190–92 EBITDA exit multiples 189 growth rate models 188–9 terminal values 188 valuation range 190 discounted cash flow theory 179–82 discounted cash flows 34, 182–3 discounting 182 distribution 117, 133–4 divide by zero 51 dividend cover 204 dividends 147, 180 documenting the model documentation outside the model contents of a typical user’s guide 255 continuing user support 255 fit for the purpose 253 good document form design 253–4, 254 structure 254 training material 255 user’s documentation 254 documentation within the model 251–3 cell comments 251–2 dialog boxes 252 macro comments 252–3, 253 specific help software 252 text boxes 252 need for documentation 250 when to document 250 where to document 250–51 Du Pont 11, 199 dynamic effects 59 dynamic links the CONCATENATE function 44 multiple models 36–7 E earnings per share 204 EBITDA (earnings before interest, tax, depreciation and amortisation), multiples 187–8, 189, 190, 192, 203, 257 economic added value (EVA) 204 economy of scale 119, 120, 120, 175, 176, 200 Edit Links box 37, 37 endogenous variables 22 enterprise value (EV) 186, 188 environmental risk 249 equity 147, 150, 151, 155, 157, 204 equity value 186 Excel Scenario Manager 248 exchange rates 15, 53, 70, 150, 167, 168, 258 behaviour 80–81 definition and uses 80 modelling approach 81–3 seed 80 exit options 257 exit screens 239–40 exogenous variables 22 EXP function 264 extrapolation techniques 85 eyeball lines 55 F FIFO (first in first out) basis 139 file folder structure 36, 36 file-naming convention 35 finance calculations 34 financial performance 18 FIND 210–11 firm value 186 fixed asset turnover 201 274 fixed assets see under capital expenditure and working capital fixed costs see under operating costs fonts 67 for and next loops 234–6 FORECAST function 95, 95, 96 forecasting, revenue see revenue forecasting forecasts 13 nominal 14 real 14 foreign exchange calculations 167–70 generic approach to modelling foreign exchange gains and losses 168 modelling foreign exchange gains and losses on overseas financing 169–70, 170, 171 modelling foreign exchange gains and losses on overseas revenue and costs 169 principles of foreign exchange accounting 167–8 format painter 50–51 formatting 67–9 colours 67 column widths 69 fonts 67 lines 67, 68 macros 218–19 number styles 68 Forms toolbar 221–5 formula bar 41, 41 formulae, deconstructing complex 208–9, 209 free cash flow (FCF) 163, 173, 173, 180, 186, 191, 205 free-form development 32 FREEZE PANES command 229–30, 230 funding see modelling funding issues G Gantt chart 10, 11 GDP see gross domestic product gearing 155, 156, 190, 245 GO TO function 53 GOAL SEEK function 242–4 goal statement 18 Gordon Growth Model 189, 190, 192 graphs 53–8, 60, 261–2, 262 eyeball lines 55 fixed cost 122, 122 improving the appearance of 54 market value 129, 129 one graph suits all 55–8, 56 triangulation 126 variable costs 119, 119 INDEX gridlines 54 gross additions/connections 88, 93, 97, 97, 98, 98, 104 gross domestic product (GDP) 15, 76, 84, 189 behaviour 71–2 definition and uses 70–71 modelling approach 72–4 seed 71 group sheet function 39 growth 205, 258 GROWTH function 106 growth rate 45, 71, 72, 74, 74, 75 H hard coding 38, 60 hedging techniques 150 HELP function 51 hiding information 69 hyperlinks 226–7, 227 I IF function 45–6, 47, 51, 65, 73, 74, 77, 120, 145, 211, 223, 264 implementation 2, 6, 7, 9 income distribution 15 levels 15 INDEX function 46, 101, 103, 103, 104, 108, 264–5 inflation 14, 15, 53, 70, 75, 132, 258 inflation rate behaviour 75–6 definition and uses 75 modelling approach 76–7 seed 75 inflexible costs see under operating costs information, hiding 69 input sheets 59–65, 60, 61, 72, 72 input timelines 29, 29, 30, 31 inputs additional 29 alternative 22 analysis 23, 24 extreme 213 inflation 76, 76 seed 19 strategic 30 uncertainty/impact 23–4, 23, 25 validation 66 variables 6, 7 interest 147, 156, 180 interest calculations 157 interest costs 131 INDEX interest income and charges alternative approaches to modelling interest income 159–60, 159, 160 interest rate assumptions 158 issues in modelling interest income and charges 158 modelling interest income and circular references 158–9 interest rates 14, 15, 53 assumptions 158 base see base interest rates interface sheets 36 internal rate of return (IRR) 13, 172, 183–5, 183, 184, 245, 257 more than one 184–5, 185 investment commencement of 258 investment funding 203 net 157 overseas 150–51 reinvestment ratio 203 investment control 149 investor measures dividend cover 204 earnings per share 204 IRR see internal rate of return IRR function 265 ISDATE function 240 ISERROR function 46, 51, 211, 213, 265 ISSER function 265 J J curve 146, 146, 152, 154 joint ownership 149 judgmental techniques 85 L land residual value 132 leases 149 operating (rents) 147 LEN function 265 lending rates 152 leverage 155 lines, in formatting 67–8, 68 LINEST function 100–101, 101, 102, 103, 104, 108, 266 list box 224, 225 LN function 266 loans 149, 152, 156 losses 163, 165, 168 M macroeconomic factors 15, 70–84 275 base interest rates 78–80 exchange rates 80–83 gross domestic product 70–75 inflation rate 75–7 other macroeconomic variables 84 population 83–4 macroeconomic forecasts 8 macroeconomics 70 macros 216–21 calculation 233, 233 comments 252–3, 253 editing the macro code 218 macros for repeated tasks 218–21 creating a personalised toolbar 221 formatting macros 218–19 personal macros 218 protecting the model 219–21 Monte Carlo 245, 246 multiplication tables 234–6, 234, 235 print macro 231, 231 recording simple 216 running the macro 218 viewing macro code 216–17, 217 manual code review 208 market growth 15 market liberalisation 18 market size 15 market value 129, 129, 130, 132 mathematical operations 209–10 MAX function 45, 125, 135, 179, 196, 266 mean square error (MSE) 99 media 19 microeconomic variables 15 microeconomics 70 Microsoft Excel 2, 4, 37, 40, 50, 51, 53, 90, 106, 180, 183, 210, 216, 218, 227, 234, 235, 236, 237, 239 milestones 10, 258 MIN function 45, 139, 154, 196, 266–7 mission statement 18 mobile telecommunications industry bottom-down/top-up forecasting 88 critical factors 15, 16 decomposition of revenue 86 penetration 105, 106, 107, 109, 111, 111 product cycle life 106, 107 regression analysis 97, 106 segmentation 112 third-generation mobile data services 88 total revenue 115, 116 MOD function 50, 125, 134 model developer 9 model development process management 32–9 276 best practice in model development avoiding some common pitfalls 39 the basics of quality control 35–8 the model development process create workings pages for all main sections and develop calculations 33 develop the user interfaces and conduct user testing 34 set up output and input templates 33 test and debug 33 transfer results to output pages 33 a model development project plan 34 establishing a modelling charter 34 using material from the modeller’s library 34 populate input templates with base or test data 33 styles of development 32 free-form development 32 model layout 59–60, 59 model outputs 13, 17, 259–62 model ownership 35 modeller’s toolbox 40–58 naming sheets 40 range names 40–44 useful features conditional formatting 52–3 divide by zero 51 format painter 51–2 macros for repeated tasks 218–21 one graph suits all 55–8 shortcut keys 50–51 using graphs 53–5 useful functions AND and OR 46–7 AVERAGE 50 CONCATENATE 44–5 MIN, MAX or IF statements 45–6 MOD 50 OFFSET 49–50, 49 SUM IF and COUNT IF 47–9, 48 modelling funding issues 146–57 cost of funding 151–2 debt to equity ratios 155–6, 156 funding strips 152–4 identifying the cash flow to be funded 147 operating environment 150–51 project control 149–50 putting the funding cost back in the model 156–7 balance sheet 157 cash flow statement 157 profit and loss account 156–7, 157 INDEX time periods 154–5, 154 types of funding 147–9 weighted average cost of capital 152 modularisation 63 Monte Carlo analysis 245–8 moving average 90, 91, 92 MSE see mean square error multiplicative model 96 multiple models and dynamic links 36–7 multiple regression 85, 87, 101–4, 102, 103, 104, 105 N naming sheets 40 navigation see under spreadsheet applications NCF see net cash flow net book value 130, 138, 139, 140, 140 net cash flow (NCF) 182 net debt 155 net operating profit after tax 204 net present value (NPV) 13, 172, 179, 182, 183, 184, 184, 189, 190, 194, 242, 243, 245, 257 nominal forecasts 14 NPV see net present value NPV function 267 number styles 68–9 numbers for an output 4 negative 4 within a formula 4 O OFFSET function 49–50, 49, 57, 119, 125, 134, 135, 138, 224, 248, 267 operating costs 29, 31, 60, 117–27, 161 completeness of operating costs 117, 117–18 cost behaviour 118 drivers of costs 123–7 inflation 126–7 inflexible costs 125, 125 tax 127 triangulation 126, 126 fixed costs 122–3, 122, 123, 125, 126, 200 variable costs 118–22 operating environment 19, 149, 150–51 operating profit 186 operational risk 248, 249 options 148 OR function 46–7, 267–8 ordinary shares 148 output sheets 33, 60, 63, 63, 64, 248 output template 16, 17, 18 277 INDEX outputs 6, 7, 23, 29 presenting model 259–62 overdrafts 149 overheads, allocated 175 overseas investments 150–51 P P/E ratios 186–7, 188 packaging 117 payback 172, 177–9, 245, 257 payroll cost 126, 203 PBT see profit before tax PED see price elasticity of demand penetration 105, 106, 107–12, 109, 114, 115 total 114 period ends 14 period length 14 PERT (Performance Evaluation and Review Technique) 10–11 PEST analysis 21 plant residual value 131–2 utilisation 258 PLC see product life cycle population 70 behaviour 83 definition and uses 83 growth 15 modelling approach 83–4 seed 83 post-project review 6, 7 PPP see purchasing power parity preference shares 148 prepayments 141, 141, 142 present value 182 price elasticity of demand (PED) 86–7, 87, 115 prices constant 14 fall in 4 print ranges 231 probability models 19 product life cycle (PLC) 106, 107, 107, 189 product prices 53 profit and loss 33, 60, 164, 257 profit and loss account 129, 141, 143, 156–7, 157, 161, 162, 163, 167, 169, 173 profit before tax (PBT) 181 profit flow 172 profit margin 199–200 profits 14 operating 186 programming techniques with Visual Basic 232–6 project appraisal and company valuation 172–92 conventions for setting out the cash flows 176–7 sign convention 176 timing 176–7, 177 discounted cash flow theory 179–82 calculating the discount rate 180 calculating the WACC 181 dicounted cash flow decision rule 182 discount rate 180 risk premium 179 short time intervals 180 time value of money 179 discounting cash flows in practice 182–3 evaluating companies 185–92 techniques for valuing companies 186–8 using DCF analysis in practice to value companies 188–92 identifying the relevant project cash flows 172–6 the cash effect of change 174–5 dealing with allocated overheads 175 group versus project 176 relevant costs and capital expenditure 174 relevant revenues 174 relevant taxes 174, 174 internal rate of return 183–5, 183, 184 more than one IRR 184–5, 184 payback 177–9 project appraisal and valuation techniques 172 project control 149–50 project manager 8, 9, 10 Project Plan see under business modelling process property space requirement 123, 124, 124 utilisation of 258 protecting the model see under spreadsheet applications purchase, timing of 132 purchase cost 131 purchase tax 127 purchasing power parity (PPP) 80, 81 R R2 value 97, 98, 102 radio (option) buttons 222–3, 223 range names 4, 40–44, 158, 159, 164, 191 accessing the named inputs and rows 44 common range names 43–4 defining several individual names 42, 42 278 naming one cell 41 naming one cell where the cell name is displayed to the left of reference value 41, 41 naming several values at once 42–3, 42 naming whole rows 43 range test the model 212–13 RANK function 268 ratios 60 the Du Pont pyramid of ratios 199–203 balance sheet management 201–2 further analysis 202–3 percentage of sales measures 201 profit margin and asset turnover 199–201 external analysis 194 internal analysis 194–5 internal ratio analysis 195 interpreting 196–7 average 196 high and low values 196 rank 196 useful ratios to calculate return on average capital employed (ROACE) 198 return on equity (ROE) 199 return on net assets (RONA) 197–8, 198, 199, 200, 201, 204 real forecasts 14 recalculation 69 reducing balance 130, 130 regression equation 98, 98 regression techniques see under revenue forecasting regulatory environment 70 rents 147 replicating actual results 212 report style 259 research agencies 8, 70 residual (“disturbance”) component 89 residual value 132 retail price index 75 return on average capital employed (ROACE) 198 return on capital employed (ROCE) 242, 243, 245, 257 return on equity (ROE) 199 return on net assets (RONA) 197–8, 198, 199, 200, 201, 204 return on sales (ROS) 257 revenue 14, 30, 53, 60, 64, 117, 147, 172, 173 decomposition 86 derivation of 29 total 86, 115–16, 116 INDEX revenue forecasting 14, 85–116 approaches to bottom-up versus top-down forecasting 87–8 classification of forecasting methodologies 85 decomposition of revenue 86 price elasticity of demand 86–7, 87 time frame 88 long-term forecasting 105–11 fitting a product life cycle curve 107–11 the product life cycle 107, 107 regression techniques 96–105 estimating the coefficients 97–9, 97, 98 forecasting using the TREND function 100, 100 limitations of regression analysis 105 the LINEST function 100–101, 101 multiple regression 101–4, 102, 103, 104, 105 regression analysis 96–7 the TREND function 99, 100 segmentation 112–16 business segment 114–15, 114, 115 consumer segment 112–13, 113, 114 mix effects 116 total revenue 115–16, 116 time series analysis 85, 87, 88–96 additive and multiplicative models 89–90, 90 components of a time series 89 estimating the trend and seasonal factors manually 91–4, 92, 93, 94 estimating the trend using the built-in moving average function 90–91, 91 forecasting using the trend, seasonal factors and the additive model 94–5, 95 limitations of time series analysis 96 the multiplicative model 96 time series data 88, 89 revenue multiples 188 revenue tax 163 ripple effect 51 risk 149, 150, 151, 155 assumption 248, 249 commercial 257 environmental 249 operational 248, 249 premium 179 ROACE see return on average capital employed ROCE see return on capital employed ROE see return on equity RONA see return on net assets INDEX ROS see return on sales ROUND function 154, 268 rounding 65–6, 65, 66, 259 ROUNDOWN function 268 ROUNDUP function 123, 133, 268 row consistency 210 rows versus columns 261, 261 S sales forecast 55 tax 127, 163–4 saving the model regularly 36 scenario development 25–31 scenario planning benefits 20 the development of 20 stage 1: identifying high impact, highly uncertain inputs 20, 21–4 stage 2: identify alternative development paths for key inputs 20, 25–6, 25–6 stage 3: select the three or four most informative scenarios 20, 26–8, 27 stage 4: develop the scenario stories 20, 28–30 stage 5: develop the business strategy 20, 30 scenarios 20 scheduling 258 scroll bars 225, 225 seasonal component 89 seasonal factors 89–90, 90, 91, 93, 94, 94, 96 seed 19, 60, 62, 71, 75, 78, 80, 83 segmentation see under revenue forecasting sensitivity analysis 147, 241–2, 241 shareholder value 193–5, 194, 199 ratio analysis 194–5 short period rate 180 shortcut keys 50–51 sign convention 66, 176 simple modified exponential trend curve 108 SIN function 268–9 SINE curve 71, 76 SMART goals 9 social trends 70 socio-economic shifts 18 specific help software 252 spin buttons 225 splash screens 237–9, 238 spreadsheet applications appearance consistency 229 freezing the screens 229–30, 230 placement of macro buttons 230 279 removing the gridlines 230 simple layout 229 basic programming techniques with Visual Basic 232–6 Forms toolbar 221–5 navigation attaching a macro to a button 228–9, 229 basic navigation 226 creating a menu using Visual Basic 227–8, 227, 228 hyperlinks 226–7, 227 recording simple macros 216 viewing macro code 216–17, 217 printing 231 creating a print macro 231, 231 setting print ranges 231 protecting the model 219–21 spreadsheet functions 263–70 spreadsheets 2, 11 advantages and disadvantages of using 3 and model ownership 35 see also input sheets; output sheets; working sheets start of trade 133, 258 stock 143–4, 144, 202 stock days 143, 144, 202 strategic plan 12, 18, 31 style and outline 59–69 alternative model layout 63–4 formatting 67–9 colours 67 column width 69 fonts 67 lines 67–8, 68 number styles 68–9 making the model intelligible 64 making range names work 64–5, 64 model layout 59–60 recalculation 69 retaining consistent logic by having the same formulae every year 65 rounding to invisible 65–6, 65, 66 sheet layout: inputs 60–61, 60, 61 sheet layout: outputs 63, 63 sheet layout: working 61–2 sign convention 66 some things to avoid, recalculation 69 things to avoid, hiding information 69 sum of the digits 131 SUM function 269 SUM IF function 47–8, 48, 269 supply chain 176 280 SWOT (strengths, weaknesses, opportunities and threats) analysis 257 synergy 176 T tables of data 259–61, 260 tactical plans 18 tasks 10 tax shield on financing 181 taxation 33, 34, 127, 173, 258 the challenges of modelling taxation 163 forms of taxation 163–4, 163 generic approach to corporation taxation workings 164–5, 165, 166–7 technical errors 206 technical obsolescence 131 technological change 70 templates 11, 13, 16, 17, 33 terminal value 14, 189, 258 testing and debugging 33, 34, 206–15 the importance of 206 testing strategy 207–15 step 1: eliminate technical and conceptual flaws 208–12, 214 step 2: range test the model 212–13, 215 step 3: stress test the model 213, 215 step 4: user testing 214, 215 types of errors conceptual errors 206 technical errors 206 user errors 206 text boxes 252 third-party forecasts 70 tick box 43, 43 time frame 13–14, 88 time periods 154–5, 154 time series analysis see under revenue forecasting time value of money 179 top-down forecasting 87–8 total revenue 86, 115–16, 116 trace error button 51 transport trends 15 trend curves, exponential, Gompertz and Logistic 108 TREND function 99, 100, 101, 105, 269 trend see under revenue forecasting trendline 55 regression 98 triangulation 126, 126 U uncertainty, scenario planning and model inputs 19–24 INDEX business model input checklist 24 defining the inputs 19 examining different approaches to uncertainty 19 scenario-based forecasting approach 20 stages of a scenario-based forecasting approach 20, 20 stage 1: identifying high impact, highly uncertain inputs 21–4 analyse variables according to uncertainty and impact 23–4, 23 identify all the variables that influence the business 21–2, 21 identifying the relationships between variables 22 review the data collection requirements 22–3 understanding the nature of uncertainty 19 uncertainty/impact matrix 23–4, 23, 24, 25, 29 units 14 upper asymptote 107, 108, 108 urbanisation 15 useful economic life 131 users documentation 254 errors 206 interfaces 34 support, continuing 255 testing 214 using the model 241–9 dependency ranking 242–4 displaying the assumption dataset on the output sheet 248 Excel Scenario Manager 248 GOAL SEEK 242–4 Monte Carlo analysis 245–8 risk and its management 248–9 sensitivity analysis 241–2 V valuation 60 see also project appraisal and company valuation valuation approaches see project appraisal and company valuation valuation range 190 value-added tax 127 variable costs see under operating costs variables 21–2, 21 dependent 96 endogenous 22 exogenous 22 281 INDEX independent (explanatory) 96–7, 100 uncertainty/impact 23–4, 23 variance analyses 13 version control 35 versions of the model, retaining 35–6 vertical analysis 201 vision statement 18 Visual Basic 216, 232–6 Visual Basic Editor 216–17, 217, 218, 240 VLOOKUP function 121, 122, 269–70 W WACC see weighted average cost of capital warrants 148 warranty 118 weighted average cost of capital (WACC) 152, 167, 180, 181, 190 wind-farm operators critical factors for 15, 16 develop the scenario stories 28–30, 29 Gantt chart 10, 11 impact/uncertainty matrix 23–4, 23 input timelines 29, 29 output template 17 potential input development paths 25–6, 25–6 revenue model 29–30 strategic inputs 30 variables influencing 21, 22 withholding tax 258 working capital see under capital expenditure and working capital working capital turnover 201–2 working sheets 60–5 workshops 17–18 writing and presenting the business plan key issues to address in a business plan 256 presenting the model outputs 259–62 graphs 261, 262 rounding 259 rows versus columns 261 tables of data 259–60 report style 259 typical content of a business plan document assumptions 257–8 commercial risk 257 economic 258 executive summary 257 financial 257 manning 258 market 257 milestones 258 safety, health and environment 258 sensitivity 258 strategic importance 257 taxes 258 technical 258 Z zero, set all inputs to 211 zero book value 136

140–41 capital gains tax 258 cars 131 cash 198, 202 deficits 157 surpluses 154, 157 cash breakeven point 146 cash flow 13, 33, 60, 130, 130, 136, 141, 172, 189 adjusting 153 anticipated 151 cumulative project cash flow 152 and equity value 186 forecasts 70 free (FCF) 163, 173, 173, 180 net 146 operational 147, 152 projected 257 short time intervals 180 sign convention 176 statements 156, 157, 159, 161, 169 tax and 127, 174 timing 164, 176–7, 177 cash flow cycle 140, 140, 141, 141, 202, 202 causative techniques 85 cell comments 251–2 chart wizard button 53 check boxes 223–4 circular references 159, 211 COC see cost of capital coefficients 97, 100, 103 collinearity 105 colour scheme 67 column consistency 210 column widths 69 company acquisitions 146 company law 70 company valuation model 190–92 competition 4, 15, 257 compounding 182 computers crash 36, 39 purchase 131 CONCATENATE function 44–5, 50, 263–4 conceptual errors 206 conditional formatting 52–3 Consolidate box 37–8, 38 consumers credit 78 expenditure 14 spending patterns 88 consumption proportion 131 INDEX control toolbox 222 convertibles 149, 155 corporate decision-making 13 corporate planning pyramid 12–13, 12 corporation tax 163, 164, 167, 172, 174, 258 cost of capital (COC) 204, 205 costs 147, 172, 173, 257 capital 60, 117 drivers of 123–7 fixed 122–3, 122, 123 inflexible 125, 125 operating see operating costs COUNT IF function 47, 48, 48, 264 covenants 156 CPM see Critical Path Method credit agencies 151 credit controllers 123, 123 creditor days 145, 202 creditors 145, 145, 147 critical factors 15, 16, 17, 23, 29 Critical Path Method (CPM) 11 currency 14, 46, 46, 80, 168 current liabilities 147 customer segmentation 112–13, 113, 114 cyclical component 89 D data assumptions 6, 7 collection 6, 7, 8, 22–3, 24 labels 38, 54 scenarios 61 warehousing 8 data collection manager 9 data screens 240, 240, 241 DATA VALIDATION function 53 DCF analysis see discounted cash flow analysis de minimus rule 128 debentures 148 debt 147, 150, 151, 155, 157, 204 bad 160–63 doubtful 160–61 funders 155 funding 152 instruments 157, 157 net 155 debt to equity ratios 155–6, 156, 190 debtor days 142, 162, 202 debtors 142–3, 147, 160, 161 debugging see testing and debugging decision-making analysis 1 273 INDEX choice 2 corporate 13 implementation 2 defining the outputs 12–18 alignment with the business’s overall objectives 12–13 business model output checklist 18 creating an output template 16, 17 defining the outputs required to answer the question 13–14 establish the basics 14 model outputs and corporate decisionmaking 13 real versus nominal forecasts 14 specify the time frame and period length 13–14 identifying the critical factors that determine the outputs 15 running a workshop 17–18 demand 75, 107, 108 demand curve 87 downward-sloping 86, 87 demographic shifts 18 dependencies 258 dependency ranking 242–4 depreciation 33, 34, 46, 118, 128, 129, 187, 203 other depreciation methods 131 reducing balance 130, 130, 137, 137 straight line 129–30, 130, 132, 136, 136 development log 35, 38 dialog boxes 252 discount factor 191 discount rates 45, 180, 183 discounted cash flow analysis 172, 181, 185, 188 company valuation example 190–92 EBITDA exit multiples 189 growth rate models 188–9 terminal values 188 valuation range 190 discounted cash flow theory 179–82 discounted cash flows 34, 182–3 discounting 182 distribution 117, 133–4 divide by zero 51 dividend cover 204 dividends 147, 180 documenting the model documentation outside the model contents of a typical user’s guide 255 continuing user support 255 fit for the purpose 253 good document form design 253–4, 254 structure 254 training material 255 user’s documentation 254 documentation within the model 251–3 cell comments 251–2 dialog boxes 252 macro comments 252–3, 253 specific help software 252 text boxes 252 need for documentation 250 when to document 250 where to document 250–51 Du Pont 11, 199 dynamic effects 59 dynamic links the CONCATENATE function 44 multiple models 36–7 E earnings per share 204 EBITDA (earnings before interest, tax, depreciation and amortisation), multiples 187–8, 189, 190, 192, 203, 257 economic added value (EVA) 204 economy of scale 119, 120, 120, 175, 176, 200 Edit Links box 37, 37 endogenous variables 22 enterprise value (EV) 186, 188 environmental risk 249 equity 147, 150, 151, 155, 157, 204 equity value 186 Excel Scenario Manager 248 exchange rates 15, 53, 70, 150, 167, 168, 258 behaviour 80–81 definition and uses 80 modelling approach 81–3 seed 80 exit options 257 exit screens 239–40 exogenous variables 22 EXP function 264 extrapolation techniques 85 eyeball lines 55 F FIFO (first in first out) basis 139 file folder structure 36, 36 file-naming convention 35 finance calculations 34 financial performance 18 FIND 210–11 firm value 186 fixed asset turnover 201 274 fixed assets see under capital expenditure and working capital fixed costs see under operating costs fonts 67 for and next loops 234–6 FORECAST function 95, 95, 96 forecasting, revenue see revenue forecasting forecasts 13 nominal 14 real 14 foreign exchange calculations 167–70 generic approach to modelling foreign exchange gains and losses 168 modelling foreign exchange gains and losses on overseas financing 169–70, 170, 171 modelling foreign exchange gains and losses on overseas revenue and costs 169 principles of foreign exchange accounting 167–8 format painter 50–51 formatting 67–9 colours 67 column widths 69 fonts 67 lines 67, 68 macros 218–19 number styles 68 Forms toolbar 221–5 formula bar 41, 41 formulae, deconstructing complex 208–9, 209 free cash flow (FCF) 163, 173, 173, 180, 186, 191, 205 free-form development 32 FREEZE PANES command 229–30, 230 funding see modelling funding issues G Gantt chart 10, 11 GDP see gross domestic product gearing 155, 156, 190, 245 GO TO function 53 GOAL SEEK function 242–4 goal statement 18 Gordon Growth Model 189, 190, 192 graphs 53–8, 60, 261–2, 262 eyeball lines 55 fixed cost 122, 122 improving the appearance of 54 market value 129, 129 one graph suits all 55–8, 56 triangulation 126 variable costs 119, 119 INDEX gridlines 54 gross additions/connections 88, 93, 97, 97, 98, 98, 104 gross domestic product (GDP) 15, 76, 84, 189 behaviour 71–2 definition and uses 70–71 modelling approach 72–4 seed 71 group sheet function 39 growth 205, 258 GROWTH function 106 growth rate 45, 71, 72, 74, 74, 75 H hard coding 38, 60 hedging techniques 150 HELP function 51 hiding information 69 hyperlinks 226–7, 227 I IF function 45–6, 47, 51, 65, 73, 74, 77, 120, 145, 211, 223, 264 implementation 2, 6, 7, 9 income distribution 15 levels 15 INDEX function 46, 101, 103, 103, 104, 108, 264–5 inflation 14, 15, 53, 70, 75, 132, 258 inflation rate behaviour 75–6 definition and uses 75 modelling approach 76–7 seed 75 inflexible costs see under operating costs information, hiding 69 input sheets 59–65, 60, 61, 72, 72 input timelines 29, 29, 30, 31 inputs additional 29 alternative 22 analysis 23, 24 extreme 213 inflation 76, 76 seed 19 strategic 30 uncertainty/impact 23–4, 23, 25 validation 66 variables 6, 7 interest 147, 156, 180 interest calculations 157 interest costs 131 INDEX interest income and charges alternative approaches to modelling interest income 159–60, 159, 160 interest rate assumptions 158 issues in modelling interest income and charges 158 modelling interest income and circular references 158–9 interest rates 14, 15, 53 assumptions 158 base see base interest rates interface sheets 36 internal rate of return (IRR) 13, 172, 183–5, 183, 184, 245, 257 more than one 184–5, 185 investment commencement of 258 investment funding 203 net 157 overseas 150–51 reinvestment ratio 203 investment control 149 investor measures dividend cover 204 earnings per share 204 IRR see internal rate of return IRR function 265 ISDATE function 240 ISERROR function 46, 51, 211, 213, 265 ISSER function 265 J J curve 146, 146, 152, 154 joint ownership 149 judgmental techniques 85 L land residual value 132 leases 149 operating (rents) 147 LEN function 265 lending rates 152 leverage 155 lines, in formatting 67–8, 68 LINEST function 100–101, 101, 102, 103, 104, 108, 266 list box 224, 225 LN function 266 loans 149, 152, 156 losses 163, 165, 168 M macroeconomic factors 15, 70–84 275 base interest rates 78–80 exchange rates 80–83 gross domestic product 70–75 inflation rate 75–7 other macroeconomic variables 84 population 83–4 macroeconomic forecasts 8 macroeconomics 70 macros 216–21 calculation 233, 233 comments 252–3, 253 editing the macro code 218 macros for repeated tasks 218–21 creating a personalised toolbar 221 formatting macros 218–19 personal macros 218 protecting the model 219–21 Monte Carlo 245, 246 multiplication tables 234–6, 234, 235 print macro 231, 231 recording simple 216 running the macro 218 viewing macro code 216–17, 217 manual code review 208 market growth 15 market liberalisation 18 market size 15 market value 129, 129, 130, 132 mathematical operations 209–10 MAX function 45, 125, 135, 179, 196, 266 mean square error (MSE) 99 media 19 microeconomic variables 15 microeconomics 70 Microsoft Excel 2, 4, 37, 40, 50, 51, 53, 90, 106, 180, 183, 210, 216, 218, 227, 234, 235, 236, 237, 239 milestones 10, 258 MIN function 45, 139, 154, 196, 266–7 mission statement 18 mobile telecommunications industry bottom-down/top-up forecasting 88 critical factors 15, 16 decomposition of revenue 86 penetration 105, 106, 107, 109, 111, 111 product cycle life 106, 107 regression analysis 97, 106 segmentation 112 third-generation mobile data services 88 total revenue 115, 116 MOD function 50, 125, 134 model developer 9 model development process management 32–9 276 best practice in model development avoiding some common pitfalls 39 the basics of quality control 35–8 the model development process create workings pages for all main sections and develop calculations 33 develop the user interfaces and conduct user testing 34 set up output and input templates 33 test and debug 33 transfer results to output pages 33 a model development project plan 34 establishing a modelling charter 34 using material from the modeller’s library 34 populate input templates with base or test data 33 styles of development 32 free-form development 32 model layout 59–60, 59 model outputs 13, 17, 259–62 model ownership 35 modeller’s toolbox 40–58 naming sheets 40 range names 40–44 useful features conditional formatting 52–3 divide by zero 51 format painter 51–2 macros for repeated tasks 218–21 one graph suits all 55–8 shortcut keys 50–51 using graphs 53–5 useful functions AND and OR 46–7 AVERAGE 50 CONCATENATE 44–5 MIN, MAX or IF statements 45–6 MOD 50 OFFSET 49–50, 49 SUM IF and COUNT IF 47–9, 48 modelling funding issues 146–57 cost of funding 151–2 debt to equity ratios 155–6, 156 funding strips 152–4 identifying the cash flow to be funded 147 operating environment 150–51 project control 149–50 putting the funding cost back in the model 156–7 balance sheet 157 cash flow statement 157 profit and loss account 156–7, 157 INDEX time periods 154–5, 154 types of funding 147–9 weighted average cost of capital 152 modularisation 63 Monte Carlo analysis 245–8 moving average 90, 91, 92 MSE see mean square error multiplicative model 96 multiple models and dynamic links 36–7 multiple regression 85, 87, 101–4, 102, 103, 104, 105 N naming sheets 40 navigation see under spreadsheet applications NCF see net cash flow net book value 130, 138, 139, 140, 140 net cash flow (NCF) 182 net debt 155 net operating profit after tax 204 net present value (NPV) 13, 172, 179, 182, 183, 184, 184, 189, 190, 194, 242, 243, 245, 257 nominal forecasts 14 NPV see net present value NPV function 267 number styles 68–9 numbers for an output 4 negative 4 within a formula 4 O OFFSET function 49–50, 49, 57, 119, 125, 134, 135, 138, 224, 248, 267 operating costs 29, 31, 60, 117–27, 161 completeness of operating costs 117, 117–18 cost behaviour 118 drivers of costs 123–7 inflation 126–7 inflexible costs 125, 125 tax 127 triangulation 126, 126 fixed costs 122–3, 122, 123, 125, 126, 200 variable costs 118–22 operating environment 19, 149, 150–51 operating profit 186 operational risk 248, 249 options 148 OR function 46–7, 267–8 ordinary shares 148 output sheets 33, 60, 63, 63, 64, 248 output template 16, 17, 18 277 INDEX outputs 6, 7, 23, 29 presenting model 259–62 overdrafts 149 overheads, allocated 175 overseas investments 150–51 P P/E ratios 186–7, 188 packaging 117 payback 172, 177–9, 245, 257 payroll cost 126, 203 PBT see profit before tax PED see price elasticity of demand penetration 105, 106, 107–12, 109, 114, 115 total 114 period ends 14 period length 14 PERT (Performance Evaluation and Review Technique) 10–11 PEST analysis 21 plant residual value 131–2 utilisation 258 PLC see product life cycle population 70 behaviour 83 definition and uses 83 growth 15 modelling approach 83–4 seed 83 post-project review 6, 7 PPP see purchasing power parity preference shares 148 prepayments 141, 141, 142 present value 182 price elasticity of demand (PED) 86–7, 87, 115 prices constant 14 fall in 4 print ranges 231 probability models 19 product life cycle (PLC) 106, 107, 107, 189 product prices 53 profit and loss 33, 60, 164, 257 profit and loss account 129, 141, 143, 156–7, 157, 161, 162, 163, 167, 169, 173 profit before tax (PBT) 181 profit flow 172 profit margin 199–200 profits 14 operating 186 programming techniques with Visual Basic 232–6 project appraisal and company valuation 172–92 conventions for setting out the cash flows 176–7 sign convention 176 timing 176–7, 177 discounted cash flow theory 179–82 calculating the discount rate 180 calculating the WACC 181 dicounted cash flow decision rule 182 discount rate 180 risk premium 179 short time intervals 180 time value of money 179 discounting cash flows in practice 182–3 evaluating companies 185–92 techniques for valuing companies 186–8 using DCF analysis in practice to value companies 188–92 identifying the relevant project cash flows 172–6 the cash effect of change 174–5 dealing with allocated overheads 175 group versus project 176 relevant costs and capital expenditure 174 relevant revenues 174 relevant taxes 174, 174 internal rate of return 183–5, 183, 184 more than one IRR 184–5, 184 payback 177–9 project appraisal and valuation techniques 172 project control 149–50 project manager 8, 9, 10 Project Plan see under business modelling process property space requirement 123, 124, 124 utilisation of 258 protecting the model see under spreadsheet applications purchase, timing of 132 purchase cost 131 purchase tax 127 purchasing power parity (PPP) 80, 81 R R2 value 97, 98, 102 radio (option) buttons 222–3, 223 range names 4, 40–44, 158, 159, 164, 191 accessing the named inputs and rows 44 common range names 43–4 defining several individual names 42, 42 278 naming one cell 41 naming one cell where the cell name is displayed to the left of reference value 41, 41 naming several values at once 42–3, 42 naming whole rows 43 range test the model 212–13 RANK function 268 ratios 60 the Du Pont pyramid of ratios 199–203 balance sheet management 201–2 further analysis 202–3 percentage of sales measures 201 profit margin and asset turnover 199–201 external analysis 194 internal analysis 194–5 internal ratio analysis 195 interpreting 196–7 average 196 high and low values 196 rank 196 useful ratios to calculate return on average capital employed (ROACE) 198 return on equity (ROE) 199 return on net assets (RONA) 197–8, 198, 199, 200, 201, 204 real forecasts 14 recalculation 69 reducing balance 130, 130 regression equation 98, 98 regression techniques see under revenue forecasting regulatory environment 70 rents 147 replicating actual results 212 report style 259 research agencies 8, 70 residual (“disturbance”) component 89 residual value 132 retail price index 75 return on average capital employed (ROACE) 198 return on capital employed (ROCE) 242, 243, 245, 257 return on equity (ROE) 199 return on net assets (RONA) 197–8, 198, 199, 200, 201, 204 return on sales (ROS) 257 revenue 14, 30, 53, 60, 64, 117, 147, 172, 173 decomposition 86 derivation of 29 total 86, 115–16, 116 INDEX revenue forecasting 14, 85–116 approaches to bottom-up versus top-down forecasting 87–8 classification of forecasting methodologies 85 decomposition of revenue 86 price elasticity of demand 86–7, 87 time frame 88 long-term forecasting 105–11 fitting a product life cycle curve 107–11 the product life cycle 107, 107 regression techniques 96–105 estimating the coefficients 97–9, 97, 98 forecasting using the TREND function 100, 100 limitations of regression analysis 105 the LINEST function 100–101, 101 multiple regression 101–4, 102, 103, 104, 105 regression analysis 96–7 the TREND function 99, 100 segmentation 112–16 business segment 114–15, 114, 115 consumer segment 112–13, 113, 114 mix effects 116 total revenue 115–16, 116 time series analysis 85, 87, 88–96 additive and multiplicative models 89–90, 90 components of a time series 89 estimating the trend and seasonal factors manually 91–4, 92, 93, 94 estimating the trend using the built-in moving average function 90–91, 91 forecasting using the trend, seasonal factors and the additive model 94–5, 95 limitations of time series analysis 96 the multiplicative model 96 time series data 88, 89 revenue multiples 188 revenue tax 163 ripple effect 51 risk 149, 150, 151, 155 assumption 248, 249 commercial 257 environmental 249 operational 248, 249 premium 179 ROACE see return on average capital employed ROCE see return on capital employed ROE see return on equity RONA see return on net assets INDEX ROS see return on sales ROUND function 154, 268 rounding 65–6, 65, 66, 259 ROUNDOWN function 268 ROUNDUP function 123, 133, 268 row consistency 210 rows versus columns 261, 261 S sales forecast 55 tax 127, 163–4 saving the model regularly 36 scenario development 25–31 scenario planning benefits 20 the development of 20 stage 1: identifying high impact, highly uncertain inputs 20, 21–4 stage 2: identify alternative development paths for key inputs 20, 25–6, 25–6 stage 3: select the three or four most informative scenarios 20, 26–8, 27 stage 4: develop the scenario stories 20, 28–30 stage 5: develop the business strategy 20, 30 scenarios 20 scheduling 258 scroll bars 225, 225 seasonal component 89 seasonal factors 89–90, 90, 91, 93, 94, 94, 96 seed 19, 60, 62, 71, 75, 78, 80, 83 segmentation see under revenue forecasting sensitivity analysis 147, 241–2, 241 shareholder value 193–5, 194, 199 ratio analysis 194–5 short period rate 180 shortcut keys 50–51 sign convention 66, 176 simple modified exponential trend curve 108 SIN function 268–9 SINE curve 71, 76 SMART goals 9 social trends 70 socio-economic shifts 18 specific help software 252 spin buttons 225 splash screens 237–9, 238 spreadsheet applications appearance consistency 229 freezing the screens 229–30, 230 placement of macro buttons 230 279 removing the gridlines 230 simple layout 229 basic programming techniques with Visual Basic 232–6 Forms toolbar 221–5 navigation attaching a macro to a button 228–9, 229 basic navigation 226 creating a menu using Visual Basic 227–8, 227, 228 hyperlinks 226–7, 227 recording simple macros 216 viewing macro code 216–17, 217 printing 231 creating a print macro 231, 231 setting print ranges 231 protecting the model 219–21 spreadsheet functions 263–70 spreadsheets 2, 11 advantages and disadvantages of using 3 and model ownership 35 see also input sheets; output sheets; working sheets start of trade 133, 258 stock 143–4, 144, 202 stock days 143, 144, 202 strategic plan 12, 18, 31 style and outline 59–69 alternative model layout 63–4 formatting 67–9 colours 67 column width 69 fonts 67 lines 67–8, 68 number styles 68–9 making the model intelligible 64 making range names work 64–5, 64 model layout 59–60 recalculation 69 retaining consistent logic by having the same formulae every year 65 rounding to invisible 65–6, 65, 66 sheet layout: inputs 60–61, 60, 61 sheet layout: outputs 63, 63 sheet layout: working 61–2 sign convention 66 some things to avoid, recalculation 69 things to avoid, hiding information 69 sum of the digits 131 SUM function 269 SUM IF function 47–8, 48, 269 supply chain 176 280 SWOT (strengths, weaknesses, opportunities and threats) analysis 257 synergy 176 T tables of data 259–61, 260 tactical plans 18 tasks 10 tax shield on financing 181 taxation 33, 34, 127, 173, 258 the challenges of modelling taxation 163 forms of taxation 163–4, 163 generic approach to corporation taxation workings 164–5, 165, 166–7 technical errors 206 technical obsolescence 131 technological change 70 templates 11, 13, 16, 17, 33 terminal value 14, 189, 258 testing and debugging 33, 34, 206–15 the importance of 206 testing strategy 207–15 step 1: eliminate technical and conceptual flaws 208–12, 214 step 2: range test the model 212–13, 215 step 3: stress test the model 213, 215 step 4: user testing 214, 215 types of errors conceptual errors 206 technical errors 206 user errors 206 text boxes 252 third-party forecasts 70 tick box 43, 43 time frame 13–14, 88 time periods 154–5, 154 time series analysis see under revenue forecasting time value of money 179 top-down forecasting 87–8 total revenue 86, 115–16, 116 trace error button 51 transport trends 15 trend curves, exponential, Gompertz and Logistic 108 TREND function 99, 100, 101, 105, 269 trend see under revenue forecasting trendline 55 regression 98 triangulation 126, 126 U uncertainty, scenario planning and model inputs 19–24 INDEX business model input checklist 24 defining the inputs 19 examining different approaches to uncertainty 19 scenario-based forecasting approach 20 stages of a scenario-based forecasting approach 20, 20 stage 1: identifying high impact, highly uncertain inputs 21–4 analyse variables according to uncertainty and impact 23–4, 23 identify all the variables that influence the business 21–2, 21 identifying the relationships between variables 22 review the data collection requirements 22–3 understanding the nature of uncertainty 19 uncertainty/impact matrix 23–4, 23, 24, 25, 29 units 14 upper asymptote 107, 108, 108 urbanisation 15 useful economic life 131 users documentation 254 errors 206 interfaces 34 support, continuing 255 testing 214 using the model 241–9 dependency ranking 242–4 displaying the assumption dataset on the output sheet 248 Excel Scenario Manager 248 GOAL SEEK 242–4 Monte Carlo analysis 245–8 risk and its management 248–9 sensitivity analysis 241–2 V valuation 60 see also project appraisal and company valuation valuation approaches see project appraisal and company valuation valuation range 190 value-added tax 127 variable costs see under operating costs variables 21–2, 21 dependent 96 endogenous 22 exogenous 22 281 INDEX independent (explanatory) 96–7, 100 uncertainty/impact 23–4, 23 variance analyses 13 version control 35 versions of the model, retaining 35–6 vertical analysis 201 vision statement 18 Visual Basic 216, 232–6 Visual Basic Editor 216–17, 217, 218, 240 VLOOKUP function 121, 122, 269–70 W WACC see weighted average cost of capital warrants 148 warranty 118 weighted average cost of capital (WACC) 152, 167, 180, 181, 190 wind-farm operators critical factors for 15, 16 develop the scenario stories 28–30, 29 Gantt chart 10, 11 impact/uncertainty matrix 23–4, 23 input timelines 29, 29 output template 17 potential input development paths 25–6, 25–6 revenue model 29–30 strategic inputs 30 variables influencing 21, 22 withholding tax 258 working capital see under capital expenditure and working capital working capital turnover 201–2 working sheets 60–5 workshops 17–18 writing and presenting the business plan key issues to address in a business plan 256 presenting the model outputs 259–62 graphs 261, 262 rounding 259 rows versus columns 261 tables of data 259–60 report style 259 typical content of a business plan document assumptions 257–8 commercial risk 257 economic 258 executive summary 257 financial 257 manning 258 market 257 milestones 258 safety, health and environment 258 sensitivity 258 strategic importance 257 taxes 258 technical 258 Z zero, set all inputs to 211 zero book value 136


pages: 344 words: 93,858

The Post-American World: Release 2.0 by Fareed Zakaria

affirmative action, agricultural Revolution, airport security, anti-communist, Asian financial crisis, battle of ideas, Berlin Wall, Bretton Woods, BRICs, British Empire, call centre, capital controls, central bank independence, centre right, collapse of Lehman Brothers, conceptual framework, Credit Default Swap, currency manipulation / currency intervention, delayed gratification, Deng Xiaoping, double entry bookkeeping, failed state, Fall of the Berlin Wall, financial innovation, global reserve currency, global supply chain, illegal immigration, interest rate derivative, Intergovernmental Panel on Climate Change (IPCC), knowledge economy, Mahatma Gandhi, Martin Wolf, mutually assured destruction, new economy, oil shock, open economy, out of africa, Parag Khanna, postindustrial economy, purchasing power parity, race to the bottom, reserve currency, Ronald Reagan, Silicon Valley, Silicon Valley startup, South China Sea, Steven Pinker, The Great Moderation, Thomas L Friedman, Thomas Malthus, trade route, Washington Consensus, working-age population, young professional, zero-sum game

Over the last two decades, about two billion people have entered the world of markets and trade—a world that was, until recently, the province of a small club of Western countries.* The expansion was spurred by the movement of Western capital to Asia and across the globe. As a result, between 1990 and 2010, the global economy grew from $22.1 trillion to $62 trillion, and global trade increased 267 percent. The so-called emerging markets have accounted for over half of this global growth, and they now account for over 47 percent of the world economy measured at purchasing power parity (or over 33 percent at market exchange rates). Increasingly, the growth of newcomers is being powered by their own markets, not simply by exports to the West—which means that this is not an ephemeral phenomenon. Nor is it one that is easily derailed. The financial panics, recessions, and debt crises that have left much of the industrialized world dazed for the last three years were unable to halt, or even significantly slow, the ongoing expansion elsewhere.

“Tip,” 179, 284 Opium Wars, 81 Organization of American States (OAS), 268 Organization of Petroleum Exporting Countries (OPEC), 30 Orissa, 155 Ottoman Empire, 67, 68, 73, 75, 82, 84, 85, 117–18 outsourcing, 27–28, 50, 148, 203 “Pacific Century,” 245 Pakistan, 12, 13, 14, 145, 159, 165, 166, 172, 176, 241, 260, 263, 264, 271 Palestinians, 6, 246 Pampers diapers, 105 Parsley crisis (2002), 239–41 Patriots Alliance, 135 Patten, Christopher, 248–49 “peaceful rise,” 119–20, 127–36 peasants, 65–66, 100, 106, 112 Pei, Minxin, 106, 110 pensions, 212 Perejil Island, 239–41 Perry, William, 265 Pershing missiles, 251 Persian Gulf, 32 Peru, 26 Peter I, Emperor of Russia, 83–84 petrochemicals, 32 Pew Global Attitudes Survey, 59, 122, 166, 226 Philippines, 11, 28, 133 Philosophical Dictionary (Voltaire), 123 Pilhofer, Aron, 220 Pines, Burton, 235 Pinker, Steven, 9 Pitt, William, 82 Pizarro, Francisco, 80 platinum, 131 Plaza Accord meetings, 282 plutonium, 176 polar ice caps, 33 political parties, 59, 154, 156–62, 178, 179–80, 235, 255, 276–77, 278, 279, 283 “political risk,” 19 Poos, Jacques, 245 population growth, 22, 31, 32–33, 50–51, 66, 80, 100, 112, 144, 145, 148, 178–83, 191, 213–16, 236–37 Portugal, 69, 79, 80, 116, 151 “positive supply shocks,” 20 post-American world: anti-Americanism and, 13, 35, 39, 42, 60, 166, 241, 245, 251–55, 274, 283 asymmetry in, 142–44, 269–72 cultural change in, 1–5, 16, 39, 41, 62–99, 126–27 economic conditions in, 6–61, 93, 94, 97, 197–99, 241–43, 255 future trends for, 1–5, 94–99, 199–203, 204, 239–85 legitimacy in, 243–50, 273–75 multilateralism in, 246–55, 267–69 nationalism in, 34–42, 101, 134–35, 143, 145, 158–59, 180–83, 192, 274 power shift in, 20, 22–23, 29, 34–42, 47–49, 51–54, 93–94, 99, 127–28, 137–44, 241–42, 259, 266–67 “rise of the rest” in, xii, 1–5, 47, 55–56, 65, 96–97, 99, 101, 199, 219–22, 242, 257–59, 263, 267–69, 285 strategic approach to, 142–44, 255–75 unipolar vs. multipolar order of, 1–5, 39, 52–53, 233, 241–42, 243–50, 264–65, 266–69, 274–75 U.S. global role in, xii, 4, 48–61, 117, 120, 142–44, 182–83, 223–26, 235–85 see also globalization postindustrial economies, 151, 200, 204 poverty, 3, 22, 65–66, 100, 102, 106, 111, 113–14, 117, 121, 146, 149, 150, 155–58, 169, 177 Powell, Colin, 240 Pratt School of Engineering, 205 Premji, Azim, 155 price levels, 21, 30, 67, 70, 128 private property, 73, 150 private sector, 148–53, 160–61 privatization, 107, 110, 150–51, 152, 153, 222 Procter & Gamble, 105, 151 product development, 202–3 productivity, 21, 30, 33, 50, 71–72, 160, 200, 212, 281, 282, 283 profit, 72, 80, 128, 200, 203 Protestantism, 81, 97–98, 125, 262 Prussia, 191 Pudong financial district, 102–3 Punjab, 180 purchasing power parity (PPP), 18n, 21, 66n, 113n, 148n, 198n qi (energy), 126 Qienlong, Emperor of China, 69 Qing dynasty, 63–64, 81 quotas, 109 Raffles, Stamford, 185 Rajasthan, 180 Ramo, Joshua Cooper, 142–43 Ranbaxy, 153 Ratner, Ely, 38 Rattner, Steven, 230 Reagan, Ronald, 168, 251, 284 real estate, 43, 85, 152, 217, 218, 225 recessions, 25, 227, 232 regional governments, 145, 161, 178–83 regional powers, 257–63 Reisen, Helmut, 281 Reliance Industries, 149, 153 religion, 15–16, 74, 76, 80, 81, 87, 98, 122–25, 127, 169, 171, 172, 213, 262, 278 Renaissance, 68 Report of Phihihu (Frederick II), 124 Republican Party, 59, 235, 276–77, 278, 280–81 reserve currency, 267 “responsible stakeholders,” 257 retail sector, 203 Revolutionary War, U.S., 194 Rhine River, 77 Ricci, Matteo, 124–25 Rice, Condoleezza, 252–53 Richie, Donald, 92 Rig Veda, 171 Rise of the Great Nations, The, 120 Rivoli, Pietra, 203 Roach, Steven, 282 Roberts, J.

* A note on terminology: For such a straightforward idea, gross domestic product (GDP) is a surprisingly complicated measurement. Although tradable items like iPhones or Nikes cost roughly the same from one country to the next, goods that can’t flow across borders—such as haircuts in Beijing—cost less in developing economies. So the same income goes much further in India than in Britain. To account for this, many economists use a measure of GDP called purchasing power parity (PPP), which substantially inflates the incomes of developing countries. Proponents say this better reflects quality of life. Still, when it comes to the stuff of raw national power, measuring GDP at market exchange rates makes more sense. You can’t buy an aircraft carrier, fund a UN peacekeeping mission, announce corporate earnings, or give foreign aid with dollars measured in PPP. This is why, in general, throughout this book I will calculate GDP using market exchange rates.


The Age of Turbulence: Adventures in a New World (Hardback) - Common by Alan Greenspan

"Robert Solow", addicted to oil, air freight, airline deregulation, Albert Einstein, asset-backed security, bank run, Berlin Wall, Bretton Woods, business cycle, business process, buy and hold, call centre, capital controls, central bank independence, collateralized debt obligation, collective bargaining, conceptual framework, Corn Laws, corporate governance, corporate raider, correlation coefficient, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cuban missile crisis, currency peg, Deng Xiaoping, Dissolution of the Soviet Union, Doha Development Round, double entry bookkeeping, equity premium, everywhere but in the productivity statistics, Fall of the Berlin Wall, fiat currency, financial innovation, financial intermediation, full employment, Gini coefficient, Hernando de Soto, income inequality, income per capita, invisible hand, Joseph Schumpeter, labor-force participation, laissez-faire capitalism, land reform, Long Term Capital Management, Mahatma Gandhi, manufacturing employment, market bubble, means of production, Mikhail Gorbachev, moral hazard, mortgage debt, Myron Scholes, Nelson Mandela, new economy, North Sea oil, oil shock, open economy, Pearl River Delta, pets.com, Potemkin village, price mechanism, price stability, Productivity paradox, profit maximization, purchasing power parity, random walk, reserve currency, Right to Buy, risk tolerance, Ronald Reagan, shareholder value, short selling, Silicon Valley, special economic zone, stocks for the long run, the payments system, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, total factor productivity, trade liberalization, trade route, transaction costs, transcontinental railway, urban renewal, working-age population, Y2K, zero-sum game

I recognize that poverty rates are notoriously hard to quantify, but according to the World Bank, the number of people living on less than $1 per day, a commonly used extreme-poverty threshold, has fallen dramatically from 1,247 million in 1990 to 986 million in 2004. In addition, since 1970, the infant mortality rate has declined by more than half, school enrollment rates have risen steadily, and literacy rates are up.* *Figures on world poverty rates are from t h e World Bank and a 2002 study by Columbia University economist Xavier Sala-i-Martin. T h e $l-per-day threshold is measured in 1985 dollars on a purchasing power parity basis. Economists use purchasing power parity as an alternative to market exchange rates w h e n gauging and comparing o u t p u t s and incomes across 259 More ebooks visit: http://www.ccebook.cn ccebook-orginal english ebooks This file was collected by ccebook.cn form the internet, the author keeps the copyright. THE AGE OF T U R B U L E N C E While, from a global perspective, wealth and the overall quality of life have risen, that success has not been uniform across regions or countries.

I first set foot in China in 1994, long after the reforms had begun. I've 295 More ebooks visit: http://www.ccebook.cn ccebook-orginal english ebooks This file was collected by ccebook.cn form the internet, the author keeps the copyright. T H E AGE OF T U R B U L E N C E been back several times. Like all visitors, I've been impressed and often amazed by the changes from visit to visit. The Chinese economy measured by purchasing power parity has become the second largest behind that of the United States. China has also emerged as the world's largest consumer of commodities generally the second-largest consumer of oil, and the largest steel producer, and has evolved from the bicycle economy of the 1980s into a country that produced more than seven million motor vehicles in 2006, with planned facilities to reach far beyond that.

The well-established principle of not putting all your eggs in one basket holds for global finance as well as for the private household. If and when foreigners' appetite for U.S. assets slackens, it will be reflected in lessened demand for U.S. currency and thus a lower foreign-exchange value of the dollar.+ A lower dollar, of course, will discourage importers and encourage *To facilitate comparisons, all nondollar currencies are converted to dollars on t h e basis of market exchange rates. Purchasing power parities (PPPs), t h e major alternative means of converting, are ill-suited for dealing with cross-border flows of saving and investment. For t h e world as a whole, saving must equal investment, irrespective of t h e currency of record. For t h e years 2003—2005, t h e absolute value of t h e statistical discrepancy between world saving and investment was $330 billion annually converting with PPPs, b u t only $66 billion employing market exchange rates, tl am disregarding t h e fact t h a t n o t all claims against U.S. residents are in dollars, and not all dollar claims, such as Eurodollars, are against U.S. residents.


pages: 414 words: 101,285

The Butterfly Defect: How Globalization Creates Systemic Risks, and What to Do About It by Ian Goldin, Mike Mariathasan

"Robert Solow", air freight, Andrei Shleifer, Asian financial crisis, asset-backed security, bank run, barriers to entry, Basel III, Berlin Wall, Bretton Woods, BRICs, business cycle, butterfly effect, clean water, collapse of Lehman Brothers, collateralized debt obligation, complexity theory, connected car, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deglobalization, Deng Xiaoping, discovery of penicillin, diversification, diversified portfolio, Douglas Engelbart, Douglas Engelbart, Edward Lorenz: Chaos theory, energy security, eurozone crisis, failed state, Fellow of the Royal Society, financial deregulation, financial innovation, financial intermediation, fixed income, Gini coefficient, global pandemic, global supply chain, global value chain, global village, income inequality, information asymmetry, Jean Tirole, John Snow's cholera map, Kenneth Rogoff, light touch regulation, Long Term Capital Management, market bubble, mass immigration, megacity, moral hazard, Occupy movement, offshore financial centre, open economy, profit maximization, purchasing power parity, race to the bottom, RAND corporation, regulatory arbitrage, reshoring, Silicon Valley, six sigma, Stuxnet, supply-chain management, The Great Moderation, too big to fail, Toyota Production System, trade liberalization, transaction costs, uranium enrichment

Some of the threats we discuss, specifically those related to governance, resemble the problems that Harvard Economist Dani Rodrik identified in a 2002 article in Harvard Magazine and later expanded on in his 2011 book The Globalization Paradox.3 We end the chapter by drawing lessons for global governance. GLOBAL INTEGRATION AND INEQUALITY Even among those who are doubtful about the benefits from globalization it is recognized that, on average, poverty has decreased during decades of global integration.4 The number of people in the developing world who are living on less than US$1.25 (in terms of purchasing power parity, or PPP) per day was as high as 1.9 billion in 1990 but had dropped to 1.29 billion by 2008; the poverty headcount ratio decreased from 43.1 to 22.4 percent over the same period.5 Even looking at higher income levels, it is predicted that “by 2030, roughly 50% of the world population [will] fall into the $6,000–$30,000 bracket, up from around 29% currently (and around 24% in the 1980s).”6 In fact, during the 20 years prior to the 2007/2008 financial crisis, “real disposable household incomes increased in all OECD [Organisation for Economic Co-operation and Development] countries, by 1.7% a year, on average.”7 Furthermore, there is evidence that the link between globalization and poverty reduction is not coincidental and that increasing integration and openness are indeed responsible for reducing global poverty.8 Figures like these are overly simplistic, and the debate about the relevant development indicators to consider and the appropriate ways of measuring them remains a concern for many development economists.

Source: Branko Milanović, 2011, “Global Inequality from Class to Location, from Proletarians to Migrants,” Policy Research Working Paper 5820, World Bank, Washington, DC, 15, accessed 3 February 2013, http://www-wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2011/09/29/000158349_20110929082257/Rendered/PDF/WPS5820.pdf. Used with permission. Figure 7.3. Income distribution, United States versus the BRIC countries, 2005. Based on national household surveys, with people ranked by per capita income or per capita consumption adjusted for price differences between the countries using the most recent purchasing power parity figures. BRIC denotes the emerging market economies of Brazil, Russia, India, and China. Each value on the horizontal axis indicates 5 percent (a ventile) of the population. The value 1 corresponds to the poorest 5 percent, 20 to the richest 5 percent. Values on the vertical axis correspond to the global percentile position of each national ventile; for the poorest 5 percent of the U.S. population (1 on the horizontal axis), the value is 60 (the location of the dashed line in the figure), implying that the poorest 5 percent in the United States are better off than 60 percent of the world population.

Whether communities that may be gaining membership will be able to translate diverse local interests into a cohesive global agenda to promote real change in global policies and institutions remains an open question. Individuals across the world now share their concerns, but there is a complexity and diffusion of responsibilities that means that the achievement of political mobilization and consequences, particularly in a sustained manner, is often lacking. Figure 7.5. (A) Oil demand and (B) car ownership by income level. PPP, purchasing power parity. Dominic Wilson and Raluca Dragusanu, 2008, “The Expanding Middle: The Exploding World Middle Class and Falling Global Inequality,” Global Economic Papers 170, Goldman Sachs, New York, 17, accessed 3 February 2013, http://www.ryanallis.com/wp-content/uploads/2008/07/expandingmiddle.pdf. Used with permission. There may no longer be an alliance of the global working class, but there are new global challenges to globalization as articulated, for example, through Attac, Anonymous, the Indignados, or the Occupy movement.50 Instead of protesting against the terms and conditions of work, protesters are concerned by the opacity of global institutions and the negative consequences of what many see as the systemic failure of globalization to deliver jobs and a sustainable environment.


pages: 361 words: 97,787

The Curse of Cash by Kenneth S Rogoff

Andrei Shleifer, Asian financial crisis, bank run, Ben Bernanke: helicopter money, Berlin Wall, bitcoin, blockchain, Boris Johnson, Bretton Woods, business cycle, capital controls, Carmen Reinhart, cashless society, central bank independence, cryptocurrency, debt deflation, disruptive innovation, distributed ledger, Edward Snowden, Ethereum, ethereum blockchain, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial exclusion, financial intermediation, financial repression, forward guidance, frictionless, full employment, George Akerlof, German hyperinflation, illegal immigration, inflation targeting, informal economy, interest rate swap, Isaac Newton, Johann Wolfgang von Goethe, Johannes Kepler, Kenneth Rogoff, labor-force participation, large denomination, liquidity trap, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, moveable type in China, New Economic Geography, offshore financial centre, oil shock, open economy, payday loans, price stability, purchasing power parity, quantitative easing, RAND corporation, RFID, savings glut, secular stagnation, seigniorage, The Great Moderation, the payments system, The Rise and Fall of American Growth, transaction costs, unbanked and underbanked, unconventional monetary instruments, underbanked, unorthodox policies, Y2K, yield curve

Table 4.1 gives estimates of “cash on person,” with figures adjusted to US dollars by purchasing power parity exchange rates.13 The table confirms that Austria and Germany are cash-intensive countries, whereas France is more similar to the United States. The figure includes only cash on person and not cash on property. Assuming similar ratios of the two for Austria and Germany as for the United States, then total cash balances would be, say, $500–600 worth of euros in Germany, and $285–340 in France, hardly enough to explain per capita currency holdings (and remember the survey is only counting adults). Table 4.1: Average cash balances in wallet Australia Austria Canada France Germany Netherlands United States Mean 59 148 64 70 123 51 74 Median 32 114 38 30 94 28 37 Note: Values are converted to US dollars by purchasing power parity–adjusted exchange rates.

The authors report making significant efforts to harmonize their approaches to gathering and analyzing data so as to make the results as comparable as possible (understanding that there are some differences across countries in the year of the survey). Although the diary survey design is similar across countries, and the process of harmonization thoughtful, the reader must recognize that precise comparisons are still difficult, and diary surveys that require meticulous detail from participants have many limitations to begin with. 13. Purchasing power parity exchange rates aim to translate nominal quantities in different currencies into a common denominator, taking account of the different price structures in each economy. The idea here, for example, is to better be able to compare the true purchasing power consumers in different countries are carrying around in their wallets or purses. 14. The 2008 survey is documented in ECB (2011). 15.


Affluenza: When Too Much Is Never Enough by Clive Hamilton, Richard Denniss

call centre, delayed gratification, experimental subject, full employment, hedonic treadmill, impulse control, Mahatma Gandhi, McMansion, mega-rich, Naomi Klein, Own Your Own Home, post-materialism, post-work, purchasing power parity, Thorstein Veblen, trickle-down economics, wage slave

Nearly half of highincome households are dissatisfied with their incomes, while four out of five in the lowest income group are dissatisfied. 62 HOW MUCH IS ENOUGH? TABLE 2: Attitudes to needs, by income group—‘You cannot afford to buy everything you really need’ Country Total (%) Lowest income group (%) United Kingdom Australia United States 61 62 50 79 79 63 Highest income group (%) GDP per person in 2000 (US$ PPP) 46 47 33 23 509 25 693 34 142 Note: PPP denotes purchasing power parity. Australians and Britons appear, however, to be much more dissatisfied with their incomes than Americans, and this is the case at both the high and the low ends of the scale. Overall, half of Americans say they cannot afford to buy everything they really need, compared with six in ten Britons and Australians. Nearly half the wealthiest households in the United Kingdom and Australia say their incomes are inadequate, whereas only one-third of wealthy Americans take that view.

The average disposable income for the poorest 20 per cent of families was $28 800 a year. This group is dominated by welfare recipients and includes a disproportionate share of single parents. 3 Hamilton, Overconsumption in Australia, op. cit. 4 Holbrook, op. cit. 5 Clive Hamilton, Overconsumption in Britain: a culture of middle-class complaint?, Discussion paper no. 57, The Australia Institute, Canberra, 200 ENDNOTES 6 7 8 9 10 11 2003. GDP is measured by purchasing power parity—that is, taking account of differences in exchange rates and differences in the purchasing power of domestic currencies in each country. Strictly speaking, equivalised household incomes would be better, that is, incomes adjusted for household size. It should be noted that the US survey was conducted in 1995 and the results might differ if it were repeated today. There has been a decade of luxury fever since that time, so it would be reasonable to assume that more Americans feel that their incomes are inadequate.


pages: 215 words: 59,188

Seriously Curious: The Facts and Figures That Turn Our World Upside Down by Tom Standage

agricultural Revolution, augmented reality, autonomous vehicles, blood diamonds, corporate governance, Deng Xiaoping, Donald Trump, Elon Musk, failed state, financial independence, gender pay gap, gig economy, Gini coefficient, high net worth, income inequality, index fund, industrial robot, Internet of things, invisible hand, job-hopping, Julian Assange, life extension, Lyft, M-Pesa, Mahatma Gandhi, manufacturing employment, mega-rich, megacity, Minecraft, mobile money, natural language processing, Nelson Mandela, plutocrats, Plutocrats, price mechanism, purchasing power parity, ransomware, reshoring, ride hailing / ride sharing, Ronald Coase, self-driving car, Silicon Valley, Snapchat, South China Sea, speech recognition, stem cell, supply-chain management, transaction costs, Uber and Lyft, uber lyft, undersea cable, US Airways Flight 1549, WikiLeaks

To measure religious observance, our data team used survey data from the Pew Research Centre, a think-tank. Levels of capitalism or feminism are harder to quantify, but an economic-liberty index produced by the Heritage Foundation, another think-tank, and a gender-equality index from the UN Development Programme (UNDP) may serve as proxies. Julian, unassuaged The relationship between fertility and wealth Sources: World Bank; The Economist *Purchasing-power parity Once GDP per person was taken into account, levels of capitalism, thus measured, did nothing extra to explain variations in birth rates. Both gender equality and the share of population that is irreligious did seem to play a part. But while those two traits may help explain why eastern European countries have far lower birth rates than Middle Eastern and Latin American ones with similar levels of income, neither was a meaningful predictor of fertility rates within Europe.

By contrast, the time spent in good health increases in a linear fashion with a country’s wealth. Italian 65-year-olds, for example, can expect to live about the same number of years as Norwegian ones, even though Norway is much richer than Italy. But Norway’s elderly are likely to spend nearly 80% of their remaining time in good health, whereas those in Italy can hope for just 40%. Live long and prosper Sources: Eurostat; IMF; The Economist *At purchasing-power parity This may be a result of countries’ spending on public services and infrastructure. Many characteristic health problems of old age, such as difficulties with hearing or eyesight, are not fatal; but unless they are dealt with, and unless public spaces are adapted to the needs of the elderly, they can make life miserable. Pavements, street signs and pedestrian signals, for example, are often designed for the young and able-bodied.


pages: 397 words: 112,034

What's Next?: Unconventional Wisdom on the Future of the World Economy by David Hale, Lyric Hughes Hale

affirmative action, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Berlin Wall, Black Swan, Bretton Woods, business cycle, capital controls, Cass Sunstein, central bank independence, cognitive bias, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, debt deflation, declining real wages, deindustrialization, diversification, energy security, Erik Brynjolfsson, Fall of the Berlin Wall, financial innovation, floating exchange rates, full employment, Gini coefficient, global reserve currency, global village, high net worth, Home mortgage interest deduction, housing crisis, index fund, inflation targeting, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Just-in-time delivery, Kenneth Rogoff, Long Term Capital Management, Mahatma Gandhi, Martin Wolf, Mexican peso crisis / tequila crisis, Mikhail Gorbachev, money market fund, money: store of value / unit of account / medium of exchange, mortgage tax deduction, Network effects, new economy, Nicholas Carr, oil shale / tar sands, oil shock, open economy, passive investing, payday loans, peak oil, Ponzi scheme, post-oil, price stability, private sector deleveraging, purchasing power parity, quantitative easing, race to the bottom, regulatory arbitrage, rent-seeking, reserve currency, Richard Thaler, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, sovereign wealth fund, special drawing rights, technology bubble, The Great Moderation, Thomas Kuhn: the structure of scientific revolutions, Tobin tax, too big to fail, total factor productivity, trade liberalization, Washington Consensus, Westphalian system, WikiLeaks, women in the workforce, yield curve

Figure 5.6 European Monetary Union Real Effective Exchange Rate Index (BIS), Adjusted by Relative Consumer Prices Source: Thomson Reuters This risk is further underlined by Figure 5.7, which shows relative hourly labor costs around the world, as surveyed annually by the US Bureau of Labor Statistics (updated using current exchange rates). This “absolute” measure of competitiveness or purchasing power parity does not depend on any expectation of mean reversion, but rather on the concept that an hour of manufacturing labor should cost about the same in advanced economies with access to similar technology and managerial know-how. On this basis, the euro appeared to be overvalued by 26 percent against the dollar and by 34 percent against the pound in the third quarter of 2010. Even if the euro weakened substantially from this level, which seemed a reasonable expectation, the lagged effects of currency overvaluation should continue to be seen in European industrial production statistics at least until the end of 2011.

There is little doubt that ambitious new Asian centers would like to attract as much international financial business as possible. (High concentrations of such business boosts land values, and the elites in these societies usually own much of the land.) Quite apart from the city-states (Singapore, Hong Kong, Dubai, Qatar, Bahrain), the big player in the background is China—more specifically Shanghai. China is by far the world’s largest creditor nation, and its national output, measured at purchasing power parity, was about $8.5 trillion in 2009 compared with the United States’ $14 trillion. (See Table 17.1.) No one can predict exactly what will happen to different countries’ output by 2020 or 2030, but there has to be a possibility that—if the trend growth differential of the 2000s (that is, about 6 percent a year, with 8 to 9 percent growth in China compared to 2.5 percent in the United States) persists—China’s GDP will catch up with US GDP by 2020.

See National Action Party (PAN) Panama, 48, 49–50 paper barrels, 197–198 paradigm shift, 204–205 Parsi, Trita, 216 Party of the Democratic Revolution (PRD), 29, 45 payroll taxes, xvii, 261–262 Paz, Octavio, 35 peak oil, 180–181 Pelosi, Nancy, 11 Pemex, xix, 40–41 Peru, 8, 48, 49, 51–52 Petrobras, 41–42 police force, Mexican, xix, 43 political reform, in Mexico, xix politics: in Australia, xxiv, 150; in Brazil, 33; in Iran, xxvi, 203–218; in Japan, xxi–xxii, 102–114; in Mexico, 29, 31, 32, 34–38, 43–45; in South Africa, 128; in US, 5–6, 269–270; in Zimbabwe, 125 pound sterling, 153–154, 161 power supply problems, in Southern Africa, 124–125, 131 PRD. See Party of the Democratic Revolution (PRD) PRI. See Institutional Revolutionary Party (PRI) productivity gains, xvi, 4 productivity lags, in Canada, 26 Project Kuwait, 184 protectionism, 24–25, 27 public debt, xxvii–xxviii, 81; global financial crisis and, 256–257; US, 5–6. See also fiscal deficits purchasing power parity, 245 Qajars, 206 quantitative easing, xvii, 7–8, 24, 96–97, 173 rand, 136, 137 rating agencies, 267, 268 rational choice theory, 286 reading skills, 293 real estate market: Australia, 143–145; Canadian, 16–17, 19–20 reality, perceptions of, 298–300 regional economic communities (RECs), 121–122 regulatory reform, 120 Rengo, 112 renminbi (RMB), 163–164 Republican Party, xvii, 6, 12–13, 63, 269–270 Reserve Bank of Australia, 144, 146–147 reserve currency, xxiv; alternative, 158; decline of British pound as, 153–154; euro as, 158–160; requirements for, 156–158; RMB as, 163–164; synthetic currency as, 161–163; US dollar as, 153–165 residential construction, 4 resource nationalism, 185 Ricardian equivalence, 71 Rich, Frank, 299 risk assessment, 276–277 RMB.


pages: 437 words: 115,594

The Great Surge: The Ascent of the Developing World by Steven Radelet

"Robert Solow", Admiral Zheng, agricultural Revolution, Asian financial crisis, bank run, Berlin Wall, Branko Milanovic, business climate, business process, call centre, Capital in the Twenty-First Century by Thomas Piketty, clean water, colonial rule, creative destruction, demographic dividend, Deng Xiaoping, Dissolution of the Soviet Union, Doha Development Round, Erik Brynjolfsson, European colonialism, F. W. de Klerk, failed state, Francis Fukuyama: the end of history, Gini coefficient, global pandemic, global supply chain, income inequality, income per capita, Intergovernmental Panel on Climate Change (IPCC), invention of the steam engine, James Watt: steam engine, John Snow's cholera map, Joseph Schumpeter, Kenneth Arrow, land reform, low skilled workers, M-Pesa, megacity, Mikhail Gorbachev, Nelson Mandela, off grid, oil shock, out of africa, purchasing power parity, race to the bottom, randomized controlled trial, Robert Gordon, Second Machine Age, secular stagnation, Simon Kuznets, South China Sea, special economic zone, standardized shipping container, Steven Pinker, The Wealth of Nations by Adam Smith, Thomas Malthus, trade route, women in the workforce, working poor

We are in the early stages of a new age of global prosperity in which, with many setbacks and challenges along the way, extreme poverty will continue to decline, incomes in developing countries will grow, health and education will improve, and democracy and basic freedoms will expand—haltingly, unevenly, but unrelentingly. * * * I. Consumption of $1.25 a day is the World Bank’s definition of “extreme” poverty, with all figures in purchasing power parity terms and adjusted for inflation, as described in chapter 2. II. This figure was calculated as a simple (unweighted) average, counting each country the same. A weighted average yields a higher growth rate due to the impact of China and a few other fast-growing countries with large populations. III. In RCTs, two groups of people are randomly selected from a population. One group (the treatment group) receives the product, policy, program, or action that is being studied (e.g., a new malaria medication, or free school lunches), and the other group (the control group) does not.

The figures are adjusted in two ways. First, they are corrected for inflation over time within countries by using the prices in a set base year. (That is, the data are measured in “constant” prices, or “real” terms.) Most of the data are measured in 2005 prices, although the Bourguignon and Morrisson data mentioned earlier are measured in constant 1985 prices. Second, the estimates are based on purchasing power parity (PPP) prices, sometimes called international prices. PPP prices account for the differences in price levels across countries. Anyone who travels knows that the cost of living varies widely across countries, and that the prices of the same goods can be very different. Fruits, vegetables, haircuts, and taxi rides are cheap in Tanzania, but expensive in Switzerland, so $1 converted at the local exchange rate goes a lot further in Dar es Salaam than it does in Zurich.

For discussions on this topic, see Kishore Mahbubani, The Great Convergence: Asia, the West, and the Logic of One World (New York: PublicAffairs, 2013); Charles Kenny, The Upside of Down: Why the Rise of the Rest Is Good for the West (New York: Basic Books, 2014); Smart Power 2.0: America’s Global Strategy (Washington, DC: US Global Leadership Coalition, 2012), www.usglc.org/downloads/2012/12/USGLC-Smart-Power-Brochure.pdf. 10. The global economy shares are from the World Bank’s World Development Indicators and include all low- and middle-income countries, and are calculated based on GDP in purchasing power parity prices. The trade shares are from Constantine Michalopoulos and Francis Ng, “Trends in Developing Country Trade 1980–2010,” policy research working paper 6334, World Bank, Development Research Group, Trade and Integration Team, Washington, DC, January 2013, http://elibrary.worldbank.org/doi/pdf/10.1596/1813-9450-6334. TWO: BREAKTHROUGH FROM THE BOTTOM 1. Thomas Hobbes, Leviathan, or The Matter, Forme and Power of a Common Wealth Ecclesiasticall and Civil, chap. 13.


pages: 573 words: 115,489

Prosperity Without Growth: Foundations for the Economy of Tomorrow by Tim Jackson

"Robert Solow", bank run, banking crisis, banks create money, Basel III, basic income, bonus culture, Boris Johnson, business cycle, carbon footprint, Carmen Reinhart, Cass Sunstein, choice architecture, collapse of Lehman Brothers, creative destruction, credit crunch, Credit Default Swap, David Graeber, decarbonisation, dematerialisation, en.wikipedia.org, energy security, financial deregulation, Financial Instability Hypothesis, financial intermediation, full employment, Growth in a Time of Debt, Hans Rosling, Hyman Minsky, income inequality, income per capita, Intergovernmental Panel on Climate Change (IPCC), Internet of things, invisible hand, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, laissez-faire capitalism, liberal capitalism, Mahatma Gandhi, mass immigration, means of production, meta analysis, meta-analysis, moral hazard, mortgage debt, Naomi Klein, new economy, offshore financial centre, oil shale / tar sands, open economy, paradox of thrift, peak oil, peer-to-peer lending, Philip Mirowski, profit motive, purchasing power parity, quantitative easing, Richard Thaler, road to serfdom, Robert Gordon, Ronald Reagan, science of happiness, secular stagnation, short selling, Simon Kuznets, Skype, smart grid, sovereign wealth fund, Steve Jobs, The Chicago School, The Great Moderation, The Rise and Fall of American Growth, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, universal basic income, Works Progress Administration, World Values Survey, zero-sum game

See US Congress (1973). 2 It is a possibility worth considering – and I touch on it later – that this particular concept of progress as material betterment over time is itself a modern construction. 3 Global population will reach ten billion people by 2056, according to the median variant in the latest UN projections (UN 2015). 4 As we discuss in Chapter 6, the GDP can be thought of as simultaneously measuring the sum of all economic output (gross value added), the sum of all incomes (wages and dividends/profits) and the sum of all expenditures (consumption and investment). This latter is often referred to as aggregate demand. For a fascinating history of the GDP and its limitations, see Philipsen (2015). 5 In October 2015, the World Bank updated its poverty lines to reflect changes in purchasing power parity. Extreme poverty is now defined as living on less than $1.90 a day at 2011 purchasing power parity. Updated poverty data at different poverty lines can be calculated on the World Bank’s PovCalNet website: http://iresearch.worldbank.org/PovcalNet/index.htm?0 (accessed 7 November 2015). 6 This evocative phrase comes from the Indian ecologist Madhav Gadjil (Gadjil and Guha 1995). 7 Philipsen (2015). 8 ‘Be moderate in prosperity, prudent in adversity’, advised Periander, the ruler of Corinth in 600 bc; ‘Prosperity tries the fortunate; adversity the great’, claimed Rose Kennedy, mother of JFK and RFK. 9 On income shares of the poor, see, for example, Milanovic (2011, 2012); see also his online presentation at www.ub.edu/histeco/pdf/milanovic.pdf, accessed 7 November 2015.

‘It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country’, Kennedy noted. ‘It measures everything in short, except that which makes life worthwhile.’20 Notice, also, that this comfortable elision of utility with the GDP completely undermines the humanitarian point above. It equates a dollar of GDP for a rich person with exactly the same dollar of GDP for a poor person. Statisticians may do clever things to adjust these dollars for ‘purchasing power parity’. But they can’t (as yet) adjust for the much higher marginal utility that a dollar represents to a poor person than it does to a rich one. The formal economics literature is replete with critical examinations of the GDP. But it was to be another 40 years before a senior politician once again dared to articulate its shortcomings. In February 2008, the President of France, Nicolas Sarkozy, set up a Commission led by Nobel laureate Joseph Stiglitz to explore the measurement of economic performance and social progress.21 ‘What we measure affects what we do’, reported the Commission late in 2009.


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Escape From Rome: The Failure of Empire and the Road to Prosperity by Walter Scheidel

agricultural Revolution, barriers to entry, British Empire, colonial rule, conceptual framework, creative destruction, currency manipulation / currency intervention, dark matter, disruptive innovation, Eratosthenes, European colonialism, financial innovation, financial intermediation, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Isaac Newton, Johann Wolfgang von Goethe, Johannes Kepler, joint-stock company, Joseph Schumpeter, knowledge economy, mandelbrot fractal, means of production, Network effects, out of africa, Peace of Westphalia, peer-to-peer lending, plutocrats, Plutocrats, principal–agent problem, purchasing power parity, rent-seeking, Republic of Letters, secular stagnation, South China Sea, spinning jenny, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, trade route, transaction costs, zero-sum game

While inequality also contributes to this pattern by boosting the standing of the United States, South Africa, and South America, the timing of modernization remains the principal determinant of these imbalances (figure I.4).4 FIGURE I.2   Distribution of global GDP adjusted for purchasing power parity in 1 CE. Sources: http://archive.worldmapper.org/display.php?selected=159 and http://archive.worldmapper.org/display.php?selected=162 (© Copyright Worldmapper.org / Sasi Group [University of Sheffield] and Mark Newman [University of Michigan]). FIGURE I.3   Distribution of global GDP adjusted for purchasing power parity in 1960. Sources: http://archive.worldmapper.org/display.php?selected=159 and http://archive.worldmapper.org/display.php?selected=162 (© Copyright Worldmapper.org / Sasi Group [University of Sheffield] and Mark Newman [University of Michigan]). FIGURE I.4   Distribution of people worldwide living on more than $200 per day in 2002 (adjusted for purchasing power parity, by country). Source: http://archive.worldmapper.org/display.php?

FROM THE FIRST TO THE SECOND GREAT DIVERGENCE 10  Institutions 337 11  New Worlds 420 12  Understanding 472 Epilogue: What Have the Romans Ever Done for Us? 503 Glossary 529 Technical Note to Chapter 1 533 Notes 537 References 603 Index 647 FIGURES AND TABLES FIGURES     I.1  Per capita GDP in the United Kingdom, China, and India, 1000–2000 CE     I.2  Distribution of global GDP adjusted for purchasing power parity in 1 CE     I.3  Distribution of global GDP adjusted for purchasing power parity in 1960     I.4  Distribution of people worldwide living on more than $200 per day in 2002     I.5  Social development scores in the most developed parts of western Eurasia, 5000 BCE–2000 CE     I.6  Social development scores in western and eastern Eurasia, 500 BCE–1500 CE     I.7  Social development scores in western and eastern Eurasia, 1500–1900 CE     I.8  The population of the single largest empire and the three largest empires in the world as a proportion of world population, 700 BCE–2000 CE     1.1  Macro-regions of state formation     1.2  The population of South Asia, Europe, the Middle East and North Africa, and the “Roman empire region” as a proportion of the population of East Asia, 200 BCE–2000 CE, at centennial intervals     1.3  The proportion of the population residing in the area covered by the Roman empire at its peak that was claimed by the largest polity in that area, 450 BCE–2000 CE     1.4  The proportion of the population of Europe claimed by the largest polity in that area, 250 BCE–2000 CE     1.5  The population of the area claimed by the Roman empire at its peak as a proportion of the population of Europe, 200 BCE–2000 CE     1.6  The proportion of the population of the MENA region claimed by the largest polity in that area, 700 BCE–2000 CE     1.7  The proportion of the population of South Asia claimed by the largest polity in that area, 500 BCE–2000 CE     1.8  The proportion of the population of East Asia claimed by the largest polity in that area, 250 BCE–2000 CE     1.9  Comparison between the proportion of the population of East Asia controlled by the largest polity in East Asia and the proportion of the population of China controlled by the largest polity in China, 250 BCE–2000 CE   1.10  Actual population and census population of the largest polity in China as a proportion of the total population of that region, 250 BCE–2000 CE   1.11  Proportion of the population of Europe and East Asia claimed by the largest polity in each region, 250 BCE–2000 CE     2.1  Italy in the early fourth century BCE     2.2  Political statuses in Italy in the third century BCE     2.3  Approximate military mobilization rates of the Roman citizenry, 346–31 BCE     2.4  Roman and Italian military deployments by region, 200–168 BCE     2.5  Expansion of the Roman empire to its peak size     2.6  (a) General form of the social structure of agrarian societies according to Ernest Gellner     2.6  (b) Adaptations of the Gellner model     3.1  The Middle Eastern political-military network, c. 1500–500 BCE     3.2  Political-military networks in the ancient Mediterranean during the third quarter of the first millennium BCE     3.3  Roman troop deployments by region as a share of all deployments, 200–168 BCE     3.4   Stylized typology of peripheries in the Roman-era Mediterranean     3.5  Time cost of transfers from Rome     3.6  Financial cost of transfers to Rome     3.7  The Mediterranean core of the Roman empire     4.1  The Akkadian, Neo-Assyrian, and Achaemenid empires     4.2  The Athenian empire (late fifth century BCE) and the empire of Alexander the Great (323 BCE)     5.1  The Mediterranean, c. 500 CE     5.2  The Roman empire, c. 555 CE     5.3  The Umayyad caliphate, c. 750 CE, and later successor states     5.4  The Carolingian empire, c. 800 CE     5.5  Carolingian partitions, 843–888 CE     5.6  The German (“Roman”) Empire, c. 1200 CE     6.1  The Mongol empire in the late thirteenth century CE     6.2  The Holy Roman empire and the European possessions of Charles V, c. 1550 CE     6.3  The possessions of Philip II, 1590s CE     6.4  The Ottoman empire, c. 1683 CE     6.5  Europe in 1812 CE     7.1  Empires of the Old World, c. 200 CE     7.2  The Han, Tang, Northern Song, Yuan, Ming, and Qing empires     8.1  Altitude profile of Europe     8.2  Altitude profile of East Asia     8.3  The Eurasian steppe     8.4  Spatial distribution of the core areas of empires of at least 1 million square kilometers in Afroeurasia     8.5  Probability of being part of large polities (> 1 million km2) at 100-year intervals, 500–1500 CE     8.6  Effective distance from the Eurasian steppe (by land)     8.7  Potential vegetation cover of Asia     9.1  Modern distribution of Chinese dialect groups 10.1.  


pages: 363 words: 28,546

Portfolio Design: A Modern Approach to Asset Allocation by R. Marston

asset allocation, Bretton Woods, business cycle, capital asset pricing model, capital controls, carried interest, commodity trading advisor, correlation coefficient, diversification, diversified portfolio, equity premium, Eugene Fama: efficient market hypothesis, family office, financial innovation, fixed income, German hyperinflation, high net worth, hiring and firing, housing crisis, income per capita, index fund, inventory management, Long Term Capital Management, mortgage debt, passive investing, purchasing power parity, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, Sharpe ratio, Silicon Valley, stocks for the long run, superstar cities, survivorship bias, transaction costs, Vanguard fund

., 222 Pioneering Portfolio Management, 204 Plaza Accord, 81 portfolio constraint, real estate, 259–260 portfolios alternative investment, 262–264 bonds in, 290–291, 309–310 commodities, 245–249 estimating returns, 155–159 examples, 159–162 expansion, 145–147 gold, 249–251 growth and value, 69–71 hedge funds, 186–187 high net worth, 264–266 real estate, 218 rebalancing, 319 stocks in, 290–291, 309–310 ultra-high net worth, 266–269 PPP. See purchasing power parity premium method, 155–159 price-earnings ratio (p-e), 31–32, 107 private equity, 191 key features, 211 proportional rule, 291 purchasing power parity (PPP), 100 Q qualified purchasers, 168 R real estate, 213–214 asset allocation, 258–262 direct ownership, 220–223 diversification gains, 219 portfolio constraint, 259–260 real estate capital, 214 real estate investment trusts (REIT), 4, 214–220 real house appreciation, 224–226 real returns, 15, 17, 25–27 compound, 35 rebalancing defined, 320–321 down economy, 323–324 portfolios, 319 up economy, 321–323 recessions, 6 effects on bonds, 7 effects on stocks, 7 Reinganum, Marc R., 49 REIT.

P1: a/b c06 P2: c/d QC: e/f JWBT412-Marston T1: g December 8, 2010 17:41 Printer: Courier Westford 100 PORTFOLIO DESIGN Irving Kravis and his colleagues at the University of Pennsylvania developed a methodology for measuring the cost of living across countries.4 This methodology, which has since been adopted by the World Bank and other international agencies, deflated gross national income using the cost of a common market basket to produce GNI adjusted for purchasing power parity or PPP. The results follow a consistent pattern. Less developed countries have lower costs of living than industrial countries. So the GNI adjusted for PPP of the less developed countries tends to be larger than the unadjusted GNI. In the case of the industrialized countries, the reverse is true. The GNI adjusted for PPP of these countries tends to be smaller than unadjusted GNI. Figure 6.3 presents the GNI per capita of the six largest emerging market economies using two measures of national income.


pages: 409 words: 125,611

The Great Divide: Unequal Societies and What We Can Do About Them by Joseph E. Stiglitz

"Robert Solow", accounting loophole / creative accounting, affirmative action, Affordable Care Act / Obamacare, agricultural Revolution, Asian financial crisis, banking crisis, Berlin Wall, Bernie Madoff, Branko Milanovic, Bretton Woods, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, clean water, collapse of Lehman Brothers, collective bargaining, computer age, corporate governance, credit crunch, Credit Default Swap, deindustrialization, Detroit bankruptcy, discovery of DNA, Doha Development Round, everywhere but in the productivity statistics, Fall of the Berlin Wall, financial deregulation, financial innovation, full employment, George Akerlof, ghettoisation, Gini coefficient, glass ceiling, global supply chain, Home mortgage interest deduction, housing crisis, income inequality, income per capita, information asymmetry, job automation, Kenneth Rogoff, Kickstarter, labor-force participation, light touch regulation, Long Term Capital Management, manufacturing employment, market fundamentalism, mass incarceration, moral hazard, mortgage debt, mortgage tax deduction, new economy, obamacare, offshore financial centre, oil shale / tar sands, Paul Samuelson, plutocrats, Plutocrats, purchasing power parity, quantitative easing, race to the bottom, rent-seeking, rising living standards, Ronald Reagan, school vouchers, secular stagnation, Silicon Valley, Simon Kuznets, The Chicago School, the payments system, Tim Cook: Apple, too big to fail, trade liberalization, transaction costs, transfer pricing, trickle-down economics, Turing machine, unpaid internship, upwardly mobile, urban renewal, urban sprawl, very high income, War on Poverty, Washington Consensus, We are the 99%, white flight, winner-take-all economy, working poor, working-age population

With growth rates that are so much larger than those of the advanced countries, the gap between them and the advanced countries is narrowing—though there is still a long way to go. China has now become the world’s largest economy—which simply means that because it has roughly five times the population, its income per head is only one-fifth that of the United States (based on standard statistics, called “purchasing power parities,” designed to convert the income in one country into an equivalent income in another). Still, that’s much better than it was even 25 years ago, when purchasing-power-parity income per capita was less than 5 percent that of the United States. But at the same time there has been an enormous growth of inequality in China—more millionaires, more billionaires. Although India’s growth spurt has not been as long or as fast as China’s, it did peak at 9 percent per year. But while fewer people and a smaller percentage of the population moved out of poverty, the increase in millionaires and even billionaires was equally impressive.

Meanwhile, East Asia took a different course; with governments leading the development effort (“the developmental state,” as it was called), incomes per capita rapidly doubled, tripled—eventually increasing eightfold. In the third of a century that Americans saw their incomes stagnate, China went from being an impoverished country, with a per capita income less than 1 percent that of the United States and a GDP that was less than 5 percent that of the United States, to being the largest economy in the world (measured in what economists called purchasing power parities). By the end of the next quarter-century, it was slated to be twice the size of the U.S. economy. But ideologies are often more influential than evidence. Free-market economists seldom looked at the success of the managed-market economies of East Asia. They preferred to talk about the failures of the Soviet Union, which eschewed the use of the market altogether. With the fall of the Berlin Wall and the collapse of Communism, it seemed that free markets had triumphed.


pages: 1,205 words: 308,891

Bourgeois Dignity: Why Economics Can't Explain the Modern World by Deirdre N. McCloskey

Airbnb, Akira Okazaki, big-box store, Black Swan, book scanning, British Empire, business cycle, buy low sell high, Capital in the Twenty-First Century by Thomas Piketty, clean water, Columbian Exchange, conceptual framework, correlation does not imply causation, Costa Concordia, creative destruction, crony capitalism, dark matter, Dava Sobel, David Graeber, David Ricardo: comparative advantage, deindustrialization, demographic transition, Deng Xiaoping, Donald Trump, double entry bookkeeping, en.wikipedia.org, epigenetics, Erik Brynjolfsson, experimental economics, Ferguson, Missouri, fundamental attribution error, Georg Cantor, George Akerlof, George Gilder, germ theory of disease, Gini coefficient, God and Mammon, greed is good, Gunnar Myrdal, Hans Rosling, Henry Ford's grandson gave labor union leader Walter Reuther a tour of the company’s new, automated factory…, Hernando de Soto, immigration reform, income inequality, interchangeable parts, invention of agriculture, invention of writing, invisible hand, Isaac Newton, Islamic Golden Age, James Watt: steam engine, Jane Jacobs, John Harrison: Longitude, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Kenneth Arrow, knowledge economy, labor-force participation, lake wobegon effect, land reform, liberation theology, lone genius, Lyft, Mahatma Gandhi, Mark Zuckerberg, market fundamentalism, means of production, Naomi Klein, new economy, North Sea oil, Occupy movement, open economy, out of africa, Pareto efficiency, Paul Samuelson, Pax Mongolica, Peace of Westphalia, peak oil, Peter Singer: altruism, Philip Mirowski, pink-collar, plutocrats, Plutocrats, positional goods, profit maximization, profit motive, purchasing power parity, race to the bottom, refrigerator car, rent control, rent-seeking, Republic of Letters, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Coase, Scientific racism, Scramble for Africa, Second Machine Age, secular stagnation, Simon Kuznets, Social Responsibility of Business Is to Increase Its Profits, spinning jenny, stakhanovite, Steve Jobs, The Chicago School, The Market for Lemons, the rule of 72, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, total factor productivity, Toyota Production System, transaction costs, transatlantic slave trade, Tyler Cowen: Great Stagnation, uber lyft, union organizing, very high income, wage slave, Washington Consensus, working poor, Yogi Berra

The Great Recession was not economic Armageddon: Years to recover from the Great Recession, for large and some small countries, measured by matching or exceeding the previous peak of GDP per head at U.S. purchasing power parity Zero to 1 year 2 years 3 years 4 years or more Australia Brazil European Union Argentina* Egypt Canada France Bangladesh* Israel Chile Mexico China* South Korea Columbia* Russia Greece Nigeria Germany UK India* Peru Japan Ireland Poland Mongolia Italy Taiwan Indonesia* Pakistan* WORLD USA Philippines Saudi Arabia South Africa # Spain Turkey (2007 peak) Venezuela * = peak occurred before 2008. Source: World Bank figures corrected for inflation and purchasing power parity. * The eminent Marxist historian Eric Hobsbawm (1917–2012) gave in 2011 the conventional left-wing analysis of the Great Recession.

Now the world’s growth rate of per-capita real income at purchasing-power parity, despite the Great Recession, I have noted, is 4.8 percent per year. However it is calculated it is notably faster than the golden age after 1945. Nor are the world’s poor paying for the growth. The economists Xavier Sala-i-Martin and Maxim Pinkovsky report on the basis of detailed study of the individual distribution of income that “world poverty is falling.” They measure it person-by-person as against nation-by-nation. (The two methods, though, come to much the same conclusion.) “Between 1970 and 2006, the global poverty rate [defined in absolute, not relative, terms] has been cut by nearly three quarters. The percentage of the world population living on less than $1 a day (in purchasing-power-parity-adjusted 2000 U.S. dollars) went from 26.8% in 1970 to 5.4% in 2006.”18 The Great Recession slowed growth among the rich countries, but not much among the vigorously growing the poor countries.

The signs are good that if we keep our wits about us we can, within a few generations, achieve for everyone on earth the riches of Sweden and America. All the formerly poor can enjoy bourgeois incomes and can pursue, if they wish, the spiritual enrichment that such an income permits. We’re on the way to a pretty good material paradise. Look at the numbers.3 Average daily expenditures by Haitians and Afghans, expressed in present-day U.S. prices at “purchasing power parity”—and so allowing for inflation and the relevant exchange rates among currencies—are well below $3 a day, which before 1800 was what the average human more or less everywhere expected to make, earn, and consume.4 So it had been, always, back to the caves. Imagine living each day on the cost, spread over all your activities, of a half gallon of milk. If you’ve been to Liberia or Afghanistan it’s not hard to imagine.


pages: 352 words: 80,030

The New Silk Roads: The Present and Future of the World by Peter Frankopan

active measures, Berlin Wall, bitcoin, blockchain, Boris Johnson, cashless society, clean water, cryptocurrency, Deng Xiaoping, don't be evil, Donald Trump, Ethereum, ethereum blockchain, F. W. de Klerk, failed state, Fall of the Berlin Wall, global supply chain, illegal immigration, income inequality, invisible hand, land reform, Mark Zuckerberg, mass incarceration, Nelson Mandela, purchasing power parity, ransomware, Rubik’s Cube, smart cities, South China Sea, sovereign wealth fund, trade route, trickle-down economics, UNCLOS, urban planning, WikiLeaks, zero-sum game

Decisions about whose voice should and whose should not be heard are closely linked to the consolidation and retention of power in a changing world and with fears about the consequences if alternative views are allowed to be expressed.23 We are living in the Asian century already, a time when the movement of global gross domestic product (GDP) from the developed economies of the west to those of the east is taking place on an astonishing scale – and at astonishing speed. Some projections anticipate that by 2050 the per capita income in Asia could rise sixfold in purchasing power parity (PPP) terms, making 3 billion additional Asians affluent by current standards. By nearly doubling its share of global GDP to 52 per cent, as one recent report put it, ‘Asia would regain the dominant economic position it held some 300 years ago, before the Industrial Revolution.’24 The transference of global economic power to Asia ‘may occur somewhat more quickly or slowly’, agreed another report, ‘but the general direction of change and the historic nature of this shift is clear’ – concluding similarly that we are living through a reversion to how the world looked before the rise of the west.25 The acute awareness of a new world being knitted together has helped prompt plans for the future that will capitalise on and accelerate the changing patterns of economic and political power.

They are based on a great movement of global GDP over the last twenty-five years, with more than 800 million being lifted above the poverty line since the 1980s in China alone.18 While the setting of what constitutes ‘poverty’ is a matter of debate for development economists and others, there can be little doubt that the pace as well as the extent of China’s growth is astonishing. In 2001, China’s GDP was 39 per cent of that of the US (on a purchasing power parity); that rose to 62 per cent by 2008. By 2016, China’s GDP was 114 per cent that of the United States, measured on the same basis – and is likely to rise both further and sharply in the next five years.19 This change is not just transformational for China; it is transformational for the rest of the world. For example, in anticipation of the further rise of the Chinese middle class, one entrepreneur based in Beijing has bought 3,000 hectares of land in central France, with the aim of providing flour for a chain of more than a thousand boulangeries that he is planning to open across China.


pages: 193 words: 63,618

The Fair Trade Scandal: Marketing Poverty to Benefit the Rich by Ndongo Sylla

British Empire, carbon footprint, corporate social responsibility, David Ricardo: comparative advantage, deglobalization, Doha Development Round, Food sovereignty, global value chain, illegal immigration, income inequality, income per capita, invisible hand, Joseph Schumpeter, labour mobility, land reform, market fundamentalism, mass immigration, means of production, Mont Pelerin Society, Naomi Klein, non-tariff barriers, offshore financial centre, open economy, Philip Mirowski, plutocrats, Plutocrats, price mechanism, purchasing power parity, Ronald Reagan, Scientific racism, selection bias, structural adjustment programs, The Wealth of Nations by Adam Smith, trade liberalization, transaction costs, transatlantic slave trade, trickle-down economics, Washington Consensus, zero-sum game

In this increasingly complex world, the domestic fight for self-determination of the people and for better control of economic processes is, in my view, the cornerstone on which the poorest countries will have to build themselves up, as young nations aspiring to have their say in the global concert of nations. 152 Sylla T02779 01 text 152 28/11/2013 13:04 Annexes Table A1 Productivity statistics according to development level GDP per capita GDP per capita, PPP* (current 2008 $) (constant 2005 $) Low-income countries Lower middle income Upper middle income 490 2,220 8,389 Agricultural value added per worker (constant 2000 $) 1,114 4,427 13,052 285 609 3,681 Note: PPP = * Purchasing Power Parity. Source: Development Indicators of the World Bank (2010a). Table A2 Transfair USA’s revenue compared to additional FT income transferred from USA (in thousand $) Licence fees Total revenue 2001 2002 2003 2004 2005 2006 2007 2008 2009 686 1,114 1,665 2,748 4,209 5,570 7,665 9,270 10,008 307 474 933 1,895 2,932 4,521 4,961 5,757 6,881 Total additional FT FT premium income from USA 5,679 8,121 15,919 26,624 14,818 17,770 19,870 34,671 48,209 344 518 1,017 2,061 2,858 4,037 6,091 10,811 13,778 Receipts transferred* 5,335 7,603 14,902 24,563 11,960 13,733 13,779 23,860 34,431 Note: * Additional income created by the positive differential between FT prices and market prices.

., 33, 64, 67; Keynesianism, 42, 74, 141; euthanasia of the rentier, 157(n2) Kiribati, 135 Klein, Naomi, 78 Korea, the Republic of, 155(n1) Kraft Jacobs Suchard, 21 175 Sylla T02779 02 index 175 28/11/2013 13:04 the fair trade scandal Label-Step, 47 Labour, child labour, 51, 69, 79, 80, 113, 158(n7); division of labour, 63, 64, 65, 75; family labour, 51, 91, 94–5; forced labour, 71, 75, 80; hired labour, 43, 48, 49, 50, 51, 52, 94, 95, 112, 123, 129, 137, 160(n4), 161(n5); labour power, 76, 88, 98, 140, 148; labour supply, 9, 94–5; see also wage Lao People’s Democratic Republic, 135 Latin America, 9, 13, 15, 24, 37, 38, 42, 49, 74, 80, 107, 112, 115, 116, 117, 122, 129, 130, 131, 133, 135, 136, 137, 138, 139, 148, 154, 155(n1), 159(n23), 161(n14), 162(n22) Latin American and Caribbean Network of Smallholder Fair Trade Producers, 107 Latouche, Serge, 82–3 Least developed countries, see developing countries Lesotho, 135 Liberalism, 63, 67, 68, 74; neoliberal critique, 1, 59, 68–74, 84, 126, 146, 156(n4); neoliberalism, 3, 4, 6, 7, 41–3, 56, 59, 72, 120, 139–45, 146, 151, 162(n26), 163(n1) Liberia, 135 List, Friedrich, 8, 25; see also Protectionism Logistics Performance Index, 89, 137 Lomé Convention 155(n2) Low Income Food Deficit Countries, 135 Luxembourg, 162(n29) Madagascar, 135 Magnusson, Lars, 63–8, 71 Malawi, 134, 135 Malaysia, 155(n1) Maldives, 135 Mali, 134, 135 Market Access Overall Trade Restrictiveness Index, 30 Mars, 21 Marx, Karl, 60, 62, 75, 87, 157(n3) Marxist (tradition), 75, 76, 82, 157(n11) Mauritania, 135 Max Havelaar (novel), 39 Max Havelaar (label), 6, 39–40, 44–5, 130, 139, 157(n4), see also Fairtrade Max Havelaar (labelling initiatives), France, 46, 127, 156(n9), 158(n10), 159(n23), 160(n25), 161(n6); Switzerland, 127 McDonald’s, 77, 78, 79 Mexico, 3, 38, 79, 98, 114, 118, 131, 132, 133, 134, 136, 137, 139, 155(n1), 157 (n4), 159(n20), 161(n17) Mercantilism, 64–7 Microfinance, 1 Middle East, 15, 49 Mill, John Stuart, 65 Millennium development goal(s), see Development Mises (von), Ludwig, 42 Mohan, Sushil, 101–2 Monde (Le), 159(n19) Mont Pelerin Society, 42 Mozambique, 135 Multatuli, see Max Havelaar (novel) Multinationals, 19, 21, 41, 47, 53, 55, 56, 77–81, 140, 147, 149, 157(n13), 158(n5), 160(n26) Myers, Norman, 23, see also hamburger connection Nadel, Henri, 76 National sovereignty, 33, 64, 152 Neoclassical economics, 4, 11; 42, 65, 66, 72, 74, 82, 94–5, 140; general equilibrium theory, 99; gravity models, 162(n20) Neoliberalism, see liberalism Nepal, 135 Nestlé, 21, 78 Netherlands, 3, 20, 38, 39, 40, 54, 160 (n26), 162(n29); Groningen, 70; Kerkrade, 36 Network of European World Shops (the), 44, 46 New York, 157(n3) New York Times (the) 159 (n15) NGO, 3, 36, 38, 46, 47, 50, 53, 116, 117, 138 Nicaragua, 133, 134 Niche, 38, 70, 77 Niger, 135 Nigeria, 21 Nokia, 85–6, 125 Non-tariff barriers, 26–7, 30, 90 176 Sylla T02779 02 index 176 28/11/2013 13:04 index North America, 24, 35, 40, 44, 53, 136 North American Free Trade Agreement (NAFTA), 136 North-North relations, 31, 54, 80, 108 North-South relations, 1, 16–33, 34, 35, 40, 41, 43–4, 61–2, 73, 80, 87, 90, 97, 105–9, 126, 135, 140–5, 147, 148, 149, 163(n2), see also dependency theory Norway, 28, 162(n29) Oceania, 9, 24, 129, 131, 154 Organic production, 9, 53–5, 79, 92, 96, 112, 115, 160(n1) Organisation for Economic Co-operation and Development (OECD), 28–9; OECD countries, 10, 15, 21, 28, 29, 30, 42, 131, 144 Overall Trade Restrictiveness Index, see Market Access Overall Trade Restrictiveness Index Oxfam, 30, 32, 36, 38, 72, 122 Pakistan, 36 Palestine, 35 Panama, 134 Papua New Guinea, 134 Penson, Jonathan, 138 Peru, 114, 133, 134, 159(n20), 160(n26) Philippines, the, 155(n1) Pitt, William, 8 Polanyi, Karl, 75, 140 Popper, Karl, 42, 58–60 Portugal, 23, 65 Poverty, 2, 7, 10, 11, 33, 35, 36, 40, 58, 62, 68, 79, 84, 85–6, 95, 97–100, 103, 105, 109, 113, 114, 119, 122, 125, 131, 132, 137, 142, 143, 144, 145, 147, 148 Prebisch, Raúl, 17, 38 Price volatility, 17–18, 66, 86, 109 Primary product dependency, 10, 16, 90, 121, 132–8, 140–1, 147 Primary product financialisation, 17–8 Problem of induction, 110 Producer organisations, 3, 80, 98, 118–19, 157(n3), 159 (n16); certification, 45, 48, 49, 51, 91, 109, 111; 159(n20), 160(n4); selection bias, 81, 116–17, 132–9, 159(n23), 160(n26); shortcomings of the Fairtrade model, 97, 107–9, 138, 142–3, 162(n25); statistics, 51–3, 123–4, 130–1, 132–4, 161(n11) Producer support Estimate, 28–9; see also OECD Productive theory, 64–5, 75 Protectionism, 5, 25–33, 63, 67–8, 71–2, 145; infant industries protection, 25, 32, 37, 66, 67; see also free trade Puerto Rico, 35 Purchasing Power Parity, 153 Quinoa, 54, 159(n15) Rainforest Alliance, 53–6 Reagan, Ronald, 42 Ricardo, David, 65–7 Rist, Gilbert, 34 Rodrik, Dani, 73–4 Roozen, Nico, 3, 38–43, 54, 70, 87–8, 98, 139, 158(n4), 163(n1) Rowntree, Joseph, 72, Ruben, Ruerd, 113–17, 160(n27) Rugmark, 47 Rwanda, 134, 135, 138, Sachs, Jeffrey, 162(n23) Sao Tomé and Principe, 134, 135 Saint Lucia, 91, 134 Saint-Vincent and the Grenadines, 91, 134 Sales Exchange for Refugee Rehabilitation and Vocation (SERRV), 35–6 Samoa, 135 Samsung, 85–6, 125 Sara Lee, 70 Schumpeter, Joseph A., 63, 156(n3) Second World War, 35, 42 Selection bias, see producer organisations SELFHELP Crafts (shops), see Ten Thousand Villages Senegal, 134, 135 Sharif, Mohammed, 94–5 Sidwell, Marc, 68–73 Sierra Leone, 135 Singapore, 155(n1) Singer, Hans, 17; see also Structuralist school Slavery, 60–2, 75 177 Sylla T02779 02 index 177 28/11/2013 13:04 the fair trade scandal Slavery footprint, 156(n2) Smith, Adam, 8, 63–8, 75–6, 156(n3) Smith, Alastair M., 132, 156(n4) Smithsonian Migratory Bird Center, Bird-friendly Coffee programme, 54 Social capital, 101, 117, 119 Solidaridad, 3, 38–9, 114; see also Roozen Solomon Islands, 135 Somalia, 135 SOS Wereldhandel; see Fair Trade Organisatie Spaghetti bowl, 27 South Africa, 136, 137, 159(n20), 162(n21) South South relations, 80, 149, 163(n2) Sri Lanka, 134 STABEX, see Export earnings stabilisation system Starbucks, 77, 78, 150; Coffee and farmer equity practices, 55 Stigler, Georges, 42 Stiglitz, Joseph E. and Charlton, Andrew, 31–3, 66 Structural adjustment policies, 17, 18, 42 Structuralist school, 37–8 Sudan, 135 Sugar, 16, 27, 30, 36, 60–2, 80, 85, 90 Sustainable Agriculture Network, 53 Sustainability, 4, 24, 34, 47, 50, 53, 55, 56, 57, 70, 79, 113, 138, 142, 149–50, 158(n5) Sustainable development, 4, 34, 47, 55, 70, 82, 83, 156(n2), 163(n1) Sustainable Fair Trade Management System, 45; see also World Fair Trade Organization Sweden, 63, 162(n29) Switzerland, 53, 127, 128 System for Minerals (Sysmin), 155(n2) Taiwan, 155(n1) Tanzania, United Republic of, 134, 135 Tariff escalation, 26–8, 30 Tariff peaks, 30 Tax havens, 157(n13) Tea, 40, 49, 52, 53, 54, 56, 80, 130, 133, 134, 136 Ten Thousand Villages, 35–6 Thailand, 155(n1) Thatcher, Margaret, 42 Third Worldism, 36–40, 120 Times (the), 160(n2) Timor Leste, 135 Togo, 134, 135, 155(n2) Torrens, Robert, 65 Trade not aid (slogan), 38, 40, 126 Trade structure, 9, 10, 133–8, 141, 154, 163(n2); see also Developing countries Traders, 20, 44, 49, 86, 106, 116–17, 140 Transfair USA, additional income transferred, 125, 128, 130–1, 153; 161(n9), 161(n11); budget and licensee fees, 127–8, 153; exit from Fairtrade, 161(n13); name change, 161(n9); sales, 161(n10) Tribune (La), 159(n18) Truman, Harry, 34, 35 Turkey, 155(n1) Tuvalu, 135 UCIRI (Union de Comunidades Indigenas de la Region del Istmo), 98, 157(n4) Uganda, 134, 135, 138 Un Comtrade, 20, 134 Underdevelopment, see development Unequal exchange, 1–2, 16–22, 25, 37, 62, 76, 120, 132, 133; unequal ecological exchange, 22–4 United Nations, 10, 144, 155(n4) United Nations Conference on Trade and Development (UNCTAD), 9, 10, 13, 14, 16, 20–1, 38, 133, 134, 135, 154, 162(n19), 162(n21), 163(n2) United Kingdom, 8, 25, 31, 32, 36, 46, 53, 56–7, 60–2, 64–9, 71, 127, 128, 132 United States, 16, 20, 22, 23, 25, 27, 29, 31, 32, 35, 36, 42, 46, 53, 54, 61, 63, 67, 71, 79, 90, 125, 127, 128, 130, 131, 132, 136, 156(n2), 158(n8), 158(n9); American System, 26, 67; United States Agency for International Development (USAID), 138; see also Transfair USA UTZ Certified, 54, 55, 56, 70 Van der Hoff, Frans, 3, 38–43, 87–9, 98, 139, 158(n4), 158(n5), 162(n26), 163(n1) 178 Sylla T02779 02 index 178 28/11/2013 13:04 index Vanuatu, 135 Vent for surplus theory, 65 Vertical integration, 19–21, 41 Vietnam, 74 Wage, 79, 80, 158(n7), 160(n26), 160(n27), 161(n5); minimum wage, 51, 95, 98; reservation wage, 94–5; wage employment, 19, 72, 94, 123–4, 128, 131, 133, 137, 142, 162(n22) Wal-Mart, 78, 79 Washington Consensus, 73 Wealth of Nations, see Smith, Adam West Indies, 60–2, Williams, Eric, 60–2 Williamson, Jeffrey G., 162(n27) World Bank, 17, 31, 42; development indicators, 9, 10–12, 15, 30, 89, 131, 137, 153, 161(n7, n14, n17) World Fair Trade Organization, 44–5, 46, 80, 151 World-system theory, 76 World Trade Organization, 26, 28, 29, 31–3, 74, 144, 155(n3) Yemen, 135 Zambia, 135 179 Sylla T02779 02 index 179 28/11/2013 13:04 Sylla T02779 02 index 180 28/11/2013 13:04


pages: 270 words: 73,485

Hubris: Why Economists Failed to Predict the Crisis and How to Avoid the Next One by Meghnad Desai

"Robert Solow", 3D printing, bank run, banking crisis, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, BRICs, British Empire, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, correlation coefficient, correlation does not imply causation, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, demographic dividend, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, Fall of the Berlin Wall, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, German hyperinflation, Gunnar Myrdal, Home mortgage interest deduction, imperial preference, income inequality, inflation targeting, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, laissez-faire capitalism, liquidity trap, Long Term Capital Management, market bubble, market clearing, means of production, Mexican peso crisis / tequila crisis, mortgage debt, Myron Scholes, negative equity, Northern Rock, oil shale / tar sands, oil shock, open economy, Paul Samuelson, price stability, purchasing power parity, pushing on a string, quantitative easing, reserve currency, rising living standards, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, seigniorage, Silicon Valley, Simon Kuznets, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, women in the workforce

His idea was rooted in the quantity theory of money. The rate at which two currencies would exchange, according to his theory, was determined by the purchasing power of each currency within its country of circulation. If one were to take an identical basket of commodities and compare how much it would cost in terms of each currency in the two countries, then the ratio was the correct rate of exchange. This was called the purchasing power parity (PPP) theory. Thus, if a basket filled with the same goods cost $350 to purchase in the US and £100 to purchase in the UK, the exchange rate would be $3.50 to the pound. If prices in the UK rose faster than in the US, and the same two baskets now cost £175 and $350 respectively, the new exchange rate would be $2.00 to the pound. The pound would have depreciated against the US dollar since one pound now bought only $2.00 rather than $3.50.

(i) Phillips curve (i), (ii), (iii), (iv), (v), (vi), (vii) Friedman’s challenge (i) Friedman’s version (i) Phillips’ historical study (i) Pigou, Arthur Cecil (i), (ii), (iii) equation (i) “The Classical Stationary State” (i) Piketty, Thomas (i), (ii) Pitt, William (younger) (i) point of maximum efficiency (i) policy, responses to (i) politics, effect of economic change (i) population aging (i), (ii) growth (i), (ii), (iii), (iv) Malthus’ law (i) portfolio selection (i) Post-Keynesians (i) postwar economic order, planning for (i) poverty, urban (i) precautionary motive (i) precious metals acquisition of (i) as indicators of wealth (i) predictive modeling (i), (ii) preemptive tax cut (i) preference shocks (i) price, as value (i) price levels, new classical model (i) price rises 1492 to 1589 (i) and inflation (i) post-World War I (i) vs. value (i) price takers, vs. price setters (i) price volatility, Smith’s theory (i) prices agricultural (i) determination (i) empirical analysis of asset prices (i) and productivity (i) sticky (i) Prices and Production (Hayek) (i) pricing, monopoly power (i) Prince, Chuck (i) Principle of Motion (i) Principles of Economics (Marshall) (i) private spending, control of (i) privatization (i) problems, concealment by accounting (i) productivity and price of goods (i) and prosperity (i) professionalization, of economics (i) profit (i) dependence on market (i) effects of progress (i) vs. interest (i) maximization (i) realization of (i) as unearned income (i) profit rates, and unrestricted movement of capital (i) profit squeeze (i) profitability (i) progress, effects on profit (i) Progressive Movement, United States (i) prospect of recovery (i) prosperity (i), (ii), (iii) protectionism (i), (ii) public debt (i) as intergenerational (i) Keynesian models (i) public policy, inflation targeting (i) purchasing power parity (PPP) theory (i) quantitative easing (i) see also liquidity injecting quantity theory of money (i), (ii), (iii) railroads (i), (ii) Rajan, Raghuram (i), (ii) random events (i), (ii), (iii) rate of profit, and unrestricted movement of capital (i) rates of return, ex ante/ex post calculations (i) rational expectations (RE) (i), (ii), (iii) ready cash (i) Reagan, Ronald (i) real balance effect (i) real interest parity (i) real wages (i), (ii), (iii), (iv), (v), (vi), (vii) see also money wages; wages recapitalization, banks (i) reconstruction (i), (ii) recovery, prospect of (i) redistribution (i) regulation of banks (i) financial and commodity markets (i) UK approach (i) Reinhardt, Carmen M.


pages: 253 words: 79,214

The Money Machine: How the City Works by Philip Coggan

activist fund / activist shareholder / activist investor, algorithmic trading, asset-backed security, Bernie Madoff, Big bang: deregulation of the City of London, bonus culture, Bretton Woods, call centre, capital controls, carried interest, central bank independence, collateralized debt obligation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, disintermediation, diversification, diversified portfolio, Edward Lloyd's coffeehouse, endowment effect, financial deregulation, financial independence, floating exchange rates, Hyman Minsky, index fund, intangible asset, interest rate swap, Isaac Newton, joint-stock company, labour market flexibility, large denomination, London Interbank Offered Rate, Long Term Capital Management, merger arbitrage, money market fund, moral hazard, mortgage debt, negative equity, Nick Leeson, Northern Rock, pattern recognition, purchasing power parity, quantitative easing, reserve currency, Right to Buy, Ronald Reagan, shareholder value, South Sea Bubble, sovereign wealth fund, technology bubble, time value of money, too big to fail, tulip mania, Washington Consensus, yield curve, zero-coupon bond

As we saw, this was one of the reasons why the fixed exchange-rate system did not survive. In the era of floating rates, economists have attempted to study how the exchange rate affects, and is affected by, both the current and the capital account. Their study has centred on two factors, the level of prices and the level of interest rates. The study of the effect of prices on exchange rates has focused on the purchasing power parity (PPP) theory. At its simplest the theory argues that exchange rates will tend towards the point at which international purchasing power is equal. In other words, a hamburger would cost the same in any country, something The Economist highlights in its Big Mac index. In turn that means differential inflation rates are the most important driving factor behind exchange-rate movements. Inflation matters because high prices make a country’s goods uncompetitive.

However, the dividend paid will normally be less than that paid to ordinary shareholders PRINCIPAL The lump sum lent under a loan or bond PRIVATE EQUITY Investment in unquoted companies by funds that use large amounts of borrowed money PRIVATE PLACEMENT Method of selling securities by distributing them to a few key investors PSBR Public-sector Borrowing Requirement – the gap between the government’s revenue and expenditure PURCHASING-POWER PARITY The belief that inflationary differentials between countries are the long-run determinants of currency movements REAL INTEREST RATE The return on an investment once the effect of inflation is taken into account REPAYMENT MORTGAGE Mortgage on which capital and interest are gradually repaid REPURCHASE AGREEMENT A deal in which one financial institution sells another a security and agrees to buy it back at a future date RETAINED EARNINGS Past profits which the company has not distributed to shareholders RIGHTS ISSUE Sale of additional shares by an existing company SALE BY TENDER Method of making a new issue in which the price is not set and investors bid for the shares SAVINGS RATIO The proportion of income which is saved SCRIP ISSUE The creation of more shares in a company, which are given free to existing shareholders.


pages: 496 words: 131,938

The Future Is Asian by Parag Khanna

3D printing, Admiral Zheng, affirmative action, Airbnb, Amazon Web Services, anti-communist, Asian financial crisis, asset-backed security, augmented reality, autonomous vehicles, Ayatollah Khomeini, barriers to entry, Basel III, blockchain, Boycotts of Israel, Branko Milanovic, British Empire, call centre, capital controls, carbon footprint, cashless society, clean water, cloud computing, colonial rule, computer vision, connected car, corporate governance, crony capitalism, currency peg, deindustrialization, Deng Xiaoping, Dissolution of the Soviet Union, Donald Trump, energy security, European colonialism, factory automation, failed state, falling living standards, family office, fixed income, flex fuel, gig economy, global reserve currency, global supply chain, haute couture, haute cuisine, illegal immigration, income inequality, industrial robot, informal economy, Internet of things, Kevin Kelly, Kickstarter, knowledge worker, light touch regulation, low cost airline, low cost carrier, low skilled workers, Lyft, Malacca Straits, Mark Zuckerberg, megacity, Mikhail Gorbachev, money market fund, Monroe Doctrine, mortgage debt, natural language processing, Netflix Prize, new economy, off grid, oil shale / tar sands, open economy, Parag Khanna, payday loans, Pearl River Delta, prediction markets, purchasing power parity, race to the bottom, RAND corporation, rent-seeking, reserve currency, ride hailing / ride sharing, Ronald Reagan, Scramble for Africa, self-driving car, Silicon Valley, smart cities, South China Sea, sovereign wealth fund, special economic zone, stem cell, Steve Jobs, Steven Pinker, supply-chain management, sustainable-tourism, trade liberalization, trade route, transaction costs, Travis Kalanick, uber lyft, upwardly mobile, urban planning, Washington Consensus, working-age population, Yom Kippur War

This is the story of one entire side of the planet—the Asian side—and its impact on the twenty-first-century world. For most of recorded history, Asia has been the most important region of the globe. As the late British economist Angus Maddison demonstrated, for the past two thousand years, until the mid-1800s, China, India, and Japan together generated a greater total gross domestic product (GDP) (in purchasing power parity, or PPP, terms) than the United States, United Kingdom, France, Germany, and Italy combined. But with the Industrial Revolution, Western societies modernized their economies, expanded their empires, and subjugated most of Asia. After two centuries of Europe ruling the world, the United States rose to become a global power through its victory in the Spanish-American War (which gave it control of Cuba and the Philippines) and its decisive role in ending World War I.

Given its archaic financial system, mobile banking is spreading before bank branches and ATMs—and eventually, once the whole population gets banking apps, demonetization (removing physical currency altogether) as its larger neighbor India has done. With their low wages, Myanmar, Cambodia, and Laos are also attracting their share of light manufacturing activity, helping them climb toward middle-income status.40 Consumption levels tend to take off once GDP per capita hits $3,000, which Pakistan has now crossed in terms of purchasing power parity (PPP). In Pakistan, the average disposable income doubled between 2010 and 2017, making the country the world’s fastest-growing retail market, with the number of retail stores expected to double to 1 million between 2010 and 2020. Two-thirds of the country’s 210 million people under the age of thirty, many of them joining the urban consumer class en masse, are benefiting Western brands from McDonald’s to Dutch Boy paint.

Western, 357–58 Phoenicians, 29 Pinker, Steven, 284 plague (Black Death), 40 Plato, 37, 286, 291, 300 Poland, 249 pollution, 176–78, 181 Polo, Marco, 40 Pol Pot, 56, 70 populism, 283–84, 296 democracy hijacked by, 3 Portugal, 44 poverty, 183, 184, 318 prisons, 308 private equity, 171–72 privatization, 169–70 Progressive Alliance of Socialists and Democrats, 249 public goods, global, 321–22 Punjab, 33, 47 purchasing power parity (PPP): of Asia, 2, 9, 10, 63, 184 global, 10 Putin, Vladimir, 84, 85–86, 87, 89, 241, 310 oligarchic regime of, 310–11 Qajars, 47 Qara Khitai, 39 Qatar, 100, 101, 247 gas exports of, 175 Russia and, 88 Qichao, Liang, 351 Qin Dynasty, 31–32 Qing Dynasty, 44–45, 47, 48, 69, 76 Qin Shi Huang, 31 Quah, Danny, 320 racism, 329 Rajgir, 31 Rakuten, 133 R&D, in Asia, 197, 210, 211, 227 Rashid al-Din, 40 Rashidun Caliphate, 36 Rashtriya Swayamsevak Sangh (RSS) movement, 313 Rason, 143 Ray, Satyajit, 349 Regional Comprehensive Economic Partnership (RCEP), 8, 9 religious tolerance, 40, 70–71, 75 renewable energy, see alternative energy renminbi, 165, 188, 243, 264 as currency for intra-Asia trade, 102, 103, 110, 157 retail sector: in Asia, 172, 184–85, 189, 200, 210–11 in US, 228 Reza Shah Pahlavi, Shah of Iran, 50, 54 ride-sharing industry, 174–75 Rio Branco Institute, 277 Riot Games, 209 robotics, 134, 193, 196–97 Roma, 256 Romance of the Three Kingdoms, 353 Rome, ancient, 33 fall of, 35, 36, 39 Roosevelt, Franklin D., 287 Rosen, Dan, 156 Rudd, Kevin, 12 rule of law, 281, 282, 292, 312 blurred line between abuse of power and, 319 economic performance and, 309–10 Rumi, 39, 220 Rushdie, Salman, 256 Russia, modern, 3, 11, 15, 40, 140 arms exports of, 86, 87 Asian territory of, 82 China and, 19–20, 82–83, 84–85 Crimea annexed by, 83 ethnic and cultural diversity of, 89 Europe and, 83–84, 85, 89 European territory of, 82 expansionism of, 240 grain exports of, 90 India and, 86–87 Iran and, 87 Israel and, 88 Japan and, 82, 86–87 Latin American investments of, 275 North Korea and, 143 oil and gas exports of, 82–83, 84, 87–88, 175, 176 Qatar and, 88 re-Asianization of, 81–91 Saudi Arabia and, 87–88 Southeast Asia and, 87 Southwest Asia and, 87 stability preferred over democratic ideals in, 310 Syria and, 11, 83, 87, 88 Turkey and, 88, 92–93 2016 US election and, 83, 320 Ukraine invaded by, 83 Western sanctions against, 83, 86, 240–41 West’s divided policies toward, 83–84 see also Soviet Union Russia, prerevolutionary: Bolshevik Revolution in, 49 in era of European imperialism, 45, 47, 48 Russian Direct Investment Fund (RDIF), 88 Rwanda, 268 Ryukyu Kingdom, 44 Safavid Empire, 106 Saint Petersburg, 82, 90 Salesforce, 331 Salman, king of Saudi Arabia, 103 Salopek, Paul, 4–5 Samarkand, 32 Samsung, 159, 195, 211 Sanskrit, 69, 253 Sassanian Empire, 36 Satanic Verses, The (Rushdie), 256 Saudi Arabia, 11, 50, 54, 57, 71–72, 101, 134, 251 alternative energy programs in, 179 Asia investments by, 104 bond offerings by, 165 Chinese arms sales to, 101 economic diversification in, 190 Indian migrants in, 334 Iran and, 95–96, 100, 105–6 oil exports of, 58, 87–88, 102, 103 privatization in, 170 Public Investment Fund (PIF) of, 164 Russia and, 87–88 technocracy in, 312 Saudi Aramco, 102, 103, 104, 168 Saudi-Iraqi Coordination Council, 96 Schmidt, Eric, 200 Schröder, Gerhard, 83 sciences: Asian achievements in, 354–55 Asian fusion of spirituality with, 355 Scythians, 29, 30, 76 SEA Group, 167, 189, 209 sea levels, rising, 181–82 security systems, in Asia, 137–44 self-determination, 22 Seljuks, 38, 39, 44, 76 September 11, 2001, terrorist attacks, 3, 62, 113, 220, 231 service sector growth, 191, 192 sexual discrimination, sexual harassment, 314–15 shadow economies, 203 Shah Jahan, 41 shale oil energy revolution, 13, 175, 272 Shanghai, 42, 114 art scene in, 342 Shanghai Cooperation Organisation (SCO), 60, 84, 86, 92, 106, 108, 117 Shanghai-Tehran railway, 106 Shankar, Ravi, 332 Sharp, 132 Shi’a Muslims, 36, 41, 58, 95, 106, 312 Shintoism, 31, 34, 69 Shōtoku, prince of Japan, 35 Siam, 45–46 Siberia, 82 Siddiqi, Lutfey, 163 Siemens, 242, 246 Sikhs, 47 Sikkim, 186 Silicon Valley, 172, 199, 219, 287 Silk Road Fund, 110 Silk Roads, 24, 32, 33, 35, 40, 68, 69, 76, 81, 106, 239, 329 modern versions of, 1, 75, 84, 92, 97, 103, 108–13, 122, 244, 246, 252 as weakened by European voyages of discovery, 44 Silk Way Rally, 81 Simpfendorfer, Ben, 96–97 Sina Weibo, 314 Singapore, 22, 46, 53, 56, 74, 121, 156, 187, 212, 268, 334 American expats in, 234 art scene in, 342 civil liberties in, 297 civil service in, 292–93 in Cold War era, 54 data collection in, 295–96 democracy in, 288–89, 290 diversified economy of, 290 education in, 294 ethnic and cultural diversity of, 288, 297–98, 337 gun and drug laws of, 306 Japan and, 50–51, 133 Latin America investments of, 277 as libertarian nanny state, 289 as melting pot, 24 as model for other Asian countries, 299, 331 multiracial families in, 337–38 parliamentary system of, 295 policy corrections in, 291 public trust in government in, 291 technocratic government of, 287–99 technological innovation in, 195 Singapore Cooperation Program, 299 Singh, Shailendra, 174 Sino-Australian Free Trade Industrial Park, 129 Sino Israel Technology Innovation fund, 99 Sistema, 90 Slovakia, 256 Slumdog Millionaire (film), 348 social media, 208–9, 314 censorship of, 320 SoftBank, 112, 134, 171, 174, 179, 193 Sogdian peoples, 32, 33, 67 solar panel industry, 242, 272–73 Song Dynasty, 38–39, 42, 73 South Asia: early history of, 35 economic growth of, 9 failure of democracy in, 302 low-level workers from, 334–35 Muslims in, 70–71 oil and gas imports of, 152 poverty in, 183, 184 religious and ethnic diversity in, 70 South China Sea, 60, 84, 125, 130 Chinese assertiveness in, 19, 60, 84, 123, 124, 128, 137 Southeast Asia, 29, 50, 52, 208 Africa and, 264 Asianization of, 81 China and, 122, 154 Chinese migration in, 333 in Cold War era, 52, 53–54 cross-border integration of, 121–27 digital integration in, 187–89 economic growth in, 63, 148 energy investments of, 102 European colonization of, 45–46, 67 failures of democracy in, 302–3 foreign investment in, 9, 121, 148, 154, 250 Gulf states trade with, 102 India and, 154–55 Indianization of, 34 Indian migrants in, 334 internal trade in, 152 Japan and, 50–51, 133, 153–54, 156 low-level workers from, 334–35 manufacturing in, 133, 148, 153–54 Muslims in, 38–39, 43, 70–71, 121 1997 financial crisis in, 121 opium products in, 123 in post–Cold War era, 61 religious and ethnic diversity of, 43, 46, 70, 121 Russia and, 87 South Korea and, 153–54 tourism in, 122 US and, 125 see also Association of Southeast Asian Nations Southeast Asia Treaty Organization (SEATO), 53 South Korea, 14, 16, 55, 56, 60, 61, 63, 104, 275 Asian migrants in, 336–37 automation in, 193 capitalism in, 159 cashless economy in, 189 China and, 141–42 civil society in, 313 corruption in, 161 economic growth of, 158 film industry in, 348 global branding of, 331 Gulf states and, 102 Japan and, 141–42 multiethnic families in, 336 North Korea and, 142 Southeast Asia and, 153–54 technological innovation in, 195, 197 US and, 52, 142–43 Vietnam and, 154 Southwest Asia, 54 in Cold War era, 54 Russia and, 87 use of term, 6 sovereign debt, 165–66 Soviet Union, 49, 300 Afghanistan invaded by, 58, 59 Africa and, 261 in clashes with China, 56 in Cold War, see Cold War collapse of, 13, 14, 58, 59, 82, 283 Germany’s invasion of, 50 Spain, transpacific trade of, 44, 74 Spanish-American War, 2, 48 Sri Lanka, 105, 334 Srivijaya Kingdom, 34, 35, 38, 39, 70 State Department, US, Asia and, 143–44 steel production, 109, 176, 272–73 Steinmeier, Frank-Walter, 12 stock markets, Asia, 167–68 Straits Times, 290 Suez Canal, 102 Suez Canal Economic Zone, 99 Suharto, 61 Sui Dynasty, 37 Sukarno, 53 Sumatra, 38, 45, 70 Sumer, 28, 29 Sunni Muslims, 11, 36, 38, 57, 95, 312 Sun Tzu, 31 Sun Yat-sen, 48, 49 Sweden, Syrian refugees in, 255–56 Sykes-Picot Agreement, 49 Syngman Rhee, 55 Syria, 11, 16, 49, 54, 62, 94 civil war in, 63, 95, 255 Iran and, 106 Russia and, 11, 83, 87, 88 Syrian refugees, 218 systems, global, 7 systems, regional: Asia as, 5, 6–7, 15 conflict and, 11 Europe as, 7 North America as, 7 in world order, 13–14 Tagore, Rabindranath, 48, 351, 353 Taipei, art scene in, 342 Taiping Rebellion, 47 Taiwan, 52, 56, 61 China and, 141 civil society in, 313 Tajikistan, 59, 108–9, 182 Talas, Battle of, 36, 37, 77, 117 Tale of Genji, The (Murasaki), 353 Taliban, 62, 68, 116–17, 139 Tan, Anthony, 175 Tan, Yinglan, 173 Tang Dynasty, 36–38, 69, 70, 72, 75, 117, 137 Taoism, 182 Tao of Physics, The (Capra), 220 Tarim basin, 32, 33, 35, 36, 59 Tatars, 89 technocratic governance systems, 286–313 civil service in, 292–93 data collection and, 295–96 policy corrections in, 291 utilitarianism and, 286, 298, 306 technological innovation, 195, 196–200 Teets, Jessica, 300–301 Tehran-Mashhad railway, 107 Tel Aviv, 98 telemedicine, 202 television, American, Asians in, 350 Tencent, 104, 167–68, 188, 189, 193, 198, 199, 200, 209, 314, 318, 319 Tenshin, Okakura, 351 terrorism, 62–63, 97, 113, 116–17, 139, 220, 231, 240 Tesla, 179 Tetlock, Philip, 291 Thailand, 61, 63, 89, 121, 122–23, 154 Asian foreign labor in, 335 in Cold War era, 53, 54 corruption in, 161 economic growth of, 148 eco-tourism in, 340 failure of democracy in, 302 foreign investment in, 192–93 manufacturing in, 192–93 military junta in, 307 privatization in, 170 technocracy in, 308 Thomas, Apostle, 36 3D printing, 213 Tibet, 34, 36, 38, 47, 52, 55, 120 Time, 288 Timur (Tamerlane), 41 Timurid Dynasty, 41, 42 Tocqueville, Alexis de, 291 Tokyo, 47, 342 top-down revolutions, 309–13 tourism: in Asia, 213–14 Asian, in US and Europe vs. within Asia, 339–40 eco-, 340 Toynbee, Arnold, 22 trade: Asia-Europe axis of, 13, 14 internal, 150–52, 156–57, 212 intraregional, 62 see also free trade; specific countries and subregions Traditional Chinese Medicine (TCM), 355 Trans-Anatolian Natural Gas Pipeline, 94 Trans-Pacific Partnership (TPP), 126, 140, 141, 272, 273 transportation innovation, 198 Treasury bonds, US, Asian holdings of, 163, 164 Treasury Department, US, 157 Trenin, Dmitri, 83, 90 Trudeau, Justin, 223 Truman, Harry, 52, 287 Trump, Donald, 213, 232 anti-Asian policies of, 10, 152, 194, 195, 224, 225 anti-Hispanic policies of, 272 climate change and, 178 election of, 3, 16, 272, 273, 283, 294, 384 Europe and, 240 Gulf states and, 101 Indian Americans’ support for, 222 Israel and, 98 North Korea and, 142 Pakistan and, 114 populism of, 18, 284 Russia and, 84 Taiwan and, 141 unpredictability of, 18 US State Department gutted by, 143–44 Tsinghua University, 232 Tsushima, Battle of, 48 Turkestan, 47, 117 Turkestan Empire, 41–42 Turkey, Republic of, 3, 49, 58, 101 Asian investment in, 93–94 Asianization of, 81 China and, 93 European focus of, 57, 60, 91–92 European immigrants from, 253, 256 Iran and, 94 Muslims in, 92 oligarchic regime in, 311 re-Asianization of, 91–94 Russia and, 88, 92–93 Syrian refugees in, 63, 94, 95 Turkic peoples, 38, 39, 67, 68, 91 Turkmenistan, 59, 92, 106, 108, 140 Turkmenistan-Afghanistan-Pakistan-India (TAPI) natural gas pipeline, 118 Turnbull, Malcolm, 129 Uber, 174–75, 198 Uighur people, 37, 42, 117 Ukraine, 83, 85, 241 Umayyad Caliphate, 36 Understanding Latin America (Toro Hardy), 275 UN Human Rights Council, 324 Uniqlo, 345 United Arab Emirates (UAE), 88, 96, 100, 101, 104, 312 alternative energy programs in, 179 bond offerings by, 165 digital technology in, 318–19 Indian migrants in, 334 oil exports of, 102, 103 technocracy in, 312 United Kingdom, see Great Britain United Nations, 51 United States: Afghanistan invaded by, 62 AI research in, 199–200 Arab world and, 100–101 arms sales of, 16–17, 101 Asian belief systems in, 220 Asian capital in, 163 Asian companies in, 227–28 Asian economic growth as benefit to, 207 Asian goal of reduced dependence on, 17 Asian immigration to, see Asian Americans Asian investments in, 164 Asian investments of, 110–11, 207 Asian military presence of, 137, 138 Asian trade deficits of, 16 Asian trade with, 144 Asian views of, 16–17 Australia and, 128 Chinese acquisition of technology companies blocked by, 195–96 Chinese trade with, 272–73 civil service in, 293 coal exports of, 177 in Cold War, see Cold War East Asia and, 140–41 eroding industrial base of, 16 ethnic diversity in, 221–22 European capital in, 164–65 Europe’s relations with, 240 failed West Asian policies of, 140 failures of democracy in, 282–85, 294 falling standard of living in, 284–85 global civilization as influenced by, 21, 22–23 global governance and, 321 income inequality in, 228, 285 Iraq invaded by, 62 Japan and, 136 Latin America and, 271–72 Muslims in, 220 in North American regional system, 7 North Korea and, 142–43 oil and gas exports of, 16, 207 outsourcing of jobs by, 16 Pakistan and, 113–14 Philippines and, 123–24 populism in, 283–84 PPP of, 10 protectionist policies of, 241 retail sector in, 228 Russian sanctions by, 240–41 shale oil revolution in, 13, 175, 272 Southeast Asia and, 125 South Korea and, 142–43 South Pacific tensions of, 48 South Pacific territories of, 48 as superpower, 2, 14, 15, 22 Syrian refugees in, 218 technocracy in, 287 utilitarian thinking as lacking in, 299 Vietnam and, 125 Ur, 28 Ural Mountains, 81, 82 urban development, 156, 190, 245–46 utilitarianism, 286, 298, 306, 320 Uzbekistan, 59, 72, 108, 169, 226–27 Chinese hegemony resisted by, 20 civil society in, 313 economic growth of, 17, 109 Vedas, 29 Venezuela, 271, 274 China and, 274–75 venture capital (VC) industry, in Asia, 173–74 Vienna, 40 Vietnam, 45, 52, 60, 121, 161, 274, 275 China and, 124–25 in Cold War era, 56 early history of, 31–32, 38 economic growth in, 308 industrialization in, 63 South Korea and, 154 territorial claims of, 11 US and, 125 Vietnamese Americans, 217 Vietnam War, 52, 56 Vitasoy, 172 Vivekananda, Swami, 220 Vladivostok, 90 Wadhwa, Vivek, 219 Wahhabism, 72, 114 Walmart, 193, 208 warfare: in Asia, 75–76 in Europe, 75 war on terror, 113, 115, 240 Washington Consensus, 2–3 Water Margin, 353 water shortages, 181 wealth management industry, 160–61 Weber, Max, 293 WeChat, 314 Wei Fenghe, 84 West: arms sales to Asia by, 212 Asia studies in, 352 China-centric views of, 18–19 as dependent on Asian economic growth, 206–14 economic and social ills of, 3 ignorance about Asia in, 17–20, 24, 76, 329 outsourcing of manufacturing to Asia by, 62 uncritical self-appraisal of, 351–52 worldview of, 10–11 West Asia, 57, 69–70, 72 Asianization of, 9, 81 civil society in, 313 conflict and state failure in, 95 crusades and, 39 dawn of civilization in, 28 ethnic and sectarian violence in, 256 India and, 155 oil and gas exports of, 9, 23, 57, 62, 152 in post–Cold War era, 58 re-Asianization of, 95–106 refugees from, 95 terrorism in, 62–63 use of term, 6 US involvement in, 59, 140 Western Educated Industrial Rich Democracies (WEIRD), 357 What Is Global History?


pages: 518 words: 128,324

Destined for War: America, China, and Thucydides's Trap by Graham Allison

9 dash line, anti-communist, Berlin Wall, borderless world, Bretton Woods, British Empire, capital controls, Carmen Reinhart, conceptual framework, cuban missile crisis, currency manipulation / currency intervention, Deng Xiaoping, disruptive innovation, Donald Trump, facts on the ground, Flash crash, Francis Fukuyama: the end of history, game design, George Santayana, Haber-Bosch Process, industrial robot, Internet of things, Kenneth Rogoff, liberal world order, long peace, Mark Zuckerberg, megacity, Mikhail Gorbachev, Monroe Doctrine, mutually assured destruction, Nelson Mandela, one-China policy, Paul Samuelson, Peace of Westphalia, purchasing power parity, RAND corporation, Ronald Reagan, Scramble for Africa, selection bias, Silicon Valley, Silicon Valley startup, South China Sea, special economic zone, spice trade, the rule of 72, The Wealth of Nations by Adam Smith, too big to fail, trade route, UNCLOS, Washington Consensus, zero-sum game

By 2019, the IMF expects it to be 20% bigger.”17 The IMF had measured China’s GDP using the yardstick of purchasing power parity, or PPP, which is the standard now used by the major international institutions whose professional responsibilities require them to compare national economies. As the CIA puts it, PPP “provides the best available starting point for comparisons of economic strength and wellbeing between countries.” The IMF explains that “market rates are more volatile and using them can produce quite large swings in aggregate measures of growth even when growth rates in individual countries are stable. PPP is generally regarded as a better measure of overall wellbeing.”18 Measured by purchasing power parity, China has not only surpassed the US, but also now accounts for roughly 18 percent of world GDP, compared to just 2 percent in 1980.19 Among those for whom American primacy is an article of faith, the IMF announcement stimulated a vigorous search for metrics by which the US is still number one.

See PLA (People’s Liberation Army) Pericles, 28, 35–38, 40, 43, 155, 212, 225, 233 Permanent Court of Arbitration, 151, 191 See also The Hague Perry, Matthew, 47 Persian Empire, 29–31, 60, 264 Persian wars, 29–31, 33, 38 Pescadores Islands, 270 Petraeus, David, 3 Peyrefitte, Alain, 134 Philip II (king), 249 Philip IV (king), 249 Philippines, 45, 93–94, 96, 127, 131, 151, 170, 173, 235, 315 n35 Phillipsburg, 258 Pillsbury, Michael, 129 Pitt, William, 141, 262 PLA (People’s Liberation Army), 130–31, 158–60, 167, 171, 175, 177–78, 183, 325 n79 Plato, 28 Plutarch, 30 Poland, 206, 222, 253, 264 Polish-Lithuanian Commonwealth, 253 Politburo, 120, 157 Pomerania, 254 populism, ix, 175, 194, 230–31 Port Arthur, 45, 48, 74, 271 Portugal, 187–91, 225, 245–47, 331 n8, 339 n2, 340 n8, 340 n12 Potidae, 36 PPP (purchasing power parity), 10–11, 118, 291 n25 preemptive attacks, 49, 74, 155, 280, 335 n59 Prince Eugene of Savoy. See Eugene of Savoy (prince) Prussia, 49–51, 59, 261, 266–67 Puerto Cabello, 97 Puerto Rico, 96 Pulitzer, Joseph, 95 Putin, Vladimir, 22, 200, 208 Q al-Qaeda, 136, 228 Qing Dynasty, 111–12, 122, 133, 143, 268, 322 n44 R Raid on the Medway, 257 railways, 62, 118, 125, 267, 275, 335 n59 RAND Corporation, 20, 132, 155, 176 Rape of Nanking, 45, 279 Reagan, Ronald, 125, 207–8, 216, 223, 226–28, 237, 283 Red Guards, 113 Reinhart, Carmen, 206 relations Anglo-American, 195–99, 222, 272–73, 333 n37 Anglo-Chinese, 7, 112, 133–36 Anglo-German, 55–89 Greek, 54 Russian, 64, 72, 83, 125, 152, 215 US-China, viii, ix, xviii, xx, 126–84, 208–11, 214, 219–21, 227–35, 279 US-Soviet, 207, 236 See also balance of power; individual countries religion, 252, 254–56 reunification (German), 191–94, 224, 284–85 Revolutionary War, 7 Rhodes, Cecil, 93 Rice, Condoleezza, 284 rise vs. rule, xv, 39, 41, 47, 187–232, 244, 288, 298 n1, 346 n153 See also rising power syndrome; ruling power syndrome; Thucydides’s Trap rising power syndrome, 44, 49, 51–52, 63, 68–69, 77, 151, 161, 211 See also honor; hubris; ruling power syndrome; Thucydides’s Trap rivalries.


Making Globalization Work by Joseph E. Stiglitz

affirmative action, Andrei Shleifer, Asian financial crisis, banking crisis, barriers to entry, Berlin Wall, business process, capital controls, central bank independence, corporate governance, corporate social responsibility, currency manipulation / currency intervention, Doha Development Round, Exxon Valdez, Fall of the Berlin Wall, Firefox, full employment, Gini coefficient, global reserve currency, Gunnar Myrdal, happiness index / gross national happiness, illegal immigration, income inequality, income per capita, incomplete markets, Indoor air pollution, informal economy, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), inventory management, invisible hand, John Markoff, Jones Act, Kenneth Arrow, Kenneth Rogoff, low skilled workers, manufacturing employment, market fundamentalism, Martin Wolf, microcredit, moral hazard, new economy, North Sea oil, offshore financial centre, oil rush, open borders, open economy, price stability, profit maximization, purchasing power parity, quantitative trading / quantitative finance, race to the bottom, reserve currency, rising living standards, risk tolerance, Silicon Valley, special drawing rights, statistical model, the market place, The Wealth of Nations by Adam Smith, Thomas L Friedman, trade liberalization, trickle-down economics, union organizing, Washington Consensus, zero-sum game

Inequality is measured by the Gini coefficient, one of the standard measures. 3.Even the $2-a-day standard is less than a fifth of the poverty standard used in the United States and western Europe. 4.Shaohua Chen and Martin Ravallion, “How Have the World’s Poorest Fared since the Early 1980s?,” World Bank Development Research Group, World Bank Policy Research Working Paper 3341, June 2004. The $1-a-day standard actually is defined as $1.08 in 1993 “real” (or purchasing power parity) dollars; the $2-a-day standard is defined as $2.15. China’s poverty reduction has been truly remarkable. At the $1-a-day standard, the number in poverty has fallen from 634 million to 212 million—more people have been brought out of absolute poverty than the total number living in Europe or America. 5.The Voices of the Poor project was undertaken while I was chief economist of the World Bank as part of the preparation for the decennial report on poverty (World Development Report 2000/2001: Attacking Poverty).

Moreover, as we shall see later, the lopsided investor protection—foreigners were provided better protections than domestic investors—put into jeopardy environmental and other regulations. 8.See Instituto Nacional Estadística Geografía e Informática, “Personal ocupado en la industria maquiladora de exportacion segun tipo de ocupación” available at www.inegi.gob.mx/est/contenidos/espanol/rutinas/ept.asp? t=emp75&c= 1811. 9.In 1993, Mexico’s per capita PPP (purchasing power parity) income was 3.6 times that of China; by 2003, the ratio was cut in half, to 1.8. China had a distinct wage advantage over Mexico—wages are one-eighth of those in Mexico. But over the period of NAFTA, China’s wages have increased, while Mexico’s wages have stagnated. Thus, China’s relative success must be based on other factors. 10.Some simple models—where there are no transportation costs and where everyone has access to the same knowledge (technology)—predict that there will be complete factor price equalization.

Complicated technical provisions (rules of origins, which detail how much of the “value added” in the good have to be produced within the country) seem partially responsible, highlighting the importance of the fine details within a trade agreement. 38.I have, accordingly, dubbed the proposal the “EBP” initiative—opening up markets to everything but what you produce. 39.OECD, Agricultural Policies in OECD Countries: Monitoring and Evaluation (Paris: OECD, 2005). 40.In 2004, OECD subsidies were $279 billion, including water subsidies and other indirect subsidies. See ibid. 41.In purchasing power parity, the farmer’s income is somewhat higher, between $1,100 and $1,200. 42.The International Cotton Advisory Committee (ICAC), an association of forty-one cotton-producing,-consuming, and-trading countries formed in 1939, estimates that the elimination of American cotton subsidies would raise the global price by between 15 percent and 26 percent. Oxfam estimates the losses to Africa at $301 million a year, with the bulk of these losses ($191 million a year) happening to eight West African countries.


pages: 515 words: 142,354

The Euro: How a Common Currency Threatens the Future of Europe by Joseph E. Stiglitz, Alex Hyde-White

bank run, banking crisis, barriers to entry, battle of ideas, Berlin Wall, Bretton Woods, business cycle, buy and hold, capital controls, Carmen Reinhart, cashless society, central bank independence, centre right, cognitive dissonance, collapse of Lehman Brothers, collective bargaining, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, currency peg, dark matter, David Ricardo: comparative advantage, disintermediation, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial innovation, full employment, George Akerlof, Gini coefficient, global supply chain, Growth in a Time of Debt, housing crisis, income inequality, incomplete markets, inflation targeting, information asymmetry, investor state dispute settlement, invisible hand, Kenneth Arrow, Kenneth Rogoff, knowledge economy, light touch regulation, manufacturing employment, market bubble, market friction, market fundamentalism, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mortgage debt, neoliberal agenda, new economy, open economy, paradox of thrift, pension reform, pensions crisis, price stability, profit maximization, purchasing power parity, quantitative easing, race to the bottom, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, Silicon Valley, sovereign wealth fund, the payments system, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, transfer pricing, trickle-down economics, Washington Consensus, working-age population

What concerns me is that the economic framework of the eurozone is being used to push for a particular set of views concerning the economy and society—and these perspectives are effectively being imposed on the crisis countries.12 WHY THE EUROPEAN PROJECT IS SO IMPORTANT It is not in the interest of Europe—or the world—to have a country on Europe’s periphery alienated from its neighbors, especially now, when geopolitical instability is already so evident. The neighboring Middle East is in turmoil; the West is attempting to contain a newly aggressive Russia; and China, already the world’s largest source of savings, the largest trading country, and the largest overall economy (in terms of purchasing power parity), is confronting the West with new economic and strategic realities. This is no time for European disunity and economic weakness. I would argue even more strongly that all people have an interest in the success of the European project. Europe was the source of the Enlightenment, which resulted in the increases in living standards that have marked the last two centuries. The Enlightenment, in turn, gave rise to modern science and technology.

., “Macroeconomic Priorities,” American Economic Review 93, no. 1 (2003): 1–14; the quote appears on p. 1. 3 With every country’s currency pegged to gold, the value of each currency relative to the other was also fixed. 4 Bryan uttered this phrase in his July 9, 1896, speech at the Democratic National Convention in Chicago. 5 See Barry Eichengreen, Golden Fetters: The Gold Standard and the Great Depression, 1919–1939 (New York: Oxford University Press, 1992). 6 The equivalent value for US and China GDPs are $17.9 trillion and $11.0 trillion, respectively. (In purchasing power parity, PPP, a standard way of making cross-country comparisons, the EU was about 1.0 percent smaller than China, but 7.0 percent larger than the United States.) Because of varying exchange rates (the value of the euro relative to the dollar varied during 2015 alone from 1.06 to 1.13), the relative size (at current exchange rates) varies. In 2014, the EU was actually the largest economic block—the fall largely reflects the changing exchange rate, which fell by some 17 percent. 7 Formally known as the Treaty on European Union. 8 Not surprisingly, many other economists and political scientists have found the euro crisis similarly fascinating, and a large literature has grown up trying to understand it, approaching the subject from many different perspectives—as a financial crisis, a political crisis, and an economic crisis.

Still more complicated issues arise when comparing GDP across countries, because the market basket of goods consumed in different countries differs and different goods cost different amounts in different countries. In this book, we focus on the effect of the euro on growth, and we assess growth by using each country’s own price deflator. When comparing levels of GDP to take account of differences in prices of different goods in different countries, a standard approach is to calculate real PPP (purchasing power parity) GDP, discussed briefly in note 6 in the preface. It compares incomes using a standardized basket of goods. 4 GDP in 2015 for the 13 countries that had adopted the euro as of January 1, 2007, was merely 0.6 percent above that in 2007. Figures were actual, with the exception of Belgium and Luxembourg, as reported by the IMF. 5 Graph shows the largest contractions over 2007–2015. For countries with multiple contractions within 2007–2015, I took the time-weighted average.


pages: 772 words: 203,182

What Went Wrong: How the 1% Hijacked the American Middle Class . . . And What Other Countries Got Right by George R. Tyler

8-hour work day, active measures, activist fund / activist shareholder / activist investor, affirmative action, Affordable Care Act / Obamacare, bank run, banking crisis, Basel III, Black Swan, blood diamonds, blue-collar work, Bolshevik threat, bonus culture, British Empire, business cycle, business process, buy and hold, capital controls, Carmen Reinhart, carried interest, cognitive dissonance, collateralized debt obligation, collective bargaining, commoditize, corporate governance, corporate personhood, corporate raider, corporate social responsibility, creative destruction, credit crunch, crony capitalism, crowdsourcing, currency manipulation / currency intervention, David Brooks, David Graeber, David Ricardo: comparative advantage, declining real wages, deindustrialization, Diane Coyle, disruptive innovation, Double Irish / Dutch Sandwich, eurozone crisis, financial deregulation, financial innovation, fixed income, Francis Fukuyama: the end of history, full employment, George Akerlof, George Gilder, Gini coefficient, Gordon Gekko, hiring and firing, income inequality, invisible hand, job satisfaction, John Markoff, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, labor-force participation, laissez-faire capitalism, lake wobegon effect, light touch regulation, Long Term Capital Management, manufacturing employment, market clearing, market fundamentalism, Martin Wolf, minimum wage unemployment, mittelstand, moral hazard, Myron Scholes, Naomi Klein, Northern Rock, obamacare, offshore financial centre, Paul Samuelson, pension reform, performance metric, pirate software, plutocrats, Plutocrats, Ponzi scheme, precariat, price stability, profit maximization, profit motive, purchasing power parity, race to the bottom, Ralph Nader, rent-seeking, reshoring, Richard Thaler, rising living standards, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, Sand Hill Road, shareholder value, Silicon Valley, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, sovereign wealth fund, Steve Ballmer, Steve Jobs, The Chicago School, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, transcontinental railway, transfer pricing, trickle-down economics, tulip mania, Tyler Cowen: Great Stagnation, union organizing, Upton Sinclair, upwardly mobile, women in the workforce, working poor, zero-sum game

As a result of these trends, America has become a low-wage nation, where both wages and total employer costs for labor, once the highest in the world, have been surpassed by many other rich democracies. As we see depicted in Chart 3.1, comprehensive costs for all private sector workers, including benefits paid by employers in shops, offices, and plants across northern Europe, are about 30 percent higher than in America. Chart 3.1. 2008, cost adjusted for purchase power parity. All private sectors including non-farm business industry, construction, and services. European data includes part time and employees at firms > 10 employers, but excludes annual bonuses generally equal to one month pay. Germany includes the former German Democratic Republic. Source: Hourly Labor Costs, Eurostat 2011, Marie Visot, “The Debate on Labor Costs Revived,” Le Figaro, February 28, 2011, OECD.StatExtracts, “Employer Costs for Employee Compensation, Bureau of Labor Statistics Historic listing (December 2008), and “The Cost of Labor Divides Senators,” Le Monde, March 9, 2011.

Domino’s, for example, pays its drivers in Australia three times what it pays in America, but still manages record profits year after year.20 Writing about Long Beach, California, port truckers, Sydney Morning Herald columnist Malcolm Maiden explains, “By our standards, they get a pittance.”21 That disparity is emphasized by comprehensive employer cost data from the key manufacturing sector, reproduced in Chart 3.2. That sector is the fount of most productivity growth, typically pays the highest wages aside from finance, and is the sector most stressed by globalization. The actual wage component of these figures ranges from about one-half in Belgium to two-thirds or so in Australia and the US. Chart 3.2. Private sector, US dollars adjusted for purchase power parity, 2007. Source: Hourly Compensation Costs, Competitiveness in Manufacturing, Bureau of Labor Statistics, Department of Labor, 2010, Washington, table 3.1. These high wages are the consequence of the family capitalism countries achieving steadily rising real wages. That means workers have received a notable portion of the gains from growth for decades. Americans are justly proud of the nation’s genuine entrepreneurial and innovative culture and presume that the US economy remains fundamentally potent.

As depicted in Chart 12.1, it began a steady slide eroded by inflation, falling a third over the following decades, before being raised modestly during the Clinton administration and again in 2007 at the insistence of Congressional Democrats. This erosion has had a generalized impact because minimum wages serve as an escalator, pushing up wages for workers further up the income scale. The US experience sharply contrasts with policies in the family capitalism countries, where minimums are considerably higher, as we will learn in a later chapter. The minimum wage, for example, in France during 2012 was €9.22 per hour; in purchase-power parity terms that is over $11 per hour, or 60 percent above the federal minimum in America. The minimum wage in Australia is higher still. Chart 12.1. Source: Wage and Hour Division, “History of Changes to the Minimum Wage Law,” Department of Labor, Washington, DC. Also: Phyllis Korkki “Keeping an Eye on the Low, Point of the Pay Scale,” New York Times, August 31, 2008, and Ralph E. Smith and Bruce Vavrichek, “The Minimum Wage: Its Relation to Incomes and Poverty,” Monthly Labor Review, June 1987.


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Empty Planet: The Shock of Global Population Decline by Darrell Bricker, John Ibbitson

affirmative action, agricultural Revolution, Berlin Wall, BRICs, British Empire, Columbian Exchange, commoditize, demographic dividend, demographic transition, Deng Xiaoping, Donald Trump, en.wikipedia.org, full employment, gender pay gap, ghettoisation, glass ceiling, global reserve currency, Gunnar Myrdal, Hans Rosling, Hernando de Soto, illegal immigration, income inequality, James Watt: steam engine, Jeff Bezos, John Snow's cholera map, Kibera, knowledge worker, labor-force participation, Mark Zuckerberg, megacity, New Urbanism, nuclear winter, off grid, offshore financial centre, out of africa, Potemkin village, purchasing power parity, reserve currency, Ronald Reagan, Silicon Valley, South China Sea, statistical model, Steve Jobs, Steven Pinker, The Wealth of Nations by Adam Smith, Thomas Malthus, transcontinental railway, upwardly mobile, urban planning, working-age population, young professional, zero-sum game

India tried to jump-start its economy by throwing up protective tariffs that instead held the country back; Mao’s Great Leap Forward aimed to bring on rapid industrialization but instead produced the Great Chinese Famine of the late 1950s, which killed upward of forty-five million people—“the greatest manmade disaster in history”69—a catastrophic slaughter even by twentieth-century standards. But with the passing of Mao and the arrival of Deng Xiaoping, China finally took off. The economy doubled between 1980 and 1990, tripled between 1990 and 2000, and more than tripled between 2000 and 2010. Let’s put it another way. In 1980, the wealth created by a Chinese citizen in one year was $205 (in constant dollars based on purchasing power parity). In 2016, it was $8,523.00. Over the past forty years, wealth creation in China has lifted a fifth of humanity out of dire poverty.70 India grew more slowly, thanks to the foolish policies of the government in New Delhi. But despite protectionism, internal corruption, and regional rivalries, India’s economy too has experienced rapid growth, though nothing like China’s. In the 1980s, the federal government increasingly embraced private capitalism over public ownership, and then in the 1990s it began to slowly liberalize the economy.

.: Environmental Protection Agency, 2017). https://www.epa.gov/air-trends 67 Dan Egan, “Great Lakes Water Quality Improved, but There Are Still Issues, Report Says,” Milwaukee Journal-Sentinel, 14 May 2013. http://www.jsonline.com/news/wisconsin/great-lakes-water-quality-improved-but-there-are-still-issues-report-says-i49uq79-207463461.html 68 Prabhu Pingali, “Green Revolution: Impacts, Limits and the Path Ahead,” Proceedings of the National Academy of Sciences of the United States of America, 31 July 2012. http://www.ncbi.nlm.nih.gov/pmc/articles/PMC3411969 69 Tania Branagan, “China’s Great Famine: The True Story,” Guardian, 1 January 2013. http://www.theguardian.com/world/2013/jan/01/china-great-famine-book-tombstone 70 Annual GDP per capita in constant dollars based on purchasing power parity. Ami Sedghi, “China GDP: How it has changed since 1980,” Guardian, 23 March 2012 (then updated). http://www.theguardian.com/news/datablog/2012/mar/23/china-gdp-since-1980 71 “GDP Per Capita of India,” Statistics Times (Delhi: Ministry of Statistics and Programme Implementation [IMF], 19 June 2015). http://statisticstimes.com /economy/gdp-capita-of-india.php 72 Such as Max Roser and Esteban Ortiz-Ospina, “Global Extreme Poverty,” Our World in Data, 2013/2017. http://ourworldindata.org/data/growth-and-distribution-of-prosperity/world-poverty 73 Clyde Haberman, “Retro Report: The Population Bomb?”


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Factfulness: Ten Reasons We're Wrong About the World – and Why Things Are Better Than You Think by Hans Rosling, Ola Rosling, Anna Rosling Rönnlund

animal electricity, clean water, colonial rule, en.wikipedia.org, energy transition, first square of the chessboard, first square of the chessboard / second half of the chessboard, global pandemic, Hans Rosling, illegal immigration, income inequality, income per capita, Intergovernmental Panel on Climate Change (IPCC), jimmy wales, linked data, lone genius, microcredit, purchasing power parity, Stanford marshmallow experiment, Steven Pinker, Thomas L Friedman, Walter Mischel

The girls in these six countries suffer under severe gender inequality, but in total they make up only 2 percent of all girls of primary school age in the world, based on UN-Pop[4]. Note that in these countries, many boys are also missing school. See gapm.io/twmedu. Income levels. The numbers of people on the four income levels have been defined by Gapminder[8] based on data from PovcalNet and forecasts from IMF[1]. Incomes are adjusted for Purchasing Power Parity $ 2011 from ICP. See gapm.io/fwlevels. The graphs showing people distributed by income, comparing incomes in Mexico and the United States in 2016, are based on the same data, slightly adjusted to align with the shape of the distributions from the latest available national income surveys. Brazil’s numbers come from World Bank[16], PovcalNet, slightly adjusted to better align with CETAD.

International Standards and Recommended Practices, 1955. gapm.io/xchi13. ICAO[3]. Global Key Figures. Revenue Passenger-Kilometres. Air Transport Monitor. 2017. https://www.icao.int/sustainability/Pages/Air-Traffic-Monitor.aspx. Ichiseki, Hajime. “Features of disaster-related deaths after the Great East Japan Earthquake.” Lancet 381, no. 9862 (January 19, 2013): 204. gapm.io/xjap. ICP. “Purchasing Power Parity $ 2011.” International Comparison Program. gapm.io/x-icpp. IHME[1] (Institute for Health Metrics and Evaluation). Data Life Expectancy. Global Burden of Disease Study 2016. Institute for Health Metrics and Evaluation, University of Washington, Seattle, September 2017. Accessed October 7, 2017. gapm.io/xihlex. IHME[2]. “Global Educational Attainment 1970–2015.” Accessed May 10, 2017. gapm.io/xihedu.


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Smarter Investing by Tim Hale

Albert Einstein, asset allocation, buy and hold, buy low sell high, capital asset pricing model, collapse of Lehman Brothers, corporate governance, credit crunch, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, Donald Trump, equity premium, Eugene Fama: efficient market hypothesis, eurozone crisis, fiat currency, financial independence, financial innovation, fixed income, full employment, implied volatility, index fund, information asymmetry, Isaac Newton, John Meriwether, Long Term Capital Management, Northern Rock, passive investing, Ponzi scheme, purchasing power parity, quantitative easing, random walk, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, South Sea Bubble, technology bubble, the rule of 72, time value of money, transaction costs, Vanguard fund, women in the workforce, zero-sum game

All rights reserved. Exchange rate – Bank of England There are several properties of currency worth considering. First, it is a rate of exchange and in itself has no economic return-generating mechanism like being an owner or a lender. Second, over the long run the exchange rate should be in line with the purchasing power parity between two countries. This principal is succinctly explained by the Economist and their well-known Big Mac Index: ‘Burgernomics is based on the theory of purchasing-power parity, the notion that a dollar should buy the same amount in all countries. Thus in the long run, the exchange rate between two countries should move towards the rate that equalises the prices of an identical basket of goods and services in each country. Our ‘basket’ is a McDonald’s Big Mac, which is produced in about 120 countries.


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The New Economics: A Bigger Picture by David Boyle, Andrew Simms

Asian financial crisis, back-to-the-land, banking crisis, Bernie Madoff, Big bang: deregulation of the City of London, Bonfire of the Vanities, Bretton Woods, capital controls, carbon footprint, clean water, collateralized debt obligation, colonial rule, Community Supported Agriculture, congestion charging, corporate raider, corporate social responsibility, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, delayed gratification, deskilling, en.wikipedia.org, energy transition, financial deregulation, financial exclusion, financial innovation, full employment, garden city movement, happiness index / gross national happiness, if you build it, they will come, income inequality, informal economy, Intergovernmental Panel on Climate Change (IPCC), Jane Jacobs, Kickstarter, land reform, light touch regulation, loss aversion, mega-rich, microcredit, Mikhail Gorbachev, mortgage debt, neoliberal agenda, new economy, North Sea oil, Northern Rock, offshore financial centre, oil shock, peak oil, pensions crisis, profit motive, purchasing power parity, quantitative easing, Ronald Reagan, seigniorage, Simon Kuznets, sovereign wealth fund, special drawing rights, The Wealth of Nations by Adam Smith, Thomas L Friedman, too big to fail, trickle-down economics, Vilfredo Pareto, Washington Consensus, wealth creators, working-age population

Recent research at the World Bank, released at the end of 2007, suggests that income inequality and absolute poverty in the world are very much worse than anybody thought.8 The problem with World Bank estimates of absolute poverty (living on less than $1 a day) is that they relied on calculations of what the equivalent of a US dollar was in some of the most impoverished economies in the world, a formula known as ‘purchasing power parity’. The latest World Bank research suggests that this was extremely inaccurate and that the 1.2 billion people living on $1 a day may be very much higher. Poverty, though, is not escaped by earning just over $1 or $2 a day, as we will see below. The World Bank estimates that the number of people in absolute poverty will have halved by 2015. But even this improvement, if it comes about, will have taken 82 THE NEW ECONOMICS place during a period of unprecedented economic growth in the wealthier countries – not to mention India and China – and may well not be sustained during a period of rising food and energy prices.

(John Kenneth) 41, 51 gambling 14–15, 152 Gandhi, Mohandas (Mahatma) 18, 19, 21, 110, 112 Gates, Bill 141 Gates, Jeff 141–2 GDP (gross domestic product) 10, 32, 36–40, 42, 43, 54, 79 alternatives to 40–2, 43 bad measure of success 10, 37, 55, 78 INDEX global 141 UK 4 see also growth genetically modified crops see GM crops Germany 33, 50, 58 Gladwell, Malcolm 68 Global Barter Clubs 57, 58 global commons 113, 148 global currencies 56, 61, 120, 147–8 global greenback 61 global warming 3, 3–4, 115, 155 see also climate change globalization 8, 28, 143, 153 see also interdependence GM (genetically modified) crops 91, 117, 119, 140–1 Goetz, Stephan 124 gold standard 8, 143 Good Life, The (BBC sitcom) 69 goods, local 19, 109, 110 Goodwin, Fred 142 government borrowing 37–8, 49–50, 58, 62, 141 governments 2, 28, 116, 129, 158 creating money 58–9, 62, 90 propping up banking system 6, 7 Graham, Benjamin 120 Grameen Bank 26, 143–4, 153 Great Barrington (Massachusetts) 57, 151–2, 153 Great Depression 3, 36, 57 green bonds 157 green collar jobs 106, 157 Green Consumer Guide, The (Elkington and Hailes, 1988) 26, 69, 72 green economics 23, 100, 117 green energy 26, 97, 102–3, 114, 156, 157 Green New Deal 156–8 green taxation 153 greenhouse gas emissions 3–4, 115, 148 gross domestic product see GDP Gross National Happiness 43 growth 2, 11, 12–13, 23, 36–7, 38–40, 42, 43 185 bad measure of success 10, 158 maximizing 25 and poverty 4, 39–40, 81–2 and progress 39, 78 wealth defined in terms of 32 and well-being 4–5 see also GDP guilds 80, 80–1 happiness 12, 18, 29, 41, 43, 45–6 Happy Planet Index 32–3, 34, 43 Hard Times (Dickens, 1854) 36 HBOS 7 health 46, 72, 78, 96, 115, 129 health costs 117 healthcare 13, 33, 44 hedge funds 5, 7, 97, 120 Helsinki (Finland) 102 HIV/AIDS 70, 111, 135, 148 Honduras 139, 141 house prices 36, 46, 79, 83, 91, 126–7, 151 London 53, 54, 91 see also mortgages Howard, Ebenezer 105, 158 HSBC 5 human interaction 67–8, 74 human needs 20, 24, 67, 86 human rights 110–11, 116, 147 ill-health 35, 38, 46 ‘illth’ 29, 35 IMF (International Monetary Fund) 27, 82, 91, 135–6, 139, 143, 147, 147–8 incomes 24, 37, 43, 44, 78, 79, 81 and happiness 45–6 inequalities 37, 81, 82, 142 of poorest 4, 81, 82, 112, 142 Index of Sustainable Economic Welfare see ISEW India 82, 91, 110, 119, 136, 139–40, 153 indigenous knowledge 82, 117 inequality 4, 81–2, 96, 112–13, 116 inflation 8, 22, 58, 90 information technology 58, 59, 115 186 THE NEW ECONOMICS intellectual property 82, 91, 110, 113, 116, 117 interdependence 111–20, 135–8 Keynes on 19, 109, 110, 115, 143 see also globalization interest 8, 11, 11–12, 58, 77, 157 interest rates 144, 144–5 interest-free money 43, 73, 84, 90 intergenerational equity 25, 117 international bankruptcy 147 International Monetary Fund see IMF investment 14, 45, 53, 60, 104, 118, 137–8 ethical 26, 69–70, 74, 154 involvement 71, 75, 128–30 Iraq 49, 60, 136 ISEW (Index of Sustainable Economic Welfare) 40–1, 43, 78 Islamic banking 58, 90, 146 islands, small 31–2, 33–4 Italy 33, 119–20, 138 Ithaca hours currency 57, 58 It’s a Wonderful Life (film, Capra, 1946) 38 Jacobs, Jane 56, 110, 126 Jaffe, Bernie 126 Japan 26, 50, 91, 113, 119, 128 Jefferson, Thomas 18, 20 Jersey 52, 53 Jones, Allan 103 Jubilee Debt campaign 137 junk bonds 1, 142–3 just-in-time 123–4, 155 Keynes, John Maynard 2, 13–14, 15, 17, 21, 37, 55 on interdependence 19, 109, 110, 115, 143 international currency 61, 120 on local production 19, 109, 110 on ‘practical men’ as ‘slaves of some defunct economist’ 10, 35, 67, 87, 159 Keynesian economics 8, 18, 22, 27, 28 Kinney, Jill 130 Knowsley (Merseyside) 104 Kropotkin, Peter 18 Krugman, Paul 52 land 19, 82, 96 land tax 43 landfill 97, 98, 100, 107 Layard, Richard 41 Lehigh Hospital (Pennsylvania) 129 Letchworth Garden City (Hertfordshire) 105 lets (local exchange and trading systems) 57 liberalism 18, 19, 27 Lietaer, Bernard 56, 61, 120 life 19, 29, 55, 69, 86, 91 need for meaning 42, 75 life expectancy 31, 32–3, 82 life poverty 82–3 life satisfaction 31, 33, 41, 42 Lima (Peru) 130–1 Linton, Michael 57, 58 Living Economy, The (Ekins, 1986) 24–5 LM3 (Local Money 3) 60, 104–5 loans see debt Local Alchemy programme 152–3 local circulation of money 103–5, 107, 124, 151–2 local currencies 26, 56, 57, 58, 59, 60, 151–2, 153 local economies 26, 81, 85, 86, 105–7, 118, 124, 133 local exchange and trading systems (lets) 57 local food 2, 118, 119–20, 151 local governments 6, 44, 60 local life 4, 81, 158 Local Money 3 see LM3 local production 109, 116, 118 local savings schemes 61 local shops 75, 82–3, 104, 124, 124–5, 126, 151 supermarkets and 80, 105, 125 local wealth 14, 53–4 localization 155–6, 159 London 52, 53, 61, 97, 102, 103 house prices 53, 54, 91 traffic speed 65–6 INDEX London Underground 147 Lutzenberger, Jose 26 Macmillan Cancer Care 88–9 McRobie, George 22, 24 mainstream 4–5, 26, 154, 159–60 see also economics Malawi 135–6, 137 Malaysia 51 Manchester United 155 manipulated debt 139–41 markets 10, 12, 51, 70, 158 financial 1–2, 52, 53, 55, 138, 154–5 free 22, 85, 112–13 new economics and 67, 72–5, 85 Marsh Farm estate (Luton) 104–5, 152–3 Maslow, Abraham 67 materialism 12, 46–7 Max-Neef, Manfred 24 Maxwell, Robert 143 MDGs (Millennium Development Goals) 39, 136 Mead, Margaret 129 meaning, need for 42, 75 measurement problem 36–40 measuring 12, 42, 55, 85 success 2, 8, 10, 43, 44, 55, 154, 156, 158 value 10, 15, 29, 53, 59, 115 wealth 32, 37–40, 53–4 well-being 4, 18, 32–3, 34, 43 mechanics, Cuban 95–6, 97 medieval economics 78–80, 80–1 mega-rich 120, 141, 142 mental health 4, 35, 36, 46, 68, 83 Merck 99 micro-credit 26, 143–4, 145, 146, 151, 153 Milkin, Michael 142 Millennium Development Goals see MDGs minimum wage 92 misery, of UK young people 35–6 Mishan, E.J. 40 Mogridge, Martin 65–6, 74 Mondragon (Spain), cooperatives 153 money 8, 11, 13, 18, 27, 29, 36, 95 187 as a bad measure 10, 15, 18, 53, 59, 90, 143, 154 creating 7, 56–7, 58–9, 84, 90, 120, 138, 147 designed for money markets 53 economics and 25, 127 externalities 35 and life 55, 86, 154, 159 local circulation 103–5, 107, 124, 151–2 means to an end 15 new economics view 15, 59–60, 89 new ways of organizing 56–60 re-using 103–5 replacing with well-being 42 slowing down 51–2, 60 too little 57 types of 14–15, 57, 59, 120 and value 10, 15, 53, 59 and wealth 15, 19, 32, 38, 78 and well-being 18, 21, 81 see also GDP; growth; price; trickle down money flows 26, 50–2, 60, 103–5, 107, 124, 136–8 money markets 1–2, 52, 53, 55, 138, 154–5 money poverty 81–2 money system 7–8, 50–6, 60 monopolies 8, 20, 83, 84–6, 89–90, 125–6, 133, 146 Monsanto 85, 140 moral philosophy 12, 19, 72–3 morality 8, 18, 28, 74, 115 economics and 12, 19, 22 Morris, William 18, 78, 151 mortgages 1, 4, 5–6, 6, 7, 46, 91 working to pay 46, 68, 73, 77–8, 79, 81, 83, 84, 89, 126–7, 140 see also house prices motivations 4–5, 11, 67–9, 70, 71, 72, 73, 75 multinationals 14, 61, 84–5, 90, 137–8, 139, 143 multiple currencies 58, 59–60, 60, 90 multiplier effect 103–5 Murdoch, Rupert 52 188 THE NEW ECONOMICS Myers, Norman 117 Nanumaea (Tuvalu) 34 national accounting 37–8, 38–9 national debt 49–50, 83, 84, 139, 141 national grid 102, 106 National Health Service see NHS natural capital 3, 99 natural resources 22, 40, 43, 84, 97–8 needs 20, 24, 25, 67, 75, 86 basic 25, 89, 91–2, 115 nef (the new economics foundation) 24, 26, 45, 71, 104, 131–2, 145 Local Alchemy programme 152–3 see also Happy Planet Index; LM3 ‘neo-liberal’ policies 8, 27–8 Nether Wallop (Hampshire) 80, 81 The Netherlands 58, 106, 138 New Century 5 New Deal for Communities 152 New Deal (US) 157 new economics 2–3, 9–10, 18–19, 28–9, 59, 153–4, 159–60 Cuba as object lesson 96–7 history of 9–10, 18–19, 21–7 and the mainstream 26 as new definition of wealth 15 principles 35, 157–8 new economics foundation see nef New York City 52, 128 News Corporation 52 NHS (National Health Service) 87, 114, 131 Northern Rock 6 Nottingham 35 Nu-Spaarpas experiment 106 Obama, Barack 154, 157 obsolescence, built-in 98, 100, 101 odious debt 146 offshore assets 136–7 offshore financial centres 52–3, 61 oil 3, 96, 115, 117, 155 Oil Legacy Fund 157 orchards 111, 112, 115, 124 organic food 26 Ostrom, Elinor 127 out-of-town retailing 75, 80, 123, 132 overconsumption 32, 40, 44, 113 Owen, Robert 57 ownership 11, 46, 60, 91, 118, 156 paid work 87–9, 92 palm oil 112 Partners in Health 130–1 peak oil 3, 96, 117, 155 Pearce, David 25–6, 98, 115 Peasants’ Revolt (1381) 18 pensions 7, 44, 61, 73, 155 people, as assets 15, 57–8, 128–9, 130, 131 permit trading 45, 117–18, 148 personal carbon allowances 45, 117–18 personal debt 7, 36, 83–4, 91, 140, 141 Petrini, Carlo 119–20 Pettifor, Ann 135, 137 philanthropy 130, 133 policy makers 28, 35, 73, 87, 90 assumptions of 67, 68, 73, 128 Keynes on 10, 35, 67, 87, 159 political agenda 42–7 politicians 11, 54, 159 politics, new 159 pollution 10, 35, 37, 40, 98, 112, 114 by GM genes 91, 117, 119 poor 29, 145–6 Porritt, Jonathon 23 post-autistic economics 9–10, 71–2 poverty 4, 23, 35, 79–80, 81–2, 127 economic system and 13–14, 18, 29, 81–2, 154 interdependence leading to 111–15 reduction 39–40, 51–2, 61, 116, 124–5 poverty gap 4, 52–3, 78, 82 power 10, 12, 25, 28, 53, 141–2 corporate 20, 28, 85 monopoly power 83, 89–90, 125–6, 146 power relationships 29, 114 price 10, 67, 72, 73, 115, 153 Price, Andrew 132 INDEX prices 80, 156, 158 Pritchard, Alison 23 product life cycle 97–8, 101 professionals 130, 132, 133, 159 profits 12, 13, 99 progress 36, 37–8, 39, 43, 44, 77–8, 81–2, 84 Proudhon, Pierre-Joseph 120 psychology, economics and 67–8, 71, 72–3 public goods 148 public sector commissioning 131–2, 133 public services 45, 74, 127–32, 158 public transport 66, 74 ‘purchasing power parity’ 81 Putnam, Robert 126–7, 127–8 189 retirement 46, 73 see also pensions rewarded work 88 rewards 7, 8, 11, 25, 92, 141, 142 roads 66, 115 Robertson, James 17, 22, 23, 55, 145 Rockefeller, John D. 28 Roman Catholic church 19, 21, 117 Roosevelt, Eleanor 96 Roosevelt, Franklin Delano 157 Rotterdam (The Netherlands) 106 rubbish 97–105 Rupasingha, Anil 124 Rushey Green surgery (London) 131 Ruskin, John 17–18, 18, 29, 35, 78, 81 Russia 110 qoin system 58 rainforests 4, 10, 111, 112 ‘rational man’ assumption 10, 71 RBS 142 re-use 97, 99, 100–5 Reagan, Ronald 22, 27 real money, generating 120 ‘real’ wealth 2, 32, 36–40 reciprocity 44, 128, 128–30, 133 see also co-production recycling 97, 98, 100–1, 105–6, 106–7 redistribution 19, 27, 52, 96 regeneration 27, 104, 105, 107, 116, 124, 128 regional currencies 58, 59, 60 regulation 129, 156 competition 85, 113, 125, 126, 133 financial sector 53, 85, 157 relationships 4, 69, 83, 128–30 remittances 137 Rendell, Matt 33 renewable energy 26, 97, 102, 102–3, 114, 156, 157 repair 97, 98, 101, 105, 107 resources 32, 43, 97–8, 99, 100–1, 114, 158 local 25, 115 natural 22, 40, 43, 84, 97–8 St Louis (Missouri) 131 Samoa 34 Sane (South African New Economics) 58 saving seeds 91, 117, 119, 141 savings 7, 46, 73, 90, 157 schools 131 Schor, Juliet 83 Schumacher, E.F.


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The fortune at the bottom of the pyramid by C. K. Prahalad

barriers to entry, business cycle, business process, call centre, cashless society, clean water, collective bargaining, corporate social responsibility, deskilling, disintermediation, farmers can use mobile phones to check market prices, financial intermediation, Hernando de Soto, hiring and firing, income inequality, information asymmetry, late fees, Mahatma Gandhi, market fragmentation, microcredit, new economy, profit motive, purchasing power parity, rent-seeking, shareholder value, The Fortune at the Bottom of the Pyramid, time value of money, transaction costs, wealth creators, working poor

It is to illustrate that the typical pictures of poverty mask the fact that the very poor represent resilient entrepreneurs and value-conscious consumers. What is needed is a better approach to help the poor, an approach that involves partnering with them to innovate and achieve sustainable win–win scenarios where the poor are actively engaged and, at the same time, the companies providing products 3 The Fortune at the Bottom of the Pyramid 4 Purchasing power parity in U.S. dollars Population in millions > $20,000 Tier 1 75 – 100 $1,500 – $20,000 Tiers 2–3 1,500 – 1,750 $1,500 Tier 4 4,000 < $1,500 Tier 5 Figure 1.1 The economic pyramid. Source: C. K. Prahalad and Stuart Hart, 2002. The Fortune at the Bottom of the Pyramid, Strategy+ Business, Issue 26, 2002. Reprinted with permission from strategy + business, the award-winning management quarterly published by Booz Allen Hamilton. www.strategy-business.com.

Within these markets, the BOP represents a major opportunity. Take China as an example. With a population of 1.2 billion and an average per capita gross domestic product (GDP) of US $1,000, China currently represents a $1.2 trillion economy. However, the U.S. dollar equivalent is not a good measure of the demand for goods and services produced and consumed in China. If we convert the GDP-based figure into its dollar purchasing power parity (PPP), China is already a $5.0 trillion economy, making it the second largest economy behind the United States in PPP terms. Similarly, the Indian economy is worth about $3.0 trillion in PPP terms. If we take nine countries—China, India, Brazil, Mexico, Russia, Indonesia, Turkey, South Africa, and Thailand—collectively they are home to about 3 billion people, representing 70 percent of the developing world population.

(HLL), India, 13, 193–198, 213 Arogya (Health) Day, 199 background, 193–194 challenges, 202–203 competition, 201 dealer evaluation, 197 gender considerations, 196 goals, 194 implementation approach, 194–198 i-Shakti, 200 leveraging government relationships in site selection, 195–196 leveraging know-how globally, 203 local organization and process, 196–198 long-term vision, 202 marketing Anapurna salt through, 198–200 newsletters, 200 Project Iodine, 200 promotional video, 200 sales and margins, 200 Shaki dealer, 196–197 Shakti Day, 199–200 Shakti Family Packs, 199 399 Shakti Pracharani, 197–198 site selection, 195–196 stimulating demand through education, 199–200 stimulating demand through linkages, 199 year 2002 results, 201 year 2003 performance, 201–202 Promoters, Patrimonio Hoy project, 156–157 Promotions, Casas Bahia, 136 Public-private partnerships (PPPs), 215–220 Pukka adatiyas, 324 Pundiselvi, Ms., 308–309 Purchasing power parity (PPP), 10–12, 218 R Rahmathulah, Lakshmi, 283 Rail distribution, salt, 191–192 Rajendra, Anuja, 385–386 Rao, Sachin, 357, 382 Ravikumar, P. H., 302 Reeder, Kate, 239, 383 Reliance, 28, 50, 116 Reserve Bank of India (RBI), 290–292 Rural Development Initiative, Bank of Madura (India), 299–301 Rural income distribution, 111–112 Rural poor, access to distribution, 13 Rural sales promoters (RSPs), 195 S Salespersons, Casas Bahia: compensation for, 143 training, 135 Salt farming, 175 Salt market, 175–179 diverse tastes/cultural variations, and demand for salt in India, 176 iodized salt, 177 players in, 179–181 Samsung, 50 Samyojaks, 339–340 defined, 335 subversion of, toward competitive entry, 354–355 Sanchalak, 70 400 SANGAM, 193 Sarawathi, Ms., 309 Savings, Mexican society, 150–151 Seaweed, as iodine source, 174 Self-help groups (SHGs), 58–61, 100, 107, 288 evolution of, 74 and ICICI Bank: affiliations, 307–308 bank loans, 308–309 dedication to, 310–311 first monthly meeting, 305 monthly meetings, 305–306 positive effects of, 311 reports of business enterprise progress, 307 scaling, 302–304 identities at, 107 maturation model, 73–74 Service of Credit Protection (SPC), 123 Sethi, P.


pages: 257 words: 94,168

Oil Panic and the Global Crisis: Predictions and Myths by Steven M. Gorelick

California gold rush, carbon footprint, energy security, energy transition, flex fuel, income per capita, invention of the telephone, meta analysis, meta-analysis, North Sea oil, oil shale / tar sands, oil shock, peak oil, price stability, profit motive, purchasing power parity, RAND corporation, statistical model, Thomas Malthus

Energy Policy (in press: doi:10.1016/j. enpol.2009.01.041). Energy Information Administration reporting of Oil and Gas Journal value (January 2008); BP Statistical Review (2008); www.opec.org/home/basket.aspx The average price of OPEC oil in 2008 was $95 per barrel. This gave a total value of OPEC reserves of about $87 trillion. The gross world product in 2008 was $69 trillion (IMF estimate in purchasing power parity, ppp). www.imf.org/ external/pubs/ft/weo/2008/01/pdf/tables.pdf Reported here are data from the US Energy Information Administration. The EIA does not include in its OAPEC oil production statistics Egypt, Syria, and Bahrain (the non-OPEC members). Note that Middle Eastern OPEC countries are low-cost producers at $2 per barrel. Shafiq (2009) estimated finding and development costs of Iraq’s oil at $1.50–2.25 per barrel.

“Circum-Arctic Resource Appraisal: Estimates of Undiscovered Oil and Gas North of the Arctic Circle,” USGS Fact Sheet 2008–3049; “90 Billion Barrels of Oil and 1,670 Trillion Cubic Feet of Natural Gas Assessed in the Arctic,” US Geological Society News Release, July 23, 2008. Consumption data from EIA; population data from Economic Research Service, USDA. Income approximated as per capita GDP; GDP based on GDP Purchasing Power Parity (PPP) is $6,200 per capita in China versus $41,500 per capita in the US. EIA 2008 and BP Statistical Review of World Energy, June 2008. The Russian Federation was formed in December 1991, and 1992 is the first full year for comparison. However, in 1985 the Russian Federation, before dissolution of the USSR, consumed about half of the oil it consumed in 2007. Note: 1980 Russia GDP was estimated as 41 percent of FSU GDP in 1980; 41 percent is the five-year average value of Russian versus FSU GDP from 1985–1989.


pages: 389 words: 87,758

No Ordinary Disruption: The Four Global Forces Breaking All the Trends by Richard Dobbs, James Manyika

2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, access to a mobile phone, additive manufacturing, Airbnb, Amazon Mechanical Turk, American Society of Civil Engineers: Report Card, autonomous vehicles, Bakken shale, barriers to entry, business cycle, business intelligence, Carmen Reinhart, central bank independence, cloud computing, corporate governance, creative destruction, crowdsourcing, demographic dividend, deskilling, disintermediation, disruptive innovation, distributed generation, Erik Brynjolfsson, financial innovation, first square of the chessboard, first square of the chessboard / second half of the chessboard, Gini coefficient, global supply chain, global village, hydraulic fracturing, illegal immigration, income inequality, index fund, industrial robot, intangible asset, Intergovernmental Panel on Climate Change (IPCC), Internet of things, inventory management, job automation, Just-in-time delivery, Kenneth Rogoff, Kickstarter, knowledge worker, labor-force participation, low skilled workers, Lyft, M-Pesa, mass immigration, megacity, mobile money, Mohammed Bouazizi, Network effects, new economy, New Urbanism, oil shale / tar sands, oil shock, old age dependency ratio, openstreetmap, peer-to-peer lending, pension reform, private sector deleveraging, purchasing power parity, quantitative easing, recommendation engine, Report Card for America’s Infrastructure, RFID, ride hailing / ride sharing, Second Machine Age, self-driving car, sharing economy, Silicon Valley, Silicon Valley startup, Skype, smart cities, Snapchat, sovereign wealth fund, spinning jenny, stem cell, Steve Jobs, supply-chain management, TaskRabbit, The Great Moderation, trade route, transaction costs, Travis Kalanick, uber lyft, urban sprawl, Watson beat the top human players on Jeopardy!, working-age population, Zipcar

But the 3 billion additional members of the world’s consuming class added in just thirty-five years is a far more significant milestone.12 That’s as many new consumers added as there were people on the planet in the mid-1960s.13 As Sanjeev Sanyal, Deutsche Bank’s global strategist, notes, “The real story for the next two decades will be emerging economies’ shift to middle-class status. Although other emerging regions will undergo a similar shift, Asia will dominate this transformation.”14 Three billion people joining the consuming class between 1990–2025 1. Historical values for 1820 through 1990 estimated by Homi Kharas; 2010 and 2025 estimates by McKinsey Global Institute. 2. Defined as people with daily disposable income above $10 at purchasing power parity (PPP). Population below consuming class defined as individuals with disposable income below $10 at PPP. SOURCE: Homi Kharas; Angus Maddison; McKinsey Global Institute Cityscope database TIPPING POINT Incomes have been rising, and the consumer class has been expanding, for some years. But we have reached a tipping point where the spending of a new generation of consumers in emerging economies has become an overwhelming force.

This analysis will become increasingly granular, down to knowing the number of college graduates and workers with specific training in cities around the world. Your business can gain an advantage by using this data to create maps of global skills supply, which will inform decisions about where to invest. The world is likely to have too few high-skill workers and not enough jobs for low-skill workers 1 Twenty-five countries from the analyzed set of seventy countries, with 2010 GDP per capita greater than US$20,000 at 2005 purchasing power parity (PPP) levels. 2 Eleven countries from the analyzed set of seventy countries, from South Asia and sub-Saharan Africa, with 2010 GDP per capita less than $3,000 at 2005 PPP. 3 Low-skill defined for advanced economies as no post-secondary education; for developing economies, low skill is primary education or less. NOTE: Numbers may not sum due to rounding. SOURCE: McKinsey Global Institute analysis Business leaders are increasingly aware of these differences and tap into the global labor pool to address their needs.


pages: 305 words: 89,103

Scarcity: The True Cost of Not Having Enough by Sendhil Mullainathan

American Society of Civil Engineers: Report Card, Andrei Shleifer, Cass Sunstein, clean water, computer vision, delayed gratification, double entry bookkeeping, Exxon Valdez, fault tolerance, happiness index / gross national happiness, impulse control, indoor plumbing, inventory management, knowledge worker, late fees, linear programming, mental accounting, microcredit, p-value, payday loans, purchasing power parity, randomized controlled trial, Report Card for America’s Infrastructure, Richard Thaler, Saturday Night Live, Walter Mischel, Yogi Berra

This is perfectly valid for some uses, such as how much Alex should value the rupees. But in some cases this can be misleading because exchange rates do not account for price differences between countries. For example, a rupee goes further in India because many things are also cheaper there. In trying to assess income differences across countries, most economists adjust not only for exchange rates but also for purchasing power parity—a measure of price differences. Since this book is not intended to be a careful cross-country comparison of incomes, for ease of reading we simply use nominal exchange rates. But the reader should keep this distinction in mind. Imagine you have spent the day shopping: This is a slightly updated (for inflation) version of Tversky and Kahneman’s famous “jacket-calculator” problem; A. Tversky and D.

a little over $2: In this book when we report dollar equivalents, we simply convert using prevailing exchange rates. Yet many experts feel this can paint a misleading impression because people in different countries also face different prices. So the vendor, for example, will also have lower prices for food and other items. As a result, her income in nominal dollar terms does not adequately reflect her purchasing power. Economists have suggested using purchasing power parity instead of nominal exchange rates. In the case of India, this would result in an income that is roughly 2.5 times higher for the vendor. An initial scarcity is compounded by behaviors that magnify it: Economists and especially development economists have focused on what they call poverty traps—the notion that those who begin poor will stay poor. A commonly discussed mechanism is a lucrative investment opportunity that requires a fixed amount of capital.


pages: 1,088 words: 228,743

Expected Returns: An Investor's Guide to Harvesting Market Rewards by Antti Ilmanen

Andrei Shleifer, asset allocation, asset-backed security, availability heuristic, backtesting, balance sheet recession, bank run, banking crisis, barriers to entry, Bernie Madoff, Black Swan, Bretton Woods, business cycle, buy and hold, buy low sell high, capital asset pricing model, capital controls, Carmen Reinhart, central bank independence, collateralized debt obligation, commoditize, commodity trading advisor, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, deglobalization, delta neutral, demand response, discounted cash flows, disintermediation, diversification, diversified portfolio, dividend-yielding stocks, equity premium, Eugene Fama: efficient market hypothesis, fiat currency, financial deregulation, financial innovation, financial intermediation, fixed income, Flash crash, framing effect, frictionless, frictionless market, G4S, George Akerlof, global reserve currency, Google Earth, high net worth, hindsight bias, Hyman Minsky, implied volatility, income inequality, incomplete markets, index fund, inflation targeting, information asymmetry, interest rate swap, invisible hand, Kenneth Rogoff, laissez-faire capitalism, law of one price, London Interbank Offered Rate, Long Term Capital Management, loss aversion, margin call, market bubble, market clearing, market friction, market fundamentalism, market microstructure, mental accounting, merger arbitrage, mittelstand, moral hazard, Myron Scholes, negative equity, New Journalism, oil shock, p-value, passive investing, Paul Samuelson, performance metric, Ponzi scheme, prediction markets, price anchoring, price stability, principal–agent problem, private sector deleveraging, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, reserve currency, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Robert Shiller, Robert Shiller, savings glut, selection bias, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, stochastic volatility, stocks for the long run, survivorship bias, systematic trading, The Great Moderation, The Myth of the Rational Market, too big to fail, transaction costs, tulip mania, value at risk, volatility arbitrage, volatility smile, working-age population, Y2K, yield curve, zero-coupon bond, zero-sum game

Formal theoretical models have had little success in explaining, let alone predicting, exchange rate movements. Thus, systematic currency-trading models tend to be purely atheoretical or only loosely guided by formal models. Many such models amount to combining carry with other indicators. Candidates for additional indicators include• Carry plus value. One could proxy E(ΔS) with some expected normalization toward a “fair value” exchange rate that can be estimated based on purchasing power parity (PPP) or other valuation models. Or one could use valuation filters that rule out carry trading when it conflicts with extreme mispricing signals. • Carry plus momentum. Exchange rates tend to trend, or at least they used to; trend-following strategies within the G10 have become much less profitable during the past decade. One could add a trend-following signal as a proxy for E(ΔS). Using stop-loss rules can serve the same purpose as using trend-following models

Proximate determinants from order flows are much better than any fundamental determinants at explaining FX changes. However, over time, various predictability patterns (potentially related to time-varying ex ante FX premia) have been documented, and certain indicators are able to contemporaneously explain FX moves. Inflation differentials across countries influence exchange rate changes, but purchasing power parity holds only approximately and even then only in the very long run. Relative interest rates (levels and changes, short and long, nominal and real) have some impact on exchange rates, perhaps because they are proxies for monetary policy or economic growth. Productivity and real-growth differences, terms of trade, and current account and/or capital flow developments also matter. Yet, many of these statistical relations are weak and are hardly stable over time or across countries.

Unlike other commodities, gold can perform well even under deflationary conditions; empirically, inflation uncertainty or disagreement predicts future gold returns better than the inflation level does. Currencies. High inflation also undermines currencies in the short term because they lose their international purchasing power. As an exception, if the central bank is sufficiently credible that markets view any rise in inflation as temporary and expect it to trigger policy tightening, higher inflation may result in short-term currency appreciation. Purchasing power parity does not hold in the short term but works reasonably well over long horizons. In the case of hyperinflation, in particular, exchange rate changes tend to offset persistent cross-country inflation differentials. Deflation—topical and scary It is important to distinguish between disinflation (which typically helps risky assets) and deflation (which can be destructive). We do not have much data on deflationary environments but what we have looks scary (the U.S. in the 1930s, Japan more recently).


pages: 337 words: 103,273

The Great Disruption: Why the Climate Crisis Will Bring on the End of Shopping and the Birth of a New World by Paul Gilding

airport security, Albert Einstein, Bob Geldof, BRICs, carbon footprint, clean water, cleantech, Climategate, commoditize, corporate social responsibility, creative destruction, decarbonisation, energy security, Exxon Valdez, failed state, fear of failure, income inequality, Intergovernmental Panel on Climate Change (IPCC), Joseph Schumpeter, market fundamentalism, mass immigration, Naomi Klein, Nelson Mandela, new economy, nuclear winter, oil shock, peak oil, Ponzi scheme, purchasing power parity, Ronald Reagan, shareholder value, The Spirit Level, The Wealth of Nations by Adam Smith, union organizing, University of East Anglia

It reminds me of a quote favored by my late father-in-law, Max Grosvenor: “Hell hath no fury like a vested interest masquerading as a moral principle.”3 That aside, though, my more considered response is to go back to the core argument as to what’s wrong with our current economic system. Quantitative economic growth is, let’s be clear, very effective at improving the quality of life and life satisfaction of the poor. Countless studies have shown that, using a measure of purchasing power parity, going from an income per annum of $0 per capita up to around $10,000 to $15,000 per capita delivers a dramatic and sustained improvement in quality of life. This means it works up to a family income of around $60,000, then any further average improvement stops. So I am not arguing that quantitative economic growth doesn’t work for the poor; it most certainly does. The problem is that the system that currently delivers this assumes, and in fact depends on, the rich getting richer in order for the poor to be less poor.

Available at http://www.treasury.gov.au/lowpollutionfuture/. 3. Dominic Wilson and Anna Stupnytska, “The N-11: More Than an Acronym,” Goldman Sachs, Global Economics Paper No. 153, 2007. Available at http://www.goldmansachs.com. 4. John Hawksworth, “The World in 2050: How Big Will the Major Emerging Market Economies Get and How Can the OECD Compete?” PwC, 2006. Available at http://www.pwc.com. PwC’s figures are based on purchasing power parity (PPP), where amounts are adjusted to take account of how many goods or services one unit of currency buys. For example, $1 at market exchange rates buys a lot more in China than it does in the United States and slightly less in Scandinavia than it does in the United States. PPP is a useful measure for our purposes, since it has been closely linked with consumption and thus ecosystem demands.


pages: 350 words: 103,988

Reinventing the Bazaar: A Natural History of Markets by John McMillan

"Robert Solow", accounting loophole / creative accounting, Albert Einstein, Alvin Roth, Andrei Shleifer, Anton Chekhov, Asian financial crisis, congestion charging, corporate governance, corporate raider, crony capitalism, Dava Sobel, Deng Xiaoping, experimental economics, experimental subject, fear of failure, first-price auction, frictionless, frictionless market, George Akerlof, George Gilder, global village, Hernando de Soto, I think there is a world market for maybe five computers, income inequality, income per capita, informal economy, information asymmetry, invisible hand, Isaac Newton, job-hopping, John Harrison: Longitude, John von Neumann, Kenneth Arrow, land reform, lone genius, manufacturing employment, market clearing, market design, market friction, market microstructure, means of production, Network effects, new economy, offshore financial centre, ought to be enough for anybody, pez dispenser, pre–internet, price mechanism, profit maximization, profit motive, proxy bid, purchasing power parity, Ronald Coase, Ronald Reagan, sealed-bid auction, second-price auction, Silicon Valley, spectrum auction, Stewart Brand, The Market for Lemons, The Nature of the Firm, The Wealth of Nations by Adam Smith, trade liberalization, transaction costs, War on Poverty, Xiaogang Anhui farmers, yield management

The child labor, the sweat shops, the environmental problems will not go away until extreme poverty disappears. The gap between rich and poor countries is vast. In China, the average income is about one-tenth that in the United States. In India it is one-fourteenth. In Tanzania, to take an extreme case, it is one-sixtieth. A typical American spends in less than a week what a Tanzanian must eke out over a whole year. (These comparisons are done in purchasing-power-parity terms, which take account of the cross-country variations in the cost of living; without such an adjustment, the disparities would be still bigger.)2 The world’s millionaires number seven million, according to the firm Gemini Consulting. Millionaires therefore make up just over one-thousandth of the world’s population. Their assets total $25 trillion.3 Most of those earning less than $2 per day are in Africa and Asia; most of the millionaires are in Western Europe and North America.

On state firm reforms, see Groves et al. (1994, 1995). 14. Shirk (1993, p. 334). 15. Skidelsky (1996, p. 142), Boycko, Shleifer, and Vishny (1995, p. 5). 16. U.S. General Accounting Office (2000, p. 10). 17. The quote is from Zhou (1996, p. 106). Chapter Sixteen. Antipoverty Warriors 1. Economist, June 23, 2001, p. 13. The Shiva quote is from www.gn.apc. org/resurgence/articles/mander.htm, accessed September 26, 2001. 2. World Bank purchasing-power-parity data for 1999, www.worldbank. org/data/databytopic/GNPPC.pdf. 3. The data on millionaires, for 1999, are at www.gemcon.com/fs/wealth2000.htm. The number of the poor, an estimate for 1998, is reported at www.worldbank.org/poverty/data/trends/income.htm. 4. Data from Temple (1999) and Pritchett and Summers (1996). The Goh Chok Tong quote is from the Economist, August 22, 1992, p. 25. 5.


pages: 370 words: 97,138

Beyond: Our Future in Space by Chris Impey

3D printing, Admiral Zheng, Albert Einstein, Alfred Russel Wallace, AltaVista, Berlin Wall, Buckminster Fuller, butterfly effect, California gold rush, carbon-based life, Charles Lindbergh, Colonization of Mars, cosmic abundance, crowdsourcing, cuban missile crisis, dark matter, discovery of DNA, Doomsday Clock, Edward Snowden, Elon Musk, Eratosthenes, Haight Ashbury, Hyperloop, I think there is a world market for maybe five computers, Isaac Newton, Jeff Bezos, Johannes Kepler, John von Neumann, Kickstarter, life extension, low earth orbit, Mahatma Gandhi, Marc Andreessen, Mars Rover, mutually assured destruction, Oculus Rift, operation paperclip, out of africa, Peter H. Diamandis: Planetary Resources, phenotype, private space industry, purchasing power parity, RAND corporation, Ray Kurzweil, RFID, Richard Feynman, Richard Feynman: Challenger O-ring, risk tolerance, Rubik’s Cube, Search for Extraterrestrial Intelligence, Searching for Interstellar Communications, Silicon Valley, skunkworks, Skype, Stephen Hawking, Steven Pinker, supervolcano, technological singularity, telepresence, telerobotics, the medium is the message, the scientific method, theory of mind, There's no reason for any individual to have a computer in his home - Ken Olsen, wikimedia commons, X Prize, Yogi Berra

That means it has the capacity to make even greater strides in space. Figure 32. China is the third nation to land a wheeled rover on the Moon, after the Soviet Union and the United States. The Jade Rabbit, or Yutu, rover reached the Moon in December 2013. It has a plutonium-powered nuclear reactor. China is a rapidly emerging superpower, with a GDP per capita (scaled to purchasing-power parity) that will exceed that of the United States in about five years. The purchasing-power-parity comparison makes sense, since goods and services are cheaper in China and they get a lot more bang for their yuan. Chinese spending in space matches the growth rate of the economy, which has been averaging 10 percent per year for the past two decades. It makes a dramatic contrast with Europe and the United States, where inflation-corrected spending has been flat or declining over the past two decades.2 China’s rank of eighth in the space league is misleading.


pages: 371 words: 98,534

Red Flags: Why Xi's China Is in Jeopardy by George Magnus

3D printing, 9 dash line, Admiral Zheng, Asian financial crisis, autonomous vehicles, balance sheet recession, banking crisis, Bretton Woods, BRICs, British Empire, business process, capital controls, carbon footprint, Carmen Reinhart, cloud computing, colonial exploitation, corporate governance, crony capitalism, currency manipulation / currency intervention, currency peg, demographic dividend, demographic transition, Deng Xiaoping, Doha Development Round, Donald Trump, financial deregulation, financial innovation, financial repression, fixed income, floating exchange rates, full employment, Gini coefficient, global reserve currency, high net worth, hiring and firing, Hyman Minsky, income inequality, industrial robot, Internet of things, invention of movable type, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, labour market flexibility, labour mobility, land reform, Malacca Straits, means of production, megacity, money market fund, moral hazard, non-tariff barriers, Northern Rock, offshore financial centre, old age dependency ratio, open economy, peer-to-peer lending, pension reform, price mechanism, purchasing power parity, regulatory arbitrage, rent-seeking, reserve currency, rising living standards, risk tolerance, smart cities, South China Sea, sovereign wealth fund, special drawing rights, special economic zone, speech recognition, The Wealth of Nations by Adam Smith, total factor productivity, trade route, urban planning, Washington Consensus, women in the workforce, working-age population, zero-sum game

Local government finance was reformed, though the effects were to prove temporary, while financial reforms affecting domestic financial markets, and the exchange rate and interest rate systems, were carried out at a rapid pace. President Hu Jintao and Premier Wen Jiabao were in power for the decade to 2013, a period in which the Chinese economy erupted. With annual growth of 10 per cent, China went from being the world’s sixth biggest economy to the second largest, and gained the status to demand a bigger seat at the global governance table. As income per head rose from $1,293 to $7,080, or in purchasing power parity terms, from $3,940 to $12,205, China could proudly justify its status as a middle-income country. For urban citizens at least, the decade was also one to savour. Wages rose steadily, owner-occupied housing boomed, and urban car ownership rates soared; Chinese car sales were almost 25 million in 2017, accounting for about a third of global car sales. The construction of highways, airports and high-speed rail networks also surged, education spending doubled to 4 per cent of GDP, and health and pension coverage and benefits were broadened.

World Bank colleagues, arguing more recently that the middle-income trap might be a myth, were careful to note that policymakers had to be aware not only that the transition from middle to high income was a lengthy process, but also that they could only expect to succeed by pursuing consistently sound policies designed to boost productivity.3 All economists can agree on that, and the quest to boost productivity in China lies at the heart of this chapter. The evidence for the middle-income trap suggests that growth in middle-income countries tends to slow down initially as income per head moves into a range of $10,000 to $11,000, and then again at levels around $15,000 to $16,000 (measured in 2005 purchasing power parity to US dollars).4 Indeed, over the course of any decade since 1950, only about a third of emerging countries were able to grow by 5 per cent or more each year, less than a quarter kept high growth going for two decades, a tenth managed to do so for three decades, and a select few – Malaysia, Singapore, South Korea, Hong Kong, Taiwan and Thailand – were able to do so for four decades.5 Eventually, though, growth slows down everywhere.


pages: 376 words: 109,092

Paper Promises by Philip Coggan

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, balance sheet recession, bank run, banking crisis, barriers to entry, Berlin Wall, Bernie Madoff, Black Swan, Bretton Woods, British Empire, business cycle, call centre, capital controls, Carmen Reinhart, carried interest, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, delayed gratification, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, falling living standards, fear of failure, financial innovation, financial repression, fixed income, floating exchange rates, full employment, German hyperinflation, global reserve currency, hiring and firing, Hyman Minsky, income inequality, inflation targeting, Isaac Newton, John Meriwether, joint-stock company, Kenneth Rogoff, Kickstarter, labour market flexibility, light touch regulation, Long Term Capital Management, manufacturing employment, market bubble, market clearing, Martin Wolf, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Myron Scholes, negative equity, Nick Leeson, Northern Rock, oil shale / tar sands, paradox of thrift, peak oil, pension reform, plutocrats, Plutocrats, Ponzi scheme, price stability, principal–agent problem, purchasing power parity, quantitative easing, QWERTY keyboard, railway mania, regulatory arbitrage, reserve currency, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, time value of money, too big to fail, trade route, tulip mania, value at risk, Washington Consensus, women in the workforce, zero-sum game

The US could run repeated deficits without triggering the kind of crisis that would have occurred under Bretton Woods. Inflation For investors, it makes sense for inflation to be a determining factor in currency markets. Inflation reduces the purchasing power of a currency; so investors should avoid currencies with high inflation rates. Roughly speaking, economists think that, over the long run, exchange rates will move in line with relative inflation rates, a concept known as purchasing-power parity (PPP). If country A’s inflation rate was 5 per cent higher than that of country B, its currency would decline by around 5 per cent a year. It has never worked quite as simply as that. At the extremes, PPP proved roughly right. Countries with very high inflation, such as several in Latin America in the 1970s and 80s, did see their exchange rates decline significantly. But for the main currencies, the dollar, yen, Deutschmark or sterling, relative inflation rates were often a very poor guide to exchange-rate movements.

leverage leveraged buyout Lewis, Michael Liberal Democrat party (UK) Liberal Party (UK) life expectancy life-cycle theory Little Dorrit lire Live 8 concert Lloyd George, David Lombard Odier Lombard Street Research London School of Economics Long Term Capital Management longevity Louis XIV, King of France Louis XV, King of France Louvre accord Lucas, Robert Lucullus, Roman general Luxembourg Macaulay, Thomas McCarthy, Cormac Macdonald, James MacDonald, Ramsay McKinsey McNamara, Robert Madoff, Bernie Malthusian trap Mandelson, Peter Marais, Matthieu Marco Polo Mares, Arnaud Marks & Spencer Marshall, George Marshall Aid Marshalsea Prison Mauro, Paolo May, Sir George means/media of exchange Medicaid Medicare Mellon, Andrew mercantilism Merchant of Venice, The Meriwether, John Merkel, Angela Merton, Robert Mexico Mill, John Stuart Milne-Bailey, Walter Minsky, Hyman Mises, Ludwig von Mississippi Project Mitterrand, Francois Mobutu, Joseph Mongols monetarism monetary policy monetary targets money markets money supply Moody’s Moore’s Law moral hazard Morgan Stanley Morgenthau, Henry Morrison, Herbert mortgages mortgage-backed bonds Multilateral Debt Relief Initiative Napier, Russell Napoleon, emperor of France Napoleonic Wars Nasser, president of Egypt National Association of Home Builders National Association of Realtors National Association of Security Dealers Netherlands New Century New Hampshire New Jersey Newton, Sir Isaac New York Times New Zealand Nixon, Richard Norman, Montagu North Carolina Northern Ireland Northern Rock North Korea North Rhine Westphalia, Germany Norway Obama, Barack odious debt Odysseus OECD d’Orléans, duc Ottoman Empire output gap Overstone, Lord overvalued currency owner-equivalent rent Papandreou, George paper money paradox of thrift Paris club Passfield, Lord (Sidney Webb) Paulson, Hank pawnbroking pension age pension funds pensions Pepin the Short Perot, Ross Perry, Rick Persians Peter Pan Philip II, King of Spain Philip IV, King of France PIGS countries PIMCO Plaza accord Poland Ponzi, Charles Ponzi scheme population growth populism portfolio insurance Portugal pound Prasad, Eswar precious metals Price-earnings ratio primary surplus Prince, Chuck principal-agent problem printing money private equity property market protectionism Protestant work ethic public choice theory public-sector workers purchasing power parity pyramid schemes Quaintance, Lee quantitative easing (QE) Quincy, Josiah railway mania Rajan, Raghuram Rand, Ayn Reagan, Ronald real bills theory real interest rates Record, Neil Reformation, the Reichsbank Reichsmark Reid, Jim Reinhart, Carmen renminbi Rentenmark rentiers reparations Republican Party reserve currency retail price index retirement revaluation Revolutionary War Ridley, Matt Roberts, Russell Rogoff, Kenneth Romanovs Roosevelt, Franklin D.


pages: 417 words: 109,367

The End of Doom: Environmental Renewal in the Twenty-First Century by Ronald Bailey

3D printing, additive manufacturing, agricultural Revolution, Albert Einstein, Asilomar, autonomous vehicles, business cycle, Cass Sunstein, Climatic Research Unit, Commodity Super-Cycle, conceptual framework, corporate governance, creative destruction, credit crunch, David Attenborough, decarbonisation, dematerialisation, demographic transition, disruptive innovation, diversified portfolio, double helix, energy security, failed state, financial independence, Gary Taubes, hydraulic fracturing, income inequality, Induced demand, Intergovernmental Panel on Climate Change (IPCC), invisible hand, knowledge economy, meta analysis, meta-analysis, Naomi Klein, oil shale / tar sands, oil shock, pattern recognition, peak oil, Peter Calthorpe, phenotype, planetary scale, price stability, profit motive, purchasing power parity, race to the bottom, RAND corporation, rent-seeking, Stewart Brand, Tesla Model S, trade liberalization, University of East Anglia, uranium enrichment, women in the workforce, yield curve

Educating children to meet the productive challenges of growing economies also becomes more expensive and time consuming. Thailand’s experience over the past thirty years exemplifies this process. During that time, female literacy rose to 90 percent; 50 percent of the workforce is now female; and fertility fell from 6 children per woman in the 1960s to 1.5 today. Although Thailand is classified as only moderately free on the economic freedom index, its gross domestic product (GDP) grew in terms of purchasing power parity from just over $1,000 per capita in 1960 to over $8,500 per capita in 2012. Back in 1968, Garrett Hardin declared, “There is no prosperous population in the world today that has, and has had for some time, a growth rate of zero.” That’s no longer true. Japan is now experiencing a fall in its population due largely to reduced fertility, as are Germany, Russia, Italy, Poland, and some 20 other countries and territories.

When can we expect this beneficial dynamic to take hold in other countries? Recent data suggests that sulfur dioxide emissions even from rapidly industrializing China may have peaked in 2006 and have begun declining. Earlier studies cite evidence for a pollution turning point at which people begin to demand reductions in sulfur dioxide emissions when their per capita annual incomes reach a threshold of around $10,000 (purchasing power parity). The researchers in that study concluded, “One important lesson here is that it is possible to reduce emissions that are by-products of a modern economy, without sacrificing long-term growth.” In the face of the overwhelming evidence to the contrary, why do so many Americans still believe that air pollution is getting worse? When crime rates fall, mayors, police chiefs, and district attorneys are eager to spread the news and take the credit.


pages: 385 words: 111,807

A Pelican Introduction Economics: A User's Guide by Ha-Joon Chang

Affordable Care Act / Obamacare, Albert Einstein, Asian financial crisis, asset-backed security, bank run, banking crisis, banks create money, Berlin Wall, bilateral investment treaty, borderless world, Bretton Woods, British Empire, call centre, capital controls, central bank independence, collateralized debt obligation, colonial rule, Corn Laws, corporate governance, corporate raider, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, discovery of the americas, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, Francis Fukuyama: the end of history, Frederick Winslow Taylor, full employment, George Akerlof, Gini coefficient, global value chain, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, Gunnar Myrdal, Haber-Bosch Process, happiness index / gross national happiness, high net worth, income inequality, income per capita, information asymmetry, intangible asset, interchangeable parts, interest rate swap, inventory management, invisible hand, Isaac Newton, James Watt: steam engine, Johann Wolfgang von Goethe, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, knowledge economy, laissez-faire capitalism, land reform, liberation theology, manufacturing employment, Mark Zuckerberg, market clearing, market fundamentalism, Martin Wolf, means of production, Mexican peso crisis / tequila crisis, Nelson Mandela, Northern Rock, obamacare, offshore financial centre, oil shock, open borders, Pareto efficiency, Paul Samuelson, post-industrial society, precariat, principal–agent problem, profit maximization, profit motive, purchasing power parity, quantitative easing, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, savings glut, Scramble for Africa, shareholder value, Silicon Valley, Simon Kuznets, sovereign wealth fund, spinning jenny, structural adjustment programs, The Great Moderation, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, trade liberalization, transaction costs, transfer pricing, trickle-down economics, Vilfredo Pareto, Washington Consensus, working-age population, World Values Survey

In this case, $5,000 per capita income will be a relatively accurate description of the standard of living in Country B but will be completely misleading for Country A. To use a more technical term, you would say that the average income is a more accurate indicator of the living standard for a country with a more equal distribution of income. (More on this in Chapter 9.) Adjusting for different price levels: purchasing power parity One important adjustment that is often made to the GNI (or GDP) figures is that for different price levels in different countries. The market exchange rate between the Danish krone and the Mexican peso may be around one krone to 2.2 pesos, but with 2.2 pesos you can buy more goods and services in Mexico than you can with one krone in Denmark (I will explain shortly why). So the official exchange rate between the Danish krone and the Mexican peso under-estimates the actual living standards in Mexico.

The problem is that market exchange rates are largely determined by the supply and demand for internationally traded goods and services, such as the Galaxy phones or international banking services, while what a sum of money can buy in a particular country is determined by the prices of all goods and services, including those that are not internationally traded, such as eating out or taking a taxi.1 To deal with this problem, economists have come up with the idea of an ‘international dollar’. Based on the notion of purchasing power parity (PPP) – that is, measuring the value of a currency according to how much of a common set of goods and services (known as the ‘consumption basket’) it can buy in different countries – this fictitious currency allows us to convert incomes of different countries into a common measure of living standards. The result of the conversion is that PPP incomes of countries with expensive service-sector workers (the rich countries, excluding a few with a lot of cheap immigrant labour, such as the US and Singapore) are significantly lower than their market-exchange-rate incomes, while those of countries with cheap service workers (the poor countries) tend to become much higher than their market-exchange-rate incomes.* Sticking to the Denmark–Mexico comparison above, Danish PPP per capita income in 2010 is around 30 per cent lower than its market-exchange-rate income ($40,140 vs. $58,980), while the Mexican PPP per capita income is around 60 per cent higher than its market-exchange-rate income ($15,010 vs. $9,330).


pages: 368 words: 32,950

How the City Really Works: The Definitive Guide to Money and Investing in London's Square Mile by Alexander Davidson

accounting loophole / creative accounting, algorithmic trading, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, Big bang: deregulation of the City of London, buy and hold, capital asset pricing model, central bank independence, corporate governance, Credit Default Swap, dematerialisation, discounted cash flows, diversified portfolio, double entry bookkeeping, Edward Lloyd's coffeehouse, Elliott wave, Exxon Valdez, forensic accounting, global reserve currency, high net worth, index fund, inflation targeting, intangible asset, interest rate derivative, interest rate swap, John Meriwether, London Interbank Offered Rate, Long Term Capital Management, margin call, market fundamentalism, Nick Leeson, North Sea oil, Northern Rock, pension reform, Piper Alpha, price stability, purchasing power parity, Real Time Gross Settlement, reserve currency, Right to Buy, shareholder value, short selling, The Wealth of Nations by Adam Smith, transaction costs, value at risk, yield curve, zero-coupon bond

In early 2006, for example, there was major dollar repatriation related to a tax window by the United States government allowing US companies to repatriate profits made abroad at a very low tax rate. ‘This is partly why the dollar started to lose ground,’ says Furness. ‘When there is movement in one direction, the hedge funds and momentum players get involved, and the movement becomes exaggerated.’ Purchasing power parity (PPP) says that exchange rates will converge to a level at which purchasing power is the same internationally, so countering inflation. It is the oldest theory of how exchange rates are formed but, according to Furness, it rarely works in the short term. _________________________________________ FOREIGN EXCHANGE 119  Economists say that an imbalance between exchange rates and inflation is driven by speculative capital flows seeking to make money from currency differentials and can last a while, but PPP works better over the long term.

Index 419 fraud 204 9/11 terrorist attacks 31, 218, 242, 243, 254, 257 Abbey National 22 ABN AMRO 103 accounting and governance 232–38 scandals 232 Accounting Standards Board (ASB) 236 administration 17 Allianz 207 Alternative Investment Market (AIM) 44–45, 131, 183, 238 Amaranth Advisors 170 analysts 172–78 fundamental 172–74 others 177–78 Spitzer impact 174–75 technical 175–77 anti-fraud agencies Assets Recovery Agency 211–13 City of London Police 209 Financial Services Authority 208 Financial Crime and Intelligence Division 208 Insurance Fraud Bureau 209 Insurance Fraud Investigators Group 209 International Association of Insurance Fraud Agencies 207, 210, 218 National Criminal Intelligence Service 210 Serious Fraud Office 213–15 Serious Organised Crime Agency 210–11 asset finance 24–25 Association of Investment Companies 167 backwardation 101 bad debt, collection of 26–28 Banco Santander Central Hispano 22 Bank for International Settlements (BIS) 17, 27, 85, 98, 114 bank guarantee 23 Bank of Credit and Commerce International (BCCI) 10, 214 Bank of England 6, 10–17 Court of the 11 credit risk warning 98 framework for sterling money markets 81 Governor 11, 13, 14 history 10, 15–16 Inflation Report 14 inflation targeting 12–13 interest rates and 12 international liaison 17 lender of last resort 15–17 Market Abuse Directive (MAD) 16 monetary policy and 12–15 Monetary Policy Committee (MPC) 13–14 Open-market operations 15, 82 repo rate 12, 15 role 11–12 RTGS (Real Time Gross Settlement) 143 statutory immunity 11 supervisory role 11 Bank of England Act 1988 11, 12 Bank of England Quarterly Model (BEQM) 14 Banking Act 1933 see Glass-Steagall Act banks commercial 5 investment 5 Barclays Bank 20 Barings 11, 15, 68, 186, 299 Barlow Clowes case 214 Barron’s 99 base rate see repo rate Basel Committee for Banking Supervision (BCBS) 27–28 ____________________________________________________ INDEX 303 Basel I 27 Basel II 27–28, 56 Bear Stearns 95, 97 BearingPoint 97 bill of exchange 26 Bingham, Lord Justice 10–11 Blue Arrow trial 214 BNP Paribas 145, 150 bond issues see credit products book runners 51, 92 Borsa Italiana 8, 139 bps 90 British Bankers’ Association 20, 96, 97 building societies 22–23 demutualisation 22 Building Societies Association 22 Capital Asset Pricing Model (CAPM) see discounted cash flow analysis capital gains tax 73, 75, 163, 168 capital raising markets 42–46 mergers and acquisitions (M&A) 56–58 see also flotation, bond issues Capital Requirements Directive 28, 94 central securities depository (CSD) 145 international (ICSD) 145 Central Warrants Trading Service 73 Chancellor of the Exchequer 12, 13, 229 Chicago Mercantile Exchange 65 Citigroup 136, 145, 150 City of London 4–9 Big Bang 7 definition 4 employment in 8–9 financial markets 5 geography 4–5 history 6–7 services offered 4 world leader 5–6 clearing 140, 141–42 Clearing House Automated Payment System (CHAPS) 143 Clearstream Banking Luxembourg 92, 145 commercial banking 5, 18–28 bad loans and capital adequacy 26–28 banking cards 21 building societies 22–23 credit collection 25–26 finance raising 23–25 history 18–19 overdrafts 23 role today 19–21 commodities market 99–109 exchange-traded commodities 101  fluctuations 100 futures 100 hard commodities energy 102 non-ferrous metals 102–04 precious metal 104–06 soft commodities cocoa 107 coffee 106 sugar 107 Companies Act 2006 204, 223, 236 conflict of interests 7 consolidation 138–39 Consumer Price Index (CPI) 13 contango 101 Continuous Linked Settlement (CLS) 119 corporate governance 223–38 best practice 231 Cadbury Code 224 Combined Code 43, 225 compliance 230 definition 223 Directors’ Remuneration Report Regulations 226 EU developments 230 European auditing rules 234–35 Greenbury Committee 224–25 Higgs and Smith reports 227 International Financial Reporting Standards (IFRS) 237–38 Listing Rules 228–29 Model Code 229 Myners Report 229 OECD Principles 226 operating and financial review (OFR) 235– 36 revised Combined Code 227–28 Sarbanes–Oxley Act 233–34 Turnbull Report 225 credit cards 21 zero-per-cent cards 21 credit collection 25–26 factoring and invoice discounting 26 trade finance 25–26 credit derivatives 96–97 back office issues 97 credit default swap (CDS) 96–97 credit products asset-backed securities 94 bonds 90–91 collateralised debt obligations 94–95 collateralised loan obligation 95 covered bonds 93 equity convertibles 93 international debt securities 92–93  304 INDEX ____________________________________________________ junk bonds 91 zero-coupon bonds 93 credit rating agencies 91 Credit Suisse 5, 136, 193 CREST system 141, 142–44 dark liquidity pools 138 Debt Management Office 82, 86 Department of Trade and Industry (DTI) 235, 251, 282 derivatives 60–77 asset classes 60 bilateral settlement 66 cash and 60–61 central counterparty clearing 65–66 contracts for difference 76–77, 129 covered warrants 72–73 futures 71–72 hedging and speculation 67 on-exchange vs OTC derivatives 63–65 options 69–71 Black-Scholes model 70 call option 70 equity option 70–71 index options 71 put option 70 problems and fraud 67–68 retail investors and 69–77 spread betting 73–75 transactions forward (future) 61–62 option 62 spot 61 swap 62–63 useful websites 75 Deutsche Bank 136 Deutsche Börse 64, 138 discounted cash flow analysis (DCF) 39 dividend 29 domestic financial services complaint and compensation 279–80 financial advisors 277–78 Insurance Mediation Directive 278–79 investments with life insurance 275–76 life insurance term 275 whole-of-life 274–75 NEWICOB 279 property and mortgages 273–74 protection products 275 savings products 276–77 Dow theory 175 easyJet 67 EDX London 66 Egg 20, 21 Elliott Wave Theory 176 Enron 67, 114, 186, 232, 233 enterprise investment schemes 167–68 Equiduct 133–34, 137 Equitable Life 282 equities 29–35 market indices 32–33 market influencers 40–41 nominee accounts 31 shares 29–32 stockbrokers 33–34 valuation 35–41 equity transparency 64 Eurex 64, 65 Euro Overnight Index Average (EURONIA) 85 euro, the 17, 115 Eurobond 6, 92 Euroclear Bank 92, 146, 148–49 Euronext.liffe 5, 60, 65, 71 European Central Bank (ECB) 16, 17, 84, 148 European Central Counterparty (EuroCCP) 136 European Code of Conduct 146–47, 150 European Exchange Rate Mechanism 114 European Harmonised Index of Consumer Prices 13 European Union Capital Requirements Directive 199 Market Abuse Directive (MAD) 16, 196 Market in Financial Instruments Directive (MiFID) 64, 197–99 Money Laundering Directive 219 Prospectus Directive 196–97 Transparency Directive 197 exchange controls 6 expectation theory 172 Exxon Valdez 250 factoring see credit collection Factors and Discounters Association 26 Fair & Clear Group 145–46 Federal Deposit Insurance Corporation 17 Federation of European Securities Exchanges 137 Fighting Fraud Together 200–01 finance, raising 23–25 asset 24–25 committed 23 project finance 24 recourse loan 24 syndicated loan 23–24 uncommitted 23 Financial Action Task Force on Money Laundering (FATF) 217–18 financial communications 179–89 ____________________________________________________ INDEX 305 advertising 189 corporate information flow 185 primary information providers (PIPs) 185 investor relations 183–84 journalists 185–89 public relations 179–183 black PR’ 182–83 tipsters 187–89 City Slickers case 188–89 Financial Ombudsman Service (FOS) 165, 279–80 financial ratios 36–39 dividend cover 37 earnings per share (EPS) 36 EBITDA 38 enterprise multiple 38 gearing 38 net asset value (NAV) 38 price/earnings (P/E) 37 price-to-sales ratio 37 return on capital employed (ROCE) 38 see also discounted cash flow analysis Financial Reporting Council (FRC) 224, 228, 234, 236 Financial Services Act 1986 191–92 Financial Services Action Plan 8, 195 Financial Services and Markets Act 2001 192 Financial Services and Markets Tribunal 94 Financial Services Authority (FSA) 5, 8, 31, 44, 67, 94, 97, 103, 171, 189, 192–99 competition review 132 insurance industry 240 money laundering and 219 objectives 192 regulatory role 192–95 powers 193 principles-based 194–95 Financial Services Compensation Scheme (FSCS) 17, 165, 280 Financial Services Modernisation Act 19 financial services regulation 190–99 see also Financial Services Authority Financial Times 9, 298 First Direct 20 flipping 53 flotation beauty parade 51 book build 52 early secondary market trading 53 grey market 52, 74 initial public offering (IPO) 47–53 pre-marketing 51–52 pricing 52–53 specialist types of share issue accelerated book build 54  bought deal 54 deeply discounted rights issue 55 introduction 55 placing 55 placing and open offer 55 rights issues 54–55 underwriting 52 foreign exchange 109–120 brokers 113 dealers 113 default risk 119 electronic trading 117 exchange rate 115 ICAP Knowledge Centre 120 investors 113–14 transaction types derivatives 116–17 spot market 115–16 Foreign Exchange Joint Standing Committee 112 forward rate agreement 85 fraud 200–15 advanced fee frauds 204–05 boiler rooms 201–04 Regulation S 202 future regulation 215 identity theft 205–06 insurance fraud 206–08 see also anti-fraud agencies Fraud Act 2006 200 FTSE 100 32, 36, 58, 122, 189, 227, 233 FTSE 250 32, 122 FTSE All-Share Index 32, 122 FTSE Group 131 FTSE SmallCap Index 32 FTSE Sterling Corporate Bond Index 33 Futures and Options Association 131 Generally Accepted Accounting Principles (GAAP) 237, 257 gilts 33, 86–88 Giovanni Group 146 Glass-Steagall Act 7, 19 Global Bond Market Forum 64 Goldman Sachs 136 government bonds see gilts Guinness case 214 Halifax Bank 20 hedge funds 8, 77, 97, 156–57 derivatives-based arbitrage 156 fixed-income arbitrage 157 Hemscott 35 HM Revenue and Customs 55, 211 HSBC 20, 103 Hurricane Hugo 250  306 INDEX ____________________________________________________ Hurricane Katrina 2, 67, 242 ICE Futures 5, 66, 102 Individual Capital Adequacy Standards (ICAS) 244 inflation 12–14 cost-push 12 definition 12 demand-pull 12 quarterly Inflation Report 14 initial public offering (IPO) 47–53 institutional investors 155–58 fund managers 155–56 hedge fund managers 156–57 insurance companies 157 pension funds 158 insurance industry London and 240 market 239–40 protection and indemnity associations 241 reform 245 regulation 243 contingent commissions 243 contract certainty 243 ICAS and Solvency II 244–45 types 240–41 underwriting process 241–42 see also Lloyd’s of London, reinsurance Intercontinental Exchange 5 interest equalisation tax 6 interest rate products debt securities 82–83, 92–93 bill of exchange 83 certificate of deposit 83 debt instrument 83 euro bill 82 floating rate note 83 local authority bill 83 T-bills 82 derivatives 85 forward rate agreements (FRAs) 85–86 government bonds (gilts) 86–89 money markets 81–82 repos 84 International Financial Reporting Standards (IFRS) 58, 86, 173, 237–38 International Financial Services London (IFSL) 5, 64, 86, 92, 112 International Monetary Fund 17 International Securities Exchange 138 International Swap Dealers Association 63 International Swaps and Derivatives Association 63 International Underwriting Association (IUA) 240 investment banking 5, 47–59 mergers and acquisitions (M&A) 56–58 see also capital raising investment companies 164–69 real estate 169 split capital 166–67 venture capital 167–68 investment funds 159–64 charges 163 investment strategy 164 fund of funds scheme 164 manager-of-managers scheme 164 open-ended investment companies (OEICs) 159 selection criteria 163 total expense ratio (TER) 164 unit trusts 159 Investment Management Association 156 Investment Management Regulatory Organisation 11 Johnson Matthey Bankers Limited 15–16 Joint Money Laundering Steering Group 221 KAS Bank 145 LCH.Clearnet Limited 66, 140 letter of credit (LOC) 23, 25–26 liability-driven investment 158 Listing Rules 43, 167, 173, 225, 228–29 Lloyd’s of London 8, 246–59 capital backing 249 chain of security 252–255 Central Fund 253 Corporation of Lloyd’s 248–49, 253 Equitas Reinsurance Ltd 251, 252, 255–56 Franchise Performance Directorate 256 future 258–59 Hardship Committee 251 history 246–47, 250–52 international licenses 258 Lioncover 252, 256 Member’s Agent Pooling Arrangement (MAPA) 249, 251 Names 248, one-year accounting 257 regulation 257 solvency ratio 255 syndicate capacity 249–50 syndicates 27 loans 23–24 recourse loan 24 syndicated loan 23–24 London Interbank Offered Rate (LIBOR) 74, 76 ____________________________________________________ INDEX 307 London Stock Exchange (LSE) 7, 8, 22, 29, 32, 64 Alternative Investment Market (AIM) 32 Main Market 42–43, 55 statistics 41 trading facilities 122–27 market makers 125–27 SETSmm 122, 123, 124 SETSqx 124 Stock Exchange Electronic Trading Service (SETS) 122–25 TradElect 124–25 users 127–29 Louvre Accord 114 Markets in Financial Instruments Directive (MiFID) 64, 121, 124, 125, 130, 144, 197–99, 277 best execution policy 130–31 Maxwell, Robert 186, 214, 282 mergers and acquisitions 56–58 current speculation 57–58 disclosure and regulation 58–59 Panel on Takeovers and Mergers 57 ‘white knight’ 57 ‘white squire’ 57 Merrill Lynch 136, 174, 186, 254 money laundering 216–22 Egmont Group 218 hawala system 217 know your client (KYC) 217, 218 size of the problem 222 three stages of laundering 216 Morgan Stanley 5, 136 multilateral trading facilities Chi-X 134–35, 141 Project Turquoise 136, 141 Munich Re 207 Nasdaq 124, 138 National Strategy for Financial Capability 269 National Westminster Bank 20 Nationwide Building Society 221 net operating cash flow (NOCF) see discounted cash flow analysis New York Federal Reserve Bank (Fed) 16 Nomads 45 normal market share (NMS) 132–33 Northern Rock 16 Nymex Europe 102 NYSE Euronext 124, 138, 145 options see derivatives Oxera 52  Parmalat 67, 232 pensions alternatively secured pension 290 annuities 288–89 occupational pension final salary scheme 285–86 money purchase scheme 286 personal account 287 personal pension self-invested personal pension 288 stakeholder pension 288 state pension 283 unsecured pension 289–90 Pensions Act 2007 283 phishing 200 Piper Alpha oil disaster 250 PLUS Markets Group 32, 45–46 as alternative to LSE 45–46, 131–33 deal with OMX 132 relationship to Ofex 46 pooled investments exchange-traded funds (ETF) 169 hedge funds 169–71 see also investment companies, investment funds post-trade services 140–50 clearing 140, 141–42 safekeeping and custody 143–44 registrar services 144 settlement 140, 142–43 real-time process 142 Proceeds of Crime Act 2003 (POCA) 211, 219, 220–21 Professional Securities Market 43–44 Prudential 20 purchasing power parity 118–19 reinsurance 260–68 cat bonds 264–65 dispute resolution 268 doctrines 263 financial reinsurance 263–64 incurred but not reported (IBNR) claims insurance securitisation 265 non-proportional 261 offshore requirements 267 proportional 261 Reinsurance Directive 266–67 retrocession 262 types of contract facultative 262 treaty 262 retail banking 20 retail investors 151–155 Retail Prices Index (RPI) 13, 87 264  308 INDEX ____________________________________________________ Retail Service Provider (RSP) network Reuters 35 Royal Bank of Scotland 20, 79, 221 73 Sarbanes–Oxley Act 233–34 securities 5, 29 Securities and Futures Authority 11 self-regulatory organisations (SROs) 192 Serious Crime Bill 213 settlement 11, 31, 140, 142–43 shareholder, rights of 29 shares investment in 29–32 nominee accounts 31 valuation 35–39 ratios 36–39 see also flotation short selling 31–32, 73, 100, 157 Society for Worldwide Interbank Financial Telecommunications (SWIFT) 119 Solvency II 244–245 Soros, George 114, 115 Specialist Fund Market 44 ‘square mile’ 4 stamp duty 72, 75, 166 Sterling Overnight Index Average (SONIA) 85 Stock Exchange Automated Quotation System (SEAQ) 7, 121, 126 Stock Exchange Electronic Trading Service (SETS) see Lloyd’s of London stock market 29–33 stockbrokers 33–34 advisory 33 discretionary 33–34 execution-only 34 stocks see shares sub-prime mortgage crisis 16, 89, 94, 274 superequivalence 43 suspicious activity reports (SARs) 212, 219–22 swaps market 7 interest rates 56 swaptions 68 systematic internalisers (SI) 137–38 Target2-Securities 147–48, 150 The Times 35, 53, 291 share price tables 36–37, 40 tip sheets 33 trading platforms, electronic 80, 97, 113, 117 tranche trading 123 Treasury Select Committee 14 trend theory 175–76 UBS Warburg 103, 136 UK Listing Authority 44 Undertakings for Collective Investments in Transferable Securities (UCITS) 156 United Capital Asset Management 95 value at risk (VAR) virtual banks 20 virt-x 140 67–68 weighted-average cost of capital (WACC) see discounted cash flow analysis wholesale banking 20 wholesale markets 78–80 banks 78–79 interdealer brokers 79–80 investors 79 Woolwich Bank 20 WorldCom 67, 232 Index of Advertisers Aberdeen Asset Management PLC xiii–xv Birkbeck University of London xl–xlii BPP xliv–xlvi Brewin Dolphin Investment Banking 48–50 Cass Business School xxi–xxiv Cater Allen Private Bank 180–81 CB Richard Ellis Ltd 270–71 CDP xlviii–l Charles Schwab UK Ltd lvi–lviii City Jet Ltd x–xii The City of London inside front cover EBS Dealing Resource International 110–11 Edelman xx ESCP-EAP European School of Management vi ICAS (The Inst. of Chartered Accountants of Scotland) xxx JP Morgan Asset Management 160–62 London Business School xvi–xviii London City Airport vii–viii Morgan Lewis xxix Securities & Investments Institute ii The Share Centre 30, 152–54 Smithfield Bar and Grill lii–liv TD Waterhouse xxxii–xxxiv University of East London xxxvi–xxxviii


The Metropolitan Revolution: How Cities and Metros Are Fixing Our Broken Politics and Fragile Economy by Bruce Katz, Jennifer Bradley

3D printing, additive manufacturing, Affordable Care Act / Obamacare, British Empire, business climate, carbon footprint, clean water, cleantech, collapse of Lehman Brothers, deindustrialization, demographic transition, desegregation, double entry bookkeeping, edge city, Edward Glaeser, global supply chain, immigration reform, income inequality, industrial cluster, intermodal, Jane Jacobs, jitney, Kickstarter, knowledge economy, lone genius, longitudinal study, Mark Zuckerberg, Masdar, megacity, Menlo Park, Moneyball by Michael Lewis explains big data, Network effects, new economy, New Urbanism, Occupy movement, place-making, postindustrial economy, purchasing power parity, race to the bottom, Richard Florida, Shenzhen was a fishing village, Silicon Valley, smart cities, smart grid, sovereign wealth fund, the built environment, The Death and Life of Great American Cities, the market place, The Spirit Level, Tony Hsieh, too big to fail, trade route, transit-oriented development, urban planning, white flight

07-2151-2 ch7.indd 148 5/20/13 6:55 PM A GLOBAL NETWORK OF TRADING CITIES 149 THE STRAITJACKET OF SELF-REFERENTIAL THINKING The path of American metros to a true trading culture will not be an easy one. The United States is the largest economy in the world and has been since 1871.15 In 2011 it made up only 5 percent of the global population but generated 19 percent of global output (at purchasing power parity rates).16 Until recently, metro areas and their firms, situated within a large, diverse, and growing domestic economy, had far fewer incentives to internationalize because they were able to realize desired growth from domestic demand. For that reason, a relatively small portion of the U.S. economy is dedicated to exports. In 2011, according to the Economist Intelligence Unit, total exports made up only 14 percent of our GDP, compared with 31 percent in Canada, 29 percent in China, 25 percent in India, and 15 percent in Japan.17 According to the U.S.

As a result, exporting metro economies are overall more productive and wealthier.24 It is not unusual in public and private gatherings to hear metropolitan business leaders ask, Isn’t it all the same to a metro whether it trades with Milwaukee or Mumbai? The answer is emphatically no. Milwaukee’s metropolitan population is 1.5 million people; Mumbai’s is 21 million. Milwaukee’s nominal gross metropolitan product (at purchasing-power parity rates) was $80.9 billion in 2012 and grew 12 percent in real terms between 2000 and 2012; Mumbai’s nominal GMP was $125 billion in 2012 but grew by 165 percent in real terms during the same period.25 Milwaukee remains, like many midsize metropolitan economies in the United 07-2151-2 ch7.indd 150 5/20/13 6:55 PM A GLOBAL NETWORK OF TRADING CITIES 151 States, an important market for U.S. metros.


pages: 332 words: 106,197

The Divide: A Brief Guide to Global Inequality and Its Solutions by Jason Hickel

Andrei Shleifer, Asian financial crisis, Atahualpa, Bartolomé de las Casas, Bernie Sanders, Bob Geldof, Bretton Woods, British Empire, Cape to Cairo, capital controls, carbon footprint, clean water, collective bargaining, colonial rule, David Attenborough, David Graeber, David Ricardo: comparative advantage, declining real wages, dematerialisation, Doha Development Round, Elon Musk, European colonialism, falling living standards, financial deregulation, Fractional reserve banking, Francisco Pizarro, full employment, Hans Rosling, happiness index / gross national happiness, Howard Zinn, income inequality, Intergovernmental Panel on Climate Change (IPCC), investor state dispute settlement, James Watt: steam engine, laissez-faire capitalism, land reform, land value tax, liberal capitalism, Live Aid, Mahatma Gandhi, Monroe Doctrine, Mont Pelerin Society, moral hazard, Naomi Klein, Nelson Mandela, offshore financial centre, oil shale / tar sands, out of africa, plutocrats, Plutocrats, purchasing power parity, race to the bottom, rent control, road to serfdom, Ronald Reagan, Scramble for Africa, shareholder value, sharing economy, Silicon Valley, Simon Kuznets, structural adjustment programs, The Chicago School, The Spirit Level, trade route, transatlantic slave trade, transfer pricing, trickle-down economics, Washington Consensus, WikiLeaks, women in the workforce, Works Progress Administration

Then, three years later, the Bank published its new official figures, which stated that poverty reduction was even more successful than Wolhfensohn had suggested – twice as successful, in fact: a grand total of 400 million people were rescued from extreme poverty between 1981 and 2001.11 The story just kept getting better. How did the World Bank’s poverty numbers change so suddenly from a rising trend to a falling one? To put it simply, they changed the international poverty line. In 2000, they shifted it from the original $1.02 level to $1.08. While the new poverty line looks slightly higher than the old one, in reality it was just ‘rebased’ to new purchasing power parity (PPP) calculations, which are updated every few years to compensate for depreciation in the purchasing power of the dollar. If the purchasing power of the dollar goes down, people need more dollars to buy the same stuff as before. So the poverty line needs to be periodically ‘raised’ to account for this. But in this case they didn’t raise it quite enough to account for purchasing power depreciation.

Shortly after the SDGs were launched, the World Bank announced a brand-new poverty line of $1.90 per day. At first glance, it might seem that the Bank has finally admitted that the old line was just too low and has raised it to a more meaningful standard; indeed, many commentators assumed precisely that. But the opposite is true. The Bank didn’t raise the poverty line at all – it simply rebased it to the newest purchasing power parity (PPP) calculations, to compensate for depreciation in the purchasing power of the dollar. And once again, the new line is significantly lower than the old one, in real terms. It makes it seem as though there are fewer poor people than before. After rolling out the new poverty line, the Bank suddenly announced that the global poverty headcount had decreased by 100 million people overnight, and that the poverty reduction trend has been declining more rapidly than we used to believe.


EuroTragedy: A Drama in Nine Acts by Ashoka Mody

"Robert Solow", Andrei Shleifer, asset-backed security, availability heuristic, bank run, banking crisis, Basel III, Berlin Wall, book scanning, Bretton Woods, call centre, capital controls, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, credit crunch, Daniel Kahneman / Amos Tversky, debt deflation, Donald Trump, eurozone crisis, Fall of the Berlin Wall, financial intermediation, floating exchange rates, forward guidance, George Akerlof, German hyperinflation, global supply chain, global value chain, hiring and firing, Home mortgage interest deduction, income inequality, inflation targeting, Irish property bubble, Isaac Newton, job automation, Johann Wolfgang von Goethe, Johannes Kepler, Kenneth Rogoff, Kickstarter, liberal capitalism, light touch regulation, liquidity trap, loadsamoney, London Interbank Offered Rate, Long Term Capital Management, low-wage service sector, Mikhail Gorbachev, mittelstand, money market fund, moral hazard, mortgage tax deduction, neoliberal agenda, offshore financial centre, oil shock, open borders, pension reform, premature optimization, price stability, purchasing power parity, quantitative easing, rent-seeking, Republic of Letters, Robert Gordon, Robert Shiller, Robert Shiller, short selling, Silicon Valley, The Great Moderation, The Rise and Fall of American Growth, too big to fail, total factor productivity, trade liberalization, transaction costs, urban renewal, working-age population, Yogi Berra

But Schuman also emphasized that pooling of coal and steel production was the first step in laying “common foundations December 1969, Summit of European leaders begins Monetary Union plans 10 March 1979, Exchange Rate Mechanism (ERM) introduced 9 8 Germany 7 6 France 5 4 3 2 1870 80 90 1900 10 20 30 40 50 60 70 80 90 2000 Figure 1.1. France falls behind Germany starting around 1870. (Each country’s share of world GDP, percent) Sources: Angus Maddison. “Historical Statistics of the World Economy: 1–​2008 ad.” University of Groningen, available from: http://​www.ggdc.net/​maddison/​oriindex.htm, series “GDP.” The values for 2009 and 2010 are from the Conference Board (GDP adjusted for purchasing power parity, series “GK GDP”), available from https://​www.conference-​board.org/​data/​economydatabase/​index.cfm?id=27762. three leaps in the dark 25 for economic development.” Working together to raise standards of living would be the glue of a politically united, postwar Europe. In his instantly historic declaration, Schuman had outlined the basic contours of postwar European integration: centralized governance and the promise of economic prosperity.

Banks financed the building of new factories that operated “along the lines of existing factories” and put people to work on “familiar tasks.”19 In the “golden decades” of the 1950s and 1960s, banks performed their task admirably: they channeled credit to where the needs and growth opportunities were greatest.20 Banks “followed enterprise,” as the great Cambridge University economist Joan Robinson might have said.21 By the early 1970s, average incomes in euro-​area countries had climbed back to around 70 percent of the US level, about where they were at the onset of the Great Depression.22 Banks assets (loans and other investments) had reached around 100 percent of GDP, which made the European banking system somewhat bigger than those in Japan and the United States. Postwar 162   e u r o t r a g e d y 80 70 60 50 40 30 20 1874 83 92 1901 10 19 28 37 46 55 64 73 82 91 2000 Figure 4.3. Europe’s impressive postwar economic recovery. (Euro-​area GDP per capita as percent of US GDP per capita, three-​year moving averages) Note: This chart plots the weighted average per capita GDP (in purchasing power parity terms) of euro-​ area countries as a ratio of US per capita GDP. Nine of the first twelve members represent the euro area in this chart. Greece, Ireland, and Luxembourg were not included, because data on these countries were not available for the entire period. Given the relatively small size of the omitted countries, the picture looks much the same if they are included for the years for which their data are available.

Chronically high unemployment levels, especially among young Italians, the sharp decline in investment, and the slide into low inflation all created further impediments to future growth. These crisis-​induced liabilities came on top of the handicaps of a rapidly aging population and a business sector that had lost its vitality decades earlier. the ecb hesitates, the italian fault line deepens 339 Per capita incomes (In thousands of US dollars, corrected for purchasing power parity) Unemployment rates (Percent) 13 50 Italy 12 48 Germany 11 46 France 10 44 9 42 France 40 38 8 7 6 36 Italy 34 Germany 5 4 2003 05 07 09 11 13 15 2003 05 07 09 11 13 15 Figure 8.1. The great divergence in euro-area incomes and employment. Source: The Conference Board, “Total Economy Database (Adjusted Version),” http://​www.conference-​ board.org/​data/​economydatabase/​; IMF, World Economic Outlook Database, https://​www.imf.org/​ external/​pubs/​ft/​weo/​2017/​01/​weodata/​index.aspx.


pages: 482 words: 117,962

Exceptional People: How Migration Shaped Our World and Will Define Our Future by Ian Goldin, Geoffrey Cameron, Meera Balarajan

Admiral Zheng, agricultural Revolution, barriers to entry, Berlin Wall, Branko Milanovic, British Empire, conceptual framework, creative destruction, demographic transition, Deng Xiaoping, endogenous growth, failed state, Fall of the Berlin Wall, Gini coefficient, global pandemic, global supply chain, guest worker program, illegal immigration, income inequality, income per capita, Intergovernmental Panel on Climate Change (IPCC), job automation, Joseph Schumpeter, knowledge economy, labor-force participation, labour mobility, Lao Tzu, life extension, longitudinal study, low skilled workers, low-wage service sector, Malacca Straits, mass immigration, microcredit, Nelson Mandela, Network effects, new economy, New Urbanism, old age dependency ratio, open borders, out of africa, price mechanism, purchasing power parity, Richard Florida, selection bias, Silicon Valley, Silicon Valley startup, Skype, spice trade, trade route, transaction costs, transatlantic slave trade, women in the workforce, working-age population

It assumes that, all else remaining unchanged (economists' heroic “ceteris paribus” assumption), individuals want to seek their highest utility, or well-being, and typically this involves pursuing higher wages.11 Migration is a way to invest one's “human capital”: people will assume the financial and psychological costs of migration in order to achieve the greatest return on their skills.12 According to this approach, migration flows between two countries are the product of aggregated individual moves undertaken in response to individual cost/benefit calculations of this sort.13 On the surface, the neoclassical approach is appealing. After all, most migration is from developing countries to developed countries, where wages are much higher. The current wage differential between Organisation for Economic Cooperation and Development (OECD) countries and nearby low-wage countries creates pressure for migration that mirrors historical movement from low-wage to high-wage areas.14 Unadjusted for purchasing power parity (PPP), wages in Japan are about $13.32 an hour, whereas in Vietnam, they are 13 cents an hour.15 A low-skilled construction laborer in the United States will work less than 4 minutes to make enough to buy a kilogram (2.2 pounds) of flour, whereas a Mexican laborer at home will have to work for more than an hour.16 A worker moving to the United States could increase his or her earnings (adjusted for PPP) from $17,000 per year to $37,989 per year through migration—with no extra training.17 Wage differentials offer powerful incentives for cross-border migration to better-paying labor markets.

World Migration 2008: Managing Labour Mobility in the Evolving Global Economy. Geneva: IOM, p. 533. 152. Ghosh, 2006: 57. 153. This paragraph draws on IOM, 2008: 152–153. 154. Michael A. Clemens, Claudio E. Montenegro, and Lant Pritchett. 2009. “The Place Premium: Wage Differences for Identical Workers across the US Border,” Harvard Kennedy School Faculty Research Working Paper Series RWP 09–004. 155. Purchasing power parity adjusted US dollars. 156. Clemens, Montenegro, and Pritchett, 2009: 2–3. 157. Rosalia Sciortino and Sureeporn Punpuing. 2009. International Migration in Thailand 2009. Geneva: IOM. 158. Irina Ivakhnyuk. 2009. “Russian Migration Policy in the Soviet and PostSoviet Periods and Its Impact on Human Development in the Region,” UNDP Human Development Report 2009 Background Paper 14, p. 34. 159.


pages: 453 words: 117,893

What Would the Great Economists Do?: How Twelve Brilliant Minds Would Solve Today's Biggest Problems by Linda Yueh

"Robert Solow", 3D printing, additive manufacturing, Asian financial crisis, augmented reality, bank run, banking crisis, basic income, Ben Bernanke: helicopter money, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bitcoin, Branko Milanovic, Bretton Woods, BRICs, business cycle, Capital in the Twenty-First Century by Thomas Piketty, clean water, collective bargaining, computer age, Corn Laws, creative destruction, credit crunch, Credit Default Swap, cryptocurrency, currency peg, dark matter, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, Deng Xiaoping, Doha Development Round, Donald Trump, endogenous growth, everywhere but in the productivity statistics, Fall of the Berlin Wall, fear of failure, financial deregulation, financial innovation, Financial Instability Hypothesis, fixed income, forward guidance, full employment, Gini coefficient, global supply chain, Gunnar Myrdal, Hyman Minsky, income inequality, index card, indoor plumbing, industrial robot, information asymmetry, intangible asset, invisible hand, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, laissez-faire capitalism, land reform, lateral thinking, life extension, low-wage service sector, manufacturing employment, market bubble, means of production, mittelstand, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, Nelson Mandela, non-tariff barriers, Northern Rock, Occupy movement, oil shale / tar sands, open economy, paradox of thrift, Paul Samuelson, price mechanism, price stability, Productivity paradox, purchasing power parity, quantitative easing, RAND corporation, rent control, rent-seeking, reserve currency, reshoring, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, school vouchers, secular stagnation, Shenzhen was a fishing village, Silicon Valley, Simon Kuznets, special economic zone, Steve Jobs, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, total factor productivity, trade liberalization, universal basic income, unorthodox policies, Washington Consensus, We are the 99%, women in the workforce, working-age population

The development challenge One aspect of the development challenge may not exist for long. The United Nations, with the support of all countries around the world, and the World Bank have set an ambitious target of ending extreme poverty by 2030. It would mean that, for the first time, there would be no one who lives on less than $1.90 per day, adjusted for what a dollar buys in the country or ‘purchasing power parity’. What would it take? Could we really see the end of poverty? First, there has been a great deal of progress already. The poverty rate in the developing world has fallen dramatically since 1981. Back then, more than half (52 per cent) of the global population lived on less than $1.25 per day. That’s dropped to around 10 per cent under the comparable measure of $1.90 per day. One of the UN’s Millennium Development Goals (MDGs) was to halve poverty by 2015 from 1990 levels.

median income The level of income of the person at the midpoint of the distribution. monopoly A firm that has market power in the product market. monopsony A firm that has market power in the labour market. OECD (Organisation for Economic Co-operation and Development) A think-tank for advanced economies, based in Paris. negative interest rates Central banks charging commercial banks for depositing money with them. purchasing power parity (PPP) A theory of exchange rate determination, which argues that the exchange rate will change so that the price of a particular good or service will be the same regardless of where you buy it. quantitative easing (QE) Cash injections into the economy by a central bank. Ricardian equivalence David Ricardo’s theory that rational people know that the government debt will have to be repaid at some point in the form of higher taxes so they save in anticipation and do not increase current consumption that boosts growth.


pages: 374 words: 113,126

The Great Economists: How Their Ideas Can Help Us Today by Linda Yueh

"Robert Solow", 3D printing, additive manufacturing, Asian financial crisis, augmented reality, bank run, banking crisis, basic income, Ben Bernanke: helicopter money, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bitcoin, Branko Milanovic, Bretton Woods, BRICs, business cycle, Capital in the Twenty-First Century by Thomas Piketty, clean water, collective bargaining, computer age, Corn Laws, creative destruction, credit crunch, Credit Default Swap, cryptocurrency, currency peg, dark matter, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, Deng Xiaoping, Doha Development Round, Donald Trump, endogenous growth, everywhere but in the productivity statistics, Fall of the Berlin Wall, fear of failure, financial deregulation, financial innovation, Financial Instability Hypothesis, fixed income, forward guidance, full employment, Gini coefficient, global supply chain, Gunnar Myrdal, Hyman Minsky, income inequality, index card, indoor plumbing, industrial robot, information asymmetry, intangible asset, invisible hand, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, laissez-faire capitalism, land reform, lateral thinking, life extension, manufacturing employment, market bubble, means of production, mittelstand, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, Nelson Mandela, non-tariff barriers, Northern Rock, Occupy movement, oil shale / tar sands, open economy, paradox of thrift, Paul Samuelson, price mechanism, price stability, Productivity paradox, purchasing power parity, quantitative easing, RAND corporation, rent control, rent-seeking, reserve currency, reshoring, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, school vouchers, secular stagnation,