The World Economy Short Run v Long-Run Issues
Short-Run Issues concerned with recovery rom global recession, which started in 2008
Long-Run issues concerned with achieving sustainable growth and development
Alesina and Ardagna basically said there would no recession as a result of austerity as it would increase business and consumer confidence stimulating spending.
Reinhart and Rogoff suggest that at 90% of debt there will be significant consequences on future growth - Causality problems
Krugman and the Keynesians v AA + RR
Alesina – Ardagna Paper not relevant to current crisis – the examples of successful austerity based fiscal adjustment carried out in a different world economy enviroenmnt – 1. No global recession 2. Independent currencies 3. Monetary Policy effective – (No liquidity trap)
Sample countries had their own currencies, were not surrounded by other countries in recession and monetary policy was not in a
Reinhart – Rogoff Paper flawed – 90% debt/gdp argument based on deficient and selective data
IMF now believes multiplier effects are larger than previously believed
Long-Run growth and Development: Why do some nations fail?
* The Key determinants the balance between exclusive (extractive) and inclusive institutions * Powerful elites support extractive industries and retard progress * A key ingredient for growth and successful development is political reform * Progress relies on creative destruction * Change creates winners and losers in the short run – losers need to be considered by policymakers * Establishment of broad based property rights and accountable and inclusive political system are crucial ingredients for success
What do we Know about Economic Growth
* Economic Growth is accompanied by the massive transformation of economies involving: Urbanisation, Migration, Demographic Transition, Income Distribution, Composition of production and consumption (particularly the change in agriculture), Internal organisation of firms and market structures (less monopoly power), Trade, Role of Government
What are the ideal conditions for progress? * an economic, social and political environment which fosters initiative, competition and emulation; * that job selection be based on merit, competence and performance; * financial rewards should relate to effort / enterprise; * the economy must encourage and be be fully exposed to existing technological knowledge (open); * that education is widespread amongst the population.
These prerequisites in turn imply: 1. an absence of discrimination based on irrelevant criteria (race, religion, gender); 2. an expressed preference for scientific rationality over ‘magic and ‘superstition’.
Dani Rodrik: The Role of