Archive | April 2015

Asian Infrastructure Investment Bank (AIIB) may rival the World Bank’s influence

Ever since China established the AIIB at the end of 2014, it has been viewed as a possible competitor to the World Bank (whose headquaters are in Washington and which is fundamentally led by the US). The AIIB will perform a similar function, providing loans to developing countries, specifically in Asia, for infrastructure projects.

Many other countries are applying to have a role in the AIIB, including Singapore, India, South Korea  and Britain. Even Japan and Australia are considering joining. The AIIB can be viewed as a part of the wider “new Silk Road” initiative by China to deepen trade and investment both in the rest of Asia and the wider world.

Have we reached a “tipping point” in the face of climate change?

There are several indicators that the world is now responding more actively to try to reverse global warming, with the main emphasis being the substitution of renewable energy (mainly wind and solar power) for fossil fuels (ie coal and oil).

1) After a period in which low oil prices and policy uncertainty pushed investment in renewable energy down, world investment, largely in solar and wind, went up by 17% to $270bn (£180bn) last year, reversing a two-year dip. This is even though oil prices are still low.

2) China and the US are now cooperating significantly on climate change. Both have announced  measures to reduce their greenhouse gas emissions by 2030.  China will slow and then stop its emissions by 2030 while the United States agreed to reduce emissions by up to 28% by 2025.

3) Central banks and financial regulators are starting to incorporate sustainability into their lending activities. In China, there’s growing momentum for building a ‘green financial system’ to tackle the country’s serious environmental problems. China, already the world’s largest wind power user, plans within five years to have more than double the capacity of all of Europe.

4) Costa Rica has managed to make its energy system powered 100% by renewable energy in 2015 and Costa Ricans are enjoying falling energy prices.

The impact of the “Digital Revolution” on structural unemployment and the distribution of income

There is an interesting debate as to whether or not the technological changes taking place, which are similar to a second industrial revolution, will ultimately benefit everyone or not.

Some argue that robots and 3-D printing etc will make our lives easier and goods cheaper. We can all gain,

However, others consider that many (particularly those in the professional middle classes) will ultimately be worse off, because the types of jobs done by lawyers, accountants, doctors and even teachers (!) can be done more efficiently by computers. Apparently, algorithms are being developed which can mark essays or diagnose illnesses more accurately than people can.

Consequently, perhaps those careers will no longer be available and many of us will suffer structural unemployment.

The other concern is that the distribution of income will widen. As capital is substituted for labour, wages will fall and those who own the capital (for example, shareholders and CEOs of firms) will get greater returns. Actually. perhaps this is happening already and could be part of the explanation for the widening distribution of incomes in many countries, including Japan. It is also in line with Thomas Piketty’s argument that when r > g  (the rate of return on capital is greater than the growth rate of real GDP), incomes will become more unequally distributed.

I wonder which viewpoint you agree with.

Greek international debt crisis will probably resurge in mid-April

After bailouts in 2010 and 2012, Greece is again edging towards financial collapse, because it needs to make large payments in April.  The government has been repaying some of its loans to the to the International Monetary Fund  (IMF), but it needs  to send about another 460 million euros next Thursday. In addition 1.7 billion euros needs to be paid for public sector wages and pensions before the end of April.

Tax revenues in January and February were 1.1 billion euros less than forecast.

Therefore the government possibly does not have enough cash to make the repayments to the IMF nor to pay its workers. It can theoretically issue bonds to borrow more money, but the interest rate it would need to pay is now over 10%.

Eurozone finance ministers agreed last month to extend Greece’s bailout program, but only on the condition that there are plans for economic reforms, such as privatisation and measures to stop tax evasion. Some of the measures contradict the newly-elected government’s anti-austerity commitments (an “austerity” policy is one which imposes a contractionary budget–cutting government spending and raising taxes-in order to reduce the budget deficit).

Increasing concentration in the food industry and accusations of price fixing

Kraft foods recently agreed a merger with Heinz in a move that would create the world’s fifth largest food company.US food giant.

Meanwhile Kraft is being accused of manipulating the price of wheat by a US government agency, who said that Kraft’s  huge purchase of wheat on the futures market raised the price of the commodity and earned them a profit of $5.4m as they sold it off.

The price-fixing methods are too complex for us to understand, but it is an example of how a more monopolistic market can lead to practices that are not in the interests of consumers or the wider economy. Government regulations are then probably necessary to correct the market failure.

Update on Japan’s macroeconomy

It is exactly a year since the consumption tax was raised from 5% to 8%, possibly raising prices—though not enough to cause sustained cost-push inflation. Actually Japan is still encountering deflationary tendencies, which make firms less willing to expand and invest because profit margins are depressed. The one definite effect of the rise in the consumption tax is that it dented confidence and shifted aggregate demand (AD) left by more than expected. Due to the negative effect on economic growth, government is still undecided as to whether or not to risk a further rise in the consumption tax to 10%, although they do want to reduce the size of the budget deficit.

However, AD has been boosted by the depreciation of the yen which has increased not only tangible exports (trade in goods), but also “invisible” exports (trade in services) most notably through the influx of foreign tourists. Many are visiting Japan at the moment, attracted by the cherry blossoms and the reduced prices (in terms of dollars, yuan etc) of travel in Japan.

For more (and some pictures of cherry blossoms) see