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«World Trade»

Topics for discussion

1. International trade is the most obvious manifistation of a globalising world.

2. Free trade is a blessing.

3. So long as each country specialises in products in which it has a comparative advantage, it will gain from trade.

4. Comparative advantage can be created through subsidies and «strategic trade policy».

5. International differences in market regulation, enviromental protection and competition policy are often said to make trade «unfair».

6. «Regionalism» poses the greatest threat to free trade.

UNIT III.  ECONOMIC AND MONETARY POLICY.

THE FUTURE OF THE STATE ECONOMIC POLICY

Text A.

BEARING THE WEIGHT OF THE MARKET ?

1. Дайте ответы на следующие 1. Have the growing international flows

вопросы без предварительного     of goods, services and money

чтения текста :                                  diminished the power of the state ?

 

2. Дайте ответы на следующие 1. Does the growing world integration

вопросы после беглого просмотра   reduce the freedom of governments

текста :                                           to act ?

                                                      2. What are the instruments of

                                                          government involvement in the

                                 economy ?

 

 3. Прочитайте следующий текст и найдите ключевые слова и предложения в каждом абзаце:

BEARING THE WEIGHT OF THE MARKET ?

          Most people in the ad­vanced economies seem willing to accept, most of the time, that economic integration through international flows of trade and finance is a good thing. They acknowledge, for instance, that foreign investment can help poor economies to modernise, and that international compe­tition helps to raise productivity and, at least in the aggregate, in­comes as well.

Yet people also recognise the costs, such as unemployment or lower wages, that integration may force on particular groups at certain times. When weighing these costs of globalisation against the benefits, economists typically point to the role of government. Through taxes and public spending, they say, soci­eties can use some of the extra in­come created by globalisation to cushion the losers. In principle, governments could go further, ensuring that everybody ended up better off. Which is very reas­suring - unless it turns out that integration itself reduces the  freedom of governments to act.

The view that globalisation makes it harder for governments to govern has come to be widely accepted. The basic idea is sim­ple enough. Globalisation adds to the reach and power of the market: now even governments, not just firms and people, must bow down before the new mas­ter of worldwide competition.

A government might want to  prohibit dangerous or unde­sirable working practices, for in­stance. But if it did, the affected industries might move abroad or shut down, because the new regulation could put domestic firms at a disadvantage in com­petition with foreign producers. Or suppose the government wants to raise taxes and spend­ing. However popular more pub­lic spending may be with voters, the market might well forbid it. In the new global economy, peo­ple and firms can flee to other tax jurisdictions rather than paying an onerous tax.

Governments do not even have their former freedom to de­sign their own social policies, the argument continues. The finan­cial markets now sit as judge; if they deem that a new national health-care scheme or a massive education reform will prove too costly, they will punish the coun­try with higher interest rates or a collapsing currency. In this way global market forces not only rule out the kind of compensa­tion to losers that would make globalisation easier to live with, they also seem to challenge de­mocracy itself.

If this thinking were correct, there would be good reason to oppose further globalisation, or to regret that the process has gone as far as it has. But it is not correct. In part it is muddled and in part it is simply wrong.    

New thinking

During the 1980s, and especially since the collapse of the Soviet empire at the end of the decade, governments have changed the way they think about the role of the state. The failure of commu­nism rattled faith even in far milder forms of socialism.

Governments had also learned from experience: evi­dence down the years suggested that ambitious economic inter­vention was often unsuccessful. Politicians in rich and poor countries alike, regardless of whether they were of “the left” or “the right”, began calling for lower taxes and public spending, for lighter regulation of industry, for privatisation of state-owned enterprises, and in general for their economies to be given greater “flexibility”.

In other words, governments have freely chosen to give market forces more sway, in the hope that this will raise living stan­dards. It is odd therefore to say that the global economy has seized power from the state - and it is plain wrong to say that dem­ocratic rights have been trampled on.

Many would argue, however, that things are not so simple. Having started to liberalise their economies, governments were left with less power than they had expected. And having sur­rendered more control than they meant to, politicians found they could not go back. As a result, ac­cording to this view, globalisation is running out of control.

Governments themselves have done a lot to foster this idea. Nowadays no statement on eco­nomic policy is complete, it seems, without a declaration of impotence which says, in effect, “Our plans reflect not what we would like to do, but what the global market requires us to do.” Advancing technology adds to the sense of helplessness. Things that governments could once for­bid or restrict -foreign borrow­ing; imports of computer soft­ware; pornography; political ideas - are now far harder to con­trol because moderm communi­cations have eroded the bound­aries between nations.

It is true that when technol­ogy and liberalisation come to­gether,governments can be taken by surprise. Anomalies ap­pear, sometimes requiring further deregulation, at other times quiring new forms of regulation that previously mattered little. It is also true that governments have sometimes done the right things in the wrong order; liberalising cross-border flows of capital without updating regulation of the banking industry, for example, is one of the factors behind the recent series of finan­cial crises in Asia.

One of the clearest examples of an apparently small measure of deregulation having larger consequences was Britain’s abolition of exchange controls in 1979. This let banks combine foreign capital and new financial technology, and thus compete more vigorously both with each other and with non-bank lend­ers, such as building societies. Soon, to enable these other lenders to fight back on equal terms, more rules had to be scrapped. This caused new problems - and so the process went on, until the rules that separated banks and building societies had been en­tirely removed. This inadvertently radical deregulation, and the financial competition it en­gendered, was instrumental in Britain’s boom and bust of the late 1980s and early 1990s.

Even so, the view that govern­ments today stand helpless be­fore the gale of international market forces is a gross exaggera­tion. Certainly, it is often a useful idea for governments to take up - what more powerful argu­ment could there be against those opposing any given change of policy than to say “we have no choice”? But, useful as the claim may be, the evidence shows that it is not in fact true.

Like Topsy

The best and simplest measure of a government’s involvement in the economy is public spend­ing. In rich industrial countries this has followed a persistently upward trend since the latter part of the 19^th century.

Public spending increased as a share of national income in the 40 years before the first world war, a time when the world econ­omy was arguably more open to trade and international flows of capital than it is today. Between 1918 and 1939, when barriers to trade and capital flows were high, spending as a share of na­tional income rose further. Since the second world war, as econo­mies have once more been opened to the outside world, the trend of rising expenditure has continued. The in­crease in the economic role of the state has been especially rapid since 1960.

True, many governments have tried hard to cut their out­lays and their budget deficits of late. By and large, however, they have succeeded only in slowing, not reversing, the rate of growth of spending. Where budget defi­cits have been reduced, this has been done more by raising taxes than by curbing expenditure. On average, public spending in the advanced economies is bigger in relation to national income than it was in 1990. Even in the un­usual case of Britain, after nearly 20 years of strenuous efforts to roll back the state, public spend­ing accounts for about the same share of the national income as it did in 1980.

On the face of it, this is puz­zling. Over the long term, a gov­ernment’s ability to spend is lim­ited by its ability to raise taxes. In the past 20 years, better interna­tional communications and  freer movement of capital should have made it easier for taxpayers to avoid high-tax juris­dictions, putting downward pressure on public spending. Why does this appear not to have happened in a significant way?

The answer is partly that tax­payers remain less mobile than one might think. Financial capi­tal, to be sure, now moves in­stantly from country to country. But once capital has been turned into physical assets such as buildings or equipment, moving it is costly. Governments may grant tax preferences to attract new capital to their countries, but they can continue to tax the profits from physical capital that is already in place.

Labour, in any case, remains far less mobile than capital -rooted by ties of family, culture and language. In recent years, therefore, many governments have reduced their rates of com­pany taxation (as well as grant­ing special concessions for new investment), and have shifted the burden on to people instead. Taxes on wages and salaries have risen. This has more than made up for the fall in reve­nues due to lower company taxes.

Extremely high rates of per­sonal taxation in many coun­tries, notably in Europe, confirm that people cannot readily es­cape the clutches of high-spend­ing governments. It is true that competition among governments has changed the structure of personal taxes in many countries, as the extremely high rates paid by the highest-in­come taxpayers have been cut. So far, however, this has failed to reduce the overall tax burden. Only in the most ex­treme cases - such as Sweden, where public spending reached 71% of national income in 1993 - has emigration of high-income taxpayers forced a retrenchment (and even then only a compara­tively modest one) on the government.

 

Free to borrow

So much for taxes and spending. What about public borrowing and monetary policy? It is often argued that today’s global mar­ket for capital applies a particu­larly severe discipline in these ar­eas. Again, this is misleading. In the first instance, greater mobil­ity of capital gives governments more freedom of manoeuvre in fiscal policy, not less. By borrow­ing from abroad, they are able to let their spending exceed their revenues by more and for longer than would be possible if their economies were closed to inter­national finance.

Of course, if they abuse this freedom, capital markets will turn against them, and raise the offenders’ cost of borrowing. But this is only like saying that peo­ple who run up too big a bank overdraft will be offered poor terms for further loans. The fact remains that an overdraft facility increases financial freedom, it does not reduce it.

Admittedly, living with fi­nancial freedom can be more complicated than living without it. In particular, the extreme mo­bility of modern financial capi­tal makes monetary policy more difficult to conduct For in­stance, it has become difficult for governments to peg their ex­change rates indefinitely in the face of adverse circumstances. Numerous crises, from the col­lapse of Europe’s exchange-rate mechanism in 1992-93 to the trauma in East Asia, make this clear.

The risk of “contagion”, when a crisis in one country leads the market to change its view of prospects in others, is a further complication, as recent events in Asia have emphasised. Nonetheless it remains entirely possible for a government to use monetary policy to steer the do­mestic economy, provided that it is willing to let its currency float. Today’s global capital market only rules out sooner what has always been impossible in the longer term - namely, treating interest rates and the value of the currency as entirely separate in­struments matters. Globalisation has not altered the basic limits: monetary policy can be used to regulate the domestic economy or to regulate the exchange rate, but it cannot successfully accom­plish both goals at once.

Finally, what of the argument that the new global economy makes it impossible for govern­ments to mandate social protec­tion, such as minimum-wage laws, rules on working hours, health-and-safety standards in the workplace, and so forth. Ac­cording to this popular view, if governments grant such protec­tion, they will make their firms uncompetitive and put workers on the dole. Globalisation is thus blamed for a “race to the bot­tom” in economic regulation.

There is no reason why this should be true. Certainly, social protection does carry economic costs, reducing the amount of output that can be squeezed from any given amount of capi­tal, labour and other resources. This is not to say that social pro­tection is wrong. Citizens may well decide the cost is worth pay­ing. But the cost must be borne. The only question is how.

In an economy closed to flows of trade and finance, the cost will take the form of lower incomes. In an open economy, the same must ultimately be true. This basic logic is the same whether the economy is closed, partially open or globalised. The only difference is that open economies with floating curren­cies may experience that fall in incomes through currency depreciation - and thus higher prices for consumer goods-while a closed economy will suf­fer a decline in wages as ex­pressed in the local currency.

The important thing to re­member about social-protection. Rules is simply that, in econom­ics, you rarely get something for nothing. That is the bad news. The good news is that social-pro­tection rules are as feasible, and in the end no more costly, in a globalised economy than they are in a closed economy.

Much the same goes for fi­nancial regulation, public spending and macroeconomic policy. Governments, always ea­ger to deflect political pressure, may prefer to justify unpopular decisions by pretending that their hands are tied. In truth, de­spite all the changes in global markets, they have about as much, or as little, control of their economies as they ever had.

 

VOCABULARY

1. in the aggregate	в совокупности, в целом
2. income (s)	доходы (ы)
3. benefit (s)	выгоды, преимущества
4. public spending	государственные расходы
5. to cushion	зд.оказывать финансовую помощь; перераспреде-лять средства в пользу...;
6. working practices	организация труда
7. collapsing currency	валюта, курс который неуклонно снижается
8. lighter regulation	смягчение регулирования (контроля)
9. health-care system	система здравоохранения
10. education reform	реформа в сфере образования
11. privatization of state-owned enterprises	приватизация государственных предприятий
12. «flexibility»	«гибкость»
13. foreign borrowing	займы (заимствование) за границей
14. deregulation	отмена государственного регулирования
15. banking industry	банковская система
16. abolition of exchange controls	отмена валютного контроля
17. non-bank lenders	небанковские кредиты
18. building societies	строительное кооперативное сообщество с функциями ипотечного банка
19. boom	«бум», бурный рост (экономики)
20. bust	резкий спад (экономики)
21. upward trend	повышенная тенденция; тенденция к повышению
22. share of national income	доля национального дохода
23. physical assets	материальные активы
24. to grant tax prefere-nces (concessions)	предоставить налоговые льготы
25. revenues	поступления, доход
26. personal tax	налог на личную собственность
27. public borrowing	государственное заимствование
28. monetary policy	денежно-кредитная политика
29. fiscal policy	фискальная политика; бюджетная политика; налогово-кредитная политика
30. a bank overdraft	банковский овердрафт (кредитование суммы превышающей остаток средств на счете)
31. to peg exchange rate	«привязать» курс национальной валюты к движению курса другой твердой валюты (например, доллара)

 

4. Переведите отрывок «Free to Borrow».