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Economic Models
1. ( Основное: text “Good (and bad) Model Guide”). An economic model is… To compare different models certain parameters can be chosen: openness of the economy, social inequality, generosity of welfare state, tax rates and trade barriers, levels of (un)employment and inflation, and some others. Based on these, an analysis of some models can be made:
2. The American model. Good Points: flexible labour and product markets; low taxes; strong competition; shareholder capitalism (managers try to maximize profits). Bad points: wide income inequalities; low welfare benefits and poor quality of public goods; low investment and savings rate.
3. The Japanese model. Good points: Life-time employment leads to high skill levels; high quality of public services, especially education; corporate cross-shareholdings help managers consider a longer view of investment (long-term profit is better than the short-term one, this is the advantage over the American model). Bad points: sheltered (defended) firms feel little pressure to use capital efficiency.
4. The East Asian model. There is no single “East Asian Model”: some countries of the region carry out market-friendly policies, others use selective government intervention. What the East Asian countries share is openness to trade and higher savings than in other emerging economies.
5. The German social-market model. Good points: excellent education and training; social harmony that comes from generous welfare state and narrow wage difference; high investment. Bad points: too powerful trade unions; high taxes; high unemployment because people can live good even without working.
6. The Swedish model has been advertised as a ‘third way’ between capitalism and socialism. Good points: both open markets and welfare state; special employment schemes to reduce unemployment. Bad points: rising inflation & recession lead to budget deficit; high personal taxes blunt incentives to work.
7. The New Zealand Model. Radical reforms in the 80s led to a very free-market economy with the lowest tax rates and overall privatization. Bad point: a big increase in inequality.
8. The Dutch Model, seen by some as a model for the rest of Europe. Smaller pay rises in return for more jobs; some taxes have been lowered. As a result – a dramatic fall in unemployment without big cuts I the welfare state or increase in inequality. Although there are some tricky points in how the unemployment rate is counted.
9. ( Дополнительно: text “One True Model”) A big question back in 2000 was whether incomes in the EU can be made to grow as fast as in the US without adopting full-fledged American-style capitalism? Many believe that due to globalization there is actually no choice: this convergence will happen one way or the other, which is seen by many as rather depressing. But others tend to think that ‘national identity be damned’.
10. Доп. Even if American capitalism is the best way to get rich, nothing forces the countries to adopt one way of development or the other. Actually, convergence occurs only in certain fields, while in others it is rather ‘diversification’ that is occurring.
11. Доп. Coarse theorem: the distribution of property rights (if they are clearly assigned and transaction costs are low) has no effect on economic efficiency, as people can negotiate their way to the efficient position. Europe can choose to stay “European” if it wants to, and is willing to pay for the privilege.
Investment
12. (about investment in America, the investments of the Yale University’s endowment fund are given) In general terms, investment means the use money in the hope of making more money. Investment is widespread all over the world, and in the US investment, especially investment in shares, is almost a ‘must’ for any institution, be it a company, a private entrepreneur, or a university. One of the main factors one has to consider when speaking about investment is liquidity – the ability of an asset to be converted into cash quickly and without any price discount. High liquidity means less risks but also less profit (less annual return), low liquidity in certain spheres, such as real assets (oil and gas, property), gives one higher return.
But nowadays, as some economists think (Mr. Swenson), liquidity is over-rated. Diversification (to endow/invest in different spheres) may be a better form of risk control than liquidity.
13. There are different spheres in which one can invest – equities (in private venture capital, in the stock market etc.); real assets (timber, oil and gas, property); holdings in emerging markets. In order not to be in high risk, it is better ‘not to put all the eggs in one basket’.
2. THE WORLD BANK AND THE INTERNATIONAL MONETARY FUND
World Bank or International Bank for Reconstruction and Development is a multinational institution set up in 1947 (following the Bretton Woods Conference, 1944) to provide economic aid to member countries - mainly developing countries - to strengthen their economics. The Bank has supported a wide range of long-term investments including infrastructure projects such as roads, telecommunications and electricity supply; agriculture and industrial projects including the establishment of new industries, as well as social, training and educational programmes.
The Bank's funds come largely from the developed countries, but it also raises money on international capital markets. The Bank operates according to 'business principles' lending at commercial rates of interest only to those governments it feels are capable of servicing and repaying their debts. In 1960, however, it established an affiliate agency, the International Development Association, to provide low-interest loans to its poorer members.
Another affiliate of the World Bank is the International Finance Corporation which can invest directly in companies by acquiring shares.
International Monetary Fund (IMF) is a multinational institution set up in 1947 (following the Bretton Woods Conference, 1944) to supervise the operation of a new international monetary regime - the 'adjustable-peg' exchange rate system. The Fund seeks to maintain co-operative and orderly currency arrangements between member countries with the aim of promoting increased international trade and balance-of-payment equilibrium. The Fund is active in two main areas:
(a) exchange rates. Down to 1971 countries established fixed exchange-rates for their currencies which provided pivotal values for concluding trade transactions. A country, provided it first obtained the approval of the Fund, could alter its exchange rate, adjusting the rate upwards (revaluation) or downwards (devaluation) to a new fixed level to correct a fundamental disequilibrium in its balance of payments -a situation of either chronic payments surplus or deficit. This procedure ensured that currency realignments were decided by multilateral agreement rather than initiated as a unilateral act. In the early 1970s, however, with a continued weakening of the US dollar, the pivotal currency in the Fund's operations, and the onset of a world recession, a large number of currencies were 'floated' to provide a greater degree of exchange rate flexibility. Most major currencies have continued to float, although fixed exchange rate arrangements have been reintroduced on a limited basis. This has resulted in the Fund losing formal control over exchange rate movements, but member countries are still obligated to abide by certain 'rules of good conduct' laid down by the Fund, avoiding in particular exchange controls and beggar-my-neighbour tactics.
(b) international liquidity. The Fund's resources consist of a pool of currencies and international reserve assets (excluding gold) subscribed by its members according to their allocated "quotas". Each country pays 75% of its quota in its own currency and 25% in international reserve assets. Countries are given borrowing or drawing rights with the Fund which they can use, together with their own nationally-held international reserves, to finance a balance-of-payments deficit.
Under the Fund's ordinary drawing-right facilities members with balance of payments difficulties may 'draw' (i.e., purchase foreign currencies from the Fund with their own currencies) up to 125% of their quota. The first 25% (the 'reserve tranche') may be drawn on demand; the remaining 100% is divided up into four 'credit tranches' of 25% each, and drawings here are 'conditional' on members agreeing with the Fund a programme of measures (for example, deflation, devaluation) for removing their payments deficit. Members are required to repay their drawings over a three to five year period.
In 1970 the Fund created a new international reserve asset, the special drawing right (SDR) to augment the supply of international liquidity, and it has also provided additional borrowing facilities for its poorer members.
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