Cena's Econ Blog

IMF

• International organization of 184 member countries.
• Established to promote international monetary cooperation, exchange rate stability, foster economic growth and high levels of employment and provide short term financial assistance to countries to help ease balance of payments adjustment.
• It offers conditional loans.

World Bank

• Concerned with financing reconstruction and development through the construction of national infrastructure such as roads and dams.
• Responsible for how the institution is financed and how its money is spent.

Other International Organizations

• The Food and Agriculture Organization of the US (FAO): lead agency for agriculture, forestry, fisheries and rural development. Aims to alleviate poverty and hunger by promoting agricultural development, improved nutrition and the pursuit of food security.
• UNICEF: aims to remove obstacles for children such as disease, poverty and discrimination.
• UNESCO: aims to contribute to peace and security in the world by promoting collaboration among nations through education, science, culture and communication.
• WHO: Aims to provide everyone the highest possible level of health.

Private Sector Banks

• Makes loans to developing countries at commercial rates of interest.

Non-Governmental Organizations

• NGO helps developing countries to improve industries

Multinational corporations

• Company which possess and controls means of production or services outside the country in which it was established.
• Controls integrated production, sales, research, marketing and finance.
• Account for a large proportion of the world’s output.

Commodity agreements

• Aims to stabilise prices through buffer stock schemes or raising prices by forming a producers’ cartel and restricting supply through the use of quotas.

Haiti’s Evaluation of Growth/Development Strategies

IMF: In a rapid response to Haiti’s needs in the aftermath of the recent earthquake, the IMF Executive Board approved an additional $102 million for the devastated country, taking the total to be$114 million. The January 27 decision will give the Haitian government immediate funds to help restore basic financial services and begin to rebuild the country. The decision from the IMF means the authorities can get money circulating in the economy so that people can buy food and employees can be paid. The funds will also help Haiti pay for urgently needed imports.

World Bank: For several years, Haiti has been left out of the World Bank’s “Heavily Indebted Poor Country” (HIPC) debt reflief initiative. However, after the earthquake the World Bank has finally turned its attention to Haiti and promised to start working on improving infrastructures.

Other International Organizations: UNICEF and its partners are conducting intensive relief operations in Haiti, in the aftermath of the 12 January 2010 earthquake that devastated Port-au-Prince and other densely populated areas.Thanks to supplies, medical equipment and technical assistance from UNICEF and its partners, routine immunization coverage has improved significantly in recent years. Haiti has been free of measles and polio since 2001; 824,000 children were inoculated against polio in 2005.

  Private Sector Banks: are not readily available in Haiti because of difficulty in paying back. This needs to be improved in the long run.

Non-Governmental Organizations: Because of the recent earthquake, Haiti’s children also need schools rebuilt and basic social services.  Georg Welleit says the process of rebuilding will take time. “Here in Haiti, everything is out of order at the moment.  And it’s still a chaotic situation, and it will last for years and years.   And it will be really necessary that there is a close cooperation between all NGOs which are based here, between the UN and the US, to really rebuild this country, and to involve the local people,” he said. (http://www1.voanews.com/english/news/UNICEF-NGOs-Haitian-Children-at-Risk-83687502.html)

Multinational corporations: There are very little of these, since Haiti has a low domestic production. Before Haiti can form firms overseas, it is necessary to secure domestic productions before hand.

Commodity agreements: Agriculture is Haiti’s greatest strength (besides the labour force). Therefore, if laws are further enforced, it could help to stabilise market prices. This could lead to an improvement of standard of living. It may be effective to use quotas to restrict inflow of imports in order to increase demand for domestically produced goods. However, quotas are a form of “protectionism” and it could lead to political tensions in the future. Since Haiti is very dependent on foreign countries, it may be the best to avoid political troubles.

Evaluation

At the moment, it seems like Haiti is depending on IMF, world bank and other international organizations. Haiti itself is not developing/growing, but it survives based on foreign aids.

Overall, I see the Haitian economy as a developing country that still has a lot of issues. In order to achieve growth and development, Haiti should focus on effective target aid. Since the number of labour force is Haiti’s strength, investment should focus on education to improve human resources. Currently, education is under-invested and it is shown by the illiteracy rate of 51%. Improving education can lead to improvement of quality of labours and efficiency. This could increase competitiveness of Haiti’s firms and the demand for Haitian goods could increase. It is necessary for Haiti to have a higher literacy rate in order to become globally competitive. Since Haiti is a densely populated area, if education is improved then the rate of economic growth could increase rapidly. A country with a large amount of skilled workers could become a highly competitive economy. Haiti has the potential to improve their quality of labour as long as they invest more in education.

Haiti has been a country that had little global attention. However, from the recent earthquake, Haiti has been globally exposed and received many aids. On January 19th 2010, the EU discussed the situation in Haiti after the earthquake.  The EU has responded quickly to the situation, with EU members already pledging €400 million, including €30 million from the UK. The EU is committed to helping Haiti with longer term reconstruction. The use of aids could determine how the Haitian economy will be in the long run. It is possible that the corrupt government will distribute the aid to the powerful, which leads to an inefficient use of aid moneys. However, if the aids were effectively distributed, not only will it help Haiti to recover from the earthquake but also be a starting point for economic growth. Instead of just reparing the damage, they could improve facility and invest surplus (left over) aid into specific areas of the economy. Like I previously stated, I think education should be the long run focus of the government.

 Haiti is a special case where many countries are not expecting a return from sending aid. Group of Seven countries have told earthquake-ravaged Haiti that any debts it owes them needn’t be repaid and international lenders should do the same. Aid has come from around the world but so much of Haiti’s infrastructure was lost or damaged that officials say it will take a wholesale reconstruction effort to get the country on its feet economically.(http://www.reuters.com/article/idUSN0616794520100206)

Sources: Triple A online
http://www.number10.gov.uk/Page22179
http://www.unicef.org/infobycountry/haiti.html
http://www.imf.org/external/pubs/ft/survey/so/2010/new012710a.htm

Strategies to Achieve Growth

Harrod-Domar growth model

• Economy’s rate of growth depends on level of saving and the productivity of investment.
• Increasing the savings ratio or the amount of investment are vital for economic growth.

Structural change / Dual Sector Model

• When an economy develops, incomes will increase and the demand for agricultural goods will rise. However, because of low income elasticity of demand, this will occur at a slow rate. On the other hand, the demand for manufactured goods have a higher income elasticity of demand, so the demand for them will increase at a faster rate.

Type of Aid

• Humanitarian - Money that is sent (by an individual country or a major organisation) to help against a specific problem, e.g. drought
• Bilateral – A loan which is given by one country to another.
• Multilateral – When seperate countries pay money into one central organisation, and it then determines who receives money and for what.

Export-led growth / outward-oriented strategies
Increase in export demand can lead to…

• Increased investment
• Enable the country to gain conomies of scale
• Increased employment
• Greater equality of income distribution
• Increased competition

Commercial Loans

• loans from banks and other financial organisations

Micro-credit schemes

• schemes that lend small amounts to the poor in a developing country.
• Directly targeted at the needs of those people and reflect the circumstances they operate in.

Sustainable Development

• Development that will not cause long run costs on the future generations.

Fairtrade Organizations

• Fairtrade organizations will set a “fair price” that ensures farmers and producer’s minimum revenue. The price covers production costs and creates a surplus so that the producers have enough money to invest and maintain a living.

Foreign Direct Investment

• Self explanatory – incomes from foreign direct investment. As more foreign firms invest in the economy, the more money that is injected into the economy.

Haiti’s Strategies to Growth

Harrod-Domar growth model: Level of disposable income is very low. This means that most of the income for an average family in Haiti will be immediately spent on commodities such as food and shelter. Therefore, the level of savings are low so the Harrod-Domar growth model cannot apply to Haiti. Instead, Haiti should consider other strategies of growth that could increase savings and investment that can lead to economic growth.

Type of Aid: Haiti has been very dependent on foreign aid. Currently in Haiti, the existing infrastructure is struggling to handle the aid that is flowing in and resources are scarce. There had been a lot of humanitarian aid (money that is sent to help against a specific problem) because of the earthquake.  Many countries that are sending humanitarian aid to Haiti is not expecting a return from it due to Haiti’s economic state. These aids may be a starting point for economic improvement, since Haiti does not have enough capital to achieve economic growth. These aids could be the basis of Haiti’s economic activity. Although many countries are not expecting a return from sending aids to Haiti, the Haitian economy will emotionally be in debt.

Export-led growth / outward-oriented strategies: This strategy of growth is not applicable to Haiti because it is a heavily import dependent country. The large sum of current account deficit indicates how dependent Haiti is on other countries. Haiti’s main exports are agriculture and it is difficult to increase demand for agriculture. Demand for innovative manufactured goods (ipod, computers) could increase largely and lead to an increase in exports, but it is unlikely that demand for primary goods will suddenly increase. Hence, this method is unreliable/unlikely to happen.

Structural change / Dual Sector Model: 66% of Haiti’s economic output is agriculture. Such primary goods have low income elasticity of demand, meaning that when the economy develops, incomes will increase but the demand for goods will increase at a slow rate. This lag between income and demand for goods slows down the economy instead and makes it difficult to achieve growth.

Commercial Loans: may be an effective way of stimulating the Haitian economy. However, note that they are “loans”, meaning that the economy will eventually have to pay back. At the moment, Haiti has low potential of paying back so this is not a reliable strategy of growth.

Micro-credit schemes: Since Haiti has a high level of income inequality, this may be a good strategy for helping the poor. It may lead to a reduction of income inequality and raise the standard of living for many.

Fairtrade Organizations: In Haiti there is little fairtrade organizations that exist. Hence, it is difficult to set fair trade prices and this may be one of the leading causes of poverty.

Sustainable Development: Since Haiti has a lot of factors to improve on, sustainable development will be an important factor to consider. Most of Haiti’s economical factors need improvement so the key is to spend aid from other countries wisely so that they will not “run out”.

Foreign Direct Investment: It is important for Haitian economy to globally expose itself. Although many might suggest that protectionism is required to protect many Haitian firms (because it is less developed/efficient than others), foreign competition and global exposion may be effective.

Evaluation

                      Haiti lacks basic capitals in every other way such as government budget, taxation system, employment opportunities, industrial factors etc. Hence, the most effective way to attain growth could be to improve basic sources of growth. Many sectors of the economy are under-invested but due to the corruption of the Haitian government, it may be difficult to invest in the short run. In the long run, if government investment is directed towards basic necessities such as improvement in infrastructure, this could stimulate the economic activity. However, in the short run, aids from other countries seem to be an effective starting point. Not only will Haiti use aid to recovery from the recent earthquake, but they could also improve their economy. For example, instead of simply fixing buildings, they could improve the quality of it.

                     Currently the Haitian economy is focusing on recovering from the earthquake. However, in the long run I think micro-credit schemes could be an effective way of achieving economic growth. Since income inequality is high in Haiti, if this strategy could focus on helping the poor, it could greatly contribute to economic growth. If the poor are helped, it could improve disposable income and consumer expenditure may increase. If consumer expenditure increases, firms will have more revenue and thus, employment may increase. This creates a positive cycle in the economy.
                     

Barriers to Economic Growth and/or Development

There are several factors that can restrain growth and development.

1. Poverty Cycle
2. Institutional and political factors
3. International trade barriers
4. International financial barriers – indebtedness
5. Social and cultural factors

1. Poverty 

 People receive little education and health care. This poverty can be very difficult to reduce as any economies struggle to develop.

Low income -> Low Savings -> Low Investment -> Low Incomes

2. Institutional and Political Factors

• Ineffective taxation structures
• Lack of property rights
• Political instability
• Corruption
• Unequal distribution of income
• Formal and informal markets
• Lack of infrastructure

3. International Trade Barriers

• Overdependence on primary products
• Consequences of a narrow range of exports (Overproduction, failure to get all producers to join, difficulty of storing commodities, high floor prices which encourage overproduction)
• Protectionism

4. International financial barriers – indebtedness

Developing countries like Haiti mainly trade in primary exports. The moneuy raised from their sale pays for imported goods. There are several problems involved in being overdependent on primary products, such as…

• The terms of trade have deteriorated over a long period of time for the developing countries.
• Low income elasticity of demand for primary products
• Sudden fluctuating prices of primary goods.

5. Social and Cultural factors

• religion, gender, culture and tradition can prevent economic growth and development.

Haiti’s Barriers to Growth

Poverty cycle : In Haiti, 80% of the people live under the poverty line. From this, there is low consumer expenditure in the market. This leads to lower revenue for firms and in return, causes higher unemployment because firms decrease business investment. This causes a poverty cycle in Haiti that prevents economic growth.

Institutional and Political Factors: Corruption is one of the key issues in Haiti. Past corruption in the government has caused under-investment in many sectors of the Haitian economy and prevented economic growth. Furthermore, a high level of income inequality further dampens economic growth as the rich gets richer and poor gets poorer as the economy grows. Since Haiti does not have a fixed taxation system that prevents further gaps in inequality, economic growth may be a negative influence to some sectors.

International Trade Barriers: Haiti’s current account balance is -611 million (2008), indicating that it is in a current account deficit. This comes from the overdependence on primary goods. (66% of the economy is agriculture). The sum of the deficit is large so it is a serious issue. Furthermore, since Haiti is not achieving large economic growth, the deficit is unlikely to show positive economic growth. It reflects Haiti’s weak economic output and dependency on foreign countries

Social and Cultural Factors: In the past, Haiti’s government have prevented any kind of foreign investment in the country. Tradition and culture have been valued heavily so it is difficult to introduce new technology and ideas to the economy. This eventually led to the current state Haiti, where Haiti is the least industrial country in the Western hemisphere.

Evaluation

                   It is clear that the poverty cycle is one of the main barriers to economic growth. However, there are other factors that prevent Haiti’s economic growth. International trade barriers is one of the most significant growth barrier in Haiti. As stated previously (blogs below), Haiti specializes in a small range of primary exports. This makes Haiti heavily reliant on foreign goods. In the blog post, “Sources of Economic Growth”, we can see that Haiti is an import-relying country because it is in a large current account deficit. With unreliable flows of earning through exports, it is difficult to invest in new industries. This leads to unemployment in the economy because there is less job opportunities. This is a significant societal cost, because Haiti is a densely populated country and many people with potential do not have jobs. Furthermore, the heavy reliance on primary exports can lead to large changes in the current account balance. Import costs can quickly exceed export revenues, and this can lead to increased debt. When developing countries like Haiti depend on primary exports, the money raised from their sale pays for imported goods. This means that sudden fluctuation prices of primary goods could occur and makes the economy less stable.
                  Another major barrier to growth is Haiti’s lack of infrastructure. Haiti’s infrastructure is primitive and poorly mainted as the result of decades of under-investment and environmental damage. Out of a total of 4160 kilometers of roads, only 1011 kilometers are paved. This indicates the lack of infrastructure, which can cause slower transportation of goods/people. After the earthquake, the Haitians are increasingly angry that a massive international aid effort is not succeeding in reaching them. This indicates how it lags economic recovery and growth. Poor road conditions have had negative effects on farmers, who find transportations of their goods to markets and towns to be difficult. Furthermore, deforestation and the resulting soil erosion have diminished Haiti’s main hydroelectric power generating system. Although the rich have private generators, many industries had barely enough electricity to keep going. From this, the main fuel was charcoal at often enormous environmental cost. 
                  

Sources:
http://www.nationsencyclopedia.com/economies/Americas/Haiti-INFRASTRUCTURE-POWER-AND-COMMUNICATIONS.html

Benefits and Consequences of Growth

1. Externalities

Positive externalities

• Construction of roads/transportation gives people the ability to commute and smoother transporation of goods.
• Spread of new technology enables efficiency.
• Improvement of environment in wealthy countries:   * Note: Although evidence supports this idea in wealthy countries, it is still hazy in developing countries. 

 Negative Externalities

• Pollution
• Land/water degradation
• Over-use of resources
• Even with constant growth rates, an increasing population will put additional burdens on the environment. Environmental costs include degradation of air, water, land, forests etc.
• Increases poverty in developing countries. There is a poverty cycle that occurs:
  

2. Income Distribution

• As economies grow and develop, income distribution is likely to widen.
• As economices grow, they tend to reward the economically strong rather than the weak. (The rich get richer while the poor get poorer)
• Developed economies have progressive tax systems and social security systems to help the poor.
• However, many developing economies do not have such systems to help. Instead, income distribution will often worsen during the process growth.

3. Sustainability

• Many economies aim for sustainable economic growth: achieving economic growth without damaging prospects for development for future generations.
• An economic system which does not utilize resources at or below the rate at which these resources regeenerate will ultimately collapse.
• Methods of acheiving sustainability include investing more in… recycling, using alternative methods/resources to generate power, watching our biodiversity, addressing social costs and benefits.

Acheiving sustainable economic growth may mean developing ways of:

• Extending property rights
• Taxing the polluter
• Issuing permits to pollute (tradable permits)
• Introducing congestion charges (road pricing)
• Using direct controls and regulations on certain types of economic activity.

Evaluation : Haiti’s Benefits and Consequences of Growth

          One consequences of growth for Haiti is income inequality. As the Haitian economy grows, the growth tends to reward the economically strong rather than the weak. (The rich get richer while the poor get poorer) Furthermore, Haiti is very dependent on aid from foreign countries. Hence, when Haiti receives aid, it tends to be distributed to the higher class. In other words, the people who are really in need do not receive the benefits of aid. Unlike developed countries, Haiti does not have a system which ensures fair distribution of benefits, meaning that income inequality will worsen as the economy grows.
          One positive aspect of Haiti’s economic growth is that it could lead to construction of roads/transportations (in other words, improvement of infrastructures). At the moment, the chances of this happening is low but it is possible in the future. Such constructions will give people the ability to commute smoother. It could also increase the efficiency of transportation of goods. Therefore, if the Haitian economy grows, it could lead to improvement of transportation and stimulate economic activity.

http://countrystudies.us/haiti/45.htm

Sources of Economic Growth and/or Development

Natural factors: the quality and/or quantity of land or raw materials (e.g. land, minerals, ocean). Improvement of quality and quantity of natural factors could lead to increase in economic output.

Human factors: the quality and/or quality of human resources. An increase in population will lead to an increase in labour force, which in return stimulates economic activity. An improvement in quality of labour (through education) could lead to an increase in efficiency, thus economic output.

Physical capital and technological factors: the quantity and/or quality of physical capital. When there is a large supply of capitals, there are many opportunities for labourers (job opportunities).

Institutional factors: Banking system, education system, health care, infrastructure and political stability. A country with stable institutional factors can attain a fixed level of growth. It also increases confidence of the economy and encourages the economy to grow/develop.
 

Haiti’s Statistics

Natural factors of Haiti

• Natural resources include bauxite, copper, calcium carbonate, gold, marble, hydropower.
• Climate is tropical and the terrain is mostly rough and mountainous.
• Lies in the middle of the hurricane belt and subject to severe storms from June to October – occasional flooding, earthquakes and draught cause damage to agriculture. (Haiti is very dependent on agriculture, so it means that their agriculture is unstable)
• Total percent of population drinking clean water: 58%
• Main industries: sugarcane, flour, cement.

Human Factors

• Life expectancy at birth - 51 years old (Short life expectancy is caused by the state of their living environment. For instance, only 58% of the population has access to clean water. This causes health problems, but 80% of the population is below the poverty line which means that they cannot afford health care. They are stick in a poverty cycle which makes it difficult to improve their standard of living)
• Infant mortality rate – 59.69 deaths/1000 live births
• Population below poverty line: 80%

Physical Capital and Technological Factors

• Labour force: 3.6 million (more than 2/3 of the labour force do not have formal jobs)
• Labour force: 66% Agriculture, 9% Industry, 25% Services (2/3 of Haitians depend on the agriculture sector such as small-scale farming and remain vulnerable to damage from frequent natural disasters caused by the country’s widespread deforestation.)

Institutional Factors

• Politically instable – “Haiti has been plagued by political violence for most of its history.” (Political Instability slows Haiti from attaining economic growth)
• Literacy rate – 52.9%
• Education expenditures – 1.4% of GDP (The extremely low expenditure on education explains why the literacy is very low. If the government was to increase spending on education, it is likely that the literacy rate will improve.)

Overview of Haiti’s Economy

• Inflation: 15.5% (Suffers from a high inflation, a lack of investment because of insecurity and limited resources and a severe trade deficit.)
• Government relies on formal international economic assistance for fiscal sustainability. (This decreases economic confidence and makes Haiti heavily dependent on other countries. It is difficult to achieve economic growth when Haiti is very dependeent on other countries.)
• GDP: $11.29 billion
• GDP Per Capita: $1900
• GNI Per Capita (US$): 560
• Current Account Balnce: -$611 million (2008) (meaning it is is a current account deficit. The sum of the deficit is large so it is a serious issue. Furthermore, since Haiti is not achieving large economic growth, the deficit is unlikely to show positive economic growth. It reflects Haiti’s weak economic output and dependency on foreign countries)
• Exports – $490 million
• Imports - $2.107 billion

Evaluation

Haiti is the second-poorest country in the Western Hemisphere. It relies heavily on its primary sector (agriclture and farming) Haiti is in a current account deficit because its imports outweights exports. At the moment, Haiti’s biggest challenge is their dependency on agriculture. 66% on the economy depends on agriculture but Haiti is prone to natural disasters. This means that their overall economic output changes depending on the weather. This causes the Haiti economy to be very unstable. In order to sustain a constant growth, they need to strengthen other sectors of the economy (such as the Industry and Services).

Furthermore, a 7.0 magnitude hit Haiti on January 12th 2010. From this, Haiti’s biggest challenge at the moment is reconstruction of the city and helping citizens. The health care system requires support as well. Haiti is the poorest country in the Western Hemisphere, ranked 159th of 182 countries on the Human Development Index. Therefore the government budget is tight and the country is considered “economically vulnerable”. Therefore it requires help to recover from the earthquake. (Aid will be further discussed in the following blog posts)

Although Haiti’s statistic seems hopeless, Haiti’s source of growth that has the largest potential is human factors. Despite the slow growth rates, Haiti is one of the most densely populated countries in the world. There is plenty of labour that is availabe, so if the economy is stimulated in a way that demand for labourers increase, the economy has the potential of growing. When the demand for workers increase, it means that more households will gain income. When employment increases, more disposable income could be spent in the market. This stimulates economic growth since there is more money in the economy. In addition, from the recent earthquake we can see that Haiti’s people are strong willed to recover. From this, the economy can expect determined workers with lots of potential. The determination of a group of workers could largely change the level of production. If Haiti has more capital, an increase in job opportunities could lead to economic growth.

Source: http://www.unicef.org/infobycountry/haiti_statistics.html
https://www.cia.gov/library/publications/the-world-factbook/geos/ha.html
http://www.nationsencyclopedia.com/economies/Americas/Haiti.html

As a reflection of the International Economics unit, I want to investigate positive and negative aspects of  Protectionism. I will compare what theories suggest (Economic textbook) to what happens in reality (Article). In other words, I will explore to what extent the theories apply to real life. Furthermore I will explore the strengths/weakness of the textbook. (i.e. Economic Theories)

My point of view: Generally the negative consequences of Protectionism outweighs the benefits. Therefore, pursuing Protectionism is usually benefiical in the short term but negative in the lon run.

Real World Examples that will be discussed: Economic textbook (McGee) and an article on protection of Japanese rice farms, titled “Japan fights to protect rice farming”.

Definitions:
Protectionism: Government action that is aims to protect against imports to reduce foreign competition and give domestic firms an advantage in the market.

Examples of Protectionism include…
Tariffs – tax on imports. It will raise the price level, which will lead to a decrease inlevel of imports.

Quotas- Restricting the maximum amount of imports allowed into an economy.

Textbook (McGee) explores both positive and negative aspects of Protectionism, but negative consequences seem to outweigh the benefits. The textbook mainly suggests that protectionism is often seen as a convenient short term solution for countries, but it causes long term consequences.

Examples include…

• Reduce world output – a decrease in a country’s imports will lead to a decrease in another country’s export. This means that there is a loss of potential world output.
• Retaliation – protectionist measures tend to be met with some form of retaliation from the other country. i.e. any success in protecting against imports lead to a fall in exports when retaliation starts.
• Costs - e.g. Tariffs: Benefits from the reduced imports are passed to domestic firms in the form of increased market share and the government in form of revenue (refer to tariff graph below), but consumers will be paying higher prices for the goods/services.

Strengths of the textbook theory – If we approach economic theories based solely on logic, it is reasonable that protectionism creates more negative consequences than benefits.

Weakness of the textbook theory – The theory on Protectionism does not specify the type of goods that are protected.
Real-life Example: Article (http://news.bbc.co.uk/2/hi/business/4907742.stm)
The article, “Japan fights to protect rice farming” highlights the positive aspects of Protectionism. Japanese rice is expensive due to limitations in factors of production (e.g. land and weather). Hence the Japanese government subsidises the rice farming industry and creates protectionist measures against foreign rice suppliers to give domestic producers an advantage. I consider rice to be traditional/cultural goods because they play a prominent role in ceremonies etc. This may be especially because I am Japanese.

Positive aspects of Protectionism include…

• Protects domestic employment
• Lowers foreign competition and helps preserve certain economic sectors (e.g. production of traditional crafts/goods such as kimono)

So, why does the Japanese government protect Japanese rice farms when..

• Rice can be produced cheaply in California, where there is better factors of production.
• Foreign rice can be mass produced and sold at a cheaper price level.

Economic Theories (Textbook) will suggest that Japanese rice farms should not be protected since they could stay inefficient. Instead, rice should be produced in California where it is more efficient.

In reality emotional ties between Japanese households and domestically produced rice may be a reason why households are willing to pay more money to buy Japan-produced rice.

From this, sometimes the type of good can affect whether certain goods are protected or not.

• Commodity (e.g. salt, sugar)
• Cultural/traditional good (e.g. kimono, paper crafts)

When a good is a commodity, usually there are no emotional connections with it. The choice of pursuing protectionist measures relies mostly on logic (economic theories & weighing benefit vs negatives).

When a good is a cultural/traditional good, an emotional tie could exist between households and the good, so the decision of pursuing protectionism could be more vague. Compared to commodities, it could rely less on logic (theories) because it has to take culture into consideration.

My point of view (Conclusion) - Based on logic, protectionism is generally an unwise choice. However, for certain situations where emotional ties exists, protectionism could be pursued. In Economics, the influence of logic and emotion will depend on the type of good that is being dealt with.

Weakness with My Claim and Validity of Examples –

• The article focuses only on the positive aspects of protectionism of Japanese rice farms. It is understandable for a person from another culture to argue that rice is a commodity so Japanese rice farms should not be protected.
• My comparision between theories and reality was based on an Economic textbook and an article on Japanese rice farms. Therefore my statement can apply to Japan, but not necessarily to all countries. Other countries may define “commodities” and “cultural goods” differently.

Article: http://news.bbc.co.uk/2/hi/business/4907742.stm

When I turn on the television, I see the word “Deflation”.Recently the Japanese media has been repeatedly reporting that the Japanese economy is still in a bad situation. Today, the rate of Yen hit a price level that further emphasized the current state of the economy.

Today the “dollar tumbled to a 14-year low against the yen”. 1US dollar diminished to 86.27 yen in Tokyo trading which is the lowest since July 1995. When the yen appreciates, imports into the US economy become more expensive. That causes the US economy’s demand for Japanese produced goods to decrease. Hence, a strong yen hurts Japanese exporters (especially autos and electronics) and dampens Japan’s oversea income. Since Japan is a country that relies heavily on exports for national income, a decrease in demand for Japanese produced goods hurts the Japanese economy on a large scale. On the other hand, a strong yen benefits the Japanese consumers, since imports will become cheaper.

By looking at the graph on the left, we can see that the dollar has deppreciated. On November 16th, the exchange rate was about 1$ US=89 yen However, 9 days later (November 25th) the yen strengthens and the rate changed to 1 $ US=86.2 yen. Like this, we can see that the yen strengthened rapidly over a short period of time.

I will like to follow the exchange rate between the yen and dollar and see how it will affect different sectors of each economy.

Source:

1)http://hosted.ap.org/dynamic/stories/D/DOLLAR_ASOL-?SITE=YOMIURI&SECTION=HOSTED_ASIA&TEMPLATE=ap_business.html

2)http://stocks.finance.yahoo.co.jp/stocks/detail/?code=USDJPY=X

Definitions

Exchange rate: the price of currency expressed in terms of another currency.

Fixed exchange rate: one currency is fixed in value against another through government intervention in currency markets. The central bank keeps the currency fixed in the short run by buying/selling its own currency on the foreign exchange market, and by increasing/decreasing the interest rate. The supply and demand for the home currency can also be adjusted in the LR by the use of contractionary/expansionary fiscal policies.

Floating exchange rate: when a currency’s value is determined only by market forces (i.e. supply and demand for currency)

Managed exchange rates: When currencies are allowed to fluctuate within a narrow band in the short run, and allowed to be realigned in the long run. The most common form is when a government pegs its currency to another.

3 Ideas of Exchange Rates:

1) Currencies are bought and sold on a foreign exchange market. The demand for a currency is a function of three main variables.
                  -The demand for other countries’ goods and services
                  -The demand for investment in another country
                  -Speculative demand (When international speculators buy/sell currencies)

2) Difference between a currency’s internal and external value.
                  -Internal value shows how much can be purchases domestically (i.e. the real purchasing power of money within the economy). Changes in internal value is caused by domestic price changes, e.g. inflation.
                  -External value is the value shown by the exchange rate (i.e. what can be purchased in other countries after buying other countries’ currencies). Changes in external value is caused by the price level in other countries AND the price of other currencies needed to buy foreign goods.

3) Methods availabe to central banks to influence exchange rate.
                 -Central banks could buy/sell their currencies in order to influence exchange rate
                 -Central bank can change the interest rate. (e.g. If the central bank wants to increase the exchange rate, the interest rate could be raised. This creates an incentive for foreign investors/speculators to buy that currency, since they would see a higher rate of return in holding the currency.)
                

Sources: Definitions from McGee textbook & Online Triple A Textbook

In March 2009, the Korean currency was about 900 won per S$1, which was 40% down from 2008.

Due to a weak currency, Korean exports were cheap but imports into Korea were expensive. Hence the Korean exporters benefited as demand for Korean goods increased. On the other hand, imports into Korea was expensive so consumers faced higher prices.

Acording to the article, Hyundai (the biggest Korean car manufacturer) benefited the most from weak won. In the first quarter its sales increased by 174%. (Which was equivalent to what it sold in the first nine months in 2008)

Due to weak currency, the Korean market share of cars increased and the Japanese’s decreased. The Japanese car sales decreased by 25 percent. However, the Japanese still had 57% share of the whole market. Malaysian and Chinese market were hit hard by cheaper won – Malaysian car sales decreased by 70% and Chinese sales decreased by 42%.

This could be a good example of how exchange rates influence sales of different countries.

http://www.asianewsnet.net/news.php?sec=2&id=5533

I found an article that suggests the economic growth in China is positively influencing the Japanese economy. Many people could argue that the Japanese economy is still in recession, but others are pointing out that figures have been improving and the economy could be in recovery.

According to the article, the Japanese economy has been improving due to the government’s stimulus measures and increase in exports, which have improved private spending and industrial production. Increase in exports to China has been playing a large role in Japan’s trade. The rate of decline in exports to China was halved from the previous month, when it was down 27.6 percent year-on-year, making clear the tone of recovery.

Toru Nishihama, an economist at Dai-ichi Life Research Institute Inc., said, “If the Chinese government continues its measures to stimulate domestic demand, it will have a very positive impact on Japan, including a ripple effect into the whole Asian economy.”

However, the article suggests that the recovery of the U.S economy seems to be slow. Although data shows that private consumption is increasing, unemployment and job situations are dampening the recovery. It will be interesting to see how China’s recovery will impact the global economy.

Source: http://www.yomiuri.co.jp/dy/business/20091024TDY08307.htm