Wednesday, August 27, 2014

Section 2.3: Equity in the distribution of income (IB Econ Syllabus)

Inequality, its causes and its effects, is an important topic in the IB Economics course for both HL & SL (syllabus section 2.3 Equity in the Distribution of Income)

This article will help candidates understand the issues better and equip them with examples.  It's written by Michael Spence and is titled Good and Bad Inequality.

...Nonetheless, experience in a wide range of countries suggests that high and rising levels of inequality, especially inequality of opportunity, can indeed be detrimental to growth. One reason is that inequality undercuts the political and social consensus around growth-oriented strategies and policies. It can lead to gridlock, conflict, or poor policy choices. The evidence supports the view that the systematic exclusion of subgroups on any arbitrary basis (for example, ethnicity, race, or religion) is particularly damaging in this respect.

The distinction between good and bad inequality is also made by Branko Milanovic (see his book The Haves and the Have-Nots: A Brief and Idiosyncratic History of Global Inequality. This is from the New York Times review of this book:
“There is ‘good’ and ‘bad’ inequality,” Milanovic writes, “just as there is good and bad cholesterol.” The possibility of unequal economic outcomes motivates people to work harder, he argues, although at some point it can lead to the preservation of acquired positions, which causes economies to stagnate.

There is also this February 2014 IMF paper by Ostry, Berg, and Tsangarides: Redistribution, Inequality, and Growth where in the Executive Summary we read:
While considerable controversy surrounds these issues, we should not jump to the conclusion that the treatment for inequality may be worse for growth than the disease itself. Equality-enhancing interventions could actually help growth: think of taxes on activities with negative externalities paid mostly by the rich (perhaps excessive risk-taking in the financial sector) or cash transfers aimed at encouraging better attendance at primary schools in developing countries, as examples. The macroeconomic effects of redistributive policies will reflect a balance between the components of the fiscal package, and it is an empirical question whether redistribution in practice is pro- or anti-growth.

This article from the Guardian discusses the above paper (perhaps though, only parts of it):
IMF study finds inequality is damaging to economic growth.

Remember that to reach Level 4 (highest marks) in the Paper 1 essays '...examples are used effectively'.

And, yes, back to school on the 11th of September in Greece: Καλή χρονιά σε όλους!

Monday, August 11, 2014


Griesa is the name of the US federal judge who ordered that Argentina could not repay creditors who had accepted its restructuring until it fully paid those who had rejected it.  Joseph Stiglitz and Martin Guzman wrote an interesting article on Argentina's default and Griesa's decision.  They write at some point:
Argentina restructured its debt in two rounds of negotiations, in 2005 and 2010. More than 92% of creditors accepted the new deal, and received exchanged bonds and GDP-indexed bonds. It worked out well for both Argentina and those who accepted the restructuring. The economy soared, so the GDP-indexed bonds paid off handsomely.
But so-called vulture investors saw an opportunity to make even larger profits. The vultures were neither long-term investors in Argentina nor the optimists who believed that Washington Consensus policies would work. They were simply speculators who swooped in after the 2001 default and bought up bonds for a fraction of their face value from panicky investors. They then sued Argentina to obtain 100% of that value. 
NML Capital, a subsidiary of the hedge fund Elliot Management, headed by Paul Singer, spent $48 million on bonds in 2008; thanks to Griesa’s ruling, NML Capital should now receive $832 million – a return of more than 1,600%.
The figures are so high in part because the vultures seek to earn past interest, which, for some securities, includes a country-risk premium – the higher interest rate offered when they were issued to offset the larger perceived probability of default. Griesa found that this was reasonable. Economically, though, it makes no sense. When a country pays a risk premium on its debt, it means that default is a possibility. But if a court rules that a country always must repay the debt, there is no default risk to be compensated. 
...Its (America's) courts have been a travesty: As one observer pointed out,it was clear that Griesa never really fathomed the issue’s complexity.
The part that this piece, in my opinion, forgets is what did the local (Argentinian) government and elite did with the borrowed money.  Judging from what has happened in Greece,  I doubt that it was well spent and invested.  Most of it, I fear, must have lined ' ...the pockets of some (local) billionaires'.

The article can be found here.