Wednesday, January 20, 2016

China is slowing down. So what? So, quite a lot...for all of us

It's been in the news roughly for 2 years now.  The 'break-neck' growth rates are pretty much a thing of the past (see China's economic growth in 2015 is slowest in 25 years).  Does it matter to the rest? It does, and very much.
For years, China voraciously gobbled up all manner of metals, crops and fuels as its economy rapidly expanded. Countries and companies, fueled by cheap debt, aggressively broadened their operations, betting that China’s appetite would grow unabated.

China’s economy is slumping. American companies, struggling to pay their debts as interest rates rise, must keep producing. All the excess is crushing prices, hurting commodity-dependent economies across emerging markets like Brazil and Venezuela and developed countries like Australia and Canada.
And, '...weakness in China prompted a stock sell-off around the world'.
And, just '...oil companies, have laid off an estimated 250,000 workers worldwide'
And, 'coal mining companies have filed for bankruptcy protection'
And, 'Venezuela is struggling to meet $10 billion in debt obligations since 95 percent of export earnings depend on crude'.
And, 'a weakening global economy, lowering the value of trade worldwide and perhaps even pushing some countries into the same kind of deflationary spiral that has hampered the Japanese economy for decades'
(all of the above quotes from China’s Hunger for Commodities Wanes, and Pain Spreads Among Producers in the NYT)

How about the EU?
Well, if China's economy is rebalancing and manufacturing is slowing down then it will not only need fewer commodities but also fewer capital goods (machines and tools and equipment) to import.  Guess who is one of the biggest exporters of capital goods to China?  Yep, you guessed right, it's Germany.  And if Germany's exports slowdown then aggregate demand will decrease (or, increase at a slower rate) so Germany's growth will suffer (and it isn't that impressive right now)

See this for example: Global groups pay a heavy price for China’s slowdown.
China buys about 8 per cent of the EU’s exports, with Germany’s share by far the highest, followed by Finland, Austria and France.
Germany’s auto companies derive between 15 and 30 per cent of operating earnings and cash flow from Chinese sales.
And, won't that affect the ECB's next decision on interest rates and monetary policy?
This photo of Mario Draghi, President of the European Central Bank, is pretty suggestive:

See China Worries Weigh Ahead of European Central Bank Policy Decision from the WSJ.

Interesting times for IB Economics candidates!

Pollution, cap and trade, carbon taxes

This New York Times article is a jewel for IB Economics candidates, both HL and SL as it is short and sweet and is full of examples one can use in any essay on solutions (discussion; evaluation) of negative production externalities.

It provides examples of 'market based solutions', i.e. solutions (or better policy responses) whereby the incentive function of price changes are still the driving force of containing pollution.  Real world examples of both 'cap and trade' systems in the world and carbon taxes are presented with a short discussion of their effectiveness.

A must to read and take down a couple of notes for all IB Economics candidates!

Proof that a Price on Carbon Works