Archive for August 15, 2016

Free Trade Agreements – the Road to Prosperity?

For those of us stuck in the middle of post-Brexit political chaos, one of the expressions that is being increasingly bandied about is that of ‘free trade’ agreements.   Free trade with the Commonwealth, free trade with China or simply protecting free trade with the European Union – it all sounds a simple and easy way to ensure a booming economy.

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All a country needs is to have lot’s of these free trade agreements and goods and services will be flying out of the country in no time, jobs, money and prosperity are bound to follow.   Except that isn’t really the case and such an opinion represents a dramatic over-simplification of a subject which has divided economists for decades – international trade.

In fact it’s more than decades, try centuries and at least from the time of David Ricardo who suggested the way to maximise world output is a theory called Comparative advantage. He’s a man who deserves to be listened to – an economist who became fabulously wealthy! His theory basically suggested that each country specialised in the areas in which it had an advantage and let other countries do the same. Sounds great, but if you sign a completely open free trade agreement with another country who does have such an advantage then prepare to see that industry be completely destroyed in your country.

Economics and Politics often don’t sit well together, it would seem from an economics perspective that letting the British Steel industry die would be a sensible option however it won’t look that way to tens of thousands who rely on this industry to pay their mortgages.

Free trade will also rarely mean fair trade, if country A supports workers rights and welfare, and promotes high standards of health and safety – it’s goods are unlikely to be competitive in price if country B does’t protect workers and utilizes child labor.   Free trade will lose jobs and income for country A because there is no level playing field.

In many developed countries there are even more costs to production which can often wipe out advantages from efficiency. Most Western countries now have strict rules on levels of pollution that can be produced in manufacturing – if you ignore these you can drastically reduce the cost of production too.

There are reasons why ‘free trade’ agreements take years to negotiate, it’s because they can equally be potentially disastrous to an economy just as they can be beneficial.  They work best in similar economies using the same currency which is why the most successful example exists between the European countries however it’s evident even this isn’t a guarantee to economic success.

John Collins

Technology, Economics Writer

 

Does Britain Risk a Debt Filled Future?

Among the corridors of economists and financial analysts, there has been largely quiet praise for the UK’s approach to the global recession, the banking crisis and the high levels of debt which have resulted.  The cut backs in Government spending are of course not everyone’s prescription for the troubles and equally many suspect it has hindered and slowed the recovery.

The reality is that much of the UK Government’s spending levels were simply unsustainable and austerity although unpopular would have been inevitable at some point in time.   Increased growth obviously impacts these figures too and a healthy growing economy can also be used to reduce debt levels in tandem with any spending cuts.

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For several years this reduction in Government debt levels has been the main focus for the economy, however the Brexit decision seems to have thrown these goals up to the winds of political expediency.   If you watch the UK news and political reports, austerity now rarely get’s a mention – apart from the brief distraction of the Olympics, the talk is all about leaving the European Union.   The reality is that this decision is likely to have a much bigger effect than any trimming of welfare payments or cutting back government departments.

The most urgent problem though is the uncertainty, the simple fact that no-one seems to know what is happening. The protagonists who promoted the leave campaign now seem to have stepped into the background, leaving a variety of pledges and promises in the dust.  The truth was none of these were ever guaranteed and indeed many simply contradicted themselves, and in truth will probably be set aside mostly by the new government entrusted to deliver some sort of Brexit result.

It looks like nothing much is happening soon, and the uncertainty looks likely to continue for months and possibly years to come.  There is a suspicion that something is happening behind closed doors, in the corridors of power some sort of workable compromise is happening but we may just have to wait and see. Until then it’s almost certain that economy will start to shrink, maybe slowly but the current situation is not conducive to growth.

Business investment has already hit a 10 year low, as companies wait for direction.  There are lots of rumours of impending trade deals and agreements, but none of these can actually be implemented until the country leaves the European Union so all the talk is very premature.

Many seem to see the ‘free trade deals’ as a passage to huge prosperity and a sales fueled bonanza for a UK freed from the shackles of the EU.  The problem is that ‘free trade’ can also be extremely detrimental to an economy as well as being beneficial.  It’s why these agreement sometimes take a decade to negotiate, a bad deal can be much worse than no deal at all.  International trade, even is you simply use the base economic model of comparative advantage can be a complex and difficult area. Establishing a ‘free trade’ agreement sounds like a simple, beneficial thing to establish however it’s implication is that you offer trade advantages over other countries, which can have huge knock on effects in an economy.

The worry for the UK economy is on many fronts – the indecision, the confusion and what is actually going to happen.  Sometimes no decisions are actually worse that ‘bad decisions’ – government debt is only going to increase while the confusion remains.

Jim Harvey

Author of Online IP Changer

Brazil’s Economy Looking Up – But Don’t Thank the Olympics

If there’s one myth that should be severely laid to rest, it’s the ridiculous levels of investment needed to host an Olympic games can revive a failing economy.   Brazil’s economy has been in trouble for years, yet recently  there has been signs of recovery.

There are obviously many economic indicators which can suggest the future prospects of an economy – however often one of the most reliable is the quite simple measure of economic activity.  It doesn’t always suggest improvement, often activity can indeed be the precursor to very bad news but for a country in malaise like Brazil – increased activity is something that is essential for recovery.

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The last few months in the UK after Brexit – the measure has predicted a heading back towards recession, economic activity has plummeted while businesses and investors try and figure out what’s going on.  One of the main issue in Brazil is debt, and the President’s economic team has made this a priority.

As I sat and watched the BBC’s Olympic coverage last night of the opening ceremony – I and many were impressed not just by the spectacle but by the obvious restraint in budget.  An economy with huge debts will do itself no favors by displaying no sense of the value of money.  Remember not that long ago Greece through a lavish spectacle at the Olympic games too, it turns out that the  money spent wasn’t even theirs.  The Olympics will not help the Brazilian economy but a responsible attitude to the costs involved may just pay dividends.

There needs to be a serious improvement in macro-economic outlook in Brazil, to reduce the cost of the equity.   There is no doubt that Brazil and neighboring countries offer attractive investment opportunities as long as there is some stability in the economy and the Brazilian bond markets.

The Olympic games always lose money despite what anyone says, and this can be very painful for smaller and developing nations. According to the world news, the Rio Games are costing over $10 billion which is relatively modest in comparison to some recent games.  There are long term benefits and of course these can be assigned an economic value but overall the Olympics usually cause more problems that they solve at least in the short term.

The feel good factor in Brazil could go a long way though and hopefully these small improvements in economic activity combined with more sensible macro-economic policies could lead to a recover sooner rather than later.