Wednesday, October 29, 2008

Law of demand in action

It is a familiar story that economic agents respond to changes in price of a commodity by changing quantity demanded. This is the basic law of demand formally learnt in Econ 101—that is, price and quantity demanded are inversely related.

Here is the same principle applied in the real world:

The number of climbing expeditions to Himalayan mountains, including Mount Everest, has risen since Nepal reduced off season climbing fees three months ago, officials said on Wednesday.

Nepal announced a 50 percent cut in the climbing fees in August for the three-month autumn season starting in September as incentive to off-season climbers and boost tourism, hit by years of Maoist civil war and political unrest.

As a result the number of expeditions to different Himalayan peaks in Nepal during the Autumn season had increased to 145 this year, up from 84 in 2007, Tourism Ministry official Gyanendra Shrestha said.

Officials say tourist arrivals in 2007 also jumped 27.1 percent to 360,000 as visitors began to return to the scenic nation after the Maoists declared a ceasefire in 2006.

By the way, eight of the world’s 14 highest peaks above 8,000 meters, including Mount Everest, are located in Nepal, which is the poorest country in Asia with a GDP per capita income of $1,500 (PPP 2006 estimate).

Sachs and Green on the financial crisis

Jeff Sachs argues for expansionary, co-ordinated action from the US, EU, China, Japan, and the Middle East to prop up credit market and domestic demand in these countries and in the developing countries as well.

Any co-ordinated expansion should include the following actions. First, the US Federal Reserve, the European Central Bank and the Bank of Japan should extend swap lines to all main emerging markets, including Brazil, Hungary, Poland and Turkey, to prevent a drain of reserves. Second, the International Monetary Fund should extend low-conditionality loans to all countries that request it, starting with Pakistan. Third, the US and European central banks and bank regulators should work with their big banks to discourage them from abruptly withdrawing credit lines from overseas operations. Spain has a role to play with its banks in Latin America.

Fourth, China, Japan and South Korea should undertake a co-ordinated macroeconomic expansion. In China, this would mean raising spending on public housing and infrastructure. In Japan, this would mean a boost in infra- structure but also in loans to developing nations in Asia and Africa to finance projects built by Japanese and local companies. Development financing can be a powerful macro­econ­omic stabiliser. China, Japan and South Korea should work with other regional central banks to bolster expansionary policies backed by government-to-government loans.

Fifth, the Middle East, flush with cash, should fund investment projects in emerging markets and low-income countries. Moreover, it should keep up domestic spending despite a fall in oil prices. Indeed, the faster a global macro­economic expansion is in place the sooner oil prices will recover.

Sixth, the US and Europe should expand export credits for low and ­middle-income developing countries, not only to meet their unfulfilled aid promises but also as a counter-cyclical stimulus. It would be a tragedy for big infrastructure companies to suffer when the developing world is crying out for infrastructure investment.

Finally, there is scope for expansionary fiscal policy in the US and Europe, despite large budget deficits. The US expansion should focus on infrastructure and transfers to cash-strapped state governments, not tax cuts. This package will not stop a recession in the US and parts of Europe, but could stop a recession in Asia and the developing countries. At the least it would put a floor on the global contraction that is rapidly gaining strength.

Again, support for Keynesianism, which is the need of the hour (even Bernanke is falling into the lap of Keynes with all those talk about second round of stimulus package)…actually, it Keynesianism is always relevant in some scale! Also, a US sponsored global summit on Nov 15 will decide whether to overhaul key global institutions like the IMF and WB. It will most be in the regulatory side.

Meanwhile, Duncan Green fleshes out more on the financial crisis, Keynesianism and the climate change.

From the wreckage of the Depression emerged radical new approaches to running the world’s economies: Roosevelt’s New Deal, Keynesian beliefs in using government spending to manage slumps, and, in developing countries, a wholesale switch away from reliance on exporting raw materials such as coffee or copper to the pursuit of industrialisation.

A similar scale of tectonic shifts may be building below the surface of the current crisis. Some could resemble earlier transformations, others will have to break new ground – the world and its economy are now very different.

As in the previous crash, we are likely to see a retreat from the excesses and bubbles of laissez-faire capitalism as markets are re-regulated.

…Even before the current crisis, the world was facing new challenges. Since the Second World War, massive economic growth based on fossil fuels has brought material benefits to millions. Now we are entering an age of scarcity – of water, fertile soil and, above all, carbon.

Whether through the onset of “peak oil” or the response to climate change, the rationing of carbon will transform the nature and language of politics. Avoiding catastrophic climate change while still allowing poor countries to grow their way out of poverty will require the United States and Canada to reduce their per capita emissions from 20 tonnes to roughly two (some argue it should be nearer one tonne). The average starting point for Germany and France is ten tonnes per head. China stands at three tonnes.

…But that is not enough. Development requires effective states. The extraordinary transformation of countries such as South Korea, Vietnam and Botswana has invariably involved governments able to ensure their people are healthy and educated and that there are decent roads and power supplies, and which are willing to steer their economy through the dangerous, but ultimately rewarding rapids of globalisation.

The fight against poverty, inequality and the threat of environmental collapse will define the 21st century, as the fight against slavery and for universal suffrage defined earlier eras. It is hard to imagine a more worthwhile cause. Fail, and future generations will not forgive us. Succeed, and they will wonder how the world could have tolerated such needless injustice and suffering for so long.